The Student Room Group

Edexcel AS Economics (New Spec) Unit 2 - 23rd May 2016

Scroll to see replies

Reply 20
I would be so appreciative if someone could help me tie up some loose ends on these please x
1. explain why some countries might manage their exchange rate to achieve international competitiveness
2.evaluate the impact of exchange rate changes on international competitiveness
3.evaluate comparative advantage as an explanation of global trade patterns
4.explain the possible trade-offs which exist between policy objectives: inflation and the balance of payments
5.evaluate the methods through which policy conflicts can be resolved or reduced
6. understand the assumptions underlying the AD/AS model

How would you structure/plan a 20 marker on these?
1. evaluate how changes in aggregate supply may affect macroeconomic performance, including economic growth, unemployment and inflation
2. evaluate how changes in aggregate demand may affect macroeconomic performance, including economic growth, unemployment and inflation
(edited 7 years ago)
Can someone explain to me how Increasing government taxation could conflict with the objective to have low unployment? Thank you :biggrin:

Posted from TSR Mobile
Original post by Princess220
Can someone explain to me how Increasing government taxation could conflict with the objective to have low unployment? Thank you :biggrin:

Posted from TSR Mobile


Increasing taxation, means that tax levels are higher. This includes taxes such as VAT, Excise Duties, Income tax and corporation taxes.

If income tax rises, workers will take home less pay, therefore there is a lower reward for work, which could act as a disincentive to work. As a result more people are likely to claim benefits, so unemployment increases.

Corporation taxes are taxes on firms profits. As a result if this increases, firms will take less profits. Therefore they may need to cut back on workers to reduce production costs, increasing unemployment.

Also, increasing taxes, such as VAT, would place a burden on producers, causing cost of production to increase. As a result firms will again cut back on workers to reduce production costs. However, this depends on the elasticity of demand of the good or service the firm is providing, as if it is inelastic, most of the tax burden can be placed on consumers.

Hope this helps!!

Please follow and rep me.
Original post by Hot&SpicyChicken
Increasing taxation, means that tax levels are higher. This includes taxes such as VAT, Excise Duties, Income tax and corporation taxes.

If income tax rises, workers will take home less pay, therefore there is a lower reward for work, which could act as a disincentive to work. As a result more people are likely to claim benefits, so unemployment increases.

Corporation taxes are taxes on firms profits. As a result if this increases, firms will take less profits. Therefore they may need to cut back on workers to reduce production costs, increasing unemployment.

Also, increasing taxes, such as VAT, would place a burden on producers, causing cost of production to increase. As a result firms will again cut back on workers to reduce production costs. However, this depends on the elasticity of demand of the good or service the firm is providing, as if it is inelastic, most of the tax burden can be placed on consumers.

Hope this helps!!

Please follow and rep me.


Thank you.. It makes sense now
Original post by AG16
I would be so appreciative if someone could help me tie up some loose ends on these please x
1. explain why some countries might manage their exchange rate to achieve international competitiveness
2.evaluate the impact of exchange rate changes on international competitiveness
3.evaluate comparative advantage as an explanation of global trade patterns
4.explain the possible trade-offs which exist between policy objectives: inflation and the balance of payments
5.evaluate the methods through which policy conflicts can be resolved or reduced
6. understand the assumptions underlying the AD/AS model

How would you structure/plan a 20 marker on these?
1. evaluate how changes in aggregate supply may affect macroeconomic performance, including economic growth, unemployment and inflation
2. evaluate how changes in aggregate demand may affect macroeconomic performance, including economic growth, unemployment and inflation


1. Countries may artificially keep exchange rate low in order to make their exports more competitive as a low exchange rate means it is cheaper for other counties to buy thieir goods and services e.g China
2. Would depend on PED for imports/exports, Protectionism, The state of economies (e.g Recession)
3. This is not in the specification for AS (although large labour force e.g China means manufacturing shifted to East: export to West - very generalised)
4. Inflation and balance of payments: If inflation is caused by rising AD, beyond AS (demand pull inflation), consumption is likely to have risen, therefore increasing the demand for Imports and worsening the current account of balance of payments deficit.
5. Overwhelming: you could say so much. Would depend on the policy conflict you are referring to?
6. AS Assumptions: Long run: inelastic, Short Run: elastic. AD: as real output increases, price level decreases (downward sloping)

1. An increase in AS: LR economic growth - However depends if SRAS or LRAS (i.e may only be price shocks). An increase in (LR)AS means that the productive potential increased, so reduced unemployment. Depends if AD also increased (e.g cyclical unemployment) Increase in AS: reduced inflationary pressure. However increased employment can lead to inflationary pressure.
Can someone explain to me the causes of inflation and deflation and the effects of them both, thank you. I really would appreciate the help :yep:
Original post by Princess220
Can someone explain to me the causes of inflation and deflation and the effects of them both, thank you. I really would appreciate the help :yep:


You only need to know the impacts of inflation for this specification (see attached point f))

Causes of Inflation:
either:
Cost-push or demand pull

Cost-push:
Caused by an increase in production costs/ left shift in AS curve
For example:

Increase in price of oil

Increase in wages of workers

Fall in exchange rate (increase in price of imports)

Depreciation of capital stock/lack of investment (AS curve shifts left)

Increased corporation tax

Demand-pull:
Caused when AD rises above AS. Most common in long run, when AS is inelastic. Basic demand, supply theory: if demand>supply, the price level is bid up.
Causes of demand pull:

Increasing consumption e.g Rising house prices causing wealth effect

Depreciating currency: exports cheaper, so AD rises

Low interest rates: cheaper to borrow, consumption and investment rise, AD rises

(For deflation, just reverse everything i.e fall in AD and right shift of AS)

Effects of Inflation:
Consider: firms, consumers, government and workers:

Firms:

Firms may use inflation to erode the value of their worker wages without cutting them in nominal terms people more likely to accept real wage fall rather than nominal

Consumption may rise: less reason to save if inflation

Loss of international competitiveness exports expensive, imports cheap

Increased Uncertainty: reduce investment due to unpredictability and falling consumption

Costs of adjusting menus

Less investment from abroad if inflation why buy into a currency that is falling in real value

Consumers:

Those with high levels of personal debt benefit from inflation as the real value of the debt falls in the same way real value of savings is eroded

Does not affect those on indexed incomes (i.e adjusted for inflation)

If firms are slow to respond and don't increase their prices, consumers will be better off because their wage may increase, but prices don't

Savings & assets (real value) fall if inflation rate is above interest rate

Purchasing power falls: -ve impact on fixed incomes

Shoe leather costs: costs of shopping around due to fluctuations and lack of info of market prices

Unemployment rises because firms face higher costs (particularly cost-push) + AD likely to fall because fixed incomes afford less

Government:

Redistribution of income: those on fixed incomes: fall in disposable Y, but indexed do not lose out

Reduced real interest rate, erodes national debt value

Can cut public sector wages and benefit payouts by freezing themreal value falls

Tax revenue falls if taxes not increased in-line with inflation

Trade deficit worsens because more imports cheaper, and exports expensive for foreign customers

Budget deficit worsens because unemployment benefits or indexed incomes

Cost of menu changing

Political instability (e.g Nazi Germany)

Workers:

If wages are indexed, no effect

Wages may not fall if in a trade union

Some workers expect higher wages, but do not get them due to lack of firm confidence (especially if firms cannot pass increased cost onto consumers)

Increased unemployment (firms may cut costs if they cannot pass inflationary costs onto consumers)

Workers suffer if wages or tax allowance does not increase in line (indexed)


You can see some flashcards I made on inflation/deflation here: http://hleavey.site/dDOnkO
(edited 7 years ago)
What is protectionism? It's the first time I've heard this term. Please explain?
can anyone help me and explain what the relationship between the exchange rate and the price level is?

also how do you calculate the multiplier?
Original post by amelienine
What is protectionism? It's the first time I've heard this term. Please explain?


Protectionism is simply any measure to protect domestic firms from cheap imports.
It is a policy to correct the current account deficit by reducing imports.

For instance, the UK government may impose a high tariff (a tax on imports) in order to encourage consumers to buy from domestic firms instead of cheap overseas firms e.g China for example

Evaluation:
- Protectionism may lead to a trade war (http://hleavey.site/tradewar)
- May lead to firms becoming uncompetitive as there is less incentive for them to cut costs
(edited 7 years ago)
Original post by Beccatenney
can anyone help me and explain what the relationship between the exchange rate and the price level is?

also how do you calculate the multiplier?


Exchange rate and price level:

If exchange rate is high: appreciation, imports are cheaper, exports are more expensive. This means that imports increase and exports decrease. As exports are a component of AD, AD falls, reducing inflationary (demand-pull) pressures and price level falls.

Also: If exchange rate is low: depreciation, imports are more expensive. This means that firms face increased production costs e.g oil. Therefore the average price level increases.

Multiplier: (definition: The amount of times a rise in national income exceeds the rise in injection that caused it. It is based on the principle that one person's spending becomes another's income in the circular flow of income)
There are many different ways to calculate:

1/MPW

1/(MPI+MPS+MPT)

1/(1-MPC)

1/MPS

Multiplier * Change in Injection = Change in Income

Multiplier = Change in Income / Change in Injection

Just ask if you need any of these explaining.
(edited 7 years ago)
Original post by Beccatenney
can anyone help me and explain what the relationship between the exchange rate and the price level is?

also how do you calculate the multiplier?

If the pound appreciates in value against the dollar then imports will appear cheap and exports appear dear.If imports appear cheap then we will buy more imports and we will buy less exports. Imports do not grow our economy as we do not produce the goods and services instead we just pay for them. This will decrease aggregate demand and therefore reduce price level.

Obviously you could evaluate by saying we may be using these imports in the future to produce, which would increase the price level.If there is a depreciation just flip my explanation around.

To calculate the multiplier it is,(1/1 - MPC) or (1/1 - MPT + MPS + MPM) or (1/MPW) I think these are right.

Hope it helps.
(edited 7 years ago)
Reply 32
How does full employment conflict with other macroeconomic objectives?
Original post by harryleavey
Exchange rate and price level:

If exchange rate is high: appreciation, imports are cheaper, exports are more expensive. This means that imports increase and exports decrease. As exports are a component of AD, AD falls, reducing inflationary (demand-pull) pressures and price level falls.

Also: If exchange rate is low: depreciation, imports are more expensive. This means that firms face increased production costs e.g oil. Therefore the average price level increases.

Multiplier: (definition: The amount of times a rise in national income exceeds the rise in injection that caused it. It is based on the principle that one person's spending becomes another's income in the circular flow of income)
There are many different ways to calculate:

1/MPW

1/(MPI+MPS+MPT)

1/(1-MPC)

1/MPS

Multiplier * Change in Injection = Change in Income

Multiplier = Change in Income / Change in Injection

Just ask if you need any of these explaining.


omg do you need to know all of these?
Original post by Beccatenney
omg do you need to know all of these?


Yeah. They are mean the same thing. Once you understand the multiplier, it is easy to use the appropriate one.

The main one is: 1/MPW

All of the others are based on this
e.g 1/(MPT+MPI+MPS) because withdrawals from the circular flow are tax, imports, savings.

I think they will only ask questions about:
1/MPW or 1/(1-MPC)

But it is important that you know how to calculate multiplier. It is brand new to the 2015 Specification. We will almost certainly be asked about it.
Original post by harryleavey
Protectionism is simply any measure to protect domestic firms from cheap imports.
It is a policy to correct the current account deficit by reducing imports.

For instance, the UK government may impose a high tariff (a tax on imports) in order to encourage consumers to buy from domestic firms instead of cheap overseas firms e.g China for example

Evaluation:
- Protectionism may lead to a trade war (http://hleavey.site/tradewar)
- May lead to firms becoming uncompetitive as there is less incentive for them to cut costs


Thank you so much!
Original post by Bruce267099
If the pound appreciates in value against the dollar then imports will appear cheap and exports appear dear.If imports appear cheap then we will buy more imports and we will buy less exports. Imports do not grow our economy as we do not produce the goods and services instead we just pay for them. This will decrease aggregate demand and therefore reduce price level.


This is correct. However the other way that exchange rates affect inflation is due to the increasing costs of production resulting from the increased production costs from imports rising in price (depreciation)
Original post by harryleavey
Yeah. They are mean the same thing. Once you understand the multiplier, it is easy to use the appropriate one.

The main one is: 1/MPW

All of the others are based on this
e.g 1/(MPT+MPI+MPS) because withdrawals from the circular flow are tax, imports, savings.

I think they will only ask questions about:
1/MPW or 1/(1-MPC)

But it is important that you know how to calculate multiplier. It is brand new to the 2015 Specification. We will almost certainly be asked about it.


thankyou so much that has really helped. Do they give you the mpt/mpi/mps or the mpw?
I just want to say how appreciative I am for you guys! For real, if I tried to 'study' with my friends they'd end up going off on a tangent. Nice that everyone here is on the same wave length.
Original post by amelienine
I just want to say how appreciative I am for you guys! For real, if I tried to 'study' with my friends they'd end up going off on a tangent. Nice that everyone here is on the same wave length.


amen to that!!!!

Quick Reply

Latest