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

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Original post by Hot&SpicyChicken
Do we actually need to know this?


no, you may want to incorporate some of those statistics to impress the examiner though
Original post by AsmaaMahamud97
If inflation means that the value of currency decreases, and the price of goods increase, won't these effects cancel each other out in terms of net exports? [Obvs not exactly, but the go in opposite directions, no?]
I mean because the weakening of the pound means that UK goods become more competitive on an international market and inflation means that they become more pricey.
I'm confused.


Yeah i see what you mean like counteracts it
Lets set this out like this
INFLATION: sustained increase in general price level leading a fall in the purchasing power of the pound
in easy terms:
POUND IS WORTH LESS

PRICE OF GOODS INCREASES - I'm assuming you mean price of goods abroad?
Original post by Synonym
predictions for unit 1 were completely off id suggest people just go over everything lol


I really think output gaps will come up. :biggrin:
Original post by officialjaayjaay
Yeah i see what you mean like counteracts it
Lets set this out like this
INFLATION: sustained increase in general price level leading a fall in the purchasing power of the pound
in easy terms:
POUND IS WORTH LESS

PRICE OF GOODS INCREASES - I'm assuming you mean price of goods abroad?


Yes, so I'm right?
No, I meant the inflation makes the prices of goods go up domestically. Like UK goods will be more expensive than they were before.
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superlu
For the 20 mark question its unlikely to be on monetary policy as it came up in the specimen paper. More likely to be Fiscal policy, supply-side policies and macroeconomic objectives.
Original post by AsmaaMahamud97
Yes, so I'm right?
No, I meant the inflation makes the prices of goods go up domestically. Like UK goods will be more expensive than they were before.


No, that is not true.
They will look like they are more expensive. But if all prices and wages... increase, there is no effect to domestic. Unless wages are not indexed (for example)

However, goods and services become more expensive for foreign consumers.
Original post by AsmaaMahamud97
Yes, so I'm right?
No, I meant the inflation makes the prices of goods go up domestically. Like UK goods will be more expensive than they were before.


you could say that these are contradicting. However, there are so many other factors it depends on i.e. rate of inflation in other countries and the price elasticity of demand of UK goods and services.
Original post by AsmaaMahamud97
Yes, so I'm right?
No, I meant the inflation makes the prices of goods go up domestically. Like UK goods will be more expensive than they were before.


but doesn't that just mean that it won't counteract it
the increase in price level basically makes the price of everything go up, with no correlation to the value of the good, it's just the value of the currency
Ohhhh, thanks guys.
I'm no longer confused.
Original post by officialjaayjaay
but doesn't that just mean that it won't counteract it
the increase in price level basically makes the price of everything go up, with no correlation to the value of the good, it's just the value of the currency


They will look like they are more expensive. But if all prices and wages... increase, there is no effect to domestic. Unless wages are not indexed (for example)

However, goods and services become more expensive for foreign consumers.
Original post by harryleavey
They will look like they are more expensive. But if all prices and wages... increase, there is no effect to domestic. Unless wages are not indexed (for example)

However, goods and services become more expensive for foreign consumers.


that means X falls and M ^ therefor worsening the trade deficit?
Original post by officialjaayjaay
that means X falls and M ^ therefor worsening the trade deficit?


Yes, (appreciation of currency: SPICED: Strong pound = imports cheap, exports dear)
Original post by officialjaayjaay
but doesn't that just mean that it won't counteract it
the increase in price level basically makes the price of everything go up, with no correlation to the value of the good, it's just the value of the currency


There is a relationship to the value of the good. Value refers to Price x Quantity. SO if prices go up, the nominal value of the good will increase.
20 marker is inevitably gonna be a policy question, I reckon supply side because it's a lot more complicated to have a chain of reasoning for, and the evaluation points are all so monotone like "time lag" and "opportunity cost" etc.
why does increased productivity help keep inflation low?
I wondered if someone could please explain the keynesian liquidity trap??
Original post by rosemondtan
There is a relationship to the value of the good. Value refers to Price x Quantity. SO if prices go up, the nominal value of the good will increase.


but I mean in real terms under effects of inflation
Original post by _chloe_abigail_
i wondered if someone could please explain the keynesian liquidity trap??


and quantitive easing!!!
Original post by Beccatenney
why does increased productivity help keep inflation low?


If you increase productivity, this means that output per input increases and this means your real national output increases (shown by a shift of the LRAS curve to the right) Bear in mind that a shift in the LRAS curve shows an increase in maximum output potential which means that quantity and quality of factors of production increase, so if your AD curve remains constant and doesn't shift, this causes a fall in general price levels in the economy, so this reduces effects of inflation.
Original post by Beccatenney
why does increased productivity help keep inflation low?


more output in the economy, means there isn't spare capacity; inflation means a sustained increase in general price level leading a fall in the purchasing power of a pound. If theres increased productivity (output per unit of input) then theres less spare capacity in the economy, shifting aggregate demand to the right. although it moves towards the inelastic part of the LRAS curve (on a keynesian diagram) a long term change in productivity (when drawing a classical LRAS curve) shows a shift in a perfectly inelastic LRAS curve to the right, and a fall in price level yet more output.
I don't know if that makes sense but if theres anything I said wrong guys please let me know lool

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