[shaunskjw]

Oh and I hate cost benefit analysis and dont really understand it all that well could someone give me a good description of it or give me a link to read about it. This would be greatly appriciated .

[CorpusNinja]

(Original post by shaunskjw)
Oh and I hate cost benefit analysis and dont really understand it all that well could someone give me a good description of it or give me a link to read about it. This would be greatly appriciated .

http://www.tutor2u.net/economics/con...t_analysis.htm
go crazy...

[shaunskjw]

The J curve effect (I hope this helps)

If the pound falls in value, this makes exports relatively currencies and imports relatively expensive in pounds.

In the short run the demand for imports and demand for exports are likely to be inelastic. This is because consumers and firms have already got their souces of supply and may be reluctant to change. Although the price of exports falls in terms of foreign currency, the total amount spend on them will fall because demand is inelastic. Although the price of imports has risen, the total amount spend on them will rise because demand is inelastic. The overall result is that the balance of payments deficit actually worsens in the short run.

In the long run, consumers and firms find alternative cheaper suppliers in other countries and UK buyers switch to the cheaper foreign imports, i.e. the demand for imports and export is price elastic. With the lower export prices spending on exports rises; with the higher import prices spending on imports rises and the balance of payments improve. In the very long run the balance of payments might worsen again. This is because the higher import prices can cause a cost push inflation and make UK goods and services uncompetitive abroad. Many argue therefore that a devaluation with NOT improve the balance of payments position over the very long term.



The above three paragraphs are from the book "AS & A level economics through diagrams" by Andrew Gillespie. I advise you to get this book if your going into A2 or AS as it has been a big help to me.

[SevenDeuceOff]

You can go quite in-depth on each point. Note that this is not how I would write the essay; I'm simply writing separate points in accordance with your layout. Many of the points should be incorporated together, e.g. when mentioning a rise in AD, comment on unemployment, growth and inflation at the same time.

(Original post by ash213)
assess the likely implications of a fall in the sterling exchange rate (12)

1st point - current account -increase in price of imported goods
2nd - decrease in foreign currency price of exports : j curve

If the Sterling depreciates, then domestic firms and consumers cannot buy as many units of foreign currency per £, therefore the price of foreign imports will have risen relatively. A higher price will reduce the quantity demanded for imports, so M is likely to fall.

A fall in value in Sterling also means that foreigners can buy more £'s per unit of their currency, therefore the price of UK exports will have fallen relatively. A lower price will increase the quantity demanded for exports, so X is likely to rise.

However, the J-curve effect would suggest otherwise in the short run, during which it is arguable that demand for X and M are both inelastic, as consumers are unlikely to switch from existing suppliers of goods, i.e. there is consumer inertia. If demand for X is inelastic in the SR, a fall in price will actually result in a LOWER level of X; and if demand for M is also inelastic in the SR, a rise in price will actually result in a HIGHER level of M. This means that in the SR, a fall in the exchange rate will actually result in a fall in net exports and a worsening of the B of P Current Account position in the SR.

But, in the long run, both domestic and foreign consumers will realise and adapt to the price changes, so the quantity demanded for X will rise while that for M will fall. This means that in the LR, the depreciation will lead to a rise in net exports and a movement in the B of P CA towards a surplus position.

(Illustrate these points with a J-Curve, B of P CA on the y-axis, Time on the x-axis)

On the other hand, in the even longer run, the B of P CA may worsen again, due to the higher-priced imports causing imported inflation. Cost-push inflation will be imported if the price of imported raw materials and commodities rise (draw AS/AD to illustrate cost-push inflation, AS shifted inwards/upwards); and higher-priced imports of finished goods will contribute to overall inflation. If inflation in the UK rises relative to abroad, then the relative price of X will rise again, resulting in a fall in net exports in the long run.

The effects on X and M also depend upon the type of exchange rate system in use. If it is a free-floating ER system, then its self-adjusting nature is likely to offset the depreciation of the £. If X rises, foreigners will exchange more of their currency for more £'s in order to buy UK exports; and if M falls, UK firms and consumers will exchange less £'s for foreign currency in order to buy foreign imports. This means that the demand for £'s will shift outwards while the supply will shift inwards, resulting in an appreciation of the £ (draw D/S diagram for £'s, illustrating shifts and ER change). This self-regulating effect always tends towards the equilibrium exchange rate of the £, offsetting any changes in the rate. If it is a fixed ER system, a devaluation will be permanent, so the effects on X and M will be lasting.

Macro-effects

3rd point inflation

4 - level of unemployment

5- rate of economic growth

can sum1 please just extend these points a lil further, and if possible evaluate the points..im only asking for one or two sentences on each

thanks in advance!

3. If (X-M) rises, then so will AD, as net exports is a component of it. This creates inflationary pressure, and increasingly so as the economy tends towards its productive capacity, but if in a slump, there may be no such pressures, and non-inflationary recovery will occur (AS/AD diagram, showing varying inflationary pressure from depression to full employment). However, the J-curve effect suggests that this is only in the LR, and that in the SR, (X-M) falls, so this may actually lower AD and short-term inflation. Still, the even longer run may experience higher inflation yet again, due to higher-priced imports causing imported inflation and cost-push inflation.

4. If (X-M) and AD rise, then output/national income/business confidence are likely to rise, so demand for labour should rise and unemployment fall; unless the economy is at full capacity, where such an effect would be purely inflationary. Mention J-Curve contradiction as above.

5. If AD rises, business confidence is likely to rise, resulting in an outward shift in the MEC and a rise in Investment (draw diagram). The accelerator effect may magnify the increase in Investment. Higher investment leads to higher levels of physical and human capital, and better technology, resulting in higher efficiency and labour productivity in the LR, so the productive capacity of the economy will increase, shifting the LRAS/PPC outwards and leading to higher economic growth (AS/AD + PPF (i.e. PPC) diagram

[tanusha-tomsk]

Niiice you guys! So much input!

(Original post by shaunskjw)
So the question is how does inflation change the exchange rate and how does investment affect the exchange rate? (for arguments sake lets use the UK as they import more than they export).
Also are investment and inflation in direct relation to each other? If you think about it, what if interest rates are lower than the inflation rate, wouldn't this cause investment to have a huge increase due to saving being almost pointless.
Oh and I hope I dont bore you

Tania can never be bored with economics

If we assume that the exchange rate is stable, higher inflation would make UK goods less and less price competitive - leading to lower exports and higher imports. So increasing rate of inflation would make pound depriciate.

Investment is a big part of AD (ok, not that big), so increases in investment lead to higher rate of inflation via a multiplier.

[tanusha-tomsk]

shaz, biggie-n and shaun, rep coming your way! turnes out I can only rep once a day, so you'll have to wait I'm afraid

[Chilly]

why would the EU10 want to loosen the growth and stability pact?

[shaunskjw]

What does EU10 mean? I know its a 'noobish' question to ask but I dont know

[SevenDeuceOff]

(Original post by shaunskjw)
What does EU10 mean? I know its a 'noobish' question to ask but I dont know

The 10 new members of the EU who have recently joined:

Cyprus
Malta
Estonia
Slovenia
Czech Republic
Hungary
Slovakia
Lithuania
Poland
Latvia

[shaunskjw]

Ahhhhhhh! that makes sense THANKS!

[e_clark]

what are the economic implications of joining the EU? plssssssssss help me!!

[SevenDeuceOff]

(Original post by e_clark)
what are the economic implications of joining the EU? plssssssssss help me!!

The EU is a customs union, which means there is free trade between member countries, but also a CET (Common External Tariff) charged against non-member countries.

Joining means the abolition of many protectionist policies, including the elimination of import tariffs; the CET charged on non-members; abolition of barriers to the free movement of labour, capital and goods/services between member states; policies advocating competition; common agriculture, transport, social, security, justice, etc. policies; and non-mandatory membership of the EMU (European Monetary Union), which is basically adopting the Euro as a single currency and everything that comes with it.

The implications are effectively an argument for and against free trade:

(This isn't a comprehensive list. I'm sure you could find more points in a textbook, but the main ones are there.)

For:

• Due to comparative advantage, free trade leads to specialisation and economies of scale, which in turn lead to lower unit costs, greater efficiency and higher output.
• Increased foreign competition drives domestic firms to cut costs and be more efficient, again leading to greater efficiency.
• Wider markets for firms - further gains from economies of scale.
• More choice for consumers.
• Greater inward foreign investment and foreign direct investment.
• Technology transfer between member states.
• Importing of skilled labour from abroad.
• Ability for domestic firms to outsource to member countries if the domestic economy is reaching productive capacity.
• Single currency can be adopted, which reduces transaction costs, uncertainty due to exchange rate fluctuations, greater price transparency, and encourages cross-border investment.
• Common Agricultural Policy (CAP) stabilises agricultural market prices and ensures a reasonable standard of living for EU farmers.
• EU regional development fund can help boots economically deprived areas and reduce regional income and employment differentials.
• European Social Fund (ESF) aims to improve labour market conditions and employment opportunities.

Against:

• May lead to overspecialisation and diseconomies of scale, which in turn lead to higher unit costs and lower efficiency.
• Excessive competition may be destructive, leading to domestic firms shutting down and a loss of jobs, especially in infant or declining industries, which need to be protected.
• May lead to 'dumping', where very cheap and often inferior quality goods are imported below cost with the sole aim of destroying domestic industry through predatory pricing.
• No tax revenue for Govt. from import tariffs on member states.
• May discourage trade with and investment from trade partners outside of EU such as the US, Japan and China.
• Cost of membership; members must pay 1.27% of their GDP towards EU budgets, the CET proceeds, and VAT contributions.
• Transition costs if single currency is adopted, e.g. menu costs for firms; shoe-leather costs for consumers trying to adjust to pricing in new currency.
• Restrictions on domestic fiscal policy; EMU members' budget deficits may not rise above 3% of GDP.
• Single monetary policy with common interest rates (i.e. One-size-fits-all) may be unsuitable for some economies at a certain time, as many maybe out of sync in terms of their trade cycles or there may be fundamental structural differences.
• CAP allocatively inefficient and costly; buffer stock scheme led to "wine lakes and butter mountains" as a result of successive surpluses of agricultural goods.

[tanusha-tomsk]

Wow, did you type it up from memory? Well done!

[SevenDeuceOff]

Yep, economics revision (for the WJEC board, at least) is pretty prescriptive; just remember a list of advantages and disadvantages for pretty much every topic, e.g. Monopoly vs. Perfect Competition.

[atack]

(Original post by /\Shaz\/)
Yep, economics revision (for the WJEC board, at least) is pretty prescriptive; just remember a list of advantages and disadvantages for pretty much every topic, e.g. Monopoly vs. Perfect Competition.

I'm doing WJEC and was wondering.. I haven't done hardly any work on the EU.. is that a second year unit?

Regards,
Chris

[SevenDeuceOff]

(Original post by cmjmiles)
I'm doing WJEC and was wondering.. I haven't done hardly any work on the EU.. is that a second year unit?

Regards,
Chris

I'm pretty sure it is, but you do need to know about free trade/protectionism for AS.

[atack]

I'm pretty sure it is, but you do need to know about free trade/protectionism for AS.

Ah right, that's ok then. I've done Protectionism and Free Trade and of course the benefits and disadvantages of each. I guess I could link in the EU as an example of a free trade organisation.

Regards,
Chris

[shaunskjw]

Hey guys, could you tell me if this is all correct?

Inflation and exchange rates - Now this can affect exchange rates heavily as it can act as the money supply in a country, if inflation increases then this means that the price level of UK’s goods and services has increased. This increase in inflation would cause the demand for exports to decrease as goods and services would be more expensive on the foreign market. The increase in inflation would also cause the demand for imports to increase as UK’s consumers will think that they have more money (the feel good factor) and will then spend more, on both domestic and foreign goods and services. Not only will that happen, but also UK’s consumers have more purchasing power on the foreign market which increases demand for imports.

Now if exchange rates increase the inflation rate decreases as the cost of importing decreases so makes the goods cheaper to import. Also the increase in exchange rates would cause demand to increase causing consumer spending to increase so due to the components of the aggregate demand curve, aggregate demand would expand causing an increase in supply and a decrease in price level (interest rates). Now if you change a few words you know what happens if exchange rates decrease (sorry about being lazy just a bit tired).

This increase in demand for imports and decrease in demand for exports causes the UK’s exchange rate to diminish (or decrease in value), this causes the UK to be able to export more and import less as foreign goods would be more expensive to import and UK consumers may switch to domestic goods and services, and exports would increase due to the cost of UK’s goods and services on the foreign market decreasing.
So know you know how exchange rates and inflation are interlinked lets move on.

Inflation and interest rates – This is quite a difficult area (in my opinion) but here you go, if interest rates are high then people are more likely to save more and spend less (this is already increase the inflation rate as spending decreases) this is due to the formula of the aggregate demand curve (C+I+G+{X-M}). The reason inflation rises is because aggregate demand would shift to the left which would cause supply to decrease and price levels to increase. Now if interest rates are low the opposite effect would happen, this means that people would spend more due to borrowing becoming cheaper therefore the demand curve would shift to the right causing supply to increase and price levels to decrease therefore decreasing the inflation rate (remember it decreases the inflation rate, it doesn’t mean that it causes deflation)

Now let’s see, how interest rates affect investment. Well it’s a similar affect to how interest rates affect consumer spending but more long term, if interest rates increase then firms in the UK are less likely to invest money into the economy as they can save more and the cost of borrowing would decrease. If investment decreases the aggregate demand curve would shift to the left due to one of the components of aggregate demand decreasing. If interest rates decrease then firms are more likely to invest in the market as the cost of borrowing has decreased and there is less incentive to save.

Now if inflation increases then the bank of England will increase interest rates to keep a steady and low inflation rate, the increase in interest rates will decrease consumer spending and investment for the reasons explained in the above two paragraphs. Remember the government doesn’t control inflation rates but influences the bank of England as to which action to take. If inflation rates decrease the bank of England would decrease inflation rate to encourage more consumer spending and investment in an attempt to increase and make the inflation rate steadier.

Finally, exchange rates and interest rates. If the interest rate increases then both the demand for imports and the demand for exports would decrease. This is because consumer spending and investment would decrease, the decrease in both causes aggregate demand to shift to the left and the decrease in investment (in the long term) would shift aggregate supply to the left. Due to the demand for imports decreasing the exchange rate in the long term would increase and due to the demand for exports decreasing the exchange rate would decrease.

[shaunskjw]

I know I go on just a little bit :P: but thanks for any input

[Jan]

inflation and exchange rates - Now this can affect exchange rates heavily as it can act as the money supply in a country, if inflation increases then this means that the price level of UK’s goods and services has increased. This increase in inflation would cause the demand for exports to decrease as goods and services would be more expensive on the foreign market. The increase in inflation would also cause the demand for imports to increase as UK’s consumers will think that they have more money (the feel good factor) and will then spend more, on both domestic and foreign goods and services. Not only will that happen, but also UK’s consumers have more purchasing power on the foreign market which increases demand for imports.

Now if exchange rates increase the inflation rate decreases as the cost of importing decreases so makes the goods cheaper to import. Also the increase in exchange rates would cause demand to increase causing consumer spending to increase so due to the components of the aggregate demand curve, aggregate demand would expand causing an increase in supply and a decrease in price level (interest rates). Now if you change a few words you know what happens if exchange rates decrease (sorry about being lazy just a bit tired).

This increase in demand for imports and decrease in demand for exports causes the UK’s exchange rate to diminish (or decrease in value), this causes the UK to be able to export more and import less as foreign goods would be more expensive to import and UK consumers may switch to domestic goods and services, and exports would increase due to the cost of UK’s goods and services on the foreign market decreasing.
So know you know how exchange rates and inflation are interlinked lets move on.

Inflation and interest rates – This is quite a difficult area (in my opinion) but here you go, if interest rates are high then people are more likely to save more and spend less (this is already increase the inflation rate as spending decreases) this is due to the formula of the aggregate demand curve (C+I+G+{X-M}). The reason inflation rises is because aggregate demand would shift to the left which would cause supply to decrease and price levels to increase. Now if interest rates are low the opposite effect would happen, this means that people would spend more due to borrowing becoming cheaper therefore the demand curve would shift to the right causing supply to increase and price levels to decrease therefore decreasing the inflation rate (remember it decreases the inflation rate, it doesn’t mean that it causes deflation)

Now let’s see, how interest rates affect investment. Well it’s a similar affect to how interest rates affect consumer spending but more long term, if interest rates increase then firms in the UK are less likely to invest money into the economy as they can save more and the cost of borrowing would decrease. If investment decreases the aggregate demand curve would shift to the left due to one of the components of aggregate demand decreasing. If interest rates decrease then firms are more likely to invest in the market as the cost of borrowing has decreased and there is less incentive to save.

Now if inflation increases then the bank of England will increase interest rates to keep a steady and low inflation rate, the increase in interest rates will decrease consumer spending and investment for the reasons explained in the above two paragraphs. Remember the government doesn’t control inflation rates but influences the bank of England as to which action to take. If inflation rates decrease the bank of England would decrease inflation rate to encourage more consumer spending and investment in an attempt to increase and make the inflation rate steadier.

Finally, exchange rates and interest rates. If the interest rate increases then both the demand for imports and the demand for exports would decrease. This is because consumer spending and investment would decrease, the decrease in both causes aggregate demand to shift to the left and the decrease in investment (in the long term) would shift aggregate supply to the left. Due to the demand for imports decreasing the exchange rate in the long term would increase and due to the demand for exports decreasing the exchange rate would decrease.

many factual errors, little or no structure at all. try to do better than that.