Hey there! Sign in to join this conversationNew here? Join for free
    Offline

    2
    ReputationRep:
    (Original post by Beccatenney)
    why does increased employment lead to increased wages?
    When there are less unemployed, inflation goes up as you can see from the phillips curve. Due to inflationary pressures in the economy people are willing to work for less as the value of money after inflation isn't worth as much as it was before and so wages increase.
    Offline

    1
    ReputationRep:
    (Original post by Bruce267099)
    Economic growth and environment

    This will result in more production and so employment will rise. This will lead to higher incomes and so consumption will increase and so there will be more litter.However as there is economic growth firms will be able to invest in environmentally friendly methods of which will better the environment.

    Economic growth and the balance of payments

    This will result in higher income and increased consumption, so there will be more imports, which will worsen the current account.However economic growth will also cause investment which will increase productive efficiency, leading to an increase I'm quality and more exports, improving the current account.

    Full employment and environment

    This will lead to more people working and so production will increase and so litter will increase as well as travel, causing pollution.However this employment will result in more taxes, of which could be spent on the environment.

    Economic growth and income distribution

    This will lead to higher incomes, as people in higher positions tend to be paid more in wage increases so there will be unequal distribution.However they will have to pay more tax, which will go back to the unemployed in the form of benefits.

    Low inflation and the balance of payments

    When achieving low inflation interest rates will increase. This will attract hot money and so it will cause an appreciation in the exchange rate, reducing exports and increasing exports, worsening the current account.However these both work well together, as low inflation tends to lead to stable prices, leading to increase competitiveness, improving the current account.

    Full employment and low inflation

    This will lead to full employment and increased spending causing demand pull inflation. It will also increase employment, leading to increased wages and cost push inflation. Furthermore it will lead to high interest rates, reducing spending and investment and increasing unemployment.However during a recession there was high inflation and high unemployment whereas now we have low inflation and low unemployment.

    Conflictions of Macroeconomic policiesReflationary

    Fiscal policy and Monetary policy

    Aggregate demand will shift to the right. This was decrease inflationary pressures and so the monetary committee will have to increase interest rates to counterbalance the effect of the fiscal policy.

    Supply Side Policy and Reflationary Fiscal Policy

    By using the SSP to try and make the workforce more productive education might be improved. This will require high levels of government spending having an impact on the fiscal policy. Added to that if the time spent in education is increasing to improve human capital the government won't receive tax revenue, again affecting the fiscal policy.

    Monetary Policy and Supply Side Policy

    If interest rates rise this will make borrowing more expensive. It will also mean there is more to pay back on existing borrowing. Firms who have borrowing will now find their costs have increased and will not be able to produce as much shifting aggregate supply to the left having an impact on the supply side policy.
    does ad shifting to the right not increase inflationary pressures?
    Offline

    2
    ReputationRep:
    (Original post by Diastal)
    How does that result in greater competitiveness? Demand for the exports will not increase, only supply.
    If businesses invest, cost per unit falls. If cost per units fall the likelyhood is firms will pass this saving onto consumers. This will extend aggregate demand for exports as we will be cheaper then other countries. Then you could argue saying that our exports are highly inelastic and so demand is very unlikely to increase.
    Offline

    2
    ReputationRep:
    (Original post by Beccatenney)
    does ad shifting to the right not increase inflationary pressures?
    Yes it does.
    • Community Assistant
    • Welcome Squad
    Offline

    12
    ReputationRep:
    (Original post by Bruce267099)
    If businesses invest, cost per unit falls. If cost per units fall the likelyhood is firms will pass this saving onto consumers. This will extend aggregate demand for exports as we will be cheaper then other countries. Then you could argue saying that our exports are highly inelastic and so demand is very unlikely to increase.
    Again this analysis is correct. However it would be more simple and correct to state that an increase in investment causes a right shift of the LRAS curve, leading to lower price level. This means that exports are cheaper and are more competitive
    Offline

    2
    ReputationRep:
    (Original post by harryleavey)
    Again this analysis is correct. However it would be more simple and correct to state that an increase in investment causes a right shift of the LRAS curve, leading to lower price level. This means that exports are cheaper and are more competitive
    I do like to over complicate things a bit.
    Offline

    2
    ReputationRep:
    (Original post by harryleavey;[url="tel:65029751")
    65029751[/url]]Again this analysis is correct. However it would be more simple and correct to state that an increase in investment causes a right shift of the LRAS curve, leading to lower price level. This means that exports are cheaper and are more competitive
    Ah okay this makes more sense, thank you. But wouldn't an increase in investment also increase AD? Resulting in higher prices and less competitive exports? So which one's right? It can't be both, can it?
    • Community Assistant
    • Welcome Squad
    Offline

    12
    ReputationRep:
    (Original post by Diastal)
    Wouldn't using reflationary monetary policy increase AD, and so price of exports increase? So how exactly does that improve the trade deficit?
    I think the reason you are getting confused is because Bruce's analysis was not fully developed.

    Reflationary monetary policy (also known as expansionary) would possibly be achieved through reduced interest rates.

    This would reduce the incentive for foreign people to put their savings in UK banks (hot money), as they receive a smaller return (due to lower interest rates).

    Therefore there would be less demand for the GBP £. As a result, the currency falls in value (depreciating currency). This means that imports become more expensive and exports are cheaper.

    As a result exports increase and imports decrease, improving the trade deficit (AKA current account deficit)
    • Community Assistant
    • Welcome Squad
    Offline

    12
    ReputationRep:
    (Original post by Diastal)
    Wouldn't using reflationary monetary policy increase AD, and so price of exports increase? So how exactly does that improve the trade deficit?
    An increase in AD does not cause the price of exports to increase.
    • Community Assistant
    • Welcome Squad
    Offline

    12
    ReputationRep:
    (Original post by Diastal)
    What policies can be used to correct the trade deficit?
    Imports and Exports:

    To correct current account deficit (simply: imports>exports, although current transfers and investment income also makes up current account)

    To structure this essay:
    Price-factors and Non-price factors

    Price Factors:
    • Monetary policy to change interest rates. i.e Lowering interest rates would reduce hot money (foreign saving money in UK banks). This would reduce demand for the pound. Causing depreciation. This would make imports more expensive, improving the current account balance.
    • Policies to reduce price level (e.g contractionary fiscal or contractionary monetary) hence making exports cheaper and more competitive. Increased exports improve current account balance.
    • Tariffs on Imports to reduce demand for imports

    Non-price factors
    • e.g customer service, high quality goods, unique products... All of which would make exports more competitive, improving current account balance. Germany is an example of a country with a current account surplus as a result of non-price factors
    Hope this helps
    • Community Assistant
    • Welcome Squad
    Offline

    12
    ReputationRep:
    (Original post by Diastal)
    Ah okay this makes more sense, thank you. But wouldn't an increase in investment also increase AD? Resulting in higher prices and less competitive exports? So which one's right? It can't be both, can it?
    Yes, both are correct. Both AD and AS are affected by investment. AD in the short run, and AS in the long run.

    Analysis of the AS curve is more respected than a simple 'Investment is a component of AD, so AD increases'. Investment does not form a huge proportion of AD, hence why LRAS analysis is more significant.

    Although you could use the AD analysis as an evaluation for the short run.
    Offline

    2
    ReputationRep:
    (Original post by harryleavey;[url="tel:65030065")
    65030065[/url]]An increase in AD does not cause the price of exports to increase.
    Huh? It doesn't? But if the price level rises doesn't mean that prices of goods within the economy rises? And so prices of exports increase? I'm really confused...lol
    • Thread Starter
    Offline

    2
    ReputationRep:
    (Original post by harryleavey)
    Again this analysis is correct. However it would be more simple and correct to state that an increase in investment causes a right shift of the LRAS curve, leading to lower price level. This means that exports are cheaper and are more competitive
    - This occurs only in the long run though
    • Community Assistant
    • Welcome Squad
    Offline

    12
    ReputationRep:
    (Original post by rosemondtan)
    - This occurs only in the long run though
    Yeah, hence "LRAS'

    I feel that AS analysis with regard to investment is better than the basic 'Investment is a component of AD'.

    Investment only forms about 10% of AD in the UK, so possibly wouldn't have as significant impact as the impact of investment on AS. But then you get the time lag evaluations with regard to LRAS...

    Although both are correct.
    • Thread Starter
    Offline

    2
    ReputationRep:
    (Original post by harryleavey)
    Yes, both are correct. Both AD and AS are affected by investment. AD in the short run, and AS in the long run.

    Analysis of the AS curve is more respected than a simple 'Investment is a component of AD, so AD increases'. Investment does not form a huge proportion of AD, hence why LRAS analysis is more significant.

    Although you could use the AD analysis as an evaluation for the short run.
    but stil entirely economically valid nonetheless and should be equally credited. It would be applicable in analysing why aggregate demand increases because consumption usually increased alongside investment (animal spirits) and this makes the increase in AD significant
    • Community Assistant
    • Welcome Squad
    Offline

    12
    ReputationRep:
    (Original post by Diastal)
    Huh? It doesn't? But if the price level rises doesn't mean that prices of goods within the economy rises? And so prices of exports increase? I'm really confused...lol
    Exports are a component of AD.
    The increase in AD may have been caused by an increase in exports for example.
    You are then saying that this causes exports to decrease?

    Increase in Exports -> Increase in AD -> Decrease in Exports
    ^ This analysis is incorrect.

    Although what you are saying makes sense on its own: increased prices, decreased competitiveness of exports, exports fall. IF you are using this analysis following a rise in AD (possibly caused by a rise in exports), I don't think it would be appropriate to continue by saying exports fall. Maybe you could evaluate with exchange rates though?
    • Community Assistant
    • Welcome Squad
    Offline

    12
    ReputationRep:
    (Original post by rosemondtan)
    consumption usually increased alongside investment (animal spirits) and this makes the increase in AD significant
    I like this analysis!
    Offline

    2
    ReputationRep:
    (Original post by harryleavey;[url="tel:65030483")
    65030483[/url]]Exports are a component of AD.
    The increase in AD may have been caused by an increase in exports for example.
    You are then saying that this causes exports to decrease?

    Increase in Exports -> Increase in AD -> Decrease in Exports
    ^ This analysis is incorrect.

    Although what you are saying makes sense on its own: increased prices, decreased competitiveness of exports, exports fall. IF you are using this analysis following a rise in AD (possibly caused by a rise in exports), I don't think it would be appropriate to continue by saying exports fall. Maybe you could evaluate with exchange rates though?
    Okay can we start from the beginning? How do exchange rates work and how does competitiveness of exports increase or decrease?
    • Community Assistant
    • Welcome Squad
    Offline

    12
    ReputationRep:
    (Original post by Diastal)
    Okay can we start from the beginning? How do exchange rates work and how does competitiveness of exports increase or decrease?
    Ok
    An exchange rate is simply the value of one currency in terms of another.

    An export is more competitive if it is cheaper (or non price competition such as high quality export)

    An export is cheaper if the exchange rate depreciates. In other words if the £ decreases in value against another currency, our exports become cheaper for overseas consumers to buy.

    Cheaper exports mean they are more competitive in comparison to exports which are more expensive.

    So exports increase.


    (An exchange rate may depreciate if the demand for currency falls. Think of a Pound coin as a good. If less people demand the good, the price falls. Therefore in the case of exchange rates, if there is reduced demand for the currency e.g low interest rates, the exchange rate falls)
    • Thread Starter
    Offline

    2
    ReputationRep:
    (Original post by Diastal)
    Okay can we start from the beginning? How do exchange rates work and how does competitiveness of exports increase or decrease?
    Basically, the economy is complicated. There are so many possible effects from one cause, which is why we have "tradeoffs". The analysis about increase in AD works because you can see it on the AD/AS Diagram. When you decrease interest rates, people naturally spend more and firms invest make as cost of borrowing falls. Therefore AD WILL increase and exchange rate increases, causing level of exports to decrease.

    However, if you consider monetary policy, this could conflict as a decrease in interest rates means foreign investors stand to get less money from putting in our banks (hot money) therefore, they will change their money to other currencies and this will cause the supply of pounds on the market to increase, resulting in a fall in the exchange rate and thus more competitive price of exports. This will cause level of exports to increase.
 
 
 
  • See more of what you like on The Student Room

    You can personalise what you see on TSR. Tell us a little about yourself to get started.

  • Poll
    Are unpaid trial work shifts fair?
  • See more of what you like on The Student Room

    You can personalise what you see on TSR. Tell us a little about yourself to get started.

  • The Student Room, Get Revising and Marked by Teachers are trading names of The Student Room Group Ltd.

    Register Number: 04666380 (England and Wales), VAT No. 806 8067 22 Registered Office: International House, Queens Road, Brighton, BN1 3XE

    Quick reply
    Reputation gems: You get these gems as you gain rep from other members for making good contributions and giving helpful advice.