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Edexcel Economics Unit 6 - ULTIMATE REVISION THREAD

Grape190190

I understand NAIRU and I understand the P-curve. What I don't understand is what you do with them in an economics essay given that they contradict each other.

I'm reading example essays in that green book, and they're completely different to the style we've been taught. They have references to Marxist theory and stuff.

Reply 761

robotic_dancer

8

jayshah31

There is one bank, they hold £1000. Me and you go to borrow £500 each, everyone is happy, we get the money, bank gets interest. Now, suppose the bank has £1000 again but the government comes and borrows £500. What happens? We both want £500 but only one of us will get it. The interest rates will rise as a result of a shortage of money supply - supply and demand.

Feel free to correct me/ask questions if I'm wrong.

I thought it was public spending increases, so interest rates are raised to attract more capital into the country. But it isn't in many textbooks?

Reply 762

x-shivi-x

Not looking forward to this exam....=|...but this time tomorrow it'll be over :smile:

Reply 763

User182034

15

As the paper was re written for the recession I can see a number of things:

Protectionism (given that countries will want to protect)
Exchange rates (sterling depreciatied, hot money decreases due to low interest rates, speculators go elsewhere)
FDI (lack of it as firms may even withdraw from some countries)
Lack of credit (firms and consumers)
Public spending
Housing market I suspect will be somewhere there

Reply 764

bobby1234

yoyo462001

Kind of looking forward to this exam, Macro is where i shine so hopefully i can get 120/120 on this one.

Wow...

Reply 765

jayshah31

14

robotic_dancer

I thought it was public spending increases, so interest rates are raised to attract more capital into the country. But it isn't in many textbooks?

This is the definition I have:

Crowding Out – If the government wanted to reflate the economy by reducing taxation or increase
government spending, then this may led to a PSBR. To finance the deficit the government have to sell debt
to the private sector. In order to attract individuals/institutions to purchase the debt the government may
have to increase interest rates. This rise in interest rates may ‘crowd out’ private investment and
consumption and offset the fiscal stimulus.

It's in my notes :s-smilie:

Reply 766

yoyo462001

16

Grape190190

I understand NAIRU and I understand the P-curve. What I don't understand is what you do with them in an economics essay given that they contradict each other.

I'm reading example essays in that green book, and they're completely different to the style we've been taught. They have references to Marxist theory and stuff.

Wait how does NAIRU contradict the Philips Curve?

Reply 767

User182034

15

This time tomorrow all my a levels will be over (apart from general studies which doesn't count)

Reply 768

yoyo462001

16

bobby1234

Wow...

Seeing as you dont even need full mark for 120 you could get like 85/100 and get 120, i think its very possible..

Reply 769

robotic_dancer

8

jayshah31

This is the definition I have:

It's in my notes :s-smilie:

I think you are right.

Reply 770

x-shivi-x

wait how would you guys answer this question:

'To what extent are trade deficits a cause for concern?' =S

Reply 771

Grape190190

2

yoyo462001

Wait how does NAIRU contradict the Philips Curve?

P curve says there's an inverse correlation between inflation and U/E. That means that you can reduce the rate of unemployment if you're willing to increase the rate of inflation. But then Friedman came along and said no, no, no, there's a fixed rate of u/e in the long run and while you can trade off inflation for employment in the short run, the only way you can keep unemployment below the NAIRU is is to keep accelerating inflation over and over.

Reply 772

illy123

12

yoyo462001

Wait how does NAIRU contradict the Philips Curve?

Philips curve implies that there is a trade-off between unemployment and inflation.

Friedman argued that there was no trade-off in the long run due to adaptive expectations - loosely based on Goodhart's law that any statistical relationship will breakdown when it is adopted as a policy tool. Once people realise that they are under the 'money illusion', given their bargaining power, they will incorporate inflationary pressuers into their wages so that they are no longer cheap - inflation will have to increase by more each time round. This results in an unemployment level with 0 inflationary expectiations.

However it's not hard to contradict the philips curve; immigration, globalisation, increased competition, more flexible labour supply, credible inflation targets by the independent MPC

Reply 773

yoyo462001

16

x-shivi-x

wait how would you guys answer this question:

'To what extent are trade deficits a cause for concern?' =S

Its likely on trade in goods - Not a concern since UK and USA have high marginal propensity to import manufacturing goods
Changing structure of the economy to tertiary based
We've had growth for all the years weve had a trade deficit, maybe its a macro objective that govts dont need to focus on
Cause for concern in manufacturing industry as it could mean increase in structural unemployment.

Reply 774

Jarvis09

l shows lack of competitiveness

Sharp fall in excahnge rate

Danger of inflation

May cause loss in confidence.

Then ofc you have to evaluate.

that is what i have written down in my notes, but im sure someone else can do it better. good luck.

Reply 775

yoyo462001

16

illy123

Philips curve implies that there is a trade-off between unemployment and inflation.

Friedman argued that there was no trade-off in the long run due to adaptive expectations - loosely based on Goodhart's law that any statistical relationship will breakdown when it is adopted as a policy tool. Once people realise that they are under the 'money illusion', given their bargaining power, they will incorporate inflationary pressuers into their wages so that they are no longer cheap - inflation will have to increase by more each time round. This results in an unemployment level with 0 inflationary expectiations.

However it's not hard to contradict the philips curve; immigration, globalisation, increased competition, more flexible labour supply, credible inflation targets by the independent MPC

Oh yeah, i remember with the economy going back to the NAIRU in the LRPC, thanks for the reminder and good explanations.

Reply 776

yoyo462001

16

Grape190190

P curve says there's an inverse correlation between inflation and U/E. That means that you can reduce the rate of unemployment if you're willing to increase the rate of inflation. But then Friedman came along and said no, no, no, there's a fixed rate of u/e in the long run and while you can trade off inflation for employment in the short run, the only way you can keep unemployment below the NAIRU is is to keep accelerating inflation over and over.

Thanks.

Reply 777

illy123

12

x-shivi-x

wait how would you guys answer this question:

'To what extent are trade deficits a cause for concern?' =S

Here's a post I posted on somethign similar, can't remember what:

A BoP deficit usually refers to a current account deficit; which is financed by a surplus in the capital/financial accounts - as the BoP must balance (if someone buys sterling, there has to be someone to sell it to him). BoP usually happen because a country is not competitive enough (minimum wage, low labour flexibility, bad human capital, high unit labour costs, low productivity, bad investment reduce quality, inflation increases price, high RER makes the good more expensive in relative terms) - usually it is due to inflation, high sterling relative to Euro and Dollar.

A BoP deficit will mean that we have imported more than we have exported - this can mean a higher standard of living however it cannot be sustained. To finance this, interest rates will be higher than normal to attract 'hot money', Foreign Direct Investment could be attracted, or the government can run down its foreign exchange reserves. The latter and the former cannot be sustained; if speculators begin to think that the economy is weak then they will need even higher rates of interest to keep their hot money there. Some issues with high interest rates are discouraged investment (bad for international competitiveness in the long run due to the MEC theory), decreased consumption (shifts AD to the left and reduces growth, increases unemployment), increases the value of the indigenous currency and so makes exports even more uncompetitive

A BOP deficit is a leakage in the circular flow of income; more money has left the economy than entered it. So you can shift AD to the left and analyse the consequences (lower employment, lower growth, etc). To correct a BoP deficit a country should make itself more competitive and so focus on price (Real Exchange Rate) and quality (investment); or it can chose to devalue its currency by buying up foreign currency on the global markets or lower the interest rate. However a currency devaluation could, in the short run damage the BoP position due to the J-curve - theory goes, trade is usually fixed in the short run due to a) difficulty in finding substitutes b) trade contracts. So, if sterling falls and we export the same quantity, we will receive less, if we import the same quantity at a higher price, then it costs us more. So Current Account could deteriorate. In the long run, if the combined export and import elasticites are more or equal to (-)1 the BoP position will improve (interesting proof on wiki by calculus).

It is not always a bad thing; for example: import led growth. Furthermore, a floating exchange rate will be open to automatic adjustments: if we have a BoP deficit then fewer pounds are demanded and more are supplied - classic S/D diagram with S shifting to the right reducing the equilibrium price. So, the pound will fall in value if there is a a BoP deficit and this will increase our international competitiveness and it can restore the deficit to some extent.

///

The advantages of trade deficits are that a) they increase the standard of living b) it could be due to increased importing of capital goods which will increase productivity in the long run.

Costs are that to have a deficit in the currency account we must have a surplus in the capital and financial account. This is due to a) high interest rates attracting 'hot' money b) government selling financial currency reserves -- these can't be sustained (increasign foreign investment can but it is more long term).

Also have to consider that a floating exchange rate can partially correct itself (as I think I mentioned in the quoted post) also consider that a deficit will mean in a lower sterling which has implications of its own (cost-push inflation), worsening trade blaance to J-curve, but in the LR better trade balance if Marshal Lerner condition is fulfilled.

... I will stop rambling.