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F585The Global Economy
F585 – global economy
Theme 1 : UK economy
Real GDP
• Definition – this is the figure that shows the total output within an economy that has been adjusted to allow for the effect of inflation
• (Real – figures that are changed to remove the effect of inflation)
Growth in Real GDP
Inflation
• Definition – a general increase in prices
Inflation
• http://www.bankofengland.co.uk/publications/inflationreport/mktcpinov09large.gif
Unemployment
• Definition – a situation where people are unable to find jobs but are willing and able to work
Unemployment
Balance of Payments
• Definition – this is a record of the trade in imports and exports in an economy
Balance of Payments
http://www.statistics.gov.uk/cci/nugget.asp?ID=194
Short Run
• The period of time during which the quantity of at least 1 factor of production is fixed and the others are variable.
• E.g. it is easy to change the level of labour relatively quickly although in the same period of time you cannot suddenly build a new warehouse (capital)
Long Run
• The period of time during which the quantity of all factors of production are variable.
• Its is possible to build new factories, implement new production lines and other large scale projects.
Short Run Economic Growth( actual growth)
• This is the annual percentage increase in the output of the economy.
• You may see GDP growth rates being mentioned in the press, they are referring to actual growth.
Long Run Economic Growth(potential growth)
• This is the percentage rate of growth in potential output. Potential output being the output that could be achieved at full employment.
• Essentially it shows the rate at which the economy could grow.
Short Run & Long Run Economic Growth on a PPF
Goo
ds
Services0
W
Z
XY
Short Run Economic Growth – increase in aggregate demand
Price level
Real GDP
AS
AD1
0 Yf Y2 Y1
AD2
P1
P2
Short Run Economic Growth – decrease in aggregate demand
Price level
Real GDP
AS
AD2
0 Yf Y1 Y2
AD1
P2
P1
Assessing the changes - BIG
Price level
Real GDP
AS
0 Yf
Macro equilibrium price and real GDP are not labelled – diagram to show effects only
Assessing the changes - small
Price level
Real GDP
AS
0 Yf
Macro equilibrium price and real GDP are not labelled – diagram to show effects only
SRAS Curve shiftsPrice Level
Real GDP
SRAS1
P1
Y10
AD
P2
Y2
SRAS2
Y3
P3
SRAS3
Firms
Households
C Banks Government Other nationsFactor Payments
Leakages
Injections
Savings
TaxesImport
Expenditure (M)
Investment (I)
Government Expenditure
(G)
Export Expenditure
(X)
Circular Flow of Income
Land – Rent
Labour – Wages
Capital – Interest
Enterprise – Profit
Marginal Propensity to Withdraw
Where:
Y = national income s = savings
t = tax m = imports
The Multiplier
The Multiplier =
(k)
1
Marginal Propensity to Withdraw
(MPW)
(MPS + MPT + MPM)
Multiplier Example (MPS)
Marginal Propensity to Save
(MPS)
∆s
∆Y
Investment = £16bn
Savings = £3.2bn
therefore
3.2 = 0.2 16
Multiplier Example (MPT)
Marginal Propensity to Tax
(MPT)
∆t
∆Y
Investment = £16bn
Tax = £1.6bn
therefore
1.6 = 0.1 16
Multiplier Example (MPM)
Marginal Propensity to Import
(MPM)
∆m
∆Y
Investment = £16bn
Imports = £1.6bn
therefore
1.6 = 0.1 16
Multiplier Example (MPM)
The Multiplier (k)
1
Marginal Propensity to Withdraw (MPW)
(MPS + MPT + MPM)
MPS = 0.2
MPT = 0.1
MPM = 0.1
therefore
k = 1 (0.2 + 0.1 + 0.1)
1 = 2.5 0.4
Multiplier example – increase in National Income
• Initially £16bn was invested into the UK economy by the firm
• The multiplier has been used to calculate the increase in national income
£16bn x 2.5 = £40bn
Accelerator model
• The accelerator model is based on an assumption of a stable (or fixed) capital to output ratio.
• Planned investment is demand induced. IE the demand for new plant and machinery comes from the demand for final goods and services.
• It is not primarily to do with interest rates
PPFs and The Trade Cycle
A
B
C A A
B
C
PPF Trade Cycle
Goods
Services0 0
Time
Output
Growth and trade
• THEORY: Countries can exceed the boundaries of their Production Possibilities Curves through trade.
• Both countries can be made better off, defined as having a higher a standard of living through trade.
• The UK is a trading economy.
• The UK does most of its trade with the EU
• There are new trading blocs outside the EU
• UK has exhibited a deficit on the current account but has success in high value industries ( see Rolls Royce article) .
Trade policies
• The big debate is
– Free trade V protectionism
Trade policy can influence the demand OR the supply side.
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