AS Economics

1. Unemployment

• List different types of unemployment• Comment on which are the easiest and

hardest to solve

2. Unemployment

• What is the difference between the ILO measure and claimant count of unemployment?

3. Unemployment

• State one cost and one benefit of unemployment

4. Advantages…

• Outline the difference between absolute and comparative advantage

5. Inflation

• Explain how inflation is calculated in the UK

6. Inflation

• State the the two main causes of inflation and for each suggest one way that this can be dealt with

7. Inflation

• What is the main target for inflation in the UK?

8. Inflation

• State 2 costs of inflation

9. Fiscal, supply side and monetary policies

• Decide which policies the following are….a. Increasing money supplyb. Increasing VATc. Increasing spending on educationd. Increasing interest ratese. Decreasing spending on educationf. Reducing income tax rates

10. Protectionism

• Comment on 2 ways in which you can protect domestic industries

11. Protectionism

• Suggest the best method of protectionism to avoid cheaper imports to the UK from Malta

12. The multiplier

• What would be the effect of an increase in government spending with

a. Lots of spare capacityb.Almost no spare capacity

Balance of payments

The current account

• Different from a personal current account and refers to trade in goods and services

• Is in 4 parts;• trade in goods – (X – M) • trade in services (X – M)• investment income (X – M) • current transfers (X – M)

Calculating BOP

Exports £M Imports £M Balance £M

Trade in goods 245,000 322,000

Trade in services

125,000 95,000

Investment income

240,000 221,000

Transfers 16,000 28,000

Current a/c balance

Imports• The purchase of goods and services by UK residents from

abroad• Imports represent a debit on the balance

of payments account• Imports may be purchased because:– They are better quality than those existing in the UK– They are not capable of being produced in the UK– The cost of production is lower than similar items

produced in the UK– The service associated with such items

may be better abroad than from UK producers

Exports

• Exports are the sale of goods and services by UK residents to foreign buyers

• Exports represent a credit on the balance of payments accounts

• The level of exports may be dependent on the competitiveness of UK producers in comparison to those abroad

Imports and exports and money flows

• Remember that each import and export involves money flows. An exporter to France will collect € then change this into £ when they bring the money back to the UK

• An importer will collect £ and change into their local currency when taking it back

Trade

• Trade not only occurs in goods and services but debits and credits are also recorded as a result of financial transactions, e.g.– Buying and selling of shares– Buying and selling of currencies– Buying and selling of bonds, financial derivatives,

forward contracts, etc.– Movements of funds by governments and

financial institutions – gold, Special Drawing Rights (SDRs), etc

Trade in goods

Main categories of goods traded:• Food, beverages and tobacco• Oil• Basic materials • Coal, gas and electricity• Semi-manufactured goods• Finished manufactured goods

Competitiveness

• UK trading position heavily reliant on the changing nature of competitiveness across the globe:

• e.g the rise of countries like China and India – manufactured goods, call centres, etc.

• Has an impact on UK trade – what we trade, how much we trade and who with

Competitiveness

• Factors influencing international competitiveness important:– Level of domestic inflation in relation

to our trading partners– Level of UK productivity in relation

to trading partners– Level of investment in physical and human resources

influences competitiveness– All affect the unit cost of production

Trade in services

• The UK’s biggest services are banking, insurance and tourism (Heathrow)

• Services are characteristic of a developed economy

• Some economists say a thriving manufacturing sector is still needed!

Change in employment

Investment Income

• Earnings from investments overseas minus income flowing abroad from foreign investments

• Bank loans and buying/selling shares are examples

• UK banks are big players in the international markets

• Toyota and Nissan have invested in the UK – profits from these plants will be exported

Transfers

• Measures transfers between countries;• Money sent to families abroad (both ways)• Government transfers;• Grants/aid to foreign countries• UK contributions to EU budget• Contributions to IMF, World Bank, WTO• Maintenance for troops, embassies and

consulates abroad

Changes in the current account

• Value of the currency (ER)• Changes in AD – increase tends to lead to more

imports• Inflation – higher inflation than competitors will

result in less exports• Labour productivity – lowers costs and makes

goods more attractive for foreign buyers• Innovation – lead to new products and

hopefully more exports

Does it matter?

• A country CAN have a deficit if there is inward flows to finance it

• Can self correct if it is due to strong demand as the economic cycle will eventually reduce demand

• Imports can be capital equipment which is used to make exports….

However…..

• The deficit may indicate that the UK has lost competitiveness (low investment, productivity, comparative advantage)

• Continued M > X will eventually lead to reduced levels of output and employment

• Not easy to move from manufacturing to services from an employment POV