4. Economic Considerations

Question 1

what are the 5 macroeconomic variables? explain them

Answer 1

-GDP: total UK production (output)
also measured by total expenditure and total income. target for gdp is 2.5% per annum (average)
-Inflation: a rise in the general/ average price level, less can be bought with a set amount of money. the target rate of inflation is 2.5%
-Unemployment: the number of people out of work and actively seeking a job
-Trade balance: the UK’s trade account with the rest of the world
value of exports-value of imports

Question 2

what is the economic cycle?

Answer 2

the economic cycle shows the current state of the economy i.e. the current level of GDP

Question 3

what are the concerns of the fiscal policy?

Answer 3

the types and rates of taxation, as well as the level and nature of government spending

Question 4

name and explain the 5 areas of spending concerned in the fiscal policy

Answer 4

Public goods: collective consumption goods
-have to be provided by the public sector because it’s difficult to charge consumers for the use of the product making it unable to make a profit (so not the private sector) e.g. street lights, police, defence

Merit goods: could also be provided by the private sector

• important goods that benefit the individual and society as a whole
• provided free of charge at a subsidised rate e.g. NHS, council houses, education

Capital spending: country’s infrastructure

Social services and transfer payments: benefits
-transfer payments: taking money from one group (through taxes) and transferring it to others e.g. unemployment benefit

to control the economy: taxation and government spending are used together to influence the level of spending in the economy

• if spending by consumers and government increases, the demand for goods and services which increases jobs
• for the government to lower unemployment in a recession, they need to stimulate spending
• the government could increase their spending on infrastructure to increase jobs
• or they could increase transfer payments to boost incomes and allow these people to spend more

Question 5

how do governments influence spending by consumers and firms?

Answer 5

• reduce direct taxation on consumers (cut income tax) and corporation tax on company profits
• consumers will have a higher disposable income so they can have a higher disposable income –> this will increase spending
• reduce corporation tax on company profits
• firms will have higher profits–> more money to reinvest in the business

Question 6

what are the problems associated with these methods? what might happen instead?

Answer 6

• people may just save
• might not buy more… just better products
• extra profits may just be distributed amongst shareholders
• reinvestment involves buying new machinery but firms usually operate in excess capacity during a recession

Question 7

what happens when the value of the £ increases/ appreciates?

Answer 7

Strong Pound Imports Cheap Exports Dear

• imports cheap: imports from abroad are cheaper
• makes UK goods relatively more expensive
• UK residents will buy foreign goods rather than goods produced at home
• price of imports decrease–> increased demand for imports and decreased demand for UK goods

-exports dear:
increased value of the £–> increased price of the exports
-UK goods become uncompetitive abroad–> decreased demand for UK exports

Question 8

who benefits from the appreciation of the £?

Answer 8

• consumers benefit from cheaper goods and more choice and people going on holiday benefit
• businesses can import goods at a lower cost…if they keep their price the same they will benefit from a higher profit margin… if they cut the price–>competitive advantage in terms of price

Question 9

who is not affected?

Answer 9

• some UK goods have strong brand names e.g. Burberry… foreign consumers will continue to buy them even if the price has gone up as they are premium goods
• the demand is price inelastic

Question 10

describe the price and demand of imports and exports from the £ depreciates

Answer 10

-decreased price of exports–>increased demand for exports
-increased price for imports–>decreased demand for imports
(opposite of spiced)

Question 11

what are the 5 macroeconomic objectives for the economy?

Answer 11

• Trade balance: the balance of imports and exports
• Inflation: target level 2%
• GDP growth: target level 2.5%
• Employment (full employment)
• Re-distribution of income