Assess the impact of a fall in world commodity prices the performance of the UK economy Flashcards
Intro
- A commodity is a tangible good that can be bought and sold or exchanged for products of similar value.
- Natural resources such as oil as well as basic foods like corn are two common types of commodities.
- UK main macroeconomic objectives: 2% inflation rate, high employment, balanced trade balance, sustainable growth, equality, higher average living standards.
Draw the diagram too
Para 1 - Inflation
Cheaper commodity prices -> cheaper cost of production
- Commodities such as steel and oil are essential parts of production
- SRAS shifts to right
- Deflationary pressure as price decreases
- If incomes growth is more than inflation rate then people will experience a rise in their real incomes
- This may lead to an increase in consumer confidence resulting in increased household spending boosting aggregate demand
- May mitigate some of reduction in prices from cheaper prices
- At the moment inflation in The UK is very high and is largely from high commodity pressures so could be very beneficial to bring inflation closer to 2% target
You could add an AD2 to represent the increase in AD
Para 2 - GDP growth
- If SRAS and AS shift to right, then output will increase, and the economy will experience economic growth
- UK doesn’t really have an output gap so this would mean we are operating a positive output gap past the point of full employment
- In the SR this can be met as firms offer higher wages and higher prices, but this leads to inflationary pressure
- Not advisable in the current climate of the UK economy
- The UK economy has suffered a massive recession due to Pandemic . -9.7% GDP in 2020 - highest out of G7 countries
- This growth could be beneficial to get UK back on track
- Through multiplier this increase in consumption will lead to further increase in consumption as an increase in one person’s spending is an increase in another’s income and so they can then increase their consumption - impact of multiplier effect dependent on MPC
Para 3 - Current account
- In the LR, once ML conditions are met fall in commodity prices should lead to an increase in imports
- However, demand for commodities is fairly inelastic and so it is like a fall in price will lead to a fall in the value of imports
- This would reduce the UKs large trade deficit
- Would also reduce the value of exports from the UK and UK commodity exporters such as North Sea Oil will suffer
- We import more commodities than we export so overall will reduce trade deficit
Para 4 - unemployment
- Demand for labour is a derived demand and so an increase in consumption and AD will mean there is an additional requirement for labour reducing unemployment
- Due to reduction in CoP firms are able to offer workers higher wages which may entice those who are elly inactive to join the labour market increasing the UK labour force and employment
- This will have many positives such as an increase in tax revenue and a reduction in government spending on unemployment benefits which will help to reduce the government’s budget deficit which is growing increasingly large due to the pandemic as national debt now exceeds 100% of National GDP
Conclusion
- UK currently suffering from severe inflationary pressure, largely due to increase in commodity prices which has been worsened due to the war in Ukraine
- Probably biggest problem currently facing the UK economy as we face a cost-of-living crisis and many of the poorest households can no longer afford basic
What is Marshall-Lerner’s Condition?
The Marshall-Lerner (ML) condition is a concept that explains the impact of exchange rate changes on a country’s trade balance. It states that a depreciation of the exchange rate (i.e., a decrease in the value of a country’s currency) will lead to an improvement in the trade balance (i.e., an increase in exports and a decrease in imports) if the sum of the price elasticities of demand for exports and imports is greater than one.
