igcse economics revision notes

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IGCSE Edexcel Economics revision notes. It could be used for CIE although some topics may vary differently from the CIE syllabus.

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IGCSE EconomicsOpportunity cost and the basic economic problemDefinition

Opportunity cost: the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen)

Production: the act of creating output, a good or service which has value contributes to the utility of others

Producer: people who make and sell goods/services

Consumption: The final purchase of goods and services by individuals

Consumer: Individuals who purchase the good/services to satisfy their wants and needs

Consumption Expenditure : Spending of consumers

Exchange: A marketplace in which securities, commodities, derivatives and other financial instruments are traded

Trade: An economic activity that involves multiple parties participating in the voluntary negotiation and then the exchange of one's goods and services for desired goods and services that someone else possesses.

Entreprenuers: individuals who, rather than working as an employee, runs a small business and assumes all the risk and reward of a given business venture, idea, goods, or service offered for sale. Human resources: the company department charged with finding, screening, recruiting and training job applicants, as well as administering employee- benefit programs. Also known as Labor. Natural resources: resources occurring in nature that can be used to create wealth Also known as Land. Examples include, seas and rivers. Factors of Production;

Definition : inputs that are used in the production of goods or services in the attempt to make an economic profit. The factors of production include land, labor, capital and entrepreneurship.

Factors

1. LandLand refers to the resources available including the seas nad rivers, forests and deserts all manner of minerals from the ground; chemicals from the air and earths crust.

2. LaborLabor refers to the physical and mental effort produced by people to make goods/services. The size and ability of a economys labor force are very important in determining the quantity and quality of the goods/services produced. The greater the number of workers the better educated and skilled they are, the more an economy can produce.

3. EnterpriseEnterprise refers to the ability to run a production process, employ and organize resources in a firm (an organization that owns a factory or a number of factories and even shops, where goods/services are produced).

4. CapitalCapital refers to already-produced durable goods that are used in production of goods or services. It is not wanted for itself but for its ability to help in producing other goods. It is also known as man-made resources.Division of labor/Specialization

Definition: A system whereby workers concentrate on performing a few tasks (instead of finishing the entire product by themselves) and then exchange their production for other goods/services

Advantages

1. More goods/services can be producedWhen workers become specialists in the jobs they do, repetition of the same operation increases the skill and speed of the worker and as a result more is produced.

2. Full use is made of everyones abilitiesWith the division of labor there is greater chance that people will be able to do those things at which they are best and which interest them the most.

3. Time is savedTime is wasted when a worker has to switch from one task to another. Time can also be saved when training people. It would take many years to train someone to be able to build a car, for example, but a person can be trained quickly to fulfill one operation in the production process.

4. It allows the use of machineryAs labor is divided up into specialist tasks, it becomes worthwhile to use machinery which allows a further saving in time and effort. For example, cars are painted by machines instead of by hand. This, in turn, allows machinery to take over peoples jobs leaving many unemployed.

Disadvantages

1. Work may become boringA worker who performs the same operation every day is likely to be unsatisfied/low morale. To combat this, many firms play music to their labor forces, or allow them to have a rest during part of each hour. Longer rest hours and annual holidays may also be introduced although this will shorten the working week.

2. People become too dependent on each otherSpecialisation and divisiol of labour means that people come to rely on others for the provision of goods/services. For example, people who produce food rely on the provision of tractors, fertilizers, etc.

3. Workers may feel alienatedWorkers may feel unimportant because they can no longer see the final result of their efforts. Some firms are trying to reverse this by introducing workers to a greater variety of tasks

4. Standardization of goodsGoods produced under a system of specialization are usually turned out in vast numbers and share the same design. Whether this is a disadvantage depends on peoples opinion. For example, there is probably variation in the color and design in clothes to please most people. However, it is not possible to please everyone because in most factories it would be difficult and expensive to change the production process to suit one persons wants since most factories practice mass production in order to produce the greatest number of goods in the lowest cost possible.

What is economics?Economics is the social science that analyzes the production, distribution, and consumption of goods and services. It studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants. Economics can generally be broken down into: macroeconomics, which concentrates on the behavior of the aggregate economy; and microeconomics, which focuses on individual consumers.

Market SystemsDefinition:

Market: One of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. It consists of all those people or firms who wish to exchange a given good or service.

Market system: Any systematic process enabling many market players to bid and helping bidders and sellers interact and make deals. It is not just the price mechanism but the entire system of regulation, qualification, credentials, reputations and clearing that surrounds that mechanism and makes it operate in a social context.

Price mechanism: Refers to the consumers and producers who negotiate prices of goods or services depending on demand and supply. This is also known as market forces.

Types of market systemsMarket systemFree economyMixed economyPlanned economy

DefinitionAn economy in which decisions regarding investment, production and distribution are based on supply and demand and the prices of goods and services are determined in a free price system.An economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies.An economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency.

Advantages Capital return. Capital flows to where it will get the greatest return, expanding the total size of the economy to its maximum level. Supply and Demand. Supply and demand are closely linked: Someone who has a good idea or product can quickly put it into the market so that it is available to those who want it. Conversely, when a certain type of product is desired by enough people, it is a simple matter for someone to provide it. Economic freedom. In a market economy, it is easier for someone with initiative and virtue to create a better life for themself and their family; economic freedom makes it eaiser to transform hard work and perseverance into material wealth. Provides fair competition. The presence of private enterprise ensures that there is fair competition in the market, and the quality of products and services are not compromised. Well regulated. Market prices are well regulated. The government with its regulatory bodies ensure that the market price do not go beyond its actual price. Efficient use of resources. Optimum utilization of national resources. In a mixed economy, the resources are utilized efficiently as both government and private enterprises are utilizing them. It does not allow monopoly at all. Barring a few sectors, a mixed economy does not allow any monopoly as both government and private enterprises enter every sector for business. Stability. Long-term infrastructure investment can be made without fear of a market downturn leading to abandonment of a project. Meeting collective objectives. Planned economies may be intended to serve collective rather than individual needs. The government can harness FOP to serve the economic objectives of the state. Advantages over free economy. It is not subject to major pitfalls of market economies and marked-oriented mixed economies. A planned economy does not suffer from business cycles, does not experience crises of overproduction. It does not result in asset bubbles massive misallocations of resources.

Disadvantages Unequal wealth distribution. a small percentage of society has the wealth while the majority lives in poverty. No economic stability. greed and overproduction cause the economy to have wild swings ranging from times of robust growth to cataclysmic recessions. Too competitive. A competitive environment creates an atmosphere of survival of the fittest. This causes many businesses to disregard the safety of the general public to increase the bottom line.

Inefficient. It's efficiency property reduces in progressively higher degree, the more its mixed nature embraces more and more of government / state intervention and State planning and reduces the reliance on competitive market economy management mechanisms. Less reliance on competition.Mixed economy system has a natural tendency to move further and further away from reliance on competitive market mechanism to greater and greater bureacratic controls and interventions. Encourage state monopolies. Mixed economy systems tend to encourage more state monopolies, higher and higher tax to GDP ratio and dominant public finances, making the government a large economic player as compared to corporate or individual entities. Inefficient resource distribution. Planners cannot detect consumer preferences, shortages, and surpluses with sufficient accuracy and therefore cannot efficiently co-ordinate production. Suppression of economic democracy and self-management. Without economic democracy there can be troubles with the flow of knowledge as is shown with the initiative for backyard furnaces and other efforts in the Great Leap Forward.

ExamplesUSA, Japan, BrazilCanada, Germany, UKChina, Cuba, North Korea

The ownership of the factors of production controls: What is produced Where to produce How to produce the method of production (labour intensive/ capital intensive) How much goods and services to produceEconomic sectorsPrimary: The extraction of natural resources e.g. oil drilling, quarrying, forestry

Secondary: The manufacturing of goods using natural or man-made resources e.g. car assembling, property construction, toy manufacturing

Tertiary: The provision of services to consumers or producers e.g. education, accounting, marketing

Quaternary: The provision of R&D, software development and information processing e.g. research into fiber optics, development of search engines. Production Productivity & Wealth CreationDefinition

Productivity: A measure of the efficiency of production. It is the amount of output that can be produced from a given amount of resources

Labor productivity: the amount of goods and services that a worker produces in a given amount of time

Production Possibility Frontier: A graph that compares the production rates of two commodities that use the same fixed total of the factors of production.

Profit = Revenue Cost ( Productivity ( CELL; FOP) Cost)Productivity Labor productivity = Output No. of workers E.g. Firm A: 10 units of labor & 20 units of output Firm B: 20 units of labor & 60 units of output Ways to increase productivity may mean: Using same number of Factors of Production to produce more output Using less Factors of Production to produce same amount of output. What is increased productivity = lower business cost Increased productivity means greater wealth for owners of firms and the economy (in general) PPF shift outwards (economic growth)

How to improve productivity of land

Increased use of fertilizers Fertilizers allow previously barren land to produce crops, and fertile lands to improve higher yields Improved drainage Reduces soil erosion and assists in the reduction of phosphorus in streams. It allows crops such as hay, corn and soybeans to produce higher yields. Improved irrigation In dry areas, improved irrigation will allow plants to receive more water and produce a higher yield. Increased use of machinery Machinery such as tractors help take in the yields much more quickly. Introduced genetically-modified high-yield crops Genetically-modified crops produce higher yield as they can be altered to fight against pests, herbicides, cold, disease or drought. Build multi-functioned buildings (e.g. skyscrapers) - By building multi-functioned buildings, land can be allocated more efficiently as buildings such as skyscrapers can accommodate a wide range of business activitiesHow to improve productivity of labour Implement division of labor Division of labor allows production to be more efficient.

Increase use of machinery (to aid tasks) Machinery allows the increase of production as well as the quality of the finished product to be better.

Specialization There is a higher output. Total output of goods and services is raised and quality can be improved. A higher output at lower costs means more wants and needs might be satisfied with a given amount of scarce resources.

Skill training Skills training increase productivity. In addition to learning how to complete new tasks and take on more responsibility, employees can learn advanced techniques to help those complete everyday tasks more efficiently. Also, it improves job satisfaction of the employee. Investing time and money in employees skills make them feel valued and appreciated, and it challenges those to learn more and get more involved in their jobs. Higher job satisfaction ultimately results in reduced turnover and higher productivity.

Motivate workers with financial incentives (pay raises, profit sharing), increase job satisfaction (better working environment)NationalizationDefinition: The process of taking an industry or assets into government ownership by a national government or state. It usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being transferred to the public sector to be operated and by the state.

Advantages The ability of the state to direct investment in key industries The distribution of state profits from nationalized industries for the overall national good The ability to direct producers to social rather than market goals Greater control of the industries by and for the workers The benefits and burdens of publicly funded research and development are extended to the wider populace

Disadvantages Costly management. The management of the nationalized industry is complicated and unwieldy. There are numerous departments and paid persons i.e. directorate, regional office conduct its management. Lack of decision making. All the necessary matters are decided by various official and committees. In case of conflicting views, quick decision cannot be made for the urgent matters which are dangerous in business. Lack of efficiency. Nationalized industries are managed by salaried persons who are generally found less efficient as compared with privately owned concerns. There is also lack of flexibility and adaptability which are asset of private ownership. Bureaucracy. There is extensive and rigid procedure of the state machinery by which event is dealt. Such stipulated rules has made the process of work very complicated which results in delay and loss of initiative. Absence of profit motive. The salaried persons are not concerned with profit. Therefore, nationalized undertaking hardly run successfully due to lack of personal interest Chances of loss. The loss of the nationalized enterprises is regarded as the loss of the nation. So the structure of nationalized economy will greatly affected by the failure of such scheme. Limited investment. Investors hesitate to invest large sum of money due to risk of nationalization. Therefore the volume of investment remains limited in private sector.Privatization Definition: The incidence or process of transferring ownership of a business, enterprise, agency, public service property from the public sector (the state or government) to the private sector (businesses that operate for a private profit) or to private non-profit organizations.

Advantages Increased efficiency. Private companies and firms have a greater incentive to produce more goods and services for the sake of reaching a customer base and hence increasing profits. A public organization would not be as productive due to the lack of financing allocated by the entire government's budget that must consider other areas of the economy. Specialization. A private business has the ability to focus all relevant human and financial resources onto specific functions. A state-owned firm does not have the necessary resources to specialize its goods and services as a result of the general products provided to the greatest number of people in the population. Improvements. Conversely, the government may put off improvements due to political sensitivity and special interestseven in cases of companies that are run well and better serve their customers' needs. Capital. Privately held companies can sometimes more easily raise investment capital in the financial markets. While interest rates for private companies are often higher than for government debt, this can serve as a useful constraint to promote efficient investments by private companies, instead of cross-subsidizing them with the overall credit-risk of the country. Investment decisions are then governed by market interest rates. State-owned industries have to compete with demands from other government departments and special interests. In either case, for smaller markets, political risk may add substantially to the cost of capital.

Disadvantages Job Loss. Due to the additional financial burden placed on privatized companies to succeed without any government help, unlike the public companies, jobs could be lost to keep more money in the company. Natural monopolies. Privatization will not result in true competition if a natural monopoly exists. Profit. Private companies do not have any goal other than to maximize profits. A private company will serve the needs of those who are most willing (and able) to pay, as opposed to the needs of the majority. Goals. The government may seek to use state companies as instruments to further social goals for the benefit of the nation as a whole.

Demand theory

DefinitionsDemand: The ability and willingness to pay a price to purchase a good/service

Quantity demanded: The total amount of goods or services that are demanded at any given point in time.

Ceteris Paribus: The relationship between both the price and the quantity demanded of an ordinary good.

Effective demand: the demand for a product or service which occurs when purchasers are constrained in a different market

Notional demand: The demand that occurs when purchasers are not constrained in any other market

Individual demand: The ability and willingness of a consumer to purchase a good/service

Derived demand: Demand for one good or service occurs as a result of the demand for another intermediate/final good or serviceTypes of income

Real. Income of an individual or group after taking into consideration the effects of inflation on purchasing power.

Disposable. Amount of money that households have available for spending and saving after income taxes have been accounted for. Disposable personal income is often monitored as one of the many key economic indicators used to gauge the overall state of the economy.

Discretionary. Amount of an individual's income that is left for spending, investing or saving after taxes and personal necessities (such as food, shelter, and clothing) have been paid. Discretionary income includes money spent on luxury items, vacations and non-essential goods and services. Factors that affect the demand for goods/services

Good's own price. The basic demand relationship is between potential prices of a good and the quantities that would be purchased at those prices. Generally the relationship is negative meaning that an increase in price will induce a decrease in the quantity demanded. This negative relationship is embodied in the downward slope of the consumer demand curve. In other words, the lower the price, the higher demand, ceteris paribus

Price of related goods. The principal related goods are complements and substitutes. A complement is a good that is used with the primary good. Examples include hotdogs and mustard, beer and pretzels, automobiles and gasoline. If the price of the complement goes up, the quantity demanded of the other good goes down. The other main category of related goods is substitutes. Substitutes are goods that can be used in place of the primary good. If the price of the substitute goes down, the demand for the good in question goes down.

Personal Disposable Income. In most cases, the more disposable income (income after tax and receipt of benefits) you have the more likely you buy. Any changes in the level of income tax rates and allowances are therefore likely to result in a change in the quantity of goods/services demanded. In a normal good, demand for a product tends to rise as incomes rise. If the demand tends to fall as incomes rise the product is said to be an inferior good.

Tastes, preference or habits. The greater the desire to own a good the more likely you is to buy the good. There is a basic distinction between desire and demand. Desire is a measure of the willingness to buy a good based on its intrinsic qualities. Demand is the willingness and ability to put one's desires into effect. It is assumed that tastes and preferences are relatively constant. For example, if consumers around the world are demanding good/services that are environmentally-friendly, the derived demand for those goods/services will increase. Advertising also plays a part. Persuasive and informative advertising tends to increase brand awareness and as a result, increase the demand for the good/service.

Consumer expectations about future prices and income. If a consumer believes that the price of the good will be higher in the future he is more likely to purchase the good now. If the consumer expects that her income will be higher in the future the consumer may buy the good now. In other words positive expectations about future income may encourage present consumption.

Seasonal demand. A hot summer can boost sales of cold drinks and ices while a cold winter can boost the demand for fuel for heating.

Higher interest rates can increase the demand for savings schemes but reduce the amount of money people want to borrow, including mortgages for house purchases. Population change. An increase in population tends to increase the demand for many goods and services in a country. For example, in a country where there is an aging population, demand for walking sticks and retirement homes may increase. Location of consumers. There is unequal distribution of income and wealth in different areas of the country. In a richer area of the country, the demand for superior goods will be higher in an area of low income. Price Elasticity of Demand

Definition: PED. A measure used to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. The elasticity of the demand curve will also affect the amount of revenue as the price changes

Formula

PED = % change in Quantity Demanded PED = (New QD Old QD) x100 % change in Price , (New P Old P) x 100

Inelastic : The PED value is between 0 and -1. It tends to have few substitutes, is necessities, and/or can be addictive, e.g., alcohol, cigarettes, or petrol. Elastic : The PED value is between -1 and -. It has a lot of substitutes and may be an inferior good. Revenue

Definition:Revenue is the amount received by the producer from the sale of the goods or service. It is calculated by the multiplying the price charged by the quantity sold (R = P x Q). The only difference between revenue and profit is the costs

Price elasticity of Supply

Definition:

PES: A measure used to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price. The PES is always a positive number

Formula

PED = % change in Quantity Supplied PED = (New QS Old QS) x100 % change in Price , (New P Old P) x 100

Inelastic : The PED value is between 0 and 1. It tends to have few substitutes and takes time to alter the quantity of production. Elastic : The PED value is between 1 and .

Note: The amount supplied is not always equal to supply and may create shortages and surplus. Economies of scale

Definition:

Economies of scale: The cost advantages that an enterprise obtains due to expansion.

Diseconomies of scale: The forces that cause larger firms and governments to produce goods and services at increased per-unit costs.

Advantages of large-scale productionInternal

Lower average unit costs. Scale of production because of a change in the way a firm is run. For example, larger firms can afford more effective advertising. They can spread the cost of advertising over a larger number of products.

Efficiency. For example companies can shut down small firms and open one large firm and paying fewer managers to run it. Another is technological economies, meaning that larger firms can buy more efficient and larger machinery and equipment, leading to lower average unit costs

Research and Development. Firms can afford to spend large amounts on research and development

Purchasing. They can afford to buy materials in bulk and therefore the unit costs are cheaper as they may be given discounts for buying in large quantities. External` Geographical advantage. An area has an excellent reputation for producing a particular good/service or a pool of skilled labour may develop in an area where many firms are concentrated. This helps reduce training costs and probably makes recruitment easier.

Risk-bearing economies. When borrowing from a large loan, the company can use assets from profitable firms are collaterals and spread the risk of the loan over several firms.

Firms may cooperate with each other.

Similar and related firms. There may be firms in the area in related industries with similar expertise and knowledge. Disadvantages of large-scale production

Managerial deos. Breakdown of communication as firms get too large. This can lead to a delay in making decisions.

Labor deos. Decrease in staff morale as it is difficult to retain close personal contact with staff because of the size of the organization

Jobs may be broken down into specialist parts and the workers may find their jobs too repetitive and boring.

Advantages of small firms

Flexibility. Small firms can adapt readily to consumer needs, designing products to meet individual requirements, whilst some products cannot be mass produced.

Industrial relations. The boss of the small firms tends to have a wide general knowledge of the performance of their employees, and may have a friendly relationship. This could increase morale and motivation. There is also less chance of poor productivity as there are less people in small firms.

Customer relations. Likewise, small firms are more likely to know their customers and to be able to offer personalized services to their customers. Personal attention is more feasible in small businesses, such as private music/sports tuition.

Local monopoly. Some firms supply only to a small market, and specialist businesses are not interested in these markets. Public and Merit Goods In a mixed economy the government exists alongside the free market to provide certain goods and services. These tend to be public goods and merit goods because a free market would either fail to provide them or not provide them in sufficient quantities.Public GoodsThese are things like street lighting, coast guard, police, fire brigade, and the army. It is clear that people want streets to be lit and to be kept safe from attack so why doesnt the market react and satisfy these wants? Why do you believe that private firms would be reluctant to provide these? They have two distinctive features: They are non-rivalry, meaning that anyone can use it, and they are non-excludable, meaning that they cant stop people from using it and it is difficult to prevent free riders.

Merit GoodsMerit goods are not provided enough by the private sectors because it is not profitable. They are things like healthcare, education, libraries, sports centers, country parks, public housing, and public hospitals. Public housing and hospitals are public because the people who use these facilities have no or low income to afford it. Again, people want to be kept well and want to be educated. The market can provide these goods; ESF is a private education provider whilst in the USA healthcare is almost exclusively carried out by the private sector. Why then in many countries do governments step in and provide healthcare?Trade UnionsDefinitions

Trade Unions:An organization of workers that have banded together to achieve common goals, promote and protect the interests of their member.

Collective bargaining: a process of negotiations between employers and a group of employees aimed at reaching agreements that regulate working conditions and pay. Open shop : A firm that can employ unionized and non-unionized labour

Closed shop : All workers in a place of work have to be union members. The closed shop is outlawed in some countries because it gave unions too much power to dictate who a firm could employ

Shop Steward: One of the firms employees who is granted time off, during working hours, to deal with trade union matters. In some larger companies, a shop steward may be employed full-time on industrial relations. His or her Wage Councils: These organisations set minimum wages (not National) for their relevant industries. Wage councils have declined dramatically in numbers since 1979. Employment Laws: Laws passed by the government or the European Union that set out rules of behaviour for workers, employers and trade unions with regard to employment

Single union agreement: An agreement between an employer and a union such that the union will represent all the workers at a particular workplace. This means that one union can represent all the workers, whatever their occupation, in the same workplace.

Industrial relations: The relationships between employees and employersTrade Unions Past and Present The change of trade unions

Since their establishment, the membership and influence of trade unions continued to grow until the early 1980s. The Conservative government at that time responded to public anger over strikes by introducing laws that restricted the unions activities. In addition, rising unemployment and the decline in the manufacturing industries (that formed the traditional base of the unions) have reduced union membership.

The increase in part-time jobs and the increased number of women working have also had an impact on union membership. In the past, neither of these groups have been strong supporters of trade unions. In addition, the 1980s and 1990s have seen a dramatic increase in the number of self-employed people - who are not usually unionized.

In response, unions have tried to improve their image by making their services more appealing and relevant to todays world - e.g. the ATL union (Association of Teachers and Lecturers) has a no strike policy. Many unions now offer their members loans, mortgages, insurance, credit cards, discount holiday vouchers and discount car hire.

Today, some trade unions also provide grants for college courses, or arrange retraining programmes (the process of developing new skills), for their members who have been made redundant. In addition, they also provide representatives for members in cases of redundancy, grievance, disciplinary hearings and legal action (e.g. on equal pay).Trade Union Membership Around the World

According to the International Labour Organisation, only 25% of the worlds 1.3bn workers were members of trade unions in November 1997. However, since the ILO also concluded that trade unions are adjusting to the realities of today, it is likely that trade union membership will increase over the next ten years.

In a recent ILO survey of 92 countries, only 14 had a unionised workforce of over 50% (and 48 countries had less than 20%). Results of selected countries are shown below

Trade Union Density in selected countries (ILO):

Country

1995 density% change since 1985

Sweden91.1+8.7

Italy44.4-7.4

South Africa40.9+130.8

Australia35.2-29.6

UK32.9-27.7

Germany28.9-17.6

New Zealand24.3-55.1

Japan24.0-16.7

USA14.2-21.1

South Korea12.7+2.4

France9.1-37.2

Source: adapted from ILO Labour Report 1997

Types of Trade Unions

Although the number of trade unions and the number of members in unions have declined steadily since 1979, we can still distinguish between four different types of trade unions:

1.Craft UnionsThese are the oldest type of unions, which were formed originally to organize workers according to their particular skill. For example, engineers and printers formed their own respective unions. Today, the GPMU (Graphical, Paper and Media Union) has members working in the printing, paper, publishing and media industries. The decline in the demand for some particular crafts has led to many of the older unions to recruit semi-skilled and unskilled workers.

2.Industrial UnionsThese unions attempt to organise all workers in their industry, irrespective of their skills or the type of work done. The National Union of Mineworkers (NUM) is an example. National Union of Teachers (NUT), Trade Union Congress (TUC)

3.General UnionsThese unions are usually prepared to accept anyone into membership - regardless of the place they work, the nature of work, or industrial qualifications. These unions have a very large membership of unskilled workers. The TGWU (Transport and General Workers Union) is a very large General Union in the UK. Their members include drivers, warehouse workers, hotel employees and shop workers.

4.White Collar UnionsAlso called non-manual unions and professional associations, these recruit professional, administrative and clerical staff (salaried workers) and other non-manual workers. They are very strong in teaching, banking, the civil service and local government.

The Role/Functions/Aims of Trade Unions

The primary role of Trade Unions is to protect the workers interests. Examples include:

Collective pay bargaining trade unions are able to operate openly and are recognized by employers, they may negotiate with employers over wages and working conditions. Subscription Early trade unions, like Friendly Societies, often provided a range of benefits to insure members against unemployment, ill health, old age and funeral expenses. In many developed countries, these functions have been assumed by the state; however, the provision of professional training, legal advice, support for members that are mad redundant and representation for members is still an important benefit of trade union membership. Political activity Trade unions may promote legislation favorable to the interests of their members or workers as a whole. To this end they may pursue campaigns, undertake lobbying, or financially support individual candidates or parties (such as the Labour Party in Britain) for public office. Industrial action Trade unions may enforce strikes or resistance to lockouts in furtherance of particular goals.Aims of the Trade Union

Defending their employee rights and jobs Securing improvements in their working condictions, including hours of work and health and safety of work Improving their pay and other benefits, including holiday entitlements Improving sick pay pensions and industrial injury benefits Encouraging firms to increase worker participation in business decision making Developing and protecting the skills of Union members.Aims of the workers: Workers will aim to maximize: Higher Wages matching inflation (index-link salaries to CPI) Job security no sacking without notice or reasons Working conditions - Health & Safety; working hours Career progression opportunities: Training and up-to-date information Health and Safety at work Perks, Health insurance, pensions, car, education allowanceAims of the employersFor the employer, targets to maximise may include: Profits Sales Lower costsIndustrial disputes

Definition: Disputes with the workforce and/or their representatives - and any resulting industrial action - are costly and damaging to both the business and workers.Causes

1. Economic Cause Demand for increase in wages on account of increase in all-India Consumer Price Index for Industrial Workers. Demand for higher gratuity and other retirement benefits. Demand for certain allowances such as: House rent allowance, medical allowance, demand for paid holidays and reduction of working hours, Better working conditions, etc.

2. Personnel Causes. Sometimes, industrial disputes arise because of personnel problems like dismissal, retrenchment, layoff, transfer, promotion, and more vacations etc.3. Indiscipline. Industrial disputes also take place because of indiscipline and violence on the part of the workforce. The managements to curb indiscipline and violence resort to lock-outs4. Misc. causes. Some of the other causes of industrial disputes can be workers' resistance to rationalization, introduction of new machinery and change of place, non-recognition of trade union, rumors spread out by undesirable elements, working conditions and working methods, lack of proper communication behaviour of supervisors to inter-trade union rivalry. How collective bargaining is organized Definition: the process whereby representatives of the workers (in a particular industry) negotiate say pay settlements - with representatives of the employers (in that industry).

Generally, an individual worker is in a weak bargaining position - the main purpose of a trade union is to remove this weakness by forcing the employer to negotiate with the representatives of his/her work force.

Trade unions are autonomous bodies - they have complete freedom to act in their own interests. Most unions, however, are affiliated to the Trade Union Congress (TUC), which is the largest trade union. It has an important role in bringing trade unions points of views on a national scale, possibly affecting government decisions - e.g. the TUC have been at the forefront of the National Minimum Wage negotiations.

If the more powerful unions make full use of their bargaining strength, they could succeed in getting larger and/or more frequent wage increases than the weaker unions. This highlights the importance of unionisation within trade unions - the larger and more united the union, the better the bargaining position, ceteris paribus.How is it organizedCollective bargaining is organized depending on the relationship between a union and firms that employ unionized labor. In a open shop, a firm can employ unionized and non-unionized labor In a closed shop all workers in a place of work have to be union members. The closed shop is outlawed in some countries because it gave unions too much power to dictate who a firm could employ. A union could also call the entire workforce in a firm/industry out on strike. In these ways, a union may act like a monopoly and restrict the supply of labour so as to force up the market wage for a job/occupation. A single union agreement allows a union to represent all the workers, whatever their occupation, in the same workplace. This is usually in return for certain commitments from the union on pay or production levels, and for agreeing not to take strike action. Negotiating with a single union rather than several at a time is much easier for a firm. The Challenges facing Trade Unions

Decline of manufacturing industries Growth in part-time employment Switch from male to female employment (in terms of percentage increases. Co-operation with management Government legislation (which seeks to reduce union influence)

The Basis for Wage Claims

Trade union demands for higher wages are normally based on one or more of the following:

1. A rise in the cost of living (e.g. due to inflation) has reduced the real income of their members.2. Workers in comparable occupations have received a wage increase.3. The increased profits in the industry justify a higher return to labour.4. The productivity of labour has increaseHow can Trade Unions raise wages?

1.Restricting the Supply of LabourUnions can restrict the supply of labour in an industry, for instance, by pushing for longer apprenticeships or tough examination (entry) requirements. This increases the wage rate in the industry from W1 to W2 in the diagram below.

S2 S1W2

W1

D

Q2Q1Employment

However, a problem has arisen - the quantity of labour able to enter the industry is restricted by Q1 to Q2.

2.Increasing the Demand for LabourUnions can influence the demand for labour by use of productivity deals. They try to persuade workers to increase productivity (which in turn helps to increase the Marginal Revenue Product of Labour - recall that the MRPL is the demand for labour). In return, trade unions negotiate wage increases for their members, justified by their increased productivity.

Productivity deals have the effect of raising the MRPL curve from D1 to D2, thereby raising wages from W1 to W2. The advantages of this method are that productivity deals help to increase the supply of and demand for labour. SL

W2

W1

D2 = MRPL2

D1 = MRPL1

Q1Q2Employment

ExternalitiesCalculations

Social Costs = Private + External CostsSocial Benefits = Private + External BenefitsDefinition Social costs and benefits are therefore the costs and benefits incurred by the entirety of society (producer, consumer and third party) as a result of the production and/or consumption of a good or service. Private costs and benefits are the costs and benefits incurred by individuals directly involved in the production and/or consumption of a good or service.

Where no market failure exists social costs would be equal to private costs. If external benefits exist more of the said good should be produced and consumed (it is being under-consumed or under-produced) thus the market system is not supplying the optimum resource allocation. If external costs exist than less of the said good should be produced and consumed (it is being consumed or produced in excessive quantities) thus the market system is not supplying the optimum resource allocation. Firms and individuals will not consume/produce any good or service unless the private benefit of their activity exceeds the private cost incurred in their activity.The government will make sure that: Merit goods (goods with external benefits) are encouraged (to prevent under-consumption or under-production from occurring.) Demerit goods (goods with external costs) are discouraged (to prevent over-consumption or over-production from occurring.) Demerit goods do not have prices which account for their external costs. Smoking and alcohol are examples of demerit goods.The government will: Subsidize merit good producers to reduce the costs of production and thereby encourage production of such goods whilst causing prices to be lowered as a result of the increase in supply and the decrease in prices of production caused by subsidization. Tax demerit good producers to increase the costs of production and thereby discourage production of such goods whilst causing prices to increase as a result of the decrease in supply caused by taxations as well as by the increase in the price of production. Sometimes the government may choose to nationalize certain industries that are producing externalities to regulate and control them and so force them to produce at the socially optimum level. Laws and regulationsLimits on the level of emissions of certain chemicals through use of the law and a fining system to punish firms for infringement. Ban on the use of certain chemicals which may result in significant external costs through use of the law and a fining system to punish any infringement. Forcing firms to internalize all costs:Pollution permits (these can be traded to firms who can then pollute more at a reasonable price). Pollution permits are given out to firms by the government before any trading is done. (Equivalent and derived from the Carbon Credits used internationally to restrict national pollution). But this scheme is costly (administration costs are high) to implement, it is difficult to measure pollution levels accurately, rich firms may simply buy their permits off poorer firms and so pollution may not have been decreased at all, it is hard to calculate how many pollution permits to give out. If external benefits exist then the public would be willing to pay more for a certain good to assure that it is produced at the socially optimum level. (Increase in demand, extension along the supply curve). If external costs exist that the public would be willing to pay more to assure that it is produced at the socially optimum level. (Decrease in supply, contraction along the demand curve.)Government RegulationThese are used to: Promote competition. Resolve externalities where market failure exists: Provision of public goods. Taxing demerit goods. Enforce law and order.Influence the location of firms: Prevent overcrowding in cities. Prevent regions from being neglected.

Governments do not desire oligopolistic or monopolistic markets as such markets are uncompetitive when compared with competition based markets. Often, a government will restrict the formation of such markets by:

Breaking up larger firms into smaller ones Providing incentive for other firms to set up in the market Preventing merges that may prove detrimental to competitionHow does the government regulate private enterprises? Investigate existing monopolies and suggesting ways in which competition may be introduced into these monopolist-dominated markets. Investigate proposed mergers and prevent such merges from taking place if they are believedto be detrimental to competition.Influencing the Location of Firms:Why is this done? o Some regions may be economically depressed, usually due to the decline of a traditional industry (this may lead to regional unemployment). o Some regions may be overcrowded with too much pollution, traffic congestion, insufficient housing and public services as a result of too many firms choosing to set up in the said regions.How is this done?Give firms incentives to set up in depressed regions: Low loan interest rates. Grants for the construction of infrastructure. Grants for the training of workers. Tax holiday/allowance. Low rent/free premises. By building and improving the infrastructure present in the said depressed region. Persuade firms in congested regions to move to depressed regions (stop granting licenses to operate in a congested region).MonopolyDefinition: A monopoly is a situation where the market is dominated essentially by one firm. The legal definition of monopoly is a firm that has 25% or more market share in the market.Advantages and Disadvantages of MonopoliesAdvantages Firms usually makes higher profits The firm can use profits to invest in new or improve upon existing products Price Maker because does not face any competitors Economies of Scale:Increased output will allow average unit prices of production to drop. This can be passed onto consumers in the form of lower prices, so customers may be more inclined to buy the firms products in the future. A firm may become a monopoly through efficiency; A monopoly is thus a sign of success and not inefficiency.Disadvantages Consumers may have to pay higher prices due to lack of competition Consumers have less choice because market is dominated by the monopolistic firm. Less innovation of products Firms may not be efficient with allocation and utilization of resources because they do not have any pressure to reduce costs.OglipolyWhat is it? An oligopoly exists when there are several dominate firms in one market. If there are only two sellers in one market than that the market structure of the said market is a duopoly which is a special case of an oligopolistic market. Examples include the petroleum industry, TV broadcasting industry (duopoly in HK), supermarket industry and the banking industry. Please note that, as a general rule of thumb, even if a market has hundreds of providers, if the top 3 7 providers together possess 50% or more of the markets total market share then that market is said to be oligopolistic.Main Features A few sellers dominate market supply/or a few sellers supply a major part of the total market supply irrespective of the total number of smaller suppliers in the market The same goods but which are heavily differentiated by use of advertising, branding and other such methods. These firms produce similar but heavily differentiated products; this differentiation makes the goods look different to the consumer. (Heterogeneous goods) These firms engage in many forms of non-price competition but rarely deign to involve themselves in price based competition as such competition can lead to price wars which only benefit the consumers and no one else. Brand image is often very important for such firms. (Coke and Pepsi test).

1. Oligopolistic firms will advertise a lot more than monopolists in the attempt to build a strong brand image and to differentiate their goods from the products of their competitors.2. If one firm has a better brand image, even with an inferior product, the said firm may be able to sell more of its product than another firm with a worse brand image. Entry into such markets is restricted either because of governmental decrees or because of the huge startup capital or technology requirements needed in order to open shop in the said market. Furthermore, because of the furious level of competition between existing oligopolistic firms, these firms generally produce at a very low price, a feat which would be very difficult for smaller firms which do not wield the same level of economies of scale as the larger oligopolistic firms. Market information is restricted and often incomplete as no firm knows what another competitor will do. To combat this, such firms often collude to form cartels (trade agreements) and conduct themselves with all the advantages, and disadvantages, of monopolists. These agreements are generally illegal. The actions of one firm will affect what the other competing oligopolistic firms will do as such firms will react very quickly to the actions of a competitor. (Sellers are highly interdependent).Barriers to Entry Existing firms are well established and have strong brand images. Existing firms enjoy economies of scale and are much more efficient. Existing firms enjoy customer confidence. The government may have issued rules that govern entry, sometimes for a certain number of years, into a certain market. These rules would have been put in place to encourage entrepreneurs to enter into a market where one would require large startup capitals. (Mobile phone industry in China).Pricing Strategies: Price wars. Price Leadership: When the dominate firm in a market determines the price of a good other firms have no choice but to follow their example or lose market share unless they choose to lower their prices even further and risk a price war. Sometimes they will even collude to prevent price wars from happening.Price collusion: Forming a cartel. Predatory pricing otherwise known as destruction pricing.Advantages Economies of scale (low average cost achieved on account of a high level of output). Excess (abnormal or supernatural) profits. Promotes research and development because these firms can spread the potential costs involved in R&D over a much larger range of income sources thus lowering the risk of R&D.Disadvantages Lower output levels and higher prices as these firms control such things Less choice for consumers. The need for government regulation to prevent oligopoly firms from overusing their powers.Economic growthDefinitionRecovery: The period where the economy moves between a recession and a boom.

Boom: This period is fast economic growth. Output is very high due to increase in demand, and unemployment is very low. Additionally, consumers may be confident about the economy so this may lead to extra spending

Recession: Economic Growth slows down and level of output may have a negative impact. Unemployment increases and consumers are likely to save instead of spend, so there is less money circulating in the economy.

Slump: A period where output starts to decrease. Consumer confidence may also begin to deplete.

GDP: The total or national output of a country over a period of time.GDP It measures the total amount of income earned in a macro economy national income. Changes used to measure economic growth Real change in GDP over time. National Output = National Income = National Expenditure Total value of output produced by all domestic firms within economy. GDP = Consumption + Government Expenditure + Investment + Net imports Some of the output income will flow overseas, as people from other countries may achieve output in your economy GDPis measured in terms of money. However, money is subject to change in its value and inflation. To solve this problem, thereal value of output or GDP is adjusted for inflation so we know how much is really generated from economic growth and how much is simply due to rising prices.

InflationDefinitionInflation: A general and sustained rise in the level of prices of goods and services prices of vast majority of goods and services on sale to consumers keeps rising over time.

Stagflation: Persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

Hyperinflation: Prices rise at phenomenal rates in short periods of time, rendering money worthless. Usually, the inflation rate is in double digits

Deflation: The prices of goods and services fall. This is usually negative inflation.

Disinflation: Fall in the rate of inflation.Ideas Price change over time (inflation) is always given per period of time. Deflation can be a cause for concern deflation will usually occur when demand for goods and services are falling, causing firms to lose profits, profits and reduce workforce. This will reduce household incomes, causing further reduction in goods and services. The value of debts held by people and firms will rise in real terms as prices fall and burden of making loan repayments rises. Eventually the economy goes into recession.How to measure inflationMeasured by CPI (Consumer Price Index)

RPI (Retail Price Index)1. A base year or starting point is chosen. This becomes the standard against which price changes are measured.2. A list of items bought by an average family is drawn up. This is facilitated by theLiving Costs and Food Survey.3. A set of weights are calculated, showing the relative importance of the items in the average family budget - the greater the share of the average household bill, the greater the weight.4. The price of each item is multiplied by the weight, adjusting the item's size in proportion to its importance.5. The price of each item must be found in both the base year and the year of comparison (or month).This enables the percentage change to be calculated over the desired time period.

Calculating the CPI/RPI:

Indices express change in prices of a number of different products as a movement in a single number. Average of basket of products in first year calculation orbase yearis given the number 100. If on average the basket rises overall by 25% next year, then index becomes 125. If in second year it rises another 10%, then 125 x 1.1 = 137.5 37.5 becomes average price rise in two year period. To construct a CPI, a sample of households are taken and surveyed their spending patterns observed for 12 months which is the base year. Theproportion of income spent on each categoryis recorded. Average prices of different goods and services (minus fuel and food) are recorded from a sample of shops. The proportion of income spent on each category is used to weight average prices of each type of good/service to find their weighted average prices. This shows how big an impact a change in price of a particular type of good or service will have on cost of living for the average household. The proportional of household income spent on a certain type of good/service is multiplied by the average price of the good/service purchased in the category, to generate its weighted average price these weighted prices are then all added together, which is the overall average price for goods and services in the basket. The weighted total price of the basket can be compared each year to work out percentage changes in average consumer prices.Uses of CPI/RPI Data:1. As economic indicator CPI is widely used measure of price inflation, and therefore is measure of changes in cost of living. Governments try to control inflation using macro-economic policies. The CPI will be used by workers to seek wage increases, and used by entrepreneurs in business making concerning purchases and setting wage and prices.2. As a price deflator Rising prices reduce purchasing power, value, of money. Rising prices can therefore affect real value of wages, profits, pensions, savings, interest payments, tax revenues and other economic variables important to people and decision making. CPI therefore used to deflate other economic series to calculate real inflation-free values. i.e. wages go up 10% but inflation is 15%, therefore real wages fallen by almost 5% less.3. Indexation involves tying certain payments to rate of increase in CPI. E.g. pensions may be indexed. Similarly, savings may be index-linked, meaning interest rate is set equal to CPI, protecting real value of peoples savings. Many workers may also be covered by collective bargaining agreements that tie wage increases to CPI changes. Government may also index threshold at which people start to pay tax or higher tax rates to stop people paying more or less tax.Problems with Price Indices: Over time typical household basket of goods and services will change. CPI needs to take account of this, but deciding how and when to make them can be difficult. Changes due to: Fashion and taste Introduction of new goods and services Change in population and household size due to migration, birth/death rates, marriage timing and numbers etc. Similarly CPI needs to take into account changes in quality of goods and services over time, how and where households buy goods and services such as internet and new shops. International comparisons of CPIs are hard to make due to different household compositions and spending patterns. Argued that exclusion of food, energy, house prices and income taxes means CPI cannot accurately measure change of living cost.Inflation Economists today tend to agree main cause of inflation istoo much money chasing too few goods. This means people are able to increase spending on goods and services faster than producers can supply goods and services, boosting aggregate demand and forcing prices up. A government can allow supply of money to increase in an economy by issuing more money or allowing banking system to create more credit lending more to people and firms. A government may do so to : Increase total demand in economy to reduce unemployment. In response to increase in demand for goods and services for goods. In response to workers demand for higher wages, or rise in other production costs. As money supply rises, peoples purchasing powers rise and inflation can occur. To stop excessive inflation, amonetary rulegovernments should follow is to only allow supply of money to expand at same rate as increase in real output or real GDP over time. If money supply increases faster than output, then inflation will occur. Stagflation when inflation and unemployment are both high and increasing often due to rising living costs causing increased demand for higher wages and less labour demand.Causes of inflation Increase in Money Supply an increase in money supply would increase the spendingpower of the average consumer, thus increasing demand and hence pushing up prices. This then causes inflation. Demand Pull Inflation When aggregate demand is increased, firms are no longer able to meet demand in production and thus prices inflate. To finance this, firms may borrow more or money supply increased. Cost Pull Inflation When the cost of producing goods is increased, firms may want to offset these increased costs to consumers to keep a certain level of profit, thus the extra cost is added to price of the good or service, causing inflation.Wage Price Spiralis when workers demand higher and higher wages, causing cost push inflation and prompting them to ask for higher wages again. Imported Inflation rising prices in one country may be exported to another country through international trade in many different goods and services. Many countries have been able to enjoy stable inflation as Chinas large supply of goods and services is produced through cheap labour.Consequences and Costs of Inflation: Personal Costs: Reducepurchasing power Real incomefalls People like pensioners and students on fixed incomes will suffer from inflation. Low paid and non-unionized workers often fail to get sufficient rises to stop real income falling. Professional workers may ask for wage increases that protect or cause increases in real wage levels. Savers and lenders may be hurt by inflation rate if interest is less. People who borrowed may benefit. Demand-pull inflation increased spending can boost company profits, while cost-push may reduce profits. Rising profits could yield more tax, however government may have to pay more for goods and services. Economical Costs: Possible unemployment purchasing power drops, less demand Some people save more, reducing economic activity and overall output Causes goods and services to become uncompetitive internationally Benefits: Economic growth Reduce debt values falling value of money reduces real debt values Higher stock value Values of fixed assets could rise financial security Possible increased employment Stimulate technological advancementEconomic Growth and InflationMost governments hope that they can achieve steady economic growth without it causing acceleration in demand-pull and / or cost-push inflationary pressures. The dangers of a booming economy is that inflationary pressures build and that the economy must slow down or fall into recession for these inflation risks to be controlled.

During the early part of the last decade, the British economy enjoyed a period of steady growth and relatively low and stable inflation In 2007-08 the trade-off between growth and inflation worsened Inflation surged higher mainly because of external factors such as high food and oil prices The economy suffered a steep descent into recession following the global financial crisis In early 2009 the economy experienced recession and higher inflation some economists warned of a lengthy phase of stagflation conditions Inflation fell back largely because of the recession. But in 2010 and into 2011, inflation has been rising again whilst GDP growth has been weak with the risk of a second downturn (a double-dip)StagflationStagflation is a period of economic stagnation accompanied by rising inflation. In other words, both of these key macro objectives are worsening. It can happen when an economy goes into a downturn or a recession but when other external forces are bringing out higher inflation. The obvious example of this is when recession is afflicting a country but the prices of imported products are surging causing prices to rise and real incomes and profits to fall. The rise in the cost of imports can be shown by an inward shift in the short run aggregate supply curve leading to a contraction in real national output and an increase in prices.

One of the dangers of stagflation is that the fall in real incomes causes consumer and investment spending to fall and thus the rate of economic growth suffers too (a deterioration in a third objective of policy). Wage demand may also pick up as people experience rising prices. The central bank needs to consider appropriate policy responses to this. Too severe a tightening of monetary policy for example will help to curb inflation but risk causing a deep recession. The combination of deflation and a sustained drop in economic output is termed an economic depression

An improvement in aggregate supply can help to resolve the growth inflation trade off. We see in the diagram how aggregate supply has moved outwards and this allows aggregate demand (C+I+G+X-M) to operate at a higher level without threatening a persistent increase in the general price level (inflation).Overcoming a conflict between economic growth and inflation increases in AD and AS

Conflicts between objectives the economics of deflation

Deflation is a sustained fall in the prices of goods and services, and thus the opposite of inflation. Increased attention has focused on the impact of price deflation in several countries in recent years notably in Japan (inflation -0.3% in 2010) and in some Euro Area countries such as Ireland Greece where prices have been falling, national output has dropped and unemployment has been rising.

It is normally associated with falling level of AD leading to a negative output gap where actual GDP < potential GDP. But deflation can be caused by rising productive potential, which leads to an excess of aggregate supply over demand.

Greece has suffered from a severe rise in unemployment (right hand scale) and is now seeing her relative living standards fall. A deflationary depression is a risk for GreecePossible damaging consequences of persistent price deflation Holding back on spending: Consumers may postpone demand if they expect prices to fall further in the future. Debts increase: The real value of debt rises when the general price level is falling and a higher real debt mountain can be a drag on consumer confidence and peoples willingness to spend. This is especially the case with mortgage debts and other big loans. The real cost of borrowing increases: Real interest rates will rise if nominal rates of interest do not fall in line with prices. If inflation is negative, the real cost of borrowing increases and this can have a negative effect on investment spending by businesses Lower profit margins: Lower prices hit revenues and profits for businesses - this can lead to higher unemployment as firms seek to reduce their costs by shedding labour. Confidence and saving: Falling asset prices including a drop in property values hits wealth and confidence leading to declines in AD and the threat of a deeper recession.Resolving the threat of price deflation Using expansionary Monetary Policy Interest rates: Deep cuts in interest rates can be made to stimulate the demand for money and thereby boost consumption Quantitative Easing printing money in the hope that, by injecting it into the economy, people and companies will be more likely to spend. Using expansionary Fiscal policy Keynesian economists believe that fiscal policy is a more effective instrument of policy when an economy is stuck in a deflationary recession and a liquidity trap The key Keynesian insight is that a market system does not have powerful self-adjustments back to full-employment after there has been a negative economic shock. Keynes talked of persistent under-employment equilibrium an economy operating in semi-permanent recession leading a persistent gap between actual demand and the potential level of GDP.

Keynes argued that this justified an exogenous injection of aggregate demand as a stimulus to get an economy on the path back to full(er) employment and to prevent deflation.UnemploymentDefinitionFrictional Unemployment:Occurs as workers change jobs and spend time without jobs during this period.

Seasonal Unemployment: Occurs when consumer demand for certain goods and services are seasonal, and as a result people are only employed during periods of time.

Cyclical Unemployment:Occurs when there is too little demand for goods and services in the economy during a recession, and firms are producing less as a result, employing less labour as a result.

Structural Unemployment: Occurs when the labour market is unavailable to provide jobs for all workers because of a mismatch between the workers skills and the skill requirement of the jobs. It arises from long-term changes in the structure of the economy, as entire industries close down due to lack of demand for goods and services they produce. Workers who become unemployed and have skills no longer needed areoccupationally immobile.

Voluntary Unemployment:Voluntary unemployment includes workers who reject low wage jobs whereas involuntary unemployment includes workers fired due to an economic crisis, industrial decline, company bankruptcy, or organizational restructuring.International labour organizationThe International Labour Organization (ILO) measure of unemployment assesses the number of jobless people who want to work, are available to work and are actively seeking employment. It is used internationally so comparisons can be made between countries. It also enables consistent comparisons over time. The ILO measure is calculated using data from surveys of a countrys labour force; it can therefore be subject to sampling differences between one country and another. It differs from theclaimantcount unemploymenttmeasure, which only includes people claiming unemployment-related welfare benefits. The ILO measure gives a higher figure than the claimant count measure as it includes those who are classified as available for work but who are not claiming jobless benefits. The ILO measure may include students who are actively seeking work but may not qualify for jobless benefits. Similarly, second earners within a household may be reluctant to claim jobless benefits but would be classified as unemployed under the ILO measure as they are available for work.Government PolicyDefinitionMonetary policy: The process by which the government, central bank, or monetary authority of a country controls the supply of money, availability of money, and cost of money or rate of interest, in order to attain growth and stability of the economy.

Fiscal policy: Government policy that attempts to influence the direction of the economy through changes in government taxes or through some spending.

Expansionary policy:Contractionary policy:Government macroeconomic objectives and policiesMost of the governments round the world have four main objectives. These are Keep inflation under control Maintain a low level of unemployment Achieve a high level of growth rate Maintain a healthy balance of payments.Government Economic PoliciesGovernment influences the economy through its economic policies. These areFiscal PolicyIt is related with taxes and government spending. This policy is there to control inflation and demand in the economy. Usually government collects money in the form of taxes and spends money through its development expenditure such as building roads, bridge, defense, transports etc. Government constantly monitors the aggregate demand in the economy. Inflation rate gives the correct measure of the aggregate demand in the economy.

When the aggregate demand in the economy is high, prices rise, this shows that the economy is spending too much. In this case, the government will lower is expenditure budget and cut back on investment spending, such as on road construction and hospital equipment. On the other hand the government might also increase the taxes, which would take spending power out of the economy by leaving consumers and businesses with less income to spend.

In the opposite scenario, when the economy is heading for a recession and unemployment is rising, the government might increase its expenditure plans. There might be a reduction in taxes so as to leave consumers and businesses with higher disposable incomes.Monetary PolicyMonetary Policy is related with a change in interest rates by the government or the Central bank. When the forecast for inflation is that it will rise above the targets set by government, then the Central Bank will raise its base rate and all other banks and lending institutions will follow. It is usually done when the economy is at the boom stage of the business cycle.

A higher interest rate will result inbusiness will not be able to expand as they have to pay more interest to the bank for their loans and they have less profit left. Businesses that are planning to take loan for expanding may postpone their decisions and wait for a cut in interest rates. Consumers demand will also fall as they will not be getting cheap loans to pay for the buying new houses and luxury items.

If inflation is low and is forecasted to remain below governments targets, then the Central Bank may decide to reduce interest rates.Supply side policiesIt includes all those policies which aim at improving the efficient supply of goods and services. These might include: Privatization Imparting training and improving the education level of the workforce resulting in higher skills. Increase competition in all industries by removing entry barriers, thus leading to more efficiency.Factors causing a change in components of ADChange in consumptionA change in consumption is caused by any of the following factors Changes in income:Income increases consumption increases and vice versa. Changes in interest rates:Fall in interest rates will make borrowing money cheaper. Consumers will now be tempted to take loans and purchase goods and services. Consumption will rise. On the other hand if the interest rates increase, borrowing becomes expensive. Consumers will be more tempted to save rather than spend. Consumption will fall. Changes in wealth:A rise in house prices or the value of stock and shares makes a person feel wealthy. Consumers feel more confident and tend to spend more . Changes in consumer confidence:Higher consumer confidence is likely lead to increased consumption.Change in Investment Interest Rates:If interest rates are low firms will find it easy to borrow funds for investment. Investment increase when interest rates fall. Changes in National Income:If the national income increases, firms will have to invest further to increase output (induced investment). Technological change: Regular changes in technological front demand firms to invest in order to keep up with the changes and remain competitive. Business Confidence:The economic environment in an economy is a major factor in determining the investment level. When an economy is showing signs of healthy growth, firms will have positive expectation and will invest in expanding their facilities and to meet higher demands in the future. During troughs firms will be more conservative in their investments and thus AD will be affected.Change in Government ExpenditureGovernment Expenditure depends on Macroeconomics objectives: If the government is considering increasing employment then it might increase its spending on public projects. Condition of the economy: During phases of slow economic growth, government is more likely to increase its spending in order to stimulate the economy.Changes in net exportsExportsare domestic goods bought by foreigners. Exports will rise when Foreigners income rise Exchange rate of the exporting country is falling. The economy follows a more liberal trade policy i.e. free trade increase Inflation rate in the economy is comparatively lower than its trading partners.

Importsare the goods bought from foreign country. Imports will rise when Domestic income rises. This is because people will increase their consumption and thus imports will increase. Exchange rate of the importing country increase. Now it becomes cheaper for the country to purchase from outside as their currency is stronger than their trading partners. If the economy is following a liberal trade policy i.e. free trade increases. Inflation rate is highPossible conflict between macroeconomic objectives It is rare for a country to achieve all of its main objectives at the same time Frequently conflicts appear between the different aims and as a result, choices might have to be made about which objectives are to be given greatest priority. This will vary from one country to another since the needs of different nations will differ according to their stage of economic development.

Here are some possible policy conflicts: Inflation and unemployment: Falling unemployment might create demand-pull and cost-push inflationary pressures leading to a fall in the value of money Economic growth and environmental sustainability: Rapid economic growth and development frequently puts extra pressure on scarce environmental resources threatening the sustainability of living standards in the future Economic growth and inflation an overheating economy may suffer accelerating inflation which then has negative effects on trade performance, business profits and jobs Economic growth and the balance of payments: Strong GDP growth fuelled by high levels of consumer demand for goods and services might lead to a worsening of the trade balance. This is particularly true when an economy has a high marginal propensity to import.Unemployment and inflation the Phillips Curve concept

Falling unemployment might cause rising inflation and a fall in inflation might only be possible by allowing unemployment to rise If a Government wanted to reduce the unemployment rate, it could increase aggregate demand but, although this might temporarily increase employment, it could also have inflationary implications in labour and the product markets.The key to understanding this trade-off is to consider the possible inflationary effects in both labour and product markets from an increase in national income, output and employment. The labour market: As unemployment falls, labour shortages may occur where skilled labour is in short supply. This puts pressure on wages to increase and prices may rise as businesses pass on these costs to their customers. Other factor markets: Cost-push inflation can also come from rising demand for commodities such as oil, copper and processed manufactured goods such as steel, concrete and glass. When an economy is booming, so does the derived demand for components and raw materials.

Product markets: Rising demand can lead to suppliers raising prices to increase their profit margins. The risk of rising prices is greatest when demand is out-stripping supply-capacity leading to excess demand (i.e. a positive output gap.)

Fiscal policyThe two main instruments of fiscal policy aregovernment spendingandtaxation.Changes in the level and composition of taxation and government spending can impact on the following variables in the economy: Aggregate demand and the level of economic activity. The pattern of resource allocation. The distribution of income.How fiscal policy workHigh rate of inflationHigh rate of inflation is caused by too much aggregate demand in the economy. Government will use deflationary fiscal policy. Government will try to influence aggregate demand by reducing its public spending. The government will spend less on construction of roads, bridges and other public spending and thus aggregate demand will fall. On the other hand, Government may increase the tax rates. An increase in tax rates will take away the extra disposable income out peoples pocket resulting in a lower demand.

Low rate of inflationIn an economic recession, aggregate demand, output and employment all tend to fall. Now the Government wants to increase employment in the economy, it can attempt to do so by increasing aggregate demand. The Government will increase the public spending resulting in a rise in aggregate demand. Government may reduce the tax rates so that people have more disposable income to spend and instigate demand in the economy.

Role of fiscal policiesThe two main instruments of fiscal policy aregovernment spendingandtaxation.Changes in the level and composition of taxation and government spending can impact on the following variables in the economy: Aggregate demand and the level of economic activity. The pattern of resource allocation. The distribution of income.

AD=C+G+I+(X-M)

As we can see in the above equation that G (Government Expenditure) is a component of AD, it can be used by Government to influence AD in the economy. The government can use expansionary or deflationary fiscal policy to get the desired results. Lets discuss each policy in detail.Expansionary fiscal policyExpansionary fiscal policy is used to increase the Aggregate demand in the economy. If the economy is having a deflationary gap, the government can use expansionary fiscal policy to reduce the gap or totally eliminate it.Deflationary gapDeflationary gap is the difference between full level of employment and the actual level of output of the economy. We can see in the diagram below, that the economy is operating a level a below the Yf (full level of employment).

The consequence is that due to deflationary gap all the resources of the economy are not being used in the optimum level and they are idle. This results in unemployment and low level of output. This is not desirable for any government. In order to reduce/eliminate the deflationary gap, the government usesexpansionary fiscal policy.

Government will either increase its spending or reduce taxes (or both) in order to stimulate the aggregate demand. Increase Government spending will result me more projects being funded by the government and thus employment and output will increase. Even a lower tax rate will result in more disposable income for households and encourage consumption.IncreasedGandCwill lead to higher AD. However, this might also lead to higher prices/inflation in the economy.Contractionary fiscal policyContractionary fiscal policy involves the reduction of government spending and increase taxes as a measure to control inflation/AD in the economy. With reduced government spending, the AD will fall and thus reduce pressure on the economic resources and the average price level in the economy will come down. Similarly, increased taxes will take away the excess disposable income from the households and result in a fall in AD. Contractionary fiscal policy is thus used to reduce the inflationary gap.Inflationary gapInflationary gap is when the Aggregate demand exceeds the productive potential of the economy. As we can see through the diagram, the economy is operating at a level above the full employment level of the output. Due the limitation of the economy to fulfil this increased demand the average price level in the economy increases resulting in inflation.

Problems of fiscal policyReduce incentive to workRaising taxes on income and profits reduce work incentives, employment and economic growth. An effort to reduce aggregate demand may cause disincentives to work, if this occurs there will be a fall in productivity and Aggregate supply could fall.Adverse effect of lowering Public SpendingReduced government spending to Increase Aggregate demand could adversely affect public services such as public transport and education causing market failure and social inefficiency.Crowding out effectWith an increase in government expenditure, there will be greater competition for limited resources. This will offset private investments resulting in shrinking of the private sector.Inaccurate forecastingIf the Governments estimate or forecasting is wrong or inaccurate the fiscal policy will suffer. For example, if a recession is expected and the government practices deficit budget, and yet the recession turns out to be a boom, this will cause inflation.Implementation of the PolicyPlanning for the spending is done once by most of the governments. If there is a delay in the implementation of the fiscal policy, it might reduce the effectiven