economic agents
the individuals and firms are economic agents in the economy
explain parts
individuals supply firms with the productive resources of the economy (land and labour in exchange for a fixed income. undivided use it to buy the entire output by firms
economic activity measures
measured ;
- total income paid by firms to individual.
- individuals total expenditure on firms output
- value of total output generated by firms
( these should all add up to a simple model of an economy)
can be subject to the below ;
- leakeages from savings taxation imported goods and services
GDP
Total value of goods and services produced domestically in a calander year.
- contracts slows down
- recession two consecutive contractions per quarter (not universal)
- GNP measures contributions from people overseas ie uk would be all British people even in australia. GDP is more effective
cycle
expansion - above average record profits and shares along with strong demand
- inflation when prices go up the bank steps in with interest rates to cool
down - As the economy slows the growth slows but inflation remains high so the central banks do not want to cut interest rates. Sales drop of with less confident purchases and unemployment increases and businesses go bust.
If the slowdown is too much then a recession happens with low profits inflation and interest rates falling and a trough.
Recovery phase occurs when the economy moves out of recession. Confidence increases profits rise and inflation and interest rates remain low
Public Sector Net Cash Requirements
money that the government uses for expenditure after revenue receipts
fixed interest securities
- when the economy is booming people are prepared to lay more for goods and services.This pushed up prices generating inflation and higher interest rates
-the yields from fixed interest securities will need to be higher to compete with other investments so their price will fall.
- when inflation and interest rates are low and falling the income from fixed interest securities becomes more attractive. in a recession and the early stages of recovery the prices of fixed interest securities should increase due to falling interest rates
equities
- prices begin to pick up as the eco img moves out of recession and strengthen as the economy expands when interest rates remain low and the operating enviorement for companies improves
- they falter in books as interest rates rise to curb inflation but the growing economy should give opportunity
- equity prices fall as the economy contracts to higher interest rates and declining corporate earnings
- prospects of corporations have more influence rather than interest rates
current account
The current account consists of transactions in goods ( visible trade ) and services (invisible trade ).
it measures trades (imports and exports) in services and goods.
Investment in cube earning in investments held by britons overseas which credit the balance from of payments. earning on investments held by foreigners in britain which debit balance
Transfer payments - items such as overseas aid and international contributions.
A current account deficit needs to be financed by International lenders. If they loose confidence there will be a currency crisis. Governments can control the trade balance through tariffs but they may belong to international organisations ie WTO
capital and financial
the capital account is a recirculate of all movements of money into and out of the country for investment.
sakes if assets earn foreign currencies while purchases use foreign currencies
The Uk has a capital account surplus if oversees investors invest more money in the Uk than over sees.
Any deficit in the current account must be made up by the capital account in overall balance of payments through net investment into the country.
- if there is a deficit then the UKs official reserve needs to cover it which is the foreign currencies gold UK reserves tranche and special drawing rights in IMF in
exchange rates
- uk exports create a demand for sterling by foreign buyers and the satisfaction of a demand increases the supply of foreign currencies in the foreign
-Uk imports creates a demand for foreign currencies and reduces supply
real exchange rates are the effective exchange rates taking into account inflation.
Rises - domestic goods become more expensive relative to foreign goods adversely affecting domestic production.
- the uk is on a floating exchange rate
international strength
- string pound means more expensive to export so less
- import arts are cheaper
- inflation falls
- weak pound means competive exports
- expensive to import
- inflation is potential (UK had no raw materials )
Foreign investments and inflations
- successful countries running surplus and keeping inflation in control tend to see their currencies doing better
-UK firms that benefit from a rise in the pound are those that rely on a substantial import
- Firms that don’t are ones that are exporters
Fiscal Policy
Fiscal Policy is the use of government spend and tax to influence both the level of demand in the economy and level of activity.
- in recession the government may increase spending it cut tax to get the economy growing. Spending tends to be better as tax cuts that are for wealthy individuals goes on imports
Countries with constant deficits ;
- have higher interest rates damps down economic activity
- sustained deficits also cause a rise in total gross government debt so that interest payments on debt become a significant element of public spending.
- private sector investment is crowded out by public sectors demand further for finance.
-higher taxes or spending cuts will eventually happen to pay the debt
monetary policy and money supply
- it attempts to stabilise the evicting by controlling interst rates.
-money supply is the quantity if money available to purchase goods
- Increase in intersect rate should decrease money demands
- M0 reflects changes in economic cycle but does not cause then as it has little affect on total national output for inflation.
- MO narrow money is an indicator of consumer spending retail sales
- growth in mo shows consumer spending is boyant
- M4 is money is notes coins and all easy access accounts. Increase in demand for lands will be reflected in a faster growth in m4
central bank control of money supply
central banks such as the bank of england normally sell short term
interest rates through open market options
- they do this by using the repo market
- a repo involved short term fake doc repurchase of government securities. it is classed as collateralised borrowing.
- the uk repo market the holder of gilts borrows money from another market participant by providing gilts as collateral for borrowing
the bank can use repo markets to influence interst rates by providing funds by lending money in exchange for gilts and inject money into the financial system m. this will lead to lower interst rates.
- They can reduce money sulky by borrowing money in exchange for gilts and so withdrawing the money sefton the financial system. This should operate to raise interest rates by reducing the supply of money.This is reverse repos as the bank is borrower.
- unexpected rise in sterling would damage business as it would be hard to export
