Why is economic growth desirable?
- Improvement in living standards
- More jobs (decrease unemployment)
- The accelerator effect of growth on capital investment: Rising demand and output encourages investment in capital – this helps to sustain GDP growth by increasing LRAS
What are the causes of economic growth?
- In the short term, economic growth is caused by an increase in aggregate demand (AD).
- In the long term, economic growth is caused by an increase in long run aggregate supply (productive capacity) as well as AD.
What is a current account surplus?
- The value of imports is less than the value of exports.
What is a current account deficit?
- The value of imports is greater than the value of exports.
What are the causes of a current account deficit?
- Recession in other countries.
If the UK’s main trading partners experience negative economic growth then they will buy less of our exports, worsening the current account. - Fixed Exchange Rate
If the currency is overvalued, imports will be cheaper and therefore there will be a higher Q of imports. Exports will become uncompetitive and therefore there will be a fall in the quantity of exports. - Economic Growth
If there is an increase in national income, people will tend to have more disposable income to consume goods. If domestic producers can not meet the domestic demand, consumers will have to import goods from abroad. In the UK we have a high Marginal propensity to imports mpm because we do not have a comparative advantage in the production of manufactured goods. Therefore if there is fast economic growth there tends to be a significant increase in the quantity of imports. - Decline in Competitiveness.
In the UK there has been a decline in the exporting manufacturing sector, because it has struggled to compete with developing countries in the far east. This has led to a persistent deficit in the balance of trade.
What are the causes of a surplus on the current account?
- A fall in the exchange rate
Reduction in the value of the currency lowers export prices and raises import prices - Recession
A country’s inhabitants will not be buying many products, including imports, and its firms, finding it difficult to sell at home, may be competing more vigorously in export markets - If products are at a high quality, at low cost, and reflect what households and firms at home and abroad want to buy
What are the consequences of a deficit on the current account of the balance of payments?
If a deficit increases, it will reduce aggregate demand in the economy. This will lower the economy’s output, be likely to raise unemployment and may out downward pressure on the price level
A rise in the deficit is also likely to lead to a fall in the exchange rate and increase the debt of the country
What is an advantage of a surplus on the currents account of the balance of payments?
A surplus means a country is consuming less than it is producing and experiencing a net inflow of money and income. The increase in the money supply means that banks will have more money, which can increase bank lending.
A rise in a surplus will mean that net exports are increasing. This will raise aggregate demand and be likely to push up the exchange rate.
What are the determinants of consumer expenditure?
- Real disposable income
- Wealth
- Consumer confidence and expectations
- The rate of interest
- Inflation
What is monetary policy?
Changes in the money supply, rate of interest and exchange rate
