6.1 – Economic Issues

• Gross Domestic Product (GDP): the total value of output goods and services in a country in one year
• Recession: a period of falling GDP
• Inflation: the increase in the average price level of goods and services over time
• Unemployment: this exist when people who are willing and able to work can not find a job
• Economic growth: when a country's GDP increases - more goods and services are produced than in the previous year
• Balance of payments: this records the difference between country's export and import
• Real income: the value of income - it falls when prices rise faster than money income
• Exports: good and services sold from one country to other countries
• Imports: goods and services bought in by one country to other countries
• Fiscal policy: any change by the government in tax rates or public sector spending
• Direct taxes: these paid directly from incomes (income tax, profit tax)
• Indirect taxes: these are added to the prices of goods, and taxpayers pay the tax as they purchase the goods (VAT)
• Disposable income: The level of income a taxpayer has after paying income tax
• Monetary policy: a change in interest rates by the government or central bank
• Supply side policies: policies to increase the competitiveness of industries in an economy against those from other countries (more efficient)
• Economic objectives:

  •   low inflation
  •   low unemployment
  •   increasing GDP
  •   balance of payments between exports and imports
• Rapid inflation can be a problem:

  • purchasing power of wages falls and living standards fall
  • pressure to raise wages
  • prices of goods and services increase - foreign goods more competitive
  • business reluctant to expand as less certain about future demand
• No or falling economic growth (recession):

  • output is falling and unemployment increasing
  • average standard of living falls - lower demand
  • business less likely to expand as future uncertain
• Balance of payments:

  • ideally will balance over a period of time
  • if exports are less than imports, there will be a deficit and the country can run out of foreign currency to pay for imports
• High unemployment can be a problem:

  • lower level of output
  • government spends more on unemployed

  But:

  • larger pool of workers to recruit
  • less pressure on wage increases
• Three government policies:

  • monetary policy
  • supply-side policies
  • fiscal policies
• Economic policies:

  • if unemployment high or growth low => expand spending in the economy
  • if inflation too high or balance of payments in deficit => reduce spending in the economy
• Monetary policy (changing interest rates):

  • higher interest on new loans and overdrafts increases costs
  • less new investment
  • mortgages higher so demand less for other spending
  • could lead to higher exchange rate if attracts currency
• Supply-side policy (making the economy more efficient):

  • privatisation - increases competitiveness of business
  • improvement in education and training
  • ways to increase competition between businesses
  • encourage investment
• Fiscal policy:

  
  

  (changes in government spending):

  • increase in spending on government services or investment in schools, hospitals or infrastructure (e.g. roads)
  • increases demand and possibly economic growth

  Fiscal policy

  
  

  (tax changes):

  • taxes higher - spending reduces
  • can be income tax or profits tax or tax on sales of goods and services
  • import tariff - raises price of imports - lowers demand