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60 Aggregate Demand - government spending

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The shortage means shoppers can also expect shortages of baby spinach, mixed leaves, rocket, lollo rossa, cauliflower, peppers, cucumbers, tomatoes, lemons and oranges. Restaurants and shops have been accused of sparking supermarkets' rationing policies by bulk-buying the salad as they too are expected to be affected by the shortage.

Supply of salad and vegetables from the Med is expected to return to normal in April. Yesterday the Co-op reported a sharp rise in sales of British vegetables over the past week with 120pc more spring greens and 130pc more curly kale being sold than the same period last year.

Adele Balmforth, trading manager for produce at the Co-op, said: "Demand for home-grown leafy vegetables has spiked in the last week. Offering an alternative to salads, cabbage, kale and spring greens are proving very popular - they make ideal additions to hearty soups and stews which are perfect to combat cold February temperatures."

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Lettuce 'black market' emerges amid national salad shortage

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The shortage means shoppers can also expect shortages of baby spinach, mixed leaves, rocket, lollo rossa, cauliflower, peppers, cucumbers, tomatoes, lemons and oranges. Restaurants and shops have been accused of sparking supermarkets' rationing policies by bulk-buying the salad as they too are expected to be affected by the shortage.

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Latest news:

The UK's economy grew by 2.6% in 2014, the fastest pace since 2007 and up from 1.7% in 2013, official figures have shown.

Figures from the Office for National Statistics showed the economy grew by 0.5% in the final three months of 2014. That was a slowdown from 0.7% growth recorded in the previous three months.

Understanding GDP:

Gross domestic product is a measure of a country's economic activity, including all the services and goods produced in a year

It is based on a huge survey of businesses and government departments compiled by the Office for National Statistics

An economy is generally considered to be in recession if it has contracted for two consecutive quarters

The first figures for any quarter are known as the "flash estimate" as they are based on incomplete data. The figures are revised at least twice as more information is collected

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Latest news: The UK's economy grew by 2.6% in 2014, the fastest pace since 2007 and up from 1.7% in 2013, official figures have shown. Figures from the Office for National Statistics showed the economy grew by 0.5% in the final three months of 2014.

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This is a short revision tutorial on aspects of the economic cycle.

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All countries experience regular ups and downs in the growth of output, jobs, income and spending.

Boom

A boom occurs when real national output is rising at a rate faster than the trend rate of growth. Some of the characteristics of a boom include:

A fast growth of consumption helped by rising real incomes, strong confidence and a surge in house prices and share prices

A pick up in demand for capital goods as businesses invest in extra capacity to meet strong demand and to make higher profits

More jobs created and falling unemployment and higher real wages

High demand for imports which may cause the economy to run a larger trade deficit because it cannot supply all of the goods and services that consumers are buying

Government tax revenues will be rising as people earn and spend more and companies are making larger profits - this gives the government money to increase spending in areas such as education, the environment, health and transport

An increase in inflationary pressures if the economy overheats and has a positive output gap

Slowdown

A slowdown occurs when the rate of growth decelerates - but national output is still rising

If the economy grows without falling into recession, this is called a soft-landing

Recession
A recession means a fall in the level of real national output i.e. a period when growth is negative, leading to a contraction in employment, incomes and profits.

A simple definition:

A fall in real GDP for two consecutive quarters i.e. six months

A more detailed definition:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and retail sales.

There are many symptoms of a recession - here is a selection of key indicators:

1. A fall in purchases of components and raw materials (i.e. intermediate products)

2. Rising unemployment and fewer job vacancies available for people looking for work

3. A rise in the number of business failures and businesses announcing lower profits and investment

4. A decline in consumer and business confidence

5. A contraction in consumer spending & a rise in the percentage of income saved

6. A drop in the value of exports and imports of goods and services

7. Large price discounts offered by businesses in a bid to sell their excess stocks

8. Heavy de-stocking as businesses look to cut back when demand is weak - causes lower output

9. Government tax revenues are falling and welfare benefit spending is rising

10. The budget (fiscal) deficit is rising quickly

The difference between a recession and a depression

A slump or a depression is a prolonged and deep recession leading to a significant fall in output and average living standards

A depression is where real GDP falls by more than 10% from the peak of the cycle to the trough

An example of a country that has suffered a depression in recent years is Greece. National output has fallen in six successive years and real GDP is more than 25% lower than at the peak of the cycle

Recovery

This occurs when real GDP picks up from the trough reached at the low point of the recession.

The state of business confidence plays a key role here. Any recovery might be subdued if businesses anticipate that it will be temporary or weak in scale.

A recovery might follow a deliberate attempt to stimulate demand. In the UK we have seen

1. Cuts in interest rates - the policy interest rate fell to 0.5% in the Autumn of 2008 and they have stayed at this low level since then

2. A rise in government borrowing

3. A policy of quantitative easing (QE) by the Bank of England to pump more money into the banking system in a bid to increase the supply of loans - now worth more than £375 billion.

Why is GDP growth difficult to forecast?
When economists make forecasts about the future path for an economy they have to accept the inevitability of forecast errors. No macroeconomic model can hope to cope with the fluctuations and volatility of indicators such as inflation, exchange rates and global commodity prices.

Uncertain business confidence levels

Fluctuations in exchange rate

External events e.g. volatile oil and gas prices

Uncertain reactions to macro policy changes

Rate of business job creation hard to forecast

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Understanding the Economic Cycle | tutor2u Economics

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All countries experience regular ups and downs in the growth of output, jobs, income and spending. Boom A boom occurs when real national output is rising at a rate faster than the trend rate of growth.

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This section of the specification is primarily about macroeconomics. However, students should understand that microeconomic principles underpin the behaviour of the macroeconomy. Understanding some aspects of macroeconomic behaviour requires that students have a firm grasp of related microeconomic principles, for example, understanding of price elasticity of demand is essential when analysing the extent to which a fall in the exchange rate will lead to an increase in exports.

Students will be required to acquire knowledge and understanding of AD/AS analysis and should be provided with opportunities to use this analysis to explore recent and current economic behaviour. They should understand, and be able to analyse and evaluate, macroeconomic policy.

When applying and evaluating all the macroeconomic models in the specification, such as the circular flow of income and the multiplier process, students should be critically aware of the assumptions upon which these models are based and their limitations when investigating macroeconomic and global issues.

Students should have a good knowledge of developments in the UK economy and government policies over the past fifteen years. They should also be aware that the performance of the United Kingdom economy is influenced by its membership of the European Union (EU) and by external events in the international economy.

3.2.1 The measurement of macroeconomic performance

3.2.1.1 The objectives of government economic policy

3.2.1.2 Macroeconomic indicators

Data which is commonly used to measure the performance of an economy, such as: real GDP, real GDP per capita, Consumer Prices and Retail Prices Indices (CPI/RPI), measures of unemployment, productivity and the balance of payments on current account.

3.2.1.3 Uses of index numbers

3.2.2.1 The circular flow of income

3.2.2.2 Aggregate demand and aggregate supply analysis

3.2.2.3 The determinants of aggregate demand

3.2.2.4 Aggregate demand and the level of economic activity

3.2.2.5 Determinants of short-run aggregate supply

3.2.2.6 Determinants of long-run aggregate supply

3.2.3 Economic performance

3.2.3.1 Economic growth and the economic cycle

3.2.3.2 Employment and unemployment

3.2.3.3 Inflation and deflation

3.2.3.4 The balance of payments on current account

3.2.3.5 Possible conflicts between macroeconomic policy objectives

3.2.4 Macroeconomic policy

3.2.4.1 Monetary policy

3.2.4.2 Fiscal policy

3.2.4.3 Supply-side policies

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The national economy in a global context

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This section of the specification is primarily about macroeconomics. However, students should understand that microeconomic principles underpin the behaviour of the macroeconomy. Understanding some aspects of macroeconomic behaviour requires that students have a firm grasp of related microeconomic principles, for example, understanding of price elasticity of demand is essential when analysing the extent to which a fall in the exchange rate will lead to an increase in exports.

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Chapter 14 worksheet and extension answers

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Economic Growth Past Paper Multiple Choice

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The Measurement of Macroeconomic Performance

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Economic Growth and the Economic Cycle - Economics AS Level Unit 2

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A short revision video on the joys of Economic Growth which is designed to be watched by students studying Economics AS Level with AQA.

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Economic Growth Series:  Evaluating the Consequences of Economic Growth

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Hey Everyone, This is video 3 of 3 videos in "The Economic Growth Series". Watch the entire series right here: https://www.youtube.com/playlist?list=PLNI2Up0JUWkFxkSsb8p3fCrx0Z3i59REX As a teacher of IB Economics in Santiago, Chile, these videos were created to help students navigate their way through their two-year course of study.

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Economic Development Series:  Sources of Economic Growth

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Hey Everyone, This is video 2 of 6 videos in "The Economic Development Series". Watch the entire series right here: https://www.youtube.com/playlist?list=PLNI2Up0JUWkEhlr-c4dpa1xqQf-Sq2BXv The List! Here is the "The List" for "The Economic Development Series": For an explanation of the logic of "The Lists" click here: https://youtu.be/dE0fbsgXlFE What is economic development?

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Population Growth and Economic Development

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The Foundations of IB Economics Series:  Economic Growth vs. Development

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Hey Everyone, This is video 10 of 14 videos in "The Foundations of IB Economics Series". Watch the entire series right here: https://www.youtube.com/playlist?list=PLNI2Up0JUWkEIqIpDdEo2_gupbWWHpYwT The purpose of this series is to provide students with a quick explanation of the foundational concepts of IB Economics.

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This A Level Macroeconomics topic video explains what economic growth is and makes a distinction between short run and long term factors that can affect the rate of real GDP growth in a country.

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This topic video looks at the output gap which is a measure of the margin of spare capacity available for an economy to continue to grow.

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Benefits and Costs of Economic Growth I A Level and IB Economics

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IB Benefits and Costs of Economic Growth

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Costs and Benefits of Economics Growth - A look at the costs and benefits of economic growth, great for an evaluation based question

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Y1/IB 4) Causes of Economic Growth (Short Run and Long Run) with Evaluation

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Causes of Economic Growth (Short Run and Long Run) with Evaluation - The causes of economic growth in both the short and long run with strong evaluative points to use in the exam Twitter: https://twitter.com/econplusdal Facebook: https://www.facebook.com/EconplusDal-1651992015061685/?ref=aymt_homepage_panel

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Economic growth means an increase in real GDP. Economic growth means there is an increase in national output and national income.

Economic growth is caused by two main factors:

1. An increase in aggregate demand (AD)

2. An increase in aggregate supply (productive capacity)

Demand-side causes

In the short term, economic growth is caused by an increase in aggregate demand (AD). If there is spare capacity in the economy, then an increase in AD will cause a higher level of real GDP.

AD= C + I + G + X- M

C= Consumer spending

I = Investment (gross fixed capital investment)

G = Government spending

X = Exports

M = Imports

Graph showing increase in AD

1. Factors which affect AD

Lower interest rates - Lower interest rates reduce the cost of borrowing and so encourages consumer spending and firms to invest. Lower interest rates also reduce mortgage payments and so increase the disposable income of consumers.

Increased wages. Higher real wages increase disposable income and encourage consumer spending.

Increased government spending (G). e.g. government investment on building new roads or increased spending on welfare benefits, which increase disposable income.

Devaluation. A fall in the value of the exchange rate (e.g. Pound Sterling) makes exports cheaper and increases the quantity of exports (X). A depreciation also makes imports more expensive, reducing quantity of imports and making domestic goods relatively more attractive.

Confidence. Increased consumer confidence encourages households to spend by either running down savings or taking out more personal credit. It enables higher spending (C)., which encourages spending (C).

Lower tax. Lower income tax will increase the disposable income of consumers and increases consumer spending (C).

Rising house prices. A rise in the price of houses creates a positive wealth effect. Homeowners who see a rise in the value of their houses will be more willing to spend (remortgaging house if necessary)

Financial stability. If there is financial stability and banks are willing to lend, then firms will be more willing to invest and investment will increase aggregate demand.

2. Long-term economic growth

This requires an increase in the long-run aggregate supply (productive capacity) as well as AD.
Diagram showing long-run economic growth
LRAS or potential growth can increase for the following reasons:

1. Increased capital. e.g. investment in new factories or investment in infrastructure, such as roads and telephones.

2. Increase in working population, e.g. through immigration, higher birth rate.

3. Increase in labour productivity, through better education and training or improved technology.

more on labour productivity

1. Discovering new raw materials. For example, finding oil reserves will increase national output

2. Technological improvements to improve the productivity of capital and labour e.g. Microcomputers and the internet have both contributed to increased economic growth. In the future, economic growth may come from new technology such as Artificial intelligence (AI) which enables robots to take the place of human workers.

Other factors affecting economic growth

Economic and political stability. Stability is important for reassuring firms it is a good idea to invest in increasing capacity. If we see a rise in uncertainty, confidence tends to fall and this can cause firms to delay investment.

Low inflation. Low inflation is a good climate for encouraging business investment. High inflation increases volatility.

Periods of economic growth in UK
1980s boom
In the 1980s, the UK achieved rapid rates of economic growth, this was caused by

Cuts in income tax, increasing disposable income, leading to higher spending and thereby stimulating business investment

Boom in house prices, which caused a positive wealth effect, equity withdrawal and higher consumer spending.

Rise in confidence, especially amongst south

Low real interest rates, which made mortgages cheaper.

See: UK economy in the 1980s

Period of great moderation 1992-2007

The longest period of economic expansion on record was from 1992 - 2007. This period of economic growth was caused by:

Low global inflation, which created a period of economic stability.

A rise in house prices, which helped increase consumer spending.

Growth in productivity, helped by supply-side reforms.

Inward investment helped create new jobs and better labour relations.

See: Great moderation

The great recession of 2008/09 caused by

Credit crunch and fall in bank lending

Rise in price of oil - reducing disposable income

Fall in confidence

Fall in house prices leading to the negative wealth effect.

Global recession causing fall in export spending.

Related

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Causes of economic growth - Economics Help

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Economic growth means an increase in real GDP. Economic growth means there is an increase in national output and national income. Economic growth is caused by two main factors: An increase in aggregate demand (AD) An increase in aggregate supply (productive capacity) In the short term, economic growth is caused by an increase in aggregate demand (AD).