as econ session 3

A Level Economics – Year 1 (AS) Revision Workshop

Session 3Measuring UK Economic

performance

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In this session we will consider how the UK’s economic performance is measured, how the economy is currently performing and discuss the validity of the measures that are used.

Welcome Back

Settle down quickly and get ready to playThe Great Economics Snail Race

Meet Winston. He’s representing the UK in ‘The Great Economics Snail Race’! He is going to compete against snails from other countries over 4 different heats. Your task is to decide which position you think that Winston will finish (out of 5)

and which snail will win in each race.

Get ready to start!

China

Spain

Australia

India

UK

6.4%

3.5%

2.5%

7.4%

1.9%

2nd

3rd

4th

1st

5th

Which of these countries had the highest annualrise in GDP (as a percentage) in 2015?

1

Italy

France

Japan

USA

UK

11.4%

10.6%

3.3%

5.0%

5.1%

5th

4th

1st

2nd

3rd

Which of these countries had the lowest rate ofunemployment (LFS measure) in 2015?

2

Spain

Japan

USA

France

UK

97.7%

230.00%

102.98%

95.0%

89.4%

3rd

5th

4th

2nd

1st

Which of these countries had the lowest Government debt(as a percentage of GDP) in 2015?

3

China

Russia

Brazil

Germany

UK

1.6%

12.9%

10.7%

0.5%

0.2%

1st

5th

4th

2nd

3rd

Which of these countries had an inflation ratethat was closest to 2.0% in 2015?

4


Session 3Measuring UK Economic

performance

24

In this session we will consider how the UK’s economic performance is measured, how the economy is currently performing and discuss the validity of the measures that are used.


The Economic Cycle24

Indicator

AThe number of new housing starts begins to fall

B Rising real income

C Rising homelessness

DMore building skips start appearing on the streets

EMore companies attempt to introduce wage freezes

F Imports of sewing machines rise

A

B

C

D

E

F


The

Econ

omic

Cy

cle

Indicator Depends on…..

A The number of new housing starts begins to fall

B Rising real income

C Rising homelessness

D More building skips start appearing on the streets

E More companies attempt to introduce wage freezes

F Imports of sewing machines rise

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How much supply shortage there is in housing

Whether firms use their increased profits to pay higher wages

Government initiatives to prevent homelessness

Confidence that growth will continue and builders’ bills can be paid

Rising national minimum wages

An appreciation of the exchange rate


The Components of Aggregate Demand

25

3.4 1.42 No Mode

This can

happen!


Shifts in the Aggregate Demand Curve

25

AD2

AD2

AD3


Indicator Depends on…..

A fall in income tax

A fall in interest rates

A rise in the value of the GB Pound compared to the Euro

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People save the extra cash they have (= leakage from the circular flow)

How much the interest rates fall

The proportion of UK goods sold to countries who have the Euro as their currency and of imports from those countries

Analysis - Again, for each of the changes above, write a ‘depends on’ phrase to illustrate the level of impact for each change:


Shifts in Aggregate Supply25

SRAS (or, elastic section of Keynesian

AS curve)

•Decreases (left/upwards shift) if production costs increase•Increases (right/downwards shift) if production costs decrease

LRAS (or, inelastic section of Keynesian

AS curve)

•Decreases (shifts left) if the quantity or quality of factors of production falls•Increases (shifts right) if the quantity or quality of factors of production rises


Shifts in Short run Aggregate Supply

25

AS3

AS2

AS3


Application – Universal credit – Changing labour supply

Universal Credit rolled out to replace other

benefits

Key feature of policy is to gradually reduce

benefits to workers as they remain in employment

Counteract ‘trap’ caused by sudden loss of

benefits if claimant started to work beyond

16 hours a week

Report in Dec 2015 indicated that UC has

led to a 8% better chance that someone

will return to work and earn more money

86% were trying to work more hours under UC, compared to 38% under Jobseeker’s Allowance

77% were trying to earn more, compared to 51% under Jobseeker’s Allowance.

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TASK: Analyse the view that move towards to the Universal Credit system has led to a long term change in Aggregate Supply.

Introduction of Universal Credit

This means that…

This can lead to….

This can cause…

It depends upon……

Increase in the long run aggregate supply

As someone on low income works more hours the difference between what they lose as benefits and what they earn in income is less than the previous system.

A greater incentive to work longer hours

An increase in the amount of available labour (a factor of production) which shifts LRAS to the right

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The availability of more work


27

2

2


Growth in the UK Economy 28

Slow down in the growth of some international economies e.g. China

Wage growth in the UK decreased

Continued low inflation stunts consumer spending


What are the economic and social costs of Economic Growth?

A large rise in AD could be met with rising prices. Interest rates rise to curb high inflation.

Environmental damage (negative externalities) caused by economic activity (e.g. pollution) rises with a growth in output

Growth tends to benefit some groups more than others (e.g. urban citizens of China vs rural farmers)

28


What is the best way to attain sustainable economic growth in the long run?

29

What is meant by ‘sustainable’?

‘Sustainable’ growth is a level of economic growth that can be achieved without creating other significant economic issues, particularly for future generations.


What is the best way to attain sustainable economic growth in the long run?

29

A growth of networks and shared norms so that society is more co-operative

Expand role of organisations such as WTO, allow more countries to feel benefit of trade agreements

Ensure all institutions (e.g. legal, financial) are more economically efficient

Provide market places that do not over-regulate enterprise

Policies such as use of interest rates to control inflation

A ‘fairer’ distribution of income may reduce waste


Equality vs Equity!


Employment29


Evaluate the view that employment and unemployment rates of 16 to 25 year olds (in the UK) represents a significant issue with regards to the performance of the UK economy.Argument for

Point

Explanation

Evidence

Evaluation

Link back

Employment amongst young people is disproportionately lower than older age groups; unemployment is disproportionately higher.

This results in greater spending on benefits, and is an inefficient use of labour resources; furthermore it can lead to long-term unemployment

Employment of 16-18 year olds is only 25.5% compared to 83.3% of 35- 50 year olds. The figure is compounded by a 24% unemployment rate

30

Many 16-18 year olds are in FT education, therefore will be more employable in the future. Unemployment rates may reflect lack of skills – but the Universal Credit Youth Option requires them to work or train.The low youth employment rate is less of a problem for the UK economy than the high youth unemployment rate


Evaluate the view that employment and unemployment rates of 16 to 25 year olds (in the UK) represents a significant issue with regards to the performance of the UK economy.Argument against

Point

Explanation

Evidence

Evaluation

Link back

The employment and unemployment rates of this age category should also be compared with other similar countries

The employment and unemployment rates may be “typical” of that age group in similar economies, therefore not too concerning

The average unemployment rate for 16-18 year olds in Europe is 23.5%, and in some countries is close to 50% e.g. Spain

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However, youth poverty and long-term unemployment can have significant impact on LR growth, crime, and gov’t spending

The youth employment and unemployment rates may be similar to other countries, but should still be tackled to improve the UK’s performance


InflationThe UK has had consistently low inflation levels over the last 2 years. In recent months the Consumer Price Index has shown inflation to be close to zero – way below the targeted level of 2%. Much of the issue appears to be the falling price of fuel and food in the UK.

30


31Inflation levels for food, fuel and other products


Evaluate the view that the very low levels of inflation within the UK should not concern the Government as it is primarily caused by falling prices for fuel and food.Argument for

Point

Explanation

Evidence

Evaluation

Link back

Falling prices of fuel and food are good for the UK’s consumers and businesses

Food and fuel are essential items so lower prices help poor households especially, and increase discretionary income. SRAS may also increase.

Governor of BoE believes low inflation does not require immediate action – other prices are still rising, and we aren’t suffering deflation

30

Falling prices are bad for profits of food/fuel producers, and could impact on long-term supply of these products because investment may fall

On balance, low UK inflation rates caused by low fuel and food costs are probably a benefit as long as they don’t lead to reduced supply


Evaluate the view that the very low levels of inflation within the UK should not concern the Government as it is primarily caused by falling prices for fuel and food.Argument against

Point

Explanation

Evidence

Evaluation

Link back

Falling fuel prices have a secondary impact on prices of many products, which could cause issues.

Many products and services are impacted by the cost of fuel. A reduction in their costs will keep prices low generally.

Inflation of ‘others’ category is also very low (less than 1% in 2015)

30

General low prices may lead to a reduced level of consumption as people wait to see if prices fall any lower.

A fall in inflation generally is a cause concern for the UK economy as it could lead to a reduction in consumption.


Extension activities

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as econ session 3

Education