Please enable JavaScript.
Coggle requires JavaScript to display documents.
Evaluate the micro and macro effects of falling house prices (25),…
-
Evaluate the micro and macro policies which could be used to promote growth and development in Kenya or another developing country
MICRO:
micro-finance loans -> increased loans to small businesses to invest -> greater investments drives greater efficiency -> increased I component of AD for GDP growth (but GPL rises)
privatisation -> increased competition between lots of private firms -> incentivises greater efficiency to be able to compete -> more allocative efficient pricing to compete on price factors -> more dynamically efficient to compete non non-price factors e.g quality -> facilitated by greater investments to boost quality and productivity -> labour saving capital and technology -> lower unit costs -> outward shift in AS which increases GDP and lowers GPL
MACRO: attracting FDI -> increased investment from TNCs and countries like China -> greater infrastructure projects reduces production costs of transport and reduces geographical immobility of labour so increases the size of workforce -> greater productivity and output -> outward shift in AS -> GDP growth and GPL falls -> greater training or workforce -> decreased occupational immobility with greater skills and qualifications -> outward shift in AS so GDP growth and GPL falls -> greater employment overall would lead to greater wages and consumption driving AD and GDP growth
buffer stocks (when the government can buy stock in good years to prevent prices falling and increase supply using this buffer stock in bad years to prevent prices rising) -> reduces vulnerability to price volatile commodities -> increased certainty for governments to spend on healthcare and education so greater life expectancy and literacy rates so HDI improves -> increased certainty for people to consume and individuals to invest -> growth of C+I+G which results in AD outward shift and GDP growth (but GPL rises)
MICRO eval
- small businesses may not use their loans to invest, banks may not be willing to lend, access to credit and business confidence may be low, business taxes may be high
- privatisation may cause exploitation of consumers on high prices and restricted output -> time lag for investment projects to be completed so won't grow GDP in the short run -> impacts of outward shift in AD depends on many factors already mentioned
MACRO eval -> TNCs may exploit workers on low wages and poor working conditions, economic leakage, may have to may back loans and interest which is an opp cost of money spent on other policies to drive growth and may make them less attractive to FDI in the future
impacts of the outward shift in AS depend on many factors already mentioned
if population growth is faster than GDP growth then the GDP per capita value worsens which actually reduces HDI score and holds back development. government may not have the knowledge (information asymetry) or skills to facilitate this could waste lots of scarce resources especially if perishable
time lags for imprivements to arise from greater spending on education and healthcare by the government
Others could mention: trade liberalisation, protectionism, allow floating exchange rates, devalue exchange rate, government spending on education, infrastructure and healthcare
-
(d) Evaluate the microeconomic and macroeconomic effects of a depreciation of the
pound. Refer to restaurants or other food delivery services in your answer.
MICRO EVAL
- BUT if AVC is less than or equal to AR in the short run firms can continue to operate at a loss since they can cross-subsidise or take out a bank loan to contribute to paying back fixed costs (short run shut down theory)
- depends on the magnitude and duration of the depreciation, where if this causes imported food prices to rise by 2% for 2 months this won't increase production costs as much as if this caused imported food prices to rise by 10% for 2 years
- depends on what is happening to other costs, e.g. if rent costs fall this could counterbalance the rising import costs, so costs may not rise as much or at all
MACRO EVAL - the impacts of the outward shift in AS and AD depend on factors previously mentioned in other plans
- the BoP only improves in the long run due to the j-curve theory due to the time lag for economic agents to realise price changes to exports and imports have occurred, so doesn't drive economic growth in the short run
- a depreciation only causes a rise in economic growth if the Marshall Lerner condition is met, where PED of exports + imports >1
- could restaurants get food sources from other countries that the pound hasn't depreciated against so prices don't rise? so depends on the currencies the pound has depreciated against (if a major trading partner for food e.g. France, may have a greater impact on costs)
MICRO -
- increased import prices -> increased costs for restaurants that import a large proportion of food used in their production -> increases variable costs -> increased average and marginal costs -> decreases profits or creates a loss -> less returns to shareholders and owners -> less funds to re-invest in R+D and innovation thus dynamic efficiency decreases -> firms could shut down and increases unemployment -> lower quality products may also worsen consumer experience and satisfaction due to less DE
MACRO
- increased import prices whilst reducing export prices -> higher demand for exports -> lower demand for imports -> value of imports fall whilst value of exports rises -> improves the BoP
- increased demand for exports -> increased incentive for exporters to invest in capital goods (machinery and tech) and labour to increase capacity to supply to meet rising demand -> increased investments and employment (which increases wages, purchasing power and consumption) -> increased C+I+(X-M) components of AD -> outward shift in AD -> GDP rises (achieves economic growth objective) and GPL rises (may hinder 2% inflation target)
- increased import prices results in higher production costs for restaurants -> inward shift of AS -> lower GDP (threatens economic growth objective) and higher GPL (threatens 2% inflation target) which would negate benefits explained above
higher GPL has negative impacts previously mentioned and evaluated
Evaluate the impacts of a significant rise in the minimum wage in the UK on restaurants or other food delivery services
MACRO -> this reduces income inequality as this increases the wages of those on the lowest incomes, and assuming nothing else changes, this closes the gap between the highest and lowest incomes -> inward shift of Lorenz curve from L1 to L2 -> decreased Gini Coefficient score -> greater motivation of workers because they have higher incomes, so a more focused and productive -> lower unit labour costs -> outward shift in AS curve -> higher GDP and lower GPL -> meets objectives for economic growth and 2% inflation target (lower GPL has many benefits already mentioned) -> higher disposable income of the lowest paid workers boosts their purcahsing power and consumption -> accelerator effect of greater investments for firms to meet rising demand -> outward shift in AD so GDP and GPL rises
MICRO
- this increases wages from W1 to W2 which boosts quantity of labour supplied from Q1 to Qs but reduces quantity of labour demanded from Q1 to Qd -> creates an excess supply of labour
- this increases demand for firms that sell normal goods as positive YED value causes demand to rise as incomes rises -> greater profits -> increased returns to shareholders and owners and dynamic efficiency
- increases labour costs for firms that hire people on the minimum wage -> increased variable costs (wages) so increased AC and MC -> reduces profits or could create a loss -> less returns to shareholders and owners, less dynamic efficiency and firms could shut down causing unemployment
MICRO EVAL -> short run shut down theory evaluation of why firms may not shut down as they can continue to operate at a loss -> impacts on firms depends on the PED of the products they sell where firms selling inelastic products (necessities, addictive) can pass on higher wage costs to consumers as higher prices (since demand won't fall as much as prices rise) so revenue and profits won't fall compared to firms selling products which have an elastic PED -> the % of total costs that are labour costs where the higher this % the more costs rise -> certain industries can replace labour cheaply and easily with machinery e.g. manufacturing vs labour intensive industries like social care + education so doesn't impact all firms the same -> depends on what happens to other costs since costs may not rise as much or at all if other costs decrease e.g. raw materials and rent
MACRO EVAL -> could cause real wage unemployment due to surplus of labour which reduces the incomes of the lowest paid workers thus worsening income inequality -> higher wage costs could outweigh productivity gains -> increased production costs overall -> inward shift of AS which reduces GDP and increases GPL -> impacts of the outward shift in AS depends on many factors already mentioned -> consumption of the lowest paid workers may not increase until the long run when they actually feel better off (may be paid monthly) -> lowest paid workers may choose to save extra incomes since interest rates are high, thus returns on savings are high OR could spend more on imports which increases leakages to the circular flow and may result in an inward shift of AD instead -> impacts of outward shift in AD depends on factors previously mentioned -> consumption of lowest paid workers may not increase as the UK faces the highest tax burden in 70 years, uncertainty around Brexit and trumps tariffs
Evaluate the impact of decreasing interest rates in Kenya or another developing country of your choice
MICRO: greater borrowing thus greater consumption -> greater demand for goods and services -> increased revenue for Kenyan firms -> outward shift in AR and MR curves -> higher profits -> greater returns to shareholders and owners and greater dynamic efficiency -> greater quality and range of products sold -> greater consumer choice, satisfaction and experience
MACRO -> lower cost of borrowing and returns on savings -> increased borrowing and less savings so more injections (C+I) and less leakages (savings) -> outward shift in AD curve which drives GDP but worsens inflation as demand-pull pressures rise -> greater incentive to consume -> accelerator effect adds to greater incentive to invest -> in the long run greater investments can result in a rise in productivity especially if labour and capital saving technology is implemented -> unit labour and production costs fall -> outward shift in AS which increases GDP and GPL (so inflation falls in the long term)
MICRO eval -> depends on the magnitude and duration of interest rates falling -> if this falls by 0.5% for 2 months this has less of a significant impact than a fall of 3% for 3 years. -> consumption may not increase in the short run since there will be a time lag for people to realise interest rates have changed -> DE may not rise in firms only distribute higher profits among shareholders and owners
MACRO eval -> may hold back development as suggested by the Harrod-Domar Model (savings gap widens so less funds for banks to lend to consumers to consume, businesses to invest and governments to spend thus holding back C+I+G in the future for AD and GDP growth) -> impacts of AD and AS outward shift depends on many factors already mentioned. consumption and investment may not rise if consumer and business confidence is low and/or tax rates are high. investments may not rise if businesses lack access to credit or the banks aren't willing to lend
-
-
-