Chapter 5.

Key performance indicators.
There are certain indicators that economist should examine to find out how well an economy is performing.One of them is economic growth.
Economic growth: in the short run it is an increase in real GDP,in a long run-an increase in productive capacity.
Another indicator is unemployment.
Unemployment is a situation when people who are willing and able to work are out of work.Usually,when countries output increases,unemployment falls and economy is thought to be doing well.But some people may not be in the labour force because they are homemakers or disabled.This people are not regarded as unemployed,they are economically inactive (neither employed nor unemployed).
Inflation (sustained rise in price level ) is another indicator of economic performance. But a country may also experience deflation which is an opposite to inflation.
And the last one is balance of payments.This is a record of money flows coming in and going out of the country.

Objectives of the government economic policy.
There are 4 main objectives of the government economic policy:
- Achieve economic growth
- Reduce Inflation
- Reduce unemployment
- Balance of payment(international trade)

Economic growth.
Government wants to achieve economic growth because of the benefits its brings.One of those benefits is an increase in living standards.But it is important for the government to achieve steady and sustainable economic growth.
Steady economic growth means without negative fluctuations in economic activities.
Sustainable economic growth:growth which can continue over the time.
There are two types of sustainable economic growth: the year after year an the generation after generation economic growth.
The first type can be achieved if increases in AS match increases in AD.Government is trying to achieve the actual economic growth by matching trend growth.
Trend growth:the expected increase in potential output over time.It is measure of how fast the economy can grow without generating inflation.

To sustain economic growth from one generation to another the methods of raising productive potential and output must not endanger future generations` ability to grow.This means avoiding depleting non-renewable resources and stop damaging environment,reducing pollution.
EMPLOYMENT AND UNEMPLOYMENT.
High employment and low unemployment is another objective of government policy.Some governments state that their objective is full employment.
Full employment:a situation where those wanting and able to work can find employment at the going wage rate.
As well as trying to ensure that people have job government is trying to encourage more people to enter the work force,because it should increase productivity of the country.
INFLATION.
A third objective is low and stable inflation rate. As well as in case of unemployment,price stability does not actually mean zero inflation,because for a good performance of the country there still should be the small percentage of inflation.For example,the Bank of England set the target to achieve a 2% of inflation rate.
BALANCE OF PAYMENTS
In the past, government wanted to achieve a satisfactory balance of payments. However,nowadays it may not be too concerned in the short term if there are more exports than imports,for example,if this deficit is arising from the imports of raw materials that later can be converted into finished goods that could be exported.There also could be a current account deficit (when more money is leaving the country than coming into).But in the longer run government is still likely to want to see an increase in international competitiveness.

EXCHANGE RATES

Exchange rates: the value of one currency expressed in terms of another.
Free exchange rate system: the value of currency is determined by supply and demand in free market.
Fixed exchange rate:the value of currency is controlled and set by the government.
Managed floating: when the free market operates but the government may intervene.
FREE EXCHANGE RATE/
Demand:the demand for currency comes from people who have other currencies and need to exchange them for that particular currency.
Why there is a demand for any currency?
answer is:
*people want to purchase this countries exports
*they want to invest in this country
So why may people want to invest in another country?
there could be two main reasons for that:
*currency of this country is more stable
*there are higher interest rates,so if,for example,someone will put his/her money in bank of this country he/she will gain more interest from that.

Supply:the supply for a currency comes from people who have that currency but want to change it to another,so there is a supply of this currency.
Why might the supply for something change?
*because people may need to have this currency in order to buy imports
*may be that people want to invest in another country
*also supply may change because of the speculators

Also there is a number of reasons for demand for any currency to increase or decrease.
It is increases because:
*speculators may expect the value of this currency to rise,so they will buy it and therefor demand increases.
*demand for exports of this country rises.
*an increase in investment in this country.
As the result the currency appreciates, there is a rise in the value of this currency.


It is decreases because:
*Invest rates have fallen
*Speculators think that the value of this currency will fall
*Demand for exports have fallen
As the result currency dapreciates.

Monopoly

Monopoly exists where there is a single seller in a market.A monopolist is a price taker.The monopolist faces a downward sloping demand and can set a price or the output but not both.If the monopolist sets a price it must accept the quantity that is demanded at this price;if it sets the output it must accept the price it can get for this quantity.
In monopoly situation we assume that the firm is faced with a downward slopping demand curve and must lower the price to sell an additional unit.
In the situation of a single price monopolist,only one price can be charged for all the goods,so if the price is lowered on the last unit it must also be lowered on the ones before.
For example,the firm was selling one unit for 10 pounds.To sell another unit, the price must be lowered to 9 pounds.The firm`s revenue for two units is 18 pounds compared to 10 pounds for one.Its marginal revenue is therefore 8 pounds (18-10).So,the firm gained 9 pounds on the second unit which was not sold before but lost 1 pound on the fist unit which was previously sold for 10 pounds.
Similarly,if the price of two units is 9 pounds each,the firm may have to lower the price to 8 pounds to sell three units.
I n each case the firm is gaining revenue from the sale of the extra unit but losing revenue on the ones before,where the price have been lowered.


The marginal revenue is below the average revenue (or price) line and gets further away from it as more units are sold.This is because the price is continually being reduced an all the units before.
BARRIERS TO ENTRY-these prevent firms entering an industry in the long run.
*fear of reaction of existing firms.It means that other firms may not entry if they think this will trigger a price war.
*control over outlets so competitors can not get their products to the market.
*product differentiation-by making their product seem very different from the competition through their marketing and branding a firm can establish a monopoly position.
*Legislation.The government may restrict the ability of firms to compete in a market.
*Patents and trademarks-this provide firms with legal protection for their ideas or design.
*Control over supplies-if the firm has a monopoly control of the supplies in an industry, other firms will not be able to enter.
*a cost advantage-if a firm has a major cost advantage,because of the economy of scale,other firms will not be able to compete.
(Economies of scale-reduction in cost per unit resulting from increased production, realized through operational efficiencies. Economies of scale can be accomplished because as production increases, the cost of producing each additional unit falls.)

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Chapter 4.Aggregate demand and aggregate supply and their interactions.

Before we looked at how markets for particular products work and how sometimes they fail to achieve allocative efficiency.But now we are moving to study of the whole economy.And factors that have an influence on economy as a whole now will be shown by aggregate demand and aggregate supply.Aggregate means total,so:
AGGREGATE DEMAND(AD):the total demand for a country`s goods and services at a given price level and in a given time period.
Formula for aggregate demand is: AD=C+I+G+(X-M),where C is consumer expenditure,I-investment,G-government spending,X-exports and M-imports.
PRICE LEVEL: the average of of each of the prices of all the products produced in an economy.
CONSUMER EXPENDITURE(CONSUMPTION):spending by households on consumer products,such as clothing,food and insurance.For the most countries it is the largest component of aggregate demand.
INVESTMENT: spending on capital goods (delivery vehicles,machines and office buildings).But it is the most volatile component of aggregate demand.
GOVERNMENT SPENDING: spending by the central government and local government on goods and services(education,health and police service).But it does not include transfer payment,job seeker`s allowance and state pensions.
TRANSFER PAYMENT:money transferred from one person or group to another not in return for any goods and services.
JOB SEEKER`S ALLOWANCE: a benefit paid by the government to those unemployed and trying to find a job.
EXPORTS: products sold abroad.
IMPORTS:products bought from abroad.
NET EXPORTS: the value of exports minus the value of imports.Net exports add foreigners` spending on the countries goods and services and deduct spending by the country`s population on imports.This component can make positive or negative contribution to aggregate demand,with other words it can cause trade surplus or trade deficit.
TRADE SURPLUS: the value of exports exceeding the value of imports.
TRADE DEFICIT:the value of imports exceeding the value of exports.

CONSUMER EXPENDITURE.

There are a range of influences on how much households spend:
*Real disposable income(income after taxes on income have been deducted,state benefits have been added and results have been adjusted to take into account changes in price level).
This is the main influence on consumption.Richer households and richer economies will spend more than the poorer ones.But the average propensity to consume(APC)may fall as disposable income rises.
The average propensity to consume(APC):the proportion of disposable income that is spent.It is consumer expenditure divided by disposable income.
*Wealth.
The more wealth people have(their home,saving account,shares)-the more their tend to spend.
*Consumer confidence and expectations.
CONSUMER CONFIDENCE:how optimistic consumers are about future economic prospects.When consumers are optimistic about their future (expecting their job prospects to be good and wages to be hight) they spend more.So,sometimes proportion of income spent can rise as income rises.
*The rate of interest.
RATE OF INTEREST:the charge for borrowing money and the amount paid for landing money.
Changes in a rate of interest are another important influence on consumer expenditure,but also it can be overshadowed by the state of consumer confidence.Usually a fall in the rate of interest will stimulate a rise in consumer expenditure.There are 3 main reasons for that:
1)It makes it cheaper for consumer to borrow in order to buy expensive items
2)It reduces the incentive to save
3)Those who paying interest on any type of loans will have more money to spend.
But the net savers (those who save more than they spend)will lose out if the rate of interest falls.Also there is possibility that even if a rate of interest falls spendings will not rise.It can be because people are worried too much about the future or they may think that the rate will fall further.
*The age structure of the population
*DISTRIBUTION OF INCOME-it is how income is shared between households in a country.
Poor people spend more proportion of their income that the rich people do.So,government measures that redistribute income from the rich to the poor are likely to increase total consumer spending.
*INFLATION-a sustained rise in the price level.
this is difficult to determine what impact inflation has on consumers spending.Because,if people expect that the prices will rise rapidly in the future they may increase their spending now.Or,on the other hand,people increasing their savings rather than spendings.

SAVING.
It is real disposable income minus spending.
Well,saving is a not a component of aggregate demand,but still...
Savings may be influenced by:
*Real disposable income.This is the main influence on savings.As real disposable income increases,households save more and also they save a higher proportion of their income.Their average propensity to save rises.
AVERAGE PROPENSITY TO SAVE(APS):the proportion of disposable income saved.Savings divided by disposable income.
*THE RATE OF INTEREST: A rise in the rate of interest usually encourages people to save.There are some people called target savers.They are saving to achieve a particular sum in savings.In their case higher interest rate would reduce the amount they have to save.
*Confidence and expectations.
*Saving schemes.
Some saving is contractual, when people agree to save a certain amount on a regular basis in insurance and pension schemes.
*Range of financial institutions.
In a countries with a hight number of established and trusted financial institutions people will have a confidence to place their savings with this institutions.But as financial system becomes more developed saving rate may fall.Because people find it easier to borrow.
*Government policies
*The age structure of the population.
People of the middle years save more than young people.
DISSAVE: spending more than disposable income
SAVING RATIO:savings of the proportion of disposable income.

TO BE CONTINUED...