Public sector finances

Automatic stabilisers are policies designed to immediately offset fluctuations in the economy and work to stabilise the economy before any intervention by the government/policy makers.

e.g in a recession as unemployment increases, the government is automatically spending more in unemployment benefits due to JSA already being in place

Discretionary fiscal policy is when the government makes deliberate changes to spending, tax rates or borrowing in order to boost aggregate demand.

The fiscal deficit is the amount that government expenditure exceeds the revenue the brings in. Occur when tax revenues aren't enough to fund spending so the government must borrow.

The national debt is the total amount that the government owes to its creditors. This is the total level of debt accumulated over previous years to help finance spending.

A structural deficit exists at any point in the business cycle (due to the difference in government expenditure and tax revenue), whereas a cyclical deficit exists based on where the economy is in its business cycle. In a boom the deficit should shrink (or even become a surplus) and vice versa in a recession.

Factors influencing the size of the deficit:

Level of tax avoidance/evasion - greater levels of this decrease the amount of revenue the government collects and increases the deficit.
Level of income/wealth inequality - Inequality leads to the richer attempting tax avoidance and the poorer not having enough money to contribute much or any tax revenue (when progressive taxation is in place).
Demographics - affects the level of government spending required (an ageing population will require more spending in healthcare than a younger one) and the level of tax collected
Government efficiency - if the government isn't efficient in providing services then there will be less value for money and spending will have to increase to cover what is needed.
Level of subsidies/financial support - more subsidies require more government spending.

Government often sells bonds to raise money for government spending. This can lead to crowding out. So if there's a large deficit more likely chance of crowding out.

If debt is too high people may be unwilling to lend to a country as they lose confidence in the ability of that country to pay the money back. They will demand higher interest rates (rates of return) to compensate for the increased risk which dampens economic growth.

Comments

Output gaps and the business cycle

Output gaps and the business cycle The fluctuation of real GDP around an underlying trend is a phenomenon known as the business cycle. Output gap - difference between the actual output of an economy and its potential output. There are two types of output gap, trend and potential. Trend growth is the estimated rate of growth of an economy. Trend output gaps: Business cycle diagram A negative trend output gap is when real GDP is below trend GDP. The economy is producing below its trend. e.g If real GDP is £1.8 trillion and trend GDP is £2 trillion then the negative output gap is £0.2 trillion. Here the economy is in a bust period. This is characterised by an expansion in GDP, high employment and high confidence. Price levels often rise, meaning inflation occurs. A positive trend output gap is when real GDP is above trend GDP. Here the economy is in a recession (bust). This is characterised by a contraction in GDP, high unemployment and lo

3.4.1 Efficiency

Efficiency Allocative efficiency Output at which the marginal utility, or benefit, of a good to a consumer is the same as equal to the marginal cost of producing it. This is seen on demand/supply curves, where D = S, output is produced as demand = marginal utility and supply = the sum of firms' marginal costs in an industry. On an individual scale, it is where: AR = MC Output is where the demand curve cuts the MC curve. NB: technically occurs where MSB = MSC (if you consider externalities) Occurs in perfect competition. Eval - PC markets achieve allocative efficiency where there are no externalities. LR equilibrium is where P = MPC, so if MSC > MPC, then there is an allocative inefficiency which leads to overproduction and consumption. Productive efficiency Output at which a good is produced at the lowest possible average cost for a firm. This occurs at the minimum point of the AC curve. AC = MC at this point, because w

3.3.4 Normal profits, supernormal profits and losses

Normal profits, supernormal profits and losses Profit maximisation Occurs at: MC = MR where MC cuts MR from below (as where it cuts from above is point of profit minimisation) This is because past this point MR < MC , and each additional good is costing the firm more than it is making. Before that point MR > MC so the firm can increase profit by producing more. NB - point of prof max can be found using TC and TR: Normal and supernormal profit and losses Normal profit is profit that covers the opportunity cost of capital and is just sufficient to keep the firm in the market. Supernormal/economic profit are profits that exceed normal profits. When AC lies below AR at the point of output, the difference between AR and AC is the supernormal profit on that unit output. The overall supernormal profit is the difference times the quantity sold (Q2 in the above). Likewise, when AC lies above AR at the point of output, the company makes s

Edexcel AS/A Level Economics revision

Search This Blog