Inflation And Supply Side Policies In The Uk Economics Essay

Hints: Using information from the internet and economic textbooks.explain what has been happening to the rate of inflation in your country or a region that includes your country,since 1990.You should include diagrams

In our region the inflation is on its peak. the rate of commodities and goods increases day by day with high speed. If we look to the diagram changes have been done in every year. In some time in past the inflation rate fall but in the recent time that’s 2009 its raised upto 73% which is quite high as compare to the previous year 2008.So this inflation can bring a lot of changes in daily human life.It can effect every field of life.By inflation facilities become reduced everyone tries to reduce his expenditure because of this he tries to spend less as he could.If he his expenses is high as copare to his outcome so he is not trying to facilitate himself.In short inflation can bring change in every term of life.

Followin is a Table which shows inflation and percent change since 1990 till to 2009.

Year

Inflation, average consumer prices

Percent Change

1991

12.628

39.52 %

1992

4.851

-61.59 %

1993

9.825

102.54 %

1994

11.272

14.73 %

1995

13.022

15.53 %

1996

10.789

-17.15 %

1997

11.803

9.40 %

1998

7.812

-33.81 %

1999

5.736

-26.57 %

2000

3.584

-37.52 %

2001

4.41

23.05 %

2002

2.504

-43.22 %

2003

3.102

23.88 %

2004

4.568

47.26 %

2005

9.276

103.06 %

2006

7.921

-14.61 %

2007

7.771

-1.89 %

2008

11.998

54.39 %

2009

20.775

73.15 %

Task 2

Define Inflation

Provide a clear explanation of 2 different causes of Inflation showing knowledge of Keynesian and monetarist views on inflation.

Definition:

The overall general upward price of goods and services in an economy is called inflation.

OR

The raising of price in commodities and other daily life materials is called inflation

The downward price of goods and services in an economy is called deflation.

OR

In economics inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

Causes of inflation:

Higher indirect taxes imposed by the government:

in our country government imposes some indirect taxes annully which ultimately become a cause for rise in the price of commodites For example a rise in the rate of excise duty on alcohol and cigarettes, an increase in fuel duties or perhaps a rise in the standard rate of Value Added Tax or an extension to the range of products to which VAT is applied. These taxes are levied on producers (suppliers) who, depending on the price elasticity of demand and supply for their products, sum up the amount in the price of commodityt. For example, if the government was to choose to levy a new tax on aviation fuel, then this would contribute to a rise in cost-push inflation.

Cost-push inflation can be illustrated by an inward shift of the short run aggregate supply curve. This is shown in the diagram below. Ceteris paribus, a fall in SRAS causes a contraction of real national output together with a rise in the general level of prices

Rising labour costs:

increases in the wages of labour which exceed any improvement in productivity also affect the price of commodity.  This cause is important in those industries which are ‘labour-intensive’. Firms may decide not to pass these higher costs onto their customers (they may be able to achieve some cost savings in other areas of the business) but in the long run, wage inflation tends to move closely with price inflation because there are limits to the extent to which any business can absorb higher wage expenses.

Monetarists

Monetarists do not believe that the government should intervene by trying to manage the level of aggregate demand. They argue that this type of intervening policy will affect acquilibrium in the long run and should therefore be avoided. A key problem with discretionary demand management policies is the time lags, which monetarists believe make fiscal policy too difficult to use to manage the economy effectively. The best thing therefore, is to take a long-run view of price stability and use monetary policy to achieve this.

Keynesians

Keynesians traditionally see fiscal policy as the key tool of economic management. They see the role of government as maintaining the economy at full employment. The way to do this was to manage the level of aggregate demand until the economy was at or close to full employment. If the economy was growing too fast, then fiscal policy should be essentially deflationary, and vice-versa when below full employment. Monetary policy should, in their view, simply be used as a backup to fiscal policy. However, they would argue that direct interest rate changes could be used to control aggregate demand. Their main objection to monetary policy has always been that there is a weak link between the money supply and aggregate demand, and that.

Task 3

What effects would a substantial increases in inflation every year have on the following:

An individuals who keeps all his money in a box under his bed.

Keeping all his money in box under his bed its means that if someone is money and he is not investing his money in a business or keeping the money in a bank its means that he is decreasing his money one day will come that he will spend all his money so if you have a little money you should have to start a small business then your money will not end over.

Someone who is borrowing money at the current rate of inflation but who does not have to pay back for a number of years.

It is a good picking point that whenever someone borrows money from someone he is not able to return the money according to the rate of inflation. He may think to return him at rate of inflation.

Someone has lent money out at the current rate of inflation but will not be repaid for a number of years.

If some one has lent money from someone at the time of current inflation he may need to repaid the money as compare to the rate of inflation.If he has the ability to think then he may need to return more than the original amount he lent.

Task 4

Provide reason why the government may want to tackle inflation.

Government is trying to control rate of inflation. Inflation can generate a lot of problems in the society. It affect daily life as well as increase in commodities prices. that reasult in the economy , politcal and social unstability It can also bring unemployment as well as poverty.

Provide a remedy for each of two different types of inflation you outlined in Task 2 (b).

all though the inflation cannot be completely change in deflation in the developing countries but it can be control through removeing its causes.

Folwing are the causes which is responsible for inflation

Cost Push Inflation

Rising imported raw materials costs

Rising labour costs

Higher indirect taxes imposed by the government

A depreciation of the exchange rate

A reduction in direct or indirect taxation

The rapid growth of the money supply

Rising consumer confidence and an increase in the rate of growth of house prices

Faster economic growth in other countries

Task 5

You have to write a section in the report that includes the following.

An explanation of is meant by supply side economics.

Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. Consumers will then benefit from a greater supply of goods and services at lower prices.

The term “supply-side economics” was thought, for some time, to have been coined by journalist Jude Wineskin in 1975, but according to Robert D. Atkinson’s Supply-Side Follies , the term “supply side” (“supply-side fiscalists”) was first used by Herbert Stein, a former economic adviser to President Nixon, in 1976, and only later that year was this term repeated by Jude Wanniski. It popularized the ideas of economists Robert Mundell and Arthur Laffer. Today, supply-side economics is often conflated with the politically rhetorical term “trickle-down economics”, but as Jude Wanniski points out in his book The Way The World Works, trickle-down economics is conservative Keynesianism associated with the Republican Party.

Typical policy recommendations of supply-side economics are lower marginal tax rates and less regulation. Maximum benefits from taxation policy are achieved by optimizing the marginal tax rates to spur growth, although it is a common misunderstanding that supply side economics is concerned only with taxation policy when it is about removing barriers to production more generally.

Many early proponents argued that the size of the economic growth would be significant enough that the increased government revenue from a faster growing economy would be sufficient to compensate completely for the short-term costs of a tax cut, and that tax cuts could, in fact, cause overall revenue to increase

Evidence of 2 countries that have supply side measures in an attempt to reduce inflation and the success or failure of those measures.

What are supply-side policies?

Supply-side economic policies are mainly micro-economic policies designed to improve the supply-side potential of an economy, make markets and industries operate more efficiently and thereby contribute to a faster rate of growth of real national output

Most governments now accept that an improved supply-side performance is the key to achieving sustained economic growth without a rise in inflation. But supply-side reform on its own is not enough to achieve this growth. There must also be a high enough level of aggregate demand so that the productive capacity of an economy is actually brought into play.

There are two broad approaches to the supply-side. Firstly policies focused on product markets where goods and services are produced and sold to consumers and secondly the labour market – a factor market where labour is bought and sold.

Supply Side Policies for Product Markets

Product markets refer to markets in which all kinds of commodities are traded, for example the market for airline travel; for mobile phones, for new cars; for pharmaceutical products and the markets for financial services such as banking and occupational pensions.

Supply-side policies in product markets are designed to increase competition and efficiency. If the productivity of an industry improves, then it will be able to produce more with a given amount of resources, shifting the LRAS curve to the right.

Measures to encourage small business start-ups / entrepreneurship

The small businesses of today can often become the larger businesses of tomorrow, adding to national output, employing more workers and contributing to innovative behaviour that can have positive spill-over effects in other industries. Governments of all political persuasion argue that they want to promote an entrepreneurial culture and to increase the rate of new business start-ups. Supply side policies include loan guarantees for new businesses; regional policy assistance for entrepreneurs in depressed areas of the country; advice for new firms

Capital investment and innovation:

Capital spending by firms adds to aggregate demand (C+I+G+(X-M)) but also has an important effect on long run aggregate supply. Supply side policies would include tax relief on research and development and reductions in the rate of corporation tax. Ireland is a good example of a country inside the EU that has benefited hugely from cutting company taxes which has led to a large rise in foreign direct investment. One of the new countries joining the EU in 2004, Estonia, has cut its corporation tax rate to zero per cent (0%) in a deliberate attempt to attract new investment and stimulate economic growth and employment. There are now big differences in corporation tax rates among the twenty five nations of the European Union.

Corporate Tax Rates in the European Union in 2004

Estonia

0.0%

Luxembourg

30.0%

Ireland

12.5%

Denmark

30.0%

Lithuania

15.0%

Czech Rep.

31.0%

Cyprus

15.0%

Portugal

33.0%

Latvia

19.0%

Austria

34.0%

Slovakia

19.0%

Belgium

34.0%

Poland

19.0%

Italy

34.0%

Hungary

20.0%

Netherlands

34.5%

Slovenia

25.0%

Spain

35.0%

Sweden

28.0%

Greece

35.0%

Finland

29.0%

France

35.4%

UK

30.0%

Germany

38.7%

Innovation and Economic Growth

‘A dynamic environment with opportunities for enterprise and innovation is vital to improving economic performance. New businesses entering the marketplace increase competitive pressures facilitating the introduction of new ideas and technologies. The Government is therefore committed to supporting enterprise and innovation throughout the economy, including in Britain’s most disadvantaged areas.’

Supply side policies for the Labour Market

These policies are designed to improve the quality and quantity of the supply of labour available to the economy. They seek to make the British labour market more flexible so that it is better able to match the labour force to the demands placed upon it by employers in expanding sectors thereby reducing the risk of structural unemployment. An expansion in the UK’s total labour supply increases the productive potential of an economy.  That expansion in the supply of people willing and able to work can come from several sources for example: encouraging older people to stay in the workforce; a relaxed approach to labour migration and measures to get non-working parents to actively look for work.

Trade Union Reforms

Many of the traditional legal protections enjoyed by the trade unions have been taken away – including restrictions on their ability to take industrial action and enter into restrictive practices agreements with employers. The result has been a decrease in strike action in virtually every industry and a significant improvement in industrial relations in the UK.

Showing the effects of supply-side improvements in the economy

Supply-side factors often help to explain why it is that some countries grow faster than others. In a world of globalisation, it is becoming clearer that maintaining and improving competitiveness is vital in achieving success in international markets. A rising share of GDP in most countries is devoted to international trade. Markets are becoming more competitive and those countries whose supply-side lets those down can find a rising level of import penetration into their domestic markets and a weak export performance in goods and services.

Supply side improvements can also be shown using a production possibility frontier

Supply side policies and productivity

It is important to recognise that the supply-side does not operate in isolation from changes in aggregate demand. If there is insufficient AD, it is unlikely that better supply-side performance can be achieved over a number of years. Equally, if aggregate demand grows too quickly, acceleration in wage and price inflation might require deflationary policies that ultimately harm a country’s productive potential.

Evaluating the UK’s supply-side performance

On the right tracks

“There has been a remarkable structural improvement in the British economy. This began under Margaret Thatcher and has largely been maintained under Tony Blair. Deregulation, privatisation, reductions in trade union power and reform of unemployment benefits have transformed the business environment.”

Improvements in the Supply Side

Supply-Side Weaknesses

Sustained economic growth. The UK has maintained its position as the 4th largest economy in the world and has weathered the global economic downturn well

There remains a large productivity between the UK and other leading economies – this is now a major focus of supply side policies

Task 6

Combine Task 1 to 5 into a single written report to be given to world bank economics unit which is properly structured with.

Title of the page

Table of contents

¶ Risk of Inflation

¶ Definition of Inflation

¶ Government efforts to control Inflation

¶ Supply side economics

Main body of report

In our region the inflation is on its peak. the rate of commodities and goods increases day by day with high speed. If we look to the diagram changes have been done in every year. In some time in past the inflation rate fall but in the recent time that’s 2009 its raised upto 73% which is quite high as compare to the previous year 2008.So this inflation can bring a lot of changes in daily human life.It can effect every field of life.By inflation facilities become reduced everyone tries to reduce his expenditure because of this he tries to spend less as he could.If he his expenses is high as copare to his outcome so he is not trying to facilitate himself.In short inflation can bring change in every term of life.

Followin is a Table which shows inflation and percent change since 1990 till to 2009

In economics inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

Government is trying to control rate of inflation. Inflation can generate a lot of problems in the society. It affect daily life as well as affect commodities prices. It can also bring unemployment as well as poverty.

Provide a remedy for each of two different types of inflation you outlined in Task 2 (b).

When the causes of inflation remove that’s the best solution to control the inflation.

Flowing are the causes

Cost Push Inflation

Rising imported raw materials costs

Rising labour costs

Higher indirect taxes imposed by the government

A depreciation of the exchange rate

A reduction in direct or indirect taxation

The rapid growth of the money supply

Rising consumer confidence and an increase in the rate of growth of house prices

Faster economic growth in other countries

An explanation of is meant by supply side economics.

Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. Consumers will then benefit from a greater supply of goods and services at lower prices.

The term “supply-side economics” was thought, for some time, to have been coined by journalist Jude Wineskin in 1975, but according to Robert D. Atkinson’s Supply-Side Follies , the term “supply side” (“supply-side fiscalists”) was first used by Herbert Stein, a former economic adviser to President Nixon, in 1976, and only later that year was this term repeated by Jude Wanniski. It popularized the ideas of economists Robert Mundell and Arthur Laffer. Today, supply-side economics is often conflated with the politically rhetorical term “trickle-down economics”, but as Jude Wanniski points out in his book The Way The World Works, trickle-down economics is conservative Keynesianism associated with the Republican Party.

Typical policy recommendations of supply-side economics are lower marginal tax rates and less regulation. Maximum benefits from taxation policy are achieved by optimizing the marginal tax rates to spur growth.

Reference and bibliography

(Economics Books)

Micro Economics

Macro Economics

Manegiral economics

Monetry and Finance

Internet

Source: Ed Crooks, Source: Government Spending Review Statement

July 2002 Economics editor of the Financial Times. June 2004

Appendices