Question & Answer

Illustrate equilibrium in the market for loanable funds using a demand and supply diagram.

If a retailer buys a product from a wholesaler for £80 and sells it to a consumer for £100, then the £20 of value that has been added will go partly in wages, partly in rent and partly in profits. Thus £20 of income has been generated at the retail stage. But the good actually contributes a total of £100 to GDP. Where then is the remaining £80 worth of income recorded?

Go through each of the above reasons for shifts in the demand for and supply of sterling and consider what would cause an appreciation of the pound.

From looking at Figure 15.16, how has the pound ‘fared’ compared with the US dollar and the yen from 1980? What conclusions can be drawn about the relative movements of these currencies?

With reference to the above, provide an assessment of the UK balance of payments in 2020.

1. Why may inflows of short-term deposits create a problem?

2. Where would interest payments on short-term foreign deposits in UK banks be entered on the balance of payments account?

Why are the US and UK current balances approximately a ‘mirror image’ of the Japanese and German current balances?

Make a list of those who are most likely to gain and those who are most likely to lose from inflation.

If this analysis is correct, namely that a reduction in wages will reduce the aggregate demand for goods, what assumption must we make about the relative proportions of wages and profits that are spent (given that a reduction in real wage rates will lead to a corresponding increase in rates of profit)?

Is it in the interest only of workers (i.e. and not employers) to resist falls in real wage rates?

If the higher consumer expenditure and higher wages subsequently led to higher prices, what would happen to:

(a) real wages;

(b) unemployment (assuming no further response from unions)?

1. If the number unemployed exceeded the total annual outflow, what could we conclude about the average duration of unemployment?

2. Make a list of the various inflows to and outflows from employment from and to

(a) unemployment;

(b) outside the workforce.

Many traditional shops have closed in recent years as more people have shopped online – a trend hastened by the forced closure of non-essential shops in the lockdowns during the COVID-19 pandemic. How is this likely to have affected the balance of employment and unemployment of women and men?

How does the ILO/OECD definition differ from the economist’s definition? What is the significance of the phrase ‘available for work at current wages’ in the economist’s definition?

In terms of the UK economy, are the following net injections, net withdrawals or neither? If there is uncertainty, explain your assumptions.

(a)  Firms are forced to take a cut in profits in order to give a pay rise.

(b)  Firms spend money on research.

(c)  The government increases personal tax allowances.

(d)  The general public invests more money in banks and building societies.

(e)  UK investors earn higher dividends on overseas investments.

(f)   The government purchases US military aircraft.

(g)  People draw on their savings to finance holidays abroad.

(h)  People draw on their savings to finance holidays in the UK.

(i)   The government runs a budget deficit (spends more than it receives in tax revenues) and finances it by borrowing from the general public.

(j)   The government runs a budget deficit and finances it through new money created by the central bank.

Would this argument still hold if prices rose?

If the average percentage (as opposed to the average level) of potential output that was unutilised remained constant, would the trend line have the same slope as the potential output line?

Figure 15.5 shows a decline in actual output in recessions. Redraw the diagram, only this time show a mere slowing down of growth in phase 4.

(Threshold Concept 14) 1. Give some examples of supply-side policy. (see Chapter 23 for some ideas if you are stuck).

(Threshold Concept 14) 2. If there is an increase in aggregate supply, will this result in an increase in potential growth?

How might the volatility of an economy affect the growth of potential output?

Name some external benefits that are not included in GDP statistics?

If we were trying to get a ‘true’ measure of national production, which of the following activities would you include: (a) washing-up; (b) planting flowers in the garden; (c) playing an educational game with children in the family; (d) playing any game with children in the family; (e) cooking your own supper; (f) cooking the supper for the whole family; (g) reading a novel for pleasure; (h) reading a textbook as part of studying; (i) studying holiday brochures?       Is there a measurement problem if you get pleasure from the do-it-yourself activity itself as well as from its outcome?

By what would we need to divide GDP in order to get a measure of labour productivity per hour?

(Threshold Concept 13) When comparing two countries’ GDP growth rates, does it matter if we use nominal figures, provided we use them for both countries?

Would it matter if all prices rose by 20 per cent, but everyone’s income also rose by 20 per cent?