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The Community Charge  

  The Community charge is a system of local taxation used in Great Britain for a brief period between 1987 –1990. It was popularly referred to as the ‘poll tax’ and was widely disliked for its perceived inequity. The Community charge replaced the previous local tax system known as rates. The essence of the community charge was that people would pay a flat rate, whatever their income or place of residence. The Community charge was introduced in Scotland in 1987,…

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The role of firms in the economy

In economics producers – often referred to as firms or companies play a role in using inputs (different factors of production) and producing goods and services (output). Firms play a key role in deciding what to produce and how to produce. Different types of firms Individual entrepreneurs – self-employed individuals Private companies – often small/mid-sized companies who are owned by a small number of individuals. Public limited companies – generally large companies who are listed on the stock market. The public can buy shares in the company and share in…

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Tight Fiscal Policy

Definition of tight fiscal policy Tight fiscal policy involves increasing the rate of tax and/or cutting government spending. It is sometimes known as deflationary fiscal policy and aims to improve government finances Purpose of tight fiscal policy The aim of tight fiscal policy could be either Reduce inflationary pressure by reducing the growth of aggregate demand (AD) in the economy. Improve government finances (reduce the budget deficit) by increasing tax revenue and reducing government spending.   Evaluation tight fiscal policy Higher income tax rates may create disincentives to work. This is a reason why…

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Tight Monetary Policy

Tight monetary policy implies the Central Bank (or authority in charge of Monetary Policy) is seeking to reduce the demand for money and limit the pace of economic expansion. Usually, this involves increasing interest rates. The aim of tight monetary policy is usually to reduce inflation. With higher interest rates there will be a slowdown in the rate of economic growth. This occurs due to the fact higher interest rates increase the cost of borrowing, and therefore reduce consumer spending and investment,…

Time Lags

Time Lags

In economics we often see a delay between an economic action and a consequence. This is known as a time lag. An impact of time lags is that the effect of policy may be more difficult to quantify because it takes a period of time to actually occur. Example of time lags Change in interest rate (macro) Increase in level of investment (macro) Change in price of commodity (micro) Effect of devaluation (macro) (J-Curve effect) 1. Interest rate changes If we cut interest rates, we would expect a rise in investment and consumer…

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Token Money

Token money is a form of money which represents a greater value than its intrinsic value. Originally medium of exchange involved metals with an intrinsic value – such as gold coins. However, it became inconvenient to carry around sufficient gold. Therefore banks began issuing token money – notes and coins which they promised could be converted into gold. If people have faith in the notes and coins, others will accept them as a form of payment. Token money is related to the concept of fiat money – money which derives its value…

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Total utility

In economics, utility refers to the amount of satisfaction that a consumer gains from a particular good or service. Total utility refers to the complete amount of satisfaction gained. Marginal utility refers to the satisfaction gained from an extra unit consumed. If the marginal utility of the last item is positive – then total utility will be increasing If the marginal utility of the last consumption is negative – total utility will be falling Example of Marginal and Total Utility for Icecream consumption  

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Trade Barriers

Definition Trade barriers are government policies which place restrictions on international trade. Trade barriers can either make trade more difficult and expensive (tariff barriers) or prevent trade completely (e.g. trade embargo) Examples of Trade Barriers Tariff Barriers. These are taxes on certain imports. They raise the price of goods making imports less competitive. Non-Tariff Barriers. These involve rules and regulations which make trade more difficult. For example, if foreign companies have to adhere to complex manufacturing laws it can be difficult to trade. Quotas. A limit placed on the number…