A multinational company is a global operation with the production and distribution of its goods located in numerous countries. Typically multinationals have different stages of the supply chain located in different countries. This enables the firm to specialise production in countries where it has a comparative advantage. The firm gains many benefits of being global …
The inflation rate measures the annual percentage rise in the cost of living. (CPI) A rise in the inflation rate – means prices are rising at a faster rate. Summary of higher inflation In the short-run, it is more likely the Central bank will increase interest rates to moderate the inflation rate. Savers who have …
The confidence fairy refers to the criticism that cutting government spending will lead to renewed confidence and economic recovery. In response to the economic crisis of 2008, many economies faced large budget deficits – due to cyclical factors (e.g. falling tax revenue in recession) and also underlying structural deficits (e.g. growing welfare bills). Some countries …
Readers Question: Does job creation come from public or private sector? The public sector is government (national and local). Public sector jobs include doctors, police, teachers and civil servants. The private sector is private enterprises – retail, manufacturing, local services. Public sector jobs as a share of total employment UK 23.5% (2013) US 14.6% (2008) …
In the nineteenth century, the UK was characterised by high levels of income inequality. However, from the start of the twentieth century until 1978, there was a steady fall in inequality and reduction in poverty (both relative and absolute). However, the 1980s saw a sharp rise in inequality which has not been reversed in the 1990s and 2000s.
Reasons for post-war fall in inequality
Welfare state – benefits for the unemployed, sick
Higher income taxes on high earners
Period of full employment
Rising wages for the working class.
Erosion of class privileges
Improvement in universal education and universal health care.
Readers Question: What is the difference between short run aggregate supply (SRAS) and Long run aggregate supply (LRAS)? Essentially, the SRAS assumes that the level of capital is fixed. (i.e. in the short run you can’t build a new factory) However, in the short run you can increase the utilisation of existing factors of production, …
The US has recently placed tariffs on Chinese imports and is threatening to further increase tariffs in the next few weeks. The effect of these tariffs is to increase domestic prices, provide some benefits to domestic producers, but also cause costs to US exporters. There is a strong risk that these tariffs will cause loss …
Investment influences the rate of economic growth because it is a component of aggregate demand (AD) and more importantly influences the productive capacity of the economy. (LRAS)
An increase in investment should be a boost to economic growth.
Readers Question: Discuss the importance of investment in increasing economic growth.
Investment means expenditure on capital spending, e.g. buying new machines, building bigger factories, buying robots to enable automation. (in economics investment does not mean saving money in a bank)
Investment is a component of aggregate demand (AD). Therefore, if there is an increase in investment, it will help to boost AD and short-run economic growth.
If there is spare capacity, then increased investment and a rise in AD will increase the rate of economic growth.
However, if the economy is close to full capacity, then rising AD will only cause inflation and not an increase in real GDP
However, there are other factors that affect AD apart from investment. For example, if there was a fall in consumer spending or a fall in exports, then a rise in investment may not actually increase AD. Investment is not the biggest component of AD (approx 16%); the biggest component of AD is consumer spending (approx 66%).
Investment and the multiplier effect
If the economy has spare capacity, a rise in investment can also cause a multiplier effect. The initial rise in investment increases economic growth, but if firms gain more sales and profit, they are willing to reinvest this in further investment. Also, households who gain employment from the investment, have more income to spend. Thus an investment of £2 billion could cause a final increase in real GDP of £3 billion. (multiplier effect of 1.5)
