MANAGING THE ECONOMY:
The Economy at Work
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What you need to know...
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Lesson Resources
Free-Market Economy versus Mixed Economy- An economic system (such as a free, command or mixed economic system) is a network of organisations used by a society to resolve the basic economic problem of what, how much, how and for whom to produce
- There are 3 types of economic systems 1. A free-market economy 2. A command (planned) economy 3. A mixed economy - A useful summary analysis of a mixed economy can be found here - Check out the video below for a simple summary of the different economic systems Market Failure- Market Failure occurs when the free market fails to allocate resources efficiently (watch the video below to help with your understanding of market failure)
- Note that the video below talks about different types of market failure compared to the types we covered in the course - There are a number of different ways in which markets can fail (see the Mind Map below - click to enlarge)
Stretch and Challenge: How many market failures can you spot?- Click on the image to enlarge it!
What are Positive and Negative Externalities? - It's important that you have both knowledge and understanding of both positive and negative externalities, as well as the difference between them (watch the video below for inspiration!)
- Tutor2u provides some useful notes on externalities (click here)
Test yourself on these topics using the Zondle App belowThe Economic (Business) Cycle - There are 4 stages of the economic (business) cycle
1. Boom 2. Slump 3. Recession 4. Recovery - Watch the video below which explains the economic cycle - Note that the video uses different language to explain the different stages of the cycle (expansion = boom, peak = slump, contraction = recession, trough = recovery); stick to the list above when asked about the stages of an economic cycle Government Revenue & Expenditure
- The UK Government attempts to contribute to economic growth and smooth the economic cycle through its own expenditure, which is financed through taxation
-The Guardian provides a useful insight into where the UK Government gets its money from and how it spends it (right click to save the image opposite and read the important information it contains) - The Government is running a budget deficit, having to borrow £108 billion to meet its expenditure targets - Remember that a Budget Deficit is where the government spends more money than it receives Fiscal Policy: a government tool to influence the economy
- Fiscal Policy refers to the choices and decisions made for government expenditure and taxation
- Changes in government spending and taxation have a huge impact on consumer spending and (aggregate) demand within the UK economy - Watch the video below which illustrates how fiscal policy is used to help the government achieve its macroeconomic objectives The Bank of England & Monetary Policy
- The Bank of England is the UK's central bank, responsible for monetary and financial stability of the UK economy (click here for more information)
- The Bank of England is responsible for setting Monetary Policy, which involves changing interest rates that represent the cost of borrowing money (i.e. an increase in interest rates will raise the cost of borrowing and therefore reduce spending in the economy) - Interest rates are set monthly by the Bank of England to help control inflation and meet the UK Government's target of 2% (since March 2009 interest rates have remained at a record low of 0.5%) - Interest rates affect spending and demand within the economy, therefore Monetary Policy can be used to help the government achieve its main economic objectives (watch the video below to see how and why this happens) Supply-side policies
- Using both fiscal and monetary policy, economic growth can be increased with more spending (demand)
- However if spending rises quicker than the rate at which output (the production of goods and services) increases then this higher spending will create inflationary pressures in the economy - It is therefore important that an economy can produce more output over time to meet any increase in spending (demand), offsetting any inflationary pressures at the same time - Government policies designed to increase the growth of output to meet future increases in spending and demand are known as supply-side policies - Successful supply-side policies will allow the UK economy to grow with fewer risks of inflation - Supply-side policies are varied in nature and cover a wide range of policies, such as; - Education and training programmes to improve the flexibility and productivity of labour - Encouraging competition between firms to increase output and reduce prices - Labour market policies: reducing direct taxes to encourage workers to return to employment - The Economics Online website provides you with some useful analytical and evaluative points about supply-side policies |