Martin: Created page with "=Factors Determining Economic Activity= ==Levels of market activity 4== ===1 State Controlled Economies=== * AKA Planned economies Government decides on what is produced and..."

2021-09-14T21:39:27Z

Created page with "=Factors Determining Economic Activity= ==Levels of market activity 4== ===1 State Controlled Economies=== * AKA Planned economies Government decides on what is produced and..."

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=Factors Determining Economic Activity=

==Levels of market activity 4==

===1 State Controlled Economies===
* AKA Planned economies
Government decides on what is produced and how distributed

Excessive bureaucracy + removes choice
===2 Market Economies===
Supply and demand - determines resource allocation
; Market clearing price
: Price customer willing to pay - balanced against price supplier willing to accept
* High price - attracts suppliers
* Low price - suppliers leave market

market:
* goods
* productive assets - labour - wages
* money - interest rate
* machinery - capital goods

===3 Mixed Economies===
Market economy + state control - vast majority

state control:
* welfare, defence, police, education, public transport, health

Governments finance
* direct taxing - companies + wages
* indirect tax - VAT, petrol, alcohol
* borrowing on capital markets

Civil servants- raising + allocating spending - largest labour market

===4 Open Economies===
Few barriers to trade/controls over foreign exchange

;Barriers
: Sanctions - prevention of free trade
: Protectionism - preservation of domestic market

'''World trade organisation''' - WTO - promote free trade - arbitrate disputes

= Central Banks=
Government manage - Taxation/economic + monetary policy

;Stabilisation policies
: '''Fiscal policy''' - Governments spending + taxation
: '''Monetary policy''' - Interest rages + money supply

Implement policies using central banks

Role
{|class=wikitable
!BoE!!Role
|-
|Y||Public body increasingly independent of government
|-
|Y||Banker to baking system - accept deposits/lend
|-
|Y||Banker to government
|-
|N Debt Management Office (DMO)||Manage national debt
|-
|Y Prudential Regulatory Authority (PRA) ||Regulate domestic banking system
|-
|Y||Lender of last resort - prevent collapse
|-
|Y Monetary Policy Committee (MPC)||Set short term rate of interest
|-
|Y||Control money supply
|-
|Y||Issue notes/coins
|-
|Y||Hold nations gold/foreign reserves
|-
|Y||Influence currency - intervention in currency markets
|-
|N Financial Services Compensation Scheme (FSCS)||Provide deposit protection
|}

==Bank of England==
Founded 1694

===Purpose===
==== Monetary stability====
stable prices => confidence in currency
; Monetary policy committee MPC
: set interest rates
: ensure inflation kept within government set range

Gauge inflation factors:
* Economic exchange rage
* Economic growth
* Government spending/taxing plans
* Customers borrowing/spending
* Wage inflation

9 members including - Governor of BoE + Four members appointed by the Chancellor of the Exchequer

meet every month

==== Financial stability====
* Detect and reduce risks to financial system
; Macro financial policy
: Set by financial policy committee
: Supervision and oversight

Inflation target - 2% (CPI) - controlled via base rate

===Quantitative Easing===
Low inflation - normally cut base rate to provide stimulus, when base rate close to zero, another mechanism required

Inject money directly into economy = quantitative easing

Government bonds - high quality debt - creates money (Not printing)

Effects:
* seller of bonds - more money to spend
* buy assets
** boost prices/boost liquidity
** higher asset prices, lower yields -> reduced cost of borrowing
** banks have more reserves -> can lend more -> spending increases
Theory: extra money goes though economy

===Financial Stability===
Maintain 3 vital functions:
# mechanism for paying - goods/services/assets
# intermediary between borrowers/savers - investments: debt/equity
# insuring against/dispensing risk

4/2013 reform
* new committees:
** Prudential Regulation Authority (part of BoE) - supervision of banks + infrastructure - e.g. London Clearing House
** Financial Conduct Authority ('''Not''' part of BoE)

==Federal Reserve FED (1913)==
comprises 12 regional federal reserve banks - each monitor + provide liquidity to banks in their region
* Free from political interference

Governed & Monetary policy determined by:
===Federal Open Market Committee FOMC ===
Made up of:
* Board of seven appointed by US president
* President of 12 Federal Reseve banks
* Chairman appointed by US president
Responsible for:
* Provide price stability
* Sustain economic growth
* Meets every 6 weeks - can have emergency session outside
* Lenders of last resort - rescue banks
* Prevent panic/systemic risk

==European Central Bank - 1/1999 Euro creation==
* Based in Frankfurt
* Monetary policy for entire Eurozone
;Objective : maintain price stability
: Keep inflation close but below 2% - Harmonised Index of Consumer Prices (== CPI)

President + Council (3 Governors for each eurozone national central bank)

Supposedly independent of EU Government - has succumbed to political pressure

Only during recent crises has acted as lender of last resort

=Inflation=
Persistent increase in general level of prices

Price increase - caused by -> excess demand, scarce resource, increased government spending.

; Credit creation
: Buying "on credit" - buy and pay later
: re-lend % of money deposited - money used to buy -> savings -> relent
* 96% of money comes from credit creation
* 4% from notes/coins
too much increase in supply -> too much money chasing too few goods

Restrict creation though interest rate controls - BoE Monetary Policy Committee

==Impact of inflation==
; Problems
: continually adjusting prices
: value of salaries/pensions eroded
: exports less attractive
: future values - pensions/investments - difficult to assess

; Advantages
: Raising house prices
: Borrowers debt value eroded
: National debt eroded

=Key economic indicators=
Health of economy - long term investment decision aid
==Inflation measures==
* National basket of average person
* Wages/government benefits
===Consumer Price Index CPI = synonym = Harmonised index of consumer prices HICP ===
Geometric mean

* EU standard - excludes mortgages - EU largely rent
* Excludes house depreciation - cost of upkeep

===Retail Price Index AKA Headline Rate===
* Includes mortgages/rent + food + transport + entertainment
* representative average - excludes pensions & top 4% - has changed since inception

CPI used for inflation to compare with Europe

[[file:CirculrFlowIncome.jpg‎]]

====Measures====
* Total income paid to individuals by firms
* Total expenditure on firms output
* Value of total from firms

== GDP - Quarterly ==
= Consumer spending + Government spending + Investments + Exports - Imports

==Economic growth - Economic cycle==
Trend of growth - sustainable growth
* growth and productivity of labour force
* rate of new innovative technology - replace obsolete - from effective investment - domestic/overseas
* infrastructure maintenance/growth - transport, communication, energy

===Mature economy===
Labour 1% growth, overall UK ~1.25, US ~1.75

IOC: The Economic Environment - Revision history

Martin: Created page with "=Factors Determining Economic Activity= ==Levels of market activity 4== ===1 State Controlled Economies=== * AKA Planned economies Government decides on what is produced and..."