Aggregate Demand - Net Exports (Macroeconomics)

Right, the last component of aggregate demand: net exports. Net exports is the result of subtracting the value of imports from the value of exports. Imports is the value of goods bought from abroad by a country, exports is the value of goods sold abroad.

Both exports and imports are influenced by the same things, so therefore they can be grouped together into net exports. These are the influencing factors:

• Disposable income abroad. This refers to how much money people in other countries have available to spend. Therefore, if people have more money then they are likely to purchase more goods - potentially ones from our country, thus exports will rise and the value of net exports will increase. If disposable income abroad is low then exports will fall and the value of net exports will fall. 
• Disposable income at home. This refers to how much money people at home have available to spend on luxuries. The more money people have at home, the likelier they are to spend - which can result in a rise in imports. Rising imports will have a negative effect on net exports on the overall aggregate demand. Vice versa.
• Protectionism. Protectionism will be explained in depth in a later post, but i'll briefly mention it here as it's relevant. This is measures taken by a government to restrict trade. Normally these limit imports, so lots of protectionism at home may have a positive impact on net exports as imports will fall. However, lots of protectionism in countries abroad may limit exports and thus net exports will fall. 
• Exchange rates. These play a large part in the value of net exports. A fall in a countries exchange rate will reduce the price of exports and raise the price of imports, thus exports should rise and imports fall - resulting in an increase in net exports. A rise in a countries exchange rate will raise the price of exports and make imports cheaper, therefore making exports fall and imports rise. The overall effect will be a fall in net exports. 

These are the main influencing factors on net exports. And with that comes the end of the posts about the components of aggregate demand. Next up i'll move on to aggregate supply. Thanks. :-)

Aggregate Demand - Government Spending (Macroeconomics)

Government spending, another component that makes up aggregate demand. It is often referred to as just (g). As with the other components of aggregate demand, there are a lot of factors which influence it, these factors will be discussed in this blog post.

So, the influencing factors are:

• The type of government. This is key to how much government spending there is. If the government is a 'high tax, high spend' government, such as Labour in the UK then we can expect government spending to be generally quite high. If the government is the opposite and doesn't interfere with the market as much we can expect government spending to be lower.
• Time of year/Time in power. Governments seem to spend a lot more in the run up to elections as an attempt to please the public and boost the chances of re-election. So, around these times government spending may be higher, and lower in times away from elections.
• War or threat of war. The government will look to spend if the country is in war or is threatened by war. Defence spending will rise in an attempt to prepare. This is the same for crime as well. If the crime rate is high, or there is a threat that crime may rise then the government may increase spending to solve the issue. 
• Current economic situation. Unemployment is probably the biggest factor here. If unemployment is high then the government need to attempt to create jobs. To create jobs, they increase spending which will boost aggregate demand and hopefully expand the economy - creating jobs. This theory will be explained in greater detail in a later post. If there is high inflation, the government may reduce spending to try and dampen down the rising price levels. 

Government spending is the least influenced of the components of aggregate demand, it generally stays fairly constant and doesn't vary that much. That is all. Next up is the influences on net exports... Stay tuned. 

Aggregate Demand - Investment (Macroeconomics)

Right, investment is another of the components that makes up aggregate demand as a whole. It is often referred to as just (I). It basically takes into account firms investing money into their business, which normally occurs when they expect that return of their investment to be larger than the investment itself - or more basically put if there is profit available to be made.

There are many influences on this factor, it is also the most volatile component and therefore fluctuates a lot depending on the economic climate and other factors. Here are the influences:

• Corporation Tax - This plays a major part in how much investment is made. Corporation tax is a tax on business' profits. So, the lower the tax the more likely firms are to invest as they will be likely to keep a larger percentage of the profit created from the investment. 
• Interest Rates - This is also a large influencing factor. Interest rates generally dictate the amount paid back on loans. So if the interest rates are low then firms can expect to take out a loan without having to pay as much back in comparison to if interest rates were high. This would be an incentive for firms to increase their investment. Obviously, if interest rates were higher then firms would be discouraged from investing as much.
• Price of Capital Equipment - Investment is all about firms spending money on capital equipment to expand their output. If the capital equipment is cheap, then firms are more likely to invest in it knowing that they will be able to increase profits potentially at a lower cost. 
• Profit Levels - This may influence a firms willingness to invest. If a firm has a high profit level already, they will feel more comfortable investing as they have more money to throw around. However if profit levels are very low then the firm will be taking more of a risk investing money and may be discouraged from doing so.

These are the main factors that influence the level of investment in an economy. Other minor factors include changes in real disposable income, expectations and advances in technology. 

That's the lowdown on investment.. Next up will be government spending. Thanks for reading. 

Aggregate Demand - Consumer Expenditure (Macroeconomics)

As stated in the previous post, consumer expenditure makes up part of aggregate demand. It is also referred to as consumption. There are many factors that affect the size of consumer expenditure in an economy:

• Disposable income. This makes up the largest part of consumption. If people's real disposable income is high then you'd likely see high consumption, if real disposable income is low then you'd expect to see low consumption. 
• Wealth. The wealthier people are, in the form of things such as their home and cars, the more likely people are to buy and consume goods - thus increasing consumption.
• Confidence. The confidence of consumers also plays a big part in consumption. If consumers are confident with spending and have high expectations for the future - maybe they feel safe in their job, then they are likely to purchase  more, boosting consumption. If consumers aren't confident then they are more likely to save their money than spend and consumption will fall.
• Interest rates. Generally, a lower interest rate will mean more consumption. This is because it is cheaper for consumers to take out loans to pay for expensive items such as houses or cars and also because they won't be earning much money on savings so it is beneficial to spend. 
• Inflation. High inflation, means higher prices and thus lower consumption. Vice versa as well, of course.

Obviously, there are other factors that will have a minor effect on consumption other than these ive stated. Next up will be investment, stay tuned. Thanks!

Aggregate Demand (Macroeconomics)

Well, the first post on a macroeconomic topic. I'll start with the very basics - aggregate demand.

Aggregate demand, often shortened to just AD, is the total demand for goods and services in an economy at a given price level. No longer are we looking at just individual markets, but the demand in the economy as a whole. When we say price level, we are referring to the average price of products produced in the economy. Price levels go up and we have inflation, which will be explained in a later post.

Aggregate demand is made up of 5 components. These 5 components are consumer expenditure (C), investment (I), government spending (G) and net exports [exports (X) - imports (M)]. Therefore, aggregate demand equals C + I + G + (X - M). Each component will be detailed individually in later posts, but i'll give a brief description of each here.

• Consumer expenditure - This is often called consumption, it is spending by households on products and generally makes up the biggest proportion of aggregate demand. 
• Investment - This is spending on capital goods, such as machinery and delivery vehicles. It's the most volatile component. 
• Government spending - This is government injecting money into economy through spending on things such as the NHS. 
• Exports - Simply put, the value of goods we sell abroad.
• Imports - The opposite of above, the value of goods we buy from abroad.

So, each of these components make up the overall value of aggregate demand. The next post will look at consumer expenditure. Thanks. 

Government Intervention - Tradable Pollution Permits (Microeconomics)

Tradable pollution permits are another option the government has to correct certain types of market failure. A pollution permit allows the owner to pollute up to a specific amount of pollution. These permits can also be traded, as the name gives away. The total number of permits available is strictly controlled by the government, so that they can limit the maximum pollution level to whatever they want it to be. Companies have to buy they permits in order to pollute, therefore the incentive is for companies to invest in greener technology to reduce pollution and overall reduce their costs by cutting out the need to buy permits. Any permits that are unused by companies can be sold on to other companies to generate some money. Companies exceeding their limit of pollution will face legal action and prosecution.

The theory is that a fixed supply of pollution permits will be allocated. Then, if demand for these permits rise because companies need to pollute more then the price will rise. This price rise will increase the incentive for companies to invest in green technology so their costs are lower.

Tradable pollution permits do come with their drawbacks, as with all methods of government intervention. The first problem is calculation what price to put the permits at initially. If the price is too high then companies won't be able to afford them and production will fall. If the price is too low then it will have no effect on the market failure of too much pollution. Another problem will be the additional cost to the government of policing and enforcing the scheme, it will be a costly affair and thus may not be the most effective method of fixing market failure.

That's the lot, next post may be delayed as i'm busy with exams. Thanks.

Government Intervention - Subsidies (Microeconomics)

Subsidies work in sort of the opposite way to taxation. They are direct payments from the government to firms and businesses, or in some cases consumers. The aim of a subsidy is to reduce the overall cost of producing the good/service so that more can be made and sold at a cheaper price. These subsidies are normally given to produces of goods with positive externalities, so that the market failure can be fixed by increasing the production and consumption.

Lets have some examples of subsidies:

• The government may give subsidise local bus companies so they can run bus routes in rural areas without making a loss. This fixes the market failure of under-production of public transport. This is an example of a subsidy to the producers.
• The government also give subsidies to the over 60's so they can pay for fuel during the Winter. This means they can now afford to pay for the fuel to keep them warm, fixing the under-consumption there.

In both of these cases, if they were left to the free-market there would be under-consumption. In a way, a subsidy works in the opposite way to an indirect tax. It increases the supply of the good so that the price decreases and thus the quantity demanded increases.

That's about all for basic subsidies to correct market failure. Thanks.