1. Economic Environment Workshop Two

2. Indicators of Economic Performance -Output -Unemployment -Inflation -Balance of Payments

3. Output Higher output is likely to raise people’s living standards Output is measured by the Gross Domestic Product -> The GDP of France = output from all firms and organisations located in France

4. The Evolution of the French GDP

5. Three Methods of Calculating Output 1) Output –Measures output from industries in France –Be careful not to double count -> Value-added Value-added in greetings card production (£m) Value of output Cost of interm- ediate products Value added Paper producers 250 Designers522527 Card producers 855233 Retailers1408555 140

6. Three Methods of Calculating Output 2) The Income Method –The value of output corresponds to the incomes created in production –Income totals = wages, rents, etc. –N.B. Transfer payments are not included

7. Three Methods of Calculating Output 3) The Expenditure Method All the countries finished products – spending on: Consumption Investment Government spending Export (not imports)

8. Output Nominal GDP is measured in current prices; real GDP is adjusted for inflation What does an increased GDP mean? Is this good or bad for a county? In your opinion, which industry group has the highest value added (e.g. agriculture…)? In your opinion, which industry group has the lowest value added? Can you think of reasons why it might be difficult to calculate a country’s real GDP?

9. Output –Non-marketed goods and services –Hidden goods –Distribution of income –Environmental effects….

10. Output Look at the table opposite, which economy do you think performed better? Look at the table opposite and calculate the UK’s GDP in 2000. Economic Indicator for 3 countries in 2001-% Increase in output Increase in prices Unemployme nt Germany 0.82.47.9 Ireland 5.64.03.8 UK 2.41.2 5.1 £ billion Consumer spending 536.5 Investment 155.7 Government spending 149.1 Exports258.9 Imports297.2 TOTAL

11. Inflation Inflation is the general increase in prices for a sustained period of time Measured by the Retail Price Index What are the effects of inflation?

12. Inflation - Uncertainty - A fall in purchasing power - A fall in the value of savings - Higher wage demands - Export problems - Time-wasting costs - Price administration costs - Problems for those on fixed incomes

13. Controlling the Economy Over the past 25 years, overall demand for goods and services has grown at roughly 2.2% in real terms. But the actual trend of business cycles has gone up and down more -> business cycle -> 4 different phases –Slump –Recovery –Boom –Recession –-> complex : lengths of cycle may vary ; the length of individual phases may also vary –-> Expectation and confidence play a big role

14. Fiscal Policy The government uses polices to try and influence aggregate demand Direct influence -> taxes and government spending Indirect influence -> consumption and investment Generally speaking = governments aim to stabilize the economy In a recession, governments may try too increase aggregate demand -> for example, reduce taxes / give subsidies to try and increase spending or try and redistribute money from the rich to the poor (who tend to spend more money)

15. Monetary Policy In recent years, the main tool of monetary policy has been interest rates -> to control bank lending and therefore the money in circulation Higher interest rates may encourage spending => more demand for goods and services, potential levels of inflation, employment, exchange rates and foreign trade In a situation when customers have too much money to spend (from increased wages and credit) and where output is at its maximum (=> risk of inflation) interest rates will tend to be raised. Who decides on the base rate of interest for France? Nicolas Sarkozy? The bank of France?……?

16. Supply-side Policies Some economists argue that European economies are not performing to their best potential because of supply-side problems -> particularly with the labour market These economists argue that output is restricted because of the power of trade unions, minimum wage legislations and social security charges. Other supply-side policies => create incentives for employees through extra tax allowances, lower tax rates. The aim of these policies is to increase investment and productivity of capital and labour.