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EC6_C14.qxd 10/31/05 13:14 Page 395 Chapter 14 Macroeconomic Issues and Analysis: an Overview In the previous chapter we examined economic growth In this chapter we turn to the other three key macroeconomic issues of unemployment, inflation and the balance of payments We give an overview of these problems: how they are measured and their effects on society We also have a first look at the causes of these problems This helps prepare the ground for the analysis of later chapters We saw in Chapter 13 that macroeconomics deals with economic problems in the aggregate (i.e for the whole economy) An important tool for analysing these aggregate problems is aggregate demand and supply analysis We look at this analysis in section 14.2 This is then the basis for our analysis of inflation in section 14.3 Part D has been laying the foundations of macroeconomics The final section of this chapter brings the threads together It examines the relationship between the four macroeconomic objectives in both the short run and the long run: something that will be explored in more detail in Part E CHAPTER MAP 14.1 Unemployment The meaning of ‘unemployment’ Official measures of unemployment The duration of unemployment The composition of unemployment Unemployment and the labour market Disequilibrium unemployment Equilibrium unemployment 396 396 397 397 399 400 401 403 14.2 Aggregate demand and supply and the level of prices The aggregate demand curve The aggregate supply curve Equilibrium 14.4 The balance of payments and exchange rates The balance of payments account Assessing the balance of payments figures The meaning of exchange rates Determination of the rate of exchange in a free market Exchange rates and the balance of payments Managing the exchange rate 405 405 406 407 14.3 Inflation The costs of inflation Causes of inflation Policies to tackle inflation 407 408 409 413 14.5 Postscript to Part D: The relationship between the four macroeconomic objectives Aggregate demand and the short-term relationship between the four objectives The long-term relationship between the objectives 416 416 419 419 420 422 422 424 424 426 EC6_C14.qxd 10/31/05 13:14 Page 396 396 14 MACROECONOMIC ISSUES AND ANALYSIS: AN OVERVIEW 14.1 UNEMPLOYMENT TC 13 Unemployment fluctuates with the business cycle In recesp 381 sions, such as those experienced by most countries in the early 1980s, early 1990s and early 2000s, unemployment tends to rise In boom years, such as the late 1980s and late 1990s, it tends to fall Figure 14.1 shows these cyclical movements in unemployment for selected countries As well as experiencing fluctuations in unemployment, most countries have experienced long-term changes in average unemployment rates This is illustrated in Table 14.1, which shows average unemployment in the UK, the EU and the USA for four unemployment cycles (minimum to minimum) Average unemployment rates in the 1980s and 1990s were higher than in the 1970s, and average rates in the 1970s were, in turn, higher than in the 1950s and 1960s In certain countries, such as the UK and USA, the late 1990s and early 2000s have seen a long-term fall in unemployment This section gives an overview of the problem of unemployment: how it is measured and what its costs are Then we look at the range of possible causes of unemployment We explore these causes and the policies for tackling unemployment in more detail as the book progresses Table 14.1 Average unemployment for given cycles (%) Period UK EU USA 1964–73 1974–9 1980–90 1991–2001 3.0 5.0 9.4 8.4 2.7 4.7 8.7 9.3 4.6 5.8 7.1 6.1 Figure 14.1 The meaning of ‘unemployment’ Unemployment can be expressed either as a number (e.g 1.6 million) or as a percentage (e.g per cent) But just who should be included in the statistics? Should it be everyone without a job? The answer is clearly no, since we would not want to include children and pensioners We would probably also want to exclude those who were not looking for work, such as parents choosing to stay at home to look after children The most usual definition that economists use for the number unemployed is: those of working age who are without work, but who are available for work at current wage rates If the figure is to be expressed as a percentage, then it is a percentage of the total labour force The labour force is defined as: those in employment plus those unemployed Thus if 25 million people were employed and 1.5 million people were unemployed, the unemployment rate would be: 1.5 × 100 = 5.7% 25 + 1.5 Definitions Number unemployed (economist’s definition) Those of working age who are without work, but who are available for work at current wage rates Labour force The number employed plus the number unemployed Unemployment rate The number unemployed expressed as a percentage of the labour force Unemployment rates in selected industrial countries: 1970–2006 Source: Thomson Financial EC6_C14.qxd 10/31/05 13:14 Page 397 14.1 UNEMPLOYMENT Official measures of unemployment Claimant unemployment Two common measures of unemployment are used in official statistics The first is claimant unemployment This is simply a measure of all those in receipt of unemploymentrelated benefits In the UK claimants receive the ‘jobseeker’s allowance’ Claimant statistics have the advantage of being very easy to collect However, they exclude all those of working age who are available for work at current wage rates, but who are not eligible for benefits If the government changes the eligibility conditions so that fewer people are now eligible, this will reduce the number of claimants and hence the official number unemployed, even if there has been no change in the numbers with or without work The following categories of people are ineligible for benefits and are thus not included in claimant unemployment: • People returning to the workforce (e.g after raising children) • Those who are on government training schemes (e.g school leavers without jobs) • People over 55 If such people are out of work, the benefit they receive is not regarded as ‘unemployment related’ • The temporarily unemployed • People seeking part-time work, rather than full-time work The claimant statistics in the UK thus understate the true level of unemployment Standardised unemployment rates Recognising the weaknesses of the claimant statistics, the UK government since 1998 has used the standardised unemployment rate as the main measure of unemployment In this measure, the unemployed are defined as people of working age who are without work, available to start work within two weeks and actively seeking employment or waiting to take up an appointment This is the measure used by the International Labour Organisation (ILO) and the Organisation for Economic Cooperation and Development (OECD), two international organisations that publish unemployment statistics for Definitions Claimant unemployment Those in receipt of unemployment-related benefits Standardised unemployment rate The measure of the unemployment rate used by the ILO and OECD The unemployed are defined as persons of working age who are without work, are available to start work within two weeks and either have actively looked for work in the last four weeks or are waiting to take up an appointment 397 many countries The figures are compiled from the results of national labour force surveys A representative cross-section of the population is asked whether they are employed, unemployed (using the above definition) or economically inactive From their replies, national rates of unemployment can be extrapolated In the UK, the Labour Force Survey is conducted quarterly But is the standardised unemployment rate likely to be higher or lower than the claimant unemployment rate? The standardised rate is likely to be higher to the extent that it includes people seeking work who are nevertheless not entitled to claim benefits, but lower to the extent that it excludes those who are claiming benefits and yet who are not actively seeking work Clearly, the tougher the benefit regulations, the lower the claimant rate will be relative to the standardised rate ? How does the ILO/OECD definition differ from the economist’s definition? What is the significance of the phrase ‘available for work at current wage rates’ in the economist’s definition? The duration of unemployment A few of the unemployed may never have had a job and maybe never will For most, however, unemployment lasts only a certain period For some it may be just a few days while they are between jobs For others it may be a few months For others – the long-term unemployed – it could be several years Table 14.2 shows the composition of standardised unemployment by duration What determines the average duration of unemployment? There are three important factors here The number unemployed (the size of the stock of unemployment) Unemployment is a ‘stock’ concept (see Box 9.9) It measures a quantity (i.e the number unemployed) at a particular point in time The higher the stock of unemployment, the longer will tend to be the duration of unemployment There will be more people competing for vacant jobs The rate of inflow and outflow from the stock of unemployment The people making up the unemployment total are constantly changing Each week some people are made redundant or quit their jobs They represent an inflow to the stock of unemployment Other people find jobs and thus represent an outflow from the stock of unemployment The various inflows and outflows are shown KI 23 p 251 in Figure 14.2 Unemployment is often referred to as ‘the pool of unemployment’ This is quite a good analogy If the water flowing into a pool exceeds the water flowing out, the level of water in the pool will rise Similarly, if the inflow of people into unemployment exceeds the outflow, the level of unemployment will rise EC6_C14.qxd 10/31/05 13:14 Page 398 398 14 MACROECONOMIC ISSUES AND ANALYSIS: AN OVERVIEW Table 14.2 UK unemployment (ILO) by duration: Spring quarters (Mar–May) 1993 (thousands) (per cent) 1999 (thousands) (per cent) 2004 (thousands) (per cent) Up to months Over and up to 12 months Over 12 months Total 1156 (38.6) 1025 (57.0) 915 (63.6) 576 (19.2) 269 (15.0) 232 (16.1) 1267 (42.2) 503 (28.0) 291 (20.2) 2999 (100.0) 1797 (100.0) 1438 (100.0) Source: Labour Market Trends (National Statistics) Figure 14.2 Flows into and out of unemployment The duration of unemployment will depend on the rate of inflow and outflow The rate is expressed as the number of people per period of time Table 14.3 shows the inflows and outflows in selected years Note the magnitude of the flows In each of the years, the outflows (and inflows) exceed the total number unemployed The bigger the flows are relative to the total number unemployed, the less will be the average duration of unemployment This is because people move into and out of the pool more quickly, and hence their average stay will be shorter ? If the number unemployed exceeded the total annual outflow, what could we conclude about the average duration of unemployment? Make a list of the various inflows to and outflows from employment from and to (a) unemployment; (b) outside the workforce The phase of the business cycle The duration of unemployment will also depend on the phase of the business cycle At the onset of a recession, unemployment will rise, but as yet the average length of unemployment is likely to have been relatively short Once a recession has lasted for a period of time, however, people on average will have been out of work longer, and this long-term unemployment is likely to persist even when the economy is pulling out of recession *LOOKING AT THE MATHS The duration of unemployment (DU) will equal the stock of unemployment (U) as a proportion of the outflow (F) from unemployment Du = U F Thus the bigger the stock of unemployment relative to the outflow from it, the longer will unemployment last Taking the figures for 1992: Du = 2.74 = 0.67 4.09 Thus the average duration of unemployment was 0.67 years or 245 days By contrast, in 2000, the average duration was 1.09/2.99 = 0.36 years or 133 days EC6_C14.qxd 10/31/05 13:14 Page 399 14.1 UNEMPLOYMENT Table 14.3 399 UK (claimant) unemployment flows (millions) Inflow Outflow Total level of unemployment 1980 1984 1986 1990 1992 1995 1998 2000 2002 2004 3.85 3.21 1.66 4.50 4.40 3.16 4.49 4.88 3.29 3.51 3.31 1.65 4.51 4.09 2.74 3.62 3.84 2.29 3.08 3.17 1.35 2.85 2.99 1.09 2.74 2.76 0.95 2.42 2.50 0.85 Source: Labour Market Trends (National Statistics) The composition of unemployment Unemployment rates vary enormously between countries and between different groups within countries Geographical differences Table 14.4 illustrates the considerable differences in unemployment rates between countries Compare the unemployment rates in Ireland and Spain! Countries have very different labour markets, very different policies on unemployment, training schemes, redundancy, etc., and very different attitudes of firms towards their workers Also, countries may not be at precisely the same phase of their respective business cycles Unemployment also varies substantially within a country from one area to another Most countries have some regions that are more prosperous than others In the UK, unemployment in the north of England, Scotland and Northern Ireland is higher than in the south of England For example, in the fourth quarter of 2004, unemployment was 6.3 per cent in the north-east of England and only 3.2 per cent in the south-west But geographical differences in unemployment are not just a regional problem In many countries, inner-city unemployment is very much higher than suburban or rural unemployment, and, as a result, most developed countries have schemes to attract employment to the inner cities In 2002, unemployment in Tower Hamlets in London was 13.4 per cent, whereas in north Somerset it was 2.1 per cent Table 14.4 Country Belgium Germany France Ireland Japan Netherlands Spain UK USA EU-15 Differences in unemployment rates between women and men In many countries, female unemployment has traditionally been higher than male unemployment Causes have included differences in education and training, discrimination by employers, more casual or seasonallyrelated employment among women and other social factors In many countries, however, the position has changed in recent years As you can see, in five of the countries in Table 14.4 male unemployment rates are higher than female The main reason is the decline in many of the older industries, such as coal and steel, which employed mainly men Differences in unemployment rates between different age groups Table 14.4 also shows that unemployment rates in the under-25 age group are higher than the average, and substantially so in many countries There are various explanations for this, including the suitability (or unsuitability) of the qualifications of school leavers, the attitudes of employers to young people and the greater willingness of young people to spend time unemployed looking for a better job or waiting to start a further or higher education course The only exception in the table is Germany, which has a well-established apprenticeship system Differences in unemployment rates between different ethnic groups In many countries, members of ethnic minorities suffer from higher unemployment rates than Standardised unemployment rates in different sections of the labour market: 2004 (Q1) Total (all ages) Women (all ages) Men (all ages) Total under 25 years old Women under 25 years old Men under 25 years old 8.4 10.4 9.7 4.6 5.0 4.8 11.4 4.7 6.1 8.4 8.7 9.6 10.5 4.1 4.7 5.0 15.7 4.1 5.6 9.1 8.2 11.0 8.9 4.9 5.2 4.7 8.4 5.2 6.5 7.8 21.8 11.6 21.2 8.1 10.5 9.4 23.1 11.4 12.4 16.2 20.0 8.5 21.6 7.2 9.1 8.5 27.6 9.7 11.1 15.8 23.1 14.4 20.8 9.1 11.8 10.2 19.7 12.9 13.6 16.6 Source: Eurostatistics (Eurostat) EC6_C14.qxd 10/31/05 13:14 Page 400 400 14 MACROECONOMIC ISSUES AND ANALYSIS: AN OVERVIEW EXPLORING ECONOMICS BOX 14.1 THE COSTS OF UNEMPLOYMENT Who loses and by how much? The most obvious cost of unemployment is to the unemployed themselves There is the direct financial cost of the loss in their earnings Then there are the personal costs of being unemployed The longer people are unemployed, the more dispirited they may become Their self-esteem is likely to fall, and they are more likely to succumb to stress-related illness Then there are the costs to the family and friends of the unemployed Personal relations can become strained, and there may be an increase in domestic violence and the number of families splitting up Then there are the broader costs to the economy Unemployment represents a loss of output In other words, actual output is below potential output Apart from the lack of income to the unemployed themselves, this underutilisation of resources leads to lower incomes for other people too: • The government loses tax revenues, since the unemployed pay no income tax and national insurance, and, given that the unemployed spend less, they pay less VAT and excise duties The government also incurs administrative costs associated with the running of benefit offices It may also have to spend extra on health care, the social services and the police • Firms lose the profits that could have been made, had there been full employment • Other workers lose any additional wages they could have earned from higher national output the average In the UK, the unemployment rate for AfroCaribbeans is 1/2 times greater than that for whites For those of Pakistani and Bangladeshi origin, it is three times greater Explanations are complex, but include differences in educational opportunities, a higher proportion of younger people, a greater sense of alienation among the unemployed, and the attitudes and prejudices of employers What is more, the longer people remain unemployed, the more deskilled they tend to become, thereby reducing potential as well as actual income ? Why have the costs to the government of unemployment benefits not been included as a cost to the economy? Finally, there is some evidence that higher unemployment leads to increased crime and vandalism This obviously imposes a cost on the sufferers The costs of unemployment are to some extent offset by benefits If workers voluntarily quit their jobs to look for a better one, then they must reckon that the benefits of a better job more than compensate for their temporary loss of income From the nation’s point of view, a workforce that is prepared to quit jobs and spend a short time unemployed will be a more adaptable, more mobile workforce – one that is responsive to changing economic circumstances Such a workforce will lead to greater allocative efficiency in the short run and more rapid economic growth over the longer run Long-term involuntary unemployment is quite another matter The costs clearly outweigh any benefits, both for the individuals involved and for the economy as a whole A demotivated, deskilled pool of long-term unemployed is a serious economic and social problem Figure 14.3 Disequilibrium unemployment Unemployment and the labour market We now turn to the causes of unemployment These causes fall into two broad categories: equilibrium unemployment and disequilibrium unemployment To make clear the distinction between the two, it is necessary to look at how the labour market works Figure 14.3 shows the aggregate demand for labour and aggregate supply of labour: that is, the total demand and supply of labour in the whole economy The real average wage rate is plotted on the vertical axis This is the average wage rate expressed in terms of its purchasing power: in other words, after taking prices into account The aggregate supply of labour curve (ASL ) shows the number of workers willing to accept jobs at each wage rate Definitions Aggregate demand for labour curve A curve showing the total demand for labour in the economy at different average real wage rates Aggregate supply of labour curve A curve showing the total number of people willing and able to work at different average real wage rates EC6_C14.qxd 10/31/05 13:14 Page 401 14.1 UNEMPLOYMENT KI p58 This curve is relatively inelastic, since the size of the labour force at any one time cannot change significantly Nevertheless it is not totally inelastic because (a) a higher wage rate will encourage some people to enter the labour market (e.g parents raising children), and (b) the unemployed will be more willing to accept job offers rather than continuing to search for a better-paid job The aggregate demand for labour curve (ADL ) slopes downwards The higher the wage rate, the more will firms attempt to economise on labour and to substitute other factors of production for labour The labour market is in equilibrium at a wage of We – where the demand for labour equals the supply If the wage rate were above We, the labour market would be in a state of disequilibrium At a wage rate of W1, there is an excess supply of labour of A – B This is called disequilibrium unemployment For disequilibrium unemployment to occur, two conditions must hold: • The aggregate supply of labour must exceed the aggregate demand • There must be a ‘stickiness’ in wages In other words, the wage rate must not immediately fall to We KI p43 Even when the labour market is in equilibrium, however, not everyone looking for work will be employed Some people will hold out, hoping to find a better job This is illustrated in Figure 14.4 The curve N shows the total number in the labour force The horizontal difference between it and the aggregate supply of labour curve (ASL ) represents the excess of people looking for work over those actually willing to accept jobs Q e represents the equilibrium level of employment and the distance D – E represents the equilibrium level of unemployment This is sometimes known as the natural level of unemployment Note that the ASL curve gets closer to the N curve at higher wages The reason for this is that the unemployed will be more willing to accept jobs, the higher the wages they are offered Figure 14.4 Figure 14.5 401 Equilibrium and disequilibrium unemployment Figure 14.5 shows both equilibrium and disequilibrium unemployment At a wage of W1, disequilibrium unemployment is A – B; equilibrium unemployment is C – A; thus total unemployment is C – B But what are the causes of disequilibrium unemployment? What are the causes of equilibrium unemployment? We will examine each in turn Disequilibrium unemployment There are three unemployment possible causes of disequilibrium Real-wage unemployment Real-wage unemployment occurs when trade unions use their monopoly power to drive wages above the marketclearing level It could also be caused by the government setting the national minimum wage too high In Figure 14.3, the wage rate is driven up above We Excessive real wage rates were blamed by the Thatcher and Major governments for the high unemployment of the 1980s and 1990s The possibility of higher real-wage unemployment was also one of the reasons for their rejection of a national minimum wage One effect of high real wage rates, however, may help to reduce real-wage unemployment The extra wages paid to Equilibrium unemployment Definitions Disequilibrium unemployment Unemployment resulting from real wage rates in the economy being above the equilibrium level Equilibrium (‘natural’) unemployment The difference between those who would like employment at the current wage rate and those willing and able to take a job Real-wage unemployment Disequilibrium unemployment caused by real wages being driven up above the market-clearing level EC6_C14.qxd 10/31/05 13:14 Page 402 402 14 MACROECONOMIC ISSUES AND ANALYSIS: AN OVERVIEW those who are still employed could lead to extra consumer expenditure This addition to aggregate demand would in turn lead to firms demanding more labour, as they attempted to increase output to meet the extra demand In Figure 14.3, the ADL curve will shift to the right, thereby reducing the gap A – B ? Figure 14.6 Demand-deficient unemployment If the higher consumer expenditure and higher wages subsequently led to higher prices, what would happen to: (a) real wages; (b) unemployment (assuming no further response from unions)? TC 13 Demand-deficient or cyclical unemployment p 381 Demand-deficient or cyclical unemployment is associated with economic recessions As the economy moves into recession, consumer demand falls Firms find that they are unable to sell their current level of output For a time they may be prepared to build up stocks of unsold goods, but sooner or later they will start to cut back on production and cut back on the amount of labour they employ The deeper the recession becomes and the longer it lasts, the higher will demand-deficient unemployment become As the economy recovers and begins to grow again, so demand-deficient unemployment will start to fall again Because demand-deficient unemployment fluctuates with the business cycle, it is sometimes referred to as ‘cyclical unemployment’ Figure 14.1 (on page 396) showed the fluctuations in unemployment in various industrial countries and for the OECD as a whole If you compare this figure with the figure in Box 13.4 (on page 382), you can see how unemployment tends to rise in recessions and fall in booms Demand-deficient unemployment is also referred to as ‘Keynesian unemployment’, after John Maynard Keynes (see Person Profile on the book’s website), who saw a deficiency of aggregate demand as the cause of the high unemployment between the two world wars Today, many economists are known as ‘Keynesian’ Although there are many strands of Keynesian thinking, these economists all see aggregate demand as important in determining a nation’s output and employment Demand-deficient unemployment is illustrated in Figure 14.6 Assume initially that the economy is at the peak of the business cycle The aggregate demand for and supply of labour are equal at the current wage rate of W1 There is no disequilibrium unemployment Now assume that the economy moves into recession Consumer demand falls and as a result firms demand less labour The demand for Definition Demand-deficient or cyclical unemployment Disequilibrium unemployment caused by a fall in aggregate demand with no corresponding fall in the real wage rate labour shifts to ADL2 If there is a resistance to wage cuts, such that the real wage rate remains fixed at W1, there will now be disequilibrium unemployment of Q – Q Some Keynesians specifically focus on the reluctance of real wage rates to fall from W1 to W2 This downward ‘stickiness’ in real wage rates may be the result of unions seeking to protect the living standards of their members (even though there are non-union members out of work), or of firms worried about the demotivating effects of cutting the real wages of their workers For such economists, the problem of demand-deficient unemployment would be solved if there could somehow be a fall in real wage rates For other Keynesian economists, however, the problem is much more fundamental than a downward stickiness in real wages For them the problem is that the low level of aggregate demand causes an equilibrium in the goods market at an output that is too low to generate full employment Firms’ supply is low (below the full-employment level of supply) because aggregate demand is low This low-level equilibrium in the goods market, and the corresponding disequilibrium in the labour market, may persist This is the result of a lack of confidence on the part of firms After all, why should firms produce more and take on more workers, if they believe that the recession will persist and that they will therefore not sell any more? The economy remains trapped in a low-output equilibrium In such cases, a fall in real wages would not cure the unemployment In fact, it might even make the problem worse In Figure 14.6, even if the average wage rate were to fall to W2, demand-deficient unemployment would still persist The reason is that this general cut in wages throughout the economy would reduce workers’ incomes and hence reduce their consumption of goods As the aggregate demand for goods fell, there would be a further reduction in demand for labour: the aggregate demand for labour curve would shift to the left of ADL By the time the wage had fallen to W2, W2 would no longer be the equilibrium wage There would still be demand-deficient unemployment EC6_C14.qxd 10/31/05 13:14 Page 403 14.1 UNEMPLOYMENT ? If this analysis is correct, namely that a reduction in wages will reduce the aggregate demand for goods, what assumption must we make about the relative proportions of wages and profits that are spent (given that a reduction in real wage rates will lead to a corresponding increase in rates of profit)? Figure 14.7 403 Average duration of unemployment Growth in the labour supply If labour supply rises with no corresponding increase in the demand for labour, the equilibrium real wage rate will fall If the real wage rate is ‘sticky’ downwards, disequilibrium unemployment will occur ? On a diagram similar to Figure 14.6, illustrate how a growth in labour supply can cause disequilibrium unemployment This tends not to be such a serious cause of unemployment as demand deficiency, since the supply of labour changes relatively slowly Nevertheless there is a problem of providing jobs for school leavers each year with the sudden influx of new workers on to the labour market Equilibrium unemployment (or natural unemployment) Although there may be overall macroeconomic equilibrium, with the aggregate demand for labour equal to the aggregate supply, and thus no disequilibrium unemployment, at a microeconomic level supply and demand may not match There may be excess demand for labour (vacancies) in some markets and excess supply (unemployment) in others There may be vacancies for computer technicians and unemployment in the steel industry, but unemployed steel workers cannot immediately become computer technicians This is when equilibrium unemployment will occur There are various types of equilibrium unemployment Frictional (search) unemployment KI 15 Frictional (search) unemployment occurs when people p101 leave their jobs, either voluntarily or because they are sacked or made redundant, and are unemployed for a period of time while they are looking for a new job They may not get the first job they apply for, despite a vacancy existing The problem is that information is imperfect Employers are not fully informed about what labour is available; workers are not fully informed about what jobs are available and what they entail Both employers and workers, therefore, have to search: employers searching for the right labour and workers searching for the right jobs The longer people search for a job, the better the wage offers they are likely to be made This is illustrated in Figure 14.7 by the curve Wo It shows the highest wage offer that the typical worker will have received since being unemployed When they first start looking for a job, people may have TC high expectations of getting a good wage The longer they p101 are unemployed, however, the more anxious they are likely to be to get a job, and therefore the lower will be the wage they are prepared to accept The curve Wa shows the wage that is acceptable to the typical worker ? Why are Wo and Wa drawn as curves rather than straight lines? The average duration of unemployment will be Te That is, workers will remain unemployed until they find a job at an acceptable wage One obvious remedy for frictional unemployment is to provide better job information through government job centres, private employment agencies, or local and national newspapers This would have the effect of making the curve Wo reach its peak earlier, and thus of shifting the intersection of Wo and Wa to the left Another much more controversial remedy is for the government to reduce the level of unemployment benefit This will make the unemployed more desperate to get a job and thus prepared to accept a lower wage It will therefore have the effect of shifting the Wa curve downwards and again of shifting the intersection of Wo and Wa to the left Structural unemployment Structural unemployment occurs where the structure of the economy changes Employment in some industries Definitions Frictional (search) unemployment Unemployment that occurs as a result of imperfect information in the labour market It often takes time for workers to find jobs (even though there are vacancies) and in the meantime they are unemployed Structural unemployment Unemploymet that arises from changes in the pattern of demand or supply in the economy People made redundant in one part of the economy cannot immediately take up jobs in other parts (even though there are vacancies) EC6_C14.qxd 10/31/05 13:14 Page 404 404 14 MACROECONOMIC ISSUES AND ANALYSIS: AN OVERVIEW may expand while in others it contracts There are two main reasons for this A change in the pattern of demand Some industries experience declining demand This may be due to a change in consumer tastes as certain goods go out of fashion Or it may be due to competition from other industries For example, consumer demand may shift away from coal and to other fuels This will lead to structural unemployment in mining areas A change in the methods of production (technological unemployment) New techniques of production often allow the same level of output to be produced with fewer workers (see Web Case 14.2) This is known as ‘laboursaving technical progress’ Unless output expands sufficiently to absorb the surplus labour, people will be made redundant This creates technological unemployment An example is the job losses in the banking industry caused by the increase in the number of cash machines and by the development of telephone and Internet banking Structural unemployment often occurs in particular regions of the country When it does, it is referred to as regional unemployment Regional unemployment is due to the concentration of particular industries in particular areas For example, the collapse in the South Wales coal-mining industry led to high unemployment in the Welsh valleys The level of structural unemployment will depend on three factors: • The degree of regional concentration of industry The more that industries are concentrated in particular regions, the greater will be the level of structural unemployment if particular industries decline • The speed of change of demand and supply in the economy The more rapid the rate of technological change or the shift in consumer tastes, the more rapid will be the rate of redundancies • The immobility of labour The less able or willing workers are to move to a new job, the higher will be the level of structural unemployment Remember from Chapter the distinction we made between geographical and occupational immobility Geographical immobility is a particular problem with regional unemployment Occupational immobility is a particular problem with technological unemployment where old skills are no longer required There are two broad approaches to tackling structural unemployment: market orientated and interventionist A market-orientated approach involves encouraging people to look more actively for jobs, if necessary in other parts of the country It involves encouraging people to adopt a more willing attitude towards retraining, and if necessary to accept some reduction in wages An interventionist approach involves direct government action to match jobs to the unemployed Two examples are providing grants to firms to set up in areas of high unemployment (regional policy), and government-funded training schemes Policies to tackle structural unemployment are examined in detail in sections 22.2–22.4 Seasonal unemployment Seasonal unemployment occurs when the demand for certain types of labour fluctuates with the seasons of the year This problem is particularly severe in holiday areas, such as Cornwall, where unemployment can reach very high levels in the winter months Policies for tackling seasonal unemployment are similar to those for structural unemployment Definitions Technological unemployment Structural unemployment that occurs as a result of the introduction of labour-saving technology Regional unemployment Structural unemployment occurring in specific regions of the country Seasonal unemployment Unemployment associated with industries or regions where the demand for labour is lower at certain times of the year Section summary Who should be counted as ‘unemployed’ is a matter for some disagreement The two most common measures of unemployment are claimant unemployment (those claiming unemploymentrelated benefits) and ILO/OECD standardised unemployment (those available for work and actively seeking work or waiting to take up an appointment) The ‘stock’ of unemployment will grow if the inflow of people into unemployment exceeds the outflow (to jobs or out of the labour market altogether) The more rapid these flows, the shorter the average duration of unemployment In most countries, unemployment is unevenly distributed across geographical regions, between women and men, between age groups and between different ethnic groups The costs of unemployment include the financial and other personal costs to the unemployed person, continued EC6_Z06.qxd 10/27/05 17:19 Page 24 I:24 INDEX money (continued) current transfers 416 definition 479, 480 establishing value 480 evaluation role 480 functions 479–80 interest rates and 478 –503, 506–7 M0 490, 491, 494, 510, 543 – 4, 547, 549, 558, 563 M1 491 M2 491 M3 490, 491, 495, 548, 549, 561 M3 (eurozone) 490, 491 M4 490, 491, 493 – 6, 510, 544, 549, 563 marginal utility 96–7 medium of exchange 479 – 80, 479 motives for holding 497 multiplier 493, 494, 548 –9, 493 narrow definitions 480 near 493 printing extra 438 –9 quantity theory 436, 440 –1, 443, 448–9, 505, 436 store of wealth 480 unstable demand for 506 –7 velocity of circulation 370, 436, 510, 511–12, 548, 566 money, demand for 406, 497, 543 – curve 498–9, 500 effects of expectations 499, 500 interest rate and 498, 499, 500 –1, 518, 550 Keynesian/monetarist analyses 514 motives for holding 497 national income and 518 speculative (asset) demand 499 –500 total demand 500–1 transactions and precautionary demand 497– unstable 507–8, 552–3 money GDP 374 money illusion 374, 414, 576, 578, 414, 576 money market 484, 513, 484 changes (full effects) 519 –22 complementary 488 deregulation 483 discount 319, 488 – 9, 545, 560 equilibrium in 501, 517 goods market and 504–27 ISLM analysis 515–22 London (role) 488 – parallel 488, 489 repos 483, 488–9, 545 – 6, 548, 549, 550–1, 483 money supply 406, 448 –9, 543 aggregate demand and 440 –1, 448 –9, 505 –8, 552 changes (effects) 501, 505 –8 control 542–3, 544 –50 credit and 490 –3 curve 496, 534 definitions 490 direct transmission mechanism 509 –11 endogenous 496, 509, 515, 496 eurozone 490, 491 exchange rate and 507, 509, 672, 681 exogenous 496, 515, 534, 496 flow-of-funds equation 495 –6 Goodhart’s law 548, 552, 561, 567, 552 interest rate and 496, 550 –3 national income and 479, 505 –8, 509 portfolio balance 509 –11, 509 rise in (causes) 493 –5, 555 rise in (effects) 505, 506 targets 444, 507, 511–12, 552, 566, 696 UK 413 –14 USA 694 Monitor 618 monitoring performance 208 Monopolies and Mergers Commission 183, 353 monopolistic competition 157, 158, 164, 182, 305, 574, 157 assumptions of 178 equilibrium of firm 178 – ice-cream sellers 179 limitations of model 179 – 80 monopoly and (comparison) 181 non-price competition 180 perfect competition and 180 –1 public interest and 180 –1 monopoly 25, 157, 158, 164, 574, 157 advantages 170 –1 barriers to entry 166 –7, 168, 174, 175, 348, 353 bilateral 237, 238 –9, 237 competition under 323 –4, 348 –9, 350, 352, 353 contestable markets and 172 –6 deadweight loss under 305 definitions 166 disadvantages 169 –70, 172 equilibrium price and output 168 –9 EU policy 350, 662 foreign-based (prevention) 648 import-substituting industrialisation 729 kinked demand under 191 legislation 313 limit pricing 168 –9 Microsoft case 170 –1 monopolistic competition and 181 natural 144, 166 –7, 173, 356 –7, 361, 362, 617, 166 policies 348 –9, 350, 352, 353 potential 172–3 power 166, 172, 214, 224, 237–8, 252, 255, 271, 306, 310, 317, 349, 352, 357, 412, 593 –610, 646, 648, 657, 662, 679, 723, 729 privatised industry as 357–8 profit maximising under 166 –72 public interest and 169 –71 supply of exports 648 taxes to correct for 310 –11 UK policy 352, 353 X inefficiency 172 monopsony 236 –7, 242–3, 236 power 238, 243, 249 –50, 251, 252, 271, 274, 306, 648 –9 Victorian times 238 Monsanto 167, 735 Mont Pelerin Society 112, 324 –5 Monti, Mario 351 moonlighting 280, 376 moral dilemma 75 moral hazard 104, 747, 104 moral judgement 77, 229 morale (wage rates) 243 mortgages 46 –7, 484 most-favoured nation status 652 motoring costs 340 –1 motorways 343 –4 multi-divisional form 206 –7, 206 multi-factor case (in long run) 134 multi-product firms 224 multi-stage production 132 multinational companies 207, 218, 220, 648, 731, 735, 736 multiple aims 219 –25 multiplier 463, 509, 532, 533, 535, 591, 463 accelerator interaction 473 – 4, 535, 537 balanced budget 442 bank (or deposit) 492, 542–3, 544, 546, 547, 492 formula 464, 466 –7, 464 income and expenditure approach 464, 465 –6 EC6_Z06.qxd 10/27/05 17:19 Page 25 INDEX multiplier (continued) marginal propensity to consume 464–5, 466 –7 money 493, 494, 548 – 9, 493 numerical illustration 465 size of 517, 533, 535 withdrawals/injections 463 –5 multiplier effect 441–2, 493, 533–4, 441 on 45° line diagram 467– regional 625, 657, 625 world 652 mutual recognition 659, 660, 661, 660 narrow definitions of money 480 narrow monetary base 490 Nash equilibrium 190, 192, 193, 194, 190 National Bus Corporation 617 national debt 487, 529, 546, 706, 711, 529 national economy calculating GDP 388 –93 circular flow of income 370–3 long-term growth 384 – measuring national income and output 373 –7 scope of macroeconomics 368 –9 short-term growth 377– 84 National Grid Company 360, 361 National Grid Transco 359 National Health Service 75 –7, 308 – internal market 618 national income 19, 531, 535 accelerator effect see accelerator aggregate demand and 370, 371, 452 circular flow 370–3 comparisons 375 – consumption and 377, 453 –5, 457 demand for money and 518 determination 462– equilibrium 462–3, 601–2 exchange rate and 375, 459, 507, 669, 675, 680 external balance 669 –70, 678, 681, 669 full employment level 468 – 9, 669, 468 gross 392, 393 inflation and 374, 523 – injections 370 –3, 458 –9, 371 internal balance 669 –70, 678, 679, 681, 669 investment and 371–2, 473 ISLM analysis see ISLM analysis living standards and 376 – measurement 373 –7 monetary changes (effects) 505 –12 money supply and 479, 505 –8, 509 nominal 498 ratios of shares in 267 real 452–3, 505 –12, 526 steady-state level 602, 604 –5, 602 underground economy 19, 376 –7 welfare measurement 377 withdrawals 370 –2, 373, 455 –60, 463 –5, 370 national insurance contributions 277, 279, 371, 393, 400, 614, 626 National Loans Fund 487 national output 405, 602 aggregate supply and 432–3, 574 –6, 579 – 80 measurement 373 –7 National Power 360, 361 National Savings certificates 487 National Vocational Qualification (NVQ) 621, 623 national wealth 479 nationalisation 621–2 privatisation and 355, 356 nationalised industries 315, 355, 356 –7, 355 natural level of output 577 natural level of unemployment 401, 444, 447, 532, 537, 577, 590, 577 natural monopoly 144, 166–7, 356 –7, 361, 362, 617, 166 contestable markets and 173 natural rate of unemployment 444, 447, 583, 610, 678, 583 natural resources 4, 260, 337, 378, 385, 411 natural unemployment see equilibrium unemployment natural wastage 238, 595, 238 nature (determinant of supply) 41 near money 493 needs 18 negative equity 46 negative externalities 301 negative income elasticity of demand 60 negative income tax 287–8, 287 negative marginal utility 93 negative sign 49 negative tax 371, 372 negotiations (outcome) 239 –40 Neighbourhood Renewal Unit 630 neo-Austrian/libertarian school 323, 324 –5, 610 neo-classical theory 229, 232, 296, 611, 731, 736 I:25 neo-Marxist economists 731 net importer (agricultural) 82 net marginal tax propensity 531 net national income 392 net present value calculation 319, 320 –1 of investment 253 net saving 371, 455, 457 net taxes 371, 455 –6 NETA system 361 network 218 network economies 167 network effects 170 –1 new classical school 447, 509, 574, 586, 447, 586 fixed exchange rates 669, 681 inflation and unemployment 586 –92 supply-side policies 610 –11 New Deal for Communities 630 New Electricity Trading Arrangements (NETA) 361 new Keynesians 448 new products 171 newly industrialised countries 368, 728 no-strike agreements 239 nominal exchange rate 670 –1, 678–9 nominal GDP 374 nominal national income 498 nominal values 374, A:6 non-accelerating-inflation rate of unemployment (NAIRU) 583, 593, 583 non-bank private sector 493, 494, 495, 493 non-collusive oligopoly 182 breakdown of collusion 188 –9 game theory 191–5 kinked demand curve 190 –1 rival behaviour 189 – 91 non-discrimination 248, 652 non-distortionary tax 276 non-economic advantages (trade) 644 non-excludability 302, 303, 331, 303 non-human factors of production 249 –50 see also capital; land non-interest bearing deposits 716 non-intervention policies 296, 323–6 Keynesian criticism 595 see also laissez-faire policy non-linear function A:9 non-market-based environmental policies 333 –6 EC6_Z06.qxd 10/27/05 17:19 Page 26 I:26 INDEX non-marketed items 376 non-monetary benefits 315, 316, 317–18 non-monetary costs 315, 316 non-monetary externalities 318 non-price competition 180, 182, 196, 180 non-profit institutions serving households (NPISH) 391 non-renewable resources 260, 329, 379 non-rivalry 302 non-tariff barriers 660 non-traded goods (in developing countries) 723, 725 non-union labour 239 normal goods 36, 59 – 60, 112–14, 36, 60, 112 normal profit 151, 152, 153, 159 – 60, 235, 151 normal rate of return 255 normative statement 28 – 9, 28 norms and regulations (EU) 660 North American Free Trade Association (NAFTA) 658 North Sea oil 411, 561, 693, 694 number unemployed 396, 397, 396 numerical flexibility 246, 247, 246 objective function 109 objectives macroeconomic 307, 372, 424 –7 microeconomic 9–11 policy (exchange rate regimes) 669–70 occupational distribution of wages and salaries 268 – odds (in gambling) 64, 66, 101–2 OECD 329, 351, 397, 402, 407– Office of Communications (Ofcome) 359 Office of Electricity Regulation (OFFER) 360 Office of Fair Trading 169, 352, 353, 354, 359, 362 Office of Gas and Electricity Markets (OFGEM) 359, 360, 361 Office of Rail Regulation (ORR) 359 Office of Water Services (OFWAT) 314, 359 Official List (Stock Exchange) 256 official loans 741, 743 oil crises 693–4, 740–1 debt problem and 740 –1 North Sea 411, 561, 693, 694 OPEC 186 –7, 411, 412, 648, 679, 692– prices 186 –7, 260, 411, 444, 560, 679, 692, 694 –5 shocks 740 –1 oligopoly 157, 158, 164, 178, 181, 193, 305, 309, 574, 157 brewing industry 183 collusion 182 –9, 313, 349 –50, 362, 657, 182 competition 182, 323 –4, 349 –50 equilibrium of industry 182–3 key features 182 labour with market power 237–8 legislation 313 non-collusive 182, 188–95, 182 power 224, 255, 412, 662 public interest and 195 –6 oligopsony 236, 242, 236 OPEC 186 –7, 411, 412, 648, 679, 692– open-market operations 544 –5, 546, 547, 549, 550, 672, 544 open economy 416, 703, 416 balance of payments in 416 –19 crowding out in 513 exchange rates 419 –23, 697–700 ISLM analysis 697–700 macroeconomic objectives 424 –7 open unemployment rates 737 operating expenses (total variable cost) 127–8 operational balances (central bank) 483 –4, 487 opportunity (for merger) 214 opportunity costs 8, 21, 100, 126, 127, 292, 626, 722, 8, 126 car use 340 choice and 8, 11, 13 constant (gains from trade) 638 –40 of growth 378 –9 of holding money 499 increasing 13 –14, 640 –1, 642, 13 international trade 638 –41, 642, 646 of leisure 282 optimal currency areas 713 optimum tariff 649 Organisation of Petroleum Exporting Countries see OPEC organisational economies 132 organisational slack 210, 220 –1, 221 organisational structure of firm 206 –7 outcomes, uncertain 66, 318 –19 output 18, 120, 141–2, 596 actual 380, 383, 385, 424 agricultural 81, 735 classical analysis 435 –6 determination 43 – economic growth and 600, 606 –7 equilibrium price and 43 –5, 168 – 9, 222, 224 expectations 578 gaps 378, 382–3 highest (given product cost) 138 –9 least-cost method 134, 138 –9 long-term trend 358, 380 under monopoly 168 –9 national see national output natural level of 577 potential 14 –15, 378, 380, 383, 385, 424, 378 price and 146 –8 price discrimination and 199, 201 profit maximisation 150 –2, 199, 201, 295 short-run 357–8, 381 steady-state 602 sustainable 382–3, 577, 382 technological progress and 604 –5 unemployment and 400 outsiders 240, 445, 240, 445 outsourcing 165 outward-looking policies 151, 725 –6, 729, 731–4 overdrafts 483, 484 overheads 132 overshooting (exchange rate) 687–8, 689, 687 ownership of capital/land 236, 261 of dwellings (GDP measurement) 389 factors of production 126 –7 key inputs 167 public 315, 355 –7 public interest and 355 wholesale/retail outlets 167 Oxfam 746 ozone depletion 331, 333 Paish, Frank 538 paradox of thrift 467 parallel money markets 488, 489 parent company 213 Pareto, Vilfredo 292 Pareto improvement 292–3, 298 –9, 322, 343, 349, 292 Pareto optimality 292–6, 297, 298 –9, 300, 305 –6, 307, 310, 292 in cost-benefit analysis 322 lack of 304 EC6_Z06.qxd 10/27/05 17:19 Page 27 INDEX Paris Club 741, 743, 744 park-and-ride schemes 344 parking charges 341, 346 –7 parking restrictions 345 parking spaces (tax) 345, 347 part-time work 243, 247, 274, 397, 614, 620 partial derivative A:12 partial differentiation A:12 partial equilibrium 22 participation rate 603 – 4, 603 passenger transport 339 – 48 patents 255, 623, 653, 737 PAYE system 277, 280 peak-load pricing 198 peaking out phase (business cycle) 380 pedestrian-only areas 345 pensions 272, 274, 284, 285, 371, 393 per-capita measures (national income) 375, 376 percentage changes 52, A:6–A:7 percentage measures (elasticity) 49 perestroika 19 perfect common market 655 perfect competition 34, 157, 169, 305, 643, 650, 34, 157 agriculture 78 assumptions 158 best (or total) 160 demand for labour 232–5 e-commerce 165 economies of scale 163 – efficiency under 292 –300 equality/inequality 235 – income distribution 228 –36 incompatibility of 163 – labour supply under 229 –32 long run under 158 – 60, 162–3, 159 loss minimising 153, 161 monopolistic competition and 180–1 perfect labour markets 228 –9 private efficiency 292, 295, 297, 298, 292 profit maximisation under 157– 66 public interest and 164 short run under 158 – 62, 158 social efficiency and 295, 298 –9 wage determination 228 –36 wages and profits under 235 perfect knowledge 158, 165, 228 perfect labour markets 228 –9 perfectly contestable market 173, 174, 173 performance 9, 208 peripheral workers 246 –7 perks 210, 239, 729, 731 personal income tax see income tax persuasion (intervention) 622 perverse incentives 21 petrol prices 334, 340, 345 Phillips, A.W 414 Phillips curve 414 –15, 470, 532, 567, 611, 669, 678, 414 aggregate demand and 414 –15, 449, 591 aggregate supply and 586, 587–90, 591, 592, 596 breakdown of 592 clockwise Phillips loops 584 –6 common ground among economists 596 effects of deflation 583 –4 expectations-augmented 581–6, 581 Keynesian approach 443 long-run 443, 449, 583, 585 –6, 591, 610 monetarist approach 444 policy implications 585 –6 short-run 447, 590, 591, 593, 594 –6 stagflation (explanations) 584 –5 physical capital 249, 254, 606, 623 supply of 254 physical product see average physical product; marginal physical product; total physical product picketing 239, 615, 239 pie chart A:4 planned economy 16, 17–20, 21, 16 planning of industry 357 national economic 622 Soviet system 18 –19, 20, 21 plant closure 239 plant economies of scale 132 point elasticity 52, 55 –6, 59, 55 police (as public service) 303 policy co-ordination (international) 704 – economics and 28 –9 harmonisation 706 –10, 706 objectives (exchange rate regimes) 669 –70, 669 political business cycle 425, 585 political problems (monetary control) 543 poll tax 278 polluter pays principle 310, 312, 332 pollution 26, 164, 378, 390, 737, 745 agricultural policy and 84, 85 car access and 344 I:27 costs 260, 293, 310, 312, 331–2 economics of the environment 328 –39 Kyoto Protocol 320 –1, 336 –7, 338 social costs 312 tax 310, 312, 313, 332, 333 –5, 338 tradable permits 336 –8 population in developing countries 737–8, 739 growth 122, 434 national income and 375 pressures (limited resources) 328–9 workforce increase 603 –4 portfolio balance 509 –11, 509 portfolio investment 417–18 positive externalities 314 –15, 386 positive income elasticity of demand 60 positive sign 49 positive statement 28 –9, 28 positive sum game 24 post-Keynesians 448 Post Office 355 potential competition 172–3 potential economic growth 377–9, 386, 387, 378 potential monopoly 172–3 potential output 14 –15, 378, 380, 383, 385, 424 poverty 236, 261, 279 –80, 378, 735, 740, 743 absolute 264, 271, 272 analysis of 264 –5 determinants 271–3 harmonisation to reduce 708 heavily indebted poor countries initiative 744 –6 inequality and 264 –74 minimum wage 274 –5 in the past 271 relative 264, 271, 272 social protection 285, 286 underdevelopment problem 721, 725 ‘Poverty Funds’ proposal 747 Poverty Reduction Strategy Paper 744 poverty trap 287, 532, 615, 287 power in collective bargaining 239 –41 market see market power mergers/acquisitions 349 monopoies/oligopolies 195 –6, 349 trade unions 239 –41 PowerGen 360, 361 Pratten, C.F 144 –5 pre-trade position 638 –9, 643 EC6_Z06.qxd 10/27/05 17:19 Page 28 I:28 INDEX pre-trade production possibilites 638–9 precautionary demand for money 497–9 precautionary motive (holding money) 497 predatory pricing 175, 201, 353, 201 prediction 27, 28 see also speculation preferential trading arrangements 654 –5, 654 common market 655, 657, 655 customs union 655 –7, 655 EU 659–65 most-favoured nations 652 in practice 657–8 trade creation 655– 6, 657 trade diversion 656–7 types of arrangements 655 see also international trade present value approach 252–3, 252 price-cap regulation 359, 362, 359 price-consumption curve 111 price-fixing agreements 352–3 price-setting behaviour 223, 359 price benchmark 187– 8, 187 price change budget lines and 105, 107–9, 231, 284 demand and 36 demand curve and 35– 6, 53– expectations of future 36, 41 income effect 111–16, 111 quantity demanded 37– substitution effect 111–16, 111 price control 73 imperfect markets 314 setting maximum 71–2 setting minimum 70 price discrimination 197, 350, 353, 197 advantages to firm 198 – in cinema 200 conditions necessary for 197– first-degree 197, 199, 197 output and 199, 201 profit-maximising prices and 199, 201 profits and 201 public interest and 201 second-degree 197 third-degree 197, 199, 201, 197 on trains 197 price elasticity of demand 48, 200, 340, 48 agriculture 79 calculus 56 consumer expenditure and 50 –2 cross-price elasticity 60 determinants 50, 59 formula 49, 54, 59, 49, 54 marginal revenue and 147–8 measurement 49 –50 time periods 50 price elasticity of supply 57–8, 57 determinants 57 formula 57, 58, 57, 58 measurement 57–8 time period 57 price index A:7 consumer 359, 360, 407, 564, A:7 exports/imports see terms of trade retail 359, 360, 407, 564, A:7 price leadership 184 –5 price levels 405 –7 price makers 148, 168 price mechanism 20, 23, 345, 20 supply and demand 33 –68 price stability 191 price takers 34, 146 –7, 148, 158, 250, 301, 648, 651, 34, 146 prices 537 arc elasticity 52– buffer stocks to stabilise 80 –1 of capital services 252 change (indifference analysis) 108, 110 –16 classical analysis 436 consumption and 454 control see price control current 260 demand and 34 –5, 340 determination 223, 252, 642 in developing countries 723 equilibrium 20, 43 –5, 168 –9, 222, 224, 407, 20 exchange rate and 675 –6 expectations 61–4, 500 factor services 249 firm’s power over (reduction) 165 fixed 70 –3, 81, 82, 349, 350, 351 flexible 432, 587 fluctuations 63, 78 –9, 82, 728 higher 353 of houses 46 –7 inflation see inflation of land 259 –61 maximum 70, 71–2, 70 minimum 70, 82, 70 under monopoly 168 –9 of non-renewable resources 260, 329 output and 43 –8, 168 –9, 596 output determinants 43 –8, 168 –9 profit-maximising 199, 201, 224 reform (agriculture) 86,735 regulation and 357–8 relative 25, 456, 25 of resources (increases) 260 road space/usage 340 RPI 359, 360, 407, 564, A:7 of securities (changes) 499 short-run equilibrium of firm 160 signals/incentives 21 speculation and 61–4 stickiness 413, 577, 592, 681 supply and 39 –40 taxation and 73, 276 –81, 393, 560 zero 13, 73, 76 prices and incomes policy 559, 560, 610, 559 pricing on buses 54 cost-based 222–4 the environment 332 limit 168 –9, 168 peak-load 198 in practice 222–5 predatory 175, 201, 353, 201 road 345 –7 primary exports balance of payments problems 727– comparative advantage 726 –7 as engine of growth 727 importance of 726 justification for 726 traditional trade theory 727 as vent for surplus 726 –7 primary labour market 246 –7, 246 primary market in capital 256 primary production 727 principal-agent problem 207–8, 242, 306, 207 prisoners’ dilemma 192, 193, 338, 706, 192 private benefits 302 private efficiency 292, 295, 297, 298, 292 Private Finance Initiative (PFI) 616 –17, 618, 630 private monetary costs 315, 316, 342 private non-monetary benefits/costs 315, 316 private property rights 312, 313, 332, 611 privatisation 241, 445, 560, 742 arguments for 355 –6 nationalisation and 355, 356 EC6_Z06.qxd 10/27/05 17:19 Page 29 INDEX privatisation (continued) potential problems 356 –7 regulation and 355– 63 supply-side policies 617, 621 privatised industries behaviour 358 competition in 356, 360 –2 externalities 357, 358 as monopoly 357– privatised utilities 314, 356 electricity industry 360 –1, 362 merger 216 regulation 359 UK 360–2 problem of the second best 308 procurement hubs 165 procurement policies 646, 655 producer sovereignty 648 producer supply 295, 296 producer surplus 295, 305 producers aims of 41 in circular flow 15–16 individual 52 share of tax on goods 75 social efficiency between 298 product alternative (profitability) 41 development 180 differentiation 167, 178 domestic 370 –1, 466 –7 identical 158 method (GDP measurement) 373, 388–9 new 171 production of ‘bads’ 377 in circular flow 15–16 in common market 655 consumption and 377 costs 41, 126 –7, 138 –9, 160, 377, 620 efficency 10 equity 11 external benefits 301 external costs 301 factors see factors of production gains from trade 639 – 40 human costs 377 increasing opportunity costs of 13–14, 13 long-run theory 131– 40 marginal rate of transformation 298–9 methods (change) 404 private efficiency and 298 quotas (agriculture) 85 scale of 131–3 short-run theory 120 –6 social efficiency and 293 –5 subsidy 651 production function 121 Cobb-Douglas 135, 136, 135 short-run 121–5 production possibility curve 12–13, 298 –9, 637, 639, 640, 643, 650, 12 economic growth and 727 macroeconomics and 14 –15 microeconomics and 13 –14 productive capacity 212 productive efficiency 10, 134, 10, 134 productivity of capital 255, 385, 715 deal 238 economic growth and 606 –7 of factors 386, 601 gap 620 importance of 607 of labour 386 of resources 385 profit aims of firms and 120 capital and 249 –58 corporation tax 277, 371, 393, 614, 623, 663 in Cournot model 190 economic 153 meaning of 151–3 mergers and 214 normal 151, 152, 153, 159 –60, 235, 151 in perfect competition 157–66, 235 pure 153 rate of 159 –60, 159 retained 212, 255 short-run equilibrium 161 size of 151 supernormal 153, 161, 162, 164, 180, 235, 306, 348, 153 profit-push inflation 411 profit maximisation 120, 208, 210, 574 –5 alternative market structures 157–8 cartels 182, 184 contestable markets theory 172–6 difficulties in 205 by firms 149 –53 under imperfect competition 177–203 income distribution and 242 labour demand and 232– I:29 long-run 151, 153, 209 –10, 212, 209 loss minimising 153 under monopoly 166 –72 natural monopoly 356 –7 under oligopoly 189 –90 output 150 –1, 152, 199, 201, 295 under perfect competition 157–66 price discrimination and 199, 201 rule 150 short-run 149 –51 stock of capital 254 use of land/capital 249 –50 profit satisficers/satisficing 206, 211, 206 profitability alternative products 41 of banks 484 –6 of goods in joint supply 41 liquidity and 484 –6 progressive taxation 279, 280, 282, 532, 279 prohibition illegal products 77 undesirable structures 313–14 promissory notes 489 property rights 611 changes in 312–13 extending 332 intellectual 623 proportional tax 279, 280, 279 proportionate change 52, 53 –4 proportionate measures (elasticity) 49 proportionate values A:5 protection 679, 681 agriculture 727 bureaucracy and 652 corruption and 652 costs of 650 –2 declining industries 649 effective rate of 730 inefficiency and 652 infant industries 646, 729 most-favoured nation status 652 people’s interests 306 –7 problems with 650 –2 reciprocity 652 retaliation and 652 as second best 651 senile industries 646 strategic trade theoy 647–8 trade restrictions 645 –54 US steel industry 652 world multiplier effects 652 prudential control 487 public goods 302–3, 307, 314, 302 EC6_Z06.qxd 10/27/05 17:19 Page 30 I:30 INDEX public interest 24 alernative maximising theories 218–19 competition policy and 348 –9, 353 contestable markets and 175 monopolistic competition and 180–1 monopoly and 169 –71 oligopoly and 195– ownership and 355 perfect competition and 164 price discrimination and 201 satisficing and 221 public limited company 205 – 6, 256, 205 public opinion, environment and 329 public ownership 315 arguments against 355 – arguments for 355 of nationalised industries 315, 355, 356, 357 of natural monopolies 356 –7 public property 313 public sector debt 495, 530 deficit 494–5, 530 –1, 543, 566 market relationships in 618 surplus 495, 530 –1 public sector borrowing requirement 529 public sector net cash requirement (PSNCR) 51, 529, 581, 529 financing 513 fiscal policy and 529 –30,538, 563 monetary policy and 543, 545, 561 money supply and 494 –5, 496, 561 reducing 612 UK policy 561, 563 public services police as 303 private provision 616 –17 public transport 343, 344, 346, 347 public works 438–9 purchase taxes 278 purchasing power parity 375 Big Mac index 684 –5 exchange rates and 375, 694, 695 gross national income and 723, 724, 725 rates 375, 684–5, 688, 694, 695 theory 683, 693, 683 purchasing power standard GDP 375, 376, 600, 375 pure fiscal policy 534 pure profit 153 qualifications 399, 621, 623, 663 inequality and 271 quality, relative 458 quantiles 265, 267, 265 quantitative controls (foreign exchange) 715 quantity arc elasticity 54 of assets owned 261 of capital 601–3 changes 49 Cournot model 189 –90 demanded 35 demanded (change) 37–8, 113, 39 effect of tax 73 of factors 600 national output 373 –7 supplied 39 supplied (change) 41, 57–8, 41 quantity theory of money 436, 443, 448 –9, 505, 436 aggregate demand and 440 –1 questionnaires 318 queues 71 quintiles 265, 268, A:4, 265 quotas 184, 423, 184 CAP 85 cartels 182–4, 187, 188, 184 IMF 691 new cars (Singapore) 346 trade restrictions 645, 652 racial discrimination 243 – radical left 448 radical right 447 railways 340, 341, 346, 347, 356, 359 random shocks 475, 535, 553 determinants of supply 41 random walk 258 rate of discount 253, 319, 484, 547, 551, 253 rate of economic growth 368 rate of exchange see exchange rates rate of inflation 6, 368 –9, 407–8, 413 –14, 423, 523 –4, 562, 6, 369 rate of interest see interest rates rate of profit 159 –60, 159 rate of return approach (to investment) 253 –4 on assets 499 internal (IRR) 253 normal 255 supernormal 255 rational behaviour consumer 95, 98 economic 292 rational choices 8, 10, 292, 324, rational consumer 92, 95, 98, 109, 116, 293, 92 rational consumer behaviour 95, 98, 95 rational decision making 9, 10, rational economic behaviour 292 rational expectations 447, 587–90, 594 –5, 587 rational producer behaviour 120 rationalisation 132, 213, 349, 132 as industrial policy 622 rationing 19, 71–2, 323, 71 credit 544, 551–2, 560 raw materials 4, 133, 385, reaction function (or curve) 189 Reagan administration 283, 325, 612, 613, 694 Reaganomics 613, 694 real-wage unemployment 401–2, 401 real balance effect 406 real business cycle theory 381, 447, 590 –2, 447, 591 real exchange rate 670 –1, 673, 678, 679, 695, 670 real GDP 374 real income 34, 110 real interest rates 730 real national income 452–3, 505 –12, 526 real values 374, A:6 recession 6, 216, 387, 454, 463, balance of payments deficits 673, 681 in business cycle 380, 381, 471–6 debt problem 740 –1, 742 Great Depression 437–9, 529 hysteresis 445, 578, 593, 445, 578 Japan 506, 536 –7 managed floating 693 –4 unemployment and 396, 402, 618 reciprocity (GATT rule) 652 rectangular hyperbola 52 red tape 612, 623, 729, 737 rediscounting bills of exchange 488 –9, 545, 548, 488 redistribution see income redistribution redundancies 239, 246, 616, 662 reference value 548, 549, 711 reflation 591, 681, 690 budgets (1972/1973) 559 fiscal policy 413, 442–3, 413 monetary policy 413, 442–3, 413 refusal to supply 353 EC6_Z06.qxd 10/27/05 17:19 Page 31 INDEX Regional Development Agencies (RDAs) 622, 627, 630, 627 regional electricity companies 360, 362 Regional Greenhouse Gas Initiative 337 regional interdependence 706 –18 regional multiplier effects 625, 657, 662, 625 regional policy 404 approaches 626 disparities 624 –5 effectiveness 627 EU 622, 628 – 9, 659, 712 government attitudes 630 imbalance (causes) 625 interventionist policies 626 UK 627, 628 –9 Regional Selective Assistance (RSA) 627 regional unemployment 404, 624 – 6, 627, 404 regression analysis 39, 42, 39 regressive taxation 279, 280, 335, 279 regulation 626 assessment (UK) 359 – 62 command-and-control 333, 336, 338, 333 in common market 655 electricity industry 360 –1, 362 in EU 660 optimum price and output 357– privatisation and 355 – 63 privatised utilities 359 transport policy 344 –5 in UK 359– 62 undesirable structures 313 –14 see also legislation regulatory bodies 314 regulatory capture 362 relative efficiency 637 relative incomes 25 relative poverty 264, 271, 272 relative price 25, 456, 25 relative quality 458 renewable resources 260 rent 249, 252 control 71 determination of 259 economic 232, 261, 232 land and 259 – 61 rental value 261 replacement cost 127 repos/repo rate 483, 488 –9, 545 – 6, 548, 549, 550 –1, 483 resale price index 359, 360, 407 resale price maintenance 352 rescheduling debt 741–3, 744 research and development 171, 305, 349, 387, 423, 743 reserve ratios, minimum 542–3, 544, 546 –7, 542 reserves 418 –19, 423, 688 resources allocation 10 –11, 17, 19, 20, 23, 164, 297, 324, 325, 445 common 303–4, 313, 330, 331 crowding out 438 depletion/damage 390 distribution of environment as 328 –9, 331, 332 factors of production flow (customs union) 657 increasing quantity 378, 384 –5 inflation and 409 non-renewable 260, 329, 379 output and 120 productivity of 385 renewable 260 use of 14 restricting trade arguments for 645 –54 comparative advantage 636 – 40, 642, 646 economic arguments for 646 –50 methods 645 –6 non-economic arguments 650 protection problems 650 –2 World Trade Organisation 652– restrictive practices 349 –51, 359, 349 retail banks 481, 482, 488, 481 retail deposits and loans 481 retail market for electricity 360 –1 retail outlets (ownership/control) 167 retail price index 359, 360, 564, A:7 see also consumer price index (CPI) retail price maintenance 352 retailers 165, 353 retaliation 647, 652 returns to scale 136 constant 131, 142, 604 revaluation 676, 691, 676 revenue curves 146 –9 revenue of the firms costs and 149 –53 curve 146 –9 total, average and marginal 144 – revenue maximisation 200 reverse repos 484 reverse shocks 592 Ricardo, David 97, 637 risk 64 I:31 attitudes towards 101–2, 208 –9, 739 aversion 102, 193 in cost-benefit analysis 318 –19 demand under conditions of 100–5 diminishing marginal utility of income 102–3 independent 104 insurance and 104 investment 254 loving 102, 193 neutrality 102 premium 151 spreading 103, 648, 103 survival and 208 –9 taking 102–3, 612, 619 tranformation 481 uncertainty and 64 –6, 100 –5, 318–19 rivalry 189 –91, 214, 221, 248, 331 road-building schemes 343–4, 357, 735 road accidents 339, 342 road pricing 345 –7 road safety 317, 318 road space building schemes 343 –4, 357, 735 demand for 340 –1 environmental impact of roads 344 existing system 340 –1 long-run supply 341 short-run supply 341 socially optimum level 343 supply of 341 traffic congestion 339 –48 road usage 341–3, 345 Roskill Commission (1968) 318 Rowntree Foundation inquiry 272 RPI minus X formula 359, 360 rules 564 discretion and 565 –70 rules of thumb 185 –8, 205 rural-urban migration 721, 738 –9 rural co-operatives 736 rural development 86 rural infrastructure projects 735 rural way of life 78 Russia 18 –19, 217, 336, 337 salaries see wages sale and repurchase agreements (repos) 483, 488 –9, 545 –6, 548, 549, 550 –1, 483 sales, tie-in 353 sales revenue maximisation 210 –12, 218 –19, 210 price elasticity of demand 48 –52 total 51 EC6_Z06.qxd 10/27/05 17:19 Page 32 I:32 INDEX satisficing 219–20, 221 savings in circular flow 371 consumption and 457 determinants 455 effect of increase 602–3, 605 golden-rule savings rate 603 interest rate and 516 investment and 372 marginal propensity to save 455, 466–7, 470, 734, 455 net 371, 455, 457 optimum rate 603 paradox of thrift 467 as withdrawals 371, 455, 457 Say, Jean-Baptiste 436 Say’s law 436, 441, 436 scarcity 4, 8, 20, 23, 297, abundance and 13 problem of 4–5, 13 rationing 19, 71–2, 323, 71 search procedure 220 search unemployment 403 seasonal unemployment 404 second-best solution 309, 317, 309 policies 310 privatised industries 357– problem of 308 protection as 651 second-degree price discrimination 197 second derivate A:12 second derivative test A:12 secondary action 241, 615, 241 secondary labour market 247 secondary market in capital 256 secondary marketing of assets 485 securities 256, 494, 499 Securities and Exchange Commission 215 security prices 499 Selective Finance for Investment 627 selective intervention 614, 622–3 self-employment 267, 280, 376 self-fulfilling speculation 62 self-interest 23, 25, 98 –9, 296, 304, 335 self-sufficiency 82, 650, 725 sellers 61–2, 64, 65 semi-strong efficiency (share market) 257 senile industry (protection) 646 sensitivity analysis 318 –19, 318 Serious Fraud Office 352 services balance 416 circular flow 15 –16 competition (EU) 661 deadweight loss from tax on 311 direct provision of 314 –15 domestically produced 370 –1, 370 free movement 655 free at point of delivery 76 –7 production prohibiting sale of illegal 77 taxes on 280, 311 set-aside scheme 85, 86, 85 sex, income inequality by 269 sexual discrimination 244 –5 shadowing the mark 562 share markets (weak efficiency) 257 shareholders 207, 212, 214, 356, 619 shares 212, 213, 255 efficient market hypothesis 257–8, 257 equities 255 –6, 255 on-line dealing 618 yield on 258 shirking 242, 243 shocks asymmetric 713 economic 294 fixed exchange rate 678 –9 oil price 740 –1 random 41, 475, 533, 535 reverse 592 supply 411, 579 short-run 57, 120 –1, 139, 120 adjustment 61 aggregate demand 424 –5 aggregate supply 574 –5 consumption function 454, 537 effect (internal shock) 678 equilibrium of firm 160 –1, 178 macroeconomic equilibrium 451–77 optimum price and output 357–8 under perfect competition 158 –62, 158 Phillips curve 447, 590, 591, 593 –6 profit maximisation 149 –51 sales revenue maximisation 210 –12, 210 socially efficient road usage 341–3 supply of capital services 251 supply curve 161–2 supply of road space 341 variability of velocity circulation 510, 511 short-run average cost curves 142 short-run costs average and marginal 128 –30 inputs and 127 marginal 128 –30, 358 measuring production costs 126 –7 total cost 127–8 short-run shut-down point 153 –4, 153 short-run theory of production 120 average and marginal product 123 –5 changes in production 120 –1 law of diminishing returns 121 production function 121–5 total product 121–3 short-term economic growth 377–84 short-term finance 255 short-term loans 484 short-term operation of monetary policy 542, 543 –4 short-term price fluctuations 78 –9 short-termism 256 –7, 359, 620, 256 shortages 20, 21, 323 sickness benefit 285 side-effect problems (taxation and subsidies) 310 side-effects see externalities side streets (no entry) 345 sight deposits 482, 490, 482 signs (negative/positive) 49 simple dominant strategy games 191–2 simple linear function A:8 –A:9 single currency 655 European see euro Single European Act (1987) 324, 618, 660, 661, 710 Single European Market 216, 618 benefits and costs 660 –2 features 663 Internal Market Scoreboard 662, 664 legislation 324 single farm payments 86 Single Regeneration Budget 630 size distribution of income 264–70, 264 skills deskilling 400, 445, 578, 593 shortages 620 transferable 620 slowdown (in business cycle) 380 see also recession slump (in business cycle) 380 see also recession small firms 267 assistance to 622–3 smart card (in cars) 347 Smith, Adam 22, 24 –5, 97 smuggling 75 Snowdon, Philip 437 EC6_Z06.qxd 10/27/05 17:19 Page 33 INDEX social-impact standards 333 social benefit 301 marginal 292–3, 301–2, 342 road usage 342 social chapter (Maastricht Treaty) 660 social charter 659 – 60 social cost 301, 620, 731, 301 marginal 293 – 4, 301–2, 304, 309–11, 330, 342 of pollution 312 road usage 342 social effects (economic growth) 379 social efficiency 292, 297, 292 approach (environment) 330, 331, 334 in exchange 298 –9 externalities and 293, 295, 300 –2, 308 general equilibrium and 294, 295 –7 in goods market 298–9 government intervention 300 –15 imperfect markets 300 –15 improvement 292–3, 298 –9, 292 intermediate analysis 297 through the market 293 –5 Pareto optimality 292– 6, 297, 298–9, 292 under perfect competition 295, 298–9 simple analysis 292–3 sustainability and 330, 331 taxes/subsidies to achieve 309 –12 urban transport policy 341–3 Social Exclusion Unit 272 social implications of choice 12 social indifference curve 299, 643 social justice 314, 357 social objectives, markets and 26 social policy (EU) 659 – 60 social protection benefits 285, 286 social rate of discount 319, 330, 319 social science, economics as 28 social security employer contributions 277 individual contributions 277, 279 taxation and (unified system) 287 see also benefits; national insurance contributions socialisation process 271 socialism 324–5 ‘soft buffers’ 717 Solow, Robert 601 Solow growth model 601–2 Soros, George 717 sound finance 434 Southern Common Market 657 Soviet Union 18 –19, 20, 21, 337 Spahn, Paul Bernd 717 special deposits 547 special treatment (domestic industries) 655 specialisation 132 as basis for trade 636 in China 732 division of labour 132, 207, 132 efficiency 10 limits to 640 –1 specific tax 73, 278, 73, 278 spectrum diagram 17 speculation 47, 62, 421, 552–3, 679 –80, 684, 62 adjustable peg system 691 currency stability and 714 –16 demand for money 497, 499 –500, 555 destabilising 63, 64, 463, 511, 685 –6, 687–8, 693, 694, 696, 63 free-floating exchange rate 684, 686– managed floating 692, 694, 695 price expectations and 61–4 self-fulfilling 62 stabilising 63, 64, 685 –7, 688, 63 see also risk; uncertainty speculators 62, 64, 65, 502, 62 spot price 65 spreading overheads 132 spreading risks 103 stabilising exchange rates 676, 706 –10 farm income 79 – 80 prices (buffer stocks) 80 –1 speculation 63, 64, 685 –7, 688, 63 Stability and Growth Pact 540 –1, 543, 711, 713 stagflation 443, 445, 559, 443, 559 demand management policies 559 – 60 explanation of 584 –5 Keynesian analysis 443, 552, 592 problem of 559 –60 response to 560 stakeholders 219–20, 219 Stalinist system 18–19 standard of living see living standards standardised unemployment rate 397, 399, 397 statistics (economic analysis) data in A:2–A:6 elementary differentiation A:9 –A:12, A:9 I:33 functional relationships A:7–A:9, A:8 index numbers A:6 –A:7, A:6 real-life A:2–A:4 true picture from A:4 –A:6 statutory cash ratios 547, 548 statutory reserves 544, 560 steady-state growth path 605 level of national income 602, 604 –5, 602 ‘steady as you go’ approach 560, 561 sterilisation 672, 674 sterling 419 –20, 423, 670, 671 assets 483 –4 crisis 694 –5 demand/supply 422 managed floating 693, 694 –5 Stimulus Bill (USA) 532 stock appreciation 389, 390, 389 Stock Exchange 256 –7, 485, 617–18, 620 stock market 255, 256, 463 role 256 – stocks and flows 251 fluctuations (business cycle) 475 in GDP measurement 388 –9 risk 65, 66 stop-go policies 442, 557, 560, 561, 562, 691, 442, 557 straight-line demand curve 56, 148 strategic alliances 214 –18, 214 strategic trade theory 647–8, 648 strict Pareto criterion 322 strike action 239, 241, 615 strong efficiency (share market) 257–8, 257 structural adjustment 741, 743 structural change 679 structural deficit/surplus 531 Structural Funds 628 –9, 630 structural inflation 412 structural policies agriculture 83 income redistribution 274 –5 unemployment 446 structural problems 445 developing countries 735 –40 structural reform 313, 743 structural unemployment 403 –4, 412, 436, 446, 577, 593, 620, 662, 403 subcontracting 218 subsidiaries 217 EC6_Z06.qxd 10/27/05 17:19 Page 34 I:34 INDEX subsidies 623 advantage of 312 in agriculture 81–2, 84, 86 in depressed areas 626 disadvantage of 312 environment 333 GDP measurement 389, 390 –1 government intervention 309 –12 income method (GDP measurement) 389, 391 income redistribution 274 privatisation and 358 protection and 646, 647 taxation and 309–12 trade restriction by 646 –7, 648, 651 transport 347, 357 subsistence production 17 substitute goods 34, 36, 41, 51, 60, 341, 36 substitutes in supply 41 substitution effect 34, 35, 532, 34 aggregate demand 406 exchange rate 674 –5, 674 expenditure switching 674 –5, 674 inferior goods 114 normal goods 112–13 of price change 111–16, 112 tax cuts 613, 626 tax rise 282–3, 282 wage rise 230 sulphur-free fuels 320 –1 sunk costs 126, 173 supernormal profit 153, 161, 162, 164, 180, 235, 306, 348, 153 supernormal rate of return 255 suppliers 41 speculation 61–4 supply 5, 15 aggregate see aggregate supply background 119 –55 of capital for purchase 252 – of capital services 250 –2 change in 21–2, 41–2, 44, 76 –7, 41 determinants 41 elastic 74 equations 42, 45, 58 in free-market economy 435 inelastic 74 joint 41, 42, 41 of labour see labour supply of money see money supply of physical capital 254 price and 39–40 price elasticity of 57– 8, 57 problems (agriculture) 78 reductions (agriculture) 82–3 of road space 341 Say’s law 436, 441 shocks 411, 525 –6, 579 substitutes in 41 time dimension 61–6 supply-side economics 433 supply-side effects, adverse 532 supply-side inflation 411–12, 413, 414, 610 supply-side policies 6, 385, 413, 532–3, 560, 596, 606, 679, 681, 743, 6, 413 capital movements 612, 618 competition and 616 –18 demand-side and 610, 611–12 deregulation and 613, 617–18 economic growth 610 exchange rate 683 fixed exchange rate 423 free trade 618 government expenditure 612–13 inflation and 411–12, 413, 414, 610, 413 interventionist 611, 619 –24, 626, 611 Keynesian approach 611 labour power and 615 macro objectives and 610 market-orientated 610, 612–19, 610 neo-Austrian/libertarian school 610 new classical approach 610 –11 in 1980s 612 regional and urban policy 624 –31 tax cuts and 613 –15 Third Way 611, 616 –17, 624 transport policies 343 –4 unemployment 586, 610, 614 in USA 613 welfare reduction and 612, 615 –16 supply curve 40–1, 43, 57–8, 224, 642–3, 40 aggregate 405 –7, 409 –11, 433, 438 –9, 447, 524 –5, 574 –5, 577–9, 586 agriculture 85 – bilateral monopoly 237, 238 –9 of capital 254 of capital services 250 –2 elasticity of 73 –5 identifying position of 45 –8 indirect taxes and 73 of labour 231 long-run industry 162–3 movements along 41–2 shifts in 41–2, 44, 45, 48, 421–2 short-run 161–2 supply schedule 40 supply shocks 411, 525 –6, 579 surpluses 20 agriculture 80 –1, 84 –6 deficits and 416, 529 general government 530 government intervention 323 public sector 495, 530 –1 vent for 726 –7, 726 survey data 42 survival 208 –9 sustainability 330, 331, 333, 330 sustainable communities 630 sustainable development 653 sustainable economic welfare, index of (ISEW) 390 –1 sustainable output 382–3, 577, 382 sweatshops 248, 660 Sweezy, Paul 190 syndicated loans 482 table A:8 tacit collusion 184, 350, 184 price leadership 184 –5 rules of thumb 185 –8 takeover bid 190 takeover constraint 212 takeovers 183, 213, 313, 488, 619, 657 barrier to entry 167 tap stock 487 target-setting exchange rate 562–3, 566, 716 –18 by firms 219 –20 inflation 413, 523, 524, 563, 564, 566 –70, 579 –60, 585, 669, 695 –6, 706 money supply 444, 507, 511–12, 552, 566, 696 tariffs 82, 167, 278, 423, 650 –1, 657, 726, 82, 278 ad valorem 645 binding 652 common external 659 effective rate of protection 730 escalation 728 –9, 736, 728 GATT 652 –4 optimum 649 taste 36, 164, 221, 727–8 consumption and 454, 458 demand for road space 341 influence of trade 648, 727 structural unemployment and 404 tax-push inflation 411 tax credits 272 EC6_Z06.qxd 10/27/05 17:19 Page 35 INDEX taxation 77, 400, 438 ad valorem 73, 278, 73, 278 advantage of 312 allowances 277, 283, 614, 277 average rate 277, 280 avoidance 276, 280, 717, 276 balance of 279 basic rate 277, 282–3, 284 –5, 277 benefit principle of 276 capital gains 277 changes 535, 537, 538 –9 collection costs 276 in common markets 655 concessions 623, 626, 737 consumption and 454 convenience requirements 276 corporation 277, 371, 393, 614, 623, 663 correcting for monopoly 310 –11 council 278, 625, 630 credits 272, 287– 8, 622 cuts 280, 283, 284 –5, 356, 511, 532, 613–15, 626 direct see direct taxation disadvantages 312 disincentives 276, 287 in EU 659, 660, 663 evasion 276, 280, 276 excess burden of 311 export 646, 649 fiscal policy and 532, 538 –9 GDP measurement 389, 390 –1 as government intervention 309 –12 green 333, 334 –5, 338, 521 higher rate 282 incentives and 282 –5, 613–15 incidence of 74 –5, 280 –1, 74 income see income tax income redistribution 274 –5, 279–82 indirect see indirect taxation inheritance 270, 271, 277 local authority 278, 625, 630 lump-sum 279, 280, 310 –11 marginal rate 277, 279, 282, 613, 614 negative 371 net 371, 455– non-distortionary 276 pollution 260, 293, 310, 312, 331–2 privatisation and 358 progressive 279, 280, 282, 532, 279 proportional 279, 280, 279 regional policy and 626 regressive 279, 280, 335, 279 road usage and 345 social security and (unified) 287 specific 73, 278, 73, 278 subsidies and 309 –12 supply-side policies 613 –15 system (requirements) 275 –6 threshold 280, 282, 285 of tobacco 75 Tobin 715–17 types (UK) 276 –9 undesired incidence 280 –1 VAT see value added tax (VAT) on wealth 277–8 as withdrawal 371, 455 –6 Taylor rule 567, 568 –9, 678, 567 team work 247 technical diseconomies 142 technical inefficiency 172 technological change 560 technological developments 329, 727 technological progress 601–6 technological unemployment 404, 560, 593, 662, 404 technology 141 agricultural 735 – -based standards 333 capital-intensive 135, 626, 640, 730, 736, 737 development/spread 386 developments (environment) 329 EU 662, 663, 665 inappropriate (developing countries) 736 –7 rapid spread (customs union) 657 see also information technology telecommuting 231 temporary unemployment 397 temporary workers 620 tendering, collusive 352, 354, 352 tendering process 616 terms of trade 641 comparative advantage and 642 in customs union 657 determination of 642–3 developing countries 728 improvement (market power) 648 –9 textile mill (Victorian England) 238 Thatcher government 47, 325, 355, 401, 543, 612, 613, 615, 618 monetarism under 444, 560 –1, 694, 695 theory (role/usefulness) 210 third-degree price discrimination 197, 199, 201, 197 Third Way policies 611, 616 –17, 624 Third World see developing countries threats/promises (game theory) 194 I:35 threshold concepts 8, T:1 threshold hypothesis 391 thrift, paradox of 467 thriftiness 254 Thurow, Lester 647 tie-in sales 353 time comparison (statistics) A:6 costs of (traffic congestion) 342 deposits 482–3, 490, 482 dimension 61–6, 100 lags 306, 475, 535, 536 –7, 554 time-series data A:2–A:3, A:2 index numbers A:6 –A:7, A:6 time periods decision-making 139 –40 for price elasticity 50, 57 for profit-maximisation 205 timing, importance of (oligopoly) 194 timing problems (fiscal policy) 535–8 tobacco duties/taxation 75 Tobin, James 715, 716 Tobin tax 715 –17 tolls (on roads) 345 total (private) surplus 295, 305, 295 total consumer expenditure 50 –1, 457, 51 total consumer surplus 95 –6, 305, 95 total costs 127–8, 149 –50, 152, 127 total currency flow 669, 672 total curves 149 –50 total demand for money 500 –1 total expenditure 95 –6 total factor productivity 606 total fixed cost 127–8 total market demand schedule 35 total physical product 121–5, 135–6, 138, 121 total producer surplus 294, 305, 294 total profit 149 –50, 152, 224 total quality management 247 total revenue 51, 144 –6, 148, 149–50, 51, 144 total social surplus 295 total utility 92, 93 –6, 97, 102–3, 104, 92 total variable cost 127–8, 294 total withdrawals function 371, 458 totalitarianism 325 totally fixed exchange rate 671 totally inelastic demand 51–2 tradable permits 336 –8, 336 trade in common market 655 creation 655 –6, 657, 660 –1, 665, 655 EC6_Z06.qxd 10/27/05 17:19 Page 36 I:36 INDEX trade (continued) deficit 416 and development 653 diversion 656–7, 662, 656 as engine of growth 644 equality and 727 as exploitation 640 in goods account 416 interdependence through 703 – international see international trade limits to 640–1 restrictions see restricting trade rounds (WTO) 652 – in services account 416 strategies 725–6 terms of see terms of trade traditional theory 727 unfair practices 647, 648 trade-offs 8, 307 trade cycle 379 see also business cycles trade unions 236, 401, 432, 560, 593 closed shops 241, 615, 241 collective bargaining 239 – 41 in developing countries 730 industrial action 239 – 41, 615 labour movement 240 –1 membership 240–1, 660 monopoly 237–8, 273, 612 promises/threats 239 secret ballots 615 traded goods 723, 725 traders, uncertainty for 688 traditional theory of the firm 120 problems with 205 –9 traditional trade theory 727 traffic congestion (urban policy) 339 road space (existing system) 340 –1 socially efficient road use 341–3 socially optimum road space 343 solutions 343–7 training 423, 736 alternative approaches 620 –1 schemes 623 Training and Enterprise Council 621 transactions 497–9 transfer payments 371, 372, 390, 393, 371 transfers of money 416 transmission mechanism direct monetary 509–11 exchange rate 508 – Keynesian 505–8, 511 Transport Act (2000) 347 transport costs 133, 251, 316, 349, 641, 657 transport policies, urban 339 –48 transport subsidies 347, 357 transposition deficit 662, 664, 665 Treasury 437–8, 439, 486 Treasury bills 484, 487, 488, 494, 495, 529, 545, 547, 550, 484 Treaty of Amsterdam 350, 352, 659, 715 Treaty on European Union see Maastricht Treaty Treaty of Rome 83, 659 trend growth rate 383 turnover (sales revenue) 212 two-factor case (long run) 134 two-year foundation degrees 621 U-form (corporate organisation) 206 uncertainty 66, 317, 688, 66 attitudes towards 101–2 cost-benefit analysis 318 –19 demand under 100 –5 ignorance and 306 lack of investment and 409 mergers to reduce 214 reduced (growth through) 213 risk and 64 –6, 100 –5, 318 –19 underconsumption 467 underdevelopment problem 721–5 underemployment 737 underground economy 19, 376 –7 see also black markets undesirable structure/behaviour 313 –14 unemployed long-term 400, 595 number (economist’s definition) 396 unemployment 6, 19, 368, 432, 650, 704, age factor 399 aggregate demand and 372, 400 –3, 445 aggregate supply and 400 –1, 403, 445, 581 Argentina 742 benefit 272, 285, 368, 371, 397, 400, 403, 532, 543, 614, 615, 616, 626 business cycle and 396, 398, 402–3 causes 400 –4 in circular flow 441–2 claimant 397, 624, 397 classical Treasury view 438 composition 399 –400 costs of 400 cyclical 396, 402–3, 402 demand-deficient 402–3, 410, 424 –5, 440, 447, 469 –70, 577–8, 593–4, 610, 681, 402 in developing countries 725, 737– 40 disequilibrium 400, 401–3, 432, 577, 615, 669, 401 disguised 737 duration 397–9, 403, 414 equilibrium see equilibrium unemployment ethnic groups 399 –400 frictional (search) 403, 414, 435, 577, 610, 403 geographical differences 399 inflation and 408, 413 –15, 437, 448, 470, 557, 586 –95 inflow/outflow 397–9 involuntary 400 Keynesian analysis 402, 440, 445, 468 –71, 592–5 labour market and 399, 400 –1, 402 macroeconomic objectives 424 –7 meaning of 396 monetarist approach 444 natural see equilibrium unemployment natural level 401, 444, 447, 532, 537, 577, 590, 577 natural rate 444, 447, 583, 610, 678, 583 new classical position 586 –92 non-accelerating-inflation rate of 583, 593, 583 official measures of 397 poverty and 273, 274 rate 396, 397, 399 –400, 396, 397 real-wage (classical) 401–2, 401 reducing (Third Way) 624 regional/regional policy 404, 624 –7, 404 seasonal 404 structural 403 –4, 412, 436, 446, 577, 593, 620, 662, 403 supply-side policies 586, 610, 614 technological 404, 560, 593, 662, 404 temporary 397 underemployment 737 urban policy 624 –31 voluntary 587, 615 Welfare to Work policy 624 see also Phillips curve unfair trade practices 645, 647 unions see trade unions UNISON 241 unit elasticity of demand 50, 52, 50 unitary form (corporate organisation) 206 EC6_Z06.qxd 10/27/05 17:19 Page 37 INDEX United Nations 747 Conference on Environment and Development (UNCED) 745 Development Program (UNDP) 724 United States airline deregulation 174–5 budget deficit 694 cartels 351 exchange rates 686 –7, 691–2, 694 –5 globalisation and 703, 704, 705 Justice Department (Microsoft case) 170–1 managing the economy 532 merger activity 216 –17 monetary policy 547 Reaganomics 613, 694 steel industry 652 trade imbalance 705 training approach 620 universal benefits 284, 287, 284 unpredictable events (determinants of supply) 41 unstable demand 507– 8, 552–3 upturn phase (business cycle) 380 urban policy approaches 626 developing countries 721, 730 effectiveness 630 interventionist policies 626 rural-urban migration 721, 738 – transport 339 – 48 in UK 627, 630 wages and 626 Urban Regeneration Agency (URA) 630 urban regeneration companies 630 urban sector (dualism) 737 urban shantytowns 721, 738 Uruguay Round 652– user charges 332 util 92, 93, 288, 92 utility demand for road space 341 interpersonal comparisons 288 marginal see marginal utility maximisation 206, 208, 210 total 92, 93 – 4, 95 – 6, 97, 102–3, 104, 92 utility curves (total/marginal) 93– vacancies 403, 432 value elasticity 49 –50 future claims/payments 480 labour theory of 97, 229 value-in-exchange 97 value-in-use 97 value added (in GDP) 388, 389, 390 value added tax (VAT) 73, 276, 277–8, 371, 393, 400, 412, 560, 561, 614, 659, 663, 278 values absolute A:5 nominal 374, A:6 proportionate A:5 real 374, A:6 variable costs 127 variable factors 120, 406, 120 variable minimum reserve ratios 546 –7, 549 velocity of circulation 370, 436, 510, 511–12, 548, 566, 436 vent for surplus 726 –7, 726 vertical equity 275, 280, 275 vertical integration 183, 212–13, 361 vertical merger 213, 217, 349, 361, 213 vertical price-fixing agreements 352 vertical restraints 353 visibles 416 vitamin cartel 351 vocational training 620 –1, 623 voluntary agreements (VAs) 334 –5 voluntary economic interaction 24 voluntary unemployment 587, 615 wage-push inflation 411 wage determination collective bargaining 239 –41 firms with market power 237, 238 –9 in imperfect markets 236 –48 labour with market power 237–9 perfect competition 228 –36 wage inflation 408 Phillips curve 414 –15 wage setters 237 wage takers 228, 230, 228 wages 210 in developing countries 640 efficiency 241–3, 447, 593, 241, 593 equal pay 235, 244 –5, 660 equality method 235, 244 –5, 660 EU 660, 665 flexibility 432, 587 of homeworkers 232 imperfect markets 236 –48 locally negotiated 626 market-clearing 243, 730, 736 minimum (legislation) 70, 240 –1, 248, 274 –5, 660, 730 occupational distribution 268 –9 under perfect competition 228 –36 rates 238 –9, 242, 268, 640 real 401–2, 577–8 I:37 stickiness 402, 403, 413, 439, 447–8, 577, 592, 596, 669, 681 unemployment and 396, 401–2, 403, 440 wages councils 274 waiting lists 76, 323 Wall Street crash (1929) 437, 652 Walras, Leon 97, 324 War Communism 18 War on Want 715, 716 warehousing costs 349 waste, elimination of 247 waste disposal 301, 328, 332 weak efficiency (share markets) 257 wealth 236, 261 distribution of 264, 270 –1 international comparisons 721, 725 money as store of 480 national 479 taxes on 277–8 Websites A:3, A:14 –A:16 weighted average A:7 welfare loss (deadweight) 281, 305 measurement 377, 390 –1 reducing (supply-side policies) 612, 615 –16 Welfare to Work policy 624 White Knight stragegy 214 whole curve 52–3 whole industry (size) 133 –4 whole market 52 whole public sector 529 –30 wholesale banks 481–2, 488, 481 wholesale deposits and loans 482 wholesale market (electricity) 360–1 wholesale outlets (ownership/control) 167 wide monetary base 490, 491, 490 Williamson, John 716 –17 Williamson, O.E 210 windfall tax 310 Windows system 170 –1 with trade position (two-goods model) 643 – withdrawals 370, 555, 370 in circular flow 370 –2, 373 imports as 371, 456 injections and 372, 436, 463 –5, 467, 479, 513, 515, 530 marginal propensity 458, 464–5, 458 multiplier 463 –5, 466 –7 national income and 370 –2, 455 –60, 463 –5 savings as 371, 455, 457 shift in 465 EC6_Z06.qxd 10/27/05 17:19 Page 38 I:38 INDEX withdrawals (continued) tax as 371, 455–6 total (function) 458 women equal pay 244–5 income inequality 269 unemployment 399 work marginal disutility 229–30, 229 see also employment; labour Work-based Learning for Adults 621 workers output per 606 supply of hours by 229 surplus 243 see also labour workforce increase (economic growth) 603– working age, output and 606 working conditions (in EU) 660 working hours 228, 229 –30, 271, 606, 613–14, 660 working population 384, 386 working to rule 239 working tax credit 288 Workplace Parking Levy 347 World Bank 708, 716 –17, 730, 743 HIPC initiative 744 –6, 747 world depression 681 world multiplier effects 652 World Trade Center 175, 460, 532, 535, 564, 569 World Trade Organisation 652– 4, 703, 727, 734 worldwide merger activity 216 –17 X inefficiency 172, 208, 733 Yeltsin, Boris 19 yield (on a share) 258 zero price 13, 73, 76 ... 1991 20 00 20 01–06 7.1 9.8 5.1 14.6 8.8 7.3 15.0 9.6 13 .2 7.0 10.0 4 .2 6.3 2. 5 10.0 2. 2 2. 4 9 .2 8.0 6 .2 4.5 6 .2 1.9 1.8 2. 3 4.3 0.4 2. 4 4 .2 3.0 3.3 2. 2 3.0 1.9 1.8 1.3 2. 5 –1 .2 2 .2 3.0 2. 0 1.9 2. 1... −937 −38 826 +24 004 −10 860 25 6 82 +9 82 + 9 82 +2 073 +2 073 +49 609 −90 24 6 + 126 599 −183 078 −40 637 −56 479 +20 0 3 52 +407 526 −167 151 − 323 826 +33 20 1 +2 380 − 056 +83 700 −193 +27 028 −5 011... 4 .23 3.78 2. 88 2. 75 2. 48 2. 35 2. 91 (2. 97) (3 .21 ) (3.15) – – – – 1747 1500 1447 19 92 2463 21 33 21 63 24 67 24 08 28 76 (29 41) (3180) (3115) – – – – – – (1.70) (1. 62) (1.71) (1.37) (1.33) (1 .27 ) (1 .21 )