These are designed to increase the level of AD and increase in national income. Lower taxation/higher government spending or lower interest rates will encourage more consumption. The diagram shows an increase in real GDP (economic growth) and a falling output gap. We would expect there to be a fall in unemployment. Therefore two objectives have been met.
If there is spare capacity (negative output gap), then demand side policies can play a role in increasing economic growth. For example if we decrease interest rates, we will increase the demand in the economy as people have more money as their mortgage costs are decreased. It is the same idea with lowering taxes - this will boost demand, as people have more money to spend as less is taken away from them by the government. Aggregate demand is made up of consumption (consumer spending, Investments Government spending and Exports (minus) imports (Net exports). If anything affects these factors will result in affecting the demand.
A better education and health care will improve the labors’ output, as productivity will be higher. Further to this, people will be more able to save more from their increase in income, which allows higher rates of investment and therefore increase in growth. The graph above is a PPF curve, which shows consumer goods against capital goods. Since there is an increase in Aggregate demand, this will potentially lead to an increase in economic growth as seen from the graph above. However, on the other hand an excessively equal
If unemployment falls, less people will be claiming unemployment benefits and other similar pay-outs from the government, this will allow a lot of tax to be spent on other things, such as expanding public services further, which also leads to an increase in living standards. Another benefit of economic growth is the increase in confidence, with all these new goods and services on offer to the country, the consumer
In order to close this gap, a government will typically increase their spending which will directly increase the aggregate demand curve (since government spending creates demand for goods and services). At the same time, the government may choose to cut taxes, which will indirectly affect the aggregate
Companies can grow faster in a developing country than they can in a MEDC which has more competition, and with company growth comes increased investment from the company in machinery and workers, which increases consumption and an increased level of employment, who work for the company. This initial entrepreneurship leads to a multiplier effect with the new workers spending their income, due to increased disposable income and this leads to greater consumption from the workers. The investment into machinery and workers leads to an increased gross domestic product, the value of output from domestic based companies. Foreign investors would be attracted to the developing country due to the high rate of economic growth and the increasing GDP, and the investment comes as an injection into the circular flow of income, and increased foreign investment can further increase the speed of growth for a company, possibly allowing the company to expand to other nations in the long run. The increased entrepreneurship
If one household had all the income then it would be one (complete inequality). Inequality in economics encourages individuals to work more. The potential to earn higher incomes produces an incentive for workers to work longer and harder, however, workers will have to give up leisure time in order to gain more work. This will only occur when the extra income is more valuable than leisure time. Output will then be increased, and will boost the economy.
The idea of bigger government was reversed after the 1990s, but then in 2011, the government started to grow once again. There have been many studies that show the relation between the size of the government and performance in the public sector. There has been interest in trying to understand how growth in the size of the government effects social wellbeing, and maximizing economic growth. If a government grows beyond a certain size, it can have a deep negative effect on public sector growth, lowering the standard of living for its citizens. It seems that there is a definitive relationship between small government, and increased efficiency and performance.
In American economic review (papers and proceedings), Oi and Idson suggest that workers are more productive in large firms, accordingly, they deserve higher wages(Oi and Idson,1999b). Hamermesh holds that since large firms have more capital and need workers who are able to work with this capital, they are likely to recruit workers with high-quality and employees with more working experience, which requires higher wages(Hamermesh, 1980). Another popular explanation is proposed by Albasket al., arguing that large firms have a greater ability to pay than small firms do, and large firms are more likely to benefit from monopoly and share the great amount of profits with their employees. Moreover, it is easier for them to attract more
Short-term and Long-term Effects It is quite difficult to predict short-term effects of migration, as this process mainly depends on Political and Economic changes. As Christian Dustmann and Tommaso Frattini say, those immigrants who arrived to the UK in the 2000s may have realized less benefits despite the tax they paid. In a short-term time immigration is likely to have a negative impact on wages as the labour market widens. As for the employment in longer term, “increase in labour supply should lead to increases in aggregate demand through increases in demand for goods and services” (Ciaran et al). Specialists say that in the long term, it seems to be