Econ2 Jan2012 Context 1 Essay

Submitted By CallumB
Words: 866
Pages: 4

Econ2­Jan2012­Context 1
By Callum Barnett

1)

Disposable Income is the amount of money a household has to spend after tax such as income tax and national insurance has been deducted from their income.

2) Public expenditure peaked at the end of this period in 2009/10 where public expenditure reached 47% of GDP. Whereas unemployment peaked near the start of the period between 1992 and 1994 where unemployment reached 2.8 Million.
However Unemployment did significantly drop after that and reached its lowest (twice) both in
2004/05 and 2007/08 where unemployment was only at 0.9 Million. Also public expenditure reached its lowest in 1990/00 where it only represented 36% of GDP.

3) Public expenditure is when the government spends using taxpayers money to help produce goods and services that will help those taxpayers e.g Schools and Hospitals. Public expenditure makes up a lot of the government’s spending. Also Aggregate Demand (AD) is the overall demand in the economy and the equation for AD is AD= C+I+G+(X­M). So as public expenditure is a major part of government spending and government spending is a very important factor in Aggregate Demand then cuts in public expenditure will reduce Aggregate demand.
As shown in the diagram below:

Plus another reason why this would lead to a decrease in AD is because if the government were to cut public expenditure then that would probably lead to job cuts in the public sector such as nurses in the NHS.
So this increase in unemployment will result in a decrease in AD because when they are made unemployed then they will have a lower disposable income so they will consume less and consumption is a large part of the AD formula so this will also lead to a decrease in AD if that was to lead to a decrease in consumption as well. 4)
The reason why the government are making these huge cuts in government spending is because the budget deficit is just getting bigger because government spending is always greater than tax revenue, so they want to try and balance it out and try to reduce the deficit. However the performance of the UK economy depends very much on the level of Aggregate demand within the economy. AD=C+I+G+(X­M). Cuts in public expenditure are likely to cause job losses. As stated in extract B this will reduce the quantity and quality of public sector services available. Due to job cuts, those people employed in the public sector will be out of work. This was shown in the previous diagram.

A decrease in AD is shown on the above diagram as a shift to the left of the AD curve to AD2. As a result real output has decreased to Y2. This is because those people who have lost their jobs will have less disposable income and will demand less goods and services. This may also lead to a loss in jobs in other sectors of the economy due to their being deficient demand. As a result government expenditure will rise on welfare benefits, which means this money can’t be spent on other supply side policies causing an opportunity cost.
In addition purchasing confidence will decrease for consumers, which will also reduce AD, because consumers will have less confidence because they feel the economy could be heading towards a recession.
Likewise productivity will reduce…