Please click on the links below to access some model essay plans. Helpful to understand how to plan an essay in the exam.
Essay 1: Here is a suggested essay plan to this question: Evaluate the micro and macro policies a government might use to make food more affordable to lower income groups.
Essay 2: Here is a suggested answer to the following question: Examine the role of barriers to entry in earning economic profit. Click here for essay plan Essay 3: Here is a suggested approach to how A Level Economics students might respond to the essay question "Examine the view that the government should subsidise free entry to museums in the UK." Click here for essay plan
A requirement of the AQA syllabus is that students should have a good knowledge of recent major economic events. Please see below two articles that came out of the BBC on the same day (24th April 2018). They are useful in that they show two differing views on what to do with interest rates.
The accelerator effect happens when an increase in national income (GDP) results in a proportionately larger rise in capital investment spending. In other words, we often see a surge in capital spending by businesses when an economy is growing quite strongly.
How can the accelerator effect come about?
Consider an industry where demand is rising at a strong pace.
Firms will respond to growing demand by expanding production and making fuller use of their existing productive capacity. They may also choose to meet higher demand by running down their stocks of finished products.
At some point – and if they feel that the higher level of demand will be sustained – they may choose to increase spending on capital goods such as plant and machinery, factories and new technology in order to increase their capacity. If this investment goes beyond what is needed simply to replace worn out, fully depreciated machinery, then the capital stock of the business will become larger.
In this sense, the demand for capital goods is being driven by the demand for the products that the firm is supplying to the market. This gives rise to the accelerator effect - the principle states that a given change in demand for consumer goods will cause a greater percentage change in demand for capital goods.
A good example might be the surge in capital investment in wind turbines due to the super-high level of oil and gas prices and a rising market demand for renewable energy. In this case, strong demand created a positive accelerator effect.
But this can also go into reverse e.g. during an economic slowdown or recession. World oil prices have collapsed and many wind farm projects have been scaled back or postponed because the economic viability of renewable energy has worsened.
Explaining the importance of the Capital Output Ratio
The accelerator model works on the basis of a fixed capital to output ratio
For example if demand in a given year rises by £4 million and each extra £1 of output requires an average of £3 of capital inputs to produce this output, then the net level of investment required will be £12 million.
One criticism of this simple accelerator model is that the capital stock of a business can rarely be adjusted immediately to its desired level because of ‘adjustment costs’ and ‘time lags’. The adjustment costs include the cost of lost business due to installation of new equipment or the financial cost of re-training workers. Firms will usually make progress towards achieving an optimum capital stock rather than moving smoothly from one optimal size of plant and machinery to another.
A further criticism of the basic accelerator model is that it ignores the spare capacity that a business might have at their disposal and also their ability to outsource production to other businesses to meet a short term rise in demand.
How does the accelerator effect help to explain the economic cycle?
The accelerator principle is used to help explain business cycles.
The accelerator theory suggests that the level of net investment will be determined by the rate of change of national income.
If national income is growing at an increasing rate then net investment will also grow, but when the rate of growth slows net investment will fall.
There will then be an interaction between the multiplier and the accelerator that may cause larger fluctuations in the trade cycle.
Summary - when will the accelerator effect be strongest?
The accelerator effect will tend to be high when
The rate change of consumer income and spending is strongly positive
The amount of spare productive capacity for businesses is low
Saving is income not spent, or deferred consumption.
Factors affecting savings
Interest rates: Higher interest rates will encourage people to save more.
Availability of appropriate savings schemes: With more options to save money people will be attracted to save more
Advertising of/knowledge about what is available at financial institutions
Confidence/trust in financial institutions
Size of real disposable income: Disposable income is the income left after paying taxes. Thus more money left in pockets will encourage people to save more.
Rate of inflation: when inflation is high people have less money left with them to save because a major part of their disposable income will be spent to satisfy their needs and wants.
Save for a future purchase: People might save with the motive to carry out a future purchase e.g. a house
Precautionary factors: People might be ‘saving for a rainy day’
Tastes and preferences of consumers: It also depends on a individuals preference. Some people save more than others.
Consumer confidence/expectations about future changes in the economy, e.g. risk of unemployment may lead to people saving more
Here is an updated revision webinar covering aspects of game theory and competition policy. We look at some past multiple choice questions and work through a version of the Prisoner's Dilemma.
Hi all, so as you know Trump has decided to protect America from certain foreign goods. As usual with any protectionist measures, there is retaliation. See below for a few articles that are well worth a read. I am certain a question on trade will come up this year.
What is important is to look at the macro (& Micro) impact of this trade war. Winners, losers, significance etc etc
Click here to read about China's retaliation tariffs.
Click here to read about an immediate impact on an American company (Micro)
Click here to read a good summary of tariffs and trade.
What are the main economic and social arguments against trade protectionist policies?
Market distortion and loss of allocative efficiency
Higher prices for consumers: Tariffs push up the prices for consumers and insulate inefficient sectors from genuine competition. They penalise foreign producers and encourage an inefficient allocation of resources both domestically and globally.
Reduction in market access for producers: Export subsidies depress world prices and damage output, profits, investment and jobs in many lower-income developing countries that rely on exporting primary and manufactured goods for their growth.: Protectionism can be an ineffective and costly means of sustaining jobs.
Loss of economic welfare: Tariffs create a deadweight loss of consumer and producer surplus. Welfare is reduced through higher prices and restricted consumer choice. The welfare effects of a quota are similar to those of a tariff – prices rise because an artificial scarcity of a product is created.Extra costs for exporters: For goods that are produced globally, high tariffs and other barriers on imports act as a tax on exports, damaging economies, and jobs, rather than protecting themRegressive effect on the distribution of income: Higher prices from tariffs hit those on lower incomes hardest, because the tariffs (e.g. on foodstuffs, tobacco, and clothing) fall on products that lower income families spend a higher share of their income.Production inefficiencies: Firms that are protected from competition have little incentive to reduce their production costs. This can lead to X-inefficiency and higher average costs.Trade wars: There is the danger that one country imposing import controls will lead to retaliatory action by another leading to a decrease in the volume of world trade. Retaliatory actions increase the costs of importing new technologies affecting LRAS. Students should mention game theory when discussing the risks of retaliation with countries embroiled in trade disputes.Negative multiplier effects: If one country imposes trade restrictions on another, the resultant decrease in trade will have a negative multiplier effect affecting many more countries because exports are an injection of demand into the global circular flow of income.Second best approach:Protectionism is a second best approach to correcting for a country's balance of payments problem or the fear of structural unemployment. Import controls go against the principles of free trade. In this sense, import controls can cause government failure.
Arguments against protectionism
Economic Nationalism
Economic nationalism describes policies to protect domestic consumption, jobs and investment using tariffs and other barriers to the movement of labour, goods and capital
The term gained a more specific meaning in recent years after several European Union governments intervened to prevent takeovers of domestic firms by foreign companies. In some cases, the national governments also endorsed counter-bids from compatriot companies to create 'national champions'. Such cases included the proposed takeover of Arcelor (Luxembourg) by Mittal Steel (India). And the French government listing of the food and drinks business Danone (France) as a 'strategic industry' to block potential takeover bid by PepsiCo (USA
Analysis of the effects of an import tariff on consumer welfare
The deadweight loss of welfare from an import tariff
