Spend or Save? Rather you than me, Mr Osborne.

Much has been said over the last few years on the UK's budgetary position. The economy has been deepening itself into a deficit - which is when Government spending is greater than Government receipts (mainly taxes). 

The word deficit brings negative connotations, and it definitely does. But it also brings positive impacts on the economy, as I will now explain. 

A budget deficit means high or progressively increasing levels of Government spending. Government spending is a component of Aggregate Demand - the total planned expenditure in an economy over a given time period. An increase in Government spending will lead to an increase in Aggregate demand, and through using a basic macroeconomic model, this will bring increased national incomes, outputs of goods and services and higher levels of employment.

All this leads to economic growth which is very positive for the UK economy. This increase in aggregate demand (AD) as a result of an increase in government spending can be shown on the following aggregate demand/supply curve: 

As the above diagram shows, economic growth occurs if AD increases from Y1-Y2. However, this also brings inflation - a sustained increase in the general price level in an economy, shown by the increased from P1-P2 on the above diagram. 

Initially, when AD increases, the increase in economic growth is proportionately larger than the increase in the level of inflation. But, the major problems with a budget deficit mainly occur in the long term. This is because there will be a point where the economy cannot grow any more (shown on any point on the vertical AS curve above) because all the factors of production and available resources are being employed. 

So, if AD continues to increase after the economy has reached its productive capacity, then inflation will increase proportionately more than economic growth, and eventually it will be solely inflation which occurs. 

This method of spending your way out of a recession has been adopted by Labour over recent years, and is very much, in my opinion anyway, a short term vs long term argument. 

In the short term, a budget deficit brings mainly positive effects on the economy as reflation exceeds inflation. But, in the long run, without increasing the productive capacity of the economy, inflation will exceed reflation, and bring neagative impacts on the economy.

Looking at this from a political view, it is the Labour party who, as mentioned above, have adopted the view to spend the UK out of the recession. But since the Coalition government have come into power from 2010, the plan has been to save the UK out of the recession, by decreasing the deficit through increasing taxes and cutting spending in numerous areas. 

In my opinion, I think that Labour got the UK into a huge mess through firstly leading the country into a recession, but also in the way they tried to get out of it. To continue spending seems a very shallow approach and one which seems to be narrowly focussed on the present issues, and not on the possible long term effects. Spending your way out of a recession is known as a fiscal stimulus and I think that the Coalition government's plan of fiscal austerity (saving your way out of a recession) is not only the sustainable option, but it is now the only option after the mistakes and actions of the failed Labour Government.

I am, however, not completely supporting the Conservative and Coalition plan of action, as I think some areas of planned spending cuts are very precarious. But, the deficit is decreasing (by around 25% so far) and for that I think the Coalition should   be commended to a degree. 

In conclusion, I think that in many ways, it is almost an impossible task for government's to stimulate economic growth whilst keeping the level of inflation at a controllable rate, and preventing periods of recession whilst still maintaining the public' vote when it comes to a general election. Politics and economics interlink in many ways, but I think that when it comes to the UK's budget, the government cannot and will never be able to please everyone. For an example of this you only need to look as far as the current Coalition, where the cuts in Government spending are resulting in many displeased members of the British public and many who will give a protest vote to a party such as UKIP to show their frustrations.

The Price Mechanism Explained

'The Invisible hand' theory was created by famous economist Adam Smith. The theory is described as the “invisible hand of the price mechanism” in which the hidden-hand of the market operating in a competitive market through the pursuit of self-interest allocated resources in society’s best interest.

3 main functions of the Price Mechanism:

1) Rationing function:

• In a market of scarce resources, price acts as a control on the allocation of these resources when demand is greater than supply.
• When there is a shortage in a good or service, price is increased, leaving only those who are able or are willing to pay the raised price. This hopes to re-find the balance between demand and supply.

2) Signalling Function

• Prices are able to form a signalling function; where price adjusts to demonstrate where resources are required, and where they are not.
• This means that price increases and decreases reflect shortages and surpluses of goods/services.

3) Incentive Function

• When consumers make choices, they send information to producers about changes in preferences and demand in certain goods.
• Higher prices act as an incentive to raise output because the supplier stands to make a better profit.
• When demand is weaker in a recession then supply contracts as producers cut back on output.

Funds for Greek Bailout Due

Greece are today due to receive the essential funds required for their shattered economy to keep afloat. after weeks of tough talks, an agreement has been reached to release 40 billion euros by the eurozone finance ministers and the International Monetary Fund.

Greece have been waiting since June for the funds needed to begin to rebuild their economy and stabilise the banks.   

There has also been an agreement by the ministers that the Greek debts will be cut by 40 billion euros.

In return for the funds, Greece have had to impose several rounds of tough austerity measures, which have contributed to a severe and prolonged economic contraction.



Cameron ready for battle over EU Budget

The PM, David Cameron has arrived in Brussles ahead of crunch talks over the future of EU spending. Cameron is ready to argue for a minimum real-terms freeze in the budget. Some nations, such as Germany support Britain in this proposal, but many others support the European Commissions call to increase spending.

During the talks in the next couple of days, the discussions must include an agreement on how much each EU state is allowed to spend over the period of 2014-2020. They must also decide how much is allowed to be spent on certain areas, like business, agriculture and security.

In terms of how realistic it is that Cameron will return with his proposal approved, is "tough, but realistic" according to the Deputy Prime Minister, Nick Clegg.



G4S want £57million for making a mess at the Olympics. Hmm.

Security firm G4S are being pressured by MP's to decline to accept the £57million, yes £57 million, that they claim to be entitled to as part of a contract after being hired during this Summer's Olympics. However a slight problem with this is that they did not do their job properly. They were hired to help to make our home, once in a lifetime Olympic Games a safe and secure one. But the company failed to supply the sufficient amount of staff that was required and agreed. It is now clear that G4S were over ambitious and agreed to terms beyond their capabilities.
          However G4S have said the £57m management fee was "substantially" real costs not profit.
But Keith Vaz who's is the committee Chairman for this case said the firm had delivered an "11th-hour fiasco" after "recklessly boasting" of what they were able to offer.
G4S admitted last month that the Olympic contract had cost it £50m after it failed to deliver the 10,400 Olympic security guards needed in time. The government was forced to turn to the military for the extra staff, for which G4S confirmed it would pay.
          This story will no doubt rumble on. Good luck G4S, you may be struggling for a case here.

Command, Mixed and Free Market Economies

A Command Economy - This is when the allocation of resources, along with production methods and amounts, incomes and prices in any investments are dtermined by the government.

A Free Market - It is based on supply and demand with little or no government control. A completely free market is a desired form of market economy where consumers and sellers are allowed to trade freely based on a mutual agreement on price without any authority involvement in the form of taxes, subsidies or regulation.

A Mixed Economy - This is a combination of a Command and Free Economy. It is partly determined by the government allocating and investing in resources and having control over production, but also is influenced by firms and companies trading and agreements between one and another on allocating different resources as well as controlling the production process.

Examples
  
A Comand Economy - North Korea
Nations such as North Korea and Cuba are examples of countries where Command Economy still exists in complete form. 
                  For decades North Korea has been one of the world's most secretive societies. It is one of the few countries still under nominally communist rule.
Decades of this rigid state-controlled system have led to stagnation and a leadership craving power and control over their people. Aid agencies have estimated that up to two million people have died since the mid-1990s because of acute food shortages caused by natural disasters and economic mismanagement. The country relies on foreign aid to feed millions of its people.
                 So in a Command Economy, both state-owned and private enterprises receive instructions and directives from the government regarding production capacity, volume, modes of production and course of their actions. North Korea is an extreme example of a command economy as many see it as more of a dictatorship due to the harsh control of the leadership and the little concern for welfare of the people.


A Mixed Economy - The United States.
The USA is known to be a mixed economy. This means that citizens can own their own businesses, but political leaders make policies concerning these. The government controls the mail system. The government controls most of the road networks. The government controls most of the schools. All American airports are government operated but all American airlines are private. The government tells manufacturers what to make if something is in need during war time. The government has created a minimum wage law. The government provides social welfare payments to some citizens. The majority of education costs are government-provided. In recent years, the Federal government has given taxpayers money to failing businesses, in the form of bail outs.
                   So this means there is a balance between influences from the Government and the companines and firms having the freedom to tade and choose production methods. That the authorities provide services and have control over the public and most important facotrs such as health and education. The key characteristics of the US economy is that it has a free market, there is private property owned, and there is consumer sovereignty

A Free Market Economy - Hong Kong
Hong Kong has been ranked the freest economy in the world. The way Hong Kong has been tagged to be the freest economy in the world is from an analysis of 50 different economic variables, grouped into 10 categories. These categories are:

• Banking and finance; 

• Capital flows and foreign investment; 

• Monetary policy; 

• Fiscal burden of government; 

• Trade policy; 

• Wages and prices; 

• Government intervention in the economy; 

• Property rights; 

• Regulation; and informal, 

• Informal market activity

So the Hong Kong economy is one of a free market. Further key factors for this include a very low level of government involvement in business activities as well as a very low inflation rate.

Drop in Market Value hints Facebook craze is coming to an end.

Facebook Owner, Mark Zuckerburg has spoken for the first time since his creation, which has been the forefront of social media for the past few years, has had its market drop in value.

The full story on the BBC website: http://www.bbc.co.uk/news/business-19565937

I believe reasons for this decline in the sites market value and stocks are as a result of a number of key factors:
- Rival sites, particularly Twitter, have grown and increased in interest and popularity.
- Changes and developments of the Facebook site have been unpopular for many, including the new timeline and chat system.
- For many, the fact celebrities and sports stars are in close contact on a site like twitter attracts particularly the older teenagers so the main audience of Facebook is becoming a younger one, and younger teenagers are less likely to have as much access to the site - e.g. not having laptops or smart phones.