Deflation

Deflation is decreasing in the general price level.

Deflation might be caused by decreasing in the

aggregate demand (as we know aggregate demand=

consumption+government spanding+investment+

exports - imports).

From the diagram above we can see that AD decreases

and shifts to the left and price decreases from P to P1.

Possible Economic Costs of Deflation:
-Holding back on spending: Consumers may prefer to spend

money later if they expect prices to fall further in the future.
-Debts increase: People might spend less because

the real value of household, corporate and government debt

rises when the price level is falling.
-The real cost of borrowing increases: Real interest rates will

rise if nominal rates of interest do not fall in line with prices –

another factor driving spending lower.
-Lower profit margins: Company profit margins come under

pressure unless costs fall further than final prices to consumers –

this can lead to higher unemployment as firms seek to reduce

their costs. Weaker profit margins can also have a negative effect

on stock markets because of a fall in expected profits and dividends

to shareholders
-Confidence and saving: Falling asset prices such as price deflation

in the housing market hit personal sector financial wealth and confidence –

leading to further declines in AD and a rise in precautionary savings

(the average and marginal propensity to save will tend to rise).

However deflation can also be caused by an increase

in a nation's productive potential which leads to an

excess of aggregate supply over demand.

From the second diagram above we can see that long run

aggregate supply increases and shifts to the right and price

falls from P1 to P2. This increasing of LRAS might be

caused by technological improvement or increasing in

a nation's productive potential.

In this case deflation might cause an increasing in the

country's economic growth. Consumers gets the benefit

of technology and increased competition in the form of

lower prices leading to an improvement in economic welfare.

Balance of payments

The balance of payments measures the payments that
flow between any individual country and all other countries.
It is used to summarize all international economic transactions
for that country during a particular time period, usually a year.
It is include the current account, the capital acount and the
financial account.
The current account records payments for imports and exports
ofphysical goods. Imports are the debit items and exports are
the credit items for a country. The current account also includes
the trade in service accounts (imports and exports of services
such as transport, tourism), income flows,and the current transfers
of money.
The financial account records the flows of money into and out of the
country for the purposes of investment or as deposits in banks and
financal institutions. The financial account includes the direct investment
from foreign countries in one of its branches or associated companies
in the UK and portfolio investment changes in the holding of
paper assets, such as shares. Also it includes other financial flows
such as short term monetary movement.
The capital account records the flows of funds.

Government policies

There are three types of policies: monetary and fiscal
policies which are also known as demand-side policies
and supply-side policy. Government use them to achieve
economic targets such as economic growth, reduce
unemployment, reduce inflation and of course increase trade.
So I would like to talk about each of them more detailed.

In economics, fiscal policy is the use of government spending
and revenue collection to influence the economy.
The two main instruments of fiscal policy are government
spending and taxation. Changes in the level and composition
of taxation and government spending can impact on the
following variables in the economy:

• Aggregate demand and the level of economic activity;
  
• The pattern of resource allocation;
  
• The distribution of income.

So in other word government changes the level of taxation and government expenditure to affect to the economy.

The effectiveness of fiscal policy depends on a number of factors:

• The accuracy of forecasting. Government would obviously like to act as swiftly as possible to prevent a problem of excess or deficient demand. The more reliable are the forecasts of what is likely to happen to aggregate demand, the more able will the government to be intervene quickly.
• The extent to which changes in government expenditure and taxation will affect total injections and withdrawals.
• The extent to which changes in injections and withdrawals affect national income. Will it be possible to predict the size of the multiplier and accelerator effects?
• The timing of the effects. It is no good simply being able to predict how long they will take. If there are long time lags with fiscal policy, it will be far less successful as a means of reducing fluctuations.
• The extent to which changes in aggregate demand will have the desired effects on output, employment, inflation and the balance of payments.

Discretionally fiscal policy deliberates changes in tax rates or the level of government expenditure in order to influence the level of aggregate demand. Government may use it if there is a fundamental disequilibrium in the economy or substantial fluctuations in national income. If government expenditure on goods and services (roads, health care, education) is raised, this will create a full multiplied rise in national income. The reason is that all the money gets spent and thus all of it goes to boosting aggregate demand. Cutting taxes, however, will have a smaller effect on national income. The reason is that cutting taxes increases people's disposable incomes, of which only part will be spent. Part will be withdrawn into extra savings, imports and other taxes. In other word not all the tax cuts will be passed on round the circular flow of income as extra expenditure.

Monetary policy is the process by which the government, central bank, or monetary authority of a country controls the supply of money, availability of money, and cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary policy either can be expansionary or contractionary policy. If it is expancionary policy government use it to reduce unemployment in the period of recession by cutting interest rates. If it is contractionary it is used by the government to reduce inflation by raising interest rates.

It is impossible to use monetary policy as a main force of controlling aggregate demand. It is especially weak when when it is pulling against the expectations of firms and consumers and when it is implemented too late. However, if the authorities operate a tight monetary policy firmly enough and long enough, they should eventually be able to reduce lending and aggregate demand. But there will inevitaly be time lags and imprecision in the process. An expansionary monetary policy is even less reliable. If the economy is in the recession, no matter how low interest rates are driven, people cannot be forced to borrow if they do not wish to. Firms will not borrow to invest if they predict continuing recession. Despite these problems, changing interest rates can be quite effective. After all, they can be changed very rapidly. There are not the time lags of implementation on that there are with fiscal policy.

Supply-side policies:

• education
• training
• increase investment
• reduce the power of Trade Unions
• increase the number of small firms
• cutting of the direct taxation
• privatisation

Herzberg

Frederick Irving Herzberg (1923 - 2000) was a noted
psychologist who became one of the most famous
names in business management. He is most famous for
introducing job enrichment and the Motivation theory.

According to Herzberg motivators are:

-Achievement
-Recognition
-Work Itself
-Responsibility
-Promotion
-Growth

Demotivators are:

-Pay and Benefits
-Company Policy and Administration
-Relationships with co-workers
-Physical Environment
-Supervision
-Status
-Job Security
-Salary

Answers to your questions, Mr.Chris

1) Whether tariffs are good or bad?

At first what is a tariff? A tariff is a tax imposed on goods when they are moved across a political boundary. They are usually associated with protectionism, the economic policy of restraining trade between nations. For political reasons, tariffs are usually imposed on imported goods, although they may also be imposed on exported goods. In the other words tariifs are the taxes on imports.

When we answer to this question we should consider what are the advantages and disadvantages of having tariffs for one particular country.

Advantages:

• protest domestic industries from overseas competitors
• infant industries (young, new)
• prevent unemployment
• reduce current account deficit
• political pressure
• attract FDI (foreign direct investment)

Disadvantages:

• discourages efficiency
• inefficient allocation of resources
• increases in costs of production/cause inflation
• consumer choice is restricted/consumer surplus decreases
• retaliation/trade war

2) Why do European countries over-produce food and destroy it instead of giving to poor and starving countries?

The Common Agricultural Policy (CAP) is a system of European Union agricultural subsidies and programmes. It means that government protects domestic farmers from overseas competitors by subsidies, tariffs and quotas. They encourage them to produce more or even subsidise them for not producing anything if it is over-producing.

There are several reasons why European countries do not give over-produced food to poor countries:

• costs of transfering of the food. If they transfer it by plane, ship or car it will cost a lot of money
• there are some types food which is non-transferable, it can not be keeped for a log time
• distribution of the food might be wrong
• it will help prevent starving only for a short period of time
• local farmers might be affected by the free food from the European countries an in the long run it can make situation in the starving countries even worth than it is.

Keynesian analysis of unemployment and inflation

In simply Keynesian theory, it is assumed that there will be a

maximum level of national output, and hence real income, that

can be obtained at any one time. If equilibrium level of income

is at this level, there will be no deficienc of aggregate demand

and hence no disequilibrium unemployment.

Full-employment level of national income is the level of national

income at which there is no deficiency demand.

Deflationary gap is the shortfall of national expenditure below

national income ( and injections below withdrawals) at the

full-employment level of national income.

As you can see on the diagram above if the equilibrium level

of national income (Ye) is below the full-employment level (Yf)

there will be excess capacity in the economy and hence

demand-deficient unemployment.

The inflationary gap is the excess of national expenditure over

income (and injections over withdrawals) at the full-employment

level of national income.

As you can see on the second diagram above if at the full-employment

level of income, national expenditure exceeds national income, there

will be a problem of excess demand.

Keynesians advocate an active policy of demand management:

raising aggregate demand (for example, by raising government

expenditure or lowering taxes) to close a deflationary gap and

reducing aggregate demand to close an inflationary gap.

A little bit about Kazakhstan....

According to the Law of the Republic of Kazakhstan
the main purpose of the National Bank of Kazakhstan is
to stabilise the price level in country. Even if it was a big
pressure to the exchange rate of tenge (national currency)
the National Bank was trying to stabilise the exchange rate
and keep it as 117-123 tenge per US dollar. It helped to
control economic and financial situation. However the
National bank should take into account gold reserves of
the country and also competiveness of the Kazakhstan
producers. That's why from 4th february 2009 the
National Bank of Kazakhstan sets the new exchange rate as
150 tenge per US dollar (+/-3%).
The main causes of this changes are:

• Decreasing in oil prices. Oil is 60% of all Kazakhstan exports.
• Devaluation of currencies of other countries. For example in the period of early 2008 and january of 2009 devaluation of national currencies per US dollar was in Russia 44%, Ukraine - 53%, UK - 38%, Eurozone - 13%, Brazil - 31%, Australia - 27% and in Canada - 26%. The level of devaluation os tenge is 23% which is less than average level in other countries.
• A lot of private banks have a government support so they can operate as usual.
• Maintaining of gold reserves of country. In the period of 2008-2009 the National bank has spent 6 billions US dollars to stabilise currency market and to control the exchange rate.