Download Demand-Pull Inflation

Income,
employment and
prices
Learning outcomes
 By
studying this section students will be
able to:



distinguish between microeconomics and
macroeconomics
measure the total level of economic activity in
an economy
understand and apply the multiplier principle
Thailand
Total economy-wide activity (US$ bn), between 2007 - 2010
Total economy-wide activity (US$ bn) (Thailand)
Personal Consumption
2007
2008
2009
2010
132.148
148.481
135.357
144.333
Government Expend. (incl. transp. of persons)
30.0587
31.7508
30.7825
34.3432
Non-Market Products - Individual
9.12369
9.64386
9.3436
10.4307
Non-Market Products - Collective
20.935
22.107
21.4389
23.9125
65.1011
73.4998
63.1112
68.8555
Exports
180.406
205.779
181.313
203.251
Imports
176.903
214.02
178.755
200.85
Gross Domestic Product
246.053
275.939
252.614
271.873
Employment (000s)
36269.8
36909.1
36385.1
37183.9
Gross Capital Formation
Foreign Trade
TYPES OF ECONOMIC
ANALYSIS

Economic impact analysis -- What is the
contribution of tourism activity to the
economy of the region?


An economic impact analysis traces the flows of
spending associated with tourism activity in a
region to identify changes in sales, tax revenues,
income, and jobs due to tourism activity.
The principal methods here are visitor spending
surveys, analysis of secondary data from
government economic statistics, economic base
models, input-output models and multipliers.
TYPES OF ECONOMIC
ANALYSIS

Fiscal impact analysis – Will government
revenues from tourism activity from taxes,
direct fees, and other sources cover the
added costs for infrastructure and
government services?

Fiscal impact analysis identifies changes in
demands for government utilities and services
resulting from some action and estimates the
revenues and costs to local government to
provide these services.
TYPES OF ECONOMIC
ANALYSIS

Financial analysis – Can we make a profit
from this activity?



A financial analysis determines whether a
business will generate sufficient revenues to
cover its costs and make a reasonable profit.
It generally includes a short-term analysis of the
availability and costs of start-up capital as well as
a longer-range analysis of debt service, operating
costs and revenues.
A financial analysis for a private business is
analogous to a fiscal impact analysis for a local
government unit.
TYPES OF ECONOMIC
ANALYSIS

Demand analysis – How will the number or
types of tourists to the area change due to
changes in prices, promotion, competition,
quality and quantity of facilities, or other
demand shifters?


A demand analysis estimates or predicts the number
and/or types of visitors to an area via a use
estimation, forecasting or demand model.
The number of visitors or sales is generally predicted
based on judgment (Delphi method), historic trends
(time series methods), or using a model that captures
how visits or spending varies with key demand
determinants (structural models) such as population
size, distance to markets, income levels, and
measures of quality & competition.
TYPES OF ECONOMIC
ANALYSIS

Benefit Cost analysis (B/C) – Which alternative
policy will generate the highest net benefit to
society over time?



A B/C analysis estimates the relative economic
efficiency of alternative policies by comparing benefits
and costs over time.
B/C analysis identifies the most efficient policies from
the perspective of societal welfare, generally including
both monetary and non-monetary values.
B/C analysis makes use of a wide range of methods
for estimating values of non-market goods and
services, such as the travel cost method and
contingent valuation method.
TYPES OF ECONOMIC
ANALYSIS

Feasibility study – Can/should this project or
policy be undertaken?



A feasibility study determines the feasibility of
undertaking a given action to include political,
physical, social, and economic feasibility.
The economic aspects of a feasibility study typically
involve a financial analysis to determine financial
feasibility and a market demand analysis to determine
market feasibility.
A feasibility study is the private sector analogue of
benefit cost analysis. The feasibility study focuses
largely on the benefits and costs to the individual
business or organization, while B/C analysis looks at
benefits and costs to society more generally.
TYPES OF ECONOMIC
ANALYSIS

Environmental Impact assessment – What are
the impacts of an action on the surrounding
environment?


An environmental assessment determines the
impacts of a proposed action on the environment,
generally including changes in social, cultural,
economic, biological, physical, and ecological
systems.
Economic impact assessment methods are often
used along with corresponding measures and models
for assessing social, cultural and environmental
impacts. Methods range from simple checklists to
elaborate simulation models.
Macroeconomics
 Macroeconomic
issues affect the whole
economy
 Aggregates

Eg. adds together the spending of individuals
to calculate consumers’ expenditure, or
aggregate demand
Aggregates
 Aggregate

The total value of the goods and services
produced in a country, plus the value of
imported goods less the value of exports.
 Aggregate

supply
demand
Aggregate demand is the sum of all demand
in an economy. This can be computed by
adding the expenditure on consumer goods
and services, investment, and net exports
(total exports minus total imports).
A simple macroeconomic model
• The economy is
divided into two
sectors, households
and firms
• Real and Money
Flows
• Circular Flow
• National Income = A
• National Output = B
• National
Expenditure = C
GDP and GNP

Gross domestic product (GDP) is defined as
the "value of all final goods and services
produced in a country in one year“.
 Gross National Product (GNP) is defined as
the "value of all goods and services produced
in a country in one year, plus income earned
by its citizens abroad, minus income earned
by foreigners in the country".
Net National Product
 Some
investment is merely replacing worn
out machinery, so:

Net national product (national income) = Gross
national product – Capital consumption (The total
depreciation in the value of the capital goods in an economy during a
specified period)
Impacts: Types of Household
Expenditure
Impacts: Employment 1
Impacts: Employment 2
Impacts: Taxation

The tourism industry’s
indirect tax
contribution has been
estimated at 10.6% of
total tax revenues
worldwide.
Economic Impacts: Pattaya
Economic Impacts: Pattaya
Economic Impacts: Pattaya
Economic Impacts: Meribel, France
De-industrialisation in the
developed world

Employment in the services sector has grown in
importance, manufacturing employment has shown a
long-term decline. This is known as deindustrialization.
This is caused by three factors.



First, technological progress enables productivity increases in
manufacturing and thus the ratio of labour input to output
declines.
Second, manufacturing has been subject to intense competition
from low labour cost countries such as China and Vietnam, so
many manufactured goods are now imported.
Third, as incomes increase expenditure on services increases by
a greater proportion (services demonstrate high income elasticity
of demand).
De-industrialisation
Wages

Demand and
supply
 Trade Unions
 Minimum
Wage
Multipliers
 Example:



Investment of 100 000 on a new leisure
complex.
Firms will hire factors of production to the
value of 100000 and therefore national
income, measured at point A, will rise by
100000.
However, the effects of the investment do
not stop there.
Cont’d….
Multipliers (cont’d)
 Example:



The workers who earned money from building the
complex will spend their money in shops and bars,
etc. Thus the incomes of shop and bar owners will
rise. They in turn will spend their incomes. In other
words, a circular flow of income and expenditure
will take place.
The investment expenditure sets in motion a
dynamic process, and the total extra income
passing point A will exceed the initial 100 000.
This is known as the multiplier effect. .
Multipliers
 The
Keynesian multiplier (k) shows the
amount by which a change in expenditure
(∆ EXP) in an economy leads to a change
in national income (∆Y)
 ∆EXP x k = ∆Y
 Thus if an increase in investment on a
leisure complex of 100 000 led to a final
increase in national income of 400 000,
then the multiplier would have a value of 4.
Multipliers

The key factors
affecting the size of
the multiplier are:


The size of the initial
injection into the
economy
“Leakages” from the
economy:
• Savings
• Taxation
• Imports
Multipliers
 Formula
for calculating the multiplier:
 k = 1/MPL
 where MPL = the marginal propensity to
leak (the proportion of extra income that
leaks out of the economy).
 MPL = MPS + MPM + MPT



where MPS = marginal propensity to save (the
proportion of extra income saved),
MPM = marginal propensity to spend on imports (the
proportion of extra income spent on imports) and
MPT = marginal propensity to be taxed (the
proportion of extra income taken in taxes.
Multipliers
 For
example if MPS = 0.1Y,
MPM = 0.05Y and MPT = 0.1Y,
 where Y = income, then:
k = 1/(0.1 + 0.05 + 0.1)
k = 1/0.25
k = 4.
Multiplier Impacts
Tourism Destination Price Index
 Prices
in destinations can have an
important effect on tourism demand
 A tourism destination price index can offer
a guide to relative prices of key tourismrelated activities (e.g. hotel costs, meal
prices, car hire etc)
Destination Price Index
Tourism Destination Price Index
Government policy

Government policies to promote employment may
include the following:

Demand management
• (e.g. increase in gov’t spending; tax cuts increase demand)

Export-led policies
• Lower taxes for producers of export products

Project assistance
• Attract (e.g. tax incentives) foreigners to create projects in the
country.

Governments of countries with comparatively high
rates of inflation may utilize counter-inflationary policy.


Demand pull inflation
Cost push inflation
Cost-Push Inflation vs.
Demand-Pull Inflation
 Inflation
is caused by a combination of four
factors. Those factors are:
 The supply of money goes up.
 The supply of goods goes down.
 Demand for money goes down.
 Demand for goods goes up.
Cost-Push Inflation

Inflation can result from a decrease in aggregate supply.
The two main sources of decrease in aggregate supply
are




An increase in wage rates
An increase in the prices of raw materials
These sources of a decrease in aggregate supply
operate by increasing costs, and the resulting inflation is
called cost-push inflation.
Other things remaining the same, the higher the cost of
production, the smaller is the amount produced. At a
given price level, rising wage rates or rising prices of raw
materials such as oil lead firms to decrease the quantity
of labor employed and to cut production.
Demand-Pull Inflation

The inflation resulting from an increase in aggregate
demand (an increase in demand for goods) is called
demand-pull inflation. Such an inflation may arise
from any individual factor that increases aggregate
demand, but the main ones that generate ongoing
increases in aggregate demand are

Increases in the money supply
• more money flowing in the economy e.g. individuals or FIs

Increases in government purchases
• The increased demand for goods by the government causes factor
4 inflation.

Increases in the price level in the rest of the world
• Suppose you are living in the United States. If the price of gum
rises in Canada, we should expect to see less Americans buy gum
from Canadians and more Canadians purchase the cheaper gum
from American sources. From the American perspective the
demand for gum has risen causing a price rise in gum.
The End