Short-run and long-run aggregate supply

Résumé du document

One of the salient features of this document is to distinguish between the short-run and long-run aggregate supply curves and explain why they are important for the definition of a macroeconomic equilibrium. The Aggregate Demand model tries to examine the effects on the real GDP and price level of increases in American tourism to the UK. One of the goals of economists is to try to predict the changes in the state of the UK economy. Thus, they are interested in the economic growth that is driven by the growth of potential GDP-, the inflation and business cycle fluctuations. The Aggregate Supply - Aggregate Demand model permits to understand, and even to predict the changes in these three features of macroeconomic performance. This model permits to determine the level of real GDP and the price level when the economy is at its equilibrium. Thus, in this essay, we will use this AS-AD model to predict the effects on real GDP and price level of increases in American tourism to the UK. To do so, we will first have to describe how this model works both in the short and long-run.

Extraits

[...] According to R. Durbarry's thesis, accounts for of national GDP and of employment”[8]. Bibliography Readings Michael Parkin, Melanie Powell and Kent Matthews, Economics (5th edition, Addison Wesley, 2002) David Begg, Stanley Fisher, Rudiger Dornbusch, Economics (7th edtition, McGraw-Hill, 2002) Modeling tourism demand: A dynamic linear AIDS approach. Journal of Travel Research (2004) Internet links www.sparknotes.com/economics/macro/aggregatesupply www.nottingham.ac.uk: Ramesh Durbarry “Tourism expenditure in the (2001) www.econ100.com www.mtholyoke.edu/courses/jchristi/econ100/homepage.html Michael Parkin, Melanie Powell and Kent Matthews, Economics (5th edition, Addison Wesley, 2002) Relative prices are equal to the prices of the goods and services divided by the prices of the factors of production. [...]

[...] These shifts and their consequences are represented in figure 6.This process is called a is a pull-demand inflation, that is to say a general rise in the prices of goods and services which results from an initial increase in aggregate demand. So, the use of the aggregate supply aggregate demand model has permited to describe the effects on price level and real GDP of increases in American tourism to the UK. In the short term, it causes an increase in both price level and real GDP. This is a period were factors of production are more than fully employed. [...]

[...] It is equal by the quantiy of pounds earned by doing a hour's work divided by the price level. Michael Parkin, Melanie Powell and Kent Matthews, Economics (5th edition, Addison Wesley, 2002) Ramesh Durbarry “Tourism expenditure in the (2001) Indeed, we said earlier that all costs of production, included the cost of labour, are fixed in the short term. [...]

[...] In the long term, the aggregate supply is equal to this potential GDP. Indeed, even if economy is constantly bombarded with events that move real GDP away from potential the macroeconomic long-run is a period long enough to permit to the forces which makes real GDP equal to potential GDP to have done their work. The green curve on figure 1 represents the long-run aggregate supply curve: it shows the relationship between the quantity of real GDP supplied and the price level in the long term, when real GDP equals potential GDP. [...]

[...] That is why the long run aggregate supply curve is vertical. The curve of the short term aggregate supply is different because in the short run, money wage rate and the prices of all other factors of production are constant. In the short run, real GDP does not equal potential GDP, because all the factors of production are not always fully employed. The short-term aggregate supply curve is represented on figure 1 by the blue curve. It is an upward sloping curve because, as costs of production are fixed, the higher the price level, the greater the profit firms make. [...]