Using aggregate demand and aggregate supply analysis examine the different effects on the UK economy

Essay by jonjonasHigh School, 12th grade February 2004

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a) Decisions by firms based in the UK to relocate abroad

Aggregate demand is defined as the total amount of demand/expenditures in the economy at any given price level. It is measured as

AD = C + I + G + (X - M)

The letters abbreviate the four major components of aggregate demand. Consumption (C ) is the spending by households on goods and services. Investment ( I ) is the spending by firms on investment goods. Government spending (G ) includes current spending in terms of wages and salaries, and investment in goods such as new roads and new schools. Exports minus imports (X - M ) shows the difference between what we sell and what we buy from abroad.

Aggregate supply is defined as the total amount of production of goods and services in an economy.

If the decision by UK based firms to move abroad were acted upon, this would in theory lead to a decrease in aggregate demand.

The AD curve would shift left to signify this. This is because there are now fewer firms producing goods and services for the UK and so there is less choice in the market. As consumers now have less to buy, consumer spending, which is a component of aggregate demand, falls. Furthermore, investment is affected. With the relocation there are less national firms to invest in, and therefore investment decreases. Another point would be that these firms may have perhaps exported their goods and services abroad to foreign countries. After they move UK exports could see a decrease, meaning that, according to the aggregate demand equation, the difference between exports and imports will be smaller. This factor too would conclude in a decrease in AD.

To illustrate the affect the transfer of UK based firms would have on...