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Short-run and long-run aggregate supply

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  1. the goal of economists.
  2. Understanding the AS-AD model.
    1. The quantity of capital and the state of technology.
    2. The prices of factors of production in the long run.
  3. The purpose of the aggregate supply.
  4. The determination of the macroeconomic equilibrium.
  5. Conclusion.

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 ?given 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. Indeed 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. To understand the AS-AD model, we need to explain the concepts of short-term and long-term aggregate supply.

[...] So, the use of the aggregate supply aggregate demand model has permitted 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. After an adjustment process takes place, real GDP goes back to its first value ?real GDP- but price level increases again. Thus, in the long term, increases in American tourism create inflation in the UK. [...]

[...] Indeed, real GDP equals aggregate expenditure which is itself equal to the sum of consumption expenditure, government expenditure, investment and net export. A rise in foreign tourism to the UK will make the consumption expenditure to increase, or, according to some economists, the net export. Ramesh Durbarry, for example, argues that ?tourism is the largest invisible export?[5], but an export which takes place at the point of production. The increase in the aggregate demand will be followed by the decision of the firms to increase production and prices. [...]

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