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"UK retail sales see big rise, says CBI"
Posted by Rhys Williams on Tuesday 29th May 2012

"21% of retailers reporting an increase in sales from 12 months before" 

What does an increase in sales mean for the global economy?

If sales are up at retailers then we would expect consumption to be rising. Remember consumption is a component of Aggregate Demand (AD = C + I + G + (X-M)). This may lead to a rightward shift of the Aggregate Demand curve (practise drawing this shift). As we can see from our graph (if you bothered to draw it!) there is an increase in real output (GDP) along with an increase in price levels (inflation).

A rightward shift of the AD curve should reduce the output gap (try drawing this). This may mean employment will rise (note unemployment may not fall because of this; for example their might me immigration causing unemployment to rise whilst employment also rises). There are many implications of this on the macroeconomy.

Try answering a few questions -

1. Think of some evaluation points to this. Remember to think about the long and short run, elasticities and why this may not be the case. For example; perhaps this increase in retail sales has resulted in people shifting their spending from online to the highstreet, this may not necessarily mean therefore that there has been an increase in consumption. Think of some other reasons why this may not be the case.

2. What is the multiplier effect? Explain the impact of this in the current situation and if it would be positive or negative.

3. What effect would this increase inflation have on households? A good evaluation point may be that this increase in inflation deters Investment and further Consumption and thus AD falls back down again after a while.

4. What would happen to the government's budget deficit if this article is true? How significant would the effect be?

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