Posts from the ‘Economics’ Category

Unit 2: Revision: Supply side policies

May 13th, 2012 at 9:19 pm by Blogger Bryn

Revision from tutor

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Unit 2: Macro data: May 2012

May 13th, 2012 at 9:11 pm by Blogger Bryn

Great data from tutor2u

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Unit 1 Micro: Price Elasticity of Supply

May 13th, 2012 at 1:07 pm by Geoff Riley

Revision Blog on Price Elasticity of Supply

Price elasticity of supply (Pes) measures the relationship between change in quantity supplied and a change in price.
• If supply is elastic, producers can increase output without a rise in cost or a time delay
• If supply is inelastic, firms find it hard to change production in a given time period.

The formula for price elasticity of supply is:

Percentage change in quantity supplied divided by the percentage change in price

PES values

1. When Pes > 1, then supply is price elastic
2. When Pes

< 1, then supply is price inelastic
3. When Pes = 0, supply is perfectly inelastic
4. When Pes = infinity, supply is perfectly elastic following a change in demand

What factors affect the elasticity of supply?

(1) Spare production capacity: If there is plenty of spare capacity then a business can increase output without a rise in costs and supply will be elastic in response to a change in demand. The supply of goods and services is most elastic during a recession, when there is plenty of spare labour and capital resources.

(2) Stocks of finished products and components: If stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand – supply will be elastic. Conversely when stocks are low, dwindling supplies force prices higher because of scarcity in the market.

(3) The ease and cost of factor substitution: If both capital and labour are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour cannot easily be switched. A good example might be a printing press which can switch easily between printing magazines and greetings cards.

(4) Time period and production speed: Supply is more price elastic the longer the time period that a firm is allowed to adjust its production levels. In some agricultural markets the momentary supply is fixed and is determined mainly by planting decisions made months before, and also climatic conditions, which affect the production yield. In contrast the supply of milk is price elastic because of a short time span from cows producing milk and products reaching the market place.

Elasticity of demand and supply and price changes – a quick summary

Elasticity determines how much a shift changes quantity versus price.
• If D increases and S is perfectly inelastic, then price rises and quantity doesn’t change.
• If S increases and D is perfectly inelastic, then price falls and quantity doesn’t change.
• If D increases and S is perfectly elastic, then price stays the same and quantity rises.
• If S increases and D is perfectly elastic, then price stays the same and quantity rises.

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Unit 1 Micro: Income Elasticity of Demand

May 13th, 2012 at 12:54 pm by Geoff Riley

A revision blog on income elasticity of demand

Income elasticity of demand measures the relationship between a change in quantity demanded for good X and a change in real income.  The formula for calculating income elasticity is:

% change in demand divided by the % change in income

(a) Normal Goods

Normal goods have a positive income elasticity of demand so as consumers’ income rises more is demanded at each price i.e. there is an outward shift of the demand curve

1. Normal necessities have an income elasticity of demand of between 0 and +1 for example, if income increases by 10% and the demand for fresh fruit increases by 4% then the income elasticity is +0.4. Demand is rising less than proportionately to income.

2. Luxury goods and services have an income elasticity of demand > +1 i.e. demand rises more than proportionate to a change in income – for example a 8% increase in income might lead to a 10% rise in the demand for new kitchens. The income elasticity of demand in this example is +1.25.

(b) Inferior Goods

Inferior goods have a negative income elasticity of demand meaning that demand falls as income rises. Typically inferior goods or services exist where superior goods are available if the consumer has the money to be able to buy it. Examples include the demand for cigarettes, low-priced own label foods in supermarkets and the demand for council-owned properties.

The income elasticity of demand is likely to be strongly positive for
• Fine wines and spirits, high quality chocolates and luxury holidays overseas.
• Sports cars
• Consumer durables – audio visual equipment, smart-phones
• Sports and leisure facilities (including gym membership and exclusive sports clubs).

In contrast, income elasticity of demand is likely to lower and possibly negative for
• Staple food products such as bread, vegetables and frozen foods.
• Mass transport (bus and rail).
• Beer and takeaway pizza!
• Income elasticity of demand is negative (inferior) for cigarettes and urban bus services.

Product ranges and longer term trends

Income elasticity of demand will vary within a product range. For example the Yed for own-label foods in supermarkets is less for the high-value “finest” food ranges.

There is a general downward trend in the income elasticity of demand for many basic products, particularly foodstuffs. One reason is that as a society becomes richer, there are changes in tastes and preferences. What might have been considered a luxury good several years ago might now be regarded as a necessity? How many of you regard a Sky sports subscription or an iPhone5, an iPad3 or a new Blackberry as a necessity?

How do businesses make use of estimates of income elasticity of demand?

Knowledge of income elasticity of demand helps firms predict the effect of an economic cycle on sales. Luxury products with high income elasticity see greater sales volatility over the business cycle than necessities where demand from consumers is less sensitive to changes in the cycle.

Income elasticity and the pattern of consumer demand

As we become better off, we can afford to increase our spending on different goods and services. The income elasticity of demand will also affect the pattern of demand over time.

* For normal luxury goods – income elasticity of demand exceeds +1, so as incomes rise, the proportion of a consumer’s income spent on that product will go up.

* For normal necessities (income elasticity of demand is positive but less than 1) and for inferior goods (where the income elasticity of demand is negative) – then as income rises, the share or proportion of their budget on these products will fall

* For inferior goods as income rise, demand will decline and so too will the share of income spent on inferior products.

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Unit 1 Micro: Price Elasticity of Demand

May 13th, 2012 at 12:40 pm by Geoff Riley

Revision note on price elasticity of demand

Price elasticity of demand (Ped) measures the responsiveness of demand following a change in its own price.  The formula for calculating the co-efficient of elasticity of demand is: Percentage change in quantity demanded divided by the percentage change in price

Since changes in price and quantity usually move in opposite directions, usually we do not bother to put in the minus sign. We are more concerned with the co-efficient of elasticity of demand.

Values for price elasticity of demand

1. If Ped = 0 demand is perfectly inelastic – demand does not change at all when the price changes – the demand curve will be drawn as vertical.

2. If Ped is between 0 and 1 (i.e. the percentage change in demand from A to B is smaller than the percentage change in price), then demand is inelastic.

3. If Ped = 1 (i.e. the percentage change in demand is exactly the same as the percentage change in price), then demand is unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total spending by the same at each price level.

4. If Ped > 1, then demand responds more than proportionately to a change in price i.e. demand is elastic. For example a 10% increase in the price of a good might lead to a 30% drop in demand. The price elasticity of demand for this price change is –3

Factors affecting price elasticity of demand

1. The number of close substitutes – the more close substitutes there are in the market, the more elastic is demand because consumers find it easy to switch.

2. The cost of switching between products – there may be significant costs involved in switching. In this case, demand tends to be relatively inelastic. For example, mobile phone service providers may insist on a12 month contract.

3. The degree of necessity or whether the good is a luxury – necessities tend to have an inelastic demand whereas luxuries tend to have a more elastic demand.

4. The proportion of a consumer’s income allocated to spending on the good – products that take up a high % of income will tend to have a more elastic demand

5. The time period allowed following a price change – demand tends to be more price elastic, the longer that consumers have to respond to a price change. They may search for cheaper substitutes and switch their spending.

6. Whether the good is subject to habitual consumption – consumers become less sensitive to the price of the good of they buy something out of habit (it has become the default choice).

7. Peak and off-peak demand – demand tends to be price inelastic at peak times and more elastic at off-peak times – this is particularly the case for transport services.

8. The breadth of definition of a good or service – if a good is broadly defined, i.e. the demand for petrol or meat, demand is often inelastic. But specific brands of petrol or beef are likely to be more elastic following a price change.

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Unit 1 Micro: Economics of Cocoa Prices

May 12th, 2012 at 5:07 pm by Geoff Riley

A revision blog on recent developments in the international cocoa market

Cocoa prices have recently fallen back from record highs but remain above the average level of the last ten years. Growing demand for cocoa has been coming from the developed world and from e developing countries where rising per capita incomes are fuelling higher demand for chocolate-based products. Chocolate consumption in India, China has been increasing by over 10% annually and this is expected to continue. The recession in many rich nations has caused higher demand for chocolate – widely regarded as an affordable snack.

Cocoa nears highest price in 30 years

On the supply side production is being hit by poor weather conditions, higher fertiliser prices, long-term under-investment in cocoa plantations and a shift of production towards lucrative products such as rubber and palm oil. A recent report found that the world could run out of affordable chocolate within 20 years as farmers abandon their crops in the global cocoa basket of West Africa.  According to a report in the Scottish newspaper the Herald, “Ivorian cocoa trees, planted more than 25 years ago, have already passed their peak of productivity and, without new planting, production in the country is likely to drop every year, tightening the global market as demand rebounds.”

Ivory Coast’s bittersweet cocoa industry

Hundreds of thousands of small-scale farmers in developing countries rely on cocoa production as their main source of income. And for countries such as the Ivory Coast, cocoa is a hugely important source of export earnings. Despite price rises on the trading floor, precious little reaches the smallholders who make up 95 per cent of growers. The minimal rewards they have historically received do not provide incentives for the time-consuming work of replanting as their cocoa trees die off – a task that usually means moving to a new area of canopied forest and waiting three to five years for a new crop to mature.  Cocoa is competing for agricultural space with other commodities like palm oil – which is increasingly in demand for bio-fuels.

A volatile cocoa price makes investment in new cocoa plantations risky. Many young people in the Ivory Coast are moving away from cocoa into rubber.

Ivory Coast cocoa ban hits Belgian chocolate

Cocoa is a basic ingredient in the multitude of chocolate bars and cakes that Britons consume on an enormous scale each day. According to a report in the Independent, under EU rules, a milk chocolate bar must consist of at minimum 25 per cent cocoa solids. Dark bars need at least 35 per cent.  Some chocolate manufacturers are reported to have reduced the cocoa content in their chocolate products in order to ease the impact of the increasing costs of raw cocoa material in their products and to be able to offer chocolate products at an affordable price.


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Unit 1 Micro: Market Failure Glossary

May 12th, 2012 at 12:31 pm by Geoff Riley

This blog provides a glossary of many key market failure terms

Absolute poverty
The number of people living below a certain income threshold or the number of households unable to afford certain basic goods and services. The United Nations definition is a severe and persistent deprivation of basic human needs

Adverse selection
Where the expected value of a transaction is known more accurately by the buyer or the seller due to an asymmetry of information; e.g. health insurance

Asymmetric information
Occurs when somebody knows more than somebody else in the market. Such asymmetric information can make it difficult for the two people to do business together. A situation in which some agents have more information than others and this affects the outcome of a bargain between them

Common resources
Goods or services that have characteristics of rivalry in consumption and non-excludability – grazing land or fish stocks are examples. The over-exploitation of common resources can lead to the “tragedy of the commons”

Deadweight loss of welfare
The loss in producer and consumer surplus due to an inefficient level of production perhaps resulting from market failure or government failure

De-Merit goods
The consumption of de-merit goods can lead to negative externalities which causes a fall in social welfare. The government normally seeks to reduce consumption of de-merit goods. Consumers may be unaware of the negative externalities that these goods create – they have imperfect information.

External cost
External costs are those costs faced by a third party for which no appropriate compensation is forthcoming. Identifying and then estimating a monetary value for air and noise pollution is a difficult exercise – but one that is increasingly important for economists concerned with the impact of economic activity on our environment.

Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid.

Geographical immobility
People may also experience geographical immobility – meaning that there are barriers to them moving from one area to another to find work

Gini Coefficient
The Gini coefficient measures the extent to which the distribution of income (or, in some cases, consumption expenditures) among individuals or households within an economy deviates from a perfectly equal distribution. The coefficient ranges from 0 -meaning perfect equality -to 1- complete inequality.

Information Failure
Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially ‘wrong’ choices

Market Failure
Market failure exists when the competitive outcome of markets is not efficient from the point of view of the economy as a whole. This is usually because the benefits that the market confers on individuals or firms carrying out a particular activity diverge from the benefits to society as a whole

Market Power
Market power refers to the ability of a firm to influence or control the terms and condition on which goods are bought and sold. Monopolies can influence price by varying their output because consumers have limited choice of rival products.

Merit Good
A merit good is a product that society values and judges that everyone should have regardless of whether an individual wants them. In this sense, the government (or state) is acting paternally in providing merit goods and services

Moral hazard
When people take actions that increase social costs because they are insured against private loss: sometimes it is called hidden action due to the agent’s actions being hidden from the principal.

Negative externality
Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. This causes social costs to exceed private costs

Non-rival consumption
Non-rivalry means that the consumption of a good by one person does not reduce the amount available for others. An example could be air. Non-rivalry is one of the key characteristics of a public good

Positive externalities
Positive externalities exist when third parties benefit from the spill-over effects of production/consumption e.g. the social returns from investment in education & training or the positive benefits from health care and medical research.

Poverty Trap
The poverty trap affects people on low incomes. It creates a disincentive to look for work or work longer hours because of the effects of the tax and benefits system

Public bads
Public bads include environmental damage and global warming which affects everyone – no one is excluded from the dis-benefits

Public goods
Pure public goods are non-rival – consumption of the good by one person does not reduce the amount available for consumption by another person, and non-excludable – Where it is not possible to provide a good or service to one person without it thereby being available for others to enjoy.

Relative poverty
Relative poverty measures the extent to which a household’s financial resources falls below an average income threshold for the economy

Social benefit
The benefit of production or consumption of a product for society as a whole. Social benefit = private benefit + external benefit

Social cost
The cost of production or consumption of a product for society as a whole. Social cost = private cost + external cost

Spillover effects
External effects of economic activity, which have an impact on outsiders who are not producing or consuming a product – these can be negative (creating external costs) or positive (creating external benefits)

Tragedy of the Commons
When no one owns a resource, it gets over-used, for example fish stocks and deforestation – people use and benefit from it without regard to the effect on others










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Unit 1 Micro: Price Volatility in Markets

May 12th, 2012 at 10:28 am by Geoff Riley

Here is a revision presentation which should be useful for AS economists revising for core microeconomics topics

Revision presentation on Price Volatility in Markets

Download printable slife handouts (pdf)

Link below for related articles on global food price volatility and world food price inflation

Lack of investment worsens food crisis (November 2011)

Food prices could double by 2020


UK firms blamed for food price hike

Ethiopia and the ‘agriculture revolution’



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Unit 1 Micro: Economics of a Minimum Wage

May 12th, 2012 at 9:49 am by Geoff Riley

This revision blog looks at some of the economic issues surrounding the minimum wage. A pay floor is an important government intervention in the labour market and it was first introduced into the UK in April 1999 at a rate of £3.60 per hour for adult workers. The adult rate of the National Minimum Wage will be increased by 11 pence to £6.19 an hour from 1 October 2012

Over the years the rate for the national minimum wage has been raised each year – the current rate is £6.08 for adult workers, £4.98 is the Development Rate
(for workers aged 18-20) and £3.68 is the 16-17 Year Olds Rate.

The Low Pay Commission reported in 2012 that “the adult rate of the NMW has now increased by nearly 69 per cent since its introduction. That is faster than both average earnings and prices. Since October 2006, however, the increases in the minimum wage have broadly been in line with average earnings, though below inflation.”

A key point is that the minimum wage rate is not set at an especially high level relative to other wages rates in the economy. The UK minimum wage as a proportion of median earnings) increased from 45.7 per cent in 1999 to 51.0 per cent in 2007 but then remained just under this level between 2007 and 2010.

The main aims of the minimum wage

1. The equity justification: That every job should offer a fair rate of pay commensurate with the skills and experience of an employee. There are many low-paid jobs in the UK. Low-paying sectors include care services and housing; fast food, pubs and restaurants; hotels; leisure; retail.

2. Labour market incentives: The NMW is designed to improve incentives for people to start looking for work – thereby boosting the economy’s labour supply.

3. Labour market discrimination: The NMW is a tool designed to offset some of the effects of persistent discrimination of many low-paid female workers and younger employees.

Possible disadvantages of a minimum wage

Although all of Britain’s major political parties are now committed to keeping the minimum wage, there are still plenty of economists who believe that setting a pay floor represents a distortion to the way the labour market works because it reduces the flexibility of the labour market

1. Competitiveness and Jobs: Firstly a minimum wage may cost jobs because a rise in labour costs makes it more expensive to employ people and higher labour costs. It will be interesting to observe whether the minimum wage is said to have caused extra unemployment during the current economic downturn. Studies of the effects of the National Minimum Wage (NMW) carried out before the recent recession found almost no evidence of significant adverse impacts on employment and only little evidence of a negative impact on hours worked

2. Effect on relative poverty: Is the minimum wage the most effective policy to reduce relative poverty? There is evidence that it tends to boost the incomes of middle-income households where more than one household member is already in work whereas the greatest risk of relative poverty is among the unemployed, elderly and single parent families where the parent is not employed.

Can a minimum wage actually increase employment?

The answer is yes – depending on the circumstances in the labour market when a pay floor is introduced and also on what happens to the productivity of labour when a high (statutory) rate of pay is introduced. There are two main explanations for the possibility of higher employment

The Keynesian argument that higher wage rates will increase the disposable incomes of lower-paid workers many of whom have a high propensity to consume. Thus they will increase their spending and this will feed through the circular flow of income and spending

The efficiency wage argument that raising pay levels for low-paid employees may have a positive effect on their productivity. In addition to the psychological benefits of being paid more, businesses may take steps to improve production processes, workplace training etc if they know that they must pay at least the statutory pay floor.

The importance of elasticity of demand and supply of labour

The impact of a minimum wage on employment levels depends in part on the elasticity of demand and elasticity of supply of labour in different industries. If labour demand is inelastic then the contraction in employment is likely to be less severe than if employers’ demand for labour is elastic with respect to changes in the wage level.

In the next diagram we see the possible effects of a minimum wage when both labour demand and labour supply are elastic in response to a change in the market wage rate. The excess supply created is much higher than in the previous diagram.

Evidence on the minimum wage – has it worked?

1. Employment: For most of the years since the NMW was launched, unemployment has been falling. The jobless total is now increasing at a rapid rate but the main cause has been the domestic and global economic recession.

2. Inflation: In many sectors firms find it hard to pass on higher wage costs to final consumers – limiting the inflationary effect of the minimum wage

3. Wage costs: The minimum wage affects only a small proportion of workers and the effects on the wage bills of most businesses is not a significant factor in their employment decisions. In the short term, the demand for labour tends to be inelastic with respect to changes in wages

4. Discrimination: The minimum wage has had an impact on the earnings of part-time female workers.

5. Productivity: It is hard to identify any strong positive effect on labour productivity – but efficiency gains have been made in most low-paying industries, a trend which started before the minimum wage was introduced.

There is now a growing campaign in the UK to consider moving beyond a minimum wage and look to introduce a living wage. The living wage is calculated by academics at £7.20 an hour, as a minimum level of pay to ensure an acceptable standard of living.

Newsbeat (BBC news, April 2012) – is the minimum wage enough? Click here


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Unit 1 Micro: Poverty and Inequality and Market Failure

May 12th, 2012 at 9:36 am by Geoff Riley

In a market economy an individual’s ability to consume goods & services depends upon his/her income or other resources such as savings
An unequal distribution of income and wealth may result in an unsatisfactory allocation of resources and can also lead to alienation and encourage crime with negative consequences for the rest of society. The free-market system will not always respond to the needs and wants of people with insufficient economic votes to have any impact on market demand. What matters in a market based system is your effective demand for goods and services.

When we are discussing inequality and poverty, we cannot escape making value judgements i.e. normative views about what is an acceptable scale of inequality and what is not

Absolute poverty

Absolute poverty measures the number of people living below a certain income threshold or the number of households unable to afford certain basic goods and services. What we choose to include in a basic acceptable standard of living is naturally open to discussion. This may vary from country to country at different stages of development.

Relative poverty

Relative poverty measures the extent to which a household’s financial resources falls below an average income level. Although living standards and real incomes have grown because of higher employment and sustained growth, Britain has become a more unequal society over the last 30 years

The most commonly used threshold of low income in Britain is 60% of median household income after deducting housing costs.

Poverty hits British families


The distribution of income in the UK

In the UK there is a large degree of income inequality:

In 2009, income before taxes and benefits of the top fifth of households in the UK was £73,800 per year on average compared with £5,000 for the bottom fifth, a ratio of 15 to one.

After taking account of taxes and benefits, the gap between the top and the bottom fifth was reduced with average income of £53,900 per year and £13,600, respectively, a ratio of four to one. This shows that the tax and benefits system works in a progressive way to reduce the scale of income inequality.

The Poverty Trap

    The poverty trap affects people living in households on low incomes.
    It creates a disincentive either to look for work or work longer hours because of the effects of the income tax and welfare benefits system.
    For example, a worker might be given the opportunity to earn an extra £60 a week by working ten additional hours. This boost to his/her gross income is reduced by an increase in income tax and national insurance contributions.
    The individual may lose some income-related welfare benefits and the combined effects of this might be to take away over 70% of a rise in income, leaving little in the way of extra net or disposable income.
    When one adds in the possible extra costs of more expensive transport charges and the costs of arranging child care, then the disincentive to work may be quite strong.

Government Policies to Reduce Poverty

When evaluating different policies to reduce poverty consider some of these related issues:
• Cost
• Effectiveness
• Impact on others in the economy

1. Changes to the tax and benefits system: For example, increases in higher rates of income tax would make the British tax system more progressive and reduce the post-tax incomes of people at the top of the income scale. The risk is that higher rates of taxation may act as a disincentive for people to earn extra income and might damage enterprise and productivity.

2. A switch towards greater means-tested benefits: Means testing allows welfare benefits to go to those people and families in greatest need. A means-test involves a check on the financial circumstances of the benefit claimant before paying any benefit out.  This would help the welfare system to target help for those households on the lowest incomes. However means tested benefits are often unpopular with the recipients.

3. Linking the state retirement pension to average earnings rather than prices: This policy would help to relieve relative poverty among low-income pensioner households. Their pension would rise in line with the growth of average earnings each year

4. Special employment measures: Government employment schemes seek to raise employment levels and improve the employment prospects of the long-term unemployed.

5. Increased spending on education and training: Unemployment is a cause of poverty and structural unemployment makes the problem worse. There are millions of households in the UK where no one in the family is in any kind of work and this increases the risk of poverty.

6. The National Minimum Wage: The National Minimum Wage (NMW) was introduced in April 1999 – employers cannot legally undercut the NMW.  Since 1999, the beneficial impact of the minimum wage has been concentrated on the lowest paid workers in service sector jobs where there is little or no trade union protection.

Oxfam: UK Poverty – John and Donna’s story




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Unit 1 Micro: Asymmetric Information

May 12th, 2012 at 9:25 am by Geoff Riley

For markets to work, there needs to be symmetric information i.e. consumers and producers have the same level of knowledge about the products, and they know everything there is to know about them. Asymmetric information occurs when somebody knows more than somebody else in the market. This can make it difficult for the two people to do business together. This is an example of information failure in a market


Examples include the following:

Warranties: The miss-selling of extended warranties by high street retailers on domestic electrical goods such as televisions and dishwashers

Sub-prime mortgages: A lender does not know how likely a borrower is to repay their loan.

Insurance: A car insurance company cannot tell the risks associated with each single driver

Market for used cars: A used-car seller knows more about the quality of the car being sold than do buyers. The mini case study below on the Market for Lemons covers this example!


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Unit 1 Micro: De-Merit Goods

May 12th, 2012 at 7:53 am by Geoff Riley

This is a revision blog on the concept of de-merit goods

De-merit goods are thought to be ‘bad’ for you (note here the inevitability of making value judgement when discussing this topic!). Examples include the costs arising from consumption of alcohol, cigarettes and drugs together with the social effects of addiction to gambling. The consumption of de-merit goods can lead to negative externalities.

Consumers may be unaware of the negative externalities that these goods create – they have imperfect information about long-term damage to their own health. The government may decide to intervene in the market for de-merit goods and impose taxes on producers or consumers.

But many economists argue that taxation is an ineffective and inequitable way of curbing the consumption of drugs and gambling particularly for those affected by addiction. Banning or limiting consumption through regulation may reduce demand, but risks creating secondary (illegal) or underground markets in the product

Market failures with demerit goods

The free market may fail to take into account the negative externalities of consumption because the social cost exceeds the private cost. Consumers too may experience multiple information failures about the long term costs to themselves of consuming products deemed to be de-merit goods

Obesity – a time bomb

There is a huge debate at the moment about the root causes of obesity and the social costs that arise from increasing levels of obesity. Obesity is also an international problem. Across the Atlantic in the USA, two out of every three Americans are overweight; one out of every three is obese. One in three is expected to have diabetes by 2050. Minorities have been even more profoundly affected. The UN has signled out obesity as one of the world’s greatest health challenges.

Global diabetes numbers at all-time high


What of harder drugs?

Should hard drugs be prohibited at all costs by the government in a bid to control demand by restricting supply? Regulation has been the route chosen by most governments in developed countries – but economists are divided on the issue. Some believe that legalisation and taxation of harder class drugs is a better policy to pursue, arguing that regulation is ineffective and costly. Another approach would be to divert resources away from regulation towards giving better information to drug users about the longer term health implications of their consumption decisions.

Alcohol and health fears: Alcohol: new risk of cancer even for moderate drinkers


The case for a complete ban on de-merit goods such as class A narcotics could be justified on the ground that the social marginal cost of consumption is always higher than the social marginal benefit. In the diagram above there is no output where the social benefit equals the social cost and welfare would be best protected by trying to enforce a total ban on the product



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Unit 1 Micro: Differences between Merit and Public Goods

May 12th, 2012 at 7:36 am by Geoff Riley

Here is a brief summary of the “textbook” differences between merit goods and public goods

Merit Goods

* Provided by both the public and private sector
* Positive marginal cost to supply to extra users
* Limited in supply – may be a high opportunity cost
* Rival – consumption reduces availability for others
* Excludable
* Rejectable by those unwilling to pay

Merit goods are those goods and services that the government feels that people will under-consume, and which ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service

Why does the government provide merit goods and services?

• To encourage consumption so that positive externalities of merit goods can be achieved for example free inoculation against infectious diseases
• To overcome the information failures linked to merit goods
• On grounds of equity – because the government believes that consumption should not be based solely on the grounds of ability to pay for a good or service

Related blog posts:
Unit 1 Micro: Market Failure in Private Health Care

Pure Public Goods

* Normally funded & provided by the government
* Marginal cost of supply close to zero – if provided to one, it is provided to all
* Largely unconstrained in supply
* Non-rival – one person’s consumption does not reduce availability for others
* Non-excludable giving rise to the free rider problem
* Non rejectable – usually funded by general taxes

Pure public goods are not normally provided by the private sector because they would be unable to supply them for a profit. It is up to the government to decide what output of public goods is appropriate for society. To do this, it must estimate the social benefits from making public goods available

Public goods blogs on Tutor2u

Unit 1 Micro: Revision MC Questions on Public and Private Goods

Unit 1 Micro: Revision Presentation on Public Goods



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Unit 1 Micro: Public Bads

May 12th, 2012 at 7:25 am by Geoff Riley

A public bad is the opposite of a public good – it provides disutility or dis-satisfaction to people when consumed and therefore reduces our economic welfare.

A good example to look at would be the disposal of household and commercial waste. People are normally prepared to pay a price for their household waste to be collected and disposed of in a safe and non-polluting way. But if waste was changed for according to how much had been generated, then some people would find an incentive to dump their waste on other people’s property and thereby avoid direct charges – this would be a free-rider problem. Some local council authorities in the UK have considered a policy of charging according to how much waste is collected.

Waste creates external costs

* Human costs such as exposure to respiratory diseases and increasing risk of birth defects
* Clean up costs including collection and disposal costs and the money spent on cleaning up contaminated land
* Noise and air pollution
* Visual pollution / general dis-amenity
* External costs from the transportation of waste products

Hierarchy of waste management

(1) Reduction of waste
(2) Reuse the product – waste materials are put back into the raw product stream
(3) Recycle or compost the product
(4) Recover the energy e.g. by incinerating
(5) Disposal of the product using landfill

Disposal is the least favoured option – at the bottom of the waste hierarchy

Policy options for waste

Environmental taxes e.g. charges e.g. for waste water treatment and waste collection and disposal.
Subsidies e.g. for recycling initiatives e.g. Deposit refund schemes
Information and awareness raising
Improving producer responsibility
Specific targets – e.g. disposal of “end of life” consumer products
Incentives for innovative uses of waste – see this example from Brazil

The Power of Rubbish


Inside Story – Wasting food




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Unit 2 Macro: Government Spending

May 12th, 2012 at 12:19 am by Geoff Riley

Government spending (or public spending) and in Britain, it takes up nearly half of our annual GDP. Spending by the public sector can be broken down into three main areas:

1. Transfer Payments:  These are welfare payments made available through the social security system including the Jobseekers’ Allowance, Child Benefit, State Pension, Housing Benefit, Income Support and the Working Families Tax Credit. The main aim of transfer payments is to provide a basic floor of income or minimum standard of living for low income households. And they allow the government to change the final distribution of income.

2. Current Government Spending: i.e. spending on state-provided goods & services that are provided on a recurrent basis – for example salaries paid to people working in the NHS and resources for state education and defence. The NHS is the country’s biggest employer with over one million people working within the system!

3. Capital Spending: Capital spending includes infrastructure spending such as new motorways and roads, hospitals, schools and prisons. This investment spending adds to the economy’s capital stock and can have important demand and supply side effects in the long term.

Economic and Social Justifications for Government Spending

1. To provide a socially efficient level of public goods and merit goods and overcome market failure in the provision of these public services

2. To provide a safety-net system of welfare benefits to supplement the incomes of the poorest in society – this is also part of the process of redistributing income and wealth

3. To provide necessary infrastructure via capital spending on transport, education and health facilities – an important component of a country’s long run aggregate supply

4. As a means of managing the level and growth of AD to meet macroeconomic policy objectives such as low inflation and high levels of employment

Fiscal austerity – the Coalition’s plans to cut government spending

The Coalition Government has introduced a policy to halve the size of the budget deficit over the course of the current Parliament. They have launched a programme of fiscal consolidation amounting to £126 billion a year of combined spending cuts and tax rises. Their plans consist of total reductions in spending of £95 billion and a net increase in taxes of £30 billion including a new higher VAT rate of 20%. The “fiscal squeeze” is controversial and has led to an impassioned debate among economists about the best way to control a budget deficit as an economy struggles to lift itself out of recession and sustain a recovery.

Keynesian economists argue that tough deficit reduction policies risk driving the economy into a second recession – known as a double-dip. Reducing spending or raising taxes could hurt an already fragile economy and make the fiscal deficit problem even worse. The government believes that cutting the budget deficit is possible without causing another downturn

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econoMAX May 2012

May 11th, 2012 at 11:38 am by Jim Riley

The latest edition of econoMAX (May 2012) is now available to download. The new articles and case studies are summarised below:

Is it possible for government policy to deter the consumption of cigarettes? (Andy Reeve)

In his recent budget, George Osborne added 37 pence to the price of a packet of 20 cigarettes. In doing so, he was signalling a desire to raise additional revenue and also discourage the use of cigarettes. In his budget speech, the Chancellor stated that “smoking remains the biggest cause of preventable illness and premature death in the UK and there is clear evidence that increasing the cost of smoking encourages smokers to quit and discourages young people from taking it up”

The economic importance of the Commonwealth (Robert Nutter)

The Commonwealth cannot be seen as a trading bloc such as the EU or NAFTA but it does have economic priorities. According to the Commonwealth Secretariat; “The Secretariat aims to strengthen policies and systems that support economic growth in our member countries. We help Commonwealth countries take advantage of opportunities for economic growth and improve their ability to manage their economic development in the long-term”.

Let’s all panic! (Liz Veal)

There was a wave of panic spreading through Britain this spring. The trade union, Unite, balloted it members and the fuel tanker drivers looked as if they would take action. The government hastily suggested that people should top up their petrol tanks, so they did not risk running out.

Why do some economists think road pricing is the most effective solution for traffic congestion? (Tom White)

Traffic congestion is a huge problem in Britain and most economists perceive it as a form of market failure that has arisen because of negative externalities – external costs not included in market transactions. The existence of these costs means that consumption can often be higher than the social optimum. Traffic congestion is a good example of a negative externality because when you drive your car you can put a cost onto other people: delays, longer travel times, higher fuel consumption, extra noise, stress, accident and additional vehicle wear and tear. As one German government-funded advert says, “You are not stuck in traffic. You are the traffic”.

Sovereign Debt and Banking Crises (Mark Johnston)

The credit crisis of 2008 is the major economic story of this century but should economists, politicians, bankers and others have seen this coming? If there is one common theme to this present crisis and others that went before, it is the excessive debt accumulation.

Royal Mail tries to Stamp out its Losses (Andy Reeve)

The price of a first and second class stamp is rising in the United Kingdom from the end of April. Currently, the price of a first class stamp is 46 pence and this will rise to 60 pence at the end of the month. The price of a second class stamp is 36 pence and this will rise to 50 pence. These are significant price hikes, which are designed to reduce the losses that Royal Mail made in 2011.

Is Spain becoming another Greece? (Mark Johnston)

With increasing debt, out of control unemployment and a general strike Spain has some serious economic problems. However, before the financial crisis of 2008 Spain was seen as a prudent member of the Eurozone with GDP debt being half that of Germany at 36%, and a well regulated financial sector. But since the aftermath of the financial crisis it has been all downhill for the Spanish economy with unemployment now at 24% and public debt at 66%.

Is US unemployment Cyclical or Structural? (Mark Johnston)

Whilst a lot of the talk in US political circles has focused on the fiscal crisis of budget deficits and tax rates it seems that those without work has been put further down the priority list. With almost 13 million Americans still without a job and little change apparent on the horizon, the US economy is struggling to develop any significant growth to rectify these jobless levels. However, the significant issue to do with unemployment is how many of the 13 million reflect cyclical or structural unemployment?

Will we consume more – or less? (Tom White)

If you’re worried about the environmental consequences of economic and population growth, one question is more important than any other. Is further economic growth a good thing? Will that extra growth (and associated technological change) help or hurt the environment? You might think the answer is obvious, because more growth causes us to consume more. Only we don’t, according to the Material Flow Accounts, a set of data published annually by the Office for National Statistics (ONS). Yet it may be that 2001 will turn out to be the year that the UK’s consumption of ‘stuff’ – the total weight of everything we use, from food and fuel to flat-pack furniture – reached its peak and began to decline.

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Unit 2 Macro: Revision Question on Supply-Side Policies and Trade

May 10th, 2012 at 10:18 pm by Geoff Riley

Discuss the role that fiscal and supply-side policies might have in improving the trade performance of a country such as the UK (30)

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Unit 2 Macro: Revision Notes on Supply-side Policies

May 10th, 2012 at 5:00 pm by Geoff Riley

Supply-side policies are mainly micro-economic policies designed to improve the supply-side potential of an economy, to make markets and industries operate more efficiently and contribute to a faster underlying-rate of growth of real national output. Most governments believe that improved supply-side performance is the key to achieving sustained growth without causing a rise in inflation. Supply-side reform on its own is not enough to achieve this growth. There must also be a high enough level of AD so that the productive capacity of an economy is actually brought into play.

Different approaches to the supply side

Free-market Approach

(1) Cut government spending and taxes to reduce burdens on the private sector
(2) Laws to limit trade union powers and improve the flexibility of the labour market e.g. flexible hiring and firing
(3) Keep government intervention to a minimum to avoid government failure
(4) Tough competition laws and laws to protect intellectual property

Interventionist Approach

(1) State has key role in investing in public services and building critical infrastructure for long run economic benefits
(2) Tax incentives and welfare reforms can encourage more people into work
(3) Regional policy to boost under-performing areas / areas of high unemployment
(4) Some case for controlling international trade to allow domestic industries to expand

Supply-side objectives

The key supply-side concepts to focus on are incentives, enterprise, technology, mobility, flexibility and efficiency.

1. Improve work incentives and invest in people’s skills for people to find work to raise employment and cut unemployment – human capital investment
2. Increase labour and capital productivity
3. Increase the occupational and geographical mobility of labour – skills shortages are a supply-side weakness in the UK economy
4. Increase capital investment and research and development spending by firms
5. Promoting more competition and stimulate a faster pace of invention and innovation
6. Provide a platform for sustained non-inflationary growth of an economy
7. Encourage the start-up and expansion of new businesses / enterprises

There are two broad approaches to the supply-side. Firstly policies focused on product markets where goods and services are produced and sold to consumers and secondly the labour market – a factor market where labour is bought and sold

Product markets refer to markets in which all kinds of goods and services are made and traded, for example the market for airline travel; smart-phones, new cars; pharmaceutical products and the markets for financial services such as banking, mortgages and pensions.

Supply-side policies in product markets are designed to increase competition and efficiency. If productivity improves, more can be supplied with given amount of resources and at lower costs and prices.

* These policies are designed to improve the quality and quantity of the supply of labour available to the economy.

* They seek to make the British labour market more flexible so that it is better able to match the labour force to the demands placed upon it by employers in expanding sectors thereby reducing the risk of structural unemployment.

* An expansion in the labour supply increases the productive potential of an economy. 

* That expansion in the supply of people willing and able to work can come from several sources for example: encouraging older people to stay in the workforce; a relaxed approach to labour migration and measures to get non-working parents to actively look for work

How can supply-side policies help lift a country out of recession?

Recessions are often the result of negative demand-side shocks that hit real incomes of consumers and demand and profits for businesses. The consequences show through in higher unemployment, a fall in capital investment and an increasing rate of business failures. Most macroeconomic policies in a recession centre on boosting demand and confidence in a bid to generate a rebound in output, jobs and incomes within the circular flow. What role can supply-side policies play during an economic downturn?

The key to answering this is to understand the range of policies that have a supply-side dimension or have supply-side effects!

1. Extra capital spending on an economy’s critical infrastructure – much of this might be funded by the government for example bringing forward some investment spending on hospital re-building, transport projects and environmental schemes. Other big capital spending projects might be partly financed by the private sector perhaps as part of a public-private partnership. These projects are often labour-intensive and can create a sizeable multiplier effect on demand. BBC – What would a growth agenda look like?

2. Reductions in business taxation – for example lowering the standard rate of corporation tax (to stimulate investment) or reducing employers’ national insurance contributions (to boost the demand for labour). The UK Government is reducing the main rate of corporation tax. From April 2011, the rate will be reduced from 28 per cent to 26 per cent and, by 2014, it will reach 23 per cent Lower taxes for business research and development spending or tax relief for inward investment projects also have a supply-side aspect to them – Osborne cuts corporation tax

3. Policies designed at improving the quality of and access to education and training for all. This is particularly relevant when coming out of a recession because many of the new jobs in an economy as recovery gathers momentum are not in the same industries as before a downturn. It is hugely important to prevent cyclical unemployment from turning into structural unemployment

4. Measures to stimulate business start-ups – seed-corn finance and other help for new enterprises can provide a flow of new jobs as an economy picks up

5. Policies to maintain the openness to trade and investment from overseas – instead of choosing protectionist policies, politicians should understand the importance of trade and competition as a means of generating new demand and creating extra jobs.

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How do we promote growth in Europe?

May 10th, 2012 at 4:25 pm by David Carpenter

Read on to find out about an interesting BBC News report published today investigating what can be done to promote growth across Europe…

Within this report, a variety of economic experts from different organisations have been asked to put forward their proposal for growth across Europe. An issue that is obviously very pertinent at the moment with the election of Francois Hollande in France and the Greek attempts to form a government looking increasingly unlikely to succeed.

This article would also make excellent reading for students to help them with the context surrounding the current European crisis in preparation for their upcoming macroeconomics exams.

Click here to read the article.

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Unit 1 Micro: 12 Blogs on Markets and Intervention

May 10th, 2012 at 3:50 pm by Geoff Riley

Here is a selection of a dozen recent blog resources on topics that appear on the core Unit 1 Syllabus

Unit 1 Micro: Revision on Maximum Rents in Housing

Unit 1 Micro: Using the Cost-Benefit Principle

Unit 1 Micro: Brazilian coffee buffer stock hit by falling prices

Unit 1 Micro: The Collapsing Price of Carbon

Unit 1 Micro: Prezi on the Economics of Negative Externalities

Unit 1 Micro: Biomass Subsidies and Timber Prices

Unit 1 Micro: Is the Sun Dipping on Solar Subsidies?

Unit 1 Micro: Economics of Volatile Corn Prices

Unit 1 Micro: FirstBuy, Affordability and Effective Demand in Property

Unit 1 Micro: Electric cars: a case of government failure?

Unit 1 Micro: AS Micro: Revision on Government Failure 

Unit 1 Micro – Labour Migration and the Economy

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Unit 1 Micro: True and False Revision Questions on Elasticity

May 10th, 2012 at 3:08 pm by Geoff Riley

Here is a ten question quiz on elasticity of demand to give you a little extra variety in your revision!

zondle – games to support learning
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Unit 1 Micro: Revision Quiz and Game on Market Prices

May 10th, 2012 at 12:55 pm by Geoff Riley

Test your understanding of market prices using this newly created Zondle game

zondle – games to support learning
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Knoema: ‘The Youtube of Data’

May 10th, 2012 at 11:05 am by Ben White

I have found Knoema incredibly useful for collecting data and imagine it would be an excellent site for teaching colleagues and researchers, particularly with its focus on Economics. The Guardian’s data team have a good article on it today.

‘Launched in April 2012, it aims to be the ‘Youtube of data’ and is marketed by its creators as “your personal knowledge highway”, combining data-gathering with presentation to create an online bank of socioeconomic and environmental data-sets. The website’s homepage shows a selection of the topics on which Knoema has collected data. Among the categories are broad fields such as economics, commodities and energy, but also more specialised collections such as (useful for Development Economics) Africa

The wealth of data is outstanding and I’m sure it could be of use to teaching colleagues in Humanities subjects or pupils looking to develop their research skills.

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Fact or Forfeit!

May 10th, 2012 at 9:25 am by David Carpenter

It’s the year 13’s last ever day at school today so I thought it was time to come up with a new idea for a game. Read on to find out how to play ‘fact or forfeit’…

The rules of the game are simple- students have to answer a multiple-choice question. In my powerpoint all the questions come from The Economist’s fabulous ‘World in Figures’ iPad app, available to download free from iTunes. If a student gets the question right, they receive five points. If they get it wrong, they must complete a forfeit- for which they can be awarded up to five points depending on how good they do at completing the forfeit.

There are three files you need to play this game:

1. Powerpoint for the game (to display on your interactive whiteboard or similar)
2. Answer sheet (in theory the answers should light up in green but this is a useful back-up)
3. List of forfeits (some of these are currently specific to my school so may need adapting slightly)

And, of course, feel free to adapt this with your own questions as you see fit.


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Unit 3 Micro: Innovation in Markets

May 10th, 2012 at 8:36 am by Geoff Riley

A presentation on the key topic of innovation in markets – including drivers and the differences between product and process innovation

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Unit 1: Are youngsters suffering from information failure about alcohol?

May 9th, 2012 at 9:44 pm by Blogger Bryn

Great clip from the BBC about youngsters in the North East

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Unit 1 Micro: Getting Higher Marks for Evaluation!

May 9th, 2012 at 7:21 pm by Geoff Riley

Some brief advice on getting higher evaluation marks

Evaluation questions carry the highest marks and ask for more from the student.  For the AQA evaluation marks are reserved for the final essay-style question. But for EdExcel, evaluation marks are available in more questions – summarised below:

For students taking EdExcel Unit 1: From January 2011 there is a standard formula for evaluation:
• 6 from 14 marks
• 4 from 10 or 12 marks
• 2 from 8 marks
• 2 from 6 marks
• Evaluation may be spread across three or four of the five sub-questions in the data response.

Here are some thoughts from the examiners

(i) Before you can evaluate you must analyse!

(ii) Evaluate each argument as it is introduced into the answer

(iii) Examiners like students who develop clear chains of reasoning in their answers

(iv) Try to make at least 3 “explicit” references to the data given in the question

(v) “Answers do not always have a clear, logical structure”. Hints for better marks:

a. Your answer should be around 2 sides in length, including diagrams

b. Identify the area of economics which is being tested in the essay-style question

c. Outline the relevant theory, using a diagram if possible (they really do help!)

d. Evaluate arguments/policies as you go

e. Develop one key point/argument per paragraph (no more) and leave a clear line between each paragraph

f. Remember to come to a ‘final judgement’ including referring back to the data

g. A conclusion is essential and should not just repeat earlier points

h. Leave yourself 5 minutes for a final judgement of 4-5 lines. This is time well spent. Try to incorporate a new idea, e.g. how a policy may impact on different parties; how the policy may have different short v long run effects

Recent exam reports offer good advice on how to finish an evaluative essay strongly:

• Answers should include alternative points of view and these should be clearly identified
• Some attempt should be made to consider the strengths and weaknesses of the different viewpoints. [Rank them if possible]
• Where possible, use data to provide support for arguments or to refute a point of view
• Final judgements might be qualified by statements that include phrases such as ‘it depends on’.
• Useful evaluative words: “However, nevertheless, it is likely that, on the other hand….”
• Maintain a high quality of presentation, especially in high mark questions and with your diagrams

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Command Words in Questions

May 9th, 2012 at 7:16 pm by Geoff Riley

A quick overview of command words and what they mean in economics exam papers and how many marks are awarded

This term appears often in essay questions and requires you to examine, analyse carefully and present considerations for and against items involved

Express the meaning of, translate, exemplify (give examples of), solve, or comment upon the subject. Usually you will give your judgement or reaction to the problem, but always make use of evidence

Give reasons or present facts for and against an issue; try to provide by giving reasons or evidence for and against

Give reasons or present facts for and against an issue; try to provide by giving reasons or evidence for and against

Present in brief, clear form

Make a careful judgement of the worth of something (e.g. a theory) in the light of its truth, usefulness etc. Give supporting evidence. You might include your opinion to a lesser extent, or refer to other theories.

Clarify and interpret the material you present.
State the ‘how’ and ‘why’, the results, and where possible causes

Give concise, clear meanings

1. Does this question require evaluation or not?

Define, Explain, Analyse, ‘Distinguish between’ and ‘Outline’ require no evaluation.

Evaluate, Assess, Discuss, To what extent, Examine do require evaluation.

2. How many marks are awarded for KAA and how many for Evaluation?

For Unit 1 (micro), provided the question requires evaluation, (see above command words), the standard formula for evaluation is:

6 from 14 marks   (so explain 3 points or 2 very well, backed up with data)
4 from 10 or 12 marks
2 from 8 marks
2 from 6 marks

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Supported MC Questions for EdExcel Unit 1 Economics

May 9th, 2012 at 7:06 pm by Geoff Riley

Some advice on answering these questions

(i) There is one mark for selecting the correct option
(ii) There are three marks for explanation
(iii) It is possible to achieve 3 explanation marks even if the incorrect option has been selected

General advice on good ways to get the three extra marks

1/ Define key terms throughout
2/ Consider the key concept or model that lies behind the question
3/ Apply the information provided e.g. the effects of a tax or a subsidy on a market
4/ Annotate the diagrams provided in the question paper e.g. shading in or labelling areas of consumer & producer surplus, spending on a subsidy or agency spending on a buffer stock
5/ Be prepared to calculate percentages and show your workings, including a relevant formula
6/ Reject one or more of the options – remember to explain why you have rejected them

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Unit 2 Macro: Model answer for revision data question

May 9th, 2012 at 3:12 pm by Geoff Riley

Here is a suggested answer for the first of the practice questions available from this resource:



Using the data and your own knowledge, to what extent might a fall in the value of the exchange rate help to bring about a recovery for the UK economy? (30 marks)

A depreciation in the exchange rate reduce the external purchasing power of sterling against other currencies including the US dollar and the Euro. Recovery is a broadly-based expansion of economic activity shown through a pick up in aggregate demand, real GDP and (hopefully) a rise in employment as the economy recovers from a recession.

Figure 2 indicates that sterling has depreciated against the US dollar in recent years. The steepest fall came in 2007-09 when the pound fell from $2.00 to $1.57, a decline of over 20 per cent. This is a significant change in the exchange rate although sterling has remained fairly stable since then and we are not given data on movements against other currencies including the Euro with whom more than 50% of UK trade is conducted.

That said a 20% depreciation represents a sizeable and important easing of monetary policy which in normal times might have an equivalent effect to a 3-4% reduction in policy interest rates. A more competitive exchange rate can be expected to contribute to recovery in several ways.

First it makes UK exports more price competitive in international markets, and assuming that demand is fairly price elastic, we would hope to see a strong increase in export volumes overseas, creating a fresh injection of demand into the circular flow. Evidence for this is shown in Figure 2 where real export volumes grew by 7.4% in 2010 after a 9.5% fall a year earlier. This could be seen as a lagged response to a sterling depreciation a year or so earlier.

Higher export sales provide a direct boost to demand and the effect on output and jobs will be amplified if there is a multiplier effect. For example a rise in overseas sales of cars will cause increased derived demand for component parts, raw materials and higher profits for many industries involved in other supply-chain activities. A rise in exports might also prompt an increase in capital investment although this effect might be limited because of the high level of spare capacity at the end of recession.

If sterling is weaker, the UK price of imports will increase bringing about a slower growth of demand for foreign-produced goods and services. Import growth was negative in the recession year of 2009 (-12.2%) but rebounded strongly a year later despite the fall in sterling. Perhaps the price elasticity of demand for imports is low, at least in the short term?

Overall, a depreciation of sterling should help to bring about a recovery of output and also a re-balancing of the economy away from consumption and imports towards exports and investment. That at least is the hope of the Bank of England and the Treasury. We see from Figure 1 that, despite a higher deficit in 2010 of 2.5% of GDP, there has been a gradual improvement in the UK’s current account on the balance of payments. The trade deficit in goods has continued to grow (it was £99bn in 2011) but the trade surplus in services is higher (over £70bn last year) and the weakness of sterling has increased the sterling value of the interest, profits and dividends from UK investments overseas.

My view is that a depreciation of the exchange rate has been an important part of the UK economy beginning a long, slow process of recovery and adjustment after the downturn. But several other factors need to be borne in mind.

First, a 20% depreciation increases the prices of imports – from finished manufacture products to the prices of essential foodstuffs and energy supplies. This is one reason why CPI inflation has been persistently above target in recent years. Figure 2 shows an acceleration in inflation from 2.2% in 2009 to more than double this (4.5%) in 2011. Higher inflation threatens to erode the competitive advantage given by the fall in sterling’s external value and it has been a key factor causing real incomes and living standards to fall in the last two years.

Second the fall in sterling has not been sufficient on it’s own to bring about a strong recovery. Figure 1 shows that the LFS unemployment rate continues to rise climbing from 5.7% of the labour force in 2008 to over 8% in 2011. Real GDP growth for the UK has been weak, the economy grew by less than 1% last year and output lags well below the level seen at the start of the recession.

A key problem has been that many of the UK’s major export markets have had deep economic troubles of their own, notably the debt crisis engulfing the Euro Zone. Too few of our exports go to the fast-growing emerging nations including the BRIC and MIST countries where per capita incomes are rising and trade and export opportunities are flourishing.

Despite the weakness of sterling, many British businesses have found it tough to secure the trade insurance and export credit finance needed to complete new export orders, our financial fragility may well be holding back am export-led recovery. Doubts remain too about the non-price quality of many UK products especially in industries where intense global competition requires strong innovation and research investment. Manufacturing industry in particular exports over sixty per cent of output to the rest of the world, but decades of de-industrialisation have led to a situation where this industry contributes less than 12% of GDP and one could argue is no longer of a sufficient scale to reap the rewards of the advantages of a competitive exchange rate.

Sterling’s depreciation came at the right time for the UK economy and without it there is a real danger that we would have suffered a depression and unemployment well in excess of 10%. But the lagged and, so far modest expansionary effects of a cheaper currency are a reminder that no single macroeconomic policy instrument on its own is likely to have a sufficiently big impact to bring about a strong recovery. External demand provides a welcome boost when we are at risk of semi-permanent recession but it needs the injection of higher domestic demand for growth rates of 2% or more to be sustained. Growth is being held back by deep cuts in real living standards and mistimed and poorly judged fiscal austerity from central Government.



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Poverty tells many stories

May 9th, 2012 at 1:28 pm by Geoff Riley

Poverty tells many stories -  this is a powerful award-winning short film that will raise many issues with your students


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Unit 1 Micro: Minimum Wages and Living Wages

May 9th, 2012 at 9:36 am by Geoff Riley

The campaign for a living wage has gained renewed prominence in the last year or so. Students and teachers wanting to know more about the minimum and the living wage debate might find this background blog from Channel 4 news relevant and useful. More here on the living wage from the Citizens UK web page.

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Unit 2 Macro: Practice Questions for EdExcel AS Macro

May 9th, 2012 at 9:35 am by Geoff Riley

Here are a couple of practice questions for EdExcel AS macro – one 30 marker on exchange rates and macro objectives, one 12 marker on interest rates and the distribution of income and wealth. Hope they might be useful.


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Unit 4 Macro: Fiscal Policy Revision Charts

May 9th, 2012 at 9:33 am by Geoff Riley

This PowerPoint contains four fiscal policy charts for the UK – I have been using them in a revision session this morning. I will blog a little bit more about them later on


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Unit 3 Micro: The Dawn of a Shareholder Spring?

May 8th, 2012 at 10:28 pm by Geoff Riley

Here is a pertinent and timely resource from Channel 4 news on overcoming the principle agent-problem. Are shareholders in some of our leading companies becoming more active in holding senior executives to account for poor performance? or more concerned with their own shareholder value at a time when CEO earnings continue to grow well above inflation? I own plenty of shares but have never once been to a company AGM or exercised my right to vote. Could planned legislation further embolden activist shareholders and shake up boardrooms across the UK? More on the debate over the shareholder spring here See also BBC news: FTSE 100 bosses’ pay ‘rose 11% last year’

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Development Economics Revision Pack- Updated for 2012!

May 8th, 2012 at 9:31 pm by David Carpenter

I’ve updated my development economics revision pack with lots of new case studies for 2012. Read on to find out how to download the pack

Within this revision pack, written specifically for unit 4 Edexcel Economics although still relevant to other boards, you will find a number of useful pieces of information for students:

1. Revision questions- if students can complete all these activities then they are fully conversant with the content of development economics
2. Case studies- in my opinion the most important section. Students regularly fail to include application in their essay answers, and this will prevent them from achieving top grades. Over these page I’ve suggested examples to go with every limit to growth & development and every strategy to promote growth & development, and include ones relevant to both explanation and evaluation points. And this section has been fully updated with lots of new countries for 2012.
3. Levels Marking Criteria- it’s vital that students put enough points into their essays, otherwise they’re making it impossible for an examiner to give them top grades
4. Example essay questions- I’m strongly encouraging all my students to undertake several of these essay questions in preparation for their unit 4 exam

Personally I always print this out as an A5 booklet for all the students I teach and it then acts as a useful revision aid which they can keep with them during their revision over the next few weeks- but feel free to make whatever use of it you desire!


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Made in China – but not quite so cheaply……

May 8th, 2012 at 6:40 am by Penny Brooks

How long can China keep its comparative advantage of cheap production for manufacturing goods? We are aware of rising inflation in China which is eroding their advantage, and here is an article about a UK firm which manufactures cushions, some from a factory in Kirkby on Merseyside and some from his factory in the Zhejiang province in China. The story comes from a programme ‘The Town taking on China’ to be shown on BBC2 at 8pm tonight – and subsequently on i-player.

The business owner, Tony Caldeira, had expected to be moving all of his business to China in order to survive. However, now he is finding that this is not the only solution, for a variety of reasons which provide useful examples for many AS and A2 economic theories. One is the supply and demand for labour – the shortage of labour in China, which is leading to pay rises of up to 50%, cutting the cost advantage for one of his products from 55 pence less to manufacture in China a year ago to just eight pence now. In spite of excess supply of labour in the UK though, Mr Caldeira finds it hard to recruit and retain a skilled workforce – he recently hired 17 new members of staff in a variety of jobs in his Kirkby factory, but five quickly left. He says the skills of textile manufacturing are being lost and that for the industry to be sustainable, they need to be re-established in the younger workforce.

One factor which has driven globalisation in the last 20 years has been lower transport costs – but at present the rising cost of transport for finished goods is contributing to that smaller differential as well.

He also finds the labour productivity in China far lower than in the UK, and also the quality of the product is different – the cushion factory in China produces cheaper cushions, the Kirkby factory offers high-end, hand-finished products. Jessica Lewis, buyer for TJX, the parent group of TK Maxx confirms that a “…UK product in the States adds value just because it’s made in the UK. The customer sees value in that” – so the price elasticity of demand for higher quality UK exports is a factor here.

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Unit 2 Macro: 10 Key Revision Topics for EdExcel

May 8th, 2012 at 6:32 am by Geoff Riley

A selection of key topics to cover for the paper for the 25th May linking to our blogs in each category – there are loads of great revision notes in these blogs for students wanting extra background and help with evaluation

1/ Limitations of GDP as measure of living standards: Issues in comparing stats between developed/developing nations – click here for resources

2/ The consequences of rising unemployment and policies to increase employment (global context matters a lot)  – click here for resources

3/ Key recent trends in UK balance of payments and supply-side policies to improve UK trade (global trade imbalances) – click here for resources

4/ Understanding the difference between growth and development and handling development data – click here for resources

5/ Fiscal policy – economics of budget deficits + debate over which stimulus policy is best + supply-side effects of fiscal policy – click here for resources

6/ Keynesian economics – important to understand the essence of Keynesian approach + other policies to drive recovery – click here for resources

7/ The multiplier effect – concept, size of, limitations of – hugely important topic, it can be used in nearly every question – click here for resources

8/ Inequalities in income and wealth, interest rates and distribution of income, inequality and econ growth – click here for resources

9/ Migration – significance for unemployment, inflation, trade, productivity, economic growth – click here for resources

10/ External influences- click the links for resources (i) oil and gas prices  (ii) Euro crisis  (iii) emerging economies including the BRICS

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UK Economy Update – AS/A2 Econ Evaluation Special

May 7th, 2012 at 9:28 pm by Jim Riley

Geoff and the team are holding an online revision clinic for an hour on Tuesday 8 May (9pm here on this blog entry) for AS & A2 Econ students who would like to refresh their understanding of the key recent developments in the UK economy. The focus will very much be on helping students build their confidence to evaluate issues and potential policy options for the UK economy.

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Unit 1: Negative externalities from excessive alcohol consumption in Australia

May 6th, 2012 at 9:14 pm by Blogger Bryn

Just the same as in the UK, reports Aljazeera

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Unit 2: Youth unemployment; the problem and possible solutions

May 6th, 2012 at 8:59 pm by Blogger Bryn

A nice summary, including comparative EU data, from economicshelp

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Unit 2: Macroeconomic data: May 2012

May 6th, 2012 at 8:54 pm by Blogger Bryn

Latest data thanks to tutor2u

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AQA Unit 3 Micro: Practice Paper

May 6th, 2012 at 5:12 pm by Geoff Riley

A selection of practice questions for this paper are shown below

• This paper is synoptic. It assesses your understanding of the relationship between the different aspects of Economics.
• You will be marked on your ability to:
(i) Use good English and organise information clearly
(ii) Use specialist vocabulary where appropriate

Essay Questions: Explanation Questions (15)

(i) Explain what is meant by the satisficing principle and how can affect price and output in an imperfectly competitive market (15 marks)

(ii) Explain the circumstances under which short run average cost for a business can be rising but long run average cost can be falling (15 marks)

(iii) Explain how a change in wage rates for a business can bring about a change in their costs of production and the choice of factor inputs (15 marks)

(iv) Explain the factors that will influence the rate of innovation in an industry (15 marks)

(v) Oligopolistic markets, such as supermarkets or car manufacturing, can be defined in terms of market structure or in terms of market conduct (behaviour).

Using examples of particular industries, explain this statement. (15 marks)

(vi) Explain some of the short run and long run benefits of an increase in market competition (15 marks)

(vii) Explain the difference between equality and equity and explain how market failures can lead to a loss of equity (15 marks)

(viii) Explain how cost-benefit analysis might be used to assess the impact of a government subsidy scheme for the installation of solar panels (15 marks)

Essay Questions: Evaluation Questions (25)

(i) Evaluate the view that providing a market is contestable, there is no need for government intervention (25 marks)

(ii) Discuss whether the objective of profit maximisation becomes less important than other possible objectives as a firm grows in size. (25 marks)

(iii) Is collusion in an oligopoly always good for producers and bad for consumers? Justify your answer. (25 marks)

(iv) Evaluate the view that the private sector should be encouraged to play a greater role in providing health care in the United Kingdom (25 marks)

(v) Evaluate the view that progress in reducing environmental market failures such as deforestation and rising carbon emissions is best left to market forces rather than government intervention (25 marks)

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F585: Recent Articles of Relevance

May 6th, 2012 at 7:09 am by Geoff Riley

A Sunday hat tip to Tom White for providing this super selection of recent articles relevant to students preparing for the OCR F585 paper in June 2012

May Day marches: Activists protest against austerity – click here

Sir Mervyn King rejects criticism for crisis – click here

UK back in recession: Reaction

Bank of England’s Paul Tucker warns on inflation rate – click here

China growth to ‘hold up’ but inflation remains a risk – click here

“>The end of cheap China

China ran a massive trade deficit in February. What does it say about the economy?

US Treasury Secretary Timothy Geithner has urged China to change its export-led growth policy and focus on increasing domestic consumption

Rare Earths – click here

Rare earths and climate change – click here

US, EU and Japan challenge China on rare earths at WTO – click here

US imposes 5% tariff on Chinese solar panel cells – click here

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Unit 2 Macro: Exchange Rates Glossary

May 5th, 2012 at 11:15 pm by Geoff Riley

A short glossary covering concepts relevant to exchange rate economics

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

When the value of an asset or exchange rate increases in value relative to another

Clean float
A currency exchange rate that varies (or floats) according to market forces, free from intervention by a country’s central bank

Competitive devaluation
When a country tries to devalue its currency to increase its competitiveness. However, this often encourages other countries to also devalue leading to only temporary increases in the competitiveness of exports.

Currency union
A group of countries (or regions) using a common currency – for example the 17 countries that have entered the single European currency since it started in 2001

A fall in the market value of one exchange rate against another

Fixed exchange rate
An exchange rate that is fixed against other major currencies through action by governments or central banks, usually within small margins of fluctuation around the central rate. Likely to involve periodic intervention in the foreign exchange market by one or more central banks to buy or sell the currency in question if it moves below or above its margins

Foreign exchange reserves
The reserves of gold or foreign currencies (e.g. US dollars or Euros) typically held by central banks on behalf of their national government

Hot Money
Money that flows freely around the world looking to earn the best available rate of return. It might be invested in any asset whose value is expected to rise (e.g. property or shares) or placed in an account offering the best real rate of interest.

Managed floating currency
An exchange rate that is basically floating but subject to intervention from time to time by the monetary authorities, in order to resist fluctuations that they consider to be undesirable

Reserve currency
A foreign currency that is held in countries’ official reserves because of its global importance as a medium of exchange and its inherent stability

Special drawing rights
A unit of money created by the IMF. Each member country can borrow SDRs at favourable interest rates from the IMF’s reserves when they are needed for reasons related to a country’s balance of payments

Sterling exchange rate index
The external value of sterling in the foreign exchange market calculated using a weighted index of a basket of currencies – weightings are based on the percentage of trade between the UK and other countries.

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

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Unit 4 Macro: TV Assembly Back in the USA

May 5th, 2012 at 10:43 pm by Geoff Riley

Here is a small, tentative counter-weight to the inevitable shift of global manufacturing / assembly to the East. A short video about a US firm that has started to manufacture televisions in the USA. Tariffs and transportation costs have played a role in making it viable and their marketing department has been quick to exploit nationalistic feelings among some consumers.

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Unit 2 Macro: Growth and Development Glossary

May 5th, 2012 at 9:44 pm by Geoff Riley

A short selection of key terms connected to economic growth and development for AS macro students

Brain drain
The movement of highly skilled or professional people from their own country to another country where they can earn more money

BRIC countries
Brazil, Russia, India and China – short hand for a group of fast-growing countries

Capital flight
The rapid movement of large sums of money out of a country per due to a lack of confidence in a country’s economy and/or its currency and political turmoil

Catch-up effect
When countries that start off poor but grow more rapidly than countries that start off rich causing convergence in the standard of living measured by per capita GDP

Comparative advantage
The relative advantage that one country has over another. Countries can benefit from specializing in and exporting the product(s) with the lowest opportunity cost of supply

Debt forgiveness
The cancelling by a creditor of a debt to a country or a company

A decline in the share of national income from manufacturing industries

Economic nationalism
The idea that a country’s economy will perform best if its industries are protected from competition, for example by taxes on imported goods

Economic structure
The balance of output drawn from different economic sectors – ranging from primary (farming, fishing, mining etc) to secondary (manufacturing and construction industries) to tertiary and quaternary sectors (tourism, banking, software industries)

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

Foreign direct investment
FDI is the acquisition of a controlling interest in productive operations abroad by companies resident in the home economy. May involve the creation of new productive capacity such as a new factory

Gini Coefficient
Measure of the extent to which groups of households, from the bottom of the income distribution upwards, receive less than an equal share of income.

Gross Domestic Product per capita
National income per head of population

Gross National Income (GNI)
The same as GDP except that it adds what a country earns from overseas investments and subtracts what foreigners earn in a country and send back home

Human Development Index
An index devised to assess comparative levels of development in countries, quantified in terms of literacy, life expectancy and purchasing power

Changes to products or production processes – innovation is important in delivering improvements in dynamic efficiency

Spending on capital goods including plant & machinery and infrastructure

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

The transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economy

Living standard
The amount of wealth or comfort that a person, group, or country has. The standard measure of average living standards is GNI (gross national income) per capita measured in a common currency and adjusted for differences in the cost of living between countries i.e. GNI per capita (PPP) – purchasing power parity adjusted

Lorenz Curve
A way of showing the unequal distribution of income and wealth in an economy

Primary sector
An industry involved in the production of raw materials including agriculture

Purchasing Power Parity (PPP)
The exchange rate that equates the price of a basket of identical traded goods and services in two countries

Sending of money to people in another country for example migrant workers sending some of their wages to their home country

Sovereign wealth fund (SWF)
A government or state run fund usually created by profits from natural resources such as oil, gas or minerals. Highly secretive, their assets grew dramatically when oil prices rose to record levels. Some of the largest SWFs are in the oil-rich Middle East

Sustainable growth
Growth without non-renewable resources being used up or pollution becoming intolerable

Trend growth
The long run average growth rate – mainly determined by changes in the stock of available factor inputs and also improvements in productivity

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric


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Unit 2 Macro: Monetary Policy and Inflation Glossary

May 5th, 2012 at 9:33 pm by Geoff Riley

A selection of key terms on monetary policy and inflation


Creeping inflation
Small rises in the general level of prices over a long period of inflation

A persistent fall in the general price level of goods and services

A fall in the rate of inflation. This means a slower increase in prices but not a fall in prices (deflation)

Inflation target
The Bank of England has an inflation target of 2% for the consumer price index

School of economic thought that considers money supply as the main factor influencing the economy, and monetary policy as the key instrument of government decision-making. Controlling money supply should ensure steady economic growth and a healthy price environment. Opposed by the Keynesian school, which considers fiscal policy as the key macroeconomic tool

Money illusion
Money illusion occurs when people confuse nominal and real values when making economic decisions. Money illusion is most likely to occur when inflation is unanticipated, so that people’s expectations of inflation turn out to be some distance from the correct level.

Money supply
The entire quantity of a country’s commercial bills, coins, loans, credit, and other liquid instruments in the economy.

Negative interest rate
An interest rate that is below zero. For real interest rates, this can occur when the inflation rate is higher than nominal interest rates.

Neutral interest rate
A neutral interest rate is a rate of interest that neither deliberately seeks to stimulate aggregate demand and growth, nor deliberately seeks to weaken growth from its current level. In other words, a neutral rate of interest would be that which is set at a level which encourages a rate of growth of demand close to the estimated trend rate of growth of real GDP.

When an economy is growing too fast and aggregate supply cannot keep up with demand, leads to a rise in demand-pull and cost-push inflation

Price stability
A period of low stable inflation of between 1-4% when price rises are modest

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

Relative deflation
The term “relative deflation” is generally used to describe an economy with an inflation rate, which has not necessarily descended into negative territory, but is markedly lower than comparable economies

Retail Price Index (RPI)
The RPI is broadly similar to the CPI but includes mortgage repayments and some taxes, and excludes the top 4 per cent of earners. It is used to calculate increases in wages, state benefits and pensions.

A combination of slow economic growth and rising inflation, can lead to stagflation. The most notable recent period of stagflation occurred during the 1970s, when world oil prices rose dramatically, and UK inflation rose at one point to nearly 30 per cent.

Wage price spiral
Workers bid for higher wages because they have seen their real income eroded by rising prices. This can lead to a further burst of cost-push inflation in an economy.

Monetary Policy

When the value of an asset or exchange rate increases in value relative to another

Credit crunch
Situation where banks across the economy reduce lending to each other due to falling confidence that loans will be repaid

A fall in the market value of one exchange rate against another

Euro Zone
17 countries (currently) that share a single currency (the Euro) and a common policy interest rate set by the European Central Bank

Expansionary monetary policy
A policy to expand money supply and boost economic activity, mainly by keeping interest rates low to encourage borrowing by companies, individuals and banks. May also involve quantitative easing (bank purchases of government bonds)

Policy interest rate
The base / policy interest rate set by the Monetary Policy Committee of the Bank of England when operating monetary policy

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

Quantitative easing
Attempts by a central bank to increase the base supply of money by buying debt off banks and other financial institutions. Has occurred in the UK since 2009

Real interest rate
Nominal (money) rate of interest adjusted for inflation

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

Transmission mechanism
The process by which changes in interest rates and/or the supply of money work to affect demand, output and prices


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Unit 2 Macro: Trade and Balance of Payments Glossary

May 5th, 2012 at 9:26 pm by Geoff Riley

A short glossary of some international trade and balance of payments key terms for AS macro

Balance of Payments (BoP)
The total of all the money coming into a country from abroad less all of the money going out of the country during the same period

Beggar my Neighbour
This is an economic policy that seeks to promote a nation’s economy at the expense of another country. An obvious example is the use of import tariff barriers. A country may place tariff on imports to help promote local domestic industry. This may help local unemployment, but, be at the expense of the other country’s export sector

Capital flight
The rapid movement of large sums of money out of a country. There could be several possible reasons – lack of confidence in a country’s economy and/or its currency and political turmoil. The result can be a sharp downward movement in a currency.

Capital flows
Movements of capital between countries. Outward capital flows are movements of domestically-owned capital abroad; inward capital flows are movement of foreign-owned capital to the domestic economy

Competitive devaluation
When a country tries to devalue its currency to increase its competitiveness. However, this often encourages other countries to also devalue leading to only temporary increases in the competitiveness of exports.

Cost and non-price factors that make a business successful in international markets

Creeping protectionism
A period of time where import tariff rates rise and where countries introduce quotas and barriers to the mobility of labour and capital

Countervailing tariffs
Tariffs (duties) that are imposed by a country to counteract subsidies provided to a foreign producer or to counter-act the perceived effects of export dumping

Current account
Balance of trade in goods, services, net transfers of money & net investment income

When a producer in one country exports a product to another country at a price which is below the price it charges in its home market or is below its costs of production

Export revenue
Sales from selling goods and services overseas

Foreign direct investment from overseas businesses into a specific country

Foreign exchange reserves
The reserves of gold or foreign currencies (e.g. US dollars or Euros) typically held by central banks on behalf of their national government

Free trade
Ability of people to undertake trade with people in other countries free from any restraints imposed by governments or other regulators

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

The deepening of relationships between countries of the world reflected in an increasing level of overseas trade and investment.

A good or a service produced overseas but domestic in domestic markets. Imports are a leakage of demand from the circular flow

Infant industry
New industry that requires government protection from overseas competition (for instance through the setting of import tariffs) in order to develop

Investment income
Interest, profits and dividends from assets owned and located overseas

The notion that the wealth of a nation was based on how much it could export in excess of its imports, and thereby accumulate precious metals. Applied in the modern context to countries accumulating huge trade surpluses in goods or services and focusing on export-led growth

North American Free Trade Agreement – a free trade area agreement signed by the US, Canada and Mexico

Net Trade
The balance between the value of exports and imports

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

Overseas assets
Assets such as businesses, shares, property which are owned in overseas countries and which can generate a flow of investment income which is a credit item on the current account of the balance of payments.

The use of tariff and non-tariff restrictions on imports to protect domestic producers from foreign competition

Punitive tariff
An extra tariff charged on goods going into or out of a country, that is introduced because a country has done business in an illegal or unfair way

The sending of money to people in another country. For many lower-income nations, remittance income is now a big contribution to their Gross National Income (GNI)

Sovereign wealth fund (SWF)
A government or state run fund usually created by profits from natural resources such as oil, gas or minerals. Highly secretive, their assets grew dramatically when oil prices rose to record levels. Some of the largest SWFs are in the oil-rich Middle East

A tax on imported products which may be ad valorem (%) or a specific tax

World Trade Organisation
The WTO oversees trade agreements, negotiations and disputes between member countries
Trade deficit
When a country imports a greater value of goods and services than it exports.

Trade surplus
When the value of exports exceeds the value of imports in a given time period

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric


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Unit 2 Macro: Unemployment Glossary

May 5th, 2012 at 9:21 pm by Geoff Riley

A selection of key terms linked to the topic of unemployment

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

Capital-labour substitution
Replacing workers with machines in a bid to increase productivity and reduce unit costs. This can lead to structural unemployment

Claimant Count
The number of people claiming unemployment-related benefits. It is the number of people claiming Jobseeker’s Allowance

Classical unemployment
Classical unemployment is the result of real wages being above their market clearing level leading to an excess supply of labour

Cyclical unemployment
Involuntary unemployment due to a lack of demand for goods and services. This is also known as Keynesian unemployment

Discouraged workers
People often out of work for a long time who give up on job search leading to a rise in economic inactivity

Frictional unemployment
Transitional unemployment as people move between jobs or are in active job search

Full Employment
Jobs for all that want them but not zero unemployment because some people are always between jobs, there will usually be some frictional unemployment

Hidden unemployment
Unemployment which is known to exist but is not included in the official government figures, also known as under-employment, e.g. people taking part-time work because they cannot find a suitable full-time job. This tends to rise in a recession.

Labour shedding
When businesses reduce the size of their workforce

Labour shortages
When businesses find it difficult to recruit the workers they need

Labour supply
The number of people able, available and willing to work at prevailing wage rates

Long term unemployment
People out of work for at least one year, often suffering structural unemployment

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

Net inward migration
When the number of migrants coming into a country is greater than those leaving in a given time period

United Kingdom from Timetric

Structural unemployment
A mismatch between people’s skills and requirements of the new jobs due to occupational and geographical immobility of labour

Tight labour market
When demand for labour is high and there are shortages of labour. Businesses may have to offer higher wages to attract more workers

When people want to work full time but find that they can only get part-time work – the result is a loss of hours that the economy can use

United Kingdom from Timetric

Unemployment trap
When the prospect of the loss of unemployment benefits dissuades those without work from taking a new job – creates a disincentives problem

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric


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