Posts from the ‘Economics’ Category

BMW – Bavarian Monopolist at Work

May 24th, 2012 at 3:14 pm by Michael Owen

BMW have been fined SFr156m ($163m) by Swiss Competition Authorities for restricting the supply of BMW and MINI cars to Swiss purchasers.

Swiss buyers reported that they were unable to buy BMW and MINI cars from dealers in the EU, as BMW had restrictive clauses in sales contracts in Europe which prevented sales to would be customers in Switzerland.

As the Swiss Franc has appreciated by 20% against the Euro, it is hardly surprising that customers were looking the buy cars in Germany, Italy and France. The Financial Times reported that Swiss competition authorities claim that BMW was taking steps to prevent ‘parallel’ imports

Since October 2010,after allowing for exchange rate fluctuations, BMW cars were approximately 25% in Germany, but the Authorities in Switzerland noted that from 2008, direct imports of most cars had risen, but there had been little change in the number of BMWs and Minis brought in as parallel imports.

BMW intend to appeal. This is an interesting case study of how a monopolist’s behaviour allows it to limit supply, and discriminate on prices; and how and why governments might respond to an ‘abuse’ of competitive power.

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Investment in Energy Infrastructure

May 23rd, 2012 at 2:58 pm by Geoff Riley

Many people take as given a pressing need to increase capital investment in the infrastructure of our energy sectors – but how strong are the economic and social impacts of such investment? The LSE Growth Commission met this week to discuss this and I have brought together some of the arguments drawing on a number of various twitter feeds

Substantial investment is need in energy infrastructure in the UK going forward

Particularly in the electricity grid and in the natural gas pipeline infrastructure – UK a net importer of gas (increasing energy dependency?)

Investment is a necessary but insufficient condition to make significant progress towards a low carbon economy

Investment in renewables is growing – creating and protecting a significant number of jobs, especially in the north of England and Scotland and thus has the power to be a major driver of regional economic re-balancing

Promoting improved energy efficiency has high Net Present Values – pick the low-hanging fruit – cut emissions in the least cost way first

Stronger investment in renewable energy infrastructure makes the UK economy less vulnerable to macroeconomic shocks (global oil and gas price shocks in particular)

Too little of infrastructure acts as a severe constraint to growth – a long-term result of under-investment

Key issue is whether our energy industries / systems / networks have enough spare capacity to meet future demand – Economies of agglomeration in london, for example, were suported by the spare capacity of the then existing transport system

Many energy / transport projects with a high estimated net present value have not been undertaken – barriers are put in the way – the planning system acts as a huge barrier, local opposition, lack of fundamental political will to think long term and make key decisions, make and mend

 

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Unit 2 Macro: Cyclical and Structural Economic Issues Facing the UK

May 23rd, 2012 at 12:54 pm by Geoff Riley

Our focus in an AS macro revision session was on the difference between cyclical issues and events and the wider / deeper structural problems and issues facing the UK economy at this fascinating time. Key macro policy decisions affect the path of an economy out of recession, but are these the same policies that will address the supply-side constraints and weaknesses that hold back growth, development and contribute to growing inequality?

Cyclical issues:

* Deep recession and a slow, weak, fragile recovery – UK GDP remains well below the peak at the end of the last cycle
* Falling real incomes and low consumer confidence
* Weak capital investment – the share of investment as a % of GDP has fallen steeply, low business animal spirits
* High cyclical unemployment as national output remains well below potential
* Cyclical fall in labour productivity (output per person employed) in part because of the weakness of demand
* Slower than expected expansion of UK exports – despite a competitive exchange rate – weakness in demand in our key export markets
* Cyclical fall in tax revenues and a rise in government transfer payments contributing to sizeable rise in size of fiscal deficit
* Rising household savings ratio, cyclical fall in property prices – both negative for consumer spending

Key issue here is why has recovery been so weak thus far (growth of less than 1% in 2011 and 2012 (forecast))?
Has monetary policy lost the power to stimulate demand, output and jobs? 
Will Osborne’s Plan A of fiscal austerity make things worse – what will come under Plan B?

Structural issues

These focus mainly on the supply-side but keep in mind that an economy in semi-permanent recession with deficient aggregate demand for goods and services is likely to find that existing supply-side problems will deepen and become even harder to tackle

* An unbalanced economy – too dependent on financial services and housing, need to re-balance e.g. towards high value manufacturing, creative sectors
* Huge level of household debt – one of the highest among any advanced rich nation
* Structural weaknesses in the banking system – squeezing the supply and raising the cost of credit for businesses
* Long term low level of research and development as a share of national income
* Immobilities, disincentives, skills gaps in the labour market – resulting in high rates of structural unemployment
* Huge levels of youth unemployment
* Long term rise in economic inactivity, growing signs of people leaving the active labour market or having to settle for part time work
* Persistent productivity gap with many other countries
* Structural budget deficit is high – a key aim of the Coalition is to reduce this over the lifetime of this Parliament
* Structural changes in the balance of world economic power and influence – growing competitive threats from emerging countries (BRICs et al)
* UK economy falling back in international league tables for competitiveness
* Creaking infrastructure – telecoms, transportation, increasing pressure on public services such as education and health
* Structural rise in inequality / widening divide in income and wealth, deep regional disparities

These structural weaknesses mean that economic growth will be slower and unemployment higher in the years to come. The fall out from the global financial crisis is likely to have generational effects on employment and living standards especially for the younger generations. Do the current generation of politicians and policy-makers have the creativity, imagination and strength to develop policy ideas that will energise emerging industries and provide a platform for stronger growth in the years ahead? If not, the “new normal” will not be a good place to be

 

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A2 Macro: You Have $75 Billion To Save the World – How would you spend it?

May 23rd, 2012 at 11:48 am by Ben Christopher

Five top development economists including 4 Nobel Laureates were asked how they would best spend $75 billion to improve human welfare especially in developing countries and the list below is what they came up with in order of priority.

  1. Bundled interventions to reduce undernutrition in preschoolers (to fight hunger and improve education)
  2. Expanding the subsidy for malaria combination treatment
  3. Expanded childhood immunization coverage
  4. Deworming of schoolchildren, to improve educational and health outcomes
  5. Expanding tuberculosis treatment
  6. R&D to increase yield enhancements, to decrease hunger, fight biodiversity destruction, and lessen the effects of climate change
  7. Investing in effective early warning systems to protect populations against natural disaster
  8. Strengthening surgical capacity
  9. Hepatitis B immunization
  10. Using low‐cost drugs in the case of acute heart attacks in poorer nations (these are already available in developed countries)
  11. Salt reduction campaign to reduce chronic disease
  12. Geoengineering R&D into the feasibility of solar radiation management
  13. Conditional Cash Transfers for School Attendance
  14. Accelerated HIV Vaccine R&D
  15. Extended field trial of information campaigns on the benefits of schooling
  16. Borehole and public hand-pump intervention

More details can be found here.

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For $24.95, George W. Bush Will Share His ‘Strategies For Economic Growth’

May 22nd, 2012 at 11:36 am by Ben Christopher

If you’re looking for some light post exam season poolside reading material, perhaps the previous US President’s thoughts on how to achieve economic growth will appeal.

However, according to this report by the Economic Policy Institute under Bush’s watch “between the end of the 2001 recession (2001Q4) and the peak of that expansion (2007Q4), the U.S. economy experienced the worst economic expansion of the post-war era.”

Further details as to why this may struggle to make Richard and Judy’s current book list can be found here.

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AS Macro (Unit 2) Economics Online Revision Clinic – Tuesday 22 May 2012

May 21st, 2012 at 10:12 pm by Jim Riley

The second in our series of online revision clinics for AS Economics students taking their Unit 2 exams will be 8.30 pm to 9.30 pm on Tuesday 22 May 2012.

To participate in the revision clinic (e.g. ask questions, comment etc) you will need to login using your FB or Twitter ID.

NOTE: PLEASE DO NOT USE THE DISQUS COMMENT SYSTEM BELOW TO ASK QUESTIONS IN THE REVISION CLINIC – THIS DOESN’T WORK.

 

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Unit 2 Macro: Evaluation on Supply-Side Policies

May 21st, 2012 at 4:22 pm by Geoff Riley

Lots of students will be revising the economics of supply-side policies this week with their AS macro paper coming into view. There are different interpretations of what constitutes a supply-side policy measure. I like to label SSP (supply-side policy) to any policy or group of measures where emphasis is given to improving the working of markets, raising factor efficiency, improving the quantity and quality of labour and in lifting the capacity and competitiveness of an economy in a constantly-changing international environment.

Many supply side policies focus on improving incentives and outcomes in the labour market, others are geared towards bettering the performance of markets for goods and services, All of them centre on helping to sustain non-inflationary growth, improve trade performance, lift living standards and create new and fulfilling jobs opportunities.

This revision blog looks in particular at some evaluation points on supply-side approaches:

1/ Be Specific!

When writing about SSPs, it is always better to be specific rather than talk in generalised terms. So for example, you might be discussing measures to improve occupational mobility and employability for the long-term unemployed. In my experience, few students venture far beyond mentioning New Deal (….. old deal …… New Deal no longer exists in its original format) and perhaps flirt with mentioning government subsidies. Far better to be clear on specific measures such as the new Youth Contract, educational maintenance allowances (now being phased out by Gove), Modern Apprenticeships and a raft of other labour market interventions focusing on a key objective of creating a more educated workforce that is the most flexible in Europe (see this document from HM Treasury, March 2012)

Some specifics from the March 2012 Growth Review:

* reducing the main rate of corporation tax by a further one per cent. From April this year, the rate will be reduced to 26 per cent and by 2014 it will reach 23 per cent
* increasing the SME rate of R&D tax credit
* opening up more land for development, while retaining existing controls on greenbelt land
* etting up 21 new Enterprise Zones with superfast broadband, lower taxes and low levels of regulation and planning controls
* increasing green investment through support for the carbon price and a Green Investment Bank
* establishment of a High Value Manufacturing Technology and Innovation Centre
* development of a new degree-equivalent Higher Level Apprenticeship
* nine new university based centres for innovative manufacturing
* funding for up to 100,000 additional work experience placements for young people and 50,000 additional apprenticeship places over the next four years
* University Technical Colleges programme – establish at least 24 new colleges by 2014

There are many commentators of course who argue that these measures are half hearted and do not go far enough

2/ Long time lags

Supply-side policies tend by their nature to have longer time lags between a policy being applied and the effects becoming visible and durable. This is an important evaluation point. Many of the structural weaknesses and problems in Britain have been around for a long time and seem to have become embedded – for example the deep problem of functional illiteracy among millions of adults or the long-standing productivity gap between the UK and a number of advanced high-income nations.

3/ Policy combinations

SSPs on their own may be necessary but insufficient to make significant progress in achieving macroeconomic goals. Students are encouraged to think about combinations of policies that might work well together – policies that might have a mutually reinforcing effect. A good example to discuss here would be a set of policies designed to promote innovation, change consumption and make noticeable progress in cutting carbon emissions per unit of output

Fiscal and monetary policy

Changes in fiscal and / or monetary policy can have supply-side consequences too! Well targeted government spending on infrastructure or changes in direct and indirect taxation can have an effect on a number of supply-side variables. Likewise monetary policy decisions that affect the cost of borrowing or the value of the exchange rate clearly have aggregate demand effects but also second round implications for investment, research, productivity and jobs.

4/ SPPS and the distribution of income and wealth

This is a key one! Many exam boards have made it clear that students ought to at least consider the possible effects of different policies on the final distribution of income and wealth. SSPs should not be ignored in this respect. Some policies might risk widening the gap between high and low-income groups – for example those lobbying for lower rates of income tax especially at the top end, or a decision to cut inheritance tax or capital gains tax with a view to encouraging entrepreneurship. Other SSPs such as changes in employment laws, minimum wages, and reforms to welfare benefits also have scope to alter the distribution of disposable income and wealth.

Some SSP have a narrow impact – for example tax relief for small businesses, targeted subsidies for creative industries, financial incentives for specific industries in specific regions. Other policies have a broader scope or magnitude – changes in direct taxation, changes to welfare entitlement, investment maintained schools and the national health service.

5/ SSPs in other countries

The global economy changes at an increasingly rapid speed and in nearly every nation there are strategies for reforms and investment that impact on the relative competitiveness of the UK economy. My evaluation point here is that SSPs need to keep pace with what is happening in other parts of the world. Where does the UK stand in terms of educational achievement, health outcomes, research and development spending, progress towards low and zero carbon technologies? Are we getting value for money from supply-side investments? What can we learn from the experience of other countries?

6/ Different approaches to the supply-side

Examiners will reward students who are aware of different approaches to supply-side policy ranging from free-market approaches (cutting the size of government, lower taxes, opening up markets, flat rate taxation) through to those who favour interventionism from the state (active regional policies, a key role for government, progressive taxation, employment protection) and many views in between.

7. SSPs have demand-side effects

Supply and demand are not independent variables – if SSPs work well then there are demand-side spillover effects to consider. Improved innovation creates new demand (from home and overseas markets), infrastructure investment can bring sizeable fiscal multiplier effects, an increase in investment in training and education will increase the demand for people in those sectors, measures to make child-care more affordable or to attract net inward migration of skilled workers will expand the labour supply, lift national income and inject more spending power into the circular flow.

Supply-side policies are important. Ensure that you can bring good AD-AS analysis into your answer and try to make effective use of data contained in the stimulus question. Understand the links between effective supply-side policies and the key macroeconomic objectives of a government. And be prepared to evaluate / discuss some of the limitations of SSPs – some of which are mentioned above.

 

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An Economists Guide to Teaching Styles

May 21st, 2012 at 9:56 am by Geoff Riley

Many thanks to Paul Bridges for this witty and revealing interpretation of teaching styles – I am sure our student and teaching community can suggest additional styles and we will happily showcase the best! Over to you!

Smithian:
Day 1, teacher walks in and sits down, points at books. Students figure it out. Some students do not.

Ricardian:
Same as Smithian but this time the students learn who is good at learning topics and who isn’t. They swap each other for information and tips until one student becomes grand poobah and charges all the others (possible short cut if teacher intervenes and charges beforehand).

Malthusian:
There is only so much spaces available in the classroom so the first students get the seats. The rest have to watch press their ear to the window as they watch from outside.

Pigouvian:
Each student is charged for every wrong answer and paid for every right answer.

Darwinian:
System whereby students develop natural advantages through the exhortations of their mothers upon their teachers.

Keynesian:
The students submit work, teachers mark it. The more they submit the more we mark and fill up our assessment spreadsheets. Everyone seems to be learning more and more. Student leave eventually and fail to ever learn anything again due to their inherent need to be spoon-fed.

Hayekian:
Perfect information, teachers tell the students everything good and bad about their performances and their learning, constantly feeding them information to ensure they make the best possible decisions. Every action is reported, analysed and evaluated. Students leave after one week to do Geography.

Marxian:
Every student gets a textbook to learn at the beginning of the course and exactly the same set of course notes. All lessons are delivered according to a script with accompanying PowerPoint. The course is only delivered once, filmed and shown as a movie to future students while the staff develop their professional knowledge down the pub.

Greenspan:
Hdsk, sdadsjh Rand ahdn tnea strong adkhdn ggfint low interest fgngbvhj algngu mghvhs gfnuiy,l,h BOOOmm zzzzzzzzz. We’ve all had a brilliant time.

Minksy:
Everyone within a school is superb, all students are insightful, well behaved and hard working, teachers are fantastically inspirational and everyone does jolly well. At the end of their time in school students leave and fail miserably for the rest of their lives as they are completely unprepared for the crushing drudgery of the real world.

Sachsian:
There is no perfect way to learn… apart from this brilliant way I’ve just thought of in that every child must have a bespoke, context specific and changing learning plan suited perfectly for their exact needs.

Easterleyian:
The opposite of whatever Sachs said.

Stiglizian:
Having taught for years the Stiglitzian teacher is an expert par excellence on all methods and in all contexts and will be happy to point out where you’ve been going wrong. (The Stiglitizian teacher can often be found working for OFSTED)

EdExOCRAQAesian:
All students must work really hard but their teacher should ensure they attend one short but expensive CPD course where all the exam answers might be provided

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Oxbridge Economics: Introduction to Game Theory

May 21st, 2012 at 8:09 am by Mo Tanweer

Here is an “Introduction to Game Theory” lecture, which offers a broad introduction to the field, with some exercises to do at the end. (The yellow-underlined text hyperlinks out to other resources).

The document can be downloaded below:

Game_Theory_Intro_and_questions_2009.pdf

image

And for those of you who are particularly interested in Game Theory, you may find this public lecture at the LSE of interest – entitled Predictioneer: How to predict the future with game-theory”. (A hat-tip to Peter Judge for spotting this!)

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Unit 3 Micro: Game Theory and Business Economics

May 21st, 2012 at 8:04 am by Geoff Riley

Game theory is mainly concerned with predicting the outcome of games of strategy in which the participants (for example two or more businesses competing in a market) have incomplete information about the others’ intentions.  This revision blog looks at some of the ways in which game theory can be applied to business economics decisions.

Here are some recent examples of game theory in action:

* Panic buying of fuel ahead of a tanker driver strike (2012)
* London bus drivers threaten strikes during the Olympics (2012)
* Central banks intervene in currency markets: What are currency wars?
* Over-fishing of the oceans (tragedy of the commons): Overfishing ‘costs EU £2.7bn each year’
* Doping in professional sports: The race to keep up with blood doping sports cheats
* Supermarket petrol price war (May 2012)
* Competition between London’s free newspapers
* 3G and 4G spectrum auctions (4G spectrum auction in the UK is currently delayed by legal wranglings)
* Decisions by airlines about whether to levy fuel surcharges when world oil prices rise (collusion fines for BA and others)
* Solar panel trade wars (May 2012) See also New York Times
* Environmental policies – e.g. decisions about whether or not to introduce carbon trading schemes (China) or a carbon tax (Australia)
* The Euro Zone crisis – will Germany blink and permit a relaxation of austerity conditions in Greece and other crisis countries?

Game theory analysis has direct relevance to the study of the conduct and behaviour of firms in oligopolistic markets – for example the decisions that firms must take over pricing and levels of production, and also how much money to invest in research and development spending.

Costly research projects represent a risk for any business – but if one firm invests in R&D, can a rival firm decide not to follow? They might lose the competitive edge in the market and suffer a long term decline in market share and profitability.

The dominant strategy for both firms is probably to go ahead with R&D spending. If they do not and the other firm does, then their profits fall and they lose market share. However, there are only a limited number of patents available to be won and if all of the leading firms in a market spend heavily on R&D, this may ultimately yield a lower total rate of return than if only one firm opts to proceed

The Prisoners’ Dilemma

The classic example of game theory is the Prisoners’ Dilemma, a situation where two prisoners are being questioned over their guilt or innocence of a crime.

They have a simple choice, either to confess to the crime (thereby implicating their accomplice) and accept the consequences, or to deny all involvement and hope that their partner does likewise.

The “pay-off” is measured in terms of time spent in prison arising from their choices and this is summarised in the table below.

(Acknowledgede source: Mo Tanweer,2009)

No communication is permitted between the two suspects – in other words, each must make an independent decision, but clearly they will take into account the likely behaviour of the other when under-interrogation.

Nash Equilibrium

A Nash Equilibrium is an idea in game theory – it describes any situation where all of the participants in a game are pursuing their best possible strategy given the strategies of all of the other participants. In a Nash Equilibrium, the outcome of a game that occurs is when player A takes the best possible action given the action of player B, and player B takes the best possible action given the action of player A

Applying the Prisoner’s Dilemma to business decisions

Game theory examples revolve around the pay-offs that come from making different decisions. In the classic prisoner’s dilemma the reward to defecting is greater than mutual cooperation which itself brings a higher reward than mutual defection which itself is better than the sucker’s pay-off.

Critically, the reward for two players cooperating with each other is higher than the average reward from defection and the sucker’s pay-off.

Consider this example of a simple pricing game: The values in the table refer to the profits that flow from making a particular decision.

• Display of payoffs: row first, column second e.g. if Firm A chooses a high output and Firm B opts for a low output, Firm A wins £12m and Firm B wins £4m.

• In this game the reward to both firms choosing to limit supply and thereby keep the price relatively high is that they each earn £10m. But choosing to defect from this strategy and increase output can cause a rise in market supply, lower prices and lower profits – £5m each if both choose to do so.

• A dominant strategy is a strategy that is best irrespective of the other player’s choice. In this case the dominant strategy is competition between the firms.

The Prisoners’ Dilemma can help to explain the break down of price-fixing agreements between producers which can lead to the out-break of price wars among suppliers, the break-down of other joint ventures between producers and also the collapse of free-trade agreements between countries when one or more countries decides that protectionist strategies are in their own best interest.

The key point is that game theory provides an insight into the interdependent decision-making that lies at the heart of the interaction between businesses in a competitive market.

Some strategies in the Prisoners’ Dilemma (for repeated games)

* Always defect.
* Always cooperate.
* Tit for Tat: On the first encounter cooperate; thereafter do what the other player did last time.
* Massive retaliation: Cooperate until the other player defects; thereafter always defect.
* Tit for Two Tats: Forgive a single defection; strike back once after two in a row.
* Two Tits for a Tat:Defect twice following a defection by the other side.
* Sneaky: Normally play TIT FOR TAT, but try to sneak in a defection now and then.
* Opportunist Tit for Tat: Play TIT FOR TAT unless the other player appears to be unresponsive; then always defect.
* Random: Choose between defection and cooperation randomly.

Game Theory and Climate Change

Can repeated games of the prisoner’s dilemma help climate negotiations? With 2012 signalling the expiry date of the Kyoto Protocol, there is an urgent need for a successor treaty to tackle the ever-increasing global emissions problem.

The main issue with tackling climate change is the cost to countries of implementing it. To be successful it will need profound transformation of energy and transport organisations, and changes in the behaviours of billions of consumers. The Stern Review admitted that it will likely cost 1% of GDP –even though it doesn’t seem much, it is double the amount currently spent on development aid worldwide.

The issue here is how countries can expect to make cuts in emissions when their economic competitors refuse. This in turn leads to the Tragedy of the Commons which occurs when a group’s individual incentive lead them to take actions which, overall, lead to negative consequences for all group members. A country that refuses to act, whilst the other cooperates, will experience a free-rider benefit – enjoying the advantage of limited climate change without the cost. On the flip side, any country that imposes limits, when its competitors do not, incurs not just the cost of limiting its own emissions, but also a further cost in terms of reduced competitiveness

The dynamics of the prisoner’s dilemma do change if participants know that they will be playing the game more than once. In 1984 an American political scientist at the University of Michigan, Robert Axelrod, argued that if you play the game repeatedly you are likely to see emerging is cooperative rather than defective actions.

He identified four elements to a successful strategy which is this case can be applied to climate negotiations:

1. Be Nice – sign up to unilateral cuts in emissions, as deep as your economy and financing capacity allows.

2. Be Retaliatory – single out countries that have not commenced action and, in collaboration, find ways of pressurising them until they do so.

3. Be Forgiving – when non-compliant countries come onboard give them generous applause; signal that good behaviour will be rewarded with even deeper cuts in your own emissions.

4. Be Clear – let everyone know in advance exactly how you are going to behave – that you will work with them if they take action on emissions, and that you will retaliate if they do not.

Repeated Prisoner’s Dilemma provides valuable insight into how countries should act away from the negotiating table and over the longer term. Ultimately, for the planet’s sake, one hopes that everyone will play the game

Source: Mark Johnston, EconoMax, December 2007

 

 

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Unit 2 Macro: The Current Account of the Balance of Payments

May 20th, 2012 at 7:45 pm by Geoff Riley

A revision note for AS economists on the current account of the balance of payments

Measuring the current account

* The current account of the balance of payments comprises the balance of trade in goods and services plus net investment incomes from overseas assets and net transfers

* Net investment income comes from interest payments, profits and dividends from external assets located outside the UK.

For example a UK firm may own a business overseas and send back some of the operating profits to the UK. This would count as a credit item for our current account as it is a stream of profits flowing back into the UK.

Similarly, an overseas investment in the UK might generate a good rate of return and the profits are remitted back to another country – this would be a debit item in the balance of payments accounts.

Transfers into and out of a country include foreign aid payments. For the UK the net transfers figure is negative each year, mainly due to the UK being a net contributor to the budget of the European Union. As a rich nation, the UK makes sizeable foreign aid payments to many other countries.

Trade balance in goods and services

Data from Timetric.

To view this graph, please install Adobe Flash Player.

Office for National Statistics’ time series from Timetric

What does a current account deficit mean?

Running a deficit on the current account basically means that the UK economy is not paying its way in the global economy. There is a net outflow of demand and income from the circular flow of income and spending. 

The current account does not have to balance because the balance of payments also includes the capital account. The capital account tracks capital flows in and out of the UK. This includes portfolio capital flows (e.g. share transactions and the buying and selling of Government debt) and direct capital flows arising from foreign investment.

The capital account is not covered at AS level; you only need to understand the current account of the balance of payments.

What are the main causes of a current account deficit?

Why do some countries including the UK and the United States run persistently large trade deficits? Whilst other nations including China, Germany and Japan achieve big trade surpluses each year?

This is an example of the economics of causation – i.e. looking at an issue and trying to unravel some of the main causes. It is good for your evaluation skills to group the explanations for the record trade deficit in goods into short-term, medium-term and long-term factors. In general, shorter-term explanations tend to focus on demand-side factors whereas longer-term causes are often the result of supply-side factors.

1. High income elasticity of demand for imports – the income elasticity for imports is high so when consumer demand is strong, the volume of imported products grows quickly

2. Long-term decline in the capacity of manufacturing industry because of de-industrialization

3. There has been a shift of manufacturing production to lower-cost emerging market countries and then export products back into the UK. Many UK businesses have out-sources assembly of goods to other countries whilst retaining other aspects of the supply chain such as marketing and research within the UK.

4. The UK is a net importer of foodstuffs and beverages and has also seen a sharp rise in imports of oil and gas as our North Sea oil and gas production is long past its peak levels

5. The trade balance is vulnerable to shifts in world commodity prices and exchange rates. We import a large volume of raw materials, component parts and pieces of capital equipment.

The balance of payments and the standard of living

A common misconception is that balance of payments deficits are always bad for the economy. This is not necessarily true.  In principle, there is nothing wrong with a trade deficit. It simply means that a country must rely on foreign direct investment or borrow money to make up the difference. And in the short term, if a country is importing a high volume of goods and services this is a boost to living standards because it allows consumers to buy more consumer durables.

The balance of payments and aggregate demand

1. When there is a current account deficit – this means that there is a net outflow of demand and income from a country’s circular flow. In other words, trade in goods and services and net flows from transfers and investment income are taking more money out of the economy than is flowing in. Aggregate demand will fall.

2. When there is a current account surplus there is a net inflow of money into the circular flow and aggregate demand will rise. Examples of countries than run with current account surpluses include China, Germany and Norway.

 

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Unit 2 Macro: UK Trade in Services

May 20th, 2012 at 7:39 pm by Geoff Riley

A revision blog on UK overseas trade in services

Trade in services includes:

• Banking, insurance and consultancy
• Other financial services including foreign exchange and derivatives trading
• Tourism industry
• Transport and shipping
• Education and health services
• Research and development
• Cultural arts

Britain has a strong trade base in services with over thirty per cent of total export earnings come from services. Indeed the success of our service sector industries has been one of the strong points in tour economic performance over the last twenty years.

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

The UK balance of trade in services has been in surplus for many years. In 1999 the UK became the second largest exporters of services in the world. Strong surpluses are especially common in financial and business services and hi-tech knowledge services. The UK is also a major net exporter of creative services such as film and television programmes, books, advertising and marketing services and architecture and design.

But the UK runs a deficit in international travel and transportation in part because of rising demand for overseas holidays as living standards have improved. Once again, rising incomes have caused a large rise in the demand for leisure and business travel and the recent strength of the exchange rate (until recently) and the rapid expansion of low cost airlines offering short haul overseas breaks has also played its part.

Britain has a comparative advantage in selling financial services to the rest of the world.

London is one of the three main financial centres in the world and has the largest share of trading in many international financial markets. For example, around one third of all of the currency dealing takes place in London’s trading platforms and many overseas banks have established themselves in London’s money and capital markets.

Numerous British financial businesses have world class status in their areas of expertise.  Our UK based commercial banks, fund managers, securities dealers, futures and options traders, insurance companies and money market brokerage businesses are part of a complex network of financial and business services that represent a huge asset for the UK balance of payments accounts.

 

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Unit 2 Macro: Migration and the UK Economy

May 20th, 2012 at 3:36 pm by Geoff Riley

A revision blog on the economic impact of migration on the UK economy

Net migration is the net total of migrants during the period, that is, the total number of immigrants less the annual number of emigrants, including both citizens and non citizens

Data from Timetric.

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Net migration, United Kingdom from Timetric

Factors affecting the direction and scale of migration

Many economic and social factors affect the rate of migration. In general, the incentive to migrate is strongest when the expected increase in earnings exceeds the cost of relocation.

1. Differences between countries in wages and salaries on offer for equivalent jobs
2. Access to the benefits system of host countries plus state education, housing & health care
3. Employment opportunities vary between nations, in particular for younger workers
4. A desire to travel, learn a new language, pick up new skills and qualifications
5. A desire to escape political repression and corruption in the country of origin
6. The impact of satellite television and the internet in changing people’s expectations
7. The effects of cheaper trans-national phone calls and more affordable air travel and coach travel for example within the European Union
8. The unwillingness of people within the domestic economy to take certain “drudge-filled” jobs such as porters, cleaners and petrol attendants

The effects of labour migration on the labour markets of richer nations inside the European Union including the UK depend on where the main source of competitive advantage lies, according to research from Marques and Metcalf in a paper delivered to the Royal Economic Society. They argued that industries that source their competitive advantage from a large, skilled workforce will have gained from an influx of younger, well-educated workers. Industries such as high-knowledge manufacturing, transportation and financial services may well gain from an increase supply of skilled workers from Eastern Europe.

In contrast industries that rely on low-educated labour-intensive workers will lose out because production will gravitate to countries where unit labour costs are lower. Examples of include textiles and clothing and leisure sectors where there has been a shift of production towards emerging market countries in the Far East.

United Kingdom from Timetric

The impact of migration on the UK economy

Have migrant workers provided a boost to the competitiveness and supply-side capacity of the UK economy?

The debate will rage on for years and it is important to be aware that with this kind of controversial issue, many of those putting forward evidence will be using normative economics laden with value judgments and will often use data selectively to push their own point of view. 

Supporters of unrestricted inward labour migration have argued that migration provides numerous advantages:

1. Fresh skills: Migrants can provide complementary skills to domestic workers, which can raise the productivity of both (a Brazilian child minder provides good quality child care at an affordable price which allows a highly paid female magazine editor to continue to work.)

2. A driver of innovation and entrepreneurship: Inward migration can also be a driver of technological change and a fresh source of entrepreneurs. Much innovation comes from the work of teams of people who have different perspectives and experiences.

3. Pressure on government to reform: Labour migration can also put political pressure on failing governments and regimes e.g. a mass exodus of productive workers from Zimbabwe.

4. Multiplier effects: New workers create new jobs, there is a multiplier effect if they find work and contribute to a nation’s GDP through a higher level of aggregate demand.

5. Reducing skilled-labour shortages and expanding the labour supply: Migration can help to relieve labour shortages and help to control wage inflation. Recruitment of skilled workers from outside the European Union is important to many businesses in the UK, and evidence indicates they currently make a positive contribution to UK’s GDP.

6. Making a country attractive to FDI: Availability and quality of labour is known to be a key investment location factor for many businesses. In a global battle for talent, if a country is not successful in attracting and keeping skilled workers then FDI in high-knowledge industries will eventually flow to other parts of the world.

7. Income flows (remittances): Remittances sent home by migrants add to the GNP of the home nations. And if these remittances boost spending in these countries, this creates a fresh demand for the exports of other nations. Remittances sent home by migrants exceeded $440bn in 2010, with more than two-thirds of these flows going to developing countries.
According to the economist Professor Ian Goldin from Oxford University, in Latin America and the Caribbean, more than 50-million people are supported by remittances, and the numbers are even higher in Africa and Asia.

8. Tax revenues: Legal immigrants in work pay direct and indirect taxes and are likely to be net contributors to the government’s finances.

Supporters of allowing free movement of labour argue that labour mobility is a positive-sum game rather than a zero-sum game.

United Kingdom from Timetric

On the other side there are several pressure groups campaigning for tighter restrictions on migrant workers. Some of the arguments include:

• Welfare costs: Increasing cost of providing public services as migrants come into a country.
• Worker displacement: Possible displacement effects of domestic workers
• Wage cuts: Migrant workers may lower the wages of people in other jobs.
• Social pressures: Social tensions arising from the problems of integrating hundreds of thousands of extra workers into local areas and regions.
• Pressure on property prices: Rising demand for housing which forces up prices and rents.
• Benefit claims: Many immigrants find it hard to get work
• Who really gains? The benefits of migration are focused mainly on employers, especially those who take on illegal workers at low wages.
• Poverty risk: Migration may have the effect of worsening the level of relative poverty in a society. And many migrant workers have complained of exploitation by businesses that have monopsony power in a local labour market.

United Kingdom from Timetric

Brain Drains

A brain drain is a term that describes the movement of highly skilled or professional people from their own country to another country where they can earn more money. It has been used to describe net outward migration of people from several European Union countries in recent times (notably Ireland, Greece and Spain) – another phrase for this is human capital flight.

A sizeable brain drain can bring economic costs and benefits for the sending nation. One disadvantage is that countries lose out on the benefits that might have accrued from the resources used in educating people who leave. Add to this the loss of tax revenue from those who choose to live and work overseas. A sizeable loss of skilled workers (many of whom may be younger and therefore more geographically mobile) could lead to labour shortages in the sender country, putting upward pressure on wages and labour costs.

Some of this income earned overseas returns to the sender country in the form of remittances (adding to GNP) and many skilled migrants often leave only for a year or two – the percentage of permanent migration inside the EU is relatively small.

The benefits and costs of labour migration are hard to quantify and estimate. Much depends on

1. The types of people who choose to migrate from one country to another.

2. The ease with which they assimilate into a new country and whether they find regular jobs.

3. Whether a rise in labour migration stimulates capital spending by firms and by government.

4. Whether workers who come into a country decide to stay in the longer term or whether they regard migration as essentially a temporary exercise (e.g. to gain qualifications, learn some English) before moving back to their country of origin.

Impact on the economies of source countries

An important evaluation point is that inward migration into the UK from Eastern European countries has affected not just the UK labour market but also the labour markets in the countries from which these migrants have come.  Many eastern European countries have suffered from a sustained reduction in the size of their populations – migration is one factor behind this although not the only one. There are many potential negative consequences among them the following:

• A reduction in the size of the available labour supply

• A possible reduction in the quality of the labour supply if skilled migrants leave

• A fall in aggregate demand for goods and services

• A worsening problem of labour shortages which could drive up wages, costs and prices

• A decline in the tax-paying population which will hit government tax revenues

 

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Unit 2 Macro: Positive and Negative Multiplier Effects

May 20th, 2012 at 3:20 pm by Geoff Riley

An initial change in aggregate demand can have a much greater final impact on equilibrium national income. This is known as the multiplier effect. It comes about because injections of new demand for goods and services into the circular flow of income can stimulate further rounds of spending – in other words “one person’s spending is another’s income”. Put another way, spending becomes someone else’s income. This can lead to a bigger eventual effect on output and employment.

Here are three recent news videos covering aspects of the multiplier effect at work:

Irish economy seeks foreign direct investment to sustain their economic recovery

1,300 lost jobs at Bombardier in Derby may threaten up to 13,000 other jobs  – this new video on the story is particularly good about the wider knock-on economic effects: Bombardier trains: Loss of contract felt across UK

Mostyn port deal over windfarm creates 100 new jobs

What is the multiplier process?

• An initial change in aggregate demand can have a much greater final impact on equilibrium national income.
• This is known as the multiplier effect
• It comes about because injections of new demand for goods and services into the circular flow of income can stimulate further rounds of spending – in other words “one person’s spending is another’s income”
• Put another way, spending becomes someone else’s income
• This can lead to a bigger eventual effect on output and employment.

What is a simple definition of the multiplier?

It is the number of times a rise in national income exceeds the rise in injections of demand that caused it

Examples of the multiplier effect at work

Consider a £300 million increase in capital investment – for example created when an overseas company decides to build a new production plant in the UK. This may set off a chain reaction of increases in expenditures. Firms who produce the capital goods and construction businesses who win contracts to build the new factory will see an increase in their incomes and profits. If they and their employees in turn, collectively spend about 3/5 of that additional income, then £180m will be added to the incomes of others.

At this point, total income has grown by (£300m + (0.6 x £300m).

The sum will continue to increase as the producers of the additional goods and services realize an increase in their incomes, of which they in turn spend 60% on even more goods and services.

The increase in total income will then be (£300m + (0.6 x £300m) + (0.6 x £180m).

Each time, the extra spending and income is a fraction of the previous addition to the circular flow.

The Multiplier and Keynesian Economics

The concept of the multiplier process became important in the 1930s when John Maynard Keynes suggested it as a tool to help governments to maintain high levels of employment. This “demand-management approach”, designed to help overcome a shortage of capital investment, measured the amount of government spending needed to reach a level of national income that would prevent unemployment.

The higher is the propensity to consume domestically produced goods and services, the greater is the multiplier effect. The government can influence the size of the multiplier through changes in direct taxes. For example, a cut in the rate of income tax will increase the amount of extra income that can be spent on further goods and services.

Another factor affecting the size of the multiplier effect is the propensity to purchase imports. If, out of extra income, people spend their money on imports, this demand is not passed on in the form of fresh spending on domestically produced output. It leaks away from the circular flow of income and spending, reducing the size of the multiplier.

The multiplier process also requires that there is sufficient spare capacity for extra output to be produced.

If short-run aggregate supply is inelastic, the full multiplier effect is unlikely to occur, because increases in AD will lead to higher prices rather than a full increase in real national output. In contrast, when SRAS is perfectly elastic a rise in aggregate demand causes a large increase in national output.

In short – the multiplier effect will be larger when

1. The propensity to spend extra income on domestic goods and services is high
2. The marginal rate of tax on extra income is low
3. The propensity to spend extra income rather than save is high
4. Consumer confidence is high (this affects willingness to spend gains in income)
5. Businesses in the economy have the capacity to expand production to meet increases in demand

Time lags and the multiplier effect

It is important to remember that the multiplier effect will take time to come into full effect. A good example is the fiscal stimulus introduced into the US economy by the Obama government. They have set aside many billions of dollars of extra spending on infrastructure spending but these sorts of capital projects can take months if not years to be completed. Delays in sourcing raw materials, components and finding sufficient skilled labour can limit the initial impact of the spending projects.

Calculating the value of the multiplier

The formal calculation for the value of the multiplier is

Multiplier = 1 / (sum of the propensity to save + tax + import)

Therefore if there is an initial injection of demand of say £400m and

• The marginal propensity to save = 0.2
• The marginal rate of tax on income = 0.2
• The marginal propensity to import goods and services is 0.3

Then the value of national income multiplier = (1/0.7) = 1.43

An initial change of demand of £400m might lead to a final rise in GDP of 1.43 x £400m = £572m

If
• The marginal propensity to save = 0.1
• The marginal rate of tax on income = 0.2
• The marginal propensity to import goods and services is 0.2

The value of the multiplier = 1/0.5 = 2 – the same initial change in aggregate demand will lead to a bigger final change in the equilibrium level of national income.

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Unit 2 Macro: The Importance of Productivity

May 20th, 2012 at 3:13 pm by Geoff Riley

Productivity is a key measure of supply-side economic performance and labour efficiency.

Output per person employed in the UK

Data from Timetric.

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Bank of England Target 2.0 from Timetric

Productivity is a measure of the efficiency of the labour force measured by output per worker or output per worker hour.

The advantages of higher productivity

Productivity is the main determinant of living standards – it quantifies how an economy uses the resources it has available, by relating the quantity of inputs to output. As the adage goes, productivity isn’t everything, but in the long run it’s almost everything.

Higher productivity can lead to:

(1) Lower average costs: These cost savings might be passed onto consumers in lower prices, encouraging higher demand, more output and an increase in employment.

(2) Improved competitiveness and trade performance: Productivity growth and lower unit costs are key determinants of the competitiveness of British firms in global markets.

(3) Higher profits: Efficiency gains are a source of larger profits for companies which might be re-invested to support the long term growth of the business.

(4) Higher wages: Businesses can afford higher wages when their workers are more efficient.

(5) Economic growth: If the British economy can raise the rate of growth of productivity then the trend growth of national output can pick up.

Data from Timetric.

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United Kingdom from Timetric

The productivity gap

The level of GDP per worker and GDP per hour worked in the UK is well below that of the United States, France and Germany. This is known as the productivity gap. Some progress has been made in closing the gap but there is still much work to do.

No one factor on its own is sufficient to explain the differences in efficiency.

(1) Relatively low rates of capital investment – i.e. the failure of the economy to invest and thereby to raise the stock of physical capital available to the workforce

(2) Low rates of spending on research and development – The UK now devotes much less of GDP to research spending than other nations and this impacts on the pace of innovation and the speed with which new technology is incorporated into production

(3) Skills of the labour force – there are long-standing concerns about the educational skills of the UK labour force including basic literacy and the quality of job specific training. Britain has one of the highest rates of functional illiteracy among adults, together with fewer workers with higher skills (at degree level or above) compared to the United States and fewer workers with intermediate and vocational skills compared to Germany and Japan.

(4) Over-regulation of industry and commerce and a lack of competition – the 1999 McKinsey Report highlighted a lack of competitive pressures in some industries (notably retailing) as a source of inefficiency and low productivity growth.

Data from Timetric.

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United Kingdom from Timetric

Those industries with the most up-to-date capital machinery, together with advanced managerial skills and highly qualified and well-trained workforces tend to achieve much higher levels of productivity. The availability of large-scale green-field, full-integrated production plants and good industrial relations are also at the heart of achieving year on year improvements in output per person employed.

The strength of demand also affects productivity. When demand is high and production plants are running close to full capacity, then output per worker employed is likely to be rising because factor resources including labour and capital are being used to their full extent. In contrast, during a recession or a slowdown in demand, the utilisation of labour and capital falls. Productivity growth often slows down in a recession

Skills gap and low profits contribute to poor productivity

A recent study from the Engineering Employers Federation finds that fewer firms in Britain take on apprentices, investment projects are often ditched by managers and skilled workers are in short supply. The EEF argues that UK firms need to invest in capital equipment and skills and innovation, as well as making the best of modern working practices such as lean manufacturing and high performance working. Part of the problem for manufacturers has been a lack of profits to invest.

Adapted from research published by the Engineering Employers Federation www.eef.org.uk

‘Productivity in Britain continues to lag behind that of our main European competitors. One important reason is the large number of workers in Britain who have low skills and, consequently, low productivity and low pay. Many young people still fail to acquire any adequate level of skill. Young people with low skills on the UK labour market are faced with restricted employment opportunities, and the prospect of a poor quality job.’

Adapted from research published by House of Lords Economic Affairs Committee

Report into low UK productivity by economists at the London School of Economics

The persistent productivity gap between the UK and the two big continental European economies can mainly be ‘explained’ by the fact that they have more capital invested per worker and their workers are more skilled. Productivity growth is highest in industries with greater product market competition – where less productive firms contract and close while new more productive ones open and grow; and where competitive pressures force existing firms to improve.

If the UK could reach French productivity levels, we could award ourselves 20% higher wages or take a day off and still earn the same. Or we could spend the extra resources on schools and hospitals, greater benefits for the needy or lower taxes.

Capital investment plays an important role in productivity growth. But the UK has less physical capital per worker than the United States and considerably less than France and Germany. Many explanations have been offered for these shortfalls, including macroeconomic instability and business uncertainty.

 

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Unit 2 Macro: Measuring Unemployment in the UK

May 20th, 2012 at 3:07 pm by Geoff Riley

The unemployed are people able, available and willing to work at the going wage rate but cannot find a job despite an active search for work.

Unemployment means that scarce human resources are not being used to produce goods and services to meet people’s needs and wants. Persistently high levels of joblessness have damaging consequences for an economy causing both economic and social costs.

Measuring unemployment

Claimant Count
The Claimant Count measure includes people who are eligible to claim the Job Seeker’s Allowance (JSA). The data is seasonally adjusted to take into account predictable seasonal changes in the demand for labour.

The chart below shows the level of unemployment as measured by the claimant count – note the y-axis, the number of people claiming the jobseekers’ allowance

Data from Timetric.

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Bank of England Target 2.0 from Timetric

Labour force Survey
The Labour Force Survey counts those who are without any kind of job including part time work but who have looked for work in the past month and are able to start work immediately. The figure includes those people who have found a job and are waiting to start in the next two weeks

The chart below shows the LFS unemployment rate is unemployment as a percentage of the labour force

Data from Timetric.

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Bank of England Target 2.0 from Timetric

On average, the labour force survey measure has exceeded the claimant count by about 500,000 in recent years. Because it is a survey – albeit a large one and one that provides a rich source of data on the employment status of thousands of households across the UK – there will always be a sampling error in the data. The Labour Force Survey uses the internationally agreed definition of unemployment and therefore best allows cross-country comparisons of unemployment levels among developed countries.

No measure of unemployment can ever be completely accurate since there are some people out of work but looking for a job who are not picked up by the official statistics. An example of this are discouraged workers who may have been out of employment for a lengthy time and who have lost the motivation to keep applying for jobs. Many may decide to leave the formal labour market and look to earn extra income through ‘cash in hand’ jobs in informal parts of the economy.

Economic inactivity

Economically inactive people are not actively looking for work – some of the reasons include

• The need to look after elderly or infirmed relatives
• Parents who are full-time carers for their children
• The retired

Data from Timetric.

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Bank of England Target 2.0 from Timetric

Note that in many countries the official data may ignore the extent of under-employment in an economy, for example people who are desperate for full-time work but who cannot find it and have to settle for a part-time job. In many lower-income countries the quality of the labour market data may be poor causing published figures to be inaccurate

 

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Unit 2 Macro: Measuring Inflation in the UK

May 20th, 2012 at 2:58 pm by Geoff Riley

Inflation is a sustained increase in the cost of living or the average / general price level leading to a fall in the purchasing power of money. The opposite of inflation is deflation which is a decrease in the cost of living or average price level.

How is the rate of inflation measured?

The rate of inflation is measured by the annual percentage change in consumer prices.

The British government has set an inflation target of 2% using the consumer price index (CPI). It is the job of the Bank of England to set interest rates so that aggregate demand is controlled, inflationary pressures are subdued and the inflation target is reached. The Bank is independent of the government with control of interest rates and it is free from political intervention

The process of calculating the rate of inflation in the UK

The cost of living is a measure of changes in the average cost for a household of buying a basket of different goods and services.

Price data is used in many ways by the government, businesses, and society in general. They can affect interest rates, tax allowances, wages, state benefits, pensions, maintenance payments and many other ‘index-linked’ contracts.

In the UK there are two measures, the Retail Price Index (RPI) & the Consumer Price Index (CPI).

The major difference between the two measures, is that CPI calculations excludes payments on mortgage interest (It’s thought that by excluding mortgages, the CPI is a better measure of the impact of macroeconomic policy

The CPI is a weighted price index. Changes in weights reflect shifts in the spending patterns of households in the British economy as measured by the Family Expenditure Survey

CPI for goods and services

Data from Timetric.

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Bank of England Target 2.0 from Timetric

Limitations of the Consumer Price Index as a measure of inflation

The CPI is a thorough indicator of consumer price inflation for the economy but there are some weaknesses in its usefulness for some groups of people.

The CPI is not fully representative: Since the CPI represents the expenditure of the ‘average’ household, inevitably it will be inaccurate for the ‘non-typical’ household, for example, 14% of the index is devoted to motoring expenses – inapplicable for non-car owners. Single people have different spending patterns from households that include children, young from old, male from female, rich from poor and minority groups. We all have our own ‘weighting’ for goods and services that does not coincide with that assigned for the consumer price index.

Housing costs: The ‘housing’ category of the CPI records changes in the costs of rents, property and insurance, repairs. It accounts for around 16% of the index. Housing costs vary greatly from person to person.

Changing quality of goods and services: Although the price of a good or service may rise, this may also be accompanied by an improvement in quality as the product. It is hard to make price comparisons of, for example, electrical goods over the last 20 years because new audio-visual equipment is so different from its predecessors. In this respect, the CPI may over-estimate inflation. The CPI is slow to respond to the emergence of new products and services.

Data from Timetric.

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Bank of England Target 2.0 from Timetric

Deflation

Price deflation is the opposite of inflation and happens when the rate of inflation becomes negative. I.e. the general price level is falling and the purchasing power of say £1,000 in cash is increasing. Some countries have experienced bouts of deflation in recent years; perhaps the most well-known example was Japan during the late 1990s and in the current decade. In Japan, the root cause of deflation was slow growth and a high level of spare capacity in many industries that was driving prices lower. 

Hyperinflation

Hyperinflation is extremely rare. Recent examples include Yugoslavia Argentina, Brazil, Georgia and Turkey (where inflation reached 70% in 1999). The classic example of hyperinflation was of course the rampant inflation in Weimar Germany between 1921 and 1923. When hyperinflation occurs, the value of money becomes worthless and people lose all confidence in money both as a store of value and also as a medium of exchange. The recent hyperinflation in Zimbabwe is a good example of the havoc that can be caused when price inflation spirals out of control. It has made it virtually impossible for businesses to function in any kind of normal way.

UK Retail Price Inflation

Data from Timetric.

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Bank of England Target 2.0 from Timetric

 

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Unit 2 Macro: Real Interest Rates

May 20th, 2012 at 2:56 pm by Geoff Riley

The real rate of interest is important to businesses and consumers when making spending and saving decisions. The real rate of return on savings, for example, is the money rate of interest minus the rate of inflation.

So if a saver is receiving a money rate of interest of 6% on his savings, but price inflation is running at 3% per year, the real rate of return on these savings is only + 3%.

Real interest rates become negative when the nominal rate of interest is less than inflation, for example if inflation is 5% and nominal interest rates are 4%, the real cost of borrowing money is negative at -1%.

Real interest rates for the UK

Data from Timetric.

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United Kingdom from Timetric

 

 

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Unit 2 Macro: Human Development Index (HDI)

May 20th, 2012 at 2:30 pm by Geoff Riley

The Human Development Index (HDI) forms part of the annual human development report and is a composite measure of economic and social welfare that has three main components. At its most basic it focuses on longevity, basic education and minimal income and progress made by countries in improving these three outcomes. The inclusion of education and health indicators is a sign of successful government policies in providing access to important merit goods such as health care, sanitation and education. World Human Development Map

1. Knowledge: First an educational component made up of two statistics – mean years of schooling and expected years of schooling

2. Long and healthy life: Second a life expectancy component is calculated using a minimum value for life expectancy of 25 years and maximum value of 85 years

3. A decent standard of living: The final element is gross national income (GNI) per capita adjusted to purchasing power parity standard (PPP)

“Human development is the expansion of people’s freedom to live long, healthy and creative lives; to advance other goals they have reason to value; and to engage actively in shaping development equitably and sustainably on a shared planet. People are both the beneficiaries and the drivers of human development, as individuals and in groups” Source: HDR Report, November 2010

HDI Indicator Gateway

 

Important note: GNI is now used rather than GDP because of the growing significance of remittances in the global economy and also the importance of international aid payments. For example, because of large remittances from abroad, GNI in the Philippines greatly exceeds GDP

Log of income is used in the HDI calculation because income is instrumental to human development but higher incomes have a declining contribution to human development

Uneven progress but deep inequalities

• The world average HDI rose to 0.68 in 2010 from 0.57 in 1990, continuing the upward trend from 1970, when it stood at 0.48

• The fastest progress has been in East Asia & the Pacific, followed by South Asia and Arab States.

• All but 3 of the 135 countries have a higher level of human development today than in 1970

• The exceptions are the Democratic Republic of the Congo, Zambia and Zimbabwe

• From 1970 to 2010 real per capita income in developed countries increased 2.3 percent a year on average, compared with 1.5 percent for developing countries

• The real average income of people in 13 countries in the bottom quarter of today’s world income distribution is lower than in 1970

Limitations of the Human Development Index

• The HDI notably fails to take account of qualitative factors, such as cultural identity and political freedoms (human security, gender opportunities and human rights for example).

• Many argue that the HDI should become more human-centred and expanded to include more dimensions, ranging from gender equity to environmental biodiversity

• The GNP per capita figure – and consequently the HDI figure – takes no account of income distribution. If income is unevenly distributed, then the GNP per capita will actually be an inaccurate measure of the monetary well-being of the people. Inequitable development is not human development.• PPP values change quickly and are likely to be inaccurate or misleading

• The 2010 edition of the Human Development Report marked the launch of a new Inequality-adjusted HDI and also a Gender Inequality Index and a Multidimensional Poverty Index

Key point:
The United Nations HDI is intended to allow economists to draw broad conclusions about which countries enjoy relatively high standards of living, and which are, by comparison, under-developed.

 

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Q&A: What do we need to know about output gaps?

May 20th, 2012 at 12:51 pm by Geoff Riley

Q&A: For AS macroeconomics, what do we need to know about output gaps?

For AS level (the AQA board)

“An understanding of potentially inflationary, positive, and potentially deflationary, negative, output gaps is also expected in the context of the economic cycle. Candidates should understand that positive output gaps occur when actual GDP is above the productive potential of the economy, and negative output gaps occur when actual GDP is below the economy’s productive potential.”

Our focus in this blog is on the negative output gap in the UK. Actual GDP is estimated to be some distance below productive potential – this is because of the recession:

1/ Aggregate demand fell during the downturn causing businesses to sell less and then contract supply as a response to weaker demand. For many businesses price discount were used to offload excess stocks. Others took the decision to close down some of their production operations. Real GDP fell by more than 6 per cent from the peak of the economic cycle to the trough.

2/ As a result of lower production and employment, actual GDP is less than potential GDP. This implies that the level of spare capacity in the economy has risen.

3/ When spare capacity is high businesses have less power to raise prices even when costs are rising. Partly this is due to demand being more elastic in a recession as consumers become price conscious and savvy when it comes to finding a bargain.

4/ Higher spare capacity reduces the need for fresh capital investment designed to increase potential supply. The real level of investment is down by more than 25% in the UK during the downturn.

Nobody can be quite sure about the size of the output gap – perhaps the best estimates are provided by economists at the OECD. But is it clear that the British economy has a large margin of capacity available to meet rising aggregate demand as a recovery takes hold.

The danger is that a deep recession or perhaps a double-dip downturn will hurt long run aggregate supply for example as workers become structurally unemployed and as fewer new businesses start up to replace those that have fallen by the wayside.

Data from Timetric.

To view this graph, please install Adobe Flash Player.

OECD Economic Outlook Database (version 88) from Timetric

 

 

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Unit 2 Macro: The Output Gap

May 20th, 2012 at 12:45 pm by Geoff Riley

How much spare capacity does an economy have to meet a rise in demand? How close is an economy to operating at its productive potential? Has the recession damaged the economy’s productive potential? These sorts of questions all link to an important concept – the output gap. The output gap is the difference between the actual level of national output and the estimated potential level and is usually expressed as a percentage of the level of potential output.

Negative output gap – downward pressure on inflation

If actual GDP is less than potential GDP there is a negative output gap. Some factor resources such as labour and capital machinery are under-utilized and the main problem is likely to be higher than average unemployment.

A rising number of people out of work indicate an excess supply of labour, which causes pressure on real wage rates. We have seen millions of people in the labour market have to accept lower pay rises in recent years, many have seen wage freezes or actual wage cuts at a time when businesses have been under huge pressure to control their costs.

Data from Timetric.

To view this graph, please install Adobe Flash Player.

OECD Economic Outlook Database (version 88) from Timetric

Positive output gap – upward pressure on inflation

• If actual GDP is greater than potential GDP then there is a positive output gap.
• Some resources including labour are likely to be working beyond their normal capacity e.g. making extra use of shift work and overtime.
• The main problem is likely to be an acceleration of demand-pull and cost-push inflation.
• A positive output gap is associated with countries where an economy is over-heating because of fast and rising demand – a good example of this might be countries such as India and China

 

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Revision notes on unemployment

May 20th, 2012 at 10:24 am by Geoff Riley

A revision blog on possible unemployment questions on AS and A2 papers

Data from Timetric.

To view this graph, please install Adobe Flash Player.

Bank of England Target 2.0 from Timetric

Key revision points on unemployment – AS macroeconomics

Make sure you are aware of the main UK measures of unemployment, i.e. the claimant count and the Labour Force Survey measure.
Be aware of how employment and unemployment may be determined by both demand-side and supply-side factors

Demand side factors include:

1/ Strength / weakness of aggregate demand in the economic cycle i.e. changes in C+I+G+X-M – e.g. effect on jobs of a fall in UK exports overseas
2/ Cost of employing workers including real wages, employers’ national insurance contributions – many economists now calling for a cut in NIC as a way of stimulating jobs
3/ Impact of changes in the exchange rate and growth in trading partner countries on demand for and output in our export industries
4/ How changes in government spending and taxation can change the incentive for businesses to employ more/less people – impact of fiscal austerity / sharp decline in public sector jobs
5/ Impact of foreign direct investment on the demand for labour in the UK economy
6/ Employment effects from policies designed to stimulate enterprise (long run employment creation effects)

Supply-side factors include:

1/ Incentives to search for and then accept paid work (frictional U)
2/ Skills of the labour force (human capital)  (structural U)
3/ Impact of changes in geographical mobility of labour (structural U)
4/ Impact of changes in net migration of workers into the economy
5/ Importance of the availability and cost of child care as a factor affecting the ability of parents to seek and find work
6/ Changes in state retirement ages and investment in further and higher education

*Students should be able to analyse and evaluate these determinants with the help of production possibility curves and AD/AS diagrams.
*Students should also understand the terms cyclical, frictional, seasonal and structural unemployment.
*There should be an understanding of the output gap in relation to economic growth, unemployment and the price level

It is likely that questions on unemployment will focus on the consequences of the slowdown / recession on the labour market and also on the policy options that will be most effective in stimulating growth and new jobs. Growth of real GDP of less than 2 per cent per year is often enough to trigger a rise in the number of people registered as unemployed and looking for work

Data from Timetric.

To view this graph, please install Adobe Flash Player.

Bank of England Target 2.0 from Timetric

Key revision points on unemployment – A2 macroeconomics

At A2 level the focus of study on unemployment switches more to the consequences of unemployment and economic inactivity. For example you need to understand and discuss the consequences for individuals and the performance of the economy

Consequences may include:

(i) Effects on the underlying trend growth rate
(ii) Impact on government finance and the budget deficit
(iii) Implications for relative poverty / inequality
(iv) Direct effects on demand and associated multiplier and accelerator effects
(v) Longer term impact on the skills / motivation / employability of the unemployed
(vi) Social implications

There is also a need to be aware of the determinants of the natural rate of unemployment and both the short-run and long-run Phillips curves, and to be able to discuss the implications of these for economic policy.

So crucial to your revision will be

1/ The dynamics of the natural rate (i.e. frictional + structural) and the most effective policies to bring down both types of unemployment
2/ Discussions about the efficacy of different demand-side approaches to limiting cyclical unemployment in a recession
3/ The basics of the original Phillips Curves and criticisms / variants of it including the importance of inflation expectations, money illusion and the NAIRU
4/ Understanding the factors that explain why there are persistent differences in unemployment rates between countries – not least within the 27 nations of the European Union
5/ Consideration of labour market flexibility and how it can impact on macroeconomic performance
6/ Long term unemployment / youth unemployment and other deeper policy dilemmas

Data from Timetric.

To view this graph, please install Adobe Flash Player.

Bank of England Target 2.0 from Timetric

Evaluation on unemployment policies

1. Unemployment policies are designed to
a. Improve skills / human capital of the workforce so that people can be flexible as the economy changes over time
b. Provide the right incentives to look for and accept work
c. Increase the occupational and geographical mobility of labour
d. Maintain a sufficiently high level of demand for goods and services to create new jobs
e. Encourage entrepreneurship and innovation as a way of creating new products and market demand which will generate new employment opportunities
2. There are always cyclical fluctuations in employment. If growth can be sustained and monetary and fiscal policy can avoid a large negative output gap then it should be possible to create a steady flow of new jobs.
3. An economic recovery creates new jobs, the issue is whether people in the labour market have the right skills, qualifications and experience to take them
4. Demand and supply-side policies need to work in tandem for unemployment to fall. Simply boosting demand if the root cause of unemployment is structural is an ineffective way of tackling the problem. If demand is stimulated too much, the main risk is rising inflation
5. Full-employment does not mean zero unemployment! There will always be some frictional unemployment – it may be useful to have a small surplus pool of labour available. Most economists argue that in a modern economy there will always be some frictional unemployment of perhaps 2-3% of the labour force.
6. There are still large regional differences in unemployment levels which causes significant economic and external costs. Urban and regional regeneration can take decades to achieve.

Economists agree that unemployment cannot fall to zero since there will always be frictional unemployment caused by people moving into the labour market and others switching between jobs. Full-employment might be defined as when the labour market has reached a state of equilibrium – i.e. when those who are willing and able to work at going wage rates are able to find work.

 

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Unit 1: Which policies could promote economic growth?

May 19th, 2012 at 7:11 pm by Blogger Bryn

A fantastic summary of how fiscal, monetary and supply side policies could help achieve economic growth from economicshelp

http://www.economicshelp.org/blog/5272/economics/policies-for-economic-growth/

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Peston on The Eurozone

May 17th, 2012 at 8:27 pm by Michael Owen

As the Eurozone continues to be bufferted by instability in Spanish Banks, and uncertainty over Greek membership of the single currency. Robert Peston fronts a programme on The Euro on BBC2 tonight.

It remains to be seen if he offers any answers to Mervyn King’s observation, that the UK biggest trading partner, the euro area, is “tearing itself apart without any obvious solution,”

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tutor2u Visit to the Middle East – April 2013

May 17th, 2012 at 2:09 pm by Jim Riley

We have been invited by several colleagues to organise a visit to the Middle East in April 2013 to provide a programme of CPD and student revision workshops. As part of our planning, we’d like to invite colleagues in the area to let us have their thoughts on the content of the programme. Please use this online survey to have your input into the tour planning!

https://tutor2u.wufoo.com/forms/2013-uae-qatar-programme/

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Unit 1 Micro: Revision Presentation on Government Intervention

May 17th, 2012 at 5:54 am by Geoff Riley

Here is a short 35 slide revision presentation on government intervention in markets designed for AS microeconomics revision

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Unit 1 Micro: Revision Presentation on Externalities

May 17th, 2012 at 5:52 am by Geoff Riley

Here is a short revision presentation on externalities streamed using Slide Share

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Unit 2 Macro: Bank Cuts UK growth Forecast for 2012

May 17th, 2012 at 5:35 am by Geoff Riley

The quarterly Inflation Report is an opportunity for the Bank of England to flesh out their latest forecasts and thoughts on the direction of the UK economy and it is safe to say that the May report will probably be best remembered for a remarkable statement from the Bank of England Governor Mervyn King.

“We have been through a big global financial crisis; the biggest downturn in world output since the 1930s; the biggest banking crisis in this country’s history; the biggest fiscal deficit in our peacetime history; and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution. The idea that we could reasonably hope to sail serenely through this with growth close to the long-run average and inflation at 2 per cent strikes me as wholly unrealistic.”

In short:

* Economic growth for 2012 – forecast has been cut to just 0.8%
* Consumer spending will continue to fall this year as real living standards for millions of people are squeezed
* The rising cost of borrowing in the wholesale money markets is increasing costs for banks and is putting upward pressure on the price of business loans and mortgages
* Now sees significant chance of negative annual GDP growth in 2012. Raises near term inflation forecast – CPI inflation inflation to fall back to target before the middle of 2013
* It may take a long time to get the UK economy back to previous growth / inflation paths: ““There’s no obvious reason to believe we can’t get back to original path [of economy pre-crisis] but may take 10/15/20 years” – a realisation of the severity of the shock to the global financial system and the aftermath
* Weak growth forecasts for 2012 assumes that there will not be a collapse / breakup of the single currency

Bank governor warns of eurozone crisis ‘storm’

Bank of England warns of euro crisis ‘storm’ (BBC news video)

A sticky wicket for the Bank (Stephanie Flanders)

Bank of England Inflation Report Data Sections

 

King on economic risks for the UK

       

 

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Unit 2: The components of Aggregate Demand

May 16th, 2012 at 9:38 pm by Blogger Bryn

Explanation and data from tutor2u

http://www.economicshelp.org/blog/5301/economics/components-of-aggregate-demand/

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Unit 1: Supply and Demand: Revision powerpoint

May 16th, 2012 at 9:32 pm by Blogger Bryn

….from tutor2u

http://www.tutor2u.net/blog/index.php/economics/comments/unit-1-micro-revision-presentation-on-the-price-mechanism?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+economics_news+%28tutor2u+Economics+Blog%29#When:16:23:21Z

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Unit 2: Youth unemployment in the UK and across the OECD

May 16th, 2012 at 9:24 pm by Blogger Bryn

Get the data for different regions of the UK from the Guardian

http://www.guardian.co.uk/news/datablog/interactive/2011/nov/16/youth-unemployment-map

and comparisons across the OECD

http://www.guardian.co.uk/news/datablog/2012/may/16/youth-unemployment-europe-oecd

a) How equitably is youth unemployment spread across
1.the UK?
2. the OECD?

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Unit 1 Micro: Revision Presentation on Elasticity of Supply

May 16th, 2012 at 5:43 pm by Geoff Riley

A slide share revision presentation on price elasticity of supply

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Unit 1 Micro: Revision Presentation on Elasticity of Demand

May 16th, 2012 at 5:38 pm by Geoff Riley

A slide share revision presentation on elasticity of demand

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Unit 1 Micro: Revision Presentation on the Price Mechanism

May 16th, 2012 at 5:23 pm by Geoff Riley

Here is a slide share presentation on the price mechanism in action focused in students taking their AS microeconomics papers.

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Improving Evaluation Skills in Economics Exams

May 16th, 2012 at 4:51 pm by Geoff Riley

Here is an updated version of the WEESTEPS approach to economics evaluation designed to boost the evaluation scores and exam results for AS and A2 students. Paul Bridges is the mastermind behind this superb approach to evaluation – it gives you some great pointers about the evaluative approaches that can be used. Works well for micro and macro – but particularly when you have to evaluate a specific policy intervention in a market / industry / or a macro policy discussion.

 

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Date Announced for RES Essay Competition Judging

May 16th, 2012 at 4:07 pm by Geoff Riley

Monday 11th and Tuesday 12th June are the days set aside for the teacher judging panel to assess the hundreds of entries for the 2012 RES competition. The main judging takes place on the Tuesday and we will post a list of shortlisted and highly commended essays sometime on the evening of the 12th June. The final shortlist will then proceed to judging from the RES panel.

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Eurozone Crisis – Lessons Learnt

May 16th, 2012 at 12:03 pm by Oliver Fernie

Last week I attended a very interesting lecture at the LSE on the Eurozone crisis, given by Leszek Balcerowicz, a Polish economist who is former chairman of the National Bank of Poland and Deputy Prime Minister.

The following blog outlines his thoughts, but also includes useful links to articles to read.
Using the crisis as a case study will hugely benefit A2 students as it encompasses many of the topics covered in the syllabus.

What has caused the Eurozone crisis?

• Excessive spending in the private and public sector due to the cheap availability of credit.
• Governments held an unequal fiscal stance due to a combination of taxes not being high enough and the expansion of the welfare state (increased welfare payments).

Consequences

This has ultimately led to a financial crisis and a breakdown of long run growth.

Two types of crises

1. A banking crisis which led to a fiscal crisis (Ireland, Spain, UK)
Expansionary monetary policy led to commercial banks’ lending a large amount of credit at low interest rates fuelling a private sector boom, particularly in the housing market. As the housing bubble burst, households and firms defaulted on their loans, causing banks to default themselves. This was because they failed to hold sufficient capital as a ratio to the loans they loaned. Government had no choice but to ‘bail them out’, through provided large loans or in some cases being a majority shareholder (nationalisation – e.g. Northern Rock, RBS). A global recession followed, causing mass unemployment. Households have been doubly squeezed; not only from a loss of income, but due to the rising costs of raw materials throughout the world, there has been above target inflation.

2. A fiscal crisis which led to a financial (banking) crisis. (Greece)
Systematic overspending by the government as they expanded the welfare state and politicians became more popularist promising more spending (the Santa Claus effect). In Greece this coincided with the adoption of the Euro. It’s well known that the Greek government accounts did not reflect the true size of the budget deficit. Otherwise they would not have met the Maastricht criteria of a low fiscal debt and as percentage of GDP. The fiscal crisis of the Greek government led to a banking crisis as the banks had bought the government’s debt, but as time has moved on, the Greek government haven’t been able to pay back their debts. 

Escaping the Crisis (Policy Options)

There are six potential options that can be used in attempting to recover from the crisis:

1. Bailouts
2. Austerity measures (reducing the fiscal deficit)
3. Quantitative Easing (Monetary Policy)
4. Debt reduction/cancellation
5. Leave the single currency
6. Reform (Supply-side policies)
http://www.economist.com/blogs/freeexchange/2012/05/euro-crisis-0?fsrc=gn_ep

Bailouts

Balcerowicz believes there has been too much focus on bailouts as a policy option. For a start the IMF and its contributors cannot provide enough funds to completely bail the struggling governments out. It is only a short term solution and more importantly creates a moral hazard, weakening the incentive to reform, not to mention the additional cash can fuel inflation. In addition, there is a political limit to bailouts, as the Angela Merkel is finding in Germany with German taxpayers becoming increasingly frustrated with the amount of money being used to bail out the Greek government.

Austerity Measures

It’s been empirically proven that it is more effective to lower government spending than raise taxes. By lowering government spending governments can at least guarantee a reduction by a given amount, where as it is hard to gauge how effective a tax rise may be (Laffer curve analysis). However, even if a government cuts the deficit, the overall level of debt as a percentage of GDP is dependent on growth. Without growth the ability to repay the debt becomes increasingly difficult. More from the economist here

Quantitative Easing

As bank credit has all but dried up and base rates are zero-bound, Central Banks have adopted expansionary monetary policy by using quantitative easing. This involves Central Banks buying government bonds from private firms and commercial banks, with the aim of injecting much needed funds into the financial system, increasing lending and investment and thus boosting the economy. Unfortunately, there are limitations to this policy. The additional supply of money in the economy can also contribute to inflation. There is also as a case of asymmetric information, with the CB not knowing how much QE will be effective. Too much of an increase in the money supply will fuel further inflation within the economy.  In reality banks have preferred to build up their balance sheets and have not lent as much as the CB may have wished. Having said that, evidence suggests that the UK economy has grown as result of QE being used.

Debt reduction/cancellation

Back in February, investors foregave 53.5 percent of their principal and exchange their remaining holdings for new Greek government bonds and notes from the European Financial Stability Facility. More here

Leave the Eurozone

Some economists and media commentators believe that Greece would not be in as much of a mess if they were not part of the European Monetary Union (EMU). By being part of the EMU, monetary policy is controlled by the European Central Bank (ECB) who set one base rate for all 17 member countries. One interest will not also be applicable to all the countries. They will be at different stages in the business cycle and will suffer from asymmetric shocks.  This is illustrated when comparing the economies of Ireland and Spain to Germany, prior to the start of the financial crisis. Ireland and Spain were at a different stage of economic development to Germany and required a higher natural rate of interest in order to control their growing economy. Germany, as more established economy, required lower interest rates to encourage further investment and keep the value of the Euro low and thus keep exports competitive.  However, the difference in business cycle isn’t as great as it might have been given the criteria that accession countries are required to meet, which aims to synchronise the economies prior to entry.

The inability of Greece to be able to devalue their currency is a major factor in there struggle for growth, as highlighted by Michael Portillo in a recent BBC documentary (available on iplayer). Leaving the Eurozone would be have major ramifications, not only for Greece, but for the other Eurozone countries and the global financial markets. The policy response to the euro crisis has four elements.

A summary of Ian Stewarts remarks on his ‘Monday Briefing’ blog, outlining the consequences of a country exiting the Eurozone:

• The precise effects of a country leaving the euro would depend on the circumstances, in particular the degree of preparedness of the euro area and the seceding country and the ability of policymakers to resist contagion.

• An exiting country would hope that, by devaluing its currency, defaulting on its external debt and, perhaps, stoking inflation, it could eventually boost growth. The key word is “eventually”.

• UBS last year estimated that the economic cost of secession for Greece could be in the range of 40-50% of GDP. The potentially huge costs involved provides perhaps the best reason for thinking a breakup will be resisted and, were one country to secede, European and global policymakers would make great efforts to limit the collateral damage.

• To limit bank runs and a mass exit of capital the authorities would probably close the banking system and impose capital and exchange controls.

• A currency law would be needed to specify the new currency as legal tender and to convert existing euro contracts and financial instruments into the new currency. Contracts written in the law of seceding countries would be more likely to be switched from euros to the new currency than contracts written in international law. Legal battles around contracts written in euros would keep lawyers busy for years.

• The newly introduced currency would probably devalue sharply. Citibank recently estimated that a Greek New Drachma would devalue by 50-70% against the euro.

• Big shifts in currencies would mean large and arbitrary shifts in wealth. Foreigners would see sharp declines in the value of their holdings in the seceding country. And holders of euro denominated liabilities in the seceding country would see a sharp rise in the burden of their debts. The likely result would be a wave of bank, corporate and household bankruptcies.

• Inflation would also surge on the back of a falling currency. This was seen in Argentina in the 1980s when a sovereign debt crisis and the introduction of a new currency – the austral – drove inflation above 200%.

• Such prospects make it difficult to ensure an orderly breakup of the single currency. Foreign holders of assets in a country which was thought likely to devalue would sell to avoid future losses. Domestic holders of euros would take cash out of the bank and either hide it or convert it into hard currencies to avoid forced conversion to the new, devalued currency.

• Corporates and individuals in a seceding county might well turn to US dollars or euros as an everyday parallel currency, much as happened during Zimbabwe’s hyper inflation five years ago.

• There appear to be few strong historical parallels for a euro break-up. Some supposed precedents, such as the fracturing of the Gold Standard or Argentina’s breaking of its dollar peg, involve the devaluation of an existing currency. This is a simpler and less traumatic process than exiting a currency union and introducing a new currency with all the legal, logistical and political challenges this involves.

If the move succeeds then the pressure on the other weaker economies inside the single currency area (Spain, Portugal) to do the same will be huge. 2 Excellent videos and a well written piece from the FT.

However, as Balcerowicz highlighted, countries are able to improve their international competitiveness without leaving the Eurozone/devaluing their currency. The ‘BELL’ countries of Bulgaria, Estonia, Latvia and Lithuania suffered deeper recessions following the collapse of Lehman Brothers, but have adjusted quickly in lowering unit labour costs and significantly lowering their current account deficit. Balcerowicz concluded that it isn’t fatal that Greece is unable to control its currency, it is a complication. Other policy options are available, such as supply-side reform. However politics can often get in the way of these reforms being implemented in full.

Supply-side reform (improve international competitiveness)

With the limitations and short term nature of the policies solutions outlined previously, Balcerowicz believes that there is only one viable option left (why should China/ IMF lend more money!?) and that is supply-side reform because growth can’t be created out of nothing. Policy suggestions include:

• Improve the flexibility of labour markets (e.g. increase retirement age, make it easier to higher and fire workers. This would lower the amount of youth unemployment that is currently common place in many European countries. More from the Economist here.
• Deregulation to increase competition and efficiency of firms, but also the right type of regulation to prevent similar crisis’ happening in the future.
• Improve productivity (lower unit labour costs)

Supply side reforms would not only see long term benefits, but Balcerowicz believes they would cause benefits in the short run too as bond yields would fall and confidence would return to the markets when such policies were announced.

However, policies can be subject to political bias, so I believe political parties need to become less populist. This poses the question of whether the EMU needs a tighter political union?David Cameron thinks so.

The Eurozone can be used as a very useful A2 case study for revision as it covers a number of key topics in the syllabus. These include:

• Globalisation
• Fiscal Policy
• Monetary Policy
• International Competitiveness
• Supply-side Policy
• Exchange Rates
• Balance of Payments
• Debt Cancellation (traditionally covered in the development economics part of the course)

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Grexit – Andrew Balls on Greece and the Euro

May 16th, 2012 at 10:31 am by Michael Owen

Following on from Ben Christopher’s article, a BBC Radio 4 interview with Andrew Balls, an investment fund manager, and younger brother of The Shadow Chancellor on the possibility of a Grexit – Greek exit from the Euro.

Andrew Balls, of global investment firm Pimco, said on The Today Programme that ” the markets are “starting to price-in a disorderly outcome”“.

The current edition of The Economist has some useful graphs and comparative analysis of the plight of 3 little PIGs – Portugal, Ireland and Greece. It points out that although Ireland had a current account surplus, Portugal had a current account deficit of c. 6.4%.  “Greece’s (current account deficit) was still higher, at 9.7%, an astonishing level for the depths of recession.”  Ireland’s recovery

Greece’s GDP dropped almost 7% last year and a further decline forecast of 4.7% in 2012. Since 2007, The Economist estimates a cumulative decline in Greek GDP of 17%, compared with 6% drop for Portugal, and 9% for Ireland. In part the magazine article implies that Ireland has a more flexible labour market and a more open economy. Greek policy makers also have to contend with unemployment rate of 22-23% .The level of Youth Unemployment is a heartbreaking 52% in Spring 2012, it may not drop quickly as the impasse over the Euro continues.

“Greece is now caught in a vicious circle between political uncertainty and economic contraction. The renewed doubts over its commitment to meeting the conditions for its bail-out will impair investment and frighten households, exacerbating the economic misery that voters are rejecting, and perhaps making it less likely that they will elect a government that can manage to keep Greece in the euro area.”

One thing worth discussing is this, over the long term will a Greek government, be able to finance its persistent current account deficit as well as it fiscal deficit, even if it remains in the Euro or not?

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Jonathan Portes to speak at the Economics Teacher National Conference 2012

May 15th, 2012 at 9:03 pm by Jim Riley

Jonathan Portes

https://tutor2u.wufoo.com/forms/economics-teacher-national-conf-2012-booking-form/

We are delighted that Jonathan Portes will be one of our key note speakers at the Economics Teacher National Conference at the British Library on Wednesday 27th June.

In recent months Jonathan has been a prominent figure in the media commentating on a wide range of macroeconomic issues but notably on the lively debate about how best
to drive economic growth and recovery in the UK.

He is currently Director of the National Institute of Economic and Social Research and previously, he was Chief Economist at the Cabinet Office, where he advised the Cabinet Secretary, Gus
O’Donnell, and Number 10 Downing Street on economic and financial issues. Before that he held a number of other senior economic policy posts in the UK government. Jonathan writes a blog “Not the Treasury View” that has fast-gained a large following within the economics community and much wider afield.  Jonathan is also a prolific user of Twitter!

We are delighted that one of the UK’s top economists will be joining us for a pre-lunch presentation and open floor discussion.

Delegate Rates:
£175 (+ VAT) for a single delegate
£125 (+ VAT) for groups of two or more delegates from the same institution

https://tutor2u.wufoo.com/forms/economics-teacher-national-conf-2012-booking-form/

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Peston on a Greek Euro Exit

May 15th, 2012 at 8:05 pm by Ben Christopher

Speculation about a Greek exit from the Eurozone has reached fever pitch particularly after today’s talks between the national political parties failed to achieve any agreement over forming a government to make the tough decisions required to free up the next tranche of the bailout package. If the second lot of elections are as inconclusive as the last, then a Euro exit is inevitable according to what seems to be the entire world’s press. Clear explanation here by the inimitable Robert Peston on what the Eurozone members are facing if greece isforced to revert back to the Drachma.

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Peston on a Greek Euro Exit

May 15th, 2012 at 8:05 pm by Ben Christopher

Speculation about a Greek exit from the Eurozone has reached fever pitch particularly after today’s talks between the national political parties failed to achieve any agreement over forming a government to make the tough decisions required to free up the next tranche of the bailout package. If the second lot of elections are as inconclusive as the last, then a Euro exit is inevitable according to what seems to be the entire world’s press. Clear explanation here by the inimitable Robert Peston on what the Eurozone members are facing if Greece is forced to revert back to the Drachma.

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Unit 1: Elasticity: Revision posts from tutor2u

May 15th, 2012 at 7:19 pm by Blogger Bryn

Price ED

http://www.tutor2u.net/blog/index.php/economics/comments/unit-1-micro-price-elasticity-of-demand?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+economics_news+%28tutor2u+Economics+Blog%29#When:11:40:29Z

and powerpoint

http://www.tutor2u.net/blog/index.php/economics/comments/unit-1-micro-revision-presentation-on-elasticity-of-demand?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+economics_news+%28tutor2u+Economics+Blog%29#When:16:38:21Z

Income ED

http://www.tutor2u.net/blog/index.php/economics/comments/unit-1-micro-income-elasticity-of-demand

Price ES

http://www.tutor2u.net/blog/index.php/economics/comments/unit-1-micro-price-elasticity-of-supply

and powerpoint

http://www.tutor2u.net/blog/index.php/economics/comments/unit-1-micro-revision-presentation-on-elasticity-of-supply

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Unit 4 Macro: African Human Development Report 2012

May 15th, 2012 at 7:18 pm by Geoff Riley

May 15th 2012 marks the day when the African Human Development Report 2012 is published. This will no doubt become a key reference point for students and teachers who are passionate about their development economics.

“Sub-Saharan Africa cannot sustain its present economic resurgence unless it eliminates the hunger that affects nearly a quarter of its people, the United Nations Development Programme (UNDP) argues. More than one in four Africans – close to 218 million people – is undernourished, African governments spend between 5-10% of their budgets on agriculture, well below the 20% average that Asian governments devoted to the sector during the green revolution there.”

Resources:

African Human Development Report 2012

Guardian: Sub-Saharan Africa can only grow if it solves hunger crisis – UNDP

Video

 

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Unit 4 Macro: African Human Development Report 2012

May 15th, 2012 at 7:18 pm by Geoff Riley

May 15th 2012 marks the day when the African Human Development Report 2012 is published. This will no doubt become a key reference point for students and teachers who are passionate about their development economics.

“Sub-Saharan Africa cannot sustain its present economic resurgence unless it eliminates the hunger that affects nearly a quarter of its people, the United Nations Development Programme (UNDP) argues. More than one in four Africans – close to 218 million people – is undernourished, African governments spend between 5-10% of their budgets on agriculture, well below the 20% average that Asian governments devoted to the sector during the green revolution there.”

Resources:

African Human Development Report 2012

Guardian: Sub-Saharan Africa can only grow if it solves hunger crisis – UNDP

Video

 

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Unit 1: What will be the effect of a minimum alcohol price?

May 15th, 2012 at 7:15 pm by Blogger Bryn

This Guardian article shows how prices will be effected

http://www.guardian.co.uk/news/datablog/2012/may/14/scotland-minimum-alcohol-price-effect

and this article from tutor2u

http://www.tutor2u.net/blog/index.php/gcse-economics/comments/demand-and-supply-in-action-minimum-price-on-alcohol

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Under-employment – the dark side of flexible working or just a sign of the recession?

May 15th, 2012 at 9:06 am by Steve Whiteley

Today, TUC figures showed that the number of men working part time who are looking for full time work has doubled in the last four years from 293,000 to nearly 600,000. Is this a sign of the recession or is it an inevitable result of a move towards more flexible working?

In both A level Economics and Business Studies, flexible working is an important topic. It can be seen in many forms, including part time, temporary, casual, flexi-time and tele-working. More recently, the Government has been looking at making it easier for firms to fire unwanted workers by increasing to two years the minimum period of employment before unfair dismissal can be claimed.

For businesses, flexible working has a number of possible advantages:

Firstly, it potentially brings many more workers into the market such as working parents, the semi-retired and those who simply cannot or do not want to work nine to five, Monday to Friday, 52 weeks of the year with four or five weeks’ holiday. In many cases, these are highly trained and experienced professionals who might be in short supply.

Secondly, it helps turn labour costs from a fixed cost to a semi-fixed cost – that is to say, the amount (and hence the cost of labour) can be altered to meet changing levels of output.

As students of Economics, we value supply side policies that encourage more flexible working practices since it increases the potential size and quality of the workforce and helps firms control costs, thereby making firms more competitive.

There is a pssible ‘dark’ side to this however, as explained by the TUC’s Brendan Barber, who said: “Last month’s fall in unemployment was a welcome surprise. No-one should be under any illusion however that the jobs crisis is over. Virtually all employment growth is coming from part-time and temporary jobs but most of the people taking them want and need permanent, full-time work.”

“Any job may be better than no job at all but people are having to make huge salary sacrifices to stay working. This is bad news for family finances and it is holding back our economy. Any hope of an economic recovery that benefits everyone rests on the growth of well-paid, skilled, full-time jobs. It is the only way for people to increase their incomes and get back to working to the best of their ability.”

“Proper jobs growth, rather than self-defeating austerity and making work even more insecure by attacking basic employment rights, must be the Government’s top priority.”

Under-employment’ is a possible evaluative point when discussion the merits of flexible working practices and when looking at unemployment figures. The fact that someone has a job does not mean that they are fully utilised; they may only be working part time and hence earning far below their full value as a full time employee.  When looking at employment data it is important to be critical – just as it is with every other kind of data. In this case, it can be useful to consider the ‘quality’ of the work that is being done in terms of hours of work, rate of pay and whether it makes full use of workers’ skills and qualifications. A move towards flexible working can mean that many workers are substantially under-utilised, do not earn a good enough rate of pay and hence cannot enjoy a good standard of living.

 

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AS / A2 Economics Revision Clinic – Market Failure (Monday 14 May 2012)

May 14th, 2012 at 8:07 am by Jim Riley

The next in our series on online revision clinics for AS & A2 Economics students takes place at 9pm on Monday 14 May. This time, the topic will be Market Failure.

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Unit 1 Micro: Revision on Rice Prices

May 13th, 2012 at 10:47 pm by Geoff Riley

A revision blog on developments in international rice prices

Thai launches price guarantee scheme

In the autumn of 2011, Thailand (the world’s biggest exporter of rice) introduced a new intervention buying scheme designed to boost the incomes of their rice farmers. For some time the Thai government has believe that the international price of rice has been too low and they pledged to pay above-market rates to provide aid to farmers. The scheme involves buying rice at a premium to the world market price and storing any surplus. Thailand has accounted for between 25% to 30% of world rice exports in recent years. The Thai government is buying the unmilled, or unprocessed, grain from growers at an artificially high rate of around $487 a ton

Click: Thailand launches new rice price policy

India – rice export controls 2008-2011

India is another major rice producer and for the last three year it has been limiting exports of rice to world markets because it wants there to be enough rice within India to provide ample domestic supply and keep home prices low for what is a hugely important part of the Indian staple diet. Indian rice is about $100 cheaper than supplies from Thailand. One key reason behind the relaxation of Indian rice export controls is that they have run out of places to store their unsold rice. In the last year in India there was a record grain crop, estimated at over 252 million tons. The Indian government buys rice and wheat at a guaranteed price that tends to be at or near the global price. This ensures that farmers won’t switch to other crops and builds stockpiles in case of domestic shortages

Other countries are looking to expand their exports of rise including Vietnam, Brazil, Uruguay, Pakistan, Cambodia and Myanmar. They see opportunities in the world market from both the Thai price guarantee scheme for producers and Indian export controls.

High levels of rice production coupled with weaker demand has created downward pressure on international prices, especially after India lifted its ban on regular rice exports.

Falling rice prices in India hits farm incomes

 

Thailand’s tough rice choices

 

 

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Unit 2: Revision: Supply side policies

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

Revision from tutorhttp://www.tutor2u.net/blog/index.php/economics/comments/unit-2-macro-revision-notes-on-supply-side-policies?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+economics_news+%28tutor2u+Economics+Blog%29#When:16:00:29Z2u

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Unit 2: Macro data: May 2012

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

Great data from tutor2u

http://www.tutor2u.net/blog/index.php/economics/comments/macro-revision-key-statistics-on-the-uk-economy?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+economics_news+%28tutor2u+Economics+Blog%29#When:07:23:14Z

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