Here are a couple of practice questions for EdExcel AS macro – one 30 marker on exchange rates and macro objectives, one 12 marker on interest rates and the distribution of income and wealth. Hope they might be useful.
Posts from the ‘Economics’ Category
This PowerPoint contains four fiscal policy charts for the UK – I have been using them in a revision session this morning. I will blog a little bit more about them later on
Here is a pertinent and timely resource from Channel 4 news on overcoming the principle agent-problem. Are shareholders in some of our leading companies becoming more active in holding senior executives to account for poor performance? or more concerned with their own shareholder value at a time when CEO earnings continue to grow well above inflation? I own plenty of shares but have never once been to a company AGM or exercised my right to vote. Could planned legislation further embolden activist shareholders and shake up boardrooms across the UK? More on the debate over the shareholder spring here See also BBC news: FTSE 100 bosses’ pay ‘rose 11% last year’
I’ve updated my development economics revision pack with lots of new case studies for 2012. Read on to find out how to download the pack
Within this revision pack, written specifically for unit 4 Edexcel Economics although still relevant to other boards, you will find a number of useful pieces of information for students:
1. Revision questions- if students can complete all these activities then they are fully conversant with the content of development economics
2. Case studies- in my opinion the most important section. Students regularly fail to include application in their essay answers, and this will prevent them from achieving top grades. Over these page I’ve suggested examples to go with every limit to growth & development and every strategy to promote growth & development, and include ones relevant to both explanation and evaluation points. And this section has been fully updated with lots of new countries for 2012.
3. Levels Marking Criteria- it’s vital that students put enough points into their essays, otherwise they’re making it impossible for an examiner to give them top grades
4. Example essay questions- I’m strongly encouraging all my students to undertake several of these essay questions in preparation for their unit 4 exam
Personally I always print this out as an A5 booklet for all the students I teach and it then acts as a useful revision aid which they can keep with them during their revision over the next few weeks- but feel free to make whatever use of it you desire!
How long can China keep its comparative advantage of cheap production for manufacturing goods? We are aware of rising inflation in China which is eroding their advantage, and here is an article about a UK firm which manufactures cushions, some from a factory in Kirkby on Merseyside and some from his factory in the Zhejiang province in China. The story comes from a programme ‘The Town taking on China’ to be shown on BBC2 at 8pm tonight – and subsequently on i-player.
The business owner, Tony Caldeira, had expected to be moving all of his business to China in order to survive. However, now he is finding that this is not the only solution, for a variety of reasons which provide useful examples for many AS and A2 economic theories. One is the supply and demand for labour – the shortage of labour in China, which is leading to pay rises of up to 50%, cutting the cost advantage for one of his products from 55 pence less to manufacture in China a year ago to just eight pence now. In spite of excess supply of labour in the UK though, Mr Caldeira finds it hard to recruit and retain a skilled workforce – he recently hired 17 new members of staff in a variety of jobs in his Kirkby factory, but five quickly left. He says the skills of textile manufacturing are being lost and that for the industry to be sustainable, they need to be re-established in the younger workforce.
One factor which has driven globalisation in the last 20 years has been lower transport costs – but at present the rising cost of transport for finished goods is contributing to that smaller differential as well.
He also finds the labour productivity in China far lower than in the UK, and also the quality of the product is different – the cushion factory in China produces cheaper cushions, the Kirkby factory offers high-end, hand-finished products. Jessica Lewis, buyer for TJX, the parent group of TK Maxx confirms that a “…UK product in the States adds value just because it’s made in the UK. The customer sees value in that” – so the price elasticity of demand for higher quality UK exports is a factor here.
A selection of key topics to cover for the paper for the 25th May linking to our blogs in each category – there are loads of great revision notes in these blogs for students wanting extra background and help with evaluation
1/ Limitations of GDP as measure of living standards: Issues in comparing stats between developed/developing nations – click here for resources
2/ The consequences of rising unemployment and policies to increase employment (global context matters a lot) – click here for resources
3/ Key recent trends in UK balance of payments and supply-side policies to improve UK trade (global trade imbalances) – click here for resources
4/ Understanding the difference between growth and development and handling development data – click here for resources
5/ Fiscal policy – economics of budget deficits + debate over which stimulus policy is best + supply-side effects of fiscal policy – click here for resources
6/ Keynesian economics – important to understand the essence of Keynesian approach + other policies to drive recovery – click here for resources
7/ The multiplier effect – concept, size of, limitations of – hugely important topic, it can be used in nearly every question – click here for resources
8/ Inequalities in income and wealth, interest rates and distribution of income, inequality and econ growth – click here for resources
9/ Migration – significance for unemployment, inflation, trade, productivity, economic growth – click here for resources
Geoff and the team are holding an online revision clinic for an hour on Tuesday 8 May (9pm here on this blog entry) for AS & A2 Econ students who would like to refresh their understanding of the key recent developments in the UK economy. The focus will very much be on helping students build their confidence to evaluate issues and potential policy options for the UK economy.
Just the same as in the UK, reports Aljazeera
A nice summary, including comparative EU data, from economicshelp
A selection of practice questions for this paper are shown below
• This paper is synoptic. It assesses your understanding of the relationship between the different aspects of Economics.
• You will be marked on your ability to:
(i) Use good English and organise information clearly
(ii) Use specialist vocabulary where appropriate
Essay Questions: Explanation Questions (15)
(i) Explain what is meant by the satisficing principle and how can affect price and output in an imperfectly competitive market (15 marks)
(ii) Explain the circumstances under which short run average cost for a business can be rising but long run average cost can be falling (15 marks)
(iii) Explain how a change in wage rates for a business can bring about a change in their costs of production and the choice of factor inputs (15 marks)
(iv) Explain the factors that will influence the rate of innovation in an industry (15 marks)
(v) Oligopolistic markets, such as supermarkets or car manufacturing, can be defined in terms of market structure or in terms of market conduct (behaviour).
Using examples of particular industries, explain this statement. (15 marks)
(vi) Explain some of the short run and long run benefits of an increase in market competition (15 marks)
(vii) Explain the difference between equality and equity and explain how market failures can lead to a loss of equity (15 marks)
(viii) Explain how cost-benefit analysis might be used to assess the impact of a government subsidy scheme for the installation of solar panels (15 marks)
Essay Questions: Evaluation Questions (25)
(i) Evaluate the view that providing a market is contestable, there is no need for government intervention (25 marks)
(ii) Discuss whether the objective of profit maximisation becomes less important than other possible objectives as a firm grows in size. (25 marks)
(iii) Is collusion in an oligopoly always good for producers and bad for consumers? Justify your answer. (25 marks)
(iv) Evaluate the view that the private sector should be encouraged to play a greater role in providing health care in the United Kingdom (25 marks)
(v) Evaluate the view that progress in reducing environmental market failures such as deforestation and rising carbon emissions is best left to market forces rather than government intervention (25 marks)
A Sunday hat tip to Tom White for providing this super selection of recent articles relevant to students preparing for the OCR F585 paper in June 2012
May Day marches: Activists protest against austerity – click here
Sir Mervyn King rejects criticism for crisis – click here
UK back in recession: Reaction
Bank of England’s Paul Tucker warns on inflation rate – click here
China growth to ‘hold up’ but inflation remains a risk – click here
Rare Earths – click here
Rare earths and climate change – click here
US, EU and Japan challenge China on rare earths at WTO – click here
US imposes 5% tariff on Chinese solar panel cells – click here
A short glossary covering concepts relevant to exchange rate economics
When the value of an asset or exchange rate increases in value relative to another
A currency exchange rate that varies (or floats) according to market forces, free from intervention by a country’s central bank
When a country tries to devalue its currency to increase its competitiveness. However, this often encourages other countries to also devalue leading to only temporary increases in the competitiveness of exports.
A group of countries (or regions) using a common currency – for example the 17 countries that have entered the single European currency since it started in 2001
A fall in the market value of one exchange rate against another
Fixed exchange rate
An exchange rate that is fixed against other major currencies through action by governments or central banks, usually within small margins of fluctuation around the central rate. Likely to involve periodic intervention in the foreign exchange market by one or more central banks to buy or sell the currency in question if it moves below or above its margins
Foreign exchange reserves
The reserves of gold or foreign currencies (e.g. US dollars or Euros) typically held by central banks on behalf of their national government
Money that flows freely around the world looking to earn the best available rate of return. It might be invested in any asset whose value is expected to rise (e.g. property or shares) or placed in an account offering the best real rate of interest.
Managed floating currency
An exchange rate that is basically floating but subject to intervention from time to time by the monetary authorities, in order to resist fluctuations that they consider to be undesirable
A foreign currency that is held in countries’ official reserves because of its global importance as a medium of exchange and its inherent stability
Special drawing rights
A unit of money created by the IMF. Each member country can borrow SDRs at favourable interest rates from the IMF’s reserves when they are needed for reasons related to a country’s balance of payments
Sterling exchange rate index
The external value of sterling in the foreign exchange market calculated using a weighted index of a basket of currencies – weightings are based on the percentage of trade between the UK and other countries.
Here is a small, tentative counter-weight to the inevitable shift of global manufacturing / assembly to the East. A short video about a US firm that has started to manufacture televisions in the USA. Tariffs and transportation costs have played a role in making it viable and their marketing department has been quick to exploit nationalistic feelings among some consumers.
A short selection of key terms connected to economic growth and development for AS macro students
The movement of highly skilled or professional people from their own country to another country where they can earn more money
Brazil, Russia, India and China – short hand for a group of fast-growing countries
The rapid movement of large sums of money out of a country per due to a lack of confidence in a country’s economy and/or its currency and political turmoil
When countries that start off poor but grow more rapidly than countries that start off rich causing convergence in the standard of living measured by per capita GDP
The relative advantage that one country has over another. Countries can benefit from specializing in and exporting the product(s) with the lowest opportunity cost of supply
The cancelling by a creditor of a debt to a country or a company
A decline in the share of national income from manufacturing industries
The idea that a country’s economy will perform best if its industries are protected from competition, for example by taxes on imported goods
The balance of output drawn from different economic sectors – ranging from primary (farming, fishing, mining etc) to secondary (manufacturing and construction industries) to tertiary and quaternary sectors (tourism, banking, software industries)
Foreign direct investment
FDI is the acquisition of a controlling interest in productive operations abroad by companies resident in the home economy. May involve the creation of new productive capacity such as a new factory
Measure of the extent to which groups of households, from the bottom of the income distribution upwards, receive less than an equal share of income.
Gross Domestic Product per capita
National income per head of population
Gross National Income (GNI)
The same as GDP except that it adds what a country earns from overseas investments and subtracts what foreigners earn in a country and send back home
Human Development Index
An index devised to assess comparative levels of development in countries, quantified in terms of literacy, life expectancy and purchasing power
Changes to products or production processes – innovation is important in delivering improvements in dynamic efficiency
Spending on capital goods including plant & machinery and infrastructure
The transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economy
The amount of wealth or comfort that a person, group, or country has. The standard measure of average living standards is GNI (gross national income) per capita measured in a common currency and adjusted for differences in the cost of living between countries i.e. GNI per capita (PPP) – purchasing power parity adjusted
A way of showing the unequal distribution of income and wealth in an economy
An industry involved in the production of raw materials including agriculture
Purchasing Power Parity (PPP)
The exchange rate that equates the price of a basket of identical traded goods and services in two countries
Sending of money to people in another country for example migrant workers sending some of their wages to their home country
Sovereign wealth fund (SWF)
A government or state run fund usually created by profits from natural resources such as oil, gas or minerals. Highly secretive, their assets grew dramatically when oil prices rose to record levels. Some of the largest SWFs are in the oil-rich Middle East
Growth without non-renewable resources being used up or pollution becoming intolerable
The long run average growth rate – mainly determined by changes in the stock of available factor inputs and also improvements in productivity
A selection of key terms on monetary policy and inflation
Small rises in the general level of prices over a long period of inflation
A persistent fall in the general price level of goods and services
A fall in the rate of inflation. This means a slower increase in prices but not a fall in prices (deflation)
The Bank of England has an inflation target of 2% for the consumer price index
School of economic thought that considers money supply as the main factor influencing the economy, and monetary policy as the key instrument of government decision-making. Controlling money supply should ensure steady economic growth and a healthy price environment. Opposed by the Keynesian school, which considers fiscal policy as the key macroeconomic tool
Money illusion occurs when people confuse nominal and real values when making economic decisions. Money illusion is most likely to occur when inflation is unanticipated, so that people’s expectations of inflation turn out to be some distance from the correct level.
The entire quantity of a country’s commercial bills, coins, loans, credit, and other liquid instruments in the economy.
Negative interest rate
An interest rate that is below zero. For real interest rates, this can occur when the inflation rate is higher than nominal interest rates.
Neutral interest rate
A neutral interest rate is a rate of interest that neither deliberately seeks to stimulate aggregate demand and growth, nor deliberately seeks to weaken growth from its current level. In other words, a neutral rate of interest would be that which is set at a level which encourages a rate of growth of demand close to the estimated trend rate of growth of real GDP.
When an economy is growing too fast and aggregate supply cannot keep up with demand, leads to a rise in demand-pull and cost-push inflation
A period of low stable inflation of between 1-4% when price rises are modest
The term “relative deflation” is generally used to describe an economy with an inflation rate, which has not necessarily descended into negative territory, but is markedly lower than comparable economies
Retail Price Index (RPI)
The RPI is broadly similar to the CPI but includes mortgage repayments and some taxes, and excludes the top 4 per cent of earners. It is used to calculate increases in wages, state benefits and pensions.
A combination of slow economic growth and rising inflation, can lead to stagflation. The most notable recent period of stagflation occurred during the 1970s, when world oil prices rose dramatically, and UK inflation rose at one point to nearly 30 per cent.
Wage price spiral
Workers bid for higher wages because they have seen their real income eroded by rising prices. This can lead to a further burst of cost-push inflation in an economy.
When the value of an asset or exchange rate increases in value relative to another
Situation where banks across the economy reduce lending to each other due to falling confidence that loans will be repaid
A fall in the market value of one exchange rate against another
17 countries (currently) that share a single currency (the Euro) and a common policy interest rate set by the European Central Bank
Expansionary monetary policy
A policy to expand money supply and boost economic activity, mainly by keeping interest rates low to encourage borrowing by companies, individuals and banks. May also involve quantitative easing (bank purchases of government bonds)
Policy interest rate
The base / policy interest rate set by the Monetary Policy Committee of the Bank of England when operating monetary policy
Attempts by a central bank to increase the base supply of money by buying debt off banks and other financial institutions. Has occurred in the UK since 2009
Real interest rate
Nominal (money) rate of interest adjusted for inflation
The process by which changes in interest rates and/or the supply of money work to affect demand, output and prices
A short glossary of some international trade and balance of payments key terms for AS macro
Balance of Payments (BoP)
The total of all the money coming into a country from abroad less all of the money going out of the country during the same period
Beggar my Neighbour
This is an economic policy that seeks to promote a nation’s economy at the expense of another country. An obvious example is the use of import tariff barriers. A country may place tariff on imports to help promote local domestic industry. This may help local unemployment, but, be at the expense of the other country’s export sector
The rapid movement of large sums of money out of a country. There could be several possible reasons – lack of confidence in a country’s economy and/or its currency and political turmoil. The result can be a sharp downward movement in a currency.
Movements of capital between countries. Outward capital flows are movements of domestically-owned capital abroad; inward capital flows are movement of foreign-owned capital to the domestic economy
When a country tries to devalue its currency to increase its competitiveness. However, this often encourages other countries to also devalue leading to only temporary increases in the competitiveness of exports.
Cost and non-price factors that make a business successful in international markets
A period of time where import tariff rates rise and where countries introduce quotas and barriers to the mobility of labour and capital
Tariffs (duties) that are imposed by a country to counteract subsidies provided to a foreign producer or to counter-act the perceived effects of export dumping
Balance of trade in goods, services, net transfers of money & net investment income
When a producer in one country exports a product to another country at a price which is below the price it charges in its home market or is below its costs of production
Sales from selling goods and services overseas
Foreign direct investment from overseas businesses into a specific country
Foreign exchange reserves
The reserves of gold or foreign currencies (e.g. US dollars or Euros) typically held by central banks on behalf of their national government
Ability of people to undertake trade with people in other countries free from any restraints imposed by governments or other regulators
The deepening of relationships between countries of the world reflected in an increasing level of overseas trade and investment.
A good or a service produced overseas but domestic in domestic markets. Imports are a leakage of demand from the circular flow
New industry that requires government protection from overseas competition (for instance through the setting of import tariffs) in order to develop
Interest, profits and dividends from assets owned and located overseas
The notion that the wealth of a nation was based on how much it could export in excess of its imports, and thereby accumulate precious metals. Applied in the modern context to countries accumulating huge trade surpluses in goods or services and focusing on export-led growth
North American Free Trade Agreement – a free trade area agreement signed by the US, Canada and Mexico
The balance between the value of exports and imports
Assets such as businesses, shares, property which are owned in overseas countries and which can generate a flow of investment income which is a credit item on the current account of the balance of payments.
The use of tariff and non-tariff restrictions on imports to protect domestic producers from foreign competition
An extra tariff charged on goods going into or out of a country, that is introduced because a country has done business in an illegal or unfair way
The sending of money to people in another country. For many lower-income nations, remittance income is now a big contribution to their Gross National Income (GNI)
Sovereign wealth fund (SWF)
A government or state run fund usually created by profits from natural resources such as oil, gas or minerals. Highly secretive, their assets grew dramatically when oil prices rose to record levels. Some of the largest SWFs are in the oil-rich Middle East
A tax on imported products which may be ad valorem (%) or a specific tax
World Trade Organisation
The WTO oversees trade agreements, negotiations and disputes between member countries
When a country imports a greater value of goods and services than it exports.
When the value of exports exceeds the value of imports in a given time period
A selection of key terms linked to the topic of unemployment
Replacing workers with machines in a bid to increase productivity and reduce unit costs. This can lead to structural unemployment
The number of people claiming unemployment-related benefits. It is the number of people claiming Jobseeker’s Allowance
Classical unemployment is the result of real wages being above their market clearing level leading to an excess supply of labour
Involuntary unemployment due to a lack of demand for goods and services. This is also known as Keynesian unemployment
People often out of work for a long time who give up on job search leading to a rise in economic inactivity
Transitional unemployment as people move between jobs or are in active job search
Jobs for all that want them but not zero unemployment because some people are always between jobs, there will usually be some frictional unemployment
Unemployment which is known to exist but is not included in the official government figures, also known as under-employment, e.g. people taking part-time work because they cannot find a suitable full-time job. This tends to rise in a recession.
When businesses reduce the size of their workforce
When businesses find it difficult to recruit the workers they need
The number of people able, available and willing to work at prevailing wage rates
Long term unemployment
People out of work for at least one year, often suffering structural unemployment
Net inward migration
When the number of migrants coming into a country is greater than those leaving in a given time period
A mismatch between people’s skills and requirements of the new jobs due to occupational and geographical immobility of labour
Tight labour market
When demand for labour is high and there are shortages of labour. Businesses may have to offer higher wages to attract more workers
When people want to work full time but find that they can only get part-time work – the result is a loss of hours that the economy can use
When the prospect of the loss of unemployment benefits dissuades those without work from taking a new job – creates a disincentives problem
A selection of economic terms linked to government fiscal policy
AAA credit rating
The best credit rating that can be given to a corporation’s or government’s bonds, effectively indicating that the risk of default is negligible
Both companies and governments can issue bonds when they need to borrow money
The rate of interest market investors demand when purchasing government bonds
When government spending > tax revenues. This leads to a rise in the level of debt
A tax on the profits made by companies
The amount of debt that a business or country has expressed as a share of GDP
High levels of debt leading to falling asset prices which makes debt harder to repay
Discretionary fiscal policy
Deliberate attempts to affect aggregate demand using changes in government spending, direct and indirect taxation and borrowing.
Disposable income adjusted for spending on essential bills such as fuel
Income after the effects of direct taxes and welfare benefits have been calculated
When government spending is being cut and/or taxation is being raised
Increased public spending and lower taxation, aimed at boosting economic activity
Another word for government bonds
The debt issued by a national government for example by the sale of bonds
The belief that the state can directly stimulate demand in a stagnating economy. For instance, by borrowing money for projects like roads, schools and hospitals.
Credibility means that economic agents such as businesses and consumers believe that a given policy is appropriate for a given economic situation and is likely to achieve the objectives or targets that have been set out. Credibility is widely assumed to be important in financial markets and can affect the cost of borrowing for governments in the capital markets and the value of a currency in the foreign exchange markets.
A tax that takes an increasing proportion of income as income rises
A tax that takes a smaller proportion of income as the taxpayer’s income rises
Debt issued by or guaranteed by a government
Also known as a financial transactions tax, the tax involves applying a small charge – of as little or less than 0.1 per cent – on foreign currency transactions to protect countries from exchange-rate volatility caused by short-term currency speculation
A short glossary of key terms connected to the economic cycle
Capital investment is linked positively to expected growth of consumer demand
The state of confidence or pessimism held by consumers and businesses.
An unexpected shock to one or more of the components of aggregate demand e.g. From recession in the economy of a major trading partner
Used to describe a severe recession which may become a prolonged downturn in the economy and where GDP falls by at least 10 per cent.
Double dip recession
When an economy goes into recession twice without a full recovery in between
Variations in the annual rate of growth of an economy over time
Unpredictable events such as volatile prices for oil, gas and foodstuffs.
When indicators such as growth, prices and unemployment do not change much from one year to another.
How we expect the future to unfold – this can have powerful effects on the spending decisions of households, businesses and the government
Changes in policy designed to gradually influence demand, output and prices
A prediction made about the likely future performance of an economy
Indicators which tend to follow economic cycles e.g. unemployment
Indicators which predict future economic trends e.g. consumer confidence
The difference between potential and actual real national income in an economy
The high point of the economic cycle beyond which a recession starts
A period of at least six months when an economy suffers a fall in output
A fall in the rate of growth of an economy but not a full-scale recession
A sustained decrease in real GDP and a persistent rise in unemployment
A slowdown in economic activity but which does not result in a recession
An unexpected shock to one or more of the components of aggregate supply e.g. Higher oil and gas prices or a rise in the cost of imported food
A target is an objective of government policy e.g. low inflation or rising employment
A trade-off implies that choices have to be made between different objectives of economic policy for example a choice between unemployment and inflation
The low point of the economic cycle beyond which a recovery starts
A glossary of some key terms related to aggregate demand
The state of confidence or pessimism held by consumers and businesses
Capital is factors of production that are used to make other goods and services, for example machinery, plant and equipment and technology.
Constant prices tells us that the data has been inflation adjusted
Products such as washing machines that are not used up immediately when consumed and which provide a flow of services over time
The monetary value of the output of goods and services produced inside a country
The value of assets – including property, shares, savings and pension fund assets
The economics of John Maynard Keynes. The belief that the state can directly stimulate demand in a stagnating economy. For instance, by borrowing money to spend on public works projects like roads, schools and hospitals.
If there is an initial injection (e.g. a rise in exports) into the economy then the final increase in AD and Real GDP will be greater.
When the value of an asset falls below the debt left to pay on that asset. Term is most commonly used in connection with property prices and mortgages
Nominal means the money value of something, for example the money value of a weekly wage unadjusted for the effects of inflation
This is the monetary value of all goods and services expressed at current prices
Paradox of thrift
If people save more, it will reduce consumption, thus aggregate demand will fall, impeding economic growth and, in fact, lowering the general level of savings
Saving because of fears of a loss of real income or employment
Real disposable income
Income after taxes and benefits, adjusted for the effects of inflation
The nominal wage adjusted for the effects of inflation
The percentage of disposable income that is saved rather than spent
A leakage from the circular flow of income (savings, taxation and imports)
With AS and A2 modules on the horizon, here is a presentation outlines an approach to demonstrating evaluation using the WEESTEPS acronym – first developed by Paul Bridges and his students who is now Head of Economics at the RGS Guildford.
It is an approach that has struck a chord with us all during our Economics revision workshops. The presentation uses a macro topic to illustrate the approach… but WEESTEPS can be used for all evaluation-style questions especially those focusing on different forms of government intervention in markets.
Mindmap on Sustainable Transport Policy for OCR Economics A Level
I helped a student with her OCR revision on Transport Economics last year – it isn’t my usual exam board but one thing I found pretty quickly was that ‘sustainable transport policy’ is a recurring theme. This prompted me to summarise the key issues on a mind map that can be seen here. I am sure this isn’t exhaustive but from the specification, textbooks and past papers, it pretty much seems to cover it!
For the May and June macro papers here is a brief summary of the key macroeconomic numbers for the UK economy so that you can demonstrate good awareness to the examiners in your papers:
Real GDP / Economic growth
* Recession was deepest since the 1930s in terms of lost output – real GDP fell 7.3% from peak to trough
* Recovery has been weak
* Real GDP still 4.3% smaller than at the beginning of the 2008 recession
* Growth in 2011 was only 0.7%
* IMF forecasts growth of just 0.8% in 2012 – world GDP set to rise by 3.5%, but Euro Zone forecast to contract by 0.3%
UK economy said to be in double-dip – but as the NIESR says in latest report “small quarter to quarter movements of this sort are largely irrelevant to the broader picture of an economy that remains very weak.”
Components of aggregate demand (AD)
% change in component for 2011
Consumer spending: -1.2%
*CPI inflation in 2011 was 4.5%
*RPI inflation in 2011 was 5.2%
*Uk inflation is eight highest in the EU (27 countries) in 2011
*Sweden had lowest inflation last year 1.1%, Hungary the highest at 5.5%
*Another year of deflation for Japan, -0.3% in 2011
Latest figures – up to Feb 2012
*LFS unemployment rate: 8.3% or 2.650 million people
*Youth unemployment 1,033,000 (22% of people in this age range)
*Long term unemployed: 883,000 people out of work for at least a yeart
*North-east has highest unemployment rate (11.2%), South-east has the lowest (6.3%)
*Net borrowing in 2011/12 was £126 billion or 8.3% of GDP
*Down from £157billion, 11.25 of GDP in 2009/10
*Net government debt has risen from £760billion in 2009/10 to £1,023 billion in 2011/12 – equal 66% of UK GDP
*Current account balance was -£29bn
*Trade in goods balance was -£99.7bn
*Trade in services balance was +£71.8bn
*Net investment income was +£21bn
*Net transfers was -£22.1bn
For more background on the UK economy – go to the BBC news page
The NIESR has published its latest ‘Prospects for the UK economy’ this morning – this link given is to the one-page press release. This clear document gives some stark headlines from their predictions: they consider the persistent weakness in the economy to be unprecedented, they continue to expect that CPI will fall below target by the end of the year, and they believe that unemployment will rise to 9% and stay there for some years, doing permanent damage to the supply side of the UK economy. They estimate that a 1 per cent of GDP increase in government investment this year would boost GDP by around 0.7 per cent, and would provide a boost to the short-run lack of aggregate demand. They do predict a return to growth in 2013, with some above-average growth figures for 2014, which may return the economy to its size of 2008. For the sake of the students sitting their AS and A levels in the next few weeks, let us hope that they are right.
Here’s a revision activity that combines ‘beat the teacher’ and ‘spoof/peer assessment’ to get students thinking about the first 5 questions and ensuring they carefully read the case study.
You simply need to provide pairs of students with a blank copy of the June 2011 F582 paper, along with copies of the answers on the slides in the powerpoint file.
To begin, get them to sort the answers out and match them to the questions.
Then, get students to spot and correct deliberate mistakes.
Finally, provide students with a copy of the mark scheme and get them to develop the answers to some questions which could be more thorough in their analysis and evaluation. You could make this harder by not providing the mark scheme.
If there is time, students could write up answers to certain question on the paper to take away as a revision resource.
If you are trying to rank the most pressing European economic problem, This morning’s copy of The Sun has a set of statistics which make Grim reading for the under 25s across the EU.
On the other hand, how do your grand-parents feel about seeing negative returns on their savings?
It is pertinent to ask where you would rank unemployment relative to rising inflation, stagnant growth,failed fiscal and monetary policy, and an over-ambitious attempt at monetary union, and why? Evaluation requires judgement over what might be the most pressing macroeconomic problem and some consideration of policy options, over the short and long term.
These economics and business teaching vacancies just keep on coming! Here’s another really good one – with the chance to join the team at Rainham Mark Grammar School. More details below.
Teacher of Economics & Business Studies
The School is a highly successful co-educational selective school with a large Sixth Form (350 students). We are seeking to appoint, from September 2012, an enthusiastic, well qualified and inspiring teacher to contribute to the work of our high-achieving Economics & Business Studies Department. The post will primarily involve teaching GCSE, AS and A2 Economics courses. An ability to teach AS and A2 level Business Studies is also desirable. Economics and Business Studies is a popular and successful subject in the school. The post would be suitable for an experienced teacher or an NQT.
What RMGS can offer you?
● Working with high ability young people in a supportive, well-equipped and forward-thinking department
● Laptop and interactive whiteboards in all classrooms
● Excellent professional development opportunities
● Free Health care provision
An application pack is available from the school website or you are welcome to telephone the school for further details.
Closing date: 12 noon on Friday 11 May 2012
Many A2 students are now working their way through the pre-released stimulus for the OCR F585 unit, perhaps helped by our popular OCR F585 Revision Toolkit! Geoff is hosting a one-hour online revision clinic on Thursday evening (3 May, 9pm) at which students can have any initial revision queries addressed. The clinic will be hosted here on this blog entry.
Another fantastic teaching opportunity here – lots coming at once! Many thanks to Andrew Ellams for sending me the details – bound to be of interest to many of you!
Teacher of Economics at Merchant Taylors’ School.
Merchant Taylors’ School are looking for an enthusiastic graduate teacher of Economics from September 2012 who will communicate a love of the subject to the students and become leader of an experienced, committed and friendly team.
The successful applicant will teach AS and A2 level Economics, the ability to teach AS/A2 level Government and Politics would be an advantage, but is not essential. The teaching week currently consists of 24 periods of an hour each, together with games on Monday after school and on Wednesday afternoons. A normal teaching load is around 20 periods per week.
Economics and Politics are both extremely successful A level subjects in the Merchant Taylors’ School Sixth Form. The department currently teaches over 170 students and regularly achieves an A*A grade of around 80% at A level and enjoys considerable success in Oxbridge applications.
The post would suit an applicant looking to expand their teaching experience within an intellectually stimulating and challenging environment; however, the department is also able and willing to offer all the help and support that a colleague new to the profession would need.
For further information visit the MTS website at http://www.mtsn.org.uk/ and please do not hesitate to contact the Head Master Stephen Wright at firstname.lastname@example.org or the incumbent Head of Department Andrew Ellams at email@example.com.
We’re seeing increasing evidence of A Level Economics student numbers going through the roof this year and it looks like the superb department at Greenhead College is no exception! tutor2u presenter Mark Mitchell has just sent me details of a new economics vacancy at Greenhead (see pdf link below) where the team are putting on 7 groups of AS – that’s nearly 160 students just for AS! Fantastic news.
For September 2012 Oundle are looking for an enthusiastic graduate teacher of Economics who has a real passion for the subject to become part of a friendly team (packed full of tutor2u bloggers and presenters!), to provide maternity cover for two terms – September 2012 through to March 2013….
Details from Mo Tanweer:
- Currently in a department of five, Economics is a popular and growing subject with approximately 110 pupils across the Sixth Form opting for the subject.
- We offer the choice to pupils to pursue either the Edexcel/AQA A-level syllabus or the Pre-U qualification.
- In 2011, 80% of candidates gained an A* or A grade at A2 level.
- There is a healthy level of extra-curricular economics activities, with active Junior and Senior Economics Societies which allow the pupils to experience the subject well beyond the confines of the curriculum.
- Oundle School has its own salary scale.
- Accommodation may be available.
- Closing date for applications: Friday 4 May 2012
- Please contact Mo Tanweer at MT@oundleschool.org.uk if you require any further information about the vacancy.
- You can visit the School’s website at www.oundleschool.org.uk to learn more about the school.
- To apply for this vacancy, please complete the application form here: http://www.oundleschool.org.uk/about/vacancies/index.php and send your CV and letter of application to: Mrs Tracy Heath – PA to the Deputy Head; Oundle School, Brereton Rooms, Church Street; Oundle, Peterborough PE8 4EE
Many thanks to the team at Bishop Vesey’s Grammar School for letting us know about this new teaching opportunity which I’m sure will be of interest to many tutor2u teacher users. Details below
Job Title: Full Time Teacher of Economics & Business Studies
School / College: Bishop Vesey’s Grammar School
Sutton Coldfield, West Midlands
Salary Level : Teacher Main Pay Scale
Description of the Job
Economics & Business Studies teacher required to join our outstanding Busines Studies Department in which a significant number of students study Advanced Level Economics and Business Studies. Academic results are excellent and the Department has a wide range of resources available for Year 9, GCSE and ‘A’ Level studies. Many students choose to read these subjects at Russell Group Universities and Oxbridge.
Application forms and further details are available from Lesley Overton, HR Officer via firstname.lastname@example.org. Telephone (0121) 250 5400
Contact Name for Applications: Lesley Overton
Email Address for Applications * email@example.com
Telephone Number for Further Information: (0121) 250 5400
Address for Postal Applications
Bishop Vesey’s Grammar School Lichfield Road
Sutton Coldfield, West Midlands B74 2NH
An excellent opportunity here to join the Economics teaching team at The Sixth Form College, Farnborough. The college enjoys a national reputation for excellence. The link to the college website is provided below. Farnborough SFC is an ‘Outstanding’ department of 8 teachers with just under 500 A-level economists!. Great emphasis is placed on developing an engagement with economics beyond the confines of the specification. A wide range of extra curricular opportunities are provided. Farnborough were The Target 2.0 National Champions in 2011.
Full details of the vacancy here. Don’t forget to mention you saw it first on tutor2u!
A selection of headlines in the last 24 hours:
– Householders hit at mortgage rates rise
– Maximum waiting time at Heathrow’s terminal 3 was breached more than 100 times in 15 days
– Microsoft has invested $300mn to rival Apple and Amazon in the e-book market
– The cancellation of the Badminton Horse Trials due to a rain-sodden course will cost insurers £3mn and local businesses thousands more
– Global labour market ‘alarming’
– Double-dip – does it matter?
– Rate of pub closures is slowing
– Top tax rates hit four million people
……so many news stories at the moment, which students could use as evidence to help strengthen their points in essays. Too many to write up a blog on each one – but I might try to vary the revision lessons at the moment by taking in a selection of cuttings from the newspapers and asking students to imagine essay titles, topics and paragraph points which each one might be used for.
The BBC has a study under way to analyse the psychology of pressure, which will offer “…a new look at why some people are particularly prone to pressure, while others cope rather well.” Not surprisingly, with a launch at this time of year, the introduction to it focuses on exam pressure, and relates it to the pressure faced by athletes and others who have to perform to their best at a set time and under set conditions. The comparison is a good one; facing your A level exams means that all of the work you have done in the last two years comes down to how well you can perform in just two hours or so in the exam room. The study is introduced with an article by Matthew Syed who competed for Britain at the Sydney Olympics, in which he looks at the working assumption that such pressure is a fact of life, and therefore we should practice techniques to learn the best way to deal with it.
He describes the difference between strolling along a pavement, and walking along a narrow path with a 10,000 foot precipice on either side – in both cases the ‘skill’ of walking is all we need to use, but in the latter case we are much more likely to fall because we are so conscious of the way in which we are moving, rather than letting our subconscious take over such a familiar action. Athletes preparing for the Olympics will spend hours not just on their skills but preparing for the competition venue – the lighting, feel, and acoustics. He draws parallels with preparation for an exam – students can put themselves through a similar programme to ensure that, as well as knowing the content of the syllabus, they are ready to take on the environment of the exam room. Here are some suggestions:
– In the exam room you have a strict limit to the time you can take to show your best performance – so put time aside to practice essays or problems under time constraints, perhaps with a parent or friend acting as invigilator to keep you to the task, in order to make that into a familiar challenge.
- He suggests that many students are “vexed by the unfamiliar format of an exam paper, or the tone of the questions” – in which case deep familiarity with past papers, as well as chief examiners’ reports, will work wonders, and teachers at school should be able to provide copies or links to tell you where to find them.
– If you run out of steam because of the nervous energy you expend – taking a banana and a bottle of water would boost mental performance.
I think the article is well worth reading. There is a 20-minute test that you can take online which will contribute to the BBC study of how people respond to pressure as well – although I found that the software for it didn’t work at one point of the test, which didn’t do anything to calm my stress levels!
….acording to the BBC
There have been several examples in the news recently of competition authorities acting in ways which may actually ultimately lead to less competition in several different industries. Read on to find out more.
Here we are- three excellent examples of how government regulation, aimed at improving service and price for consumers, could potentially in the long run make the situation worse…
1. Apple and E-book pricing: Before Apple came onto the e-book scene, Amazon dominated the market with around 90% market share. Thanks to Apple’s insistence on ‘agency’ pricing- where the publishers set prices rather than retailers- Amazon’s share has dropped to around 60% and other companies (e.g. the Nook and Kobo) have been able to enter the market. But regulators, currently primarily in the US, are viewing this as essentially price fixing and it looks like publishers will be forced to agree to abandon this pricing strategy. In the short term it might help to reduce prices for consumers, but if it allows one firm to dominate the e-book market then in the long run it may not be in consumers’ best interests. Macrumors.com provides an excellent background and explanation of this story here.
2. Lloyds have recently ended exclusive negotiations with the Co-Op about selling the ‘project verde’ group of branches after the Co-Op has faced significant regulatory hurdles which may well end up making it impossible for the deal to go through. This time it’s the Financial Services Authority which is standing in the Co-Op’s way, as because the whole Co-Op group would become classified as a financial institution- from supermarkets to funeral directors. And this would mean a significant shift in the way the company functioned, something they may be unwilling or unable to do. So, again, the likelihood of the Co-Op emerging as a strong national high street bank to help shake up the industry and generate more competition looks much less likely. For more on this story see Robert Peston’s excellent blog post here.
3. The rising price of stamps has obviously been in the news a lot recently, and I must confess to doing a bit of hoarding of stamps before the price hike. However, Royal Mail chief executive Moya Greene still worries that the company faces a ‘spiral of decline’, as reported by the BBC. The issue here is about what Royal Mail views as unfair competition. It’s been a few years now since the postal market has been opened up to competition, particularly for letters, and now numerous firms- including the Netherlands’ TNT, Deutsche Post, and others, are involved in the UK postal market. However, while rivals such as TNT are free to provide the services they want to (and so only offering profitable services- e.g. bulk delivery of letters for large national firms) Royal Mail is constrained by its universal service obligation, meaning it must deliver the next working day to anywhere else in the UK for a set fee- so even at 60p for a first class stamp, many of those letters are still costing significantly more, and it’s becoming increasingly difficult for Royal Mail to cross-subsidise between profitable and not profitable services as they are undercut by private sector competition on their most profitable services. In the long, it could be the ‘average’ consumer who suffers as deliveries cost more and become less frequent in order to keep Royal Mail afloat.
An amusing musical clip to introduce or revise negative externalities associated with fly tipping, private costs, social costs, spillover costs, and a discussion of policy options.
Michael Flanders was the father of Stephanie Flanders, the BBC Economics Correspondent.
Professor Robert Schiller from Yale University spoke at the RSA in London tonight on the roles and responsibilities of the financial sector and built an argument that finance can be a root to addressing some of the toughest economic and social challenges of the age. Here are some brief notes from his talk.
Financial innovation has got a bad name recently – creativity in financial markets gave us Enron, sub-prime mortgages, credit default swaps and a myriad of other incredibly complex new financial instruments deeply connected to the global financial crisis. But despite this, “financial capitalism” is taking hold all over the world, for example futures and stock markets are setting up in many fast-growing emerging countries. But how strong is public support for and tolerance of financial institutions? Are financial businesses taking too many of our most talented students? In 2006 – 46% of Princeton students went into financial businesses – are they draining the real economy of too many talented people? How do we distinguishh between good and bad financial innovations? What does the Good Society actually mean?
Robert Schiller argues that we cannot go back in time – “practically everything that is good or important in society will at some point have to go through financial systems to grow and be sustained” – we need think of finance as something that manages and maintains our goals – be they individual, corporate or social. He argues that we need stronger knowledge of finance (an important message here for exam boards as they condiers re-calibrating the A level syllabus). The logical next step from the worldwide Occupy movement protests is structural changes to financial institutions but first we need to understand them more and reform on that basis.
Recent innovations in finance
Consider the last two years only ……
1/ The Benefit Corporation
Companies in US are constrained by law to maximise profits – they are fearful of a shareholder law suit if they dont do this – the Benefit Corporation creates a stated purpose of making profits and allocating some for a social purpose and the communities that surround businesses. Benefit corporations in the United States are spreading quite widely but they are still very small. An example is Blessed Coffee
2/ Social Impact Bonds
This is a bond that pays to investors if some goal to society is met e.g. social impact bond whose goal is to reduce re-offending rates at Peterborough prison – the bond pays to investors only if there is a 7.5% reduction in re-offending rates – social impact bonds focuses entrepreneural attention on solving social problems. More details on social impact bonds can be found here BBC News – August 2011 – Social impact bonds launched by government to help poor
3/ Crowd Funding
Web sites such as KickStarter that allow people to invest small amounts of money in start up businesses many of which are social enterprises.
These are a few examples of the penetration of finance to a broader group of people and they reflect the increasing emphasis given to allocating finance to social projects. Schiller regards this as financial innovation to help grow and deepen the spread of social enterprises – profits for a purpose.
Future innovations in finance
Schiller claims that “We need to democratise and humanise finance, we should strive to make it work better for real people and communities
a) A new kind of participatory philantrophy – a participation non-profit – e.g. a school or a hospital that takes donations by selling shares from people (perhaps tax deductible), shares receive dividends which go into a special closed account in your name that then allows you to make donations to charities and causes of your choice. People would be motivated to watch their account grow and then take active decisions about how to allocate their dividends.
b) A new form of government debt – shares in the nation’s economy – the convention is that governments issue straight debt but little else. The government might start selling shares (Schiller talks about trills – a “trillionth” of a share of GDP) or GDP-linked bonds – the UK should sell £1 trillion worth of shares in the economy, the shares would pay a dividend (variable) and would be traded on the stock market. Issuing shares would curb the sovereign debt crisis and there would be a pent up demand from overseas investors and domestic investors would drive up the price.
Trills would have a coupon (interest payment) tied to a country’s growth prospects. The security would have a long-term maturity (say 20-30 years) that pays out an annual coupon worth a fraction of that year’s nominal GDP.
An interesting idea – but how would GDP/GNP be calculated? Would there be share buy-backs? And annual country AGMs? The sandwiches would have to be pretty good.
“If the Greek economy was diversified around the world with shares held by many investors globally, then the systemic risk of debt default from a tiny economy relative to the rest of the world would be much lower”
c) Mortgage reforms – at the moment they are simple debt contracts and people get into trouble as hosue prices fall and mortgage arrears build up – a huge problem for highly leveraged young families who have put virtually everything into getting onto the property ladder. Schiller proposes that mortgages have compulsory “work-out” elements – when house prices fall, the outstanding mortgage would fall too.
Schiller proposes inequality indexation of taxes – this means that the tax system becomes more progressive automatically in the future if inequality (relative poverty) exceeds some agreed threshold. Inequality is trending higher in many advanced countries, some limit on the extent of inequality has to be decided on now rather than waits until it happens. A really interesting pyschological viewpoint lies behind this approach – this would be an insurance policy against future inequality.
Financial innovation provides a clear path for dealing with many concerns – not the innovation that one would normally think about – e.g. sub-prime – this is convention-challenging stuff! Schiller is trying to formulate ideas that reform our financial system in ways that moderate and manage risk for the social good rather than simply maximising returns to private sector financial organisations.
For more background on Schiller’s ideas in “Finance and the Good Society”
Review of Finance and the Good Society (Huffington Post)
The midnight deadline passed and with it came the news that over 730 entries had been submitted – this is a huge new record. Lots of new schools and colleges have entered this year and the mammoth entry will give the teacher judging panel quite a task when they meet in mid June! A big thank you to all of the economics teachers who have encouraged their students to research their essays and promote independent work. The standard of the answers rises each year and we are sure that the shortlisted entries will be of a very high standard! Keep an eye on the blog for details of the finalists sometime next month!
For all you Android users, if you want to get ahead in your Economics, you can now download an app called: ‘Econ Classroom App’
This is particularly useful for IB Economists. The app is written by Jason Welker, a teacher and author of the IB and AP. I use many of his IB approved books, PDF’s and other video resources in my teaching.
There are many different market failures when it comes to understanding some of the key environmental problems and challenges of the age. Addressing, attacking and correcting for complex and multiple market failures requires pointing to different policy instruments / interventions. Together can they make a sizeable difference to consumer and business behaviour and lead us away from a “business as usual” approach?
Cutting Greenhouse Gases
Carbon taxes: Video resources on carbon taxes
Cap and trade – emissions trading – The collapsing price of carbon (blog)
Emissions regulations: Sales of low emissions cars soar in the UK (April 2012)
Floors on carbon prices: UK to introduce a carbon price floor (HM Treasury)
Green Investment Bank: UK green investment bank to be set up
Research, development and deployment (RDD)
Tax breaks for research:
Feed-in-tariffs for renewables (a deployment incentive): UK government cuts the solar subsidy (Nov 2011)
Corporate commitments – businesses with clear commitments to improving sustainabiity
Information gaps / asymmetries
Labelling information on cars, household products: Carbon Labelling
Smart electricity grids: Smart electricity meters
Low-emissions mass transport services: Air pollution costs lives
Widespread adoption of broadband technologies
Community insulation schemes – energy bills explained
Fuel efficiency standards
End of product life disposal laws
Recycling targets – what should be done about plastic bags?
Community and stronger institutions
Preventing deforestation – “Winning the war on deforestation”
Low-carbon community projects / experiments
Prezi on environmental economics can be found here
The cost-benefit principle is one of those core ideas that can be brought into so many evaluation discussions both in micro and macroeconomics – you should be using it in your papers!
The cost-benefit principle says that you should take an action if, and only if, the extra benefit from taking it is greater than the extra cost
Here are some examples where the principle might be built into your analysis and evaluation
1. Costs and benefits of government subsidies e.g. the arguments for and against subsidies to incentivise new housebuilding, to part finance environmental improvement schemes or measures to curb deforestation
2. Costs and benefits of indirect taxes e.g. environmental taxes (such as a carbon tax) or taxes designed to curb demand for / consumption of de-merit goods including higher indirect taxes on alcohol, fuels, air transport etc
3. Costs and benefits of the introduction of competition into a market e.g. postal market liberalisation which is eroding the monopoly power of the Royal Mail, liberalising the market for telecommunications
4. Costs and benefits of an increase in government spending on public goods and merit goods such as flood defence schemes, free entry to museums and galleries, spending on new motorways or state-funded wifi infrastructure
5. Costs and benefits of different strategies designed to reduce income and wealth inequality e.g. the national minimum wage, the introduction of a living wage or changes to the top rates of income tax
6. Costs and benefits of the introduction of carbon trading as a way of reducing CO2 emissions
7. Costs and benefits of different government policies designed to reduce unemployment e.g. comparing the effectiveness of investment in training with an employment subsidy for the long term unemployed
8. Costs and benefits of major infrastructural projects such as new motorways, London 2012, CrossRail, infrastructure projects as part of a fiscal stimulus
9. Costs and benefits of a decision by the government to relax planning controls on new house-building
10. Costs and benefits of tougher regulations for different industries e.g. increased fuel efficiency targets for the motor industry or tighter laws on carbon emissions from factories
Key revision points:
• Market failure diagrams are an excellent way of illustrating the ideas here e.g. you can draw / show private and social costs and benefits and also the welfare losses and gains from different policies. So any question on externalities (positive and negative); merit and de-merit goods etc should definitely have a cost-benefit diagram within the answer and some supporting text explaining it and applying it to the question.
• Consider short and longer term costs and benefits – which policies might have the greatest impact over the longer term?
• Whenever you are considering policies from a cost-benefit viewpoint, the hard part is
o Identifying the relevant costs and benefits
o Measuring and valuing them (we don’t have markets and prices in every kind of environmental resource)
o Recognise that individual rational behaviour does not always lead to a socially optimum / desirable outcome
• When governments get their cost-benefit analysis wrong, there is always scope for government failure
• Remember – the best policies are those that are likely to be:
o Most effective in achieving an aim(s)
o Most efficient in not wasting resources or creating secondary problems / disincentive effects
o Are equitable in terms of their impact on different stakeholders
Please try to remember the basics of the cost-benefit principle in your exams this summer!
I always ask of my students that they try to put policy issues and decisions into context. The effective use of context – either in a domestic or external setting or using recent history as a guide can greatly improve evaluation marks in exam essays. Our aim in a revision session today was to build some of that context with respect to some of the key issues facing the UK economy.
A starting point was the short and medium-term impact of the recession and how this is shaping the strength and pattern of recovery as we head through 2011 and into 2012. As befits an open economy heavily integrated into the European and global economic and financial system, many key recent developments on growth, jobs, inflation and trade are impacted by external demand and supply-side shocks and headwinds.
The Legacy of a Recession
The 2008-09 recession was deep and we started by looking at some of the consequences:
a) High unemployment – lower than the jobless peaks of previous downturns but still a major policy issue – with 8.5% of the labour force out of work, amounting to 2.5 million on official figures. Hidden unemployment understates the true scale of the problem, part-time unemployment is rising
b) Long term structural unemployment (people out of work for at least a year) – now over a third of the total, with a particular focus on youth unemployment and deep-rooted unemployment in certain regions and industries. Many older unemployed people have little chance of finding fresh work. The estimated NAIRU has risen to aroud 6% of the labour force. For some economists this modest rise in the natural rate is relatively welcome news – it has grown more steeply in previous recession.
c) The recession has dealt a blow to consumer confidence (falling wealth, rising unemployment, declining real incomes, the prospect and reality of higher taxes). That said business confidence has rebounded well, indeed corporate finances (outside of the financial system) look healthy, there are many cash rich businesses out there. However weak consumer sentiment will hit short term growth and subdued domestic demand will do little to generate enough extra spending to promote job creation.
d) The impact of the steep decline (more than 25%) in the real level of business capital investment - capital spending is recovering but has a long way to go to reach pre-recession levels – this will limit productivity growth in the years ahead.
e) The legacy of high government borrowing (UK budget deficit = £155bn 2010-11) and (by modern standards) dangerously high levels of government debt.
f) A fall in productivity growth and this – combined with weak investment and high unemployment – is contributing to a reduction in the estimated trend growth rate for the UK economy. A “new normal” growth rate might be closer to 2% rather than 3% and this has important implications for a government desperate to bring borrowing down and for an economy badly in need of hundreds and thousands of new jobs.
g) High inflation – the economy emerges out of recession with CPI inflation running well ahead of the 2% target (latest data: 4.5% on CPI) – indeed CPI inflation has been higher than 3% in each of the last sixteen months. Inflation remains much lower than we saw in the 1970s and 1980s but with prices rising at close to 5% per year and wages for many frozen or static, we are seeing a sharp drop in real disposable incomes and living standards.
h) Perhaps the biggest legacy of the recession …. namely a financial system that remains fragile both here in the UK and overseas (e.g. the European banking system) – the system is still under-capitalised and has become deeply risk-averse. It charges higher and higher interest rates to corporate and personal borrowers.
The financial crisis created a negative externality that affects the entire economy. Yes – some mortgage payers are enjoying lower interest rates on their loans. But millions of savers have seen their incomes slashed (and they didn’t create the crisis!) whilst thousands of businesses find it tougher and more expensive to get the loans and trade credit needed to sustain a recovery and build new enterprises
Recessions are painful and damaging - there is an ongoing debate about the extent to which the downturn has damaged our productive potential and export capacity (i.e. hysteresis effects). Here is a simple question – where will growth come from – invites a range of answers – some of which are explored here.
Our discussion then switched to monetary policy… there is little doubt that the handling of monetary policy has become much tougher in recent times, a stark contrast with the NICE decade in which setting base rates must have seemed like a busman’s holiday. Divisions within the MPC have been well reported. Some of the questions we raised were as follows:
i) When to tighten monetary policy – either in the form of gradual increases in base interest rates or a partial withdrawal of the policy of quantitative easing (QE) – replaced by quantitative tightening (QT)
ii) Is the inflation credibility of the Bank of England being eroded by a long period in which inflation is persistently above target? How much longer will the “temporary factors” driving inflation higher continue to hold?
iii) What are the dangers of rising inflation expectations? Why has there been (so far) a muted wage-price response to CPi and RPI inflation in excess of 4%?
(iv) Should we continue to use inflation targets”>continue to use inflation targets? If so is there a case for changing the target?
(v) Is the Bank of England / government right to continue using a free floating exchange rate?
(vi) How effective is conventional monetary policy? Has the UK (and the USA) experienced a liquidity trap? If so what are some of the consequences?
There are many important fiscal policy decisions in the near future. Most students will be familiar with the debate about fiscal tightening (mentioned below) but there are other key developments in changing the architecture of the fiscal system to meet supply-side, environmental and distributional aims …
(i) Fiscal tightening – when to cut the deficit? How to cut borrowing? Over what time frame?
(ii) The scale of government spending – with Government spending now more than 50% of GDP have we reached a point where the state sector has grown beyond an optimal size for long term growth? Govt spending can be a powerful force for good but what ought to be the balance between public and private sector demand and resource claims?
(iii) Could the balance between direct and indirect taxes be changed to create stronger incentives to work, save, invest, innovate, employ?
(iv) Should governments be more brave in using fiscal policy instruments to meet tougher environmental targets? how strong are the arguments for a proper tax on carbon?
(v) How best can fiscal policy support supply-side improvements in competitiveness and trade?
Well … this is what we covered in a revision lesson on context. Macroeconomic policy making is not easy at the moment and the last few years has certainly tested the design of policy - from choice of exchange rate regime, to the independence of central banks, to the ability of sovereign governments to engage in an independent economic policy in a world of globalization and increasingly frequent macroeconomic and financial crises.
Check below to some links on recent macro policy blogs that I think are helpful as part of final revision
Preparing for the AS Macroeconomics Paper (Slideshare presentation)
2 posts from economics help
http://www.economicshelp.org/blog/5198/economics/preparing-for-economics-exam/ on preparing for the exam, and
http://www.economicshelp.org/blog/542/economics/evaluation-for-exams/ on evaluation
Catastrophically high unemployment in countries such as Spain are causing people to leave the Med in search of work elsewhere and thousands are trying their luck in South America. This short video from Al Jazeerah news looks at the growing number of people heading to Argentina looking for a job or perhaps the chance to start a new business. Watching it is a chance to revise some of the factors that affect the geographical mobility of labour? This Economist report looks at some of the causes of geographical immobility of labour.
Spain’s struggle with high unemployment
Boasting a steering wheel that doesn’t steer, an in car radio that is an optional extra and acceleration powers that – on a good day – can take you from 0 to 60 in less than three minutes, the Lada has for a long time been a figure of fun in global motoring circles. But production is coming to an end following a collapse in sales. As is often the case, news of the demise of the Lada has prompted increased interest among younger urban consumers whose DNA is to go against the grain and drive something that is sturdy, mercifully free of corporate design features and most of all, tremendously cheap.
Russian car-maker AutoVaz has announced that it will stop production of its Lada 2107 model, better known in Britain as the Lada Riva, after more than 40 years.
Provisional estimates show that Britain’s recovery from the debt crisis has stalled yet again with real GDP falling by 0.2% in the 1st quarter of 2012. Many small and medium sized businesses want to grow, have products whose demand is rising and wish to take advantage of a competitive exchange rate – but the fragility of the financial system is holding them back and the Channel 4 news broadcast below is superb in highlighting the weaknesses caused by fiscal austerity and de-leveraging in the banking system. The UK economy has seen almost no growth since the Coalition government took office in May 2010. Plan A isn’t working George.
“The performance of the economy in the past four years has been the worst in peacetime for at least a century” (Video news report here)
Fears of construction companies
On Tuesday, a friend showed me a wildly entertaining video of a man “winning” a game show by utilising an astonishing understanding of game theory. Without spoiling it too much, the show involves a variant of the Prisoner’s Dilemma and invites the final two contestants to “split” or “steal” the pot of prize money. Video link below:
***WARNING: SPOILERS AND BORING ANALYSIS BELOW***
The final result, as the audience gasps suggested, was a surprise to many. However, there is more theoretical meat here than what might first appear. Unsatisfied with simply enjoying the show, I sought to explain the strategy and the result by extending the traditional model of the Prisoner’s Dilemma, which may present the situation as thus:
According to this payoff matrix, [Split, Split] is never a Nash equilibrium and the (weakly) dominant strategy is to Steal for both players. However, a frequent criticism of the traditional model is that wealth does not equal utility, so to present the payoff matrix in terms of wealth (i.e. the payout of prize money) may miss some key variables in explaining the situation.
One significant variable may be an aversion to inequality, which we denote by A in reference to Atkinson. If A is non-zero and positive, players suffer disutility if the game ends in an unequal outcome. If this is too magnanimous a concept to assume, consider A to represent “an aversion to being screwed over”, i.e. players dislike the outcome in which they alone are left with nothing, after having Split whilst their opponent has Stolen. We can now represent the situation as thus :
The inclusion of A results in [Steal, Steal] being the sole remaining Nash equilibrium because Steal is now the strictly dominant strategy for both players. However, this only compounds our problem since this result is even further from what had actually happened on camera. For that, we need to consider the strategies played.
From the start, Nick (Red) played the unconventional strategy of insisting that he is going to Steal. Assuming that Nick’s claim is credible, this removed one uncertain half of the game, leaving Ibrahim (Blue) certain that Nick was going to Steal. Given the removal of uncertainty, we can now represent the new game as follows:
This suggests that Ibrahim will Steal simply to avoid getting screwed over by Nick, who would otherwise gain the entire prize pot at the expense of Ibrahim. However, Nick does not stop there. He makes the additional claim that if Ibrahim Splits and Nick wins the entire prize pot, Nick will offer half of it to Ibrahim after the show. Ibrahim is understandably suspicious of this claim, as this is much less credible than Nick’s previous claim of definitely Stealing. Even the host hastens to add that Nick’s second claim is not legally binding, anxiously promoting the [Steal, Steal] outcome.
However suspicious Ibrahim is, there may be some probability that Nick is indeed honourable and would split the prize pot after the show. Given Ibrahim is the only player making a decision in this version of the game, it is his perception of Nick’s honour that matters. Let us denote this probability by H, where H% of the time, Nick honours his vow and splits the prize pot equally after the show, and (1-H)% of the time, Nick runs away with the entire pot. We can now represent the game as thus:
This time, there is no clear dominant strategy for Ibrahim and everything depends on his values of H and A, Ibrahim’s perception of Nick’s honour and Ibrahim’s aversion to inequality, respectively. In order for Ibrahim to choose Split, H(1)+(1-H)(0-A) must be greater than 0. This can be simplified to the inequality H-A+HA>0.
This inequality suggests that the more honourable Ibrahim perceives Nick, the more likely Ibrahim will choose Split. And the more Ibrahim is averse to inequality, the less likely Ibrahim will choose Split. This is in tune with our intuition. The corner solutions for the inequality are as thus:
• If H = 1, 1 must be greater than 0 (which it is!) so if Ibrahim doubtlessly believes that Nick will be honourable, Ibrahim will always Split.
• If H = 0, -A must be greater than 0 so if Ibrahim doesn’t think Nick can be honourable at all, Ibrahim will not Split unless he actually prefers being screwed over.
• If A = 0, 2H must be greater than 0 so if Ibrahim doesn’t care about being screwed over, as long as he thinks there is some chance of Nick being honourable, Ibrahim will Split.
• If A = 1, 2H must be greater than 1 so if Ibrahim significantly cares about being screwed over, Ibrahim must strongly believe (with >50% probability) that Nick will be honourable in order for Ibrahim to Split.
As can be seen, whether Ibrahim will Split or Steal depends upon his perception of Nick’s honour and his aversion to inequality. As the audience, we have the fortunate hindsight of knowing that Ibrahim chose to Split, from which we can infer that he either perceived Nick to be honourable enough or he wasn’t too averse to inequality. However, H and A are both hidden to Nick so let us now analyse his possible moves in turn.
Despite insisting that he will definitely Steal, Nick still has the choice to Split or Steal. He knows for certain that he will be honourable (H=1) so that if he Steals whilst Ibrahim Splits, he will share out the prize money equally after the show. However, in the event that Ibrahim Steals after all, if Nick Steals then both players go home with nothing, whereas if Nick Splits then there is a tiny possibility that Ibrahim will be generous and gives him something small (S) in return . We can therefore represent the payoffs Nick faces below:
The above matrix suggests that as long as there is some probability of Ibrahim being generous and giving something to Nick (G and S both being non-zero and positive, even if small), then Splitting is the weakly dominant strategy for Nick. In fact, one might even consider adding an extra positive satisfaction value to Nick if the [Split, Split] outcome is achieved, out of pride that he has “solved” the game, which would result in Splitting being the strictly dominant strategy for Nick.
The final outcome suggests that both the H-A+HA>0 and the G(S)+(1-G)(0)>0 inequalities have been fulfilled, which is why the result was [Split, Split]. Some final takeaway points include:
• This game has deviated substantially from the classic variant of the Prisoner’s Dilemma, so one cannot say that Nick has “beaten” the Prisoner’s Dilemma. The two contestants were almost playing a different game, with open communication and incomplete information (about H, A, G, S, etc.) This is why the outcome has also deviated so much from the traditional expectation.
• Commitment is key. Not only in increasing H (others’ perception of your honourableness), but also in how credible you are in insisting you are definitely going to Steal, a point which we did not explore here. Ironically enough, if Nick was not credible in committing to Steal, then Ibrahim may have been more likely to Steal.
• Aversion to inequality is also important. Studies have shown that most people value relative wealth as opposed to absolute wealth, which suggests that if they were definitely going home with nothing, people would prefer their opponents leave with nothing too, rather than leaving with more money. This spite can almost be described as a certain sadism (increasing utility in others’ decreasing wealth), and the outcome may have been drastically different if either player was a strong sadist!
There is still much to be explored in this theoretical goldmine, so please share your comments in the comments section below, and I hope you’ve enjoyed reading this!
Many thanks to:
Eugene Hwang for sharing the video with me.
Professor Schankerman for teaching me game theory and spurring me to write this.
 This payoff matrix only shows A for the losing/Splitting player hence it is more akin to the “aversion to being screwed over”. As for a true Atkinsonian aversion to inequality, it is plausible to consider the existence of A for the winning/Stealing player too, as an admission to guilt, but for brevity this is not represented here.
 This is a less farfetched assumption than Nick being altruistic. We are also omitting Nick’s aversion to inequality here for the sake of brevity, but it does factor into his decision.