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Oxbridge Economics: Introduction to Econometrics

Tuesday, September 29, 2009

As we enter the season of university applications, and discussing the more advanced “off-syllabus” topics in Economics; here’s an “Introduction to Econometrics” presentation that I have prepared.

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The trade impact of car scrappage

As expected, the UK government has announced an extension to the car scrappage scheme which will expand the consumer subsidy to another 100,000 cars.

The ‘clash for clunkers’ scheme has at least helped to stabilise domestic car production but four fifths of the new cars sold in the UK are imported from overseas. According to the Guardian “For the year to date, production has declined by 44.6%. But the slight improvement recorded last month has prompted some carmakers to hope that the slump is bottoming out.”

So the direct impact on UK car assembly plants is smaller than we might think. Factor in though the multiplier effects on the suppliers of car parts and the boost to retail and distribution businesses.

Stephanie Flanders is on excellent form in her latest Stephanomics blog. She argues that the much larger German car scrappage scheme may have had an even bigger effect on our own producers than the UK government’s modest version. The German subsidy is worth ten times that of the UK and around 40% of German car sales last year were imports. More here.

A2 Micro Multiple Choice Quiz

A ten question multiple choice quiz on aspects of introductory theory of the firm can be found here

Launch interactive version of the quiz

Download SCORM-VLE Zip file (import to your VLE)

Pump down the volume

We have all suffered the inconvenience of sitting on a train or bus or in the library and being distracted by the whirring sound of someone’s pop favourites blasting out of their earpieces. Quite apart form the potential long term damage to their own health, the externalities of inconsiderate people oblivious to those around them are not inconsiderable! The EU is considering intervening to set a maximum noise default setting on new portable music players.

They want manufacturers of digital music players to introduce these standards voluntarily before legislation is prompted - this is an interesting example not just of externalities but also information failure among predomianantly younger people about the long term impact of playing loud music through ear pieces for hours at a stretch.

According to EU Consumer Affairs Commissioner Meglena Kuneva.

“The evidence is that particularly young people - who are listening to music at high volumes sometimes for hours each week - have no idea they can be putting their hearing at risk. It can take years for the hearing damage to show, and then it is simply too late.”

What other interventions might be possible as alternatives? Beware the law of unintended consequences - how would consumers who want to max the volume get around such limits?


Scots may lead the way in setting minimum price for alcohol

The smoking ban first came in north of the border and now we find that the Scottish government has been proactive in trying to curb the economic and social costs of high alcohol consumption and binge drinking. Establishing a minimum price per unit of alcohol seems like an obvious economic approach to the issue and this report by Colin Blane looks at the plan for a minimum price of 40p per unit - making a bottle of wine at least £3.60.If it works the number of hospital admissions could be cut by many thousands per year. Will Scotland become the first country in Europe to go down this path? This short video piece would make a good starter resource for a lesson on intervention options and an evaluation of their potential impacts.

How to start the next Google or Facebook

Monday, September 28, 2009

Victor Seidel, Fellow of Trinity College, Oxford is speaking at our Management Society on Wednesday evening - if any colleague would like to come along they are more than welcome. The meeting starts at 8-45pm in Upper School, Eton and lasts for an hour.

A reminder too that Chris Coleridge, the founder of V-Water .... a business that is operating in an increasingly competitive market space with the likes of Vitamin Water and Juice Doctor - is speaking at our Entrepreneurship Society on Thursday night - again starting at 8-45pm. Teaching colleagues and their students are welcome.


A2 Economics Revision - External Shocks

We have created this PowerPoint for A2 Economics students who wish to update their understanding of external macroeconomic shocks and cyclical fluctuations.

Viewed streamed version of the presentation

Download SCORM-compliant VLE version (ZIP file)

Download printable pdf version

Let a falling pound rebalance the economy

Stephen King has a superb article on the importance of exports and a cheaper currency to prospects of recovery in today’s Independent.

“If consumer spending, government spending and investment spending are going to be weak, the only likely source of growth is exports. One way to boost exports is to adjust the relative price of goods and services produced in Britain, and an obvious way of doing this is to encourage sterling to fall. Unlike the individual eurozone members, the UK still enjoys exchange-rate flexibility.”

But he makes the point that a lower currency on its own provides little more than a quick palliative to the fragily economic situation - the UK needs to reinforce our competitive advantage in many different industries by improving non-price quality, keeping costs under control and investing in productive capacity rather than simply relying on a weaker sterling to boost the profitability of exports.



Economics in the News Quiz - 28 September 2009

Ten more questions for Economics students in our weekly interactive quiz:

Launch interactive version

Download printable (pdf) version (answers at the back)

Download SCORM-compliant VLE Zip Version

Are the Japanese the latest victims of a strengthening currency?

The Japanese Yen has hit an eight month high vs the US Dollar according to BBC news BBC News Article. This has prompted a lot of hand wringing from the Japanese ruling party and has sent share prices in Tokyo tumbling. But why should having a strong currency against the greenback equate to economic turmoil?

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Classic cuts

Tonight’s edition of Panorama will be examining the way in which government spending might be cut after the next election. In anticipation of that, the BBC have made a three-minute extract from the programme in 1968 which looked at spending cuts in that year, reporting on prospects for abolishing prescription charges and the 20% increase in the cost of the Civil Service between 1964 and 1967 with the average civil servant costing £1537. It makes an interesting period piece, and I think that the episode to be shown at 8.30 tonight will make an interesting discussion around options for fiscal policy over the next few years.

Cause and effect of the weakness of sterling

Sunday, September 27, 2009

I do recommend this 4-minute interview to help explore the reasons for the weakness of sterling and whether it is helping the UK economy. Mark Thompson , a dealer at Moneycorp, was interviewed on Radio 5’s ‘Breakfast’ programme, and explained the shocks to the economy caused by the use of Quantitative Easing and the negative bank deposit rate (which means that if banks choose to hold money on deposit with the Bank of England it actually costs them money, rather than gaining them a return as interest). He sees these as strong statements that had been deliberately used to depress the value of the pound on the currency markets, thus encouraging exports and raising the price of imports, so that there is a substitution effect towards home-produced goods, which we can see is reducing the negative trade balance and so helping to raise the level of AD.

The link here will take you to the Friday 25th September episode of the programme, and should remain live until the end of this week; I think that after that it will be unavailable. Once you have opened the i-player page, use the scroll bar below the ‘control panel’ to move forward through the programme to 1 hour 48 minutes, which is the start of the interview.

Pain in Spain - on the brink of depression

Saturday, September 26, 2009

In our introductory AS macroeconomics we have discussed the differences between a cyclical recession and a depression. Much depends on the scale of the contraction in real national output from peak to trough of the cycle. This article from the Telegraph looks at a dire outlook for the Spanish economy which - not long ago - was one of the fastest growing countries in the European Union with a rising relative per capita income.

Quoting a report from Madrid research group RR de Acuña & Asociados, the peak to trough loss of GDP is likely to be more than 11%. “The group said Spain’s unemployment will peak at around 25pc, comparable to the worst chapter of the Great Depression…...The construction sector will shrink from 18pc of GDP at the peak of the boom to around 5pc, making it unlikely that there will be any significant recovery before 2012. Even then growth will be “slow, weak, and fragile”.

A huge rise in the Spanish government’s budget deficit has left them little wriggle room for a fresh fiscal stimulus.

Spain and Ireland are frequently quoted as two EU countries whose property bubbles have been well and truly smashed with huge macroeconomic consequences. The slump in property represents a very large internal demand-side shock for a country heavily dependent on construction and also tourism for value-added measures of GDP.

You Tube Micro Economics Videos from Econ Girl!

Friday, September 25, 2009

A big hat tip to Jason Welker for flagging up this new and growing series of You Tube videos on introductory microeconomics.

Six countries in recovery

Thursday, September 24, 2009

Ahead of the G20 summit, CNN money provides an overview of six countries that look on the path to recovery ... or at least are heading down the slip road…...good macro background for A2 economists wanting to understand the economic cycle.

Say sorry ... it makes business sense!

Sorry seems to be the hardest word for politicians and for all of us who have dug ourselves into a hole. But a new study of consumers from academics at Nottingham University finds that customers are more likely to continue a commercial relationship with a business that is up front anmd apologises rather than those who resort - after a delay - to financial sweetners. More here

Managing a global business in turbulent times

Over ten years at my current school I have been hugely fortunate to hear some tremendous speakers on a tremendously wide range of issues. Few have impressed me as much as Simon Henry, CFO of Shell plc in his talk to our Keynes (Economics) and the newly-formed Management Society last night. His talk was beautifully paced and considered; the responses to questions were candid and rooted in a deep understanding of energy industries where volatility has become the norm. Future shareholder value will depend largely on successfully breaking the cycle of volatility.

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AS & A2 Digital Course Companions for 2010

Monday, September 21, 2009

Our range of digital course companions for popular AS & A2 Economics units has been extended and updated over the last few weeks…

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UK Economy ExamBuster 2009

Here is a study resource which will really help A2 students prepare effectively for exams in January 2010…

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Paul Mason on Economic Aftershocks

Newsnight’s Economics Editor Paul Mason was on fine form last week with a set of short reports on how the economic and financial crisis has affected the UK and Global economy. Both are between five and six minutes long and I showed them to my A2 students as a prompt for discussion and also to an able AS set who are still dipping their toes in the macroeconomic waters! The features allowed us to discuss (at AS level) the inter-connected nature of the world economy (for example the need to re-balance demand and trade between the USA and China) and also to consider the reasons for and consequences of the huge rise in public sector spending and borrowing.

For AS economics I have deliberately left introductory stuff on the circular flow until we have kicked around ideas and arguments about the recession - causes, effects and ways out of the downturn.

Here are the links to Paul Mason’s three video reports from last week:

Aftershock - Impact on the UK

Aftershock - Impact on the World

Aftershock - Has ideology changed?

RES Annual Lecture 2009 - 25 & 26 November

Schools and colleges are invited to request tickets for the popular 2009 RES Annual Lecture series on Wed 25 November (London - Royal Institution - 3.00 p.m.) and Thursday 26 November (Bristol - Bristol Grammar School, 4.30 p.m.).

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How Moodle can change a school (2)

Sunday, September 20, 2009

The second video looks at the wider side effects of developing an open source VLE.

How Moodle can change a school (1)

A superb presentation - from a school using Moodle to deliver business and economics education. Inspirational stuff for those of us who are becoming Moodlers!

Economics in the News Quiz - 20 September 2009

The latest edition of our weekly Economics Quiz for AS/A2 students is now available:

Launch interactive version

Download printable (pdf) worksheet version

Simon Henry at the Keynes Society

Simon Henry the CFO of Shell plc is speaking at the Keynes Society this coming Wednesday evening at 8-45pm in Upper School, Eton College. He will be talking on the topic of ‘Managing a business in a time of change’. Teaching colleagues are most welcome to come along to this meeting and it may also interest A2 students applying to read Economics and Management or A2 Business Strategy papers. Please .(JavaScript must be enabled to view this email address) if you are planning to come along.

Protectionism and the free-market Economist

Friday, September 18, 2009

The Economist magazine is furious with Barack Obama for his announcement of a 35% import tax on tyres from China. The writer looks at the role of world trade in the extraordinary burst of growth that globalisation has triggered, which has “lifted hundreds of millions out of poverty over the past few decades and brought lower prices to consumers everywhere.” The effect is being threatened now though, as world trade is predicted to fall by 10% in 2009 and many countries attempt to help their domestic industries with subsidies or new tariffs on imports: the Economist quotes a report from the Geneva-based World Trade Alliance claiming that, on average, once every three days a G20 member has broken the no-protectionism pledge they made at the summit in April. Specifically, they look at the potential problems to be caused by the new import tax on Chinese tyres: either consumers will have to pay more for tyres made more expensively in the domestic economy, which will cause the motor trade to suffer, or buyers will simply switch to an alternative source of low cost imports, from India or Malaysia, in which case the US jobs will be lost anyway, and in either case there is the risk of provoking retailatory measures from China.

Does one small measure of protectionism matter? The selective steel tariffs introduced by George Bush on imports from China in 2002 had very little effect on trading relations between the two nations in the long-run. The Economist thinks that this is different, and that America has to take a leading role in resisting the temptation to protect, but also largely because they are reliant on the Chinese as major buyers of the government bonds that are financing America’s massive fiscal deficit.

Keep up-to-date with the Economics Blogs with our widgets!

Thursday, September 17, 2009


Start the new term with by adding our free Economics Blog widget to your departmental VLE, blog or website.  You can also add this content to a Facebook, MySpace or Bebo page.  The possibilities are endless…

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Debt repayment - a virtue or a curse?

This useful article from the BBC looks at debt, repayments and savings for individuals in the UK. In July UK households actually paid back more debt than they took out for the first time since the Bank of England started recording this data 16 years ago in 1993. At the end of that month total household savings amounted to £1.1 trillion, and total outstanding lending to individuals stood at £1.46 trillion (which is almost a trillion more than in 1993). Of this, £1.23 trillion was mortgage debt and £231m was other forms of consumer credit. Households are now starting to get the message about repaying that debt, with the average individual paying back £10 more than they borrowed in July – but the average personal debt standing at £24,000 is going to take an awful long time to pay back at £10 a month.

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Steelmakers stock up on surplus carbon permits

Wednesday, September 16, 2009

Grist to the mill of those who believe that the EU carbon market is flawed - it appears that some of Europe’s biggest steelmakers have been given a huge financial windfall from the carbon trading system This article from the Guardian explores the background.

Olive Oil Producers Suffer from Falling Prices

For the olive oil growers of Spain falling prices are threatening their very existence. They claim that the supermarkets - who sell 9 out of every 10 bottles - have used their market muscle to drive down the retail price and the growers are barely able to justify continuing production. This is a good short video on the workings of the price mechanism.

King confirms green shoots

CPI inflation has fallen to 1.6%, and RPI inflation started to recover to -1.3%, in the measure of the annual rate to August. Is this good news?

For CPI, it means that the rate is moving further away from the target of 2%, which would be a concern if it was to continue on that trend, but the RPI measure indicates a slightly lower level of deflation, which should be a welcome sign. However, in both cases, it depends upon the reason as well as the expectation of what happens next. In a speech to the Treasury Select Committee, Mervyn King suggested that inflation is likely to be volatile over the next year, and focusing on GDP, he said that there were signs of a recovery to positive growth in the third quarter of the year.

But he remains very cautious; although the European Commission forecast the UK to grow 0.2% between July and September, this is less than in France or Germany, and Mervyn King suggested three factors, or headwinds, against which UK growth would have to struggle in order to become positive.

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Downturn Drives Hotel Rack Rates Lower

Tuesday, September 15, 2009

Here is a super short article from BBC news on the impact that the recession has had on average hotel room rates in different locations across the UK. Demand and supply side factors impact on room rates in specific towns and cities. More detailed information can be found from this press release from

“UK hotel prices fell 16% on average making the first six months of the year a great time to staycation. Prices in London were down 12% to £101 on average, in Bournemouth by 14% to £66 on average and in Southampton by 33% to £57 on average.”

It might be worth having a discussion about the reasons for these regional price variations:

Bath £111
London £101
Edinburgh £91
Jersey £90
York £86
Blackpool £59
Southampton £57
Plymouth £57
Nottingham £53

Infrastructure investment to keep the Chinese economy driving forward

The Chinese government has moved heaven and earth to keep their economy growing during the global economic crisis. The focus has been on boosting domestic demand such as consumer spending and capital investment. The government is behind the world’s largest stimulus programme - investing around $566bn - and the government has pledged to go ahead with large-scale projects. Quentin Sommerville reports on a huge infrastructural project - a good video to use to illustrate the multiplier effects of capital spending.

Is Keynes still relevant?

Paul Mason considers the return of Keynesian economics as the state has returned to rescue the market in this BBC Newsnight video - an excellent resource to show in the classroom. The return of Keynesian thinking is - according to Paul Mason - a result of a more pragmatic approach to macro-economic policy-making.

In a follow-up discussion on Newsnight Jeremy Paxman is joined by Lord Skidelsky, biographer of John Maynard Keynes, and Sunday Telegraph columnist Liam Halligan, to debate how relevant Keynes’ theories are in the current economic climate.

Mature Banking

Monday, September 14, 2009

A post from student Tom Hosking

Where does parmesan cheese come from? It may surprise you to know that it is most likely to have come from a bank! Banks in Northern Italy have been running a cash-for-cheese loan scheme for the past fifty years. This year, demand for the scheme has risen 15% because cheese makers are struggling in these hard times.

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Economics in the News Quiz - 14 September 2009

Sunday, September 13, 2009

Have your been keeping on top of the breaking UK & International economics news stories of the last 7 days?  Take our interactive quiz to find out!

Launch Economics in the News 14 September 2009

Download printable pdf worksheet version (includes answers at back)

Sunday Selection

Here is a selection of recommended web articles and features

Robert Peston asks whether a slower recovery will be better for the UK than a rapid rebound from the trough of the cycle:

Nobel-Prize winning Economist Joseph Stiglitz considers the pitfalls of relying heavily on GDP as a measure of economic well-being and sustainability - “Chasing GDP growth results in lower living standards. Better indicators are needed to capture well-being and sustainability.”

Over at the Independent, Hamish McRae argues that the future of the British motor industry depends on creative and highly skilled designers rather than hanging on to the desire to keep mass manufacturing going at any cost

“There is no room for sentiment in the motor business. It is a really tough one and one that in the developed world will continue to be in slow decline. The world’s largest car producer now is China and that is the way the world will continue to go. There is room for a country like the UK in niches – of which the Mini is perhaps the best example and MG might have been – at the top end of the market where craft and design outweigh the cost of manufacturing in the developed world, and as a sterling base supplying the UK market.”

More here

What is economics? Modern approaches

This looks like a very useful resource for ambitious A2 economists - a New Scientist special on Economics from earlier on this year

Second-hand car market – law of unintended consequences

Drive a new car off the forecourt and you it immediately loses a sizeable slice of its value. And, under normal market conditions, second-hand cars lose value by about 15 per cent a year, but this year they are increasing in value – by an average of £600 so far this year – mainly due to a shortage of supply caused by the government’s scrappage scheme.

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Endogenous models of the economic cycle

In A2 macro today we are considering some of the internal dynamics of the business cycle and in shaping turning points. We will cover stock cycles, multiplier effects, the accelerator mechanism and the significance of the output gap. I have attached below a chart-based handout in word format used for annotated notes. 


Obama treads a difficult path with Chinese tyre tariffs

One aspect of the global trade recession in 2008-09 has been the resurgence of protectionist tendencies as countries have lined up to introduce fresh barriers to trade in goods and services. The pressures for import protectionism in the form of tariffs, quotas and other barriers is largely driven by politics and there is a new example to dissect with the news that the US government is to raise the import tariff on low-grade Chinese tyres following a petition filed by the United Steelworkers trade union, which represents workers at many US tyre factories. Chinese exporters will be subject to 35% import tariffs (taking effect on September 26th) which will decline to 30% in the second year and 25% in the third.

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Volkswagen looks to China on the road to being the biggest car maker

Volkswagen has a hugely ambitious long term aim - by 2018 it wants to overtake Toyota as the world’s biggest car manufacturer.

With this in mind it makes clear sense to focus capital investment in countries where the projected growth of demand for new vehicles is strongest. The relatively mature markets of Western Europe and North America look less attractive compared to emerging economies such as China and Brazil.

This week Volkswagen has announced a Euro 4 billion plan to expand capacity and output in China. In the short term the commercial need is to have sufficient capacity in place to meet the surge in demand brought about by the deep cuts in taxes on new cars introduced by the Chinese government as part of its economic stimulus programme - there has been a temporary cut in the purchase tax on cars with 1.6 liter engines to 5%. In the first half of 2009 Volkswagen has already sold over 620,000 cars in China!

Long term however the market demand for automobiles is forecast to rise by more than 10% per annum. Volkswagen has engineered joint ventures with Chinese manufacturers to build cars at plants in Nanjing and Chengdu - it is not beyond the realms of possibility that within eight years, it could be assembling over two million cars a year in China - a staggering volume of production and one designed to maximise the economies of large scale production.

More here from the BBC news site

Getting into the Blogging Spirit

A new school year and for their first assignment my students have been asked to blog on any topic of their choice providing it has a business / economics / financial theme. For new students in particular I find that it encourages them to develop a narrative. The new Open University blogging module for Moodle works well. I will showcase some of the blogs over the coming days - but students have been writing on an eclectic range of topics, among them:

Mature banking - Italian banks and the parmesan cheese makers
Malaysia and the palm oil boom
Trade in the 1930s
Galaticos and the European football transfer market
Financial crisis one year on
The Setanta disaster
Do our Newspapers have a future?
Market record of 75 million Euros for televisions in Muslim countries during Ramdan
The Opportunity Costs of Football Transfers
Neuroeconomics and the perverse effects of anti-smoking campaigns
I’m out ... the collapse of SpinVox
Power to Africa - better government needed to make investments worthwhile
The US Bailout Plan: ‘A Dagger in the Heart of Capitalism?’
Why Low-Quality Stuff Sells

The Wealth Effect

Saturday, September 12, 2009

Economists often mention something called the ‘wealth effect’ - referring to the link between the level of personal wealth and our decisions about how much to spend or save on goods and services. In our AS macro lesson today we were flagging up ideas about what causes a recession. Some of the causes are from overseas, for example the impact on banks and businesses from the fall out after the global credit crisis. But many of the root causes of a recession are home-made.

And it seems for the UK that people across every region have been hit by a sharp reduction in the value of household wealth.

The BBC reports that “in the course of 2008 alone, £815bn was knocked off the wealth of households in the UK.That amounted to an average of nearly £31,000 for every household in the UK.”

How is wealth stored (and accumulated?)

In property - there has been 9% cut in the market value of all residential property, from £4,077bn to £3,693bn

In pension funds and other investments - the financial assets of households, such as the value of pension funds and investments, also dropped by 9%, to £3,687bn

Asset prices have been falling - but the borrowing used to finance much of this does not go away

Net financial wealth adjusts household wealth for unpaid credit card bills and outstanding mortgage debt. This has fallen by 12% in the last year.

Little wonder that for many people the priority at the moment is to cut back on borrowing, increase saving and try to rebuild their ‘balance sheets’.

Much the same applies to the banking system too! Lenders are making it tougher to borrow and accumulating deposits of cash to give themselves a stronger ‘capital base’ for the years ahead.

In recent months, share prices have surged ahead and the FTSE-100 is now back above 5,000. There are signs too of a revival in the property market.

Will the wealth effect now start to prompt a recovery in demand for goods and services? Keep a keen eye on the housing market and the stock market.

Kick-start for the economy?

The British Retail Consortium estimate that England’s qualification for the World Cup finals in South Africa next year could be worth £1.25 to the UK economy next year. Pubs could take an extra £30-40mn at each live match they show, and electrical manufacturers will get boom sales in flat-screen TV’s to those watching at home and supermarkets will sell huge quantities of food and drink to keep the blood sugar levels up and combat the nerves. Spending on world cup advertising in 2006 generated £300mn, sports kit manufacturers Umbro will be rushing to make more England shirts, and flights and package tours to South Africa are selling out fast. Could this be the news we need to combat the recession and get people spending again? The Times leader writer yesterday thought it might be; in spite of the trillions that have been spent in the last year, this could finally be the news that we need. I see lots of educational opportunities too - game theory as illustrated by the penalty shoot-out for a start (should you shoot left or right? And can the goalie guess which way the penalty taker will go, to save the match?).

Not all businesses will be so happy though. In 2006 estate agents found a huge drop of interest in house buying during the World Cup, and some cinemas had to close for the month with too few visitors. Not to mention the potential effect on A level students: the tournament kicks off on 11th June, with group matches and the knock-out round of 16 lasting through the rest of that month – just when the exams will be scheduled. Best to get the revision done early……..

More ‘Aftershock’ resources

The ‘Aftershock’ section of the BBC website continues to come up with good stuff about causes and effects of the credit crisis and recession.

If you missed the first part of their 3-part documentary series ‘The Love of Money’ you can still watch it on BBC i-player, and it is well worth doing so as it examines the collapse of Lehman Brothers and the consequences for the world’s economy.

Now they have two interactive features examining the way in which national debt has built up during the bail-outs covered by the programme, one focussing on the UK economy, looking at how a total of £1.5trn, or 94% of GDP, has been spent. One of the slides here estimates that in 2014 taxes will have to cover £60bn in interest payments on that debt alone, equivalent to the entire budget for education for the year, or over 50% of the spending on the NHS.

The second looks at the breakdown of bail-out debt around the world, adding up to £10.8trn, and includes an analysis of shrinkage in the global economy and the wealth effect on homeowners and pensioners.

Both could be useful not only in reminding A2 students of the events of the last year and their potential impact on the economy but also introducing AS students to the macroeconomic aspects of The Economic Problem, as resources are going to be very scarce indeed in the next few years, and choices about which needs and wants should be satisfied will be key economic and political debates.

Strictly Labour Market theory?

One of the most cumbersome terms in Economics is the Marginal Revenue Product of Labour (MRPL), which we encounter during our A2 Micro lessons. The phrase itself is one of those clumsy things that many students find hard to get clear in their minds quickly.

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BRIC Watch: Brazil climbs out of recession

Friday, September 11, 2009

The BBC reports that one of the BRIC nations - Brazil - is emerging from the recessionary stage of the economic cycle. “The largest economy in Latin America expanded by 1.9% in the second quarter from the previous three months.”. The article also flags up three policies that may have helped to bring about a turning point in the economic cycle: “Brazil has poured money into large-scale public infrastructure projects, cut taxes on new cars and passed tax breaks on companies and individuals.”

Can you name an example of a “public infrastructure project”?

Why might the government have chosen to cut the tax on new cars?

What is a tax break?

As a linked article Steve Schifferes from BBC news looks at the financial costs of the credit crunch and the many government bail-outs of banks and other lenders that have fallen into deep trouble because of toxic debts

“The world’s largest economies have spent $10,000 for every person in a bid to fix the financial meltdown of the past year…..most of this bail-out money was in the form of guarantees to the banking system, and as that system pulls out of the crisis, governments stand to recover most but not all of that money.”

Idle capacity in recession-hit Japan

A fascinating short video from the BBC takes us behind the scenes of a Japanese electronic components business that is having to handle demand that is around 60% lower than last year.  Japanese business culture is fundamentally different from the UK & USA, and redundancies are almost unheard of…until now. Having invested huge sums in capital equipment the business - like many in an economy that is struggling to emerge from a deep manufacturing slump - has an extraordinary amount of spare capacity… but there appears to be a silver lining!

A2 Macro: Domestic and External Headwinds

As part of an introduction to a deeper analysis of economic cycles one of my A2 groups considered some of the domestic and external economic headwinds that will shape the next stage of the business cycle - not least the likely pattern of any recovery in activity. The aim of the exercise was to emphasise the importance of the inter-connected nature of modern economies. And also to reinforce the idea that policy decisions taken inside the UK economy can be blown off course by external shocks.

Here are some of the ideas

Domestic influences

Consumer expectations - about future changes in taxes, unemployment, house prices, real incomes
Business expectations - the state of confidence / pessimism about sales, costs, credit availability, cash-flow and profits
Scope for further monetary policy decisions - e.g. extension of quantitative easing, edge policy rates to zero
Fiscal policy changes - need to scale back borrowing, control G, likely sharp rise in the tax burden
Access to credit and the cost of borrowing - are the banks and other lenders sufficiently recapitalised to start lending?

External influences

Shape and strength of recovery in economies of our major trading partners
Ability of the global economy to coordinate a sustained recovery
Growing pressures for protectionism / economic nationalism
Volatile exchange rates
Volatile international commodity prices
Large swings in direction of foreign direct investment / international capital flows

It is really important for A2 macroeconomists to keep abreast of the news and develop a deeper awareness of what is happening and the mutliple inter-relationships between economic, financial and political forces. Are we in a substantially brighter position than six months ago? What causes turning points in cycles? The anniversary of the collapse of Lehman Bros is an opportune moment to take stock of where we are.

Some suggestions for reading

Telegraph: Too early to celebrate the end of the recession

Guardian: Recession is officially over, according to leading thinktank

The Times: House prices rise 0.8% to fuel rebound hopes



McLaren’s new super sports car - income elasticity and status races

Thursday, September 10, 2009

We are told that this new product has been forty-five years in the making. McLaren has unveiled its new super sports car, designed using Formula 1 technology.

This BBC video offers a sneak preview of the new car and it might be a good one to use when discussing needs and wants! Or the income elasticity of demand for luxury products and the price premium for motorists already wetting themselves in anticipation of getting behind the wheel! Given the relative absence of economies of scale in production, you might get students to estimate the likely introductory price in the market?

At a pinch I would price it between £175,000 and £200,000 but then again I am happy to potter around in a nine year old Citroen that is just a year from the knackers yard.

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