Cycles and Shocks
NICE decade is over
Mervyn King declared that the NICE decade was formally over in his Inflation Report published today – NICE stood for non-inflationary continuous expansion (a good term to use in the exam) – but the combination of sharply rising food, energy and fuel prices is driving inflation higher whilst contributing to a fall in real incomes and a wider economic slowdown.
Things can only get better …..
We asked a thousand people and most of them said ...... there is trouble ahead! Consumer confidence took a further nose-dive last month according to fresh data from the Nationwide Building Society. The main reason was another steep decline in the percentage of people reported as saying that the UK economy is in good shape. This is just one survey among many, and its limited longevity doesn’t give it much of a record in anticipating turning points in the economic cycle. But if the housing market presages a wider economic downturn, it might well be one of the survey indicators to watch carefully because the shift in sentiment does not appear to have benign causes. Sixty per cent of those surveyed say that now is a bad time to make a major purchase such as a house or a new car – almost twice the number compared to two years ago.
Cheaper sterling to the rescue?
For some time now I have been arguing that the media should be paying more attention to the exchange rate when considering the propsects for the UK economy over the coming months. A cheaper currency acts as a boost to exports and aggregate demand and can be a very useful stabiliser in an economy weakening from the fall-out from the credit crunch. There are naturally risks from a sharp downward movement in the exchange rate, not least the impact on the prices of imported products and possible flow-through effects on cost and price inflation. But taken as a whole, a lower exchange rate is what the UK economy needs at the moment - and we are getting it! Charles Bean, Chief Economist of the Bank of England made clear reference to this in an important speech in London today - it is available to download here from the Bank of England website. I have picked out one paragraph in particular which focuses on the exchange rate and compares the impact of cuts in interest rates with currency depreciations.
Revision: Recessions
“What’s the difference between a recession and a depression? A recession is when your neighbour loses their job; a depression is when you lose yours.”
read more...»Chart of the Day: Nationwide Consumer Confidence Index
First published in May 2004, the Nationwide Building Society’s consumer confidence index is a recent addition to the phalanx of indices seeking to track changes in household sentiment and give us a lead indicator of where the economic cycle might be heading. 1,000 adults are interviewed each month, in a survey that is the closest we get in the UK to the Conference Board surveys published in the United States,The Index is based on responses to 5 questions included in the survey:
People’s appraisal of current economic conditions
People’s expectations regarding economic conditions six months hence
People’s appraisal of the current employment conditions
People’s expectations regarding employment conditions six months hence
People’s expectations regarding their total family income six months hence
The latest figures were released today and show the weakest confidence since the survey was launched, evidence perhaps that the gloomier economic headlines dominating the papers and TV news coverage in recent days and weeks is starting to show through. Looking a little at the detail within the survey, it seems that people’s expectations for the economy in six months time are improving slightly, but on balance those surveyed still expect house prices to rise during 2008. Perhaps the news on property prices from the last few days will change this perception in the May survey?
Economic Resilience?
Gordon Brown and his Chancellor, Alistair Darling, have been keen to stress that the economy is ready to weather any storm that hits it. Although the economy remains standing, despite recent turbulence in the financial markets, it does seem like tempting fate to claim that the economy is so resilient, and capable of withstanding any disturbances that might come along. So what supports their statements, and what are the risks to the economy? This post looks at a few of the problems on the horizon.
Revision: Commodity Prices and Economic Effects
In recent years we have seen a sharp rise in the prices of many internationally traded commodities such as oil, gas, iron ore, palm oil, rubber, copper and many foodstuffs. This revision note looks at some of the demand and supply-side explanations for this and also covers some macroeconomic consequences for various countries. This five page revision note available in pdf format (below) will also highlight some micro and macro concepts from the AS and A2 specification and offers ideas for scoring more highly using evaluation.
Revision: Household Saving
This revision focus looks at household saving - the decision to postpone consumption
At AS level, changes in the household savings ratio can have significant effects on the level of aggregate demand (in the short term) and also on the funds available to finance investment. There has been a trend decline in the savings ratio in many countries (in the United States, the personal sector savings ratio has touched zero!) and AS economists ought to be able to use an aggregate demand / supply framework to analyse some of the effects for variables such as GDP, employment, inflationary pressures and the balance of payments.
Is the low level of household saving a cause for economic concern in the longer term? if so, what might be done to increase saving? How does globalisation impact on the significance of saving for economic growth? This 3 page revision focus document (available in pdf format) covers some of these issues.
Revision Mind Map: External Economic Shocks
This is an important topic at A2 and you can also bring in useful ideas in AS macro papers too. A revision mind map is attached together with the original mind map for colleagues who might want to amend and develop further.
Notes to students:
All economies that are partof the global trading system are exposed to one or more exogenous shocks
They can be either demand or supply side
They can be positive or negative in terms of their impact on prices, output, jobs and living standards
It is important to be able to use AD-AS analysis to show some of the effects of shocks
Evaluation is key in these sorts of questions - how large is the shock? is it temporary or longer-lasting?
Consider how policy-makers can respond to shocks and understand the importance of economic flexibility in dealing with the aftermath
External_Economic_Shocks.pdf
Global_External_Economic_Shocks.mmap
