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Employees in the UK are not being denied their fair share of economic growth, according to research by João Paulo Pessoa and Professor John Van Reenen, director of the Centre for Economic Performance at LSE. Their investigation of claims that wage growth has become ‘decoupled’ from productivity growth finds that decoupling has been overstated and cannot be used to justify redressing the balance between wages and profits.read more...»
An initial change in aggregate demand can have a much greater final impact on the level of equilibrium national income. This is known as the multiplier effect
It comes about because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending – in other words “one person’s spending is another’s income." This can lead to a bigger eventual effect on output and employmentread more...»
Here is a thoroughly updated (20123) 94-slide revision presentation on aspects of fiscal policy - designed for student and teachers taking the AS macro paper.read more...»
This topic is of profound importance. It gets the heart of a fundamental economic issue: the distribution of income. When national income rises, does that extra income go into the pockets of workers or capitalists?
The answer is clear cut: labour is getting a smaller slice of the pie. How and why might that be happening, and what might be done? Here are links and summary of a couple of articles, plus a great Economist video clip.read more...»
BBC Newsnight explores the latest UK growth data and holds a discussion about the durability and nature of the upturn in economic fortunes. Excellent background for evaluating this crucial stage of the cycle.read more...»
Here is a set of ten charts on aspects of the UK economic cycle and growth story for recent years - designed as a possible teaching / handout resource for teachers on an AS macro courseread more...»
This is an updated revision presentation on aggregate demand in the UK economy - designed for AS macro students. Revision notes on aggregate demand can be found here. Click here to take a revision quiz on aggregate demand.read more...»
On the World Bank twitter account, President Jim Kim is quoted as saying that "Properly managed, new minerals wealth could transform Africa’s development." Back in June 2013, a new report from the African Progress Panel looked at this important issue and set out an agenda for maximising Africa’s natural resource wealth and using it to improve well-being.
My own students have been researching the economics of natural resources and whether they can be a blessing and/or a curse to countries seeking sustained growth and development. I just wanted to share one or two of these essays with you because I was delighted with the depth of the independent research on show and the quality of evaluation in their arguments.read more...»
Changes to key interest rates by central banks have a significant impact on economic activity during periods when the economy is expanding. Unfortunately, they seem to have virtually no effect during recessions – the time when the stimulus of monetary policy is most needed.
These are the central findings of research by Professor Silvana Tenreyro and Gregory Thwaites, published by the new Centre for Macroeconomics at the London School of Economics.read more...»
There’s been plenty of recent coverage of the fact that Britain needs more investment for a sustained, balanced recovery. Why aren't firms investing more? Many firms are flushed with cash. Interest rates are at a record low. As The Economist notes, profits have been booming in America, reaching the highest proportion of GDP since the second world war. Given such buoyant conditions, you might imagine that businesses are investing like crazy to take advantage of all those great opportunities. Not a bit of it. The ratio of business investment to GDP has picked up since the depths of the financial crisis, but is still close to the lows of previous cycles. Instead, businesses are handing cash back to shareholders, a tactic once reserved for executives who had run out of ideas. In 2011 the value of British share buy-backs was equal to 3.1% of GDP.
Enter a new theory shedding light on this puzzle – why might investment be so low?read more...»
Over 400,000 new cars were registered in the UK last month, the highest number for five and a half years. And while this increase of 12% over sales in September 2012 still cannot compare with Mercedes 21% rise in sales in China, it must surely be a sign of recovery in the UK economy.read more...»
A revision presentation on aspects of the links between investment and economic growth. Plus some slides on the causes of the so-called Middle Income Trapread more...»
Most of us are keen to see the economy grow – as measured by GDP – and in the short run, the most likely driver of growth will be aggregate demand (AD). But which component of AD do we want to grow the most?read more...»
The presentation below provides our latest perspectives on developments in the UK economy.read more...»
This revision presentation provides an introduction to the concept of GDP as a measure of economic growth and an indicator of the standard of living.read more...»
This revision presentation helps students develop their understanding of the Circular Flow of Income & Spending. It builds the circular flow step-by-step and then provides examples of the circular flow in action. An essential revision presentation for a core macroeconomic concept.read more...»
Here is an updated revision presentation on international trade that can be downloaded from our tutor2u slide share streamread more...»
As an introduction to trade theory I am looking at data on the pattern of exports for different countries drawing on 2010 data from the Observatory of Economic Complexity at MIT. The task for students is to match the country with their pattern of exports (% by value) for the year 2010. There are ten countries - who can get all ten right? Download the resource below - in pdf format and also the charts in a powerpoint formatread more...»
Why is economic growth such a rare and elusive butterfly in the UK garden? What institutions and policies are needed to sustain UK economic growth in the dynamic global economy of the twenty-first century?read more...»
SOME people are never satisfied. The evidence is mounting that the UK economy is now on the path to recovery. But to those who denied the possibility of any economic revival at all under the policies of “austerity”, this is simply not good enough. It is the wrong kind of recovery, they say. Fuelled by debt-based personal spending, unsustainable house prices, another crash, the doom-mongering litany more or less writes itself.read more...»
Britain's exports of whisky have been growing strongly in recent years helped by a lower pound and fast-rising demand from whisky drinkers in emerging markets. Whisky exports set to rise to £4.5bn by 2017 even though sales to traditionally strong markets in the European Union have stalled because of persistent recession in countries such as Spain, Portugal and Italy. This Channel 4 news report looks at the experiences of two whisky producers - one a small-scale manufacturer and the other the giant Diageo to consider prospects for UK exports as a way of strengthening the recovery,read more...»
In its annual assessment of the U.K. economy, the IMF called on the UK to invest in skills and infrastructure and increase banking sector competition in order to foster growth and achieve a sustainable recovery.
The report can be found here and contains plenty of relevant background information on the current situation facing the UK - here is a selection of quotes from their summary
Here is a streamed (and downloadable) presentation on policies to cut unemployment in the UK economy.read more...»
The credit crunch is widely regarded to have started during 2007 and is certainly not over yet! Indeed the period of severe constraints on credit availability and rising borrowing costs most notably for smaller businesses has now lasted longer than the Second World War. It represents a major barrier to sustained and hopefully more robust economic recovery. This short streamed presentation looks at the importance of the credit squeeze on the UK economy.
A number of new government policy initiatives have been introduced but doubts persist about their effectiveness. Underneath the surface new forms of business finance are taking shape including peer to peer lending and the rise of retail bonds issued by a number of businesses.read more...»
In this short Financial Times video, Vicky Redwood the Chief UK Economist of Capital Economics looks at why economic recovery in the UK has been slower than in the USA since the end of the last recession.read more...»
The European Union has just released some new figures on the spread of hourly labour costs among the member nations of the European Union. Labour costs are made up of wages & salaries and non-wage costs such as employers' social contributions e.g. national insurance payments in the UK. Students who have covered aggregate supply and demand theory might be able to consider why changes in labour costs can have an effect on key macroeconomic indicators such as inflation, demand, exports and growth.
Hourly labour costs are different from unit labour costs - the latter takes into account the productivity of people employed. For example, a 5% rise in hourly labour costs will leave unit labour costs unchanged if productivity rises by 5% over the same time period.read more...»
Capital investment spending in the UK has remained below 15% of GDP for four years and there are few strong signs that investment in Britain will rebound strongly in the near term. No other country inside the Group of 7 (G7) had experienced investment below 15% of GDP in any single year in the last thirty - it is clear that investment in the UK remains stuck in the doldrums and this may have damaging consequences for short term recovery and long-term competitiveness and growth.
It is now over four years since the Bank of England cut their policy interest rate to 0.5%. The Bank along with other central banks has seemingly moved away from changes in interest rates to policies aimed at manipulating the base supply of money in the economy / financial system. Others are focusing on managing the exchange rate. Monetary policy has undergone big changes in recent years as this revision note explains.read more...»
When is the right moment to start tightening monetary policy by gradually raising interest rates? Some macro economists believe that in the UK, the Monetary Policy Committee has already delayed the first upwards nudge in policy interest rates for too long with the result that inflation has remained persistently above target for most of the last five years. Others argue that fundamental economic weakness makes the recovery fragile and vulnerable and that raising interest rates now is the wrong option.
Check out some key macro charts here
An increase of one percentage point in the interest rate that a firm faces during a financial crisis increases its chances of failure by more than five percentage points. Young firms, firms with high bank dependency and firms that don’t export are particularly vulnerable to changes in their debt-servicing costs.
These are among the findings of research by Alessandra Guariglia, Marina-Eliza Spaliara and Serafeim Tsoukas, to be presented at the Royal Economic Society’s 2013 annual conference. The study looks at a large data set of mainly private-held firms in the UK tracked over several years.
Economic commentators love their acronyms and abbreviations - they come in handy when reaching character capacity limits on a tweet and also for students fighting the exam clock to complete a timed essay. Two new ones have come to my attention in recent days. What does ZIRP and PLOG mean to you?read more...»
This 10-question revision quiz looks at the basics of aggregate demand.
This 10-question revision quiz looks at the concepts of the multiplier and accelerator.
A revision blog and online test on the interaction between aggregate demand and aggregate supplyread more...»
Updated revision notes on aggregate demand and a short revision quiz to test your understanding!read more...»
Updated revision notes and short online tests to check your understanding on macroeconomic objectives - plus a selection of news article links for extension reading.read more...»
- The circular flowis a basic way of understanding how
different parts of the economic system fit together
- The circular flow of income shows
connections between different sectors
- It shows flows of goods and services and factors
of production between firms and households
- The circular flow shows how national income or
Gross Domestic Product is calculated
Businesses produce goods and services and in the process of doing so, incomes are generated for factors of production (land, labour, capital and enterprise) – for example wages and salaries going to people in work.
Leakages (withdrawals) from the circular flow
Not all income will flow from households to businesses directly. The circular flow shows that some part of household income will be:
- Put aside for future spending, i.e. savings (S) in banks accounts and other
types of deposit
- Paid to the government in taxation (T) e.g. income tax and national insurance
- Spent on foreign-made goods and services, i.e. imports (M) which flow into the economy
Withdrawals are increases in savings, taxes or imports so reducing the circular flow of income and leading to a multiplied contraction of production (output).
Injections into the circular flow are additions to investment, government spending or exports so boosting the circular flow of income leading to a multiplied expansion of output.
- Capital spending by firms, i.e. investment expenditure (I) e.g. on
- The government, i.e. government expenditure (G) e.g. on the NHS or
- Overseas consumers buying UK goods and service, i.e. UK
export expenditure (X)
An economy is in equilibrium when the rate of injections = the rate of withdrawals from the circular flow.If there is an increase in the rate of injections (other factors remaining constant), then equilibrium GDP will rise
If there is a fall in the rate of leakages (other factors remaining constant), then equilibrium GDP will rise
Aggregate Demand may be stimulated by an increase in exports. Ha-Joon Chang, Author of the best seller, 23 Things They Don’t Tell You About Capitalism considers reasons in a short article for The Guardian why this hasn't happened after Sterling had fallen against other major trading economies. " Compared with ...2007, the pound has been devalued about 30% against the dollar, 50% against the yen, and 20% against the struggling euro. Yet despite the huge incentive to export created by such devaluation, Britain is still running trade deficits because it has lost the productive capacity to respond."
It may help students consider plausible policies to reduce its trade deficit, a macroeconomic goal overlooked in arguments over fiscal and monetary policies to control inflation or output. Finally it may aid evaluation, how different are the most pressing short and long term macroeconomic challengers facing UK governments.
Link to most trade figures.
It’s not often you read such a clearly set out, even-handed article on macroeconomic policy, so this relatively lengthy piece was interesting in itself as its writer appears to deal relatively equally with both sides of the big austerity debate. But you really have to take notice when the writer is the Secretary of State for Business, Innovation and Skills, Vince Cable.
The latest edition of the Economics Journal publishes some new macroeconomic research on the vexed issue of fiscal austerity. Below are some of the summaries of these research papers.read more...»
The loss of triple A status on UK government bonds has intensified the demands for a Plan B. So-called Keynesians demand an increase in both public spending and the public sector deficit.
What might Keynes himself have said about the current situation? Lacking a Ouija board, I am unable to communicate directly with the great man himself. But we can get a very strong hint from the title of the first major work which Keynes published when confronted with the 1929 financial crash. It is the Treatise on Money. His most famous work was not published until 1936, when the Great Depression was well and truly over. Its full name is the General Theory of Employment, Interest and Money.read more...»
The much anticipated surge in exports of goods and services from the UK economy has not really materialised in recent times. Hopes of an export-led recovery and contribution to re-balancing of aggregate demand have diminished somewhat. In this discussion, writers from the Economist explain why Britain is no longer one of the world's biggest goods exporters.read more...»
Having just taught the circular flow of income to my year 12 Economists, the Office for National Statistics come along with a brilliant tool I can use to revise this topic- but it would work equally well as part of an introductory lesson.
Many AS students are now embarking on their macroeconomics course. I feel that building up a good awareness of what is actually happening in the UK and other economies is a great way of adding value and context to your assignments. There are many sources of useful articles, supporting evidence, comment and analysis pieces. I'll be putting quite a few of them together on this blog page and adding to it on a regular basis.read more...»
National output declined by 0.3% in the final three months of 2012 bringing into focus the real possibility of the first ever triple dip recession for the British economy. Growth has been weakening for some time; consumers are under pressure, capital investment remains subdued and our export industries are being hit by low demand in key export markets - despite a competitive exchange rate. Overall real GDP showed no growth at all in 2012 and the level of national production of goods and services remains well below the height reached just before the recession first arrived in 2008.
The OECD estimates that the trend growth rate for the UK economy is now less than 2% per year. A new normal growth rate this low poses many questions for businesses that have perhaps been waiting for a stronger rebound in confidence and spending to happen.read more...»
Robert Nutter explains that, over recent years, the fear that the minimum wage would cause increased unemployment has not materialised, although since the start of the current economic crisis employers have expressed some concerns that employment may be affected in low paid jobs. Another concern has been the belief that a national minimum wage is inappropriate for an economy where costs and labour market conditions vary significantly between regions. The national minimum wage may perhaps provide a living wage in North-East England but certainly not in London.read more...»
Is the UK economy being held back by 'zombie' households lumbered with too much debt to go out and spend? This short Financial Times discussion video considers aspects such as the real value of property and the total level of household debt. The video tackles measures of inequality including a chart showing the gini coefficient (a broad measure of inequality) and the share of household income going to the top 1% (a narrow measure of inequality). Inequality matters for lots of economic, social and political reasons but one is the divergent savings behaviour between households. The poorest households in the UK have in recent years borrowed more and more creating a big personal debt problem - often debt provided at very high interest rates from payday loans companies and the like. Plus lending to lower income households looking to buy property but with a high risk of problems in repaying debt.
Is the UK economy being held back by 'zombie' households lumbered with too much debt to go out and spend? Angus Armstrong, director of macroeconomic research at the National Institute of Economic and Social Research, argues this problem is linked to growing inequality over the last 30 years.
Many students will be starting their AS macro course once the AS micro paper is done and dusted. For teachers about the embark on macro I have put together a small collection of UK macro charts covering some of the key indicators. This is available to download using the link below, and when you use this link you will always get the latest data.
If you would like a neat set of A3 colour UK macro charts for your classroom wall then you might be interested in clicking here for details!read more...»
The economist Robert Solow (pictured) developed the neo-classical theory of economic growth. Solow won the Nobel Prize in Economics in 1987.read more...»
An updated glossary of key terms for AS macroread more...»