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We all know that the UK government has run up a colossal national debt - £1475bn as I type this sentence. And it’s rising fast, since the UK government also has a fiscal deficit to finance this year, which will add even more to the total stock of debt.
Yet the cost of borrowing all this money is falling to new record lows. Why? And should this influence the government’s economic policy in any way?read more...»
I like to read Jeff Sachs for his alternative viewpoints. He often writes about investment and has recently argued that the problem with both free-market and Keynesian economics is that they misunderstand the nature of modern investment. Both schools believe that investment is led by the private sector, either because taxes and regulations are low (in the free-market model) or because aggregate demand is high (in the Keynesian model).
In Sachs’ alternative view, private-sector investment today depends on investment by the public sector. But investment into what? What types of capital should we be accumulating?read more...»
The world seems to want, and need, plenty of advice on ways to boost macroeconomic performance. I was drawn to one piece on Project Syndicate that was especially interesting because the author, Jeff Sachs (one of the most famous development economists) introduces his comments by saying:
“I am a macroeconomist, but I dissent from the profession’s two main schools of thought … the neo-Keynesians, who focus on boosting aggregate demand, and the supply-siders, who focus on cutting taxes. Both schools have tried and failed to overcome the high-income economies’ persistently weak performance in recent years. It is time for a new strategy, one based on sustainable, investment-led growth”.read more...»
Yesterday’s Conservative party conference threw up some lovely economic policy proposals for students and teachers to get stuck into. They certainly grabbed the headlines today with David Cameron’s proposals to increase the personal allowance and 40p tax thresholds. Sky News have some decent coverage which can be used to spark a good discussion.
In Economics, saving offers something of a puzzle. From some viewpoints, savings are a leakage from the circular flow of income, reducing multiplier effects. And if we all saved - in a determined effort to repay our debts (which sounds like a great idea) – the level of aggregate demand (AD) and economic activity would take a serious hit. This is the famous paradox of thrift.
Yet economies do need saving as a fund for business investment. The Harrod-Domar model is used in development economics to explain an economy's growth rate in terms of the level of saving and productivity of capital (see above). But many economies have a savings gap.
Yet I’ve been reading that adults in developing countries are half as likely to have an account at a formal financial institution as those in the rich world. Only 18% of people in the Middle East and north Africa do, compared with 89% in high-income countries. This makes saving even harder. So economists would like the world’s poorest to save more. That would help them to pay for big or unexpected expenses, such as school fees or medical treatment. It could also boost investment and thus accelerate economic growth.read more...»
An interesting piece in the Economist about the current state of the output gap – the difference between an economy’s actual output and its potential output.
Paul Ormerod argues that this value is almost impossible to estimate, so it is a pretty useless concept. Others think trying to estimate the size of the gap is valid, and knowing how much spare capacity the economy has could be a crucial guide to economic policy makers.
What are the thoughts of economists who have been looking at recent OECD data?read more...»
Trams have been experiencing a revival in a number of towns and cities in the past few decades. Edinburgh is the latest city to invest in trams, and hopes they will boost local economy. But do the benefits outweigh costs? Manchester, Sheffield, Blackpool, Nottingham, Newcastle and Croydon have all installed trams / light rail and others are considering investment.
The Edinburgh trams at running (at last) but the jury will remain out for a long time about their net impact on economic activity, traffic congestion and the broader health of Edinburgh and the local environs.read more...»
Guinea has agreed a huge new capital investment framework with a number of transnational partners including Rio Tinto and Chinalco to develop one of the world's biggest iron ore assets. This is a project that may double the country's GDP not least because as well as mining the iron ore, there is a proposal to seek funding to construct a 650km railway and a deep-water port to transport the rocks and minerals.
It is one of those examples that comes along every once in a while that prompts both students and teachers to re-visit the economics of large scale foreign direct investment projects. Is this nation building of the old style? Or is the proposed investment framework one that could be genuinely transformative for one of the world's poorest countries?
- Forecast of 45,000 new jobs created across the entire project
- State of Guinea will retain 15% of any proceeds from the mine
- In exchange, the joint venture with Rio Tinto / Chinalco will enjoy eight years' tax free operations in the country
- Production at the Simandou mine is expected to start within five years
- It will be Africa's biggest mine
In remarks made when launching the new quarterly inflation report (May 2014), the Governor of the Bank of England, Mark Carney, has signaled that policy interest rates set by the MPC are likely to remain at historically low levels for some time to come. The first rise in rates is probably less than a year away and some economists have penciled in early New Year 2015 for a rate hike. But what are some of the arguments for raising interest rates now?read more...»
The BBC's Robert Peston looks at the broader issue of heavy debt in the UK economy and whether it is holding back economic growth.read more...»
In this session from our macro revision workshop, we are focus on the performance of the UK economy over recent years and see how economic growth appears to follow a cyclical patternread more...»
A significant 5 year rail infrastructure investment plan adds weight to the belief that capital spending will be a major driver of the next phase of the UK economic recovery. Network Rail is state owned, a not-for-profit business whose commercial returns are reinvested into the rail network.read more...»
Britain’s current account deficit for 2013 as a whole (4.4% of GDP) was greater than in any other developed economy and the widening current account gap is raising fresh concerns about whether the UK's economic recovery is balanced and sustainable.read more...»
There seems little that is stopping the surge in London house prices at the moment but do you think the rapid acceleration of prices is good for either London or the wider UK economy?read more...»
Here is a good example of an inward investment project likely to create a strong multiplier effect for the economy of East Yorkshire.read more...»
I thought it worthwhile sharing my resources which I have been collecting for students (and teachers alike). I have been promoting them on Twitter (@Economics_KSF) through scoop.it but for those of you not on there, the link for the scoop.it boards are here:read more...»
The government wants more new homes to be built, so too do hard-pressed home-buyers facing a continued problem of low property affordability. But cautious construction companies are reluctant to press ahead favouring share buy-backs (returning money to their shareholders) and only a limited expansion of new building.read more...»
Here is a revealing quote from a special study published in March 2014
"Simply put, too much of the city’s essential infrastructure remains stuck in the 20th Century—a problem for a city positioning itself to compete with other global cities in today’s 21st Century economy."
Which city do you think this report was referring to?read more...»
There’s been lots of media coverage of a recent anniversary: it was five years ago in March 2009 that the Bank of England took the dramatic step of cutting interest rates to their lowest level in more 300 years. And there they have stayed - with some predicting they will stay low for a while longer yet.
How about a quick bit of analysis (why the Bank took the move) and then some evaluation? I’m suggesting an evaluation based on a recent Guardian article. Has it been a good move? Well – it depends – on who you are, for a start.read more...»
Here is a revision presentation for an AS Macro topic - the multiplier effect, the accelerator effect and Keynesian economicsread more...»
Here is a revision presentation for an AS Macro topic - macroeconomic equilibriumread more...»
Most of the commentary on the UK’s economic recovery focuses on consumers. Are they taking on too much debt again to finance their spending? Is there a bubble in house prices, as people get excited about bricks and mortar again? Certainly, in terms of its sheer size, spending by consumers is by far the biggest component of GDP, making up around 60 per cent of total domestic expenditure.read more...»
Here is a revision presentation for an AS Macro topic - aggregate demandread more...»
He might have only had his feet under the Governor's desk for 8 months but BOE Governor Carney has announced changes to the role of the MPC for a second time as forward guidance has been overhauled.
Celebrations in Ireland as the credit ratings agencies no longer regard Irish government debt as ‘junk’, according to the BBC. What does this mean and why does it matter? Here are some bond market reminders and links, helping to explain how governments borrow, and at what cost.read more...»
The concept of the 'output gap’ is central to mainstream macroeconomics. It is not merely of academic interest.
The Office for Budget Responsibility (OBR) has a specific requirement to estimate the output gap, which it defines formally as “the difference between the current level of activity in the economy and the potential level it could sustain while keeping inflation stable”.
The output gap is a key consideration for central banks around the world including the Bank of England. If output is well below its potential, nominal interest rates should be kept low, to try to stimulate the economy. And a large output gap should keep cost and price inflation low. Prices are hard to put up in a depressed economy.
See: http://www.bbc.co.uk/news/business-23145755 for a discussion of the changes made to the policy of forward guidance.read more...»
The coming year looks like it will be a good one. At the start of each of the past five years, the economic scales have been tilted down, and the challenge has been to look for factors which might have tipped them back up. This year, the balance is reversed. The onus lies with the pessimists to prove their case. Not that there are any shortages on this score. For example, King Canute of Twickenham, aka Vince Cable, has solemnly commanded that house prices must stop rising, for fear of a new bubble.read more...»
An important landmark has been reached in the construction of Crossrail, London's £14.8bn rail programme. The tunnelling of 21km of twin-bore tunnels dug beneath the capital is well underway and the project is now at the half way stage assuming things run to plan. The first tunnel was completed in November 2013.
The scale of the project is epic - one of a number of infrastructure projects that are underway or in the planning stage in the UK. the importance of infrastructure investment is often debated by economists. They can affect both aggregate demand and aggregate supply and have wider effects on a nation's competitiveness.read more...»
Two cartoons to illustrate two key issues: Britain doesn't export enough (especially goods) and so has a large current account deficit.
That's not to say that the UK doesn't have significant exports markets - but where?read more...»
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...»