Unit 2 Macro: Positive and Negative Multiplier Effects
An initial change in aggregate demand can have a much greater final impact on 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 can stimulate further rounds of spending – in other words “one person’s spending is another’s income”. Put another way, spending becomes someone else’s income. This can lead to a bigger eventual effect on output and employment.
read more...»Unit 2 Macro: Real Interest Rates
The real rate of interest is important to businesses and consumers when making spending and saving decisions. The real rate of return on savings, for example, is the money rate of interest minus the rate of inflation.
So if a saver is receiving a money rate of interest of 6% on his savings, but price inflation is running at 3% per year, the real rate of return on these savings is only + 3%.
Real interest rates become negative when the nominal rate of interest is less than inflation, for example if inflation is 5% and nominal interest rates are 4%, the real cost of borrowing money is negative at -1%.
read more...»Q&A: What do we need to know about output gaps?
Q&A: For AS macroeconomics, what do we need to know about output gaps?
read more...»Unit 2 Macro: Model answer for revision data question
Here is a suggested answer for the first of the practice questions available from this resource:
AS_Macro_Revision_Trade_Sterling.docx
read more...»Unit 2 Macro: Monetary Policy and Inflation Glossary
A selection of key terms on monetary policy and inflation
read more...»Unit 2 Macro: Economic Cycle Glossary
A short glossary of key terms connected to the economic cycle
read more...»Unit 2 Macro: Aggregate Demand Glossary
A glossary of some key terms related to aggregate demand
read more...»Prospects for the UK economy, in brief
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.
Unit 2 Macro: Britain back in Recession
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.
read more...»Unit 2 Macro: Skills Shortages Hold Back Recovery
Here is a superb news report from Channel 4 news about the shortage of skilled workers in the North East of England (an area of high unemployment). Nissan this week announced a big new investment in car making at their ultra-high productivity plant in Washington, Tyne and Wear. But many of the manufacturers along Nissan’s supply chain are finding it tough to get enough skilled people coming througth to make realistic bid for the orders that will come from Nissa. Some businesses are having to turn down contracts because they dont have the extra workforce to cope with the higher volumes of businesses.
Skills shortages are restricting the growth of many small and medium sized businesses especially in manufacturing. Little wonder that Nissan is working very closely with Gateshead College to run an apprenticeship scheme - an example of external economies of scale in action.
read more...»Unit 2 Macro: How the Economic Cycle affects Businesses
This updated revision presentation guides students through the topic of business cycles and economic growth. It looks at issues such as:
- How economic growth is defined and measured
- The nature of the business cycle
- How different kinds of businesses are affected by the economic cycle
- The Credit Crunch
Unit 2 Macro: The UK Balance of Payments in 2011
Here is an update on the UK trade / current account of the balance of payments figures for 2011. Has there been a noticeable improvement in our trade performance given the 25% depreciation of sterling in recent years? Which parts of the trade accounts have improved? What are some of the key underlying trends? Follow the charts and the brief commentary on each.
read more...»Unit 2 Macro: Revision on Real Economic Data
Why do economists often find ‘real’ figures to be of more use than ‘nominal’ or ‘money figures?
read more...»Unit 2 Macro: Revision on Real Disposable Income
Real disposable income (RDI) measures income after taxes and benefits, adjusted for the effects of inflation. It is a guide to the quantity of goods and services that people can buy after the tax and benefit system has adjusted original incomes and we have made allowance for the effect of price changes.
read more...»Posen on slower growth in the UK compared to the USA
Adam Posen is a member of the Monetary Policy Committee featured in Extract 1 of the OCR F585 paper for June 20120. He has consistently argued that the Bank of England should maintain their policy of ultra-low policy interest rates and also expand QE if and when the economic conditions require it. In a speech to the National Institute this week, Adam Posen contrasted the differences in economic recoveries in the United States and the UK.
read more...»Unit 2 Macro: Revision on Capital Investment
Here is a planned answer to an exam question
“Explain two factors that are likely to affect the level of aggregate investment.”
read more...»Life in the Slow Lane - UK Growth in 2011 Lags the Euro Area
Newly published and revised figures for growth in the UK economy show that output fell by 0.3% in the final three months of 2011, and that, over the year as a whole, real GDP in Britain climbed by a paltry 0.7% during the year as a whole. To put that into context, the crisis-ridden Euro Zone achieved growth of double that largely because of a strong performance from Germany.
Output in the UK remains well below the peak before recession engulfed the economy in the autumn of 2008. In the charts and links below we track some of the key economic indicators as the country stuggles to achieve a durable and resilient / robust upturn.
read more...»Unit 4 Macro: Evaluating 3 Years of Quantitative Easing
It is now over three years since the Monetary Policy Committee of the Bank of England cut policy interest rates to 0.5% and subsequently introduced a policy of quantitative easing (or an asset purchase programme) now worth £325 billion.
These have been difficult times for the Bank. The average rate of CPI inflation since 2008 has averaged 3.5% - well above the official target - and the Bank has faced pressures from many sectors of the economy not least the millions of pensioners and other net savers whose incomes have been dragged lower by this period of ultra-low interest rates.
Has conventional monetary policy lost its effectiveness in the aftermath of the global financial crisis? Bank lending continues to fall, consumer and business confidence is fragile, many people have seen interest rates on unsecured credit rise not fall, and the depreciation of sterling seems to have had a muted expansionary effect on demand, profits and jobs.
Here are a few evaluation slides on Monetary Policy and the Bank of England from our recent A2 macroeconomics revision workshop together with some links to recent news reports on the Bank of England’s strategy and the impact of policies such as QE.
read more...»Budget 2012 - analysis with evidence
As ever, there are loads of sources that students can use to analyse the Budget and to extract pieces of Evidence for the Examples they will need to add depth to their analysis in essays. Those who are attending the current round of revision workshops will recognise this as a key part of ensuring that they write essays which PEEL the answer (each paragraph makes one Point, using Examples with Evidence, offering Evaluation and Linking to the question). As start points, I would suggest these sources which are reasonably free of opinions:
BBC website: Budget 2012 at a glance, Farewell 50p tax rate, and Over 65-s tax-free income freeze
The Guardian Budget 2012: welfare cuts, tax cuts too, but retreat on child benefit and for the visual learners a nice graphic version: Tax and spending plans visualised
Unit 2 Macro: Policies to Drive Economic Recovery
We were looking today in AS macro at the policy options being considered as part of a strategy to drive a stronger recovery in demand, output, jobs and investment in the UK economy.
I am trying to encourage my students to put things into context as soon as possible in their longer essay-style questions. Here are some thoughts on a question on policies designed to bolster growth:
read more...»Unit 4 Macro: Sovereign Wealth Funds
Students of A2 macro will no doubt becoming increasingly familiar with coverage of sovereign wealth funds in their study of global economics, trade, investment and currency developments. A sovereign wealth fund is a government or state run investment fund usually created by supernormal profits from natural resources such as oil, gas or minerals. Here is some brief background on them:
read more...»Unit 2 Macro: Targeted Tax Cuts to help the Economy
The Confederation of British Industry is a lobbying organisation and seeks to promote and protect the interest of many of the UK’s leading businesses across manufacturing and services. Ahead of the March Budget, their head John Cridland argues in this video for a series of targeted tax cuts as a stimulus for the economy. This is worth watching to get a feel for what are the priorities of business at this stage of the cycle. How much different would it be if the interviewee was representing the trade unions?
read more...»Unit 2 Macro: Is the UK Economy Turning a Corner?
Joe Lynam reports for BBC Newsnight on prospects for the UK economy - an excellent short feature on attempts to grow the economy and achieve a re-balancing towards exports and investment. See also BBC news: Bank of England says UK economy ‘to zigzag’ this year
read more...»Unit 4 Macro: King on the UK Economy
Here are some notes from watching and listening to the Bank of England Inflation Report press conference. As always there was much for students of macroeconomics especially those keen to pick up some of the key thoughts of policy makers as we strive to achieve a sustained recovery.
read more...»Unit 2 Macro: China’s Trade Engine is Spluttering
New data suggests that the rapid growth of exports from China is once again slowing down. This Reuters business news video (2 minutes) provides some useful background information on the recent downturn in export and import volumes and mentions that rising imports and a shrinking trade surplus may help the Chinese to rebalance their economy and perhaps provide a demand stimulus for exporters from struggling European countries.
That said the continued weakness of many EU countries will make it difficult for Chinese exporters to maintain sales and employment. During the global recession of 2008-09 millions of workers in Chinese manufacturing industry lost their jobs prompting many to return to their rural homelands in search of work and income.
* Which industries in China are likely to be most affected by a reduction in the growth of exports?
read more...»Unit 2 Macro: Focus on China - Trade and Growth
Export demand can be an important driver of growth and development. For many years China has practiced export-led growth with exports accounting for over 40% of GDP. China ran a trade surplus with the rest of the world of around of $200 billion in 2009 – this looks huge, but is fairly modest as a share of GDP. The surplus on the balance of payment current account has diminished from over 10% of GDP in 2007 to less than 6% in each of 2010 and 2011. But China still has a structural trade / BoP surplus.
read more...»Unit 2 Macro: Focus on China - Per Capita Incomes
Per capita incomes in China are rising though still low by advanced-nation levels. China ranks at 119 in terms of average incomes, according to World Bank data (per capita incomes, PPP adjusted). But China is now the biggest car market in the world and there has been a huge rise in the sales of luxury goods to China (these products have a strong income elasticity of demand).
China wants to achieve a re-balancing of her growth – towards domestic consumption and away from exports. Another key aim of the plans for the next 5 years is a surge in market-driven entrepreneurial activity. Plus a continued shift towards higher-value, high-knowledge manufactured products.
read more...»Unit 2 Macro: Exporting to the Booming Chinese Economy
Before you read this blog please have a look at another blog written by our good friend Mark Johnston from New Zealand. Students of China and the US economy will find it fascinating!
There are good grounds for no longer calling China an emerging economy - it has arrived! The multiple significance of the rapidly-growing Chinese economy is plain for all to see but for Britain, only a small percentage of our exports of goods and services go there and this must change if Britain is to fully engage with and benefit from the rising might of the Chinese consumer. This article from the Daily Mirror provides a non-technical but clear explanation of the growing purchasing power of newly wealth Chinese, thousands of whom are flocking to western shopping malls to buy premium brands. Chinese foreign exchange reserves are also being used to buy up real assets - last week we heard that a Chinese sovereign wealth fund is set to buy nearly 9% of Thames Water.
read more...»Unit 2 Macro: Look Upwards to Find the next Downturn
Correlation does not necessarily imply causation but analysts at Barclays Capital are worried that a surge in skyscraper construction in China and India might be a forward indicator of another burst of financial and economic distress. This report in the Independent covers their findings:
“Clusters of building activity usually coincide with periods of easy credit, excessive optimism and rising land prices, which often occur before market corrections.”
* India is scheduled to complete 14 new skyscrapers taller than 240 meters (787 feet) over the next five years from the current two
* China will increase the number of skyscrapers to 141, from the current 75, by 2017
* London’s Shard is expected to be completed in 2012 – at 1,017ft, it will be the tallest building in Western Europe
News video from the BBC: Skyscrapers ‘linked with impending financial crashes’
Guardian news video: Huaxi: the village that towers above China
Newsnight on rebalancing the UK economy
Last night’s edition of Newsnight should be required viewing for all AS and A level economists - and it is a huge shame that it is only available on i-player for another 7 days. Introduced on the shock news that even Tesco is vulnerable to the downturn, it included reports from Andrew Verity looking at whether the British economy will ever wean itself off shopping and the City, and an excellent (and all-female!) discussion including Deborah Meaden and the FT’s Gillian Tett. Try challenging your students to watch and listen to this while noting down every aspect of the syllabus which is mentioned or referred to - that will keep them busy!
There was also a debate between Employment Minister Chris Grayling and disability campaigner Sue Marsh about the government’s welfare reforms, defeated in the House of Lords the night before, and finally Tokyo correspondent Roland Buerk looking at Japanese economic stagnation of the late 1980s and 90s, to consider whether it was a “lost decade” and what could be learnt from it.
