A2 Macro: Consumer Spending
Consumer (or household) spending on goods and services is driven by a number of factors, the relative importance of which will vary over the course of an economic cycle and from one cycle to another. The Keynesian theory describes a consumption function where household spending is directly linked to people’s disposable income
read more...»The Big Money Test - a behavioural economics experiment
Significant effort is made by teachers, companies and the government to try and educate people about managing their financial affairs, but often to no avail. Indeed, the book Nudge suggests that even financial experts often struggle to make the ‘right’ or ‘best’ decision. A new experiment has been designed that aims to examine how people make financial decisions - and you can take part! Firstly, visit this BBC website to find out a bit more about the experiment, then look at what is being termed ‘money sanity’ here, before taking the Big Money Test.
UK economy - as seen by the Bank of England
Students who want to be able to quote current data and trends in the UK economy could do worse than spending some of their revision time picking out the highlights from the Bank of England’s Agents Summary of Business Conditions, published today.
There is plenty of opportunity to find evidence which can be used to back up evaluative arguments in macroeconomics papers here.
Key points
1/ Growth in domestic markets is sluggish at best, but investment in the export sector looks better, probably driven by the rise in exports to emerging markets, Germany and the US.
2/ The service sector looks far from buoyant, with so much spare capacity that investment intentions are low and recruitment in consumer services is down.
3/ Unsurprisingly, import and raw material prices are driving a need to pass on cost push inflation to buyers, although many found that their power to pass on price increases to consumers was very limited, in spite of widespread awareness of the increase in costs - reflecting fears that price elasticity is very high at the moment.
Interest Rates Held at 0.5% once again
The Monetary Policy Committee decided to keep interest rates unchanged at 0.5%, a rate which offers little comfort to savers and pensioners groups who have seen a significant fall in interest paid out on deposit accounts, i.e. falling incomes from savings. The Base Rate is at a historically low level, its lowest rate since the foundation of the Bank of England.
read more...»AS Macro: Extended House Price Deflation?
A pessimistic forecast for the UK economy produced by the National Institute for Economic and Social Research (NIESR) suggests that the UK housing market is set to remain in the doldrums for some time to come. The NIESR has predicted a 4.5 per cent average fall in house prices in real terms this year, with further falls averaging 1.5 per cent for the following five years. The background to this forecast of house price deflation is that mortgage finance remains hard to come by (there has been a steep fall in the average mortgage loan to house price deal on offer). And mortgage interest rates are set to rise from their current low levels. Weak demand is thus the main driver of falling prices. The NIESR argues that “(housing) supply constraints were less important than is often argued since supply just about kept pace with household formation.”
read more...»AS Macro: Essay Plan on Rising Imports
Here is an essay plan on this question: Assess the extent to which a rise in imports may affect macroeconomic performance (25 marks). Like many macro questions, the focus is on the longer-term performance of the economy – this requires a brief explanation at the start of the answer – e.g. economic growth, unemployment, inflation and material well-being. The essay plan can be downloaded using the link below:
Essay_Plan_Imports_Economy.pdf
Rise in investment could kick start recovery
UK businesses are sitting on a pile of cash and need to loosen the purse strings and invest more according to new research from Ernst and Young. Their latest macroeconomic forecast for the UK can be found here.
There has been a shift in the share of total factor incomes flowing to workers and a corresponding rise in the share of profits in GDP (by factor income). Ernst and Young find that wages and salaries in the UK fell from 46.5% of GDP to 45.3% last year, while the share of non-financial company profits increased from 15.9% to 16.2%. The non-financial company financial surplus increased from £56 billion to £71 billion, almost 5% of GDP helped by a fall in interest payments on debt and a sharp fall in dividend payments.
For economists at Ernst and Young, the cash mountain provides a big opportunity for the UK economy. They are urging companies either to step up capital spending commitments including creating extra capacity to export products. Or return surplus cash to shareholders through bigger dividends. The Ernst and Young forecast shows business investment in the UK increasing by 12.3 % this year and another 14.1% in 2012. With housing investment slowly recovering, this easily outweighs the effect of lower public sector investment, pushing total investment up by 5.7% this year and 8.1% in 2012.
Higher investment provides a boost to aggregate demand and also the economy’s productive capacity. And a rise in exports will help to re-balance the economy. For cash to be committed to investment projects requires sufficient business confidence and this is where the Keynesian idea of animal spirits becomes so important to where the UK economy is heading over the next year or two.
read more...»UK Economy at a Glance April 2011
Here is an updated word document covering many of the key UK macroeconomic indicators - focusing on aggregate demand, growth, inflation, the labour market, fiscal and monetary policy, trade and exchange rates. It provides a summary of the data from 2009-2011(forecast) and provides brief comments on each - designed as a revision aid for students taking their AS and A2 Economics papers this summer. The document can be downloaded using these links:
AS Macro Key Term: Real Disposable Income
Disposable income is personal income that remains after direct taxes and government charges have been paid. Real disposable income is the post tax and benefit income available to households after an adjustment has been made for price changes.
Changes in real disposable income are thought to have a strong relationship over time with the level of consumer spending on goods and services. The Keynesian theory of consumption focused on this link between current real disposable income and household spending and saving. But keep in mind that expectations of future changes in post tax and benefit income also have a role in determining spending levels.
read more...»AS Macro Key Term: Double-Dip Recession
A double-dip recession happens when an economy goes into recession twice without having undergone a full recovery in between. There are several different possible causes of a double-dip recession:
read more...»Timetric: UK Balance of Trade with China
There is a noticeable trend in the monthly trade balance! UK exports to China have grown over the years but the trade imbalance has widened enormously! According to former Business Secretary, Lord Mandelson UK exports to Brazil, Russia, India and China - the so-called ‘Bric countries’ - are lagging behind the rest of the world. The share of exports to the four BRIC nations remains persistently below our 3.7% share of world trade. Some economists point to an “export gap” worth £19.8bn with China, £3.2bn with India, and £1.8bn with both Russia and Brazil.
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Timetric: UK Consumption as a Share of GDP
There is much talk in macro-economic policy circles of “re-balancing the economy” as a prelude to sustaining economic growth in the future. One aspect of this is addressing the long-term increase in importance of household spending as a share of national income (GDP). As our Timetric chart shows, the proportion of GDP accounted for by consumer spending on goods and services has edged higher over the years from 58% in 1980 to nearly two thirds of GDP in the credit-fuelled spending boom of the last few years.
read more...»AS Macro Revision: Investment Spending
This revision blog looks at the drivers of capital spending and the importance of investment for economic performance
read more...»The Consumer Pants Index (CPI)
GDP, unemployment rates, inflation, imports, exports, mortgage approvals - how else can we assess the current state of the economy? This article from Lovemoney.com suggests a whole new kind of CPI for us to consider, as well as other ‘unofficial indicators’ of the economy’s health. Might be fun way to kick off a lesson.
US pay day loan firms set for rapid expansion in the UK
The financialisation of the British economy continues apace. This article in the Guardian reports that US pay day loan businesses (regulated loan sharks to you and me) are planning a rapid and sizeable entry into the UK consumer credit market. In part this might be because in the UK there is little or no effective regulation on what they can charge.
Cash-strapped families often denied credit by high street banks are vulnerable to the heavy marketing of these businesses - students will know of one of them Wonga the shirt sponsor for Blackpool FC. The typical pay day loan is around £75 to £750, which is deposited in their bank account in as little as 15 minutes, to be repaid in around two to four weeks but with interest rates that can easily reach 30% a month or higher.
The pay day loan market might be a good case study for students wanting to understand more about the demand for credit and discussions about whether there should be a maximum price or cap on the interest rates that can be charged.
5 Fresh Links: Videos to attract FDI
I am teaching European and Global context for A2 macro this term and one of the key topics is the economics of EU enlargement. The opportunities to attract inflows of direct investment is one of the major attractions for new EU countries as they enter the single market. Here is a selection of videos promoting FDI into a selection of European nations.
read more...»Wildcard Wednesday - financial jargon
A BBC news story from earlier this month on confusing financial jargon provides the inspiration for today’s extension activity. The National Employment Savings Trust (NEST) is concerned that many consumers struggle to understand the choices that they are making with regards to selecting pension plans and knowing what to do with them when the time comes to retire, just because the wording used in the policies is full of jargon.
read more...»Martin Weale argues for higher interest rates now!
The newest member of the Monetary Policy Committee - Martin Weale - makes the case here in this article in the Guardian for an early and modest rise in base interest rates.
read more...»James Dyson on Innovation
This is a must read article for every student who wants to appreciate the impact of innovation on competitiveness and growth. Writing in the Business Guardian, James Dyson argues that “For me, the UK economy shouldn’t be built entirely on the City of London or the next digital fad. We need substance – patentable exports. They bring new money into our coffers. And what will generate economic growth is not just talk of spending cuts, but creating the right environment for research and invention.” Dyson is a strong supporter of tax credits and lower corporation tax for research and development projects and also for science and maths graduate teachers to be paid more.
More here: Innovation: Britain’s other deficit
Tories look to Dyson on hi-tech economy (BBC news video)
Introducing Tuesday Talks!
Last week, my extension class and I watched a thought-provoking short TED talk by Rachel Botsman on the increasingly prevalent phenomenon of collaborative consumption - the talk is shown further below. According to Botsman, collaborative consumption is the use of bartering, swapping or sharing of consumer goods (usually durables) using technology to help the manage these collaborative relationships between strangers. The idea provides a great contrast to the ‘standard’ approach to thinking about consumer expenditure in an economy.
read more...»Consumption Graphic
Good graphics on population and Consumption in January 2011’s National Geographic magazine.
Opportunity for cross-curricular understanding.
Economics Q&A: Will the rise in VAT harm the UK’s economic performance?
On January 4th 2011, the standard rate of value added tax (VAT) jumped from 17.5% to 20%. For the first time, the UK VAT rate is now the same as the basic rate of income tax! Prime Minister David Cameron has stated publicly that the rise in VAT is likely to be permanent rather than temporary. The UK economy will thus have to adjust to this higher rate but what are some of the possible macroeconomic consequences?
read more...»Will we have to live with high unemployment?
Will many advanced economies have to live with a new semi-permanently higher level of unemployment as a consequence of the global financial crisis, economic slump and a period of fiscal austerity?
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Economics Q&A: Will the Government spending cuts affect inflation?
In early July 2010 Chancellor George Osborne announced a tough government spending review designed to cut the size of the UK’s structural budget deficit and bring down managed state sector spending as a share of GDP. The UK is not alone in introducing fiscal austerity measures and they have prompted fierce debate not least among economists about the likely impact on economic performance. The spending squeeze brings to an end more than a decade of strong real terms increases in state spending.
This question is really about causation and in this case we are asked to think about how the steep planned cuts in government spending may affect the annual rate of consumer price inflation in the next couple of years.
read more...»A2 Macro Revision: The Stock Cycle
The stock cycle helps to explain changes in national output because nearly all businesses hold stocks of finished products or raw materials and components as a way of balancing changes in demand.
read more...»External shocks
Some recent examples of external shocks, useful for classroom discussion on the economic effects of these on the economy (bearing in mind that external shocks can have positive and negative effects):
Snow
Shark attack in Sharm al-Sheikh
Fifa awarding Qatar
French strikes
Spanish strikes
Iceland ash cloud
Asia Rising - Thai Car Exports Speeds Up Growth
One of my former students Alastair Leithead reports on the boom in car production in Thailand and the multiplier effects their export-oriented strategy is having on the Thai economy. Ford has invested hundreds of millions of dollars into expanding car manufacturing capacity in Thailand and Boots is a UK retailer that has seen the opportunities for boosting profits from inward investment.
Video resources on consumption and saving
I am teaching the determinants of consumption and saving with my AS Macro group and have been putting together a set of short video news reports on factors such as taxation, consumer confidence, house prices, expectations, interest rates and unemployment. My selection of video resources is provided below.
read more...»Lesson Plan for introducing changes in AD
Thought I would share a lesson that I felt went well today. Given that it is the time of year where we try and get pupils shifting and playing with curves, I hope it is of use to someone! Feel free to comment critically. I am really keen to hear from colleagues about how they get pupils working together to be more independent in their learning.
read more...»Apple, Amazon and The MultAPPlier Effect
With the Bank of England now considering further QE and also urging us all to empty our bank accounts and get out there and spend, spend, spend it got me thinking about the enabling effect of technology, in particular in the area of portable electronic devices. I did toy recently with buying an iPhone, but was struggling to justify the cost. I did however recently succumb to temptation and treated myself to a new 32G Apple Ipod Touch.
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