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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...»
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...»
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...»
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...»
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...»
Updated revision notes on aggregate demand and a short revision quiz to test your understanding!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...»
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.
An updated glossary of key terms for AS macroread more...»
As the sun rises on another year will the headwinds be favourable for Britain or are we facing up to another year of stresses and strains? Here is a brief commentary and overview of some of the key macroeconomic data for the UK economy together with some links to external articles and videos on economic prospects for Britain as we head in 2013.read more...»
When discussing consumer spending and household savings, I find that students frequently question why poor people tend to save less. Surely, being more concerned about their future, poor people should be saving more?
We are pleased to partner with the Office of National Statistics who have provided us with this PowerPoint presentation on the initial release of 3rd quarter GDP data for the UK which created much media interest as it took the UK out of a double drip recession. Once again the ONS have provided some really good questions that may prompt classroom discussion and their slides make for excellent handouts for teachers wanting more background on the economic cycle. One of the issues this time was the impact that the Olympics and the Diamond Jubilee might have had on the growth figures. There is also a good chart in the powerpoint deck that looks at UK recoveries from previous recessions.
You can download the resources at the bottom of this blog entry.
We are pleased to partner with the Office of National Statistics who have provided us with this PowerPoint presentation on the revised second quarter data for UK GDP and some of the key constituent parts. This downloadable resource might make for an interesting AS macro lesson on different stages of the economic cycle and some of the issues regarding the strength or weakness of components of aggregate demand.read more...»
Are there signs of a recovery in consumer spending on goods and services? A rebound in household demand will be important in helping to drag the UK economy out of the double dip recession although dependency on consumption-led growth is not necessarily the best recipe for a sustainable growth of output and incomes. For too long the UK economy has relied heavily on domestic consumption rather than exports and investment.
Consumer spending is being assisted by:
i) Falling inflation which is easing the squeeze on real disposable incomes
ii) A sharp rise in dividend payments from corporates (estimated to be worth nearly £80 billion in 2012)
iii) Rising employment (now at a record high) and lower than forecast unemployment given the depth of the last recession
iv) Some signs of an easing in the mortgage market with low interest rate home loans more accessible than a year ago
Click below for some background charts and notes on consumer spending in the UK economy at this crucial stage of the business cycle
Another superb 60 second video from the OU which introduces the concept of the paradox of thrift. The Paradox of Thrift suggests that while it may be wise for an individual to save money when income is low and job prospects are precarious, it could be collectively disastrous if everyone is thrifty together. read more...»
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...»
A short glossary of key terms connected to the economic cycleread more...»
A glossary of some key terms related to aggregate demandread more...»
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
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...»
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...»
With consumption being such a large component (approximately 2/3rds) of aggregate demand, it is important to understand the role that consumer confidence plays when decisions are made upon major spending commitments.read more...»
What links rising VAT and energy prices, higher unemployment, loss of bonuses, a reduction in overtime and more part-time working?read more...»
Over many years the rate of change of unit labour costs (ULCs) has been a decent reliable indicator of inflationary pressures in the UK economy. Times when wage costs adjusted for productivity have grown quickly have often coincided with a rise in the annual rate of inflation - little wonder when payroll costs are a sizeable chunk of operating expenses for many businesses.
But in the last couple of years we have seen a growing disconnect between unit labour cost inflation and the published figures for CPI.read more...»
As a follow up to my homework assignment I have attached below in a powerpoint file a set of data charts used as handouts and a prompt for discussion in our AS macro lessons on consumer spending.
I have attached below an example of a homework assignment for my Unit 2 macro economic group which focuses on some of the main drivers of consumer demand for goods and services. It is available for free download as a pdf file. Discussion in class will centre on income, wealth, interest rates, confidence and expectations as key determinants. This is a particularly important stage of the economic cycle and there are many influences constraining household demand as we head towards the end of 2011.
The government in Denmark, has introduced additional taxes on foods which contain more than 2.5% saturated fat. It will add 25p on packets of butter, 8p on crisps.read more...»
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 incomeread more...»
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.
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...»
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...»
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.
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...»
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...»
Good graphics on population and Consumption in January 2011’s National Geographic magazine.
Opportunity for cross-curricular understanding.
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...»
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.read more...»
Swings in consumer confidence have often provided reliable evidence of short term turning points in economic activity. And there are growing fears of a double-dip recession for the UK with a raft of household surveys suggesting a weakening of sentiment about prospects for the economy.read more...»
Most of us at some time need to borrow money to finance spending. From taking out a mortgage or using a student loan and making frequent use of bank credit cards, borrowing is a normal feature of life and not necessarily something to be worried about. What matters is whether building up debt is sustainable – in other words, can those who rely on debt pay it back? Huge levels of borrowing and an inevitable surge in household debt were features of the long period of growth that came to an end in 2008. Now the British economy is being held back by a historically high level of consumer debt - and you thought that it was the British government stuck in the deepest debt trap?read more...»
Consumer spending on goods and services is the main driver of aggregate demand in the British economy. Over sixty five per cent of demand comes from the household sector and the strength or weakness of household spending has a major bearing on movements in the economic cycle.read more...»
This new streamed revision presentation guides students through some key evaluation points on the changing patterns in global trade & investment. Ideal for A2 revision.
Students wanting to demonstrate up-to-date understanding of the UK economy should find this streamed revision presentation really useful. It was delivered by Geoff at our AS & A2 Economics workshops in London & Manchester. It provides a comprehensive coverage of recent developments in the UK economy and highlights some potential downsides and upsides as the economy attempts to sustain a recovery during 2010 and 2011. Has the era of macro economic stability been replaced by a new phase of macro economic uncertainty, slower growth and a recovery constrained by debt? Or are there grounds for being more optimistic about the near-term future for the British economy?
Animal spirits refers to the state of confidence or pessimism held by consumers and businesses. Expectations for the future inevitably influence decisions made today about how much consumers are prepared to spend or save and the willingness of businesses to commit funds towards capital investment in their chosen markets.read more...»
Today marks the end of the UK government’s car scrappage scheme. The scheme offered drivers of cars at least 10 years old £2,000 off the price of a new vehicle with half of the money is paid by the government and half by the carmaker in question. Over the course of the scheme is estimated that the scrappage initiative has been responsible for about a fifth of all new UK car registrations. And there seems little doubt that the consumer subsidy has provided a shot in the arm for a car industry affected badly by the global financial crisis and subsequent recession. Paul Everitt, chief executive of the Society of Motor Manufacturers and Traders is quoted as saying that it had provided a “much-needed stimulus for the UK motor industry”.read more...»
There has never been a strong link between the policy rate decisions of the Bank of England and the interest rates charged to customers who take out unsecured loans using their credit cards. But withbase rates at 0.5% and lilkely to remain well below their neutral rate for some time to come, the chasm between this and the average of 18-19 per cent annual rate on unpaid credit card balances has rarely been wider.
The lenders claim that rising debt default levels from borrowers suffering from the recession and rising unemployment has increased the risks of loans and that higher rates are the inevitable result of this.
Consumer watchdogs take a less benign view and argue that the financial companies are exploiting consumers and whacking up their profit margins even during these difficult times.
This BBC news video from Brian Milligan provides food for thought on the credit card issue and makes a good resource to use when teaching monetary policy and personal finance. The BBC Radio 4 Today programme also covered this issue during the week.
This new revision presentation examines the implications of changes in consumer and business confidence for the UK economy
The following video clips from the FT focus on the so-called BRIC economies (coined by the Chief Economist at Goldman Sachs in 2001).
There are excellent to provide discussion points on why grouping the BRIC (Brazil, Russia, India, China) economies together is flawed, with the 4 countries being actually very different and the acronym BRIC no longer being appropriate, in its description of their experiences or their futures. They also discuss whether economic power has shifted from the US to the East.
Consumer spending is the main short term driver of demand in the British economy so the expectations and confidence levels within the household sector will be pivotal in determing the speed of any revival in demand during 2010.
The latest Nationwide Building Society consumer confidence index recorded a five point decrease in December to 69 – its biggest fall since November 2008. It seems that people are worried about being hit by higher tax burdens this year as the fiscal squeeze looms on the horizon. Higher VAT (back now to 17.5% and rumoured to be rising to 20% later in the year) and increases in national insurance contributions may be the tip of an ill-concealed fiscal iceberg. House prices are rising and unemployment is rising at a slower rate than feared a year ago. But real disposable income is the dominant factor that determines how much we can spend and the prospects for 2010 do not look good.