Hopes and Fears 2012
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...»Changing Consumer Behaviour - falling incomes
What links rising VAT and energy prices, higher unemployment, loss of bonuses, a reduction in overtime and more part-time working?
read more...»Unit 4 Macro: Unit Labour Costs and Inflation
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...»Unit 2 Macro: Consumer Spending Charts for the UK
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.
Unit 2 Macro: Homework Assignment 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.
Changing Consumer Behaviour - Taxing Saturated Fat
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.
This BBC news clip introduces this new fiscal measure.
read more...»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.
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...»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...»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.
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...»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.
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...»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.
read more...»Consumer sentiment weakens as double dip looms
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...»AS Macro Revision: Consumer Borrowing
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...»AS Macro Revision: The Importance of Consumption
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...»A2 Economics Revision - Changing Pattern of Global Trade & Investment
This new streamed revision presentation guides students through some key evaluation points on the changing patterns in global trade & investment. Ideal for A2 revision.
Revision Presentation on the Changing Pattern of Global Trade & Investment
AS / A2 Revision - Where Next for the UK Economy?
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?
Revision Presentation on the UK Economy
Animal Spirits
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...»End of the Road for the Car Scrappage Scheme
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...»Margins and risk - the spiralling cost of credit
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.
Revision Presentation - A Question of Confidence
This new revision presentation examines the implications of changes in consumer and business confidence for the UK economy
Launch revision presentation on a Question of Confidence
Download printable slide handouts
Focus on the BRICs
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.
Cautious consumers fear tax rises
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.
Aggregate Demand - Teacher Revision Presentation
Many thanks to Geoff for updating his popular revision presentation for AS students on Aggregate Demand
Launch interactive version
Download slides handout
Losing overtime to cut capacity
Here is another example of how firms are cutting capacity during the recession without making their staff redundant. The TUC report that, although four million workers do still work extra paid hours, over half a million people have lost the opportunity to work overtime in the last year. The average amount of weekly overtime last year worked out at almost £3,000 a year per employee, a total of £10 billion. However this is down by £1 billion on last year, representing a loss of income of hundreds of pounds per month for those employees for whom it is no longer available. Workers aged 20-24 have experienced the sharpest fall in overtime: in 2008, 20.1% of young people earned overtime pay, compared with 15.9 per cent this year.
Workers in manufacturing, transport and communication, industries that traditionally offered overtime, were hit by a sharp fall in extra hours over the past year. In this video report from the BBC looks at one company in Bristol which was faced with the need to cut costs and offered staff the option of either cutting overtime for all of them, or making some of them redundant. They agreed to take the first option, but are having to cut their discretionary spending, and so their living standards, as a result.
13% fall in household wealth will shape any 2010 rebound
One key reason to expect a more subdued recovery from the downturn is that the household sector in the UK has suffered a huge negative wealth effect over the last couple of years. Asset values have fallen but outstanding debts have not and it is this imbalance that will shape the nature of any rebound in consumer demand for goods and services even though the cost of borrowing is at unusually low levels. The National Institute has done some research on the negative shift in personal sector wealth and it is reported in this article in the Telegraph.
