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The output gap: how much economic potential has been lost?

Thursday, June 26, 2014

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?

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Transport Economics: The Return of Trams - Benefits and Costs

Sunday, June 01, 2014

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.

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Unit 4 Macro: Guinea and Rio Tinto Agree Investment Deal that might Double GDP

Wednesday, May 28, 2014

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?

Key points:

  1. Forecast of 45,000 new jobs created across the entire project
  2. State of Guinea will retain 15% of any proceeds from the mine
  3. In exchange, the joint venture with Rio Tinto / Chinalco will enjoy eight years' tax free operations in the country
  4. Production at the Simandou mine is expected to start within five years
  5. It will be Africa's biggest mine
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UK Economy: Debt and Barriers to Growth

Wednesday, April 23, 2014

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.

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Unit 2 Macro: Network Rail plans £38bn Investment Programme

Monday, March 31, 2014

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.

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Unit 2 Macro: Regional Multiplier Effects with Siemens Investment

Tuesday, March 25, 2014

Here is a good example of an inward investment project likely to create a strong multiplier effect for the economy of East Yorkshire. 

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Unit 2 Macro: Hurdle Rates and New Housebuilding

Tuesday, March 18, 2014

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.

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Unit 2 Macro: Ageing Infrastructure and Economic Growth

Saturday, March 15, 2014

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?

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Unit 2 Macro: Multiplier and Accelerator Effects

Saturday, March 01, 2014

Here is a revision presentation for an AS Macro topic - the multiplier effect, the accelerator effect and Keynesian economics

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Paul Ormerod: Forward guidance needed for companies, not consumers!

Thursday, February 27, 2014

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.

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Unit 2 Macro: Aggregate Demand

Monday, February 24, 2014

Here is a revision presentation for an AS Macro topic - aggregate demand

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Unit 2 Macro: Europe’s Biggest Infrastructure Project

Monday, January 06, 2014

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. 

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Labour is getting a smaller and smaller slice of national income

Monday, November 11, 2013

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.

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Unit 2 Macro: Aggregate Demand

Monday, October 21, 2013

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.

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Monetary Policy less powerful in recessions

Wednesday, October 09, 2013

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.

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What’s driving (the lack of) investment?

Sunday, October 06, 2013

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?

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Unit 4 Macro: Economic Growth, Investment and the Middle Income Trap

Thursday, October 03, 2013

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 Trap

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What’s the right ‘type’ of growth for the UK economy?

Sunday, September 29, 2013

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?

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Unit 2 Macro: IMF Report on UK Economy calls for Increased Investment

Thursday, July 18, 2013

In its annual assessment of the U.K. economy, the IMF called on the UK to invest in skills and infrastructure and increase banking sector competition in order to foster growth and achieve a sustainable recovery.

The report can be found here and contains plenty of relevant background information on the current situation facing the UK - here is a selection of quotes from their summary

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Unit 2 Macro: Investment in UK Economy Remains Low

Monday, April 08, 2013

Capital investment spending in the UK has remained below 15% of GDP for four years and there are few strong signs that investment in Britain will rebound strongly in the near term. No other country inside the Group of 7 (G7) had experienced investment below 15% of GDP in any single year in the last thirty - it is clear that investment in the UK remains stuck in the doldrums and this may have damaging consequences for short term recovery and long-term competitiveness and growth.

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Unit 2 Macro: Revision on Interest Rates

Saturday, April 06, 2013

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.

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Unit 4 Macro: Interest Rates and Business Failure Risk

Wednesday, April 03, 2013


When is the right moment to start tightening monetary policy by gradually raising interest rates? Some macro economists believe that in the UK, the Monetary Policy Committee has already delayed the first upwards nudge in policy interest rates for too long with the result that inflation has remained persistently above target for most of the last five years. Others argue that fundamental economic weakness makes the recovery fragile and vulnerable and that raising interest rates now is the wrong option.

Check out some key macro charts here

UK_Policy_Interest_Rates.pptx 

An increase of one percentage point in the interest rate that a firm faces during a financial crisis increases its chances of failure by more than five percentage points. Young firms, firms with high bank dependency and firms that don’t export are particularly vulnerable to changes in their debt-servicing costs.

These are among the findings of research by Alessandra Guariglia, Marina-Eliza Spaliara and Serafeim Tsoukas, to be presented at the Royal Economic Society’s 2013 annual conference. The study looks at a large data set of mainly private-held firms in the UK tracked over several years.

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Unit 2 Macro: Revise and Test - Aggregate Demand

Thursday, March 28, 2013

Updated revision notes on aggregate demand and a short revision quiz to test your understanding!

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Paul Ormerod: What would Keynes have said?  Ouija board active!

Friday, March 01, 2013

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.

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Unit 4 Macro: Economic Growth - the Solow Model

Sunday, January 06, 2013

The economist Robert Solow (pictured) developed the neo-classical theory of economic growth. Solow won the Nobel Prize in Economics in 1987. 

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Unit 2 Macro: Key Term Glossary

Friday, January 04, 2013

An updated glossary of key terms for AS macro

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Prospects for the UK Economy in 2013

Wednesday, January 02, 2013

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.

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UK Macro: UK GDP Growth in Q3 of 2012

Saturday, November 03, 2012


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. 

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UK Macro: Developments in UK Economy - GDP Data


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.

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Unit 4 Macro: Savings and Investment in China

Saturday, July 14, 2012

Saving is the difference between income and consumption. In countries such as China and India, the national savings rate is high in contrast to developed economies.  

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Unit 2 Macro: Economic Cycle Glossary

Saturday, May 05, 2012

A short glossary of key terms connected to the economic cycle

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Unit 2 Macro: Aggregate Demand Glossary

A glossary of some key terms related to aggregate demand

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Unit 2 Macro: How the Economic Cycle affects Businesses

Friday, April 06, 2012

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

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Unit 2 Macro: Revision on Capital Investment

Friday, March 30, 2012

Here is a planned answer to an exam question

“Explain two factors that are likely to affect the level of aggregate investment.”

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Life in the Slow Lane - UK Growth in 2011 Lags the Euro Area

Wednesday, March 28, 2012

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.

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Unit 4 Macro: Sovereign Wealth Funds

Sunday, March 04, 2012

A sovereign wealth fund is a government or state run investment fund usually created by super-normal profits from natural resources such as oil, gas or minerals. Here is some brief background on them:

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Unit 2 Macro: Look Upwards to Find the next Downturn

Monday, January 16, 2012

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

 

Unit 2 Macro: Factors Driving Business Investment

Tuesday, January 10, 2012

Investment flow factors

Profit-seeking businesses will go ahead with an investment if they believe that it will - over its projected lifetime - yield a real rate of return greater than if the money had been invested in the next best alternative way. Opportunity cost is a useful idea to use here. Private sector businesses usually focus on these objectives when investing in new capital inputs:

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Unit 1 Micro: Costs and Benefits of a Super Sewer for London

Tuesday, November 01, 2011

Thames Water

Thames Water has plans for a super sewer running 20 miles from Hammersmith to Beckton but the plan has come up against intense opposition from many local resident groups. It is a good example to use of cost-benefit analysis in action with a project that will directly affect millions of people living and working in the capital. There is an almost unending list of stakeholders involved in the debate.

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UK economy - as seen by the Bank of England

Wednesday, May 18, 2011

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.

Rise in investment could kick start recovery

Monday, April 18, 2011

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.

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AS Macro Revision: Investment Spending

Saturday, March 12, 2011

This revision blog looks at the drivers of capital spending and the importance of investment for economic performance

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5 Fresh Links: Videos to attract FDI

Friday, February 04, 2011

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.

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A2 Macro Revision: The Stock Cycle

Friday, December 31, 2010

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.

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Specific Supply Side policies

Saturday, June 05, 2010

Its always good to be able to refer to real economic policies when teaching supply side policies, rather than referring to them in the abstract, such as “increase real expenditure on R&D and education”.

Here is a good current example of a supply side policy - the government last week began the long process of distributing its £200m UK Innovation Investment Fund (IIF), which will be focused on life sciences, digital and advanced manufacturing businesses. Lord Drayson, the science minister, also outlined plans to tackle the bureaucracy and red-tape that creates a log-jam for initial public offerings of high-tech companies, which have dried up in the last two years, creating problems for venture capital groups.

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A2 Economics Revision - Changing Pattern of Global Trade & Investment

Sunday, May 02, 2010

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

Sunday, April 25, 2010

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.

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Broadband and economic growth

Saturday, April 03, 2010

Investment in broadband capacity and speed has a strong impact on economic growth according to new research.

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Foreign investment videos

Friday, April 02, 2010

Videos produced by governments seeking foreign direct investment can be a useful teaching aid when studying the drivers of FDI.

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