Get Summer 2014 Right First Time with tutor2u Exam Coaching & Revision Workshops
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.read more...»
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...»
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?read more...»
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 Trapread 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...»
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
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.
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...»
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
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.
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...»
The economist Robert Solow (pictured) developed the neo-classical theory of economic growth. Solow won the Nobel Prize in Economics in 1987.read more...»
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...»
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...»
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. In 2010, Singapore, Korea, Taiwan and Hong Kong all had gross national savings rates at or above 30 per cent of GDP, as did Vietnam, India and Malaysia. China topped the list with 53 per cent of GDP.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
Here is a planned answer to an exam question
“Explain two factors that are likely to affect the level of aggregate investment.”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...»
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:read more...»
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
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:read more...»
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.read more...»
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.
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.
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...»
This revision blog looks at the drivers of capital spending and the importance of investment for economic performanceread more...»
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...»
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...»
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.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...»
Investment in broadband capacity and speed has a strong impact on economic growth according to new research.read more...»
Videos produced by governments seeking foreign direct investment can be a useful teaching aid when studying the drivers of FDI.read more...»
This is a hugely important announcement and boost for the North east economy whose long term future must be built on competitive advantages in the emerging low-carbon industries of tomorrow. The decision to manufacture the lithium-iron batteries used in the Leaf electric cars is the key to the employment creation effects of the new investment by Nissan. Note too the role played by government financial support. The investment is backed by a £20.7m government grant and up to £220m from the European Investment Bank.
The Nissan car plant is the most productive in the European Union. The plant opened in 1984 and has so far built 5.6 million cars. It produced a third of all cars built in Britain in 2009. Digby Jones sings the praises of businesses such as Nissan in this super interview on the Politics programme a few days ago.
Rapid growth has put India’s creaking infrastructure under tremendous pressure. The Indian government has sharply increased investment spending on infrastructure with ambitious projects such as adding 20km of new roads each day! Can the spending projects deliver? This BBC India Business Report looks at the rise in investment spending.
A top-down programme to encourage bottom-up growth of entrepreneurship in China’s rural areas. We have become accustomed to the enormous size of infrastructure projects in China designed to maintain domestic demand and employment and sustain a minimum growth rate of 8 per cent. China’s investments in new factories and properties surged 67 percent last year to 15.2 trillion yuan, more than Russia’s gross domestic product.
This is another approach focusing on enterprise in rural areas. The Chinese Government has spent about $40 billion training people from the countryside to run their own business. The Government’s scheme provides free skills training, tax free loans of up to $8,000 and two years of support.
This new revision presentation examines the implications of changes in consumer and business confidence for the UK economy
Whisper it quietly but there are signs of a rebound in orders and production in UK manufacturing industry. In recent weeks we have seen a cluster of articles suggesting that some of the industrial production that left the UK during an age of out-sourcing is now starting to return home. Having plunged last year manufacturing output appears to have stabilised and today we heard news from the Chartered Institute of Purchasing & Supply’s purchasing managers’ index that UK manufacturing activity grew at its fastest pace in more than two years in December 2009.
Last week, a survey by the Engineering Employers Federation revealed that one in seven British companies had repatriated manufacturing operations to the UK in the past two years. Keep in mind that manufacturing contributes less than 12% of UK GDP - although many service sector jobs and businesses depend directly on the health of the industrial sector. Manufacturing may be making a comeback because of:
1/ Sterling: The weaker value of sterling against the Euro and the US dollar has given manufacturing industry a competitive boost
2/ Relative costs and supply issues: Higher than expected costs and quality problems have been cited by some businesses that have outsourced some manufacturing - high wage inflation in fast-growing emerging market countries has narrowed some of the unit labour cost gap between the UK and rivals
3/ Oil and transport costs: The high price of oil has increased the cost of shipping goods around the world encouraging producers to focus output closer to the market
4/ Overseas markets: Signs of a recovery in some of the UK’s main export markets - the majority of manufacturing production in the UK is exported, manufacturing industry in Britain is sensitive to the global economic cycle
Sunday Times (3rd Jan) Made in Britain: How manufacturing is returning to the UKread more...»
Many thanks to Geoff for updating his popular revision presentation for AS students on Aggregate Demand
John Gapper’s blog in the Financial Times today focuses on the risks that come from excessive capital investment in the Chinese economy. Bloated by an ultra-low cost of capital, many heavy industries have boosted their capacity to enormous levels and then relied on double digit annual growth in exports to absorb this capacity and maintain output and jobs. But this excess investment has made China vulnerable to the world financial crisis (not least the slump in world trade) and it has been a key factor behind global trade imbalances and the rise of protectionism. Capital investment of up to 40% of GDP is a reflection of a deeply skewed development model and one that is unsustainable.
“The result is huge over-capacity in heavy industries that soak up excess capital, which was hidden until last year by strong export demand for steel and the other affected products. But it also makes Chinese industry vulnerable to shocks such as the financial crisis.The Chinese government itself accepts - at least in theory - the need to switch away from a pure reliance on exports to fuel growth, to boost domestic consumption and to make growth more balanced.”
More here - China’s over-investment is its Achilles’ heel
An FT editorial today develops the discussion and highlights the waste of scarce resources that occurs when investment is made in capacity that will probably never be used:
“At the end of 2008, China’s steel capacity was 660m tons against demand of 470m tons. This difference is much the same as the European Union’s total output. Yet, notes the report, “there are currently 58m tonnes of new capacity under construction in China”. To the extent that gross domestic product is driven by such absurd spending is a measure of waste, not of economic welfare.”
George Magnus also writes on China in his piece in the Times
This streamed presentation provides a snapshot of the latest economic data on UK business capacity. The slump in output in the British economy has left many businesses and industries with a huge amount of spare capacity and the negative output gap is expected to grow beyond 6% of GDP in 2010 according to the OECD. A high level of spare capacity (or productive slack) has important consequences for jobs, inflationary pressures, planned investment and business profits.
This revision presentation is ideal for AS Macro students who wish to build their knowledge and understanding of the important topic of investment and its role in driving macroeconomic performance. The presentation stays clear of AD-AS or PPF diagrams as we cover this analysis next - I will post a second presentation on applying investment to the AD-AS framework sometime next week.
Here is a summary of four reports posted on the Business and Economics sections of the BBC News website over the last few days. Be warned - none of them are particularly hopeful, the green shoots of summer giving way to autumn mists.
Not all investment contributes to growth - and in an economy where super-charged capital spending has been a driving force of economic expansion over several decades, there is always a risk that a country that invests over forty per cent of GDP on capital goods can eventually suffer an investment-led slump. Japan learned to her cost the dangers of being over-capitalised. Is China recognising the same symptoms in time? This article from the Times makes for fascinating reading.
“Beijing is eager to keep GDP growth above the level of 8 per cent supposedly required to maintain social stability and job creation. But there are fears that huge imbalances between production capacity and actual demand could lead to price wars, corporate failures and severe setbacks for the country’s stellar expansion trajectory.”
We have created this PowerPoint for A2 Economics students who wish to update their understanding of external macroeconomic shocks and cyclical fluctuations.