Q&A: What do we need to know about output gaps?
Q&A: For AS macroeconomics, what do we need to know about output gaps?
read more...»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...»Economics Q&A: Does the UK economy achieve a trade surplus in anything?
The answer is yes! Although the British economy has overall run a large deficit in the balance of trade in goods and services for many years, if we look a little deeper underneath the trade statistics we can reveal a comparative advantage in a number of industries. Many of them are in the service sector which - as a whole - has generated sizeable and growing annual trade surpluses for the best part of two decades.
read more...»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...»Q&A: Does a positive output gap always mean rising inflation?
A student asks “Does a positive output gap always mean rising inflation?”
read more...»Q&A: Size of State Sector and Automatic Stabilisers
A student asks: “how does having a large state sector allow automatic stabilizers to act in a downturn?”
read more...»Q&A: Current and Capital Account
Q: Please explain the difference between the current and the capital account on the balance of payments
read more...»Q&A: AD and Inflationary Pressures
A student asks: Will a rise in AD will only cause cost-push inflation if there is a positive output gap?
read more...»Q&A: What is the productivity gap?
The productivity gap is a phrase to describe a sustained difference in measured output per worker (or GDP per person employed) between one country and another.
read more...»Q&A: Changes in pattern of national output
A student posts this question:
Sectoral contribution to the national income and employment have changed over a period. Explain in context of structural changes in economy.
Thanks for just posting an exam question! How imaginative! Briefly here are my thoughts:
read more...»Q&A: Are there countries not in recession this year?
The simple answer is yes! Although the world economy is forecast to experience a recession this year (Deutsche Bank have pencilled in a 1.9% contraction in global GDP for 2009 and the G7 nations will see output slump by 4.5%), there will always be countries at different stages of the business cycle and those who for one reason or another manage to avoid the worst of the fall out from the global financial and economic crisis. Using forecasts for 2009 from the economics team at Deutsche Bank here are some of the countries expected to avoid a full-blown recession:
read more...»Q&A: What is fiscal retrenchment?
Fiscal retrenchment means that a government has to introduce deflationary fiscal measures designed to reduce the amount of borrowing and debt that has been run up during the downturn and economic/financial crisis.
read more...»Q&A: What is a positive sum game?
A positive sum game refers to the outcome of a decision or a policy or a negotiation involving at least one agent. And in this outcome a positive sum game occurs when no one wins at someone else’s expense - indeed the sum of positives and negatives (wins and losses) is positive.
A good example of this are the mutually beneficial gains from trade in goods and services between nations. If businesses or (more generally) countries can find a terms of trade in which both parties benefit then specialisation and trade can lead to an overall improvement in the economic welfare of both countries.
Many environmental campaigners believe that countries should do more to recognise the benefits of cooperation in designing policies and incentives to mitigate the impact of climate change. Surely there are positive sum games from agreement on strategies to lower C02 emissions for example by promoting innovation and the diffusion of technological change?
At a micro economic level positive sum games might be discussed in the context of negotiations between employees and employers or businesses in an oligopoly recognising their mutual interdependence and agreeing to cooperate in ways such as joint research projects (legal under EU competition law). Joint ventures are good examples of businesses understanding the power of collabborrative ventures.
A good recent example of this is the joint venture agreed by O2 and Vodafone to build and share new network sites together. They will share the masts, antennas, cabinets and power supply, as well as consolidate their existing G and 3G masts.
Q&A: What is the difference between a depression and a recession?
This is a good question and you wont be surprised to hear that economists have different views on the distinction between the two! My answer is that the difference is a matter of degree both about the duration of an economic downturn and also the severity.
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Q&A: Full employment and inflation
When the economy is at full employment, what measure is most effective in reducing inflation in the short run?
This question hints at the possible trade-off between two macroeconomic objectives - namely high employment and stable prices.
read more...»Q&A: Will the UK economy’s PPF shift inwards because of the recession?
Will the UK economy’s PPF shift inwards because of the recession?
This is an interesting question and hints that a deep recession that lasts longer than we expect can have a damaging effect on the UK economy’s supply-side performance and productive potential.
read more...»Q&A: Government deficit and current account deficit
What is Current Account Deficit and Government Deficit and do they have any effect on Aggregate Demand or Supply
This question flags up what seems to be a frequent confusion among students - the difference between a current account deficit and a government fiscal deficit
read more...»Q&A: What is crowding out?
Crowding out is an idea often used by fiscal conservatives to suggest that a strategy of using fiscal policy to stimulate demand during an economic recession might not be particularly effective.
read more...»Q&A: What is a reserve currency?
This question is in the news at the moment. The Chinese central bank has proposed replacing the US dollar as the world’s reserve currency with a new hybrid currency controlled by a beefed up International Monetary Fund.
read more...»Q&A: Is capital investment always more profitable in inflationary times?
Is capital investment are always more profitable in inflationary times?
One way of measuring the profitability of an investment project is as a rate of return on capital employed. The real return makes an adjustment for the effects of inflation and it is the expected real return that should drive investment decisions.
read more...»Q&A: Suggest and evaluate policies that the UK government can use to tackle the recession?
Suggest and evaluate policies that the UK government can use to tackle the present recession?
This sounds a bit like a homework essay to me! So I won’t write a detailed answer to it but instead offer some links to recent blogs and other articles on this topic.
read more...»Q&A: What is a Keynesian stimulus and will it work?
A Keynesian–style stimulus happens when policy-makers deliberately seek to stimulate one or more of the components of aggregate demand to boost output, jobs and incomes during an economic recession.
read more...»Q&A: Why is youth unemployment so high?
Youth unemployment rates are typically higher than for the rest of the working population. Nearly 4 people out of 10 who are unemployed are aged between 16 and 24. And as our chart shows over 100,000 young people have been out of work for over a year, a figure that has doubled since 2002 although it is much lower than it was when the UK economy was coming out of recession in the early 1990s.
read more...»Q&A: Is roadbuilding an effective way of reducing unemployment?
Q&A: To what extent would a major road building project by the government be an effective way for the government to tackle unemployment?
Road to recovery or bridge to nowhere?
Road-building projects would count as capital investment spending and (if financed by borrowing) a net injection of demand into the circular flow of income and spending. The question mentions a major programme hinting at projects that together could amount to many millions of pounds.
The question also invites the student to focus on whether this is an effective way to tackle unemployment and so a good answer will go back to the main causes of people being out of work and address how a spending programme might tackle this.
read more...»Q&A: Why might a country have a sustained surplus on their current account?
Why might a country have a sustained surplus on their current account?
The current account of the balance of payments is the sum of four separate balances:
• Net trade in goods
• Net trade in services
• Net investment income from overseas assets
• Net transfers
4/5ths of the trade surpluses in the world economy can be found in China, Japan, Germany and the oil-exporting nations of the gulf. According to Martin Wolf (FT, December 2008) “As a share of gross domestic product, China’s current account surplus is forecast at an astonishing 9.5 per cent, Germany’s at 7.3 per cent and Japan’s at 4 per cent. “
read more...»Q&A: To correct a large current account deficit what can the government do?
To correct a large balance of payments current account deficit what can the government do?
Current account deficits are back in the news again as trade imbalances within the world economy have widened in recent years. Spain for example has run a current account deficit of more than 10% of her GDP in 2008. There are many options open to the government should it decide that the current account deficit needs to be reduced.
read more...»Q&A: Why when base rates change does it cause other interest rates to also change?
Q&A: Why when base rates change does it cause other interest rates to also change?
The concise answer is that the Bank of England acts as the nation’s central bank and it can use its daily operations in the money markets to nudge other interest rates higher or lower.
read more...»Q&A: What is the accelerator effect?
What is the accelerator effect?
The accelerator effect describes a principle where how much a business chooses to spend on capital investment will be influenced by how quickly demand is growing for their products.
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