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An initial change in aggregate demand can have a much greater final impact on the level of equilibrium national income. This is known as the multiplier effect
It comes about because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending – in other words “one person’s spending is another’s income." This can lead to a bigger eventual effect on output and employmentread more...»
Getting out of our slump is challenging economics policy makers.read more...»
UK immigrants who arrived since 2000 are less likely to receive benefits and less likely to live in social housing than UK natives. What’s more, over the decade from 2001 to 2011, they made a considerable positive net contribution to the UK’s fiscal system, and thus helped to relieve the fiscal burden on UK-born workers.
The positive contribution is particularly evident for UK immigrants from the European Economic Area (EEA – the European Union plus three small neighbours): they contributed about 34% more in taxes than they received in benefits over the period 2001-11.
These are the central findings of a comprehensive analysis of the fiscal consequences of immigration to the UK, published today by the Centre for Research and Analysis of Migration (CReAM) at University College London.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...»
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...»
Are government bonds risky? This question arose a year ago, during a meeting with my bank. I wanted a low risk portfolio, but they noted that I did not want to hold UK government bonds. Whether it was the regulator who was insisting, or whether it was the way the bank was interpreting some Delphic pronouncement of the regulator, was not quite clear. But I could not be in both categories. Bonds were deemed low risk. So if I wanted to continue not to have bonds, my risk profile would have to change.read more...»
The Focus Circle is quickly becoming one of our most popular teaching & learning activities and here is a version that comes ready-made for a lesson macroeconomic policy.
In the Focus Circle, students are shown up to 4 topic areas (categories) inside. Around the Focus Circle are up to 18 words/ phrases which belong to one or more of the different categories. Students select 1 of the topic areas and decide which of the key words/ phrases belong inside the Focus Circle (words that are specifically related to that topic area).
So, is currency intervention a supply-side policy? Is "forward guidance" part of fiscal or monetary policy? Can your students define the words or phrases they select? Can they provide an example to back-up their selection.
The possibilities for an engaging and effective lesson are endless...read more...»
SOME people are never satisfied. The evidence is mounting that the UK economy is now on the path to recovery. But to those who denied the possibility of any economic revival at all under the policies of “austerity”, this is simply not good enough. It is the wrong kind of recovery, they say. Fuelled by debt-based personal spending, unsustainable house prices, another crash, the doom-mongering litany more or less writes itself.read more...»
The GDP growth figures announced last week for the second quarter of this year have sent most people away on their holidays in a cheerier mood than last year. The recent weather has certainly helped. But gloomy clouds may hover over the exclusive settings of Tuscan villas and beach houses in Martha’s Vineyard, where bien pensant commentators and so-called Keynesian economists ritually gather for the summer.read more...»
Potential defaults in the Euro zone have been in the news again. In Portugal, the ruling coalition parties and the main opposition Socialists have been unable to agree on a European Union-led bailout plan after days of talks. Yields on the country’s 10 year bonds have approached 7 per cent, compared to the 1.5 per cent in Germany. There has been some improvement this week on the news that an early general election has been avoided, but yields still remain over 6 per cent.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
The Chancellor's review of public spending tomorrow will generate a wealth of articles and analysis - here is a nice one to start with. The BBC website has looked at how the proportion of total spending which goes to each department has changed since 2004, when government spending was last 40.5% of national income: this is the figure that the Chancellor is aiming at in 2017-8 if the government reaches its targets, and is a stark contrast to the 47.4% reached in 2009-10.
Here is a great short two minute animation that introduces us to taxation in different countries - courtesy of the cartoonist KAL from the Economistread more...»
Here is a streamed (and downloadable) presentation on policies to cut unemployment in the UK economy.read more...»
The distinguished American academic economists, Carmen Reinhardt and Ken Rogoff, have been very much in the news. Their 2009 book, This Time is Different, was a comprehensive examination of financial crises over the past 800 years. The work received many plaudits and awards. They suggested that when the ratio of public debt to GDP in a country rose above the 90-100 per cent range, the chances of a financial crisis increased sharply. And the consequence was that economic growth in the country would be adversely affected.
Introducing The Government Game - tutor2u's new Economic Simulation game that is just perfect for revising for AS & A2 Macroeconomic Policy topics!
The recent debacle in Cyprus has essentially been shrugged off by the markets. The European Central Bank vigorously asserts the crisis in the Euro zone is over. So why is there continued unease about the financial viability of countries such as Spain and Portugal, a morass into which even the French are now being dragged?
Economic theory helps us understand a bit more about why this is the case. One thing which the last few years in Europe have shown very starkly is the massive difference between debt which is denominated in nominal terms and that which is in real terms. Nobel Laureate Chris Sims makes the point clearly in his recently published Presidential Address to the American Economic Association.read more...»
How Britain escaped from the travails of the Great Depression and achieved 4% a year growth in the years from 1933 to 1937 has important lessons for today’s policy-makers, according to research by Professor Nicholas Crafts, presented at the Economic History Society’s 2013 annual conference.read more...»
Here's a 5 to 10 minute activity for your post-Easter classes on macro-economic objectives - The Angry Economist! The design is very loosely based upon the 'Angry Bird' game.
You will need up to 8 volunteers to answer the 'Angry Economist's' questions.
Each student can choose a Government policy named on-screen and then the Angry Economist randomly chooses a macro-economic objective. The student has to to apply their knowledge and understanding of their chosen policy to the macro-economic objective shown.
The screen encourages the student to analyse and evaluate their own answer.
Use this link to access the resource. Give it a go!read more...»
I know that it is April Fools Day, but the new and quite radical social welfare reforms are starting to come in to play from this week and they are genuine!
Use this link to access a document that summarises the main changes to the welfare reforms. You can use this document as a lesson activity to discuss government policies to achieve macro-economic objectives.
Are these reforms just aimed at reducing the government's debt or are they aimed at improving the unemployment situation? Are they part of a wider supply-side set of policies aimed at making the UK workforce more effective and flexible?
Could students discuss each policy's strength and weakness? Could they suggest alternative and (possibly) more effective policies.
Useful graphic from The Guardian showing Government Revenues and Spending - helps to put some perspective on some of the announcements.
Politicshome's live Blog showing that hell hath no fury like pressure groups scorned, with plenty of useful links to early comments on The Budget.
Evening Standard's coverage here, it managed to pre-empt the Chancellor's statement.
With Evening Standard-like speed, please follow this link for a short set of questions about today's Budget.
the IFS outlined some aspects of The Rapidly Changing State and showed that predicted public spending in 2017-18 will take a similar proportion of national income as it did in 2003–04. But where and how its spent are quite different. This was alluded to by Penny Brooks earlier today.
Undoubtedly, many of this week's macro lessons will focus on tomorrow's Budget. This radio piece by Evan Davis might make a good starter - seven minutes from the Today programme, in which he examines the objective of simultaneously growing the economy and shrinking public spending.
Channel 4 news hosted an extended discussion recently on the impact of fiscal austerity in the UK and many other European countries. Click below for the video which looks at whether austerity measures are bringing massive government borrowing under control or threatening an even deeper descent into semi-permanent recession. The discussion features Professor Paul Krugman. I have also added in a recent Newsnight debate between Joseph Stiglitz and Paul Ormerod.
It’s not often you read such a clearly set out, even-handed article on macroeconomic policy, so this relatively lengthy piece was interesting in itself as its writer appears to deal relatively equally with both sides of the big austerity debate. But you really have to take notice when the writer is the Secretary of State for Business, Innovation and Skills, Vince Cable.
Tomorrow's Financial Times leads with a headline, "Osborne to hand Carney powers to kick start the economy." Budget to alter Bank of England's remit...Loser Monetary Policy."
Stephannie Flanders, the BBC's Economics Editor, considered if the UK's present monetary policy with its use of Quantitative Easing had played a part in pushing up share prices and wondered if other unorthodox measures would be effective to deal with a stagnating economy.
Vince Cable the Business Secretary provides an outline in The New Statesman of the economic problems the current coalition government has faced, how monetary, fiscal and supply side measures might be used to stimulate the UK economy in response to what he calls the long economic stagnation of post-crisis Britain.
The FT implies that The Chancellor is not wholly convinced by arguments from Vince Cable to boost growth with a new programme of infrastructure spending on schools, roads and housing, funded by extra borrowing. The arrival of Mark Carney at The Bank of England may signal a sea change in how monetary policy is used to stimulate the economy, breaking with the 2% inflation targeting approach. The MPC may be encouraged to focus on targets for inflation and employment. Some of The Committee's members support more quantitative easing whilst The Deputy Governor Paul Tucker said the idea of negative interest rates should be considered.
Link to coverage of Cameron's Speech http://www.guardian.co.uk/politics/2013/mar/07/david-cameron-rules-out-extra-borrowing
The Economist wades in with an analysis of why the slump in consumer spending has contributed to a flatlining economy with low or barely perceptible growth. Household saving has increased to c.7%. Falls in real wages, coupled with rising 'administered prices' of gas and electricity have also helped lower consumption. But the cycle of higher costs and prices isn't helped when Sterling depreciated by 6% in the course of the New Year.
The latest edition of the Economics Journal publishes some new macroeconomic research on the vexed issue of fiscal austerity. Below are some of the summaries of these research papers.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...»
Huge media headlines today for the decision by Moody's to downgrade the UK's credit rating from AAA. It will take some time to see if this decision from one of the ratings agencies - who we must recall lost much of their credibility because of the sub-prime crisis - will have genuine and significant consequences for variables such as market interest rates, the sterling exchange rate, inflation and GDP growth. Stripping away the rather facile spin from the political parties, there have been some interesting and relevant comment pieces on the downgrading and I have chosen some of them for this blog entry. I hope some of them are helpful for your studies:
"The main driver underpinning Moody’s decision to downgrade the UK’s government bond rating to Aa1 is the increasing clarity that, despite considerable structural economic strengths, the UK’s economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public- and private-sector de-leveraging process. Moody’s says that the country’s current economic recovery has already proven to be significantly slower — and believes that it will likely remain so — compared with the recovery observed after previous recessions, such as those of the 1970s, early 1980s and early 1990s. Moreover, while the government’s recent Funding for Lending Scheme has the potential to support a surge in growth, Moody’s believes the risks to the growth outlook remain skewed to the downside."read more...»
Like many teachers, I'm firmly of the belief that money is not the root of happiness. I have to think like that - otherwise how do I argue with my old university friends who went to join the big banks that there’s more to life than big cars and foreign holiday homes ("Come and join us, Jon," they used to say to me, "you can set your own Libor rate and everything" ). It's important that we remind the 'those-who-can't-do' brigade that teaching is a life-style. It's a vocation. A calling.
Well, according to research by US academics Daniel Sacks, Betsey Stevenson and Justin Wolfers, the evidence suggests that wealth is a determining factor in happiness after all. Apparently, the data shows that there are no upper limits to happiness with regards to money – yes, the increase in happiness slows down but still rises.
Quick, somebody tell Victoria Beckham before David gives away all of his cash to the Paris children.read more...»
On Thursday 31st of January 2013, the long-awaited LSE Growth Commission Report was published and launched in London. The document itself is available for download from this link and I urge all teachers and students interested in growth, competitiveness and the fairness agenda to have a look at it. It is full of rewarding and important insights into the drivers of balanced growth in a modern advanced economy.
I will be adding new resources and links to this blog following the launch event
Key Points from LSE Growth Report
- Strong rule of law
- Generally competitive product markets
- Flexible labour market
- A world-class university system
- Openness to foreign investors and migrants
- Independent regulators including competition authorities
- Strengths in many key sectors including high end manufacturing
LSE Commission Growth Agenda
- Greater autonomy for schools, tackle the long tail of under-performance. Conditional cash transfers for families to pupil attendance and performance. Focus league tables less on % attaining 5 A-C grades. Reveal performance at the bottom end.
- Concentrating on skills (improving human capital) gives people the resilience to recover from global shifts in the division of labour
- Critical infrastructure essential for competitiveness in modern economy. For the UK, transport and energy are infrastructure areas with biggest issues; there has been a lack of clear strategy and lots of dithering / political delays.
- Huge opportunities for UK - industrial revolution driven by search for low-carbon technologies driving innovation - can the UK keep up?
LSE Commission proposes:
- 1) Strategy Board (for planning)
- 2) Planning Commission (for delivery)
- 3) Infrastructure Bank (for funding)
- Innovation is the third channel for increased growth
- Problems in UK capital markets mean innovation is not properly funded - short-termism remains a structural weakness of the markets
- More competition in retail banking
- Business bank that prioritises lending to SMEs and innovative firms
Changing the compass of economic performance
- Commission suggests that focus on GDP is not helpful
- GDP misses out on who gets the growth and measures production not income
- Need more focus on Median Household Income
- Median household income and GDP per capita have been decoupled since about 2002. GDP no longer tracks it
UK trend growth rate can be lifted by 0.5% with effective structural reforms - large compound effect on incomes over the long run
Institutions and incentives matter for growth. Macro stability important too. UK politics too short term and adversarial. Fundamental weakness is the failure to create a stable policy framework.
More focus needed on evidence based policy making to make government smarter.
Here Professor John Van Reenen, Director of CEP and co-chair of the LSE Growth Commission, presents a 'manifesto for growth' for the UK economy over the next 50 years, backed up by the Growth Commission's report.read more...»
There has been much controversy and debate recently about the ability and incentives of transnational corporations to cut their liability to pay taxes on profits. Starbucks is one example, Amazon is another. This Financial Times video offers a useful summary of some of the issues. Many governments have been shaving their corporation tax rates in a bid to attract inward and domestic investment. Are they engaged in a damaging race to the bottom? Latest data suggests that companies paid a total of £77bn in UK corporation tax in 2012, 14.2% of total tax receipts.read more...»
Kier Starmer, the Director of Public Prosecutions, has vowed to ‘ramp up’ prosecutions against individuals for tax evasion five-fold in two years. He has made clear his plan to target middle-class earners, citing as examples ‘lawyers, tax consultants and plumbers’, an intriguing perspective on the British class system, or perhaps we are all middle-class now.read more...»
Here is a selection of links and news videos on the vexed economic, social and political issue of fiscal austerity - there is a particular focus on the effects of austerity in the debt-ridden crisis countries of the Euro Zoneread 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...»
A superb short video here from Chris Lockwood at the Economist which explains the background to the Fiscal Cliff and the policy options being considered.read more...»
Reducing the income tax rate and increasing the inheritance tax rate could induce a huge increase in UK GDP, according to research by Professors Alberto Alesina and Guido Cozzi and Dr Noemi Mantovan, published in the latest Economic Journal (December 2012)
Here is a link to a video of a talk given by the eminent economic historian, Professor Nick Crafts on whether there are important lessons from the 1930s for policy-makers as they search for growth enhancing policy measures. The opening statement is gloomy, but the historical sweep and arguments are impressive! A stretch and challenge talk for ambitious sixth form economists.read more...»
Those of you who felt angry or let down by the recent proposals for a Pasty Tax, or those that have been imposed on static caravans or toasties (turning the mighty Subway in to a new lobbying organisation) in the UK should spare a thought for the poor French citizens who are potentially about to have a new surcharge placed upon Nutella - that famous hazelnut and chocolate spread.
Unlike the previously mentioned British taxes, which were imposed or proposed to generate revenue or close apparent loopholes, this tax has been put forward for market failure reasons. The tax, of course, is not directly on the brand but upon one of its main ingredients - palm oil. The proposed increase by the French government is nearly 300%. The French are arguing that palm oil is a product with negative externalities - poor for the health of its consumers and a large burden on the health system. There is also a claim that the high production of palm oil in South East Asia has resulted in large-scale deforestation.
Read a short article on the issue at the Huffington Post. The cost of your morning crepe in Brittany may be about to increase!
Three senior corporate executives were grilled by a Parliamentary Select Committee yesterday over the controversial use of transfer pricing as a way of legally avoiding corporation tax on profits made in the UK. Starbucks, Google and Amazon all have an incredibly strong UK presence in their respective markets but all are under fire for using legal, but undesirable methods to minimise tax payments in this country. US coffee giant Starbucks reportedly paid just £8.6m in corporation tax in the UK over 14 years, they are masters at using complex corporate tax codes to lower their tax liability.
How strong is the reputational risk at stake here? As a consumer, I use all three of these businesses most days and I could be persuaded to change my habits albeit reluctantly. Surely there is a case for a strong government response to identify and close legal tax loopholes that allow this to happen? Corporate tax avoidance is an issue that will not go away.read more...»
Here are some links connected to the news that the United Kingdom is drawing to a close financial aid to India by the year 2015. The focus will shift from aid to trade. Bilateral trade between the countries in 2010 was worth £10 bn. The countries have set a target of £20 bn by 2015. We also link to a new Inside Story programme from Al Jaxzeerah on the continuing debate over the effectiveness of and future of overseas aid in the world economy.read more...»
Michael Heseltine’s report on economic growth came out last week. It contains 89 recommendations. A mere 57 varieties, to recall the famous Heinz slogan, might have connected it more with popular culture.
Corporation tax is very much in the news. Starbucks is merely the latest to be in the spotlight, having paid no corporation tax on more than £1billion of sales in the past three years . This became noteworthy when the Prime Minister himself declared he was unhappy with the level of tax avoidance by big corporations working in Britain.
The plain fact is that if corporation tax did not exist, it would be madness to introduce it. The tax plays to the ignorance not only of the general public, but of almost all politicians. It encourages the fantasy that there is a free lunch, that someone else will pick up the bill for the welfare state and bloated state bureaucracy.read more...»
In the boom decade of the 2000s, corporate rebranding and renaming was all the rage. Some were successful. Others are best forgotten, like PWC’s proposal to bestow the name of Monday on its consulting arm. But as the world’s economic recovery gathers momentum, perhaps it is time to revive the practice.
If fiscal consolidation continues and radical changes to monetary policy are ruled out, it is mainly ‘supply-side’ reform that can restart UK growth without doing longer-term damage to the economy. Among other things, that means repairing infrastructure, improving education, reforming taxation and tackling the restrictive planning system. But one area that could deliver both short-term stimulus and long-term efficiency is private house-building – as happened in the 1930s recovery from recession. Today’s planning restrictions mean that the stock of houses is three million below and real prices are 35% above what they would be if market forces operated freely.
These are among the conclusions of Professor Nick Crafts on what policy-makers can learn from the 1930s and 1980s, when the UK economy made strong recoveries from severe recessions very similar to the current one. Despite fiscal consolidation, both the 1930-32 and 1979-81 recessions were followed by strong recoveries.
Delivering the Royal Economic Society (RES) annual policy lecture in London on Wednesday 17 October 2012, Professor Crafts summarised the policy lessons from those decades that are relevant to kick-starting recovery now:
I set some of my AS economics students an assignment on Keynes last week. The starting point was the first of Stephanie Flanders' excellent series featuring Keynes, Hayek and Marx. We watched it in class and I was keen for students to explore some of the guiding principles of Keynesian economics well before we get stuck into AD-AS analysis. I am also desperate to avoid showing them a mark scheme until March at least (when I am taking a sabbatical!) - so I marked their work mainly on the quality of their writing and whether or not I enjoyed reading it! I have showcased a few examples below of their answers.
The UK economy is struggling to recover from the last recession. Private sector demand in the form of consumer spending and business capital investment remains weak, confidence is low and exports of goods and services have been affected by problems in the economies of many of our trading partners. UK GDP remains well below the peak achieved before the start of the last recession and unemployment continues to rise. Keynesian economics has made a comeback in recent times, indeed many governments around the world have decided to introduce Keynesian policies as a way of injecting fresh demand into their fragile economies.
Analyse how the macroeconomic problems outlined above would be approached by Keynesian economists. In your answer try to capture the essence of the Keynesian approach and attempt to raise and discuss some of the criticisms that have been levelled at Keynes.read more...»
Wealth is spread far more unequally than income, so The Lib Dem leader and Coalition Deputy Prime Minister Nick Clegg has proposed a temporary wealth tax, and Ed Balls implied that Labour would introduce permanent tax on wealth. The graph from This week's Economist contrasts estimates of net private assets with net national debt. A wealth tax is being touted in Germany as a means to raise revenues.