AS Economics Revision - Managing the Economy
This is a streamed version of the presentation that supported the revision session undertaken by students at our workshops last week as they examined the issue of managing the economy during these unusual times.
Revision Presentation on Managing the Economy
read more...»A2 Economics Revision - From Budget surplus to deficit
Here is a suggested answer to this question: “Explain why a government budget might move from surplus to deficit” (15 marks)
From Junk to Triple A
Here is a useful ranking of sovereign debt ratings for many countries - updated as ratings change!
Top rated:
Australia AAA - STABLE
Austria AAA - STABLE
Canada AAA - STABLE
Denmark AAA - STABLE
Finland AAA - STABLE
all the way down to
Pakistan B- (STABLE)
Ukraine B- (POSITIVE)
Ecuador CCC+ (STABLE)
Contagion spreads…
After Greek’s junk status downgrade yesterday, as well as Portugal’s downgrade; S&P today downgraded one of the other PIIGS, Spain as the contagion effect takes hold… Last night’s (Wednesday) Newsnight discussed the potential contagion ( from 27 minutes).
With Spain’s economy making up 8.5% of the EU GDP, this downgrade has bigger consequences than Greece’s.
Could the UK be next?
Greek junk status timeline
This informative interactive graphic from the FT shows the rapid rise in Greek government yields over the past year, resulting in yesterday’s downgrade to junk status.
When S&P warns holders of Greek debt that they only had an “average chance” of between 30% and 50% of getting their money back in the event of a debt restructuring or default, its going to have consequences…
One result of going junk (or sub-investment grade…) is that many financial institutions (including pension funds) are not allowed to hold such investment instruments, which will lead to a big sell-off of these, causing the yields to rise further.
As the fears of contagion spread, Portugal was also downgraded and the Vix index, a measure of “fear” in the US stock market, rose by more than 30 per cent, its biggest one-day jump since the height of the financial crisis in October 2008.
The moves highlighted the potential that the Greek crisis – the result of too large a debt load and expectations that it may default or have to restructure that debt – could spread and have knock-on effects on the global economy.
In this month’s edition of Economax, there is an in-depth article on Greece’s fiscal crisis.
Detail of the “deepest spending cuts since the 1970’s”
Following on from Geoff’s blog below about recent IFS reports, their latest research released yesterday looks at the scant detail that the three main political parties have given of their plans for spending cuts and tax rises, if elected. This could be introduced with this video of writer Will Self, who reckons the parties are in denial about the real challenges which face them after the election, and the IFS report adds the numbers to this suggestion.
read more...»Links to recent IFS Research
The Institute for Fiscal Studies occupies a lofty place in any coverage of the fiscal crisis facing the British economy. Their independent research is frequently quoted and the fiscal plans of the three main parties are scrutinised in the context of the dispassionate analysis that the IFS brings to bear. Some seriously good economists have cut their teeth at the IFS before moving onto other things. Here is the link to the recent research publications from the IFS. Among the various election and budget reports there are some good documents on what has happened to productivity during the recession and an analysis of what has happened to poverty during the 13 years of the Labour government.
Issues and Prospects for the UK Economy in 2010
Here are some notes from a presentation on some current issues affecting the UK economy - suitable I hope for AS and A2 macroeconomics courses and students preparing for their June 2010 papers.
We will make the full presentation available late and this blog post links to many of our other recent blogs on UK and global macroeconomic issues.
read more...»Capacity utilisation
Capacity utilisation is a macroeconomic term that is now commonly used in AS macro exam questions. It measures how much of the productive potential of the economy is being used at a given point in an economic cycle. Capacity utilisation falls during a recession because of falling aggregate demand for goods and services. The result is that scarce resources of land, labour and capital are not being used to their full extent.
read more...»Animal Spirits
Animal spirits refers to the state of confidence or pessimism held by consumers and businesses. Expectations for the future inevitably influence decisions made today about how much consumers are prepared to spend or save and the willingness of businesses to commit funds towards capital investment in their chosen markets.
read more...»Bonds
Both companies and governments can issue bonds when they need to borrow money. The issue of new government debt is done by the central bank and involves selling debt to capital markets. The bond market is also the place where companies may seek to raise funds by issuing new tranches of debt.
read more...»Accommodatory policies
An accommodatory policy is best described as a neutral macroeconomic policy stance in the face of an economic shock.
read more...»CEP analysis of the UK economy
On the day that weak economic growth data was released by the Statistics Commission, a hat tip to Romesh Vaitilingam for sending through details of the new CEP election analysis briefing. The latest CEP Election Analysis describes where we are now in terms of macroeconomic performance and the impact on the public finances – and the policy options, focusing on debt reduction and economic recovery, and comparing the parties’ positions. It can be downloaded here.
India raises interest rates
Sean O’Grady writes here about the decision by the Reserve Bank of India to raise interest rates once more to combat retail price inflation that hovers just below the ten per cent mark. A volcanic hat tip to John Richards from Tonbridge for spotting this one.
John points out that the article covers some really interesting macroeconomic aspects: namely the use of policy interest rates to control a booming economy, changes in reserve asset ratios (remember them?) as a tool of monetary control (limiting new bank lending), And also the high importance of food in the inflation basket for Indian consumers and the uneven impact of growth on the poorest parts of Indian society.
“The World Bank has said that faster economic growth has seen rising disparities between urban and rural areas in India, prosperous and lagging states, and skilled and low-skilled workers. India’s richest states have incomes that are five times higher than those of the poorest states – a gap that is higher than in most other democratic countries, and may damage social cohesion.”
PIIGS
Excellent interactive graphic from The Economist on the vital statistics of the PIIGS economies.
Super-fast broadband slows down again
Figures comparing growth in UK productivity consistently show us falling behind our major competitors. As Geoff highlighted in this recent blog, there are many underlying factors on the supply-side of the economy and one of them is infrastructure bottlenecks caused by, among other things, slow broadband speeds.
read more...»Stephen King on connections between monetary and fiscal policy
Monetary and fiscal policy may be two separate topics in the published AS and A2 economic syllabus but any smart student knows that there are many connections between the two.
read more...»The (sovereign) default option is costly
No rich advanced nation has defaulted on sovereign debts since the end of the second world war but should the default option seem attractive governments should beware the longer term costs and consequences. The Economist this week has a feature on some recent research into the impact of sovereign debt default focusing in particular on the experience of Argentina. Three major effects are identified:
read more...»50% top rate tax comes into force
The start of the new financial year heralds the launch of a new top rate of income tax of 50% for people with taxable incomes in excess of £150,000. This makes the income tax system more progressive at the top end but the move has attracted criticism from some business groups who claim that it will stifle enterprise and risk-taking in the economy and rise a brain drain effect. Will it lead to higher tax revenues or perhaps encourage greater tax avoidance and evasion?
Here are some links on the issue:
*BBC: New top-rate tax rate of 50% comes into force
*The Times: Millions prepare to count the cost of new tax regime
*Daily Mail: 50p tax increase could hit UK sporting events
*Joe Lynam provides this BBC news video report
Broadband and economic growth
Investment in broadband capacity and speed has a strong impact on economic growth according to new research.
read more...»Small businesses and financial economies of scale
The latest Bank of England survey on financial and credit conditions finds that smaller businesses are finding it tough to get the credit they need to finance an upturn in sales and production. Interest rate spreads on new loans are rising and it is larger firms that seem to be benefitting from lower borrowing costs. A Times article explains that “larger groups are enjoying a reduction in the cost of borrowing and improved access to credit as banks favour lower-risk custom.” - the main commercial banks continue to adopt a risk averse approach to new lending and this may hamper prospects of recovery.
Unsecured loans for consumers have also become harder to get and more expensive despite the ultra-low interest rate policy of the Bank of England. In 2006, the top 10 average rate for a £3,000 personal loan was 6.49%, but today it is 14.92%, analysis by price comparison website moneysupermarket.com has shown.
End of the Road for the Car Scrappage Scheme
Today marks the end of the UK government’s car scrappage scheme. The scheme offered drivers of cars at least 10 years old £2,000 off the price of a new vehicle with half of the money is paid by the government and half by the carmaker in question. Over the course of the scheme is estimated that the scrappage initiative has been responsible for about a fifth of all new UK car registrations. And there seems little doubt that the consumer subsidy has provided a shot in the arm for a car industry affected badly by the global financial crisis and subsequent recession. Paul Everitt, chief executive of the Society of Motor Manufacturers and Traders is quoted as saying that it had provided a “much-needed stimulus for the UK motor industry”.
read more...»Ask the Chancellors debate
If you missed the live election debate between the Chancellors, you can watch it here on Channel4OD; or read a review of it at the FT here.
Economics graphics from the Budget
A hat tip to Mark Seccombe for sending through this snappy selection of macroeconomics graphics linked to last week’s budget
1/ A good graphic to show how the government intend to reduce the debt (Guardian Data Blog)
2/ An interactive breakdown of government revenues and expenditure
3/ BBC editors’ comment (including comments from Stephanie Flanders)
4/ Times analysis - not only the measures introduced but also a bit of comment about some of them
UK Economy in 2010 - Essential Revision Presentation
Many thanks to Geoff for producing this superb 51-slide analysis and evaluation of the prospects for the UK Economy in 2010. Updated to 25 March 2010 with the latest available data.
read more...»NICE to see you, to see you NICE…
Interesting speech given last week to Cambridge Alumni by Charles Bean (Deputy Governor at the MPC): ‘The UK Economy after the Crisis: Monetary policy when it is not so NICE’. The graphs that it refers to can be found here.
Erotic economics
We’ve seen various attempts at tax avoidance before, with the likes of the big debate about whether Jaffa cakes are truly biscuits or cakes , but today another “interesting” example appeared in the news here.
The Erotic Cinema in Belgium claimed it should benefit from the reduced 6% rate of VAT (instead of the normal 21%) paid by cinema owners, who get a discount under law to promote cultural activities. Perhaps unsurprisingly, it was rejected by the ECJ!
Is 70% of the world economy in a liquidity trap?
Paul Krugman expands on the nature of the liquidity trap and why more of the world economy might be in this situation than is commonly supposed. His opening paragraph raises an interesting question for A2 economists - does a liquidity trap encourage protectionist policies and heighten the risks of a period of prolonged de-globalisation?
“Being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense.”
Death to the speculators!
There’s been lots of discussions in the news these last few months about the power of speculators against sovereign debt. My students have been asking about this so I thought I’d write a short note here about it:
- There has been a lot of naked short selling of sovereign debt recently, particularly Greece debt.
- A naked position (also known as an uncovered position) in derivatives speak is when the seller of an option does not have the corresponding position in the underlying security
- A short sell is a strategy to aimed at taking advantage of an expected fall in prices
Fed pledges to keep policy rates “exceptionally low”
Here is an interesting approach to interest-rate setting by the US Central Bank - the Federal Reserve. The Fed has pledged to maintain ultra-low interest rates for the time being in a bid to support and sustain a recovery in domestic demand and output and reduce the risk of a double-dip recession later on this year.
read more...»
