A selection of revision notes on fiscal policy
The handling of fiscal policy is one of the big macroeconomic issues of the year and one that is likely to dominate many AS and A2 macro essays in the exams this summer. Here is a selection of our recent blogs on aspects of fiscal policy during the last twelve months together with some brief revision notes on fiscal policy and its impact on the real economy.
read more...»Warnings of hysteresis for the EU economy
This is an updated blog post on the topic of hysteresis in the EU economy. The recession and financial crisis may lead to a permanent loss in potential economic output and a slower trend rate of growth in the future according to a study by the European Commission. The fall in potential GDP will be an example of hysteresis effects across the European economy and the cyclical downturn in output and jobs creates long term damage.
read more...»EU Economics: Eurozone crisis in graphics
An excellent graphic resource on the BBC web site - available here
Greek’s shadow economy and institutions
Economic institutions matter! From the credibility of central banks to the roles played by legal systems in upholding property rights and the need for a functioning system of government in collecting tax revenues and making sure that each dollar or euro or pound of state spending is money fairly well spent. I enjoyed reading Tyler Cowen’s piece in the New York Times today - among many others he senses that an eventual default and departure from the Euro is probably the best approach that greek can take.
The budget crisis facing Greece boils down to excessively high levels of government spending and a failure to collect sufficient tax income. This comes as no surprise when we discover the size of Greece’s shadow economy.
“Greece has a malfunctioning fiscal system in which the shadow economy is estimated to be roughly 20 to 30 percent of the reported economy and tax evasion may run at $30 billion a year. Simply collecting taxes that are legally due would help bring Greece’s books into balance, yet even this simple remedy does not appear imminent.”
Brazilian aviation reaches new heights
This BBC News Asia report provides a terrific example of how the Brazilian aviation industry is enjoying fast growth on the back of greater competition and rising per capita incomes. (Air travel has a high income elasticity of demand). Domestic demand for short haul and long haul flights is rising quickly and the emergence of Brazil as the world’s third largest manufacturer of commercial airlines is testimony to the increasing diversity of the Brazilian economy away from dependence on exporting commodities.
Britain at risk of Japan-style deflation
So warns MPC member Adam Posen - whose remarks at a speech at the LSE are reported in the Telegraph. It is worth flagging up three of the specific difficulties facing the UK according to the Posen view
1/ The heavy reliance on foreign investors as a source of funding for the UK fiscal deficit
2/ Britain’s small manufacturing sector - currently rebounding quite well - but not of a sufficient size to make a really big difference to prospects of a recovery
3/ Continued weakness and fragility in the UK banking system - where deeply risk averse behaviour and continued de-leveraging is “undermining companies’ abilities to raise funds” prompting many businesses to hoard cash rather than invest.
More here from the Independent
The Realities and Relevance of Japan’s Great Recession - slides and transcripts are available here
Spain adds to the Euro’s woes…
As if having Greece going into meltdown was not enough for the euro currency to shoulder, Spain yesterday added to this burden… the Spanish government was forced to rescue one of its biggest regional banks: the central bank has taken operational control of Cajasur, which needs an urgent cash injection of €500m.
There has been a fresh bout of horizontal integrations announced in a bit to make their balance sheets more stable - Caja Mediterraneo, Grupo Cajastur, Caja Extremadura and Caja Cantabria want to form a bank with €135 billion in assets, to make it the country’s 5th largest lender.
This is all a time when the IMF has just delivered a bearish analysis on the Spanish economy:
“The challenges are severe: a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness,” the report said.
Do troubles for the euro know no end…?
The cutting begins…
The first round of government spending cuts were announced earlier today amounting to £6.2 billion. Whilst this is not “austerity” of the sort that Greece has been talking about recently, they are genuine cuts, albeit further measures are still required to tackle the huge black hole in the public purse.
read more...»A2 Economics Revision - Data Description Revision on Fiscal Deficits
Here is another example of some macro-economic data that you might be asked to interpret in an A2 AQA data response exam paper
“Using the extract, identify two significant features of the changes in the fiscal balance for the USA and the UK over the period shown by the data” (5 marks)
read more...»Revision Presentation - US Economy Chartroom
Here is a new revision presentation (and slide handout) highlighting key economic data and trends for the US economy. How strong is the early stage of recovery from the recession? In a related blog post I consider some of the ways in which economic events in the USA affect trade, investment and prices in the British economy.
View revision presentation on US Economy Chartroom
Download printable (pdf) handout
A2 Economics Revision - The US and the UK Economy
This revision note covers some of the macroeconomic connections between the UK and the USA economy.
read more...»New IPPR report on migration economics
The IPPR has issued a new report detailing research on the effects of labour migration for a number of developing countries. Here is the link to the press release and the report itself.
A2 Economics Revision - Data Description Revision on BoP
Just as with your AS exams from one year ago, AQA unit 4 macro papers contain data response questions and the first part involves drawing evidence from statistics either in table or chart format - a good example is the one above which tracks the current account balances for the UK and the USA from 1995 onwards. Note that 2010 and 2011 are labelled as forecasts - always something to pick up on when writing about the data in your answer.
read more...»Indian Economy Chartroom
Shubham Puri a visiting student from Mayo College India gave a super presentation on the Indian economy to one of my Year 12 economics classes this morning. It inspired me to call up a range of charts on the state of health of the Indian economy - one of the new key drivers of world demand and a vital component in the BRIC hypothesis!
It was interesting to hear from Shubham how much weight he attached to corruption as a factor holding back the underlying growth rate of the Indian economy. There are widespread doubts for example about the economic and social legacy of India’s hosting of the Commonwealth Games in Delhi later on this year.
Chronic unemployment in urban areas and much disguised unemployment across the country remain deep-rooted features of the Indian labour market despite impressive rates of growth and rising per capita incomes. Shubham confirmed that weak infrastructure is one of the aspects that contrasts India’s current situation with that of China.
Earlier on this week I heard Nouriel Roubini say in a lecture at the LSE that infrastructure in China is way ahead of where China has any right to be! Over ninety per cent of growth in China last year came from a massive surge in capital spending (capex). Too much investment in China will leave the economy with a glut of unused capacity and a major deflation problem once the short-term overheating is resolved.
Here is a brief presentation highlighting some of the key macro trends for the Indian economy.
Indian Economy Chartroom - Streamed Presentation
Download printable slide handout
And here is a wonderful short video My India that Shubham included at the end of his presentation
Ireland’s GNP and the Debt Crisis
Despite well publicised attempts to tackle an alarmingly high fiscal deficit, Ireland still has a budget shortfall in excess of ten per cent of national income and a high accumulated national debt measured as a percentage of GDP. But the true situation may be much worse. Low corporate taxes encouraged sizeable inflows of FDI especially from North America, the result being that Ireland’s GDP is much larger than her GNP - a better measure of the national income generated by Irish-owned economic assets. Government borrowing measured against GNP is very large indeed. And Ireland along with countries such as Greece, Portugal and Spain is mired in the classic debt-growth trap - how can it achieve fiscal austerity when national output and real incomes are falling.
Simon Johnson is strong on this issue today - the dangers of sovereign debt
“Debt overhangs hurt growth for many reasons: business is nervous that taxes will go up in the near future, the cost of credit is high throughout society, and social turmoil looms because continued austere policies are needed to reduce the debt.”
EU Economics: Greek Tragedy foresees the demise of the Euro
Angela Merkel has warned that the euro is in turmoil and is desperately trying to ensure that the rescue package is passed by the German parliament in a vote tomorrow.
Stephanie Flanders suggests that she needs to make this a crisis about “who runs Europe - governments or the markets?” if the vote is to be won. Her Stephanomics blog focusses on the leading role that Germany intends to play in discussions about how to implement and co-ordinate the package.
Her view is that Euro Zone aggregate demand is going to grow even more slowly than previously predicted, which will hold back GDP growth for other economies that rely upon Euro Zone customers to buy their exports.
However Reuters’ finance blogger Felix Salmon gave an even more gloomy scenario in this series of mock news reports broadcast on the Today programme this morning.
He imagines the fate of Europe’s single currency and the unrest that might accompany its break-up. Could this really happen? It could make a nice discussion piece to break up the final stages of revision classes next week!
Japanese economy - exports up but debt squeeze tightens
Here are two useful update articles on some of the issues facing the Japanese economy.
First, the BBC reports on an IMF study that urges the Japanese to take immediate steps to cut their national debt which “at nearly 230% of GDP, is the highest of any industrialised nation.” The IMF believes that economic growth is sufficiently robust at present to take some of the tough fiscal consolidation measures needed. (In contrast to the situation in the UK?). Second, a report that finds that Japanese exports are providing a kick-start to hopes of a recovery in GDP as “emerging Asian markets such as China have been driving Japan’s economy.” Faster growth will be key to Japan breaking free from the latest bout of consumer price deflation.
The UK too is hoping for an export-led recovery in the second half of 2010 and well into 2011 but a dark cloud on the horizon are fears that financial turbulence in the Euro Zone will cause the Euro Zone economy to fall back into recession and the pound to appreciate against the Euro - both factors would hit British exporters looking to grow sales in a region that accounts for well over fifty per cent of our trade in goods and services.
Roubini at the LSE - governments run out of policy bullets
The LSE was packed tonight for a talk and discussion with Nouriel Roubini. It was an occasion to help launch his latest book “Crisis Economics” and Roubini started by arguing that financial crises are now more common than is supposed. Economics textbooks pay lip-service to crises and the conventional wisdom is that systemic crises in the markets are irregular and few and far between. Dr Doom takes a completely different stance believing that the sorts of crises that have dominated the headlines in recent years are best described as White Swans rather than the Black Swans beloved of Nicholas Taleb.
The Roubini lecture is now available on video using this link
read more...»Skeletons in the Fiscal Cupboard
The incoming government has announced the creation of an Office for Budget Responsibility - a 3 person committee headed up by Sir Alan Budd and given the task of providing independent economic forecasts for the Treasury as it prepares budget statements and other public spending reviews. This is quite an important step if not perhaps on the same scale of surprise and excitement as May 1997 when Gordon Brown surged into the Treasury and made the Bank of England independent!
read more...»Labour shortages in a recession
Despite unemployment being over 2.5 million (using the labour force survey) the British economy still suffers from labour shortages. These may become a constraint on the recovery as output and employment picks up. The CBI have published a new report on structural weaknesses in the labour market - reported here by the BBC.
“Despite the recession, nearly half of employers said they were already having difficulty recruiting staff with skills in science, technology, engineering and maths, with manufacturers and science-related businesses finding it hardest to find staff.”
This raises important questions about skills gaps in the economy and also the proposal to put an annual cap on inward migration. What happens if the cap has been reached and a business cannot fulfill a key export order for want of getting the vital workers they need? Are caps on labour migration a root cause of government failure?
As my chart shows, the regular survey of recruitment difficulties from the British Chamber of Commerce finds that the percentage of manufacturing and service sector businesses reporting problems in getting the workers they need has dropped during the recession, but remains appreciably above the level seen at the end of the last downturn in the early 1990s.
A2 Economics Revision - Practice Essay Questions for AQA Unit 3 and Unit 4
I have put together eight essay questions on topics that have not yet been set on the AQA A2 papers. Four cover Unit 3 (micro) and a second group cover Unit 4 (macro). Each is split into the usual two-parts worth fifteen and twenty-five marks respectively. They are attached in the word file and shown below. My groups next week will be doing some of these essays to fine tune technique and improve evaluation - we dont have study leave for another fortnight!
read more...»A2 Economics Revision - Direct and Indirect Taxation
Decisions about which types of tax to use as a way of raising revenue raise questions about the roles and relative merits of the different UK taxes. Should we move further towards relying on indirect taxes or are direct taxes the best way of generating enough revenue to fund government spending and cutting the fiscal deficit.
read more...»A2 Economics Revision - Price Expectations and Money Illusion
Expectations of what lies ahead can influence how we behave today and price expectations in the economy remain topical and relevant to the handling of macroeconomic policy in the UK.
read more...»The Financial Crisis and Beyond
Modern economies run on credit and so the collapse in confidence and lending within the international financial system in 2007-09 was bound to bring about a series of after-shocks to global demand, trade and jobs. In this sense, the economic and political crisis in Greece represents a stark example of the ripple effects of the credit crunch as we edge our way forward in an age of instability.
This to me was the key theme running through David Smith’s talk at the Keynes Society on Thursday night. Followers of David’s columns in the Sunday Times will appreciate his unerring ability to capture the essence of what really matters in the economics and business domain. In his presentation David’s narrative provided a tremendously clear overview of the background to the crisis, the shape of the inevitable recession that followed. And, more pertinently, prospects for the UK economy in 2011 and beyond.
read more...»Classroom Resource - Global Interest Rate Tracker
Interactive data visualisations are becoming an increasingly useful resource in the economics classroom. Here is another excellent example that is well worth bookmarking. The Wall Street Journal provide this up-to-date tracker of bank base rates. Moving the slider across the timeline, you get a visual sense for whether rates are rising, on hold, declining etc. Hovering over an individual country gives you the current rate for that nation together with the next expected rate decision date.
View WSJ Global Interest Rate Tracker
A2 Economics Revision - Protectionism
This new streamed revision presentation for A2 economics examines the topic of protectionism and the threats to the process of globalisation.
Revision Presentation on Protectionism
A2 Economics Revision - Changing Pattern of Global Trade & Investment
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
Business profits and the recession
In previous economic recessions in Britain, the profits of businesses large and small have taken a big hit and have contributed to sizeable and damaging cut-backs in employment.
One of the interesting features of the most recent downturn (in which GDP has fallen by more than 6 per cent) is that corporate profitability has been resilient in the face of a contracting economy.
Yes there have been many high profile causalities notably in retailing and financial services. But the overall picture is that profits have stayed quite high. There are appear to be several reasons
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)
