Revision: The Economics of Interest Rates
This revision note is aimed at both AS and A2 economists. In particular it offers some pointers as to the deeper level of understanding and awareness of monetary policy required at A2 level. I have also attached a powerpoint chart file looking at trends in several different interest rates in the UK economy - including base rates, mortgages rates, the rates on unsecured credit and bond yields.
Revision note (pdf file)
Revision_Interest_Rates.pdf
PowerPoint charts
Interest_Rates.ppt
Bootle on the dangers of a regulatory backlash
Roger Bootle has long warned of the dangers of the Money for Nothing economy and in particular the damage that can occur when asset price inflation is allowed to let rip encouraged by a policy of absurdly low interest rates. But here in the Telegraph he fears for “a strong intellectual tide running against free markets and in favour of increased state action.” “What we must not allow to happen is for disgust at the activities of bankers and their absurd rewards to prompt disillusion with the market system in general. That would take us on an extremely dangerous journey. The next stop would be the embrace of protectionist trade policies. And the final destination would be impoverishment.”
Read the rest of “Free market defenders need to find their voice”. A well written defence of the free market and the dangers of regulatory failure.
Chart of the Day: Unfilled Vacancies
The seasonally adjusted number of unfilled vacancies in the UK economy has grown steadily over the last two years from just under 590,000 to a new high of 680,000. What might this figure be telling us?
read more...»Depression watch: Food stamps a sign of recession?
The Indy carries a vivid front page lead story today about the sharp jump in the number of people in the States claiming food aid in the form of food stamps. The article is headed “The Great Depression” - clearly the headline writers at the Indy dont understand the difference between a recession and a slump.
read more...»Stephen King savages rigid inflation targets
Stephen King, Chief Global Economist at HSBC is brilliant in today’s Independent - attacking the rigid adherence to an inflation target based solely on the rate of change of consumer prices and ignoring asset price deflation. One of the best comment pieces on macroeconomic policy that I have read in a long time.
“The rigid adherence to an inflation target in a world of constant external shocks may sometimes be more a source of instability than of tranquillity. With sizeable relative price shocks stemming from globalisation, the risks of instability are all the greater. Even worse, if the public thinks that price stability is the only litmus test of economic health, the achievement of low inflation may encourage excessive risk-taking which, in turn, could undermine the achievement of broader economic objectives.”
Our whopping trade deficit!
International trade statistics always come with a health warning atatched to them - the data on the value of exports and imports is frequently subject to future revisions. That said, the ONS released figures today showing that the UK economy ran a current account deficit for the year 2007 of £57.8 billion (-4.2 per cent of GDP), compared with a deficit of £50.7 billion in 2006 (-3.9 per cent of GDP). The rise in the annual deficit was mainly due to a higher deficit on trade in goods and a lower surplus on investment income. A deficit of £46.6 billion was recorded with the EU in the 2007,
compared with a deficit of £39.0 billion in 2006. The deficit on trade in goods was £87.6 billion in 2007, a rise of £10.1 billion compared with 2006. The surplus for trade in services was £38.5 billion in 2007, a rise of £7.4 billion compared with 2006. You can download the data here
I have produced a chart summary of some of the key stats which might be useful when revising the current account with students.
PowerPoint
UK_BoP_2007.ppt
UK migrant flows starting to reverse?
Migrant flows starting to reverse
There are signs that the huge inflow of migrant workers predominantly from eastern european countries which has boosted the effective UK labour supply in recent years is starting to go into reverse.
read more...»UK National Accounts for 2007
The revised 4th quarter national income data for the UK has been published. There is a brief report here. Lehman Brothers have also released a pessimistic forecast for the UK predicting a one-in-three chance of an outright recession.
Now that the data is in I have revised my macro charts for showing the various components of aggregate demand for the UK - I often hand this out to AS macro students so that they can get a feel for the numbers and the difference in scale between for example household spending and capital investment. I have put some of these charts into the accompanying PowerPoint
Components of aggregate demand
UK economic cycle over the last 30 years
Real GDP since the mid 1970s
Macro objectives - growth, inflation and unemployment for the UK since 1989
I hope that these might be useful in macro revision sessions
PowerPoint file
Aggregate_Demand_UK.ppt
US Recession Watch: Hold onto your Hats!
The latest Standard & Poor’s/Case-Schiller house price index shows the biggest year-on-year decline in real estate prices for 21 years. Hold onto your hats - US Treasury Secretary Henry Paulson has come out with some very bearish statements on where the US housing market will head before the worst is over.
read more...»Revision: Commodity Prices and Economic Effects
In recent years we have seen a sharp rise in the prices of many internationally traded commodities such as oil, gas, iron ore, palm oil, rubber, copper and many foodstuffs. This revision note looks at some of the demand and supply-side explanations for this and also covers some macroeconomic consequences for various countries. This five page revision note available in pdf format (below) will also highlight some micro and macro concepts from the AS and A2 specification and offers ideas for scoring more highly using evaluation.
Revision: Household Saving
This revision focus looks at household saving - the decision to postpone consumption
At AS level, changes in the household savings ratio can have significant effects on the level of aggregate demand (in the short term) and also on the funds available to finance investment. There has been a trend decline in the savings ratio in many countries (in the United States, the personal sector savings ratio has touched zero!) and AS economists ought to be able to use an aggregate demand / supply framework to analyse some of the effects for variables such as GDP, employment, inflationary pressures and the balance of payments.
Is the low level of household saving a cause for economic concern in the longer term? if so, what might be done to increase saving? How does globalisation impact on the significance of saving for economic growth? This 3 page revision focus document (available in pdf format) covers some of these issues.
Revision: Innovation
Innovation has been defined by the OECD as “The transformation of an idea into a new, improved product, process or service.” This revision mind map looks at the micro and macroeconomic importance of innovation. Successful innovation can be a driving dynamic of a modern, competitive economy. A range of supply and demand-side policies can be used to foster innovative behaviour. Of key importance is the type of market structure in which innovation within the private sector can be encouraged. We must not forget too the potential for innovation in the public sector and in collaborative ventures between countries.
read more...»Revision: Expectations in Economics
Expectations are forecasts or views that decision makers hold about future prices, sales, incomes, taxes, or other key variables. Our expectations also shape today’s decisions – since expectations can become a “self-fulfilling prophecy.” There is no doubt that expectations play a really important role in determining consumer and business decisions. From speculative behaviour in commodity markets, to the carry trade in foreign exchange and to expectations of changes in tax policy, how our expectations are formed and the factors that might cause them to change matter a great deal. Students can score higher marks for critical evaluation if they bring in the concept of expectations into their discussions.
I have attached a revision mind map in pdf format on expectations in economics. There are many applications of the concept in both AS and A2 micro and macroeconomics.
The mind map includes sections on
Speculative behaviour in markets
Adaptive Expectations
Rational Expectations
Behavioural Economics
Expectations and Government Economic Policy
Expectations of inflation
Microeconomic applications of expectations
Mindmap file
Expectations.mmap
Pdf version of the mindmap
Expectations_in_Economics.pdf
A revolution at the Fed?
The current edition of Business Week has a special on Ben Bernanke’s leadership of the US Fed Reserve. As he drives real official policy interest rates into negative territory, this set of articles is good background reading for students in the UK who want to understand a little more some of the differences in approach between the Fed Reserve and our own Bank of England. How big a risk is the Fed taking that its enormous efforts to inject liquidity into the US financial markets and bolster confidence with aggressive rate cuts, will create further problems down the line?
Revision Mind Map: External Economic Shocks
This is an important topic at A2 and you can also bring in useful ideas in AS macro papers too. A revision mind map is attached together with the original mind map for colleagues who might want to amend and develop further.
Notes to students:
All economies that are partof the global trading system are exposed to one or more exogenous shocks
They can be either demand or supply side
They can be positive or negative in terms of their impact on prices, output, jobs and living standards
It is important to be able to use AD-AS analysis to show some of the effects of shocks
Evaluation is key in these sorts of questions - how large is the shock? is it temporary or longer-lasting?
Consider how policy-makers can respond to shocks and understand the importance of economic flexibility in dealing with the aftermath
External_Economic_Shocks.pdf
Global_External_Economic_Shocks.mmap
Credit Crunch Mind Map
I have updated my mind map on the credit crunch and now made it available to download as a mmap.file. If you have Mind Jet Mind Manager, please feel free to download it and amend if you find it useful.
The_Credit_Crunch.mmap
Zero unemployment - costs and benefits
Over at About Economics.com Mike Moffatt considers whether a zero rate of unemployment, even if it were attainable, might not be a good thing. He argues that “A positive rate of unemployment is the price we pay for technological development and for people chasing their dreams.” It is a good article for revising three of the main causes of unemployment and for thinking about the possible macroeconomic effects when the poll of surplus labour shrinks to a very low size. My AS revision presentation on unemployment is here and my A2 revision presentations are here: (1) Natural rate (2) Philips Curve and the NAIRU
Fed opts to leave a little powder left
It is a sign of the times when a decision to cut (slash) official short term interest rates by 0,75% (taking US rates to 2.25%) comes in below market expectations! The US Fed Reserve has cut the cost of borrowing in a fresh bid to limit the downside risks for the real economy as financial turbulence threatens to dent a huge hole in prospects for the US economy in the coming months. Loads of comment available on this one from virtually every commentator. Evan Davis, the former Economics editor of the BBC was on good form on TV this morning - explaining that cuts in interest rates from the central banks is not really where the problem lies for most consumers. It is the interest rate charged on the lending and borrowing that the banks do between each other which then feeds through into the market for mortgage and other retail loans.
One of the keys to coming out of this crisis will be for banks to recapitalise and improve their own block of funding before they start lending out again. In short, the banks need to attract fresh injections of capital - perhaps from encouraging more of us to save and also from external sources such as the petro-dollars being held by the sovereign wealth funds. Confidence in the different pieces of the financial system is ebbing away - stabilising the markets is the immediate issue and the problem.
Data charts on US and UK interest rates
US_Rate_Cut_March_2008.pdf
UK_Interest_Rates.pdf
Suggested links on the US rate cut
Mind Map: Credit Crunch
Our A2 macro group mind-mapped the Credit Crunch in a lesson on Friday, a text summary appears below and the original map is also available as a pdf file.
read more...»New Labour’s Economic Dream turns to Nightmare?
The Sunday Times offers an article which suggests the public’s perception of New Labour’s economic policies are turning decidedly sour.
“By 78% to 12%, voters think that the government wastes large amounts of money and is not trying to do anything about it,” according to David Smith.
read more...»Yuan’s World
Countries running gigantic trade surpluses must take some responsibility for rebalancing the world economy by raising their own domestic demand for goods and services. That was the message I took from a speech on the balance of payments given last week by John Gieve, deputy governor of the Bank of England. In a talk to the Sovereign Wealth Management Conference in London. Mr Gieve argued that stronger action is needed to correct some of the deep rooted balance of payments imbalances in the world economy and that sovereign wealth funds will have an increasing role to play by boosting investment in their domestic economies to close some of the gap between domestic savings and investment.
Some key points from his speech are given below:
read more...»ECB inertia threatens the slow lane
Central banks in the USA and the UK are cutting interest rates as credit crunch 2.0 takes hold. But the European Central Bank is holding firm with official rates at 4 per cent despite mounting evidence that the surging Euro-dollar exchange rate is hitting investment, exports and growth prospects. Why the inertia? And is the ECB so firmly fixated on the altar of price stability that it is prepared to allow the Eurozone economy to tumble into a growth recession thus putting the future of the single currency area under theat?
read more...»US and UK inflation
Latest data on inflation suggests price rises are dampening in the US - opening the door for further rate cuts.
But in the UK there are fears that sustained inflationary pressures will prevent the Monetary Policy Committee of the Bank of England reducing the base rate until at least the summer. Geoff looked at this in detail earlier in the week.
read more...»Adaptive expectations?
For over ten years the Bank of England has been keen to manage expectations of inflation. It knows that if people fear a return of high rates of price inflation, they will factor that into their wage demands and there is a risk that the price stability we have enjoyed for fifteen years or more might be under threat. That would make the setting of interest rates even more complicated than normal, particularly given the current economic uncertainties at home and abroad.
With that in mind, the latest quarterly survey of price expectations published by the bank does not make happy bed-time reading for the Governor. Expectations of future inflation rose to 3.3 percent in February - the highest since the Bank started to publish the survey in 1999 and (importantly) more than a percentage point above the actual rate of CPI inflation.
Perhaps this survey is an example of adaptive expectations at work. Families see the rising cost of living every time they go to the supermarket, fill their car with diesel or check their quarterly energy bills. More people than ever before are discovering that the official measure of inflation (the CPI) bears little resemblance to the inflation they feel. The RPI inflation rate which includes housing costs, is much closer to their day-to-day experience.
It might be that we are unduly influenced by the prices we see around us and those highlighted in news broadcasts and on the front pages of the papers. Behind the scenes, the prices of audio-visual products continues to fall, as does the retail prices of clothing and second hand cars!
Whatever the cause, the reality is that rising expectations of inflation will make it more difficult for the MPC to sanction aggressive cuts in interest rates if and when the economy moves into a sharper than expected slowdown.
Credit Crunch in 3:07
I teach a General Studies course on Friday mornings and will be looking at the credit crunch and the link between financial and economic crises tomorrow.
read more...»Revision Focus: Export Performance
Explain the factors which may help to determine an economy’s export performance (20 marks)
A revision note on some of the factors that shape the growth of exports for an economy
read more...»Stormy Weather
The UK has been battered by uncomfortable and volatile conditions and fears over damage to property this week - and the weather has been awful as well.
When it rains, it pours, and this is as true for the macroeconomy as anything else.
read more...»Robert Frank on Income and Happiness
One of my favourite authors, the ‘Economic Naturalist’, Robert Frank writes about real incomes and happiness in today’s New York Times. He makes the point that “findings suggest that relative income is a much better predictor of well-being than absolute income” and the article is excellent for students wanting to know a little more about the problems in adjusting for price changes in the economy when trying to capture real improvements in living standards.
“Since the mid-1970s, however, income growth has been confined almost entirely to top earners. Changes in per-capita G.D.P., which track only changes in average income, are completely silent about the effects of this shift. A society that aspires to improve needs a better measure of what counts as progress.”
See: Income and Happiness: An Imperfect Link
Commanding Heights online
The Commanding Heights is a 6 hour, 3 DVD resource (and also a book) and the website has a huge amount of material which is useful for putting economic theory into context and also a great source of short video clips on globalisation and 20th Century economic history.
Excellent for getting across a historical perspective on some of the big issues in economics.
Recession Watch: American Idle
Economists in the United States pay a lot of attention to the monthly payroll numbers and the latest set of figures are being taken as a sign that recession is more or less a done deal in the USA.
read more...»
