Unit 2 Macro: Cyclical and Structural Economic Issues Facing the UK
Our focus in an AS macro revision session was on the difference between cyclical issues and events and the wider / deeper structural problems and issues facing the UK economy at this fascinating time. Key macro policy decisions affect the path of an economy out of recession, but are these the same policies that will address the supply-side constraints and weaknesses that hold back growth, development and contribute to growing inequality?
read more...»Unit 2 Macro: Evaluation on Supply-Side Policies
Lots of students will be revising the economics of supply-side policies this week with their AS macro paper coming into view. There are different interpretations of what constitutes a supply-side policy measure. I like to label SSP (supply-side policy) to any policy or group of measures where emphasis is given to improving the working of markets, raising factor efficiency, improving the quantity and quality of labour and in lifting the capacity and competitiveness of an economy in a constantly-changing international environment.
Many supply side policies focus on improving incentives and outcomes in the labour market, others are geared towards bettering the performance of markets for goods and services, All of them centre on helping to sustain non-inflationary growth, improve trade performance, lift living standards and create new and fulfilling jobs opportunities.
This revision blog looks in particular at some evaluation points on supply-side approaches:
read more...»Unit 2 Macro: Real Interest Rates
The real rate of interest is important to businesses and consumers when making spending and saving decisions. The real rate of return on savings, for example, is the money rate of interest minus the rate of inflation.
So if a saver is receiving a money rate of interest of 6% on his savings, but price inflation is running at 3% per year, the real rate of return on these savings is only + 3%.
Real interest rates become negative when the nominal rate of interest is less than inflation, for example if inflation is 5% and nominal interest rates are 4%, the real cost of borrowing money is negative at -1%.
read more...»Unit 2 Macro: Bank Cuts UK growth Forecast for 2012
The quarterly Inflation Report is an opportunity for the Bank of England to flesh out their latest forecasts and thoughts on the direction of the UK economy and it is safe to say that the May report will probably be best remembered for a remarkable statement from the Bank of England Governor Mervyn King.
“We have been through a big global financial crisis; the biggest downturn in world output since the 1930s; the biggest banking crisis in this country’s history; the biggest fiscal deficit in our peacetime history; and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution. The idea that we could reasonably hope to sail serenely through this with growth close to the long-run average and inflation at 2 per cent strikes me as wholly unrealistic.”
In short:
* Economic growth for 2012 - forecast has been cut to just 0.8%
* Consumer spending will continue to fall this year as real living standards for millions of people are squeezed
* The rising cost of borrowing in the wholesale money markets is increasing costs for banks and is putting upward pressure on the price of business loans and mortgages
* Now sees significant chance of negative annual GDP growth in 2012. Raises near term inflation forecast - CPI inflation inflation to fall back to target before the middle of 2013
* It may take a long time to get the UK economy back to previous growth / inflation paths: ““There’s no obvious reason to believe we can’t get back to original path [of economy pre-crisis] but may take 10/15/20 years” - a realisation of the severity of the shock to the global financial system and the aftermath
* Weak growth forecasts for 2012 assumes that there will not be a collapse / breakup of the single currency
Bank governor warns of eurozone crisis ‘storm’
Bank of England warns of euro crisis ‘storm’ (BBC news video)
A sticky wicket for the Bank (Stephanie Flanders)
Bank of England Inflation Report Data Sections
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Improving Evaluation Skills in Economics Exams
Here is an updated version of the WEESTEPS approach to economics evaluation designed to boost the evaluation scores and exam results for AS and A2 students. Paul Bridges is the mastermind behind this superb approach to evaluation - it gives you some great pointers about the evaluative approaches that can be used. Works well for micro and macro - but particularly when you have to evaluate a specific policy intervention in a market / industry / or a macro policy discussion.
read more...»Eurozone Crisis - Lessons Learnt
Last week I attended a very interesting lecture at the LSE on the Eurozone crisis, given by Leszek Balcerowicz, a Polish economist who is former chairman of the National Bank of Poland and Deputy Prime Minister.
The following blog outlines his thoughts, but also includes useful links to articles to read.
Using the crisis as a case study will hugely benefit A2 students as it encompasses many of the topics covered in the syllabus.
Grexit - Andrew Balls on Greece and the Euro
Following on from Ben Christopher’s article, a BBC Radio 4 interview with Andrew Balls, an investment fund manager, and younger brother of The Shadow Chancellor on the possibility of a Grexit - Greek exit from the Euro.
read more...»Unit 2 Macro: Exchange Rates Glossary
A short glossary covering concepts relevant to exchange rate economics
read more...»Unit 2 Macro: Monetary Policy and Inflation Glossary
A selection of key terms on monetary policy and inflation
read more...»Unit 2 Macro: Economic Cycle Glossary
A short glossary of key terms connected to the economic cycle
read more...»Unit 2 Macro: Revision on Interest Rates and the Exchange Rate
The exchange rate measures the external value of sterling in terms of how much of another currency it can buy. E.g. in July 2011 £1 would buy you $1.65 and Euro 1.17. The daily value of the currency is determined in the foreign exchange markets (FOREX) where billions of $s of currencies are traded every hour. The value of the pound in the currency markets depends in how strong is demand for the currency relative to supply
Many factors affect the external value of one currency against another and one of these factors is the level of interest rates in a country compared to other economies. Money moves around the world economy seeking the best risk-adjusted rate of return. The rate of interest available on deposit in the banking system of a particular country is a factor that might drive what are known as “hot money” flows into and out of a particular currency.
read more...»Beyond the Bike - Monetary Policy in Africa
When my old boss told me that observing UK inflation flying above 3% would be an exciting moment in my career as an economist in London, I knew it was time to leave. Most African policymakers, meanwhile, would be delighted to see single digit inflation. I’ve discussed the challenges of formulating monetary policy as well as for the broader economy with two central bankers en route so far…
Brian Khan sits on the South Africa Reserve Bank’s (SARB) Monetary Policy Committee. A former academic at the prestigious University of Cape Town, he kindly agreed to see me at the SARB’s Pretoria HQ before I set off in July last year. Stephen Kabayo, meanwhile, is head of financial markets at the Bank of Uganda (BoU). A long term stalwart at the Bank, his career spanning 3 decades, I spoke to him & his head of research Jimmy Appa in Kampala earlier this month.
Author with Brian Khan (July 2011). Questions over ID of author at BoU, Feb 2012.Stephen Kabako at BoU – I had spoken at his son’s school the day before; Jimmy Appa in the Monetary Policy Committee Room
read more...»Did the Bank of England cause the boom and bust?
What contributed to the boom and bust?
Many answers might focus on the reckless behaviour of lenders and borrowers; or irresponsible fiscal policies set by politicians who believed that the days of boom and bust were over. But to turn the question on its head, you could ask if “to what extent did Central Banks play a part in the debacle”?
read more...»Unit 4 Macro: Evaluating 3 Years of Quantitative Easing
It is now over three years since the Monetary Policy Committee of the Bank of England cut policy interest rates to 0.5% and subsequently introduced a policy of quantitative easing (or an asset purchase programme) now worth £325 billion.
These have been difficult times for the Bank. The average rate of CPI inflation since 2008 has averaged 3.5% - well above the official target - and the Bank has faced pressures from many sectors of the economy not least the millions of pensioners and other net savers whose incomes have been dragged lower by this period of ultra-low interest rates.
Has conventional monetary policy lost its effectiveness in the aftermath of the global financial crisis? Bank lending continues to fall, consumer and business confidence is fragile, many people have seen interest rates on unsecured credit rise not fall, and the depreciation of sterling seems to have had a muted expansionary effect on demand, profits and jobs.
Here are a few evaluation slides on Monetary Policy and the Bank of England from our recent A2 macroeconomics revision workshop together with some links to recent news reports on the Bank of England’s strategy and the impact of policies such as QE.
read more...»Unit 2 Macro: Policies to Drive Economic Recovery
We were looking today in AS macro at the policy options being considered as part of a strategy to drive a stronger recovery in demand, output, jobs and investment in the UK economy.
I am trying to encourage my students to put things into context as soon as possible in their longer essay-style questions. Here are some thoughts on a question on policies designed to bolster growth:
read more...»Economies hooked on central bank stimulants?
Three years ago Andrew Sentance was one of the 9 members of the MPC who voted for the extraordinary measures of bringing base rate down to 0.5% and creating the new stimulant of Quantitative Easing in an attempt to bring the economy around. In today’s Sunday Telegraph he recalls why he voted for them at that time, and explains why he thinks that they must be gradually withdrawn now from an economy which has become dependent on them for its survival.
read more...»Mortgage interest rates, LIBOR and game theory
This morning’s headline on BBC Breakfast was the news that yesterday RBS raised the interest rate on three of its mortgage products by a quarter of a percent to 4%. Three days ago the Halifax wrote to its mortgage holders saying that it intends to raise the cap on its Standard Variable Rate (SVR) to 3.75% above base rate, rather than the current 3%. As the Telegraph reports, although this doesn’t guarantee that Halifax would raise the rate itself, brokers”… believe otherwise and suggested that this would soon happen for a million Halifax borrowers” – and the BBC are now reporting an expectation that the Halifax will announce a rise in the SVR with effect from 1st May. For A level economists this story has several implications.
read more...»Unit 4 Macro: King on the UK Economy
Here are some notes from watching and listening to the Bank of England Inflation Report press conference. As always there was much for students of macroeconomics especially those keen to pick up some of the key thoughts of policy makers as we strive to achieve a sustained recovery.
read more...»Evaluating the effect of Quantitative Easing - A Case Against?
The effect of QE on savers is examined here in this excellent video and studio discussion led by Faisal Islam, the Economics Correspondent at Channel 4 news. Those households that don’t borrow are less interested in sustained low interest rates. One significant effect of QE and the decision to keep the base rate at 0.5% is to effectively eliminate the returns to saving. Is the policy worthwhile?
read more...»Stephanie Flanders explains Quantitative Easing in 60 seconds
This has to be amongst the best 60 seconds of Economics you’ll ever see on television. The superb Stephanie Flanders takes a leaf out of the RSA playbook to explain the basic theory behind quantitative easing. Wonderful!!
read more...»The impact of interest rates
The US economy may have grown at nearly 3% in the last quarter of 2011, but the Federal Reserve announced last week that they do not expect to raise interest rates until the end of 2014. It has cut its growth forecast for 2012 from 2.5-2.9%, to 2-2.7%, and says that the economy faced “significant downside risks” and that it “expects to maintain a highly accommodative stance for monetary policy” - which I take to mean expansionary.
This article about that interest rate decision is useful for economics teachers and students as it highlights a couple of results of that announcement; firstly that the dollar’s exchange rate immediately lost value as the interest rate made the US a less attractive place to keep cash, and secondly that government benefited as the cost of its borrowing in markets for 10 years fell from 2.06% to 1.94%, as traders priced in the lower medium-term interest rate expectations.
Unit 4 Macro: Money, Debt and the New World Order
“All money these days is really a form of debt from somewhere else. We know now in 2012 that our debts cannot be repaid in full.”
Philip Coggan from the Economist was on fine form at the LSE last week when he spoke to a packed audience in the new academic building on the subject of his latest book. When trust in the monetary system breaks down we are in a very difficult place and, in a wonderfully broad historical sweep Philip Coggan offered some revealing insights into what a reformed global monetary system might look like in the years ahead.
read more...»Unit 2 Macro: Quantitative Easing in the UK
On 11th March 2009 the Bank of England started a policy of quantitative easing. QE is also called an ‘asset purchase scheme’. It was extended to a total of £275 billion in October 2011 and is likely to be expanded further during 2012.
Other central banks have introduced quantitative easing in recent year through huge purchases of government bonds. Indeed the economist Gavyn Davies, writing recently in the Financial Times has calculated that “around one half of the bonds issued to fund the budget deficits of the US, UK and eurozone since 2008 have been acquired by the Fed, BoE and ECB.”
This is a remarkable change in the conduct of monetary policy in advanced nations.
Unit 2 Macro: Revision Quiz on Monetary Policy
Here is a ten question revision multiple choice revision quiz on monetary policy designed for students taking AS macroeconomics (unit 2). The quiz has been created using the free software Zondle.
read more...»Unit 2 Macro: A New £50 comes into circulation
This short BBC news video looks at the revamped £50 note - a terrific short piece on the new note and some of the innovation built into the design to reduce the risk of forgery.
Australia lowers interest rate to 4.5%
The Reserve Bank of Australia (RBA) has cut interest rates from 4.75% to 4.5% in a bid to boost growth amid fears of a slowdown in the global economy (the BBC article can be found here). This could be a useful case study to use with AS macro-economists when studying monetary policy so I have clipped the article and added a couple of questions onto this document to test analysis and evaluation of interest rate changes.
Top 10 resources on inflation on YouTube
What follows is a list of the ten video clips I use when teaching inflation as a topic.
They are a mixed bunch. Some are useful for class use, others work as pointers to a series of video clips from one producer. What I’ve tried to avoid, however, are links to the teach yourself Economics resources (though obviously they have their place) that are out there.
read more...»Unit 1 Micro: Copper prices and a copper crime wave
This Fact Check piece from the Channel 4 web site is superb background on the growing scale of copper thefts and also the economics of incentives when it comes to crime. One to read perhaps if and when your train home is delayed because local hoodlums have lifted some copper wiring from Network Rail! According to the feature, “At its peak of $10,000 a tonne in February 2011, copper was worth more than seven times what it was in 2001 – $1,425 a tonne, according to figures from the London Metal Exchange.”
FactCheck: Why copper theft is the perfect crime
Unit 1 Micro: Rice market intervention
A good example to discuss of government intervention into agricultural markets - in this case Thailand’s government have intervened in the market to buy unmilled rice at 15,000 Thai baht per metric tonne, which is a 50% premium on the current market rate. A good discussion of the possible impacts can be found, with a discussion of the economic rationale/consequences of it, here.
Will Jean-Claude Trichet be missed?
JCT is no longer president of the European Central Bank and he leaves, after eight years at its helm, with as many detractors as there are supporters. The ECB is widely perceived as being ‘genetically’ close to the German
Bundesbank following the neo-classical school where inflation is the route of all problems and so needs to be controlled no matter the cost.
