Ricardo Rules OK?

This week’s newspaper headlines have been dominated by the £2.7 bn tax bribe (whoops .... tax adjustment) announced by the embattled Chancellor Alastair Darling to compensate for the fiasco over the abolition of the 10% starting rate of income tax. The FT this morning linked the economic effects of this tax cut to one of the most celebrated and controversial ideas of moden macroeconomics - Ricardian equivalence theory ..... how sexy does macroeconomics get!

Mervyn faces the Music

The Governor and his colleagues faced the press yesterday at the launch of the quarterly inflation report .... here is a selection of comments from them from questions fired from economics journalists, there is some great evaluation in here for AS and A2 economics students!

Does a current account deficit matter?

Yes according to economist Roger Bootle writing in the latest edition of the Deloitte Economic Review and reported in this article from the Financial Times.

“Britain is headed for its highest peacetime current account deficit and both household and government spending will have to slow painfully to correct it, according to economist Roger Bootle”

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

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.

Saving_Revision.pdf

Getting real…?

Despite continuing problems in the financial sector, UK consumers are defying the odds and doing what they know best - shopping.

Merit and De_Merit Goods

We had an interesting brainstorming session in our AS micro today! We wanted to discuss which examples of consumption and/or production deserved the sobriquet of merit or de-merit goods. The point was made very early on that what each of us regards as socially beneficial or socially damaging depends very much on our own value judgements. And the other aspect of merit and de-merit that we emphasised was the ever-present issue of information failure. Just today there was an article in the Telegraph about how ”taking aspirin can cut breast cancer risk by 20%” and at the same time, we know the risks of addiction to painkillers and other treatments.

This was the list of merit and de-merit goods that my two groups came up with - fuelled it has to be said by a plentiful supply of mini doughnuts and chocolate cookies from Sainsburys! I used this as an example. We wanted to test doughnuts and consider their social benefits (!) but the plastic packaging and waste we created also has a social cost. I have linked to some relevant BBC news stories as well.

The London Pollution Charge

The London Congestion Charge is to tax more highly polluting vehicles more in a bid to reduce pollution. From October 2008, drivers of many sports cars, MPVs and 4x4s will pay £25 per day rather than the current level of £8. In addition, the charge will be abolished for the lowest polluting vehicles.

The Congestion Charge is generally regarded as a success, and environmental groups are applauding the new structured charge as an effective way of shifting drivers of ‘gas guzzlers’ into cleaner cars or onto public transport. The CC is a hypothecated tax in that the revenue it raises is, in theory, used to fund improvements to public transport.

What, exactly, does the CC aim to achieve? It is called a congestion charge, but the new structured tax appears to be more focused on reducing CO2 emissions. So should it really be called the Pollution Charge?

Is the Smoking Ban Working?

There are signs that the ban on smoking in public places that was extended to England and Wales last summer is having an effect on the number of people trying to kick the habit. The information Centre for Health and Social Care released data today which said that nearly 165,000 smokers managed to kick the smoking habit in the summer of 2007 with the help of NHS Stop Smoking Services - this is a 28 per cent increase in the number of successful quitters.