Warning - Businesses at Risk from Economic Recovery
An excellent recent article in the ACCA magazine examines an interesting phenomenon - more businesses collapse at the beginning of a recovery than during the depths of a recession. Its all to do with working capital…
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13% fall in household wealth will shape any 2010 rebound
One key reason to expect a more subdued recovery from the downturn is that the household sector in the UK has suffered a huge negative wealth effect over the last couple of years. Asset values have fallen but outstanding debts have not and it is this imbalance that will shape the nature of any rebound in consumer demand for goods and services even though the cost of borrowing is at unusually low levels. The National Institute has done some research on the negative shift in personal sector wealth and it is reported in this article in the Telegraph.
Classroom Activity - Economic Cycle in Pictures
Here is a great starter activity that gets students thinking about what can happen at each stage of the economic cycle. The idea was created by Ruth Tarrant who will be presenting at our November conference at the Moller Centre Cambridge University and I have developed it a little further with some additional images. There are twenty six - an A to Z of images associated with different stages of the business cycle.
read more...»Gloomy summary
Here is a summary of four reports posted on the Business and Economics sections of the BBC News website over the last few days. Be warned - none of them are particularly hopeful, the green shoots of summer giving way to autumn mists.
The UK Economy - a Long Run Perspective
We tend to focus on short run changes in output, jobs, prices and profits and risk missing the long term picture of where an economy is. A year ago I produced this chartroom presentation as the UK economy entered recession - this has now been updated and might be useful for colleagues helping students develop an appreciation of the long-run trends in key UK economic data. It is available for download in pdf and scorn-compliant VLE format.
Launch streamed revision presentation on the Long Run Perspective
Download SCORM-compliant VLE ZIP version
Download printable pdf handout version
Are the Japanese the latest victims of a strengthening currency?
The Japanese Yen has hit an eight month high vs the US Dollar according to BBC news BBC News Article. This has prompted a lot of hand wringing from the Japanese ruling party and has sent share prices in Tokyo tumbling. But why should having a strong currency against the greenback equate to economic turmoil?
Paul Mason on Economic Aftershocks
Newsnight’s Economics Editor Paul Mason was on fine form last week with a set of short reports on how the economic and financial crisis has affected the UK and Global economy. Both are between five and six minutes long and I showed them to my A2 students as a prompt for discussion and also to an able AS set who are still dipping their toes in the macroeconomic waters! The features allowed us to discuss (at AS level) the inter-connected nature of the world economy (for example the need to re-balance demand and trade between the USA and China) and also to consider the reasons for and consequences of the huge rise in public sector spending and borrowing.
For AS economics I have deliberately left introductory stuff on the circular flow until we have kicked around ideas and arguments about the recession - causes, effects and ways out of the downturn.
Here are the links to Paul Mason’s three video reports from last week:
Aftershock - Impact on the World
Aftershock - Has ideology changed?
More ‘Aftershock’ resources
The ‘Aftershock’ section of the BBC website continues to come up with good stuff about causes and effects of the credit crisis and recession.
If you missed the first part of their 3-part documentary series ‘The Love of Money’ you can still watch it on BBC i-player, and it is well worth doing so as it examines the collapse of Lehman Brothers and the consequences for the world’s economy.
Now they have two interactive features examining the way in which national debt has built up during the bail-outs covered by the programme, one focussing on the UK economy, looking at how a total of £1.5trn, or 94% of GDP, has been spent. One of the slides here estimates that in 2014 taxes will have to cover £60bn in interest payments on that debt alone, equivalent to the entire budget for education for the year, or over 50% of the spending on the NHS.
The second looks at the breakdown of bail-out debt around the world, adding up to £10.8trn, and includes an analysis of shrinkage in the global economy and the wealth effect on homeowners and pensioners.
Both could be useful not only in reminding A2 students of the events of the last year and their potential impact on the economy but also introducing AS students to the macroeconomic aspects of The Economic Problem, as resources are going to be very scarce indeed in the next few years, and choices about which needs and wants should be satisfied will be key economic and political debates.
Keynes and the Multiplier Effect
I am cross-posting Jon’s excellent blog on Keynes and the multiplier over at his excellent IB Blog that flags up some handy recent articles on this important macro policy concept:
The Telegraph continues with it series of extracts from Edmund Conway’s new book and today it focuses on the twentieth centuries greatest economist John Maynard Keynes.
In its simplest form Keynesianism argues that governments should be proactive during economic downturns rather than relying upon the power of the markets and interest rate cuts. Proactive in the sense that the government should borrow money and start spending. The doctrine lost favour in the 1970s as monetarist theory gained popularity. As you will be well aware Keynes has returned in earnest over the past 18 months as governments across the globe have pumped billions into the spluttering economies in the hope of restarting them. Although early days there are tentative signs that Keynes may have be right once again.
Key to his argument of the effectiveness of pumping money into an economy is that of the multpier. Conway provides an excellent overview of the multiplier in his piece today:
Say the US government orders a $10bn (£6bn) aircraft carrier. You might assume the effect of this would be merely to pump $10bn into the US economy. Under the multiplier argument, the actual effect would be bigger. The shipbuilder takes on more employees and generates more profits; its workers spend more on consumer goods. Depending on the average consumer’s “propensity to consume”, this could raise total economic output by far more than the amount of public money actually injected.
If the $10bn increase caused total United States economic output to rise by $5bn, the multiplier would be 0.5; if it rose by $15bn, the multiplier would be 1.5.
The article also provides some good points that students could use when being critical of fiscal policy (these were particuarly prevalent when monetarists were arguing against Keynesianism in the 1970s):
One of their main arguments was that governments cannot “fine-tune” an economy by regularly adjusting fiscal and monetary policy to keep employment high. There is simply too long a time lag between recognising the need for such a policy (tax cuts, say) and the policy taking effect. Even if policy-makers speedily identify the problem, it takes time for laws to be drafted and passed, and more time still for the tax cuts actually to drip through the wider economy.
There are a couple of recently published books on Keynes that you may want to get your teeth into:
Keynes: Return of the Master by R Skidelsky
Keynes: The Twenthieth Century Most Influential Economist by P Clarke
Hysteresis
This recent article in the Financial Times discusses how the world recession may have severe long-term effects on the UK economy, exhibiting strong hysteresis effects.
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