Happiness (or subjective well-being) in the spotlight
Macroeconomists are in the dog-house but behavioural and welfare economists are in the acsendancy as policy focuses on ways in which we can nudge people to healthier lifestyles and away from an age of excess. A new survey finds that people seem to get happier as they age. And Tim Harford writes about the growing emphasis being given to aspects of welfare economics in today’s Sunday Times
“Silly or sobering, happiness economics is in the ascendancy. The economists conducting this research have influence in high places. Lord Layard, the patron saint of happiness economics in the UK, is a Labour life peer. Alan Krueger, an economist who has been working with Kahneman and Schwarz, has been made a senior Treasury official by President Obama. Before his nomination he was working on a method for producing “happiness accounts” for the United States.”
Don’t forget to pack Tim’s new book for the beach ..... it is a super read
Revision - Labour Market Failure (presentation)
Here is a revised streamed presentation on market failure in the labour market
read more...»Revision: Short Note on Government Intervention
A short two pager on evaluation when discussing different forms of government intervention in markets - designed for AS micro
AS_Micro_Govt_Intervention_Evaluation.pdf
Revision: Contestable Markets
Understanding the nature of contestable markets is crucial to answering theory of the firm questions for the AQA Unit 5 paper. Many students confuse contestable markets with perfect competition - they are different and this revision note attempts to focus on some of the key aspects of contestability.
read more...»Q&A: What is the Easterlin Paradox?
The Easterlin Paradox concerns whether we are happier and more contented as our living standards improve. In the mid 1970s Richard Easterlin drew attention to studies that showed that, although successive generations are usually more affluent that their parents or grandparents, people seemed to be no happier with their lives? It is an interesting paradox to study when you are writing about measuring economic welfare and the standard of living.
read more...»Bootle on Deflation
Roger Bootle’s quarterly Deloitte Economic Review rarely disappoints and the new edition which is available here provides a timely and crystal-clear explanation of the demand and supply-side factors that might bring about price deflation in the UK economy during 2009 and into 2010.
Seven forces are raised as contributing to downward pressure on the general price level
1. The sharp fall in global food and energy prices
2. Intense competition amongst retailers such as deep-discounting to maintain cash flow and market share
3. The impact of the temporary cut in VAT from 17.5% to 15%
4. Falling housing costs including lower mortgage interest repayments (which affects RPI inflation)
5. The lagged effects of a large margin of spare capacity in the economy due to the negative output gap
6. Downward pressure on basic pay settlements and average earnings - how many people will take pay cuts this year?
7. The sustained and persistent decline in asset prices with consequences for consumer confidence and aggregate demand
For AS students - consider how these forces might be explained and illustrated using AD and SRAS analysis.
The risks of price deflation are not insignificant, indeed as Bootle points out, price deflation might have been rare during the latter part of the twentieth century but we have had plenty of instances of it in the UK in earlier ages.
What of the likely consequences of a bout of price deflation?
Some of the forces mentioned above are indeed likely to be temporary (the VAT cut is reversed in 2010) and some will have favourable effects on real income and spending power. But the consensus seems to be that deflation can have a pervasive and damaging effect on the real economy:
1. A rise in the real value of debts - personal, corporate and state
2. A change in the psychology and expectations of businesses and consumers
3. Second round effects including pressure for wages to fall and output to be cut back further
4. The possibility that the usual instruments of monetary policy become ineffective
5. Consequences for welfare benefits - will the government cut unemployment and state pensions in a world of deflation?
6. The damaging effects on the corporate sector of falling prices and profit margins
Sterling’s continued depreciation perhaps holds out the best hope of avoiding deflation this year as does a partial rebound in the price of oil and gas and other inputs. Bootle predicts that - having cut policy interest rates to the bare bones of 1.5% - the Government and Bank of England are likely to resort to further emergency measures to prevent a Japanese-style deflationary spiral.
Apprenticeships and Economic Performance
My Monday morning edition of the Financial Times carried an important article on the prospects for apprenticeships during the economic downturn. The broad thrust of the piece was encouraging - a number of Britain’s biggest companies have said that they do not plan to curtail the number of apprenticeship programmes on offer to school and college leavers. It is not simply a case of altruism - a number of studies have shown that investing in the human capital of the workforce can achieve a positive payback in just a few years.
“Recent studies have shown that investing in an apprentice is often cheaper than recruiting qualified workers from rivals and then having to retrain them in the procedures of their new employer......BT had “calculated a net financial benefit of over £1,300 ($1,910) per apprentice a year when compared with non-apprentice recruitment”......A more recent study by Warwick university for the taskforce’s successor, the Apprenticeship Ambassadors Network, found that it cost £28,762 to train an engineering apprentice but the “employer’s investment was, on average, paid back in less than three years”.
Why is the success of apprenticeship schemes important for the longer-term health of the UK economy? Many of the benefits of vocational programmes show through on the supply-side of the economy:
A lower risk of structural unemployment through lower occupational immobility
Less pressure on the welfare benefits system resulting from long term unemployment
A reduction in the number of unfilled vacancies for skilled workers
Higher productivity and better paid jobs - which then boosts aggregate demand
Ultimately - higher profits for businesses with successful apprenticeship schemes
Reduced dependence on inflows of migrant workers
Better skilled workers will improve the quality of work and provide a stronger platform for greater innovation in their chosen fields
Improved customer service e.g. in industries such as gas supply, plumbing and construction
The FT article can be found here
The website of the Apprenticeship Ambassadors Network is also worth visiting
Contestable Markets – The Market for Smart-Phones
In AS microeconomics the examiner may set you a question about the effects of a new supplier entering a market. There are also frequent questions on the costs and benefits of competitive markets compared to industries dominated by a monopolist or a handful of new firms. In A2 economics, contestable markets form an important part of your study of the theory of market structures, economic welfare and efficiency.
Tim Weber, Business editor of the BBC News website has written a superb article on the competitive pressures building inside the mobile phone market – “as the market for high-end mobiles gets ever more crowded, which should you pick?” – this is a classic tale of a market space become evermore congested as the likes of Apple, Microsoft, Research in Motion and Symbian (developers of the software that run most of Nokia’s smart-phones) compete with each other for a share of the lucrative corporate and personal sector market.
It is a market where performance, functionality, speed and reliability of access, look and feel of the hardware and the length of battery life are all important non-price factors influencing consumer preferences. Price is significant – and the article makes reference to the need to attract heat-seekers or ‘early adopters’ – consumers who are willing to pay a premium price for being among the first to be seen using a new piece of kit.
Despite the obvious barriers to entry for new participants, the smart-phone market is increasingly contestable even though it is dominated by a handful of major players. The increasing use of open-source software has helped to make the battle for market dominance a more intense affair.
Far from being geeky, this is an article that gives you a super case study in how the existing operators are competing with each other. How will the market for smart-phones be affected by the recession?
The article is available here:
Regular articles on the economics of contestable markets appear on my blog here:
SPEW
A hat tip to a fellow presenter on our revision workshops in London whose acronym to remember some of the effects of monopoly power in markets struck a chord with me
SPEW
Service - does the lack of competition affect the quality of service to consumers?
Prices - how high are prices compared to competitive / contestable market
Efficiency - productive, allocative and dynamic
Welfare - what are the overall welfare outcomes? Is there a net loss of welfare in markets dominated by businesses with monopoly power?
Are there anymore useful revision acronyms out there that you use? Please share them via the blog!
Could the UK budget deficit reach £100bn?
The government announced this week that it was borrowing money at a record rate of over £200m a day. Over the last six months, the budget deficit (the difference between government spending and tax revenues) was a staggering £37.6bn - the largest since records began in 1946, when Clement Attlee was prime minister. In September alone the government ran a fiscal deficit of over £8bn.
For the current fiscal year the British government has forecast a budget shortfall of £43bn. This will be impossible to achieve and the likely out-turn will be £65bn or more. But what worries many commentators is that the worst is yet to come. Can the budget deficit reach £100bn?
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