Unit 1: Agriculture in the news again...

This could very esasily be a case study question in a Unit 1 paper....questions they may ask can be found at bottom of this post!

This is a superb BBC news report on the rising demand for and prices of potash.



Potash is shorthand for potassium carbonate - a potassium compound often used in agriculture and industry. Potash is the third major plant and crop nutrient after nitrogen and phosphate and the vast majority of the annual global supply is used as a soil fertilizer. It is a product with virtually no close substitute making the demand insensitive to the ruling market price - the price elasticity of demand for potash is very low and high prices make the product hugely profitable to supply


There are several factors coming together at the same time to explain a rising demand for fertiliser across the world.

Firstly, much of the world’s existing farmland is under-fertilised and the world’s demand for food is likely to grow strongly in the years ahead because of rising global population and the higher demand for meat especially in the developing world. Global population is expected to rise by more than 800 million in the next decade, the majority of which will be people in developing nations living in urban areas.

Keep in mind that it takes about 8kgs of grain to produce a kilogramme of beef - little wonder that there will be increased demand for grains from livestock farmers.

The supply of arable land has come under pressure from urbanisation and a shift of farm land away from food production towards growing bio-fuels. So the long term importance of fertiliser in boosting agricultural productivity is set to rise and this has been a key factor driving the demand for and the price of potash ever higher

On the supply side of the market - global potash supply is limited - only 12 countries around the world supply it with the majority of production flowing from Canada, Russia and Belarus. Canada and the former Soviet Union account for 80 per cent of reserves and two-thirds of production. And Potash Corp on its own is already responsible for more than 20 per cent of global production. All three countries set their supply prices using an industrial alliance - controlling exports and keeping prices relatively high.

Extending capacity in the potash industry is difficult - each potash mine takes at least seven years to build, compared to less than two for other types of fertiliser. One market analyst has been quoted as saying that “Potash has the highest barriers to entry and is found in the fewest countries”. The market is highly concentrated - it is effectively a duopoly

Supply contracts for potash deliveries aren’t listed on an international exchange. But if BHP Billiton is successful in acquiring Potash Corp - it may opt to move the potash market away from the duopolistic cartel that controls prices towards a market-based pricing system where the daily price for potash can fluctuate in spot trading. Whether this leads to higher prices in the medium term will depend on the balance between global supply and demand

Possible questions:

Using a Supply & Demand diagram explain why the price of Potash has increased? (6)
What does the article suggest about the PeS for Potash? (5)
Assess the implications of a rise in the price of potash for farmers. (8)
What does the article suggest is the relationship between grain & beef? (5)

Unit 1: A successful govt policy which has loads of positive externalities!

Over one million bike rides have been taken using the new bicycle hire system introduced by Boris Johnson and Transport for London (supported by Barclays). Perhaps this is a good example of how getting the pricing right and other related incentives and disincentives provides for a successful scheme and a change in commuter behaviour?

Membership of the scheme is affordable (£45 per year + £3 for each key) and journeys under thirty minutes are free at any time. There are stiff penalties for late and non-return of the bikes as well as for damaged bikes. The network of docking stations is substantial and TFL appear to becoming more proficient in getting round London and re-balancing supply with demand for bikes at key times during the day.

When I visit the UK in December, it will be interesting to see how many bikes are being used in the middle of winter!

To judge from the heavy demand for bikes at the Waterloo and South Bank docking stations, there is already firm evidence that the scheme has bedded in well. The number of stolen bikes is far lower than in Paris and the volume of bike rides taken is set to grow strongly as new docking stations are opened and the stock of bikes grows.

There is still plenty to do - many users complain of logistics problems that leave docking stations empty and also the limited choice of gears - but the early signs are promising indeed.

The Guardian writes in praise of the scheme here.

Unit 1: Where have all the bees gone?

The vanashing of the bees (click) is a documentary film that ties in both economics and agriculture is out now in the UK, and on DVD.
The film explores the nature of a problem known as ‘colony collapse disorder’ (CCD). It has the potential to devastate agricultural production not just in the UK but in many countries around the world, as bees are essential to the pollination of many food crops.

I have posted it on the blog because there’s actually a lot of economics involved- just think about what would happen if there were significant reductions in the supply of many major crops. We’ve already had riots in several developing countries over rises in just a few key foods over the last few years. As students are required to know about agricultural markets and can be given such case studies in exams.

Below is a typical exam question, adapted from an old paper. I would STRONGLY advise you attempt it for homework and hand it in before parents evening next week.

Bees dont just make honey edexcel paper

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Unit 3: Barriers to entry & Monopoly

Barriers to Entry & Monopoly

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Unit 1: Intro video to Market Failure

This astonishing documentary has many vivid sections that we can use to teach economic concepts. This film acts as a great introduction to the concept of market failure, highlighting issues such as; the tragedy of the commons, economies of scale, government failure and when looking at how a long-run fall in supply can impact on the prices consumers pay in the shops. It invites discussions about how to achieve sustainability in fishing and the costs and benefits of different schemes including marine parks in the oceans.

Unit 3: Updated presentation on Perfect Competition

Perfect competition

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Unit 2: Inflation, excellent revision aid and useful for all Economists.

Great interactive graph here courtesy of 'The New York Times'. It looks at the basket of goods used to measure Consumer Price Inflation (CPI is the measure of inflation we use in the UK) in the US and helps to illustrate the idea of weights.

It zooms into the different categories and is colour coded to let us know how the prices of each good and service has changed. It’s important that all DBS students, whether studying IGCSE or 'A' level Economics, can interepret information and this definitely helps!

Y13 Homework

Guys, remember you need to complete Jan 07, Q's 5, 6 & 7

Please ensure you have full explanations for each.

Unit 3: Monopsony and coffee buying

Black Gold is a remarkable film about the global market for coffee. In one striking scene we see the imbalance of market power between the coffee growers and the major coffee buyers including multinational roasting businesses. A vivid way of illustrating monopsony power in a market and a clip that lends easily to discussion about how coffee growers might work collectively to improve their prices and incomes. Black Gold is a fantastic documentary to show when teaching commodities markets and globalisation.

Definitely not on your syllabus...dont watch it.....no point!!!!!

LOL!

Unt 1: Supply & Demand, the Death of the Bidet!!

“The bidet, once the height of sophistication in bathrooms, is slowly dying out in Britain.”

According to this article, bidets appear to have fallen out of fashion in Britain as people prefer larger walk-in showers and so-called wet rooms.

Using the mnemonic PACIFICS of factors which shift demand (Population, Advertising, Complements, Incomes, Fashions, Income tax, Confidence and Substitutes) pupils could illustrate what’s happening in the market for this piece of classic bathroom furniture...and maybe even suggest possible other uses!

Not relevant to your studies, but you really should read this!

Economics matters, it affects peoples lives. What I try & get across to you is that it's not just about graphs and definitions. It's about making a difference. The article below highlights just what certain economic policies can mean for the average person....

Robert Frank – Professor of Economics at Cornell University and author of the book “The Economic Naturalist” – wrote his usual thought provoking piece in the New York Times. His focus was on the increasing levels of inequality in the US economy and how economists seem to be unwilling to grapple with this matter – to them it requires a moral judgment by philosophers.

But surely economists promote policies, like tax cuts for the higher-income groups, that increase inequality substantially. Also, economics was founded by moral philosophers – Adam Smith was a professor of moral philosophy at the University of Glasgow and author of the celebrated “Wealth of Nations,” which was itself peppered with trenchant moral analysis.

Frank comes up with some very interesting stats:

U.S. total income that went to the top 1% of American households:

-1976 = 8.9%

-2007 = 23.5%.

but during the same period, the average inflation-adjusted hourly wage declined by more than 7%.









Recent research by Frank and other economists found that the states where income inequality grew fastest also showed the biggest increases in symptoms of financial distress eg:
- these states had the largest increases in bankruptcy filings.

- largest increase in divorce rates

- long commute times as families move to cheaper housing to make ends meet

- the middle-class squeeze has also reduced voters’ willingness to support even basic public services.

There is no persuasive evidence that greater inequality bolsters economic growth or enhances anyone’s well-being. Yes, the rich can now buy bigger mansions and host more expensive parties. But this appears to have made them no happier. And in our winner-take-all economy, one effect of the growing inequality has been to lure our most talented graduates to the largely unproductive chase for financial bonanzas on Wall Street.

Click here for full article.

So, just what are commodities???

A great film....Trading Places with Eddie Murphy (when he was still funny!)

Unit 3: Good graphic, Market Strucures

Y12 Economists, Wednesdays Lesson: Case Study work

You will all attempt a data question which you will be required to complete for homework.

June 2004 - Q9 - Freddie & Liza
June 2005 - Q10 - Michael & Georgia
Jan 2006 - Q9 - Lisa & Charlotte
June 2006 - Q9 - Rory & Zara
June 2006 - Q10 - Larissa & Sami
June 2008 - Q10 - Wafeeq & Nick
Jan 2009 - Q9 - Ramez & James

Have a look at your question if you see this before tomorrow!

Unit 1: Workbook on Elasticity

AS guys and retakers: Homework for next Thursday. Please complete the workbook below....you will need to print it out!

Elasticity student workbook

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Unit 3: Contestable Markets Presentation

Contestable Market Theory

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Unit 3: Competition Policy in UK

UK Competition Structure

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Unit 3: Evaluation of Contestable Markets

Remember, the quality of your evaluation could be the difference between an A* and a B. Please make sure you understand all the following points re contestable markets.

The question you will get will take the following form:

To what degree is the *********** market contestable? (it could be an 8 - 12 marks question)

Points to discuss would be:

There is no such thing as a perfectly contestable market, only degrees of contesability.
Focus on what levels of competition are in the market.
Has there been new entrants to the market/is there a threat of new entrants to the market?
What are the barriers to entry? (are they significant??)
Is there strong brand loyalty in the industry?
What are the barriers to exit (sunk costs)? (are they significant??)
Is there evidence of entry limit pricng?
What level profits are made in the industry? (NB actual amounts mean nothing, what are the profit margins??) The diagram above shows the difference between a market that is not contestable (MC=MR) and perfectly contestable (Normal prifits AC=AR)
Is there evidence of 'Hit and Run'?
Is the industry regulated? (OFCom, OFGem etc)

You would need to focus on some of the above points and decide whether it would be easy/difficult to enter this market. A conclusion would be needed.

Unit 3: 'Bundling', a barrier to entry.

Product bundling is a marketing strategy that involves offering several products for sale as one combined product. This strategy is very common in the software business (for example: bundle a word processor, a spreadsheet, and a database into a single office suite), in the cable television industry (for example, basic cable in the United States generally offers many channels at one price), and in the fast food industry in which multiple items are combined into a complete meal. A bundle of products is sometimes referred to as a package deal or a compilation or an anthology.




Bundling is most successful when:

there are economies of scale in production,

there are economies of scope in distribution,

marginal costs of bundling are low.

production set-up costs are high,

customer acquisition costs are high.

consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product.

Product bundling is most suitable for high volume and high margin (i.e., low marginal cost) products. Research by Yannis Bakos and Erik Brynjolfsson found that bundling was particularly effective for digital "information goods" with close to zero marginal cost, and could enable a bundler with an inferior collection of products to drive even superior quality goods out of the market place.

In oligopolistic and monopolistic industries, product bundling can be seen as an unfair use of market power because it limits the choices available to the consumer. In these cases it is typically called product tying.

Pure bundling occurs when a consumer can only purchase the entire bundle or nothing, mixed bundling occurs when consumers are offered a choice between the purchasing the entire bundle or one of the separate parts of the bundle.

Pure bundling can be further divided into two cases: in joint bundling, the two products are offered together for one bundled price, and, in leader bundling, a leader product is offered for discount if purchased with a non-leader product. Mixed-leader bundling is a variant of leader bundling with the added possibility of buying the leader product on its own.

Q) Can you think of businesses who offer 'Bundling' to consumers??

Unit 1: Practice Q's on elasticity

1. A clothing retailer reduces the price of shirts from £50 to £40. As a result, quantity
demanded rises from 20,000 to 24,000 per month. What is the best estimate for price
elasticity of demand?

A –1.

B –2.5.

C +2.5.

D –2.
 
2. If the price elasticity of demand for coffee is –0.7 and the cross elasticity of demand
between tea and coffee is +1.1, then a 10% increase in the price of coffee will cause the
quantity demanded of coffee to;

A) fall by 7% and the demand for tea to fall by 11%

B) rise by 0.7% and the demand for tea to fall by 1.1%

C) fall by 0.7% and the demand for tea to fall by 1.1%

D) fall by 7% and the demand for tea to rise by 11%.

3. A hairdresser has 200 regular customers each week, paying $20 per haircut. He estimates that the PeD for this service is -2. As a result he decides to cut the price to $18. What would be the impact on revenue?

A) increase by $640

B) decrease by $320

C) increase by $320

D) decrease by $640

Unit 1: Supply & Demand in action!

Here’s a great example of the price mechanism in action - on a topic that is highly relevant to all you Y12 economists and the re-takers!

The cost of buying car insurance has risen by a staggering 40% in the last year, with even bigger increases being registered for young drivers wishing to insure their own car or be added to their parent’s policy.


http://www.bbc.co.uk/news/uk-11521019

The above link shows one such customer, whose pride and joy (a Ford Fiesta) cost him just £700, but whose annual insurance premium is over £2,000. Suppliers are raising their prices and (in some cases) withdrawing from the market altogether for this “risky” group of customers. The article highlights how supply and demand curves interact in the real world!

Good luck with your car insurance....especially Ramez!

Unit 3: Gaviscon £10.2 m fine

The (soon-to-be-no-longer) OFT have just ruled on household products giant Reckitt Benckiser abuse of it’s monopoly position. It has agreed to pay a £10.2m fine after admitting to abusing its monopoly position for the supply of heartburn drug Gaviscon.

This offers a good discussion of the role of patents as barriers to entry.

The OFT’s allegation was that Reckitt Benckiser withdrew NHS packs of Gaviscon Original Liquid from the NHS prescription channel after the product’s patent had expired but before the publication of the generic name for it, so that more prescriptions would be issued for its alternative product, Gaviscon Advance Liquid. Pharmacies that receive prescriptions for Gaviscon Advance Liquid must dispense it, as it is patent protected and there are no generic equivalent medicines.”
The OFT has stated: “‘This case underlines our determination to prevent companies with a dominant position in a market from using their strength to seek to restrict competition from rivals. The imposition of penalties should serve to deter firms from engaging in anticompetitive behaviour of this sort in future.”

Unit 1 & 4: Not good news for me, the $ is sliding.....

Several analysts are predicting a tough 12 months ahead for the US dollar.

The US economic recovery is stalling with little impact of strong growth. Unemployment figures have been depressing and look unlikely to fall in the near future.

Given prospect for weak growth, deflation, high unemployment and lack of fiscal stimulus, the Federal Reserve has indicated that they will resume the policy of quantitative easing to try and increase demand in the economy. Ben Bernanke, the Fed chairman said the bank was "prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate."

Weakness of the Dollar Results from:

Low Interest Rates with no prospect of rising rates.
Weak prospect for growth and unemployment.
Prospect for further Quantitative easing.
High Levels of public sector debt. A concern is that growing levels of public debt will undermine the confidence in the dollar. Europe and the UK under the Conservatives have been more willing to pursue spending cuts and austerity measures.

If the US economy was to bounce back and grow strongly, the prospects for the dollar would immediately change as it would raise possibility of higher interest rates and end to quantitative easing.

However, it is hard to see this bounce in the US economy.

The financial sector is still stretched from the ongoing effects of mortgage defaults and the credit crunch.
Government shows little appetite for a fiscal stimulus package. If anything, spending cuts are more likely.
Rising joblessness is reducing confidence and spending.

Goldman Sachs, the investment bank expects the dollar to drop to $1.79 against the pound in six months and $1.85 in 12 months. Against the Euro, Goldman Sachs expect it to fall to $1.50 in six months and $1.55 in a year’s time.

A sore point for the US economy is also the perceived undervaluation of the Chinese Yuan. The Chinese have been keeping their currency undervalued by intervening in the market to buy dollars. If China reversed this policy and stopped keeping the Yuan weak, the dollar would depreciate further against the Chinese currency, though there is little evidence of this change in policy.

Unit 1: Tax & Subsidy powerpoint

Remember, you can always access these presentations from the archives. (Scroll down on the right hand side).

Tax & subsidies

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Unit 1: Price, Cross and Income elasticity....excellent!

Price, cross and income elasticity

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Econ Unit 1: Spinneys sponsor our weekly run!!

Myself, Mr Pennock, Mr Barfoot have just been for a run around the race track at motor city.

The track is lit up every Wednesday, bottled water is provided and it's all for free!!

Spinneys pay for everything!!


Questions for discussion:-

What reason might Spinneys want to do this?
Are there any financial positives for Spinneys?
What are the externalities that arise from this? (Econ Unit 1)

Unit 1: Factors determining Elasticity

Please make sure you print screen/write down/scan the following factors effecting Price Elasticity of Demand. It is important that you can recognise whether a product/service is inelastc and how this may effect business decisions and government taxation policy;

1. The number of substitutes available (more subs = more elastic)

2. The degree of necessity. (Necessities inelastic/luxuries elastic)

3. The % of a consumers income the product takes up. (small % = inelastic, large % elastic)

4. Addictiveness of good. (coffee, cigarettes = inelastic)

5. The time period under consideration. (more time = more elastic)

6. Peak Vs off peak.......you answer this one!!!!

Unit 3: Price Elasticity of Demand, perfect competition & watermelons!

Consumers are interesting creatures to study. Economics offers us a unique set of tools for understanding the behavior of consumers in various markets. Elasticity is one of those tools, one which helps us understand how consumers will respond to the change in price of some goods more or less than others.

Some of the questions elasticity of demand helps to answer are:

Why do governments place such huge taxes on cigarettes?
Why did Apple cut the price of the new iPhone in half from the original one, despite the fact that it had so many new features?
Why do movie theaters seem to raise their prices so steadily over the years, rather than doubling the price of tickets each year?

These and other questions can be answered by knowing something about the relative price elasticities of demand for the goods in question. Price elasticity of demand refers to the sensitivity of consumers to a change in price. For some goods, even the slightest increase in price will scare consumers away, while for others, price can go up and up and up and the quantity demanded won’t budge!

Here’s just one illustration of a good for which consumers are extremely sensitive to changes in price:

Every autumn, around the city of Shanghai thousands of small farms harvest the Chinese watermelon, a small, green, juicy melon that looks and tastes the same regardless of which farm it came from.

The farmers sell their melons to one of the hundreds of melon vendors who drive their big blue trucks into the city of Shanghai during about two weeks in October to sell the watermelons to the city folk who love their refreshing taste.

During the two weeks of the melon harvest, there are hundreds of blue trucks parked two or three per block all over the city. The hundreds of melon vendors sell an identical product, acquired at identical costs from thousands of farms using identical techniques for farming. In other words, the melon market in Shanghai during these two weeks is close to being perfectly competitive.

The price of melons is established through competition at something very close to the exact cost to the vendor of getting the melons into the city. Consumers know this, and therefore if one vendor tries to sell his melons for more than the equilibrium price, consumers will respond by buying NONE of that vendors melons.

Conversely, if a vendor were to lower his price at all, rationally EVERY consumer would want to buy from that vendor, but since the price is already at the cost to the vendor, no vendor is able to lower the price without losing money. The outcome in the market for melons in Shanghai is that demand for melons is close to being perfectly elastic, meaning that consumers are completely sensitive to changes in price of watermelons.

Not all goods are like watermelons. In fact, for some goods demand is close to perfectly inelastic.

Study the graph below, showing the relative elasticities of five different products, then answer the questions below in your comment!

Discussion Questions:

For which product is demand pefectly inelastic? Perfectly elastic? Unit elastic?
What relationship exists between relative slopes of demand curves and elasticity?
What are two characteristics of cigarettes that make demand for them inelastic?
What are two characteristics of heart transplants that make demand perfectly inelastic?
What are the characteristics of a good for which demand is perfectly elastic?

Unit 3: The Prisoners Dilemma

The Prisoners' Dilemma

Non-zero sum games are more complex to analyse as a result. The classic case of the non zero-sum game is the so-called Prisoners' Dilemma.

The dilemma is based around the following scenario. Two people are arrested and placed in separate rooms on a charge of (let us say) robbery. Each is then questioned and faces the following options. They can either confess to the crime or stay silent. They are each fully aware of the consequences of their action which is represented in the matrix below.

Let us investigate the possible outcomes of this matrix.

If Dave pleads guilty and Henry pleads not guilty, Dave gets 1 yr and Henry gets 5.
If both plead guilty, they get 3 years in jail
If Dave pleads not guilty but Henry pleads guilty, Dave get 5 years in jail but Henry only gets 1.
If both plead not guilty each get 2 years in jail

There is now a risk element in playing the game; there is no optimal solution. If I choose to stay silent there is a 50% chance that I could end up with a paltry sentence of just a year but equally I run the risk of going to jail for 5 years. If I choose to confess I have a 50% chance of going free or receiving 3 years in jail.

In this game, it is assumed that there cannot be any cooperation between the two players.

Cooperation would imply that the best option is for us both to stay silent and take the lesser sentence of 2 years.

Without the option of cooperating, the prisoners have to think about what they would least like - that seems to be the idea of spending 5 years in jail. I don't want to spend any time in jail but 3 years is preferable to 5 years but not as preferable as only 2 years.

Given this logic, therefore, my best option is to confess. I have a 50% chance of going free or facing 3 years in jail. If I chose to stay silent there is a 50% chance I could end up in jail for 5 years!

Public, Merit & De-Merit Goods

Public goods are defined as products where, for any given output, consumption by additional consumers does not reduce the quantity consumed by existing consumers.

There are very few absolutely public goods, but common examples include law, parks, street-lighting, defence, light-houses etc.

As there is no marginal cost in producing the public goods, it is generally argued that they must be provided free of charge, because otherwise the people who benefit less than the cost of using the public good, will not use it. That will lead to a loss of welfare.

Also the goods are mostly non-excludable, that means that if once provided everybody can use them, which when charged will lead to the "Free Rider effect". So these goods will not be provided by free markets as there is no way to charge for the usage, the solution is, that state must provide these goods and finance them from taxes collected from everybody.

Merit goods on the other hand are products generally not distributed by means of the price system, but based on merit or need, because people although having perfect knowledge would buy the wrong amount of them. These goods can be supplied by free market, but not on the right quantity.

Merit goods are, for example, education and to some extent the health-care. They are provided by state and are deemed beneficial to society.

In many cases, these goods are subsidised by governments in an effort to increase consumption.

De-Merit goods - A good which is considered unhealthy or damaging in some way (Detrimental to society).

A demerit good can be physically harmful (cigarettes), mentally harmful (gambling), or morally harmful (prostitution).

In many cases, demerit goods are subject to additional taxes in an effort to reduce consumption; these taxes are frequently known as sin taxes.

Not so sure about this guy.....

Supply & Demand in 60 sconds!

Supply & Demand boring....never!

A2 Unit 3: The Principal agent problem!

Here is a fine that the guilty party may find tough to repay.

Jerome Kerviel - rogue trader for Société Générale has been found guilty of breach of trust, forgery and entering false data into computers all linked to covering huge and illicit stock bets that are estimated to have cost France’s second biggest bank just under Euro 5 billion in losses. Kerviel faces three years in jail - in other words, plenty of time to organise the bring and buy sales, whip-rounds and begging letters to make a chink in the Euro 4.9bn bill.



One of the aspects of the case is that bank’s defence that it did not know what Kerviel was doing - in other words we see here an example of the principal agent problem, a massively costly failure of information and back office controls and systems.

The presiding judge told the court that he was confident that Société Générale was not aware of Jerome Kerviel’s fraudulent activities. The trader had taken speculative positions on selected stocks without the knowledge of the bank. Societe Generale has already been fined four million euros after admitting to lax financial controls. Kerviel himself was something of a loner and took home a meagre salary by city standards.

The principal agent problem stems in part from a separation of owners from managers where the agent (or manager) acts in their own self-interest, not in support of the aims of the principal (stockholder). Much has been written in recent years about the incentives to cheat (Dan Ariely has plenty of say on this in his two recent books - see this talk - “Finding Cheating’s Comfort Level ). For many the pressure or incentive to cheat is greatest when you are given the chance to ‘Play’ with other people’s money (you do not have the same sense of ownership). The Kerviel case highlights just how risky this can be for huge financial organisations if there is a failure of control over the trading floors.

Extension work...macro economic issues

"...Imagine, if I were to stand up in the House of Commons in two weeks time and say: I’m cancelling the deficit plan. I agree with Ed Miliband. Let’s delay the tough decisions. Let’s borrow more. Let’s go on adding to our debt.

“Imagine if I said that. Now imagine what would follow. The market turmoil; the flight of investors; the dismay of business; the loss of confidence; the credit downgrade.”

I will add: “So Labour’s cuts wouldn’t be smaller. They would be bigger and last longer.

“In eight years time we would still be meeting here talking about what we would cut. A decade lost to debt." - George Osbourne 4th October 2010

This is not necessarily the case:

You could argue that rapid spending cuts now could push the economy into recession or much lower growth. If that is the case, the cyclical budget deficit will worsen. With lower growth it will be harder to reduce the debt to GDP ratio.

Zeal in tackling a budget deficit can make it more painful in the long run. Look at the example of Ireland. Stringent spending cuts earlier in the year. These cuts caused a fall in GDP and so have worsened the budget deficit. It has led to higher interest rates and a worse credit rating. Now, Ireland is being asked to cut spending again.

How did we reduce Post War Debt?

After the second world war, the UK had large deficit - much larger than today. The Labour government of 1945, didn't slash spending. In fact we increased spending on the new NHS and new welfare state. Debt to GDP was reduced over time through economic expansion. It is economic expansion which is the best way to reduce debt to GDP in the long term.

The IMF admits, in a recent publication MACROECONOMIC EFFECTS OF FISCAL CONSOLIDATION that fiscal tightening in Northern Europe is likely to depress European economies for the foreseeable future.

Questions to think about:

are fiscal austerity packages the way forward?

or should we embark on a 'Keynesian' spending programme akin to 1945?

You decide!

AS Economics Homework.......

Complete for Thursday..including explanations!!!!!

Paper Question

Ju 03 Q5
ju 04 Q4 Q8
ja 05 Q2 Q5
ja 06 Q4
Ju 06 Q5
Ja 07 Q4

Mr Bentley (What a guy!)