Unit 2: Inflation data : Changes in real prices (UK 2010)

This is a graphic looking at changes over time in indices of consumer prices for different goods and services.

Using data drawn from the published Retail Price Index since 1988 (the base year)

What are the economic factors behind the divergence in prices for rail fares, cigarettes, household repair services, clothing and electrical items?

The factors you could include in discussions may be;

 changes in indirect taxes

unit labour costs

economies of scale

trade

globalization effects

the intensity of competition

What are the main issues?

Unit 2/4: Inequality

The article below covers all aspects of income inequality. Read on to find out more…

This article covers all the bases on what is a potentially fascinating topic for a study of both the UK economy and those around the world.

If you take the time to read it properly, it should provide for a potentially very thought-provoking discussion of the meaning and importance of the gini coefficient and what it means for a country. To provide some international comparison, you could also make use of the graphic below, courtesy of visualeconomics.com, which also acts as a useful revision sheet/explanation of how the gini coefficient is calculated.

Unit 2: Jan 09 Past Paper

Jun 09 - Unit 2

View more documents from mattbentley34.

Unit 1: The externalities of Plastic

I came across this video which shows the negative externalities on both the production and consumption side of plastic. It also reinforces the difficulties of putting monetary values on externalities. The first half is better for Economics, the second half drifts into sociological comment.

The above video is supported by this great site on plastic bag usage. In addition, this article considers plant based plastics as a way forward, it is a good example of weighing up costs and benefits – the second-to-last paragraph has some good stuff from a business point of view.

Unit 2: Latest GDP figures make dismal reading! (Jan 2011)

This article and video highlight the problems we economists face when trying to predict GDP growth. The figures suggest that the UK Economy is still struggling to grow.

Questions for discussion:

1. What would you do with interest rates?

2. Should the government follow a fiscal stimulus or stick with its fiscal austerity measure?

Unit 2: What is GDP and why should we care?

Unit 2: Happiness Index

I love this article...it just goes to show that moeny will NOT buy you happiness!

Unit 2: Unemployment in UK Regions

This article is interactive and highlights the differences in unemployment around the UK.

Unit 2: Economic performance in Europe & recent data

Excellent interactive graphic showing the economic fortunes of European economies.

What do recessions look like?

View more documents from mattbentley34.

Japan - Is economic growth the only target?

This article discusses alternative objectives to economic growth.

Unit 2: Measures of Economics Performance Powerpoint

Measures of Economic Performance

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Unit 2: UK Inflation in the 1960's & 70's

UK Inflation in 60s and 70s.

Recently there have been quite a few newspaper articles talking about the 'horrific' inflation of 3.7%. Actually, if you look at Core inflation, CPIY (inflation - taxes) it's not quite as horrific as 3.7%.

Many people make the comparison with the 1970s, when an oil price shock caused inflation to rise to double digits. However, there are notable differences with the 1970s.

The 1970s didn't see an asset price recession with banks reluctant to lend and a significant amount of spare capacity.

In the 1970s, rising wages were a very important factor in causing a wage price spiral. There is no evidence for rampant wage inflation, - just try asking anyone in the public sector about rampant wage inflation and they will give a wry smile.
Worse Trade Off.

Like the 1970s, we are experiencing a worse trade off. We do have higher inflation and prospects of a slowdown in growth.

If the Bank of England really wanted to target CPI inflation of 2%, they could do. But, if they raised interest rates to reduce inflation, it would mean a trade off of lower economic growth.

However, even without interest rate increases, it is forecast that economic growth could slump to as little as 0.1% per quarter; with this growth rate, spare capacity and unemployment will continue to rise. It doesn't make sense to inflict more economic pain with such feeble growth forecasts.

It should also be remembered the inflation target of 2% is not the ultimate goal of economic policy. Savers may say it is not fair inflation is above base interest rates, leading to a decline in real savings. However, would it be fair to increase interest rates rapidly causing a second recession and keep three million out of unemployment?

Unfortunately, there is a situation where something has to give. We can't have both low inflation and full employment. We need to accept this and make a sensible choice between the different choices.

Unit 2: Uneven recovery in UK (UK Economic data)

This article highlight the uneven recovery in the UK. There are also some excellent links at the bottom of piece which will give you some key facts about the UK economy...essential reading for Unit 2.

Unit 2: Which Inflation measure should we use?

CPI, RPI, RPIX, CPIY, CPI-CT, HICP, Core inflation? (or if you live in US - CPI vs PCE)


If that list of inflation measures confuses you, don't worry - there's probably many more measures too. But, it does illustrate how calculating inflation is much an art as a science. Depending on how you measure inflation, you can get quite different statistics. But, given the importance we attach to the inflation rate, it becomes very important which one we actually use to decide policy.

The official method of calculating inflation is the CPI. This involves taking a typical basket of goods most commonly bought by consumers. This is a relatively good guide to the cost of living.

However, CPI can give a misleading impression to certain aspects of the economy.

Firstly, some components of CPI (food and energy prices) tend to be volatile. They can change due to weather and unexpected factors. High food inflation can make headline news. However, these volatile factors can give a misleading indicator of spare capacity and underlying growth in the economy.

Usually, a rise in inflation suggests the economy is growing quickly and firms are getting close to full capacity. In this case, it is necessary to tighten monetary policy to prevent a boom and prevent demand pull inflation. However, if inflation increases due to a boom in the oil price or a bad wheat harvest, this doesn't necessarily reflect a booming economy. We are learning this year that you can have inflation and a stagnant economy. In 2008, CPI inflation rose to 5%, but a couple of months later we were in deep recession.

Core inflation, seeks to strip away these temporary factors. It includes less, but gives a better guide to inflation caused by excess demand. As you might expect, core inflation in the UK is less than the headline rate. This graph is from the US.

 

Another issue is the impact of indirect taxes. Increases in airport tax, VAT, excise duty all lead to an increase in the price level and higher inflation. But, this is a one off factor, it is not an indicator of a booming economy.

This is important at the moment, as recent tax increases are increasing the headline inflation rate.

CPIY and CPI -CT basically strip away the impact of tax rises.


When setting interest rates, it is arguably much more important to look at core inflation, excluding the temporary effect of tax. This helps monetary policy to deal with the rate of economic growth and spare capacity.

Clearly, this is very important at the present moment. If we only consider CPI, we will wonder why the Bank of England haven't been increasing interest rates. If we consider other measures of inflation, their policy of resisting monetary tightening makes more sense.

When to Use the CPI?

When setting wages and pensions, it is better to use CPI than core inflation. If pensions were index linked to core inflation, it would mean that pensioners could get an increase less than the actual cost of goods and services they buy. (it could work the other way, core inflation can be higher than CPI)

There is even an argument for creating a CPI index adjusted for pensioners. For example, pensioners may spend a higher % of income on energy and heating. In this case, the pensioner CPI index could take account of this different weighting.

CPI vs RPI

The official inflation rate used to be RPI. The main difference between RPI and CPI is that RPI includes mortgage interest payments. Therefore fall in interest rates led to a lower inflation rate. This graph shows that in 2008, RPI was negative during the period of interest rate cuts, CPI is less volatile.

Unit 1: Some amazing images showing economies of scale

Many thanks to colleague Innes Robinson for spotting this absolutely priceless collection of images of Sainsbury’s main distribution centre - the ideal visual stimulus for illustrating, explaining and discussion economies of scale. The sheer scale of the distribution operation is breathtaking, as is the extent of automation in the stockholding and handing processes.

Unit 1: Market Failure & stupid people!!!!!

This picture from a US newspaper has great examples of both negative production and consumption externalities, although the woman involved only seems to be concerned about one of them!


The cigarette is a little hard to see but definitely there.

It has been investigated by hoax busting websites after allegations that it was simply a photoshop job, but has been pronounced true!


Click here for full article! Would be hilarious if not so tragic!

Unit 3: Monopoly Power and train car parks!!

You have just parked your car at the station only to discover that the parking fee has risen 19%, significantly higher than the RPI and CPI rates of inflation.


This this short video clip highlights monopoly power, loss of consumer surplus, producer surplus, price discrimination, pressure groups and normative economics, and lack of intervention from the goverment.

Unit 2: Macro-Economic - Policy Conflicts

Y12 students will be trying to consider squaring the macroeconomic circle, as they face trade offs between economic growth, stable employment and inflation. This short article explores one of the policy conflicts.

The interview considers trade offs between growth and inflation in China.

Unit 1: Market Failure: Property rights the Chinese Way (hilarious)

What do you do when you want to tear an apartment building down so that it can be redeveloped in to a (presumably) more profitable factory. If you own the entire building there may not be too much of an issue. But what happens when you only own six of the seven floors and the family on the highest level isn’t interested in moving out?


The answer is obvious - demolish as much as the bottom six floors as you can, and definitely including any access via stairs to the top level.

To the credit of the local court system, the developers have now been told to halt their work and restore one stairwell so that the family can access their apartment, while the court can fully investigate the situation.


Discussing the costs and benefits of lax government controls on investment and development could make for an interesting lesson starter!

Unit 2: Nice graphic showing UK economy

Unit 2: Latest Inflation figures for UK

Answer - They have all helped to drive up inflation to 3.7% last month.

The December CPI figure was released today and shows an increase from 3.3% in November to 3.7% in December.

To see what has happened to inflation since 2006 click here

Unit 2: Hamsters & Economics Growth!!

Check out this short and snappy animation about food happy hamsters and unsustainable growth. There are plenty of other videos linked in and around this you tube video.

Unit 2 & 4: Excellent Website for statistics

Thankyou to Nick for finding this superb statistics website. Trading Economics has all the data you will need to understand how macro-economic markets are performing.

Unit 2: Is unemployment inevitable in 2011?

Will many advanced economies have to live with a new semi-permanently higher level of unemployment as a consequence of the global financial crisis, economic slump and a period of fiscal austerity?


It is a dangerous scenario for all kinds of economic, social and political reasons and hints at a defeatism and defensiveness among some economists and policy-makers that active labour market policies and macro demand management cannot lift employment close to where it was before the slump.

In this article in the Guardian, Dean Baker questions the validity of the crowding out hypothesis championed by economists who believe deficit reduction must be the number one macro priority.

Monetary and fiscal policy still have a vital role to play in sustaining demand and jobs in economies where private sector demand is weak and likely to be constrained by falling real wages, asset prices and rising unemployment.

“The methods for generating demand are not a mystery. It basically amounts to the government spending more money until the private sector is again in a position to fuel demand. The fears of deficits and debt that the pessimists promote stem from a misunderstanding of basic economics. Deficits can be a problem when they crowd out private economic activity. In a severe slump like the current one, this crowding-out is not a realistic fear; there are vast amounts of idle resources.

Furthermore, there is no reason that the debt needs to pose an interest burden on taxpayers in the future. The Fed and other central banks can simply buy and hold the debt, refunding the interest payments to the government.”

Unit 2: It's not all that bad.......all poverty is relative!!

After todays lesson spelling out doom and gloom. I felt it was all a bit depressing....things are not that bad! See the article below....Mr B

Recently, I bought an iPhone. I always resist technology for a few years, then get one and wonder why I didn't buy it two years ago. I can't believe how good the iPhone is. It does so many things that those writing 'Star Trek' in the 1960s could never have imagined. Yet, despite these huge advances in technology, there seems to be a sense of dissatisfaction.


If you start a chat about the state of the economy, you invariably hear people complaining about the usual suspects: prices rising, debt, broke government , unemployment e.t.c. It would be tempting to put this all down to economic crisis and austerity measures of the government. But, even in so called good years, you hear similar complaints.

If you look at real incomes over the past 50, 100 years, statistics suggest that we've never had it so good.

Now if I was a cabinet minister I would have to resign for suggesting 'we've never had it so good'. But, if you ignore cyclical factors and look at decade by decade, living standards are immeasurably higher than 50 or 100 years ago. In 1948, Real GDP was £304,000 Bn (adjusted for inflation). Today it is £1,300,000 bn

Yes, we still have poverty, but the classification of poverty has changed dramatically. When Joseph Rowntree did his ground breaking study of York - Poverty - A study in Town Life in 1901, poverty was defined as not having enough money to buy sufficient food to meet a recommended minimum calorie intake.

These day, you can be relatively poor, but have TV, good housing and unimaginable luxuries compared to the slums of York in 1890s.

One reason is that poverty is essentially a relative concept. If we see great affluence around us, we feel poor even if we have quite a reasonable income. Someone in the slums of York in the nineteenth century might have felt very well off if he gained a promotion which gave an extra sixpence wage per week. We tend to measure our sense of welfare by comparing our income to others. If useless bankers can award themselves six figure bonuses, we feel poor on a £20,000 a year salary.

Also, our feeling of living standards are not just monetary but self-respect. Several million Britons live on welfare benefits, either unemployment or sickness benefits. The actual income of welfare benefits is very high by nineteenth century standards. But, unemployment represents an economic failure, there is no satisfaction from being economically idle. It is a big step down compared to the income of work. If a nineteenth century labourer was given a 2010 unemployment benefit, he would feel remarkably wealthy. But, if you lose a good job, and survive on benefits it is a big step down.

Date: 1926-42. From UK National Archives, Reference: INF 9/887


This is not to say, we should just count ourselves lucky we aren't living in a Victorian slum. It is just an observation. If anything it is an observation that the best way to increase economic welfare would be through increasing the perceived level of equality in society. But, also, when things do look grim, I guess it could be a whole lot worse. If you really don't believe that things have got a little better, try reading George Orwell's essay on life as a Coal miner

"It is a dreadful job that they do, an almost superhuman job by the standard of an ordinary person. For they are not only shifting monstrous quantities of coal, they are also doing, it in a position that doubles or trebles the work. They have got to remain kneeling all the while--they could hardly rise from their knees without hitting the ceiling--and you can easily see by trying it what a tremendous effort this means."

And as my Dad would say - those miners with a job were the lucky ones! they had at least a roof over their head! (Four Yorkshireman's Sketch at God's own County)

Unit 2: The UK Economy in 2011

Here are two fascinating video talks from Robert Peston and Stephanie Flanders (BBC Economics Correspondants) on some of the business and economics issues that might be high on the news agenda during 2011.


Hopefully this will give you a flavour of what is to come this year. I hope you find it interesting!

Mr B

Robert Peston



Stephanie Flanders

Unit 1: What economic factors affect the demand for new cars?

The motor industry is one of the sectors whose fortunes seems to permeate nearly every part of the economy. Most of us know someone who works in the motor trade and changes in demand and production have sizeable effects not just on the industry itself but on many supply-chain businesses and economic activity in areas where car production is concentrated.


In 2010 just over two million new cars were registered in the UK - a rise of 1.8% on the 2009 figure. The biggest single course of rising demand came from the fleet market which rose by over 10% in 2010, but demand for and spending on privately bought cars slipped following the end of the Car Scrappage Incentive Scheme.

Crucially for the year ahead, the new car market is forecast to decline by 5% in 2011 to 1.93 million units - according to the Society of Motor Manufacturers and Traders “difficult market conditions continue.”

So what are the main factors that affect the market demand for new cars?

1/ Strength of business demand for new vehicles.


These are cars bought as fleet vehicles for example by taxi firms, fleet cars required by car hire businesses and new vehicles used by utility companies and the police force. Demand for fleet cars picked up in the second half of 2010 but 2011 may see a decline in demand in part because of public sector spending cuts.

2/ Real incomes of car buyers relative to car prices

New cars are normal goods with a high income elasticity of demand. When real incomes are rising (i.e. pay is increasing faster than inflation) we expect to see an expansion of demand for new vehicles as they become more affordable. In 2011 this factor is likely to cause a fall in demand because millions of people have experienced either a pay freeze or a pay cut and this, together with higher taxes including VAT is causing real disposable income to fall.

3/ The cost and availability of motor finance (credit)

Some new car buyers pay in cash but many rely on securing a finance agreement and pay in instalments. It remains tough to get a new loan to pay for a car and the average rate of interest on unsecured credit has been rising even though official monetary policy interest rates are at historic lows. The high real rate of interest on car loans will put off new buyers.

4/ The cost of running a vehicle

The costs of running a vehicle continue to rise well above the average rate of consumer price inflation. Petrol prices are at a record high and car insurance premiums are increasing at a rapid rate. High petrol prices do not always bring about a fall in demand for vehicles since a new car is often more fuel efficient than an older offering the buyer the chance to save money.

5/ Consumer confidence


Buying a new car is a major purchase and, with macroeconomic conditions remaining uncertain, there is a lack of consumer confidence that this is a good time to make a major purchase. People are having a tough time with a recession and many will opt to postpone their purchase of a new car until the situation improves. In 2011 the fear of job losses (in the public and private sector) will dominate many people’s thoughts.

6/ The end of the government’s Scrappage Incentive Scheme and the rise in VAT

The car scrappage incentive scheme came to an end in May 2010 - it had offered at £2000 subsidy for owners of 9 year old cars who traded them in for a new one. In January 2011 VAT has increased from 17.5% to 20% - an increase which has added almost £320 to a £15,000 car.

Overall


There are strong grounds for thinking that 2011 will be a difficult year for the UK motor industry. New car sales are likely to decline by 5% or more and this will have a direct effect on production in UK factories. It will also affect the demand for imported new vehicles although changes in the sterling exchange rate will affect the balance between demand for domestic and overseas produced cars.

Units 1, 2 & 3: Revision material

click here to access several documents that cover a range of topics. Excellent for last minute revision for Units, 1, 2 & 3.

NB Ignore the unit names as it's written for AQA, but topics are the same....

Some interesting facts!

The Christmas edition of The Week magazine has a selection of Statistics of the Year which have been published during 2010 and I like this one from Prospect Magazine - China now exports as much every six hours as it did in the whole of 1978.

Others given that are perhaps less immediately memorable, but do illustrate some points:

Each day consumers in the UK throw away 1.3million unopened yogurt pots, 440,000 ready meals, 5,500 whole chickens, 5.1 million potatoes and 1.6 million bananas (source - The Daily Telegraph; wasted resources, negative externalities and associated costs)

Only five FTSE-100 companies have a female chief executive (source - The Independent; labour economics and equality)

22% of English 16-19 year olds are functionally innumerate, and 17% are illiterate (source - TES; wasted resources, government failure, labour economics and equality issues, negative externalities.....)

Unit 2: Fiscal Policy - Will the recent spending cuts work?

In early July 2010 Chancellor George Osborne announced a tough government spending review designed to cut the size of the UK’s structural budget deficit and bring down managed state sector spending as a share of GDP. The UK is not alone in introducing fiscal austerity measures and they have prompted fierce debate not least among economists about the likely impact on economic performance. The spending squeeze brings to

an end more than a decade of strong real terms increases in state spending.

This question is really about causation and in this case we are asked to think about how the steep planned cuts in government spending may affect the annual rate of consumer price inflation in the next couple of years.

The obvious starting point is to consider the impact on aggregate demand (C+I+G+X-M).


Government spending on goods and services is a sizeable percentage of total demand and real terms cuts in public sector expenditure will have a direct negative effect on the circular flow of income and spending. Cuts in G will also have negative multiplier effects leading to a larger final decrease in real GDP. Many private sector businesses supply goods and services to the public sector such as the NHS, schools and local authorities.

The independent Office for Budget Responsibility estimates that 330,000 public sector workers in the UK will lose their jobs over the next four year and there will be thousands more in supply-chain businesses.
In the absence of a compensating increase in private sector demand (for example consumer spending or exports of goods and services), a fall in AD from lower G will have a direct effect on the output gap. Actual GDP in the UK is already well below potential GDP and the fiscal squeeze will mean that demand-pull inflationary pressures will remain almost non-existent.
A second effect of government cut-backs might be seen in the rate of wage inflation. Many government departments will be scaling back on jobs and there will be increased pressure on workers in the public sector to agree to wage freezes or pay rises below the rate of inflation. This will lead to a reduction in the risks of cost-push inflation.
Govt spending cuts might also have an effect on the UK exchange rate for example against the Euro.
(i) A fiscal contraction makes it more likely that policy interest rates set by the Bank of England will stay low as we head into 2011. Ultra low interest rates might be a factor causing the UK currency to weaken in the foreign exchange markets
But
(ii) Greater credibility for the UK government in the bond markets may drive sterling higher if the UK is seen as having an appropriate policy for debt reduction.

The government has announced £81bn of planned spending cuts over the next few years. Assuming that these cuts are actually carried through (this is clearly open to doubt) the biggest risk seems to me to be that deep cuts in spending will bring about a double dip recession - driving UK inflation lower because of falling demand and extra spare capacity. There are good grounds for thinking that growth rates in the UK economy will be slower than in previous recoveries and the fiscal contraction will be a key factor behind this. The Office for Budget Responsibility has a GDP growth forecast of just 2.1% for 2011 whilst the Paris-based Organisation for Economic Co-operation and Development believes the UK economy will grow by just 1.7%.

As with most questions in macroeconomics, there are so many other factors that are unlikely to remain constant over the same period! We have seen consumer price inflation well above the 2% target in much of the past two years but the causes have in the main come from external events in the world economy - notably the steep increases in the prices of foodstuffs, oil and gas and many other primary commodities.

Much of the inflation that we experience in the UK is determined by global economic forces beyond the control of the government and the Bank of England.











Unit 1: Trees; Public & Private goods!

An Excellent article from Nancy Folbre an economics professor at the University of Massachusetts, provides a beautifully clear explanation of the economics of deforestation and the tragedy of the commons.

A superb article to print out and use when studying the motives of individuals within society and ideas for how social norms and local institutions really do matter when putting together policies to reduce global deforestation.

Unit 3: Price Discrimination: Useful notes

In contrast to predatory pricing, price discrimination is perfectly legal and very common. It involves charging a different price to different groups of people for the same product.

The basic objective of price discrimination is that, by setting different prices for the same product in different markets / segments, a business can increase its total sales revenues.

You’ll see lots of examples of price discrimination in action. For example:

• Student and senior citizen discounts, off peak fares cheaper than peak fares

• In the airline and hotel industries, spare seats and rooms are sold at the last minute at greatly reduced prices (price discrimination used to sell off spare capacity)

• Reduced prices for cinemas and theatres in the afternoons

Two things need to happen for a business to use price discrimination:

(1) Differences in price elasticity of demand: There must be a different price elasticity of demand for each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a lower price to the group with a more elastic demand.
(2) Barriers to prevent consumers switching from one supplier to another: The business must be able to prevent “consumer switching” – a process whereby consumers who have purchased a product at a lower price are able to re-sell it to those consumers who would have otherwise paid the expensive price. This can be done in a number of ways, – and is probably easier to achieve with the provision of a unique service such as a haircut, dental treatment or a consultation with a doctor rather than with the exchange of tangible goods such as a meal in a restaurant.

Examples of price discrimination:

Early-bird discounts

If you are looking for a bargain flight with a low-cost airline, booking early with carriers such as EasyJet or RyanAir will normally mean lower prices. This gives the airline the advantage of knowing how full their flights are likely to be and is a source of cash flow prior to the flight taking off. Closer to the time of the scheduled service the price rises, on the justification that consumer’s demand for a flight becomes inelastic. People who book late often regard travel to their intended destination as a necessity and they are likely to be willing and able to pay a much higher price.

Peak and Off-Peak Pricing

Peak and off-peak pricing and is common in the telecommunications industry, leisure retailing and in the travel sector. For example, telephone and electricity companies separate markets by time: There are three rates for telephone calls: a daytime peak rate, and an off peak evening rate and a cheaper weekend rate. Electricity suppliers also offer cheaper off-peak electricity during the night.

At off-peak times, there is plenty of spare capacity whereas at peak times when demand is high and supplier may experience capacity constraints.