Unit 2 & 4: Aggregate Demand - Revision Notes (with Links)

Updated revision notes on aggregate demand - there are several links for you to research further. Essential for Unit 2 & a really good refresher for Unit 4 students.
Aggregate demand(AD) = total spending on goods and services

AD = C + I + G + (X-M)

C: Consumers' expenditure on goods and services: Also known as consumption, this includes demand for durables e.g. audio-visual equipment and vehicles & non-durable goods such as food and drinks which are “consumed” and must be re-purchased.

I: Capital Investment – This is spending on capital goods such as plant and equipment and new buildings to produce more consumer goods in the future. Investment includes spending on working capital such as stocks of finished and semi-finished goods.

Capital investment spending in the UK accounts for between 15-20% of GDP in any given year. Of this investment, 75% comes from private sector businesses such as Tesco, British Airways and British Petroleum and the remainder is spent by the government – for example building new schools or in improving rail or road networks. Investment has important effects on the supply-side as well as being an important component of AD. A small part of investment spending is the change in the value of stocks. Producers may find either than demand is running higher than output (i.e. stocks will fall) or that demand is weaker than expected and below current output (in which case the value of stocks will rise.)

G: Government Spending – This is spending on state-provided goods and services including public goods and merit goods. Decisions on how much the government will spend each year are affected by developments in the economy and the political priorities of the government.

Government spending on goods and services is around 18-20% of GDP but this tends to understate the true size of the government sector in the economy. Firstly some spending is on investment and a sizeable amount goes on welfare state payments. Transfer payments in the form of benefits (e.g. state pensions and the job-seekers allowance) are not included in current government spending because they are a transfer from one group (i.e. people paying income taxes) to another (i.e. pensioners drawing their state pension having retired, or families on low incomes).

X: Exports of goods and services - Exports sold overseas are an inflow of demand (an injection) into our circular flow of income and spending adding to aggregate demand.

M: Imports of goods and services. Imports are a withdrawal of demand (a leakage) from the circular flow of income and spending.

Net exports measure the value of exports minus the value of imports. When net exports are positive, there is a trade surplus (adding to AD); when net exports are negative, there is a trade deficit (reducing AD). The UK has been running a large trade deficit for several years now.

The main components of aggregate demand are shown in the table above

Remember that

AD = C + I + G + X – M

Shocks to aggregate demand

Many unexpected events cause changes in the level of demand, output and employment. These events are called “shocks”. Some of the causes of AD shocks are as follows:

1.A large rise or fall in the exchange rate – affecting export demand and second-round effects on output, employment, incomes and profits of businesses linked to export industries.

2.A recession in main trading partners which affects demand for exports of goods and services.

3.A slump in the housing market or a big change in share prices

4.An event such as the credit crunch (global financial crisis) – involving a fall in the amount of credit available for borrowing by households and businesses.

5.An unexpected cut or an unexpected rise in interest rates or change in government taxation and spending – for example deep cuts in government spending as part of fiscal austerity

These shocks will bring about a shift in the aggregate demand curve

Factors causing a shift in AD

Changes in Expectations

Current spending is affected by anticipated income and inflation

When confidence falls, we see an increase in saving and businesses postpone investment projects because of worries over weak demand and lower expected profits.

Changes in Monetary Policy – i.e. a change in interest rates

If interest rates fall – this lowers the cost of borrowing and the incentive to save, encouraging consumption & investment

There are time lags between changes in interest rates and changes in AD

Changes in Fiscal Policy

Fiscal Policy refers to changes in government spending, taxation and borrowing

The Government may increase its expenditure e.g. financed by a higher budget deficit - this directly increases AD

Income tax affects disposable income e.g. lower income tax raises disposable income and should boost consumption.

Economic events in the world economy

International factors such as the exchange rate and foreign income

A depreciation in a currency makes imports dearer and exports cheaper - the net result should be that UK AD rises

An increase in overseas incomes raises demand for exports. In contrast a recession in a major export market will lead to a fall in exports and an inward shift of aggregate demand.

Changes in household wealth

Changing share and property prices affect the level of wealth

Declining asset prices can hit confidence / a fall in expectations

Changes in the supply of credit

The availability of credit is vital for the smooth functioning of most modern economies

Many banks and other lenders are now more reluctant to lend

Interest rates on different loans have become more expensive

Extension Reading for Contextual Knowledge

Here is a selection of articles for extension / enrichment reading on this topic

UK house prices see annual growth, Nationwide says - how might a recovery in house prices affect the different components of aggregate demand?

Budget 2013: Infrastructure spending boosted by £3bn a year - will this expansion in investment spending be sufficient?

Britain, the world and the end of the free lunch? - Britain's trade deficit increased in 2012, what does this mean for aggregate demand and prospects of a stronger recovery from recession?

Unit 4: FDI in Africa

Below is a concise yet comprehensive set of notes on advantages of FDI and its issues...a MUST read for Y13 students. This will really help with any case study or essay on development and FDI.

The specific focus is on foreign direct investment in Africa and how investment from China and other BRIC countries is helping or nindering development.


Foreign direct investment comes in different forms

•Merger and takeover activity

•Land purchases by overseas investors – known as land grabs

•Fixed capital investment involving building new factories, assembly plants and distribution centres

Motivations for foreign direct investment

The main motivations for the expansion of multinational activity are as follows:

1.Higher profits and a stronger position and market access in global markets

2.Reduced technological barriers to movement of goods, services and factors of production

3.Cost considerations – a desire to shift production to countries with lower unit labour costs

4.Forward vertical integration (e.g. establishing production platforms in low cost countries where intermediate products can be made into finished products at lower cost)

5.Avoidance of transportation costs and tariff and non-tariff barriers

6.Extending product life-cycles by producing and marketing products in new countries

7.The urge to merge – the financial incentives created by the global deregulation of capital markets is making it easier to achieve acquisitions and mergers and thereby encouraging the external growth of a business.

China in Africa - Evaluating Benefits and Costs for Africa

Partly because of persistent trade surpluses with many other parts of the world, China has accumulated foreign-exchange reserves in excess of $3 trillion. These surpluses allow for huge levels of overseas direct investment – much of the current focus is on China’s investments in many African and Latin American countries. The media often portray such investment in highly simplistic terms – accusing the Chinese of land-grabbing, resource-snatching, and neo-colonialism. The reality is much more complex.

We have seen large Chinese investments in Africa and hundreds of thousands of Chinese are now living and working in Africa – this is now major source of remittance income back to domestic Chinese economy. In recent years China has given more loans to poor countries than the World Bank. In African countries such as Nigeria and Zambia, amounts from China of over US$100 million per year have been the norm over the past few years. In Zambia, for instance, this has represented 1–1½ percent of GDP.”

Debunking the myths of china from MoTanweer

Benefits of Chinese FDI for Africa


1.FDI has boosted growth – with recent growth rates in Sub-Saharan Africa of more than 8% - substantial progress has been made in reducing extreme poverty

2.FDI has accelerated investment in new infrastructure. For example, the Addis Ababa – Djibouti road; provides coastal access for land-locked Ethiopia. Other projects include dams and airports, mines and wind farms providing opportunities for African nations to grow capacity in renewable energy.

3.Africa is endowed with significant natural advantages – it is the best continent for solar/bio-fuel. Africa cannot wait 5-10 years for these technologies to improve: energy investment is needed now and FDI provides the key to achieving this

4.Imported cheaper goods from China raises real incomes for an emerging African middle class

5.Investment is linked to better training for local workers, an improvement in human capital

6.Chinese investment in fertile but underdeveloped farmland in Africa will raise farm productivity and incomes whilst helping to keep down world food prices – benefitting millions of the poorest people

7.Open bidding for investment contracts is an opportunity for African businesses

8.Chinese investment in Africa has been mixed: 29% mining, 22% manufacturing, 15% construction, 14% finance, 19% other – mostly not resource depletive activities; FDI into Africa does create jobs (China does not exclusively bring in Chinese workers unless locals are unavailable; e.g. building a graduate college in Ethiopia to train engineers for construction projects)

9.China historically has operated in a self-interested way, not expansionary/colonial. For FDI to work in the long run, the benefits have to be mutual. FDI from China to Africa is not that large - only 5% of Africa inwards FDI comes from China; only 3% of Chinese investment is to Africa

10.Many African governments prefer to borrow from China rather than depend conditional lending by the World Bank and the IMF - loans from China’s Exim bank to Africa in 2011 were double that of the World Bank, cementing a trend which started around 2005.



Costs / Risks of Chinese FDI for Africa


1.Inward migration of Chinese workers has limited the employment-creation effects for African nations

2.There are fears that Chinese FDI will accelerate the process of natural resource depletion for African countries relying heavily on these resources as a source of income and wealth.

3.Some economists argue that Chinese companies have set up in Africa as a route to get their products into the USA – thereby avoiding US tariffs and other import controls on Chinese manufactured products

4.Many African countries have a limited domestic manufacturing base unable to compete effectively with the arrival of Chinese competition.

5.Fears of a loss of control over economies, remittance of profits and wages back to China and the risk of foreign takeovers

6.It was estimated in 2011 found that over 1 million Chinese migrants were living and working in Africa, often connected to Chinese FDI projects. The Chinese Diaspora might be undermining entrepreneurship in many local communities in some African countries

7.Fears that the balance of economic power is firmly tilted in favour of the Chinese who can negotiate favourable terms for any investment projects.

8.Dangers of unsustainable natural resource depletion - fears about weak social and environmental responsibility from Chinese investors

Unit 4: The BRICS meet to aid development.

Click here to access a BBC article which discusses the latest meeting of the BRICS economies in South Africa. It was said that the BRICS wanted to create a 'Development' bank...however, this article by Al Jazeera states that the talks have not agreed to set up the bank.

Check out the Al Jazeera news clip from 27th March 2013



There are so many development issues here. Possible questions include:

Do the BRICS economies trust each other?
Why are they so interested in Africa?
Will Africa benefit from the (possible) infrastructure projects or will there be strings attached?
What do they have to gain to meet without the powers of EU & USA?

Unit 1: Price Elasticity of Demand

Hilarious....My brother trying to teach Economics.....(it's actually quite informative & useful for Y11 & Y12)....enjoy!!

Unit 2: Rebalancing the economy

"Rebalancing the economy - it has become a mantra in Whitehall, the Bank of England and the world of economic think tanks." But why? 

It is up to you Year 12 to investigate!

In your research you need to find out what is going on with the UK's Current Account Balance of Payments, why a deficit might be a problem and how it can be solved. What does George Osborne think needs to be done?

Look here for more information...

Here and here 

http://www.cbi.org.uk/media/1231301/cbi_rebalancing_the_economy_report_301211.pdf

Unit 2 & 4: Keynesian stimulus can reduce govt debt

Increasing taxes during an economic crisis makes perfect sense!

Thank you to Mr Drennan for spotting this recent Guardian article focusing on debt-friendly stimulus rather than austerity. It suggests that citizens do not necessarily have to endure further financial hardship. Excellent for students discussing macroeconomic policy in their essays.

(Source: guardian.co.uk, Thursday 21 March 2013)

Raising taxes means more government expenditure on projects such as road-building, which directly benefits the public. Photograph: Bob Battersby/Eye Ubiquitous/

With much of the global economy apparently trapped in a long and painful austerity-induced slump, it is time to admit that the trap is entirely of our own making. We have constructed it from unfortunate habits of thought about how to handle spiralling public debt.

People developed these habits on the basis of the experiences of their families and friends: when in debt trouble, one must cut spending and pass through a period of austerity until the burden (debt relative to income) is reduced. That means no meals out for a while, no new cars and no new clothes. It seems like common sense – even moral virtue – to respond this way.

But, while that approach to debt works well for a single household in trouble, it does not work well for an entire economy, as the spending cuts only worsen the problem. This is the paradox of thrift: belt-tightening causes people to lose their jobs, because other people are not buying what they produce, so their debt burden rises rather than falls.

There is a way out of this trap, but only if we tilt the discussion about how to lower the debt/GDP ratio away from austerity – higher taxes and lower spending – toward debt-friendly stimulus. This means further increasing taxes and raising government expenditure in the same proportion. That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government has borrowed) declines.

This kind of enlightened stimulus runs into strong prejudices. For starters, people tend to think of taxes as a loathsome infringement on their freedom, as if petty bureaucrats will inevitably squander the increased revenue on useless and ineffective government employees and programs. But the additional work done does not necessarily involve only government employees, and citizens can have a voice in how the expenditure is directed.

People also believe that tax increases cannot realistically be purely temporary expedients in an economic crisis, and that they must be regarded as an opening wedge that should be avoided at all costs. History shows, however, that tax increases, if expressly designated as temporary, are indeed reversed later. That is what happens after major wars, for example.

We need to consider such issues in trying to understand why, for example, Italian voters last month rejected the sober economist Mario Monti, who forced austerity on them, notably by raising property taxes. Italians are in the habit of thinking that tax increases go only to paying off rich investors, rather than to paying for government services such as better roads and schools.

Keynesian stimulus policy is habitually described as deficit spending, not tax-financed spending. Stimulus by tax cuts might almost seem to be built on deception. Its effect on consumption and investment expenditure seems to require individuals to forget that they will be taxed later for public spending today, when the government repays the debt with interest. If individuals were rational and well informed, they might conclude that they should not spend more, despite tax cuts, since the cuts are not real.

We do not need to rely on such tricks to stimulate the economy and reduce the ratio of debt to income. The fundamental economic problem that currently troubles much of the world is insufficient demand. Businesses are not investing enough in new plants and equipment. They are not adding jobs, largely because people are not spending enough – or are not expected to spend enough in the future – to keep the economy going at full tilt.

Debt-friendly stimulus might be regarded as nothing more than a collective decision by all of us to spend more to jump-start the economy. It has nothing to do with taking on debt or tricking people about future taxes. If left to individual decisions, people would not spend more on consumption. However, maybe we can vote for a government that will compel us all to do that collectively, thereby creating enough demand to put the economy on an even keel in short order.

Simply put, Keynesian stimulus does not necessarily entail more government debt, as popular discourse seems to assume. Rather, stimulus is about making collective decisions to get aggregate spending back on track. The spending naturally involves different kinds of consumption than we would make individually – say, better highways, rather than more dinners out. But that should be OK, especially if we all have jobs.

Balanced-budget stimulus was first advocated in the early 1940s by William Salant, an economist in president Franklin Roosevelt's administration, and by Paul Samuelson, then a young economics professor at the Massachusetts Institute of Technology. They argued that, because any government stimulus implies higher taxes sooner or later, the increase may as well come immediately. For the average person, the higher taxes do not mean lower after-tax income, because the stimulus will have the immediate effect of raising incomes. And no one is deceived.

Many believe that balanced-budget stimulus – tax increases at a time of economic distress – is politically impossible. After all, French president François Hollande retreated under immense political pressure from his campaign promises to implement debt-friendly stimulus. But, given the shortage of good alternatives, we must not assume that bad habits of thought can never be broken, and we should keep the possibility of more enlightened policy constantly in mind.

Some form of debt-friendly stimulus might ultimately appeal to voters if they could be convinced that raising taxes does not necessarily mean hardship or increased centralisation of decision-making. When people understand that it means the same average level of take-home pay after taxes, plus more jobs and products of additional government expenditure (such as new roads), they may well wonder why they ever tried stimulus any other way.

Unit 2: Balance of Payments

I know this is poor blogging Mr Bentley! Just links to look at.. better blogging to follow!!

http://www.tutor2u.net/economics/revision-notes/as-macro-balance-of-payments.html

http://www.cbi.org.uk/media/1231301/cbi_rebalancing_the_economy_report_301211.pdf

http://brynsaseconomicsblog.blogspot.ae/search/label/Balance%20of%20Payments

Unit 4: Development syllabus requirements (EDEXCEL)

Development Economics – Syllabus requirements

 

1. Evaluation of measures to promote growth and development
2. Theories of growth and development

An extensive list of measures to promote growth and development is provided in the specification.

 

Students should understand the nature of each of these, and be able to evaluate them, remembering that different measures will be valid depending on the nature of the country requiring assistance (for example, degree of political stability/ corruption, or sophistication of transport and communication links).

 

There is significant debate regarding the impact of Fair Trade schemes, particularly with respect to the coffee market — much of the literature on this is available on the internet.

 

Students could be introduced to some of the theories of growth and development, such as Harrod-Domar, Solow, Rostow’s Stages of Growth, and the Lewis 2 — sector model.

 

The role of institutions such as the IMF could be considered, and the World Bank’s

 

Structural Adjustment Programmes (with reference to Uganda as the first ‘success’).

 

Able students could also consider whether growth and development is actually desirable, since it may be accompanied by a number of negative externalities.

 

The activities of pressure groups such as Jubilee 2000 could be examined. The dependence of countries such as Ethiopia on aid hand-outs and humanitarian relief could be evaluated as an example.

 

James - Jubilee 2000
Hazim - Uganda & SAP's
Holly - Fair trade & Coffee
Gabrielle - Evaluation of all models of growth
Amba - Millenium Development Goals
Abe - Aid Vs Trade (Ethiopia or country of your choice)
Connor - IMF & World Bank (effectiveness)

Unit 4: Tariffs back in vogue

Costs Up, So Dry Cleaners Want Their Hangers Back!

If you think your dry cleaning bills are high now, hang on. Wire hangers are getting more expensive due to import tariffs on cheaper hangers from China. So dry cleaning operators are asking customers to return their hangers to help keep costs down.


At Monarch Cleaners in Birmingham, Ala., customer Don Kirkpatrick strolls in clutching dirty shirts in one hand and a bunch of wire hangers in the other. He uses wooden hangers at home and says he doesn't care for the wire variety.

They are "pretty much useless," Kirkpatrick says. "There wasn't enough of them to try to give them to an iron or steel scrap person. It just didn't weigh enough to make any sense, so I just literally threw them away."

But at Monarch, they are a dry cleaner's treasure. On the counter is a stack of fliers urging customers to return hangers on their next visit. Across the United States, dry cleaners are begging people to do the same.

A Flood of Imports

A flood of cheap Chinese hanger imports in recent years has forced all but one major U.S. hanger manufacturer out of business. M&B Hangers in Leeds, Ala., hung on.

In 2006, U.S. shipments of wire hangers were valued at $40.39 per 1,000, compared with $31.69 per 1,000 for shipments from China, according to the U.S. International Trade Commission. Last year, the United States imported 2.7 billion wire hangers from China — up 52 percent from 2006.

M&B President Milton Magnus III complained to the U.S. Commerce Department that Chinese manufacturers were dumping hangers well below market value. In March, the government responded by imposing a tariff on all wire hangers from China.

"I had almost come to the realization that we couldn't make hangers in this plant anymore," Magnus says.

Today, M&B is thriving. It makes more than a million hangers a day, and Magnus expects to double his work force in two years. But that still isn't enough to meet the demand.

Since the tariff was imposed, nearly every dry cleaner in the U.S. has had to pay more for hangers, on average about $4,000 a year. But Magnus says most customers probably won't notice it.

"If I pay $12.95 to have my suit cleaned and that hanger cost him a cent and a half more, that's $12.96 and a half," he says. "It's not a factor."

Costs Press Industry

Bill Fisher is an analyst with the Drycleaning and Laundry Institute, an industry trade group. He says a number of former U.S. hanger manufacturers have made a comeback since the tariff ruling. One company has reopened a plant in Wisconsin and opened another in California. But he says it's a mixed bag.

"It will certainly result in competition," Fisher says. "I would be very surprised if it drove prices down. The bottom line is cleaners are really struggling right now."

Hangers aren't the only drag on costs. Higher energy prices have taken a toll, and Fisher says there are too many dry cleaners nationwide. The institute says there are about 30,000 dry cleaners in the United States.

At Monarch Cleaners, owner Mark Dichiara says he goes through 2,000 hangers a week and that he's doing anything he can to save money.

"I don't mind getting free hangers," Dichiara says. Customers are "giving me what they consider to be garbage. [If] somebody brings me in a box full of hangers, that's like putting $10 on the counter before they even do business with me."

And that's a cost he won't have to pass on to customers.

Unit 2 & 4: Gabrielle's nightmare - The Keynes word!

Thanks to James edwards for this article from the Guardian. George Osbourne (that's the Chancellor Abe) , faced with the failure of austerity policies, is about to quietly try out some rather interventionist ideas.

Interesting!

Unit 2 & 4: The budget in pictures/Graphs

Click here to access an excellent piece from the Guardian on all things to do with the budget.

Unit 2 & 4: Budget 2013 - winners & losers

Bitter losers and winners 2013 Budget

Wednesday, March 20, 2013

Useful graphic from The Guardian showing Government Revenues and Spending - helps to put some perspective on some of the announcements.

Office For Budget Responsibility forecasts for the economy in 2013. The Treasury's Budget details are here. 

Politicshome's live Blog showing that hell hath no fury like pressure groups scorned, with plenty of useful links to early comments on The Budget.

Evening Standard's coverage here, it managed to pre-empt the Chancellor's statement.

Unkit 2 & 4: Fiscal Policy - Osbourne style

It is the Budget announcement this week so it might be good to focus on fiscal policy on this blog.

This radio piece by Evan Davis might make a good place to start - seven minutes from the Today programme, in which he examines the objective of simultaneously growing the economy and shrinking public spending. 

In the first half of the programme there is a comparison with 2003-4, when government spending as a proportion of GDP was the equivalent of what the government hopes to achieve for 2017-8, at just under 40%. This includes an excerpt from the Budget speech of an optimistic Chancellor of the Exchequer Gordon Brown, happily declaring that the UK no longer suffers from "...the old British disease of stop-go". 

In the second half there is a discussion with Paul Johnson of the IFS (Institute for fiscal studies) about the room for manoeuvre available to the current Chancellor as he prepares this Budget, which highlights the extent of the cuts since 2010, and the opportunity cost of maintaining spending on health, pensions and schools on all other areas of government spending.

Unit 4: Economic Develoment - Colliers 4 traps

In his book ‘The Bottom Billion’, Paul Collier outlines four poverty traps that prevent development.Useful when looking at reasons why some countries develop and others do not.

Conflict

The first of the four traps is conflict. 73% of those in the poorest billion of the world’s population are either involved in or recovering from civil war. In the fight against poverty, civil war creates a vicious circle – war causes poverty, and low income contributes to tension. Low growth means high unemployment and thus plenty of angry young men ready to fight. Conflict then destroys infrastructure and scares away investors, leaving even fewer opportunities. Building peace has to be a major part of solving poverty.

Natural resources

Another poverty trap is natural resources. It sounds a little paradoxical to suggest that natural resource wealth is a factor in poverty, but you only have to consider that Sudan, Angola, and Zimbabwe all have oil to see how this plays out. It’s rare for natural resource wealth to come back to the people. Sometimes this is simply because the revenues end up in the foreign bank accounts of the elite, but the big problem is this: the rush of investment into one sector draws attention, capital, and skills from all the other sectors of the economy. When oil is discovered for example, the demand for infrastructure and business development in that area will immediately trump any other concerns. As the oil is pumped, other sectors of the economy wither, their costs rising from increased wage competition and the sudden rush of foreign currency into the country that is unfairly shared across the country.

This isn’t just a problem of badly managed African nations. The phenomenon is known as ‘Dutch Disease‘, after Holland’s mis-management of their natural gas stocks. Countries like Angola prove the point. The government and the elite are making a fortune out of the oil. There is no incentive for them to invest in the country more broadly, so Angola’s oil is a curse and not a blessing.

Landlocked countries

A third trap is geographical – the problem of being landlocked with bad neighbours. 38% of the bottom billion live in landlocked countries,  and these pose a real challenge to development. Being landlocked doesn’t have to be a disaster, as long as your neighbours have decent infrastructure and allow you to use their ports. Collier gives the example of Switzerland, who can trade through Italy or Germany. If your neighbours don’t like you, or if they are basket-case countries, there is no way you can export. Compare Switzerland with Uganda, which shares borders with Kenya, Sudan, Somalia, Rwanda, The Congo, and Tanzania.

Without dependable ways to export, landlocked countries such as Uganda or Rwanda are unable to participate in the global economy. Interestingly, both of those countries have invested in growing air-freighted produce such as green beans and mange-tout. I generally disagree with air-freighted food, but you can see why they have chosen to specialize here.

30% of Africa’s population lives in landlocked countries. We have a lot to answer for here, because we drew up the borders. “A reasonable case can be made that these places should never have become countries” says Collier. “However: the deed is done. These countries exist and they will continue to do so.” The best we can do is make sure that landlocked countries are prioritised in aid.

Bad governance

Three quarters of the bottom billion live in countries that are either failing, or recently were failed states – countries such as Somalia, Haiti, Sudan, Zimbabwe. While governments do not function, or exist only to benefit themselves, development is ultimately impossible. It’s difficult to price these things, but Paul Collier estimates that each failed state costs the global economy $100 billion, and since the costs of intervening to fix a failed state would usually be less, he makes a case for more military intervention. That’s going to upset a lot of people, but it doesn’t have to mean Afghanistan or Iraq. What if an international presence had forcibly removed Mugabe when he lost the election recently? Or moved in fast after the Kenyan elections last year, not to occupy, but as a guarantee of democracy?

Unit 2 & 4: Spain and Austerity

Spain's debt to GDP ratio is 84%, €884.4 billion ($1.14 trillion).In an attempt to control this spiraling debt Spain's Government has been employing a contractionary fiscal policy. "In 2012 it tried to obey Brussels and Berlin, raising taxes and chopping spending on health, education, social services and almost everything else."

This has caused massive public anger, with GDP shrinking and unemployment at 26% a contractionary fiscal policy has been very controversial. Half of those under 25 are able to find jobs and in 2013 800,000 people lost their jobs. In 2013, unemployment will rise further as another half a million or more jobs are lost. A new labour law offers workers in companies with falling revenues either wage cuts, sackings or both.

Angry at the austerity measures Spaniards took to the streets in protest. Click here, here and here for more information. 

Interestingly, Germany's unemployment rate is only 5.4% - what is Germany doing that Spain isn't? Find out here... 

Eurozone Crisis

 

 Click here for a cool interactive timeline on the Eurozone crisis

Unit 4: The Eurozone Crisis

Would you want to live in Cyprus right now?

Click here to access an article on one solution to the problem - A one off payment to the government by savers!!!!

How did the crisis in Europe happen? Click here to access a useful Q & A on the reasons behinfd it - really useful for a basic understanding.

Unit 2 & 4: The Latest CPI Basket of Goods

Does that reflect your changing habits over the last year? The ONS have released news of changes to be made to the official representative basket of goods whose prices they check to measure inflation. 

Each year they update the 700-or so items in the basket so the contents accurately reflect current trends in spending. So the items added and removed provide an interesting view of the goods and services which are most important to us, and how we are choosing to spend our disposable income.

For 2013, they have included blueberries and pre-packed stir-fry vegetables to improve fruit and fresh vegetable coverage - with perhaps a slight shift towards healthier lifestyles? 

For our leisure habits, Freeview boxes are out but digital TV recorders in, following the digital switchover, and we may be spending more time reading, as e-books are now to be included. 

Apparently young people are buying more white rum from off-licences so that is included, at the expense of champagne as its sales in restaurants and bars dropped by 7% last year - although some off-licence champagne sales are still included. 

And it seems that we are buying more charcuterie, but fewer taps.... 

Quesions for discussions:

A) Do these chages affect you?

B) What is the issue with having an average measure of inflation?

Unit 4: Fiscal Austerity - does it work?

Channel 4 news hosted an extended discussion recently on the impact of fiscal austerity in the UK and many other European countries. 

Click below for the video which looks at whether austerity measures are bringing massive government borrowing under control or threatening an even deeper descent into semi-permanent recession. The discussion features Professor Paul Krugman

Unit 4: Economic Development in South Korea

This article discusses growth and development issues in South Korea. 

The country now has a per capita income in excess of $30,000 and is a high-income developed country with membership of the OECD. Having escaped the middle-income trap, can South Korea continue to prosper or will the country have to modify their development strategies to meet fresh competitive challenges and changing expectations?

Download this handout to help you:

Growth_and_Development_in_South_Korea.docx

Videos to help decide what model to follow:

Long Hours: http://www.youtube.com/watch?v=l_ZFIi9BX9w
Smart schools: http://www.youtube.com/watch?v=Cll9RP3F9mg
Ageing population: http://www.youtube.com/watch?v=Em4vbzS2Ijw
Mid Cap Quandary: http://www.bbc.co.uk/news/business-21175403

Economic growth in prospect: http://www.bbc.co.uk/news/business-20091248
South Korea – In search of a new model: http://www.youtube.com/watch?v=RGvl-kLzva8

Unit 2 & 4: Macroeconomic Policy - What is austerity?

Unit 4: Macro stimulus - what to do?

Jeffrey Sachs, one of the most respected economic advisors of his generation, has launched an attack on Nobel laureate Paul Krugman's short term stimulus solutions to the US' current economic woes believing that what's required is "a consistent, planned, decade-long boost in public investments in people, technology, and infrastructure". 

According to Sachs, Krugman, a disciple of John Maynard Keynes, is guilty of what he calls "crude Keynesianism" which he outlines in the four points below:

(1) The belief in large, stable, and predictable multipliers on taxes and transfers;

(2) The belief that our problems are due overwhelmingly to a deficiency of aggregate demand, rather than to structural problems that need a long-term approach;

(3) The belief that a rapidly rising debt-GDP ratio is largely benign because interest rates are low today and will stay so indefinitely;

(4) The belief that "to a large effect, spending is spending," thereby catering to waste and vested interests while ignoring America's urgent investment needs. 

Sachs criticizes the size of Krugman's multiplier calculations (useful to my AS students who have looked at this theory recently and who'll be appreciative of some relevant media coverage. Look here for some more fiscal policy multiplier estimates): 

"Krugman believes that fiscal multipliers are predictable and large. Thus, a $1 rise in government spending of any kind, according to Krugman, predictably leads to something like $1.50 in higher GDP. Similarly, a $1 cut in payroll taxes leads to something like a $1.30 rise in GDP. "

He then goes on to suggest three possible policy solutions:

(1) Decade-long public investment programs in renewable energy, upgraded public infrastructure, fast rail, job training and the like;

(2) Adequate fiscal revenues (including tolls on infrastructure) to pay for these investments over the course of a decade, including a downward path of the debt-GDP ratio;

(3) Increased revenues through taxation on high net worth, financial transactions, high incomes, capital gains and carried interest, offshore corporate earnings, and carbon emissions, and a stiff crackdown on tax havens and phony transfer pricing. 

Krugman's response via his NY Times blog is characteristically to the point - "I don’t know what’s happened to Jeff Sachs. He’s been critical of “crude Keynesianism” throughout this crisis, without ever explaining what’s crude about viewing a huge slump in aggregate demand through a Keynesian lens. So his position has been a mystery."

To finish, for a straightforward explanation of the austerity-stimulus debate have a look at this Business Insider article. It comes with the below graph which compares UK GDP growth after their austerity approach to the crisis to US growth after their stimulus response. No prizes for guessing what Krugman would advocate more of.

Unit 4: USA & the Unequal distribution on wealth - Shocking Graphic!

An excellent, yet shocking clip on the distribution of wealth in the USA. This just highlights the problems of fulfilling the supply side dream at the expense of society.

If you don't believe me, watch this clip on you tucbe and read the comments below....it sickens me to the core!

Unit 4: GDP and distribution on income in China

Thanks to Amba for finding this article on Chinese disparities in income distribution. A useful piece for discussion on the relative merits of economic growth for developing economies.

Unit 4: Weak pound - no increase in exports??

This is a follow on from the previous post (Exchange rates, weak pound and the Euro)

Aggregate Demand may be stimulated by an increase in exports. Ha-Joon Chang, Author of the best seller, 23 Things They Don’t Tell You About Capitalism considers reasons in a short article for The Guardian why this hasn't happened after Sterling had fallen against other major trading economies. " 

Compared with ...2007, the pound has been devalued about 30% against the dollar, 50% against the yen, and 20% against the struggling euro. 

Yet despite the huge incentive to export created by such devaluation, Britain is still running trade deficits because it has lost the productive capacity to respond."

You guys should consider plausible policies to reduce its trade deficit, a macroeconomic goal overlooked in arguments over fiscal and monetary policies to control inflation or output. 

Finally it may aid evaluation, how different are the most pressing short and long term macroeconomic challengers facing UK governments....which are the most significant?

Award of an A* Grade

Guys,

as always, I am right (it's tough being me!).

To gain an A* you need to have achieved an A at AS and if you get a COMBINED score of 180/200 at A2, you get the A*.

You do not need to get an A* in both papers.

It is the same for all subjects and all exam boards. (if you take three units at A2, you get an A* if combined score of three unit is more than 90%.

Unit 3: Anti-Competitive Practices - they are still at it - Allegedly!

Microsoft fined by European Commission over web browser

Click here to access a recent article regarding Microsoft. Despite previous fines it looks like they are still unfairly competing in the web browser market.

Questions for discussion:

Do you think the CC is being too harsh? (have Microsoft not invested heavily in browser technology and therefore should be allowed to promote only their own brand?)

Were the initial fines big enough to discourage anticompetitive practices?

Unit 4: Exchange rates, weak pound and J-Curve

An excellent recent article on the current state of the UK Pound.....+ other mascro issues for the UK. Click on the blue words to access further notes.

The UK export mystery - We've seen  30% devaluation in Pound Sterling, but the UK current account still worsened at the end of 2012.

 - Does a devaluation actually help the economy or does it just make us poorer? Is a strong currency a good thing?

UK exports rise to non-EU countries.  Away from the depressed EU economy, exports to China and India rose sharply. Export growth to BRIC countries was 35% between 2009 and 2012.

UK wage growth.

Real wages at the end of 2012 fell to levels not seen since 2003. That's the impact of the great recession. Unfortunately, there is no end in sight for stagnant real wages. A look at the impact of falling real wages for inflation, monetary policy and unemployment.

Do we have an inflationary time bomb? Many still worry the Bank of England has lost its anti-inflationary credentials as it happily watched the Pound slide, but when you look at figures for M4 money supply, it looks more like we are stuck in a severe recession.

 

 

- M4 Money supply

Negative Interest rates?

Could the Bank of England really implement negative interest rates? It has been done in Denmark, and it could be implemented for commercial banks borrowing from Bank of England. But, it is still unlikely to be implemented unless the Bank get even more desperate. 

• Osborne, debt and credit ratings - Report card for G.Osborne and the governments economic reforms. No grade A for Osborne. more likely a grade E for scraping a pass, just because they turned up to exam. 

EU Double dip recession

Quick links for A-Level economics help

• Causes of the business cycle - why growth is rarely stable.
• The Phillips Curve - is there still a trade off between unemployment and inflation?
• Definition of economic downturn

Unit 2: Unemployment

Jaguar - a MANUFACTURER! to create jobs in the UK!

http://www.bbc.co.uk/news/uk-england-21662673 

Unit 2: Solutions to Unemployment

Thanks to the Year 13's today for their evaluative comments! Hopefully it has got Year 12 thinking about evaluation. 

This is a list of ideas that you guys came up with today...

1. Increase income tax for "rich people"
2. Increase corporation tax
3. Decrease taxation
4. Subsidies and grants for firms
5. Lower the retirement age
6. Depreciation of the exchange rate
7. Lower interest rates
8. Encourage FDI
9. Improve the mobility of labour by lowering house prices
10. Decrease the minimum wage
11. Offer tax breaks to businesses
12. Shake up the education system
13. Lower benefits

On Thursday we will be going over these solutions and thinking about their effects in more detail. Here are some articles for you to look at in the mean time:

Increasing the tax rate:

James mentioned France's 75% tax rate: Look here and here  and here for more information. 

Corporation Tax

Connor mentioned Ireland's low corporation tax rate's (12.5%) - David Cameron announced that the UK's Corporation Tax would be cut to 21% find out more here

Unit 4: Monetary policy solutions in 2013

Paul Tucker, The Deputy Governor of The Bank of England has stated in evidence to The House of Commons' Treasury Select Committee that negative interest rates should be considered as a monetary policy instrument to stimulate the UK's Economy. In their discussions with the MPs, other members of the Bank's MPC implied that they were not inflation-rate nutters, and that other means of stimulating or managing the economy were being considered.


The current base rate of 0.5% leaves little scope for the Bank of England to use conventional means to stimulate a weak economy.The Bank has used quantitative easing (QE), pumping billions into the economy. A policy using negative interest rates could penalise savers, and might mean that the Bank of England is charging banks to hold their money, this might encourage them to increase lending.

Given that the incoming Governor Mark Carney has called for increased flexibility in monetary policy, with a greater emphasis on growth rather than inflation, it might be worth watching how The Bank of England's monetary policy changes, and how savers, borrowers, banks and firms react.

The Telegraph's coverage.

http://www.telegraph.co.uk/finance/economics/9895068/Bank-of-England-mulls-negative-interest-rates.html

The Guardian's coverage.

http://www.guardian.co.uk/business/2013/feb/27/bank-of-england-negative-interest

Coverage in The Independent.

http://www.independent.co.uk/news/business/news/bank-of-england-mulls-negative-interest-rates-8512047.html

and here:

http://www.independent.co.uk/news/business/news/qa-so-what-is-a-negative-interest-rate-8512008.html

The Economist.

http://www.economist.com/news/finance-and-economics/21572215-rich-world-central-banks-explore-more-doveish-strategies-brave-new-words

Unit 4: Development - Mobile internet reaches Indonesia

Mobile commerce can be an important driver of growth and development. Here is an example of emerging business opportunities for leveraging the power of mobile telephone in Indonesia.