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Monday 29 April 2013

Unit 4: Essay Question on Euro

As the Euro has not necessarily come up as a direct question and the fact that it has been in the news for the last year or so, it is a possibility for the June examination. Therefore, why not try this question for homework:

a) The value of the dollar fell from $1 = 6.8 Yuan in 2010 to $1 = 6.3 Yuan in 2013. Examine the factors which might explain this depreciation of the dollar against the Yuan. (NB: Yuan is the Chinese Currency)

(20 Marks)

b) The UK & Latvia have very different opinions on whether or not to join the Euro Zone. What would be the potential economic benefits/drawbacks if either country joined?

(30 Marks)

Wednesday 24 April 2013

Unit 2 & 4: Economic Impact of Margaret Thatcher

Economic Impact of Margaret Thatcher


By Tejvan Pettinger on April 19, 2013 in uk economy

Summary of Thatcher’s Economic policies

•Belief in desirability of free markets over government intervention. E.g. pursuing policies of privatisation and deregulation.

•Pursuit of supply side policies to increase efficiency and productivity.

•Reducing power of trades unions and increased labour market flexibility.

•Financial deregulation, e.g. building societies becoming profit making banks.

•Reducing higher rates of marginal income tax to increase incentives to work.

•Ending state subsidies for major manufacturing companies.

•Encouraging home ownership and share ownership.

•Targeting money supply and monetarist policies to reduce inflation of late 1979. Monetarism was effectively abandoned by 1984.

The Economic Impact of Margaret Thatcher


Recession of 1981

When Mrs Thatcher came to power, she sought to:
•Reduce inflation running at over 20% in 1979

•Reduce budget deficit.

•Increase efficiency of economy

•Reduce power of Trades Unions

On coming to power, the Conservatives followed a policy of Monetarism – seeking to control the Money Supply in order to control inflation. This involved higher interest rates, and higher taxes. This did reduce inflation from over 20% to 5%, but at the cost of a deep recession and unemployment rising to over 3 million.

In 1981, 365 economists signed a letter to the Times newspaper arguing the government should reverse its economic policy and seek an end to the recession. This caused Mrs Thatcher to make her famous speech to the Conservative party conference of 1981.

“To those waiting with bated breath for that favourite media catchphrase, the U-turn, I have only one thing to say: You turn if you want to. The lady’s not for turning! (BBC)

It was great politics, but the economic cost was a significant decline in GDP and unemployment staying at nearly 3 million until the mid 1980s.


Trade unions

In the 1970s, days lost to trade union strikes were at all time highs. It was feared that poor industrial relations was a key factor in holding back industry. Thatcher was determined to reduce the power of trades unions and end industrial disputes from costing British industry.


Trade union membership fell in the 1980s, forever changing British union.

There is no doubt that industrial disputes were a real problem in the 1970s (though it should be remembered there are always two sides to industrial disputes – not just unions). Days lost to strikes fell significantly in the 1980s, and there have been improved industrial relations. To some extent Mrs Thatcher can claim some success, e.g. ending the right to secondary picketing, ending closed shops, compulsory ballots. But, also, the decline in trade union power was also caused by other factors, such as the decline in British manufacturing, British heavy industry and the rise in unemployment.

The coal miners

An iconic moment of Mrs Thatcher’s early policies was the Miners strike of 1984. She successfully out manoeuvred the miners and fundamentally weakened the NUM – no more would the mining unions be able to bring down a government like in the 1970s. The strike was bitter, leaving lasting scars, and miners see the decline of the industry as evidence that their fears over pit closures were true. But, the mining industry had been declining since the 1920s. Even in 1945, half a million people worked in coal mines. Today, the figure is less than 10,000 and is being replaced by cheap imports and other forms of electricity. (see: decline of coal mines) It is hard to justify, given the environmental cost of coal, that a government should have subsidised a declining industry.

UK Unemployment in 1980s

Unemployment never really recovered from 1981 recession. It is one of the great failures of the 1980s – to have much higher unemployment than any previous post-war period. Even in the late 1980s, unemployment was over 2 million. A significant factor was the structural and geographical unemployment caused by industrial decline.

Lawson Boom of the 1980s

After 1985, the UK economy grew very rapidly. Economic growth reached 4-5% a year. This was well above the UK’s long run trend rate. The Conservatives felt there had been a supply side miracle. But, inflation increased to 10%. And in 1990, the boom came to an end, leading to another recession of 1991-92.


Since 1985, the UK has experienced a prolonged current account deficit. In the Lawson boom, the deficit reached 5% of GDP.

Supply side policies

A key feature of Thatcher economics was the implementation of supply side policies aimed at increasing the efficiency of the economy. These policies included:

•Reducing the power of trades unions

•Privatisation of state owned assets from BP and BT to gas, water and electricity.

•Deregulation of monopolies, such as gas and electricity

•Deregulation of financial sector, e.g. enabling building societies to become profit making banks.

Housing Market

A key philosophy of the Mrs Thatcher was the idea of a ‘home owning democracy’. During the 1980s, home ownership rates rose. In particular, the policy of selling off council homes to residents, helped to increase home ownership rates. It is worth noting, that home ownership rates had been rising since the late 1960s. In the 1970s, we see a similar trend in house prices to the 1980s. (1970s housing market) Also in recent years, the percentage of home ownership rates has fallen, due to house prices becoming unaffordable for many.

•Home Ownership – Mrs Thatcher encouraged a belief in home-ownership. Many Council houses were bought be tenants. It led to a rise in home-ownership rates.




House prices in the late 1980s boomed, with record house price inflation, especially in the south east. This created a powerful feel good effect and contributed to the Lawson boom of the late 1980s. But, the growth in house prices was also unsustainable and prices fell after 1990.



Other Economic Theories and Beliefs of Mrs Thatcher

•Privatisation – Under Mrs Thatcher many nationalised industries were sold to the private sector. Her belief was that the private sector was more efficient because the private sector have a profit motive and pursue greater efficiency than government owned industries. See: advantages and problems of privatisation

•Tax Cuts for High earners. During the 1980s, tax rates for high income earners was reduced. Mrs Thatcher felt, high taxes discouraged incentives to work. However, as a consequence of tax cuts and growth in finance sector, inequality in UK widened.

•An acceptance of Inequality. Mrs Thatcher didn’t quite break up the Welfare state, but increasingly there was greater means-testing. See: inequality in UK

•Poll Tax. A very controversial tax, which arguably led to Mrs Thatcher’s downfall. Poll tax

•Reduced Power of Trades Unions. The Miner’s Strike of 1984, led to a marked decline in the power of organised labour. Time lost to strikes fell rapidly.

Success of Thatcher Years

•Privatisation did lead to efficiency gains for some industries. Helping lead to lower prices for telecoms, airlines and at times electricity.

•Deregulation of key industries led to greater competition within industries which were formerly monopolies. This competition helped create incentives to be more efficient and cut costs.

•Reduction in power of organised Labour. In the 1970s, UK industry was paralysed by strikes and industrial confrontation. During the 1980s, industrial relations improved. Though this was partly due to much higher unemployment levels.

•Growth of new service sector and financial sector industries.

•Inefficient firms no longer received state support, but had to be competitive and go out of business. Although it was a painful process, arguably it was necessary for long-term growth

•Rise in home-ownership helped more people feel they had a stake in economy.

Failures of Thatcher Years

•The 1980s saw a return of mass unemployment – levels not seen since the 1930s.

•Two recessions were caused by deliberate policies. Although inflation needed controlling in 1980, arguably the government deflated economy too much – chasing money supply targets which were unreliable. The cost was unemployment and social disorder, which need not have been so deep.

•Growth in north – south divide and regional inequality. Unemployment particularly affected former industrial areas; the government were slow to help deal with problems of structural unemployment.

•The Lawson boom was a missed opportunity. The government deliberately allowed a boom and bust which caused an unnecessary and painful recession of 1991. For all Mrs Thatcher’s claims to see the importance of keeping inflation low. It was ironic, the government made such a mistake in allowing an inflationary bubble in the late 1980s. Part of the reason is that really felt they had created a supply side miracle – which hadn’t actually occurred.

•The rise in home-ownership was good for those who could buy, but has increased wealth inequality in the UK. The supply of council homes is limited because many have been sold off.

•Large rise in inequality during the 1980s.

•Financial deregulation of the 1980s laid framework for credit bubble of 2000s and subsequent credit crisis. For example, privatized building societies like Northern Rock, and Bradford & Bingley pursued risky growth strategies which eventually needed government bailouts in the aftermath of the 2008 recession. Financial deregulation was good for some, but arguably created greater financial instability in the long-term.

•Thatcher reduced the power of trades unions, but arguably at the cost of alienating many working class because of the fierce nature of her conflict.

•Privatisation involved selling off state assets at an undervalued price. Many who could afford to buy shares, saw immediate gains. This was politically popular, but another missed opportunity to use nations resources to invest in the future.

•Thatcher made little attempt to deal with environmental issues during a decade of increased concerns over global warming, pollution and environmental degradation.

Conclusion

Sometimes it is hard to separate how much politicians are responsible for certain events. For example, I don’t believe Thatcher was personally responsible for the dramatic change in the composition of the British economy. The process of de-industrialisation and growth of service sector was inevitable, whatever politicians had done. However, her stubbornness in 1981, did mean we experienced a much deeper recession than necessary. Thatcher’s u-turn speech cemented her reputation as a great politician, but the 365 economists were right. Monetarism was a failure. The social cost of 3 million unemployed is not a price worth paying for being ‘strong’ leader.

Similarly, the decline in industrial disputes was only partly due to Thatcher’s policies on unions and industrial relations. It was also a reflection of changing economic fortunes. Her determination to defeat the miners (for good or ill) was very important. Other leaders could have sought greater compromise.

The supply side policies of the 1980s were a mixed bag. There is no doubt that some privatised industries saw great strides in efficiency and quality of service a combination of both privatisation and greater competition. The greater labour market flexibility, she encouraged, could be responsible for reducing the structural unemployment (though it took many years to have an effect). But, at the same time, the deregulation of the finance sector saw a rise in underlying instability, which is a factor behind the credit boom and crunch of the 2000s.

Thatcher solved certain problems – high inflation, time lost to strikes, poor manufacturing productivity, but also created new problems. – Mass unemployment, rising inequality and a more fragmented society. It is also ironic that she came to power promising to solve inflation, but left power with an unnecessary inflationary boom, which led to another unnecessary recession of 1991.



Sunday 21 April 2013

Unit 4: Examiners report June 11


Unit 4: Income and Substitution effects

The clip below explains the income and substitution effect using the backward bending individuals supply curve. Although it looks at individuals it can be used to discuss the relative merits and issues of income tax policy.


For example, a government might increase the standard rate of income tax (which would be seen as a disincentive to work, but actually it increases the supply of labour as workers feel they need to work longer to maintain their current lifestyle. (the income effect now outweighs the substitution effect)



Monday 15 April 2013

Unit 2: Balance of Payments

There are four components of to the Balance of Payments:

Components of Current Account
  1. Trade in goods
  2. Trade in services
  3. Total income (e.g. investment income)
  4. Total current transfers
In Unit 2 you only need to concentrate of the current account; trade in goods and trade in services.





Above is up to date BOP data.. You can see the the UK's Current account is negative, the value of imports is greater than the value of exports.



As you can see from the above graph the UK's deficit has increased over the last few years. Watch this video HERE from Sky News about the UK's Balance of Payments....

Unit 2 requires you to think about the following things in relation to the Balance of Payments:

  1. Causes of a deficit or surplus
  2. Solutions to a deficit or surplus
  3. And evaluative points such as whether a persistent deficit is a problem?
Look at these links and make some notes!




Unit 2 and 4: Balance of Payments, Trade and Exchange Rates

Unit 2 and Unit 4: Global Current Account Balances


Economics Review - April Issue

The economic review is available from the library. It covers the following topics:
  • What motivates people to work harder?
  • Imperfect information
  • Looking at inequality
  • Free bus travel – does it benefit older people?
  • Asymetric information – problems and responses
  • Human development – the Millennium development goals
  • Review of the UK economy in 2012
 
 

Unit 4: Income Inequality

This is possibly even more shocking than the inequality clip on the USA. Useful data which can be used to evaluate 'Free Trade' and 'Supply Side' Economic Policy.

Saturday 13 April 2013

Revision Notes on all areas of AS & A2 Economics

Click here to access excellent revision material for all syllabus content. This shoulkd be a must look at at every day in the run up to exams.