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Tuesday 26 April 2011

Unit 2: Essay Plan on Macro economic performance and rising imports.

This is an AQA essay question worth 25 marks, but it could easily be an edexcel case study question worth 30 marks....enjoy!


Unit 4: A new strategy for promoting growth & development?

I’ve just read this fascinating economic development story on the BBC website;
It seems the solution to economic development now lies in the virtual world. According to this BBC article (Click here), workers in the developing world are playing massively multiplayer games such as ‘World of Warcraft’ as a full-time job, and then selling various virtual ‘game goods’ on to players in the developed world with less leisure time but more money. Apparently it’s more profitable for the developing country employees than growing coffee!

Whilst this sounds like just a bit of fun, if you wanted to use it in a more formal context in a lesson, it’s another argument in favour of making investments in communication infrastructure in developing countries- especially high-speed internet connections. And a number of countries, particularly in Africa, have made such investments over the last few years, including in Kenya (See related article here)

Sunday 24 April 2011

Unit 1: Price Elasticity of Supply

This revision note considers some areas of the AS micro course where price elasticity of supply can become important in your analysis:


 Price elasticity of supply measures the relationship between change in quantity supplied and a change in price.

• When Pes > 1, then supply is price elastic

• When Pes < 1, then supply is price inelastic

• When Pes = 0, supply is perfectly inelastic

• When Pes = infinity, supply is perfectly elastic following a change in demand

Factors determining elasticity of supply

1. Spare production capacity – high Pes when businesses or the economy has plenty of spare capacity (also known as ‘productive slack’) e.g. when a business or economy is coming out of recession

2. Stocks of finished products and components – high level of stocks (inventories) means that supply can quickly be adjusted to meet changes in demand – this is important in commodity markets

3. The ease and cost of factor substitution - if both capital and labour resources are occupationally mobile then the elasticity of supply for a product is high because capital and labour can be swapped with little loss of efficiency or productivity

4. Time period involved in the production process – Pes is higher the longer the time period that a firm is allowed to adjust its production levels. In some agricultural markets, momentary supply is fixed and is determined mainly by planting decisions made months before, and climatic conditions that affect production yield.

Areas of the AS and the A2 economics syllabus where price elasticity of supply is important

o Housing supply – inelastic supply of new housing in response to rising demand – pushes up property prices with consequences for housing wealth, affordability etc

o Oil industry – can OPEC and non-OPEC countries step up crude oil output as global demand expands?

o Trade: I.e. the ability of a nation’s export industries to respond to depreciation in the exchange rate if export demand grows – important for countries using the exchange rate as an instrument of macro policy

o Commodity prices: Inelastic supply of many hard and soft commodities – making prices more volatile – especially in markets where there is strong speculative activity - link to global food price inflation

o Labour market: Elasticity of supply of labour is a factor explaining wage differentials – i.e. migrant workers can help to relieve shortages of labour and improve the elasticity of supply

o Macroeconomics and the output gap: The changing elasticity of SRAS at different points of the economic cycle

o Elasticity of supply of renewable sources of energy as demand increases e.g. bio-fuels, solar power

o Quasi public goods – i.e. public goods such as the airwaves, motorways, beaches etc which become crowded and congested – causing the marginal cost of supplying to an extra user to rise

o Government intervention in a market – if you are answering questions on maximum and minimum prices or indirect taxes and subsidies, you can always make a useful analytical point about the importance of price elasticity of supply in affecting the results of any such market intervention.

Unit 2: Policy Conflicts

This revision note looks at possible conflicts between macroeconomic objectives and some of the policy prescriptions for over-coming them.

When conflicts arise, choices have to be made about which objectives are given greatest priority. This is a different issue – for example which ought to be the main objective of macroeconomic policy.

These choices will vary from one country to another since the needs of different nations will differ according to their stage of economic development.


Revision aid: Mnemonics - you love them!

I am on the search for handy revision Mnemonics for use with economics - can people recommend ones that they find useful?


SPEW (Monopoly)

Service - does the lack of competition affect the quality of service to consumers?

Prices - how high are prices compared to competitive / contestable market

Efficiency - productive, allocative and dynamic

Welfare - what are the overall welfare outcomes? Is there a net loss of welfare in markets dominated by businesses with monopoly power?

SPICED - to help explain the currency transmission mechanism (X-M)

Strong

Pound

Imports

Cheaper

Exports

Dearer

BRITS - to help explain the elasticity of supply.

1. Barriers to entry – e.g. Patents or high cost of advertising could make it hard for new firms to enter the market

2. Raw materials – If raw materials are readily available, it will be relatively easy to expand production

3. Inventory – Businesses with plenty of stock can increase supply easily.

4. Time – Many agricultural products take time to make so supply is fixed in the short term.

5. Spare Capacity – If businesses are not running to full capacity they are more able to increase supply. The supply of goods and services is often most elastic in a recession when there is plenty of spare labour and capital resource

If you can think of anymore, let me know....

Friday 22 April 2011

Unit 3: Revision notes on market power.

Unit 1: Public and Private Goods

Exam Advice: 10 ways to improve your marks....

Here are some thoughts on ways to improve your scores on your summer economics exam papers. They are in no particular order but I hope some of them might be useful


Ten Thoughts on Improving Your Economics Papers:


Tuesday 19 April 2011

Unit 2: Causes & Effects of Inflation

Unit 2: Causes & Effects of Unemployment

Unit 1 & 2: June 2009 Mark Scheme

Excellent Exam advice: A must read for all Economists!


No doubt you have found in your revision that many factors can influence the direction of a single economic variable. For most key issues there are many short-term and longer-term contributing factors and strong students are aware of these multiple reasons and can bring this explicitly into their answers. For example:


Unit 2: The causes of unemployment (demand and supply side causes): Click here for presentation.

Unit 2: The causes of inflation (cost push and demand pull, domestic and external): Click here for presentation.

Unit 2: Reasons behind changes in the exchange rate (trade, foreign direct investment, other capital flows, central bank intervention): Click here for presentation.

Unit 2: The many factors that the Bank of England and other central banks take into account when setting policy interest rates: Click here for presentation.

Unit 2: Causes of economic growth in both the short run and the long run (AD and LRAS causes): Click here for presentation.

Unit 1: Multiple causes of market failure and of government failure: Click here for presentation.

Unit 3: The reasons why producer cartels are often unstable: Click here for presentation.

Unit 4: The factors driving globalisation (and more recently de-globalisation): Globalisation blogs here

Examiners will always reward students who make an attempt to use relevant economic analysis and make it clear that several factors affect a particular economic variable (eg, inflation, investment spending). Often we make use of the ceteris paribus assumption to isolate in theory the effects of one variable – but the real world does not allow this to happen! Challenging the ceteris paribus assumption can also add weight and value to your answer.

We will discuss this in class....

Unit 1: Key AS Micro Terms: Taxes and Subsidies

Here are some key terms relating to taxes and subsidies - two key forms of government intervention. Don't worry if you have not heard of a 'Pigouvian tax', not essential, but for you high flyers, it would impress the examiner.....
Ad valorem tax: An indirect tax based on a percentage of the sales price of a good or service. The best known example in the UK is Value Added Tax which is 20%. Other examples include Insurance Premium Tax and the ad valorem tax on cigarettes. Stamp duty on house purchases is also an ad valorem tax. An increase in an ad valorem tax causes an inward pivotal shift in the supply curve for those producers affected

Emission tax: A charge made to firms that pollute the environment based on the quantity of pollution they emit - also known as a carbon tax

Excise duties: Excise duties are indirect taxes levied on our spending on goods and services such as cigarettes, fuel and alcohol. There are also duties on air travel, car insurance.

Tax burden or incidence of a tax: The incidence of tax is a measure of how the final burden of a tax is shared out. If demand for a good is elastic and a tax is imposed then the tax may fall mainly on the producer as they will be unable to put prices up by much without losing a lot of demand.

Indirect tax: An indirect tax is imposed on producers (suppliers) by the government. Examples include excise duties on cigarettes, alcohol and fuel and also value added tax

Lump sum tax: A tax that is the same amount across all income levels

Pigouvian tax: A tax placed on a good with negative externalities so that the external cost is internalised: the polluter pays principle. The tax is set equal to the marginal negative externality - linked to the idea of a carbon tax and the polluter-pays-principle

Polluter-pays-principle: The government may choose to intervene in a market to ensure that the firms and consumers who create negative externalities include them when making their decisions egg first parties are forced to internalise external costs & benefits through indirect taxes.

Specific tax: A lump sum tax on the amount sold per unit. An example is the duty on beer

Subsidy: Subsidies represent payments by the government to suppliers that have the effect of reducing their costs and encouraging them to increase output. The effect of a subsidy is to increase supply and therefore reduce the market equilibrium price

Monday 18 April 2011

Unit 2: Essential data about UK Economy April 2011

Unit 3: Key A2 Micro Terms: Competition and Monopoly

Here is a selection of key terms connected to competition and monopoly. Essential for Unit 3....
Competitive market: A competitive market is one where no single firm has a dominant position and where the consumer has plenty of choice when buying goods or services. There are few barriers to the entry of new firms which allows new businesses to enter the market if they believe they can make sufficient profits.

Anti-competitive behaviour: Anti-competitive practices are strategies operated by firms that are deliberately behaviour designed to limit the degree of competition inside a market. Such actions can be taken by one firm in isolation or a number of firms engaged in some form of explicit or implicit collusion. Where firms are found to be colluding on price it could be seen to be against the public interest.

Horizontal integration: Where two firms join at the same stage of production in one industry. For example two car manufacturers may decide to merge, or a leading bank successfully takes-over another bank

Cartel: A cartel is a formal agreement among firms. Cartels usually occur in an oligopolistic industry. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. Cartels are illegal under UK and European competition laws.

Local monopoly: A monopoly limited to a specific geographical area

Market power: Market power refers to the ability of a firm to influence or control the terms and condition on which goods are bought and sold. Monopolies can influence price by varying their output because consumers have limited choice of rival products.

Monopoly: A pure monopolist is a single seller of a product in a given market or industry. This means the firm has a market share of 100%. The working definition of a monopolistic market relates to any firm with greater than 25% of the industries’ total sales

Monopsony: A situation in a market where the buyer has power or leverage against the seller. Typically this happens when the buyer is purchasing a large volume of a product relative to total sales. They may be able to use their buying power to drive down the price paid or to negotiate other favourable conditions with the producer.

Natural monopoly: A market situation in which economies of scale are such that a single firm of efficient size is able to supply the entire market demand

Oligopoly: An oligopoly is a market dominated by a few large suppliers. The degree of market concentration is high with typically the leading five firms taking over sixty per cent of total market sales

Profits: Profits are made when total revenue exceeds total cost. Total profit = total revenue - total cost. Profit per unit supplied = price = average total cost. The standard assumption is that private sector businesses seek to make the highest profit possible from operating in a market

State monopoly: A monopoly that is owned and managed by a government - also known as a nationalised industry

Saturday 16 April 2011

Unit 1: Key AS Micro Terms: Definitions - The Price Mechanism

The price mechanism figures heavily in the AS micro syllabus. Below are some definitions of key terms;

Equilibrium: Equilibrium means ‘at rest’ or ‘a state of balance’ - i.e. a situation where there is no tendency for change

Excess demand: The difference between the quantity supplied and the higher quantity demanded when price is set below the equilibrium price. This will result in queuing and an upward pressure on price

Excess supply: When supply is greater than demand and there are unsold goods in the market. Surpluses put downward pressure on the market price
Market equilibrium price: Equilibrium means a state of equality between demand and supply. Without a shift in demand and/or supply there will be no change in market price. Prices where demand and supply are out of balance are termed points of disequilibrium. Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market.

Market incentives: Market signals that motivate economic actors (i.e. consumer and businesses) to change their behaviour (perhaps in the direction of greater economic efficiency). Behavioural economics studies some of the incentive effects.

Maximum price: The Government can set a legally imposed maximum price in a market that suppliers cannot exceed - in an attempt to prevent the market price from rising above a certain level. To be effective a maximum price has to be set below the free market price. One example of a maximum price might be for foodstuffs when a shortage of essential foodstuffs threatens a very large rise in the free market price.

Minimum price: A minimum price is a legally imposed price floor below which the normal market price cannot fall. To be effective the minimum price has to be set above the normal equilibrium price. A good example is the minimum wage.

Peak pricing: When a business raises prices at a time when demand is strongest

Penetration pricing: Where a firm choose to set a low price to gain market share / brand recognition

Price mechanism: The price mechanism is the means by which decisions of consumers and businesses interact to determine the allocation of resources between different goods and services
Price signals: Price signals are a vital part of a market system. Changes in price act as a signal about the way that scarce resources should be allocated. For example a rise in price encourages producers to switch into making that good but encourages consumers to reduce to use an alternative substitute product (therefore rationing the product). Government intervention in the market may be designed to change relative prices and therefore change producer and consumer decisions.

Signalling: Prices have a signalling function because the price in a market sends important information to producers and consumers

Thursday 14 April 2011

Unit 1: In Praise of Farmers and Farming

The agriculture sector now contributes less than one per cent of UK GDP and the share of employment in farming has continued to diminish over the years. But with the continuing boom in prices of soft commodities and innovative investment in recreation services run by the farming community and organic products, there are signs of better times ahead.

Below is a clip from a great article by Luke Johnson of the Financial Times;


“Farmers face many challenges: climate, labour shortages, environmental worries and loneliness, among others. Also, an unequal relationship between growers and buyers means farmers often receive scant reward for their efforts. Yet perhaps the greatest issue facing most farmers is age and succession – more than 55 per cent of all European Union farmers are over 55 years old. Farming involves long hours and hard, physical work, which deters many young people. But if we want food security, competent stewardship of our environment for the long term and a productive agricultural economy, we must persuade more people to become farmers.”

It is a superb piece and well worth reading - here is the link

UK agriculture - output as a share of GDP

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UK agriculture - employment as a share of total employment


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Unit 3: Unilever and Procter & Gamble in price fixing fine

The EU Competition Commission got into a LATHER about alleged price fixing by a number of multinational soap and washing powder producers and in a ruling today they have imposed fines on Unilever and Procter & Gamble €315.2m ($456m) for fixing washing powder prices in eight countries within the single market.

An investigation was prompted by whistle-blowing from Henkel, a German competitor (manufacturer of Persil) and so the investigation CYCLE began.

Unilever was fined €104m and Procter & Gamble was fined €211.2m. Henkel was not WHITER THAN WHITE but under EU cartel rules, it avoided a hefty fine because of alerting the authorities to the price fixing scheme.


The EU commission found that the three major producers in the washing powder oligopoly had agreed not to decrease prices when making their packages smaller and even agreed later to raise prices. The cartel operated in Belgium, France, Germany, Greece, Italy, Portugal, Spain and the Netherlands between 2002 and 2005.

Hopefully the size of the fines will be a deterrent for collusion.

This adds to the catalogue of fines from the EU Competition Commission for illegal price fixing activity within the single market. In May 2010 it hit 10 computer memory makers with fines totalling €331m. Two months later the commission fined producers of animal feed phosphates more than €175m.

Q) Lots of it going on, so why do the companies do it? What are the advantages to them?

Wednesday 13 April 2011

Unit 4: International Trade, Costs & Benefits!

Fantastic video clip on the ideas of politicians vs economists!

The battleground is the Smithsonian Museums in Washington D.C where the gift shops have been selling patriotic trinkets that are made in China. A US senator has decided that this is unacceptable and called the museum’s board of directors to account for their actions.


One can easily see the Senator’s motivations in attempting to provide US manufacturing jobs, and / or scoring political points, as the average “man on the street” thinks that they should be made in the USA. But the economist does a good job in explaining the possible costs of such a move, including a useful discussion on comparative advantage.



I like the woman econmist....Her reference to creating jobs “using spoons” is based on a Milton Friedman quote, which goes as follows...“At one of our dinners, Milton recalled traveling to an Asian country in the 1960s and visiting a worksite where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: “You don’t understand. This is a jobs program.” To which Milton replied: “Oh, I thought you were trying to build a canal. If it’s jobs you want, then you should give these workers spoons, not shovels.

Tuesday 12 April 2011

Unit 2 & 4: Extreme example of excessive bureacracy - surely Spain’s not that bad..?

Hilarious video below highlighting the difficulty of dealing with Spain’s notorius civil servants - it came with this tag line -

Life in Spain: 3.000.000 bureaucrats in a workforce of 17.000.000 in a country with 4.200.000 unemployed (20+%.). Ouch!

A good example of how ineficient supply side policies cause long term problems for economies....


Unit 2: AS Macro Key Term: Monetary Policy Tightening

A tightening of monetary policy is a decision by a central bank to use monetary policy to squeeze the growth of demand in the economy in an attempt to control / reduce inflationary pressures. It is the opposite of an expansionary monetary policy. In recent weeks we have seen both the European Central Bank and the People’s Bank of China increasing their benchmark lending rates by 0.25 percentage points – this is an example of monetary tightening.


Tightening of policy occurs when
(i) Policy interest rates are increased

(ii) The central bnak decides to reverse some of the quantitative easing applied to the banking system

(iii) Tighter controls are applied on the level of bank lending / credit creation

(iv) The central bank seeks to achieve an appreciation of the exchange rate

Short term interest rates in the Euro Area - the UK will probably follow suit soon


To view this graph, please install Adobe Flash Player.

Unit 2: AS Macro Key Term: Frictional Unemployment

Frictional unemployment is transitional unemployment due to people moving between jobs: For example, redundant workers or people joining the labour market for the first time such as university graduates may take time searching to find the work they want at wage rates they are prepared to accept.


Imperfect information in the labour market may make frictional unemployment worse if the jobless are unaware of the available jobs. Incentives problems can also cause some frictional unemployment as some people looking for a new job may stay out of work if they believe the tax and benefit system will reduce the net increase in income from taking work. When this happens there are disincentives for the unemployed to accept work – this is known as the unemployment trap.

In short, frictional unemployment happens when it takes time for the labour market to match the available jobs with those people seeking work. Our charts below track what has been happening to the scale of unfilled job vacancies in the UK labour market over recent years.

Job vacancies

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Unemployed people per vacancy in the UK


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Monday 11 April 2011

Unit 4: Invest in Turkey Campaign...

Click here to see the promotional campaign by the Turkish government. Excellent criteria for students studying foreign direct investment and what factors countries/firms take into account when deciding where to invest!

Also, thanks to Sami (Ginger Iraqi one) for this article looking at FDI in Qatar. Click here for article.

Unit 4: Student Notes on Development Essay


Q) To what extent is primary product dependency a constraint on Economic Growth and Development in developing countries? (20Marks)

Unit 4: Development - Prebisch-Singer hypothesis

The Prebisch-Singer hypothesis basically says that if a country exports primary products (e.g. raw materials) and imports manufactured goods (think TVs and the like), over time its terms of trade will erode. That is, the price of its imports would be rising relative to the price of its exports and the counry will be increasingly worse off.

Unit 2: Latest Interest Rate decision exlained

Click here to access an excellent article including an 'Idiots Guide' to why interest rates matter!

Click here for another article explaining the issues/worries that UK businesses face.

(Thanks to Nick for both articles)

Thursday 7 April 2011

Unit 4: Jan 10 Mark Scheme

This is the mark scheme for the old Unit 6 .... ie the new Unit 4....


Unit 2: AS Macro Key Term: Balance of Payments (Current Account)

The Balance of Payments provides data on how an economy is doing in international trade and investment with other countries. There are a variety of different items that together make up the balance of payments.

For AS level you need to understand what goes into the current account – namely:
* The trade balance in goods and services (i.e. the value of exports – value of imports)

* Transfer balance – cash transactions which do not form payments for goods or services such as foreign aid or payments to the EU budget

* Investment income balance – measures earnings on foreign investments minus the earnings paid to foreigners on their investments in this country. Income can come in the form of interest, profits and dividends.

What is happening to a country’s current account can tell us a lot about the macroeconomic performance and competitiveness of a nation and in particular whether businesses and industries are competing successfully in the world economy.

Our charts below track what has been happening to the various components of the current account of the UK balance of payments. The data is taken from the OECD World Economic Outlook and thus the data is measured in US dollars ($).

Balance of Trade in Goods and Services

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Net Transfers


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Net Investment Income


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Overall Current Account Balance


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Unit 2: AS Macro Key Term: Aggregate Supply Shock

Supply-side shocks are unexpected events affecting costs and prices in different countries. An aggregate supply shock is either an inflation shock or a shock to a country’s potential national output.


Adverse aggregate supply shocks of both types reduce output and increase inflation and can increase the risk of stagflation for an economy. For example a rise in the world price of crude oil or natural gas. Or perhaps an unexpected and sizeable change in world prices of foodstuffs used both for direct consumption and also as an input into the production of manufactured foods.

The effects of supply-side shocks are normally to cause a shift in the short run aggregate supply curve (shown below).



But there are also occasions when significant changes in production technologies or step-changes in the productivity of factors of production that were not expected, feed through into a shift in the long run aggregate supply curve.


When analysing supply-side shocks in your economics exam:

1/ Make good use of AD-AS analysis (use your AS economics!)

2/ Consider short-run and possible longer-run effects

a/ First round effects (immediate or short term)

b/ Second round fallout (medium term effects – can be positive or negative)

Further evaluation might consider:

*The impact of higher shocks will vary from country to country

*How big is the supply shock? Is the shock temporary or more persistent?

*Consider how macroeconomic policy might respond to the shocks - for example how might a central bank respond to an inflationary shock? With an immediate increase in policy interest rates? or might it leave interest rates alone because it feels that the supply-side shock causing inflation to spike higher is probably only a temporary effect?

Unit 2: AS Key Macro Term: Fiscal Austerity

Fiscal austerity is a term in common use in the media at the moment. It refers to decisions by a government to reduce the amount of government borrowing (i.e. cut the size of a fiscal deficit) over a period of years. Fiscal austerity normally involves a combination of measures including increases in the overall burden of taxation and cuts in either the real level or growth of government spending on state-provided goods and services.


Fiscal austerity is in the news in the UK because of the Coalition Government’s plans top eliminate the structural budget deficit over the course of the current Parliament. In their Coaltion document they claim that:

1/ We will accelerate the reduction of the structural budget deficit over the course of a Parliament

2/ The main burden of the budget deficit reduction will be from reduced spending rather than increased taxes.

To view this graph, please install Adobe Flash Player.


Supporters of the Coalition’s plans to squeeze the deficit through a policy of fiscal consolidation argue that:


a) High government debt threatens the UK’s financial stability and our AAA credit rating

b) Higher public sector debt and higher future taxes might crowd-out the private sector and reduce the strength of the recovery over the next cycle

c) It is inequitable to leave future generations with excessive levels of debt to repay

d) There are doubts about the size of the fiscal multiplier and effectiveness of fiscal stimulus policies in boosting demand and output

e) Tight fiscal policy now may help to restore confidence among businesses and the financial sector

Critics of the Coalition - many of whom are arguing from a Keynesian perspective - argue that:

a) UK Government bond yields are low – it is sensible for the government to borrow now to boost demand when the private sector remains weak

b) Deep cuts in government spending will derail a fragile recovery and another recession will make the fiscal deficit worse - this needs to be avoided

c) The government should let monetary policy (in the hands of the Bank of England) do the main job of controlling inflation – don’t slash and burn public spending

d) There are doubts about resilience of the private sector and whether it will be able to create enough new jobs to absorb the hundreds of thousands of jobs that will be lost in the public sector

e) Tough fiscal austerity provides an illusion of prosperity - there is little evidence that it boosts confidence. Instead millions of people will see their real living standards affected by the squeeze on state spending and the rise in taxation

To view this graph, please install Adobe Flash Player.

Unit 1: A couple of cartoons to lighten the mood....




Wednesday 6 April 2011

Unit 2: AS Macro Key Term: Inflationary Pressure

Inflationary pressures refers to the demand and supply-side pressures that can cause a rise in the general price level. Demand-pull inflationary pressure is greatest when actual GDP exceeds potential GDP causing a positive output gap. Cost-push inflationary pressure can arise from increases in unit wage costs, rising import prices and an increase in the prices of raw materials, fuel and components used in production.


Cost push inflationary pressures

Input prices for UK manufacturers

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Unit labour cost inflation for the UK


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UK Output Gap


(Difference between actual and potential GDP, expressed as a % of potential GDP)

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Tuesday 5 April 2011

Unit 2: AS Macro Key Term: Expansionary Monetary Policy

An expansionary monetary policy (also known as a relaxation of monetary policy or loose policy) means an attempt to use monetary policy to boost or reflate aggregate demand, output and jobs.

Typically this involves a central bank cutting official policy interest rates. It might also involve a relaxation of credit controls and in some countries, Quantitative Easing has been used involving the creation of new money by the Central Bank to purchase debt from banks and boost their capacity to lend to individuals and businesses.

The Bank of England cut official policy rates from 5.5% in the early autumn of 2008 to 0.5% in February 2009 in a bid to stabilise confidence and demand during the descent into recession. Quantitative easing worth £200bn (or 12% of UK GDP) has also been used to provide an extra flow of funds in the UK banking system in a bid to unfreeze credit supply and support an economic recovery.

A fall (depreciation) in the exchange rate is also an expansionary monetary policy

UK Short Term Interest Rates

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UK Effective Exchange Rate Index


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Bank of England View (Inflation Report, February 2011)


“Expansionary monetary policy, combined with growth in global demand and the past depreciation of sterling, should ensure that the recovery in the UK is maintained. But the continuing fiscal consolidation and squeeze on households’ real purchasing power are likely to act as a brake on the economy.”

Monday 4 April 2011

Unit 2: AS Macro Key Term: Relative deflation

The term “relative deflation” is generally used to describe an economy with an inflation rate, which has not necessarily descended into negative territory, but is markedly lower than comparable economies. Over time, a low relative rate of inflation can lead to an improvement in price competitiveness in international markets, assuming that there has not been a compensating change in the exchange rate between two countries.


In our data example shown below we track consumer price inflation in Ireland, Spain and Germany. For most of the period shown, the annual rate of inflation in Germany was substantially lower than two of her partners in the European single currency area - this is an example of relative deflation.

To view this graph, please install Adobe Flash Player.



As you can see, in 2009 and 2010 Ireland has experienced two years of absolute consumer price deflation - where the rate of inflation becomes negative.

Unit 2: Government Finances (Fiscal Deficit)

AS Macro Key Term: Fiscal Deficit


The fiscal deficit (or the budget deficit) is the amount by which government spending on state provided goods & services, transfers and capital spending exceeds income from taxation.
 
A fiscal deficit must be financed usually by the issue of new government debt. Data for the UK’s fiscal deficit is shown in the following charts. The UK Coalition government has set an ambitious (and controversial) target to eliminate the structural element of the fiscal deficit over the course of the next four years.


The first chart below tracks UK government borrowing as a share of GDP

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Some countries continue to run fiscal surpluses even despite the global economic downturn of 2008-09 - a good example is Norway.


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In contrast to Greece!


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Unit 3: Short Run Shut Down - When & why

That mysterious area between the break-even and shutdown points.

Most students tend to find it easy to understand why a business will cease production below the shutdown point and make a profit above the break-even point. But they usually find it difficult to explain why a business will continue production in the short run between these points. Here is a quick activity that may help explain why.....hopefully using an example that you can relate to.


Should you rent out an apartment that you have the lease on while they are away for a month. ou need to look at the fixed cost (lease payment) and variable cost (electricity). From there, it is only a very short step to explaining how the same principles work for a business!

Unit 2 & 4: Economic Growth in China

Thanks to Nick for this article.... Click here for an interesting link discussing the ramifications of the seemingly unstoppable economic growth in China.

Sunday 3 April 2011

Exam Advice: Putting Things in Context

High level economics students at AS and A2 seem to have a happy knack of putting issues and debates into a clear context and this certainly counts as evaluation and scores good marks in your papers. Here is a brief revision note on the importance of context!

Consider the textbook theory of perfect competition (Unit 3)

On the surface this is an extremely limiting theory because the assumptions on which it is based are so restrictive. There may almost certainly exist better theories more appropriate to real world markets such as contestable markets theory? But then again, understanding a world that might come close to perfect competition does have its uses. For example being able to understand why the foreign exchange markets are very near to pure competition is a useful context to have.

Consider another example drawn from microeconomics - namely the debate about whether to have a national minimum wage and if so, at what hourly rate? (Unit 1)

Here context does make a difference. Would you be in favour of raising the UK minimum wage from £5.93 an hour to £7? That sounds like a significant rise (it wouldn’t necessarily happen immediately but could be phased in over 2-3 years) but what is £7 worth? Some context matters?

In 2010, median earnings of full-time male employees were £538 per week; for women the median was £439. Assuming a 40 hour working week, for men that is just over £13 per hour, for women just under £11 per hour. So a £7 minimum wage would still be well below median earnings. It might affect (directly) only around 10-15% of workers at the bottom of pay scales in the UK labour market. And £7 per hour in London has to be put into the context of the higher average cost of living in the capital.

The point I am making is that some CONTEXT in your answer deepens your evaluation and strengthens the quality of your answer.

In macroeconomics exams, high marks are available for students who have a good working knowledge and understanding of the recent performance of the British economy, but who can also put that performance into context, for example comparing and contrasting the UK with other European Union countries. Or being able to put the UK into a wider global context especially given the deep and wide-ranging changes that have been happening in the international economy in recent years.

Here is an example drawn from the UK. (Unit 2)

The chart below shows consumer price inflation (in the Spring of 2011) rising steeply to 4.4% (more than double the official inflation target). This looks high and there are good grounds for thinking that an acceleration in inflation can have damaging economic and social consequences.


To view this graph, please install Adobe Flash Player.



But context is also important. Inflation may appear high now but it remains much lower than it was throughout the 1970s and 1980s. And context would also require seeing what is happening to inflation in other countries at the moment. The UK is not alone in experiencing external inflationary forces e.g. from the steep rise in global commodity prices.


During your revision in the coming weeks, remind yourself of the importance of context .... it could make all the difference and it is often a useful approach to take in the final paragraph of an essay, something that is considered vital for students wanting to achieve an A* in their final exams.

Unit 1: AS Micro Revision: Banana Prices

This revision note covers supply and demand factors that help to determine the world and domestic retail price of bananas. Despite rising world prices, the UK retail price of bananas has actually fallen in recent years.

Can you explain why?

What effect does intense competition within the UK food retail sector have on the prices we pay?


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Unit 2: Macro Key Term: Current Account Deficit

A current account deficit is the amount by which money relating to trade, going out of a country is more than the amount coming in (Value of Exports - Value of Imports).

The current account is made up of balances in trade in goods and services, net incomes from overseas investments and net transfers.

A current account deficit implies a net reduction of demand in a country’s circular flow. The UK’s current account position is shown in the charts below:


UK Current Account as a % of GDP, quarterly data

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Annual data for the UK current account


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Unit 4: Sources of Finance for Development (No 3)

Unit 4: Development Strategies (2nd Presentation)

Unit 4: Economic Development (Intro)

Saturday 2 April 2011

AS Macro Revision - Key Term Revision Bank

This interactive revision resource tests whether you can match a definition from AS Macroeconomics to one of five key terms. Each time you take the quiz, the resource selects 10 definitions from our database. Please allow 5-10 seconds for the quiz to load as it selects a new set of definitions from the server!




Click here to launch the interactive quiz......

Exam Advice: Evaluation: Maintaining Balance in your Answers

In AS and A2 economics exams, especially in the essay questions that require evaluation, examiners will always reward students who adopt a balanced approach and those who try to reason out and explain their arguments i.e. they demonstrate an awareness of different points of view / different schools of thought in Economics.


Examples might include:

*Monetarist versus Keynesian views on the impact of fiscal and monetary policies as instruments of demand management during a recession

*The arguments for and against the Coalition’s plans to eliminate the structural budget deficit over the next four years

*Polluter-pays principle (carbon tax) versus tradable-permits (carbon trading) versus regulation as means of cutting emissions and addressing environmental market failure

*The arguments for and against manipulation of currencies as an instrument of macroeconomic policy

*Competing views on the relationship between economic growth and its long-term environmental impact.

*Different schools of thought on the benefits of competition versus regulation in a market

*Free market forces versus state intervention approaches to reducing child poverty or poverty in general

Discussion of competing theories leads naturally into good evaluation – For example, you may be asked to evaluate how well the free-market performs and the circumstances in which there may be a case for non-market (state) provision of goods or services or other forms of government intervention.

Maintaining a semblance of balance means avoiding extreme views or assertions that are never backed up with any evidence or examples. The final section of your essay answer does give you an opportunity to come to a reasoned conclusion that favours one side of an argument of another - but do this having considered a variety of arguments and perspectives rather than a narrow, blinkered approach! (That last bit is for you Milad!!)