Unemployment
Real interest rates
Inflation
Measuring unemployment
Productivity
The multiplier - note you do not need to know how to calculate it at AS
The Current Account
Supply side
Please use wisely. Email if you need help!
Monday, 21 May 2012
Macro revision links
All Tutor2u links on macro ready for Friday
Please use wisely. Email if you need help!
Please use wisely. Email if you need help!
Tuesday, 15 May 2012
EU 'not in recession'
The attached story has the details, but it shows that Italy, Spain and Greece are in dire recessions, with output contracting and France just managed to maintain output. So what is the reason that Eurostat says the Eurozone isn't in recession? Well Germany grew strongly and overall Eurozone GDP rose when added together.
This means that recessions are now not only defined by arbitrary dates, but also arbitrary borders. It depends how you group countries together.
Of course the real point of interest is the effect of cutting government budget deficits on GDP. As Government spending is a component of AD changes in it have a multiplier effect. Add to that higher taxation and we see disposable income falling and so Consumption dragging AD down further.
Today the new French President, a man worryingly named after a sauce, will argue for more stimulus to boost short-run growth. But today the people of Italy, Spain and Greece, and I think France and Britain, might agree with him.
Revision links for AS micro
These are all Tutor2u blog items, so you can go there directly
These are all well worth looking at.
Public and merit goods
Demerit goods
Asymmetric information
Minimum wage
Price volatility in markets
PED
YED
PES
Rice prices - applied piece
These are all well worth looking at.
Monday, 14 May 2012
Scotland's 50p per unit minimum alcohol price
Overall then the market consumes more alcohol than is optimal.
Scotland has decided that they will impose a minimum of 50p per unit of alcohol to try to address the problem of people abusing alcohol. This means that a drink that contains two units of alcohol (say a pint of lager) cannot be sold for less than £1. Of course there is no effect if the price is already over a pound.
The effect of this minimum price therefore depends on the current price. Setting a minimum price below the market equilibrium has no effect at all, while setting a price above equilibrium will reduce demand. Of course it can also raise the willingness to supply!
The aim of this policy is to overcome the 'cheap alcohol' available in supermarkets (such as ownbrands) and 'happy hours'. These promote heavier drinking and, as some people know, this is habit forming!
The real question is will it be effective? Alcohol is already heavily taxed, restricted by age limits and only available from licenced premises. There is also a concerted effort to educate people about the true effects of drinking (although this is far less than the effort made on smoking). So far these have failed to eliminate the problem.
The PED of alcohol is likely to be inelastic. Therefore the effect on current drinkers will be small, but maybe it will stop some people from starting to drink. Therefore the pay-off will come in the long-term. What is clear is that dealing with imperfect information goods needs a set of complementary measures which reinforce each other.
Friday, 4 May 2012
Permanent damage to supply side - NIESR
A regular report by the National Institute for Economic and Social Research (A bit like the IFS without the political posturing) has said they expect unemployment to reach 9% and not decline until the end of 2013.
This continued economic weakness will do long-run damage to the supply side of the economy. This will include the loss of motivation and skills of many workers who find themselves in long term unemployment. It will also lead to the loss of productive capacity, which had initially fallen into disuse but is eventually derelict and scrapped.
Interestingly the NIESR suggest, as I have, that there is a need for a moderate and targeted fiscal boost. They say:
It remains our view that fiscal policy could be used to raise aggregate demand in the economy with little to no loss of fiscal credibility. We have never and do not now advocate scaling back the government’s medium- to longer-term policy of fiscal consolidation. However, the UK also suffers from a lack of demand in the short term. As we noted in our January Review, a 1 per cent of GDP increase in government investment this year would boost GDP by around 0.7 per cent, assuming no reaction by the MPC. A temporary boost to net investment, which has been cut extremely sharply, would have no direct effect on the government’s primary fiscal target of balancing the cyclically-adjusted current budget in 2016–17.
Interestingly there is a one year estimate of the multiplier effect in that paragraph. Suggesting that governments are not really that powerful when it come to demand management.
This continued economic weakness will do long-run damage to the supply side of the economy. This will include the loss of motivation and skills of many workers who find themselves in long term unemployment. It will also lead to the loss of productive capacity, which had initially fallen into disuse but is eventually derelict and scrapped.
Interestingly the NIESR suggest, as I have, that there is a need for a moderate and targeted fiscal boost. They say:
It remains our view that fiscal policy could be used to raise aggregate demand in the economy with little to no loss of fiscal credibility. We have never and do not now advocate scaling back the government’s medium- to longer-term policy of fiscal consolidation. However, the UK also suffers from a lack of demand in the short term. As we noted in our January Review, a 1 per cent of GDP increase in government investment this year would boost GDP by around 0.7 per cent, assuming no reaction by the MPC. A temporary boost to net investment, which has been cut extremely sharply, would have no direct effect on the government’s primary fiscal target of balancing the cyclically-adjusted current budget in 2016–17.
Interestingly there is a one year estimate of the multiplier effect in that paragraph. Suggesting that governments are not really that powerful when it come to demand management.
Wednesday, 25 April 2012
When is a double dip not a double dip?
The Office for National Statistics (ONS) reported that GDP fell for the second successive quarter (January to March) and so the press have heralded a recession. The much feared 'double dip'.
What are the implications of this? The most important is the impact on confidence. Consumer and business confidence is incredibly low and this will do it no good at all. We can expect people to save more and firms to hold back on investment. This is going to reduce the rise in AD over the coming months and that will hamper recovery.
An important question about the data has to be asked however. The definition of a recession as 'two quarters of falling GDP' is not a technical one. It was coined by the semi-technical press and has now passed into the literature as if it is true. Actually it is at best a guide in order to point out that a single quarter of falling GDP is not a trend. So is this definition accurate?
Actually a better definition of a recession is six months of continuously falling GDP. That is GDP falls in each month of the six. The problem of ONS data is that it is based on calender quarters, January to March, April to June etc. But this means it is quite possible for two bad months, say December and January, to make GDP appear to fall in two quarters, while in fact there was growth in four and the current trend is still for growth.
In this case it is not at all clear that there is a recession, and it is not even certain that the Jan to March figure won't be revised back to very low growth. In addition a recession usually is accompanied by rising unemployment, and yet the latest figures show falling unemployment.
What is clear is that the news alone is potentially damaging, especially as the idiot Balls will cynically exploit figures he knows to be exceptionally dodgy and encourage the very behaviour that will further damage the recovery.
What are the implications of this? The most important is the impact on confidence. Consumer and business confidence is incredibly low and this will do it no good at all. We can expect people to save more and firms to hold back on investment. This is going to reduce the rise in AD over the coming months and that will hamper recovery.
An important question about the data has to be asked however. The definition of a recession as 'two quarters of falling GDP' is not a technical one. It was coined by the semi-technical press and has now passed into the literature as if it is true. Actually it is at best a guide in order to point out that a single quarter of falling GDP is not a trend. So is this definition accurate?
Actually a better definition of a recession is six months of continuously falling GDP. That is GDP falls in each month of the six. The problem of ONS data is that it is based on calender quarters, January to March, April to June etc. But this means it is quite possible for two bad months, say December and January, to make GDP appear to fall in two quarters, while in fact there was growth in four and the current trend is still for growth.
In this case it is not at all clear that there is a recession, and it is not even certain that the Jan to March figure won't be revised back to very low growth. In addition a recession usually is accompanied by rising unemployment, and yet the latest figures show falling unemployment.
What is clear is that the news alone is potentially damaging, especially as the idiot Balls will cynically exploit figures he knows to be exceptionally dodgy and encourage the very behaviour that will further damage the recovery.
Sunday, 22 April 2012
Monetary policy dilemma continues
It is possible that we are now approaching the point at which we can say interest rates will move up, possibly at the end of the year. Adam Posen, the most enthusiastic member of the MPC on easing monetary conditions, believes that the Bank has now done enough (or at least all it can).
Of course this had to happen. The markets decided this was a bit of a surprise and the pound was bid up in price, as the expected rise in interest rates was moved forward. The link between exchange rates and the interest rate couldn't be more clearly indicated.
But Posen also makes the point that interest rates alone are not enough to induce growth. Expectations, based on business confidence, are also crucial, but so is the ability to borrow money.
If the financial sector cannot lend money to businesses then even when firms believe it is worth investing and can afford the loan then the investment won't happen. The attached article shows how important it is to get all the pieces in the jigsaw in place.
Of course this had to happen. The markets decided this was a bit of a surprise and the pound was bid up in price, as the expected rise in interest rates was moved forward. The link between exchange rates and the interest rate couldn't be more clearly indicated.
But Posen also makes the point that interest rates alone are not enough to induce growth. Expectations, based on business confidence, are also crucial, but so is the ability to borrow money.
If the financial sector cannot lend money to businesses then even when firms believe it is worth investing and can afford the loan then the investment won't happen. The attached article shows how important it is to get all the pieces in the jigsaw in place.
Wednesday, 18 April 2012
Inflation figures a blip, but a blow too
The CPI figure rose last month to 3.5% (from 3.4%). The Bank of England has been saying that there was a danger of being below the 2% target by the end of the year and this is a concern for them.
The cause of the rise in inflation was mainly due to energy prices (which rose but more slowly than a year ago), food and clothing prices. These are items that monetary policy finds difficult to control as they are supply side or exchange rate driven and monetary policy works on AD.
However there is a concern in these figures for the pace of recovery. The higher inflation rate means that real disposable incomes are falling faster. Wage rises are less than 3.5% and so it means that households have less real income to spend on consumption. Also as households are very aware of inflation rates (indeed they exaggerate the rise in their minds) and this rise in inflation will affect consumer confidence. As we all know consumption is around 2/3 of AD and so short-term growth can easily be reduced.
It is pretty much impossible for the Bank of England to do more. They also believe, as do most economists, that inflation will fall for the rest of the year. (RPI did fall this month.) But this change in the direction of inflation, however temporary, may have a much bigger impact than the actual small change suggests.
The cause of the rise in inflation was mainly due to energy prices (which rose but more slowly than a year ago), food and clothing prices. These are items that monetary policy finds difficult to control as they are supply side or exchange rate driven and monetary policy works on AD.
However there is a concern in these figures for the pace of recovery. The higher inflation rate means that real disposable incomes are falling faster. Wage rises are less than 3.5% and so it means that households have less real income to spend on consumption. Also as households are very aware of inflation rates (indeed they exaggerate the rise in their minds) and this rise in inflation will affect consumer confidence. As we all know consumption is around 2/3 of AD and so short-term growth can easily be reduced.
It is pretty much impossible for the Bank of England to do more. They also believe, as do most economists, that inflation will fall for the rest of the year. (RPI did fall this month.) But this change in the direction of inflation, however temporary, may have a much bigger impact than the actual small change suggests.
Tuesday, 10 April 2012
Just getting supply side labour market policies in perspective
This restores the situation to the pre-1997 situation and is another move that has seen the period vary between six months and two years. The argument is about getting the balance right between protecting workers from being used by employers and then discarded, and encouraging employers to take on new staff.
If employers feel that there is a financial risk in taking on staff they may not do so. If they can terminate employment without cost then they might take the risk. Under the current situation the point might be welcomed by prospective employees, but many feel it just transfers uncertainty from employer to employee and is unfair.
The aim of UK policy is a flexible labour market. Making the UK capable of responding quickly to world events and keeping the economy competitive. Contrast this with the Australian view, where even moderate reforms are seen as unacceptable, and the legislation is loaded massively in favour of employees.
This makes the Australian economy quite staggeringly uncompetitive. There are high wages for shifts, young people can't work short shifts preventing them competing in the labour market and add on costs for staff are very high. The article from The Age is a typical response to any attempt to bring supply side reform to Australia, but for us its main use is to contrast the UK and a 1970's style labour market.
You may conclude Australia is doomed once the mineral prices fall.
Sunday, 1 April 2012
New Keynes papers prove Keynesian's wrong
Papers belonging to John Maynard Keynes were discovered in the archives of King's College Cambridge last year. Since then academics have been studying the manuscripts dated between 1940 and 1946.
Keynes was engaged in war work throughout that period and published nothing on economic theory, although he had stated that he intended to write a revised edition of the 'General Theory' in 1938 and had told Hayek that he could 'easily deal with' those such as Joan Robinson who were using his ideas for their own purposes. Keynes died in 1946 before the revised edition had been submitted and many of the papers are his revised draft of that book.
To the distress of many Keynesians, recently crawled out from under their stones, Keynes revises his view of the economy and states that demand management techniques only have a role in the very short term.
One section states; "In periods of severe restriction of aggregate demand, such as in the period of the recent depression, {1929 - 33} then it is the role of responsible government to abandon the pursuit of a balanced budget and boost national output through deficit finance."
He continues later; "Many have taken my meaning to be that government should seek to manage the level of national output through persistant budget deficits. This would lead to unsustainable debt and ignores the crucial importance of increasing productive capacity. Generally government should seek to balance their budgets to allow the industrial sector to create the wealth necessary for growth and improved living standards."
Professor Bob Williams of the WBO commented "Keynes was clearly preparing to put the world straight on a massive mis-interpretation of his work. He makes it clear that demand management is an emergency measure only and that classical, or monetarist views were those that should be used in normal times."
Professor Lord Robert Skidelsky, Keynes' biographer is quoted in The Sunday Times as saying; "I was wrong. I am devistated. These papers make it clear that Keynes never changed his views from 'The Treatese on Money' in 1930 but saw the Great Depression as a special case. I don't know what I will do now."
Well I always said Keynesians were wrong!
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