Free Essay: Discuss the Economic Effects of running out of non renewable raw materials

1. Higher prices of raw materials. As Supply falls price will rise. Demand for many of these goods is inelastic; therefore the price rise could be significant.

2. This would lead to an increase in costs of production, Therefore it would cause the SRAS curve to shift to the left. This would lead to a higher inflation rate and lower economic growth.

However, it is worth bearing in mind that higher raw material prices don't necessarily lead to inflation and lower economic growth. There are many other factors that affect inflation. Cost push inflation from raw materials may be offset by technological advances.

3. Countries who rely on importing raw materials will see an increase in costs. However, they are unlikely to lose competitiveness because it will effect all countries. However, those countries who import the most raw materials will see a deterioration in their current account on the balance of payments.

4. Countries who export these raw materials may see an increase in export revenues. This is because demand is inelastic for these goods. However, there will come a point when they run out of raw materials altogether, negatively effecting their export revenue. This could be very damaging for countries.

5. In the long run, rising prices of scarce commodities will provide incentives for firms and governments to develop alternatives. For example, in recent years there have been developments in finding viable alternatives to petrol. As the price of petrol increases, it becomes more attractive to use hydrogen / solar powered cars. However, markets don't always predict future shortages. Free markets respond to price changes rather than anticipate in advance. Therefore, to develop effective substitutes for some raw materials may lead to market failure. For example, the research starts when it is too late. Therefore, the effect may depend upon whether governments intervene to subsidise the alternatives.


see also: Should we be concerned with running out of oil?

Labels: micro essays

Temporary employment means that you work for a short time. Either on a very short contract, or no contract at all. The % of temporary employment has increased in the UK because:

1. Increase in service sector employment, rather than manufacturing sector. Generally, the service sector needs more temporary workers for catering e.t.c

2. Globalisation has increased pressures to be efficient. Therefore, firms are looking for ways to cut costs. One way is to only employ workers when they are needed.

3. More flexible labour markets. Trades unions now have less power; workers are also more willing to take on temporary employment.

4. More women in the labour force. Women are more likely to take temporary employment in between having children.

Labels: labour markets

Discuss The Extent to Which Government's can deal with the Problems caused by economic shocks.

Demand side Shocks are events that adversely affect AD. For example, a fall in the stock market can cause a drop in confidence, consumer spending and economic growth e.g. 1929. In response to this, the government can implement expansionary fiscal or monetary policy. Lower rates of income tax, increase personal disposable income, and therefore, encourage consumer spending. This can kickstart the economy. However, fiscal policy may be subject to some problems. If confidence is very low then lower income tax may be insufficient to increase AD. It will also cause a bigger budget deficit.

Higher government spending may lead to crowding out. This suggests that higher government spending doesn't increase AD. This is because government spends more by borrowing from the private sector; therefore, the private sector has less to spend. Monetarists argue this makes fiscal policy ineffective. Keynesians however, disagree; they argue the government is using resources not currently utilised. Therefore, higher government spending leads to increased AD; there may also be a multiplier effect.

Supply Side Shock are events that affect AS. For example, an increase in the price of oil causes AS to shift to the left. Therefore, this causes lower growth and higher inflation. Therefore, it is difficult to solve both problems at the same time. For example, higher interest rates may reduce the inflation, but it will make the fall in growth worse; it could lead to a recession.

An alternative to demand management is to use supply side policies. These are policies that can increase productivity and shift AS to the right. For example, privatisation, may cause increased efficiency. However, supply side policies can take a long time to have an effect.

It also depends on whether the shocks are global or not.

There are concerns the US economy may be heading towards recession. If the US economy did go into a recession how would it effect the UK economy?

There is an old saying that "If America sneezes, the rest of the world catches a cold"

Discuss the effects on the UK economy of a Recession in the US.

A recession in the US will lead to a fall in UK exports to the US. If UK exports to the US are luxury goods there will be a bigger % fall in UK exports. A fall in Exports could cause a fall in AD. Therefore, it could contribute to a recession in the UK.

Furthermore, a recession in the US is likely to adversely effect consumer confidence in countries, such as the UK.

However, Exports to the US are a small component of AD. Only 16% of our trade is with the US, our biggest trading partner is the EU. Also, it depend upon other components of AD; for example, if UK domestic spending was rising rapidly (e.g. due to rising house prices) then UK AD will probably keep rising.

The UK is likely to have an appreciation in the exchange rate against the dollar, this is because interest rates in US are likely to be lower. Therefore, there will be more hot money flows into the UK. A stronger £ will make UK exports less competitive and therefore reduce AD further.

The effect of a stronger £ and fall in exports to US is likely to worsen the current account deficit. Exports increase relative to imports.

It depends on the strength of the UK economy. For example, at the moment the UK Central bank is concerned over inflationary pressures. A slowdown in exports could help reduce inflationary pressures without the necessity of rising interest rates.

Overall, the effect is likely to be fairly small. However, it depends why the US economy went into recession. If it was due to global phenomena it could effect UK as well.

related:

• Causes of recessions
• Is US economy heading towards recession?
  

Labels: recession

The Minimum Wage is a popular topic in exams. It is a good example of how theory can be applied to the real world.

Does A Minimum Wage help Reduce Poverty?

A minimum wage increases the wages of the low paid, but does it actually reduce relative poverty? This is a matter of debate because the effects of a minimum wage may not be felt by the poorest.

How a minimum wage reduces poverty

1. Increases wages of lowest pay. This reduces relative poverty of the low paid. (It also perhaps, reduces need for goverment benefits, such as, income support
2. Counteracts Monopsony Power. In some cases a minimum wage can actually reduce unemployment. See diagram

Why a Minimum Wage May not Reduce Poverty

1. The poorest do not work at all. The poorest are on government benefits; therefore, they do not benefit from a minimum wage.
2. Many workers receiving the minimum wage are second income earners or students. Therefore, the benefits of a minimum wage can often accrue to middle class families.
3. Minimum wages can lead to a fall in employment. Unemployment can be the biggest cause of poverty. See: Disadvantages of Minimum wages
   
4. May increase Black Market Economy. Minimum wage legislation may encourage people to work on the black market, and therefore, avoid all government legislation.
5. Evidence from America suggest effect is limited. See this paper by James Sherk: Raising minimum wage does not reduce poverty

"The obvious policy implication is that minimum wage laws cannot be justified as a poverty reducing device."

- Dr R.Vedder and Dr E. Galloway [1]

See Essay: Does a Minimum Wage Reduce Poverty?

Does A Minimum Wage Cause Unemployment?

For example, the classical analysis of minimum wages suggests that a minimum wage above the equilibrium will cause unemployment.

However, in practice, we see that increasing the National Minimum Wage may not lead to unemployment. For example, in the UK the minimum wage has increased from £3.30 in 1997 to £5.35; however, during this period unemployment has fallen.

There are various economic reasons to explain why this might occur. The most convincing reasons in the UK include:

• Economic Growth
• Monopsony Power of Employers
• Increasing Productivity

Labels: minimum wage

Essay: Discuss the effects on the UK economy of a Recession in the US.

A recession in the US will lead to a fall in UK exports to the US. If UK exports to the US are luxury goods there will be a bigger % fall in UK exports. A fall in Exports could cause a fall in AD. Therefore, it could contribute to a recession in the UK.

Furthermore, a recession in the US is likely to adversely effect consumer confidence in countries, such as the UK.

However, Exports to the US are a small component of AD. Only 16% of our trade is with the US, our biggest trading partner is the EU. Also, it depend upon other components of AD; for example, if UK domestic spending was rising rapidly (e.g. due to rising house prices) then UK AD will probably keep rising.

The UK is likely to have an appreciation in the exchange rate against the dollar, this is because interest rates in US are likely to be lower. Therefore, there will be more hot money flows into the UK. A stronger £ will make UK exports less competitive and therefore reduce AD further.

The effect of a stronger £ and fall in exports to US is likely to worsen the current account deficit in the UK.

It depends on the strength of the UK economy. For example, at the moment the UK Central bank is concerned over inflationary pressures. A slowdown in exports could help reduce inflationary pressures without the necessity of rising interest rates.

Overall, the effect is likely to be fairly small. However, it depends why the US economy went into recession. If it was due to global phenomena it could effect UK as well.

Related Essays

• Is the US economy heading into recession?
• Causes of Recessions
• Difficulties of Overcoming Recessions
  

Labels: recession

Discuss 3 Factors that can explain the persistence of poverty, despite the efforts of the IMF and the World bank.

The IMF and World Bank are focused on giving loans to countries. Usually with conditions of free market deregulations.

1. These loans are not Targeted to development.

Often they are to meet government deficits and / or lack of foreign exchange. Therefore, may not be used for development. However, the injection of foreign funds can make a difference, through a trickle down effect. Also, some economists argue the conditions that the IMF impose, can help significantly in reducing corruption and economic mismanagement, therefore this is most effective kind of AID, because it makes them reform inefficient economies.

2. Rural Areas need AID most.

AID improved economic development most when it is targeted in certain ways: for example, investment in better technology, education and training for certain workers. AID targetted at rural areas. AID from the world bank is a relatively small % of GDP.

3. Domestic Savings

Harod Domar model considers domestic savings to be the key to economic development. This domestic savings enable higher levels of investment. Higher investment is crucial to economic development (take off period), also domestic investment is usually more beneficial than investment from outside.

However, the importance of domestic savings is less important than some economists believe. Loans from IMF can have the same effect as domestic savings in stimulating investment. The key is how are the loans used.


Other factors worth considering:

• IMF impose economic conditions e.g. privatisation and deregulation. However, it is debatable whether these are actually appropriate for developing countries.

Related Essays:

• Poverty, Income Inequality and Economic Growth
• Does Globalisation Benefit developing countries
  

Labels: Poverty

• Examine the role of GDP figures as a measure of economic development. (15)
• GDP measures National Output, National Income and National Expenditure.
• GDP per capita gives a rough guide to average income per person in the country.
• GDP is a rough guide to living standards.

• Higher GDP enables more consumption of goods and services.
• Potential for Higher tax revenues, and therefore government spending on public services like health, education and transport.
• Higher GDP may create more employment opportunities.
• Generally countries with much higher GDP OECD countries have more economic development than low GDP

Limitations of GDP in measuring Economic Development

1. Depends on distribution of GDP.

For example, if 90% of GDP is owned by small oligarchy then the majority of economy may have low economic development. This is an issue for several sub saharan African economies, where high % of GDP is owned by small % of those in power.

2. GDP may underestimate economic development.

This is because official GDP statistics do not include black market; this is a significant part of subsistence economies. However, economic development often reduces the size of this "black market" or economic activity which is not recorded.

3. Difficult to Compare Living Standards through GDP.

This is because exchange rates do not reflect local purchasing power of a currency. For example, a Big Mac may cost $5 in Japan, but $1 in India. Therefore, comparisons need to take these into account.

4. Levels of Infrastructure important to economic development.

For example, GDP may not be used to improve infrastructure, communication and transport. These factors are very important for determining development. GDP does indicate how money is spent. GDP may be used to finance projects that do not help education development.

5. Standards of education important for long term economic development.

6. Some countries may get high GDP from primary products, but struggle to develop and diversify into manufacturing and service sector based economy.

See also:

• Does Economic Growth Bring Increased Happiness?

Labels: economic growth

"Examine the factors which might explain why 'strongly rising domestic demand has run ahead of overall economic growth" [60]


Basically, the question is asking "why is domestic demand increasing at say 4-5% per year, but economic growth is only increasing at say 2%"

These are some factors, which may explain the unbalanced growth the UK has seen in recent years:

1. Rising House Prices.

House prices have doubled in past 6 years. Rising house prices lead to an increase in consumer wealth. This increases consumer confidence, and also, homeowners can remortgage to get equity withdrawal. Therefore, rising house prices have led to higher consumer spending. This is a significant factor in increasing consumer spending because 75% of households own their house; housing is also the biggest form of wealth of UK. However, rising house prices do not increase the productive capacity of the economy. This has been a big factor in increasing domestic demand at a faster rate than economic growth.

2. Lower Real Interest Rates

Lower interest rates make it more attractive to borrow and therefore lead to an increase in consumer spending. Lower interest rates have also contributed to a fall in the savings ratio; this means savings are falling and consumer spending is rising as a % of net income. This explains why domestic demand is outstripping demand. A fall in the savings rate theoretically leads to less investment and therefore explains why economic growth is lower than consumer spending.

• However, over time you would expect lower interest rates to contribute to higher levels of investment; because it is cheaper to borrow for investment. This should benefit general economic growth and not just consumer spending.

3. Exchange Rate.

A strong exchange rate makes exports more expensive and less competitive. Therefore, there is a fall in demand for exports. This harms the manufacturing sector, which relies heavily on exports. Therefore, although consumer spending is rising, other aspects of economic growth like manufacturing output is in relative decline. This explains a lower growth rate. However, the manufacturing sector has been declining as a % of GDP. This makes the economy less dependent upon manufacturing than it used to be. The decline in competitiveness and changing comparative advantage is also exacerbating the decline in the manufacturing export sector.

4. Supply Side Factors.

Domestic demand is rising, but the Productive capacity of the economy may be lagging behind. Therefore, in the long run this will lead to inflation and a balance of payments deficit. Therefore, it is not sustainable for domestic demand to run ahead of economic growth in the long run.

Other factors to consider:

• Increased availability of credit
• Changing Comparative Advantage
• Cost Push factors like rising Oil prices
• Government spending as a component of AD
  

Labels: economic growth, essays

" Using marginal productivity theory, examine the view that 'wages are determined not by productivity alone but by the interaction of demand and supply of workers of various skills' "

Edexcel Unit 5a labour Markets.


Marginal Productivity theory states that demand for labour depends upon marginal revenue product (MRP) MRP=MPP * MR.

Basically, demand for labour depends upon the productivity of workers and the price of the goods that the workers are producing.

For example, strawberry pickers will be paid depending upon how many strawberry's they pick. It is easy to measure productivity; the more you produce, the more you will be paid.

However, many other factors determine wages.

• Supply (inelastic supply = higher wages)
  
• Monoposony vs Competitive markets
• Trades unions / min wages
• Difficulty of determining MRP of workers
• Firms non profit maximising
• part time / full time
• service sector / private sector.

See:

• Wage Determination in competitive Markets - the theory of wage determination MRP theory
• Labour Market Imperfections - what else determines wages. Basically this is the evaluation part of this question
  

Labels: wages

Republican Candidate Ron Paul on Economics

Principles of Economics

Economics Explained - Funny Economics Video

Lesson on Economics

Free Economics videos online

Labels: videos

A good revision technique is reviewing sample questions and model essays:

Micro A Level Questions and Answers:

• Why Women are Paid Less than Men (30) Edexcel Unit 5a
  
• Does a Minimum Wage Reduce Poverty? - (30) AQA unit 5 Business Economics
  
• Discuss 3 different Policies to Reduce Inequality(30) AQA
• When if Ever should the Government prevent a Merger or Takeover? OCR (20)
• Advantages of Electronic Road Pricing (30) AQA

Sample Macro Economics Questions and Answers

• Discuss the Effects of a falling Dollar (30)
  
• Discuss Policies to Stop the Dollar Falling (30)
  
• Does Devaluation Cause Inflation?

Economic Growth Essays

• Evaluate the Benefits and costs of Economic Growth
• Discuss the Problems of Recovering from a Recession
• Discuss Effect of a fall in the Savings Ratio

Inflation Essays

• Discuss the Difficulties of Controlling Inflation
• Should the Aim of the Government be to Attain Low Inflation?
• Explain What Can Cause a Sustained Increase in the Rate of Inflation

Unemployment Essays

• Explain what is meant by Natural Rate of Unemployment?
• What Can Cause Natural Rate of Unemployment to Change over time?
• Should the Main Macro Economic Aim of the Government be Full Employment?

Labels: essays

What are the Advantages of Globalisation for Developing Countries?

1. Inward Investment from foreign Mulitnationals MNCs. This inward investment creates job opportunities and helps to boost economic growth. Critics of MNCs paying low wage ignore the fact other wages in developing countries are generally lower.

2. Greater free Trade Increased free trade creates more export Markets.
For example, improvements in transport have enabled primary products to be sold around the globe. This increases the opportunity to make foreign currency earnings.

3. Improved Technology and information. Globalisation has enabled technology and information to be shared more easily this has helped countries in their development.

4. Positive Impact upon Agriculture

Globalisation has increased the scope for earnings from agriculture



What are Disadvantages of Globalisation for Developing Countries.?

1. Infant Industry Argument.

If developing countries wish to diversify and start new industries, they may find it very difficult to compete against developed countries. This is because they don't have economies of scale or experience.

2. Globalisation can reinforce a state of development.

A developing country may have a comparative advantage in the production of pineapples, globalisation will encourage them to specialise in their production. However, this has drawbacks.

• Limits potential growth (low income elasticity of demand for pineapples.
• Economy unbalanced. - fall in price of pineapples could cause serious problems for economy.

3. Free Movement of Labour

Free movement of labour may cause the highest skilled workers to leave the economy and get better jobs in developed countries.

4. Environmental costs.

Often globalistion has led to the exploitation of natural resources, such as cutting down the Amazon rain forest to increase grazing land.

Related:

• Essay: Effects of Globalisation on developed and developing countries
• Definition of Globalistation
• Effects of Globalisation on UK Economy
  

Labels: globalisation

Evaluate the impact of a sustained rise in the value of the Chinese Currency (Renminbi) against the dollar?


If The value of the Chinese currency increases, it will mean it is cheaper for Chinese consumers to import from abroad. It will make Chinese exports relatively more expensive.

The US currency will be weaker and therefore it will be more expensive for American consumers to buy imports from China.

Therefore this may lead to a reduction in the Chinese current account surplus and a reduction in the US current account deficit. This is because Chinese exports become less competitive and so will import less from China.

However, it depends upon the elasticity of demand for imports and exports. For example, if US demand for Chinese exports is inelastic, then an increased price of exports will not reduce their value. Also, the US may simply switch to buying these imports from related Asian economies.


Benefits of an Appreciation in the Chinese Currency

1. Improvement in current account deficit
China's trade surplus with America was $233 billion in 2006, this is almost 30% of America's total deficit. However, the improvement in the deficit may be much smaller than anticipated. A revaluation will not tackle underlying problems of low US savings and changing comparative advantage

2. Help Reduce Chinese Inflation.
Higher exchange rate will help reduce inflationary pressures in China for 3 reasons;

• Lower AD falling Exports (Exports is a big component of Chinese AD)
• Price of Imported goods is cheaper.
• Chinese exporters have greater incentive to cut costs and increase efficiency. This can benefit the economy in the long run.

this is important, because the Chinese economy is growing above 10% per annum. (11.1%) most recent. There are concerns this could lead to inflationary pressures. An appreciation will help to moderate growth; in particular reduce the investment and borrowing boom, which results from low interest rates

3. Help economic growth and reduce unemployment in US.

It is argued that many American exporters are losing out to Chinese firms. If the Chinese Renminbi was revalued, it would allow an increase in demand for US good. This could be important with American growth slowing. However, American politicians exaggerate the impact of a low Chinese currency on the US economy. Firstly, US unemployment is quite low at 4.5% and the US trade deficit is merely a reflection of the low US savings ratio (and high consumer spending) if the deficit wasn't with China it would be with somebody else.



Problems of an appreciation

1. Could lead to lower economic growth in China

An appreciation will reduce economic growth, this could exacerbate the problem of unemployment resulting from privatisation. This is the main reason the Chinese government is reluctant to revalue. However, with growth of 10%, maybe they do not have the right priorities. Even though Exports are the main determinant of growth, an appreciation is unlikely to cause any serious damage to economic growth. A slightly lower growth rate would have several advantages, primarily low inflation.

See also:

• Exchange Rates

• China and US currency at Economist.com

Labels: Chinese economy, exchange rates

government borrowing is when spending is higher than taxation revenue.

Problems from Government Borrowing.

1. Expansionary Fiscal Policy may cause Inflation

A Government deficit means Injections (government spending) are higher than withdrawals (taxations) Therefore, this has the effect of increasing AD. If the economy is close to full capacity and growing at the long run trend rate, higher AD may lead to inflationary growth. If the economy is in recession or growing below trend rate, higher borrowing may increase growth, without causing inflation.

2. Higher Taxes in the Future.

High borrowing now leads to higher taxes in the future; this is a burden on future generations. Higher income taxes may reduce productivity in the future.

3. Crowding Out.

This is an argument to say that higher government borrowing may lead to a fall in private sector spending and investment. This is because government borrowing means that they need to borrow from the private sector. If the government are borrowing from the private sector (selling bonds) it means they have less to spend. Therefore, there may not be any increase in AD. Furthermore, it is argued that government spending is more inefficient than private sector spending. Therefore government borrowing may cause greater inefficiency.
However, it depends on why the government are borrowing, if they are borrowing to finance investment in education, this may lead to an increase in productivity in the long term. Also, Keynesians argue government borrowing will not cause crowding out, if the economy is in recession the government is merely helping to use resources that are currently idle.

4. Financial Crowding out.

It is argued that high levels of government borrowing can put upward pressure on interest rates. This is because if the government need to borrow large sums of money, they may have to increase interest rates to attract enough investors. Higher interest rates will lead to lower growth and lower investment in the long term.

5. Demographic Factors will Exacerbate the problem in the future.

In many western economies, demographic factors will worsen government's fiscal positions in the future. This is because of the aging population. The baby boomer generation is about to retire, therefore, the government will have higher spending requirements and lower taxes.
Basically any problems in government problems will be exacerbated in the future.

Related essays and revision notes

• Fiscal Policy
• Government Deficits
• Advantages of Budget Deficits
  

Labels: fiscal policy

1. The £ is stronger therefore, exports are more expensive to buy. More foreign currency is needed to get the same amount of British goods

2. Imports will be cheaper.

3. Therefore, we will get a rise in the quantity of imports and a fall in quantity of exports.

4. Assuming demand is relatively elastic this will cause a fall in the value of exports and rise in value of imports.

5. AD = C + I + G + X - M. Therefore, a fall in exports and rise in imports will reduce AD, or lower the growth of AD.

6. A fall in AD will cause a lower rate of economic growth and a lower rate of inflation.

7. A fall in exports and rise in imports will lead to a worsening of the current account, e.g. deficit will get bigger.


Evaluation of an appreciation

1. Does on State of Economy.

If economy is growing rapidly and is close to full capacity then an appreciation can help to reduce inflationary pressures.

2. The exchange rate is only a small factor affecting AD. For example, the UK has seen an appreciation in the exchange rate, but the MPC has needed to increase interest rates 4 times in the past 8 months to control inflationary pressures.

3. Depends on other factors affecting AD.

E.g. Rising house prices have led to rising consumer confidence and therefore growth in the UK has been strong, despite an appreciation in the £.

4. Depends on Elasticity of demand.

If demand is inelastic, an appreciation in the exchange rate will cause a rise in AD and improvement in the current account. However, it is rare for demand to be inelastic, at least in the long run.

5. An Appreciation can reduce inflation.

Lower AD - less demand pull inflation
Cheaper imports - lower cost push inflation
Increased incentive for exporters to cut costs and become more efficient. Helps reduce cost push inflation.

related essay:

• Discuss effects of Increase in interest rates

Labels: exchange rates

An appreciation means the exchange rate (£) becomes stronger against a basket of currencies.

The £ will become stronger if there is higher demand, or lower supply of sterling.

Reasons for an appreciation in the Exchange Rate

1. Increase in Interest Rates.

Higher interest rates make it more attractive to save in the UK. Therefore, there will be an inflow of hot money (people holding currency in UK saving accounts. This increase in demand for sterling causes the appreciation.

2. Lower Inflation.

Lower UK inflation makes UK goods more competitive against foreign goods. Therefore, there will be more demand for British goods and hence sterling. This is a long term factor.

3. Increased competitiveness of UK goods.

Increased productivity and greater competitiveness will make British goods more attractive.

4. Expectations

Speculation plays an increasing role in the determination of exchange rates. If investors feel a currency is likely to appreciate in the future they will buy now and actually make it occur. E.g. if people expect interest rates to rise the currency will rise.

5. Surplus on Current Account.

This causes an inflow of foreign exchange into the economy

• Exchange Rates

Labels: exchange rates

Unemployment rates amongst different ethnic minorities tends to be higher.

For example, Unemployment statistics for 2001-02 UK Economy:

• White 4%
• Pakistani 16%
• Bangladeshi 22%
• Black Caribbean 12%
• Indian 7%
• Chinese 6%

Source: Official for National Statistics, Annual Local Area Labour Force Survey 28 March 2003

Why Unemployment rates are Higher for Certain Ethnic Minorities Groups


1. Language Skills.

In a service based economy English language speaking, is a high priority. Those workers who have English as a second language are at a disadvantage.

However, many ethnic minorities in the UK are second or third generation and speak English as their first language. Therefore, this argument only applies to first generation immigrants who are now in a minority.

It is also worth noting that unemployment levels tend to be much higher amongst young (first generation immigrants) For example, unemployment amongst Bangladeshi 16-24 year olds rises to 36% compared to 22% for all ages

2. Lower Educational qualifications.

Reports show that Black Carribean student have lower A Level grades and are less likely to go to university. However, educational standards vary significantly amongst ethnic minorities. For example, Chinese and Indian students quite often surpass white students.

E.G. The proportion of black and Pakistani pupils gaining five GCSEs at grades A to C was 29% in 1998.

The proportion of Bangladeshi pupils is 33% while the performance of Indian, Chinese and other Asian pupils continues to outstrip that of white pupils.

% of students gaining Five GCSEs at grades A to C

White Pupils 47%
Chinese Students 61%
Indian pupils 54%

Source for statistics: BBC

See also: Discrimination



3. Discrimination.

The effects of discrimination are hard to quantify. But, it could be a significant factor to explain higher unemployment. In practise racial discrimination is outlawed, but, in practice it can be difficult to enforce.
However, there appears to be a big divergence between Indian unemployment and Bangladeshi unemployment. This suggests education is more significant than discrimination.

Racial discrimination in the workplace

4. Geographical Factors.

Ethnic minorities often live in certain areas of the country and in parts of cities. Some of the areas in these inner city ghettos are associated with higher rates of unemployment. This can lead to a feeling of alienation and hopelessness. Discouraging young ethnic minorities from being able to entering the labour force.

• Unemployment Revision Notes
  
• Unemployment and Ethnic Minorities
• Ethnic Minorities Task Force
  

Labels: unemployment

In this essay I looked at: Whether economic growth reduces relative poverty and inequality.

It is a controversial subject and there have been numerous studies examining this issue in both developed countries and developing countries.

Another controversial question is whether income inequality matters

Does it Matter if Economic Growth does not reduce Income Inequality?

Some economists argue that inequality is essential for creating suitable incentives for people to work, innovate and take risks. If economic growth was managed to reduce relative inequality, it may cause a situation of lower growth rates. They argue that as long as people’s real incomes are increasing, it shouldn’t matter if other people experience faster increases in income.

However, contrary to this position, other economists argue that reducing relative poverty should be a goal of the government.

1. Inequality can often be a cause of social problems such as alienation, leading to crime, vandalism and even rioting (as in the case of Paris 2006 and Brixton, UK 1981)
2. Inequality is often the result of inequalities of opportunities. For example, those on low incomes and unemployed often have a lack of education and skills. This kind of inequality should be reduced.
3. Economic Growth is a poor indicator of living standards and well being. Governments should consider other objectives as more important.

In addition to economic arguments, there are of course, many other arguments we could add to these 3 suggestions

Labels: economic growth, inequality

Tips and advice for Writing Evaluation Essays.

Evaluation is an important component of an advanced essay.

Evaluation is a difficult skill because it requires more than simple analysis and explanation. Evaluation requires the ability to look at facts, arguments and analysis, with a degree of critical distance. To explain the meaning of evaluation it is most helpful to give different examples of what evaluation can involve.

1. How Reliable is the Data?

For any essay, you will be using a variety of sources. For example, an essay on trades unions, may include information from the TUC. It is good to give data from a source like TUC. However, a valid evaluation technique is to question the reliability and independence of your source.

For example, it is quite likely that the TUC will choose statistics that are more advantageous to workers. Business organisations on the other hand, are likely to give alternative sets of date.

Therefore, examine the likelihood of bias in data and resources for the essay.

2. Short Run and Long Run?

The effects of a decision can be quite different in the long run. For example, suppose you had an essay, which examined the impact of an increase in tax on petrol. The obvious answer is to say: "very little, demand for petrol is inelastic"

However, it would be evaluative to say; "However, over time demand may become more elastic. After a couple of years people may find alternative ways of driving.

3. It depends on other factors.

When looking at the effect of one outcome, it is worth bearing in mind it is often difficult to isolate other factors. For example, if we were looking at the impact of a rise in interest rates. The effect would usually reduce consumer spending. However, there are many other factors that can affect consumer spending. If confidence was high, for example, consumer spending may not fall at all.

4. Look at both Points of View.

In subjects like economics, history and politics there are usually several different viewpoints. It is important to give them all consideration, even if we don't necessarily agree with them. For example, if we look at the impact of a rise in government spending, a Keynesian might say this will increase growth; a Monetarist, on the other hand, may argue higher spending merely causes crowding out. Therefore, there are 2 different possibilities.

Related:

• Advice for Writing Economic Essays
• Tips for writing economic essays
• 7 Tips for Writing Essays
  

Labels: economics help, essays

Definition Game Theory:

Game Theory involves the modeling of interactions among agents. Game theory is used in a variety of economic models to examine various different potential outcomes. Game Theory usually involves looking at events where the decisions of others have some influence on your own decisions.

Game Theory can be used for pricing strategies.

For example, in oligopoly firms may be deciding whether to cut prices, increase prices or keep them static.

The kinked demand curve model suggest the most likely outcome is for price stability. This is because

1. If firms increase price, others don't - Therefore demand falls significantly. (demand is elastic)
2. If firms cut price, you would gain an increase in market share. Other firms don't want to allow this. Therefore, they cut prices as well. Basically causing a price war where everybody loses out.

Therefore, in oligopoly an important feature of firms decisions is the impact of interdependence. Decisions of one firm significantly impact on others.

Real World Examples of Game Theory

In the real world pricing strategies may not occur as the kinked demand curve model suggests. This is because game theory can be more complex in the real world:

• Firms may be able to collude. - This is where they agree to raise prices and stick to output quota's. In the UK this is illegal, however, it can be difficult to enforce in practice.
• Firms may not be profit maximisers. For example, they may be willing to make lower profits in order to gain a small increase in market share. For example, the supermarket, Wal Mart often claims to have this strategy towards expansion.
• Firms may not be aware, or choose to ignore the reactions of rivals. For example, in an oligopoly, a small firm may feel that if it cuts price it will not have a significant impact on its bigger rivals.

Related:

• Economics of Game Theory including look at Nash Equilibrium
• Game Theory.net
• Oligopoly
  

1. Finance Government Spending.

2. Reduce inequality. Higher income tax can help to reduce inequality. For example, the top rate of income tax (40% on incomes over £27,000) is a progressive tax. It takes a higher % of income from high earners.

3. Reduce consumption of De Merit Goods. These are goods like alcohol and tobacco. They have negative externalities.(costs to third parties e.g. passive smoking); they are also good where consumers underestimate benefits. Examples include cigarette tax and excise duty.


Essay Question: The government wishes to increase spending on the NHS and financing it by increasing taxes. Discuss the economic effects. (30) AQA


1. Effect on AD.

Higher government spending increases AD, however, the increase in tax will have the opposite impact of reducing consumer spending. Therefore overall the net impact on AD will be neutral.

However, it is possible that AD rises, if consumer confidence was high and increased taxes led to lower savings amongst consumers. This is unlikely thought.

2. Incentive Effects of Higher taxes.

An increase income tax could reduce work incentives. Higher tax makes work less attractive (substitution effect). However, there is also the income effect, which states that higher income tax reduces income and therefore, encourages people to work more. Overall, the impact is likely to be negligible; this is because income tax rates are low, and a modest increase will not reduce incentives.
The government may prefer to increase indirect taxes, such as; VAT and excise duties.

3. Effect on Inequality

If the government increased income tax on high earners, inequality is likely to fall. However, if they increased indirect taxes inequality is likely to rise; this is because taxes are regressive.

4. Crowding Out.

Increased spending and taxation, increases the size of public spending as a % of GDP. It is argued by some economists that government spending is more inefficient than private spending. For example, government spending is subject to admin costs, and a lack of financial incentives. Therefore in the long run, economic growth may fall due to the increased inefficiency.

However, it could be argued that government spending can actually increase productive capacity, by overcoming market failure. For example, better health care may lead to a healthier and more productive workforce. This argument would be stronger if it was for education and training.

• Tax in UK

Labels: taxation

Explain Reasons for Increasing Government Spending. (10)

1. Improve Public Services

Higher government spending can lead to improved public services like health, education and transport. These are important for increasing the quality of life and economic well being

2. Increase Productive Capacity of Economy.

Some types of government spending, can help to overcome market failure. For example, education can help increase labour productivity and reduce structural unemployment; if the education spending is well targeted it can help to increase the long run trend rate of growth.

However, not all government spending is guaranteed to actually increase government spending, it may be subject to government failure and inefficiency.

3. Expansionary Fiscal Policy

Increased government Spending without higher taxes is likely to increase AD. It will cause a budget deficit, however, the increased Government spending is an injection of spending to the economy and could help to increase the rate of economic growth. Note, some monetarists argue increased government spending will just cause crowding out, and therefore it will not increase AD.

4. Reduce Inequality.

A significant % of government spending is spent on social security. This includes benefits, such as; unemployment benefit, income support, child benefit and housing benefit. The majority of these benefits are means tested; this means they are targeted to those on low incomes. The aim is to reduce relative poverty and inequality

• Fiscal Policy
• Government Intervention in the Macro Economy
  

Labels: government

With MPC recently increasing interest rates. It may be worth explaining in simple terms the economic effects of a rise in interest rates

Effect of an Increase in interest Rates.

1. Cost of Borrowing is more expensive
2. Mortgage and loan repayments increase.
3. Return on savings increase.


------------------------

1.1 If borrowing is more expensive consumers will take out fewer loans. Firms will borrow less. Therefore consumer spending and investment will fall (or increase at slower rates)

1.2 Higher mortgage payments reduce disposable income so consumer spending will be lower.

1.3. Saving is more attractive, so this will also reduce consumer spending.

------------------------

• If Consumer Spending and Investment falls, this will lead to lower AD. Therefore this cause a fall in Real GDP, or fall in rate of economic growth.
• Lower growth will tend to increase unemployment. With less output, firms demand less workers.
• Lower growth will also help to reduce inflation.

---------

Evaluation of Interest rate increases

1. Depends on situation of Economy.

If the economy is at full capacity a rise in interest rates may reduce inflation, but not growth. However, if there is already spare capacity then rising interest rates could cause a recession.

2. Depends on Other Components of AD.

For example, if exports are rising, or if consumers confidence is high; rising interest rates may not reduce AD. For example, in the UK interest rates have risen 2% since 2003, however, consumer spending is still strong.

3. Income effect of higher interest rates.

Higher return on saving may give some consumers a high income. This will be consumers like pensioners. However, in the UK, the savings ratio is quite high, therefore the income effect of a rise in interest rates is likely to be quite low. The substitution effect will be higher.

Interest Rates and Exchange Rates

Interest rates also cause an appreciation in the exchange rate. Higher interest rates make it more attractive to save money in the UK. Therefore, this causes hot money flows into the UK and an appreciation in the exchange rate.

See also:

• Essay on Effects of Rising interest rates
• Interest Rate Swaps explained
  
• AS Macro Economic Essays
  

A current account deficit means the value of imports of goods and services is greater than the value of exports.

The UK has a growing current account deficit. It is currently stands at 3.5% of GDP.

Reasons for this deficit include:

1. Growth in Consumer Spending.

Due to 14 consecutive years of economic growth, a falling savings ratio, rising house prices, and low interest rates, consumer spending in the UK has been increasing. A significant percentage of this consumer spending is on imports (often on luxury manufactured goods). Part of the deficit is called cyclical.

2. Strong Exchange Rate.

Sterling has appreciated against other countries, especially the dollar. The strength of the £ makes exports less competitive and imports cheaper. Demand for exports is less elastic than it used to be, nevertheless a higher value of the exchange rate still reduces the total value of exports.

3. Structural Weaknesses in manufacturing.

Our export manufacturing sector has struggled to compete with low wage countries like China. The process of globalisation has hastened the relative demise of the UK's exporting sector. The deficit on the goods component of the current account is bigger than the overall current account deficit.

4. Deficit is Being Financed

the UK has been able to attract capital flows from abroad. This has financed the current account deficit.

Related

• What Causes US Current Account Deficit?
• Balance of Payments Revision Notes
  

Labels: UK economy

Globalisation involves the increased integration of national economies. It means a reduction in barriers of trade and investment between different economies.

The benefits of globalisation are related to the benefits of free trade.

1. Consumers will have a wider choice of goods, and prices are likely to be lower. Globalisation has been an important factor in the falling price of manufactured goods.

2.Globalisation gives an opportunity for domestic firms to export a wider market. Export led growth has been an important factor in increasing economic welfare in Asian countries.

3. Globalisation enables increased specialisation of production. This specialisation enables firms to benefit from economies of scale. This leads to lower average costs and increased efficiency.

4. Globalisation causes increased competition between different firms and countries. This puts pressure on firms to be increasingly efficient and offer better products for consumers.

5. Increased Inward Investment. The process of globalisation has encouraged firms to invest in other countries. For example, many firms are relocating call centres to countries like India, where wage costs are lower. This inward investment benefits developing countries because it creates employment, growth and foreign exchange. Some foreign companies are criticised for exploiting cheap labour. But often the wages are higher than otherwise.

Problems of Globalisation

1. Developing Countries May Struggle to compete.

If a developing country wishes to develop a new manufacturing industry, it may face higher costs than advanced industries in the west, who will benefit from years of experience and economies of scale. To develop an industry it may be necessary to have protection from cheap imports; this gives the firm chance to develop and gain economies of scale.

2. Globalisation keeps Developing countries producing primary products. Developing countries may have a comparative advantage in primary products, however, this offers little scope for economic growth. Primary products have a low income elasticity of demand. Therefore, with economic growth demand for products increases only slowly. Primary products often have volatile prices, this can cause the economy to be subject to fluctuations in income

3. Multi national Companies may be able to force out local retailers, leading to less choice for consumers and less cultural diversity.

4. Movement of Labour. globalisation enables workers to move easily around. however, this may cause the highest skilled workers of developing countries to leave for better paid jobs in developed countries.

Labels: globalisation

Today the Bank of England increased interest rates to 5.5%, this is the highest since 2001.

Interest rate increase at BBC

I have written a short article:

• Have interest rates in UK now Peaked?

Is it possible the next movement in interest rates is downward?

Many factors suggest that underlying inflation is not a real problem, therefore, these recent interest rate rises may be sufficient to reduce the minor inflation blip.

What do you think? are interest rates likely to keep rising? could this signal the end of the housing boom?

Labels: UK Monetary Policy

The government intervenes in the macro economy in various ways including demand and supply side policies.

Macro Economics Objectives of the government include:

1. Low Unemployment
2. High but sustainable economic growth.
3. Low Inflation (inflation target in UK CPI = 2%)
4. Equilibrium on Balance of Payments (e.g. minimising current account deficit)

Less important objectives

5. Reduce Government Deficit (in UK Chancellors Golden rule of Borrowing less than 3% of GDP)
6. Stable Exchange rates

Non Economic Objectives

7. Environment - increasingly important
8. Issues of Equality.

Types of Government Intervention

1. Supply Side Policies.

These are government policies which aim to increase productivity and efficiency in the economy. If they are successful, they will shift the LRAS to the right and potentially increase the long run trend rate of growth. An increase in productivity can also help to reduce inflation, especially cost push inflation. Improvements in productivity may make UK exports more competitive and, therefore, should help to improve the current account.

Types of Supply Side policies

1. Interventionist. Government intervention to overcome market failure. For example, spending on education and training to reduce occupational immobilities.
2. Market Oriented supply side polices : This occurs when the government reduces regulations and enables market to work more freely. For example, reducing the power of trades unions and minimum wages can reduce labour market inflexibility's.
   

Evaluation of Supply Side policies.

• They will take a long time, e.g. increasing education standards.
• May be subject to government failure. e.g. spending on education misplaced.
• Promoting free markets may increase inequality. E.g. removing trades unions may lead to worker exploitation.

See: Supply Side Policies

• Supply side policies UK

Demand Side Policies

Demand side polices to influence the level of AD. It may be to reduce the growth of AD, to prevent inflation. Alternatively, it could be to increase AD in time of a recession.

Types of Demand Side Policies

1. Fiscal Policy - changing the level of government spending and taxation in the economy. It will effect the government's budget and fiscal position.
2. Monetary Policy - Influencing the supply and demand for money. In the UK monetary policy revolves around changing interest rates, which are set by the MPC (Bank of England).
   

If there is inflation:

• The government could pursue deflationary fiscal policy. This involves increasing tax rate and / or cutting spending.
• The MPC could increase interest rates. This is known as a tightening of monetary policy. Note, in the UK the government no longer sets monetary policy, the Bof E is independent.

In a recession.

• Government can introduce Expansionary Fiscal Policy. This involves cutting taxes and / or increasing spending, AD should increase.
• The MPC can cut interest rates.

Evaluation

• It is difficult to control predict future economic trends, therefore, it can be difficult to know how much to change tax rates / interest rates.
• Time Lags, Interest rates can take upto 18 months to have an effects.
• Crowding out. Expansionary fiscal policy may increase government spending, but, reduce private sector spending.
• Depends on Confidence. For example, a cut in income tax may not increase AD, if confidence is low.
  

The aim of Demand side policies is to ensure sustainable growth. The aim is to avoid Boom and Bust economic cycles. In practise, this means that growth will be close to the long run trend rate of growth. This enables economic growth, without inflationary pressures.


See also:

Evaluation of MPC in controlling monetary policy

Essay Question: Discuss the effects of a fall in the Savings ratio?(30)

The savings ratio is the % of income that is saved not spent. A fall in the savings ratio implies that consumer spending is increasing, often this is financed through increased borrowing. For example, in the UK a fall in the savings ratio has been associated with an increase in equity withdrawal.

UK savings ratio is currently 3.7% In 1997 savings ratio was 10%


Effects of Fall in Savings Ratio

1. Higher levels of Consumption.

Therefore, it is expected that AD will increase. (consumption is 66% of AD, therefore it will be quite significant.)
The increase in AD will cause an increase in economic growth and lower unemployment. However, rising AD may cause inflation. Inflation will occur when growth is faster than the long run trend rate. This is now a potential problem in the UK; inflation has recently gone above the government's inflation target of 1-3%. Although other factors, such as; rising taxes and cost push factors have played a role, the increase in consumer spending is pushing up the underlying inflation rate.

2. Boom and Bust

A fall in the savings ratio is usually accompanied by a rise in confidence. It is the rise in confidence which encourages borrowing and consumers to run down savings. Therefore, there is always a danger that a falling savings ratio can be a precursor to a boom and bust situation. For example, the last time the savings ratio fell to this levels was in the late 1980s at the height of the Lawson boom [2], shortly after the economy went into recession. However, things were different in the early 1990s inflation was much higher (10% rather than 3%).

3. Economy more sensitive to interest rates.

With a fall in the savings ratio interest rate changes will have a bigger effect in reducing spending. This is because levels of borrowing are higher and therefore a rise in interest rates has a significant impact on increasing interest repayments. Also, higher rates will not be increasing incomes from savings as much.

Mortgage interest payments account for nearly 20% of homeowners disposable income, for first time buyers it is higher; therefore, any rise in interest rates could reduce spending significantly.

4. Balance of Payments.

With higher levels of consumer spending, there will be an increase in imports.Therefore this will lead to a deterioration in the current account. This has occured in the UK. The UK's current account deficit now accounts for 3.5% of GDP. UK consumers have a high marginal propensity to import; this means as incomes increase, a high % goes on imports. The current account deficit could put downward pressure on the exchange rate in the long term.

Conclusion

A fall in the savings ratio can increase economic growth, at least in the short term. However, the growth may be unsustainable, especially if interest rates rise in the near future. There is also a danger of increased consumption causing inflation. However, at the moment the MPC is looking very carefully at inflationary pressures, and interest rates could rise to reduce spending.

However, some people argue a fall in the savings ratio is not a problem, but, it is just a reflection of strong economy and booming housing market, which increases scope for equity withdrawal.

But if house price were to fall, it could be a real problem as many people would have negative equity.


[1] Savings Ratio Statistics at National Stats
[2] Savings Ratio 1998 Q3 4.%


Related essays:

• Causes of Economic Growth
• What can increase Long Run Trend rate of Growth?
• Causes of recessions
• Trends in the UK Savings Ratio at Tutor 2u
  

Q. Discuss Reasons for Low Inflation in the UK? (30)

Despite recent increases in inflation, by historical standards, inflation in the UK is very low (3% as opposed to 10% in 1990). Since independence of the B of England, in 1997, inflation has remained close to the governments target of 2% Many feel the MPC has played a pivotal role in keeping inflation low. However, there are also other reasons to consider such as; globalisation, commodity prices and supply side reforms.

Factors explaining Low Inflation in UK

1. Independent Bank of England - MPC

The MPC has sought to maintain low inflation and sustainable economic growth. It has managed interest rates to avoid inflationary growth. If the economy was expanding too quickly interest rates were increased to prevent future inflation. This is known as pre-emptive monetary policy, interest rates increased BEFORE inflation becomes a problem. As a consequence of this policy, growth has been close to the long run trend rate, and this has been a significant factor in maintaining low inflation.
(AD increasing at same rate as AS)

2. Lower Inflation Expectations

Related to the independence of the MPC, is the fall in inflation expectations. Because people expect low inflation it is easier to create low inflation. For example, workers do not bargain for high wage increases. Firms don't expect to be able to pass price increases on. It is a virtuous circle.

3. International Price trends.

It is not just in the UK that inflation has fallen. Other OECD countries have seen low inflation. For example, the process of globalisation has seen falling prices of manufactured goods, often produced in China. Several commodity prices have also been increasing at low rates, although recently they have started to increased.

4. New Technology.

New technology has helped to reduce the costs of firms. Therefore, the AS curve will shift to the right. For example, the internet and improvements in microchip computers have helped to reduce costs for firms.

5. Supply side reforms in the UK.

Supply side policies implemented since the 1980s have helped to reduce cost push inflation. For example, privatisation has seen public companies become more efficient, leading to lower prices. Privatisation was often accompanied by deregulation, which seeks to increase competition and therefore reduce prices. It is hard to quantify the contribution of supply side reforms to reducing inflation, but, they have had a benefit.


Related Posts

• An Evaluation of MPC in controlling inflation
• Forecasts for Inflation in UK during 2007
• Causes of Inflation
• Bank of England - home to MPC
  
• UK inflation - recent trends at tutor 2U
  

Labels: inflation, UK economy

• Discuss the Effects of an Increase in Interest rates on UK Economy.

In the UK Interest rates are currently 5.25% (April 2007). Inflation is 3.1%. Therefore real interest rates are 2.15%

An increase in the base rate will lead to an increase in the general cost of borrowing, throughout the economy. Also higher interest rates increase the return on saving money in an interest bearing account.

Therefore consumers will be less willing to borrow, e.g. on credit cards and personal loans. Also, consumers with variable mortgages will have an increase in monthly payments, therefore, they will have a reduction in disposable income. This will cause a significant fall in consumer spending, because, in the UK many home owners have mortgage payments, which account for a high % of their income. (This is as a result of rising house prices)

Similarly, the increase in borrowing costs will also reduce business investment.

Therefore with a fall in consumption and investment there is likely to be a fall in Aggregate Demand, or more accurately, AD will increase at a slower rate.

Therefore higher interest rates tend to reduce the rate of economic growth and inflation.

However, the effect of a rise in interest rates depends on various factors.

1. Effect on Savings (income and substitution effect)

Higher interest rates encourage savings and therefore reduce consumption (substitution effect). However, higher interest rates also increase income, for those with high levels of savings(income effect). Therefore, some consumers may actually increase spending. For example, in Japan many firms are currently investing out of savings. Therefore, an increase in interest rates is unlikely to discourage investment. In the UK, levels of debt are high and the savings ratio low, therefore, rising interest rates will be more likely to reduce investment and consumer spending in the UK.

2. The State of the Economy.

If the economy is growing above the trend rate of economic growth and is close to full capacity, a rise in interest rates will have the effect of moderating growth and reduce inflation. However, it is unlikely to cause a recession because the rest of the economy is buoyant. In the UK growth is close to the long run trend rate. Inflation is also slightly above target (3.1%). Therefore, arguably a rise in interest rates will not cause a significant problem.

3. Depends on Consumer Confidence

The effect of a rise in interest rates is sometimes hard to predict. If consumer confidence is high then rising interest rates may not discourage spending; people may just be willing to pay more interest. However, at other times a rise in interest rates may adversely effect confidence; therefore, the effect will be much greater. E.g. In the UK, many are concerned about the booming housing market, they feel the boom could soon turn to bust. A rise in interest rates could be the catalyst to stop house prices rising. If house prices fell it would have a significant impact on reducing consumer spending.


4. Effects on Exchange Rate.

Higher interest rates cause hot money flows, because it is more attractive to save money in the UK. Therefore, this will cause an appreciation in the exchange rate. An appreciation will make exports more expensive and imports cheaper. Assuming demand for exports and imports is relatively elastic, then an appreciation will reduce the growth of AD and help reduce inflation. In the UK, the exchange rate has been strong during the past year. Some experts argue it is fundamentally overvalued. Therefore, a further appreciation in the exchange rate would definitely not be welcomed by the exporting sector.

5. Time Lag.

It is estimated interest rate changes can take upto 18 months to have its full effect. Therefore, an increase in interest rates now, may reduce growth in the future. However in the UK interest rates have been increased from a low of 3.5% in 2003. Therefore, previous interest rates will begin to have an accumulative effect.

See also:

• Evaluation of MPC in controlling inflation
• Effects of Rising interest rates in UK
  

Labels: interest rates, UK Monetary Policy

Economics in the 1920s

The 1920s was often referred to as the "Roaring Twenties", or the "Jazz age". This related to the booming period of rapid economic expansion, but also changing social attitudes. Society was becoming less regimented and discovering new found freedoms; suddenly people's expectations were changing, and this was fueled by new technologies and a booming economy. However, hidden behind the optimistic views and a booming economy, there were significant structural problems, which led to the notorious stock market crash of 1929 and the Great Depression of the 1930s.

US Economy in the 1920s

• Booming Economy

Economic Growth was high, with significant increases in living standards for many.

Reasons for booming Economy:

1. Growth in Automobile industry
2. High levels of Consumer confidence, increased by new attitudes to consumerism.
3. Improvements in technology, partly as a result of WWI
4. Improvements in Labour Productivity - e.g. technology and new management techniques
5. Scientific Management - Taylorism
6. Mass Production - Assembly line e.g. Ford's Car Factory

• Laissez-Faire.

During the 1920s the Republican governments favoured a laissez-faire approach. Income tax was cut, especially the higher rate (from 73-25%)

• Anti trust laws were weakened.

This allowed the growth of monopoly power in industries like banking.

• Trade Union membership declined
  

The government offered little statutory support for unions. This is best exemplified by Henry Ford, whose revolutionary production methods for the production of cars, included banning trades unions. However, it is worth noting Ford paid wages much higher than elsewhere, therefore, most of his workers didn't seem to mind the absence of unions.

• Growth in Debt.
  

The booming economy and widespread advertising, led to a shift in consumer attitudes. This encouraged greater spending through credit. This also extended to the stock market.

• Boom in Stock Market.
  

The performance of the stock market, seemed to create an easy way to make money. This encouraged more speculators to enter. However, share prices became divorced from reality. It was a classic boom and bust in market sentiment. In October 1929, a few companies reported lower profits than expected, this proved to be a trigger for a dramatic change in market sentiment.

• Recession in Agriculture.

The boom in the US economy did not extend to all areas of the economy. It was mainly confided to construction and car manufacture. During most of the 1920s the agricultural sector struggled with declining prices and orders. This led to a record number of farmers going bankrupt. It also led to shifts in the population from rural to urban areas.

• Fragmented nature of banking system

A structural weakness in the US economy was the limited reserves of small and medium sized regional banking companies. This meant that when the Great Depression came, the banking sector was not prepared to meet the extraordinary circumstances. Even before the Great Depression of the 1930s many regional banks faced problems. They often failed to secure sufficient funds in the case of bad debts. Therefore, when farmers when bankrupt, they didn't have sufficient reserves to meet credit demand.

There was also no system of lender of last resort. This meant that if the banks were short of money, they couldn't borrow from a Central Bank. When the Great Depression struck, people wanted to withdraw their money, but the banks didn't have enough reserves to meet this demand. This caused a fall in confidence in the banking system and many banks went under.

• US economy 1920s
• The Jazz Age - Economics of the 1920s
• American Economics in 1920s and 1930s
  

Labels: economic history

I have written some essay plans for A Level economics Questions. They are free to use, they will give an idea about how to answer some questions. Don't reproduce in their entirety.

• Macro Economic Essays

ESSAYS INCLUDE:

• Should Aim of Government be to Aim for Low inflation
• What Can Cause Natural Rate of Unemployment to Change over time?
  

hi i am a student taking my A levels this year. i wrote an essay and i hope if ure free u can perhaps look through it for me and give me some comments cos my econs teacher is really really bad. thanks alot!

1. Discuss the consequences for an economy of an increase in interest rates. (25marks)

Interest rate is the effective rate paid on borrowed money. Increasing interest rates is a contractionary monetary policy i.e. the government is aiming to decrease aggregate demand by decreasing consumption and investment, to keep inflation under control when the economy is overheated.

The effects of an increase in interest rates can be analyzed using two approaches, Keynes and Monetarist approach. Under the Monetarist approach, the demand for investment is interest inelastic and an increase in interest rates (from r1 to r2) will lead to a more than proportionate decrease (I1 to I2) in investments.

(diagram)

An increase in interest rates may also help reduce households’ consumption because if interest rates are too high, consumers may not want to borrow to spend as they would have to pay back even more. This is especially so in the case of durable goods such as automobiles. Also, an increase in interest rates will encourage savings due to the higher returns thereby reducing consumption as well.

As a result of the decrease in consumption and investments, there will be a decrease in the aggregate expenditure of the economy to the level of full employment (Yfe) thereby reducing inflation.

(diagram)

However, under the Keynes approach, the demand for investment is interest inelastic and an increase in interest rate (from r1 to r2) will be met with an unresponsive change in investment (I1 to I2) hence the effect of interest rates on investment is less certain. This is because the investments largely depend on the confidence of future markets as well. If confidence is high, firms will continue to invest even if interest rates are high. Firms might pass the higher costs to consumers thereby worsening inflation.

(diagram)

In addition increasing interest rates would not reduce consumption as effectively if consumption is dependent on disposable income rather than interest rates.

The increase in interest rate will only work if the inflation is one that is demand-pull inflation. Since increasing interest rates is followed by unemployment and a cost-push inflation is also followed by a recession, increasing interest rates will only worsen the recession and inflation as it further increases the costs of production, hence it is inappropriate for cost-push inflation.

An increase in interest rates can also affect the external balance of the economy. An increase in interest rates can attract more capital inflows to the country due to the higher returns. As such there might be an improvement in the capital accounts of the Balance of Payments.

In addition, increasing interest rates might not be effective when the degree of control of the Central Bank on commercial banks’ credit-creating ability is low (due to emergence of subsidiary agencies like finance companies) and when there are alternative sources of funds to finance projects.

Increasing interest rates to achieve low rates of inflation and to stabilise the economy only works if the inflation in demand-pull. The effects of interest rates also depend on each economy and can vary for different countries. To have a more certain impact on the economy, fiscal policy should be adopted with monetary policy.

Some Suggestions:

• Higher interest rates lead to hotmoney flows (it becomes more attractive to save in UK) and therefore an appreciation of the exchange rate. A stronger currency will make exports more expensive and help to reduce AD. A stronger exchange rate will also help reduce inflation (lower AD, cheaper imports) An appreciation can worsen the current account if the ML condition is satisfied.
  

However the effect depends upon the elasticity of demand. If Demand is elastic it will reduce AD and worsen the current account. If inelastic the opposite will occur.

• The effect of increasing interest rates may take time to have effect, upto 18 months.
• It is very rare for A level students to be able to look at the keynesian and monetarist views of raising interest rates. You have some good evaluative points in your essay. - Like depends on type of inflation and depends on confidence. That is good.
  

see also: What determines effectiveness of monetary policy?

There is an interesting essay question from an old AQA AS paper.

Should the Government leave house prices to market forces, or actively intervene to prevent a house price crash? Justify your answer. (15 marks AQA Jan - 2006)

View: Suggestions on how to answer this Essay on the Housing Market

Basically, a house price crash would have serious economic consequences for the UK economy. (Effects of house prices on UK economy) Therefore it is best for the government to prevent a house price crash, if possible. However, if house prices are fundamentally overvalued, as some suggest, there is little the government can do to prevent them falling.

Also, not everyone will be displeased to see house prices fall. Especially, those first time buyers who have been priced out of the market.

The rise in House prices has led to a dramatic shift in wealth from the younger generation to the older generation. There is also little political will to do anything about it.

Related Posts:

• Why House prices have risen in UK
• Effect of rising house prices

1. Does Economic Growth Lead to Increased Happiness?
2. Economics - The Dismal Science
3. 7 Common Economic Fallacies

UK Economy

1. Economic Record of Gordon Brown
2. UK Economy under Mrs Thatcher 1979-1984
   
3. Why UK Will Never Join Euro
4. Will House Prices Fall?
5. Arguments in favour of A FAT TAX
6. How To Deal with an Ageing population
   

US + Global Economy's

1. Is US Economy Heading Towards Recession?
2. Economic Problems of European Union
3. Reasons for fall in US dollar
   

Students

1. Tips for Writing Economics Essays
2. Top 10 Reasons for Studying Economics