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
  

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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.


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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.

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• 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.

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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
• 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