Back in March, I wrote this essay - Is the US heading towards recession?

Today, I updated some of these arguments to take into account recent events of the past 6 months. In particular the chances of recession have increased due to the continued weakness in the US housing Market and also the global credit crunch, which makes borrowing more expensive.

Nevertheless, despite factors such as this and investment banks like Morgan Stanley predicting recession, growth in the US has remained unexpectedly high. (Helped to some extent by the weak dollar making exports more competitive). However, I doubt this high growth will last and there are good reasons to expect a fall in growth rates in the coming year.

Will US enter into Recession?

Outlook for US Dollar 2008

In this essay I looked at the factors affecting the US dollar, unfortunately, many of the fundamental weaknesses in the dollar remain. If the dollar does continue to fall, it will make it harder for the Fed to cut interest rates and avoid a recession

Forecasts US dollar 2008

It is a strange development that developing economies like India are now seen as a safer environment for investment than the battered credit markets of the West.

The Indian economy has performed remarkably well in the past 10 years. Posting levels of growth only beaten by China. Admittedly the growth is not without problems (see: Problems of Indian Economy) in particular rural poverty and lack of infrastructure threaten to diminish the gains from growth. However, the strength of the Indian economy and its attractiveness for funds is causing a new and unexpected problem - a rising currency.

In 2007, the amount of global funds into India increased to a record $44 billion (up from $24 billion in 2006). India is an an attractive place for investment for several reasons:

• Emerging economy with much potential for further growth
  
• An alternative to the bloated stock markets of US and Europe (with concerns over the global credit crunch)
  
• An alternative to dollar based securities.
  
• Cheap labour makes it an attractive place for manufacturing and call centres.
  

Because of this the Indian Rupee has appreciated 15% against the dollar in the past year.

The future of the Indian Rupee depends on whether the government will want or be able to stem the flow of capital into India.

On the one hand capital flows are beneficial - providing funds for investment.
On the other hand if capital flows are not limited the rise in the Rupee may cause increasing hardship for exporters, especially in manufacturing and the financial services industry.

Another dilemna the Indian Federal reserve faces is between the exchange rate and inflation. Inflation in India is increasing as the economy reaches full capacity. To reduce inflation the standard response is to increase interest rates. However, increased interest rates will further strengthen the Rupee. Something the Indian Reserve bank will be reluctant to do.

The Rupee will also continue to benefit from the strength of commodities like Gold and jewellery. India is a net exporter of these.

It is likely foreign currency could continue to flow into India. however, in the long term inflationary pressures could start to weaken the Rupee, as it becomes less competitive on an international scale.

I feel the Indian stock market provides good potential for investment, but, the recent rises in the Rupee may be unsustainable in the medium term.

A reader asked a question about cost effectiveness and cost utility analysis. It sounded very boring, but, actually leads to some interesting dilemmas.

This is an issue that is likely to pit public opinion against the advice of an Economist.

Compare 2 potential responses to a decision to not give treatment for terminally ill cancer sufferers.

"There is a new drug that can prolong the lifespan of young cancer sufferers. Yet, government economists have sought to block the treatment on ground that it doesn't conform to some hypothetical cost utility analysis. Don't let heartless bureaucrats sign the death warrant of cancer sufferers. Treatment should be available to All - Write to Your MP now."

-----

The NHS has limited resources, each year, the NHS receives over £70 billion. Therefore, each year the NHS needs to make decisions about what to spend its money on.

This dilemna of opportunity cost, has increased in recent years due to an increased number of expensive treatments that are becoming available.

For example, a new drug, is said to have a 50% chance of increasing life expectancy of cancer sufferers by upto 12 months. However, the new treatment is expected to cost an average of £100,000 per patient. This gives a cost utility of about £100,000 per extra year. (although only 50% chance of success means it is actually £200,000 per year.

If you compare this to the cost of other treatments and spending, it is a very inefficient use of money. Other treatments not always widely available have a cost utitily of much less than £200,000. Therefore, with limited resources it is advised that the NHS does not spend its money on this new drug, but continues to offer drugs with a better cost utility.


Which is right - Should the government ever refuse treatment that can prolong life?

Why Some drugs are not worth it at BBC

When I became an Economics teacher, 8 years ago, I was firmly under the impression that economics was a boring subject. Fiscal deficits, current accounts, money supply, MV=PY, and the monetarist theory of inflation was about as exciting as it gets. Yet, these days it appears that economics has developed a rather fashionable / trendy public image.

Not least amongst the reasons, is the popularity of the best selling, Freakonomics. Written in an engaging, and quirky style it looks at everyday problems and examines them from an economist perspective. There seems to be little that cannot be explained through Economics, from Roe vs Wade (abortion) to decisions by school teachers and sumo wrestlers.

The runaway success of Freakonomics and its associated blog has spawned many similar books such as:

• More Sex is Safer Sex: The unconventional wisdom of Economics.
• Sex, Drugs, and Economics: An unconventional introduction into Economics
• The Undercover Economist by Tim Harford
  

Fortunately, or unfortunately, such juicy questions are unlikely to start appearing on Economics A Level and University exams. But, nevertheless they do serve to illustrate the all pervading influence of economics.

I had an English teacher who was fond of saying Shakespeare was all about Economics. (yes, I agree a strange thing for an English teacher to say. His argument was that if Shakespeare had been born in a time of less economic affluence. His plays would have never been written)

We even have a economic stand up in Yarum Baumon - Funny Economic video

One might ask where it is all going to end?