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Growth of Developing Countries

By on April 15, 2008 in economics

Readers Question: To what extent can a government influence the rate of growth of a developing country?

There are various policies the government can use to try and increase the economic growth of developing economies.

Demand side policies.

Cutting taxes, and cutting interest rates. These help to increase aggregate demand and boost short term growth. However, demand side policies are only really appropriate for helping short term problems of slowing demand. Demand side policies do not deal with the fundamental structural weaknesses of an economy.

Supply Side Policies

These are policies which help to increase the long run rate of productivity in an economy. For example, spending money on better education and training helps to increase labour productivity. These policies can help to increase productivity in the long run.

Increasing Savings Ratio

It is argued if a government can increase savings ratio, it enables a higher rate of investment. This can lead to higher rates of growth over time. However, it depends on the efficiency of the investment. Higher savings rates do not always equate to higher growth rates Continue Reading →

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When will oil run out?

By on April 15, 2008 in oil

Readers Question: when will oil run out?

It is difficult to say.

Firstly on the demand side, demand for oil is rising faster than many expected. This is largely being driven by rising growth in developing economies such as India and China. Today we consume an average of 85 million barrels daily. According to the most conservative estimates from the International Energy Agency that figure will rise to 113 million barrels by 2030.

On the supply side the known reserves of oil varies between 1 trillion barrels and 3 trillion.

Unknown Reserves

The amount of oil reserves is uncertain. For example, there could be a lot in the Antarctic. At the moment, this continent is relatively unknown. However, as oil prices rise, it will become difficult for countries to resist the the temptation to increase supply in these fragile areas.

Steady Decline of Oil.

Most oil analysts argue that the production of oil tends to follow a bell curve distribution. Reaching a peak before slowly declining and tailing off towards the end. Continue Reading →

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Buying Property in Cyprus

By on April 11, 2008 in economics

Readers Question: Hello, I found your column an interesting read how ever with some concern to my myself.
I’m currently in a contract terms with buying a property in Cyprus. The property is valued at 153,774Euros and is due to complete by the 30th June 2008.

In today rates the current price in sterling would around £123,500 to buy, however with the pound continuing to fall, how long do you forecast it to continue?

Is it likely to pick up in time for me make some saving on the current exchange rate and reducing my outlay?

I think in a case like this, I would not advise waiting in the hope that the Pound may appreciate against the Euro. As I mentioned in this post, there are many good economic reasons why the Pound is weak against the Euro. I believe it is more likely the Pound will fall further, although I don’t think it will reach 1 Euro to 1 Pound.

To be honest, it is always difficult to correctly predict exchange rates; even the top currency dealers will get it wrong on many occasions.

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Getting Rid of Mosquitoes

By on April 11, 2008 in concepts

Readers Question: Why government, rather than private industry, is required for an effective mosquito eradication program?

An effective mosquito eradication program is an example of a public good.

If you exterminate all the mosquitos it has the characteristics of

  1. Non rivalry. – When you benefit from living in an area free of mosquito’s it doesn’t reduce the benefit to anyone else. (unlike a private good where if you consume it, you reduce the amount available)
  2. Non Excludability – Once provided you can’t stop anybody benefitting from it. I

If you get rid of all mosquitoes and prevent malaria, then everyone in the community will benefit.

However, in a free market the service may not be provided; this is because you will benefit even if you don’t pay and contribute to the program. Therefore there is an incentive to wait for others to pay for the program and then ‘free ride’ on the efforts of others.

A private firm will therefore, struggle to get sufficient people to pay.

This is why the government can pay for it out of general taxation. This forces everyone to pay.

This contrasts to a private good, where the benefits accrue to a certain individual and there are market incentives to pay for it.

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The Greatest Risk to an Economy – Inflation?

By on April 11, 2008 in economics

Readers Question: To what extent do you agree that “the greatest risk to the economy is not inflation, but over-investment

To be honest, the idea of over-investment has never struck me as being the biggest risk to an economy.

Over-investment may refer to excessive growth in an economy, such as China is experiencing at the moment. It is possible that the main problem of over investment is that inflation will occur. e.g. China is currently expanding very rapidly causing a boom and rise in inflationary pressures. Another problem of the Chinese situation is that a lot of the investment is based on bad loans. The banking sector have a poor record of lending to viable business options. Therefore, the banking sector is risking being left with bad debts related to the increase investment. Continue Reading →

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Definition of Marginal Cost

By on April 11, 2008 in concepts

Readers Question what is the marginal cost measured at a particular level of output defined as?

Definition: Marginal cost is the extra total cost of producing one extra unit of output.

  • For example, suppose the cost of producing 10 bikes is £2,000. If you produce 11 bikes and the total cost increases to  £2,150.
  • This means the marginal cost of the 11th bike is £150. (Note, the marginal cost is less than the average cost of the first 10 bikes)

Diagram Marginal Cost

mc

See: Diagram of marginal cost 

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Gross Domestic Income

By on April 11, 2008 in economics

Readers Question: what is gross domestic income?

Gross Domestic Income is a measure of a countries National Income. It is the same level as National Output and National Expenditure. The GDP in the UK is about £1,200 billion.

Gross domestic income is calculated by adding all the different types of income in a society. This includes

  • Wages
  • Profit
  • dividends

Real Gross domestic income will take into account the effect of inflation on income to show the actual increase in purchasing power the income can buy.

Related

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Disguised Unemployment

By on April 11, 2008 in unemployment

Readers Question: what is the difference between disguised unemployment and involuntary unemployment

Definition of disguised unemployment. This is when people do not have productive full-time employment, but are not counted in the official unemployment statistics. This may include:

  • People on sickness / disability benefits (but, would be able to do some jobs)
  • People doing part-time work.
  • People forced to take early retirement and redundancy
  • Disguised unemployment could also include people doing jobs that are completely unproductive, i.e. they get paid but they don’t have a job. In a developing economy like China, many workers in agriculture may be adding little if anything to overall unemployment, therefore this type of employment is classed as disguised unemployment.
  • See: The true level of unemployment

Definition of Involuntary Unemployment

This is when people are unable to work because there are insufficient jobs available in an economy. For example, during a great depression. Classical economists argue unemployment is voluntary ‘i.e. wages are too high’ but involuntary unemployment says that people are unemployed for a lack of aggregate demand. Keynes argued a cut in wages would not solve unemployment because it would only reduce AD further.

Involuntary unemployment would be measured by government statistics. E.g. in the 1930s, unemployment rose to 25% in the UK. This was involuntary unemployment.

Note: the definition is somewhat disputed

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Do Free Markets cause Recession?

By on April 11, 2008 in recession

Readers Question: Consider the view that leaving the economy to private enterprise and the market system is more likely to lead to recessions and instability than to sustained economic growth.

Without government intervention, I believe the economic cycle would be more volatile.

  • Booms and busts will be more common see: The economics of Herding and irrational behaviour
  • Economies can get stuck in recessions, where resources are under utilised and it can take a long time for the economy to recover. See: Keynes general theory.
  • The finance sector does need regulating. The experience of the current credit crunch suggests that banks are not good at self regulation; it would have been better to have stricter regulation of lending and this would have avoided many bad debts.

See: How long do recessions last?

However, government intervention is not always successful:

Also, it is argued by classical economists that economies will automatically recover after a fall in short term output. But, the experience of the great depression shows that a lack of government intervention can cause problems.

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Sterling Weakens against the Pound

By on April 10, 2008 in currency

I wrote a quick essay on the Reasons for the falling value of the Pound

Some are predicting we might see parity between the Euro and Pound in the next few months. That would be bad news for UK tourists travelling to America. However, I think it is unlikely the pound will fall that low – unless the housing price falls turns into a housing slump.

Apologies for getting behind with readers questions

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