economics

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Principal-Agent Problem

The principal-agent problem occurs when a principal delegates an action to another individual (agent), but the principal does not have full information about how the agent will behave. Secondly, the interests of the principal diverge from that of the agent, meaning that the outcome is less desirable than the principal expects.   Shareholder and manager For example, a shareholder (principal) wants to maximise profits for his firm. He hires a manager (agent) to run the business. However, due to agency costs the shareholder cannot fully know how hard the agent is working…

The relationship between economic growth and average pay

The relationship between economic growth and average pay

Readers Question: Does the level of real income grow as the economy grows? Can we say that real income grows as the economy grows? If yes, what factors surround it?  Summary In a period of positive economic growth, usually, you would expect a rise in real wages and higher pay. However, it is not guaranteed. GDP measures wages, but also profit, interest and rent. Therefore, it is possible for GDP to increase but average wages to stagnate and even decline. – e.g. if profit takes a bigger share of GDP. Economic growth…

Human Capital definition and importance

Human Capital definition and importance

  Human Capital is a measure of the skills, education, capacity and attributes of labour which influence their productive capacity and earning potential. According to the OECD, human capital is defined as: “the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances”. Individual human capital – the skills and abilities of individual workers Human capital of the economy – The aggregate human capital of an economy, which will be determined by national educational…

When will interest rates rise?

When will interest rates rise?

Readers Question: Will interest rates rise? Some say yes, my investment analyst/advisor says no (“because the UK is largely living on credit and the government and bank of England do not want a repeat of 2008”) Interest rates will rise when the Bank of England feel the economy has returned to a normal trend of economic growth and underlying inflation (ignoring cost-push factors) is predicted to rise above the government’s target of CPI 2%. Given recent rises in US interest rates and a fall in UK unemployment to 4.7%, it is…

Self-employment tax rises

Self-employment tax rises

In the recent budget, the chancellor Phillip Hammond announced higher national insurance contributions for the self-employed. Class 4 NICs for the self-employed would rise from 9% to 10% in April 2018 – and then to 11% in April 2019 – on income up to the higher rate threshold of £45,000. The new rates are still lower than for employees who pay NI at 12% on the same income levels, while both groups will continue to pay at 2% on income above the higher rate threshold. (Self-employment at Guardian) Personal comment I am…

Should university education be free?

Should university education be free?

Summary Education has positive benefits for the rest of society. If university education is left to market forces, there may be under-provision, and the economy may suffer from lack of skilled graduates. Furthermore, in a free market, higher education would become the preserve of wealthy families who can afford to send their children to university. Therefore there is a strong case for the government providing higher education free at the point of use. However,…

Should we be concerned about a falling savings ratio?

Should we be concerned about a falling savings ratio?

In the Bank of England’s latest forecast for the UK, they predict reasonably good economic growth in term of real GDP. At the same time, forecasts for average real incomes are more pessimistic. The Bank of England suggests UK economic growth will be maintained by consumer spending – spending which will partly be funded by a decline in the savings ratio. Essentially, real wages are forecast to stagnate (or grow slowly), but higher spending will be financed by lower saving.

Savings ratio UK

Definition of Household savings ratio: The percentage of disposable income that is saved. (1) Total savings = Disposable income – Household consumption UK Saving Ratio Latest UK household savings ratio: Q3 2016 = 5.6% (Feb 2017) The Bank of England have forecast a fall in the savings ratio during 2017 because of the effects of depreciation in the Sterling pushing up prices. If the forecast is correct it could push the savings ratio down to levels not seen since 2008 – just before the  pre financial crisis.