Could you perhaps elaborate on that or point me to articles that discuss European debt?
National debt in EU countries is a real problem. Countries like Italy already have a national debt of over 100% of GDP, but, demographics mean that the ratio of retired people to workers is increasing making future debt likely to grow. Good article here in Times - EU debt
Is it certain that European countries will slip into a recession (by classical definition, and if so, who will and how deeply)?
I’m sure EU countries will slip into technical recession. How long will the EU recession last?
Depends on:
Extent of financial crisis spreading to EU banks
Depends how much EU house prices fall
Depends how much global economy slows down
The response of the ECB and whether lower rates would actually boost spending amongst EU consumers
Will the Euro continue its appreciation making it more difficult for EU exporters.
Gold looks like such a good investment at the moment.” How can you advise one to invest in Gold, and how can a person like myself start?
I think Gold is a good investment (though be wary of a speculative bubble in Gold). You could just buy shares in gold companies. Or I presume you could buy Gold stocks direcly. But, being an economist I have no money to invest, so actually, I don’t really know.
Readers Question: if production of food crops is increasing at a diminishing rate what factors of demand can reverse this trend.
If the production of food crops is increasing at a diminishing rate, then it is likely to increase the marginal cost of food production. If demand is rising faster than the supply of food then the market price will rise. Demand for food crops tends to be inelastic. Therefore, if price of food rises there will be only a small % fall in demand. Therefore, there could be an increase in revenue for farmers. This increase in revenue could give farmers an incentive to increase investment in agriculture. e.g. farming new land, using better technology to try and improve yields. Therefore, in the long run, the diminishing returns and higher prices may encourage greater supply.
However, that is only one possibility. For example, maybe there is no new land to farm. Maybe famers have exhausted productivity levels with use of chemical fertilisers / tractors e.t.c.
Also, if there are diminishing returns from increasing supply, but, not an increase in demand then prices won’t rise but fall. This may lead to lower revenues for farmers. Eventually some may go out of business (unless subsidised by government which often happens)
Readers Question: Should we worry about water running out?
In a way water is a renewable resource. From a global perspective, water is almost infinite in supply. However, there can be serious water shortages in local areas. This is becoming an increasing problem due to population growth and rapid economic growth.
Also, it is not just water, but, clean drinking water that is important.
In theory, if demand rises faster than supply, then the market price of water should rise and this will ration demand. This increase in the price of water should encourage local areas to ship water in or invest in desalination plants.
However, the market may not be able to respond to water shortages satisfactorily.
Water is an essential commodity for life. People expect to be able to consume water for free. However, the marginal cost of supplying extra water can be quite high. For political or social reasons governments may be reluctant to charge a market price for water to ration demand. However, this probably will need to change.
Water shortages are not easy to predict. With oil, the supply is fairly constant. If we run out, we at least can plan for it. However, water shortages have a habit of being unexpected. E.g. the draught in Spain and Australia was more severe than for a long time. In other words the market mechanism will respond too late. You need to invest in more water supplies a long time before having a draught period.
Demand continues to Grow.
The world’s population continues to rise, causing higher demand.
Global warming is causing increased demand for water for agriculture.
Economic growth also requires higher demand for water. People in rich countries use 10 times more water than poor countries.
Yet, the supply of drinking water is struggling to keep up.
“Two-fifths of the world’s people already face serious shortages, and water-borne diseases fill half its hospital beds.” - Why World’s taps are running dry at BBC
This is only part of the answer. There is no reason why the world cannot find a solution to water shortages. But, it is a problem which certainly requires intelligent intervention.
Quite a few people have been asking about the economic effects of falling share prices.
I remember seeing one A Level question asking ‘ Discuss economic effects of a fall in share prices and a fall in house prices’ (15)
Falling share prices will
Reduce consumer wealth for those who own shares. Therefore, they may spend less
Reduce value of pension funds and reduce private pension income (if it is a prolonged fall in share prices)
Make it more difficult for companies to raise finance on the stock markets, leading to lower investment.
Falling share prices tend to reduce consumer confidence.
Therefore, these factors tend to reduce aggregate demand growth and lead to lower rates of economic growth.
However, bear in mind the impact may be limited
Not everyone owns shares.
People who own shares tend to be rich and can ‘afford to lose money’ on the stock market. Therefore, their consumption levels will not be affected at all.
Stock market crashes don’t always affect levels of economic growth. e.g. 1987 stock market crash didn’t reduce growth at all. (Partly because interest rates were cut sharply)
The impact of falling house prices would be much greater. More people own houses - it is the biggest form of wealth in the UK.
Also, falling share prices are often a reflection of bad economic news rather than the cause.
US National debt is currently, $9.7trillion. It is forecast to rise to, at least, $11.3tn (possibly more with financial bailout by the end of 2009. In the coming years, the National debt could become an ever increasing burden for the US economy. This is because:
Cyclical downturn reduces tax revenue and increases spending
Long term demographic trends which create additional demand on government spending, especially health care and pension commitments.
Financial bailout. There is much interest in the $700bn bail out; it will definitely worsen the National debt, if the government take responsibility of mopping up the bad loans from the banking system.
The Credit Crunch can be bewildering. (I’m glad the derivatives market is not on the A Level syllabus) I have to admit that 18 months ago, I had little idea about terms such as CDOs and ‘Credit Default Swaps’
Outside of Wall Street and the City, I’m sure most people had little idea either. Yet, despite being a mystery to the wider public, the Credit default swap market had (according to the International Swaps and Derivatives Association) ballooned to more than $45 trillion by mid-2007. If it is possible to put any meaningful perspective on this figure, Mongolia had a total GDP of $3.905 billion (2007 est.) The GDP of the UK, is a little over $1 trillion.
18 months ago, I would never have predicted so many high profile banking firms would have gone bankrupt or required bailouts from the government. The credit crunch has certainly been a shock to the global financial system.
Readers Question From: Economic Policies to Reduce Inflation. What about a case were there is inflation and government needs central bank to print more money to spend and does not want to increase tax or interest rate. What can policies should the central bank adopt on this case.
If the Central Bank is printing more money, then the increase in the Money Supply is likely to cause inflation. Monetarist theory suggests inflation will occur if the money supply grows faster than Real Output.
If the government does not want to increase tax or increase interest rates, it is going to be difficult to reduce inflation.
They could reduce government spending. This will help to reduce the growth of AD. Government spending is a component of AD (C+I+G+X-M). This lower government spending will help reduce demand pull inflation. Although, it may be difficult to find areas of government spending to cut. One thing the government like to focus on is maintaining ‘wage restraint’ in the public sector. What this means is that public sector workers will get low wage increases. This will help reduce cost push and demand pull inflation.
The other option is to use Supply side policies. For example, reducing power of trades unions may help reduce wage inflation. Privatisation and deregulation may increase competitiveness and reduce inflation. However, at best, supply side policies will take a long time to have an effect. They will not be able to meet the immediate need.
One final policy is having a fixed (and high exchange rate) like the UK in the ERM 1990. However, this may require high interest rates to keep exchange rate high.
Readers Question: I have to write a paper on when it would be a good time to own a business that sells price elastic products, I have read the text and looked on this web site and am still confused as to what price elasticity really is. Should i get the Economics for Dummies book???
If the price of salt increases, will you reduce demand for salt?
If the price of volvic mineral water increases, would you reduce demand for volvic?
If the price of electricity increases, would you reduce demand?
If the price of a Vodaphone mobile phone increased, would you still buy it?
All these questions relate to the issue of elasticity. Price elasticity of demand measures how responsive demand is to a change in price. Some goods like salt are price inelastic because if the price of salt increases, people will generally keep buying it. e.g. a 10% increase in price, may reduced demand for salt by only 1%. We say the PED of salt is -1/10 = -0.1
However, if the price of volvic mineral water increased by 10% many consumers would buy other types of mineral water. This is because volvic mineral water has many close substitutes - Evian, Vittel, Gerolsteiner e.t.c.
Therefore, a 10% increase in the price of volvic water may reduce demand by 18%. Therefore, the PED of volvic is -18/10 = -1.8. We say that Volvic has an elastic demand - it is sensitive to changes in price.
Price Inelastic demand.
We say demand is inelastic if a change in prices causes a smaller % fall in demand. Examples, include
petrol
salt
Tobacco
Electricity
Gas
All these goods are seen as necessary by consumers. If the price of electricity goes up, you will still use it to turn on lights and your TV. You can’t plug your TV into the gas socket. Electricity is inelastic because it doesn’t have any close substitutes. It is the same for petrol and salt.
Elastic Goods
This means a change in price leads to a bigger % change in demand. Elastic goods will be anything with many substitutes or luxury items that are expensive to buy e.g.
Tesco Bread
Tesco Value Baked Beans
Sports car outside
Designer label Clothes
Therefore, a firm could cut price and gain a bigger % increase in demand. These are goods with many substitutes. E.g. if Volvic cut its price by 10%, it may gain an 18% increase in market share (unless other firms also cut prices)
It is good to have elastic goods, if you can cut prices, without your competitors following suit.
After several years of rapid growth, 2009, will prove a testing year for India.
Inflation Inflation continues to pose a threat. Inflation peaked at 12% in early August ‘08. Inflation, is being caused by rapid growth (demand pull factors) but, also the cost push inflation factors (rising oil prices). Hopefully, the fall in oil prices and higher interest rates will reduce inflation without causing too much of a slowdown.
Economic Growth. After reaching growth of 9.8% in 2007/08, growth is expected to slow down to 7%. This might not be a bad thing as it will avoid inflationary pressures building further. However, some worry the global credit crunch could reduce growth much more.
Global Recession and Indian Economy. It appears that Europe, Japan and the US are entering into recession. Falling house prices, crisis in the financial system, and lower confidence could lead to a sharp downturn, with the worst still to come.
Many argue, that India’s growth is not so dependent on growth in the West. However, the Indian stockmarkets have been hit by the global crisis. India’s growing service sector and manufacturing sector would be adversely impacted by a global downturn. However, I still feel that India’s economic success is not dependent on growth in the West, and at worst India’s growth rate will be less than hoped for.
