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Underdeveloped Economies and Depression

Readers Question: What is the difference between depression economy and underdeveloped economy? A depression economy suggests the economy is experiencing a deep recession, characterised by falling output and rising unemployment. An economy experiencing a recession could have a high GDP per Capita or a low GDP per capita. E.g. UK and the US have  both experienced a recession in the past year. There is a difference between the definition of a recession and depression, which you can view here: Depression and Recession definition. Basically, a depression is a much more…

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The Demise of the Dollar?

The Independent featured an interesting article on the Demise of the Dollar. There are more reasons for the dollar’s economic weakness here The weak dollar is causing the price of gold to rise and the Euro to appreciate. In some respects, the US won’t mind a weak dollar at the moment. This is because: Weak dollar will help boost exports and limit imports. Overall domestic demand should be stronger It will help reduce their long term trade deficit. With inflation currently very low, they will not be worried about the inflationary impact of…

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Why Do we Study Economics In School?

Readers Question: Why Do we Study Economics In School? 1. It’s Good to Study and improve the mind. At least, that is what I was told when I was learning ancient Greek and Latin. Many Employers are not looking for a specific degree but, the ability to learn, write and understand relevant ideas. I guess the idea is that if you have an A level in Economics (or other subject), you would be able to understand a firm’s business plans and be a competent employer. 2. Understand Practical Mathematics I often teach students…

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Current and Financial Account Balance

Readers Question I am confused by the statement that is written in my O’level text book (Economics Author: Dan Moynihan & Brian Titley). It says that if the current account is in surplus the financial account will be in deficit. Is this true? Yes, it is true Firstly, the current account on balance of payments measures trade in goods,  services, investment incomes and current transfers The financial account measures capital flows / short term and long term. For example, long term investment in building a factory or financial flows such as buying…

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Liquidity Trap and Fiscal Policy

Liquidity trap: When monetary policy becomes ineffective because, despite zero / very low interest rates, people want to hold cash rather than spend or buy illiquid assets. Example: Cut in interest rates in early 2009, failed to revive economy. Liquidity trap explained Keynesians argue that a liquidity trap means fiscal policy becomes very important for getting an economy out of a recession. Since interest rates are zero but aggregate demand is still falling, governments need to intervene to ‘crowd in’ resources left idle. The argument is that the rise in private sector…

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Deflationary Spiral

The Bank of England has been buying gilts through the creation of money. One reason for increasing the money supply is to try and avoid deflation. Japan is experiencing a serious bout of deflation. In Japan prices are currently falling at a record 2.4%. (BBC link) This fall in prices is also termed a negative inflation rate. European countries are also experiencing deflation. Belgium – 1.2% Spain – 1.0% Germany – 0.3% UK RPI is -1.3% (though the governments preferred measure, CPI, is 1.6%) Deflation can be damaging for an economy because: Deflation creates expectations…

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The Long Run and Keynes

Readers Question: What did Keynes mean by ‘In the Long Run we are all dead’ – From ‘In the Long Run we are all dead’ For Keynes, the short run was important and due to the instability of the macro economy, government intervention may be necessary to kickstart the economy. Classical economists tend to be more dismissive of short term falls in output. According to their models, falls in real output below the equilibrium would only be temporary and the economy would return to equilibrium of its own accord. In…

Pound Sterling Depreciation

Pound Sterling Depreciation

Despite a 10% appreciation in the first half of 2009, at the end of June 2009 the £Exchange Rate Index was around 20% lower than in August 2007. Since July, the Pound has weakened again. Why Is Pound Depreciating? Low Interest Rates 0.5% and prospect of interest rates staying low throughout next year. This makes the UK less attractive to deposit money. (less hot money flows) Bank of England suggesting low Pound is beneficial and they will not increase interest rates to protect pound. Prospect of…