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Benefit of Recession

Readers Question: it is commonly known that a recession has only one benefit, that is curing inflation of goods and services. But in the UK there has been no fall in the prices of goods and services. Does it mean we are not affected by the recession? There have been recessions where certain economists felt the recession was necessary to remove the problem of inflation. e.g. recession of 1981 occurred after a period of inflation reaching 27% Recession of 1991 occurred after Lawson boom and double digit inflation. The chancellor Norman…

Is Phillips Curve still Relevant?

Is Phillips Curve still Relevant?

Readers Question Discuss the view that the Phillips Curve is irrelevant in explaining the relationships between unemployment and inflation in the UK. The standard Phillips curve suggests there is a trade off between unemployment and inflation. This relationships occurs because of the Keynesian view of the AD/AS diagrams. Diagram showing an Increase in AD. As AD increases, the economy experiences an increase in Real GDP and therefore firms demand more workers, helping to reduce unemployment. However, as the economy approaches full capacity, we get…

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Hopes of Recovery

A report by the OECD suggests the worst of the recession may be over in the UK. Leading indicators (guide to future economic activity) suggested a slight improvement in the UK. Last quarters GDP decline of 1.9% may prove to be the worst aspect of the recession. Also it is worth noting that GDP statistics are often revised later. For example in 1992, the initial statistics suggested a fall of 2.5%. Later this figure was revised to show only a fall of 1.4%. Why Economic Recovery? Just to recap there have…

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Reforms to Labour Market

Readers Question Evaluate the likely effectiveness of two policies that german government could introduce to increase labour market flexibility. Recently, the German government have introduced a variety of reforms to try and tackle the high rates of unemployment in Germany. These policies have included: It’s easier to hire and fire. It’s more tax-efficient to set up a small firm. Unemployment and welfare benefits have been cut and rolled into one, to force people to leave what the Germans call the “soziale Haengematte”, the welfare hammock. People who have been without a job…

ECB Interest Rates

ECB Interest Rates

The ECB cut interest rates to 1% as they slowly face up to the extent of the recession in the Eurozone. The German economy is facing a large drop of 6% in GDP this year due to the global recession and strong Euro. The lower interest rate may make the Euro less attractive as Euro rates become closer to US and UK rates. A fall in the Euro would help German and Euro exporters regain…

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Term Deflationary Recession Explained

Readers Question What is meant by the term deflationary recession? A recession is a period of negative economic growth. (official definition is a period of negative economic growth for two consecutive quarters) see: Definition of Recession Deflationary pressures imply a fall in aggregate demand. This leads to a lower rate of growth or a fall in GDP and consequently a lower inflation rate. Strong deflationary pressures may also cause inflation to become negative. i.e. a fall in prices known as deflation. definition of deflation So all recessions have deflationary pressures….

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Paradox of Deleveraging

Readers Question: What is the paradox of deleveraging? It isn’t as difficult as it sounds. Basically, it refers to a situation where everyone is trying to reduce debts and improve their balance sheets all at once; and this process of paying off debts creates problems for the economy. From a personal point of view it is good to reduce your debts, and improve your financial position. However, if everyone does it at the same time it can lead to a financial crisis. Why? To reduce debts people sell off assets to gain liquidity. Selling…

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List of Poorest Countries by GDP

Poorest 20 countries in the world.  This list shows the GDP per capita of the poorest 20 countries in the world. It is in stark contrast to the richest 10 countries GDP per capita. However, although this is an indicator of the vast inequality in the world. GDP per capita statistics should be treated with caution. Lower living costs in poor countries GDP per capita in $ doesn’t reflect local purchasing power of currency. Poor countries may have a bigger underground (hidden economy). E.g. a subsistence farmer would have no income and…