UK Economy 2010

UK Economy 2010

2010 will be a difficult year for the UK economy. After the deepest recession since the 1930s, the outlook is for a sluggish recovery. Though recovery is welcome, it still leaves the problem of spare capacity, high unemployment and record levels of peacetime government borrowing. It will be a difficult tightrope between boosting economic growth whilst  keeping borrowing under manageable levels. Economic Growth Source: ONS The economy is expected to recover in 2010, but give the depth of…

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Recession and Government Finances

Readers Question: Indicate the problems which are created for the government’s finances as a result of having to help avoid an even deeper recession. In a recession, automatic fiscal stabilisers automatically cause a rise in borrowing. The UK recession hit tax revenues hard. Income tax receipts fell as top earners were made unemployed. Corporation tax fell as company profit decreased VAT receipts fell as consumers spent less A fall in house prices and fall in property transactions led to a marked fall in stamp duty. At the same time Government spending on unemployment benefits and…

Terms of Trade Effect

Terms of Trade Effect

Definition: The Terms of Trade is the average price of exports / by the average price of imports. It is a measure of a countries relative competitiveness. If export prices rise relative to import prices we say there has been an improvement in the terms of trade. – A unit of export buys relatively more imports. If import prices rise relative to export prices we say there has been a deterioration in the terms of trade. Effect of Devaluation on Terms of Trade. If a currency falls in value. Then we would expect…

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Difficulty of Reducing Debt

Most western economies are facing the prospect of record peace time government debt levels. The EU Maastrict Criteria stated that the maximum budget deficit member countries could run is a budget deficit of 3% of GDP. (By the way, I am glad this target for government borrowing has not been enforced. That would have been very damaging. See: Growth and Stability Pact) Unfortunately, this target looks a bit of a joke. To give a few examples: Ireland’s budget deficit runs at 14% of GDP Greece at 12% of GDP UK at 11-12% of…

Prospects for US Economy in 2010

Prospects for US Economy in 2010

This graph illustrates the difference between actual GDP and potential GDP. It also indicates how much Real GDP growth has lagged behind potential growth. This means the US economy currently has substantial spare capacity. This is reflected by a rise in unemployment and factories operating below full capacity. The Real potential GDP illustrates the long run trend rate of growth which is the average sustainable rate of growth over a period of time. Notice how the recession has reduced the growth of potential GDP from 3%…

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Fixing a Broke Economy (Iceland)

Readers Question: I trying to find appropriate policies that the Icelandic government could adopt to deal with the country`s substantial current account deficit. Do you know what policies they are using for the moment, and more importantly which policies they should adopt? Related Problems with Iceland Economy Solving UK Current account deficit At the height of the crisis the Icelandic economy had a large current account deficit financed by capital inflows (mainly capital flows to Icelandic banks). Since the crisis these capital flows have dried up  making it harder to finance…

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Wage Settlements

Readers Question: i am 16 and i have been working in Mcdonalds in my local area for about a year now do you think i should ask for more money? Danielle (from Min Wage 16-17 year) Well according to another commentator, Christopher, he is 17 and earns £4.35 an hour and ‘if i work well it goes up by 10p every 6 months‘. Which is above the official National Minimum wage rate of £3.57. So if you are earning at or above the national minimum wage is is worth asking…

Demand Deficient Unemployment

Demand Deficient Unemployment

There are several different types of unemployment. The most significant, especially at the moment is, Demand deficient unemployment. Graphs of UK unemployment Demand Deficient Unemployment. This occurs when there is insufficient demand in the economy to maintain full employment. If demand falls, firms sell less and so reduce production. If they are producing less, this leads to lower demand for workers. Either workers are fired or a firm  cuts back on employing new workers. In the worst case scenarios the fall in demand may be so great a firm…