MPC and Inflation Forecasts

By on January 11, 2008 in inflation

Readers Question: What are the monetary policy committee tools which are use to set the inflation target?

The inflation target is set by the Government. The government set the inflation target at CPI 2% +/-1. If the inflation rate moves away from these targets the MPC have to write a letter of explanation to the chancellor.

Inflation Forecasting.

A very important job of the MPC is to try and forecast future inflation. Future inflation trends determine how and when they change monetary policy. For example, if they forecast a fall in the UK inflation rate in 2008, they could cut interest rates to boost the economy and the housing market.

To Forecast future inflation the MPC look at various economic statistics which give an insight into the amount of spare capacity and levels of inflationary pressure. They look at other 30 statistics including:

Continue Reading →

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Is Global Warming Happening in the UK?

By on January 11, 2008 in environment

global warming

This data from the National Statistics online shows that global warming has been accelerating in the past 7 years.

Note 2006 and 2007 were also record hot years, with 2007 being the warmest on record.

The highest temperature on record was in 2003, when the thermometer reached 38.5 degrees.

The Intergovernmental Panel on Climate Change (IPCC) said that most of the temperature increases can be attribute to man made activities, like burning of fossil fuels.

Who knows what will happen in the future, but some predictions for global warming suggest temperatures could rise by 2-3 degrees having a significant impact on the UK economy and UK society.

global warming uk. Source BBC

In the biggest peer to peer group study of global warming, several different research groups all pointed to similar trends The warming figures they arrive at differ very slightly because each group uses its own dataset and does its own analysis, but they reveal a common trend. Since pre-industrial times, all point to a warming of around 0.75C. (from Berkeley Team)

Changes as  a Result of Global Warming

  • Traditional fish like Cod and haddock on the decrease, but growth in other types of fish who thrive in warm water (like Red Mullet) are on the increase(Guardian link)
  • Increased range of areas which can grow warm weather crops such as grapes, tomatoes and melons

Related

Latest news on climate at BBC

See: Economics of Global Warming 

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Measuring Living Standards

By on January 11, 2008 in development

Measuring living standards is very important for economic policy. However, in practise there are several difficulties in measuring living standards and therefore there are several different measures we could use.

The most common measure of living standards is to start with  real GDP per Capita

GDP per Capita – GDP measures National Output / National Income. Per capita is the average income per person in the economy. This is a rough guide to living standards because it measures average incomes / the amount produced in an economy. However, income and average output is only a rough guide to living standards. (for example, increased GDP per Capita could be at the cost of increased pollution; in this case, higher GDP could lead to a decline in living standards.

GDP – Purchasing Power Parity PPP

Another important factor in measuring living standards is GDP measured at Purchasing power parity. This means that the statistics take into account the actual cost of living. For example, some countries may have lower GDP, but the cost of living is much cheaper. PPP adjusts for these different costs of living.

Real GDP per Capita / Hours Worked

A more accurate guide to living standards is to take into account the number of hours worked. If you gain high GPD per capita but have to work a 12 hour day, then this is less desirable than same income for 6 hours work per today. (measuring living standards / hours worked – external link)

Household Expenditure / Consumption

Most measures of living standards focus on income. However, income is only a rough guide to the goods and services you can actually buy. Some people may have very high living costs (e.g. rent / council tax / transport costs). Therefore, the quantity of goods and services you can actually buy will give a better guide to living standards than just income. Another issue is that some people may receive benefits in kind. E.g. those on means tested benefits often receive prescriptions and dentist visits for free. Therefore, their living standards are better than their actual income may suggest.

When comparing UK vs US, one feature of the US is that people have to devote a high % of income to health care insurance.

Poverty and Living Standards

An important factor in measuring living standards for the economy is the number of people living below the poverty line.

The poverty line is defined as:

The level of expenditure necessary to buy a minimum level of nutrition and other basic necessities. The World Bank say that the poverty line can vary somewhat from country to country, reflecting different costs of living for taking part in the everyday life of society. Continue Reading →

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What Should Happen To Northern Rock?

By on January 10, 2008 in finance

Readers Question from:Trevor Downer. Glasgow. From what little I know the theory of Economics appears to have very little scientific basis. Two “experts” will give two different answers, add a third “expert” and yet another answer is provided.
Can someone explain to me why there is no easy answer to the problem of the Northern Rock Bank?I presume that the 26 billion pounds loaned by the government is the amount that the bank owes, including interest, to lenders to the bank. I presume that this money has been loaned by the bank to borrowers that have the assets that are equal to that amount and will return a greater amount over the agreed loan period.

This suggests to me that the simple answer would have been to close the bank down, for the government to pay that sum directly to the lenders and have the borrowers make re-payments directly to the government, thus, no losers and, over a long period, large gains for the government, ie, us the taxpayers.

Have I gone wrong somewhere? Where have I gone wrong? An explanation would be appreciated.

Firstly, you are absolutely right about Economists. Put 10 in a different room and you will get 11 different answers (or so the joke goes)

It is an interesting question.But, I think that if the bank is closed down i.e. made bankrupt, it is hard for the government to get its money back. Because if you declare bankruptcy there is no requirement to pay back your debtors. If the bank closed down it would be difficult for the government to get its money directly from the borrowers. Continue Reading →

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Trickle Down Economics

By on January 9, 2008 in economics

Trickle down economics is a term used to describe policies which primarily benefit the wealth and high income earners. The term ‘trickle down effect’ is often used pejoratively – in that economists often criticise ‘trickle down policies’ which in effect do little to improve the welfare of the average citizen.

Trickle Down Effect and Tax Cuts

An important element of the trickle down effect is with regard to income tax cuts for the rich. It is argued that cutting income tax for the rich will not just benefit the rich, but also everyone. The argument goes as this:

  1. If high income earners see an increase in disposable income, they will increase their spending and this creates additional demand in the Economy. This higher level of Aggregate Demand creates jobs and higher wages for all workers.
  2. Alternatively, increased profits for firms may be reinvested into expanding output. This again leads to higher growth, wages and incomes for all. Continue Reading →
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Increasing Productivity On Internet

By on January 9, 2008 in internet

Since Economists are concerned with efficiency, I thought I would share some ideas about the efficient use of time, particularly on the internet.

If you read this post, the chances are you spend a lot of time surfing the internet. But, how much of this time is profitably spent? Just because the internet has great possibilities and a wealth of information, it doesn’t mean that it will always increase our productivity. These are some tips to increase our productivity

Have a Clear Purpose

When you sit down to your computer do you know what you intend to achieve? or do you just sit down and see what happens. If you want to spend 30 mins surfing through different sites, that is fine. However, the problem is that we often just surf aimlessly for want of having a clear target. When you turn on the computer have a mental check box of things that you want to achieve and complete. Once these are completed, either turn off the computer or allow yourself to relax and visit sites for enjoyment

Avoid Repetition.

One thing that really wastes time is repeating activities. A good example, is multiple checking of email accounts. It may only take 1-2 minutes, but, if you check it 10 times a day that is 20 minutes. That is a pretty high % of your total computer time. If you checked it once, it may take a total of 5 minutes. There are several sites where we may keep checking, even though not much has changed. If we find we are repeating things, try doing something different.

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Anti Trust Policy and Monopoly

By on January 9, 2008 in monopoly

Anti trust policy refers to government intervention in markets dominated by monopolies and abuse of monopoly power. In the UK, anti trust policy is better known as simply competition Policy, with the OFT and Competition Commission investigating mergers and abuse of monopoly power.

In the US, antitrust become important in the late nineteenth century, when American industry and become dominated by a few very powerful firms – in particular Rockefeller and J.P. Morgan trust’s. In 1890, the US anti trust board successfully broke up some of the big Railroad firms, Du Point chemicals and Rockefeller corp. This became known as the Sherman Antitrust act of 1890 and dominated American antitrust policy in the twentieth centuries. Continue Reading →

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Average Incomes in UK

By on January 9, 2008 in economics

There are different ways of measuring average incomes in the UK.

  • Average Household Incomes – combined income of a family. This may include 2 or 3 salaries
  • Average Individual Incomes – average income of individual earner.
  • Gross Income – Original income before tax and benefits
  • Disposable Income – Final income after subtracting tax and adding benefits.
  • Median Average Incomes
  • Mean Average Incomes

Graph Showing Inequality in Average Income

The graph below shows the distribution of average incomes. The top 20% households earn 16 times more than the bottom 20%, although this is significantly lessened by the impact of the tax and benefit system

graph

Source: ONS

This shows average incomes in the UK were just under £30,000 in 2006. Continue Reading →

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Benefits of Central Bank Independence

By on January 9, 2008 in finance

Monetary Policy used to be the preserve of the Government. The Government would change interest rates to meet its various economic objectives. At different times the Government would give priority to:

  • lower inflation
  • higher growth
  • targeting exchange Rate
  • and even balance of payments.

For example, in the early 1980s, the Thatcher Government increased interest rates to reduce inflation.
In 1987, after a stock market crash, interest rates were cut to boost economic growth. In 1992, interest rates were increased to 15% to try and maintain the value of the £, which was then in the Exchange Rate Mechanism ERM

Arguments for Central Bank Independence

  1. It was argued that the governments tended to make poor decisions about monetary policy. In particular they tended to be influenced by short term political considerations.
  2. Before an election, the temptation is for a government to cut interest rates. This increases economic growth, reduces unemployment and increases the political support of the party. However, this expansionary monetary policy may lead to inflation and boom and bust economic cycles. Therefore arguably, it is better to take monetary policy out of government’s hands.
  3. People have more confidence in the Central Bank, therefore this helps to reduce inflationary expectations. In turn this makes inflation easier to keep low. Continue Reading →
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Testing Marshall Lerner Condition

By on January 8, 2008 in trade

Readers Question: When my class and I try to test the Marshall-Lerner condition it doesn’t always work. i.e. we assumed a country with just one export and one import and assumed their price elasticities added up to less than one. We gave each a price and quantity that led to a current account balance =0 for simplicity then assumed a devaluation of the exchange rate – on calculating the new quantities and then new current account balance IT IMPROVED. Why ? I can give the figures we worked with if that helps…or does the Marshall-Lerner condition have additional conditions?

To be honest, I have never tested the Marshall Lerner condition with figures. I have always just taught it as given that what is in the textbooks must be correct. There is probably some mathematical proof that the Marshall Lerner condition must hold. But, to be honest I don’t know it. (it isn’t required for what I teach) I think the most likely thing is an error in your calculation.

Definition of the The Marshall Lerner condition

This states that, for a currency devaluation to lead to an improvement (e.g reduction in deficit) in the current account, the sum of price elasticity of exports and imports (in absolute value) must be greater than 1.

  • E.g. if PED of exports is -0.2
    And if PED of Imports is -0.5
    In this case a devaluation of the currency should worsen the current account.

Empirical evidence suggests the elasticity of demand for exports and imports tends to be inelastic in the short run, but more elastic in the long run. Therefore a devaluation, often worsens the current account in the short term, but improves it in the long term

(in absolute value means modulate numbers.) i.e. -0.3 + -0.6 = 0.9

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