UK Inflation Worsens Despite Slower Sales

Despite a slowdown in retail sales during March (Sales fell 0.4% in the month) UK CPI inflation increased to 3%. Retail Price Index RPI (which includes more items) increased to 4.2%. This is at the upper limit of the Government’s inflation target. It is the highest UK inflation rate for quite a while.

Last month, The Bank kept interest rates stable at 5%. The Governor of the Bank of England, Mervyn King said that they had a difficult balancing act.

On the one hand they had a faltering housing market and decline in consumer spending.

On the side of the monetary policy scales, they have rising inflation. Mostly caused by higher food and energy prices.

Inflation at National Statistics

Essay on Supply Side Reforms and Appreciation

Readers Question: Assess the view that supply-side reforms have enabled the UK economy to be ‘more successful in maintaining growth, despite an appreciation in the value of its currency’ (Extract 1, lines 5-6}. (From Edexcel unit 3)

An appreciation in the exchange rate would tend to reduce aggregate Demand and lead to lower economic growth. An appreciation makes exports less competitive, decreasing quantity of exports. An appreciation also  makes imports cheaper, increasing quantity of imports (and hence money leaving the economy). Therefore, the (X-M) component of AD will be lower. This will reduce Economic growth.

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Turkey and Joining the EU

There has been much debate about whether Turkey should be admitted to the European Union. These are some of the benefits and costs which Turkey is likely to face if it is successful in joining the EU.

Benefits to Turkey of Joining the European Union EU

  1. If Turkey join the EU they have the potential to benefit from higher growth and investment.
  2. Membership of the EU will reduce barriers to trade (tariff barriers and non tariiff barriers). Therefore, it is easier for Turkish firms to export to the large EU market (nearly 0.5 billion). Turkey may have a competitive advantage because of lower labour costs.
  3. Furthermore, joining the EU will increase competitiveness. Domestic monopolies will face greater competition from EU rivals. This should help to reduce prices and increase efficiency.
  4. Another benefit from joining is that successful firms can benefit from economies of scale. As they sell to a wider EU market they can expand production and get lower costs.
  5. Membership may encourage inward investment. Western EU firms will be attracted to invest in Turkey because of the new potential markets and lower labour costs.  This investment will help boost productivity and stimulate economic growth growth.
  • However, Many Turkish firms may struggle to compete in the single market and could lose business to more efficient western firms. However, this lose of business may be most acute in the short term; in the longer term the increased competition may act as a spur to increase competitiveness.
  • However, inward investment may not increase because Turkey’s infrastructure is insufficient.

6. Turkey may benefit from EU policies such as CAP, Regional Policy and Transport Funds. Turkey is one of the poorer areas in the EU and therefore is eligible to regional funds. Over time this could make a big improvement in the structure of the Turkish economy.Problems of Joining the EU

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What is the Plural of Euro ?

A reader left a comment on a post saying the plural of Euro is Euro.

I was surprised to see this because according to the rules of English it should be Euros.

On researching the issue I found, that the European Commission did adopt Euro as the the plural of Euro.

However, rather bizarrely the Directorate-General for Translation (Eu body) advise using the plural form Euros for any publication intended for general publication.

It seems bizarre to have one official definition (which breaks the rules of English grammar) and then advise a different form for the general public.

In Ireland, the plural of Euro is supposed to be Euro. But, many have ignored the EU directive saying why should the EU dictate changes to the basic use of Language.

Personally I will continue to use the form Euros.

The English Style Guide of the European Commission Translation Service states:

12.12 … Guidelines on the use of the euro, issued via the Secretariat-General, state that the plurals of both ‘euro’ and ‘cent’ are to be written without ‘s’ in English. Do this when amending or referring to legal texts that themselves observe this rule. Elsewhere, and especially in documents intended for the general public, use the natural plural with ‘s’ for both terms.

Sometimes you can have too many commissions. They are complicating a simple issue.

Linguistic uses of the Euro

Does the UK Need More Immigrants?

There is news that the UK’s food crops could be left to rot in the fields due to the shortage of temporary workers.
Farmers say they are having great difficulty in recruiting enough people to pick fruit at £5.52 an hour.
Poles and eastern Europeans are preferring to remain in their own countries. This is caused by falling Pound against Euro and a boom in the eastern European economy.
UK immigration laws have been tightened making it difficult for students to get a temporary visa. This particularly applies to potential workers from the former Soviet Union who would be attracted by wages of £5.52.

It seems a real failure of the free market, if fruit is left to rot for lack of workers. Especially when there are over 1 million people unemployed in the UK. Maybe there is a way to get the unemployed to take temporary jobs?

If food is left to rot, UK supermarkets will also have to import from oversees. Food miles is increasingly becoming a political issue as people say we should buy local foods. (The outspoken chef, Gordon Ramsey, recently said restaurants should be made to serve only ‘in season’ vegetables). But, if we can’t pick our own fruit, how can we eat only local produce?

Other Benefits of Immigration

  • Immigrants can help increase the flexibility of labour markets. If unemployment is low and many job vacancies, people will be attracted to come and work. However, if the labour market turns and unemployment rises, it will encourage immigrants to return home. (e.g. in Irish recession of 2010, many Polish workers returned to Poland.
  • Immigrants can help fill important job vacancies. If they are of working age, they will be net contributors to the exchequer (paying income tax and VAT). This will help to reduce government debt burden. However, if they are near retirement age, they will increase the burden on government spending.

Problems of Immigration

  • Increase pressure on local housing stock. The UK already has a shortage of housing, leading to higher prices and a decline in affordability. An increase in the population without a corresponding increase in supply is likely to cause even higher prices.
  • Increase congestion. The UK’s roads are already congested, increasing the population will lead to time lost in traffic jams.

Related

Statistics which determine Investment

Which Economic Statistics are the Most Significant for Investing in Manufacturing Sector?

my suggestions

• % change real GDP (35%)
• CPI % change (24%) see: impact of inflation
• Real interest rate (21%) impact of interest rates
• CPI trend (5%)
• Budget balance (5%) impact of borrowing
• Deficit trend (2%)

• Public sector debt (5%)
• Public sector debt trend (3%)

Growth is the most important. If you are selling to the domestic market, it is rising incomes which will help increase sales. Without growth, manufacturing firms will struggle.

Inflation is very important and does have a direct bearing on the performance of manufacturing firms. The annual rate is more important than the past trend rate, though often it is the trend rate which influences the current rate.

Real interest rates are very important for manufacturing industries. Though it might be difficult to put it into a model. High rates will reduce growth. But, negative real interest rates can also be damaging to an economy in the long run.

The last 4 are relatively similar. Also, I don’t think they have a direct impact on the performance of manufacturing firms. Nevertheless very high levels of debt are symptomatic of poor economic performance. Note countries like Greece, Italy and Spain have very high levels of national debt (over 100% of GDP)

Demand Side Unemployment and Inflation

Readers Question: “To what extent can government use demand management policies to reduce unemployment without affecting inflation?” (60)

Demand side unemployment is known as demand-deficient or cyclical unemployment. It is the unemployment that occurs due to an economic slowdown / recession. In a recession, there is a fall in output and this leads to lower demand for workers.

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Recession in 2008/09 led to rise in unemployment in Western economies.

1. Monetary and fiscal policy can be used to increase AD and therefore increase economic growth. For example, if the MPC cut interest rates, this makes borrowing cheaper and therefore encourages investment and consumption. This will cause a rise in AD. If there is spare capacity in the economy then there will be an increase in Real Output; as firms produce more they will demand more workers and this will reduce demand deficient unemployment.

This could cause inflation depending on the elasticity of the AS curve. If there is a lot of spare capacity rising AD will not cause inflation. However, if the rise in AD causes a multiplier effect and the economy gets close to full capacity then there will be inflation.

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Performance of Firms in UK Construction Industry

The economic performance of a UK Construction PLC will be affected by many factors, including the role of government, exchange rates and inflation. Discuss

The construction industry tends to be a quite volatile sector of the economy. Investment spending in construction has a strong correlation to the rate of economic growth and future prospects. When growth is high, demand for construction will be rising, when growth rates fall and the economy heads toward recession, firms invariably cut back on new construction projects and the industry can be hard hit by a slow down.

The exchange rate has a bearing on the exporting sector. If there is a depreciation in the exchange rate, exports become more competitive and the exporting sector will generally do better. This can lead to increased investment by industry.

However, a lower exchange rate tends to be only a short term boost and demand for UK exports is increasingly inelastic, meaning a depreciation doesn’t help much.

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Microeconomics Models and Theories

Readers Question: “Microeconomics involves the study of models. These are central elements of theories”. Discuss the statement by providing examples of such models.

To be honest, when studying and teaching economics I have not really placed much emphasis on the distinction between models and theories.

The models that you use will depend on which syllabus and course you are doing. These are some of the basic models you might find in A Level economics

There is a strong relationship between theories and models

The definition of a theory suggests:

Theory n A model or framework (made up of a body of principles) to explain phenomena. The word ‘theory’ derives from the Greek word ‘theorein’, which means ‘to look at’.

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Elasticity in the Petrol Market

Readers Question: Discuss the relationship between elasticity and market power’ in terms of the retail petrol market. And then it says ’use common determinant of both’, whatever that means ??

  • Demand for petrol is quite inelastic. If you have a car, there are not many alternatives to buying petrol. This is why the increased price of petrol has failed to reduce demand for petrol significantly. (there is an estimated PED of petrol of -0.1 in the short term)
  • However, if you are a car owner you don’t really mind who you buy petrol from. Esso petrol is not really any different to petrol from Tesco. Therefore, consumers are sensitive to changes in prices for an individual petrol station.
  • If there are many petrol stations close by the petrol companies will find that there demand is elastic. Increasing price could lead to a loss of market share.
  • However, if you are the only petrol station in a rural area or if you are a petrol station on a motorway, you have a lot more market power. A motorist is not going to exit the motorway just to avoid paying motorway prices. Therefore, in these locations the petrol stations have more market power, consumers less choice, demand inelastic; and this is why petrol is more expensive.

And then it says ’use common determinant of both’, whatever that means ??

  • Maybe it means that the higher the market share the lower the PED. the less market power a petrol station has the more elastic demand is