The relationship between economic growth and average pay

The relationship between economic growth and average pay

Readers Question: Does the level of real income grow as the economy grows? Can we say that real income grows as the economy grows? If yes, what factors surround it?  Summary In a period of positive economic growth, usually, you would expect a rise in real wages and higher pay. However, it is not guaranteed. GDP measures wages, but also profit, interest and rent. Therefore, it is possible for GDP to increase but average wages to stagnate and even decline. – e.g. if profit takes a bigger share of GDP. Economic growth…

Human Capital definition and importance

Human Capital definition and importance

  Human Capital is a measure of the skills, education, capacity and attributes of labour which influence their productive capacity and earning potential. According to the OECD, human capital is defined as: “the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances”. Individual human capital – the skills and abilities of individual workers Human capital of the economy – The aggregate human capital of an economy, which will be determined by national educational…

Rotten Kid Theorem

Rotten Kid Theorem

The Rotten Kid Theorem states that in a family with a wealthy altruistic parent  – even selfish kids – can have a financial incentive to be harmonious and kind to their siblings. This theory of family behaviour was first proposed by Gary Becker in an article (1974). “A Theory of Social Interactions”. He later expanded on the idea in ‘a Treatise on the Family’ (1981) Assumptions of the Rotten Kid Theorem We start off with a wealthy family head. This head of…

When will interest rates rise?

When will interest rates rise?

Readers Question: Will interest rates rise? Some say yes, my investment analyst/advisor says no (“because the UK is largely living on credit and the government and bank of England do not want a repeat of 2008”) Interest rates will rise when the Bank of England feel the economy has returned to a normal trend of economic growth and underlying inflation (ignoring cost-push factors) is predicted to rise above the government’s target of CPI 2%. Given recent rises in US interest rates and a fall in UK unemployment to 4.7%, it is…

Inflation Targeting Pros and Cons

Inflation Targeting Pros and Cons

Inflation targeting means Central Banks are responsible for using monetary policy to keep inflation close to the agreed level.  Since the 1990s, inflation targeting has become widely adopted by developed economies, such as UK, US, and Eurozone. Inflation targets were introduced to help reduce inflation expectations and help avoid the periods of high inflation which can destabilise an economy. However, since the recession of 2008 and consequent unemployment, people have begun to question the importance attached to inflation targets and are worried that a strict commitment to low inflation…

Self-employment tax rises

Self-employment tax rises

In the recent budget, the chancellor Phillip Hammond announced higher national insurance contributions for the self-employed. Class 4 NICs for the self-employed would rise from 9% to 10% in April 2018 – and then to 11% in April 2019 – on income up to the higher rate threshold of £45,000. The new rates are still lower than for employees who pay NI at 12% on the same income levels, while both groups will continue to pay at 2% on income above the higher rate threshold. (Self-employment at Guardian) Personal comment I am…

UK National Debt

The UK national debt is the total amount of money the British government owes to the private sector and other purchasers of UK gilts. In January 2017 UK Public sector net debt is £1,682.8 billion equivalent to 85.3% of GDP Source: (page updated October 22nd 2016) Source: ONS debt as % of GDP – HF6X | PUSF – public sector finances at ONS Budget deficit – annual borrowing This is the amount…