The effect of tax cuts

The effect of tax cuts

Question: What are the effects of reducing tax? Let us take the example of a cut in the basic rate of UK income tax from 20% to 18% In this case, workers will see an increase in their discretionary income. With lower income tax rates, they would keep more of their gross income, so effectively they have more money to spend. In this case, we could expect to see a rise in consumer spending because workers are better off. (AD=C+I+G+X-M). Because consumers spending is a component of…

An end to globalisation?

An end to globalisation?

Readers Question: Why doesn’t WTO make into law that all manufactured goods should either be assembled or made in the continent where its been sold? There is so many reason why this should be put in place in our globalised world I don’t agree. The benefits of a globalised world are that we can benefit from goods and services produced in many different continents. If Japan is…

inflation-base-rates-since-03

Different ideas of tight monetary policy

Readers Question: I only recently discovered your site, which is spectacular, and have been reading every article since then. However, I found that two of your articles are contradicting. In your article “Problems of Deflation” you state that the current monetary policy of the EU is tight due to 0.5% inflation and interest rates. In your article about tight monetary policy though, you state that tight monetary policy could include open market operations and rising interest rates. I was hoping that you would help me solve my misunderstanding. It is…

Economic issues for the UK General Election

Economic issues for the UK General Election

I’m off to New York on Wednesday, I’m tempted to stay until May 8th, so I can miss the UK General election campaigning, which so far has been quite depressing for the poor quality of economic debate. This is just an outline of some issues for consideration. I may expand upon these in the coming weeks. Whose fault was the 2008/09 economic crash? – Essentially a global financial crisis, exacerbated by weak financial regulation. But, who was advocating much stricter regulation of the banks pre 2007? See: who is to blame…

Types of deflation

Types of deflation

Readers Question: I have just been reading your opinion on deflation. You say generally it’s bad unless it is caused by  production and technology improvement. My question is this, how would the consumer know the difference ? Consumers wouldn’t really notice the difference why prices are falling. The key thing is what happens to their nominal wages – and therefore their effective purchasing power. If we have ‘good’ deflation – due to a big increase in productivity, lower costs – then in theory firms will be able to…

Effects of Zero inflation on Aggregate Demand (AD)

Effects of Zero inflation on Aggregate Demand (AD)

Readers Question: I was really hoping you might be able to inform me of the effects that zero inflation (which the UK is currently experiencing) might have on aggregate demand in the economy? Firstly, this post will help consider the impact of zero inflation on AD and economic growth  – Is zero inflation a good thing? To add a few things to this. Let us look at an AD curve Aggregate Demand Curve If we look at an aggregate demand curve, we usually assume…

Is zero inflation a good thing?

Is zero inflation a good thing?

In the UK, CPI inflation has fallen to 0%. Is this a cause for celebration or a cause for concern? Firstly the government set an inflation target of CPI 2% +/-1 for good reasons. The fear is that if inflation is too low, we may start to get problems associated with deflation. More details here About the problems of deflation. But a quick summary: Rising real value of debt. With low inflation, it becomes harder than expected for people to pay back…

UK Inflation Rate and Graphs

UK Inflation Rate and Graphs

Current UK Inflation Rate CPI inflation rate: 0.0% (headline rate) (page updated 25 March, 2015) Source: Raw data General inflation tables | CPI annual % change D7G7 at ONS What is causing the fall in inflation? Lower cost push inflation – falling oil prices Other commodity prices also falling, such as metals, food. Lower energy prices – gas and electricity Low worldwide inflationary expectations. Europe is experiencing deflation and this is keeping inflation low. Supermarket price wars, with big chains, such as Tesco and Sainsbury attempting to maintain…