Economics help blog – Page 255

How Much Would You Pay for Cigarettes – $222?

19 November 2007 by Tejvan Pettinger

When we buy a packet of cigarettes for $8, we may think that this is the personal cost. But, a new study claims the real personal and social cost of smoking a pack of cigarettes is closer to $200. pdf of report – Report by Kip Viscusi and Joni Hersch To arrive at these statistics …

Preparing for Economics Interview at Oxford

14 January 202015 November 2007 by Tejvan Pettinger

Readers Question: what do I need for an interview of “Economics and Management” course or PPE course in Oxford ?

I have written one article here with some general advice for preparing for an interview at Oxford

For Economics and Managemanent or PPE. I would suggest the additional pieces of information

1. Read Outside Syllabus

Make sure you have read, at least, a couple of economics books which go beyond the A Level syllabus. This might be the popular Freakonomics, or something by Paul Krugman . There is no guarantee that they will ask you about what you have been reading. But, If you can’t point to any outside reading it will look bad.

2. Be Confident to Express Opinions.

If you were asked should the UK join the EURO, make sure you would be able to offer some convincing arguments one way or the other. At the same time, try to give the impression, you are aware things are not black and white.

3. Practise speaking / arrange an interview with someone.

In an interview you want to:

Avoid excessive hesitation
Answer the questions they ask
Be confident but not arrogant.
Appear interested in the topic
Look well presented

Don’t worry about being a bit nervous, but, it makes a big difference to have a mock interview, making it as realistic as possible.

The Role of Aggregate Demand in Reducing unemployment

11 January 201814 November 2007 by Tejvan Pettinger

Evaluate the importance of managing aggregate demand (AD) to bring about a sustained reduction in the rate of unemployment in the UK economy. In 1992 Unemployment in the UK rose to 3 million. A significant part of this unemployment this was due to the recession of 1992. In a recession, demand deficient unemployment will increase. …

Chinese Yuan Dollar Forecast 2008

15 August 20139 November 2007 by Tejvan Pettinger

Graph to show last 5 years Dollar vs Chinese Yuan (remenbi)

yuan

Economics for Business Students

24 January 20208 November 2007 by Tejvan Pettinger

Reader’s Question: What are the importance of economics to a business student? There is a strong overlap between business and economics. A Business student needs to take into account these various aspects of Economics. At various times I have taught Business Studies in addition to Economics. Several topics are the same. These are the key …

UK House Price Crash 2007?

10 March 20206 November 2007 by Tejvan Pettinger

Readers Question: Critically evaluate the argument for and against the likelihood of an imminent house price correction in UK ?

House prices in the UK have risen much faster than inflation; in the past 6 years average house prices in the UK have more than doubled. This has caused many to speculate that house prices are overvalued and are likely to fall, in the near future, to more realistic levels.

These are the arguments in favour of house prices falls.

House prices have risen faster than average incomes.

This has made it more difficult for first time buyers, especially the younger generation to get on the property ladder. With falling demand for new houses, it is only a matter of time before this is reflected in lower prices.

Rising Interest Rates.

Interest rates have increased 5 times in the past 18 months. This rise in interest rates increases the cost of mortgage payments. Therefore, more people will struggle to make mortgage payments and therefore make renting more attracting than buying. It is also worth noting interest rates have a delayed effect; this means it takes upto 18 months for interest rate increases to have an effect on the economy. Therefore, even if interest rates don’t increase anymore, there will be more people affected by interest rate rises (e.g. those negotiating new fixed rate deals, will see a big increase in cost)

Speculation.

If house price rises have been caused by the fundamentals of supply and demand, there is unlikely to be any correction. However, some experts believe the booming housing market has created a ‘bubble effect’; this means that speculators and foreign investors have been buying houses to try and make capital gains. If the market turns, then these speculators will seek to leave the market and cash in their capital gains. This could make a small correction much bigger. – Falling house prices lead to a fall in confidence and discourage many others from buying.

UK investors may also be alarmed by the experience of the US housing market which has already gone from boom to bust.

Prices overvalued

Evidence suggests that house prices are already starting to fall in some parts of the country. Demand is falling from many areas of the economy. Bovis, the new house builder predicted prices would fall by 3% this year. link – Times

A study by PwC suggested house prices are overvalued by 10% – link BBC. This follows reports from the International monetary Fund IMF, which also states UK house prices are fundamentally overvalued.

However, it is notoriously difficult to decide whether house prices are overvalued or not. For example, back in 2003, many commentators argued house prices were already overvalued. The UK housing market has often defied Market predictions

Credit Crisis

The run on Northern Rock, was due to problems in global credit markets. These problems will have an increasing effect on the UK Housing Market. Basically, US mortgage lenders were too willing to lend risky amounts to sub prime lenders. When the housing market faltered there was a rise in mortgage defaults as people couldn’t pay back their repayments. Therefore, many US mortgage companies went bankrupt. This has made other financial institutions much more wary of offering support for mortgage lending. To summarise it is increasingly difficult to get mortgages, especially risky unconventional mortgages. Therefore, this will make it more difficult for first time buyers to get a mortgage; demand will fall further.

However, UK mortgage lending is generally much stricter than US. At the moment, there is not a significant problem of mortgage defaults. With interest rates unlikely to rise in 2008, affordability is unlikely to deteriorate.

Overcrowding on UK Trains

2 November 2007 by Tejvan Pettinger

Despite rising ticket prices and lower government subsidies, demand for rail travel in the UK is increasing and beating all expectations.

Network Rail have published statistics showing that demand for rail services has increased by nearly 45 per cent between 1996-97 and 2006-0. Annual growth is increasing by about 8%. Yet, the DTI is sticking to its forecast of 3% growth per year, in an effort to avoid spending more money.

Demand for Train Travel is increasing for Various Reasons

Congestion on UK Roads. Demand for roads is also increasing faster than supply. To avoid lengthening traffic jams, people are turning to rail transport
Long period of economic Growth. Higher economic growth causes increased business and therefore increases the demand for transport.
Higher House prices in City Centres. People can often not afford to live close to their place of living, therefore they prefer to commute long distances on trains.
Environmental Awareness – Trains are seen as an environmentally friendly alternative to driving, helping to reduce global warming.
New Services being offered by Privatised Companies.

UK Economic Miracles?

2 November 2007 by Tejvan Pettinger

In the 1980s, The UK introduced many supply side policies such as privatisation, deregulation, and reform of trades unions. The government also cut the higher rate of income tax from 80% to 40%. It was hoped that these supply side policies would create a productivity boom. The government argued this reinvigoration of the British economy would enable a faster rate of economic growth, and overcome the years of under achievement.

The Lawson Boom – The Miracle that never was

In the late 80s, economic growth reached 5% and the Thatcher government started to believe that it had succeeded. It was the era of the Lawson boom; confidence was high, house prices rising and a new feeling of wealth was almost visible (especially in the south) Newspapers and not just the government started to talk of an economic miracle. However, the ‘economic miracle’ was short lived the fast pace of growth caused the economy to overheat. As a consequence, inflation rose to 11% and the government were forced to raise interest rates in an attempt to reduce inflation. The Lawson boom was soon over and the UK was left with a pretty bad hangover: growth fell in 1992, unemployment rose to 3 million, and house prices plummeted by 15%.