Problems of high house prices in the UK

Problems of high house prices in the UK

In the UK, house prices have shrugged off both the credit crunch and the longest recession on record. After a blip in 2007-08, house prices are at record levels. It means that UK house prices are relatively very expensive; UK house price to earning ratios are amongst the highest in the developed world. Unfortunately, there are many problems with expensive house prices – it creates a nation of winners and losers – between those who own a house and those who are renting. There has been a sharp rise…

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How does the stock market affect the economy?

Movements in the stock market can have a profound economic impact on the economy and individual consumers. A collapse in share prices has the potential to cause widespread economic disruption. Most famously, the stock market crash of 1929 was a key factor in precipitating the great depression of the 1930s. Yet, daily movements in the stock market can also have less impact on the economy than we might imagine. The stock market is not the real economy. Share prices can change for many reasons – such as…

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What explains the volatility of oil and food prices?

In a recent post, we looked at food inflation and noted how prices were often volatile. Primary products like food and oil tend to be volatile because:Supply is inelastic in short run. (Supply is unresponsive to temporary shortages of food) Supply can vary due to the weather/geopolitical events. Demand is price inelastic – a small change in supply causes bigger percentage change in price.Diagram showing price volatility  This diagram shows why inelastic demand and a change in…

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Causes of Boom and Bust Cycles

Boom and bust economic cycles involve:Rapid economic growth and inflation (a boom), followed by: A period of economic contraction / recession (falling GDP, rising unemployment)Causes of boom and bust cycles 1. Loose Monetary Policy If monetary policy is too loose, it means real interest rates are too low given the state of the economy, e.g. UK economy in late 1980s. Loose monetary policy reduces the cost of borrowing and mortgage payments (increasing disposable income). This will cause a rise in…

Farming subsidies in the UK

Farming subsidies in the UK

One potential benefit of leaving the EU is the opportunity to radically change how we spend agricultural subsidies. The Common Agricultural Policy CAP is one of the great mistakes of the EU. Given the share of EU spending on agriculture, it is their flagship policy, yet the CAP has given a very poor return regarding economic and social welfare. Unfortunately, the EU has become caught by powerful agricultural lobbies, and it has proved very difficult to wean Europe off these very extensive subsidies. There is no other industry which…

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Neoliberalism – examples and criticisms

Neoliberalism is a term commonly used to describe free-market economics. Neoliberalism involves policies associated with free trade, privatisation, price deregulation, a reduced size of government and flexible labour markets. Recently, neoliberalism has been associated with the policies of austerity and attempts to reduce budget deficits – usually by cutting government spending on social programmes.Neo-liberalism is closely associated with the Washington Consensus – the free market approach of the IMF and other institutions. It also closely overlaps with the classical economic…

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Producer and Consumer Sovereignty

An examination of consumer and producer sovereignty. Also, an evaluation of which is stronger – who drives markets – is it, consumers or producers? Definition consumer sovereignty The ability and freedom of consumers to choose from a range of different goods and services. It means that ultimately it is consumers who will decide what is produced and how scarce resources are allocated. Consumer sovereignty is an important concept for classical economics. This assumes that consumers have the freedom and ability to choose between different suppliers and firms. In theory, consumers will use…

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Creative destruction

Definition of creative destruction This refers to the process of how capitalism leads to a constantly changing structure of the economy. Old industries and firms, which are no longer profitable, close down enabling the resources (capital and labour) to move into more productive processes. Creative destruction means that the company closures and job losses are good for the long-term well-being of the economy. It can be seen from both a negative and positive perspective. Creative destruction and Marxism Karl Marx wrote at length about the nature of capitalism causing large-scale loss, which enabled new…