Some misconceptions about how the economy works

Some misconceptions about how the economy works

What are some of the biggest misconceptions about how the economy works? Some misconceptionsEconomists can make reliable forecasts. Presidents control the economy – Policies of government only partially responsible for economic activity. Luddite fallacy. – Misconception that new technology destroys jobs. Broken window fallacy – Misconception paying for damage creates economic activity. The lump of labour fallacy – Misconception that immigrants take jobs from native workerForecasters People…


The broken window fallacy

The broken window fallacy states that if money is spent on repairing the damage, it is a mistake to think this represents an increase in economic output and economic welfare. If money is spent on repairing a broken window, the opportunity cost is that individuals cannot spend money on more productive goods. The broken window doesn’t increase overall output – it merely shifts an economy from productive output to maintaining the existing situation.The broken window fallacy can be used to criticise…


Why do countries import and export the same good?

Why does a country like the UK import and export the same good? Would it not be more efficient to just consume domestically the exports and therefore import less? There are many reasons a country exports the same good it importsA difference in style of products may be suited to different market Seasonal trends, e.g. export fruit during domestic harvest – import during the rest of the year. The appeal of buying foreign goods – more exciting than buying domestic goods, e.g. Italian fashion has a good image amongst…


Types of recession

A recession is defined as a period of negative economic growth. However, there can be different causes and types of economic contraction. Different types of recession will influence the length, depth and effects of the recession. These are some of the different types of recessions.Boom and bust recession (e.g. UK 1991/92_ Balance sheet recession  (e.g. Global recession of 2008/09 after credit crunch) Depression (1930s, decline in GDP) Supply-side shock (1970s recession due to higher oil prices)1. Boom and bust recession Many recessions occur after a previous economic boom. In the…


Maximum Working Week – Pros and Cons

A maximum working week is a legal limit on the standard number of hours that can be worked in a week. For example, in 2000 France passed a maximum working week of 35 hours. Additional hours could be worked, but they had to be paid at an overtime rate of +25%. At the 2019 Labour Party Conference, the shadow chancellor John McDonnell proposed a maximum working week of 32 hours – within ten years. However, it is worth noting this plan did not set a legal limit – but an…

Inelastic demand

Inelastic demand

Demand is price inelastic when a change in price causes a smaller percentage change in demand. It occurs where there is a PED of less than one. Good which are price inelastic tend to have few substitutes and are considered necessities by users.For example, in the above case price rises 40% ($10 to $14 – 4/10) Quantity demanded falls 10%. Therefore PED = -10/40 = -0.25 Examples of inelastic demandPetrol – those with cars will need to buy petrol to get to work …


Effects of slower economic growth

Economic growth means an increase in national income/national output. If we have a slower rate of economic growth – living standards will increase at a slower rate. For example, in the post-war period, western economies grew at 2.5% to 4.% per year. However, since the early 2000s, growth rates have slowed down. This process of slower economic growth is sometimes known as ‘secular stagnation.’ The effects of slower economic growth could include:…

Understanding exchange rates

Understanding exchange rates

A summary for understanding exchange rates. Factors that affect exchange rates and the impact of exchange rates on the economy.TerminologyDepreciation/devaluation – fall in value of exchange rate – exchange rate becomes weaker (see also: definition of devaluation and depreciation) Appreciation – increase in the value of exchange rate – exchange rate becomes stronger.Example of Pound Sterling depreciating against the Dollar£1 used to equal $2. Now £1 is only equal to $1.75What does this Depreciation in the value of the Pound mean?