The Role of Aggregate Demand in Reducing unemployment

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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. …

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Chinese Yuan Dollar Forecast 2008

 

See also: Chinese Economy 2008 

For many years the Chinese Yuan was tied to the dollar, however in July 2005 the yuan was finally allowed to break away from the dollar. However, unlike most other currencies, the Chinese government still try to influence the level of the Yuan. They have tried to keep the value of the Yuan low, to enable Chinese exports to remain competitive. Chinese record growth is due mainly to its exporting sector. The Chinese government fear that if the Yuan is allowed to become too strong, growth will slow causing unemployment to increase.

As a consequence of the undervalued Yuan, China has one of the world’s biggest current account surpluses (10% of GDP) (surplus = value of exports > value of imports)

As of November 9th, the Yuan appreciated to 7.4108 versus the dollar

The Chinese Yuan has appreciated by a small amount since 2005

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

yuan

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Economics for Business Students

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 …

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UK House Price Crash 2007?

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.

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Overcrowding on UK Trains

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.

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UK Economic Miracles?

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%.

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Predictions Canadian Dollar 2008

Forecasts for Canadian Dollar With the Canadian dollar reaching a 130 year high, (Canadian Dollar reaches highest level since 1800 – Reuters) many are asking when the loonies upward momentum will end. The strength of the Canadian dollar is being pushed by several factors: Strong price of commodities such as oil, and precious metals. – …

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Is A Strong Canadian Dollar A Good Thing?

Q. Is A Strong Canadian Dollar A Good Thing? This is an interesting question. The effects of an appreciation are good for some aspects of the Canadian economy, but, create problems for Canadian exporters. The real winners are Canadian consumers who are able to buy US goods at a much cheaper price. US border towns …

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