Tejvan Pettinger - Economics Help

Unemployment and Inflation in UK 2008

10 March 20202 March 2008 by Tejvan Pettinger

Readers Question: how the unemployment and inflation is related to country’s economy

If we take the example of the UK, we can see differing examples of how unemployment and inflation are related to a country’s economy. The key to this question is what causes unemployment and inflation. There are several different factors, but it is important to consider both demand side and supply side factors.

Unemployment and Economic Growth. The most obvious factor is that higher economic growth will reduce unemployment. Since 1992, the UK has experienced a long period of economic growth, causing a fall in demand deficient unemployment. Unemployment in 2007 was just under 1 million. In 2008, the unemployment rate has continued to fall; it is about 4% of the labour force (depending on which method you use.) However, in the recession of 1981 (negative growth) unemployment rose to 3 million. Unemployment also rose to 3 million in 1992.

UK Unemployment v Inflation 1981 – 2010

% annual change in growth and inflation.

Financial Derivatives and Risk Management

1 March 2008 by Tejvan Pettinger

Readers Question: How and why do firms use derivatives to hedge risk?

Financial derivatives are a mechanism for managing risk. They involve options to buy or sell at a certain price in the future. This means that a firm can guarantee being able to buy or sell a contract at a certain price.

Why Firms Use Financial Derivatives.

The main reason firms use financial derivatives is that it is way to manage risky price movements. In a way derivatives are a type of insurance and enable them to ‘hedge’ against adverse price fluctuations. This is important in volatile commodity prices or when exchange rates may be volatile.

It is ironic that financial derivatives are often considered to be ‘risky speculation’ when there intended purpose is to insure against volatile markets. Of course, derivatives can be misused by speculators. Rather than insuring against positions, derivatives can be used to gamble on a way one increase in stock markets e.t.c. But, the initial purpose of derivatives is to reduce risk.

M&S to Charge for Plastic bags

28 February 2008 by Tejvan Pettinger

I was interested to hear that Marks and Spencers will be charging for plastic bags. The idea could be a clever marketing ploy. Most M&S customers have quite an inelastic demand. It is the kind of customer who is quite happy to pay £3 for a ready made meal. If you ready to pay 50% …

Council Tax Banding – A Fair Tax?

28 February 2008 by Tejvan Pettinger

The argument was that the poll tax was so bad that anything had to be an improvement. So with little thought, the Conservative government brought out the Council Tax. The council tax aims to introduce a degree of proportionality and fairness by charging a tax equal to the value of a house. The argument is that people who are wealthy have a high house value and therefore can afford to pay more.

However, this policy has been widely criticised. These are some of the criticisms of the Council Tax

Problems of the Council Tax

Wealth is not the Same as Income. Just because your house is worth £200,000 doesn’t mean you have a high income. For example, a pensioner may own their own house, but, their pension may give a very meagre income. People living in the same valued house can have widely varying incomes and therefore ability to pay.
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Poll Tax and the definition of a good tax

22 March 201928 February 2008 by Tejvan Pettinger

For those studying Economics A-Level at the moment, you will probably not remember the poll tax. This tax introduced by Mrs Thatcher was probably one of the most unpopular taxes ever introduced. It was widely condemned as being unfair and inequitable. The principle of the council tax was that everyone would pay the same. Whether you were wealthy or low paid, you received the same council services so. Therefore, the argument went, you should pay the same amount. The problem was that if the poll tax was £500, it could be a high % of a wasn’t willing workers disposable income. Another problem with the poll tax was that the amount could vary widely from one borough to another. Some rich boroughs were able to charge very low poll tax; others charged a very high %.

After a long campaign, including the infamous poll tax riots in London, Mrs Thatcher responded to the criticism by offering a rebate, to reduce the cost of the poll tax. But, she wasn’t willing to compromise on the principle that everyone pay the same amount.

Tesco Value Goods – Why are they Unattractive?

15 January 202022 February 2008 by Tejvan Pettinger

Why do Firms Make some Goods Unattractive/difficult to buy? It may seem strange but sometimes firms purposefully want to make a good unattractive. Why is this? Tesco value products have an unattractive design. It shouts out “I’m cheap and low quality”. What happens is that customers with inelastic demand, – people who give importance to …

Chinese Inflation and how to reduce it

15 January 202021 February 2008 by Tejvan Pettinger

Readers Question: How about the case of cost push inflation like that of China? there’s high inflation and yet the economy is not operating at its full level of employment and due to the fact that its exchange rate is fixed, monetary policies would not be effective but fiscal policies would further increase unemployment. What policies can be implemented to reduce this cost push inflation in a fixed exchange rate system?

Comment on post: Economic Policies to reduce inflation

It’s a good question. Inflation in China has recently reached an 11 year high of 7.1% (inflation China)

The Chinese blame rising food prices and rising oil prices. However, I would also blame the Chinese government for allowing demand to rise too quickly.

Loose Monetary Policy. The benchmark interest rate in China is currently 7.4%. Although it has been increased several times in the past 12 months, it still represents a very low real interest rate 0.3% (7.4-7.1%) Compare that to the UK, where real interest rates are closer to 3.0%. The low cost of borrowing is encouraging a boom in borrowing, but often the borrowing is badly directed and it could contribute towards a boom and bust in the Chinese property markets.

Undervalued Exchange Rate. Although the Yuan has appreciated in the past couple of years (although the exchange rate is supposed to be fixed it has been allowed to be gradually revalued) However, it is arguably still undervalued. The Chinese government is keen to keep it artificially low to stimulat export led growth. The weakness of the Yuan is indicated by the size of the Chinese Current account surplus.

Should we tax the plastic bag?

22 January 202018 February 2008 by Tejvan Pettinger

Ireland has introduced an interesting law, which has placed a 15 cent tax on the plastic bag. Combined with an advertising campaign to make the plastic bag unacceptable, use has fallen between 90-94%. Within a few weeks, there was a visual improvement in the number of plastic bags littering the environment. Other countries such as Bangladesh and China have gone further and banned the plastic bag.
Due to its relative success, many are suggesting we should implement this policy in the UK. These are some of the economic, social and environmental arguments in favour of banning the plastic bag.

Advantages of Plastic Tax

Reduces costs to shops. Usually, shops are reluctant to charge for plastic bags. But, if they have to charge, people will be increasingly likely to use alternatives and reuse old bags.
Reduces Litter. Around Oxford, I see a real problem with litter, 50% of which seems to be plastic bags. They get blown into hedgerows and get stuck for years, causing visual blight to the environment. If plastic bag use was discouraged the amount of litter would significantly be reduced.
Plastic Bags not Biodegradeable. Plastic bags take 1000s of years to disintegrate, therefore our landfills are full of plastic bags which don’t breakdown
Bad for Wildlife. Because plastic bags can float around they can often cause problems for wildlife.
Reduce dependence on oil-based products. Because plastic bags are made from the oil they increase our dependence on oil imports. With rising prices of oil, there is an increased desire to avoid oil products where necessary.
Aesthetically pleasing. For those who yearn for the good old days of high street shopping in paper bags, before the advent of the out of town supermarket, banning the plastic bag would encourage people to go back to the basics of shopping.
Tax Raises Revenue. An estimated 10 million Euros
Tax makes people pay the social cost. Using plastic bags creates negative externalities, a tax will make people pay the social cost. At the moment, plastic bags are usually free and therefore, firms subsidise the use of goods with negative externalities.