concepts

How to know when you’re in a recession?

How to know when you’re in a recession?

A recession is defined as a decline in real GDP for two consecutive quarters. An economy is in an official recession after six months of falling national income. A recession will typically lead to higher unemployment, a decline in confidence, falling house prices, decline in investment and lower inflation. However, although that may seem quite straightforward, in practise it can be difficult to know. GDP stats may not tell us until a significant time lag after the event. The ability to know whether you’re in a recession is important for policymakers….

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Lagging and leading indicators

A lagging indicator is an economic statistic that tends to have a delayed reaction to a change in the economic cycle. A leading indicator is an economic statistic that tends to predict future changes in the economic cycle. A co-incident indicator is a variable that changes with the whole economy. The recession of 2008 was very deep, but which statistics indicated it would happen? Lagging and leading indicators explained At the start of a recession, we may get a…

Sectors of the economy

Sectors of the economy

The three main sectors of the economy are: Primary sector – extraction of raw materials – mining, fishing and agriculture. Secondary / manufacturing sector – concerned with producing finished goods, e.g. factories making toys, cars, food, and clothes. Service / ‘tertiary’ sector –  concerned with offering intangible goods and services to consumers. This includes retail, tourism, banking, entertainment and  I.T. services. A primitive economy will primarily be based on the primary…

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Price Elasticity of Demand – Short and Long Run

Demand tends to be more price inelastic in the short-run as consumers don’t have time to find alternatives. In the long-run, consumers become more aware of alternatives. Price elasticity of demand measures the responsiveness of demand to a change in price. Demand is price inelastic if a change in price causes a smaller % change in demand. This gives a low PED <1. Demand is price elastic if a change in price causes a bigger % change in demand. This gives…

Fairness and Reciprocity

Fairness and Reciprocity

In behavioural economics, studies have suggested individuals value the concept of reciprocity. If people are kind to us, we have a greater tendency to respond in kind – behaving more altruistically than self-interest theory suggests. Reciprocity can also work in a negative sense, with agents willing to ‘punish’ those who abuse the ‘rules of the game.’ We can be willing to punish others, even if it harms our own individual utility. The importance of fairness and reciprocity is that it suggests the importance of social rules for influencing decisions and economic…

The relationship between economics and politics

Readers question: Why cannot politics and economics be seen in isolation? Economics is concerned with studying and influencing the economy. Politics is the theory and practice of influencing people through the exercise of power, e.g. governments, elections and political parties. In theory, economics could be non-political. An ideal economist should ignore any political bias or prejudice to give neutral, unbiased information and recommendations on how to improve the economic performance of a country. Elected politicians could then weigh up this economic information and decide.

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Rational expectations

Definition of Rational expectations – an economic theory that states – when making decisions, individual agents will base their decisions on the best information available and learn from past trends. Rational expectations are the best guess for the future. Rational expectations suggest that although people may be wrong some of the time, on average they will be correct. In particular, rational expectations assumes that people learn from past mistakes. Rational expectations have implications for economic policy. The impact of expansionary fiscal policy will be different if people change their behaviour because they…

Money and credit

Money and credit

Readers Question: In simple terms what is the difference between credit and money? Credit Credit is any form of deferred payment. For example, if you purchase on a credit card – a bank effectively pays on your behalf – anticipating you will pay back the amount to the credit card company in six weeks time. If a bank lends money to a consumer, this is a form of credit. The consumer is given money, which it later has to pay back to the bank. Money Money is any item or electronic record that can…