economics

Factors affecting Current Account Deficit

Factors affecting Current Account Deficit

The size of current account deficit/surplus is affected by several factors including:Exchange rate (overvalued exchange rate would cause large deficit) Level of consumer spending (economic growth) and hence import spending Capital flows to finance deficit in long-term Saving rates – influencing level of import spending Relative inflation/competitivenessThe current account measures:The balance of trade in goods The balance of trade in services. Net current income e.g. profit from overseas investment. Transfer payments e.g. payments to the EU.NotesA deficit…

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State Intervention and Market Failure

Readers Question: State intervention is necessary to maximize social welfare but intervention often comes at a heavy price. So why not rely on the market system to tackle the problem? It is one of the great debates of economics – How much should the government intervene in the economy. Firstly we have to consider occasions where government intervention is necessary to improve economic welfare. Types of Market FailureMerit goods (e.g. education, under-consumed because people ignore benefits of it) Demerit goods (e.g. alcohol, over-consumed because people ignore costs of it.) Public goods…

Effect of Government Subsidies

Effect of Government Subsidies

Readers Question: What happens when the government subsidizes a product?  A subsidy means the government pays part of the cost. For example, the government may give farmers a subsidy of £10 for every kilo of potatoes. The effect is to shift the supply curve to the right, leading to lower price and higher quantity demanded Diagram of SubsidyIn this case, the government is giving a subsidy of £14 (30-16). The subsidy shifts the supply curve to the right. It leads to a lower market…

How to increase Economic Growth

How to increase Economic Growth

Readers Question: from solutions to the economic crisis? I agree on ‘growth’ but we don’t understand how to achieve sustainable growth. This can only come from either continuing to increase the UK’s population or by continuing to improve efficiency. The first is clearly impossible as we would bust at the seams. This means the only choice we have is INVESTMENT – And in the RIGHT areas. Our politicians (and most economists?) do not understand this. There are two main aspects to economic growth:Aggregate demand (AD) (consumer spending, investment…

Would inflation and stagflation help to reduce inequality?

Would inflation and stagflation help to reduce inequality?

Readers Question: It has been suggested in a philosophy/economics class that I am taking that given the current state of income inequality between the 1% and 99%, that a period of stagflation might be an effective equalizer. I don’t see it. Any thoughts? Stagflation is a period of negative economic growth (or very low growth) combined with inflation. Under stagflation we get several problems at once – rising unemployment, rising prices, falling real wages and lower economic growth. Stagflation poses a problem for policymakers because it has hard to…

Will automation cause technological unemployment?

Will automation cause technological unemployment?

Technological unemployment occurs when the adoption of new technology causes job losses. Automation is a process of using robots, AI and machines to take the place of workers – not just in manufacturing, but increasingly new avenues – even in the service sector. The pace of automation is causing job disruption – with workers – especially in manufacturing losing jobs. Any good economist will be well-acquainted with the Luddite Fallacy – the argument that new technology destroys jobs in the long-run is not true. Back in the…

Exchange Rate and Current Account

Exchange Rate and Current Account

Readers Question: Can you please discuss the nature of the current account deficit and the exchange rate in the UK along with the theory that would suggest there is a relationship between the exchange rate and the current account. A current account deficit implies the value of imports of (goods/services/investment incomes) is greater than the value of exports. Movements in the exchange rate will have an impact on the current account. For example, a depreciation in the value of a currency is likely to improve the current account (reduce deficit) How…

Crowding Out

Crowding Out

Definition of crowding out – when government spending fails to increase overall aggregate demand because higher government spending causes an equivalent fall in private sector spending and investment. Question: Why does an increase in public sector spending by the government decrease the amount the private sector can spend? If government spending increases, it can finance this higher spending by:Increasing tax Increasing borrowingImpact of higher government spending on aggregate demandIncreasing tax. If the government increases tax on the private sector, e.g. higher income tax, higher corporation tax, then…