Austerity can mean different things. See: definition of austerity. But, for this article, I will take austerity to mean a squeeze on public sector spending. In real terms (adjusted for inflation), government spending is rising. However, despite an overall rise in government spending, some departments have seen spending fall or at least shrink as a …
Readers Question: Explain what is meant by a balance of payments disequilibrium?
The Balance of Payments is comprised of two main components:
The Current Account (trade in goods, services + transfer payments and investment incomes)
The Financial Account (used to be called capital account; this is capital flows such as foreign direct investment)
If the UK imports more goods and services than we export – then we have a deficit on the current account. A significant deficit on the current account is generally referred to as disequilibrium. It will be matched by a surplus on the financial account.
In the post-war period, the UK has usually had a current account deficit, apart from a brief surplus in the early 1980s and 2000s. The UK currently has a deficit on the current account.
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 …
Readers Question: I would like to know why in the USA we have minimum wage law but not a maximum wage law? What are the advantages and disadvantages of a maximum wage law? A maximum wage means that for specified industries, jobs, wages cannot exceed a certain level. They may be used to regulate labour …
In recent years, the level of pension spending in the UK has increased significantly in both real terms and as a share of GDP. Demographic trends suggest there will be a continued increase in the old age dependency ratio, and further rises in pension spending, at a time, when budget constraints limit spending in other …
Level of Company Gross Profit in the UK Profitability of companies – ONS In 2016, Gross profit by UK non-financial companies was £2,993,446 million or £2,993 bn Cash reserves of companies have increased. In 2014, the Bank of England estimated cash reserves of UK firms at £284 billion See: Cash reserves PNFC – Private non-financial companies. …
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 be used for the purchase of goods, provide a store of account, and can be used as a medium of exchange.
If you buy on a debit card, you are using actual money in your bank account. You have a certain amount, and once your bank account is depleted, you can’t spend any more money. People will accept your money as legal tender in that country.
Example of difference between money and credit
If you buy on a credit card, the amount you can spend depends on the generosity of your credit card company. For example, you may spend £3,000 on credit (money you may or not have). However, the credit card company may decide to increase the amount of credit that it gives you, it can increase your credit card limit to £5,000 and more credit is created. But, you have to pay this back. This credit is not negotiable; you can’t go to a shop and directly offer them some of your credit card limit.
You can’t increase the amount of money you have (without earning it), but you can increase the amount of credit you receive – if banks are willing to lend it to you. In this sense, you could think of money as more tangible, and credit is more intangible.
As a youngster, you will be told ‘money doesn’t grow on trees’. You can’t personally create money out of thin air.
But credit in a way can be created out of thin air. If a bank decides to lend you more.
The 1929 stock market crash was a result of an unsustainable boom in share prices in the preceding years. The boom in share prices was caused by the irrational exuberance of investors, buying shares on the margin, and over-confidence in the sustainability of economic growth. Some economists argue the boom was also facilitated by ‘loose …
