Economics help blog – Page 117

Austerity – Pros and Cons

5 February 202020 July 2017 by Tejvan Pettinger

A look at the pros and cons of austerity (government spending cuts). Is austerity a way to solve economic problems, or does it merely lead to a deeper recession and lower tax revenues.

Price Elasticity of Demand – Short and Long Run

8 January 201818 July 2017 by Tejvan Pettinger

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 …

What Determines Pay / Wages?

7 January 201816 July 2017 by Tejvan Pettinger

Readers Question: What factors determine the wage that someone receives? Basic economic theory suggests that wages depend on a worker’s marginal revenue product MRP. (this is basically the value that they add to the firm which employs them.) MRP is determined by two factors: MPP – Marginal physical product – the productivity of a worker. …

Importance of exports to the economy

8 September 202115 July 2017 by Tejvan Pettinger

Exports play an important role in the UK economy, influencing the level of economic growth, employment and the balance of payments. In the post-war period, lower transport costs, globalisation, economies of scale and reduced tariff barriers have all helped exports become a bigger share of national income. In 2011, exports of goods and services accounted …

Fairness and Reciprocity in economics

4 March 202014 July 2017 by Tejvan Pettinger

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 …

Pareto improvement

23 December 201711 July 2017 by Tejvan Pettinger

A Pareto improvement occurs when an economic action leads to a net welfare gain, without anyone being made worse off. See also: Pareto efficiency. Pareto improvement and a production possibility curve Moving from point D to A or B – leads to a Pareto improvement because we can produce both more services and goods. However, …

Can the UK afford to end austerity?

16 November 201710 July 2017 by Tejvan Pettinger

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 …

Balance of Payments Disequilibrium

8 January 201810 July 2017 by Tejvan Pettinger

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.

Deficit in current account as % of GDP