Interest rates are the cost of borrowing money. Interest rates are normally expressed as a % of the total borrowed, e.g. for a 30-year mortgage, a bank may charge 5% interest per year.
Interest rates also show the return received on saving money in the bank or from an asset like a government bond.
Different types of interest rates
Central Bank Base Rate
The base rate is the interest rate which the Central Bank lends money to the commercial banks.
This base rate is the most important interest rate because it tends to influence all the other interest rates in the economy.
If the Central Bank increases the base rate. Commercial banks find it more expensive to borrow from the Central Bank. Therefore, they pass this onto their consumers.
Indirectly, the Central Bank rate affects all interest rates in the economy – from mortgage rates to the saving rate you get in a savings account
Commercial banks are free to set their own interest rates, but it tends to be strongly influenced by the Central Bank base rate. If they find it more expensive to borrow from the Central Bank, they tend to increase their commercial rates.
This shows that banks tend to follow the Central Bank base rate, but from 2009, there was a bigger gap between bank SVR and Base rate. Commercial banks didn’t pass the full base rate cut onto their customers.
Economics is concerned with the optimal distribution of scarce resources within society. For example, economics is concerned with how individual decisions like how firms produce goods and which goods people buy. An important element in economics is concerned with the extent to which governments can intervene in the economy to improve economic welfare. Economics is also concerned with wider issues such as economic growth and unemployment – issues that affect the whole of society.
Readers Question: Explain how a change in the rate of income tax is likely to affect the size of the national income multiplier ? The National Income Multiplier says that an initial increase in spending (injections J) can cause further rounds of spending. Therefore, the final increase in National Income (Y) is greater than the …
In the past few years, there have been a noticeable increase in the calls for the UK to consider leaving the European Union. A few years ago, we may have enjoyed complaining about EU directives on the bendy banana (which didn’t really exist) but it was taken as almost sacrosanct that membership of the EU was in the UK’s interest.
What has changed and would we really benefit from leaving – and negotiating a free trade agreement, which enables the benefits of EU membership without the supposed costs?
Should we stay in the EU?
The Ideal of European unity
The relative peace and prosperity in Europe since 1945, is a huge achievement, given the past century of inter-European conflict. Britain is an intrinsic part of Europe, whether it likes it or not. We should take the opportunity to be a member of the European Union and help maintain this European integration and harmony. If the UK left the EU, we would be increasingly politically isolated.
However, do we need to be a member of the European Union to achieve this? The UK could still contribute to European ideals without signing up for all the political and economic integration that the EU elite wish to pursue. European countries, who have stayed out of the EU, such as Switzerland and Norway maintain friendly relations with Europe.
Free Trade
One of the strongest benefits of the European Union is the fact that it is our main trading partner, and membership of the EU has helped reduce trade barriers – both tariff and non-tariff barriers. European trade is critical to the UK economy. Leaving the EU could put this important aspect of our economy under threat.
The hope of Eurosceptics is that we could leave the political integration of the EU, but maintain all the free trade agreements. Again the model is that Switzerland and Norway have not been disadvantaged by staying out of the European Union. Evidence suggests, the EU would be keen to accommodate the UK as a free trade partner.
“If the British cannot support the trend towards more integration in Europe, we can nevertheless remain friends, but on a different basis. I could imagine a free trade agreement.”
How to calculate price elasticity of demand. Price elasticity of demand = % change in Q.D. / % change in Price To calculate a percentage, we divide the change in quantity by initial quantity. If price rises from $50 to $70. We divide 20/50 = 0.4 = 40% Example of calculating PED When the price …
GDP fell 25% during the three years following the end of the First World War.
Unemployment rose to 20%
UK experienced deflation of 10% in 1921, and 14% in 1922
Causes of fall in GDP
End of First World War led to sharp fall in government spending which accounted for a large part of the fall in GDP
UK’s return to the gold standard made UK exports expensive leading to lower demand.
Trade slow to recover in the aftermath of First World War and reparations on Germany. (Keynes opposed Versailles Treaty on ground crippling reparations would harm European trade)
Great Depression 1930-33
GDP fell 5.1% in 1930-31.
GDP fell less in the UK than other countries. But, this was against a backdrop of the poor economic performance of the 1920s. Leaving the gold standard in 1931, helped the UK recover quicker than other countries.
Unemployment rose to over 22%
The effects of the great depression were highly geographical. Manufacturing heartlands in north and Wales much more affected than the South and London.
Laissez-faire economics is defined as a situation with minimal government intervention. Under laissez-faire, governments and regulators ‘leave alone’ private firms to allow them to make decisions about production and output. In particular, laissez-faire involves zero / minimal government intervention on issues such as regulation, taxes and tariffs. Comparison between Laissez-Faire economics and social democracy Origin …
Measuring living standards is important for economic policy. However, in practice, there are several difficulties in measuring living standards and therefore there are several different measures we could use.
The most common measure of living standards is to start with real GDP per Capita.
World Map of GDP per Capita
GDP per Capita. Source: Source: IMF
GDP per capita – GDP measures National Output / National Income. Per capita is the average income per person in the economy. This is a rough guide to living standards because it measures average incomes / the amount produced in an economy. However, income and average output is only a rough guide to living standards. (for example, increased GDP per Capita could be at the cost of increased pollution; in this case, higher GDP could lead to a decline in living standards.
GDP – Purchasing Power Parity PPP
Source: IMF
Another important factor in measuring living standards is GDP measured at Purchasing power parity. This means that the statistics take into account the actual cost of living. For example, some countries may have lower GDP, but the cost of living is much cheaper. PPP adjusts for these different costs of living.
Real GDP per Capita / Hours Worked
A more accurate guide to living standards is to take into account the number of hours worked. If you gain high GPD per capita but have to work a 12 hour day, then this is less desirable than same income for 6 hours work per today. (measuring living standards / hours worked.)
Household expenditure/consumption
Most measures of living standards focus on income. However, income is only a rough guide to the goods and services you can actually buy. Some people may have very high living costs (e.g. rent / council tax / transport costs). Therefore, the quantity of goods and services you can actually buy will give a better guide to living standards than just income. Another issue is that some people may receive benefits in kind. E.g. those on means tested benefits often receive prescriptions and dentist visits for free. Therefore, their living standards are better than their actual income may suggest.
When comparing UK vs US, one feature of the US is that people have to devote a high % of income to health care insurance.
Poverty and Living Standards
An important factor in measuring living standards for the economy is the number of people living below the poverty line.
The poverty line is defined as:
The level of expenditure necessary to buy a minimum level of nutrition and other basic necessities. The World Bank says that the poverty line can vary somewhat from country to country, reflecting different costs of living for taking part in the everyday life of society.
