Inflation and the Basket of Goods

cpi-weights-2017

The basket of goods reflects the most commonly bought goods in an economy. When calculating inflation, statisticians check these 1,000 most commonly bought goods and multiplier price changes by their respective weighting. There is an interesting interactive graph here at the NYT showing the different components of the US basket of goods, used to calculate …

Read more

Solutions for Water Shortages

water

“Water, water, every where, Nor any drop to drink.”

– Samuel Taylor Coleridge – The Rime of the Ancient Mariner.

The water companies are the least loved out of the privatised utilities, and the lack of rain over the past two winters is making their job much more difficult. For many people, it is hard to understand that you can have the wettest April for years, and yet we still face the prospect of drought as serious as a country like Australia or Spain (which have much lower rainfall)

It seems crazy that a county with rainfall like the UK should still face the potential for a serious drought. Even when it doesn’t rain much in the UK, there is still more rainfall than other semi-arid countries in the Mediterranean. What is the economics of the UK water situation?

  • Every day half a billion (17,395 million) litres of water goes into the UK mains water supply
  • average consumption in the UK is 150 litres – one of the highest in the EU

Where Does Our Water Come From?

When we think of water supplies, we tend to think of reservoirs like Thirlmere in the Lake District. But, actually, 70% of drinking water in England comes from underground boreholes. These underground water supplies can be very deep. After recent dry winters, water is taken from up to 40 metres down. This is why the recent April showers haven’t really altered these underlying water reserves. The April rain will not have been able to seep down 40 metres yet. The current rain is good for topping up reservoirs and rivers, but to top up underground reservoirs, we need persistent rain in winter. Winter rain is not taken up by plants or evaporates, it just seeps down. That is why water companies, complain about ‘the wrong kind of rain’

Policies to Deal With Water Shortages

To deal with water shortages, there are two main approaches:

  1. Increasing Supply of Water
  2. Managing Demand

Increasing Supply of Water

1. Build More Reservoirs. Building reservoirs will increase the potential supply of water. They are easier to refill than underground boreholes. However, building more reservoirs:

  • Is quite expensive. To rely on reservoirs for our water supplies will increase the cost of water.
  • Typically it takes 25 years from the concept of a new reservoir to bringing it into use.
  • Land availability is quite limited in the south east to build reservoirs.
  • It is not always possible. In many areas of the south of England, the soil is very chalky. Reservoirs are not practical because the chalky soil is not good at holding water. Therefore, reservoirs are not an option in some parts of the country. The problem some regions face is that the only real supply of water is these underground boreholes.

Read more

How has China affected UK Economy?

Readers Question: How Has China’s Economic Industrialisation affected the UK’s Economy? And What Policies Could The UK Government Implement To Rectify The Problems Created From China’s Growth?

The rapid growth of China’s economy has had various effects on the UK economy – some positive and some which have created challenges and problems for the UK.

1. Lower Goods Inflation. Chinese economic growth has been characterised by low priced manufactured goods. The price of items such as clothes and electronic goods has consistently fallen, helping to maintain low inflation in the UK. This downward pressure on prices is particularly helpful for consumers, who have experienced rising cost-push inflation in areas such as energy and food in recent years. The falling prices of electrical goods and textiles have helped to increase UK living standards and have enabled a higher percentage of income to be spent on other goods and service

2. Higher price of raw materials. As well as contributing to lower goods inflation. You could argue China’s growth is contributing to rising prices of raw materials e.g. oil. The economic growth in China is pushing up demand and therefore price of oil, which is having an impact on Western inflation. China’s growing demand for oil and raw materials was a key factor in creating cost push inflation in the past few years. Therefore, even though the West has been in recession (2009-2013), we have also seen cost-push inflation. This cost-push inflation arguably exacerbated the recent recession. However, the rising price of oil is not just due to China, but also supply disruption in the Middle East and other factors. Also, the rising price of oil may encourage the developments of greater fuel efficiency and alternatives to oil which will benefit in the long run.

3. Relative decline in manufacturing sector. The UK’s manufacturing sector has been in relative decline since early 1980s. Chinese growth has in a way speeded up this process as British firms with higher labour costs become uncompetitive compared to Chinese firms. However, the manufacturing sector may have declined anyway and up to recently job losses in manufacturing sector have been absorbed into the service sector. Arguably, it is not a problem if we do have a relative decline in manufacturing. The theory of comparative advantage states that we should specialise in those industries, which we are best at.

Read more

Reasons for strength of the Euro

Readers Question: Europe is in grip of real deflation and low growth period but then why Euro is on a rise

In recent months, European inflation has fallen to 0.5%. In several countries within the Eurozone, countries are now experiencing actual deflation. In the past year, the Euro has appreciated against a basket of currencies, such as the Dollar, the Pound and also other Emerging market currencies.

Read more

Disguised unemployment

Readers Question: what is the difference between disguised unemployment and involuntary unemployment Definition of disguised unemployment. This is when people do not have productive full-time employment but are not counted in the official unemployment statistics. This may include: People with sickness/disability benefits (but, would be able to do some jobs) People doing part-time work. (sometimes …

Read more

The Euro and deflation

A look at the effects of how an over-valuation of the exchange rate can cause deflation. Readers Question: does an appreciation in the exchange rate cause deflation? An appreciation does tend to reduce inflationary pressures. This is because after after an appreciation in the exchange rate: Price of imports will fall, causing a fall in …

Read more

UK unemployment threshold of 7%

Readers Question Why is the forward guidance threshold set at 7% unemployment and how does this affect the threshold for inflation? The MPC have a remit to target inflation of CPI = 2% +/-1. But, the MPC also consider wider issues of economic growth and unemployment. UK Real GDP is still lower than the level …

Read more

Item added to cart.
0 items - £0.00