Effects of a falling inflation rate

Effects of a falling inflation rate

Readers Question: Evaluate the possible consequences of a falling rate of inflation for the performance of the UK economy. A falling rate of inflation means that prices will be rising at a slower rate. A fall in the inflation rate could cause various benefits for the economy:Goods of that country becoming more internationally competitive increasing exports and growth Increase rates of return for savers Improved confidence, encouraging firms to invest and boost long-term economic growth. Increased disposable incomes (if nominal wage growth is constant)However, if a fall in the inflation…

Measures of Poverty

Measures of Poverty

Poverty implies low income and struggling to meet basic needs. There are two main types of povertyAbsolute poverty – income below a certain threshold necessary to meet basic necessities of life (food, shelter, clothing, rent) Relative poverty – Individuals receiving income a certain level (e.g. 50%) below the median income of the general population.Definitions of absolute poverty do not change with economic growth. Usually, if average incomes rise, then more of the population should be lifted out of absolute poverty. However, if economic growth is unequal and high-income…

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…

Types of deflation

Types of deflation

Is deflation good or bad? Mostly experiences of deflation in western economies have been damaging – deflation has been associated with falling rates of economic growth and higher unemployment. However, it is possible to have a different type of deflation – from rapidly improving productivity; then deflation can be consistent with higher rates of economic growth.The key issue is – what is causing the deflation and if prices are falling – what is happening to real wages and real interest…

Government Price Controls

Government Price Controls

Government price controls are situations where the government sets prices for particular goods and services. This can take various forms such as:Minimum prices – Prices can’t be set lower (but can be set above) Maximum price – Limit to how much prices can be raised (e.g. market rent) Buffer stocks – Where government keep prices within a certain band Limiting price increases – In a privatised monopoly (e.g. electricity, gas, water – where there is no competition) the government regulator may play a role in limiting how much prices…

Balance of Trade and Terms of Trade

Balance of Trade and Terms of Trade

1.How can a change in the terms of trade affect the balance of trade ? 2. How can a change in the balance of trade affect the terms of trade ? The terms of trade is the index of export prices divided by index of import prices (*100)The balance of trade measures value of imports and exports of goods and services. The current account balance of payments is primarily composed of this balance of trade (but also includes investment incomes and transfers) How…

Benefits and costs of tariffs

Benefits and costs of tariffs

Readers Question what are the benefits and costs of a tariff on consumers, producers, employment levels and the government? The effect of tariffs on consumersTariffs increase the cost of imports, leading to higher prices (P1 to P2) for consumers and a decline in consumer surplus. For example, UK consumers have lost out from EU wide tariffs on agricultural products. Many agricultural goods are more expensive because of the high tariffs placed to protect EU farmers. It is hard to think of any…