Economic inactivity – definition and causes

reasons-for-economic-inactivity

Definition: Economic inactivity means that people (aged 16-64) are not involved in the labour market – they are neither working or actively seeking employment. Economic inactivity includes students, early retirees and the long-term sick. There are 8.5 million counted as economically inactive in the UK. The unemployed who are seeking working and willing and able …

Read moreEconomic inactivity – definition and causes

The throw-away economy

broken-tin-opener

The throw-away economy refers to the prevalence of consumer goods which only last for a short period of time. When they stop working / no longer relevant, we throw them away and replace them with new goods.

This is in contrast to an economy where resources are more scare – and if a good is purchased, we expect to make it last a considerable time – repairing if necessary.

For example, in the past, if our socks had a hole, we would sew them up (‘darning’ your socks). But, these days, if socks get a hole, it is more convenient to throw them away and buy some cheap socks instead.

If average wages are £10 an hour. Why spend 30 minutes sewing your socks, when you can buy a new pair for £3? In the past, wages were much lower compared to prices. If you only earnt £1 an hour, then it is worth sewing your socks to save buying a new pair for £3.

Therefore, rising real wages make a throw-away economy more likely.

Repair shops

TV repair
TV repair. Photo Katie Chao and Ben Muessig – Flickr

 

In the past, there were many TV repair shops – if your tv or electronic goods broke down, you would try to have them fixed. In today’s world, if a TV broke down, we would be liable to throw away the TV and buy a new one. It is not so expensive and electronic goods are always offering new features. After a couple of years, your electronic goods can feel ‘outdated’ pretty quick. I have a stack of CDs I don’t play in CD players any more.

The problem of the tin openers

broken-tin-opener
Broken tin opener from a Pound Shop

 

The inspiration for this post has been the number of tin-openers we have got through in the past 12 months. We have bought four tin openers, all of which have ceased working after a short period of use. In each case, we have thrown it away and bought a new one. The first two were from Sainsburys and Asda. They cost about £4 and looked fairly robust. But, after a few weeks, they stopped working properly, and then failed completely. My lodger uses the tin-opener most, so I told him since I paid £5 for a tin-opener and it stopped working, he might as well go get one from a Pound shop. The first tin opener did open one can of Heinz soup then it snapped. 99p to open one tin! That is called a false economy!

He took it back to the 99p shop and the workers laughed. They obviously got returned tin openers all the time. He got a replacement, but that broke straight-away, even before opening a tin.

Read moreThe throw-away economy

Pros and Cons of High Speed Rail HS2

hs2

HS2 is a proposed new railway line linking London Euston to Birmingham, and in the second phase – Manchester, Leeds, Sheffield and eventually Scotland. Supporters of high-speed rail argue it is necessary to meet the UK’s rapidly growing demand for travel. High-speed rail will provide the greenest, safest and most efficient form of transport. The …

Read morePros and Cons of High Speed Rail HS2

Methods to Control Inflation

effect-interest-rates-personal-economy

Inflation is generally controlled by the Central Bank and/or the government. The main policy used is monetary policy (changing interest rates). However, in theory, there are a variety of tools to control inflation including: Monetary policy – Higher interest rates reduce demand in the economy, leading to lower economic growth and lower inflation. Control of …

Read moreMethods to Control Inflation

Common Mistakes in Economics

misery-index

Some potentially common mistakes in economics. 1. Confusion of rates of change and actual levels What happened to the UK price level between May 2011 and Feb 2015? The answer is that prices rose at a slower rate. There was a fall in the inflation rate. Prices were still rising just at a lower rate. …

Read moreCommon Mistakes in Economics

The gift economy

gift-economy

The gift economy refers to economic activity characterised by offering services and goods to other members of the community without the expectation of monetary reward. Giving things to other people may be based on pure altruism, a wish to gain status in society, the hope of reciprocal gifts in the future or out of a …

Read moreThe gift economy

Policies for Economic Growth

policies-for-economic-growth

Government policies to increase economic growth are focused on trying to increase aggregate demand (demand side policies) or increase aggregate supply/productivity (supply side policies)

  • Demand side policies include:
    • Fiscal policy (cutting taxes/increasing government spending)
    • Monetary policy (cutting interest rates)
  • Supply side policies include:
    • Privatisation, deregulation, tax cuts, free trade agreements (free market supply side policies)
    • Improved education and training, improved infrastructure. (interventionist supply side policies)

Demand side policies are important during a recession or period of economic stagnation. Supply side policies are relevant for improving the long run growth in productivity.

policies-for-economic-growth

Demand side policies

Demand side policies aim to increase aggregate demand (AD). This needs to be done during a recession or a period of below-trend growth. If there is spare capacity (negative output gap) then demand-side policies can play a role in increasing the rate of economic growth. However, if the economy is already close to full capacity (trend rate of growth) a further increase in AD will mainly cause inflation.
ad-increase

In this case, the economy at Y1 has spare capacity. Therefore an increase in AD leads to a rise in real GDP.

Monetary Policy

Monetary policy is the most common tool for influencing economic activity. To boost AD, the Central Bank (or government) can cut interest rates. Lower interest rates reduce the cost of borrowing, encouraging investment and consumer spending. Lower interest rates also reduce the incentive to save, making spending more attractive instead. Lower interest rates will also reduce mortgage interest payments, increasing disposable income for consumers.

econ-growth

In 2009, base rates were cut to 0.5% to try and stimulate economic growth in the UK.

More detail on the effect of lower interest rates.

Evaluation of Monetary Policy

Lower interest rates may not always boost spending. In a liquidity trap, lower interest rates may not increase spending because people are trying to pay back debts. In 2009, UK interest rates were cut to 0.5%, but spending remained subdued. Banks were unwilling to lend because of liquidity shortages. Therefore, although in theory, it was cheap to borrow, it was hard to actually create credit. Therefore, this shows monetary policy can be ineffective in boosting economic growth

Another criticism of monetary policy is that cutting interest rates very low could distort future economic activity. For example, the US cut interest rates following the economic uncertainty of 9/11. These low-interest rates encouraged people to take on ambitious loans and mortgages; this was a factor behind the US housing bubble. Therefore cutting interest rates, at the wrong time, can contribute to a future housing and asset bubble which will destabilise economic growth. However, in 2009-12, the depth of the financial crisis means there is no immediate danger of a housing bubble, so it was appropriate to keep interest rates at zero.

2. Quantitative Easing

In a liquidity trap, where lower interest rates fail to boost demand, the Central Bank may need to pursue more unconventional types of monetary policy. Quantitative easing involves increasing the money supply and buying bonds to keep bond rates low. The hope is that the increase in the money supply and lower interest rates will boost investment and economic activity. The fear is that increasing the money supply could cause inflation. Though evidence from 2009-12 suggests that the inflationary impact was minimal. Without quantitative easing, the recession was likely to be deeper, though QE alone failed to return the economy back to a normal growth projection.

Read morePolicies for Economic Growth

Carbon Tax – Pros and Cons

pros-cons-carbon-tax

A carbon tax aims to make individuals and firms pay the full social cost of carbon pollution. In theory, the tax will reduce pollution and encourage more environmentally friendly alternatives. However, critics argue a tax on carbon will increase costs for business and reduce levels of investment and economic growth. The purpose of a carbon …

Read moreCarbon Tax – Pros and Cons

Item added to cart.
0 items - £0.00