Economics help blog – Page 22

House Prices Forecast to drop in 2023

7 March 2023 by Tejvan Pettinger

Last week, the Nationwide reported a sixth consecutive monthly fall in house prices. They are now 6% down on last summer’s peak with buyers able to get an average £14,000 off the asking price. Annual price changes are falling at the fastest rate since 2012. Yet, some analysts wonder if the worst is already over? …

Bond Yields Explained

24 March 20235 March 2023 by Tejvan Pettinger

UK bond yields are the rate of interest received by those holding Government bonds.
Governments sell bonds (also called gilts) via the Debt Management Office to fund their budget deficits. Bonds are a way for the government to borrow – a bit like the government taking out a loan.
Government bonds are frequently traded on bond markets. Therefore, their market price may be quite different to the original price set by the government.

Example of why bond yield changes

A government may sell a 10-year, £1,000 bond at 5% interest. This means every year the government will pay £50 to the holder of this bond.

If demand for government bonds rose, this £1,000 bond would increase in price as investors pushed up the market price.
But, the government still pay £50 a year interest until maturity. If the market price of the bond rises to say £2,000, the interest rate (yield) is now 2.5% (50/2,000)
Therefore higher demand for bonds leads to lower bond yields.
Conversely, if people sell bonds, this pushes up the bond yield (e.g. what happened in UK September 2022)

How a change in price of a bond changes the effective yield

bond-yield-price

The law of the bond market

inverse-relationship-bond-yield-vs-bond-price

As bond value rises, interest yield falls
As bond value falls, interest yield rises

Video summary

The Bond Market Explained - Why the Bond Market can force government's to do U-Turns

Watch this video on YouTube

Recent UK Bond Yields

10-year-gilts-85-22-web

Source: Bank of England – 10-year bond yields

Phillips Curve Explained

14 March 20241 March 2023 by Tejvan Pettinger

Summary of Phillips Curve

The Phillips curve suggests there is an inverse relationship between inflation and unemployment.

This suggests policymakers have a choice between prioritising inflation or unemployment. During the 1950s and 1960s, Phillips curve analysis suggested there was a trade-off, and policymakers could use demand management (fiscal and monetary policy) to try and influence the rate of economic growth and inflation. For example, if unemployment was high and inflation low, policymakers could stimulate aggregate demand. This would help to reduce unemployment, but cause a higher rate of inflation.

In the 1970s, there seemed to be a breakdown in the Phillips curve as we experienced stagflation (higher unemployment and higher inflation). The Phillips Curve was criticised by monetarist economists who argued there was no trade-off between unemployment and inflation in the long run.

However, some feel that the Phillips Curve has still some relevance and policymakers still need to consider the potential trade-off between unemployment and inflation.

Origins of the Phillips Curve

The Phillips curve originated out of analysis comparing money wage growth with unemployment. The findings of A.W. Phillips in The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861–1957 suggested there was an inverse correlation between the rate of change in money wages and unemployment. For example, a rise in unemployment was associated with declining wage growth and vice versa.

Original Phillips Curve Diagram

This analysis was later extended to look at the relationship between inflation and unemployment. Again the 1950s and 1960s showed there was evidence of this inverse trade-off between unemployment and inflation.

Would Falling House Prices Push Economy into Recession?

28 February 2023 by Tejvan Pettinger

Many young people will understandably be hoping and praying that there is a substantial fall in UK house prices to make them affordable and escape the broken rental sector. However, if there is a serious house price fall, there is a real danger this would push the UK economy deeper into recession. In the last …

Why The UK Became Relatively Worse Off

9 March 202323 February 2023 by Tejvan Pettinger

average-disposable-income-77-23-pre-crisis-trend

In the past 13 years, the UK has seen an unprecedented stagnation in real incomes. If Pre-crisis growth had been maintained, real incomes would be around £7,000 higher. Whilst global events like Covid and Ukraine War are mitigating factors, the UK economy has still performed relatively worse, with one of the poorest performances in real …

Is there really a Housing Shortage in the UK?

18 February 2023 by Tejvan Pettinger

Do we really need to build 300,000 Homes a year – How Bad is the Housing Shortage? When we talk about UK housing, we tend to think of an acute shortage. And it is not surprising given the fact house prices have reached nine times income, and we face a crisis of affordability. But, do …

How much immigration has there been in the UK?

16 February 2023 by Tejvan Pettinger

How many migrants have come to the UK in recent years? Between 1991 and 2021, the ONS estimate 14.64 million immigration 10.36 million emigration 5.55 – Net Migration (average of 177,000) Between 2002 and 2021 (last 20 years) 12.0 million immigration 7.2 million emigration 4.64 net migration (average of 232,000) Between 2012 and 2021 (last …

Are these economic benefits of Brexit?

15 February 2023 by Tejvan Pettinger

Since 2016, the UK economy has performed poorly, – weak Pound, high inflation, falling real wages, and a worrying decline in business investment. There are mitigating factors, such as Covid and the Ukraine war, but despite this, the UK seems to be performing relatively badly compared with other countries, with one of the lowest rates …