Economics help blog – Page 243

Factors that affect Performance of Firms in UK Construction Industry

15 January 20209 May 2008 by Tejvan Pettinger

The economic performance of a UK Construction PLC will be affected by many factors, including the role of government, exchange rates and inflation. Discuss

The construction industry tends to be a quite volatile sector of the economy. Investment spending in construction has a strong correlation to the rate of economic growth and future prospects. When growth is high, demand for construction will be rising, when growth rates fall and the economy heads toward recession, firms invariably cut back on new construction projects and the industry can be hard hit by a slow down.

The exchange rate has a bearing on the exporting sector. If there is a depreciation in the exchange rate, exports become more competitive and the exporting sector will generally do better. This can lead to increased investment by industry.

However, a lower exchange rate tends to be only a short term boost and demand for UK exports is increasingly inelastic, meaning a depreciation doesn’t help much.

Why is US in Recession? (2008)

10 March 20201 May 2008 by Tejvan Pettinger

Readers Question: Why is US in Recession?

According to the latest statistics provided by the Economist April 24th 2008

US economic growth is 2.4% year on year.
In the last quarter, growth is 0.6%. This is still a long way off the technical definition of a recession – negative economic growth for two consecutive quarters.

Nevertheless people have been predicting that the US will soon enter into recession. This is because

1. Credit Crunch. Banks have lost money in lending sub-prime mortgages, which involved high levels of defaults. It is not just mortgage companies who have been affected, but, banks who lent to the mortgage companies. The result is that there is a shortage of funds for borrowing and bank lending has become more difficult.

Question on Carbon Trading Emissions and Global Warming

22 January 202030 April 2008 by Tejvan Pettinger

Readers Question: “the only viable solution to the problem of global warming is an international agreement that sets a ceiling to the world’s production of carbon emissions, by allocating a quota to each country. The sum of the quotas being set equal to the agreed global maximum. countries should then be permitted to buy and sell their quotas”

In theory this scheme can provide a market-based response to the problem of global warming.

It would require countries to agree on a global maximum of carbon emissions. This level would presumably be less than current and would provide the necessary target to reduce emissions and help prevent global warming.
If countries are given a quota, they would have an incentive to reduce carbon emissions. If they can pollute less than their quota they will be able to sell their quotas to other countries; if they pollute more then they will have the cost of buying more quotas.
This fiscal incentive should encourage the development of technology which leads to more efficient engines and reduces carbon emissions.
In theory, it is also socially efficient. i.e. a firm can pollute more if it feels it is worth the cost of buying more carbon permits.

The impact of Government Borrowing on Industry

15 January 202029 April 2008 by Tejvan Pettinger

The impact of government borrowing on industry.

Generally, government borrowing of over 3% of GDP and National Debt of over 60% of GDP is considered to be harmful and if government debt is too high it might start to deter foreign investment.

Budget balance

This is the amount the government need to borrow from the private sector. It occurs because the government is spending more than they receive in taxation. Problems of government borrowing include:

Crowding out of private sector. It is argued that high government borrowing can cause crowding out. This means private sector investment is reduced because the private sector are lending to the government instead of investing in more profitable private projects.
Liable to lead to higher tax and lower spending in the future.
Higher interest rates. It is argued that higher levels of government borrowing tend to put upward pressure on interest rates. This is because the government need to raise rates to attract sufficient people to lend them money.
High levels of borrowing may by symptomatic of poor government management. i.e failure to collect taxes and failure to control spending. This may indicate poor management of economy.

Readers Questions III

17 January 201428 April 2008 by Tejvan Pettinger

You are welcome to ask questions on Economics. However, due to volume of questions, I can no longer promise to answer all questions. I will post the answer on this blog, for everyone to benefit from. I shall try to answer the economics question and / or point to other resources but please bear in …

Impact of increasing the rate unemployment benefits

15 January 202028 April 2008 by Tejvan Pettinger

Readers Question. Explain the benefits of increasing the rate of unemployment benefit for

1. the unemployed, 2. society. Identify and costs that may result from such a policy.

Benefits of increasing unemployment benefits

Provides more income, reducing relative poverty and improving living standards.
Gives them support in finding the best job. If benefits are low, then they will be forced to get the quickest job they can find. But, this may not be suitable for their skills. Higher benefits enable the unemployed to take more time and find a job which matches their skills. This is also a benefit for society. For example, if someone leaves university, with a degree in astrophysics, we don’t want them working in McDonalds because unemployment benefits are too low to support their job search on leaving university. Basically, frictional unemployment is not a bad thing; sometimes it takes time to find the right job.
Low unemployment benefits could fuel social unrest and encourage the unemployed to resort to crime to supplement their income. Unemployment is often associated with a feeling of social alienation leading to riots such as Brixton 1981 and Paris in 2006.
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Sustained and Temporary Inflation

30 June 202025 April 2008 by Tejvan Pettinger

Readers Question: Can you please differentiate between the causes of once-off inflation and sustained inflation? A temporary period of inflation, also called one-off inflation, may be caused by: Temporary inflation in 2008 and 2011. Rising in tax rates. Suppose the chancellor announces a 10% rise in fuel duty. This means prices will rise. But, next …

Student Loan Repayments Finished at Last

29 March 202325 April 2008 by Tejvan Pettinger

I took out a student loan 13 years ago in 1995. I remember taking out the maximum possible loan, which in those days was about £3,800 over 3 years. Being an economist, I didn’t spend any of the loan but put it in a bank account and benefit from receiving a higher interest rate than that charged by the government (interest rate was equivalent to inflation rate).

For 4 years after graduating University, I never had to pay any money back because my salary was below the minimum amount. The student came in very useful when I bought a house and I was able to use the £4,000 as part of the deposit.