Readers Question: I understand why, generally, low inflation is considered to be a good thing and why high inflation is bad particularly if you have savings whose value in real terms then diminishes faster.

What I do not understand is why inflation is not in fact a good thing for those of us in their late 30s, saddled with a huge mortgage, two kids, and no savings to speak of. Surely once I have bought a house for £x, what I really want is for the cost of it (which is of course fixed when I hand over the purchase price – this is nothing to do with what happens to the VALUE of the property in future since that only has an impact if I ever sell) in real terms to drop as quickly as possible, so that the cost of borrowing to fund it becomes a smaller part of my income as quickly as possible?

To give an extreme example, my parents bought their first house in 1964. They paid about £1500. This felt like a fortune at the time, but they could probably get an overdraft to refinance it now, if they had only ever had an interest only mortgage! And the interest payments themselves, though a struggle in 1964, would be a quite trivial amount relative to their income now.

So surely if inflation hits 10% (I know that is unlikely, but let’s just say, for the sake of argument), and since I do not propose to move again, then the cost of my house (which remains thus static at what I paid for it) IN REAL TERMS will drop faster so that, assuming my salary at least keeps up with inflation, I’m going to be better off than if the £300,000 I paid still “feels” like £300,000 in 10 years’ time?

Thanks for the question. You raise a good point. Inflation is generally considered to be a damaging thing for the economy. There are many costs of inflation such as uncertainty, declining competitiveness, menu costs. For full explanation see: Costs of inflation. However, although inflation is generally bad, there are some people who will benefit from inflation (as long as nominal wages rise faster than inflation)

If you keep money under your bed, inflation will reduce the value of your savings. But, if you borrow a fixed amount, inflation makes it much easier to pay back (assuming wages keep pace with inflation, which generally they do in OECD economies)

When people are considering whether to buy or rent, they often forget the importance of inflation. They look at the cost of mortgage payments and focus on how expensive they are. But, these mortgage payments historically, decline in real terms over the course of the mortgage.

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Readers Question: What economic factors should I consider if I want to know the relationship between innovation and the presence of patents/copyrights? Do copyright/patents (generally Intellectual Property Rights) stifle innovation? Does it slow down economic growth?

There is some debate. But, one argument is that patents are necessary to encourage innovation. If firms were unable to patent new machines, they would have less incentive to spend the necessary money on research and development. Research and Development is risky and expensive; a firm may have to spend millions of pounds on developing new technology. If the technology was then freely available to all firms the market would be competitive and therefore, they would not make sufficient profit to justify the investment. Also, it is argued that investment for innovation is paid for out of retained profit. So current patents on drugs are in effect financing future innovation. (This is certainly what the drug companies will say)

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When people hear that I am an economist, I often get asked for advice for buying and selling shares; I don’t know why because I am completely hopeless at knowing which shares to buy. To be honest, I don’t buy any shares for the very good reason that I don’t have any money to invest. If I did have any money, I would probably get a copy of the financial times and use a drawing pin. So when I’m asked about shares I usually feel a slight sense of guilt as I wax lyrical about interest rate futures, and Price to earnings ratios – trying to sound knowledgeable without actually giving any particularly useful advice.

When investing in the stock market it is worth bearing in mind.

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Question OCR 2887: Discuss whether the EU should set strict regulations for CO2 emissions on new Cars? (20)

By 2012, the EU is aiming to limit pollution from cars to 130g of CO2 per kilometre.

Reasons for regulating CO2 emissions.

1. Pollution from cars is a negative externality. Driving a car causes harmful effects to a third party. These negative externalities include:

• increased pollution leading to global warming
• Deterioration in air quality, leading to health problems such as asthma.

In a free market, firms and consumers ignore these external costs; therefore, there is overconsumption and market failure. Firms lack incentives to develop more fuel efficient engines. Therefore, there is a strong argument for government intervention to limit pollution levels.

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Readers Question: Discuss the Impact on Czech Economy of a decline in the Car Industry.

The car industry plays an important role in GDP of Czech (16% of economy is Car industry) (19% of export revenue) and jobs. BTW: Skoda is the main car.

A decline in the car industry would lead to lower exports and lower aggregate demand. This would lead to lower rates of economic growth and a rise in unemployment. It may also adversely affect related industries such as suppliers to the car industry. Therefore, there could be a negative multiplier effect.

It would also cause a deterioration in the current account balance of payments. Cars give 19% of export revenue so it would be relatively significant and could cause a depreciation in the exchange rate.

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