Economics help blog – Page 251

Reducing Inequality and the Impact on Incentives to work

16 January 20205 June 2008 by Tejvan Pettinger

Readers Question “Evaluate the argument that further measures to reduce inequality may have adverse consequences for work incentives ”

Measures to reduce inequality include, progressive taxes, means tested benefits and higher minimum wages

1. Higher Income Tax. Increasing the highest rate of income tax from 40% to 50% will make work and overtime less attractive because of the lower renumeration. Here the substitution effect means people will be encouraged to work less and have more leisure time.

However, there is also the income effect. This states that if wages fall (because of higher taxes) people will need to work longer hours to maintain their target income. If you have a target income of £40,000 (large mortgage, school fees e.t.c) then higher taxes actually mean you need to work longer hours. Therefore, it is uncertain whether people will work longer hours or not.

It may depend how much income tax is increased e.g. an increase in basic rate from 22% to 24% is unlikely to have much impact. But, if higher rate was increased to say 70% then disincentives are more likely to occur.

Tips for Taking Exams

4 June 2008 by Tejvan Pettinger

If you have exams this afternoon, there isn’t much more revision you can do. What is important now is the right exam technique. These tips may sound like common sense and stating the obvious, but, every year a significant % of candidates make these mistakes and so reduce their grade. Although they may sound obvious tips, make sure you implement them!

Answer the Question.

This is the biggest cause of doing badly. You write brilliant economics, but, it is not relevant to the question. One tip is at the end of each paragraph, write one sentence to summarise how you have just answered the question.

For example, if you are asked – Discuss how to reduce poverty? Don’t write what causes poverty or whether we should be concerned about poverty.
Another example. One year there was a question. Discuss whether higher taxes will reduce consumption of cigarettes. A lot of candidates started talking about demerit goods, social efficiency and why we should reduce demand for cigarettes. But, this doesn’t gain any marks because it is not relevant to the question.

Evaluate where appropriate.

If you have questions which start with these keywords, then you will need to add evaluation to the answer: See: Tips for writing evaluative answers.

Discuss
Evaluate
To what extent
Assess

Note: Evaluation can give 40% of the mark so give it importance.

Globalisation and the increase in labour market flexibility

1 February 20204 June 2008 by Tejvan Pettinger

Readers Question: This one is about flexibility in the labour market. I am wondering why globalisation has made a contribution to the increase in flexibility. Is it because firms face fierce competition so they have to hire workers only when they need them? Increased competition is certainly one factor. If a firm has a domestic …

Political Stability and Foreign Direct Investment

16 January 20203 June 2008 by Tejvan Pettinger

Readers Question: why is political stability needed to attract FDI?

FDI = Foreign Direct investment. For example, if BP invested in Venezuela or Iraq to produce oil. This would be an example of foreign direct investment into Venezuela and Iraq.

Clearly for countries like this, the political situation is going to be important for determining whether investing in these countries is a good idea.

Investing in Iraq may have high potential returns. But BP maybe dissuaded from investing there because:

Risk of terrorist action. Cost of equipment, cost in terms of lives. Difficulty of getting workers to go and live in Iraq.

China’s Economic Growth, Poverty and Inequality

16 January 202030 May 2008 by Tejvan Pettinger

Readers Question: Discuss the likely economic impact on absolute and relative poverty of China’s rapid economic growth? It is an interesting question because even the Chinese government have been concerned that China’s rapid economic growth has not helped large sections of the population, especially in the north. Absolute poverty is defined as the minimum level …

Should Government Try To Solve Shortages of Oil?

16 January 202027 May 2008 by Tejvan Pettinger

Readers question: Should the Government intervene to deal with the problem of Oil Shortages or is it better to leave it to a free market?

As oil runs out, supply will shift to the left and the price will increase. Because demand is inelastic, oil firms will make increased profits. This creates an incentive for oil companies to discover new oil supplies. This research is often expensive, so the higher profits is beneficial for encouraging investment. There are many oil reserves which are difficult to access, e.g. oil in the Antarctic and Siberia. Therefore, the cost of production maybe $100 a barrel. Therefore, now oil prices have risen over $100, it has become profitable. Therefore, the market can respond to the changing market signals and try and increase supply. Also, firms have an incentive to develop and promote alternatives to oil, such as solar panel cars; the more expensive oil becomes the more attractive these options are.

In theory, the free market should respond to shortages and rising prices through increasing supply or developing alternatives. However, the free market may not be able to deal with the oil shortages in a timely manner.

Firstly, demand is rising very rapidly because of economic expansion in Asia (China and India). Therefore, prices are rising rapidly, even though supply is still increasing. If we had a combination of falling supply and rising demand, prices could skyrocket. Investing in new supplies or alternatives to oil could take several years. By the time the free market has provided alternatives to oil, the world economy may have suffered several years of very high oil prices.

Why is the UK Housing Market is an obstacle to joining the Euro?

1 February 202026 May 2008 by Tejvan Pettinger

Readers Question: ‘Outline two reasons why the UK’s housing market represents a barrier to the UK’s membership of the euro’.

Joining the Euro involves a common monetary policy. This means that UK interest rates will be set by the ECB. Therefore, if the ECB has to increase interest rates it will increase UK rates and therefore increase the cost for UK homeowners. If interest rates increase at the wrong time it could cause economic hardship for homeowners.

1. Mortgages are a high % of consumer’s disposable income and therefore are sensitive to changes in interest rates. UK House prices are a high ratio of average incomes. Many homeowners have had to take out mortgages 4-5 average incomes to get on the property ladder. This means mortgage payments are a high % of disposable income. If interest rates increase, it could make mortgages unaffordable.

Male Inactivity Rates in UK 2008

20 February 202026 May 2008 by Tejvan Pettinger

Readers Question ‘Evaluate two policies which the government might adopt to reduce the male inactivity rate’

Main Reasons for Inactivity in Labour Market

Inactivity rates imply that people have left the labour market and are not able or are unwilling to seek employment. According to the ONS, inactivity rates can be caused by:

Being a student
Looking after family/home
temporary sickness
long-term sickness
Discouraged
Retired (early)
Other

Source: ONS (nov, 2011)

Policies To Reduce Inactivity Rates

1. Make It more difficult to gain sickness / long term disability benefits. It is argued that it has become too easy for the long term unemployed to be given sickness benefits. The government could introduce a scheme where those on benefits are revaluated every 12 months and given the option to take on light work. This could help reintegrate them into the labour market.