Does inflation cause unemployment?

Readers Question: Does inflation causes unemployment? There are a few different scenarios where inflation can cause unemployment. However, there is not a direct link. Often we will notice a trade-off between inflation and unemployment – e.g. in a period of strong economic growth and falling unemployment; we see a rise in inflation – see Phillips Curve.Also, it is important to bear in mind, (especially in the current climate) If the economy has deflation or very low inflation and…

Wealth inequality UK

Inequality in the UK

In the nineteenth century, the UK was characterised by high levels of income inequality. However, from the start of the twentieth century until 1978, there was a steady fall in inequality and reduction in poverty (both relative and absolute). However, the 1980s saw a sharp rise in inequality which has not been reversed in the 1990s and 2000s. Reasons for post-war fall in inequalityWelfare state – benefits for the unemployed, sick Higher income taxes on high earners Period of full employment Rising wages for the working class. Erosion of…

democratic-socialism-pros-cons

Pros and cons of socialism

There are different forms of socialism but for this blog will use the form of democratic socialism advocated by Socialist parties in Western Europe. For example, Nordic countries where government spending is between 40-50% of GDP. This brand of socialism believes in:Redistribution of income and wealth through progressive tax system and welfare state. Ownership of key public sector ulitities, such as gas, electricity, water, railways. Private enterprise and private ownership for other industries. Free health care and free public education provided by direct taxation. Support for trade…

us-tariffs-china

Effect of US tariffs on Chinese imports

The US has recently placed tariffs on Chinese imports and is threatening to further increase tariffs in the next few weeks. The effect of these tariffs is to increase domestic prices, provide some benefits to domestic producers, but also cause costs to US exporters. There is a strong risk that these tariffs will cause loss of economic welfare and in some circumstances could even precipitate an economic downturn. Whatever you say about the relative merits of these tariffs, it does provide useful tools for teaching the practical application of economics. Example…

UK National Debt

The UK national debt is the total amount of money the British government owes to the private sector and other purchasers of UK gilts.In Mar 2019, UK public sector net debt was £1,801.0 billion  equivalent to 83.1% of GDPSource: (page updated 6 May 2019)Source: ONS debt as % of GDP – HF6X | PUSF – public sector finances at ONS Budget deficit – annual borrowingThis is the amount the…

effect-interest-rates-personal-economy

Methods to Control Inflation

Inflation is generally controlled by the Central Bank and/or the government. The main policy used is monetary policy – set by Central Banks. However, in theory, there are a variety of tools to control inflation including:Monetary policy – Setting interest rates. Higher interest rates reduce demand, leading to lower economic growth and lower inflation Control of money supply – Monetarists argue there is a close link between the money supply and inflation, therefore controlling money supply can control inflation. Supply-side policies – policies to increase competitiveness and efficiency…

real-vs-nominal

Real vs nominal

Nominal values are the current monetary values. Real values are adjusted for inflation and show prices/wages at constant prices. Real values give a better guide to what you can actually buy and the opportunity costs you face.Example of real vs nominalIf you receive an 8% increase in your wages from £100 to £108, this is the nominal increase. However, if inflation is 2%, then the real increase in wages is (8-2%) 6%. The real wage is a better guide to how your living standards changes. It shows…

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How the housing market affects the economy

A look at how the housing market and changes in house prices affect the rest of the economy. In summary:Rising house prices, generally encourage consumer spending and lead to higher economic growth. A sharp drop in house prices adversely affects consumer confidence, construction and leads to lower economic growth. (falling house prices can contribute to economic recession) Rising house prices can also redistribute wealth within an economy – increasing the wealth of homeowners (primarily older people), but reducing effective living standards for those who do not own a…