Crowding Out

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Definition of crowding out – when government spending fails to increase overall aggregate demand because higher government spending causes an equivalent fall in private sector spending and investment. Question: Why does an increase in public sector spending by the government decrease the amount the private sector can spend? If government spending increases, it can finance …

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What is a structural deficit problem?

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Readers Question: Surely when we have near full employment as we have now the Government should be producing a surplus (as in the late 1990s) and reducing the national debt. Not to do so means that we have a structural problem in the UK? Not necessarily. A structural deficit problem implies that even allowing for …

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Importance of economics in our daily lives

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Economics affects our daily lives in both obvious and subtle ways. From an individual perspective, economics frames many choices we have to make about work, leisure, consumption and how much to save. Our lives are also influenced by macro-economic trends, such as inflation, interest rates and economic growth. Summary – why economics is important The …

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Policies for Economic Development

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Economic development implies an improvement in economic welfare through higher real GDP, but also through an improvement in other economic indicators, such as improved literacy, better infrastructure, reduced poverty and improved healthcare standards.

Policies for economic development could involve:

  1. Improved macroeconomic conditions (create stable economic climate of low inflation and positive economic growth)
  2. Free market supply-side policies – privatisation, deregulation, lower taxes, less regulation to stimulate private sector investment.
  3. Government interventionist supply-side policies – increased spending on ‘public goods’ such as education, public transport and healthcare.

For developing economies, other issues could involve:

  1. Export oriented Development – Reduction in tariff barriers and promoting free trade as a way to improve economic development.
  2. Diversification away from agriculture to manufacturing as a way to promote economic development.

Policies for Economic Development

policies-for-econ-development

Macroeconomic Stability

Macroeconomic stability would involve a commitment to low inflation. Low inflation creates a climate where foreign investors have more confidence to invest in that country. High inflation can lead to devaluation of the currency and discourage foreign investment. To create a low inflationary framework, it requires:

  • Effective monetary policy. E.g. given a Central Bank independence to control inflation through using monetary policy.
  • Disciplined Fiscal Policy – i.e. avoid large budget deficits.
  • For example, if you look at the current situation of China and India – they both have high rates of economic growth, but the concern is that their economies could easily ‘overheat’ and cause inflationary pressures. Therefore, to keep a lid on inflation is an important underlying factor in sustainable economic development.

A potential problem of macroeconomic stability is that in the pursuit of low inflation, higher interest rates can conflict with lower economic growth – at least in the short term. Sometimes, countries have pursued low inflation with great vigour, but at a cost of recession and higher unemployment. This creates a constraint to economic development. The ideal is to pursue a combination of low inflation and sustainable economic growth.

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Should government run a budget surplus?

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The Lib Dems have proposed a budget rule that would run a persistent current budget surplus of 1%. This means that current spending (day to day costs of government) should always be less than tax revenue. Borrowing would only be allowed to finance capital investment after an independent watchdog found that the return would be …

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Nationalisation of broadband – Pros and cons

The Labour Party has announced a policy to nationalise full-fibre optic broadband provision and offer free broadband to every UK home. It is an ambitious policy which would involve costs of £20-£40bn to purchase Openreach from BT (Labour suggest £20bn, BT, £40. Do the benefits of nationalisation outweigh the costs? Arguments for nationalisation External benefits …

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Debt under Conservatives 2010-19

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From 2010 to 2019, total gross government debt (1) increased by £643 bn from £1.2 trillion to £1.8 trillion. UK Public sector debt 2010 – £1,194.3bn 2019 – £1,838.2bn A more helpful statistic is to consider debt as a percentage of GDP In 2010 Q2, public sector debt was 64.7% of GDP In 2019 Q3 …

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Role and Function of Price in Economy

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Readers Question: What is the role and function of price in the economy? The price of goods plays a crucial role in determining an efficient distribution of resources in a market system. Price acts as a signal for shortages and surpluses which help firms and consumers respond to changing market conditions. If a good is …

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