Examples of economic problems


The fundamental economic problem is the issue of scarcity but unlimited wants. Scarcity implies there is only a limited quantity of resources, e.g. finite fossil fuels. Because of scarcity, there is a constant opportunity cost – if you use resources to consume one good, you cannot consume another. Therefore, an underlying feature of economics is …

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The relationship between economics and politics

Readers question: Why cannot politics and economics be seen in isolation?

Economics is concerned with studying and influencing the economy. Politics is the theory and practice of influencing people through the exercise of power, e.g. governments, elections and political parties.

In theory, economics could be non-political. An ideal economist should ignore any political bias or prejudice to give neutral, unbiased information and recommendations on how to improve the economic performance of a country. Elected politicians could then weigh up this economic information and decide.

Houses of Parliament london

In practice there is a strong relationship between economics and politics because the performance of the economy is one of the key political battlegrounds. Many economic issues are inherently political because they lend themselves to different opinions.

Political ideology influencing economic thought

Many economic issues are seen through the eyes of political beliefs. For example, some people are instinctively more suspicious of government intervention. Therefore, they prefer economic policies which seek to reduce government interference in the economy. For example,  supply side economics, which concentrates on deregulation, privatisation and tax cuts.

On the other hand, economists may have a preference for promoting greater equality in society and be more willing to encourage government intervention to pursue that end.

If you set different economists to report on the desirability of income tax cuts for the rich, their policy proposals are likely to reflect their political preferences. You can always find some evidence to support the benefits of tax cuts, you can always find some evidence to support the benefits of higher tax.

Some economists may be scrupulously neutral and not have any political leanings (though I haven’t met too many). They may produce a paper that perhaps challenges their previous views. Despite their preferences, they may find there is no case for rail privatisation, or perhaps they find tax cuts do actually increase economic welfare.

However, for a politician, they can use those economists and economic research which backs their political view. Mrs Thatcher and Ronald Reagan were great champions of supply side economists like Milton Friedman, Keith Joseph, and  Friedrich Hayek. When Reagan was attempting to ‘roll back the frontiers of the state’ – there was no shortage of economists who were able to provide a theoretical justification for the political experiment. There were just as many economists suggesting this was not a good idea, but economists can be promoted by their political sponsors. In the US, the Paul Ryan budget proposals were welcomed by many Republicans because they promised tax cuts for better off, cutting welfare benefits and balancing the budget. (1) A popular selection of policies for Republicans.

Economic thought independent of politics

On the other hand, economists who stick to data and avoid cherry picking favourable statistics may well come up with conclusions and recommendations that don’t necessarily fit it with pre-conceived political issues.

Many economists may be generally supportive of the EU and European co-operation, but the evidence from the Euro single currency is that it caused many economic problems of low growth, deflation and trade imbalances.

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World Financial Crisis AD/AS diagram


Readers Question: how to illustrate the world financial crisis by using the graphs of aggregate demand and aggregate supply? The financial crisis has essentially caused an unprecedented fall in aggregate demand. Aggregate demand has fallen because: Bank lending decreased due to the credit crisis and shortage of bank funds. The shortage of bank lending has …

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The Economics of Doping in Cycling

Apart from economics my big interest is in cycling. This weekend, I’m  doing the UK national hill climb championships, a short race up a steep hill in Ramsbottom (the Rake). First prize is a nice cloth cotton cap and a pat on the back. It is unlikely there will be any dope tests (though there are sometimes dope tests at national championships) because they are really expensive and the race is so low key, there isn’t the sponsorship money to pay for them.


However, across the pond, professional races, such as the Tour de France, are a little more well known than amateur UK races I compete in.

I’ve been following the Tour, ever since I’ve been interested in cycling in the early 1990s. I’m sure there was a time when I looked upon cycling with rosy spectacles and admired only the heroic efforts of riders battling through the mountains with nothing more than bread and water. But, alas the doping culture of professional cycling was so deeply embedded that revelations about EPO and other wonder products slowly seeped through – no matter how much you didn’t want to hear it.

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Why Are UK Retail Sales Increasing? (2008)

Readers Question: explain why two sectors of the UK economy are growing faster than other sectors ?

According to the Office of National Statistics for March 2008

  • Retail Sales Volume Seasonally Adjusted (2000=100) increased to 140.3 an annual growth rate of 4.7%
  • Manufacturing grew at only 0.9%
  • Services grew at 3.2%

latest statistics at ONS

I have to admit I was a little surprised to see retail sales increase at 4.7%. Anyway it seems that retail sales and the service sector are still doing much better than manufacturing and production. These are some potential reasons.

Exchange Rate. Against the dollar, at least, the Pound has been strong. This makes our exports more expensive reducing demand. Manufacturing goods are often exported so would explain weakness of manufacturing sector. Imported goods become cheaper so may boost sales on the high street.

  • However, the pound has been weak against the Euro, our main trading partner, so I doubt how important this factor is.

Interest rates. The Bank of England has cut interest rates to 5%. In theory this should boost spending because it makes borrowing cheaper. This would explain increased retail sales and services because consumers will have more spending power.

  • However, the cuts in base rates have often not been passed on by banks. The credit crisis has led to a tightening of lending restrictions. This is why I was a little surprised to see retail sales growing so strongly.

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