Savings or Consumption?

I came across this great video about savings and consumption today. This video highlights the importance of savings in the economy, despite the common conception that consumption may be a more important component of the economy. I was told in school that consumption was roughly 70% of the economy. Indeed, in Keynes' view, increasing consumption will increase growth via higher spending. Remember that AD = C + I + G + (X-I), where AD = aggregate demand, C = consumption, I = investment, G = government spending, X = exports, I = imports. If consumption increases, the left hand side of the equation, AD, increases. An increase in AD will increase economic growth, so the argument goes. 

But this 3 minute video actually argues the opposite. Savings are more important for the economy because it allows investment to grow and this helps increase production. In exams, the examiners are looking for a balanced argument. These alternative views are perfect to help you gain extra marks. 

You want to read this if you're considering studying Economics at university!

So I came across this interesting article recently reporting how a new economics curriculum will be taught at universities in London, Paris, New York, Boston, Budapest, Sydney and Bangalore. Apparently its a 'dismal science' that leaves students feeling 'disenchanted'. I hope you don't feel like that reading my blog! 

This article by the FT outlines how economic events have changed economics curricula over the years, from neoclassical to Keynesian to new Keynesian. Of course curricula must keep changing to adapt to events that make models obsolete, but a message to take away from this is that students are spending years learning models that are continuously changing, which makes it less enjoyable to study at degree level. Perhaps changing from abstract, mundane, incomprehensible maths will indeed make economics more accessible for young people. That's actually the whole reason why I started this blog! 

I'll end this post with the ending sentence of the article to provide my readers with some food for thought: 'The new thought is a return to the past: less maths and more history of economic thought might make for more enthusiastic and useful graduates.'

UPDATE: The state of the European economy

Recently, Europe’s economy has avoided appearing on many of our news screens what with other international affairs such as Russia/ Ukraine, Syria and Iraq in the headlines for probably my entire summer holidays. But that doesn't mean that the European economy is all hunky-dory and the recession is a thing of the past.

This post is an update of what is actually going on in Europe right now, giving you three key case studies: Italy, France and Germany.

Italy

·      Triple dip recession – GDP fell by 0.2% in the second quarter of 2014

·      12.6% unemployment rate

·      43% youth unemployment

·      Little political will to do anything about it

France

·      Rising budget deficit

·      Last quarter’s GDP growth: 0%!

·      Chance of going back into recession, was also 0% in the quarter before last

Germany

·      GDP fell 0.2% in the last quarter, the first GDP contraction this year

·      Manufacturing sector slow down

·      Geopolitics is affecting growth: Russia’s embargo on European food imports is apparently affecting 9.5m European farmers, and is affecting Germany’s trade

Key points to note about Europe right now:

·      Low inflation.

Average Euro Area: 0.4%

Deflation in 8 Eurozone countries including the PIGS (Portugal, Italy, Greece and Spain)

Country in Eurozone	Inflation rate
France	0.4%
Italy	-0.1%
Germany	0.8%
Spain	-0.5%
Greece	-0.3%
Portugal	0.4%

Why is this a problem?

·           Increases the real value of debt which means that government debt increases making it harder to pay off and increasing the likelihood of needing another bail out

·           Taxes will have to rise eventually to fund the increased debt accumulation which means businesses will have a higher tax burden à leaving some Eurozone countries

·           There is danger of falling into a deflation trap where prices just keep falling. This is called a deflation spiral.

·      High unemployment

·      High government debt

·      Political upheaval

·      Geopolitics with Russia

·      Lack of political union

Different countries in the Eurozone want different things and have different views with how situations should be handled, e.g. with Russia, which makes it hard to manage economic policy and introduce austerity measures where needed.

What can be done?

·           Keep interest rates low – increasing interest rates will just decrease inflation more

·           “Quantitative Easing lite”: the European Central bank buys assets to stimulate the economy and help inflation rise

Anything else?

·           Role of competition in markets:

o   There was a period of very low inflation during the late 19^th century in Germany and the UK

o   Analysis shows there was competition in markets and businesses operated in a competitive environment

o   Competition restricts wage growth because there are many companies in the same industry offering the same job and the same wage. This is happening now!!!

o   A competitive market means that firms are unwilling to increase the price of goods and services – preventing inflation from rising. This is happening now!!!

o   It is therefore hard to increase inflation. This is happening now!!!