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. 

UK and Foreign Capital

Last week it was reported that 53.2% of shares of UK-listed companies are foreign owned. This post sees globalisation rearing its head again, discussing further impacts of globalisation on the UK economy.

More than half of all shares in UK-listed companies are owned by foreigners which shows the UK’s greater integration with the global economy. One reason for this is that people in emerging economies such as China and India are investing more abroad as they become wealthier. Another reason for this is that foreigners tend to look for investment opportunities in other countries, particularly rich countries, as a safe place to put their money, thus their attraction to the UK.

An increase in foreign capital coming to the UK can help us reduce our current account deficit. Investment is a component of aggregate demand, and so increasing investment can increase demand and help reduce the effects of the financial crisis.

(Evaluation point: it could, however, be showing that many UK-listed companies are foreign and conduct little business in the UK)

One negative consequence of foreigners owning shares in UK companies is that board level decisions are more difficult to make because directors are scattered all around the world. This point is key as it links micro with macro, something examiners relish to find in top exam answers.

Deck the Halls with Macro Follies

Here's something to get you all into the Christmas spirit, economics style!

This is a video summing up the different economic schools of thought from Keynes, Malthus (less relevant), J. B Say (from Say's Law) and Hayek in playful song.

Its surprisingly enjoyable to listen to and is also a nice quick and dirty memory refresher for the key economics viewpoints. Here you go:

http://www.youtube.com/watch?v=7uKnd6IEiO0

About a year ago I posted up other playful videos from Econstories on Boom and Bust and Fight of the Century.

Quantitative Easing (QE)

QE causes a change in the money supply. Steps:

1. The Bank of England (BoE) purchases assets such as government bonds and corporate bonds
2. Pays for these assets by creating money electronically and crediting the accounts of the companies that it bought assets from
3. These accounts are called reserves. All banks hold reserves at the BoE and the essence of QE is that it builds up these reserves
4. QE is likely to lead to inflation because banks lend more and increases the money supply (see Quantity Theory of Money). Another reason for inflation is, holding everything else equal (ceteris paribus), more people have more money that they supposedly use for consumption, creating demand pull inflation

Explained by Stephanie Flanders

http://www.bbc.co.uk/news/business-16973560

Stephanie Flanders in the BBC’s economics editor, the link above provides a short video RSAnimate of QE. A summary of the video is as follows:

·         The Bank of England creates money and spends it so that there is “extra cash” flowing into the economy. They spend it by buying government bonds or IOU’s (formal definition: documentation confirming that the debt is owed) from financial institutions such as pension funds or insurance companies.

·         This puts more money into the economy (higher money supply) because these financial institutions that sold these bonds have more money to spend on new businesses or on housing for example.

·         Because of this, it is cheaper for the government to borrow as the BoE pushes up demand for the Treasury’s IOUs and supply of bonds has been reduced. Long term interest rates are lower than they should be making it cheaper for everyone else to borrow as well, because higher demand means more spending and this leads to faster growth.

The last point explains the theory WHY the government uses QE even with the risk of inflation, particularly during recessions. If demand rises, consumption may increase and the economy begins to recover. 

Fiscal Policy video

Paj Holden's video on fiscal policy is a great material for revision or learning fiscal policy from scratch.

Key points/summary of topics explained

Fiscal policy - manipulating government spending and taxation levels in order to manage the level of AD in the economy.

Definition of AD (C+I+G+X-M)

In a weak economy (low AD), the government might consider loosening fiscal policy - lower taxes (boost consumption) and increasing government spending. Disadvantage of loose fiscal policy, if spending becomes too high, deficits rise, creating problems, such as the Eurozone crisis.

Explains the Euro crisis

Business cycle and output gaps

Note: The AD/AS diagram he uses shows the Keynesian LRAS (notes to come!)

Case Study: Greece

---> GDP growth of -6.6%

---> Budget deficit (2009) was 15% of GDP. In 2010, it was 11% of GDP and in 2011 it was 8% as a result of increased taxes and lower government spending (austerity measures). However the Greek government is still spending 8% more than revenues gained from taxation. There is also interest gained from the additional spending, demonstrating the importance of their fiscal constraints.


Quantitative Easing

BBC Radio 4 - The World Tonight

'The World Tonight', a BBC Radio 4 programme, yesterday, touched on the UK economy, discussing the following:

• Slowing growth and rising unemployment
• The importance of moving the economy from services to manufacturing
• Case Study: Starbucks: increasing training opportunities, education in management, job creation and career pathing 
• Vicious circle: 
• Manufacturing declines à Training and development of people to go into this sector declines à Manufacturing declines further
• Euro sovereign debt crisis
• The look into the future in 2012

Listen from 0:11:40 to 0:28:00 for the programme on 20/12/11 on this link: BBC R4 The World Tonight

The Andrew Marr Show

This morning the Chancellor, George Osborne and the shadow Chancellor, Ed Balls, were on The Andrew Carr show talking about the economy and the government's fiscal position. The Chancellor outlines the new schemes that are being introduced to help small medium sized businesses and Britain's position in the Eurozone crisis.

Here is the link for BBC iplayer to watch it:

http://www.bbc.co.uk/programmes/b01803z5

Next week Nick Clegg is on the show, so for those of you who are still interested in what he has to say, watch the show next week as well. Alternatively, I will post up the iplayer link next week as well.

BBC programme called 'Your Money and How They Spend It'

There is a really good programme by the BBC's political editor, Nick Robinson. It concerns itself with the fiscal policy of the UK in the past and the future. It describes the government's decisions in the allocation of resources and how the government spends our money. The programme is on the link here and is broadcast every Wednesday at 9pm on BBC2.  The issues discussed include:

• Politics
• UK's budget
• Ageing population
• Winter fuel allowance
• Pensions
• NHS
• Financial crisis 2008
• Tuition fees
• Inequality
• Infrastructure spending

Please watch it, there are case studies that you can use in your exam and some statistics that, if you learn, will make your exam answers different than others. It is also useful to know about previous governments' fiscal policies. The extra knowledge that you will receive will definitely be beneficial.

Energy in the 21st Century - Commodity Markets

'Cheap resources underpinned economic growth for much of the 20th century. The 21st will be different'. http://www.mckinseyquarterly.com/A_new_era_for_commodities_2887?srid=520

Read the short article about the future for commodities to give you a better overview of the commodities market. You might need to register to read the full article, but if you don't want to register, I have posted up a summary below.

  · Research from McKinsey Quarterly shows that in the past eight years, prices have risen to levels not seen since the 1900s.

  · Price are very volatile – similar to that of the oil shock in the 1970s.

  · The future oil prices look set at remaining high and volatile because of two factors:

o Global supply is changing. If oil reserves begin to decline, prices will shoot up, until a factor such as new reserves being found, affects the price and they begin to drop.

o Inelastic supply. This means that OPEC for example, can charge high prices because they know that demand from Western countries particularly, will not decrease so much. To refresh your memory on elasticity, click here.

· Demand for energy, food, water and raw materials will rise exponentially as three billion new middle-class consumers will arise in the next 20 years.

o In India, calorie intake is predicted to rise by 20% within the next 20 years and per capita meat consumption is set to rise by 60%

o Demand for infrastructure will rise

  · Through the 20^th century, demand rose between 600-2000% for some commodities, however the reason prices did not rise so dramatically was due to improvements in exploration and extraction techniques enabling new reserves and sources to be found.

· Climate change and rising carbon emissions illustrates the rise in resource usage.

· For the future, outlook for supply increases in bleak because it is becoming harder to find new reserves of raw materials and freshwater in the short run.

o Supply is increasingly becoming inelastic in the future

o The marginal cost for resources is increasing as they are depleted faster and costs of extracting in unconventional methods/locations rise. For example, tar sands, the alternative to pure crude oil, requires separation from sand, using up more energy and water.

o In Uganda, water shortages have led to higher energy prices in a country already trying to develop. This has led to burning wood for energy à deforestation à soil degradation à food supplies fall.

·  A future solution includes trying to increase productivity from natural resources by, for example, improving mining recovery rates, making households more energy efficient (home insulation, solar panels…etc) and reusing wastewater.  

·  If you want to find out more, check out this live stream of the event ‘Resource Revolution: Meeting the World’s Energy, Water, Food and Material Needs’ that you catch watch on Thursday 24^th November through this link:

http://www.chathamhouse.org/livestream-mckinsey

Normal Good

A normal good is one where, as incomes rise, demand for the good rises. For example, my demand for clothes and shoes would rise if my income rose.

In contrast to a normal good, is an inferior good, where notes on that can be found here.

Buffer Stock Video

Hi everyone, so there is a great video on buffer stocks here, explaining clearly how the buffer stock scheme works.

Link here.

This guy is absolutely amazing, so do check out his other videos!

Inferior Good

A good whereby demand for the good decreases as income increases. It goes against the normal law of demand where increasing income should lead to higher demand. An example of this type of good is demand for public transport. As income rises, more people can afford to buy and use cars, thus demand for public transport should fall.

Seasonal Unemployment

A type of short term unemployment whereby fluctuations in climate affect demand for a good/service thus in turn affecting demand for labour. Industries affected include tourism, agriculture, catering building/construction...etc.

Also called casual unemployment

Conditions that affect Supply and Demand

Demand

These following conditions cause demand to fall and shift leftwards:

• Low prices of substitute goods (goods that perform the same function as each other and can be used as substitutes for one another, for example, a computer and a laptop). If substitute goods are cheaper, then demand for the original good will fall because consumers are buying the substitutes (assuming everything else remains constant – ceteris paribus).
• High prices of complementary goods (goods that are bought with each other, for example a printer and printer ink). If complementary goods are sold at high prices, consumers may decide the purchase is not worth it, ceteris paribus.
• Low personal income. This leads the household with lower disposable income for spending, therefore demand for goods and services may fall.
• Tastes and preferences for the good changes.

The reverse of these factors will cause demand to rise and shift rightwards.

Supply

The following factors cause (short run) supply to fall and shift leftwards:

• High costs of production
• Wage costs
• Rent prices
• Commodity/raw material costs
• Cost of borrowing (higher interest rates)
• Higher taxes
• Corporation tax
•  VAT
• Excise duties
• Lack of subsidies/grants

These factors can cause firms to leave the market, thus resulting in a fall of supply.

The opposite of the factors above can cause supply to increase and shift rightwards, along with the addition of technical progress.