King's EcBSt blog

50 economics ideas you need to know

2009-09-04T07:25:00.002+01:00

Edmund Conway, economics editor of the Telegraph, is serialising his book, 5o economics ideas you really need to know.

This is a great resource for students of economics. So far, the extracts cover the following central concepts in economics:

The 'Invisible Hand'
The Malthusian trap
Comparative advantage
Keynesianism
Monetarism

Click here to access the series.

A2 students should read Conway's account of the importance of comparative advantage and the criticisms of Rcardo's idea. AS students can get ahead of the game by taking a look at Conway's explanation of Adam Smith's great insight into the power of markets, the 'Invisible Hand'.

AS economics revision

2009-05-18T23:38:00.002+01:00

Here is a quick revision link on economic stability, courtesy of Economics Student:

http://rapidrevision.co.uk/economics-student/2009/05/10/economic-stability-as-a-macroeconomic-objective/

AS business studies revision

2009-05-18T23:22:00.004+01:00

Here are some links my AS business studies students might want to use in your final days of revision:

BUSS2 (Managing a Business) - revision checklist
BUSS2 (Managing a Business) - calculations and formulae
BUSS2 (Managing a Business) - help on evaluation

BUSS1 (Planning and Financing a Business) - key terms revision sheet
BUSS1 (Planning and Financing a Business) - evaluation questions

Hope these are of some help ...

Economic growth

2009-03-17T00:08:00.001Z

This presentation from Biz/ed will be of use to both Year 11 and Year 12 students who have been looking at economic growth in the past few weeks:

Publish at Scribd or explore others: Academic Work Business world development

Dear Ed

2009-02-28T19:47:00.008Z

It takes only a whiff of socialism to get Ed Longinotti (U6) into his chain mail and on his horse, lance at the ready.

Imagine his state of readiness reading this piece in The Times.

So here is Ed's letter to the Editor of The Times followed by my challenge (alternatively, you can now read Ed's letter on The Times website by clicking here):

Dear Sir,
Naomi Klein feels vindicated because ‘she did warn us’. Anyone with a basic understanding of free market economics and history could have warned us. A free market economy will always suffer from recession, as Joseph Schumpeter put it ‘they are the winds of creative destructive’ [I think Ed means 'creative destruction'], reallocating resources from inefficient to efficient firms. Such a process has been experienced in every free market economy, for example ‘tulipomania’ in 17th Century Amsterdam. To suggest that the current recession represents the collapse of the free market system is an unjustified leap; it is merely an integral process of the capitalist model. Klein asserts that any gap left by the apparent failure of free market economics must be filled by the left – or else fascism will ensue. However there is no alternative proven system to that of individual liberty and free market economics. The left has never been able to propose a practical alternative, as the experiences of the 20th century and the Soviet Union show. Indeed, socialism and fascism have strong connections, for socialism depends on the sort of collectivisation and centralisation of control that in the words of Adam Smith puts governments in a position where ‘to support themselves they are obliged to be tyrannical’. Socialism is not the path to freedom, for it is inherently authoritarian. Such criticism of this kind is not to be confused with dogmatic support for laissez faire economics, but is based on the concept that where individual competition can be created, it is a better way of guiding the allocation of efforts and resources than any other. It does not deny, but indeed emphasizes that for competition to work beneficially a carefully thought out legal framework is required – perhaps more carefully thought out than the current framework.
Yours faithfully,
E. Longinotti, King’s School Chester, Upper Sixth.

My challenge
Best response to Ed (starting 'Dear Ed') will be published on the blog.

Testing times for the euro

2009-02-28T17:48:00.006Z

Year 13 economics students have just under a fornight to wait before they get the results of their January synoptic exam. They spent much time getting to grips with whether membership of the euro area was in the long term interests of an economy and the sustainability of the euro. Year 11 students have also explored the pros and cons of the euro in their recent poster work.

The Telegraph has a useful article covering the trials and tribulations of the Irish economy, not long ago hailed as the Celtic Tiger, or the 'miracle' economy of the euro area. According to the article "Ireland's 'miracle' economy has turned terrifyingly sour - and as it strains against the inflexibility of the euro, its next crisis may shake the entire EU. "

Recommended reading for all economics students and for Year 11 GCSE students. Click here to access the article.

Sterling silver lining?

2009-02-28T17:06:00.011Z

Some of my Year 11 students are fully signed up members of Citreon C4 Picasso admirers club. My own Picasso won't be getting its second outing to its homeland this summer because of the collapse of sterling - the Waltons will be holidaying in the UK.

It seems that holiday companies Pontins and Butlins are banking on more of us doing the same. Pontins are investing £50 million in their UK holiday facilities after a 20% increase in summer bookings. And Butlins is moving up market, opening a 'boutique hotel' in Bognor Regis (boutique in Bognor?). Families planning a trip to Cornwall could be disappointed as many holiday cottages are reportedly fully booked. Good illustrations of the impact on business of changes in the exchange rate.

The collapse of serling (the trade-weighted index is down almost 25% from its peak in 2007) is also worth Year 12 economics students exploring. One of questions posed in recent lessons was the relative importance of each of the components of aggregate demand (AD). Inevitably, most attention focused on the importance of consumer expenditure. Such a dramatic fall in the exchange rate, though, can have a significant expansionary impact on AD. Economists have a rule of thumb that each 1% fall in the exchange rate has the same effect on the economy as 0.25% cut in interest rates. If this is right, the collapse of sterling is equivalent to a whopping 6% cut in interest rates. On top of the interest rate cuts announced by the Bank of England, the expansionary impact is incredible.

As the full effects of both the falls in sterling and the interest rate have yet to fully feed through to output, maybe there is a silver cloud on the horizon?

My challenge
What are the parallels between this story and the UK's exit from the Exchange Rate Mechanism (ERM) in the early 1990s?

No tight collar for TM Lewin

2009-02-23T20:19:00.006Z

It's refreshing to post some up-beat news for a change. Amidst the gloom of ailing and failing car manufacturers I found this piece in The Times uplifting. Its focus is very much for business students and is perfectly timed for the AS course.

TM Lewin, Jermyn Street shirtmaker, is thought to be due to report sales up around 20% since last February. It opened 11 new stores over the course of the year to boot. Why is it when the City boys are losing their jobs that sales of classic cotton shirts are on the up? The answer it appears is TM Lewin's promotional strategy of almost constant discounts - not what you would expect in a market in which quality is often judged by price. The company's best known discount is its offer of four shirts for £100. The result is that, on price, TM Lewin competes with M&S but still has the advantage of being perceived as being more up-market.

Watch out for my stripey red and blue number tomorrow - so cheered am I that I intend to get out the iron tonight!

Recommended site

2009-02-23T04:34:00.012Z

I can strongly recommend John Sloman's economics news site to AS and A2 students looking for a way of relating what they study in class to what is going on in the real world.

Yes, it is linked to his book and, yes, it is all part of the online promotion which seems to accompany textbooks these days. But it is well worth a look. It takes the form of a blog with entries that give links to news and articles. Each blog is followed by a series of questions. The search facility is good - I used it to find resources on the problems of interpreting GDP statistics for my Year 11 GCSE students. Unless you have Sloman's book, finding blogs linked to chapters is not likely to be useful.

We are currently reviewing textbook provision for sixth form students and Sloman's book is a contender - it is one we have used in the past with success.

Young Economist of the Year 2009

2009-02-22T13:56:00.004Z

Those of you putting together your essay for the Royal Economics Society's essay competition might like to read teh winning entry from last year.

It is available on the Tutor2u website or by clicking here.

Slumdog success

2009-02-21T22:52:00.007Z

Whether or not Slumdog Millionaire wins the Oscar for best picture, the story of the film's making should interest GCSE and AS students studying business. The film industry can generate box offices success, yes (Slumdog has so far netted £21 million) but the risks involved are huge.

The business story behind the glamour of the Oscars makes interesting reading and a good case study in entrepreneurship and raising finance for 'independent' films. Click to read more in today's Sunday Times.

What's it all costing?

2009-02-21T11:47:00.003Z

Today a group of influential Labour MPs call for another £20 billion of government injections into the economy to reduce the impact of the recession. They claim that, if implemented, their package of measures would ensure that 2009 became known as the year the recession bottomed out. The measures include a freeze on stamp duty on house purchases, a tax credit for those buying houses, an increase in the Job Seeker's Allowance and a reduction in capital gains tax on new investments.

But what is all this really costing? There are several ways of answering this question. According to the Office for National Satistics ONS), the effect of the bank bailouts has been to add between 70 and 100% of the nation's GDP to national debt. The recession itself has reduced the amount of tax collected from individuals and businesses by around £7 billion. Then there is the cost to the economy of the lost output due to falling demand.

Economists have a simple but useful concept to measure 'cost'. This concept measures not the financial costs but the cost of what is foregone - the opportunity cost. The graphic at the top of this blog shows what the money so far spent on bank bailouts could have bought had it been spent on alternatives. This helps us to make sense of the very big numbers which have appeared of late.

My Year 10 economics and business students will be looking at opportunity cost after they return from half term.

Useful weblinks

ONS announcement on the national debt

January's public finances release from the ONS

Stephanie Flanders on the cost of the bank bailouts

BBC video on the reduction in tax revenue

BBC article on the reduction in tax revenue

Tutor2u presentation of the impact of the recession on tax revenues

BBC graphics: the global downturn

Chance to be Chancellor

2009-02-19T15:24:00.004Z

Fancy a go at being Chancellor? Well now you can thanks to a competition being run by the Citizenship Foundation and The Times.

Here is what you have to do:

Students are provided with a list of ways (policies) in which public money can be spent on areas such as Environment, Health and Education. However, just like in the ‘real world’, they can’t pick them all. Students will need to prioritise the policies that they think are most important, making compromises where necessary, and then justify their choices by writing the Chancellor’s speech. Once they’ve made their choices, students will need to write a speech of between 500-1000 words to explain to the country what they will be spending their money on, and why. Students will need to express their opinions clearly in writing and be persuasive in their arguments. They’ve got a whole country to convince!

Contact SDW if you are interested in taking part - the competition is open to all students aged 14 - 19. Closing date for entries is 31 March 2009.

Further information

Chance to be Chancellor website

Competition pack

Briefing information on the Budget and the economy

What IS happening to prices?

2009-02-19T13:02:00.007Z

During the Great Depression prices in the US fell by 10% a year from 1930 - 33. Fears of deflation are obviously weighing heavily in the minds of the Bank of England's MPC (see 'Turn on the printing press' below) But what exactly IS happening to prices in the UK.

On the government's preferred measure of prices (the Consumer Price Index - CPI), prices were UP 3.0% last month compared to January 2007. So what is all the fuss about deflation? Part of the problem is that whilst the CPI shows prices rising the comparisonn is with the same period last year. So prices may be falling but they may still be higher than last January. The expectation is that by the middle of the year CPI will be showing more of the trend that worries the Bank of England.

An alternative measure of prices, the RPI (Retail Price Index), shows prices last month only 0.1% higher than last January. But the RPI includes a measure of mortage interest payments which are falling due to lower interest rates and falling house prices. The correction in house prices is probably in itself desirable. Asset price bubbles as they are known (over-inflated house prices for eaxmple) tend to devote scarce resources away from their most productive uses - a little less obsession with property prices would not be a bad thing. The house price bubble of the last decade is, after all, why we are where we are today and what led to 'creative' banking practices at the root of the credit crunch.

Prices, then, may not be falling and inflation may still be above the Bank of England's target rate of 2%. But, as we have seen, economic indicators can turn on the head of a pin.

Watch this space ...

Useful weblinks

Spectre of deflation haunts Britain (Independent)

Turn on the printing press

2009-02-19T09:35:00.009Z

The latest minutes of the Bank of England's Monetary Policy Committee (MPC) recorded a unanimous vote in favour of the Bank requesting premission from the Chancellor of the Exchequer to turn on the priniting presses and print more money. In an unprecented move the Governor of the Bank of England is expected to write to Alistair Darling within the next few days.

There has been much about 'quantitative easing' on this blog and in lessons (thanks to Rex Harrison). Here are just t a couple of links which economics students may find useful.

At the end of 2007 while writing a chapter on macroeconomic performance for the new OCR A2 economics textbook, I remember opening to a Study Tip with the words "you live in interesting times" - little did I know HOW interesting times would become!

Useful weblinks

Bank to request permission to print (Independent)

Stephanie Flanders on quantitative easing

Times graphic explaining quantatative easing

Guardian Q&A on quantative easing

Too high, too low - but not 'just right'

2009-02-18T01:30:00.009Z

The rate of inflation in the UK is falling, whichever measure you look at. According to the latest CPI (Consumer Price Index) inflation was down to 3% last month. On the RPI (Retail Price Index) measure it was close to zero.

In the current climate monetary policy is being driven by a fear of deflation - falling prices. Listen to Stephanie Flanders report on the Bank of England's fears here.

Yet some believe that the slashing of interest rates is stoking up an inflationary problem for 2011. All of this uncertainty means that the period of price stability ushered in by the granting of operational independence to the Bank of England is over. It is anyone's guess whether prices will actually fall (deflation) or whether prices will rise (inflation) dramatically in 18 - 24 months time. According to Stephanie Flanders, the Goldilocks economy (where prices are 'just right') is a thing of the past. This makes things very tricky for the Bank of England ...

My challenge to Yr 12 economics students

Why are there different measures of inflation and does it matter?

Old or new romantic?

2009-02-17T23:05:00.008Z

Economic's claim to be a science is rooted in the 'marginal revolution' of the 19th century. Economic agents were thought to act rationally, seeking to maximise their gain from consumption and production and acting independently of each other. The neatness of such rationality was that economic theories could be developed with the tools of mathematics. As time passed, economic theories became more mathematically elegant and testable by their predictions.

This was all very different to the era of the Romantics in the 18th century which inspired music, literature and the arts. Yet a new book, The Romantic Economist, argues that we have much to learn from the likes of Byron and Wordsworth. Economics is as much an art as a science, if not more so.

The Romantic Economist is reviewed by Larry Elliot in Monday's Guardian here. I will make sure that there are copies available in the library after half term.

My challenge

For those thinking of applications to Oxbridge for PPE / economics consider whether economics is an art or a science. We will meet up during the second half of term to discuss. Prepare by reading The Romantic Economist and books / articles in the library on the methodology of economics.

Growth and development

2009-02-10T00:06:00.010Z

It hardly seems like the time to be critical of economic growth! Most commentary on the global economy takes for granted that it would be quite nice to have a little growth at the moment. For with growth comes jobs, with jobs comes income and with income comes a higher standard of living.

But is economic growth the be all and end all of economic policy? My Year 13 economists are beginning to question whether economic growth necessarily implies development in the early stages of their final A2 module on development economics. I'll get around to looking at their first thoughts when I mark their blog task challenge based on the recent news about tyhe activities of a UK multinational mining company in India. Not long either before the same sorts of questions are posed to Year 11 economics and business students.

Both year groups will find the following link to a great resource on the BBC website useful. It provides a walk through of the United Nation's Millenium Development Goals (MDGs) and is accessible to all students.

My challenge to Year 11 students

To what extent has China's recent impressive economic growth been desirable?

Latte lessons

2009-02-09T12:03:00.010Z

My Year 12 economics classes are now well into their weekly 'latte lesson'. The concept is simple - each Friday morning is a break from the monotony of the specification and a chance to explore something economic that takes the students' fancy. Oh, and the drinks, biscuits, homemade brownies and chocolate tea cakes the presenter must supply!

The result? Some fantastic research, presentations and discussions so far on the Japanese economy and Zimbabwe. And a couple of inches on my waist line too!

Rex Harrison was spurred on to research Japanese economic performance in the 1990s in order to draw lessons about the current economic downturn and the appropriate policy responses. Rex's explanation of quantitative easing was masterly - who will forget his matchstick bankers? I will make his presentation available on the VLE for everyone to download.

In the meantime, as interest rates in the UK fall to 1%, the likelihood of 'quantitative easing' grows stronger. Year 12 students might be interested in this interactive guide to quantitative easing from the FT as a follow up to Rex's presentation. I think the FT may have borrowed the idea from Rex!

Protests over mining

2009-01-29T00:58:00.004Z

This story is perfectly timed for my Year 13 students as they start their final A2 module. I doubt that many of them spotted this on Tuesday night - they may have been doing some revision for their synoptic module (or I hope they were!).

According to this BBC report, 10,000 people encircled the Niyamgiri hills in Orissa to protest at the ruling of India's Supreme court to allow a UK based firm to begin mining bauxite in the hills. Local tribes view the hills as sacred and mining activities clearly threaten their culture and way of life. Vedanta argues the extraction of bauxite will earn valuable export revenue, generate jobs and increase the standard of living for local people and that such natural resource endowments provide the key to economic development in the area.

Campaigners on the other hand argue that "India's rush to development should not come at the expense of traditional and sustainable ways of life of tribal and marginalised people".

There are lots of issues in this story which we will explore over the coming months including:

the meaning of development;
the charactreristics of developing countries;
the role of multinationals;
sustainable development.

My challenge to Year 13 students
Best response to the two questions below by the end of this week
1. What is the difference between economic growth and development?
2. To what extent are global patterns of trade determined by countries' resource endowments?

Is there a future for the UK steel industry?

2009-01-27T20:51:00.007Z

The Independent makes this its Big Question for the day after Corus announced it was laying off 3,500 workers, 2,000 of them in the UK.

The demand for steel is a textbook example of 'derived demand' - steel is demanded primarily by the car manufacturing and construction industries, so falling demand in these sectors has reduced the demand for steel. In turn this has created excess supply in the industry and over-capacity. The response is to cut jobs. Whether these jobs are lost permanently depends upon a number of factors. An eventual upturn in demand should ensure a revival of output (hence why Corus has mothballed production facilities rather than closed them). However, strong competition from China may mean that production of steel in the UK and the rest of Europe is simply too costly - despite the huge gains in labour productivity in the last twenty years.

The Independent's coverage of the big steel question is excellent and well worth reading

My challenge to Year 10 students

What is meant by labour productivity?

Click on the chart at the top right of this blog and tell me by how much productivity in the UK steel industry has increased since 1988.

Is your essay worth £1000?

2009-01-27T14:57:00.004Z

The Royal Economics Society's essay competition for A Level economists offers £1000 for the best essay from an A Level student (£500 for the second best).

The 2009 essay title is certainly topical:

'Are economic recessions inevitable?'

Anyone interested in entering the competition should see SDW for further details as soon as possible.

Spotting the green shoots

2009-01-27T14:32:00.004Z

With the recession only just officially confirmed, it is way too early to be talking about the 'green shoots of recovery'.

But what will these shoots look like and how do we spot them when they emerge?

This short BBC video interview with four economists helps to understand the signs. It is likely to be a long time before we spot them though.

Recession tracker

2009-01-27T10:01:00.005Z

The word 'tracker' raises my blood pressure - a series of blunders by my mortage broker resulted in me moving from a 'tracker' mortage to a fixed rate mortage some 5 months ago. The dramatic decrease in interest rates since then is having little impact on the family finances!

That aside, the BBC's 'recession tracker' is a great resource for economics and business students. It gives the latest data and news on GDP, unemployment, interest rates, house prices and repossessions on a single page.

Check it out here.

Impact of exchange rates on business

2009-01-26T22:14:00.007Z

My Year 11 GCSE students have had a quick introduction to exchange rates in today's lesson. Tomorrow we will be considering the importance of exchange rates to business. A great illustration of the problems created by changes in exchange rates is to be found in today's news, with British Airways experiencing rising costs due to the fall in the value of sterling on foreign exchange markets.

Click here to read the short BBC article about the impact of the exchange rate on BA's costs.

Other useful weblinks

Robert Peston on the impact of the weak pound on retailers such as Next

Latest on the falling pound

The New Capitalism

2009-01-17T19:41:00.005Z

Robert Peston is undoubtedly the face of reporting when it comes to the events of the last three months. He has led with 'scoops' (some have said inside information) of troubles in the financial sector and definitely been one step ahead of the story.

His analysis of what went wrong and what the future of capitalism holds is well worth sixth form students of economics reading. You can read what he has to say here and you might want to follow his blog (if you aren't already) by clicking here.

Microsoft in the dock ... again

2009-01-17T01:36:00.003Z

Year 11 students have just completed work on monopolies and the role of the competition authorities. The behaviour of Microsoft was raised more than once! 'Bundling' has been an issue that has vexed competition authorities in the EU and the US - giving away products free with Microsoft's operating system. The argument has been that Microsoft has restricted competition unfairly by given away products for free as part of Windows - taking advantage of its monopoly of operating systems.

Think about what you are using to read this blog. My bet is that most of you, like me, are using Explorer. Why are you using it? Because it's free and it came with your PC. Now think about other firms producing brower products. How do you compete against a free product? How do you break into this market?

The EU competition commission has reached a prelimary conclusion to these
questions:

Microsoft's tying of Internet Explorer to the Windows operating system harms competition between web browsers, undermines product innovation and ultimately reduces consumer choice

Leam more about this breaking story by clicking here.

Third runway for Heathrow

2009-01-14T22:51:00.004Z

Year 13 economists have a field day on transport economics this week. This Friday they are lucky enough to have Alex Hynes, the Commercial Director for London Midland come in to give a presentation on the rail industry. Very timely given the January module examination!

Tonight the BBC breaks the news that the Government has given the go-ahead for a thrid runway at Heathrow airport. Lots of relevant issues here for students to mull over as a way of revising some of the key bits of the specification - environment, sustainability, externalities, cost-benefit analysis to name but a few.

Well worth reading more on this.

Useful weblink

Heathrow runway 'gets go-ahead'

Busy time for administrators

2009-01-10T00:58:00.008Z

A quick blog entry for Year 10 students.

Now I know that none of you ever nod off in lessons, you all regularly read the quality press and you all believe in Father Christmas - even if he didn't bring YOU an iPhone. So, I'm guessing that you will have all heard about firms going into 'administration'.

My groups are nearing the end of Unit 1, Enquiry 4 of the GCSE course in which we have been considering how business success might be measured. Enquiry 5 considers reasons for business failure and what happens when firms fail.

You might find this link useful in explaining what administrators actually do. It would make good reading in advance of us considering business failure.

Fed accused of 'drink driving'

2009-01-10T00:38:00.006Z

Former Vice President and Chief Economist of the World Bank (and Nobel Prize winner for economics) accuses the US Federal Reserve of behaving like a drunk driver over its conduct of monetary policy.

In an interesting article in the Guardian, Joseph Stiglitz shifts attention from the symptons of the global economic downturn to the causes. Stiglitz argues that the current economic crisis is part of the "unwinding of 'global imbalances'". He calls for long term solutions to these imbalances and offers three solutions:

First, we need to reverse the worrying trends of growing inequality.
Second, the world needs enormous investments if it is to respond to the challenges of global warming.
Third, a global reserve system is needed. It makes little sense for the world's poorest countries to lend money to the richest at low interest rates.

Who and what next?

2009-01-08T20:08:00.006Z

'Cheers' to Charles Barry (U6) for his blog entry (see below). Anyone else want to join us?

1,200 job losses announced by M&S. Another 1,200 jobs lost at Nissan, Sunderland, the UK's most productive car plant. My Year 10 group may be quizzing me tomorrow, after today's discussion of the importance of productivity - guess which car manufacturing plant we were looking at?

Britain's oldest name in the clothing industry, Viyella, goes into administration (or at least part of the business does). The Sofa Workshop is on the brink of administration. Who is next? The impact of the recession deepens by the week - by the day would not be an exaggeration.

And UK interest rates come down to their lowest level since the Bank of England was founded in 1694. As Charles has explained there is a limit to how far interest rates can fall. With 0.5 percentage points knocked off the base rate today, the UK is now reaching this limit. What next? Will we see 'quantitative easing' and deliberate 'printing' of money to prevent the UK entering a period of deflation? Maybe. When the very politicians that gave the Bank of England its operational independence just over 10 years ago start talking about having a say in monetary policy you know that you are living in historic times. I first started to study economics at the height of 'monetarism' - a theory (actually more than that, as it provided the bedrock to a whole new political philosophy - Thatcherism) which urged governments to restrict the growth of the money supply. For an independent central bank to be contemplating deliberate expansion of the money supply is an even bigger shock than the return to fashion of Keynesian demand management.

What intrigues me about this is the battle for control over monetary policy which I suspect will grow over the coming months. Alistair Darling is effectively saying that responsibility for monetary policy decisions will now revert back to politicians. As an economist this scares me, but it doesn't surprise me. Monetary policy decisions made for political reasons are apt to destablise rather than stabilise the economy. And there is now talk of a further boost to government spending too. Economists don't always agree about appropriate policy responses, but at least the debate can be rational and objective. I know who I would want with their hands on the tiller.

Useful weblinks

Darling wants say on 'quantitative easing'

Economy may need a second cash boost

Bank cuts interest rate to 1.5%

"Quantitative Easing" - A way forward?

2008-12-20T00:44:00.008Z

About roughly a month ago, I asked Mr Walton that perhaps, with the threat of deflation looming, the best thing for the Bank of England to do would be to print more money. My thinking was that by printing more money, the government would be literally shoving more money into the economy, which would in turn stem off deflation and potentially help to self-right the economy.

Sadly, as it was the end of period 3, Mr Walton gave me one of those looks which said "I really want to go and have a cup of tea", quickly mumbled "Yes" and made a sharpish exit from the room.

Now, without wishing to sound like I am the new prophet of the credit crunch or anything, looking at the papers now, my prediction seems to have come true.

Only 4 days ago the Open Market Committee of the US Federal Reserve (the American equivalent to the Monetary Policy Committee) announced its intention to start buying mortgage-backed securities (the supposed 'dodgy debt' that caused the credit crunch in the first place). Where would the money for this come from? The short answer: nowhere. The Federal Reserve will simply create money, electronically or through printing, to use to buy this 'toxic debt'.

Now, the upside for this is obvious: by putting money straight into the economy through such purchases, there are strong cash injections into the economy. Best of all, the government gets to do this for free. This will improve liquidity, allowing banks to start lending and business thus to start investing. It will reduce the cost of borrowing, allowing consumers and business alike more breathing space, reducing any potential falls in GDP and increases in unemployment.

You might start to wonder, however - since this is all so good, why don't we do it all the time? Well, as the saying goes, there's no such thing as a free lunch. The main danger with printing more money is that it has a strong inflationary pressure upon the economy. Milton Friedman won the Nobel Prize for Economics in 1976 for, amongst other things, the simple equation:

MV=PQ

Where M is the Money Supply, V is the speed at which money circulates through the economy, P is the price level (ie the level of inflation) and Q is the real economic output. Increasing the supply of money, by printing more of it, will increase inflation and/or GDP growth.

This effect can be so extraordinary that in Zimbabwe, where the government has been printing money for years, the economy suffers Hyperinflation. This is the rather comical situation where inflation reaches levels that devalue the currency so much that the economy cannot function properly. The official inflation level in Zimbabwe is 231,000,000%, meaning that when the $100 billion dollar note was introduced last October, it was only worth 8p.

However, inflation is not our main concern. We are currently experiencing a demand side slump in the world economy. Demand side slumps, or falls in the Aggregate Demand of the economy lead to higher unemployment, lower inflation (or possibly deflation) and falling economic output. The threat is actually from the pessimistic and demoralised economic situation that deflation can cause, and the economic depression that may result from the declines in consumer spending and reductions in employment levels of recent times.

Overall then, printing more money is potentially the only way forward. We are nearing the end of the usefulness of interest rates as a means of controlling the economy. In fact, low interest rates, as seen in Japan in the 1990s, may prove counter-productive (though something called "The Liquidity Trap" - where returns are so low that investment in anything is severely discouraged and people simply hoard money). In the short run, printing money may prove to be the most useful tool available to the government. But even in the medium term, it must avoid using it as a "magic bullet", a fix-all cure, and must know when to stop.

Otherwise we could leave the recession to find ourselves waking up to a inflationary crisis in 5 years time.

Further Info:

Forget Hard Choices. We need pampering - Anatole Kaletsky, The Times.
Press Release of 16th December - The Board of Governors of the Federal Reserve
Federal Reserve slashes Interest Rates to zero - Larry Elliot and Ashley Seager, The Guardian
Deflation: Making sure it doesn't happen here - Ben Bernanke, Governor, US Federal Reserve

What is deflation?

2008-11-28T21:56:00.006Z

Completely out of the blue, someone in my Year 12 economics set asked me what deflation is. Apparently, there had been some discussion of this in a politics lesson and it was throught a good idea to refer the question to the economists! How wise. Best not to trust the politicians when it comes to anything to do with prices.

All the talk for the last 10 years has been about bearing down on INFLATION - the sustained increase in the general level of prices. So, why should DEFLATION matter?

Deflation is a sustained decrease in the general level of prices. 'Great', you may say. If things are getting cheaper then surely that must be good news? Well, no. If prices are continuously falling, what's the point of buying now when you can wait for prices to drop even further? If we all think like this, then spending will drop. If spending drops, overall demand drops. As demand drops that affects output. If output falls, that means jobs are lost. Defaltion matters because it causes us to hang on to our money rather than spend it and that means prolonged recession.

My challenge

A reward for the best account of the problems of deflation with an illustration from the recent economic performance of Japan.

Useful weblinks

Article in the Independent

Reuters guide to deflation

New GCSE - details for students and parents

2008-11-20T01:52:00.003Z

From September 2009 the economics and business department will offer a new business studies and economics GCSE.

The GCSE, taught over 2 years, will allow students to engage actively in the study of both subjects and will develop skills such as building arguments and making informed judgements. Students will be encouraged to adopt a critical approach to the subjects, and appreciate different perspectives on business and economics issues.

The course is modular. Students will be assessed at various points throughout the two years and will be able to ‘bank’ their results or re-sit depending on their performance.

The course provides an excellent introduction to both business studies and economics and provides a rigorous preparation for the study of either or both subjects at A Level.

The first unit of the course provides an introduction to small business and focuses on the issues involved in setting up a business. It involves the study of entrepreneurs, how business ideas are put into practice, how business start-ups can be made effective and the economic environment in which businesses operate. It is examined by multiple-choice and objective test questions and can be sat online. Students will sit this exam at the end of Year 10 (the fourth form). This exam makes up 25% of their GCSE.

The second unit allows students to investigate a small business of their own choosing under controlled conditions in the classroom. Students are allowed six hours of research time and three hours of writing time. They are given a choice of five tasks:

Task 1: What are the most important qualities that an entrepreneur needs to possess, in order to start up and run a business successfully?

Task 2: What is the most important way in which a business you have chosen competes with its rivals?

Task 3: What is the most important way in which a business you have chosen motivates its workers?

Task 4: What is the most important element of the marketing mix to a business you have chosen?

Task 5: To what extent have recent changes in interest rates affected the business you have chosen to investigate?

This unit is marked internally and moderated by the exam board and makes up 25% of the total GCSE mark. It can be done in Year 10 (fourth form) but is more likely to be done in Year 11 (fifth form).

The final unit of the GCSE focuses entirely on economics and involves the study of a wide range of economic issues, including how markets work, international trade and exchange rates, monopoly power, how the economy is managed by governments and central banks, and debates related to economic growth, the environment and global inequality. The exam makes up 50% of the total GCSE mark and is a mixture of multiple-choice, short- and extended- answers and data response questions. Students will sit the exam at the end of Year 11 (fifth form).

Students and parents wanting to find out more about the new GCSE in business studies and economics may find these online documents useful:

The specification
Sample question papers
Student guide – page 1 and page 2
e-spec and guide

The economics and business department will be producing its own short guide to the new GCSE course shortly along with an outline scheme of work for each of the two years of the course.

When down is up

2008-11-03T20:45:00.008Z

My Year 11 groups are looking at the management of the economy this week and have been asked to assess the effectiveness of fiscal and monetary policy in stimulating demand in the economy. Quite a big question, since that is exactly the one which is exercising the likes of Gordon Brown, Alistair Darling and Mervyn King.

Today we got to the point where we had traced through the impact of lower interest rates on the economy - the monetary transmission mechanism. OK, so that makes it all very simple we thought. That should mean that the Fed's latest interest rate cut (which brings US interest rates down to 1%) and the much anticipated cut in the Bank of England's Base Rate (some think as much as 1% will be lopped off the Base Rate) should give a welcome boost to demand.

But these cuts in interest rates just aren't getting through to households and firms who. in some cases, are paying higher interest rates than they have done in the past. So why when the Base Rate of interest is coming down are market rates of interest going up?

The answer lies in our attitude to risk. Lending money to anyone is now much riskier than it has been. So the rate at which banks lend to each other has risen (so-called interbank rates) and the rates they offer to savers has gone up to try to plug the hole in the bank's balance sheets. Look at the chart at the top of this post to see what is going on. Down really does mean up.

Watch this space as the Bank of England decides what should happen to UK interest rates this Thursday. In the meantime you might like to read some of the recent articles listed below.

Useful weblinks

Robert Peston's recent blog post on interest rates

US interest rate cuts

Bank of England may cut Base Rate by 1% point

It's all a beauty contest ... and the winner is ...?

2008-10-27T20:03:00.000Z

John Maynard Keynes introduced the concept in his book, The General Theory of Employment, Interest and Money, in 1936. It goes something like this. The stock market behaves like a beauty contest in which people are asked to select the six faces they like most from a selection of around 100. Those picking the most popular face are entered into a prize draw to win a fantastic prize. How do you go about maximising your chances of being in the prize draw. According to Keynes, you don't choose what to you is the prettiest face:

"It is not a case of choosing those [faces] which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest.We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there aresome, I believe, who practisethefourth, fifth and higher degrees."

And so it is with the stock market. Or housing markets. Investors would be prepared to pay more for something that it is worth if they believe that others will pay even more for it in the future. And so you get bubbles in these markets which grow and grow, even if the fundamentals don't justify the high prices being paid. But bubbles burst and when they do, the rational thing to do is to keep selling whilst you believe that everyone else believes that prices will continue to fall. In short, what we have experienced over the last month or so is a classic failure of markets to value assets at their correct value.

Inevitably at this time, there is a more traditional beauty contest playing itself out. The contestants are flaunting their ideas for how best to rescue the economy from the downturn which we now know officially is under way. Alistair Darling thinks the solution, in part, is to bring forward public expenditure plans. A group of 16 economists writing in yesterday's Sunday Telegraph think not - best to rely on interest rate cuts, they say.

So, my question is 'who wins the economists' beauty contest (who is right) and why'? Usual rewards on offer ...

Useful weblinks

Stephen King's' article on the Keynesian beauty contest in today's Independent.

BBC report on the 16 economists disagreeing with Darling.

The letter itself

Roger Bootle's seven point summary of Keynesian economics in today's Telegraph

Beauty Expectations - online beauty contest game

It's official - GDP on the decline

2008-10-24T11:56:00.000+01:00

Official figures released by the Office of National Statistics show that GDP declined by 0.5% in the third quarter of 2008 (July to September). This is a bigger fall in output than had been expected and the biggest fall in economic growth since 1990.

The BBC is running a day long coverage of the downturn which you can access here (or you could turn on your TV and tune in to the BBC News Channel). A running commentary is also available here.

Enjoy!

New international debt crisis looming?

2008-10-23T11:05:00.000+01:00

A new and worrying twist to the global financial crisis emerges today.

If we didn't know it already, the lesson of the past few months is that we can't go on living beyond our means. What applies to individuals also applies to countries who import more than they export. The difference between what a country earns (its export revenue) and what it spends abroad (its import bill) has to be paid for. This difference is known as a current account deficit on the balance of payments. Countries bridge this gap by attracting flows of money, measured on the capital account of the balance of payments. These flows take many different forms - foreign direct investment and private and public sector borrowing. All very well if those providing the capital carry on doing so or don't want it back in a hurry. Not so good if this source of long-term capital dries up or the investors want their money back.

Just as a loss of confidence in the banking system causes individuals to withdraw their cash (a run on the banking system), a loss of confidence in a country's ability to repay its 'debts' causes a run on the currency. Capital flight, as it is called, can send a currency into free fall and countries going cap in hand to the International Monetary Fund (IMF).

So much for the theory. It's happening. According to the BBC's business reporter, Robert Peston:
Queuing up for the intensive care ward are Iceland, Hungary, Pakistan, Ukraine and Belarus, all of which are in discussions about accessing special loans from the International Monetary Fund, the emergency medical service for the global economy.
But there has also been a substantial withdrawal of capital from South Africa, Argentina and - most worrying of all - South Korea.

South Korea's balance between its exports and imports (its balance of trade) is much healthier than the UK's and they are not nearly so dependent on financial services as a source of export revenue. Sterling is falling on the foreign exchange markets. Is this the start of a new international debt crisis? Will the UK be next in the queue at the door of the IMF?

Read Robert Peston's excellent blog here.

The 'R' word

2008-10-22T14:56:00.000+01:00

The National Institute of Economic and Social Research says its likely. The Governor of the Bank of England agrees. Gordon Brown acknowleges it at Prime Minister's questions today.

The UK economy is on the brink of recession.

GDP data for the third quarter of 2008 is published on Friday. It is widely believed that this will show UK output fell in the last three months. Also widely expected are revisions to the data for the second quarter which will show that the economy's output fell from April to June. That will be two successive quarters of negative economic growth and an end to the matter - recession will be official.

Brace yourself for a BBC day long special on Friday. Apparently, the decks have been cleared and the journalists dispatched.

Who's the discount Daddy?

2008-10-22T05:52:00.000+01:00

The focus of our Year 11 economics and business lessons this week has been on business survival startegies in a recession. Discussion inevitably turned to price cutting and to the 'war' amongst supermarkets to attract the value conscious consumer. With annual food price inflation running at over 14% the big four supermarkets are keen to prevent their customers rushing to the big discounters like Aldi and Lidl. In one month alone (July), Aldi's sales increased by 44% as households strapped for cash sought to reduce their weekly shopping biils. Sales at Aldi are 25% up over the year and their market share is growing at the expense of the bif four - Tesco, Asda, Sainsbury and Morrisons.

So, it is no wonder the big four have fought back. Whilst my Year 11 groups raised the importance of cost-cutting, they recognised the even greater importance of cost-effective and targetted promotion during a recession. Students identified Tesco's latest claim to be 'Britain's biggest discounter' as evidence of this trend.

The extent of this promotion can be found in a fascinating article in the Independent from 22 September:

Last week, Tesco launched a major national press campaign to position itself as "Britain's biggest discounter". It booked every full-colour ad slot in the first 20 pages of all the popular and mid-market papers on Wednesday, a real advertising extravaganza and a great example of the power of print advertising.

Except that Tesco's campaign was hijacked by arch-rival, Asda. Having got wind of the Tesco blitz, which media buyers estimated would have cost the supermarket chain around £450,000, Asda booked its own full-page colour ads to run in the same papers on the same day, claiming that Asda sells 3,457 products cheaper than Tesco. Ouch.

This article is well worth reading in full - click here.

Year 11 'thinking skills' were at the fore when one student questioned how retailers such as Waitrose coped in a recession. Would they be forced to follow suit and abandon their business model based on selling quality food at high prices? How could they hope to regain this position in the future if they responded to changing market conditions by discounting?

These were exactly the questions Declan Curry posed to the MD of Waitrose last Friday when he appeared as the special guest on Working Lunch. If you are quick you can still catch the interview on BBC iPlayer by clicking here - the first six minutes and then the main interview 20 minutes in.

I just want to say to my Year 11 group how well I thought they ended a long and tiring first half of term. The demands of coursework investigations and the routine of past paper questions hasn't dulled your brains and your assessment of the strategies we raised was first rate.

No questions in this post (it's half term after all!) - just an encouragement to extend your learning by following up the three links I have given.
Commendations for the best comments to the issues raised as an incentive!

It isn't official ... yet

2008-10-20T13:40:00.000+01:00

This week is the week that attention ought to be focused on the wider economy. Data on economic growth in the third quarter of 2008 is widely expected to indicate that the UK economy is entering recession. Last month the British Chamber of Commerce nailed its colours to the mast and announced that a survey of its members showed output falling. This morning the Ernst and Young Item Club, who use the same forecasting model as the Treasury, have declared that the economy is already in recession. So, watch this space - after you have watched this video clip from the BBC. There will be no prizes if official data confirms what most economists, businesses and the increasing number of unemployed already know.

Fresh from devising bank rescue plans, Alistair Darling (Chancellor of the Exchequer) has announced that key government expenditure plans will be brought forward in an attempt to inject extra spending into the economy. The implications for government borrowing will be significant, not least because they come at a time of record borrowing by the government - see this article on the BBC website.

Quick questions for Year 10 economics and business students (post your answers as a comment to this blog) - commendations for all those with a correct set of answers!

1. What is the official definition of a recession?

2. What is the name for the use of government expenditure and taxation to regulate the econmic cycle?

3. What are the four stages of the economic cycle?

Longer question for sixth form economists (post your asnwer as a comment to this blog)

1. What are the drawbacks of using government expenditure and taxation to regulate the economic cycle?

All hands on the interest rate lever

2008-10-18T21:46:00.000+01:00

When this blog was running on the department's VLE, a week didn't go by without some reference to the dilemmas facing the Bank Of Engalnd's Monetary Policy Committee (MPC). At that time the tension was between keeping interest rates unchanged to keep inflationary pressures under control and bringing them down to anticipate a feared slowdown in economic growth.

All that seems a long time ago now! The crises in the financial markets have dominated thinking - Paulson plans, rescue packages, nationalisations and falling stock markets to name but a few debates raging. Last week's 0.5% co-ordinated cut in interest rates by the Bank of England the Federal Reserve and others didn't get the attention it might otherwise have got in more 'normal' times.

However, the global slowdown now gives central banks greater freedom to act to loosen monetary policy. Oil prices have fallen and so too have commodity prices. The inflationary pressures that concerned central bankers at the beginning of the year are receeding.

And so, some economists are now predicting historically low interest rates by the end of 2008. Roger Bootle, interviewed on Radio 4's Money Box programme, has predicted that interest rates might fall as much as 1% by Christmas and be down as low as 2% by next spring. If they did fall this low it would be the lowest interest rates have been since the creation of the Bank of England in 1694.

Forecasts are just that, forecasts. What is more important than whether interest will fall is what impact falling interest rates will have on the economy. Will lower interest rates stimulate spending and growth and can governments rely oon monetary policy alone to fend off a recession?

Two quick questions (give your answers via a comment to this blog)

1. Under what circumstances might reductions in the Bank of Engalnd's interest rate have little impact on the overall level of spending in the economy?

2. What is the 'liquidity trap' and with which British economist is this concept most closely associated?

Welcome

2008-10-18T11:24:00.000+01:00

Welcome to the new-look King's EcBSt blog. I hope that the switch from it's Learning to Google blogger goes down well with everyone. The advantages are that I can include links to other blogs (see the BBC News and Tutor2u blogs on the right) and that it is much easier for you to comment on the postings on the blog.

Let me know if you would like to become a blog author or if you are interested in joining an EcBSt blog club. Call into the department office or email me at stephenwalton@kingschester.co.uk .

Nobel prize goes to Paul Krugman

2008-10-18T09:25:00.000+01:00

The nobel prize for economics has this week been awarded to Paul Krugman for his work on 'new trade theory'. Krugman, professor of economiccs at Princeton University, has done much to popularise economics writing a regular column in the New York Times and publishing accessible books such as The Accidental Theorist - a collection of short essays in which he exposes bad economic ideas with a sharp pen. Krugman's columns in the New York Times have recently taken a dim view of the US response to the financial crisis and included savage attacks on the outgoing Bush administration.

You can find out more about Krugman by reading this short article from the FT.

Blocked pipes

2008-10-18T00:46:00.001+01:00

My four year old son has a nasty habit of blocking the toilet with large wads of toilet roll. Unblocking what he has clogged up is not a pleasnt job, and it tends to fall to me.

As many of you will be aware, the present financial problems stem from the fact that banks are reluctant to lend to each other because of a breakdown in trust. As a result the pipes of the financial system are blocked.This is a classic failure of the market to function efficiently. Unblocking these pipes is proving difficult for governments around the world. These issues are the focus of one of the many useful article in this week's Economist magazine.

If you don't know your LIBOR from your EURIBOR, or are simply curious to find out more about the 'money markets' then you can't do better than to read this article.