The Ramblings of an Economics Student...

The Economist

noreply@blogger.com (Sam) — Thu, 19 Sep 2013 15:15:00 +0000

Today's post is going to be about The Economist. Reason: I've been made the Student Brand Ambassador for The Economist on campus at the University of Birmingham. Therefore, my role is to promote the brand to students on campus - however it can also be relevant to anybody with an interest in current news, whether it be economic, financial or political.

In general terms, The Economist is a fantastically well informed weekly newspaper that can be delivered to your door. Each issue gives a brief run-down of the political and business news of the week, then further goes on to give in depth articles on matters affecting Britain, the US, Europe, Asia, The Americas, business and finance.

The main audience I'm targeting, however, is students. The Economist acts as excellent supplementary reading for those studying degree courses in economics, finance, politics and many more. For students, this is invaluable. I found in my first year at university that having knowledge on current affairs was essential for my exams, with questions asking for real life exams to back up concepts being discussed. The fact I regularly read The Economist meant I was in a position to answer these questions. Second big selling point (similar to the first, I know) relates to the job market. Through personal experience, I've found out that interviews for spring weeks/internships/graduate jobs(I assume) all require you to know how your chosen industry is being affected by current affairs. A degree alone is no longer good enough, you need a lot of further knowledge about your chosen sector - and The Economist is a good way of getting this. The final selling point is for referencing terms. The deal gives you full access to The Economist online which gives you a fully searchable archive dating back to 1997. Perfect for pulling up past news as a reliable source for referencing in coursework and essay tasks.

The student deal currently being offered is a staggering 90% off of the standard price. It is now possible for students to get themselves 12 issues for £12, which will cover you for a term at university. After that period has expired you'll be paying £38 per 13 issues, however the offer is on a completely no contractual basis. The deal can be cancelled at any time, meaning as soon as the offer period has expired you can walk away from the subscription if you so wished. In addition, the subscription can paused for up to a period of 4 weeks. This is extremely useful during exam periods when there isn't the time to read and when on holiday or away from the home. The subscription can be restarted again with the click of a few buttons.

What's more if you sign up now you get a free mini speaker!

So, here's a brief summary of what The Economist is offering to students:

- 12 print issues for £12

- No contract, cancel the subscription at any time.

- Full access to The Economist online - giving an archive of news dating back to 1997.

- The ability to pause your subscription for up to 4 weeks.

- All of this available on your smart-phone and tablets. (iPhone, iPad, Android devices, Blackberry)

- Free mini speaker.

Follow this link to subscribe now: The Economist Subscription

If there's any other questions about The Economist feel free to comment and I'll be very happy to help you out as soon as I can.

Cheers guys.

The Curious Case of the Free Money

noreply@blogger.com (Sam) — Thu, 01 Aug 2013 22:11:00 +0000

So, a combination of too much free time and increasing boredom meant I did a bit of personal accounting. The thrill. Upon closer inspection of my Santander student account, I noticed I get an overdraft of £1500 (I'm not one to overspend), but more intriguing is the line of text below my overdraft limit: "The fee for using an Arranged Overdraft is £0.00 per day". No fee for using this overdraft? Hmm. So much potential.

Essentially, a student account needs to have some form of overdraft because of the tendency for some youths to overspend drastically in week one of university and be stuck for the remainder of the term. Mine comes with a condition that £500 is paid into the account every academic term. Simple, the maintenance loan covers that. So, my bank is giving me access to £1500 worth of free money to do what I will with for the duration of my year at University. Is this money really free? In essence, yes it is. But in truth, if you're haphazard with your money I wouldn't view it this way. It isn't free forever, and there will come a time when the bank will try and charge you for using it - if you cannot pay it back at this point that free money has just turned into expensive money. You see, banks use their overdraft as a way of praying on unsuspecting students. They know the stereotype that students spend all of their money on booze and parties and use this to their advantage. Force these students into their overdrafts, thinking their safe, up until a point where they cannot pay the money back and slap them with a huge charge. Not great.

If you're good with money - savers particularly, investors preferably, then there is profit to be made here. The bank is giving you £1500 (£1200 to be safe, or whatever your bank offers) to play around with. On the day the student loan is paid into your account, pull out all £1200. Use this money wisely. Put it in a savings account or an ISA if you want to make a small, but safe return. If you're willing to take risks and you know your markets then use it to create/enhance your investment portfolio. £1200 invested wisely has the potential to make a seriously good mark-up. For the remainder of the term live off your overdraft. Spend your way through it, but not past the £1200 mark. At the end of the term, cash out of your investments and pay £1200 of it back into your student account to cover the overdraft. Your account is back in the black, and you *hopefully* have some extra spending money to go out with, or donate to me for giving you this handy tip.

I guess it is here that I should say I do not condone all students blowing their money on a lousy investment. I do not condone students emptying their accounts. I do not condone anything. Nada. Understand the risks before you do anything, it is on you if it goes balls up. This is just a ramble from myself, I personally went down the safe ISA route - I'm not an investor, but the potential is there. Free money eh? Just a thought.

BRICs: Then and Now - An Emerging Markets Timeline

noreply@blogger.com (Sam) — Fri, 26 Jul 2013 16:19:00 +0000

A recent article in The Economist regarding emerging markets, and more specifically the BRICs, caught my attention. BRICs is an acronym used for the 4 major emerging markets - Brazil, Russia, India and China (South Africa was added in 2010, it is now known as 'BRICS'). All 4 of these nations are newly industrialised, developing economies who share a common, rapidly expanding national economy.

As can be seen from this World Bank graph, the four economies have consistently posted growth rates well in excess of that set by the USA in the last 10 years (ignoring 2009 'financial crisis effect year', everyone suffered) up until this year. Brazil has dipped below the growth rate of the USA whilst the other 3 are falling. The turning point, potentially. The four economies have reached a point of maturity. The gap between themselves and the world leader that existed 20 years ago has been wiped out by the rapid progress, leaving no more room for this 'catch-up growth'. Coupled with this, each of the economies have their own individual problems that are hindering them from carrying on this progress - China's ageing population and India's need for reform, for example. Although we can't exactly call this slowdown a failure in economic terms, it does pose a problem for the economies.

For the most part of my life (or what I can remember of it) emerging markets and their rapid expansion has been one of the dominating stories, consistently cropping up in the media. Now the sense is that this era has come to an end. The days of the rapid economic expansion seen by the BRICS over recent decades are drawing to a close. Take China as an example, it's growth rate was 7.8% in 2012, half of the level it achieved back in 2007. China is also struggling to reached its 7.5% forecasted GDP growth for 2013 which would be the lowest growth rate the country has seen in 23 years.

The consensus is that the world will not be seeing growth rates well into the double figures like China posted in the mid 2000's ever again.

With this thought in mind, I thought it would be fitting to do a researched piece on the BRICS, looking at where they have come from in the last few decades and what has been the cause of this slowdown. I'll do this over a 5 part blog post, with each country being looked at in detail and then a conclusion at the end - so stay tuned for that.

Using Your First Year of Economics Wisely...

noreply@blogger.com (Sam) — Tue, 18 Jun 2013 14:29:00 +0000

Firstly, feel free to write off any of the drivel I spurt out here as rubbish - this will be coming from my own personal experiences, and I know everyone is different. So today I'm going to try and give some advice into how to spend your first year studying economics at university to set yourself up for the future. I started my first year fairly clueless about how to move forward and help myself pursue a career in finance - so I contacted a third year friend who has tied down a graduate job at an investment bank. I took that advice on board and used it to steer me in the correct direction. I feel if I had known what I do now before even starting my degree I'd be better placed, but that's life and the benefit of hindsight. I'm going to go through three main points: studying, interning and 'other stuff'.

So, firstly, the studying. A lot of the people you meet at university will tell you "it's only first year, it doesn't count". Ok, yes, that is partly true. At most universities what you achieve in your first year has no effect on your final degree classification. Most will have it in their heads that they only need to achieve the bare minimum to pass, 40%, anymore would be wasted efforts. I disagree totally with this. When you get into your second year and things get serious, the only thing anyone has to go on regarding your academic ability is your first year grade. So they may see a 42% average and get the wrong impression, you could be the smartest guy alive. However, try hard in your first year and achieving a good grade isn't that difficult. Put the effort in and reap the rewards. A solid 2:1 in your first year is a great way to start your degree, it shuts no doors in your face - and in fact opens a lot. My first piece of advice for your first year studying economics would be to take it seriously, aim for a decent grade.

My second point is interning. This is the information I could really have used before I started my degree - but I was lazy and didn't put the effort into researching. My fault entirely. The bottom line is, if you want to enter the finance sector after completing your degree you need some experience under your belt. The best way to get this experience is to intern. Internships are commonly done during the Summer of your penultimate year, but you can get a head start. Many firms offer what is known as a 'Spring Week' during first year. This is essentially, as the name suggests, a week during Spring spent at the firm learning the ropes and getting an insight into the operations undertaken there. It can lead to a fast track to a second year Summer internship, which is fantastic. These aren't a necessity though, I never got a Spring week because I started applying too late, but they sure will help. Applying early is my advice. Applications for some firms can open as early as August, and as they recruit on a rolling basis getting in there early is the best bet. I applied in late December/early January and didn't even get a look in.

My third point is do 'stuff'. Ambiguous, I know, but you need to get out there and do as much as you can in the first year. Join societies, go to events, network.. everything will help. Even if it doesn't seem like its helping, it isn't doing any harm. The likelihood is that your CV will be fairly dull before going to university, you need to spend first year sprucing it up - doing things that show you'd be a great catch for some firm in the future. Get on committees for societies, volunteer, these sort of things all make your CV look good. And it needs to. Talk to people, get numbers and e-mail addresses. Having a large network of people you can talk to is vital - you'll hear it a lot but it's definitely 'who you know' that gets you places nowadays. You'll be surprised how much you can benefit from befriending and staying in contact with just a few people. So, my third tip for first year is to build up the CV fodder.

I hope my advice is helpful to some, if not then I apologise for taking up your time and I'll ask you nicely to bugger off my blog. If you want to ask any questions about being a first year economics student with a goal of the finance career then feel free, I'll be happy to answer. Best of luck.

Economics at the University of Birmingham

noreply@blogger.com (Sam) — Mon, 20 May 2013 13:06:00 +0000

My first year at the University of Birmingham came to an end last Friday. I finished my last exam at half past 11 and now I have an overwhelming feeling of freedom. Too much so, perhaps. I have nothing to do, hence why I'm here. I wanted to give my opinion on the University of Birmingham, and the economics course they offer. I'm going to try to be honest, but of course I have the potential to be bias so feel free to ignore every word I say. There will be a few words of advice towards the end.

I'll start by saying that I've loved my first year at University. It's been great. I've enjoyed pretty much all of it - but it did fly by, unfortunately. It seems only yesterday I was moving my stuff in and saying goodbye to friends from home. If I had to quantify my first year studying economics at the University of Birmingham it would be a solid 8 out of 10 (I believe that nothing is perfect, so an 8 is pretty damn good coming from me).

'Old Joe'

As far as the University as a whole goes, there are plenty of positives. The campus is talked about a lot - it's a beautiful campus, centring around the main attraction 'Old Joe', and it doesn't get that reputation for no reason. It even looks good in the rain. It almost makes you want to walk on to campus for your 9 o'clock lecture! Understandably, having a nice environment around you for your 3 years+ of studying is important - it really does help. The transport links are also a massive benefit. Having an on-campus train station that can take you to Birmingham New Street in 10 minutes is invaluable. It makes the trip home/back to university for holidays so much easier and less stressful, as well as giving you easy access to a great city in your free time. I'd recommend getting a 16-25 railcard if you plan on using the station a lot, the railcard makes a return journey into New Street only £1.40 and you can also use it to get a third off trains home. Perfect. Amenities on campus are also pretty awesome. I love my coffee, so being able to pick up a Starbucks or a Costa in the middle of campus is great. The queues aren't even that big as you might expect, and it's normal pricing. There's also the farmers market for all of your fresh fruit and vegetables which is a neat touch.

The walk to campus during the snow

Everything of course isn't perfect, there are some downsides which I'll even admit to. Firstly, although this depends on what sort of person you are, the accommodation leaves a fair bit to be desired. Although I can only speak for the halls I live in, I assume it's a similar story for the others. For what you're paying you may expect a lot more. I've paid over £4,000 a year for my room and with that I get a flat with one shower, two toilets and a kitchen that I'm sharing with 4 others. The rooms are averagely sized. The biggest problem is from above. The management seem very unwilling to put any effort into helping out students. I met with my halls manager twice about issues in my flat that were affecting me and my flatmate and she virtually laughed us out the door - not ideal, but if you have thick skin you probably won't meet many problems. The maintenance service is also pretty slow - expect at least a 2 day delay when it comes to fixing broken things in your flat. We had to cook for a week using torchlight because our kitchen light broke and essentially bath in the shower because of a blocked drain. Another slight issue is location for decent food shopping. If you're a food delivery sort of person then ignore this, but if you're like me and you actually like going to the shop and picking out your own things then there's a slight problem. You get an Aldi, a Sainsbury's, a Tesco and a Morrisons nearby, but all are about a twenty minute walk. This of course limits the amount of stuff you can actually buy to the amount you can carry in bags, meaning you may have to go a few times a week - which can be a bit of a pain.

The course itself was very good. I went with straight economics, but there was plenty of scope to vary that a bit - maybe put in a language, or go down a more mathematical route. I liked the fact I could cater my degree to my own preferences, despite still sticking with pure economics. There's a good balance of modules in first year: a few maths-y ones, some pure economics and then more applied and specific modules which give you a good introduction to the whole subject and assist you when it comes to picking modules in the second year. On that note, for the second year you get to choose 6 out of the 12 modules you will study - so there is a lot of freedom for you to make your degree as appropriate to you and your aspirations as possible. The teaching quality is as good as I expected - I do feel I've learnt a lot in this first year, despite it of course not really counting for anything. The office hours of lecturers are always available if you're having any issues with the work and they're more than happy to help you over e-mail in the hours when their office isn't open. One of the big debates nowadays is how the university are spending our £9000 tuition fees - but I think the economics department is doing it well. We get all lecture slides printed out for us, which is good when it comes to note-taking and the revision period. We also get a personal tutor that we can see with any issues and an economics office staffed with friendly people who are always willing to help. I'd say that money was well spent relative to other departments in the university.

One little fault I had with the course was that one of the modules was made up of 50% business studies. I mean, no disrespect to business studies students, but that wasn't really the sort of stuff I wanted to be learning on my economics degree. It's not very relevant to me and thus I found it frustrating. Especially when it came to revising for the exam, I couldn't focus or concentrate on learning the material because it just didn't interest me. Although the boundaries between economics and business studies can be blurred at times, this module definitely took a step over which I wasn't best pleased with. My second problem is the library. This is probably an issue in all other universities at exam time, but I noticed it was particularly difficult to even get a space during April and May, let alone get a computer. The solution would be to get up at 8 am and get in there before the crowd, but that isn't always ideal. I toyed with taking my laptop down there to use, but found the Wi-Fi to be infuriatingly unreliable and I had to just stay at my flat to revise. There could be an improvement in this area. However, the next big investment from the university is a re-housing of the library so that could solve the issues.

My 'average' sized bedroom

I'd like to conclude by saying that Birmingham is a great place to study. It's an awesome city, everything you need is right on your doorstep and the University is fantastic. It's highly rated and will take you places in life. I do have some tips for you, though. First, try hard in your first year. Many people will tell you that the first year is a doss and 40% is all you need to continue to second year. Yes, that's true, but 40% doesn't look great on the CV, and if you have real aspiration you're going to want to be doing internships during the Summer of second year. A 2:1 minimum in first year is needed to do these internships, and that will take some commitment and some work. My second piece of advice is to dive in to everything. So many opportunities will present themselves in such a short space of time. Try as much as you can and get involved in everything that takes your fancy. If it means little sleep, so be it - you won't look back and remember the nights where you got plenty of sleep. "C.V, C.V, C.V" will be hammered into you for the first few weeks, and the only way to make yours look good is to do stuff, get involved and experience things. Good luck in your ventures, and I'll potentially see you at Birmingham next year. Laters.

Sam.

A Background to Financial Assets

noreply@blogger.com (Sam) — Sat, 11 May 2013 18:29:00 +0000

Financial markets essentially revolve around the buying and selling of assets, intangible assets to be precise. An intangible asset is an asset that's physical properties are irrelevant to its value - it tends to just be a piece of paper. The relevant part is the future claim to some income or benefit that the asset legally entitles the owner to. The owner of the asset would be referred to as the investor, whereas the person/institution that is agreeing to pay out in the future is known as the issuer. Examples of these intangible, also known as financial, assets would be common stock, bonds, loans or mortgages to name but a few. These differ from tangible assets. The value of a tangible asset is derived directly from its physical properties. Examples of these would be a house or a car.

The return the investor receives on these financial assets depends on what sort of asset they've purchased. It could be an equity instrument or a debt instrument. If the investor has purchased an equity instrument then the issuer will be paying an amount out depending on the earnings of the asset. So, for example, an equity instrument could be a partnership share in a business. The issuer would then pay the investor an amount depending on the profits earned by the business. In contrast to this, a debt instrument involves fixed payments to the investor. These would be loans or bonds, when a fixed interest rate is paid out. One exception to the rule would be a convertible bond - these allow the investor to switch between debt and equity if certain conditions are met.

Financial assets play two key roles in the economy. They are a method of transferring funds to those who need them to purchase tangible assets from those who have excess funds. They also act as a method of redistributing the risk that comes with the cash flow generated by tangible assets among those seeking and those providing the funds.

The price of an asset is the most important factor - this is essentially what determines whether people will buy and/or sell. The basic principle to follow is that the price of the asset is equal to the current value of its expected cash flow. The certainty of that cash flow is what causes variations in the price of the asset. The assets are all subject to risk, and it's this risk that can cause price fluctuations, allowing investors to potentially profit. The three main risks that financial assets are subject to are the following:

Purchasing Power Risk - This is to do with the rate of inflation. The rate of inflation will affect the real value of the financial asset and thus cause the price to fluctuate.
Credit/Default risk - This is the risk that the issuer will default on their obligation. Or, in Lehman's terms, the risk that the person agreeing to pay up cannot pay up, causing the investor to lose money.
Foreign Exchange Risk - The risk associated with the value of the currency changing and potentially being worth less.

There is a relationship between tangible and financial assets. Financial assets tend to be used to finance tangible assets. So a debt instrument may be issued to generate funds to buy some delivery vehicles, for example.

There's a simple introduction to financial assets. An intangible asset that legally obliges the issuer to pay the investor an agreed amount in the future. The play a pivotal role in the economy - moving funds around from those with an excess to those that need them. The price is determined by how much the asset is expected to bring in at a future date, this value is subject to fluctuations caused by different types of risk. Hope that all makes sense

The European Union - A Process of Economic Integration

noreply@blogger.com (Sam) — Fri, 10 May 2013 09:50:00 +0000

The European Union is a very contentious issue in current affairs. To stay? To leave? The benefits? The drawbacks? These are dilemmas that will never really be resolved, regardless of what action is taken. What we can discuss, though, is how the European Union came to be what it is today - and what exactly that is.

Source: www.cia.gov

Today's EU is has derived from more than 50 years of European economic, political and social integration. The process started on the 25th March 1957 when the Treaty of Rome was signed by the six founding members of the European Economic Community: West Germany, Italy, France, Luxembourg, the Netherlands and Belgium. The treaty was laid out into a series of articles, with Articles 1, 2 and 3 being the most important. Article 1 established the European Economic Community. Articles 2 and 3 set out all of the economic goals and initiatives to achieve them for the six nations.

Article 3 would be the main focus for us economists, here the methods of creating economic integration between the nations are discussed. The main points are outlined below:

Article 3a - Removal of trade barriers, tariffs and quotas between member states.
Article 3b - Adoption of a 'Common Commercial Policy'. This in essence is a tariff on imports from all non-members. This common policy with respect to tariffs made the EEC a 'customs union'.
Article 3c - Integration of capital and labour markets, which meant there should be a freedom of movement of services.
Article 3g - Ensures undistorted competition in member states. This meant subsidies from governments to national firms that distorted trade were banned, there had to be a common competition policy, a harmonizing of national laws that affected market operation and harmonization of some national taxes.
As well as these, there was a call for mechanisms to coordinate member state macroeconomic policy in case of Balance of Payments crises and they all agreed on goals and principles for agriculture (The Common Agricultural Policy came into effect in 1962).

One thing that wasn't included in the treaty was integration on social policy and taxes (bar the ones that affected competition). The argument was that both of these would greatly affect the lives of citizens in the EU and therefore a harmonization would cause difficulties and conflict. There was also an economic argument put forward as to why both of these weren't necessary for success.

Since the Treaty of Rome was signed in 1957 there has been very little modifications to the actual content of the articles - until the signing of the Treaty of Lisbon in 2007, changes only came in the form of additions to the original policies. For example, Article 2 stated that the EU should be promoting the 'economic good life'. The definition of this has changed and been expanded over time and now includes all of the following criterion: high employment, gender equality, high degree of competition, environmental quality improvements and rising living standards, to name but a few. Article 3 set out a list of activities to achieve the 'economic good life', this list has also been added to as the years have progressed and the dynamic of the community has changed. It now includes the following non-exhaustive list: immigration policy for non EU members, coordination of employment policy, environmental policies, improvements in industrial competitiveness, promotion of research and development and promotion of health and consumer protection. The Treaty of Lisbon is set to overhaul the original treaty in terms of its form, not its content. The main change would come in its promotion of the 'good life' as opposed to the 'economic good life', suggesting less emphasis is being placed on economic integration in more recent times. The result of this treaty will not be seen for many years yet as most of the policies aren't set to take effect until 2014 and beyond.

So European economic integration took place in a variety of stages. An index was created so economic historians could quantify the extent of integration (Mongelli et al. 2007). The suggestion from this index was that from 1958-1968 integration happened quickly and over these 10 years a Customs Union was formed. From 1973 to roughly 1986 there was a period of Euro-pessimism where little integration occurred because people were unsure of the effects. From 1986 to 1992 things picked up again as the Single Market was formed through the Single Market Programme. Finally, from 1992 onwards integration continued as the Economic and Monetary Union was adopted and of course the common currency came into effect.

The structure of the EU changed drastically in 1992 and is set to change again when the effects of the Lisbon Treaty fully take effect. Prior to the signing of the Maastricht Treaty in 1992, all new integration had to be subject to majority voting before it was passed. This system was problematic - it created a divide. On one side we had "the Vanguards", Germany for instance, who were all for the spread of integration and would agree to any policy that improved things. On the other side was "the Doubters", the UK for example, who feared that further integration was forcing EU citizens to accept more integration that they didn't even want - therefore this side rejected most attempts at further integration. The solution was the Maastricht Treaty and its three pillar system. This organisational structure drew a line between supranational and intergovernmental policy areas. The first pillar contained all integration under the Treaty of Rome, and was still subject to supranational-ity (majority voting between members). This was the European Community. The second pillar was for all foreign and defence matters and the third pillar for police, justice and 'other home affairs'. This treaty put member states in full control of the second and third pillars, giving some independence. Integration is these two pillars was subject to direct negotiation between member states and required a full "yes" consensus before anything was passed. The development of the Treaty of Lisbon is set to remove the three pillar system.

What we can conclude is that economic integration in Europe has come about through a progressive series of treaties. The three most important ones to remember are the Treaty Establishing the European Community (Treaty of Rome), the Treaty on the European Union (Maastricht Treaty) and finally the Treaty of Lisbon. These three are the only ones that created real structural change to integration in Europe. The results of the Treaty of Lisbon are still in the pipeline, so it'll be a while before we can analyse the success of such a policy. Cheers for reading.

Regions and Cities

noreply@blogger.com (Sam) — Thu, 09 May 2013 10:57:00 +0000

Regional disparities have always been an issue in Britain, going as far back as before World War 2. For instance, before the war each industry was very much based in one part of the country. Finance was in London, textiles in Lancashire/Yorkshire and metalwork in the midlands. No government really thought in terms of regional policy, it only starts to creep into politicians minds during the interwar period because of the depressed states of some old industrial areas.

Measuring regional inequality was and had always been a tough task. Firstly, which places fall into what region? Birmingham, for example, seems to have shifted from being part of the prosperous South in the 30s-60s to now being part of the depressed North. There are many ways that the inequality could be measured: unemployment rates, labour force participation or income per head, for example. As far as unemployment goes, the further we go back the more unequal they are. In the 50s, unemployment was higher in the peripheral regions (N.England, Scotland, Wales) but the regional average was low and acceptable so nothing was done. Through the 60s, 70s and 80s unemployment everywhere rises, especially in the old industrial regions. The South and East are the only regions to avoid double figure unemployment rates in the 80s. From 1990 onwards, unemployment rates have diverged nationwide.

Labour force participation rates show a different story to the one above. They still show large regional variations with the biggest increase in working population taking place in the South. Income per head puts more attention the income in each region. It states that London and the South East have always had the highest levels, but that the South West and East Anglia have improved a lot recently. The North West fell behind after the First World War whilst the West Midlands followed suit in the 1960s.

So what is the cause of these imbalances? Part of the blame is the amount of people employed in declining sectors. As these sectors were all based in the same regions it left them lagging behind. Through the 70s and 80s the blame was increasingly placed on having the wrong mix of industry and services. Too many people were in industry when services was the growing sector. But, if we look at the statistics in a slightly different way we can get a different outlook on things. For example, if you look at female unemployment alone then the patterns diminish. Also, London looks like the best region - but it also lost a lot of manufacturing jobs from 1960-1990 leaving people unemployed. There are periods where East Anglia actually increases its employment in manufacturing.

Imbalances do exist, this is true. But why do they persist? Theory states that market forces should even things out. The first reason the imbalances continue is agglomeration effects. Firms expanding in a sector all seem to cluster together in the same area. This means, despite them perhaps clustering in high wage and rent cost, prosperous areas they benefit in the sense that they are close to skilled/specialist labour, suppliers, customers and the local infrastructure is attracting the correct type of employee. This is why more firms set up in the South - these benefits are more prevalent there. For larger firms, this effect meant that they tended to set up their corporate HQs, legal services and research and development centres in the South whilst their basic distribution and assembly tasks were focused in 'Outer Britain'. Proof of this is that over half of research and development spending in the 1980s came out of the South East of England.

The government make an attempt to rid the country of these regional imbalances from 1945 onwards. Some argue it would distort the market, others argue it was a necessity for faster national growth. The main tools they had was building and land controls and financial aid.

Financial aid could come in varying forms: loans, tax rebates to firms or grants, subsidies or infrastructure developments. Some of this aid came from the central government, some from local government and some from the EU.

1963 is when regional policy starts getting used widespread. It is used to raise growth and combat local unemployment. Before this there just wasn't the available resources to do much regionally. After 1976 this regional funding fell back because there were large constraints on public spending and the money that was available was directed towards inner city problems. More recently, from the 90s onwards perhaps, regional issues are of more importance for political reasons. Financial aid is given but much more selectively, with the focus being on new firms, regional competitiveness and aid to larger firms to attract external investment.

How effective was the policy of regional aid then? In the most assisted areas net job creation stood at around 600,000 from 1960-81. The majority of firms receiving aid said they wouldn't have been able to go ahead in their original form without the aid. But, it had its negatives. Manufacturing employment fell rapidly in assisted areas if you took the aid away - makes the suggestion that job creation was marginal. Firms receiving aid exaggerated the effects to try and get themselves more. Since the 90s, studies have suggested that aid would be useful if it was better targeted, but there haven't been available funds to do this. The problem of different tasks in the North and South persists.

Finally, we can conclude by saying that government policy affects regions differently even if they are not specifically regional policies. Plus, we cannot be sure of that actual effects of job creation because all the estimates vary massively. Make your own mind up.

Football Isn't Just A Sport...

noreply@blogger.com (Sam) — Wed, 08 May 2013 10:17:00 +0000

A lot of criticism gets thrown about these days regarding the sheer sum of money involved in football. In all honesty, it's true. There's a heck of a lot of money in football. I feel these critics are looking at the game all wrong - football isn't just a sport anymore, it is a business and it should be viewed as one. When football is viewed as a business nothing seems out of place - we have a bunch of firms aiming to maximise profit by producing the best quality goods.

Everything you'd expect to see in a market for a 'normal' good can be witnessed in the 'football market'. We have a bunch of firms competing against each other to maximise their profits - these firms are the football teams. At the top of these firms are owners, CEOs, etc all with the intention of making a lot of money. They'll say the aim of the football club is to win football matches and to win tournaments, and this is true. But, they only want to win because that is what earns the dollar. Greed is very much apparent in football as it is in other businesses - the greed to make as much money as possible. A firm cannot operate without its employees, just like a football team cannot operate without its players. The players are the football teams employees. The football team wants the best employees, to win the most matches and therefore earn the most money - therefore a lot of money is flashed around to encourage the most talented players to join the club. I could go on, I think we are getting the idea - a football team is also a business.

If you're bored and lonely on a night then get yourself stuck into the reports and financial statements that each football club releases on a yearly basis. I'm afraid to admit that I'm a Liverpool fan in fear of losing a large proportion of my audience - but hey ho! The report for Liverpool can be found here. It gives a very detailed breakdown of where the money has come from and where it is going - a very interesting read.

The first thing that can be noticed is that Liverpool F.C made a loss in the 2011-2012 financial year, although not quite as large as the loss from the 2010-2011 financial year. An explanation for this is that Liverpool F.C's accounts for 2011-2012 only cater for 10 months because of a change in financial year dates to align with the football season. July 2011-May 2012 is accounted for. But, it still stands that the last two years a loss has been made - totaling over £85 million (£89,960 million for the exact-ists). So, a business making massive losses for a prolonged period of time.. one question springs to mind - why are they still operating? It's a tough question - it could be through expectation, the want for stability, profits being made elsewhere. One thing we can confirm is making losses isn't such a bad thing in football.

A reason for this could be the constant investment flows in the modern game. Not only are the players employees of the firm, but for the duration of their contract they are also an asset. Clubs are constantly investing in new assets and selling on owned assets it's very hard to get a static look at the profitability of the club. Owners will expect losses if they are constantly pumping money into the club in the form of investment. Another reason the loss is essentially overlooked by those that matter is because they may be picking up the gains elsewhere. The owning of the football club gains a unique entry into English markets with access to a large pool of potential custom. Companies could see profits rise in other sectors due to the owning of the club.

This was just a quick ramble in an attempt to be as productive as possible during my procrastination. I'll be writing a full length, in depth post on the economics of football during the Summer - so stay tuned for that. Feel free to throw your thoughts at me.. do you think there is too much money in the game? Is the game suffering as a consequence? Cheers for reading guys.

Sam.

Britain and Europe

noreply@blogger.com (Sam) — Tue, 07 May 2013 12:36:00 +0000

This post will give you a walk through the years of the relationship between Britain and the rest of Europe. We start with the 1800s. In this period, Europe is generally a protectionist place, but Britain is closer to it economically than any other point since the 1600s. Due to the protectionism, though, Britain sees most of its trade growth occurring outside of Europe. It is cheaper to import and export from elsewhere.

By the time World War One starts most of Britain's trade is not with Europe. The only real interest Britain has in Europe at this point is a political one - they didn't want one nation (Germany) from dominating the continent. Two wars are fought to stop this happening, they succeed. During the 1930s, the gold standard collapses which pushes Britain closer to its empire. This relationship continues through World War 2 and the Commonwealth and the USA become Britain's main trading partners.

The years immediately following World War 2 leave Britain relying on European recovery to stop the spread of communism. Despite this, the empire and USA are still the main trading links. The expectation is that Western Europe will remain protectionist and broken for a whole generation following the war, so Britain still considers itself a key power.

An important event occurs in 1957 when the European Economic Community is formed with the signing of the Treaty of Rome. France, Germany, Italy, Belgium, Netherland and Luxembourg were the original 6 members. They all agree to strive for three keys goals: Abolishment of internal trade barriers on manufactured goods, introduction of a common external tariff and aim for further economic and political integration between the six of them. How does Britain react? It immediately feels like it cannot join. The common external tariff would not be compatible with Britain's empire and trading patterns. Britain goes and creates its own community - the European Free Trade Association with Scandinavia and parts of Central and Southern Europe. It was a much looser agreement than the EEC; there was an internal free market on manufactured goods but no external common tariff so Britain could still effectively operate with their empire.

By the time the 1960s come around it is obvious that the Sterling is no longer a major currency. The Commonwealth begins to erode away as countries gain their independence and trading with the EFTA is growing too slowly. Conversely, trade with the EEC is growing faster despite not being a member. It would be access to these markets that would be necessary for prosperity. The decision to join comes in 1961 when Britain makes a formal application. France initially blocks the join, they think that Britain is far too committed to the Commonwealth and therefore would not be a beneficial member. It took 12 years for Britain to finally be accepted, but there are problems almost instantly. The loss of sovereignty, relations with the Commonwealth and the EEC budget are all issues.

The Common Agricultural Policy was the main spending focus of the EEC budget. The problem was that Britain's agricultural sector was so structurally different from other EEC members that the CAP was not beneficial. Britain imported cheap food and subsidised its own small agricultural sector. Deficiency payments were made to try and increase productivity, but overall the cost of aiding the British farms was very small. The 6 EEC members all had very large and inefficient farming sectors. Imports were kept out with high tariffs and any surplus product was bought by the EEC to maintain the price. It was costly for the consumer and highly inefficient, but it gave the farmers a lot of political power. The rest of the budget was also an issue for Britain. Roughly 1.2% of each members GDP was donated to the EEC budget. Income was also derived from external tariffs, and as Britain imported a lot of food and raw materials they found themselves contributing a lot to the budget. 75% of the budget was spent on the CAP, and with Britain's small farming sector they did not receive much. Britain was essentially contributing more than it was getting from the EEC.

So why did Britain join? Well, mainly through fear. They thought economic and political marginalisation would take place, they'd lose influence and not be considered an important player in Europe if they didn't become a member. Britain also hoped to ride the short term costs in the hope that the longer term would reap benefits. They hoped the longer term benefits would come in the form of access to fast growing markets and exposure to greater competition. I guess in the long run some of this does occur, Britain benefits in the early 1980s when they receive a rebate on the EEC budget, but an economic crisis in the 70s puts plans for further integration well and truly on hold.

Since 1985, the Single Market has been created in Europe by the Single European Act. The EEC became the EU and political governance changed partly to police the market. The single currency, of course, was introduced, but Britain vetoed. They opted out in the hope that the whole plan of a single currency would fall through, but this did not happen. By 2000, though, Britain had become closer to Europe economically despite being less integrated than the other Euro members. Most foreign direct investment goes outside of Europe, but the amount staying within is increasing.

Essentially, Britain goes along with change in Europe because it has no other choice. It is no longer the biggest player in the continent and other countries are setting the agenda.

1980s Economic Miracle?

noreply@blogger.com (Sam) — Mon, 06 May 2013 08:59:00 +0000

If you read my previous post, the 1980s look like a rough time. But, as with most periods - look at them in a different light and the complete opposite can be argued. Thatcher had other aims whilst in power: reducing state intervention, allow market forces to do their thing and curb Trade Unions. The year she came to power was seen as a year of 'cutting spending' when in actual fact spending grew every year Thatcher was in power. Poor start.

But why does her spending stay high? Is it Thatcher's fault? In a way, no. She was stuck with an aging population and rife unemployment - this meant high social security spending. It was impossible to make big cuts in the core government services, the only cuts that could effectively be made were in minor spending programmes. She does, however, lower public sector borrowing. But with spending staying high and borrowing falling, the tax burden had to rise. Tax payments as a percentage of GDP in the 80s rise as a structural change is made in taxation. Indirect taxes become the main focus as income tax falls and indirect taxes rise. A popular move with voters.

Thatcher is obviously know for her process of privatisation as well. The industries under public control were being heavily criticised for their loss making and the benefits they provided to producers, not consumers. The investment in state programmes were adding to borrowing, so selling these industries could fund tax cuts and promote efficiency. The process started with the competitive industries being sold first: shipbuilding, for example. Utilities went after, but were still overseen by the government because they were natural monopolies.

Curbing the Trade Unions was another of Thatcher's aims in power. She didn't like the influence they had. She went about a process of tearing them down with policies such as banning closed shop, outlawing secondary picketing and strengthening internal balloting procedures.

These three policies were a political success. Trade union membership falls, income tax cuts are popular, privatisation is popular and striking falls. The manufacturing sector came out particularly strong - Britain's productivity here was growing at a faster rate than the other G7 countries. It was known as the 'manufacturing miracle'. What caused it? Hmm. The downside was, though, that absolute levels of manufacturing were below competitors and the jobless count rose sharply.

De-industrialisation had seemingly occurred. The industrial workforce falls from 43% to 30% of total employment in a 16 year period from 1973-1989. Growth was now mainly coming from the service sector. The pessimists thought this switch to services was slowing overall productivity growth. The counter argument was that these employment trends were in line with what was happening in the other G7 countries - it seemed like a natural trend. There was no tangible output from the service sector so it was hard to measure improvements in the quality of the goods, but technological changes were definitely increasing growth in the sector.

Overall productivity in services was growing slower than in manufacturing. Across the whole economy, productivity growth wasn't that impressive - but this was a global trend at the time. Claims of an 'economic miracle' in the 1980s were overstating the reality. There were improvements, yes, but we were still behind the rest of Western Europe and these gains came at the price of higher unemployment and higher income inequality.

The Thatcher and Major Years

noreply@blogger.com (Sam) — Sat, 04 May 2013 08:16:00 +0000

In 1979 Margaret Thatcher came to power in Britain - the first female Prime Minister. It was seen as a turning point for Britain, not just for this reason, but because of the effect it could have on economic policy. She was a radical woman, and her policies echoed her personality. Brutal. Defeating inflation was the key to her policies. In the run up to the election the Conservatives rethink their philosophy and come up with their "New Approach". They'd place greater emphasis on market forces, preferring small government intervention in the economy. This wouldn't be possible with the inflation problem, however. This needed to be defeated because it was distorting price signals and angering voters.

This period saw the rise of the Monetarists. They were born out of the "Chicago School" with Milton Friedman a figurehead of sorts. Their argument was fairly simple. They felt using demand management would be shooting ourselves in the foot - more demand meant more inflation and not higher output. Inflation was a monetary phenomenon, the money supply had to be cut to control it - tight financial policy was needed. In 1980, the Conservatives follow this line of thought. They raise interest rates and VAT while lowering their public borrowing. What's the result?

Well, in 1981 the economy is in recession - yet the Budget of this year sees policy tightened even further. It was a bold move, it showed that the Conservatives were really trying to tackle inflation. And it works. Inflation falls rapidly from 18% to a more acceptable 4.3% from 1980-1983. Interest rates are increased further after this and growth starts to pick up. It was a step in the right direction, but unemployment was remaining high and inflation was still higher and more volatile than other major economies.

The policy still struggled, however. They know that responding to the headline inflation rate was pointless because of the time lags in policy taking effect. They somehow needed to find an effective framework that could predict inflation in the future and respond to that level now. This indicator for when to change policy came in the form of the Medium Term Financial Strategy (1980). It was a framework that targeted the money supply - targets would be made and the broad money supply would not be allowed to rise above them. Interest rates and lower public borrowing would be used to control the money supply and keep it within the desired range. It had risks, tightening policy always carried the risk of bringing a recession.

It could have worked, but it had its problems. The targets weren't met - the money supply consistently grew faster than it was meant to and public borrowing wasn't cut enough. The policy wasn't tight enough, yet the real economy suggested the policy was too tight - domestic demand was being curbed by the interest rates and the pound soared. Britain entered a bad recession not long after. Why does this happen? A recession shouldn't really mean the money supply rises. Yet it did. This is the same period that the banks are being deregulated and firms were struggling and needing to borrow more to stay afloat. Lending controls were abolished, which means more loans were now showing on the official statistics. Overall, the money supply figures weren't an accurate guide to the economic conditions.

The Medium Term Financial Strategy is gradually abandoned because of its weaknesses - the government starts to slowly target the exchange rate by keeping the pound steady with the German mark. The pound starts at too low a level against the mark and the economy overheats in 1988. The government try and raise interest rates but it's too late as we enter recession again and end the 1980s with rising inflation. Britain needed help - and this came in the form of the European Exchange Rate Mechanism. This mechanism pinned the pound to the strong Mark allowing it to fluctuate 6% either side - Britain joined at a rate of 2.95 DM. The advantages were that it would supposedly improve fiscal discipline and therefore curb the inflation problem. It didn't. In 1992, on a day known as 'Black Wednesday' we see that it didn't. Britain finds it needing to lower its interest rates because the initial rate it joined the ERM with was over-valued. Other countries in the ERM had high interest rates which meant Britain couldn't realistically lower theirs. Speculators begin to see the pound falling and start to sell, a run on the pound starts. The aftermath of this was that the pound had to be devalued in 1992 and the credibility of the John Major government was ruined. Improvements do follow, but they can't restore the governments political position. An inflation target rate is set and interest rate decisions are given to the Bank of England who based their changes on a range of economic variables and not just the one.

Nationalisation

noreply@blogger.com (Sam) — Thu, 02 May 2013 18:33:00 +0000

A nationalised industry is an industry owned by the state that produces a marketable, priced output. Over the course of 40 years from the 1940s to the 80s there was a lot of action in the field of nationalisation. Post World War 2 saw a lot of industries brought under state control: coal, gas, buses and the Bank of England to name but a few. Between the 50s and the 70s there was some backtracking and indecision from the government. Road haulage and steel were denationalised, but then steel was nationalised again in 1967. Further nationalisation took place after 1970 when shipbuilding, aerospace, Rolls Royce, British Leyland and water were all brought by the government. By 1980, 8% of the workforce were in public industries and they produced 11% of Britain's GDP.

The aim behind this process was to achieve a fairer society. This was what Labour wanted. They were also attempting to improve economic performance - for example coal was performing poorly under private sector control and the energy and transport industries had plenty of scope for coordination. The problem was that a lot of other countries in Europe had high levels of public ownership in this era also but there is no evidence to suggest that nationalisation had any positive effect on economic performance. Of course the vast range of sectors made overall performance very hard to measure, may I add.

The policy had its supporters... and its critics. Milward shows that public sector productivity growth, as a whole, is better from 1951-1985. Hannah, another historian, shows that on a global scale Britain's utilities and airline sectors had poor productivity. The consensus seemed to be that nationalisation didn't have any transformative effect on economic performance.

So, what were the problems with nationalisation? In summary, you could say the problem was that the task was too big. The initial organisational challenges were huge - some firms needed to be combined to improve efficiency which was no easy feat. To oversee the whole operation expert managers were needed, but managers that were good enough were in very short supply.

As stated earlier, the process of nationalisation had an aim of improving economic performance. Efficiency needed to be promoted - but how did public firms differ from private firms in order to create this change? A series of nationalisation White Papers were released (1961, 1967, 1978) detailing the responsibilities of public corporations. It outlined the following:

· Investment projects had to be subjected to a series of accountancy tests that would be used in the private sector to ensure a worthwhile rate of return.

· The firms marginal cost would be used to determine output.

· Cross subsidisation was discouraged.

· Firms should be aiming to break even over a planned period of time.

But, as with most things - this didn't quite work out as intended. Each point mentioned above seemed to encounter a difficulty. Forecasting the rates of return was difficult because the markets were constantly changing. With such complex outputs, measuring the corporations marginal cost was a challenge. It was virtually impossible to define conditions for loss making activities and any loss makers weren't penalised, nor firms that exceeded targets rewarded. The government was using the nationalised industries to achieve short term goals and this was undermining the White Papers.

The three main short-term goals the government was trying to achieve with these industries was technological nationalism, macroeconomic stability and social rescue. By technological nationalism we mean nationalised firms being forced to buy British products as opposed to those from abroad to try and push the firms and make them more attractive to exports. The problem with this is British products, such as planes, tended to be more costly than those from abroad, and pretty frankly they were rubbish. The macroeconomic stability was controlled by using nationalised firms investment programmes in line with the 'Stop-Go' cycle. Finally, they attempted to achieve social rescue by keeping jobs in declining industries in unemployment black spots to stop the unemployment levels from rising and creating depressed regions, despite these declining industries essentially holding the economy back.

To conclude, nationalisation wasn't really a massive failure or a success. The thought was that bringing these firms under state control would be beneficial, but in reality they still shared the same problems they faced under the private sector. The use of these industries to meet short term goals potentially hindered the success of the program.

Battling Against Inflation, 1970-79

noreply@blogger.com (Sam) — Wed, 01 May 2013 10:34:00 +0000

The 70s were a bad decade for the British economy. 'Failure' is probably the most fitting word for the period. From 1974 to 1979 unemployment had crept up to pushing on 5%, growth had fallen to 2% but the real issue was inflation at 16%. Part of the rise in prices can be attributed to the collapse of the Bretton Woods system, this led to a global commodity price rise which saw oil rise four fold in a 2 year period. Domestically, though, the supply side issues discussed in a previous post weren't helping and a lot of errors were made in macroeconomic policy cause partly by confusion over the actual cause of inflation.

The confusion was theorists thinking they understood the tradeoffs between economic objectives, such as inflation and unemployment. Stagflation occurred in the early 70s which shocked theorists - inflation and unemployment was rife at the same time, the government were struggling to achieve any of their objectives.

The government needed to re-think. They put the priority on targeting unemployment in the early 70s. During this period the Barber Boom took place. The chancellor at the time (Barber) injected a large monetary and fiscal stimulus to raise output but not inflation because of the spare capacity in the economy. Sterling was also allowed to float freely to stop a balance of payments crisis choking the growth. Did it work? In the short term - yes. Growth peaks at 7% in 1973. But, over the longer term, the balance of payments deficit soars, inflation starts to runaway and smaller financial institutions collapsed - the three things that really weren't wanted.

Because of the soaring inflation the government makes controlling this the main priority as the 1970s progress. Unemployment falls down the pecking order. Revised Keynesian theory defined the inflation as cost-push. Wages were rising faster than productivity forcing up the prices. Pay rises needed to be checked - were income policies the solution to this? Income policies worked like so: pay rises would be limited by setting a norm that everyone should follow. Some would be voluntary, some would be forced, others would be more complex. It worked for small periods of time, but it always failed eventually as people became dissatisfied and it defied the point of trade unions.

The monetarists attacked the income policies claiming they didn't curb inflation at all they just distorted the labour market. Tighter financial policy was required. This was true, public spending was high and still increasing. It rose faster than national income from 1970-75 and reached 9% of GDP during 1975. This high spending was crowding out private sector investment by pushing up interest rates. In 1976, Labour realise the problem and agree to a deflationary package. Their new budget regime centred around cash limits. 60% of their spending would now be subject to 'cash limits' and different programmes received a fixed cash sum year on year regardless of inflation. In real terms, this change meant public spending fell and brought inflation down to some extent.

What can we conclude from this then? Was this the end of the Keynesian era? The government were still trying their hardest to adapt Keynesian demand management policies rather than find a new, improved framework. This just resulted in what seemed like aimless policies that didn't solve any problems. Real living standards on the whole were hit, especially the middle income people, which led to a lot of resentment.

The Crisis of the Sterling

noreply@blogger.com (Sam) — Tue, 30 Apr 2013 12:27:00 +0000

In an international sense, the 'Golden Years' weren't quite so great. Sterling had major problems. Although as a whole the world is booming, external problems in the British economy were starting to show. The fastest area of trade growth between major economies was in manufactured goods, yet Britain's share of manufactured trade fell from 25% in 1950 to 11% in 1970. The balance of payments was also perceived as weak because of its volatility. Visible trade was constantly in deficit and invisible trade in surplus, but the magnitude of these fluctuated a lot meaning there was never a consistent surplus. It was weakened further by the Sterling balances.

Sterling balances is the term given to debts accumulated during the Second World War. This figure stood at roughly £3.5 billion by 1950. The gold and foreign exchange reserves covered roughly 1/5th of this, although this figure was increasing. In 1957 exchange controls were removed and there was a danger than holders of the pound would sell up. The government needed to strengthen their reserves in order to stop this run on the sterling from occurring. It needed to run a persistent balance of payments surplus.

The government needed to resolve Britain's balance of payments problems. It had three routes to go down: protectionism, devaluation or deflation and 'Stop-Go'. Protection would've been opposed by the US and other members of GATT and EFTA, therefore that option was ruled out. Devaluation took place in 1949 to $2.80 as a war adjustment, but any further devaluation was difficult because of being part of the fixed exchange rate system of Bretton Woods. It would also conflict with the Sterling Area. The Sterling Area was what laid behind and held together the Commonwealth. It also supported the City of London's position as a global financial centre. Devaluation of the sterling would cause a collapse of the Sterling Area and would be unfavoured electorally. The final choice was the route taken. Bouts of deflation would be implemented to cut imports to improve the balance of payments position. However, the way the government went about it ultimately failed. They were too timid with their squeezing of the economy because they wanted to protect their full employment objectives and therefore foreign currency reserves stayed low and the sterling crisis continued.

One of the main issues Britain had was that state spending abroad was offsetting all private sector surpluses in the 1960s. The state was spending nearly £200 million a year in aid to the Commonwealth and £313 million in overseas military spending. Without this being cut any attempt to improve the balance of payments would be in vain.

Eventually, the Sterling had to be devalued. The Balance of payments crisis just prior to 1967 was the last straw and the Sterling was devalued to $2.40. Military spending was also cut back. There was some short term success from this, the balance of payments was in surplus by 1969 but it didn't last long as inflation and wage rises meant any gains were soon wiped out. The Sterling Area gradually faded away after this. It just could no longer be maintained with the decline of Sterling as a global currency. The empire was also in the process of breaking up as Commonwealth countries were beginning to gain independence and demand their own currency to complete this process. The demise of Britain was in full swing.

To conclude, we can say that during the 60s and 70s it was realised that the British economy was no longer in a position to support a global currency. The balance of payments was a persistent problem for the economy because of a wrongly held belief that Sterling was still a major currency. The problems did not end with the 1967 devaluation.

The Challenges of the 'Golden Age'

noreply@blogger.com (Sam) — Mon, 29 Apr 2013 08:31:00 +0000

If you read my previous post you'll see that the 'Golden Age' is a very positive time if viewed in certain lights. It wasn't all plain sailing for Britain, though, as this post will explain. If we look at the growth rate from the 1950s to mid 70s, we see it averages around 2.8% per year. Pretty good, higher than during the industrial revolution. But, compare it to the growth rate of other advanced economies and it looks feeble. In the 1950s we expected these other economies to grow quicker with their scope for 'catch up' growth, but in the 60s many of these economies had actually caught up with and overtaken Britain and were still growing faster.

This suggests there's a fundamental problem somewhere in the British economy. Could it be a problem of investment? We said investment was one of the reasons for Britain's low unemployment in this period, but it could also be part of the reason Britain was lagging behind. Our investment rates had grown since the 1930s, but they were still a way behind other advanced economies. Some blamed this on the policy of 'Stop-Go'. The poorly planned contractions and expansions of demand were too frequent, which left a level of instability that hindered investment. In reality, during the 'Go' phase the demand was pumped into the economy too fast. Prices rise quickly and the government has to quickly backtrack with a deflationary policy that chokes off investment. In the 'Stop' phase firms just help back on their investment, waiting for the next 'Go' phase. The uncertainty of the whole system meant lower investment.

The government needed some alternative methods to raise investment whilst still maintaining their very favourable employment conditions. They didn't want to devalue the sterling and they didn't want to deflate the economy for too long. The only option left was to return to a policy of state planning. A policy of 'Indicative planning' was working well in France so the governments of the early 60s tried to mimic it.

In steps the National Plan! Launched in 1964 by the Labour government with the aim of boosting long term growth up to 4%. A lot of effort was put in to the plan, production targets were set across the board which were needed to achieve the goal. It was all placed under the control of the new 'Department of Economics'. Sound good? It wasn't. It failed. There was no method given to meeting the targets and no penalties for those that didn't make them. It was a naive hope that workers would just cooperate. Well, they didn't. It potentially could have worked, but the whole plan stemmed from a misdiagnosis of the economy's problems. It all assumed that the 'Stop-Go' cycle caused the low investment which hindered growth. What if this wasn't the cause?

Was 'Stop-Go' really the problem? In a way, no. Large fluctuations in the economy that were persistent before 1939 and also occurred after 1973 didn't occur during the 'Golden Age' and a similar policy was used in other countries that were experiencing rapid growth. So was low investment the problem? Britain's investment rates were catching other countries by the 70s, but it was investment in private housing that was holding the rate back. It seemed that Britain was very unproductive compared to its competitors with the same equipment which could have been a deterrent for investment. Investment is seen more and more as a symptom of Britain's decline, rather than a cause of it.

The suggestion from this was that Britain was suffering from other supply side weaknesses. What could these have been? Bad industrial relations, restrictive practices, poor management, poorly aimed research and development and inadequate human capital formation.

Britain's bad industrial relations came partly in the form of strikes. Compared to Germany the strike rate was poor, but compared to the USA it was much better. Productivity was the real issue. Britain's steel productivity was a 1/3 of the EEC average. We were over-manning our factories with people putting in little effort. Top managers in large industry seemed to be completely oblivious to shop floor activities.

Research and development was one of the big problems too. Britain was spending more than all other Western economies bar the USA, with half of this coming from the private sector. The direction of this spending was an issue. It was being spent on defence, civil nuclear power and civil aerospace - three unprofitable and poor commercial areas. All of the most talented scientists and technical manpower were stuck in dead end projects not adding much to the GDP of the country. Innovation was falling too.

Another one of the supply-side issues was education. We were a comparatively uneducated economy. Only half our factor directors had degrees, the figure was closer to 90% if you looked abroad. It was even worse at middle management level. Those managers that did have degrees tended to have them in arty subjects and not managerial subjects.

So, if these really are the problems causing low growth - why did they persist? You'd assume that market forces would create change and push the inefficient parts of the economy out. The explanation for this is put down to 'Institutional sclerosis'. Key power structures had been left undisturbed for such a period of time that they had become entrenched. Vested interests were created and these resisted change. A part of this can be put down to the little damage Britain took during war. If we compare it to Germany, who took a lot of damage, we see why. Germany's war damage forced them to rethink the whole economy, they kept their strengths and replaced their weaknesses. With Britain, this didn't happen and institutions were left entrenched. The world boom then further lessens Britain's incentive to change.

The government were also very reluctant to generate the required change. They didn't want to challenge the vested interests in competition policy and preferred to follow the path of 'Stop-Go' and not detailed economic intervention. Another reason the government didn't force change is perhaps the problems weren't as bad as first implied. This was the view of some historians. There were some positives: our research and development spending was similar to France and they were growing rapidly. We looked good in industries such as pharmaceuticals and food and drink. Globally, Britain's incomes were in line with the OECD average and the economy was still successful. The only real negative was the loss of global political influence.

To conclude, the 'Golden Age' is a period that can be argued to have been good and bad for Britain. The debate about the extent and causes of the failures I've detailed above will continue for many years to come. Britain does lose ground, but is still a successful economy.

The 'Golden Years'

noreply@blogger.com (Sam) — Sun, 28 Apr 2013 14:39:00 +0000

Once World War 2 had come to an end, the government had a changed view on the economy. There was a unanimous agreement that the economy could not be returned to the conditions of the 1930s. A prime opportunity had presented itself for economic betterment to take place. The war experience could fuel this improvement along with breakthroughs in Keynesian economic theory.

In weighing up what exactly the government could do to improve the economy from the 1930 levels, three main areas appear. Firstly, could they try a policy of nationalisation? The short answer to this was no. Many key industries were already under national control, such as steel, coal and the railways and most other important industries were so highly regulated already that nationalising them completely would have been ineffective. So, the policy of nationalisation was crossed off the list. Could they try and raise public spending? Well, in reality - not really. Public spending was already high at 37% of GDP in 1948, most of this going on social safety nets rather than boosting the economy. Any further public spending would be unsustainable. There goes public spending off the list. The option that was chosen was macroeconomic management.

The 1950s was a period of breakthrough for Keynesian theory. It saw the policy of demand management come to flourish - or better known: 'Stop-Go'. The idea behind this policy was constant tweaking of the economy to keep it heading in the right direction and to avoid overheating or recession. When unemployment began to rise, the government would loosen policy and when the economy looked like it was overheating the government would tighten policy again. Did it work? Eh... In some senses, yes, in most other senses, not really. If you place a high priority on unemployment then it could be passed as a success - unemployment reached historically low levels and fluctuated around the 1.5-2.5% mark. Living standards also rose. However, this was at the cost of frequent balance of payment crises, slower growth than the UK's major competitors and inflation (although not runaway inflation).

The policy had a famous critic in the form of the economist RCO Matthews. He had his doubts about Keynesian theory. The basic thrust of his argument was that the reason unemployment was so low wasn't to do with the policy the government had implemented - this policy only affected unemployment at the margin. He claimed that demand was higher than pre-war levels, but not because of financial policy. Tax was higher than spending, budgetary policy tended to be deflationary and interest rates were consistently higher in the 50s.

So what could the other reasons for the low unemployment be? Some have put it down to high investment rates. Investment was especially higher than in 1939 and most of it was coming from the private sector. Investment is a fickle economic variable that depends a lot on confidence. From 1950-1973 there was a world economic boom which is the reason for this high investment. In Europe and Asia, war had hit harder than in the US. This left a lot of scope for 'catch up' growth to repair the war damage using the best practice techniques. Many workers also moved into more productive sectors such as services instead of agriculture. As well as this, world trade barriers come down and the Bretton Woods system begins to function efficiently as the USA pump the system with overseas aid and defence spending. Overall, world demand increases which fuels investment and productivity growth. This growth in world trade in a way drags the British economy along with it.

Another contributory factor for the higher investment comes from Broadberry. Productivity rises were higher than wage rises which favours job creation. As well as this, wage restraints continued through the 1960s, essentially increasing firms profits allowing investment to take place. The wage restraints were supplemented by cheaper imports of food and raw materials to keep living standards rising.

We can conclude the 'Golden Age' by saying that, yes, full employment was pretty much achieved, but it wasn't all down to the wonders of government policy. They were helped a great deal by very favourable conditions around the world. With hindsight, we can also see that this is only a temporary purple patch for Britain as problems begin to crop up.

Macro-Economic Issues

noreply@blogger.com (Sam) — Thu, 25 Apr 2013 17:42:00 +0000

The macro-economy refers to the wider economy - it's looking at an economy as a whole as opposed to individual firms or operators within an economy that micro-economics refers to. We come across macroeconomics on a daily basis: inflation and unemployment for example. The topic gets a lot of media attention and is the main cause of a lot of the criticism that politicians receive. The importance placed on macroeconomics by politicians can never be understated - they fully understand that voters want a thriving economy and therefore they strive to achieve this.

The four major economic issues are ones we will all have heard of: Economic growth, unemployment, inflation and the Balance of Payments/Exchange rate. The government aims to keep all four of these in check as part of their policy objectives. They want economic growth to be at a high, stable level. They aim to reduce unemployment because not only is it a drain on their finances in the form of unemployment benefits but it is a waste of resources. Inflation needs to be kept low and stable to make decision making easier on individuals and firms. The balance of payments wants to be in surplus, or at least balanced, so that the exchange rate isn't pushed upwards (this can fuel inflation as import prices will rise). The problem the government faces is that these policy objectives can conflict. If there's one thing you learn from this post, make it be this: The government are in a difficult position - they will struggle to achieve all four of these objectives at the same time.

At this point I am going to direct you to a previous post I've written about the circular flow of income as this will come in handy when looking at the next part. Click here to be linked to that post.

So, the macroeconomic goals of the government have a close relationship with the circular flow of income. If the withdrawals from the flow exceed the injections into the flow then we will see a case of aggregate demand falling. This subsequently will lead to a fall in economic growth, a rise in unemployment, lower inflation and a potential improvement of the balance of payments. With injections exceeding withdrawals we expect the opposite to happen. Here is a perfect example of the difficulties the government faces. A rise in aggregate demand has the potential to push the government closer to two of its goals (economic growth and a fall in unemployment) but at the same time it also pushes them further away from the other two goals (rise in inflation and a worsening balance of payments). The dilemmas of a politician.

VampireStat: A Warning & Referrer Spam

noreply@blogger.com (Sam) — Sat, 20 Apr 2013 21:49:00 +0000

This is completely off the topic of economics I'm afraid. It's a heads up to other bloggers - if you've been getting hits on your blog from a website called VampireStat then do not click on it. Please. I was always suspicious of it when I saw it was browsing my page and pumping up my hit counter so I never clicked on it to find out what it was - but from what I've heard its a potentially malicious site. There are other sites similar to it, trying to entice blog owners onto their page to spam them and potentially infect them.

So, this is a heads up to blog owners not to click on the link to VampireStat. I don't know anyway of blocking them from viewing your blog, but for now just resist the temptation to click. If you know the names of other similar sites please comment them and help out fellow bloggers.

A few other sites have come up that are essentially the same thing: 'Filmhill', 'current' and 'topblogstories'. Once again, DO NOT click on these links. I did some digging and these sites are known as referrer spam. There isn't actually someone viewing your blog, these sites are using bots to trawl through blogs to get you to click on their link. The only way to stop them is to not click on them. Clicking on them makes them do it more. So, to reiterate, ignore any hits from these sites and do not click the link. It's for the good of yourself as well as others!
Cheers guys!

Marketable Permits

noreply@blogger.com (Sam) — Sat, 20 Apr 2013 08:24:00 +0000

Another market based instrument the government can use to try and internalise the externalities caused by the use of environmental goods and services is marketable permits. The authorities choose the amount of pollution they feel is acceptable for a particular pollutant. Then, they issue permits to firms, each one allowing the firm to emit one unit of pollution. The amount of permits they give out will be equal to the pollution limit they have set. A market has then been created - firms can buy or sell these permits when they need to, the price of the permits will depend on the demand and supply. These marketable permits leave the decision to the firm as to how many permits to buy and how much pollution to abate.

The firms marginal abatement cost and the cost of permits will influence the firms decision to cut their pollution. If the marginal abatement cost is greater than the permit price then the firm will keep its pollution as it is and buy permits to cover it. If the permit price is greater than the firms marginal abatement cost then the firm will cut its pollution because it will be cheaper than buying the permits to cover it all.

Marketable permits are a lower cost way of reducing pollution than command and control. Imagine we have two firms: Firm 1 and Firm 2. Firm 1's MAC is £100 and it is polluting 50 tonnes. Firm 2's MAC is £150 and it is also polluting 50 tonnes. Total emissions is 100 tonnes. If we wanted to cut pollution down to 80 tonnes using command and control methods we'd get each firm to cut pollution by 10 tonnes. This would have a cost of £1,000 to Firm 1 and £1,500 to Firm 2, a total cost of £2500 to cut the pollution.

Now, If the permit price was £130 and we were trying to get to 80 tonnes under marketable permits the cost would be different. 80 permits would be issued to firms, so Firm 1 and Firm 2 would both get 40. Firm 1 could cut pollution by 20 tonnes to reach a total of 30 tonnes emitted at a cost of £2000. They could then sell 10 spare permits netting them £1300, meaning the net cost was £700. Firm 2 could buy up 10 additional permits and keep its pollution at 50 tonnes - this would cost them £1300. So, pollution has now fallen to 80 tonnes (30 from Firm A and 50 from Firm B) but it has only cost a total of £2000 (£700 for Firm A and £1300 for Firm B). Therefore marketable permits is a more cost effective way of reducing pollution than command and control.

Marketable permits also have a benefit over the pollution tax system. Permits allow authorities to set the amount of pollution and then let the market choose the price. With taxes, the authorities choose the price and let the market choose the pollution level.

There are many technicalities to the system that I'll talk through now. The first of these is 'bubbles'. This is essentially a 'bubble' over a whole firms pollution - the aim is to make the aggregate level of pollution in the bubble stay the same. So, they can increase pollution from one of their outlets as long as they reduce pollution elsewhere in their firm by an equal amount. 'Banking' is an extension to this. It allows a firm to bank credits for later use if they reduce below the aggregate amount - it allows them to temporarily pollute more in the future by using these credits. 'Netting' is another concept. This allows firms to create a new source of emissions only if they generate equal reductions elsewhere in their firm - they cannot buy new permits from the outside to cover the new emissions they must internally trade the permits they already have.

In reality, marketable permits are a difficult concept to get going. An example of this is the EU CO2 Emissions Trading Scheme of 2005. It ultimately failed because too many permits were given out at the start and therefore nothing was achieved, but a lot of money was wasted. There are many other problems with the system. Firstly, the politics behind it make it difficult to impose and coupled with this the unethical-ness of actually permitting firms to pollute generates a lot of opposition. The system comes with massive administration costs that only get higher with more firms being included in the operation. The main problem is how to actually allocate the permits in the first place? One method used already is 'grandfathering'. Firms are given permits based on historical emissions data, the more the firm polluted in the past the more permits they get. This is, in essence, rewarding dirty firms. It also incentivises firms to increase production and therefore pollution when talk of a permit scheme being introduced starts so that the firm can gain more permits.

In theory marketable permits are a great idea, currently in reality they don't work too well and there are many obstacles that need to be overcome. Maybe in the near future we will see these sort of schemes becoming more common and helping the pollution problem. What is your opinion? Cheers for reading.

Sam.

Government Failure

noreply@blogger.com (Sam) — Fri, 19 Apr 2013 08:41:00 +0000

Sometimes we see governments intervening in markets in an attempt to make them more efficient. However, it is very often the case that they aren't any better at managing resources than the free market - this is known as government failure. We'll look at example involving land conversion and biodiversity loss.

Land conversion is the main reason for biodiversity loss around the word - both grassland and forest cover is declining rapidly in some parts of the planet. We use a diagram similar to the one used in the last post which looks at the interaction between a firm's marginal net private benefit and the marginal external cost of land conversion. The definitions in this case are as follows:

Marginal net private benefit (MNPB) = the profit associated with a one unit increase in land conversion.
Marginal external cost (MEC) = External cost of a one unit rise in land conversion.

The market for this looks as follows:

Let us describe the market. We have an initial over-conversion because of the market failure. Lp is converted when the socially optimal level would be L*. This is all explained in the last post I made. The government failure, however, comes in the form of the subsidy. The government may be subsidising farmers' incomes, or something of the sort, but this is encouraging more land to be converted. The subsidy increases the marginal net private benefit of land conversion for the firm and therefore the amount of land converted has moved further away from the socially optimal level. We have to remove the government failure before we can remedy the market failure.

We've assumed a constant upwards sloping marginal external cost curve here, but it may be a good time to mention other plausible curves. We could have a curve that increases at a constant rate and once a threshold point is reached it increases faster. Or, we could even have a downwards sloping MEC curve. How? Imagine a view being ruined by a factory. The first factory has a massive effect on the view but subsequent factories have a lesser effect because the damage has already been done by the previous factories.

Government failure occurs a lot in the real world. One example would be with the Common Agricultural Policy. It aimed to provide farmers with a steady income by offering a guarantee price for their goods. This meant overproduction was rife - farmers knew that the best technique was to farm as much as they possibly could to get the most revenue. Land was farmed more intensively and more land was converted to farming to expand production. This will/has caused degradation of the land and biodiversity loss.

Another example is subsidies in developing countries. Governments there tend to impose subsidies to keep prices below the market price so that food and the like is affordable. This encourages over use of the land once again and makes the economic activity look artificially appealing, attracting more firms in. It is also a waste of financial resources that are needed elsewhere.

As we can see government failure is something that is very real. It can occur fairly easily and it needs to be stopped before any market failure can be addressed. How do we stop it, though? I'll be going into this in later posts, stay tuned. Thanks for reading.

Sam.

Markets and Market Failure

noreply@blogger.com (Sam) — Thu, 18 Apr 2013 09:18:00 +0000

When it comes to a firm deciding what output to produce, they generally take into account only two things: How much they can sell the good for and how much it costs to produce. Using this information, they set out to maximise profit by producing where the marginal costs are equal to the marginal revenue. This means there is a strong incentive for the firm to keep costs as low as possible to maximise profits.

Many environmental goods do not come with a price tag, they are treated as being free by the firm. This 0 price tag means that firms put no effort into using these resources efficiently. The costs that the firm should incur when using these goods are known as the external costs. They do not get taken into account by the firm when making production decisions and therefore we experience over production. External costs are the difference between the social cost of an economic decision and the private costs (costs to the one making the decision).

Here we can clearly see that at the price P the optimal production would be Q*, if the social costs were taken into account. But production is actually at Q because only the firms private costs are looked at when deciding how much to produce. This is an obvious overproduction and it is due to environmental goods not having a price and therefore being treated as free.

Another way to map this out is using marginal external costs versus the marginal net private benefits of production. The marginal net private benefit is the additional benefit the producing firm gains from each additional unit of production. The marginal external cost is the cost to the third party of each additional unit of production. Each additional unit of production adds an increasing amount to the costs but a decreasing amount to the benefits, hence the shape of the curves you're about to see.

In the scenario here, the firm produces at the point Q. Why? Well, they do not care about the marginal external cost of their actions so we can ignore that curve for now. At point Q, benefit for the firm is maximised. Any more production past point Q and benefit to the firm will start to decline. Any point before Q will mean there is more potential benefit to gain. The socially optimal point of output/pollution would be at Q*. This is where the profit from producing the last unit of pollution equals the cost of producing it. Essentially, here, benefits = costs. The external cost has been paid for and the true value of the environmental good has been taken into account. The problem is getting firms to produce at this point. There needs to be a form of incentive to encourage firms to reduce production and therefore pollution to the socially optimal point. How to do this?

That's market failure in an environmental sense. Thank you for reading, comment if you have questions.. blah blah blah. Have a good day.

Sam.

Interactions Between the Economy and the Environment

noreply@blogger.com (Sam) — Sun, 14 Apr 2013 09:20:00 +0000

The economy and the environment is a topic that divides opinion. There are groups of people that feel very strongly either way and a bunch sitting on the fence. One thing is for certain - it is an important issue that needs addressing. The interaction between the economy and the environment is vast, almost all economic action has some impact on the economy and vice versa.

The interaction can be summarised fairly easy. Environmental inputs are taken from the environment for use in the economy and are exchanged with waste created from their use. While this is going on the environment and the economy also operate independently. If the link was broken then both would suffer.

Where does this all come from then? Well, we assume the economy functions in a circular motion. (P)Production produces (C) consumer goods and (K) capital goods, which produce more (C). This yields societies (U) welfare:

So where does the environment come into this? Well, the environment starts off the chain. We can add (R) the flow of natural resources leading to (P) production. We can also add waste (W). At each stage of the process waste is created and fed back into the environment. Using the First Law of Thermodynamics that states we cannot create or destroy energy and matter, the amount of waste used in a time period must be equal to the amount of resources used. The start of the chain now looks something like this:

Now the final stage to convert this into the circular system is to add in recycling (r). This gives us the full circular system. Natural resources add to production which adds to consumer/capital goods. All three of these create waste which is fed back into the environment. Some of this waste is taken to be recycled and fed back into the system as a natural resource. Ultimately the consumer/capital goods lead to consumer welfare. The environment also adds to consumer welfare as it is.

This is how the system works, but can it be improved? Yes, yes it can. We can reduce R by using energy more efficiently. This will in turn reduce waste which is of course a good thing. We have to take care of the assimilative capacity of the environment. This is the ability for the environment to break down waste, it becomes more and more limited with higher amounts of waste. Therefore, the more waste we create, the less can be broken down naturally by the environment - a bad thing.

The question now might be why don't we recycle all waste? That way the assimilative capacity of the environment would never get strained and natural resources could remain very much intact. Well, we can't because of the Second Law of Thermodynamics. This states that energy can change states and become unusable. The word for this dissipation is 'entropy'. Unused resources have low entropy but once they've been used it becomes high entropy. This explains why we cannot recycle everything.

So, we've essentially covered the three main economic functions of the environment above: a supplier of natural resources, an assimilator of waste and a source of utility. Environment damage occurs because us as the consumer do not value these functions correctly. We treat them as free when in actual fact if they were marketable goods they would have higher prices.

The concept of sustainable development can be touched upon here. There are many different definitions for this phrase, you've just got to pick one. The one I like is "Development that meets the needs of the present without compromising the ability of future generations to meet their own needs".

How do we ensure that future generations can meet their wellbeing needs? We need to make sure we look at the ideas of intergenerational and intergenerational equity. This means providing for the most needy in today's society (intra) but also meeting the needs of the next generation (inter). A good way of doing this is to ensure that we leave a stock of capital at least as large as the current one. This comes in two forms: weak and strong sustainable development. Weak will involve maintaining the aggregate level of capital stock. A fall in natural stock can be substituted by a rise in man-made capital. Strong differentiates between the two types of stock, it understands that some natural stock is a necessity. It encourages the need to be cautions and beware of irreversibility.

Sam.

Externalities and Public Goods

noreply@blogger.com (Sam) — Sat, 13 Apr 2013 17:12:00 +0000

Externalities are the effect on the third party of an action made by an individual or a firm - whether it be for the better or the worse. A lot of the time externalities are negative, pollution for example, and this is the example we will use here. We'll look at a firm in industry creating a good that means they are polluting the atmosphere.

With externalities being ignored, the firm will hire workers and capital according to the rule: (Marginal revenue product of labour = marginal cost of labour = wage = marginal cost of labour)

In Layman's terms, this means they'll employ labour up until the point where the marginal revenue product of labour is equal to the marginal cost of labour, meaning profits are being maximised. If the producer had to clean up the pollution as well then the amount they'd employ would become:

What has been added is a new Price, the price of cleaning pollution. This is taken away from the price of the product they're producing which will overall leave a lower figure. If we rearranged above we could achieve this:

The marginal cost of the good will now be the wage plus the marginal cost of cleaning up the pollution. This means the social cost of the firms actions have been taken into account. Previously, the marginal cost of production was below the marginal social cost - leading to an overproduction. Here it is graphically:

Q2 is the social optimum when the cost of clearing the pollution is taken into account. If MSC is greater than MC then there are external costs of production, if it's the other way round there are external benefits to production.

Now for a quick look at public goods, a fairly simple sub-topic. A public good is one that has the characteristics 'non rival' and 'non excludable'. What does this mean? It means that my consumption of the good does not stop other people consuming it (non rival) and I cannot be prevented from consuming the good once it is provided (non excludable). Street lighting is a good example. It's a good that generally has to be provided by a government because no individual or firm would pay for it - they'd just wait for someone else to buy and free ride. A good that has only one of the characteristics stated above but not both is known as a 'quasi-public good'.

That's all boys and girls! Comment if you need more help, share the blog if it has assisted you. Cheers!
Sam.

The 5 Minute Guide to the "Credit Crunch"

noreply@blogger.com (Sam) — Fri, 12 Apr 2013 19:21:00 +0000

So, "credit crunch" is a phrase that has been tossed around way too much in the last few years. I find it tremendously cheesy and I'm not ashamed to say that it makes me cringe a bit when I read it. But, it seems to have reached that stage where it is now a socially acceptable term (ugh!) and therefore we have to roll with it. I'm taking a wild stab in the dark here assuming that a lot of people know what the "credit crunch" is but don't know how it came about, or how we ended up slap bang in the middle of it! Fear not, I am here to talk you through it in 5 minutes (don't hold me to that).

So, we roll back the clock to the early to mid 2000's. We are in America and looking at the US mortgage market. Around this time most things economical are going well, generally the world is in a stable position and growing well - meaning confidence is high. What is important to note is that, due to this, property prices in the USA were on the rise. High confidence and rising house prices put the mortgage lenders in a fairly arrogant position. We saw an expansion of what is known as the 'sub prime' mortgage market. These are essentially risky mortgages - mortgages given out to people who may have trouble meeting the repayment schedule. Why do this? Well, the banks felt safe because the rising house prices meant if the recipient of the mortgage couldn't make the payment then the bank would inherit an asset that was rising in value - increasing their profit.

Everything was all well and good until we reach 2007. Towards the end of the year inflation in the USA rises and this forces interest rates up (higher interest rates are a method of bringing prices/inflation down). The mortgage default rate begins to rise now because the low introductory interest rate of the mortgages start to come to an end. The mortgage recipients now have to pay the higher national interest rate on their repayments and many could not do this and were forced to default.

Coinciding with this, the housing boom collapses and house prices plummet. Now the banks are left with a defaulted mortgage and a worthless house - they have entered a very sticky situation and their balance sheets are severely hit. A key part of the finance sector is banks lending to each other when needed, they do this at special rates and it is the cheapest way of generating short term funds. This stops. Banks stop lending to one another because their balance sheets were hit by the defaulting mortgages and worthless properties.

This essentially is the problem. Some banks cannot afford to keep going due to the losses they've made and with no access to short term funding from other banks they have no option but to declare bankruptcy - Lehman Bros for example. It becomes a global crisis because of the integration of the world economy. Countries are so intertwined now due to trading, international agreements that something like this can spread around the world in a matter of months. It took roughly 3 months from when the USA entered recession for the UK to enter recession. In the space of a few months a crisis in one country has become a global financial crisis.

That's it. Sub-prime mortgages increase -> inflation causes interest rates to rise -> housing market collapses -> default rates increases -> banks stop lending to one another -> recession -> spreads around the world.
This is a very simple look at the credit crunch, of course there is a lot more to it. For the normal person, this is as much detail as you need to understand, essentially, what went on and why we are where we are now.
Cheers guys,
Sam.