International Trade and Economic Growth

Does international trade increase economic growth? In this context, what are the trade policies that have been followed by developing countries?

Standard textbook economic theory tells us that international trade benefits both parties in the trade, based on the gains from comparative advantage as laid out by David Ricardo. However, recent research into New Trade Theory suggests that trade may not always be beneficial, and there are examples when it could inhibit growth. This essay will examine when this could be the case and then relate this to the example of developing countries.

The Ricardian story goes that countries have comparative advantages in producing certain goods. [...]

Ricardian Equivalence

Explain Ricardian equivalence, and discuss what implication it might have on the efficacy of expansionary fiscal policy.

Ricardian equivalence states that for a given level of government spending a change in taxes – financed by a deficit – will have no effect on the real economy. It is posited that individuals are forward thinking and rational and realise that a tax break today will have to be paid in the future. Therefore individuals won’t go out and spend this tax cut but will instead save it so that they can smooth consumption.

They will save ΔT.r (tax cut multiplied by real interest rate), acknowledging that the government will have to pay interest on its debt so future taxation will need to incorporate this. [...]

Europe 2020

Within the overall Europe 2020 strategy, there will be difficult tensions to resolve between social and economic aims, as well as between qualitative progress and quantitative targets.

The impact of Europe 2020 on employment and the labour market will be pivotal, because it is the policy domain that straddles the boundary between the EU as an economic union and its wider social ambitions. Discuss.

The 2020 strategy is designed to promote “smart, sustainable and inclusive growth” with 7 key targets to; increase total investment in R+D to 3% of GDP; reduce greenhouse gas emissions by at least 20% compared to 1990 levels; increase the share of renewable energy to 20%; and move towards a 20% increase in energy efficiency; reduce school drop-out rates to less than 10% and increase the share of the population having completed tertiary education to at least 40%; lift 20 million people out of the risk of poverty and social exclusion; and raise the employment rate to 75% amongst 20-64 year olds. [...]

The Mundell-Tobin Effect

This article explains the Mundell-Tobin effect by showing the relationship between the ISLM and ADAS models. The Mundell-Tobin effect states that nominal interest rates may not rise 1:1 with price levels, as the Fisher effect states.

The Fisher effect derives from Fisher’s identity of i = r + π where i=nominal interest rates, r = real interest rates and π=inflation rate (i.e. rate of change in price levels). Fisher believed that if π rose by 1 then i must also rise by one.

Mundell-Tobin came along and said that this wasn’t the case, because they believed that r, the real interest rate, would fall if inflation rose, meaning the overall effect would be that i didn’t rise on a 1:1 basis with inflation. [...]

Quantitative Easing

What is Quantitative Easing and Why has it been used?

Quantitative easing is a policy introduced by the Bank of England to pump [to date] £375 billion into the economy. It works by the BofE purchasing government bonds (known as Gilts) off private and institutional investors which increases the price of government bonds, thus lowering the yield* and making it cheaper for the government to borrow. When first used it was seen as a form of unconventional monetary policy and was used because the central tool in a monetarists pocket – the use of interest rates to stimulate demand – was ineffective. [...]

Minimum Wages

Why have statutory minimum wages become more prominent in recent decades? Why have they generally had little adverse effect on employment?

Prior to the introduction of the national minimum wage (NMW) in 1999 there had been no statutory wage floors since the abolishment of the Wages Councils in 1993 by the Conservative government. Growing wage inequality in both the D50:D10 and D90:D50 measure (which looks at the differing wage rates in the respective percentiles) was one of the leading reasons in the demand for some form of minimum wage to counter this growing inequality. Metcalf finds that the NMW reduced the D50:D10 ratio by 9 points if we include the effects of immigration. [...]

Paul Mason’s Capitalism

Paul Mason today gave a ‘sermon’ (they even made us sing hymns!) on what he describes as Post-Capitalism. Without yet having read his book I wanted to address a few of his points based on his talk. Therefore some of my issues and criticisms may be cleared up at a later date. I find it ironic that he describes post-capitalism as being based on the shareholder economy which arises through voluntarism, yet the talk cost £20 per ticket and was followed by a book sign afterwards, which was also sold – but hey, we haven’t reached the post-capitalist state yet!

My first criticism with the whole idea (I think the same as Iain Martin’s) is that he seems to describe capitalism as an ideology, when in fact it is simply a system to distribute scarce resources. [...]

What is hysteresis?

I recently wrote an article on the situation in Greece, and mentioned the effects of hysteresis which I will expand upon in this blog article.

Hysteresis is a theory developed by the Keynesians to explain why laissez-faire economic policy may be damaging in the long run. Neoclassicalists would argue that during an economic downturn, when an external shock causes demand to fall, wages should be allowed to fall which would increase the international competitiveness of the economy so that exports can grow to increase demand and provide a boost to the economy fueling further growth until the economy is out of the slump and growing again. [...]

An Introduction to Post-Keynesianism

I recently attended a 3 day Post-Keynesian Study Group (PKSG) workshop at Kingston University, and here is some of what I learnt on the course. I am sure this will spawn many other research interests, leading to future blog articles on some of the theory discussed.

Day 1

The course was to be split up into 3 days, on the first day we would cover Post-Keynesianism, on the second we would continue with PK and financial crises in the morning, followed by Marxist Political Economy in the afternoon and then on the final day we would round off what we had learned, ask any further question and debate the success of student movements in encouraging pluralism. [...]

Why is Osborne adamant on a budget surplus?

Sawyer - budgetruleobjectionsI’ve just finished reading Malcolm Sawyer’s take on budgets surpluses (Malcolm Sawyer – Budget 2015 The budget surplus – see image for his basic objections) which leads be to write the following post, questioning whether budget surpluses are as positive as Osborne would have the public believe.

A government’s fiscal situation and that of an individual, or even a firm, are completely different. When a government decides to borrow then it must be the case that the private sector is saving, and when the government decides to save then it must be the case that the private sector is borrowing. [...]