Category: MacroEconomics

Why worry about having a low domestic exchange rate?

Posted on by Rhys Williams

There has been a lot in the news recently about the weak exchange rates of countries such as Brazil and India, mainly as a result of the impeding action being taken by the Federal Reserve (US Central Bank) to taper its Quantitative Easing scheme (that is to say, they will be reducing the amount of money they pump into the economy). The reason for this, is that US investors who were using QE dollars to speculate in the Indian and Brazilian economy’s, are now removing some of that money in order to place it in other US bonds which are expected to increase in yield. [...]

US Default

Posted on by Rhys Williams

There has been a lot in the news recently about the possibility of a US default – what does this mean? A default is a term used for when a country refuses to pay its debt. Generally this is because they can no longer afford to, however there could be other reasons, e.g. a change of government brings in a socialist regime whose policy was to default. A default may not be of the entire debt, debtors may be required to take a ‘haircut’ – which is considered a default – meaning they wont be paid back the entire amount they are owed. [...]

Privatisation – Good or Bad?

Posted on by Rhys Williams

Privatisation (also known as denationalisation) is a policy undertaken by a government, whereby an industry owned by the government (thus the nation) is placed into the hands of the private sector. This is often done through an Initial Public Offering on a stock market, but could be also done through a sale to a single entity. There are a number of reasons why a government may decide to privatise a holding:

  • Sell off loss making enterprises – if the government is making a loss on a firm it owns it may wish to sell it. By doing this it reduces the amount it has to pay for the loss, and a private firm may be able to turn its fortunes around, and turn it into a profit making firm, potentially increasing government tax revenue and reducing unemployment (and thus unemployment benefit spending).
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French Labour Inflexibility

Posted on by Rhys Williams

This article shows the the extent of the French labour market inflexibility and as a result the uncompetitiveness of the French economy and may provide an explanation as to why it is falling behind compared with Northern European economies.

Meanwhile UK unemployment falls again, despite economic output similarly falling, this will result in a fall in productivity. [...]

UK GDP Growth Shrinks in Q4 2012

Posted on by Rhys Williams

http://www.bbc.co.uk/news/business-21193525

The UK economy has shrunk by 0.3% in line with many economists’ predictions. The fall is mainly due to a slowdown in North Sea oil extraction, excluding oil and gas extraction the economy shrank 0.1%. This comes after a previous 0.9% growth in GDP during Q3.

Nick Clegg has blamed a lack of capital investment (investment in infrastructure) by the government as an explanation to why GDP is still lacklustre 5 years after the onset of the global financial crisis (http://www.bbc.co.uk/news/uk-politics-21190108). Increased capital spending would result in a rightward (positive) shift of the long run average cost curve. [...]

Network Rail Investment

Posted on by Rhys Williams

http://www.bbc.co.uk/news/uk-20938280

The article shows plans by Network Rail (the government owned firm which is responsible for maintaining the railway networks in the UK) to invest £37.5 billion in infrastructure over the next 5 years.

The effect of investment is to shift long run average supply curve rightwards. Investment should improve the speed and capacity of the network, this is good for businesses and should be good for the aggregate economy. However the current investment plans are going to mean a rise in train fares (prices are assumed to rise above inflation) which will reduce consumer surplus. This also indicates that price elasticity of demand for rail travel is relatively inelastic (train firms can also use price discrimination based on peak and off-peak travelling times) to allow for a higher price. [...]

Big Mac Index

Posted on by Rhys Williams

The Big Mac Index is published by the Economist and is used to demonstrate the idea of Purchasing Power Parity (PPP) and is a method of showing whether a currency is under or overvalued in relation to the US Dollar.

The theory behind PPP is that all currencies should be equal, not in nominal terms, but in purchasing terms. So I should be able to purchase a good in the UK using Pound Sterling for the same price as if I were to change my money into Euros and purchase the exact same good in France (ignoring transaction costs). Why is this? [...]