Capital Exports during the Victorian Period

Posted on 27/12/202127/12/2021 by Rhys Williams

Between 1860 and 1914 net foreign investment averaged 1/3 of national income with net overseas assets forming 7% of national income in 1850 which more than quadrupled to reach 32% by 1913 (Edelstein). Contemporaries of the time along with recent economic historians have speculated that this vast amount of capital being sent abroad was detrimental to domestic growth believing that if the capital had instead been invested at home Britain would have seen more rapid growth. We will explore these arguments to find that whilst capital exports may have been slightly too excessive during the period, it didn’t cause a huge impact on domestic growth.

The Household Demand Model

Posted on 03/01/202103/01/2021 by Rhys Williams

We may be interested in understanding fertility decisions, because it is generally believed that population growth is detrimental to economic development (c.f. the Solow growth model and lessons from the British Industrial Revolution) and so we would advise policymakers to try and reduce population growth. The death rate has been falling across the globe since the 1960s (by 50% according to Schultz) as a result in medical advancements and the cheapening of drugs (as well as globalisation which meant this knowledge could diffuse across the world more easily), yet many LDCs have not followed the same transition path with respect to birth rates as developed countries did. By understanding why a couple decide to have a child (at the margin) we may be able to reduce these incentives, so as to limit population growth.

Trade Agreements and Reciprocity

Posted on 16/06/202016/06/2020 by Rhys Williams

Reciprocity, a mutual or reciprocal reduction in tariffs, is a key feature of trade agreements between large countries. Explain why reciprocity is a necessary feature for a trade agreement to yield higher welfare to both parties. Can a trade agreement be sustainable (or “self-enforcing”) if it is not characterized by reciprocity?

Following McLaren, let us consider two large countries, A and B which are symmetric both countries produce goods a and b, but A has a comparative advantage in the production of a whilst B has a comparative advantage in the production of b. To placate the domestic industry country A has an incentive to impose a tariff on good b which imposes a terms of trade loss for B and efficiency loses for both countries, whilst B has an incentive to impose a tariff on good a causing a terms of trade loss for A and efficiency losses for both country. [...]

Yield Curves

Posted on 04/05/202007/05/2020 by Rhys Williams

The yield curve shows us the interest rate of bonds maturing at different dates. We might generally expect – in normal times – that the yield curve would be upward sloping, which would imply that short term yields are lower than long-term yields. This would reflect the fact that investors expect interest rates to be higher in the future which would occur if they expect monetary policy to be tight, in order to fight inflationary pressures caused by an expanding economy. Hence we might think that an upward sloping yield curve is a positive reflection on the future of the economy, as investors believe that it will be overheating and will require contractionary monetary policy. However this analysis is only true if we focus on the long end of the yield curve: that long-term interest rates will be fairly high. It might be the case that we have an upward sloping yield curve because the current short term yield is low (and the long-term yield is at an average level); this will obviously imply that expectations are such that future activity will improve, but may not be particularly reassuring about the magnitude of such activity.

Big Push Model

Posted on 12/03/202007/05/2020 by Rhys Williams

A coordination problem is a situation where agents are unable to coordinate their behaviour, such that they end up in an equilibrium that leaves all agents worse off than in an alternative Pareto efficient equilibrium. This exists because complementarities between several conditions are necessary for successful development and the externalities arising from these complementarities are often not considered by decision making agents. Rosenstein-Rodan developed the big push theory which suggests that a government, or coalition of firms/organisations/individuals, needs to overcome these preconditions before growth can occur. Ellis describes this Big Push theory as a "minimum level of resources that must be devoted to... a development programme if it is to have any chance of success. Launching a country into self-sustaining growth is a little like getting an airplane off the ground. There is a critical ground speed which must be passed before the craft can become airborne....".

Political Commitment Theory of Trade Agreements

Posted on 04/01/202007/05/2020 by Rhys Williams

The political commitment theory of trade agreements argues that trade agreements arise due to the desire of the government to signal to private investors that they wish to pursue pro-growth policies. If announced unilaterally, this signal is not binding and so may not induce investors to invest, as they may not be confident that the government will stick to its announcement. However, when signalled via the signing of an international treaty, this may increase confidence that the government will stick to its promise, because the punishment from breaking its international commitments is much higher than if it broke a unilaterally declared promise. This theory therefore complements are understanding of why governments sign-up to trade agreements, and more importantly, explains why small countries enact tariff reductions when they don’t benefit from reductions in the terms of trade externality, due to their economic size.

Should changes in consumption be predictable?

Posted on 05/05/201907/05/2020 by Rhys Williams

The classical consumption models (Modigliani’s Life-Cycle hypothesis and Friedman’s Permanent Income hypothesis) tell us that consumption is dependent on life-time income. This is based on the assumptions of credit market access (so we don’t have liquidity constrained individuals) and certainty. In short this means that consumption will only change if income changes, and a temporary income change will cause consumption to rise by less (i.e. MPC is low) than a permanent income change (i.e. MPC is close to 1).

Due to the theory of consumption smoothing – whereby individuals prefer to have similar incomes over two periods (or a lifetime) than extremities in either period – we would expect change in consumption to be low over a lifetime. [...]

Behavioural Economics – Some notes

Posted on 13/02/201907/05/2020 by Rhys Williams

The advent of the neoclassical approach to establish economics as a science, led to the disappearance of many psychological insights already made by economists, for example Smith says “we suffer more… when we fall from a better to a worse situation, than we ever enjoy when we rise from a worse to a better.” And Edgeworth points out that one agent’s utility can be affected by another agent’s payoff. One development of neoclassical economics was the formulation of the expected utility framework which makes precise assumptions that can be falsified, it assumes stable and consistent preferences, the ability to perform complex computations, and an ability to memorise a large amount of information. [...]

Neoclassical Business Cycles

Posted on 27/12/201802/10/2020 by Rhys Williams

According to Prescott the reason for business cycles is due to technology shocks which manifest itself as changes in the TFP productivity term (or Solow residual) A. Summers criticises this explanation believing that Prescott doesn’t provide evidence for where these technology shocks come to. Furthermore he cites Berndt who shows that the oil shock crisis – recessionary periods in the 1970s for both the US and the UK – had little effect on labour productivity which would cast doubt on Prescott’s story. Summers also points out that US GNP declined by 50% between 1929 and 1933, and questions whether it is really plausible that such an output shock could be caused by a productivity shock which lead to inter-temporal substitution on such a scale, as Prescott’s model would predict.

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