Economic Thoughts and Essays

By Rhys Williams

The Relationship Between Debt and Growth

Posted on by Rhys Williams

The debt-growth nexus has received renewed interest among academics and policy makers alike in the aftermath of the recent global financial crisis and the subsequent euro area sovereign debt crisis. Discuss whether there exists a tipping point, for public indebtedness, beyond which economic growth drops off significantly; and more generally, whether a build-up of public debt slows down the economy in the long run.

This essay explores the effects of debt on growth, by first examining the theoretical mechanisms that high debt can lead to lower growth before examining some of the empirical literature to see whether we observe such a relationship. [...]

Investment Functions

Posted on by Rhys Williams

In this article we explain the fundamental factors determining investment decisions of firms, which comprise the investment function. By determining the structure of the investment function we can hypothetically estimate this and thus predict how much a given firm ought to be investing, given economic fundamentals. This is interesting because we could then aggregate such functions – i.e. add up each firm-specific investment equation – to get a measure of what total investment by private firms in the economy ought to be investing. By comparing this amount with actual levels of investment we can derive a measure of the investment gap. [...]

GDP Data Revisions

Posted on by Rhys Williams

The importance of accurate GDP data is often understated and there is a need to document carefully the extent of revisions to statistics on economic activity and evaluate how this affects macroeconomic policy as well as examine ways to improve statistical methods.

The Office for National Statistics (ONS) has a trade-off between providing estimates on measures of economic activity, such as GDP, quickly, but also accurately. Information sources used to calculate GDP often take up to three years to arrive, but policymakers need to know before this the state of the economy. As such, the ONS uses a fraction (44%) of the eventual data source to make first estimates of the GDP. [...]

Why has wage inequality risen?

Posted on by Rhys Williams

Wage inequality has increased in many economies in recent decades. Discuss the three leading hypotheses regarding the causes of this increase. What does the empirical evidence tell us about the quantitative importance of each of these factors?

The US economy has almost double since the 1970s, and labour productivity has risen over this period. Yet real wages for the median worker hasn’t changed much since the 1970s, and below-median male wages have fallen; showing that the increasing size of the economy hasn’t been fairly distributed.

The rise in inequality between high skilled and low skilled workers is particularly pronounced, with Autor finding that households which are composed of university education individuals earned $30,298 more than non-skilled workers in 1979, but this rose to $58,249 by 2012, an increase of 92%. [...]

The Colonial Origins of Comparative Development: A Summary

Posted on by Rhys Williams

Acemoglu, Johnson and Robinson (AJR) attempt to measure the effects of institutions on income differences by introducing an exogenous source of variation in institutions to measure their differing outcomes. They begin by pointing out that the history of colonisation resulted in different institutions being formed: some countries received extractive institutions (whereby the coloniser would simply extract all resources but would not build proper institutions to promote growth and sustainable living) whilst others received inclusive institutions. This depended upon the ability for colonisers to settle, if a country was full of disease then the coloniser would not wish to live in this colony, but simply take as many resources as possible and then leave. [...]

Economic Growth: Where does it come from?

Posted on by Rhys Williams

One of the fundamental questions of economics is why are some countries rich and others poor? Why do some countries experience heavy growth which allows them to catch-up with the economic giants of the world, whilst others are relegated to the bottom and are unable to jump on the growth train? Is it due to luck, geography, culture or institutional factors? This article explains some of the different theories of economic growth, beginning with the Solow growth model (neoclassical model), before criticising such a model and suggesting that endogenous growth models have more to tell us about the growth phenomenon. We highlights the pitfalls of each model, but conclude that the main reason that incomes are different between countries is due to institutional differences. [...]

Did small scale firms inhibit Victorian Growth?

Posted on by Rhys Williams

Britain’s manufacturing firms have been accused of remaining family-run and small scale in the period 1850-1914, so ignoring the benefits of the large corporation evident in the USA. Discuss whether this represents a form of entrepreneurial failure by the owners of British firms.

Chandler identifies that corporation’s in America are vertically and horizontally integrated, invested in new technology and produced the latest industrial wares such as electricals, chemicals and automobiles. Britain was characterised by an “atomistic organisation of production”, according to Elbaum and Lazonick, with many small firms that were run by families. This is evidenced by the fact that in 1880s less than 10% of the manufacturing sector was accounted for by the largest 100 firms, the US figure was 22% (Hannah 1983). [...]

Marshallian Industrial Districts and the Rise of the Internet

Posted on by Rhys Williams

Recently I attended a Conference for the 40th Anniversary of the Cambridge Journal of Economics where a talk was given on “Industrial Districts, Organisation & Policy”. This article is a summary of some of the discussion from this talk as well as my further thoughts on extending Marshallian Industrial Districts to incorporate the internet.

What is a Marshallian Industrial District?
A Marshallian Industrial District is normally considered a clustering of firms in a similar industry operating from a certain geographic area. Being close to many other firms in the same industry allows a number of benefits, sometimes called benefits of agglomeration or Marshallian atmospheric externalities. [...]

Was there a Victorian Failure in Manufacturing?

Posted on by Rhys Williams

Comparisons of Britain’s labour productivity in manufacturing with that of other industrialised countries, such as the USA and Germany, from 1850-1914 suggest no dramatic decline in this sector during the period. However, labour productivity performance at the whole economy level was poor in comparison to other countries. (a) How can this be explained (b) Does it suggest a failure occurring in the UK economy?

Over the period 1850-1914 there was a decline in Britain’s overall labour productivity comparative to its competitors – against the US Britain was more productive in 1870 but was overtaken during the 1890s – in 1870 US/UK labour productivity in the aggregate economy was 89.8 which rose to 117.7 in 1910 (Broadberry 2006) demonstrating the ability of foreign nations to overtake Britain on this measure. [...]

Brief: Cannibalisation

Posted on by Rhys Williams

Cannibalisation occurs when a company reduces the sales of one of its products by introducing a similar, competing product in the same market.

Igami and Yang study this phenomenon in relation to burger outlets, pointing out that entry of new outlets harms the profitability of existing stores (cannibalisation) but that this occurs so as to preempt the threat of rivals’ entry: i.e. a firm may have an incentive to cannibalise its market share if it thinks this will keep rivals out (by saturating the market and depriving it of store locations).

One of their main findings is that “shops of the same chains compete more intensely with each other than with shops of different chains, which implies cannibalization is one of the most important considerations for the firms’ entry decisions”. [...]