Interesting and accessible information, links, video and more for students, teachers and anyone looking for an understanding of economic issues.

House prices and the economy.

RBS (the large banking group) produce really useful 'economic insights' which you can sign up to for free delivery via email - a great way of staying up-to-date with the major economic events and announcements.

The one dated 5.11.12 mentions a number of things including the following:

"Nationwide's house price index grew 0.6%m/m in October. While growth of any sort is good news, this is only the fourth month this year in which prices have risen. The average house price has remained about the same since January 2010 and is currently 11% below the October 2007 peak. However, accounting for inflation the real average house price is 25% below peak. With September mortgage approvals unchanged, and little growth in mortgage lending, the market is treading water."

As you can see, those with houses who bought at the peak have seen the value of this asset deteriorate.  Some people will have bought many years before the peak and therefore would still have seen an overall increase in the value of their house - however, if they are the kind of people who took out a second mortgage on the house (like many people did in the boom years up to 2007) in order to buy a new kitchen, new car, or fund a holiday, they may be feeling a bit poorer now.

House price rises tend to exaggerate booms as people feel wealthier and take out extra loans and mortgages due to this feeling of wealth that their house price rise has given them.  If house prices then go down it can make the economic downturn even worse.  The effects of this can be seen in the Consumption (C) part of Aggregate Demand (AD) and is one of the things which is prolonging the current economic slump.

On the positive side, at least houses are now more affordable, especially for first-time buyers.  BUT that depends on whether people have a safe job, a deposit for a house and are able to get a mortgage - this is the problem which is keeping the housing market flat.

The knock-on effect of this is that if people aren't moving house and don't feel wealthy in the house they are in, they will tend not to buy furniture, new carpets, new kitchens, etc.  This can affect the wider economy and hence makes an economic downturn worse.

Eventually people will get more confident and the housing market will pick up but it is difficult to know when.  But it's probably a good time to buy if you can afford it!

Supply of food - shift in the supply curve

Farmers have announced that they are looking at a particularly bad harvest this year.  With a drought at the beginning of 2012 followed by too much rain for the rest of the year, it has been a difficult time for a range of crops.

From an economist's point of view, these crops are sold directly to consumers but are also commodities and raw materials used in the manufacture of other products.  The problems with the supply will cause a shift in the supply curve to the left for these products and will also hit the supply curves for products which use these crops as raw materials.  Read the article, have a think about the knock-on effects of the price rises and perhaps draw a supply and demand diagram for an associated product which may be affected.

Graphic showing pressure on food prices in the UK

The Social and Economic Costs and Benefits of Prison

Students at Marlwood School undertook some independent study of some economic issues of their own choice.  An impressive collection of work and here is my pick of them by Rebekah Ashford:

Do the social benefits of prison outweigh its economic costs?

Should tax payers be forking out for ‘TVs and GCSEs’ for lawbreakers?
The number of people in UK prisons stands at over 85,000. On average, it costs £38,000 per annum per inmate; leading to an expenditure by the government of over £3bn each year. Such huge public expenditure cannot proceed without questioning and economic analysis – especially during a time when budgets are being slashed due to a looming national deficit. *“An economic approach to assessing the value for money of prison would involve comparing the cost of prison against its benefits.” Such benefits could be measured by observing reduced offending rates; or the benefit to society of rehabilitating prisoners – leading to their employment ‘outside’ and therefore contributing to the economy and GDP.
We cannot escape the fact that the cost of prison has risen from 2% GDP to 2.5% GDP over the last 10 years. We also cannot escape the fact that the majority of offenders will not have a job in which to immediately engage after they are released – with 6 out of 10 employers automatically disregarding applicants who hold a criminal record. Is it a wonder why reoffending rates stand at 47%? It appears that an unemployed ex – prisoner is driven back to crime though feelings of lack of purpose, lack of drive and an influential environment, showing that the government is simply throwing money at the criminal justice system. If resources were correctly allocated then we should see a significantly lower rate of reoffending and therefore a lower long run cost.
Food and shelter are necessities. Denying a criminal of such resources would arguably be a crime in itself. But when prisoners are provided with luxury; TVs, music equipment, free education courses, we are left wondering if this is just. We see the existence of families who are scraping the poverty line, with parents working tirelessly day and night just to put food on the table, while a convicted murderer lounges in a roomy cell watching Eastenders after a hearty meal. If life would be better in prison, wouldn’t you be tempted? This point highlights a key economic failure of the justice system; high spending on prisoners will simply encourage criminality – leading to a higher economic cost in the future. The government should critically review prison life in order to drive down reoffending rates.
On the other hand, prisons have invaluable social benefits. Research suggests that cutting funds and “Mcdonald-ising” our cells would actually decrease value for money. Investing more in prisons per head delivers financial savings in the long run; educational and vocational programmes saving society an average of £50,000 per inmate. It is very easy from a position of financial and family stability to criticize prisoners. But we cannot chose where we are born, and to what circumstances we are born into. Of course a main social benefit of prison is the safety of the general public from dangerous criminals; can a value be placed upon this safety? After exploring facts and figures on the BBC website, I was surprised to discover that over half of all prisoners had run away from home as a child: with 70% suffering with 2 or more mental disorders, making me contemplate my previous naivety. From presuming that the majority of prisoners were ‘lazy unemployed yobs’, I have come to understand that people can be driven to crime for a number of reasons. This leads to the argument that a “rehabilitation revolution” is the only way forward (described by Ken Clarke – Justice Secretary in 2008) – the root of the problem must be addressed in order to overcome it. Through counselling, training schemes and education, prisoners are given the opportunity to turn their lives around and to gain skills which can increase their chances of becoming employed. Socially, this is very beneficial as it allows ex-prisoners to support themselves, their families and the economy as whole; statistics showing that the majority of those entering prison have no qualifications. Even celebrity chef Gordon Ramsay has cooked up controversy in his new show “Gordon Behind Bars”, claiming that his “learn to earn” regime aims to rehabilitate prisoners who are “sick of failing, of not getting somewhere, not being someone." Everyone deserves a second chance. Don’t they?
After analysing the argument, I am beginning to understand why we as a nation invest in prisons. Although some argue that prison is “too kind” and “financially draining”, I have developed the belief that rehabilitating people with troubled backgrounds and personal issues is incredibly valuable, both economically and socially. There is thought that alternatives to prison may deliver a better return on public money. For example, residential drug treatments have been praised for delivering low reoffending rates along with a saving of £200,000 over the lifetime of an inmate in comparison to prison. But can pill popping really solve the complex issues that prisoners are often wrapped in? No. The social benefits of giving people a second chance, a second life clearly outweigh this economic cost – which with effective prison regime would be expected to decrease. The government’s primary aim is to maximise social welfare; holding the duty to improve lives of people from all walks of life in all types of situations.
Should tax payers be forking out for ‘TVs and GCSEs’ for lawbreakers?
The answer could be yes.


Looking at past interviews on the subject (BBC website) from Ken Clarke – Justice Secretary

Google – to find out key figures and facts

The Guardian – a very helpful article entitled “the real cost of prison”

Asking the opinions of others on the subject before drawing my own conclusion



Greece in Eurozone Debt Crisis

If someone owes you a large amount of money and can't pay there are a number of options open to you: 

a) go to their house and take their stuff (there are legal restrictions on this);
b) take them to court;
c) ask them nicely to pay you back;
d) agree with them that they can pay some back now and some back later;
e) agree with them that they can pay some back and let them off the rest;
f) write off the whole debt and put it down to experience.

These are some of the options open to the people who have been lenders to the Greek government. 

Who are these people?  Banks, insurance companies, pension funds - any institution that was looking for a place to keep their money and earn a return on it (government debt is regarded as a safer place than, for example, the stock market).

Why lend it to Greece?  Because governments are traditionally (and ironically) safe people to lend to and Greece debt gave them a decent return compared to other governments.

Why did the Greek government need to borrow?  All governments borrow money from time to time - to pay for railway projects, new hospitals, the Olympics, or to make up the difference when tax revenues aren't as high as what they are spending.  Of course, they need to pay it back and the theory is that as the economy grows they will earn the tax revenue to pay back the debt.  Simples.

However, the Greeks borrowed a bit too much and these banks and pension funds were a bit too keen to lend to them.  Consequently we are now looking at a number of options for Greece and each one has its own consequences.  If you write off the debt then that could potentially put banks and insurance companies out of business or at the very least cause some damage to them (and they could include YOUR bank and the company that insures YOUR car).  If you force Greece to keep paying then they might end up being unable to pay and then not pay any of it off.  Or if you write off some of it, what message does that send?

A small but significant example of the problem is that large pharmaceutical companies are so worried about not being paid that they have been cutting the credit available to the Greek insurance fund which provides prescription drugs - equivalent to them cutting back on the amount of drugs they are willing to sell to the NHS without the money up front.  The consequences of this are that patients with cancer or heart problems are having trouble getting the drugs they need and people are lined-up outside pharmacies trying to get life-saving drugs for ill relatives.

This is just one example of the current consequences.  However, if Greece ended up having to leave the Euro, this would throw up even more issues.  They would have to have a new currency, this would probably devalue against the Euro but what would happen to someone who had borrowed 100,000 original Euros to buy a house - do they pay back the bank (which could be German) in original Euros (which will cost that person a fortune) or do they pay them back in new Greek Euros (which would lead to a loss for the bank)?  What about contracts with foreign suppliers which involve multi-million Euro agreements?  Are these original Euros or new Greek Euros now?  And if you were Greek, how quickly would you try to get your money out of the bank to keep the value of it as the original Euro?

This is why it's all a bit of a nightmare.  I have heard suggestions that it the debt gets written off then the banks should seize the island of Rhodes as compensation.  Interesting but probably illegal under international law.  However, at least it's an idea.

The Causes of the Eurozone Crisis

Believe it or not, the Euro has been around in its current form since 1st January 1999 when all the member currencies were joined together.  However, at that point there was still no physical Euro currency, it was just that the exchange rates of Francs, Deutschemarks, etc were 'permanently' fixed in value in relation to each other - 1 Euro was equal to 1.96 Deutschmarks, 6.56 French Francs, 1936 Italian Lira (yes, that many), etc, etc (source:

The physical currency as we know it today appeared on 1st January 2002 and there was then a period of weeks when the old currencies were exchanged for the new one.

The arguments for a single currency were numerous but were focused on the existence of a 'single market' in the European Union and the idea that one market should have one currency - this would lead to clearer prices between countries, no exchange rate risk when doing business, a reduction in the costs of doing business and encouragement of more trade.  The United States has one currency - why can't Europe?

In order to join the club you had to prove that you met certain criteria - that your inflation rate, growth rates, and levels of government debt were within certain boundaries.  This was so that you could avoid having economies with huge variations and a potential situation where one country had high inflation and high growth and another was in recession.

Eventually it was thought that there would be movement of goods, service, capital, labour, etc, between countries and everything would even out leading to more efficiency, greater economies of scale, lower prices and higher growth rates.

However, when some countries joined, particularly Greece, a number of economists suggested that they weren't meeting the criteria to join and had too much government debt; there was also a feeling that the state of their economies were too different from economies such as Germany.

Initially no issues arose from this but once the 'credit crunch' hit and economies started struggling it became clear that countries such as Spain, Portugal and Greece did not have the underlying economic strength to deal with it.  Were they not in the single currency they could have even lower interest rates in order to encourage growth (having said that. Eurozone interest rates are very low) and could also devalue their currencies in order to make their exports cheaper and encourage growth that way.  As it is they are now tied to the policies of the whole Eurozone and have no room for manoeuvre.

Of course, part of this problem is their own making due to the large amount of government debt they have accumulated by spending much more than they were getting in taxes.  They are not the only governments to have done this but the markets do not feel they have the underlying ability to cope with the levels of debt and consequently are demanding high rates of interest to lend to them.

If the Eurozone was truly one currency in one 'country' then the central bank would step in and help out with the debt.  However, convincing German and French citizens to back the debt of other countries is a big ask and this is one of the flaws in the Eurozone project.  Would you like to see your tax money supporting debt built up by another country?  Probably not.

So what happens now.  Another blog required I think.

Fiscal Policy and Economic Performance

Fiscal Policy can be used to manage economic performance - below are the kind of data response questions you might find in an AS examination.

Graph A

Graph B

Extract C

Shadow Chancellor Ed Balls suggested the Government could cut income tax by 3p, raise the income tax threshold to above £10,000 or increase tax credits for working people.

He said it would be "fairer and quicker" to cut VAT - as Labour has previously called for - but added that the Chancellor would be unwilling to admit his "mistake" in raising the sales tax to 20%.

In an article for The Sunday Times, Mr Balls warned of lasting damage to the economy if the coalition did not take action in the March 21 Budget to help squeezed households and promote growth.

"Without that decisive action in the Budget to boost growth, I fear we are in for a lost decade of slow growth and high unemployment which will leave a permanent dent in our nation's prosperity," he wrote.

His intervention comes after credit ratings agency Moody's last week put Britain on negative outlook, warning that it could lose its AAA standard. Unemployment figures were also up again, with youth joblessness reaching another record high. Inflation, while falling in the latest update, continues to outstrip wages.

Mr Balls said the coalition had not just gone "too far and too fast" with spending cuts but also with tax rises, including the 2.5% hike in VAT. "That is why the Chancellor should announce a temporary reversal of his VAT rise," he said.

Speaking to BBC1's Andrew Marr Show later, Mr Balls repeated his call for a VAT cut to spark growth, claiming it was the "fastest and fairest way" to temporarily boost demand. He added: "We need some stimulus into our economy to get the economy moving. To get growth and jobs back is the only way to get the deficit down."

Tory deputy chairman Michael Fallon said: "This Government's credible plan to start living within its means is keeping interest rates low for families and businesses.

"But Ed Balls has clearly learnt nothing from his time as Gordon Brown's right-man. He wants billions of pounds of more borrowing and more debt, exactly how Labour got us into this mess in the first place."

The Guardian 19.2.12


Define the term economic growth. (5 marks)

Using the period from 1990 to 2009 on graphs A and B, identify two significant points of comparison.  (8 marks)

Extract C states that a stimulus should be used to boost the economy.  Explain TWO ways in which fiscal policy can do this.  (12 marks)

Using the data and your knowledge of recent economic events, assess the contribution that fiscal policy can have on economic performance.  (25 marks)