Interesting and accessible information, links, video and more for students, teachers and anyone looking for an understanding of economic issues. www.economicsrevealed.co.uk www.economicsrevealed.blogspot.com

Shock news - Jamaica tops Rio Olympics medal table with China and USA at the bottom.

Jamaica tops the gold medal table, Uzbekistan enters the top ten and China and USA fall to the bottom.


Analysis of the top 21 gold medal winning countries by www.EconomicsRevealed.co.uk reveals that once the gold medal places are re-adjusted in order to take into account the relative economic size of each country then Jamaica becomes the surprise winner and the USA and China falls to the bottom of the table.

It seems that money cannot buy you success at the Olympics.

Economist, Nick Langston-Able (Associate Lecturer at a leading UK university) analysed the gold medal results and compared them to the GDP of each country (GDP stands for Gross Domestic Product and is a standard measure of a country's economic size as it measures the output of all goods and services over a year).

The surprise result sees Jamaica as the most successful country in comparison to its economic size with Croatia in second place and Kenya coming in third.  Uzbekistan becomes a surprise entrant in at number eight in the table.

The large economies of USA and China find themselves at the bottom of the table with Team GB finishing in the number 12 spot.

Economist, Nick Langston-Able who carried out the research commented:

"Jamaica has a relatively small GDP and would not be regarded as a rich country but it has put in an excellent performance despite this.

"In terms of economic size, the UK is over 200 times bigger than Jamaica but only achieved three and a half times as many gold medals.

"The economy of the USA is over 1200 times bigger than Jamaica but the USA's medal haul does not reflect that.

"The relatively poorest country on the list is Jamaica and they have done brilliantly coming top of this revised medal table.

"Team GB have come a creditable tenth, just beneath Netherlands.

"It seems that perhaps money can't buy you success."

Countries with relatively large GDPs which did not even make it into the top 21 included India, Mexico, Indonesia and Turkey.



Here are the full results of the top 21 gold medal winning countries when adjusted for GDP:



CountryGold MedalsGDP (billions of dollars)GDP per medal (billions of dollars)
Jamaica6142
Croatia54910
Kenya66311
Hungary812115
Cuba57816
Uzbekistan46717
New Zealand417444
Russia19132670
Netherlands875394
GB272849106
South Korea91378153
Australia81340168
Spain71199171
Germany173356197
Italy81815227
France102422242
Brazil71775254
Japan124123344
Canada41551388
USA4617946390
China2610866418




Further analysis has also been done looking at gold medal performance in comparison to the size of each country's population.   See here.

Shock news - Jamaica tops gold medal table with USA and China at the bottom.

Jamaica tops the gold medal table, Uzbekistan enters the top ten and China and USA fall to the bottom.


Analysis of the top 21 gold medal winning countries by www.EconomicsRevealed.co.uk reveals that once the gold medal places are re-adjusted in order to take into account the relative economic size of each country then Jamaica becomes the surprise winner and the USA and China falls to the bottom of the table.

It seems that money cannot buy you success at the Olympics.

Economist, Nick Langston-Able (Associate Lecturer at a leading UK university) analysed the gold medal results and compared them to the GDP of each country (GDP stands for Gross Domestic Product and is a standard measure of a country's economic size as it measures the output of all goods and services over a year).

The surprise result sees Jamaica as the most successful country in comparison to its economic size with Croatia in second place and Kenya coming in third.  Uzbekistan becomes a surprise entrant in at number eight in the table.

The large economies of USA and China find themselves at the bottom of the table with Team GB finishing in the number 12 spot.

Economist, Nick Langston-Able who carried out the research commented:

"Jamaica has a relatively small GDP and would not be regarded as a rich country but it has put in an excellent performance despite this.

"In terms of economic size, the UK is over 200 times bigger than Jamaica but only achieved three and a half times as many gold medals.

"The economy of the USA is over 1200 times bigger than Jamaica but the USA's medal haul does not reflect that.

"The relatively poorest country on the list is Jamaica and they have done brilliantly coming top of this revised medal table.

"Team GB have come a creditable tenth, just beneath Netherlands.

"It seems that perhaps money can't buy you success."

Countries with relatively large GDPs which did not even make it into the top 21 included India, Mexico, Indonesia and Turkey.



Here are the full results of the top 21 gold medal winning countries when adjusted for GDP:



Country Gold Medals GDP (billions of dollars) GDP per medal (billions of dollars)
Jamaica 6 14 2
Croatia 5 49 10
Kenya 6 63 11
Hungary 8 121 15
Cuba 5 78 16
Uzbekistan 4 67 17
New Zealand 4 174 44
Russia 19 1326 70
Netherlands 8 753 94
GB 27 2849 106
South Korea 9 1378 153
Australia 8 1340 168
Spain 7 1199 171
Germany 17 3356 197
Italy 8 1815 227
France 10 2422 242
Brazil 7 1775 254
Japan 12 4123 344
Canada 4 1551 388
USA 46 17946 390
China 26 10866 418




Further analysis has also been done looking at gold medal performance in comparison to the size of each country's population.   See here.

Shock news - Jamaica tops gold medal table for Rio Olympics with TeamGB finishing seventh.

Jamaica tops the table, Team GB finish seventh with China in last place.


Analysis of the top 21 gold medal winning countries by www.EconomicsRevealed.co.uk reveals that once the gold medal places are re-adjusted in order to take into account the relative size of each country then Jamaica becomes the clear winner with 1 gold medal per 500,000 citizens.

The surprise result sees Croatia finishing second in the table with 1 gold medal per 800,000 citizens and Hungary finishing third with 1 gold medal per 1.3 million citizens.

New Zealanders will be excited to find themselves in joint third place, also with 1 gold medal per 1.3 million citizens.

In a disappointing result, China find itself at number 21 in the top 21 countries with 1 medal per 53.8 million citizens.

Economist, Nick Langston-Able (Associate Lecturer at a leading UK university) who carried out the research commented:

"It is fascinating to look at how the gold medal performance of different countries changes once you take into account the relative populations of those countries.

"Jamaica has performed brilliantly- for every 500,000 people in Jamaica there is a gold medal winner.

"The performance of China, with its population of 1.4 billion looks less impressive with a gold medal winner for every 53.8 million people.

"If population and gold medals were directly linked then China should have one over 100 times more gold medals than Jamaica did and around 20 times more than Team GB did.

"So Team GB can still be very proud but I would imagine the Kiwis will take some satisfaction from this result!"

Countries with relatively large populations which did not feature in this table and so have very much under-performed include India, Mexico, Indonesia and Turkey.


Here are the full results of the top 21 gold medal winning countries when adjusted for population size:

Country Gold Medals Population (millions) Population per medal (millions)
Jamaica 6 3 0.5
Croatia 5 4 0.8
New Zealand 4 5 1.3
Hungary 8 10 1.3
Netherlands 8 17 2.1
Cuba 5 11 2.2
GB 27 65 2.4
Australia 8 24 3.0
Germany 17 82 4.8
South Korea 9 51 5.7
France 10 65 6.5
Spain 7 46 6.6
USA 46 324 7.0
Kenya 6 44 7.3
Italy 8 61 7.6
Russia 19 147 7.7
Uzbekistan 4 32 8.0
Canada 4 37 9.3
Japan 12 127 10.6
Brazil 7 207 29.6
China 26 1,400 53.8


Further analysis has also been done looking at gold medal performance in comparison to the size of each country's GDP (Gross Domestic Product - the amount each country produces in a year and a common measurement of the economic size of a country).  See here.


Mobile Roaming Charges - Virgin Mobile under the spotlight

There has been a great deal of discussion about mobile phone operators and the extent to which they operate fairly and competitively.  Here is an interesting story:

N went to Dubai and Oman for 2 weeks.  He made and received no calls, the reason being that Virgin Mobile had a published tariff rate which stated here what all the rates were:  £1 to receive calls and £4 to make calls.  He decided not to access voicemail until he returned to the UK as he assumed that this would also incur a charge if he got through to it.

However, on returning to the UK he checked his account and his bill was way higher than usual and there were a collection of strange items on his bill for call received and made, even though he had not made nor received any calls and the phone log on this phone clearly showed this.

On contacting Virgin Mobile on 18th March, straight after he returned, he was told he would be called back within 3 days but this never happened.  On or around 30th March he spent 70 minutes on the phone to a call centre which left him on hold twice, the second time never coming back to him.  He tried phoning again and spoke to someone who said that they could not help because if the system said he made call then he made calls, even though his phone said otherwise.  On asking to make a complaint they seemed to have no clear system for dealing with this.


We will keep you updated on any progress on this but in the meanwhile be very wary of Virgin Mobile.  Once we hear of a response from them we will, of course, publish it.



Boosting the economy with Fiscal Policy. What is the Multiplier and how does it work?

Today at the University of the West of England in Bristol, undergraduate economists have been considering the ideas of John Maynard Keynes.  This is very relevant for countries such as Greece who are being told to increase taxes, cut government spending and balance their budget as this is not necessarily what Keynes would have recommended

John Maynard Keynes suggested that in an economic downturn you needed to inspire confidence in the economy - consumers tend to stop spending through a lack of income but also fear*, businesses do the same, so it takes the government to step in and start spending to get the whole thing moving again - perhaps through investment on infrastructure like roads and schools which gets people working and spending.

*(If you are really interested then further reading on 'the paradox of thrift' and 'the circular flow of income' would prove useful)

Keynes suggested that this government expenditure could be funded by borrowing.  This is fine if the government doesn't have too much debt but not so fine if you have the debt levels of Greece.  Interestingly, the USA, despite its debt levels, has tried this kind of 'fiscal stimulus' over the last few years and it has been relatively successful; in the UK, however, the government has been against this policy, has aimed to cut government spending and some have argued this has made the downturn in the UK worse.

How does 'the multiplier' fit into this?

The multiplier suggests that if an economy gets an injection of new money, this money gets spent a number of times and so multiplies in value.  Think about a new housing development - money gets paid to the developers, they pay suppliers and workers, those groups spend it in local shops or down the pub, etc, etc.  Bits of that initial pot of money will get spent thousands of times over the next few years which will boost the economy and increase Gross Domestic Product.

However, does all the money get spent?  No.  Some of it leaks out. 

Some it gets saved, some of it goes to the government in taxation, some of it gets spent on imports.  So we need to know how much leaks out and how much gets spent.

Let's assume the following:

There is an injection of new money into the economy - this could be £1000 of government spending on a new road, or £1000 investment in a new factory or an extra £1000 of exports we sell to a foreign country.

Of that £1000, assume that 40% goes in tax to the government, 10% gets spent on imports and 5% gets saved.  This means that 45% actually gets spent and 55% gets withdrawn.

In economic terms, the above information means that the marginal rate of taxation is 0.4 (40%), the marginal propensity to import is 0.1 (10%) and the marginal propensity to save is 0.05 (5%).  'Marginal' means what happens to each extra bit of money, i.e. the injection of £1000.

Therefore the marginal propensity to consume is 0.45 (45%) - this is the bit that gets spent each time.

So how do we calculate the multiplier?

Two ways but they are both the same. 

1 divided by 1 minus the marginal propensity to consume = 1/(1-0.45) = 1/0.55= 1.82

OR  1 divided by the marginal propensity to withdraw (or leak) = 1/0.55 = 1.82

What does the multiplier mean?

This figure of 1.82 is the multiplier.  It means that if there is an injection of new money into the economy of £1000, some if it will be spent (the marginal propensity to consume) and some of it will be withdrawn (the marginal propensity to withdraw or leak).  Taking all this into account, £1000 will be worth 1.82 times more because of this multiplier effect, therefore, £1820.

Why should we care?

If you're the government and you want to boost the economy by £18 Billion it means that you don't need £18 Billion to do it.  You need £10 Billion if the multiplier is 1.82.

This makes it very important to know what the multiplier is - and like many things in economics it can be difficult to measure and there are varying opinions.  However, after a little bit of research there seems that there is an average estimate for the UK of around 1.3.  There is debate about this and also a suggestion that it can vary with the state of the economy.

So was Keynes right about trying to boost the economy?

If you are a Keynesian then of course.  However, there are a group of economists who believe it is more important to get public spending under control, to balance the government budget and to reduce debt.  They believe that government gets in the way of individuals, crowds out the private sector and stifles enterprise.  This is the attitude taken by the republicans in USA and by the conservatives in the UK.

Those on the Keynesian side would suggest that if the economy is in a downturn and you have low consumer confidence, low business confidence and high unemployment, the worst thing you can do is exacerbate this through cutting government spending.

It's an interesting one.




 

 

 

 

 

 

 

 

The UK's Trade Deficit - big and getting bigger.

At the University of the West of England in February 2015 I had a chat with some undergraduate economists about the state of the UK's current account deficit.

The current account is the part of the balance of payments which deals with the money value of Imports and Exports of Goods & Services along with transfers of income (the other part is the Financial and Capital Account).

If you add up the money value of all Imports, Exports, transfers of income and a couple of other small things you have a situation where £25 to £30 Billion or around 5-6% of GDP is leaking out of the UK economy.  This is not great news.  The money may be coming back in terms of foreign companies investing in the UK or putting it in UK banks or buying government debt but over the long-term this can be unsustainable.

The question I asked the students was:

Should we look at ways of reducing our reliance on imports?

They considered:
  • A 'Buy British' campaign.
  • Leaving the EU.
  • Increasing protectionism.
  • Investing in UK productivity so the UK becomes more efficient.
  • Spending more money on capital investment so the UK becomes more efficient.
  • Developing more support for exporters.
  • Concentrating on further developing exports of UK services.
  • A devaluation of the pound.
None of these were straightforward.  They felt that the EU was a major trading partner so leaving the EU could harm the UK.  They were aware that it was difficult to impose tariffs on imports because of international trade rules.  Investment seemed like a good idea but would take time.  Supporting exports or developing the service sector were possibilities.  A devaluation of the pound could just mean that imports became more expensive but we could still be reliant on them - if you look at the value of food and oil we import you can see the problem.

There are no simple answers but the figures certainly show that the UK has a serious problem which those on power appear to be largely ignoring.


 

Economics - easy-reading books that make you think.

It's always good to find some easy-reading books which make you think about the world.

I would recommend all of these - you can pick them up, put them down, dip into a chapter and it doesn't matter if you are new to the idea of Economics as they are accessible, interesting and occasionally amusing.  After all Economics is an anagram of comic nose.


23 Things They Don't Tell You About Capitalism Paperback – 1 Sep 2011
by Ha-Joon Chang  (Author)



The Undercover Economist Paperback – 3 May 2007
by Tim Harford  (Author)


Freakonomics: A Rogue Economist Explores the Hidden Side of Everything Paperback – 18 Jun 2007
by Stephen J. Dubner  (Author), Steven D. Levitt  (Author)


The Undercover Economist Strikes Back: How to Run or Ruin an Economy Paperback – 3 Jul 2014
by Tim Harford  (Author)


Superfreakonomics: Global Cooling, Patriotic Prostitutes and Why Suicide Bombers Should Buy Life Insurance Paperback – 24 Jun 2010
by Steven D. Levitt  (Author), Stephen J. Dubner  (Author)


Naked Economics: Undressing the Dismal Science Paperback – 7 May 2010
by Charles Wheelan (Author), Burton G. Malkiel (Author)


The Armchair Economist: Economics & Everyday Life Paperback – 10 May 2012
by Steven E. Landsburg  (Author)


Where does Growth, Income and Wealth come from?


There are a number of theories about this but think about a simple village where you have a number of families tending the land.  All the land is fully utilised, there is no unemployment and when they aren't working the land they are doing domestic chores, raising children, etc.  They produce enough to get by and so there is no wealth accumulation as such.

How could such an economy grow?

I put this to an undergraduate Economics class at UWE, Bristol and here were their ideas:

  • Division of Labour and Specialisation -using the ideas of the economist Adam Smith, look at how they could divide up tasks and get individuals to specialise - perhaps one would be an expert at ploughing, another at digging, another at chopping, another at carrying.  This should result in efficiencies leading to greater output from the same amount of land.
  • Education - training and development of individuals will hopefully make them more productive which should lead to greater output.
  • Technology - developments in how land is sown or fertilised and developments of the plough could increase output.
  • Immigration - new immigrants may find it hard to find work as there is no extra income to pay them, however, if new immigrants have skills lacking in the community then this may help them - a new immigrant may have new knowledge or working practices which can benefit everyone in terms of increasing ouput.
  • Expansion - perhaps the town can expand outwards from its borders and utilise new natural resources.
  • Trade - the town could find other towns and perhaps trade with them - these other towns may have products which they are particularly good at producing and mutual trade may benefit both places.

What is 'Middle Income'?

Ex-Conservative Chancellor of the Exchequer, Norman Lamont was on Newsnight this week and one of the points he made was that the 40% tax bracket which starts at around £42,500 (this is on total yearly income) is harming 'middle-income earners'.


There is a debate to be had about what an appropriate high level of income tax should be, however, what is meant by middle income?

If you get data from the official source, the Office of National Statistics, this is what you find:
  • Gross (total before tax) yearly earnings are just under £27,000 per year on average (average being median - the middle-earner when you line everyone up in order) when you look at all full-time equivalent workers.
  • For women the figure is closer to £24,000 per year.
  • There are differences depending on the region you live in - in the South-West, for example, the average is around £25,000 per year when you look at all full-time equivalent workers.
  • And if you happened to be someone who was in what is called the 75th percentile, that is earning more than the 74% below you but less than the people above you, you would be earning around £38,000 per year.

Therefore, is £42,500 a middle-income.  Short answer, based on the evidence, No.

However, if Lord Lamont has alternative data, do get in touch.





Profit margins - who is making money and how much is too much?

There's a great deal of fuss in the papers about company profit margins.  Profit is the thing you make as a reward for running a business.  It also gives you the money you need if you want to invest in new products, machinery or buildings.

How much profit is too much?  Perhaps it depends on the industry and perhaps it depends on your political views.  However, when you see figures such as Tesco making £2,188,000,000 (just over £2 Billion), remember that it depends on how this relates to their total sales - in Tesco's case it is just £3.3% or £3.30 per £100 of stuff that they sell.

Below are some examples of Operating Profit Margins.  SSE, nPower and Centrica (British Gas) are all power companies - you will recognise the rest of them.


 
SSE 2.34%
nPower 7.57%
Centrica 10.96%
Tesco 3.30%
Sainsburys
3.81%
Next 19.51%
Wetherspoons 7.14%
Vodafone 10.64%
Apple 28.67%
HSBC 27.31%

Mr Cameron - the real problem of UK Competitiveness is NOT the EU

The UK Prime Minister, David Cameron spoke last week about a 'crisis of European Competitiveness'  http://www.number10.gov.uk/news/david-cameron-eu-speech/ and he cited issues such as the rights of workers, including the Working Time Directive, as being a source of some of the problems. (More on the Working Time Directive here: https://www.gov.uk/maximum-weekly-working-hours/weekly-maximum-working-hours-and-opting-out).

The evidence on this is mixed and it could be argued that the crisis in competitiveness is the fault of the UK itself and its own economic failures rather than anything 'European'.

Economic students will know that economic growth is largely dependent on a country's improvements in 'productive capacity' in terms of investment in technology, factories, infrastructure and people.  An economy needs to spend money on the future in order to ensure that it can increase production and remain competitive compared to its neighbours.  To what extent has the UK done this?

Labour productivity

The UK Office for National Statistics has looked at a range of data and the productivity figures are very interesting. http://www.ons.gov.uk/ons/rel/icp/international-comparisons-of-productivity/2011---first-estimates/stb-icp-sep2012.html

If you measure the amount of GDP per each hour worked by each worker in the economy, Germany is around 21% higher and France is around 23% higher.  (Gross Domestic Product is the total output of the economy in a year.)

If the UK were as productive as them then UK workers could work four days a week instead of five and still produce the same amount of output!

Why this is the case could be due to any number of reasons: lack of investment, poor UK management, inefficient and lazy UK workers, lack of training, a less educated workforce, poor use of technology, etc.  However, what is less likely to be the cause for this differential is European legislation because surely that would equally affect France and Germany?

Granted, there is a small case to be made when comparisons are made between Europe and the USA which has higher levels of productivity than all three countries mentioned here, but this could be due to a variety of factors including the economies of scale of the US being such a massive market.

Investment

Economists refer to Business Investment in factories and infrastructure as Gross Fixed Capital Formation.  On this basis the UK spends around 14% of GDP, Germany 18% and France 20% on Investment.  http://data.worldbank.org/indicator/NE.GDI.FTOT.ZS

This has tended to be the case for a number of years, therefore every year our competitors are improving their productive capacity to a greater extent than the UK.

Conclusion

The UK has a competiveness problem but David Cameron's focus on elements such as the Working Time Directive and other similar points seem to be misguided - the argument for reducing the rights of workers is complicated, both economically and politically, moreover, they don't appear to be the main problem.

Before the UK looks to 'Europe' as the cause of the competitiveness issue we could do with learning some lessons from some of our continental cousins and then sort out our own shortcomings first.

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."

http://www.rbs.com/news/2012/11/burn-baby-burn-economics-weekly.html

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.

http://www.bbc.co.uk/news/uk-19890250

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.


RESEARCH METHODS:

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


REFERENCES:

*www.insidetime.org


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: http://www.ecb.int/euro/intro/html/index.en.html)

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


Questions

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)

Inflation and Monetary Policy

Inflation remains an issue in the UK economy as it stays stubbornly above the Bank of England's target rate, despite the economic slowdown.  Here are the kind of questions you should be able to answer as an economist:

Read the following article:

http://www.bbc.co.uk/news/business-15344297

1.  Identify three points of interest in the graph.

2.  Explain what is meant by inflation and why it is regarded as a 'bad' thing for an economy.

3.  Using the article identify two main contributors to inflation and, with the use of a graph, explain what is meant by cost-push inflation.

4.  Explain the process by which monetary policy can be used to reduce inflation.

5.  Evaluate the extent to which the use of a 'tighter' monetary policy would be an effective way of reducing inflation in the current economic climate. Conclude with justified recommendations for the Monetary Policy Committee.

GDP and the economic cycle

You may have noticed that there is a bit of an economic downturn going on at the moment.  For students of economics this means that you need to understand the background to this, possible causes and possible solutions.

As a starting point you should be able to do the following:

1. Explain what is meant by GDP.

2. Identify three points of interest on the diagram below.

3. Using the diagram, explain what is meant by the economic cycle.

4.  Identify each of the components of Aggregate Demand and, using these, explain some of the reasons why the UK is currently experiencing low levels of economic growth.

5.  With regards to solutions, do some research as to how different countries are coping with the current economic crisis.  You might also want to look at how different political parties and different commentators view the issues.


Welcome!

Welcome to the new site and the new blog - it's a fascinating time to be interested in Economics.  Hopefully you will find loads of useful information here.  There are already a few videos available and many useful links.  Subscribe to the blog to stay updated.