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Welcome

Welcome to the Sloman Economics News Site. This blog contains links to topical stories in the news discussing key economic issues and concepts.

Each news item starts with an introduction to the issue. This is followed by several links to relevant news articles – some to videos or podcasts. The item finishes with discussion questions that can be used either for self-testing or for use in class.

Scroll down below to read the latest articles posted, or use the search facilities on the left-hand side to search the articles by date, keyword and your chosen textbook.

Most of the postings are by Elizabeth Jones, John Sloman, Dean Garratt, Matt Olczak, Jon Guest and Alison Wride.

We also welcome guest posts from lecturers using one or more of the books in their teaching – see the About this Site section on the left for more details.

For registration and access to companion websites, MyEconLab products or lecturer resources accompanying your Sloman textbooks click here to access the Sloman textbook online resources page.

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Ending global poverty

In the developed countries of 2015, extreme poverty is (or should be) a thing of the past. With well-developed welfare states and hence safety nets, no-one should be living in deep poverty. However, that is not the case across the rest of the world, where extreme poverty is still a common thing – though much reduced compared to a decade ago.

In the article linked below, Linda Yueh of the BBC asks whether it is possible to end global poverty. Looking at some of the key data, we are certainly moving in the right direction, with the poverty rate in the developing world halving since 1981. Projections suggest that ending global poverty by 2030 is possible, though it will require significant investment and commitment. The World Bank data indicates that 50 million people would need to be brought out of poverty every year. Economists, on the other hand, suggest that the poverty rate may have fallen to around 8% – still progress, but perhaps a more realistic target?

How we measure poverty is clearly important here, as the higher the threshold income required to be ‘out of poverty’, the longer it will take and the more people will currently be in poverty. It is also important to consider things like changes in the population as although more people may be brought out of poverty, if an even greater number of people are being born in a country, then it is entirely possible that poverty actually increases in absolute terms.

A key thing to bear in mind when it comes to reducing poverty is that there is no ‘one size fits all’ policy. What works in one country is not necessarily going to work in another country. Policies will have to be targeted to the needs of the population and this means more time and resources. The numbers are definitely moving in the right direction, but whether they are going quickly enough to meet the 2030 target is another story. The BBC News article is linked below, as are some interesting documents and items from the World Bank and United Nations.

Is it possible to end global poverty? BBC News, Linda Yueh (27/3/15)
Poverty will only end by 2030 if growth is shared World Bank, Espen Beer Prydz (19/11/14)
Far greater effort needed to eradicate extreme poverty in world’s poorest nations United Nations News Centre (23/10/14)
Ending Poverty and Sharing Prosperity World Bank Group and International Monetary Fund, Global Monitoring Report 2014/2015 2015

Questions

  1. What is poverty and how to we measure it?
  2. If the growth rate of the world is high, does this mean that poverty is falling?
  3. What factors have explained the success of China in reducing poverty? Why might similar policies be ineffective in Africa? What types of policies would you recommend to reduce global poverty in Sub-Saharan Africa?
  4. Does Aid or Debt Forgiveness from developed countries help poorer nations or could it create a moral hazard?
  5. How important is economic growth in eliminating global poverty?
  6. How important are the Millennium Development Goals in driving efforts to eradicate global poverty?
  7. What are the 3 elements that the Global Monitoring Report focuses on to make growth inclusive and sustainable? In each case, explain how the elements would contribute towards global efforts to end poverty.
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Fuelling the absence of inflation

The latest inflation figures, as detailed in February’s Consumer Price Inflation Statistical Bulletin, show that the annual rate of CPI inflation hit zero in February. This is down from 0.3 per cent in January. While inflation is now well outside the 1-3 per cent target range that the Bank of England is charged with meeting, perhaps a more pertinent question is whether the UK is teetering on the brink of deflation – and the risks that may carry.

To get a better sense of the latest inflation picture we need to delve deeper into the numbers and look at the patterns in the prices that make up the overall Consumer Price Index. Interestingly, these shows that five of the 12 principal product groups that make up the index are currently experiencing price deflation.

As explained in Consumer Price Inflation: The 2015 Basket of Goods and Services, produced by the ONS, around 180,000 prices quotations are collected each month for around 700 representative items. These goods and services fall into one of 12 broad product groups. These include, for example, food and non-alcoholic beverages and transport.

The items included in each of the 12 product groups are reviewed once a year so that the chosen items remain representative of today’s spending patterns. A monthly price index is calculated for these 12 broad groupings, known as divisions, and for sub-categories of these. For example meat is a category within food and non-alcoholic beverages. The overall CPI is a weighted average of the 12 broad groupings.

The annual rate of CPI inflation in February 2015 was zero. This means that the price of the representative basket of goods and services was unchanged from its level in February 2014. As Chart 1 shows (click here for a PowerPoint of the chart), the annual rate of CPI inflation series goes back to January 1989 and this is the first time it has fallen to zero. Its average over this period is in fact 2.7 per cent. The recent fall is quite stark with the rate of CPI inflation in June 2013 close to the top-end of the Bank of England’s target range at 2.9 per cent.

Of the 12 product groups, five constitute 10 per cent or more of the overall weight of the CPI index. These weights are dependent on the relative level of expenditure comprised by each division.

Chart 2 shows the annual rates of inflation for these five groups (click here for a PowerPoint of the chart). The most heavily-weighted component is transport (14.9%), which includes the price of fuel and passenger transport. Here we observe deflation with prices 2.7 per cent lower year-on-year in February. This is the fourth consecutive month where its annual rate of price inflation has been negative.

The second most heavily-weighted component within the CPI index is recreation and culture (14.7%), which includes games, toys and audio-visual equipment. Here too we see the emergence of deflation. In February 2015 prices were 0.8 per cent lower than in February 2014. Deflation is most prevalent in the fifth most heavily-weighted component (11.0%): food and non-alcoholic drinks. The price for this division of the CPI was 3.3 per cent lower in February 2015 as compared with February 2014. In nine of the last ten months the price of food and non-alcoholic drinks, helped by aggressive price competition in the grocery sector, has been lower year-on-year.

February also saw a negative annual rate of inflation emerge for the first time in the CPI division capturing furniture and household equipment and appliances (-0.3 per cent). Further, miscellaneous services, which include personal care and personal effects (e.g. jewellery) saw an annual rate of deflation for the eight consecutive month. The annual rate of inflation for miscellaneous services stood at -0.4 per cent in February. However, February did see an upturn in price inflation for clothing and footwear with prices 1.7 per cent higher than a year earlier while the price of alcohol and tobacco was 3.8 per cent higher year-on-year.

The detailed inflation numbers do reveal the extent to which many CPI divisions are already characterised by deflation. It is interesting to note that in A Comparison of Independent Forecasts published monthly by HM Treasury, the forecast for the final quarter of 2015 is for the annual rate of CPI inflation to be running at 0.8 per cent. An important reason for this is that the effect of falling fuel prices from November 2014 will begin to drop out of the year-on-year inflation rate calculations. The removal of this effect should help to prevent the specter of deflation provided that peoples’ inflationary expectations remain anchored, i.e. exhibit stickiness. If these were to be revised down, however, this would further contribute to downward pressure on prices since input price inflation – including wage inflation – would again be expected to fall.

Articles
U.K. on Brink of Falling Prices as Inflation Rate Drops to Zero Bloomberg, Tom Beardsworth (24/3/15)
UK inflation rate falls to zero in February BBC News (24/3/15)
Britain sees no inflation in February for first time on record Reuters, David Milliken and Andy Bruce (24/3/15)
Inflation hits a record zero boosting household incomes Independent, Clare Hutchinson (24/3/15)
Inflation Hits 0% As Food Costs Fall Further Sky News (24/3/15)
Inflation falls to zero in February as Britain heads to deflation Telegraph, Szu Ping Chan (24/3/15)
UK inflation hits zero for the first time on record Guardian, Angela Monaghan (24/3/15)

Data
Consumer Price Inflation, February 2015 Office for National Statistics
Consumer Price Indices, Time Series Data Office for National Statistics

Questions

  1. Explain the difference between a decrease in the level of prices and a decrease in the rate of price inflation. Can the rate of price inflation rise even if price levels are falling? Explain your answer
  2. Explain what is meant by deflation.
  3. In what ways might deflation affect the behaviour of people? What effect could this have on the macroeconomy?
  4. Why do you think policy-makers, such as the Monetary Policy Committee, would be interested in the inflation rates within the overall CPI inflation rate?
  5. What factors do you think lie behind the fall in the transport component of the CPI?
  6. Explain why the rate of inflation would be expected to rise in the late autumn, a year on from when the transport component of the CPI began falling.
  7. Does the possibility of deflation mean that inflation rate targeting has failed?
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The North Sea

The Budget takes place on 17th March 2015 and as always there is much speculation as to what it will and won’t include. One industry that is eagerly awaiting Osborne’s Budget is the North Sea oil and gas industry. Tax cuts and rises may well play a key role in the Budget, but this is one sector where a possibly large tax cut is expected.

The tax paid by this industry is very high compared to others, potentially reaching 80%. The tax rate was increased some years ago and it is now thought that it may come back down. One key factor is oil prices: with such huge decreases in the price of oil relative to when the tax on the industry was increased, the industry is now asking for these tax rises to be reversed. The industry has suggested that a 10% tax cut is a possibility and this would make a big difference for the industry.

Danny Alexander, the chief secretary to the Treasury, said:

“We’ve been very clear that the direction of travel for tax in the North Sea needs to be downwards … And that needs to be even stronger given the low oil price we see at the moment. We want people to have the confidence to invest for the long term future of the North Sea … And so George Osborne and I have been listening very carefully to what the industry has been saying …People will have to wait and see what we say on Wednesday [Budget day], but I hope very much that it will give the North Sea that confidence that we all want to see for one of Britain’s most important industries.”

We may also see further changes for this industry, such as allowances to encourage further investment, as costs of investment are extremely high and this has led to many years of under-investment. These changes are hoped to regenerate this industry. Any change in tax allowances or tax rates will have an impact on tax revenue and it is not necessarily the case that an increase in tax will lead to a rise in revenue or a fall in revenue. The relationship between tax rates and tax revenues can be very complex. The following articles consider this particular issue and what the Budget will do for this industry.

North sea oil groups set for tax breaks in budget Financial Times, Christopher Adams and George Parker (16/3/15)
What does the Budget 2015 mean for the North sea oil industry? The Telegraph, Andrew Critchlow (16/3/15)
Britain needs oil tax cuts to attract North Sea Investment Reuters, Karolin Schaps and Claire Milhench (16/3/15)
Treasury paves way for major tax cut for North sea BBC News, Kamal Ahmed (16/3/15)
Home of Brent Oil benchmark seeks help as investment slumps Bloomberg, Firat Kayakiran (17/3/15)

Questions

  1. If a tax is imposed on an industry, what type of effect might this have on costs of production? Use a diagram to support your answer.
  2. In the BBC News article, North Sea Oil is referred to as a cash cow. What does this mean?
  3. If taxes are cut for the North Sea Oil industry, how will this affect its costs and what might it doe for investment?
  4. What will happen to tax revenues if taxes are cut? Use the Laffer curve to help your answer.
  5. How has the North Sea Oil industry been affected by falling oil prices? Does this offer a justification for a tax cut?
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Your basket: ins and outs

The rate of inflation in the UK is measured using the Consumer Prices Index (CPI). This is made up of a basket of goods and the ONS updates this ‘basket’ each year to ensure it is representative of what the average UK household buys. The basket contains 703 items, with 110,000 individual prices collected each month.

In past years, items such as lip gloss have been added to the basket of goods, together with tablet computers and teenage fiction. In the recent update by the ONS, e-cigarettes have been added, together with specialist ‘craft’ beers and music streaming. On the other hand, other items have been removed, as the world changes. For example, during the recession, champagne was removed as an item that the representative household was no longer buying. In other cases, items are removed as they become outdated or obsolete with technology changing. This is the case with satellite navigation systems. As people turn to using their smartphones to navigate their way from A to B, satellite navigation systems are no longer seen as an item bought by the representative household.

The UK inflation rate is at an all-time low of 0.3% and there have been concerns that it may become negative, meaning we enter the world of deflation. However, if this does occur, many suggest that it is not bad deflation, as it is being driven by the extremely low oil prices. No matter what the inflation rate, the ONS will always continue to update the basket of goods that calculates inflation. It is therefore essential that these changes are made each year, as consumer buying habits do fluctuate considerably, as income changes, technology changes and general tastes change. The following articles consider what’s in and what’s out.

From craft beer to e-cigarettes, inflation basket reflects Britain’s changing shopping habits The Guardian, Katie Allen (17/3/15)
Inflation-measuring basket of goods adds protein powder, e-cigarettes The Grocer, Andrew Don (17/3/15)
E-cigareets and craft beers in updated inflation basket BBC News (17/3/15)
E-cigs added to inflation basket Mail Online (17/3/15)
Craft beer, e-cigarettes and protein shakes dded to price basket used to calculate inflation Independent, Hazel Sheffield (17/3/15)
U.K. hipsters and gym junkies win approval in new price basket Bloomberg, Tom Beardsworth (17/3/15)
Spotify in and sat navs out: take a look at the new inflation basket The Telegraph, Szu Ping Chan (17/3/15)
E-cigarettes, craft beer and Spotify enter UK inflation basket Reuters, Toby Melville (17/3/15)
Craft beer and e-cigarettes added to CPI basket Financial Times (17/3/15)

Questions

  1. What is the difference between the CPI and RPI? Which is usually higher? Explain your answer.
  2. Explain why champagne was removed from the basket of goods during the recession. What is sensible?
  3. How is the CPI calculated and hence how is inflation measured?
  4. Why has there been a movement towards chilled pizzas and away from frozen pizzas? Is the change likely to affect their relative price? Use a diagram to support your answer.
  5. What impact has technological progress had on the basket of goods that the representative household purchases? Do you think that technological progress make it more or less important for the basket of goods to be reviewed annually?
  6. Do you think products such as the iPad and e-cigarettes should be included in the CPI? Are they truly representative?
  7. In the BBC News article, you can access a list of the products that are ‘in and out’. Is there anything on there that you think should be in or that should be out? Be sure to justify your answer!
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The six year anniversary

In March 2009, interest rates in the UK fell to a record low of 0.5%. At the time, it is unlikely that anyone expected that we would still be talking about such low interest rates 6 years later. There has been no movement in the UK rate of interest over the past 6 years and many believe that we are unlikely to see an increase before 2016 or late 2015 at the earliest. With inflation at 0.3%, there is ‘little reason to raise the cost of borrowing’.

The cut in interest rates back in 2009 was in response to the financial crisis and recession. A key instrument of monetary policy, interest rates affect many of the components of aggregate demand. Lower interest rates reduce the cost of borrowing, reduce the return on savings and hence encourage consumption. They can also reduce mortgage repayments and have a role in reducing the exchange rate. All of these factors are crucial for any economic stimulus. As the recovery in the UK took hold, discussions started to focus on when (and not if) interest rates would increase. As the 6 year anniversary occurs, with the MPC keeping rates at 0.5% for March, this question has once again been raised.

Interest rates are used to target inflation and the target in the UK is 2% +/- 1%. With inflation at 0.3% and some predicting that it will turn negative, thanks to such a large fall in oil prices, perhaps the most likely change in interest rates is that they will fall further. A senior Economic Adviser to the EY Item Club commented:

“While the risks of an earlier rate rise have probably increased lately, we still think it most likely that the Bank will wait until February 2016, by which time inflation will be back above 1% and heading towards the 2% target.”

This was echoed by the Chief Economist at the British Chambers of Commerce, who said:

“The strengthening pound against the euro is already posing challenges for many UK exporters and higher interest rates would only make matters worse…Given this background, business confidence will be strengthened if the Monetary Policy Committee (MPC) clearly states that interest rates are likely to stay on hold until at least early 2016.”

Some might question the logic of keeping interest rates so low, given that unemployment is falling and the economy is growing. In such cases, we would normally expect interest rates to increase, especially given how low they are and the fact that it has been 6 years since they went down. However, with oil prices down, inflation has fallen and wage growth does remain relatively weak. Furthermore, there are still some areas within the UK that are still in the recovery process.

The strength of the economy relative to Europe is also putting upward pressure on the pound, which will adversely affect the competitiveness of UK exports. These factors together mean that retaining interest rates at 0.5% received unanimous support amongst the MPC. The only disagreement was on the future direction of interest rates. It is this disagreement that is perhaps what is causing problems, as confirmation of what will happen to interest rates over the rest of 2015 would give greater certainty to an economy. The following articles consider this anniversary.

UK interest rates mark six-year anniversary at record low The Guardian, Angela Monaghan (5/3/15)
UK interest rates mark six years at record low of 0.5% BBC News (5/3/15)
Bank of England keeps interest rates on hold Financial Times, Emily Cadman (5/3/15)
Carney facing seven-year itch as BOE holds rates Bloomberg, Jennifer Ryan (5/3/15)
Bank of England rates have now been on hold six years. Here’s how it has affected you The Telegraph, Szu Ping Chan (5/3/15)
Bank of England keeps rates on hold, six years after crisis cut Reuters (5/3/15)
Bank of England keeps key rate at record low Wall Street Journal, Jason Douglas (5/3/15)

Questions

  1. By outlining the key components of aggregate demand, explain the mechanisms by which interest rates will affect each component.
  2. How can inflation rates be affected by interest rates?
  3. Why is there a debate amongst the MPC as to the future direction of interest rates?
  4. The Chief Economist at the British Chambers of Commerce has said that the strengthening pound is creating problems in the UK and higher interest rates would make matters worse. Why is this?
  5. Who would be helped and harmed by a rate rise?
  6. Consider the main macroeconomic objectives and in each case explain whether economic theory would suggest that interest rates should (a) fall , (b) remain at 0.5% or (c) rise.
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