Category: Essential Economics for Business: Ch 11

The recent credit crunch has resulted in a lot of criticism of the banks and other financial institutions. Many commentators have argued for reforms to the financial system with greater controls on lending and restrictions on banks’ ability to create credit. The articles below have a common theme – assessing the actions that politicians and policy makers need to consider as a result of the recent credit crunch.

After excess comes fear – and then socialism, at least for the bankers Guardian (23/3/08)
Capitalism’s too important to be left to capitalists Observer (23/3/08)
If the City won’t put its house in order, politicians must Observer (23/3/08)

Podcast

How to stop the market mayhem Guardian (19/3/08)

Questions

1. Explain what is meant by the ‘liberalisation of financial markets’.
2. “If the City won’t put its house in order, the politicians must”. Examine the validity of Will Hutton’s argument.
3. Discuss the extent to which the freedom of banks to lend has been the cause of the recent credit crunch.

Late March saw the auctioning by the Bank of England of £10.9bn to boost liquidity in financial markets. This was £5bn more than had been expected and so should help ease the liquidity position for cash-strapped banks and other financial institutions.

When the rivers run dry The Economist (6/3/08)
Bank of England answers pleas with £5bn injections Times Online (21/3/08)

Questions

1. Explain what is meant by liquidity.
2. Assess the main factors that have resulted in a shortage of liquidity in financial markets.
3. Discuss the extent to which this extra liquidity is likely to help reduce the likelihood of recession in the UK.

The principal measure of inflation, the consumer prices index, is calculated from price changes in a basket of goods. The composition of this basket is changed each year to reflect changes in consumer spending patterns. 2008 sees smoothies, USB storage devices and muffins coming into the basket, while ready meals and 35mm camera film have had their day and leave the basket of goods.

What’s in and what’s out in 2008 Guardian (17/3/08)
Fruit smoothies in, ready meals out Guardian (17/3/08)
Smoothie pour into cost of living basket Guardian (17/3/08)
Let them eat sourdough bread, olives and sun-dried tomatoes Guardian (17/3/08)
Smoothies join basket of goods used to calculate inflation Times Online (18/3/08)

Questions

1. Explain what is meant by a weighted index. Why does the consumer prices index (CPI) need to be a weighted index?
2. Explain how the CPI is calculated.
3. Discuss why annual percentage changes in the CPI may not be an appropriate measure of inflation for all groups in society.

Rapid economic growth in China has pushed inflation to an 11-year high of 8.7% in February 2008. This was driven significantly by higher food prices, with the price of pork rising by nearly 64%. This higher level of inflation has led to concerns that policy may need to be tightened.

Sweet and sour pork The Economist (13/3/08)
China inflation hits fresh high BBC News Online (11/3/08)
Chinese inflation alarms authorities Guardian (11/3/08)
Chinese warn on decade-high inflation Times Online (5/3/08)
Chinese inflation shoots to 11-year high Times Online (11/3/07)
China tries to apply brakes to economy Guardian (4/3/08)

Questions

1. What are the main causes of rising inflation in China?
2. Assess the extent to which policy needs to be tightened to counter the rising level of inflation in China. What would be the possible downsides of such a policy?
3. Discuss possible policy changes that could be implemented by the Chinese government to reduce the level of inflation.

The Budget 2008 was quite an under-stated affair, but was the first delivered by Alistair Darling as Chancellor. As ever, many of the changes had been announced well in advance, reducing the element of surprise. But the Budget remains an important event. Note that the Budget websites can also be useful reference sources for economic policy changes.

Budget 2008 Guardian Budget Special
Interactive: Budget 2008 Guardian (11/03/08)
What to tell us on Budget day: where our money is going and how it can be stopped Guardian (10/03/08)
Budget 2008 BBC News Online Budget Special

Videos and podcasts

Old Mother Hubbard Guardian (13/03/08)
Budget speech in full (Video) BBC News Online (12/03/08)

For details of the Budget measures, you may want to look at:
Budget 2008 HM Treasury Budget pages HM Treasury Budget microsite HM Treasury (March 08)

Questions

1. What are the key changes in the Budget? What effects are they likely to have on the economy?
2. Assess the extent to which this Budget can be considered a ‘Green Budget’.
3. How has the Budget changed the overall fiscal position of the government?
4. Discuss the likely impact of the Budget on small and large businesses.