Category: Essentials of Economics: 8e Ch 09

The European Central Bank has its tenth anniversary this year and the year is shaping up to be one of the toughest of the last decade in terms of economic management. While the Eurozone has generally withstood the global credit crisis very well, there are some possible problems emerging and the ECB will have to manage interest rates carefully to cater for the conflicting demands from economies at different stages of the business cycle.

If the Eurozone is on fire, will the ECB get burnt? Observer (1/6/08)
More testing times ahead as the euro turns ten Times Online (26/5/08)
Euro growth better than expected BBC News Online (15/5/08)

Questions

1. Explain the role of the European Central Bank (ECB).
2. Assess the difficulties faced by the ECB in setting interest rates for the whole Eurozone.
3. Discuss the extent to which the economic performance of stronger countries in the Eurozone will be constrained by weaker-performing economies.

Russia has been growing rapidly. Average earnings have recently been growing at 20% a year and consumption growth has not been far behind this. Moscow apparently has more ‘6-series BMWs’ than any other city in the world. With Vladimir Putin now the prime minister he has promised to rein in inflation and boost social spending on housing and infrastructure. So what are the prospects for Russia in the next decade?

Russia: giant of a new economic world order Observer (25/05/08)
Vladimir Putin pledges to transform economy of Russia into a world leader Times Online (9/05/08)
Putin in 2020 pledge on economy BBC News Online (8/05/08)

Questions

1. Assess the recent economic performance of the Russian economy.
2. Examine the importance of oil to the Russian economy. What can the Russian government do to reduce the dependence on oil revenues?
3. Discuss the importance of infrastructure and spending on other social capital for the development of the Russian economy.

The Phillips Machine may, in this era of super-computers modelling the economy, appear an outdated artefact. However, when it was first unveiled at the London School of Economics in 1949 it caused a sensation. The Phillips Machine is a model of the economy which uses water, pumps, valves and, in the case of the original, an electric motor scavenged from the windscreen wiper of a Lancaster bomber. For some photos of a Phillips Machine at the Science Museum, follow the links below:

Phillip’s Economic Computer (1949)
Enginuity article (Cambridge Engineering Department)

The computer model that once explained the British economy Guardian (8/5/08)
The computer model that once explained the British economy Guardian (8/5/08) (Cartoon)

Questions

1. Explain what is meant by the term ‘economic model’.
2. What were the limitations of the Phillips machine? Assess whether the Phillips machine could be of value to modern economists.
3. Discuss the value of economic models to policy makers when formulating economic policy.

GDP is quite a good measure of a nation’s production of goods and services, but it doesn’t include many other factors relating to the standard of living in an economy and for this reason, various other measures of living standards have been developed. However, there is also another issue with GDP and that relates to how best to measure a country’s economic performance. Should we use GDP per head or GDP growth? Population changes can significantly distort economic welfare and so do need to be taken into account. The article below from The Economist looks at these issues in depth and considers the best way to measure economic performance.

Grossly distorted picture The Economist (13/3/08)

Questions

1. Explain how GDP per head can fall while economic growth is rising.
2. Explain why the use of GDP per head as a measure of economic performance may lead to the definition of recession being flawed.
3. Assess the principal factors that result in economic growth and GDP per head rising together.

Concerns have been growing that the UK faces a downturn in economic growth during 2008. The articles below consider this possibility. With a credit crunch taking place and manufacturing output falling, the concerns for a recession may well not prove unfounded.

Is this the big one? Guardian (3/1/08)
Your survival plan if a recession strikes Times Online (5/1/08)
Top of the flops – 10 pointers to a downturn in 2008 Guardian (6/1/08)
Recession fears as manufacturing drops Times Online (11/1/08)
Crash that ‘won’t happen here’ looms large Guardian (3/12/07)

Questions

1. What are the key indicators of an impending recession?
2. Assess the likelihood of a recession in the UK in 2008.
3. What policies could the UK government adopt to avoid a recession during 2008. What would determine the success of such policies?