It is rising inflation that typically causes problems for countries, whether it is demand-pull or cost-push. However, one country that has not been subject to problems of rising prices is Japan. Instead, this economy has been suffering from the gloom of deflation for many years and many argue that this is worse than high inflation.
Falling prices are popular among consumers. If you see a product whose price has fallen from one day to the next, you can use your income to buy more goods. What’s the problem with this? The Japanese economy has experienced largely stagnant growth for two decades and a key cause has been falling prices. When the prices of goods begin to fall over and over again, people start to form expectations about the future direction of prices. If I expect the price of a good to fall next week, then why would I buy now, if I can buy the same good next week at a lower price? But, when next week arrives and the price has fallen as expected, why would I purchase the product, if I think that the price fall is set to continue? The problem of deflation is that with continuously falling prices, consumers stop spending. Aggregate demand therefore declines and economic growth all but disappears. This is the problem that the Japanese economy has been faced with for more than 20 years.
However, the latest data from Japan shows core consumer prices growing faster than expected in December 2013, compared to the previous year. This figure was above market forecasts and was the fastest rate of growth in the past 5 years. These data, together with those on unemployment have given the economy a much needed boost.
Recent government policy has been focused on boosts in government spending, with an aim of reducing the value of the currency (click here for a PowerPoint of the chart). Such policies will directly target aggregate demand and this in turn should help to generate an increase in national output and push up prices. If the price trend does begin to reverse, consumers will start to spend and again aggregate demand will be stimulated.
The future of the economy remains uncertain, though the same can be said of many Western economies. However, the signs are good for Japan and if the recovery of other economies continues and gathers pace, Japan’s export market will be a big contributor to recovery. The following articles consider the Japanese economy.
GDP is still the most frequently used indicator of a country’s development. When governments target economic growth as a key goal, it is growth in GDP to which they are referring. And they often make the assumption that growth in GDP is a proxy for growth in well-being. But is it time to leave GDP behind as the main indicator of national economic success? This is the question posed in the first of the linked articles below, from the prestigious science journal Nature.
As the article states:
Robert F. Kennedy once said that a country’s gross domestic product (GDP) measures “everything except that which makes life worthwhile”. The metric was developed in the 1930s and 1940s amid the upheaval of the Great Depression and global war. Even before the United Nations began requiring countries to collect data to report national GDP, Simon Kuznets, the metric’s chief architect, had warned against equating its growth with well-being.
GDP measures mainly market transactions. It ignores social costs, environmental impacts and income inequality. If a business used GDP-style accounting, it would aim to maximize gross revenue — even at the expense of profitability, efficiency, sustainability or flexibility. That is hardly smart or sustainable (think Enron). Yet since the end of the Second World War, promoting GDP growth has remained the primary national policy goal in almost every country
So what could replace GDP, or be considered alongside GDP? Should we try to measure happiness? After all, behavioural scientists are getting much better at understanding and measuring the psychology of human well-being (see the blog posts Money can’t buy me love and Happiness economics).
Or should we focus primarily on long-term issues of the sustainability of development? Or should we focus more on the distribution of income or well-being in a world that is becoming increasingly unequal?
Or should measures of well-being involve weighted composite indices involving things such as life-expectancy, education, housing, democratic engagement, leisure time, social mobility, etc. And, if so, how should the weightings of the different indicators be determined? The United Nations Development Programme (UNDP) produces annual Human Development Reports, where countries are ranked according to a Human Development Index. As the UNDP site states:
The breakthrough for the HDI was the creation of a single statistic which was to serve as a frame of reference for both social and economic development. The HDI sets a minimum and a maximum for each dimension, called goalposts, and then shows where each country stands in relation to these goalposts, expressed as a value between 0 and 1.
HDI is a composite of three sets of indicators: education, life expectancy and income (see). The UNDP since 2010 has also produced an Inequality-adjusted HDI (IHDI).
The IHDI will be equal to the HDI value when there is no inequality, but falls below the HDI value as inequality rises. The difference between the HDI and the IHDI represents the ‘loss’ in potential human development due to inequality and can be expressed as a percentage.
You can now build your own HDI for each country on the UNDP site by selecting from the following indicators: health, education, income, inequality, poverty and gender.
The Nature article considers a number of measures of progress and considers their relative merits. The other articles also look at measuring national progress and well-being and at the relationship between income per head and happiness. It is clear that focusing on GDP alone provides too simplistic an approach to measuring development.
When the rest of the developed world went into recession after the financial crisis of 2007/8, the Australian economy kept growing, albeit at a slightly lower rate (see chart 1: click here for a PowerPoint). Then as the world economy began to grow again after 2009, Australian grow accelerated. Partly this was the result of a strong growth in demand for Australian mineral exports, such as coal, iron ore and bauxite, especially from China and other east Asian countries.
But in 2013, Australian growth slowed and jobs grew by their lowest rate for 17 years. Employment actually fell by 22,600 in December and unemployment was only prevented from rising by a fall in the participation rate. The Australian dollar, which has been depreciating in recent months, fell further on the news about jobs, reaching its lowest level for over two years (see chart 2: click here for a PowerPoint).
Chart 1 Chart 2
The following articles look at the reasons behind Australia’s slowing growth and at possible reactions of the Australian government and the Reserve Bank of Australia (Australia’s central bank). They also look at the link between economic performance and policy on the one hand and the exchange rate on the other.
Why has the Australian dollar been depreciating in recent months?
Why did the Australian dollar fall further on the news that economic growth had slowed and employment had fallen?
Find out what has been happening to commodity prices in the past three years (see Economic Data freely available online and especially site 26) How has this affected (a) the current account of Australia’s balance of payments; (b) the exchange rate of the Australian dollar?
If commodity prices are in US dollars, how is a depreciation of the Australian dollar likely to affect Australia’s balance of payments?
How are possible fiscal and monetary responses in Australia likely to affect the exchange rate of the Australian dollar?
What determines the magnitude of the rise or fall in demand for Australian exports as the world economy grows or declines? How are the determinants of the price and income elasticities of demand for Australian exports relevant to your answer?
Conservative Party leaders are considering the benefits of an above-inflation rise in the minimum wage. This policy has been advocated by both the Labour Party and the Liberal Democrats as a means of helping the lowest paid workers. From 2008 to 2013, minimum wage rates fell 5.2% in real terms: in other words, nominal increases were less than the increase in both the RPI and CPI (see UK minimum wage: a history in numbers).
Advocates of a real rise in the minimum wage argue that not only would it help low-paid workers, many of whom are in severe financial difficulties, but it would benefit the Treasury. According to Policy Exchange, a free-market think tank closely aligned to the Conservative Party, increasing the minimum wage by 50p would save the Government an estimated £750m a year through higher tax revenues and lower benefit payments.
But even such a rise to £6.81 would still leave the minimum wage substantially below the living wage of £8.80 in London and £7.65 in the rest of the UK, as estimated by the Living Wage Foundation (see The cost of a living wage). Although many businesses are now paying at least the living wage, many others, especially small businesses, argue that a rise in the minimum wage above the rate of inflation would force them to consider cutting the number of employees or reducing hours for part-time workers.
Meanwhile, in the USA 13 states have raised their minimum wage rates from the 1st January 2014 (see). Some of the rises, however, were tiny: as little as 15 cents. In a couple of cases, the rise is $1. Currently 21 states and DC have minimum wage rates above the Federal level of $7.25 (approx. £4.40); 20 states have rates the same as the Federal level; 4 states have rates below the Federal level. At $9.32 per hour, Washington State has the highest state minimum wage; the lowest rates ($5.15) are in Georgia and Wyoming. In 5 states there is no minimum wage at all. As the ABC article below states:
The piecemeal increases at the local level are occurring amidst a national debate over low wages and income inequality. Fast food and retail workers have been staging protests and walking off work for more than a year, calling for better pay and more hours. Currently, fast food workers nationally earn an average of about $9 per hour.
Workers from McDonald’s, Wendy’s, Burger King and other fast food joints are calling for $15 per hour. Wal-Mart workers organizing as part of the union-backed OUR Walmart aren’t asking for a specific dollar amount increase, but they say it’s impossible to live on the wages they currently receive.
President Obama has been throwing his weight behind the issue. Earlier this month, the President said in a speech that it’s “well past the time to raise the minimum wage that in real terms right now is below where it was when Harry Truman was in office.” But such legislation has a bleaker outlook if it reaches the Republican-led House of Representatives. House Speaker John Boehner has said that raising the minimum wage leads to a pullback in hiring.
So what are the costs and benefits of a significant real rise is the minimum wage on either side of the Atlantic? The articles explore the issues.
Draw two diagrams to demonstrate the direct microeconomic effect of a rise in the minimum wage for two employers, both currently paying the minimum wage, where the first is operating in an otherwise competitive labour market and the other is a monopsonist.
What is meant by the term ‘efficiency wage rate’? How is the concept relevant to the debate about the effects of raising the minimum wage rate?
What are the likely macroeconomic effects of raising the minimum wage rate?
What is the likely impact of raising the minimum wage rate on public finances?
Is raising the minimum wage rate the best means of tackling poverty? Explain your answer.
There’s been much talk about the UK’s economic recovery and whether or not it has begun and whether consumer spending is actually the cause. The latest sector to post positive figures is the car industry, which has seen 2013 bring in the highest level of car sales since the onset of the credit crunch.
According to the Society of Motor Manufacturers and Traders (SMMT), vehicle registrations in 2013 were 2.26 million, which represented a 10.8% increase from 2012. That’s not to say that we have returned to the heights seen pre-crisis levels, as sales still remain some way below their 2007 figure, but the data is certainly moving in the right direction. The key questions are: What’s the cause of this growth and what does it mean for the UK economy?
The economy has certainly turned a corner and perhaps consumer confidence is improving to reflect this. With consumes more optimistic about future economic prospects, more luxury items may well be purchased. During the height of the recession, many families may well have said ‘it will last’ or ‘we’ll make do’, referring to their old cars. However, this improved confidence, together with attractive finance deals may have been instrumental in convincing consumers to splash out. This is reflected in the data, which indicates that some 75% of car sales involve a finance package. One further explanation that has been offered by industry analysts is that the refunds individuals are receiving through mis-sold payment protection insurance are providing a nice contribution towards the deposit.
PPI payments will certainly dry up, but as long as attractive finance packages remain, car sales should continue. A key factor affecting affordability may be interest rates. When they increase, any variable rate loans will become more expensive to service and this may act to deter consumers. However, if the car industry helps to stimulate other sectors and wages begin to increase, the overall effect may be to sustain and even further the growth of this key economic sector. The following articles consider the car industry.
It is rising inflation that typically causes problems for countries, whether it is demand-pull or cost-push. However, one country that has not been subject to problems of rising prices is Japan. Instead, this economy has been suffering from the gloom of deflation for many years and many argue that this is worse than high inflation.
But, when next week arrives and the price has fallen as expected, why would I purchase the product, if I think that the price fall is set to continue? The problem of deflation is that with continuously falling prices, consumers stop spending. Aggregate demand therefore declines and economic growth all but disappears. This is the problem that the Japanese economy has been faced with for more than 20 years.
Recent government policy has been focused on boosts in government spending, with an aim of reducing the value of the currency (click here for a PowerPoint of the chart). Such policies will directly target aggregate demand and this in turn should help to generate an increase in national output and push up prices. If the price trend does begin to reverse, consumers will start to spend and again aggregate demand will be stimulated.
Why Abenomics holds lessons for the West BBC News, Linda Yueh (18/12/13)
