Tag: aggregate demand

Given all the attention that the recession has had for months in the media, it may be surprising to find out that in fact Britain only went into recession officially today (January 23rd 2009). This is because, as economists, we have a more precise definition of recession than much of the media. A recession is when there is two successive quarters of negative economic growth. Figures released by the ONS today, show that this is finally the case. The links below give a flavour of the media attention dedicated to this announcement.

Recession Britain: It’s official Guardian (23/1/09)
Countdown to recession Guardian (23/1/09)
No end to the melodrama Guardian (22/1/09)
Recession: we knew it was coming, but we didn’t know it would be this bad Times Online (24/1/09)
Recession: Sector-by-sector breakdown Times Online (23/1/09)
It’s official – Britain is in recession Times Online (23/1/09)
UK in recession as economy slides BBC News Online (23/1/09)
Recession figures heighten the gloom Independent (23/1/09)
UK recession: It’s official and the worst since 1980 Telegraph (23/1/09)
UK recession: How does this one compare to those since 1945 Telegraph (23/1/09)
UK recession: It’s now official Telegraph (23/1/09)

Questions

  1. Explain the principal reasons why the UK has fallen into recession.
  2. Discuss the extent to which the UK recession is likely to be worse than in other countries in Europe.
  3. Analyse whether the policies adopted by the UK government will reduce the length and depth of the UK recession.
  4. Evaluate two further policies that the governmnt could adopt to reduce the depth of the recession.
  5. Assess which sectors of the economy are likely to suffer (a) the most and (b) the least, as a result of the recession.

While deflation was quite common right up to World War II, it has not been seen in the UK since 1947. The podcast considers whether it might return and looks at the impact of deflation on economic activity. There is a short case study on the deflationary years suffered by Japan between 1997 and 2006 and a consideration of policies that might be appropriate to overcome defaltionary pressures.

Governments and central banks around the world are trying hard to minimise the impact of the economic downturn on their economies. One means of doing this is to cut interest rates. The aim is to boost aggregate demand by giving people more disposable income and making borrowing and investment cheaper. But how responsive will people be to the interest rate cuts? The articles and podcasts below look at the issues.

Combating the recession The Economist (8/1/09)
Economic downturn: ‘Interest rates may not be such a useful tool any more’ Guardian (9/1/09) Podcast
Beyond rate cuts Financial Times (15/1/09)
Beyond retail therapy Guardian (8/1/09)
Uncharted territory for interest rates BBC News Online (8/1/09)
Latest cut in interest rates will not revive flagging economy Times Online (9/1/09)
Interest rates – the setting of the LIBOR rate BBC Biz Daily (9/1/09) Podcast – Tim Harford

Questions

  1. Explain the process by which lower interest rates boost aggregate demand.
  2. Explain what is meant by the LIBOR rate. Listening to the BBC Biz Daily podcast above may help in answering this.
  3. Assess the importance of the LIBOR rate in determining the levels of borrowing and investment in the economy.
  4. Discuss the relative effectiveness of fiscal and monetary policy in boosting the level of aggregate demand in the UK economy.

The World Economic Forum has warned that 2009 may see a ‘hard landing’ for China. In the context of China, this does not necessarily mean a recession, but the WEF report does identify a significant possible slowdown in Chinese growth. Given that high growth in China has led to a high level of demand for imports from other countries, especailly for raw materials and semi-finished goods, any slowdown in Chinese economic growth may have significant repercussions in the rest of the world. Any hopes that China and the emerging economies may help the rest of the world through their recessions have been dashed by data showing that even exports from China have been falling in October and November 2008 by 2.2% and 2.8% respectively. This has meant that aggregate demand in China is falling and may cause further problems, not only for China, but for the whole world economy.

China slowdown ‘big global risk’ BBC News Online (13/1/09)
China’s exports in record decline BBC News Online (13/1/09)
China’s exports slump in sharpest decline in decade Times Online (13/1/09)
World Economic Forum highlights Chinese slump as biggest risk to global economy Telegraph (14/1/09)
Chinese exports fall by the biggest margin in a decade Telegraph (14/1/09)

Questions

  1. Explain the significance of the fall in Chinese exports for the Chinese economy.
  2. Analyse the principal causes of the fall in the level of Chinese exports.
  3. Assess how the changes in China’s trade position will affect the exchange rate of the Chinese currency, the yuan.
  4. Discuss policies that the Chinese government can implement to try to minimise the impact of the fall in exports on economic growth.

Many commentators (and politicians) have suggested that the most painless route out of the recession is for us all to shop until we drop. If we can prevent consumer spending from falling too far then this may help maintain oonsumer confidence and therefore aggregate demand. So, is it our patriotic duty to shop? Should we all be out there helping in our own small way to prevent recession, or will more shopping just land us even further in debt and therefore make us worse off? The articles linked to below look at various aspects of the ‘shopping debate’ and consider whether retail therapy is also economic therapy.

Your country needs you … to buy some underpants Guardian (20/12/08)
Beyond retail therapy Guardian (8/1/09)
Shopping is no panacea for a broken economy Guardian (28/12/08)
High street counter-offensive Guardian (31/12/08)
Should shopping be a patriotic duty? BBC News Online (19/12/08)

Questions

  1. How could the need both to reduce debt and to maintain aggregate demand be reconciled?
  2. Discuss the extent to which an increase in consumer expenditure is (a) a necessary and (b) a sufficient condition for a recovery of the economy?
  3. To what extent will long-term aggregate supply depend on the maintenance of aggregate demand?
  4. If shopping is your patriotic duty, what types of shopping would be best for the country?