Tag: aggregate demand

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?

It is something of a media sport in these recessionary times to find ‘economic scapegoats’. One minute the recession is the fault of the banks and their poor lending practices; the next minute it is the fault of the media themselves, who are constantly reporting doom and gloom; the next minute it is the fault of the politicians, who have failed to react quickly enough to the economic uncertainties; the list goes on! However, the one group that is rarely blamed is ‘us’ – the consumers. Given that the state of the economy is the outcome of our collective decisions, it could be said that we have no real right to complain, as our collective lack of confidence could be what has caused much of the current situation. As James Meek puts it in the article below:

What makes the situation peculiar is that the crisis that threatens us also seems to be us; we are simultaneously menaced by the wave, and exist as elements of the wave. After all, that is what an economic crisis is: the sum of all the actions of billions of people around the world, deciding whether to lend or hoard, borrow or save, sell or buy, move or stay, hire or fire, study or look for work, be pessimistic or optimistic.

To live in remarkable times Guardian (5/1/09)

Questions

  1. Explain how changes in consumer confidence can affect the level of aggregate demand.
  2. Examine the importance of consumer confidence in determining the length and depth of a recession.
  3. Discuss policies that the government can implement to try to boost consumer confidence.
  4. Analyse the impact on an economy of a prolonged period of poor consumer confidence.

In successive months the Monetary Policy Committee of the Bank of England (MPC) has cut Bank Rate from 4.5% down to 2% – the lowest level since November 1951. The dramatic changes show that the Bank is concerned that inflation and economic activity will fall sharply. Indeed the Governor has recognised that there is a possible danger of deflation (defined, in this context, as negative inflation: i.e. a fall in the price index, whether CPI or RPI). To the extent that these cuts in Bank Rate are passed on in interest rate cuts by banks and building socities, they will reduce the cost of borrowing. It is hoped that this, in turn, will result in a boost to aggregate demand – particularly in the run-up to Christmas.

Below is a selection of articles relating to the interest rate cuts, with many commentators wondering if the cuts will be enough and whether interest rates have much lower to go. For some background on interest rates, you may like to look at the History of Britain’s interest rate published by the Times Online. Martin Rowson’s cartoon in the Guardian clearly summarises the view that this may not be enough to revive an ailing British economy!

Bank enters uncharted territory BBC News Online (4/12/08)
Q&A: The Bank Rate cut and you BBC News Online (12/12/08)
Where will interest rates go now? BBC News Online (4/12/08)
Bank of England still has ammunition for the new year Guardian (4/12/08) Video
Farwell, convention Guardian (5/12/08)
No doubt that we’ve got further to go in this rate cutting Guardian (5/12/08) Podcast
Bank cuts rate by 1% to historic low Times Online (4/12/08)
Analysis: Shock and awe of rate cut Times Online (4/12/08)
Rates cut again as recession deepens Times Online (5/12/08)
Unconventional steps may slow the slide into global recession Times Online (7/12/08)
Bank cuts UK rates to 57-year low Times Online (4/12/08)

Questions

  1. Explain the transmission mechanism whereby the cut in interest rates will affect aggregate demand.
  2. Explain the process used by the Bank of England to ensure that the interest rate set by the MPC becomes the equilibrium market rate. You may find the money markets pages on the Virtual Bank of Biz/ed helpful for this.
  3. Why not try the Biz/ed worksheet on the monetary transmission mechanism and the interactive quiz on inflation and interest rates?
  4. Discuss the extent to which the cuts in interest rates are likely to increase aggregate demand.

The global financial crisis has led to a significant number of countries going into recession. Recession is defined by economists as two successive quarters of negative economic growth. Banking collapses and a collapse in consumer confidence, and therefore expenditure, have reduced aggregate demand. This situation has been exacerbated as each country’s exports fall due to the slowdown in other countries. The combination of these and other factors has led to negative economic growth resulting in recession. We have linked below to a range of news articles looking at different countries that have fallen into recession in recent months.

Germany
German economy now in recession BBC News Online (13/11/08)
Germany tumbles into recession as exports dive Times Online (13/11/08)
Germany slides into recession Guardian (13/11/08)

Eurozone
Threat of worst postwar slump grows as major economies enter recession Times Online (14/11/08)
Eurozone officially in recession BBC News Online (14/11/08)
Eurozone tumbles into first-ever recession Times Online (14/11/08)

Spain
Spain has that shrinking feeling as economy heads south Times Online (20/11/08)
Economic clouds gather as Spain faces recession Times Online (6/12/08)

Japan
Japanese economy now in recession BBC News Online (17/11/08)
Global slowdown and resurgent yen finally drag Japan into recession Times Online (18/11/08)
Japan in sharpest plunge to recession since war Times Online (28/11/08)
Japan slides into recession as global slowdown hits exports Guardian (17/11/08)

Singapore
Singapore officially in recession BBC News Online (21/11/08)

Hong Kong
Hong Kong slides into recession BBC News Online (14/11/08)

Questions

  1. Choose one of the countries above and analyse the principal reasons why it went into recession.
  2. Discuss whether a fiscal policy or a monetary policy stimulus will be more effective at boosting aggregate demand in a country that is in recession.
  3. Assess policies that the governments of the countries above could use to minimise the impact of recession on the level of employment in their country.