Tag: GDP

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Fighting cyber crime

When you look at the linked articles below, I’m sure many of you will be thinking that this is an odd choice for an economics blog! However, part of the economic relevance of ‘cyber-crime fighters’ relates to the relative skills of workers and the gap that exists between the most and least skilled workers in the UK.

Crime has always existed, but as technology has developed the types of crime committed have grown along with the complexity of them. For certain crimes, a very skilled individual is needed. With this emergence of technologically advanced crimes, those fighting crimes have also had to improve their skills and techniques. Thus crime-fighters have become more technologically advanced as well.

The problem is that the number of skilled workers able to deal with things like cyber crime has not kept pace with the demand for them and thus we have a skills gap. Usage of the Internet has continued to grow, creating more and more opportunities for cyber crime. However, the UK supply of IT and cyber-security professionals has not been able to keep pace. Therefore, we have a shortage of skilled labour in this area.

More investment into research and education is occurring, with the aim of addressing this shortage, but it is expected to take many years before supply catches up to demand. In particular, more investment is needed in the sciences and technology subjects at school to create the supply at university level. The NAO said that:

‘The current pipeline of graduates and practitioners are unable to meet demand.’

A second area of relevance to economics is the cost of cyber crime. The NAO estimated that the cost is somewhere between £18bn and £27bn per annum. However, on the other side, is there a case that crime actually benefits the macroeconomy by requiring government investment. As cyber crime has grown, so has the demand for cyber-crime fighters and this has created more jobs. With more jobs comes increased spending and the benefits of the multiplier. The following articles consider cyber crime and the impact it is having.

National Audit Office warns UK needs more skilled cyber crime fighters BBC News (12/2/13)
IT staff shortages raise cyber crime risk Sky News (12/2/13)
UK planning ‘Cyber Reserve’ defence force BBC News (3/12/12)
Britain vulnerable from cyber attacks for at least 20 years The Telegraph, Tom Whitehead (12/2/13)
Britain targeted by 120,000 every DAY with cost to country thought to total £27billion Mail Online, Jack Doyle (12/2/13)

Questions

  1. Illustrate the demand for and supply of labour curves in the market for cyber crime fighters. How is the equilibrium wage determined?
  2. If there is increased investment in education, how would this affect the shape and position of the MRP curve and what impact would this have on your diagram?
  3. If there is a shortage of cyber crime fighters, what does that suggest about the position of the two curves? Illustrate this situation and explain why it is a problem.
  4. Which factors would be considered by NAO in estimating the costs of cyber crime?
  5. Explain why crime can pay.
  6. How does the macroeconomy benefit from increased crime? Illustrate this on a diagram.
  7. Does your answer to question 5 above suggest anything about the effectiveness of using GDP as a measure of welfare?
  8. How is the multiplier effect relevant?
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Falling flat

According to the first estimate by the Office for National Statistics, the UK economy shrank by 0.3% in the final three months of 2012. This means that over the whole year growth was flat.

The biggest contributor to the fall in GDP in Q4 was the production industries, which include manufacturing. Output of the production sector fell by 1.8% in Q4. Construction sector output, by contrast, was estimated to have increased by 0.3%. Service sector output was flat. The chart below shows quarterly and annual growth in the UK from 2007 to 2012. (Click here for a PowerPoint.)

Latest estimates by the IMF are that the UK economy will grow by 1.0% in 2013 – well below the long-term growth in potential output (see also the last blog, High hopes in the Alps). But some forecasters are predicting that real GDP will continue to fall for at least one more quarter, which means that the economy would then be in a ‘triple-dip recession’.

Not surprisingly politicians have interpreted the statistics very differently, as have economists. The government, while recognising that the UK faces a ‘very difficult economic situation’, argues that now is not the time to change course and that by continuing with policies to reduce the deficit the economy will be placed on a firmer footing for sustained long-term growth

The opposition claims that the latest figures prove that the government’s policies are not working and that continuing attempts to bear down on the deficit are depressing aggregate demand and thereby keeping the economy depressed.

The following webcasts, podcasts and articles expand on these arguments. Try to be dispassionate in using economic analysis and evidence to assess the arguments.

Webcasts and podcasts
Video Summary: Gross Domestic Product Preliminary Estimate, Q4 2012 Media Briefing (Click here for the following Q&A) ONS (25/1/13)
Triple dip on the menu? Channel 4 News, Siobhan Kennedy and Faisal Islam (25/1/13)
Getting and spending – the key to recovery Channel 4 News, Cathy Newman (25/1/13)
UK economy shrinks by 0.3% in the last three months of 2012 BBC News, Hugh Pym (25/1/13)
Danny Alexander on GDP figures and economic plans BBC Daily Politics (25/1/13)
Osborne defends government’s deficit reduction plan BBC News (25/1/13)
Ed Balls: UK economy urgently needs a ‘Plan B’ BBC News (25/1/13)
UK heads for triple dip as GDP contracts 0.3pc The Telegraph, Philip Aldrick (25/1/13)
Economist: Government may need to rethink its fiscal policy The Telegraph, Jim O’Neill (25/1/13)
Has austerity really been tried in Britain? BBC Today Programme, Jonathan Portes and Andrew Lilico (29/1/13)

Articles
UK GDP: Economy shrank at end of 2012 BBC News (25/1/13)
UK GDP shrinks by 0.3% in fourth quarter: what the economists say The Guardian (25/1/13)
New Bank of England head Mark Carney hints at big shift in policy The Guardian (26/1/13)
The Bank of England, the chancellor, and the target BBC News. Stephanie Flanders (29/1/13)
The Entire World Of Economics Is Secretly Thankful To The UK Right Now Business Insider, Joe Weisenthal (26/1/13)

Data
Gross Domestic Product: Preliminary Estimate, Q4 2012 ONS (25/1/13)
Video Summary: Gross Domestic Product Preliminary Estimate, Q4 2012 ONS (25/1/13)
Preliminary Estimate of GDP – Time Series Dataset 2012 Q4 ONS (25/1/13)
Business and Consumer Surveys DG ECFIN

Questions

  1. What are the reasons for the decline in GDP in 2012 Q4??
  2. Examine how likely it is that the UK will experience a triple-dip recession.
  3. What measures could be adopted to increase consumer and business confidence?
  4. If there is substantial spare capacity, is expansionary fiscal policy the best means of achieving economic growth?
  5. What additional monetary policy measures could be adopted to stimulate economic growth?
  6. Find out what has happened to the UK’s public-sector deficit and debt over the past three years. Explain what has happened.
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The 2 Ds of British recessions

We know two things about economic growth in a developed economy like the UK: it is positive over the longer term, but highly volatile in the short term. We can refer to these two facts as the twin characteristics of growth. The volatility of growth sees occasional recessions, i.e. two or more consecutive quarters of declining output. Since 1973, the UK has experienced six recessions.

Here we consider in a little more detail the growth numbers for the UK from the latest Quarterly National Accounts, focusing on the depth and duration of these six recessions. How do they compare?

The latest figures on British economic growth show that the UK economy grew by 0.9 per cent in the third quarter of 2012. However, when compared with the third quarter of 2011, output was essentially unchanged. This means that the annual rate of growth was zero. Perhaps even more telling is that output (real GDP) in Q3 2012 was still 3.0 per cent below its Q1 2008 level.

The chart helps to put the recent output numbers into an historical context. It shows both the quarter-to-quarter changes in real GDP (right-hand axis) and the level of output as measured by GDP at constant 2009 prices (left-hand axis). It captures nicely the twin characteristics of growth. Since 1970, the average rate of growth each quarter has been 0.6 per cent. This is equivalent to an average rate of growth of 2.35 per cent per year. The chart also allows us to pin-point periods of recessions.

One way of comparing recessions is to compare their ‘2 Ds’: depth and duration. The table shows the number of quarters each of the six recessions since 1973 lasted. It also shows how much smaller the economy was by the end of each recession. In other words, it shows the depth of each recession as measured by the percentage reduction in output (real GDP).

British recessions

Duration (quarters) Depth (output lost, %)
1973Q3–74Q1 3 3.25
1975Q2–75Q3 2 1.76
1980Q1–81Q1 5 4.63
1990Q3–91Q3 5 2.93
2008Q2–09Q2 5 6.28
2011Q4–12Q2 3 0.90

We can see that three of the recessions lasted for five quarters. In the case of the recessions starting in 1975 and 2011 they occurred very shortly after a previous recession. Hence, we observe two so-called double-dip recessions.

The table reveals that the deepest recession by some distance was that in the late 2000s. As a result of this recession, UK output declined by 6.3 per cent. As the recent GDP numbers show, the UK has yet to recover the ‘lost output’ that followed the financial crisis.

Data

Quarterly National Accounts Time Series Dataset Q3 2012 Office for National Statistics
Statistical Bulletin: Quarterly National Accounts Q3 2012 Office for National Statistics

Articles

UK economic growth less than expected Sky News UK(21/12/12)
GDP growth revised down to 0.9% Financial Times, Claire Jones (21/12/12)
Uk borrowing higher than expected as GDP revised down BBC News (21/12/12)

Questions

  1. What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
  2. Looking at the chart above, summarise the key patterns in real GDP since the 1970s.
  3. What is a recession? What is a double-dip recession?
  4. Looking at the table, rank the recessions from 1973 by the amount of lost output.
  5. Can a recession occur if nominal GDP is actually rising? Explain your answer.
  6. What factors might result in economic growth being so variable?
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A positive turn of events?

The story of the UK economy over the past few years has been one of bad news and worse news. With a double-dip recession having kept confidence low in the UK, positive news for the economy was seemingly a distant hope of government ministers. However, official statistics show that that in the 3 months from July to September, the UK economy emerged from recession, with growth of 1.0%.

This positive GDP figure (click here for a PowerPoint of the chart below) was undoubtedly helped by the London Olympics over the summer, which may have added as much as 0.2 percentage points to GDP, according to the ONS. Millions arriving in London and other venues, spending money on countless things. Yet, other factors have also contributed to this welcome growth. Stephanie Flanders said:

The positive ‘surprise’ in these figures is largely to be found in the service sector, which is estimated to have growth by 1.3% in the third quarter, after shrinking by 0.1% in the three months before.

Further to this, in Stephanie Flanders’ ‘Stephanomics’, she says that ‘it confirms that the last three months of this latest recession were brought to you by the Queen. Or at least, the extra Bank Holiday to celebrate her Jubilee.’ The Bank of England suggests that the Jubilee took 0.5 percentage points from official GDP statistics. So, the news so far is positive, but the economy is far from being back to its pre-recession size.

The 2008-2009 recession knocked 6.4% off the UK economy. Since then, the total growth (over the past 4 years) has reached only half of that – 3.2% and that includes the 1% figure just published. Thus, while we may be on ‘the right track’, there is still a long way to go. Economists differ in their interpretations of what this means for the overall recovery: some say that this is a sign of what’s to come; others argue that this recovery has been driven by one-off factors.

What is certain is that government policy over the next few months will be crucial in keeping the economy on the right growth path. The following articles consider the implications of this new economic data.

A special recovery BBC News, Stephanomics, Stephanie Flanders (25/10/12)
UK GDP rises 1pc: economist reaction The Telegraph (25/10/12)
Nick Clegg warns economic recovery will be ‘fitful’ The Guardian, Daniel Boffey (28/10/12)
GDP figures set to show UK economy has exited double-dip recession The Telegraph, Philip Aldrick, Emma Rowley and Jessica Winch (25/10/12)
UK economy returns to growth with help from Olympics BBC News (25/10/12)
U.K. posts quarterly gain in GDP, lifted by Olympics Wall Street Journal, Cassel-Bryan Low (25/10/12)
GDP figures show UK emerging from recession: full reaction The Guardian (25/10/12)
UK growth signals move out of recession Financial Times, Sarah O’Connor and George Parker (25/10/12)

Questions

  1. How do we define a recession?
  2. How is GDP calculated and what does it measure?
  3. Which factors have contributed towards lower GDP data towards the beginning of this year?
  4. Which factors have helped boost GDP in the 3 months from July to September?
  5. Why is there disagreement about the likelihood of positive GDP figures continuing throughout the rest of the year?
  6. Prior to the official release of the GDP figures, David Cameron hinted at positive news. Given that the market is so sensitive, what effect might this suggestion have had?
  7. Given this positive figure, what implications does this have for the government’s quantitative easing programme?
  8. If we translate this latest growth data onto an AD/AS diagram, how would you show what has recently happened?
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A measure of well-being

Although every recession is different (for example in terms of length and magnitude), they do tend to have a few things in common. The focus of this blog is on consumer income and how it is affected in the aftermath of (or even during) a recession. According to data from the ONS, real national income per head has fallen by more than 13% since the start of 2008.

This latest data from the Office of National Statistics shows that in the aftermath of the 2008 recession, UK incomes have fallen by much more than they did in the 2 previous recessions experienced in the UK (click here for a PowerPoint of the chart). We would normally expect consumer incomes to fall during and possibly directly after a recession, as national output falls and confidence tends to be and remain low. However, the crucial thing to consider with falling consumer incomes is how it affects purchasing power. If my income is cut by 50%, but prices fall by 80%, then I’m actually better off in terms of my purchasing power.

The data from the ONS is all about purchasing power and shows how UK consumer incomes have fallen at the same time as inflation having been relatively high. It is the combination of these two variables that has been ‘eating into the value of the cash that people were earning’. Comparing the incomes in the four years after the 2008 recession with similar periods following the early 1980s and 1990s recession, the ONS has shown that this most recent recession had a much larger effect on consumer well-being. Part of this may be due to the rapid growth in incomes prior to the start of the credit crunch.

It’s not just the working population that has seen their incomes fall since 2008 – the retired population has also seen a decline in income and according to a report from the Institute for Fiscal Studies, it is the wealthiest portion of older households that have taken the largest hit since 2007. According to the IFS, the average person over 50 has experienced a fall in their gross wealth of about 10%, or close to £60,000. Of course for these older households, the concern is whether they will be able to make up this lost wealth before they retire. The concern for everyone is how long until incomes and purchasing power increase back to pre-crisis levels. The following articles consider this latest data on economic well-being and the impact the recession has had.

UK wellbeing still below financial crisis levels Guardian, Larry Elliott and Randeep Ramesh (23/10/12)
National income per head ‘down 13% in four years’ BBC Newsd (23/10/12)
Financial crisis hits UK retirement income Financial Times, Norma Cohen (23/10/12)
Over 50s ‘left £160,000 out of pocket by the financial crisis’ The Telegraph, James Kirkup (23/10/12)
Those near retirement in UK hit hard by crisis Wall Street Journal, Paul Hannon (23/10/12)
Living standards down 13pc since start of recession The Telegraph (23/10/12)

Questions

  1. Why is net national income per head said to be the best measure of economic well-being?
  2. Why is it so important to take into account inflation when measuring wellbeing?
  3. What explanation can be given for the larger fall in consumer incomes following the 2008 recession relative to the previous 2 recessions?
  4. According to data from the IFS, the richest portion of older households have suffered the most in terms of lost wealth. Why is this the case?
  5. What is meant by purchasing power?
  6. GDP has fallen by about 7%, whereas national income per head, taking inflation into account is down by over 13%. What is the explanation for these 2 different figures?
  7. How can recessions differ from each other? Think about the length, the magnitude of each.
  8. Is GDP a good measure of economic well-being? Are there any other ways we can measure it?