Readers Question: Account for the estimated 3.8 million increase in the number of new houses needed over the next 15 years in the UK.

With house prices falling at the moment, it is hard to imagine that we need an extra 3.8 million houses. Most people don’t want to buy (or can’t get a mortgage). But, in the long run, there are various factors causing increased demand for housing.

1. Rising Population. Boosted by net migration, the UK’s population is expected to increase to 65 million in next 15 years (population growth in UK)
2. Demographic Changes. These are factors which cause increased numbers of households. For example,
3. Higher divorce rates means more people living on their own
4. Ageing population - more old people living alone.
5. Rising affluence means young people want to leave home.
6. Increase in number of second homes. e.g. buying in country
7. Increased demand from abroad.

Falling house prices may reduce speculative demand. But, if demand rises as predicted and current low levels of supply are maintained, prices are likely to be squeezed up. What may happen is that increasing numbers of young people will be forced to rent.

• Why Boom and Busts are common in housing Markets
• Should govt increase supply of housing?
• Problems in UK Housing market
• Long term forecasts for UK Housing Market

Readers Question: What are the effects of increased investment on aggregate demand in the short term and the long term.

Investment is a component of AD. AD+ C+I+G+A-M. I think, Investment spending takes about 15% of AD; it is not as significant as Consumer spending which is 66%.

If Investment increases, then ceteris paribus, AD will increase. However, it depends on circumstances. e.g. in present situation with falling house prices and lower consumer spendin, increased investment may be insufficient.

In the long term, higher investment may increase productive capacity and increase Aggregate supply. Therefore, you could argue, invesment enables a more sustainable increase in AD.

People often ask whether increased AD leads to an increase in Real GDP. Often the suggested answer is yes in the short term, but not in the long term.

See also:

• Causes of Economic Growth
• Discuss whether demand side policies reduce unemployment

Readers Question: Why are future debt commitments, pensions, PFI repayments, Northern Rock, et al, not part of the National Debt? The treasury must do cash flow projections (?) to calculate how much income it needs. Don’t these factor into the calculations?

It is a good question. A while back, The Institute of Fiscal studies produced a report arguing it should be included. In particular, the pension obligations are effectively, future calls on government spending.

The reason that they are not included, is that National debt statistics are only calculated using existing and past spending. You could argue, there is no inevitability that the government have to spend on pensions. (maybe they could raise the retirement age to 75) (maybe mass immigration will change demographic demands on the state.)

However, in practical terms, future spending committments are important. The Institute of Fiscal studies argue it should be. See: Problems of National debt In particular, the pension obligations are effectively, future calls on government spending. National debt since WW2 at IFS (pdf)

The thing with Northern Rock is that the cost to the government is uncertain. In theory they could be left with significant losses, but, in theory it could also lead to big improvements.

Readers Question: Please explain the role that property plays in a country’s economic development.

Property rights are important for giving firms the incentive and confidence to invest. Firms need a profit incentive to invest in buying capital and investing in equipment. Without the guarantee of private property their profit is a risk. This is important for foreign multinationals considering whether to invest in a developing country. For example, they may fear investing in oil production, if there is a chance that the oil industry could be nationalised and therefore they would lose out.

Property might also be important for dealing with market failure such as tragedy of the commons.

For example, if there is no ownership of limited water supplies, it may lead to over supply or over fishing which harm the long term economic welfare of the economy.

It is also worth bearing in mind Property can create problems in an economy. If

• Property is inequitably distributed. e.g. many rural farmers have no access to land so they can’t grow their own crops.
• Monopoly exploitation of firms / people with property rights.
• Tragedy of the anti commons. E.g. people with patents preventing the use of their inventions.

It would be interesting to have a cost benefit analysis of the Beijing Olympics. It seems the Chinese have spared little expense in trying to impress the world with an immaculate Games.

It is estimated that hosting an Olympic games can have a net economic benefit of £5billion. Although research by Price Waterhouse and Coopers find that Olympic games rarely lead to a boost in economic growth rates.

Of course, China is not just thinking about the economic impact; they see the Olympics as a way of impressing the world. Compared to the political impact of the Games, £5billion is relatively insignificant for an economy the size of China.

These are some of the costs and benefits of hosting the Olympics

On a side note - Congratulations to cyclist Nicole Cooke, on winning GB first Olympic Gold.

The Economist website includes the full print version of the magazine, plus additional features such as blogs.

Registered users can add comments to online stories. The debate is generally a higher standard than most newspaper comment sections. But, still I tend to avoid the comments section.

Economist Country Briefings

• Country Briefings of main economies

Economist and Markets

• Latest Stock Market and other financial data

Economist Big Mac Index

• Big Mac Index

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National Statistics online has had a well overdue make over. The new web design takes up the whole screen and is easier to navigate and read. It also comes with RSS feed which is useful

For any economist, National Statistics Online is a very useful resource for finding latest data and statistics and understanding some of the changes which occur. It includes a broad snapshot of the economy, with the main economic indicators.

• Economic Growth
• Inflation
• Balance of Payments
• Unemployment
• Productivity
• Consumer spending

It is an excellent site for an A Level student to visit and try and understand.

There are also interesting statistics on population and social demographics which might influence economic trends.

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Readers Comment. the obvious question is why doesn’t the bank of England just print the money instead of borrowing the money?

Many often ask why government’s don’t print more money to deal with the problem of National debt.

The reason is that printing more money doesn’t improve economic output in any way. It merely causes inflation.

Suppose an economy produces £10million worth of goods. e.g. 1 million books at £10 each.

If the government doubled the money supply, we would still have 1 million books but people have more money. Demand for books would rise and firms would push up prices.

The most likely scenario is that if money supply was doubled. we would have 1 million books sold at £20. The economy is now worth £20million rather than £10million. But, the number of goods is exactly the same.

We can say that the increase in GDP is a money illusion. - True you have more money, but if everything is more expensive, you are not any better off.

If the government printed more money. It would create inflation. The price of goods would rise, it would have to increase benefits and wages inline with inflation. Government spending would rise because of inflation. Borrowers would require higher interest rates to buy bonds. Printing money would not solve the problem but create additional problems of inflation.
Printing more money is exactly what Weimar Germany did in 1922. To meet Allied reparations, they printed more money; this caused the hyper inflation of the 1920s. The hyper inflation led to the collapse of the economy.

• National Debt, Printing money and inflation
• Hyperinflation - Causes, costs and examples

Readers Comment It is shocking to me that revenues from all my future income tax and even my young childrens future tax payments have already been committed by our national debt. If it is not some kind of nefarious carve-up, why would the UK wage 2 unnecessary wars costing billions when we do not have the money.

We are borrowing the money for these wars , and paying interest to private entities !!
Am I right saying that the BofE sells and buys bonds when it wants more cash.

• If the government needs to borrow money then the Bank of England sells government backed bonds to the private sector. This is how they government raises revenue. When the government has a budget surplus it can buy back more bonds than it sells.

Government Debt

• Government borrowing does create a burden on the future Future Tax payers will have to pay debt interest plus the debt. (interestingly, the current payments on debt interest payments are equivalent to total spending on defense.)
• The Benefit of borrowing now is that current taxpayers benefit from lower tax rates (than they should be) and / or higher government spending. Borrowing can be beneficial if it is invested in improving long term productive capacity of the economy.
• The problem is that reducing national debt now would exacerbate the economic downturn. e.g. higher taxes would reduce consumer spending and lead to slower growth.
• The government predicted (hoped) continual economic growth would keep national debt manageable, but, the economic slowdown means National debt will increase by more than they expected.
• You could argue the government have wasted the last 15 years of economic growth. This would have been a good time to keep reducing national debt as a % of GDP, rather than allow it to rise. (from 29% of GDP in 2003 to 40% now)

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The credit crunch has already lasted for over 12 months. There are still signs that more loan defaults may work their way into the financial system causing more problems for banks with already depleted balance sheets.

A Look at the credit crunch one year on

Recent news that oil prices are falling, may give some grounds for optimism, but even lower inflation rates may not really help. The credit crunch is caused by bad loans that banks have had to right off. Lower interest rates merely lessen the pain for borrowers, but, do not tackle the fundamental problems. In fact, many argue that it was low interest rates that helped contribute to a boom in reckless borrowing.