Economics help blog – Page 101

Impact of National Debt on Economic Growth

12 January 20188 December 2017 by Tejvan Pettinger

Readers Question: What is the impact of persistent national debt on economic growth? Source: IMF (2012) In summary, there is no obvious link between national (public sector) debt and levels of economic growth. Both UK and US finished the Second World War with high levels of national debt – but this did not prevent rapid …

Deadweight Welfare Loss of Tax

28 January 20186 December 2017 by Tejvan Pettinger

Readers Question: I heard this over the radio one day and was dumbfounded. Can you please explain what the phrase means? Higher tax rates exact real economic costs: Maybe two dollars in deadweight loss to the economy for every extra one dollar collected. I am not asking what your beliefs are (liberal or conservative), I …

Falling UK tax revenue

13 July 20225 December 2017 by Tejvan Pettinger

A few years ago, I wrote several posts about the need for a government to borrow in a recession. One thing I would have said is that when the economy recovers, tax receipts will automatically rise and the deficit will fall. You could almost say ‘solve unemployment and the deficit will take care of itself.’

The logic is that even if you keep tax rates the same, economic recovery will lead to higher tax revenues, for example,

With greater consumer spending – VAT and Excise duty revenues will rise
Rising incomes will lead to higher income tax and NICs.
Greater profitability will lead to higher corporation tax.
Recovery will help housing market and stockmarket lead to more stamp duty and capital gains.

However, one feature of this recovery is that tax revenues have proved disappointing. Tax revenues have increased by a small amount, but as a % of GDP, tax receipts are struggling to keep up. In particular, corporation tax and income tax have fallen behind schedule.

This shows overall nominal HM Revenue and Custom revenues. Not adjusted for inflation. (Note. This also excludes other sources of Government revenue) See Tax revenue sources for more detail.

In 2007/08, tax receipts were £451 bn
In 2013/14 tax receipts were £489 bn

This is very weak growth, when you remember these are nominal figures.

Portugal Economic Crisis

26 February 20184 December 2017 by Tejvan Pettinger

Between 2009-16 the Portugal economic experienced a severe economic crisis – characterised by falling GDP, high unemployment, rising government debt and high bond yields. This was caused by a combination of the global recession, lack of competitiveness and limitations of being in the Euro. What caused the Portuguese economic crisis? In the period Q4 2o10 …

Why are there so many different Interest Rates?

21 April 20223 December 2017 by Tejvan Pettinger

I’ve been studying economics for 13 years and I can still get confused at the bewildering array of interest rates. Basically, interest rates can range from anywhere between 0% and 2,316%

saving-interest-rates-inflation

The most important rate is the base rate (sometimes referred to as the repo rate). This is the rate set by the Bank of England. (In the US by the Federal Reserve). This is important because it determines the rate at which banks borrow money from the Bank of England. Therefore, if the Bank of England changes the base rate the commercial banks, like Natwest and HSBC will alter their interest rates accordingly.

Current account rates. These tend to be low, e.g. 1%. This is because you can access the money at any time. Therefore, for these accounts, the banks have to keep a greater % of cash in the bank for when people wish to withdraw money.
Savings Account rates. These tend to be higher e.g. 4%. The banks are willing to pay higher interest rates because they are less likely to have deposits withdrawn.
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Current Account = Savings – Investment

5 January 20183 December 2017 by Tejvan Pettinger

Readers Question: I’m currently reading ‘Crisis Economics’ (by N.Roubini) at the moment and I don’t get some stuff in the book. When it was talking about the current account balance, the book referred to it as a balance between national savings and national investment, but I don’t quite understand this.

The Current account on the Balance of payments measures the balance of trade in goods and services.

A deficit implies we import more goods and services than we export.

To be more precise, the current account equals:

Trade in goods (visible balance)
Trade in services (Invisible Balance) e.g. insurance and services
Investment incomes e.g. dividends, interest and migrants remittances from abroad
Net transfers – e.g. International aid

The current account is essentially exports – imports (+net international investment balance)

It is also worth noting that if we have a current account deficit, in a floating exchange rate this must be balanced by a surplus on the financial/capital account.

Why do economists say that the current account also equals saving – investment?

Firstly, it is worth remembering that in a closed economy, we assume that saving = investment. (S=I). For a firm to invest, it needs savings to be able to finance the investment. See: Saving and investment

Economists have noted that if domestic saving are lower than domestic investment, we will see a current account deficit. Why?

Before we look at a more mathematical approach, it is helpful to think of a country which experienced a rapid fall in savings, but investment levels stay the same. A fall in savings means people are spending more (higher consumption) therefore, this would tend to suck in imports as we buy goods and services from abroad.

But, also, if domestic savings fall – how will the domestic investment be financed? The investment must be financed by capital inflows from abroad.

A country like Japan has had a glut of saving over investment. This saving has tended to go abroad looking for more profitable investment. Therefore, Japan has had a deficit on capital flows, and a corresponding surplus on the current account.

The US, by contrast, has often had a level of investment greater than savings. This has been financed by capital inflows and a current account deficit.

State Intervention and Market Failure

6 January 20182 December 2017 by Tejvan Pettinger

Readers Question: State intervention is necessary to maximize social welfare but intervention often comes at a heavy price. So why not rely on the market system to tackle the problem? It is one of the great debates of economics – How much should the government intervene in the economy. Firstly we have to consider occasions …

Why do prices always go up in an economy?

25 January 20181 December 2017 by Tejvan Pettinger

If you speak to someone of the older generation, it is not long before they will start saying something like: “When I was a lad, you could get a pint of beer for only 10p, its outrageous how much it costs these days” Economies are more likely to experience inflation than deflation. Despite fall in …