Economics help blog – Page 107

Consumer confidence

5 January 201821 October 2017 by Tejvan Pettinger

Consumer confidence is the outlook that consumers have towards the economy and their own personal financial situation. This outlook can be optimistic (high consumer confidence) or pessimistic (low consumer confidence)

The level of consumer confidence will be an important factor that determines the willingness of consumers to spend, borrow and save. A high level of consumer confidence will encourage a higher marginal propensity to consume. A fall in levels of consumer confidence is often an indicator of an economic downturn.

Source: OECD

This measure uses 100 as the long-term average for confidence. Therefore, a stat above 100 indicates consumer confidence is higher than average. A value below 100 indicates below average confidence.

Consumer confidence often mirrors the state of the economy

Confidence fell sharply during the 2008/09 recession and recovered with the economic recovery.

Factors that affect consumer confidence

House prices – Housing is the largest form of household wealth Falling prices reduce wealth and confidence. Rising house prices enable households to ‘re-mortgage’ and gain equity withdrawal.
Economic news – Depressing statistics about the global and national economy will reduce confidence and encourage saving rather than spending.
Uncertainty – a major political/economic change can lead to uncertainty which reduces confidence. For example, major terrorist attack, uncertainty over Brexit deal.
Unemployment – The fear of rising unemployment will discourage consumers.
Inflation and real wages. High inflation will reduce confidence. Stagnant and falling real wages will make people pessimistic.
Personal debt levels. Rising debt levels will be a source of concern – especially if interest rates rise or the economy slows down.
Economic growth – A recession will invariably be associated with a fall in consumer confidence; positive economic growth tends to improve consumer confidence.
Current economic situation. Expectations are largely based on the current economic situation and reported the news. News of job losses and falling house prices are amongst the key factors which influence consumer confidence.

Outlook for future UK consumer confidence

If I were a betting man, I would expect consumer confidence to deteriorate over the next 18 months.

Squeeze in real wages is reducing spending power.
Growing personal debt levels will make consumers vulnerable to higher interest rates or economic slowdown.
Prospect of Brexit related uncertainty.
Fall in unemployment but growing uncertainty of new jobs in the flexible labour market.

Measuring consumer confidence

cfk-consumer-confidence — This measure plots net positive vs net negative. It shows people more likely to be negative in this period. – rarely does index record net positive score.

Consumer confidence is based on qualitative surveys, where people carrying out research ask a sample of the population questions, such as:

Do you feel confident about the general economic situation for next year?
Do you feel confident about your personal economic situation for next year?
Expectations regarding employment conditions six months hence
Expectations regarding their total family income six months hence
Confidence indexes are often measured in terms of +/-. With a + of 10 meaning, there are a greater number of people optimistic than pessimistic about the future.

How Firms Use Income Elasticity of Demand YED

5 March 201820 October 2017 by Tejvan Pettinger

Readers Question: Evaluate the importance of knowing YED in a firm’s decision-making process. Knowing the YED of a product may help a firm respond to changing economic situations and help the firm to plan ahead. If a firm is producing inferior goods Demand will increase during periods of recessions and economic downturns. Therefore, in …

List of Countries Energy Use per Capita

22 January 201820 October 2017 by Tejvan Pettinger

A list of energy use (kg of oil equivalent) per capita by country. The list shows a huge disparity between the highest energy users and the lowest. It is worth bearing in mind: Colder countries understandably have a relatively higher use of energy because more resources are devoted towards heating. Energy producers have a high …

Marginal Analysis in Economics

14 January 201818 October 2017 by Tejvan Pettinger

In economics, marginal analysis means we look at the last unit of consumption/cost. It gives a different picture to the total cost. For example, the total cost of flying a plane from London to New York will be several thousand Pounds. However, with a plane 50% full, the cost of carrying one extra passenger is …

UK Economy in the 1920s

8 January 201816 October 2017 by Tejvan Pettinger

The 1920s are sometimes referred to as the ‘roaring twenties’, but for the UK economy, it was a period of depression, deflation and a steady decline in the UK’s former economic pre-eminence. In the US, the economy boomed on the back of mass production techniques, growing efficiency – and increasingly a credit bubble, which would later contribute to the stock market crash and the great depression. But the UK, tied to the gold standard, the economy experienced a decade of deflation and stagnant growth.

Mass Unemployment in the UK

After the post-war boom of 1919-20 ended, UK unemployment rose sharply to over 10% and stayed high until the Second World War. The unemployment problem was particularly depressing for the many servicemen who returned from the Western front to find a lack of jobs on their return.

Reasons for Unemployment in the 1920s

Lack of demand. Due to contractionary fiscal and monetary policy, there was insufficient demand in the UK economy, leading to stagnant economic growth.

real gdp 1920s — Real GDP stagnant in the 1920s after a deep recession post-war.

Efforts to keep Britain in the Gold Standard, and in particular, the decision in 1925 to return to the prewar level of $4.85. This meant UK exports were overvalued, and also monetary policy had to be kept tighter than necessary (real interest rates very high)
Supply-side factors. Postwar, UK industries struggled to make the same productivity gains as competitors such as the US. British industries, which had performed well in the nineteenth century, such as cotton, steel, coal and iron faced difficulties from global oversupply and falling prices. There was a sluggishness in switching resources from these old industries to new growth industries like chemicals, rayon and motor cars. Other supply-side factors included a cut in the average working week and industrial unrest.
Real Wage unemployment. Wholesale prices fell by 25 percent between 1921 and 1929. However, falling prices were not matched by falling wages, as understandably, the increasingly unionised labour movements resisted nominal wage cuts. This led to real wage unemployment.
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External benefits in housing market

27 January 201816 October 2017 by Tejvan Pettinger

Readers Question: Could you please explain how positive externality (external benefit) lead to market failure in property industry? A positive externality occurs when a third party benefits from the production or consumption of a good. In many cases, building the right kind of housing can have benefits to the rest of society. Therefore, the social …

Is inflation caused by economic growth?

5 January 201814 October 2017 by Tejvan Pettinger

Readers Question: Is rise in prices a reflection of economic growth?

A sustained rise in prices is known as inflation. A large rise in prices / higher inflation rate is often caused by economic growth.

However, there are also occasions, when we can get inflation despite weak or negative economic growth.

Inflation caused by economic growth

Typically, higher inflation is caused by strong economic growth. If Aggregate Demand (AD) in an economy expands faster than aggregate supply, we would expect to see a higher inflation rate. If demand is rising faster than supply this suggests that economic growth is higher than the long run sustainable rate of growth.

For example, in the UK, the long-run trend rate of economic growth is around 2.5%.

If the UK economy expands very rapidly, e.g. economic growth of 5%, then you expect to get inflationary pressures:

With high growth, demand rises faster than firms can keep pace with supply; faced with supply constraints, firms push up prices.
High growth leads to more employment. Unemployment falls, but this may cause labour shortages. This fall in unemployment puts upward pressure on wages which leads to higher inflation.

Private, Public and Free Goods defined

9 January 201813 October 2017 by Tejvan Pettinger

Definition and explanation of different types of goods Free good – no opportunity cost Private – Good with opportunity cost, rivalry and excludable Public good – non-rivalry, non-excludable Free Good A free good is a good needed by society but available with no opportunity cost. It is a good without scarcity. For example, air is …