Economics help blog – Page 260

Policies to Increase Equilibrium National Output

29 January 20207 February 2008 by Tejvan Pettinger

Equilibrium national income occurs where aggregate supply equals aggregate demand. An increase in equilibrium national income requires an increase in long-run aggregate supply and aggregate demand. Equilibrium national income and Keynesian Consumption function We can also show equilibrium national income using a Keynesian consumption function. In this case, an increase in domestic aggregate demand (C+I+G) …

Readers Questions II

17 January 20145 February 2008 by Tejvan Pettinger

You are welcome to ask questions on Economics. I will post the answer on this blog, for everyone to benefit from. I shall try to answer the economics question and / or point to other resources but please bear in mind. The replies will be guidance and not for duplication. Your essays should always be …

GDP and Economic Development

5 February 2008 by Tejvan Pettinger

Readers Question: If there is a increase in GDP why is development often unseen? Higher GDP means an increase in National Output and National Income but it doesn’t necessarily lead to economic development this is for the following reasons: Investment takes Time. It takes time for improvements in statistics like education and literacy rates. Higher …

Are House Prices Set to Fall? (2008)

22 January 20204 February 2008 by Tejvan Pettinger

Graph showing Ratio of House prices to Incomes

This graph shows an interesting increase in the ratio of house prices to income. It is well know that UK house prices have increased significantly since 1993. In some areas the house price increase has been at least 300%, since the early 1990s. However, since 1998, house prices have been increasing at a much faster rate than incomes, meaning that the ratio of house prices to average disposable income is reaching an all time high of 6.

Note disposable income means the income after taxes have been paid.

Why House Prices are Set to Fall

The effect of this is that house prices are increasingly unaffordable for many first time buyers. People are simply being priced out of the market and so demand is likely to fall. Other reasons why prices may fall.
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Subprime Crisis and the Global Financial Markets

4 February 2008 by Tejvan Pettinger

Readers Question: To what extent can the subprime crisis affect the global financial market?

The subprime crisis refers to the rising number of defaults on US subprime mortgages. Basically, US mortgage companies sold a lot of inappropriate mortgages to people on low income and poor credit histories. Rising interest rates, and falling house prices are causing many of these mortgage owners to struggle with repayments. Therefore, many mortgage companies have lost significant amounts of money. Some of the leading US subprime mortgage firms have gone under and bankrupt. If it was just mortgage companies who went bankrupt, it wouldn’t be so much of a problem.

However, many of these mortgages were financed through securitization. Basically, the mortgage companies would lend the money to homeowners but would finance the mortgage loan by selling ‘mortgage bundles’ to other financial institutions. Basically, mortgage loans were financed by many different financial companies, not just the mortgage companies.

In the US, upto 70-80% of mortgage loans were financed by securitisation. In the UK, the rate is much lower about 21%. The only British bank to get into trouble was the Northern Rock. The Northern Rock, unsurprisingly had the highest rate of 61%.

The Most Profitable Company in the UK (2008) – Shell

14 January 20201 February 2008 by Tejvan Pettinger

But, do they deserve it?

Last year, Shell made profits of $27.6bn (£14bn). This equates to profits of about £1.5 million per hour – which by any stretch of the imagination is not a bad hourly earning.

The profits have been criticised by trades unions, environmentalists and motoring organisations.

Motoring organisations claim that petrol is too expensive and it is unfair companies make such profit at the expense of the motorist. Personally, I think petrol should be expensive (for environmental reasons). But, also, Shell make the majority of their profits in the production of upstream oil, not at the petrol pump. The profit margin on the retail price of petrol is quite low; most of the cost of petrol is tax to the government.

Environmentalists argue it is wrong to make the profit from a process which is contributing to environmental problems. It is argued a windfall tax should be levied on the profits of Shell; this money could be used to combat the effects of global warming.

Mortgage Equity Withdrawal and Economic Growth

3 December 202030 January 2008 by Tejvan Pettinger

Readers Question: Does mortgage equity withdrawal enhance economic growth? There is good evidence that mortgage equity withdrawal can lead to higher levels of consumer spending and economic growth Definition of Mortgage equity withdrawal – Mortgage equity withdrawal occurs when homeowners remortgage taking out bigger loans to take advantage of rising property values. Suppose you bought …

Why is Government Reluctant to Boost Demand?

29 January 2008 by Tejvan Pettinger

Readers Question. Explain how interest rates could be used to boost the economy. Why, then do the govenment frequently hesitate to take such steps.

Interesting Question.

Generally, lower interest rates help increase consumer spending, investment and economic growth. Lower interest rates help increase Aggregate Demand for various reasons.

Lower interest rates make borrowing cheaper encouraging investment and spending
Lower interest rates make mortgage payments cheaper, increasing disposable income of consumers.
Less incentive to save. Therefore increased incentive to spend
Lower exchange rate, making exports cheaper and boosting AD.

Most people in the economy like to see interest rates cut, especially homeowners and businessmen. Why then do Governments or Central Banks hesitate to cut rates?

Lower interest rates can cause inflation. If Aggregate Demand increases faster than aggregate Supply, the economy will experience inflation. Inflation is said to create instability and uncertainty in the economy.
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