Economics help blog – Page 89

J-Curve Effect

20 November 2018 by Tejvan Pettinger

The J Curve effect a depreciation in the exchange rate can cause a deterioration of the current account in the short-term (because demand is inelastic). However, in the long-term, demand becomes more price elastic and therefore, the current account begins to improve. The J-Curve is related to the Marshall-Lerner condition, which states: If (PED x …

What is Austerity?

18 January 202016 November 2018 by Tejvan Pettinger

Readers question: What is Austerity?

Simple definition of Austerity

Austerity involves policies to reduce government spending (or higher taxes) in order to try and reduce government budget deficits – during a period of weak economic growth.

Austerity policies are often associated with higher unemployment and lower economic growth.

Austerity policies (and automatic stablisers) have reduced levels of government borrowing since 2010.

More complex points and definitions of austerity

The term austerity is more likely to be used when government spending cuts and higher taxes occur during a recession or period of very weak economic growth. Austerity implies that spending cuts and tax increases are highly likely to have an adverse impact on aggregate demand and economic growth. For example, if the government increased taxes during an economic boom, this would probably not be referred to as austerity. But, if the government cut spending during a period of negative growth, this would be referred to as austerity policies.

What constitutes actual austerity?

A simple definition of austerity implies actual spending cuts. However, some may refer to austerity policies – even if there has just been a limit in the growth of government spending. For example, in the past 10 years, government spending may have increased on average by 3% in real terms. If the government now freezes public sector spending, this may be termed ‘austerity policies’ – because government spending is not increasing at the same rate as previously.
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Terms of Trade Effect

17 May 202415 November 2018 by Tejvan Pettinger

Definition: The Terms of Trade is the average price of exports / by the average price of imports. It is a measure of a countries relative competitiveness. If export prices rise relative to import prices, we say there has been an improvement in the terms of trade. – A unit of export buys relatively …

Real business cycle

15 November 2018 by Tejvan Pettinger

Summary Real business cycle models state that macroeconomic fluctuations in the economy can be largely explained by technological shocks and changes in productivity. These changes in technological growth affect the decisions of firms on investment and workers (labour supply). Hence changes in output can be traced to microeconomic and supply-side factors. Real business cycle models …

Evolutionary economics

12 November 2018 by Tejvan Pettinger

Evolutionary economics is a branch of economics which views the economy through a dynamic model of constant change, adaptation, chaos and revival. Evolutionary economics was coined by radical economist Thorstein Veblen (1857-1929). Veblen was interested in psychological factors that often gave better explanations for economic behaviour than traditional rational choice theory. For example, Veblen noted …

Factors affecting oil prices in short and long run

1 February 202010 November 2018 by Tejvan Pettinger

A look at the different factors affecting the price of oil in both short term and long.

Readers Question: I’m trying to update myself on what’s happening with oil prices at the moment (partly to prepare myself for uni interviews) but I’m finding very conflicting articles, such as:

Article warning of oil rising to $150 at BBC
Oil drops below $96 on Italian debt fears at Washington Post
Oil nears $96 on Italian debt fears at NPC

Could you possibly explain to me what’s really going on?

It’s an interesting question, and in a way, all three articles are sound economics. It is possible to have conflicting predictions for oil prices. Perhaps the easiest explanation is to consider both short term and long term factors.

Oil Prices Since 1987

Between Jan 1999 and Jan 2008, oil price rose from under $20 a barrel to over $130. However, during this long term price rise, there were still periods where oil prices fell.

America’s Rural – Urban Economic Divide

9 November 2018 by Tejvan Pettinger

The political map of the US increasingly represents a divided America, and this political divide has roots in an increasing economic divide. In brief – rural areas tend to have lower average incomes (though also cheaper rent) higher rates of unemployment, declining population, reliance on one major employer and more concentrated on the primary sector …

Costs and benefits of hosting the Olympics

10 March 20208 November 2018 by Tejvan Pettinger

Readers Question: Evaluate the arguments for and against the view that major sports events are good for the economy?

Major sports events such as the World Cup and the Olympics are often seen as a potential source of economic regeneration. Yet, many are worried about the economic costs of hosting a major sporting event that only lasts for three weeks. These are some of the economic benefits and potential costs of the Olympics and other major sporting events.

Economic benefits of the Olympics

1. Encourages investment in transport and infrastructure

Major sporting events usually require upgrades to transport and communication links. This investment leaves a lasting legacy for the whole economy. Better transport links reduce congestion and help to improve efficiency for local business. It can help increase the productive capacity of the economy (shifting aggregate supply to the right). For example, for the London Olympics in 2012, we have seen new rail links created in East London, and improvements to existing underground and overground train services (London Olympic rail networks)

2. Influx of foreign visitors

A major sporting event like the Olympics can attract thousands of people for the duration of the games. These foreign tourists bring a boost to the local economy. In particular the local tourist trade, shops/hotels will benefit from the surge in visitor numbers. However, it is worth noting that these visitor numbers tend to be temporary. The major sporting event only lasts for a few weeks; potentially there could be many empty hotel beds in the future. On the other hand, people argue a major sporting event can lead to a long-term growth in visitor numbers. e.g. China felt the Beijing Olympics created a feeling that China could be a popular tourist destination. Barcelona saw higher visitor numbers continue after the Barcelona Olympics of 1992.

3. Job creation

Typically, major sporting events require investment in building stadium and hotels. This creates jobs for the local economy for up to 4 years before the event. These extra jobs help create a positive multiplier effect within the local economy. It is hoped that the London Olympics will help regenerate the east end of London. Some argue this temporary job boost can prove more permanent if the economic regeneration continues after the games.

4. Higher economic growth

It is estimated that the ‘Olympics Effect’ leads to a boost in economic growth due to the higher investment and foreign visitors. This leads to higher tax revenues for the government