Monday, September 29, 2008

Preparing Yourself For Unit 3: Managing The Economy

Popular questions being tested in Unit 3-Edexcel

Popular definitions:

(1) Real GDP/ annual real GDP growth
(2) Productivity
(3) LFS measure of unemployment/ claimant count measure of unemployment
(4) Injections/ withdrawals
(5) Fiscal/ monetary/ supply side policies

Popular short questions:

(1) Graph or data interpretation. Most of the time is always ‘increasing but at a slower rate’ e.g. the average earnings for year 2004 is growing albeit at a slower rate

(2) Drawing AD-AS diagram, then explain the impact of changes in injections/ withdrawals towards price level & real GDP

(3) Factors that could cause UK to loose its pricing competitiveness. Here we often say fall in productivity, increase in sterling, domestic inflation, bad management, growing attractiveness of Asian economies etc

(4) Impact of fall in productivity towards BOP. Here students have to explain that fall in productivity, causing the goods produced to be more expensive, exports will fall then worsening of the existing deficit

Popular form of essays:

(1) Effectiveness of fiscal/ monetary/ supply side policy in countering inflation & raising real GDP. Normally the comparison is often between fiscal and monetary policy

(2) How fiscal/ monetary/ supply side policies can help to achieve UK macroeconomic objectives. It is important for students to know all that 4 objectives: high but sustainable growth, low inflation, low unemployment & BOP in equilibrium

How to know when do we need to evaluate?

Normally if the questions contain any of these key words,

(1) Why might…..
(2) Evaluate…..
(3) Discuss…..
(4) Assess…..
(5) To what extent…..
(6) Examine…..

Video Lesson: More On Falling House Prices By Richard Pettinger

Important Concepts & Definitions For Unit 3-Edexcel

Definitions & concepts for Unit 3: Managing the Economy

(1) LFS measure of unemployment. Measures unemployment based on the ILO (International Labor Organisation) definition & that is someone without a job, has been looking for jobs since past 4 weeks & able to take up a job 2 weeks from the date of interview

(2) Claimant count measure of unemployment. Measures unemployment based on number of people who registered themselves as unemployed & claim for Jobseekers Allowance

(3) Inflation. Sustain increase in general price level

(4) Inflation target. Where Monetary Policy Committee (MPC) needs to ensure that the inflation level must fall within the given target of CPI 2% +/- 1%

(5) Stagflation. Situation where economy is facing an upward pressure of price level & real GDP is stagnant or fall

(6) Real GDP. Total value of goods & services produced within an economy adjusted for inflation

(7) Annual real GDP. Total value of goods & services produced within an economy adjusted for inflation from one year to another

(8) Annual real GDP growth. Percentage of increase in total value of goods & services produced within an economy adjusted for inflation from one year to another

(9) Balance of Payments. Records the financial transactions between one country & the rest of the world

(10) Withdrawal. An outflow of money from the circular flow of income. Components are like savings (S), taxation (T) & import (M)

(11) Injections. Inflow of money into the circular flow of income. Components are like investments (I), government expenditure (G) & exports (X)

(12) Fiscal policy. The manipulation of government spending & level of taxation to influence the movement of AD & thus overall level of economic activity

(13) Monetary policy. The manipulation of interest rates & money supply to influence the movement of AD & thus overall level of economic activity

(14) Supply side policy. Policies to influence the movement of AS curve, by increasing the productive capacity of the economy

(15) Budget deficit. Where government expenditure exceeds its revenue

(16) Budget surplus. Where government expenditure is less than its revenue

(17) Crowding out effect. Situation where an increase in government spending will crowd out private investments & consumptions by the way of higher interest rates

(18) Multiplier. An initial increase in spending which will eventually lead to a multiple increase in AD or national income

(19) Aggregate demand. Total planned expenditure into the economy. AD = C + I + G + (X-M)

(20) Aggregate supply. Total supply of goods & services produced within an economy at a given overall price level in a specific time period

(21) Productivity. Output per worker

(22) Investment. Increase in the amount of capital stock such as machineries & buildings

(23) Mortgage equity withdrawal. Phenomenon where consumers borrow larger sum of money secured against the rising value of their property

Sunday, September 28, 2008

Video Lesson: Richard Pettinger on Market Failure

Should Insurance Be Provided To Troubled Companies In US?

Student’s question: Should insurance be offered to the troubled banks & mortgage companies?

By the way, your question is actually the same by saying ‘Whether the US government should bail out these troubled companies?’ The outcome is still the same & that is those financial companies will be finally bailed out. The difference is who should bail them, government or insurance companies?

I’m not an expert about insurance here, but I’ll try to reason it out. Before arriving at your question, I need you to understand the purpose of insurance & the concepts of moral hazard.

Insurance is a form of risk management tool which means transfer of loss to another party. Moral hazard is defined as the risk of a presence contract will actually change the behavior of a party. Say (hypothetical example), if your car is not insured, then you will take good care of it to avoid being stolen. If it was insured for its full value, then if stolen you do not really lose out. Therefore you have less incentive to take care of it

Same goes for banks & mortgage companies here. If their risk is insured, they may start again another round of reckless lending which may cause all of us to end up in another sub-prime mortgage crisis, knowing that the government & insurance companies are ready to bail them out once again. From free market point of view, these ‘inefficient’ companies should be left out, allowed to bankrupt & perish.

However, I argue against the usage of free-market principle in this case. If those banks were insignificant to global economy then yes, they should be left out. Somehow, influence of Freddie Mac, Fannie Mae, Merrill Lynch, Lehman Brothers & many more are just too great to be ignored just like that. It’s better to harm the taxpayers’ wallet than to see everyone being jobless, increase in crime rate, worsening poverty rate & global economy slowing down which feeds through the multiplier effect

Hope that answer your question Paul.

Saturday, September 27, 2008

Effect Of Falling Share Prices Onto Economy

Student’s question: Can you tell me about the recent downward rally of share prices?

Ok, I’ll just make it general since you do not specify which country you are referring to like US, UK or Malaysia. Furthermore the size of the effect in each country is rather different, for instance in UK investment in property market is more significant than owning shares

Effect of falling share prices onto economy:

(1) Fall in wealth. Those who own shares will be severely affected now as falling share prices translate to fall in wealth. Therefore they will spend less & economic growth is affected

(2) Fall in economic confidence. Just like prices of house, bear rally of stock prices will reduce consumer confidence. If it’s severe & prolonged, any concerted effort by government & central bank to stimulate spending will likely be futile

(3) Difficult time for firms. Firms may need to raise capital to finance their business through the issuance of shares. In such period, most investors will likely shy away from the financial market, & thus there is possibility of shares issued unsubscribed. Therefore firms’ investment will fall

(4) Pension funds. If the fall in share prices is prolonged, value of pension funds may be wiped off & nothing much the fund managers can do counter this

How Effective Is Monetary Policy In Achieving Higher Economic Growth?

How monetary policy works?

Definition: Monetary policy is the manipulation of interest rates & money supply to influence the movement of AD & overall level of economic activity

By lowering interest rates:

(1) Consumption will increase. Lower interest rates means cheaper to borrow & finance items on credit like houses, cars etc. Those with existing loan pay lesser to the bank on monthly basis & found that they actually have more money to spend now. Lastly, low interest rates may discourage people to save. These 3 factors contribute significantly to consumption spending. AD will shift rightward, thus increasing the real GDP. In fact, UK economy is consumption driven with C standing at 66% of its GDP

(2) Investment will increase. Just like households, firms will find that financing capital goods like machineries & buildings is now cheaper. They will be encouraged to spend onto these. As investment spending is a component of AD, AD will increase thus achieving higher real GDP

(3) Falling imports but rising exports. Value of UK currency can be manipulated by interest rates. By slashing rates, wealthy foreigners & international fund managers will pull their monies out from UK. This may result in heavy selling of pound, thus causing it to depreciate against other currencies. However, as pound falls, UK’s trade partner will find it relatively cheap to buy from UK. Exports increase. On the other hand, weakening pound translates fall in purchasing power for the Britons. Imports fall. Overall effect will be an increase in net exports. AD moves rightward & higher real GDP can be obtained


1. Unlike fiscal policy, monetary policy does not suffer from implementation lags. Members of MPC will hold meeting on monthly basis & thus decision can be executed immediately. For fiscal policy, often a remedial measure has to go through various debates & many other red-tapes before being instituted. By the time it’s put into action, very likely the economy has corrected itself & therefore the policy can be harmful e.g. worsening inflation

2. Also decision making by MPC receives no or minimal political intervention. This has been the case since May 1997, where the Labor government granted BOE independent. This is necessary as some politicians may influence the central bank to pursue policy that enables the economy to grow in short run, regardless of long run effect. It is part of effort to help candidates during elections

3. With the effect of multiplier, an initial increase in consumption & investment spending will lead to a multiple increase in AD. By then, real GDP will increase much more, thus achieving greater employment at the same time. However economists argue that how effective is the multiplier depends on mpc (marginal propensity to consume). The greater they are, the higher will be the multiplier

4. Somehow, just like fiscal policy, monetary stance does suffer from both recognition & effect lags. Recognition lags refer to time between the beginning of inflation or recession & the recognition that it is actually occurring. Meanwhile effect lags refers to time taken before the effects can be seen in economy. It is said that monetary policy may take up to 2 years or even more, for instance to change the consumption pattern of households. Some of them may take fixed-rate mortgages

5. Effectiveness of monetary policy to achieve greater economic growth depends on whether the UK economy is near full employment or not. If it is, real GDP will not increase by much, only price level will exacerbate

6. Major role of MPC is to achieve price stability & that is to ensure it falls within the targeted rate of CPI 2% +/- 1%. Thus the objective of achieving higher economic growth may be viewed as ‘secondary goal’

7. There is conflict of macroeconomic objectives. While slashing interest rates can help steer economic growth & reduce unemployment, it is done at the expense of higher inflation

8. Slashing interest rates may not be effective to increase consumption & investment spending, if the reduction is minimal say 25 basis points. However some may argue that it does affect those who take up huge loans. Also its effectiveness depends on other factors like consumer & business confidence, prices of house, government commitment on its fiscal spending etc

Saturday, September 20, 2008

Video Lesson: AIG Bailout by Fed (CNN)

Factors That MPC Needs To Consider Before Making Interest Rates Decision

This is an extremely popular question tested by Edexcel. It has appeared in the following years:
(i) June 04, Q1 (b) (iii)
(ii) June 05, Q2 (a) (iv)
(iii) June 06, Q2 (b) (ii)
(iv) Jan 07, Q1 (c)
(v) June 07, Q1 (b) (ii)
(vi) June 08, Q2 (b) (iii)

Indicators that are of interest to the MPC (Monetary Policy Committee) before any interest rate decision: (one at a time, ceteris paribus)

(1) Sub prime mortgage crisis. The imminent housing market crisis which originally stems from ‘generous lending’ has now caused a collapsed of households’ wealth. Consumer spending which forms the largest bulk of UK's GDP will be severly affected. AD will fall & there will be a downward pressure on price level. To meet the the inflation target, normal stance would be to slash interest rates

(2) Unemployment. If unemployment is rising, it could be a sign that the UK economy is slowing down or perhaps hit by a recession. In such period, people are less willing to spend & price level will likely fall. Therefore MPC may choose to slash interest rates

(3) Savings. High level of savings translates to lower spending in the economy & therefore price level is likely to be low. MPC may opt to maintain or slash interest rates

(4) Change of retail sales. If retail sales are growing at a healthy rate, this means high level of household spending into the economy. As consumption is the largest component of AD & standing of about 66% of UK’s GDP, this will most likely trigger inflationary pressure. To dampen the effect, MPC will choose to increase interest rates

(5) Exogenous shocks e.g. high oil price. UK is now a net importer of oil. As such this could lead to period of cost-push inflation. To reduce the pressure of inflation, MPC may choose to raise interest rates

(6) Fiscal stance. MPC has to factor in the current level of government spending, personal income tax, National Insurance Contributions (NIC), tax allowance, corporation tax etc. If say, level of taxation is low, it could be an indicator that consumption spending is on the upward trend & inflationary pressure is riding up. Therefore, MPC will most likely increase interest rates

(7) Level of confidence in the economy. This can be accrued to many factors such as performance of stock market, extent of job losses & threat of terrorism, not just the performance housing market (although arguably it is the main driver). Under the period of pessimism, inflationary pressure is unlikely to build up. Therefore MPC may choose to maintain or slash interest rates

(8) Exchange rate. If pound is weakening, this could likely trigger an increase in price level. Falling pound means other countries such as US, France, Germany & Italy will find that it is relatively cheap to buy from UK & therefore this will boost the export market. Meanwhile in home country, Britons will be discouraged to consume imported goods given the fall in purchasing power. The net effect would be an increase in net exports. Therefore MPC will likely to raise interest rates

In reality, there is no ceteris-paribus. More often than not, interest rate changes can improve one thing but at the expense of another. We called it as trade-off. For e.g. raising interest rates to curb inflation at the same time may dampen UK economic growth & thus creating more unemployment

Is Falling House Prices In UK A Blessing?

What are the likely consequences of falling property prices?

(1) Decline in wealth. Traditionally, most average Britons store their wealth in property market. This is a more popular mode of savings rather in banks or stock markets. It could be due to the factor that prices of property are more stable & fast appreciating. But as the bubble burst, significant fall in prices of property leads to dramatic drop in household wealth.

This could result in slowdown of consumer spending which leads to lower economic growth. If consumer confidence remains low, very likely UK economy will run into recession. I personally believe that periods of negative economic growth is imminent, given that house price predictions often becomes the front page news. In fact the 1991-92 recession in UK was largely due to house prices that fell by as much as 15%

(2) Interest rate adjusted downward. The Monetary Policy Committee (MPC) may consider to reduce interest rates if the downward spiral continues. This is done not to prevent prices of house from falling further but rather to meet the inflation target of CPI 2% +/- 1%

(3) Reduce inflationary pressure. As falling property prices translate to slower spending into the economy, we may witness a period of low inflation in UK economy


(1) Benefits the first time buyers. House prices had increased by an average of 165% since 1992. As such many young generations find it hard to get on the property ladder. In some areas, ratio of house prices to average disposable income is 5:1. Therefore the recent UK property market slump is said to best the best entry point for young working people

(2) Relieve the shortage of key public sector workers. There is an acute shortage of key workers like doctors, nurses, teachers & police in areas like London & South East. This is accrued to 2 factors. First, prices of house in relation to their earning power are extremely high. This is worsened by the slow increase in earnings. Hence they prefer to work in the North where housing is more affordable. Some place like Gerrards Cross in Buckinghamshire proved to be the least affordable town in Britain for key workers where the price of a 3 bedroom house is around 26 times the average income of a nurse

(3) How likely will MPC slash interest rates? In the period of housing loom, very often MPC will cut rates to meet the inflation target. But this round is rather interesting as UK’s inflation rate is already standing at all time high of 4.7% (July 2008) & some economists even predict that it will skyrocket to 5% by year end. Therefore reducing interest rates from the current 5%, is likely to aggravate the situation

Monday, September 15, 2008

Simulation Game: Managing The Farm

Try to manage your own farm for about 10 years & see how much profit you can make. Before commencing the game, take this advice:

(a) Play with patience, be rational & do run some analysis. Apply all economic concepts you had learned in class e.g. elasticity, exchange rate factor etc

(b) Best if you can have a partner. One of you do the thinking, & another run the figures

Good luck!

Sunday, September 14, 2008

Unit 3 Quiz: Fiscal, Monetary & Supply Side Policy

Test your understanding on tools used in each of these policy:

Why UK House Prices Used To Be So High?

Source of diagram:

(1). Shortage of land. Increasing number of land has been turned into greenbelt. This is a policy to restrict urban growth. As such it is very difficult to increase supply of housing in places like Greater London, therefore making it extremely unaffordable. Other areas which begin to feel the pinch are like North West, South Yorkshire & West Yorkshire etc

(2). Demand outstrips supply. This is the fundamental of all economic theory. In UK, property market craze is deemed as normal & people will rush into it so long as buying opportunity presents itself. As such, property is the largest form of wealth for an average Britons, even greater than stock market

(3). Rising population. Increase in number of people coupled with strong inflow of immigrants had increased the demand for housing. At the moment, there are about 5 millions of them in UK, which means for every 14 Britons, there will be 1 immigrant

(4). More people are living separately. This is due to social force e.g. working in different areas, divorce etc I am a very good example. I used to live with my parents in Malacca, which means 3 in a household. Now, I’m staying alone in Kuala Lumpur which means I contribute to the demand for housing & I’m a single person household

(5). New mortgages are introduced. People are being lured into property market as banks use creative tactics to make housing looks “very affordable” even to the first time buyer. New mortgages that are increasingly popular are like interest only mortgage, self certification mortgage & 50 year mortgage (which is popular in Japan).

(6). Lower interest rates. UK base interest rates had been on a steady decline since 2001 & it hovers around 4-5%. This translates into cheaper cost of borrowing, & therefore encouraging more people to rush in the property market

(7) Rising incomes. Ever since 1992, UK has witnessed a long streak of uninterrupted economic growth. Along the way unemployment fell from record high of 3 million to around 1 million in 2007. In this period of rising incomes, people are more willing to spend onto property market given that it is the most popular & best long term investment

(8). Speculation. Just like stock market, we have speculators too in property investment. These investors speculate that house prices will sky-rocket in the near future, thus jump in & aggravate the demand for housing. More often than not, this is actually a self-fulfilling prophecy when every speculators share the same thinking

Wednesday, September 10, 2008

Sample & Tips On Writing UCAS Personal Statement

This should help:



(WARNING: This serves only as a guide. Please DO NOT COPY & PASTE, or else everyone end up stranded pursuing their degree in Malaysia. British do not like plagiarism)

Tuesday, September 9, 2008

Fun Quiz Unit 3: Managing the Economy

Please click the following links:

(1) What happens to consumption, investment, government expenditure, exports & imports when interest rates were raised?

(2) All about monetary policy, AD, AS & business cycle (there are some questions which are more to Unit 6, but worth to try. Don't worry, explanations are given if you got wrong)

Monday, September 8, 2008

World Economic Forum

What is World Economic Forum?

A forum where world top corporate leaders, national political leaders, economists, journalists & intellectuals gather to dialogue & debate about major social & economic problems. At times they also invite critics from NGOs like Amnesty International, Save the Children, Friends of the Earth etc

What is its mission?

To improve the economic & social state of the world. Key issues address here are like HIV treatment, clean water supply, fostering ties between Islam & the West etc

Does it have political affiliations?

No. It’s independent & free from any political intervention. Also it’s regarded as not-for-profit organisation.

What is the “Annual Meetings of New Champions”?

Since 2007 World Economic Forum has instituted the “Annual Meeting of New Champions”. This year it will be held in Tianjin, China. It is to address the role & contributions of top companies particularly from rising economies such as China & India. Businesses from developed countries which are fast moving up also considered

Malaysia not bad though, as Puncak Niaga & Scomi are recognised as one of the top companies in the world

Check this out, the so called world top companies:

Friday, September 5, 2008

Fear The Tiger Or The Dragon?

Why Chinese takes the lead in the short run?

(1) Earlier reform. The Chinese economy has transformed itself from being a closed centrally planned communist economy a decade earlier than India (1978 vs. 1991). Economy liberalisation means opening up its economy to private & foreign investment, international trade etc. As a result after both opening up, China takes the lead by receiving more than 10 times the foreign direct investment India receives ($700 billion vs. $ 68 billion)

(2) Infrastructure. This is the key area the Indian economy needs to bail itself out if were to compete with the mighty Chinese economy that registered double digit growth. By 2005, India spent just 5.9% of its GDP onto upgrading infrastructures while China 14.6%. Due to the recent Olympics, the Chinese government spending on this area accelerates further. World class ports, airports, expressways, rail networks, telecommunications etc can increase productive capacity of the economy by speeding up business transactions & reducing business costs. This is said to be the main attraction for foreign investors

(3) Flexibility of labor market. Unlike China, India has very rigid labor market such as difficulty to lay of workers even in time of difficulties. This is worsened with amendment made to IDA (Industrial Disputes Act) 1947 that states any firms employing more than 100 workers must get permission from government before retrenchment schemes, which very often not granted. As such unemployment is high as firms are wary of the fact that they will not be able to offload them, do not hire in the first place. This translates to lower growth of job opportunities

(4) Social righteousness. Unlike China which believes in justice & righteousness, the world largest democracy still practices caste system where people are put into grades. Very often those lower class people are being denied chances of getting education & proper employment opportunities. This may mean that unemployment in India will remain high & the income inequality between the rich & poor will widen. It is argued that by taking these people into the workforce, India can easily narrow down the gap of economic growth with China

(5) Mass educated workforce. China has larger population than India (1.3 billion vs. 1 billion). From this, nearly 91% of Chinese over 15 can read and write while only 61% of Indians over the age of 15 can read and write. More educated workforce in China translates to greater productivity per worker from supply side argument. This will inevitably give a higher boost to their national output

However, India is set to take over China in next few decades due to:

(1) Exploding population in India. Chinese population is growing but at a slower rate & most of its people are entering retirement age. Beyond some point, economists argue that the Chinese population may dip below 1 billion. In a country where boys are preferred, coupled with the One-Child-Policy & modern technology, families will go to great length to ensure that one child is male. Statistics proven that 90% of the aborted fetuses are female. Hence, decline in number of human capital will adversely affect the Chinese economy at later stage

(2) Slowdown in foreign investments & some has even pulled out. Chinese labour costs are escalating & therefore manufacturers & foreign investors have begun to look elsewhere for more profitable opportunities. The average Chinese worker earns approximately US $500 more a year than an Indian counterpart for doing the same work. As a result, India has become more and more attractive to large international companies, at least in terms of workers' wages. Other examples like Nike, for example, has expanded four production lines in Vietnam and invested US $16 million in new facilities there, diverting from Taifeng Corp, a Guangdong-based firm that made shoes for Nike in the past

(3) Inefficient banking sector. China’s NPL (non performing loans) & bad debts are doubled of that India due to biased lending policies. Banks often made loans to government projects with little regard for the working of market force. Also very often these loans are made to finance the bankrupt state-owned enterprises which produce goods & services that account only a meager 25% of China’s GDP. These liabilities average to more than half of China's current GDP, an alarming trend that could set the economy on the brink of collapse.

(4) Other issues. India has emerged to become the ‘back office of the world’ & that is imminently growing dominance in services sector. Though it has lower number of educated workforce compared to China, but rest assured they are regard as more highly skilled & their expertise is sought worldwide in the medical & IT field. Indian firms also has better corporate governance standards which explains why though Chinese economy is growing rapidly, it is India’s ROA (return on assets) which are higher, lower NPL & stock market performance which is better. Lastly Indian speaks much better English than Chinese, & this gives them the edge in absorbing & innovating technologies

My opinion: China will take over US dominant position in economy in nearest future. But in several decades, if nothing is done to address the demographic issue in China, it will be the Tiger that roars!!

Also it is interesting to note that, yes it is China now that takes the lead but don't forget that it is because of the earlier reform & openning up of the Chinese economy. But if we have a second thought, Indian economy which is trailing from behind of about 2-3% means they are behind but they are chasing up fast!!

Wednesday, September 3, 2008

Outlook For UK Consumption Spending in 2009

UK’s record of ‘uninterrupted growth’ may soon come to an end. Its economy which is consumption-driven has fared badly with continuous fall in spending, when private consumption stands for 66% of UK’s GDP.

Chancellor Alistair Darling has alerted that UK economy ‘may be in the worst crisis in 60 years’


Diagram source:

(1) House prices continue to fall. Most Britons store their wealth in property market. With continuous fall in property prices, means a significant reduction in wealth. Situation is being made worse as most mortgage companies tighten up their lending even those big ones like Halifax, Nationwide etc to prevent further loss. This automatically triggers a lower demand for houses, thus sending its price even lower. As such consumption is adversely affected

Diagram source:

(2) Falling pound. Pound has fallen relative to dollar & Euro. This means it will be more expensive for UK to import, thus reducing spending. Theoretically we say that this may benefit exporters, but in current situation this may not be the case. Most of UK’s trading partners are from Eurozone which have now shown obvious symptoms of recession

(3) High inflation. Inflation has hit 4.4% in July & is predicted to breach 5% soon. With slow growth in earnings rate, it means purchasing power will be squeezed. This will also result in decrease in spending

(4) Rising unemployment. Unemployment has been on the rise since the end of 2007 from 5% to 5.3% in May 2008. In figure term, it is estimated that 2 millions of people will be unemployed by year end. This will result in lower overall spending into the economy. The effect could be far worse if we also factor in the weak consume confidence

Key statistics of global economy:

Click on this link. It will lead you to key indicators on major economies worldwide like US, France, Germany, UK, Japan etc

Tuesday, September 2, 2008

What Affect Both AD & AS?

Macroeconomic policies that can affect both AD & AS:

(1) Level of taxation. When UK government reduces tax rates, working individuals will have higher disposable income. As a result more money can be spent into the economy. Increase in consumption (C) will lead to an increase in AD.

From supply side, lower income tax rates can encourage an individual to work harder. An increase in productivity, will lead to more output being produced & at lower costs. This leads to AS moving rightward

(2) Investment. As firms increase their investment onto R&D, capital goods, factories etc AD will shift to right. In long run, this means an increase in productive capacity of the economy e.g. more machinery to produce goods, discovery of more efficient method of production etc. This will shift AS rightward

(3) Education spending. By building more schools, universities & giving more grants for varsities to conduct research means an increase in government expenditure. Increase in G leads to increase in AD

In long run, UK economy will experience a rightward shift of AS curve. This is because we have more productive workforce that can lead to increase in production

(4). Health spending. This is another area where UK government has spent heavily on top of education. Increase in government expenditure on building new number of hospitals means AD will increase

However, in long run, due to an increase in accessibility of healthcare, UK will generally have a healthier workforce. This will reduce number of days being absent from work due to illness etc. Productivity will increase & more work can be done. AS shifts right

(5) Infrastructure spending. Equally, more allocation to upgrade public transports, build more roads etc is a form of government spending. Increase in G leads to an increase in AD.

In long run, having a more efficient transportation network such as less congestion may also result in greater productivity. Fewer hours are being spent on the road & more time can be allocated onto production of goods

Monday, September 1, 2008

Markets For Organ Transplant

Why is there even a market for organ transplant? Simple! Due to the existence of demand & supply, organs especially kidney is being traded like commodities

Why is there a demand?

There are many people mostly from the developed nations with health problems & is closely associated with unhealthy lifestyle like less work out, over-eating, stress, living in polluted environment etc. Somehow, they do have the means to pay

Why is there supply?

On the other hand, many hardcore poor people from countries like India & Brasil especially, are willing to sell off one of their healthy kidney in order to make ends meet. What attracts these poor people is the high market price offered

Why is the market price high?

(1) Demand outstrips supply. Demand from 1st world country is on the rise & yet some places like North America & Europe impose a legal bans on its sales. So technically, supply falls

(2) Demand & supply curve is inelastic. People are ready to pay for the high price & yet a kidney patient may need to wait indefinitely for a suitable donor. Therefore say, an increase in its demand will cause organs like kidney to fetch a very high market price

Is the kidney donor in poor countries better off?

Not really. In most cases they only received halve of what is being promised as they need to pay commissions to those middlemen