On Summer Holiday: Back on 16th August (just before A-level results!)

No 210: Govt spending v Govt Borrowing

EITHER of these topics could be in the exam tomorrow. However, be careful, they are not exactly the same.

Think about yourself for a moment: are the reasons you spend money the same as the reasons why you might need to borrow money? For example, are you likely to borrow money just to buy food? Are you likely to need to spend money every day? Are you likely to need to borrow money every day?
 

In other words, governments need to borrow money to spend only on certain things, and only at certain times.

We know that govt borrowing is necessary when G > T. Therefore a govt will need to borrow if there is a sudden increase in G and/or a sudden fall in T. What could cause such situations to happen? 

In a question about the effects of government borrowing, you can refer to some arguments about the effectivess of government spending. I would say, "some economists argue that since govt spending for demand mangement is ineffective, therefore they should not borrow money to finance this" and give some reasons for it. 

But what you are really looking for are the effects of the borrowing itself. These could be: 

• higher interest payments mean govt has to reduce other areas of spending or raise taxes (as we have seen with Cameron's spending cuts);
• possible need for bail-out (ECB and/or IMF) which would lead to even tighter fiscal policy;
• reduced confidence in the govt's ability to manage the economy sucessfully, particularly affecting future government borrowing;
• inflationary risk if govt increases money supply to pay borrowing or deliberately causes inflationary pressures to reduce the real cost of borrowing;
• financial crowding out;
• an unacceptable burden of debt passed on to future generations.

Try to read about what is happening in Greece at the moment to give you a sense of the real-world consequences of excessive govt borrowing.

Also be careful not to mix up the base rate of interest and the rate government pays on bonds.

The first is the rate offered by govt to buyers of govt debt. The second is the rate govt lends to banks. 

The rate on bonds affects the amount of interest govt will have to pay back in the future. It does not affect the other interest rates in the economy, particularly those for households and firms. It might though affect the attractiveness for banks of lending to govts or to businesses/consumers. It could affect the exchange rate too, as described next.
 
If the govt wants to borrow a lot more, possible lenders become worried since they are more concerned about the govt's ability to pay back its debts. In order to attract them, the govt offers a higher rate of interest (called the yield) on its bonds. 

This might attract foreign investors if the bonds are thought by them to be a good mixture of reward compared to risk. In such a case demand for the currency would increase, causing an appreciation. 

However, at the moment no-one wants to buy Greek govt bonds, even though, for example, the yields on 2 year bonds are 28.24%!!!
  

No 209: tutor2u prediction of key areas for Module 4

THIS morning tutor2u contains a prediction of possible contexts that could turn up in the exam:

• The consequences for the UK economy should the US economy experience a double-dip recession

• The economic consequences for the UK of natural disasters such as flood, drought, tsunami (external shocks) and economics of global price volatility

• The fast-changing role of the Chinese economy and its implications for the UK

• The impact on the UK economy of major instability of the euro

• The impact on the UK economy of the newer membership of the EU 

This link connects to the tutor2u post, which also contains links to presentations about the above topics and exam advice.

tutor2umodule4advice

On exam advice, this is what they say about ending your essay:

A conclusion is essential and should not just repeat earlier points.
A supported final judgement is a criterion in the Level 5 mark band (i.e. to get 22+)
Leave yourself 4-5 minutes for a final judgement of 5-6 lines. This is time proportionately well spent. Try to incorporate a new idea, e.g. how a policy may impact on different parties; how the policy may have different short v long run effects.

No 208: A useful TV programme

IF you need a break from revising, there is a useful TV programme being shown tomorrow (Monday 20th) on BBC2 at 9 o'clock.

It is now available on BBC iplayer:

http://www.bbc.co.uk/iplayer/episode/b0125v5h/Made_in_Britain_Episode_1/

"Made in Britain"

Episode 1

Who says we don't make anything any more? In the first of a three-part series on how Britain pays its way in the world, Evan Davis busts the myths that we were wrong to let so much of our manufacturing go abroad, and that we have become a nation of shopkeepers, bankers and estate agents.
As he flies in the world's most revolutionary jet and drives one of the world's fastest supercars, he discovers Britain still makes a lot it can be proud of. But post crash, he asks is it enough to meet the country's bills.

No 207: A few ideas about Module 4

ONE of my students has just e-mailed me to ask whether I have any ideas about topics for the Module 4 exam. I thought it might be useful for all of you to see my reply:

Dear (student),

A number of us teachers think that issues relating to government borrowing and budget   deficit (what the newspapers call "sovereign debt") may come up. It might be a good idea to read about what is happening at the moment with regard to Greece and its debts.

In addition, Mr Bowen thinks the topic of "rebalancing" may come up. This means the shifting of an economy from one area to another in order to improve its performance: e.g. from relying on domestic demand to expanding exports, from one particular industrial specialisation to another, from producing goods to producing services, etc..

As always though, these are just guesses so don't neglect other areas of the syllabus. On Monday I am going to send everyone a list of the key areas of Module 4 compared to Module 2 so you can check you have covered all the main areas in your revision.

I hope the Module 3 exam went ok today. If you have time to write back, I'd like to hear about your thoughts regarding the exam.

Please e-mail me if you have further questions and please come along to lunch next Friday!

Best wishes,

Mr Spottiswoode

 In addition here are some pictures that might help you....

No 206: Some last minute stories of interest

HI there! Hope your revision is going well!

Here are some last minute stories before the exams that might be worth reading.

1) Chancellor announces new banking regulations and sale of bank shares
New regulations are going to be introduced to force banks to "ring fence" (separate) the retail and invstment parts of their organisation. The government is also planning to sell the shares in Northern Rock that were bought during the Credit Crunch, thereby privatising it.
 http://www.bbc.co.uk/news/business-13770746

http://www.bbc.co.uk/news/business-13783765


2) MS fine 
Microsoft has been fined £178 million by the US courts for using a patented piece of code in its Microsoft Word software.
http://uk.news.yahoo.com/microsoft-must-pay-copyright-cash-084855404.html






 3) Worlds most valuable currency

 It's called the "bitcoin". Have you heard of it?
http://uk.finance.yahoo.com/news/The-world-most-valuable-yahoofinanceuk-945291950.html






4) China inflation
 Inflation in China is set to rise to 6% next month. This is first time since China has been the second largest economy in the world that it has experienced sustained infaltionary pressure. How will this effect the global economy?
http://uk.news.yahoo.com/china-inflation-may-top-6-percent-june-expert-044616876.html

No 205: North Korean TV produces happiness index