Tuesday, 15 November 2011


Evaluate policies to reduce consumption of alcoholic drinks:

Average British consumes about 450 drinks a year. Over 70% of these is beer, strong alcohol drinks (vodka, whiskey) stand for about 15% of this amount. Although through last 5 years there is a significant decline on alcohol drinks consumption, still many scientists alarm the public on dangers it brings. Additionally alcohol is a demerit good, so people do not actually reasilse how harmful it can be. What policies may be introduced by the state in order to reduce alcohol consumption?

Increasing taxes:

VAT on alcohol in the UK is 17,5%. Increasing it would make alcohol more expansive and unaffordable for some consumers. From mathematical/economical point of view this reasoning may be actually right. Higher price - lower demand, but this policy could actually hit the most vulnerable. Low income earners are those who consume the most and a significant group of them is alcohilics. Increasing VAT on alcohol could cause that they would give up spending on things like food in order to get a drink. This would cause even worse damage to national health, which means that demand on expensive alcohol related deseases treatment would rise.


In order to reduce consumption we should prevent young generation to start drinking. Therefore, at schools some alcohol education calasses could be provided. Children would learn about negative externalities and harms, which alcohol brings, so maybe they would think tice before having their first shot. This would increase costs of education, but in long term run could reduce the consumption. Additionally, this method worked with cigaretts, so it is efficient.


Alcohol is cool, especially for the young people. Teens feel that they need to drink in order to be popular and have friends. Changing this fashion could significantly decrease the consuption of alcohol, especially among kids.

Thursday, 10 November 2011

Econimic question:

Comment on the effectiveness of one policy which could be used by a government to reduce income equality:

Progressive tax is the most obvoius answer. It means that earners are divided into groups and the tax level is rising with the income. It means that richer give back higher proportion of their income to the state, and poorer give lower.

Some say that this policy is fair, because it causes that richer actually supply poorer, and the income inequality is partialy leveled.
However, it might be inefficient, as higher income groups are usually mobile and they can move to countries with lover income tax. People also may feel discouraged to work harder and, therefore, get promoted, because they will pay higher taxes after a pay rise.
There also is a moral problem with progressive tax. Some say that, through p.t., state actually punishes these people, who are hard-working and clever, and promotes less efficient and less gifted. After all, why someone who had been working hard has to give his money to someone who was lazy.

Friday, 4 November 2011

Next Homework:

1) What are the arguments for a rise in Bank rate at the current time?

The current Britain inflation rate is 3,3%. Current Bank rate is 0,5%. Such a difference makes further inflation increase possible and probable. The threat of higher inflation is high and, therefore, some say that increase in interest rate is inevitable.

2) What are the arguments against a rise in Bank rate at the current time?

Higher interest rates may decrease the demand. After all, the higher they are the more expensive the mortagages. British economy is already vulnerable, so increasing the i.r. is a risk of another economic slow down.

3) What information would you require to decide which of the arguments was the
more powerful?

The type of inflation has to be considered. Todays inflation comes from indirect taxation, food and energy, which , as experts argue, the MPC has not real influence on. So increase of increase rates may be actually a worse solution, regardless the current rate of inflation.

4) Why is it difficult to decide the size of the output gap?

Because in such difficult and unpredictable economic times it is hard to guess what potential GDP is going to be.

5) To what extent do the arguments for and against a rise in Bank rate depend on
the factors determining expectations, and what expectations are important here?

Most of all the increase of the wages is to be considered. If wages are to increase, than the increase of i.r. would be more likely, as people would afford more expensive mortgages.

6) To what extent are exchange rates relevant to the effectiveness of interest rate

Thursday, 3 November 2011

Next Homework:

1) Why may relative income tax rates between countries give only a partial picture
of the international competitiveness of these countries? What else would need to
be taken into account?

Firstly, the income tax may be just one factor in considering whether a country is competitive or not. There are also some social fees, like the insurance. In Germany, for example, high income earners (over 200 000$ per annum) additionally need to pay high social services fees. The aim of this social contract is to take more from the rich and give some of that to poor, so low income earners (below 25 000$ per annmum) are given nearly full healthcare. In U.S. there is no obligation to buy the national insurance, which makes living there cheaper for the citizens. European countries reguraly rob good and hard-working earners and redistribute their money to less gifted and less clever. It definitely does not make these countries attractive...

2) Does making taxes more steeply progressive necessarily act as a disincentive to
output? Explain.

No, if people do not decide to leave their country. Scandinavian countries are great examples. The exorbitant taxes are being paid by citizens without protest, but in exchange everyone is rewarded with high-quality state services. One of the best state education levels in the world and exeptional quality of NHS are supplied to everyone in need. It shows that when a country spends peoples money well, they are not discouraged to stay there and keep earning more.

3) What factors are likely to determine the relative size of the income and
substitution effects of tax changes?

When taxes are increased, people may not feel encouraged to work. They may give up working overtimes or trying to get promted. Simply because their work is less rewarding. Another phenomenon linked with tax increase is "brain drain"- most mobile and talented move out to work abroad.
Opposite things happen when the taxes are decreased.

4) How progressive are income taxes in the UK compared with other countries?
Give examples.

They highly vary. From 0-50%. It is a lot, even coparing to other EU developed states. In Germany it is 14-45%.

5) What externalities (positive and negative) might result from steeply progressive
income tax rates?

Positive: there is nothing good about progressive tax

Negative: Lack of incentive to work, increase of tax-avoiding crimes, brain drain.

6) What determines the international elasticity of supply of labour?

Tax levels, training system, education system, inwood investments, level o benefits etc...

7) What is the Laffer curve? How will the shape of the Laffer curve be affected by
the international mobility of labour and international tax rates?

The Laffer curve is a theoretical representation of the relationship between government revenue raised by taxationand all possible rates of taxation.

The higher the taxes and the higher the mobility, the less revenue. That is because people would simply move abroad with thei earnings and pay less.

Wednesday, 2 November 2011

New Homework:

1) What special ‘one-off’ factors help to explain why the underlying growth in
2011Q2 may have been higher than 0.2%?

  • Hopefully, there will be no natural catastrophy next year in any of Brotain's major trade partners (referring to Japan).
  • Also, next summer is more likely to be "mild" rather than extremely hot.
  • Finally, there is no royal wedding planned for next year. (unless Pippa marries Harry:)
2) Why is the output gap rising? How may supply-side changes affect the size of
the output gap?

New jobs are being created, and no "special circumstances" are being taken intoaccount. Government also aims to increase pending in subsidies for businesses and hopefully they will cut the benefits and increase the retirement age. These factors of supply side policy create a more positive predictions for the future output indexes.

3) Why is the recovery from recession in the UK slower than in most other
countries? Why is it slower than the recovery from previous recessions?

Mostly because of the size of the crisis. This global economic slow down causes that not only the UK is in crisis, but also all of their major trade partners. Additionally, the UK is in the EU, where some countries (PIGS) are slowing down the rest. These deeper economic interdependences cause slow down of the recovery pace.

4) How may automatic fiscal stabilisers affect (a) economic growth and (b) the size
of the public-sector deficit if the output gap widens?

Automatic Stabilisers

Definition Automatic stabilisers: Automatic stabilisers refer to how fiscal instruments will influence the rate of growth and help counter swings in the economic cycle.
Example of Automatic stabilizers

High Growth - In a period of high economic growth, automatic stabilizers will help to reduce the growth rate. With higher growth, the government will receive more tax revenues - people earn more and so pay more income tax (note the tax rate doesn't change, the % just becomes higher). With higher growth, there will also be a fall in unemployment so the government will spend less on unemployment benefits.

Recession - In a recession, the economic growth becomes negative. However, automatic stabilisers will help to limit the fall in growth. With lower incomes people pay less tax, and government spending on unemployment benefits will increase.

Source: Economicshelp.com

5) Distinguish between demand-side and supply-side causes of the slow rate of
economic growth in the UK.

Supply side: High benefits and powerful trade unions. Limited training of the nemployed.

Demand side: Lack of confidence, therefore lower borrowing. People are not sure about their futore, so even if they are not wore-off, due to the crisis, they are rather paying their debts back and save for taugher times (Keyns's Paradox)

6) Compare the likely effectiveness of demand-side and supply-side policy measures
to stimulate economic growth, referring to both magnitude and timing.

In long short term run, it is more important to restore confidence and demand. The economy has, therefore, more "fuel" to run. For long term stability, supply side policy is crucial. Some reform and new mechanism need to be applied, combining with consolidation of public expenditure. For example, more training of the unemployed, higher quality of education (especially for demanded jobs) and some major gov. investments (f.e. London Olympic Games).

Thursday, 20 October 2011

Thursday's homework:

1) Think about how we define abundance. Is body heat an abundant resource?

Abundant means plenty. I is hard to describe a body heat in terms of quantity. We know, however,  that the b.h. is fully renewable so we might describe it as abundandt.

2) Why are energy and oil prices so high? How does scarcity affect their price?

The demnad for oil is: VAST and inelastic, which means that producers can increase the price and still sell virtually the same amount. That is why the oil prices are so high. Another factor is that crude depositis, as an unrenewable resource, will eventually end so the less it will be, the more it will cost.

3) Could this source of heating be described as a market failure? If so, how could we illustrate this on a diagram?

Well we might describe body heat as a positive externality, but only in the case when it is used in some economic purpose, otherwise it is getting wasted.

Here is the diagram showing positive externalities. It is labeled for condoms, but it also works for the body heat:

4) Consider the Swedish firm’s profit-maximising price and output. The new heating method is said to reduce their costs – will it affect their average and/or marginal costs? Show the impact on a diagram. What happens to the firm’s profits?

Yes it will but i cannot really draw any diagram on this thing.

5) Is this heating method something other firms could benefit from? How could they decide whether it is cost-effective?

It can be used to heat every building, providing that enough people will pass through it. It works best, however, when the outside temp. is relatively low and the gas price high (as in the case of cold and expensive Sweden).

6) Is there a role for the government to encourage more firms to use this method? Explain your answer.

Definitely yes. It might be an efficient alternative to gredually more expensive and unrenewable oil. This technology should be developed, mainly due to its simplycity. People just need to be in a building and the rest is going to do itself. I might also be a good idea to instal such a energy creator in places, where people generate more heat. For example gyms.

Wednesday, 19 October 2011

Wednesday homework:

1) Outline the measures agreed at the eurozone heads of government summit on 21 July.

  • Greece, Portugal and Ireland will have the interest rate on the money borrowed from the European Union cut to 3.5%.
  • An agreement by private-sector creditors to accept a writedown on their Greek debt.
    • Boost economic growth in Greece, with the deployment of "structural funds" under a European "Marshall Plan". The members said they would "mobilize all resources necessary in order to provide exceptional technical assistance to help Greece implement its reforms".
    2) Explain what is meant by a ‘haircut’ in the context of debts. What types of haircut were agreed at the summit?

    Haircut  – the private financial sector to offer facilities such as bond exchange, rollovers and buybacks "on conditions comparable to public support" but on a voluntary basis

    3) How big a reduction in Greece’s debt stock will result from the deal? Why may it not be enough?

    "More than expected but not enough to make us sleep comfortably" - According to some Berclay specialists the deal lacks of details in areas like private sector involvement for Greece and collateral requirements. Also, the overall project will not be sufficient until the whole debt of PIGS will decresase, which suggest that the case of Greece cannot be solved without a greater action in Southern Europe economy.

    4) Explain how the European Financial Stability Facility (ESFS) works? How will this change as a result of the agreement?

    EFSF is authorised to use the following instruments linked to appropriate conditionality:
    • Provide loans to countries in financial difficulties
    • Intervene in the debt primary and secondary markets. Intervention in the secondary market will be only on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability
    • Act on the basis of a precautionary programme
    • Finance recapitalisations of financial institutions through loans to governments

    To fulfill its mission, EFSF issues bonds or other debt instruments on the capital markets.
    The main change after the agreegement is that the interest rates for Greece were lowered to 3,5% .
    Also the EFSF will be allowed to "intervene in the secondary markets". It may fund "recapitalisation of financial institutions through loans to governments including in non programme countries", code for Italy and Spain. The full weight of the German-led creditor bloc will stand behind south Europe's banking system.

    5) What vulnerabilities remain in the eurozone?

    The overall economic crisis. Economies of all eurozone are at the slow dow, in terms of the GDP growth. Some other, major eurozone countries are getting closer to the bankrupcy line, for example, Italy. The national debts are simply to high.

    6) What are the arguments for closer fiscal union in the eurozone? Is more required than merely a return to the Stability and Growth Pact?

    The main arguement is that closer fiscal integration will prevent net crises to so easily appear. When each country's finances were more severely controlled, states would not be able to run into massive debts anymore. The natural trade-off is a certain decrease of member state's soveregnity.