List of public pages created with Protopage

open university

Bookmarks

Bookmarks

Rich sticky notes

Rich text note

opelearn@open.ac.uk

Short Biography

Bookmarks

Bookmarks

Rich sticky notes

Rich text note

I am CEO of Red Octopus Business Services  Limited.

We are a non profit organisation focusing on the development of youth by providing online learning advice and support.

We hope to bring Open Learn to a wide audience of young - pre university keen minds. And an older generation of fun seekers.  

I have completed a number of opening courses and attempted level 2 training which went successful even though i dropped out of the course due lack of contact with fellow students.  I more or less completed the whole course in a on day session where i was the only person that attended. I was advised that with a City and Guilds in c programming Java level 2 would offer me no more experience than I already had. I took my refund to do more openings courses that I enjoyed.

I am now looking forward to my Economics Training  - You will be able to track y progress on http://protopage.com/mystudybuddies http:protopage.com/economics and protopage.com/economics2020 


CBT Thought LOG

Bookmarks

17 12 2020 05:58

Rich sticky notes

17 12 2008

05 30.
I should look futrtherr and deeer into Macro Economics and the 3 principles that govern our ecomonic strategies.

I should look deeper into Matin Friedman and find his publications and research second hand book shops for his best sellers.

I need to buy nooks..... Which books to but ?   Dig out my book on European Economies urchased from Manchester university second hand book sale.

Contact Mabchester Un iversity - get Macro Economics reading list.

Research the 1830's recession and the rise of Keyesian Economics. Make comparison with 2008 recession.

Worjk through You Tube Macro Economics Lectture an Place hold Forumulae within Ptotopage.

Cross reference Formulae with 5 types of economic principles.

The course Martin Friedman word of Macro Economics. Recession.

Watch Martin Fridman and take notes - keystones.














Rich text note

 Everybody researching Global Economics should buy an Ecoglobe to make notes on of trade transactions between companies.

Do a camera Video on The World Pump Trade Analysis System  - The System that never was.

Rich text note

Economic Kreystones

Chrysler Bail out.
Government Intervention
The Motor Industry - Safety - C02 Emissions - Manahemebt - Greta Thunberg.

Read Me

Rich sticky notes

Rich text note

Camera

Bookmarks

Bookmarks

Photo booth

Bookmarks

Bookmarks

Richard Gilbert / Paul Edwards

Plain sticky notes

Sticky note

We are settiung up the IT for an Internatioanlal trading company - Please see LTS tan for system requirements. I need your input and enthusiasm anout this project if we are going to achieve a packaged product.

LTS

Rich sticky notes

Lemantec Trading Systsms

Lemantec Trading Systsems

Databases required

HR and Payroll
Stock Recording
Sales Ledger
Purchase Ledger
Nominal Ledger
Genesis
Communications
Bonded Warehousing
Acttion do Camara video for Lemantec - Brexit Video

Note : This is looking like a big project - understanding the new Btexit Legislation when the fact is out exit strategy is still undecided and the Government / Europe are still negotiating terms.

Action : Get rules for international trading / corporate documentation requirements. 
Statutory Documentation.....






BrexIT Intrrnational Trading Systems

Richard /  Paul lets build a model for international trading.

Keynesian Economic and the 2008 Recession

Bookmarks

Bookmarks

Social psychology and politics

Bookmarks

Bookmarks

Home

News

MSNBC - Top Stories

This Week in Tech

PopSugar

FOXNews.com

Fresh Air

CNN.com

ESPN.com

Bookmarks

Bookmarks

Martin Fienman

Plain sticky notes

Sticky note

Click 'edit' on the Bookmarks widget to add all of your favorite sites to your page for quick access

Notes

Plain sticky notes

Sticky note

Sticky note

Click here to type

Economics aims and objectives

Bookmarks

Bookmarks

Plain sticky notes

17 12 2020

Click here to type What I want to gain from learning economics. At present the only factors that I know about the economy is Taxation and the Exhchange Rate Mechanism. I do not know about Interrnatioanal Trade Treties and the rules regarding trading with other countries . i hope to get involved with the Import Export Compaby Lemantec to gain an appreciation of Internatiaonal trade. Throu this I will create Lemantec Trafing Systems and model the spreadsheet that the business requires to opertate in this market. Set up tab for LTS..

Sticky note

Action - Go to the job centre to discuss setting up your own business. Contact Barclays Bank to set up a Namk Account.

Rich sticky notes

Aims

What I hope to Achieve

1. Statutory Documentation
A complete list of documents that an International Trading Documents need to maintain.

1. Payroll Tax
2. Natioanal Indurabce
3 Corporation Tax
4 Balance Sheet 
5 Profit and Loss
6 Articles of Association
7 Statutory Sick Pay 
8 Statutory Maternity Pay

Keystones / Keywords

Bookmarks

Bookmarks

Rich sticky notes

The Great Recession of 2008 a Kensian View

1. Keynsian Ecomomics
2. Real Business Cycle
3. Moneytorist Approaches
4. Austrian School of Economics

4 Blind men grasping an elephant
Tail / Body / Head / Trunk all looking at different aspects of the problem  

Keysian
Shortfall in Aggregate Demand
 - Consumption 
- Investment 
- Government

Housing bubble in the American Economy
Consumption fell
Mortgages fell
less credit creation
less investment
Government taking in less money - investment.



Aggregate Demand

Aggregate Demand

Permanent income hypothesis

A key proponent of the idea that government spending may crowd out consumption is the economist Roger Farmer. His arguments start with a way of looking at the consumption function that is different from the familiar Keynesian one in which consumption is determined largely by income (Farmer and Plotnikov, 2012). The alternative is based on an approach developed by Milton Friedman called the permanent income hypothesis (Friedman, 1957, pp. 21–2). In Friedman’s view, consumption is closely linked to wealth rather than income. People take a long view and set a normal level of consumption according to their wealth. This means that people may borrow now to support a high standard of living if they expect their earnings to rise in future (because of, say, the anticipated rewards from their education, training and experience), or they may limit their consumption now in order to save enough for a comfortable lifestyle later when income is expected to drop (typically after retiring).

Fiscal Stimulus

Fiscal Stimulus

Stabilisation policy

Stabilisation Policy

Fine Tuning

butskellism

butskellism

In the UK, successive Conservative and Labour Chancellors of the Exchequer (Hugh Gaitskell and Rab Butler) were arguably so close to each other that their names were combined in an approach called ‘butskellism’: where the mixed economy, consisting of a viable private sector and a large welfare state, were championed. It was not until the 1970s, when problems of inflation reared their ugly head, that this postwar Keynesian consensus fell apart.

Automatic Stabiliser

Yet if the public sector is sufficiently large, in a butskellite type mixed economy, then its very presence can dampen down the business cycle. If growth slows, for example, and there is an increase in unemployment, then under a welfare state workers will receive unemployment benefit. So although they are not earning the wages that they earned under employment, unemployed workers are still able to consume, albeit at a lower level. Such a transfer payment can be thought of as a negative tax, affecting consumer expenditure in a similar way to a tax cut.

This second type of fiscal policy is referred to as an automatic stabiliser – a fiscal response to a slowdown in economic activity that happens without any active decisions on the part of the government. Governments, of course, have to choose to keep the system in place to facilitate this automatic spending, but they do not have to actively direct the spending from day to day.

Treasury View / Sound Finance

Rather than spending in a recession, the government orthodoxy (traditionally referred to as the ‘Treasury view’ or ‘sound finance’) has been to balance its budget by cutting expenditure. This ‘sound finance’ view, traditionally associated with the nineteenth-century Liberal Prime Minister William Gladstone, is not limited to recessions. It more generally states that the government budget should be balanced at all times (or in slight surplus so as to pay down past debt).

The Great Axe

The Anti-Waste League, formed by Lord Rothermere, had put up candidates and won three by-elections during 1921.

David Lloyd George, the prime minister, acted by appointing a businessman Sir Eric Geddes to head the new Committee on National Expenditure, which was soon dubbed ‘The Great Axe’. It highlighted waste in all areas of public spending, including details such as there being a ratio of one cleaner for every vehicle in the Army. Between 1921 and 1922 it recommended economies totalling £87 million, about 10 per cent of the country’s entire GDP.

Budget Surplus

If there is a budget surplus (tax receipts exceed expenditure), then the government may decide to use part of it to reduce its outstanding debt. If tax receipts exactly match government spending, then this is referred to as a balanced budget.

Loans / Bonds / Gilts

Keynes recognised the need, in times of crisis, for government borrowing to finance a sizeable expansion of government spending. The government traditionally borrows by issuing loans (referred to as government bonds or gilts) that it promises to pay back at a future date. In the meantime, interest is also paid to holders of these bonds.

Government infrastructure spending

In the case of Greece, during the European financial crisis that started in 2010, the main problem has been trying to service the interest payments on its debt. This problem has been compounded by the lack of confidence in Greek bonds in the world financial markets.

The ‘sound finance’ advice given by policymakers, in the European Commission and beyond, has been for Greece to cut government spending and increase taxes in order to meet its debt interest payments. From the perspective of Keynes, however, the problem with this austerity approach is that the reduction in government spending will, via the multiplier, reduce national income and the ability of the economy to generate tax revenue. In the face of this type of crisis, Keynes would have called for the government to boost income using government infrastructure spending.

Sound Finance ‘debt alarmism’ or ‘fiscal scare tactics’

But even if this orthodox classification of capital spending is accepted, it can still be argued that the Treasury view, under which government spending is cut in order to balance the budgets, is misguided in times of recession. Rather than viewing this approach as ‘sound finance’, it can alternatively be labelled ‘debt alarmism’ or ‘fiscal scare tactics’. In this vein, Neild (2012) has compared gross levels of debt in the UK since 1816, as shown in Table 2.

Debt to GDP Ratio

Neild (2012) makes three main points. First, the gross debt for 2010 of £1 071 000 million – just over one trillion pounds – is a large amount of money, and can easily make its way into the headlines, but it is not so high in historical terms. To show why, Neild examines what economists call the ‘debt to GDP ratio’ (ratio of total debt outstanding to GDP). In 1816, just after the Napoleonic Wars, this amounted to 260%; after the First World War, in 1919, it was 127%; after the Second World War it amounted to 225%. So the 75% of GDP in 2010 does not look so alarming in this historical context. Keynes argued that British governments are far too unwilling to spend during times of peace. They are often willing to wage a war on the French or Germans – but when it comes to attacking unemployment, governments are unusually peace-loving in their expenditure plans

Harvard Reference

Bookmarks

Bookmarks

Rich sticky notes

Harvard Reference 1

The economy as modelled by the circular flow diagram, below, appears to be a rather peaceful place, where expenditure is always identical to output and saving is always identical to investment. But saving decisions and investment decisions are made by different people, so it seems there is no reason why they should match, and Keynes’s model of change in national income depends precisely on expenditure being too great or too small to match output and hence on saving being too small or too great to match investment.

Harvard Reference 12 - Fiscal policy

A major factor determining the effectiveness of fiscal policy is the confidence that international markets have in government-issued debt and animal spirits. As Keynes puts it:

If animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.

(Keynes, 1973, p. 162)

Harvard Reference 2

According to Keynes, there is a fairly stable relationship between planned consumption and current income. Households plan to spend a fairly constant proportion of each additional pound they earn. He calls this proportion the ‘marginal propensity to consume’. To present this diagrammatically, we start with two axes at right-angles to each other.

Harvard Reference 3

4 Modelling equilibrium

We have said that the economy will be in equilibrium when planned saving matches planned investment. So we need to use our diagram to explore this relationship. First, we need to show planned saving. Our diagram already shows planned consumption at each level of income, and of course planned saving is simply the difference between income and planned consumption. Having shown saving, we need to go on to add investment to our model to complete our analysis of equilibrium.

Harvard Reference 4 - Aggregate Demand

4.3 Modelling planned investment

At an income level of £600, households are planning to spend £520 on consumption and to save the remaining £80. But firms are not planning to invest at all! Let’s now incorporate planned investment into our diagram. This will mean two slight changes.

  1. We re-label the vertical axis ‘Aggregate demand’, as we are adding investment demand to consumption demand.
  2. We reinterpret the 45 degree line accordingly. Recall that at any point on the 45-degree line the variable plotted on the vertical axis is equal to the variable plotted on the horizontal axis. So in this diagram, at any point on the line, aggregate demand is equal to income.

The Keynesian model treats planned investment as an exogenous component of demand, that is, as not dependent on current income. It will therefore appear as a horizontal line on our diagram but, when we add planned investment to planned consumption, the aggregate demand line, which at present shows only planned consumption, will move upwards by the amount of planned investment we introduce.


Harvard Reference 5

4.4 And so to equilibrium

In our diagram, planned saving is shown by the vertical gap between the consumption function and the 45-degree line. Planned investment is shown by the vertical gap between the consumption function and the aggregate demand function.

Given the assumptions we have made about exogenous consumption, the propensity to consume and the level of exogenously determined investment, these two vertical gaps are equal at an income level of £600, so at this income level planned saving = planned investment. We have therefore illustrated an economy in equilibrium at an income level of £600.

Note that the AD line (C + I) crosses the 45-degree line at an income level of £600. Since at any point on the 45-degree line AD = Y, we can say that at an income level of £600 aggregate demand = income.

Described image
Figure 10 Equilibrium at an income level of £600

Harvard reference 6 - Fiscal Policy

It should be emphasised that the role of fiscal policy is highly contested by economists and policymakers. From a Keynesian perspective, the government has a vital role in stabilising the macroeconomy, because there is no automatic mechanism through which the economy can recover from a recession. For critics of the Keynesian approach, however, the government should leave the private sector alone: it is government intervention that prevents the private sector from bringing about full employment equilibrium. The purpose of this section is to introduce and explore the Keynesian point of view. Some critiques of the Keynesian approach are also explored.

Harvard Reference 7 - About Keynes

Keynes formulated his ideas during the 1920s, making a number of attempts to persuade the UK government to increase its expenditure in order to boost aggregate demand. Although the wartime British Prime Minister, David Lloyd George, had promised that there would be ‘jobs for the boys’ when soldiers came home after the First World War, this did not materialise. High unemployment in the 1920s led to the decline of the Liberal Party, of which Lloyd George was the leader, and its replacement by James Ramsay MacDonald’s Labour Party as the main alternative to the Conservatives – a position from which the Liberal Party (calling itself the Liberal Democrats at the time of writing) has never recovered.

In one final push, in the 1929 General Election, Lloyd George tried to regain his supremacy over the ‘spectre’ of socialism. Under his auspices, the Liberal Party published a pamphlet entitled ‘We can conquer unemployment’. He also marshalled the support of Keynes to develop his party’s manifesto. In his address to Liberal candidates on 1 March 1929, Lloyd George pledged: ‘If the nation entrusts the Liberal Party at the next General Election with the responsibilities of government, we are ready with schemes of work which we can put immediately into operation, work of a kind which is not merely useful in itself but essential to the well-being of the nation’ (Keynes, 1972, p. 88).

Harvard Reference 8 - Budgets

6.2 Government expenditure (2)

Lloyd George’s £300 million programme had three main planks:

Similar public spending programmes were announced throughout the world in response to the economic crisis of 2008. In the USA, President Obama introduced the American Recovery and Reinvestment Act of 2009, which resulted in US$831 billion of government spending on items such as infrastructure, health and education. In the same year, Australia launched a ‘Nation Building and Jobs Plan’, costing AUS$42 billion, on items such as building local community infrastructure and refurbishing schools – estimated to create 90 000 jobs and to boost annual GDP by 1% after two years (Vu and Tanton, 2010, p. 129).

Harvard Reference 9 - Categorising expenditure

Some elements of spending may form part of I at one time in history and part of G at another. For example, investment in railways in the 1920s would be categorised as part of private investment (I ), whereas after railway nationalisation in the 1940s such investment would be categorised as part of government spending (G ).

Harvard Reference 10 - Friedman

‘We are all Keynesians now’ (Friedman, 1965) 

This period of sustained growth was attributed in part to the benefits of Keynesian intervention – in sharp contrast to the plethora of disasters that befell the world economy in the 1920s and 1930s. Postwar governments bought into the Keynesian idea that it was their responsibility to manage aggregate demand. In the USA, during the 1960s, the phrase ‘We are all Keynesians now’ (Friedman, 1965) was even used by the right-wing president, Richard Nixon

Harvard Reference 11 - Hannan (Debt)

The debt problem

You cannot spend your way out of recession or borrow your way out of debt.

(Hannan, 2009)

This common sense mantra has been espoused by those on the right of the political spectrum in response to the economic crisis of 2008, such as the Tea Party movement in the USA. The alternative political position is captured in the T-shirt below, worn by supporters of the anti-cuts movement.


Running the Economy

Rich sticky notes

Ou Recording

NARRATOR
The familiar circular flow diagram shows the flows of incomes, consumer expenditure, saving and investment. Suppose households decide to save more and, therefore, to consume less. How can it be that investment automatically increases to compensate?
As households spend less in the shops, firms will find that their stocks of unsold consumer goods will build up. This counts in the national income accounts as additional investment, although it is unplanned. The identity – saving equals investment – still holds but only because of the way in which the terms 'saving' and 'investment' are defined for accounting purposes.
Now for the opposite story. Suppose households decide to save less and, therefore, to consume more. One possible outcome is that firms will run down stocks to satisfy the extra demand. This counts as unplanned disinvestment, so the lower saving is accommodated by reduced investment.
But suppose firms have no spare stocks to run down. How can saving still equal investment? Think about this before continuing with the tutorial. [PAUSE] The answer is that if firms have no spare stocks, households' plans to save less and consume more will be frustrated since there is no more available to buy. Part of their saving will now be unplanned, but neither total saving nor total investment will change.
The national income identities you studied in Block 1 belong to the world of the accountant in which every change in a variable is compensated by a corresponding change in another, so that the accounts always balance. The national accounts record the values of actual expenditure and actual output. So an increase in stocks – called inventories in the national accounts – even if unplanned, is recorded as investment. And unplanned saving by households is reflected in the recorded level of consumption.
But none of this means that planned expenditure will always equal output or that planned saving will always equal planned investment. And if plans don't accord, then, as we have seen, someone's plan will be thwarted. We consider now what happens to national income when plans do not accord. We will start by reinterpreting the circular flow diagram.
The diagram is familiar but, now, the labels are going to mean something rather different. Consumer expenditure now means planned consumer expenditure. This is how much households would like to spend given the income that they have. So saving now means how much they would like to save – planned saving. And investment now means how much firms would like to invest – planned investment.
Let's start off with these plans in harmony so nothing is rocking the boat. But now, suppose that households spontaneously decide to consume more. The flow of consumption expenditure becomes stronger as they save less. But this doesn't mean firms simultaneously plan to invest less. So there is a surge of expenditure, and the boat does rock.
The balance of the economy has been upset, or to put it another way, the equilibrium has been disturbed. Recall that, in equilibrium, there is no impetus within the model for any economic agents to change their behaviour. Households are not coming under pressure from changed incomes to change their consumption or saving plans. And firms are not coming under pressure from changed demand to change their production plans.
Following the spontaneous surge of consumer spending, however, there is an impetus for firms to change their behaviour by producing more to satisfy the extra demand. Equilibrium is quite different from identity. Actual saving and actual investment will still be identical when households increase their spending, as stocks will be run down, but the equilibrium equality between planned saving and planned investment will no longer hold true.
If firms do not wish to see their stocks depleted for long, they will need to increase production. According to Keynes's theory, this imbalance will put in train a process that will lead to a restoration of equilibrium. National income will increase as firms respond to the extra consumption demand by producing more, and therefore, paying out more in incomes. And equilibrium will be restored at a higher level of income when the additional income earned is sufficient to increase planned saving to its previous level.

Formulae

Bookmarks

Bookmarks

Rich sticky notes

Consumption Function

C=100+0.7Y


Where C = Planned Consumption
Y = Income
 

Planned Government Spending

Aggregate demand (AD) in the extended model consists of planned consumption (C ) and planned investment (I ), as before, with an additional term (G ) representing planned government spending:

AD = C + I + G

Government Expenditure

The size of the multiplier depends on the marginal propensity to consume, as explored in the box below. It has a simple formula:

where b is the marginal propensity to consume. In the example in Table 1, the propensity to consume is equal to 1/2. Hence

The eventual doubling of income in the multiplier process is captured in total by this formula for the multiplier.

Heavy Stuff

Bookmarks

Bookmarks

Acts

Bookmarks

Bookmarks

Rich sticky notes

The Geddes Act

The Geddes Act, introduced by one of the great Liberal administrations, ironically gave impetus to a burgeoning Labour Party. The number of seats it held rose from 59 in 1918 to 142 in 1922, reflecting a new coalition across class lines. It went on to form its first administration in 1924.

(Source: Wallop, 2010)

It was in the aftermath of the Geddes cuts in the 1920s that Lloyd George and Keynes formulated their arguments as to why governments could spend their way out of recession.

Under the Stability and Growth Pact

Under the Stability and Growth Pact, set up in 1996, European countries were set a target for government deficits of 3% of GDP, and could be fined if this was transgressed. So when a recession comes along, even the automatic stabilisers must be taken off the policy bike if the 3% target is breached.

Wiki

Bookmarks

Bookmarks

Videos

Bookmarks

Bookmarks

Rich sticky notes

Transcript - Low wage manufacturing

NARRATOR
The rise of low wage manufacturing has fundamentally changed the nature of international competition. Firms in western economies with higher wages and costs have struggled to remain competitive. This film explores how firms in two of Europe's largest economies - Italy and Germany - are facing up to competition from low cost international producers. Should they force down their own costs, or are there other ways they can compete?
Historically, the two countries have taken very different routes towards improving industrial competitiveness. The German success story in exporting manufactured goods is well documented, but less well known is Italy's track record.
SANDRO TRENTO
Italy is among the top exporter in the world. We are the second largest manufacturing country in Europe. After Germany, there is Italy as the largest manufacturing sector in Europe.
NARRATOR
Before the introduction of the euro in 1999, the Italians relied on manipulating their currency.
SANDRO TRENTO
Up to the nineties, the Italian economy could gain competitiveness through the devaluation of the Italian lira, the currency. That gave competitiveness gain to the Italian industry.
NARRATOR
After Italy joined the euro, devaluation was no longer an option, and structural economic changes were vital to improve competitiveness and economic growth.
SANDRO TRENTO
The real problem is growth. We have a very bad performance in terms of GDP growth. Most of the problem are micro, labour market, firm size, education. If the justice sector is very inefficient, if the state sector is very inefficient, if transportation are not very efficient, the easiness or the difficulty to make business, enforcing contracts, getting credit, they are very difficult to solve in Italy compared to other advanced economies. Most of the problem, the urgent problem, are micro economic today.
LUIGI ORSENIGO
Productivity has been stagnating for over 20 years now, whereas in other countries, it has been growing at higher rates. There has been very little investment, especially in training, R&D, not necessarily stand up, high sky R&D, but day-to-day operations. I remember 28 years ago, when some friend of mine and I were complaining, saying, listen, we're spending too little in this kind of investments. We are going to suffer. Here we are.
MARIANA MAZZUCATO
Italy has not actually made the kind of investments that countries like Germany have been making in human capital, in research and development, in different variables that increase productivity. Fiat has not been investing in new engines at the same level that Volkswagen has.
NARRATOR
Low productivity has meant Italian companies have struggled with competition from countries with lower labour costs. In textiles, Italy is a significant exporter but, over the last 20 years, cheap clothes and fabrics from Asia have had a big impact on sales.
FERNANDO ALBERTI
In the nineties and the first years in 2000, this was the most horrific time: 2005 is actually the turning point, where most of the companies which were not prepared in order to compete very fiercely and strongly towards survival, they started to fail.
NARRATOR
Italian companies across all sectors tend to be smaller than their competitors, making them more vulnerable: 95 per cent have fewer than ten workers.
FERNANDO ALBERTI
If we take the typical size of furniture company in Italy, it's about six employees. If we take the average size of German firms in furniture, it's sixty employees, so it's one to ten in comparison. And this, I think, is important in many respects, especially when it comes to face the global competition.
NARRATOR
Small firm size makes it difficult to invest in new technology and exploit economies of scale. The companies that have proved most resilient have controlled costs and been the most innovative. Biella - an historic textile district in northern Italy. Giovanni Germanetti is a family owner of a medium-sized woollen and cashmere business that has survived.
GIOVANNI GERMANETTI
In Biella, many companies have closed down in the past years. Most of the competition came from Eastern Europe and China because in those countries, the labour force is much, much cheaper than in Italy. The people who are doing higher stuff has stayed in the market. The people who are doing very lower stuff, they have been taken over from China.
NARRATOR
And in Prata, a famous Tuscan textile district, the changes were even more dramatic. When Italian businesses went bust, Chinese entrepreneurs took over the factory space with Chinese workers on lower wages than the surviving Italian companies. The Chinese were keen to exploit the 'Made in Italy' label. Initially, they supplied Italian businesses with cheaper fabrics and clothes but, once established, they began to directly compete with the Italians at the low end of the market.
NARRATOR
Although Italian clothing firms at the low end have been wiped out, there's still a strong global market for Italian high end textiles. But there's also a heightened awareness that even these businesses cannot afford to be complacent.
NARRATOR
In Germany, like Italy, family firms form the backbone of the economy. The so-called mittelstand of small and medium sized companies employ over 60 per cent of the labour force. But, unlike Italy, there's a strong history of high investment.
GERNOT NERB
We have quite a few medium sized companies which are very successful. Often, they are world champion in a specific niche. In Germany, the companies normally stick to their main product line or improve it, of course, and leave the money there, and I think this reinvestment by the owners is helping them to be successful.
NARRATOR
One of Germany's most successful companies is Miele. Set up in 1899 to make high quality butter churns, it's evolved into a premium white goods manufacturer, selling high end washing machines and household appliances around the world.
MARKUS MIELE
We have a higher quality. We test the appliances to last 20 years, and this means we have to charge a higher price for that. We have just one brand, and this is different to most of the competitors in the white goods industry. They have a lot of brands.
MARKUS MIELE
We charge a higher price, but we have the quality and we have the features inside. And this strategy has served us well for more than 100 years.
NARRATOR
Like many mittelstand companies, Miele invest in high levels of R and D, to keep up quality levels, but also to create new and improved products.
MARKUS MIELE
Innovations are very, very important in the white goods industries, like our honeycomb drum, for example, in the washer. So you have to add something in order that the consumer says, wow, this is really a great machine. So we have to constantly innovate, and we spend between five to seven per cent of the whole turnover on research and development, which is quite a lot. So you have to invest.
Sometimes, features or products do better than others. We also have products which are not successful, of course. We also stop products where we said we don't make much money on them.
NARRATOR
Despite charging high prices to cover their investments, Miele are conscious about costs and maximising profits.
MARKUS MIELE
We have to really look into every detail and see how can we optimise costs. Sometimes, we have to automate. Sometimes, we have to find different solutions, but in the end, you have to also look at profitability. So what's the most profitable point for your company in the market? Economies of scale are important, but sometimes they stop for the premium positioning, for example. And then you go into the mass market, which others can do much better than we do, so you have to observe what is the right point for your company, concerning sales quantities, and so on.
NARRATOR
The German economy is currently flourishing but, ten years ago, in the early 2000s, growth was stagnant with high unemployment. This led the Schroder government to introduce labour market reforms, including cuts to unemployment benefit.
GERNOT NERB
This put pressure on employees to take up jobs which are less well paid than they used to be. Also, the temporary work became a very important element, and this gave lots of flexibility to companies like - if you take companies like BMW or others - they employ almost one-third of their staff with the help of such agencies.
NARRATOR
But just how important were the Schroder reforms for improving German competitiveness?
MARIANA MAZZUCATO
Alone that would have never, in and of itself, allowed Germany to produce the kind of goods that the world wants to buy. I think it's really in combination with the investments that Germany was making in R and D, in human capital, and its varied institutional structure that those Schroder reforms had an effect. Instead, what we're hearing today is that, if the weaker eurozone countries want to grow and to be like Germany, then they should hold down wages, as if that was the only source of its success. That is a very ideological interpretation of the German miracle.
NARRATOR
Back in Italy, many of the textile companies that have survived have adopted an approach with similarities to that of the German mittelstand, by targeting the high end of the market.
NARRATOR
Lenzi Egisto used to specialise in shoes but, after being undercut by the Chinese in the 1990s, they shifted to collaborating with American company DuPont on new textile innovations.
ROBERTO FENZI
DuPont was producing very nice fibres, very nice yarns, and they had a gap between the yarn and the end user. And we were the link between those two points, so we become a sort of operating lab, receiving the special fibre, making the fabric. Thanks to this operation, we went in touch with some of the major brand names, offering very high tech materials, but with a very fashion look.
NARRATOR
Over the last ten years, Lenzi have developed a series of innovative textile based products, including bulletproof clothing, protective footwear, and specialised fabrics for the health and fashion sectors. More and more companies are also opting for vertical integration, where all stages of production are kept in-house, as much as possible, to ensure consistency and top quality.
ROBERTA RABELLOTTI
We've a very important process of selection of companies, the good firms have survived, and probably the bad or so-and-so firms have now disappeared. So, from this point of view, this could even be a good sign for the future.
NARRATOR
Another growing trend in both German and Italian manufacturing is to take a much more global perspective on production and on sales.
MARKUS MIELE
In 1994, we still had a share of 50 per cent in Germany and 50 per cent abroad. Now, last year, it was 30 per cent Germany and 70 per cent abroad, although we were growing in Germany. This means, if you think about development for example, that people have to think much more about the needs of the consumers outside Germany. With 47 countries where we're selling, we have to make sure the products we produce have the right features for the right consumers in those countries. So it's not only Far East, it's not only Italy, it's not Germany any more. It's a worldwide competition.
NARRATOR
Part of meeting that competition has been to offshore some of the labour intensive aspects of the production process, to save costs. But this can threaten the quality control of companies that are used to high levels of vertical integration.
MARKUS MIELE
We have factories, also abroad, where we manufacture parts and sometimes also whole appliances for Miele, but always the same quality level. So the most difficult decision is to find the right persons to run that factory because they have to understand how we think about quality, what we want the product to look like, and if they can really get our spirit. Once they got it, then it's not a problem, and then you can run a factory in almost any country.
NARRATOR
And even in Italian textiles, where the 'Made in Italy' label is crucial, there's a growing trend to offshore at least the early stages of production.
GIOVANNI GERMANETTI
We have invested 15 years ago in Poland, and we have a spinning mill over there where we produce part of our yarn that is used in our weaving facility. When we started 15 years ago, it wasn't easy, and they didn't have that know-how that we had in Biella. But things were going so expensive for the labour force in Italy that we were obliged to move to Poland. And so now, after a long time of training our employees, we can say that we achieve the same level of quality as we do in Italy. But if the production, the weaving, and the finishing is done in Italy, it's made in Italy.
NARRATOR
And some Italian textile companies have taken a step further by developing international partnerships.
ROBERTA RABELLOTTI
This is an important strategy for the competitiveness of Italian firms. Probably it's less widespread than one can imagine, and this is due to the small size of Italian companies, but the successful companies, companies which have been able to scale up and to outsource. And this is, of course, very important in terms of reducing cost.
ROBERTO FENZI
We have found a very profitable cooperation with the Chinese. And so Chinese are not always an enemy, but they can be an opportunity because, for Lenzi, China is a good customer. It's a good partner. They want a local service. They want a logistic to buy directly from China. Doesn't matter if it is made in Italy or somewhere else. The problem for them is to buy China on China.
NARRATOR
But although many companies have made those international partnerships work, they're not always successful.
HAGEN REIMER
The skills are not something you can just train people on for a year or a few month and then expect them to work like workers who have been doing this for years or even for generations, in Germany. For example, there's a big manufacturer of bearings for industry needs and for automotive, and he pushed production a few years ago to Romania. And he send German people to train the workers there on the job, and it just didn't work out. They lost millions of euros, and then, finally, they decided to get their production back here because it just didn't work the way it was supposed to.
NARRATOR
Another danger is that international partnerships seem to speed up the process of catch-up with Italy and Germany, even at the high end of production.
GERNOT NERB
We did a study some years ago to what extent China could be a competitor for German high-tech industry. Well, at that stage, we thought it will take at least 10, 15 years before they catch up but, nowadays, we have to face the problem that, in some areas, the Chinese are catching up faster than expected. This makes it necessary that we push ahead in the field of innovation in order not to lose the technological leadership.
NARRATOR
This film has shown that, despite their very different economic contexts, there are some striking similarities in the way the strongest Italian and German firms compete on the global market.
FERNANDO ALBERTI
We notice that those companies that are much more performing compared to others, they have the same kind of patterns. So first of all, they [are] innovating in the products, these companies are companies that continuously introduce new kind of products. The second thing is process innovation, so they continue to renew their production process and also to renew machineries and to renew the technology. The third thing is that they repositioned theirself on higher part of the market, so they differentiate their brand, style, design but, on the other side, they didn't lose the control of costs. So it's a combination of two different strategies - the differentiation on one side, but the strict control of costs on the other side.
End transcript: Facing the competition
Resize (use arrow keys)
 

Transcript of Fixed and Variable CostRich text note

SPEAKER
Let's consider a firm supplying tablet computers. The firm produces tablets in-house. The capital and land needed for production at the firm include an administrative head office and a manufacturing site. These are fixed factors of production-- in the short-run, they cannot be changed. After all, it takes time to expand buildings and develop new production facilities.
Let's assume the firm pays an annual rental charge for the use of buildings and machinery. In the short-run, the firm's fixed factors represent a fixed cost. A fixed cost does not change with output. But the firm can squeeze more staff into its existing buildings to help increase output without altering the size of buildings or the amount of equipment.
The firm can produce more tablet computers by increasing its use of variable factors, such as labor and raw materials. Increasing output will mean more work needs to be done. Additional forklift truck drivers will be needed to move raw materials. Similarly, more engineers will be needed to service equipment and provide adequate maintenance. More administrative staff will be required in the head office to manage the increasing flow of labour. And, of course, the amount of raw materials used will also increase.
If the firm increases its variable inputs, output will increase. In the short-run, the variable costs will increase while our fixed costs remain unchanged. Fixed cost is constant-- it's the same at all levels of output, so it's represented by a horizontal straight line on the diagram. Here we are showing costs on the vertical axis, and quantity produced per week on the horizontal axis.
But average fixed cost will change as output increases. Average fixed cost must fall as output rises. As output is increased, the fixed cost is spread over larger and larger numbers of units. The average fixed cost will get smaller and smaller. So the average fixed cost curve looks like this.
Variable costs increase with output. If we assume that this firm experiences increasing returns to variable factors at low levels of output and decreasing returns at high output, then we can draw an average variable cost curve which has a U shape. Now we have a U shape cost curve for average variable cost, and a cost curve for average fixed cost. Now we can add these two curves together to produce an average total cost curve which we'll label AC for our average cost curve.
Since we're adding together two cost curves, we must sum vertically. Average fixed cost plus average variable cost gives average total cost, more simply called average cost. So at Q1, average variable cost is equal to AVC1, to which we add the average fixed cost AFC1 to give a value of average cost, AC1. AVC1 plus AFC1 equals AC1.
Now we have one point on the firm's average cost curve. Similarly, for Q2 we have AVC2 plus AFC2 equals AC2. The same reasoning applies for Q3 and Q4. So we can repeat this process for all possible levels of output and so derive the average cost curve.
At low levels of output, average cost is falling. This is because, firstly, average fixed cost falls as output is increased. And secondly, average variable cost fall due to increasing returns to the variable factors being used by the firm.
At higher output levels, average variable cost rises due to the effect of diminishing returns to the variable factors which outweigh the decrease in average fixed cost. The average cost curve takes the shape of a U, falling as output is increased when output is low, and rising as output continues to be increased at high output levels. Because economists expect that the same kind of thing will happen in all, or at least most, production processes, the U-shaped average cost curve is the model that economists use in analysing the short-run behaviour of firms' costs.

Transcript of Average cost and marginal costote

INSTRUCTOR
Activities this week have already discussed in detail the concept of average cost and the average cost curve. Another measure of cost is marginal cost. Marginal cost is the change in total cost incurred as a result of producing an extra unit of output. Marginal cost and average cost are closely related.
To see how marginal cost and average cost are related, let's think about the average height of people in a room. Consider how the average height changes when an extra person enters. For instance, if the room contains just three people, we can calculate the average height of people in the room.
Suppose a fourth person enters. We can call this extra person the marginal person. If the marginal person is shorter than the average height of people already in the room, then the average height of people will fall. We can use the same idea to look at what happens to average cost in a firm when an additional unit of output is produced.
Let's consider a typical average cost curve for a firm. If average cost is falling as a firm increases its quantity of output, then the cost of each marginal unit of output must be less than the average cost. For instance, at output Q1, the marginal cost must be less than the average cost. The marginal cost, the cost of producing an additional unit, lies below the average cost curve.
When average cost is rising as output increases, then marginal cost must be greater than average cost. For instance, at output Q2, the marginal cost must be above the average cost curve. With every additional unit of output, average cost increases. Marginal cost is greater than average cost.
Average cost and marginal cost are only equal when average cost is no longer falling, and has not started to rise. In other words, average cost is at a minimum. Average cost is at a minimum when output is Q3.
As a quantity less than Q3, marginal cost is less than average cost. Marginal cost can be drawn as a curve like this. To the right of Q3, marginal cost is greater than average cost, and the marginal cost curve is drawn like this. The marginal cost curve intersects the average cost curve where average cost is at a minimum.
Now we have described the marginal cost curve whose shape and position are determined by the shape of the average cost curve. As we will see later in the block, economists use marginal cost to analyse firms' decisions about how much output to produce.

Transcript of Activity 26

JOHN CRAVEN
The auction's going well, with strong interest in Ken's herd. The price farmers get for their milk is the highest for 15 years, but the average dairy farmer's profit margin is being squeezed by spiralling costs.
A pint of milk costs us consumers about 48 pence. Now, of that, 15 pence goes to the farmers. The rest of it goes to the processors and to the retailers.
Now, what about the farmers' costs? Well, of that 15 pence, 9 pence goes on to variable costs - things like feed and vet's bills, bedding, fertilisers and those sort of things. Then there's another 6 pence going to overhead costs, such as fuel, electricity and, of course, wages.
And that's it. The bottle's empty. The farmer has broken even. But that doesn't take into account his extra costs, such as depreciation, and vital investment in the future. When you add that on, the farmer is losing at least one penny for every pint.
Dairy farmers like Ken say they aren't asking for the earth. Just a little more a litre would make all the difference.
Vicky, you were Ken's milk buyer. A lot of people will say, well, look. We pay 48 pence a pint for our milk, and the farmer's only getting 15 pence. People like yourself are getting an unfair share.
VICKY HICKS
Well, I mean, I think figures recently published by Dairyco themselves actually show that the biggest proportion in the supply chain has actually gone to the supermarkets. They do relatively little, and actually get relatively a lot for what they do. All they do is put the milk on the shelves. We have to process it and pack it, and that itself is a very small margin to what we have to work to to sell it to the supermarkets, or whoever our customers may be. And they dictate what we can pay.
JOHN CRAVEN
There are around 11,000 dairy farms in England and Wales. That's half what there were 20 years ago. But every day for the past 12 months, two dairy farms have closed. That keeps auctioneers like Gwilym Richards busy.
Dairy farmers are facing a crisis. Rising costs mean many are losing money on every pint of milk they produce. Rather than give up on dairy, others see a supersized future. In America, the mega-dairy is already a reality. This is just a small part of a 30,000 cow farm in Indiana.
In Gloucestershire, David Ball has 750 cows. Only by getting bigger has he been able to turn the white stuff into a profit.
Well, you've put a huge investment into things like the milking machines here.
DAVID BALL
That's right. I mean, this equipment represents a huge capital investment.
JOHN CRAVEN
How much, roughly?
DAVID BALL
So this would be in excess of 200,000 pounds for this milking equipment. And so, therefore, we need to use it as efficiently as we possibly can. And if that means putting more cows through it in order to utilise it more efficiently, then it represents a better return on that investment.
JOHN CRAVEN
So how many times do your cows get milked every day?
DAVID BALL
The cows come through here three times a day, and the equipment will be running for 15 to 18 hours a day.
JOHN CRAVEN
So it's really earning its keep
DAVID BALL
Indeed, yes.
JOHN CRAVEN
David's herd is one of Britain's biggest. But could mega-dairies be the ultimate answer?
PRESENTER
The scale of this farming operation is absolutely enormous. I've never seen anything like it in my life. Each of these sheds has got about 3000 cows in it, and there's ten units spread out across this farm.
And you can't see any of the cows because they're all indoors. They never go outside. It makes my farm look like an allotment.
JOHN CRAVEN
Adam, obviously taken aback by the size of that farm, David. And you've been to that very same place. Is it the way that UK dairy farming will go eventually?
DAVID BALL
I think that the scale that we've seen there represents a huge step forward from where we are here, and so that will be a long time before we see anything of that nature here. But generally speaking, over time, sizes of businesses grow.
JOHN CRAVEN
But not to thirty-odd thousand cows, you don't think?
DAVID BALL
I don't think that's going to happen here, because we haven't got the space.
JOHN CRAVEN
We might never see the scale of the American mega-dairy in the UK. But while some smaller dairy farms decide to call it a day, those that want to carry on are finding that getting bigger is the only way to survive. Bigger may be better for business, but will we, the consumer, be happy with the idea of huge herds living 24 hours a day indoors rather than in fields?

Bookmarks

Bookmarks

Bookmarks

References

Bookmarks

Bookmarks

Content

Bookmarks

Bookmarks

Questions / Answers

Bookmarks

Bookmarks

Rich sticky notes

Question 1

(b) In what way is it unrealistic to suggest, as in this example that the consumption function would start from the origin?

  Words: 6

Answer

Even with no income, there must be some consumption: households need to consume basic goods so would need to borrow or run down savings balances to finance this consumption. This bare minimum consumption that does not depend on income is known as exogenous consumption. Exogenous consumption is usually symbolised by a.

Question 2

Task 2

(b)  What is the equation of the aggregate demand function you have derived?

  Words: 2

Answer

The equation is: AD = 180 + 0.7Y, as there are now two constants: exogenous consumption (100) and planned investment (80).

Question 3 Policy intervention

Task B

(b) State by how much AD falls short of the level required to produce the full-employment income of £800.

  Words: 2

Answer

In this example, aggregate demand at any level of income is calculated using the equation:

AD = 180 + 0.7Y

So, if equilibrium income (Y) were to be £800:

AD = 180 + 0.7 x 800 = 180 + 560 = 740

which would fall short of income by £800 – £740 = £60.

Policy intervention will be needed to give a stimulus that initially raises aggregate demand by £60.

Question 4

Task C

(c) Assume that the required stimulus is going to take the form of policy to increase investment. Use the tool to change investment by the amount you calculated in (b).

Answer

If you increased investment by 60, the new amount of investment should be 140. The outputs and chart from the tool should now look like this:

Described image

Question 5

Task D

(d) Describe what has happened to the equilibrium level of income as a result of the change you made in (c).

  Words: 2

Answer

The economy is now in equilibrium at an income of £800 which is the full-employment level of income.

Question 12

Question (a)

(a) What are the different challenges faced by firms in Germany compared to firms in Italy?

  Words: 2

Answer

The video raises a variety of issues at both the macro and microeconomic level, so your notes may be different from those here.

The video describes the story of a strong German economy with rising exports and falling unemployment compared to a struggling Italian economy. In Italy, the video indicates some of the macro problems related to lack of productivity growth and a lack of investment. A lot of Italian firms are very small so this can be a barrier towards improving production technology and human capital. Being able to increase productivity is one strategy for competing with firms based in countries with lower wages.

Question 6

As reported above, the official estimate was that 5000 jobs were created by each £1 million of expenditure. Directly and indirectly, how many jobs could have been created by the £72.5 million earmarked for the first year of the Lloyd George road-building programme?

Answer

The total impact would have been 362 500 jobs (72.5 × 5000) in the first year – a substantial hole in the more than one million unemployed in 1929, created just by road-building. For Keynes, this was not a Lloyd George fantasy; it was confirmed by the government itself after intensive pressure and analysis.

Question 13

Question (b)

(b) How do macroeconomic conditions relate to firm performance?

  Words: 2

Answer

The direct relationship between macro and micro performance is not clear in the video. Dr Nerb emphasises the role of change to Germany’s labour market – increasing flexibility of labour by allowing firms to recruit workers on a temporary basis, which is supposed to encourage reduced unemployment. However, Professor Mazzucato strongly disagrees, suggesting the real change is also due to Germany investing in research and development (R&D) and human capital to make firms perform better.

Question 7

6.4 Government expenditure (4)

The aggregate demand model can also be used to illustrate what might happen under an increase in government spending, as shown in Figure 15. Let government spending increase by £300 million – money that could be spent along the lines of the 2009 Obama Recovery Act or the 1929 Lloyd George three-point plan. This is shown by an upward shift of the intercept of the aggregate demand schedule by £300 million due to an increase in government spending from G0 to G1. It is referred to in modern economics as a fiscal stimulus. Using one of its key fiscal powers – the ability to carry out expenditure – the government is able to boost aggregate demand.

Described image
Figure 15 Modelling a fiscal stimulus

Activity 10

By how much does income increase in Figure 15 under a £300 million fiscal stimulus?

Answer

Figure 15 shows, for this particular example, that the increase in income is £600 million – which is double the fiscal stimulus. In this example an extra £1 million of income is created for each £1 million of fiscal stimulus – an extra £1 million of output that could lead to double the number of jobs initially created directly and indirectly by the stimulus.

This ‘double your money’ insight can now be explained by breaking down the effect of the stimulus into a series of rounds, as shown in Table 1. In Round 1, the change in income is equal to the fiscal stimulus of £300 million. Round 2 then depends on how much of this income is spent.

Question 14

Question (c)

(c) What factors determine the success of firms? How are these factors different in Italy and Germany?

  Words: 2

Answer

Successful firms, whether in Germany or Italy, share similarities: instead of trying to compete directly with low-cost producers, they have differentiated their products, focusing on very high-quality goods requiring specialist expertise. So even though the macroeconomic situation in each country is different, there are similar examples shown for how firms can succeed. In this section, we will investigate some of the ways we can model how firms compete.

Question 8

Activity 11

Calculate the size of the multiplier when a £300 million fiscal stimulus increases income by £900 million.

Answer

In this example, ΔY = 900 and ΔG = 300; hence the multiplier is equal to 900/300 = 3. Since the multiplier is 3, the fiscal stimulus increases income by a threefold amount.

Question 15

Activity 18

Think about the goods and services you use each week – what types of firm produce them? You may also work for a firm. Make a quick list of at least five different firms that you have a connection with, for instance, as a customer, employee, investor or owner. What are the similarities between firms on your list?

  Words: 1

Answer

Your list may show a bewildering variety of different firms, a mixture of well recognised national names, other local suppliers, and some that may appear to have only a virtual presence.

The diversity of firms in the economy is enormous: from the local corner shop, bakery or other food producers such as dairy farmers, to vast enterprises like Microsoft or Apple producing consumer goods, or GlaxoSmithKline or Pfizer producing pharmaceutical and health care products. Major multi-product firms are bigger on most measures of size than the economies of many whole countries, and also operate from sites across different countries, giving them the term Multi-National Corporations (MNCs). Not all firms produce goods, but some instead provide services, or a mixture of both goods and services. Services firms offer a range of activities, from the professional services, such as tax, legal and financial advice offered by ‘The Big Four’ audit firms (PWC, Ernst & Young, Deloitte and KPMG), or caring and social services provided by a local childminder or nursery.

Some firms are particularly well-known, capturing the attention of the media by developing innovative products to challenge the status quo. In fact, firms like Microsoft, Apple and, more recently, Amazon and Google began as small enterprises before growing to become large corporations known to households internationally. Aside from these high-profile firms with customers all over the world, there are many firms that sell directly to other businesses and provide intermediate goods and services as inputs into other firms’ production processes.

Question 9

Activity 13

Suppose that the marginal propensity to consume (b) is equal to 0.75 and the tax rate (t) is 0.2. Calculate the size of the tax-modified multiplier.

Answer

This calculation involves carrying out a number of steps.

Step 1: Calculate 1 − t = 1 − 0.2 = 0.8

Step 2: Calculate b(1 − t) = 0.75 × 0.8 = 0.6

Step 3: Calculate 1 − b(1 − t) = 1 − 0.6 = 0.4

Step 4: Calculate 1/(1 − b(1 − t)) = 1/0.4 = 2.5

The tax-modified multiplier has a value of 2.5. Without the leakage of taxation, using the calculation 1/(1 − b) = 1/(1 − 0.75), the multiplier would be equal to 4. So instead of a fourfold increase in income, in response to a fiscal stimulus, only a 2.5-fold increase is generated once the leakage of tax is taken into account.

Question 16

Activity 19

Read the article 'Herd instinct – Companies need to think more carefully about how they offshore and outsource'  from The Economist and list at least two factors that can make firms reverse a decision to offshore or outsource. Can you think of any other factors not mentioned in the article?

Answer

Here are three different issues in the article – you may have found others.

  1. Labour cost increase. The article highlights that when labour cost is not a large proportion of total cost, firms may not gain from offshoring. If the motivation for offshoring is access to cheaper labour input, then firms that have labour cost that is a low proportion of their product’s total cost have little to gain from moving production overseas. Also as increasing numbers of firms follow the same strategy, they end up producing in the same country or location, which pushes up local wages, eroding the expected cost saving.
  2. Quality of production falls. If a firm has high-quality standards, offshoring can make it difficult to maintain them or achieve similar quality levels of output because of a lack of experience and training in the workforce. This is also true with outsourcing, which has further difficulties for firms to maintain control of production processes taking place outside the firm. The video, Facing the competition, also highlighted that some firms had these concerns about the quality of producing goods from offshore or outsourced locations.
  3. Expected cost savings fail to materialise. The article also suggests some firms fail to allow for delays and unexpected problems that arise as a result of their offshoring or outsourcing decision. For example, consider the case of Boeing described in the article.

Some reasons not listed in the article include:

  • Economies of scale cannot be realised. Economies of scale are not discussed in the article, but the video, Facing the competition, describes how small textile producers lacked the motivation to offshore production because they could not gain from economies of scale – their businesses were too small and could not realistically hope to increase output. Firms that only produce a small output will not realise the labour cost saving from offshoring, but will still face similar issues related to loss of control and quality.
  • Increase in cost of transport. The production cost when firms offshore or outsource may involve significant transport costs that depend on factors outside the control of the firm.

Question 10

Activity 14

For a multiplier of 3.57 (as in the above example, with initial tax rate 10% and a marginal propensity to consume of 0.8), calculate the multiplier impact on income of an increase in government spending ΔG = £30 million.

Answer

This activity allows you to compare the above tax cutting example with a fiscal stimulus based on increased government spending. With a multiplier of 3.57, the final increase in income from the increase in government spending is 3.57 × £30m = £107.1 million. Even without the benefit of an increase in the multiplier, an increase in government spending delivers a higher boost to income than an equivalent tax cut: £7 million more in this example.

Micro Economics

Bookmarks

Micro Economics

Macro Economics

Bookmarks

Bookmarks

Adam Smith

Bookmarks

Bookmarks

Milton Friedman Macro Economics

Bookmarks

Bookmarks

Bookmarks

Bookmarks

Plain sticky notes

Sticky note

Intervention : The government can intervene to control the economy.

Rich sticky notes

Learning Outcomes

Learning outcomes

After studying this course, you should be able to:

Open university recording


I’m joined by Jonquil Lowe and Andrew Trigg who both teach Economics at The Open University. Both have been heavily involved in Block 2. So if we could start with you Jonquil, can you talk us through how Block 2 picks up from Block 1?
JONQUIL LOWE
Yes, Block 1 was all about data and how data can tell us something about the state of the economy and whether things are going wrong. That’s a bit like looking at the dashboard of a car. And just as with a car if you’re looking at the dashboard and the red lights are flashing you want to know what can policymakers do to steer the economy back on track. And that’s essentially what Block 2 is all about.
INTERVIEWER
But the economy is of course much more complex than a car, Andrew.
ANDREW TRIGG
Well yes there are different ideas about how an economy works. So we’re not sure whether the car’s the right analogy really but we’re going to run with it and see if we can try and introduce some basics of economics using that approach. One approach is that the economy is self-correcting. That there’s no need for government intervention. Until the 1920s that was the main approach followed in economics. There was a change then in the Great Depression with the unemployment and the crisis, the banking crash of 1929, where the great economist John Maynard Keynes came in and said we can do something; we can intervene to make a difference when there’s unemployment and crisis. The car analogy comes in there whereby, you know, we can steer the car. We can steer through economic problems.
JONQUIL LOWE
Well a bit more than that he actually said we have to steer the car, if we don’t steer the car, we’re on a collision course.
INTERVIEWER
And how influential were his ideas in those days?
ANDREW TRIGG
Well throughout the 1920s nobody was listening to him really. It was only in the 1930s when the Great Depression set in that his ideas were listened to. In 1936 his General Theory was published. And that had a huge impact internationally.
INTERVIEWER
And what were the ideas that he was advocating at that time?
ANDREW TRIGG
Well his main idea was that he used to joke that you should pay people to dig holes and fill them in again. And that that would get the economy going because if people were paid money then they would spend money and other people would be employed making things that would be consumed by the people who were being paid to dig the holes. Of course he thought the money would be spent on more important things, useful things.
INTERVIEWER
Shall we just talk about fiscal policy and monetary policy because a key for students in this block is understanding the difference between the two?
JONQUIL LOWE
Yes. Fiscal policy and monetary policy they’re both strands of what we call macroeconomics. And macroeconomics was really invented by Keynes. Before Keynes there was a very laissez-faire attitude towards the economy and a feeling that along with the teaching of Adam Smith, if you like, that if everybody pursued their own self-interest then collectively the economy would work and everybody would have jobs. And the Great Depression showed that that wasn’t the case. If individuals pursue their own self-interest sometimes the economy actually doesn’t work fine. It goes wrong. There simply aren’t enough jobs in the economy for people.
And so the two strands of policy to try and steer the economy and keep it operating towards the full employment level are fiscal policy and monetary policy. Now Keynes is very much associated with fiscal policy but in some respects that’s a bit misleading because he was also a monetarist. But fiscal policy is all about using government spending and taxation to put more money into the hands of the people who can go out and spend and get income circulating in the economy as a whole.
And Keynes said this was really important because sometimes the economy fails because the private sector loses confidence in the economy. Loses what he called animal spirits. And then firms hang on to their money. They don’t want to invest. The economy doesn’t grow. And it’s important in that situation for the government to step in and for the public sector to make the investment that the private sector won’t. So that’s fiscal policy. Monetary policy has become, at least until the financial crisis in 2008, the mainstay of just keeping the economy ticking over in non-crisis times. And this works more indirectly. If we’re going to thrash our car analogy then fiscal policy is a bit like putting your foot on the accelerator and sometimes on the brake. Whereas monetary policy is rather more like driving through the gears. It’s more indirect.
So conventionally it involves using the interest rate. So if interest rates are low then it’s cheap for firms to borrow, that tends to stimulate investment. It’s also as you know, if you have a mortgage say, if interest rates are low then you can borrow to buy a big house. The housing market, as it booms you feel wealthy. You feel more confident. You go out and spend and that all helps the economy as well. So interest rates can be raised and lowered to influence the level of activity in the economy. And that’s the essence of conventional monetary policy.
INTERVIEWER
Andrew, how important is it for students to really have a clear idea of what the difference is between monetary and fiscal policy?
ANDREW TRIGG
Well they're the main policy choices for the government and for the Bank of England, the government in the UK, traditionally it’s the Treasury Department that decides fiscal policy. So that involves its spending decisions: how much to spend on the National Health Service, how much to raise in terms of taxes, setting VAT and so on and so forth. Monetary policy is decided in recent years by the Bank of England. The Bank of England sets the rate of interest. And does other things as well which this block talks about, in terms of how much money it releases into the financial system. So it’s important what interest rate policy, monetary policy is and it’s important what spending and taxation policies. Those are big decisions for macroeconomics, for running the economy as a whole. And they have international implications in terms of how much money flows into the economy, exports and imports.
INTERVIEWER
So how do policymakers know how much accelerator to apply to use your car analogy or which gear to choose?
JONQUIL LOWE
That’s where economic models come in and building an economic model is going to be a core activity in this block. So using an economic model is a bit like lifting the bonnet and looking at how the engine works. An economic model is a representation or an image of the economy that focuses on the key factors, the key relationships in the economy.
ANDREW TRIGG
And it relates back to what we were saying about the dashboard of the car in terms of the information about the car, the temperature gauge and so on and so forth. That with the economy we’ll be looking at the level of output GDP, which we’ve looked at in Block 1, we’ll be looking at the level of inflation and unemployment, and this block we’ll focus mainly on unemployment and GDP. So driving the car you’d be looking at these indicators, you'd be steering the economy. And the model would help to look at the gearstick, the accelerator pedal, how you try and react to these indicators.
INTERVIEWER
So clearly sometimes it works and sometimes it doesn’t. And when we had the financial crisis in 2008, did the model break down?
ANDREW TRIGG
Well the Queen asked the question why did nobody predict this? Why did nobody see this crisis? It did provoke a major change of thinking in economics about whether we have really understood how economies work. We had a period of boom. Gordon Brown told us that boom and bust was over. We had this period of growth throughout the 1990s and into the 2000s. And then there was this major, as we all know, financial crisis that started in 2007. You might call it an epic recession that started in 2008. Suddenly Keynes was back. There was a return of Keynes. He’d been sort of forgotten about during the post-war period. And suddenly Chancellors throughout the world, finance ministers, were discovering Keynesian levers on how to react. Even though the borrowing was going up, governments were spending more than they were earning. The governments were spending money in a Keynesian approach to try and get the economy out of the crisis to reduce the borrowing because of all the money that’s been spent on unemployment benefit. All the waste involved with high unemployment, governments were spending. This was the Keynesian response, macroeconomic response to the recent economic crisis of 2008.
End transcript: Open University economists discussing Keynes' ideas and influence
Resize (use arrow keys)
 

My Study Buddies

Bookmarks

Bookmarks