'Slowing Down and Falling Behind' - Prof. Charles Feinstein

Professor Charles Feinstein wrote an article named 'Slowing Down and Falling Behind' which was a discussion as to the potential reasons why Britain may have lost it's economic dominance at some point before the First World War. This blog post will discuss what I took from the article when I read it and what I think about the issue. For a brief synopsis of what happened to Britain economically between 1870 and 1913 have a read of my previous blog post by clicking here.

The Great Depression of the mid 1880's could be partly to blame as this was basically a decade of falling prices which meant a fall in incomes for the farmers and a cut in profits for manufacturers. A fall in income for the farmers obviously restricted purchasing power, and because agriculture took up a large percentage of the economy we can infer that this was detrimental for the economy. Profits falling aren't necessarily such a big issue, but it does restrict the ability for the firm to expand somewhat which is not fantastic. Falling prices, however, could be said to be beneficial to wage earners as it effectively increased the power of their wage. Despite all of this, the volume of output and exports did continue to grow.

Feinstein immediately talks about how difficult it was to pin down actual GDP figures at the time, because looking at the three different measures of growth of real output per worker from 1856 to 1913 gave three varying results. If the data was entirely accurate then the three different measures should give the same figure. What was obvious, thought, was that that the growth rate over the whole period in question was roughly 1%. Income and expenditure were the more volatile measures as they had a brief period of growth from 1882 to 1899 but then fell sharply, whereas output slowly and consistently fell for the whole period. The reliability of the data is one thing Feinstein blames for the differing results of GDP figures. Revisions need to be made although estimates show a significant worsening of the economy from the turn of the century. For example, the measures for the output index were created based on the raw material inputs, rather than the actual output. Therefore, any boom period would be understated because the figures would pay no attention to the fact that stocks of raw materials were being used to meet the rising demand rather than more raw resources being input. Similarly, in a depressed period the figures would be overstated as the estimates made no account for the fact that stocks may have been filling up without the inputs being turned immediately into finished goods. Another explanation for the potential variation was the unrest towards the end of the Edwardian era which meant that between 1908 and 1914 on average 14 million working days were lost through strikes compared to the two to three million from previous years.

Maybe it wasn't a case that Britain was actually doing badly, it could just be that we see other countries doing better over the same period. At the end of the day Britain's economy was still growing, just not at a rate of 1.5-2% per year like some of the other economies around the world were. Admittedly, Britain was using less advanced equipment, had less standardization of its output and was slow to develop it's new industries (chemicals, for example). It was an inevitable process in some people's view, the latecomers were just catching up.

However, Feinstein also discusses the point that entrepreneurial failure could to be to blame for Britain's relative decline. He gives examples of when British firms were slow and ignorant when it came to adopting new methods and machinery. What's interesting though, is that scholars looked at data and noticed that profits were being maximised and costs minimised with the policies installed -  inferring that the entrepreneurs weren't to blame for the decline. Another group of scholars entered the argument to say that installing policy and overseeing production was the job of the manager and not the entrepreneur. The entrepreneur's job was to make changes in the current business framework, finding new products for example. The entrepreneurs therefore failed to create the large scale corporations with management systems that dictated policy rather than following market forces. These firms would have developed specialised managerial skills and co-ordination as well as allowing the benefit of economies of scale in production.

The debate is ended on a, well, un-ended note.  The point is made that there is still a lot of uncertainty about the cause of Britain's economic downturn and that the downturn has pretty much continued throughout the 20th century and due to this it's a very important investigation to have.

Sam.

European Economic Issues: Background to the EU

The European Union we know today was formed back in 1957 wen the Treaty of Rome was signed and it came into operation on the 1st of January. It was initially called the European Economic Community. Initially, it had six member states whom had started to integrate their economies as early as 1952 with the European Coal and Steel Community which removed trade restrictions between the countries in an attempt to gain economies of scale and be able to compete with the U.S.A. Most internal tariffs had been abolished and common external tariffs introduced by 1968. However, the European Union at this point was still a 'customs union' rather than a 'common market' because restrictions were still in place on trade (legal, administrative and fiscal).

Many policies were in place at this point that made the EU a very integrated economy, these include:

• Common Agricultural Policy - Includes common high prices for farm products and import duties to bring foreign food up to EU prices.
• Regional Policy - Grants to firms and local authorities in deprived regions.
• Competition Policy - For example, Article 81 of the Amsterdam Treaty says that agreements between firms cannot be made if it will affect competition in trade between member states. 
• Taxation - VAT is the standard form of indirect tax through the EU.

A further move towards making the EU a single market came in 1987 with the Single European Act. This aimed to remove any extra barriers and form a common market by 1992 using the principle of mutual recognition. This meant that if a firm could do something under the rules of one EU country that firm could do it in all EU countries. It stopped individual governments from making special rules that would keep competition from other EU countries out. In June 1997, the 'Action Plan' aimed to remove any remaining barriers before the launch of the euro currency in January 1999. The 'Internal Market Scoreboard' was published every six months to show the progress made towards the abandonment of restrictions. The last two nations joined the EU in 2007: Bulgaria and Romania to make it 27 members. 

The EU now consists of 27 states. These states are classed into different categories depending on the population of the countries. For example, 6 'big' nations are part of the EU. A 'big' nation in terms of population means that the population is greater than 35 million. Germany and the United Kingdom are two of these 6 'big' countries. Next comes the mid-sized countries of which there are two: Romania (22 million) and the Netherlands (16 million). Smaller than these still are the 'small' countries with a population of between 8 and 11 million, this category includes Greece and Belgium. Finally the rest of the countries are referred to as 'tiny' nations making up less than 5% of the EU25's population between them. Examples of these 'tiny' nations are Denmark and Finland.

As with population, the EU nations can also be categorised based on their income per capita. This is GDP divided by population and is a good way of comparing the wealth of a country with another. 12 countries fall into the 'high' income category. As you'd expect, Germany and the U.K are in this category as well as the likes of Denmark and Italy. 7 countries are classed as medium income; Greece, Portugal and Cyprus are examples of this. The rest of the EU nations fall under the low income band. Luxembourg is the richest country when looking at income per capita, they have an income per capita that's more than double France. The poorer countries have generally done better economically since joining the EU. Here is a graph to show the income per capita figures graphically, taken from the Eurostat website.

Source: http://epp.eurostat.ec.europa.eu/tgm/graph.do?tab=graph&plugin=1&pcode=tec00114&language=en&toolbox=sort


The economies in the EU are very uneven in their sizes. For example, the following six nations together make up over 80% of the EU's economy: Germany, France, Italy, Spain, Netherlands and the United Kingdom. The rest of the countries are once again sorter into categories such as 'small', 'tiny' and 'minuscule' depending on the size of their economy. 'Small' is an economy that accounts for between 1% and 3% of the EU's overall economy. Sweden and Belgium, for example. 'Tiny' is an economy that accounts for less than 1% of the EU's overall economy and Hungary and Belgium fall under this title. Finally, 'minuscule' refers to an economy that makes up less than one tenth of 1% of the EU's economy (Latvia, Estonia, Malta).

EU countries tend to most of their trading with, well, themselves. Roughly two thirds of imports of exports are to or from Western Europe. Exports to North America make up roughly 10% of the total and to Asia even less, around 8%. About 80% of these EU exported goods are industrial goods.

The EU's budget has to balance each year. The four sources of funding for the budget are tariff revenue, agricultural levies, VAT resource and GNP based (A tax paid by members based on their GNP). All countries tend to contribute roughly 1% of their GDP to the EU budget, meaning it's not a 'progressive' tax. Germany and the United Kingdom are at the top of the spectrum of countries that donate a lot more than they receive in benefit from being part of the EU, whereas Spain and Greece gain a lot more in benefits than they donate to the EU. The majority of the EU budget is spent on agriculture, roughly 46%, hence the Common Agricultural Policy we hear a lot about.

That's a rough insight into the background and habits of the EU. I wanted to lay some foundations for some of the posts on European economic issues that are to come. Thank you for reading, stay tuned!

Sam.

Britain's Victorian Economic Dominance

Back in 1870, Britain still held the position as the top economy in the world. We were producing more than 50% of the worlds cotton cloth, iron, steel and coal in 1851 and 20% of the worlds trade was conducted through British ports. We were dominating after being the first economy to go through the industrialisation phase.

However, after 1870 the British economy has gained an association with decline, despite still growing in absolute terms. There are two reasons for gaining this reputation: the rate of growth was less than in previous years and other countries were growing at a faster rate. So comparatively, the era following 1870 was a time of economic failure for Britain. An example of this slowing of economic growth can be seen by the British manufacturing output statistics for the time. From 1856-1873, the annual growth of British manufacturing output was 2.6%. From 1873 to 1913 this annual growth had fallen to 2.0%. Britain's competitors were growing at a faster rate as well, as i said, which made the British economy look like it was failing even more.
The 1870 - 1913 figures for annual growth of output look like this:

• Britain - 1.9%
• Netherlands - 2.1%
• Germany - 2.8%
• USA - 4.2%

As can be seen from these figures, Britain was growing a lot slower than it's competitors and due to this the USA and Germany overtook Britain's economy by the time the First World War came around. The U.S now had the biggest economy with Germany close behind. The share Britain held on world manufacturing exports also declined from 37.1% in 1883 to 25.4% in 1913 whilst at the same time the U.S's and Germany's grew. 

Some economists came to the conclusion that this relative decline of Britain was inevitable as other countries began to make their way through the industrial revolution phase. On the other hand, some economists blamed the United Kingdom's internal weaknesses for this decline. These weaknesses include a failure to adopt the latest machinery, too much focus on older industries (coal, steel, etc) and not good enough commercial and technical education. But, nowadays this view has pretty much been dismissed as more data and evidence has come to light. British firms were still maximising profit and production at the time, which suggests that there wasn't a need to adopt new machinery. Technology from the U.S wasn't always suitable for the British market. An example of this is the ship building industry. The U.S were more technologically advanced when it came to building ships yet Britain could still produce them cheaper and therefore more efficiently. Finally, the main causes of this relative decline were external. Britain was losing out to countries with more raw materials and larger markets. The U.S, for example, had a lot of land, oil and coal and a massive internal market which benefited them greatly. This is known as the 'Factor Supply Thesis'. This also leads onto the 'Early Start Thesis'. This is basically the principle that because Britain had industrialised first, other countries could learn from Britain's mistakes during the process and catch up much quicker. Also, because of Britain's early start, many aspects of the economy had become very outdated and difficult to change. The railway system is a good example of this. The Victorian railway system which Britain was left with was not as efficient as it could have been.   

Overall though, the structure of the British economy in 1913 was still good. There was a small agricultural sector, taking up an 11.5% share of employment. This differed from the U.S and Germany who's agricultural sectors were much larger. The U.S's took up 25% of employment and Germany's took up 33%. Britain had many large firms operating in many sectors of the economy. There was a very sophisticated service sector holding a share of 44% of Britain's employment. Manufacturing held steady at 32.1% of employment. Britain even had the highest level of output per head in Europe in 1910. It lead the way with $1,302 per head compared to $958 per head from Germany. 

In summary, up to 1870 the British economy was dominating the world due to it being the first economy to industrialise. After 1870, other economies started to industrialise too and this meant they caught up the British economy, leading to doubts about the economy. However, these doubts were pretty much out of the control of Britain and despite these problems, in 1913 the outlook for Britain was still good as they were producing more per head in Europe than anyone else. The position of the economy of Britain was made to look worse because all the other economies were doing so well. 

A brief insight into Britain's Victorian economic dominance and the period from 1870 up to 1913. Thanks for reading, have a good day!

Sam. 

Principles of Economics: Demand (Microeconomics)

*Disclaimer: I'm fully aware of the fact that I've already written a post on demand. However, I've decided to cover it again now I know more on the subject and can give a better coverage.*

Basically, I'm back to cover a very basic principle of microeconomics: Demand. Demand refers to the amount consumers can and are able to purchase of a good or service, 'can and able' being a very important part. Note that a consumers want for a good should not be included in demand. I'm sure everyone wants a flashy sports car on their drive yet the true demand of that good will be very small. Glad we got that out of the way. The demand of a good in a market plays a pivotal role in determining the price. For this, demand must interact with supply and the point at which they meet can be called the 'market output' or the 'equilibrium output'. This is displayed on a graph which I'll do a post about in a few days. The price at this 'equilibrium output' is called the 'market price' or the 'equilibrium price' which is essentially the price consumers have to pay for the good and the price suppliers are selling at.

It's important for me to point out here also that when looking at demand we assume that we're operating in a market of perfect competition. This basically means that in the market there are an abundance of consumers and producers and therefore they have no control over prices. We call them price takers. The size of each producer is too small and there is too much competition from other firms that it would be impossible for them to raise prices and still make sales. Perfect competition is the closest theoretical example to most real-world markets and therefore we use it in our examples.

Let's now look at the relationship between the demand and the price of a good or service. The law of demand is as such: 'When the price of a good rises, the quantity demanded will fall'. This occurs for two reasons:

1. The good/service will cost more than substitute goods. Other similar products will be comparatively cheaper and therefore demand for the good will fall as consumers start to purchase the substitute. For example, a Playstation 3 could be said to be a substitute good for an Xbox 360. Therefore, if the price of the Xbox 360 were to rise then the demand for it would fall as consumers move over to purchase the comparatively cheaper Playstation 3. This is called the 'substitution effect' of a rise in price.
2. People will feel poorer. A rise in the price of a good means people will effectively be able to afford less of the good which makes them seem less well-off, or poorer. This is known as the 'income effect' of a price rise. 

Obviously it occurs the other way also; if the price of a good falls then the quantity demanded will rise. We'll consider the following example, theoretical figures for the monthly coffee demand:

Now, if we were to plot the demand curve for this data it would look something like this:

A typical demand curve would look like this, if real data is being used. The curve you can see slopes downwards from left to right, also called a negative slope, as when the price falls the quantity demanded rises. In most cases, however, real figures aren't used, it's just theoretical. In these cases the demand curve will just be a straight line sloping down from left to right. Remember that we still use the term 'curve' when the line is straight. 

Apart from the price of a good, the demand for a product is also determined by other factors. These are as follows:

• Tastes - The more desirable a good the more it will be demanded and vice versa. This is often affected by advertisements, fashions and what other consumers are purchasing. 
• Quantity and Price of Substitute Goods - If a substitute good has a higher price then demand for the good in question will be higher. If the substitute good has a lower price then the demand will be lower for the initial good.
• Quantity and Price of Complimentary Goods - This works in the opposite way to above. Complimentary goods are products that are consumed together, examples would be cars and petrol or DVD players and the actual DVDs. If the complimentary good's price rises you can expect the demand for the good in question to fall and vice versa. 
• Income - This one is fairly obvious. As people's incomes rise, so does their spending power and therefore demand for 'normal' goods will rise. With this, demand for 'inferior' goods will fall. When we say 'inferior' goods we are talking about things such as supermarket own brand foods. 
• Distribution of Incomes - This determinant is a little more ambiguous. If wealth was re-distributed from the rich to the poor, then demand for luxury items would rise as the poorer people would be able to buy these goods for the first times. It works in the opposite way too, if the poor in society get poorer then the demand for 'normal' goods will fall as the demand for 'inferior' goods should rise. 
• Expectations - Last but not least, people's expectations. Everyone speculates, and if the speculation is that the price of a good is set to rise in the near future then we can expect demand to rise in the short term. If the price is expected to fall we'd expect demand to fall as people hold out until the lower price arrives. 

When we put together a demand curve, we do it assuming that all other things are remaining equal and this is known as ceteris paribus. Nothing but the price changes and when the price changes it results in a movement along the curve. A movement along the curve is different to a shift of the curve, which is very important to remember. When any other determinant of demand changes the curves will shift. A movement along means the demand curve remains the same but the demand just moves to a different point on that curve. A shift means a new demand curve, where at each price a different amount is demanded. 

This is the same demand curve we used earlier, but here we can see that the demand curve has shifted. At each price a different amount of coffee is being demanded. This occurs when a non-price determinant of demand changes. That's probably the hardest basic principle of demand to grasp, but here it is summed up:

• A change in price results in a movement along the demand curve.
• A change in a non-price determinant results in a shift  of the demand curve.

If the change in the determinant of demand causes a rise in demand then the demand curve will shift to the right. If the change in the determinant causes a fall in demand then the demand curve will shift to the left.
The proper names for these two principles are as follows:

• A shift in the demand curve is called a change in demand.
• A movement along  the demand curve is called a change in the quantity demanded.

And that is pretty much that, the principles of demand. The hardest part here is probably differentiating between a movement a long and a shift in the demand curve, however you can pick it up rather quickly. Feel free to comment if you feel i missed something out or something is incorrect. Thanks for reading!

Sam.

Economics at the University of Birmingham

Such a hectic week, so I've rushed a few things so I could squeeze in a blog post today. I'm going to focus this one of Economics at the University of Birmingham, which is where I am currently studying. I arrived on Sunday the 16th of September and as of today, the 24th, i started my 3 year Bsc course in Economics properly. I will be blogging about what I've learned, as well as going into depth more during my debates as my economic knowledge improves.

The timetable I've created myself for the coming semester (24th September - 7th December) is as follows:

A bit confusing I know, but basically every 'code' in the timetable corresponds to either a room or a subject in the keys at the bottom. From this you can see that I'll be studying modules in the following disciplines: Principles of Economics, Mathematical Modelling for Economists, Advanced Quantitative Methods, Economic History of Britain and European Economic Issues. Excited is an understatement, I just want to dive in and start. I'll be blogging about all of these subjects within the next few months so stay tuned for them. Follow the blog as well to keep in touch.

Anyway, I'd like to talk about my application process to study at the University of Birmingham as well. I knew from early on in my AS level studies that economics is what i wanted to take further. It always helps to have an idea of what you actually want to do when it comes to the visiting stage of universities or else you could be in for some very long days trawling from talk-to-talk on different subjects. Not fun! I looked at umpteen different universities: University of Bristol, University of Bath, University of Southampton and the University of Warwick to name but a few. I had no issues with any of the universities I visited, it's just I found Birmingham to be more 'me', so to speak (So far it's proving to be!). So i went through the application stage and was given an offer from Birmingham of AAB or AABB because I studied four subjects through to A2 level. I met this target with a grade A in economics, A in computing and a B in both maths and history. So, it all went to plan and here I am. But, that was only the grades. Of course universities expect a lot more; expressed through your personal statement. Speaking from experience, I found this to be the hardest part of the application process, as I'm sure many other people did too. However, displaying your interest in the subject is all that really needs to be done. For me, I talked about the fact that I blogged about the subject (fully recommend it, great revision and fun too!)  which displayed an interest in the subject outside of college hours. Also mention any books you've read. 'Freakonomics' is a good one, seems to be quite a commonly read economic related book, but still, they all count and plus it's quite an entertaining read. Subscribe to the Economist too! Being a student you can get some great deals on it, 12 issues for £12 is a great example, you can't turn that down! Basically, i padded out the personal statement with a variety of economic related things to show my interest, rather than just monotonously listing a bunch of books i'd read. It seemed to work, so take note!

...and here I am at Birmingham! Loving it so far, the course looks great, exactly what I want to learn about - so I can't wait to start. Seems like I'll be starting properly next week as I've previous economic experience so just a week more of waiting around! I plan to do some reading around the subject. Also, I'm starting to put myself out there in terms of networking. I've joined a number of societies and plan on getting involved as much as I can to get my name in with potential graduate employers. I'd love to chat with anyone with experience in the banking and finance industry, so drop me a comment if you don't mind and we can talk! Once again, thanks for reading, enjoy your day, stay tuned & follow the blog!

Sam.

Debate: Rise In University Costs

We all know about the big 'hoo-har' that was caused when the government scrapped funding for universities, meaning students now have to pay a lot more to go than in previous years. Speaking from experience, this is, I've just arrived at the University of Birmingham to study a Bsc in Economics and i'm paying £9000 a year for this. That means i'll be riddled with £27,000 of 'debt' by the time i (hopefully) graduate in 2015. I'd like to put my opinion across about these changes to the university funding system.

Basically, the expectation is that all students despise this change and are totally against it. Well, i differ from these. I actually think it's quite a good idea and will be beneficial to me. Why do i think this i hear you say? Well, first and foremost, competition. The amount of applications in the United Kingdom in 2012 fell by 8.9% according to the BBC news website. So, for me, when i finally leave university in 2015 the amount of U.K graduates competing for jobs will be lower and therefore i have a better chance of achieving a job. Call me greedy, but it's in the human nature to be greedy isn't it. Look at the American Government for example, they were one of the biggest and richest economies at a recent point yet they still feel the need to try and make even more money be it through war or whatever. So, my greed isn't really unjustified as everyone seems to want better for themselves.

Leading on from this is the fact that due to falling numbers of applicants it means fewer degrees will be handed out from 2015 onward, compared to previous years. I think this is excellent. Degrees had become too common in recent years, it seems that the majority of people naturally moved onto university after completing A-Levels, whereas in the past this was never the case. Back then, degrees were rare and it really separated the good from the great. Nowadays, with degrees becoming so common, employers look more at other factors such as skills and personality rather than how hard-working, dedicated and academically sound a person is. I think this is wrong. You're born with your personality and it's very hard to change. So, people who were born confident and outgoing are going to stand a better chance of a job than people who are shyer and keep themselves to themselves, purely because they may both have degrees and therefore other factors need to be assessed. Whereas, if degrees become rarer then it goes back to academic achievements as the main basis for employment, which is a much better reflection of how well rounded a person is in a work environment.

My final point as to why i feel the increased cost of university is good is the risk factor. The fact that a student will be put into £27,000 of debt makes going to university a natural risk. But this risk is then very motivational and makes people work harder in an aim to not waste the three years or so that they're spending so much on. The risk factor makes those with ambition thrive and this is a very good thing. It brings the ambitious and driven people to the front of the group academically, which is where they rightfully should be. These are the people we want to be running businesses and taking the top jobs in the future as they're the ones with the drive to push things forward which will more than likely enhance the economy. The great get separated from the good and i think this is fantastic.

Call me bias, i don't mind, it's my opinion. Feel free to throw yours out there! Thanks for reading guys, have a good day!

The World Coffee Market

As i was sort of on the theme of the world economy, imports and exports and that sort of thing i thought i'd bring you this little snippet which i found quite interesting. Basically it's a bunch of facts about the world coffee market. Roughly 10 years ago the world coffee economy was worth $30 billion, $12 billion of this the producers received. However, nowadays the world coffee economy has grown and is worth roughly $50 billion, yet only $8 million goes to the producers. I sense some injustice here. It just goes to show how these big multi-national companies who have expanded globally have effected the lives of the basic producers. Obviously a lot is being done with 'fair-trade' and the like, but it will still take a lot to return the coffee market back to how it was with the producers, the ones putting the most effort into making the coffee, getting a larger cut of the proceeds.

Coffee is the worlds second most traded commodity, falling just behind oil. I thought that was staggering, very unexpected from my point of view. 60% of the coffee is produced in Latin America and 70% of the coffee is produced on farms of less than 12 acres. We can infer from this that the majority of coffee is produced by small time farmers working small plots of land, and this just adds to the frustrations regarding the pay for the producer. If the majority of coffee was produced by large scale companies it wouldn't matter so much as earning less isn't the end of the world for them. But when it comes to a poor farmer in Latin America, it makes all the difference!

Over 60 developing countries are involved in the production of coffee, with over 100 million being employed in the industry. Just makes you wonder whether if the producers received even something like 10% more than they currently are, how much the economies of these less economically developed countries would improve. It's not even a stable market either, making it all the more worrying and fascinating at the same time. The price of raw coffee can fluctuate by up to 40% in one year. Worrying from the point of view of the farmers in Latin America who have no stable income, but fascinating from the point of view of a market economist looking at how and why the price fluctuates and why by so much! Interesting. What are your thoughts?

Little ramble with something that was on my mind, i found the coffee market very interesting so expect a longer, more thought out post in the near future when i find time. Think about where your money is going next time you buy your coffee beans too! Thanks for reading.

Debate: Thoughts on U.K Foreign Aid

Quick point I'd like to discuss in today's post is the foreign aid given out by the United Kingdom and whether it's justified. The form of aid I'm most focusing on here is 'Official Development Assistance'. It comes in many different forms, not just lump sums of cash, and it represents one of the financial flows received by the so called 'developing economies'.

In many cases I'm sure this aid is very much necessary. For example, a case I think the aid is necessary is to Ethiopia. In 2007, Ethiopia received $273 million in Official Development Assistance from the United Kingdom. In that same year, the GDP per capita in that country by PPP was $779, making Ethiopia a very poor country. They also had a Human Development Index rating of 0.414 which is a low score, bearing in mind in 2012 the United Kingdom posted a rating of 0.863. I feel in this scenario, the aid is justified because they need capital to help their economy grow, and with such little money to start out with they'd have been getting nowhere without such aid. Another fairly decent example of justified ODA is to Afghanistan who had a HDI rating of 0.352 in 2007. However, this does lead me on to the main argument I have against foreign aid. It's all well and good it being justified, but is the money going to where it needs to go?

Lots of these less economically developed countries are like that for a reason. Whether it be corrupt government, lack of resources or whatever. Donating lump sums of money to countries with a corrupt government is just a pure waste of capital. The money will be thrown about to fund lavish lifestyles for those in favour of the government with very little being invested into the people living in poverty and on expanding the economy. This is a big put off against ODA in my opinion. The money needs to be directed at precisely the places that need it, there's no use giving it to governments if the money will not be invested efficiently. Furthermore, adding on to this point is the fact that are we not partly to blame for the money not being invested wisely? It doesn't take a rocket scientist to work out that if the money is invested into the economy and the economy grows, the aid will stop. Living off the aid is an easy way out for these developing countries and they may be using that as an incentive not to expand their economies. The over-reliance on aid would soon become apparent when it stops and the developing countries start to crumble again. It seems the aid that has been throw around has placed the world in a bit of a catch 22. Keep investing money in the form of aid and the money is not all used efficiently, or stop the aid and watch countries fall further into poverty. Dilemma, in my opinion.

What's more is that it's not like our country is a perfect example. We throw all this money away to other countries without a second thought about the issues we have regarding poverty and a dwindling economy. I know that we feel there is an obligation to Commonwealth countries or an expectation that at some point in the future we'll be rewarded with great trading deals from these countries when they finally develop, but i think it has to be toned down. The money needs to be re-invested directly into our own country in times like these until we can reach the point where we can say 'Yes, our economy is running smoothly and the people are happy'. If that ever happens, who knows?

I guess I wouldn't have as much of a problem if the amount we plan to give in foreign aid didn't grow anymore, but that isn't the case.

Notice here, virtually all government departments in the United Kingdom were planned to be cut by 2014-2015 and that money basically sent out in the form of foreign aid. How that can be justified i do not know! Our economy is shrinking, taking more money out of it doesn't seem at all logical in my mind. Believe it or not, though, in 2007 we gave almost $1 billion of ODA to China and India, the two economies that will be dominating the world potentially in the coming years. Of course they do have problems, but we have problems too.

I'll tie it up there, I think my opinion on foreign aid has become very clear in this post. But that's all it is, my opinion. What do you think? Thanks for reading!

Protectionism (Macroeconomics)

Protectionism refers to the protection of a domestic industry from foreign competition. There are many types of protectionism which i'll run through later on in this post. The free movement of goods and services is restricted between countries and economic blocs to try and protect a countries own industries from the powers of competition from abroad. The main types of protectionism are as follows:

• Tariffs
• Quotas
• Voluntary Export Restraints
• Foreign Exchange Restraints
• Embargoes
• Red Tape

Tariffs is very much self-explanatory. A tariff, or tax, on a good being imported into the country from abroad.  The effect of the tariff will be moving the supply curve of the good backwards by the value of the tariff. A tariff will protect domestic firms, especially new firms, by making it more expensive for goods to be imported and therefore raising the price, allowing home-grown firms to compete more. It's useful when it comes to goods from the likes of China and India. These countries have such low costs of production that they can afford to sell the goods at prices much lower than those of domestic firms in the United Kingdom. Therefore, these tariffs add to the production cost meaning that imported goods will cost more and allow domestic firms to compete more. 

A quota is also a fairly self-explanatory form of protectionism. It is a limit on the supply of a good or service into a country from abroad. An example would be a quota restriction on the import of t-shirts from China. The government may create this quota in the form of a number of goods, i.e 20,000 t-shirts per year, or they could do it by value, i.e £4 million worth of t-shirts per year. Supply of the good will fall which will in turn help domestic industries once again to compete as well as potentially raise the price of the goods. A problem with quotas, however, is that it can cause international disputes such as the one between China and the EU about the importing of Chinese textiles. More can be read about that by clicking here.

Voluntary export restraints are an agreement between one country and another to limit their exports to each other of certain goods. This is normally made between countries who are on good terms with one another or who are in the same economic bloc. Foreign exchange restrictions are a type of protectionism that doesn't appear much. This is when a government seeks to reduce imports by limiting the amount of foreign exchange made available to those within the country who wish to buy imported products. Basically, the supply of foreign money to buy these imports will be limited so not as may goods can be purchased from abroad. 

The final two now: embargoes are a ban on the import or export of products to/from a particular country. For example, a ban on weapons to a country with poor human rights records. Red tape is the idea of making importing difficult by creating lots of paperwork and procedures to delay and therefore discourage the imports. 

There is, of course, an argument for going ahead with protectionism. Firstly and potentially most importantly, it gives the government the ability to control imports which can therefore improve the trade balance. If the trade balance is in the red the government can use any form of protectionism in an attempt to curb spending on imports and improve the trade balance. Protectionism is very beneficial to declining domestic industries as well as the new industries. Both these industries aren't at the stage to be totally competitive and therefore could easily be wiped out from cheap imports. However, protecting them by limiting imports or raising the price allows these firms to get a proper foot in the market, expand and grow enough to be able to compete with the cheaper imported goods and services. Finally, it's also a method for generating revenue for the government if the protectionism comes in the form of a tariff. This tariff placed by the government goes straight in their pocket and can therefore help to eradicate budget deficits as well as improve investment power. 

With all advantages does come disadvantages, and the case of protectionism is no exception. Consumers will experience a welfare loss due to higher prices and the loss of consumer surplus. It can also be regressive for low income families as the protection will effect everyone equally, therefore those with less money will feel it the most. Raw materials may well become more expensive. This is far from beneficial for domestic industries as production costs will rise and therefore profits will be squeezed. Retaliation is another big thing that could crop up as a direct result. Putting a form of protectionism on imports from a certain country could cause that country to do the same back, which will restrict the exporting potential of the country and could worsen the balance of trade.  Finally, maybe a minor disadvantage, but there is the administration and implementation costs of the protections to take into account.

That pretty much sums up protectionism for you. Decide or yourselves whether you think they're beneficial or not, but at the end of the day forms of protectionism will always be used. Thanks for reading guys, stay tuned and share the blog if you find it useful!

Debate: Transport for the Olympics?

I thought I'd throw my opinion out there on the transport system for the London 2012 Olympics in today's blog post. First and foremost, I think on paper the transport ideas sound like a great idea. The whole idea of making it easier for people to access the events of London 2012 and the Paralympic games economically should be a very sound move. Bear in mind when reading that prior to the Olympics, the games were expected to boost the economy in the short term and the long term. Now that such data has appeared that seems to suggest the Olympics haven’t really achieved that much economically - can we partly blame the transport system?

Mervyn King was reported to have told the Daily Mail that the "the happiness won't last long..." in regards to the short term economic surge caused by the Olympics. More about this story can be read by clicking here. Therefore, economically the consensus is that the games haven't achieved that much, despite the years of planning and millions of pounds of investment. Obviously I understand that nothing can be predicted accurately at this stage, so time may prove Meryvn wrong - which is what we all hope. I think the fact Meryvn has gone so publically with this negative outlook is disgusting, as if there isn't enough bad economic news around as it is. I know people will argue that we have a right to know about these things, but I'd say most people already don't expect much in the next few years economically and the fact that Mervyn has just confirmed this will not install confidence in anyone. The doom and gloom merchants need to keep some of their thoughts to themselves!

I'd like to look at both the London Underground system and the Olympic driving lanes in this debate as these are two of the Olympic transport policies that I have experienced during the games. Firstly, the London Underground. I encountered this at peak time in the middle of the games and I have nothing but praise for the planners. It was seamless, I made a trip into Waterloo and from there I had to get the Victoria Line and then the Northern line through to London Kings Cross. Bearing in mind this was at peak time, so I was expecting crowds of workers as well as Olympic go-ers, I was pleasantly surprised. Everything ran smoothly - I was on and off the Underground painlessly and I have nothing but praise for the. The return journey, also a peak time (the evening this time), was seamless as well. I experienced it twice during the games at peak times and I thought it was great, obviously there will be people who used it a lot more and saw a lot more that went on, but on the whole I think it ran smoothly. Therefore, economically I think the investment that went into the London Underground was very beneficial and justified. Not only were workers in London still able to get to work on time but the extra travellers heading to the games were also catered for and this can only have benefited the economy. My problem occurs when it comes to the Olympic lanes...

The few times I encountered the Olympic driving lanes were around 10 - 11 am. I wasn't heading to the games so therefore I was in the 'normal' lane, queuing, whilst watching the empty lane next to me remain... empty. One occasion, on route to Staines, it took me 25 minutes to travel a mile as all the traffic had to bottleneck into one lane, all whilst a perfectly fine lane lay empty next to me. During those 25 minutes the Olympic lane wasn't used once. This was beyond frustrating, this lane seemed redundant during this time, a waste of space even, yet we couldn't use it and had to queue up in traffic - delaying arrivals to our destinations. Infrastructure is always a big point in the economy, and in my opinion I think this is evidence of it failing. The lanes were unnecessary during the Olympic sessions and should have been opened to all traffic. Already, according to the Daily Mail, Londoners waste 66 hours a year stuck in traffic. 66 hours that could be spent working, benefiting the economy. Turning normal lanes into these Olympic lanes is only going to have added to this figure and that is no way to benefit the economy when we're in a rocky situation. In my opinion, the Olympic lanes weren't thought out too well and didn't function efficiently - but, what is my opinion worth anyway?

I'd like to conclude by saying that I think the Olympics will be successful economically for us. The sense of national pride and 'togetherness' that seemed to shine during the games surely has to have some effect! The London Underground, like I said, was very good during the games but the Olympic lanes let the transport system down. I'd like to hear other people's opinions on the situation, though. So, what are your thoughts on the Olympic transport policies and how do you think they've affected the economy?

Thanks for reading guys, stay tuned.

Sam. (@TutorEconomics)