Understand the Greek crisis?

It's ok, nobody really understands the Greek crisis, and few have a  clear idea of what will happen next.

The Guardian have done a handy interactive flow chart where you can explore the possibilities.

The Guardian flow chart is here

Macro revision links

All Tutor2u links on macro ready for Friday

Unemployment

Real interest rates

Inflation 

Measuring unemployment

Productivity

The multiplier - note you do not need to know how to calculate it at AS

The Current Account

 Supply side

Please use wisely. Email if you need help!

EU 'not in recession'

'Lies, damn lies and statistics' as Disraeli put it can be illustrated by the way Eurostat has claimed that the Eurozone is no longer in recession.

The attached story has the details, but it shows that Italy, Spain and Greece are in dire recessions, with output contracting and France just managed to maintain output. So what is the reason that Eurostat says the Eurozone isn't in recession? Well Germany grew strongly and overall Eurozone GDP rose when added together.

This means that recessions are now not only defined by arbitrary dates, but also arbitrary borders. It depends how you group countries together.

Of course the real point of interest is the effect of cutting government budget deficits on GDP. As Government spending is a component of AD changes in it have a multiplier effect. Add to that higher taxation and we see disposable income falling and so Consumption dragging AD down further.

Today the new French President, a man worryingly named after a sauce, will argue for more stimulus to boost short-run growth. But today the people of Italy, Spain and Greece, and I think France and Britain, might agree with him.

The BBC cover the story here

Revision links for AS micro

These are all Tutor2u blog items, so you can go there directly

Public and merit goods

Demerit goods

Asymmetric information

Minimum wage

Price volatility in markets

PED 

YED

 PES

Rice prices - applied piece

These are all well worth looking at. 

Scotland's 50p per unit minimum alcohol price

Alcohol is an imperfect information good. Those who consume it don't take fully into consideration the complete costs of drinking it on themselves, or on others. There are clear negative externalities, such as the cost to the NHS of treating alcohol related disease. Drinkers also overestimate the private benefits to themselves.

Overall then the market consumes more alcohol than is optimal.

Scotland has decided that they will impose a minimum of 50p per unit of alcohol to try to address the problem of people abusing alcohol. This means that a drink that contains two units of alcohol (say a pint of lager) cannot be sold for less than £1. Of course there is no effect if the price is already over a pound.

The effect of this minimum price therefore depends on the current price. Setting a minimum price below the market equilibrium has no effect at all, while setting a price above equilibrium will reduce demand. Of course it can also raise the willingness to supply!

The aim of this policy is to overcome the 'cheap alcohol' available in supermarkets (such as ownbrands) and 'happy hours'. These promote heavier drinking and, as some people know, this is habit forming!

The real question is will it be effective? Alcohol is already heavily taxed, restricted by age limits and only available from licenced premises. There is also a concerted effort to educate people about the true effects of drinking (although this is far less than the effort made on smoking). So far these have failed to eliminate the problem.

The PED of alcohol is likely to be inelastic. Therefore the effect on current drinkers will be small, but maybe it will stop some people from starting to drink. Therefore the pay-off will come in the long-term. What is clear is that dealing with imperfect information goods needs a set of complementary measures which reinforce each other.

The Guardian has details here

Permanent damage to supply side - NIESR

A regular report by the National Institute for Economic and Social Research (A bit like the IFS without the political posturing) has said they expect unemployment to reach 9% and not decline until the end of 2013.

This continued economic weakness will do long-run damage to the supply side of the economy. This will include the loss of motivation and skills of many workers who find themselves in long term unemployment. It will also lead to the loss of productive capacity, which had initially fallen into disuse but is eventually derelict and scrapped.

Interestingly the NIESR suggest, as I have, that there is a need for a moderate and targeted fiscal boost. They say:

It remains our view that fiscal policy could be used to raise aggregate demand in the economy with little to no loss of fiscal credibility. We have never and do not now advocate scaling back the government’s medium- to longer-term policy of fiscal consolidation. However, the UK also suffers from a lack of demand in the short term. As we noted in our January Review, a 1 per cent of GDP increase in government investment this year would boost GDP by around 0.7 per cent, assuming no reaction by the MPC. A temporary boost to net investment, which has been cut extremely sharply, would have no direct effect on the government’s primary fiscal target of balancing the cyclically-adjusted current budget in 2016–17. 


Interestingly there is a one year estimate of the multiplier effect in that paragraph. Suggesting that governments are not really that powerful when it come to demand management.

The BBC covers the story here