State of the UK Economy in 2016 | Economics | tutor2u

What shape is the UK economy in as economics students prepare for their summer 2016 exams?

Source: State of the UK Economy in 2016 | Economics | tutor2u

Essential viewing for all AL students, also useful for IB students should they wish to use the UK for Paper 1 macro examples.


Port Talbot & A’level economics

A’level economics students frequently moan  that what they have been taught is not relevant to what is going on around them while economics teachers complain that students do not relate what they have been taught to the real world!

The recent events at Port Talbot provide an ideal example to use economics concepts.

The multiplier can be used in assessing the costs to the area should Port Talbot close since not only will steel jobs be lost if the plant closes, additional jobs will also be at risk as steel workers suffer lower disposable income and cut back on expenditure,  particularly in non-essential areas.

In considering the type of unemployment created, one can use the idea of structural unemployment since many of the steel workers affected will not have the skills needed in newer, growing industries.

The possible closure of the plant is relevant to the arguments about the benefits of free trade and the theory of comparative advantage whereby UK steel purchasers benefit from cheaper steel imports from China which need to be set against the  job losses among UK steel producers. This aspect can be expanded to consider whether the Chinese are dumping steel on the world market and, if so, what action should be taken, especially in the light of the tariffs on Chinese steel imposed by the USA and those imposed by China on imports of steel from the EU and elsewhere.

A final example is in the  field of market failure where Tata have complained that the UK Government’s environmental policies have raised energy prices and helped make UK produced steel (and heavy industry generally) uncompetitive. UK electricity prices are almost double those in the rest of the EU and more than double those in China and while these high prices help to subsidise renewable forms of energy, they make life difficult for UK firms.

BREXIT- more questions than answers

Over the next two months there will be increasing discussion about whether we will be better off in or out of the EU. Some of this will focus on the political aspects, for example the potential gains in sovereignty and our ability to gain greater control of our borders  versus our loss of influence were we to leave the EU. However the purpose of this article is to focus on the economic arguments.

In theory the case for and against leaving the EU should be an ideal opportunity to apply cost-benefit analysis, weighing up the monetary costs of leaving and comparing them with the monetary benefits and then seeing which are greater. However, in practice, this will not be easy to do. Even our contribution to the EU is not clear with the Leave Campaign focussing on the £18.3bn we paid in 2014/15 (which sounds a lot) while the Remain Campaign concentrate on the net contribution which is about £9bn, which, when divided by the population, works out at less than 40p per day (which sounds very little). There is little consensus on the overall cost or benefit of being a member. The National Institute for Economic & Social Research suggested, in 2004 that membership of the EU contributed about 2% to GDP, the CBI is suggesting that each household benefits by £3,000 per year while the  Institute of Directors thinks it costs us 1.75% of GDP to belong.

Even assuming that we could agree on the amount of our net contribution to the EU, we are not going to be able to quantify the costs and benefits we will face if we leave. Crucial to this figure will be the type of trade deal we are able to negotiate if we leave. Will the EU be keen to encourage trade with us and therefore allow us to negotiate a favourable deal or will they be keener to discourage others from leaving and therefore impose significant tariffs on UK goods entering the EU? Possibly a more important question, given that non-tariff barriers are of increasing importance,is whether or not we will be able to gain easy access for our services, particularly financial services, if we leave the EU? It is true that we run a deficit with the EU but we cannot infer from this that we will be able to negotiate  a favourable deal. Almost half our exports go to the EU while only about 7% of theirs come to us, therefore a favourable deal is far more important to us than them.

Furthermore,  the deal we eventually agree will involve us making a financial contribution to the EU as Norway and Switzerland do. How much will this be and how many of the regulations we currently have to meet will we need if we leave and how much will it cost us to do so?

Another key question is what sort of trade deals we will be able to agree with non-EU countries? We would have less influence negotiating individually than we would as part of the EU given that the EU market is almost five times as large as the Uk’s.

[An unbiased analysis of the various claims and a good source of data is thr Channel 4 Factcheck (

India 1 China 0?

Does the economic rise of India make it the country to watch instead of China?

There has been much talk of the BRICs [Brizil, Russia, India and China] and then the  MINTs [Mexico, Indonesia, Nigeria and Turkey] –  newly-industrialised countries which were going to be instrumental in driving the world economy. Of these, Russia and Brazil have suffered from slow growth and falling commodity prices and the MINTs also seem to have faded from the economic horizon and so only China and India remain.

Last month China’s growth fell and India’s GDP growth rate overtook it. Previously China had consistently outpaced India so that China’s average income per head which was approximately equal to India’s in the 1970s is now four times as high. Although the change in relative growth rates is currently more to do with a slowdown in China than an increase in India’s growth, the future is bright for the latter country. China is currently facing up to the need to look after a rapidly aging population while India has a much younger population and so will not face the burden of dealing with an aging population for some time.

Economic Data

The collection of data about the economy is possibly not the most exciting element of economics however it is one of the most significant since, without accurate data, the Government and the Bank of England are unable to accurately assess the state of the economy and hence manage the economy.

Last week there were two interesting developments in the statistical world. The first was the announcement of two new measures of inflation which might shortly  replace the Consumer Price Index (CPI) which previously replaced the Retail Price Index (RPI). The new measures are CPIH – the consumer prices and housing index – and HHI – the household inflation index which aims to reflect the costs that households face so includes interest payments as well as the prices of goods and services. It is possible that CPIH might soon replace the CPI as the indicator used by the Bank of England. It is likely that CPIH will be slightly above CPI since housing costs tend to exceed the average rate of inflation. Therefore, if the measure is adopted, it is possible that the 2% target will change as well.

The other development involved an Old Brentwood, Sir Charlie Bean, who was interviewed on Radio 4 on Thursday. He was previously Deputy Governor of the Bank of England, and is now head of independent review of economic statistics, set up by the Chancellor of the Exchequer after problems with some government data, leading to many revisions.. His view is that economic data has not taken into account the changes which have taken into account the way the digital economy has changed we operate. For example,  a few years ago, when I booked a holiday, I would have gone to a travel agent and booked my holiday through them, paying them a commission which would have been counted in the UK’s GDP. Today I will go online and book my own flights and then go to Airbnb to book my accommodation. I might even avoid eating in restaurants and, instead, try one of the new schemes to eat in private homes. Similarly the way I obtain my home entertainment has changed – no longer do I buy CDs (or gramophone records!) but download music and, similarly, do not buy DVDs but use catch-up services for my TV viewing.  Not all of these transactions will be included in the GDP and Sir Charlie believes that the inclusion of such transactions might add as much as 0.66% per year to the UK’s GDP.