finance: 9/8 Economics Blog

Please add updates@feedmyinbox.com to your address book to make sure you receive these messages in the future.

Starting Economics
September 7, 2009 at 6:08 am

Today, is the first day of term for my students. A few are in their second year. A few are doing retakes and a few are studying economics for the first time.

For many students, taking economics can be challenging because it is a subject they haven’t studied before. There are quite a few new concepts and vocabulary to learn.

A good place to start is to try and understand ‘everyday economics’. Reading an article about the current recession and the state of the economy will help familiarise you with some of the basic concepts like GDP, inflation, and interest rates. If you can get a good overview of the subject it will make it easier to learn the various macro economic topics.

For micro economics the key is understanding basics like supply and demand. If you are happy with supply and demand and related topics like elasticity, there will be many economic topics you will be able to tackle.

Again it is good to think of everyday economics. If you are getting confused by supply and demand diagrams think about everyday common sense. If the price of CDs fall, and your income stays the same, ceteris paribus, you will buy more. If the price of mobile phones is rising, you would expect more firms to enter the market and increase the supply.

During the holidays I wrote a new guide - Study Tips for Economics £4. It is aimed mainly at the techniques of writing essays, using evaluation and writing exams. It will be helpful for students who have good knowledge, but, have difficulty combining this knowledge to answer exam questions.

You may also be interested in this essay - Importance of Economics

Benefits of Low Personal Debt
September 7, 2009 at 5:18 am

Readers Question. what is the benefit to a country having low personal debt??…apart from fear that people wud default what else?

A low level of personal debt has various advantages.

Typically saving rates will be higher. This enables more investment in the economy. If banks are lending to consumers for personal debt, it means that, ceteris paribus, they have less funds to lend to firms for investing in productive capacity. It is argued that investment is more important for the future productive capacity of the economy than consumer spending.

However, it is a question of balance, arguably some countries have been focusing on saving too much. But, in the UK, personal debt was so high it was a reflection of an unbalanced economy.

Economy Less sensitive to interest rates rises. If consumer debt is very high, it means consumers will be very sensitive to any rise in interest rates. If it is necessary for rates to increase then it could lead to debt default. This would be more of an issue if a country was in the EURO with a common monetary policy.
It makes Monetary / Fiscal Policy more effective. When the UK entered recession, personal debt was so high, people instinctively looked to save. It was difficult for Central Banks to boost spending despite rate cuts and tax cuts. However, in countries with lower levels of personal debt, there is more room for manoeuvre

Like many things it is a question of balance. It also depends on the type of personal debt. Mortgage debt is better than credit card debt because it is secured against the value of an asset. Though falling house prices can cause negative equity for those with large mortgages