Going through the roof

The Confederation of British Industry (CBI), a business lobbying group, has warned that UK policy makers need to be ready to act and prevent house prices from increasing too fast. House price inflation has reached 10% in some areas.

The CBI stated it expected the first rise in interest rates would occur in the first quarter of 2015. It argued that the government needed to act quickly to deal with the major shortage of houses in the UK, so that supply could increase at the same rate as demand. The CBI wants councils to release more land and to explore the possibility of new cities being built.

The Organisation of Economic Cooperation and Development (OECD) also highlighted the need to control house price increases in the UK. A recent OECD report said that “Monetary policy tightening should be accompanied by timely prudential measures to address the risks of excessive house price inflation”.

Borrowing in the UK has already got more difficult.  At the end of April tighter rules on mortgage lending were introduced that required tougher checks on whether borrowers can afford to repay their loans. More measures may well be introduced.

The OECD stated that further action might include less access to the government’s Help to Buy programme, which provides guarantees for higher-risk mortgages in an attempt to encourage first time buyers enter the market.

Meanwhile, the UK Treasury said: “The chancellor has said we must remain vigilant in order to avoid repeating the mistakes of the past.

“This government has given the Bank of England new powers and new responsibilities to monitor risks in the economy and take action if necessary, something that did not happen before the crash.”

 Prices in the housing market are determined by supply and demand. To understand market forces you can read chapter 6 in Foundations of Economics (3e). The housing market is examined specifically on page 130

Questions

What are the possible causes of house price increases in the UK? Why does it matter if house prices are rising fast?

Illustrate the effect of a) an increase in demand b) an increase in supply on house prices

What actions might a government take to slow down house price increases?

Sources

http://www.theguardian.com/business/2014/may/12/cbi-high-alert-house-prices-interest-rates

http://www.theguardian.com/business/2014/may/06/uk-house-prices-oecd-warning

http://www.bbc.co.uk/news/business-27293044

http://www.telegraph.co.uk/finance/economics/10809896/OECD-warns-housing-boom-risks-overheating-UK-economy.html

SOS: save our seas

SOS: save our seas

The Global Ocean Actions Summit was held in April 2014 in the Netherlands to try and protect oceans around the world and prevent overfishing. Governments, business leaders, and NGOs from 80 countries committed themselves to firm agreements to restrict fishing and pollution.

The results from the summit were the agreements that:

  • The only way to end the war of attrition at sea is to stop overfishing and to eliminate overcapacity
  • Subsidies should be used for sustainable fisheries only;
  • Illegal fisheries need to be banned
  • There would be accelerated ratification of agreed mechanisms for improved fisheries practices to make the fisheries sector more sustainable, and to tackle pollution

Reading:

You can read about a similar issue known as the Tragedy of the Commons on page 128 on Foundations of Economics (3e).

You can also read about the problems of agreements between organisations if you read about cartels page 238-240.

Questions

Why are agreements between countries required to stop overfishing? What problems do you think there might be in keeping countries to these agreements?

Sources

http://www.government.nl/ministries/ez/news/2014/04/25/ocean-summit-action-for-healthier-oceans-starts-today.html

http://www.globaloceansactionsummit.com/

http://www.worldbank.org/en/news/press-release/2014/04/22/global-oceans-action-summit-food-security-blue-growth-hague

New Look Blog

Welcome to our updated blog! The third edition of Foundations of Economics published earlier this year and we thought this would be a good opportunity to refresh the blog. We will be posting stories that are in the news and that raise some interesting economic issues. Do comment on them and send us anything that would be good to share with others. Keep looking out for new posts as the academic year gets underway.

Rational decision making

A lot of economic models are based on rational decision making and a principle of maximisation. In reality the human decision making process may not be quite as tidy as this. The recent announcement by Antonio Horta-Osorio, the chief executive of Lloyds who took a leave of absence from the bank because of exhaustion, that he wishes to return to work highlighted the stress managers can work under. Horta-Osorio is basically having to reapply for his job because  the board of Lloyds needs to be reassured that he won’t again become incapable of working. The pressure of senior positions especially at times of major economic turmoil may make us wonder quite how logical, calculating and dispassionate the decision making process actually is and how many other influences there may be on it.

No easy access to Indian consumer

India’s parliament has prevented the reform proposal that would have allowed foreign ownership of retail outlets. This has halted the expansion plans of business such as Wal-Mart and Tesco (at least temporarily). A foolish attempt to hold back the crushing waves of globalisation? A mistaken defence of local inefficient producers? Or an honourable defence of domestic culture and business?

http://www.bbc.co.uk/news/world-asia-india-16063955

http://www.bbc.co.uk/news/business-16046394

 

Ready for 80?

Proposals to raise the speed limit to 80 on the motorways has highlighted the difficulties of cost benefit analysis. Will a higher speed limit mean more accidents and , if so, how do we value injuries and human lives. What about the impact on the environment if more fuel is used at higher speeds? but then what about the benefits of moving products more quickly around the country and the extra time that might be gained at work?  A complex decision involving numerous external effects.