Bayes’ theorem is used in statics to describe the probability of an event, using evidence has been given. It uses a mathematical formula to revise existing predictions given additional evidence. It was named after the 18th century British mathematician Thomas Bayes
This formula is used in many day-to-day situations, for example it is used by spam filters to determine whether an email is real or spam, given the words presented in the email.
Event A = Message is spam
Event B = Message contains certain words
After analysing the words in a message, a probability is calculated rather than making a certain yes or no decision as to whether it is spam or not. So, if the probability calculate has a 97% chance of being spam, the email most likely is. As the spam filter is trained with more messages, it updates the probabilities that certain words lead to spam messages.
In finance, it can be used to calculate the risk of lending money to potential borrowers which would be of important use in many transactions. It is created by using different conditional probabilities, which shows how probable an event is given that some other event occurs. It can also be useful in medical science as it can be used to show the likelihood of getting false positives in tests such as cancer screening and drug testing.
Game theory is the study of decision making where several people must make choices which can affect the interests of other people. It is also defined as the study of human conflict and cooperation within a situation which is seen to be competitive. This concept is used whenever the actions of several people are interdependent, for example in an oligopolistic market. It lays out the players (a.k.a. the agents), their preferences, their information, the strategic actions available and how these may influence the outcome. An assumption that is usually made when considering the game theory is that the players are rational, which means that they will act in their own best interest, given what he expects his competition to do.
In game theory, a Bayesian game is a game in which the players do not have complete information on the other players. For example, one player may be unaware of the other player’s available strategies. This is called the Bayesian game because probability is used when making assumptions. At the start of the game, players have assumptions about the opposite player, and can update their assumptions as they change using Bayes’ theorem as the game takes place.
Since the Great Depression of 1929, the financial crisis of 2008 has been the most serious economic catastrophe. As described by the Guardian, the financial crisis is the ‘three weeks that changed the world’. It started becoming noticeable in September 2008 when several large US financial firms began to fail. It led to a recession which is when housing prices fell by more than 30 percent – which was more than it did during the Great Depression. It had many long-term effects, many of which are still present, the unemployment rate in the US was still above 9 percent two years after the recession ended.
Why did this all happen? The US government encourage home ownership. People were buying expensive houses using money from abroad, which caused house prices to increase. Mortgage companies lent money even if the borrower did not have a good credit, these were called subprime loans – they have a higher risk of defaulting. However, after a while housing companies built too many houses which caused the price of houses to decrease (when supply is greater than demand, prices fall) and the value of a lot of the houses decreased below the value of the mortgage debt. This meant that the homeowners were unable to sell their houses – this is what we call negative equity.
By 2007 and 2008, the whole system started to collapse. Banks started to realise that they were holding onto many worthless debt instruments and the US economy started to freeze up. In September of 2008, Lehman Brothers filed for bankruptcy and this was the largest filing in history, and at the time of its collapse it was the fourth largest US investment bank with 25 000 employees worldwide. It had $639 billion in assets and $619 billion in debt.
Banks were bundling up mortgages together and selling the packages to other banks or investors. The packages included mortgages from prime borrowers who would pay back the loan, along with mortgages from subprime borrowers who had a high risk of defaulting. However, the banks were selling these packages as if they only included prime mortgages and were making money. Although this was meant to reduce the risk, it meant that many institutions had bought mortgage packages that were worth less than what they had bought them for. Other countries were also affected from this issue, in the UK the Northern Rock became their first casualty – too many loans were not being repaid so savers started to withdraw their money.
The UK government soon bought Northern Rock (guaranteeing savers their money) and soon bought most of Royal Bank of Scotland and parts of Lloyds Bank. This fall in lending by banks led to a fall in consumer spending and investment leading to a fall in GDP and a rise in unemployment. Due to the rise in unemployment, government spending related to welfare payments (i.e. unemployment benefits) rose. Governments had to rely on institutions such as the European Union to lend them the loans that they needed.
Fiscal austerity is when the government of a country decides to raise taxes or cut government spending in order to reduce a government budget deficit.
It has advantages as well as disadvantages, one being that it reduces the welfare of citizens both in the short-run and in the long-run. For example, a rise in taxes means that consumers have less disposable income. Government spending includes transfer payments which is welfare benefits, so a cut in government spending effects those gaining benefits who are likely to be those on low-incomes. This leads to income inequalities.
Cutting spending on infrastructure and education will reduce the supply of physical and human capital in the future, this will then lead to lower economic growth. Austerity will lead to a fall in GDP, in the short-run – the more severe the rise in taxes are or the more severe the cut in government spending is, the more negative the impact on GDP is. If the economy is in a recession, austerity will only cause the recession to worsen. If the economy is in the recovery phase of the trade cycle, it will slow down the rate of recovery. However, Canada pursued austerity in 1993-1996 and maintained strong economic growth; their exchange rate depreciated as a result of this.
Unemployment will rise when there are cuts in government spending, this is because cuts in public spending or rises in taxes reduces aggregate demand which means there will be more spare capacity in the economy. This leads to welfare benefits for those unemployed or on low incomes rising while tax revenues will fall.
The main advantage of austerity is that it reduces the budget deficit, which overtime reduces the national debt. Austerity can cause interest rates to decrease, because there is low domestic demand,
and can cause the current account of the balance of payments to improve. This is because interest rates decrease which means that exports are cheaper so they increase and imports decrease as they are more expensive, the exchange rate depreciates which helps to restore a country’s competitiveness.
Spending cuts will lead to lower inflation, this is due to the fall in aggregate demand and if the government decreases public sector wages, public sectors workers will have less disposable income so consumption decreases, lowering aggregate demand which leads to a fall in inflation.
Some economists say that austerity is self-defeating – government spending cuts and higher taxes fail to reduce budget deficits. They come to this conclusion due to the large negative impact on real GDP. As explained above, government spending cuts lead to lower aggregate demand which leads to lower real GDP. The fall in GDP causes tax revenues to fall and spending on transfer payments (i.e. benefits) to increase. Although the original aim is to reduce budget deficit, there is no real improvement in the deficit as the spending cuts are outweighed by the increase in government spending that follows.
What is the digital economy? The digital economy refers to an economy that is based on digital computing technologies. An example of a digital economy is Amazon. This economy revolves around high-tech computing and the internet to communicate with consumers. The digital economy replaces the traditional retail style shopping which is known as creative destruction.
Another example of a popular digital economy is eBay. eBay is a platform where individuals and suppliers can buy and sell goods and services. Consumers can also bid for the good. The website uses PayPal, which is an American company which operates worldwide and supports online money transfers and services an electronic version to traditional paper methods. In order for these digital economies to work, many skilled workers are required to collectively use their knowledge to create a platform. This means that the introduction of new digital economies decreases the rate of unemployment, which is currently at 4.7%.
The digital economy requires suitably skilled workers, for example those that have been trained in the technology field, these workers are usually in short supply. This means that the wage price increases as supply is less than demand. As wages increases, it will give people more incentive for them to train under the technology field, this results in lower unemployment due to the many jobs created. This also corrects the problem of unemployment being central for those who are younger.
However, the increasing rate of the digital economy can also cause unemployment. This is because the traditional methods of retail, such as the shops on the high street, will soon be overtaken by the internet. This causes high street retailing shops to close down as less profit is produced. This then results in some workers losing their jobs, which increases the rate of unemployment. Furthermore, older workers would most likely impact from this the most as they do not have the skills to move jobs into the digital economy.
Although the digital economy does create jobs, it also causes many jobs to be lost. And as the internet is constantly growing very fast, these effects should soon be visible to the overall economy. UK’s unemployment rate will increase as retail is the UK’s largest private sector employer, employing around 2.77 million people in the UK. The digital economy employed 1.3 million people in 2014, and 5% of all those employees were in the UK. This shows the massive difference between those who work in store and online.
The current account is a component of the balance of payments. The balance of payments account is a record of all financial dealings over a period of time between economic agents of one country and all other countries. The current account records the trade in goods and services, as well as transfers and income flows. We say that the current account is in deficit when imports are greater than exports. The UK has been in a current account deficit since 2000 of an average 2.4% of GDP. This means that what is flowing out of the UK from trade in goods and services are more than what is flowing into the country.
The UK currently has an inflation rate of 2.3% and has generally been quite low in the UK economy. However, before the financial crisis of 2008 – resulted by deregulation of banks in the US – the inflation rate was 2% and this then increased to 5.2% during the crisis. The first bank to go bankrupt was Lehman Brothers, which was then followed by many other banks that became bankrupt. This resulted in crashes in other economies around the world. So, what is the link between inflation rate and the current account deficit? Well, an increase in the inflation rate, increases the prices of commodities (a raw material that can be bought or sold) which means that the costs of production for firms increase too (as commodities are needed in order to make products). As well as this, as the inflation rate rises, real wages (nominal wages adjusted for inflation) begins to fall so trade unions (a supply-side policy) may negotiate for higher wages as their aim is to maximise their welfare at their work. This will also lead to an increase in costs of production for firms as wages are one of the biggest parts of a firms’ costs of production. Firms will then increase the price of the good or service in order to maximise their own utility (profit). So higher prices makes UK goods less competitive internationally, and demand for UK exports decrease relatively to imports. Therefore, as imports increase and exports decrease relative to each other, the current account deficit worsens. As the inflation rate has constantly been changing (increasing and then decreasing and then increasing again) in the UK, it means that our economy is constantly in a deficit.
Furthermore, a current account deficit can also be caused by a rise in the exchange rate. At present, exchange rates have been falling but during the Financial Crisis of 2008 exchange rates rose by around 25%. This was because people started to want to sell stocks and highly liquid assets for dollars. This demand for cash appreciated the dollar, same as in other countries with their currency. A rise in the exchange rate means that the pound is strong. This means that imports would be cheaper to buy and exports would be more expensive to buy. So the demand for imports rises and the demand for exports decreases. This means that the size of the current account deficit worsens as imports are greater than exports. Similarly, a fall in incomes abroad means that incomes of foreign buyers fall due to a lack of economic growth in their economy (perhaps a recession). This means that they will demand less of UK exports. This also increases the size of the current account deficit as exports decrease. The effects of the financial crisis of 2008 still haven’t entirely been removed as we can see looking at the current account deficit as it was the biggest following 2008.
Obamacare is a nickname for the Patient Protection and Affordable Care Act (often shortened to Affordable Care Act, ACA). In 2010, President Obama and Congress signed ACA into the law. They wanted all Americans to be able to get health insurance. They also wanted to lower the cost of healthcare. Unlike in the UK, in the US, in order to receive health care, you have to pay. Going to the doctor or the hospital has become very expensive and health care costs are the number one reason of bankruptcy in the US. For example, one visit to the hospital for an emergency costs $1,265 on average and cancer treatment can cost $30,000 roughly. Under this law, hospitals would have to improve their technology to increase better health outcomes, lower costs and improve their methods of distribution and accessibility. The act aims to slow the growth rate of US healthcare spending, which is the highest in the world.
Those with health insurance do not have to pay these costs as their insurance covers most of them; although, they just have to pay a small fee on visit, which is called co-payment. Many US citizens will receive their health insurance as a benefit from their employer. For those who do not receive health insurance by their employer or cannot afford it, will be able to qualify for Medicaid. Medicaid is a programme created by the government to provide payment for medical services for citizens on low-income. Medicare is a federal programme that covers your health insurance if you are 65 or older, no matter what your income is. However, if you are on high-incomes, are not older than 65 and your health insurance is not provided by your employer then you have to pay yourself. Obamacare does not have a requirement, the law requires insurers to accept all applicants, regardless of their condition or sex.
The introduction of Obamacare allowed the amount of people who didn’t have health insurance to decrease. The uninsured rate among adults (18 and over) fell from 18.0% in Q3 2013 to 13.4% by Q2 2014. The rate has dropped by 5% since the programme began.
However, some disagree on whether Obamacare actually reduces the deficit. The original estimate was $143 billion savings; although others forecast that it will add $1.76 trillion to the debt. This would be a burden because Congress passed the ACA by saying that it would reduce the cost of Medicare and Medicaid – which were eating up the entire budget. Experts say that the law imposes too many costs on businesses; however, since the beginning of Obamacare, jobs in the healthcare sector rose by 9%. The new president of the US, Donald Trump, has said that he wants to repeal; although if he does, it is estimated that 22 million people would lose their medical insurance.
Article 50 is a part of the European Union law that lists the process of the withdrawal of a member from the European Union. The Brexit referendum was held in the UK on 23rd June 2016, in which the majority voted to leave. The UK will trigger Article 50 on 29th March 2017. Why did it take a long time to be triggered? Prime Minister Theresa May announced in October 2016 that she did not want to rush the withdrawal process. After the article is triggered, there is a two-year time limit (during which the EU laws still apply to the UK) in which the UK have to complete negotiations. If negotiations do not go to plan, the UK will have to leave empty handed. The UK would continue to participate in the EU; however, the UK members would not be allowed to participate in discussions about the withdrawal of the UK.
The EU customs union is a system which allows all member states to follow a set of common rules about custom controls over goods entering the EU from the outside. This system focuses on the levying of tariffs and trade quotas, they also include other matters, such as checking food with health standards and checking that consumer goods comply with safety rules (e.g. children’s toys).
According to figures by the Office for National Statistics (ONS), the UK exported £134.3 billion worth of goods and services to countries in the EU but imported £223 billion, meaning there was £88.7 billion more imports than exports. This results in the EU exporters facing a struggle as their incomes will decline as the UK leave the EU. As a result of this, this will allow the EU to reach an agreement which avoids the imposition of tariffs on exports to its largest single export market (the UK), this is known as a ‘mixed agreement’.
However, an important question for the UK is: who decides whether the UK can have a free trade agreement? It will need to be finalised by EU leaders via a majority-wins vote, the European Parliament also by a majority-wins vote and by the remaining national parliaments across the EU. The general rules of the EU policy of free movement of goods and services have generally worked well with other countries, for example, Korea; This means there should be no difficulty in replicating these rules in an EU-UK trade agreement. And since this rule benefits the consumers of the imports, there is a strong argument for replicating these rules.
Other examples of negotiations that Article 50 will cover are discussions about unspent EU funds, access to EU agencies who have a role in the UK law (e.g. European Medicines Agency), access for UK citizens to the European Health Insurance card, the rights of UK fishermen to fish in non-UK waters (including the North Sea) and many others.
What happens next? During May/June 2017, the negotiations will commence. And in the autumn of 2017, the UK government is expected to introduce laws to leave the EU and to incorporate some of the EU laws into the UK laws, which is known as the ‘Great Repeal Bill’. The negotiations are said to be completed by October 2018 and in March 2019, the UK will formally withdraw from the EU (unless the two-year time limit is extended, but this will only happen if the other EU member states grant approval).
After the steep fall in the value of the sterling after the Brexit vote, expectations for inflation has risen. A fall in the value of the pound meant that goods brought into the UK are more expensive. This means that firms will past on their costs onto their consumers in the form of higher prices, which increases inflation. Sterling fell as much as 20% against the US dollar after the EU referendum in June. The Bank of England and many private economists say inflation is set to carry on increasing sharply in 2017. The quarterly survey, which was published on Friday, illustrated average public expectations for inflation over the next 12 months rose to 2.9% in February from 2.8% in the previous survey in November. And taking a five-year view, inflation is expected to be at 3.2% compared with 3.1% that was expected three months earlier.
The Bank’s Monetary Policy committee was divided on the decision about interest rates. Kristin Forbes is a member of the committee, who voted to raise interest rates as she felt that inflation was rising too quickly and that it could become a problem in the near future. Other members also indicated that they could join her in the future meetings if they began to feel the same. Ian McCafferty, who voted for an increase in the rate in early 2016, was the most likely member to join Forbes (according to analysts). Other members included Michael Saunders who came across as enthusiastic about the economy in a speech he made in January.
Forbes believes that inflation is likely to remain above the Bank’s 2.0% target for at least three years. She voted against the rest of the committee and wanted an increase in the base rate to 0.5% from 0.25%. The rest showed that the Bank of England did not want to follow the US Federal Reserve, which raised base rates on Wednesday. This was the first disagreement the committee faced since after the Brexit vote in July 2016 (when Jan Vlieghe voted for a cut in the costs of borrowing from 0.5% to 0.25% - the majority of the committee opposed him but in August 2016, they voted for a cut).
Last month, the Bank of England said it expected the economy to grow by a relatively strong 2.0% this year but was likely to slow down after the uncertainty with the country’s involvement with countries in the European Union, as they buy roughly half of Britain’s exports. This week, economists pointed out that wage growth was “notably slower” than they had thought even though the unemployment rate is now 4.7%, marking its lowest level since the summer of 2005 said the ONS, which economists say it nearly at full employment.
This week has been important for many business people, savers, students and families across the UK; this is because, the Budget was released and it is the annual financial statement that sets out the Government’s plans for spending and taxation for the coming year. As of Tuesday 8th of March, Chancellor Philip Hammond presented his first and last Spring Budget. It is his last because of the transition to a single fiscal event each year, an Autumn budget.
The Office for Budget Responsibility expects the economy would expand by 2% this year, which is an increase from their previous forecast of 1.4% economic growth. They judge that growth will moderate during 2017, as real incomes are affected by an increase in inflation due to sterling’s depreciation which leads to a slowdown in consumer demand growth. However, growth in the future years have been expected to be lower: in 2018-19, 1.6%; in 2019-20, 1.7% and in 2020-21, 2%. This means that the British economy will grow at a slower rate than before the Brexit referendum until the EU withdrawal and maybe even beyond. Higher levels of growth mean higher tax receipts and lower levels of borrowing; however, growth will be better in the short-run than in the long-run. Britain can, therefore, no longer claim to be the fastest-growing economy in the G7 group (which is a group consisting of Canada, France, Germany, Italy, Japan, the UK and the US – they are the major advanced economies as reported by the International Monetary Fund, together they represent more than 64% of the net global wealth).
There has been an increase on duties for demerit goods, for example: a packet of 20 cigarettes will cost 35p more; while it will be 44p more for a packet of 30g of hand-rolled tobacco. This is another way of decreasing the amount of demerit goods consumed. This is an example of an increase in tax revenue, which the Government can use to pay back what they have borrowed or to pay their bill to the EU. This then has an effect on public sector net borrowing, this has been forecasted to decrease from 3.8% of GDP to 2.6% this year, and reaching 0.7% in 2022.
The government has announced that it is getting rid of the Class 2 National Insurance contributions (NICs) from April 2018. The self-employed also have access to the same pension scheme as employers. This leads to an increase in the main rate for the Class 4 NICs from 9% to 10% in April 2018 and to 11% in April 2019. This means that only self-employed individuals with profits above £16,250 will have to pay more NICs. This affects 5 million people (who are self-employed) and breaks the Tory’s manifesto promise of “no increase in National Insurance contributions” that was made during the elections of 2015.
These are just some examples of the key points that were written in the Budget 2017. There are many other changes (increases or decreases) in spending, for example: the additional £2 billion given to councils in England over the next 3 years for adult social care.
Monetary policy is the manipulation by the Bank of England’s monetary policy committee of monetary variables, such as interest rates, to control inflation and reach its objectives. The committee consists of 9 economists who meet every Thursday of every month. They have a target for CPI (Consumer Price Index) inflation, which is set by the chancellor of the exchequer of 2% ± 1%.
The committee have to consider different factors when making their decision:
o Domestic monetary developments
• Bank and building society lending figures
• High street consumer credit data
• UK share prices
• House prices
• Growth of money supply
o Exchange rate
o Demand and output figures
• Retail sales
• Consumer expenditure
• GDP figures
o Unemployment figures
So as house prices are just one factor that the economists consider when making their decisions, we can question how important it actually is. Across England, by February 2016, 64% of households own their home according to the Resolution Foundation. This has fallen to its lowest level in 30 years as the gap between earnings and property prices has increased creating a housing crisis. The proportion of people who own their own home has fallen across every part of the UK since their peak in the early 2000s. Although even though this figure has decreased, it is still over half. This means that households are very sensitive to changes in interest rates as it affects their disposable income. However, as Theresa May will announce as her second biggest housing pledge, to support people between the ages of 23 and 40 to buy their first home by helping 30 areas around the country to unlock land to build on; this will increase the sensitivity of interest rates on the housing market as more people will be affected. There are about 25 million homes in the UK, of which seven out of 10 are owner-occupied. The number of homeowners has risen by more than one million since 1997.
Although, it only affects those with tracker mortgages. Tracker mortgages are a type of variable rate mortgage which follows the base rate of interest set by the Bank of England plus a charge on top that would be pre-agreed for a set amount of time. For example, if your tracker mortgage is base rate plus 2%, and the base rate is 1%, you will pay 3%. If the base rate rises to 2%, you will pay 4%. As interest rates fall, discretionary income (income remaining after deduction of taxes) rises for those with tracker mortgages. This means those households start consuming more and as consumption is a component of aggregate demand [C + I +G + (X - M)], so aggregate demand shifts to the right.
Furthermore, as Bank of England increases interest rates, the demand for housing falls because of the decrease in the demand for mortgages. Banks’ supply of mortgage equity withdrawals begin to fall so consumers have less money so consumption decreases and aggregate demand shifts to the left. This is known as the wealth effect, which is when consumer spending is affected by a change in the value of an asset, in this case house prices.
However, we should consider whether the housing market is the most important factor that the Bank of England should consider?