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The Most Affected Sectors by COVID-19 and Production Networks
The Race Between Supply and Demand Transmission Channels
Bibliography The COVID-19 pandemic triggered one of the most severe economic contractions in modern history. Unlike the 2007–09 Global Financial Crisis, which originated endogenously within the financial sector through credit market failures and balance-sheet deterioration, the COVID-19 shock was exogenous in origin, arising from a public health emergency that then reverberated through the real economy via multiple, mutually reinforcing channels. The novelty and speed of transmission made it extraordinarily difficult for policymakers, firms, and households to anchor expectations, producing elevated uncertainty that itself became an independent source of economic damage.
The left-hand panel of this slide illustrates the sharp sell-off across major global equity indices in early 2020. The FTSE MIB (Italy) and FTSE 100 (UK) fell by approximately 30 per cent from their January 2020 levels by mid-March, while the S&P 500 (USA) declined by a similar magnitude before recovering. Notably, the Shanghai Composite (China) fell less steeply, partly reflecting earlier shock absorption and a faster initial lockdown. The right-hand panel tracks UK GDP as a percentage deviation from its pre-pandemic (February 2020) level, sourced from the ONS Monthly GDP series. The first national lockdown produced a contraction of approximately 25 per cent, an unprecedented peacetime fall. Crucially, subsequent lockdowns in autumn 2020 and winter 2020/21 generated far shallower declines, consistent with the hypothesis that households and firms adapted behaviour, shifting to remote working, online commerce, and other substitutes that partially insulated economic activity from the public health restrictions.Economic Intuition The diminishing severity of successive lockdowns illustrates learning and adaptation effects: firms reorganised production processes; consumers shifted to digital substitutes; and furlough schemes stabilised household incomes. This asymmetry matters for modelling: the first shock was largely unanticipated and therefore maximally disruptive, whereas later shocks were partially incorporated into expectations. Exam Insight If asked to compare the economic impact of successive lockdowns, emphasise adaptation mechanisms, the role of policy buffers (furlough, business loans), and the distinction between anticipated and unanticipated shocks. Reference the ONS GDP data as empirical support. Economic uncertainty is not merely a background condition during crises; it is an active contractionary force. The World Uncertainty Index (WUI), constructed by Ahir, Bloom, and Furceri (2018) on the basis of the frequency of the word "uncertain" and its variants in country-level Economist Intelligence Unit reports, demonstrates that COVID-19 produced the largest spike in global uncertainty ever recorded in the index's history, surpassing even the Global Financial Crisis, 9/11, and the Iraq War.
The left-hand chart shows the normalised WUI from 1990 to approximately 2022. The index was on a rising trend from 2016, driven by Brexit, US–China trade tensions, and US political risk, before spiking dramatically at the onset of COVID-19. The right-hand chart documents the consequences for a canonical durable good: Chinese car sales collapsed by 92 per cent in the first two weeks of February 2020 relative to the year-prior period. This is an extreme illustration of the precautionary savings motive and the irreversibility effect on durable goods spending.Theoretical Interpretation In standard permanent income models, a household facing an income shock will smooth consumption by drawing on savings or borrowing. However, durable goods purchases are inherently lumpy and reversible only at a cost. When uncertainty rises sharply, households with a high marginal propensity to consume (MPC) — typically those with limited liquid assets — respond by postponing large discretionary outlays such as vehicle purchases. This precautionary motive, formalised by Kimball (1990) and empirically studied by Carroll (1997), implies that uncertainty shocks can generate demand contractions that are disproportionately large relative to the underlying income loss. Common Mistake Do not conflate the precautionary savings motive with simple income effects. Even if expected income is unchanged, a mean-preserving spread in the income distribution (i.e. increased uncertainty with no change in the mean) is sufficient to trigger precautionary saving if households have prudent preferences (positive third derivative of the utility function). The pandemic shock was not uniformly distributed across sectors. It disproportionately affected contact-intensive services: industries where production requires physical proximity between producer and consumer and therefore cannot be relocated to remote or digital environments without fundamental restructuring.
The left panel of this slide shows year-on-year changes in restaurant reservations and walk-ins tracked via OpenTable data. From mid-February 2020, bookings in the United Kingdom, the United States, and globally collapsed towards zero by mid-March, with the UK reaching approximately a 100 per cent decline as lockdowns were imposed. The right panel reports the year-on-year change in US outbound flight bookings by region between 6 January and 8 March 2020. Asia Pacific bookings fell by 98.1 per cent, reflecting the earlier onset of the outbreak there, while bookings to Europe fell by 31.9 per cent. These figures underline the asymmetric geographic sequencing of the shock and the near-total shutdown of international aviation, a sector that itself generates significant upstream and downstream linkages across tourism, hospitality, and logistics networks.Economic Intuition The collapse in restaurant and travel data also illustrates why standard Keynesian demand-management tools face limitations in this type of crisis. A fiscal stimulus that puts money in consumers' pockets cannot easily restore demand for restaurant meals if the restaurants are legally closed or if consumers fear infection. The constraint here is not primarily a lack of purchasing power but a disruption to the feasibility of transacting. This is why some economists described the pandemic shock as a "wall between supply and demand." A central analytic lens for understanding the economics of COVID-19 is the concept of externalities: situations in which an individual's action imposes costs or confers benefits on third parties that are not reflected in market prices. The pandemic generated both negative and positive externalities simultaneously.
The right-hand satellite imagery from NASA/ESA Copernicus compares nitrogen dioxide (NO) concentrations over China in early January 2020 (pre-lockdown) versus mid-to-late February 2020 (during lockdown). The dramatic reduction in atmospheric pollution — a clear positive externality of the economic slowdown — is visible in the near-disappearance of the dense NO band that normally covers China's industrial and transport corridors. This provides striking visual evidence of the environmental externalities embedded in normal economic activity and, by implication, the social cost of production that markets typically fail to internalise.On the negative externality side: Contagion as a negative consumption externality: an individual who chooses not to self-isolate when infectious imposes a risk of illness on others. This is a textbook externality that justifies government intervention (mandated quarantines, social distancing rules, lockdowns). Healthcare crowding-out: non-COVID-19 patients may be displaced from intensive care capacity, so the social cost of infection extends beyond the direct victim. Congestion in delivery services: a surge in demand for online grocery and food delivery — driven by voluntary or mandated social distancing among high-risk groups — can create congestion externalities in logistics networks, raising prices and reducing service quality for all users. Theoretical Interpretation The public health economics literature models infection as a negative externality in the spirit of Pigou (1920). The socially optimal infection rate — accounting for the spillover cost imposed on others and on healthcare capacity — is lower than the privately optimal rate, justifying corrective intervention. The standard Pigouvian remedy is a tax or prohibition equivalent to the marginal external cost; in the context of a pandemic, this translates to lockdown mandates, mask requirements, or vaccination incentives. Exam Insight If an exam question asks you to apply externality theory to COVID-19, structure your answer around: (1) definition of the externality; (2) why the market fails to internalise it; (3) the divergence between private and social optimum; (4) the corrective policy (Pigouvian tax/regulation); and (5) real-world complications (enforcement, distributional consequences, uncertainty about the magnitude of external costs). Summary COVID-19 caused an unprecedented GDP contraction, deepest during the first lockdown; subsequent lockdowns had smaller impacts due to adaptation. Global stock markets fell sharply in early 2020, reflecting both fundamental reassessment of earnings and a surge in uncertainty. The WUI reached historically unprecedented levels, triggering precautionary savings and collapsing durable goods demand. Contact-intensive services (hospitality, aviation) were disproportionately affected. The pandemic created negative externalities (contagion, healthcare crowding-out) and positive externalities (pollution reduction), both of which are outside the market mechanism. Not all sectors suffered equally. According to the McKinsey Global Institute report of 9 March 2020, the industries facing the most severe and protracted disruption were: airlines; automobiles; energy equipment and services; hotels, restaurants, and leisure; and specialty retail. These sectors share several characteristics that made them acutely vulnerable: high labour-intensity in face-to-face settings; dependence on international supply chains; high fixed costs combined with near-zero revenue; and sensitivity to discretionary consumer spending.
This McKinsey matrix summarises the estimated global restart timeline and characteristics of disruption across six broad sectors. Tourism and hospitality faced the longest duration of impact, with recovery delayed to Q4 2020 at the earliest and potential for further negative demand shocks if the disease resurged. Aviation faced a similar timeline, with domestic travel recovering approximately twice as fast as international. The automotive sector faced compounding difficulties: pre-existing vulnerabilities (e.g., declining Chinese sales, US–China trade tensions) were amplified by supply chain disruptions and a sharp fall in consumer sentiment. The consumer electronics and semiconductor industry presented a more nuanced picture: the pandemic accelerated structural shifts towards digitalisation, with some product segments proving resilient or even experiencing increased demand, though supply chain disruptions in China created downstream bottlenecks for 5G rollout and high-tech manufacturing.Economic Intuition The key asymmetry in sectoral recovery timelines reflects the distinction between tradeable and non-tradeable goods and between discretionary and non-discretionary consumption. Non-tradeable services (a restaurant meal, a hotel stay) cannot be stored or imported; demand deferred is largely demand destroyed. Tradeable manufactured goods, by contrast, may see some pent-up demand release upon reopening, though this effect is partial and depends on the durability of the underlying good. The sectoral analysis above understates the true economy-wide impact of COVID-19 because it ignores input-output linkages through production networks. Modern economies are characterised by highly complex webs of vertical specialisation: each sector purchases intermediate inputs from supplier sectors and sells its output either to final consumers or to other industries as intermediate inputs.
This diagram illustrates the stylised production network for the automotive sector. The focal sector (automotive) sits at the centre. Downstream effects are shocks that propagate from upstream suppliers (e.g., steel producers, electricity producers) down through the supply chain to the automotive firm. Upstream effects are shocks that originate in downstream customer sectors (e.g., automobile dealers, car rental companies) and propagate backwards towards the focal sector and its suppliers. A productivity shock to the steel industry, for instance, constitutes a downstream effect on automotive: it raises intermediate input costs and constrains vehicle production. Conversely, a fall in government fleet procurement of vehicles constitutes an upstream demand shock that reverberates upstream to reduce orders placed by automotive firms on steel producers.A critical finding from the empirical production-networks literature (see Carvalho et al., 2021) is that spillover effects — both upstream and downstream — are quantitatively large relative to the "own" effect of a shock confined to the originating sector. This means that naive partial-equilibrium estimates of sector-specific COVID-19 damage substantially understate the general-equilibrium aggregate impact.Theoretical Interpretation The production network framework is formalised in the Leontief input-output model and its general-equilibrium extensions (Acemoglu et al., 2012). In these models, an exogenous productivity shock to sector affects sector by an amount proportional to the share of 's output that uses as an intermediate input (downstream effect) or to the share of 's output purchased by (upstream demand effect). The Leontief inverse matrix, , where is the matrix of input coefficients, captures the full system of direct and indirect propagation. The sum of elements in each column of this inverse gives the total output multiplier for a unit shock to final demand in that sector. Common Mistake Do not confuse upstream and downstream effects. Downstream effects travel FROM suppliers TO the focal sector (i.e., an input supply shock). Upstream effects travel FROM customers BACK TO the focal sector (i.e., a demand shock originating downstream). Summary COVID-19 disproportionately damaged contact-intensive, supply-chain-dependent, and discretionary-spending sectors: aviation, tourism, automotive, energy services. Recovery timelines varied by sector; domestic services recovered faster than international ones; electronics were partially shielded by digitalisation trends. Production networks amplify sectoral shocks: both downstream (supplier-to-firm) and upstream (customer-to-firm) spillovers are empirically large. Aggregate GDP impacts of COVID-19 substantially exceeded what simple sector-by-sector arithmetic would suggest, due to network amplification. A fundamental question in the economics of COVID-19 is whether the pandemic constituted primarily a supply shock or a demand shock. The answer matters enormously for policy: a pure supply shock, for instance, cannot be remedied by fiscal stimulus because the constraint on output is not insufficient demand but insufficient productive capacity. Conversely, a pure demand shock with idle capacity calls for expansionary policy to restore aggregate demand to its potential-output level. COVID-19, as the lecture demonstrates, was neither one nor the other, but rather an unprecedented simultaneous disruption to both sides of the economy, with strong complementary feedback loops between them.The lecture distinguishes between two types of sector-level shocks in empirical work: A supply shock, proxied by changes in sectoral Total Factor Productivity (TFP) A demand shock, captured by changes in sectoral government spending
At first glance, COVID-19 has the appearance of a supply shock. Quarantine requirements and social distancing mandates directly reduced labour supply by keeping workers away from their places of work. Global supply chains were disrupted as factories shut, ports reduced capacity, and logistics networks fragmented. In the standard AS-AD framework, this is modelled as a leftward shift of the Aggregate Supply curve from to : at any given price level, the economy can produce less output, shifting the equilibrium from to . The price level rises as a result, distinguishing a supply contraction from a demand contraction (which would reduce both output and prices simultaneously). However, the slide also notes that COVID-19 differed from previous supply shocks: The Great Recession of 2007–09 originated as a financial sector supply shock (credit market seizure, bank balance-sheet deterioration). Wars and natural disasters generate supply shocks through destruction of physical capital and permanent workforce losses. COVID-19's supply shock was distinctive in that it was: (a) temporary in anticipated duration; (b) policy-induced rather than arising from resource destruction; and (c) highly uncertain in its duration and ultimate magnitude.Economic Intuition A supply shock that reduces labour supply shifts AS leftward, raising P and reducing Q. Unlike a natural disaster, COVID-19 did not destroy capital stock — it rendered it temporarily inaccessible. This distinction has implications for recovery: once restrictions lifted, latent productive capacity could (in principle) be rapidly re-engaged, producing a V-shaped recovery in some sectors.
The initial supply shock was rapidly compounded by a series of demand-side contractions. The AS-AD diagram on this slide shows aggregate demand shifting leftward from to simultaneously with the supply contraction, pushing output further down to . The demand channels include: Uncertainty about the epidemiological trajectory: households and firms could not form reliable expectations about when restrictions would end, suppressing investment and consumption decisions. Uncertainty about the policy response: the scale and form of fiscal and monetary policy support was itself uncertain in the early weeks, reinforcing precautionary behaviour. Income losses among non-permanent workers: hospitality, retail, and manufacturing workers on zero-hours contracts or temporary employment had no income floor, directly reducing their consumption. Precautionary savings: even households that retained employment reduced consumption, raising their saving rate to buffer against potential future income losses. Firm-level investment postponement: capital expenditure was suspended as firms awaited clarity on the duration of the shock and faced liquidity constraints due to revenue collapse. Theoretical Interpretation In Keynesian theory, a fall in aggregate demand is self-reinforcing through the multiplier mechanism: a reduction in consumption lowers income, which further reduces consumption. COVID-19 amplified this standard multiplier by adding the uncertainty channel, which elevated precautionary savings and compressed the marginal propensity to consume out of current income. The combination of reduced income and elevated uncertainty thus produced demand contractions far exceeding what either channel alone would generate.
The interaction between supply and demand deterioration became mutually reinforcing, creating a feedback loop. This slide introduces the mechanism by which demand contraction feeds back into further supply contraction: Firms — particularly those more dependent on operating cash flows — faced a dual shock: revenues collapsed (due to demand contraction) while fixed obligations (rent, wages, debt service) remained. Liquidity-constrained firms were forced into bankruptcy, permanently removing productive capacity from the economy. This represents a demand-driven supply destruction: falling demand caused firm exits, which in turn contracted aggregate supply further (AS shifts further left from to ), compounding the output loss beyond what the initial supply or demand shock alone would have generated. The slide also draws an important distinction from war or natural disaster scenarios. In wartime, government expenditure typically surges (war production, reconstruction), pushing aggregate demand upward even as some supply is destroyed. This divergence means that wartime output contractions can be partially or fully offset by demand stimulus, and there is a risk of inflation. In the COVID-19 case, both supply and demand fell together, with the feedback loop making it qualitatively different from most historical macroeconomic crises.Economic Intuition Think of this as a spiral: reduced demand → firm revenue collapse → insolvencies → capacity destruction → further supply contraction → further demand contraction → deeper insolvencies. Each iteration amplifies the shock. The social planner's role in interrupting this spiral is the economic rationale for emergency furlough schemes (which maintain household income and thus demand) and business interruption loans (which relieve cash-flow stress and prevent unnecessary firm exit).
A further demand feedback loop operates through the labour market. Workers who lose jobs due to business closures lose their income entirely and therefore reduce consumption, further depressing aggregate demand. This shifts from to . The AS-AD diagram on this slide illustrates how equilibrium output is progressively driven down to through successive rounds of supply and demand deterioration. This is analogous to the Keynesian multiplier process but amplified by the supply-side feedbacks described above.
This slide synthesises the entire dynamic sequence into a single conceptual framework. The COVID-19 virus is characterised not merely as a large shock to real economic fundamentals, but as a shock to the frictionlessness of the market: it introduced a "wall between demand and supply" — a structural impediment to the matching of willing buyers and willing sellers that would ordinarily occur in a well-functioning market. The red shaded area in the diagram represents the cumulative destruction of economic surplus as supply and demand spiral downward through multiple rounds of feedback. This wedge between what producers could supply and what consumers could demand — under normal market conditions — represents the core economic harm of the pandemic.Theoretical Interpretation The "wall between demand and supply" framing resonates with the theory of search and matching frictions (Diamond, Mortensen, Pissarides). In normal times, market frictions are present but limited. COVID-19 dramatically increased these frictions — physical distancing made it literally impossible for buyers and sellers to meet in many markets. The result is that transactions that would have been mutually beneficial at prevailing prices simply could not occur, generating a deadweight loss that is fundamentally different from the price-driven welfare losses analysed in standard competitive market failure models. Exam Insight The supply-demand spiral is a high-value analytical framework. In essays or short answers, walk through the stages clearly: (1) initial supply shock (AS shifts left); (2) demand effects emerge (AD shifts left); (3) demand contraction feeds back into supply via firm insolvencies (AS shifts further left); (4) further demand feedback via job losses and income effects. Conclude by noting that COVID-19 is distinct from prior crises in that BOTH sides of the economy deteriorated simultaneously and interactively.
An IGM (Initiative on Global Markets) poll of leading economists — from both the European and US IGM panels — was conducted on the question of whether the demand effects of COVID-19 would dominate the supply effects. The statement polled was: "The economic effects of COVID-19 coming from reduced spending will be larger than those coming from disruptions to supply chains and illness-related workforce reductions." Among the European panel, 47 per cent agreed or strongly agreed, while 41 per cent expressed uncertainty. Among the US panel, 44 per cent agreed, while 52 per cent were uncertain. A very small minority disagreed. This expert consensus — weighted toward agreement but with substantial residual uncertainty — is consistent with the theoretical analysis above, which identifies demand contraction (through precautionary savings, income loss, and uncertainty) as the primary driver of the output decline, even though supply disruptions were the initial trigger.Expert surveys suggest that demand effects were expected to dominate supply effects over the course of the COVID-19 recession, consistent with the empirical literature on financial crises and uncertainty shocks.Summary COVID-19 began as a supply shock (labour supply reduction, supply chain disruption) but rapidly generated simultaneous demand contraction (uncertainty, income loss, precautionary savings, investment postponement). Supply and demand deterioration interacted via two feedback loops: (a) demand collapse causing firm insolvencies and supply destruction; (b) job losses reducing household income and further depressing demand. The pandemic is best understood as a shock to market frictionlessness rather than a conventional shock to fundamentals. The cumulative welfare loss — the "red wedge" — represents surplus destroyed by the spiral of mutually reinforcing contractions. Expert opinion, as captured by the IGM poll, broadly favoured the view that demand effects would dominate supply effects in magnitude, though with significant uncertainty. Acemoglu, D., Carvalho, V.M., Ozdaglar, A. and Tahbaz-Salehi, A. (2012) 'The network origins of aggregate fluctuations', Econometrica, 80(5), pp. 1977–2016.
Ahir, H., Bloom, N. and Furceri, D. (2018) 'World Uncertainty Index', Stanford mimeo. Available at: https://worlduncertaintyindex.com (Accessed: [date]).Barrett, P. et al. (2021) 'After-effects of the COVID-19 pandemic: Prospects for medium-term economic damage', Chapter 2 in World Economic Outlook, April 2021. Washington, D.C.: International Monetary Fund.Brien, P. et al. (2022) 'Economic impact of COVID-19 lockdowns', House of Commons Library Research Briefing. London: House of Commons Library.Carroll, C.D. (1997) 'Buffer-stock saving and the life cycle/permanent income hypothesis', Quarterly Journal of Economics, 112(1), pp. 1–55.Carvalho, V.M. et al. (2021) 'Supply chain disruptions: Evidence from the Great East Japan Earthquake', Quarterly Journal of Economics, 136(2), pp. 1255–1321.Diamond, P.A. (1982) 'Aggregate demand management in search equilibrium', Journal of Political Economy, 90(5), pp. 881–894.Kimball, M.S. (1990) 'Precautionary saving in the small and in the large', Econometrica, 58(1), pp. 53–73.McKinsey Global Institute (2020) COVID-19: Implications for Business. McKinsey & Company, 9 March 2020.Office for National Statistics (ONS) (2022) Monthly GDP, UK: February 2020 to July 2022. Newport: ONS.Pigou, A.C. (1920) The Economics of Welfare. London: Macmillan.]]>econ1016_currenteconissues/econ1016_notes/5-mohamed-zahran/lecture-19-covid-19's-economic-damage-i.htmlECON1016_CurrentEconIssues/ECON1016_notes/5- Mohamed Zahran/Lecture 19 - COVID-19's Economic Damage I.mdTue, 28 Apr 2026 15:15:47 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lec_3/slide4.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lec_3/slide21.htmlECON1016_CurrentEconIssues/ECON1016_images/lec_3/Slide21.pngTue, 28 Apr 2026 15:11:24 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lec_3/slide21.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lec_3/slide20.htmlECON1016_CurrentEconIssues/ECON1016_images/lec_3/Slide20.pngTue, 28 Apr 2026 15:11:24 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lec_3/slide20.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lec_3/slide19.htmlECON1016_CurrentEconIssues/ECON1016_images/lec_3/Slide19.pngTue, 28 Apr 2026 15:11:24 GMT<figure><img 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The Benefits of a Single Currency
2. The Costs of a Single Currency
3. Optimum Currency Area Theory
4. Is Europe an Optimum Currency Area?
5. Fiscal Policy and Common Currency Areas (Optional)
BibliographyThe adoption of a common currency across a group of nations eliminates the frictions that arise from conducting trade in multiple denominations. From a welfare-economics perspective, these frictions are not trivially small: they represent real deadweight losses — allocative inefficiencies that reduce total societal surplus without benefiting any party.Every currency conversion entails a cost: bank spreads, broker fees, and administrative overhead. At the macroeconomic scale, these costs aggregate into a significant drag on trade volumes and efficiency. When a single currency replaces multiple national currencies, this friction disappears entirely for intra-union transactions. The gain is not merely distributional — it is a net welfare improvement, since resources previously spent on conversion are freed for productive uses.Economic Intuition Think of currency conversion like a toll on a motorway. Even if the toll is small per journey, the cumulative cost across millions of transactions is enormous. Abolishing the toll does not just redistribute money — it reduces the total resources wasted, increasing aggregate efficiency. Where separate currencies exist, firms can charge different prices across national markets with relative ease, since consumers cannot straightforwardly compare prices denominated in different units. A common currency makes prices directly and transparently comparable across borders, which undermines the informational preconditions for third-degree price discrimination. Since price discrimination generates deadweight loss by excluding consumers whose willingness to pay lies below the discriminatory price but above marginal cost, its reduction is welfare-improving.Exchange rate volatility imposes a particular burden on businesses engaged in cross-border trade. A firm that invoices in a foreign currency faces the risk that the value of those receipts, when converted to the domestic currency, may be substantially different from what was anticipated at the time of contracting.Firms can hedge this risk through forward foreign exchange contracts, which lock in a predetermined exchange rate for a future date. However, these instruments are not costless: they require the payment of a premium and involve counterparty risk. This hedging cost is itself a form of deadweight loss — it is a real resource expenditure that generates no output, but merely redistributes risk.Common Mistake Students sometimes argue that exchange rate uncertainty is "not a real problem because firms can hedge." This misses the point: hedging has a cost. The very existence of hedging costs means there is a welfare gain to be had from eliminating the underlying uncertainty altogether. Furthermore, beyond short-run hedging, the elimination of exchange rate fluctuations materially reduces uncertainty for long-term investment planning. A firm considering building a factory abroad must make projections over a decade or more; even modest annual exchange rate volatility, compounded over many years, can make the expected return on such an investment highly uncertain. A single currency removes this source of risk entirely, thereby encouraging deeper cross-border investment and capital allocation efficiency.Key Takeaways — Benefits Currency conversion imposes a deadweight loss that a common currency eliminates. Price discrimination across borders becomes harder under a common currency, improving consumer welfare. Eliminating exchange rate risk removes the need for costly hedging and encourages long-term investment. All three benefits ultimately stem from reducing frictions in cross-border economic activity. The benefits described above are real, but they must be weighed against the principal macroeconomic cost of monetary union: the loss of monetary sovereignty. A country that joins a currency union surrenders two distinct but related policy instruments.Once a country adopts a common currency, it cedes the ability to set its own interest rate. Monetary policy is transferred to the supranational central bank — in the European case, the European Central Bank (ECB). The ECB sets a single interest rate for the entire currency area, calibrated to area-wide conditions. A country experiencing a recession that would ordinarily call for a rate cut cannot obtain one if other members of the union are experiencing inflationary pressure and calling for a rate rise.Under flexible exchange rates, the exchange rate acts as an automatic stabiliser for the macroeconomy. A negative demand shock that reduces output and employment will tend to depreciate the domestic currency (as capital flows decline and import demand falls), which in turn boosts the competitiveness of domestic exports and stimulates aggregate demand. Inside a currency union, this adjustment channel is foreclosed entirely.The gravity of this loss depends critically on whether shocks affecting member economies are symmetric (hitting all members in the same direction and magnitude) or asymmetric (affecting members differently). If shocks are largely symmetric, the loss of an independent exchange rate matters little — a common monetary policy response is appropriate for all members simultaneously. The problem arises acutely when shocks are asymmetric.Consider the canonical example from the lecture: suppose a shift in consumer preferences occurs away from German goods and towards French goods. This is a textbook asymmetric shock. The aggregate demand curve shifts leftward in Germany (output falls, unemployment rises, downward pressure on prices) and rightward in France (output rises, unemployment falls, upward inflationary pressure).
This diagram illustrates the divergent macroeconomic outcomes arising from an asymmetric preference shock. The German economy moves from equilibrium towards as AD shifts left, with falling output () and downward price pressure. France simultaneously moves from towards as AD shifts right, with rising output and prices. Without policy intervention, the long-run self-correcting mechanism — wages and prices falling in Germany (shifting SRAS rightward to restore equilibrium at ) — eventually restores full employment, but this process is slow and painful. The French economy adjusts symmetrically in reverse.Theoretical Interpretation The long-run self-correction mechanism relies on nominal wage and price flexibility. If wages fall sufficiently in Germany, the SRAS curve shifts rightward, eventually restoring output to its natural rate. This is the classical adjustment channel. In a world of sticky wages — highly relevant empirically for European labour markets — this process is protracted, implying sustained unemployment in the negatively shocked country. Under separate currencies with flexible exchange rates, the asymmetric shock would be partially offset by exchange rate movements, as shown in the following diagram.
Here, the depreciation of the German currency following the negative demand shock shifts back rightward (towards ) by making German exports cheaper and French imports more expensive for German consumers. Simultaneously, the appreciation of the French currency (or equivalently, the depreciation of the German currency relative to it) moderates the French AD boom. The exchange rate acts as a shock absorber, limiting the divergence in output and employment across the two countries.Inside a currency union, this mechanism is entirely unavailable. The ECB faces an impossible task: Germany's policymakers want interest rate cuts to stimulate aggregate demand, whilst France's policymakers want rate rises to contain inflation. The single monetary policy instrument cannot simultaneously satisfy these divergent needs. Currency union therefore imposes a structural constraint that a "one size fits all" monetary policy cannot resolve when shocks are asymmetric.Exam Insight When asked to evaluate the costs of a common currency, structure your answer around (1) loss of monetary policy independence, (2) loss of the exchange rate adjustment mechanism, and (3) the asymmetric shock problem. Use the Germany–France example to illustrate all three. Always note that costs are higher when shocks are asymmetric AND when wage/price flexibility and labour mobility are low. The theoretical mechanism described above is not merely a textbook abstraction. The lecture highlights three major episodes in which asymmetric shocks hit the eurozone whilst exchange rate adjustment was unavailable: The Great Financial Crisis (2008–09) imposed very different severity of recession across eurozone members. Southern European countries — already suffering from competitiveness problems — bore the brunt of the crisis without the ability to depreciate. The COVID-19 Pandemic affected service-sector-dependent economies (such as Spain, Italy, and Greece) more severely than manufacturing-export-led economies (such as Germany), generating asymmetric fiscal and output pressures. The Ukraine conflict and associated energy price shock hit energy-importing economies far harder than those with diversified energy supply, again generating asymmetric macroeconomic pressure within the eurozone. Common Mistake Do not assume that asymmetric shocks are rare or unusual. The lecture explicitly flags the GFC, the pandemic, and the Ukraine conflict as recent examples. Examiners may ask you to evaluate whether Europe is well-suited to monetary union in light of these episodes — always engage with real-world evidence. Key Takeaways — Costs A currency union member loses both independent monetary policy and exchange rate adjustment. This matters most when shocks are asymmetric — affecting member economies differently. The asymmetric shock problem transmits directly into policy disagreement within the union's central bank. Real-world episodes — GFC, pandemic, Ukraine conflict — demonstrate that asymmetric shocks are recurrent, not hypothetical. Definition An Optimum Currency Area (OCA) is a group of countries for which it is welfare-maximising to adopt a single common currency and form a currency union — that is, a geographic area over which the benefits of a common currency outweigh the costs. OCA theory, originating in the work of Robert Mundell (1961) and extended by McKinnon (1963) and Kenen (1969), provides a systematic framework for evaluating when the benefits of monetary union outweigh the costs. The central analytical question is: what structural characteristics of a group of countries determine whether the net welfare effect of forming a currency union is positive?The costs identified in Section 2 are not fixed — they depend on the structural features of member economies. Several characteristics reduce the magnitude of these costs.Real Wage and Price Flexibility. Since the trade-off between unemployment and inflation is a short-run phenomenon only (the long-run Phillips curve is vertical at the natural rate), an economy that adjusts rapidly to long-run equilibrium suffers relatively little from the loss of monetary policy. High real wage flexibility means that wages fall quickly in response to unemployment, shifting SRAS rightward and restoring full employment without requiring a monetary or exchange rate response. The greater the degree of price and wage flexibility, the shorter the duration of any unemployment spell following an asymmetric shock, and the lower the "asymmetry cost" of currency union membership.Labour Mobility. An alternative adjustment mechanism is factor mobility. If workers can freely and costlessly migrate between member countries, then labour will flow from the negatively shocked country (where unemployment is high and real wages are depressed) to the positively shocked country (where labour is scarce and wages are high). In the Germany–France example, emigration of German workers to France would simultaneously reduce German unemployment and ease French inflationary pressure, performing the adjustment that the exchange rate would have achieved under flexible rates. Mundell's original OCA theory stressed labour mobility as the primary criterion precisely for this reason.Similarity of Economic Structure. If member countries have similar industrial compositions, global sectoral shocks will hit all members more symmetrically. A shock to the automobile industry, for instance, will have approximately equal first-round effects on Germany, France, and Italy if all three have comparably sized automotive sectors. Structural similarity therefore reduces the frequency and severity of asymmetric shocks, lowering the expected cost of currency union ex ante.Capital Mobility. Where capital flows freely across borders, a country experiencing a temporary recession can borrow from residents of booming member states to smooth consumption, without requiring a rise in domestic interest rates. This mechanism provides consumption smoothing without any active monetary or fiscal intervention, and is closely related to the broader concept of international risk-sharing.Theoretical Interpretation OCA theory is fundamentally a cost-benefit framework. The costs of a currency union are proportional to (a) the frequency and severity of asymmetric shocks and (b) the slowness of adjustment to those shocks. Each of the four criteria above reduces one or both of these factors. Wage flexibility and labour mobility speed up adjustment; structural similarity reduces the asymmetry of shocks; capital mobility provides a risk-sharing buffer that reduces the welfare cost of any given output fluctuation. Trade Integration. The benefits of a common currency — reduced transaction costs, reduced exchange rate volatility, and reduced price discrimination — are all proportional to the volume of trade conducted between potential union members. A high degree of trade integration amplifies all three benefit channels. Intra-European trade accounts for a substantial share of the total trade of EU member states, suggesting that the transaction cost and exchange rate stability benefits of the euro are non-trivial.Economic Intuition The benefits of a common currency scale with trade volumes. Two countries that barely trade with each other gain almost nothing from adopting a common currency, but bear the full costs of losing monetary sovereignty. For two countries with very high bilateral trade intensity, the same trade-off looks far more favourable. Key Takeaways — OCA Criteria Cost-reducing characteristics: High real wage and price flexibility (speeds adjustment to long-run equilibrium) High labour mobility (substitutes for exchange rate adjustment) Structural similarity (reduces asymmetry of shocks) High capital mobility (enables cross-border consumption smoothing) Benefit-increasing characteristics: High trade integration (amplifies all benefit channels) The question of whether the eurozone constitutes an OCA is one of the most contested empirical questions in international macroeconomics. The answer, as the lecture explicitly acknowledges, is ambiguous.Arguments that Europe approaches an OCA: There is substantial intra-European trade. EU member states conduct a large proportion of their total trade with other EU members, implying significant potential gains from reduced transaction costs and exchange rate stability. This trade integration criterion is broadly satisfied. Capital is highly mobile within the EU's single market, providing some degree of cross-border risk sharing. Arguments that Europe falls short of an OCA: Labour and wage flexibility are comparatively low in EU member states, particularly relative to the United States. European labour markets are characterised by strong employment protection legislation, collective bargaining structures that slow wage adjustment, and linguistic, cultural, and institutional barriers to cross-border worker migration. These features mean that the self-correcting mechanism following an asymmetric shock operates slowly and painfully. The structural heterogeneity of EU economies is substantial: Germany's export-led manufacturing economy is structurally very different from the service- and tourism-dependent economies of Southern Europe. This implies that a wide range of shocks will hit member states asymmetrically. The historical experience of Southern European countries within the eurozone illustrates the costs in stark terms. Countries such as Greece, Spain, Portugal, and Italy, having lost the ability to depreciate their exchange rates against Germany and Northern Europe, have faced protracted periods of wage deflation and high unemployment as the only available internal adjustment mechanism. The Great Financial Crisis exposed this structural vulnerability most acutely, with Greek GDP falling by approximately 25 per cent between 2008 and 2013 — a contraction without a corresponding currency depreciation to offset the loss of competitiveness. More structurally, Southern European economies have chronically lower productivity growth than their Northern counterparts, implying that their real exchange rates (relative to Germany) have persistently appreciated within the eurozone, eroding competitiveness in a way that cannot be corrected by nominal depreciation. Exam Insight A common essay prompt is: "Evaluate whether the eurozone is an optimum currency area." The expected structure is: (1) define OCA and state the criteria; (2) assess Europe against each criterion (trade integration — broadly satisfied; labour mobility and wage flexibility — not satisfied; structural similarity — mixed; capital mobility — broadly satisfied); (3) use real-world evidence (GFC, sovereign debt crisis, pandemic) to support the assessment of costs; (4) reach a balanced conclusion noting that the answer is genuinely ambiguous. Avoid asserting a definitive yes or no — the examiners reward nuance. Key Takeaways — Is Europe an OCA? Trade integration: broadly satisfied — supports the case for the euro. Labour mobility and wage flexibility: weak — the primary argument against the eurozone satisfying OCA criteria. Structural similarity: mixed — Northern and Southern European economies remain structurally heterogeneous. Real-world verdict: the eurozone imposes significant costs on members during asymmetric shocks, as the GFC and subsequent sovereign debt crisis demonstrated. Whether it is an OCA on balance remains contested. Although monetary union forecloses independent monetary policy, member states initially retain control over their fiscal policies (tax and spending decisions). This raises the question of whether fiscal policy can serve as a substitute stabilisation instrument, and whether fiscal governance arrangements at the union level are adequate.In the presence of an asymmetric shock, a country that can no longer cut interest rates or depreciate its currency may instead increase government spending or cut taxes to stimulate aggregate demand. This is the national fiscal policy response. However, this approach has limitations: it may conflict with existing deficit rules (such as the Stability and Growth Pact in the EU), it increases national debt, and it does not address the underlying competitiveness problem.Fiscal federalism refers to a system in which a common fiscal budget operates at the union level, with automatic or discretionary transfers flowing from high-income or booming regions to low-income or recession-affected regions. This is the system that operates within national federations such as the United States and the United Kingdom. When Texas experiences an oil-sector recession, federal tax revenues automatically fall in Texas while federal transfers (unemployment benefits, healthcare, etc.) automatically rise — the federal budget acts as a supranational automatic stabiliser.The EU currently lacks a fiscal union of meaningful scale. The EU budget is small relative to member-state GDPs, and there is no system of automatic fiscal transfers comparable to those within federal nation-states. This is widely regarded as a significant institutional gap in the eurozone's architecture.Theoretical Interpretation Fiscal federalism can be understood as a mechanism for internalising the externalities of asymmetric shocks within a currency union. Without fiscal transfers, the full burden of adjustment falls on the affected country's labour market and domestic fiscal policy. With fiscal transfers, the burden is shared across the union, reducing the welfare cost imposed on any single member. This is precisely how adjustment works within national economies — the fiscal system automatically redistributes across regions — and its absence at the European level is a structural weakness. When countries retain independent fiscal policies within a currency union, a significant free rider problem emerges. A member state that issues large quantities of government debt benefits from an implicit guarantee from solvent partner countries: financial markets perceive that other members will not allow a fellow union member to default (the "too big to fail" logic applied to sovereign debt). This implicit guarantee allows the profligate country to borrow at lower interest rates than it could obtain outside the union. The cost — in the form of slightly higher borrowing costs for the union as a whole — is dispersed across all members.Economic Intuition If a student with a history of late loan repayments joins a study group with a student who always repays on time, a lender who cannot distinguish them perfectly may offer both students terms influenced by the more reliable borrower's track record. The unreliable borrower benefits from the association; the reliable borrower's "credit reputation" has been partially expropriated. This mechanism provides a strong economic argument for either fiscal federalism (with centralised control and democratic accountability for union-wide fiscal decisions) or strict fiscal rules (such as debt and deficit limits) that constrain national fiscal autonomy. The EU's Stability and Growth Pact represents an attempt at the latter approach, though its enforcement has been inconsistent in practice.The COVID-19 pandemic illustrated these tensions vividly. Italy accumulated very large additional public debts to finance pandemic support, raising questions about the sustainability of Italian public finances and the extent to which other eurozone members bore implicit risk from this borrowing.Exam Insight If asked about fiscal policy and currency unions, always distinguish between (1) the use of national fiscal policy as a substitute for lost monetary policy — limited by rules and debt sustainability concerns; (2) fiscal federalism as an alternative architecture — provides automatic stabilisation but requires political agreement and cross-border transfers; and (3) the free rider problem — explains why independent national fiscal policy within a currency union creates negative externalities for partner states. The debate about fiscal union in the EU is explicitly flagged in the lecture as "ongoing." Key Takeaways — Fiscal Policy and Common Currency Areas Monetary union removes interest rate and exchange rate policy; national fiscal policy partially substitutes but is constrained. Fiscal federalism (a common budget with automatic transfers) would provide genuine stabilisation but does not currently exist at the EU level. Independent national fiscal policy within a currency union creates a free rider problem: profligate members borrow at subsidised rates at the expense of fiscally responsible members. This creates a strong argument for either fiscal union or strict fiscal rules — the EU has attempted the latter with mixed success. Mankiw, N.G. and Taylor, M.P. (2020) Economics. 5th edn. Andover: Cengage Learning EMEA.Mundell, R.A. (1961) 'A theory of optimum currency areas', American Economic Review, 51(4), pp. 657–665.McKinnon, R.I. (1963) 'Optimum currency areas', American Economic Review, 53(4), pp. 717–725.Kenen, P.B. (1969) 'The theory of optimum currency areas: an eclectic view', in Mundell, R.A. and Swoboda, A.K. (eds) Monetary Problems of the International Economy. Chicago: University of Chicago Press, pp. 41–60.De Grauwe, P. (2018) Economics of Monetary Union. 12th edn. Oxford: Oxford University Press.Krugman, P., Obstfeld, M. and Melitz, M. (2018) International Economics: Theory and Policy. 11th edn. Harlow: Pearson Education.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-18-common-currency-areas,-brexit-and-the-euro.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 18 - Common Currency Areas, Brexit and the Euro.mdTue, 28 Apr 2026 12:08:41 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week10_1_01/slide10.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week10_1_01/slide27.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week10_1_01/Slide27.pngTue, 28 Apr 2026 12:04:45 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week10_1_01/slide27.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week10_1_01/slide26.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week10_1_01/Slide26.pngTue, 28 Apr 2026 12:04:45 GMT<figure><img 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The vertical LRAS reflects the classical dichotomy in the long run: real output is determined by factor endowments, technology and institutions, not by nominal variables. The upward-sloping SRAS reflects nominal rigidities, sticky wages, or imperfect information that allow output to deviate from when the price level surprises agents. Long-run equilibrium is therefore the point at which there are no surprises and no nominal frictions bite.Definition Long-run equilibrium: a configuration in which and , so that AD, SRAS and LRAS all pass through the same point. The economy has no inflationary or recessionary gap. A leftward shift of the AD curve, triggered by a wave of pessimism, a stock-market collapse, a fall in foreign demand, or a monetary tightening, produces a demand-driven contraction. In the short run output falls below and the price level falls. Over time, expected prices adjust downwards, the SRAS curve shifts rightwards, and the economy converges back to natural output but at a permanently lower price level.
The figure depicts the canonical three-stage adjustment. The economy begins at A on the LRAS, AD shifts from to and the economy slides down to point B at output and price level . As workers and firms revise expectations downwards, shifts right to and the economy reaches its new long-run equilibrium at C, where output has fully recovered to but the price level is now permanently lower at . The slide therefore captures both the short-run cost of a demand shock (lost output, higher unemployment) and the long-run neutrality property whereby real variables eventually revert to their natural levels.Economic Intuition The movement from A to B is not a shift of SRAS but a movement along it. The crucial reason is that in the short run. Workers who negotiated nominal wages on the basis of higher expected prices now face higher real wages, so firms cut employment and output. Only once expectations adjust does the SRAS shift and full employment reassert itself. Common Mistake Do not confuse a movement along SRAS with a shift of SRAS. The initial response to an AD shock is a slide along the existing SRAS curve. The shift of SRAS is the slow, expectations-driven adjustment that restores the natural rate. A demand-driven contraction is inherently deflationary: prices fall (or rise more slowly) and output falls. This co-movement of prices and quantities is the diagnostic signature of a demand shock and contrasts sharply with the supply-driven case below. In policy terms, deflation combined with falling output makes the case for stimulus particularly compelling because there is no inflation-output trade-off to navigate.Exam Insight When asked to identify whether a recession was demand-driven or supply-driven, examine the price level. Demand recessions exhibit falling output and falling prices; supply recessions exhibit falling output and rising prices. This is the cleanest empirical fingerprint. A leftward shift in SRAS, caused by a sudden rise in production costs (such as an oil price shock) or an upward revision of price expectations, produces an aggregate supply driven contraction. Output falls while the price level rises, a combination known as stagflation. With time, if the underlying cost shock is transitory, SRAS will return to its original position and the economy will revert to as prices unwind.Theoretical Interpretation Stagflation was a major theoretical challenge in the 1970s because the simple Phillips Curve, which posited a stable inverse relationship between inflation and unemployment, could not accommodate simultaneously rising prices and unemployment. Friedman and Phelps's expectations-augmented Phillips Curve resolved the puzzle by introducing explicitly. A supply shock raises both unemployment (output below natural) and inflation (prices above expectations), severing the simple trade-off. Economic Intuition Supply shocks are particularly painful because they confront policymakers with a dilemma. Stimulating demand to fight unemployment worsens inflation; tightening to fight inflation worsens unemployment. There is no policy lever that simultaneously addresses both arms of stagflation in the short run. The 1970s oil crises are the textbook case of supply-driven contractions, with OPEC-induced increases in crude prices feeding through to producer costs across the industrialised world. By contrast, supply-driven expansions are harder to identify, but the IT-driven productivity boom of the 1990s is a plausible candidate, since rapid technological progress in computing arguably shifted SRAS (and indeed LRAS) outwards.The interwar Great Depression provides the canonical demand-driven contraction: real GDP fell by roughly 27%, unemployment rose from 3% to 25%, prices fell by 22%, and the money supply contracted by 28%. The simultaneous fall in output and prices is the hallmark of a demand collapse, and the monetary contraction (associated by Friedman and Schwartz with the Federal Reserve's failure to act as lender of last resort) is widely regarded as the principal cause. Conversely, the early 1940s wartime expansion shows the symmetric case: a positive demand shock from military expenditure drove unemployment from 17% to 1% with prices rising 20%.A central policy question is whether to "accommodate" an adverse supply shock by shifting AD rightwards. The trade-off is sharp: accommodation prevents the short-run drop in output but locks in a permanently higher price level.
The slide formalises the choice. Following the leftward shift of SRAS from to , doing nothing would produce stagflation at the new short-run intersection but eventual reversion to . By instead shifting AD from to , the policymaker moves the economy from A to C, holding output at throughout but raising the price level permanently from to . The diagram thus visualises the classic output-inflation trade-off in supply shock accommodation.Theoretical Interpretation Accommodation is controversial because of credibility. If a central bank with an inflation target accommodates supply shocks, agents may rationally infer that the target is soft, embedding higher inflation expectations and shifting the SRAS leftwards persistently. This is why modern inflation-targeting frameworks tend to "look through" temporary supply shocks rather than accommodate them. The 1970s experience taught policymakers that repeated accommodation can entrench stagflationary expectations. Exam Insight A clean essay on supply shocks should articulate three points: (i) the short-run stagflationary outcome, (ii) the long-run self-correction via expectations, and (iii) the accommodation trade-off between output stabilisation and permanent price-level increases. Mention credibility and expectational anchoring to score the highest marks. Monetary policy is the first instrument by which AD can be shifted. An expansion in the money supply lowers the equilibrium nominal interest rate, which (since the interest rate is the cost of borrowing) raises investment demand, durable consumption and interest-sensitive expenditures. The result is a rightward shift of the AD curve at any given price level.

Panel (a) shows the money market: the Bank of England shifts money supply from to , and the equilibrium interest rate falls from to . Panel (b) translates this into the goods market: at a given price level , the lower borrowing cost stimulates output demand from to , shifting AD from to . The two panels together capture the monetary transmission mechanism through the interest rate channel, and operationalise Keynes's "theory of liquidity preference" within the AD-AS framework.Economic Intuition Think of money supply expansion as flooding the bond market: the central bank buys bonds, their price rises, their yield (the interest rate) falls, and lower yields make every interest-sensitive expenditure more attractive. Consumption of cars and houses rises, firms invest more, and the currency tends to depreciate, boosting net exports. All three channels expand AD. In practice central banks rarely target a quantity of money. They set a policy interest rate (the repo rate, refinancing rate, or discount rate) and conduct open market operations (OMOs) of whatever size is needed to enforce that target. Economically, however, the two operating procedures are isomorphic: setting an interest rate target endogenously determines the money supply, and vice versa.Theoretical Interpretation The choice between targeting the money supply or the interest rate is a Poole (1970) problem. If shocks predominantly hit the money market (LM curve), interest rate targeting is more stabilising. If shocks predominantly hit the goods market (IS curve), money supply targeting performs better. Most modern central banks have settled on interest-rate targeting because money demand has proven empirically unstable, making monetary aggregates unreliable instruments. Summary Expansionary monetary policy: shifts right. Contractionary monetary policy: shifts left. In practice central banks set directly via OMOs; the two instruments are equivalent. Fiscal policy operates through changes in government spending and taxation. Expansionary fiscal policy (higher or lower ) shifts AD rightwards; contractionary policy shifts AD leftwards. Crucially, the magnitude of the AD shift relative to the initial fiscal impulse depends on the balance of two opposing forces: the multiplier effect and the crowding-out effect.A £20 billion increase in government purchases initially shifts AD rightwards by £20 billion. The recipients of this expenditure (workers, contractors, firms) experience an income gain and spend a fraction of it, generating second-round consumption. Firms anticipating stronger demand may raise investment (the investment accelerator). Each round adds to AD, producing a total shift larger than the initial £20 billion.
The figure shows the cumulative effect. The initial shift to reflects the direct expenditure effect of £20 billion. The further shift to captures the induced consumption and investment responses. The horizontal gap between and is therefore strictly greater than £20 billion, and the ratio is the spending multiplier.The simplest closed-economy multiplier is , where is the marginal propensity to consume. The intuition is geometric: if MPC is 0.75, then 75% of every income gain is respent, generating an infinite geometric series that sums to .Economic Intuition The multiplier is larger when the recipients of fiscal expansion are liquidity-constrained households with MPC near 1. This is why targeted transfers to low-income households or unemployment benefits typically have higher multipliers than tax cuts for high-income earners, who tend to save a larger fraction of windfall income. Definition Marginal propensity to consume (MPC): the fraction of an additional unit of disposable income that a household spends rather than saves. Higher MPC implies larger spending multipliers. Common Mistake Do not assume the multiplier applies only to fiscal policy. Any autonomous £1 increase in , or for non-fiscal reasons (such as a confidence boost) will likewise be amplified through the same induced-spending mechanism. The countervailing force is crowding out. As government spending raises aggregate income, money demand rises (transactions demand for money is income-elastic). With a fixed money supply, this drives up the equilibrium interest rate, which depresses private investment and partially offsets the initial fiscal stimulus.
Panel (a) shows the money market response: money demand shifts from to , raising the equilibrium rate from to . Panel (b) shows the AD response: the initial fiscal impulse shifts AD from to , but the induced rise in interest rates depresses interest-sensitive spending and pulls AD back to . The net rightward shift is therefore less than the initial £20 billion, in contrast to the multiplier-only case.Theoretical Interpretation The strength of crowding out depends on the slopes of the IS and LM curves and on whether monetary policy "accommodates" the fiscal expansion. If the central bank holds the interest rate constant (perfectly elastic LM, as at the zero lower bound), there is no crowding out and the full multiplier applies. If LM is steep and the economy is near full employment, crowding out can be near-total. This is why fiscal multipliers are estimated to be much larger in deep recessions than in normal times. Summary The net effect of expansionary fiscal policy on AD is the multiplier effect minus the crowding-out effect. Whether £1 of shifts AD by more or less than £1 is therefore an empirical question whose answer depends on: the size of the MPC, the interest-elasticity of investment, the interest-elasticity of money demand, the stance of monetary policy, the degree of slack in the economy. Exam Insight When discussing fiscal policy effectiveness, always state both forces explicitly and then identify which dominates in the scenario at hand. In a liquidity trap or zero-lower-bound environment, crowding out vanishes and the fiscal multiplier is at its largest. There is a separate, long-run notion of crowding out operating through the loanable funds market. Persistent government deficits absorb private savings, raise long-term real interest rates, and depress private capital accumulation. Unlike the short-run version, this effect is independent of business cycle conditions and accumulates as deficits become chronic.The Keynesian view stresses that aggregate demand is the principal driver of short-run fluctuations and that nominal rigidities prevent rapid self-correction. Recessions therefore impose avoidable welfare losses through unemployment, hysteresis, and human capital depreciation. The corollary is a moral and economic case for activist countercyclical policy aimed at sustaining full employment.Theoretical Interpretation The Keynesian case rests on three pillars: (i) prices and wages are sticky in the short run, so markets do not clear instantaneously; (ii) the welfare cost of involuntary unemployment is high and asymmetric (job losses hurt more than wage gains help); and (iii) monetary and fiscal instruments are sufficiently powerful to offset shocks. Take any one of these away and the case for activism weakens. The opposing view, associated with classical, monetarist and Austrian traditions (epitomised by Hayek and Friedman), raises four objections to discretionary stabilisation: Long and variable lags: monetary policy affects output with delays of 12 to 18 months, so by the time stimulus arrives the economy may already be recovering, turning countercyclical policy into procyclical policy. Forecast unreliability: stabilisation requires accurate prediction of the output gap, which is notoriously difficult; errors lead to overheating, asset bubbles, and entrenched inflation. Political economy distortions: discretionary spending is vulnerable to corruption, capture and electoral cycles, producing systematically biased policy. Self-correcting markets: if SRAS adjusts reasonably promptly, the welfare gains from intervention may be small relative to its costs. The conclusion drawn by sceptics is that policy instruments are better directed at long-run goals (price stability, fiscal sustainability, supply-side reform) than at fine-tuning the cycle.Economic Intuition The lag problem is best understood by analogy: trying to drive a car by looking only in the rearview mirror. If feedback about your position is delayed, attempts to steer can amplify rather than dampen oscillations. This is the essence of the monetarist critique of fine-tuning. Exam Insight A balanced essay on stabilisation policy should set out the Keynesian case, the monetarist/Austrian counter-case, and conclude with a contingent answer: activism is more justified in deep recessions with clear demand causes and slow self-correction; passivity is more defensible in normal times or when shocks are supply-driven. The 2008 to 2009 financial crisis produced the worst macroeconomic contraction in over half a century at the time. Real GDP fell by approximately 4% between Q4 2007 and Q2 2009, and US unemployment rose from 4.4% in May 2007 to 10.1% in October 2009. The proximate cause was a collapse in financial intermediation: insolvency in the housing-related shadow banking system propagated into a generalised credit freeze, suppressing investment, durable consumption and trade. In AD-AS terms this is a large leftward shift of AD.Three policy actions were deployed, integrating monetary and fiscal levers in a coordinated reflation strategy: Conventional monetary easing: Federal Reserve, Bank of England and ECB cut policy rates aggressively, hitting the effective lower bound (close to zero) by late 2008. Unconventional monetary policy: with the policy rate constrained, central banks engaged in large-scale asset purchases (quantitative easing), buying government bonds, mortgage-backed securities and other private claims via OMOs to compress long-term yields, repair impaired credit markets, and supply liquidity to banks. Fiscal stimulus: in October 2008 the US Congress appropriated $700 billion (TARP) to recapitalise banks via equity injections, with the US and UK governments temporarily acquiring stakes in major institutions. In February 2009 the Obama administration's $787 billion stimulus bill (ARRA) provided a further large fiscal impulse. Theoretical Interpretation The Great Recession illustrates several theoretical points simultaneously. The zero lower bound rendered conventional monetary policy impotent at the margin, justifying quantitative easing as an alternative transmission channel. The proximity to the ZLB also raised fiscal multipliers, because crowding out was muted when the central bank was committed to accommodating fiscal expansion. The episode therefore vindicated the modern Keynesian view that demand management is most powerful precisely when it is most needed. The lecturer's verdict is "arguably yes", tempered by the perennial counterfactual problem: we cannot observe the no-policy scenario. Cross-country comparisons (between economies that stimulated more and less) and structural model simulations broadly suggest the interventions cushioned the downturn meaningfully, though debate continues over magnitudes and side-effects (such as the post-crisis sovereign debt overhang in the eurozone).Common Mistake Beware of post hoc inference: the fact that recovery followed stimulus does not by itself prove stimulus caused recovery. Sound evaluation requires a counterfactual, typically constructed via structural models or comparative analysis across countries with differing policy responses. Beyond discretionary policy, economies possess automatic stabilisers: features of the tax and transfer system that mechanically dampen fluctuations without explicit policy decisions.Definition Automatic stabilisers: mechanical changes in government revenues and expenditures that cushion aggregate demand over the business cycle, operating without discretionary action. The principal channels are progressive taxation (tax revenues fall disproportionately in recessions) and unemployment insurance (transfers rise as joblessness rises). Both raise disposable income and AD in downturns and reduce them in booms, smoothing the cycle.Economic Intuition Automatic stabilisers neatly sidestep the lag and forecasting critique levelled at discretionary policy. They activate immediately and proportionally to the shock, requiring no parliamentary decision, no forecast and no political negotiation. This makes them the most reliable countercyclical instrument an economy possesses. The strength of automatic stabilisers depends on the size and progressivity of the public sector. They are strongest in Scandinavia, weakest in the United States, and intermediate in the United Kingdom. They are not powerful enough to eliminate business cycles entirely, but without them output and employment volatility would be markedly higher.Exam Insight When asked about the merits of "rules versus discretion", automatic stabilisers offer a powerful synthesis: they provide stabilising effects without requiring discretionary judgment, addressing the Keynesian goal of demand management while sidestepping the monetarist critique of policy errors. Summary The AD-AS framework explains short-run fluctuations as departures from long-run equilibrium driven by shifts in AD or SRAS. Demand shocks move output and prices in the same direction; supply shocks move them in opposite directions, producing stagflation. In the long run, output reverts to via expectational adjustment of SRAS; only the price level is permanently affected. Monetary policy shifts AD via the interest rate channel; setting and setting are operationally equivalent. Fiscal policy shifts AD by amounts depending on the balance between the multiplier effect (amplification through induced consumption) and the crowding-out effect (offset through higher interest rates). The case for active stabilisation policy rests on price stickiness and the welfare cost of unemployment; the case against rests on lags, forecast errors and political distortions. Automatic stabilisers provide built-in countercyclical force and partially reconcile the activist and non-activist views. The Great Recession illustrated the use of all three policy tools (rate cuts, QE, fiscal stimulus) in tandem, with the zero lower bound enhancing the case for fiscal action. Exam Insight The most common essay prompts in this area ask you to (i) trace the dynamic effects of a specific shock through the AD-AS model, (ii) evaluate the effectiveness of a specific policy response, or (iii) discuss the rules-versus-discretion debate. Strong answers always combine a clearly labelled diagram, explicit treatment of expectations, and a balanced statement of the multiplier-versus-crowding-out trade-off. Friedman, M. (1968) 'The Role of Monetary Policy', American Economic Review, 58(1), pp. 1 to 17.Friedman, M. and Schwartz, A. J. (1963) A Monetary History of the United States, 1867 to 1960. Princeton: Princeton University Press.Hayek, F. A. (1945) 'The Use of Knowledge in Society', American Economic Review, 35(4), pp. 519 to 530.Keynes, J. M. (1936) The General Theory of Employment, Interest and Money. London: Macmillan.Mankiw, N. G. (2021) Principles of Macroeconomics. 9th edn. Boston: Cengage Learning.Phelps, E. S. (1968) 'Money-Wage Dynamics and Labor-Market Equilibrium', Journal of Political Economy, 76(4), pp. 678 to 711.Poole, W. (1970) 'Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model', Quarterly Journal of Economics, 84(2), pp. 197 to 216.Romer, C. D. and Romer, D. H. (2010) 'The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks', American Economic Review, 100(3), pp. 763 to 801.Bernanke, B. S. (2015) The Courage to Act: A Memoir of a Crisis and Its Aftermath. New York: W. W. Norton.Blanchard, O. and Leigh, D. (2013) 'Growth Forecast Errors and Fiscal Multipliers', American Economic Review, 103(3), pp. 117 to 120.Krugman, P. (2009) The Return of Depression Economics and the Crisis of 2008. New York: W. W. Norton.Taylor, J. B. (1993) 'Discretion versus Policy Rules in Practice', Carnegie-Rochester Conference Series on Public Policy, 39, pp. 195 to 214.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-13-monetary-and-fiscal-policy-claude-notes.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 13 - Monetary and Fiscal Policy Claude Notes.mdSun, 26 Apr 2026 14:38:32 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_7_2/slide4.png"></figure>econ1002_introtomacroeconomics/econ1002_notes/untitled-1.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Untitled 1.baseSun, 26 Apr 2026 14:08:42 GMTThis diagram illustrates the derivation of the IS curve from the Keynesian cross. The left panel shows the goods market: for a given high interest rate , planned expenditure is , yielding equilibrium income (point ). When the interest rate falls to , investment and consumption rise, shifting planned expenditure upward to and equilibrium income rises to (point ). The right panel maps these two pairs onto a new diagram. Connecting points and traces out the IS curve, which slopes downward from left to right.The negative slope of the IS curve embodies the following causal chain: a lower interest rate raises planned expenditure via increased investment and consumption, which — through the Keynesian multiplier — raises equilibrium output by more than the initial increase in spending.Theoretical Interpretation The slope of the IS curve depends on two factors: (1) the interest sensitivity of investment and consumption (how much and respond to a change in ), and (2) the size of the fiscal multiplier (which itself depends on the MPC). A highly interest-sensitive economy with a large multiplier will have a flat IS curve; a less responsive economy will have a steep IS curve. This has direct implications for the relative effectiveness of fiscal versus monetary policy. Definition IS Curve: The locus of all combinations of the interest rate () and national income () at which the goods market is in equilibrium (i.e., planned expenditure equals actual output). It slopes downward in space. The money market block is built upon Keynes's theory of liquidity preference. Money demand depends on two distinct motives: Transactions demand: Households and firms require money to facilitate everyday purchases. Higher income () is associated with a greater volume of transactions, hence a higher demand for money. This creates a positive relationship between and money demand. Portfolio/speculative demand: Holding money is costly insofar as it forgoes the interest that could be earned on alternative assets (bonds, equities). A higher interest rate () therefore makes money holding less attractive; agents shift their portfolios away from liquid money and towards interest-bearing assets, reducing money demand. The money demand curve thus slopes downward in space: for a given level of income, higher interest rates reduce the quantity of real money balances demanded.Money supply () is treated as exogenous — it is set by the central bank and does not depend on or . In the standard IS-LM framework, money supply is represented as a vertical line.Common Mistake Do not confuse a movement along the money demand curve with a shift of the curve. A change in the interest rate causes a movement along a given money demand curve. A change in income causes the entire money demand curve to shift (right if rises, left if falls). The LM curve is built precisely by tracing these shifts. Money market equilibrium requires that the quantity of real money balances demanded equals the exogenous real money supply:where is the liquidity preference (money demand) function, increasing in and decreasing in . Because is held fixed, changes in the nominal money supply translate one-for-one into changes in real balances.
This diagram shows the derivation of the LM curve. Panel (a) depicts the money market: the vertical line is the fixed money supply , and and are money demand curves corresponding to income levels respectively. A higher income level raises money demand, shifting rightward; with a fixed supply, equilibrium in the money market requires a higher interest rate to dampen demand back to the level of supply. Points (at ) and (at ) in panel (a) map onto points and in panel (b), tracing the upward-sloping LM curve.The positive slope of the LM curve reflects a straightforward mechanism: as income rises, the transactions demand for money increases; with a fixed supply, the interest rate must rise to clear the money market by reducing the speculative demand for money.Definition LM Curve: The locus of all combinations of the interest rate () and national income () at which the money market is in equilibrium (i.e., money demand equals the exogenous money supply). It slopes upward in space. Economic Intuition The LM curve is steeper when money demand is less sensitive to the interest rate (because a large rise in is needed to re-equilibrate the market after an increase in ). It is flatter when money demand is highly interest-sensitive. At the extreme, a perfectly flat LM corresponds to the liquidity trap, in which interest rates cannot fall further and monetary policy becomes ineffective.
This diagram combines the IS and LM curves in a single space. The downward-sloping IS curve and the upward-sloping LM curve intersect at the unique point , which represents the simultaneous equilibrium of both the goods market and the money market. At this point, planned expenditure equals actual output and money demand equals money supply.The analytical power of IS-LM lies precisely in this simultaneity. The goods market alone (the IS curve) cannot determine and independently — it only tells us that for any given , there is a corresponding equilibrium . Similarly, the money market alone (the LM curve) cannot determine both variables. Only the joint solution pins down the economy's short-run position.Theoretical Interpretation The IS-LM intersection represents a Walrasian-style simultaneous clearing of two interconnected markets. Critically, because the price level is fixed, any shock to either market must be absorbed through changes in and , not through price adjustment. This is the analytical foundation for the Keynesian argument that demand management policy can raise output in the short run. Exam Insight When asked to analyse a policy shock in IS-LM, always identify which curve shifts, in which direction, and by how much, before stating the new equilibrium values of and . Fiscal policy (changes in or ) shifts the IS curve; monetary policy (changes in ) shifts the LM curve. Summary The IS curve slopes downward: higher reduces investment and consumption, lowering equilibrium . The LM curve slopes upward: higher raises money demand, requiring higher to clear the money market. Equilibrium is where IS and LM intersect, jointly determining . The price level is assumed constant throughout. The IS-LM model can be used to derive the Aggregate Demand (AD) curve, which maps the relationship between the general price level and the equilibrium level of national output .The derivation proceeds as follows. For a given initial price level , the IS-LM model delivers an equilibrium . Now consider a rise in the price level to . Because the nominal money supply is fixed by the central bank, a higher price level reduces the real money supply :This reduction in real money balances shifts the LM curve to the left: at every level of income, a higher interest rate is now required to equate the reduced real supply with money demand. The new equilibrium has a higher interest rate and lower output: where .Plotting against and against in space yields two points on the AD curve. The AD curve slopes downward because a higher price level reduces real money balances, tightens financial conditions via a higher interest rate, crowds out investment and consumption, and therefore lowers equilibrium output. This monetary transmission channel (sometimes called the Keynes effect) is the IS-LM explanation for the negative slope of the AD curve.Economic Intuition The mechanism is: LM shifts left and . Each arrow is a causal link. Trace it carefully in both the IS-LM diagram and the AD diagram. Common Mistake When deriving the AD curve from IS-LM, remember that a change in the price level shifts the LM curve (because it affects real money balances), whilst a change in fiscal or monetary policy shifts the AD curve itself. A movement along the AD curve is caused by a price level change; a shift of the AD curve is caused by an autonomous policy or demand shock. Summary A higher price level reduces real money supply, shifting LM left and raising whilst lowering . This gives the downward slope of the AD curve: . The IS-LM framework provides a microeconomically grounded rationale for the negative slope of AD via the interest rate channel. The IS-LM model, formalised by Hicks (1937) as an interpretation of Keynes's General Theory (1936), captures the essence of Keynesian macroeconomics in a tractable two-equation framework. Its enduring relevance lies in the central proposition that prices are rigid in the short run. This rigidity means that the economy need not automatically self-correct following a negative demand shock; output and employment can remain below their natural levels for a sustained period, providing the theoretical case for discretionary stabilisation policy.The model also formalises a key distinction between fiscal and monetary policy transmission. Fiscal expansion (higher government spending or lower taxes ) shifts the IS curve rightward, raising both and . The rise in partially offsets the fiscal stimulus by crowding out private investment — the extent of this crowding-out effect depends on the slopes of both curves. Monetary expansion (a rise in ) shifts the LM curve rightward, lowering and raising — the classic mechanism of monetary stimulus.Theoretical Interpretation The crowding-out effect is central to debates about fiscal multipliers. If the LM curve is vertical (classical case, perfectly interest-inelastic money demand), a fiscal expansion raises by enough to fully crowd out private investment, leaving unchanged. If the LM curve is horizontal (liquidity trap), there is no crowding out and the fiscal multiplier is at its maximum. Most empirical economies lie between these extremes. Exam Insight For essay questions on the effectiveness of fiscal versus monetary policy, always invoke IS-LM slopes. Fiscal policy is most effective when IS is steep and LM is flat; monetary policy is most effective when IS is flat (interest-sensitive investment) and LM is steep. The liquidity trap — where LM is flat — is a frequently examined special case in which monetary policy becomes impotent. Summary The IS-LM model is a short-run general equilibrium framework jointly determining the interest rate and national income . The IS curve is downward-sloping: lower interest rates raise investment and consumption, increasing equilibrium output via the multiplier. The LM curve is upward-sloping: higher income raises transactions demand for money, requiring a higher interest rate to clear the money market with a fixed money supply. The key assumption is that the price level is fixed, making this a model of nominal rigidities and Keynesian demand management. The IS-LM equilibrium simultaneously clears both the goods market and the money market. The AD curve can be derived by varying within the IS-LM model: higher prices reduce real money supply, shift LM left, raise , and reduce . The model encodes the two core channels of macroeconomic policy: fiscal policy shifts IS; monetary policy shifts LM. Price rigidity is the philosophical heart of Keynesian economics — without it, markets self-correct and policy is redundant. Hicks, J.R. (1937) 'Mr. Keynes and the Classics: A Suggested Interpretation', Econometrica, 5(2), pp. 147–159. Keynes, J.M. (1936) The General Theory of Employment, Interest and Money. London: Macmillan. Mankiw, N.G. (2019) Macroeconomics. 10th edn. New York: Worth Publishers. Blanchard, O. (2021) Macroeconomics. 8th edn. Harlow: Pearson Education. Carlin, W. and Soskice, D. (2015) Macroeconomics: Institutions, Instability, and the Financial System. Oxford: Oxford University Press.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-10-keynesian-economics-and-the-islm-model-claude.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 10 - Keynesian Economics and the ISLM Model Claude.mdFri, 24 Apr 2026 23:37:55 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_6_set1(islm)/slide10.png"></figure>econ1002_introtomacroeconomics/econ1002_notes/untitled.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Untitled.baseThu, 23 Apr 2026 12:08:29 GMTBusiness Cycles as Deviations from Trend
The Short-Run Aggregate Supply Curve
Theories Explaining the Upward Slope of SRAS
Sticky-Wage Theory
Sticky-Price Theory
Misperceptions Theory
The SRAS Curve: Unified Summary Equation
AD-AS Equilibrium: Short Run and Long Run
Shifts in the SRAS Curve
From AD-AS Framework to Business Cycles
Bibliography
The chart above plots nominal GDP (in current US dollars) from 1960 through 2014 for a representative economy. The smooth red curve represents the long-run growth trend, whilst the jagged blue line captures actual GDP. The central insight is immediately visual: actual output does not travel along a smooth upward path but oscillates above and below trend, producing recognisable peaks and troughs. These oscillations are what economists define as the business cycle.It is analytically important to resist the temptation to conflate the level of GDP with its deviation from trend. A country may enjoy rising nominal GDP every decade and still suffer serious recessions if actual output falls below potential for a sustained period. The particularly sharp dip visible around 2008–2009 reflects the Global Financial Crisis, during which actual output fell dramatically below its trend value.Economic Intuition Think of the trend as where the economy "should" be given its productive capacity — what it can produce at full employment and normal capacity utilisation. Business cycles are the story of why it temporarily over- or undershoots that level. The AD-AS framework is built precisely to explain those deviations. Definition Business cycle: Fluctuations in real economic activity (output, employment, income) around the long-run trend level of potential output, characterised by alternating phases of expansion (boom) and contraction (recession).
The diagram illustrates the fundamental property of the Short-Run Aggregate Supply (SRAS) curve: it slopes upward in price-level/output space. When the price level falls from to , the quantity of output that firms collectively supply falls from to . This positive relationship between the price level and the quantity of output supplied is the defining characteristic of the short run, and it stands in direct contrast to the vertical Long-Run Aggregate Supply (LRAS) curve, which asserts that output is independent of the price level in the long run.The upward slope arises not from classical market-clearing logic but from the presence of market imperfections that prevent instantaneous adjustment. These imperfections take three main forms, each of which will be examined in turn. The critical commonality is that all three rely on a wedge between the expected price level () and the actual price level (). Once expectations catch up with reality, the imperfection dissolves and the economy reverts to its long-run supply.Common Mistake Students sometimes draw the SRAS curve as having the same interpretation as a microeconomic supply curve, responding to the "price" of a single good. The SRAS traces output responses to changes in the aggregate price level, and the upward slope arises from nominal rigidities or informational frictions, not from the law of supply in a competitive market. Theoretical Interpretation The SRAS curve implicitly assumes that some input prices (most importantly wages) or output prices are pre-set based on prior expectations. When the actual price level diverges from what was anticipated, real variables — real wages, real revenues, perceived relative prices — are distorted relative to planned values, inducing firms to alter production. This is the core of New Keynesian short-run supply theory. All three theories the lecture presents share a common structure: they describe a mechanism by which an unexpected change in the price level generates a real response in output. The formal expression for this is:Each theory offers a different institutional or informational account of why that gap translates into a change in supply.The sticky-wage theory rests on the observation that nominal wages are not continuously renegotiated but are instead fixed by labour contracts over medium-term horizons. When workers and firms agree on a nominal wage at the start of a contract period, they implicitly base that wage on a forecast of the future price level. If the actual price level subsequently deviates from expectations, the real wage — which governs the firm's actual marginal cost of labour — departs from the level that was anticipated.The mechanism can be stated precisely. The real wage is , where is the nominal wage (fixed by contract) and is the actual price level. Consider two scenarios: When : the price level is lower than workers and firms anticipated when they set . Since is fixed, the real wage rises above the planned level. Higher real wages raise the marginal cost of labour, so firms find production more expensive than planned, cut output, and reduce employment. When : the price level exceeds expectations, so the real wage falls below the planned level. Lower real wages reduce marginal costs, making production cheaper than firms expected, so they expand output and hire additional workers. This asymmetric response to price surprises is exactly what the upward-sloping SRAS captures: higher actual prices relative to expectations are associated with higher output.Economic Intuition Imagine a firm negotiates a one-year pay deal expecting 3% inflation. If inflation turns out to be only 1%, the firm is paying its workers more in real terms than it anticipated. That unplanned cost increase squeezes profit margins and induces the firm to pull back on production. The wage is "stuck" because the contract cannot be immediately rewritten. Exam Insight When asked to explain why the SRAS slopes upward, always specify the channel: fixed nominal wages → real wages move inversely with unexpected price changes → marginal cost moves → output responds. Examiners reward the causal chain, not just the conclusion. The sticky-price theory applies a parallel logic to output prices rather than input prices. Many firms face menu costs — the real and administrative costs of changing posted prices (printing new menus, updating catalogues, renegotiating supplier contracts). Because these costs are non-trivial, firms pre-set prices based on expected future conditions and do not instantly revise them when actual conditions change.In this framework, prices function as marginal revenues. Consider: When : the overall price level is below what firms anticipated, meaning actual revenues are lower than planned. Firms with pre-set prices find their real revenues squeezed. Unable to immediately cut costs or raise prices, some firms respond by reducing output, contracting aggregate supply. When : actual revenues exceed plans; firms with sticky prices earn unexpectedly high real revenues and respond by expanding output. The sticky-price theory is particularly prominent in New Keynesian macroeconomics, where staggered price-setting by firms (Calvo pricing, Taylor contracts) is used to derive a New Keynesian Phillips Curve from first principles. Even if a firm would prefer to adjust its price, coordination failures and menu costs generate short-run price rigidity at the aggregate level.Theoretical Interpretation The microeconomic foundation here draws on imperfect competition: firms in monopolistically competitive markets face downward-sloping demand curves and set prices as a mark-up over marginal cost. If marginal costs change but prices are temporarily fixed, the mark-up is squeezed or inflated, altering the incentive to supply. This stands in contrast to the perfect competition assumed in classical models where prices adjust instantaneously. Common Mistake Do not conflate sticky wages and sticky prices. Sticky wages operate through the cost side (labour is an input whose price is fixed), whilst sticky prices operate through the revenue side (output prices are fixed, so revenues diverge from expectations). Both produce an upward-sloping SRAS, but via different channels. The misperceptions theory (also called the imperfect information or Lucas island model approach) differs from the above two in that it requires no nominal rigidity whatsoever. Instead, it relies on an informational friction: individual producers observe the prices of the goods they sell but do not immediately observe the overall price level.The mechanism is as follows. Suppose the aggregate price level falls below the expected level. An individual firm observing a fall in the price of its own product faces a signal extraction problem: is this fall a relative price decline (its good has become cheaper relative to others, signalling lower demand specifically for its product) or is it simply part of a general deflation? If the firm incorrectly attributes the aggregate price fall to a fall in its own relative price, it will perceive its real marginal revenue as having fallen, and rationally reduce production — even though in reality the general price level has fallen and no relative price change has occurred. Conversely, if the aggregate price level rises unexpectedly, firms may misinterpret this as an improvement in their relative price position and expand output.This model, associated with Robert Lucas, has the striking implication that only unanticipated monetary policy can affect real output in the short run — anticipated changes will simply update expectations, leaving no wedge between actual and expected prices.Theoretical Interpretation The misperceptions theory is closely related to Lucas's (1972, 1973) rational expectations supply framework. Its policy implication is the famous "policy ineffectiveness proposition" in its strong form: if agents have rational expectations and only nominal surprises drive output, systematic monetary policy rules cannot systematically stabilise output. This contrasts sharply with the Keynesian sticky-wage and sticky-price frameworks, where even anticipated policy may have real effects. Exam Insight For a high-scoring answer, distinguish the informational basis of the misperceptions theory from the institutional basis of the sticky-wage and sticky-price theories. The former requires only imperfect information; the latter two require contractual or administrative frictions. Linking this to Lucas and the rational expectations revolution will demonstrate analytical depth. All three theories converge on a single algebraic representation of the SRAS curve:where: is the quantity of aggregate output supplied is the natural rate of output, equivalent to the LRAS level of production (output at full employment and normal capacity) is a parameter reflecting the responsiveness of output to unexpected price level changes; a larger implies a flatter SRAS curve is the "price surprise" term — the gap between the realised and anticipated price level This equation encapsulates the core logic of the short run: output deviates from its natural rate if and only if the actual price level differs from what was expected. In the long run, expectations adjust fully so that , the price surprise term vanishes, and by definition. This confirms the vertical LRAS.Definition Natural rate of output (): The level of real GDP produced when all inputs are employed at their normal utilisation rates, corresponding to the long-run equilibrium of the economy. It is the value of output to which the economy gravitates over time as wages, prices, and expectations fully adjust. Theoretical Interpretation The parameter determines the slope of the SRAS curve in space. If is very large, even a small price surprise generates a large output response, meaning the SRAS is relatively flat (highly elastic in output). If is small, the SRAS is steep, meaning price surprises have little effect on real output. In the limit, as , the SRAS becomes horizontal (the extreme Keynesian case); as , it approaches the vertical LRAS (the classical case). Common Mistake Do not confuse a movement along the SRAS with a shift of the SRAS. A change in with held fixed is a movement along the SRAS. A change in , , or any other shifter moves the entire curve. Summary The SRAS slopes upward because sticky wages, sticky prices, or misperceptions create a short-run link between price surprises and output. All three theories are unified by the equation . In the long run, by definition, so long-run output equals regardless of the price level.
The summary diagram brings together all three curves — the Aggregate Demand (AD) curve, the Short-Run Aggregate Supply (SRAS) curve, and the Long-Run Aggregate Supply (LRAS) curve — in a single framework. The long-run equilibrium is at point A, where the AD curve intersects the vertical LRAS at the natural rate of output. At this point, the actual price level equals the equilibrium price level, and crucially, , so the SRAS curve also passes through point A.The diagram conveys a fundamental property of the AD-AS model: the long-run equilibrium is entirely determined by the supply side of the economy (the LRAS), whilst the price level is jointly determined by AD and LRAS. In long-run equilibrium, the economy produces at its potential regardless of where the AD curve lies; a shift in AD will only change the price level in the long run, not real output.The SRAS passing through the same long-run equilibrium point is not a coincidence but a theoretical necessity: the long-run equilibrium is defined as the state in which there are no price surprises, and the SRAS equation confirms that when , output must equal . The three curves therefore always intersect at a single point in long-run equilibrium, and this property is what anchors the model's dynamics.Economic Intuition Think of the long-run equilibrium as the economy's "resting point." When disturbed by a demand or supply shock, the economy moves away from point A in the short run, but internal adjustment mechanisms (wage renegotiation, price revision, expectation updating) gradually pull it back. The SRAS shifts over time until all three curves once again intersect at the same point. Exam Insight In essay questions on macroeconomic stabilisation or the effects of demand shocks, always begin by drawing all three curves with the long-run equilibrium at point A. Then show the short-run deviation, explain the adjustment mechanism, and show the return to long-run equilibrium. This three-step structure — impact, adjustment, new long-run — will secure strong marks. Understanding what moves the SRAS curve is essential for analysing macroeconomic shocks. The SRAS can shift for two broad categories of reason.Because the natural rate of output anchors the SRAS equation, any factor that changes the economy's productive capacity will shift both the LRAS and the SRAS together. These supply-side factors include: Labour: changes in the size or quality of the workforce (immigration, education, demographics) Capital: changes in the stock of physical or human capital through investment Natural resources: discovery or depletion of productive resources Technology: improvements in total factor productivity, process innovation A rightward shift in the LRAS (higher ) shifts the SRAS rightward by an equivalent amount for any given expected price level, since the equation moves its intercept.The second and arguably more important source of SRAS shifts is a change in the expected price level . Since all three theories of the upward-sloping SRAS hinge on the expected-versus-actual price divergence, any revision to expectations will shift the entire curve.If rises (inflation expectations increase), the SRAS shifts to the left. The intuition is direct: workers will negotiate higher nominal wages in anticipation of higher prices, raising production costs for firms. If actual prices do not rise by as much as expected, real wages are higher than planned, marginal costs exceed revenues, and firms supply less at every price level. Higher inflation expectations embedded in wage contracts shift the SRAS leftward, raising the price level and reducing output for a given AD curve.This is precisely why central banks are so concerned with anchoring inflation expectations. If households and firms believe the central bank will keep inflation low and stable, stays anchored, the SRAS remains stable, and the economy avoids the stagflationary dynamics that arise when expectations become unmoored.Theoretical Interpretation The role of expectations in shifting the SRAS provides the microeconomic foundation for the expectations-augmented Phillips Curve, developed by Friedman (1968) and Phelps (1968). Their argument was that any attempt to exploit the short-run trade-off between inflation and unemployment by surprise demand expansion would eventually cause workers to revise their inflation expectations upward, shifting the SRAS leftward and returning the economy to the natural rate of unemployment at a permanently higher inflation rate. This insight demolished the notion of a stable long-run Phillips Curve and redirected macroeconomic policy towards credibility and expectation management. Exam Insight When answering questions about stagflation or supply-side shocks, emphasise that the SRAS shifts left when either falls or rises. The 1970s oil shocks are the canonical example: higher energy costs reduced and raised cost expectations simultaneously, producing a leftward SRAS shift that generated both higher inflation and lower output. Summary The SRAS shifts left (or up) when: rises (higher inflation expectations) falls (adverse supply shock: labour, capital, resources, technology) The SRAS shifts right (or down) when: falls (lower inflation expectations, credible disinflation) rises (favourable supply shock: productivity growth, technology) The AD-AS model is the principal analytical tool for understanding macroeconomic fluctuations. Having derived all three curves and catalogued their shift factors, the framework can now be deployed to trace the economy's response to a variety of shocks.A demand shock (such as a collapse in consumer confidence, a tightening of monetary policy, or a fiscal contraction) shifts the AD curve. In the short run, with the SRAS fixed, output falls below and the price level falls: the economy is in a recessionary gap. Over time, workers accept lower nominal wages (revising downward), the SRAS shifts right, and the economy returns to at an even lower price level.A supply shock (such as a sharp rise in oil prices or a natural disaster) shifts the SRAS leftward. In the short run, output falls and the price level rises simultaneously — a phenomenon known as stagflation. The economy faces an inflationary gap in terms of prices but a recessionary gap in terms of output, presenting policymakers with an uncomfortable trade-off: stimulating AD to recover output exacerbates inflation, whilst contracting AD to fight inflation deepens the recession.Economic Intuition Business cycles are the economy's journey away from and back towards the long-run equilibrium point A on the AD-AS diagram. Every lecture in this course that discusses policy — monetary policy, fiscal policy, stabilisation — can ultimately be mapped to a question of how a particular intervention shifts AD or SRAS and whether it helps or hinders the return to . Summary Key takeaways for business cycle analysis using AD-AS: Business cycles are temporary deviations of output from . Demand shocks move output and prices in the same direction. Supply shocks move output and prices in opposite directions (stagflation when adverse). Self-correction occurs through wage and price adjustment, which shifts the SRAS over time. Policy intervention can accelerate this adjustment but at potential costs (inflation, credibility). Friedman, M. (1968) 'The role of monetary policy', American Economic Review, 58(1), pp. 1–17. Lucas, R.E. (1972) 'Expectations and the neutrality of money', Journal of Economic Theory, 4(2), pp. 103–124. Lucas, R.E. (1973) 'Some international evidence on output-inflation trade-offs', American Economic Review, 63(3), pp. 326–334. Mankiw, N.G. (2020) Macroeconomics. 10th edn. New York: Worth Publishers. Phelps, E.S. (1968) 'Money-wage dynamics and labor-market equilibrium', Journal of Political Economy, 76(4, Part 2), pp. 678–711. Taylor, J.B. (1979) 'Staggered wage setting in a macro model', American Economic Review, 69(2), pp. 108–113.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-12-aggregate-demand-and-aggregate-supply-(part-ii)-claude.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 12 - Aggregate Demand and Aggregate Supply (Part II) Claude.mdThu, 23 Apr 2026 10:34:29 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_7_set1(adas_p2)/slide3.png"></figure>Economic Fluctuations and Business Cycles
From the Long Run to the Short Run
The AD-AS Framework
The Aggregate Demand Curve
Why the AD Curve Slopes Downward
Shifts in the Aggregate Demand Curve
The Aggregate Supply Curve
The Long-Run Aggregate Supply Curve (LRAS)
Shifts in the LRAS Curve
Long-Run Growth: AD and LRAS Together
The Short-Run Aggregate Supply Curve (SRAS)
Road Ahead
Bibliography Macroeconomic output does not grow smoothly. Instead, it oscillates around a long-run upward trend, producing what economists refer to as the business cycle. These fluctuations are the central subject of short-run macroeconomics, and understanding their causes, patterns, and policy implications is the primary purpose of the AD-AS model.Three stylised facts characterise economic fluctuations: Economic fluctuations are irregular and unpredictable — unlike the long-run growth trend, short-run deviations cannot be forecast with precision. Most macroeconomic quantities fluctuate together — output, investment, and employment all tend to move in the same direction at the same time. As output falls, unemployment rises — recessions and booms are economy-wide phenomena, not sector-specific events.
This chart plots GDP (in current US dollars) from 1960 to 2014. The red curve represents the long-run trend, while the blue line traces actual GDP. The striking feature is that whilst the long-run trend is smooth and exponential, the actual series exhibits pronounced deviations — visible peaks and troughs that correspond to boom and recession episodes. The business cycle is precisely the study of these deviations around trend, not of the trend itself.
Panel (a) plots US real GDP in billions of 2005 dollars from 1965, with recessions shaded in pink. The chart demonstrates that whilst the long-run trajectory of output is strongly upward, there are repeated episodes during which output falls or stagnates. Crucially, every shaded recession period corresponds to a visible contraction or plateau in real GDP. This confirms the first stylised fact: fluctuations are irregular but observable, and they represent genuine departures from potential output.
Panel (b) shows investment spending over the same period. Investment is notably more volatile than overall GDP — its percentage decline during recessions (the shaded bands) is substantially larger than the corresponding decline in total output. This is consistent with the economic intuition that investment is the most interest-sensitive and expectation-sensitive component of aggregate demand. During a downturn, firms cancel capital projects far more rapidly than households cut consumption.
Panel (c) displays the unemployment rate. In sharp contrast to real GDP and investment, unemployment moves inversely with the cycle: it rises during recessions and falls during expansions. This is the graphical representation of Okun's Law — the empirical regularity linking output gaps to unemployment deviations. The countercyclical nature of unemployment visible in this chart is one of the most robust facts in macroeconomics.Economic Intuition Think of the three panels as three faces of the same coin. When firms expect lower demand, they cut investment first (panel b), output subsequently contracts (panel a), and workers are laid off (panel c). The co-movement of all three confirms that recessions are not sector-specific accidents but economy-wide coordination failures. Key Takeaways: Economic Fluctuations The business cycle describes deviations of actual output around the long-run trend — not movements in the trend itself. Real GDP, investment, and unemployment co-move over the cycle: the first two are procyclical; unemployment is countercyclical. Investment is disproportionately volatile relative to GDP, making it a key transmission channel for aggregate shocks. The models examined in earlier weeks — covering economic growth, the financial system, the loanable-funds market, and the quantity theory of money — all belong to the domain of classical economic theory. Two foundational assumptions underpin these long-run models: The classical dichotomy — economic variables can be cleanly separated into real variables (real GDP, unemployment, real interest rates) and nominal variables (money supply, price level, nominal wages). In the long run, these two sets of variables are determined independently. Monetary neutrality — changes in the money supply alter nominal variables proportionally but leave real variables unaffected. A doubling of the money supply doubles all prices but does not change the productive capacity of the economy, real output, or real factor returns. These assumptions yield powerful tractability: they allow economists to study the real determinants of output (capital, labour, technology) without worrying about the behaviour of prices, and vice versa. However, they are fundamentally assumptions about the long run.Theoretical Interpretation The classical dichotomy holds because, in the long run, all prices and wages are fully flexible. If the money supply doubles, firms and workers will eventually renegotiate wages and prices upward, leaving the real wage and thus real output unchanged. The mechanism is one of complete nominal adjustment. In the short run, however, this adjustment is incomplete — prices and wages are sticky — so nominal shocks have real consequences. In the short run, the assumption of monetary neutrality ceases to be a reasonable approximation. Real and nominal variables become highly intertwined: a change in the money supply can, for instance, temporarily lower interest rates and thereby stimulate real investment, pushing real GDP above its long-run trend. This interaction between nominal and real variables is precisely what the AD-AS model is designed to capture.Common Mistake Students sometimes claim that the classical dichotomy is simply "wrong." This is an overstatement. The classical dichotomy is an appropriate description of the long run, where full nominal adjustment occurs. The AD-AS model is a short-run framework — it does not replace classical analysis but complements it by modelling the transition period during which wages and prices have not yet fully adjusted. The Aggregate Demand – Aggregate Supply (AD-AS) model is the standard short-run macroeconomic framework. It explains short-run fluctuations in economic activity around the long-run trend by modelling the relationship between the overall price level and the economy's total real output . The Aggregate Demand (AD) curve shows the total quantity of goods and services demanded at each price level. It is derived from the national income identity and slopes downward. The Aggregate Supply (AS) curve shows the total quantity of goods and services supplied at each price level. Its shape depends critically on the time horizon under consideration.
This diagram presents the canonical AD-AS equilibrium. The vertical axis measures the overall price level ; the horizontal axis measures total real output . The equilibrium occurs at the intersection of the two curves, simultaneously determining the equilibrium price level and equilibrium output. This is directly analogous to the microeconomic supply-and-demand diagram, but it operates at the level of the entire economy. The key departure from the classical model is that here, both and are jointly determined — a nominal variable (the price level) and a real variable (output) interact, precisely violating the classical dichotomy.Exam Insight If an exam question asks you to "explain macroeconomic equilibrium using the AD-AS model," begin by defining each curve, state their slopes and why, then identify the equilibrium as the intersection. Note explicitly that this violates the classical dichotomy in the short run. The AD curve is derived from the aggregate expenditure identity:where is household consumption, is business investment, is government spending (assumed fixed by policy), and is net exports. The AD curve plots, for each price level , the total quantity of output demanded across all four expenditure components.Definition The Aggregate Demand (AD) curve shows the quantity of goods and services that households, firms, the government, and foreign buyers collectively wish to purchase at each price level, holding everything else constant. The AD curve slopes downward: a higher price level is associated with lower total quantity demanded. This negative relationship operates through three distinct channels, known collectively as the three effects.A fall in the price level increases the real value of money holdings. Consumers hold a given stock of nominal wealth (cash, deposits, bonds denominated in nominal terms); when the price level falls, the purchasing power of those nominal holdings rises. Consumers feel wealthier in real terms and therefore increase consumption spending . Since consumption is a component of , aggregate demand rises. Conversely, a rise in the price level erodes real wealth and depresses consumption.Economic Intuition Think of someone holding £10,000 in a savings account. If the price level halves, that £10,000 now buys twice as many goods and services. The person feels richer — not because they earned more, but because the real value of their nominal assets has risen. This perceived increase in real wealth stimulates spending. A fall in the price level reduces households' demand for money (they need fewer nominal balances for a given volume of transactions). With a fixed nominal money supply, the excess supply of real money balances drives down the nominal interest rate. Lower interest rates reduce the cost of borrowing for firms, stimulating investment expenditure . This channel links the goods market to the money market, and is formally captured by the IS-LM model studied in more advanced courses. The interest rate effect has an additional open-economy dimension. A fall in the domestic interest rate makes UK assets less attractive relative to foreign assets, causing a net capital outflow (NCO increases). The increased supply of pounds on foreign exchange markets causes the pound to depreciate. A depreciated pound makes UK exports cheaper for foreign buyers and imports more expensive for domestic consumers, thus stimulating and suppressing . Net exports rise, adding to aggregate demand. Theoretical Interpretation The three effects are not independent: the interest rate and exchange rate effects are connected through the money market and the foreign exchange market. The wealth effect operates independently via the balance sheet channel. Together they ensure that the AD curve is downward-sloping in space, though the precise slope depends on the quantitative magnitudes of each effect.
This diagram illustrates a movement along the AD curve. Starting at price level and output , a fall in the price level to increases the quantity of goods and services demanded to . This is a movement along the existing curve, not a shift of the curve. The diagram makes explicit that it is changes in the price level that trace out the AD schedule; all other determinants are held constant. Students must distinguish this clearly from a shift of the AD curve, which is caused by changes in those other determinants.Common Mistake A change in the price level causes a movement along the AD curve. A change in any exogenous expenditure component (e.g., a tax cut, a rise in business confidence, a foreign boom) causes a shift of the AD curve. Confusing these two is one of the most common errors in macroeconomics examinations. The AD curve shifts whenever there is a change in the desired level of spending at any given price level. Since , any exogenous change in one of these four components will shift the curve.Changes in consumption (): Shifts in consumer confidence or patience (e.g., rising pessimism during a financial crisis reduces at every price level, shifting AD left). Changes in household wealth not caused by price level movements (e.g., a stock market crash reduces wealth and thus ). Changes in investment (): Technological improvements that raise the expected return on capital, increasing firms' desired investment at each interest rate and price level. Changes in the money supply: an increase in lowers the interest rate for any given price level, stimulating and shifting AD right. Changes in government purchases (): Discretionary fiscal policy: government decides to build new hospitals or infrastructure, raising directly and shifting AD right. Note that tax changes affect indirectly — a tax cut raises household disposable income and thus shifts AD right through the consumption channel. Changes in net exports (): A sudden appreciation or depreciation of the nominal exchange rate alters the competitiveness of exports and imports for a given price level. Foreign income shocks: if the UK's major trading partners experience a boom, they demand more UK exports, raising and shifting AD right. Exam Insight For any AD/AS question involving a policy or shock, always identify: (1) which component of is directly affected; (2) whether this is a shift or a movement; (3) in which direction the curve shifts; and (4) what happens to equilibrium and . This four-step framework scores marks reliably. Key Takeaways: AD Curve The AD curve slopes downward via the wealth effect (), interest rate effect (), and exchange rate effect (). Changes in cause movements along the AD curve; exogenous expenditure shocks cause shifts. Rightward shifts occur from increases in , , , or at a given price level; leftward shifts from decreases. Government spending is assumed fixed by policy and does not respond to changes in — it shifts the AD curve when policymakers actively change it. The Aggregate Supply (AS) curve shows the quantity of goods and services that firms are willing to produce and sell at each price level. Unlike the AD curve, the shape of the AS curve depends critically on the time horizon under consideration.Definition The Long-Run Aggregate Supply (LRAS) curve is vertical: output is determined solely by real factors (capital, labour, technology) and is independent of the price level. The Short-Run Aggregate Supply (SRAS) curve is upward-sloping: higher price levels are associated with greater output supplied, at least temporarily. This distinction between short-run and long-run aggregate supply is one of the most conceptually important in all of macroeconomics. It reflects the difference between an economy in which all wages and prices have fully adjusted and one in which nominal rigidities still exist.In the long run, the productive capacity of an economy is determined entirely by its real endowments: Physical capital — the stock of machinery, structures, and equipment. Human capital — the skills, education, and knowledge of the workforce. Labour — the size and participation rate of the working population. Natural resources — land, minerals, and other natural inputs. Technology — the available methods for combining inputs into output. None of these determinants depends on the overall price level. A doubling of the price level does not change the stock of machines, the education level of workers, or the available technology. Consequently, the quantity of output supplied in the long run is the same at any price level — the LRAS curve is a vertical line positioned at the economy's natural rate of output .Definition The natural rate of output is the level of real GDP produced when all factors of production are fully and efficiently utilised. Unemployment at this point equals the natural rate — frictional and structural unemployment are present, but there is no cyclical unemployment.
This diagram shows the LRAS as a vertical line at the natural rate of output . When the price level moves from down to , the quantity of output supplied remains unchanged at . The two orange callout boxes make the logic explicit: a change in the price level (step 1) does not affect the quantity supplied in the long run (step 2). This is a direct graphical representation of monetary neutrality and the classical dichotomy — in the long run, real output is entirely insulated from nominal disturbances.Theoretical Interpretation The verticality of the LRAS reflects full nominal flexibility. In the long run, if the price level rises by 10%, nominal wages will also rise by 10%, leaving the real wage unchanged. Since firms' supply decisions depend on real wages (real costs of production), their output decisions are unaffected. The real economy is thus insulated from nominal changes, validating the classical dichotomy in the long run. Because the LRAS is anchored to the natural rate of output , any factor that changes will shift the LRAS curve. These are the same factors that drive long-run economic growth, analysed in the growth theory weeks of this course: Changes in labour supply — population growth, immigration, or changes in the natural rate of unemployment (e.g., improved job-matching technology) alter the equilibrium labour input and thus . Changes in physical capital — investment in new machinery or infrastructure raises productive capacity. Conversely, capital depreciation or destruction reduces it. Changes in human capital — investment in education and training raises the effective quality of the labour force, expanding . Changes in natural resources — discovery of new resources (e.g., North Sea oil) or depletion of existing ones shifts LRAS right or left respectively. Technological progress — the most sustained driver of LRAS rightward shifts, as improvements in production methods raise output per unit of input. Exam Insight When asked to analyse the effects of a supply-side policy (e.g., increased spending on education, deregulation of labour markets), the correct approach is to identify how the policy changes one of the LRAS determinants, show LRAS shifting right, and then note that long-run output rises whilst the price level falls (assuming AD is held constant). The AD-AS framework can reproduce the classical analysis of long-run growth and inflation when both curves are allowed to shift over time.Over the long run, two processes occur simultaneously: Technological progress continuously shifts the LRAS curve to the right, expanding the economy's productive capacity. Monetary expansion by the central bank continuously shifts the AD curve to the right. The result is a combination of: Ongoing output growth — driven by rightward shifts in LRAS as technology improves. Ongoing inflation — driven by AD shifting rightward faster than or alongside LRAS; as the money supply grows, the price level rises over time.
This diagram traces three equilibrium points across decades: 1990, 2000, and 2010. The LRAS shifts rightward each decade (), reflecting sustained technological progress. Simultaneously, the AD curves shift rightward (), driven by monetary expansion. The combined result is that output grows from to (steps 3 and 4 in the figure), whilst the price level rises from to (step 4). This diagram is highly instructive because it reconciles the AD-AS model with the long-run classical analysis: growth is driven by supply-side improvements, whilst monetary expansion explains the trend inflation observed in the data.Economic Intuition Why does ongoing money supply growth cause inflation rather than output growth in the long run? Because the LRAS is vertical — once the economy is at , there is no extra productive capacity. Additional demand from monetary expansion simply bids up prices rather than pulling more output from firms. This is the graphical expression of the quantity theory of money in the long run. Key Takeaways: LRAS and Long-Run Equilibrium LRAS is vertical at , determined by capital, labour, natural resources, and technology. Any change in these real factors shifts LRAS; price level changes do not. Long-run growth is explained by LRAS shifting right (technology) plus AD shifting right (money supply), producing both output growth and trend inflation. In the short run, the relationship between the price level and output supplied is fundamentally different from the long run. The SRAS curve is upward-sloping: a higher price level induces firms to supply a greater quantity of output.This positive relationship arises because, in the short run, not all prices and wages adjust instantaneously. Three major theories explain the upward slope of the SRAS: Sticky-wage theory — nominal wages are set in advance through contracts or social convention and do not instantly respond to changes in the price level. If the price level rises unexpectedly, firms receive higher revenues for their goods, but their wage costs are temporarily fixed. Real wages fall, making labour cheaper in real terms and inducing firms to hire more workers and expand output. Sticky-price theory — some firms face menu costs or contractual obligations that prevent them from immediately adjusting their prices. When the overall price level rises, firms with stuck prices find their relative prices have fallen, stimulating demand for their products and inducing them to produce more. Misperceptions theory — firms may confuse a general rise in the price level with an increase in the relative price of their own product. Believing that their specific product has become more valuable relative to other goods, firms temporarily expand production before eventually recognising that all prices have risen proportionally. In all three cases, the short-run positive relationship between and is a temporary one. Over time, wages adjust, price-setters update their menus, and misperceptions are corrected. Once all nominal adjustments are complete, the economy returns to the LRAS.
This diagram shows the SRAS as an upward-sloping curve. Beginning at price level and output , a fall in the price level to reduces the quantity of output supplied to . This is the reverse of what occurs with the AD curve: lower prices reduce the incentive (or ability, given nominal wage stickiness) of firms to produce. The slide caption notes that the positive slope could arise from sticky wages, sticky prices, or misperceptions — any or all of these mechanisms is consistent with an upward-sloping SRAS. Critically, the positive relationship is explicitly described as temporary, dissolving once nominal rigidities are resolved.Theoretical Interpretation The upward slope of the SRAS reflects the failure of the classical dichotomy in the short run. Nominal prices and wages are temporarily rigid, so a change in the overall price level does affect real variables — specifically, it alters real wages and thus firms' marginal cost of production. Higher nominal prices, with wages stuck, compress unit labour costs in real terms, making it profitable to expand production. This channel disappears once wage contracts are renegotiated, restoring the classical dichotomy. Common Mistake Do not confuse the SRAS and LRAS curves. The LRAS is vertical because price level changes have no long-run effect on output. The SRAS is upward-sloping because of short-run nominal rigidities. The key question in any dynamic AD-AS analysis is: are we in the short run (SRAS relevant) or has sufficient time passed for adjustment to the long run (LRAS relevant)? Exam Insight When a question asks "why does the SRAS slope upward?" always name at least two of the three theories (sticky wages, sticky prices, misperceptions) and briefly explain the mechanism of each. Then note that the positive relationship is temporary — this signals to the examiner that you understand the distinction between short-run and long-run supply. Key Takeaways: SRAS The SRAS slopes upward because of short-run nominal rigidities: sticky wages, sticky prices, or misperceptions about relative prices. Higher price levels temporarily reduce firms' real costs, encouraging more output; lower price levels have the opposite effect. The positive slope of SRAS is a transient phenomenon: as nominal variables adjust, the economy returns to the LRAS. The next part of the AD-AS analysis will: Explain in greater depth why the SRAS slopes upward — focusing on the role of expectations in the wage-setting process and how expectational errors generate short-run output fluctuations. Combine AD and SRAS to analyse business cycles — examining how demand and supply shocks displace the economy from its long-run equilibrium, and how the economy returns to over time. Examine stabilisation policy — whether and how monetary and fiscal policy can be used to counteract business cycles and speed the return to long-run equilibrium. Mankiw, N.G. (2020) Principles of Economics. 9th edn. Mason, OH: South-Western Cengage Learning.Mankiw, N.G. (2019) Macroeconomics. 10th edn. New York: Worth Publishers.Blanchard, O. (2021) Macroeconomics. 8th edn. Harlow: Pearson Education.Keynes, J.M. (1936) The General Theory of Employment, Interest and Money. London: Macmillan.Hicks, J.R. (1937) 'Mr. Keynes and the "Classics": A Suggested Interpretation', Econometrica, 5(2), pp. 147–159.Friedman, M. (1968) 'The Role of Monetary Policy', American Economic Review, 58(1), pp. 1–17.Lucas, R.E. (1973) 'Some International Evidence on Output-Inflation Tradeoffs', American Economic Review, 63(3), pp. 326–334.Okun, A.M. (1962) 'Potential GNP: Its Measurement and Significance', in Proceedings of the Business and Economic Statistics Section of the American Statistical Association. Washington, DC: American Statistical Association, pp. 98–104.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-11-aggregate-demand-and-aggregate-supply-i-claude.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 11 - Aggregate Demand and Aggregate Supply I Claude.mdThu, 23 Apr 2026 10:30:45 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_6_set2(adas_p1)/slide4.png"></figure>econ1051_econpol_andeconpoliticians/econ1051_tutorials/coursework2/group_dgpt.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_tutorials/COURSEWORK2/Group_DGPT.pdfWed, 22 Apr 2026 21:49:58 GMTPart I – Budget Constraints
Part II – Constrained Consumer Choice
Interior Solution: Graphical Approach
Interior Solution: Calculus (Substitution Method)
Corner Solutions
Summary and Key Takeaways
Bibliography Microeconomic theory of consumer behaviour rests on two distinct pillars. Last week established the theory of preferences, formalising what a rational consumer wants to do. This lecture introduces the second pillar: the budget constraint, which represents what the consumer can do. Taken together, the two pillars allow us to solve the consumer's choice problem as a constrained optimisation: maximise utility subject to a budget constraint.The analysis proceeds under two simplifying but important assumptions. First, consumers are assumed to be unable to save or borrow; they have a fixed amount of money to spend now. This rules out intertemporal considerations and keeps the model static. Second, consumers are assumed to be price takers: they treat market prices as given and beyond their control. This is the competitive environment assumption, familiar from the theory of perfect competition.Theoretical Interpretation The price-taker assumption is crucial. If a consumer could influence prices, the budget line would curve, making the constrained optimisation problem significantly more complex. Price-taking behaviour is consistent with the standard assumption that markets are large and no individual agent commands market power. With two goods, quantities and at prices and respectively, and income , the consumer's full budget expenditure condition is: This equation simply states that total expenditure equals total income; the consumer spends everything. Rearranging to express as a function of yields the budget line in slope-intercept form: This form is especially useful graphically. The vertical intercept is the maximum quantity of good 2 purchasable if the entire income is spent on good 2. Similarly, the horizontal intercept is the maximum quantity of good 1 when all income is spent on good 1.
The diagram above (Figure 1) illustrates Lisa's budget constraint with , (pizzas), and (burritos). The vertical intercept is and the horizontal intercept is . The shaded area below the line represents the opportunity set: all feasible consumption bundles. The budget line itself is the outer boundary of this set. The slope of the line is , meaning that for each additional pizza consumed, Lisa must give up half a burrito.Economic Intuition The intercepts have a natural interpretation: tells you the maximum quantity of good you could buy if you spent every penny on it. The slope tells you the market exchange rate between the two goods — how many units of good 2 you must sacrifice to get one more unit of good 1. This is a purely market-determined trade-off, not a preference-based one. The slope of the budget constraint, , is given the specific name the marginal rate of transformation (MRT). It represents the rate at which the market allows the consumer to trade one good for another. In Lisa's example, if she gives up one burrito (at £2), she can afford two more pizzas (at £1 each): the MRT is in absolute value terms, or more precisely .Crucially, the MRT measures market or opportunity trade-offs, and should be contrasted with the marginal rate of substitution (MRS) from the previous lecture. The MRS measures the trade-offs the consumer is willing to make in order to stay on the same indifference curve; the MRT measures the trade-offs the consumer can make given market prices. The consumer's optimisation problem is, in essence, the search for the point where these two rates align.Common Mistake Students frequently conflate MRS and MRT. Remember: the MRS is the slope of the indifference curve (preferences, willingness to trade); the MRT is the slope of the budget line (market prices, ability to trade). They are conceptually distinct and come from entirely different parts of the model. The budget constraint shifts or rotates in response to changes in , , or : Income increase (): Both intercepts increase proportionally ( and both rise). The budget line shifts outward in parallel, expanding the opportunity set without changing the slope. The relative price of the two goods is unaffected. Price of good 1 increases (): The horizontal intercept falls whilst the vertical intercept is unchanged. The budget line rotates inward around the vertical intercept, becoming steeper in absolute terms. The MRT rises in absolute value: good 1 has become relatively more expensive. Price of good 2 increases (): The vertical intercept falls whilst the horizontal intercept is unchanged. The budget line rotates inward around the horizontal intercept, becoming flatter. Exam Insight In exam questions on budget constraint shifts, always identify which axis is affected and whether the line shifts or rotates. A parallel shift indicates an income change (since the slope does not change). A rotation indicates a price change (since only one intercept moves). Stating this distinction explicitly is worth marks. For the worked example on Slide 9: if doubles to £100, both intercepts double and the line shifts out in parallel. If doubles to £2, only the horizontal intercept halves (from 50 to 25), and the line rotates inward, pivoting around the vertical intercept of 25. Summary The budget constraint defines the set of affordable bundles. The slope is the MRT: the market exchange rate between the two goods. An income change causes a parallel shift; a price change causes a rotation. The opportunity set is the triangle bounded by the axes and the budget line. Having established both the preference ordering (indifference curves) and the feasibility frontier (budget constraint), we can now solve the consumer's choice problem. The consumer seeks the highest attainable indifference curve subject to the budget constraint.
Figure 2 shows Lisa's constrained choice over pizzas () and burritos (). Several key observations follow directly from the diagram: Point lies above the budget line. It represents a bundle Lisa would prefer but cannot afford; it is infeasible. Points in areas (and point ) lie strictly within the budget set, on lower indifference curves. By the non-satiation assumption, Lisa is not maximising utility here; she could increase utility at no extra cost by moving to a bundle on the budget line itself. Points and lie on indifference curves that cross the budget line. At such points the indifference curve is not tangent to the budget line, meaning Lisa could still reach a higher indifference curve whilst remaining within the budget set. Point represents the optimum: it lies on indifference curve , which is the highest curve that touches the budget line. At this point the budget line is exactly tangent to the indifference curve. The consumer cannot do better. Point lies on a higher indifference curve () but is not on the budget line; it is infeasible. Economic Intuition Graphically, the optimum is found by asking: which indifference curve just "kisses" the budget line from below? Any curve that cuts through the line is not an optimum because the consumer could move along the budget line to reach a higher curve. The highest indifference curve that is still reachable is the one tangent to the budget line. The geometric condition "tangent to the budget line" translates directly into an algebraic condition. Since the slope of the indifference curve is the MRS , and the slope of the budget constraint is the MRT , tangency requires:This last expression is the "bang per buck" or equalisation of marginal utilities per pound spent condition. It states that at the optimum, the marginal utility gained from the last penny spent on good 1 must equal the marginal utility gained from the last penny spent on good 2.Theoretical Interpretation The equalisation condition has deep economic logic. Suppose : each pound spent on good 1 yields more utility than each pound spent on good 2. The consumer could raise utility by reallocating a pound from good 2 to good 1. This reallocation continues until the ratio equalises. The same logic applies if the inequality is reversed. Only when the two ratios are equal is there no profitable reallocation possible — i.e., the consumer is at an interior optimum. Common Mistake A common pitfall is to state that MRS = MRT is always the optimality condition. It is only the optimality condition for an interior solution, i.e. one where the consumer purchases strictly positive quantities of both goods. In corner solutions (see below), the tangency condition does not hold. Always check whether an interior solution is consistent with both quantities being positive before applying MRS = MRT. The graphical approach can be formalised as a constrained maximisation problem. Lisa wishes to:Two methods can solve this problem. The Lagrangian method (covered in quantitative modules) introduces a Lagrange multiplier to handle the constraint formally. The substitution method is presented here: substitute the binding constraint into the objective function, converting the constrained problem into an unconstrained one in a single variable.Step 1: Rearrange the budget constraint to express one quantity as a function of the other. Choosing to isolate :Step 2: Substitute this expression into the utility function to eliminate :The problem is now unconstrained in the single variable .Step 3: Differentiate with respect to and set the first-order condition (FOC) equal to zero. Solve for .Step 4: Substitute back into the rearranged budget constraint from Step 1 to recover .Consider (a Cobb-Douglas form) with , , .The maximisation problem is:Step 1: Solve the budget constraint for :Step 2: Substitute into the utility function, eliminating :Step 3: Compute the first-order condition with respect to :Step 4: Substitute back into the budget constraint:The utility-maximising bundle is , with utility .Exam Insight For the substitution method in an exam setting, always: (1) clearly state the maximisation problem with the constraint; (2) show each substitution step; (3) compute the FOC explicitly; (4) verify that the solution yields positive quantities of both goods (confirming an interior solution). If a negative quantity results, a corner solution exists and this method breaks down. The Cobb-Douglas form always yields an interior solution, which is why it is the workhorse example. Economic Intuition With the Cobb-Douglas utility , income is split evenly between the two goods in terms of expenditure shares — a well-known property. Lisa spends on good 1 and on good 2: exactly half her income on each, consistent with equal expenditure shares for the symmetric Cobb-Douglas case. Summary The constrained optimisation problem: subject to . The substitution method converts it to an unconstrained single-variable problem. The interior optimality condition is , equivalently . Always verify positivity of both solutions before declaring an interior optimum. Not all utility functions yield interior solutions. Interior solutions require that the indifference curves are strictly convex (bowed inward) and never intersect the axes; this is the case for Cobb-Douglas preferences. However, for perfect substitutes (e.g., ) and quasilinear preferences (e.g., ), the indifference curves may not be strictly convex and corner solutions can arise.At a corner solution, the consumer purchases only one of the two goods, consuming zero units of the other. The optimum lies at a corner of the budget line on one of the axes. The tangency condition does not hold at such a point; instead, the consumer's willingness to substitute differs from the market rate, but the constraint prevents further adjustment because a quantity cannot fall below zero.Consider Ben, who views Coca-Cola () and Pepsi () as perfect substitutes:His indifference curves are straight lines with slope (he is always willing to trade one can of Coke for one can of Pepsi, keeping utility constant). Suppose Coke is cheaper: . Then the budget line, with slope , is flatter than the indifference curves (which have slope ). In absolute value terms, .
Figure 3 illustrates Ben's situation. The budget line has a slope flatter than the parallel indifference curves . The highest feasible indifference curve is reached at point , which lies on the horizontal axis where and . This is a corner solution: Ben spends his entire income on the cheaper good (Coke) and purchases zero Pepsi. The condition does not hold here; indeed , which means Ben always prefers to substitute Coke for Pepsi at market prices, and does so until Pepsi consumption reaches zero.Theoretical Interpretation The intuition for perfect substitutes is straightforward: if the market offers goods that the consumer views as identical in terms of utility, the consumer will always buy whichever is cheaper. The MRS (equal willingness to substitute) combined with (Coke costs less per can) means Coke delivers more utility per pound than Pepsi. The consumer specialises entirely in Coke. The rule breaks down because the standard tangency requires the indifference curve to be strictly more curved than the budget line; with linear indifference curves, they can never be tangent at an interior point. Common Mistake Students sometimes wrongly apply the condition to corner solutions. For the perfect substitutes case, attempting to solve yields , i.e., . This would only be satisfied if the goods happen to be priced proportionally to their utility weights. In the generic case ( and ), this equation has no solution consistent with an interior point, correctly indicating a corner solution. Exam Insight When identifying corner solutions in an exam, the key diagnostic is: are indifference curves linear (perfect substitutes) or do they hit the axes (quasi-linear)? For linear indifference curves, compare the slope of the indifference curve () with the slope of the budget line (). If they are unequal, the consumer will specialise in the good that offers the highest marginal utility per pound. State explicitly that at the corner, and explain why the non-negativity constraint binds. Summary Corner solutions arise when utility functions have linear or axis-intersecting indifference curves (e.g., perfect substitutes, quasilinear preferences). At a corner solution, one good is consumed in zero quantity and the entire budget is spent on the other. The tangency condition does not apply at corner solutions. For perfect substitutes, the consumer spends all income on the cheaper good. This lecture completed the foundation of the neoclassical model of consumer choice. Starting from the mathematical representation of the budget constraint and the concept of the MRT, we derived graphically and algebraically the conditions under which a rational consumer maximises utility. The central insight is that at an interior optimum, the consumer equates their subjective willingness to trade goods (MRS, determined by preferences) with the objective market rate at which goods can be exchanged (MRT, determined by prices). The substitution method provides a systematic calculus-based approach to solving such problems, whilst the graphical method provides geometric intuition for the tangency condition. Corner solutions arise when utility functions do not yield strictly convex indifference curves, as in the perfect substitutes case, and the standard tangency rule must be replaced with a comparison of the MRS and MRT.Lecture 7 Master Summary Budget constraint: ; Opportunity set: all bundles on or below the budget line. MRT: the market exchange rate between goods (slope of budget line). Interior optimum: highest feasible indifference curve tangent to budget line; , equivalently . Substitution method: substitute budget constraint into utility, differentiate, set FOC . Corner solution: arises with perfect substitutes or quasilinear utility; consumer specialises in one good; at the corner. Income change parallel shift; price change rotation of budget line. Perloff, J.M. (2014) Microeconomics. 2nd edn. Harlow: Pearson Education. Perloff, J.M. (2016) Microeconomics. 3rd edn. Harlow: Pearson Education. Perloff, J.M. (2018) Microeconomics. 4th edn. Harlow: Pearson Education. Varian, H.R. (2010) Intermediate Microeconomics: A Modern Approach. 8th edn. New York: W.W. Norton. Mas-Colell, A., Whinston, M.D. and Green, J.R. (1995) Microeconomic Theory. Oxford: Oxford University Press.]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-7-budget-constraints-and-consumer-choice.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 7 - Budget Constraints and Consumer Choice.mdWed, 22 Apr 2026 21:44:48 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture7_consumerchoice/slide6.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture7_consumerchoice/slide28.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture7_ConsumerChoice/Slide28.pngWed, 22 Apr 2026 13:35:50 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture7_consumerchoice/slide28.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture7_consumerchoice/slide27.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture7_ConsumerChoice/Slide27.pngWed, 22 Apr 2026 13:35:50 GMT<figure><img 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src="econ1001_introtomicroeconomics/econ1001_images/lecture7_consumerchoice/slide3.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture7_consumerchoice/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture7_ConsumerChoice/Slide2.pngWed, 22 Apr 2026 13:35:49 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture7_consumerchoice/slide2.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture7_consumerchoice/slide1.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture7_ConsumerChoice/Slide1.pngWed, 22 Apr 2026 13:35:49 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture7_consumerchoice/slide1.png"></figure>The NUTS2 map of European regional GDP per capita reveals a striking core-periphery pattern. Wealthy regions concentrate in a blue banana arc stretching from southern England through the Benelux countries, western Germany, Switzerland, and northern Italy, supplemented by Scandinavian and Alpine clusters. Eastern European regions, together with southern Iberia, southern Italy, Greece, and much of the Balkans, remain substantially poorer. The range is extreme, running from under €13,000 to over €81,000 per capita.Economic Intuition A single map communicates what tables obscure: the disparities are not merely statistical artefacts but are geographically clustered, with rich regions near rich regions and poor regions near poor regions. This spatial autocorrelation is precisely what neoclassical theory has the hardest time explaining and what NEG models were developed to rationalise.
This dot plot shows the dispersion of regional GDP per capita within each EU member state. The key observation is that within-country inequality is often as large as, or larger than, between-country inequality. Germany spans roughly €27,800 to €65,200; France ranges from around €9,200 to €59,000; Ireland stretches from €27,100 to €85,500. Small countries such as Malta, Cyprus, and Luxembourg naturally show little variation because they have few internal regions. This matters because it implies that national averages mask severe internal divergence, and so effective regional policy must target sub-national units rather than simply transferring resources between member states.Common Mistake Students often conflate country-level convergence with regional convergence. The EU as a whole can be converging in terms of national GDP per capita (with poorer new member states catching up) while simultaneously experiencing widening within-country gaps. Always specify the level of aggregation.
Employment rates for the 20-64 age group reinforce the core-periphery picture but with some interesting deviations. Nordic countries, Germany, the Netherlands, and the UK show high employment, while southern Italy, parts of Spain, Greece, and much of Turkey display employment rates below 57%. Employment gaps capture something GDP per capita cannot: the extensive margin of labour market participation, which reflects both labour demand and structural features such as female participation, informal economy size, and welfare incentives.
The map of young people Not in Employment, Education, or Training (NEET) offers a forward-looking diagnostic. NEET rates predict future human capital depreciation and social exclusion. Southern Italy, parts of Spain, Bulgaria, and Romania show alarmingly high NEET rates, consistent with the hypothesis that these regions are caught in a low-skill equilibrium, where poor labour market prospects suppress educational investment, which in turn reinforces low productivity.
The ONS map of UK household income reveals a pronounced London and South-East premium. The London-centric spatial structure of the UK economy is extreme by G7 standards, with incomes in parts of Inner London exceeding 1.3 times the UK average while large swathes of the North and the Celtic periphery lie below 0.8 times.
This infographic dramatises the UK's duality: Inner London is the richest region in northern Europe, yet nine of the ten poorest regions in northern Europe are also British (West Wales, Cornwall, Durham and Tees Valley, Lincolnshire, South Yorkshire, Shropshire and Staffordshire, Lancashire, Northern Ireland, and East Yorkshire and North Lincolnshire). This is a textbook example of agglomeration rents accruing to a dominant capital while the periphery is hollowed out.Theoretical Interpretation The UK pattern is hard to reconcile with simple neoclassical logic. If capital were truly mobile and free to arbitrage, we would expect diminishing returns to push investment out of London and towards cheaper peripheral regions. That this does not happen at sufficient scale points to powerful agglomeration externalities (financial clustering, human capital spillovers, deep labour markets, global connectivity) that keep the capital attractive despite congestion and high rents. The lecture contrasts two frameworks: the Solow neoclassical model and New Economic Geography.The Solow model (Solow, 1956) rests on a production function with two factors (capital and labour), constant returns to scale overall, and diminishing returns to each factor individually. A Cobb-Douglas specification with embodies these assumptions. Capital accumulates through savings, is depleted by depreciation , and is diluted by population growth . The fundamental equation of motion for capital per worker is:A steady state is reached where . At this point investment exactly offsets depreciation and population growth, so is constant.Definition Conditional convergence: poor regions with similar savings rates, population growth, and human capital to rich regions will tend to grow faster and catch up, because their lower capital-labour ratio gives them higher marginal returns to capital. Capital-labour ratio and per-capita income rise with the savings rate and productivity , and fall with and . In the long run, without technological progress, per-capita growth is zero at the steady state. A permanent increase in raises the level of income but not its growth rate. Augmenting the model with human capital (Mankiw, Romer and Weil, 1992) produces the augmented Solow model, in which investment in human capital drives technological adoption and conditional convergence becomes more plausible empirically. Exam Insight If asked to "evaluate the Solow model's relevance for EU regional policy", emphasise the following: (i) Solow predicts convergence, so regional policy is at best a temporary accelerator; (ii) the model implies that removing institutional rigidities and enabling factor mobility is sufficient; (iii) the augmented version reframes policy as investment in human capital rather than raw transfers. Under Solow logic, integration promotes equality because capital flows to regions with high marginal returns and labour flows to regions with high wages, eliminating differentials. Regional inequalities are therefore either transient adjustment frictions or symptoms of institutional failure. Policy should focus on liberalisation and factor mobility, not subsidies.Common Mistake It is wrong to say Solow predicts unconditional convergence of all regions. It predicts conditional convergence given similar structural parameters. Regions that differ in savings rates, demographics, or technology converge to different steady states. NEG (Krugman, 1991; Krugman and Venables, 1990) overturns the neoclassical intuition by introducing increasing returns, monopolistic competition, and trade costs. Integration in this framework can worsen regional disparities rather than eliminate them.
The Krugman and Venables (1990) numerical example contrasts producing in "Belgium" (central, high-cost, good market access) with "Spain" (peripheral, low-cost, worse market access) and splitting production across both. Production costs are 10 in Belgium, 8 in Spain, and 12 if production is duplicated. Shipping costs fall from 3 (high barriers) to 0 (full integration). The total-cost minimising location depends on trade costs in a non-monotonic way.Economic Intuition With high trade barriers, firms duplicate production to avoid shipping costs (total 12). With moderate barriers, they concentrate in the larger market Belgium (10 + 1.5 = 11.5) despite its higher production costs, because good market access dominates. Only with very low barriers does production migrate to the cheap location Spain (8 + 0 = 8). The path is high-cost concentration first, low-cost relocation later, meaning integration can hurt the periphery before it helps. Exam Insight A canonical question is "Does economic integration necessarily benefit peripheral regions?". Use the Krugman-Venables table to argue that the answer is non-monotonic in trade costs, that partial integration can harm the periphery, and that deeper integration or active regional policy is needed to realise peripheral gains. NEG formalises the tension between forces that concentrate activity and forces that disperse it. Agglomeration forces: increasing returns to scale, positive externalities (spillovers), technological spillovers, labour market pooling, and demand and supply linkages. Dispersion forces: congestion, high rent and land prices, and product market competition.
The Duranton and Kerr (2015) figure on Silicon Valley shows how innovation activity clusters in a very small number of zip codes, with patent citations tracing a dense web of intra-cluster knowledge flows. This visualisation is the empirical incarnation of Marshallian externalities: firms cluster because proximity lowers the cost of accessing ideas, specialised labour, and intermediate suppliers. The knowledge sourcing zones are small and overlapping, suggesting that spillovers decay rapidly with distance.
The demand-linkage cycle captures a self-reinforcing agglomeration mechanism. If industry initially moves to the larger region, workers follow and spend their incomes locally, expanding the market. The bigger market attracts still more firms because of trade costs and economies of scale, prompting further production shifting. This is a positive feedback loop whose logic is fundamentally different from the diminishing-returns logic of Solow. The economy can have multiple stable equilibria, and small historical accidents can tip it into an unequal outcome.
The supply-linkage cycle complements the demand side. When firms agglomerate, intermediate goods become locally available and cheaper in the larger region, which attracts further upstream and downstream firms. This is the classic input-output complementarity at the heart of industrial clusters. The combined operation of demand and supply linkages produces what Krugman terms cumulative causation.
The dispersion side of the ledger shows why agglomeration does not proceed indefinitely. London rental costs rise towards the centre, and congestion imposes real productivity costs. At some point the marginal benefit of locating in the core is outweighed by congestion rents, stabilising the spatial equilibrium. The relative strength of agglomeration versus dispersion forces determines the equilibrium configuration.Theoretical Interpretation In Krugman's core-periphery model, the key parameter is the level of trade costs. Very high trade costs make dispersion dominate (each region must produce for itself). Very low trade costs can tip the system into a core-periphery equilibrium in which one region hosts all manufacturing. The model thus predicts a non-monotonic relationship between integration and inequality, often called the U-shape or tomahawk bifurcation.
The map of the southeastern United States shows that population density in 2000 clusters visibly along the fall line, the geological boundary where rivers cross rapids. Historically, these were portage sites where boats had to unload, creating natural trading posts. The original economic logic, water transport, has been obsolete for more than a century, yet the settlements persist as large metropolitan areas (Washington, Richmond, Augusta, Columbus, Macon).
The Bleakley and Lin (2012) figure plots population density against distance to the fall line, with a sharp peak at zero. The causal interpretation is that a transient geographical advantage, eliminated by railways and modern transport, locked in population agglomerations that have persisted through path dependence. This is compelling evidence for NEG: small historical accidents, amplified by agglomeration externalities, produce permanent spatial outcomes.Economic Intuition Think of it as regional destiny being determined by a long-forgotten coin flip. Once workers, firms, and infrastructure coordinate on a location, the self-reinforcing dynamics of NEG preserve that configuration even after the original reason for choosing it disappears. History casts a long shadow on spatial outcomes. Exam Insight When asked "What evidence supports path dependence in regional economics?", cite Bleakley and Lin (2012) on US portage sites as the cleanest natural experiment: an original advantage that is unambiguously obsolete, yet the populations persist. Neoclassical (Solow): integration plus factor mobility implies convergence; policy should remove frictions. NEG: integration can trigger cumulative divergence through demand and supply linkages and spillovers; path dependence means that initial advantages persist. Prosperous regions enter a virtuous circle (clustering, high incomes, new industries). Poor regions face a vicious circle (brain drain, low investment, obsolete technology). Summary Solow implies regional inequality is temporary; NEG implies it can be permanent. NEG supplies the intellectual case for active regional policy. Empirical path-dependence findings tilt the balance towards NEG for questions of long-run spatial structure. Rich regions and countries may wish to support poorer neighbours for several reasons: Equity: a normative concern for fairness and a minimum standard of living. Political solidarity: cohesion supports the legitimacy and stability of the Union. Economic self-interest: poorer regions growing faster expands future export markets and investment opportunities, and reduces pressure for labour migration. Provision of physical capital: infrastructure, transport links. Support for research and development. Public education and training to raise human capital. Income transfers to households and regions. A single EU-level policy is justified by coordination failures: uncoordinated national aid risks duplication, free-riding, and a race to the bottom in subsidies. A common policy also allows the Union to influence recipient policy priorities and to generate sufficient scale to affect growth trajectories.Theoretical Interpretation EU regional policy is an exercise in fiscal federalism. It combines (i) an insurance function against asymmetric shocks, (ii) a redistributive function to secure political consent for integration, and (iii) a developmental function to correct NEG-style market failures. The Optimum Currency Area (OCA) literature is relevant: in the absence of fiscal transfers, regions hit by asymmetric shocks have limited adjustment options inside a currency union, so regional policy partly substitutes for the automatic stabilisers that a federal fiscal system would provide. Roughly 34% of the EU budget is dedicated to regional/cohesion policy. Funds are largely pre-allocated by country, with the poorest regions receiving the largest share. Funds co-finance national projects within agreed regional development plans. Convergence (approximately 82% of funds): targets regions with GDP per person below 75% of the EU average. Regional competitiveness and employment (about 16%). Territorial cooperation at cross-border and transnational level (about 2%). European Regional Development Fund (ERDF): innovation, research, the digital agenda, SME support, and the low-carbon economy. European Social Fund (ESF): employment, education, and those at risk of poverty. Cohesion Fund: restricted to countries with Gross National Income below 90% of the EU average, focused on trans-European transport networks and environmental infrastructure. European Agricultural Fund for Rural Development (EAFRD). European Maritime and Fisheries Fund (EMFF). ERDF and ESF together constitute the Structural Funds.
The side-by-side maps show the geographic reach of the two main funding streams for 2014-2020. Structural Funds eligibility (left) is broad and graduated, with less developed regions in red (GDP per head below 75% of EU-27 average) concentrated in southern and eastern Europe plus West Wales, Cornwall, and parts of the UK. Cohesion Fund eligibility (right) is stricter, confined to member states with GNI per head below 90% of the EU-27 average, and therefore covers the central and eastern member states, Portugal, and Greece. Richer members such as Germany, France, and the Benelux countries are net contributors to the budget but do not draw on the Cohesion Fund.Common Mistake Students often confuse Structural Funds eligibility (regional, GDP-per-capita-based) with Cohesion Fund eligibility (national, GNI-based). A rich country can contain Structural Fund regions, but only poor countries receive Cohesion Fund support. Evaluating regional policy is difficult because treatment is not random: All poor regions receive transfers. There is a mechanical negative correlation between income and transfers. A clean experiment would require randomly allocating transfers to some poor regions and withholding them from others, which is politically infeasible. Theoretical Interpretation This is a classic endogenous treatment problem. The simple regression of growth on transfers is biased because the worst-off regions get the most transfers, producing a spurious negative correlation. Credible evaluation requires exploiting discontinuities, such as the 75% GDP threshold, as a quasi-random source of variation (a regression discontinuity design).
The Nobel Prize-winning work of Banerjee, Duflo, and Kremer demonstrates the power of randomised controlled trials in development economics. The vaccination example on the slide compares three randomly assigned groups of villages: a control group, villages receiving mobile clinics, and villages receiving mobile clinics plus small incentives (lentils). Full immunisation rates rise from 6% in control to 18% with clinics and 39% with clinics plus incentives. Remarkably, the cost per fully immunised child falls from $56 (mobile clinics alone) to $28 (clinics with incentives), because incentives raise take-up enough to spread fixed costs over more vaccinations.Economic Intuition The design exploits randomisation to isolate causal effects. It also illustrates a subtle point: adding a small incentive can be cheaper on a per-outcome basis because of non-linearities in take-up. This is a powerful counter-example to the intuition that any subsidy increases unit costs. Exam Insight If asked to "discuss how the causal impact of EU regional funds might be credibly estimated", draw the analogy to RCTs, explain why they cannot be used directly for EU policy, and mention quasi-experimental methods such as regression discontinuity at the 75% threshold. Boldrin and Canova (2001): no significant growth effects beyond short-term consumption stimuli. Midelfart-Knarvik and Overman (2002): positive effect in attracting high-tech industries, but at the expense of medium-skilled industries. Becker, Egger, and von Ehrlich (2010): positive growth and income effects only in regions with adequate human capital endowments and strong institutions (low corruption, functional administration). Theoretical Interpretation The Becker, Egger, and von Ehrlich result has a strong theoretical interpretation. Transfers are not a substitute for absorptive capacity: without human capital to use the funds productively and institutions to prevent rent extraction, money is dissipated. This is consistent with the augmented Solow view that capital investment requires complementary factors, and with the NEG view that transfers alone cannot overcome agglomeration disadvantages unless they build genuine productive capacity. Summary The causal impact of EU regional policy is hard to identify cleanly. Effects are generally modest and conditional on institutional quality. Transfers work best when combined with human capital and good governance. This gives a nuanced policy message: design and context matter more than raw quantity of funds.
The map of UK Structural Funds eligibility for 2014-2020 shows that only West Wales and Cornwall qualified as less developed regions (below 75% of EU-27 GDP per head), while a belt of northern, Welsh, and Scottish regions qualified as transition regions (between 75% and 90%). Southern England, particularly London and the South-East, is classified as a more developed region. This is striking: the UK, a top-tier economy overall, contains areas with GDP per capita low enough to qualify alongside Greek and Romanian regions, illustrating the earlier point that the UK is the most regionally unequal G7 economy.
The ESIF 2014-2020 budget breakdown for the UK by theme shows SME competitiveness as the largest single category (over €2.5 billion), followed by sustainable and quality employment, environmental protection, climate adaptation, educational and vocational training, and social inclusion. The colour coding shows that SME support is dominated by ERDF (blue), whereas employment and education are largely ESF-funded (purple). This allocation reflects the UK's specific structural weaknesses: relatively low productivity in the SME sector and regional skills gaps. Northwest and northeast England and Yorkshire established Jeremie funds (Joint European Resources for Micro to medium Enterprises) to improve access to finance for SMEs, tackling a persistent UK market failure. Inner London used funds for transport infrastructure, including the cable car over the River Thames. West Wales used funds to roll out faster broadband to homes and businesses, directly addressing digital exclusion in peripheral regions. What should be the main levers for growth in English regions and at what level should decisions be taken? Is comprehensive reform of local government needed? How should regions be funded? How should the balance be struck between local fiscal autonomy and accountability on one hand and redistributive transfers from rich to poor regions on the other? Theoretical Interpretation The Wolf questions capture the central tension in fiscal federalism: subsidiarity (local decision-making improves information and accountability) versus solidarity (central redistribution corrects spatial inequities). Pure devolution risks entrenching regional inequality, because poor regions have thinner tax bases. Pure centralisation risks paternalism and allocative inefficiency. The optimal design combines central financing with decentralised spending choices subject to conditionality. The lecture's coherent narrative can be summarised as follows. Regional disparities in the EU and the UK are large, persistent, and geographically structured. The neoclassical Solow framework predicts convergence and implies that regional policy should be modest and transitional. The NEG framework, supported by evidence on path dependence (Bleakley and Lin, 2012) and innovation clustering (Duranton and Kerr, 2015), predicts that integration without intervention can entrench spatial inequality through cumulative causation. EU regional policy, structured around the ERDF, ESF, and Cohesion Fund, channels roughly one-third of the EU budget towards poorer regions, with convergence as the dominant objective. Empirical evaluations are mixed: effects are conditional on human capital and governance, consistent with the augmented Solow view and with NEG's emphasis on absorptive capacity.Exam Insight A strong essay answer will do three things. First, set up the theoretical contrast between Solow and NEG, with explicit mention of convergence versus cumulative causation. Second, deploy empirical evidence for both sides: conditional convergence findings support Solow; Bleakley and Lin (2012), the core-periphery map, and UK inequality support NEG. Third, apply the framework to EU regional policy, noting that the Becker, Egger, and von Ehrlich (2010) conditionality result reconciles both views: transfers work when they build absorptive capacity, consistent with augmented Solow, and when they compensate for agglomeration disadvantages, consistent with NEG. Summary Regional inequality is both a market outcome (NEG) and a diagnostic of structural weakness (absorptive capacity). Policy instruments include infrastructure, R&D, human capital, and income transfers. Effectiveness is conditional: money without complementary factors yields little. The UK case highlights that high national income can coexist with severe regional inequality, making robust regional policy a live concern for any integrated economy. Banerjee, A., Duflo, E. and Kremer, M. (2019) Understanding Development and Poverty Alleviation. The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2019, Popular Information. Stockholm: The Royal Swedish Academy of Sciences.Becker, S.O., Egger, P.H. and von Ehrlich, M. (2010) 'Going NUTS: The effect of EU Structural Funds on regional performance', Journal of Public Economics, 94(9-10), pp. 578-590.
Becker, S.O., Egger, P.H. and von Ehrlich, M. (2013) 'Regional transfers in Europe: Do we need fewer of them or different ones?', VoxEU, 17 July. Available at: http://www.voxeu.org/article/regional-transfers-europe-do-we-need-fewer-them-or-different-ones.Bleakley, H. and Lin, J. (2012) 'Portage and path dependence', The Quarterly Journal of Economics, 127(2), pp. 587-644.Boldrin, M. and Canova, F. (2001) 'Inequality and convergence in Europe's regions: Reconsidering European regional policies', Economic Policy, 16(32), pp. 206-253.Duranton, G. and Kerr, W.R. (2015) The Logic of Agglomeration. NBER Working Paper No. 21452. Cambridge, MA: National Bureau of Economic Research.Krugman, P. (1991) 'Increasing returns and economic geography', Journal of Political Economy, 99(3), pp. 483-499.Krugman, P. and Venables, A.J. (1990) 'Integration and the competitiveness of peripheral industry', in Bliss, C. and Braga de Macedo, J. (eds.) Unity with Diversity in the European Economy: The Community's Southern Frontier. Cambridge: Cambridge University Press, pp. 56-77.Mankiw, N.G., Romer, D. and Weil, D.N. (1992) 'A contribution to the empirics of economic growth', The Quarterly Journal of Economics, 107(2), pp. 407-437.Midelfart-Knarvik, K.H. and Overman, H.G. (2002) 'Delocation and European integration: Is structural spending justified?', Economic Policy, 17(35), pp. 321-359.Solow, R.M. (1956) 'A contribution to the theory of economic growth', The Quarterly Journal of Economics, 70(1), pp. 65-94.Solow, R.M. (1987) Robert M. Solow: Biographical. The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1987. Stockholm: The Royal Swedish Academy of Sciences.]]>econ1014_economicintegrationii/econ1014_notes/lecture-1-&-2-regional-policy-notes.htmlECON1014_EconomicIntegrationII/ECON1014_notes/Lecture 1 & 2 Regional Policy Notes.mdWed, 22 Apr 2026 11:06:17 GMT<figure><img src="econ1014_economicintegrationii/econ1014_images/ei_ii_l1_2/slide7.png"></figure>econ1016_currenteconissues/econ1016_notes/4-adrien-vigier/lecture-15-cryptocurrencies-iii.htmlECON1016_CurrentEconIssues/ECON1016_notes/4 - Adrien Vigier/Lecture 15 - Cryptocurrencies III.mdTue, 21 Apr 2026 19:55:42 GMTThis figure plots long-term international migration to the UK from 1970 to 2014, decomposing the total into gross immigration, gross emigration, and the resulting net migration figure. The chart illustrates a structural transformation in the UK's migration balance: throughout the 1960s and 1970s, net migration was consistently negative, meaning more individuals were leaving Britain than arriving. This reversed modestly in the 1980s and remained at a low positive level into the early 1990s. From 1994 onwards, net migration has been positive in every single year, driven initially by non-EU flows and subsequently amplified by intra-EU mobility following the 2004 and 2007 enlargements. By 2016, net migration stood at approximately 273,000 persons annually, a figure that features prominently in domestic political debate.Economic Intuition The sustained positive net migration from the mid-1990s onwards coincides with a period of strong UK economic growth. This illustrates a fundamental push-pull dynamic: migrants respond to wage differentials and employment opportunities, and a growing economy exerts a powerful gravitational pull on mobile labour.
This ONS chart disaggregates net migration by nationality group (non-EU, EU, and British nationals) from mid-2012 to mid-2023. Several structural breaks are clearly visible. Prior to the 2016 EU referendum, EU net migration was the dominant driver of the positive total, running at roughly 200,000 per annum. Following the referendum and especially after the end of the EU transition period in late 2021, EU net migration collapsed sharply and turned mildly negative as EU nationals departed or reduced inflows in response to the new immigration system. By contrast, non-EU net migration surged dramatically after 2021, reaching provisionally estimated figures approaching 800,000 by year ending June 2023. This compositional shift is crucial: it shows that Brexit did not reduce overall immigration but rather redirected its source, replacing free-movement EU workers with visa-based non-EU migrants (predominantly from South and East Asia, and from humanitarian routes).Theoretical Interpretation This compositional shift has significant implications for skill selection and labour market assimilation. Free-movement EU migrants under the pre-2021 system could self-select flexibly in response to labour demand signals. The new points-based immigration system selects on qualifications, salary thresholds, and occupation type, generating a different skill distribution among entrants and altering the substitutability or complementarity relationship between immigrants and natives.
This figure shows total immigration, emigration, and net migration between mid-2018 and mid-2023 with confidence intervals. It makes unmistakably clear that the explosion in net migration post-2021 was driven almost entirely by a surge in immigration rather than a reduction in emigration. Gross immigration exceeded 1.2 million in provisional estimates for year ending June 2023. The sharp divergence between the immigration and emigration series from late 2021 onwards underlines that the UK became a substantially more attractive destination following the pandemic, with students, workers on the Health and Care visa, and humanitarian entrants all contributing.
This ONS stacked bar chart decomposes non-EU immigration and emigration by reason from 2019 to 2023. The composition of immigration flows shifted markedly over this period. Study and work visas accounted for the bulk of the post-2021 rise, with humanitarian routes (including the Ukraine and Afghanistan programmes) also making a significant contribution. Work-related immigration was the primary driver of the non-EU surge by year ending June 2023. Crucially, emigration remained relatively flat throughout, reinforcing the interpretation that higher net migration was driven by increased arrivals rather than reduced departures. For the purposes of labour market analysis, the dominance of work and study visas in the immigration column confirms that the majority of recent non-EU entrants are economically active or likely to become so.Exam Insight When asked to comment on trends in UK immigration, always distinguish between gross immigration, gross emigration, and net migration. Many exam candidates confuse these. Net migration is the relevant concept for assessing labour market and fiscal effects, but gross immigration determines skill composition effects. Summary Net migration has been positive in every year since 1994. The post-2021 surge in net migration reflects a collapse in EU inflows and a dramatic rise in non-EU inflows. Work and study visas dominate the reasons for non-EU immigration. Brexit changed the composition of immigration, not the overall level in the short run. A foundational question in immigration economics concerns who chooses to migrate. If immigrants are positively selected from their source population (i.e., they possess above-average ability, motivation, or education), the labour market and fiscal consequences for the destination country are likely to be more favourable than if selection is negative. The debate has a long history: Benjamin Franklin's 1753 complaint about German immigrants characterised them as disproportionately drawn from the least able. Subsequent economic scholarship has largely inverted this assessment.Chiswick (1978) provided influential early evidence that immigrants to the United States were more able and highly motivated than comparable natives. Carliner (1980) similarly found that immigrants chose to work longer and harder than non-migrants. These findings are consistent with a simple theoretical prior: migration is a costly investment, requiring not only monetary resources but also the psychological capacity to uproot oneself and take risks, so only individuals with the drive and ability to profit from migration will undertake it.
Borjas (1987) provided the canonical theoretical treatment of immigrant self-selection. The framework models the migration decision as a comparison of returns to skills in the source and destination countries. The two panels of this diagram plot log wages against skills in both the source country and the US, with the crossing point determining the selection threshold (positive) or (negative).In the left-hand panel (positive selection), the US wage-skills schedule has a steeper slope than that of the source country, implying that the returns to skill are higher in the US. Only workers above the threshold will find it worthwhile to migrate, so the migrant pool is disproportionately drawn from the upper end of the skill distribution. This arises when the source country has relatively low income inequality (a compressed wage distribution), since high-skilled workers gain proportionally more by moving to the more dispersed US wage structure.In the right-hand panel (negative selection), the source country offers a steeper wage-skills gradient than the US, implying that the source country already rewards skill more generously. In this case, only workers below the threshold gain from migrating, generating a negatively selected pool. This is more likely when income inequality in the source country is high, since the returns to skill are already being captured domestically.Theoretical Interpretation The Borjas model formalises the Roy (1951) model of self-selection in a migration context. The key insight is that the direction of selection depends on the relative returns to skills (i.e., income inequality) in the source and destination countries, not simply on wage levels. A source country with very high returns to human capital will lose relatively few high-skilled workers, whilst a country with a compressed wage structure provides strong incentives for skilled workers to emigrate to higher-inequality destinations. Positive selection: Migrants are drawn disproportionately from the upper end of the skill distribution of the source country, typically arising when destination-country returns to skill exceed those in the source country. Negative selection: Migrants are drawn disproportionately from the lower end of the skill distribution of the source country, typically arising when source-country returns to skill exceed those in the destination country. The empirical record is mixed, but leans towards positive selection on educational attainment. Gould and Moav (2016) found that Israeli immigrants to the United States were positively selected. Feliciano (2005) and Grogger and Hanson (2011) document that, on average, immigrants exhibit positive selection on educational attainment from almost every sending country worldwide. Chiquiar and Hanson (2005) provide a nuanced finding for Mexico: Mexican immigrants to the US are drawn from the middle of the skill distribution rather than the bottom, suggesting neither strongly positive nor negative selection, which they interpret as reflecting the fixed costs of migration.For the UK specifically, the relevant finding is that immigrants are, on average, better educated than native workers, which is consistent with positive selection.Common Mistake Do not conflate positive selection on observable characteristics (e.g., education) with universally positive labour market outcomes. Even positively selected immigrants may face downgrading of foreign qualifications, language barriers, and discrimination that compress their wages relative to their human capital. Friedberg (2001) documents precisely this phenomenon for Russian immigrants to Israel, who entered occupations below their skill level. Summary Migration is inherently a costly investment; theory predicts migrants will be self-selected. The direction of selection depends on the relative returns to skill (income inequality) in source vs. destination countries (Borjas, 1987). Empirical evidence leans towards positive selection, especially on educational attainment. Selection patterns vary significantly by source country and skill level. The central analytical question is whether immigration raises or lowers the wages and employment of native workers. The answer depends critically on two structural assumptions: (i) whether immigrants and natives are substitutes or complements in production; and (ii) whether capital is fixed (short run) or mobile (long run).
This diagram depicts the short-run labour market equilibrium for the UK under the assumption that immigrants and natives are perfect substitutes. The horizontal axis measures total employment ( for natives, for natives plus immigrants), and the vertical axis measures the wage . Initially, the market clears at wage with native employment .When immigrants arrive, the total labour supply curve shifts outward from the domestic supply to the combined (domestic + immigrant) supply curve. In the short run, capital is fixed, so the demand curve does not move. The new equilibrium sees the wage fall from to , total employment rise from to , and native employment actually fall from to as some native workers are priced out of the market at the lower wage. Capital owners benefit because the return to capital rises as labour becomes cheaper.Economic Intuition The short-run model is a straightforward application of supply and demand. Immigration expands labour supply → labour becomes cheaper → wage falls → native employment contracts and capital returns rise. The distributional consequence is that workers lose and capital owners gain, making immigration a redistributive shock even if total output increases. Common Mistake Do not state that immigration always reduces employment. In the short-run model, total employment rises (from to ); it is native employment specifically that falls (from to ). The confusion of total and native employment is a common error.
In the long run, capital is mobile: it can expand or contract in response to profitability signals. The short-run wage depression increases the return to capital, inducing firms to invest and expand their capital stock. As capital accumulates, the labour demand curve shifts rightward, raising wages back towards and restoring native employment to . Total employment expands further to , incorporating both the original immigrant inflow and the additional workers hired as a result of expanded capital.The long-run implication is striking: with capital mobility, the wage effect of immigration is attenuated towards zero. The economy effectively scales up, absorbing the immigrant supply shock without a permanent deterioration in native wages. This is the mechanism underlying the finding that immigration may have little long-run effect on native wages even when short-run effects are negative.Theoretical Interpretation This result mirrors the logic of the Rybczynski theorem in trade theory: a factor endowment change alters output composition (here, the scale of the economy) rather than factor prices when all markets adjust freely. The long-run neutrality of immigration on native wages requires capital mobility, competitive markets, and no scarce sector-specific factors. In practice, not all of these conditions hold, which is why some wage effects persist in the data. Exam Insight Examination questions often ask you to "distinguish between the short-run and long-run effects of immigration on native wages." The key is capital fixity: wages fall in the short run because capital cannot expand, but capital accumulation restores wages in the long run. Always relate the mechanism to the diagram and specify the direction of curve shifts.
The substitute model assumes immigrants and natives compete in the same labour market. However, if immigrants and natives are complements, the analysis is fundamentally different. In this case, immigrants make native workers more productive, shifting the demand curve for native labour outward rather than the supply curve. The diagram shows that native wages rise from to and native employment rises from to .Two canonical channels generate complementarity. First, high-skilled immigrants (such as scientists and researchers) may enable native academics and researchers to further specialise in areas of comparative advantage, expanding the productivity frontier. Second, low-skilled immigrants who fill manual, routine, or physically demanding roles may free native workers to move into more complex, communication-intensive, and higher-paid occupations. In both cases, the immigrants occupy a distinct niche in the production process rather than directly competing with natives.Economic Intuition Complementarity implies that the immigrant inflow raises native marginal productivity → demand for native labour shifts right → native wages and employment rise. The distributional implication reverses: workers gain alongside capital owners, and the net effect on native welfare is unambiguously positive.Substitutes (in production): Immigrants and native workers can be exchanged for one another in production. An increase in immigrant supply exerts downward pressure on native wages. Complements (in production): Immigrants and native workers enhance each other's productivity. An increase in immigrant supply raises native marginal productivity and, hence, native wages. Summary Short run (substitutes): immigration depresses native wages and native employment but raises total employment and capital returns. Long run (substitutes): capital accumulation restores native wages and employment; total employment rises further. Complements: immigration raises native wages and employment by shifting labour demand outward. The empirical outcome depends on whether immigrants and natives are substitutes or complements, which varies by skill level and occupation. Identifying the causal effect of immigration on native wages is methodologically complex. The naive approach of correlating wages across cities with different immigration intensities suffers from a severe endogeneity problem: immigrants are not randomly distributed across labour markets. They tend to cluster in prosperous, growing cities where wages and employment conditions are already favourable. A simple cross-city regression would therefore generate a spurious positive correlation between immigration and wages, biasing estimates away from any negative effect. The literature has responded with two principal strategies: instrumental variables and natural experiments.A natural experiment is an event that generates quasi-random variation in the treatment variable (here, immigrant supply), allowing the researcher to compare outcomes between an affected group and a control group that was not exposed. Unlike a randomised controlled trial, individuals in a natural experiment have not been randomly assigned; they may have self-selected. The key requirement is that the variation in the treatment is plausibly exogenous to the outcome variable of interest.The canonical examples in the immigration literature are the Mariel boatlift (Card, 1991), the mass arrival of Russian Jews in Israel (Friedberg, 2001), and the repatriation of French settlers from Algeria (Hunt, 1992). Each provides an abrupt, large-scale labour supply shock that is plausibly independent of pre-existing labour market conditions.In 1980, Fidel Castro temporarily opened the port of Mariel in Cuba, permitting emigration to the United States. Approximately 125,000 Cuban nationals arrived in Miami between May and September 1980, increasing the city's labour force by around 7%. Critically, the Marielitos were substantially less educated than the average US resident, with around 57% lacking a high school diploma. This makes them a strong test case for the substitutability hypothesis, since they were directly competing with the least-skilled segment of the Miami labour market.Card (1991) found no discernible effect on the unemployment rate or wages of unskilled non-Cuban workers in Miami. Comparing Miami to a control group of cities (Atlanta, Houston, Los Angeles, and Tampa-St. Petersburg) that did not receive the shock, the unemployment rate for unskilled workers actually fell relative to the comparison cities after the boatlift.Theoretical Interpretation Card's (1991) finding is consistent with two theoretical mechanisms. First, native workers may have responded to the immigrant supply shock by relocating to other cities, thereby re-equilibrating the national rather than local labour market. Evidence supports this: Miami's population growth rate slowed after April 1980 relative to the rest of Florida, suggesting outmigration of natives. Second, the rapid absorption could reflect complementarity or fast capital adjustment. Borjas (2017) subsequently contested Card's findings, arguing that the relevant comparison group is less-educated workers more broadly defined, and finding more significant wage effects when focusing on high-school dropouts specifically.
Ottaviano and Peri (2012) shift the unit of analysis from local to national labour markets, arguing that local market studies underestimate the wage impact of immigration because native mobility disperses the shock across all markets. Their results, reproduced in this table for 1990-2006, reveal a striking asymmetry: native-born workers experienced small positive wage changes across all education groups (aggregate +0.6%), whilst foreign-born workers experienced large negative wage effects in every educational category (aggregate -6.7%). The largest losses fell on previous immigrants with a high school degree (-12.6%).This finding has a clear economic interpretation. It suggests that within education categories, immigrants and native workers are imperfect substitutes, presumably because language fluency, networks, and familiarity with domestic institutions make native workers more productive in many roles. New immigrants therefore compete primarily with existing immigrants rather than with natives, explaining why natives fare reasonably well at the national level.Exam Insight The Ottaviano and Peri (2012) result is a high-value empirical example. When asked about evidence on the wage effects of immigration, mention: (1) the unit of observation matters (local vs. national); (2) the key finding that immigrants mainly depress wages of earlier immigrants, not natives; (3) the implication that natives and immigrants are imperfect substitutes.Friedberg (2001) exploits the mass emigration of Russian Jews to Israel following the dissolution of the Soviet Union as a natural experiment. Between 1990 and 1991 alone, 610,000 Russian Jews arrived in Israel, representing approximately 7% of the Israeli population; over the 1990s as a whole, the Israeli population grew by 20% due to this single migration episode.Russian immigrants were, on average, more highly educated than the native Israeli population. Yet real wages fell by approximately 5% in the short run. Friedberg explains this apparent paradox through occupation downgrading: Russian immigrants entered occupations well below those commensurate with their qualifications, effectively flooding the lower occupational tiers of the labour market. Crucially, the wage effect was attenuated by substantial capital accumulation in Israel during the same period, consistent with the long-run theoretical prediction that capital investment absorbs the wage impact of immigration over time.Hunt (1992) studies the repatriation of approximately 900,000 French-born settlers (pieds-noirs) from Algeria in 1962 following the end of the Algerian War of Independence. This constituted roughly 1.6% of the French labour force and was largely unanticipated, providing a plausible natural experiment. Unlike the Marielitos, the repatriates were educationally similar to French natives. Hunt finds only very small negative effects on wages, consistent with the view that skill complementarity and capital adjustment rapidly absorbed the supply shock.The UK evidence, synthesised across Dustmann et al. (2005, 2008), reveals a nuanced distributional pattern. Immigrants to the UK are, on average, better educated than native workers. The wage effect of immigration is not uniform across the wage distribution: there is a small negative effect at the bottom of the wage distribution and a small positive effect at the top, with no average wage effect overall.Manacorda, Manning, and Wadsworth (2010) extend this analysis and find, consistently with Ottaviano and Peri (2012) for the US, that immigration primarily depresses the earnings of previous immigrants rather than of native-born workers. They document a small rise in the returns to education for natives and a small deterioration for previous immigrants, reinforcing the interpretation that natives and immigrants are imperfect substitutes in the UK labour market.Common Mistake A common error is to interpret "no average wage effect" as "immigration has no impact on wages." The distributional evidence shows clear heterogeneity: low-skilled natives face small wage pressure whilst high-skilled natives may benefit. Aggregating to a zero average obscures these distributional consequences.Summary Local market studies are biased by native outmigration and immigrant clustering in prosperous cities. Natural experiments (Mariel boatlift, Russian mass migration to Israel, Algerian repatriation to France) provide cleaner estimates. At the national level, immigration mainly depresses wages of previous immigrants, not natives (Ottaviano and Peri, 2012; Manacorda et al., 2010). UK evidence: small negative effect at the bottom of the distribution, small positive at the top, zero average effect. Long-run capital accumulation mitigates wage depression across all settings studied. Beyond labour market effects, a central policy question concerns the net fiscal contribution of immigrants: do they receive more in public services and transfers than they pay in taxes, or vice versa? This question is analytically distinct from the wage effect question and requires careful attention to the definition of the immigrant population studied and the allocation of fixed public goods such as defence and infrastructure.Dustmann and Frattini (2014) provide the most comprehensive UK analysis, using Labour Force Survey data linked to tax and benefit records. They distinguish between all immigrants who have been present in the UK since 1995 and "recent" immigrants who arrived from 2000 onwards, and further disaggregate by European Economic Area (EEA) and non-EEA origin.The aggregate fiscal picture for all immigrants resident since 1995 is mixed. EEA immigrants made a positive net contribution to the UK public finances of £8.8 billion between 2001 and 2011, paying approximately 4% more in taxes than they received in transfers and public services. Non-EEA immigrants made a negative contribution of £104 billion over the same period. Natives made the largest negative contribution of £604.5 billion, reflecting the scale of the native population and their heavier reliance on public services across all stages of the life cycle.
This chart plots the ratio of revenues to expenditures for natives, EEA immigrants, and non-EEA immigrants across fiscal years from 1995 to 2011. A ratio above 1.0 indicates net fiscal contribution (taxes exceed benefits received); below 1.0 indicates net fiscal cost. The EEA line (red) fluctuates above and around 1.0 for much of the period, with a notable peak in the early 2000s when large waves of EU-10 workers arrived. The non-EEA line (green) is predominantly below 1.0, reflecting the older age profile and family-based migration of many non-EEA entrants, whilst the native line (blue) is consistently below 1.0, particularly in the post-2008 recessionary period.Economic Intuition EEA immigrants arrive predominantly of working age, pay income tax and National Insurance from the outset, and make limited claims on state benefits and pensions in the short run. Their human capital was financed in their country of origin, so the UK receives the productive returns without bearing the educational investment costs. Non-EEA immigrants include a larger share of family reunification and asylum cases who may initially have lower employment rates or face legal restrictions on work, generating a less favourable fiscal profile in aggregate.When Dustmann and Frattini (2014) restrict the analysis to recent immigrants who arrived from 2000 onwards, the picture becomes markedly more positive. EEA recent immigrants made a positive contribution of £22.1 billion between 2001 and 2011, paying 34% more in taxes than they received. Non-EEA recent immigrants also made a positive contribution of £2.9 billion, paying 2% more than they received. By contrast, natives made a negative contribution of £624.1 billion.These findings highlight the importance of the time horizon and cohort definition. Recent immigrants, who are more likely to be of working age and to have arrived specifically for employment or study purposes, exhibit a substantially more favourable fiscal profile than the stock of all immigrants including those who arrived decades earlier.One of the most striking findings from Dustmann and Frattini (2014) concerns the human capital endowment that immigrants bring. Because immigrants' education was financed abroad, the UK labour market receives the productive returns to this investment at zero educational cost to the UK public sector. Dustmann and Frattini estimate that immigrants arriving since the early 2000s were endowed with human capital that would have cost approximately £49 billion had it been produced through the UK education system. Additionally, recent immigrants are approximately 21% less likely to receive state benefits or tax credits than comparable natives of similar age, gender, and education.Exam Insight The human capital externality argument is a powerful but often overlooked point. When discussing fiscal effects, examiners reward candidates who note that the true fiscal value of immigration includes not just tax contributions but the free transfer of human capital formation costs from the source to the destination country.Summary EEA immigrants made a net positive fiscal contribution over 2001-2011; non-EEA immigrants made a small net negative contribution; natives made the largest net negative contribution in absolute terms. Recent immigrants (post-2000) made strongly positive contributions regardless of EEA/non-EEA status. Recent immigrants are 21% less likely to claim benefits than comparable natives. Human capital imported by immigrants saved the UK an estimated £49 billion in avoided education costs. Immigration may restrain inflation through its effects on wage growth. For the United States, evidence suggests that a 10% increase in the supply of low-skilled immigrants reduces wages of other low-skilled immigrants by 8.0% and wages of low-skilled native workers by 0.6%. Since low-skilled workers are disproportionately employed in non-traded services (cleaning, catering, construction, personal care), wage compression in these sectors lowers the price of non-traded goods and services, reducing the overall price level. This mechanism provides a potential welfare gain for consumers, particularly those who purchase labour-intensive services.Immigration also exerts demand-side pressure on local housing markets. Evidence from the United States, drawing on the Mariel boatlift natural experiment, documents an 8% increase in the prices of low-quality apartments in Miami as a result of the 1980 Cuban inflow, with no significant effect on high-quality apartment prices. This distributional asymmetry makes sense: low-income immigrants compete for low-quality housing, bidding up rents at the bottom of the housing market, whilst their presence does not materially affect demand for high-quality housing. From the perspective of low-income native renters, this constitutes a welfare cost that partially offsets labour market gains.A more speculative but important strand of the literature concerns the effects of immigration on social capital, institutions, and political behaviour. The political economy of immigration has become more salient in recent years. Alesina and Tabellini (2024) examine whether the political backlash against immigration in high-income countries is driven primarily by economic fears (labour market competition, fiscal costs) or by cultural concerns (preferences over social norms, language, and identity). Their findings suggest that cultural factors play a significant and potentially dominant role in shaping political responses to immigration, even when economic effects are modest or positive. This has important implications for policy design: even technically sound immigration programmes may face political resistance rooted in non-economic motivations.Theoretical Interpretation The distinction between economic and cultural drivers of immigration preferences has institutional implications. If opposition is purely economic, redistribution policies or wage floor interventions could defuse it. If the opposition is culturally rooted, economic compensation does not resolve the political equilibrium, pointing to the need for different policy instruments such as integration programmes, civic education, and language acquisition support.Brell, Dustmann, and Preston (2020) draw a fundamental analytical distinction between economic migrants and refugee migrants. Economic migrants self-select in response to wage differentials and employment opportunities, as the Borjas (1987) framework predicts. Refugees, by contrast, are forced or unexpected migrants who flee persecution, conflict, or humanitarian crisis. Their migration decision is driven not by expected economic returns but by survival and safety considerations.This difference in the migration motive has profound implications for labour market performance in the destination country: Refugees are not economically selected, meaning their skill distribution reflects their source population rather than a positively selected subset. They possess less locally applicable human capital, particularly language skills and knowledge of the destination labour market. They typically start at lower wages and with lower employability than economic migrants of comparable education. The complexity of traumatic experience, including post-traumatic stress disorder and mental health challenges, further constrains productive capacity in the short run. Refugees have limited ability to choose their specific destination, reducing the likelihood of an optimal skills-to-labour-market match.
This figure from Brell, Dustmann, and Preston (2020) tracks employment rates and wage levels for refugees and other immigrants in nine high-income countries over the decade following arrival. The blue lines (refugees) lie consistently below the red lines (other immigrants) in both employment rate and wage level at arrival, confirming the lower initial labour market performance of refugees. However, both series exhibit an upward-sloping trajectory, and the gap between refugees and other immigrants narrows over time in most countries, suggesting a process of slow but real labour market assimilation.The lower starting point for refugees reflects both human capital deficits (language, credentials, professional networks) and the structural barriers they face (restrictions on working during the asylum determination process, poor mental health, concentration in low-demand geographic areas due to dispersal policies).Theoretical Interpretation The relatively low investment in host-country specific human capital (language, professional recertification, social networks) by refugees can be explained through a real-options logic. A refugee facing an uncertain asylum outcome has a high option value of waiting: if asylum is denied, investment in host-country human capital yields zero return. Conversely, a desire to return home once it is safe to do so reduces the expected duration of residence and thus the returns to integration investment. The optimal strategy under uncertainty is therefore to under-invest in assimilation relative to the socially optimal level, explaining the slower convergence observed in the data.Common Mistake Do not conflate the lower labour market performance of refugees with a lack of ability or motivation. The performance gap is explained by structural factors (no economic pre-selection, language barriers, mental health consequences of trauma, legal restrictions on work) rather than innate characteristics. Policy interventions targeted at these barriers can improve outcomes substantially.The theoretical analysis and empirical evidence suggest several policy levers for improving refugee labour market integration: Keeping the asylum determination process short reduces the period of uncertainty and increases the incentive to invest in host-country human capital. Providing mental and physical health support addresses the trauma-related barriers to productive participation. Facilitating labour market entry at the earliest possible stage, rather than imposing work restrictions during the asylum process, accelerates human capital accumulation and reduces long-run fiscal costs. Exam Insight If asked to distinguish between economic migrants and refugees in terms of labour market integration, the key dimensions are: (1) selection mechanism; (2) human capital relevance; (3) investment incentive under uncertainty; (4) mental health and trauma barriers. Cite Brell, Dustmann, and Preston (2020) and the cross-country convergence evidence.The lecture integrates theory, methodology, and international empirical evidence to reach the following principal conclusions: The UK has been a net recipient of immigrants since the mid-1990s, with the composition of flows shifting markedly since Brexit from EU to non-EU sources. Immigrants are self-selected, and on average positively so with respect to educational attainment, though the direction of selection varies by source country and skill distribution. In the short run, when immigrants and natives are substitutes, immigration reduces native wages and native employment whilst raising capital returns. In the long run, capital accumulation restores wages and employment levels. When immigrants complement native workers, the effect is unambiguously positive for native wages and employment. Empirical evidence does not support large adverse wage effects on natives in cities with high immigration: native outmigration and national-level capital adjustment absorb much of the shock. At the national level, immigration primarily depresses the wages of previous immigrants rather than natives (Ottaviano and Peri, 2012; Manacorda et al., 2010). Recent immigrants make a positive net fiscal contribution to the UK, with EEA immigrants especially so. They are less likely to claim benefits and import human capital at no cost to the UK education system. Refugee migrants face structural barriers to labour market integration that are qualitatively distinct from those facing economic migrants, requiring targeted policy responses. Overall Key Takeaways Theory predicts wage effects depend on substitutability vs. complementarity and the time horizon (capital mobility). Natural experiment evidence finds smaller wage effects than the simple supply-demand model predicts. Immigrants primarily compete with prior immigrants, not natives. Fiscal evidence is nuanced: recent immigrants contribute positively; the stock of all immigrants presents a more mixed picture. Refugee integration requires different policies from economic migration management, centred on reducing uncertainty and investment barriers. Alesina, A. and Tabellini, M. (2024) 'The political effects of immigration: culture or economics?', Journal of Economic Literature, 62(1), pp. 5-46.Borjas, G.J. (1987) 'Self-selection and the earnings of immigrants', American Economic Review, 77(4), pp. 531-553.Borjas, G.J. (1994) 'The economics of immigration', Journal of Economic Literature, 32(4), pp. 1667-1717.Brell, C., Dustmann, C. and Preston, I. (2020) 'The labor market integration of refugee migrants in high-income countries', Journal of Economic Perspectives, 34(1), pp. 94-121.Card, D. (1991) 'The impact of the Mariel boatlift on the Miami labor market', Industrial and Labor Relations Review, 43(2), pp. 245-257.Carliner, G. (1980) 'Wages, earnings and hours of first, second and third generation American males', Economic Inquiry, 18(1), pp. 87-102.Chiquiar, D. and Hanson, G.H. (2005) 'International migration, self-selection, and the distribution of wages: evidence from Mexico and the United States', Journal of Political Economy, 113(2), pp. 239-281.Chiswick, B.R. (1978) 'The effect of Americanization on the earnings of foreign-born men', Journal of Political Economy, 86(5), pp. 897-921.Dustmann, C. and Frattini, T. (2014) 'The fiscal effects of immigration to the UK', The Economic Journal, 124(580), pp. F593-F643.Dustmann, C., Frattini, T. and Preston, I. (2008) 'The effect of immigration along the distribution of wages', IZA Discussion Paper, No. 3861.Dustmann, C., Hatton, T. and Preston, I. (2005) 'The labour market effects of immigration', The Economic Journal, 115(507), pp. F297-F299.Feliciano, C. (2005) 'Does selective migration matter? Explaining ethnic disparities in educational attainment among immigrants' children', International Migration Review, 39(4), pp. 841-871.Friedberg, R.M. (2001) 'The impact of mass migration on the Israeli labor market', Quarterly Journal of Economics, 116(4), pp. 1373-1408.Gould, E.D. and Moav, O. (2016) 'Does high inequality attract high skilled immigrants?', Economic Journal, 126(593), pp. 1055-1091.Grogger, J. and Hanson, G.H. (2011) 'Income maximization and the selection and sorting of international migrants', Journal of Development Economics, 95(1), pp. 42-57.Hunt, J. (1992) 'The impact of the 1962 repatriates from Algeria on the French labor market', Industrial and Labor Relations Review, 45(3), pp. 556-572.Manacorda, M., Manning, A. and Wadsworth, J. (2010) 'The impact of immigration on the structure of wages: theory and evidence from Britain', Journal of the European Economic Association, 10(1), pp. 120-151.Ottaviano, G.I.P. and Peri, G. (2012) 'Rethinking the effect of immigration on wages', Journal of the European Economic Association, 10(1), pp. 152-197.
Office for National Statistics (2024) Migration Statistics Quarterly Report. Available at: https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/internationalmigration/bulletins/migrationstatisticsquarterlyreport/latest (Accessed: April 2026).Roy, A.D. (1951) 'Some thoughts on the distribution of earnings', Oxford Economic Papers, 3(2), pp. 135-146.]]>econ1014_economicintegrationii/econ1014_notes/lecture-4-&-5-labour-immigration-claude-notes.htmlECON1014_EconomicIntegrationII/ECON1014_notes/Lecture 4 & 5 Labour Immigration Claude Notes.mdTue, 21 Apr 2026 19:13:53 GMT<figure><img src="."></figure>This slide presents a collection of contemporary Financial Times and Guardian headlines illustrating the IMF's persistent centrality to global economic discourse, from warnings about trade fragmentation to global debt sustainability. The juxtaposition of headlines spanning different decades signals that the IMF's role is continuously contested and redefined in response to emerging crises rather than being static.The IMF was established in 1944 with the primary mandate of overseeing the Bretton Woods pegged exchange rate system. Under this arrangement, member countries fixed the value of their currencies in terms of gold (or equivalently, the US dollar, which was itself convertible to gold at $35 per troy ounce). Countries were required to maintain their exchange rates within a narrow band of 1% around the agreed par value.The system was designed to achieve two objectives simultaneously: Provide exchange rate stability to facilitate international trade and investment. Prevent the competitive devaluations ("beggar-thy-neighbour" policies) that had destabilised the interwar economy during the 1930s. Economic Intuition Competitive devaluation is a race to the bottom: if country A devalues to gain export competitiveness, country B retaliates with its own devaluation, and neither gains permanently but both suffer inflationary distortions and eroded institutional credibility. The IMF was designed to make unilateral depreciation costly by requiring members to hold exchange rates stable, with the IMF providing liquidity to members who could not do so through their own reserves alone. Under the Bretton Woods framework, a country running a current account deficit (imports exceeding exports) would face downward pressure on its currency as residents sold domestic currency to acquire foreign exchange to pay for imports. Under a fixed rate, this depreciation pressure could not be accommodated by a market movement in the price. Instead, the central bank had to intervene, supplying foreign exchange to buy back its own currency and sustain the peg.
This diagram illustrates the foreign exchange market mechanics under a pegged exchange rate. A current account deficit shifts the supply of pounds rightward (from Supply of £ to Supply'), putting downward pressure on the exchange rate from to . Since depreciation is not permitted under a fixed rate, the IMF provided member countries with temporary liquidity to purchase domestic currency, thereby restoring demand and returning the exchange rate to its original level . The diagram captures the Mechanism: IMF liquidity injection increased demand for domestic currency rate restored. This is the original stabilisation function of the IMF in its most transparent form.Common Mistake Students often confuse the direction of intervention. The IMF funds the purchase of domestic currency, shifting the demand curve rightward, not reducing the supply. The equilibrium effect is to prevent the exchange rate from moving below par, not to shift the supply curve back. The IMF is funded principally through member quotas, denominated in Special Drawing Rights (SDRs). Each member's quota is determined by a formula that reflects its relative economic size (broadly, its share of world GDP, trade, and financial openness). Quotas serve a dual function: They constitute the primary source of IMF lending resources (analogous to deposits in a cooperative bank that still belong to the depositor). They determine each member's voting power within the institution's governance structures. Countries in balance-of-payments distress can draw temporary loans from the IMF, subject to conditionality, and are expected to repay once the crisis has passed. The IMF is not intended as a development bank providing long-term capital; its original mandate was the provision of short-term liquidity to smooth transitory imbalances.On 15 August 1971, President Nixon suspended the convertibility of the US dollar into gold, effectively ending the Bretton Woods system. The Smithsonian Agreement of February 1973 subsequently allowed the currencies of all members to float independently. This removed the IMF's original raison d'être as the guardian of the pegged exchange rate system.The IMF was compelled to reconstitute its mandate around the realities of a globalised, floating-rate world. The key insight motivating its reconstituted role is that globalisation has greatly expanded trade and financial flows, creating a high degree of interdependence in which national policy decisions generate significant cross-border spillovers. Without coordination, these spillovers can produce globally suboptimal outcomes.Theoretical Interpretation The IMF's post-Bretton Woods role is best understood through the lens of international policy coordination under externalities. In an open economy, fiscal or monetary expansion generates demand leakage abroad (positive spillover) while financial instability generates contagion (negative spillover). The IMF's surveillance and conditional lending functions are institutional responses to this coordination problem: they internalise spillovers by setting common standards, monitoring compliance, and providing crisis insurance. The IMF conducts multilateral surveillance at three levels: National reviews (Article IV consultations): Annual examinations of each member's economic and financial policies, producing a published staff report. Financial Sector Assessment Programmes (FSAPs): In-depth assessments of macro-financial linkages, stress tests of the banking system, and regulatory architecture. Multilateral reviews: Assessments of the global economic and financial system, including the World Economic Outlook (WEO) and Global Financial Stability Report (GFSR). Early warning system: Conducted jointly with the Financial Stability Board (FSB) to identify systemic vulnerabilities before they crystallise into crises. The surveillance function is preventative: the IMF aspires to identify emerging imbalances and encourage corrective policy before a crisis occurs.Exam Insight When asked to evaluate the IMF's surveillance function, structure your answer around the tension between effectiveness and sovereignty. Surveillance is advisory; the IMF cannot compel members to act. This creates a credibility gap: members may ignore uncomfortable recommendations, particularly politically powerful ones. The IMF's failure to identify the 2007 financial crisis is the canonical empirical illustration of this limitation. When a crisis does materialise, the IMF provides conditional loans at low interest rates. Countries in crisis typically face: A sharp depreciation of the national currency. Elevated sovereign borrowing costs reflecting default risk. Inability to access international capital markets. The IMF acts as the lender of last resort at the international level, providing emergency liquidity in exchange for a programme of conditionality: macroeconomic policy reforms that are intended to address the root causes of the crisis and restore market confidence.Common Mistake The IMF is not the same as an ordinary lender. Its loans are not commercially motivated. The conditionality attached is a policy commitment mechanism designed to make the adjustment programme credible, not simply a set of repayment terms. Confusing the two misconstrues the incentive structure of IMF lending.
This donut chart from the IMF's own data illustrates the distribution of quota shares and hence voting power among the 184 member states. The United States holds approximately 17% of voting rights, while EU member states collectively hold around 32%. Individual major European economies hold significantly smaller shares: Germany (6.12%), France (4.51%), the UK (4.51%), and Italy (3.31%). China held 3.7% at the time of the data shown, substantially below its share of world GDP.The most consequential governance rule is that the most important decisions require a supermajority of 85% of votes. Since the United States holds 17%, it possesses an effective veto over all fundamental institutional decisions, including amendments to the Articles of Agreement, large quota increases, and the allocation of SDRs.Theoretical Interpretation The weighted voting structure reflects the power-resource nexus inherent in international institution design. Voting power tracks financial contribution (quotas), which in turn reflects economic size. This creates a systematic tension: those whose cooperation is indispensable (major economic powers) must be given sufficient institutional authority to maintain their commitment, but this authority can then be used to shape the institution to serve their interests rather than the collective good. This is Stiglitz's (2002) central critique. Stylised fact: IMF quotas do not keep pace with shifts in global GDP. Emerging market and developing economies, particularly in Asia and Latin America, have grown substantially faster than advanced economies since the 1990s, yet their quota shares have historically lagged their economic weight. This creates a representation deficit that has been a persistent source of tension and a driver of calls for quota reform.Summary Quotas determine both funding contribution and voting power. The US holds an effective veto (17% share; 85% supermajority required). EU collectively holds ~32% but is fragmented into individual national quotas. Quota shares lag shifts in GDP, under-representing emerging economies. Governance reform is politically contentious because it requires large shareholders to dilute their own power. During the 1980s and 1990s, the IMF expanded its conditional lending operations significantly, particularly in sub-Saharan Africa and Latin America, as part of what became known as Structural Adjustment Programmes (SAPs). The logic of conditionality rested on a specific theory of government failure: that governments with deteriorating macroeconomic fundamentals could not be trusted to deploy unconditional foreign aid productively, and that policy reform was a prerequisite for effective use of external resources.Critics argued that this logic was both excessively intrusive and economically inappropriate. Conditionality often imposed contractionary fiscal policies on economies already in deep recession, compressing demand and exacerbating social distress without achieving durable stabilisation. Joseph Stiglitz (2002), a former World Bank chief economist, famously characterised the IMF as a "market fundamentalist" institution, arguing that its policy prescriptions were dogmatic applications of neoclassical theory insufficiently sensitive to institutional context and distributional consequences.The World Bank (formally the International Bank for Reconstruction and Development, IBRD) was founded at the same 1944 Bretton Woods Conference as the IMF, with an initial mandate of financing post-war reconstruction in Western Europe. As European economies recovered with the assistance of the Marshall Plan, the Bank's focus shifted progressively towards the developing world.Its stated mission is the elimination of extreme poverty: "Our dream is a world without poverty." The World Bank Group today comprises multiple institutions, but its core activity involves channelling concessional loans, grants, and technical assistance to low and middle-income countries.The traditional justification for the World Bank rests on a cluster of market failures that prevent developing countries from accessing adequate long-term capital: Asymmetric information: International capital markets face acute information asymmetries when evaluating borrowers in low-income countries, particularly for long-term infrastructure projects where cash flows are uncertain and distant. Perceived risk premium: Projects with high social rates of return may nonetheless appear too risky for commercial lenders because private returns are lower than social returns (externalities are not captured by the borrower). Missing markets: Domestic capital markets in developing countries are often thin or absent, precluding domestic financing of large infrastructure investments. Economic Intuition The World Bank's role is to intermediate between global capital markets (where it borrows at low rates, backed by the guarantees of wealthy member states) and developing country governments (who would otherwise face prohibitively high interest rates or be excluded from markets entirely). The Bank passes on most of this interest rate advantage, lending at rates significantly below what borrowers could obtain privately. World Bank loans are funded by the Bank's own borrowing on international capital markets, backed by the callable capital of its wealthy member shareholders. Loans are conditional on policy programmes agreed with the borrowing government. The Bank also provides technical assistance, research, and policy advice alongside financial resources.The intellectual antecedents of the Washington Consensus lie in a reaction against the dominant development economics paradigm of the 1950s and 1960s, which was characterised by "export pessimism" (the belief that developing countries could not generate growth through trade), state-led development planning, and import substitution industrialisation. This approach produced mixed results, and by the 1980s a neoclassical counter-revolution had emerged, emphasising market liberalisation and macroeconomic discipline.The term Washington Consensus was coined by economist John Williamson in 1989 to describe a set of ten policy prescriptions that he believed commanded broad support among Washington-based institutions (the IMF, the World Bank, and the US Treasury) as remedies for the macroeconomic instability afflicting Latin America. It is important to note that Williamson himself later distanced himself from the more maximalist interpretations that the term came to denote.Definition Washington Consensus (Williamson, 1989): A set of ten liberal economic policy prescriptions promoted by the IMF and World Bank as conditions for development loans, principally to Latin American economies in the late 1980s and 1990s. The ten policies include fiscal discipline, reordered public expenditure priorities, tax reform, financial liberalisation, competitive exchange rates, trade liberalisation, FDI liberalisation, privatisation, deregulation, and property rights reform. The ten policies of the Washington Consensus can be grouped into three broad categories:Macroeconomic stabilisation: Fiscal discipline: reducing budget deficits to sustainable levels. Reordering public expenditure priorities away from untargeted subsidies towards health, education, and infrastructure. Tax reform: broadening the tax base and reducing marginal rates to minimise distortions. A competitive (managed) exchange rate. Financial and trade liberalisation: Financial liberalisation: deregulating interest rates and the financial sector. Trade liberalisation: reducing tariffs and non-tariff barriers. Liberalisation of inward foreign direct investment. Institutional and structural reform: Privatisation of state-owned enterprises. Deregulation of entry and exit. Property rights reforms to extend secure tenure to the informal sector. Fiscal austerity is the most contested element. In favour: fiscal consolidation reduces sovereign default risk, lowers borrowing costs, and creates space for private investment by reducing "crowding out." Against: when applied procyclically (cutting expenditure during a recession), austerity amplifies the contraction through the Mechanism: tax revenues debt/GDP ratio, the very outcome it sought to prevent. The Greek crisis provides the most high-profile contemporary illustration.Privatisation transfers state monopolies to private ownership. The efficiency argument is straightforward: competitive private firms have stronger incentives to minimise costs and respond to consumer preferences than public enterprises. The counter-arguments are significant: without adequate regulatory frameworks, privatisation may simply replace public monopolies with private ones (capturing the monopoly rent without the competitive discipline); privatisation processes in transitional economies were frequently corrupted, with assets sold far below market value to politically connected buyers.Liberalisation encompasses both trade and capital account opening. Trade liberalisation aligns production with comparative advantage, expanding the gains from trade. Capital account liberalisation was the most damaging element in practice: Stylised fact: the East Asian Financial Crisis of 1997 demonstrated that premature capital account liberalisation in the absence of adequate domestic financial regulation could expose countries to destabilising speculative attacks and sudden stops in capital flows.Exam Insight A strong essay on the Washington Consensus distinguishes between the theoretical logic of each pillar and its practical implementation failures. The theoretical case for fiscal discipline, competitive markets, and trade openness is reasonably robust in the neoclassical framework. The implementation failures arise from: (1) sequencing problems (liberalising before regulatory institutions are in place); (2) procyclical application of austerity; (3) neglect of distributional consequences; and (4) "one-size-fits-all" imposition ignoring institutional heterogeneity. The 1997 Asian Financial Crisis provides a critical test case for evaluating IMF crisis management. Prior to the crisis, several East Asian economies had pegged their currencies to the US dollar, attracting large capital inflows. Speculators who believed the Thai baht was overvalued engaged in a classic speculative short-selling strategy: Borrow baht from Thai commercial banks. Immediately sell baht in the foreign exchange market for dollars. If the baht depreciates, buy back baht at a lower price, repay the loan, and pocket the difference. The arithmetic of the canonical example is illuminating: a speculator borrows 25 million baht (equivalent to $1 million at the original rate of 25 baht per dollar). Selling baht increases the supply of baht in the foreign exchange market, depressing the exchange rate to 50 baht per dollar. The speculator then converts $500,000 back to 25 million baht to repay the loan, retaining $500,000 as profit. This gain accrues directly from the devaluation that the speculative attack itself helped to precipitate.Theoretical Interpretation This is an example of a self-fulfilling speculative attack of the kind modelled in second-generation currency crisis models (Obstfeld, 1994). The key insight is that the fundamentals may not themselves necessitate devaluation; rather, if enough speculators believe devaluation is likely and act on that belief, the resulting pressure on reserves forces the government to abandon the peg, validating the original expectation. The equilibrium is not unique: there is a range of fundamentals for which a peg is vulnerable to attack depending on the coordination of speculative expectations. The Thai baht crisis spread with remarkable speed across the region to Indonesia, South Korea, Hong Kong, Malaysia, and beyond, eventually reaching Russia and Latin America. This contagion reflected not only common macroeconomic vulnerabilities (over-leveraged banking systems, current account deficits financed by short-term capital) but also the herd behaviour of international investors withdrawing from the entire "emerging market" asset class simultaneously.The IMF provided conditional bailout packages totalling approximately $95 billion across the affected economies. The conditionality required: Bank closures and financial sector restructuring. Tight domestic credit conditions. High interest rates (to defend exchange rates and attract capital). Fiscal contraction. Common Mistake A common error is to assume that high interest rates always stabilise exchange rates. In the Asian crisis, the contractionary combination of tight fiscal and monetary policy increased unemployment, triggered corporate bankruptcies, and destroyed the balance sheets of banks already weakened by bad loans. The resulting panic further depressed confidence and accelerated capital outflows, exacerbating rather than resolving the crisis. This is the "contractionary adjustment trap." The Asian crisis crystallised a powerful critique of the IMF's approach. Stiglitz (2002) argued that the IMF's insistence on contractionary policies in the middle of a severe recession was economically illiterate: it intensified the downturn at precisely the moment when expansionary fiscal policy was most needed. The underlying error, in his analysis, was a dogmatic commitment to the view that "markets know best," which blinded the IMF to the possibility that market failures (particularly in financial markets) could necessitate a very different policy response.Summary The Asian crisis was triggered by speculative attacks on pegged exchange rates, facilitated by premature capital account liberalisation. IMF conditionality imposed contractionary policies during a recession, amplifying the downturn. Contagion spread beyond Asia to Russia and Latin America, revealing the fragility of pegged exchange rate regimes. The crisis powerfully demonstrated the risks of financial liberalisation without adequate regulatory infrastructure. The Greek sovereign debt crisis, which erupted in 2010, placed the IMF in an unprecedented institutional context: operating as one leg of the Troika alongside the European Commission and the European Central Bank. Greece had been severely exposed by the 2007-09 global financial crisis, with fiscal deficits that had been systematically understated and debt levels that proved unsustainable once market confidence collapsed.The Troika provided successive bailout packages totalling €88 billion (2010), €98 billion (2012), and €61 billion (2015), collectively amounting to approximately 87% of Greek GDP in 2010 alone. In exchange, Greece was required to implement a package of austerity measures: sharp cuts in public expenditure, increases in taxation, and structural reforms to the labour market and pension system.
These Financial Times headlines from March 2017 capture the ongoing political and economic tensions surrounding the Greek bailout programme. The juxtaposition of "IMF under pressure in Washington over Greek bailout" and "EU, IMF to continue Greek debt talks" illustrates the persistent divisions within the Troika and the contested nature of the conditionality being imposed. The United States Congress, as noted in the headline, questioned whether the IMF should be involved in a primarily European crisis, reflecting the governance tensions discussed in Section 5.The Greek episode replicated the Stiglitzian critique at a European scale: harsh austerity caused GDP to contract by approximately 25% over the programme period, unemployment to peak above 27%, and the debt-to-GDP ratio to increase despite the cuts, because the denominator (GDP) fell faster than the numerator (debt) could be reduced. This is the textbook illustration of the Mechanism: procyclical austerity tax revenues and social transfers deficit debt/GDP.A persistent criticism is that the IMF failed entirely to anticipate the 2007-09 global financial crisis, the most severe since the Great Depression. The institutional failures were several: No critical scrutiny was applied to the credit and housing booms in the United States and United Kingdom. The IMF did not begin analysing the US subprime mortgage market until approximately six months after the problem had publicly emerged. Assessments of heavily over-leveraged banking systems in Iceland and Ireland were complacent. The predominant institutional paradigm remained "the market knows best," which precluded serious analysis of systemic financial sector risk. The IMF activated an emergency funding scheme in October 2008, providing approximately $200 billion to Hungary, Romania, and Ukraine. The eurozone crisis of 2010 drew it further into European crisis management.Exam Insight The 2007 crisis is a crucial empirical test case for assessing the IMF's surveillance function. To score high marks, argue that the failure was not merely a technical forecasting error but a paradigm failure: the IMF's dominant intellectual framework (efficient markets, self-regulating financial systems) did not permit the kind of analysis that would have identified systemic risk. This is consistent with Boughton's (2004) analysis of how ideas shape the institution. Beyond the Washington Consensus debates, the World Bank has attracted institutional criticism on several dimensions: Environmental neglect: Large infrastructure projects (dams, roads, extractive industries) funded by the Bank have historically generated severe environmental externalities not adequately assessed in project appraisal. Ideological uniformity: The application of a single neoliberal formula to highly diverse borrowing countries ignores the heterogeneity of institutional contexts and development paths. Governance concentration: Dominance by a small number of economically powerful countries (principally the US) means that the Bank's lending priorities and policy prescriptions reflect the interests of creditors rather than debtors. Risk aversion and bureaucracy: The Bank's project approval processes are slow and risk-averse; it is more likely to finance a metro system in an upper-middle-income country such as China than a primary health project in a fragile state such as Afghanistan. Expert insularity: Technical staff are frequently siloed in regional specialisations, limiting cross-pollination of knowledge and the application of global best practice to specific country contexts. Ravallion (2016) acknowledges these failures while arguing that the World Bank retains an irreplaceable role precisely because of its hybrid nature: it combines financial resources, technical expertise, and convening power in ways that neither purely commercial institutions nor bilateral donors can replicate.Since the 2007 crisis, the IMF has undergone significant intellectual and operational reform: Austerity reassessment: The Fund has publicly acknowledged that fiscal multipliers in recessions are substantially larger than assumed in previous programme design, meaning that austerity in downturns is more contractionary than originally modelled. Capital controls: The IMF now accepts the use of direct capital flow management measures to dampen volatility associated with speculative cross-border capital movements. This represents a significant departure from the Washington Consensus orthodoxy that capital controls were universally distortionary. Stimulus: The IMF has endorsed fiscal stimulus as an appropriate response to demand shortfalls, particularly in liquidity trap conditions. Theoretical Interpretation The IMF's intellectual evolution reflects a broader shift in macroeconomic consensus following the 2007 crisis. The pre-crisis "divine coincidence" view (that price stability alone was sufficient to ensure macroeconomic stability) has been replaced by a greater emphasis on financial stability, macro-prudential regulation, and the legitimacy of heterodox policy tools including capital controls and unconventional monetary policy. The World Bank faces a structural challenge to its traditional business model. Many middle-income countries, including Brazil, India, China, and South Africa, can now access international capital markets independently, reducing their need for World Bank intermediation. This has prompted a debate about refocusing: Poverty focus: Redirecting lending exclusively to the poorest countries that lack market access. Global public goods: Financing cross-border problems (climate change, pandemic preparedness, infectious disease control) that markets under-supply because national governments do not internalise international externalities. Catalytic role: Using co-financing and the Bank's "seal of approval" to crowd in private capital for projects that would otherwise not attract investors due to country risk perceptions. Exam Insight A question on "Is the World Bank still needed?" should be structured around the market failure justification. Acknowledge that the traditional rationale (asymmetric information/risk premium facing middle-income borrowers) has eroded for many countries. Then pivot to the argument that the Bank remains relevant for the poorest countries and for global public goods where the market failure logic is even stronger. The Ethiopian case illustrates the on-the-ground consequences of Washington Consensus conditionality applied rigidly in a low-income context. The IMF's insistence on strict fiscal austerity constrained total expenditure to domestically generated revenues. This meant that international donors operating in parallel were prohibited from supplementing government budgets to construct schools or hospitals, as this would constitute a deficit. The institutional incoherence of aid conditionality and fiscal rules operating in the same country simultaneously reveals the limitations of treating macro-policy in isolation from development objectives.On financial liberalisation, the Kenyan experience was instructive: the removal of interest rate controls and increased bank competition did not produce the expected decline in borrowing costs. Instead, insufficient supervisory capacity allowed commercial banks to proliferate with inadequate prudential standards, leading to rising rather than falling interest rates and a subsequent banking sector crisis.Summary The IMF was created in 1944 to oversee the Bretton Woods pegged exchange rate system and provide short-term liquidity. After Bretton Woods collapsed in 1973, the IMF adopted a new role centred on surveillance, conditional lending, and crisis management. The Washington Consensus prescribed fiscal austerity, privatisation, and liberalisation as universal development prescriptions. All three pillars attracted significant empirical and theoretical criticism; the Asian and Greek crises are the canonical illustrations. Both institutions have undergone reform since 2007, with the IMF accepting greater complexity in fiscal policy and capital controls. The World Bank faces a relevance challenge as middle-income countries gain independent market access, pointing towards refocusing on the poorest countries and global public goods. Boughton, J. (2004) 'The IMF and the force of history: Ten events and ten ideas that have shaped the institution', IMF Working Paper WP/04/75. Washington DC: International Monetary Fund.IMF (2012) The liberalization and management of capital flows: An institutional view. Washington DC: International Monetary Fund.
Leipziger, D. (2012) 'What's next at the World Bank?', available at: http://rodrik.typepad.com/dani_rodriks_weblog/2012/06/what-next-at-the-world-bank.html [Accessed as per lecture notes].Obstfeld, M. (1994) 'The logic of currency crises', Cahiers Économiques et Monétaires, 43, pp. 189-213.Ravallion, M. (2016) 'The World Bank: Why it is still needed and why it still disappoints', Journal of Economic Perspectives, 30(1), pp. 77-94.Stiglitz, J. (2002) Globalization and Its Discontents. New York: W. W. Norton.Williamson, J. (1989) 'What Washington means by policy reform', in Williamson, J. (ed.) Latin American Readjustment: How Much Has Happened. Washington DC: Institute for International Economics.]]>econ1014_economicintegrationii/econ1014_notes/econ1014-imf-and-the-world-bank-16-&-17.htmlECON1014_EconomicIntegrationII/ECON1014_notes/ECON1014 - IMF and the World Bank 16 & 17.mdTue, 21 Apr 2026 19:05:48 GMT<figure><img src="."></figure>econ1016_currenteconissues/econ1016_notes/2-spiros-bougheas/untitled.htmlECON1016_CurrentEconIssues/ECON1016_notes/2 - Spiros Bougheas/Untitled.mdTue, 21 Apr 2026 11:05:50 GMTecon1016_currenteconissues/econ1016_notes/2-spiros-bougheas/test-note.htmlECON1016_CurrentEconIssues/ECON1016_notes/2 - Spiros Bougheas/Test note.mdMon, 20 Apr 2026 21:42:36 GMTTallies were physical accounting devices used to record debts and credits. Each notch or marking represented an obligation between parties. The tally embodied trust, memory, and enforcement in the absence of formal legal systems. Importantly, the tally itself did not need intrinsic value. Interpretation: Tallies illustrate that money and finance are fundamentally institutional and informational systems, not merely physical objects. Modern financial contracts are more complex, but they solve the same core problem: recording and enforcing claims over future resources.
Modern economies replace bilateral credit with organised markets that match many borrowers and lenders simultaneously.In stock markets: Firms raise finance by issuing equity. Shareholders obtain residual claims on profits and losses. Returns are uncertain, aligning risk-sharing between firms and investors. Economic logic: Equity finance mitigates insolvency risk for firms because payments are contingent on performance. However, investors bear higher risk, requiring higher expected returns.
In bond markets: Borrowers promise fixed repayments of principal plus interest. Contracts specify maturity and payment schedules. Default risk arises if cash flows are insufficient. Key distinction: Equity contracts share risk. Debt contracts concentrate risk on the borrower. Crisis relevance: Debt-heavy financial structures are more fragile. When revenues fall, fixed obligations can trigger defaults, amplifying downturns.Direct finance works best for large, well-known firms. Smaller firms and households typically lack reputation, information transparency, or scale.Banks solve this problem by: Pooling deposits from savers. Screening and monitoring borrowers. Transforming maturities and risk. This intermediation reduces transaction costs and information asymmetries.
The balance sheet formalises the financial position of a bank. Assets: reserves and loans. Liabilities: deposits. Equity: residual claim of owners. A bank is: Solvent if assets exceed liabilities. Insolvent if equity is negative. Economic interpretation: Equity acts as a buffer against losses. Financial crises often involve rapid erosion of bank equity due to loan defaults, forcing intervention or collapse.An autarkic economy is fully self-sufficient. Allowing trade enables specialisation according to comparative advantage, raising total output and welfare. Gains arise even if one country is absolutely more productive. Specialisation improves efficiency at the global level. Opening the economy also allows capital mobility. Savers can invest abroad. Borrowers can access global funding. Risk is diversified internationally. Crisis link: While capital flows enhance efficiency, sudden reversals can destabilise economies, particularly when domestic financial institutions are weak.
In an open economy with multiple currencies, exchange rates are determined in the foreign exchange market. The price of one currency is expressed in terms of another. Appreciation and depreciation reflect shifts in supply and demand. Exchange rates influence trade competitiveness and capital flows. Economic intuition: Exchange rates act as prices that equilibrate international markets. During crises, exchange rate volatility often transmits financial stress across borders. Credit predates money and functions as intertemporal insurance. Direct finance involves equity and debt markets, each with distinct risk properties. Banks exist to overcome information asymmetries and transform risk. Bank solvency depends critically on equity buffers. Opening the economy introduces gains from trade but also exposure to global shocks. Exchange rates coordinate international transactions but can amplify crises. Graeber, D. (2011) Debt: The First 5,000 Years. New York: Melville House. Ricardo, D. (1817) On the Principles of Political Economy and Taxation. London: John Murray. Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning.]]>econ1016_currenteconissues/econ1016_notes/2-spiros-bougheas/lecture-6-credit-and-foreign-exchange-markets.htmlECON1016_CurrentEconIssues/ECON1016_notes/2 - Spiros Bougheas/Lecture 6 - Credit and Foreign Exchange Markets.mdMon, 20 Apr 2026 17:48:20 GMT<figure><img src="."></figure>Because the denominator excludes the economically inactive, the unemployment rate can appear low even when a large share of the adult population is not working. This distinction is essential for interpreting headline unemployment figures.Unemployment is a dynamic state rather than a permanent condition. Many individuals move: Into employment Out of employment Into and out of the labour force
A striking empirical fact is that: Over one-third of unemployed individuals are recent entrants to the labour force Around half of unemployment spells end not in employment, but in economic inactivity This highlights that unemployment statistics partly reflect participation decisions, not just job creation.Some economically inactive individuals would like to work but have given up searching. These are known as discouraged workers. Others may be inactive due to long-term illness, even if they would prefer employment.
From an economic perspective, discouraged workers represent hidden slack in the labour market. Their exclusion from unemployment statistics can understate the true extent of labour underutilisation.The labour-force participation rate measures engagement with the labour market:
Changes in participation can significantly affect unemployment figures. A fall in participation can reduce unemployment even if employment does not rise, which is why participation and unemployment must always be analysed together.Over the past century, female labour-force participation has risen sharply, while male participation has declined.
Key economic drivers include: Household technology reducing time spent on domestic tasks Improved birth control Changing social norms Education and retirement decisions These structural shifts illustrate how labour markets evolve with technology, demographics, and institutions.There are two main methods of measuring unemployment in the UK: Claimant Count (CC) Counts those claiming unemployment-related benefits Sensitive to eligibility rules Excludes some job seekers Labour Force Survey (LFS) Surveys individuals directly Internationally comparable Conceptually closer to the economic definition of unemployment
For economic analysis, the LFS is generally preferred, as it better captures labour supply behaviour.Unemployment varies systematically by: Age Gender Ethnicity
Youth unemployment tends to be higher due to: Lower job-specific human capital Job-search frictions School-to-work transitions This reinforces the idea that unemployment is partly a matching problem, not just a lack of jobs.The lecture distinguishes between: Natural rate of unemployment: the rate around which unemployment fluctuates in the long run Cyclical unemployment: short-run deviations driven by economic fluctuations The natural rate does not disappear automatically and is shaped by institutions, incentives, and market frictions.Structural unemployment arises when: The number of jobs available is insufficient at prevailing wages Labour market institutions prevent wage adjustment
Examples include: Minimum wage laws Payroll taxes such as National Insurance Regulations that increase the cost of hiring These factors can keep real wages above equilibrium, creating persistent unemployment.Frictional unemployment reflects the time needed for workers and firms to find suitable matches.
It arises due to: Sectoral change Regional mismatch Skill obsolescence In a constantly evolving economy, frictional unemployment is unavoidable and may even signal a healthy process of reallocation.Policies aimed at reducing frictional unemployment focus on speeding up matching and retraining workers.
Examples include: Job centres Training programmes Apprenticeships These policies can reduce the natural rate of unemployment without suppressing wages.Addressing structural unemployment often involves politically contentious measures: Reducing unemployment benefits Lowering minimum wages Increasing hiring and firing flexibility
Such policies may reduce unemployment but at the cost of lower wage security, highlighting a trade-off between efficiency and equity.Minimum wage laws can create unemployment by setting wages above the equilibrium level.
When : Labour supply increases Labour demand decreases Excess supply of labour emerges This surplus represents unemployment caused by wage rigidity.Unions bargain collectively on behalf of workers and tend to raise wages above market levels.
This creates: Benefits for employed union members (insiders) Higher unemployment for outsiders The economic debate weighs wage protection against reduced labour market flexibility.Efficiency wage theory suggests that firms may rationally pay wages above equilibrium to increase productivity.
Mechanisms include: Better worker health Higher effort Lower turnover This provides an alternative explanation for persistent unemployment that does not rely on government intervention. Unemployment statistics depend critically on definitions Participation matters as much as employment The natural rate reflects institutions and incentives Structural and frictional unemployment are long-run phenomena Policy trade-offs between efficiency and equity are unavoidable Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning EMEA.Office for National Statistics (ONS) Labour Force Survey.Bank of England (2011) Quarterly Bulletin.Trading Economics (UK labour market indicators).]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-6-unemployment.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 6 - Unemployment.mdMon, 20 Apr 2026 13:31:01 GMT<figure><img src="."></figure>This diagram illustrates the upward sloping SRAS curve.When the price level falls from to : firms reduce production output falls from to This creates a positive relationship between prices and output in the short run.The key insight is that firms make decisions based partly on expectations about prices, and when reality differs from those expectations, production adjusts.Economic Intuition If firms suddenly receive lower prices than expected, their revenues fall relative to costs. Production becomes less profitable, so they cut output and employment. Conversely, if prices rise more than expected, production becomes temporarily more profitable and firms expand output. Three main theories explain the upward slope of SRAS: Sticky-wage theory Sticky-price theory Misperceptions theory Each explanation relies on a temporary mismatch between expected and actual price levels.Nominal wages often adjust slowly because: labour contracts fix wages for periods of time renegotiation is costly firms prefer wage stability for morale and planning Workers and firms typically negotiate wages based on expected inflation or expected prices.Definition Sticky Wages Nominal wages that adjust slowly to changing economic conditions, often due to contracts, institutions, or bargaining frictions. Suppose wages were negotiated based on an expected price level .Then: Real wage = increases Labour becomes more expensive for firms Firms reduce hiring and production Result:Then: Real wages fall Labour becomes cheaper Firms increase hiring and production Result:Theoretical Interpretation Firms base labour demand on the real wage . If wages are fixed in nominal terms but prices move unexpectedly, real wages change automatically. This creates temporary distortions in labour demand and output. Many firms do not continuously update prices.Reasons include: menu costs coordination problems customer relationships uncertainty about demand Definition Menu Costs The costs associated with changing prices, including administrative costs, customer reaction, and strategic considerations. Because firms set prices in advance, unexpected changes in the overall price level affect real outcomes.If the general price level differs from expectations: Firms that set prices in advance receive lower revenues than expected Production becomes less profitable Firms reduce output Firms receive higher revenues Production becomes more profitable Output increases Economic Intuition Firms base their production decisions on expected selling prices. If the overall price level rises unexpectedly, firms perceive their goods as relatively more valuable, so they produce more. Producers often observe the price of their own product faster than they observe the overall price level.This can lead to confusion between: relative price changes general inflation Suppose the general price level falls.A firm might interpret this as: a decline in demand for its product Rather than recognising it as a macro-wide price decline.The firm therefore: cuts production reduces employment Theoretical Interpretation Firms react to relative price signals. If they misinterpret a general price change as a relative price change, they respond incorrectly by altering production. All three theories can be summarised by a single macroeconomic relationship:Where: = actual output = natural level of output = actual price level = expected price level = responsiveness of output to unexpected price changes If: output rises above the natural rate output falls below the natural rate Definition Natural Rate of Output The level of output determined by labour, capital, natural resources, and technology, corresponding to the Long-Run Aggregate Supply (LRAS). Economic Intuition Unexpected inflation temporarily stimulates production because firms perceive conditions as more favourable than expected. Unexpected deflation temporarily reduces production because firms perceive conditions as worse.
The economy reaches long-run equilibrium where: AD intersects LRAS output equals the natural level At this point:This equality ensures that: no systematic surprises occur production decisions align with expectations The SRAS curve therefore also passes through this equilibrium point.Theoretical Interpretation In the long run, expectations adjust through adaptive or rational learning. Workers renegotiate wages and firms adjust prices. As a result, the economy converges to potential output, eliminating temporary deviations. SRAS shifts whenever production costs or expectations change.The SRAS curve shifts with the same structural factors that affect LRAS: labour supply capital stock natural resources technological progress These change the productive capacity of the economy.SRAS also shifts when expected price levels change.Example:If expected prices rise: workers demand higher nominal wages firms face higher production costs This shifts SRAS leftward.
The diagram illustrates how changes in expectations shift the SRAS curve.If expected prices increase: production costs rise firms reduce output at each price level SRAS shifts left. Economic Intuition Expectations influence wage negotiations and price-setting behaviour. If workers anticipate inflation, they demand higher wages, increasing firms’ costs and reducing supply. The AD-AS framework provides a foundation for analysing business cycles.Definition Business Cycles Short-run fluctuations of economic activity around its long-run trend. In the AD-AS model: Demand shocks shift AD Supply shocks shift SRAS Expectation adjustments move the economy back to LRAS Exam Insight A common exam question asks you to explain why the SRAS curve slopes upward. A full-marks answer should: mention sticky wages mention sticky prices mention misperceptions explain the difference between expected and actual prices reference the equation . Summary The SRAS curve is upward sloping because wages, prices, and expectations adjust slowly. Three key theories explain this relationship: sticky wages sticky prices misperceptions. Output deviates from the natural rate when actual prices differ from expected prices. In the long run, expectations adjust and the economy returns to LRAS equilibrium. Changes in expectations or production costs shift the SRAS curve. The AD-AS framework provides a powerful tool for analysing business cycles and macroeconomic fluctuations. Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning.Jensen, M.K. (2026) Aggregate Demand and Aggregate Supply II (Lecture Slides). ECON1002 Introduction to Macroeconomics, University of Nottingham.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-12-aggregate-demand-and-aggregate-supply-(part-ii).htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 12 - Aggregate Demand and Aggregate Supply (Part II).mdWed, 08 Apr 2026 15:29:21 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_7_set1(adas_p2)/slide3.png"></figure>econ1002_introtomacroeconomics/econ1002_materials/is-lm-equations.htmlECON1002_IntroToMacroeconomics/ECON1002_materials/IS-LM Equations.mdSat, 04 Apr 2026 13:27:55 GMTThe Keynesian Cross illustrates equilibrium in the goods market.The diagram typically shows: Actual output () on the horizontal axis Planned expenditure on the vertical axis A 45-degree line representing points where expenditure equals output Equilibrium occurs where: Planned expenditure equals actual output. If expenditure exceeds output: Firms increase production. If output exceeds expenditure: Firms accumulate inventories and reduce production. Economic Intuition The Keynesian Cross demonstrates that aggregate demand determines output in the short run. Firms respond to unexpected demand changes through adjustments in production rather than price changes. Exam Insight When explaining the Keynesian cross: Highlight planned vs actual expenditure Explain the inventory adjustment mechanism Mention the multiplier process. Planned expenditure depends on the interest rate (). The interest rate affects two major components of spending.Higher interest rates encourage saving. Households receive higher returns on savings Consumption tends to fall. Investment decisions depend strongly on borrowing costs. Higher interest rates imply: Higher cost of borrowing Fewer profitable investment opportunities. Therefore:Investment declines when interest rates rise.Theoretical Interpretation Firms invest when the expected return on capital exceeds the cost of borrowing. Rising interest rates increase the required rate of return, reducing the number of profitable investment projects.
The IS curve represents combinations of: income () interest rate () for which the goods market is in equilibrium.Definition IS Curve The relationship between the interest rate and output such that planned expenditure equals output. The IS curve slopes downward.Reason: Higher interest rates reduce investment Lower investment reduces aggregate demand Output must fall to restore equilibrium. Economic Intuition When borrowing becomes expensive, investment and consumption decline. This reduces aggregate demand and forces output downward. The money market equilibrium depends on money demand and money supply.Money demand depends on two factors.Higher income leads to: More transactions Higher demand for money. Households allocate wealth between: money (liquid but no return) bonds or other interest-bearing assets. When interest rates rise: bonds become more attractive money demand falls. Definition Liquidity preference Keynes's theory describing how individuals choose between holding money and interest-bearing assets.
The LM curve represents combinations of income and interest rates where the money market is in equilibrium.Definition LM Curve The relationship between interest rate and income such that money demand equals money supply. When income increases: transactions increase money demand rises. Because the money supply is fixed: interest rates must rise to reduce money demand. Thus:Higher income → higher interest rates.Economic Intuition When the economy expands, people require more money for transactions. With a fixed supply of money, interest rates increase to balance money demand with money supply.
The intersection of the IS curve and the LM curve determines the economy's short-run equilibrium.This equilibrium gives: Output: Interest rate: At this point: the goods market clears the money market clears. Theoretical Interpretation The IS-LM framework is essentially a two-market general equilibrium model linking financial markets and real economic activity. The IS curve captures equilibrium in the goods market, while the LM curve captures equilibrium in the money market. Exam Insight In policy analysis questions: Fiscal policy shifts the IS curve Monetary policy shifts the LM curve The new intersection determines the change in output and interest rates.
The Aggregate Demand (AD) curve describes the relationship between: the price level () output (). The IS-LM model helps derive this relationship.The IS-LM model determines equilibrium output for a given price level .When prices increase: real money supply decreases because: falls.Lower real money supply shifts the LM curve left.The new equilibrium involves: higher interest rates lower output. This generates the downward-sloping aggregate demand curve.Economic Intuition Higher prices reduce the purchasing power of money balances, tightening financial conditions and reducing spending. Summary Mechanism linking price level to output: Higher → lower LM shifts left Interest rates increase Investment falls Output declines. Although modern macroeconomics often uses more advanced models, the IS-LM framework remains valuable because it captures the core ideas of Keynesian economics.Key insights include: Short-run price rigidity Demand-driven fluctuations in output Interaction between financial markets and real activity Effects of monetary and fiscal policy Summary Core takeaways: IS curve: goods market equilibrium LM curve: money market equilibrium Intersection determines income and interest rate Policy changes shift these curves The framework explains the aggregate demand curve Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning EMEA.Jensen, M.K. (2026) Keynesian Economics and the IS-LM Model. ECON1002 Lecture Slides, University of Nottingham. ]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-10-keynesian-economics-and-the-islm-model.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 10 - Keynesian Economics and the ISLM Model.mdSat, 04 Apr 2026 11:55:49 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_6_set1(islm)/slide10.png"></figure>oai_citation:1‡Week_5_set1.pptx]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-8-money-growth-and-inflation.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 8 - Money Growth and Inflation.mdThu, 02 Apr 2026 13:41:10 GMTThis slide formalises the cryptographic structure of identity: Each agent generates: A private key A public key These satisfy: Knowing does not reveal To sign a message : Compute signature: Send Verification: Anyone checks Economic Intuition Think of the private key as a perfectly secure signature stamp. Everyone can recognise it, but only the owner can produce it. This eliminates impersonation without requiring trust. Common Mistake Confusing encryption with signatures: Encryption ensures secrecy; signatures ensure authenticity. They solve different problems. Theoretical Interpretation This creates a credible commitment technology. Agents cannot deny actions ex post because signatures are verifiable and unique. This replaces institutional enforcement with mathematical enforcement.
Key implication: A digital signature is a function of the message itself Therefore: It cannot be reused across different messages It prevents forgery This allows integration into blockchain protocols: Each transaction is tied to a unique identity Each block contains verifiable authorship Economic Intuition This ensures property rights over digital assets. Ownership is defined by control over private keys. Exam Insight If asked “how does Bitcoin ensure transaction validity?”: Mention digital signatures as the mechanism ensuring authenticity and non-repudiation.
The protocol defines a valid blockchain structure:Each block contains: Hash of previous block Ensures chain integrity Transaction data: Identity Message Signature such that Proof-of-work: A number such that the hash begins with zeros Always build on the longest valid chain Theoretical Interpretation The longest-chain rule acts as a coordination equilibrium. It solves a decentralised coordination problem where agents must agree on a single history of transactions. Economic Intuition The cost of producing blocks (proof-of-work) creates a barrier to manipulation. Rewriting history becomes prohibitively expensive. Common Mistake Thinking blockchain is immutable by design: It is only economically immutable because rewriting history is too costly. The lecture shifts from a toy model (BBT) to real-world Bitcoin.
Key transition: BBT relied on intrinsic motivation (prestige) Bitcoin relies on extrinsic incentives (profit) Terminology shift: Pages → Blocks Book → Blockchain Theoretical Interpretation This reflects a move from non-pecuniary incentives to market-based incentives. Participation becomes driven by expected returns rather than social recognition.
Two fundamental problems: Traditional systems: Central banks create money via lending Bitcoin: No central authority Block creation is costly Participants must be rewarded Definition Decentralised money creation: A process where new currency is issued according to protocol rules rather than a central authority. Theoretical Interpretation Bitcoin replaces discretionary monetary policy with a rule-based monetary system. This eliminates time inconsistency but removes stabilisation tools.
Bitcoin solves both problems simultaneously: When a new block is added: A fixed reward is created Paid to the block creator (miner) This is known as the coinbase transaction.Economic Intuition This creates a self-sustaining equilibrium: Miners invest resources They are compensated with new coins This maintains network security Theoretical Interpretation This is an example of incentive compatibility: Profit motive → honest validation → secure network Deviations (e.g. fraud) reduce expected payoffs. Exam Insight If asked “why does Bitcoin work without a central authority?”: Emphasise aligned incentives via mining rewards and proof-of-work.
Authenticated transaction: such that Coinbase transaction: Creates new money , Genesis block initialises the system Each block must: Reference previous hash Include valid transactions Respect balance constraints Satisfy proof-of-work Follow longest chain Ignore competing chains of equal length Theoretical Interpretation The protocol implements a decentralised ledger with endogenous enforcement. Rules are enforced through: Cryptography (identity) Computation (proof-of-work) Incentives (rewards) Economic Intuition The system replaces: Banks → protocol rules Courts → cryptographic verification Central bank → algorithmic money supply Summary Key Takeaways Digital signatures solve the identity problem in trustless systems Blockchain ensures integrity via hashing and proof-of-work The longest-chain rule coordinates decentralised consensus Bitcoin replaces central authority with rules + incentives Mining rewards ensure participation and money creation The system is secured by economic costs, not legal enforcement Exam Insight For a 10–15 mark answer on Bitcoin: Define blockchain and decentralisation Explain digital signatures (authentication) Explain proof-of-work (security) Explain incentives (mining rewards) Conclude with economic interpretation: Credibility Commitment Trade-offs vs central banking Vigier, A. (2026) Cryptocurrencies Lecture 4. University of Nottingham. ]]>econ1016_currenteconissues/econ1016_notes/4-adrien-vigier/lecture-16-cryptocurrencies-iv.htmlECON1016_CurrentEconIssues/ECON1016_notes/4 - Adrien Vigier/Lecture 16 - Cryptocurrencies IV.mdFri, 27 Mar 2026 13:41:39 GMT<figure><img src="."></figure>The diagram categorises: Push factors: poverty, low wages, unemployment, conflict. Stay factors: family ties, familiarity, social networks. Pull factors: high wages, employment, freedom, stability. Stay-away factors: discrimination, language barriers, low status. Transport costs Lost income during transition Risk and uncertainty Formal exit and entry barriers The figure makes clear that migration is not simply about wage differences. It is a comparison of: Origin utility Destination utility Transition costs The presence of formal exit and entry barriers highlights that migration is also shaped by institutions and policy.Theoretical Interpretation Migration is shaped by state policy via quotas, visas and taxation. These affect directly and therefore influence equilibrium migration flows. Policy can therefore distort or redirect self-selection. Exam Insight If asked about migration drivers, always distinguish: Push vs pull Economic vs non-economic motives Individual vs institutional constraints John Hicks argued: Differences in net economic advantages, chiefly differences in wages, are the main causes of migration. Consider two countries: Origin: Destination: Migration occurs if:Higher expected wage gap → higher probability of migrationHowever, employment is uncertain. So we incorporate employment probabilities:Where: = probability of employment in destination = probability of employment in origin Migration depends on expected earnings, not posted wages.If an individual is age and retires at 65:Younger individuals have: More years to benefit Larger cumulative wage gains Higher likelihood of migration Economic Intuition Migration is like buying an asset. The younger you are, the longer you can earn returns. Summary Who is most likely to migrate? Younger individuals Those with large expected wage gaps Those with higher employment probabilities abroad Migration is often a household-level decision, not individual.Let household contain two members:Even if one member loses from migration individually, the household may still migrate if the total is positive.The following slide visualises this:
Region A: Both gain → migrate. Region D: Both lose → stay. Region B/F: One loses individually but household migrates. Region C/E: One gains individually but household stays. Migration involves: Joint utility Bargaining power Intra-household trade-offs Theoretical Interpretation This introduces collective decision-making. Migration outcomes depend on household bargaining models, not just individual optimisation. Common Mistake Do not assume migration decisions are always individually optimal. They may reflect household maximisation. The simple wage gap model ignores heterogeneity in skills.Enter the Roy model.Wages depend on skill :Countries differ in the return to skill: Flat wage-skill profile → more equality Steep wage-skill profile → more inequality The slide below illustrates this:
Destination has steeper wage-skill profile. High-skill workers gain more. Skilled workers migrate. Migrants are positively selected. Destination has flatter wage-skill profile. Low-skill workers benefit. Migrants are negatively selected. Definition Positive selection: migrants are above-average skilled relative to origin. Negative selection: migrants are below-average skilled relative to origin. Tax and transfer systems affect wage dispersion. Progressive taxation → flatter net wage profile. Low progressivity → steeper profile. Thus:Tax policy → wage inequality → migration selection patternExam Insight If asked why migrants differ across destinations, link: Wage inequality Returns to skill Tax structure Roy self-selection Migration does not end at arrival. The next question is:Do immigrant wages converge to native wages?We focus on economic assimilation, particularly wage convergence.Assimilation is broader and may include: Language acquisition Cultural integration Residential patterns Social mobility Empirical model:Where: = immigrant dummy = years since migration = controls (education, gender, etc.) → initial wage gap → wage growth with time in host country Empirical findings:Most studies find negative initial gaps () and positive catch-up ().Immigrants start behind but partially catch up.Theoretical Interpretation Initial wage gaps may reflect: Source-country-specific human capital Credential recognition issues Language deficits Discrimination Economic Intuition Over time, migrants accumulate host-country-specific human capital, improving wages. A major identification problem:Later migrant cohorts may differ in skill from earlier cohorts.Observed wage growth may reflect cohort quality differences, not assimilation.Solution:Where is an individual fixed effect.This controls for time-invariant characteristics.Common Mistake Do not interpret automatically as assimilation. It may reflect selection or cohort effects. Migration economics combines: Rational choice Labour market theory Inequality and redistribution Human capital theory Econometric identification It links micro-level decisions to macro-level demographic change.Summary Migration is an expected cost-benefit decision. Wage gaps and employment probabilities are central. Younger individuals migrate more due to lifetime returns. Household decision-making complicates individual incentives. The Roy model explains skill self-selection. Wage inequality influences migration patterns. Assimilation is measured econometrically. Cohort effects complicate interpretation. Bodvarsson, Ö.B. and Van den Berg, H. (2013) The Economics of Immigration: Theory and Policy. 2nd edn. New York: Springer. Hicks, J.R. (1932) The Theory of Wages. London: Macmillan. Roy, A.D. (1951) ‘Some Thoughts on the Distribution of Earnings’, Oxford Economic Papers, 3(2), pp. 135–146. University of Nottingham (2026) ECON1016 Current Economic Issues – Lecture 3 Slides.]]>econ1016_currenteconissues/econ1016_notes/3-jake-bradley/lecture-11-migration,-self-selection-and-assimilation.htmlECON1016_CurrentEconIssues/ECON1016_notes/3 - Jake Bradley/Lecture 11 - Migration, Self-Selection and Assimilation.mdFri, 27 Mar 2026 13:39:56 GMT<figure><img src="."></figure>The Greek bailout illustrates the IMF’s central role as a lender of last resort. Greece received massive bailout packages (over £180bn combined), equivalent to a large share of GDP, highlighting the scale of sovereign crises. The imposed austerity conditions aimed to restore fiscal sustainability but led to severe contractions in output and employment.Economic Intuition Austerity reduces government spending and increases taxes → lowers aggregate demand → recession → falling tax revenues → worsening debt ratios. This creates a self-reinforcing debt spiral. Exam Insight Discuss the Greek crisis as an example of IMF conditionality: emphasise trade-off between fiscal discipline and growth. Established in 1944 (Bretton Woods) Based in Washington D.C. Core objective: ensure international monetary stability Surveillance Annual country reviews Global financial monitoring Early warning systems Financial Assistance Conditional loans at low interest rates Target: countries facing balance of payments crises Theoretical Interpretation IMF lending addresses liquidity constraints rather than solvency. However, conditionality reflects a principal–agent problem, where lenders impose constraints to ensure repayment.
The IMF operates on a quota system based on economic size, determining both contributions and voting power. Advanced economies retain disproportionate influence, with the US holding an effective veto due to the 85% voting threshold.Common Mistake Assuming equal voting power across countries. In reality, governance reflects global power asymmetries. Expansion of conditional lending to developing countries Policy prescriptions: Fiscal austerity Structural reforms Theoretical Interpretation Conditionality was based on the belief that poor macroeconomic management caused crises. However, this assumes governments lack credibility, justifying external enforcement. Pro-cyclical austerity during crises Over-reliance on market liberalisation Failure to anticipate the 2007–08 financial crisis Summary IMF stabilises crises but may worsen short-run outcomes Governance reflects global power imbalances Policy paradigm historically rooted in market efficiency Founded in 1944 as IBRD Goal: poverty reduction Provides loans and technical assistance to developing countries Developing countries: Lack capital markets Face asymmetric information Perceived as high-risk borrowers Theoretical Interpretation The World Bank solves a market failure in capital allocation, where socially profitable investments are underfunded due to risk and information frictions. Borrows from global capital markets Lends to developing countries Loans often conditional on policy reforms Fiscal austerity Privatisation Market liberalisation Definition Washington Consensus: A set of policy prescriptions promoting market-oriented reforms in developing countries. Shift from state-led development to market-based approaches Influenced by neoclassical theory and comparative advantage Economic Intuition Markets allocate resources efficiently → liberalisation increases growth → government intervention distorts incentives. One-size-fits-all approach Ignored institutional quality Neglected inequality and poverty Overemphasis on short-term stabilisation Common Mistake Equating liberalisation with development success. Outcomes depend on institutional context. Environmental neglect Imposition of neoliberal policies Dominance by wealthy countries Bureaucratic inefficiency Theoretical Interpretation Reflects political economy constraints, where donor countries influence lending priorities. Failed to anticipate systemic risks Overconfidence in financial markets Emergency lending during crisis (e.g. Hungary, Ukraine) Economic Intuition If regulators believe markets are efficient, they underweight systemic risk → crisis vulnerability increases. Greater acceptance of: Fiscal stimulus Capital controls Focus shifting towards: Poorest countries Global public goods (e.g. climate change) Projects unattractive to private sector Theoretical Interpretation These changes reflect recognition of market incompleteness and the limits of pure liberalisation strategies. Summary IMF plays dual role: Preventative (surveillance) Curative (crisis lending) World Bank addresses development finance gaps Both institutions shaped by neoliberal policy paradigm Increasing recognition of institutional and distributional factors Exam Insight Evaluate IMF and World Bank: Benefits: stability, liquidity provision, development support Costs: austerity, loss of sovereignty, policy misalignment Boughton, J. (2004) The IMF and the force of history: Ten events and ten ideas that have shaped the institution. IMF Working Paper WP/04/75.Leipziger, D. (2012) What’s next at the World Bank?Ravallion, M. (2016) ‘The World Bank: Why it is still needed and why it still disappoints’, Journal of Economic Perspectives, 30(1), pp. 77–94.Stiglitz, J. (2002) Globalization and Its Discontents. New York: W. W. Norton.International Monetary Fund (2012) The liberalization and management of capital flows: An institutional view.]]>econ1014_economicintegrationii/econ1014_notes/lecture-16-&-17-imf-and-the-world-bank.htmlECON1014_EconomicIntegrationII/ECON1014_notes/Lecture 16 & 17 - IMF and the World Bank.mdFri, 27 Mar 2026 13:15:11 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l16_17/slide41.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L16_17/Slide41.pngFri, 27 Mar 2026 13:12:15 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l16_17/slide40.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L16_17/Slide40.pngFri, 27 Mar 2026 13:12:15 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l16_17/slide39.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L16_17/Slide39.pngFri, 27 Mar 2026 13:12:15 GMT<figure><img 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13:12:15 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l16_17/slide19.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L16_17/Slide19.pngFri, 27 Mar 2026 13:12:15 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l16_17/slide18.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L16_17/Slide18.pngFri, 27 Mar 2026 13:12:15 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l16_17/slide17.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L16_17/Slide17.pngFri, 27 Mar 2026 13:12:15 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l16_17/slide16.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L16_17/Slide16.pngFri, 27 Mar 2026 13:12:15 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l16_17/slide15.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI 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2026 13:12:14 GMT<figure><img src="."></figure>This diagram illustrates how market equilibrium (where demand = MPB) results in overconsumption relative to the socially optimal level (where MSB intersects supply). The wedge between MPB and MSB represents the external cost of consumption. The resulting deadweight loss reflects inefficiency due to unpriced external harm.Theoretical Interpretation The gap between MPB and MSB captures the marginal external cost. Welfare loss arises because units beyond the social optimum generate more harm than benefit. Exam Insight Always explain that overconsumption occurs because consumers ignore external costs.
Introducing a per-unit tax shifts the supply curve upward (or increases marginal cost), raising the price faced by consumers and reducing equilibrium quantity. If calibrated correctly, the tax moves consumption to the socially optimal level.Definition Pigouvian tax: A tax equal to the marginal external cost, designed to internalise an externality. Economic Intuition The tax makes harmful goods more expensive, discouraging consumption and reducing welfare loss. Common Mistake Confusing a movement along demand with a shift in demand. The tax changes price, not preferences.
When demand is elastic, consumers are highly responsive to price changes. As a result, they reduce consumption significantly, and producers bear a larger share of the tax burden through lower prices received.
When demand is inelastic, consumers are less responsive to price increases. Therefore, they bear a greater share of the tax burden.Definition Tax incidence: The distribution of the burden of a tax between consumers and producers. Theoretical Interpretation Tax incidence depends on relative elasticities. The side of the market that is less price-sensitive bears more of the burden. Economic Intuition If consumers “need” sugary drinks, they will keep buying them even at higher prices, so they pay most of the tax. Exam Insight Always relate tax incidence to elasticity, not statutory burden. Definition Regressive tax: A tax that takes a higher proportion of income from low-income individuals. Arguments for regressivity: Lower-income groups consume more sugary drinks Demand is relatively inelastic Therefore, they pay a larger share of income in tax However, the key counterargument is that the policy may generate progressive health benefits.Theoretical Interpretation There is a trade-off between financial regressivity and health progressivity. Welfare analysis must consider both monetary and non-monetary outcomes. Economic Intuition Poorer individuals may pay more tax, but they also gain more from improved health outcomes. Financially regressive, but only to a small degree Health benefits are larger for lower socio-economic groups Reduction in disease disproportionately benefits poorer populations Summary Sugar tax may be regressive in income terms But progressive in health outcomes Net welfare effect depends on weighting of these factors Regulation (e.g. sugar limits) Behavioural “nudges” (e.g. labelling, placement) Consumers may switch to untaxed sugary alternatives Common Mistake Ignoring substitution effects when evaluating policy effectiveness Reduced demand may affect employment Industry restructuring may occur Theoretical Interpretation Policy evaluation must consider general equilibrium effects, not just partial equilibrium outcomes. Effect on prices Effect on consumption Compare outcomes before and after tax implementation Weak due to confounding factors Common Mistake Assuming all changes are caused by the policy Compare treated vs control groups over time Attempts to isolate causal effect Definition Difference-in-differences: A quasi-experimental method comparing changes in outcomes between treatment and control groups. Theoretical Interpretation DiD relies on the parallel trends assumption, meaning both groups would have evolved similarly without treatment. Exam Insight Always mention the validity of the control group when discussing DiD. Sugar taxes consistently increase prices Most studies find reduced consumption of taxed drinks Stronger effects where: Tax rates are higher Pass-through to prices is complete Tax scope is broader Economic Intuition Higher prices discourage consumption, especially when substitutes are limited. Summary Price increases are robust across studies Consumption falls in most cases Policy effectiveness depends on design The sugar tax is a textbook example of corrective taxation aimed at addressing market failure. However, its effectiveness depends critically on behavioural responses, elasticity, substitution patterns, and policy design. While concerns about regressivity exist, broader welfare analysis suggests potentially significant public health benefits.Griffith, R., O’Connell, M. and Smith, K. (2019) The evidence on the effects of soft drink taxes. IFS Briefing Note BN255.Teng, A.M. et al. (2019) Impact of sugar-sweetened beverage taxes on purchases and dietary intake: Systematic review and meta-analysis.CORE Econ (2020) The Economy: Unit 12 – Market failure and externalities.]]>econ1016_currenteconissues/econ1016_notes/5-mohamed-zahran/lecture-18-sugar-taxes.htmlECON1016_CurrentEconIssues/ECON1016_notes/5- Mohamed Zahran/Lecture 18 - Sugar Taxes.mdWed, 25 Mar 2026 11:20:37 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide8.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide25.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide25.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide25.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide24.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide24.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img 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2026 11:06:46 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide20.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide19.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide19.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide19.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide18.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide18.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide18.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide17.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide17.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img 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2026 11:06:46 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide13.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide12.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide12.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide12.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide11.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide11.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide11.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide10.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide10.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img 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GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide6.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide5.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide5.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide5.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide4.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide4.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide4.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide3.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide3.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide3.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide2.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide2.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide2.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture__2/slide1.htmlECON1016_CurrentEconIssues/ECON1016_images/lecture__2/Slide1.pngWed, 25 Mar 2026 11:06:46 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture__2/slide1.png"></figure>This figure shows substantial fluctuations in the nominal exchange rate, specifically the dollar price of £1, over time. The key insight is that exchange rates behave like asset prices rather than stable relative prices. They respond rapidly to macroeconomic conditions, expectations, and financial flows. The scale and persistence of these movements indicate that simple trade-based mechanisms alone cannot explain exchange rate dynamics, particularly in the short run.The lecture motivates two complementary frameworks: Purchasing Power Parity (PPP) for long-run exchange rate determination A full open economy model incorporating capital flows and interest rates Theoretical Interpretation Exchange rates are determined in asset markets as well as goods markets. PPP captures goods-market arbitrage, while the open economy model incorporates financial market equilibrium. Summary Exchange rates are highly volatile Inflation explains long-run trends Financial markets dominate short-run movements Definition Purchasing Power Parity (PPP): a long-run theory stating that identical goods should cost the same across countries when expressed in a common currency. The PPP condition:This implies that the nominal exchange rate adjusts to equalise price levels internationally.PPP is founded on arbitrage: If goods are cheaper abroad → import and sell domestically If goods are cheaper domestically → export This ensures convergence of prices across countries.Economic Intuition If a Big Mac is cheaper in the US than the UK, traders will buy in the US and sell in the UK, pushing US prices up, UK prices down, or adjusting the exchange rate. PPP implies: Exchange rates reflect relative price levels Inflation differentials drive exchange rate movements Higher domestic inflation → currency depreciation Example: UK inflation > US inflation → UK goods become expensive → demand for £ falls → £ depreciates PPP works in tandem with the quantity theory of money: Money supply ↑ → price level ↑ Price level ↑ → exchange rate depreciates Thus: Monetary expansion → inflation → depreciation Theoretical Interpretation This creates a chain: , linking monetary policy directly to exchange rate outcomes in the long run.
This figure demonstrates the German hyperinflation (1921–1924), showing a close co-movement between: Money supply Price level Exchange rate As money supply increased dramatically, inflation surged, and the currency depreciated rapidly. When monetary growth stabilised, both prices and the exchange rate stabilised.This provides a near textbook example of PPP holding strongly.Economic Intuition In extreme inflation, monetary factors dominate all other influences, making PPP highly predictive. Exam Insight Use hyperinflation as empirical validation of PPP in long-run answers PPP is not a complete theory: Non-tradable goods (services cannot be arbitraged) Product differentiation (BMW vs Toyota) Transaction and transport costs Market frictions Theoretical Interpretation PPP assumes perfect arbitrage and identical goods, which rarely holds in reality. Therefore, real exchange rates vary over time. Summary PPP works best in the long run Poor predictor of short-run exchange rates PPP explains long-run exchange rates but: Says nothing about trade deficits Ignores capital flows Cannot explain short-run volatility This motivates a broader framework: the open economy model.The model integrates two key markets: Loanable funds market Foreign exchange (forex) market Assumptions: Real GDP fixed (factor supply + technology) Price level fixed (short-run focus)
This diagram extends the closed economy framework to include international investment. National saving finances both domestic investment and foreign investment (NCO).Definition Net Capital Outflow (NCO): the net purchase of foreign assets by domestic residents. Supply: upward sloping Demand: downward sloping Higher → saving ↑, investment ↓, NCO ↓ Unlike the closed economy: This market determines both and Theoretical Interpretation The interest rate equilibrates intertemporal consumption and investment decisions, while also determining international capital allocation.
This figure shows a negative relationship between the real interest rate and net capital outflow. High → capital inflow (NCO ↓ or negative) Low → capital outflow (NCO ↑) The existence of negative NCO reflects international borrowing.Economic Intuition Investors chase returns. If UK interest rates rise, global capital flows into the UK.
The forex market determines the real exchange rate. Supply of pounds = Demand for pounds = The supply curve is vertical because NCO is determined in the loanable funds market. Higher → exports ↓, imports ↑ → NX ↓ Thus: Exchange rate adjusts to balance NX and NCO
This figure integrates the entire model: Loanable funds → determines → determines → determines Summary equilibrates saving and investment equilibrates currency markets Together determine external balance
An import quota initially increases net exports by reducing imports. However, this raises demand for domestic currency, leading to appreciation. The appreciation reduces exports, offsetting the initial increase. Trade policy does not affect net exports in equilibrium Because:Common Mistake Thinking protectionism improves trade balance. It only changes composition.
Capital flight increases NCO due to perceived risk. Demand for loanable funds ↑ Interest rate ↑ Currency supply ↑ → depreciation Theoretical Interpretation Capital flight reflects a shift in global portfolio preferences due to risk, illustrating the role of expectations and credibility.
Budget deficits reduce national saving, shifting supply of loanable funds left. → → → currency appreciation Appreciation → Definition Twin deficits: simultaneous budget deficit and trade deficit. Summary Fiscal deficit crowds out investment Leads to capital inflow Causes currency appreciation Worsens trade balance The open economy is governed by two key equilibrium conditions: Loanable funds market → determines Forex market → determines These jointly determine: Saving Investment Capital flows Trade balance Always link Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning EMEA.
Jensen, M.K. (2026) ECON1002 Open Economy Macroeconomics II Lecture Slides. University of Nottingham. oai_citation:0‡Week_9_1.pptx]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-17-open-economy-ii.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 17 - Open Economy II.mdTue, 24 Mar 2026 16:23:11 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide4.png"></figure>This figure illustrates the cyclical behaviour of three important macroeconomic variables: real GDP, investment spending, and unemployment. During recessions, GDP and investment decline while unemployment increases. The shaded recession periods demonstrate that these movements occur simultaneously across the economy. Investment is particularly volatile, often falling much more sharply than output during downturns.Economic Intuition Investment is highly sensitive to expectations and interest rates. When firms anticipate weaker demand, they postpone capital expenditure, causing investment to collapse rapidly during recessions. Earlier macroeconomic analysis focused primarily on the long run.Key long-run concepts include: Economic growth Financial markets and interest rates Money growth and inflation These analyses rely on two important classical assumptions.Definition Classical dichotomy The theoretical separation of real variables (such as output and employment) from nominal variables (such as money and prices). Under the classical dichotomy: Real variables are determined by real factors Nominal variables are determined by monetary factors Definition Monetary neutrality Changes in the money supply affect nominal variables but do not affect real economic variables in the long run. Implications: Changing the money supply changes prices It does not change real GDP, employment, or productivity in the long run. Theoretical Interpretation In classical models, the economy always operates at its natural level of output determined by factor endowments and technology. Monetary variables only determine the price level required to clear markets. Hence money is neutral in the long run. In reality, monetary neutrality does not hold in the short run.Short-run macroeconomic fluctuations occur because: Prices and wages adjust slowly Expectations change gradually Financial markets transmit shocks across sectors Therefore:Changes in money supply → changes in interest rates → changes in spending → changes in output.This temporary interaction between nominal and real variables requires a different framework.The primary framework used to analyse short-run macroeconomic fluctuations is the Aggregate Demand–Aggregate Supply (AD–AS) model.Definition AD–AS model A macroeconomic framework that explains short-run fluctuations in output and prices through the interaction of aggregate demand and aggregate supply. The model focuses on the relationship between: Price level (P) Real GDP (Y)
This diagram illustrates the equilibrium of the macroeconomy where the aggregate demand curve intersects the aggregate supply curve. The vertical axis shows the overall price level while the horizontal axis represents real output. The equilibrium determines both the economy's output and price level simultaneously. Any shock to demand or supply shifts these curves and generates macroeconomic fluctuations.Economic Intuition If aggregate demand exceeds supply, prices rise and firms increase production. If supply exceeds demand, prices fall and output contracts. The economy moves toward equilibrium through price and quantity adjustments. Definition Aggregate demand (AD) The total quantity of goods and services demanded in the economy at each possible price level. Aggregate demand is determined by total expenditure:Where: = Consumption = Investment = Government spending = Net exports Government spending is assumed fixed by policy in the short run.
The aggregate demand curve slopes downward, indicating that lower price levels increase the quantity of output demanded. This relationship arises because changes in the price level influence consumption, investment, and net exports. As prices fall, purchasing power rises and financial conditions ease, increasing spending throughout the economy.
A fall in the price level increases the real value of money balances held by households. As individuals feel wealthier, they increase consumption spending. Higher consumption increases aggregate demand.Theoretical Interpretation If nominal money balances remain constant while the price level falls, real money balances rise. Households perceive this increase in real purchasing power as an increase in wealth.
A lower price level increases real money balances, which reduces interest rates through the money market mechanism. Lower interest rates stimulate investment spending by firms. As investment increases, aggregate demand rises.Economic Intuition Lower interest rates reduce the cost of borrowing. Firms therefore find more investment projects profitable, increasing capital expenditure.
When domestic prices fall relative to foreign prices, domestic interest rates decline. Lower interest rates cause capital outflows, leading to currency depreciation. A weaker currency increases exports and reduces imports, thereby increasing net exports.Theoretical Interpretation The exchange rate effect connects the AD curve to open-economy macroeconomics. Lower domestic interest rates lead to capital outflows and currency depreciation, improving the trade balance. A movement along the AD curve occurs when the price level changes.A shift of the AD curve occurs when one of the components of expenditure changes independently of the price level.Common Mistake Movement along AD occurs due to a change in the price level. Shift of AD occurs due to changes in , , , or . Changes in consumption Changes in savings behaviour Consumer confidence Household wealth Changes in investment Technological improvements Changes in interest rates Business expectations Changes in government spending Infrastructure projects Fiscal stimulus programmes Changes in net exports Exchange rate movements Foreign income changes Summary Key determinants of aggregate demand: Consumption Investment Government spending Net exports Definition Aggregate supply (AS) The total quantity of goods and services firms are willing to produce and sell at each price level. The shape of the AS curve depends on the time horizon.Two key concepts: Long-run aggregate supply (LRAS) Short-run aggregate supply (SRAS) In the long run, output is determined by the economy's productive capacity.Key determinants: Labour Physical capital Human capital Natural resources Technology Because these factors determine production capacity, the price level does not influence long-run output.
The LRAS curve is vertical at the economy's natural level of output. This reflects the idea that long-run production capacity depends only on real economic factors. Changes in the price level affect nominal variables but do not influence long-run output.Theoretical Interpretation The vertical LRAS curve reflects the classical dichotomy. In the long run, markets adjust fully and prices are flexible, ensuring the economy operates at its potential output. Definition Natural rate of output The level of output produced when all factors of production are fully utilised and unemployment equals its natural rate. This corresponds to: Potential GDP Full employment output Because LRAS reflects productive capacity, it shifts when the economy's long-run fundamentals change.Key drivers include:Labour Population growth Immigration Labour force participation Capital Investment in machinery Human capital accumulation Natural resources Resource discoveries Environmental constraints Technology Innovation Improvements in production methods Summary LRAS shifts when: Labour supply changes Capital stock changes Technology improves Natural resources change
Over time, technological progress increases the productive capacity of the economy, shifting LRAS to the right. Simultaneously, central banks typically increase the money supply, shifting aggregate demand to the right. The combined effect is rising output alongside rising prices.This process explains why modern economies experience both economic growth and inflation over time.Economic Intuition Economic growth comes from productivity improvements, while inflation reflects expansion of the money supply relative to output. In the short run, aggregate supply behaves differently.
The short-run aggregate supply curve is upward sloping, indicating that higher prices lead firms to produce more output. This occurs because wages and other input prices adjust slowly. When the price level rises but wages remain temporarily fixed, production becomes more profitable.Economic Intuition If firms can sell their output at higher prices while wage costs remain unchanged, their profit margins increase. This encourages firms to increase production in the short run. The next stage of the AD–AS framework will explain: Why the SRAS curve slopes upward The role of expectations How economic shocks create business cycles The role of monetary and fiscal policy Exam Insight When asked to explain business cycles: Begin with empirical facts about fluctuations Introduce the AD–AS framework Explain the slope and determinants of AD Distinguish LRAS from SRAS Conclude with equilibrium and macroeconomic shocks Mankiw, N. G. and Taylor, M. P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning.Jensen, M. K. (2026) ECON1002 Introduction to Macroeconomics: Aggregate Demand and Aggregate Supply I Lecture Slides. University of Nottingham.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-11-aggregate-demand-and-aggregate-supply-i.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 11 - Aggregate Demand and Aggregate Supply I.mdTue, 24 Mar 2026 14:08:20 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_6_set2(adas_p1)/slide7.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide43.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_9_1/Slide43.pngTue, 24 Mar 2026 13:22:52 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide43.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide42.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_9_1/Slide42.pngTue, 24 Mar 2026 13:22:52 GMT<figure><img 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src="econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide6.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide5.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_9_1/Slide5.pngTue, 24 Mar 2026 13:22:52 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide5.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide4.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_9_1/Slide4.pngTue, 24 Mar 2026 13:22:52 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide4.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide3.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_9_1/Slide3.pngTue, 24 Mar 2026 13:22:52 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide3.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide2.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_9_1/Slide2.pngTue, 24 Mar 2026 13:22:52 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide2.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide1.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_9_1/Slide1.pngTue, 24 Mar 2026 13:22:52 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_9_1/slide1.png"></figure>This slide highlights the concept of a carbon budget and the probabilistic nature of catastrophic outcomes. Even if emissions are limited to maintain a 2°C increase, there remains a non-zero probability of extreme warming. Remaining carbon budget: ~1–1.5 trillion tonnes of CO₂ Even within this limit: ~1% chance of >6°C warming Exceeding it increases catastrophe probability to ~10% Theoretical Interpretation This introduces fat-tailed risk distributions, where extreme outcomes dominate expected welfare losses. Standard cost-benefit analysis may underestimate these risks. Exam Insight Climate policy justification often relies on risk aversion and precautionary principles, not just expected values. What is the optimal level of pollution reduction? Full elimination is inefficient due to high economic costs Optimal policy balances: Marginal benefit of abatement (reduced damage) Marginal cost of abatement (reduced output/consumption) Definition Abatement: Actions taken to reduce environmental harm, such as lowering emissions. Efficiency trade-off: Consumption vs environmental quality Ethical trade-off: Present vs future generations Theoretical Interpretation This is an intertemporal welfare maximisation problem, often modelled using discounted utility. The choice of discount rate critically affects policy outcomes. Common Mistake Assuming zero emissions is optimal ignores opportunity costs and diminishing returns to abatement.
This diagram shows the divergence between marginal private cost (MPC) and marginal social cost (MSC) due to pollution. Market equilibrium: where MPC = MPB → overproduction Social optimum: where MSC = MPB → lower output Deadweight loss arises from unpriced external costs Economic Intuition Firms ignore pollution costs, so they produce “too much”. Society would prefer less output at a higher price.
A carbon tax increases MPC to equal MSC, correcting the externality. Raises cost of emissions Reduces demand for polluting goods Achieves socially optimal output Definition Carbon tax: A tax per unit of emissions designed to internalise environmental externalities. Advantages: Internalises external costs Generates government revenue Encourages innovation and substitution Disadvantages: Measurement difficulties Administrative costs Risk of carbon leakage (firms relocating) Theoretical Interpretation Carbon taxes provide price certainty but not quantity certainty, unlike cap-and-trade systems. Government sets emissions cap Firms trade permits Market determines price of emissions Theoretical Interpretation Cap-and-trade ensures quantity control, but introduces price volatility. Exam Insight Compare instruments using uncertainty: taxes preferred under cost uncertainty, permits under benefit uncertainty. Climate policy must account for: Unknown damage functions Irreversibility Extreme tail risks Economic Intuition When uncertainty is large and damages are irreversible, early action is often optimal. Climate change requires: International cooperation Burden sharing across countries Enforcement mechanisms Theoretical Interpretation This is a prisoner’s dilemma: Each country benefits from others reducing emissions But has an incentive to free ride Summary Climate change is a global externality with intertemporal consequences Efficient policy requires equating Carbon taxes and cap-and-trade are primary instruments Uncertainty and irreversibility justify precautionary policy International coordination is essential but difficult Andersson, M., Morgan, J. and Baccianti, C. (2020) Climate change and the macro economy. ECB Occasional Paper. Batten, S. (2018) Climate change and the macro-economy: a critical review. Bank of England. Batten, S., Sowerbutts, R. and Tanaka, M. (2020) Climate change: macroeconomic impact and implications for monetary policy. Bowen, A., Campiglio, E. and Tavoni, M. (2014) A macroeconomic perspective on climate change mitigation. Climate Change Economics. Kahn, M.E. et al. (2021) Long-term macroeconomic effects of climate change. Energy Economics. McInerney, N. (2022) Macroeconomic implications of climate change for central banks. Thakoor, M.V.V. and Kara, E. (2022) Macroeconomic effects of climate change in an ageing world. IMF. CORE Econ (2023) The Economy: Units 20. ]]>econ1016_currenteconissues/econ1016_notes/5-mohamed-zahran/lecture-17-climate-change,-externalities-and-policy-design.htmlECON1016_CurrentEconIssues/ECON1016_notes/5- Mohamed Zahran/Lecture 17 - Climate Change, Externalities and Policy Design.mdMon, 23 Mar 2026 16:23:35 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide5.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide32.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide32.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide32.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide31.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide31.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img 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Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide15.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide14.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide14.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide14.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide13.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide13.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide13.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide12.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide12.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide12.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide11.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide11.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide11.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide10.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide10.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide10.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide9.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide9.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide9.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide8.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide8.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide8.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide7.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide7.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide7.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide6.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide6.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide6.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide5.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide5.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide5.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide4.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide4.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide4.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide3.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide3.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide3.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide2.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide2.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide2.png"></figure>]]>econ1016_currenteconissues/econ1016_images/lecture1/slide1.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture1/Slide1.pngMon, 23 Mar 2026 16:08:01 GMT<figure><img src="econ1016_currenteconissues/econ1016_images/lecture1/slide1.png"></figure>The balance sheet representation of a bank highlights the fundamental economic role of financial intermediation. On the liabilities side, banks accept deposits, which are typically short-term and withdrawable on demand. On the assets side, banks issue loans and hold investments, which are longer-term and illiquid.This mismatch is not accidental but central to the economic function of banks: they transform liquidity preferences of savers into productive long-term investment.Definition Maturity transformation: The process by which banks convert short-term liabilities into long-term assets. The diagram therefore captures a critical structural feature: Deposits are safe and liquid Loans are risky and illiquid Theoretical Interpretation This structure reflects an equilibrium response to heterogeneous preferences: Households demand liquidity and safety Firms demand long-term financing Banks emerge as institutions that reconcile these demands, but at the cost of introducing systemic fragility. Economic Intuition Short-term promises + long-term investments → potential inability to meet withdrawals → bank run risk The system works smoothly only if depositors believe others will not withdraw. Banks earn profits through the interest rate spread: Pay low rates on deposits Charge higher rates on loans This reflects compensation for: Risk-bearing Liquidity provision Screening and monitoring borrowers Summary Banks exist to allocate capital efficiently Their structure inherently creates liquidity risk Profit arises from intermediation margins The fragility of the banking system is not a flaw but a direct consequence of its function. Depositors expect others to withdraw They withdraw pre-emptively The bank cannot liquidate assets quickly The bank fails, validating expectations Theoretical Interpretation This is a self-fulfilling equilibrium: Good equilibrium: no withdrawals → bank survives Bad equilibrium: mass withdrawals → bank collapses This aligns with Diamond-Dybvig models of banking crises. Economic Intuition Expectations → withdrawals → insolvency The crisis is driven by beliefs, not necessarily fundamentals. Fragility is amplified by: Interbank lending networks Common asset exposures Information asymmetries These create contagion effects, where the failure of one institution spreads to others.Summary Banking crises are endogenous Expectations and confidence are central Interconnectedness amplifies shocks Definition Bank capital: The residual claim on assets after liabilities are deducted; serves as a buffer against losses. Bank capital determines the resilience of the financial system. Absorbs losses before insolvency Reduces probability of bank failure Aligns incentives by increasing “skin in the game” However, banks have incentives to minimise capital because: Higher leverage increases return on equity Equity is more expensive than debt Theoretical Interpretation This creates a trade-off: Private incentive: maximise leverage Social optimum: maintain sufficient buffers Regulation is required to correct this divergence. Economic Intuition Low capital → small losses wipe out equity → insolvency risk increases sharply Common Mistake Confusing liquidity with solvency A bank may be solvent (assets > liabilities) but still fail due to illiquidity. The 2007– financial crisis revealed several systemic vulnerabilities: Excessive leverage Mispricing of risk Overreliance on short-term funding Weak regulatory oversight Definition Too-big-to-fail: Institutions whose failure would impose unacceptable costs on the wider economy, leading governments to intervene. Governments provided bailouts to prevent systemic collapse, but this created long-term distortions.Theoretical Interpretation Implicit guarantees → reduced market discipline → excessive risk-taking This is a classic moral hazard problem where private actors do not bear the full consequences of their actions. Deep recession Collapse in credit supply Sharp increase in public debt due to bailouts Exam Insight Frame the crisis as a failure of both market discipline and regulatory design Basel III represents the global response to the crisis, aiming to strengthen banking system resilience. Minimum capital requirement: 7% Additional buffers up to 9.5% Restrictions on dividend payouts if capital falls below thresholds Increase loss-absorbing capacity Reduce procyclicality of lending Improve risk management Theoretical Interpretation Basel III attempts to internalise systemic externalities by forcing banks to hold more capital, thereby reducing the probability of cascading failures. Reliance on risk-weighted assets Scope for manipulation of internal models Potential for regulatory arbitrage Economic Intuition Higher capital → lower leverage → lower probability of collapse But at the cost of potentially reduced lending. Common Mistake Assuming regulation eliminates risk Financial innovation can circumvent regulatory constraints.
The UK response to the crisis involved a restructuring of regulatory responsibilities across three institutions: Financial Policy Committee (FPC): systemic risk oversight Prudential Regulation Authority (PRA): bank-level supervision Financial Conduct Authority (FCA): consumer protection This reflects a shift towards macroprudential regulation, recognising that systemic risk cannot be addressed solely at the firm level.Theoretical Interpretation Regulation operates at two levels: Microprudential: individual bank stability Macroprudential: system-wide stability The latter addresses externalities arising from interconnectedness. Retail banking is separated from investment banking activities to: Protect essential deposit functions Limit contagion from risky trading Economic Intuition Segregation → reduces spillovers → protects core financial services Difficult to enforce operational separation Governance conflicts between divisions Exam Insight Discuss trade-offs: stability vs efficiency, regulation vs innovation
The historical case of the Overend & Gurney crisis (1866) demonstrates how financial shocks propagate through global networks. Collapse of interbank lending Breakdown of trade finance Loss of confidence across borders Theoretical Interpretation International trade depends critically on financial intermediation: Letters of credit Payment guarantees Trade financing Therefore, banking crises directly reduce trade volumes Bank failures reduce exports by 8.5% after one year Effects are persistent and economically significant Economic Intuition Less credit → fewer transactions → lower trade flows Summary Financial stability is a prerequisite for trade Banking crises transmit to the real economy Trade declines amplify economic downturns Increased capital buffers Improved systemic oversight Greater resilience to shocks Regulatory arbitrage Measurement of risk Political economy constraints Theoretical Interpretation Financial regulation is inherently incomplete because: Markets innovate faster than regulators Risk is endogenous and evolving Incentives remain imperfectly aligned Summary Banking systems are structurally fragile due to liquidity transformation Crises emerge from endogenous risk-taking and expectations Regulation mitigates but cannot eliminate systemic risk Financial stability is crucial for international economic integration Farag, M., Harland, D. and Nixon, D. (2013) Bank capital and liquidity. Bank of England Quarterly Bulletin.Financial Crisis Inquiry Commission (2011) The Financial Crisis Inquiry Report. Jenkins, P. (2012) ‘Volcker criticises UK banking reforms’, Financial Times. Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics, 6th ed. Cengage Learning.Pescon, R. (2011) ‘Banking Commission: Basel not enough to make banks safe’, BBC.Xu, C. (2022) ‘Reshaping global trade: the immediate and long-run effects of bank failures’, Quarterly Journal of Economics, 137(4), pp. 2107–2161.]]>econ1014_economicintegrationii/econ1014_notes/lecture-14-&-15-banking-reforms.htmlECON1014_EconomicIntegrationII/ECON1014_notes/Lecture 14 & 15 - Banking Reforms.mdThu, 19 Mar 2026 11:40:58 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l14_15/slide40.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L14_15/Slide40.pngThu, 19 Mar 2026 11:36:21 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l14_15/slide39.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L14_15/Slide39.pngThu, 19 Mar 2026 11:36:21 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l14_15/slide38.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L14_15/Slide38.pngThu, 19 Mar 2026 11:36:21 GMT<figure><img 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II_L14_15/Slide14.pngThu, 19 Mar 2026 11:36:20 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l14_15/slide13.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L14_15/Slide13.pngThu, 19 Mar 2026 11:36:20 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l14_15/slide12.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L14_15/Slide12.pngThu, 19 Mar 2026 11:36:20 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l14_15/slide11.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L14_15/Slide11.pngThu, 19 Mar 2026 11:36:20 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l14_15/slide10.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L14_15/Slide10.pngThu, 19 Mar 2026 11:36:20 GMT<figure><img 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GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l14_15/slide4.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L14_15/Slide4.pngThu, 19 Mar 2026 11:36:20 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l14_15/slide3.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L14_15/Slide3.pngThu, 19 Mar 2026 11:36:20 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l14_15/slide2.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L14_15/Slide2.pngThu, 19 Mar 2026 11:36:20 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l14_15/slide1.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L14_15/Slide1.pngThu, 19 Mar 2026 11:36:20 GMT<figure><img src="."></figure>This figure shows exports and imports as a percentage of GDP over time. The clear upward trend reflects increasing global integration and trade openness. Economies are becoming more interdependent, meaning domestic shocks can transmit internationally.Theoretical Interpretation This reflects globalisation, driven by: Reduced trade barriers Technological progress in transport and communication Financial integration Summary Trade has grown significantly relative to GDP Open economy effects are increasingly important for macroeconomic analysis Definition Net capital outflow (NCO): Foreign Direct Investment (FDI): Ownership and control (e.g. building a factory abroad) Foreign Portfolio Investment (FPI): Financial assets (e.g. buying shares) Real interest rate differentials Risk perceptions Political stability Government restrictions Economic Intuition Higher domestic interest rates → capital inflow → lower NCO Definition Accounting identity: Trade surplus () implies capital outflow Trade deficit () implies capital inflow Theoretical Interpretation This identity reflects a fundamental constraint: A country exporting more than it imports must be accumulating foreign assets A country importing more must be borrowing from abroad Exam Insight Always link trade balances to financial flows Marks are awarded for recognising that goods flows and capital flows are two sides of the same coin. Since :Definition National saving: Income not consumed or spent by the government. Excess saving flows abroad Foreigners finance domestic investment
This table summarises the three equilibrium cases. It highlights how saving-investment imbalances determine international borrowing or lending positions.Theoretical Interpretation This connects to intertemporal trade: Trade deficits allow countries to consume more today by borrowing Trade surpluses reflect deferred consumption via lending Summary determines international financial position Trade imbalances are fundamentally saving-investment imbalances Definition Nominal exchange rate (e): The rate at which one currency can be exchanged for another. Appreciation: Currency gains value Depreciation: Currency loses value Economic Intuition Appreciation → imports cheaper → exports less competitive → NX falls Definition Real exchange rate: Measures relative price of domestic goods in terms of foreign goods Where: = nominal exchange rate = domestic price level = foreign price level “How many foreign goods can one unit of domestic goods buy?” Domestic goods become cheaper Exports increase Imports decrease rises Economic Intuition Lower relative price → substitution towards domestic goods Common Mistake Confusing nominal and real exchange rates Nominal changes do not necessarily imply changes in competitiveness unless adjusted for prices.
This figure shows fluctuations in the nominal exchange rate over time. Exchange rates are highly volatile due to financial flows, expectations, and macroeconomic conditions.Theoretical Interpretation Exchange rates are determined in asset markets, not just goods markets. Expectations, speculation, and capital mobility play a central role. Open economy macroeconomics integrates: Goods markets () Financial markets () Exchange rates Summary links trade and finance links saving and global capital allocation Exchange rates determine competitiveness Global integration amplifies macroeconomic interdependence Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning.Jensen, M.K. (2026) ECON1002 Open Economy Macroeconomics I Lecture Slides. University of Nottingham.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-16-open-economy-i.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 16 - Open Economy I.mdWed, 18 Mar 2026 16:49:31 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide5.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide22.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide22.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide22.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide21.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide21.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide21.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide20.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide20.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide20.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide19.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide19.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide19.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide18.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide18.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide18.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide17.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide17.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide17.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide16.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide16.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide16.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide15.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide15.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide15.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide14.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide14.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide14.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide13.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide13.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide13.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide12.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide12.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide12.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide11.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide11.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide11.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide10.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide10.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide10.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide9.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide9.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide9.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide8.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide8.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide8.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide7.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide7.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide7.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide6.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide6.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide6.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide5.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide5.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide5.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide4.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide4.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide4.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide3.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide3.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide3.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide2.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide2.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide2.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide1.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set2/Slide1.pngWed, 18 Mar 2026 16:31:50 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set2/slide1.png"></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide32.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide32.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide31.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide31.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide30.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide30.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide29.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide29.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide28.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide28.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide27.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide27.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide26.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide26.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide25.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide25.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide24.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide24.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide23.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide23.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide22.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide22.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide21.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide21.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide20.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide20.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide19.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide19.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide18.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide18.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide17.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide17.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide16.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide16.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide15.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide15.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide14.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide14.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide13.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide13.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide12.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide12.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide11.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide11.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide10.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide10.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide9.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide9.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide8.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide8.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide7.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide7.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide6.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide6.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide5.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide5.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide4.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide4.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide3.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide3.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide2.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide2.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(64)/slide1.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (64)/Slide1.pngWed, 18 Mar 2026 16:13:26 GMT<figure><img src="."></figure>This diagram links the AD–AS model to the Phillips Curve. A shift in aggregate demand moves the economy along the short-run aggregate supply curve, changing both output and the price level. These changes translate into movements along the Phillips Curve. Low AD → low output, high unemployment, low inflation (Point A) High AD → high output, low unemployment, high inflation (Point B) Theoretical Interpretation The Phillips Curve is not an independent relationship. It is derived from the AD–AS model via the output–price adjustment process. Higher demand increases output temporarily because wages and expectations adjust slowly. Summary AD shifts drive movements along the Phillips Curve Inflation and unemployment are jointly determined in the short run The trade-off reflects temporary deviations from equilibrium
In the long run, the Phillips Curve becomes vertical at the natural rate of unemployment. Expansionary policy increases inflation only No permanent effect on unemployment Definition The natural rate of unemployment is the level determined by structural factors such as labour market institutions, search frictions, and wage-setting mechanisms. Theoretical Interpretation This reflects the classical dichotomy: nominal variables (like inflation) do not affect real variables (like unemployment) in the long run. Summary Long-run Phillips Curve is vertical No long-run trade-off Monetary policy is neutral in the long run
The short-run Phillips Curve depends on the difference between actual and expected inflation.Definition The expectations-augmented Phillips Curve: where: = unemployment = natural rate = actual inflation = expected inflation Economic Intuition Only unexpected inflation affects unemployment. If inflation is higher than expected, real wages fall, firms hire more workers, and unemployment decreases. Common Mistake Thinking policymakers can permanently choose a point on the Phillips Curve. This is incorrect because expectations adjust over time.
Empirical evidence from the 1970s showed that both inflation and unemployment were high simultaneously. Known as stagflation Caused by: Rising inflation expectations Supply shocks (e.g. oil crises) Theoretical Interpretation This breakdown supports the Friedman–Phelps view that the Phillips Curve shifts with expectations. There is no stable trade-off. Summary Phillips Curve is not stable Expectations shift the curve ]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-15-the-phillips-curve-and-the-short-run-trade-off.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 15 - The Phillips Curve and the Short-Run Trade-Off.mdTue, 17 Mar 2026 13:15:56 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set1/slide5.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set1/slide29.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set1/Slide29.pngTue, 17 Mar 2026 13:03:35 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_8_set1/slide29.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_8_set1/slide28.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_8_set1/Slide28.pngTue, 17 Mar 2026 13:03:35 GMT<figure><img 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src="econ1002_introtomacroeconomics/econ1002_images/week_8_set1/slide1.png"></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(54)/slide18.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (54)/Slide18.pngMon, 16 Mar 2026 19:45:00 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(54)/slide17.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (54)/Slide17.pngMon, 16 Mar 2026 19:45:00 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(54)/slide16.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (54)/Slide16.pngMon, 16 Mar 2026 19:45:00 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(54)/slide15.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (54)/Slide15.pngMon, 16 Mar 2026 19:45:00 GMT<figure><img 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src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(54)/slide6.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (54)/Slide6.pngMon, 16 Mar 2026 19:45:00 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(54)/slide5.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (54)/Slide5.pngMon, 16 Mar 2026 19:45:00 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(54)/slide4.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (54)/Slide4.pngMon, 16 Mar 2026 19:45:00 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(54)/slide3.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (54)/Slide3.pngMon, 16 Mar 2026 19:45:00 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(54)/slide2.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (54)/Slide2.pngMon, 16 Mar 2026 19:45:00 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(54)/slide1.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (54)/Slide1.pngMon, 16 Mar 2026 19:45:00 GMT<figure><img src="."></figure>This figure shows a long-run increase in average mark-ups for US firms.The rising mark-up trend raises an important policy question: are increasing profits driven by greater efficiency and innovation, or by declining competition and market power?Economic Intuition A mark-up measures the gap between price and marginal cost. Rising mark-ups suggest firms may have increased pricing power, possibly due to market concentration or weaker antitrust enforcement. This debate has become central to modern competition policy.Competition authorities frequently uncover illegal cartels.Examples include: Financial institutions manipulating markets Sausage producers fixing prices in Germany Major breweries coordinating price increases Technology firms abusing dominant platform positions Cartels are illegal because they raise prices and reduce output relative to competitive markets.
The cartoon illustrates how firms may secretly coordinate prices while pretending to compete.The joke highlights the central idea of cartel behaviour: firms cooperate privately while maintaining the appearance of competition.Economic Intuition Collusion allows firms to replicate monopoly outcomes. By restricting output and increasing prices collectively, firms capture higher profits at the expense of consumers.
EU competition policy rests on three main pillars: Antitrust policy Merger control State aid control Each pillar targets a different source of market distortion.Antitrust laws prevent: cartels collusive agreements abuse of dominant market positions These policies ensure that firms compete on price, quality, and innovation.Merger control prevents corporate mergers that significantly reduce competition.Authorities evaluate whether mergers: increase market concentration allow price increases reduce consumer welfare Governments may attempt to support domestic firms through subsidies.However, subsidies can distort competition within the integrated market.Definition State aid refers to government financial support provided to firms that may distort competition within a market.
This slide highlights debates surrounding EU state aid rules, particularly in the context of Brexit.State aid regulations prevent governments from artificially supporting domestic firms, ensuring that competition across the single market remains fair.Theoretical Interpretation Without state aid restrictions, governments could subsidise national firms to maintain employment or industrial capacity. This would trigger subsidy races between countries and undermine the level playing field of economic integration.
This figure presents examples of EU competition rulings involving multinational corporations.Cases involving Apple, Amazon, and Starbucks show how tax advantages granted by individual countries can be interpreted as illegal state aid if they distort competition.These rulings demonstrate that competition policy increasingly intersects with tax policy and global corporate structures.To understand competition policy, economists model how integration affects market structure.Assume: two identical countries identical firms constant marginal cost positive fixed costs Total cost function:Average cost:As output increases, average cost falls, reflecting economies of scale.Even under perfect competition with fixed costs, prices must exceed marginal cost in order to cover fixed costs.Profit is:Under long-run equilibrium:Thus:Theoretical Interpretation This result explains why competitive industries with fixed costs often display positive mark-ups. Firms must charge prices above marginal cost to cover fixed costs while still earning zero economic profit. Two curves determine the equilibrium number of firms: Competition curve (COMP) Break-even curve (BE) COMP: more firms → stronger competition → lower mark-ups BE: more firms require higher mark-ups to cover fixed costs
This diagram illustrates the equilibrium market structure in a single domestic market.At equilibrium: number of firms = mark-up = price = Firms earn zero economic profit but maintain a positive mark-up due to fixed costs.
Economic integration changes two key conditions: Firms gain access to a larger market Firms face more competitors As a result: firms produce more output prices fall average costs decline firms become more efficient Summary Key effects of integration without collusion: Larger market size Higher firm productivity Lower prices Greater consumer welfare Despite the efficiency gains from integration, firms may attempt to coordinate behaviour.Definition Perfect collusion occurs when firms coordinate prices and output exactly as a monopolist would. Under collusion: firms restrict output prices increase profits rise
When firms collude: the industry behaves like a single monopolist output falls to price rises to Consumers lose because prices increase and consumption decreases.Compared with competitive integration: prices increase production falls firms become smaller average costs rise consumer welfare declines Exam Insight Exam trigger: Explain how economic integration can improve efficiency but still create incentives for collusion. Firms may merge rather than collude.Mergers can have ambiguous welfare effects: prices may rise due to reduced competition costs may fall due to efficiency gains
The welfare effect depends on the balance between: efficiency gains consumer losses from higher prices Total welfare change:If efficiency gains exceed consumer losses, the merger may increase welfare.EU merger regulation was introduced in 1990.Large mergers are reviewed if combined turnover exceeds approximately €5 billion globally.Authorities assess whether mergers: significantly impede competition create dominant market positions Only mergers that satisfy competition criteria are approved.Digital markets present unique competition challenges.
Major digital platforms include: Alphabet (Google) Amazon Apple Meta Microsoft These firms dominate digital ecosystems.Key features include: strong network effects extremely low marginal costs global scale massive data accumulation Definition Network effects occur when the value of a product increases as more users adopt it. These forces often lead to winner-takes-most markets, producing highly concentrated industries.
Digital platforms collect enormous volumes of user data.Data provides competitive advantages because it allows firms to: improve algorithms personalise advertising refine pricing strategies Switching costs are also high.For example, sellers on Amazon may hesitate to switch platforms because they would lose accumulated customer reviews and reputation data.
Digital platforms frequently face allegations of abusing their dominant positions.Examples include cases involving Google and digital advertising markets.These cases illustrate how platform dominance can distort competition in adjacent markets.
Google’s search advertising system operates through auctions.Advertisers: choose keywords submit bids Ads are ranked based on bids and relevance.The advertiser with the highest bid receives the most visible position.
This figure compares advertising costs between Google and Bing.The data suggests that Google commands higher prices due to its dominant position in search markets.Traditionally, collusion required explicit communication between firms.
The example of Christie’s and Sotheby’s shows how firms historically coordinated prices through direct communication.However, modern technology introduces a new possibility.Pricing algorithms increasingly determine market prices.Firms program algorithms with objectives such as profit maximisation.AI systems then learn pricing strategies autonomously.
Experiments show that AI pricing algorithms can learn collusive strategies even without explicit coordination.Algorithms punish price deviations and converge toward high-price equilibria.Theoretical Interpretation Reinforcement learning algorithms optimise strategies through repeated interaction. In oligopoly settings, these learning processes can converge toward collusive outcomes even when firms never explicitly communicate. This creates major challenges for competition authorities.Potential policy solutions include: expanding antitrust enforcement introducing data portability requirements increasing interoperability between platforms shifting burden of proof onto dominant firms regulating acquisitions of small start-ups Competition authorities must also understand how AI systems shape market outcomes.Summary Economic integration expands markets and allows firms to exploit economies of scale. Without collusion, integration leads to larger, more efficient firms and lower prices. Collusion and anti-competitive mergers can undermine these gains. EU competition policy relies on three pillars: antitrust enforcement, merger control, and state aid regulation. Digital markets create new challenges due to network effects, data accumulation, and AI pricing algorithms. Algorithmic pricing may enable new forms of collusion that regulators must address. Assad, S., Clark, R., Ershov, D. and Xu, L., 2024. Algorithmic pricing and competition: Empirical evidence from the German retail gasoline market. Journal of Political Economy, 132(3).Baldwin, R. and Wyplosz, C., 2022. The Economics of European Integration. 7th ed. London: McGraw-Hill.Calvano, E., Calzolari, G., Denicolò, V., Harrington, J.E. and Pastorello, S., 2020. Protecting consumers from collusive prices due to AI. Science, 370(6520), pp.1040–1042.Lancieri, F. and Sakowski, P., 2021. Competition in digital markets: A review of expert reports. Stanford Journal of Law, Business and Finance, 26, p.65.]]>econ1014_economicintegrationii/econ1014_notes/lecture-13-&-14-competition-policy.htmlECON1014_EconomicIntegrationII/ECON1014_notes/Lecture 13 & 14 - Competition Policy.mdThu, 12 Mar 2026 11:18:37 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l13_14/slide48.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L13_14/Slide48.pngThu, 12 Mar 2026 11:08:34 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l13_14/slide47.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L13_14/Slide47.pngThu, 12 Mar 2026 11:08:34 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l13_14/slide46.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L13_14/Slide46.pngThu, 12 Mar 2026 11:08:34 GMT<figure><img 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II_L13_14/Slide8.pngThu, 12 Mar 2026 11:08:34 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l13_14/slide7.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L13_14/Slide7.pngThu, 12 Mar 2026 11:08:34 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l13_14/slide6.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L13_14/Slide6.pngThu, 12 Mar 2026 11:08:34 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l13_14/slide5.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L13_14/Slide5.pngThu, 12 Mar 2026 11:08:34 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l13_14/slide4.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L13_14/Slide4.pngThu, 12 Mar 2026 11:08:34 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l13_14/slide3.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L13_14/Slide3.pngThu, 12 Mar 2026 11:08:34 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l13_14/slide2.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L13_14/Slide2.pngThu, 12 Mar 2026 11:08:34 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l13_14/slide1.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L13_14/Slide1.pngThu, 12 Mar 2026 11:08:34 GMT<figure><img src="."></figure>econ1016_currenteconissues/econ1016_notes/4-adrien-vigier/lecture-14-cryptocurrencies-ii.htmlECON1016_CurrentEconIssues/ECON1016_notes/4 - Adrien Vigier/Lecture 14 - Cryptocurrencies II.mdWed, 11 Mar 2026 18:20:43 GMTThe figure illustrates two possible macroeconomic outcomes: Point A: Low inflation High unemployment Point B: High inflation Low unemployment The diagram therefore shows the short-run trade-off faced by policymakers: reducing unemployment tends to require tolerating higher inflation.Theoretical Interpretation The Phillips curve can be interpreted as a reduced-form representation of aggregate demand management. When policy stimulates demand, firms increase production and hire more labour. As economic slack disappears, price pressures rise. Thus inflation and unemployment move in opposite directions in the short run. The Phillips curve can be derived directly from the AD–AS framework.
Panel (a) shows the AD–AS model: Low aggregate demand leads to low output and low prices High aggregate demand leads to higher output and higher prices Panel (b) converts these outcomes into inflation and unemployment outcomes:Thus:Higher AD → higher output → lower unemployment → higher inflationEconomic Intuition When firms experience rising demand they increase production and hire workers. Labour markets tighten and wages rise. These wage increases feed through to prices, producing inflation. Exam Insight If asked to explain the Phillips Curve using AD–AS, always explain: AD expansion increases output unemployment falls price level rises therefore inflation increases The short-run trade-off does not persist in the long run.
The long-run Phillips curve is vertical at the natural rate of unemployment.Key implications: Expansionary monetary policy raises inflation But does not reduce unemployment permanently Output returns to potential This mirrors the vertical long-run aggregate supply (LRAS) curve.Definition Natural Rate of Unemployment The level of unemployment determined by labour market institutions such as job search frictions, unions, minimum wages, and efficiency wages. Theoretical Interpretation In the long run, expectations adjust and nominal variables fully reflect monetary changes. Because real wages and prices adjust, unemployment returns to the level determined by structural labour market conditions rather than by inflation. The short-run Phillips curve exists only because actual inflation differs from expected inflation.The expectations-augmented Phillips Curve states: Where: = unemployment = natural rate of unemployment = actual inflation = expected inflation = responsiveness parameter Implication: If actual inflation exceeds expected inflation, unemployment falls. Economic Intuition Unexpected inflation temporarily lowers real wages because workers negotiated wages based on lower expected inflation. Firms therefore find labour cheaper and hire more workers. Common Mistake The Phillips curve is not a permanent policy menu. Policymakers cannot permanently choose lower unemployment in exchange for higher inflation. Early empirical evidence seemed to confirm a stable negative relationship.
Data from 1961–1968 showed a clear downward relationship between inflation and unemployment.This led many economists to believe that governments could choose combinations of inflation and unemployment through demand management.However this interpretation proved incorrect.During the 1970s, many economies experienced stagflation: High inflation High unemployment
This breakdown occurred because: inflation expectations adjusted upward workers demanded higher wages the short-run Phillips curve shifted upward Thus the economy moved along the long-run Phillips curve, not along a stable short-run trade-off.Theoretical Interpretation Friedman and Phelps argued that the Phillips curve must incorporate expectations. When people anticipate inflation, wage demands adjust immediately. As a result, expansionary policy produces only higher inflation without permanently reducing unemployment. Changes in expected inflation shift the short-run Phillips curve.If expected inflation increases: the entire Phillips curve shifts upward If expected inflation decreases: the curve shifts downward Sources of shifts include: oil price shocks monetary policy credibility inflation expectations Reducing inflation requires contractionary monetary policy, which reduces aggregate demand.Short-run effects: lower inflation higher unemployment reduced output
The economy initially moves along the short-run Phillips curve.Over time: expected inflation falls the Phillips curve shifts downward unemployment returns to the natural rate Definition Sacrifice Ratio The percentage of annual output lost when reducing inflation by one percentage point. Typical estimates: sacrifice ratio ≈ 3–5 Thus reducing inflation by 1% costs roughly 3–5% of annual GDP during the adjustment.During the early 1980s: UK inflation exceeded 20% monetary tightening reduced inflation to about 5%
The policy succeeded in lowering inflation but produced: very high unemployment recessionary conditions However the economic cost was smaller than predicted by simple sacrifice ratio calculations.Some economists argue that disinflation could be less costly if expectations adjust immediately.Definition Rational Expectations The hypothesis that economic agents use all available information, including knowledge of policy, to forecast future economic variables. If the central bank is credible: people immediately lower inflation expectations the Phillips curve shifts downward quickly inflation falls without large unemployment increases Theoretical Interpretation Credibility is central to modern monetary policy. If the public believes the central bank's commitment to low inflation, wage and price setters adjust expectations immediately, preventing costly recessions. Modern central banks attempt to anchor expectations through inflation targeting.Typical policy framework: explicit inflation target (e.g. 2%) transparent policy communication independent central bank Benefits: stabilises expectations reduces inflation volatility lowers sacrifice ratio Economic Intuition If firms and households believe inflation will remain near 2%, wage contracts and price setting will reflect this expectation. This prevents persistent inflation spirals. Key lessons for macroeconomic policy: Short-run inflation–unemployment trade-offs exist Long-run trade-offs do not Expectations determine the dynamics of inflation Credible monetary policy reduces adjustment costs Summary Key Takeaways The Phillips Curve describes the short-run trade-off between inflation and unemployment. The long-run Phillips curve is vertical at the natural rate of unemployment. Unexpected inflation temporarily lowers unemployment. Changes in expected inflation shift the short-run Phillips curve. Disinflation often requires costly recessions unless policy is highly credible. Modern monetary policy uses inflation targeting to anchor expectations. Friedman, M. (1968) The Role of Monetary Policy. American Economic Review.Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. London: Cengage Learning.Phillips, A.W. (1958) ‘The Relation between Unemployment and the Rate of Change of Money Wages in the United Kingdom, 1861–1957’. Economica.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-14-the-short-run-trade-off-between-inflation-and-unemployment-(phillips-curve).htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 14 - The Short-Run Trade-Off Between Inflation and Unemployment (Phillips Curve).mdWed, 11 Mar 2026 14:38:31 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_7_set3/slide4.png"></figure>The economy is in long-run equilibrium where the AD curve intersects the LRAS curve.At this point: Output equals natural output (). Expected price level equals the actual price level. The SRAS curve also passes through the same point. This represents a situation where expectations about prices and wages are correct.Theoretical Interpretation Long-run equilibrium reflects the classical macroeconomic idea that output is determined by real factors such as capital, labour, and technology. Nominal variables such as the price level adjust so that aggregate demand equals this supply-determined level of output. Economic Intuition When expectations are correct, firms and workers set prices and wages optimally. There are no unexpected price movements that distort production decisions. Summary Key properties of long-run equilibrium: Unemployment equals the natural rate
A demand-driven recession occurs when the aggregate demand curve shifts left.Possible causes include: Consumer pessimism Stock market crashes Falling exports during foreign recessions Contractionary monetary policy When AD shifts from to : Output falls: Employment falls Price level declines: The economy moves along the SRAS curve from point A to B.Over time: Expected prices adjust downward. The SRAS curve shifts right. Output returns to natural output . The economy eventually reaches a new equilibrium at point C.Economic Intuition Firms initially set wages and prices based on expectations formed earlier. When demand collapses unexpectedly, firms reduce output because they cannot immediately adjust wages and expectations. Theoretical Interpretation The key expectations channel operates through wage-setting behaviour. If actual prices fall below expected prices (), real wages rise temporarily, reducing employment and production until expectations adjust. Exam Insight Exam trigger: “Explain how a negative demand shock affects output and prices in the short run and long run using the AD–AS model.”
A negative supply shock occurs when the SRAS curve shifts left due to higher production costs.Possible causes include: Energy price shocks Wage pressures Supply chain disruptions Regulatory changes When SRAS shifts left: Output falls: Price level rises: This situation is known as stagflation.Definition Stagflation: A macroeconomic condition where inflation rises while output and employment decline. Economic Intuition Higher production costs force firms to both reduce output and increase prices simultaneously. Common Mistake Pitfall: Not all recessions reduce inflation. Supply-driven recessions typically increase inflation. Summary Demand shocks → recession with falling prices Supply shocks → recession with rising prices Economic expansions occur when either: Aggregate demand shifts right Aggregate supply shifts right Examples include: Wartime government spending in the early 1940s. Post-pandemic fiscal stimulus. Mechanism: Government spending increases. Aggregate demand rises. Output and employment expand. These occur when productive capacity increases due to: Technological innovation Productivity improvements Capital accumulation Example: the technology boom of the 1990s.Theoretical Interpretation Supply-driven expansions shift productive capacity outward and can eventually move the LRAS curve to the right.
Policymakers may respond to a supply shock by shifting aggregate demand to the right.Policy objective: Prevent the decline in output and employment. Result: Output returns to natural output more quickly. Price level increases permanently. This creates a policy trade-off between stabilising output and controlling inflation.Theoretical Interpretation Policymakers face a stabilisation trade-off. Increasing demand reduces unemployment but exacerbates inflation. Exam Insight Exam trigger: “Discuss the policy trade-off involved in responding to stagflation.” Governments influence aggregate demand using two main tools: Monetary policy Fiscal policy Both policies aim to stabilise the economy during recessions and booms.
Monetary policy works through changes in the money supply and interest rates.If the central bank increases the money supply: Interest rates fall. Investment spending increases. Aggregate demand rises. The transmission mechanism can be summarised as:If the central bank reduces the money supply: Interest rates increase. Borrowing falls. Aggregate demand decreases. Theoretical Interpretation Monetary policy operates through the interest rate channel, influencing investment and consumption decisions. Central banks typically influence interest rates using: Policy interest rates (Bank Rate) Open market operations Asset purchases or sales Changing interest rates and changing money supply are effectively two sides of the same policy instrument.Fiscal policy involves government decisions regarding: Public spending Taxation Expansionary fiscal policy shifts AD right.Contractionary fiscal policy shifts AD left.However, the ultimate effect depends on two opposing forces: Multiplier effect Crowding-out effect
The multiplier effect describes how an increase in government spending leads to a larger increase in total demand.Example: Government increases spending by £20 billion. Income rises. Households increase consumption. Firms increase production and investment. This creates a chain reaction of additional spending.Definition Marginal Propensity to Consume (MPC): The fraction of additional income that households spend. Higher MPC → larger multiplier.Economic Intuition When households spend most of their extra income, new spending circulates repeatedly through the economy, amplifying the initial demand shock.
The crowding-out effect occurs when government spending increases interest rates and reduces private investment.Mechanism: Government spending increases income. Higher income increases money demand. Interest rates rise. Investment falls. This partially offsets the fiscal expansion.Theoretical Interpretation The crowding-out effect reflects interactions between fiscal policy and financial markets. Higher interest rates reduce private sector investment. Summary Net impact of fiscal expansion depends on: Size of multiplier effect Strength of crowding-out Definition Active stabilisation policy: The use of fiscal and monetary policy to stabilise output and employment in response to economic shocks. The objective is to maintain: Full employment Stable inflation Keynesians argue that: Aggregate demand drives short-run fluctuations. Governments should actively stabilise demand. Fiscal stimulus can reduce unemployment during recessions. Critics argue: Policy operates with long and variable lags. Economic forecasts may be incorrect. Policy mistakes can cause inflation or asset bubbles. Government intervention may introduce inefficiency or corruption. Common Mistake Pitfall: Assuming policy can perfectly stabilise the economy. In reality, implementation lags and forecasting errors limit effectiveness. The global financial crisis caused a major contraction in aggregate demand.Key outcomes: Real GDP fell by about 4%. Unemployment rose from 4.4% to 10.1% in the US. Financial markets experienced severe disruptions. Governments and central banks implemented major interventions.Central banks: Cut interest rates close to zero. Purchased government bonds and financial assets. Provided liquidity to banks. Governments: Injected capital into banks. Provided emergency loans. Temporarily nationalised parts of the banking sector. In the United States: A $787 billion fiscal stimulus package was implemented in 2009. These policies aimed to restore aggregate demand and stabilise the financial system.Exam Insight Exam trigger: “Discuss the policy responses to the 2008 financial crisis using the AD–AS framework.” Definition Automatic stabilisers: Government mechanisms that automatically stabilise aggregate demand without discretionary policy changes. Examples: Progressive taxation Unemployment benefits Welfare payments During recessions: Tax revenue falls. Transfer payments rise. Both effects increase aggregate demand automatically.Economic Intuition Automatic stabilisers inject spending into the economy during downturns and withdraw spending during booms. Summary Key features: Operate automatically Reduce volatility in output and employment Strength depends on size of government sector Mankiw, N. G. and Taylor, M. P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning EMEA.Jensen, M. K. (2026) ECON1002 Introduction to Macroeconomics Lecture Slides: Monetary and Fiscal Policy. University of Nottingham. שלום, קוראים לי דן גרינברג. הכל בסדר? אני נולדתי בתל אביב אבל עזבתי את ישראל לבריטניה בגיל שניים עסר ימים. תזיין איראן. מה אתה עושה עכשיו ]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-13-monetary-and-fiscal-policy.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 13 - Monetary and Fiscal Policy.mdWed, 11 Mar 2026 14:37:45 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_7_2/slide3.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_7_set3/slide29.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_7_set3/Slide29.pngWed, 11 Mar 2026 14:35:06 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_7_set3/slide29.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_7_set3/slide28.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_7_set3/Slide28.pngWed, 11 Mar 2026 14:35:06 GMT<figure><img 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src="econ1002_introtomacroeconomics/econ1002_images/week_7_set3/slide10.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_7_set3/slide9.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_7_set3/Slide9.pngWed, 11 Mar 2026 14:35:05 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_7_set3/slide9.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_7_set3/slide8.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_7_set3/Slide8.pngWed, 11 Mar 2026 14:35:05 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_7_set3/slide8.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_7_set3/slide7.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_7_set3/Slide7.pngWed, 11 Mar 2026 14:35:05 GMT<figure><img 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src="econ1002_introtomacroeconomics/econ1002_images/week_7_set3/slide1.png"></figure>econ1002_introtomacroeconomics/econ1002_images/week_7_set3.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_7_set3.pdfWed, 11 Mar 2026 14:34:52 GMT]]>econ1002_introtomacroeconomics/econ1002_images/week_7_2/slide37.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_7_2/Slide37.pngTue, 10 Mar 2026 14:02:21 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_7_2/slide37.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_7_2/slide36.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_7_2/Slide36.pngTue, 10 Mar 2026 14:02:21 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_7_2/slide36.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_7_2/slide35.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_7_2/Slide35.pngTue, 10 Mar 2026 14:02:21 GMT<figure><img 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src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(17)/slide11.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (17)/Slide11.pngMon, 09 Mar 2026 16:05:49 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(17)/slide10.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (17)/Slide10.pngMon, 09 Mar 2026 16:05:49 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(17)/slide9.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (17)/Slide9.pngMon, 09 Mar 2026 16:05:49 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(17)/slide8.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (17)/Slide8.pngMon, 09 Mar 2026 16:05:49 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(17)/slide7.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (17)/Slide7.pngMon, 09 Mar 2026 16:05:49 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(17)/slide6.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (17)/Slide6.pngMon, 09 Mar 2026 16:05:49 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(17)/slide5.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (17)/Slide5.pngMon, 09 Mar 2026 16:05:49 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(17)/slide4.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (17)/Slide4.pngMon, 09 Mar 2026 16:05:49 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(17)/slide3.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (17)/Slide3.pngMon, 09 Mar 2026 16:05:49 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(17)/slide2.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (17)/Slide2.pngMon, 09 Mar 2026 16:05:49 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/nottingham_teaching-(17)/slide1.htmlECON1016_CurrentEconIssues/ECON1016_images/Nottingham_Teaching (17)/Slide1.pngMon, 09 Mar 2026 16:05:49 GMT<figure><img src="."></figure>This figure illustrates the foreign sales share of the largest multinational firms. Firms such as General Electric, ExxonMobil, Toyota, and Nestlé derive a substantial proportion of their revenue from international markets.The chart highlights two central features of multinational activity: Global revenue distribution Major firms generate a large portion of sales outside their home countries. International production networks Rather than exporting everything from the home country, firms often produce directly within foreign markets. Theoretical Interpretation The presence of large foreign sales shares suggests that firms face strong incentives to establish local production rather than relying solely on exports. These incentives arise due to trade costs, market access considerations, and supply chain optimisation.
This slide shows how the composition of the world’s largest firms has evolved over time. Technology companies such as Apple, Google, Microsoft, Amazon, and Tencent now dominate global rankings.This reflects a shift toward: Digital platforms intangible capital global technology networks The rise of tech firms highlights the increasing importance of knowledge-based assets such as software, intellectual property, and data.
The Fortune Global 500 list demonstrates that multinational firms collectively generate enormous revenues exceeding tens of trillions of dollars annually.The persistence of certain firms at the top (for example Walmart) reflects the growing phenomenon of “superstar firms” with massive global reach.Summary Key features of large multinationals: Global sales networks Large internal production chains Dominance in R&D and innovation Significant market concentration Multinational investment can take different organisational forms depending on strategic goals.Two primary ways firms establish foreign operations:Greenfield investment Creating a new subsidiary from scratch Building factories, infrastructure, and operations abroad Mergers and acquisitions (M&A) Purchasing an existing foreign firm Immediate entry into the host market Greenfield investments generally involve larger capital expenditures but allow firms to design operations optimally.A second classification concerns the structure of production across countries.Firms replicate the same production activities in multiple countries.Example: Toyota producing cars in Japan, the US, and the UK. Purpose: Serve foreign markets locally Avoid trade costs Firms locate different stages of production in different countries.Examples include: Component manufacturing in one country Assembly in another Design or R&D elsewhere Two forms:Backward vertical integration Subsidiary supplies inputs to the parent company. Forward vertical integration Parent supplies inputs to the subsidiary.
The scatter plots show that multinational activity is heavily concentrated among high-income economies.This reflects several structural factors: large market size developed institutions skilled labour availability advanced infrastructure Consequently, most multinational activity occurs between developed economies, rather than between developed and developing countries.
This figure shows the distribution of US multinational affiliate employment across host country income groups.Historically, the majority of employment was located in high-income countries, although the share in middle-income countries has increased gradually.This indicates a slow shift toward emerging markets as global production locations.
The table shows the share of US economic activity generated by multinational parent firms.Despite representing a small fraction of firms, multinationals account for disproportionately large shares of: value added employment R&D expenditure exports This reflects the fact that multinational firms tend to be large, productive, and innovation-intensive.
This graph illustrates the share of business R&D in the United States performed by multinational firms.The share consistently exceeds 70%, indicating that innovation is highly concentrated within multinational corporations.
The figure summarises the role of multinational firms in US economic activity.Multinationals account for large proportions of: manufacturing employment capital expenditure R&D spending exports Exam Insight When discussing MNEs in essays, emphasise the empirical pattern that a small number of large firms dominate international trade and innovation.
This figure illustrates the increasing concentration of economic activity among the largest global firms.Sales among the top firms have grown dramatically over time, a phenomenon often referred to as the “superstar firm” effect.Possible explanations include: global market integration economies of scale in digital industries network effects intellectual property advantages The most influential explanation of multinational activity is the OLI framework, developed by Stephen Hymer.It proposes that firms become multinational when three conditions hold: Ownership advantages Location advantages Internalisation advantages
Ownership advantages refer to firm-specific assets that allow companies to compete successfully abroad.Examples include: proprietary technology brand reputation intellectual property organisational capabilities These assets allow firms to overcome the disadvantages of operating in foreign markets.
Management practices also constitute a critical ownership advantage.Research shows that multinational firms often implement superior organisational structures and performance management systems, which enhance productivity across subsidiaries.
Location advantages arise when specific countries offer favourable conditions for production.Examples include: lower labour costs proximity to markets favourable tax regimes access to natural resources Tax optimisation is also an important factor, as multinational firms may structure operations to shift profits toward low-tax jurisdictions.
Internalisation refers to the decision to conduct transactions within the firm rather than through external markets.This occurs when markets fail to efficiently coordinate transactions due to: intellectual property risks quality control problems contract enforcement difficulties coordination failures Theoretical Interpretation Internalisation theory argues that firms expand boundaries when market transactions become inefficient. By bringing activities inside the firm, management authority replaces contractual negotiation. Horizontal multinational activity involves replicating production across countries.The key theoretical framework explaining this behaviour is the proximity-concentration trade-off.Two competing forces influence firm decisions:Producing close to consumers reduces: transport costs tariffs delivery time Producing in one location reduces: fixed production costs duplication of facilities Economic Intuition Firms must choose between exporting from a central plant or building factories abroad. If trade costs are high and markets are large, foreign production becomes more attractive.
This figure illustrates the effects of US anti-dumping measures against washing machine imports.Imports from targeted countries fell sharply after tariffs were imposed. However, imports from other countries increased as firms reorganised supply chains.
The data reveal that production shifted toward new manufacturing locations such as Vietnam and Thailand.This demonstrates how multinational firms reallocate production geographically in response to trade policy changes.
The cartoon highlights a central insight: tariffs often impose costs on domestic consumers.Empirical estimates suggest the tariff policy increased consumer costs by roughly $1.5 billion annually, illustrating that protectionist policies may generate significant welfare losses.The Brexit referendum introduced uncertainty regarding the UK's access to the EU single market.As a result, firms anticipated potential trade barriers and responded strategically.
Researchers analysed multinational investment using detailed datasets on FDI transactions.They applied the synthetic control method, which constructs a counterfactual scenario representing what UK investment flows would have looked like without Brexit.
The results show a 17% increase in outward investment from UK firms into EU countries.This suggests firms relocated operations inside the EU to maintain market access.Exam Insight Brexit provides a clear empirical example of how firms use multinational investment to circumvent new trade barriers. Vertical MNEs fragment production across countries according to comparative advantage.However, empirical evidence reveals that: most FDI still occurs between developed countries many subsidiaries produce primarily for local markets rather than exporting back to the parent This suggests multinational production often serves market access motives rather than purely cost-saving motives.
Recent geopolitical tensions and supply chain vulnerabilities have triggered a restructuring of global production networks.The United States has reduced dependence on Chinese imports, shifting production toward alternative locations.Key trends include: Nearshoring to Mexico Friendshoring to politically aligned economies relocation toward Southeast Asia (e.g. Vietnam)
This chart shows changes in US import market shares between 2017 and 2022.Countries such as Vietnam gained market share, while China experienced substantial declines.Summary The “great reallocation” reflects: geopolitical risk management supply chain diversification trade policy tensions Multinational firms play a major role in global R&D networks.Reasons include: access to specialised talent proximity to research clusters differences in labour costs immigration restrictions affecting skilled workers Increasingly, firms establish R&D subsidiaries abroad to access global pools of human capital.Organisational theories explain why firms internalise transactions.Under perfect contracts, firm boundaries would be irrelevant.However, real-world contracts are incomplete.Key issues include: unforeseen contingencies costly monitoring asymmetric information Transaction cost theory (Williamson) argues that firms exist because hierarchical authority can resolve conflicts more efficiently than markets.Common Mistake Do not assume firms always internalise production to reduce costs. Internalisation occurs primarily when market transactions are inefficient due to contractual frictions. Empirical research finds that multinational integration is more likely when: products are technologically complex inputs are relationship-specific contracts are difficult to enforce More productive firms are also more likely to become multinationals because: international operations involve large fixed costs internal supply chains require managerial capability Multinationals can generate positive spillovers for domestic firms.Mechanisms include: technology diffusion worker mobility supplier linkages competitive pressure Domestic firms may improve productivity by learning from multinational practices.Summary Core insights about multinational firms: MNEs dominate global trade and innovation Their existence is explained by ownership, location, and internalisation advantages Trade policy and geopolitical shocks reshape global supply chains Multinationals drive productivity growth and technological diffusion Alfaro, L. and Chor, D. (2023) Global supply chains: The looming “great reallocation”. National Bureau of Economic Research.Antràs, P. and Melitz, M. (2013) Global production: Firms, contracts, and trade structure. Antràs, P. and Yeaple, S. (2014) Multinational firms and the structure of international trade. Handbook of International Economics.Atalay, E., Hortaçsu, A., Roberts, J. and Syverson, C. (2019) Network structure of production. Bloom, N., Sadun, R. and Van Reenen, J. (2019) Management practices across firms and countries. Branstetter, L., Glennon, B. and Jensen, J. (2021) The new global invention machine. Breinlich, H., Leromain, E., Novy, D. and Sampson, T. (2020) Voting with their money: Brexit and outward investment by UK firms. European Economic Review.Flaaen, A., Hortaçsu, A. and Tintelnot, F. (2020) The production relocation and price effects of US trade policy: The case of washing machines. American Economic Review.Sutton, J. (2003) Market structure and productivity spillovers.Williamson, O. (1985) The economic institutions of capitalism.]]>econ1014_economicintegrationii/econ1014_notes/lecture-11-&-12-multinational-enterprises-(mnes).htmlECON1014_EconomicIntegrationII/ECON1014_notes/Lecture 11 & 12 - Multinational Enterprises (MNEs).mdWed, 04 Mar 2026 16:06:28 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l11_12/slide55.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L11_12/Slide55.pngWed, 04 Mar 2026 15:53:36 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l11_12/slide54.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L11_12/Slide54.pngWed, 04 Mar 2026 15:53:36 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l11_12/slide53.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L11_12/Slide53.pngWed, 04 Mar 2026 15:53:36 GMT<figure><img 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2026 15:53:35 GMT<figure><img src="."></figure>This diagram illustrates the concept of the immigration surplus, a standard result from labour economics. Initially, the labour supply is and the equilibrium wage is , producing national income represented by area . When immigration occurs, labour supply shifts to , increasing employment and lowering wages to . Total national income rises to area .However, immigrants receive wages equal to area . The remaining increase in national income, represented by triangle , is the immigration surplus. This is the additional income accruing to native residents due to immigration.Definition Immigration surplus The increase in national income accruing to native residents resulting from immigration, after paying wages to immigrant workers. Economic Intuition Immigration expands the labour force. Because labour demand is downward sloping, additional workers lower the equilibrium wage slightly. Firms hire more labour at the lower wage, increasing output. The extra output exceeds the wages paid to the additional workers, generating a small net gain for natives. Immigration increases total economic output. Wages may fall slightly due to increased labour supply. Firms and consumers benefit from lower labour costs. Native workers may experience income losses. The immigration surplus arises because immigrants typically produce more value than they receive in wages, except for the marginal worker.In competitive labour markets: Firms hire workers up to the point where With immigration, wages fall slightly below the previous level, allowing firms to hire additional workers. This generates a wedge between: The marginal product of labour The wage paid to workers The difference contributes to the surplus accruing to natives.Theoretical Interpretation The immigration surplus emerges because labour demand is downward sloping. When supply increases, wages fall but output rises. The additional output generated by inframarginal immigrant workers exceeds their wage payments, creating surplus captured primarily by capital owners and consumers. The magnitude of the immigration surplus depends crucially on the elasticity of labour demand.If labour demand were perfectly elastic: Wages would not fall. Immigrants would be paid exactly their marginal product. The immigration surplus would equal zero. In contrast, if labour demand is relatively inelastic: Wage reductions are larger. Firms capture a greater share of the additional output. The immigration surplus increases. Common Mistake Confusing total gains with distributional gains. Immigration may increase total national income while still reducing wages for some native workers. The immigration surplus represents a net gain, but it masks important distributional effects.Economic groups affected include: Firms (lower labour costs) Consumers (lower prices) Owners of capital Native workers who compete with immigrant labour Workers in sectors with high immigrant labour supply The loss to native workers is represented by area in the diagram.Exam Insight Typical short-answer exam question: "Explain the immigration surplus using a labour market diagram." Key points to include: Labour supply shift Wage reduction Increase in national income Distribution between workers and firms Triangle representing surplus The immigration surplus can be approximated using the formula:Where: = initial wage = wage after immigration = total employment after immigration = native employment To express this relative to national income:Empirical estimates suggest: Wage reduction: about 3% Immigrant workforce share: 10% Labour share of income: 70% Result:Economic Intuition Even though immigration increases national income, the surplus is typically small relative to the overall economy. Most gains and losses are redistributive rather than purely additive. Summary Key insights about the immigration surplus Immigration increases national income. Firms capture most of the gains. Some native workers may lose due to wage effects. The net gain is typically small relative to GDP. Immigration also raises important questions about public finances. The fiscal impact depends on whether migrants pay more in taxes than they receive in public services.Two opposing narratives dominate public debate.Some critics argue that certain migrant groups: Have higher welfare usage Place pressure on public services Increase government expenditure Others argue migrants often: Are younger Have higher employment rates Pay taxes for many years before claiming benefits This leads to a positive net fiscal contribution.Migration tends to involve young working-age individuals, which has important fiscal implications.Children typically receive public transfers through: Education Child benefits Older people tend to receive: State pensions Health care Social care Young adult migrants therefore often contribute more in taxes than they receive in public spending.Theoretical Interpretation From a lifecycle perspective, governments incur large costs during childhood and old age. Migrants who arrive during working age bypass the childhood spending phase, effectively importing workers whose education was financed abroad. Fiscal pressures from immigration may arise at the local government level.Local authorities must provide services such as: Schools Housing Healthcare Social services Central government funding often relies on population forecasts. If migration is underestimated: Local governments may receive insufficient funding. Infrastructure and services may become strained. Importantly, these issues arise from planning failures, not immigration itself.Economic Intuition Immigration increases population quickly. If government planning is slow or inaccurate, public services may struggle to adjust in the short run even if the long-run fiscal effect is positive.
The UK population pyramid illustrates demographic ageing. Over time, the share of elderly individuals in the population increases while the proportion of working-age individuals declines.This demographic shift creates economic pressures because older individuals: Pay less tax Receive more government spending Major expenditure categories include: State pensions Health care Long-term care Immigration can partially mitigate this problem by increasing the working-age population.Theoretical Interpretation Ageing populations create a dependency ratio problem. When the number of retirees rises relative to workers, tax revenues fall while pension and healthcare costs rise. Immigration can increase the labour force and temporarily stabilise this ratio.
Empirical studies on the fiscal effects of immigration often reach different conclusions. However, most estimates suggest the effects are small relative to GDP, generally within ±1%.Three prominent studies illustrate this variation:Differences arise because results depend heavily on: Definitions of migrants Time horizons Methodological assumptions Static estimates measure current tax payments and benefits.Dynamic estimates account for: Future tax contributions Long-term labour market integration Contributions of migrants' children. Dynamic studies tend to find more positive fiscal impacts.Common Mistake Ignoring time horizons. Short-run fiscal effects may differ substantially from long-run effects. Summary Fiscal effects of immigration Most studies find small net fiscal impacts. Young migrants often contribute positively. Results depend on assumptions and methodology. Long-run dynamic analyses tend to be more favourable. The economics of immigration reveals several key insights: Immigration increases aggregate output. The immigration surplus creates a small net gain to natives. Distributional effects can create winners and losers. Fiscal impacts depend heavily on migrant characteristics. Immigration may help mitigate the economic effects of population ageing. From a policy perspective, debates about immigration often revolve less around the total economic effect and more around distributional consequences and political perceptions.Borjas, G. J. (1999) ‘The Economic Analysis of Immigration’, Handbook of Labor Economics, 3A, pp. 1697–1760.Dustmann, C. and Frattini, T. (2013) ‘The Fiscal Effects of Immigration to the UK’, Economic Journal, 124(580), pp. F593–F643.Migration Watch (2016) The Fiscal Effects of Immigration to the UK.Oxford Economics (2018) The Fiscal Contribution of EEA Migrants.Riley, R. and Weale, M. (2018) Migration and Fiscal Sustainability. National Institute of Economic and Social Research.]]>econ1016_currenteconissues/econ1016_notes/3-jake-bradley/lecture-12-immigration's-economic-effects-and-fiscal-implications.htmlECON1016_CurrentEconIssues/ECON1016_notes/3 - Jake Bradley/Lecture 12 - Immigration's Economic Effects and Fiscal Implications.mdWed, 04 Mar 2026 14:32:29 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l4-printable/slide12.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L4 printable/Slide12.pngWed, 04 Mar 2026 13:43:53 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l4-printable/slide11.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L4 printable/Slide11.pngWed, 04 Mar 2026 13:43:53 GMT<figure><img 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src="econ1002_introtomacroeconomics/econ1002_images/week_6_set1(islm)/slide1.png"></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l3-printable/slide17.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L3 printable/Slide17.pngMon, 02 Mar 2026 16:07:37 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l3-printable/slide16.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L3 printable/Slide16.pngMon, 02 Mar 2026 16:07:37 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l3-printable/slide15.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L3 printable/Slide15.pngMon, 02 Mar 2026 16:07:37 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l3-printable/slide14.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L3 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Mar 2026 16:07:37 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l3-printable/slide5.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L3 printable/Slide5.pngMon, 02 Mar 2026 16:07:37 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l3-printable/slide4.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L3 printable/Slide4.pngMon, 02 Mar 2026 16:07:37 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l3-printable/slide3.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L3 printable/Slide3.pngMon, 02 Mar 2026 16:07:37 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l3-printable/slide2.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L3 printable/Slide2.pngMon, 02 Mar 2026 16:07:37 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l3-printable/slide1.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L3 printable/Slide1.pngMon, 02 Mar 2026 16:07:37 GMT<figure><img src="."></figure>The 23 June 2016 referendum resulted in a 51.9% vote to leave the European Union. The vote share differed substantially across regions: England: 53.4% Leave Wales: 52.5% Leave Northern Ireland: 44.2% Leave Scotland: 38.0% Leave This heterogeneity is economically meaningful. Regions vary in: Exposure to EU trade Participation in EU supply chains Labour mobility patterns Net fiscal transfers Brexit therefore represents not only a change in trade policy but also a redistribution shock across UK regions and sectors.Definition Economic integration: The reduction of trade barriers and regulatory differences between economies, facilitating cross-border flows of goods, services, capital and labour. Theoretical Interpretation Integration reduces trade costs. In general equilibrium, lower trade costs expand market size, intensify competition, increase productivity through selection effects, and raise aggregate welfare. However, they also generate distributional consequences across sectors and skill groups.

The EU internal market for goods rests on three pillars: Abolition of customs duties and quantitative restrictions Common external tariff Harmonisation of national legislation The Customs Union (CU) eliminates tariffs between members and imposes a common external tariff on third countries.Without a common external tariff, countries would have incentives to import goods via the lowest-tariff member and re-export internally. This is known as trade deflection.Theoretical Interpretation The Customs Union solves a collective action problem. By coordinating external tariffs, members eliminate arbitrage incentives and remove the need for rules-of-origin checks. This dramatically reduces administrative trade costs. Frictionless trade in goods Unified trade negotiations Reduced compliance costs Loss of independent trade policy Constraints on external agreements Exam Distinguish clearly between Single Market and Customs Union in essays. Single Market involves regulatory harmonisation and the four freedoms. Customs Union concerns common external tariffs.

The Sweden–Norway example shows that free trade without a customs union still requires customs formalities.Even with: Zero tariffs Free movement of people There are: Customs declarations X-ray checks Compliance procedures Economic Intuition Tariffs are only one dimension of trade costs. Administrative and regulatory compliance costs can significantly affect trade volumes even when tariffs are zero. This is central to understanding the EU–UK Trade and Cooperation Agreement (TCA).
Ad valorem tariff: Specific tariff: fixed amount per unit Tariffs increase domestic price from to . Tariffs: Raise domestic prices Reduce import volumes Increase producer surplus Reduce consumer surplus Generate government revenue But they create deadweight loss.
NTBs include: Quotas Voluntary export restraints Technical standards Labelling requirements Anti-dumping measures High-income countries use NTBs extensively.Theoretical Interpretation NTBs often substitute for tariffs when tariff bindings under WTO limit overt protection. They may reflect regulatory objectives but can also be strategically used to restrict trade. Warning Pitfall: Assuming NTBs are less distortionary than tariffs. NTBs can impose higher welfare losses because they raise costs without generating revenue.
The WTO enforces: Most-Favoured-Nation (MFN) principle Tariff bindings Definition MFN: A WTO member must apply the same tariff to all other WTO members. Tariff bindings cap maximum tariff rates.Exam Preferential Trade Agreements are exceptions to MFN.
Hierarchy of integration: Nonreciprocal PTAs Reciprocal PTAs Customs Union Common Market Economic Union Definition Common Market: Customs Union plus free movement of services, capital and labour. Definition Economic Union: Common Market plus coordinated monetary and/or fiscal policy.

The TCA includes: Zero tariffs Zero quotas Rules of origin Customs formalities No: Free movement of services Automatic regulatory recognition Theoretical Interpretation The TCA reduces tariffs but increases non-tariff barriers relative to Single Market membership. This represents an increase in trade costs.

Northern Ireland: Remains aligned with EU goods rules Applies EU customs code at ports This avoids a hard border on the island of Ireland.Theoretical Interpretation The Protocol reflects the trade-off between political sovereignty and economic friction. Maintaining regulatory alignment minimises border costs but constrains policy autonomy.
Trade creation replaces high-cost domestic production with lower-cost partner imports.Trade diversion replaces low-cost external imports with higher-cost partner imports.

High tariff case: Trade creation Lower tariff case: Trade diversion Theoretical Interpretation Welfare effects of PTAs depend on relative cost rankings before and after tariff changes.
Consumer surplus: Producer surplus: Free trade increases total surplus.
Deadweight loss: Two distortions: Consumption distortion Production distortion Definition Deadweight loss: Net welfare loss not transferred to any agent.
Trade affects: Wages Employment Firm entry and exit Theoretical Interpretation In heterogeneous firm models, trade raises productivity through selection. Low-productivity firms exit. Labour reallocation generates transitional unemployment. Summary Aggregate gains coexist with concentrated losses.
Protection justified if: Learning effects exist Economies of scale Temporary protection
China gradually reduced tariffs after achieving scale.
Brazil’s protection failed to create competitiveness.Warning Governments face information and commitment problems.
Terms of Trade: Large country tariff: Foreign exporters lower prices Import price rises by less than tariff Terms of trade improve Definition Optimal tariff: Tariff that maximises national welfare for a large country by exploiting market power. But if all countries do this: Retaliation Lower global welfare
Countries face a Prisoner’s Dilemma:Trade agreements: Enforce reciprocity Internalise terms-of-trade externality Prevent protectionist spirals Theoretical Interpretation Trade agreements move countries from a non-cooperative Nash equilibrium to a cooperative outcome.
Evidence: 13.2% fall in exports to EU 14% exporter exit Reduction in imports No strong evidence of trade diversion.Interpretation: Increased non-tariff barriers Reduced deep integration Lectures 8–10 integrate: Institutional forms of integration Welfare analysis of trade Political economy of protection Strategic interaction in trade policy Empirical Brexit evidence Core insight: Trade increases aggregate welfare, but distributional effects and strategic incentives create persistent political demand for protection. Trade agreements are institutional solutions to these strategic and political distortions. Brown, C.P. and Crowley, M.A. (2016) ‘The empirical landscape of trade policy’, in Bagwell, K. and Staiger, R. (eds.) Handbook of Commercial Policy. Ederington, J. and Ruta, M. (2016) ‘Non-tariff measures and trade agreements’, in Bagwell, K. and Staiger, R. (eds.) Handbook of Commercial Policy. Feenstra, R.C. and Taylor, A.M. (2008) International Economics. New York: Worth Publishers. Laird, S. and Yeats, A. (1990) Quantitative Methods for Trade Barrier Analysis. London: Macmillan. OICA (various years) World Motor Vehicle Production Statistics. UK Trade Policy Observatory (2020) The Costs of Brexit. University of Sussex.]]>econ1014_economicintegrationii/econ1014_notes/lecture-8,-9-&-10-gains-and-losses-from-trade.htmlECON1014_EconomicIntegrationII/ECON1014_notes/Lecture 8, 9 & 10 - Gains and Losses from Trade.mdThu, 26 Feb 2026 10:27:08 GMT<figure><img src="."></figure>The standard competitive labour market diagram presents: Downward sloping labour demand Upward sloping labour supply Equilibrium wage Equilibrium employment Firms demand labour up to the point where the real wage equals the marginal product of labour. Workers supply labour according to the wage relative to reservation utility.Definition Competitive labour market equilibrium occurs where labour supply equals labour demand, determining equilibrium wage and employment . Economic Intuition The wage adjusts to clear the market. If wages are above equilibrium, unemployment emerges. If below equilibrium, firms face labour shortages. The equilibrium wage equalises the marginal cost of labour with its marginal product.
This slide compares two regional labour markets, North and South.Key result: Labour mobility shifts supply curves across regions Wages converge toward a common If workers move from low-wage to high-wage regions: Labour supply falls in the origin region → wages rise Labour supply rises in the destination region → wages fall Mobility → supply adjustment → wage equalisationHowever, full convergence requires zero mobility costs.Theoretical Interpretation In a spatial equilibrium model, workers move until the utility differential across regions equals mobility costs. Perfect wage convergence implies zero migration costs and identical amenities. In reality, mobility frictions sustain persistent regional wage differentials.
Blanchard and Katz document wage convergence across US states.This provides evidence that: Labour is mobile Regional shocks are partly absorbed by migration Exam Insight If asked about regional labour market adjustment, mention both wage flexibility and migration as adjustment mechanisms. Immigration is modelled as an outward shift in labour supply. Total employment increases Equilibrium wages fall But effects depend critically on whether immigrants are substitutes or complements.
If immigrants and natives have similar skills: Labour supply shifts right Wage falls from to Native employment may decline Definition Substitutes are workers whose skills are sufficiently similar that firms can replace one with the other at low cost. Increased supply of substitute labour → downward wage pressure
If immigrants complement natives: Native marginal productivity increases Native wages rise Example: Migrants in manual tasks allow natives to specialise in communication-intensive tasks Definition Complementarity occurs when one type of labour raises the marginal product of another. Economic Intuition If migrants perform routine tasks, natives can specialise in higher value activities. This raises overall productivity and can increase native wages.
In the long run: Capital adjusts Firms invest more Labour demand shifts outward Result: Wages may return toward initial levels Output permanently increases Theoretical Interpretation In a neoclassical growth framework, capital deepening offsets labour supply increases. With endogenous capital adjustment, the long-run wage effect of immigration may be small, while output gains persist.
This diagram decomposes national income effects.Key elements: Initial national income: area After immigration: supply shifts from to Wage falls Total output rises The immigration surplus is triangle .Definition Immigration surplus is the net gain to native residents from immigration, arising because wages fall but total output increases more. Employers gain Consumers may gain via lower prices Competing native workers lose Immigrants gain wage income Size depends on labour demand elasticity.Exam Insight Always separate aggregate efficiency gains from distributional effects. Immigration can raise total surplus while harming specific groups. Regression framework:Where: = native wage in city at time = migrant share Migrants choose high-wage cities.This creates:Endogeneity biasIf migrants move to booming cities: may appear positive True causal effect may be zero or negative Common Mistake Correlation between migrant share and wages does not imply causation. Migration decisions are endogenous.
Model:City fixed effects control for permanent differences.This uses within-city variation over time.We compare a city to itself over time, not across cities.Theoretical Interpretation Fixed effects eliminate time-invariant heterogeneity. Identification relies on temporal variation in migrant inflows within a city. But migrants still choose where to move.
In 1980: 125,000 Cubans arrived in Miami Labour force rose by 7 percent Sudden and unexpected shock David Card used this as a natural experiment.
The DiD estimator:It compares: Before vs after Miami vs control cities Common trends assumption:Absent immigration, Miami wages would have followed the same trend as control cities.Exam Insight Always state the identifying assumption explicitly when discussing DiD. Borjas argues: Geographical units may not define labour markets Natives may move away Adjustment may occur across skill groups, not locations Thus, analysis should focus on: Skill-experience cells National labour markets Theoretical Interpretation If labour is mobile internally, local effects may be attenuated. The relevant labour market may be defined by skill, not geography. This lecture illustrates several core economic principles: General equilibrium effects matter Distributional consequences differ from aggregate gains Identification requires credible counterfactuals Institutional and mobility frictions shape outcomes Summary Immigration shifts labour supply outward Short-run wage effects depend on substitutability vs complementarity Long-run capital adjustment mitigates wage impacts Immigration generates a positive immigration surplus Empirical identification requires fixed effects or natural experiments DiD depends on the common trends assumption Labour market definition critically shapes conclusions Blanchard, O.J. and Katz, L.F. (1992) ‘Regional Evolutions’, Brookings Papers on Economic Activity, 1, pp. 1–61. Borjas, G.J. (2003) ‘The Labor Demand Curve Is Downward Sloping: Reexamining the Impact of Immigration on the Labor Market’, Quarterly Journal of Economics, 118(4), pp. 1335–1374. Card, D. (1990) ‘The Impact of the Mariel Boatlift on the Miami Labor Market’, Industrial and Labor Relations Review, 43(2), pp. 245–257. University of Nottingham (2026) ECON1016 Current Economic Issues: Lecture 2 Slides. ]]>econ1016_currenteconissues/econ1016_notes/3-jake-bradley/lecture-10-immigration,-labour-markets,-and-empirical-identification.htmlECON1016_CurrentEconIssues/ECON1016_notes/3 - Jake Bradley/Lecture 10 - Immigration, Labour Markets, and Empirical Identification.mdThu, 26 Feb 2026 10:23:54 GMT<figure><img src="."></figure>The chart shows total immigration, total emigration, and net migration (2012–2025). Key moments include: The EU referendum The COVID-19 lockdown The new immigration system post EU transition The most striking feature is the sharp post-2021 rise in immigration, particularly non-EU migration.Economic Intuition Immigration responds strongly to policy and macro shocks. Lockdowns suppressed mobility. Reopening plus new visa routes increased flows. Exam Insight When discussing migration trends, reference structural breaks such as Brexit and COVID. Examiners reward linking data patterns to institutional change.
This slide decomposes net migration into: Non-EU EU British nationals Post-Brexit, EU migration declines sharply, while non-EU migration increases substantially.Theoretical Interpretation Brexit represents a regime shift from free movement to a points-based system. The composition effect demonstrates how immigration policy affects who migrates, not necessarily just how many. Policy restriction on EU free movement → reduction in EU inflows → substitution toward non-EU routes
This chart separates migration motives: Study-related Work-related Asylum Humanitarian Other The large rise post-2021 is driven primarily by study and work routes, not asylum.Economic Intuition Universities act as major export industries. International students represent both migration flows and service exports. Exam Insight Distinguish between economic migrants and asylum seekers. Public discourse often conflates categories.
The largest contributors include India, China, Pakistan, Nigeria and Nepal. Much of Indian and Chinese migration is study-related.Theoretical Interpretation Human capital theory predicts migration flows from countries where expected returns to education are high abroad relative to home. Higher UK wage premium for skilled labour → incentive for high-skill migration
Initial estimates are revised substantially over time.Common Mistake Treating provisional estimates as final. Migration data are subject to substantial revision. This raises a broader issue: economic policy is often made under uncertainty.Population change is defined as:From 2004–2023, 65% of UK population growth came from net migration. From 2020–2023, 98% came from net migration.Theoretical Interpretation In ageing societies with fertility below replacement, migration becomes the dominant source of demographic growth. Economic Intuition Low birth rates reduce labour supply growth. Immigration offsets demographic decline.
The population chart shows net migration dominating annual change post-2021. Stylised fact: recent UK population growth is almost entirely migration-driven.
European map: foreign-born populations concentrate in major urban regions.
OECD evidence confirms migrants disproportionately settle in large metropolitan areas.Theoretical Interpretation Agglomeration economies attract migrants. Cities offer higher wages, thicker labour markets, and migrant networks. Urban wage premium + network effects → spatial concentration
Between 1882 and 1924, 26 million immigrants arrived in the US.
The long-run data show waves of immigration rather than a steady trend.Economic Intuition Migration responds to economic booms, wars, and policy restrictions. It is cyclical rather than linear. The lecture identifies key areas of debate: GDP effects Public finances Wage and employment impacts Migrant welfare Political and cultural concerns Theoretical Interpretation In a competitive labour market model, immigration shifts labour supply rightward. Total output increases Wage effects depend on substitutability between migrants and natives Capital adjustment matters Three fundamental policy levers: Quantity: How many migrants? Composition: Which types? Rights: What entitlements post-arrival? Exam Insight Structure essays around these three dimensions. It provides analytical clarity.
European Social Survey results show variation by education level in beliefs about wage effects.Lower-educated respondents are more likely to agree immigration lowers wages.Theoretical Interpretation Perceived labour market competition shapes attitudes. Individuals expecting substitution effects oppose immigration. Perceived wage competition → anti-immigration attitudes Summary Migration measurement is complex and frequently revised. Post-Brexit UK migration is predominantly non-EU and study/work driven. Population growth is now largely migration-dependent. Migrants concentrate in urban areas due to agglomeration effects. Public attitudes reflect perceived distributional impacts. Policy debates centre on quantity, composition, and rights. Astruc, E., Le Souder, C. et al. (2024) Spatial distribution of migrants across Europe and the OECD. Dustmann, C., Glitz, A. and Frattini, T. (2008) The labour market impact of immigration. European Social Survey evidence. Office for National Statistics (2024) UK Migration Statistics. US Department of Homeland Security (2023) Historical Immigration Data. University of Nottingham (2026) ECON1016 Current Economic Issues L1 printable.]]>econ1016_currenteconissues/econ1016_notes/3-jake-bradley/lecture-9-the-economics-of-immigration.htmlECON1016_CurrentEconIssues/ECON1016_notes/3 - Jake Bradley/Lecture 9 - The Economics of Immigration.mdThu, 26 Feb 2026 10:14:31 GMT<figure><img src="."></figure>This figure shows UK and EU GDP rising over time in current US dollars.Interpretation: There is a clear upward trend in output. However, growth is not smooth. Shocks such as the oil crises, financial crisis and COVID period generate visible deviations. Theoretical Interpretation The long-run growth trend reflects capital accumulation and technological progress. Deviations around trend reflect aggregate demand shocks, supply shocks, and institutional rigidities.
This figure shows UK real GDP growth rates (1960–2014).Interpretation: Growth rates oscillate above and below zero. Fluctuations are irregular in timing and magnitude. Recessions appear as negative spikes. Economic Intuition It is easier to see cycles in growth rates than in GDP levels. The level always trends upward; growth reveals acceleration and slowdown. Common Mistake Do not confuse a fall in growth with a fall in output. If growth slows from 4% to 1%, output is still rising. Macroeconomists classify variables based on how they move relative to GDP.Definition A procyclical variable is above trend when GDP is above trend. Examples: Real wages Investment Consumption Definition A countercyclical variable is below trend when GDP is above trend. Example: Unemployment Economic Intuition When output rises: Firms demand more labour Unemployment falls Wages tend to increase Investment rises due to optimistic expectations Understanding these relationships is central to diagnosing economic conditions.Policymakers attempt to predict turning points.The OECD Composite Leading Indicator (CLI) attempts to identify peaks and troughs before they occur.
Interpretation: The CLI moves before GDP peaks and troughs. Arrows indicate predicted turning points. Mid-2007 shows early warning before the global financial crisis. Definition Leading indicators move before economic activity changes. Lagging indicators move after. Coincident indicators move simultaneously. Theoretical Interpretation Forward-looking agents base decisions on expectations. Financial markets and survey indicators embed expectations, making them leading signals. There is no consensus explanation. Household spending shocks Firm investment decisions External shocks such as geopolitical crises Government policy Confidence and expectations Technological shocks Monetary policy changes Theoretical Interpretation A shock → transmission mechanism → aggregate response framework underlies all models. The key disagreements concern: Source of shocks Speed of adjustment Role of market imperfections Whether policy intervention is stabilising or destabilising The debate is ideological as well as analytical. Fluctuations reflect market imperfections. Demand failures justify policy intervention. Cycles are natural outcomes of market processes. Policy intervention distorts signals and worsens instability. Monetary instability is central. Governments are likely to mismanage intervention. Cycles reflect structural contradictions in capitalism. Exam Insight If asked to compare schools, structure your answer as: Source of instability View of market clearing Role of policy Normative implications RBC theory attributes fluctuations to technology shocks. Markets clear Agents are rational No systematic policy mistakes No price rigidities A negative technology shock: Reduces labour productivity Lowers labour demand Reduces output Raises unemployment Raises prices Raises real interest rate Reduces investment Theoretical Interpretation In RBC models, fluctuations are efficient responses to real shocks. Output falls because the economy becomes less productive, not because demand collapses. Economic Intuition If productivity falls, producing goods becomes more costly. Firms reduce labour demand. The fall in supply pushes prices up. Common Mistake RBC does not claim recessions are “good”. It claims they are optimal responses to real constraints. Since agents have rational expectations: No systematic policy can improve outcomes. Intervention may distort optimal adjustments. Modern macroeconomics uses: Dynamic Stochastic General Equilibrium (DSGE) models Dynamic: Intertemporal optimisation Stochastic: Random shocks General equilibrium: Simultaneous market clearing These models: Microfound macro behaviour Incorporate expectations Are widely used in central banks Theoretical Interpretation DSGE models unify RBC and New Keynesian approaches by embedding optimisation and expectations within a general equilibrium structure. Internal consistency Policy simulation Structural interpretation All models are simplifications Financial sector historically underrepresented Performed poorly during the global financial crisis Exam Insight When evaluating DSGE models: Mention microfoundations Mention expectations Mention financial crisis critique Summary Business cycles are short-run fluctuations around trend growth. GDP fluctuates irregularly. Variables can be procyclical or countercyclical. Leading indicators attempt to predict turning points. Competing schools disagree on causes and policy responses. RBC attributes cycles to technology shocks. DSGE models are the modern analytical framework. Jensen, M.K. (2026) ECON1002: Introduction to Macroeconomics – Week 5, Set 2 Lecture Slides. University of Nottingham.Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning EMEA.Mitchell, W.C. and Burns, A.F. (1938) Statistical Indicators of Cyclical Revivals. New York: National Bureau of Economic Research. ]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-9-business-cycles.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 9 - Business Cycles.mdWed, 25 Feb 2026 20:05:29 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_5_set2/slide12.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_5_set2/slide28.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_5_set2/Slide28.pngWed, 25 Feb 2026 14:19:57 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week_5_set2/slide28.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week_5_set2/slide27.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week_5_set2/Slide27.pngWed, 25 Feb 2026 14:19:57 GMT<figure><img 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Feb 2026 11:07:16 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l2-printable/slide5.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L2 printable/Slide5.pngWed, 25 Feb 2026 11:07:16 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l2-printable/slide4.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L2 printable/Slide4.pngWed, 25 Feb 2026 11:07:16 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l2-printable/slide3.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L2 printable/Slide3.pngWed, 25 Feb 2026 11:07:16 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/current-economic-issues-l2-printable/slide2.htmlECON1016_CurrentEconIssues/ECON1016_images/Current Economic Issues L2 printable/Slide2.pngWed, 25 Feb 2026 11:07:16 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Feb 2026 16:21:35 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l8_9_10/slide13.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L8_9_10/Slide13.pngSat, 21 Feb 2026 16:21:35 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l8_9_10/slide12.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L8_9_10/Slide12.pngSat, 21 Feb 2026 16:21:35 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l8_9_10/slide11.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L8_9_10/Slide11.pngSat, 21 Feb 2026 16:21:35 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l8_9_10/slide10.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L8_9_10/Slide10.pngSat, 21 Feb 2026 16:21:35 GMT<figure><img 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16:21:35 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l8_9_10/slide4.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L8_9_10/Slide4.pngSat, 21 Feb 2026 16:21:35 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l8_9_10/slide3.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L8_9_10/Slide3.pngSat, 21 Feb 2026 16:21:35 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l8_9_10/slide2.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L8_9_10/Slide2.pngSat, 21 Feb 2026 16:21:35 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l8_9_10/slide1.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L8_9_10/Slide1.pngSat, 21 Feb 2026 16:21:35 GMT<figure><img src="."></figure>The image frames the optimistic narrative: trade promotes growth and growth reduces poverty. However, it explicitly acknowledges the tension that multinational enterprises may exploit low-skilled workers. This captures a fundamental development trade-off: Aggregate gains from specialisation Distributional and institutional vulnerabilities Economic Intuition Trade increases market size and allows countries to specialise according to comparative advantage. Poor countries often specialise in labour-intensive goods, increasing demand for unskilled labour and potentially raising wages. However, weak labour institutions may allow rents to accrue disproportionately to capital. Examples of EU development-oriented trade agreements: Cotonou Agreement with ACP countries Negotiations with ASEAN These illustrate the EU’s use of non-reciprocal or asymmetrically structured agreements to integrate developing countries into global markets.Theoretical Interpretation Preferential access alters relative prices facing exporting firms in developing countries. This increases expected profitability of export activity, triggering entry, technology upgrading, and scale expansion in heterogeneous-firm models. Definition The Generalised System of Preferences (GSP) is a preferential tariff system allowing lower or zero tariffs on imports from selected developing countries without extending the same treatment to developed countries. Under WTO rules: The Most Favoured Nation (MFN) principle requires equal tariff treatment across members. GSP is a formal exemption allowing differentiated treatment for development purposes. This is a key institutional innovation: development-oriented discrimination within a rules-based multilateral system.Mechanisms: Ex-ante effect: Higher expected profits → Investment in R&D and quality upgrading Access to high-income markets → Incentives to improve standards Ex-post learning: Firms absorb foreign knowledge Evidence: Mercosur case Brazilian tariffs on Argentine goods fell from 29% to zero (1991–1995) Exports quadrupled Industries with larger tariff cuts were more likely to: Enter export markets Upgrade technology Increase skill intensity Theoretical Interpretation In Melitz-type models, trade liberalisation increases the productivity threshold for survival. More productive firms expand, less productive exit. GSP can therefore induce reallocation towards higher-productivity exporters. Access to the EU market: Vastly larger than domestic markets in poor countries Reduces average costs Enables fixed-cost recovery in export industries Economic Intuition If fixed export costs are high, small domestic markets cannot sustain modern industry. Preferential access effectively increases market size and allows firms to exploit scale economies. Reduces dependence on primary commodities Encourages structural transformation Promotes resilience to external shocks Exporting firms: Demand more skilled labour Induce upgrading in non-export sectors via spillovers Definition The Infant industry argument states that emerging industries may require temporary protection to achieve scale and productivity sufficient to compete internationally. However:Common Mistake Not all industries justify protection. The industry must plausibly develop comparative advantage, and protection must be temporary. Preferences may replace more efficient suppliers Leads to inefficient global resource allocation This is a core welfare concern. EU tariffs are already low Marginal gains may be small Selective country inclusion Suspension of preferences for political reasons Countries may focus on maintaining preferences rather than supporting global liberalisation
The diagram shows: Two foreign supply curves: (rest of world) (GSP countries) Initial uniform tariff Removal of tariff on GSP suppliers EU price: Imports from rest of world only Tariff revenue: Consumers still pay GSP exports increase to Rest of world exports fall Effects: EU loses tariff revenue: GSP gains producer surplus: Deadweight loss from diversion: Theoretical Interpretation GSP can generate welfare losses for the importing bloc due to tariff revenue loss and trade diversion, even if developing country exporters gain. The policy redistributes surplus internationally. Exam Insight When analysing GSP graphically: Identify consumer price Identify tariff revenue changes Identify trade diversion area Separate domestic welfare from global welfare
The chart shows: Majority in surveyed countries view trade positively Decline in strong pro-trade sentiment between 2002 and 2014 Particularly among lower-income countries This highlights a political economy constraint: trade policy must be socially legitimate.
This figure shows perceptions of trade’s effects on: Wages Job destruction Job creation There is heterogeneity across countries and income levels.Theoretical Interpretation Stolper-Samuelson predicts trade raises returns to a country’s abundant factor. However, imperfect labour mobility, regional concentration of industries, and firm heterogeneity complicate distributional outcomes. Mechanisms: Poor countries abundant in unskilled labour Trade increases relative demand for unskilled labour Raises earnings under perfect mobility However: Industry-specific skills Rigid labour markets Geographic concentration More productive firms survive import competition and tend to employ more skilled workers.→ Potential increase in inequality.Economic Intuition Trade increases average income but redistributes within countries. Adjustment costs and mobility constraints determine who gains. Started in 1971 Covers 88 developing countries Accounts for ~5.5% of EU imports €93bn imports receive GSP treatment Variants: Standard GSP GSP+: Conditional on human rights, labour and governance conventions Everything But Arms (EBA): Duty-free, quota-free access for LDCs Product graduation: If country exceeds 15% of EU GSP imports in a product → loses eligibility Institutional Logic Graduation prevents competitive exporters from capturing preferences indefinitely and preserves developmental targeting. Only ~8% of DC products actually receive zero or reduced tariffs Reasons: Administrative burdens Rules of origin requirements Common Mistake Preference eligibility does not equal utilisation. Compliance costs reduce effective impact.
The UK replicates the EU structure: Least Developed Countries Framework General Framework Enhanced Framework Conditionality includes: Human rights Labour standards Environmental commitments This reflects continuity in development-oriented trade policy. GSP increases eligible trade by ~4% (€5.5bn) Displaces EU production and rest-of-world imports Producer surplus in DCs increased ~10% Herz & Wagner (2011): Short-run export gains Long-run potential export dependence and reduced diversification Persson & Wilhelmsson (2015): Positive effects on export diversification under GSP and GSP+ Key Takeaways GSP generates modest but positive trade effects Short-run gains may reflect trade diversion Long-run effects depend on diversification and structural transformation Distributional and political economy effects matter Non-tariff barriers increasingly constrain development The Generalised System of Preferences represents a targeted deviation from MFN principles to promote development through trade. Its effects operate through: Productivity upgrading Economies of scale Export diversification Skill reallocation However: Trade diversion creates inefficiency Gains are modest in magnitude Political conditionality matters Administrative barriers reduce utilisation Distributional consequences affect legitimacy Exam trigger: When asked to evaluate GSP, structure answer as: Definition and WTO context Theoretical benefits Graphical welfare analysis Empirical evidence Political economy and limitations Feenstra, R.C. and Taylor, A.M. (2008) International Economics. New York: Worth Publishers.Herz, B. and Wagner, M. (2011) ‘The dark side of the Generalized System of Preferences’, Review of International Economics, 19(4), pp. 763–775.Persson, M. and Wilhelmsson, F. (2015) ‘EU Trade Preferences and Export Diversification’, The World Economy, 39(1), pp. 16–53.Pavcnik, N. (2017) ‘The Impact of Trade on Inequality in Developing Countries’, Journal of Economic Perspectives, 31(3), pp. 119–140.]]>econ1014_economicintegrationii/econ1014_notes/lecture-7-trade-with-developing-countries.htmlECON1014_EconomicIntegrationII/ECON1014_notes/Lecture 7 - Trade with Developing Countries.mdSat, 21 Feb 2026 16:19:19 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l7/slide31.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L7/Slide31.pngSat, 21 Feb 2026 16:17:03 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l7/slide30.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L7/Slide30.pngSat, 21 Feb 2026 16:17:03 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l7/slide29.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L7/Slide29.pngSat, 21 Feb 2026 16:17:03 GMT<figure><img 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src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l7/slide3.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L7/Slide3.pngSat, 21 Feb 2026 16:17:03 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l7/slide2.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L7/Slide2.pngSat, 21 Feb 2026 16:17:03 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l7/slide1.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L7/Slide1.pngSat, 21 Feb 2026 16:17:03 GMT<figure><img src="."></figure>This figure shows the number of FDIC-insured bank failures per year in the United States, highlighting sharp spikes during periods of systemic stress. The late 1980s Savings and Loans crisis and the post-2008 Global Financial Crisis stand out clearly. The economic intuition is that banking systems are inherently fragile due to maturity transformation and leverage. When confidence collapses, failures cluster rather than occurring independently. This clustering is a defining feature of systemic crises and justifies regulatory oversight of banks.Exam insight Banking crises are characterised by non-linear dynamics, where small shocks can generate large institutional failures. The figure illustrates why crises are best understood at the system level rather than the firm level.
The graph depicts the Dow Jones Industrial Average around Black Monday in October 1987. The sharp collapse following a sustained rise illustrates a classic asset price bubble bursting. From an economic perspective, bubbles emerge when prices deviate persistently from fundamentals, often driven by expectations of further price increases rather than underlying value. The abrupt crash reflects coordination failures among investors when sentiment reverses.Key intuition Bubbles are linked to expectations, herd behaviour, and limited arbitrage. Financial institutions amplify bubbles through leverage and interconnected balance sheets.
This figure shows selected Asian exchange rates during the Asian Financial Crisis of 1997–98, indexed to the US dollar. The sudden depreciations reflect a collapse in confidence in fixed or semi-fixed exchange rate regimes. Economically, currency crises often arise from inconsistencies between domestic monetary policy, capital mobility, and exchange rate commitments. Once investors doubt sustainability, capital outflows force abrupt devaluations.Exam insight Currency crises highlight the trilemma between exchange rate stability, capital mobility, and monetary autonomy. Financial institutions transmit currency crises into banking and sovereign debt crises. Barter is defined as the direct exchange of goods and services for other goods and services. The lecture emphasises that barter is closely linked to specialisation. As Adam Smith argued using the pin factory example, specialisation raises productivity, output, and welfare relative to self-sufficiency.Under self-sufficiency: Households consume what they produce. Productivity is low due to lack of division of labour. With barter: Individuals specialise according to comparative advantage. Exchange allows higher aggregate output and welfare. The key insight is that exchange, even without money, is foundational to economic development.The main weakness of barter is the double coincidence of wants, identified by William Stanley Jevons. For barter to occur, each party must simultaneously want what the other offers. This creates high transaction costs and severely limits the scope of exchange.From an institutional perspective, this constraint prevents barter economies from scaling as the number of goods and agents increases.In a barter system with goods, the number of relative prices required can be as high as: This makes information requirements unmanageable as economies grow. Each additional good increases complexity non-linearly, creating strong incentives for an alternative system of exchange.Exam insight The inefficiency of barter is not moral or technological but informational. Institutions evolve to reduce transaction and information costs. Monetary exchange resolves the failures of barter by introducing a generally accepted medium of exchange, which also acts as the unit of account (numeraire). Once all agents accept a common medium, trade no longer requires a double coincidence of wants.The number of prices falls dramatically to , simplifying exchange and enabling complex economies.Core functions of money Medium of exchange Unit of account Store of value
Early monetary systems relied on commodities such as shells and metals. These commodities were scarce, durable, and widely accepted, making them suitable as money. The use of metals represents an institutional improvement, as metals are divisible and transportable.
Coins represent a further institutional advance through standardisation. By certifying weight and purity, authorities reduced transaction costs and fraud. This marks an early link between money and the state.Fiat money replaces intrinsic value with institutional trust. Its value rests on legal tender status and credibility of the issuing authority, typically the central bank. This shift allows greater flexibility but also introduces risks if credibility is undermined.
Electronic money represents the most recent evolution, reducing transaction costs further and increasing speed and scale of exchange. However, it deepens dependence on financial infrastructure and regulation, making institutional robustness even more critical.The lecture’s unifying theme is that financial crises are institutional failures. As systems of exchange become more efficient and complex, they also become more fragile. Money and finance enable growth but require trust, regulation, and credible institutions to remain stable.Big picture takeaway Financial development is a trade-off between efficiency and fragility. Understanding money’s evolution is essential to understanding modern crises. Barter enables specialisation but is limited by information and coordination problems. Money emerges as an institutional solution to the failures of barter. The evolution from commodity money to e-money reflects attempts to reduce transaction costs. Financial crises arise when institutions governing money and exchange fail. Modern crises are amplified by the same institutional features that make advanced economies productive. Jevons, W. S. (1875) Money and the Mechanism of Exchange. London: Henry S. King. Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations. London: W. Strahan and T. Cadell.
Lecture materials, ECON1016 Current Economic Issues, University of Nottingham. oai_citation:1‡Lecture 1, Part 1.pdf]]>econ1016_currenteconissues/econ1016_notes/2-spiros-bougheas/lecture-5-barter-and-monetary-exchange.htmlECON1016_CurrentEconIssues/ECON1016_notes/2 - Spiros Bougheas/Lecture 5 - Barter and Monetary Exchange.mdMon, 16 Feb 2026 23:46:57 GMT<figure><img src="."></figure>A stylised bank balance sheet:Definition Insolvency: A situation in which the value of a bank’s assets is less than its liabilities, implying negative equity. Illiquidity: A situation in which a bank cannot meet short-term withdrawal demands despite having positive net worth. The lecture compares a non-financial firm (Apple 2008) with a large bank (RBS 2008). The key concept is leverage. Leverage Ratio: ]]>econ1016_currenteconissues/econ1016_notes/2-spiros-bougheas/lecture-8-bank-panics,-contagion,-and-currency-crises.htmlECON1016_CurrentEconIssues/ECON1016_notes/2 - Spiros Bougheas/Lecture 8 - Bank Panics, Contagion, and Currency Crises.mdMon, 16 Feb 2026 16:15:41 GMT<figure><img src="."></figure>
This map highlights stark spatial disparities in GDP per capita across Europe. Core regions in Northern and Western Europe dominate the upper end of the income distribution, while Southern and Eastern regions lag behind. Importantly, these differences persist even within economically integrated areas, suggesting that market integration alone does not guarantee convergence. From an exam perspective, this motivates questioning the sufficiency of neoclassical convergence mechanisms.
Large income gaps also exist within countries, not just between them. This undermines explanations based solely on national institutions or policies and shifts attention towards region-specific characteristics such as industrial structure, human capital and geography. For policy, this implies that national-level redistribution may be too blunt to address localised disparities.
Employment rates vary substantially across regions, reinforcing the idea that regional inequality is multidimensional rather than purely income-based. Persistent employment gaps can generate self-reinforcing dynamics, as low employment discourages investment and skill accumulation.
High shares of young people not in employment, education or training (NEETs) are concentrated in poorer regions. This is particularly damaging from a dynamic perspective, as it reduces future human capital and locks regions into low-growth trajectories.
The UK exhibits some of the most pronounced regional inequalities in the G7. London is among the richest regions in Europe, while many other UK regions rank among the poorest in Northern Europe. This contrast provides a concrete case study for evaluating regional policy, especially post-EU membership.Key empirical takeaway Regional disparities are large, persistent and observable across multiple dimensions. Integration and national growth do not automatically eliminate regional inequality.
The Solow model provides the benchmark neoclassical explanation of regional income differences. (c.f. Lecture 7-8 - The Era of Sustained Economic Growth)Core assumptions Two factors of production: capital and labour. Diminishing returns to each factor. Constant savings rate and population growth. Exogenous technological progress. Under these assumptions, poorer regions with lower capital–labour ratios should grow faster than richer ones, leading to convergence.
The model predicts that: Higher savings and productivity raise steady-state income. Higher population growth and depreciation lower steady-state income. Without technological progress, growth eventually stops at a steady state. In a regional context, this implies that integration, by facilitating capital mobility and labour migration, should accelerate convergence.
By incorporating human capital, the augmented Solow model refines the convergence prediction. Poor regions converge only if they share similar savings rates in physical and human capital. This concept of conditional convergence aligns better with observed data but still struggles to explain persistent divergence between otherwise similar regions.
From a strict neoclassical perspective: Regional inequalities are temporary or policy-induced. Market integration should reduce disparities. Government intervention is unnecessary or even distortionary. This provides a clear benchmark against which alternative theories can be assessed.
New Economic Geography (NEG) models challenge the convergence result by emphasising increasing returns, transport costs and market access. Location matters because firms benefit from proximity to large markets.
The Belgium–Spain example illustrates how moderate reductions in trade costs can actually concentrate production in central regions rather than low-cost peripheral ones. This result is crucial: integration can worsen peripheral outcomes unless trade costs fall sufficiently.
The non-linear relationship between trade costs and location explains why partial integration may increase inequality. This is a frequent exam application: explain why integration has ambiguous regional effects.
Agglomeration arises from: Increasing returns to scale. Positive externalities such as knowledge spillovers. Reduced transport costs near large markets. These mechanisms generate self-reinforcing concentration of economic activity.
Demand and supply linkages further strengthen agglomeration, as firms and workers co-locate to exploit complementarities.
Congestion, high rents and competition counteract agglomeration. The spatial equilibrium reflects the balance between agglomeration and dispersion forces.
Historical advantages can persist long after their original cause disappears. The portage example shows how early geographic advantages shape modern city size, reinforcing the NEG prediction of path dependence.NEG takeaway Integration can amplify small initial differences. Regional divergence can be self-reinforcing. History and geography matter for long-run outcomes.
Governments intervene on: Equity grounds. Political cohesion. Economic self-interest through spillovers and national growth. In NEG models, intervention may be efficiency-enhancing rather than distortionary.
Policy tools include: Infrastructure investment. Support for R&D. Education and training. Income transfers. The effectiveness of these tools depends on local institutional quality and absorptive capacity.
EU-level coordination prevents free-riding and ensures a critical mass of investment. It also reflects political solidarity within an integrated market.
EU regional policy focuses on: Convergence. Regional competitiveness and employment. Territorial cooperation. Most funding targets regions with GDP per capita below 75 percent of the EU average.
The key instruments are the ERDF, ESF and Cohesion Fund, with emphasis on human and physical capital accumulation rather than short-term redistribution.
Assessing causal effects is difficult because funds are targeted at poorer regions. This creates endogeneity problems that complicate evaluation.
Empirical findings are mixed: Some studies find limited long-run growth effects. Others identify positive impacts conditional on human capital and institutional quality. This reinforces the idea that policy design and local conditions matter. Regional inequalities are large and persistent. Neoclassical models predict convergence but struggle empirically. New Economic Geography explains divergence, agglomeration and path dependence. Integration can increase or decrease regional inequality depending on context. Regional policy may be justified on both equity and efficiency grounds. EU regional policy emphasises long-run capacity building rather than pure transfers. Becker, S.O., Egger, P. and von Ehrlich, M. (2013) ‘Regional transfers in Europe: Do we need fewer of them or different ones?’, VoxEU.Bleakley, H. and Lin, J. (2012) ‘Portage and path dependence’, Quarterly Journal of Economics, 127(2), pp. 587–644.Boldrin, M. and Canova, F. (2001) ‘Inequality and convergence in Europe’s regions’, Economic Policy, 16(32), pp. 205–253.Krugman, P. and Venables, A.J. (1990) ‘Integration and the competitiveness of peripheral industry’, in Unity with Diversity in the European Economy. Cambridge: Cambridge University Press.Midelfart-Knarvik, K.H. and Overman, H.G. (2002) ‘Delocation and European integration: Is structural spending justified?’, Economic Policy, 17(35), pp. 321–359.Solow, R.M. (1956) ‘A contribution to the theory of economic growth’, Quarterly Journal of Economics, 70(1), pp. 65–94.]]>econ1014_economicintegrationii/econ1014_notes/lecture-1-&-2-regional-policy.htmlECON1014_EconomicIntegrationII/ECON1014_notes/Lecture 1 & 2 Regional Policy.mdSat, 14 Feb 2026 17:13:31 GMT<figure><img src="econ1014_economicintegrationii/econ1014_images/ei_ii_l1_2/slide7.png"></figure>The firm has: Assets: Cash = 1000, Fixed Assets = 4000 Liabilities: Loans = 2000 Equity = 3000 Shares outstanding = 500 Book value per share:Suppose profits of 1000 are generated during the year.Two cases arise: Profits paid as dividends Dividend per share = 2 Balance sheet unchanged Book value remains 6 Profits retained Cash increases to 2000 Equity increases to 4000
Book value becomes: The key question is: What determines the equilibrium market price on January 1? The answer depends entirely on expectations.Three cases illustrate valuation logic:Price = 6 Price = 8 Price = 8The crucial result: If investors fully anticipate profits, the price adjusts immediately. Dividend policy does not affect firm value under perfect markets.This illustrates the:In frictionless markets: Firm value is independent of capital structure Firm value is independent of dividend policy Value depends only on underlying cash flows.This leads directly to the Efficient Market Hypothesis.The EMH states: Asset prices reflect all available information. In competitive markets: Expected profits are immediately capitalised There are no systematic arbitrage opportunities Prices therefore act as optimal forecasts.The statistical representation of EMH is:where: is independently distributed Mean = 0 Errors are random Interpretation: The best predictor of tomorrow’s price is today’s price. New information arrives randomly. This implies price changes are unpredictable.
Returns are normally distributed with: Mean (drift) Variance (volatility) Thus:Economic intuition: captures average growth captures risk This framework underpins modern finance theory.
Pascal’s Triangle links discrete coin toss outcomes to the binomial distribution.As the number of trials increases: The binomial distribution converges to the normal distribution. This provides the statistical foundation for modelling asset returns as normally distributed.
Standard normal distribution: Most observations cluster near the mean. Extreme outcomes are very rare.This is central to traditional financial risk modelling.
Empirical data contradicts the normal distribution assumption.Examples: Annual decline >10% predicted once every 500 years Observed once every 5 years Nine 20% crashes in a century Implication: Financial returns exhibit fat tails Extreme events occur far more frequently than predicted If markets were perfectly efficient and returns normally distributed: Large crashes should be extremely rare. Observed volatility suggests: Prices deviate from fundamental values. Psychological or structural forces may amplify shocks. Revisit:For optimal forecasting: must be uncorrelated with Otherwise predictions could be improved Fundamental principle: The forecast must be less variable than the variable forecasted. If stock prices are excessively volatile relative to fundamentals, this violates optimal forecasting logic.Robert Shiller (1981) observed: The discounted present value of real dividends follows a relatively stable trend. Actual stock prices fluctuate dramatically. This creates a paradox: If prices are optimal forecasts of discounted dividends, why are they so volatile? This challenges the simplest version of EMH.The lecture builds toward bubble logic: If prices deviate persistently from fundamentals And volatility exceeds justified levels Then speculative dynamics may be present A bubble arises when: Prices rise due to expectations of further price increases Rather than underlying cash flow growth A crash occurs when: Expectations reverse Price adjustments become discontinuous Asset prices reflect expectations about future profits. Under EMH, prices follow a random walk. Forecast errors must be unpredictable. Empirical data shows excess volatility and fat tails. Modigliani–Miller implies valuation depends on fundamentals. Random walk implies unpredictability. Shiller shows volatility exceeds fundamental justification. Book value:$$ \frac{\text{Equity}}{\text{Shares}}p_{t+1} = p_t + \varepsilon_tp_{t+1} = p_t + \mu + \varepsilon_t]]>econ1016_currenteconissues/econ1016_notes/2-spiros-bougheas/lecture-7-asset-market-bubbles-and-crashes.htmlECON1016_CurrentEconIssues/ECON1016_notes/2 - Spiros Bougheas/Lecture 7 - Asset Market Bubbles and Crashes.mdSat, 14 Feb 2026 14:21:39 GMT<figure><img src="."></figure>The images illustrate the infrastructure of early globalisation. Steam locomotives and transoceanic liners drastically reduced transport time and cost, while refrigerated shipping allowed perishable goods to be traded internationally. This expanded the feasible set of traded goods and deepened comparative advantage patterns.
World exports remained relatively flat for centuries before accelerating sharply in the 19th and 20th centuries. The figure shows a structural break consistent with technological change.Economic Interpretation Technological innovation shifts the trade cost parameter downward, amplifying trade flows through elastic responses. Key implications: Trade growth is non-linear Trade responds strongly to cost reductions Institutional and technological shocks generate structural breaks The pre-1914 period marks the first modern globalisation surge, interrupted by world wars and protectionism.
The map shows dramatic reductions in travel time across global routes. Time is a trade cost. Reducing it lowers: Inventory costs Uncertainty Coordination frictions This improves feasibility of complex production networks.
The reaction of New York cotton prices to Liverpool news illustrates near-instant information transmission.
Price differentials narrowed significantly after the telegraph.Information and Market Integration Lower information frictions strengthen arbitrage and reinforce the law of one price. Economic meaning: Information asymmetries fell Arbitrage improved Market integration intensified Trade integration is not only about moving goods but synchronising markets.
Post-war trade growth was extraordinary. Manufacturing trade expanded faster than GDP.
Air freight costs collapsed between 1955 and 2004.Second Era of Globalisation Declining transport costs combined with institutional liberalisation generated unprecedented trade expansion. Implications: Enabled time-sensitive goods Facilitated global value chains Supported multinational fragmentation Technological change interacted with trade liberalisation, particularly through GATT (1947) and later the WTO (1995). GATT (1947) WTO (1995) Dispute settlement mechanisms These institutions reduce policy uncertainty and enforce reciprocal liberalisation.Commitment Problem Trade agreements solve time inconsistency by locking governments into credible tariff paths. RCEP CPTPP USMCA European Union Trade agreements reduce tariffs, harmonise standards and lower non-tariff barriers.
The figure shows falling world tariffs alongside rounds of GATT/WTO negotiations. Tariff reductions are institutionalised through negotiation rounds, producing cumulative trade liberalisation.Economic insight: Trade agreements internalise cross-border spillovers They reduce policy volatility They support investment in global value chains
Trade participation is highly concentrated. Most firms do not export or import Top 1 percent account for a large share of trade Heterogeneous Firms Only sufficiently productive firms overcome fixed export costs. This aligns with Melitz-type models: Exporting requires paying fixed costs Firms with productivity export Trade liberalisation lowers and reallocates market share Key Mechanism Globalisation operates through selection and reallocation, not uniform industry expansion. Modern trade increasingly involves intermediate inputs rather than final goods.
The iPad example shows components sourced from multiple countries. Value added is distributed across the globe.
The Boeing 787 demonstrates extreme production fragmentation.Task-Level Comparative Advantage Countries specialise in stages of production rather than entire industries. Economic meaning: Value added is geographically dispersed Trade statistics may misrepresent national gains Contracting and coordination become central
Separate components converge into a final assembly node.Characteristics: Centralised assembly Parallel input sourcing High coordination intensity
Sequential value addition across countries.Characteristics: Vertical production process Cumulative value addition Strong path dependency
Many industries combine both structures.Determinants of GVC Structure Trade costs, contract incompleteness, and coordination complexity shape whether production resembles a spider, snake or hybrid.
Multinationals account for the majority of trade flows.Key points: Large firms dominate trade Intrafirm trade is substantial MNEs operate across many countries Internalisation Firms internalise cross-border transactions to mitigate hold-up problems under incomplete contracts. Ownership structure therefore shapes global trade patterns.
Trade-to-GDP ratios have plateaued since the Global Financial Crisis.Slowbalisation Trade growth has slowed relative to global GDP since the late 2000s. Interpretation: Saturation of value chain expansion Rising trade barriers Increased geopolitical risk
Trade was resilient during Covid, rebounding quickly after initial collapse.However, recent trends include: Trade wars Geopolitical tensions Re-shoring and friend-shoring Increased tariff use Potential Macro Consequences Fragmentation may generate higher inflation, lower efficiency and greater volatility. Productivity gains via specialisation Knowledge diffusion Scale economies Skill-biased trade effects Regional inequality Sectoral labour displacement Supply chain vulnerability Financial contagion Geopolitical shocks Analytical Framework Evaluate globalisation using comparative advantage, heterogeneous firm models, institutional commitment theory and global value chain structure. Globalisation: Is historically episodic Is driven by technological and institutional innovation Has transformed production structure Is increasingly dominated by multinational firms May now be entering a more fragmented and uncertain phase Forward-Looking Challenge How should firms and governments balance efficiency gains from integration against resilience and geopolitical risk? Antràs, P. (2016) Global Production: Firms, Contracts, and Trade Structure. Princeton: Princeton University Press.Antràs, P. (2024) Lecture materials on global value chains.Bernard, A.B., Jensen, J.B., Redding, S.J. and Schott, P.K. (2009) ‘The margins of US trade’, American Economic Review, 99(2), pp. 487–493.Handley, K., Kamal, F. and Monarch, R. (2019) ‘Rising import tariffs, falling export growth: When modern supply chains meet old-style protectionism’, NBER Working Paper No. 26611.Hummels, D. (2007) ‘Transportation costs and international trade in the second era of globalisation’, Journal of Economic Perspectives, 21(3), pp. 131–154.Pascali, L. (2017) ‘The wind of change: Maritime technology, trade, and economic development’, American Economic Review, 107(9), pp. 2821–2854.Steinwender, C. (2018) ‘Real effects of information frictions: When the States and the Kingdom became United’, American Economic Review, 108(3), pp. 657–696.,]]>econ1014_economicintegrationii/econ1014_notes/lecture-6-globalisation.htmlECON1014_EconomicIntegrationII/ECON1014_notes/Lecture 6 - Globalisation.mdFri, 13 Feb 2026 16:06:41 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-2/slide13.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 2/Slide13.pngThu, 12 Feb 2026 14:22:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-2/slide12.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 2/Slide12.pngThu, 12 Feb 2026 14:22:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-2/slide11.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 2/Slide11.pngThu, 12 Feb 2026 14:22:33 GMT<figure><img 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src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l6/slide3.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L6/Slide3.pngThu, 12 Feb 2026 13:41:54 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l6/slide2.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L6/Slide2.pngThu, 12 Feb 2026 13:41:54 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l6/slide1.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L6/Slide1.pngThu, 12 Feb 2026 13:41:54 GMT<figure><img src="."></figure>Jeffrey M. Perloff - Microeconomics_ Theory and Applications with Calculus (2017, Pearson) - libgen.li.pdf University of Nottingham, School of Economics* Consumer theory helps explain how individuals allocate scarce resources to maximise utility. Here, we apply that same framework to time allocation between work and leisure. The individual decides whether to work and how many hours, balancing income (for consumption) against leisure (non-work time).
This model is a direct extension of the theory of consumer choice (cf. Lecture 7 - Budget Constraints and Consumer Choice).Each person has a fixed time endowment: Let : hours worked : hours of leisure Hence, Leisure includes everything that is not paid work: rest, housework, social activities, childcare, studying, and so on.Income has two components: Non-labour income (): grants, benefits, or investment income Labour income (): earned through work at wage rate (£ per hour) Total income and consumption:Substitute :This is the budget constraint in consumption–leisure space. It shows the trade-off between consumption () and leisure (). Vertical intercept: Horizontal intercept: Slope: Each additional hour of leisure reduces income and consumption by £. Hence, the wage is the price of leisure. Diagram:
This figure shows the straight-line budget constraint between leisure and consumption. The slope equals the wage rate. Individuals derive utility from both consumption and leisure:Assumptions: (more consumption raises utility) (more leisure raises utility) Indifference curves are downward sloping and convex, showing diminishing marginal rates of substitution. Diagram:
This plot displays indifference curves between leisure and consumption. Higher curves represent greater utility. The individual chooses and to maximise utility subject to the budget constraint:Substituting the constraint gives:First-order condition (interior optimum):At the optimum, the marginal rate of substitution (MRS) between leisure and consumption equals the wage:This means the rate at which the individual is willing to trade consumption for leisure equals the rate at which the market allows them to. Diagram:
Tangency between the indifference curve and the budget line defines the equilibrium combination of leisure and consumption. When the wage changes, the slope of the budget line changes. A rise in rotates the budget line around the time endowment point (). Two opposing effects occur: Substitution effect (SE): Leisure becomes more expensive. The individual substitutes towards work. Income effect (IE): The higher wage increases real income. If leisure is a normal good, the individual demands more leisure. The total effect on hours worked depends on which effect dominates: Diagram:
` The rotation of the budget line represents the higher wage. The move to a higher indifference curve shows the substitution and income effects. An increase in shifts the budget line upwards in parallel (no change in slope). There is no substitution effect, only an income effect. If leisure is normal, the person consumes more leisure and works less. Diagram:
The parallel shift shows the pure income effect of higher unearned income. Plotting the relationship between and gives the labour supply curve. At low wages, the substitution effect dominates, so higher increases . At higher wages, the income effect dominates, reducing . This creates the backward-bending labour supply curve. Diagram:
At low wages, labour supply slopes upward; beyond a threshold, it bends backwards. If the optimal point occurs at an extreme, the individual either: Chooses not to work (, all leisure), or Works to the maximum feasible hours (in theory ). A corner solution arises when the MRS does not equal within the feasible range. For example, high can make the no-work point optimal. Taxation: reduces the effective wage, flattening the budget line and discouraging work. Benefits: increase , shifting the budget line up and potentially reducing labour supply. Wage subsidies: increase , rotating the line and usually raising work incentives for low-income earners. Backward bending if .Labour supply decisions can be analysed using the same framework as consumer choice. The wage acts as the relative price between leisure and consumption. Changes in wages and non-labour income affect work effort through substitution and income effects, producing the familiar backward-bending labour supply curve.
(cf. Lecture 7 - Budget Constraints and Consumer Choice, Lecture 9&10 - Income Substitution Effects])]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-13-–-labour-supply.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 13 – Labour Supply.mdWed, 11 Feb 2026 13:57:51 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide16.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide16.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide15.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide15.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide14.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide14.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide13.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide13.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide12.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide12.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide11.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide11.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide10.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide10.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide9.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide9.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide8.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide8.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide7.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide7.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide6.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide6.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide5.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide5.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide4.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide4.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide3.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide3.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide2.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide2.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-2,-part-1/slide1.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 2, Part 1/Slide1.pngWed, 11 Feb 2026 11:25:39 GMT<figure><img src="."></figure>Human capital refers to the skills, education, and training embodied in workers. Investment in human capital raises labour productivity and therefore output per worker, making it a fundamental source of long-run growth.Governments play a central role through public education systems, training subsidies, and policies that support skill acquisition. However, poorer countries may struggle to retain skilled workers, leading to brain drain, where educated individuals migrate to richer economies.Key points Human capital raises productivity directly Education and training are long-term growth investments Brain drain weakens growth prospects for poorer economies The UK has historically benefited from skilled migration, highlighting the link between openness, human capital flows, and growth.
Human capital extends beyond education to include health and nutrition. A healthier population is more productive due to higher physical capacity, cognitive ability, and reduced absenteeism.Historical evidence strongly supports this view. Improvements in nutrition and health have been shown to explain a substantial share of long-run income growth, demonstrating that growth is not driven by capital and technology alone.Economic significance Health investments raise effective labour input Productivity gains accumulate over generations Growth is partly biological, not just technological This perspective reinforces the idea that development policy must consider population health alongside education and investment.
Technological progress, often denoted as A in the production function, is the ultimate engine of sustained growth. New ideas, inventions, and production techniques raise output without requiring proportional increases in inputs.Governments can stimulate innovation through public research institutions, grants, and the protection of intellectual property. However, the design of innovation policy involves trade-offs, particularly around patent systems.Core insight Technology raises productivity economy-wide Innovation creates spillovers beyond the innovating firm Policy must balance incentives and diffusion Long-run growth cannot be sustained by capital accumulation alone without continuous technological progress.
Patents grant temporary monopoly rights to innovators, increasing the private return to research and development. This can encourage innovation but may also slow follow-on improvements by restricting access to knowledge.The lecture highlights that the effect of patents on growth is theoretically ambiguous and empirically contested. The optimal patent system depends on balancing innovation incentives against knowledge diffusion.Exam insight Patents can both stimulate and hinder innovation The growth effect depends on market structure and enforcement Intellectual property is an institutional choice
Growth can also be supported by foreign investment, which allows countries to accumulate capital without relying solely on domestic saving.Two main forms are distinguished: Foreign direct investment (FDI): foreign-owned and operated capital Foreign portfolio investment: foreign-financed but domestically operated FDI is often associated with technology transfer, managerial expertise, and productivity spillovers.
While capital, labour, and technology are proximate causes of growth, institutions are fundamental determinants shaping incentives to invest, save, and innovate.Institutions that protect property rights, enforce contracts, and maintain political stability support market coordination and long-run growth. Weak institutions undermine these mechanisms.Key institutional roles Protect property rights Enforce contracts through courts Limit corruption and instability Poor institutional quality discourages both domestic and foreign investment, trapping countries in low-growth equilibria.
Political instability poses a direct threat to property rights and investment incentives. Revolutions, coups, and policy uncertainty raise the risk of expropriation and reduce expected returns on investment.Even less extreme instability, such as unpredictable trade policy or protectionism, can weaken growth by reducing openness and increasing uncertainty.Economic mechanism Instability raises risk Higher risk lowers investment Lower investment reduces growth
Population growth increases total output by expanding the labour force, but it does not necessarily raise GDP per capita. Rapid population growth can dilute physical and human capital, lowering productivity per worker.This idea dates back to Thomas Malthus, who argued that population growth can outpace resource accumulation, constraining living standards.Trade-off More workers increase total GDP Capital dilution lowers GDP per capita Environmental pressure may rise
The lecture also notes a potential upside of population growth: a larger population increases the pool of scientists, engineers, and innovators, raising the probability of technological breakthroughs.This highlights the ambiguous relationship between population growth and prosperity, which depends on education, institutions, and innovation capacity. Long-run growth is driven by productivity, not short-run cycles Capital accumulation faces diminishing returns Human capital, health, and R&D are central to sustained growth Institutions shape incentives and growth outcomes Population growth has both costs and potential benefits Exam tip: Always distinguish between total GDP and GDP per capita, and between proximate and fundamental causes of growth.Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning. Solow, R.M. (1956) ‘A Contribution to the Theory of Economic Growth’, Quarterly Journal of Economics, 70(1), pp. 65–94. Fogel, R.W. (2004) The Escape from Hunger and Premature Death, 1700–2100. Cambridge: Cambridge University Press.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-5-production-and-growth-(continued).htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 5 - Production and Growth (Continued).mdWed, 11 Feb 2026 10:59:51 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide6.png"></figure>By lowering transaction costs, pooling risk, and improving information, the financial system raises the level of productive investment and long-run GDP.In financial markets, savers provide funds directly to borrowers. In return, savers expect compensation in the form of interest or dividends.The two most important financial markets are: The bond market The stock market These markets differ in the nature of the claims they create and the risks they involve.Bonds are certificates of indebtedness. When an institution issues a bond, it borrows funds and commits to repay: The principal (amount borrowed) Periodic interest payments (coupon)
Bond yields vary due to: Credit risk: higher probability of default requires higher interest Duration risk: longer maturities usually pay higher yields Issuer type: sovereign versus corporate bonds The upward-sloping yield curve reflects compensation for uncertainty over time.Stocks represent partial ownership of a firm and therefore a claim on its future profits.
Key features: Stockholders receive dividends only if profits are earned Stock prices are determined by supply and demand Demand depends on expected profitability and available wealth Supply depends on firms’ financing needs and alternatives to debt Stock indices summarise movements in equity prices and are often interpreted as indicators of future economic conditions.Rather than lending directly, savers often channel funds through financial intermediaries, which stand between savers and borrowers.
The two main types are: Banks Mutual or investment funds Intermediaries specialise in screening borrowers, diversifying risk, and monitoring investments.Banks: Accept deposits from savers and pay interest Lend funds to borrowers at a higher interest rate Facilitate transactions through payment services
The spread between lending and deposit rates reflects administrative costs, risk, and profit.Investment funds pool savings from many individuals and invest in diversified portfolios of stocks and bonds.
Their economic value lies in: Risk diversification Access to professional management However, there is limited evidence that active management systematically outperforms the market after fees.Recall the national income identity:In a closed economy, , so:National saving is defined as:
This identity shows that saving finances investment in the aggregate:Let denote taxes net of transfers. Then:Where: Private saving: Public saving:
If , the government runs a budget deficit and reduces national saving.The market for loanable funds explains how saving and investment are coordinated.
Key components: Supply: national saving (private + public) Demand: investment Price: real interest rate As the real interest rate rises: Quantity of saving supplied increases Quantity of investment demanded decreases The real interest rate adjusts to equate saving and investment.
At equilibrium: Funds supplied by savers equal funds demanded by investors The interest rate reflects the economy’s intertemporal trade-off between consumption today and consumption tomorrow Policies that encourage saving, such as replacing income tax with a consumption tax, increase the supply of loanable funds.
Economic effects: Rightward shift of saving curve Lower equilibrium interest rate Higher investment Higher long-run GDP growth However, distributional consequences may arise, as higher-income households tend to save more.When the government runs a budget deficit, it must borrow by issuing bonds.
This reduces public saving and shifts the supply of loanable funds leftward: Interest rates rise Private investment falls This mechanism is known as crowding out.Crowding out is the reduction in private investment caused by government borrowing.It highlights a key macroeconomic trade-off: Fiscal expansion today may reduce capital accumulation and growth tomorrow The financial system coordinates saving and investment Bonds and stocks differ in risk and return National saving finances investment The real interest rate equilibrates the loanable funds market Government policy affects interest rates and investment via saving These mechanisms form the backbone of later analysis of fiscal and monetary policy.Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning EMEA.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-7-saving,-investment-and-the-financial-system.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 7 - Saving, Investment and the Financial System.mdTue, 10 Feb 2026 13:40:40 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set1/slide42.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set1/Slide42.pngTue, 10 Feb 2026 13:32:14 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set1/slide41.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set1/Slide41.pngTue, 10 Feb 2026 13:32:14 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set1/slide40.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set1/Slide40.pngTue, 10 Feb 2026 13:32:14 GMT<figure><img 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3_set1/Slide1.pngTue, 10 Feb 2026 13:32:13 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide30.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide30.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide29.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide29.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide28.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide28.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide27.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide27.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img 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GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide21.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide21.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide20.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide20.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide19.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide19.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide18.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide18.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide17.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide17.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide16.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide16.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide15.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide15.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide14.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide14.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide13.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide13.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide12.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide12.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide11.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide11.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide10.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide10.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide9.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide9.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide8.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide8.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide7.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide7.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide6.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide6.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide5.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide5.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide4.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide4.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide3.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide3.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide2.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide2.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-3_set2/slide1.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 3_set2/Slide1.pngTue, 10 Feb 2026 13:28:44 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide19.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide19.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide19.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide18.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide18.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide18.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide17.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide17.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide17.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide16.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide16.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide16.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide15.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide15.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide15.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide14.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide14.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide14.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide13.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide13.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide13.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide12.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide12.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide12.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide11.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide11.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide11.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide10.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide10.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide10.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide9.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide9.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide9.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide8.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide8.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide8.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide7.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide7.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide7.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide6.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide6.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide6.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide5.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide5.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide5.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide4.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide4.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide4.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide3.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide3.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide3.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide2.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide2.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide2.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide1.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week3_set0_repeat_f_week_2/Slide1.pngTue, 10 Feb 2026 13:13:40 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/week3_set0_repeat_f_week_2/slide1.png"></figure>The figure plots output per worker against capital per worker, holding technology, human capital, and resources constant. At low levels of capital, extra machines dramatically raise output As capital accumulates, each additional unit adds less to output The curve flattens as workers become well-equipped This captures the idea that capital deepening alone cannot sustain growth indefinitely.Exam intuition Diminishing returns explain why capital accumulation cannot generate permanent growth They motivate the importance of technology and human capital Diminishing returns imply the possibility of conditional convergence, often referred to as the catch-up effect. Poor countries start with very low capital per worker The marginal product of capital is therefore high Small increases in investment can generate large productivity gains The lecture highlights China’s rapid growth relative to Japan as an illustration, despite lower average investment rates.Catch-up is not automatic: It requires access to existing technologies It depends on institutional quality It is conditional on complementary inputs such as education and infrastructure Without these, low-income countries may fail to converge.Human capital refers to the skills, knowledge, and health embodied in workers.
The slide shows a strong positive relationship between schooling and income per capita. Education raises workers’ ability to use physical capital efficiently Health improves reliability, stamina, and cognitive performance Human capital raises output directly and amplifies returns to other inputs The lecture also discusses brain drain, where skilled workers migrate from poorer to richer countries, potentially slowing growth in the source country while benefiting the destination country.Technology, represented by , captures society’s knowledge of how to organise production efficiently.Examples include: Historical innovations such as the steam engine and electrification Modern advances in ICT, automation, and digital platforms Unlike capital, technology does not necessarily suffer diminishing returns and can generate sustained growth. Funding basic research Supporting education and training Designing patent systems The lecture emphasises the ambiguity of patents: They incentivise innovation by protecting returns But may also slow diffusion and follow-on innovation Population growth increases total GDP but does not necessarily raise GDP per capita.
More workers share a given capital stock Capital per worker falls Productivity and wages decline This reflects the Malthusian concern that population growth can offset income gains unless technology improves sufficiently.Population growth may also: Increase the number of inventors and scientists Raise the probability of technological breakthroughs The net effect depends on institutions and incentives.The lecture concludes by shifting from proximate to fundamental causes of growth.Institutions shape incentives by: Protecting property rights Enforcing contracts Limiting corruption Reducing political instability Weak institutions discourage saving, investment, and innovation, undermining all proximate growth mechanisms.Key insight Institutions determine whether capital accumulation and technology adoption actually occur Long-run growth in living standards is driven by productivity growth Capital accumulation raises output but faces diminishing returns Human capital and technology are central to sustained growth Institutions underpin all growth mechanisms Small differences in growth rates compound into large income gaps Exam advice Begin with productivity Use diminishing returns to explain catch-up Conclude with technology and institutions for sustained growth Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning EMEA.Solow, R.M. (1956) ‘A contribution to the theory of economic growth’, Quarterly Journal of Economics, 70(1), pp. 65–94.Fogel, R.W. (1994) ‘Economic growth, population theory, and physiology’, American Economic Review, 84(3), pp. 369–395.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-4-production-and-growth.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 4 - Production and Growth.mdTue, 10 Feb 2026 13:10:55 GMT<figure><img src="."></figure>econ1016_currenteconissues/econ1016_notes/1-azamat-valei/lecture-2-innovation.htmlECON1016_CurrentEconIssues/ECON1016_notes/1 - Azamat Valei/Lecture 2 - Innovation.mdMon, 09 Feb 2026 16:37:19 GMT]]>econ1016_currenteconissues/econ1016_images/lecture-1-,-part-2/slide10.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1 , Part 2/Slide10.pngMon, 09 Feb 2026 16:27:09 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1-,-part-2/slide9.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1 , Part 2/Slide9.pngMon, 09 Feb 2026 16:27:09 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1-,-part-2/slide8.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1 , Part 2/Slide8.pngMon, 09 Feb 2026 16:27:09 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1-,-part-2/slide7.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1 , Part 2/Slide7.pngMon, 09 Feb 2026 16:27:09 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1-,-part-2/slide6.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1 , Part 2/Slide6.pngMon, 09 Feb 2026 16:27:09 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1-,-part-2/slide5.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1 , Part 2/Slide5.pngMon, 09 Feb 2026 16:27:09 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1-,-part-2/slide4.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1 , Part 2/Slide4.pngMon, 09 Feb 2026 16:27:09 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1-,-part-2/slide3.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1 , Part 2/Slide3.pngMon, 09 Feb 2026 16:27:09 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1-,-part-2/slide2.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1 , Part 2/Slide2.pngMon, 09 Feb 2026 16:27:09 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1-,-part-2/slide1.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1 , Part 2/Slide1.pngMon, 09 Feb 2026 16:27:09 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1,-part-1/slide12.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1, Part 1/Slide12.pngMon, 09 Feb 2026 14:23:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1,-part-1/slide11.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1, Part 1/Slide11.pngMon, 09 Feb 2026 14:23:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1,-part-1/slide10.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1, Part 1/Slide10.pngMon, 09 Feb 2026 14:23:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1,-part-1/slide9.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1, Part 1/Slide9.pngMon, 09 Feb 2026 14:23:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1,-part-1/slide8.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1, Part 1/Slide8.pngMon, 09 Feb 2026 14:23:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1,-part-1/slide7.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1, Part 1/Slide7.pngMon, 09 Feb 2026 14:23:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1,-part-1/slide6.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1, Part 1/Slide6.pngMon, 09 Feb 2026 14:23:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1,-part-1/slide5.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1, Part 1/Slide5.pngMon, 09 Feb 2026 14:23:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1,-part-1/slide4.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1, Part 1/Slide4.pngMon, 09 Feb 2026 14:23:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1,-part-1/slide3.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1, Part 1/Slide3.pngMon, 09 Feb 2026 14:23:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1,-part-1/slide2.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1, Part 1/Slide2.pngMon, 09 Feb 2026 14:23:33 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-1,-part-1/slide1.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 1, Part 1/Slide1.pngMon, 09 Feb 2026 14:23:33 GMT<figure><img src="."></figure>The slide frames immigration as a high-salience issue in the UK. Economically, this is the context in which immigration policy is chosen: even when aggregate effects are small, who wins and who loses matters politically. A key exam move is to separate (a) overall welfare and efficiency effects from (b) distributional effects across worker groups and owners of capital.
The cross-country comparison underlines that immigration debates are not UK-specific. The economic link is that similar mechanisms appear across destinations: changes in labour supply, changing composition of skills, and public finance effects, with different institutional settings shaping the outcomes.
The historical quote (Benjamin Franklin, 1753) signals a recurring pattern: anxieties about language and institutions often accompany immigration. In economic terms, this anticipates the later “institutions and social norms” channel: concerns may not be about wages only, but about social capital and political cohesion.Theresa May’s conference speech highlights three claims: (i) migrants plug skill shortages but many are not high-skilled, (ii) students should not overstay, (iii) EU migration had become “unbalanced” and “unsustainable”. The lecture’s analytical task is not to evaluate the rhetoric but to translate it into testable economic objects: Skill composition (high-skilled vs low-skilled) and substitutability with natives Visa compliance and selection (who stays after study) Push–pull factors (relative growth and job creation influencing inflows)
This chart is the baseline stylised fact: net migration in the UK was negative in parts of the 1960s and 1970s, low in the 1980s and early 1990s, and positive every year since 1994, with a notable increase in the 2000s (linked to EU migration). The lecture uses this to motivate why we should treat immigration as a structural feature of the UK labour market rather than a one-off shock.Economic interpretation Persistent positive net migration implies that labour supply is influenced by international mobility, so “closed economy” labour market models can mislead. A rise in net migration during high UK growth is consistent with migration responding to relative labour demand (a pull factor), not just source-country push factors. Exam-friendly summary Net migration becomes persistently positive post-1994. Large 2000s rise is associated with EU inflows. Immigration analysis must account for policy regimes (free movement) and business cycle conditions. The lecture stresses that EU free movement reduced legal barriers to mobility for EU citizens, with rules covering short stays (up to three months) and longer residence linked to employment, self-employment, study, sufficient resources, or family status. Transitional restrictions (e.g., Romania and Bulgaria) delayed full access to UK labour markets until end-2013.Economic intuition Free movement lowers migration costs (legal, administrative, informational), increasing the responsiveness of labour supply to wage and employment differentials across member states. In integration terms, it is a “quantity adjustment” channel: instead of wages adjusting to clear labour markets nationally, migration can adjust labour supply across countries. Exam insight Treat free movement as institutional deepening that increases factor mobility, which can raise efficiency but can also shift adjustment burdens onto specific local labour market segments. Migration decisions are made by individuals with heterogeneous abilities, preferences, and constraints. Therefore, immigrants will differ from non-migrants in systematic ways. Any “impact of immigration” estimate risks conflating the effect of immigrants with the fact that immigrants choose where and when to move.The lecture contrasts older negative-selection narratives (e.g., Franklin’s pejorative view) with positive-selection arguments: Chiswick’s view: immigrants are “more able and more highly motivated” Carliner’s view: immigrants “choose to work longer and harder” These are not merely claims about character: in labour economics they imply higher effective labour input (hours, effort, productivity) and therefore potentially higher earnings conditional on observable skills.
This diagram summarises Borjas’ (1987) selection model: the key is relative returns to skill between source and destination. Even if mean wages are higher in the destination, who migrates depends on how the earnings distribution differs.Interpretation of the figure When the source country has low inequality, high-skilled workers may gain more from moving to a destination where skills are rewarded more strongly, generating positive selection. When the source country has high inequality, low-skilled workers may have stronger incentives to move if the destination offers relatively better pay at the bottom, generating negative selection. Economic intuition A migration decision compares expected earnings net of migration costs. If the destination compresses wages less (higher skill premium), high-skilled workers gain more. Selection is about the slope of the wage–skill relationship, not only about average income. Exam insight Use the model to explain why different origin groups can exhibit different skill profiles in the same destination country. Link selection directly to policy: points-based systems attempt to engineer positive selection by raising the relative payoff to high skills. The lecture reports: Mixed evidence for immigrants to the US. Israeli immigrants to the US are positively selected (Gould and Moav). Mexican immigrants originate from the middle of the skill distribution (Chiquiar and Hanson). On average, positive selection on educational attainment from almost every sending country (Feliciano; Grogger and Hanson). Exam-friendly summary Selection can be positive, negative, or “middle” depending on relative returns and costs. Empirical work frequently finds positive educational selection on average, but important heterogeneity remains. The slides assume production uses capital and labour. Wages reflect the marginal product of labour (MPL) under competitive labour markets. Immigration affects outcomes by changing: total labour supply (natives plus immigrants) the composition of labour by skill returns to capital (and hence investment and labour demand over time) A crucial modelling choice is whether immigrants and natives are: perfect substitutes (compete in the same labour market segment), or complements (immigrants raise natives’ productivity) The lecture’s central message is that short-run and long-run effects can differ because capital is sluggish in the short run but adjusts in the long run. Therefore, wage impacts predicted by “fixed capital” models may overstate persistent harm to natives.
This diagram is the core short-run story under substitutability. With capital fixed and labour mobile, immigration shifts the labour supply curve outward. The wage falls from to and total employment rises from to . Native employment falls from to .How to read the figure The demand curve is derived from MPL: firms hire until . The domestic supply curve is native labour supply; the total supply adds immigrants. The fall in wage is the mechanism through which the labour market clears with more workers. Distributional implications Native workers with similar skills lose via lower wages and potentially lower employment. Owners of capital gain because labour is cheaper, increasing returns to capital (as the slide notes). The magnitude depends on labour demand elasticity and the degree of substitutability. Exam insight Always specify “native workers with similar skills”. Immigration does not mechanically harm all natives, even in this simple model. State that this is a short-run outcome with fixed capital.
The long-run diagram adds a dynamic adjustment channel: when wages fall initially and returns to capital rise, firms invest, expanding the capital stock. This shifts labour demand outward, restoring wages and native employment to and , while total employment rises to .Interpretation Immigration initially raises the profitability of expanding production. Investment increases capital per worker, raising MPL and shifting demand rightward. The long-run equilibrium can feature similar wages for natives but a larger economy. Exam-friendly summary Short-run: wages down, natives potentially displaced. Long-run: capital adjusts, wage effects attenuate, total employment and output rise. The key is endogenous capital accumulation responding to higher capital returns.
The complementarity model assumes immigrants increase natives’ productivity. The diagram shows a shift out in demand for native workers, raising wages from to and native employment from to .Economic mechanisms behind complementarity (from the slide) High-skilled immigrants can enable specialisation among researchers and academics. Low-skilled immigrants can free natives to move into more complex, communication-intensive roles. Intuition If immigrants fill tasks that are different but connected to natives’ tasks, the marginal product of native labour rises. In wage terms, immigrants can raise the demand for native labour rather than replacing it. Exam insight Complementarity is fundamentally a task and skill composition story. A common exam mistake is to treat “immigration” as a single undifferentiated labour supply shock. The lecture notes that many studies correlate local wages with local immigration. The logic is: if immigration is harmful, then natives in high-immigration cities should be worse off. However, migrants may choose prosperous cities, creating endogeneity.
The “potential problems” slide states two central threats: Non-random settlement: immigrants cluster in prosperous areas, so wage–immigration correlations may be biased upwards. Open local labour markets: natives can move away in response to immigration, spreading adjustment across regions and making local effects appear small even when national effects exist. The Miami population growth comparison is used to illustrate the second point: if native out-migration offsets immigrant inflows, local outcomes understate the true equilibrium adjustment.
The lecture defines a natural experiment as a setting with treatment and control groups without random assignment, with selection into treatment remaining a concern. The point is methodological: the credibility of immigration impact estimates depends on whether we can isolate plausibly exogenous variation.
The minimum wage example (Card and Krueger) illustrates the design logic: comparing outcomes in a treated region with a similar control region helps net out confounding time trends. The lecture uses this as an analogy for how immigration shocks can be studied when a credible comparison group exists.In 1980, about 125,000 Cuban immigrants arrived in Miami over a short period, increasing the labour force by about 7 percent, and many were low educated (57 percent without high school diploma). This is presented as an “unexpected exogenous supply shock”.
The table compares unemployment rates for unskilled workers in Miami before (1979) and after (1981) the flow, versus comparison cities (Atlanta, Houston, Los Angeles, Tampa–St Petersburg). The slide reports no effect on unemployment or wages of less-skilled non-Cuban workers and rapid absorption.How to interpret the table Miami’s unemployment rises slightly (8.3 to 9.6), but comparison cities also worsen (10.3 to 12.6). The inference is difference-in-differences style: Miami does not deteriorate relative to controls, suggesting limited adverse effects. Economic explanations consistent with the lecture Fast assimilation of immigrants into the labour market. Native mobility and the fact that local labour markets are not closed. Capital adjustment may have occurred even within short horizons if firms expanded output.
The debate reflects exactly the identification concerns discussed earlier. Even if the event is large and sudden, conclusions depend on how we define the affected market and how we account for native migration responses.Exam insight Use Mariel to show why small local wage effects do not necessarily imply zero national effects. Explicitly mention the “open city” issue: adjustment can occur via population movements.
This figure (Ottaviano and Peri, 2012) is used to motivate that immigration can affect the national wage structure even when city-level comparisons show small effects. The lecture’s key line is: the unit of observation may need to be the national labour market, not the local market, because factor mobility and goods market linkages transmit shocks across space.How to use this in an exam Contrast “local approach” vs “national approach”. Explain that local estimates can be attenuated by internal migration, sectoral reallocation, and price adjustments.
Friedberg (2001) studies the large inflow of Russian Jews to Israel from 1989 onwards. Between 1990 and 1991, around 610,000 migrants arrived (about 7 percent of the population), and the 1990s saw a 20 percent population increase. The migrants were more skilled than natives, yet real wages fell by about 5 percent.Interpretation A fall in real wages alongside high-skilled inflows suggests the labour market adjustment was not a simple “more skills, higher wages” story. The slide’s explanation is occupational downgrading: immigrants entered low-wage occupations, which can temporarily raise labour supply in those segments despite high education. Link back to theory Even with positive selection, substitutability can exist within particular occupations. Capital accumulation is highlighted as mitigating labour market effects, consistent with the long-run adjustment mechanism in the substitute model. Hunt (1992) examines the return of about 900,000 French-born expatriates to France in 1962 (around 1.6 percent of the population), with similar education to natives. The lecture reports very small effects, with a slight wage decline.Interpretation This supports the lecture’s broad theme: large inflows need not generate large wage collapses, especially when the economy adjusts through sectoral expansion, internal mobility, and potentially capital deepening. The lecture summarises UK evidence as follows: Immigrants to the UK are on average better educated than natives. Composition varies by skill and region (Dustmann et al., 2005, 2008). Some small negative wage effects at the bottom and small positive effects at the top, with no average wage effect. Manacorda et al. (2010): immigration depresses earnings of previous immigrants rather than native-born; small rise in returns to education for natives and small deterioration for previous immigrants. Economic interpretation Distributional impacts are concentrated: low-wage segments may experience more competition, while high-skill complementarities can raise wages at the top. The “previous immigrants” result is consistent with substitutability within similar migrant networks, occupations, or local labour market niches. Exam insight State clearly: “no average wage effect” does not mean “no effects”. It means the positive and negative effects across groups can offset in the aggregate. The lecture asks whether social benefits exceed taxes, and how much immigrants contribute to, and receive from, the public purse. This matters for the sustainability of the welfare system and for policy debates where “pressure on services” is central.Dustmann and Frattini (2014) distinguish: immigrants residing in the UK from 1995 onwards versus those arriving since 2000 (“recent immigrants”) EEA versus non-EEA immigrants
This figure visualises the ratio of revenues to expenditures for immigrants. The economic point is that fiscal effects depend not just on employment, but also on age structure, benefit take-up, and tax contributions. A ratio above one indicates a net positive contribution.
This slide reports that recent EEA immigrants made a positive contribution (£22.1bn), paying 34 percent more than they took, and recent non-EEA immigrants also made a positive contribution (£2.9bn), paying 2 percent more than they took, while natives had a negative contribution over the period described.How to interpret the numbers The fiscal balance reflects lifecycle effects: working-age groups tend to contribute more, while groups with higher benefit eligibility can be net recipients. Separating “recent” from earlier cohorts captures that initial migrant cohorts may differ in labour market integration and benefit use.
The slide highlights a major mechanism: immigrants’ education is financed by origin countries, yet the destination gains from the resulting human capital. The lecture quantifies this as about £49bn that would have been required to produce similar human capital through the UK education system.Economic intuition This is a fiscal externality in the UK’s favour: it receives skilled workers without paying the full education cost. It also links back to positive selection: if immigrants are more educated on average, fiscal impacts tend to look better, holding employment constant. Exam insight Always mention both flows (taxes and benefits) and stocks (human capital endowment). Fiscal impacts are not the same as wage impacts, though they can be related through employment and earnings. The lecture emphasises that immigration can affect inflation, housing, and institutions, expanding the analysis from labour economics into macro and political economy.The slides report that in the US a 10 percent increase in low-skilled immigrants reduces wages of other low-skilled immigrants substantially and reduces wages of low-skilled natives slightly, with implications for prices of non-traded goods and services. The mechanism is: wages are a key cost component in non-tradables lower wage growth can translate into lower inflation in services where productivity growth is slow Economic intuition Immigration can act as a supply-side dampener on service-sector inflation if it expands labour supply in those sectors. The lecture reports evidence for the Marielitos: an increase in low-quality apartment prices (8 percent) with no effect for high-quality apartments. This is consistent with migrants disproportionately demanding lower-quality housing, shifting demand most in that segment.The lecture notes fears that immigrants may import different social capital, potentially affecting institutions, framed as part of the political economy of migration, referencing Alesina and Tabellini (2024).Exam insight Treat “institutions” as a channel that may shape long-run outcomes and political reactions, even if it is harder to quantify than wages and fiscal effects. The lecture distinguishes refugees from economic migrants: forced or unexpected migration traumatic experiences limited ability to choose destination less locally applicable human capital (language, job skills) lower initial wages and employability This implies that refugee outcomes cannot be inferred from standard “self-selection” logic used for economic migrants.
This slide stresses a key dynamic: lower initial human capital can imply high returns to investment (so potentially rapid assimilation), but uncertainty about asylum and possible return reduces incentives to invest in language and networks. Economically, this is an incentives and horizon problem: if the expected duration in the host country is uncertain, the present value of investing in host-country human capital falls.
The figure summarises the empirical regularity: lower employment rates and wages on arrival, with slow catch-up. The key interpretation is that integration is a medium-term process shaped by policy choices that affect uncertainty, access to work, and health constraints.
The slide lists three measures: keep the asylum process short (reduce uncertainty, raise incentives to assimilate) support to address health issues facilitate early access to the labour market Economic logic Shorter processing times increase expected duration and reduce option value of waiting, encouraging language investment. Early labour market access builds local experience and signals employability, improving longer-run outcomes. The UK is a net recipient of immigrants. Immigrants are self-selected. Short-run substitution can reduce wages of natives with similar skills. Long-run wage effects attenuate as capital stock adjusts. Complementarity can raise wages of natives with different, complementary skills. Evidence suggests limited local wage effects but potentially broader national effects, with explanations including fast assimilation and native mobility. Immigrants can contribute positively, including fiscally. A strong answer typically follows this template: Define the channel (substitution vs complementarity; short run vs long run). Use the diagram to show the mechanism (supply shift, demand shift, capital adjustment). Discuss identification (endogeneity, open labour markets, natural experiments). Use evidence (Mariel, Israel, France, UK wage distribution results). Add fiscal and wider channels (revenues vs expenditures, human capital transfer, inflation and housing). Conclude with nuance (aggregate vs distributional effects; differences between economic migrants and refugees). Alesina, A. and Tabellini, M. (2024) ‘The political effects of immigration: Culture or economics?’, Journal of Economic Literature, 62(1), pp. 5–46. Borjas, G.J. (1987) ‘Self-selection and the earnings of immigrants’, (as cited in lecture slides). Borjas, G.J. (1994) ‘The economics of immigration’, Journal of Economic Literature, 32(4), pp. 1667–1717. Brell, C., Dustmann, C. and Preston, I. (2020) ‘The labor market integration of refugee migrants in high-income countries’, Journal of Economic Perspectives, 34(1), pp. 94–121. Carliner, G. (1980) ‘Wages, earnings and hours of first, second and third generation American males’, Economic Inquiry, 18(1), pp. 87–102. Card, D. (1991) ‘The impact of the Mariel boatlift on the Miami labor market’, Industrial and Labor Relations Review, 43(2), pp. 245–257. Card, D. and Krueger, A. (n.d.) Minimum wage natural experiment example (as cited in lecture slides). Chiswick, B.R. (1978) ‘The effect of Americanization on the earnings of foreign-born men’, Journal of Political Economy, 86(5), pp. 897–921. Chiquiar, D. and Hanson, G.H. (2005) ‘International migration, self-selection, and the distribution of wages: Evidence from Mexico and the United States’, Journal of Political Economy, 113(2), pp. 239–281. Dustmann, C. and Frattini, T. (2014) ‘The fiscal effects of immigration in the UK’, The Economic Journal, 124(580), pp. F593–F643. Dustmann, C., Fabbri, F. and Preston, I. (2005) Evidence on composition and labour market effects in the UK (as cited in lecture slides). Dustmann, C., Fabbri, F. and Preston, I. (2008) Evidence on composition and labour market effects in the UK (as cited in lecture slides). Feliciano, C. (2005) ‘Does selective migration matter? Explaining ethnic disparities in educational attainment among immigrants’ children’, International Migration Review, 39(4), pp. 841–871. Friedberg, R.M. (2001) Evidence on mass migration to Israel (as cited in lecture slides). Gould, E.D. and Moav, O. (2016) ‘Does high inequality attract high skilled immigrants?’, The Economic Journal, 126(593), pp. 1055–1091. Grogger, J. and Hanson, G.H. (2011) ‘Income maximization and the selection and sorting of international migrants’, Journal of Development Economics, 95, pp. 42–57. Hunt, J. (1992) ‘The impact of the 1962 repatriates from Algeria on the French labor market’, Industrial and Labor Relations Review, 45(3), pp. 556–572. Manacorda, M., Manning, A. and Wadsworth, J. (2010) Evidence on impacts on previous immigrants and returns to education in the UK (as cited in lecture slides). Office for National Statistics (ONS) (n.d.) Migration statistics quarterly report. Available at: ONS website (as linked in lecture slides). Ottaviano, G.I.P. and Peri, G. (2012) Evidence on wage impact of immigrants in the US (as cited in lecture slides).]]>econ1014_economicintegrationii/econ1014_notes/lecture-4-&-5-labour-immigration.htmlECON1014_EconomicIntegrationII/ECON1014_notes/Lecture 4 & 5 - Labour Immigration.mdFri, 06 Feb 2026 21:19:39 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide57.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide57.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide56.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide56.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide55.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide55.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img 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10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide15.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide15.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide14.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide14.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide13.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide13.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide12.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide12.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide11.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide11.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide10.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide10.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide9.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide9.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide8.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide8.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide7.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide7.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide6.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide6.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide5.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide5.pngFri, 06 Feb 2026 10:22:53 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide4.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide4.pngFri, 06 Feb 2026 10:22:52 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide3.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide3.pngFri, 06 Feb 2026 10:22:52 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide2.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide2.pngFri, 06 Feb 2026 10:22:52 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l4_5/slide1.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L4_5/Slide1.pngFri, 06 Feb 2026 10:22:52 GMT<figure><img src="."></figure>This figure highlights income per capita differences across EU member states.Interpretation: Large disparities in income create scope for redistribution at the EU level. Poorer regions may underinvest in growth-enhancing activities without transfers. These disparities provide an economic rationale for cohesion and regional policies. Exam insight Link income dispersion directly to the principle of solidarity and regional aid. Emphasise that redistribution is limited by the small size of the EU budget. National budgets perform three classic economic functions: Redistribution of income. Allocation to correct market failures. Stabilisation through countercyclical fiscal policy. The EU budget differs sharply: It is tiny compared to national budgets. Example: UK government spending exceeds 50 percent of GDP, while the EU budget is about 1 percent of EU GNI. Redistributive flows amount to roughly 0.3 percent of EU GNI. It has no stabilisation role.
This comparison makes clear that the EU cannot act as a macroeconomic stabiliser in the way national governments do.
Key institutional features: The EU budget must be balanced in theory. Deficit financing is not permitted in the standard framework. Spending is organised through the Multiannual Financial Framework (MFF): Covers at least 5 years, usually 7. Sets expenditure ceilings by policy area. Provides long-term predictability. Economic intuition The absence of borrowing power prevents macroeconomic stabilisation. The MFF strengthens credibility and commitment but reduces flexibility. The EU budget is funded almost entirely by own resources.Main sources: Customs duties and sugar levies on imports from outside the EU. Member states retain 20 percent to cover collection costs. VAT-based contributions. GNI-based contributions from member states.
GNI-based contributions: Depend on country size and income. Average around 1 percent of national GNI. Generate variation in net contributor and net recipient positions.
Spending objectives include: Funding common policies such as CAP. Supporting weaker regions via cohesion policy. Completing the internal market. Promoting cooperation in research, innovation, and justice. Addressing cross-border challenges such as climate change and demographic pressures. Economic logic Spending targets areas where national decision-making leads to underprovision. Emphasis is on long-term investment rather than short-run demand management.
The theoretical foundation lies in fiscal federalism.Centralisation is justified when: Spillovers exist across borders. Economies of scale are significant. Cross-border public goods are provided, such as: Research Infrastructure Environmental protection Without coordination: National governments ignore external effects. Spending is inefficiently low from a social perspective.
Key idea: Cross-border spillovers cause underinvestment when decisions are decentralised. The EU budget partially corrects this through transfers and common spending. Economic interpretation The EU budget plays a Pigouvian role by internalising externalities. Outcomes depend on institutional design, credibility, and enforcement.
The budget also serves a political and institutional function: Sustains cooperation among member states over time. Helps solve trust and coordination problems. Transfers compensate countries that gain less from integration. Exam insight Stress that fiscal transfers are not only economic but political instruments.
Institutional theory distinguishes: Inclusive institutions Broadly shared benefits. Support long-run growth. Extractive institutions Benefits concentrated among a few. Politically unstable. The EU budget: May be economically inclusive. Was perceived as extractive by parts of the UK electorate.
Institutions require: Legitimacy. Political support. Credibility. In the UK: Benefits of EU membership and budget participation were often not salient. Institutions can fail politically even if economically efficient.
Behavioural elements help explain public attitudes: Individuals do not process information fully rationally. Loss aversion means losses loom larger than gains. Salience matters more than aggregate magnitude. Economic intuition Visible contributions dominate invisible benefits. Framing strongly influences support for institutions.
Key takeaways: The EU budget began primarily as a CAP funding mechanism. Today, around 40 percent goes to CAP and 30 percent to regional aid. It represents roughly 1 percent of EU income. Financing is mainly GNI-based, making large countries major net contributors. Institutional effectiveness depends not only on economics but on perception and political legitimacy. Baldwin, R. and Wyplosz, C. (2015) The Economics of European Integration. 5th edn. London: McGraw-Hill Education. D’Apice, P. (2015) ‘Cross-border flows operated through the EU Budget: An overview’, European Economy Discussion Papers, No. 19. Brussels: European Commission. Pigou, A.C. (1920) The Economics of Welfare. London: Macmillan. Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (2002) Behavioural Economics. Stockholm. Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (2024) Institutions and Prosperity. Stockholm.]]>econ1014_economicintegrationii/econ1014_notes/lecture-3-the-eu-budget.htmlECON1014_EconomicIntegrationII/ECON1014_notes/Lecture 3 - The EU Budget.mdThu, 05 Feb 2026 14:30:44 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide28.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide28.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide27.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide27.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide26.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide26.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide25.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide25.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img 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src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide9.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide9.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide8.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide8.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide7.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide7.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide6.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide6.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide5.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide5.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide4.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide4.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide3.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide3.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide2.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide2.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img src="."></figure>]]>econ1014_economicintegrationii/econ1014_images/ei-ii_l3/slide1.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI II_L3/Slide1.pngThu, 05 Feb 2026 14:05:09 GMT<figure><img src="."></figure>Indirect network effects arise when participation by one group increases the utility of the other group. A larger user base on one side makes the platform more attractive on the other side, which can in turn feed back.For example, more cardholders make a payment network more attractive to merchants, while more merchants accepting the card make it more valuable for consumers to carry it. These feedback loops can generate strong complementarities.Key implications Demand on one side cannot be analysed in isolation. Standard single-sided demand curves are insufficient. Exam insight Explicitly state the direction of network effects (from which side to which). Distinguish indirect from direct network effects.
The platform internalises the indirect network externalities that individual users do not consider. When choosing prices, access rules, or subsidies, the platform accounts for how participation on one side affects the other side.This gives platforms a fundamentally different optimisation problem compared to firms in one-sided markets. Profit maximisation depends on total participation and cross-side interactions, not just margins.Economic intuition Platforms act as coordinators solving a participation externality. This can justify pricing below marginal cost, or even negative prices, on one side.
In two-sided markets, the price structure matters more than the overall price level. The allocation of prices across the two sides affects participation and therefore total surplus.Let and denote prices charged to side A and side B. Even if is fixed, changing their distribution can significantly affect platform profitability and welfare.Why this matters One side may be more price sensitive. One side may generate stronger network effects. Exam-friendly phrasing In two-sided markets, reallocating prices across sides can increase profits without changing total prices.
Platforms often subsidise one side of the market to attract participation that is valuable to the other side. This explains why many digital platforms charge zero or negative prices to users while monetising advertisers.The subsidised side is typically: More price elastic, or Generates stronger positive externalities for the other side. Examples Free social media for users, paid advertising Free operating systems, paid app developers or hardware partners Exam insight Zero prices do not imply lack of market power. Link subsidies explicitly to network effects.
A core challenge in two-sided markets is the chicken-and-egg problem: each side values the platform only if the other side is already present. This creates coordination failures at launch.Platforms address this problem through: Introductory subsidies Exclusive contracts Seeding one side of the market Vertical integration at early stages Economic logic The problem is dynamic and coordination-based, not purely cost-based. Expectations about future participation are crucial.
Competition in two-sided markets differs from standard price competition. Platforms compete not only on prices but also on their ability to attract and balance both sides simultaneously.Strong network effects can lead to: Market tipping Winner-takes-most outcomes High barriers to entry However, multi-homing on one or both sides can weaken these effects and sustain competition.Exam pointers Mention multi-homing explicitly when discussing market power. Do not assume monopoly outcomes automatically. Two-sided markets pose challenges for competition policy because conventional tools may misinterpret pricing patterns. For example, low or zero prices on one side are often efficient rather than predatory.Key policy questions include: How to define relevant markets How to assess abuse of dominance How to evaluate mergers involving platforms Economic intuition Welfare analysis must consider both sides jointly. Focusing on one side alone can be misleading. Two-sided markets are characterised by indirect network effects. Platforms internalise cross-side externalities through pricing structure. Price structure matters more than price level. Subsidisation and zero pricing are often optimal responses. Competition can lead to tipping but depends on multi-homing and expectations. Armstrong, M. (2006) ‘Competition in two-sided markets’, The RAND Journal of Economics, 37(3), pp. 668–691. Rochet, J.-C. and Tirole, J. (2003) ‘Platform competition in two-sided markets’, Journal of the European Economic Association, 1(4), pp. 990–1029. Rochet, J.-C. and Tirole, J. (2006) ‘Two-sided markets: A progress report’, The RAND Journal of Economics, 37(3), pp. 645–667.]]>econ1016_currenteconissues/econ1016_notes/1-azamat-valei/lecture-4-two-sided-markets.htmlECON1016_CurrentEconIssues/ECON1016_notes/1 - Azamat Valei/Lecture 4 - Two-sided markets.mdWed, 04 Feb 2026 16:46:34 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-4-(two-sided-markets)/slide9.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 4 (Two-sided Markets)/Slide9.pngWed, 04 Feb 2026 11:07:44 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-4-(two-sided-markets)/slide8.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 4 (Two-sided Markets)/Slide8.pngWed, 04 Feb 2026 11:07:44 GMT<figure><img src="."></figure>]]>econ1016_currenteconissues/econ1016_images/lecture-4-(two-sided-markets)/slide7.htmlECON1016_CurrentEconIssues/ECON1016_images/Lecture 4 (Two-sided Markets)/Slide7.pngWed, 04 Feb 2026 11:07:44 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GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide36.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide36.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide35.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide35.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide34.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide34.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide33.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide33.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide32.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide32.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide31.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide31.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide30.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide30.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide29.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide29.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide28.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide28.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide27.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide27.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide26.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide26.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide25.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide25.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide24.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide24.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide23.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide23.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide22.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide22.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide21.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide21.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide20.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide20.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide19.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide19.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide18.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide18.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide17.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide17.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide16.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide16.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide15.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide15.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide14.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide14.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide13.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide13.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide12.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide12.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide11.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide11.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide10.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide10.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide9.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide9.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide8.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide8.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide7.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide7.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide6.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide6.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide5.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide5.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide4.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide4.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide3.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide3.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide2.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide2.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set2/slide1.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set2/Slide1.pngTue, 03 Feb 2026 14:39:45 GMT<figure><img src="."></figure>Lecture 2 - Measuring Income and Well-being introduced how economists measure output, income, and prices using nominal and real GDP, GDP per capita, and the GDP deflator.This lecture extends that discussion by introducing the Consumer Price Index (CPI), the second major aggregate price index used in macroeconomics. It then explains why inflation measurement matters for purchasing power, policy, and long-run economic analysis, before highlighting conceptual and measurement problems with price indices.Inflation measures how fast the overall price level is changing over time.By definition, the inflation rate is the relative change in a price index:Economic intuition: Inflation is not about prices being high or low, but about how quickly they change. Inflation can refer to an aggregate index or to the price of a single good. Sustained inflation erodes the purchasing power of money. The Consumer Price Index (CPI) measures the overall level of prices of goods and services bought by consumers.Key characteristics: Based on the cost of a fixed basket of goods and services. Calculated by national statistical agencies such as the Office for National Statistics (ONS) in the UK. Designed to approximate changes in the cost of living faced by households. Economic role: CPI is the most commonly cited inflation measure in public debate. It plays a central role in monetary policy, indexation, and real income comparisons.
The statistical office determines what the typical consumer buys by surveying household expenditure.Interpretation: Goods with higher expenditure shares receive higher weights. If consumers spend more on apples than pears, apple prices matter more for inflation. The basket is held fixed to isolate pure price changes, not quantity changes. Exam intuition: Fixing the basket ensures CPI measures inflation rather than changes in consumption patterns. This is also the source of later measurement problems.
Prices of each item in the basket are collected at each point in time and multiplied by their fixed quantities.Economic meaning: The CPI compares the cost of buying the same bundle of goods across time. This ensures that observed changes reflect prices rather than tastes.
The CPI is defined relative to a base year:Interpretation: The base year is normalised to 100. CPI values above 100 indicate prices are higher than in the base year. Inflation is the percentage change in the CPI between periods.
This example economy contains only hot dogs and hamburgers.Key intuition: Holding quantities fixed allows us to see how rising prices affect total expenditure. The CPI translates complex price movements into a single summary measure. Inflation reflects how much more expensive the same consumption bundle has become. Exam tip: Be able to compute CPI and inflation mechanically. More importantly, explain why quantities are fixed and what that implies.
CPIH is an extension of CPI that includes housing costs.Key differences: CPI excludes owner-occupiers’ housing costs, mortgage interest payments, and council tax. CPIH includes these elements. CPIH is often seen as a better proxy for the true cost of living. Policy relevance: The UK government and Bank of England primarily target CPI, but CPIH is increasingly referenced. Differences between indices matter for benefits, pensions, and real wage calculations.
The Producer Price Index (PPI) measures prices of goods and services bought by firms.Economic logic: PPI captures cost pressures earlier in the production chain. Rising PPI may signal future CPI inflation as firms pass costs on to consumers. Highlights the transmission of inflation through the economy.
CPI measures inflation for the average consumer.Interpretation: Individual households consume very different baskets. Inflation experiences vary widely, especially during periods of high inflation. CPI remains informative for policy, even if it does not reflect everyone’s experience.
Inflation has broad macroeconomic consequences.Key reasons we care: Directly affects purchasing power and real incomes. Central banks target inflation, for example the 2% CPI target in the UK. Inflation influences saving, investment, wage bargaining, and redistribution.
Consumers substitute towards relatively cheaper goods when prices change.Implication: A fixed basket ignores this behaviour. CPI may overstate inflation because it assumes unchanged consumption. In practice, the UK partially corrects for this using chain-linking.
Two further issues: New goods increase choice and consumer welfare but enter the basket with a lag. Quality improvements mean higher prices do not always imply higher cost of living. Economic intuition: If goods improve, a pound buys more utility even if prices rise. ONS attempts to adjust for quality using hedonic pricing methods.
CPI reflects an average consumer.Key point: Just as with GDP per capita, averages may mask large differences. CPI may be irrelevant for specific groups, yet remains crucial for macroeconomic policy.
The two indices differ in coverage.GDP deflator: Prices of all domestically produced goods and services. Relevant for measuring inflation in output. CPI: Prices of goods and services bought by consumers, including imports. Example: A rise in oil prices increases CPI more than the GDP deflator in the UK because oil has a larger weight in consumption than in domestic production.
Nominal values must be adjusted for inflation to compare purchasing power across time.Key concepts: A £ today is not equivalent to a £ in the past. Indexation automatically adjusts payments for inflation. UK pensions are indexed to CPI rather than RPI, reducing government expenditure. CPI is a fixed-basket measure of consumer prices and inflation. It is central to monetary policy, indexation, and real income analysis. Measurement problems mean CPI is imperfect, but still indispensable. Understanding differences between CPI, CPIH, PPI, and the GDP deflator is exam-critical. Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning.Office for National Statistics (ONS) (2025) Consumer Price Inflation and the Basket of Goods. London: ONS.Bank of England (2025) Inflation and Monetary Policy Framework. London: Bank of England.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-3-the-cost-of-living.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 3 - The Cost of Living.mdTue, 03 Feb 2026 14:03:35 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide32.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide32.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide31.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide31.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide30.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide30.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide29.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 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GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide19.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide19.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide18.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide18.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide17.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide17.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide16.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide16.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide15.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide15.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide14.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide14.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide13.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide13.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide12.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide12.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide11.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide11.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide10.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide10.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide9.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide9.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide8.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide8.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide7.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide7.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide6.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide6.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide5.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide5.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide4.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide4.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide3.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide3.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide2.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide2.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/week-2_set1/slide1.htmlECON1002_IntroToMacroeconomics/ECON1002_images/Week 2_set1/Slide1.pngTue, 03 Feb 2026 14:00:38 GMT<figure><img src="."></figure>This slide presents recent nominal GDP figures for the UK. The upward trend reflects both real growth and inflation. Comparing nominal GDP across years without adjusting for prices can therefore be misleading when assessing changes in living standards.The use of official national accounts data highlights the practical relevance of GDP measurement. Macroeconomists rely on such data to evaluate policy performance and economic shocks such as the Global Financial Crisis or the Covid pandemic.GDP is not the only measure of national income. Gross National Product, GNP, measures the income earned by a country’s residents, regardless of where production takes place. It differs from GDP by net factor income from abroad.For countries with large multinational sectors, such as Ireland, GDP can substantially exceed GNP because profits are repatriated abroad. Net National Product, NNP, adjusts GNP for depreciation, capturing the income available after maintaining the capital stock.Exam insight Be clear about when GDP may misrepresent residents’ income. Use Ireland as an intuitive example if appropriate. Nominal GDP values output at current prices. An increase in nominal GDP may reflect higher quantities, higher prices, or both.Real GDP values output at constant prices from a chosen base year. By holding prices fixed, real GDP isolates changes in quantities and therefore provides a better measure of changes in economic activity.In the base year, nominal GDP equals real GDP by construction.The GDP deflator is a price index that measures the average level of prices of all goods and services included in GDP relative to the base year. It equals 100 in the base year and rises as prices increase.The deflator removes the effect of inflation from nominal GDP, converting it into real GDP. It is therefore both a tool for deflation and an inflation measure in its own right.Exam insight Emphasise that the GDP deflator covers domestically produced goods and services. Contrast later with the CPI, which focuses on consumer prices.
This slide shows the historical evolution of real GDP. Over long periods, real GDP tends to grow, reflecting technological progress, capital accumulation, and population growth. However, growth is uneven and interrupted by business cycles.Recessions are periods of falling real GDP. The figure highlights both the long run trend and short run fluctuations, reinforcing the distinction between growth theory and business cycle analysis.Real GDP is often described as the best single measure of economic well-being because it captures the economy’s ability to provide goods and services. Higher real GDP allows for better healthcare, education, and material living standards.However, it is not sufficient. GDP says nothing about how output is used, how income is distributed, or whether growth comes at the expense of environmental quality.Real GDP per capita divides real GDP by population size to approximate average living standards. This improves comparability across countries and over time.Despite this improvement, important dimensions of well-being remain excluded. Leisure is ignored, non-market activity is omitted, environmental degradation is not subtracted, and inequality is hidden because GDP per capita measures the average rather than the typical individual.Median income is therefore often used as a complementary indicator, as it reflects the income of the middle of the distribution rather than the mean.Exam insight Always mention at least two limitations of GDP per capita. Distinguish clearly between average and median measures. GDP measures total income and total expenditure in an economy. It includes market-based, final goods and services produced domestically. The expenditure identity is central to macroeconomic analysis. Nominal GDP must be adjusted for prices to obtain real GDP. Real GDP and GDP per capita are useful but incomplete measures of well-being. Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning. Office for National Statistics (2025) Quarterly National Accounts, UK. London: ONS. Office for National Statistics (2025) GDP Monthly Estimate, UK. London: ONS.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-2-measuring-income-and-well-being.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 2 - Measuring Income and Well-being.mdTue, 03 Feb 2026 13:16:17 GMT<figure><img src="."></figure>econ1016_currenteconissues/econ1016_notes/1-azamat-valei/lecture-3-advertising.htmlECON1016_CurrentEconIssues/ECON1016_notes/1 - Azamat Valei/Lecture 3 - Advertising.mdMon, 02 Feb 2026 18:08:24 GMT]]>econ1014_economicintegrationii/econ1014_images/ei_ii_l1_2/slide60.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI_II_L1_2/Slide60.pngMon, 02 Feb 2026 15:06:09 GMT<figure><img src="econ1014_economicintegrationii/econ1014_images/ei_ii_l1_2/slide60.png"></figure>]]>econ1014_economicintegrationii/econ1014_images/ei_ii_l1_2/slide59.htmlECON1014_EconomicIntegrationII/ECON1014_images/EI_II_L1_2/Slide59.pngMon, 02 Feb 2026 15:06:09 GMT<figure><img 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src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/ec1002_week1_set2(income-and-well-being)_2026/slide6.htmlECON1002_IntroToMacroeconomics/ECON1002_images/EC1002_week1_set2(income and well-being)_2026/Slide6.pngWed, 28 Jan 2026 11:13:02 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/ec1002_week1_set2(income-and-well-being)_2026/slide5.htmlECON1002_IntroToMacroeconomics/ECON1002_images/EC1002_week1_set2(income and well-being)_2026/Slide5.pngWed, 28 Jan 2026 11:13:02 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/ec1002_week1_set2(income-and-well-being)_2026/slide4.htmlECON1002_IntroToMacroeconomics/ECON1002_images/EC1002_week1_set2(income and well-being)_2026/Slide4.pngWed, 28 Jan 2026 11:13:02 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/ec1002_week1_set2(income-and-well-being)_2026/slide3.htmlECON1002_IntroToMacroeconomics/ECON1002_images/EC1002_week1_set2(income and well-being)_2026/Slide3.pngWed, 28 Jan 2026 11:13:02 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/ec1002_week1_set2(income-and-well-being)_2026/slide2.htmlECON1002_IntroToMacroeconomics/ECON1002_images/EC1002_week1_set2(income and well-being)_2026/Slide2.pngWed, 28 Jan 2026 11:13:02 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/ec1002_week1_set2(income-and-well-being)_2026/slide1.htmlECON1002_IntroToMacroeconomics/ECON1002_images/EC1002_week1_set2(income and well-being)_2026/Slide1.pngWed, 28 Jan 2026 11:13:02 GMT<figure><img src="."></figure> The Austrian School emphasises individual freedom, decentralised decision making, and the coordinating role of free markets. Markets are viewed as natural outcomes of voluntary exchange rather than as institutions that need to be designed or corrected by the state.Friedrich August von Hayek is a central figure in this tradition. His work stresses the knowledge problem: information in an economy is dispersed across individuals, and no central authority can aggregate it efficiently. Prices therefore play a crucial informational role, signalling scarcity and guiding resource allocation.From an Austrian perspective, government intervention distorts price signals and leads to misallocation of resources. Business cycles are often interpreted as the result of artificial credit expansion and monetary manipulation rather than inherent flaws in capitalism.Economic intuition Markets work because prices transmit information. Intervening in markets risks unintended consequences due to limited knowledge. Exam insight Austrians reject both activist fiscal policy and discretionary monetary policy. Link Hayek’s ideas to scepticism about central banks and rule based policy.
Marxist economics offers a fundamentally different interpretation of the market economy. It is a heterodox school that views economic systems as shaped by power relations and class struggle rather than neutral market forces.According to Karl Marx, capitalism is not a natural or inevitable system. Instead, it is a historical stage characterised by exploitation, where workers produce output but do not control the means of production. Markets, in this view, reflect the interests of the capitalist class rather than voluntary exchange between equals.Marxist analysis emphasises instability and crisis. Capitalism is seen as inherently prone to business cycles and structural breakdowns, which ultimately lead to its replacement by a different economic system. This sharply contrasts with the Austrian belief in the self correcting nature of markets.Key contrasts with the Austrian School Markets are not neutral or natural but embedded in power structures. Economic crises are systemic, not policy induced accidents. Exam insight Marxist economics challenges the legitimacy of markets themselves, not just policy choices within capitalism.
Keynesian economics occupies a middle ground between laissez faire views and radical critiques of capitalism. John Maynard Keynes accepted the market economy as the dominant system but argued that it could fail to deliver desirable outcomes, particularly in the short run.A central Keynesian insight is that markets do not necessarily clear quickly. Prices and wages can be sticky, meaning that excess supply or demand can persist. As a result, economies can experience prolonged periods of unemployment due to insufficient aggregate demand.Keynes argued that fiscal policy is a powerful tool for stabilisation. During recessions, government spending or tax cuts can boost demand and reduce unemployment. This implies an active role for the state, which Austrians criticise as a loss of economic freedom and Marxists view as a mechanism that sustains existing power structures.Economic intuition Demand matters in the short run. Idle resources represent a failure of coordination, not a voluntary choice. Exam insight Be clear about the short run focus of Keynesian analysis. Always connect unemployment to demand deficiencies. A recurring theme in macroeconomics is the effectiveness of policy. Keynesians generally believe fiscal policy can work, but modern macroeconomics recognises that policy can also generate unintended consequences due to lags, political constraints, and uncertainty.The lecture introduces the idea of a more cautious or self critical Keynesianism. This approach accepts that intervention can stabilise the economy but emphasises careful design, credibility, and institutional constraints. Monetary policy is also recognised as an important stabilisation tool alongside fiscal policy.Exam insight Policy debates are about trade offs, not absolutes. Always consider timing, expectations, and credibility.
Monetarism is most closely associated with Milton Friedman. Monetarists emphasise the role of money in determining nominal variables, particularly inflation. A core principle is money neutrality in the long run: changes in the money supply affect prices rather than real output or employment.Monetarists argue that there is a natural rate of unemployment determined by structural features of the labour market. Attempts to push unemployment below this level through demand management will only generate inflation.Monetary policy is viewed as potentially powerful but highly error prone if used discretionarily. Many monetarists therefore favour rules based policy. Fiscal policy is often seen as ineffective due to implementation lags, political incentives, and crowding out.Soft vs hard monetarism Soft monetarists accept a limited stabilisation role for fiscal policy. Hard monetarists argue that fiscal activism does more harm than good. Exam insight Clearly distinguish short run non neutrality from long run neutrality. Link monetarism to inflation control and policy rules. Modern mainstream macroeconomics combines elements of Keynesian and Monetarist thought. It accepts that markets can fail in the short run and that stabilisation policy can be useful, while also recognising long run constraints, expectations, and the risks of policy mistakes.Few economists today identify strictly with the Austrian or Marxist schools. However, ideas from both continue to influence debates about the role of the state, inequality, power, and institutional design. Mainstream macroeconomics is therefore best understood as a broad church rather than a single doctrine.Big picture takeaway Macroeconomics is shaped by debate and synthesis. Understanding schools of thought helps interpret policy disagreements. Define macroeconomics and explain its policy relevance. Compare Austrian, Marxist, Keynesian, and Monetarist views. Explain why markets may fail in the short run. Distinguish fiscal and monetary policy roles. Understand why modern macroeconomics blends different schools. Friedman, M. (1968) The Role of Monetary Policy. American Economic Review, 58(1), 1–17. Hayek, F.A. (1945) The Use of Knowledge in Society. American Economic Review, 35(4), 519–530. Keynes, J.M. (1936) The General Theory of Employment, Interest and Money. London: Macmillan. Mankiw, N.G. and Taylor, M.P. (2023) Macroeconomics. 6th edn. Andover: Cengage Learning. Marx, K. (1867) Capital: A Critique of Political Economy, Volume I. Hamburg: Otto Meissner Verlag.]]>econ1002_introtomacroeconomics/econ1002_notes/lecture-1-schools-of-thought.htmlECON1002_IntroToMacroeconomics/ECON1002_notes/Lecture 1 - Schools of Thought.mdTue, 27 Jan 2026 13:37:04 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/ec1002_week1_set1(intro_and_sots)/pasted-image-20260127133608.htmlECON1002_IntroToMacroeconomics/ECON1002_images/EC1002_week1_set1(intro_and_sots)/Pasted image 20260127133608.pngTue, 27 Jan 2026 13:36:08 GMT<figure><img src="."></figure>]]>econ1002_introtomacroeconomics/econ1002_images/ec1002_week1_set1(intro_and_sots)/pasted-image-20260127133541.htmlECON1002_IntroToMacroeconomics/ECON1002_images/EC1002_week1_set1(intro_and_sots)/Pasted image 20260127133541.pngTue, 27 Jan 2026 13:35:41 GMT<figure><img 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Jan 2026 13:31:52 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/ec1002_week1_set1(intro_and_sots)/slide2.png"></figure>]]>econ1002_introtomacroeconomics/econ1002_images/ec1002_week1_set1(intro_and_sots)/slide1.htmlECON1002_IntroToMacroeconomics/ECON1002_images/EC1002_week1_set1(intro_and_sots)/Slide1.pngTue, 27 Jan 2026 13:31:52 GMT<figure><img src="econ1002_introtomacroeconomics/econ1002_images/ec1002_week1_set1(intro_and_sots)/slide1.png"></figure>econ1016_currenteconissues/econ1016_notes/1-azamat-valei/lecture-1-sources-of-market-power.htmlECON1016_CurrentEconIssues/ECON1016_notes/1 - Azamat Valei/Lecture 1 - Sources of Market Power.mdMon, 26 Jan 2026 16:37:44 GMTecon1019_growthdevlongrunhist/econ1019_notes/lecture-5-from-stagnation-to-sustained-economic-growth.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 5 - From Stagnation to Sustained Economic Growth.mdSat, 24 Jan 2026 22:13:08 GMTSlide commentary (horse meat map): The map shows countries where eating horse meat is common versus taboo. These differences are not about technology or productivity, but social norms and historical paths. Even in the absence of law, strong taboos can act as constraints on behaviour, a kind of “informal regulation”. From a growth perspective: Some norms might be neutral. Others might encourage trust, cooperation and innovation. Some may limit efficient use of resources or restrict participation in markets. Formal institutions are written, enforceable rules: Constitutions Laws and regulations Court systems and legal codes Property rights and contract enforcement Institutions differ sharply across countries. For instance, they can assign very different punishments for the same crime.
Slide commentary (average prison sentence for robbery): The figure compares average prison sentences for robbery across European countries. It illustrates that formal legal rules vary substantially even among relatively similar economies. This affects: Perceived fairness of the justice system. The credibility of property rights and contract enforcement. The cost of criminal behaviour versus lawful economic participation. For growth: Excessively harsh or arbitrary justice may undermine trust in the state. Weak or ineffective punishment may discourage investment in physical or human capital if crime risk is high. Institutions help reduce uncertainty in an expanding economy: When trade crosses distances and time, agents must trust: That contracts will be honoured. That money and units of account are stable. That disputes can be settled predictably. Historical examples: Standardised coins with known metal content. City-level merchant courts and trade laws. Maritime insurance and bill-of-exchange systems. Key point: Efficient institutions do not emerge automatically; they are the outcome of political struggles and bargaining. Economic institutions are the rules structuring economic activity: Protection and allocation of property rights Operation of financial systems (banks, credit markets, capital markets) Corporate law and contract enforcement Barriers to entry and competition rules Labour regulation and the organisation of markets They matter because they condition: Who can enter markets. Who benefits from investment and innovation. How surplus is distributed between groups. A landmark empirical paper by Acemoglu, Johnson and Robinson (AJR) links measures of institutional quality (especially protection against expropriation) to differences in income per capita.
Slide commentary (AJR scatter plot): The graph plots log GDP per capita against an index of protection against expropriation. A clear upward-sloping relationship: Countries with stronger property rights tend to be richer. Countries with weak protections cluster at low income levels. Interpretation: This correlation is consistent with the idea that secure property rights are a core channel through which institutions affect growth. AJR go further and use historical instruments (like settler mortality) to argue causality from institutions to income, not just correlation. For exam answers, you can mention AJR as empirical support for the institutional view of development. The enclosure movement in England shows how property rights can be formalised and reshaped over time.
Slide commentary (enclosure): Common land was gradually converted into privately owned plots with well-defined boundaries. Short-run consequences: Peasants lost traditional access to common land. Social disruption and increased inequality in some areas. Long-run institutional effects: Stronger property rights encouraged land improvement, investment in drainage, fertiliser, and new crops. Land became an asset that could be collateralised and traded. Property boundaries became even clearer through institutions like the Ordnance Survey (1745), which helped map and formalise land ownership.
Slide commentary (Ordnance Survey): Shows the UK’s national mapping agency and its role in defining property boundaries. Indicates the link between state capacity and institutions: High-capacity states can document, enforce and protect property rights. This reduces disputes and transaction costs, encouraging investment. Inclusive economic institutions: Allow broad segments of society to participate in economic activity. Support entry into markets and access to finance and education. Protect property rights and contracts for everyone, not just elites. Extractive economic institutions: Restrict access to markets and resources to specific groups (often along racial or class lines). Funnel resources to a narrow elite. Limit incentives for the majority to invest in skills or capital. Example of extractive institutions:
Slide commentary (South Carolina slave code): The code explicitly blocked enslaved people from: Working for pay. Owning land or animals. Operating boats or engaging in trade. Economically: The system maximised extraction of labour for the benefit of slave owners. It prevented a large share of the population from accumulating human or physical capital. This is a clear example of institutionalised exclusion, consistent with Acemoglu and Robinson’s notion of extractive institutions. Example of inclusive institutions:
Slide commentary (starting a business in the UK): Anyone, regardless of gender or ethnicity, can set up a business under transparent procedures. Institutional features: Low barriers to formal registration. Clear legal framework for contracts and taxation. Possibility of limited liability and corporate forms. This fosters: High rates of entrepreneurship. More competition and innovation. Wider sharing of the gains from growth. Economic institutions are ultimately chosen and sustained through political processes.Political institutions determine: Who holds political power. How leaders are selected and replaced. What constraints exist on rulers. How broad political participation is. Inclusive political institutions typically involve: Contestable elections. Broad suffrage. Independent judiciary. Free media and associational freedom. Checks and balances that limit arbitrary power. The slides illustrate empirical measures of different political dimensions (V-Dem, Polity, etc).Free and Fair Elections (V-Dem)
Commentary: The map shades countries according to the quality of elections. High scores indicate: Low fraud. Genuine competition. Limited intimidation and vote buying. Democracies with clean elections are more likely to be accountable and to provide public goods that support growth. Deliberative Quality of Governance
Commentary: Measures how widely and independently policies are discussed before decisions. High deliberation implies: Broader consultation of interests. More transparent decision-making. Reduced capture by narrow elites. Egalitarian Index (Exclusion by Socio-Economic Group)
Commentary: Illustrates where marginalised groups are excluded from political processes. High exclusion: Undermines the legitimacy of institutions. Leads to policies that favour elites and harm long-run growth. Bribery Rates
Commentary: Shows the percentage of people who report paying bribes to access public services. High bribery is a symptom of: Weak formal constraints. Low state capacity. Extractive political and economic institutions. Press Freedom
Commentary: Press freedom correlates with: Accountability of leaders. Exposure of corruption. Informed citizens. When media is repressed, elites can extract rents with less scrutiny, undermining inclusive institutions. Inclusive political institutions support inclusive economic institutions, which: Expand opportunities for broad segments of society. Raise income for a larger middle class. Increase demand for fairness, rule of law and accountability. Further strengthen inclusive political institutions.
Slide commentary (virtuous circle diagram): Shows feedback loops: Inclusive politics → inclusive economics → larger middle class → pressure for more inclusion. Mechanism: As more people gain economic resources, they can organise politically. This makes it harder for elites to reverse inclusion or reintroduce extractive rules. Outcome: A stable equilibrium with both political and economic inclusion. Long-run growth with relatively broad sharing of gains. Extractive elites block reforms to preserve privileges. Extractive institutions persist through: Restricted access to political office. Barriers to entry in lucrative markets. Control over security forces and legal systems.
Slide commentary (vicious circle diagram): Extractive political institutions: Limit who can access power. Favour a narrow coalition. Extractive economic institutions: Direct lucrative opportunities (land, mining, licences) to the same elite. This reinforces: Concentration of wealth and coercive capacity. Incentives to resist reforms that would increase inclusion. Iron Law of Oligarchy: Revolutions often replace one elite with another, but the new elite inherits similar incentives to preserve extraction. Hence, political turnover does not automatically create inclusive institutions. Institutions are not static. They evolve particularly at critical junctures: Large shocks or structural breaks that disrupt existing balances. Create windows of opportunity for institutional change, but outcomes depend on: Initial power distribution. Pre-existing norms and coalitions. External pressures. Key historical turning points considered in the lecture: Black Death (1347–1351) Opening of Atlantic trade Glorious Revolution (1688) French Revolution (1789) Colonial conquest and settlement strategies Industrial Revolution Analytical use in essays: Explain how similar shocks can lead to very different institutional outcomes depending on who benefits and who loses from reform.
Commentary: Visual representation emphasising scale and horror of the Black Death. Mortality rates reached up to a third or more of the population in some areas. This shock dramatically changed the labour–land ratio, making labour scarce relative to land.
Commentary: Shows how population in a specific region collapsed over time due to repeated plague outbreaks. The key for the institutional story: Scarce labour should increase workers’ bargaining power. Whether this leads to more inclusive institutions depends on political power of elites.
Commentary: Map of how and when the plague spread across Europe. The shock itself was geographically widespread, so the key difference is not “where plague hit” but how different societies responded. Western Europe: Feudal elites were relatively weaker. Labour scarcity empowered peasants to demand better terms. Peasant revolts pressured elites to relax constraints. Result: erosion of serfdom, more freedom of movement, more inclusive labour markets. Eastern Europe: Feudal elites were strong and well-organised. They responded by tightening control: “Second Serfdom”. Peasants became more bound to land, with fewer rights. Extractive labour institutions persisted into the modern era.
Commentary (England labour market chart): Shows the shift in labour force shares over time (agriculture, secondary sector, services). Highlights the emergence of a dynamic labour market: Over time, labour reallocates from agriculture to industry and services. This structural transformation is more feasible when workers can move and sell their labour freely. The Statute of Labourers (1351) tried to freeze wages, but peasant resistance limited enforcement, pushing England towards more inclusive labour institutions.
Commentary (serfdom map): The map illustrates where serfdom persisted in 1800. Western Europe largely free of serfdom; Eastern Europe still heavily enserfed. Long-run implication: Inclusive labour institutions in the West helped support industrialisation. Persistent coercive institutions in the East slowed down structural change and capital accumulation. Atlantic expansion after 1600 interacted with pre-existing political institutions: Countries with stronger parliaments and checks on the monarchy (e.g. Britain, Netherlands) saw merchants gain influence. In more absolutist states (e.g. Spain, Portugal), monarchs and traditional elites captured the gains.
Commentary: The figure shows GDP per capita in Britain, Holland, Italy and Spain from the Middle Ages to the 19th century. Britain and Holland pull ahead over time. Institutional reading: Atlantic trade benefits merchant groups who then push for more inclusive institutions (e.g. Parliament, limits on the Crown).
Commentary (London scene): Symbolises the rise of a commercial and urban economy supported by: Strong property rights. Financial infrastructure (Bank of England, stock market). A parliament that could credibly commit not to expropriate. The Glorious Revolution (1688) and Bill of Rights (1689) codified parliamentary supremacy and restricted arbitrary royal intervention in the economy.
Commentary: The French Revolution ended absolutism and promoted principles of citizenship, equality before the law and secular civil codes. Over the 19th century, France moves towards a parliamentary system resembling Britain’s.
Commentary (map of revolutionary spread): Shows where Revolutionary and Napoleonic France imposed reforms. Key transmitted institutions: Civil codes. Abolition of feudal privileges. Reform of property rights and legal equality. Countries more heavily exposed to these reforms often show earlier convergence to British income levels, supporting the institutional diffusion story.
Commentary: Bar chart of GDP per capita around 2000: shows wide gaps between Western Europe/USA and regions like Africa, India and Latin America. Raises the question: given that some of these regions were historically rich, what reversed their fortunes?
Commentary: World map of income levels, with richer countries concentrated in the Global North and parts of East Asia and Oceania. Contrasts with historical maps where pre-colonial civilisations (Aztecs, Incas, Indian states) were relatively advanced. High-density, prosperous regions in 1500 (e.g. Mexico, Peru, India): Offered rich targets for extraction (silver mines, labour tribute). Colonisers often imposed highly extractive institutions, using existing hierarchies. Less dense, poorer areas (e.g. North America): Offered fewer rents from extraction. To attract settlers, colonisers had to offer: Land grants. Representation. Basic property rights.
Commentary: AJR use historical urbanisation as a proxy for development in 1500 and 1800. They find a reversal: Places that were relatively urbanised in 1500 often became poorer later. Less urbanised places sometimes became rich. Institutional explanation: More developed areas attracted more extraction and more coercive institutions, which later hindered growth.
Commentary: Nunn shows a negative correlation between slave exports per area and GDP per capita today. The slave trade: Weakened institutions and trust. Encouraged warfare and predation. Left persistent legacies of underdevelopment in Africa.
Commentary: The mita system forced communities to send men to work in mines like Potosí. Consequences: High mortality. Disruption of local economies. Weak incentives to invest in land or human capital. Dell (2010) shows that regions historically under the mita remain poorer today, consistent with persistent institutional effects.
Commentary: Map highlights that areas covered by the mita have lower modern consumption and worse infrastructure. Dell argues the channel is property rights: The Crown and mining interests discouraged secure land titles in mita areas. This weakened incentives for local investment long after formal abolition. North American colonies: Sparse indigenous populations and limited minerals. Extraction less profitable. To attract settlers, colonial companies and the Crown: Granted land to ordinary settlers. Created representative assemblies. These more inclusive colonial institutions helped form the basis of the US Constitution, with checks on executive power and broader access to political representation (though slavery remained a fundamental exclusion).
Commentary: GDP-per-capita series comparing China and Japan over time. China was historically advanced, but by the 19th–20th century it lags behind Japan and Western Europe. Raises the question: if geography and culture did not fundamentally change, what explains China’s relative decline? Under the Song dynasty, China exhibited: Strong state capacity. Innovation in agriculture, printing, navigation, etc. Under the later Ming and Qing: The state closed off long-distance maritime trade. Political power remained highly centralised. Private profit-making and merchant classes had limited power.
Commentary: Chinese ships in the 15th century were more advanced than European ones. Technological capacity alone was not enough: Political decisions shut down Zheng He’s voyages and restricted foreign trade. European states, by contrast, encouraged exploration through competing monarchies and merchant coalitions. The institutionalist story: Chinese emperors had sufficient power to block trade and competition. They feared political fragmentation and threats to central control. Without external constraints (like competing neighbouring states or strong merchant classes), absolutism persisted. Result: China does not undergo an industrial revolution in the 18th century. Later reforms (post-1949 and especially post-1978) gradually move towards more market-oriented economic institutions. Britain in the 18th century: Stronger parliamentary control over taxation than most other European states. Better-protected private property rights. More developed financial markets (Bank of England, stock exchange). Increasingly contestable markets and relative freedom of contract. From the institutional perspective: These institutions increased: Expected returns to innovation. Willingness of banks and investors to finance risky ventures. The diffusion of new technologies through competitive markets. Allen (2012): High-Wage Economy Britain had unusually high wages relative to capital and energy costs. This made labour-saving technologies (e.g. steam engines) profitable even before widespread institutional reforms. Pomeranz (2000): Great Divergence Argues differences in access to coal and colonial resources explain why Europe, and particularly Britain, pulled ahead. Challenges the view that institutions alone can explain divergence; emphasises resource and trade shocks. Exam angle: A first-class answer will: Recognise the institutionalist view as central in this lecture. Acknowledge competing explanations (factor prices, coal, empire). Note that these factors likely interacted with institutional environments. External attempts to impose institutions have mixed and often disappointing results.Germany after WWII:
Commentary: Showcases a case where externally imposed institutional change (democratisation plus reconstruction) coincided with long-run success. But this followed: Total military defeat. Deep internal delegitimisation of the previous regime. Massive, sustained external support (Marshall Plan, NATO). Iraq after 2003:
Commentary: Illustrates failed or unstable institutional transplantation. Removal of one regime did not create an inclusive system; instead: Power vacuums occurred. Conflict and new forms of violence emerged. Lesson: The Iron Law of Oligarchy suggests that removing one elite may simply create space for another. Institutional change is path dependent and context specific; copying a constitution is not enough. Large-scale, deliberate attempts to “engineer” inclusive institutions from the outside are: Politically risky. Highly uncertain in outcome. Often prone to reversal or capture by new elites. However, small-scale, targeted institutional reforms can generate: Measurable improvements in specific outcomes (corruption, service delivery, electoral fairness). Gradual shifts in incentives and expectations. Examples mentioned in the reading: Monitoring and auditing schemes to reduce corruption in infrastructure. Electronic voting technologies improving representation and accountability. From a political economy perspective: Even modest reforms can alter the cost–benefit calculus of politicians and bureaucrats. Over time, these incremental changes can cumulate into more inclusive institutions. Inclusive institutions: Secure property rights. Broad access to education and finance. Contestable markets and fair courts. Pluralistic, accountable and constrained political power. Extractive institutions: Weak or selective property rights. Narrow access to opportunities. Monopolies, forced labour, clientelism. Concentrated, unaccountable political power. Inclusive institutions: Align private incentives with social efficiency. Encourage innovation, investment and structural transformation. Are supported by virtuous political–economic feedback loops. Extractive institutions: Benefit elites in the short run. Undermine long-run growth and widen inequality. Persist due to the Iron Law of Oligarchy and vicious circles. Similar shocks (Black Death, Atlantic trade, revolutions, colonisation) can lead to very different outcomes depending on initial institutions and power structures. Once a society is on an inclusive or extractive path, feedback mechanisms make it hard to switch trajectories. Geography and culture matter, but largely through their interaction with institutions: Geography shapes incentives for extraction vs settlement. Culture both influences and is influenced by institutional arrangements. Coherent, large-scale institutional reforms are hard to design and impose. Focus on gradual, evidence-based improvements: Strengthen specific parts of the state (courts, bureaucracies, fiscal systems). Improve transparency, accountability and enforcement in targeted ways. Use rigorous evaluation (like RCTs and quasi-experiments) to test what works. For essays and exams, aim to connect historical evidence (Black Death, Reversal of Fortunes, China vs Britain) with the conceptual framework of inclusive vs extractive institutions and the dynamics of virtuous/vicious circles. Acemoglu, D., Johnson, S. and Robinson, J.A. (2001) ‘The colonial origins of comparative development: an empirical investigation’, American Economic Review, 91(5), pp. 1369–1401. Acemoglu, D., Johnson, S. and Robinson, J.A. (2002) ‘Reversal of fortune: geography and institutions in the making of the modern world income distribution’, Quarterly Journal of Economics, 117(4), pp. 1231–1294. Acemoglu, D. and Robinson, J.A. (2012) Why nations fail: the origins of power, prosperity and poverty. New York: Crown Publishers. Allen, R.C. (2011) Global economic history: a very short introduction. Oxford: Oxford University Press. Allen, R.C. (2012) ‘Technology and the great divergence: global economic history in perspective’, Explorations in Economic History, 49(1), pp. 1–16. Banerjee, A. and Duflo, E. (2012) Poor economics: a radical rethinking of the way to fight global poverty. London: Penguin Books. Broadberry, S. (2013) ‘Accounting for the Great Divergence’, VoxEU, 10 September. Broadberry, S. and Klein, A. (2012) ‘Aggregate and per capita GDP in Europe, 1870–1913’, Scandinavian Economic History Review, 60(3), pp. 242–267. Dell, M. (2010) ‘The persistent effects of Peru’s mining mita’, Econometrica, 78(6), pp. 1863–1903. Engerman, S.L. and Sokoloff, K.L. (2000) ‘History lessons: institutions, factor endowments and paths of development in the new world’, Journal of Economic Perspectives, 14(3), pp. 217–232. Ferguson, N. (2011) Civilization: the west and the rest. London: Allen Lane. Fujiwara, T. (2015) ‘Voting technology, political responsiveness, and infant health: evidence from Brazil’, Econometrica, 83(2), pp. 423–464. Glaeser, E.L., La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (2004) ‘Do institutions cause growth?’, Journal of Economic Growth, 9(3), pp. 271–303. Herlihy, D. (1965) ‘Population, plague, and social change in rural Pistoia, 1201–1430’, The Economic History Review, 18(2), pp. 225–244. Herlihy, D. (1997) The Black Death and the transformation of the West. Cambridge, MA: Harvard University Press. Jia, R. (2014) ‘The legacy of forced freedom: China’s treaty ports’, Review of Economics and Statistics, 96(4), pp. 596–608. Luiten van Zanden, J., Buringh, E. and Bosker, E. (2012) ‘The rise and decline of European parliaments, 1188–1789’, Economic History Review, 65(3), pp. 835–861. Maddison, A. (2006) The world economy: volume 1: a millennial perspective. Paris: OECD Publishing. Mitchels, R. (1911) Political parties: a sociological study of the oligarchical tendencies of modern democracy. Leipzig: K. F. Koehler. Nunn, N. (2008) ‘The long-term effects of Africa’s slave trades’, Quarterly Journal of Economics, 123(1), pp. 139–176. Olken, B.A. (2007) ‘Monitoring corruption: evidence from a field experiment in Indonesia’, Journal of Political Economy, 115(2), pp. 200–249. Pomeranz, K. (2000) The great divergence: China, Europe, and the making of the modern world economy. Princeton, NJ: Princeton University Press. Sachs, J.D. (2001) ‘Tropical underdevelopment’, NBER Working Paper No. 8119. Cambridge, MA: National Bureau of Economic Research.]]>econ1019_growthdevlongrunhist/econ1019_notes/lecture-15-institutions-as-a-fundamental-cause-of-growth.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 15 - Institutions as a fundamental cause of growth.mdSat, 24 Jan 2026 22:08:39 GMT<figure><img src="econ1019_growthdevlongrunhist/econ1019_images/lecture15_slides/lecture15_slides-013.png"></figure> 1978: Reforms begin 1980s: Establishment of Special Economic Zones 1992: Deng retires; reforms accelerate following the Southern Tour 2011: China surpasses USD 7 trillion GDP This gradual sequencing reflects a reform strategy centred on experimentation and political control. Command economy, limited industrial capacity Collectivised agriculture → low productivity International isolation Persistent poverty and stagnation This context generates political and economic incentives for reform. Agricultural decollectivisation: Household responsibility system raises productivity and incentives. Special Economic Zones: Market rules tested in controlled locations; FDI inflows encouraged. Market mechanisms: Price liberalisation and growth of private enterprise in non-strategic sectors. Global integration: Export-led growth, technology imports and trade expansion.

SEZs serve as political compromise: controlled openness under continued Party oversight.
GDP growth ~10% annually (1980–2010) China becomes world’s second-largest economy Development includes welfare dimensions such as: Health Education Income distribution Environment Human Development Index (HDI) China’s HDI improvements lag behind GDP growth, emphasising that high growth does not automatically translate to broad welfare gains.

Key points: China outperforms India and the UK in GDP growth But per capita income remains below advanced economies India’s slower industrialisation highlights the role of political will and state capability Population size inflates aggregate GDP but not necessarily living standards
Rising Gini coefficient since the 1990s Urban–rural incomes diverge significantly Coastal regions benefit disproportionately
Political economy implication: inequality pressures can threaten social cohesion, prompting state responses. Air pollution, water shortages, soil depletion Industrialisation proceeds faster than environmental regulation Environmental limits increasingly constrain future growth Reliance on exports increases vulnerability to global shocks Rapid ageing strains pensions and healthcare Need to shift to consumption-driven, innovation-led growth

These efforts illustrate the state’s attempt to rebalance growth with sustainability. Jiang Zemin and Hu Jintao maintain market-oriented reforms Xi Jinping emphasises technological self-reliance, security and geopolitical ambition Belt and Road Initiative expands China’s presence abroad Infrastructure financing increases soft power Integration into global value chains deepens global economic influence Liberalisation of markets without liberalisation of politics Innovation requires openness, yet political control restricts pluralism Tension between decentralised economic incentives and centralised political authority This raises an important question: can China sustain innovation under authoritarian governance? Summary Deng transformed China into a hybrid market–state economy Growth has been extraordinary but uneven and environmentally costly Development indicators reveal persistent welfare gaps China illustrates how political institutions shape economic outcomes and constraints Discussion Questions Can China sustain growth while improving welfare and HDI? What can developing economies learn from China’s incremental reform strategy? Does long-run innovation require political liberalisation? ]]>econ1051_econpol_andeconpoliticians/econ1051_notes/lecture-7-deng-xiaoping's-economic-policy-reform-and-development.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_notes/Lecture 7 - Deng Xiaoping's Economic Policy Reform and Development.mdSun, 18 Jan 2026 21:17:21 GMT<figure><img src="."></figure> A clear geographical pattern emerges when examining the distribution of global income. The wealthiest societies today are overwhelmingly concentrated in temperate climatic zones, whereas the poorest economies cluster in the tropics. This spatial inequality prompts a central question in long-run development: can geography itself be a foundational determinant of economic performance?Two broad explanations frame the debate. The first emphasises geography as an intrinsic fundamental cause, arguing that physical and ecological characteristics directly shape countries’ capacity to generate productivity, accumulate capital and escape the Malthusian trap. The second emphasises geography’s historical role, contending that environmental differences shaped early human development, technological diffusion and state formation, influencing institutional trajectories that persist today.Lecture 13 develops Sachs’ claim that tropical environments impose structural constraints on agricultural productivity and health conditions, which in turn suppress long-run growth. Lecture 14 extends the analysis to the deep historical origins of global inequality, following Diamond’s thesis that geography determined which regions acquired early technological and military dominance.
Sachs (2001) argues that the tropics face ecological disadvantages that systematically hinder the proximate drivers of growth. The core proposition is that location determines the feasibility of sustained increases in productivity, especially during the critical transition from an agrarian to an industrial economy.Sachs highlights a robust empirical relationship between latitude and income per capita, with a pronounced discontinuity at the boundary of the tropics (23.5 degrees north and south). Outside the tropics, average income rises sharply. Within the tropics, productivity stagnates and historical growth rates are lower. This pattern is not merely contemporary; it persists across historical time, suggesting deep-rooted development constraints.The key insight is that geography shapes the proximate causes of growth through two channels: Low agricultural productivity, which limits the emergence of surplus and delays structural transformation. High disease burden and poor health, which reduce labour efficiency, depress human capital accumulation and slow technological adoption.
Historical data reinforce the argument. In 1820, temperate regions were only moderately richer than tropical ones, with the latter possessing roughly 68 percent of temperate income levels. By 1992, this ratio had fallen to 25 percent. The relative decline results primarily from differential growth rates: 1.4 percent per year in temperate zones compared to 0.9 percent in non-temperate regions over almost two centuries.This widening gap mirrors the divergence described in Lecture 1, but Sachs reorients the focus: instead of examining Western Europe’s uniqueness, he argues that the advantage originated not from culture or institutions but from geography itself.This claim rests on a careful examination of the mechanisms that link ecological conditions to economic performance.
Agriculture was historically the dominant sector of all economies, and the transition into sustained growth depended upon generating agricultural surpluses. In tropical climates, several ecological characteristics suppress agricultural total factor productivity ( A ), reducing the ability of societies to accumulate capital or support structural change. Soil fragility and nutrient depletion Many tropical soils are old, heavily leached and low in essential nutrients. This reduces yields even with identical labour and land inputs. Irregular water availability Rainfall patterns in many tropical areas exhibit strong seasonality or volatility. Irrigation is more challenging and costly, raising the effective price of producing food. Higher pest and parasite prevalence The hot, humid climate supports insects and pathogens that damage crops, reducing usable output. Plant physiological limits High temperatures accelerate plant respiration, lowering net photosynthetic output and thus reducing yields. Technological mismatch Agricultural technologies developed in temperate regions often cannot be transplanted effectively into tropical contexts. This exacerbates the productivity gap since innovation was historically concentrated in temperate economies. Formally, we can think of two agricultural technologies: A persistent gap in delays the transition out of the Malthusian equilibrium, as societies remain constrained by diminishing returns to land.
The health environment forms the second major component of Sachs’ argument. Tropical climates host a wider range of infectious diseases, particularly those transmitted through vectors. Malaria, dengue fever, Zika, yellow fever and sleeping sickness all originated and thrived in tropical ecosystems. Reduced labour productivity Frequent illness lowers effective labour supply, reducing output per worker and discouraging capital investment. Depressed educational outcomes Childhood exposure to disease hampers cognitive development, reduces school attendance and weakens human capital accumulation. Higher child mortality rates Elevated mortality encourages higher fertility behaviour. This diverts resources away from education and human capital, keeping economies locked in low-productivity equilibria. The empirical evidence is extensive: Sachs and Malaney (2002) estimate that malaria reduces annual growth significantly in affected countries. Bleakley (2010) shows that malaria eradication in the Americas led to large increases in adult income decades later. Klejnstrup et al. (2018) find that reductions in malaria exposure in Tanzania improved educational attainment, demonstrating long-run human capital effects. The key point is that the health environment directly shapes the effective labour input and the incentives to accumulate education, aligning the disease environment with growth outcomes.
Geographical disadvantage also influenced historical power relations. Sachs argues that tropical countries, already constrained by lower productivity, lagged further behind temperate economies in military capability and technological development. As a result, they became more vulnerable to colonisation.Colonial rule often reinforced initial disadvantages. Extractive colonial strategies prioritised resource extraction rather than institution-building. Public health investments were limited and designed primarily to secure European interests. Infrastructure supported export sectors rather than domestic integration. These legacies help explain why many tropical economies entered the twentieth century with weak state capacity and low levels of human capital.Although Acemoglu, Johnson and Robinson (AJR) challenge the primacy of geography, arguing that institutions shaped growth trajectories, even their theory acknowledges geography’s indirect role through settler mortality, which influenced institutional choices.Sachs’ framework provides a coherent explanation for why the tropics industrialised later and grew more slowly. Yet the thesis has faced several critiques. Institutional critics argue that geography explains little once differences in institutional quality are controlled for. Outliers, such as Singapore or Taiwan, show that tropical regions can achieve high incomes under favourable policies. Technological progress may allow societies to overcome natural disadvantages, particularly in health and agriculture. Geography may proxy for historical forces, such as colonisation patterns, rather than act directly. A balanced interpretation is that geography constitutes an important baseline constraint, but its effects are mediated by political economy, institutions and integration into global markets. ]]>econ1019_growthdevlongrunhist/econ1019_notes/lecture-13-geography-as-a-fundamental-cause-of-growth.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 13 Geography as a Fundamental Cause of Growth.mdThu, 15 Jan 2026 11:31:26 GMT<figure><img src="econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0003.jpg"></figure>
Two countries: France and Germany Each has its own supply (S) and demand (D) curves France: equilibrium at price Pf Germany: equilibrium at price Pg Since Pg > Pf, France could export to Germany However, a non-tariff barrier greater than (Pg − Pf) prevents trade → Markets remain isolated and no gains from integration Barrier removed → a single market price Peu forms where France exports, Germany imports Price rises from Pf → Peu Producers gain (produce more, receive higher price) Producer surplus: +a + b Consumers lose (pay higher price) Consumer surplus: −a Net welfare gain = +b Price falls from Pg → Peu Producers lose (produce less, receive lower price) Producer surplus: −c Consumers gain (pay lower price, consume more) Consumer surplus: +c + d Net welfare gain = +d France exports: q₂ − q₁ Germany imports: q₄ − q₃ At equilibrium: (q₂ − q₁) = (q₄ − q₃) Result:Integration allows resources to shift efficiently between countries, increasing total welfare by b + d.MEMORISE THIS STUFFThe programme aimed to revitalise the EC market tin order to stimulate growth and employment accross the region.
The 85 white paper included 300 'nuts and bolts' measures to incorporate into each national law by 1993. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:51985DC0310 End intra-EU frontier controls: previously added 2% to costs. There is new VAT rules, but all exports are VAT exempt Harmonisation of technical barriers: replacement of 28 national standards with one EU standard or mutual recognition of each other's standards (ISO) end 'discriminatory public procurement'. All state bodies to always buy from cheapest source, including imports from EU. (Home bias for example, focusing on domestic goods). Freedom of information online Streamline patent protection: 1977 European patent, avoids manufacturers or innovators from having to file it in every single office. More recently: 2012 unitary patent agreed; 3 languages, 25 countries. Protected across the bloc. Reduces costs, incentivises innovation. Harrison et al. (1994): +2.6% GDP assuming 2.5% barriers removed European Commission (2003): +1.8% GDP one-off gain vs. Cecchini’s +5% prediction Straathof & Linders (2008): +2–3%, argue SM impact falling with globalisation Gaps in assessment, esp. services (Pelkmans 2008, p.28) Dynamic effects (innovation, productivity) often ignored CEPII (2011): potential further gains +14% GDP → S&L likely underestimate 2011–12 Single Market Acts: introduced further deepening measures ]]>econ1013_economicintegrationi/econ1013_notes/lecture-5-single-market.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 5 - Single Market.mdTue, 13 Jan 2026 22:44:08 GMT<figure><img src="."></figure> When the price of a good falls, the consumer moves from an initial equilibrium at bundle on indifference curve and budget line to a new equilibrium on a higher indifference curve with budget line To find the equivalent variation, the new budget line is shifted inward until it is tangent to the original indifference curve . This compensated line shows the amount of income the consumer would need to lose at the new prices to remain at their original level of utility.The income difference between the original and compensated budget lines represents the equivalent variation:where is the original income and is the compensated income under the new prices.Interpretation:EV measures welfare change using the initial utility as a reference. It shows the maximum amount of income the consumer would pay to enjoy the price reduction, holding utility constant.For a price decrease, , since equivalent variation is evaluated at the higher utility level.One of the applications of CV and EV is price subsidies for housing.Governments throughout the world subsidise the consumption of various goods. Such programmes reduce the ffective price of housing.
Figure 3: Price without/with subsidy: Cost of the subsidy is This also the vertical difference: Why? Budget constraint equation without subsidy: (where I is income; note the price of q{other} _is one!) Budget constraint equation with subsidy: So the vertical difference is:$$ q{other}^S - q{other} = I - (1 - s)p_h q_h - (I - p_h q_h) q{other}^S - q{other} = -(1 - s)p_h q_h + p_h q_h = sp_h q_h $$ This housing subsidy can workout to be more costly, a direct transfer to consumers would be more economically efficient. A price subsidy lowers the market price of a specific good (e.g. housing) instead of giving consumers cash directly. It is more costly and less efficient than a direct transfer for two main reasons:A subsidy applies to each unit purchased rather than a fixed amount of income. If the subsidy rate is ( s ) and consumers buy ( q_h ) units, the total fiscal cost is:As the price falls, consumers buy more of the good, so the government must subsidise additional units. In contrast, a direct transfer gives a fixed amount ( T ), regardless of what consumers purchase, making it cheaper.A subsidy distorts relative prices. The consumer faces a lower effective price for housing (), leading to overconsumption of the subsidised good.In graphical terms: A direct transfer shifts the budget constraint upward in parallel, keeping relative prices constant. A subsidy rotates the budget constraint, changing its slope and distorting the marginal rate of substitution (MRS) away from the true market rate. This distortion generates a deadweight loss, reducing overall efficiency.Therefore: A price subsidy is costlier and less efficient because it distorts consumption and applies to all units consumed. A direct transfer achieves higher welfare at lower fiscal cost, without changing relative prices.Consumer surplus is an alternative welfare measure to compensating and equivalent variation in income.Demand curve shows a consumer's marginal valuationTotal valuation of a given quantity consumed is the sum of marginal valuations. More generally for demand functions wihtout individual steps.
Green shaded region is utility derived at
Consumer surplus is additional utility derived from consuming a product at a given price. Shown in the diagram below ]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-12-compensating-&-equivalent-variation-in-income,-consumer-surplus.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 12 - Compensating & Equivalent Variation in Income, Consumer Surplus.mdTue, 13 Jan 2026 15:38:51 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide7.png"></figure>Intuition: For , so producing an extra unit adds more to revenue than to cost → profit rises. For , so extra units cost more than the additional revenue → profit falls. At , and, with an upward-sloping MC, this point maximises profit. The MR–MC condition is local, but with a standard convex cost structure it also delivers the global maximum.Profit maximisation subject to the option of shutting down means the firm compares: Profit from producing : Profit from shutting down: (because and ) In the short run, fixed costs are sunk. The shutdown decision depends on whether revenue covers variable cost.Write total cost as Shutting down gives loss . Producing gives It is better to produce than shut down if: Dividing by : So: Produce in the short run if . Shut down in the short run if .
How to read the diagram: The minimum of the AVC curve determines the shutdown price. For prices below this level, no output is supplied. For prices at or above this level, the firm supplies where . Suppose FC = £1000, VC = £3000 at the chosen quantity. If : If : But shutting down gives , so the firm still prefers to produce. If : The firm should shut down and make a loss of £1000 instead of £1500. In a perfectly competitive market, firms and consumers are price takers.Key conditions (approximate, not all must hold perfectly): Many firms: no single firm has market power. Homogeneous product: consumers view units from different firms as perfect substitutes. Perfect information: prices and product characteristics are known to all. Negligible transaction costs: easy and cheap to switch suppliers. Free entry and exit: in the long run, firms can enter and leave the market freely. Interpretation: If a firm raises price slightly above the market price, consumers switch to rivals. If it sets price below the market price, it unnecessarily sacrifices revenue, since it can sell as much as it wants at the going price. Real-world markets that approximate this: some agricultural markets, certain commodities, and some financial markets.For an individual price-taking firm, the demand curve it faces is perfectly elastic at price .Hence: Average revenue Marginal revenue The short-run profit maximising condition: Use the slide where you have a flat price line, upward-sloping MC, and potentially ATC/AVC:
Reading the diagram: The horizontal line at price is the firm’s demand and MR. The MC curve cuts the price line at . If is above ATC at → abnormal profit (area between and ATC). If → the firm produces but makes a loss, still better than shutting down. If → the firm shuts down (no output). The firm’s short-run supply curve is the part of its marginal cost curve that lies above the AVC curve.Reason: When , the firm shuts down → supplies zero output. When , it chooses such that → supplies positive output. This is the slide where the supply curve is literally drawn as the MC curve above the AVC minimum:
Marginal cost: Short-run supply (ignoring the AVC cut-off for now) is found by solving for whenever is sufficiently high.If : Solve this quadratic for the positive root to obtain supplied by the firm at that price. (You can get the exact numeric answer with a calculator; logic is what matters for the exam.)The market supply curve is the horizontal sum of the individual firms’ supply curves.If there are identical firms, each supplying at price , then: Implications: As increases, the market supply curve becomes flatter (more elastic). In the short run, is fixed. Short-run equilibrium is where market demand equals market supply at some price and quantity .Example from slides: At the equilibrium price, total quantity traded is Each firm supplies units At this point: Each firm satisfies Market satisfies In the long run: All inputs are variable Firms can enter or exit the industry Fixed costs are no longer sunk in the same way (they can be avoided by exiting) The output decision is still: But now the shutdown (exit) condition is: If in the long run, the firm exits the industry.Long-run equilibrium: Free entry/exit implies that firms earn zero economic profit: The long-run market supply curve is the horizontal sum of firm supply curves after allowing for entry and exit.Mechanics: If market price is above long-run average cost → firms earn abnormal profit → entry → market supply shifts right → price falls. If → firms make losses → exit → market supply shifts left → price rises. The shape of the long-run supply curve depends critically on how industry expansion affects input prices and cost curves.In a constant-cost market, input prices do not change as industry output expands or contracts.Consequences: LRAC for each firm is unaffected by industry size. As new firms enter, the cost curves remain the same. Long-run supply is horizontal at the minimum LRAC. Use the three slides showing: Initial LR equilibrium. Demand increase and SR response. Entry of firms and LR adjustment back to original price but higher quantity. ]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-17-&-18-supply-and-perfect-compettition.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 17 & 18 - Supply and Perfect Compettition.mdThu, 08 Jan 2026 12:24:22 GMT<figure><img src="."></figure>The focus of this pair of lectures is to understand why sustained economic growth only emerged after roughly 1750, despite several thousand years of human history where living standards were approximately constant. Using the Malthusian framework developed in earlier lectures, we now extend the model to explain the mechanisms behind structural transformation, the endogenous reallocation of labour out of agriculture into manufacturing and services. This reallocation is crucial for understanding why growth eventually became self-sustaining in modern economies.The overarching goal is to show how technological progress, which had previously been neutralised by population growth in traditional economies, eventually interacted with sectoral wage differences to trigger a permanent break from stagnation.
We started the module with three major questions: Why did sustained economic growth emerge so late in human history? Why did growth emerge much earlier in some countries (e.g. Britain) than in others? Will developing countries catch up to the advanced economies? Lecture 5 continues the answer to the first question by enriching the Malthusian model with a second sector, which will allow us to capture the transition into a modern economy.
Today’s objectives: Understand structural transformation and why labour moves out of agriculture. Analyse wages in a traditional economy, especially how the marginal product of labour determines income. Extend the Malthusian model into a two-sector framework, opening the possibility of a modern, high-productivity sector. Explain how sustained growth becomes possible once the modern sector expands. Next lecture (Part 2) will trace these mechanisms into the historical experience of the British Industrial Revolution, offering an interpretation of Britain’s early and rapid structural transformation.
Structural transformation refers to the long-run shift of labour from agriculture into manufacturing and services. In the pre-industrial era, more than 80 percent of workers were employed in agriculture. Over time, technological progress raised labour productivity in the modern sector, offering higher wages and pulling labour out of the traditional sector.This transition involved vast rural-urban migration and underpins the emergence of sustained economic growth. The fundamental driver is income differentials between sectors, which the model will now formalise.
In the traditional economy, GDP per capita is:where: is technology, is land (fixed), is labour. Even if grows at a constant rate , the Malthusian mechanism ensures that per capita incomes return to a constant equilibrium because population growth neutralises productivity gains. The equilibrium condition is:This relationship pins down a constant living standard in the long run. While average income is constant, individual incomes may differ. Workers earn wages; landlords receive wages plus land rents. We now turn to how wages are determined.
To understand labour movements later in the model, we must derive the wage in a traditional economy. Consider a worker, Bill, on a landlord’s farm. If Bill leaves, total output falls by the marginal product of labour:This loss is the maximum amount the landlord would be willing to pay to retain Bill.Under competitive labour markets, competing landlords bid up wages until:This fundamental result applies broadly across competitive environments.
Using the fact that , we can rewrite:Since in equilibrium , we obtain:$$ w = (1 - \beta)y^* Y_T = AX^\beta L_T^{1-\beta} Y_M = AL_M L = L_T + L_Mw_T = (1 - \beta)y^*w_M = AA = \bar{A} = (1 - \beta)y^* w_T = w_My = Ag = \frac{\dot{A}}{A} = g_Ag_T = g_A - \beta n(y) = 0]]>econ1019_growthdevlongrunhist/econ1019_notes/lecture-5-6-from-stagnation-to-sustained-economic-growth.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 5-6 - From Stagnation to Sustained Economic Growth.mdWed, 07 Jan 2026 12:05:14 GMT<figure><img src="."></figure>Expanded Commentary Figure 1 illustrates the monopoly/cartel solution relative to perfect competition. Under competitive conditions, firms produce until , yielding at price . The monopoly (or cartel) restricts output to to raise price to .This behaviour creates deadweight loss: units between and that would generate positive surplus for society are not produced. Cartel behaviour is therefore welfare-reducing, transferring surplus from consumers to firms while destroying mutually beneficial trade opportunities.The figure also highlights why cartels are tempting: each firm earns higher profits because the price-cost margin widens from to . Even a competitive industry would prefer cartelisation if it were allowed and enforceable.Cartels are unstable because each member has an incentive to deviate by secretly increasing output. Consider firm .Joint profit under cartel:If a single firm deviates, raising its quantity from to , total industry output rises and price falls slightly. Because the marginal cost at the cartel allocation satisfies:a small increase in raises profit. The derivative confirms the incentive:At the cartel allocation:Thus deviation strictly dominates compliance, unless the cartel can detect and punish cheating.This is the fundamental tension: collective optimality versus individual incentives.Cartels face external barriers as well. Most developed economies have competition laws that: prohibit price-fixing criminalise collusion impose heavy fines encourage whistleblowing scrutinise suspicious behaviour (parallel pricing, market allocations) Successful cartelisation often requires: high entry barriers stable, transparent prices similar cost structures frequent interaction strong monitoring credible punishment Many historical cartels collapsed because they could not sustain discipline, whereas others, such as OPEC, remain stable due to unique geopolitical features and monitoring advantages.Cournot competition models firms as simultaneously choosing quantities. The price emerges from the market demand curve. This is appropriate for industries where output decisions must be made before sales occur and cannot be quickly adjusted (e.g. airlines, oil, aluminium, cement, steel, and some agricultural markets).We begin with the example from the slides, based on American Airlines (AA) and United Airlines (UA).Market demand:Inverse demand:Total quantity:Marginal cost is assumed constant:Each firm chooses to maximise its profit:Given firm U’s output , firm A faces residual demand:Firm A’s revenue:Marginal revenue:Setting marginal revenue equal to marginal cost:Solving for gives A’s best-response function:By symmetry:This linear best-response structure is typical under linear demand.To solve:$$ \begin{cases} q_A = 96 - \frac{1}{2}q_U \ q_U = 96 - \frac{1}{2}q_A \end{cases}q_A = 96 - \frac{1}{2}\left(96 - \frac{1}{2} q_A\right)q_A = 96 - 48 + \frac{1}{4} q_A\frac{3}{4} q_A = 48q_A = 64.q_U = 64.Q = 128.p = 339 - 128 = 211. \pi_i = (211 - 147) \cdot 64 = 4096.MC = AC = 5For , no profitable price exists for firm 1 because it would incur losses. Thus the only fixed point of mutual best responses is:$$ p_1^ = p_2^ = 5.q_i = a - b p_i + c p_j, \quad 0 < c < b,\pi_i = (p_i - MC) q_i.\frac{\partial \pi_i}{\partial p_i} = q_i + (p_i - MC)(-b) = 0. a - b p_i + c p_j - b(p_i - MC) = 0.p_i = \frac{a + bMC + c p_j}{2b}.Because , equilibrium price exceeds marginal cost. Greater differentiation (smaller ) increases market power and widens the price–cost margin.
Expanded Commentary The figure displays upward-sloping reaction curves. When one firm raises its price, the best response of the other is to also raise price, because they face less competitive pressure when products are differentiated.Thus differentiated producers enjoy greater pricing freedom, and equilibrium profits are positive. This aligns more closely with empirical observation, resolving the Bertrand paradox.A key learning outcome is understanding how market structure affects welfare.Cournot outcomes lie between competition and monopoly, while differentiated Bertrand can resemble Cournot or approach monopoly depending on substitutability. Oligopolies require strategic analysis because firm choices are interdependent. Cartels behave like monopolies but are difficult to sustain without enforcement mechanisms. Cournot competition yields intermediate prices and positive profits. Bertrand competition with identical products yields and zero profits. Differentiation softens Bertrand competition, restoring positive markups. Welfare comparisons show competition is best for consumers, collusion worst. Brander, J and Zhang, A 1990, ‘Market conduct in the airline industry’, RAND Journal of Economics. Perloff, JM 2016, Microeconomics: Theory and Applications with Calculus, Pearson. Tirole, J 1988, The Theory of Industrial Organization, MIT Press. Vives, X 1999, Oligopoly Pricing: Old Ideas and New Tools, MIT Press.]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-24-oligopoly.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 24 - Oligopoly.mdTue, 06 Jan 2026 15:07:49 GMT<figure><img src="."></figure> Superior technology or organisation Example: Early mass production (Henry Ford). Exclusive control of key inputs Example: Owning a local quarry in a region without substitutes. Natural monopoly Occurs when the average cost curve is continuously falling, often due to high fixed costs and low marginal costs. Typical examples: utilities such as water, electricity, gas networks. If is always falling, splitting production across multiple firms raises total cost. For cost function : One firm producing : Two firms producing each: This illustrates why natural monopolies often arise in network industries.
Governments can create monopoly power: State-owned monopolies Postal services, early telecommunications networks. Patent protection Temporary monopoly to incentivise innovation Examples: Pharmaceuticals, Xerox. Patents balance dynamic efficiency (innovation incentives) against static inefficiency (market power).A monopolist chooses output to maximise profit:Because price falls as rises, marginal revenue (MR) is below the demand curve.
Start with market demand Derive MR, which falls faster than demand Set to find the profit maximising quantity . Read price from the demand curve at . This is a core result: monopolists never choose a point where because that would eliminate the markup.Suppose the monopolist lowers price by a small amount to sell an extra unit. Two effects arise: Gain: Revenue from the additional unit. Loss: Lower price applied to all existing units already sold. This is visualised on the slide:
Thus MR drops faster than price. This is why intersects at a lower than the competitive equilibrium.
From the lecture example: Demand at monopoly output gives Marginal cost is Output chosen is Producer surplus: Consumer surplus: Monopoly reallocates surplus from consumers to the firm compared to perfect competition.
Under perfect competition, and output is higher.Under monopoly: Higher price Lower output Allocative inefficiency Deadweight loss (DWL) At the monopoly output, . This signals that some consumers value the good more than its cost of production, but do not purchase it due to monopoly pricing.Thus mutually beneficial trades are lost, creating DWL.
The DWL triangle measures the welfare lost relative to the competitive benchmark:This is the forgone total surplus due to reduced output.
Because monopoly restricts output and raises prices, governments intervene through:Aim: Change industry structure to increase competition.Examples: Blocking mergers (e.g. Asda–Sainsbury’s 2019) Forcing breakups (BAA airports, 2009) Open Banking (2017) to increase competition Limitations: Costly, complicated Not feasible for natural monopolies Aim: Regulate behaviour without altering market structure.Examples: Anti-cartel enforcement Direct price regulation Setting price ceilings
A regulator may set a price ceiling at , replicating the competitive outcome: The demand curve becomes flat at MR curve also becomes flat above the competitive output Firm produces where DWL eliminated Regulator may not know true If natural monopoly, gives negative profits Risk of regulatory capture Information asymmetry: firms know more about costs
Monopoly arises when firms have market power due to cost, technology or legal barriers. Monopolists choose and charge a price on the demand curve. This results in higher prices, lower output, and deadweight loss compared to perfect competition. Regulation can mitigate inefficiencies but is difficult in practice, especially for natural monopolies. After this lecture you should be able to: Explain sources of monopoly power Derive MR from demand Use to compute monopoly outputs and prices Calculate consumer surplus, producer surplus and DWL Assess regulatory approaches and their limitations ]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-20-monopoly.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 20 - Monopoly.mdMon, 05 Jan 2026 12:39:58 GMT<figure><img src="."></figure>Figure interpretation: The diagram highlights the capital structure (subscribed vs. paid-in capital) and lending capacity. This architecture mirrors IMF design principles: large callable capital reassures markets without immediate fiscal transfers. It also illustrates the relationship between the EFSF legacy funds and the permanent ESM, emphasising how crisis lending evolved from ad hoc mechanisms to a formal institutional pillar. Economically, the scale is intended to deter speculative attacks: if investors know a country has credible access to €500 billion, the probability of default priced into bond yields falls. The figure shows why expectations matter; the very presence of the ESM alters market behaviour.The crisis did not originate solely from fiscal profligacy. Except for Greece, the initial triggers were private credit booms enabled by low Eurozone interest rates and insufficient regulatory oversight. Entry into the Eurozone reduced interest rates in the periphery, triggering large increases in domestic demand. Credit expansion fuelled construction booms, especially in Ireland and Spain, generating unsustainable growth models. ‘One-size-fits-all’ monetary policy failed to restrain overheating economies. The ECB targeted average Eurozone conditions, inadvertently encouraging excessive leverage in the South. Analytical point: Monetary unions without fiscal unions risk asymmetric shocks and divergent competitiveness paths. Periphery unit labour costs rose far faster than those in the North, causing persistent current account deficits and erosion of external competitiveness. Dadush and Stancil argue that temporary revenue increases from asset booms encouraged governments to expand spending beyond sustainable levels. Public spending per capita grew significantly faster in the periphery than in core economies. Competitiveness declined: unit labour costs increased around 32 percent in the periphery, compared with roughly 12 percent in the North. Gros and Alcidi emphasise that these divergences were consequences of the demand surge, not the root cause. Exam insight: Be prepared to explain why the crisis is better viewed as a macroeconomic imbalance problem rather than simply a fiscal indiscipline story.Greece entered the Crisis with structural fiscal weaknesses: persistent deficits, debt above 100 percent of GDP, and a narrow tax base. After 2009, markets questioned Greece’s capacity to service its debts, producing a sharp rise in borrowing costs. First Troika bailout in 2010 (€110 billion), followed by a second package in 2012 (€173 billion). Conditionality required tax rises, public-sector retrenchment, pension reforms and healthcare cuts. GDP contracted by roughly 25 percent from 2007 to 2013, and unemployment surged. Despite adjustment, the debt-to-GDP ratio increased to 175 percent due to collapsing output. Economic intuition: Fiscal consolidation during recession reduces aggregate demand, worsening debt dynamics through the denominator effect. Greece’s inability to devalue its currency made internal devaluation (wage and price deflation) the only route to restore competitiveness, but this process is slow and socially costly.
Figure interpretation: The slide illustrates how interest rate spikes, combined with falling GDP, generate explosive debt ratios. Even with primary surpluses, high interest costs can push debt onto an unsustainable path. The diagram underlines why the Troika deferred interest payments and extended maturities: lowering the effective interest burden stabilises debt trajectories. This figure also conveys the paradox of austerity: short-run contraction makes fiscal targets harder to meet, strengthening the argument for growth-oriented adjustment or some degree of debt restructuring.The debate over Grexit centres on the trade-off between monetary sovereignty and financial disruption.Arguments for Grexit: Greece could introduce a national currency, allowing nominal depreciation to restore competitiveness faster than internal deflation. Independent monetary policy could support domestic demand. Default on euro-denominated liabilities would reduce the debt burden. Arguments against Grexit: Immediate capital flight, banking collapse and sharp inflation as imports become costly. Legal and political uncertainty. Contagion risk: markets might speculate against other periphery economies, threatening Eurozone integrity.
Figure interpretation: The slide maps out the adjustment mechanism under Grexit: currency depreciation, price jumps, debt restructuring and the reassertion of national monetary control. It clarifies that competitiveness gains come quickly through nominal devaluation, but balance-sheet effects on euro-denominated liabilities are severe. Economically, the figure captures the essence of the twin-problem resolution: Greece simultaneously tackles competitiveness and debt overhang. Yet the sequencing of shocks implies deep short-term pain, which explains the EU’s strong preference for keeping Greece inside the Eurozone.Countries such as Ireland, Portugal and Cyprus required bailouts, while Spain received bank-sector support. These cases illustrate how private-sector imbalances can rapidly spill into sovereign balance sheets, especially where governments act as backstops for national banking sectors.Key lessons: Monetary unions require robust institutions for crisis management. Countercyclical fiscal space is critical; procyclical expansion in boom years leaves states vulnerable. OMT (Outright Monetary Transactions) reduced speculation by signalling that the ECB would act as a lender of last resort for sovereigns, conditional on reform. Restoring competitiveness through deflation is politically challenging, suggesting that deeper fiscal union or risk-sharing arrangements may be necessary for long-term stability. The Eurozone crisis revealed fundamental weaknesses in the institutional design of monetary union. The ESM and OMT have reduced immediate break-up risk, but they do not eliminate the structural divergence between member states. The Greek case demonstrates the difficulty of adjustment without exchange rate flexibility and the political strains created by prolonged austerity. Understanding these dynamics is central to evaluating the future of European integration.Dadush, U and Stancil, B 2010, Europe’s Debt Crisis: More than a Fiscal Problem, Carnegie Endowment for International Peace, Washington DC. De Grauwe, P 2010, The Financial Crisis and the Future of the Eurozone, CEPS Policy Brief, Brussels. Gros, D and Alcidi, C 2010, The European Debt Crisis: Causes and Consequences, Centre for European Policy Studies, Brussels. Shuknecht, L, Moutot, P, Rother, P and Stark, J 2011, The Stability and Growth Pact: Crisis and Reform, ECB Occasional Paper 129, Frankfurt am Main. Wolf, M 2011, Thinking the Unthinkable, Financial Times, 9 November. Micossi, S 2011, Fixing Crisis Management in the Eurozone, VoxEU, CEPR.]]>econ1013_economicintegrationi/econ1013_notes/lecture-14-sovereign-debt-problems-in-greece-et-al..htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 14 - Sovereign debt problems in Greece et al..mdTue, 23 Dec 2025 16:21:32 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l14_greeceetal/slide8.png"></figure>econ1001_introtomicroeconomics/econ1001_notes/untitled.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Untitled.baseTue, 23 Dec 2025 16:19:30 GMTecon1019_growthdevlongrunhist/econ1019_notes/lecture-14-geography-as-a-historically-fundamental-cause-of-growth-(continued).htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 14 - Geography as a Historically Fundamental Cause of Growth (Continued).mdTue, 23 Dec 2025 16:18:09 GMTecon1001_introtomicroeconomics/econ1001_notes/lecture-9&10-income-substitution-effects.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 9&10 - Income Substitution Effects.mdThu, 18 Dec 2025 15:48:26 GMTecon1001_introtomicroeconomics/econ1001_notes/untitled-1.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Untitled 1.baseThu, 18 Dec 2025 15:43:05 GMTThe possible combinations of a bundle of goods can be represented by points on the chart.You can then map a line throughout by preferences in an indifference curve.Where multiple curves are present, at each height and elevation of bundles of goods, we can form an indifference map as pictured below.
Bundles on the indifference curve farther from the origin are preferred to those on curves closer to the origin Every bundle lies on an indifference curve a. Indifference curves cannot cross b. Indifference curves cannot slope upwards c. Indifference curves cannot be thick
The trade-off that a person is willing to make between two goods.At any point, the MRS is the absolute value of the slope of the indifference curve.]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-4-preferences-and-indifference-curves.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 4 - Preferences and indifference curves.mdThu, 18 Dec 2025 15:42:02 GMT<figure><img src="."></figure>The slide illustrates how policy rates converged to zero while peripheral sovereign yields remained dramatically elevated. This undermined the transmission channel and created a deflationary bias by tightening credit only in weaker economies. The ECB’s Outright Monetary Transactions (OMT) responded by promising unlimited purchases of sovereign bonds conditional on reform, restoring credibility and narrowing spreads.The lecture introduces nominal GDP (NGDP) targeting as a potential replacement for strict inflation targeting. Inflation targeting allegedly ignored pre-crisis asset bubbles and constrained post-crisis recovery by anchoring expectations too tightly around low inflation. NGDP targeting allows for temporary catch-up growth, enabling inflation to rise modestly during recoveries. It places explicit weight on real economic activity rather than treating output stabilisation as secondary.
The figure contrasts inflation targeting with NGDP targeting, where the latter stabilises the path of nominal spending rather than the short-run inflation rate. The economic intuition is that stabilising nominal income growth anchors expectations more effectively and provides automatic countercyclical flexibility. German policy culture remains deeply influenced by the historical memory of hyperinflation, making tolerance of higher inflation politically contentious. Implementing NGDP targeting requires robust Eurozone-wide data and a shared understanding of how to distribute the burden of rebalancing. After the debt crisis, EU governance (Six Pack, European Semester, Fiscal Compact) enforced fiscal consolidation. The underlying logic: High deficits raise borrowing needs. Higher debt raises interest payments. Without consolidation, this may trigger a default–spread spiral. Within EMU, where countries lack monetary sovereignty, fiscal sustainability became a central concern.
The slide summarises empirical critiques: High fiscal multipliers (0.9–1.7) imply that spending cuts depress output substantially. When interest rates are near zero, austerity becomes procyclical, raising the debt-to-GDP ratio rather than lowering it. Infrastructure investment during slack periods has high social returns and supports long-run productive capacity. Analytically, austerity tightened fiscal stances precisely when private demand collapsed, violating basic stabilisation-policy principles. The “austerity dilemma” captures this contradiction: Cutting deficits reduces spending, lowering growth. Lower growth raises the debt ratio. Higher debt ratios intensify investor concerns, reinforcing the original rationale for austerity. The Eurozone lacked shock-absorbing mechanisms common in successful currency unions (e.g. US automatic budget transfers). Without such buffers, asymmetric shocks produced deeper recessions in weaker states.
The figure highlights how limited fiscal space in the South, combined with ECB rigidity, prolonged stagnation. The absence of a lender of last resort prior to OMT further aggravated panic dynamics in sovereign debt markets.Reforms suggested include: Softening austerity to avoid procyclical adjustment. ECB interventions (e.g. quantitative easing) to prevent self-fulfilling debt crises. Greater fiscal coordination, potentially moving towards a fiscal union. Eurozone-level investment instruments to counter regional demand shortfalls. The crisis revealed that EMU was an incomplete OCA. Maastricht convergence criteria focused on nominal variables (inflation, deficits, debt) rather than real adjustment mechanisms. Moreover, EMU lacked: A central fiscal authority. Adequate risk-sharing mechanisms. A clearly defined lender-of-last-resort function.
The slide shows the contrast between Balassa’s integration ladder and the Eurozone’s reality: deep monetary integration without correspondingly deep fiscal or political integration. This design fault magnified asymmetric shocks and produced prolonged divergence between core and periphery. Entry requirements should place more weight on real economic structures (labour mobility, financial integration, productivity trends). Gains from EMU may be modest for heterogeneous, large states, while the loss of the exchange-rate instrument imposes substantial adjustment costs. Homogeneity matters: convergence cannot be assumed; it must be present at entry. Fiscal Union or credible coordination is necessary to support the single monetary policy. Central Banks require lender-of-last-resort powers to prevent liquidity crises from mutating into solvency crises. Reviving the Eurozone requires reassessing the balance between monetary restraint and fiscal activism. Persistent underperformance stems from structural flaws in EMU’s institutional architecture, particularly the mismatch between centralised monetary policy and decentralised fiscal capacity. NGDP targeting offers an alternative monetary framework, but its viability depends on deeper political consensus. Ultimately, stabilising the Eurozone involves complementing monetary integration with credible fiscal mechanisms and symmetrical adjustment rules that avoid placing the burden solely on deficit countries.Blanchard, O. and Leigh, D. (2012) Growth Forecast Errors and Fiscal Multipliers. IMF Working Paper. Costas, M. (2012) IMF World Economic Outlook, Chapter 3: Public Debt and Growth. Washington DC: IMF. De Grauwe, P. (2011) The Governance of a Fragile Eurozone. CEPS Working Document. Krugman, P. (2012) Revenge of the Optimum Currency Area. New York Times Blog. Quiggin, J. (2012) Inflation Target Tyranny. johnquiggin.com. Soros, G. (2012) Financial Times Commentary on the Eurozone Crisis. ]]>econ1013_economicintegrationi/econ1013_notes/lecture-15-reviving-the-eurozone.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 15 - Reviving the Eurozone.mdThu, 11 Dec 2025 14:58:24 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l15_future€/slide2.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l15_future€/slide13.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L15_Future€/Slide13.pngThu, 11 Dec 2025 14:54:32 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l15_future€/slide13.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l15_future€/slide12.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L15_Future€/Slide12.pngThu, 11 Dec 2025 14:54:32 GMT<figure><img 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It captures how fiscal spillovers, sovereign risk, and ECB pressure interlock to justify supra-national constraints. Economically, the figure highlights the shift from coordination failure to rule-based governance. Without rules, national fiscal choices interact through common interest rates and shared financial markets, creating a classic externality problem. The diagram helps visualise the EU’s logic: fiscal discipline is not simply moralistic but grounded in the risk of systemic contagion and the credibility of the monetary union.Lecture 13 establishes the economic foundations for fiscal policy coordination in a monetary union. It shows that the Eurozone’s fiscal framework emerged out of necessity rather than dogma, as national fiscal choices generate cross-border spillovers that threaten monetary stability. The evolution from Maastricht to the post-crisis regime reflects increasing recognition that discipline without centralisation requires strong, credible, binding rules.For exam purposes, you should be able to: Explain the three fiscal spillovers. Evaluate arguments for and against rules. Describe and assess the SGP, Six-Pack, Fiscal Compact, and European Semester. Analyse why market discipline fails without institutional reinforcement. Discuss whether current rules strike the right balance between flexibility and credibility. Commission (1990) One Market, One Money: An Evaluation of the Potential Benefits and Costs of Forming an Economic and Monetary Union. European Commission. De Grauwe, P. (various years) Economics of Monetary Union. Oxford: Oxford University Press. International Securities Market Association (2001) Report on EU Government Deficit Camouflage. London: ISMA. Levitt, B. and Lord, M. (2000) Political Economy of Monetary Union. Basingstoke: Macmillan. Rose, A. (2000) ‘One Money, One Market: Estimating the Effect of Common Currencies on Trade’, Economic Policy, 15(30), pp. 9–45. Summers, R. and Heston, A. (1991) ‘The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950–1988’, Quarterly Journal of Economics, 106(2), pp. 327–368. European Union (2011) Six-Pack Legislation on Economic Governance. Brussels: European Commission. European Union (2013) Treaty on Stability, Coordination and Governance. Brussels: European Council.]]>econ1013_economicintegrationi/econ1013_notes/lecture-13-fiscal-policy.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 13 - Fiscal Policy.mdWed, 10 Dec 2025 00:27:23 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide14.png"></figure> The slide illustrates inflation outcomes under ECB management, showing that headline inflation remained close to the target of just under two percent during the early years of the Eurozone. This provides prima facie evidence that the ECB met its price-stability mandate. However, price stability at the aggregate level concealed underlying divergences. Peripheral economies experienced higher inflation, while core economies undershot the target. The chart therefore highlights a recurring theme: even when the aggregate Eurozone looks stable, individual member states may experience misaligned real interest rates, leading to divergent competitiveness.
The slide summarises the Taylor-rule mismatch across countries. For example, in 2002 the Taylor rule implied a desirable interest rate of around 2.75 percent for Germany but about 7.5 percent for Ireland. The ECB, however, had to set a single rate for all members. This is a textbook example of a monetary union misalignment: countries at different stages of the business cycle require different monetary conditions. The chart reinforces the idea that monetary convergence does not necessarily imply real economic convergence. From an exam perspective, this is essential: the Taylor rule highlights the structural difficulty of operating a single monetary policy in a multicountry union.
This figure shows the divergence in competitiveness between core and peripheral members. Standard economic theory predicted convergence: higher-inflation economies should lose competitiveness, leading firms and workers to moderate wage and price growth. Instead, the Eurozone experienced the opposite, countries such as Spain and Ireland became less competitive despite common monetary policy. This reflected credit-fuelled booms and wage increases disconnected from productivity.
Taylor Rule equation goes as follows: Where: : Nominal interest rate set by the central bank at time : Actual inflation rate at time : Equilibrium real interest rate (also called the natural real rate) : Response coefficient to inflation deviations : Central bank’s target inflation rate : Response coefficient to the output gap : Actual output (real GDP) at time : Potential output (trend or full-capacity GDP) : Percentage output gap This slide typically plots property price inflation or credit growth in peripheral states. It demonstrates how low ECB interest rates encouraged borrowing, particularly in real estate markets. Cheap mortgages contributed to asset bubbles, especially in Ireland and Spain. This divergence in credit conditions widened structural imbalances and exposed the limitations of a uniform monetary stance.
This figure captures the post-boom adjustment: property crashes, negative wealth effects and severe contraction in construction sectors. The visualisation highlights the cyclical asymmetry of the Eurozone: a common monetary policy amplified booms in the periphery but was insufficient to stabilise these economies during downturns. This dynamic is central to understanding why the crisis disproportionately affected southern Europe. Divergent productivity trends meant real interest rates varied across members. Wage-setting institutions varied, making some countries more prone to overshooting inflation. Housing market structures differed, affecting how credit shocks transmitted. The ECB lacked macroprudential tools to cool national credit booms. No fiscal union existed to offset asymmetric shocks. Labour mobility within the Eurozone remained limited. These factors weakened the Eurozone’s ability to function as an optimum currency area. In exam terms, remember: failure stemmed not from ECB incompetence but from institutional constraints and structural asymmetries. Some economists (notably de Grauwe) argue that the ECB could have implemented differentiated macro-prudential policies, such as variable reserve requirements. These would allow the ECB to target overheating credit markets in specific member states without altering the headline interest rate. However, the ECB lacked a formal mandate or political consensus for such targeted intervention pre-crisis. The institutional framework relied heavily on national supervisors, which created gaps in oversight.Although this lecture primarily examines the pre-2008 period, the crisis revealed structural weaknesses: the lack of banking union, fragmented sovereign bond markets and the impossibility of stabilising asymmetric shocks with monetary policy alone. Later reforms such as the Single Supervisory Mechanism and the European Stability Mechanism were introduced to address these gaps. The ECB maintained low and stable inflation, signalling institutional credibility. However, aggregate stability masked growing divergences within member states. A single monetary policy amplified credit booms in peripheral economies. Competitiveness diverged rather than converged, contradicting standard predictions. The crisis exposed design flaws in the Eurozone architecture rather than failures of central banking technique alone. Artis, M. (2007). The Economics of the European Union: Policy and Analysis. Oxford University Press. Commission of the European Communities (1990). One Market, One Money: An Evaluation of the Potential Benefits and Costs of Forming an Economic and Monetary Union. Brussels. de Grauwe, P. (2012). Economics of Monetary Union. Oxford University Press. European Central Bank (various years). Annual Reports. International Securities Market Association (2001). Report on Government Debt Statistics. Financial Times, 5 November. Levitt, M. and Lord, M. (2000). The Political Economy of Monetary Union. Palgrave Macmillan. Rose, A. (2000). ‘One Money, One Market: Estimating the Effect of Common Currencies on Trade’. Economic Policy, 15(30), 9–45.]]>econ1013_economicintegrationi/econ1013_notes/lecture-12-monetary-policy-in-the-eurozone.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 12 - Monetary Policy in the Eurozone.mdMon, 08 Dec 2025 13:22:08 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l12_monpola/slide4.png"></figure>Analysis: Two separate markets exist: lemons and cherries. Demand curves reflect buyer willingness to pay, and supply curves reflect sellers’ reservation values. Because quality is observable, each good trades at its own competitive price – £4,000 for lemons and £8,000 for cherries. Market efficiency is preserved because prices fully reveal quality, preventing misallocation and ensuring all mutually beneficial trades occur.
Analysis: When buyers cannot observe quality, they offer a pooled price (£6,000). Because the cherry reservation value is £5,000, both lemons and cherries are supplied. The market trades all cars, and the allocation remains efficient, yet distributional consequences shift. Lemon owners gain (selling above reservation value), while cherry owners lose (selling below their perfect-information price). This illustrates that efficiency does not guarantee fairness when information is asymmetric.
Analysis: Here sellers of cherries require £7,000. Perfect information again allows both sub-markets to clear separately at £4,000 (lemons) and £8,000 (cherries). The model emphasises that the sustainability of high-quality supply depends on information: when quality is known, markets support heterogeneous goods without breakdown.
Analysis: At a pooled price of £6,000, lemon sellers accept but cherry sellers (requiring £7,000) exit. Buyers then infer correctly that only lemons remain and revise their willingness to pay down to £4,000. The cherry market collapses entirely. This is the core Akerlof mechanism: rational behaviour plus asymmetric information eliminates high-quality goods from the market, reducing efficiency and eliminating desirable trades. Product liability laws increase penalties for misrepresentation. Minimum quality standards restrict low-quality supply. Buyers invest in inspections, certification, or reputation systems. Economic logic: Screening reduces uncertainty by shifting information to the uninformed side. Sellers provide warranties, maintain brands, or invest in costly signals. Theoretical condition: Signals only work if they are more costly for low-quality sellers, ensuring credibility. Whereas adverse selection concerns selection into a contract, moral hazard concerns behaviour after signing.Economic mechanism: If monitoring is imperfect, insured agents may exert less effort. Insurance lowers the marginal benefit of precaution, shifting effort levels downward.
Analysis: Without insurance, the homeowner chooses effort where MB = MC. Insurance reduces the marginal benefit of care because part of the loss is borne by the insurer. As a result, the optimal care level falls. This encapsulates the incentive-compatibility problem: when protection is provided, behaviour adjusts in a way that increases expected losses.
Analysis: The downward shift in the MB curve shows that insured individuals internalise only part of the potential damage. This leads to a lower level of precautionary effort. The insurer must anticipate this behavioural response when designing contracts. This connects to broader microeconomic themes: optimal contracts equalise incentives and risk-sharing, but asymmetric information makes achieving both objectives difficult.
Analysis: Comparing insured and uninsured MB curves highlights the contraction in care effort. Expected total damage rises, even if the homeowner is financially protected. This illustrates a central inefficiency of moral hazard: private incentives diverge from social costs, mirroring externality logic from earlier lectures.These problems frequently co-exist, especially in insurance markets. Effective design of contracts often involves a trade-off between screening for type (adverse selection) and providing incentives for behaviour (moral hazard). Asymmetric information breaks the link between price and underlying quality. Efficient markets require information structures that allow separation or credible signalling. In insurance, full insurance is rarely optimal; contracts must balance risk-sharing with incentive provision. Diagram interpretation is crucial: look for shifts in MB, changes in feasible trade sets, and unraveling effects. Akerlof, G. (1970). ‘The Market for Lemons: Quality Uncertainty and the Market Mechanism’. Quarterly Journal of Economics, 84(3), pp. 488–500. Perloff, J. (2017). Microeconomics: Theory and Applications with Calculus. Pearson. Sefton, M. (2025). ECON1001 Lecture 27: Asymmetric Information. University of Nottingham. ]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-27-asymmetric-information.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 27 - Asymmetric Information.mdSat, 06 Dec 2025 16:49:41 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-27-asymmetric-information/slide24.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 27 Asymmetric Information/Slide24.pngSat, 06 Dec 2025 16:44:34 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-27-asymmetric-information/slide23.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 27 Asymmetric Information/Slide23.pngSat, 06 Dec 2025 16:44:34 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-27-asymmetric-information/slide22.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 27 Asymmetric Information/Slide22.pngSat, 06 Dec 2025 16:44:34 GMT<figure><img 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src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-27-asymmetric-information/slide9.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 27 Asymmetric Information/Slide9.pngSat, 06 Dec 2025 16:44:34 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-27-asymmetric-information/slide8.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 27 Asymmetric Information/Slide8.pngSat, 06 Dec 2025 16:44:34 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-27-asymmetric-information/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 27 Asymmetric Information/Slide7.pngSat, 06 Dec 2025 16:44:34 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-27-asymmetric-information/slide6.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 27 Asymmetric Information/Slide6.pngSat, 06 Dec 2025 16:44:34 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-27-asymmetric-information/slide5.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 27 Asymmetric Information/Slide5.pngSat, 06 Dec 2025 16:44:34 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-27-asymmetric-information/slide4.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 27 Asymmetric Information/Slide4.pngSat, 06 Dec 2025 16:44:34 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-27-asymmetric-information/slide3.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 27 Asymmetric Information/Slide3.pngSat, 06 Dec 2025 16:44:34 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-27-asymmetric-information/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 27 Asymmetric Information/Slide2.pngSat, 06 Dec 2025 16:44:34 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-27-asymmetric-information/slide1.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 27 Asymmetric Information/Slide1.pngSat, 06 Dec 2025 16:44:33 GMT<figure><img src="."></figure>Interpretation & Economic Analysis This figure shows how individual marginal benefit curves combine to generate the social marginal benefit curve. For public goods, each unit consumed is shared; therefore we add willingness to pay vertically. The diagram contrasts this with private-good aggregation, highlighting the conceptual shift in how demand is constructed. The upward displacement of SMB relative to individual curves captures the positive externality inherent in non-rival consumption. This framework allows us to identify the socially optimal provision point and explain why private markets underproduce.
Interpretation & Economic Analysis This slide plots SMB against the constant marginal cost of £240 to derive the optimal number of streetlights, . The intersection represents the efficient level where social willingness to pay equals cost. The visual separation between the individual MB curves and the SMB curve highlights how private incentives diverge from social welfare. The figure reinforces the insight that each individual (or family) ignores the benefit conferred on others, pushing equilibrium provision below the optimum. In exam terms, this connects directly to positive externalities and the marginal decision rule.
Interpretation & Economic Analysis Here the diagram shows equilibrium private provision, , falling short of the socially optimal . Family 2 privately chooses to buy only four streetlights, while Family 1 buys none, free riding on Family 2’s contribution. The shaded welfare area highlights lost gains from trade due to underprovision. The diagram summarises the market failure: non-excludability eliminates the ability to charge users, and non-rivalry means pricing above zero is inefficient, leaving markets unable to coordinate provision at the optimal level. Understanding this figure is essential for explaining why taxation or compulsory contributions can restore optimality.Free riding arises because individuals can consume the public good regardless of whether they pay for it. The incentive is to contribute less than one’s true marginal benefit, expecting others to supply the good.Consequences: Private equilibrium lies below the efficient level. Large groups exacerbate free riding because each individual’s contribution becomes negligible relative to the group’s benefit. Mechanisms to overcome free riding (voluntary contribution schemes, social pressure, matching contributions) work poorly when groups are large or anonymity is possible. In economic terms, the decentralised equilibrium fails because private marginal benefit ≠ social marginal benefit.Given systematic underprovision, the state can: Force contribution through taxation. Provide the good at scale, exploiting non-rivalry. Reduce duplication and inefficiency through central coordination. In small groups, private solutions (bargaining, norms, reciprocity) may succeed, but national-scale goods (defence, epidemiological research) require coercive power.Although government solves the free-rider problem, new problems arise: Determining the “right” level of provision requires aggregating heterogeneous preferences. Political failures (rent seeking, misallocation) can distort outcomes. Funding must balance efficiency and equity considerations. Public goods provision thus combines technical economic optimisation with political decision-making. Public goods are non-rival and non-excludable, generating positive externalities. Socially optimal provision satisfies . Vertical summation of marginal benefits is central to determining efficiency. Free riding drives private provision below the optimum. Government intervention (taxation or regulation) is usually required to achieve optimality. Diagrammatic analysis allows clear identification of the welfare loss from underprovision. Perloff, J. (2017) Microeconomics: Theory and Applications with Calculus. Pearson. Samuelson, P. (1954) ‘The Pure Theory of Public Expenditure’, Review of Economics and Statistics, 36(4), pp. 387–389. Cornes, R. and Sandler, T. (1996) The Theory of Externalities, Public Goods and Club Goods. Cambridge University Press.]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-26-public-goods.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 26 - Public Goods.mdThu, 04 Dec 2025 14:36:29 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide15.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide15.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide14.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide14.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide13.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide13.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide12.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide12.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide11.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide11.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide10.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide10.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide9.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide9.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide8.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide8.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide7.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide6.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide6.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide5.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide5.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide4.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide4.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide3.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide3.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide2.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-26-public-goods/slide1.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 26 Public Goods/Slide1.pngThu, 04 Dec 2025 14:23:43 GMT<figure><img src="."></figure> Interpretation: This slide depicts social marginal benefit (demand) and both private and social marginal cost schedules. The key insight is that the efficient allocation occurs where demand intersects social MC. The gap between social and private MC represents external harm. The shaded welfare area emphasises the gain from reducing output to . Importantly, even with perfect competition, ignoring external costs yields inefficiently high quantities.
Interpretation: This figure contrasts competitive equilibrium with the socially optimal point. The red triangle illustrates deadweight loss — the standard exam-friendly depiction of welfare loss due to externalities. Market participants internalise only the private MC curve, so they take socially excessive actions. This motivates intervention.Optimal policy aims to align private incentives with social costs/benefits. Efficiency is reached at the point where:At this point, all affected welfare changes are internalised. The analytical challenge is that is typically unobserved, making perfect policy calibration extremely difficult.
Interpretation: The diagram highlights the welfare-maximising output and contrasts it with competitive output. The slide underscores that competitive decisions omit the external marginal damage curve entirely. Graphically, the optimal reduction in output eliminates the red deadweight-loss triangle.A merger between a polluting firm and a harmed firm internalises the externality by turning the external cost into an internal cost. The joint profit-maximising firm chooses the socially optimal output if profit incentives align with welfare.If property rights are clearly assigned and transaction costs are negligible, parties can negotiate to achieve efficient outcomes regardless of the initial rights allocation. Distributional outcomes differ (who pays whom), but efficiency does not.
Interpretation: The figure shows how both parties can be made better off by transferring payments that induce output reductions. The mill–hotel example clarifies Coasian bargaining: whether the mill has the right to pollute or the hotel the right to clean water, efficient output is achieved through mutually beneficial transfers.
Interpretation: This slide illustrates how transfers differ under alternative allocations of rights. While total surplus is maximised in both cases, the division of surplus changes, a crucial exam point. Students should emphasise that Coase efficiency is independent of rights, but equity outcomes are not.Coase rarely applies cleanly in reality because: Transaction costs rise with the number of parties (e.g., millions harmed by climate change). Information asymmetries distort negotiation. Sources of harm may be difficult to identify. Strategic bargaining leads to breakdowns. These frictions justify government intervention.Governments can use: Quantity regulations (emission standards) Pigouvian taxes (output or emission taxes) Subsidies for positive externalities Market-based schemes such as cap-and-trade The central idea is to shift private incentives such that private marginal cost reflects social marginal cost.
Interpretation: This diagram shows the level of external marginal cost (84 in the slide) necessary for a Pigouvian tax to restore efficiency. Imposing a tax equal to marginal external harm pushes the firm’s private MC curve upwards to coincide with SMC. At this point, the firm’s profit-maximising behaviour yields . The policy goal is internalisation, not necessarily punishment.Implementing Pigouvian taxes requires: Knowledge of the true marginal external cost. Identification of who generates the externality. Consideration of market structure, e.g., taxing a monopolist can exacerbate underproduction. Thus, even well-designed instruments may misfire if information is incomplete. Externalities create a wedge between private and social marginal values. Competitive markets are inefficient under externalities because decision-makers ignore external harm/benefit. Private solutions can work when rights are well-defined and transaction costs low, but real-world frictions limit applicability. Government intervention - taxes, regulation, or market design — attempts to restore efficiency by internalising externalities. Correct calibration is essential but often difficult due to informational and institutional constraints. Perloff, J. (2017). Microeconomics: Theory and Applications with Calculus. Pearson. Coase, R. (1960). ‘The Problem of Social Cost’. Journal of Law and Economics, 3, 1–44. Pigou, A. (1920). The Economics of Welfare. Macmillan.]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-25-externalities.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 25 - Externalities.mdThu, 04 Dec 2025 14:18:18 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide19.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide19.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide18.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide18.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide17.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide17.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide16.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide16.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide15.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide15.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide14.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide14.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide13.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide13.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide12.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide12.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide11.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide11.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide10.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide10.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide9.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide9.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide8.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide8.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide7.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide6.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide6.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide5.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide5.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide4.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide4.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide3.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide3.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide2.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-25-externalities/slide1.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 25 Externalities/Slide1.pngThu, 04 Dec 2025 14:06:10 GMT<figure><img src="."></figure>econ1013_economicintegrationi/econ1013_notes/lecture-1-introduction-to-economic-integration.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 1 - Introduction to Economic Integration.mdWed, 03 Dec 2025 00:33:23 GMT]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide19.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide19.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide19.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide18.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide18.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide18.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide17.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide17.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide17.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide16.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide16.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide16.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide15.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide15.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide15.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide14.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide14.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide14.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide13.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide13.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide13.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide12.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide12.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide12.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide11.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide11.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide11.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide10.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide10.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide10.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide9.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide9.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide9.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide8.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide8.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide8.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide7.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide7.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide7.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide6.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide6.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide6.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide5.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide5.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide5.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide4.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide4.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide4.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide3.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide3.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide3.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide2.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide2.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide2.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide1.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L13_FiscPol/Slide1.pngTue, 02 Dec 2025 11:46:56 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l13_fiscpol/slide1.png"></figure>econ1013_economicintegrationi/econ1013_notes/untitled.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Untitled.baseTue, 02 Dec 2025 08:58:40 GMTCommentary: High inflation erodes competitiveness inside a fixed-exchange-rate zone. In monetary union, real depreciation through nominal devaluation is impossible, putting high-inflation countries at risk of factory closures and unemployment.In 1993, only four countries met this criterion, though by 1997 nearly all (except Greece) had converged.Long-term interest rates must be no more than 2 percentage points above those of the three lowest-inflation members.
Commentary: Long-term rates capture market expectations of inflation and fiscal credibility. Higher inflation or unstable fiscal behaviour increases sovereign borrowing costs, which could destabilise the monetary union.Annual government deficit must be below 3% of GDP.
Commentary: High deficits create incentives for governments to inflate away debt (not possible under EMU). Other members fear contagion risks if one state faces default. This criterion was flexible, and several countries used creative accounting (e.g., Italy’s use of swaps) to appear compliant. Public debt should be below 60% of GDP, or “diminishing sufficiently” towards the target.
Commentary: Only three countries met this strictly. The 60% figure approximated EU averages and was consistent with stable debt under 3% deficit assuming ~5% nominal GDP growth.Countries must remain within ERM II without devaluation for two years.
Commentary: This criterion ensures markets perceive the existing exchange rate as credible and avoids “competitive devaluations” prior to joining EMU. Criteria are judged over a short period, not structural sustainability. They ignore unemployment, growth, and convergence of business cycles (criticised by the Mundell OCA framework). Fiscal rules proved politically malleable and insufficient to prevent later crises. By 1998, 11 of 15 EU countries met the conditions sufficiently to join the Euro (confirmed by Council in May 1998). Greece failed initially. Sweden did not join ERM II. The UK and Denmark exercised opt-outs. The Euro moved from: 1999 — used for accounting; ERs fixed irrevocably. 2002 — physical notes and coins introduced.
The ECB is among the most independent central banks in the world.
Monetary policy is set by the Governing Council: 6 Executive Board members National central bank governors (20 today, 17 at the time of the slide) “One member, one vote” — decisions should reflect Eurozone-wide interests, not national positions. Executive Board members serve single non-renewable terms. Independence aims to enhance credibility, reducing inflation expectations without creating unemployment. Reflects central-bank theory: politicians face short-term incentives; independent CBs anchor long-run stability. ECB is not democratically elected. Limited obligation to justify specific decisions publicly, raising legitimacy debates.
National central banks act as ECB agents, maintaining their operational roles. The Eurogroup provides informal political oversight (Finance Ministers). The Treaty mandates that the ECB’s primary objective is price stability.Originally: (1998) Below 2% HICP Revised: (2003) Below, but close to 2% over the medium term
Commentary: Pre-2008 inflation record was strong. Post-2008 saw deviations due to the financial crisis, deflation risks, and later inflationary spikes. The ECB uses interest-rate policy transmitted through commercial banks. Provide 7-day liquidity to commercial banks at a fixed rate. Full allotment means banks can access as much liquidity as they can provide collateral for.
During crises: 1-month, 3-month, and 3-year liquidity injections. Designed to stabilise the banking system when interbank markets collapsed. Transmission mechanism: More ECB liquidity → higher bond prices → lower yields → reduced borrowing costs for governments and firms.
ECB buys or lends against collateral (government bonds). Influences short-term interest rates. Aims at controlling medium-term inflation prospects. Monetary policy is: Centralised in the ECB Based on controlling inflation expectations Executed via interest rates and liquidity operations Coordinated with national CBs under the Eurosystem Determined by Maastricht criteria (inflation, interest rates, deficit, debt, ER stability). Initially strict, but politically flexible in practice.A highly independent ECB with a clear mandate for price stability.Primarily through interest-rate setting and open-market operations, guided by inflation forecasts.Baldwin, R. and Wyplosz, C. (2013) The economics of European integration. 4th edn. Maidenhead: McGraw-Hill. Commission of the European Communities (1990) One market, one money: an evaluation of the potential benefits and costs of forming an economic and monetary union. European Economy No. 44. De Grauwe, P. (2012) Economics of monetary union. 9th edn. Oxford: Oxford University Press. El-Agraa, A.M. (2011) The European Union: economics and policies. 9th edn. Cambridge: Cambridge University Press. International Securities Market Association (2001) ‘Government deficit accounting practices in the EU’, Financial Times, 5 November. Levitt, M. and Lord, C. (2000) The political economy of monetary union. Basingstoke: Macmillan. Rose, A.K. (2000) ‘One money, one market: estimating the effect of common currencies on trade’, Economic Policy, 15(30), pp. 7–45. Senior Nello, S. (2012) The European Union: economics, policies and history. 3rd edn. Maidenhead: McGraw-Hill.]]>econ1013_economicintegrationi/econ1013_notes/lecture-11-economic-and-monetary-union-in-europe.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 11 - Economic and monetary union in Europe.mdMon, 01 Dec 2025 15:52:49 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l11_emu/slide2.png"></figure>According to Figure 1, England experienced sustained GDP growth over the eighteenth and nineteenth centuries.
Throughout the period, capital accumulation rose steadily, visible in the expansion of railways, machinery, and industrial infrastructure. However, while capital accumulation and growth appear correlated, correlation does not imply causation. Capital accumulation alone did not cause growth. TFP increased the productivity of both capital () and labour (), driving efficiency and innovation across the entire economy.Consider an economy where a fixed share of income () is saved: Let capital per worker be . Then, differentiating with respect to time: This implies that the change in capital per worker over time is given by: where is the depreciation rate and the population growth rate.At the steady state, , giving: According to Solow: TFP leads to growth. The proximate cause is capital accumulation. Conclusion 1: Accumulating capital does not mechanically lead to sustained growth. But then, what exactly is TFP?Changes in TFP () are treated as exogenous shocks in the Solow framework. There is no market for technology; it appears as a productivity shift that boosts output without direct purchase or trade.If technology is freely replicable, why don’t all countries experience the same levels of productivity? This question leads to the fundamental determinants of growth - the deep factors that explain why economies differ in their technological capacity.Today, we examine the first hypothesis: Luck.Exogenous shocks are external events that affect an economy’s performance independent of its internal structure.Examples: Hurricane Katrina (2005): The population of New Orleans fell by almost half the following year, drastically reducing economic activity in the region. Global Financial Crisis: Coffee production in Colombia declined, even though the shock originated elsewhere, showing the effect of global interdependence. Such shocks illustrate that luck can play a major role in short-term fluctuations in growth.Some countries experience bad luck in leadership. For instance, Nigeria may have suffered from poor and corrupt leadership after the 1960s, while South Korea had capable, reform-oriented leaders who fostered industrialisation and human capital accumulation.The argument is as follows:Government policy determines whether individuals and firms can invest in physical and human capital and whether they can adopt or generate new technologies.Competent leadership matters because it sets the institutional and policy environment in which growth occurs.
The red lines indicate the death of significant national leaders.Jones and Olken (2005) used leader deaths as random events to assess whether changes in leadership affect economic performance. They found structural breaks in growth patterns following the death of certain leaders.Their evidence suggests that leadership transitions can influence short-run economic outcomes, but the effects vary across countries depending on institutional strength.Luck may matter in the short run, but the long-run impact depends on the institutional context. United States: President Nixon’s resignation (1974) over the Watergate scandal caused no long-term disruption to the economy. Strong institutions ensured continuity. France: Following President Georges Pompidou’s death in office (1974), GDP per capita recovered swiftly, showing economic resilience. In well-established democracies, institutions rather than individuals determine long-run economic performance. In fragile or autocratic regimes, however, leadership shocks can produce lasting consequences.Many of the cases studied involved autocratic regimes: François Duvalier (Haiti, 1957-1971): His death ended one of the most repressive governments in the Western Hemisphere, responsible for more than 60,000 deaths. Francisco Franco (Spain, 1936-1975): His dictatorship produced decades of political repression and economic isolation before liberalisation began after his death. The findings suggest that large leadership effects are mostly observed in autocratic regimes, where power is concentrated and institutions are weak.Starting point: TFP drives long-run growth. However, understanding why some countries innovate or adopt technologies while others fail requires examining deeper structural causes. Luck can explain short-term fluctuations in growth and leadership quality. In the long run, though, differences in development cannot be explained by luck alone. In democracies, institutions prevent leaders’ deaths or political shocks from altering the economic trajectory. In autocracies, leadership quality and random shocks have stronger and more persistent effects. Therefore, while bad luck offers an explanation for short-term variations, sustained divergence in development arises from institutional, cultural, and geographical differences - topics addressed in subsequent lectures.]]>econ1019_growthdevlongrunhist/econ1019_notes/lecture-11-luck.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 11 - Luck.mdSun, 30 Nov 2025 23:05:28 GMT<figure><img src="."></figure> Fig. 2.2, Pg.29, Jones, C. I. and D. Vollrath (2013). Introduction to economic growth. New York ;, W.W. Norton.The Solow diagram shows how capital per worker () changes over time. The curve represents savings and investment per worker, while the straight line shows the amount of capital needed to replace depreciated capital and equip new workers.When , the economy is adding more capital than it loses - so increases.When , capital shrinks because not enough is saved to maintain it.The point where the two lines meet () is the steady state - capital per worker stops changing, and the economy grows at the same rate as population and technology.Any starting point like will move towards over time - this is called convergence.Starting from the Cobb–Douglas production function for output per worker:\ln \left(\frac{Y_t}{L_t}\right) = \ln A_t + \alpha \ln k_t $t$):Using the derivative of a logarithm ():Hence, in simplified notation:This expression shows that the growth rate of output per worker () is the sum of technological progress () and the capital accumulation effect (). In words: productivity growth drives long-run growth, while capital growth contributes proportionally to its share . Ke differences: Additional engine of growth (capital accumulation). Growth = technological progress in steady state. Notice that difference re growth/tech progress true for any value of n (population), which is exogenous In the long run, the economy converges towards . Hence the only growth in income pc. is due to technological progress, Recall the production function in intensive form: (Eq. 1.1) if does not grow, then neither does to keep constant, must grow at the rate of growth of and hence must also grow at so grows at ]]>econ1019_growthdevlongrunhist/econ1019_notes/lecture-7-8-the-era-of-sustained-economic-growth.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 7-8 - The Era of Sustained Economic Growth.mdSun, 30 Nov 2025 23:02:55 GMT<figure><img src="."></figure>econ1019_growthdevlongrunhist/econ1019_tutorials/econ1019_tutorial_3.htmlECON1019_GrowthDevLongRunHist/ECON1019_tutorials/ECON1019_Tutorial_3.pdfFri, 28 Nov 2025 22:45:43 GMT]]>econ1013_economicintegrationi/econ1013_tutorial/bruno-neurath-wilson-7y3g6s201gk-unsplash.htmlECON1013_EconomicIntegrationI/ECON1013_tutorial/bruno-neurath-wilson-7y3G6s201Gk-unsplash.jpgFri, 28 Nov 2025 14:46:28 GMT<figure><img src="econ1013_economicintegrationi/econ1013_tutorial/bruno-neurath-wilson-7y3g6s201gk-unsplash.jpg"></figure>]]>econ1013_economicintegrationi/econ1013_tutorial/christian-lue-8yw6tsb8tnc-unsplash.htmlECON1013_EconomicIntegrationI/ECON1013_tutorial/christian-lue-8Yw6tsB8tnc-unsplash.jpgFri, 28 Nov 2025 14:43:07 GMT<figure><img src="econ1013_economicintegrationi/econ1013_tutorial/christian-lue-8yw6tsb8tnc-unsplash.jpg"></figure>econ1001_introtomicroeconomics/econ1001_tutorials/sectionb_q3_dg.htmlECON1001_IntroToMicroEconomics/ECON1001_tutorials/SectionB_Q3_DG.pdfThu, 27 Nov 2025 18:06:06 GMT]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide33.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide33.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide32.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide32.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide31.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide31.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide30.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide30.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide29.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide29.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide28.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide28.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img 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src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide7.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide6.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide6.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide5.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide5.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide4.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide4.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide3.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide3.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide2.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-24-oligopoly/slide1.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 24 Oligopoly/Slide1.pngThu, 27 Nov 2025 15:10:28 GMT<figure><img src="."></figure>This payoff matrix shows two possible output levels (48 or 64 thousand passengers). The numerical payoffs (profits in millions) reveal that: For American Airlines, choosing 64 dominates 48: it yields a higher profit irrespective of United’s choice. By symmetry, United also has a dominant strategy of 64. Dominant strategy equilibrium: . Dominant strategies eliminate the need for strategic reasoning: firms choose profit-maximising actions unconditionally. However, dominant strategy outcomes may be Pareto-inferior, revealing tensions between self-interest and collective welfare.
This classic example shows that both players have a dominant strategy (confess), yet mutual confession yields lower payoffs than mutual silence. Dominant strategies may produce socially inefficient outcomes. The tension arises because each player internalises only their own payoff, not the externality imposed on the other. This logic underpins many problems in industrial organisation (overproduction in Cournot, underinvestment in public goods, advertising races). When dominant strategies do not exist, equilibrium requires a more general concept: Nash equilibrium.A Nash equilibrium is a strategy profile where each player chooses a best response to the strategies of others. No player can profitably deviate.
Best responses may vary depending on rivals' strategies. Nash equilibrium is found where best responses intersect.In equilibrium, each player's expectations about rivals' actions are fulfilled. This captures strategic stability: no profitable unilateral deviation exists.
Here, neither firm has a dominant strategy. Firm A's best responses depend on Firm B's choice. Firm B's best responses depend on Firm A's choice.
The Nash equilibrium occurs at: (Medium, Medium) This is the outcome where both firms’ strategies mutually best respond.For matrices: Underline (or identify) best responses. Nash equilibrium is where best responses coincide. Some games have more than one Nash equilibrium.
Two equilibria emerge: (Enter, Do Not Enter) (Do Not Enter, Enter) Payoffs depend strongly on rivals’ choices. Coordination problems arise: players prefer different equilibria. Strategic uncertainty becomes central. This is important for industrial organisation: market entry, location decisions, and technology adoption often hinge on coordination.

Firms choose outputs .Payoffs: No dominant strategies. Best responses are derived by solving each firm’s profit maximisation problem. Cournot equilibrium occurs where best response functions intersect. Unlike discrete games, the equilibrium is derived using calculus.Game theory explains why oligopolistic markets do not behave like competitive ones: Firms internalise strategic effects. Outcomes depend on timing, information, and strategic complementarity or substitutability. Market failures — such as overproduction, collusion instability, and inefficient equilibria — emerge naturally. Game theory also formalises incentives behind: Coordination games Entry deterrence Price wars Advertising competition Public goods provision This builds foundations for more advanced industrial organisation and mechanism design. Dominant strategy equilibrium: simple but rare. Prisoners’ dilemma: dominant strategies can lead to inefficient outcomes. Nash equilibrium: no profitable unilateral deviation. Best-response analysis: the practical method for finding Nash equilibria. Multiple equilibria: coordination failures and strategic uncertainty. Continuous games: Cournot equilibrium derived through calculus. These tools underpin second-year microeconomics and all modern oligopoly theory.]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-23-game-theory.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 23 - Game Theory.mdThu, 27 Nov 2025 14:54:50 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-23-game-theory/slide24.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 23 Game Theory/Slide24.pngThu, 27 Nov 2025 14:13:21 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-23-game-theory/slide23.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 23 Game Theory/Slide23.pngThu, 27 Nov 2025 14:13:21 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-23-game-theory/slide22.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 23 Game Theory/Slide22.pngThu, 27 Nov 2025 14:13:21 GMT<figure><img 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src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-23-game-theory/slide9.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 23 Game Theory/Slide9.pngThu, 27 Nov 2025 14:13:21 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-23-game-theory/slide8.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 23 Game Theory/Slide8.pngThu, 27 Nov 2025 14:13:21 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-23-game-theory/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 23 Game Theory/Slide7.pngThu, 27 Nov 2025 14:13:21 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-23-game-theory/slide6.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 23 Game Theory/Slide6.pngThu, 27 Nov 2025 14:13:21 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-23-game-theory/slide5.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 23 Game Theory/Slide5.pngThu, 27 Nov 2025 14:13:21 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-23-game-theory/slide4.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 23 Game Theory/Slide4.pngThu, 27 Nov 2025 14:13:21 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-23-game-theory/slide3.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 23 Game Theory/Slide3.pngThu, 27 Nov 2025 14:13:21 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-23-game-theory/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 23 Game Theory/Slide2.pngThu, 27 Nov 2025 14:13:21 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-23-game-theory/slide1.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 23 Game Theory/Slide1.pngThu, 27 Nov 2025 14:13:21 GMT<figure><img src="."></figure>The slide illustrates that marginal revenue equals demand under perfect discrimination. Each additional unit is sold at exactly the reservation price, enabling extraction of all surplus. The figure highlights the disappearance of deadweight loss, showing that perfect discrimination restores allocative efficiency despite market power.Third-degree price discrimination occurs when a firm charges different prices to groups with different elasticities of demand. Each group faces a uniform price.Examples include: Student or senior discounts Regional pricing of software, pharmaceuticals, or DVDs Peak/off-peak transport pricing For each group : Set Charge higher prices to groups with less elastic demand Charge lower prices to more price-sensitive groups This segmentation allows firms to sell additional units to low-valuation consumers without lowering the price for high-valuation consumers.
The slide shows the separation of markets into distinct demand curves. When groups differ in elasticity, optimal pricing across groups leads to different chosen quantities and prices. This illustrates the classic rule that the group with more inelastic demand pays the higher price.Warner Brothers sold the same DVD at different prices in the US and UK at release. US: , million UK: (£25), million Key intuition: Differences in distribution costs cannot explain the price gap. UK demand was less elastic, allowing higher markups. Copyright law prevents arbitrage — making cross-country resale difficult. This example is a textbook case of third-degree discrimination based on geographic segmentation.
The diagram compares quantities and prices across segmented markets. Marginal revenues intersect the common marginal cost at different points, implying different group-specific monopoly prices. This visualises why cross-market arbitrage restrictions allow discrimination to be sustained.Unlike first-degree discrimination, third-degree price discrimination does not guarantee efficiency improvements. Key insights: Output lower than competitive levels Deadweight loss persists in each market Consumers generally worse off Producers gain from targeted markups Ambiguous. Output in some segments may rise, in others fall. Overall welfare may increase or decrease. Producer surplus always weakly rises since the monopolist could revert to uniform pricing if it were better. The ambiguity reflects how reallocating quantity across groups alters total surplus.
The figure shows that group-specific monopsony pricing can either raise or lower welfare depending on how demand elasticities differ. The distribution of surplus shifts strongly toward producers, while consumer surplus becomes uneven across groups. Price discrimination allows firms with market power to extract additional surplus by tailoring prices to consumer heterogeneity. Perfect (first-degree) discrimination eliminates deadweight loss but also eliminates consumer surplus. Third-degree discrimination is common and depends on elasticity differences and enforceable segmentation. Welfare effects are nuanced and depend on comparisons with other market structures. In exams, always emphasise: The role of marginal revenue equalisation The importance of elasticity The conditions enabling discrimination How price discrimination reallocates surplus Perloff, J. (2017) Microeconomics: Theory and Applications with Calculus. Pearson. Cable, V. (2021) Money and Power: The World Leaders Who Changed Economics. Atlantic Books. Jones, C.I. and Vollrath, D. (2013) Introduction to Economic Growth. W. W. Norton. ECON1001 Lecture Slides (Lecture 22: Price Discrimination) University of Nottingham School of Economics. ]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-22-price-discrimination.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 22 - Price Discrimination.mdThu, 27 Nov 2025 12:48:50 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide16.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide16.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide15.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide15.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide14.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide14.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide13.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide13.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide12.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide12.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide11.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide11.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide10.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide10.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide9.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide9.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide8.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide8.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide7.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide6.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide6.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide5.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide5.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide4.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide4.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide3.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide3.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide2.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-22-price-discrimination/slide1.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 22 Price Discrimination/Slide1.pngThu, 27 Nov 2025 12:45:06 GMT<figure><img src="."></figure> The left-hand chart illustrates the United States trade deficit from 1997 to 2021, emphasising the growing bilateral imbalance with China after its accession to the WTO. This demonstrates how global supply chains and specialisation patterns amplify interdependence. The right-hand pie chart shows the distribution of the US goods deficit by country in 2014, with China dominating. The slide highlights how bilateral imbalances fuel political narratives favouring protectionist responses even when they reflect structural factors rather than unfair trade.
The long-run decline in US tariffs from the nineteenth century to the post-war period illustrates the institutionalisation of free trade norms through multilateral agreements. Spikes, such as the Smoot–Hawley Tariff in 1930, show how protectionism often emerges during crises. For exam purposes, one can argue that high tariffs historically aligned with revenue motives and infant industry protection, while their decline reflects the shift towards liberal economic ideology and global institutions like GATT.
This diagram shows how tariffs raise domestic prices from to , reducing consumer surplus by areas and generating dead-weight losses (). Producer surplus increases only by , and government gains revenue . The key intuition is that protectionism redistributes but reduces total welfare. Politically, beneficiaries tend to be small and organised, while consumers are numerous and diffuse, explaining why inefficient tariffs persist.Mercantilism dominated early modern European policy by equating national power with accumulating bullion and maintaining export surpluses. The Navigation Acts (1651–1849) institutionalised these ideas by restricting foreign shipping. This worldview structurally favoured domestic producers and maritime interests.Classical economists challenged this logic. Adam Smith argued that wealth derives from production and specialisation rather than hoarding precious metals. David Ricardo formalised comparative advantage: countries should specialise according to relative opportunity costs, not absolute productivity. Ricardo’s theory provides the intellectual groundwork for Peel’s reforms. Specialisation increases world output by reallocating labour toward sectors where each country has the lowest opportunity cost, generating mutual gains from trade.The Corn Laws (1815–1846) imposed tariffs on grain imports to protect British landowners. High food prices harmed industrial workers and raised production costs for factories reliant on cheap labour. This created a class conflict between the landed aristocracy and the rising industrial bourgeoisie. Peel, a Conservative Prime Minister, faced opposition from his own party but ultimately prioritised economic efficiency and humanitarian concerns.Peel’s decision to repeal the Corn Laws in 1846 was partly driven by the Irish Potato Famine (1845–1852), which made high food prices politically unsustainable. His credibility and administrative competence helped him push through reform despite intense intra-party resistance. The episode shows how crises can shift political equilibria and allow major policy changes that would otherwise be blocked by vested interests. Lower grain prices increased real wages and reduced industrial costs. Britain moved firmly toward unilateral free trade. The repeal strengthened Britain’s position as the “workshop of the world” during the Industrial Revolution. Politically, it split the Conservative Party for decades, demonstrating how trade policy can realign political coalitions. Ricardo’s argument shows that even if a country is more efficient in all goods, it can still gain by specialising in the good where its relative efficiency is highest. This avoids misallocation of labour into sectors where it has higher opportunity costs. The theory is powerful because it demonstrates that trade benefits do not depend on absolute productivity or development level.Examples include: UK textiles vs Portuguese wine. US–China supply chain integration, where components and final assembly occur across borders. Madagascar vanilla exports despite its limited industrial base. These cases show that modern trade encompasses not only final goods but also intermediate inputs within global production networks.Modern economies exhibit significant intra-industry trade driven by economies of scale and product differentiation. Services trade has grown rapidly, accounting for a substantial share of global trade. Regulatory convergence, such as in the EU single market, reduces non-tariff barriers and deepens economic integration. However, nationalism and geopolitical tensions challenge this system, as seen in US withdrawal from the TPP. Lower prices for consumers. Increased efficiency and innovation. Access to global markets and supply chains. Supports export-oriented growth strategies. Infant industry support. Preserving strategic or culturally important sectors. Managing distributional impacts of globalisation. Responding to geopolitical pressures. Exam answers should include the idea of “second-best” protection: if domestic market failures exist (e.g., credit constraints for new industries), tariffs may be politically attractive even if not theoretically optimal.Trade produces aggregate gains but unequal distribution. Historically, colonial structures ensured that trade benefits flowed disproportionately to imperial powers. Many developing countries remain locked into low-value commodity exports, while advanced economies capture value through technology and services. This pattern fuels North–South tensions in trade governance.China’s transition from Mao-era protectionism to export-led growth illustrates how state policy can reshape comparative advantage. Infrastructure projects under the Belt and Road Initiative further integrate developing nations into Chinese trade networks.Peel’s repeal of the Corn Laws symbolises the convergence of economic logic and political leadership. Free trade offers efficiency gains but generates distributional conflicts that shape political outcomes. Contemporary debates mirror nineteenth-century tensions: balancing national interests with global integration, managing losers from trade, and addressing structural inequalities.Adam Smith (1776) An Inquiry into the Nature and Causes of the Wealth of Nations. Krugman, P. (1996) Ricardo’s Difficult Idea. Ricardo, D. (1817) On the Principles of Political Economy and Taxation. Samuelson, P. (1970) International Trade and the Equalisation of Factor Prices. United States Census Bureau (2021) Trade Deficit Statistics. ]]>econ1051_econpol_andeconpoliticians/econ1051_notes/lecture-8-robert-peel,-the-free-trade-architect.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_notes/Lecture 8 - Robert Peel, The Free Trade Architect.mdThu, 27 Nov 2025 12:36:04 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-8/lec-8-20.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 8/lec 8-20.pngThu, 27 Nov 2025 12:15:21 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-8/lec-8-14.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 8/lec 8-14.pngThu, 27 Nov 2025 12:15:20 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-8/lec-8-15.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 8/lec 8-15.pngThu, 27 Nov 2025 12:15:20 GMT<figure><img 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src="econ1013_economicintegrationi/econ1013_images/econ1013_l12_monpola/slide2.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l12_monpola/slide1.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L12_MonPola/Slide1.pngWed, 26 Nov 2025 11:20:33 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l12_monpola/slide1.png"></figure>Lecture 4 - The trade and specialisation effects of the EU Customs UnionThe GDP measures output of all goods and services in the eonomy Economic growth involves an increase in In Europe growth in GDP/per capita was c.2% per annum over the last century The source of the growth was derived from improvements in technology. Aided by the Solow model
Recall in Lecture 7 - The Economics of a Common Market for Labour how increased amount of labour with fixed capital () lead to diminishing marginal productivity of labourHence, immigration lead to lower and lower Similarly if labour force is fixed, adding more increases output at a declining rate (diminishing returns to ) depreciates and has to replaced by investment The bigger the stock, the more depreciation, in direct proportionSome key equations Symbols: - Capital per worker Standard Solow notation: total capital K divided by labour L, i.e. - Savings rate per worker Equal to investment in a closed economy. in the standard Solow model, where s is the saving rate. - Investment per worker New capital created through saving. - Depreciation rate Amount of capital that wears out each period. captures how much of the capital stock depreciates. - Depreciation Rate/Productivity Coefficient If the model uses “” to represent depreciation, then is the depreciation rate. If instead is called a “productivity coefficient”, it scales how productive capital is. Given your notes, it likely denotes the fraction of capital lost to depreciation. - Change in capital stock per worker Represents net investment or capital accumulation: As the stock of increases:   A larger portion of savings is used to replace depreciated capital.   Therefore, less savings remain available to expand the total capital stock.   Eventually, all savings are used for replacement, meaning there is no further increase in — this is the steady state. A rising standard of living ultimately requires improvements in  technology and know-how, not merely an increase in capital investment.
(c.f. Lecture 7-8 - The Era of Sustained Economic Growth and Lecture 9-10 - Human capital and Growth empirics)
The model assumes a fixed labour force and focuses on how output changes with capital accumulation. The output curve (Y) rises with capital, but at a diminishing rate, reflecting diminishing marginal returns to capital. The savings curve represents a constant proportion of output: where () is the savings rate. As capital stock increases, total output rises, but each additional unit of capital produces less additional output.
Introduces depreciation , shown as a linear line since a fixed proportion of capital wears out each period. The savings curve maintains a diminishing slope because it depends on output, which increases at a decreasing rate. The steady state (SS1) occurs where savings (investment) equals depreciation. At this point: There is no net increase in capital.
Before reaching the steady state, savings exceed depreciation, leading to net investment and capital accumulation. The shaded area below the savings curve and above the depreciation line represents the addition to productive capacity. The portion along the depreciation line represents replacement of worn-out capital. As () rises, the gap between savings and depreciation narrows, slowing accumulation.
The economy converges to a steady state at where: and capital accumulation ceases. At , output (Y), savings, and depreciation remain constant at their steady-state levels . Further growth in living standards must come from technological progress, not from capital accumulation alone.
Two arguments Integration increases trade one-off gain Baldwin argues for further effect The increase in output (), increases incomes and therefore savings () assuming at a fixed percentage Increases investment Raises SS level of GDP Over periods of years the economy will adjust So impact is greater than comparative static analysis suggests The diagram illustrates how economic integration can temporarily raise growth through an increase in productivity and savings.
The economy begins at steady state SS₁, where:and the steady-state capital stock is:At this point, output and income are constant at:Integration (e.g. trade liberalisation or capital mobility) shifts the production function upward due to higher productivity. This creates an output effect at the same level of capital, increasing output from to . Higher productivity raises income and therefore increases total savings.The rise in income increases savings from to , shifting the savings curve upward. At the same time, the depreciation line remains unchanged since the depreciation rate is constant.With savings now exceeding depreciation at , capital accumulation resumes. Investment continues until a new equilibrium is reached at SS₂, where:resulting in a higher steady-state level of capital and output The medium-term growth bonus (MTGB) arises because: Integration initially boosts productivity and output at the existing capital stock. The resulting increase in savings drives further capital accumulation. The economy converges to a new, higher steady state with greater income and output levels. This effect is transitory; long-run growth still depends on technological progress, not capital accumulation alone.]]>econ1013_economicintegrationi/econ1013_notes/lecture-8-integration-and-growth.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 8 - Integration and Growth.mdTue, 25 Nov 2025 16:34:08 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l8_eugrowth/slide6.png"></figure>econ1019_growthdevlongrunhist/econ1019_tutorials/econ1019_tutorial2.htmlECON1019_GrowthDevLongRunHist/ECON1019_tutorials/ECON1019_TUTORIAL2.pdfTue, 25 Nov 2025 12:06:18 GMT]]>econ1013_economicintegrationi/econ1013_images/econ1013_l11_emu/slide15.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L11_EMU/Slide15.pngTue, 25 Nov 2025 11:00:31 GMT<figure><img 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differentiation pubs, barbers, corner shops Taste or branding differentiation magazines, chocolates, designer clothes In these markets, consumers view each product as distinct, meaning firms face downward-sloping demand curves.Consumers may not know all prices instantly or may incur costs when switching. This allows firms to raise price slightly without losing all demand.Monopolistic competition has two distinct time horizons: Short run (SR): Firms behave like local monopolists Long run (LR): Free entry erodes profits, shifting demand faced by each firm inward until profits fall to zero In the SR, existing firms act like monopolists. They choose output such that: Then they use the demand curve to determine price.
Downward-sloping demand curve lies below Profit-maximising quantity satisfies Price obtained from demand curve at Positive economic profits (green rectangle) if at Intuition: Product differentiation gives each firm a local monopoly over its variety. With fixed number of competitors in SR, firms exploit market power.Because entry is free, positive economic profits attract new firms. Each entrant produces a slightly differentiated but close substitute variety, reducing demand for existing firms.This shifts the demand curve leftwards (and makes it more elastic).
Entry continues until: at the point where the firm chooses . Zero economic profit Demand curve becomes tangent to AC Firm continues to set Price remains above Firms do not produce at minimum AC
Free entry ensures:This is analogous to perfect competition.Despite zero profit, the firm still has market power: Thus: Price exceeds marginal cost Output is below the socially efficient level Allocative inefficiency persists Firms operate on the downward-sloping section of AC, rather than at the minimum point.Interpretation: Firms could lower AC by producing more (moving toward minimum AC) However, the demand curve they face (due to differentiation) is not large enough to support that output with zero profit This is called the excess capacity problem.Although producing at minimum AC might be efficient cost-wise, variety is itself valuable to consumers. Reducing the number of firms could reduce costs but also reduce product diversity.Hence: Market may have too many firms (excess entry) Or too few (insufficient variety) No guarantee that LR equilibrium is socially optimal Monopolistic competition lies between perfect competition and monopoly:Key welfare implications: Price exceeds → allocative inefficiency Output below minimum efficient scale → production inefficiency Product variety increases consumer welfare (benefit not captured in basic AC-minimisation logic) The equilibrium variety of products may not be optimal from society's perspective.
Monopolistic competition mixes monopoly pricing with competitive entry. SR: firms behave like monopolists and earn positive economic profits. LR: entry drives profits to zero and demand becomes tangent to AC. However firms still produce where and not at minimum AC. The market outcome may not maximise welfare due to inefficiency and ambiguous effects on product variety. You should now be able to: Explain why firms have market power under product differentiation Derive SR and LR equilibria under monopolistic competition Analyse the impact of entry on demand and profits Understand the excess capacity problem Discuss welfare implications and the role of product variety ]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-21-monopolistic-competition.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 21 - Monopolistic Competition.mdWed, 19 Nov 2025 17:03:16 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-21-monopolistic-competition/slide8.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 21 Monopolistic Competition/Slide8.pngWed, 19 Nov 2025 17:01:01 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-21-monopolistic-competition/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 21 Monopolistic Competition/Slide7.pngWed, 19 Nov 2025 17:01:01 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A nominal ER is the price of one currency in terms of another. For example how many GBP can I get in USD. Forex markets determine the nominal ER value, based off supply and demand. ER have important after-effects on trade and investment. A high exchange rate makes exporting more difficult. Influenced by many factors: relative prices, inflation expectations, budget deficits, capital flows, sovereign wealth fund behaviour, and MNC investment decisions.
Such that: = nominal exchange rate (number of foreign currency per unit of domestic currency) = domestic price level = foreign price level Example: RER of £/$ If NER £/$ = 1.5, CPI UK = 0.7, CPI US = 1.2: So the real exchange rate gives you the exchange ratio of real goods because: Cheeseburger example: Price of cheeseburger is £1 in UK, $3 in US.
The real exchange rate affects the welfare of consumers and importers. If the real ER of the pound against the euro falls, UK tourists are worse off because their £ buys fewer EU goods and services. Long run expectation: the real ER should follow the law of one price (LOOP). Krugman et al. (2023): In competitive markets without transport costs or trade barriers, identical goods must sell for the same price once expressed in a common currency. Markets arbitrage away price differences. Nominal ER adjusts to offset the price ratio such that real ER tends to move toward 1. Cheeseburger interpretation: UK price = £1 US price = $3 = £2 Real ER = 0.5 < 1 → burgers are relatively expensive in the US. Under free trade, UK exports would push US prices down until real ER = 1.
A country with a high real ER will struggle to export goods because they become relatively expensive for foreign buyers.Two ways to restore competitiveness: Deflation Reduce domestic prices by lowering demand (e.g. monetary tightening). Often causes higher unemployment and slower growth. Devaluation A fall in the nominal ER boosts export demand. Works in the short run but can be unstable or politically costly. Eurozone constraint: Countries that share a currency cannot devalue.
Nominal ER incorporate many economic fundamentals. In the short run, ER often overshoot → excessive volatility → uncertainty for firms, consumers, and investors. Governments may therefore attempt to stabilise ER. Historical examples: Bretton Woods: fixed ER system post-WW2, ±1% bands against USD. Plaza and Louvre Accords (1980s): coordinated attempts to stabilise USD. ECB interventions: pressure to prevent excessive euro appreciation during periods of crisis. Short-run success is possible, but medium-run stabilisation faces constraints: the Impossible Trinity.
The trilemma states that a country cannot simultaneously maintain: A stable nominal ER Free capital mobility An independent monetary policy Only two of the three can be achieved at any one time.Examples: Eurozone: stable ER + free capital flows → no national monetary independence. China (2000s): fixed ER + monetary autonomy → capital controls required. UK/US: free capital flows + independent monetary policy → floating ER.
1979: ERM created to stabilise European ERs within narrow bands. Germany acted as the nominal anchor due to strong anti-inflation credibility. 1990–92: German reunification boom → higher inflation → Bundesbank raised interest rates. Other ERM members faced a choice: Raise interest rates to match Germany (deepening recession), or Allow their currency to depreciate (breaking ERM rules). Speculative attacks followed: Markets anticipated governments would prioritise domestic recession over ER stability. UK forced out of ERM on Black Wednesday (1992). Eventually the system collapsed and bands were widened.
Elimination of transaction costs Reduces currency-conversion costs for trade and tourism. European Commission estimated gains of 0.25–0.5% of GDP. Greater price transparency Consumers can compare prices directly. Increases competition across the EU. Yet price dispersion in the euro area remains persistent (≈30%). Removal of ER uncertainty No nominal ER movements inside MU. Reduces risk premia demanded by lenders → lower real interest rates. Lower interest rates → higher investment Standard neoclassical channel: a lower real interest rate increases capital accumulation → higher output. Seigniorage and financial deepening An international currency benefits from seigniorage revenues. Euro area capital markets expand in depth and liquidity.
Main cost: loss of the exchange rate as an adjustment tool. Outside MU: countries can devalue to restore competitiveness. Inside MU: adjustment must come through lower domestic prices and wages. This causes long adjustment periods, high unemployment, and social costs. Academic debate: Critics: economic benefits are small; costs are large. Defenders: integration itself reduces divergence, making ER tools less necessary. Monetarist view: ER changes have only temporary effects. Highly open economies may not lose much by giving up ER flexibility.
Definition: An OCA is a group of countries/regions for which sharing a single currency yields net economic benefits. Labour mobility Workers should move easily across borders in response to shocks. The EU has legal mobility, but linguistic and cultural barriers reduce effectiveness. Capital mobility and financial integration Supports cross-border investment to smooth shocks. Eurozone performs strongly on this dimension. Price and wage flexibility Flexible labour markets help adjust without ER movements. Some EU economies have rigid wage-setting institutions. Diversification of production Economies less reliant on single industries are less vulnerable to asymmetric shocks. Fiscal transfer mechanisms A central budget can smooth regional shocks (e.g. US federal transfers). EU fiscal capacity remains limited. Political integration and shared preferences Monetary union requires shared policy objectives and tolerance for collective decisions. The Eurozone meets some but not all criteria. Weaknesses exposed during sovereign debt crises (2009–12). Nonetheless, political commitment sustains the project. Nominal ER reflects the price of one currency in another. Real ER adjusts for relative prices and determines competitiveness. LOOP drives real ER toward 1 in the long run. High real ER harms exports; deflation or devaluation can restore competitiveness. Currency unions eliminate ER volatility but remove an important adjustment mechanism. OCA theory outlines when a single currency is optimal. Eurozone exhibits partial compliance with OCA criteria. Krugman, P.R., Obstfeld, M. and Melitz, M.J. (2023) International Economics: Theory and Policy. Pearson.]]>econ1013_economicintegrationi/econ1013_notes/lecture-10-monetary-integration;-optimal-currency-areas.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 10 - Monetary Integration; Optimal Currency Areas.mdWed, 19 Nov 2025 11:29:39 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l10_monint/slide1.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l10_monint/slide16.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L10_MonInt/Slide16.pngWed, 19 Nov 2025 11:11:14 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l10_monint/slide16.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l10_monint/slide15.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L10_MonInt/Slide15.pngWed, 19 Nov 2025 11:11:14 GMT<figure><img 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src="econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0003.jpg"></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0004.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0004.jpgTue, 18 Nov 2025 13:06:38 GMT<figure><img src="econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0004.jpg"></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0005.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0005.jpgTue, 18 Nov 2025 13:06:38 GMT<figure><img src="econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0005.jpg"></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0006.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0006.jpgTue, 18 Nov 2025 13:06:38 GMT<figure><img src="econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0006.jpg"></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0007.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0007.jpgTue, 18 Nov 2025 13:06:38 GMT<figure><img src="econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0007.jpg"></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0008.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0008.jpgTue, 18 Nov 2025 13:06:38 GMT<figure><img src="econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0008.jpg"></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0009.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0009.jpgTue, 18 Nov 2025 13:06:38 GMT<figure><img src="econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0009.jpg"></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0010.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0010.jpgTue, 18 Nov 2025 13:06:38 GMT<figure><img src="econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0010.jpg"></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0011.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0011.jpgTue, 18 Nov 2025 13:06:38 GMT<figure><img src="econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0011.jpg"></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0012.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0012.jpgTue, 18 Nov 2025 13:06:38 GMT<figure><img src="econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0012.jpg"></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0013.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0013.jpgTue, 18 Nov 2025 13:06:38 GMT<figure><img src="econ1019_growthdevlongrunhist/econ1019_images/lecture13_geography_slides/lecture13_geography_slides_page-0013.jpg"></figure>A price ceiling set below equilibrium restricts the price to .Effects: Excess demand: consumers demand but firms supply only Rationing is required We assume efficient rationing, meaning highest willingness to pay consumers receive the good Quantity traded: , not the efficient
Let the areas on the diagram be labelled as in the slide.Deadweight loss: Key insight: Even with efficient rationing, total surplus falls because all trades between and are lost.
A price floor set above equilibrium price () causes: Excess supply: firms supply but consumers buy Government must buy or store the surplus to maintain the floor Government cost: Economic consequences: Producers benefit from the higher price Consumers lose surplus Deadweight loss created by producing output above the efficient level Fiscal cost may be large
Two kinds of taxes: Ad valorem: percentage of value Specific (unit): fixed amount per unit Statutory incidence (who pays legally) vs economic incidence (who actually bears the burden) differ.Economic incidence depends on elasticities, not the legal assignment.
A unit tax on firms increases marginal cost: Supply shifts vertically up by New equilibrium price: Consumers pay Firms receive Quantity falls Government revenue: Deadweight loss generated because The wedge between prices is fixed at .
A tax on consumers shifts demand down by : Consumers are now only willing to pay New equilibrium price is received by firms Total price paid by consumers is Crucial theoretical result:The final prices and and the welfare effects are identical whether the tax is levied on consumers or producers.Therefore: Statutory incidence irrelevant Economic incidence determined by relative elasticities
This slide shows the extreme case of perfectly elastic supply: Producers bear none of the burden Consumers bear the full tax Government revenue = area Deadweight loss = area is zero both before and after tax General rules: The more elastic side of the market escapes tax The more inelastic side bears more of the burden Elasticity determines burden sharing, not statutory assignment If the ceiling is binding: Quantity supplied: Quantity demanded: Price ceilings create excess demand and reduce welfare. Price floors create excess supply and impose fiscal costs. Specific and ad valorem taxes shift supply or demand and reduce quantity traded. Statutory incidence is irrelevant. Economic incidence depends solely on elasticities. Deadweight loss arises whenever quantity falls below the competitive level. ]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-19-perfect-competition,-price-controls-and-tax-incidence.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 19 - Perfect Competition, Price Controls and Tax Incidence.mdFri, 14 Nov 2025 19:30:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide21.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide21.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide20.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide20.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide19.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide19.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide18.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide18.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide17.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide17.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide16.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide16.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide15.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide15.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide14.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide14.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide13.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide13.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide12.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide12.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide11.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide11.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide10.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide10.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide9.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide9.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide8.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide8.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img 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src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide4.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide4.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide3.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide3.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-19-perfect-competition-price-controls-and-tax-incidence/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 19 Perfect Competition - Price Controls and Tax Incidence/Slide2.pngFri, 14 Nov 2025 15:24:51 GMT<figure><img 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17_18_Supply_Perfect_Competition/Slide19.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide18.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide18.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide17.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide17.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide16.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide16.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide15.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide15.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide14.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide14.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide13.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide13.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide12.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide12.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide11.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide11.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide10.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide10.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide9.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide9.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide8.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide8.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide7.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide6.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide6.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide5.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide5.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide4.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide4.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide3.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide3.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide2.pngThu, 13 Nov 2025 14:24:33 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-17_18_supply_perfect_competition/slide1.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 17_18_Supply_Perfect_Competition/Slide1.pngThu, 13 Nov 2025 14:24:32 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/pasted-image-20251113141607.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Pasted image 20251113141607.pngThu, 13 Nov 2025 14:16:07 GMT<figure><img src="."></figure>Jeffrey M. Perloff - Microeconomics_ Theory and Applications with Calculus (2017, Pearson) - libgen.li.pdfThe lecture will look at two different types of costs Measurements of costs Short run costs Short run cost curves Production functions Optimal input choice Factor price changes LR cost curves and functions Economies of scale Economic costs can be very different from accounting costsEconomists use economic costs, or opportunity costs, to evaluate the cost of resources: The value of the next best alternative use of a resourceIncluding explicit and implicit costs Explicit: cost of employing Labour, capital, energy and materials > opp. cost is simply the market price Implicit: reflect foregone opportunities: e.g, what could an entrepreneur have earned in a job instead? Taking into account implicit costs is essential for decision making but rarely shows up in accounting costs.Capital () is a durable good which provides a service over a long period. The opportunity cost is easy to measure for capital when rented Opportunity cost is simply the rental price (similar to wage payments for labour) Even if the capital is purchased, the opportunity cost of using capital is the amount a firm could earn by renting it out to someone else, so can still use market rental rate to measure cost of capital.
In the short run, only some inputs can be varied, we assume capital () is fixed (cf. Lecture 15 - Production Functions > Assumptions) Variable costs (VC) are costs that vary with the level of output. Cost of variable inputs such as material and labour (Labour costs are not always fully variable, but assume for simplicity they are.) Total costs (or simply costs, C) are the sum of variable cost and fixed cost: Marginal costs (MC) are the change in total costs if the firm produces an additional unit of output: Can also compute three average cost measures: Average fixed costs (AFC):$$ AFC = \frac{F}{q} Average variable costs (AVC): Can increase or decrease with output. Average total costs (AC) (or simply average costs):
In this diagram: The AFC curve declines as fixed costs are spread over more output. AVC initially falls due to increasing returns, then rises as diminishing returns set in. AC is the vertical sum of AFC and AVC. The MC curve intersects AVC and AC at their minimum points, illustrating the equilibrium relationship between marginal and average measures.
The production function determines the shape of the cost curves. As marginal product of labour increases, MC declines; when marginal product falls, MC rises. This inverse relationship explains the U-shape of the MC and AC curves. Higher productivity shifts both cost curves downwards, reducing unit costs. Economic interpretation: Diminishing marginal returns cause MC to rise at higher output. When inputs are used efficiently, the firm operates at the lowest point of the AC curve, achieving productive efficiency.
In the short run, capital is fixed, constraining input adjustment. In the long run, all inputs (K, L) are variable, allowing the firm to minimise costs at each output level. The long-run average cost (LRAC) curve is tangent to each short-run average cost (SRAC) curve. Thus, LRAC lies below or equal to SRAC, as firms can always replicate short-run choices in the long run. Economic interpretation: Each SRAC represents a different fixed capital stock. The LRAC traces the envelope of these SRACs, identifying the minimum achievable cost at each output. The falling section of LRAC indicates economies of scale; the rising section shows diseconomies of scale. Short-run costs vary with fixed capital; long-run costs assume full input flexibility. MC intersects AC and AVC at their lowest points. LRAC forms an envelope of SRACs, demonstrating scale efficiencies and input flexibility. The short-run production function determines the shape of the short-run cost curve: Assume the amount of capital is fixde in the SR Assume price of labour is fixed, and is equal to , s.t. Recall that the average product of labour is: So: Similarly, we see that:Recall that the marginal product of labour is:Thus: This shows that marginal cost depends inversely on the marginal product of labour.   As labour becomes more productive (higher ), fewer labour hours are required per unit of output, reducing marginal cost.   Conversely, when diminishing returns to labour set in (lower ), marginal cost rises.(cf. Perloff, ch. 7.4) There are only two inputs, Capital () and labour () To produce a given quantity of output at minimum cost, firms use information about their production functions and the price of production factors Short run: can only vary the amount of labour used Long run: can vary both capital and labour inputs Long-run costs will never be higher than short-run costs! LR cost minimisation: what mix of K and L produces a given amount of output at minimal cost? In the long run, firms can vary both labour () and capital () to minimise the cost of producing a given level of output. The goal is cost minimisation: determining the optimal mix of inputs for a target output level (). An isoquant represents all possible combinations of and that yield the same output level. A higher isoquant corresponds to a higher output. An isocost line shows all combinations of and that incur the same total cost: where is the wage rate (price of labour) and is the rental rate of capital. Rearranging for : The slope of the isocost line is , representing the rate at which the firm can substitute labour for capital while keeping total cost constant. At equilibrium, the firm produces at the tangency point between the isoquant and the lowest possible isocost line. This point represents the least-cost input combination for producing . At tangency: That is, Economic interpretation: The firm adjusts input use until the ratio of marginal products equals the ratio of input prices. If , the firm should hire more labour and reduce capital, as labour yields more output per pound spent. Cost minimisation occurs when marginal productivity per pound is equalised across inputs.
In the diagram: Point A shows the optimal input mix where the isoquant for is tangent to the lowest isocost line. Point B lies on a lower isocost line but below the required output isoquant, so it is infeasible. Point C achieves but at a higher total cost. Hence, A represents the efficient input combination. At the optimum: This condition ensures no further cost savings can be achieved by reallocating resources between capital and labour. Any deviation from this equilibrium raises total cost for the same level of output.
When factor prices change, the slope of the isocost line changes: If wages fall (), the isocost line becomes flatter, reflecting cheaper labour. The firm substitutes labour for capital, moving along the isoquant to a new tangency point with higher and lower . This is the substitution effect of input price changes. The isoquant shape (convex to the origin) ensures diminishing marginal rate of technical substitution (MRTS), limiting full substitution.
By tracing the tangency points between isoquants and isocosts across multiple output levels, we derive the expansion path. The expansion path shows how optimal and combinations change as output increases. From the expansion path, we can derive the long-run cost curve, which relates minimum cost to output level. Economic meaning: The long-run cost curve reflects the lowest attainable cost at each output level when all inputs are variable. Its shape depends on returns to scale in production. Firms minimise costs where MRTS equals the input price ratio (). Factor price changes alter the slope of the isocost line and hence the optimal input mix. The expansion path connects all equilibrium input combinations. From this, we obtain the long-run cost curve, representing cost minimisation at each output level. Economic intuition: Efficient production requires that each pound spent on inputs contributes equally to output. Any imbalance implies misallocation and a higher cost for the same output. Long-run adjustments in both capital and labour allow firms to achieve true cost efficiency. Cost function: Tangency condition: Expansion path: locus of tangency points between isoquants and isocosts. Long-run cost function: giving minimum cost for any given input prices.
This composite diagram illustrates how changes in factor prices and output levels define the cost-minimising path. It integrates the logic of isoquant–isocost equilibrium with long-run cost minimisation.(cf. Perloff, ch. 7.4) When firms minimise costs for multiple output levels, the set of all tangency points between isoquants and isocosts forms the expansion path. Mapping the total cost at each of these output levels produces the long-run total cost curve (LRTC).
Economic interpretation: The expansion path shows how the optimal combination of capital () and labour () changes as output () increases. The long-run cost curve derived from it represents the minimum possible cost for each level of output when all inputs are variable. The curvature of the cost curve reflects how input proportions and returns to scale interact. When the price of one input changes, firms substitute away from the now relatively more expensive factor toward the cheaper one. For example, if wages fall (): The isocost line becomes flatter (since its slope is ). The optimal input combination shifts toward higher labour use and less capital.
Analytical points: Substitution along an isoquant shows the marginal rate of technical substitution (MRTS) decreasing as one input replaces another. Because isoquants are convex, the firm cannot substitute inputs indefinitely—diminishing MRTS ensures balance between inputs. The new equilibrium remains where By tracking how optimal combinations of and vary with output, the firm obtains its long-run cost function:
Interpretation: Each point on the LRTC corresponds to a tangency on an isoquant–isocost map. The shape of the LRTC depends on returns to scale in production. When production exhibits constant returns to scale, costs increase proportionally with output. A firm experiences economies of scale when average cost (AC) decreases as output rises. This occurs if doubling inputs leads to more than double output, implying increasing returns to scale (IRS). Conversely, diseconomies of scale arise when doubling inputs increases output by less than double, producing decreasing returns to scale (DRS).
Mathematically: Economic logic: IRS often result from specialisation, indivisible inputs, and managerial efficiencies. DRS emerge from coordination problems, bureaucratic inefficiency, or input constraints at large scale.
Two main shapes appear empirically: U-shaped LRAC: Initially, average costs fall with increasing output (economies of scale). Beyond a threshold, costs rise as inefficiencies emerge (diseconomies of scale). L-shaped LRAC: Costs decline rapidly at low output and then stabilise (constant returns to scale). This pattern is typical in modern industries with flexible technology and large fixed investments. In the short run, capital is fixed; in the long run, it is adjustable. Therefore, long-run costs can never exceed short-run costs.
Each short-run average cost (SRAC) curve corresponds to a specific capital stock. The long-run average cost (LRAC) curve is the envelope of all SRACs. The firm selects the SRAC that touches the LRAC at each output level. Mathematically, LRAC = min { SRAC₁, SRAC₂, … SRACₙ } for each .
Interpretation: At small scale, the firm may be constrained by under-utilised capital, leading to higher short-run costs. As capital adjusts, the LRAC reflects the lowest possible cost at each output level. The gap between SRAC and LRAC reflects short-run inflexibility. Firms operate along their LRAC in the long run, selecting the most efficient plant size for their expected output. A move down the LRAC reflects scale efficiency; moving up implies over-expansion. Technological change can shift the LRAC downwards, improving efficiency across all output levels.
Key insights: The minimum point of LRAC defines the minimum efficient scale (MES) — the lowest output level at which long-run average costs are minimised. Beyond MES, further expansion brings little or no cost advantage. The LRAC captures how technological and scale factors determine cost competitiveness over time. Long-run cost analysis allows all inputs to vary, yielding the true cost-minimising input combination for any output. Economies and diseconomies of scale shape the curvature of the LRAC. The LRAC forms the envelope of SRAC curves, each representing a short-run capital configuration. The minimum efficient scale marks the threshold of full productive efficiency. ]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-16-costs.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 16 - Costs.mdThu, 13 Nov 2025 14:03:32 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-0.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-0.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-1.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-1.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-2.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-2.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-3.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-3.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-4.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-4.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-5.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-5.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-6.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-6.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-7.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-7.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-8.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-8.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-9.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-9.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-10.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-10.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-11.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-11.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-12.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-12.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-13.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-13.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-14.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-14.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-15.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-15.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-16.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-16.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-17.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-17.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-18.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-18.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-19.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-19.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6-images-20.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6-images-20.jpgThu, 13 Nov 2025 12:29:14 GMT<figure><img src="."></figure>econ1051_econpol_andeconpoliticians/econ1051_notes/lecture-6-thatcherism-and-its-impact-on-the-british-society.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_notes/Lecture 6 - Thatcherism and its impact on the British Society.mdThu, 13 Nov 2025 12:22:24 GMTecon1019_growthdevlongrunhist/econ1019_notes/lecture-12-culture.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 12 - Culture.mdTue, 11 Nov 2025 16:49:13 GMTThe baseline model assumes output: Taking logs and steady-state values yields the standard empirical specification: MRW estimate this equation using cross-country data (1960–1985). For non-OECD countries, results are statistically weak. Coefficients on savings and population growth often deviate from theoretical restrictions (). Implied capital shares too high; residual unexplained growth suggests omitted factors. Hence, the pure Solow model underpredicts income variation and fails to capture differences in productivity stemming from education and skills.
To better match real-world production where knowledge drives output, MRW include human capital (): Human capital investment () enters analogously to physical investment (): The empirical equation becomes: proxied by secondary school enrolment rates. Estimated , , implying a realistic capital-labour income division. improves substantially (≈ 0.80). The augmented specification rescues the Solow model: once human capital is included, predicted and actual income levels align far more closely.
Scatterplots of predicted versus actual output per worker show: Tight fit for OECD countries. Large deviations for poorer nations where human-capital measurement is unreliable. Indicates conditional rather than absolute convergence: economies with similar structural parameters (savings, education, demography) converge, but globally the pattern is uneven.
The Solow model predicts that poorer economies should grow faster until they reach steady-state income: Baumol (1986) found apparent convergence among 16 rich countries (β ≈ −1). De Long (1988) showed this was a sample-selection bias: poorer nations excluded. MRW re-tested using 98 countries, 1960–1985: Non-OECD: no convergence (). OECD: moderate convergence ( p.a.). Convergence is conditional: holding , , and constant, poorer economies grow faster. Unconditional convergence is absent — structural heterogeneity prevents global equalisation.
Speed of adjustment given by: Assuming , : Half-life of income gap ≈ 35 years. OECD economies exhibit convergence consistent with this prediction. For developing economies, persistent differences in , institutions, and TFP prevent catch-up.
Post-1960s East Asia achieved exceptionally high GDP-per-capita growth (4–7 % p.a.). Was this “miracle” due to technological innovation or capital accumulation?Start from: Differentiate: Rearrange to isolate TFP: The graph decomposes total growth into contributions from: Capital deepening () Labour expansion () TFP () Young (1995) found: TFP growth modest (1–2 %, near 0 for Singapore). Rapid input accumulation — labour participation, education, and investment — explains most output growth. Hence East Asia’s growth is largely transitional, consistent with Solow: “Perspiration, not innovation.”
Incorporating human capital reconciles neoclassical predictions with observed data. Conditional convergence suggests that policy must raise effective savings and education rates rather than expecting automatic catch-up. East Asia’s trajectory supports Solow’s transitional dynamics: rapid accumulation yields temporary high growth until diminishing returns set in. In the long run, technological progress () remains the driver of sustained per-capita income growth. References Mankiw, N.G., Romer, D., & Weil, D. (1992). A Contribution to the Empirics of Economic Growth. QJE. Young, A. (1995). The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience. QJE. ]]>econ1019_growthdevlongrunhist/econ1019_notes/lecture-9-10-human-capital-and-growth-empirics.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 9-10 - Human capital and Growth empirics.mdTue, 11 Nov 2025 16:46:00 GMT<figure><img src="."></figure>econ1013_economicintegrationi/econ1013_notes/lecture-9-nafta.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 9 - NAFTA.mdTue, 11 Nov 2025 16:41:10 GMT]]>econ1019_growthdevlongrunhist/econ1019_images/pasted-image-20251111095141.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/Pasted image 20251111095141.pngTue, 11 Nov 2025 09:51:41 GMT<figure><img src="."></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/pasted-image-20251111092053.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/Pasted image 20251111092053.pngTue, 11 Nov 2025 09:20:53 GMT<figure><img src="."></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/pasted-image-20251111092013.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/Pasted image 20251111092013.pngTue, 11 Nov 2025 09:20:13 GMT<figure><img src="."></figure>econ1019_growthdevlongrunhist/econ1019_tutorials/econ1019_tutorial1.htmlECON1019_GrowthDevLongRunHist/ECON1019_tutorials/ECON1019_TUTORIAL1.pdfSat, 08 Nov 2025 15:50:06 GMTecon1001_introtomicroeconomics/econ1001_tutorials/tutorial3/econ1001_tutorial3.htmlECON1001_IntroToMicroEconomics/ECON1001_tutorials/TUTORIAL3/ECON1001_TUTORIAL3.pdfFri, 07 Nov 2025 17:57:29 GMT]]>econ1001_introtomicroeconomics/econ1001_tutorials/tutorial3/costs_chart.htmlECON1001_IntroToMicroEconomics/ECON1001_tutorials/TUTORIAL3/Costs_Chart.pngFri, 07 Nov 2025 17:37:41 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_tutorials/tutorial3/costs_chart.png"></figure> The diagram illustrates the relationship between labour input and output in the short run, where capital is fixed. It highlights the concepts of total, marginal, and average product of labour.The upper panel shows the total product of labour , defined by the production function: Initially, as labour increases, output rises at an increasing rate due to specialisation and better division of labour. This reflects increasing marginal returns. Beyond a certain point, output continues to rise but at a decreasing rate, illustrating diminishing marginal returns to labour. At point , the total product reaches its maximum, the point where . Beyond this, adding further labour reduces total output as workers become overcrowded relative to the fixed capital.The lower panel decomposes this total relationship into: Marginal product of labour () – the additional output from one more unit of labour, holding constant: Average product of labour () – the average output per unit of labour: At low levels of , , meaning that each additional worker increases average productivity, i.e. the region of increasing returns. When , the average product reaches its maximum (point ). Beyond this, , so each additional worker lowers average output, marking the onset of diminishing returns. As continues to increase, both and eventually fall. The intersection where corresponds to the maximum of the total product in the upper panel (point ). This pattern captures the law of diminishing marginal returns, a fundamental short-run production principle. Early rises in occur due to specialisation and learning effects. Declines in and reflect overcrowding and fixed capital constraints. The short-run constraint, fixed , means labour cannot indefinitely increase output. Overall, the figure provides a visual derivation of the short-run production relationships: and show how changes in influence the rate of output and productivity across different ranges of production, mutatis mutandis. In the long run, all inputs can be varied. The production function describes how much output can be produced from various combinations of inputs. If there are just two inputs, capital () and labour (), An isoquant shows the combinations of inputs that will produce a specific level of output.
Isoquants have similar properties to indifference curves: The farther an isoquant is from the origin, the greater the level of output. Isoquants do not cross. Isoquants slope downward. Isoquants must be thin. These properties all follow from the assumption of efficient production underlying production functions. One important difference from indifference curves: Isoquants have cardinal properties, not just ordinal ones. The shape of isoquants (curvature) indicates how easily a firm can substitute between inputs (viz. elasticity of substitution). Perfect Substitutes (a) Fixed-proportions (b) Convex (c) In general, isoquants appear as a between, usually convex, ceteris paribus.
The slope of an isoquant shows the ability of a firm to replace one input with another, holding output constant (s.t. ).The marginal rate of technical substitution () is the slope of an isoquant at a single point: As we move down and to the right along an isoquant: Increase , output rises by Decrease , output falls by Since output is constant, Therefore, the marginal rate of technical substitution (MRTS) is:Previously, we examined how output changes when varying one input at a time. We now analyse how output responds when all inputs increase proportionally; this is the concept of returns to scale.Returns to scale help firms: Determine their optimal long-run size. Assess production efficiency when scaling operations. Let the production function be: If inputs are doubled, i.e. and , the question becomes: How does compare with (cf. proportionality)?A production function exhibits constant returns to scale when output increases in the same proportion as all inputs:ExaMP_Le: for a linear production function : Doubling inputs: , Then Hence, when inputs double, output doubles, indicating constant returns to scale (i.e. proportional).A production function exhibits increasing returns to scale when a given percentage increase in inputs leads to a more than proportionate increase in output:Economic intuition: Often due to specialisation of labour and capital. A single large plant may be more efficient than two smaller plants. Occurs typically at low levels of output. A production function exhibits decreasing returns to scale when a percentage increase in all inputs results in a less than proportionate increase in output:Common causes: Managerial inefficiencies and difficulties in coordination. As firm size expands, organising and supervising production becomes more coMP_Lex (ex post diseconomies). Consider a Cobb-Douglas production function: Suppose inputs double: , . Then: If ⇔ Constant Returns to Scale (CRS) If ⇔ Decreasing Returns to Scale (DRS) If ⇔ Increasing Returns to Scale (IRS) In practice, many production functions exhibit different returns to scale across output levels (in situ).A common pattern: Increasing returns to scale at low output (small firms gain from specialisation). Constant returns to scale at medium output. Decreasing returns to scale at high output (coordination difficulties). This pattern is represented through the spacing of isoquants:
Figure 5 – Varying Returns to Scale: : Increasing returns to scale. : Constant returns to scale. : Decreasing returns to scale. Firms convert inputs into outputs. A production function describes the relationship between inputs and outputs when production is efficient. Short run: at least one factor (usually capital) is fixed, governed by the Law of Diminishing Marginal Returns, shaping curves for , , and . Long run: all inputs are variable; isoquants represent efficient combinations of and . The slope of an isoquant () shows input substitutability (w.r.t. factor ratios). Most isoquants display a diminishing marginal rate of technical substitution. Returns to scale measure how output responds to a proportionate increase in all inputs (mutatis mutandis). ]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-15-production-functions.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 15 - Production Functions.mdWed, 05 Nov 2025 20:45:26 GMT<figure><img src="."></figure>econ1019_growthdevlongrunhist/econ1019_notes/econ1019-tutorial-1-responses.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/ECON1019 Tutorial 1 Responses.mdMon, 03 Nov 2025 17:26:09 GMT]]>econ1019_growthdevlongrunhist/econ1019_images/9-10.-lecture-human-capital-growth-empirics/slide59.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/9-10. Lecture - Human Capital Growth Empirics/Slide59.pngSat, 01 Nov 2025 14:16:45 GMT<figure><img src="."></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/9-10.-lecture-human-capital-growth-empirics/slide58.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/9-10. 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src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide16.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide16.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide15.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide15.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide14.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide14.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide13.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide13.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide12.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide12.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide11.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide11.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide10.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide10.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide9.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide9.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide8.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide8.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide7.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide6.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide6.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide5.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide5.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide4.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide4.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide3.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide3.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide2.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-16-costs/slide1.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 16 Costs/Slide1.pngFri, 31 Oct 2025 14:24:19 GMT<figure><img src="."></figure>Following Erhard’s market liberalisation, prices were permitted to adjust freely to balance supply and demand. This process ensured that markets cleared without persistent shortages or surpluses. Under central planning and wartime price controls, prices were artificially fixed below equilibrium, creating distortions. By restoring price signals, Erhard allowed market forces to allocate resources efficiently according to consumer preferences and production costs. At equilibrium: In a competitive equilibrium, total welfare is maximised through the sum of consumer and producer surplus. Consumer surplus represents the difference between what consumers are willing to pay and what they actually pay. Producer surplus represents the difference between the market price and the minimum price producers are willing to accept. When combined: Price controls, such as those imposed during WWII, distorted these welfare gains. Artificially low prices increased demand while discouraging supply, reducing total surplus and creating inefficiency in allocation.Erhard’s decision to remove price controls was crucial to restoring competitive equilibrium. Without government-imposed ceilings, markets could reach their natural equilibrium point (, ), maximising social welfare and economic efficiency. This change reflected the Ordo-liberal belief that state intervention should provide order and competition, not price manipulation. The policy outcome demonstrated that even limited market interventions can distort welfare outcomes and resource allocation.Erhard’s reforms illustrated the practical success of balancing freedom with order. By combining market liberalisation with institutional safeguards, he enabled West Germany to achieve sustained growth and stability. His approach remains difficult to replicate because it relied on: Public trust in market mechanisms after years of state control Strong legal frameworks ensuring fair competition Cultural support for discipline and productivity The Wirtschaftswunder thus became an empirical case showing how competitive equilibrium under clear institutional rules can generate rapid recovery and long-term prosperity.At the equilibrium point: indicates the equilibrium price. represents the equilibrium quantity. The orange area shows consumer surplus. The blue area shows producer surplus. When prices are allowed to fluctuate freely around , welfare is maximised. Any government interference (e.g., price ceiling ) would lead to shortages, loss of producer surplus, and overall welfare reduction. Summary Insight: Erhard’s economic liberalisation showed that efficiency and fairness emerge not from price manipulation, but from letting markets clear through competition within a stable, rules-based system.Question: ]]>econ1051_econpol_andeconpoliticians/econ1051_notes/lecture-5-liberalism.-getting-the-economy-to-work.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_notes/Lecture 5 - Liberalism. Getting the Economy to Work.mdThu, 30 Oct 2025 16:00:44 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide27.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide27.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide26.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide26.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide25.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide25.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide24.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide24.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img 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src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide11.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide11.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide10.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide10.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide9.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide9.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide8.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide8.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide7.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide6.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide6.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide5.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide5.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide4.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide4.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide3.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide3.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide2.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-15-production/slide1.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 15 Production/Slide1.pngThu, 30 Oct 2025 15:02:58 GMT<figure><img src="."></figure> Subsequent replications reveal sensitivity of offers to experimental conditions: Real vs. hypothetical stakes. Social distance and anonymity between players. Whether the endowment was earned or randomly assigned. These variables shape social context and thus utility. Classical theory assumes individuals maximise personal utility, yet this experiment suggests that self-interest may include others’ welfare. Hence, redefine the utility function as: This introduces distributional (social) preferences; where individuals gain utility not only from their own income but also from the recipient’s payoff.
Subject maximises subject to To test rational altruism, Andreoni & Miller vary the budget set to observe consistency with utility maximisation. Setup: Dictator endowed with tokens, choosing how many to hold or pass. Tokens yield different payoffs for self and other. Formally: Budget constraint: Relative price of giving:
Example: 40 tokens, hold value = 3, pass value = 1 ⇒ Price of giving = 3 (foregone self-earnings per unit given). The experiment evaluates whether choices satisfy Generalised Axiom of Revealed Preference (GARP). If an individual chooses under Budget 1, and under Budget 2, then: If was affordable under Budget 1, but was chosen, ⇒ (revealed preferred). Choosing later implies the reverse preference. Such inconsistency violates utility maximisation.
Finding: Over 98% of participants made choices consistent with utility maximisation — evidence for rational altruism. Three utility forms broadly fit observed choices: Selfish ⇒ Maximises only own payoff. Leontief (Perfect Complements) ⇒ Values equality; prefers balanced outcomes. Perfect Substitutes ⇒ Treats own and others’ payoffs as perfectly interchangeable.
Classification: 76 subjects fitted one type exactly (strong fit). 100 more fitted closely (weak fit). Andreoni & Miller further explore how generosity changes with relative price of giving. Empirical relationship: As rises (giving becomes costlier), falls. Thus, giving behaviour obeys law of demand — generosity declines when its opportunity cost rises.
Individuals exhibit other-regarding preferences, often deviating from the self-interest postulate. Behaviour in the Dictator Game suggests that utility functions include both own and others’ payoffs. Rational altruism exists: most choices satisfy GARP even with non-selfish motives. As the relative price of giving increases, giving decreases, showing optimisation consistent with rational choice theory.
(cf. Lecture 4 - Preferences and indifference curves) → Social preferences extend standard consumer theory to include others’ welfare in the utility function.
(cf. Lecture 6 - Utility Functions) → Altruistic utility can be represented mathematically as a function over two agents’ payoffs rather than goods.
(cf. Lecture 7 - Budget Constraints and Consumer Choice) → The dictator’s choice resembles constrained optimisation under a modified budget line. Altruism can coexist with rationality. Distributional preferences are empirically measurable and predictable. Modern behavioural economics integrates social motives within standard microeconomic theory. ]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-14-altruism.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 14 - Altruism.mdThu, 30 Oct 2025 14:34:05 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide19.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide19.pngThu, 30 Oct 2025 14:27:31 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide18.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide18.pngThu, 30 Oct 2025 14:27:31 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide17.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide17.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide16.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide16.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide15.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide15.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide14.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide14.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide13.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide13.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide12.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide12.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide11.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide11.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide10.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide10.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide9.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide9.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide8.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide8.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide7.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide6.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide6.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-14-altruism/slide5.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 14 Altruism/Slide5.pngThu, 30 Oct 2025 14:27:30 GMT<figure><img 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GMTecon1001_introtomicroeconomics/econ1001_notes/lecture13.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture13.pdfThu, 30 Oct 2025 09:04:45 GMTLecture 3 Key eqn: Exogenous vs endogenousThe way we treat variables is an important consideration. Malthus argues that n, population growth is an endogenous variable.Determinants of population growth Fertility rate: how many children do mothers have Mortality rate: how quickly do people die n = Births - Deaths / n = Fertility - Mortality This leaves us with the result of population growth Demographic transition explains as to why population growth can vary, they should be classed as useful economic variablesMalthus' theory, claims that economics should effect the death rate Richer families can afford to raise more children Empirically they choose fewer House holds have higher child quality as they spend more on each child. (Quality-quantity trade off) Some may argue that death rates is a big driver of birth rates. Malthus would argue about a fixality of passion, lecturer says "people popping out babies"
"Technological progress drives population growth not economic growth" As population growth depends on income, we denote n(y) So our key eqn becomes: So we have shown that the constant in the long run, so g=0 Hence is the value that satisfies The Malthusian Trap Large population growth leads to economic stagnation, hence many economies introduced policies such as birth control, contraceptive, family planning etc. This was to ensure that growth was possible in the Era of Stagnation (Malthusian Trap)Nowadays, you are seeing the opposite. Ageing population in developing countries, not enough young people to support older pensioners. Many countries encouraging child births/Policy Implications QUESTION for ChatGPT: IF THE DEATH RATE FALLS, why does average SoL fall?, Despite death rates falling, more people having births which once again makes TFP fall, hence why Average SoL falls.Example: Irish potato famine, overpopulation with constrained factors, population causes diminishing living standards. Famine acts as a barrier where more people die off, hence some would argue that prosperity rises after. Three predictions Countries with a higher A should not be richer in equilibrium, only more populous Conclusions Malthusian theory provides ONE explanation of the stagnation of living standards Although technology did improve there was no sustained econ growth. The benefits in improved technology, was almost entirely consumed in a rise of population ]]>econ1019_growthdevlongrunhist/econ1019_notes/lecture-4.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 4.mdThu, 30 Oct 2025 01:02:53 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-13-labour-supply/slide30.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 13 Labour Supply/Slide30.pngThu, 30 Oct 2025 00:39:41 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-13-labour-supply/slide29.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 13 Labour Supply/Slide29.pngThu, 30 Oct 2025 00:39:41 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-13-labour-supply/slide28.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 13 Labour Supply/Slide28.pngThu, 30 Oct 2025 00:39:41 GMT<figure><img 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src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-13-labour-supply/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 13 Labour Supply/Slide7.pngThu, 30 Oct 2025 00:39:41 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-13-labour-supply/slide6.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 13 Labour Supply/Slide6.pngThu, 30 Oct 2025 00:39:41 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-13-labour-supply/slide5.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 13 Labour Supply/Slide5.pngThu, 30 Oct 2025 00:39:41 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-13-labour-supply/slide4.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 13 Labour Supply/Slide4.pngThu, 30 Oct 2025 00:39:41 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-13-labour-supply/slide3.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 13 Labour Supply/Slide3.pngThu, 30 Oct 2025 00:39:41 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-13-labour-supply/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 13 Labour Supply/Slide2.pngThu, 30 Oct 2025 00:39:41 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture-13-labour-supply/slide1.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture 13 Labour Supply/Slide1.pngThu, 30 Oct 2025 00:39:41 GMT<figure><img src="."></figure> 4) Perfectly competitive labour market - In a competitive markets, employers hire workers only if they generate extra output to cover their cost - - All other workers employed generate more value then their cost to employIn a model of two countries Suppose that: There is a fixed number of total workers in the two countries, at full employment Initially workers are in Poland and in Sweden Swedish and Polish workers are homogeneous Sweden has high levels of capital per worker, Poland has lower Capital/Labour ratios. Resultantly, MVP is higher in Sweden
The labour markets are initially separate: Polish workers cannot obtain working rights in Sweden. Therefore with a closed off system, Swedish workers are paid higher wages than Polish workers“ECON1013_EconomicIntegrationI/ECON1013_L7_ComMkt/Slide5.png” could not be found. Swedish Labour Force

As , Polish workers will migrate to Sweden as reflected in the diagram below. In the model we assume, that the migrants are classified as "Polish". Causing wages to clear at a new MVP value equilibrium. Causing a rise in Poland of and a fall in wages of Therefore, migration derived unemployment for Swedish workers is reflected at .
"Labour market output due to a CM will generate winners and losers in each case" If Poland are losing output, why should they even join a CM?
Welfare - "The sum between the capital welfare and the workers welfare". It is the net gain/loss, not hte overall output. As shown belowThe diagram shows the welfare effects of labour migration between Poland (P) and Sweden (S) when a common labour market is formed. Initially, Polish wages are lower than Swedish wages , creating an incentive for Polish workers to migrate. Migration continues until wages equalise at .In Poland, the outflow of labour reduces total output by areas a + b, representing a loss for Polish capital owners. However, remaining workers receive higher wages , gaining area a, while migrant workers earn higher wages abroad, gaining areas b + c. → Net Polish welfare gain: area c.In Sweden, the inflow of labour lowers wages , causing native workers to lose area e. Capital owners gain from employing more labour at lower wages, with total gains d + e. → Net Swedish welfare gain: area d.Overall, global welfare rises by the sum of areas c + d, the shaded green triangles, representing the efficiency gain from reallocating labour where it is more productive. Although some groups lose (e.g. Swedish workers, Polish capital owners), total welfare across both economies increases due to better use of resources.Consequences forming a CM: Migration of workers from Poland (Lower efficiency) to a Sweden (Higher efficient) Convergence of MVP of workers and wage Convergence of wage rates Higher output in total in the CM Income redistribution within countries in Sweden : from workers to owners in Poland   : from capital owners to workers across countries :  Workers : from Sweden to Poland Capital owners: from Poland to Sweden The model is simple and therefore acting as a starting point for examining effects in the CMEffects depend on the assumptions made, i.e. wage flexibility – is there a minimum wage? full employment – is there unemployment in Poland? capital fixed – remittances raise in Poland and reduce migration wage differentials arise from differences in the capital–labour ratio rather than differences in human capital – are Swedish workers paid more because they are more skilled? genuinely free movement – e.g. transferability of pension rights, etc. – do migration costs prevent full convergence? comparative static (one-off) – how is the growth rate affected? Treaty of Rome (1958) commits member states to form a CM This includes free movement of capital and labourFree movement is defined as Article 45 TFEU (Free Movement of Workers)
Freedom of movement for workers shall be secured within the Union. oai_citation:0‡EUR-Lex
Such freedom of movement shall entail the abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment. oai_citation:1‡EUR-Lex It shall entail the right, subject to limitations justified on grounds of public policy, public security or public health:
(a) to accept offers of employment actually made; oai_citation:2‡EUR-Lex
(b) to move freely within the territory of Member States for this purpose; oai_citation:3‡EUR-Lex
(c) to stay in a Member State for the purpose of employment in accordance with the provisions governing employment of nationals of that State laid down by law, regulation or administrative action; oai_citation:4‡EUR-Lex
(d) to remain in the territory of a Member State after having been employed in that State, under the conditions laid down by law, regulation or administrative action of that State. oai_citation:5‡EUR-Lex
The provisions of this Article shall not apply to employment in the public service. oai_citation:6‡EUR-Lex Directive 2004/38/EC (Free Movement and Residence of EU Citizens and their Family Members)
“Citizenship of the Union confers on every citizen of the Union a primary and individual right to move and reside freely within the territory of the Member States, subject to the limitations and conditions laid down in the Treaty and to the measures adopted to give it effect.” (Recital 1) oai_citation:7‡EUR-Lex Article 1 – Subject This Directive lays down:
(a) the conditions governing the exercise of the right of free movement and residence within the territory of the Member States by Union citizens and their family members; oai_citation:8‡EUR-Lex
(b) the right of permanent residence in the territory of the Member States for Union citizens and their family members; oai_citation:9‡EUR-Lex
(c) the limits placed on the rights set out in (a) and (b) on grounds of public policy, public security or public health. oai_citation:10‡EUR-Lex Migration from South to North was important in the 60s 70-90s Labour mobility among EU15 countries was low as a result of: Unemployment in the North Linguistic and cultural barriers 'The failure to establish an EC labour market (Pelkmans, 2001)' Since the 2004 englargement, considerable East-West migration (3mn) because of large wage disparities and specific skills shortages in the west ]]>econ1013_economicintegrationi/econ1013_notes/lecture-7-the-economics-of-a-common-market-for-labour.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 7 - The Economics of a Common Market for Labour.mdThu, 30 Oct 2025 00:38:12 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide3.png"></figure>econ1013_economicintegrationi/econ1013_notes/lecture8.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture8.pdfWed, 29 Oct 2025 16:50:35 GMT]]>econ1013_economicintegrationi/econ1013_images/econ1013_l8_eugrowth/slide17.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L8_EUgrowth/Slide17.pngWed, 29 Oct 2025 11:32:29 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l8_eugrowth/slide17.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l8_eugrowth/slide16.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L8_EUgrowth/Slide16.pngWed, 29 Oct 2025 11:32:29 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l8_eugrowth/slide16.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l8_eugrowth/slide15.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L8_EUgrowth/Slide15.pngWed, 29 Oct 2025 11:32:29 GMT<figure><img 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Conclusions of empirical studies of EEC effect Substantial effect within-EEC trade in manufactures Positive increase from 15-30% Trade creation >>> Trade diversion (for manufactured goods) as each country becomes more efficient Trade with RoW not adversely effected, except on agriculture (faster growth in EC, increased imports for lower cost unfinished goods from LIC) Badinger & Breuss 2004 study concluded that Increased by 1/4 of EU trade due to tarrif removal Main factor driving trade was increase in incomes, QUESTION: WHICH ONE CAME FIRST? Effect of EU entry on the UK Prebrexit, joined 1973 - CU 1977 Gasiorek, Smith and Venables (2002) study estimates CU effects by hypothetically reimposing tarrifs on UK trade with EU (computable general equillibrium model) 1985 tade with EU has increased, mostly by trade creation Trade diversion was small some external TC main gain derived from increased competition in markets and efficiency Adjustment Issues In the late 50s, concerns about CU formation might cause large job losses and widespread factory closures due to international competition Might not happen in the real world, EU have safeguard clause. Temporary Trade Barriers Why did it not happen? Golden Age of economic growth and long transition period, low unemployment Specialisation Trade barriers remained ]]>econ1013_economicintegrationi/econ1013_notes/lecture-4-the-trade-and-specialisation-effects-of-the-eu-customs-union.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 4 - The trade and specialisation effects of the EU Customs Union.mdWed, 29 Oct 2025 11:08:15 GMT<figure><img src="econ1013_economicintegrationi/did.jpg"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide20.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide20.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide20.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide19.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide19.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide19.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide18.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide18.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide18.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide17.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide17.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide17.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide16.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide16.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide16.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide15.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide15.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide15.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide14.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide14.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide14.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide13.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide13.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide13.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide12.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide12.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide12.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide11.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide11.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide11.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide10.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide10.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide10.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide9.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide9.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide9.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide8.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide8.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide8.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide7.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide7.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide7.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide6.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide6.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide6.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide5.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide5.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide5.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide4.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide4.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide4.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide3.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide3.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide3.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide2.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide2.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide2.png"></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide1.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L7_ComMkt/Slide1.pngTue, 28 Oct 2025 11:10:43 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l7_commkt/slide1.png"></figure> Implications: Consumers and producers are price takers Luxembourg is relatively small compared to the big boys, US, China, India. This means that they have to sell at the price due to competition. The domestic consumers in Luxembourg are small quantity, hence they have no bargaining power in the market Therefore is completely elastic, i.e perfectly horizontal
The assumptions of the model continued: Partial equilibrium; ignoring impact to other markets World of three countries Home country is small Future partner is large - perfectly elastic supply ROW is also large, lower supply price than partner ]]>econ1013_economicintegrationi/econ1013_notes/lecture-3-are-customs-unions-good-or-bad-for-the-economy.htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 3 - Are customs unions good or bad for the economy.mdMon, 27 Oct 2025 13:29:41 GMT<figure><img src="econ1013_economicintegrationi/econ1013_images/econ1013_l3_cutheoryr/slide3.jpeg"></figure>econ1013_economicintegrationi/econ1013_tutorial/econ1013_tutorial-25-26.htmlECON1013_EconomicIntegrationI/ECON1013_tutorial/ECON1013_Tutorial 25-26.pdfMon, 27 Oct 2025 13:04:11 GMTecon1051_econpol_andeconpoliticians/econ1051_tutorials/20759904_econ1051_2526.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_tutorials/20759904_ECON1051_2526.pdfSun, 26 Oct 2025 16:53:10 GMTecon1051_econpol_andeconpoliticians/econ1051_tutorials/coursework-assessment-1-criteria.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_tutorials/Coursework Assessment 1 Criteria.pdfSun, 26 Oct 2025 14:52:50 GMTecon1001_introtomicroeconomics/econ1001_tutorials/tutorial2/scan-251025-154953.htmlECON1001_IntroToMicroEconomics/ECON1001_tutorials/TUTORIAL2/Scan-251025-154953.pdfSat, 25 Oct 2025 14:50:14 GMT]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide33.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide33.pngFri, 24 Oct 2025 13:08:07 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide33.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide32.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide32.pngFri, 24 Oct 2025 13:08:07 GMT<figure><img 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src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide14.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide13.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide13.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide13.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide12.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide12.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide12.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide11.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide11.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide11.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide10.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide10.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide10.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide9.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide9.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide9.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide8.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide8.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide8.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide7.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide7.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide7.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide6.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide6.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide6.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide5.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide5.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide5.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide4.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide4.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide4.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide3.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide3.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide3.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide2.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide2.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide2.png"></figure>]]>econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide1.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Lecture12_CompEquVariationCS/Slide1.pngFri, 24 Oct 2025 13:08:06 GMT<figure><img src="econ1001_introtomicroeconomics/econ1001_images/lecture12_compequvariationcs/slide1.png"></figure>econ1051_econpol_andeconpoliticians/econ1051_notes/lecture-4-the-great-depression-&-roosevelt's-new-deal.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_notes/Lecture 4 - The Great Depression & Roosevelt's New Deal.mdThu, 23 Oct 2025 11:28:10 GMTecon1051_econpol_andeconpoliticians/econ_1051_slides/lec-4.htmlECON1051_EconPol_AndEconPoliticians/ECON_1051_slides/lec 4.pdfThu, 23 Oct 2025 11:10:16 GMTecon1051_econpol_andeconpoliticians/econ_1051_slides/lec-1-(1).htmlECON1051_EconPol_AndEconPoliticians/ECON_1051_slides/lec 1 (1).pdfWed, 22 Oct 2025 18:55:21 GMThttps://www.wto.org/English/thewto_e/whatis_e/tif_e/fact2_e.htm (Accessed: 22 October 2025).During negotiations, WTO members will "bind" import tariffs. This is a commitment not to raise the rates of tariffs for each specific product. Raising a "fixed" tariff would result in other members inducing retaliatory policies.The general consensus is that the WTO is a success. Where trade growth has exceeded GDP (volume +6%/year since 1980s > World GDP growth=below 4%)Respected institution until recently see:
Wikipedia contributors (2025) Tariffs in the second Trump administration. Wikipedia, The Free Encyclopedia. Last modified 21 October 2025, 01:10 UTC. Available at: https://en.wikipedia.org/w/index.php?title=Tariffs_in_the_second_Trump_administration&oldid=1317953139 (Accessed: 22 October 2025).Due to the rules and dispute settlement system to resolve trade quarrles works quicker during tough times. But losers may substitute other measures for those that are found to break WTO rules cf. Hofmann & Kim 2012The WTO enabled protection in economic crisis such as 2008. Despite trade falling 12% in 2012. WTO renegotiations allow trade to recover to the pre-crisis level. The WTO lobbied for lower tarrifs across other countries.Some rules can be abused. For example, anti-dumping Some WTO trade rules can be abused. For example, anti-dumping rules are designed to stop exporters from selling goods abroad below their average cost () in order to drive out local competitors. However, countries can manipulate these rules to protect their own industries rather than ensure fair trade. This becomes a form of hidden protectionism, where a government imposes an anti-dumping tax on foreign goods that are simply cheaper, not unfairly priced. For instance, the UK once imposed extra duties on Chinese-made football merchandise, claiming it was being dumped — even though it may have just been genuinely low-cost production. The caveat here: importers can manipulate an exporters AC values to overvalue the average cost. In large markets it becomes harder to get an accurate, reliable value. Bilateral agreements Rapid increase in bilateral (direct) agreements undermines the WTO as countries are taking deals independent of the WTO. That can leave external countries behind. Massive trade imbalances The US-China, by influencing the value of your currency, such as the USD which is what is global reserve currency, influencing the money supply could have adverse impacts on central banks outside the US due to imbalances in the exchange rate. Slowdown in trade growth.Despite this being legal (with respect to WTO policies), forming FTAs and CUs independently under certain conditions Article 24 (GATT) stipulates: be formed speedily cover substantially all trade of the participants not raise trade barriers against non-members (any increases must be compensated) The potential danger is that Europe may only trade with each-other, NA may only trade each-other and so-forth. This could be a potential recipe for conflict as MNCs are working hard to oppose each-other. Reducing efficiency derived from competition in global markets. See Spaghetti Bowl:
]]>econ1013_economicintegrationi/econ1013_notes/lecture-6-the-economics-of-the-world-trade-organisation-(wto).htmlECON1013_EconomicIntegrationI/ECON1013_notes/Lecture 6 - The Economics of the World Trade Organisation (WTO).mdWed, 22 Oct 2025 10:49:45 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/pasted-image-20251022114930.htmlECON1013_EconomicIntegrationI/ECON1013_images/Pasted image 20251022114930.pngWed, 22 Oct 2025 10:49:30 GMT<figure><img src="."></figure>]]>econ1019_growthdevlongrunhist/econ1019_images/screenshot-2025-10-21-at-09.55.31.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/Screenshot 2025-10-21 at 09.55.31.jpgTue, 21 Oct 2025 08:55:33 GMT<figure><img src="."></figure> If the Price Changes, the budget constraint changes via rotation of the curve (). If the price of pasta falls, Ingrid re-optimises at the new equilibrium (). (remember, we are under assumption ceteris paribus, that the consumer's cash is fixed)If the consumers preferences are biased towards potatoes, a fall in pasta would in-fact cause the optimum to shift upwards as shown below:
We can use comparative statics analysis of own-price changes to derive a consumer’s demand curve. Recall that a demand curve shows the quantity demanded at a given price, ceteris paribus.Ceteris paribus (all else equal): preferences, income, other prices.
Diagram overview: Panel A: Shows a consumer choosing between bowls of pasta (horizontal axis) and baked potatoes (vertical axis). Panel B: Shows the derived demand curve for pasta. Each indifference curve shows combinations of pasta and potatoes that give the consumer equal satisfaction. The budget line depends on the price of pasta — when price falls, the budget line becomes flatter. The consumer’s optimal bundle occurs where the budget line is tangent to the highest attainable indifference curve (points ). The PCC traces all equilibrium points as the price of pasta changes, holding income and the price of potatoes constant. As the price of pasta falls from , the consumer buys more pasta () and fewer potatoes. From each equilibrium point e_i in panel A, plot the corresponding price and quantity of pasta in panel B. Joining these points () gives the individual demand curve for pasta. Thus, the demand curve shows the relationship between price and quantity demanded, derived from underlying preferences. The demand curve reflects how optimal consumption changes as prices vary. It is derived from the consumer’s indifference map and budget constraint, not assumed. Movement along the demand curve corresponds to changes in relative prices, holding income constant. Explain how a consumer’s indifference curves and budget lines can be used to derive their demand curve for a good. Indifference curves model the choices that consumers make via bundles of goods under a few key axioms (assumptions)We assume that consumers are rational and want to maximise their utility. With completeness and transitivity in their preferences. ]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-8-price-and-income-changes.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 8 - Price and Income Changes.mdFri, 17 Oct 2025 14:56:09 GMT<figure><img src="."></figure> & decrease as Land and Labour respectively increase due to the law of diminishing marginal returns
In the model to find GDP per capita, It assumes the following: "The additional contribution of extra labour for given land is lower, the more labour there is already; the additional contribution of extra land for given labour is lower, the more land there is already."Find 2nd derivative do determine whether its diminishing, if sign is negative then LDR holds true.
Lecturer says "more workers more poverty" shush nigel
Average Income falls as labour increases due to LDR, which yields more poverty for everyone. As each subsequent worker is less producitve then the last. If the real world behaves as assumed, the FIXED land becomes less productive per person hence, everyone becomes poorer. This is the underlying foundation for economic stagnation
denotes the growth rate, the rate of technological progress positively benefits the eqn, however it adversely conflicts with population growth "dragging you down"Another limitation of the model is that n, population growth has been considered an exogenous variable]]>econ1019_growthdevlongrunhist/econ1019_notes/lecture-3.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 3.mdThu, 16 Oct 2025 20:53:40 GMT<figure><img src="."></figure>econ1051_econpol_andeconpoliticians/econ1051_notes/lecture-3.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_notes/Lecture 3.mdThu, 16 Oct 2025 17:12:11 GMT]]>econ1001_introtomicroeconomics/econ1001_images/pasted-image-20251016151209.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Pasted image 20251016151209.pngThu, 16 Oct 2025 14:12:09 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/pasted-image-20251016151042.htmlECON1013_EconomicIntegrationI/ECON1013_images/Pasted image 20251016151042.pngThu, 16 Oct 2025 14:10:42 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/pasted-image-20251016150608.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Pasted image 20251016150608.pngThu, 16 Oct 2025 14:06:08 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/screenshot-2025-10-16-at-14.13.52.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Screenshot 2025-10-16 at 14.13.52.jpgThu, 16 Oct 2025 13:13:56 GMT<figure><img src="."></figure>econ1051_econpol_andeconpoliticians/econ_1051_slides/lec-3.htmlECON1051_EconPol_AndEconPoliticians/ECON_1051_slides/lec 3.pdfThu, 16 Oct 2025 11:02:59 GMTUtility functions allow a reinterpretation of the gradient of indifference curves.Recall that the gradient measures the MRS between goods
Mathematically:Example: for we have Moving down the curve, we give up and gain . If the indifference curves are convex () becomes smaller as we move down the curve. As increases, each additional unit is worth less, so falls. and vice versaPerfect substitutes Goods that are consumer is indifferent about. Examples: Coke vs Pepsi, mineral water, generic vs brand-name drugs
Perfect complements Goods that are consumed in fixed proportions. Eg. phone and a charger, car and fuel The minimum determines effective consumption If you have too much of one good, the excess does not add to utilityImperfect substitutes Are between the extreme examples of perfect substitutes and perfect complements Many types of utility fnctions which yield standard shaped convex indifference curves Cobb Douglas: , Quasilinear: ]]>econ1001_introtomicroeconomics/econ1001_notes/lecture-6-utility-functions.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 6 - Utility Functions.mdWed, 15 Oct 2025 11:56:41 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide15.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide15.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide14.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide14.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide13.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide13.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide12.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide12.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide11.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide11.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide10.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide10.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide9.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide9.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide8.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide8.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide7.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide7.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide6.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide6.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide5.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide5.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide4.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide4.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide3.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide3.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide2.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide2.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/econ1013_images/econ1013_l5_single-market/slide1.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide1.pngWed, 15 Oct 2025 10:17:21 GMT<figure><img src="."></figure>econ1019_growthdevlongrunhist/econ1019_notes/lecture-6-from-stagnation-to-sustained-economic-growth-–-part-2.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 6 - From Stagnation to Sustained Economic Growth – Part 2.mdTue, 14 Oct 2025 09:13:21 GMT]]>econ1019_growthdevlongrunhist/econ1019_images/screenshot-2025-10-14-at-09.45.41.htmlECON1019_GrowthDevLongRunHist/ECON1019_images/Screenshot 2025-10-14 at 09.45.41.jpgTue, 14 Oct 2025 08:45:46 GMT<figure><img src="."></figure>glory.okutue@nottingham.ac.uk]]>econ1001_introtomicroeconomics/econ1001_tutorials/tutorial1/tutorial-1-feedback.htmlECON1001_IntroToMicroEconomics/ECON1001_tutorials/TUTORIAL1/Tutorial 1 - Feedback.mdMon, 13 Oct 2025 15:11:43 GMTecon1001_introtomicroeconomics/econ1001_tutorials/tutorial1/econ1001_tutorial1_dg.htmlECON1001_IntroToMicroEconomics/ECON1001_tutorials/TUTORIAL1/ECON1001_Tutorial1_DG.pdfSat, 11 Oct 2025 17:10:25 GMTecon1001_introtomicroeconomics/econ1001_tutorials/tutorial1/road-investment-strategy-2-2020-2025.htmlECON1001_IntroToMicroEconomics/ECON1001_tutorials/TUTORIAL1/road-investment-strategy-2-2020-2025.pdfSat, 11 Oct 2025 16:44:35 GMT]]>econ1001_introtomicroeconomics/econ1001_images/pasted-image-20251010143838.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Pasted image 20251010143838.pngFri, 10 Oct 2025 13:38:38 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/pasted-image-20251010142350.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Pasted image 20251010142350.pngFri, 10 Oct 2025 13:23:50 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/pasted-image-20251010141956.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Pasted image 20251010141956.pngFri, 10 Oct 2025 13:19:56 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/pasted-image-20251009143940.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Pasted image 20251009143940.pngThu, 09 Oct 2025 13:39:40 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/screenshot-2025-10-09-at-14.37.43.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Screenshot 2025-10-09 at 14.37.43.jpgThu, 09 Oct 2025 13:37:48 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/screenshot-2025-10-09-at-14.34.46.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Screenshot 2025-10-09 at 14.34.46.jpgThu, 09 Oct 2025 13:35:09 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/econ1001_images/pasted-image-20251009141837.htmlECON1001_IntroToMicroEconomics/ECON1001_images/Pasted image 20251009141837.pngThu, 09 Oct 2025 13:18:37 GMT<figure><img src="."></figure>econ1051_econpol_andeconpoliticians/econ1051_notes/lecture-2-federalism-and-the-role-of-the-state-in-the-economy.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_notes/Lecture 2 - Federalism and The Role of the State in the Economy.mdThu, 09 Oct 2025 13:03:12 GMTecon1051_econpol_andeconpoliticians/econ_1051_slides/lec-2.htmlECON1051_EconPol_AndEconPoliticians/ECON_1051_slides/lec 2.pdfThu, 09 Oct 2025 11:20:36 GMT]]>econ1013_economicintegrationi/econ1013_images/econ1013_l4_tradeeffecthand/slide20.htmlECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L4_tradeEffectHand/Slide20.pngWed, 08 Oct 2025 10:40:37 GMT<figure><img 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GMTecon1019_growthdevlongrunhist/econ1019_materials/slavery_and_american_economic_development_-_(2._property_and_progress_in_antebellum_america).htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/Slavery_and_American_Economic_Development_----_(2._Property_and_Progress_in_Antebellum_America).pdfThu, 27 Nov 2025 12:29:11 GMTecon1019_growthdevlongrunhist/econ1019_materials/slavery_and_american_economic_development_-_(introduction_what_was_slavery_).htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/Slavery_and_American_Economic_Development_----_(Introduction_What_Was_Slavery_).pdfThu, 27 Nov 2025 12:28:57 GMTecon1044_mathematicaleconomicseconometrics/lecture-2-systems-of-linear-equations-&-matrix-algebra.htmlECON1044_MathematicalEconomicsEconometrics/Lecture 2 - Systems of Linear Equations & Matrix Algebra.mdTue, 25 Nov 2025 16:26:40 GMTecon1013_economicintegrationi/econ1013_materials/paul-de-grauwe-economics-of-monetary-union-(2018,-oxford-university-press)-libgen.li.htmlECON1013_EconomicIntegrationI/ECON1013_materials/Paul De Grauwe - Economics of Monetary Union (2018, Oxford University Press) - libgen.li.pdfWed, 19 Nov 2025 11:50:09 GMTecon1051_econpol_andeconpoliticians/econ1051_materials/notes_on_the_theoretical_foundations_of_political_.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_materials/Notes_on_the_Theoretical_Foundations_of_Political_.pdfTue, 18 Nov 2025 18:38:40 GMTecon1019_growthdevlongrunhist/econ1019_materials/w8119.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/w8119.pdfTue, 18 Nov 2025 12:35:00 GMT]]>econ1051_econpol_andeconpoliticians/econ1051_images/lec-6/lec-6.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_images/lec 6/lec 6.pngThu, 13 Nov 2025 12:23:53 GMT<figure><img src="."></figure>econ1019_growthdevlongrunhist/econ1019_materials/2006-does-culture-affect-economic-outcomes.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/2006-does-culture-affect-economic-outcomes.pdfMon, 10 Nov 2025 08:43:12 GMTecon1044_mathematicaleconomicseconometrics/econ1044_tutorials/econ1044_tutorial3.htmlECON1044_MathematicalEconomicsEconometrics/ECON1044_tutorials/ECON1044_TUTORIAL3.pdfWed, 05 Nov 2025 13:26:28 GMTecon1044_mathematicaleconomicseconometrics/econ1044_tutorials/econ1044_tutorial2.htmlECON1044_MathematicalEconomicsEconometrics/ECON1044_tutorials/ECON1044_TUTORIAL2.pdfTue, 04 Nov 2025 15:21:56 GMTecon1019_growthdevlongrunhist/econ1019_materials/growth-&-development-transcript-(1).htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/Growth & development-transcript (1).txtSat, 01 Nov 2025 14:13:58 GMTecon1019_growthdevlongrunhist/econ1019_materials/107-2-407.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/107-2-407.pdfSat, 01 Nov 2025 14:04:41 GMTecon1019_growthdevlongrunhist/econ1019_materials/growth-&-development-transcript.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/Growth & development-transcript.txtSat, 01 Nov 2025 13:30:53 GMTecon1019_growthdevlongrunhist/econ1019_materials/oct-28-growth-&-development-(tu)_-lecture-9-10-human-capital-&-growth-empirics-notes.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/Oct 28 - Growth & development (Tu)_ Lecture 9-10 Human Capital & Growth Empirics - Notes.txtSat, 01 Nov 2025 13:12:26 GMTecon1044_mathematicaleconomicseconometrics/06_integration.htmlECON1044_MathematicalEconomicsEconometrics/06_Integration.pdfThu, 30 Oct 2025 09:22:16 GMTecon1044_mathematicaleconomicseconometrics/econ1044_tutorials/tutorial5.htmlECON1044_MathematicalEconomicsEconometrics/ECON1044_tutorials/tutorial5.pdfThu, 30 Oct 2025 09:20:01 GMTecon1044_mathematicaleconomicseconometrics/econ1044_tutorials/tutorial4.htmlECON1044_MathematicalEconomicsEconometrics/ECON1044_tutorials/tutorial4.pdfThu, 30 Oct 2025 09:19:58 GMTecon1044_mathematicaleconomicseconometrics/econ1044_tutorials/tutorial3.htmlECON1044_MathematicalEconomicsEconometrics/ECON1044_tutorials/tutorial3.pdfThu, 30 Oct 2025 09:19:54 GMTecon1044_mathematicaleconomicseconometrics/econ1044_tutorials/tutorial2.htmlECON1044_MathematicalEconomicsEconometrics/ECON1044_tutorials/tutorial2.pdfThu, 30 Oct 2025 09:19:37 GMTecon1001_introtomicroeconomics/econ1001_materials/lecture-13-transcript.htmlECON1001_IntroToMicroEconomics/ECON1001_materials/Lecture 13-transcript.txtThu, 30 Oct 2025 00:24:22 GMTecon1001_introtomicroeconomics/econ1001_materials/fhss_geb_1994.htmlECON1001_IntroToMicroEconomics/ECON1001_materials/fhss_geb_1994.pdfTue, 28 Oct 2025 16:34:25 GMTecon1001_introtomicroeconomics/econ1001_materials/andreoni-and-miller-2002.htmlECON1001_IntroToMicroEconomics/ECON1001_materials/andreoni and miller 2002.pdfTue, 28 Oct 2025 16:34:05 GMTecon1019_growthdevlongrunhist/econ1019_materials/paweł-dykas-,-tomasz-tokarski-and-rafał-wisła-the-solow-model-of-economic-growth-_-application-to-contemporary-macroeconomic-issues-(2023)-libgen.li.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/Paweł Dykas , Tomasz Tokarski and Rafał Wisła - The Solow model of economic growth _ application to contemporary macroeconomic issues (2023) - libgen.li.pdfTue, 28 Oct 2025 15:28:02 GMTecon1019_growthdevlongrunhist/econ1019_materials/jones-and-vollrath-(2013)-introduction-to-economic-growth,-3rd-edition.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/Jones and Vollrath (2013) Introduction to Economic Growth, 3rd edition.pdfTue, 28 Oct 2025 12:40:21 GMTecon1019_growthdevlongrunhist/econ1019_materials/problem-set-1.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/Problem set 1.pdfMon, 27 Oct 2025 17:06:07 GMTecon1019_growthdevlongrunhist/econ1019_materials/econ1019-main-exam-2023.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/ECON1019 Main exam 2023.pdfMon, 27 Oct 2025 15:03:00 GMTecon1044_mathematicaleconomicseconometrics/econ1044-exam-paper-2022-2023.htmlECON1044_MathematicalEconomicsEconometrics/ECON1044 exam paper 2022-2023.pdfMon, 27 Oct 2025 15:00:22 GMTecon1051_econpol_andeconpoliticians/econ1051_materials/lessons_from_the_great_depress.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_materials/Lessons_from_the_Great_Depress.pdfSun, 26 Oct 2025 15:28:57 GMTecon1051_econpol_andeconpoliticians/econ1051_materials/lesson_from_the_great_depression.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_materials/Lesson_from_the_Great_Depression.pdfSun, 26 Oct 2025 15:28:01 GMTecon1051_econpol_andeconpoliticians/econ1051_materials/module-outline-202425.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_materials/Module Outline 202425.pdfWed, 22 Oct 2025 18:54:48 GMTecon1019_growthdevlongrunhist/econ1019_slides/4-stagnation-part-2.htmlECON1019_GrowthDevLongRunHist/ECON1019_slides/4 Stagnation - Part 2.pdfWed, 22 Oct 2025 12:25:16 GMTecon1019_growthdevlongrunhist/econ1019_materials/20252026_syllabus_0917.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/20252026_syllabus_0917.pdfWed, 22 Oct 2025 12:21:53 GMTecon1001_introtomicroeconomics/econ1001_materials/jeffrey-m.-perloff-microeconomics_-theory-and-applications-with-calculus-(2017,-pearson)-libgen.li.htmlECON1001_IntroToMicroEconomics/ECON1001_materials/Jeffrey M. Perloff - Microeconomics_ Theory and Applications with Calculus (2017, Pearson) - libgen.li.pdfWed, 22 Oct 2025 12:13:26 GMTecon1044_mathematicaleconomicseconometrics/04_differentiation.htmlECON1044_MathematicalEconomicsEconometrics/04_Differentiation.pdfTue, 21 Oct 2025 15:10:14 GMTecon1019_growthdevlongrunhist/econ1019_materials/charles-i.-jones,-dietrich-vollrath-introduction-to-economic-growth-(2013,-w.-w.-norton-&-co.)-libgen.li.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/Charles I. Jones, Dietrich Vollrath - Introduction to Economic Growth (2013, W. W. Norton & Co.) - libgen.li.pdfMon, 20 Oct 2025 15:46:08 GMTecon1019_growthdevlongrunhist/econ1019_materials/lecture-5-6-notes.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/Lecture 5-6 notes.pdfMon, 20 Oct 2025 14:11:59 GMTecon1019_growthdevlongrunhist/econ1019_slides/6.-lecture-transition-part-2.htmlECON1019_GrowthDevLongRunHist/ECON1019_slides/6. Lecture - Transition - Part 2.pdfWed, 15 Oct 2025 13:31:32 GMTecon1019_growthdevlongrunhist/timetable-weeks-2025-26.htmlECON1019_GrowthDevLongRunHist/timetable-weeks-2025-26.pdfWed, 15 Oct 2025 12:01:58 GMTecon1044_mathematicaleconomicseconometrics/knut-sydsaeter,-peter-hammond,-arne-strom,-andrés-carvajal-essential-mathematics-for-economic-analysis-pearson-(2022).htmlECON1044_MathematicalEconomicsEconometrics/Knut Sydsaeter, Peter Hammond, Arne Strom, Andrés Carvajal - Essential Mathematics for Economic Analysis-Pearson (2022).pdfTue, 14 Oct 2025 18:36:26 GMTecon1044_mathematicaleconomicseconometrics/03_functions-of-one-variable.htmlECON1044_MathematicalEconomicsEconometrics/03_Functions of One Variable.pdfTue, 14 Oct 2025 15:04:09 GMTecon1019_growthdevlongrunhist/econ1019_slides/5.-lecture-transition-part-1.htmlECON1019_GrowthDevLongRunHist/ECON1019_slides/5. Lecture - Transition - Part 1.pdfTue, 14 Oct 2025 08:12:52 GMTecon1044_mathematicaleconomicseconometrics/tutorial1.htmlECON1044_MathematicalEconomicsEconometrics/tutorial1.pdfMon, 13 Oct 2025 12:55:40 GMTecon1051_econpol_andeconpoliticians/econ1051_materials/money_and_power_-_vince_cable.htmlECON1051_EconPol_AndEconPoliticians/ECON1051_materials/Money_and_Power_-_Vince_Cable.pdfSat, 11 Oct 2025 17:50:17 GMTecon1044_mathematicaleconomicseconometrics/knut-sydsæter,-peter-hammond,-arne-strøm,-andrés-carvajal-essential-mathematics-for-economic-analysis-(2021,-pearson-education)-libgen.li.htmlECON1044_MathematicalEconomicsEconometrics/Knut Sydsæter, Peter Hammond, Arne Strøm, Andrés Carvajal - Essential Mathematics for Economic Analysis (2021, Pearson Education) - libgen.li.pdfFri, 10 Oct 2025 00:14:54 GMTecon1044_mathematicaleconomicseconometrics/02_systems-of-linear-equations-and-matrix-algebra.htmlECON1044_MathematicalEconomicsEconometrics/02_Systems of Linear Equations and Matrix Algebra.pdfTue, 07 Oct 2025 15:13:23 GMTecon1019_growthdevlongrunhist/econ1019_slides/3-stagnation-part-1.htmlECON1019_GrowthDevLongRunHist/ECON1019_slides/3 Stagnation - Part 1.pdfTue, 07 Oct 2025 07:58:42 GMTecon1019_growthdevlongrunhist/econ1019_materials/william-r.-easterly-the-elusive-quest-for-growth-_-economists'-adventures-and-misadventures-in-the-tropics-(2001,-the-mit-press)-libgen.li.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/William R. Easterly - The Elusive Quest for Growth _ Economists' Adventures and Misadventures in the Tropics (2001, The MIT Press) - libgen.li.pdfMon, 06 Oct 2025 12:56:01 GMTecon1019_growthdevlongrunhist/econ1019_materials/william_easterly_the_elusive_quest_for_growth_econ.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/William_Easterly_The_Elusive_Quest_for_Growth_Econ.pdfMon, 06 Oct 2025 12:53:18 GMTecon1001_introtomicroeconomics/econ1001_materials/jeffrey-m.-perloff-microeconomics-with-calculus-3rd-(2013,-pearson).htmlECON1001_IntroToMicroEconomics/ECON1001_materials/Jeffrey M. Perloff - Microeconomics with Calculus 3rd (2013, Pearson).pdfFri, 03 Oct 2025 17:23:57 GMTecon1019_growthdevlongrunhist/econ1019_materials/lecture-1-notes-oct-23.htmlECON1019_GrowthDevLongRunHist/ECON1019_materials/Lecture 1 notes OCT 23.pdfTue, 30 Sep 2025 12:09:03 GMTecon1051econpol_andeconpoliticians/econ1051_tutorials/20759904_econ1051_2526.htmlECON1051EconPol_AndEconPoliticians/ECON1051_tutorials/20759904_ECON1051_2526.pdfSun, 26 Oct 2025 16:53:10 GMTecon1051econpol_andeconpoliticians/econ1051_materials/lessons_from_the_great_depress.htmlECON1051EconPol_AndEconPoliticians/ECON1051_materials/Lessons_from_the_Great_Depress.pdfSun, 26 Oct 2025 15:28:57 GMTecon1051econpol_andeconpoliticians/econ1051_materials/lesson_from_the_great_depression.htmlECON1051EconPol_AndEconPoliticians/ECON1051_materials/Lesson_from_the_Great_Depression.pdfSun, 26 Oct 2025 15:28:01 GMTecon1051econpol_andeconpoliticians/econ1051_tutorials/coursework-assessment-1-criteria.htmlECON1051EconPol_AndEconPoliticians/ECON1051_tutorials/Coursework Assessment 1 Criteria.pdfSun, 26 Oct 2025 14:52:50 GMTecon1001_introtomicroeconomics/tutorial2/scan-251025-154953.htmlECON1001_IntroToMicroEconomics/TUTORIAL2/Scan-251025-154953.pdfSat, 25 Oct 2025 14:50:14 GMT Fig. 2.2, Pg.29, Jones, C. I. and D. Vollrath (2013). Introduction to economic growth. New York ;, W.W. Norton.The Solow diagram shows how capital per worker () changes over time. The curve represents savings and investment per worker, while the straight line shows the amount of capital needed to replace depreciated capital and equip new workers.When , the economy is adding more capital than it loses — so increases.When , capital shrinks because not enough is saved to maintain it.The point where the two lines meet () is the steady state — capital per worker stops changing, and the economy grows at the same rate as population and technology.Any starting point like will move towards over time — this is called convergence.Starting from the Cobb–Douglas production function for output per worker:\ln \left(\frac{Y_t}{L_t}\right) = \ln A_t + \alpha \ln k_t$t$):Using the derivative of a logarithm ():Hence, in simplified notation:This expression shows that the growth rate of output per worker () is the sum of technological progress () and the capital accumulation effect (). In words: productivity growth drives long-run growth, while capital growth contributes proportionally to its share . Key differences: Additional engine of growth (capital accumulation). Growth = technological progress in steady state. Notice that difference re growth/tech progress true for any value of n (population), which is exogenous In the long run, the economy converges towards . Hence the only growth in income pc. is due to technological progress, Recall the production function in intensive form: (Eq. 1.1) if does not grow, then neither does to keep constant, must grow at the rate of growth of and hence must also grow at so grows at ]]>econ1019_growthdevlongrunhist/econ1019_notes/lecture-7-the-era-of-sustained-economic-growth.htmlECON1019_GrowthDevLongRunHist/ECON1019_notes/Lecture 7 - The Era of Sustained Economic Growth.mdSat, 25 Oct 2025 12:12:40 GMT<figure><img src="."></figure>econ1001_introtomicroeconomics/econ1001_notes/lecture-9-income-substitution-effects.htmlECON1001_IntroToMicroEconomics/ECON1001_notes/Lecture 9 - Income Substitution Effects.mdThu, 23 Oct 2025 13:34:03 GMTecon1051econpol_andeconpoliticians/econ1051_notes/lecture-4-the-great-depression-&-roosevelt's-new-deal.htmlECON1051EconPol_AndEconPoliticians/ECON1051_notes/Lecture 4 - The Great Depression & Roosevelt's New Deal.mdThu, 23 Oct 2025 11:28:10 GMTecon1051econpol_andeconpoliticians/econ_1051_slides/lec-4.htmlECON1051EconPol_AndEconPoliticians/ECON_1051_slides/lec 4.pdfThu, 23 Oct 2025 11:10:16 GMTecon1051econpol_andeconpoliticians/econ_1051_slides/lec-1-(1).htmlECON1051EconPol_AndEconPoliticians/ECON_1051_slides/lec 1 (1).pdfWed, 22 Oct 2025 18:55:21 GMTecon1051econpol_andeconpoliticians/econ1051_materials/module-outline-202425.htmlECON1051EconPol_AndEconPoliticians/ECON1051_materials/Module Outline 202425.pdfWed, 22 Oct 2025 18:54:48 GMTecon1051econpol_andeconpoliticians/econ1051_notes/lecture-3.htmlECON1051EconPol_AndEconPoliticians/ECON1051_notes/Lecture 3.mdThu, 16 Oct 2025 17:12:11 GMTecon1051econpol_andeconpoliticians/econ_1051_slides/lec-3.htmlECON1051EconPol_AndEconPoliticians/ECON_1051_slides/lec 3.pdfThu, 16 Oct 2025 11:02:59 GMTglory.okutue@nottingham.ac.uk]]>econ1001_introtomicroeconomics/tutorial1/tutorial-1-feedback.htmlECON1001_IntroToMicroEconomics/TUTORIAL1/Tutorial 1 - Feedback.mdMon, 13 Oct 2025 15:11:43 GMTecon1051econpol_andeconpoliticians/econ1051_materials/money_and_power_-_vince_cable.htmlECON1051EconPol_AndEconPoliticians/ECON1051_materials/Money_and_Power_-_Vince_Cable.pdfSat, 11 Oct 2025 17:50:17 GMTecon1001_introtomicroeconomics/tutorial1/econ1001_tutorial1_dg.htmlECON1001_IntroToMicroEconomics/TUTORIAL1/ECON1001_Tutorial1_DG.pdfSat, 11 Oct 2025 17:10:25 GMTecon1001_introtomicroeconomics/tutorial1/road-investment-strategy-2-2020-2025.htmlECON1001_IntroToMicroEconomics/TUTORIAL1/road-investment-strategy-2-2020-2025.pdfSat, 11 Oct 2025 16:44:35 GMTecon1051econpol_andeconpoliticians/econ1051_notes/lecture-2-federalism-and-the-role-of-the-state-in-the-economy.htmlECON1051EconPol_AndEconPoliticians/ECON1051_notes/Lecture 2 - Federalism and The Role of the State in the Economy.mdThu, 09 Oct 2025 13:03:12 GMTecon1051econpol_andeconpoliticians/econ_1051_slides/lec-2.htmlECON1051EconPol_AndEconPoliticians/ECON_1051_slides/lec 2.pdfThu, 09 Oct 2025 11:20:36 GMTecon1001_introtomicroeconomics/lecture-5-calculus-recap.htmlECON1001_IntroToMicroEconomics/Lecture 5 - Calculus Recap.mdFri, 10 Oct 2025 21:30:09 GMTUtility functions allow a reinterpretation of the gradient of indifference curves.Recall that the gradient measures the MRS between goods
Mathematically:Example: for we have Moving down the curve, we give up and gain . If the indifference curves are convex () U_1 / U_2 becomes smaller as we move down the curve. As q_1 increases, each additional unit is worth less, so U1 falls. and vice versaPerfect substitutes Goods that are consumer is indifferent about. Examples: Coke vs Pepsi, mineral water, generic vs brand-name drugs
Perfect complements Goods that are consumed in fixed proportions. Eg. phone and a charger, car and fuel The minimum determines effective consumption If you have too much of one good, the excess does not add to utilityImperfect substitutes Are between the extreme examples of perfect substitutes and perfect complements Many types of utility fnctions which yield standard shaped convex indifference curves Cobb Douglas: , Quasilinear: ]]>econ1001_introtomicroeconomics/lecture-6-utility-functions.htmlECON1001_IntroToMicroEconomics/Lecture 6 - Utility Functions.mdFri, 10 Oct 2025 21:00:28 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/pasted-image-20251010143838.htmlECON1001_IntroToMicroEconomics/Pasted image 20251010143838.pngFri, 10 Oct 2025 13:38:38 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/pasted-image-20251010142350.htmlECON1001_IntroToMicroEconomics/Pasted image 20251010142350.pngFri, 10 Oct 2025 13:23:50 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/pasted-image-20251010141956.htmlECON1001_IntroToMicroEconomics/Pasted image 20251010141956.pngFri, 10 Oct 2025 13:19:56 GMT<figure><img src="."></figure> The possible combinations of a bundle of goods can be represented by points on the chart A, you can then map a line throughout by preferences in an indifference curve. Where multiple curves are presence, at each height and elevation of bundles of goods. We can form an indifference map pictured below.
Properties of Indifference Curves Bundles on the I.D curve farther from the origin are preferred to those on ID curves closer to the origin Every bundle lies on an ID Curve a. ID curves cannot cross b. ID curves cannot slope upwards c. ID curves cannot be thick
MRS - Marginal Rate of SubstitutionThe trade-off that a person is willing to make between two goods. At any point, the MRS is the absolute value of the slope of the indifference curve.]]>econ1001_introtomicroeconomics/lecture-4-preferences-and-indifference-curves.htmlECON1001_IntroToMicroEconomics/Lecture 4 - Preferences and indifference curves.mdThu, 09 Oct 2025 15:14:46 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/pasted-image-20251009143940.htmlECON1001_IntroToMicroEconomics/Pasted image 20251009143940.pngThu, 09 Oct 2025 13:39:40 GMT<figure><img src="."></figure>]]>econ1001_introtomicroeconomics/pasted-image-20251009141837.htmlECON1001_IntroToMicroEconomics/Pasted image 20251009141837.pngThu, 09 Oct 2025 13:18:37 GMT<figure><img src="."></figure>econ1051econpol_andeconpoliticians/lecture-2-federalism-and-the-role-of-the-state-in-the-economy.htmlECON1051EconPol_AndEconPoliticians/Lecture 2 - Federalism and The Role of the State in the Economy.mdThu, 09 Oct 2025 13:03:12 GMTecon1051econpol_andeconpoliticians/lec-2.htmlECON1051EconPol_AndEconPoliticians/lec 2.pdfThu, 09 Oct 2025 11:20:36 GMT]]>econ1013_economicintegrationi/pasted-image-20251008113945.htmlECON1013_EconomicIntegrationI/Pasted image 20251008113945.pngWed, 08 Oct 2025 10:39:45 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/pasted-image-20251008113150.htmlECON1013_EconomicIntegrationI/Pasted image 20251008113150.pngWed, 08 Oct 2025 10:31:50 GMT<figure><img src="."></figure>]]>econ1013_economicintegrationi/pasted-image-20251008113043.htmlECON1013_EconomicIntegrationI/Pasted image 20251008113043.pngWed, 08 Oct 2025 10:30:43 GMT<figure><img src="."></figure>

Conclusions of empirical studies of EEC effect Substantial effect within-EEC trade in manufactures Positive increase from 15-30% Trade creation >>> Trade diversion (for manufactured goods) as each country becomes more efficient Trade with RoW not adversely effected, except on agriculture (faster growth in EC, increased imports for lower cost unfinished goods from LIC) Badinger & Breuss 2004 study concluded that Increased by 1/4 of EU trade due to tarrif removal Main factor driving trade was increase in incomes, QUESTION: WHICH ONE CAME FIRST? Effect of EU entry on the UK Prebrexit, joined 1973 - CU 1977 Gasiorek, Smith and Venables (2002) study estimates CU effects by hypothetically reimposing tarrifs on UK trade with EU (computable general equillibrium model) 1985 tade with EU has increased, mostly by trade creation Trade diversion was small some external TC main gain derived from increased competition in markets and efficiency Adjustment Issues In the late 50s, concerns about CU formation might cause large job losses and widespread factory closures due to international competition Might not happen in the real world, EU have safeguard clause. Temporary Trade Barriers Why did it not happen? Golden Age of economic growth and long transition period, low unemployment Specialisation Trade barriers remained ]]>econ1013_economicintegrationi/lecture-4-the-trade-and-specialisation-effects-of-the-eu-customs-union.htmlECON1013_EconomicIntegrationI/Lecture 4 - The trade and specialisation effects of the EU Customs Union.mdWed, 08 Oct 2025 14:58:50 GMT<figure><img src="econ1013_economicintegrationi/did.jpg"></figure>]]>econ1013_economicintegrationi/econ1013_l4_tradeeffecthand/slide20.htmlECON1013_EconomicIntegrationI/ECON1013_L4_tradeEffectHand/Slide20.pngWed, 08 Oct 2025 10:40:37 GMT<figure><img src="econ1013_economicintegrationi/econ1013_l4_tradeeffecthand/slide20.png"></figure>]]>econ1013_economicintegrationi/econ1013_l4_tradeeffecthand/slide19.htmlECON1013_EconomicIntegrationI/ECON1013_L4_tradeEffectHand/Slide19.pngWed, 08 Oct 2025 10:40:37 GMT<figure><img src="econ1013_economicintegrationi/econ1013_l4_tradeeffecthand/slide19.png"></figure>]]>econ1013_economicintegrationi/econ1013_l4_tradeeffecthand/slide18.htmlECON1013_EconomicIntegrationI/ECON1013_L4_tradeEffectHand/Slide18.pngWed, 08 Oct 2025 10:40:37 GMT<figure><img src="econ1013_economicintegrationi/econ1013_l4_tradeeffecthand/slide18.png"></figure>]]>econ1013_economicintegrationi/econ1013_l4_tradeeffecthand/slide17.htmlECON1013_EconomicIntegrationI/ECON1013_L4_tradeEffectHand/Slide17.pngWed, 08 Oct 2025 10:40:37 GMT<figure><img src="econ1013_economicintegrationi/econ1013_l4_tradeeffecthand/slide17.png"></figure>]]>econ1013_economicintegrationi/econ1013_l4_tradeeffecthand/slide16.htmlECON1013_EconomicIntegrationI/ECON1013_L4_tradeEffectHand/Slide16.pngWed, 08 Oct 2025 10:40:37 GMT<figure><img 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src="."></figure>]]>pasted-image-20251008113150.htmlPasted image 20251008113150.pngWed, 08 Oct 2025 10:31:50 GMT<figure><img src="."></figure>]]>pasted-image-20251008113043.htmlPasted image 20251008113043.pngWed, 08 Oct 2025 10:30:43 GMT<figure><img src="."></figure>"Technological progress drives population growth not economic growth" As population growth depends on income, we denote n(y) So our key eqn becomes: So we have shown that the constant in the long run, so g=0 Hence is the value that satisfies The Malthusian Trap Large population growth leads to economic stagnation, hence many economies introduced policies such as birth control, contraceptive, family planning etc. This was to ensure that growth was possible in the Era of Stagnation (Malthusian Trap)Nowadays, you are seeing the opposite. Ageing population in developing countries, not enough young people to support older pensioners. Many countries encouraging child births/Policy Implications QUESTION for ChatGPT: IF THE DEATH RATE FALLS, why does average SoL fall?, Despite death rates falling, more people having births which once again makes TFP fall, hence why Average SoL falls.Example: Irish potato famine, overpopulation with constrained factors, population causes diminishing living standards. Famine acts as a barrier where more people die off, hence some would argue that prosperity rises after. Three predictions Countries with a higher A should not be richer in equilibrium, only more populous Conclusions Malthusian theory provides ONE explanation of the stagnation of living standards Although technology did improve there was no sustained econ growth. The benefits in improved technology, was almost entirely consumed in a rise of population ]]>econ1019_growthdevlongrunhist/lecture-4.htmlECON1019_GrowthDevLongRunHist/Lecture 4.mdTue, 07 Oct 2025 23:02:23 GMT<figure><img src="."></figure> & decrease as Land and Labour respectively increase due to the law of diminishing marginal returns
In the model to find GDP per capita, It assumes the following: "The additional contribution of extra labour for given land is lower, the more labour there is already; the additional contribution of extra land for given labour is lower, the more land there is already."Find 2nd derivative do determine whether its diminishing, if sign is negative then LDR holds true.
Lecturer says "more workers more poverty" shush nigel
Average Income falls as labour increases due to LDR, which yields more poverty for everyone. As each subsequent worker is less producitve then the last. If the real world behaves as assumed, the FIXED land becomes less productive per person hence, everyone becomes poorer. This is the underlying foundation for economic stagnation
denotes the growth rate, the rate of technological progress positively benefits the eqn, however it adversely conflicts with population growth "dragging you down"Another limitation of the model is that n, population growth has been considered an exogenous variable]]>econ1019_growthdevlongrunhist/lecture-3.htmlECON1019_GrowthDevLongRunHist/Lecture 3.mdTue, 07 Oct 2025 22:55:37 GMT<figure><img src="."></figure> Implications: Consumers and producers are price takers Luxembourg is relatively small compared to the big boys, US, China, India. This means that they have to sell at the price due to competition. The domestic consumers in Luxembourg are small quantity, hence they have no bargaining power in the market Therefore is completely elastic, i.e perfectly horizontal
The assumptions of the model continued: Partial equilibrium; ignoring impact to other markets World of three countries Home country is small Future partner is large - perfectly elastic supply ROW is also large, lower supply price than partner ]]>econ1013_economicintegrationi/lecture-3.htmlECON1013_EconomicIntegrationI/Lecture 3.mdTue, 07 Oct 2025 10:41:37 GMT<figure><img src="econ1013_economicintegrationi/econ1013_l3_cutheoryr/slide3.jpeg"></figure>]]>econ1013_economicintegrationi/econ1013_l3_cutheoryr/slide21.htmlECON1013_EconomicIntegrationI/ECON1013_L3_cutheoryR/Slide21.jpegTue, 07 Oct 2025 10:22:52 GMT<figure><img src="econ1013_economicintegrationi/econ1013_l3_cutheoryr/slide21.jpeg"></figure>]]>econ1013_economicintegrationi/econ1013_l3_cutheoryr/slide20.htmlECON1013_EconomicIntegrationI/ECON1013_L3_cutheoryR/Slide20.jpegTue, 07 Oct 2025 10:22:52 GMT<figure><img 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09.29.00.jpgTue, 07 Oct 2025 08:29:04 GMT<figure><img src="."></figure>econ1019_growthdevlongrunhist/3-stagnation-part-1.htmlECON1019_GrowthDevLongRunHist/3 Stagnation - Part 1.pdfTue, 07 Oct 2025 07:58:42 GMTecon1019_growthdevlongrunhist/william-r.-easterly-the-elusive-quest-for-growth-_-economists'-adventures-and-misadventures-in-the-tropics-(2001,-the-mit-press)-libgen.li.htmlECON1019_GrowthDevLongRunHist/William R. Easterly - The Elusive Quest for Growth _ Economists' Adventures and Misadventures in the Tropics (2001, The MIT Press) - libgen.li.pdfMon, 06 Oct 2025 12:56:01 GMTecon1019_growthdevlongrunhist/william_easterly_the_elusive_quest_for_growth_econ.htmlECON1019_GrowthDevLongRunHist/William_Easterly_The_Elusive_Quest_for_Growth_Econ.pdfMon, 06 Oct 2025 12:53:18 GMTecon1001_introtomicroeconomics/jeffrey-m.-perloff-microeconomics-with-calculus-3rd-(2013,-pearson)-libgen.li.htmlECON1001_IntroToMicroEconomics/Jeffrey M. Perloff - Microeconomics with Calculus 3rd (2013, Pearson) - libgen.li.pdfFri, 03 Oct 2025 17:23:57 GMTecon1013_economicintegrationi/lecture-1.htmlECON1013_EconomicIntegrationI/Lecture 1.mdTue, 30 Sep 2025 19:08:33 GMTecon1019_growthdevlongrunhist/reading-list-1019,-first-lecture.htmlECON1019_GrowthDevLongRunHist/Reading List 1019, First Lecture.mdTue, 30 Sep 2025 12:13:07 GMTecon1019_growthdevlongrunhist/lecture-1-notes-oct-23.htmlECON1019_GrowthDevLongRunHist/Lecture 1 notes OCT 23.pdfTue, 30 Sep 2025 12:09:03 GMTcreate a link, or try the Importer!When you're ready, delete this note and make the vault your own.]]>welcome.htmlWelcome.mdTue, 30 Sep 2025 12:04:41 GMT