Principle of Economics Exam January 2017Watch
Im sitting the economics exam and i require a lot of help. so if anyone knows what they are doing please leave a reply down below
The UK Housing Market is Broken
Finally, an admission from the chancellor that Britain’s housing market is well and truly broken. Even a political party overflowing with estate agents, landlords and property developers knows the housing market is failing, not least because their own sons and daughters despair at affording a home.
But grand promises of 400,000 new homes, a help-to-buy scheme in London, and a doubling in the housing budget may still not be enough to reverse the decade-long fall in home ownership, that central tenet of Conservative philosophy.
No longer do rising house prices produce a feel good factor among the voting population. Instead, there’s the feel bad factor of a generation used to renting, paying half or more of their income to their landlord. It may explain why in this autumn statement the chancellor has made a second assault against one of the more powerful bastions in his own party, buy-to-let landlords.
In July’s budget he took millions off landlords with new taxes coming into force in 2017. He will find a further £1bn a year by making investors pay an extra 3% stamp duty on buy-to-lets and second homes. In real terms, this means that on a typical buy-to-let purchase of £184,000, the tax will rise from £1,180 to £6,700. The Association of Residential Letting Agents promptly called it “catastrophic” while the National Association of Estate Agents said it would “put a stop to those entering the sector”.
Telegraph readers will be in shock. The paper’s “Axe the buy-to-let tax grab” campaign features “persecuted” and “demonised” landlords, despite the fact they have made fatter profits than any other group of investors this century. The boss of one big estate agency group, Ludlow Thompson said the chancellor is now treating the buy-to-let market “like the tobacco industry”.
About time, first-time buyers will say. They have queued at new home launches, or grim “open days”, where they have been consistently outbid by the financial firepower of tax-advantaged buy-to-let landlords.
Hitting landlords and second-home buyers should provoke a welcome reduction in demand.
What about the supply side of the market? The promise is 400,000 affordable housing starts by 2020-21, including 200,000 starter homes sold at a 20% discount to market value, with £2.3bn allocated to building the first 60,000. Another 135,000 homes will be built under shared ownership schemes open to anyone earning under £90,000 (in London) or £80,000 elsewhere. Combined with an easing up of planning rules, it adds up to a developers’ charter, with Taylor Wimpey, Barratt Developments and Persimmon among the fastest-rising shares on the London stock exchange on the day of the chancellor’s speech.
Delivery is the problem. It’s a very good time to be a brick maker or bricklayer, with the industry hitting capacity constraints. Quite why this has become such a problem is a mystery; with a much smaller population, Britain built many more houses every year in the 1950s and 1960s. One reason is that small-scale developers were killed off during the financial crisis, leaving the market clear for the giant developers. But what’s good for Barratts is not always what’s good for Britain.
Rental campaigners are not concerned by the focus on the big house builders. Betsy Dillner of the Generation Rent campaigning group said: “After raising £6.9bn to invest in new affordable homes, George Osborne had an open goal, but by deciding to hand the money to private developers instead of bringing down rents for private renters, he has spooned the ball over the crossbar.” Starter homes can be sold off at full market value after five years, which she calls “another reckless giveaway”.
In Ireland, a country suffering a similar rental crisis to Britain, the government is introducing “rent certainty”, a sort of rent control-lite but there is no sign of that happening on this side of the Irish Sea. Britain’s property laws urgently need reshaping, to give tenants better protection from absurd rent rises and retaliatory evictions, but also to give landlords better powers to deal with rogue tenants. By all means, put in place measures to revive owner occupation but right now, ‘generation rent’ can’t even afford to pay the rent.
(Adapted from ‘The Guardian’ 25th November 2015)
Section A Questions
In total there are 50 marks available for this question. The marks for each section are given for each part. It is important to answer as fully as possible. Marks will also be awarded for clarity and for the use of correctly labelled diagrams where appropriate.
(1) According to the article why is the UK housing market described as being broken?
(2) Using diagrams to help with your answer, explain the effects of the chancellor’s tax measures on house prices in general. In your answer you should consider the link between the rental sector and owner occupied sector.
(3) What does the evidence from the article suggest about the market structure operating in the house building sector? Justify your answer. (10 marks)
(4) Why does the boss of Ludlow Thompson estate agents say that the chancellor is treating the buy-to-let market “like the tobacco industry”? (8 marks)
(5) Examine the measures the government might use to repair the so called ‘broken’ housing market. (12 marks)
Brexit: The Economic Consequences
The UK voted to leave the EU by 17,410,742 votes (51.9% or 37.4% of the electorate) to 16,141,241 votes (48.1% or 34.7% of the electorate). But what will be the economic consequences of the vote?
To leave the EU, Article 50 must be invoked, which starts the process of negotiating the new relationship with the EU. Once Article 50 has been invoked, negotiations must be completed within two years and then the remaining 27 countries will decide on the new terms on which the UK can trade with the EU. There are various forms the new arrangements could take. These include:
‘The Norwegian model’, where Britain leaves the EU, but joins the European Economic Area, giving access to the single market, but removing regulation in some key areas, such as fisheries and home affairs. Another possibility is ‘the Swiss model’, where the UK would negotiate trade deals on an individual basis. Another would be ‘the Turkish model’ where the UK forms a customs union with the EU. At the extreme, the UK could make a complete break from the EU and simply use its membership of the WTO to make trade agreements.
The long-term economic effects would thus depend on which model is adopted. In the Norwegian model, the UK would remain in the single market, which would involve free trade with the EU, the free movement of labour between the UK and member states and contributions to the EU budget. The UK would no longer have a vote in the EU on its future direction. Such an outcome is unlikely, however, given that a central argument of the Leave camp was for the UK to be able to control migration and not to have to pay contributions to the EU budget.
It is quite likely, then, that the UK would trade with the EU on the basis of individual trade deals. This could involve tariffs on exports to the EU and would involve being subject to EU regulations. Such negotiations could be protracted and potentially extend beyond the two-year deadline under Article 50. But for this to happen, there would have to be agreement by the remaining 27 EU countries. At the end of the two-year process, when the UK exits the EU, any unresolved negotiations would default to the terms for other countries outside the EU. EU treaties would cease to apply to the UK.
It is quite likely, then, that the UK would face trade restrictions on its exports to the EU, which would adversely affect firms for whom the EU is a significant market. Where practical, some firms may thus choose to relocate from the UK to the EU or move business and staff from UK offices to offices within the EU. This is particularly relevant to the financial services sector. As an article in The Economist explains:
In the longer run … Britain’s financial industry could face severe difficulties. It thrives on the EU’s ‘passport’ rules, under which banks, asset managers and other financial firms in one member state may serve customers in the other 27 without setting up local operations.
Unless passports are renewed or replaced, they will lapse when Britain leaves. A deal is imaginable: the EU may deem Britain’s regulations as ‘equivalent’ to its own. But agreement may not come easily. French and German politicians, keen to bolster their own financial centres and facing elections next year, may drive a hard bargain. No other non-member has full passport rights.
But if long-term economic effects are hard to predict, the short-term effects happened very quickly.
The pound fell sharply as soon as the results of the referendum became clear. By the end of the day it had depreciated by 7.7% against the dollar and 5.7% against the euro. A lower pound will make imports more expensive and hence will drive up prices and reduce the real value of sterling. On the other hand, it will make exports cheaper and act as a boost to exports.
If inflation rises, then the Bank of England may raise interest rates. This could have a dampening effect on the economy, which in turn would reduce tax revenues. The government, if it sticks to its fiscal target of achieving a public-sector net surplus by 2020 (the Fiscal Mandate), may then feel the need to cut government expenditure and/or raise taxes. Indeed, George Osbourne argued before the vote that such an austerity budget may be necessary following a vote to leave.
Higher interest rates could also dampen house prices as mortgages became more expensive or harder to obtain. The exception could be the top end of the market where a large proportion are buyers from outside the UK whose demand would be boosted by the depreciation of sterling.
But given that the Bank of England’s remit is to target inflation in 24 month’s time, it is possible that any spike in inflation is temporary and this may give the Bank of England leeway to cut Bank Rate from 0.5% to 0.25% or even 0% and/or to engage in further quantitative easing.
One major worry is that uncertainty may discourage investment by domestic companies. It could also discourage inward investment, and international companies many divert investment to the EU. Already some multinationals have indicated that they will do just this. Shares in banks plummeted when the results of the vote were announced.
Uncertainty is also likely to discourage consumption of durables and other big-ticket items. The fall in aggregate demand could result in recession, again necessitating an austerity budget if the Fiscal Mandate is to be adhered to.
We live in ‘interesting’ times. Uncertainty is rarely good for an economy. But that uncertainty could persist for some time.
Section B Questions
In total there are 50 marks available for this section. The marks for each question are given at the end. It is important to answer as fully as possible. Marks will also be awarded for clarity and for the use of correctly labelled diagrams where appropriate.
1. Outline the main differences between the Norwegian, Swiss and the Turkish models mentioned in the article.
2. Summarise the main economic arguments of both the Remain and Leave campaigns?
3. Using appropriate diagrams outline the economic impact of adopting ‘free trade’ and abolishing all import tariffs when the UK leaves the EU.
4. In what ways have monetary and fiscal policy become more difficult to use since the referendum? (6 marks)
5. What factors are likely to drive the level of investment in the UK (a) by domestic companies trading within the UK and (b) by multinational companies over the coming months? (12 marks)