My A-level further reading, Economics Preet Patel

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Most interesting

Complicated/ easy to forget

Open university: 3-hour course: Different type of businesses:

Categories:

Size

A large business employs over 250 employees and earns yearly over $50million.

A medium business employs under 250 employees and earns less than $50million.

A small business employs under 50 employees and earns less than $10million.

A micro-business employs under 10 employees and earns less than $2million.

Industry sector

Primary sector: The sector which involves extraction of raw materials.

Secondary sector: The sector which involves manufacturing and using raw materials to create a

product.

Tertiary sector- The sector which provides services.

Quaternary sector- New and emerging sector which deals with artificial intelligence and knowledge-

based jobs such as information technology and researching.

Ownership structure

Sole trader: When one person earns and is completely responsible for his financial transactions and

salary.

Limited companies: A firm that is normally owned by one or two people and can buy its own assets

as it has it’s own rights as if it were a person. Someone with their own limited company is considered

self-employed.

Corporation- Has many layers and can hire a large management team and there are both private and

public cooperations.

Open university: 8-hour course: Fundamentals of Accountancy

Bookkeeping and Accountancy

Bookkeeping is the process of identifying and recording transactions and other financial events

affecting an enterprise in a systematic way. Transactions refer to the trading activities or buying and

selling that every business needs to record. An accountant must do more than add numbers as they

can provide financial recommendations and advise to both small and the largest of firms.

The four questions

There are four main questions that an accountant needs to answer are:

Question 1: What does an enterprise own i.e. what are its assets?

Question 2: What does an enterprise owe i.e. what are its liabilities?

Question 3: How did the enterprise perform i.e. what is its profit or loss?

Question 4: How did the enterprise obtain and use cash i.e. what is its cash flow?

All the assets and liabilities of a business are summarised in a primary financial report called a balance sheet, also known as the statement of financial position.

Assets: Buildings, Receivables (debtors), Inventory, Patents, Machinery.

Liabilities: Mortgage, Overdraft, Payables.

Income and expenses

Profit is income and the cost of buying the raw materials/ product is the expenses. The income takes away the expenses is the profit. However, profit is affected by credit as if the items or services are provided or sold on credit a loss is made as the money hasn’t been given in yet.

Capital

Every enterprise starts with no money. It needs the owner to put in money to get the business going. Other assets, such as inventory (goods) to be sold to customers, are then bought for future financial benefit. Businesses need to separate out the money put into the business by the owner from the liabilities it incurs, which need to be repaid. The money ‘owing’ to the owners is known as capital.

Financial and management accounting

Financial accounting involves the preparation of financial reports such as loans and tax authorities

whereas management accounting provides greater depth with more detail and more analysis and

maybe with recommendations or ideas for the firm.

Mastering Accounting Numeracy-

This part of the course was simpler to understand so it has just been copied across.

The four operations

There are four basic operations between numbers, each of which has its own notation:

Addition 7 + 34 = 41

Subtraction 34 – 7 = 27

Multiplication 21 x 3 = 63, or 21 * 3 = 63

Division 21 ÷ 3 = 7, or 21/3 = 7.

BODMAS (B)rackets

(O)rder

(D)ivision

(M)ultiplication

(A)ddition

(S)ubtraction

Using a calculator

A portable calculator is an extremely useful tool for a bookkeeper or an accountant. Although computers normally provide computer applications, there is no substitute for the convenience of a small, portable calculator or its equivalent in a mobile phone or tablet.

Rounding For most business and commercial purposes the degree of precision necessary when calculating is quite limited. While engineering can require accuracy to thousandths of a centimetre, for most other purposes tenths will do. When dealing with cash, the minimum legal tender in the UK is one penny, or £00.01, so unless there is a very special reason for doing otherwise, it is enough to calculate pounds to the second decimal place only.

Decimals So far we have thought of numbers in terms of their decimal form, e.g., 4.567, but this is not the only way of thinking of, or representing, numbers. A fraction represents a part of something. If you decide to share out something equally between two people, then each receives a half of the total and this is represented by the symbol ½.

Ratios Ratios give the same information as fractions but expressed in a different form. Accountants make extensive use of ratios in assessing the financial performance of an organisation.

Percentages

Percentages also indicate proportions. They can be expressed either as fractions or as decimals:

45% = 45/100 = 0.45

7% = 7/100 = 0.07

Negative numbers

Numbers smaller than zero (shown to the left of zero on the number line below in Figure 2) are called negative numbers. We indicate they are negative by enclosing them in brackets as shown in Figure 2.

Reasonableness of answers

Applying a test of reasonableness to an answer means making sure the answer makes sense. This is especially important when using a calculator as it is surprisingly easy to press the wrong key.

Double entry accounting

Accounting involves the systematic recording of all relevant financial transactions and events, classifying, interpreting, summarising and reporting such bookkeeping data and the production of useful information from that data and its presentation to stakeholders of a business such as owners, lenders and the tax office.

The business entity concept is that a business is separate from the owner(s).

The accounting equation which tells us capital is equal to the sum of liabilities and capital.

The duality concept explains how every transaction has two impacts.

Capital, and each type of asset and liability, has its own T-account. These T-accounts are recorded in the general ledger (also known as the nominal ledger).

If (a) all the double entries for every transaction and financial event are correctly recorded in the relevant T-accounts and (b) all the relevant T-accounts are correctly balanced off, then a correct trial balance can be prepared. The trial balance shows the double-entry rule that ‘for every debit there is a credit’.

Open university: 6-hour course: Equity Finance:

Equity instruments:

Both small and large firms can use shares to fund their operations, the investors expect a return through dividend yield and capital growth however most companies do not give out dividends, so these investors rely mostly or solely on capital growth. The two ways to measure money earned from shares are capital asset pricing model (CAPM) or dividend valuation model. Types of shares include-

Ordinary shares: these give the shareholders ownership of the company and entitlement to a share of the business after the creditors – including bondholders and the banks – have been paid. Ordinary shareholders have voting rights but no automatic entitlement to dividend earnings.

Preference shares: these also give the shareholders ownership of the company. Like ordinary shareholders, preference shareholders cannot put the company into liquidation if a dividend is not paid. The rate of the dividend on preference shares is usually fixed and, as noted above, is payable before an ordinary share dividend can be paid.

Going public

Firms may go public with their shares in order to increase the marketing of their products or to increase involvement. The initial decision for the company would normally be to appoint a ‘lead’ bank – or possibly a small number of ‘co-leads’ – to advise it through the listing process and to manage the sale of shares to investors. These banks would usually be expected to underwrite the transaction – in effect committing to buy those shares not subscribed to by investors on the launch date. Simultaneously the company would appoint legal advisers to take charge of the documentation requirements. It is also possible at this stage that other banks would be invited into the transaction to work under the lead or co-leads – this would be the case if the IPO was of a large size.

Broking firms may also be used to lead or co-lead share offerings. Currently, though, it is common for banks – particularly investment banks such as HSBC – to lead these transactions.

Next, the company must decide which stock exchange to list on.

Secondary equity offerings

Some people are given seasoned or secondary equity offerings which is the issuance of extra shares. Offering these new shares at a discount to the prevailing price highlights a vicious circle that applies to rights issues. Given the normal three-week period of acceptance that is required when offering a rights issue, it is usual to offer the shares at a discount to their prevailing market price. This ensures – as far as possible – that during this acceptance period the prevailing price of the company's shares does not fall below the offer price of the rights issue. If this were to happen no shareholders would logically take up their rights. Yet, offering the rights at a discount almost inevitably reduces the company's share price towards the level of the price of the rights issue.

Cross listings

For many companies, particularly MNCs, there are attractions in having a share listing on more than one stock exchange. The last decade has witnessed an increase in such cross-listings globally.

The main perceived benefit of cross-listing is that by increasing the range of potential investors the cost of equity finance is reduced. Karolyi (1998) found evidence of improving liquidity in shares and a lower cost of capital, at least in the short term, after cross-listing.

Bank of America Work experience- (1/7/19-5/7/19)

Foreign Exchange- Foreign exchange is the exchange of one currency for another or the conversion of one currency into another currency.

Exchange rates can be fixed such as between Saudi Arabia and the US in order to maintain the oil prices. Most countries have floating exchange rates where the value of there currency can change in comparison to another. The exchange rates are based on supply and demand where an increase in demand and decrease in supply both cause a rise but a rise in the exchange rate means more inflation. A strong pound makes imports cheaper and exports dearer, when we travel abroad, we demand the other currency and when we import their goods, other factors including international trade, Government policies, Domestic growth, Inflation, budget conditions, Economists and speculations.

Spot dealing is a transaction executed at an agreed price today where one currency is used to buy or sell another with settlement taking place. Cross rates are the exchange rate between two currencies such as the GBP and the JPY instead of trading through the dollar like they used to. Forward Forex deals are when the settlement occurs in the future at today’s rates. Swap transactions when you buy and then hold onto a currency until the value rises in order to make a profit.

Collateral foreign exchange involves the bank providing a value up to 10 times a client’s deposits and keeping the deposit this provides the client with enough money to have an impact on the market and make a profit while the bank provides an interest on the deposit also loaning it out to make a profit. However, if the client makes a loss the bank takes the money out of the deposit and therefore this is only open to people with good credit scores.

Forex Options

Forex option contracts provide a buyer with the right but not the obligation to buy or sell a specific currency at a pre-arranged price, on or before a specified date in the future. For this right the client pays a premium the higher the risk the higher the premium and all banks will hedge the risk by buying options with lower premiums in order to make a definite profit and the premium also changes based on the length of time as the longer into the future the more likely the price is to change. This can be viewed as a type of insurance for currencies, commodities and equities and the premium is highly based on probability of an event and is non-refundable.

OTC is over the counter transactions which occur in single platforms where firms and clients can directly talk. Dual currency products are a derivative instrument which combines a money market deposit and a currency option to provide a higher yield.

Basics of Banking dictionary

Dual-currency product-is a foreign exchange-linked deposit in which the principal can be repaid after being converted into the alternative currency at the strike rate at maturity depending on the spot foreign exchange rate.

EMEA- Europe, Middle East and Africa

FCA- Financial Conduct authority

FX Option- A foreign exchange option is a derivative financial instrument that gives the right but not the obligation to exchange money denominated in one currency at an agreed exchange rate on a specific date.

FX Spot- A foreign exchange spot transaction, also known as FX spot, is an agreement between two parties to buy one currency against selling another currency on spot currency. The exchange rate is called the spot exchange rate.

Option Delta- is one of the four major risk measures used by option traders, it measures the degree to which option is exposed to shifts in the price of an underlying asset or commodity.

Option Theta- is a measure of the rate of decline in the value of an option due to the passage of time and it can be referred to as an option’s time decay. If everything is constant the option loses value.

A brief introduction to the Solow-Swan model

A sustained rise in capital investment (investment in the production of goods and services) increases the growth rate of the economy but only temporarily as the ratio from the capital to the labour goes up. As when there is more capital then labour and the ratio goes up the output will level off back to its previous growth. But the output of extra units of capital may decline and therefore the economy returns to the long term, growth plan with a regular level of capital output.

The best – ‘steady-state growth path’ is reached when output, capital and labour are all growing at the same rate, so output per worker and capital per worker remain constant. This also links back to the idea that catch-up growth when a poor country is trying to catch up with a richer country is higher because a higher rate of return in capital investments in the faster growing (often poorer countries.) This suggests that countries can increase economic growth to a faster rate by releasing short outbursts of investment in capital goods which increase productivity while maintaining an efficient worker to capital ratio.

These are the main ‘ceteris paribus’ assumptions that are taken by economists in the model:

Maintained economic environment

A single composite good

Two factors of production: capital and labour

Two agents: firms and households

In a closed economy (full government control)

Economic Models There are a large variety of economic models as well as a variety of theories, they all provide us with a variety of conclusions. Classical Economics This strand of economics derives from pioneering thinkers such as Adam Smith and John Locke.

1. Adam Smith’s invisible Hand 2. Laissez Faire economic system 3. Free trade 4. The division of labour

Adam Smith’s invisible hand and the Laissez Faire economic system The invisible hand is the unobservable market force that controls the market force of supply and demand, which is the backbone of economics. Adam Smith suggested that a free market economy (one where the government left the consumers to make their own choices and purchases) the market would maintain itself as the businesses would naturally supply the items that are high in demand which would then cause competition and drop the prices increasing the efficiency of the country and improving the allocation of resources. If there

was ever a lack of supply [producers would move in to fill the gap in order to make the profit that was available there. This theory is very good but there are negatives as if the government is releasing no regulations or taxes on certain goods there will be goods with a large external cost (impact to a third party/ negative externality) such as cigarettes and petrol which the government taxes heavily and there would be no initiative to buy more environmentally friendly products such as electric cars and solar panels which are subsidised in the UK or education which is heavily subsidised in Switzerland. This is linked to the laissez Faire economy which is the free (no intervention from the government economies) as the laissez faire economy is normally needed for the invisible hand to operate completely freely. In a mixed economy, such as the UK, we can see the invisible hand still operates but is less strong so it can’t affect the whole economy making it more stable as the government controls a large range of the economy with a variety of taxes and regulations. Free trade and division of labour The classical economists also believe in free trade which is when countries trade in between them with charging any import taxes and there are no restrictions which would lead to an increase in globalisation and an increase in specialisation in a country. This leads to overall economic growth however it leaves many countries reliant on one sector and a change in the demand (slump) could easily cause a recession and unemployment. Although countries could see an increase in their diversity, in minor countries large levels of Americanisation may lead to a loss in culture due to the free trade. Specialisation is when people work on the jobs that they are best at such as in the UK there is a massive service industry in central London where there are a lot of bankers who are specialised in finance, this is how labour is divided in the UK, this specialisation is definitely enhanced in the UK. Marxism Marxism is the economic system based on theories by Karl Marx. Karl Marx believed in the command economy which the opposite of the free market which Adam Smith believed in, the command economy is one which is completely controlled by the government and the ‘invisible hand’ of the market has no control which means supply and demand have no impact. This happens as Karl Marx was a capitalist who thought it was best for the government to control resources which is good to stop dangerous and harmful substances from circulating around, decreasing negative externalities. He believed that the idea of capitalism would take over and break communism (which is the opposite of capitalism). Keynesian Economics Theory Keynes theory pointed out that a lack of overall demand would lead to prolonged periods of high unemployment, this happens as cyclic unemployment just gets worse due to high unemployment meaning less purchasing power meaning less demand in the market meaning less output which means less money in businesses which means lower employment again. The main components of the output are consumption, investment, government purchases, and net exports. However,

the bank of England can combat these changes by decreasing the interest rate or the

government by increasing spending using an expansionary fiscal policy in order to increase

unemployment and increase economic growth. Neo-Malthusian

The Neo-Malthusian theory is about Thomas Malthus’s view on economic growth and resources. He thought that the population and economic growth would eventually be checked by absolute limits on resources such as food, energy and water. That means that the population and economic growth cannot increase any further. There was mounting evidence, too, that continued population growth and the environmental stresses associated with economic development could cause irreversible damage to the environmental systems that support life. Market Socialism A compromise between socialism and free enterprise which is most commonly seen through co-operatives, where enterprises are publicly owned and everyone gets a choice on where the profit is used, but production and consumption is still controlled by market forces. There are 7000 independent coops in the UK. Monetarism The belief that money supply growth is very important, Milton freedman aimed to keep money supplied growth very stable. He believed that if money supply growth was to rapid you would get inflation but if it was too slow you would get an economic downturn causing an economy to contract. Freedman suggests that the Great Depression occurred because the national reserve (of the US) allowed money supplied growth to contract too radically. Efficient Market Hypothesis The Efficient Market Hypothesis, or EMH, is an investment theory whereby share prices reflect all information and consistent alpha generation is impossible. This suggests that stocks can never be undervalued or sold at a lower price than they are worth. New Growth theory The new growth theory suggests that if economic growth does decrease then it will increase again naturally as people will always have wants and nothing can change that. This matches the output gap diagrams which show how after economic growth which is under the trend lines the economic growth goes through a “catch up” process where it rises again. The life cycle hypothesis- shows saving and spending throughout one’s life and how consumption affect these and across what age saving and dis-saving is most likely. Behavioural Economics Rational Expectations Theory The Rational Expectations Theory summarises that individuals base all economic decisions from three major factors; what information they have available (where there are failures in markets as customers may not have full understanding), their rationality (what they think is right) and their past experiences are. This links to the rational choice theory which highlights that individuals rely on calculations and maths in order to achieve their aims and goals, based on what gives them the best benefit and is higher in their self-interest. Prospect theory Prospect theory shows that not all decisions are optimal and so we base some of them off risk. Here is the classic problem of which people would prefer.

1. A) A certain win of $250, versus B) A 25% chance to win $1000 and a 75% chance to win nothing?

2. How about: C) A certain loss of $750, versus D) A 75% chance to lose $1000 and a 25% chance to lose nothing?

Responses were different if it was about gaining money to if it was about winning money to if it was losing money because people are less likely to happy losing money so they go with D where are as to get confirmed winning money they chose option A.

The theory of Mental Accounting

People think of the value of money relatively instead of the actual value. It is based on the pleasure

gained from the item being purchased and the quality of the deal (cheaper or more expensive than

normal or elsewhere). As humans we rarely consider all the market information which leads to

market failure. People are more willing to spend more with debit cards than cash. According to the

theory of mental accounting explains how people treat money differently depending on their

situation.

The lemons Problem

The lemons problem signifies the issue with asymmetrical information between buyers and sellers which is a type of market failure. This means that more often than not the seller knows more than the buyer, so the buyer doesn’t have full information, so this means that the buyer ends up paying the average price.

Moral Hazard

Is the risk involved when entering a contract as there is a chance that even in good faith the secondary party has due to misleading information about the party’s assets. Another moral hazard is if a party has the reasoning to take unusual decisions. This is directly linked to the lemons problem as it shows the uneven distribution of knowledge.

Game theory Breaks down the odds/ chances of getting certain options based on probability commonly associated with the three doors where to win a car behind a door you should choose one to keep and the switch as the chances increase of getting the car to double the amount it would have been from before.

Comparative Advantage

Comparative advantage is when the opportunity cost for producing one item is lower for one party then the opportunity cost of them producing another item giving both parties one good with comparative advantage in a two good two country model and a lot of assumptions.

New Trade Theory

New trade theory highlights that it is important to consider the importance of the economies of scale to the country due to globalisation and therefore specialisation which would help the country a lot. This is better than the comparative advantage model as the comparative model only accounts for two goods or services.

Trilemma A Trilemma provides three equal options to a dilemma, this occurs often in the world of economics due the amount of opportunity cost a good can have.

Neoclassical Economics Is the large theory which highlights that supply and demand are the main market factors and they think the consumer’s perception of a product’s value is the driving factor of price which has links to behavioural economics, the classical economists believe that the most important factor of the price is the cost to make the good (cost of production).

IFS public lecture

Labour Supply

Why have taxes and benefits?

The government provides taxes and benefits in order to:

Public services

Redistribute income

Provide odd insurance such as for unemployment

Cost of taxes and benefits

Prevents mutually beneficial trades between firms and consumers as the private market equilibrium

is the most efficient and to change this we face the equity efficiency trade-off; what’s worth more

equality or efficiency?

For example Labour planned to increase taxes for those with incomes above £80,000 in the 2019

general election and the IFS calculated this would have lost the UK £4.5 billion in efficiency.

Everyone has to choose between how many hours to work and how many hours to relax so changes

in taxes and benefits can affect their utility maximisation between leisure and work as they may be

better off with benefits.

To measure labour elasticities that go into the utility functions we use natural experiments:

If we just ran a regression from the utility maximisation we will struggle to estimate those wages for

those people that don't work and that is a large proportion of the population so we have to use a

different technique to find out the labour elasticities.

Endogeneity is broken as the taxes are affected by wage, so the left side effects the right side, so it

doesn't work even if we were able to consider the whole populations salary. (in a regression model).

Instead we use Quasi natural experiments

The most common of which being the “difference in difference” technique

The structure of the taxes may provide a natural experiment in the UK.

For the difference in difference we presume:

Common trends- that without the reform both samples of people will have the same results.

People don't switch between the two options so people don't just change to the lower tax rate

otherwise it will negatively impact the results.

So to work this model we presume the control group will have a matching response to the reform

and then from this we can see the difference between if the two groups remained the same and

then the impact that the reform had.

e.g

There was a cut for women with high income husband's in the US, in order to increase women in

work and they could see the success from the difference in the two closest percentiles and they did

see and increase of women in the higher percentile working.

Problems may have occurred during this time:

Common trends was broken as inequality increased during this time period affecting labour supply

from women with high income husbands.

The next problem is that this makes it more worth it to marry a high income husband and so people

will move from the control to the treatment group.

In work-benefits for families with children increased. They found an increase in work from single but

a decrease in work from families.

In 2010 the people above £150,000 were taxed fifty percent instead of fourty percent and they

found that they raised 1bn pounds in the UK, with a lot of uncertainty as there could have been

movement between the treated and control groups.

They used difference in difference to find this result.

If taxes are increased do the number of people going to university decrease? How would the control

group have responded if they were treated? You can't really use the difference in difference for this.

Income Inequality

It has increased severely during the 1980s and then has remained flat since, using the Gini

coefficient.

Milton Friedman- “a society that puts equality before freedom will get either”

Inequality

First welfare theorem is if the market is at pareto efficiency there are no market failures

The private market is pareto efficient but the government still intervenes.

“A society can be pareto efficient but still be disgusting.”

A more equal outcome can’t be created with making anyone worse off in a pareto efficient

equilibrium.

So, instead, we have the second welfare theorem which tells us that we have a bundle of options

where we are pareto efficient and we can chose a variety of points so although the equality may

have the highest output.

Inequality can actually cause market failure and it can be interpreted as an externality and it can

have a positive impact on a reason to work providing economic growth.

Inequality can also reduce effort (Kearney and Levine 2016) for those that grow in an unequal

economy people can perceive themselves as against the world and so they may chose not to invest

in themselves.

Uncompetitive markets can cause inequality

Monopsonies suppressing wages.

Monopoly owners achieve super normal profits.

To measure inequality we can use:

Annual income

Gini coefficient

Percentiles

Income ratio

The state protects us against all types of risk such as unemployment disability and living too long

these are types of social insurance. Insurance is important for risk adverse individuals.

Why do we need government intervention in this case?

Market failures

Asymmetric information

Paternalism- To correctly perceive externalities

Redistribution- from the rich of the poor

The issue the government providing insurance is:

Moral hazard- so if people know that if they leave there job they get good benefits and so they

aren't too worried so it increases the odds of them becoming unemployed.

The optimal condition is then to provide a limit for the insurance, such as putting a time limit on

unemployment benefits.

Healthcare

Why do economists care about healthcare?

Because we spend a lot on it, £160 billion a year and it is increasing and it is supposed to double by

2035.

Health is also an important input to human capital.

Economists found conditions in the womb have severe impacts on the child’s future in terms of

economic outcomes such as wages.

Also people are really proud of the NHS only second to the fire brigade, we care about their well-

being.

What if we just left it to the market?

We would have adverse selection as there is asymmetric information as only people who are

unhealthy purchase the insurance the company makes losses at fair prices, so the price rises and

higher risk individuals pay for it only. This pattern continues until the insurance companies provide

no insurance.

There are also externalities, infectious diseases, healthy workers are more productive and absent

less.

Competitive markets are the best market but the assumptions are broken:

A large number of firms

Free entry and exit

Full information

Private costs

So government intervention is needed so almost all OECD countries have social insurance.

There will be redistribution from healthy to unhealthy people and the moral hazard problem will

always remain. Therefore the government should charge a percentage of the work and some

countries have user charges for the first £100 or have waiting lists.

The government steps in to provide social insurance against a range of events.

Our defence spending is already at the NATO minimum so we don’t have room for movement.

Higher education

Why does the government regulate and subsidise higher education?

As the free market causes externalities and incomplete information.

Let's presume a completely private market in higher education. Students in poorer families will be

credit constrained.

Free market economists may say that it is the optimal but there could be risk but students could just

insure against this so if this worked then we could have a completely private market for education.

Once again the idea of insurance is an issue in the free market as only the students with low earning

expectations will purchase this and so we enter the free market insurance problem. On top of this

moral hazard is an issue as students may be less worried about finding a great job or putting

maximum effort in.

This sort of market can't exist and we see in the US there are high interest rates on student loans.

There are non-private returns to education:

Higher tax revenue

Higher productivity

Better health

Lower crime

In order to make optimal choices need complete information on the:

Quality of teaching

University experience

Prices

Repayments of loans

What does the UK government need to do to intervene?

Alleviates credit constraints by offering student loans and set rules on the repayment to the loans

such as only pay for earners over a certain wage and the loan can be foregone if students don't pay

it back by 40 and the moral hazard is relatively low as the insurance is only partial.

Another small scale policy is to use subsides for teaching grants for medicine and stem, bursaries for

teachers or information provision from the government which helps reduce information asymmetric

information.

Has efficiency be restored?

The government has done very well to get to efficiency but it costs 3 times more for the government

to get a creative arts student through university than an economics student (30k to 10k).

Financial returns to higher education

Students consider whether to attend university ?

Which subject should they take?

It is more valuable to get 5 A stars to C at GCSE level than to go to Bolton university

The government has to consider multiple things about the returns they will get to test why people

that go to certain universities earn more.

We have to check the regression discontinuity by making thresholds and compare those just under

or just above or by using a standard linear regression with controls and then u can compare earnings

from those who came from certain backgrounds then you can remove all bias an consider them

similar students who are at different universities.

The IFS uses the Leo data set to understand the value of education results from Belfield et al.

(2018b)

Controlled values

Socioeconomic background

Prior achievements

Demographics

The adapted data shows the returns differences in different universities are highly similar in

different courses it seems like economics as a subject generates higher incomes at all places than

creative arts. The better you did at school the larger in difference in salary between the subjects as it

seems the economists have higher salaries due to the fact that the value of the subject can rise

steeply.

The economics of child development

Children whose parents attended university are 3.5 times more likely to attend university early child

development is from conception to 5 years.

Things to consider:

Height

Health

Cognitive skills

Socio-emotional skills

Motor skills

These contribute to the human capital market

It is not just about spending money on the children:

Create and stimulating play

Words and verbal interactions

Play materials

Loving relationships

Unhealthy young kids causes:

Hindering cognitive skills

Hindering school achievements

Hindering productivity later in life

Contributing to inter-generational things

Why does the government care?

Efficiency

Parents and guardians may under invest

Equity it will help reduce the inequality gap

Is there a trade off?

Consumption today has the opportunity cost of consumption tomorrow.

Positive externalities

Higher education, higher productivity, higher taxes, reduced crime and reduced inequality.

This positive externality is under consumed as:

They have borrowing or time constraints don't have enough time to spend with children

Lack of information

Insufficient altruism

Parents may put their utility over their child’s.

Children from worse backgrounds have worse results, things like a shock can affect concentration at

school and indirectly we can look at the idea that they have less stimulation at the young age and

struggle to pick up the cognitive skills.

Policy options to resolve this market failure:

Childcare

Subsidise, regulate, or substitute for maternity leave or provide?

Preschool program

What age?

Universal?

Cash transfers

Food stamps?

Teacher training

How can research help?

What is the optimal to invest?

Does investing in one period means we don't need to in another?

Does investment depreciate?

Are there complementarities between investment types?

You get a higher rate of return when investing at a younger age; after schooling it is worth more to

invest elsewhere.

Physiological stimulation and child development before age 3: experimental results in Colombia

(Attanasio et al., 2015)

Why is early childhood development important?

It is a big determinant of future outcomes

Helps equity and efficiency for the government

Gives everyone an opportunity to improve their life

Corrective taxes

Are taxes on specific goods to alter people's consumption decisions useful?

They raise 7 percent of government revenue.

Correct externalities that are created when there are costs to a third party not involved in the

decision.

This means we can someone better off without making someone worse off.

Coase theorem- can bring the socially optimum market quantity

Coase has specific assumptions-

Property rights are well defined

Bargaining is costless

Complications including measuring the externality may occur.

Optimal taxes should be done on the externalities:

we should increase tax on ciders

However paternalism suggests individual failures don't exist and the government uses internalities

as an excuse to intervene.

On the other hand, the individual failures view suggests the opposite that there are human mistakes

and we have a lack of control of these “internalities”.

Taxes

Why do we care about government taxes?

1. Public spending

Spending is supposed to increase substantially with an aging population in comparison to the

standard flat public revenue.

2. Redistribution will help reduce inequalities severely.

3. Changing behaviour e.g. to address global warming basically to reduce externalities and

internalities.

The economic approach to tax design:

What’s the problem?

Fundamental welfare theorems.

Any competitive equilibrium leads to a pareto market.

Any efficient allocation can be attained as a competitive equilibrium and lump sum taxes are

Efficient as they move across a range of pareto efficient option

What do we want?

• low administration costs

• fairness

• transparency

• minimising directions

Mirrlees review (2011)

What do the people want?

• simplicity

• stability

• neutrality- treat different goods and incomes equally, fairer

Let's focus on indirect tax:

VAT is the third biggest tax that we have paying 18 percent of the UK government revenue.

VAT has been rising in revenue since the sixties in all countries and this happens as it removes taxing

the intermediate goods.

Taxing intermediate goods distorts relative distorts relative input prices for producers

This is the productivity efficiency theorem

Taxes on inputs are not neutral about the supply chain, so longer supply chains cause higher taxes,

this can be an incentive for a firm to produce their own inputs and a good indirect tax system should

tax consumption only.

VAT also has tax compliance and enforcement benefits.

Departures from neutrality: the role of evidence.

Neutrality is very important for indirect taxes.

In the UK we don't have a neutral VAT system because of this our VAT revenue is very far behind our

maximum available currently at 45 percent of the maximum possible.

If we had an equal distribution of vat rate in the UK the poorest would be hit the most so in cash

terms most the tax revenue comes from VAT so it can redistributed down which helps by creating a

rise in the total tax revenue. The impact is the poorest 40 percent will make a profit from this

rearrangement and so also very efficient for closing the budget deficit

A low rate on childcare to offset disincentives of income tax.

The aging population and pensions how will we deal with it

The number of years lived after the age of 60 is increasing and the old age dependency ratio is

severely increasing. We have an aging population so how will we pay for the pensions?

What does ageing mean for the sustainability of pension systems?

Pensions in the UK:

State pension paid by the government paid to everyone who have sufficient years of eligible

activities, the government pays when they get the taxes at £160 a week.

Employment pensions

Defined benefit: such as two-thirds of your salary before retirement

Defined contribution: you can chose how much you want to take out of your salary yearly and put it

into a pension pot which you can claim out, after retirement.

Other forms such as property portfolios, savings, own pension investments e.g. stocks.

To increase the longevity the government can:

Increase the taxation

Reduction in the generosity of the pension fund

So far they have:

eliminated the earning related part for the state pension and it's now standard at £8320 a year

increasing state pension age from 65 to 68 the government's current promise for the pension system

is not sustainable as they are offering the highest Changing factor every year out of three factors.

How do individuals provide for themselves in their retirement; this is increasingly becoming the

responsibility of individuals. If people were very rational then we wouldn't need to worry and

economics tells us that this isn't true which would cause people to not make the optimal choices

because of irrationality and imperfect information.

The response has been to since 2012 one must automatically enrol into a workplace pension as a

default if you earn above a minimum.

This was very efficient and was a huge policy success to tackle procrastination. 90 percent opted in

to the workplace pension scheme.

Should everyone be opted in?

Uncertainty about morality, do people know how long they are going to live?

They are not sure so they may overspend.

Should we be worried?

Most individuals currently reaching retirement can maintain income

(Crawford and O'dea, 2012)

Wealth accumulation has stalled for younger generations, but we have to understand they have low

interest rates and we just went through a period of low economic growth.

A-Z of economic careers Accountant

An accountant’s role involves two main parts: bookkeeping and advising. The bookkeepers record all financial transactions that occur in a company and note the assets and liabilities, and some give advice on what firms should do to sort out their budget. The minimum training is atleast 2 passing A-Levels and atleast 3 passing GCSEs including maths and English and an accountancy qualification or degree is recommended to go further. Starting salaries are from £20,000 to £30,000 for trainees and around 6 to 9 years after qualifying salaries can be £90,800 plus £20,000 in bonuses and your total earnings can soar up to £172,800.

Accounting Technician An accounting technician’s role involves helping qualified technicians to keep financial records and preparing tax returns. There is no minimum training but to go further AAT’s are a good option and there are accounting degrees. Starting salaries are from £17,591 for trainees and earnings can go up to £20,897.

Actuary An actuary’s role involves using specialist statistical skills, probability theory and compound interest to design solutions in sectors such as insurance, pensions and risk assessment. The minimum training is atleast 2 or 3 passing A-Levels and atleast 5 passing GCSEs including a strong maths pass and English and a 2.1 or higher degree is almost essential. Starting salaries are from £5,936 for trainees goes to £52,594, a function head tends to earn £116,676 yearly and as a chief actuary your total earnings can soar up to £206,236 plus bonuses.

Auctioneer An auctioneer’s role involves selling different items at auctions such as stock, commodities, furniture and many more as well as that you would have to assume the value of some items. The minimum training is atleast 2 passing A-Levels and atleast 3 or 4 passing GCSEs including maths and English and a qualification is recommended to go further. Starting salaries are from £22,000 to £26,000 for trainees and after qualifying salaries can be £28,000 to £36,000 and your total earnings can soar up to £40,000.

Business manager/ Executive A business manager’s role involves watching over a business and keeping it productive by avoiding diseconomies of scale and ensuring the company is profitable, this can be with the smallest or the largest of firms. Your main role would be organisation throughout the levels of the company. There are no set minimums, but qualifications and degrees are available in management. Starting salaries are from £18,000 to £25,000 for trainees and with experience salaries can be £45,000 to £65,000 and your total earnings can soar between £80,000 to £2,000,000.

Buying Executive A buying executive’s role involves controlling the products being bought and sold by your organisation to keep it running, competitive and profitable. 2 or 3 A-Levels are required along with 4 or 5 GCSEs and qualifications and degrees are available in the type of firm you are managing. Economics isn’t necessary. Starting salaries are from £21,000 to £26,000 for trainees and with experience salaries can be £35,000 to £45,000 and your total earnings can soar between £55,000 to £70,000.

Economist

An economist’s role has the widest range of possibilities including watching over a macro-economic structure or researching data. 2 or 3 A-Levels are required along with 5 GCSEs and qualifications and degrees are available in the type of firm you are managing. A good honour’s degree is recommended (a 2.2). Starting salaries are from £25,000 to £27,000 for trainees and with experience salaries can be £32,000 to £45,000 and your total earnings can soar between £60,000 to £80,000. It can go all the way up to £350,000 with benefit packages.

Financial Adviser A financial adviser’s role involves helping both individual clients and large firms on suitable investments for them. 2 or 3 A-Levels are required along with 4 or 5 GCSEs and qualifications and degrees are available in the type of firm you are managing. A degree or a diploma is recommended as further education. Starting salaries are from £22,000 to £30,000 and can go higher.

Insurance Broker An insurance broker’s role involves helping clients decide what insurance they need. Your job is to put the client first even though the insurance companies will offer you commission. A-Level student and graduates are preferred. Starting salaries are from £22,000 to £26,000 for trainees and with experience salaries can be £40,000 to £80,000 and your total earnings can soar up to £100,000 plus bonuses.

Insurance Underwriter An insurance underwriter’s role involves assessing the risk of providing insurance to specific people. 2 or 3 A-Levels are required along with 4 or 5 GCSEs and qualifications and degrees are available in the type of firm you are managing. Economics isn’t necessary. Starting salaries are from £21,000 to £26,000 for trainees and with experience salaries can be £35,000 to £45,000 and your total earnings can soar between £55,000 to £70,000.

Investment Analyst An insurance underwriter’s role involves informing individuals or companies which investment is most suitable for them and their needs based on a plethora of factors. 2 or 3 A-Levels are required along with 4 or 5 GCSEs and qualifications and degrees are highly recommended. Starting salaries are from £30,000 to £40,000 for trainees and with experience salaries can be £65,000 to £100,000 and your total earnings can soar between £120,000 to £1500,000 with bonuses of up to 200%.

Management / Business Consultant A business consultant’s role involves communicating with companies on how to improve the structure of their firm. Management training/ diploma/ degree is required. Starting salaries are from £25,000 to £30,000 for trainees and with experience salaries can be £50,000 and your total earnings can soar to £250,000.

Managerial Roles Catering manager, Chief Executive/ Financial Officer, Hospitality/ Hotel manager, Human resources manager, Leisure services manager, Library manager, Logistics/ Supply chain manager, Retail manager and Stage manager.

Market researcher A market researcher’s role involves finding what the public want or think about a product, this is a very important role as it helps the firm to survive in a market. 2 A-Levels are required along with 5 GCSEs and economics isn’t necessary.

Starting salaries are from £20,000 to £25,000 for trainees and with experience salaries can be £32,000 to £38,000 and your total earnings can soar between £45,000 to £100,000.

Marketing Executive A marketing executive’s role involves securing the best goods and services for the company to sell by matching the product with client requirements. 2 or 3 A-Levels are required along with 4 or 5 GCSEs and qualifications and degrees are available in the type of firm you are managing. Economics isn’t necessary but English and maths are recommended. Starting salaries are from £22,000 to £27,000 for trainees and with experience salaries can be £30,000 to £50,000 and your total earnings can soar between £65,000 to £120,000.

Shipbroker A shipbroker’s role involves facilitating the business of international trade shipping. No specific requirements. Starting salaries are from £26,000 to £28,000 for trainees and with experience salaries can be £70,000 to £100,000.

Stockbroker A stockbroker’s role involves buying and selling stocks and shares to make a profit. 2 or 3 A-Levels are required along with 4 or 5 GCSEs and a degree is almost compulsory. Starting salaries are from £30,000 to £40,000 for trainees and with experience salaries can be £50,000 to £80,000 and your total earnings can soar above £150,000 plus bonuses.

Other less known, newer jobs include: Quants, Chief Technological offices, FX Options Trader, Statistician, Forensic accountant, data analyst, quantity surveyor. P.V.P