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Home > Wednesday Wisdoms: Newsletter > What happens next....?

Welcome to the 25th edition of Wednesday Wisdoms by EdGenie!

Every Wednesday I send out actionable tips, tricks and real-world application insights from my 13-year experience coaching students to achieve As and A* in their Economics and Business A Levels.

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What happens next....?

Hey Genies

Ever find yourself in the middle of an answer, your pen hovering over the paper, thoughts scattered? You're not alone. It's a common scene in the journey of mastering A-Level Economics, especially when it comes to crafting those crucial chains of reasoning in your analysis.

Here's the deal:
Building a robust chain of analysis isn't just about knowing your stuff – it's about linking each point seamlessly, like a chain, to form a compelling argument.
But there's a trick to keep your analysis on track and ensure you don't miss those valuable steps. It's simple but incredibly effective:

🔗 Just ask yourself, "What happens next?"
This one question can transform your chains of reasoning from fragmented thoughts into a well-structured analysis. Let's break it down with an example:

Without "What Happens Next?":
"Higher interest rates may reduce inflation. It makes borrowing costlier, potentially reducing spending."
Sure, it's a start. But it's like having the pieces of a puzzle without connecting them. It lacks depth and doesn't showcase your economic understanding.

With "What Happens Next?":

When the central bank raises interest rates, it immediately impacts the banks. Initially, commercial banks feel the squeeze. They pass on these higher rates to consumers, making loans and mortgages more expensive . So, what happens next? Households find borrowing more expensive. Discretionary spending drops as mortgage borrowers find more of their income goes towards interest payments. What's the consequence of this reduced spending? Retailers and service providers see a decline in sales. This decrease in consumer demand signals businesses to cut back on production and investment, wary of overstocking or overinvesting in an uncertain market.

What happens next? As businesses reduce their investment, the demand for labour softens, risking higher unemployment. This potential rise in unemployment feeds into the negative multiplier effect, further contracting consumer spending and confidence. And how does this all tie back to the economy? It's reflected in the Aggregate Demand (AD) curve, which shifts to the left, indicating reduced overall demand in the economy. Lower AD can help to cool inflation rates, but it also brings the risk of slowing economic growth, showcasing the delicate balance central banks must maintain when tweaking interest rates.

See the difference? The second response uses the magic question to delve deeper, demonstrating a thorough understanding of economic linkages and their implications.

Remember, each point in your answer should be a stepping stone to the next, painting a complete picture of economic cause and effect. So next time you're building your argument, pause and ask yourself, "What happens next?"

This approach doesn't just add depth to your analysis; it showcases your ability to think critically and link economic concepts, a skill that examiners reward.

Keep practicing this technique, and watch as your chains of reasoning become stronger, your analysis more thorough, and your grades? Well, they'll speak for themselves.
Until next time, keep asking, keep analysing, and keep soaring!

Emre


​Lower UK government borrowing raises prospects of tax cuts

Summary

📉 Reduced Government Borrowing: Government borrowing in the UK fell to £7.8bn in December, a decrease from the previous year and the lowest for the month since 2019.

💷 Interest Payment Decline: Interest payments on government debt dropped to £4bn, down £14.1bn from December 2022, aided by last year's fall in inflation.

📊 Potential for Tax Cuts: Analysts suggest the improved borrowing figures provide Chancellor Jeremy Hunt with more flexibility, potentially leading to tax cuts in the upcoming Budget.

🗣️ Jeremy Hunt's Tax Cut Hints: At the World Economic Forum in Davos, Hunt hinted at a desire for tax cuts, stirring expectations of such measures in the March Budget.

📈 Inflation and Interest Rate Impact: The decrease in inflation has led to predictions of a quicker reduction in interest rates than previously forecasted by the Office for Budget Responsibility (OBR).

📝 Borrowing Forecast Revision: The OBR is expected to significantly revise down its borrowing forecast from 2025-26, potentially allowing the chancellor to implement popular tax cuts while adhering to fiscal rules.

🔍 Government Debt Overview: The total government debt stood at £2.67 trillion at the end of December, equating to 97.7% of the UK's GDP, a level not seen since the early 1960s.

🚨 Rising Debt Due to Recent Crises: The sharp increase in government borrowing in recent years is attributed to pandemic-related economic support and subsidies for energy bills following Russia's invasion of Ukraine.

🗣️ Political Responses: Treasury and opposition figures acknowledge the challenges posed by the high national debt, with differing views on the impact of the Conservative government's economic management.

A Level Economics Questions:

Q:How does a reduction in government borrowing impact fiscal policy in the UK?
A: A reduction in government borrowing can provide more flexibility for fiscal policy, potentially allowing for tax cuts or increased government spending. It reduces the need for the government to finance its expenditure through debt, thereby potentially lowering interest payments and creating more room in the budget for other priorities.

Q: Evaluate the potential impact of a decrease in interest payments on UK government debt.
A: A decrease in interest payments on government debt can free up government resources, reducing the strain on public finances. This can potentially lead to a budget surplus or allow for increased spending in other areas, such as public services or infrastructure projects, without increasing overall borrowing.

Q: Discuss the implications of a decrease in inflation on the UK's monetary policy.
A: A decrease in inflation can lead to a loosening of monetary policy, including lowering interest rates. This can stimulate economic growth by reducing the cost of borrowing for businesses and consumers. However, if inflation falls below the target, it may also signal weakening demand, which could prompt further monetary stimulus.

Q: How might the expectations of tax cuts in the upcoming Budget influence consumer and business confidence in the UK?
A: Expectations of tax cuts can boost consumer and business confidence. Consumers may anticipate higher disposable income, potentially leading to increased spending. Businesses might expect improved profitability and investment opportunities, contributing to economic growth. However, the effectiveness depends on the scale of the tax cuts and the sectors of the economy they target.

Possible A Level Economics 25 Marker Question

Assess the potential economic effects of the UK government's high debt-to-GDP ratio. 

Infographic of the Week

From Empire to Innovation: A 150-Year Journey of Global Trade Dominance

Over the last 150 years, the landscape of global exports has dramatically shifted, reflecting the rise and fall of economic superpowers. In the 19th century, Britain's industrial prowess led the world in merchandise exports, bolstered by its empire and efficient production, with India being a key export destination. Post-World War II, the United States emerged as the new leader in global exports, benefiting from its unscathed industrial base while Europe recovered from the war's devastation. Moving into the late 20th century, Japan's rapid growth, particularly in electronics, marked its ascent as a major player in global trade. Today, China stands at the forefront, commanding nearly 15% of all merchandise exports with its expansive manufacturing sector, producing everything from precision instruments to semiconductors. The journey from British dominance to China's current position underscores the dynamic nature of global trade, where economic power shifts in tandem with industrial and technological advancements, growing from $59 billion in 1948 to a staggering $24.3 trillion in 2022.

Chart of the Week

India's Economic Surge: Set to Outshine China in Global GDP Growth Race

The global economic landscape is witnessing a significant shift, with India emerging as a consistent frontrunner in GDP growth, outpacing its regional rival China. As per the IMF's World Economic Outlook from October 2023, India's economy is buoyant, with forecasts showing a robust growth of approximately 6.3% over the next half-decade, riding high on the central bank's revision for 2023/2024 to a stellar 7.3%. This trajectory positions India on the cusp of becoming the world's third-largest economy by 2030. In contrast, China's once-rapid economic expansion is showing signs of cooling, with real GDP growth dipping to 5.2% in 2023 and expected to fall below 4% from 2027, amidst population decline, property crises, and deflationary risks without significant economic stimuli. This diverging economic fortune, however, casts a spotlight on the uneven distribution of prosperity within India, where large corporations thrive on benefits and tax breaks, while smaller businesses and households grapple with rising bureaucratic hurdles and tax burdens financing such corporate incentives.

Macroeconomic Data


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A huge thanks for hopping on board EdGenie's Wednesday Wisdoms newsletter! 
I'm Emre, and I've got a big goal - to make A* education accessible to all A-level students.
And it Starts With You!

Emre Aksahin
Chief Learning Officer at Edgenie