who knew?

The importance of perception in Economics.

I think to answer this question we should first understand the meaning of the word "perception". Oxford dictionary define this word as "a way of understanding or interpreting something".

So what is the importance of understanding in Economics?
This question can be discussed from two different points of view:
microeconomic and macroeconomic.

In typical microeconomic model we usually have three sides:producers and consumers and the government. 

• From the point of the producers right understanding of the situation in the market is essential. Producers should decide what they should produce,the amount of goods/services they should produce and how to produce that. So wrong perception of markets is likely to lead to an economic inefficiency("wrong" good supplied, shortage/surplus of the good,productive inefficiency)
• From the point of the consumers right understanding of the market system is also important. In my humble opinion perception in this situation is similar to expectations. Expectations influence demand and therefore may also lead to an economic inefficiency.For example, if people are said that there is no more salt left in shops, they will increase demand and therefore buy all salt from the shops.
• From the point of the government wrong perception of the economic situation is likely to lead to the government failure and therefore greater economic inefficiency.
  

In typical macroeconomic model we also may define three main macroeconomic agents: firms,households and the government.

• Firms should have right perception of the economic situation to decide on the production(as well as producers in the first model),they also should have confidence in current economic situation  to plan investment.
• Households should have the right perception of the economic situation as well as have  confidence in it. These elements combined will encourage households to spend more and save less therefore improving economic performance of the country.
• Government should understand current situation in the country because wrong policies may ruin not only economical prosperity but also may damage every other sphere of people' life.
  
  

Phillips curve.

You have heard this term before but you didn't know what is it,let's ask wiki!

Easy Phillips curve:Simplifying 4 thousand words of that wiki article, this curve shows correlation between unemployment and the rate of inflation. It was made by Alban William Phillips who studied the relationship between rate of change of money wage rates and unemployment. This curve shows that there is a trade-off between inflation and unemployment. It can be simply explained by the fact that if there is high unemployment the wages are low and therefore the inflation rate is low and vise-versa.

Complicated Phillips curve:
Most of the economists think that Phillips curve is too simplistic and can't explain real world problems and trade-offs. So another theory was invented.It was called NAIRU or  Non-Accelerating Inflation Rate of Unemployment. It explained why stagflation may happen.

So on this graph we can see ordinary Phillips curve and a long run Phillips curve.The theory says that if the unemployment is at point A then there will be a stable rate of inflation but if policy makers decide to decrease unemployment in the short-run this will lead to an increase in the rate of inflation and in the long run increase of the unemployment as well and so stagflation occurs. This term comes from a believe that if the unemployment is below NAIRU then inflation is accelerating and when unemployment greater than NAIRU inflation is slowing.

Nowadays some economists refuse to accept these theories because they may not work in some cases such as in the USA during 1990.

Examine the impact of the current weather on the British economy.

Current weather worsen the economical situation in the UK because during previous week about 20% of all workers didn't go to work because of the weather conditions and that had an estimated costs to the economy equal to 6 bln pounds.

"The economy gets put back by a day as people earn less and pay less tax. People make do with what they've got at home, they don't go out and buy a sandwich," said Stephen Alambritis, chief spokesman at the FSB. 

Trading volumes at the London Stock Exchange were more than 10pc down as market makers failed to get into work. LSE said it expected about 580,000 trades to have taken place on Monday, compared with the 650,000 that took place on an average trading day in December.

© Copyright of Telegraph Media Group Limited 2009

I also suppose that most of the households were not prepared for such storms and so they started to use more fuel and that lead to an increase in imported gas and other fuels. So that lead to slowdown of the AD(because of increased leakage)

Does the recession mean that Britain should now adopt protectionist policies?

If you read this you will see that many people suppose that protectionism is almost a suicide for the UK economy and that may sound reasonable.But in my humble opinion we should answer these questions first: 

What is protectionism? 

• If we google it,we will see that protectionism is "economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed to discourage imports, and prevent foreign take-over of local markets and companies." ©Wiki.

What are the benefits of this policy?

• Protectionism may help developing industries within the country. Developing industries may not use economies of scale therefore may not be able to provide low prices(compared to foreign companies). So protectionism may make domestic companies be price-competitive.
• Protectionism may help industries that are in decline, providing incentives for firms to reinvest and revive.
• Protectionism may increase government's profits from taxes on imports.
• Reducing imports(as one of the leakages in the flow of income within the country) may boost the AD and therefore may lead to the economic growth.
• Protectionism may also increase FDI,if foreign companies really think that UK's market is worth it.
• Protectionism prevents globalisation and therefore may "increase" Cultural Identity. 

What are disadvantages of protectionism(or advantages of free trade)?

• Theory of comparative advantage. It says that countries that specialise in the production of certain good probably increase welfare of all countries.
• Increase in consumers surplus because protectionism decrease imports and therefore increase prices.
• Protectionism also may lead to cost push inflation because firms that import raw materials will have increased costs and therefore will have to increase prices.
• Protectionism policy may discourage firms to cut costs and therefore be less economic efficient.
• Free trade may help to establish economies of scale.
• Free trade encourage competition and therefore lead to greater economic efficiency.

So will that be a help during the recession?

I really believe that protectionism may be a help to the UK's economy,some industries need protection. Tariffs may also be an incentive for firms to enter the market and therefore decrease unemployment and increase aggregate supply. I also think that the Uk's markets are quite attractive for foreign firms so tariffs may also increase foreign investment and that is likely to increase both aggregate supply and demand. So protection of some industries may be help to the UK' economy, but introducing restrictions on all trade is likely to lead to inflation because England do not have enough resources to maintain production so more expensive imported raw materials are likely to lead to an increase in price level. I also think that introducing protectionism policy in some cases is useless because some markets won't be profitable for domestic firms that can not have economies of scale that foreign firms already had.