Suddenly, US retail prices has fallen in December 2009. A huge fall in prices was recorded in sales of electrical goods and cars.( hence prices for fuel, building materials and steel fell). US Commerce Department showed that prices fell by 0.3 % compared with November. This sudden declining in price was caused by decreasing in consumption. People consumed less than over the festive season last year. Finally December sales has fallen by 6.2 % compared with last year.
For many firms this event was unexpected, since they could experience declining in their profits. Concerns over job security are expected to continue to restrict spending, with unemployment still at 10%. Many economists expect unemployment to keep rising until the middle of the year. This event was experienced also in other big countries, such as UK, Japan, China, etc. But economists are expecting a warming (improvement) in economic situation next year. "I don't think that portends a new downturn in the economy, but it does serve as a warning that the recovery is going to take some time to put in place here," commented Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York.
P.S.
I was really pleasant when I read (in the past) this chapter on BBC, because my headphones have just broken and I realized that I had a good opportunity to buy it (prices has declined). Unfortunately, I realized that this chapter was about US retail prices!!!!!. When I went to the shop in Oxford, I saw the same price as 3 month ago((((( 79 POUNDS ((((
Reasons for changes in interest rate (determinants of interest rate)
- consumption. When people are taking borrowings (loans), they usually spend this money immediately (they buy cars, houses, trips, etc.). So people prefer goods now, not in the future, that why demand for loans is increasing and , therefore, in a free market system there will be a positive interest rate (growing interest rate).
- inflationary expectations (expectations about inflation rate in the nearest future). The lender ( a person who gives a loan) has to secure from expecting losses because of increasing rate of inflation.
- risks of investment. There is always a risk that the borrower will go bankrupt or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure(guarantee) that, across his investments, he is compensated for those that fail.
- taxes. Some of the gains from loans ( profit from loans) may be subject to taxes, the lender has to insist on higher rate to compensate losses.
Interest rate and Balance of Payments.
Higher interest rate will lead to:
- decrease in consumption of import goods. Consumers would, probably, consume less because of high expenses on borrowing.
- decrease in production goods ( goods for export) because it would be more expensive to produce goods (more money is needed to pay interest rate), therefore goods for export will be more expensive and less competitive.
Lower interest rate will lead to:
-increase in the amount of import goods. Consumption is rising since people have more money to spend (easier to borrow money).
-increase in production in the country, the amount of goods for export is rising.
Is the Bank of
From my point of view the Bank of England made a right decision. I’m going to look at this closely.
There are advantages and disadvantages in this decision.
One of the main disadvantages is that with low interest rate banks would decrease their rate for deposits. For people, who have their own money, there wont be a reason to keep their money in the bank on a deposit account, because they will receive a very low interest. On the other hand low rate of deposit will encourage “money keepers” to invest ( put their money into investment funds), because they can make more profit from dividends. Low interest rate will boost economy. Households will purchase more and, on the other hand, firms and companies will produce more (they will receive chipper funds to expand their production). Low interest rate would also reduce inflation, large number of firms and companies (suppliers) will keep inflation at low rate.
Of course all this changes in interest rates would lead to a positive effects on the economy if the government would not change other factors in the economy in a positive way (changes in fiscal policy, supply side policy, tariffs of trade, in others).
Here is an example of using methods of monetary policy to prove economy in recession.
UK interest rates have been left at 0.5% following the Bank of England's latest meeting. The cost of borrowing has been at a record low since March 2009 and economists do not expect the central bank to raise rates in the near term. The Bank's Monetary Policy Committee (MPC) also maintained the quantitative easing (QE), or asset buying, programme at £200bn. The UK is thought to have exited recession in the last quarter of 2009. The MPC said it expected its QE programme to take another month to complete and that the scale of the programme would be kept under review.
The data below shows how the rate of borrowing money has fallen immediately in March 2009.
I felt very surprise when I saw a void on the shelves in my local supermarket. The cause of this was the weather.
For last two days there was a snowstorm in England. Many drivers spent night on the motorways in their cubs. So in the morning retailers didn't recieve their orders (products) in time. However, stores faced a "punic buying". Consumtion of first-need products (like food, for instance) has increased roughly.
Stores have faced problems with delivery. A lot of vans were blocked on motorways in snow captured. Christopher Sturman, chief executive of the federation which represents 45 storage companies and 16 distribution companies, said members were worried about the level of gritting of roads. He described the weather conditions as the worst for 20 years and said one of the key problems was drivers being able to get to work.
There were also problems with home delivery. As people decided to stay at home, demand for online delivery has increased roughly.
Analysing this event, some scientists have started a discucion about consumer psychology. Paul Buckley, a lecturer at the University of Wales Institute, said that "social influence theory" meant that some shoppers followed the crowd if they saw their friends and neighbours stocking up with food now.
I would like to tell you about situation with swine flue that has happened in November - December in Ukraine. Ukrainian government ( in head with Juliya Timoshenko) sad to publicity that we had the most dangerous epidemic in our history. They also published some numbers about people who were ill with N1h1 virus (swine flu).
The government also announced that we had the biggest percentage of ill people for recent decades. But all this data was misleading. As you know, perhaps you know, there is an election period in Ukraine now. So the government ( Juliya Timoshenko) has created misleading (non-existing) epidemic of swine flu to ban all mass events ( like rally, for instance). All schools and universities have been closed for 4 weeks in average. Some schools have not been opened for even 3 months. So pupils and students have faced a lot of problems with studying (now they have to go to school on Saturdays).
