Expectations

We've talked at various points about the effect of expectations: On exchange rates, on investment, and hence on national output, GDP.

Today the BBC reports that business leaders fear a hung parliament because of the potential paralysis that it could produce.

This is an expectations effect: If firms are more pessimistic they may invest less, meaning that the economic growth reported in the last two quarters may be unsustainable.

Much political hay will be made of this. The Tories have most to fear about a hung parliament for many reasons: One is that not so long ago they expected to win outright - that looks unlikely now. The second is that a Labour-LibDem pact is much more likely than a LibDem-Tory pact, regardless of the recent pronouncements by the major parties.

If the political maneuvering fascinates you, you should think about taking a microeconomic theory module next year, one that will introduce you to game theory. See you at 9...