Sample Economics IA (IB)

Just a sample Economics IA to give you a feel of what it entails.


An Economics IA typically is focused on one of the 5 areas of the syllabus: Introduction in Economics, Microeconomics, Macroeconomics, International Economics or Development Economics. They require around 650-750 words in length (including diagrams, labels and footnotes).

This IA is on Microeconomics, 747 words long, and is a commentary of the original article, UK house prices rise by 1.6% in August - the largest increase since December 2006, from the DailyMail.co.uk 27/08/09.

The article:

Daily Mail

UK house prices rise by 1.6% in August - the largest increase since December 2006

By Daily Mail Reporter
Last updated at 4:24 PM on 27th August 2009

The average cost of a home in the UK jumped by 1.6 per cent during August

House prices rose for the fourth month in a row during August as the market continued to be boosted by a shortage of homes for sale, figures showed today.

The average cost of a home in the UK jumped by 1.6 per cent during the month, the biggest increase since December 2006, according to Nationwide Building Society.

The annual rate at which prices are falling also continued to ease during August, narrowing to just 2.7 per cent, down from 6.2 per cent in July.

The group said prices were now 3.2 per cent higher than at the beginning of 2009 at an average of £160,224, although it added that they were still 14.4 per cent below their peak in October 2007.

Martin Gahbauer, Nationwide's chief economist, said: 'The exceptionally low level of interest rates offers some explanation for why house prices have not repeated the very sharp falls of 2008.'

He said low interest rates had fed through into lower mortgage repayments for existing homeowners, making it easier for people who lost their jobs to continue to afford their home loan.

As a result fewer people have been forced to sell their home as is normally the case during a recession, and this has contributed to shifting the balance of supply and demand in favour of sellers during 2009.

Low interest rates have also helped make property more affordable for first-time buyers, boosting demand, despite the ongoing problems in the mortgage market.

But Mr Gahbauer warned that when interest rates did start to rise again it could make the recovery in the housing market 'bumpier' than might be expected following the recent run of price rises.

The latest figures on the property market come just days after the British Bankers' Association said the number of mortgages approved for house purchase had risen to a 17-month high during July.

The Council of Mortgage Lenders also reported a 26 per cent rise in mortgage lending in July to its highest level for nine months, as buyers continued to return to the market.

But despite the recent pick up in housing transactions, economists have warned that the number of homes changing hands still remains well down on normal levels.

The ongoing problems in the mortgage market are also continuing to limit the number of people getting on to the housing ladder, despite some recent signs that lenders are beginning to loosen their lending criteria.

As a result, it is thought any recovery in the housing market is likely to be gradual, with some commentators warning that further price falls cannot be ruled out.

The commentary:

The recent global economic recession has generated many problems worldwide, such as increased unemployment, lack of consumer confidence and reductions in salaries and wages. In the United Kingdom, housing prices also plummeted, but during August the average cost for a home rose by 1.6%. This is, according to the article, mainly because of low interest rates and shortage of supply.



Low interest rates, the amount borrowers pay to lenders for the usage of the borrowed money, would result in a shift in demand, the ability and willingness to consume a commodity, to the left (Figure 1, D to D₁). This is because consumers are encouraged to borrow more, which would lead to increased spending. Consequently, the equilibrium would move from A to B, resulting in an increase in price (P to P₁).

Furthermore, low interest rates would lead to lower mortgage repayments, hence allowing homeowners, usually predicted to sell their homes during a recession, to refrain from doing so. There would be an inwards shift in supply of homes (Figure 2, S to S₁), the ability and willingness to provide a commodity, as fewer owners choose to sell their houses, changing the equilibrium from B to C; the price would increase from P₁ to P₂. Overall, the change in price (P to P₂) would amount to 1.6%.

As mentioned in the article, it was forecasted that when there is a rise in interest rates in the future, the housing market may experience some falls in average price. This is because as interest rates increase, there is a higher tendency to save than spend. Thus, the demand curve shifts inwards (Figure 3, D to D₁). Also, homeowners may prefer to sell their houses because of higher mortgages, shifting the supply curve outwards (S to S₁). On the whole, the equilibrium would have changed from A to B, with prices falling from P to P₁.

A future increase in interest rates may affect different stakeholders in various ways; demand and supply changes may not follow what is depicted in Figure 3. Those who have high mortgage repayments may sell their homes and seek to find smaller and cheaper housing. Consequently, demand for small homes may increase, whilst demand for larger homes may decrease.

The article presents the view that in the future, there may be further price falls. This is supported by the anticipation of higher interest rates. Also, because consumer confidence is at a low due to the global economic recession, once supply catches up with demand, ceteris paribus, it may be assumed that prices will not rise any further. Hence, some economists would argue that it is most probable that prices would then fall. In addition, the increase of value added tax in January back to the previous rate of 17.5% would result in using income to compensate for the higher prices. Thus, fewer consumers would be able and willing to buy new homes and demand would drop, leading to a fall in housing prices.

However, other factors that affect demand and supply must be considered before that conclusion is made. For example in the USA, tax credit is available for homebuyers; this would increase disposable income, thus increasing demand. If this is also made available in the UK, the prices of houses may not necessarily fall. Also, because there is speculation that prices may rise, there may continue to be a shortage in supply as homeowners wait to take advantage of higher prices when they sell. Demand would also be enhanced by speculation as consumers are more willing to buy when prices are considered low, than in the future when prices may be higher. Some may also consider buying a house as an investment, because prices are predicted to rise. Thus, if these scenarios occur, price falls may not occur.

The article suggests the reasons why UK house prices rose by 1.6% and then speculates, with satisfactory reasons, why prices may fall in the future. In conclusion, the article is accurate in its justification, but does not consider the full array of alternative reasons which may affect the prices of homes.