The most important government review of UK competition since Mrs Thatcher came into office has recently taken place. The review, which was announced in June 1986, was concerned with two aspects of policy—mergers and restrictive trade practices (RTP). Its conclusions were published in March 1988 in a Department of Trade and Industry (DTI) document, ‘Mergers policy’, and in a major Green Paper entitled ‘Review of restrictive trade practices policy’ (Cm 331, 1988). The proposals on RTP involve a fundamental change in policy. The new law will consider restrictive practices in terms of their economic effects upon competition and not, as at present, with the emphasis on their legal form. This reform will require new methods of operation and will be backed up by tougher powers and penalties than have hitherto been available in Britain.

The UK economy remains in the worst recession since the Second World War. Revisions to the official GDP numbers suggest that the economy contracted even more sharply than previously thought in the first quarter of this year: 2.4 per cent compared to the preliminary estimate of a 1.9 per cent contraction. Following the publication of our April Review, new data almost immediately suggested that the UK recession might have ended. However, the recovery of industrial production in April did not continue into May and our projections remain much as they were in April, although the quarterly profile has changed, as we can see from figure 1. The dating of the recession, according to official statistics, has also been adjusted. GDP growth rates have been revised back to 2004 (figure 1), and they now suggest that the start of the recession was the second quarter of 2008. This brings the quarterly profile of GDP growth into line with NIESR's monthly estimates of GDP which date the start of the recession as March or April 2008.

Brexit has both increased the momentum towards Scottish independence and complicated what it could mean in practice, especially if Scotland rejoins the European Union (EU). EU accession would re-open the flow of goods, people, services and capital between Scotland and other EU member-states; a corollary of this, however, would be new restrictions on movement between Scotland and its non-EU neighbours. Effective border management entails a variety of ‘at the border’ and ‘behind the border’ processes. As much as these would require dedicated infrastructure and trained personnel, they would ultimately depend upon reliable data/information and good communication among myriad agencies, including on the other side of the border. Fundamentally, the nature and form of the border controls would be determined largely by the relationship that an independent Scotland had with the remainder of the UK—and, principally, on the relationship that the UK develops with the EU.

In the past three years the US dollar has been declining whilst the US current account deficit has expanded, and these two developments are clearly linked. However, the causes of the decline in the dollar and the solution to the US deficit may not be as closely related as at first may appear. The emergence of a sustained deficit does not automatically necessitate a fall in the exchange rate, and a fall in the exchange rate may not correct such a deficit. Deficits can exist if the currency moves above its sustainable real exchange rate, and a real depreciation can remove such a deficit. Deficits caused by exchange rate movements are likely to be more temporary than those that either emerge for long-term structural reasons or result from structural imbalances in the economy. A structural deficit can be the consequence of low domestic saving or high domestic government borrowing. If domestic investment is very profitable then even high levels of domestic saving may still result in a savings shortfall, and the high returns may induce a structural capital inflow which will produce a sustainable current account deficit as a consequence. All these factors have influenced the increase in the US deficit in the past decade, and it is difficult to see how a correction to the deficit can occur without one of the domestic drivers changing in some way. Here we present a set of simulations using NiGEM to examine the impacts of alternative adjustment scenarios and their global implications. Before adding to the debate about the possible remedies, we will attempt to establish the sources of the current conjuncture, as the alternative adjustment paths for deficits and for the dollar depend on the sources of misalignment.

In both 1977 and 1978, on average over the year, using a standardised international definition, the rate of unemployment in Britain about 6 per cent. This was about 1 per cent higher than the rate recorded for the average of all countries in OECD. Since then the rate of unemployment has risen in most countries, but by more in Britain than elsewhere. Our rate has gone up from 6 per cent to 13 per cent, while the OECD average has gone up from 5 per cent to about 8 per cent.

Concern over poor standards in mathematics among English school leavers has led to a number of government initiatives in recent years. Without a secure foundation of mathematical understanding and competence during the primary school years, later learning in mathematics is problematic. This paper examines recent major initiatives at the primary stage of schooling and their effect on raising standards, including the National Numeracy Strategy and the Improving Primary Mathematics (IPM) project. The latter project, influenced by successful Continental approaches to teaching mathematics, aimed both to raise average standards of attainment and to reduce the large variation in attainment that has, in the past, characterised the performance of English pupils.

Although the new teaching approaches, and the innovatively detailed teaching materials, developed by the IPM project have enabled significant improvements to be effected, concern remains over the low attainment in England of an unduly large proportion of pupils (as compared with Continental schools). It is suggested that serious consideration needs to be given to adopting arrangements that are the norm in several other countries — namely, to introduce some flexibility in age of entry to schooling (at present in England this is governed strictly by date of birth). Such a change would, it is suggested, significantly reduce the number of low attainers and range of attainment within a class, and make a teacher's task of successful interactive whole-class teaching more manageable.

Macroeconomic behaviour varies according to the character of the policy regime. There is therefore no truly ‘general’ theory which will apply at all times and in all places. Over the past hundred years, one model may be appropriate to the period of the gold standard, another to the interwar years, another to the so-called ‘Golden Age’ after the Second World War, and so on. Expectations, which depend on confidence in the regime, determine the stability of both prices and output. Institutions also adapt in ways that may support, or ultimately undermine, the foundations of the policy regime.

Ever since its beginning, the Review has devoted attention to the development of commodity prices in world markets. In both our statistics (at present in table 26 of the Statistical Appendix) and our forecasts in the World Economy section we have been focusing on price indices reflecting the importance of major commodities in the exports of primary producing countries.

Monetary policy should be guided by macroeconomic models with limited nominal rigidity; ‘New Classical’ or even for some issues just plain Classical (i.e. with no nominal rigidity at all) models are perfectly adequate for understanding various aspects of the economy that have previously led economists to believe in a high degree of nominal rigidity. On UK data these models account for the facts of inflation persistence and exchange rate ‘overshooting’; their impulse responses are in line with the data; and a typical example, the Liverpool Model, is marginally accepted in its entirety by the data since 1979. Such models suggest that no increased macro instability would result from taking the rigours of monetary policy one stage further from inflation targeting and ensuring that the price level itself is returned to its long-run preset target path — so that the value of money over long periods of time would be utterly predictable.

Most discussion of the balance of payments and its implications for exchange-rate prospects and economic policy falls into two distinct categories. Some authors focus on the current account alone while others argue that in a world of liberalised capital markets information from the volume of trade flows will simply be swamped by flows of highly mobile international capital. In this note we argue that both these viewpoints are too extreme; in aggregate both the current and capital accounts will matter.

The US current account imbalance has stayed stubbornly high despite the fall in the dollar that we have seen since the beginning of 2003. The exchange rate has fallen by around 15 per cent on average, mainly between the first quarter of 2003 and the first quarter of 2005. As we can see from figure 1, the fall has come in three steps, and each time it fell we might have expected an initial worsening of the current account for a year or so as prices change in advance of quantities (the J curve effect of the first year textbook). Hence we might have expected no sustained improvement until at least a year after the last downward step towards the end of 2004. However, as we can see from figure 2, there is no noticeable improvement in the current account during 2006, suggesting that domestic absorption was rising. At the same time inflation in the US was gradually drifting up under pressure from the weakening exchange rate.

Alternative measures of the UK output gap are considered for 1984–2007. The real-time series is strongly affected by the rolling-time estimation of the trend, and produces a picture of the business cycle which is not consistent with contemporary perceptions of the large fluctuations of the late 1980s and early 1990s. A new, ‘nearly-real’, measure developed here may be better for estimating historical reaction functions. In the context of the current recession, none of these mechanically derived measures of the output gap are useful. Policymakers should make careful estimates of the likely fall in potential output on the basis of other information.

The most recent peak in the production of UK manufacturing industries was in 1973; ten years later, in 1983, the level of manufacturing output was still 15 per cent lower.

In the same period the official output index for services (as measured by value added and other methods) increased markedly and one of its sections—Division 8, covering banking and finance, insurance, leasing, business and professional services—grew particularly rapidly, by about 70 per cent.

From mid-1955 to mid-1958, in the words of the Economic Survey, ‘the growth in home demand had to be restrained in order to check the rise in prices and to safeguard the country's external position’. the main purpose of this article is to examine how far the Government was successful in promoting price stability through restraining demand. The second part of the article discusses the next wage round and the prospect of maintaining price stability this year.

For good economic policy, two things are needed. First, there has to be clarity about objectives. The purpose of policy is to improve outcomes. The policymaker, therefore, has to know what an improved outcome would look like. There is, I think, not much dispute about this requirement: it is common ground that it would have been an improved outcome in Britain if unemployment and inflation had been lower and economic growth had been faster. There may be differences about the importance to be given to the various objectives: but that is a fairly minor matter.

Manufacturers' and distributors' views on the effects of the Price Code towards the end of Stage 4 are summarised in this article. Since the onset of the recession, market conditions rather than price controls have determined price-levels. Market constraints have limited the use of profit safeguards and low profit relief as well. The Price Code, however, was widely blamed for contributing to lower profit-margins, particularly in its earlier stages; this was mainly because of the productivity-deduction, lack ofpricingflexibility, and delays in obtaining price increases. Less generally affected were investment, sales and marketing activities, and price-differentiation. Views on the changes to the Code required in a reviving economy are summarised.

This paper analyses the role of wealth in the National Institute model of the World Economy (NIGEM). It also addresses the issues of fiscal solvency and the rote of the government budget constraint. We start with a brief theoretical and empirical overview of wealth and consumption functions. We then describe the introduction of public sector blocks into the model and summarise our approach to the determination of wealth. The paper then reports on a set of diagnostic simulations using NIGEM. We analyse the effects of a permanent fiscal expansion and its implications. We also discuss the importance of solvency constraints on the government in the solution of a forward looking model without Ricardian equivalence. We then analyse the effects of a change in equity prices in one country relative to those in the rest of the world.

This is the third and last in a series of articles comparing macroeconomic policy in this country and in our largest European neighbours. A comparison with France was published in the Review in November 1984 and with Germany in November last year. The Italian economy is less well known in this country than that of either France or Germany. As a result its achievements may not be so widely appreciated. There have been no doubt, and remain, serious economic problems in Italy, but on balance it is the continued vitality of that country that needs to be better understood. In particular we are bound to ask how economic policy has contributed to economic development in Italy given the very difficult political environment in which it has had to operate for much of the past decade.