Posts from the ‘Economics’ Category

Unit 2: The purpose of monetary policy

September 29th, 2012 at 4:46 pm by Blogger Bryn

A nice summary from economicshelp

http://www.economicshelp.org/blog/5740/inflation/purpose-of-monetary-policy/

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Unit 2: UK balance of payments

September 29th, 2012 at 7:37 am by Blogger Bryn

A fantastic summary of the topic, including up to date data, from economicshelp

http://www.economicshelp.org/blog/5776/trade/uk-balance-of-payments/

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Unit 1: Changing demand for Dominos pizza

September 29th, 2012 at 7:24 am by Blogger Bryn

This Sky news article is a good example of the role of substitutes in demand

http://news.sky.com/story/989606/dominos-pizza-gets-big-summer-boost

a) Draw 2 demand diagrams to show the changing demand for pizzas; on-line and other methods

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Unit 2: UK inflation data and stats

September 21st, 2012 at 9:06 pm by Blogger Bryn

Another thanks to economicshelp

http://www.economicshelp.org/blog/5720/economics/inflation-stats-and-graphs/

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Unit 2: UK unemployment data and stats

September 19th, 2012 at 9:46 pm by Blogger Bryn

…thanks to economicshelp

http://www.economicshelp.org/blog/5695/stats/unemployment-stats-and-graphs/

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Unit 1: Meat prices to rise

September 19th, 2012 at 9:21 pm by Blogger Bryn

….reports Sky news

http://news.sky.com/story/987059/food-prices-to-soar-after-mass-animal-slaughter

a) Draw a S&D diagram to show the effects  of the drought on animal feed prices
b) Draw a S&D diagram to show the effects of this increase in animal feed prices on the price of pigs
c) Draw a S&D diagram to show the effects of the decision by farmers to slaughter more pigs on the price of pork in the short run
d) Draw a S&D diagram to show the effects of reduction in the number of pigs on farms  on the price of pork in the long run

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Unit 1: Negative externalities from whisky production in the USA

September 18th, 2012 at 5:53 pm by Blogger Bryn

Nice story from Aljazeera

http://www.youtube.com/watch?v=L2W_6QJ2S2I

a) What is the negative externality and why is it a negative externality?
b) Comment on the likely success of different approaches to solve the problem and reduce the market failure

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Unit 2: Growth rates in selected countries

September 17th, 2012 at 8:55 pm by Blogger Bryn

Thanks to tutoir2u for the word document in this post

http://www.tutor2u.net/blog/index.php/economics/comments/teaching-macro-data-on-real-gdp-growth-rates

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Unit 2: Latest UK and EU unemployment data

September 16th, 2012 at 8:26 pm by Blogger Bryn

UK from the BBC

http://www.bbc.co.uk/news/business-19574511#

and EU from economicshelp

http://www.economicshelp.org/blog/1247/economics/european-unemployment/

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Unit 2: Latest position of the Australian economy

September 8th, 2012 at 10:17 pm by Blogger Bryn

….isn’t that clear, according to this BBC clip

http://www.bbc.co.uk/news/business-19472196#

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Unit 1: Should a law be passed to make bars with a violent past srve beer in plastic containers?

September 7th, 2012 at 8:56 pm by Blogger Bryn

…..you might think so having watched this

http://www.bbc.co.uk/news/uk-wales-19484560#

a) Explain how the free market explains in this case
b) Comment on the likelyhood that such a law would reduce the market failure

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Unit 1: Banana prices to rise!

September 3rd, 2012 at 8:40 pm by Blogger Bryn

Anyone who knows me will understand my concern about this forthcoming hike in banana prices!

http://news.sky.com/story/980166/going-bananas-fruit-price-hike-warning

a) Using a S&D diagram, explain why banana prices are set to rise

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Unit 1: Increasing demand for private jets in China

August 30th, 2012 at 8:40 pm by Blogger Bryn

…according to the BBC

http://www.bbc.co.uk/news/world-asia-china-19415655#

a) Explain, using the determinants of demand, why the demand for private jets has grown so rapidly in China

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Unit 1: Cannabis; a demerit good?

August 29th, 2012 at 6:37 pm by Blogger Bryn

Interesting clip from the BBC based on long term research

http://www.bbc.co.uk/news/health-19394368#

a) Define the term “merit good”
b) To what extent is cannabis a demerit good?
c) Comment on the likely success of government policies to reduce the market failure associated with cannabis consumption

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Unit 1: Market failure glossary

August 27th, 2012 at 7:51 pm by Blogger Bryn

Thanks to tutor2u for this; remember this is not OCR specific and so contains some words you don’t specifically need for the exam

http://www.tutor2u.net/blog/index.php/economics/comments/unit-1-micro-market-failure-glossary?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+economics_news+%28tutor2u+Economics+Blog%29#When:06:08:42Z

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Unit 1: Positive externalities from the V festival

August 22nd, 2012 at 8:57 pm by Blogger Bryn

….according to this BBC clip

http://www.bbc.co.uk/news/uk-england-essex-19347728#

a) State the positive externality in the video and explain why it is a positive externality

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Unit 1: Does the Russian space programme have negative externalities?

August 20th, 2012 at 9:29 pm by Blogger Bryn

Some locals in remote areas of Russia think the answer might be “yes” according to the BBC

http://www.bbc.co.uk/news/world-europe-19314649#

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Unit 1: Standard cigarette packaging in Australia

August 19th, 2012 at 8:55 pm by Blogger Bryn

…is on its way

http://news.sky.com/story/972658/australia-upholds-logo-ban-on-cigarette-packs Sky

Will it work?

http://www.bbc.co.uk/news/health-19267740#

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Unit 1: Positive externalities from solar lights

August 14th, 2012 at 10:33 am by Blogger Bryn

An interesting video from Aljazeera

http://www.youtube.com/watch?v=QtpO6GaTaIg

a) What would be the private costs and benefits to a firm of fitting this system?
b) What would be the positive externalities/external benefits of this system?
c) What actions, if any, should the government take in this market?

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Unit 1: Negative externalities from economic growth in Hong Kong

August 13th, 2012 at 3:16 pm by Blogger Bryn

…according to the BBC

http://www.bbc.co.uk/news/business-19204836#

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Unit 2: Worsening UK trade figures

August 13th, 2012 at 2:59 pm by Blogger Bryn

….from Sky news

http://news.sky.com/story/970588/uk-trade-deficit-rises-as-ecb-doubts-growth

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Unit 1: Chocolate prices to rise

August 13th, 2012 at 2:58 pm by Blogger Bryn

….reports Sky news

http://news.sky.com/story/969509/chocoholics-hit-by-west-african-drought

a) Using a S&D diagram, explain why chocolate prices are likely to rise

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Unit 1: The changing demand for books

August 13th, 2012 at 2:55 pm by Blogger Bryn

Amazon have sold more ebooks than paper books, reports Sky news

http://news.sky.com/story/969252/amazon-sells-more-ebooks-than-printed-titles

a) Using Demand analysis, explain what has happened in both the ebook market and the paper book market

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Unit 1: Will a waste recycling facility lead to negative externalities?

July 28th, 2012 at 9:21 pm by Blogger Bryn

You decide after watching this BBC Wales clip

http://www.bbc.co.uk/news/uk-wales-19023473#

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Unit 2: The AD function for the USA

July 27th, 2012 at 9:39 pm by Blogger Bryn

I love this from Planet Money, the US GDP sliced and diced.

http://www.npr.org/blogs/money/2012/07/27/157444854/the-u-s-gdp-sliced-and-diced-in-two-graphics?ft=1&f=93559255

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Unit 1: Flu vaccine for all children in UK

July 26th, 2012 at 10:54 am by Blogger Bryn

A major policy decision by the UK government

http://www.bbc.co.uk/news/health-18979106#

a) Explain, with examples, the private costs and benefits of this policy
b) Explain the positive externalities associated with this policy
c) What type of market failure is this policy trying to counter?
d) Using a diagram, explain how this policy will reduce the market failure in the vaccine market

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Unit 2: UK recession worsens

July 26th, 2012 at 10:49 am by Blogger Bryn

….according to the preliminary data for the last quarter

http://www.economicshelp.org/blog/5581/economics/double-dip-recession-deepens/
http://www.channel4.com/news/how-the-construction-sector-is-impeding-the-recovery Ch4 inc video
http://www.bbc.co.uk/news/uk-18989652 BBC
http://www.bbc.co.uk/news/business-18989329# BBC
http://www.bbc.co.uk/news/business-18981645# BBC

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Unit 2: How happy are you? The National Wellbeing survey results are out

July 24th, 2012 at 9:09 pm by Blogger Bryn

….and might add to the stark GDP per capita figure as a measure of economic wellbeing

The data is from the Guardian and the BBC

http://www.guardian.co.uk/news/datablog/2012/jul/24/how-happy-are-you-wellbeing Guardian
http://www.bbc.co.uk/news/uk-politics-18966729# BBC

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Unit 1: Nepal cracks down on drink driving

July 22nd, 2012 at 9:53 pm by Blogger Bryn

….according to Aljazeera

http://www.youtube.com/watch?v=HlbNC-rH5os

a) Why is drink driving an example of market failure?
b) Comment on the likely success of the zero alcohol policy in reducing the market failure

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Unit 1: Negative externalities from gold mining in Nigeria

July 22nd, 2012 at 9:45 pm by Blogger Bryn

A deeply depressing report from Aljazeera

http://www.youtube.com/watch?v=nGleguEq_JI

a) Using economic theory, explain how the unregulated mining industry isfailing in Nigeria
b) Discuss alternative strategies the Nigerian government could take to reduce the market failure

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Unit 1: The impact of the USA corn crop failing

July 21st, 2012 at 7:10 pm by Blogger Bryn

….can be large, say Aljazeera

http://www.youtube.com/watch?v=139xi2a3c8Q

a) Using a S&D diagram, explain the likely effect of this drought on US corn prices
b) Using a S&D diagram, explain the effect on corn related proucts such as foodstuffs and biofuel

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Unit 1: Alcohol ban on scottish trains

July 21st, 2012 at 7:01 pm by Blogger Bryn

…according to the BBC

http://www.bbc.co.uk/news/uk-scotland-18930963#

a) Using economic theory, explain why this ban has been put in place
b) Comment on the likely succes of the policy in reducing market failure

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Unit 1: How far should the alcohol market be regulated?

July 20th, 2012 at 10:15 am by Blogger Bryn

As much as the tobacco industry? That appears to be the direction MP’s are suggesting in this BBC video

http://www.bbc.co.uk/news/health-18898242#

a) How does the free market for alcohol fail?
b) To what extent would these new proposals reduce the market failure?

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Unit 2: How well is the Australian econmy doing?

July 19th, 2012 at 11:23 am by Blogger Bryn

A mixed picture behind the encouraging headline data, reports the BBC

http://www.bbc.co.uk/news/business-18896812#

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Unit 2: The costs of unemployment

July 19th, 2012 at 11:14 am by Blogger Bryn

….as shown by NEETS in Huddersfield (BBC video)

http://www.bbc.co.uk/news/uk-18882588#

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Unit 2: An investment boost for the UK economy?

July 19th, 2012 at 10:54 am by Blogger Bryn

Apparently so according to a Government announcement

http://news.sky.com/story/961586/uk-economy-is-given-50bn-investment-boost Sky
http://www.bbc.co.uk/news/uk-18881927# BBC

…but this isn’t the government spending; they’re promising to underwrite projects, not pay for them

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Unit 1: Laws to ensure e-waste is recycled

July 17th, 2012 at 9:10 pm by Blogger Bryn

Thanks to tutor2u for finding this Aljazeera video

http://www.youtube.com/watch?v=v1TaDwPUu4c&feature=player_embedded

a) What is the market failure that has lead to the introduction of this EU law?
b) Comment on the likely success of the policy in reducing the market failure

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Unit 2: UK inflation falls to a 31 month low

July 17th, 2012 at 8:58 pm by Blogger Bryn

…..according to Sky news and the BBC

http://news.sky.com/story/961190/record-rainfall-helps-inflation-fall-sharply sky
http://www.bbc.co.uk/news/business-18867248# BBC article
http://www.bbc.co.uk/news/18874387# BBC video

and timetric have the latest data visually

http://byline.timetric.com/2012/07/17/uk-cpi-inflation-continues-to-slow/

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Unit 1: positive and negative externalities from rubbish

July 15th, 2012 at 5:02 pm by Blogger Bryn

Nice clip from Aljazeera about rubbish disposable in Brazil

http://www.youtube.com/watch?v=5VzcsrZ5tDs

a) Using examples from the video clip, explain positive and negative externalities that arise from Rubbish disposal methods in Brazil

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Test post to twitter

July 15th, 2012 at 10:45 am by Blogger Bryn
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Unit 4 Macro M-PESA supporting growth and development

July 15th, 2012 at 12:47 am by Geoff Riley

M-PESA is a mobile payment solution launched in March 2007 and credited with having a significant impact on economic development in Kenya. This blog will carry updated resources on M-PESA and it’s economic and social impact. Click below for resources

Basic Background:

* Launched in March 2007
* Named after the Swahili for money (pesa)
* Operated by Safaricom (40% owned by UK mobile phone business Vodafone)
* Originally a micro-finance project
* Less than 10% of Kenyans have access to financial services – huge un tapped / repressed demand for basic banking
* Nine out of ten adults have access to a mobile phone in Kenya
* By 2009 M-PESA had 6.5 million customers, more recent figure suggests 15.1 million on the system
* Around 20% of Kenyan GDP washes through the M-PESA system
* Safaricom is not allowed to make a profit on the interest and neither is the customer
* Interest earnings go into a charitable M-PESA foundation
* M-PESA has been very successful in Tanzania but has had less impact in Afghanistan and India
* Airtel is the main domestic rival, formerly called Zain and now owned by India’s Bharti Airtel,

M-PESA used in myriad different ways – Kenyans pay school fees, collect their salaries, shop for groceries, buy everything from drinks in beer shacks to airline tickets thanks to mobile money, sending transfers at the push of a few buttons on a mobile telephone. As per capita incomes rise, people will make savings using the system or might be able to take out loans.

M-PESA – Changing lives in a changing world

BBC News: M-Pesa: Kenya’s mobile wallet revolution

Get Adobe Flash player

Guardian: Africa’s mobile economic revolution

‘Mobile Banking: Case of M-Pesa’, Nick Hughes

BBC News: How mobile puts business at the tip of Africa’s fingers (July 2012)

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Unit 4 Macro: Savings and Investment in China

July 14th, 2012 at 9:25 pm by Geoff Riley

Saving is the difference between income and consumption. In countries such as China and India, the national savings rate is high in contrast to developed economies.  In 2010, Singapore, Korea, Taiwan and Hong Kong all had gross national savings rates at or above 30 per cent of GDP, as did Vietnam, India and Malaysia. China topped the list with 53 per cent of GDP.

http://timetric.com/country/china/

Chinese savings measured as a share of GDP surged from 37% in 2000 to 53% in 2008 before falling back a little in 2009. What accounts for the high rate of saving?

1. The relative absence of a generous welfare system – the lack of a state-funded safety net encourages a high proportion of precautionary savings. Job insecurity is lower especially in centres of urban manufacturing; access to affordable health care is low. Most of the many millions of Chinese migrants living in urban areas are not enrolled in pension programmes or social security schemes

2. Social and cultural norms driving saving within families – there are strong motives within households to save especially for the cost of educating children which is given high priority

3. Pension reforms – the Chinese government introduced reforms of pensions from 1997 onwards which has forced people to make increased contributions

4. Housing reforms – most state-owned firms in China no longer provide housing for employees. There is incentive to save in provident funds as a means of acquiring home ownership

5. Relatively under-developed personal finance industries – until recently it has been much easier to borrow in the form of consumer credit in developed countries including the UK and the USA. The same is not true in China and India.

6. Demographics – partly as a result of the effects of the one-child policy, the youth-dependency ratio in China has fallen sharply and there is a bulge (for the time being) in the size of the population of lower to middle age. This is a generation, according to the life cycle hypothesis, that tends to save more as a percentage of their disposable income

7. Low dividend payments by Chinese businesses – many firms are highly profitable as a result of their success in exporting. They pay low dividends and retain a large % of earnings. Thus the rise in Chinese corporate savings has added much to the national savings rate as a % of GDP

Savings as a buffer stock:

High saving levels in China have helped to finance strong growth, with low inflation and the buffer of savings has helped these countries adjust to adverse external shocks such as the Global Financial Crisis. The Chinese Government was able to launch a huge fiscal stimulus programme in 2008-09. A rising saving rate also implies a falling consumption share in GDP and hence encourages a highly investment-intensive domestic demand structure. Over the past 10 years, China’s private consumption declined from 47% of GDP to 36%, the lowest among the world’s major economies. They want this to rise

There is now strong pressure from within China to rebalance her economy and rely more on domestic demand (C+I+G) as a source of growth rather than capital investment and exports

China from Timetric

With savings in excess of 50% of GDP and investment close to 40% of GDP, the surplus of savings over investment implies that the Chinese economy is running a large current account surplus because standard economic accounting means that surplus savings have to be exported. The last time that Chinese capital investment exceeded national savings was in 1993-94, and during that time China ran a current account deficit. A falling savings rate would indicate China would not be so highly dependent on investment and export growth – it would suggest that domestic consumption was rising in China and so too would imports from other countries – so could a lower savings rate be an important instrument of re-balancing?

What policy measures might help to bring this about?

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Unit 3 Micro: On Demand Manufacturing

July 14th, 2012 at 9:09 pm by Geoff Riley

Peter Marsh the Financial Times industrial editor has written a new book about the future of manufacturing. He has been travelling around the world looking at some examples of cutting edge new technologies in manufacturing that will likely reshape the industrial landscape in the years to come. In this video example we visit a company Phoenix, Arizona at the forefront of made to order manufacturing. After 17 years of development by Dr. James St. Ville, Armor Designs, can, within a few hours, create custom composites for body and vehicle armour.

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Unit 4 Macro: Kenya invests in geothermal energy

July 14th, 2012 at 8:51 pm by Geoff Riley

Here is an example of a fast-growing developing country in Africa making important investment to help meet ambitious targets for supplying energy from renewable sources. Katrina Manson films and reports for the Financial Times from the Great Rift Valley on Kenya’s latest plans to exploit geothermal energy to produce electricity.

The fixed costs of finding geo-thermal sources, build the turbines and then connect to Keyna’s energy grid are huge. But a move towards smaller geo-thermal energy plants provide a more cost efficient approach. Successful investment will help to reduce energy imports, provide a viable alternative to uncertain hydro-electric power, create new jobs and contribute to Kenya’s search for sustainable growth.

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Unit 4 Macro: Rapid Wage Inflation in China

July 13th, 2012 at 8:59 pm by Geoff Riley

Wage inflation in China

Wages are rising fast in China – many economists believe that China has hit a stage in its development at which demand for labour starts to grow faster than supply, creating labour shortages and pushing up salaries. This is known as a Lewis Turning Point.

Why are wages rising so quickly?

The fundamental reason for the acceleration in wages is that China is ceasing to be a labour surplus country – here are some explanations for the pick-up in wages. Keep in mind however that wages in China remain low compared to richer advanced countries and many other emerging nations. Recent data suggests they are typically around $300 a month in the manufacturing heartlands, lower in rural areas.

1. Demographics

The median age in China’s 35.2 years and it is rising. By way of contrast, the media age in Vietnam is 27.4 years.

a. The demographics for China are incredibly important for her future growth prospects. To some commentators, China is getting older before she has got rich. Life expectancy has soared, while fertility has plummeted due to strict birth control policies.

b. In 2009 there were 167 million over-60s in China, about an eighth of the population. By 2050 there will be 480 million, while the number of young people will have fallen. In 2000 there were six workers for every over-60. By 2030, there will be barely two.

c. Under the “one child policy” the fertility rate dropped to between 1.5 and 1.8, well below the 2.1 figure required to keep the population stable. This policy has now been relaxed.

d. The old age dependency ratio will double in the next two decades, and the size of China’s labour force is projected to start shrinking as soon as 2015.

2. Social pressures:

Wages are rising because of growing concerns among the Chinese authorities about the consequences for income inequality of rapid growth. Tens of millions of workers have migrated to the Chinese cities where average wages are higher but creating a deeper imbalance in rural areas which already suffer low incomes and low quality public services.

a. In early 2012, the Shanghai authorities announced the minimum wage will rise 13 percent prompted by labour shortages and worker unrest.

b. The government’s most recent five year plan states that firms must increase wages by at least 13% every year but in certain areas the local authorities mandate much higher rises.

3. Multinationals under the microscope:


There has been increasing international pressure on foreign multinationals operating in China to lift wages for their workers. Many media reports have highlighted factories with miserably low wages and appalling working conditions. Organisations such as the Fair Labour Organisation have been active in raising concerns about low wages and possible exploitation by monopsony employers.

Foxconn Technology Group (official name: Hon Hai Precision Industry) is a Taiwan-based company that has figured often in the headlines in recent years. It is China’s largest private-sector employer and was heavily criticised after fourteen worker suicides at one of its mainland Chinese plants over a 10-month period in 2010, prompting local protests.

What might be some of the consequences of a lengthy period of rapid wage inflation in China?

1. Costs and Profits: Short-term squeeze on profits for manufacturers such as FoxConn and Nike

2. FDI shift: There might be a shift of foreign direct investment away from China to lower-cost countries such as Vietnam and Bangladesh. But many experts argue that the relocation of manufacturing and FDI will be small because of factors unique to China – for example, high manufacturing reliability, close access to growing Chinese domestic markets, excellent supply chains built up over twenty years, the existence of external economies of scale in China and commitments to raising labour productivity and product quality – which makes the wage rate less important. Relocation of manufacturing is more likely to happen within China to lower cost interior regions with excellent transport and communication links.

3. Income and Consumption: China is currently a middle-income country but it is well positioned to join the ranks of the world’s high-income countries if growth can be sustained. Rising wages will help to boost demand for consumer durables, leisure activities and housing – providing a key new source of demand as China looks to wean itself off heavy investment and export-led growth

4. Trade Balances: Higher wages and incomes may lead to a rise in demand for imports into China – an opportunity for advanced countries – and might stimulate foreign direct investment for consumer-facing businesses such as retailers and financial services companies

5. Productivity and innovation: A decade or more of high wage growth will fast-forward the drive by Chinese producers to raise total factor productivity by investing in human capital and technology to lift output per worker. Annual labour productivity growth in China from 2010-2015 is forecast to be 8,3% which means that 10% annual growth in real wages will have little effect on unit labour costs

The last point is probably the most important. Many countries achieve a transition from low-income to middle-income status but few make the final step to being a high-income nation. Of 101 middle-income economies in 1960, only 13 became high income by 2008 (examples include Singapore, Spain and Taiwan).

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Unit 4 Macro: Global Competition in High-Speed Rail Technology

July 13th, 2012 at 8:45 pm by Geoff Riley

Japan’s high speed rail network has been for decades one of the world’s benchmark industries for rapid mass transport. Their safety record over the last forty years has been impeccable with not one single passenger fatality from a derailment.

The FT news video report available below captures the cutting edge technology and quality of infrastructure that makes Japan the envy of many other rich nations. But competition is growing especially from France and China notably in the battle to win export contracts to licence the technology and hardware used in investing in new rail capacity.

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Unit 1: The economics of the milk industry

July 12th, 2012 at 8:50 pm by Blogger Bryn

Thanks to tutor2u for this compilation of video clips regarding the milk industry

http://www.tutor2u.net/blog/index.php/economics/comments/unit-3-micro-economics-of-the-milk-industry?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+economics_news+%28tutor2u+Economics+Blog%29#When:09:03:48Z

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Unit 4 Macro: Fiscal Policy in the UK – A Question of Credibility

July 12th, 2012 at 8:47 pm by Geoff Riley

Credibility is a term widely used by politicians who like to claim that their policies and programmes have a stamp of approval and must be followed through to their logical conclusion.

For economists the keep word to link to credibility is commitment – i.e. the expectation that a given policy target or objective will be met in the years ahead

1. Inflation: The Bank of England’s inflation target of 2% had strong credibility in the first ten years after the Bank was made independent, but that credibility has been questioned in recent years with inflation persistently above target

2. Government borrowing and debt: The new Coalition government make repeated references to its policy of cutting the structural budget deficit and a need to commit to this to maintain their credibility especially in financial markets. Chancellor George Osborne has often linked this credibility to keeping the UK’s AAA credit rating for UK sovereign debt

Credibility is also be linked to the word trust – i.e. trust among the public that economic policies are being used to meet a broader range of economic and social objectives. This doesn’t just mean meeting specific inflation or borrowing targets but includes trust that policies will create jobs, prevent another recession, meet environmental aims, or to help maintain economic and social cohesion in vulnerable communities. The danger is that credibility simply becomes associated with the financial markets’ judgement on monetary and fiscal policies.

A tightening of fiscal policy and the start of higher policy interest rates (a tightening of monetary policy) might together tip the UK economy back into a recession. The argument here is that a rigid commitment to keeping inflation within target and cutting the deficit in line with the planned reductions could end up threatening other key objectives such as growth and jobs.

The Osborne View – Cut the deficit to maintain economic credibility and secure the recovery

Remember two key aims of the Coalition government in this area are:

1. To accelerate the reduction of the structural budget deficit over the course of a Parliament

2. The main burden of deficit reduction is from reduced spending rather than increased taxes

The case for cutting the budget deficit

1. Credit rating: High and rising debt threatens the UK’s financial stability and the AAA credit rating. Losing the rating would increase borrowing costs, choking off the recovery

2. Limit future tax rises: Higher public sector debt will eventually lead to a rise in the tax burden for businesses and consumers. The Institute of Fiscal Studies has estimated that that to reduce the UK budget deficit over the next five years will require every person in the UK to pay over £1250 of extra taxes each year.

3. Avoid crowding out: Putting points 1 and 2 together, if borrowing stays high, increased interest rates and taxes risk crowding-out spending and investment by the private sector

4. Fairness: It is inequitable to leave future generations with excessive levels of debt to repay, today’s tax payers need to make a bigger contribution to the cost of state spending. Higher public sector debt represents a transfer of income from those who pay taxes to people who hold government debt and causes a redistribution of income and wealth in the economy

5. Emphasis on monetary policy: If the government cuts spending and borrowing, this will give the Monetary Policy Committee more freedom to continue using low interest rates and other techniques such as quantitative easing (QE) to promote growth and recovery

Naturally there are plenty of opponents to the Osborne approach to fiscal deficit reduction. Many of approach the issue from a Keynesian perspective and they argue that there is a strong case for the government allowing higher levels of public sector borrowing especially when private sector confidence and demand is weak because of domestic and global uncertainty.

Arguments against fiscal austerity – the case for higher government borrowing

1. Stimulus: Government borrowing can benefit growth:
a. A budget deficit can have positive effects if it is used to finance capital spending that leads to an increase in the stock of national assets. For example, spending on transport infrastructure improves the supply-side capacity of the economy.
b. Increased investment in health and education boosts productivity and employment

2. Demand management: Keynesian economists support the use of changing the level of government borrowing as an instrument of managing aggregate demand.
a. An increase in borrowing is a vital stimulus to demand when other sectors of the economy are suffering from weak or falling spending. Fiscal policy can play an important counter-cyclical role “leaning against the wind” of the economic cycle
b. Deep cuts in government spending risks de-railing a fragile recovery
c. A second recession will actually make the fiscal deficit worse

3. Bond interest rates are low – there is a strong demand for UK bonds (gilts) and the UK government can currently borrow at low interest rates. It makes sense to take advantage of this now and boost government spending in key areas to kick-start a weak economy.

4. Multiplier effects: If the multiplier effect of higher spending or tax cuts is high, a fiscal stimulus might be self-financing because it will generate higher incomes, more jobs and extra tax revenues.

5. Targeted and temporary tax cuts: Instead of cutting government spending, Osborne should change course and allow tax cuts to boost demand. Shadow Chancellor Ed Balls has been calling for reductions in the rate of VAT from the current level of 20% and also reductions in employer national insurance contributions in a bid to expand employment particularly among the long-term unemployed.

Credibility and the interest rate (yield) on government bonds

The key aspect of the chart below is that the cost of servicing UK government debt as measured by bond yields has been falling. The ten year bond yield is often taken as the benchmark and this has dropped from over 5% in the summer of 2008 as the economy was falling into recession to just over 2% in November 2011. Is it the result of strong international demand for UK bonds (driving prices higher?) or a belief in the credibility of UK fiscal policy plans to cut the deficit? Or perhaps fears of renewed recession and a period of deflation?

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Unit 1: Increasing investment in the UK economy

July 12th, 2012 at 8:47 pm by Blogger Bryn

The UK’s factors of production will increase as BMW increases its investment in its UK Mini plant

http://www.channel4.com/news/bmw-to-invest-250-in-uk-mini-factories

a) Why is this an example of investment?
b) Explain the effect on the UK PPC of this investment and show this on a diagram
c) Comment on the extent to which this will increase  economic growth in the UK

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Economics at the Movies: What Have the Romans Ever Done for Us?

July 12th, 2012 at 8:27 pm by Geoff Riley

Whenever I am teaching the role of the public sector and the spending priorities of government, I am reminded of this classic clip from Monty Python’s Life of Brian. The clip is a perfect introduction into a discussion into what goods and services might be provided directly or indirectly by the state.

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