Here are some news clips on the sharp fall in measured unemployment and a record rise in employment in the UK economy at the end of 2013. Students can find revision notes on unemployment using this link
Will interest rates rise?
It was no surprise when the latest release of unemployment and employment data for the UK labour market up to the end of 2013 made headline news across the media. There was a dramatic decline in the labour force survey measure of unemployment and news of a record level of employment. Many teachers will be covering unemployment as part of their AS macro course – I have put together six updated charts into a PowerPoint file for those who want to integrate the data charts into their teaching. Download using the link below:
PowerPoint file on Unemployment
The concept of the’ output gap’ is central to mainstream
macroeconomics. It is not merely of
academic interest. The Office for Budget
Responsibility (OBR) has a specific requirement to estimate the output gap,
which it defines formally as “the difference between the current level of
activity in the economy and the potential level it could sustain while keeping
inflation stable”. The output gap is a key consideration for central banks
around the world. If output is well below its potential, interest rates should
be kept low, to try to stimulate the economy.
And a large output gap should keep inflation low. Prices are hard to put up in a depressed
The task of estimating the output gap
empirically is fraught with difficulties.
The OBR points that there are at least three recognised ways of doing
this, none of which will make sense to anyone lacking an advanced training in
statistics. So there is plenty of scope
for disagreement amongst orthodox economists who believe in the concept. Yet rather like the medieval debates about
how many angels could dance on a pin, these disputes have little meaning in the
economy of the 21st century.
The economy is not a physical object and
cannot, say, be placed on a pair of scales and weighed. GDP has to be estimated, using a wide range
of information. The basic principles of
how to measure output were worked out in the 1930s and 1940s. A major problem is that these principles are
much more suited to an economy which, as it was at that time, is dominated by
the production of goods rather than services.
We can count how many Ford Model Ts have been built. It is much less clear what the outputs of
Google or Facebook are. The problems are even more acute with the concept of
potential output. Many internet-based
services incur substantial fixed costs in order to have just a single
customer. But the additional cost of
servicing the second customer, and all subsequent ones, is effectively
zero. Potential output does not have
much meaning in these contexts, it is not obvious what the limit might be.
A powerful blow against the concept of
potential output has been published in the latest edition of the American
Economic Association’s journal Applied
Economics. Igal Hendel and Yossi
Speigel document the evolution of productivity over a 12 year period in a steel
mini-mill producing an unchanged product, working 24/7. The steel melt shop is almost the Platonic
ideal from a national accounts perspective of output measurement. The product – steel billets – is a simple,
homogenous, internationally traded product.
There was virtually no turnover in the labour force, very little new
investment, and the mill worked every hour of the year. Yet despite production conditions which were
almost unchanged, output doubled over the 12 year period. As the authors note, rather drily, “the findings suggest that capacity is not well
defined, even in
Time to put the concept of potential output into the rubbish bin!
Ormerod is an economist at Volterra Partners LLP, a Visiting Professor at the
UCL Centre for Decision Making Uncertainty, and author of Positive Linking: How Networks Can Revolutionise the World
An item on a Twitter feed, highlights how changes in
technology, contribute to a rise in the standard of living as prices of
consumer goods fall. However the demand for most the products in the advertisement from 1991 has collapsed. Look at the
items in the photo, most have been replaced
by a lightweight, plastic coated bundle
of superior technology, the smart touchscreen phone.
Steve Cichon concluded that you might ’have spent $3,054.82 in 1991 or c. $5,100 in today’s money to buy all these items.
This is a great learning aid, especially if you’ve not come across it before. If you’re trying to understand exchange rates, you often end up wondering which countries have overvalued exchange rates (that should, ideally, depreciate in value) or those that are undervalued (where appreciation would probably help).
The idea is so simple – find a product that’s available in most countries, produced to a standardised design, and that serves as a reasonable ‘basket of goods’ capturing a range of price data for the economy you’re looking at. By this measure, the countries with expensive Big Macs have overvalued exchange rates and cheap Big Macs means an undervalued exchange rate.
The Economist have been producing their index for several years, and what started out as a light-hearted exercise has turned into something that is taken seriously – so seriously that you can legitimately talk about the Big Mac index in your exams (with supporting explanation, of course).
The key concept under discussion is really PPP (Purchasing Power Parity, or what is the real buying power of a local currency).
This topic is hugely relevant to Economics students, and it’s very current. No matter how you measure it – Big Macs or otherwise – the £UK has steeply depreciated in recent years. That should have boosted our exports …. only it doesn’t seem to have done so, and the UK’s export performance is struggling.
We are experimenting with some
new software called Mediacore at my school – to try to promote more
flip-teaching and independent learning as well as easier revision.
My initial idea was to create short video tutorials explaining
key concepts on the topic of elasticity.The pupils are to watch this
outside the classroom, and then in the classroom we would follow up with class
exercises to check their understanding. The plan is that they will also prove
useful for revision.
I have put them on a public page so you can view them – note,
they are ‘unpolished’ in terms of presentation but they may be useful to some pupils on the key
issues with elasticity.
I have uploaded 12 short audio-video tutorials of me
teaching the key points on these topics.
They are deliberately short and rapid-fire – around 10 mins
long for each mini topic – remember, you can pause, take notes, rewind,
re-watch them as many times as you wish.
Then if you have any further queries, you can ask your teacher to clarify any points you didn’t understand. This will
make the lesson time much more productive.
The tutorials are short and quick:
The website link is: http://motanweer.mediacore.tv/guide
The NHS gives us so much value, as Economics teachers, as it serves as a great example of so many areas of theory. The story which heads up the BBC News site this morning is another useful one: NHS waiting time data for elective surgery has been found to be ‘unreliable’
The NHS, although not strictly non-excludable or non-rival, is provided as if a free public good in order to benefit from the huge positive externalities to be gained from a healthy population. It is a glowing example of The Economic Problem: scarce resources
which have to be allocated as efficiently as possible in order to
satisfy our infinite (and growing) needs and wants for healthcare.
Waiting time targets have been set by government (government
intervention) in order to try to overcome the potential for inefficient
use of those resources, which may arise in the public sector without the
incentive of the profit motive that the market mechanism would supply.
This also helps to ration the use of those scarce resources. In order to
introduce some consumer choice into what is really a monopoly market,
patients can choose where they would like to have planned operations –
and to overcome the problem of information failure, in which patients
don’t know which hospital to choose, data is collected and published
about how long patients will have to wait for that operation at each
There are over 19 million referrals from GPs to
hospitals for planned operations each year – that implies an operation
is needed by almost one in five of the population of the UK each year.
The government’s target is that the waiting time between referral and
having the operation should be no longer than 18 weeks, and the NHS is
just about meeting this at present. However, the National Audit Office
(which has two aims: to hold government departments and bodies to
account for the way they use
public money, thereby safeguarding the interests of taxpayers, and to
help public service managers improve
performance and service delivery) has found that the data supplied by
hospitals is unreliable. It found wrong and inconsistent recording after
reviewing 650 cases in seven trusts, and said it was unable to discern
whether this was deliberate, but says it should be investigated. Could
it be that the data provided by the hospital trusts about their waiting
times has been ‘fudged’ in order to make it appear as if they are
meeting the targets, when in reality they are not? Hospital managers may
be finding ways to massage the data; the NAO said that in about a
quarter of the cases they reviewed, the rules for calculating waiting
times were not being correctly applied.As so often happens,
government intervention designed to correct for market failure rears its
ugly head – it may be that the rules of the system are too complicated
or that they don’t apply in practice to the range of problems the
hospitals face; it’s also probably an example of how an attempt to solve
one problem simply gives rise to another, and the law of unintended
consequences as the requirement to meet targets results in systems of
data collection which enable the target to be met, rather than keeping
the focus on allocatively efficient use of resources to meet patient
It’s the time of year when many commentators are going back to basics and asking if our dominant economic model – free market capitalism – is a force for good in the world.
A few days ago I drew attention to Oxfam’s double decker bus analogy – that half the world’s wealth is owned by 85 people, who could all fit on a bus at a squeeze. That’s a shocking suggestion, and well worth taking seriously. There is an appalling long and depressing list of economic injustices and challenges facing the world.
So there’s a lot wrong with the world, and some of the problems can be directly attributed to capitalism. But when listening to some people, many economists feel like a clown at a funeral. Things are not so bad. In fact, in some ways they are vastly better than we typically imagine.
This is a huge debate in which you might try compiling evidence on either side.
Allister Heath (a renowned ‘supply-sider‘) writes in The Telegraph that we should be prepared to celebrate millionaires and their fortunes – if they have been earned, rather than a product of what he describes as ‘Crony Capitalism’. That’s almost the opposite point to the one made by Oxfam about inequality. According to the Huffington Post, Bill Gates is reported as saying that there will be ‘No More Poor Countries By 2035‘ (the article also contains a link to Hans Rosling who makes the clear point that economic growth is essential to reduce population pressures). The Economist also predicted that the world has an astonishing chance to take a billion people out of extreme poverty by 2030. Last summer I wondered if we might all look forward to a future of astonishing abundance.
I don’t mean to sound complacent. There’s clearly a potential conflict between economic growth and the environment, for instance. Last year I also had a go at putting some resources together myself on that subject – the impact of business on the environment, for good and for bad. I think I might go back to the fundamentals again…
Jeffrey Sachs on great form in this article ‘The Case For Aid‘. Well worth reading the article for pupils to see how well-reasoned and well-researched arguments can be used to put forward a compelling case for aid.
To summarise his article in a few lines: “It’s become fashionable to argue that foreign aid
doesn’t make a difference. Here’s why the critics couldn’t be more wrong. The issue is not “yes” or “no” to aid. Aid is needed, and can be highly successful. The issue is how to deliver high-quality aid to the world’s poorest and most vulnerable people.”
Good timing to go with Bill and Melinda Gates’ annual public letter on 3 myths of development.
It is common for pupils to be taught the market failure associated with alcohol, negative externalities, demerit goods etc.
However, it is worth also using the pub industry as an example for teaching other issues involved with free markets. Around 26 pubs a week are closing in the UK.
Are pubs merit or demerit goods? Do they create any positive externalities?
This article discusses how pubs need to be protected from closure - There is certainly a strong argument to be made for the social and economic value of the community pub. A recent report from the Institute for Public Policy Research, set the wider social value of a sample of community pubs at between £20,000 and £120,000 each. It found that pubs inject an average of £80,000 into their local economy every year, on top of their cultural and practical community value.
In the Newstatesman last week there was an article that discussed the unbalanced and unfair relationship between landlords and the large pub companies (known as PubCos) from whom they rent their premises. Too many pub companies force their licencees to buy limited products at inflated prices. This offers a discussion of market failure, of relative bargaining power in the production supply chain and the abuse of oligopsony power. With some pub owners as a result earning less than the national minimum wage.
It is always worth keeping abreast of institutional reform to ensure that exam responses show an awareness and understanding of current contexts.
In light of this, one of the important reforms in the anti-trust arena is the creation of the Competition and Markets Authority, which comes into full existence in April 2014.
In 2012 the Government announced its plans for reform of UK’s competition regime. These include creating a new single Competition and Markets Authority (CMA), which will take on the functions of the CC , and the OFT’s competition functions and consumer enforcement powers. The Enterprise and Regulatory Reform Bill, which gives the effect to these reforms, was approved in April 2013.
A summary of these reforms can be found in this PDF here.
The CMA’s website is here.
Demerit goods are market failures which arise from information failure – specifically that consumers/producers fail to fully understand and therefore value the true costs and benefits of consumption/production. In particular, with demerit goods, consumers underestimate the long term costs and overestimate the short term benefits of consumption.
A good current example of this at the moment in the news involves energy drinks. A 500ml can of Red Bull contains about 13 teaspoons of sugar and the equivalent caffeine of two cups of coffee - There is a lack of awareness on their part and their parents of the effects - Children get a brief high followed by a low. As a result energy drinks have been banned at a school in Manchester to try and help pupils be healthier.
John Vincent, a government adviser on school food, thinks the mix of sugar and caffeine in energy drinks can damage children’s concentration and health. He’s called for more research into the effects of the drinks. Gavin Partington from the British Soft Drinks Association says the drinks “are not designed for children.”
What is the best solution to address this market failure?
“The short-term high is causing disruption to children’s behaviour,” said Vincent. If a ban were needed, he said, that is what they would support. “Our objective is to stop children drinking them,” he added. “We’re agnostic about the means.”
Read more here.
Those who know me, might be unsurprised to learn that I had a very interesting chat in the pub last night with a friend who works in economic development. Apart from discussing the eyecatching headline of the recent Oxfam report published on the day that the World Economic Forum met in Davos, and discussed by Tom White below, he also suggest a new resource that was currently popular among the his world.
The resource is an excellent blog – which I’ve subsequently had a look at – written by Duncan Grant, at strategic adviser to Oxfam GB whose also written a book of the same name, which is currently in its 2nd edition. Now my friend didn’t recommend the book, but he did endorse the blog:
And after a cursory glance I’ll second that endorsement; it has some interesting, engaging and just downright informative insight into the world of development and the NGO
Coming hot on the heels of Geoff’s post on “Are Robots Stealing our Jobs”, The Economist has now taken it one step further and attempted to predict the probability that technological unemployment will cause job losses in particular industries.
The predictions are contained in the article The future of jobs: The onrushing wave. The premise of the article is that technological innovation has always created more jobs than it has destroyed but as the level of automation increases this may not necessarily be the case in the future. However, some jobs are likely to be completely immune to technological unemployment and the following graphic is the estimated probability in each case. Dentists, clergy, and physical therapists seemingly can’t be replaced by a machine whereas the future is not so bright for telemarketers, accountants or retail salespersons! In any case, should make for some interesting discussion and food for thought for students contemplating future careers.
According to Oxfam, half of all the world’s wealth is owned by 85 people, who could all fit onto a single double-decker bus.
It’s an astonishing suggestion, and worth your time to consider the implications.
It’s always worth noting the difference between income (a flow of funds) and wealth (which is a total stock of previous income). The distribution of income is not as unequal as the distribution of wealth, but that’s not much comfort.
“We cannot hope to win the fight against poverty without tackling inequality. Widening inequality is creating a vicious circle where wealth and power are increasingly concentrated in the hands of a few, leaving the rest of us to fight over crumbs from the top table.
In developed and developing countries alike we are increasingly living in a world where the lowest tax rates, the best health and education and the opportunity to influence are being given not just to the rich but also to their children.
Without a concerted effort to tackle inequality, the cascade of privilege and of disadvantage will continue down the generations. We will soon live in a world where equality of opportunity is just a dream. In too many countries economic growth already amounts to little more than a ‘winner takes all’ windfall for the richest.”
Oxfam’s statement is intended to be provocative. It presents a worst case scenario, when the real picture might be slightly more cheerful. At least inequality between countries is falling, even if inequality is rising within them. I don’t seek to justify inequality, which is a significant and growing problem, even in rich countries like Britain.
Inequality is an important component in the debate about economic development. A nice info-graphic about its measurement can be found here.
Government failure is a great way to add weight to evaluation and to bring in an extra strand of knowledge that can separate students from the rest. This video aims to provide a brief introduction to the topic with references to Milton Friedman both in the video and at the bottom of the YouTube clip.
On the 1st January 2014, Latvia became the 18th country to enter the single currency Euro area, joining Estonia who adopted the Euro four years ago. How will it affect the economy? Are the forecast benefits greater than the costs and risks? Here are some resources on the issue:
Guardian: For Latvia, euro still attractive despite Europe’s financial crisis (July 2013)
Independent: Latvia – the country that fell for the Euro (Jan 2014)
Reuters: Unease over Latvian euro entry (Jan 2014)
Baltic Times: EU president says Latvia will feel economic benefits after euro switch (Jan 2014)
Estonia’s Euro advice for Latvia (Financial Times)
Latvian government bets on the Euro (Al Jazeerah news)
Sting’s new musical takes him back to his north-eastern roots and the old shipyards of Wallsend on the Tyne. Here is a flavour of his new album – try it as a starter on the economics of structural unemployment!
We have been discussing the economics of innovation in class in the last few days. I came across this short talk given by David Rowan, editor of Wired magazine. What sets disruptive entrepreneurs and innovators apart from the rest? In his INK talk, David Rowan, editor of Wired UK, asserts it’s a “healthy disregard for the impossible” and offers nine tips for cultivating that mindset.
Here is a beautifully crafted essayby leading economist John Kay on the dangers of an academic obsession with rigour and consistency in developing economic models. “Economics is not a technique in search of problems but a set of problems in need of solution. Such problems are varied and the solutions will inevitably be eclectic.” He argues for a move away from formulating models that can simply run on a computer and towards “more eclectic analysis ….requiring an understanding of processes of belief formation, anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses, and governments actually do.”
A rather wonderful piece that will excite many ambitious student economists keen to approach our fantastic subject in a non-linear and often contrarian way. Enjoy!
What type of business integration is happening here? The announcement of Google’s takeover of smart home-appliance maker Nest for $3.2bn is potentially hugely significant for Google.
Google is a highly acquisitive company, completing dozens of takeovers every year in a wide range of technologies and markets. However, there has been particularly intensive media coverage about Google’s takeover of Nest.
Part of the reason for the takeover (and some of the concerns raised about it) is due to what Nest does. Nest makes smart appliances. For example, it produces a thermostat capable of learning user behaviour and working out whether a building is occupied or not, using temperature, humidity, activity and light sensors. Nest also makes an acclaimed smoke detector and carbon monoxide alarm.
The takeover is seen by some observers as being a significant development in the growth of the “internet of things” – household and other devices being controlled by operating systems (including Google’s Android OS), capturing and transferring data about those “things” and the people that use them.
However, there is potentially something much more significant about the Google takeover of Nest and it concerns the entrepreneurs and team who have built Nest so rapidly (it was formed way back – in 2010!).
The Nest CEO and founder is Tony Fadell. His is probably not a name you are familiar with. However, you will be familiar with two products that he helped create – the iPod and the iPhone. Fadell was a key member of the design team at Apple and worked closely with Steve Jobs. He is said to share many of the attributes of Jobs in terms of his leadership style a vision. Perhaps not surprisingly, Fadell has recruited many ex-Apple employees as he has grown Nest.
The FT suggest that the key feature of the $3.2bn takeover is that Google is effectively buying some of the innovative culture of Apple – te Apple “genome” as well as a fast-growing business. As a result, the potential revenue synergies from the takeover could be significant. However, things could go wrong, as explained here on CNET.
Some key quotes from Google and Nest in their respective announcements about the takeover help explain the rationale for the deal:
Tony Fadell (Nest)
“Google will help us fully realize our vision of the conscious home and allow us to change the world faster than we ever could if we continued to go it alone”.
“Google has the business resources, global scale and platform reach to accelerate Nest growth across hardware, software and services for the home globally. And our company visions are well aligned – we both believe in letting technology do the hard work behind the scenes so people can get on with the things that matter in life. Google is committed to helping Nest make a difference and together, we can help save more energy and keep people safe in their homes.”
“I know that joining Google will be an easy transition because we’re partnering with a company that gets what we do and who we are at Nest –and wants us to stay that way”
Larry Page (Google CEO)
“Nest’s founders, Tony Fadell and Matt Rogers, have built a tremendous team that we are excited to welcome into the Google family. They’re already delivering amazing products you can buy right now–thermostats that save energy and smoke/CO alarms that can help keep your family safe. We are excited to bring great experiences to more homes in more countries and fulfill their dreams!”
The excellent Lex team at the FT explore the takeover in a little more detail here – some excellent analysis for students who want to add this example to their research:
This Bloomberg interview also looks at the deal:
Here is a great overview from the Economist of some of the ideas behind lean start-ups and the shift in focus towards frequent / hi-speed reaction to customer feedback as minimum viable products are launched into the market-place. Conventional views of entrepreneurs are evolving fast but they still need to have that driving energy and a willingness to challenge orthodoxy! The Eric Ries book – The Lean Entrepreneur – is given extensive mentions here and rightly so.
This report which the Public Accounts Committee published on Friday, entitled Supporting UK exporters overseas, gives a useful piece of background reading, as it marries up AS and A2 level theory, and micro and macro topics. It looks at the combined efforts of the Foreign and Commonwealth Office and UK Trade and Industry to help UK firms, particularly small and medium sized businesses, boost their exports and so contribute to UK GDP recovery. The summary of the report on the PAC website could be used by students to consider a couple of questions:
How many examples of government failure can you identify?
Given that the UK does not currently use monetary policy to influence the exchange rate, what mix of government policies might be used in order to meet the target of doubling exports by 2020?
….from the Guardian. Particularly interesting is the graph showing the change in the minimum wage adjusted for inflation
This is from the states, but clearly shows how the CPI measures AVERAGE price changes
Many thanks to Louise Raye at Yavneh College (Borehamwood) who has been in touch to reach out to Economics teaching colleagues in the south-east of England. Louise is keen to encourage the creation of a network of Economics teachers – details below. Do please get in touch with Louise if you would like to get involved.
DO YOU TEACH A-LEVEL ECONOMICS?
WOULD YOU LIKE TO PICK UP TIPS FROM EDUCATION EXPERTS?
ARE YOU PREPARED TO SHARE YOUR EXPERTISE WITH OTHER PROFESSIONALS?
I am creating a network of Economics teachers in the south-east of England to meet twice a year.
The details of the first event are below and I hope you can make it.
For further information and to confirm your place please email me at firstname.lastname@example.org
Speaker: Colin Leith – Business and Economics Advisor at Pearson will be talking on “The new subject criteria for GCE Economics from 2015”
Date: Wednesday 26th March 2014
Place: Yavneh College, Borehamwood, WD6 1HL
Open to all A-level Economics teachers (irrespective of board) in the South-east of England.
Please note that it is not possible to attend without booking due to security restrictions.
When analysing the market for education, some good data out today on the effects of tuition fees – could be linked into PED analysis for higher education.
Read the BBC article here.
Last week, I was privileged to deliver our first ever Wow Economics events in both Edinburgh and Cardiff. The day-long CPD event had the usual mix of fantastic teacher-designed resources and delegate interaction. We showcased a good selection of our 50+ resources and discussed how they could be used and adapted. We covered a good range of topic matters both in the micro and macro field of economics along-side activities aimed at engaging learners and promoting strong assessment techniques.
The good news is that the same event is coming back for further outings in London, Birmingham, Manchester and Dubai as well as arriving for the first time in Singapore and Belfast. The dates are:
Dubai 05/03/2014 & 06/03/2014
Singapore 10/03/2014 & 11/03/2014
Some of the fantastic delegate feedback can be found on the Good CPD guide by clicking here.
Bookings for the upcoming events can found here.
Look forward to seeing you in the very near future!
The monopoly deadweight loss diagram can cause confusion conceptually and diagrammatically for students. This Why…? video aims to clear every up.
Welcome to Why…? Friday, where I will post a video every Friday covering an area of Economics which extends the brightest students, providing a deeper understanding of a given topic or concept.
This week is the deadweight loss inflicted by a monopoly producer, first of all to understand why we say a social loss is made at all and secondly why, as economists, we call this loss deadweight. To know how to use this in an long essay click here.
Generally speaking, whilst many market failures are bad, some market failures are worse than others. Market failure in the healthcare market can have significant adverse consequences for an economy.
Today, the Competition Commission (CC) has outlined its proposed measures to increase competition in the private healthcare market.
At the heart of these proposals is that freer markets and competition work best.
Read more on the report here.
This resource from The Guardian could offer students an excellent way of considering the negative social consequences of civil war and internal conflict.
This is an interactive ‘journey’ in the life of a Syrian refugee who has decided to flee the country. At each stage of their journey, you can choose from the relevant options- the first being which route out of the country you decide to take. It is interspersed with more information and latest news about the growing crisis with Syrian refugees as well as video reports. I’m thinking this would make a good piece of extension reading/homework for a class that could then aid discussion the following lesson, or be used as a prompt for some exam questions or part of an essay answer. Click here to visit the site and take this heart-rending journey for yourself.
Ed Glaeser – author of Triumph of the City is giving a LSE public lecture
on Mon 20th January – should be awesome – free & unticketed – details here – hope to see some of you there! Details here
Interesting clip from the BBC
The pharmaceutical (medicines) industry poses interesting questions for economists.
According to The Economist, a new drug war is looming. (Not the doomed war on drugs which looks finally, thankfully, to be winding down into a broader public health debate). This is the growing market for medicines: patients in rich countries are ageing and those in developing ones are getting richer, living far longer and so suffering from chronic diseases. But as demand for drugs rises, so does concern at their price. A record $1 trillion will be spent globally on medicines in 2014, and “the costs of many new medical products are becoming unsustainable for even the wealthiest countries in the world,” said the head of the World Health Organisation (WHO), recently.
Should drugs be cheap? Most people think so, because of the obvious impact on human health and wellbeing, and because of the numerous positive externalities associated with good health.
Pricing medicines is very difficult. One common model is to use price discrimination. One price for poor countries, and a higher price for richer ones. But this model tends to break down (as price discrimination often does) when markets cannot be effectively separated, with the cheaper medicines stockpiled in poorer countries to be resold in the richer ones. In October 2013, Maine became the first American state to allow drugs purchases from cheaper foreign online pharmacies. The drug makers’ have sued, charging that the policy is illegal.
The drugs companies – a good example of an oligopolistic industry – are testing new pricing models. “The starting point always is, what is the right price for a medicine?” says the chief executive of Roche, a Swiss pharmaceutical giant. “And there is no objective answer…At the end you are discussing, what is the price of life?”
Drug development is expensive, slow and chancy, so pharmaceutical firms charge a lot. But if drugs are too pricey, support for patents will collapse. The boss of Pfizer, an American giant, recently laid out the threat: “Unless we’re respected by society, unless we’re seen as good stewards of our resources, then we run the risk of both losing patents and losing the ability to price our medications.” The classic defence of supernormal profit in many industries is that those profits fund R+D, investment and innovation. At the height of the AIDS epidemic, protesters accused drugs companies of putting “profits before people”. The drugs backed down and dropped prices.
There’s much in the article to discuss, such as cost/benefit analysis. In the United States (in contrast to many other rich countries), treatments are chosen with little regard for cost. Britain’s National Institute for Health and Care Excellence (NICE), for example, works to a rough threshold of £20,000-30,000 for each additional year of good health when deciding which treatments should be available on the National Health Service. But in America any mention of cost-effectiveness generates fury. High American prices support research and subsidise lower prices elsewhere. Yet even Americans are starting to question the affordability of some treatments, one of which costs $11,000 a month and extends life by a median of six weeks.
Spending on drugs is a huge part of the health care debate as drugs must compete for new spending with many other health-care needs, including new hospitals, more staff and more surgery. In part because health budgets are small, drugs often already account for a bigger share of health spending in poorer countries than in rich ones. India spends 44% of its total on drugs and China 43%. America and Britain spend 12%.
Any students struggling with Natural Monopoly? Have a watch
and share this video by a new YouTube Economics tutorial provider to gain full
As an Economics teacher at Bromsgrove School, I have taken
the opportunity to make video tutorials of all key Economics content covered in
AS, A Level (all boards) and IB Economics for the aid of my students and
department at Bromsgrove School and as it turns out, for students worldwide.
The videos produced have been extremely popular at Bromsgrove, they are used as
starters and plenaries for recap, set to watch for homework (used as a flipped
learning exercise) and also used to understand exam technique in order to score
well in examinations. The significance of rewinding, pausing and fast
forwarding cannot be understated – for students to learn at their own pace is a
notoriously difficult task for teachers to implement in class, technology like
this helps no end.
My channel is EconplusDal on YouTube where you will find
separate playlists that cover the major key content of AS, A2 and IB
microeconomics. Although there is excellent content by other providers out
there, I try to offer something unique to my students, where exam technique,
Oxbridge extension material and evaluation skills all are videos included in
depth, gaps which haven’t been filled by current YouTube ‘tutors’.
So next time
you’re on YouTube or if you’re trying to find ways to help a struggling student
– think EconplusDal! Please do like, comment and subscribe and spread the word
to colleagues and other departments. Have a watch and let me know what you
think. One content video will feature every Monday with an extension video to
feature every Friday
The recent BBC
series on the Fragile Five and Linda
Yueh’s blog on what
we can expect in 2014 have each brought a sharp focus on how India may fare.
The slowdown in GDP
growth since 2010 abated with a good monsoon boosting agricultural output, and
helping to dampen inflation in the final quarter of 2014, with a growth rate of
4.8%. Wholesale price inflation is
running at 7.52% and interest rates were held this month at 7.75%.
allegations of government corruption continue, leading to the success of Arvind
Kaejriwal’s anti-corruption Aam Aadme Party in the recent Delhi assembly elections;
the outcome of this year’s general election is uncertain and foreign capital
flows have begun to fall. Regulations faced
by foreign companies who locate and invest in the country are still seen as
over-zealous- Wal Mart recently pulled the plug on a deal to set up branches in
India, Tesco decided to stay and boost its range of stores after rules on local
sourcing of products were deferred for 5 years.
Infrastructure problems remain. Building
of the Mumbai metro took five years longer than scheduling after a legal
dispute over the location of a key bridge…
government hampered by a large budget deficit and the cost of the Food Security
Bill that guarantees basic foodstuffs at subsidized prices, the Central Bank
has been charged with using the marginal gains philosophy to boost growth, keep
inflation low and stable, support the banks and to stabilize the value of the
Enter Raghuram Rajan- a great article here from Forbes India about the challenges he faces in
Former Chief Economist
at the IMF, Mr Rajan is popular with the ladies and may well drink sip dry martinis
as he seeks to save India from economic malaise. In India, he is likened to Rajnikanth, a
tough guy actor from South Indian movies.
He has begun a series of minor tweaks that include measures to support
the banking system. Much like China, India’s banks, though not exclusively
privately owned, sit on a large debt pile, a result of the property boom in the
big cities. In Mumbai even apartments in
the northern suburbs can go for US$600, 000. Middle class India is evident in
Mumbai- sleek shopping malls, car show rooms, and a growing range of local
designers and producers in suburbs such as Bandra, Juhu and Powai illustrate
rising wealth and the globalization of tastes.
New licences have
been issued for private
banks, including one set up to support Indian women; foreign banks have also
been encouraged and can now set up wholly owned subsidiaries, no longer
required to find a local partner. Commercial banks now need to buy fewer government
securities. Steps have also been taken
to encourage Non Resident Indians (NRIs) abroad to deposit more money back in
India banks. Together it is hoped these
changes stabilize the value of the Rupee by balancing any loss in capital
Rajan says India
won’t need any money from the IMF. In
fact, he told the BBC
in this interview
that India is now a net contributor.
Great clip showing how effective government intervention can be in reducing market failure
Great data in this clip from Aljazeera
A great case study in The Economist, ideal for those of you wanting to
link business economics theory to a clearly relevant case study.
If you read the article, you’ll immediately see the links between exam specifications and what’s happening now in the global car market. I’ve picked out a few key points below:
Toyota is on the brink of becoming the first member of the “10m club”. It will swiftly be followed by GM and Volkswagen. There are plenty of reasons why size matters. Besides the obvious economies of scale and the strong bargaining power with suppliers, being big makes it easier, especially with today’s flexible production lines, to offer an ample product range that can exploit every niche. And the biggest car making groups are better able to spread the heavy cost of complying with ever tougher environmental regulation. High productivity is vital.
Makers of luxurious models with strong brands, such as BMW and Jaguar Land Rover, can do well selling relatively small volumes of cars for handsome profits.
The importance of large scale innovation, investment and R+D (often said to be an important barrier to entry), VW is investing a whopping €84 billion ($114 billion) over the next five years, with two-thirds going to develop new vehicles and technology (although big doesn’t necessarily mean innovative, of course).
There are ways to compensate for lack of scale. The most obvious is to get big by merging. Deals of the sort that will fully integrate Fiat and Chrysler are one way of getting bigger but the history of car makers attempting full mergers is not a happy one. Though several have been suggested recently, such PSA Peugeot-Citroën with GM Europe, they are hard to pull off. Another way of bulking up is to stop short of a merger but to build a broad alliance. Alliances are typically complicated and can come unstuck when the benefits to both sides become unclear. A more common way to exploit the advantages of scale without the drawbacks of a full merger or broad alliance is through partnerships to share the costs of specific technology.
The Hyundai-Kia group of South Korea is another maker with prospects of joining the 10m club one day. Being part of a conglomerate that includes a big steelmaker has also helped the group continue to gain critical mass, or minimum efficient scale. The rise of emerging markets is an ongoing theme: many of the big manufacturers are also enjoying continued growth, especially in the world’s largest car market, China. Location decisions are still crucial.
Size also comes with risks. Producing vehicles for every region in every segment means manufacturing a vast array of cars that add cost and complexity without necessarily contributing much profit – a good example of diseconomies of scale. The mass-market SEAT and Skoda brands bulk up VW’s sales but it makes most of its money from flashy Audis and Porsches. However, the game that the biggest car makers are in is to survive for the long term as the stragglers fall by the wayside (here’s what happened to Saab). Every small SEAT that VW sells at a big discount is a sale denied to a struggling European rival, making it harder for it to stick around to compete: a great example of a clever marketing strategy in complex oligopolistic markets where firms are interdependent.
Many thanks to the Economics team at Dulwich College who have alerted us to a superb opportunity to join this friendly and talented team!
TEACHER OF ECONOMICS (1 Year fixed-term)
Application forms available on the College website
or through the TES.
Application forms, accompanied by a covering
letter, should be submitted to:
The Master, Dulwich College, Dulwich Common, London
Applications may also be sent by email to email@example.com
Closing date for applications: 10am on Monday 20th January 2014 with interviews taking place on Friday 24th January 2014.
Further details are available from www.dulwich.org.uk/appointments
Any queries regarding the post please contact Nick Fyfe, (Head of
An amazing statistic from BBC Scotland
Is this a market which suffers from market failure and so requires greater government intervention?
Interesting clip from the BBC
Thanks to economicshelp
Fantastic interactive resource from the Guardian
Another superb Economics teaching opportunity here – HOD Economics from Sept 2014. Many thanks to the dept at KES for letting us know about it. Please mention tutor2u as the source if you apply for this one!
A HOD opportunity to teach Economics and Business Studies at The Blue Coat School in Liverpool. All the details below. Please mention that you saw this opportunity on the tutor2u website if you apply!
Head of Economics and Business Studies
The Blue Coat School, Liverpool
Salary Level: MPS/UPS TLR2.3
The school is looking to appoint a Head of Economics and Business Studies and applications are sought from enthusiastic, dedicated and well-qualified teachers to lead a highly successful department.
The successful candidate will be a good honours graduate, preferably with a degree is Economics and will have a proven track record of good teaching and leadership qualities together with the drive, energy and administrative skills to run a successful department.
Closing Date for Applications: Monday 27 January 2014
Interview Date: Tuesday 4 February 2014
Contact name for applications: Andy Lowe (email: firstname.lastname@example.org)
Contact telephone for further information: 07713 389303
coming year looks like it will be a good one.
At the start of each of the past five years, the economic scales have
been tilted down, and the challenge has been to look for factors which might
have tipped them back up. This year, the
balance is reversed. The onus lies with
the pessimists to prove their case. Not
that there are any shortages on this score.
For example, King Canute of Twickenham, aka Vince Cable, has solemnly
commanded that house prices must stop rising, for fear of a new bubble.
The most pervasive negative myth, for it is indeed a myth, is
that the current recovery is driven by consumer spending. Spending which is fuelled by more debt and
lower savings, and is therefore not sustainable. This is simply untrue. In most Western economies, overall output,
stopped falling at some point during 2009.
Since then, the percentage increase in GDP has been more than that of
The latest official data relates to the third quarter of
2013. From the trough of the recession
in 2009, GDP in American has grown by 10 per cent, and consumer spending by 8.9
per cent. In the UK, the figures are 5.2
and 3.5 per cent respectively. The same
point applies to the main Eurozone economies.
In Germany, output has risen 9.9 per cent and personal consumption is up
by 4.8 per cent. In France the figures
are 4.1 and 2.4 per cent.
The main driver of the recovery has been corporate
investment. In the US, it has risen by
30 per cent since 2009 and in the UK by 19 per cent. The increase is only 12 per cent in Germany,
but here there has also been a big rise in net exports.
It is France which is the basket case. And it is public spending which is their
problem. In the national accounts, there
is a category: ‘public sector consumption’.
Basically, this is the cost of employing public sector workers, their
salaries, pension contributions and so on.
In America, spending on public
sector consumption has actually fallen by 5 per cent since 2009. Over half a million net jobs have been cut
from the public payroll. Yet total GDP
has expanded by 10 per cent. In Britain,
despite the rhetoric of cuts, public consumption has risen slightly, by 2.5 per
cent, half the speed of the increase in GDP.
In France, public spending growth has outstripped GDP growth,
rising by 5.3 per cent since 2009.
Corporate investment has grown slightly faster, by 7.4 per cent compared
to the 4.1 per cent figure for GDP. So
since 2009, out of these four big economies, France has had the lowest GDP
growth, the lowest growth in personal consumption, the lowest growth in
corporate investment, and the highest growth in public spending.
Ed Miliband last year said President Hollande is ‘leading the
debate in Europe to find that different way forward’. One of the safest predictions for 2014 is
that he won’t be repeating the praise!
Ormerod is an economist at Volterra Partners LLP, a director of the think-tank Synthesis and author of Why Most Things Fail: Evolution, Extinction