| Economics News Articles: April 2007 |
| Welcome to the April set of news articles. A few major economic themes run through our articles this month with a number of major stories. The first is the surprise jump in inflation to 3.1% that has led to the Governor of the Bank of England (Mervyn King) to have to write the first ever letter to the Chancellor explaining why they have missed the target rate of inflation for the first time since they were given independence 10 years ago (see News Item 11). This has also been accompanied by the exchange rate going through the important psychological barrier of £1=$2 (see News Item 13). Another major theme has been that of competition and competition policy. The Office of Fair Trading (OFT) has announced an inquiry into the levels of charges imposed by the banks (see News Item 5) while the EU has announced fines for a cartel being operated by Dutch brewers who have been cooperating on setting prices (see News Item 3). As ever we hope you find the articles and question useful as you further your study of economics and economic issues. |
|
Andy Beharrell
|
| Contents |
1. Yeltsin's legacy
2. Milk - the white stuff, but for who?
3. Is a cartel brewing or is brewing a cartel?
4. Womenomics revisited
5. Free banking, or is it?
6. Turning pig fat into bio-diesel
7. Is the UK economy going to suffer a post-Brown hangover?
8. Zimbabwe - inflating further
9. Are things getting better in the Eurozone?
10. Learning the lost art of letter writing
11. Slowing productivity growth in the USA
12. Pound breaks the $2 barrier
13. Everything's almost free in America
14. The World Bank has the perfect standard bearer
| Relevant to: |
| Economics (6th edition) Chapters 1, 21, 22 |
| Essentials of Economics (3rd and 4th edition) Introduction and Chapters 1, 10 |
| Economics for Business (3rd and 4th edition) Chapters 2, 21, 22 |
| The Economic Environment of Business (1st edition) Chapters 1, 8 |
| With the news this month of the death of Boris Yeltsin, it has been an opportunity to look back at the economic legacy of the first democratically-elected President of Russia. Boris Yeltsin took over at a time when all goods were scarce and the industrial infrastructure was crumbling. He adopted policies of extensive privatisation and abandoned price controls. To what extent has this created the Russia of today and what is the legacy he has left behind? |
Yeltsin's moment The Economist (26/4/07)
Yeltsin's economic legacy BBC News Online (24/4/07)
| Questions | |
| 1. | Explain the reasoning behind the policies that were adopted by Boris Yeltsin in his early years in office. |
| 2. | Discuss the extent to which those policies enabled the development of the Russian economy. |
| 3. | Assess the current state of the Russian economy. |
| Relevant to: |
| Economics (6th edition) Chapter 7 |
| Essentials of Economics (3rd and 4th edition) Chapters 4, 6 |
| Economics for Business (3rd and 4th edition) Chapters 12, 21 |
| The Economic Environment of Business (1st edition) Chapters 5, 8 |
| Reading the first article linked to below, you may be forgiven for thinking that farming has moved into the realms of science fiction. Dairy farming has moved determinedly into the era of technology and now benefits from extensive economies of scale with much higher productivity levels than even a decade ago. Yet 3000 dairy farmers are planning to leave the industry in the next two years and even the largest farms are struggling to make money. The processing sector has become significantly more concentrated and margins are being squeezed ever further by the power of the supermarkets, so has the market become unbalanced with too much power in the hands of supermarkets and processors? |
Rising prices, failing farms. The strange story of milk Guardian (24/4/07)
Why British dairy farming is in crisis Guardian (24/5/07)
| Questions | |
| 1. | Describe the market structure of the milk industry. |
| 2. | Discuss the extent to which this market structure has changed the level of prices in the market for milk in recent years. |
| 3. | Evaluate possible measures that governments could implement to make the market for milk more competitive. |
| Relevant to: |
| Economics (6th edition) Chapter 7 |
| Essentials of Economics (3rd and 4th edition) Chapters 4, 6 |
| Economics for Business (3rd and 4th edition) Chapters 12, 21 |
| The Economic Environment of Business (1st edition) Chapters 5, 8 |
| Dutch brewers including Heineken and Grolsch have been fined a total of nearly £185m between them for stifling competition and sharing price information with the intention of fixing prices. This cartel was discovered by EU investigators and the fine has been imposed by the EU competition commission. |
Dutch brewers fined over cartel BBC News Online (18/4/07)
Beer makers fined in Dutch price probe Business Week (18/4/07)
EU fines Heineken for fixing beer prices Business Week (18/4/07)
Heineken and Grolsch fined for price-fixing Guardian (18/4/07)
Heineken fined 219m euro for fixing beer prices Times Online (18/4/07)
| Questions | |
| 1. | Explain the conditions required for a cartel to develop. |
| 2. | Explain the methods used by the brewing firms to fix prices in the beer market. |
| 3. | Evaluate two policies that could be used by the EU competition commission to try to prevent cartels reemerging in the future in the brewing industry. |
| Relevant to: |
| Economics (6th edition) Chapter 9 |
| Essentials of Economics (3rd and 4th edition) Chapter 5 |
| Economics for Business (3rd and 4th edition) Chapter 18 |
| The Economic Environment of Business (1st edition) Chapter 7 |
|
The article linked to below from The Economist starts: "MEN like to believe that they run the world. They are not deluding themselves. In politics, men still dominate most of the planet's governments and legislatures. In economic life, they rule its boardrooms and have most of the best-paid jobs. Women, meanwhile, do by far the greater part of the world's unpaid work." To what extent is this situation changing around the world? |
Womenomics revisited The Economist (30/3/06)
| Questions | |
| 1. | Summarise the changes that have taken place in global labour markets in recent years. |
| 2. | Assess the impact of these changes on the equilibrium level of wages in (a) the developed world and (b) the developing world. |
| 3. | Assess the argument given in the article that higher participation by women in the workforce would lead to higher levels of GDP.. |
| Relevant to: |
| Economics (6th edition) Chapter 12 |
| Essentials of Economics (3rd and 4th edition) Chapter 6 |
| Economics for Business (3rd and 4th edition) Chapters 17, 21 |
| The Economic Environment of Business (1st edition) Chapters 5, 8 |
| The Office of Fair Trading (OFT) is to set up an investigation into the reality of 'free banking' to establish whether greater transparency in charging would benefit consumers. The articles linked to below consider the scope of this investigation and look at what some consider the 'myth' of free banking. |
OFT probe into bank charges could mean end of 'free banking' The Scotsman (27/4/07)
'Free' banking could end as overdraft charges challenged Guardian (27/4/07)
Watchdog probes cost of banking BBC News Online (27/4/07)
Charges inquiry may spell end of free banking Telegraph (28/4/07)
OFT considers ending 'free' banking Times Online (27/4/07)
Q&A: Banking investigation and you BBC News Online (26/4/07)
Calling banks' bluff BBC News Online - Robert Peston blog (26/4/07)
Free banking 'myth' to be probed Guardian (26/4/07)
| Questions | |
| 1. | Explain the reason why some people consider free banking to be a 'myth'. |
| 2. | Examine the likely impact of the market structure in the market for banking on the level of competition. |
| 3. | Assess two policies that the government could implement to ensure that consumers get a fairer deal from their banks. |
| Relevant to: |
| Economics (6th edition) Chapter 12 |
| Essentials of Economics (3rd and 4th edition) Chapter 6 |
| Economics for Business (3rd and 4th edition) Chapters 20, 22 |
| The Economic Environment of Business (1st edition) Chapter 8 |
| You do perhaps need to check the date for this story, but once you have established that it wasn't written on April 1st, you can start to take it a little more seriously. An alliance of an American oil company and food producer is to turn pig fat into diesel fuel. The fuel will apparently have the same chemical properties as diesel but a lower carbon dioxide content and zero sulphur, so should be beneficial for the environment the companies argue. |
Pig fat to be turned into diesel BBC News Online (19/4/07)
| Questions | |
| 1. | Using diagrams as appropriate, compare and contrast the environmental impact of conventional diesel and the new pig fat bio-diesel. |
| 2. | Discuss the extent to which the new pig fat diesel will be better for the environment than conventional diesel. |
| 3. | Evaluate two policies that the government could implement to encourage the use of alternative fuels like the new pig fat bio-diesel. |
News Item 7: Is the UK economy going to suffer a post-Brown hangover?
| Relevant to: |
| Economics (6th edition) Chapters 14, 20 |
| Essentials of Economics (3rd and 4th edition) Chapters 7, 9, 10 |
| Economics for Business (3rd and 4th edition) Chapters 26, 29 |
| The Economic Environment of Business (1st edition) Chapters 9, 10 |
| The conventional wisdom may consider the UK economy to be the success story of Europe with growth in every quarter in the last ten years and one of the lowest rates of unemployment in Europe. However, is this really true or is the real state of the economy not quite as good as we have been led to believe. In the article below Larry Elliott, the economics editor of the Guardian, argues that the chancellor who follows on from Gordon Brown may face something of an economic hangover. |
The king-sized hangover we face - as Brown takes over Guardian (20/4/07)
| Questions | |
| 1. | Explain why Larry Elliott argues that we may be facing a 'king-sized hangover'. |
| 2. | Explain why Elliott considers that there needs to be "radical reform of land and property taxation in the UK to keep the housing market in check". |
| 3. | Evaluate two policies that would help the government to counter the economic problems identified by Larry Elliott in his article. |
| Relevant to: |
| Economics (6th edition) Chapters 14, 17, 20 |
| Essentials of Economics (3rd and 4th edition) Chapters 9, 10 |
| Economics for Business (3rd and 4th edition) Chapters 26, 28, 30 |
| The Economic Environment of Business (1st edition) Chapters 9, 10 |
| Hyperinflation in Zimbabwe is no longer news. Indeed the news below that inflation has risen to 2,200% may not even surprise us any more. However, inflation of this level should also mean similar changes in the exchange rate if purchasing power parity is to be maintained. The official exchange rate in Zimbabwe, however, hasn't changed by anywhere near this amount and there are reports (See Scotsman article below) that the Governor of the Central Bank has even tried to portray a recent devaluation as not really a devaluation at all! |
Our mutual friend The Economist (12/4/07)
Zimbabwe inflation reaches 2,200% BBC News Online (26/4/07)
When is a devaluation not a devaluation? When Mugabe is your boss Scotsman (27/4/07)
| Questions | |
| 1. | Explain, using diagrams as appropriate, how hyperinflation will affect the exchange rate in Zimbabwe. |
| 2. | Discuss the likely economic impact of not devaluing the official exchange rate in line with the level of inflation in Zimbabwe. |
| 3. | Assess possible exchange rate policies that would help reduce the level of hyperinflation in Zimbabwe. |
| Relevant to: |
| Economics (6th edition) Chapters 14, 19, 20 |
| Essentials of Economics (3rd and 4th edition) Chapters 7, 9, 10 |
| Economics for Business (3rd and 4th edition) Chapters 26, 28, 30 |
| The Economic Environment of Business (1st edition) Chapters 9, 10 |
| Economic growth in the Eurozone has been weak for many years, but there have been a number of signs recently that the Eurozone economies may be recovering. Germany, one of the largest Eurozone economies, has increasing business confidence, higher forecasts of GDP growth and the prospect of further improvements. Even in France, the economy looks a little stronger than this time a year ago. This is all despite the rising currency and therefore higher export prices being faced by most European economies. |
Strength to strength The Economist (26/4/07)
| Questions | |
| 1. | Explain the likely impact of a rising Euro on the levels of imports and exports in the Eurozone. |
| 2. | Assess the reasons why the European Central Bank is likely to increase interest rates "from 3.75% to 4%, in June". |
| 3. | Discuss the risks faced by the German economy as recovery progresses. |
| Relevant to: |
| Economics (6th edition) Chapters 19, 20 |
| Essentials of Economics (3rd and 4th edition) Chapters 9, 10 |
| Economics for Business (3rd and 4th edition) Chapters 28, 30 |
| The Economic Environment of Business (1st edition) Chapters 9, 10 |
| One of the key aims of making the Bank of England independent from government in 1997 was to reduce the level of inflation in the UK. An independent Bank is seen as untainted by political associations and so more likely to maintain price stability. One of the provisions of the independent bank was that if inflation went more than 1% outside the target range, then the Governor of the Bank of England would have to write an open letter to the Chancellor explaining what had gone wrong and what he was going to do to address it. In 10 years this hasn't happened until this month when inflation hit 3.1%. |
Fuel, food and furniture: why the Bank had to explain itself to Brown Guardian (18/4/07)
Inflation shock The Economist (17/4/07)
Bank Governor defends record Guardian (17/4/07)
The main surprise is that it has taken this long Guardian (17/4/07)
A pint of milk and half a point on mortgages Guardian (18/4/07)
Is the China effect over? BBC News Online - Evan Davis blog (17/4/07)You may also like to read the Governor's letter and the Chancellor's reply:
Dear Gordon .....
Dear Mervyn .....
| Questions | |
| 1. | Explain the main reasons for inflation having exceeded the target rate. |
| 2. | With reference to the letter written to the Chancellor by the Governor of the Bank of England, assess the strategies being used by the Bank of England to bring inflation back within the target range. |
| 3. | Examine the relevance of the 'China effect' in determining the UK level of inflation. (See Evan Davis's blog article) |
| Relevant to: |
| Economics (6th edition) Chapter 21 |
| Essentials of Economics (3rd and 4th edition) Chapter 10 |
| Economics for Business (3rd and 4th edition) Chapter 31 |
| The Economic Environment of Business (1st edition) Chapter 10 |
| A crucial element of America's success in the last decade has been rapid productivity growth. This has helped drive economic growth. However, there have been recent signs that productivity growth may be falling and the article below from The Economist considers the likely impact of lower productivity growth on other US economic indicators. |
Making less with more The Economist (12/4/07)
| Questions | |
| 1. | What are the main factors that have led to rapid productivity growth in the USA over the last decade? |
| 2. | Using aggregate demand and supply analysis, show the impact on economic growth of a slower rate of productivity growth. |
| 3. | Evaluate policies that the US government could implement to try to restore the level of productivity growth. |
| Relevant to: |
| Economics (6th edition) Chapter 24 |
| Essentials of Economics (3rd and 4th edition) Chapter 12 |
| Economics for Business (3rd and 4th edition) Chapter 27 |
| The Economic Environment of Business (1st edition) Chapter 11 |
| It was over 25 years ago that £1 was worth more than $2 on the foreign exchange markets, but that important psychological barrier was broken again this month as the value of sterling crept above $2 on foreign exchange markets. The continuing weakness of the dollar is making life difficult for UK exporters and also for firms in the Eurozone as the weakness in the dollar also affects the Euro and other major currencies. |
Pound reaches 26-year dollar high BBC News Online (18/4/07)
UK pound goes through $2 barrier BBC News Online (17/4/07)
Yen hits record low against euro BBC News Online (16/4/07)
Pound hits 25-year dollar high Guardian (18/4/07)
British pound breaks through $2 International Herald Tribune (17/4/07)
| Questions | |
| 1. | Explain the impact of the weak value of the dollar on international markets on the price of UK imports and exports. |
| 2. | Assess the likely impact of the high value of sterling on the major UK economic targets. |
| 3. | Assess policies that the government could use to try to reduce the value of sterling against the dollar if they chose to. |
| Relevant to: |
| Economics (6th edition) Chapter 24 |
| Essentials of Economics (3rd and 4th edition) Chapter 12 |
| Economics for Business (3rd and 4th edition) Chapter 27 |
| The Economic Environment of Business (1st edition) Chapter 11 |
| As we have seen in News Item 13, the pound has reached a record high against the dollar. This makes it an excellent time for UK tourists to visit the USA with prices appearing relatively low thanks to the exchange rate. These exchange rate values will also affect the balance of payments of both the USA and the UK and the article below looks at the economic impact of the high exchange rate against the dollar. |
Why everything's almost free in America (and why it won't last) Guardian (23/4/07)
| Questions | |
| 1. | Explain the principal reasons for the change that has taken place in the exchange rate in recent years. |
| 2. | "On a PPP basis, a pound should buy $1.60". Explain what is meant by this statement. |
| 3. | "My bet is that within a year the rate will be closer to $1.60 than $2. Maybe a lot closer." Assess the impact of this possible outcome on economic growth and inflation in the UK. |
| 4. | Examine the likely impact of the high exchange rate on the balance of payments situation of (a) the USA and (b) the UK. |
News Item 14: The World Bank has the perfect standard bearer
| Relevant to: |
| Economics (6th edition) Chapters 25, 26 |
| Essentials of Economics (3rd and 4th edition) Chapter 12 |
| Economics for Business (3rd and 4th edition) Chapter 32 |
| The Economic Environment of Business (1st edition) Chapters 11, 12 |
| The World Bank and the IMF are no strangers to criticism. Both organisations have pursued controversial policies in their attempts to improve the lot of people in developing countries. Recent events at the World Bank have heightened criticism of the organisation and in the first article below Naomi Klein (author of No Logo - nologo.org) argues that the behaviour of Paul Wolfowitz is symptomatic of a wider hypocrisy in the behavior of the World Bank around the world. In the second article George Monbiot writes a criticism of the behaviour of the IMF and its approach. |
The World Bank has the perfect standard bearer Guardian (27/4/07)
If Britain wants to help Africa's poor, it must stop acting like an emperor Guardian (17/4/07)
| Questions | |
| 1. | Use the web sites of the IMF and the World Bank to write a summary of their roles. |
| 2. | Assess the validity of the arguments of (a) George Monbiot with respect to the IMF and (b) Naomi Klein with respect to the World Bank. |
| 3. | Discuss possible changes in World Bank policies that would help address Naomi Klein's criticisms. |