News January 2007

Economics News Articles: January 2007

Welcome to the January 2007 edition of the economics news articles section. Happy New Year from us all. This month has seen a wealth of valuable economics articles and the main problem has been selecting just a few. One important theme this month has been interest rates and inflation. The Governor of the Bank of England's new year resolution not to have to write to the Chancellor seems to be holding so far, but with inflation within 0.1% of the target limit, this looks a little precarious. See News Items 7 and 9 for further details on this. January 1st 2007 saw the EU grow further with the addition of Bulgaria and Romania as members. We look at the implications of this in News Item 11.

A further ongoing theme for this month seems to be the iPod. This comes in twice in News Items 3 and 12, though this is for totally different reasons. An Australian bank, as an alternative to the Economist's Big Mac Index has developed an iPod Index (News Item 12). This is intended to show the impact of exchange rates on purchasing power in different countries. The iPod is now such an universally available good that it makes a good standard good for this kind of valuation. In News Item 3, we look at the pricing of the iPod. Why is it that they always appear to be the same price to within a few cents. Have you ever seen a substantially discounted iPod?

As always, I hope that you find the articles useful for your studies and that they give you some insight into how economics can help to explain the world around us. Enjoy!

Andy Beharrell

Contents

1. Guns to caviar - measures of prosperity
2. The big orange freeze
3. Why are iPods always the same price?
4. Cutting the wealth cake
5. Offsetting carbon regulations
6. China - is it really the economic powerhouse we think?
7. Inflation and the governor's letter - will he, won't he?
8. The government gets deeper in debt
9. The rise and rise of interest rates
10. A land tax is 200 years overdue
11. The EU goes on getting bigger
12. A guide to exchange rates - the iPod way
13. UK trade - ever deeper into the red
14. Destabilising Asian currency flows
15. Streets ahead - the growth of urbanisation

News Item 1: Guns to caviar - measures of prosperity

Relevant to:

Economics (6^th edition) Chapter 1

Essentials of Economics (3^rd and 4^th edition) Introduction

Economics for Business (3^rd and 4^th edition) Chapter 2

The Economic Environment of Business (1^st edition) Chapter 1

News articles can give us the impression that the world is both more warlike (with fighting in various countries) but also more peaceful and prosperous. To try to explain this confusion, an American economist with the Teal consultancy group, Richard Aboulafia, has developed a unique index; the Guns-to-Caviar Index. By mapping how much the world spends on fighter jets (guns) against how much the world spends on executive private jets (caviar) for the last 17 years, Aboulafia has given us an interesting view of the state of the world.

Obscure Economic Indicator: The Guns-to-Caviar Index MSN Slate (14/12/06)

Questions
1.	What is meant by a production possibility frontier.
2.	Draw a production possibility frontier to illustrate the underlying theory behind the Guns-to-Caviar index. Use the diagram to illustrate the changes that have taken place in the index during the 1990s and the early part of this century.
3.	Critically assess whether the Guns-to-Caviar index can really help explain changes in the current geopolitical/economic climate.

Questions
1.	Using supply and demand diagrams as appropriate, explain the impact of the freezing weather in California on the world price of oranges.
2.	Using supply and demand diagrams as appropriate, compare and contrast (a) the change in the price of oranges and orange juice and (b) the change in the price of oranges in the USA and the rest of the world..
3.	Examine the likely impact of the cold weather in California on prices of other foods.

Questions
1.	Explain what is meant by the term 'price dispersion'.
2.	Explain how Apple manage to keep the price of iPods from falling below a certain level.
3.	Discuss the impact on competition of using minimum advertised price and marketing subsidies as tools to maintain the desired market price.

Questions
1.	Examine whether the fact that the richest 10% in the world own 85% of all world assets is likely to cause problems for developing countries.
2.	Suggest two policies that a developed country could use to narrow wealth distribution and evaluate the likely impact of these policies on the level of economic growth.
3.	""In some ways, wealth is more important to people in poorer countries than in richer countries." Discuss the extent to which this assertion from the article is likely to be true.

Questions
1.	Using diagrams as appropriate, explain how carbon offsetting is intended to reduce the environmental impact of plane travel.
2.	Discuss the effectiveness of carbon offsetting as an approach to reducing the impact of increasing plane travel.
3.	Suggest one demand-side and one supply-side policy to reduce the carbon emissions resulting from air travel and assess their relative effectiveness.

Questions
1.	"..... the transition from communism remains fundamentally problematic". Discuss the extent to which these problems are likely to affect the pace of development in China.
2.	Explain what Will Hutton means by 'Leninist corporatism'. Why does he believe this to be a problem for China?
3.	Assess the likely impact of corruption in China on long-term development and the rate of economic growth.

Questions
1.	Examine the underlying economic factors that led to the rise in inflation.
2.	Explain the transmission mechanism that leads from interest rates to changes in aggregate demand.
3.	Discuss the likely impact of the higher inflation levels on the short-term and medium-term levels of economic growth in the UK.
4.	Use the National Statistics Personal Inflation Calculator to work out your personal level of inflation. Assess the reasons why your personal level of inflation is greater than/less than the headline inflation rate.
3.	Explain why the process of weighting of the Consumer Price Index is required. Why does this process result in different personal inflation rates for individual households?

Questions
1.	Explain the relationship between the budget deficit and the national debt.
2.	Examine the likely impact of the rising budget deficit on (a) interest rates, (b) the level of investment and (c) economic growth.
3.	"At a time when the economy is experiencing sustained economic growth, these figures highlight the problem the chancellor will have in the future in the event of a downturn". Assess the impact that a downturn would have on the level of national debt in (a) the short term and (b) the long term.

Questions
1.	Examine the underlying economic factors that led to the MPC deciding to increase interest rates.
2.	Assess the likely impact of the interest rate rise on each of the components of aggregate demand. How will economic growth therefore be affected in (a) the short term and (b) the medium term.?
3.	Use the Virtual Bank of Biz/ed to write a short summary of the the process the MPC goes through in making their monthly decisions.

Questions
1.	Explain what is meant by a land tax and suggest different ways that this could be levied.
2.	Discuss the likely impact of a land tax, as proposed by Ashley Seager, on the major economic targets.
3.	Analyse possible alternative policies to reduce the levels of exclusion in UK society.

Questions
1.	What are the likely benefits to Bulgaria and Romania of membership of the EU?
2.	What are the likely costs to existing EU members of Bulgaria and Romania joining the EU?
3.	Assess the likely impact on the EU budget of Bulgaria and Romania joining the EU.

Questions
1.	Explain what the iPod index shows and how it might be used.
2.	Suggest possible reasons why the iPod is $327.71 in Brazil as against $195.04 in the UK.
3.	Discuss the value of indices like the Big Mac index and iPod index for economists and policy-makers.

Questions
1.	Explain the impact of a strong pound on the relative prices of UK exports and imports.
2.	Assess the underlying economic factors that have led to the deterioration in the UK trade performance in November 2006.
3.	Discuss the likely impact of the weak dollar on the UK trade in good deficit in (a) the short-term and (b) the long term..

Questions
1.	Using diagrams as appropriate, show the impact of a rise in inward capital flows on the exchange rate of an Asian country.
2.	Assess the likely economic impact of recent Thai restrictions on foreign ownership of Thai companies.
3.	"It is, and will surely be, the most difficult task for any monetary authorities to maintain the stability of foreign exchange rates, the free flow of capital, and the independence of monetary policy simultaneously.....". Discuss the extent to which all these factors are interdependent.

Questions
1.	Assess the impact of the growth of urbanisation on the rate of development in developing countries.
2.	Discuss the advantages and disadvantages of growing urbanisation to a developing country.
3.	Assess the role of non-governmental organisations (NGOs) in helping to minimise the negative consequences of urbanisation.