| Economics News Articles: October 2005 |
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Welcome to the October set of news articles. A considerable amount has happened this month covering a wide range of economic issues. As ever, we have tried to give you a flavour of these by selecting a number of articles. The oil market and the oil price seem to have hardly been out of the news over the past few months. Indeed this time last year we were looking at news items about the oil price. Hurricanes Katrina and Rita have seriously disrupted the supply of oil and this, combined with continued demand growth, has kept the price high. This month we look, however, at a more long-term issue related to the oil market. Have we reached what is termed 'peak oil' (see News Item 3). In other words has production around the world peaked and is oil running out? In News Items 4 and 5 we look at the fundamental economic principle of elasticity. These articles look at how demand for SUVs and independent school places may have been affected by price changes. We also look at the Nobel Prize winners for economics (see News Item 7) and consider whether Gordon Brown may have 'over-egged' his economic forecasts. Could the Chancellor be losing his reputation for prudence? As is often the case, the most difficult thing for us this month has been working out which articles not to include from the wealth of economics news stories that appear each month. I hope that you find the articles informative and useful for your studies, and that you enjoy reading them and answering or discussing the questions. |
|
Andy Beharrell
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| Contents |
1. China - guns or butter?
2. China - state or private?
3. Have we reached 'peak oil'?
4. SUVs - cross elastic?
5. Independent school fees - is demand getting more elastic?
6. Doing business the World Bank way
7. Playing games wins a Nobel Prize
8. Raising the minimum wage
9. The economic cost of gridlock
10. Tourism - who does it benefit?
11. Gordon Brown - skating on thin ice?
12. Inflation - what's in a name?
13. Taxing black gold?
14. EU regional spending
15. The BRIC economies
| Relevant to: |
| Economics (5th edition) Chapters 1, 26 |
| Essentials of Economics (3rd edition) Chapter 1 |
| Economics for Business (3rd edition) Chapter 2 |
| The Economic Environment of Business (1st edition) Chapter 1 |
| As with other planned economies, China produces a five-year economic plan. The plan sets out their targets for those years and sets the economic agenda for that period. The latest plan was discussed at the annual Communist Party plenum. However, this plan appears to herald a shift away from emphasis on just economic growth and a move towards more social and environmentally friendly policies. The breakneck economic growth that China has experienced in recent years has caused significant environmental damage and opened divisions in Chinese society. It appears that the latest plan may be trying to address some of these issues. |
China unveils new growth model BBC News Online (12/10/05)
| Questions | |
| 1. | Using a production possibility curve, illustrate the shift in economic policy that is proposed by China. |
| 2. | What social problems are likely to be caused by a policy emphasis on purely economic growth? |
| 3. | Assess policies that could be adopted by the Chinese government to reduce the social divisions that have emerged in China. |
| Relevant to: |
| Economics (5th edition) Chapters 1, 12 |
| Essentials of Economics (3rd edition) Chapters 1, 6 |
| Economics for Business (3rd edition) Chapters 2, 22 |
| The Economic Environment of Business (1st edition) Chapter 1 |
| The role of the state in the economy is an issue that is usually considered at an early stage in an economics course. At one extreme is a planned economy where the state takes all economic decisions and owns all resources, while at the other extreme is a free-market economy where all economic resources are privately owned and resource allocation decisions are all taken by the market. Traditionally China has been a planned economy, but as they increase the role of markets, there is still some confusion over the role of the state in business. The article below from The Economist considers how the relationship between the state and business needs to change if China is to build world-class companies. |
The myth of China Inc The Economist (1/09/05)
| Questions | |
| 1. | Explain the current relationship between the Chinese government and Chinese businesses. |
| 2. | What are the disadvantages of the state taking a more interventionist stance in business? |
| 3. | Assess the policy changes that are likely to be required if Chinese business is to be able to compete effectively in a global market place. |
| Relevant to: |
| Economics (5th edition) Chapters 2, 12 |
| Essentials of Economics (3rd edition) Chapters 1, 7, 8 |
| Economics for Business (3rd edition) Chapters 4, 22 |
| The Economic Environment of Business (1st edition) Chapters 2, 9 |
| North Sea oil has peaked and production is now set to decline permanently. It may only be 20 years before it becomes economically unviable to extract oil from the North Sea at all and in many areas of the world the story is the same. The only good news for oil production seems to be in parts of Africa and Central Asia where production is rising. So have we reached what is termed 'peak oil'? |
The pressure mounts Guardian (19/10/05)
| Questions | |
| 1. | Using diagrams as appropriate, show the impact of declining oil production on the oil market. |
| 2. | Discuss the economic impact on the UK of declining North Sea oil revenues. |
| 3. | Assess the strategies that are likely to be used by the major world oil companies in adapting to declining oil production. |
| 4. | Discuss the impact on the global economy of further medium-term increases in the oil price. |
| Relevant to: |
| Economics (5th edition) Chapter 2 |
| Essentials of Economics (3rd edition) Chapter 2 |
| Economics for Business (3rd edition) Chapter 4 |
| The Economic Environment of Business (1st edition) Chapter 2 |
| In September this year, sales of SUVs in America were 50% down on the previous year. Does this mark the end of the gas-guzzling giants? |
Is this really the end of the SUV? BBC News Online (4/10/05)
| Questions | |
| 1. | What are the main factors that have led to a fall in demand for SUVs? |
| 2. | What is likely to be the value of the cross elasticity of demand for SUVs with respect to the petrol price? How has this value changed in the last year. |
| 3. | What strategies could the car manufacturers adopt to try to reduce the cross elasticity of demand for SUVs with respect to the petrol price? |
| 4. | Explain the external costs that arise from higher sales of SUVs. |
| Relevant to: |
| Economics (5th edition) Chapter 2 |
| Essentials of Economics (3rd edition) Chapter 2 |
| Economics for Business (3rd edition) Chapter 4 |
| The Economic Environment of Business (1st edition) Chapter 2 |
| A recent study from the Independent Association of Preparatory Schools (independent junior schools) showed that the number of pupils at independent schools decreased for the first time in a decade. The IAPS Chairman told the association's annual conference in Edinburgh: "I do not believe that price elasticity will forever be on our side. Somehow, we have to innovate in such a way as to square a circle that says, on the one hand, that fees are too high and are thus discouraging potential customers, whilst, on the other hand, knowing that a much higher proportion of families in Britain would afford private education if they possibly could." So what can the economic principle of price elasticity of demand tell the policy-makers at independent schools? |
High fees force parents to abandon independent schools Guardian (3/10/05)
| Questions | |
| 1. | What did the Chairman mean when he said "I do not believe that price elasticity will forever be on our side"? |
| 2. | What value would you expect for the price elasticity of demand for independent schools places? How has this value changed in recent years? |
| 3. | Assess policies that the independent schools could try to adopt to reduce the value of the price elasticity of demand. |
| Relevant to: |
| Economics (5th edition) Chapters 5, 6, 22 |
| Essentials of Economics (3rd edition) Chapters 3, 4, 10 (Section 8) |
| Economics for Business (3rd edition) Chapters 9, 31 |
| The Economic Environment of Business (1st edition) Chapters 4, 5, 10 (Section 3) |
| The World Bank's latest 'Doing Business' report identified Serbia as the country that had cut red tape the most in the World last year. As a result business startups boomed in Serbia. Red tape (bureaucracy) is often identified as a key business cost and in many of the less developed parts of the world entrepreneurship can be discouraged by excessive tax and regulation. The article below from The Economist looks at the issues identified by the World Bank report. |
Unblocking business The Economist (15/9/05)
| Questions | |
| 1. | Using diagrams as appropriate, show the impact on price and output for (a) a monopoly and (b) a firm in perfect competition of an increase in the costs associated with 'red tape'. |
| 2. | Using diagrams as appropriate, show the impact on (a) a monopoly and (b) an industry in perfect competition of a reduction in 'red tape'. |
| 3. | Evaluate four possible supply-side policies that a government could adopt to raise their ranking in the World Bank 'Doing Business' report. |
| Relevant to: |
| Economics (5th edition) Chapter 7 |
| Essentials of Economics (3rd edition) Chapter 4 |
| Economics for Business (3rd edition) Chapter 12 |
| The Economic Environment of Business (1st edition) Chapter 5 |
| The Nobel Prize for Economics for 2005 was jointly awarded to Robert J. Aumann and Thomas C. Schelling. The prize was awarded for their work on 'interactive decision theory' otherwise known as game theory. Game theory was developed by John Nash (whose life was chronicled in the film 'The Beautiful Mind') and has proved an invaluable tool for economists. Perhaps the best known area of game theory is the 'prisoner's dilemma' and this type of problem is one that Aumann and Schelling worked on. |
Game theorists share Nobel Prize BBC News Online (10/10/05)
Israeli, American share Economics Nobel ABC News (10/10/05)
Two awarded Nobel Prize for work in economics International Herald Tribune (11/10/05)
Economics and the Nobel Prize Rediff.com (Quiz)
Conflict resolution pair wins Nobel economics prize Guardian (10/10/05)
Nobel prize Biz/ed In the News (10/10/05)
| Questions | |
| 1. | Write a brief summary of the area of economics that the 2005 Nobel economics prize winners work on. |
| 2. | What is the prisoner's dilemma and how does it help explain the behaviour of firms in oligopoly? |
| 3. | In what areas other than oligopoly theory can game theory be helpful to economists? |
| Relevant to: |
| Economics (5th edition) Chapters 9, 10 |
| Essentials of Economics (3rd edition) Chapter 5 |
| Economics for Business (3rd edition) Chapter 18 |
| The Economic Environment of Business (1st edition) Chapter 7 |
| On October 1st 2005 the minimum wage increased to £5.05 - the first time it has been above £5 per hour. More than a million workers are expected to benefit from the increase. Business greeted the news with less enthusiasm arguing that the increase in costs will adversely affect their ability to compete. However, despite these arguments, a recent report from the Low Pay Commission said that the number of jobs had grown since the minimum wage was introduced in 1999. |
Fierce debate after hike in minimum pay Scotsman (1/10/05)
Minimum wage increasing to £5.05 BBC News Online (30/9/05)
| Questions | |
| 1. | Discuss the impact of the increase in the minimum wage on the level of employment in the UK. |
| 2. | What factors might have led to an increase in employment despite the introduction of the minimum wage in 1999? |
| 3. | Using diagrams as appropriate, show the impact on the labour market of the increase in the minimum wage. |
| Relevant to: |
| Economics (5th edition) Chapters 11, 12, 22 |
| Essentials of Economics (3rd edition) Chapter 6 |
| Economics for Business (3rd edition) Chapters 9, 22, 31 |
| The Economic Environment of Business (1st edition) Chapters 4, 8 |
| The 2005 State of the Nation report from the Institution of Civil Engineers considers the infrastructure of the UK and how well it is able to cope with the demands on it. The report looked at the state of UK roads and argued that gridlock in the UK is costing business in excess of £20bn per year. The increase in the number of cars on the roads has pushed the road infrastructure to the limit and increased congestion and other problems. |
Gridlock Britain 'chokes economy' BBC News Online (17/10/05)
The future of UK roads ICE press release (18/10/05)
ICE State of the Nation report 2005 Institution of Civil Engineers
| Questions | |
| 1. | What external costs arise from greater use of the roads? |
| 2. | Using diagrams as appropriate, show the impact of these external costs on resource allocation in the market. |
| 3. | Explain why traffic congestion costs UK business in excess of £20bn per year. How would these costs be classified? |
| 4. | Discuss suitable demand-side and supply-side policies that the government could adopt to reduce the cost to business of traffic congestion. |
| Relevant to: |
| Economics (5th edition) Chapters 15, 24 |
| Essentials of Economics (3rd edition) Chapter 12 |
| Economics for Business (3rd edition) Chapter 27 |
| The Economic Environment of Business (1st edition) Chapter 11 |
| Tourism is an internationally traded service. When UK residents travel abroad there is a flow of money out of the UK (a debit on the balance of payments) while overseas residents travelling to the UK results in a flow of money into the UK (a credit on the balance of payments). According to a recent report from the British Hospitality Association, tourism benefits the UK economy to the tune of £81.5bn. |
Tourism 'boosts economy by £81bn' BBC News Online (17/10/05)
| Questions | |
| 1. | What section of the balance of payments is used to record flows of money arising as a result of tourism? |
| 2. | Use the National Statistics website to find out whether tourism results in a net inflow or net outflow of money for the UK. |
| 3. | Suggest policies that the government could adopt to try to encourage tourists to visit the UK. |
| Relevant to: |
| Economics (5th edition) Chapters 17, 20, 22 |
| Essentials of Economics (3rd edition) Chapters 7, 8 |
| Economics for Business (3rd edition) Chapters 26, 29 |
| The Economic Environment of Business (1st edition) Chapters 9, 10 |
| For some months, independent economic forecasters have been arguing that the official Treasury forecasts have been excessively optimistic. The ITEM club (which uses the Treasury's own forecasting model) joined these critics this week. They predicted that GDP growth for 2005 would be just 1.6%: just half the rate predicted by the Treasury. This shortfall in growth could cause the Chancellor considerable problems with slower growth leading the lower tax revenues than forecast and therefore higher borrowing. |
Brown 'on thin ice with economy' BBC News Online (17/10/05)
Think tank joins attack on 'optimistic' Brown growth target Scotsman (17/10/05)
Brown at fault as growth hopes dim, forecaster claims Times Online (17/10/05)
Britain faces Nineties-style slowdown Guardian (16/10/05)
| Questions | |
| 1. | What factors have led to growth being less than originally forecast by the Treasury? |
| 2. | Why does a slower growth rate matter to the Chancellor? |
| 3. | If you were a member of the Bank of England's Monetary Policy Committee that sets interest rates for the UK, how would this news affect your decision and why? |
| Relevant to: |
| Economics (5th edition) Chapter 18 |
| Essentials of Economics (3rd edition) Chapter 9 |
| Economics for Business (3rd edition) Chapter 28 |
| The Economic Environment of Business (1st edition) Chapter 10 |
| When Labour first came to power in 1997, Gordon Brown set what has become known as the 'Golden Rule' for borrowing. This states that the government may only borrow to invest over the course of an economic cycle. The intention is to ensure that the government doesn't borrow to fund 'current' spending as this is unlikely to have more than a short-term benefit for the economy. However, concerns are mounting that rising borrowing levels may lead to the Chancellor breaking his own golden rule unless taxes are raised or spending is cut. Both seem relatively unlikely in the build-up to an election period. |
Inflation index 'blocks a cut' Guardian (5/10/05)
| Questions | |
| 1. | Define (a) the CPI and (b) the RPIx. |
| 2. | Why was the inflation target for the Bank of England reduced when the CPI took over as the targeted measure of inflation? |
| 3. | Explain why the RPIx has fallen below the CPI for the first time since the new measure was targeted.. |
| 4. | Assess the impact that the difference between these two measures is having on the implementation of monetary policy. |
| Relevant to: |
| Economics (5th edition) Chapters 11, 20 |
| Essentials of Economics (3rd edition) Chapters 6, 8 |
| Economics for Business (3rd edition) Chapters 20, 30 |
| The Economic Environment of Business (1st edition) Chapters 9, 10 |
| The recent rise in the oil price has led to windfall profits for oil companies. While their costs essentially remain the same (apart from external supply shocks like the American hurricanes), they receive higher revenues for the oil. This results in higher profits. These profits are classified by economists as supernormal profits. This makes them a target for a windfall tax by the government. Given the pressure on public finances and the extent of the rise in the oil price, this may be increasingly likely. In the Guardian article below, it is suggested that such a tax may be imposed in the Chancellor's pre-budget report. |
Ex-Treasury taxation chief predicts North Sea swoop Guardian (19/10/05)
| Questions | |
| 1. | Define supernormal profits. |
| 2. | Using diagrams as appropriate, show the impact on equilibrium price and output of an oil company of a windfall tax. |
| 3. | Taking into account the current economic situation of the UK, evaluate whether it would be appropriate to impose a windfall tax on the oil companies. |
| Relevant to: |
| Economics (5th edition) Chapter 25 |
| Essentials of Economics (3rd edition) Chapter 12 |
| Economics for Business (3rd edition) Chapter 32 |
| The Economic Environment of Business (1st edition) Chapter 11 |
| Negotiations are currently underway at the EU to try to agree its regional policy spending levels for the 2007-2013 budget. Relatively low levels of GDP in many of the countries that joined with enlargement of the EU have further complicated the discussions, as the EU tries to target the regional spending at the areas that are likely to benefit the most. However, this may mean some existing areas suffering reductions in regional aid. Indeed only one thing seems certain: these negotiations will take a considerable amount of time! |
EU regions battle over spending BBC News Online (17/10/05)
| Questions | |
| 1. | What are the current criteria for the distribution of regional aid within the EU? |
| 2. | How is the EU proposing to change the method of allocation of regional funds? Assess the likely impact of this change on the EU economies. |
| 3. | Discuss the advantages and disadvantages of increased levels of regional aid. |
| Relevant to: |
| Economics (5th edition) Chapter 25 |
| Essentials of Economics (3rd edition) Chapter 12 |
| Economics for Business (3rd edition) Chapter 32 |
| The Economic Environment of Business (1st edition) Chapter 12 |
| The BRIC economies is perhaps not the most flattering of acronyms, but it may well be that we ignore it at our peril. The BRIC economies (Brazil, Russia, India and China) are some of the fastest growing and potentially largest economies in the world. Between them they have well over a third of the world's population and growth rates are accelerating, so it makes sense to look in more depth at how they are performing and their prospects in coming years. The first article linked to below looks at them in more depth, while the others offer further materials on a series of BBC programmes looking at who really runs the world or where the power is. |
Boom times await new powers BBC News Online (4/10/05)
Who runs your world? BBC News Online (Quiz)
Who runs your world? BBC News Online (In Depth feature)
| Questions | |
| 1. | What are the main factors determining the level of growth in the BRIC economies? |
| 2. | Discuss the impact that the growth of the BRIC economies is likely to have on the UK in the next decade. |
| 3. | Assess possible policies that the government could adopt to ensure that the UK maintains a competitive advantage over the BRIC economies. |
| 4. | Who does run the world? |