News April 2003

Economics News Articles: April 2003

Welcome to the April set of news articles. Although the news this month has been dominated by the war with Iraq (see news items 1 and 7), there have been several other events that are relevant to the study of economics, such as the spread of the SARS virus (news item 5), the annual Budget in the UK (news items 11 and 13) and the signing in Athens of the treaty for the accession in May next year of the 10 new members of the EU (news item 17). The following items also include plenty of other news stories that relate to your studies. As always, I hope you find them useful and enjoy reading them and answering the questions.

John Sloman

Contents

1. OPEC and oil prices
2. Drugs company profits
3. The ailing US airline industry
4. 'Fat cat' pay awards
5. The economic effects of SARS
6. Sky's monopoly of Premier League football broadcasting
7. The macroeconomic outlook for the world economy
8. Why has the business cycle gone topsy-turvy?
9. Czech taxes 'mean higher prices'
10. Dangers of deflation and the liquidity trap
11. The UK Budget
12. Assessing the PFI
13. A market-orientated approach to supply-side policy in the UK
14. WTO rules against India in textiles dispute with USA
15. The US dollar's decline
16. The Big Mac index
17. The new EU

News Item 1: OPEC and oil prices

Relevant to:

Economics (4^th and 5^th editions), Chapters 2, 7

Essentials of Economics (2^nd edition), Chapters 1, 2, 4

Economics for Business (2^nd edition), Chapters 4, 5, 12

With falling oil prices and the prospect of a resumption of oil production by Iraq, OPEC members met in Vienna to decide how to support oil prices. They agreed to cut oil production by two million barrels per day, but at the same time to increase the daily quota by 900 000 barrels per day, given that production had been considerably exceeding the quota. The immediate effect of the decision, however, was for oil prices to fall further. The following articles look at the decision and its likely impact on the oil market.

Opec trims oil output BBC News Online (25/4/03)
OPEC Cuts Output to Stabilize Oil Prices New York Times (25/4/03)
Opec set to curb oil output Guardian (24/4/03)
Cartel confusion hits oil price Guardian (25/4/03)

Questions
1.	Why, if Opec members increased oil production before the Iraq war, did oil prices soar?
2.	Why did oil prices fall in mid April? Will the planned cut of 2 million barrels of oil stop prices falling?
3.	Why is it hard for Opec members 'to keep the price of a barrel of crude oil between $22 and $28 by adjusting production'? What relevance has the price elasticity of demand for oil to your answer?

Questions
1.	Why is anger against drugs companies mounting in the USA?
2.	Make out a case for the high monopoly profits of the drugs companies.
3.	Make out a case for drugs companies supplying drugs more cheaply (a) to the poor in advanced countries; (b) to developing countries.

Questions
1.	Why are airlines in the USA making a loss?
2.	Are these losses good news or bad news for passengers? Explain.
3.	Explain how the 'hub-and-spoke' system works and why 'it makes a lot of sense'. How can the system be made more efficient?
4.	How can costs by cut by the airlines? Does the answer to the airlines' problems lay entirely in cutting costs?
5.	Would a 'rash of mergers result in an oligopoly - and sky-high fares'?

Questions
1.	What forms do the remuneration of top executives take other than salary? To what extent do these different forms act as incentives for the top managers to perform better.
2.	Why do the remuneration committees of large companies choose to pay their executives such large pay increases?
3.	Are the pay increases the result of competitive forces (a point argued by many top managers)? In what ways could more competition be injected into the process?
4.	Why may shareholders be reluctant to vote against the recommendations of the company's board of directors?

Questions
1.	What industries are most affected by the spread of SARS?
2.	Why is it hard to estimate the long-term macroeconomic effects of an epidemic?
3.	How may the concept of the multiplier help to understand the macroeconomic impact of SARS?

Questions
1.	Why is the European Commission unhappy about the current situation?
2.	How could competition be introduced into broadcasting Premier League matches?
3.	What is the case for continuing with the present system?

Questions
1.	To what extent has the war with Iraq, both before, during and after, affected the world economy?
2.	What other factors explain the sluggish state of the US and UK economies?
3.	For what reasons might there be a 'solid return of [US] business investment later this year'?

Questions
1.	How do 'real business cycle' theorists explain recessions? What are the weaknesses of their arguments in the current circumstances?
2.	How do new Keynesians explain recessions? What are the weaknesses of their arguments in the current circumstances?
3.	To what extent can the events of the past few years be explained in terms of changes in aggregate demand and the causes of those movements?

Questions
1.	How does a rise in excise duties affect inflation in (a) the short term; (b) the long term?
2.	What determines the size of the effect on prices of a given rise in excise duties?
3.	At present the Czech Republic is experiencing slowing growth and inflation at around 2 per cent (well below the Czech National Bank's target of 3 to 3.5 per cent). What impact will a rise in excise duties have on the Czech economy under these circumstances?

Questions
1.	Explain what is meant by the 'liquidity trap'. How is related to the problem of deflation?
2.	Why can nominal interest rates not fall below zero?
3.	What can a government or central bank do to bring an economy, such as Japan, out of a liquidity trap?
4.	Is the problem of a liquidity trap likely to be experienced in the UK?

Questions
1.	Summarise Gordon Brown's economic strategy in the Budget.
2.	Was the Chancellor right to assume economic growth of 2 to 2.5 per cent in 2003 and 3 to 3.5 per cent in 2004?
3.	Explain whether or not the Budget is consistent with the Chancellor's 'golden rule'?
4.	You might like to have a go at being Chancellor of the Exchequer and see the consequences of setting your own tax rates and levels of government expenditure. To do so, click on the following: The Virtual Economy. (This model was devised by the Institute for Fiscal Studies and is on the Bized site.)

Questions
1.	What measures is Gordon Brown advocating for improving UK productivity? What role does he see finance and capital market playing in closing the productivity gap with the USA?
2.	How is productivity best measured?
3.	Assess the response of the Engineering Employers Federation to the Chancellor's approach to improving productivity.

Questions
1.	Describe how the PFI system works to fund public-sector projects.
2.	Why might the PFI be a 'recipe for nasty surprises'?
3.	Why might PPPs be (a) more cost effective; (b) less cost-effective than publicly funded, built and run projects?

Questions
1.	What is the 'rules-of-origin' agreement?
2.	Is it in the long-term interests of the USA to restrict textile imports from developing countries?
3.	What was India's case? Why did the WTO rule against India?

Questions
1.	Why has the exchange rate of the US dollar fallen in recent months?
2.	What has been the impact on the war with Iraq on the dollar?
3.	In what ways do the eurozone countries (a) benefit and (b) lose from a weak dollar relative to the euro?

Questions
1.	What is meant by the purchasing-power parity theory of exchange rates?
2.	What are the implications for a country if it has an overvalued exchange rate?
3.	What are the limitations of the Big Mac index in assessing whether a currency is overvalued or undervalued?

Questions
1.	What are the likely economic effects of the accession of the 10 new members to the EU on (a) existing members; (b) the new members?
2.	What are the convergence criteria for joining the euro?
3.	What are the dangers for these countries of having to join the ERM before adopting the euro?