News April 2004

Economics News Articles: April 2004

Welcome to the April set of news articles. Political news this month has been dominated by the government policy U-turn relating to the European Constitution. However, there has also been plenty of relevant economic news as well. At the start of the month the European Commission ordered Microsoft to pay a record 500m euro fine for abusing their dominant market position (see news item 5). Since then there have also been a number of news stories relating to development. Gordon Brown has been trying to galvanise other countries to double global aid to $100bn (news item 15), while the South Pacific island of Nauru, once one of the world's richest countries has moved close to bankruptcy (news item 12). Market failure and government policies to address it has once again been in the news with the surprise refusal of the proposed port development at Dibden Bay in Southampton. 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.

Andy Beharrell

Contents

1. Is the oil running out?
2. Bangladesh triples farm subsidies
3. The cold truth about the cost of ice cream
4. Pay restraint - is it possible?
5. Microsoft - shutting the window on anti-competitive practices
6. Port expansion - not plain sailing
7. Restructuring the rail industry - the death knell for the SRA?
8. Government attacked on quality of life
9. Global growth on the up
10. China fears boom and bust cycle
11. Sugar tariffs - not so sweet for developing countries
12. Pacific island - paradise postponed?
13. Eurozone stability pact - more countries to break it?
14. A remedy for financial turbulence
15. Brown pushes to double global aid
16. One third of Brazilians live on less than $1 per day

News Item 1: Is the oil running out?

Relevant to:

Economics (5^th edition) Chapters 2, 12

Essentials of Economics (2^nd and 3^rd editions) Chapters 1, 2

Economics for Business (2^nd edition) Chapters 4, 5, 22
Economics for Business (3^rd edition) Chapters 4, 5, 21

Oil is going to run out at some stage, but how soon is this and will it matter for the the global economy? Views differ on this and the article below looks at two opposing views and considers the likely impact of it.

Head-to-head: Oil concerns BBC News Online (21/4/04)

Questions
1.	Using supply and demand analysis, illustrate the likely impact of oil gradually running out.
2.	How will gradually rising oil prices affect firms and how are they likely to react in (a) the short term and (b) the long term?
3.	What negative externalities (external costs) are generated from the use of oil and related products by developed countries?

Questions
1.	On a supply and demand diagram show the impact on agricultural markets of the tripling of farm subsidies. On the diagram show the area that represents the expenditure made by the government.
2.	How is the move to triple farm subsidies likely to affect relationships with other countries in the region?
3.	Evaluate the likely impact of the extra farm subsidies on economic growth and consumer welfare.

Questions
1.	Classify the costs that are increasing into fixed costs or variable costs? How will a firm's cost curves be affected?
2.	What would you expect the value for the price elasticity of demand for ice cream to be? Why?
3.	To what extent is the value of the price elasticity of demand (identified in question 2) likely to limit the firm's ability to pass on the cost increases?
4.	What can the ice cream firms to do limit the impact of these cost increases?

Questions
1.	What government policies are available to try to reduce the level of skills shortages in markets like bricklaying or should it just be left to the market?
2.	What economic impact are higher wage demands likely to have on the economy and why is the Chancellor intervening to try to prevent them?
3.	Are the pay increases of directors 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 anti-competitive practices has Microsoft been using according to the EU?
2.	Why is it necessary to intervene to prevent these anti-competitive practices?
3.	What other policies could governments use to try to increase the level of competition in the market for computer software?

Questions
1.	What external costs (negative externalities) did the public enquiry about Dibden Bay identify?
2.	How does a divergence between private and social costs affect the allocation of resources in a market?
3.	What other policies are available to a government to reduce the externalities arising from economic development?

Questions
1.	Why is regulation of the rail industry necessary and to what extent would a new 'super-regulator' help with this?
2.	The train operating companies are arguing against centralisation of fares and ticketing services. Evaluate the arguments for and against this centralisation? What are likely to be the costs and benefits for consumers?
3.	How would the new 'Railways Agency' help to reduce the costs of running the railways?

Questions
1.	What is meant by sustainable development?
2.	Have a look at Chapter 2 of the report from the Sustainable Development Commission and assess the government's performance in reducing market failure.
3.	Why might simple national income figures be inadequate to measure the quality of life?

Questions
1.	What are the key determinants of the level of global economic growth?
2.	What impact is further growth in the US budget deficit likely to have on the level of global economic growth and why?
3.	What other external shocks could result in global economic growth being lower than the IMF has forecast?

Questions
1.	Where are the inflationary pressures coming from in China?
2.	How will an increase in the reserve ratio help reduce inflation?
3.	What other policy options are available to the Chinese government to help reduce inflationary pressures?

Questions
1.	Why do the European sugar tariffs have a damaging effect on developing economies?
2.	What would be the impact of removing sugar tariffs in European countries on (a) European farmers and (b) European economies?
3.	In the BBC article Tate and Lyle suggest that a full liberalised sugar market in Europe would probably not benefit farmers in the poorest countries. Why might this be the case?

Questions
1.	What economic problems may be faced by economies that are heavily dependent on the sale of commodities (primary resources)?
2.	What are the main factors that have led to the current economic crisis on Nauru?
3.	Evaluate the policy options that the government of Nauru is currently adopting to try to find a way out of the current crisis ?

Questions
1.	Why is a eurozone stability pact necessary to maintain the stability of the single currency?
2.	What policies can the four countries set to break the rules implement to reduce their budget deficits? What impact are these policies likely to have on the other main economic indicators?
3.	What are the main factors contributing to the sluggish levels of economic growth in the eurozone?

Questions
1.	What are the main causes of financial turbulence identified in the article?
2.	Assess the likely success of the plan proposed by Mr. Eichengreen to create a new market for lending and borrowing targeted at the emerging market economies.
3.	What problems are likely to be caused if countries choose to adopt capital controls to try to reduce their exposure to international financial markets?

Questions
1.	Have a look at the UN Millennium Goals site linked above and note down the Millennium Goals.
2.	What other policies are available to governments in the developed world and non-governmental organisations to help achieve these goals?
3.	What constraints are governments in the developed world likely to face when trying to achieve these goals?

Questions
1.	What is the difference between relative and absolute poverty? Which of these is more relevant to the analysis given of Brazil in the BBC News Online article?
2.	What policies are available to the Brazilian government to try to reduce this poverty?
3.	Assess the extent to which the international community could help to reduce this poverty.