News April 2005

Economics News Articles: April 2005

Welcome to the April set of news articles. Political news this month has been dominated by the election and the associated debate about economic policy. The aspect of the debate of most interest to us as economists may be the part related to taxation and tax policy. This month, however, we avoid the main election debates and look more widely at a possible change to taxation systems being considered by many countries: the adoption of a flat-rate tax as in Eastern Europe (News Item 6). The collapse of MG Rover also dominated the news for many days this month and in news Item 5 we look at the possibility of MG Rover workers moving to Australia to work. Market failure has also been an ever-present topic and in News Items 8 and 9 we look at waste in China and the possibility of the congestion charge becoming a variable rate charge. 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. The digital power of the consumer
2. Anglo-French differences - surely not?
3. Are we heading for a global oil price crisis?
4. Booming demand for Indian steel
5. MG Rover workers heading down under?
6. Is flattening tax the answer?
7. The regulators' best friend - cost benefit analysis
8. Variable congestion in London?
9. Waste in China - the side effect of rapid growth?
10. Are we saving enough?
11. Greenspan warns about the twin US deficits
12. Taxing exchange - Tobin-lite?
13. Global is good
14. The risks facing developing countries
15. FDI, but not as we know it

News Item 1: The digital power of the consumer

Relevant to:

Economics (5^th edition), Chapters 1, 6

Essentials of Economics (3^rd edition), Chapter 1

Economics for Business (3^rd edition), Chapter 4

The Economic Environment of Business (1^st edition), Chapters 2, 4

A key aspect of any market system is 'consumer sovereignty' - the power of consumers, as a group, to influence what is made. However, has the growth of online buying and selling made up more powerful as consumers? The article below from The Economist argues that the growth of the Internet has meant that we are better informed about the purchases we make and therefore better able to exercise our 'sovereignty'.

Crowned at last The Economist (31/3/05)

Questions
1.	Describe how consumer sovereignty leads to changes in the allocation of resources.
2.	Assess the extent to which the growth of the Internet has led to changes in consumer power.
3.	What impact is this change in consumer power likely to have on related markets?

Questions
1.	Assess the advantages and disadvantages of greater intervention (like that adopted in France) in the economy by the government.
2.	What are the arguments for and against maintaining a national producer of, for example cars, when the firm may not be viable in the global market?
3.	Why have government generally shifted away from 'nationalisation' towards 'privatisation' of industries and government services?

Questions
1.	Using supply and demand diagrams as appropriate, show the changes in the oil market that the article suggests.
2.	As oil runs out, how would you expect the value of the price elasticity of demand for oil to change? Why?
3.	What impact is a global oil price crisis in the next three years likely to have on (a) the UK economy and (b) the world economy?

Questions
1.	What is meant by the term 'derived demand'? Why is the demand for steel a derived demand?
2.	Using supply and demand diagrams as appropriate, illustrate the anticipated changes in the Indian steel market in the next few years. N.B. You should also take account of the investment taking place in the steel industry mentioned in the article.
3.	What problems is the steel industry likely to face as it tries to expand to cope with the rapid growth in demand for steel?
4.	Given global over-capacity in the steel market, what would you expect the value of the price elasticity of demand to be for steel in India?

Questions
1.	What are the main factors affecting the mobility of MG Rover workers who have lost their jobs?
2.	What impact are skills shortages likely to have on the Australian economy?
3.	How does greater labour mobility benefit an economy?
4.	What can governments do to encourage greater labour mobility?

Questions
1.	Explain how a pure flat-rate tax would work in practice.
2.	Why do many groups believe that a flat-rate tax will help boost economic growth? What impact is a flat-rate tax likely to have on the level of tax revenue?
3.	Evaluate the arguments for an against the adoption of a flat-rate tax in the UK.

Questions
1.	Explain what is meant by cost-benefit analysis.
2.	How will cost-benefit analysis help in reforming the regulatory structure of the European Union?
3.	What problems may be faced when preparing a cost-benefit analysis on a particular regulation, or set of regulations?

Questions
1.	What are the economic arguments for a variable congestion charge?
2.	What problems might be caused by the implementation of a variable congestion charge?
3.	What other policy options could the Mayor's office consider to reduce congestion in London? What are the advantages and disadvantages of each of these?

Questions
1.	What negative externalities are evident from the article?
2.	What policy options are available to the Chinese government to try to reduce the level of pollution as the economy grows rapidly?
3.	What problems are likely to be faced by the Chinese economy if they fail to update their infrastructure and reduce pollution levels?

Questions
1.	Using an online data source such as the OECD Factbook, find out the savings rates for the major OECD countries.N.B In the OECD Factbook, you will find savings under 'Macroeconomic trends'.
2.	How will a reduction in the savings rate affect the UK economy in (a) the short term and (b) the long-term?
3.	What can the government do to try to raise the rate of savings in the economy?

Questions
1.	What are the main causes of the twin US deficits?
2.	What is likely to be the impact of a further rise in the budget deficit in (a) the short term and (b) the long term?
3.	What policies are available to the government to try to reduce the balance of payments deficit and what constraints are they likely to face in implementing these policies?

Questions
1.	Assess the arguments for and against a 'Tobin tax' on foreign exchange.
2.	Evaluate whether a 'Tobin-lite' foreign exchange tax would be more effective at reducing poverty than debt relief for developing nations.
3.	What problems might be faced if the 'Tobin-lite' tax was adopted unilaterally by the UK government as suggested by the campaign?

Questions
1.	Write a critique of the pro-globalisation arguments expressed in the article.
2.	What are the main constraints preventing further globalisation taking place?
3.	Who are the main (a) winners and (b) losers from globalisation?

Questions
1.	What have been the main driving forces behind the higher level of economic growth achieved by the developing countries in 2004?
2.	Examine the risks that developing countries face in trying to maintain these levels of growth through 2005.
3.	What can the developed world do to help the developing world maintain this improved economic performance?

Questions
1.	Distinguish between 'horizontal' and 'vertical' FDI, as referred to in the article.
2.	Assess the advantages and disadvantages for the host country of inflows of FDI.
3.	Identify the main reasons for the growth in FDI flows between developing countries?