News April 2002

Economics News Articles: April 2002

News Item 1: House prices

Relevant to:

    Economics (4^th edition), Chapter 2

    Essentials of Economics (2^nd edition), Chapter 1

    Economics for Business (2^nd edition), Chapter 4

Despite the recession over the last year in many countries and the slowdown in economic growth in others, house prices have continued to boom in the UK, the USA and elsewhere. Why has this occurred and what are the implications? The following two articles give some answers. The first is from The Economist of 28 March and the second from BBC NewsOnline of 18 April.

Going through the roof
Property shortage fuels price boom

Questions
1.	(a) Why has 'house-price inflation been so robust over the past year despite a recession or at least a sharp slowdown in most economies'? (b) Why is there 'no end in sight for house price increases' in the UK?
2.	Why has a booming house price market around the world helped to save the world economy from deep recession?
3.	Is there any evidence that particular countries are suffering from a house price bubble, either nationally or in specific regions?

News Item 2: Oil prices

Relevant to:

    Economics (4^th edition), Chapters 2, 3, 7, 13

    Essentials of Economics (2^nd edition), Chapters 1, 2, 4, 7

    Economics for Business (2^nd edition), Chapters 4, 5, 12, 25

Oil prices have risen significantly since the beginning of the year. In January, the price stood at around $18 per barrel; by mid the beginning of April it had risen to almost $28. Since then it has fallen somewhat, but this does illustrate the volatility of oil prices at a time of political uncertainty. The two linked articles look at the causes of this volatility and at whether Saudi Arabia, the world's biggest oil producer, can stabilise the price. They also consider the implications for the world economy of dearer oil. The first article is from The Economist of 11 April and the second from BBC NewsOnline of 9 April.

Flaring up
Saudi soothing deflates oil price

Questions
1.	What caused the rapid oil price rises in the first three months of 2002?
2.	How and to what degree are higher oil prices likely to affect world economic growth?
3.	Why is it difficult to predict the effect on world inflation of higher oil prices?

News Item 3: Governments around the world clamp down on cartels

Relevant to:

    Economics (4^th edition), Chapters, 7, 12

    Essentials of Economics (2^nd edition), Chapters 4, 6

    Economics for Business (2^nd edition), Chapters 12, 20

Regulators in many countries are being given new powers by governments in the attempt to prevent price fixing and other collusive acts of oligopolists. The following linked article, from The Economist of 18 April, looks at this 'get tough' trend and the reasons for it.

Fixing for a fight

Questions
1.	What are the arguments for and against tough government actions against cartels?
2.	What particular factors are driving the tougher stance against collusive practices in recent years?
3.	In what ways may new technologies make collusive practices harder to detect?

News Item 4: Microsoft slashes European Xbox prices

Relevant to:

    Economics (4^th edition), Chapters 6, 7

    Essentials of Economics (2^nd edition), Chapter 4

    Economics for Business (2^nd edition), Chapters 11, 12, 16

Microsoft has recently sharply cut the price of its Xbox games console in Europe and Australia and is expected to cut the price soon in the USA? What have been the reasons behind this and what will be the likely effects? The following article from The New York Times examines the case.

Microsoft Slashes European Xbox Prices. USA Next?

Questions
1.	Why has Microsoft cut the price in Europe and Australia, but not yet in the USA?
2.	Draw a graph to show how the cut in price could increase profits for Microsoft?
3.	What will determine the likely reaction of Sony and other competitors? How would their reactions influence the wisdom of Microsoft's current price cuts?

News Item 5: Decline in inward investment to UK

Relevant to:

    Economics (4^th edition), Chapters 8, 16

    Essentials of Economics (2^nd edition), Chapters 4, 8

    Economics for Business (2^nd edition), Chapters 14, 23, 25

Foreign investment in Europe has fallen over the past year and especially in the UK. Why has this occurred and what are the implications? The following linked article, taken from BBC NewsOnline of 10 April, looks at the issues.

Foreign investors turn away from UK

Questions
1.	What are the advantages and disadvantages to an economy of foreign direct investment (FDI)?
2.	Why has FDI in the UK fallen both absolutely and as a proportion of FDI in Europe?
3.	What factors in an economy are likely to attract FDI?

News Item 6: Tackling child poverty

Relevant to:

    Economics (4^th edition), Chapter 10

    Essentials of Economics (2^nd edition), Chapter 5

    Economics for Business (2^nd edition), Chapter 17

In this month's Budget (see News Item 11 below), the UK government introduced a new system of child tax credits, which will give tax relief to income earners with children. The relief gradually tapers away as family incomes rise. Thus more is given to poorer families. The government has stated that this will significantly reduce child poverty. The first article, from the Guardian of 18 April, examines the details of the new measures. But just how is child poverty measured? The second article, from The Times of 19 April looks at proposals to change the definition used by the government.

Benefit will help fight child poverty
Ministers to 'manipulate record on poverty'

Questions
1.	How will the child tax credit work to reduce child poverty?
2.	Will the measures lessen or worsen the 'poverty trap'?
3.	Compare the relative merits of measuring child poverty in absolute and relative terms.

News Item 7: Proposed changes to road taxes

Relevant to:

    Economics (4^th edition), Chapter 12

    Essentials of Economics (2^nd edition), Chapter 6

    Economics for Business (2^nd edition), Chapter 21

As part of its recent Budget measures, the government has announced changes to the way in which lorries will be taxed. Depending on the lessons learned from this, a similar system could be introduced for cars sometime in the future. The following article, from BBC NewsOnline of 18 April, looks at the proposals and their merits.

Road tax revolution

Questions
1.	What are the arguments in favour of taxing lorries by the distance travelled, rather than having a system of flat-rate licences.
2.	Why could the system make British hauliers more competitive relative to foreign hauliers using their lorries to bring imports into Britain?
3.	Do the same arguments in favour of the system of charging lorries by distance travelled apply to private cars? Are there any disadvantages of charging private motorists according to distance travelled?

News Item 8: The World economy: is recovery underway?

Relevant to:

    Economics (4^th edition), Chapters 13, 14, 16, 25

    Essentials of Economics (2^nd edition), Chapters 7, 8, 12

    Economics for Business (2^nd edition), Chapters 25, 28, 31

Is recovery in the world economy underway? What are the prospects for world economic growth over the coming months? The first two articles, from BBC NewsOnline of 18 April, look at the evidence. The third article, taken from the Financial Times of 21 April, looks at the views of the G7 countries about global recovery.

IMF upbeat on world economy
US economy 'to keep growing'
G7 says recovery taking hold but oil is a risk

Questions
1.	Why has the IMF revised its forecast upwards for world economic growth in 2002?
2.	Why has US growth recovered relatively quickly?
3.	What are the major causes of concern in the global economy in the coming months?

News Item 9: Recovery in Asian economies

Relevant to:

    Economics (4^th edition), Chapters 13, 16, 25

    Essentials of Economics (2^nd edition), Chapters 7, 8, 12

    Economics for Business (2^nd edition), Chapters 25, 28, 31

Most Asian economies suffered a recession in 1997/8 and have taken a long time to recover from this. Indeed, Singapore and Taiwan suffered an even deeper recession in 2001. There are now clear signs, however, that most economies of south, south-east and east Asia are recovering. The following articles from BBC NewsOnline examine this recovery and its causes.

S Korea shops its way to recovery (23/3/02)
South Asian growth speeds up (9/4/02)
Asian rebound gathers pace (9/4/02)
Singapore aims for recovery (10/4/02)

Questions
1.	Why are many Asian economies now recovering from recession?
2.	What could cause this recovery to go into reverse?
3.	Compare the relative merits of a recovery based on export growth and one based on a growth in consumer demand.

News Item 10: Recent US fiscal and monetary policy: the view of economists

Relevant to:

    Economics (4^th edition), Chapters 17, 19, 20

    Essentials of Economics (2^nd edition), Chapters 8, 9

    Economics for Business (2^nd edition), Chapter 29

A recent survey of economists in the USA showed that they generally supported the policy of interest rate cuts that had been pursued by the Federal Reserve Bank (the US central bank) throughout 2001, but were more mixed in their views about the benefits of the expansionary fiscal policy pursued by the Bush administration. The following article, from the Financial Times of 25 March, looks at the results of the survey.

Poll gives full marks to Fed's swift action

Questions
1.	What is meant by an 'arithmetic pick-up rather than an economic pick-up'? Does it matter if recovery is initially of this nature?
2.	For what reasons might the expansionary monetary policy have been more effective than the expansionary fiscal policy?
3.	Why might US interest rates rise in the near future? Would the prospect of such rises be likely to enhance or dampen expectations about future growth in the US economy?

News Item 11: The UK Budget

Relevant to:

    Economics (4^th edition), Chapters 10, 17, 20

    Essentials of Economics (2^nd edition), Chapters 5, 8, 10

    Economics for Business (2^nd edition), Chapter 29

On April 17, Gordon Brown, the UK Chancellor of the Exchequer, delivered the government's Budget. It was notable for the announcement of large increases in expenditure on the National Health Service, funded mainly by a one percentage point increase in national insurance contributions for both employees, the self employed and employers. The following articles give details of and reactions to the Budget. The first link is to the Treasury Web site and gives access to the the two main supporting documents: the Economic and Fiscal Strategy Report and the Financial Statement and Budget Report (the Red Book).

Treasury Budget Report 2002
The Budget at a glance (Independent, 18/4/02)
The Chancellor pushes his luck with two huge gambles (Independent, 18/4/02)
Low-tax UK starts to close gap with rest of Europe (Financial Times, 19/4/02)
The promises but not yet the proof (Financial Times, 17/4/02)
Four economists have a say on Brown's measures (Financial Times, 18/4/02)
Historic post-election Budgets (Financial Times, 17/4/02)
Hands up for a hand-out (Financial Times, 18/4/02)
NHS prescription amounts to kill or cure (Guardian, 18/4/02)
Can Brown deliver the health of the nation? (Guardian, 18/4/02)
Evan Davis: Budget view (BBC NewsOnline, 17/4/02)
Why the odds are against clever Gordon (The Times, 18/4/02)
Gordon's gamble (The Economist, 18/4/02)

Questions
1.	What are the main features of the Budget and in what senses could it be characterised as a change of direction in government policy?
2.	Is the Budget fiscally expansionary, contractionary or neutral? Is it consistent with the Golden Rule? Explain and give evidence.
3.	In what senses could Mr. Brown be said to be 'taking a gamble'?
4.	What has happened to the ratio of tax receipts to GDP in recent years? How will the Budget affect this ratio? How does the ratio compare with other European countries?

News Item 12: Current monetary policy in the UK

Relevant to:

    Economics (4^th edition), Chapter 19

    Essentials of Economics (2^nd edition), Chapter 9

    Economics for Business (2^nd edition), Chapter 29

The Bank of England's Monetary Policy Committee decided unanimously to leave interest rates unchanged at its monthly meeting on April 4, faced with 'mixed' news on the state of the economy. The first two articles look at the thinking behind the decision. But has the Bank of England generally been too cautionary? The third article looks at evidence suggesting that this might indeed be so.

Bank chiefs unanimous on holding rates (BBC NewsOnline, 17/4/02)
MPC voted 9-0 to hold rates amid growth concerns (Independent, 18/4/02)
Bank of England 'over-estimates inflation threat' (Financial Times, 25/3/02)

Questions
1.	Why did the MPC decide to keep interest rates on hold at its April meeting?
2.	Why will interest rates have 'to rise inevitably'?
3.	For what reasons might the MPC consistently err on the side of overpredicting (as opposed to underpredicting) the rate of inflation?

News Item 13: Productivity in the UK

Relevant to:

    Economics (4^th edition), Chapter 22

    Essentials of Economics (2^nd edition), Chapter 10

    Economics for Business (2^nd edition), Chapters 20, 30

Productivity in the UK remains below that in other industrialised countries, such as the USA, France and Germany. Chapter 3 of the Treasury's Economic and Fiscal Strategy Report, published as background to the 2002 Budget, examines the reasons. It is the first of the following two links. The second link is to an article, taken from the Guardian of April 18, which looks at one of the measures in the Budget designed to tackle the productivity gap, namely the new tax incentives to encourage research and development.

Economic and Fiscal Strategy Report Chapter 3: Meeting the productivity challenge
£400m R&D handout lifts industry

Questions
1.	What are the reasons for the UK's lower productivity per worker compared with other major industrialised countries?
2.	What measures could be adopted to tackle this 'productivity gap'? Consider their relative strengths and weaknesses.
3.	What will determine the success of the new £400m tax credit for research and development?

News Item 14: Latest on the international steel dispute

Relevant to:

    Economics (4^th edition), Chapter 23

    Essentials of Economics (2^nd edition), Chapter 11

    Economics for Business (2^nd edition), Chapter 22

The international trade dispute between the USA and other countries seems to be hotting up. The dispute is over the Bush administration's decision to impose tariffs of up to 30 per cent on steel imports. The dispute had been taken to the WTO; the European Commission plans to take retaliatory action, imposing more than $300m of trade sanctions on politically sensitive US products; Japan is demanding compensation. The first two linked articles look at recent developments in the dispute. The third examines why steel seems to be so important to governments.

Global steel trade war hots up (BBC NewsOnline, 11/4/02)
Europe plans $300m sanctions retaliation on US (Financial Times, 18/4/02)
Heavyweight metal (Financial Times, 25/3/02)

Questions
1.	If there is no retaliation against the USA's decision to impose tariffs on imported steel, will the average US citizen be a gainer or a loser from the Bush administration's action?
2.	How can game theory help to explain the actions and reactions of the different countries in the dispute?
3.	Why is steel often seen as 'the most important manufacture'? Why might this lead to mistaken economic policies?

News Item 15: US trade gap widens

Relevant to:

    Economics (4^th edition), Chapters 14, 24

    Essentials of Economics (2^nd edition), Chapter 12

    Economics for Business (2^nd edition), Chapter 26

The US trade deficit is growing. When you exclude oil, the trade deficit has reached record levels. The following article, from BBC NewsOnline of 17 April, describes the situation.

US trade gap widens

Questions
1.	Why is a growing trade deficit a clear sign that the US economy is recovering?
2.	Why are imports into the USA growing more rapidly than exports from the USA?
3.	Does it matter if the USA has a growing trade deficit?

News Item 16: The worsening economic situation in Argentina

Relevant to:

    Economics (4^th edition), Chapters 24, 25, 26

    Essentials of Economics (2^nd edition), Chapter 12

    Economics for Business (2^nd edition), Chapters 26, 31

Since abandoning the pegged exchange rate of 1 peso = $1(US), Argentina has seen its currency slide further and further. Exchange controls have been introduced, but to little effect. Then on 19 April, the Argentinean central bank 'declared a complete and indefinite suspension of all banking activity' in the country.

Argentina fights to save its falling currency (Financial Times, 25/3/02)
Argentina closes all banks (BBC NewsOnline, 20/4/02)
G7 concern as Argentina suspends all banking (Financial Times, 20/4/02)

Questions
1.	Why has the Argentine peso continued to depreciate?
2.	Why could the withdrawal of deposits lead to bankruptcy for banks?
3.	What are the advantages and disadvantages of the policy of freezing bank deposits in the current situation?

News Item 17: When countries go bankrupt

Relevant to:

    Economics (4^th edition), Chapters 24, 25, 26

    Essentials of Economics (2^nd edition), Chapter 12

    Economics for Business (2^nd edition), Chapters 26, 31

'When companies default on their debts there is a clear procedure to guide a restructuring. Not so with countries.' This quote is from the first of the linked articles on what happens when nations default on the debts. What is needed, argues the article, taken from The Economist, of 4 April, is a clear procedure for restructuring the debt. The second link is to the speech referred to in the article. It is by Anne Krueger, number two at the IMF.
    The other two articles, taken from BBC NewsOnline of 17 April and the Financial Times of 21 April, look at the current situation for many developing countries. The first argues that more needs to be done in terms of debt forgiveness. The final one, which was linked to in News Item 8, looks at the meeting of the G7 finance ministers in Washington and, among other things, reports on the ministers' views on the need to clarify procedures for debt restructuring in case of default.

Sovereign bankruptcies
A new approach to sovereign debt restructuring: Address by Anne Krueger
Debt relief plan off track, IMF warns
G7 finance ministers meeting

Questions
1.	In what ways do Anne Krueger and John Taylor disagree over debt restructuring?
2.	In what ways is the HIPC (highly indebted poor countries) debt relief scheme off track? (For details of the HIPC initiative see Economics (4th edition) pages 769-70 or Essentials of Economics (2nd edition) pages 475-6.)
3.	Is greater caution in lending to developing countries the best long-term solution to debt default?