News Feb 2003

Economics News Articles: February 2003

Welcome to the February set of news articles. The news this past month has been dominated by the possibility of war with Iraq. Not only would a war have enormous human, political and social consequences, but it would also affect the economies of the countries involved and the world economy in general. In fact, the world economy is already being affected. Worries and uncertainties about whether there will be a war have affected business and consumer confidence. This, in turn, has had a direct effect on both investment and consumer spending and hence on countries' macroeconomic performance. News item 9 looks at some of these effects.
In the UK, one of the major news items has been the introduction of congestion charging in London. This is examined in the articles under news item 7.
As before, I hope that you find the articles informative and useful for your studies. I also hope that you enjoy reading them and answering the questions.

John Sloman

Contents

1. Housing boom coming to an end
2. Agricultural support
3. Social capital and 'rational' behaviour
4. An explosion of pay inequality
5. Tackling poverty in the UK
6. Brown's middle way (the 'third way'?)
7. Congestion charging in London
8. Falling into recession?
9. The economic impact of war
10. Comparing US and European standards of living
11. Goodbye to the City
12. The future of pensions
13. Is the Bank of England inflation model out of date?
14. UK and Eurozone monetary policy decisions
15. Are we heading for deflation?
16. UK and US trade deficits
17. The outlook for east Asian economies

News Item 1: Housing boom coming to an end

Relevant to:

Economics (4^th and 5^th editions), Chapter 2

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

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

We have looked at the housing market in previous months' news items and there have been suggestions that the rapid increases in house prices were beginning to slow down. New evidence confirms this trend. Indeed, in London and the south-east of England, they have recently fallen. Whether other parts of the country will see falling prices remains to be seen. The following articles look at the reasons for the cooling in the housing market and look ahead to what will happen in the coming months.

Housing boom 'coming to an end' BBC News Online (20/2/03)
House price inflation to drop, says Bank of England Ananova (12/2/03)
Housing market 'heading for soft landing' Ananova (18/2//03)

Questions
1.	Why have house price increases been slowing down rapidly in recent weeks (and in some areas actually falling)?
2.	Why has the supply of houses coming on to the market increased recently?
3.	What effect is the cut in interest rates by the Bank of England from 4% to 3.75% likely to have on house prices? How will the effect be influenced by (a) expectations; (b) the price elasticity of supply of houses?

Questions
1.	Why would abolishing price support and other subsidies be 'the nearest thing to a free lunch in the economics textbooks'?
2.	How would abolishing agricultural support affect the farmers in the EU in (a) the short run; (b) the long run? (Consider both adverse and beneficial effects.)
3.	If the UK has a comparative disadvantage in food production, what would happen to (a) the structure of the economy, (b) the rural community, (c) the rural environment, if agricultural support were abolished?

Questions
1.	Why might you spend time doing things whose private costs to you outweighed the private benefits to you?
2.	If people derive utility from helping others, does this mean that social behaviour and trust are merely more sophisticated forms of self-interested behaviour?
3.	Give some examples of positive and negative externalities that could result from people investing in social capital.

Questions
1.	Why has the pay gap widened in the UK? Why have people at the very top seen such dramatic rises in their incomes?
2.	To what extent can the minimum wage help to close the gap?
3.	How could the government reduce the size of the gap and what would be consequences of attempting to do so?
4.	Why would a recession narrow the gap?

Questions
1.	What are the arguments for and against raising the minimum wage to (a) £5 per hour; (b) £8 per hour?
2.	What are the implications for low paid workers of local authorities putting more of their services out to tender?
3.	How would you explain workers in low-pay occupations receiving identical rates of pay from different employers?
4.	How is the macroeconomic state of the economy likely to affect the extent of low pay?

Questions
1.	For what reasons, according to Gordon Brown, are market solutions in some public services inappropriate?
2.	Why might the introduction of choice in health "be a mirage" and risk "creating a two-tier system"?
3.	Click on the full speech and then press Ctrl F (the find command) and type in the words: The economics of healthcare This takes you to the part of the speech looking at the limitations of the market in allocating healthcare resources. Use this part of the speech to explain these limitations and examine alternative answers to the limitations.

Questions
1.	Who gain and who lose from the London congestion charging system? Would it be a good idea to raise the charge to £10?
2.	What determines the price elasticity of demand for travel into the congestion zone?
3.	Compare the relative merits of the system in London (an area licence scheme of one payment per day) and the system in Singapore (an electronic toll scheme)? See the final link for details. See also Box 12.4 in Economics (5th ed) or Box 6.5 in Essentials of Economics (2nd ed) or Box 21.1 in Economics for Business (2nd ed).
4.	Referring to The Economist article, what lessons can be learnt from other countries for reducing traffic congestion in cities?

Questions
1.	Why did industrial output drop by 3.5 per cent in 2002, despite a growth in consumer demand?
2.	Why has the growth in consumer spending been slowing recently?
3.	What are the likely to be the major determinants of consumer spending in the next few months?
4.	For what reasons may the UK economy be better placed than most other economies for dealing with turmoil in financial markets and for avoiding recession?

Questions
1.	What would be the likely impact of war with Iraq on oil prices? Why might the effect be of a different magnitude from that of the Gulf War in 1991?
2.	What are the possible types of macroeconomic cost of a war?
3.	Under what circumstances could the US economy slip into a new recession?
4.	What are the likely costs to the UK economy of a war with Iraq and its aftermath?

Questions
1.	For what reasons’ may GDP figures overstate living standards in the USA relative to those in the EU? (Try to extend the reasons beyond those given in the article.)
2.	Should GDP be abandoned as an indicator of a country’s living standards? Give reasons for your answer.
3.	What alternative measures could be used for living standards as alternatives to, or in addition to, GDP?

Questions
1.	Who else, other than investment banks, are being affected by the current crisis in the City and why?
2.	What are the causes of the crisis?
3.	Why does merger and acquisition (M&A) activity tend to fall in a recession?
4.	What is likely to happen to City profits and employment in the near future?

Questions
1.	Why might increased saving not be a sufficient answer to the future funding of pensions?
2.	Why are so many companies abandoning 'final salary' pension schemes (i.e. schemes where pensioners receive a proportion of their final salary based on the number of years they have contributed to the pension scheme)?
3.	What is the best solution to the problem?

Questions
1.	What are the main findings of the Pagan report?
2.	Why have the deficiencies in the Bank of England's quarterly macroeconometric model not had any significant adverse effect on the decisions of the Monetary Policy Committee?
3.	What are the advantages and disadvantages of basing interest rate decisions on forecasts of inflation?

Questions
1.	Why did the Bank of England decide to cut interest rates, given that inflation, at 2.7% was above the target rate of 2.5%?
2.	Why did the ECB decide to keep interest rates on hold?
3.	Argue the case for and against each of these decisions.

Questions
1.	In what sense is price deflation already a reality in Britain?
2.	Does price deflation matter if it is the result of intense competition from low-cost imports rather than the result of weak demand?
3.	Give some examples of services that face competition from low-cost imports?

Questions
1.	What are the causes of the UK's record trade deficit and what are the consequences for the UK economy? How will a depreciation of the US dollar affect the UK's trade deficit?
2.	What are the causes of the USA's record trade deficit? How do these causes differ from those explaining the UK's trade deficit?
3.	Is a record US trade deficit good or bad news for the rest of the world? Explain.

Questions
1.	What is meant by the 'demographic dividend' that the region is likely to experience?
2.	What measures were taken in South Korea that helped recovery from the crisis in 1997?
3.	How has the economic and financial situation in Japan affected the region over the past few years?