News Feb 2004

Economics News Articles: February 2004

Welcome to the February set of news items. February may be a short month, but there has certainly been no shortage of economics news articles this month. The dollar has continued to fall (see news item 14) and trade also has been very much in the news. World trade talks, known as the Doha round, stalled at Cancun in Mexico over disputes about agricultural subsidies, but some African nations have been trying to get the talks back on the rails (see news item 13). However, the UK balance of payments figures for last year put us even further into the red and so we look at this issue again in news item 15. Market failure has also continued to make the news with the congestion charge celebrating its first anniversary (see news item 5) and Exxon being ordered by a court in Alaska to pay a $6.75bn settlement in relation to the Exxon Valdez oil spill (see news item 8). Competition policy has also been in the news with the supermarkets being investigated to see if the new code of practice for dealing with suppliers has been working (news item 6) and Ryanair ordered to pay back the subsidies they have received from the Belgian government for operating through Charleroi airport (news item 7).

As usual, 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.

Andy Beharrell

Contents

1. OPEC - cutting oil production quotas
2. Rolls - cost cutting in production
3. Glaxo - the threat of generic drugs
4. One in 10 workers incompetent?
5. Congestion charge - happy first birthday
6. Supermarket competition code - is it working?
7. Ryanair must pay back subsidies received
8. Exxon Valdez - paying for the clean up
9. The conservative fiscal alternative
10. Replacing the council tax?
11. Interest rates rise - MPC warns on debt
12. Chinese rural spending - supporting the regions
13. Restoring the Doha trade talks
14. The fall, fall and rise of the dollar
15. Further into the red zone - UK trade deficit

News Item 1: OPEC - cutting oil production quotas

Relevant to:

Economics (5^thedition), Chapters 2, 7, 12

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

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

This month OPEC announced a cut in output of 10%. This was a surprise to the markets and led to a jump in oil prices. OPEC (Organisation of Petroleum Exporting Countries) tries to influence oil prices through the manipulation of oil quotas for each member country. A quota cut of 10% will reduce supply on the world oil market and therefore push up prices.

OPEC to cut daily production Miami Herald (11/2/04)
Crude soars on OPEC cut The Scotsman (11/2/04)
OPEC will cut output by 10% Boston Globe (11/2/04)
OPEC to cut oil output 10% News.com (11/2/04)
OPEC output cut criticised by US BBC News (11/2/04)

Questions
1.	What sort of conditions in a market are likely to lead to the establishment of a cartel?
2.	What other market influences are there on oil prices?
3.	What impact will the increase in the oil price have on the UK economy?
4.	What problems are OPEC likely to face in maintaining these quota reductions?

Questions
1.	What type of costs have Rolls Royce reduced with their 'revolutionary' new factory?
2.	Why is it important for them to reduce engine manufacture times?
3.	Why have Rolls Royce chosen to import over 70% of their components from low-cost producers? What disadvantages might this strategy have?

Questions
1.	Who are the winners and losers from the protection of intellectual property (a) in the short term and (b) in the long term?
2.	Why might government intervention be necessary to protect intellectual property rights?
3.	Examine whether intellectual property rights could be against the interests of competition in a market.

Questions
1.	What impact will a more skilled workforce have on the marginal revenue product curve (the demand curve for labour)?
2.	Evaluate three different policies for reducing the skills shortages.
3.	What impact will these skills shortages have on the macroeconomy?

Questions
1.	What forms of market failure led to the Mayor of London introducing a congestion charge?
2.	Assess the impact that the scheme has had in terms of changes in external costs and external benefits.
3.	Assess the impact that the scheme has had on businesses (a) inside the area and (b) outside the area.
4.	How is the national roll-out of such schemes likely to affect the economy?

Questions
1.	What alternatives are there to voluntary codes of conduct to ensure fair and free competition in these markets?
2.	To what extent does the market structure of the supermarket industry affect the level of competition?
3.	What potential advantages does a concentrated market structure deliver for consumers? Do these advantages outweigh the potential costs?

Questions
1.	Draw a diagrams to illustrate the impact of the subsidy on (a) the market for air travel and (b) the equilibrium price and output level of Ryanair.
2.	What determines the value of the regional multiplier in the airports that Ryanair fly into?
3.	Why are the subsidies to Ryanair considered anti-competitive?
4.	What is likely to be the impact on the low-cost airline industry of the removal of the subsidies?

Questions
1.	Draw up a list of private costs and private benefits and external costs and external benefits arising from the exploitation of oil.
2.	What market failures are evident from the articles arising from the Exxon Valdez oil spill?
3.	What problems are likely to arise when valuing the external costs that have arisen from the oil spill?
4.	What other market failures are evident from the Friends of the Earth press release (the last link above)?

Questions
1.	Why are the Tories proposing reducing the share of national income taken up by government expenditure?
2.	What are the disadvantages of high levels of public borrowing?
3.	What impact are the proposed policies likely to have on the government's major macroeconomic objectives?

Questions
1.	What are the disadvantages of the council tax?
2.	Discuss the advantages and disadvantages of changing from a council tax to a system of levies on incomes.
3.	What impact is a change of this nature likely to have on the macroeconomy?

Questions
1.	Use the articles to find figures that illustrate why the MPC felt it necessary to increase interest rates.
2.	What impact is the rate increase expected to have on the economy?
3.	Why is the Bank concerned about rising levels of consumer debt?
4.	What is the transmission mechanism by which changes in interest rates impact on aggregate demand?

Questions
1.	Why has the government felt it necessary to boost spending in rural areas? Why have markets alone not been able to deliver improvements in rural incomes?
2.	What will determine the value of the regional multiplier that will result from these increases in spending?
3.	What are the disadvantages of the government intervening directly to influence economic growth in this way?

Questions
1.	Why are the Doha trade talks considered important?
2.	Why are subsidies seen as a form of protectionist policy? What impact does the policy have on (a) the nation giving the subsidies and (b) nations trying to export to them?
3.	Why have African countries been trying to revive the trade talks? What problems are developing countries likely to face if the Doha trade talks are not resumed?

Questions
1.	Why is the USA 'basking in the dollar decline'?
2.	How is the appreciation of sterling likely to affect the UK trade balance (a) in the short term and (b) in the long term? Explain your answer fully considering elasticity of demand for imports and exports where relevant.
3.	How is the appreciation of sterling likely to affect unemployment and inflation in the UK? To what extent are the MPC likely to be taking account of exchange rate changes when making their interest rate decisions (see news item 11)?

Questions
1.	Should we be concerned about a large trade deficit?
2.	What policy options does the government have to try to improve the trading performance of the UK? What impact are these policies likely to have on the rest of the economy?
3.	The article considers import penetration for certain areas of trade. What is meant by import penetration? What possible policies are available to try to reduce import penetration in the areas mentioned in the article?
4.	What differences are apparent from the article in our trade performance in goods as compared to services?