News Jan 2002

Economics News Articles: January 2002

News Item 1: Soaring cocoa prices

Relevant to:

    Economics (4^th edition), Chapter 2

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

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

Cocoa prices rose by 73 per cent in 2001 and continued to rise into the new year. But what could cause such a dramatic change in a commodity's price? The following linked articles, taken from Canada's Financial Post of 7 January 2002, examines the reasons and looks at the likely effects on production.

Soaring prices may not be enough to prompt new supply

Questions
1.	Why did cocoa prices rise so much in 2001?
2.	From the information in the article, what do you conclude about the price elasticity of demand for cocoa?
3.	What is likely to happen to the price of cocoa over the coming 12 months?

News Item 2: UK house prices

Relevant to:

    Economics (4^th edition), Chapter 2

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

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

Despite the recession in the USA, the slowdown in the eurozone and fears of a possible slowdown in the UK, house prices continue to surge ahead. In December 2001, they rose at their fastest rate for two years according to HBOS, the country's biggest mortgage lender. The first of the following articles, which is taken from BBC News Online of 8 January 2002, looks at the reasons and at the prospects for house prices in 2002. The second article (first part), taken from the Telegraph of the same date, looks at the effect of building restrictions on the housing market.

UK house price growth 'very strong'
Restrictions on new house building

Questions
1.	Why should higher house price inflation make interest rate rises more likely?
2.	If people believed that interest rates were likely to rise, how would this affect the demand for and price of houses?
3.	Why were fewer new dwellings completed in 2001 than in any peacetime year since 1924?

News Item 3: UK companies' profitability

Relevant to:

    Economics (4^th edition), Chapters 5, 7, 13, 14

    Essentials of Economics (2^nd edition), Chapters 3, 4, 7, 12

    Economics for Business (2^nd edition), Chapters 9, 10, 12, 25, 26

Company profitability has fallen in recent months. The following linked article from the Financial Times of 10 January 2002, examines the reasons for this.

UK companies' profitability at 30-month low

Questions
1.	What has caused the decline in profitability?
2.	Why does a strong pound damage profitability? Are any firms likely to gain from a high exchange rate?
3.	If firms in general cut employment in order to save costs, what effects will this have on profitability?

News Item 4: British Gas's pricing policy

Relevant to:

    Economics (4^th edition), Chapters 5, 6, 7, 12

    Essentials of Economics (2^nd edition), Chapters 3, 4, 6

    Economics for Business (2^nd edition), Chapters 9, 11, 12, 21

Last month's News Item 7 considered the announcement by Centrica (British Gas) that it was raising its prices by 5.3 per cent, bring the total price rise to 10 per cent in less than 10 months. This month has seen various reactions to the announcement. The following two articles, taken from the Guardian and the Independent of 9 January 2002, consider these reactions, both by bodies such as the Consumers' Association and by consumers themselves.

British Gas feels the heat after 10% price rise
'Millions set to desert British Gas' after 10% price increase

Questions
1.	Why did British Gas raise its prices?
2.	Should British Gas consider questions of fairness when setting its prices? Should a regulator take such questions into account?
3.	What conditions are necessary for competition to work in the retail gas market?
4.	How have wholesale gas prices been kept high by 'manipulation of the interconnector pipe between Britain and the continent'?

News Item 5: Objections by US Justice Department to BA / American Airlines alliance

Relevant to:

    Economics (4^th edition), Chapters 7, 8, 12

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

    Economics for Business (2^nd edition), Chapters 12, 14, 20

'The alliance threatens a substantial loss of competition, which would likely result in higher airfares and reduced services.' This statement from the US Justice Department on the proposed alliance between British Airways and American Airlines begins the following article from BBC News Online of 18 December 2001. The article looks at the concerns of the Justice Department and the response by the airlines.

BA-American deal faces obstacles

Questions
1.	What are the justifications for the demands of the Justice Department?
2.	What are the replies by the airlines?
3.	Provide an assessment of these replies.

News Item 6: New fishing quotas agreed by EU

Relevant to:

    Economics (4^th edition), Chapter 11

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

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

Fishing grounds are an example of a 'common resource'. The trouble with such resources is that they tend to get overused, because no individual has an incentive to conserve them. Instead, users impose the external cost of depletion on everyone else. The result is what is known as the 'Tragedy of the Commons'. In the case of fishing grounds, this means the severe depletion of stocks. One solution to this tragedy is for governments or international agencies to impose restrictions on the use of such resources. The following articles, taken from the Guardian and BBC News Online, look at the problem of overfishing and consider the new quotas that have been agreed by the EU.

Fishing industry hit by tough new quotas (Guardian, 18/12/01)
'Punitive' fish quota cuts staved off (Guardian, 19/12/01)
Cod facts (Guardian, 18/12/01)
EU fisheries face collapse (BBC News Online, 17/12/01)

Questions
1.	Why have 'dramatic cuts' in fishing quotas (total allowable catches, or TACs) been necessary?
2.	What is the objection of leaving the use of the open seas purely to the market? Will not the market automatically 'correct itself', with prices rising if fish stocks run down?
3.	If conserving fish stocks is in the interests of the fishing industry, why do so many in the industry object to quotas being imposed by the EU?

News Item 7: Negative consumer surplus from gifts

Relevant to:

    Economics (4^th edition), Chapter 12

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

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

The Christmas season is now over for another year, and maybe you have several gifts that you don't really want. The following article, taken from The Economist of 20 December 2001, asks whether gifts involve a deadweight loss, or, to put it another way, negative consumer surplus.

Is Santa a deadweight loss?

Questions
1.	Is there any 'market failings' in buying the right gifts for other people? If so, what are they?
2.	Explain what is meant by 'deadweight loss' in the context of gifts. Should we extend the concept of consumer surplus to the giver as well as to the receiver of a gift?
3.	Why do people often prefer cash from distant relatives but a gift from their loved ones?

News Item 8: Dealing with traffic congestion in Dublin

Relevant to:

    Economics (4^th edition), Chapter 12 (section 2)

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

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

Dublin, like many cities throughout the world, faces ever increasing traffic congestion, with all its attendant problems. In the following link to a series of articles in the Irish Times, various alternative schemes are considered for tackling the problem.

Tackling the traffic

Questions
1.	Consider the arguments for and against the widespread introduction of tolls.
2.	What conditions must be met if electronic road pricing is to be effective in reducing congestion?
3.	What general lessons can be learnt from continental European cities for reducing traffic?

News Item 9: Forecast staves off eurozone recession fears

Relevant to:

    Economics (4^th edition), Chapter 13

    Essentials of Economics (2^nd edition), Chapter 7

    Economics for Business (2^nd edition), Chapter 25

'The eurozone economy appears to have avoided falling into recession ...' So begins the following article from the Financial Times of 10 January 2002. The article reports on the estimates of a consortium of leading European research institutes.

Forecast staves off eurozone recession fears

Questions
1.	What is the official definition of a recession?
2.	Why is 'the current situation still unfavourable' to economic growth?
3.	Why do forecasters do so badly in predicting rates of economic growth even as little as 12 months hence?

News Item 10: The relationship between inflation and growth

Relevant to:

    Economics (4^th edition), Chapters 13, 16, 19

    Essentials of Economics (2^nd edition), Chapters 7, 8, 9

    Economics for Business (2^nd edition), Chapters 25, 27, 29

Throughout the world, central banks have the control of inflation as their prime objective of monetary policy. The assumption is that inflation is harmful to economic growth. Clearly, rampant inflation is harmful. But what about mild inflation? In the following article, from the Guardian of 24 December 2001, Tony Thirlwall argues that a 'slowly sagging price level' is far worse than mild inflation. In fact, he argues that there is a positive relation between inflation and economic growth.

Inflation is no devil in monetary policy detail

Questions
1.	For what reasons might you expect there to be a positive relationship between inflation and economic growth?
2.	Why might price stability turn out to be a 'recipe for perpetual stagnation'?
3.	What lessons could the European Central Bank learn from the Federal Reserve Bank in the USA about the conduct of monetary policy?

News Item 11: Fiscal policy in Japan

Relevant to:

    Economics (4^th edition), Chapter 17

    Essentials of Economics (2^nd edition), Chapter 8

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

Japan is in recession. Yet it has recently launched a strict budget. Why should this be so? The following linked article, from iWon of 23 December 2001, explores the thinking of the Japanese government in deciding to 'tighten its fiscal belt' at a time of recession.

Japan launches strict budget despite recession

Questions
1.	What problems have arisen from previous attempts to stimulate the Japanese economy by increased government spending not matched by increased taxation?
2.	What dangers lie in the proposed policies?
3.	How could supply-side reforms help to tackle the problem of a lack of investment and consumer spending?

News Item 12: History of paper money

Relevant to:

    Economics (4^th edition), Chapter 18

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

    Economics for Business (2^nd edition), Chapter 27

With the advent of the new euro notes and coins in 12 EU countries, The Economist in the following linked article of 20 December 2001 takes a look at the history of paper money. In doing so it draws some lessons about what makes good paper money - and what makes bad. So are euro notes examples of good paper money? The article has a view on this.

Crisp and even

Questions
1.	Why has paper money not always successfully replaced precious metals or commodity money?
2.	What conditions must be met if paper money is to be successful?
3.	What 'layers of security' are there for the euro? What inherent flaws are there in such security measures?

News Item 13: Have a go at the Guardian's euro quiz!

Relevant to:

    Economics (4^th edition), Chapter 18

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

    Economics for Business (2^nd edition), Chapter 27

Try the following multiple-choice quiz (the first link) to see how much you know about the euro! The second link is to the Financial Times 'special' on the euro. It has many links in it to articles on all aspects of the currency. So, maybe it would be a good idea to read some of the articles there first! One thought-provoking article from these special reports can be found at the third link.

Quiz: How well do you know the euro?
Financial Times euro special
A catalyst for further change

News Item 14: UK waits on five crucial tests

Relevant to:

    Economics (4^th edition), Chapters 19, 25

    Essentials of Economics (2^nd edition), Chapters 9, 12

    Economics for Business (2^nd edition), Chapters 27, 31

Euro notes and coins are now a reality and even in the UK the likelihood is that they will be quite widely used in tourist areas. But what of the three EU countries outside the eurozone: Denmark, Sweden and the UK. In the most recent opinion polls, a majority of the populations of both Denmark and Sweden are now in favour of adopting the euro, and it is likely that there will be a referendum on joining in both countries in 2003, with probable adoption of the currency in 2005 or 2006. But what of the UK? The government has promised to hold a referendum, but not until five crucial tests have been met. In the first of the following linked articles, which is taken from the Guardian of 18 December 2001, the five tests are outlined and the likelihood of meeting the tests is considered. The second article is from the Irish Times of 28 December 2001, and looks at the issue of having a single interest rate for all the eurozone countries and whether this would be in Britain's interests. The third article is from the Birmingham Post of 10 January 2002 and examines whether the degree of convergence of the UK and eurozone economies is weakening.

UK waits on five crucial tests
Interest rates key factor in Britain's currency decision
UK growth 'to weaken eurozone links'

Questions
1.	Is Britain meeting the first test at the moment?
2.	What is meant by 'flexibility' to deal with problems (test 2)?
3.	Why is there considerable scope for disagreement over whether the tests have been passed?

News Item 15: UK interest rates on hold for second month in succession

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 Monetary Policy Committee (MPC) of the Bank of England announced on 10 January that interest rates were to remain unchanged. The first of the linked articles explains why this had been expected. There is a chance, however, that UK interest rates may have to rise in the near future. The second article examines why. But what of interest rates in the eurozone? The eurozone economy remains sluggish, but further interest rates cuts at the present time may be too late, as the effects take several months to work through into output. The next three articles look at these arguments. The final article considers the implications of money supply growth in the eurozone for interest cuts by the ECB.

UK interest rates left unchanged (BBC News Online, 10/1/02)
Rate rises expected as Britons slide into the red (Financial Times, 4/1/02)
Duisenberg says further rate move would only be felt a year from now (Ananova, 18/12/01)
IMF Rogoff says 'getting late in the game' for further ECB rate cuts (Ananova, 18/12/01)
Duisenberg sees inflation below 2% throughout 2002 and 2003 (Ananova, 18/12/01)
ECB warns on risk of rising money supply growth (Financial Times, 11/1/02)

Questions
1.	Why did the MPC decide to leave interest rates unchanged in January?
2.	What time lags are there between changes in interest rates and changes in output?
3.	If eurozone inflation is expected to be around 1.5 per cent in both 2002 and 2003, what actions should the ECB take now?
4.	How is money supply growth in the eurozone likely to affect decisions by the ECB on interest rates? Why?

News Item 16: Poor UK labour productivity

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

Britain has lower output per worker than many other industrialised countries, and the gap is not closing. The linked article, from BBC News Online of 21 December 2001, examines the situation.

UK workers are less productive

Questions
1.	Assess the argument that 'a decline in average output per worker makes a country's economy less internationally competitive'. Can international competitiveness be restored by a low exchange rate?
2.	What are the causes of low labour productivity in the UK?
3.	What policies can be adopted to increase labour productivity?

News Item 17: The Big Mac index

Relevant to:

    Economics (4^th edition), Chapter 23

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

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

Box 24.3 on page 706 of Economics (4th edition) looks at The Economist's 'Big Mac index' of currencies. A comparison of the price of a Big Mac in different countries gives an indication of whether currencies are over- or undervalued. The linked article, from The Economist of 20 December 2001, gives the latest Big Mac index.

The Big Mac index

Questions
1.	According to the index, which country's currency is the most overvalued? What implications does this have for that country's trade?
2.	For what reasons might the Big Mac index be an unreliable give to purchasing-power-parity exchange rates?
3.	If the index does give an approximate guide as to the purchasing power of currencies, what are the implications for the PPP value of South Africa's GDP compared with its GDP as conventionally measured?

News Item 18: The yen continues to fall

Relevant to:

    Economics (4^th edition), Chapter 24

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

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

The yen reached a three-year low on 8 January, having fallen by more than 10 per cent in just two months. Why has this been happening and what is the implication for the Japanese economy. The following linked articles explain. The final article reports on a rally for the currency, following remarks from the Japanese finance minister that the rate had been falling too fast.

Yen slides as bankers mull options (BBC News Online, 18/12/01)
Yen hits 3-year low against the dollar (BBC News Online, 9/1/02)
Yen dips to lowest since 1998 (National Post of Canada, 9/1/02)
Japan says yen's fall 'too rapid' (BBC News Online, 10/1/02)

Questions
1.	Why has the yen fallen so rapidly?
2.	What are the advantages and disadvantages of a depreciating exchange rate for Japan?
3.	What could the Japanese authorities do to prevent the rate falling further (if they wanted to)?

News Item 19: The Argentinean crisis

Relevant to:

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

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

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

The Argentinean economy has been in crisis over the past few weeks. With riots against economic stagnation and rising unemployment, the resignation of the government, the defaulting on debt and a massive devaluation of the peso, commentators have been quick to pass judgements on the mishandling of the economy. Yet just a few years ago, Argentina was seen as an 'economic miracle'. By pegging the peso to the dollar in 1991, Argentina successfully cured its hyperinflation and attracted inward investment. Growth seemed assured. How then did it all go so horribly wrong? The following articles trace the path to the current crisis, the measures that have recently been taken and whether they are likely to succeed in turning the economy around. (The first link is to a series of articles in the Financial Times.)

Financial Times Special reports on Argentina's crisis
The events that triggered Argentina's crisis (BBC News Online, 21/12/01)
Q&A: Argentina's economic crisis (BBC News Online, 7/1/02)
Argentina's central bank gets new role, but can it control inflation? (MSNBC News, 9/1/02)
Foreign creditors join the pyre (The Economist, 5/1/02)
Fixing the rate, not the problem (The Economist, 9/1/02)
IMF sees more pain for Argentina (BBC News Online, 8/1/02)
A country praying for tango and cash (Observer, 13/1/02)

Questions
1.	What were the causes of the recent crisis?
2.	What are the advantages and disadvantages for a country of pegging its exchange rate to a major international currency, such as the US dollar?
3.	Will Argentina's central bank be able to control inflation?
4.	Was defaulting on debt a good policy measure, given the circumstances?
5.	Has Argentina's new president 'done enough to stave off unrest and further economic collapse'?

News Item 20: Conglomerate companies and developing countries

Relevant to:

    Economics (4^th edition), Chapters 5, 26

    Essentials of Economics (2^nd edition), Chapter 3, Box 11.5

    Economics for Business (2^nd edition), Chapters 3, 23

Is globalisation forcing local conglomerate companies in developing countries to change their approach? Conglomerate companies, by their very nature, have diverse activities and can make up for a lack of specialist suppliers by supplying what they need themselves. This can be very suitable in developing countries, where infrastructure is lacking and where suppliers are often unreliable. But with freer trade and capital movements, such companies are increasingly facing competition from more specialist international companies. Will this competition force the break-up of local companies? The linked article, from The Economist of 3 January 2002, looks at the issues.

Monsters still, but prettier

Questions
1.	What economies and diseconomies of scale are likely to occur with large vertically integrated conglomerates producing a range of products?
2.	Why may the development of conglomerates make economic sense in developing countries, while the break-up of such firms might make more sense in rich countries?
3.	How is globalisation affecting the economic arguments about the merits of conglomerates in developing countries?

News Item 21: World Bank backs commodity hedging

Relevant to:

    Economics (4^th edition), Chapters 2, 26

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

    Economics for Business (2^nd edition), Chapter 5

The economies of many developing countries rely heavily on the earnings from the export of commodities, both minerals and crops. With world demand being both price and income inelastic, prices are subject to considerable fluctuations and export earnings rise only slowly over time (and, in some cases fall). One solution to commodity price instability being advocated by the World Bank is to set up markets in options - 'the right to sell a specific quantity of a good on a particular date at a particular price'. The linked article, taken from BBC News Online of 28 December 2001, looks at the proposed scheme.

World Bank backs commodity hedging

Questions
1.	Explain what is meant by 'commodity options'?
2.	How can the system of hedging through the use of options help to stabilise prices and reduce risks for commodity producers?
3.	What would be the likely effect of such schemes on long-term supply and prices?