News Dec'02/Jan'03

Economics News Articles: December 2002 / January 2003

Welcome to this combined December and January set of news articles. I have combined the two months to take account of the fact that most of you will have been having a break from your studies - and it gives me a break too!
There have been several notable events in the news these past two months that are relevant to a principles of economics course. These include: continuing worries about the fragile state of the world economy (see news item 10); the likely effects of a war with Iraq (news item 2); the struggle of the supermarket giants and others to take control of Safeway, the UK's fourth biggest supermarket chain (news item 4); the announcement by the UK government in the 'Future of Higher Education' White Paper that universities in England and Wales will be able, from 2006, to increase the fees they charge from the current £1100 to £3000, but that these fees will no longer be paid 'up-front' - instead, students will have to pay them back after they graduate (news item 6); and the causes and effects of a record balance of trade deficit for the UK (news item 19).
As always, I hope that you find the articles useful for your studies and that they give you some insight into the usefulness of economics in helping to explain the world around us. Enjoy!

Two additional news links that you might find useful are:

NewsDirectory.com (links to newspapers worldwide)
Google News (allows you to search over 4000 news sources by topic)

John Sloman

Contents

1. End of the house price boom in sight?
2. Effects of war fears on commodity prices
3. Reform of the Common Agricultural Policy
4. The battle for Safeway
5. The great pay divide
6. Funding higher education
7. Business and sustainable development
8. Are airfares too low?
9. Competition policy and regulation: two recent cases
10. The world economy: recovery or deepening recession?
11. The state of London's economy
12. Fiscal rules versus discretionary fiscal policy
13. Should monetary policy be confined to inflation targeting?
14. The relationship between property prices and consumer spending
15. Economic growth and supply-side policy
16. Free trade and Mexico's farmers
17. The effects of EU enlargement
18. Record UK balance of trade deficit
19. Exchange rate volatility
20. The IMF warns of the dangers of a single currency for west Africa

News Item 1: End of the house price boom in sight?

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

There are increasing signs that the UK house price boom is beginning to slow. The following articles examine the reasons and whether there will be a 'soft landing', with price increases gently slowing, or whether there will be a sharp reversal, with prices actually falling. The final article looks at the effects in certain parts of the country, and particularly in previous housing 'hotspots'.

House prices ease as buyers wait and see Ananova (23/1/03)
Home buyers put off by price fears BBC News Online (23/1/03)
Prices 'to fall 15% in housing hotspots' Independent (24/1/03)

Questions
1.	What factors determine the demand for houses?
2.	Why was there a decline in 'buyer activity' in December? What role does speculation play here?
3.	For what reasons might the housing market crash? Do any of these reasons exist at the moment?

Questions
1.	Why have oil prices been rising recently? What has determined the amount by which prices have risen?
2.	For what reasons might oil prices fall again? What would determine the amount by which prices would fall in such circumstances?
3.	What reasons does Nordhaus give (discussed in The Economist article) for arguing that the long-term economic costs to the USA of a war with Iraq could be significantly greater than most analysts predict?
4.	Why does a fall in the exchange rate of the dollar relative to other currencies lead to a rise in the price of gold? What determines the amount by which the price gold would rise in such circumstances?

Questions
1.	What the main criticisms of the current EU system of setting minimum prices above the market equilibrium from the perspective of (a) EU consumers; (b) the environment; (c) farmers in developing countries?
2.	Why does the prospect of 10 additional countries joining the EU in the middle of next year make reform of the CAP urgent?
3.	What are the main features of the proposed reforms and what effects would they be likely to have on (a) EU farm production; (b) EU agricultural prices; (c) the rural environment in the EU?

Questions
1.	What benefit would a takeover of Safeway bring for a successful bidder?
2.	How are Safeway staff likely to be affected by a takeover? To what extent will this depend on which company is successful in acquiring Safeway?
3.	What issues will the competition authorities (the Office of Fair Trading (OFT) and the Competition Commission, if the bid is referred to them by the OFT) address in deciding which, if any, of the bids should be allowed to succeed?
4.	What can Wal-Mart do to increase its market share in the USA and beyond?

Questions
1.	What reasons can you suggest for the widening of the 'yawning gulf' in pay between executives at Britain's top companies and those at the bottom of the income scale? To what extent could this growing gap be explained by (a) marginal productivity differences; (b) the exploitation of market power in the labour market?
2.	Why has the gender pay gap increased?
3.	Does increasing wages of low-paid workers necessarily lead to a reduction in employment? Explain.
4.	Are tax credits a more effective way of helping poor families than increases in the minimum wage?

Questions
1.	In what ways will future students (a) gain; (b) lose from the proposals in the White Paper?
2.	Would it be a good idea to charge more for degrees (such as Economics degrees) where graduates can expect to earn large salaries?
3.	Will the new system make it easier or harder for the government to meet its target of raising the proportion of the UK population between 18 and 30 studying in higher education from the current 42% to 50% by 2010?
4.	Assess the proposals on fees on grounds of (a) social efficiency; (b) equity; (c) long-term economic growth.

Questions
1.	What for reasons might businesses adopt more environmentally friendly or socially responsible practices?
2.	Discuss the relative effectiveness of two government policy methods to get firms to adopt such practices.
3.	Critically assess current UK government policies towards achieving sustainable development.

Questions
1.	How would you attempt to establish a socially efficient number of flights?
2.	Why is the number of flights at present likely to be greater than the social optimum?
3.	What determines the cross price elasticity of demand for train journeys relative to plane journeys? How might this change over time?
4.	Discuss the relative merits of alternative policies for achieving the socially optimum number of flights.

Questions
1.	In what ways were Hasbro's activities 'anti competitive'? What barriers to entry are there in the markets in which Hasbro is operating that allowed a lack of competition to continue?
2.	What was the value of 'X' in the RPI - X formula that Oftel wished to impose before the proposal was referred to the Competition Commission. What incentives would this have imposed on the mobile phone operators?
3.	Comment on the response by the mobile phone operators to the Competition Commission report.
4.	What are the main features of the Enterprise Act? Will they make competition legislation in the UK more effective?

Questions
1.	What factors will determine whether the world economy grows or declines over the coming months?
2.	Why has business investment fallen substantially in many countries, while consumer demand has remained relatively buoyant? To what extent can the accelerator theory explain this?
3.	Why would a continuing recession in the eurozone or the UK cause a conflict between meeting fiscal targets and the use of fiscal policy to cure the recession?

Questions
1.	What evidence is there that London is in, or heading for, recession?
2.	Why does the London economy tend to be more volatile than most other parts of the UK?
3.	How is the rest of the UK economy likely to be affected by a recession in London?

Questions
1.	Explain the conflict between using fiscal policy to bring an economy out of recession and the adherence to fiscal rules.
2.	What is the case for sticking to fiscal rules in such circumstances?
3.	What are the benefits and dangers of relaxing fiscal rules?

Questions
1.	What is the case for using monetary policy to prevent asset price 'bubbles'?
2.	Why do some central bankers reject these arguments? Are they justified in rejecting them?
3.	How can a framework of inflation targeting "cope with the policy dilemmas about asset prices"? Why might short-run deviations from inflation targets be desirable?
4.	Why might the taking into account of asset prices when framing monetary policy lead to money supply growth targets being used alongside inflation targets (as already happens in the eurozone)?

Questions
1.	Why has consumer spending gone on increasing despite falling share prices?
2.	Does it matter if average real debt as a proportion of income has increased?
3.	Why is the rate of equity withdrawal (i.e. people borrowing more based on the increased value of their property) likely to slow down? What would be the implication of this for consumer spending?

Questions
1.	Is it reasonable to claim that the business cycle has been effectively tamed by fiscal and monetary policy?
2.	What policy measures could a government adopt to improve the rate of growth in potential output?
3.	What specific measures should be adopted in the UK to improve the supply side of the economy?
4.	Are there any drawbacks in focusing on increasing the rate of growth in potential output?

Questions
1.	In what ways would Mexicans gain and lose from the complete elimination of tariffs and other trade restrictions on food imports?
2.	What effects will the recent tariff reductions have in practice?
3.	Why have Mexican agricultural exports declined in recent years?
4.	From the evidence of The Economist article, does Mexico have a comparative advantage in agricultural produce?

Questions
1.	What will the accession countries gain from EU membership?
2.	What will be the costs and benefits to the 15 existing members of this enlargement?
3.	Why will it be very difficult to adopt and operate a consistent and fair regional policy after 2004?

Questions
1.	Why has the trade deficit risen? Are any of the reasons to be found in the domestic economy?
2.	Would a reduction in the trade deficit be achieved by a change in interest rates, and, if so, how?
3.	What is meant by the term "erratics", when applied to the balance of payments account? What erratics were contributing to the balance of trade deficit?

Questions
1.	What are the costs and benefits to the eurozone countries of a high exchange rate of the euro with respect to the US dollar? What implications would a higher exchange rate have for interest rates in the eurozone? Why?
2.	Why do volatile and unpredictable exchange rates pose serious problems for business and economies generally?
3.	What policy measures can governments take, either on their own or jointly with each other, to reduce exchange rate fluctuations?

Questions
1.	What are the potential benefits to the participating countries of a single west African currency?
2.	What are the arguments used by the IMF to suggest that a single currency could harm the economies of member states?
3.	What policies would Nigeria have to adopt, according to the IMF, if the remaining countries were to gain from Nigeria's membership of the single currency?