News January 2004

Economics News Articles: January 2004

Welcome to the January 2004 edition of the economics news articles section. My name is Andy Beharrell and I have taken over the authoring of these news updates from John Sloman. The number of updates, the style and the contents will all be broadly similar, but both John and I would welcome any feedback that you may have about them. I hope you continue to find them useful.

The last couple of months have been a busy time in the economy and there are a number of issues worth looking carefully at. A theme that has been important in many areas of the world has been the growth in budget deficits. Concerns over the level of borrowing in Japan (see news item 13) have led to budget cuts, while the EU budget dispute (see news item 12) has now made its way into the courts. Though the OECD has given the UK economy a clean bill of health in many respects, they are also concerned about UK borrowing which is at its highest monthly level since records began (see news item 10). The choices the Chancellor has in his forthcoming budget are perhaps becoming increasingly limited. There has also been a lot of emphasis on pollution and emissions with the UK government announcing the emissions targets under the new EU emissions trading scheme for pollution permits (see news item 6). Also on this theme, a report for the packaging industry about recycling (see news item 5) suggested some difficult lifestyle choices if we are to deliver more sustainable growth. A final thought - how much do you think the UK is worth? Have a look at news item 7 to find out.

As always, I hope that you find the articles useful for your studies and that they give you some insight into how economics can help to explain the world around us. Enjoy!

Another link that you might find useful is the ONS report on the State of Britain 2004. This 527 page document offers a complete guide to the state of Britain in numbers and words. Beware though, this is a very large pdf document and so don't try downloading it over a dial-up modem connection (and don't just press print unless you have a spare ream of paper!):

The official yearbook of the UK 2004 (http://www.nationalstatistics.gov.uk/downloads/theme_compendia/UK2004/UK2004.pdf)

Andy Beharrell

Contents

1. Gold - an investment haven?
2. North Sea oil - is it running dry?
3. OFTEL RIP - long live OFCOM - the launch of the new regulatory body
4. Price fixing - has the NHS been ripped off?
5. Recycling - is it the priority we thought for sustainable growth??
6. Pollution permits - will the UK become less competitive?
7. Britain - what's it worth? How the ONS value Britain
8. The Hiccup (HICP) - a new inflation target
9. The Old Lady in the courts - the Bank of England is sued over BCCI
10. Britain goes deeper into the red
11. President Bush's fiscal performance
12. EU budget dispute - the Commission takes France and Germany to court
13. Japan's budget deficit - what impact is an ageing population having?
14. China considers a move away from being pegged to the dollar
15. Five years of the Euro - what do you think of it so far?
16. UK trade - deeper into the red
17. Free Trade Area of the Americas - will it become a reality?

News Item 1: Gold - an investment haven?

Relevant to:

Economics (5^thedition), Chapter 2

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

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

In recent months the price of Gold has continued to rise, soaring to a 15 year high of $425 per ounce. Concerns over the falling dollar and further terrorism threats have led investors to look to Gold as a safe haven for their investment.

Gold 14 year high as dollar falls CNN.com (05/01/04)
Gold glitters as investors seek haven Guardian (06/01/04)
Gold touches fresh 14 year best Business Day (26/01/04)

Questions
1.	What are the main determinants of demand for gold? Comment on the value you would expect for the price elasticity of demand for gold.
2.	What are the main determinants of the supply of gold? Comment on the value you would expect for the price elasticity of supply for gold.
3.	In the light of your answers to questions 1 and 2, discuss how volatile you would expect prices to be in the gold market.

Questions
1.	What is meant by the 'deteriorating economics in the North Sea' referred to in the Business Telegraph article?
2.	Using appropriate diagrams illustrate the following changes referred to in the Business Telegraph article: (a) ....mounting unit costs (b) ....surprise 10% rise in corporation tax for oil and gas companies in 2002 (c) ....rising investment levels
3.	What impact is the reduction in exploitable oil reserves in the North Sea likely to have on the UK economy?

Questions
1.	Why do we need a regulatory body for all these areas?
2.	What would you expect to be the advantages and disadvantages of combining five regulators into one new super-regulator?
3.	"Ofcom’s prime role is to enact the government’s liberalising policies on media ownership". Explain this statement from the Scotsman article.

Questions
1.	What type of market structure is most likely to lead to price-fixing?
2.	Use the Competition Commission and Office of Fair Trading web sites to investigate recent changes in competition law.
3.	What economic benefits arise from removing price-fixing and other anti-competitive behaviour?

Questions
1.	What costs of economic growth are evident from the INCPEN report?
2.	Using suitable diagrams, show how economists develop the argument that recycling will help reduce market failure.
3.	What do we mean by sustainable growth? What changes in lifestyle and policy changes may be required if we are to achieve sustainable growth?

Questions
1.	Explain what is meant by a 'tradable permits' scheme. How does it help to reduce pollution levels?
2.	Why are UK firms concerned about becoming less competitive with the introduction of UK pollution allowances?
3.	Compare and contrast the use of a market-based 'tradable permits' scheme for reducing pollution with the use of rules and regulations.
4.	Why is pollution considered a market failure by economists?
5.	What do you think would be the economic costs and benefits of introducing a 'domestic tradable permits' scheme for the UK?

Questions
1.	What is the difference between GDP and the figure given in the above articles?
2.	What are the key determinants of the value of the UK?

Questions
1.	Explain briefly the difference between the inflation measures - RPI, RPIX, RPIY and HICP.
2.	What problems might the changeover to the HICP target cause for the Bank of England's Monetary Policy Committee (MPC) in the setting of interest rates?
3.	Given that the HICP takes no account of housing costs in inflation, what problems may result if house prices continue to rise rapidly?

Questions
1.	Why is regulation of financial institutions an important policy priority?
2.	What is the impact on the financial system of a major banking collapse like that of BCCI?
3.	Why is the Bank of England immune from being sued over charges of negligence?

Questions
1.	What factors have caused the growth in the UK budget deficit?
2.	What is meant by counter-cyclical fiscal policies (see Pssst! Don't mention JM Keynes article)? What recent examples of these policies can you identify from the articles?
3.	What policy options does the Chancellor have to reduce the deficit and what impact are these likely to have on the economy?

Questions
1.	What problems might arise from the increase in overseas ownership of US debt that was seen in this period? (See the article from Forbes.com)
2.	What have been the principal causes of the rise in the US budget deficit?
3.	What is likely to be the impact of the higher budget deficit on the economy in (a) the short term and (b) the long term?

Questions
1.	Why is a 'Growth and Stability Pact' important to ensure the stability of the euro as a single currency?
2.	The UK Chancellor has argued for an agreement where budget deficits are capped over the 'whole economic cycle'. What does he mean by this and what advantages would this system have over the current one?
3.	What economic problems are France and Germany likely to face if they have to change their fiscal stance to comply fully with the growth and stability pact?

Questions
1.	Why has the Japanese government moved away from using government spending to stimulate the economy?
2.	What problems might they face by relying so heavily on issuing bonds as a method of funding the budget deficit (see Japan Times article)?
3.	What effect will a rapidly ageing population have on the government's fiscal position?
4.	In what other ways is an ageing population likely to affect the Japanese economy over the coming years?

Questions
1.	What are the advantages and disadvantages of a pegged exchange rate?
2.	The Hong Kong Standard article says that experts expect that a link to a basket of currencies would lead to a depreciation in the yuan. What effects would this have on the Chinese economy?
3.	Why are the Chinese reluctant to adopt a freely floating exchange rate system?

Questions
1.	What are the main arguments for and against the UK joining the Euro? How might these have changed in the light of the performance of the Euro since it was introduced?
2.	How is monetary policy managed in the Eurozone to ensure price stability? What problems have the ECB faced in the implementation of monetary policy?
3.	What have been the key factors contributing to the rise in the Euro since 2002?

Questions
1.	What are the main factors causing the deterioration in UK trade performance?
2.	What impact is the falling dollar likely to have on the balance of trade in (a) the short term and (b) the long term? How might this change if the price elasticity of demand for exports was to increase in value (exports become more price-sensitive)?
3.	What effect is rising US economic growth likely to have on (a) the dollar/sterling exchange rate and (b) the UK's trade performance in the medium term?
4.	What policy options are available to the Chancellor to reduce this trade deficit?.

Questions
1.	What benefits would a Free Trade Area of the Americas bring for the countries involved?
2.	Why is the presence of agricultural subsidies preventing agreement on the FTAA among the countries involved? What would be the impact of the removal of these subsidies on the US economy?
3.	Discuss the impact of the introduction of a Free Trade Area of the Americas on some of the less-developed economies in the region in (a) the short term and (b) the long term.