News March 2003

Economics News Articles: March 2003

Welcome to the March set of news articles. As I write this, war against Iraq has begun and the news is totally dominated by it - not only by the day-to-day conduct of the war and its direct effects, but also by the likely consequences over the longer term. Some of the following economics news articles are directly related to the war (see items 1, 2, 11 and 12); some indirectly so. But there are plenty of other articles that relate to the topics you are likely to be studying. As always, I hope you find them useful and enjoy reading them and answering the questions.

John Sloman

Contents

1. Share prices
2. Oil prices
3. Outsourcing and its effects on costs
4. The benefits of an Economics or Business degree
5. A rise in the UK national minimum wage
6. Tackling poverty
7. What future for government
8. The Energy White Paper
9. The use of green taxes and charges
10. UK unemployment falls
11. US and UK confidence and investment
12. The economic aftermath of the war with Iraq
13. GDP and happiness
14. Budgetary problems as tax receipts fall
15. The problem of deflation
16. The slow death of manufacturing in the UK
17. Towards a more stable monetary world
18. Mali reaches completion point under the HIPC scheme
19. Have IMF policies failed developing countries?

News Item 1: Share prices

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 has been a lot of volatility in share prices over the past four weeks. Share prices fell by over 10 per cent in three-week period to 12 March, only to rise again by nearly 15 per cent over the following week. The price of shares has been driven largely by expectations; and with uncertainty about war and its consequences, share prices have reflected this uncertainty and the swings between pessimism and optimism for the future of the world economy, the price of oil and the prospects for business. The following articles look at why share prices have behaved the way they have. The final article looks at the practice of 'short-selling' and its effect on share prices.

UK shares drop 2% BBC News Online (25/2/03)
Shares post strong gains BBC News Online (21/3/03)
Don't shoot the messenger The Economist (27/2/03)

Questions
1.	Using supply and demand analysis, explain why shares (a) dropped in late February; (b) rose as war drew close and then began.
2.	Explain what is meant by 'short-selling' and the direct influence it has on share prices in (a) a falling ('bear') market; (b) a rising ('bull') market.
3.	Under what circumstances is speculation on stock markets likely to (a) increase share price fluctuations; (b) reduce such fluctuations?

Questions
1.	Using supply and demand analysis, explain why oil prices first rose and then fell.
2.	What determined the magnitude of these fluctuations? Distinguish between shifts in the curves and the elasticity of demand and supply in explaining what happened.
3.	Find out and explain what has happened to oil prices since these two articles were written

Questions
1.	In what ways may outsourcing help to reduce a firm's costs?
2.	Do cost savings from outsourcing suggest that many firms are suffering from diseconomies of scale?
3.	What effects does outsourcing have on the degree of competition in a given industry?

Questions
1.	What is meant by 'the financial return to education'? How would you attempt to calculate the rate of return?
2.	How can marginal productivity theory help to explain the findings of the Labour Force Survey and, in particular, the huge variation in rates of return from different degree subjects?
3.	There has been a rapid expansion in the proportion of school-leavers going on to higher education. Given this, why has the rate of return from a degree not fallen?

Questions
1.	For what reasons may even a significant rise in the minimum wage fail to eradicate poverty?
2.	Why, up to now, has the minimum wage had apparently no adverse effects on unemployment?
3.	How could firms respond to a rise in the minimum wage in ways that allowed them to retain their current level of profits?

Questions
1.	What is the difference between absolute and relative poverty? (See case study 10.1 in the student section of the Economics 5th edition section of this site.) Why is relative poverty harder to eliminate than absolute poverty?
2.	Compare the relative advantages and disadvantages of tax credits and child benefit as means of reducing child poverty.
3.	What are the six long-term policy priorities identified in the Joseph Rowntree Foundation paper for reducing poverty? For what reasons might it be difficult to achieve significant improvements in these areas, even over a 20-year period?

Questions
1.	The article begins: "Government has been on the retreat for the past decade or more. But there are signs it is staging a comeback. This may be a good thing." Why may it be a good thing?
2.	To what extent is the article arguing for a partnership of government and the market?
3.	What objectives, other than economic efficiency, might governments pursue? To what extent might these conflict with the achievement of economic efficiency?

Questions
1.	What are the government's proposals in the white paper and what are the mechanisms for achieving them?
2.	Compare the relative merits of alternative fuels from the perspectives of private costs and environmental costs.
3.	Is a switch to greener fuels the best long-term solution to problems of global warming and other forms of pollution from the use of fuels?

Questions
1.	To what extent has the London congestion charge been a success so far?
2.	What are the arguments for and against a nation-wide road charging scheme using satellite technology, where the charge would vary according to the degree of congestion?
3.	Consider the arguments for and against (a) aviation fuel taxes, (b) taxes on air tickets and (c) tradable permits for emissions from planes, as alternative means of reducing atmospheric pollution from aircraft.

Questions
1.	Explain the differences in recent employment/unemployment trends in the manufacturing and public sectors of the economy.
2.	What would be the likely effects on unemployment of a fall in house prices?
3.	To what extent can (a) time lags and (b) movements in the exchange rate explain the recent unemployment trends?

Questions
1.	What have been the causes of declining business confidence?
2.	What have been the causes of declining consumer confidence?
3.	Explain what is meant by 'the accelerator'. Is the behaviour of investment over the past few months consistent with the accelerator?

Questions
1.	Explain how a basket of goods is used to work out the price index.
2.	Why, "if you are a struggling single mother in the North-east who buys only discount clothes, [is] your inflation much lower than if you are buying services in an expensive city such as London"?
3.	Why may US and eurozone GDP statistics give a poor indication of the relative standards of living in these two parts of the world?
4.	Why may the pursuit of 'economic' growth not lead to an increase in happiness?

Questions
1.	Why are manufacturing companies in the UK generally faring far worse than service-sector companies?
2.	Is it important to have a thriving manufacturing sector, or can the UK prosper purely through its service sector?
3.	What policies should the government adopt towards the manufacturing sector?

Questions
1.	Why were floating currencies adopted in 1973?
2.	Why was the adoption of floating exchange rates "at most a second-best solution"?
3.	Explain the "three deficiencies" of the present international monetary arrangements.
4.	What are the arguments for and against having a single world currency?

Questions
1.	Why may it be "mistaken to assume that all will be well (for the world economy) once war is over"?
2.	Why might the US economy be expected to "grow a lot faster than Japan's or the European Union's"? What are the arguments against this happening?
3.	What are the likely direct and longer-term effects of the war on (a) share prices, (b) the value of the US dollar and (c) interest rates? Why is it very difficult to forecast these?

Questions
1.	Why has the UK Budget deficit increased substantially over the past few months?
2.	Should the government simply borrow to finance the rising deficit, or should it try to reduce the deficit?
3.	What should the Bank of England do about interest rates under such circumstances?

Questions
1.	Why has Japan found it so difficult to break out of its deflationary trap?
2.	How can real interest rates in Germany be higher than in other eurozone countries, given that the ECB sets the same interest rate for all eurozone countries?
3.	Is Germany likely to "follow Japan and slip into deflation"? Would cutting interest rates be the best policy for the eurozone?
4.	Why is there a low risk of deflation in the UK?
5.	Why may targeting the rate of inflation be too simple and rigid a policy objective?

Questions
1.	Why is the HIPC scheme? Why does it not provide for the complete cancellation of all the debts of these countries?
2.	Why was Mali now qualified to reach the 'completion point'?
3.	For what reasons may the HIPC scheme not provide long-term debt sustainability for these countries?

Questions
1.	What are the main findings of the report?
2.	What policy implications follow from the report?
3.	To what extent can developing countries benefit from financial globalisation?