|
Economics News Articles: March 2004 |
| Welcome to the March set of news
articles. March is traditionally Budget month in the UK coming, as it does,
just before the end of the tax year. This year is no exception and the Budget
was presented by the Chancellor on March 17th. Budgets tend to have fewer
surprises these days as many of the measures are either leaked in advance
or floated as possibilities in the pre-Budget statement at the end of the
previous year. However, it remains the key statement of the government's fiscal
policy each year and so it will be well worth looking at news item 11 for
further details on the Budget. One change announced prior to the Budget was
the extension of the minimum wage to 16 and 17 year olds and we look at this
in news item 4. March also saw fairtrade fortnight and we look at the issue
of fairtrade, aid and business ethics in news item 13. This month also saw
two major reports on the housing market and, given the importance of this
market at a macro as well as micro level for the UK economy, we look at these
reports in more detail in news item 3.
As ever, we hope you find the articles and
questions valuable. Do let us know any feedback you may have about the topics
included and any other you would like to see.
|
|
Andy Beharrell
|
1. The hungry dragon – China's insatiable appetite
2.
China – embracing the market
3.
The housing market – a help or a hindrance?
4.
Extension of the minimum wage
5.
Supermarkets – their impact on the environment
6.
Liberalisation of the transatlantic airline industry
7.
Measuring social and economic progress – a new measure
8.
The UK Economy – a health check from the IMF
9.
Inflation – a basket case?
10.
Measuring unemployment
11.
The 2004 Budget – UK fiscal policy
12.
The latte index – an alternative to the Big Mac?
13.
Trade, aid and ethics – do they mix?
14.
Argentina – will they or won't they pay?
News Item
1: The hungry dragon – China's insatiable appetite
| Relevant to: |
| Economics (5
th edition) Chapters 1, 2 |
| Essentials of Economics
(2nd and 3rd
editions) Chapters 1, 2 |
| Economics for
Business (2nd edition) Chapter 2 |
| |
| When we start out looking at economics,
we always look at the concept of factors of production – land, labour, capital
and enterprise. To grow, an economy needs to put in place policies to ensure
that they can improve both the quality and the quantity of the factors of
production available to them. The article below looks at the impact that
China's increasing demand for factors of production has had on world markets.
An economy the size of China can have a significant effect on world commodity
markets on its own! |
The hungry dragon
The Economist (19/2/04)
|
Questions |
| 1. |
Classify the factors
of production mentioned in the article under the headings land, labour, capital
and enterprise. |
| 2. |
Use supply and demand
analysis to illustrate the changes shown in the value of the Economist
metals index. |
| 3. |
What negative economic
effects would you expect from the changes in commodity prices shown by the
article? |
Go back to contents
News Item
2: China – embracing the market?
| Relevant to: |
| Economics (5
th edition) Chapters 1, 10 and 11 |
| Essentials of
Economics (2
nd and 3rd editions)
Chapters 1, 6 |
| Economics for
Business (2nd edition) Chapters 2, 3 |
| |
| China has moved slowly but progressively
in recent years towards allowing markets a greater prominence in economic
activity. They have reduced government intervention and allowed private enterprise
to grow. This month the Chinese parliament agreed landmark changes to the
constitution that will protect private property for the first time since
the 1949 revolution. The first article below looks at this issue, while the
second looks at related tax changes that may help encourage people to own
their own home. However, increased economic growth and a greater role for
the private sector will lead to widening income distribution and the third
article looks at the extent to which this is already happening. |
China endorses private property
BBC News Online (15/3/04)
China
may cut home buying costs
BBC News Online (15/3/03)
China's wealth gap widens to gulf
BBC News Online (26/2/03)
|
Questions |
| 1. |
What problems is China
likely to face as they move further towards being a free market economy? |
| 2. |
What policies could
the government use to try to reduce the disparities in income distribution
between rural and urban areas? What are the disadvantages of these policies? |
| 3. |
What is the likely impact
on the Chinese economy of cutting the cost of home buying? |
Go back to contents
News
Item 3: The housing market – a help or a hindrance?
| Relevant to: |
| Economics (5
th edition) Chapter 2 |
| Essentials of
Economics (2
nd and 3rd editions)
Chapter 2 |
| Economics for
Business (2nd edition) Chapters 4, 5 |
| |
| The latest report from the Royal
Institutions of Chartered Surveyors (RICS) on the housing market suggested
that prices rose strongly in February 2004 and argued that there remained
a mismatch between supply and demand in the UK housing market. The government
has also been concerned about this issue for some time and in March they
published a report from Kate Barker (a member of the Monetary Policy Committee)
looking at the medium to long term issues facing the housing market. This
also suggested a mismatch between supply and demand and argued that 140,000
homes per year would need to be built for there to be an adequate supply of
houses. |
Radical plan to shake up housing
BBC News Online (17/03/04)
UK homebuilding rates too low
Guardian (17/03/04)
Housing shortage leads to price hike
BBC News Online (17/03/04)
Shortages mean house price rises
BBC News Online (17/03/04)
To read the full report from Kate Barker, follow the link
below:
Treasury housing market report
|
Questions |
| 1. |
What is the impact of
a mismatch between supply and demand in the housing market on (a) the housing
market and (b) the economy? |
| 2. |
What values would you
expect for the price elasticity of supply in (a) the short term and (b) the
long term? Justify your answer. |
| 3. |
What reforms may be
necessary to make the housing market more responsive to "price signals"? |
Go back to contents
News Item 4: Extension of the minimum wage
| Relevant to: |
| Economics (5
th edition) Chapter 10 |
| Essentials of
Economics (2
nd and 3rd editions)
Chapter 5 |
| Economics for
Business (2nd edition) Chapter 17 |
| |
| When the minimum wage was introduced
it applied only to those 18 and above. The rates set also differed for 18-21
year olds (the development rate) and those aged 22 and over (the adult rate).
The rates are currently £3.80 per hour for those aged 18-21 and £4.50
per hour for those over 21. However, this month the government announced
that they are extending the minimum wage to those aged 16 and 17 at a rate
of £3 per hour. The articles below look at this introduction and the
possible impact of the extension of the minimum wage. |
Minimum wage for under-18s
BBC News Online (15/03/04)
Business community uneasy at increase in minimum wage
Scotsman (16/03/04)
Young workers to get £3 minimum wage
Guardian (15/03/04)
Fears as minimum wage for young is increased
Telegraph (16/03/04)
Low-paid workers to get pay rise ....
Low Pay Commission - press release (19/03/04)
|
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? |
Go back to contents
News Item 5: Supermarkets – their impact on the environment
| Relevant to: |
| Economics (5
th edition) Chapter 11, 12 |
| Essentials of
Economics (2
nd and 3rd editions)
Chapter 6 |
| Economics for
Business (2nd edition) Chapters 19, 21 |
| |
| This month the Liberal Democrats
published a report by their environmental spokesman Norman Baker, looking
at the impact that supermarkets have on the environment. They found that
customers spent £15bn on packaging each year and that supermarket delivery
trucks travel the equivalent of two return trips to the moon every day. So
what impact is this having on the environment and the economy and what policies
can we adopt to try to minimise the environmental impact without constraining
economic growth and development? The report itself, the third link below
is well worth looking at for detailed figures and information on the environmental
effect of current supermarket policy. |
Grocery packaging costs £15bn
BBC News Online (9/3/04)
How green is your supermarkets
Liberal Democrats press release (9/3/04)
How green is your supermarket?
Liberal Democrats – full report (Word document)
(9/3/04)
|
Questions |
| 1. |
What types of market
failure are evident from the Liberal Democrats report on the environmental
impact of supermarkets? |
| 2. |
What policies could
the government adopt to minimise the increase in external costs resulting
from the activities of supermarkets? |
| 3. |
What impact are the
report recommendations (see page 24 and 25 of the full report) likely to
have on the economy? |
Go back to contents
News Item 6: Liberalisation of the transatlantic airline industry
| Relevant to: |
| Economics (5
th edition) Chapter 12 |
| Essentials of
Economics (2
nd and 3rd editions)
Chapters 4, 6 |
| Economics for
Business (2nd edition) Chapter 21 |
| |
| Negotiations towards an "open-skies"
policy have been taking place since June 2003 between the EU and the US. Open
skies means that all carriers have free access to transatlantic routes and
this type of policy is often referred to as liberalisation of the airline
industry as it should help enable freer competition. The European Court ruled
in 2003 that Britain was acting illegally in allowing only four airlines to
fly on lucrative routes between London and the USA and since then the EU
has been negotiating with the USA. However, Britain objects to the policies
that will allow US carriers to fly freely on routes within Europe while UK
and European airlines are prevented from operating domestic US flights. These
negotiations are sure to generate plenty of business for the airline industry
and likely to take some time to resolve! In the meantime, the Liberal Democrats
have proposed that all planes should pay a green tax (see article 3 below). |
Darling reject US open skies plan
Guardian (3/3/04)
Guardian special report - airline industry
Guardian
All planes - freight and passenger - should pay green tax
Guardian (1/03/04)
|
Questions |
| 1. |
What benefits
are likely to accrue from an open-skies policy for (a) consumers and (b) airlines? |
| 2. |
What arguments are countries
likely to use to oppose liberalisation of their air space? |
| 3. |
Evaluate the arguments
for and against the imposition of a green airline tax. (You may like to
use the Guardian Special report on the airline industry and perhaps do some
wider web searches). |
Go back to contents
News Item 7: Measuring social and economic progress – a new measure
| Relevant to: |
| Economics (5
th edition), Chapter 13 |
| Essentials of
Economics (2
nd and 3rd editions)
Chapter 7 |
| Economics for
Business (2nd edition) Chapter 25 |
| |
| We conventionally use GDP (or other
national income measures) as an indicator of the standard of living of an
economy. However, GDP only measures income and so many other indicators of
social progress are not included. The New Economics Foundation (NEF) has
argued in a recent report that their measure – Measure of Domestic Progress
(MDP) – shows that social progress has become disconnected from economic
growth. In fact the MDP shows that the best year in the last four decades
was 1976! Since then the MDP has failed to reach the same values and fell
significantly during the 1980s. |
Social progress stagnant as GDP soars
New Economics Foundation (16/3/04)
Chasing progress: beyond measuring economic growth
New Economics Foundation - full report (March 04)
So was 1976 really Britain's best year ever?
Scotsman (17/03/04)
The time of our lives? Science has no formula for happiness
Scotsman (21/03/04)
Was 1976 all it's cracked up to be?
BBC News Online (17/03/04)
|
Questions |
| 1. |
How does the MDP measure
differ from GDP? |
| 2. |
Use the articles to
compare and contrast 1976 from an economic and social perspective. |
| 3. |
What factors need to
be taken account in addition to income to give a more accurate measure of
the standard of living of an economy? |
| 4. |
What economic costs
are likely to result from faster GDP growth? |
Go back to contents
News Item 8: The UK economy – a health check from the IMF
| Relevant to: |
| Economics (5
th edition) Chapter 13 |
| Essentials of
Economics (2
nd and 3rd editions)
Chapters 7, 8, 9, 10 |
| Economics for
Business (2nd edition) Chapters 25, 29,
30 |
| |
| Each year the IMF takes a careful
look at the state of all the world economies. This month it published its
current assessment of the state of the UK economy and, as the BBC article
below put it, the IMF is "cautiously optimistic". However, it did express
some concerns at the state of the UK public finances and was worried that
a collapse in the UK housing market could have an adverse impact. The first
two articles below summarise the IMF report, but it may also be worth following
the third link below to have a look at the full report. It has detailed data
and information about the state of the UK economy. |
IMF cautiously optimistic on UK
BBC News Online (5/3/04)
IMF predicts 3.1% growth for the UK
The Age (Australia) (6/3/04)
You may also want to have a look at
the full
IMF report
(pdf file) for a more detailed assessment of the state of the UK economy.
|
Questions |
| 1. |
Why is the IMF "concerned"
about the state of the UK's public finances? To what extent have changes in
the Budget (see news item 11) helped to address these concerns? |
| 2. |
What impact is a collapse
in the housing market likely to have on the main economic targets of the UK? |
| 3. |
Why did the IMF express
a concern that pension liabilities may be "higher than projected"? What impact
would these higher pension liabilities have on our economic performance? |
Go back to contents
News Item 9: Inflation – a basket case?
| Relevant to: |
| Economics (5
th edition) Chapters 14, 17, 20 and 21 |
| Essentials of
Economics (2
nd and 3rd editions)
Chapter 10 |
| Economics for
Business (2nd edition) Chapter 25 |
| |
| The main measure of inflation in
the UK is now the Consumer Prices Index (CPI). This has taken over from the
Retail Prices Index (RPI), though figures for the RPI are still published.
The CPI and RPI figures are calculated by taking the price changes in a basket
of goods and then weighting the price changes according to their importance
in the average family's shopping basket. In February inflation fell somewhat
unexpectedly and the Office for National Statistics also carried out its
annual review of the "basket of goods" that should be included. The first
group of articles below looks at the fall in the rate of inflation, while
the second group considers the changes in the composition of goods in the
basket. |
Inflation rate remains stable
Guardian (16/3/04)
Cheaper clothes bring inflation down
Scotsman (16/3/04)
UK sees inflation fall in February
BBC News Online (16/2/04)
Prices surprise takes pressure off rates
Guardian (17/03/04)
March also saw a review of the
"weights" that are used to calculate inflation and the items that are included
in the "basket of goods" used to calculate inflation. The articles below
look at the changes in the basket:
'Shopping basket' snapshot of UK
BBC News Online (16/3/04)
Nail care in, frozen turkey out
Guardian (15/3/04)
Measuring inflation - changes to RPI and CPI baskets
Office for National Statistics briefing document
|
Questions |
| 1. |
Why is it necessary
to weight the goods in the basket to get an accurate measure of inflation? |
| 2. |
Why will the CPI figure
for inflation not be representative for many groups in society? Have a look
at the Office for National Statistics
site to see what other measures of inflation / price changes they publish. |
| 3. |
How is the fall in inflation
in February 2004 likely to affect the interest rate decision of the Bank of
England at their next monthly meeting and why? N.B. Look carefully at
the reasons why inflation has fallen in February. |
Go back to contents
News Item 10: Measuring unemployment
| Relevant to: |
| Economics (5
th edition) Chapters 14, 17, 20 and 21 |
| Essentials of
Economics (2
nd and 3rd editions)
Chapter 10 |
| Economics for
Business (2nd edition) Chapter 25 |
| |
| It sounds easy to measure unemployment
- you simply count everyone who doesn't have a job. Unfortunately, it far
more complex than this. In the past unemployment in the UK was measured through
a count of all those claiming unemployment benefit - the so-called benefit
count method. However, we have now switched to measuring unemployment by
a more internationally acceptable method – a survey. The survey is called
the Labour Force Survey. However, statisticians, economists and commentators
still argue over the exact employment and unemployment figures and the 'true'
level of unemployment. The article below from the Economist looks at the
issues relating to the measurement of unemployment. |
The reserve army
Economist (12/2/03)
|
Questions |
| 1. |
Why is it important
for economists and policy makers to have accurate labour market data, including
unemployment figures? |
| 2. |
What is meant by the
"natural rate of unemployment" (see paragraph 2 in the article)? |
| 3. |
What policies are available
to policy makers to try to reduce unemployment (a) in the short term and (b)
in the long term? |
Go back to contents
News Item 11: The 2004 Budget – UK fiscal policy
| Relevant to: |
| Economics (5
th edition) Chapter 17 |
| Essentials of
Economics (2
nd and 3rd editions)
Chapter 8 |
| Economics for
Business (2nd edition) Chapter 29 |
| |
| The tax year in the UK runs from
April 6th to April 5th the following year and so Budgets have traditionally
been in March as they set out the government's tax policy for the following
year. This Budget is perhaps the last one before an election and so was a
cautious Budget, though there were no dramatic giveaways as the Chancellor
is very constrained with a high level of public borrowing. He has committed
to significant increases in spending on public services, but tax revenue has
not been quite as high as expected and he has been in danger of breaking his
own "Golden Rule" – that, over the course of the business cycle, borrowing
should be only for investment. His room to manoeuvre was therefore very limited. |
Budget 2004
BBC News Online Budget
pages (March 04)
HM Treasury Budget site
HM Treasury (March 04)
Tax: the taboo subject
BBC News Online (14/3/04)
|
Questions |
| 1. |
What are the key changes
in the Budget? |
| 2. |
Why had the Chancellor
set himself a "Golden Rule" to borrow only for investment? |
| 3. |
What will be the implications
for the economy and economic policy-making of public borrowing continuing
to rise? |
Go back to contents
News Item 12: The latte index – an alternative to the Big Mac?
| Relevant to: |
| Economics (5
th edition) Chapters 14, 17, 20 and 21 |
| Essentials of
Economics (2
nd and 3rd editions)
Chapter 12 |
| Economics for
Business (2nd edition) Chapter 26 |
| |
| For some years the Economist
has published a statistic called the Big Mac Index. This is an alternative
measure of purchasing power parity in different countries.. Because the Big
Mac is almost universally available around the world and the resources used
for production are almost identical, it can be a good measure of purchasing
power in different countries. However, could this measure be superseded by
the "latte index"? Now that Starbucks have opened their first coffee shop
in France, perhaps we could use the price of a latte worldwide to measure
purchasing power parity? Statisticians of course would disagree, but this
may be a fun way to look at what is an important issue – purchasing power
parity. |
Burgers or beans?
The Economist (15/01/04)
Big Mac Index
The Economist
|
Questions |
| 1. |
What is purchasing power
parity theory? |
| 2. |
How do differences in
purchasing power affect the value of the exchange rate? What other factors
affect the exchange rate? |
| 3. |
How is purchasing power
parity used when converting GDP figures to compare them internationally? |
Go back to contents
News Item 13: Trade, aid and ethics – do they mix?
| Relevant to: |
| Economics (5
th edition) Chapter 26 |
| Essentials of
Economics (2
nd and 3rd editions)
Chapter 12 |
| Economics for
Business (2nd edition) Chapters 22, 23 |
| |
| Developing countries often struggle
to compete with the developed world on fair terms and the market power of
the large multinationals is often seen as a key factor in constraining further
development. The fairtrade movement was set up to try to provide a way for
producers in developing countries to get a fair price for their products.
March saw 'Fairtrade fortnight' which tried to raise the profile of goods
sold under the Fairtrade label. March also saw the publication of a report
by Oxfam accusing major sportswear manufacturers of ignoring workers' rights
in their rush to get products ready for the summer Olympics. So can free
trade ever be fair trade? |
How fair trade hit the mainstream
BBC News Online (2/3/04)
Fair trade sales may hit £150m
BBC News Online (13/3/04)
A modest undertaking
Economist (4/3/04)
Staff exploited in Olympic rush
BBC News Online (4/3/03)
Sportswear firms to investigate Oxfam sweatshop claims
Guardian (4/3/04)
Biz/ed fairtrade fortnight resources
Biz/ed
Oxfam has set up a dedicated web site to support the publication of its report
about sweatshop conditions in many countries producing goods for the major
clothing firms ready for the Olympic Games. It may be worth having a look:
Fairolympics.org
Oxfam
|
Questions |
| 1. |
What is meant by 'fair
trade'?. |
| 2. |
Why is free trade not
always fair trade? |
| 3. |
What policies could
the international community adopt to try to improve conditions for workers
in developing countries? (N.B. Why not have a look at the
United Nations
web site to see what initiatives are currently underway?) |
Go back to contents
News Item 14: Argentina – will they or won't they pay?
| Relevant to: |
| Economics (5
th edition) Chapter 26 |
Essentials of Economics (
2nd and 3rd
editions) Chapter
12
|
| Economics for
Business (2nd edition) Chapters 28, 29 |
| |
| Many developing countries around
the world are heavily indebted and some have defaulted on many of their loans.
Argentina defaulted on the payment of bonds to many individual and institutional
bondholders in 2001–2. The government wants its creditors to accept a 75%
reduction in the face value of their bonds, but many creditors are angry with
this deal. Argentina has already defaulted on one loan payment to the IMF
and a second default may have led to aid being withdrawn. The Argentine President,
Nestor Kirchner, left it to the last minute before deciding whether to pay
the next loan instalment, but in the end it was paid. For some background
on the Argentine debt crisis follow the last link in the list below. For
more information on the Argentine crisis, you could also look at the case
study in Box 26.6 on page 754 of Economics (5th
edition) |
Argentina 'pays IMF $3.1bn loan'
BBC News Online (9/3/04)
Argentina avoids default at last minute
Guardian (10/3/04)
Argentina makes IMF payment
The Age (10/3/04)
Q&A: Argentina and the IMF
BBC News Online (9/3/04)
|
Questions |
| 1. |
Why have many countries
defaulted on their loans? |
| 2. |
Evaluate the economic
arguments for and against rescheduling Argentina's debts. |
| 3. |
Evaluate the economic
arguments for and against Argentina being forgiven a significant proportion
of its debt. |
Go back to contents