| Economics News Articles: March 2005 |
| 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 16th. 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. March also
saw fairtrade fortnight and we look at the issue of fairtrade and whether
it helps developing countries in news item 13. This month has also seen
the publication of the Africa Commission report. This commission was set
up by Tony Blair to drive to drive forward his ambitions to reduce poverty
in Africa and he has made this aim one of his priorities during the UK
presidency of the G8 countries. This month has also seen a number of competition-related
issues. One of these was over the sale of world cup tickets, but in news
item 7 we look at EU efforts to open up access to Chinese and Russian
airspace.
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
|
| Contents |
1. The relentless march of private enterprise in China
2. Mobiles in Africa - more supply, but higher price?
3. Cutting fuel subsidies in the Tiger economies
4. The cost of red tape
5. North-south wage divide?
6. Raising the wage floor higher
7. Opening Russian and Chinese air space
8. Ecuador tribes vs oil companies
9. A great moneymaking opportunity?
10. Global liquidity - too much money sloshing around?
11. The 2005 Budget – UK fiscal policy
12. Closing the productivity gap
13. Free trade, not fair trade?
14. The Africa Commission
News Item 1: The relentless march of private enterprise in China
| Relevant to: |
| Economics (5th edition), Chapter 1 |
| Essentials of Economics (3rd edition), Chapter 1 |
| Economics for Business (3rd edition), Chapter 4 |
| The Economic Environment of Business (1st edition), Chapter 2 |
| We often use China as an example where most economic activity is still organised by the state, with the private sector growing in importance, but still small. While in many areas this may be true, some parts of China have a balance of economic activity more akin to that of the USA and UK. In the province of Wenzhou (500km south of Shanghai), for example, 95% of the local economy is based in the private sector. Will this entrepreneurial spirit spread the rest of China. |
Wenzhou lights the way for China BBC News Online (9/3/05)
| Questions | |
| 1. | Discuss the advantages and disadvantages of the state being the principal organiser of economic activity. |
| 2. | What are the main advantages to the Chinese economy of extending the role of the private sector in the economy? |
| 3. | What are the key factors that have led to the success of the Ri Feng Lighter company mentioned in the article? |
News Item 2: Mobiles in Africa - more supply, but higher price?
| Relevant to: |
| Economics (5th edition), Chapter 2 |
| Essentials of Economics (3rd edition), Chapters 1, 2 |
| Economics for Business (3rd edition), Chapter 4 |
| The Economic Environment of Business (1st edition), Chapter 2 |
| Unreliable services have led many people in Africa wanting a telephone to desert the fixed line providers and buy a mobile phone instead. Indeed a recent study found that 85% of small businesses run by black people in South Africa relied completely on a mobile for their telephone services. Though the proportion of people using mobiles in Affirm (6%) is still low by international standards, it has the fastest rate of growth for mobile phone usage and sales. However, mobile prices remain high in much of Africa and so given all this extra supply, why are the prices not falling? |
Mobile growth 'fastest in Africa' BBC News Online (9/3/05)
Africa counts cost of making a call BBC News Online (6/3/05)
| Questions | |
| 1. | Assess the changes that are taking place in demand and supply in the market for mobile phones in Africa. |
| 2. | Why, despite the rise in mobile usage in Africa, are prices not falling? |
| 3. | Given the results of the study (in article 1 above), what value would you expect for the price elasticity of demand for mobile phones in Africa and why? |
| Relevant to: |
| Economics (5th edition), Chapters 2, 3 |
| Essentials of Economics (3rd edition), Chapters 1, 2 |
| Economics for Business (3rd edition), Chapter 4 |
| The Economic Environment of Business (1st edition), Chapter 2 |
| Singapore is alone among many of the Tiger economies in not offering subsidies for fuel. However, with the rise in oil prices that has taken place recently, many of these economies are having to cut the subsidies that they offer for fuel. The article below considers the impact that this is likely to have on their economies. |
Tigers count the cost of easing fuel subsidies Asia Times Online (10/03/05)
| Questions | |
| 1. | Why have many of the Tiger economies chosen to subsidise fuel? What benefits were they hoping would arise from this policy? |
| 2. | Using supply and demand diagrams as appropriate, show how the reduction in fuel subsidies implemented by Indonesia will affect the equilibrium price. How will the effect depend on the price elasticities of demand and supply? |
| 3. | On the same diagram show how government expenditure on subsidies will change. |
| 4. | Use diagrams to compare how the market equilibrium will differ from the social optimum in Singapore and Thailand. |
| Relevant to: |
| Economics (5th edition), Chapters 5, 6, 7 |
| Essentials of Economics (3rd edition), Chapters 3, 4 |
| Economics for Business (3rd edition), Chapters 9, 10, 11, 12 |
| The Economic Environment of Business (1st edition), Chapters 4, 5 |
| Businesses dislike regulations and would rather be free to exist in a regulation-free business environment. However, regulations protect consumers, employees and other stakeholders. Compliance with regulations is expensive for business and if regulations are excessive, this may make them uncompetitive internationally and so governments have a difficult balance to strike when formulating the regulatory environment for business. The Business Barometer, published by the British Chamber of Commerce, shows that UK firms have been hit with a bill of £39bn to implement "major regulations" introduced since 1998. To what extent were these regulations necessary? With an election looming, we are sure to hear more on this subject. |
Burden on business 'costs £39bn' BBC News Online (28/02/05)
| Questions | |
| 1. | Discuss the possible problems that may arise from a reduction in the number of regulations affecting businesses. |
| 2. | How would we classify the extra costs that businesses face in complying with regulations? |
| 3. | Using diagrams as appropriate, show the impact that the higher costs resulting from these new regulations are likely to have on the equilibrium price and output for an imperfectly competitive firm. How will profitability be affected? |
| Relevant to: |
| Economics (5th edition), Chapter 9 |
| Essentials of Economics (3rd edition), Chapter 5 |
| Economics for Business (3rd edition), Chapter 18 |
| The Economic Environment of Business (1st edition), Chapter 7 |
| Average weekly earnings in the Royal Borough of Kensington and Chelsea are £1,252. This is more than four times the level in Berwick-upon-Tweed, the local authority with the lowest incomes. So what causes these regional differences and are we seeing a deepening of the north-south divide? |
You'd want to go to Chelsea if you knew what they earned Guardian (5/3/04)
London heads the UK wages league BBC News Online (4/3/04)
| Questions | |
| 1. | Assess the differences between the supply and demand for labour in the Royal Borough of Kensington and Chelsea and Berwick-upon-Tweed. |
| 2. | What impact are these wage differences likely to have on the mobility of labour? |
| 3. | What policies are available to the government to try to reduce regional wage differences? |
| Relevant to: |
| Economics (5th edition), Chapters 9, 10 |
| Essentials of Economics (3rd edition), Chapters 5, 6 |
| Economics for Business (3rd edition), Chapters 18, 20 |
| The Economic Environment of Business (1st edition), Chapters 7, 8 |
| Since the introduction of the minimum wage, the government has gradually increased it each year. From October 2005 it will rise from £4.85 per hour to £5.05 per hour with a further increase to £5.35 in 2006. This move is likely to benefit around 1.4 million low paid workers, but not surprisingly business has argued that rises above inflation are an "unmanageable cost". Employers warned from the outset that the minimum wage was likely to cost jobs, but the Low Pay Commission has found that, in fact, employment in industries where the minimum wage has had the most impact - like catering and retailing - has increased. |
Minimum wage increased to £5.05 BBC News Online (25/2/05)
Blair ups minimum wage to £5.05 Guardian (25/2/05)
Q&A: Minimum wage increase BC News Online (25/2/05)
| Questions | |
| 1. | What impact is the increase in the minimum wage likely to have on the level of poverty in the UK economy? |
| 2. | Assess the reasons why employment in retailing and catering may have risen since the imposition of the minimum wage. |
| 3. | How is the elasticity of demand and supply of labour for people employed at or near the minimum wage in the catering industry, likely to differ from that of their managers? Suggest reasons for these differences. |
| Relevant to: |
| Economics (5th edition), Chapter 12 |
| Essentials of Economics (3rd edition), Chapter 6 |
| Economics for Business (3rd edition), Chapter 21 |
| The Economic Environment of Business (1st edition), Chapter 8 |
| Negotiations towards an "open-skies" policy have been taking place since June 2003 between the EU and the US, but these have been stalled by EU demands that European airlines should have access to the US domestic market. 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 EU is now aiming to start negotiations with Russia and China for a similar open-skies policy. Both Russia and China are seen as key markets and the EU is keen to negotiate the right for airlines to access the markets on an equal footing with domestic operators. |
EU head office seeks expansion of 'open-skies' International Herald Tribune (15/3/05)
EU seeks to open up Russian aviation ties Business Week (14/3/05)
| 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. | Assess the potential economic costs and benefits for China of opening up their air space to overseas airlines. |
| Relevant to: |
| Economics (5th edition), Chapter 12 |
| Essentials of Economics (3rd edition), Chapter 6 |
| Economics for Business (3rd edition), Chapter 22 |
| The Economic Environment of Business (1st edition), Chapter 8 |
| Ecuador tribes vs multinational oil companies and governments - not exactly an even battle. However, the indigenous tribes of Ecuador are starting to organise themselves politically to fight the expansion of oil and gas operations into their ancestral lands. With the discovery of significant new reserves beneath pristine Amazon rainforest, the battle is on to exploit the reserves. Ecuador already relies on oil reserves to keep the economy afloat and with a high level of poverty, the government is likely to see these new reserves as a development opportunity. However, the tribes living in the area were not consulted before the exploration rights were sold and so the battle is now on. |
Ecuador tribes vow to fight oil threat BBC News Online (3/3/05)
| Questions | |
| 1. | Examine the social costs and benefits that are likely to arise from the exploitation of these new oil and gas reserves below pristine Amazon rainforest. |
| 2. | Assess policies that the government could use to protect the indigenous tribes and still allow some exploitation of the oil and gas reserves. |
| 3. | What are likely to be the costs and benefits faced by the government if it allows inward investment from oil companies to exploit the oil and gas reserves. |
| Relevant to: |
| Economics (5th edition), Chapters 13, 24 |
| Essentials of Economics (3rd edition), Chapters 7, 12 |
| Economics for Business (3rd edition), Chapters 26, 27 |
| The Economic Environment of Business (1st edition), Chapters 9, 11 |
| MSN Slate recently offered its readers a fantastic moneymaking opportunity. Entertainment companies, faced by high levels of piracy on DVDs, are proposing radical price cuts in China and other markets. So, why not buy up DVDs in China and then offer them for sale back in the USA and elsewhere? Easy money surely? Or is it? |
Next up, DVD reimportation MSN Slate (8/3/05)
| Questions | |
| 1. | What is meant by purchasing power parity? What other factors determine exchange rates? |
| 2. | What conditions are required for price discrimination to work for the sale of DVDs in different countries? |
| 3. | How do differences in purchasing power parity affect exchange rates? |
News Item 10: Global liquidity - too much money sloshing around?
| Relevant to: |
| Economics (5th edition), Chapters 18, 20 |
| Essentials of Economics (3rd edition), Chapter 9 |
| Economics for Business (3rd edition), Chapters 28, 30 |
| The Economic Environment of Business (1st edition), Chapter 10 |
| According to The Economist's measure of global liquidity, the total amount of liquidity rose by more than 20% in both 2003 and 2004. This is the fastest pace it has expanded at for 30 years. What impact is this likely to have on the world economy? |
Saturated The Economist (24/2/05)
| Questions | |
| 1. | How does The Economist define global liquidity? What other possible measures could it use? |
| 2. | Assess the impact that the growth in global liquidity is likely to have on the world economy. |
| 3. | What policies are available to governments to reduce the amount of liquidity and minimise any adverse effects of excess liquidity? |
| Relevant to: |
| Economics (5th edition), Chapter 20 |
| Essentials of Economics (3rd edition), Chapter 8 |
| Economics for Business (3rd edition), Chapter 30 |
| The Economic Environment of Business (1st edition), Chapter 10 |
| 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 almost certainly the last one before an election and so was a cautious Budget. With the exception of a £200 council tax rebate for pensioners, 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. He is still forecasting that he will stay within his own self-imposed "Golden Rule" (see news item 10 - Feb. 05). The rule states that, over the course of the business cycle, borrowing should be only for investment. His room to manoeuvre was therefore very limited. However, in the run-up to the Budget the IMF was suggesting that the Chancellor may need to either raise taxes or reduce spending to avoid excessive borrowing. |
UK spending plans are right, Brown tells Brussels Guardian (9/3/05)
Chancellor attacks IMF at suggested need for a tax rise Telegraph (9/3/05)
IMF praises Chancellor's economic skills The Herald (9/3/05)
For details of the Budget measures, you may want to look at:
Budget 2005 BBC News Online Budget pages (March 05)
HM Treasury Budget site HM Treasury (March 05)
| Questions | |
| 1. | What are the key changes in the Budget? What effects are they likely to have on the economy? |
| 2. | Why has the Chancellor set himself a "Golden Rule" to borrow only for investment? |
| 3. | Assess the impact that tax rises following the election may have on the performance of the UK economy. |
| Relevant to: |
| Economics (5th edition), Chapter 22 |
| Essentials of Economics (3rd edition), Chapter 10 |
| Economics for Business (3rd edition), Chapter 31 |
| The Economic Environment of Business (1st edition), Chapter 10 |
| For many years there has been a gap between the productivity performance of the UK and the USA. Successive governments have tried to close the gap, but as a recent report from the OECD has revealed, there is still some way to go. The OECD report suggests relaxation of the UK planning laws, more investment in public infrastructure and more emphasis on the development of workplace skills. The report also considers the progress made by other European economies and acknowledges that UK economic performance has been considerably stronger than that of mainland Europe. |
Britain must do more to bridge the gap with US Guardian (2/03/05)
Press handout - Going for Growth Report OECD (pdf file)
| Questions | |
| 1. | What different measures of productivity are available and how do they differ? |
| 2. | What policies have been implemented by the UK government in recent years to try to improve the level of productivity? |
| 3. | How have UK supply-side policies in recent years differed from those adopted by other European countries? |
| Relevant to: |
| Economics (5th edition), Chapters 25, 26 |
| Essentials of Economics (3rd edition), Chapters 11, 12 |
| Economics for Business (3rd edition), Chapters 24, 25 |
| The Economic Environment of Business (1st edition), Chapter 11 |
| Each year in March is 'Fairtrade fortnight' which tries to raise the profile of goods sold under the Fairtrade label. Sales of Fairtrade goods are growing fast and reached £140m in 2004. However, not everyone agrees that fair trade is the best solution for developing countries. Many argue that free trade and the market will be the best way for economic development to take place. The first article linked to below considers the arguments for free trade rather than fair trade, while the other two look at the growth of Fairtrade sales in the UK. The final link is to a range of resources relating to Fairtrade fortnight. |
Myths of Fairtrade goods hurt the poorest The Scotsman (2/3/05)
Fairtrade products sales reach £140m The Herald (1/3/05)
UK Fairtrade product sales soar BBC News Online (28/2/05)
Biz/ed fairtrade fortnight resources Biz/ed
| Questions | |
| 1. | What is meant by 'fair trade'?. |
| 2. | Outline the ways in which the World Trade Organisation is trying to change the world trading system to make trade freer. You may find the WTO web site useful for researching this. |
| 3. | Write a detailed critique of the arguments for free trade outlined in the article from The Scotsman 'Myth of Fairtrade goods hurt the poorest'. |
| Relevant to: |
| Economics (5th edition), Chapter 26 |
| Essentials of Economics (3rd edition), Chapters 11, 12 |
| Economics for Business (3rd edition), Chapter 24 |
|
This month, the long awaited report of the Africa Commission set up by Tony Blair was published. The commission was set up to consider solutions to the development problems faced by Africa and proposes a number of possible policy changes. These are in the article from The Economist linked below as: "The report calls for an extra $25 billion a year in aid to Africa by 2010, and another $25 billion a year by 2015. It demands 100% debt cancellation for countries that need it. It calls for an end to rich-world agricultural subsidies, which hurt farmers in poor countries. And it calls on rich countries to tear down the trade barriers that keep African goods out of their markets, including not only tariffs but also finicky rules-of-origin and health-and-safety standards." |
Past plans cast shadow on Africa report BBC News Online (11/3/04)
Erasing the scar The Economist (11/3/05)
Africa Commission report in full BBC News Online (March 05) (pdf file)
Africa report at a glance BBC News Online (11/3/05)
Africa report demands aid boost BBC News Online (11/3/05)
Africa report findings welcomed BBC News Online (11/3/05)
Africa Commission report: Analysis BBC News Online (11/3/05)
Commission for Africa web site
Short changed by history, Africa deserves a hand-up Guardian (13/3/05)
| Questions | |
| 1. | Use the articles linked to above to summarise the main proposals from the Africa Commission report. |
| 2. | What factors are preventing the EU and USA from "tearing down the trade barriers that keep African goods out of their markets"? |
| 3. | What problems are developing countries likely to face if they agree to 100% debt cancellation for "countries that need it"? |