| Economics News Articles: May/June 2003 |
Welcome to the final set of news
articles for the academic year 2002/3. I'm now taking a break for the summer
from this monthly trawl through the papers. The next set of articles will
be in September and monthly thereafter. In the meantime, if you're searching
for economics news, I would recommend the following two sites:
The Guardian World News GuideThis month's economics news in the UK has been dominated by discussion of whether Britain should enter the euro and whether the government's five tests are close to being passed. The government is due to give its recommendations on 9 June. It's expected that the government will say that the time is not ready for entry to the euro, but that it is still in favour of Britain joining when the time is right. News Item 12 contains several articles looking at the arguments for and against joining the single currency. The other news item in the UK that has had considerable coverage in the papers has been the issue of 'fat-cat' pay awards to senior executives, with several companies giving multi-million-pound pay awards, not only for success, but also as severance pay for failure: the so-called 'platinum parachute'. This topic is considered in News Item 3. One item that has been prominent in the international news has been the possibility of deflation (falling prices) overtaking the world economy, with the accompanying problem of prolonged recession as people are discouraged from spending, waiting for prices to fall. This is considered in News Item 8. Another international news item has been the problem of exchange rate volatility and particularly that between the dollar and the euro. This is the topic for News Item 10. As always, I hope that you find the articles useful for your studies. If your academic year is coming to an end, good luck with any exams and have a good break. |
|
John Sloman
|
| Contents |
1. House prices and their effect on the economy
2. Oligopoly in the UK energy market
3. "Platinum parachutes for fat cats"
4. Minimum wages in South Africa
5. Information as signals
6. The burgeoning illegal economy in the USA
7. Japanese monetary policy
8. Is there a risk of worldwide deflation?
9. Changing inflation targets
10. Currency volatility
11. Global financial integration
12. Britain and the euro
13. International economic co-operation
14. Vegetable exports from developing countries: who gains and who loses?
15. Does oil benefit the oil producing countries?
| Relevant to: |
| Economics (4 th and 5th editions), Chapter 2 |
| Essentials of Economics (2nd edition), Chapters 1, 2 |
| Economics for Business (2nd edition), Chapters 4, 5 |
| We've looked at house prices several times this year, as economists have predicted a marked slowing down in price rises or even a fall in prices. House prices have continued to make the news this month as economists continue to forecast the state of the market. But is the house price boom over? Or are prices set to start rising rapidly again? The following articles look at the factors affecting house prices. |
Is the house price boom over? BBC News Online (28/4/03)
UK house prices could rise 10% BBC News Online (13/5/03)
Housing market 'on the wane' BBC News Online (15/5/03)
A tale of two cities for house prices The Scotsman (15/5/03)
| Questions | |
| 1. | Why might house prices fall over the next few months? |
| 2. | Why, alternatively, might house prices start to rise more rapidly over the next few months? |
| 3. | Why are there such wide regional variations in the level and rate of change of house prices? |
| 4. | For what reasons would you expect house prices to rise or not to rise at the same rate as average earnings over the long term? |
| Relevant to: |
| Economics (4 th and 5th editions), Chapters 8, 12 (and especially Box 12.8 in the 5th edition) |
| Essentials of Economics (2nd edition), Chapters 4, 6 |
| Economics for Business (2nd edition), Chapters 12, 20 |
| Six companies now dominate the UK gas and electricity markets. Does this oligopoly threaten the consumer's interests, or does it make for robust competition between the six rivals? The following three articles, taken from the Guardian of 3, 9 and 10 May 2003, look at the arguments. |
British Gas claims it is electricity superpower
Electricity switchers could save £50 a year
Pledge to pull plug on chaos
| Questions | |
| 1. | What forms is competition taking in the energy market? |
| 2. | Do consumers benefit from the various types of competition in the energy market? |
| 3. | To what extent are mergers between energy companies in the consumer's interests? |
| 4. | Are energy consumers' interests best served by regulating the energy market, or by encouraging more competition, or by some combination of the two? |
| Relevant to: |
| Economics (4 th and 5th editions), Chapters 9, 10 |
| Essentials of Economics (2nd edition), Chapter 5 |
| Economics for Business (2nd edition), Chapter 17 |
| "In an unprecedented backlash against executive excess, shareholders are finally taking a stand against outrageous pay demands and huge rewards for failure. The government may take action, too." So begins the first of the following linked articles. The issue is one not just of whether executives should receive very high rewards for success, but of whether they should also get rewards of several millions of pounds when their company fails and they lose their job (the 'platinum parachute'). Apart from the moral issue, does it make economic sense to pay such high rewards? Do such rewards reduce the money for shareholders' dividends? Certainly, many smaller shareholders cannot see the sense. |
Heads they win Guardian (9/5/03)
Felling fat cats becomes fashion Guardian (10/5/03)
Rebels humiliate Glaxo Guardian (20/5/03)
The day investors said enough is enough Guardian (20/5/03)
Glaxo boss hints at pay review BBC NewsOnline (20/5/03)
Have fat cats had their day? The Economist (22/5/03)
Revolting shareholders The Economist (22/5/03)
Taking aim at the parachutes Observer (25/5/03)
'Fat cat' row turns to HSBC BBC News Online (25/5/03)
Excessive executive salaries proven to damage the corporate bottom line ON LINE Opinion (Australia) (26/5/03)
| Questions | |
| 1. | Is paying huge salaries to executives in accordance with the aim of profit maximisation? |
| 2. | Are massive 'platinum parachutes' in accordance with the aim of profit maximisation? |
| 3. | What are the arguments for and against allowing shareholders to nominate candidates for directorships and then holding open elections of the shareholders? |
| 4. | To what extent can remuneration committees of companies be likened to collusive oligopolies/oligopsonies? |
| 5. | What are the arguments for and against introducing legislation to regulate directors' pay? |
| Relevant to: |
| Economics (4 th and 5th editions), Chapters 9, 10, 26 |
| Essentials of Economics (2nd edition), Chapter 5 |
| Economics for Business (2nd edition), Chapter 17 |
| The South African government has been introducing minimum wage legislation industry by industry. For instance, in March this year, minimum wages were introduced for farm workers. As the first article in the following selection from the South African press states: "Striking a balance between improving the lives of about 600 000 farm workers and preventing large-scale job losses was always going to be difficult." |
Minimum wage proposal strikes difficult balance Business Day (14/11/02)
Farmers' union may challenge minimum wage law in court Business Day (4/2/03)
Minimum Wages Implementation Goes Ahead BuaNews (Pretoria) (25/2/03)
Taxi industry next in government's drive to protect vulnerable workers Business Day (3/4/03)
Tension runs high at talks on wages for farm workers Business Day (25/4/03)
Instead of macroeconomics, meet Thembinkosi Business Report (9/5/03)
Basic Grant Can Ease Pain of Poverty Business Report (20/5/03)
Higher Pay Means Fewer Jobs Mail and Guardian (22/5/03)
| Questions | |
| 1. | What factors determine the number of job losses from the introduction of minimum wages for farm workers? |
| 2. | What determines the (wage) elasticity of demand for farm workers? |
| 3. | Compare the relative merits of minimum wages and spending on labour-intensive infrastructure projects as means of getting "purchasing power into the hands of the profoundly poor and unemployed people". |
| 4. | Write a critique of the final article. |
| Relevant to: |
| Economics (4 th and 5th editions), Chapters 2, 11 |
| Essentials of Economics (2nd edition), Chapters 1, 6 |
| Economics for Business (2nd edition), Chapters 4, 5, 19 |
| Good information is normally assumed to be necessary for accurate communication and economic decision making. Information is often obtained from signals (e.g. price signals, or the behavioural signals of people). But sometimes it is in people's interests to use signals to try to send out false information. Such 'countersignalling' is considered in the following linked article, from The Economist of 1 May 2003. |
Signal failure?
| Questions | |
| 1. | Can countersignalling be seen as a form of market failure? |
| 2. | Does countersignalling lead to a misallocation of resources? |
| 3. | What do you understand by 'counter-counter signalling'? Is it likely to improve the accurate flow of information? |
| Relevant to: |
| Economics (4 th and 5th editions), Chapters 3, 11, 13 |
| Essentials of Economics (2nd edition), Chapters 2, 6, 7 |
| Economics for Business (2nd edition), Chapters 5, 19, 25 |
| "Marijuana, pornography and illegal labour have created a hidden market in the United States which now accounts for as much as 10% of the American economy, according to a study." So begins the following linked article from the Guardian of 2 May 2003. But what does this illegal economy contribute to economic welfare? What should the government do about such illegal activities? Do higher penalties merely push up the price of illegal merchandise and make it more profitable for the producers? |
With pot and porn outstripping corn, America's black economy is flying high
| Questions | |
| 1. | If GDP statistics were to provide an accurate measure of economic welfare, should we (a) add, (b) subtract or (c) ignore illegal activities such as those considered in the article? How should we attempt to put a value on such activities (either positive or negative)? |
| 2. | Assuming that the government has the objective of reducing such activities, compare the relative merits of (a) making such activities illegal; (b) making them legal but imposing a high tax on them? |
| 3. | Explain and comment on the following extract from the article: "Migrant work in California has long absorbed Mexican surplus labour, while Mexico has in effect paid for the education, health care and retirement of California's farmworkers," writes Schlosser. "Maintaining the current level of poverty among migrant farmworkers saves the average American household around $50 a year." |
| Relevant to: |
| Economics (4
th edition), Chapters 18, 19 Economics (5th edition), Chapters 18, 20 |
| Essentials of Economics (2nd edition), Chapter 9 |
| Economics for Business (2nd edition), Chapters 27, 29 |
| The Japanese economy has experienced flat GDP so far this year and, with the impact of the SARS virus, there is fear that GDP will fall. In an attempt to stave off a possible liquidity shortage and to stimulate the economy, the Bank of Japan has decided to increase liquidity in the banking system. The following article from BBC News Online of 20 May 2003 explains the details. The other two links are to the Bank of Japan's Website announcing changes in both April and May. |
Japan eases monetary policy
Change in the Guideline for Money Market Operations (April 30)
Change in the Guideline for Money Market Operations (May 20)
| Questions | |
| 1. | Why could a recession cause a liquidity problem for banks? |
| 2. | How can a central bank increase the monetary base? |
| 3. | How are the measures taken by the Bank of Japan likely to help ease the economic and financial problems caused by the SARS virus? |
| Relevant to: |
| Economics (4
th edition), Chapters 13, 18, 19, 20, 25 Economics (5th edition), Chapters 14, 18, 19, 20, 25 |
| Essentials of Economics (2nd edition), Chapters 9, 10, 12 |
| Economics for Business (2nd edition), Chapters 27, 29, 31 |
| As we saw in the previous news item, the Japanese economy is stagnant. But this is not a recent phenomenon. Japan has been in and out of recession for over a decade. Prices have been falling and interest rates have been close to zero. People are not spending, as they prefer to wait for prices to fall. They are not saving in banks and other financial institutions, as interest rates are so low. Instead, they hoard cash. But is this problem unique to Japan? Could the 'disease' afflict other countries such as Germany, or even the USA? The following articles look at the threat of world deflation and at a speech by Alan Greenspan, Chairman of the US Federal Reserve Bank (the Fed), in which he argued that deflation could be staved off. |
All you wanted to know about deflation but were afraid to ask Scotland on Sunday (24/5/03)
Fed chairman raises spectre of deflation Telegraph (7/5/03)
Deflation: Hear that hissing sound? The Economist (15/5/03)
Deflation fears over US price dip BBC News Online (15/5/03)
Fed ready to fight deflation MSNBC News (21/5/03)
Deflation: Real threat, or convenient whipping boy? Bankrate.com (23/5/03)
The minor threat of major global deflation Irish Examiner (24/5/03)
Less debt can guard against deflation Indystar (25/5/03)
Dollar weakness spells German deflation Telegraph (25/5/03)
| Questions | |
| 1. | What are the harmful economic consequences of a general fall in prices? |
| 2. | What are the causes of deflation? Are these causes likely to get more severe or less severe over time? |
| 3. | If deflation was a severe threat, would it be in the interests of the world for Alan Greenspan to admit this? |
| 4. | What monetary measures could a central bank take to boost aggregate demand once interest rates have hit zero? What would determine the effectiveness of these measures? |
| 5. | Why might Germany find it especially difficult to avoid deflation? |
| Relevant to: |
| Economics (4 th and 5th editions), Chapters 19, 20 |
| Essentials of Economics (2nd edition), Chapters 9, 10 |
| Economics for Business (2nd edition), Chapters 27, 29 |
| The ECB's target for inflation used to be a 'below 2 per cent' increase in the HICP (the harmonised index of consumer prices). This has been recently changed to 'below 2 per cent, but close to it'. This is, in effect, moving from a ceiling to a central target and thus amounts to aiming for a higher inflation and hence a relaxing of policy. The Bank of England's current inflation target is a symmetrical 2.5 per cent increase in the RPIX - the retail price index (excluding mortgage repayments). The RPIX recently has been a little above the HICP. The Chancellor is currently considering changing the Bank of England's target to that of the ECB. These changes in targets are examined in the following two articles. |
Stalemate The Economist (9/5/03) (see second part of article)
Inflation target faces change Sky News (21/5/03)
| Questions | |
| 1. | What are the benefits of aiming for a symmetrical inflation target (such as that of the Bank of England) rather than an asymmetrical one (such as that formerly used by the ECB)? |
| 2. | What are the arguments for governments or central banks having the discretion to change their inflation target? |
| 3. | Why might sticking to an inflation target become less and less relevant to macroeconomic stability the longer inflation remains at or near the target? |
| Relevant to: |
| Economics (4 th and 5th editions), Chapters 24, 25 |
| Essentials of Economics (2nd edition), Chapter 12 |
| Economics for Business (2nd edition), Chapter 31 |
| The world has experienced considerable currency volatility this past few months. The euro has appreciated rapidly against the dollar. Sterling has fallen against the euro and several other currencies. The South African rand is considered to be overvalued and could fall rapidly. What are the causes of this volatility and can anything be done about it? The following articles look at the causes and some possible solutions. |
Super-euro The Economist (8/05/03)
Euro/dollar exchange rate Times Online (20/5/03)
US declares war on the euro Observer (25/5/03)
Sterling in meltdown as rates are frozen Guardian (9/5/03)
Caution is key for the Bank as sterling declines Times Online (13/5/03)
Rampant Rand Could Be in a for a Hard Landing Business Day (2/5/03)
'Rand volatility not healthy for economy' Business Day (2/5/03)
'SA can weather the global storm' Business Day (10/5/03)
| Questions | |
| 1. | Why has the euro risen so sharply against the dollar? What have been the consequences for the US and eurozone economies? |
| 2. | Why has sterling depreciated against several other currencies? Is this good or bad for the UK economy? |
| 3. | Do these currency movements suggest that the purchasing-power parity theory has no relevance to real-world exchange rates? |
| 4. | Why is the volatility of the rand not healthy for the South African economy? |
| 5. | Why is it difficult to achieve stable exchange rates if central banks are engaged in inflation targeting? |
| 6. | To what extent can reforming an economy with supply-side policies help it to weather global economic instability? |
| Relevant to: |
| Economics (4 th and 5th editions), Chapter 25 |
| Essentials of Economics (2nd edition), Chapter 12 |
| Economics for Business (2nd edition), Chapter 31 |
| One of the key aspects of globalisation has been the massive increase in capital flows. But have these benefited economic growth and development, or have they contributed to world economic instability. The following article, from The Economist of 1 May 2003, considers the effects of capital flows on the world economy and whether such flows should be controlled. |
A cruel sea of capital
| Questions | |
| 1. | What are the economic arguments for open capital markets? |
| 2. | What are the economic dangers of unimpeded capital markets? |
| 3. | Why is trade in capital more prone to mistakes than trade in goods and services (whether within a country or between countries)? |
| 4. | What makes finance 'so prone to error'? |
| 5. | How can capital markets be regulated? |
| Relevant to: |
| Economics (4 th and 5th editions), Chapter 25 |
| Essentials of Economics (2nd edition), Chapter 12 |
| Economics for Business (2nd edition), Chapter 31 |
| On June 9 the government announces whether it will recommend that the UK joins the euro, and if so, call a referendum. It is widely expected that the Chancellor will recommend that entry be delayed, since more than one of the five economic tests for entry have not been passed. The following articles look at the progress in meeting these tests and at some of the broader arguments surrounding entry, including some of the political ones. |
The UK's five tests BBC News Online (21/11/02)
The case for staying out of the euro BBC News Online (7/5/03)
The case for joining the euro BBC News Online (12/2/03)
Euro decision: The business verdict BBC News Online (15/5/03)
Until Europe agrees with us, the tests will always fail Guardian (20/5/03)
The door to euro entry will remain ajar after June 9 Times Online (24/5/03)
Q&A: Can Britain ever enter the eurozone? Times Online (29/4/03)
Best way of saying ‘no’ to euro entry Times Online (29/4/03)
Getting on with Europe like a house on fire Observer (25/5/03)
Cabinet shifting in favour of the euro Observer (25/5/03)
No need for crystal balls. The euro has already flopped Guardian (26/5/03)
There are six economic tests, not five Guardian (22/5/03)
| Questions | |
| 1. | What are the five economic tests? |
| 2. | Why is it difficult to judge whether each of the five economic tests have been unambiguously passed or failed? |
| 3. | To what extent does it make sense to add a sixth test as proposed by Peter Mandelson (see final article above)? |
| 4. | Summarise the arguments for Britain (a) joining and (b) not joining the euro. |
| Relevant to: |
| Economics (4 th and 5th editions), Chapter 25 |
| Essentials of Economics (2nd edition), Chapter 12 |
| Economics for Business (2nd edition), Chapter 31 |
| "Finance ministers from the world’s biggest economies have promised to co-operate and help contribute to global growth. Fine words - but is it empty rhetoric?" So begins the third of the linked articles below. With the background of a falling dollar and rising euro, a faltering world economy and the danger of deflation (see News Item 8), the G8 countries, meeting in France, are faced with an uphill task if they are to achieve anything like the degree of harmonisation of policy necessary to bring stability and growth to the world economy. |
Time for Tony to walk on water again Observer (11/5/03)
Stimulate growth, US tells G7 BBC News Online (16/5/03)
Co-operation or confrontation? The Economist (20/5/03)
| Questions | |
| 1. | How likely is it that the G8 countries will co-ordinate their policies over the coming months? |
| 2. | How could G8 countries create greater currency stability by co-ordinated action? |
| 3. | Is a weak dollar in the interests of (a) the USA; (b) the eurozone? |
News Item 14: Vegetable exports from developing countries: who gains and loses?
| Relevant to: |
| Economics (4 th and 5th editions), Chapters 2, 26 |
| Essentials of Economics (2nd edition), Chapters 1, 2, 12 |
| Economics for Business (2nd edition), Chapters 4, 5, 23 |
| If you buy a plastic tray of miniature fresh vegetables, they have probably come from Kenya or some other developing country. Do such countries have a comparative advantage in such vegetables and, if so, who gains from the trade? Is the market competitive, or is it distorted by economic power, and if so, where does the power lie? The following article, from the Guardian of 17 May 2003, looks at the Kenyan suppliers and at the structure of the market. It also looks at the wages and conditions for the workers. |
Growers' market
| Questions | |
| 1. | Does Kenya have a comparative advantage in the export of fresh flowers and vegetables? Explain. |
| 2. | Would Kenyan workers be better or worse off if the trade in fresh flowers and vegetables ceased? On what does your answer depend? |
|
3. |
Would strictly enforced labour laws be the answer to low pay and long hours
for workers in the industry? |
| 4. | What market failures are there in the Kenyan horticultural export trade? How could such market failures be corrected? |
| Relevant to: |
| Economics (4 th and 5th editions), Chapters 8, 23, 26 |
| Essentials of Economics (2nd edition), Chapters 4, 11 |
| Economics for Business (2nd edition), Chapters 12, 22, 23 |
| Has oil wealth helped or hindered the development of oil-rich developing countries? The first of the following links is to an article in The Economist of 22 May 2003. It argues that a lack of transparency by the oil companies may have masked corrupt practices, where governments and powerful interest groups in developing countries have benefited at the expense of the mass of their populations. The second link is to the Christian Aid report, referred to in the Economist article. |
Is oil wealth a blessing or a curse?
Fuelling poverty - Oil, war and corruption
| Questions | |
| 1. | What is 'Dutch disease'? |
| 2. | What has been the effect of a rapid increase in oil earnings on the poor in oil-rich developing countries? |
| 3. | To what extent could greater transparency help to solve the problem the benefits of oil not flowing to the general population in developing countries? |