Economics News Articles: November 2001
News Item 1: UK house prices fall
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‘The economic slowdown and the aftermath of the 11 September terrorist attacks have begun to take their toll on the UK's housing market.’ So begins the following article, taken from BBC News Online of 1 November 2001. The article examines recent house price movements and their causes.
Questions
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Why does the state of the global economy affect house prices in the UK? |
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In response to the global slowdown, central banks, such as the Bank of England, the Federal Reserve Bank of America and the European Central Bank, have adjusted interest rates. Will the interest rate changes aggravate or help to offset any fall in house prices? Why? |
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Why are properties at the upper end of the London market seeing a rapid slowdown in price growth (over a three-month period)? |
News Item 2: Cereal prices
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When firms are price takers, they are at the mercy of the market. In recent years, Scottish cereal producers have seen their incomes fall as market forces have moved against them. There seems at last, however, to be some grounds for cautious optimism. The factors giving rise to this are analysed in the following linked article, taken from The Scotsman of 29 October 2001.
Cautious optimism for Scottish cereal growers
Questions
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Why have wheat and barley prices fallen in recent years? Why have things been particularly bad for UK growers? |
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What do falling cereal prices imply about the level and/or nature of support given by the EU to cereal producers? |
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Why is the outlook better now? Will a growing world population necessarily mean that the fortunes of cereal producers will improve over the long term? Explain. |
News Item 3: Supply chain management systems and their effect on costs
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‘As a small business expands into a large one, sooner or later it will become impractical to manage suppliers over the phone or by fax. A supply chain management (SCM) system will be necessary.’ So begins the following linked article, taken from The Sunday Times of 4 November 2001. Supply chain management (SCM) is a way by which companies can automate the purchasing of their supplies. But what are the implications for companies’ costs? Does this provide companies with greater flexibility, or is there a problem with ‘scalability’?
Questions
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What implication does the introduction of an SCM system have for a firm’s costs? What will happen to its short-run average cost curve. |
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What implications does the lack of ‘scalability’ of an SCM system have for the shape of a firm’s (a) short-run average cost curve; (b) long-run average cost curve? |
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How do application service providers help to ensure scalability? What will be their effects on a firm’s cost curves? |
News Item 4: Costs and profits in the telecoms sector
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The telecommunications industry has experienced a massive expansion in demand and a fall in costs. Yet despite this, the sector has found it very difficult to make profits. The following linked article, taken from the Independent of 15 November 2001, explores the reasons for this conundrum.
Profitability of the telecoms sector
Questions
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Why are many telecommunications companies 'on the sick list' despite rising market demand and falling costs of production? |
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What are the similarities and differences between the telecoms boom of recent years and the railway boom of the 1840s?. |
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How close is the telecommunications industry to perfect competition? |
News Item 5: The latest on US action against Microsoft
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There have been further developments this month in the long-running saga of Microsoft's position in the operating systems market. A deal was struck between Microsoft and the US Department of Justice. As a result of this, will Microsoft be able to continue 'abusing its monopoly power' (something that its competitors and many commentators have claimed)? Will the launch of Windows XP further embed Microsoft's monopoly position. Will XP come bundled with Microsoft products (such as Internet Explorer) or will other companies be able to have their products incorporated into the desktops of new computers running Windows XP? The following is a series of linked articles discussing the issues. They are taken from the Guardian, the Observer, Ananova, SiliconValley.com and The Economist.
But, Microsoft! what light through yonder Windows breaks? (Guardian, 25/10/01)
Gates must not win at monopoly (Observer, 28/10/01)
U.S. reaches settlement with Microsoft (SiliconValley.com, 2/11/01)
Department of Justice moves closer to end case (SiliconValley.com, 2/11/01)
Microsoft deal seen giving 'theoretical' choices (SiliconValley.com, 2/11/01)
Sun micro may sue Microsoft, slams settlement (SiliconValley.com, 2/11/01)
Rejuvenated Microsoft gives software rivals shivers (SiliconValley.com, 2/11/01)
US DoJ says it hopes states will join federal government in Microsoft deal (Ananova, 2/11/01)
An unsettling settlement (The Economist, 10/11/01)
Questions
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How is the settlement likely to affect the position of Netscape and software manufacturers who are rivals to Microsoft products? |
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Would the original requirement that Microsoft be broken into two companies, one producing the Windows operating system and the other producing various software to run on it, be likely to have generated more competition for Microsoft than under the current settlement? |
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Referring to the Observer article, should we ‘just say no to XP’? |
News Item 6: EU tackles the Royal Mail monopoly of letters
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Under a recent agreement by ministers from the 15 EU states, the Royal Mail’s monopoly on letters will be substantially eroded. The following linked article, from the Guardian of 16 October 2001 gives the details.
EU posts notice on Royal Mail monopoly
Questions
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Which consumers are likely to gain and which are likely to lose from the agreement to reduce the weight threshold for the Royal Mail’s monopoly? |
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Compare the relative merits of price regulation (e.g. capping the prices that the Royal Mail can charge for letters of given weights) with that of opening up letter mail to competition. |
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If the whole of the letter post were to be opened up to competition, should people be able to post letters with any company’s stamps on in letter boxes, or should each company have its own boxes? |
News Item 7: Small independent petrol stations face ‘unfair’ competition
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In recent weeks, small independent petrol stations are finding it impossible to compete with the large supermarkets and the outlets of the giants, such as Esso. Is this a case of unfair competition? Is this a case of price discrimination being used to force the independents out of business? The following linked article, taken from the Independent of 4 November 2001, looks at the facts.
Small garages suffer crude logic
Questions
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How are the large supermarkets able to charge (retail) prices below the wholesale price paid by the independents? |
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Who is engaging in price discrimination and why? Could this be described as unfair competition? |
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Why are the supermarkets charging such low prices for petrol and making so little, if any, profit? Does this make good business sense? Could this be described as unfair competition? |
News Item 8: Declining oil prices and the role of OPEC
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Oil prices have been falling and some analysts are predicting that the price per barrel could fall as low as $10. The following linked articles trace the events and look at the role of OPEC. The articles are taken from a range of sources.
Economic Times of India 16/11/01
Economic Times of India 16/11/01
Questions
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Why have oil prices been falling? Why has OPEC found it so difficult to stop the fall? |
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What effects will falling oil prices have on the world economy? |
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How does the price elasticity of demand for oil influence the volatility of oil prices? |
News Item 9: Monopolies, oligopolies and competition
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The following linked article, taken from the Philippines BusinessWorld of 14 October 2001, looks at the search of big business for increased market power and gives various examples from around the world. It also asks how stable oligopolies are likely to be over the longer term.
Questions
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For what reasons, according to the article, do some industries become oligopolistic or monopolistic? |
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Explain the forms of economic power, other than market share, that the article identifies. |
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What are the major threats to oligopoly and oligopolistic collusion over the longer term? |
News Item 10: Are the fat cats getting obese?
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‘The remuneration of the chief executives of the UK’s top 100 quoted companies rocketed by 20.4% in the last year.’ So reports the first of the following two linked articles from HRM Guide.co.uk. Are such pay rises economically (or morally!) justified? The article considers the arguments. The second article, also from HRM Guide.co.uk, considers the implication of new legislation that will give shareholders the right to an annual vote on directors’ pay.
Are the fat cats getting obese?
Shareholders to vote on directors’ pay
Questions
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Why are directors able to achieve such large remuneration increases? To what extent does the market power of directors influence their pay? |
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What is the economic justification for linking directors’ pay to their companies’ performance |
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If directors’ pay is to be linked to performance, what is the best measure of performance? |
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News Item 11: Increasing concentration in the electricity industry
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The electricity industry has seen several mergers and takeovers in recent months. The result has been a growing level of concentration. The first linked article, from the Independent of 20 November 2001, looks at what’s been going on. The second, taken from Ananova of 1 November 2001, looks at the fortunes of PowerGen and examines the increased competition in the retail market for electricity and gas – despite the increased number of mergers and takeovers.
French become UK’s biggest power distributor
PowerGen faces increased competition
Questions
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What are meant by ‘horizontal’ and ‘vertical’ mergers in the electricity industry? |
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In what ways might consumers (a) benefit and (b) lose from horizontal and vertical mergers in the electricity industry? |
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Do mergers increase the case for tighter regulation of the electricity industry? |
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Why, despite mergers and takeovers, is there increased competition in the retail electricity and gas markets? |
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News Item 12: Compromise reached on global warming treaty
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At the United Nations negotiations in Marrakech in Morocco, agreement was reached on a way forward to ratifying the Kyoto protocol on tackling global warming. The two linked articles give details of the negotiations and the outcome. The first is from the Financial Times of 10 November 2001; the second is from The Japan Times of 13 November 2001.
Questions
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Explain what is meant by ‘selling credits for "surplus" emissions’ or for carbon absorbing sinks. |
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How can such tradable permits contribute to a reduction in global warming? |
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What are Mr Bush’s objections to the treaty? Are they valid? |
News Item 13: The recession: how far down?
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‘Most economists reckon that America's recession will be brief and mild. They are likely to be proved wrong.’ So says The Economist of 18 October 2001: the first of the following linked articles. The article explains the thinking behind this view. The other three articles, taken from BBC News Online, give some more information on the state of the US economy.
Questions
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Some economists expect merely a mild recession. What reasons are given? |
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Why might such economists be ‘too complacent’? |
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What problems arise from deflation (in the sense of negative inflation)? |
News Item 14: Falling nominal growth rates: why this matters
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With very low inflation, low real GDP growth (i.e. after adjusting for inflation) is only slightly less than nominal GDP growth (i.e. growth in simple money terms without adjusting for inflation). Normally commentators focus on real growth, and much of the concern in recent weeks has been falling or negative real growth. But low nominal growth, according to the first linked article, taken from The Economist of 1 November 2001, can bring problems of its own. The other two articles also examine problems of falling prices. They are taken from the Guardian and The Times, both of 10 November 2001.
Record fall in US prices prompts deflation fears
Record US price falls stir deflation anxiety
Questions
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In what ways is the current recession in the USA different from that of previous recessions over the past four decades? |
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What are the implications of slow nominal growth for profits, wages and debts? |
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Why does low or negative nominal growth limit the ability of monetary policy to boost aggregate demand? |
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Explain the ‘rule of thumb’ about the relationship between nominal interest rates and nominal GDP growth. |
News Item 15: problems of an overvalued pound
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What are the implications for UK competitiveness of a high exchange rate? Should the UK use monetary policy to engineer a depreciation of sterling? The problem with a country regaining its competitiveness through depreciation is that other countries lose theirs. Is a better solution to lack of demand, therefore, for countries to agree on expansionary policies, whether fiscal or monetary or both? The linked article, taken from the Observer of 14 October 2001, considers the issues.
Just feel quality of cheaper pound
Questions
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Do you agree that ‘the most important price of all in an economy is the exchange rate that governs transactions in goods and services with the rest of the world.’? |
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What impact has an undervalued French franc and an overvalued German mark relative to the euro had on the performance of these two countries? |
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Should the UK abandon targeting inflation and, instead, target the exchange rate (at a lower level than at present)? |
News Item 16: Shoppers: your country needs you
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Despite the economic gloom surrounding many sectors, such as airlines and overseas holidays, shoppers have not been deterred. The two linked articles, taken from BBC News Online of 30 October 2001 and the Washington Post of 14 November 2001, look at consumer spending on either side of the Atlantic.
Shoppers: Your country needs you!
US retail Sales Soar by Record 7.1 Percent
Questions
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What will be the effect of increased consumer spending on GDP? What determines the size of the impact? |
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What will be the effect on investment? Why are such effects difficult to predict? |
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Explain the following statement from the Washington Post article: ‘The only major categories of retailers whose sales fell last month were furniture and home furnishing stores and gasoline stations. The latter decline was due to a sharp drop in the price of gasoline.’ |
News Item 17: UK fiscal policy
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Gordon Brown has made much of his ‘fiscal prudence’ and of adhering to his ‘golden rule’ (see Economics (4th ed) Box 17.1; Essentials of Economics (2nd ed) Box 8.5; or Economics for Business (2nd ed) Box 29.1). Yet, according to the following linked article, ‘a case could be made out that Mr Brown is the most successful fiscal activist of modern times’.
The unfashionably fiscal Gordon
Questions
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Why, according to the article, is a sharp deterioration in the public finances just as it should be under current circumstances? |
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Why can Mr Brown’s actions over recent months be described as Keynesian? |
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Is ‘fiscal activism’ enough to ward off a recession? (Explain.) |
News Item 18: the City: a British success or a study in failure?
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The following linked article, taken from the Independent of 26 October 2001, looks at the functioning of the City of London – a major international financial centre – and considers its changes over the past 15 years, since the Big Bang of 1986.
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Summarise the main changes to the City of London over the past 15 years. |
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What have been the benefits of these changes? |
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From a UK perspective, what are the potential weaknesses of the City as it is now constituted? |
News Item 19: World-wide cuts in interest rates
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The past month has seen cuts in interest rates by central banks in America, the Eurozone and the UK. The following linked articles taken respectively from The Economist, BBC News Online, the Financial Times and The Economist.
The Fed keeps cutting (6/11/01)
ECB under pressure to cut rates (8/11/01)
UK and eurozone rates both cut by half a point (8/11/01)
A hat trick (8/11/01)
Questions
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How much have US, Eurozone and UK interest rates fallen since their peak in early 2001? |
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How have the approaches to monetary policy over recent months differed between the three central banks (the Fed, the ECB and the Bank of England)? |
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Is the US likely to find that, even with interest rates close to zero, it could suffer the same problem as Japan – namely the seeming inability of monetary policy to boost the economy? |
News Item 20: Forecasting the effects of expansionary fiscal and monetary policies
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What will be the effects of the expansionary fiscal and monetary policies enacted in 2001 and especially since the September 11 disaster? The problem is that such policies work with a lag and forecasting their magnitude and timing is notoriously difficult. The following linked article from The Times of 20 November 2001 looks at the poor forecasting record of the IMF but the relatively successful record of the Bank of England.
IMF's poor forecasting record is good news for UK economy
Questions
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Why is forecasting the effects of fiscal and monetary policies difficult? |
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Why has the Bank of England been more successful in forecasting than the IMF? |
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What is the case made for active demand management policy in the article? |
News Item 21: International trade negotiations
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This last month has seen international trade negotiations taking place under the auspices of the World Trade Organisation (WTO) in Doha, the capital of Qatar. The outcomes included the accession of China and Taiwan to the WTO and the setting up of a new round of trade negotiations (‘the Doha Round’): the first since the Uruguay Round of 1986–93. The following articles trace the events at the talks and examine the implications of the negotiations.
New trade round is vital (BBC News Online, 7/11/01)
WTO formally approves China as a member (Financial Times, 10/11/01)
Moore spells out dangers of failure at WTO talks (Financial Times, 10/11/01)
Getting close (The Economist, 13/11/01)
Another great leap forward (The Japan Times, 14/11/01)
Highlights of WTO declaration (Economic Times of India, 14/11/01
India returns a loser from Doha (Economic Times of India, 14/11/01)
Core labour & agro issues on India’s side (Economic Times of India, 14/11/01)
Doha meet ends in win-win situation (Economic Times of India, 14/11/01)
Seeds sown for future growth (The Economist, 15/11/01)
Free trade policies benefit everybody (Bangkok Post, 17/11/01)
Tinkering with poverty (Guardian, 20/11/01)
Questions
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What are the arguments for saying that a successful launch of a new round of trade talks was vital? |
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What will be the likely consequences of China joining the WTO? |
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What are the implications of the Doha talks for India? |
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What is the reasoning behind the statement in the Guardian article that ‘even if the indebted nations of the poor world were governed by angels, the trade and financial institutions launched at Bretton Woods would ruin their economies’? |
News Item 22: Swedish public opinion moves in favour of the euro
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Only three of the EU countries – the UK, Denmark and Sweden – have not adopted the euro, and hence are not moving over to the new euro notes and coins on 1 January 2002. Denmark rejected the euro in a referendum in September 2000 and UK public opinion remains firmly against membership. But public opinion in Sweden seems to be moving in favour of the euro. Why should this be so? The linked article, taken from the Guardian of 16 November 2001, looks at the reasons.
Sceptical Swedes warm to the euro
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Why are many Swedes having a change of heart about the euro? |
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Are any of these arguments applicable to the UK? |