Economics in the News: October 2001
With the news this last month dominated by the September 11 disaster in New York and the subsequent response of the USA, much of the economics news has been concerned with the consequences of these events. What have been the effects on the world economy? What economic measures have been taken by governments to bolster consumer and business confidence and to avert a recession?
Despite the effects of the disaster and the war on terrorism, there have also been many other things happening in the world economy. The following items are a selection from both before and after September 11.
News Item 1: The Soviet Transformation
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After several years of economic stagnation, Russia and some of the other former Soviet republics seem at last to be recovering and reaping some benefits from the painful process of transition to a market economy. The following linked article, from the Financial Times of 10 September 2001, argues that growth can only be sustained if the pace of reform is maintained.
Questions
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What are the costs and benefits of low taxes on individuals and enterprises? |
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What forms can liberalisation take? |
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Does anyone lose from market liberalisation? Why? |
News Item 2: The price of cattle in Australia
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A good example of supply and demand in action is the recent behaviour of the cattle market in Australia. The linked article below, taken from the Financial Times of 10 October 2001, looks at some of the factors that have caused cattle prices to fall, reversing the trend of soaring prices over recent months.
Questions
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What are the determinants of the demand for cattle? |
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What demand and supply factors have changed recently in the Australian market for cattle? Explain how and why these changes have affected (i) the demand curve; (ii) the supply curve. |
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How is speculative behaviour by US buyers influencing these price changes? |
News Item 3: The price of computer chips
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One industry that has suffered particularly badly in recent months has been the semiconductor industry: the industry that supplies the microprocessors (chips) for PCs, mobile phones and many other electronic devices. The linked article, from the Financial Times of 2 September 2001, looks at the prices of chips and seeks to explain why they have fallen so rapidly and so far.
Questions
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What have been the causes of the slump in chip prices? Use demand and supply curves to explain your answer. |
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Is the income elasticity of demand for chips relatively high or low? Explain why. |
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Why is recovery, when it comes, likely to be L-shaped, rather than V-shaped? |
News Item 4: The latest on US action against Microsoft
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The Bush administration has decided against breaking up Microsoft for flouting US competition laws (‘anti-trust’ laws). Instead the US Justice Department is considering imposing restrictions on Microsoft’s behaviour. The linked articles, taken from BBC News Online and the Financial Times of 6 September 2001, look at the issues.
Government may still impose big curbs on Microsoft
Questions
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In what ways can Microsoft’s tying its Internet Explorer with its Windows operating system be seen as anti competitive? |
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How could Microsoft be made to be more competitive in the applications market without breaking it up into two or more companies? |
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How might the consumer gain from Microsoft’s behaviour? |
News Item 5: OPEC and oil prices
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Oil prices have fluctuated considerably since the attacks on September 11. After falling at first by some 20 per cent, they have since risen. The following articles, taken from BBC News Online of 5 October 2001 and the Financial Times of 10 October, explain why prices have followed this pattern and look at the role of OPEC in determining the price.
OPEC and oil prices: article 1
OPEC and oil prices: article 2
Questions
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Why did speculation that OPEC would cut output cause the oil price to rise? Use demand and supply curves to explain your answer. |
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Why is it becoming increasingly difficult for the OPEC cartel to ensure that oil prices remain within the $22–28 per barrel range? |
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From OPEC’s perspective, what are the advantages and disadvantages of cutting oil output at the current time? |
News Item 6: OFT raids replica soccer kit firms and retailers
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Under the 1998 Competition Act, the Office for Fair Trading (OFT) has the power to raid the premises of any company suspected of anti-competitive practices. If it is then found that the companies have indeed been behaving anti-competitively, fines of up to 10 per cent of annual turnover can be levied. An example of a ‘raid’ took place in September, when the offices of various replica football kit manufacturers and retailers were searched by OFT inspectors. The following two articles, taken from BBC News Online of 5 September 2001 and the Guardian of 6 September 2001, give the details.
Probe of the soccer kit market: article 1
Probe of the soccer kit market: article 2
Questions
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Of what type of anti-competitive practice are the firms suspected? |
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How do the manufacturers (as opposed to the retailers) benefit from the price fixing? |
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How would you attempt to establish what was a ‘fair price’ for a replica football shirt? |
News Item 7: The changing role of trade unions
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Recent years have seen waning membership of trade unions, especially in the private sector. Today, the majority of unions are in the public sector, and many are questioning the government’s policy of introducing more and more private-sector involvement in the public sector. The linked article, from BBC News Online, looks at the history of trade unions and their changing role.
Questions
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How has the role of trade unions in determining UK economic policy changed over the past 40 years? |
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Why has union membership fallen so dramatically since 1980, especially in the private sector? |
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If unions succeed in driving up wage rates in a particular company, will this inevitably lead to a fall in employment in that company? |
News Item 8: Are Britons overworked?
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Britain seems to have gained the reputation as the ‘long-hours’ capital of Europe. With average working hours of 43.6 per week, this is more than 3 hours per week above the European average and more than 5 hours per week above that in Belgium and Italy. The first linked article looks at this phenomenon and seeks to explain it. The second article looks at a specific example of longer working hours: that of working mothers. Both articles are taken from BBC News Online.
Longer working hours: article 1
Longer working hours: article 2
Questions
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If people want to spend less time at work, even if that means less take-home pay, why don’t they reduce the hours they work, or move to another job? |
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Under what circumstances is it in employers’ interests for people to work longer hours? Under what circumstances is it not? |
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Why are women who combine work with children ‘having a worse time now than a decade ago’? |
News Item 9: The end of Railtrack
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On 7 October, Railtrack went bankrupt. Why should a monopoly, which owned all the rail infrastructure in the UK (track, signals, most stations, etc.) have reached this state. Surely a private monopoly owning the rail network should easily be able to make a profit! The two linked articles explore the issues. The first is taken from The Economist of 13 October 2001. The second is taken from the Independent of 8 October 2001.
Railtrack's bankruptcy: article 1
Railtrack's bankruptcy: article 2
Questions
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Why did Railtrack go bankrupt? |
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What alternative form of privatisation of the railways could have avoided this outcome? |
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Was the objective of Railtrack of paying high dividends to shareholders inconsistent with running an efficient rail infrastructure? |
News Item 10: OFCOM: a new communications regulatory agency for 2003
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The government plans for there to be a new regulatory agency – OFCOM (the Office of Communications) – by 2003. The following speech by the Director of Telecommunications, David Edmonds, which appeared on the OFTEL site, sets out some of the issues for regulating the communications industry.
The regulatory challenges for OFCOM
Questions
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What does David Edmonds suggest that the role of OFCOM should be? |
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Why is OFCOM being created to replace existing regulatory agencies for the industry? |
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Why is there a need to regulate the industry and how would consumers benefit? |
News Item 11: Is a US recession inevitable?
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One of the likely economic consequences of the attacks on the USA on September 11 has been a deepening of the recession into which the USA was already slipping. The following article, taken from the Financial Times of 23 September 2001, looks at the prospects for the US economy over the coming months.
Majority of economists see US recession
Questions
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How is a recession defined? |
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Why do economist differ in their predictions of the timing and magnitude of a recovery from recession? |
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Why does a recession in the USA make a recession in Europe more likely? |
News Item 12: Measuring Britain’s real economy
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‘The USA in recession’. ‘Britain heading for recession’. These dramatic headlines are based on the assumption that a recession is defined in terms of a decline in real GDP (for two or more quarters). But how useful is it to define a recession in terms of GDP? The linked article, from BBC News Online of 7 September 2001, examines some alternative ways of measuring the state of the economy.
Measuring Britain’s real economy
Questions
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Which of the indicators considered in the article would you consider to be good measures of the state of the economy, and why? |
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Why may a decline in travel and holidays in the current world situation be a poor measure of the overall health of the world economy? |
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What are the weaknesses of real GDP as a measure of economic wellbeing? |
News Item 13: A return to Keynesianism?
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After a decade of focusing largely on supply-side policy, with fiscal ‘policy’ being relegated to reducing the size of the budget deficit and with a rules-based approach to monetary policy (i.e. based on targeting inflation), the USA has now pledged to inject a massive increase in expenditure in order to stave off a recession. Does this mean a return to Keynesianism? The linked article, from the Financial Times of 5 October 2001, considers this change in policy and whether it is occurring elsewhere in the world.
Questions
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How would a Keynesian criticise the fiscal actions of George Bush (Senior) in 1990 and Bill Clinton in 1993? |
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Why is a Keynesian approach to fiscal policy back in fashion? |
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Explain what is meant by the statement of the European Commission ‘that the "automatic stabilisers" should be allowed to work’. |
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Why are countries such as Japan critical of using fiscal policy to manage demand? |
News Item 14: UK’s public finances
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When an economy goes into recession the size of the budget deficit is likely to rise (or the surplus to fall). With the UK economy slowing down, does this mean that there will be a significant deterioration in the public finances? Will taxes have to rise as a consequence? The linked article, taken from The Economist of 6 October 2001, considers the issues.
Questions
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Why is a deterioration in the public finances unlikely to have any significant effect on planned public expenditure? |
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Why, however, do ‘worries persist’? |
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If the government sought to avoid a budget deficit, why could this make any recession worse? |
News Item 15: Using fiscal and monetary policy to offset world recession
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Since the attacks in the USA of September 11 and the subsequent fears of a further slowdown in the world economy, there has been much discussion around the world of using fiscal and/or monetary policy to stimulate aggregate demand. The following linked articles are a small selection of the many that have appeared in the world’s press.
Bangladesh Daily Star (October 8)
International Herald Tribune (October 11)
Questions
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What are the common features of the policies being pursued by the various countries mentioned in the above articles? |
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Why is it difficult to predict the effects of the measures? |
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Why does Alan Blinder (in the Guardian article above) recommend a very specific form of fiscal stimulus? |
News Item 16: Monetary policy in an era of globalisation
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Can the use of an inflation target help to deliver economic stability in a world where economies are highly dependent on each other, and where problems in one part of the world can rapidly spread to others? In the following article, taken from the Observer of 2 September 2001, Ed Balls, the Chief Economic Adviser to the Treasury, argues that, although we cannot abolish the economic cycle, ‘we can put the gross instability of the past behind us’. (Note that the ‘Old Lady’ of the title is the ‘Old Lady of Threadneedle Street’, a name sometimes given to the Bank of England).
We taught Old Lady to ride cycle
Questions
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How can targeting a precise figure for inflation (2½ per cent in the case of the UK) help to smooth out economic fluctuations? |
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Why is it better to have a precise (‘symmetric’) target, rather than a ceiling? |
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Can the pursuit of an inflation target as the sole basis for monetary policy allow the authorities to avoid a recession such as that feared by many countries in the wake of the events of the atrocities of September 11? |
News Item 17: How low can interest rates go?
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Nominal interest rates (i.e. interest rates before taking inflation into account) are at exceptionally low levels by historical standards. The average real interest rate (i.e. after taking inflation into account) in the USA, Japan and the euro area is at the lowest level since the 1970s. Many have thus argued that monetary policy is very loose (i.e. expansionary). But is this the case? Could interest rates go lower? The linked article, taken from The Economist of 4 October 2001, considers the arguments.
Interest rates: how low can they go?
Questions
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What reasons are given in the article for suggesting that monetary policy is not exceptionally loose? |
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Explain the old rule of thumb ‘that, when interest rates are higher than the rate of growth in nominal GDP, monetary policy is restrictive; when interest rates are lower, policy is expansionary’. |
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What do the arguments of the article imply that governments should do in terms of fiscal and monetary policy? |
News Item 18: Milton Friedman on ‘The great euro mistake’
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Milton Friedman has long been a critic of a single European currency and an advocate of separate currencies with flexible exchange rates. Changes in exchange rates, he argues, allow countries to adjust more easily to the effects of the various changes to their economies: changes that differ both in their magnitude and their effects from one country to another. In the following article, taken from The Irish Times, Friedman explains his position.
Questions
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Why, according to Friedman, is the euro bad for Ireland? |
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Could Ireland persist in having a higher rate of inflation than the eurozone average? |
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How can countries in the eurozone respond to shocks that differ from one country to another (‘asymmetric shocks’)? Is the degree of asymmetry of such shocks likely to become greater or less over time? |
News Item 19: James Tobin on the Tobin tax
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Some 30 years ago, James Tobin proposed the use of a small tax on speculative foreign exchange transactions, the aim being to reduce speculation and thereby reduce currency instability. With world currency markets showing considerable volatility in recent times, the idea of using some form of a ‘Tobin tax’ has gained in popularity. In the linked article, from the Financial Times of 10 September 2001, James Tobin revisits the arguments.
Questions
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Why, in a world with virtually costless currency exchange, is it difficult for one country to set an interest rate different from that in other countries (making it virtually impossible to pursue an independent monetary policy)? |
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How could a tax of as little as 0.05 per cent on each foreign exchange transaction significantly reduce speculative exchange dealing, without damaging trade and investment? |
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What problems would there be in getting such a tax adopted throughout the world? |