Economics News Articles: November/December 2004

 
Welcome to this combined November/December news file. A number of issues have been prominent this month right across the range of the economics curriculum. The dollar has continued to fall and in News Item 11 we consider how much further it may fall and the impact the fall has on the rest of the world economy. Inflation too has been in the news. In News Item 8 we look at how Mervyn King (the Governor of the Bank of England) has been saved from writing to the Chancellor as inflation rose by 0.1% due to rising oil prices, while in News Item 9 we look at whether inflation may be about to return to positive levels in Japan. In News Item 3 we look at the worrying possibility of a lard shortage leading to problems with cooking mince pies and Christmas puddings for Christmas! As ever, I hope you find the articles useful and interesting.
Andy Beharrell

 Contents 
1.  Entrepreneurial flair in Tanzania
2.  The ups and downs of cocoa
3.  A lardy Christmas?
4.  A productivity primer
5.  Music - a contestable market?
6.  Keeping the minimum wage to a minimum
7.  The planet under pressure
8.  Mervyn King is saved the cost of a stamp
9.  Japan - deflating or reflating?
10. Reforming trade?
11. The dollar - can it go lower?
12. The "China Price"
13. ASEAN integration
14. How to save the world - the Millennium Goals

News Item 1: Entrepreneurial flair in Tanzania


Relevant to:
    Economics (5th edition) Chapter 1
    Essentials of Economics (3rd edition) Introduction
    Economics for Business (3rd edition) Chapters 2, 3
 
Economists identify three main groups of factors of production - land, labour and capital. Many economists also add a fourth - 'enterprise' or 'entrepreneurial ability'. This involves the work of the entrepreneur who is the owner and controller of the business and, as such, the risk taker and decision maker. It could be argued that the entrepreneur is a human resource and therefore part of labour, but the argument for including the entrepreneur as a separate category is because of his/her organisational skills. The article below looks at rise of entrepreneurial flair in Tanzania - particularly among women.
Tanzania's women fuel brain gain BBC News Online (10/11/04)
Questions
1. How do the characteristics of 'enterprise' differ from the other factors of production?
2. Why is 'enterprise' important for the development of an economy?
3. What constraints are faced by entrepreneurs in Tanzania? What policies are available to the government to try to encourage 'enterprise'?

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News Item 2: The ups and downs of cocoa


Relevant to:
    Economics (5th edition) Chapters 2, 3
    Essentials of Economics (3rd edition) Chapters 1, 2
    Economics for Business (3rd edition) Chapter 4
 
At the start of this month the political situation in the Ivory Coast was very unsettled and rioting and other unrest led to a rapid rise in cocoa prices. Dealers in cocoa were concerned that the unrest would lead to supply problems for cocoa. However, prices settled back a few days later as production of cocoa resumed. The two articles below consider both the rise and fall in price.
Cocoa prices soar on Ivory unrest BBC News Online (8/11/04)
Cocoa drops as Ivory crisis cools BBC News Online (12/11/04)
Questions
1. Using supply and demand analysis, illustrate the price changes identified in the articles.
2. What would you expect the values of price elasticity of demand and supply to be for cocoa? Justify your answer.
3. Analyse possible strategies that chocolate producers could adopt to try to minimise the impact that exogenous shocks like this have on their production.

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News Item 3: A lardy Christmas?


Relevant to:
    Economics (5th edition) Chapter 2
    Essentials of Economics (3rd edition) Chapters 1, 2
    Economics for Business (3rd edition) Chapter 4
 
Lard is an important ingredient for many traditional Christmas dishes. However, there are worries that there may be a shortage of lard this Christmas as East Europeans are stockpiling cheap cuts of pork. This has led to a shortfall in lard production as firms have struggled to source suitable pork for their production. How will this affect your Christmas? You have been warned - make sure you get your lard and keep it in your larder ready for Christmas!
Lard lovers face national crisis BBC News Online (15/11/04)
Questions
1. Use supply and demand analysis to illustrate the reasons for the shortage of lard. N.B. Consider both the market for pork and the market for lard.
2. The article suggests that 'Lard is Lord' - particularly for the over 50s. How would you expect the value for the cross elasticity of demand between lard and butter (an alternative fat) to differ for young people and the over 50s?
3. What are the main factors that determine the value of the cross elasticity of demand for butter with respect to the price of lard?
4. How will you ensure a sufficient supply of lard for Christmas?

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News Item 4: A productivity primer


Relevant to:
    Economics (5th edition) Chapters 5, 6, 7
    Essentials of Economics (3rd edition) Chapters 3, 4
    Economics for Business (3rd edition) Chapter 9
 
Productivity is generally used as a measure of economic efficiency. When we think of the term 'productivity', we tend to think of measures such as output per worker hour (or 'man-hour' as the article below calls it). However, the article below from The Economist suggests that this is not the best measure of efficiency. The article argues that we should be looking at multi-factor productivity. This takes into account the efficiency with which capital is used as well as labour. It is though, much more difficult to measure.
A productivity primer The Economist (4/11/04)
Questions
1. Explain the following terms used in the article (a) output per man-hour (b) multi-factor productivity and (c) capital deepening.
2. What are the main differences between output per-man hour and multi-factor productivity?.
3. Using aggregate supply and demand analysis show the impact of productivity growth on an economy.
4. Using the information from the article compare and contrast the productivity performance of Europe and US in recent years and the prospects for the next few years.

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News Item 5: Music - a contestable market?


Relevant to:
    Economics (5th edition) Chapters 6, 7
    Essentials of Economics (3rd edition) Chapter 4
    Economics for Business (3rd edition) Chapters 11, 12
 
The music industry is set to change rapidly in coming years. With the advent of music download and a range of new services like iTunes, Big Noise Music and many others having recently launched, change could be considered inevitable. The big four traditional music companies (Sony/BMG, Universal, EMI and Warner) have up to now seen the Internet as a threat, but they are increasingly starting to look at ways to incorporate it into their business development plans. So how is the nature of the industry changing and what will it look like in 5 or 10 years? The article below from The Economist looks at some of these issues.
Music's brighter future The Economist (28/10/04)
Questions
1. What type of market structure currently characterises the music industry?
2. Assess the extent to which the music market has become more contestable in the last ten years.
3. Analyse how the market structure of the music industry is likely to change in the next 10 years.

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News Item 6: Keeping the minimum wage to a minimum


Relevant to:
    Economics (5th edition) Chapters 9, 10, 14
    Essentials of Economics (3rd edition) Chapters 5, 6
    Economics for Business (3rd edition) Chapter 18
 
When setting the level of the minimum wage, the government has always been caught between a rock and a hard place. On the one hand the CBI and other employer groups have always argued that the minimum wage should be as low as possible. The government is keen to comply with this as it is aware that any rise in the minimum wage will affect business costs and may impact on UK competitiveness. On the other hand the trade unions and individuals have always argued to raise the minimum wage significantly. The government is also keen to comply with this as it is aware that this can help reduce poverty, improve living standards and, one could suggest more cynically, win votes. So which way should it turn? As can be seen from the article below from the Guardian, this lobbying has started once again as the government start considering its minimum wage decision for next year.
CBI: 'Freeze minimum wage' Guardian (17/11/04)
Questions
1. Using supply and demand diagrams as appropriate, show the effect of a rise in the minimum wage on the UK labour market.
2. In what circumstances is a rise in the minimum wage most likely to lead to a rise in unemployment?
3. Assess the extent to which a significant rise in the minimum wage would affect UK competitiveness.

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News Item 7: The planet under pressure


Relevant to:
    Economics (5th edition) Chapter 12
    Essentials of Economics (3rd edition) Chapter 6
    Economics for Business (3rd edition) Chapters 20, 22
 
Awareness of global environmental issues is arguably higher than it has been for many years. Global solutions to the problems are perhaps, despite the Kyoto protocol, further away than ever. As many developing countries start to grow rapidly and their energy requirements grow correspondingly, the pressure on the planet will be greater than ever. The first article below looks at the costs imposed by soaring energy demand in China. The second link is to an introduction to a six-part series on BBC News Online looking at the 'Planet under pressure'. The third link is to the third part of the 'Planet under Pressure' series looking at how the world can supply these growing energy demands without damaging the environment.
China's dirty energy takes its toll BBC News Online (9/11/04)
Introduction: Planet under pressure BBC News Online
Energy: Meeting soaring demand BBC News Online (9/11/04)
Questions
1. What external costs are identified in the article 'China's dirty energy takes its toll'?
2. Using an appropriate diagram, show the impact that these external costs will have on the market for energy in China.
3. "In the last decade, US oil use has increased by almost 2.7 million barrels a day - more oil than India and Pakistan use daily altogether" (from Energy: Meeting soaring demand). Assess the impact that rising oil prices are likely to have on the US economy.
4. What alternative sources of energy are available to help meet these soaring levels of demand? What impact are they likely to have on the socially optimum level of output of energy?
5.

Examine the policies that are available to the international community to try to limit the growth in demand for energy in developed economies.

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News Item 8: Mervyn King is saved the cost of a stamp


Relevant to:
    Economics (5th edition) Chapters 14, 18
    Essentials of Economics (3rd edition) Chapter 9
    Economics for Business (3rd edition) Chapters 26, 28
 
The Monetary Policy Committee of the Bank of England is responsible for setting the level of interest rates to keep inflation within one percentage point either side of the target rate of inflation set by the Chancellor (an annual 2% rise in the Consumer Price Index). If the rate of inflation falls above or below these limits, the Governor of the Bank of England has to write an open letter to the Chancellor of the Exchequer explaining why the target has been missed and what the Bank proposes to do about it. This has not yet happened (since the Bank of England gained operational independence in 1997), but it has been coming close in recent months as inflation nudges the bottom limit. In October 2004 inflation was 1.1% and the Governor (Mervyn King) once again saved 28p (assuming he sends his letter first class!) as inflation rose in November 2004 to 1.2%. The articles below look at this rise.
Oil rise saves King the cost of a stamp Guardian (17/11/04)
Petrol prices drive up inflation BBC News Online (16/11/04)
Petrol prices fuel inflation rise Guardian (16/11/04)
Record fuel prices push up inflation Scotsman (16/11/04)
Questions
1. Assess the reasons why the Bank of England has recently been raising interest rates, when the inflation figure is close to the bottom limit. You may find the MPC minutes on the Monetary Policy section of the Bank of England web site helpful or alternatively, you could have a look at the latest copy of the Inflation Report.
2. Explain how the consumer price index is calculated. How will the value of the weight for fuel affect the level of inflation as oil prices rise? You may find the National Statistics article on CPI weights helpful.
3. From the articles, identify current upward and downward pressures on inflation.

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News Item 9: Japan - deflating or reflating?


Relevant to:
    Economics (5th edition) Chapter 21
    Essentials of Economics (3rd edition) Chapters 8, 10
    Economics for Business (3rd edition) Chapter 26
 
The mean forecast by central bankers for inflation in Japan next year is 0.1%. This is good news, but not perhaps for the reason it may be good news elsewhere. The Japanese will be delighted if inflation becomes positive after more than 5 years of negative inflation - or 'deflation'. The Japanese economy has been recovering well in the last couple of years after many years of deflation and negative growth, but positive inflation will be the next phase in this recovery and may enable the central bank, at last, to raise interest rates above zero.
Death of deflation The Economist (4/11/04)
Questions
1. Explain the difference between real and nominal interest rates. What has been the difference between nominal and real interest rates in Japan in recent years?
2. Examine the costs of deflation.
3. Using aggregate supply and demand analysis, show the changes currently taking place in the Japanese economy.
4. What policies are the Japanese government currently pursuing to try to boost levels of growth?.

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News Item 10: Reforming trade?


Relevant to:
    Economics (5th edition) Chapters 23, 25
    Essentials of Economics (3rd edition) Chapter 11
    Economics for Business (3rd edition) Chapters 24, 25, 32
 
The outgoing EU Trade Commissioner, Pascal Lamy, has called for the governance of international trade to be moved away from just the hands of the WTO and for environmental and social organisations to play a greater role. The article below summarises the interview that he gave with the BBC.
Lamy bids farewell with call for trade reform BBC News Online (17/11/04)
Questions
1. What is the role of the World Trade Organisation (WTO) in the governance of world trade? You may find the WTO web site helpful in considering this.
2. Examine the arguments for greater involvement of social and environmental organisations in the governance of world trade.
3. Assess the arguments for and against the changes in the world trade system proposed by Pascal Lamy.

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News Item 11: The dollar - can it go lower?


Relevant to:
    Economics (5th edition) Chapter 24
    Essentials of Economics (3rd edition) Chapter 12
    Economics for Business (3rd edition) Chapter 27
 
The dollar has been falling for some time, but it looks likely to keep falling. The articles below summarise the recent path of the dollar and consider some of the effects this may have on the rest of the world economy. Just how low can the dollar go?
The wolf at the door The Economist (28/10/04)
Dollar hits new record euro low BBC News Online (23/11/04)
Q&A: Why the dollar's in decline BBC News Online
Dollar bounces up from record low BBC News Online (26/11/04)
Questions
1. Why has the dollar fallen so dramatically against the euro?
2. What will be the effects of a low dollar on the US economy?
3. What will be the effects of a high euro on the eurozone economies?
4. What are the long-term policy implications of the low dollar and high euro?
5. Why may currency movements be less damaging (or helpful) to trade than they were in the past?

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News Item 12: The "China Price"


Relevant to:
    Economics (5th edition) Chapter 24
    Essentials of Economics (3rd edition) Chapter 12
    Economics for Business (3rd edition) Chapters 23, 24, 27
 
The article linked to below starts "The China Price. They are the three scariest words in U.S. industry. Cut your price at least 30% or lose your customers. Nearly every manufacturer is vulnerable -- from furniture to networking gear. The result: A massive shift in economic power is under way." Global and US industry is waking up to the economic power and competitiveness of Chinese firms. What impact is this change likely to have on the world economy?
The China Price Business Week (1/12/04)
China in pictures Business Week (1/12/04)
Questions
1. What impact will this gap in competitiveness have on the US balance of payments?
2. What measures are available to measure the competitiveness of China compared to other countries?
3. Examine possible policies that the US government could adopt to try to close the gap in competitiveness between the US and China.

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News Item 13: ASEAN integration


Relevant to:
    Economics (5th edition) Chapter 25
    Essentials of Economics (3rd edition) Chapter 12
    Economics for Business (3rd edition) Chapter 25
 
ASEAN, the Association of Southeast Asian Nations, held a major summit this month. As a result of the summit a significant number of trade deals were signed and discussed that could change the face of world trade in coming years. Talks were agreed and various agreements signed to create what would potentially be the largest free trade area in the world. The articles linked to below give details of the outcomes of the ASEAN summit.

ASEAN takes a step closer to economic integration Channel News Asia (29/11/04)
Asian summit moves to create single market, inks deal with China Channel News Asia (30/11/04)
ASEAN, South Korea to start free trade talks next year Channel News Asia (30/11/04)
Narrowing the development gap between ASEAN countries Channel News Asia (29/11/04)
China, ASEAN deal moves towards world's biggest free trade zone Channel News Asia (29/11/04)
ASEAN wraps up summit, may create largest free trade area worldwide Channel News Asia (30/11/04)

Questions
1. What is meant by a free trade area?
2. Examine the likely benefits to the ASEAN countries of developing a free trade area.
3. Assess the impact that an ASEAN free trade area is likely to have on the rest of the world.

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News Item 14: How to save the world - the Millennium Goals


Relevant to:
    Economics (5th edition) Chapter 26
    Essentials of Economics (3rd edition) Chapter 12
    Economics for Business (3rd edition) Chapter 32
 
Jeffrey Sachs, the head of the United Nations "Millennium Project", thinks that if aid to poor countries were increased by this sum - i.e. more than doubled - and kept at that level until 2015, extreme poverty could be halved. The article below from The Economist considers his views.
How to save the world The Economist (28/10/04)
Questions
1. What does Jeffrey Sachs argue are the key obstacles to the reduction of poverty in African countries?
2. What are the UN Millennium Goals? Hint: to find the UN Millennium Goals web site, try typing 'Millennium Goals' into Google and clicking the 'I'm feeling lucky' button.
3. Examine the arguments for and against using increases in aid spending to boost development in developing countries.

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