| Economics News Articles: November/December 2005 |
|
Welcome to this combined November/December news file. In previous months we have looked at the growth of oil prices and considered how they may affect the economy. We look again at this issue in News Item 4 as we consider the impact of falling UK oil reserves. This month has also seen other commodity prices rise and in News Item 5 we look at the explosive rise in gas prices, while News Item 7 looks at how one of the largest dairy firms has been affected by rising raw material and energy costs. Inflation has been an ongoing issue during this month as well. It has risen sharply in India (News Item 12) and there have also been more general concerns about global inflationary pressure resulting from rising energy and commodity prices (News Item 14). Japan, on the other hand, has been welcoming the possible return of inflation as it may mark the end of many years of deflation and economic recession (News Item 15). The theme continues in News Item 16 with a look at global monetary policy in response to the rising inflationary pressures. We hope, as ever, that you find the articles and questions helpful and wish you the very best for the holiday period. The next News File will be in January 2006. |
|
Andy Beharrell
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| Contents |
1. Retail therapy in Moscow
2. Tracking supply and demand via lobster
3. A chill wind blows through juice markets
4. UK oil output running on empty?
5. Gas prices explode upwards
6. Can we ever have too much?
7. Milk producers are squeezed (the firms not the cows)
8. Price peace breaks out in the newspaper market?
9. Learning to fix prices
10. Green fuel - a contradiction in terms?
11. Growth - theory and policy
12. Inflation rising rapidly in India
13. The Eurozone - in better shape than we thought?
14. Inflation - a global view
15. The end of deflation in Japan?
16. Global monetary policy
17. Saudi Arabia joins the world trade club
18. EU sugar - a sweet deal?
19. Adopting the Euro in the East
| Relevant to: |
| Economics (5th edition) Chapter 1 |
| Essentials of Economics (3rd edition) Chapter 1 |
| Economics for Business (3rd edition) Chapters 2, 4 |
| The Economic Environment of Business (1st edition) Chapters 1, 2 |
| In the Communist era in Moscow, shopping was a time-consuming process. Getting even basic necessities often required queuing for several hours. With the move towards being a market economy all that has changed. The shelves in the shops are bursting with goods and Western names have moved into the Russian shopping centres. Choice is now a meaningful concept. However, has shopping in Moscow lost that special feel? N.B. Why not download the article linked below as an MP3 file and listen to the programme? |
Moscow shopping loses special feel BBC News Online (5/11/05)
| Questions | |
| 1. | Compare and contrast a planned and market economy. |
| 2. | What are the advantages and disadvantages of using a planning process to allocate resources? |
| 3. | Discuss possible market failures that may have arisen in the retail industry as a result of the shift to a market-based economy. |
| Relevant to: |
| Economics (5th edition) Chapter 2 |
| Essentials of Economics (3rd edition) Chapters 1, 2 |
| Economics for Business (3rd edition) Chapters 4, 5 |
| The Economic Environment of Business (1st edition) Chapter 2 |
| Glenn Jones is a paleo-oceanographer. No don't stop reading - this is still economics! Mr Jones and his team have tracked back through almost 40,000 menus dating back up to 150 years. This has enabled them to track the price of seafood back further than anyone else has before. This has enabled them to assess the extent to which seafood as a resource has changed over this time. Has it become more or less plentiful? You can probably guess the answer to that! |
When lobster was fertiliser The Economist (27/10/05)
| Questions | |
| 1. | Using supply and demand analysis, illustrate the price changes identified in the articles. |
| 2. | Assess the factors that have led to the price changes for seafood identified in the article from the research. |
| 3. | How has the demand for lobster changed over the period of the research? What factors have led to this change? |
| 4. | Discuss how the price elasticity of lobster is likely to have changed over the period of the research. |
| Relevant to: |
| Economics (5th edition) Chapter 2 |
| Essentials of Economics (3rd edition) Chapters 1, 2 |
| Economics for Business (3rd edition) Chapters 4, 5 |
| The Economic Environment of Business (1st edition) Chapter 2 |
| The cost of fruit juice could rise by up to 25% as a result of the recent spate of hurricanes in the USA. Orange crops in the USA and Caribbean are likely to be lower as a result of the hurricane. A drought in Poland has also affected the apple crop and this may lead to price rises for apple concentrate. |
Hurricanes squeeze juice prices BBC News Online (2/11/05)
| Questions | |
| 1. | Use supply and demand analysis to illustrate the impact of the US hurricanes on the market for orange juice. |
| 2. | What changes in the pattern of demand for fruit juices might you expect as a result of the US hurricanes and the drought in Poland? |
| 3. | What are the main factors that determine the value of (a) the price elasticity of demand and (b) the price elasticity of supply of fruit juice? |
| Relevant to: |
| Economics (5th edition) Chapters 2, 4, 20 and Box 9.11 |
| Essentials of Economics (3rd edition) Chapters 1, 2, 8 |
| Economics for Business (3rd edition) Chapters 4, 30 |
| The Economic Environment of Business (1st edition) Chapters 2, 4, 10 |
| The theme of oil output from the North Sea is one we have dealt with often in these News Items. Given that oil output from the North Sea has been declining since 1999, it is one we are likely to return to as well. The rate of decline is likely to rise quite quickly as fields are economically exhausted and the oil companies pull out from them. The impact of this could be quite significant on the UK economy - not least on the Chancellor's public finances. |
Is UK oil output running on empty? BBC News Online (22/11/05)
| Questions | |
| 1. | Using supply and demand analysis, illustrate the impact of declining UK oil production on the oil market. Assess the likely impact of this decline on the world oil price. |
| 2. | What is meant by peak oil? Why is the timing of peak oil important for the world economy? |
| 3. | Assess the likely impact of declining tax revenues from North Sea oil production on the UK economy. |
| Relevant to: |
| Economics (5th edition) Chapters 2, 6, 7 |
| Essentials of Economics (3rd edition) Chapters 1, 2, 4 |
| Economics for Business (3rd edition) Chapters 4, 29 |
| The Economic Environment of Business (1st edition) Chapter 2 |
| In three weeks the wholesale gas price has risen fivefold with an increase of a third in just a day in the spot gas price. This rapid increase has led to concerns about industrial production and also worries about whether there might be a gas shortage this winter. This is despite a doubling of capacity in a pipeline between Norfolk and Belgium to help us expand potential capacity. In fact little gas is flowing down this pipe as highly regulated monopolies in the rest of Europe have proved reluctant to sell gas to the UK. |
Bank 'keeping eye' on gas prices BBC News Online (24/11/05)
Gas price surge shows no slowdown BBC News Online (22/11/05)
Supply fears amid gas price surge BBC News Online (18/11/05)
Q&A: Gas prices Guardian (23/11/05)
| Questions | |
| 1. | Assess the main factors that have led to the rapid rise in gas prices. Has the price rise been caused mainly by demand or supply factors? |
| 2. | What is the value of the price elasticity of demand for gas? How is this likely to differ between the short and long term? |
| 3. | Discuss the impact that the rise in gas prices is likely to have on the UK economy as winter approaches. |
| 4. | Compare and contrast the market structure of the gas industry in the UK and the rest of Europe. |
| Relevant to: |
| Economics (5th edition) Chapter 2 |
| Essentials of Economics (3rd edition) Chapters 1, 2, 3 |
| Economics for Business (3rd edition) Chapter 9 |
| The Economic Environment of Business (1st edition) Chapters 2, 4 |
| The Chinese government are beginning to get concerned that the rapid growth of Chinese industrial production will lead to an oversupply in some areas. Steel is one of these areas with excess steel production expected to top 100 million tonnes in 2005. So why has this situation arisen and what impact is it likely to have? |
China fears domestic oversupply BBC News Online (15/11/05)
| Questions | |
| 1. | What are the main factors that have led to the oversupply of steel in the Chinese economy. Given the nature of the Chinese economy, assess the likely impact that this oversupply will have on the price of steel. |
| 2. | Assess the main reasons for domestic production of steel growing much faster than domestic demand. |
| 3. | Discuss the likely impact on the world steel market of this oversupply in China. |
| Relevant to: |
| Economics (5th edition) Chapter 5 |
| Essentials of Economics (3rd edition) Chapters 3, 4 |
| Economics for Business (3rd edition) Chapters 9, 11, 12 |
| The Economic Environment of Business (1st edition) Chapters 4, 5 |
| Robert Wiseman dairies has a 20% share of the UK market for milk and delivers around 1.3 billion litres per annum. Increases in raw material costs have hit them hard in 2005 and their profits slumped 22% in the year to October 2005. With the rapid rise in gas prices in November and further increases in costs expected due to high oil prices, there is no sign of a rapid return to profit. |
Wiseman shaken by increased costs BBC News Online (9/11/05)
| Questions | |
| 1. | The sharp rise in plastic prices has been one factor leading to increased costs for Robert Wiseman. Would you classify plastic costs as fixed or variable? |
| 2. | A rapid rise in energy prices has also led to increased costs for Robert Wiseman. Would you classify energy costs as fixed or variable? |
| 3. | Using diagrams as appropriate, show separately the impact of a rise in fixed costs and variable costs on the level of output and profitability of Robert Wiseman dairies. |
| 4. | Wiseman have reacted to the fall in profits by reducing the price they pay to farmers for milk. Assess the likely impact of this on the UK dairy industry. |
| Relevant to: |
| Economics (5th edition) Chapters 7, 2 |
| Essentials of Economics (3rd edition) Chapters 4, 2 |
| Economics for Business (3rd edition) Chapters 4, 5, 12, 13, 17 |
| The Economic Environment of Business (1st edition) Chapters 2, 5, 6 |
| Rupert Murdoch has never been backward in coming forward and a recent rare interview led to him taking a characteristic verbal swipe at the BBC and various others. In the same interview he predicted that the newspaper price war was over for the time being and there was unlikely to be further competition in prices. So has price peace finally broken out? |
Newspaper industry price war over says Murdoch Scotsman (25/11/05)
Murdoch: I'm proud of my legacy, but BBC resents me Guardian (25/11/05)
'They all hate me because of Sky' Guardian (24/11/05)
News Corp's Murdoch down on small ads MSN Money (24/11/05)
| Questions | |
| 1. | How would you characterise the newspaper industry in terms of market structure? |
| 2. | If newspapers are no longer set to compete on the basis of price, what forms of competition are we most likely to see? |
| 3. | "I think it's very important that the purchase of a newspaper should be insignificant as a price." What does this quote from Rupert Murdoch's interview tell us about the price elasticity of demand for newspapers? |
| Relevant to: |
| Economics (5th edition) Chapters 7, 12 |
| Essentials of Economics (3rd edition) Chapters 6, 4 |
| Economics for Business (3rd edition) Chapters 12, 21 |
| The Economic Environment of Business (1st edition) Chapter 8 |
| The Office of Fair Trading (OFT) has been investigating a group of top independent schools over the past couple of years to assess whether the practice of sharing information about fees has been anti-competitive and acted against the interests of consumers. In November it reported that the schools (a group of 50 schools) had breached competition law. The schools will now be given a chance to respond to the report before the OFT decides on the action that should be taken against them. |
Elite schools 'breached law' on fees Guardian (9/11/05)
Top public schools found guilty of 'fee fixing' Times Online (9/11/05)
Private schools rule out refunds BBC News Online (11/11/05)
Private schools fee-fixing ruling BBC News Online (9/11/05)
| Questions | |
| 1. | Explain how these schools have been 'price-fixing'. |
| 2. | Assess the impact of this price fixing on the level of fees charged by the schools. What are the other main factors that determine the level of fees charged? |
| 3. | Discuss the impact of the OFT imposing fines on the schools as a result of this 'price-fixing'. |
| 4. | What other areas has the OFT recently been investigating and what have been their main findings? You may find the OFT web site helpful for this. |
| Relevant to: |
| Economics (5th edition) Chapter 12 |
| Essentials of Economics (3rd edition) Chapter 6 |
| Economics for Business (3rd edition) Chapters 20, 22 |
| The Economic Environment of Business (1st edition) Chapter 8 |
| The rapid growth in traffic levels has led to concerns that the government will fail to meet its own emissions targets and as a result it has been looking for new ways to try to limit the environmental impact of travel and transport. Policies under consideration have included tighter enforcement of speed limits to oblige drivers to use less fuel; driving at 80mph rather than 70mph uses an extra litre of fuel every 20 miles. However, this was quickly dropped as politicians backed away from an angry reaction by the motoring lobby. One policy that was announced though was a requirement for 5% of fuels sold to be bio-fuels by 2010. |
Green fuel obligation announced BBC News Online (10/11/05)
| Questions | |
| 1. | Identify the main external costs that arise from car travel. Using diagrams as appropriate, show how these external costs affect the allocation of resources in the market for car travel. |
| 2. | Assess the likely impact of the new bio-fuel requirements on the level of CO2 emissions from cars. |
| 3. | Analyse other policies that could be used by the government to reduce the level of CO2 emissions from cars. |
| Relevant to: |
| Economics (5th edition) Chapters 13, 22 |
| Essentials of Economics (3rd edition) Chapters 7, 8, 10 |
| Economics for Business (3rd edition) Chapters 15, 19, 26, 31 |
| The Economic Environment of Business (1st edition) Chapters 9, 10 |
| Average economic growth rates in America have been around 1% higher than those in Europe over the last decade. Economic theory offers a number of explanations for this; freer markets, wider use of new technology and a more supportive policy environment. A new research paper from two American economists has looked more closely at this situation and identified factors that may have led to the differences in growth rates. |
Closing the growth gap The Economist (27/10/05)
| Questions | |
| 1. | Explain the following terms from the article (a) capital accumulation, (b) capital markets, (c) econometric tests and (d) countercyclical policy. |
| 2. | Summarise the main findings of the research paper discussed in the articles. |
| 3. | Assess the implications for economic policy of the findings of the research paper. |
| Relevant to: |
| Economics (5th edition) Chapters 14, 18, 19, 20 |
| Essentials of Economics (3rd edition) Chapters 9, 10 |
| Economics for Business (3rd edition) Chapters 26, 28, 29, 30 |
| The Economic Environment of Business (1st edition) Chapters 9, 10 |
| Inflation in India has risen rapidly to 4.75% last month. With industrial production growing strongly, it is quite likely that this trend will continue. |
India sees inflation accelerate BBC News Online (11/11/05)
Inflation rises to 4.75pc due to expensive food/non-food items NewKerala.com (13/11/05)
Inflation inches up to 4.75% Financial Express (12/11/05)
Inflation rises to 4.75% Business Standard (12/11/05)
| Questions | |
| 1. | Identify the main factors that have led to the growth in inflation in India. |
| 2. | "The Reserve Bank of India (RBI) a fortnight ago raised the short-term reverse repo rate by 25 basis points to 5.25 per cent in its monetary policy review, to contain inflation caused by robust demand and high oil prices." What is meant by the term repo rate? What impact is this increase in the repo rate likely to have on the level of aggregate demand in India? |
| 3. | Discuss other policies available to the Indian government to reduce the level of inflation. |
News Item 13: The Eurozone - in better shape than we thought?
| Relevant to: |
| Economics (5th edition) Chapter 14, 13 |
| Essentials of Economics (3rd edition) Chapter 10 |
| Economics for Business (3rd edition) Chapters 25, 29 |
| The Economic Environment of Business (1st edition) Chapters 9, 10 |
| Recent riots in France have highlighted that country's severe problem of unemployment. Many other European countries too have been suffering from high levels of unemployment. However, is the picture really that bad? The article linked below in The Economist considers the view that the Eurozone economies are in better shape than is perhaps conventionally thought. |
Seeing Europe the right way up The Economist (17/11/05)
| Questions | |
| 1. | The article suggests that the Eurozone has a 'potential growth rate' of 1.8% What is meant by the potential growth rate? What are the main factors that determine the potential growth rate? |
| 2. | The potential growth rate for America is thought to be around 3%. Discuss the factors that may cause the difference between the US and European potential growth rates. |
| 3. | Analyse policies that European governments could use to try to raise the potential growth rate of their economy. |
| Relevant to: |
| Economics (5th edition) Chapters 14, 18, 25 |
| Essentials of Economics (3rd edition) Chapters 10, 9 |
| Economics for Business (3rd edition) Chapters 26, 28, 29, 30, 32 |
| The Economic Environment of Business (1st edition) Chapters 9, 10, 12 |
| Stephen Roach, the Chief Economist of Morgan Stanley, has suggested that globalisation has led to changes in the factors that affect inflation. He argues that globalisation has broken the link between domestic cost pressures and inflation and that international changes have become more important than domestic changes in determining inflation in individual countries. |
A foreign affair The Economist (20/11/05)
| Questions | |
| 1. | Explain why global factors may now be more important in determining inflation in individual countries. |
| 2. | Identify recent changes in the world economy that may have led to more inflationary pressure. |
| 3. | Discuss why labour costs may now have a reduced impact on the level of inflation. |
| Relevant to: |
| Economics (5th edition) Chapters 14, 18, 20 |
| Essentials of Economics (3rd edition) Chapters 10, 9 |
| Economics for Business (3rd edition) Chapters 26, 28, 29, 30 |
| The Economic Environment of Business (1st edition) Chapters 9, 10 |
| In most countries economists do not get over-excited about zero inflation. However, in Japan last month's figures showed that the core consumer price index was unchanged. This has raised hopes that the years of deflation are finally over in Japan and that inflation may finally return. |
Japan sees deflation years ending BBC News Online (31/10/05)
Japanese deflation appears to end BBC News Online (25/11/05)
Deflation may be over in Japan Toronto Star (25/11/05)
Japan's core CPI unchanged in October Business Week (25/11/05)
Japanese consumer prices unchanged CNN.com (25/11/05)
| Questions | |
| 1. | Examine the costs of deflation. |
| 2. | Using aggregate supply and demand analysis, show the changes currently taking place in the Japanese economy. |
| 3. | "Oil-related prices have a smaller weighting in the Tokyo index because fewer people drive cars in the nation's capital." (CNN.com article) What is meant by weighting? Explain why the smaller weighting for oil-related prices led to deflation continuing according to the Tokyo index. |
| 4. | "Consumer prices are key as the Bank of Japan has vowed to maintain its four-year-old "quantitative easing" framework of flooding the banking system with excess funds until the change in core CPI stabilises above zero percent." (CNN.com article) Explain what is meant by this statement. |
| Relevant to: |
| Economics (5th edition) Chapters 18, 20, 25 |
| Essentials of Economics (3rd edition) Chapters 10, 9 |
| Economics for Business (3rd edition) Chapters 26, 28, 29, 30, 32 |
| The Economic Environment of Business (1st edition) Chapters 9, 10 |
| Higher oil prices in recent months have led to concerns about rising inflationary pressure around the world. In the US the Federal Reserve has been raising interest rates to try to ensure that the higher oil and energy prices do not lead to higher levels of inflation. |
A nasty whiff of inflation The Economist (22/09/05)
| Questions | |
| 1. | Examine the costs of inflation. |
| 2. | What are the main factors leading to higher inflationary pressure around the world? |
| 3. | What policies are available to world governments to try to ensure that higher oil and energy prices do not lead to higher levels of inflation? Discuss the effectiveness of these policies. |
| Relevant to: |
| Economics (5th edition) Chapter 23 |
| Essentials of Economics (3rd edition) Chapter 11 |
| Economics for Business (3rd edition) Chapter 24 |
| The Economic Environment of Business (1st edition) Chapter 11 |
| In December 2005 Saudi Arabia will become the 149th member of the World Trade Organisation (WTO). This will mean that they have to adopt the trade policies prescribed by the organisation and may involve liberalisation of a number of markets. It may also lead to them having to review a number of other policy areas including their trade boycott of Israel given that Israel is also a WTO member. |
Saudi WTO membership approved BBC News Online (11/11/05)
WTO general council successfully adopts Saudi Arabia's terms of Accession WTO press release (11/11/05)
| 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. | Assess the impact that membership of the WTO is likely to have on the Saudi Arabian economy. |
| 3. | Use a suitable Internet search tool (e.g. Google news) to analyse the impact that recent actions of the WTO have had on the world trading system. |
| Relevant to: |
| Economics (5th edition) Chapters 23, 3 |
| Essentials of Economics (3rd edition) Chapter 11 |
| Economics for Business (3rd edition) Chapter 32 |
| The Economic Environment of Business (1st edition) Chapter 11 |
| The European sugar market has long been a carefully controlled and protected one. Farmers are paid around three times the market rate for sugar and imports are significantly limited. However, in April 2005 the World Trade Organisation (WTO), following a complaint by Brazil, ruled that the sugar subsidy broke world trading rules and so the EU has been forced to find a new deal for sugar producers. Under the new deal, support for farmers will be cut by 36% and there will be a compensation package worth over £4bn to help farmers in the interim. The deal has been welcomed by European sugar producers who had feared the worst for the European industry. However, African, Caribbean and Pacific (ACP) producers are not happy as they currently enjoy privileged access to the subsidised prices and export around 1.3 million tonnes of sugar a year to the EU. |
Sugar firms welcome subsidy deal BBC News Online (25/11/05)
Sweeter EU cane trade deal SBS (25/11/05)
Australia welcomes sugar subsidy cut Business Week (24/11/05)
EU agrees sugar industry revamp Guardian (25/11/05)
Sugar prices to fall as EU ends 'rigged' market' Times Online (25/11/05)
EU ministers agree to cut sugar supports International Herald Tribune (25/11/05)
Q&A: Sugar subsidies BBC News Online (19/09/05)
Sugar producers see crisis ahead BBC News Online (24/11/05)
| Questions | |
| 1. | Using diagrams as appropriate, demonstrate the impact of the new EU deal on the European sugar market. |
| 2. | Which countries will benefit the most from the new EU deal? What impact is it likely to have on their economies? |
| 3. | Assess the main costs and benefits of the deal for (a) European consumers and (b) European sugar producers. |
| Relevant to: |
| Economics (5th edition) Chapter 25 |
| Essentials of Economics (3rd edition) Chapter 12 |
| Economics for Business (3rd edition) Chapter 32 |
| The Economic Environment of Business (1st edition) Chapter 11 |
| A number of new members of the European Union including Estonia, Lithuania and Slovenia are due to join the single currency on January 1st 2007. However, there are a number of concerns about whether they will be ready. To be able to join the euro they have to meet a number of criteria. These include criteria on inflation, budget deficits and exchange rate stability. Whilst Estonia, for example, can easily most of these, its inflation rate is well above the rate required and there are some concerns over whether it will be able to reduce inflation sufficiently to be able to join the euro. |
Flights to Frankfurt The Economist (3/11/05)
| Questions | |
| 1. | Assess the arguments for and against Estonia joining the euro. |
| 2. | Explain what is meant by the “Balassa-Samuelson effect”. |
| 3. | Analyse why Estonia may find it difficult to reduce the level of inflation sufficiently to be able to join the euro in 2007. |