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Sunday 29 April 2012

Unit 4: Greece and the Euro

Greece was not ready for euro admits ex Bundesbank head

Mr Welteke said growth as well as austerity was needed to solve the eurozone crisis

Greece should not have joined the euro, a former head of the German central bank, who was central to eurozone policymaking at the time, has said.

But Ernst Welteke, who was Bundesbank president from 1999-2004, told the BBC that none of the eurozone's problems would be solved if Greece left.

He added there should be greater transfer of wealth from richer parts of the eurozone to poorer parts.

He said he was confident measures were in place to ensure the euro's survival.

"The euro is not in as big a danger as is often recorded," Mr Welteke told Business Daily on the BBC's World Service.

"The euro has been stable [for] 10 years, inside and outside the European Monetary Union (EMU)."

Strong union

He said that, in hindsight, it was clear that Greece was not ready for the euro.

"We can say that Greece should not have joined the EMU, but that doesn't help."

He said Greece only accounts for 3% of the economic output of the eurozone, so "if Greece leaves the EMU then monetary union will still work."

"But I don't think Greece leaving will solve any problems."

The country's new currency would depreciate, meaning Greece would struggle to repay its euro-denominated debts, he said. This would cause big problems for Europe's banks that lent Greece the money.

Growth needed

Mr Welteke said the current problems facing the eurozone were due to a debt crisis in southern Europe resulting from the financial crisis.

He also highlighted deeper problems, such as trading imbalances, with some countries running current account surpluses and others running deficits.

"Austerity alone is not the solution... without more growth the problems cannot be solved," Mr Welteke said.

"There have to be structural reforms in all countries, not just in the labour market but in tax administration [for example].

"In the end... monetary union is a solidarity union; there is no question [there should be a greater transfer of wealth from Germany to struggling countries].

It was the job of politicians, not the European Central Bank (ECB), to resolve these problems, he said.

The ECB should go back to focusing on managing inflation after its recent moves to provide cheap loans to boost liquidity in the banking sector.

Bankers to blame

But Mr Welteke, who resigned from the Bundesbank in 2004 in a row over a luxury hotel bill, said it was important to remember who caused the crisis in the first place.

"The problems occurred after the financial crisis and the financial crisis was not the result of undisciplined politicians," he said.

"It was the result of people living, working and earning a lot of money in the financial centres.

"For 10 years, the financial markets did not differ between lending money to Germany or lending money to Spain, Portugal and Greece.

"If there is a creditor and a debtor, both are responsible for the credit."



Unit 4: Development - South Sudan 'agrees $8bn deal with China'


Officials in South Sudan say China has agreed to loan it $8bn (£4.9bn) for major development projects.

A government spokesman said funds would be used to build roads, bridges and telecom networks, and to develop agriculture and hydro-electric power.

However, there was no mention of plans to build a new pipeline to export oil from the newly independent state.

News of the deal emerged after South Sudan's president returned from his first official trip to China.

His visit came amid a flare-up in the dispute between the two Sudans over the oil-rich Heglig border region.

China imports the bulk of oil output from the two countries.

It wants to maintain good relations both with Sudan - a long-time ally - and with the South, which acquired the lion's share of the region's oil production when it seceded in July 2011 after decades of conflict.

Since then, South Sudan's relations with Sudan have been tense - primarily over the division of oil reserves and the full definition of borders.

Both Sudan and the South are reliant on their oil revenues, which account for 98% of South Sudan's budget. But the two countries cannot agree how to divide the oil wealth of the former united state. Some 75% of the oil lies in the South but all the pipelines run north. It is feared that disputes over oil could lead the two neighbours to return to war.

'Beginning from zero'

Main disputes between the two Sudans Transit fees the South should pay Sudan to use its oil pipelinesDemarcating the borderBoth sides claim Abyei regionThe rights of each other's citizens now in a foreign country - there are estimated to be 500,000 southerners in Sudan and 80,000 Sudanese in the South Each accuses the other of supporting rebel groups on its territory

South Sudan Information Minister Barnaba Mariel Benjamin told the BBC's Focus on Africa programme that the Chinese wanted to help develop the country.

"There are no strings attached to it," he said. South Sudan's president called China one of his country's "economic and strategic partners"
"You know we are beginning from zero but we have enormous resources. At least [if] the resources are developed, I'm sure it will be for the benefit of the people of South Sudan, and the region and internationally."

The Chinese funding would be provided over the coming two years, and projects would be conducted by Chinese firms.

In January, South Sudan shut down oil production, which provides 98% of its revenue, after Khartoum impounded South Sudanese oil shipments amid a dispute over transit fees.

It currently relies on pipelines to seaports in Sudan to export the oil. It is proposing a new pipeline that would take oil to an Indian Ocean port rather than north to Sudan.



Unit 4: UK Budget Deficit - How can we imporve it?


Thursday 26 April 2012

Unit 2 & 4: Is this the worst recession ever?

Click here to see a comparison with the current recession and others since the worst one of the 1930's.

Unit 1: Market Failure - Pack Of Cigarettes 'May Rise To $100' In NZ

The cost of a packet of cigarettes in New Zealand could rise to as much as $100 dollars - around £50 - by 2020 amid moves to stamp out smoking.


The Ministry of Health wants New Zealand to be smoke free by 2025 and the suggested increase gives the first hint of the drastic measures being discussed.

A document released under the Official Information Act to the country's 3 News website features a number of pricing scenarios - with the most extreme showing a single cigarette costing the equivalent of £2.50.

One option being considered is a 10% increase on a pack of 20 cigarettes year-on-year from 2013 to 2025, meaning it would cost $40 (£20) a pack by 2024.

But a second scenario would see packs at $100 each by 2020, achieved by an immediate shock rise of 30% to 60%, with on-going increases of 30% each year after that.

New Zealand aims to be smoke free by 2025

This model would reach the 2025 target to stamp out smoking completely, but is described in the paper as "probably unrealistic".

The most likely model would see a shock tax increase next year, and then a 10%-a-year rise, which would mean a packet of cigarettes costs around $60 (£30) by 2025.

Other ideas discussed in the document include regulating tobacco as a highly toxic substance, a ban on smoking in cars with children, a doubling of anti-smoking media campaigns and removing tobacco from duty-free sale.

The briefing paper said: "If we are to continue to lower smoking prevalence we need to both increase the numbers who successfully quit smoking, and reduce smoking initiation among young people.

"Tobacco taxation is the single most effective intervention available to drive down smoking prevalence figures."

The Ministry of Health has said that the paper is an internal policy discussion and does not represent Government policy.

Questions for discussion:

  • Why is smoking an example of market failure?
  • Do you think these policies will work?
  • Which policy do you think would be the most effective and why?
  • If you think yes, why then does the government not want to introduce them (see last sentence)?



Wednesday 25 April 2012

Unit 2 & 4: UK economy in double-dip recession



The UK economy has returned to recession, after shrinking by 0.2% in the first three months of 2012.

A sharp fall in construction output was behind the surprise contraction, the Office for National Statistics said.

A recession is defined as two consecutive quarters of contraction. The economy shrank by 0.3% in the fourth quarter of 2011.

Wednesday's figure is an early estimate and is subject to at least two further revisions in the coming months.
These figures are slightly worse than many expected, but the fact that the UK is now technically back in recession should not detract from the underlying reality, which is very much as predicted.

The UK economy has been bumping along the bottom for more than a year and is still struggling to gain momentum.

Many have questioned the dire numbers for the construction sector, which accounts for less than 7% of the economy, but has done much to pull the GDP figure into negative territory.

The sharp fall in output from the production sector is also at odds with recent business surveys (though manufacturing has not fallen as the sector overall).

However, this preliminary figure is consistent with the message coming from official and private data - that the UK was once again relying heavily on services and consumption by households. That suggests the recovery will continue to be weak, though whether we will see further quarters of negative growth is very much an open question.
The ONS said output of the production industries decreased by 0.4%, construction decreased by 3%, and output of the service sector increased by 0.1%.

Some have questioned the validity of the ONS' figures, particularly on the construction industry, which has been volatile in recent quarters.

But Joe Grice, chief economic adviser to the ONS, said the construction data was based on a survey of 8,000 companies and had been carefully compiled.

Shortly after the data was released, the pound fell half a cent against the dollar to $1.6093, and half a cent against the euro to 1.2184 euros.

The UK economy was last in recession in 2009.

"It is clearly not good news, the missing link in the economy has been confidence," said Graeme Leach, chief economist at the Institute of Directors.

"These are relatively small falls, so we shouldn't be too alarmist.

"[But] regardless of the figures, it is the message that comes out to business - to be cautious - exactly when we want them to be a little more aggressive in terms of recruitment and investment."



Monday 23 April 2012

Unit 3: Game theory / Nash Equilibrium - Brilliant Strategy!

In my original “Golden Balls” blog post (see below), written almost three years ago after I saw a clip of the finale in an episode of the British game show, Golden Balls, I analyzed the actions of Sarah and Steve, who had to decide whether they would split or steal a jackpot of 100,000 British pounds. The contestants had one minute to try to convince one another that they would split the money; but when it came down to it Sarah stole and Steve split, meaning Sarah got to keep the whole jackpot and Steve went home with nothing.


In that original post, I proposed that Steve’s best chances for going home with any money would have been “for him to use the one minute of discussion time to convince Sarah that he would choose SPLIT, yet be willing to go home with something LESS THAN $50,000 and accept that Sarah was going to choose STEAL. He could have threatened to chose steal if she did not agree to share her winnings with him to some extent.”

In a recent episode of the same game show, a contestant followed a similar strategy to that I suggested Steve should have taken. Watch the clip below, from a February 2012 episode of Golden Balls.



In this episode, Nick immediately takes control of the negotiations by insisting that he is going to steal, which is a very unorthodox approach to this game, in which the traditional strategy is to try and convince your opponent that you are going to split. By establishing a credible threat to steal, Nick puts all the pressure on Ibraham to decide only one of two things:

Does Ibraham trust that Nick will split the money with him after he has stolen the full jackpot, and

Would Ibraham rather both of them go home without any money at all than Nick win the jackpot and possibly not split it with him later on?

Nick’s strategy is brilliant. By the end of the negotiation, Nick has convinced Ibraham 100% that he is going to steal the money. Ibraham may only have had a confidence level of 50% that Nick was honest about splitting the money with him after the show, but with a 50% confidence level, Ibrahim’s possible payoffs are:

Choose steal and go home with nothing.

Choose split and have a 50/50 chance of going home with half the jackpot (based on his level of confidence in Nick’s promise to split the money after the show).

In other words, with a jackpot of 14,000 pounds, the payoffs for Ibrahim became:

If he splits: 0 pounds or 0.5(14,000) = 7,000 pounds

If he steals: 0 pounds or 0 pounds (assuming his confidence level in Nick’s intention to steal is 100%).

Clearly Ibraham now has a dominant strategy: to split. In the typical version of this game, a player’s dominant strategy is always to steal (as explained below), since the possible payoffs are:

If you split: 0 pounds or half the jackpot

If you steal: 0 pounds or the whole jackpot.

But because Nick has convinced his opponent that he will steal, and then split the winnings, Ibraham’s dominant strategy shifted to split, since the possible payoffs have changed. Ultimately, Ibraham does what is most rational given his confidence in Nick’s threat to steal, and that is to split. Ibraham then chooses split (as he should), but then to everyone’s surprise, Nick chooses split, not steal as he had threatened to do throughout the negotiation. This a surprising twist, since from Nick’s perspective stealing is clearly now a dominant strategy! Nick had convinved Ibraham to split, which means Nick faced a greater payoff by stealing. But by splitting, Nick shows that he had intended to split all along, but first needed to convince Ibraham otherwise to establish splitting as Ibraham’s dominant strategy.
What a thrilling game! I won’t even bother getting into how this relates to economics today, I’m still shaking with excitement over the outcome!

Original Golden Balls post:
Rarely does such a perfect illustration of the Prisoner’s Dilemma come along for Econ teachers to use in their classroom:



The payoffs are clear:



Each player has a weakly dominant strategy, which is to choose to steal. By choosing to steal, the player has a chance at maximizing his own payoff, but will do no worse than he would if his opponent also chooses to steal and at least will have the satisfaction of thwarting his opponent’s attempt to steal the money.

There are three Nash equilibria in the game, which are outcomes at which a player can not do better on his or her own by changing his or her strategy. The outcome Steve was hoping for by chosing “split” (50/50) was not a Nash equilibrium because Sarah knows she can do better if she chooses steal when Steve chooses split. Steve doomed himself by choosing split because he should know that Sarah’s dominant strategy is to choose steal. However, Sarah would also have doomed herself by choosing split because she should assume that Steve would also chose steal since steal is a dominant strategy for him too.

John Nash, who pioneered the field of Game Theory, assumed that humans were coldly rational, self-interested, deceptive creatures that would not hesitate to stab one another in the back to get what was best for themselves. His theory of human behavior is only partially proven correct in this game, in which Steve is shown to be the sucker and Sarah the coldly rational self-interested player. The best chance for Steve to go home with any money would have been for him to use the one minute of discussion time to convince Sarah that he would choose SPLIT, yet be willing to go home with something LESS THAN $50,000 and accept that Sarah was going to choose STEAL. He could have threatened to chose steal if she did not agree to share her winnings with him to some extent. Then again, any promise Sarah makes she could later break, thus further empowering the players to choose steal.
Discussion questions:

What in the world is going on here? Why did Sarah choose steal rather than collaborate with Steve and share the $100,000?

Was Steve totally wrong to choose split? What would you have done in his situation?

How do the choices faced by Steve and Sarah relate to the choices faced by firms in oligopolitic markets? Now that you’ve seen this video, can you explain why collusive agreements between oligopolists often fall apart? Why do cartels such as OPEC often fail to achieve the high price targets agreed upon in meetings of their leaders?



Unit 4: Economic Development - Aid to Africa

This highly interactive programme on Al Jazeerah a few days ago focused on the impact of foreign aid on the African economy. It runs for 35 minutes but there is plenty of interesting debate and many comments flying in on the twitter feeds. Plenty of discussion that might inform a revision session on the future for the African economy and the debate over the effectiveness of aid programmes.




Sunday 22 April 2012

Unit 2: Excellent Revision Guide

See below for a comprehensive new revision presentation by Geoff Riley (Eton College).


Preparing for the AS Economics Macro Paper 2012


Sunday 15 April 2012

How to improve your exam technique


Unit 4: Development Strategies

Welcome back everyone...fun over, work solid now for 10 weeks...then that's it!!!

Lets start by looking at some development strategies.....