Unit 1: Supply & Demand for eggs in California

New changes in the egg market in California are a great resource for teaching a number of economic concepts, particularly supply and demand in action. A number of scenarios are possible as different rules in different states impact on egg producers decisions on how to produce their eggs and where to sell them.

It started back in 2008 when Californian voters approved a law that increased the minimum cage area per bird from 67 square inches to 116 square inches, a jump of 70%. That law comes into effect from the beginning of 2015 and applies to all eggs produced and / or sold in California. Therefore, existing facilities will be able to produce less eggs and there will be a clear increase in the cost of production per egg. 

The outcome predicted by supply and demand analysis would be higher prices and a lower quantity of eggs sold. Initial estimates are that there will be an increase in price in California of 20%.

But what is also interesting is the dynamics with other producers in states that don’t have the Californian restrictions. 

The largest producer of eggs is Iowa and they sell a lot of their output to California. Their first option for Iowan producers is to comply with the restrictions so that they can sell their eggs into California. This is likely to lead to a national loss of 10 million egg laying birds (3.3% of the total market). The second option is to ignore the rules and sell only to other states – having the effect of “flooding” the market and driving prices in other states down. 

The outcomes of these options are shown below.

The link to the article in The Wahington Post is found here. There are a number of issues that could be devloped which make it an eggscellent (groan) topic for a Data Response question. These include

- elasticity of demand (if estimates are correct, the 20% increase in price leading to a 3.3% decrease in national egg production would indicate a price elasticity of -0.17)

- distribution effects (will the increase in egg prices have a disproportionate effect on the poor)?

- demand for substitutes and complements of eggs

And as an extension, since the Californian law only applies to eggs still in their shells, what other outcomes could occur?

Unit 3: Market Structures in transport

I haven't posted a Unit 3 article for a while, so it was pleasing to find this excellent video made applying the theory of market structures to the world of transport in Singapore. 

This is superb as it goes through each transport mode analysing the market structure before digging into the conduct within that market. 

This will provide crucial A* level content to exams for a given market structure question. Well worth a watch.

Merry xmas everyone....happy blogging!

Unit 2 & 4: Monetary Policy, Exchange rates and Russia

All,

I really hope you have been keeping up to date with the economic crisis facing Russia at the moment. As you can read in this article, the Russian Rouble is in free fall. This has huge implications for the Russian economy. The central bank is trying to reverse this trend by raising interest rates to a massive 17% (compared to 0.5% in the UK).

This could have a devastating effect on the average Russian trying to survive the economic crisis. This article is also loaded with information.

Questions to discuss include:

Why is the Rouble depreciating?
How will raising the interest rate stop this fall?
What impact will the rise have on the other major objectives?

This is so similar to 'Black Wednesday in the UK. Read this article from the BBC. Economic policy repeating itself......did it work then? Will it work now?

I welcome your thoughts.

Unit 4: Primary Product Dependency & commodity prices

As world commodity prices plunge, who gains and who loses?

This should be a ‘favourite topic’ for determined macro students. The concept of a resource curse is well worth covering, since there are many analysis points (about how the cause of primary product dependency could lead to a variety of effects). There’s also ample scope for evaluation, examining who will be affected, by how much and to what extent it can impact on economic performance – loads of ‘it depends’ statements, in other words.

The Economist has published a handy map tool to see who are the primary product importers and exporters around the world.

The plunging oil price has sent the currencies of oil exporting economies into a dive. This is the flip side of Dutch Disease, in which demand for resources drives exchange rate movements.

Shifting terms of trade also have a big impact, especially on developing economies.

Lots of key issues for Unit 4 essay and case study questions: Please click on the links to access notes on them. (Dutch disease, terms of trade)

Unit 4: Development and capital investment

Thank you to Tom White for this excellent article on capital accumulation. It is a must read for students looking at ways to help developing economies grow........

The problem with both free-market and Keynesian economics is that they misunderstand the nature of modern investment. Both schools believe that investment is led by the private sector, either because taxes and regulations are low (in the free-market model) or because aggregate demand is high (in the Keynesian model).

In Sachs’ alternative view, private-sector investment today depends on investment by the public sector. But investment into what? What types of capital should we be accumulating?

Sachs argues that unless the public sector invests, and invests wisely, the private sector will continue to save profits or return them to shareholders in the forms of dividends.

Sachs believes that government investment needs to complement private sector investment for the best results. He describes six types of capital:

1. Business capital includes private companies’ factories, machines, transport equipment, and information systems.
2. Infrastructure includes roads, railways, power and water systems, fibre optics, pipelines, and airports and seaports.
3. Human capital is the education, skills, and health of the workforce.
4. Intellectual capital includes society’s core scientific and technological know-how.
5. Natural capital is the ecosystems and primary resources that support agriculture, health, and cities.
6. Social capital is the communal trust that makes efficient trade, finance, and governance possible.

Sachs’ point is that the different forms of capital work in a complementary way. Business investment without infrastructure and human capital cannot be profitable. Nor can financial markets work if social capital (trust) is depleted. 

Without natural capital (including a safe climate, productive soils, available water, and protection against flooding), the other kinds of capital are easily lost. And without universal access to public investments in human capital, societies will succumb to extreme inequalities of income and wealth.

Sachs says that the key to development was basic education, a network of roads and power, a functioning port, and access to world markets. 

Today, however, basic public education is no longer enough; workers need highly specialised skills that come through vocational training, advanced degrees, and apprenticeship programs that combine public and private funding. 

Transport must be smarter than mere government road building; power grids must reflect the urgent need for low-carbon electricity; and governments everywhere must invest in new kinds of intellectual capital to solve unprecedented problems of public health, climate change, environmental degradation, information systems management, and more.

Sachs goes on to worry that this just isn’t happening on the required scale. Like most observers, he is concerned that there is too much focus on the short term, and excessive cutbacks in public sector investment – which he sees as a false economy.

Unit 3: Monopsony Power

Many thanks to Newsnight for providing the material for a lesson about monopsony power - if nothing else, it makes a change from taking Tesco as the model for this topic. 

On Friday, Newsnight carried a report about Premier Foods, a conglomerate which owns many different grocery brands such as Mr Kipling, Ambrosia, Bisto and Oxo. Their allegation is that Premier Foods has been using its power as a major customer to request payments from its suppliers; if they don't pay up, they are 'delisted' from supplying the company. In other words, monopsony power.

The online report comes with a 5-minute video clip which sets up the topic nicely. Newsnight's Laura Kuenssberg interviews engineer Bob Horsely, who had a contract to supply maintenance services to Ambrosia's factory in Devon. He received a letter from Premier Foods saying that "We are aiming to work with a smaller number of strategic suppliers in the future that can better support and invest in our growth ideas. We will now require you to make an investment payment to support our growth." 

When he queried this, he received another letter: "We are looking to obtain an investment payment from our entire supply base and unfortunately those who do not participate will be nominated for de-list."

Premier Foods has been in financial trouble recently, and says that it is trying to invest in growth; it makes the point that, if it succeeds, that can only be to the benefit of its suppliers. However, there are calls for this case to be referred to the Competition and Markets Authority. 

If a supermarket behaved like this, it would be against The Groceries Code which regulates relationships between supermarkets and their suppliers (....but see below*); however, that code doesn't cover manufacturers like Premier Foods.

The article presents a good opportunity for a class exercise, leading to questions like:

- What form of market failure is demonstrated by this case?

- Can Premier Food's statement that "...our suppliers benefit from opportunities to secure a larger slice of our current business. They also stand to gain as our business grows in the future." be justified?

- Should the Groceries Code be extended to include producers as well as retailers?

- What other actions could governments take to prevent this market failure?

- What are the risks of government failure?

* Supermarkets and Suppliers - back to Tesco

There can be no doubt that in this relationship, the power is in the hands of the supermarkets: according to an online report, Britain’s top ten supermarkets owe about £15billion to suppliers for goods at any one time, giving them leverage to 'negotiate' extra payments.

However, listening to The Report on Radio 4 recently, I was really taken aback by the extent of those pressures, as they were explained by current and ex-suppliers and ex-staff of Tesco.

As much as a third of Tesco's gross profit comes, not from sales of goods and services to customers, but from payments they receive from suppliers. Some of those are called “rebates”, reported here in the FT: "Rebates are payments that Tesco receives from suppliers for hitting a certain level of sales, or for support for promotions. For example, Coca-Cola could offer a percentage discount on 2-litre bottles if 20m of them were sold in a specific period – but it will only pay this rebate if the sales target is hit. 

Tesco’s UK sales volumes have dropped as it loses market share to competitors, so there is a risk that such volume-driven rebate targets could be missed." The report in the FT is a fascinating one, very accessible to students, about the way in which such payments are pre-estimated by the retailers in order to be included in their accounts, and this practice has been largely responsible for the 'black hole' of £250mn in Tesco's accounts.

Rebates are clearly common in the industry, and a report in The Grocer implies that many suppliers see this as 'fair enough' - if Tesco can shift huge numbers of the goods, the suppliers and manufacturers benefit by selling more, producing at closer to full capacity and gaining economies of scale. 

However, there are other payments as well. There are listing or gate fees, in which the supplier pays tens or hundreds of thousands of pounds in order to get their products onto Tesco's shelves, more fees in order to get them displayed at eye level, and more recently, payments demanded in order to avoid having products delisted. 

The radio report carried several instances of small scale suppliers who simply couldn't make such payments, and so lost their contract to supply. As a sales negotiator quoted in The Grocer says, when a buyer says 'give me £4mn or I won't stock your product any more', things are getting desperate. Meanwhile, Groceries Code Adjudicator Christine Tacon has urged suppliers to come forward with “hard evidence” to allow her to investigate alleged breaches of the Code.

Unit 3: Contestable Markets - introduction notes

Introduction to contestability theory

A contestable market has no entry barriers - firms can enter or leave an industry costlessly. The threat of potential entry may be enough competition to ensure imperfectly competitive set price and output at or close to the competitive price and output.

Imperfectly competitive markets can be contestable. Contestability theory is associated with Baumol who argues the mere threat of new firms entering a market means existing firms act competitively ie lowest costs, prices and profits. The theory of contestable markets argues that what is important is not actual but potential competition.

A market is perfectly contestable when the costs of entry and exit are zero where any entry costs can be recovered on exit ie there are no sunk costs.

In a contestable market the threat of entry by potential rivals will ensure that the firm or firms in the industry will earn normal profits and deliver allocative and productive efficiency:

· Few barriers to entry into the market means potential entrants are able to enter market quickly if abnormal profits are made. This process helps ensure normal profits only, are earned in the long run;

· The size of firm is irrelevant;

· Price competition is unlikely, although it may occur for short periods;

The government has sought to create contestable markets in the rail, bus, ferry and air industries through deregulation (buses) and short franchises (trains).

However:

· Significant entry barriers may exist and incumbent firms can often scare potential entrants away from entering.

· Sunk costs refer to expenditure that cannot be recovered if a firm leaves an industry and represent a barrier to entry. If potential entrants anticipate high sunk costs contestability theory is less effective in lowering price and profits

· Short-term franchises introduce contestability into transport markets but deter long-term investment where firms feel they may lose their current franchise and experience sunk costs. For this reason, the latest franchise agreements are for longer periods eg 15 years. 15 year franchises create uncontested legal monopolies.

· Road haulage: many small one-lorry owners. Monopolistically competitive?

· Bus: after deregulation early competition mergers have created three oligopolies. Many regional bus monopolies are local monopolies. London Bus is a franchised monopoly. A national oligopoly and regional monopoly?

· Rail operators 28 TOC's are regional monopolies with a time-limited franchise. Extensive price discrimination on fares.

· Airlines: Bilateral agreements giving way to open skies resulting in an increase in the number of low cost operators and flights. Monopolistically competitive? Duopolies giving way to monopolistic competition

· Infrastructure natural monopoly argument means one regulated operator eg Railtrack and NAT's

Unit 3: Monopoly and regulation - Google

Thanks to Safiyah for this excellent post on monopoly and regulation. Click here for the article from the Economist. It highlights many issues, such as contestability, barriers to entry, restrictive practices, government regulation, on line vs off line......fantastic stuff.

We will discuss this on Sunday/Monday....be ready!

Questions I will be asking will be:

How contestable is this market?
Should the EU be regulating all online monopolies?
How could they regulate them?
What will be the impact on the customer?

Unit 3: Will OPEC cut oil supply - Cartels in action

Thanks to Mr Barfoot for this excellent article on what OPEC (an overt cartel) might do to the supply of oil, to combat the 30% fall in prices since June.

Lots of useful and relevant material for Unit 3 questions. Such as:

Price Leadership - Saudi Arabia
Cartel busters - many OPEC members
Competitive pricing - Saudi Arabia
Limit Pricing - Saudi again.

Important to read and understand........

Unit 4: Current Account - Surplus Vs Deficit

The table below shows the trade balances for eight countries. They are ranked in order from the country whose trade deficit makes up the largest percentage of its GDP  to the country whose trade surplus makes up the largest percentage of its GDP. The blue bars represent the value of the deficit or surplus of each nation. Try and think about the questions that follow this diagram.

Discussion Questions:

1. Identify and define the four components of a nation’s current account balance.
2. According to the data, which three countries are the most import dependent? Which three countries are the most export dependent? Which country has the most balance trade in goods and services? Which has the most imbalanced trade?
3. For one of deficit countries above, answer the following two questions:
   1. Assuming its currencies’ exchange rates is floating, explain how persistent current account deficits will affect a country’s exchange rate over time?
   2. Summarize and explain the likely effects of a current account deficit on the following: a) the financial account balance, b) domestic interest rates, and c) national debt.
4. For one of the surplus countries above, answer the following two questions:
   1. Assuming its currencies’ exchange rates is floating, explain how persistent current account surpluses will affect a country’s exchange rate over time?
   2. Summarize and explain the likely effects of a current account surplus on the following: a) domestic savings rates, b) the financial account balance.
5. What are the various methods a country can take to reduce a current account deficit? What is the benefit of having a balanced current account as opposed to a large deficit or surplus?

Unit 1 & 4: Labour Markets and pay

The ONS published the Annual Survey of Hours and Earnings today, which contains some very useful data.

For the first time, they have produced an interactive tool to help explore some of the new figures. It graphically illustrates the occupations with the highest and lowest earnings, allows the user to see which occupations have similar salaries, and incorporates a couple of quick quizzes comparing. It highlights some of the issues around gender pay gaps, different pay rates for different occupations and elasticity of supply of labour.

For example, which of these would you expect to be the highest earners:

• Senior Police officers
• Medical Practitioners
• Airline pilots
• IT directors
• Air traffic controllers

And at the other end of the scale, which of these do you think earn the least:

• Nursery nurses
• Hairdressers
• Retail cashiers
• Bar staff
• Cleaners

Unit 4: Bi-Lateral trade agreements - Australia & India

Another article from Elliot (Click here) - Useful for questions on free trade/trade blocs and protectionism.

You should think about the arguments in favour of these agreements, the benefits of bi-lateral agreements v's being in a trading bloc (EU, NAFTA, ASEAN etc).

What could the economic impact of this agreement be, both for the two countries involved and others in the area not involved.

Unit 4: Indonesia raise fuel prices by 30%

Thank you to Elliot for this interesting article on how the Indonesian government is trying to achieve certain objectives at the expense of others.

You will no doubt be aware that the main govt objectives are:

Low Inflation (Stable prices)
Low Unemployment
Sustainable Economic Growth
Healthy Balance of Trade
Strong Government fiscal position.

Governments will put certain objectives before others depending on circumstances. It ios clear that the Indonesian government (much like most of the developed world in recent years) are putting stable govt finances as a priority this year.

The question you would be asked to look at could be:

How will this policy affect the economy both in the short and the long run?

Unit 3 & 4: Oil prices continue to fall.

Once again I am out on a school trip (sorry), so we will put on hold the work on Oligopoly and do something constructive and relevant for Unit 4.

Oil prices are likely to continue falling well into 2015, the International Energy Agency has said. 

Click here to read the article and answer the following questions:




Unit 3 - Why are oil prices falling? (8 marks)

(this could be linked to Unit 3 - supply/demand/cartel issues)

Unit 4 ; Assess the economics effect on both a developed and a developing country of the predicted fall in oil prices. (30 marks)

Unit 3: Lesson plan for Economics group

This message is for Luke's group. I am not in class tomorrow (Thursday P6). Please split yourselves into 3 groups.

Group A - Complete question 9 part a & b from Jun 13 paper. (it's about eggs)

Group B - Complete question 9 part a & b from Jun 12 paper. (it's about supermarkets)

Group C - Complete question 10 part a & b from Jun 11 paper. (its about Thorntons chocs)

Please leave you completed packs on my desk.

Thank you.

Unit 4: Comparative advantage & Income inequality

The poor countries should catch up with the richer ones, in theory, at least. And between 1988 and 2008, global inequality, as measured by the distribution of income between rich and poor countries, has narrowed, according to the World Bank. But within each country, there has been widening inequality in many poor places.

According to The Economist this can be seen in the Gini index, a measure of inequality. (If the index is one, a country’s entire income goes to one person; if zero, the spoils are equally divided.) Sub-Saharan Africa saw its Gini index rise by 9% between 1993 and 2008. China’s soared by 34% over 20 years. It has hardly fallen anywhere.

The article explains why this is a puzzle, given economists’ confidence in the concept of comparative advantage. Economies export what they are relatively efficient at producing. Take America and Bangladesh now. In America the ratio of highly skilled to low-skilled workers is high. In Bangladesh it is low. So America focuses on products requiring highly skilled labour, such as financial services and software. Bangladesh focuses on simpler products such as garments. Comparative advantage predicts that when a poor country starts to trade globally, demand for low-skilled workers will rise disproportionately. That, in turn, should boost their wages relative to those of higher-skilled locals, and so push down income inequality within that country.

Economists have wondered why this hasn’t been happening.

A (simplified) account of their findings is that the latest wave of globalisation has jumbled workforces: high-skilled workers in poor countries can now work more easily with low-skilled workers in rich ones, leaving their poor neighbours in the lurch. Take “intermediate goods”, the semi-finished products that account for about two-thirds of world trade. The production processes outsourced by big companies in factories or call-centres are by rich-world standards unskilled. But when jobs are sent offshore, they are snapped up by relatively skilled ones in poor countries. According to research, the typical call-centre employee in India has a university degree.

In the modern, interconnected world, such workers come into more regular contact with less-skilled people in the rich world. The result of booming trade in intermediate goods is higher demand and productivity for skilled poor-country workers. Higher wages ensue: multinationals in developing countries pay manufacturing wages above the norm for the country. One study showed that in Mexico export-oriented firms pay wages 60% higher than non-exporting ones. Another found that foreign-owned plants in Indonesia paid white-collar workers 70% more than locally owned firms. Globalisation, though, does not boost wages for all. The least skilled cannot “match” with skilled workers in rich countries; worse, they have lost access to skilled workers in their own economies. 

The result is growing income inequality.

Unit 4: Primary Product Dependency: Mauritius

Morning all!

Thank you to Riz for finding this interesting article on Mauritius and the issue with relying on one main agricultural crop - sugar.

Lots in the article for application marks for Unit 4 essays. Fluctuating prices, decreasing terms of trade, primary product dependence, low value added product, poor savings ratio and small inefficient farms all contribute to difficult development conditions.

Question for discussion: Is the tourism industry big enough for them to develop based on this alone?

Unit 3: Cartels and game theory - The Oil Industry

The Organization of Petroleum Exporting Countries (OPEC) is an example of an oligopoly colluding overtly to fix the price of a barrel of oil - currently there are 12 members and according to OPEC they control 81% of crude oil reserves. One of OPEC's main aims is to “ensure stable oil prices, secure fair returns to producing countries and investors in the oil industry“. 

Prices have hardly been stable of late, in fact according to the Economist "the price of Brent crude fell over 25% from $115 a barrel in mid-June to under $85 in mid-October, before recovering a little". This great article is well worth a read as it goes into the global consequences of this fascinating turn of events in such a key market. But what caught my eye, in particular as we're not far off looking at oligopolies and game theory in A2 Microeconomics, was this Bloomberg article pointing out a potential breakdown of the OPEC price fixing agreement as predicted by the prisoner's dilemma and game theory:

"China is finding oil supplies 14,000 miles away, aided by the global rout in prices that’s left producers vying for new markets. PetroChina Co. said it bought Colombian crude for a northern refinery for the first time because it was good value. The transaction underscores how the world’s second-biggest oil consumer is benefiting as producers from the Middle East to Latin America vie for customers in Asia."

Part of the reason for this price fall is the rapid increase in US production (not a member of OPEC) - see graphic left - and the Saudi response was to INCREASE production by half a percent (causing other OPEC members to follow the Saudi lead) determined to protect their market share against non-cartel rivals. 

“OPEC appears to be gearing up for a price war,” Eugen Weinberg, head of commodities research at Commersbank , wrote on Oct. 2 - another feature of Oligopoly behaviour explained by the kinked demand curve. 

The prisoner's dilemma highlights the difficulty in cartels lasting any length of time as the temptation to break the agreement and reap the rewards is simply irresistible - now the US, Latin American and others not tied to OPEC are willing to sell for cheap, are we witnessing the beginning of the end of this cartel?

Possible question:

With reference to the Extract, assess reasons for Oil producing countries’ changing behaviour. Refer
to game theory in your answer. (16 Marks)

Unit 3 & 4: Oil Prices - Collusion and Primary Product Dependency

Thank you to Safiya for another article on falling all prices (click here to read).

The article is useful for both Unit 3 (Collusion) and Unit 4 (Primary Product Dependency).

Unit 4: The Big Mac Index - Purchasing Power Parity

At some point this year we will be looking at exchange rates and the Purchasing power Parity theory....all interesting stuff, but perhaps not as interesting as the 'Big Mac Index invented by that crazy magazine, 'The Economist. Click here to read their piece.

Unit 4: Falling oil prices - Winners & Losers

This is a common question on a Unit 4 essay paper. Please take some time to read the article and check out this question. I'm not saying do it, but think about what you would say and where you would get the points from.

Click here for article

Here are some questions from relatively recent papers. Not always about a fall in oli specifically, but similar nonetheless. 

Evaluate the likely implications for the world economy of the predicted decline in

non-renewable energy resources. (30 Marks)

Evaluate the likely economic effects of a sustained rise in commodity prices on the world economy. (30 Marks)

Evaluate the likely effects on the UK economy of the decrease in price of oil from $147 per barrel in July 2008 to $56 per barrel in November 2008. (30 Marks)

Unit 3: Monopoly - Essential background reading

Dear all,

I will miss first half of the lesson today. Please click on this link to access a presentation on monopoly.

We will discuss in class later.

All units: positive economic reasons for immigration.

Immigration to the UK can have economic benefits, despite what UKIP might say. Click on the article for an informative piece, looking at the argument we rarely hear about these days.

Unit 4: Growth & Development in Ethiopia 2

All,

I see already that 8 people have viewed the previous post (good work). When the rest of you catch up, look at a Unit 4 Essay on development and try and include the piece on Ethiopia.

I guarantee that those who do, will get great marks come the summer. Foe example, here is a question from June 2010:-

NB: A 30 mark question requires 4 points and 3 evaluation (Although, I would always look at 4 & 4)

(b) Evaluate four ways in which economic growth and development might be
promoted in developing countries. (30 Marks)

Unit 4: Growth & Development in Ethiopia

Ethiopia is a fascinating country to use as a case study in economic growth and development. According to a recent editorial in the Financial Times, "Ethiopia has transformed in 20 years from a famine-ravaged nation into a destination for savvy and well-known private equity groups such as KKR."

Ethiopian economic growth compared to Sub Saharan Africa

Economic growth

• Over the last decade, Ethiopia has been one of the fastest-growing countries in the world averaging annual increases in real GDP of close to 10%.
• The pace of expansion is expected to slowdown in the near term but real GDP growth is likely to be around 7.5% in 2014-15, driven by public capital investment in critical infrastructure such as extended road and power networks, which benefit both industry and agriculture.
• Long-term economic growth potential is boosted by untapped reserves of coal, gold, oil and gas.
• The country has experienced significant foreign direct investment valued at 2% of GDP in 2014 and this is set to continue growing, through investments in agriculture and manufacturing.

Structure of GDP

• Ethiopia remains heavily dependent on farming for her economic growth
• Rain-fed agriculture (accounting for almost 50% of GDP) is the country’s main source of employment and export earnings, which results in vulnerability to weather shocks that affect farm yields, incomes, profits and domestic investment.

Inflation

• Fast growing countries often experience accelerating inflation rates and Ethiopia is no exception with consumer price inflation measured at 6% on average in 2014.
• However higher interest rates set by the Ethiopia central bank and a period of lower global commodity prices has helped to prevent inflation from surging into double-digit territory.

• A key feature of the Ethiopian economy is a persistent large current account deficit on the balance of payments combined with low foreign exchange reserves estimated to be sufficient only to cover the cost of three months worth of imports.
• The current account deficit may exceed 6% of GDP in 2015 and is structural rather than cyclical, given major capital imports for infrastructure development and low-value exports (20% of which come direct from coffee exports). Major power generation projects are under way and are set to boost exports when completed.
• At around 30% of GDP, Ethiopian external debt is relatively low as are its servicing costs. Indeed, 70% of the debt stock is public medium- and long-term debt to official creditors, both multilateral and bilateral.
• The Ethiopian government benefits from large foreign aid inflows – worth 6% of GDP in 2013 and almost 20% of government revenues. They are supported by Ethiopia’s geopolitical importance as a key Western ally in the unstable, terrorism-prone Horn of Africa.

Fiscal Position

• After increasing sharply in 2013 due to high spending on infrastructure (capital spending reached 14% of GDP in 2013), the fiscal deficit is likely to decline to 2.5%-3% of GDP in 2014-15. Public (government) debt is low, at less than 25% of GDP.

Unit 1: Elasticity of Demand

Year 12 students at Eton College were covering elasticity of demand last week and were given an assignment encouraging them to create a resource on the topic. 

Some chose a (challenging) snakes and ladders quiz, another group produced a news video, and a third group produced this fine video-scribe production covering the various elasticities of demand. 

Unit 3: Homework

Ok, so I'm trialing this and the blog to see what works for my Y13 people. I wont be in today's lesson so I want you to attempt a case study question. It will be difficult as we have not covered anywhere near enough content, but I want you to have a go anyway.

It's June 10 question 10 on the market for instant coffee. I expect it to be handed in the following lesson. So Eco 1 - that's Sunday, Eco 2 - Monday.

See Edmodo for question, but it's also in your packs.

Unit 3: Jean Triole wins the Nobel Prize for Economics

The 2014 Nobel Prize has been awarded to a microeconomist who has done a huge amount of work on the economics of large-scale businesses operating in monopolistic and oligopolistic industries. 

In the Q&A during the prize announcement, Tirole discussed some of his work on network/platform businesses such as Google.

Web search has aspects of natural monopoly - Google dominates in many different countries. And they set price well below cost -- as a customer you get a very good deal from Google, while advertisers, pay a lot. Consumer surplus is highly relevant here. 

But the cost structure of such industries has a strong tendency to lead to dominant monopoly power - Tirole argues that industry regulation needs to ensure that dynamic firms can replace complacent, rent-seeking monopolies in the long run.

Here is the press release from the Nobel Academy - it is well worth a read

"Many industries are dominated by a small number of large firms or a single monopoly. Left unregulated, such markets often produce socially undesirable results – prices higher than those motivated by costs, or unproductive firms that survive by blocking the entry of new and more productive ones.

From the mid-1980s and onwards, Jean Tirole has breathed new life into research on such market failures. His analysis of firms with market power provides a unified theory with a strong bearing on central policy questions: how should the government deal with mergers or cartels, and how should it regulate monopolies?

Before Tirole, researchers and policymakers sought general principles for all industries. They advocated simple policy rules, such as capping prices for monopolists and prohibiting cooperation between competitors, while permitting cooperation between firms with different positions in the value chain. Tirole showed theoretically that such rules may work well in certain conditions, but do more harm than good in others. Price caps can provide dominant firms with strong motives to reduce costs – a good thing for society – but may also permit excessive profits – a bad thing for society. 

Cooperation on price setting within a market is usually harmful, but cooperation regarding patent pools can benefit everyone. The merger of a firm and its supplier may encourage innovation, but may also distort competition.

The best regulation or competition policy should therefore be carefully adapted to every industry’s specific conditions. In a series of articles and books, Jean Tirole has presented a general framework for designing such policies and applied it to a number of industries, ranging from telecommunications to banking. 

Drawing on these new insights, governments can better encourage powerful firms to become more productive and, at the same time, prevent them from harming competitors and customers."

Unit 4: Ebola virus and economics!

Hi from the Maldives! It's the last day of the holidays and although it's been awesome, I have always had an eye on the news. Today I was watching Al Jazeera and they were discussing the reasons behind the outbreak of the Ebola virus in West Africa.

The hypothesis is that it is economics that has caused it (remember, bad economics kills more than any war ever will!).

In essence, the two big financial houses (both of which you will study and use for unit 4 essays), the IMF and the World Bank have been blamed for the outbreak for two differing reasons.

The IMF lends money to developing countries but with rules attached. Essentially, they cannot operate budget deficits to fund public programmes. As a result, hospitals and education have suffered as the govts have no money to spend, other than on infrastructure projects to benefit big business!

The World Bank lends money to private companies rather than public enterprises, therefore any hospitals that have been built are for the rich only!

Shocking in that it is the rich west that is killing innocent Africans, albeit indirectly. The head of the IMF suggested yesterday that their policy of not allowing budget deficits should be eased....some might say 'too little too late'.

 Click here for article

Unit 4: Income inequality - a must read!

This is an excellent article looking at all aspects of poverty and wealth.....so much evaluation for a Unit 4 question, a must read!!!!

Robert Peston has an excellent new blog to accompany a Radio 4 programme on inequality. He examines whether the ‘Great Recession’ has sharpened the debate on inequality so that the conventional wisdom has shifted. Even the International Monetary Fund are now arguing that income inequality may be a cause of slower economic growth.

There are various lines of reasoning involved.

Keynesians argue that the poor have a greater marginal propensity to consume- they are much more likely than the rich to spend the extra £1 they earn. This way, redistribution from rich to poor via progressive income tax can boost consumption and therefore aggregate demand, raising GDP. 

Peston points out that the incomes of America's poorest 20% of households fell by 8% between 2010 and 2013. He goes on to examine the link between this and sub prime lending in the lead up to the 2008 financial crash- so called NINJA loans- to those with no job, income or assets. This left those on lower income with debts they found hard to pay back, resulting in a lower level of consumption in the US.

The wealthy also have a lower marginal utility of money. That is they place less value on the next pound they earn. This way, the theory of diminishing marginal utility also applies to earnings. It might explain Mario Balotelli’s alleged trip to John Lewis and his decision to have an in-house firework display. 

It might also explain the tastes of the Mexican drug barons who had a house with various items in gold. And kept a pet cheetah...

There are also the negative externalities associated with low income- cycles of poverty: the unemployment and the poverty traps mean families can stay on low income for generations. Research also suggests those on lower income need more frequent hospital treatment. This places a longer-term burden on government spending.

On the other hand, the Neo-Classical arguments of economists such as Friedman and Lucas are that lower wages provide incentives for the poor to work harder. Wage differentials also allow the free market to attract labour to where there are shortages and to ensure vacancies are filled, boosting the supply potential of the economy. There’s a classic Milton Friedman video on why the market can solve problems of poverty here, including why the minimum wage is a bad idea.

This links to the idea of ‘trickle down’ economics, that if Roman Abramovich buys a new yacht, it creates jobs in the yacht company so that employees on lower incomes earn more. They might also get a share of the company profits too. So overall spending in the economy increases.

This argument was famously criticised by J K Galbraith, who said it was like saying “if you feed enough oats to the horse, some will pass through to feed the sparrows”…