Economics Reading List - March 2018

Check out the list of books I may read between now and the holidays. 

1.    23 Things They Don't Tell You About Capitalism (Ha-Joon Chang) – challenges conventional thinking

2.    Age of Discovery: Navigating the Risks and Rewards of Our New Renaissance: (Ian Goldin & Chris Kutarna)

3.    Alibaba: The House that Jack Ma Built (Duncan Clark) – The rise of the Chinese corporate giant

4.    Almighty Dollar (Dharshini David) – follows the journey of a single $ to show how the global economy works

5.    Capitalism Without Capital: The Rise of the Intangible Economy (Haskel and Westlake)

6.    Capitalism: 50 Ideas You Really Need to Know (Jonathan Portes) – compact and excellent reference material

7.    Choice Factory (Richard Shotton) – a story of 25 behavioural biases that influence what we buy

8.    Doughnut Economics (Kate Raworth) – challenges much of orthodox thinking in the subject

9.    Drunkard’s Walk (Leonard Mlodinow) – a brilliant history of Maths with lots of relevant applications

10.  Economics for the Common Good (Jean Tirole) – applied micro from a recent Nobel prize winner

11.  GDP: A Brief but Affectionate History (Professor Diane Coyle) – really good on the GDP / well-being debate

12.  Grave New World: (Stephen King) – Former head of Econ at HSBC looks at the fracturing global economy

13.  Great Economists: How Their Ideas Can Help Us Today (Linda Yueh) – perspectives on contemporary issues

14.  Growth Delusion: The Wealth and Well-Being of Nations (David Pilling) – antidote to gospel of GDP

15.  Inequality (Anthony Atkinson) – a superb book on one of the defining economic/political issues of the age

16.  Inner Lives of Markets: How People Shape Them—And They Shape Us (Sharman and Fishman)

17.  Limits of the Market: The Pendulum Between Government and the Market (Paul De Grauwe)

18.  Misbehaving: The Making of Behavioural Economics (Richard Thaler) – a truly superb biography

19.  Plundered Planet: How to Reconcile Prosperity with Nature: (Professor Paul Collier) – development classic

20.  Poor Economics: Rethinking Ways to Fight Global Poverty (Banerjee & Duflo) – development economics

21.  Positive Linking – Networks and Nudges (Paul Ormerod) – good introduction to network economics

22.  Rise and Fall of Nations: Ten Rules of Change in the Post-Crisis World (Richir Sharma)

23.  Risk Savvy - How to make good decisions (Gerd Gigerenzer) – the world of heuristics and risk management

24.  Ten Great Economists (Philip Thornton) – biographical background, well worth a read

25.  The Box - How the Shipping Container Made the World Smaller and the World Economy Bigger, (Levinson)

26.  The Everything Store: Jeff Bezos and the Age of Amazon (Brad Stone) – a great business page turner

27.  The Great Divide (Professor Joseph Stiglitz) – one of the classic critiques of globalisation

28.  The Great Escape (Professor Angus Deaton) – a broad sweep of economic history and poverty reduction

29.  The Undoing Project: (Michael Lewis) – Tracks the birth of behavioural economics, Kahneman and Tversky

30.  Thinking Fast and Thinking Slow: (Professor Daniel Kahneman) – the classic Kahneman epic on psychology

31.  Upstarts: How Uber and Airbnb are changing the world (Brad Stone) Follow up to his work on Amazon

32.  What Money Can't Buy: The Moral Limits of Markets (Michael Sandel) – Pure PPE bliss

33.  Who Gets What - And Why: Understand the Choices You Have; Improve the Choices You Make (Al Roth)

34.  Why Information Grows: The Evolution of Order, from Atoms to Economies (Cesar Hidalgo) – challenging

35.  World of Three Zeroes (Muhammad Yunus) – new book from founder of the Grameen Bank

International Trade & Protectionism (Tariff Diagram Explained)

This short revision video takes you through the basic analysis diagram showing the effects of a tariff introduced into a domestic market.

Import tariffs are a form of protectionism.

Tariffs aim to protect domestic industries from overseas competition by increasing the relative price of imports, thereby causing a fall in import demand.

Thus a higher proportion of domestic demand will be met from domestic suppliers.

Tariffs can also generate tax revenues for the governments who levy tariffs. Indeed, for many lower and middle-income countries, import tariffs are an important source of tax revenues.

A reduction in the quantity of and total spending on imports as a result of the import tariff may also improve a nation’s trade balance.

 

Protectionism represents any attempt to impose restrictions on trade in goods and services

Some of the arguments put forward for protectionism

Examples of EU import tariffs by product

Trade disputes between countries happen because one or more parties either believes that trade is being conducted unfairly, on an uneven playing field, or because they believe that there is one or more economic or strategic justifications for import controls.

All countries operate with some forms of import controls

The aim is to cushion domestic businesses and industries from overseas competition and prevent the outcome resulting from the inter-play of free market forces of supply and demand.

Different forms of protectionism

1. Tariffs - a tax or duty that raises the price of imported products and causes a contraction in domestic demand and an expansion in domestic supply. For example, until recently, Mexico imposed a 150% tariff on Brazilian chicken. The United States has an 11% import tariff on imports of bicycles from the UK.
2. Quotas – these are quantitative (volume) limits on the level of imports allowed or a limit to the value of imports permitted into a country in a given time period. Until 2014, South Korea maintained strict quotas on imported rice. It has now replaced an annual import quota with import tariffs designed to protect South Korean rice farmers. Quotas do not normally bring in any tax revenue for the government
3. Voluntary Export Restraint – this is where two countries make an agreement to limit the volume of their exports to one another over an agreed time period. Sometimes this is enforced by a government for example the USA enforced VER on Japan during the late 1980s
4. Intellectual property laws e.g. patents and copyright protection
5. Technical barriers to trade including product labeling rules and stringent sanitary standards. These increase product compliance costs and impose monitoring costs on export agencies. Huge vertically integrated businesses can cope with these non-tariff barriers but many of the least developed countries do not have the some technical sophistication to overcome these barriers.
6. Preferential state procurement policies – this is where a government favour local/domestic producers when finalizing contracts for state spending e.g. infrastructure projects or purchasing new defence equipment
7. Export subsidies - a payment to encourage domestic production by lowering their costs. Soft loans can be used to fund the dumping of products in overseas markets. Well known subsidies include Common Agricultural Policy in the EU, or cotton subsidies for US farmers and farm subsidies introduced by countries such as Russia. In 2012, the USA government imposed tariffs of up to 4.7 per cent on Chinese manufacturers of solar panel cells, judging that they benefited from unfair export subsidies after a review that split the US solar industry.
8. Domestic subsidies – government help (state aid) for domestic businesses facing financial problems e.g. subsidies for car manufacturers or loss-making airlines.
9. Import licensing - governments grants importers the license to import goods.
10. Exchange controls - limiting the foreign exchange that can move between countries – this is also known as capital controls
11. Financial protectionism – for example when a national government instructs banks to give priority when making loans to domestic businesses
12. Murky or hidden protectionism - e.g. state measures that indirectly discriminate against foreign workers, investors and traders. A government subsidy that is paid only when consumers buy locally produced goods and services would count as an example. Deliberate intervention in currency markets might also come under this category.

Quotas, embargoes, export subsidies and exchange controls are examples of non-tariff barriers

Examiner’s tip: the tariff is frequently examined. Ensure that you can analyse the removal as well as the imposition of a tariff.

Short & Long Run Aggregate Supply - All you need to know

What is short run aggregate supply?

Short run aggregate supply shows total planned output when prices can change but the prices and productivity of factor inputs e.g. wage rates and the state of technology are held constant.

What is long run aggregate supply?

Long run aggregate supply shows total planned output when both prices and average wage rates can change – it is a measure of a country’s potential output and the concept is linked to the production possibility frontier

• In the long run, the LRAS curve is assumed to be vertical (i.e. it does not change when the general price level changes)
• In the short run, the SRAS curve is assumed to be upward sloping (i.e. it is responsive to a change in aggregate demand reflected in a change in the general price level)

Short Run Aggregate Supply Curve

A change in the price level brought about by a shift in AD results in a movement along the short run AS curve. If AD rises, we see an expansion of SRAS; if AD falls we see a contraction of SRAS.

Short run aggregate supply curve

Shifts in Short Run Aggregate Supply (SRAS)

Shifts in the position of the short run aggregate supply curve in the price level / output space are caused by changes in the conditions of supply for different sectors of the economy:

• Employment costs e.g. wages, employment taxes. Unit labour costs are also affected by the level of labour productivity
• Costs of other inputs e.g. commodity prices, raw materials. The exchange rate can affect the prices of key imported products
• Impact of government e.g. environmental taxes such as carbon duties & business regulations which affect the costs of production

Analysis diagram of shifts in aggregate supply

Shifts in the aggregate supply curve

What are the main causes of shifts in aggregate supply?

The main cause of a shift in the aggregate supply curve is a change in business costs – for example:

1.Changes in unit labour costs - i.e. labour costs per unit of output

2.Changes in other production costs: For example rental costs for retailers, the price of building materials for the construction industry, a change in the price of hops used in beer making or the cost of fertilisers used in farming.

3.Commodity prices Changes to raw material costs and other components e.g. the prices of oil, natural gas, electricity copper, rubber, iron ore, aluminium and other inputs will affect a firm’s costs

4.Exchange rates: Costs might be affected by a change in the exchange rate which causes fluctuations in the prices of imported products. A fall (depreciation) in the exchange rate increases the costs of importing raw materials and component supplies from overseas

5.Government taxation and subsidies:

1. An increase in taxes to meet environmental objectives (known as green taxes) will cause higher costs and an inward shift in the SRAS curve – for example a higher price for carbon emissions
2. Lower duty on petrol and diesel would lower costs and cause an outward shift in SRAS

6.The price of imports:

1. 1. Cheaper imports from a lower-cost country has the effect of shifting out SRAS
   2. A reduction in an import tariff on imports or an increase in the size of an import quota will also boost the supply available at each price level causing an outward shift of SRAS

Key revision point: The main driver of SRAS for the economy is the level of production costs some of which are influenced by government policy, others by world prices. Remember that the exchange rate is important for the UK because a large percentage of our components / raw materials / energy are imported.

Causes of a fall in aggregate supply

The Economics of BREXIT: A must read for A level students

Here are the slides and videos from our revision webinar covering some aspects of Brexit relevant to A level economics students. In particular there is a focus on synoptic connections to micro and macro consequences.

Economics of Brexit from tutor2u

The EU, taken as a whole is the UK’s largest trading partner. In 2016, UK exports to the EU were £236 billion (43% of all UK exports). UK imports from the EU were £318 billion (54% of all UK imports). The UK had an overall trade deficit of £82 billion with the EU in 2016. A surplus of £14 billion on trade in services was outweighed by a deficit of £96 billion on trade in goods.

25 Mark Essay Plan - Housing market

In this video we look at building an answer to a synoptic 25 mark essay question on the micro and macro effects of an increase in house-building in the UK economy. Once again, this could be a synoptic question and therefore would require both micro and macro analysis. 

Micro point 1

An increase in new house-building will lower prices and therefore help to make property more affordable for home-buyers.

For example, eliminating VAT on building new homes on brownfield sites reduces costs for building firms and therefore make it more profitable to construct new homes. An increase in supply can bring down prices for home-buyers if the number of new homes exceeds the increase in demand for property.

Whether prices fall and makes housing more affordable depends on the other costs of building homes. The construction industry might be affected by skills shortages which leads to higher wage costs or higher costs caused by tougher building regulations such as meeting emissions targets.

Micro point 2

Increased house-building may lead to environmental damage which could then be a cause of market failure.

Building new homes can lead to external costs in the form of noise pollution and waste products. Building hundreds of new homes in a local area might negatively affect people already living there and lead to increased congestion on roads.

However a counter argument is that the local authority might insist on construction companies spending money on improving roads and also building new facilities for the local community as part of the planning process.

Macro point 1

Policies that successfully increase the rate of new house-building will help to stimulate UK economic growth in both the short and the long run.

This is because investment in new housing is a component of aggregate demand and is likely to lead to a strong multiplier effect as building is a labour-intensive industry. More homes also increases the geographical mobility of labour which will help to reduce the rate of unemployment in the longer term.

The size of the multiplier effect depends on whether the building industry is able to expand their labour force. They may face skills shortages which leads them to use workers who have migrated from overseas. Their remittances sent home would be a leakage from the circular flow of income.

Macro point 2

An increase in  house-building will lead to a rise in government tax revenues which will help to bring down the fiscal deficit.

House-building companies will make more profits when new homes are sold and pay more corporation tax. More houses will also be bought and sold leading to an increase in revenue from Stamp Duty and VAT on building/DIY materials.

This macro effect depends on the extent to which building homes is actually profitable. Building firms might face higher costs (e.g. imported raw materials) which lowers the rate of return and cuts corporation tax liability.

Final reasoned comment:

There is substantial unmet demand for housing in the UK and a rise in new house-building is likely to provide significant micro and macro benefits. But the government needs to maintain a balance between homes available to buy and those offered for rent since new homes are unaffordable for many people.

Opportunities for analysis diagrams in this question

25 Mark Essay Plan - Financial Market failure

Another 25 mark essay plan, this time on market failure and government policy.

25 Mark Essay Plan - Steel tariffs

Tutor2u are now producing a series of model essay plans for 25 mark essays. I will publish them all on this blog. Just search essay plans and they will pop up....

This one is on Steel tariffs and would be on the synoptic paper 3.

Micro point 1

One micro effect of a tariff on Chinese steel is that steel manufacturing firms in the UK will see an increase in demand and improved profits from selling output.

This is because an import tariff makes Chinese steel more expensive which can lead to expenditure-switching effects. Users of steel such as construction firms may substitute towards relatively cheaper UK steel leading to an outward shift of demand and a higher supernormal profit per tonne of steel supplied.

However the strength of the substitution effect depends on the size of the import tariff because Chinese steel might have been significantly cheaper than the UK. It also depends on whether there is a compensating change in the exchange rate e.g. a devaluation of the Yuan against the £ sterling.

Micro point 2

A second micro effect of a tariff on Chinese steel is that the UK steel industry may become less contestable.

Import tariffs are barriers to trade and they make it harder for imports to compete with domestic suppliers. Weaker import competition increases the monopoly power of UK producers and might lead to both allocative and productive inefficiency.

A counter-argument is that the dumping of cheap steel at a price below cost into the UK by Chinese suppliers is itself an attempt to weaken market competition and give Chinese firms more monopoly power in the long run.

Macro point 1

A macro effect of a tariff on steel is that the policy will help to prevent a rise in structural unemployment in regions where steel-making is a key industry.

The closure of loss-making steel plants creates structural unemployment because workers in these factories often have specific skills that are not fully transferable to other jobs. Workers therefore suffer from occupational immobility.  Rising unemployment can then lead to a negative multiplier effect.

A critique of this point is that a tariff does not address the long-term problems of low productivity and higher unit costs in the UK steel industry. Occupational immobility might be better addressed with a significant increase in government investment in training programs.

Macro point 2

A 2nd macro effect of a tariff is that the current account of the balance of payments is likely to improve.

This is because a tariff increases prices and therefore reduces the quantity of imports bought which then leads to a fall in spending on imports. UK steel makers will be able to supply a higher percentage of total market demand for steel.

However, many other industries use steel and will be affected by the tariff. For example, car makers will see rising costs which might make them less price competitive in overseas markets leading to a possible decline in UK exports.

Diagram opportunities for analysis marks

Tariff diagram – showing rise in imported steel price, changes in domestic demand and supply

Welfare diagram – e.g. impact of a tariff on consumer and producer surplus

AD-AS diagram - Rising import costs causing an inward shift of SRAS

Supply Side Policies - Everything you need to know

This is excellent for all Economists, both Y11 and Sixth Form!

Supply-side policies are mainly micro-economic policies aimed at making markets and industries operate more efficiently and contribute to a faster underlying-rate of growth of real national output.

Brief Video Introduction to Supply Side Policies

• Successful policies have the effect of shifting the LRAS curve to the right leading to a rise in potential output
• Most governments believe that improved supply-side performance is the key to achieving sustained growth without causing a rise in inflation.
• Supply-side reform on its own is not enough to achieve this growth. There must also be a high enough level of AD so that the productive capacity of an economy is actually brought into play.
• Supply-side policies can be implemented by the public or the private sector

Evaluating supply-side policies

Supply-side objectives

Key concepts to focus on are incentives, enterprise, technology, mobility, flexibility and efficiency.

• 1.Improve incentives to look for work and invest in people’s skills
• 2.Increase labour and capital productivity
• 3.Increase occupational and geographical mobility of labour to help reduce the rate of unemployment
• 4.Increase investment and research and development spending
• 5.Promoting more competition and stimulate a faster pace of invention and innovation to improve competitiveness
• 6.Provide a platform for sustained non-inflationary growth
• 7.Encourage the start-up and expansion of new businesses / enterprises especially those with export potential
• 8.Improve the trend rate of growth of real GDP

Some key supply-side challenges for the UK economy

Market-based supply-side policies

• 1.Cutting government spending and borrowing
• 2.Lower business taxes to stimulate investment and lower income taxes to improve work incentives
• 3.Reducing red-tape to cut the costs of doing business
• 4.Measures to improve the flexibility of the labour market / reforming employment laws
• 5.Policies to boost competition such as deregulation and tough anti-monopoly and anti-cartel laws
• 6.Privatisation of state assets (selling off public sector businesses into the private sector)
• 7.Opening up an economy to overseas trade and investment

Interventionist policies

• 1.State has key role in investing in public services and building critical infrastructure
• 2.Tax incentives and welfare reforms can encourage more people into work
• 3.A commitment to a fair minimum wage / living wage to improve work incentives
• 4.Active regional policy to boost under-performing areas / areas of high unemployment
• 5.Some case for selective import controls to allow domestic industries to expand
• 6.Management of the exchange rate to improve competitiveness of export industries
• 7.Nationalisation of some key industries
• 8.Stronger regulation of industries

Recent UK Government Supply-Side Policies

• Relaxation of the Sunday trading laws – but worries over work-life balance
• 24 new regional enterprise zones – aiming to take advantage of external economies of scale by attracting inward investment
• Completion of London’s Cross Rail – with plans for Cross Rail 2 and HS3 (East-West high speed rail in North of England)
• Tax relief for businesses investing in low carbon technologies – designed to increase investment in renewable energy capacity
• Increases in the income tax free allowance to £11,000 a year
• Reduction in taper rate at which universal benefit is taken away as people earn extra income from 65% to 63% - helps work incentives
• Main rate of corporation tax (a tax on profits) - currently 20% - to fall to 17% by 2020 – designed to stimulate domestic I and FDI
• UK National Infrastructure Plan – range of projects including the new nuclear power station at Hinkley Point in Somerset
• Planned investment of £400m in 'full-fiber' super-fast broadband
•  £2.3 billion for a new Housing Infrastructure Fund – i.e. investment in improved road and water connections to support new housing

The Keynesian Multiplier and Accelerator effects

AS Macro Revision: Multiplier, Accelerator and Keynesian Economics from tutor2u

Private Finance Initiatives & Public Private Partnerships

A useful and reasonably up to date presentation on Private Finance Initiatives. Very relevant at the moment!

Private Finance Initiative (PFI) from tutor2u

Here is an article from the National highlighting the PPP's that Dubai government is involved with.