All Economists: Graphic: EU debt by country

Click on the link for excellent graphic showing the debt problems faced by the EU.

http://www.bbc.co.uk/news/10150007

Unit 1: Chocolate Shortage!!!

This headline is enough to send many chocolate lovers running off to the nearest shop to buy up all the stocks of chocolate!

A cocoa pod disease is threatening the supply of cocoa which is used in the production of chocolate.

Click on the clip below. This article is a great read and ideal to use as a data response for demand and supply. It also makes great reading for year 11 pupils who will be covering the topic of poverty over the course of this year.

http://l.wbx.me/l/?instId=26d30032-15b2-48e0-a48c-0ce20710a702&token=e178f992c353186d38e5eec30b509c32c9714e860000012b519a9269&u=http%3A%2F%2Fwww.tutor2u.net%2Fblog%2Findex.php%2Fgcse-economics%2Fcomments%2Fdemand-and-supply-in-action-could-there-be-a-chocolate-shortage%2F

Critique of the earlier 'Crisis of Capitalism' clip

If only to support fairness, please see below a response to the 'Crisis of Capitalism' clip...

Unit 1: Cuba moving to market economy shocker!!!

Since his seizure of power in 1959, Fidel Castro turned Cuba into a centrally planned economy. But in a recent interview the former dictator has expressed doubts about the effectiveness of a centrally planned system.

'The Cuban model doesn’t work for us anymore'

His remarks appeared to support his brother Raul’s attempts to encourage a greater role for private enterprise.

When a headline ‘Cuban Model Doesn’t Even Work For Us Anymore’ appeared 3 weeks ago, it appeared to signal a change in attitudes at the top towards entrepreneurs setting up their own businesses, and a significant move away from the dominant role of the state in a planned economy.

Within in a couple of days Raul Castro, the head of the Cuban government announced that approximately 500,000 to 1,000,000 public sector jobs would go, out of a working population of 5.5 million.

Capitalist Storm Clouds Over Havana

“"Our state cannot and should not continue maintaining companies, productive entities, services and budgeted sectors with bloated payrolls [and] losses that hurt the economy,” said the official

Cuban labour federation, which announced the news. “Job options will be increased and broadened with new forms of non-state employment, among them leasing land, co-operatives and self-employment, absorbing hundreds of thousands of workers in the coming years”.

The Party newspaper Granma announced that “250,000 licences would be issued to allow people to establish their own firms, and Cubans will be allowed to employ people other than relatives.”

Plans to triple the communist country’s private sector

The removal of some of the controls on private employment provide some scope to increase production levels and efficiency. It remains to be seen if the Cubans have sufficent transferable skills to adapt to these changes, given the power of the state, and limited opportunities to make profits legally.

Is Cuba now about to join the ranks of the transformation economies albeit 21 years after the sweeping changes in Poland, Hungary and East Germany. The island’s population now braces itself for significant changes in prices, employment and growth.

In conclusion there is scope for debate over how far there would be a shift across an economic spectrum as a result of the proposed reforms.

Questions:

Why do you think Cuban politicians want to change?

What problems may they face when trying to open up its markets?

AS Unit 1: Price of luxury goods

Unit 1 in AS Economics begins by examining the interaction of supply and demand in product markets, and the importance of these factors in determining the equilibrium price in any particular product market.

In the above article from the NY times, the author reviews a book that exposes the diminished quality and attention to detail among manufacturers of luxury goods (think Prada, Gucci, etc…) The era of globalization and off-shoring of manufacturing has aided luxury firms in their quest for profits, as they’ve been able to significantly cut costs while maintaining exorbitant prices for their product.

The author takes issue with the alleged demise in the luxury market of attention to detail and craftsmanship, as competition and profit seeking behavior have led to an industry where the back alley workshops of Milan and Paris have been replaced by the factory floors of China and Vietnam. Free trade has allowed European luxury brands to produce more of their products at lower costs, which leads the author to her current question:

“Why is this stuff still so expensive even as the cost of producing it goes down?”

Despite her accusations of poor quality and greedy, profit seeking managers in the luxury goods industry, the author seem unable to resist the luxury goods she claims to despise:

When, I asked myself, did it become commonplace to charge several thousand dollars for a mass-produced handbag?

How could the flimsy designer sundress I bought on sale (a “steal”, the saleswoman assured me) still wind up costing a whole month’s salary?

Why is my favorite brand of lipstick more expensive than a nice bottle of Italian wine?

When did these products’ values grow so distorted, and what is the would-be customer to make of it all?

The author continues…

…the luxury industry is a sham because its offerings in no way merit the high price tags they command. Yet once upon a time, they most certainly did. In the 19th and early 20th centuries, when many of luxury’s founding fathers first set up shop, paying more money meant getting something truly exceptional.

Dresses from Christian Dior, luggage from Louis Vuitton, jewelry from Cartier: in the golden period of luxury, these items carried prestige because of their superior craftsmanship and design. True, only the very privileged could afford them, but it was this exclusivity that gave them their cachet. Although they may have “cared about making a profit” the merchants who served this pampered class aimed chiefly to produce the finest products possible.

It appears that the author never took an introductory economics course. If she had, she would clearly understand that price is not determined by the level of craftsmanship, the attention to detail, nor the level of exclusivity represented by a particular purse, shoe or dress.

Rather, price is determined by the interaction of Demand AND Supply in the market for all goods, EVEN luxury goods!

When she claims that “the merchents who served this pampered class aimed chiefly ‘to produce the finest products possible’”, the reviewer is forgetting some of the basic teachings of capitalism’s founding father. Adam Smith himself could have corrected the NYT reviewer when he said,

Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer…

Smith knew as any economics student should know that exchanges in any market happen not because of a mutual appreciation for craftsmanship or artistry, rather because a producer (firm) wants to make a profit by charging as high a price possible to a consumer (household).

In the case of luxury goods, Gucci and Prada never made high quality goods because they loved making high quality goods, rather they made them cause consumers demanded them and were willing to pay top dollar for them.

What the author is missing is a basic understanding of the determinants of Demand. The price a good commands in the market has little to do with how much it cost to produce or where it was produced, and everything to do with the level of demand relative to the level of supply.

Discussion questions:

Why do Prada, Gucci, Cartier and other luxury brands command such high prices relative to cheaper substitutes widely available to consumers?

As nothing else changes and the price of luxury goods goes up, how is demand affected? Explain.

What are some of the determinants of demand that have kept the price of luxury brand goods high even as the costs of production have been reduced due to cheap overseas manufacturing?

All economists! - Brilliant clip on Capitalism

Check out the clip below, it explains the reasoning why Capitalism (free market Economics) has failed.....excellent!



Questions

What is the authors main argument?
Do you agree?
Would you rather live in an economy that was controlled by governments?
If not, why not?

AS Unit 1: Economic Systems

Check out this great satellite image of ********. What do you think it is showing......

Attention all Economists, a great piece on the 'Great Depression'.

The Great Depression was a period of unprecedented decline in economic activity. It is generally agreed to have occurred between 1929 and 1939. Although parts of the economy had begun to recover by 1936, high unemployment persisted until the Second World War.

Background To Great Depression:

•The 1920s witnessed an economic boom in the US (typified by Ford Motor cars, which made a car within the grasp of ordinary workers for the first time). Industrial output expanded very rapidly. Sales were often promoted through buying on credit. However, by early 1929, the steam had gone out of the economy and output was beginning to fall.

•The stock market had boomed to record levels. Price to earning ratios were above historical averages.

•The US Agricultural sector had been in recession for many more years

•The UK economy had been experiencing deflation and high unemployment for much of the 1920s. This was mainly due to the cost of the first world war and attempting to rejoin the Gold standard at a pre world war 1 rate. This meant Sterling was overvalued causing lower exports and slower growth. The US tried to help the UK stay in the gold standard. That meant inflating the US economy, which contributed to the credit boom of the 1920s.

Causes of Great Depression

Stock Market Crash of October 1929

During September and October a few firms posted disappointing results causing share prices to fall. On October 28th (Black Monday), the decline in prices turned into a crash has share prices fell 13%. Panic spread throughout the stock exchange as people sought to unload their shares. On Tuesday there was another collapse in prices known as 'Black Tuesday'. Although shares recovered a little in 1930, confidence had evaporated and problems spread to the rest of the financial system. Share prices would fall even more in 1932 as the depression deepened. By 1932, The stock market fell 89% from its September 1929 peak. It was at a level not seen since the nineteenth century.

•Falling share prices caused a collapse in confidence and consumer wealth. Spending fell and the decline in confidence precipitated a desire for savers to withdraw money from their banks.

Bank Failures

In the first 10 months of 1930 alone, 744 US banks went bankrupt and savers lost their savings. In a desperate bid to raise money, they also tried to call in their loans before people had time to repay them. As banks went bankrupt, it only increased the demand for other savers to withdraw money from banks. Long queues of people wanting to withdraw their savings was a common sight. The authorities appeared unable to stop bank runs and the collapse in confidence in the banking system. Many agree, that it was this failure of the banking system which was the most powerful cause of economic depression.

•Because of the banking crisis, Banks reduced lending, there was a fall in investment. People lost savings and so reduced consumer spending. The impact on economic confidence was disastrous.
Deflation

With falling output, prices began to fall. Deflation created additional problems.

•It increased the difficulty of paying off debts taken out during 1920s

•Falling prices, encouraged people to hoard cash rather than spend (Keynes called this the paradox of thrift)

•Increased real wage unemployment (workers reluctant to accept nominal wage cuts, caused real wages to rise creating additional unemployment)

Unemployment and Negative Multiplier Effect.

As banks went bankrupt, consumer spending and investment fell dramatically. Output fell, unemployment rose causing a negative multiplier effect. In the 1930s, the unemployment received little relief beyond the soup kitchen. Therefore, the unemployed dramatically reduced their spending.

Global Downturn.

America had lent substantial amounts to Europe and UK, to help rebuild after first world war. Therefore, there was a strong link between the US economy and the rest of the world. The US downturn soon spread to the rest of the world as America called in loans, Europe couldn't afford to pay back. This global recession was exacerbated by imposing new tariffs such as Smoot-Hawley which restricted trade further.

Different Views of the Great Depression

Monetarists View

Monetarists highlight the importance of a fall in the money supply. They point out that between 1929 and 1932, the Federal reserve allowed the money supply (Measured by M2) to fall by a third. In particular, Monetarists such as Friedman criticise the decisions of the Fed not to save banks going bankrupt. They say that because the money supply fell so much an ordinary recession turned into a major deflationary depression.

Austrian View

Austrian school of Economists such as Hayek and Ludwig Von Mises place much of the blame on an unsustainable credit boom in the 1920s. In particular, they point to the decision to inflate the US economy to try and help the UK remain on the Gold standard at a rate which was too high. They argue after this unsustainable credit boom a recession became inevitable. The Austrian school doesn't accept the Friedman analysis that falling money supply was the main problem. They argue it was the loss of confidence in the banking system which caused the most damage.

Keynesian View

Keynes emphasised the importance of a fundamental disequilibrium in real output. He saw the Great Depression as evidence that the classical models of economics were flawed.

•Classical economics assumed Real Output would automatically return to equilibrium (full employment levels); but the great depression showed this to be not true.

•Keynes said the problem was lack of aggregate demand. Keynes argued passionately that governments should intervene in the economy to stimulate demand through public works scheme - higher spending and borrowing.
•Keynes heavily criticised the UK government's decision to try balance the budget in 1930 through higher taxes and lower benefits. He said this only worsened the situation.

•Keynes also pointed to the paradox of thrift.

Marxist View

The Marxist View saw the Great Depression as heralding the imminent collapse of global capitalism. With unemployment over 25%, Marxists held that this showed the inherent instability and failure of the capitalist model. Furthermore, they pointed to the Soviet Union as a country which was able to overcome the great depression through state sponsored economic planning.

How Important was Stock Market Crash of 1929?

The stock market crash of October 1929, was certainly a factor which precipitated events. It did cause a decline in wealth and severely affected confidence. However, changes in share prices were a reflection of the underlying boom and bust in the economy. Also a collapse in share prices might not have caused the great depression, if bank failures had been avoided. In October 1987, share prices fell by even more (22%) than black Monday. But, it didn't cause an economic recession.

Unit 4 Euro Debate

Ireland did everything the EU asked of it. It slashed spending, it cut jobs, it cut public sector wages. Ireland was praised for its 'courage' in implementing austere fiscal policy which would reduce the deficit and 'improve confidence' in the economy.

Apparantely, some people are now surprised, that Ireland is now facing a shocking collapse in GDP. The Irish economy shrank by 1.2pc in the three months between April and June compared (an annual decline of 4.8%)

Has no one in the EU heard about Herbert Hoover and the initial response to the Great Depression?

Of course, being in the Euro makes it even more difficult because as well as fiscal retrenchment there is no possibility of exchange rate devaluation or loosening of monetary policy to help the economy.

So the EU response has been to

•precipitate a second recession
•Cause interest rates on Irish bonds to rise to a record 6.3%
•leave possibility of debt default.

The talk is of Ireland implementing further cuts or a partial debt default. But, there is depressingly little talk of the ECB implementing quantitative easing, which is what they need to do.

Unit 3: Oligopoly in action

1. A few summers ago, a friend and I spent three weeks travelling around the island of Bali in Indonesia. For six of those days we rented a jeep and circumnavigated the island. Our first stop was for two days of scuba diving in the northeast region of Ahmed.
   
   As we drove along the seven beaches near Ahmed, we observed there were around ten dive operators offering packages for the local dive spots (including one of Asia’s most famous dives, the WWII-era USS Liberty wreck).
   
   Based on our Lonely Planet recommendation, we settled on Eco-Dive, where we paid $60 a day for two dives and all our gear rental. We felt good about this rate and agreed that $60 was a fair and competitive price for a day of diving.
   
   Our next stop, Pemuteran, a remote and relatively undeveloped area on the northwest coast just across the straits from Java, is also known for its great diving. On our first morning in Pemuteran, we strolled along the beach and found that there were only three dive operators to choose from! And guess what, they all charged between $95-$105 for a day of diving. That’s around 60% more than the operators in Ahmed charged!
   
   In the end, we decided to do only one day of diving in Pemuteran, and elected to spend our second day there reading by the pool.
   
   Discussion Questions:
   
   What was the difference between the scuba diving markets in Ahmed and Pemuteran?
   
   Which market was more competitive? Which of the four market structures did the two markets most resemble: perfectly competitive, monopolistically competitive, oligopolistic or monopolistic?
   
   How were the dive operators in Pemuteran able to charge 60% more than the operators in Ahmed?
   
   What do you think is keeping one of the three dive operators in Pemuteran from lowering their price to, say, $60 for a day of diving? How would the other two operators respond?
   
   Would this be good or bad for the dive operators of Pemuteran?
   
   Would it be good or bad for scuba divers?
   
   Assuming that the cost of opening a dive operation was relatively low, and there were no government or other barriers to doing so in Pemuteran, what do you suspect will happen in the Scuba diving market as the tourism industry continues to develop in the remote town of Pemuteran? Explain.
   
   Which village’s dive operators do you think were more “efficient” in their use of resources? Explain.

Currencies in the news - 2 videos

Movements in the external value of currencies have direct and indirect effects on plenty of macroeconomic variables such as inflation, exports, output, profits and - ultimately - jobs.

This week we have seen the Japanese central bank intervening in the foreign exchange market in an attempt to drive the value of the Yen lower. Japan is struggling to sustain a recovery after the global financial crisis and a weaker currency is seen as a vital part of the attempt to prevent another draining bout of price deflation.




And the long-running dispute between the United States and China about the alleged under-valuation of the Yuan against the US dollar continues to rumble.

This BBC news video takes a swing through New Jersey to find trade unions lobbying government for more action on the exchange rate issue.

AS Unit 1 - Price of coffee rises - demand and supply in action

GSCE Economics - Price of coffee rises - demand and supply in action

A2, Unit 4: Why is Japan buying US bonds?

The recent economic crisis has led to various unusual types of economic behaviour. One example is that countries such as Switzerland and Japan have been trying very hard to reduce the value of their currency.

Japan, for example, is buying US bonds and selling Yen on markets. The Bank of Japan sold ¥1 trillion (£7bn) just yesterday. They hope by buying dollar assets, they will weaken the Yen against the dollar.

Japan has two main fears.

Strong currency makes Japanese exports more expensive, leading to less demand and lower growth. Because Japan is seen as a relative 'safe haven' there is unexpectedly high demand for Japanese currency.

Japan still has deflation (-1.5%). Deflation of course can lead to lower growth and debt deflation.
They hope by creating money to buy US bonds, they will create a monetary stimulus and improve exports.

The problem is that the US doesn't want a stronger dollar either. The US fears an appreciation in the dollar will hurt US exports. The US is already dismayed at the perceived under valuation of the Chinese currency. This attempt to manipulate exchange rates is often called 'competitive devaluation' or beggar-thy-neighbour policies - because you seek to improve your prospects by making other countries less competitive.

Why is the Japanese Currency Rising? when -

the economy is sluggish.
The Central Bank is trying to pursue monetary stimulus
Japanese Public Sector debt is over 200% of GDP
Generally, many markets see Japan as one of the least bad options for depositing money. This year concerns over the fiscal state of Euro bonds has led to a significant revaluation of the desirability of holding Euro bonds. The Euro has become much less attractive over fears of Euro debt default. Thus investors have been seeking alternatives - such as the Swiss Franc and Japanese Yen.

It may be that it is difficult to actually weaken the Yen, because the level of intervention may be too great given markets appetite for Japanese Yen

The problem is that the demand for Japanese Yen is not so much because of strong economic growth and good prospects in Japan, but because - well it isn't the US or Euro. Thus the Japanese Yen is rising at a time when their economy doesn't need it.

One thing is certain, countries like Japan need to avoid deflation. Weakening the currency and creating money is one way of dealing with it.

Revision quiz on Costs, Revenues & Profits

Oh, isnt it good to be back...........

http://www.tutor2u.net/business/quiz/costsrevenuesprofits/quiz.html

Have a go at the following, lets se what you remember!

Mr Bentley