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Sunday 28 February 2016

Unit 2 & 4: Globalisation with essay question - essential reading!

Many thanks to the team at tutor2u for this excellent set of notes and presentation on globalisation. Essential reading for A2 students and any AS student who wants to stretch themselves (that should be all of you! :-))

Globalisation is a process of deeper economic integration between countries and regions of the world.

The OECD defines globalization as

"The geographic dispersion of industrial and service activities, for example research and development, sourcing of inputs, production and distribution, and the cross-border networking of companies, for example through joint ventures and the sharing of assets."

Characteristics of globalisation

  1. Greater trade in goods and services both between nations and within regions
  2. An increase in transfers of capital including the expansion of foreign direct investment (FDI) by trans-national companies (TNCs) and the rising influence of sovereign wealth funds
  3. The development of global brands that serve markets in higher and lower income countries
  4. Spatial division of labour– for example out-sourcing and off shoring of production and support services as production supply-chains has become more international. As an example, the iPhone is part of a complicated global supply chain. The product was conceived and designed in Silicon Valley; the software was enhanced by software engineers working in India. Most iPhones are assembled / manufactured in China and Taiwan by TNCs such as FoxConn
  5. High levels of labour migration within and between countries
  6. New nations joining the world trading system. China and India joined the WTO in 1991, Russia joined the WTO in 2012
  7. A fast changing shift in the balance of economic and financial power from developed to emerging economies and markets – i.e. a change in the centre of gravity in the world economy
  8. Increasing spending on investment, innovation and infrastructure across large parts of the world
  9. Globalisation is a process of making the world economy more inter-dependent
  10. Many of the industrializing countries are winning a rising share of world trade and their economies are growing faster than in richer developed nations especially after the global financial crisis (GFC)



 Among the main drivers of globalisation are the following:
  • Containerisation – the costs of ocean shipping have come down, due to containerization, bulk shipping, and other efficiencies. The lower cost of shipping products around the global economy helps to bring prices in the country of manufacture closer to prices in the export market, and makes markets more contestable in an international sense.
  • Technological change – reducing the cost of transmitting and communicating information – sometimes known as “the death of distance" – a key factor behind trade in knowledge products using web technology
  • Economies of scale: Many economists believe that there has been an increase in the minimum efficient scale (MES) associated with particular industries. If the MES is rising, a domestic market may be regarded as too small to satisfy the selling needs of these industries.
  • Opening up of global financial markets: This has included the removal of capital controls in many countries facilitating foreign direct investment.
  • Differences in tax systems: The desire of corporations to benefit from lower unit labour costs and other favourable factor endowments abroad and develop and exploit fresh comparative advantages in production has encouraged countries to adjust their tax systems to attract foreign direct investment (FDI)
  • Less protectionism - old forms of non-tariff protection such as import licencing and foreign exchange controls have gradually been dismantled. Borders have opened and average tariff levels have fallen – that said in the last few years there has been a rise in protectionism as countries have struggled to achieve growth after the global financial crisis.
Globalization no longer necessarily requires a business to own or have a physical presence in terms of either owning production plants or land in other countries, or even exports and imports. Many businesses use licensing and franchising to help expand their overseas operations.
Aspect of globalisation
Links for further exploration
Transfer of financial capital and great FDI
Transfers of technology and information
Outsourcing and offshoring
Labour migration within and between the world's economies
Development of global brands



Unit 2: Current Account Balance of Payment Presentation

Presentation for AS students on the Balance of Payments. Remember, for AS, it's the CURRENT ACCOUNT that is important!

Wednesday 24 February 2016

Unit 3: Competition policy - Presentation

Why does the government intervene in markets to maintain competition?
You should be able to:
  • Explain and evaluate measures aimed at enhancing competition between firms and their impact on prices, output and market structure.
  • Compare and evaluate the strengths and weaknesses of methods of regulation for example price capping, monitoring of prices and performance targets.

Unit 4: Why some countries are rich and other are poor!

This is an excellent set of clips that explains why countries are developed and others are not. It is a little right wing, too focused on money and some of the claims can be questioned, but it does give a good picture of why & how a country can develop.

Tuesday 23 February 2016

Unit 2 & 4: Fiscal Austerity Essay

Here is a really good example of a student essay that uses strong contextual evidence to build arguments on both sides of the fiscal austerity debate. First Year student Juhwan Sohn answered this question: 

"Evaluate the impact of the UK government’s fiscal austerity programme"
Fiscal austerity in the UK describes decisions made by the government with the aim of reducing the amount of government borrowing, or cutting the size of the fiscal deficit, over a time period adjusting for the effects of the economic cycle. This means that automatic stabilisers (fiscal changes as the economy moves through stages of the economic cycle of recessions and booms) result in the deficit rising and falling as the economy expands and contracts. Fiscal austerity is implemented by cuts in government spending such as welfare caps, “wage freezes” and defence cuts, and an increase in taxes such as the increase in VAT in 2011. 
A fiscal or budget deficit is when the government spending is greater than the tax revenue in a given time period. This means that during a period of economic growth, the cyclical deficit will fall, due to the decrease in spending on unemployment benefits and an increase in government tax revenues. The UK government fiscal austerity programme was introduced by the Conservative and Liberal Democrat coalition in 2010, and almost succeeded in halving the UK budget deficit by the end of 2015. George Osborne’s new fiscal rule (2015) stated a target for a budget surplus by 2019/20 and for all subsequent years in ‘Normal times’ (real annual growth is above 1%). 

Whilst it may make sense to cut the budget deficit and work towards a budget surplus, especially during periods of strong growth, cuts in spending and an increase in taxes are arguably counterproductive and potentially damaging to parts of the UK economy. The impacts of fiscal austerity in the UK has raised questions on whether the government has placed too much emphasis on deficit-cutting in recent years, and it could be argued that running a budget deficit is better than contractionary fiscal policies and there are better alternatives.
Although fiscal austerity has had some success in reducing the budget deficit, it has also resulted in negative impacts on the lower income families in the UK. Cuts in government spending since 2010 such as wage freezes and welfare caps, have had regressive effects in the UK, as it has affected lower income families the most. 
According to a UK case study by Oxfam, as a result of the austerity measures, the poorest two-tenths of the population “have seen greater cuts to their net income in percentage terms than every other group, except the very richest tenth.” Furthermore, according to the Institute for Fiscal Studies, the effect of the tax increases and welfare cuts will be to increase both absolute and relative poverty by 2020. It is estimated that an additional 800,000 children will be living in poverty, and an extra 1.5 million working age adults could slip into poverty. This therefore could lead to a worsening of inequality in the UK, which has risen faster among the working-age population than in any other OECD country. 
The unemployed portion of the UK population has also experienced significant impacts of the austerity programme. Following the cuts in welfare and small increases in taxes, unemployed people have seen a 7% loss of income, worsening their chances of climbing out of unemployment. This could contribute to the growth of long-term unemployment, whilst failing to address the problem of youth unemployment in the UK. Therefore, the regressive impacts of the fiscal austerity programme are damaging to the UK economy in the long term, and can be seen as being counterproductive. The Oxfam case study concludes that “the UK’s current austerity programme threatens to solidify the UK’s position as a country of growing inequality and poverty.”

The UK government’s fiscal austerity programme may not have significantly contributed to and have had a restrictive effect on the UK economic performance on its way to recovery since the 2008-9 crisis. Professor John Van Reenen of the LSE argues that the figures for the UK economic performance over recent years  gives a distorted view of reality, as fast population growth (net immigration is triple the government’s 100,000 target) contributed significantly to the GDP growth rate of 2.7% in 2014, and in comparison with “historic trends, GDP per capita was nearly 16% lower in 2014- a loss of about £4,500”. Further to this UK productivity measured by GDP per hour is approximately 16% below the trend and 17% below the G7 average. 
John Van Reenen has labeled the UK’s performance as “the worst recovery this century” and argues that plans for continued austerity would decrease the budget deficit but would also sacrifice investment, growth and employment, thus further affecting the already weak economic performance. The government’s contractionary fiscal policy and accelerated austerity such as increased in VAT to 20% in 2011, £32 billion of spending cuts by 2015 and an enormous 40% real cut in public investment during 2010-12, could have restricted the prospects of economic growth, especially following a recession and contributed to the UK’s poor economic performance due to factors such as the lack of multipliers (a change in one of the opponents of aggregate demand can lead to a multiplied final change in the equilibrium level of GDP) from investment. 
The OBR estimated that approximately 2% of GDP was lost due to austerity policies by the government. The fiscal austerity programme is arguably acting as a dragging force on the UK economy’s road to recovery. Having said all this, many other factors outside of the state’s control have also contributed towards “the worst recovery this century”. The eurozone crisis has had a drag on the UK economy and the decline of productivity in sectors such as oil and finances has played a role in the UK’s economic performance. However, the fiscal austerity measures undoubtedly forms a part of the reasons behind the poor performance.
Fiscal conservatives argue that a deficit reduction and balancing of budgets through a fiscal austerity programme will help maintain the UK’s international credit rating as well as improving confidence among domestic and foreign investors, encouraging an inflow of capital which could result in an increase in aggregate demand and aggregate supply (economic growth). The maintenance of a good credit rating should lower interest rates on bonds and this is shown by the fact that the yield on the UK government bond is 2%. The yield on a bond is calculated by coupon(annual interest)/market price x 100%. However, following the UK credit rating downgrade in 2013, the government was called to “ease the pace” of austerity. The UK still has a triple A rating from Standard & Poor, and a AA+ rating from Fitch, but in 2013 the UK lost Moody’s rating of AAA and was downgraded to AA1 due to the “continuing weakness in the UK’s medium-term growth outlook” according to Moody. Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment stated that “now that the UK’s triple-A rating has been lost, it probably makes sense for the Chancellor to ease the pace of fiscal consolidation”. This shows that although fiscal austerity has not significantly harmed the UK’s credit rating or confidence among investors, its contractionary and restrictive nature could be a cause for concern. 


The concerns for the UK government’s fiscal austerity programme seems to be justifiable in numerous cases, as cutting the budget deficit does seem to be coming at a significant cost to other aspects of the UK economy. An alternative, and perhaps less harmful approach to cutting government spending to reduce the budget deficit may be to cut middle-class benefits to fund infrastructure spending in the UK. According to the Social Market Foundation (SMF), welfare and benefits for the relatively better-off families should be reduced and reinvested infrastructure projects. It estimates that £15 billion could be raised by cutting free bus passes and television licences for better-off pensioners, halving higher-rate pension tax relief (reduction in the amount of pension tax owed by an individual) and removing child benefits for the top 50% of income earners. This could lead to a significant cut in public spending and it would go towards a more expansionary policy. However, according to The Guardian, this alternative is unlikely to be taken up by a Conservative government, “as they will not want to cut pension tax relief for a core segment of their voters.” Another alternative to fiscal austerity, offered by Keynesians, is counter-cyclical fiscal policy. This means going against the economic cycle and during a recession, the government should send and borrow more to stimulate economic growth. This suggests that running a budget deficit is not very damaging to the economy and is better than paying the costs of correcting it through a fiscal austerity programme. Furthermore, Keynesians argue that running a budget deficit and borrowing more to stimulate growth could be partly self-financing. For example, when increased borrowing leads to an increase in incomes and tax revenues for the government. 
This approach is to allow economic growth through fiscal stimulus to bring the deficit down gradually through higher tax revenues and lower spending on benefits as the economy grows. Increased in spending especially on infrastructure projects, made possible by a rise in borrowing, could result in fiscal multipliers in the long run, as well as increases in the productive capacity of the economy. However, the Economist argues that “since [infrastructure] projects take time and money to construct, the argument for infrastructure spending having a positive impact on productivity in the short-term is difficult to quantify.” Therefore it could be said that running a budget deficit and borrowing more is likely to benefit the economy in the long run.
Overall, although the UK government’s fiscal austerity programme following the economic crisis of 2008-9 has significantly reduced the budget deficit, it has come at a significant cost and damage to other aspects of the economy, which could have long term implications. The austerity programme cannot be written off and branded as being completely damaging and useless, but an easing of or simply less austerity may be more effective in reducing the deficit without having serious implications for the economic performance. 

This reflects the views of economists such as Jonathan Portes, the director of the National Institute of Economic and Social Research and Ed Balls who blamed the economic performance since 2010 on the severe fiscal austerity programme. Jonathan Portes stated that “Fiscal consolidation has slowed, at least for the time being, and as a consequence it is playing a considerably smaller role in driving economic developments than it did two years ago”. A looser austerity measure may enable the government to rebalance the UK economy without doing further damage to the UK economy, and alternative measures that could work in tandem with a less severe austerity programme should also be considered. 

Monday 22 February 2016

Unit 2: Unemployment - All you need to know

Unit 4: Economic Development - Lesson Plan

This week, you will be researching countries using lots of development data. The aim will be to answer any question on development by the end of the process. Click here for the lesson plan.


Sunday 21 February 2016

Unit 4: Constraints on Economic Development

Unit 3: Contestable markets - a presentation

How does the threat of competition affect a firm’s behaviour?
Students should be able to:
  • Understand the characteristics of this market structure with particular reference to the interdependence of firms
  • Explain the behaviour of firms in this market structure
  • Explain reasons for collusive and non-collusive behaviour
  • Evaluate the reasons why firms may wish to pursue both overt and tacit collusion

Unit 3: Impact of competition in the mobile phone market

Why are regulators in Britain and Europe opposed to a proposed £10.5-billion merger between the UK’s second-largest operator, O2, and the fourth-largest, Three?
According to the Economist, in many respects Britain’s mobile-phone market is one of the most successful in the world. About 30 operators compete for business, ensuring that prices are among the lowest for rich countries. A number of retailers offer an almost infinite variety of bundles of services, and coverage is relatively good too.

The proposed merger would continue a long-standing trend towards consolidation among mobile operators, both in Britain and other rich countries. It is a mature market, and since 2008 revenues have generally been falling. It has thus made sense for companies to merge, freeing up capital for investment in costly infrastructure and new technology, such as speedy “4G” networks. In Britain, T-Mobile and Orange merged to create the biggest operator, EE, in 2010. EE, in turn, has been taken over by BT, the former state-run monopoly, in a £12.5-billion deal that created a giant covering mobile, fixed-line phones, broadband and television.
Yet Britain’s telecoms regulator, Ofcom, is opposed to the O2-Three merger. The main reason is that the removal of one of these would so diminish competition that it “could mean higher prices for consumers and businesses”.The concern is that although there are about 30 operators overall, there are only four—EE, O2, Three and Vodafone—that run and maintain the physical infrastructure for mobiles. Ofcom contends that the reduction of network providers from four to three will allow them to drive up prices.
Mergers of this size are automatically referred to the European competition commissioner, who shares the UK regulator’s worries about the O2-Three case. Ofcom’s own research in 25 countries shows that average prices were up to one-fifth lower in markets with four network operators than in those with three.
Another reason for preferring the four-network model is that the smallest operator of the gang usually operates as the disrupter and innovator. This has been the case with Free Mobile in France and T-Mobile in America. Three has played a similar role in Britain. It was the first to launch a 4G service at no extra cost than 3G, in 2013, as well as a “Feel at Home” service, scrapping roaming charges in 16 countries. According to one telecoms expert at the OECD, in the rapidly evolving world of the “internet of things”, companies that innovate will be more important than ever.

Wednesday 17 February 2016

Unit 3: The kinked demand curve - presentation

A revision presentation on the kinked demand curve theory of oligopoly plus revision notes on the basics of an oligopoly 
Students should be able to:
  • Understand the characteristics of this market structure with particular reference to the interdependence of firms
  • Explain the behaviour of firms in this market structure
  • Explain reasons for collusive and non-collusive behaviour
  • Evaluate the reasons why firms may wish to pursue both overt and tacit collusion

Unit 3: Oligopoly & Collusion

Tuesday 16 February 2016

Unit 3: The Independent - non price competition

A fantastic piece for Unit 3 and how to compete in a declining market. Click here for the article.

As a strategy, will it work? Please comment.

Unit 4: Financial markets in turmoil

I read this interesting article on why the financial markets are so volatile at the moment. It does help explain why certain factors are affecting economic growth (or lack of it) in many countries. Essential reading for Unit 4 essays.

Wednesday 10 February 2016

Unit 3: Barriers to Entry - presentation

This is an updated revision presentation on Barriers to Entry in Markets
Students should be able to:
  • Understand the meaning & types of barriers to entry and exit and how they affect the behaviour of firms.
  • Discuss the significance of barriers to entry and exit to firms operating in different market structures.

Tuesday 9 February 2016

Unit 3: The UK Mobile Phone operators & regulation

Click here to access an article found by Arjun about the UK mobile phone industry. Excellent when discussing the advantages of competition, issues with mergers and effectiveness of government regulation.

Monday 8 February 2016

Unit 4: UK and its current account deficit

Thank you to Mo Tanweer for digging out this detail on the breakdown of the UK current account deficit in 2015. It provides some revealing context to aid the evaluation arguments surrounding Britain's historically high external deficit!
Key points are:
The deficit is now around 6% of GDP - the highest on record
Net property income from overseas investment has turned negative - for a long time this was a steady positive contributor to the UK balance of payments accounts.
Of the UK current account deficit last year: 
  • c.37% of it is the trade deficit i.e. the value of imported goods & services exceeds the value of exports
  • c.36% of it is net factor income from abroad
  • c.27% of it is the net unilateral transfers deficit for example affected by UK net contributions to the European Union
For info, the 2008 UK figures show how much things have changed:
  • Trade deficit made up 90% of the UK current account deficit back then.
  • Net factor income from abroad was in surplus to tune of c.16%.
  • The net unilateral transfers has been stable – was around 26% back then

Sunday 7 February 2016

Unit 4: Factors effecting Exchange rates

Thank you to Daniel (not something I say very often!) for this article on factors affecting exchange rates. This is a really good piece highlighting the main influences on exchange rates.

Click here for article.

Thursday 4 February 2016

Unit 4: FDI in developing countries

Thank you to Delton for finding this article about the potential issues with FDI in developing nations. It discusses how corruption in government has helped one man exploit the countries vast minerals at the expense of income inequality.

For the sake of balance, here is an article that shows how FDI can help improve a countries economy for all. (although, even this article has issues such as tax free holidays and repatriate all profits)






Tuesday 2 February 2016

Unit 4: Why is sterling on the slide?

According to The Economist, Sterling has had a very choppy history, marked by crises such as 1967, 1976 and 1992. And it is having another rocky period.  Thanks to Guy Tennant at Norwich School for highlighting this article:
In trade weighted terms, the £ Sterling has dropped more than 7% in just two
months, a fall of a magnitude only surpassed once since the MPC assumed
responsibility for setting UK monetary policy in 1997. The pound has behaved more
like a commodity currency (the Aussie or Canadian dollars) even though it is a large
net importer of commodities.
Mark Carney, the governor of the Bank of England, indicated recently that British interest rates were unlikely to rise in the near future. That may have held down Sterling.  But interest rate expectations can't explain these moves.
Are fears of BREXIT responsible?
Recently there’s been a big increase in the focus on the UK's EU referendum – with
some insiders believing that the likelihood that Britain votes to exit the EU has risen
from 30% to 35%. The uncertain outcome has led to a weaker sterling, which reflects reduced demand and increased risk for UK assets. “But current sterling weakness
is probably only a small taste of what would be store for the UK in the unlikely event
of an exit”.
The Economist is against BREXIT, and quotes bank ING, who think the uncertainty of
the vote might lead to a quarter of a point being knocked off this year's GDP growth,
and a further 1.2 points off 2017 GDP if Britain votes to leave. Morgan Stanley's economists write that “We expect the outcome to be a close call. We also think that
a vote to leave the EU would trigger a major and sustained rise in political and economic uncertainty”.
Indeed, Brexit could trigger another Scottish referendum to leave the UK. This
uncertainty would make it less likely that both domestic and foreign companies
would invest in Britain and according to another bank: “if the UK voted to leave, the
risk of an immediate and severe weakening in economic activity would be very high
and we would not rule out a recession. Consumer and business sentiment could
decline sharply, leading to a slowdown in consumption and business investment".
Those in favour of BREXIT will dispute the numbers, arguing that Britain will be
better off without the dead hand of EU regulation, contributions into the EU Budget
and so on. Given all the uncertainties (Norway is outside the EU but has to
contribute to the budget, for example), there can be no definitive answer. Fans of behavioural economics might note that minds on either side are unlikely to
be swayed by these numbers; confirmation bias tends to set in (you only believe
"facts" that chime with your initial opinion).
Axa, the French insurance company, has just come up with a cost of Brexit of
2-7% of GDP, largely down to the effects of reduced investment and consumer
uncertainty. In the long run, the British economy would probably adjust to the
new reality. Open Europe, a think tank, estimated that the shift in UK GDP by
2030 would lie somewhere in the range of minus 1.6% to plus 2.2%.
Of course, one likely reason for depreciation is Britain's current account deficit,
which at 4.5% of GDP, needs foreign capital to finance it. In the absence of
foreign direct investment, that deficit would be harder to finance; hence sterling's
fall.
A fall in the pound could help exporters but that tactic hasn't been working
elsewhere
(nor did it for the UK when the pound last plunged in 2008-09).