Federal Budget 2017

Here is a link to The Guardian coverage

Here

Applying demand and supply

Below are links to two articles that can be used for applying demand and supply analysis.
Might be useful for IA's or Year 11 VCE assessment.

Price of Avacoados Daily Telegraph

Price of Avacados Evening Standard

Incentives to reduce pollution

The UK is considering a scheme to help remove diesel cars from the roads. This is after years of encouraging diesel fuelled cars by taxing it more favourably than petrol.

The reason for this scheme is that it is now considered that diesel fuel is more polluting than petrol. This is especially true of older diesel engines (mainly an ageing thing I think). The negative externalities of consumption associated with diesel are now thought to be more severe than previously thought (indeed it was thought diesel was better than petrol for the environment because less was needed to travel the same distance).

The proposal might be called a 'nudge' by behavioural economists, because they don't really understand subsidies! This scheme proposes to give a minimum payment, in excess of the market value of old diesel vehicles, to incentivise people to trade in their old vehicle for a brand new one. The new vehicles will emit less pollution and there is therefore a win for the environment as the market moves closer to allocative efficiency.

The scheme will effectively shift the demand curve for new vehicles to the right with the price difference between what the consumer is prepared to pay and the price they must pay covered by the government. Not everyone will trade in their diesel cars and vans, but some will and this will help efforts to reduce harmful pollution.

There is an interesting benefit for car and van manufacturers of course, they sell more new vehicles and so there will be a boost to Aggregate Demand and employment. The benefits will go to all manufacturers, not just those in the UK and so a Europe wide scheme would make the most sense.

The Daily Express covers the story here

This article has most relevance to IB who look at market failure in more detail than VCE. It is, however, a useful example of how governments can intervene in markets to improve resource allocation for everyone. Please note the Daily Express is not the only paper to cover this and I'd never recommend it as a serious newspaper generally, but I thought the Guardian and BBC deserved a rest.

Manipulating supply to raise prices

OPEC is a group of countries that produce oil and in the 1970's formed a cartel to try and raise the revenue they received from oil production. They were very successful then, but today there are many oil producers who are not members of OPEC and so their ability to influence the market has declined.

There is more oil production capacity than there is demand, and presently more oil is produced than the market wants. This situation of excess supply has depressed oil prices.

OPEC has tried to reduce supply from its members, with the cooperation of a few other countries, in order to raise oil prices. They succeeded, but the agreement is running out and there is talk of extending it.

There are some useful areas to investigate.

1. The oil price has fluctuated in anticipation of the agreement being renewed and to news about the level of oil stocks. Why?
2. The members of OPEC have an incentive to agree production limits and then cheat by producing more. Is this always true in cartels?
3. Why is the oil market producing so much more than the market requires? (The move away from fossil fuels and the rate of economic growth are both relevant here.)
4. Who gains and who loses from the lower oil price?

The BBC covers the story here

A trade off for monetary policy

Since the global financial crisis interest rates in the UK (and the US, Europe and Japan) have been at record lows. The aim was to boost Aggregate Demand and avoid prolonged recession and promote faster recovery. An interesting trade-off has been highlighted as a result of this policy.

The low interest rates have indeed maintained UK output, according to a Bank of England economist, but the low rates have meant firms that should have ceased operations have been able to survive. Around 1.5 million jobs have been protected according to Andrew Haldane.

Of course saving jobs was exactly what the Bank of England were trying to do when they lowered rates. The unintended consequence of this action was that it reduced the costs of poorly performing firms. Those who were not efficient enough to earn the profits necessary to repay loans at 'normal' rates of interest have been able to survive ('Zombie firms' according to Haldane).

The impact has been to allow low productivity jobs to survive and this has led to poor improvements in productivity overall, because the productivity figures reported are an average over the whole economy.

Productivity is a measure of efficiency. It records how many inputs are required to produce a given level of output. For economic growth to deliver higher standards of living a rise in productivity year on year is crucial. The UK has a very poor productivity record generally and the low interest rates since 2008 have allowed this to get worse.

Haldane says that he is happy to have seen 1.5 million jobs saved rather than 2% productivity growth. At least 1.5 million people and their families will be agreeing with him.

The BBC article is here

As this is an article about the UK as an example it is directly useful to IB students. However VCE students can see the example of how all policy has trade-offs and policy actions often have unintended consequences, such as supporting inefficiency to reduce unemployment.

Record high underemployment in Australia

The latest unemployment figures for Australia show a number of worrying indicators.

• A rise in unemployment overall (to 5.9% of the workforce)
• A record high in underemployment (1.1 million people are employed but want to work longer hours)
• Falling numbers of full-time jobs 

This all helps explain why wages growth in Australia is also at record lows. There is simply too much supply in the labour market for wages to rise. This may be because of a number of reasons, for example, an increasing workforce (immigration and more young people joining the market than older ones leaving it), or lower demand for goods and services made by Australians leading to less demand for workers. 

The prospect of falling Aggregate Demand (AD) is clearly a possibility. At present the rise in commodity prices is helping to boost exports, assisting modest AD growth, but isn't really employing any more people (because its the value not the volume of exports which is rising).

This is going to present difficult policy options for the Government (budgetary/fiscal policy) and the Reserve Bank of Australia on interest rates.

The Guardian covers the story here

The Fed tries to keep 'ahead of the game'

Eddie George, the former Governor of the Bank of England, described the role of Monetary Policy as 'keeping ahead of the game'. By this he meant central banks have to act early, in anticipation of movements in the economy.

The Federal Reserve Bank of the USA (the Fed) has raised its base interest rate from 0.75% to 1. The base (or benchmark) interest rate is important because all other interest rates in an economy are like rafts to the base rates tide. When the tide comes in all the rafts go up. All US commercial interest rates (like personal loans, savings rates and mortgage rates) will rise as a result.

The article points out that the US, like the UK and EU, has an inflation target of 2%. In all three inflation is around that level, but only the Fed is raising rates. This is where Eddie George's phrase becomes relevant. Monetary policy has 'long and variable lags' and takes up to two years to take full effect. The Fed is anticipating changes in the US economy and setting higher rates for what will happen in the future.

This is a very good topic for a Macro IA and you should follow the interest rate changes in major economies. (Note the 'analysis' section of the BBC story below makes this an unsuitable article for an IA, because it is doing the job you need to do in the IA, but there are lots of other reports.)

The BBC article is here

While this is about UK monetary policy the basics of monetary policy are the same in Australia, so useful for both VCE and IB students.

Eddie George was an almost fanatical player of Bridge. He attributed his initil success at the Bank of England to playing with various important people!