After Brexit what next for Britain's trade

After the (disastrous) result of the UK's vote to exit from the EU a good question is what trade arrangements can be made for the future.

The EU operates a 'single market'. There are no restrictions on the movement of goods, services, people or money. This is a completely 'free trade area' and the countries that operate with the Euro as their currency also eliminate any exchange rate transaction costs.

The UK sends about half it's exports of goods to the EU. The services sector is the crucial one however, with the City of London (the financial sector) easily the most important single part of the UK economy.

The UK now finds itself back at the basic level of trying to negotiate trade deals with the EU and replace all the trade deals that cease to exist with the rest of the world when leaving the EU.

There are a hierarchy of arrangements, from simple bilateral 'concession deals' with individual countries, to Free Trade Areas (which cover goods not services) right up to full access to the EU's single market (but at a cost).

The BBC sets out five alternative new models for the UK/EU trading relationship. It is rare to have the chance to pick where on the ladder of trade agreements you will sit. The pro's and cons of each arrangement need to be carefully considered.

What is clear is that none of the five options the BBC outline will prove acceptable to those who voted 'Leave' in the British referendum and simultaneously protect the UK's vital services sector. I hate to say 'I told you so', Brexiters.

The BBC article is here

This article has relevance to both IB and VCE. VCE students can apply it to the deals made by Australia in recent years and the TPP proposal to look at their pros and cons. For IB the article is essential reading, partly for the theory and application, but mainly because this is exactly the sort of thing you would set questions about in Paper 2!

Another sugar tax

Very sorry I have no time to write posts at the moment. Here is a post on another eample of a sugar tax, called a 'soda tax' as it is the USA.

The BBC article is here

Australian interest rates on hold for now

On Tuesday the Reserve Bank of Australia (RBA) held their cash rate at 1.75%. This wasn't a shock as they cut the rate last month from 2% and it takes a crisis for rates to move very quickly. However forecasters are saying that 1.5% is the likely rate by the end of 2016.

The RBA is setting monetary policy to an expansionary stance because inflationary pressures are low. Growth is presently 3.1% which is below trend, but still the second best in the OECD. Wage pressures are low and the investment component of Aggregate Demand is weakening. This all points to a need to help boost the demand side of the economy with lower rates.

International concerns also feature in the RBA's thinking. If Australia is the second fastest OECD economy then we cannot expect a major growth in export demand any time soon. Also commodity prices are expected to remain at around current levels for the rest of the year.  Australia needs to look to the domestic market for growth.

The reaction of the markets to the interest rate decision was to raise the price of the Australian dollar. The exchange rate has fallen since 2013, but is now fluctuating between 70c and 75c to the US dollar. The boost to Australian export competitiveness has been welcomed, but the RBA's decision to keep Australia's relatively high rates on hold a while longer has meant a move to the higher end of the current trading band.

Major countries central bank interest rates compared to Australia

Australia      1.75%
USA             0.5%
UK               0.5%
Euro area    0.0%
Japan          0.0%

The RBA's decision is reported here 

Monetary policy is a major topic in both VCE and IB. The reasons for setting interest rates is a key area of knowledge as is the impact those decisions have on the wider economy.

How is the Australian economy doing?

Yesterday the ABS presented a report on the state of the economy. The news was somewhat mixed.

The good news was that the economy is growing more strongly than expected. An annual rate of 3.1% after a strong first quarter. This is encouraging as it suggests that growth might continue to pick up over the next year or so.

However there was bad news on business investment, which contracted 2.2%. Investment is a component of Aggregate Demand and a driver of future growth on the supply side.

There was also bad news on real disposable income per capita which has been declining for two years according to the ABS. This means the purchasing power of households is declining and so lower material living standards will follow.

The picture is very mixed. The 'third phase' of the mining boom is driving output and exports. The third phase of the mining boom is the 'production phase', all those new and larger mines producing coal, iron ore and LNG. But the mining sector is located in remote Australia and provides few jobs, so most people will not see the benefit of this economic growth.

The ABC covers the report here (some nice graphs)

This article is most relevant to VCE students who must know how the Australian economy is performing and what the major demand and supply side influences are on the economy. IB students will be able to use it to understand how economic performance is measured and draw the inference that not all indicators point in the same direction.