The good side to exchange rate depreciation

The exchange rate of the UK Pound against other currencies has fallen considerably in 2016, the result of the vote to leave the EU. The cause of the fall is actually based on the view that the UK economy will do less well outside the EU than in it.

The chart shows the value of the pound against the US$ over 2016.

The pound has performed in a similar way against other currencies.

What does this mean? Firstly UK imports are more expensive because more pounds have to be given to buy each foreign good or service than before. This can lead to higher inflation as the price of imported goods and services in pounds rises and it makes UK consumers worse off.

On the plus side British exports are cheaper as far as foreigners are concerned. This will allow British firms to raise the level of exports. As long as the Marshall-Lerner conditions hold this will mean that the UK will experience rising net exports (X - M) and so a boost to Aggregate Demand and economic growth.

The article below explains how the British tourist industry is already experiencing a rise in demand and expects 2017 to be an exceptionally good year. A silver lining for Brexit?

The Guardian article is here

This article is an excellent example for International Economics for IB and can equally be used to illustrate the effect of changing exchange rates for VCE students. Note the Marshall-Lerner conditions are only part if the IB syllabus.

Scarcity, choice and opportunity cost

The fundamental problem of economics is scarcity. There are infinite wants, but limited resources and so all societies have to make a choice about which wants to satisfy. The cost of that choice is called the opportunity cost and is defined as the next best alternative forgone.

An example of these concepts is seen in the article linked below, which describes how the health service for England has rejected the use of a cancer treatment because they do not consider the benefits to be worth the costs.

A few words on health provision in the UK. The National Health Service (NHS) provides healthcare free at the point of use. No member of the British public, or indeed visitors, are charged for NHS care although there may be a small charge for prescriptions. The service is paid for from general taxation which means that those not working, the old or the young are not required to have contributed to tax in order to benefit. There is little need, or requirement, to have private health insurance and only 9% to 11% of the population have it.

The NHS therefore provides healthcare from a budget allocated by the government. This is, by definition, limited and the NHS must decide on the most effective way to allocate the resources it has between alternative uses.

This is a classic case of scarcity, choice and opportunity cost. The drug the article is concerned with treats a form of breast cancer that affects about 1200 women a year. It costs 90,000 GBP (AU$153,000) a year and is estimated to extend life for the average patient by around nine month.

The decision to deny access to the drug seems callous. It is really quite distressing to those who will be denied access. But what is the opportunity cost of providing the treatment? What could the NHS do with 108 million pounds a year otherwise? Of course the answer is quite a lot and hence the decision not to fund the drug.

The diagram below shows a PPF for the NHS.

As the NHS has a limited budget they cannot simply buy more of all cancer treatments. If they provide extra breast cancer treatments by reallocating resources from point A to point B there will be CD more breast cancer patients treated, but EF fewer patients treated with other forms of cancer. This is the inevitable consequence of scarcity. The opportunity cost of providing CD more breast cancer treatments is, in this case, EF fewer other treatments.

The Guardian article is here

This is a fundamental principle for all economics students when starting their course. This is a particularly unpleasant exampleto illustrate these central concepts.

The effect of Trump on the US economy

We are condemned to live in interesting times, and one of the most interesting things is what Trump's Presidency will do to the US economy.

Joe Stiglitz, a Nobel winning new-Keynesian economist, has written an opinion piece on what he thinks will happen. Some of this is beyond the new Year 12's at present, but will become clear soon. Notice in particular how Stiglitz links together different policy areas as a change affecting one part of the economic system affects others.

For example the idea that the USA will invest more than it presently saves to 'boost' economic growth leads to a rising current account deficit, which reduces Aggregate Demand and so dampens economic growth.

Stiglitz's implies Trump is just a blow-hard who does not understand economics. Can't argue with that.

Stiglitz's article is here

Pretty much essential reading for all IB students. Keep this bookmarked to refer back to.

How economies are highly interdependent

I found the article below while looking through papers on newspapermap.com. It is about how Brazil's recession is affecting Argentina's economic growth. It also details how some other injections into the circular flow will help Argentine growth in 2017.

The key here is that exports are an injection into the circular flow, but depend on foreign income, not domestic income. Therefore as Brazil suffers its 'worse recession in 100 years' their major trading partner suffers a fall in Aggregate Demand too.

This article lends itself to AD/AS analysis and discussion of multipliers. It could be taken to be an article on international trade, but for me would be best suited to a macro IA that discusses how changes in injections have a multiplier effect and to discuss the impact on the economy, government, taxpayers etc.

The article from the Buenos Aires Herlad is here

Shifting consumer preferences

The sales of fish fingers (frozen processed fish in breadcrumbs) is on the rise, Fish fingers were a popular 1970's dish, but declined in popularity over time. This is a perfect example of changing conditions of demand.
                
We know that the relationship between the price of a product and the quantity demanded will obey the law of demand. However the quantity of a product will vary while the price remains the same due to changing conditions of demand which shift the demand curve.

As the 1980's and 1990s' progressed real incomes rose. Changing real income is a change in the conditions of demand and revealed that fish fingers are inferior goods. The demand curve for fish fingers shifted to the left, while demand for substitutes for fish fingers, normal goods, shifted to the right. This might have included the wonderful Chicken Kiev in the 1980's and pre-prepared meals such as curry's in the 1990's.

The demand curve for fish fingers now appears to be shifting right once again and it's not the law of demand that is causing it. Rather the concerns about the dangers of processed meant, such as bacon and sausages, is being credited with the change. As the demand for the substitute goods shifts left the demand for fish fingers shifts back to the right. The result is that more fish fingers are being bought at the market price, while fewer sausages and bacon rashers are purchased.

The diagram below shows the effect. The demand curve in each market shifts from D to D' as tastes and preferences, another condition of demand, changes for each good.
                                             Fish fingers                        Sausages

 

The article from the Daily Telegraph below explains some other factors and provides some numbers on the changes in quantities. If you are considering this for a microeconomics IA you should draw your own diagrams and incorporate the numbers.

Note that the rise in fish finger consumption could also be due to falling real incomes in the UK, particularly in lower income households. That is the income effect and shows fish fingers are still an inferior good. 

The Daily Telegraph article is here

 

Effects of the UK sugar tax

The article below is not suitable itself for an IA. However it makes important points about the effectiveness of the proposed UK sugar tax that would be useful material to help analyse any sugar tax or anti-obeisity measure.

Therefore very useful for those revising their IA's or the 2017 year 11's.

The BBC article is here

US raises interest rates

The US Central Bank, The Federal Reserve Bank, (the Fed) has raised interest rates in the US from 0.5% to 0.75%.

This may not seem like much, but for the fact this is only the second rise in ten years. (Note that 0.25% is the usual change in rates around the world.) It reflects the recovery of the US economy from the deep problems caused by 'The Great Recession' and signs that Aggregate Demand  and economic growth is picking up.

Note the factors which the Fed have cited as reasons for the rise. Clearly not everything is going really well, but AD is rising. They also seem to be taking account of the fiscal boost President-elect Trump is proposing.

Why should the Fed act now when inflation is so low (below target) and Trump has yet to unleash his 'hope for the best' economic policies on the USA and the world? The answer lies in the 'long and variable' lags in monetary policy. It will take at least 18 months for this interest rate rise to have full effect, and possibly two years. 

Another Chairman of the Fed, William McChesney Martin famously stated that the job of the Federal Reserve is "to take away the punch bowl just as the party gets going",  recognising the long lags in policy. (That is raise interest rates early in the upward part of the business cycle and not wait until inflation is already rising.)

US Federal Funds Rate December 2005 to December 2016

The Sydney Morning Herald covers the story here

This article is about monetary policy and how decisions are made. AD/AS analysis can be applied to it and analysis of why the decision has been made can be discussed.

Monetary policy in the EU

Here is another possible IA topic. The European Central Bank (ECB) is to extend its Quantitative Easing (QE) programme by nine months, but won't buy as many bonds each month.

You will recall that QE is like printing money to expand the money supply. The ECB buys bonds from the public adding to their cash holdings. This increases liquidity in the market and forces down yields on all financial assets. The hope is that this encourages households and firms to spend money (boost AD).

The question is, will it work? The phrase 'pushing on a piece of string' is often used to suggest that under current circumstances it will have little effect. But can it do any harm?

Notice that the Euro depreciated. This may help make Euro Area exports become more competitive if that situation persists.

The BBC covers the story here 

This story is about monetary policy, but 'unconventional monetary policy'. It is a good topic for an IA. Again you may want to find other sources where the article leaves you more to say.

Justifying protection in the book market

Books in Australia are expensive. Really expensive. It has been well known that buying books from Amazon or 'The Book Depository' and having it shipped from the UK or USA has been cheaper than walking down to Dymocks. The reason is protectionist measures imposed by the government.

It is illegal to import for resale any book that an Australian publisher has the rights to. Therefore if an Australian publisher sells a book at $50 and a UK or US publisher sells the book for $15 then buying it in Australia leaves the consumer $35 worse off and until the internet there was nothing you could do about it.

The rules that cause this are called the 'parallel import rules' and have applied in several sectors. Recently the government accepted the recommendations of a report that all such rules should be abolished.

The argument for the rules on books has been that it protects Australian authors. By protecting Australian publishers from competition this raises all book prices.  Therefore the Australian authors can be published because the returns from Australian publishing are high enough to justify the investment.

Of course the big loser is the Australian book buyer. They pay more for all books, regardless of who wrote them. The big gainers are Australian publishers who can charge more because they are protected from competition from international publishers. For example a Harry Potter novel could be published overseas and in Australia but the overseas copy cannot be sold in Australian bookshops despite being a third of the price.

Would fewer Australian authors be published if the rules were dropped? Probably, but only because their product was uncompetitive - that is consumers preferred overseas alternatives. That is improving allocative efficiency.

Would fewer people be employed in the publishing industry if the rules were dropped? Certainly, because printing overseas is very much cheaper than printing in Australia. This means improved productive efficiency. (Many point out that overseas printing is also of much higher quality as their equipment and technology is superior. Improved allocative efficiency too.)

Would fewer people be employed in book selling in Australia? Probably not. Lower prices will increase book sales if the law of demand is right. Of course they may be employed differently to at present, but there is no reason why bookselling should see less activity at all.

Therefore the parallel import rules are an example of old fashioned protectionism with little to recommend it. The losers are the Australian public who will see their consumer surplus transferred to publishers or lost completely.

The Guardian covers the story here

This story is relevant to both IB and VCE students. IB students will study protectionism in international economics and VCE students will also look at the goal of external stability and policies to achieve it.

Australia is not 'half way' to recession.

Yesterday it was revealed that in the September quarter the Australian economy shrank by 0.5%. Some commentators chose to say that Australia was 'half way to recession' on the basis of the semi-technical definition that a recession is two quarters of declining real GDP.

The fact that Australian GDP has fallen is remarkable and looking at the reasons for this is a very important exercise. There are many articles on the fall in. output that might make useful Macro IA's for the IB students.

The article below is from the Guardian Australia and as always has lots of data and opinion. The opinion makes it unsuitable for an IA article itself, but it can help you write a commentary.

What could be the causes of the fall in real GDP?
Falling AD?
AS not growing fast enough?

Certianly plenty to apply in this story to the AD/AS model.

The Guardian article is here

See above - this is classic IA topic stuff. Causes, consequences and policy implications galore. For VCE students an absolute must to read as well.

India's withdrawal of bank notes

At what was in effect no notice, on 8th November, India announced that all 500 and 1000 rupee notes would cease to be legal tender. That is 86% of the cash in the Indian economy.

This is quite a shock to the system, after all 90% of India's transactions take place in cash. Yet the bulk of the Indian population apparently support the move, despite having to queue for hours to deposit their now otherwise worthless notes into bank accounts.

The reason the government took this radical step is to reduce tax evasion. India has a massive corruption problem where only 1% of people pay income tax, largely because transactions go unrecorded because they take place in cash.

The move is designed to make people deposit their cash in banks and to make more future transactions through the banking system.

Those who deposit large amounts will be asked to prove they paid tax, or be taxed on it. From then on transactions will largely have to be transparent through the banking system as people can only obtain a limited amount of cash in new notes. Therefore in the future they can be taxed fairly.

This is a bold attempt to deal with the informal or black economy. Developing countries lack the tax base to raise the money governments need to fund infrastructure and other development projects. Of course it is unclear whether the Indian governments bold (reckless?) plan will work.

The BBC explain the motives here

This is an article that is relevant to Development Economics, the last topic in the IB syllabus. However it is well worth looking at now for use later. 

UK Sugar Tax

Much has been written on the sugar tax in this blog. The article below is posted to allow those in the 2017 Year 11 cohort to have a chance to use in their microeconomics IA. Remember all articles must be less than a year old at the time of writing.

The BBC cover the sugar tax here

A twist on protectionism

Donald Trump probably has a brain which can only carry 140 characters at once. It would explain many of his policy statements, where the consequences of what he says gets missed out of his thought process. (Apologies, but he is such an easy target.)

The latest policy 'burp' from Trump is that he will impose a 35% tariff on the goods made by any American firm which has switched production out of the USA to another country.

The aim is to reduce the price competitiveness that the move will bring to the firm and so make it less attractive to move. This, Trump believes, will keep more jobs in the USA.

Analysis of this protectionist policy measure might be quite useful. Many points to make so I'm going to dot point them.

• If 100% successful the measure would keep uncompetitive (inefficient) jobs in the USA - this means everyone is worse-off in the long run.
• The firms remaining in the USA will therefore loose their overseas markets to firms that do move (possibly from EU countries).
• The loser from this policy is the USA consumer, wherever the goods are made. They either pay more for goods made in the USA or more for goods made abroad, reducing consumer surplus.
• The obvious problem might be that the firms move export sales production overseas while keeping domestic sales production in the USA. All the gains go overseas in this scenario.
• There is likely to be retaliation from the country which hosts the firms, as their exports are now being taxed.
• This policy breaks the WTO rules and therefore is illegal.
• The policy misses the really important point that the USA needs to move to industries that are high value and knowledge based, not try to hang on to low value manufacturing jobs.
• The cost advantage of moving abroad may well be more than 35%, so it still pays to move abroad.

CNN covers the story here

This topic comes under the International Economics topic for IB and is a good example of the new protectionism (economic nationalism) which is becoming popular. The problem is it goes against hundreds of years of economic knowledge on the gains from trade. An IA on this could look at the impact of a tariff, resource allocation or the impact on the various stakeholders.

Unemployment figures and policy

There have been a lot of stories on unemployment recently - see my posts on Australia's unemployment figures hiding the true state of the economy for example. Below is a link to one on US unemployment.

US unemployment is falling as the economy adds jobs. This has led the US Central Bank - the Federal Reserve Bank of America - to suggest interest rates will rise. Why? Because inflationary pressures are likely to be building, monetary policy works with a long lag and a small rise now should help prevent a problem in a couple of years. (Note more rate rises will certainly be needed over the next year.

See if you can find an article that doe not do too much of the analysis for you to use as an IA source.

The BBC article is here