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.