Selling Cheese to the Chinese
Savvy businesses target the emerging middle class in emerging market countries whose income elasticity of demand for consumer goods and services is strongly positive. The FT reports today that “British dairy producer Milk Link owner of the Stilton brand, has signed a two-year deal with Yili Group to export Stilton – the first direct exports of the cheese to China. The cheese will be sold in supermarkets along the Chinese east coast, including branches of Tesco, Wal-Mart and Carrefour , while quarter-wheels will also be sent to upmarket hotel chains.”
Two balance of payments aspects here
1/ The direct export of tangible products to the Chinese economy - China accounts for only 2 per cent of total UK exports overseas at present
2/ The use of Tesco (UK), Wal-Mart (USA) and Carrefour (France) as distribution channels - made feasible by direct investment into the Chinese economy
Also worth mentioning that Milk Link is a cooperative of dairy producers - so successful export promotion into emerging markets will provide a flow of extra revenue for UK farmers who are licensed to make Stilton.
There is still a long way to go! Total cheese exports from the UK to China – mostly (processed) cheddar – accounting for just three tonnes in 2008.
More cheese please Gromit
Buyers market drives new car prices below second hand
This seems to defy microeconomic logic but it is a sign of how the balance of power in the new car market has switched to the buyer rather than the seller. New car registrations remain almost a third lower than at the same time last year and car dealerships are so desperate to unload stocks and generate much needed cash flow that their deep discounts on the prices of new or nearly new cars have driven the prices of some models below that of prices for the same vehicles in the second hand market.
read more...»Causes and Consequences of Russia’s Shrinking Population
This excellent BBC news article considers the background to Russia’s shrinking population. “By 2050, Russia’s population could shrink from the current figure of 142 million people to 100 million, according to a United Nations sponsored study published last year.” Staggeringly high mortality rates (life expectancy for males barely touches sixty) and low birth rates lie at the heart of this particular demographic time bomb. Students might be asked to consider the likely demand and supply-side effects of a long term decline in the size of the population. And also which policies are likely to be most effective in reversing it.
Recession provides boost to vitamin demand
A cyclical hat tip to Chris Freeman for spotting this excellent article in the New York Times which looks at the rising demand for vitamin pills and other health products as recession bites. “Sales of vitamins and nutritional supplements, which have grown consistently for years, have surged in recent months, rising as the stock market has fallen. People are clearly cutting back on many items, from bread and milk to designer jeans and flat-screen televisions, but they are stocking up on pills that they think can spare them expensive doctor visits.”
Lots of interesting economics here:
1/ The power of emotion in driving demand - are sales of fish oil tablets linked to how many times people read stories about the growing incidence of early dementia?
2/ Utility and price - is the utility that people say they get from nutritional tablets linked to the price they pay? Some behavioural economists have pointed to studies about the impact on perceived benefit that consumers report when they are told the price of a product - including placebos!
3/ Sales of vitamins are up but sales of pain-killers are down - what might this say about consumer preferences?
4/ Cross price elasticity of demand - the price of health care goes up - causing some consumers to look for supplements to reduce the risk of needing health treatments later on in life
Calories you can believe in
On first glance it seems like a neat way of giving consumers helpful information on the calorific consequences of their meal choices. By the end of April, 18 national food chains, including Burger King, Prêt A Manger, Pizza Hut , Subway, Sainsbury and Tesco cafes, Wimpey, Marks & Spencer cafes, KFC, Harvester pubs and a number of workplace canteens will print on menus and/or menu-boards the calories contained in many of their most popular dishes.
read more...»Bus oligopoly under scrutiny
The Office of Fair Trading has announced an investigation into the alleged lack of competition in local bus services. Years after the deregulation of bus services, the market has become concentrated in the hands of just a few main operators. Announcing the launch of a review, the OFT said that “This sector has become increasingly concentrated by takeovers, with nearly two-thirds of services now controlled by five large operators. The study will consider whether concentration in the market has a positive or negative impact on the prices consumers pay and the services they receive, and whether or not there is competition between operators bidding for tendered services.”
The five biggest local bus operators are Arriva, First Group, Go Ahead Group, National Express and Stagecoach. Arriva has approximately 20 per cent of the London market under contract to Transport for London. Outside of London Arriva runs more than 5,000 buses and has built up an approximate market share of 15 per cent.
Expect a report to emerge in the autumn about the extent to which the competition authorities may have to intervene to provide greater safeguards against the dimunition of competition in local bus markets where often one firm has emerged as a dominant force. Are consumers’ interests best served by unfettered competition between bus service providers on the road?
Around the World in 80 Trades
There us what looks to be a very promising series launching on Channel 4 next Thursday - With £25,000 in his pocket from the sale of his flat, Conor Woodman travels across four continents, trading in all kinds of products with the aim of doubling his money - Around the World in 80 Trades. This potentially could be an excellent resource to use alongside your teaching on international trade, commodity markets and globalisation. There is also a new book to accompany the series.
USA triples the tax on cigarettes
I will resist the temptation to roll out the usual cigarette puns .... smokers fuming over tax rise etc etc ...but the news that the Federal tax on puffing away has risen so much remains of interest to economists….
The US government has introduced a huge rise in the tax on cigarettes - reported here by the BBC. For a 10-pack carton, the tax leapt to 10.06 dollars from 3.90 dollars.
It is a good example of how large scale increases in indirect taxes are needed to have a significant impact on demand and the timing of the tax hike is also interesting - is it better to raise taxes during an economic slump when household budgets are under great strain? Does this give people just the right incentive when they might be considering cutting back or stopping altogether? Note too that the article mentions how the extra tax revenue will be used - to pay for health care for uninsured children - an example of ‘earmarked’ or hypothecated taxation at work. Always assuming of course that the tax jump does lead to more revenue coming in.
Keep in mind that this is a federal tax and that individual states can (and do) levy their own supplementary duties on packets or cartons of cigarettes. With the combined city, state and recently raised federal tax, smokers in New York City pay about $10 per pack - $4 higher than in many southern states and a clear incentive for smuggling!
Higher taxes, health warnings, bans on smoking in public has reduced per capita consumption in the USA from almost 4,300 annually in 1965 to below 1,700 now but the market remains highly profitable.
Thrifty days are here again
Just when we thought that saving had gone out of fashion for good, along comes a fresh set of numbers on the economy indicating that the British consumer is more than happy to start paring back their debts saving more of their incomes.
read more...»Infrastructure and Growth (2)
A hat tip to my colleague Jon Mace for spotting this rather good BBC news article that considers the role that investment in infrastructure can have in sustaining and promoting economic growth. It is a good example of how government spending (fiscal policy) can affect both aggregate demand and long run aggregate supply. And it raises important questions about how such projects are funded.
read more...»Taxi licences and excess supply
Taxi drivers in Reading are facing an uncertain future after the council increased the number of taxi licences from 120 to 180, despite falling demand as a result of the economic downturn. A local association representing taxi drivers the Reading Taxi Drivers’ Association says that this move is highly dangerous, with cab drivers having to wait on average over an hour for a fare, resulting in more hours being worked to take home the same pay. In effect a cut in their real wage rate.
read more...»Q&A: What is a Keynesian stimulus and will it work?
A Keynesian–style stimulus happens when policy-makers deliberately seek to stimulate one or more of the components of aggregate demand to boost output, jobs and incomes during an economic recession.
read more...»Revision presentation - UK Housing Market 2009
This updated revision presentation profiles the UK housing market considers the links between the housing market and the UK economy. Asset prices have become hugely important in driving macroeconomic activity - although policy makers in the Treasury and the Bank of England have probably made serious errors in allowing the property bubble to go on for too long before that asset price bubble burst in spectacular fashion.
Launch interactive presentation on UK housing market
The Power of Relativity - a Doritos Dilemma
One of my students Arno Albici contributed this interesting post to our internal student forum this week - I feel it deserves a broader audience
Anyone who’s read the first chapter of Dan Ariely’s Predictably Irrational will immediately be familiar with what I’m about to discuss. The first chapter is entitled “The truth about relativity”, and in it Ariely sets out to show how the our perceptions of objects and concepts are defined by how we can compare them to similar things. The example given are these three subscription choices for The Economist:
Economist.com yearly subscription - $59.00
Print subscription - $125.00
Print and web subscription - $125.00
In this example we are incited to think that either there is a stupid misprint, or that the “print and web subscription” is a steal. It’s just like getting the web subscription for free! Isn’t it?
Something similar happened to me this week. I went to our local school store to buy myself one of those 45p packs of Doritos (Chilli Heatwave flavour, they’re my favourite), and to my dismay they were now priced 50p! To be fair a 5p difference isn’t going to change my life in any way, but with UK inflation supposedly under 3% (according to recent CPI index figures) I just wasn’t going to have it. Then I had this idea, why not buy the bigger pack instead?
read more...»
Q&A: Is roadbuilding an effective way of reducing unemployment?
Q&A: To what extent would a major road building project by the government be an effective way for the government to tackle unemployment?
Road to recovery or bridge to nowhere?
Road-building projects would count as capital investment spending and (if financed by borrowing) a net injection of demand into the circular flow of income and spending. The question mentions a major programme hinting at projects that together could amount to many millions of pounds.
The question also invites the student to focus on whether this is an effective way to tackle unemployment and so a good answer will go back to the main causes of people being out of work and address how a spending programme might tackle this.
read more...»Q&A: What is the accelerator effect?
What is the accelerator effect?
The accelerator effect describes a principle where how much a business chooses to spend on capital investment will be influenced by how quickly demand is growing for their products.
read more...»Q&A: In what type of market does the iPod operate in?
Q&A: iPod and Market Structure: In what type of market does the iPod operate in?
In this answer I will assume that we are discussing the market for personal digital audio and video media players. Keep in mind that music can be downloaded (legally and illegally) in numerous ways such as the iPod, smart phones and standard laptops.
read more...»Defining our Times
For example, the National Bureau of Economic Research in America defines it as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”. On this basis the US economy has been in recession since the end of 2007.
While for the economist Christopher Dow, recession worthy of the name was one featuring a “clear absolute fall in GDP between one calendar year and the next”, usually but not always followed by a second fall.
David Smith goes on to examine difference interpretations of what constitutes a ‘depression’ and how we will know whether we are in one or not, drawing some comparisons with recessions and depressions from the past – which might make useful reading for those students starting to think about their entry for the RES Young Economist of the Year competition.
Charts used in this blog
US_Charts_0209.ppt
Premum Flyers Go Awol
The front seats of many aircraft have been rather quiet and empty in recent months….
read more...»What will be left of UK manufacturing?
There is a real danger that over twenty per cent of the output of UK manufacturing industry might be lost before this recession is over.
The Guardian reports that “closures, short-term working and the mothballing of plants led to a drop of more than 5% in UK manufacturing production in the final quarter of 2008, according to data from the Office for National Statistics.” Manufacturing output has now fallen by 10.5% in 10 successive months from the peak in February 2008.
The signs of a deep downturn in what remains of our industrial heartlands are all there to see. Profitability has been squeezed – the net rate of return is already lower than it was during the 1990-91 recession. Employment is contracting and at some time this year the number of people classified as working in manufacturing will dip below 3 million – just 12 per cent of the employed labour force.
The net trade deficit in manufactured products has continued to widen despite the possible benefits of a cheaper pound. One problem is that the weaker currency increases the costs of importing component parts but in a recession, producers find it difficult to pass on these costs to their own customers, hence a decline in profit margins. Manufacturing production accounts for just 18 per cent of UK real national output.
Student handout
UK_Manufacturing_Recession_Feb_2009.pdf
February 2009 – UK policy rates cut to historic low of 1%
The Bank of England’s Monetary Policy Committee (MPC) has lowered the Bank Rate by 50bps to 1.00%.
read more...»Video Case Study: Problems for Iconic Japanese Manufacturers
Iconic Japanese manufacturers feel the pain of the global downturn
Sony, Toshiba and Panasonic are iconic global manufacturers but they are all suffering to a greater or lesser extent from the combination of a rising Yen and the impact of falling global demand. These two video clips provide an illustration of the impact of changes in the exchange rate and the world economic cycle.
Download the video case study handout
Video_Panasonic_Sony.pdf
Video Case Study: Is Chinas Export Boom Over?
China’s export-driven growth is slowing down with exports of manufactured goods showing a marked decline over the last six months. Despite this, the trade surplus continues to rise partly because of a large fall in imports of primary products such as mineral fuels and iron ore.
Download the case study question sheet
China_Export_Slowdown.pdf
NFL salary cap and US sporting socialism
The Arizona Cardinals, one of the oldest franchises in the NFL came within a whisker - actually just 35 seconds - of winning the SuperBowl having spent a long time among the also-rans. Can you imagine Stoke City doing the same at the end of a long Premier League season or Castleford Tigers storming to victory in the Super League Grand Final ..... it does stretch the imagination (and I speak as a hardcore Leeds Rhinos fan!).
Mihir Bose reports from America’s biggest cultural event - the SuperBowl final - and considers the way in which the structure of the NFL maintains genuine competition by a set of measures deigned to level the playing field for each team:
1. The draft system with the bottom teams each year having the pick of the new influx of college football stars
2. Revenue sharing
3. Tough regulations on debt and franchise finances
4. Salary cap - for each of the teams in 2010 the salary cap will be $123m
Can the Premier League in Soccer and the Premiership learn from the NFL’s sporting model? Might they have to move in this direction because of the recession? With income from sponsorship and TV rights set to decline, and ticket sales squeezed by the recession, dont bet against some really significant changes in the structure of top class professional sport before this recession is out.
Exchange Rates - Student Handout
I am discussing the macroeconomic effects of exchange rate movements with my AS students this week.
The suddeness and severity of the recent depreciation of sterling, both against the US dollar and the Euro as well as on a trade weighted basis provides plenty of ammunition for a good lesson which seeks to develop their understanding of the transmission mechanism of exchange rate fluctuations together with a chance to develop their evaluation skills. I have made the AS macro student handout available for download below - it contains up to date charts on sterling together with a short exercise for students on how different stakeholders might be impacted by a sterling depreciation.
Student handout
Effects_of_Exchange_Rate_Movements.doc
Manufactured Landscapes
Edward Burtynsky and Jennifer Baichwal’s film Manufactured Landscapes is now available in DVD format in the UK and it contains some tremendously powerful images and takes which underline the depth of impact on our landscape that rapid economic development, globalisation and mass production can have.
read more...»Dell Relocates - Nissan Downsizes
On the day that Nissan opted to cull a quarter of its workforce at the ultra-efficient car plant on Tyne and Wear, the story that caught my eye was across the Irish sea.
Dell’s decision to close its manufacturing capacity in Limerick and transfer production to a low-cost location in Lodz in Poland will come as a severe blow to the Irish economy….
A quite astonishing statistic from this news article today. It claims that Dell’s operation in Ireland accounted for 5% of the country’s GDP. Dell is Ireland’s largest exporter too. So the loss of around 1,900 jobs (add another 3-4,000 on top from suppliers to the factory) will deal a crippling blow to the local economy.
This is a good example of the multiplier effect - where a change in output and jobs in one business or market can have important second-round effects in related supply-chain industries or the local or regional economy. It has been estimated that the knock-on effect could be between one and three jobs lost elsewhere in the region for every one lost at the Dell plant directly.
read more...»Apple introduces variable pricing
As a regular customer of the iTunes digital music store, I have become accustomed to clicking “buy song” and spending my hard-earned seventy nine pence to download another single. So too have the 75 million customers who have over the last six years bought around six billion songs from the iTunes store.
read more...»Waterford Wedgwood potters towards the brink
Another day and yet another venerable institution falls. The Waterford Wedgwood (WW) group had been in talks with US private equity groups for some time before those talks collapsed last Friday, and the Bank of America decided it could not extend its credit deadlines to the company any longer. In October WW reported losses of 63 million Euros, with debts of 450 million Euros, and it had been struggling since May 2005 to restructure the company, cut costs and shift to more capital intensive production, in order to survive a growing lack of demand for these high prestige crystal and china products.
read more...»Negative equity - in the used car market
2008 was a year of sustained price deflation in the used car market. As our chart shows, the index of prices for second hand cars fell sharply and, in a second illustration of the weakness of the market place, there was a huge fall in the proportion of original new car price retained. By December 2008 this rate of depreciation had fallen to 33% for a car averaging 39 months and 42,100 miles - in other words, a new car lost two thirds of its original showroom value within three and a half years.
Activity is strong in the motor auction halls as thousands of used cars come up for sale having been ditched by their owners. Some of these fire-sales are the result of a slashing of spending on fleet cars by larger businesses including car rental companies. Others are attempts by motor finance companies to claw back some of the bad debts that they have made with car buyers having reneged on their vehicle purchase loans. Negative equity in the car market is becoming more frequent.
This article from the Telegraph explains the problem
“Buying a car is often a family’s biggest financial transaction apart from home purchase. Thousands of motorists try to spread the bill through a system known as Personal Contract Purchase. This entails putting a deposit down and then paying monthly installments for two or three years, before having the option to buy the car outright. The final payment – known as a balloon payment – is based on what the car is expected to be worth at the end of the contract. But the collapse of the second hand market has meant that the amount demanded by finance companies is often far more than the car is actually worth.”
A strong and active used car market is important for sellers of new vehicles because prospective buyers of a shiny new car want to know that the value of their big-ticket purchase will not collapse like a deck of cards within a few months. But with wholesale and retail credit for financing car purchases much harder and more expensive to maintain. And with unemployment on the rise and consumer confidence remaining exceptionally low, there is little chance of a recovery in demand and prices for used cars during this year of recession.
Thousands in negative equity on their cars
Thousands of drivers who bought cars on hire purchase face ‘negative equity’
