Unit 4 Macro: Natural Disasters and their Economic Impact
From tsunamis to tornadoes, from droughts to floods, 2011 was a particularly nasty year for natural disasters in many parts of the world. These natural disasters inevitably have demand and supply side effects affecting not just those countries affected but ripple impact across regions and in the broader global economy.
The Al Jazeera news video report below provides a clear overview of some of the major natural climatic shocks of 2011 and could easily be used as an introductory resource to discuss what are some of the micro and macroeconomic effects in both the short and medium term.
These include:
* Effects on the stock of physical capital / infrastructure
* Impact on a country’s human capital
* Effects on commodity prices, export revenues
* Effects on agricultural output, profits, investment, productivity
* Ripple effects on manufacturing industries and energy supply/cost
* Impact on state tax revenues and the costs of re-building and providing emergency financial support
* Effect on the movement of population following extreme climatic events
* Natural disasters and changes in the distribution of income / risk of poverty
This Economist graphic (published in Jan 2012) looks at the human cost of natural disasters and claims that “the world has succeeded in making natural disasters less deadly.”
read more...»Unit 1 Micro: Supply Shortages Drive Peanut Prices Higher
Supply shortages in key growing regions have caused the price of peanuts to surge to record highs. Peanut prices in Europe are 60% higher than a year ago and the cost of peanuts in the USA has more than doubled in the last twelve months. The price spike is the result of lower production from India, Argentina and the United States.
read more...»Unit 1 Micro: Economists attack food price speculation
Food prices are now rising by up to 10% a year in Britain and Europe and a new forecast from the United Nations predicts that prices can be expected to rise at least 40% in the next decade. Whilst conventional theories of changes in supply and demand conditions can be used to explain some of the increase in food prices, many economists are concerned that speculation by hedge funds and other investors has amplified the natural volatility of prices driving food prices away from fair values and contributing to a huge rise in global food poverty and hunger. These days, cocoa, fruit juices, sugar, staples, meat and coffee are all now global commodities, along with oil, gold and metals.
Is this the moment to legislate to limit the scope for speculative activity in food markets? The video below provides an excellent introduction to speculation in food markets - it features Neil Kellard, Professor in Finance at the University of Essex
read more...»Unit 1 Micro: Producing Coffee - Kenya in Pictures
If you are teaching the economics of commodity prices and coffee in particular - this resource - will appeal strongly to your visual learners! The Guardian Pictures web site has a quite stunning set of photos of Kenyan coffee producers - growers who are hoping that rising world prices will bring respite after years of difficulty including volatile crop yields, poverty prices and incomes and a long term decline in investment.
Unit 1 Micro: Cotton Prices and the Retail Price of Clothing
How does the world price of raw cotton affect the cost of buying new clothing on the high street and in the supermarkets? The answer is that the price of natural fibres is a key raw material into manufacturing garments and home furnishings. If prices rise, this increases the costs of production causing an inward shift of supply for clothing and furnishings at a given market price.
The world price of cotton has been rising steeply in recent times. As our chart below shows, raw cotton prices are well down from their peak in the spring of 2011, but the index is still more than twice the level of two years ago.
read more...»Unit 1 Micro: Economics of Volatile Corn Prices
Corn is a soft commodity along with the likes of coffee, tea and rubber. Referred to as “yellow gold”, corn is used in products ranging from cereals, snack foods, salad dressings, soft drink sweeteners, chewing gum and peanut butter. Little wonder that shifts in the world price of corn can have a noticeable effect on the prices that we may for many popular foods and drinks.
The world’s appetite for corn is strong. In recent months there has been a surge in the global price of corn, indeed at the end of June 2011, corn prices were up 74 per cent on a year earlier. Super-high prices affect the price of feed for livestock farmers and eventually lead to more expensive foodstuffs for consumers, including millions of people in the world’s poorest countries exposed to persistent and life-shortening food poverty. Robert Zoellick, President of the World Bank has said that high and volatile food prices are “the single gravest threat” facing developing countries at the current time.
read more...»Zondle Game: 10 Question Quiz about OPEC
OPEC continues to be in the news in an age of high and volatile crude oil prices. Here is a ten question quiz on OPEC created using Zondle designed to test student knowledge of this important international group.
AS Micro: Fears over a century of hunger
Nigel Cassidy reports in this video from BBC news on fears that the world faces “a century of hunger” if the international community cannot agree on new rules regarding food prices. Food security is a hugely important global economic, political and social issue and one of the best resources for keeping up to speed on this is the Guardian’s dedicated page of articles. Here is the link. Check the links at the bottom of the blog for past articles on this topic.
AS Micro: What´s really behind the oil price rise?
The price of oil continues to rise ($114.61 per barrel) and there a number of reasons put forward why this is so, none perhaps more pertinent than the reason explained in this WSJ article.
read more...»AS Micro: Commodity Prices
The economics of volatile commodity prices are a staple feature of many AS micro papers - it gives you a chance to apply your understanding of supply and demand factors and the importance of elasticities of demand and supply in explaining price movements. And also understand some of the consequences of volatile price and output movements for different stakeholders - including consumers, producers and the government. This BBC news article takes a look at the likely direction of world commodity prices and embraces a number of different markets that have appeared on exam papers in the past - so a useful exercise to test your revision is to read through and see how much you get first time. I have put a revision presentation on price volatility in markets on my web site - available here (it does the job for a really good AS micro answer)
AS Micro: Rising Global Food Prices
This Euro News video report (8 mins) looks at the background to the rise in global food prices and the economic impact. I have linked below to related blog posts on the issue of the economics of food price inflation (also known as agflation)
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Key AS Micro Terms: Prices
The price mechanism figures heavily in the AS micro syllabus. Below we have provided definitions of some key terms and also link to recent blog items and revision presentations
read more...»AS Micro: The volatile price of crude oil
Few commodity prices are watched as closely as the international price of crude oil. Brent crude is currently trading at over $122 a barrel - the highest price for over two years. Our Timetric chart is constantly updated and will always show the latest price. We have included below links to many of our recent blogs on the economics of oil prices and some of their micro and macro economic effects.
read more...»AS Micro: Prices for New and Second Hand Cars
The prices of new and second-hand cars as measured by the consumer price index have changed in absolute and real terms in recent years as the chart below shows
read more...»AS Macro Key Term: Bubble
A bubble is said to happen when the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely (at which point the bubble “bursts”). Typically this is seen in property markets where housing valuations can rise to unsustainable levels relative to income or long-run average prices. Speculative demand driven by positive price expectations has the effect of amplifying market demand and driving prices higher - especially when supply is restricted and unresponsive to short-term price movements.
Bubbles are common in other asset markets such as for stocks and bonds. And increasingly we find that world commodity prices exhibit bubble tendencies with high levels of volatility in the prices of foodstuffs, oil and natural gas and metals.
The bursting of a bubble - such as a collapse in property prices - can have important demand-side effects on wealth, confidence and aggregate demand
read more...»AS Micro Revision: Banana Prices
This revision note covers supply and demand factors that help to determine the world and domestic retail price of bananas. Despite rising world prices, the UK retail price of bananas has actually fallen in recent years. Can students explain why? What effect does intense competition within the UK food retail sector have on the prices we pay?
read more...»Economics Q&A: What factors help to explain rising food prices?
Global food prices have risen on average by more than 135% over the last 5 years. While the price of food has been highly volatile, with a spike during 2008, there is clearly a trend pattern of a long term rise. This can be attributed to various root causes, both demand and supply side in nature.
read more...»Shorting the market - the vultures target HMV
A few weeks back we focused on the problems facing UK retailer HMV. Weak sales and a difficult financial position have made the business a target for hedge funds who decide to short the stock anticipating a further fall in the company’s share price. This Guardian article looks at the stocks on the UK FTSE that lead the list of shares being targeted by the short-sellers.
Short selling is a strategy used by investors who expect the price of a stock to fall. It involves selling shares by borrowing them from another institution and then betting that they can buy them back at a lower price and profit from the difference. Short selling became a high profile and controversial tactic during the global financial crisis when many fragile banks were the targets of the stock market vultures and some were forced to accept nationalisation and emergency financial support.
Economics Q&A: How might rising food prices affect food retailers and manufacturers in the UK?
Food retailers are service sector businesses selling food products to consumers. The leading retailers in the UK are Tesco, Sainsbury’s, Asda (Walmart) and the Co-Op/Somerfield. Although the food retail industry in the UK is dominated by a handful of national chains, there are many others including thousands of small-scale retailers. And discount retailers that have done well in recent years including Aldi and Lidl.
Food manufacturers process foodstuffs into new products and they rely on buying raw materials from wholesalers. Good examples to use might be Nestle, Heinz and Sara Lee.
The larger retailers manufacture some of their own-label foods although they may choose to out-source this to another manufacturer. And likewise, some food manufacturers have their own chain of retail stores or outlets - for example Gregg’s the Baker or Domino’s Pizza.
read more...»Economics Q&A: What are some of the benefits and drawbacks of a period of rising world food prices
A sustained rise in the global prices of foodstuffs is called agflation. As our chart below shows, the Economist’s index of global food prices has shown high volatility in recent years, there have been two sizeable and steep increases in food prices and a downturn in the wake of the 2009 global recession. And now the United Nations Index of Food Prices has now risen back above levels last seen in 2008 at a record high.
A period of rising food prices affects both the demand and supply-side of an economy. And the impact will depend on many factors including:
(i) The patterns of trade for one or more countries e.g. whether a country is a net exporter or importer of food
(ii) The importance of food production and exports in economic activity e.g. the share of value added contributed by farming, food processing and other food-related industries
(iii) Average incomes for a given country / region and the percentage of incomes that must be spent on food to ensure a modest but adequate lifestyle
(iv) Possible effects of rising food prices on variables such as inflation, interest rates and the exchange rate
OCR A2 Economics F585 (Feb 2011) - Price Volatility
One important aspect of the OCR A2 Economics F585 (Feb 2011) Pre-Release Case Study is the causes of price volatility in world markets. As Extract 1, page 4, paragraph four says:
“The value of banana exports for developing countries depends critically on the world price of bananas. The price is volatile in the short term, yet there are distinct trends in price over the medium term.”
read more...»Watch out for the £7 chocolate bar!
Will a collapse in global cocoa production bring an end to chocolate as an affordable treat and giver of blood sugar? This article from the Independent today was timely as I am teaching price volatility in commodity markets in my AS micro class as a prelude to discussions abour price intervention strategies such as maximum prices / buffer stock schemes etc. I have attached my class homework as a word file in case it is of use to colleagues.
Cocoa Economics (AS micro)
Cocoa_Economics.docx
Here is a highly relevant section from a new report from Commodities Now
“World food prices have been trending higher as emerging markets have increased their share of global food demand due to rising populations and incomes. Food products are having to compete for finite resources such as water, land and fertiliser inputs and are increasingly being used for alternative applications such as bio-fuels. As an example, ethanol now accounts for approximately one-third of annual corn output in the US, up from 5% a decade ago.”
More here and some links to useful news articles.
The Market for Potash
This is a superb BBC news report on the rising demand for and prices of potash.
Potash is shorthand for potassium carbonate - a potassium compound often used in agriculture and industry. Potash is the third major plant and crop nutrient after nitrogen and phosphate and the vast majority of the annual global supply is used as a soil fertilizer. It is a product with virtually no close substitute making the demand insensitive to the ruling market price - the price elasticity of demand for potash is very low and high prices make the product hugely profitable to supply
read more...»Potash - a battle for grey dust that has become gold dust
The market for a particularly lucrative gray dust has been thrust into the spotlight this summer with news of a $38.5bn (£25bn) hostile takeover bid from Australian mining giant BHP Billiton for Potash Corp of Saskatchewan in Canada a business coined by some as the “Saudi Arabia of Potash”!
read more...»Presentation - Wheat Prices in 2010
Here is a new streamed revision presentation that covers key changes in global wheat prices during 2010 and their economic impact. Surging wheat prices impact on producers and consumers of many different goods and services. The market is a great case study in the causes of price volatility and the inter-connected nature of markets.
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Cocoa Economics
The global cocoa market is a focus of much attention at the moment. Global prices are close to record highs and are likely to stay strong for some time to come. Just two weeks ago we learnt of the single largest cocoa trade in 14 years with a hedge fund manager purchasing 240,000 tonnes of cocoa beans (seven per cent of the entire world’s supply) valued at £650m ($992m) and sufficient to make five billion chocolate bars!
High prices are the result of surging market demand and limits to available supply. Jürgen Steinemann, chief executive of Barry Callebaut, a chocolatier supplying many of the world’s top foods groups, is reported as saying that: “At this moment, cocoa is a scarce material: demand has been rising, supply has been stable, so prices have gone up.”
Market demand for cocoa is coming from the developed world and emerging markets - rising per capita incomes are fuelling higher demand for chocolate-based products. Chocolate consumption in India, China and demand has been increasing by 15-20% annually and this is expected to continue.
On the supply side there are signs that production is being hit by poor weather conditions, underinvestment in cocoa plantations and a shift of production away from cocoa towards lucrative products such as rubber. Destructive diseases, such as black pod disease have plagued cocoa yields in Africa for the past 15 years.
According to a report in the Scottish newspaper the Herald, “Ivorian cocoa trees, planted more than 25 years ago, have already passed their peak of productivity and, without new planting, production in the country is likely to drop every year, tightening the global market as demand rebounds.”
read more...»Broker spends $520m in a drunken stupor and moves the global oil price
Not an example you would find in a standard textbook - but a fun one to use nonetheless!
Ethiopia’s electronic market place
Coffee is a lifeline for twelve million farmers in Ethopia who are vulnerable to volatile world prices and the monopsony power of the major coffee roasting businesses. But this heart-warming report from Jonathan Dimbleby finds that a new electronic trading system is providing a superb market place for the setting of prices - connected instantaneously to the world commodities market.
Prices agreed on the Ethiopian trading floor are transmitted round the world and the farmer is guaranteed payment within 24 hours. Since the exchange was launched over $400m has been traded without a single dollar of default. Farmers are getting the price that is agreed on the open-outcry market platform. Technology as a support to the problems of real people - outstanding.
Is the UK coal industry turning a corner?
These are fascinating times for the UK coal industry. Over several decades, production of coal from an industry that once employed hundreds of thousands was in steep decline. The nadir appeared to be the early 1990s when an accelerated pit closure programme was introduced as the UK turned decisively towards gas a major energy source. The result was the end for deep-mine activity for thousands of miners, high levels of structural unemployment and major economic and social problems for local communities.
read more...»AS Economics Revision - Price Volatility in Markets
Here is a new revision presentation which should be useful for AS economists revising for core microeconomics topics
