OCR 2887 Essay Bank (1)
As promised in my blog at the weekend here is the first installment in as series of essay banks that I hope will be useful for students sitting OCR 2887 (The UK Economy) this summer. I am coming to the end of 2887 with my students and I always think it worthwhile to get some structured revision in before the stimulus material is released for the european paper (2888) next month.
The first one is on the fiscal policy essays that have appeared on the paper over the last 6 years or so. As I amend each essay bank I will place the pdf file on the blog.
OCR_2887_Essay_Data_Bank_FP.pdf
In due course I will provide some outline essay plans and exam hints for selected titles.
Large and Small
The economic landscape of the twenty seven member nations of the EU is very different. I find that students preparing for the AQA European economics paper often have little idea of the relative size of economy as measured by GDP. Five countries together account for 72% of EU27 GDP (Germany, the UK, France, Italy and Spain). Ireland - for nearly twenty years the Celtic Tiger but now in real macroeconomic distress - accounts for only 1.5% of EU GDP.
And if we add together the national income of
Romania
Czech Republic
Hungary
Slovakia
Luxembourg
Slovenia
Bulgaria
Lithuania
Latvia
Cyprus
Estonia
and
Malta
We get a ‘combined economy’ which contributes 4.7% of EU national income ..... equivalent to a country the size of the Netherlands!
Green Shoots?
An article from today’s Telegraph suggets there may be ‘Glimmers of hope on the Horizon’ for the world economy.
read more...»Risk of protectionism in recession policies
Concerns about protectionism ending free trade agreements, as countries take measures to get their own economies out of recession and back to growth are now taking centre stage – today the EU has expressed concern about Barack Obama’s recovery package because it includes a ‘Buy American’ clause, which seeks to ensure that only US iron, steel and manufactured goods are used in projects funded by the bill. The US Congress is surely likely to feel that the $800bn it is being asked to spend should all be for the benefit of the US economy. The EU Ambassador has expressed concern that, if passed, the measure could erode the US’s global leadership on free trade. Canada’s International Trade Minister Stockwell Day went further: “These protectionist measures, in a time of recession, only make things worse,” he told broadcaster CBC. “It can only trigger retaliatory action and we don’t want to go there.”
Should the US Senate see this as a threat?
Globalisation and EU labour law
The unofficial strike action centred on the Lindsey oil refinery in Lincolnshire is illegal, as any strikes called without a ballot and proper notification are counter to employment law. It seems to be based on a complicated example of sub-contracting involving French, US and Italian companies – an example of globalisation involving ‘a process of deeper international economic integration that involves a rapid expansion of international trade in goods and services between countries’.
read more...»Presentation on EU Enlargement
I have updated my revision presentation on aspects of the economics of EU enlargement. This can be downloaded as a PowerPoint using the link below.
Presentation
European_Union_Enlargement.ppt
Investing in Poland
Have you noticed on Sky News a new advert featuring regularly looking to attract inward investment into Poland? It is short (just 30 seconds) but puts across some of the potential benefits from relocating to central Europe - and I used it in one of my lessons today on EU enlargement - it is available here. This second advert reinforces the point - together they might be a useful starter video for a lesson on inward investment in ‘the heart of an enlarged EU”. The Invest in Poland agency is here.
Negative mulitplier effects of a brutal outlook for carmakers
There seems to have been grim news from the car industry every day for the last week or so. Nissan and Jaguar are shedding jobs. In November Honda said they would shut down production for February and March, and today said they will extend that to cover April and May as well.
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...»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...»Slovakia joins the Euro
Fifteen has become sixteen. Slovakia joined the Euro Area on January 1st - dropping the national currency, the koruna, 16 years after the former Czechoslovak federation split amicably in 1993 and switching to the Euro at an agreed exchange rate of 30.126 korunas per euro.
Many economists regard this change-over exchange rate as favourable to the Slovakians - the government has wanted to enter at a relatively high level to provide a boost to the spending power of Slovakians in European markets and as a discipline against a return of high inflation.
The country has a population of 5.4 million and its £100bn annual GDP barely registers compared to that of Germany, France, Italy or Spain -
Slovakia is the first central European country to achieve membership of the single currency and it is also the poorest nation inside the currency union with a per capita income of only 70 per cent of the European Union average.
For Slovakia one of the major reasons for joining the Euro is to bring about greater exchange rate stability - the country is the 3rd largest car manufacturer in central Europe and has introduced many labour market and fiscal reforms designed to make the economy more attractive to inflows of foreign direct investment.
Slovakia is the 4th country of the ten that joined the EU in May 2004 to have taken the step towards deeper economic integration. Slovenia,
Malta and Cyprus are already members of the Euro Area. Poland and Hungary are considering 2012 as a possible entry date and the Czech Republic (long regarded as a well placed country to take the leap) is now having second thoughts.
In 2005, prior to joining the Euro Slovakia entered the semi-fixed exchange rate mechanism known as ERM-2 and since then there have been two revaluations of the crown’s parity rate within the pre-euro currency grid. The last one came in the early summer of 2008 when the Slovakian central bank revalued the krona (increasing its value against the Euro) in a bid to reduce inflationary pressures and keep the economy in line with the inflation rate of the Euro Area.
Reuters: Slovaks latch on to euro anchor in economic storm
Background Charts
German Export Machine Starts Creaking
Germany has perennially run large trade surpluses with the rest of the world and used external demand as an important source of demand growth for their domestic industries. Germany ran a current account surplus of 7.6 per cent of gross domestic product in 2007.
Germany is the Euro Area’s biggest economy and in 2003 became the world’s biggest exporter. It has developed significant competitive advantages in industrial manufacturing and technology and in a world leader in mechanical engineering, holding about 20 percent of the global market. Just think of some of the world’s major high value-added manufacturing brands - DalmerChrysler, BMW, SAP, Siemens, Volkswagen, Adidas-Salomon and Porsche.
As our chart shows the annual rate of growth of exports has in recent years grown faster than her real GDP, the result has been a large and rising share of exports as a percentage of national income. Overseas sales have, to some extent, masked relatively weak consumer spending. Indeed real household consumption has been flat in real terms for the best part of two years.
But now the macroeconomic situation is changing.
read more...»Will sterling’s slide spook investors?
Hamish McRae has a thoughtful piece in his column in the Independent on the risk that sterling’s fall will make it harder for the UK government to finance their budget deficit. It is a good example of how, in the current climate, the effects of monetary policy and fiscal policy decisions are becoming blurred.
read more...»Devaluation and salvation?
The exchange rate is big news at the moment and it is worth following closely since changes in the external value of a currency can have significant effects on prices, export and domestic demand, jobs and the rate of economic growth.
As with most topics in AS macro, think about causation, consequences and whether changes to macroeconomic policies through intervention can and should seek to make a difference.
Larry Elliott in the Guardian considers whether the devaluation of sterling against the Euro could be a saving grace for the economy. And there is a neat interactive graphic showing what has been happening to the pound’s value against the Euro Area currency.
The Times reports on sterling’s weakness and suggests that falling overseas demand for UK denominated shares is one factor driving the currency lower. Britain is expected to suffer a deeper recession than most of the leading advanced economies and this will impact on profits and dividends from UK businesses largely dependent on the health of the UK economy.
The Financial Times reports on the rise of the Euro as a reserve currency
“There are now more euros in circulation than dollars, and the euro’s role as an international reserve currency is growing. By the first half of this year, the euro accounted for 27 per cent of official foreign reserves, up from 18 per cent soon after its launch. The dollar’s share fell from 71.2 per cent to 62.5 per cent during the same period.”
Reserve currency status is an important factor driving demand for a currency – sterling seems to have lost its much vaunted safe-haven status among international investors and this is another reason behind the steep depreciation of recent weeks and months.
Will the government (through the Bank of England) intervene in the currency markets to help stabilise the value of the pound against the Euro?
Not if you believe the public statements of Treasury Minister Yvette Cooper who is reported in the Independent as saying that the value of the pound was not a top priority for the government implying that the pound would be left to find its own market level. In an interview on the BBC radio 4 Today programme she is quoted as saying:
“We’ve never had a policy of targeting the pound. Our policy is to target inflation. And that I think has been the right one.”
Regular articles on the economics of exchange rates appear on my blog here:
OCR 2888 - Euro Area Industry in Recession
British manufacturing industry is suffering from a sharp drop in production due to a backdrop of a weakening world economy and domestic recession. Even the lower pound which ought to make our products more competitive is having a muted effect because of the slowdown in real incomes and demand in our major export markets.
In the Euro Area too industrial production is contracting at an alarming rate as our chart shows. And once more the US dollar seems to be weakening against the Euro which will make life harder for European manufacturing businesses heading into 2009.
And in a week when German politicians have criticized the ‘crass Keynesianism’ of Brown and Darling’s macroeconomic policies, it is worth noting that capital goods production in the world’s biggest manufactured goods exporter is heading south at a rate of knots.
Coal and CO2 emissions - Poland
Almost all of Poland’s power comes from coal and much of the cheap brown coal is very expensive in terms of CO2 emissions.
This level of dependency on a dirty fossil fuel has been headlined this week as the climate change conference in Poland confronts how best to cut emissions. The BBC environment correspondent David Shukman has been at Poland’s largest mine in Belchatow and his report provides a good resource on the issue of how best to encourage some of Europe’s emerging market economies to lower their emissions.
Economics of fishing
The BBC today has two stories on the economics of fishing. Firstly the government has announced a £5m plan to fund the de-commissioning of some of the UK’s in-shore fishing fleet in a bid t oreduce what the government regards as fundamental excess capacity in the industry.
£5m fund to scrap fishing boats
This BBC video looks at the background
Secondly the rising stocks of cod in the north sea has led in part oa rise in the size of the annual cod quota given to scottish fishermen by the European Union as part of their common fisheries policy. But the thorny issue of discarding excess fish remains unsettled. The quotas refer to landed cod which encourages fishing vessels to dump much of the fish they have caught before they reach home in order to avoid fines for over-fishing. The result is a deadweight loss of scarce resources in an industry already suffering from the long term decline in fish stocks.
Fishermen land cod deal at talks
See also “Scots anger over discarded fish”
OCR 2888 - Spanish Economic Difficulties
There is a relevant article on the problems facing the Spanish economy in the Times today - a useful background article for those sitting the OCR 2888 paper in January.
“After a decade in which per capita income doubled - and household debt tripled - the Spanish economic fiesta is well and truly over. More than 40,000 workers are losing their jobs each week, a far higher rate than elsewhere in Europe. Unemployment is at 2.99 million, a 12-year record of 12.8 per cent of the workforce and the highest unemployment rate in the eurozone.”
The remainder of the article can be found here
OCR 2888 - Sterling Questions
The exchange rate figures prominently in the stimulus material for the OCR 2888 January 2009 paper. And in the Independent today Jeremy Warner writes about the recent fluctuations in sterling and the impact on key macroeconomic objectives for the UK such as inflationary pressures and the trade balance. It also touches on the question of economic convergence with the members of the Euro Area.
“By staying out of the euro, Britain is able to set interest rates to suit its own particular needs, rather than labour under a rate set for the eurozone as a whole, while the collapse in the exchange rate provides the impetus for the sort of export-led recovery that other European countries can only dream of. Our economic situation is already ruinous enough, the argument goes, but if we had been in the euro it would be even worse with little hope of redemption. Yet the argument can equally well be made the other way. As it happens, Britain is probably more converged with the eurozone right now in terms of the economic cycle, interest rates.”
Read the remainder of “Sterling was far too high. Now it may be going the other way”
Britain and the euro
Price mechanism in action - something fishy is going on
The output from the BBC local news teams often produces some superb Economics materials. Take this video clip for example. For those of you who are not in the Grimsby area, you may have missed this great example of supply and demand in action. Plenty of scope for teacher puns too, but I’ll pass on that opportunity - I know my plaice…
Launch video clip from BBC site
EU goes bananas over price rigging
It has taken over three years of intensive investigations. But the EU has decided that the time is now ripe to announce heavy fines for a well-known bunch of banana growers guilty of operating a price-fixing cartel in eight European Union countries.
Chiquita Brands and Dole Food were among the producers found guilty of rigging import prices into a market worth around Euro 3 billion annually. Because of their ‘whistle-blowing’ role in outing the cartel, Chiquita have been given immunity from the fines. In contrast, Dole faces a liability of over Euro 45m for its key role in the price-fixing agreement. Del Monte is also involved and has been fined $19.8 million, but Fyffes was not part of the anti-trust investigation. Tough EU competition laws now allow businesses who suffered commercial damage from the banana price fixing cartel to take legal action against the growers / importers.
Ireland waves goodbye to borrowing rules
I am writing an article for EconoMax on how governments in many EU countries will abandon formal fiscal rules for the time being in response to the challenges from the credit crunch. News came through today that Ireland - former celtic tiger economy and a nation with one of the highest per capita incomes in the twenty-seven member nations of the EU - has announced a huge rise in government borrowing. It will blow the existing fiscal stability pact rules out of the water.
Ireland’s government now expects to borrow around Euro 12 billion next year - equivalent to 6.5 per cent of gross domestic product. A series of large budget surpluses have disappeared into thin air. Public sector debt is set to rise from 25 per cent of GDP to 44 per cent next year.
One reason is the sharp rise in unemployment which is now at its highest level since 1999. Ireland was officially the first European Union economy to drop into recession during the current economic crisis.
Great resources on inflation
A big hat tip to fellow Economist Mo Tanweer for flagging up this very useful selection of resources on inflation, price stability and monetary policy made available by the European Central Bank.
There’s this video clip:
There’s also these two pdf’s for pupils/teachers.
http://www.ecb.eu/home/pdf/students/leaflet_en.pdf
http://www.ecb.eu/home/pdf/students/booklet_en.pdf
They also have lots of short 5 min videos on the role of the ECB; its strategy etc.
Its also got some resources on European integration. They are under ‘FACTS’ presentations.
Barriers to labour mobility in Europe
The BBC website has updated developments in restrictions introduced by national governments for the movements of workers within the European Union. The free movement of labour is one of the key foundations of the single market but in the wake of EU enlargement, many governments have introduced limits often in the form of quotas - funny how these ‘temporary’ controls often become semi-permanent! And any form of restriction creates an incentive to by-pass the control. There is more detailed background information available from the EurActive website.
EU airlines to be included in emissions trading
Airlines will be included in the EU carbon emissions trading scheme and this BBC video provides a good introduction to the issue. All airlines flying into and out of the EU, including non-European carriers, will be included as part of the Emission Trading Scheme, and would have to pay for 15 per cent of their emissions permits from 2012. Will the Americans be persuaded to move towards a global agreement on aviation emissions? How will demand be affected by the expected Euro 2 to Euro 9 increase in the price per passenger for short haul flights?
Good background information is available here from the EurActive website. And here is coverage and comment on the issue from the Guardian.
Nostalgia wont help central bankers
Stephen King has been pushing hard the view that central bankers in developed countries (with the possible exception of the ECB which last week raised interest rates) have been too slow to react to the seismic change in the balance of power in the world economy. He has read the copious minutes of the monthly meetings of the US Fed and the Bank of England and has found rather scant reference to any of the economic developments in emerging markets. The world is changing and perhaps our monetary policymakers are not giving sufficient weight to the likelehood that commodity prices will remain much higher than their forecasts risking embedding a worsening trade-off between economic growth and inflation.
He writes:
“The biggest single economic problem facing the developed world is the deteriorating trade-off between growth and inflation. This is happening primarily because of the impact of strong emerging economic expansion on global commodity prices ............China has become the world’s most important marginal consumer of energy in recent years. It now consumes more energy than the whole of the European Union and isn’t too far behind the US. If China’s economy overheats, it’s no longer an internal Chinese prob-lem: through global commodity markets, China’s overheating becomes a problem for the rest of us as well.”
The rest of his article is here
Unemployment rates in the European Union
Having enjoyed one of the strongest labour market records among fellow EU member nations over the last decade, the UK has slipped to 10th place in the rankings for unemployment using the standardised ILO measure (i.e. the labour force survey measure in the UK). Five of Europe’s new member states now have unemployment rates below that of the UK. The club med countries continue to dominate the lower reaches of the table.
read more...»EU plans cut in VAT for local ‘labour intensive services’
Caterers, care homes and constructin firms will be among those interested to hear that the BBC reports that the EU Commission has unveiled plans to allow EU states to lower VAT rates for local service businesses, including restaurants and builders. Currently the minimum standard rate of VAT in the EU is 15%, although there are many exemptions. This would be a good example to use when discussing the effects of VAT on market supply for different goods and services in the AS micro course. The Guardian reports that “Zero-rated goods, such as children’s clothes in Britain, will be unaffected.”
Denmark the first to enter recession - form an orderly queue please
Denmark has become the first European nation to go into recession on July 1—economic output officially shrank for two quarters in a row. Known for its high taxes and expensive cost of living, Denmark was not alone in enjoying a property bubble over the last decade, but the boom is well and truly over and a combination of falling wealth, and real incomes eroded by the spiralling cost of living has contributed to the economy moving into recession territory.
Spain, Ireland and the UK dont look to be too far behind!
Here is a short report from the Guardian
