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A quick chart tour through some of the confidence and expectations surveys that seem to expand with increasing frequency. They all point to near-recession conditions but the official data on output, incomes and jobs will take longer to show through - hat tip to Edmund Conway for a good article on the newly released GDP data which shows that the economy is growing at its slowest rate for fifteen years and that was before the collapse in sentiment.read more...»
Does the publication of economic data encourage too much meddling by governments and policy-makers? How much use is data in telling us what we already know - that the economy is going through a bad time. The Today programme featured this discussion between Tim Harford, author of The Undercover Economist, and Phil Collins, of the London School of Economics, on how much influence economists should have.
Jack Ma (chairman of Alibaba Group) writing in the Financial Times reminds us of an important shift in trade flows between China and the rich advanced nations. Although growth in the Chinese economy is slowing down her export growth will continue to remain strong because of fundamental comparative advantages - but supporters of protectionism often fail to look at the other side of the ledger - the very fast growth of import demand into the Chinese economy - China is becoming a powerful global buyer and not just of mineral supplies from other developing nations.
“While there is a lot of competition from cheaper alternative markets, such as India, Bangladesh and Vietnam, nothing can beat China’s vast choice of products and suppliers. Over the years, Chinese suppliers have redefined themselves beyond pricing and sharpened their advantage in terms of quick turnround, good infrastructure, speed to market and compliance with international standards…..China’s role as top supplier, and now a leading buyer, is causing a new economic phenomenon that should be embraced rather than feared.”
The US federal minimum wage increases today by 70 cents on Thursday, to $6.55 per hour from $5.85. The increase will raise the minimum wage in 25 states; the other 25 have minimum wages higher than $6.55 and the move will affect around two million workers. But will rising food prices simply swallow up the real income boost that the rise in the pay floor provides? And is it wise to rack up the minimum wage at a time of recession? What will happen to employment in the low skilled segments of the US labour market? Coverage here via the Associated Press and also the Charlotte Observer in North Carolina.
Another UK restaurant chain has been exposed for paying the staff less than half of the UK minimum wage of £5.73 an hour and using tips and other gratuities to make up the difference - there is a groundswell of public opinion that this is inequitable and may require further government intervention
This superb resource from the Financial Times will be ideal for A2 and AS students wanting to understand a little more about the different approaches of the various central banks in tackling inflationary pressures through the use of monetary policy.
Over £5 for a standard cup of coffee would stagger most of us but it has become the norm for expats living in Moscow - officially the world’s most expensive city and a fact already well known to the thousands of Manchester United and Chelsea fans who travelled to the Champion’s League final last May.read more...»
The market mechanism at work!
Ford Motor has announced in the wake of a second quarter loss of nearly $9bn and a double-digit decline in US car sales volumes that it is shifting its focus from pick-up trucks and fuel guzzling sport-utility vehicles towards smaller, more fuel-efficient passenger cars. It will bring six small European models to north America, and convert three existing truck and SUV assembly plants to small cars. It also plans to accelerate the introduction of a new fuel-efficient V6 engine and to double four-cylinder engine capacity.
There are costs involved in revamping production, re-tooling the factories that previously assembled SUVs and writing off assets that can no longer be used in making the smaller vehicles - but the aim is to reduce operating costs by $5n over the course of the next couple of years. This is a good mini case study in one of the factors that affects elasticity of supply - i.e. the cost and ease with which factor inputs can be switched to produce different goods and services. The issue of how the motor sector is adjusting to changing consumer preferences is a good application of the concept of allocative efficiency.
Production of the Ford transit van in the UK is currently under review This BBC news article looks at how some of the world’s biggest volume car-manufacturers are adjusting to falling demand and heavy losses.
The Guardian: Ford downsizes to beat the car industry crisis
The author of Predictably Irrational - the hit book with my students this summer - talks to the folk at Google in a presentation in early July. The venue looked packed and it is easy to see why - I love his explanation of the effects of asymmetric dominance as a way of changing our buying behaviour.
The BBC news magazine explores the psychological basis for retailers pricing their products at £1.99 or £3.99 and the disproportionate effect this kind of price point can have on our buying behaviour. It is a great article to use when introducing consumer behaviour and in explaining the non-linearity of demand curves when teaching price elasticity of demand.read more...»
This is an excellent video snippet with Declan Curry quizzing Amazon chief executive Brian McBride on news that the online retailer - which is estimated to have over 15% of the market share in selling books - has reported profits of $158m in the three months to the end of June, a rise of 102% - helped by DVD releases of hit tv series and the likes of the enw Cold Play album and the incredible volume of sales achieved by the release of Grand Theft Auto IV.
Lots of concepts linked to the brief discussion
Amazon’s buying power in the market - does Amazon get better wholesale prices from the publishers than others in the book trade?
The long term shift towards online retailing and away from bricks and mortar
The emphasis on huge sales volumes allied to low profit margins
In April Amazon opened a new 800,000 sq ft fulfilment centre in Swansea Bay which is the size of ten football pitches
This article links in - smaller bookstores are clubbing together to give themselves better buying power in a bid to compete with the online retailers and the supermarkets.
The Monetary Policy Committee split three ways at the July meeting - the result of course being that rates were left on hold at 5% for a further month. The minutes of the meeting make for fascinating reading providing as they do a generous overview of the most recent macroeconomic developments both here and overseas. I was struck by the emphasis given in most of the rate setting variables to the increasing flow of evidence from survey data - be it reports from the Bank’s own regional agents on conditions on the ground in the real economy, to survey information from the property market, employers’ organisations and data on business and consumer confidence and expectations.read more...»
The long awaited financial bonanza for Beijing’s hotels during the forthcoming summer Olympic games seems less likely to materialise with the news that many 3 and 4 star hotels remain vastly under-occupied with the games just a few days away. It seems that the expected influx of nearly 500,000 visitors from overseas will prove to be an over-estimate - tourists appear to have been put off by the cost of travelling, fears over security and the time and expense of arranging visas. Domestic visitors from elsewhere in China seem to have been affected by the massive earthquake in south-west China and the snowstorms that struck the south in February.
The response of hoteliers when market demand turns out to be lower than forecast is a classic form of second degree price discrimination - reducing rack rates in a bid to increase the take up of unsold rooms. Given the travel distances involved, it would appear unlikely that the price reductions will have much impact in enticing people onto planes bound for Beijing this August. Most of the four or five star hotels will already be full of Olympic dignitaries most of whom wont have to pay a penny for their time at the Games.
Incentives matter! A good news story from Norfolk about the simple power of incentives and behavioural change. Apples, carrots and bananas would probably have had nowhere near the same effect! But the Schools Food Trust are not amused. It reminds me that my Latte Lessons have been one the best things I have done to encourage students to read around the subject.
What is the main cost of producing a new car for the US automotive giant General Motors? It is a question I could routinely ask of my introductory economics class this autumn when we think about the basics of supply. The likely answers might include the cost of steel, wages of assembly workers, glass and rubber, design costs and the expense of fixed capital machinery for the production line.read more...»
The Today Programme on Radio 4 had a spell-binding interview with an economic historian who has devoted virtually the whole of his working life to creating national income statistics for the world economy - data that we can use today to enrich and deepen our understanding of why some countries grow faster than others. Click here for a discussion between Evan Davis and the historian Angus Maddison, Emeritus Professor at the Faculty of Economics at the University of Groningen. He explains how you can work out the GDP of the Roman Empire! And here is a link to his most important work.
The Rightmove asking price index is a useful gauge to where the balance of power lies in the UK housing market and the shifting sands of sentiment in the property sector.read more...»
Here is a great example of occupational mobility and transferable skills in the labour market. With the UK construction industry shedding thousands of jobs among highly skilled workers, another industry is booming and trying to encourage newly redundant workers to retrain for a trade as a deep-sea diver. The Underwater Centre in Fort William has a world-class reputation for providing professional diving courses and demand for divers has been booming as the oil and gas industry looks to step up production in response to rising prices.
“According to the International Marine Contractors Association (IMCA) who represent over 350 offshore marine and underwater engineering companies worldwide, over 40 more floating drilling rigs will be commissioned over the next two years, creating a demand for 5000 more support roles, of which commercial divers and ROV operators make up a proportion.”
The work is arduous and risky but the rewards are good providing that people are able to work their way through the training programme.
This story helps to apply lots of economic concepts linked to the labour market
Opportunity cost of paying for a diving qualification
Occupational mobility of workers when they are made redundant
The elasticity of supply of labour to highly skilled jobs such as deep-sea divers
Outward shift in market demand for labour and the effect on wages
The derived demand for labour
Would you like to include the very latest content from the Economics Blog on your department web page? How about adding the Blog to your Facebook or MySpace page? Why not keep track of specific categories on the Blog such as Recession Watch, Market Failure and the Price Discrimination in Action.
How can you do all these cool things? You need an Economics Blog Widget…read more...»
Collapsing consumer confidence, increasing competition from other live events across the UK, high ticket prices, dreadful problems with the online ticketing system have all combined to hit ticket sales for the Edinburgh Fringe this August and remarkably there are still many city centre hotels with spare rooms with the Festival just a fortnight away. Normally the month of August is the cue for hotels and B&Bs to hike up their prices to silly levels to take advantage of the influx of people staying for the festivals. But this year things look to be different ...the Scotsman reports that “Hotel and guest house bookings for this year’s Festival are at an all-time low for this time of year….and… Dozens of private flats are still being advertised as available to rent on the Fringe’s website”
My week in Edinburgh for the fringe is always one of the highlights of my year, maybe it will be a little easier to get a table for supper in 2008 and perhaps I should have played chicken and delayed booking hotel rooms!
Earlier this year Apple was accused of engaging in some blatant price discrimination by selling download tracks at a higher price in mainland Europe compared to the UK. They responded by saying that they wanted to bring in a “standardised price” within months. Well now the falling pound against the Euro seems to have done the job for them - according to this BBC report - “exchange rate changes since January mean 0.99 euros now equals 79p, meaning no price cut is necessary, Apple said”
Still no explanation for why download prices are cheaper in the USA? I haven’t downloaded a song from iTunes for months - there is now much more competitoon - but I am happy enough downloading the free podcasts to keep me happy!
Alister Darling’s interview in the Times today was revealing on several different levels. First for confirming that the Treasury is actively looking at altering the government’s own fiscal rules in time for the Pre-Budget statement in November. Second that Darling did not appreciate the extent of the negative fall-out on the real economy from the credit crunch - a crunch which has now reached Crunch 2.0 as it moves from the financial sector to manufacturing and services. And third that, given the parlous state of the government’s own finances - this year will be a particularly difficult one and tough choices will have to be made on spending priorities
”“So every chancellor has to be conscious of the fact that there’s a balance to be struck between how much you can spend, and how much people will say, ‘OK, if you’ve another pound to spend, remember me as well.”
A classic example of opportunity cost to use when the new term starts in September.
The dreadful public borrowing figures are reported here: public borrowing surges
I spotted this article in the Guardian from a little while back - “The largest rooftop solar power station in the world is being built in Spain. With a capacity of 12 megawatts of power, the station is made up of 85,000 lightweight panels covering an area of two million square feet” It brings into play three important economic concepts - renewable energy as a factor resource, economies of scale in production and also the costs and benefits of government subsidy - Spain has introduced subsidies of €0.42 per kilowatt per hour for investment in solar power - though the level of subsidy may be lowered in the months ahead.
Two minimum wage stories
A Sheffield butcher has become the first employer to be prosecuted for not paying the minimum wage to its employees - this BBC report covers the story - Jackson, from Pontefract, and Smout, from Sheffield, were charged with non payment of minimum wage and failing to keep adequate pay records. Reading between the lines, I was surprised to read that so few prosecutions have been brought forward since the NMW came into force in April 1999.
And today BBC London exposes the Hard Rock cafe for paying a basic wage of just £2.06 an hour in a story linked to the debate about whether restaurants are routinely using customer tips to supplement the wages of their workers.
The current minimum wage stands at £5.52 for workers over 22 years of age. If you worked 48 hours a week, that translates into £13,772 a year - a few weeks ago, the Joseph Rowntree Foundation published survey research which indicated that a single person in Britain today needs to earn at least £13,400 a year before tax to afford a basic but acceptable standard of living.
The soaring cost of child care is worsening the poverty trap according to a new report commissioned for the save the Children Fund in Scotland. More than one quarter of Scots parents on low incomes cannot work full time because of the cost of registered childcare which has risen by more than 10 per cent this year across most of the country. The average cost of child care in Britain during the holiday season is nearly £90 per week.
The Times has this article
“Joanne Brady, a single mother of two children from Glasgow, is unable to work because she loses more in means-tested child tax credits than she gains in income. “They take 20 per cent off for each child when you go to work. You still have to pay your housing, travel and lunches and it’s just not adequate.” Ms Brady, 27, is among the 28 per cent of parents with children under 18 and an income of less than £15,000.”
And the BBC also covers the report.
It usually takes some time for turning points in the broader economic cycle to show through in the labour market numbers - in econ-speak, we talk of unemployment being a lagging indicator of the rest of the economy. Job losses make the headlines but new jobs created rarely filter into the news. But such is the nature of our flexible labour market that the jobs data looks likely to start moving in the wrong direction with greater haste than in previous downturns. Just listening to the banter in my local gym, I have picked up that many of the small to medium sized businesses in my area are battening down the hatches and looking to cut their overheads - if businesses want to survive they have little choice.read more...»
I normally teach about there being a shut-down price - a price so low that a business cannot hope to cover even the variable costs of production and one that implies that it might be better to close down production in the short term. Perhaps I should be tweaking this to talk about the ‘shut-down point’ - focusing less on the price facing consumers, but more on businesses making calculated decisions about which shops to keep running, which factories to close and which products to continue selling.
The airlines provide an example of this. Faced with surging aviation fuel prices, slowing consumer demand and expensive take-off and landing fees, Ryanair has become the latest airline to ground some of its flights and cut back on operating capacity in a bid to stem losses. In his typically colourful language, Ryanair CEO Michael O’Leary has blamed the “twats” at the British Airports Authority” for his decision. In today’s Guardian he claims that “the airline would lose less money by grounding its aircraft and not hiring personnel to fly them rather than operating them at a loss from Stansted.”
Grounding planes is his response rather than abandoning route - the airline will be making a 14% reduction in the number of weekly flights at Stansted this winter, from more than 1,850 a week to to just under 1,600 this winter. The number of planes based at Stansted will fall from 36 to 28. The number of weekly flights to Dublin will fall from 58 to 50, to Glasgow from 29 to 20 and to Rome CIA from 35 to 28.
EasyJet (24th July) has also announced reductions in their winter capacity as a cost cutting measure - The Telegraph reports that “Oil price inflation had increased the company’s fuel bill by £185m for the full year”
Consolidation continues apace in the UK food retail sector. Yesterday the Co-op (a mutual owned by its 2.5 million members) acquired Somerfield (owned by a private equity fund) for £1.57bn in an example of horizontal integration designed explicitly to give the Co-op the opportunity to achieve greater economies of scale across its business. The combined market share of the newly merged business will be around 8% - less than half the share enjoyed by each of the next biggest retailers Sainsburys and Walmart (Asda).read more...»
For occasional taxi journeys from my home to and from Heathrow and to my local station at Slough I am almost completely price insensitive. But in central London I do weigh up the costs and benefits of jumping in a taxi for shorter forays. This is a terrific article on the cost pressures facing London’s metered cabs whose prices are capped by Transport for London. Earlier on this year, the price of metered can journeys was raised by 2.7% - below the CPI and RPI rate of inflation and nowhere near the increase in the cost of fuel at the forecourts.read more...»
What if anything can a government do to avoid an economic recession? Especially when central bankers appear hamstrung by the risk of stagflation and the financial system is incredibly fragile. The community pages of the New York Times asked readers for suggestions! Their contributions will appear here. read more...»
The news on UK inflation this week wasn’t good - it is difficult to find anything positive in seeing CPI inflation surge to an eleven year high of 3.8% and the RPI climbing to just under 5%. Little wonder that the government is getting more paranoid by the hour about the dangers of losing the battle on pay restraint as a wage price spiral takes hold.
The monthly inflation data tells us what has been happening to prices for a basket of goods and services - but to my mind what is more worrying is the data on input and output prices facing manufacturing businesses. My chart above shows just how steep has been the acceleration in inflation in the costs of imported foods and raw materials - costs are rising in excess of 20% pa for both categories. There comes a point when businesses simply have to raise their prices to avoid a calamitous fall in profits - and that point seems to have been reached. Manufacturing output prices are not rising at an annual rate of more than 10% and this “factory gate” inflation will flow through from wholesale to retail level in the space of a few weeks and months. If you want an early warning of why the inflation problem will not go away in 2009 - this one of the key indicators to watch.
It is not supply that will drive the world price of oil down in the near term - it is demand. Oil prices dropped by the biggest amount in three-and-a-half years yesterday as commodity dealers sold on fears that the world’s leading economies are facing a sustained economic downturn. A firmer dollar and weaker prospects for economic growth should - in the absence of supply shocks to crude production and refining output - bring prices down further providing some relief to motorists, the aviation industry and countless others.
Prices are incredibly volatile at the moment - and the huge number of options contracts tends to increase volatility, with computers programmed to automatically sell once prices reach certain thresholds.
The Guardian: “Fears of recession drive shares and oil prices down”
Do you regard yourself as a good tipper? Or is it something that fills you with dread everytime the bill for a meal comes round?
Who do you tip? Your hairdresser? Your taxi driver, cleaner or perhaps the person who delivers your groceries? Why is it considered routine to tip waiters and waitresses and hotel staff whereas good service at the check-out counter in a supermarket is rarely if ever considered worthy of an extra financial reward?
The Independent today launches a campaign for greater transparency and fairness in the restaurant industry when it comes to tipping staff and the distribution of money from service charges. I didn;t realise until today that money left as a tip on a credit card or paid as service change on a menu is legally the property of the employer to dispose of as they wish.read more...»
A new set of A3-sized UK macro-economy posters is now available from tutor2u. This new poster collection gives Economics teachers a set of data charts offering students a sense of how the figures have moved over recent years but also bringing them up to speed with the latest developments…read more...»
Seth Godin writes about scarcity
“We can learn a lot from the abysmal performance of Apple this weekend. They took a hot product and totally botched the launch because of a misunderstanding of the benefits and uses of scarcity ...Smart marketers understand that scarcity (intentional or not) is a tool, one that can be used to enhance the story, not detract from it”
And gives five principles for how smarter businesses can exploit scarcity
I am told I must now regard my BlackBerry as a inferior products now that the all-singing, all-dancing iPhone 3 has hit the streets - bunkum!
Over twenty airlines have gone bust since the price of aviation fuel started to climb and the turbulence in the global aviation market is likely to lead to a fall in demand for new aircraft according to a report in today’s Times.
This is a pretty inspirational story about an Economics student, Seth Weidman, whose go-getting attitude seems to have rubbed off on his fellow students and pupils! He obviously has a great future as an economics-educator! Hat tip to Tyler Cowen for the original link.
Heather Stewart writing in the Observer draws parallels with previous recessions and suggests that vastly over-inflated private sector debt will be the main cause of a painful recession and a return to the boom and bust days of the 1980s and 1990s. Three useful A2 macro concepts work their way into her primer at the end of the article:
Correction - however much you thought your home was worth, you were wrong.
Deleveraging - banks that have made risky loans trying to get their finances back in order by lending less and asking for more cash from shareholders.
Spare capacity - that means higher unemployment, mothballed factories and empty shops and offices.
Jim O’Neill the Chief Economist of Goldman Sachs writes on the benefits of globalisation for the UK economy in today’s Sunday Telegraph
“For the nation that provided the English language to the world, that provides the link between east and west in terms of time zones, globalisation - the major structural trend of our generation - is going to become an ever greater bonus….At the heart of all of this is the expansion of the so-called BRIC economies. The emergence of Brazil, Russia, India and particularly China, closely followed by another group of emerging economies with large populations that we have dubbed the “Next 11”, will drive our future.”
Jim spoke at the Keynes Society in February and there is a report here
Paddy Power is giving gamblers the chance to make some money in a recession! In order for yes bets to be deemed winners, there must be a decline in the GDP for two or more consecutive quarters. Applies to the UK only for 2008. Current odds are
Only single bets - no accumulators!
The increase in the price of aviation fuel is causing airlines across the world to think about how they can control costs and the obvious solution is to reduce the weight on flights to increase fuel economy even if only by a slender amount. US airways has announced that it plans to remove the in-flight entertainment systems from many of its flights in an effort to cut down on the amount of fuel - the 500lb movie systems will be discarded from domestic flights from November onwards - the decisions affects around 200 aircraft and is estimated to save around $10 million a year. It will keep movies in its widebody aircraft for international flights and trips to Hawaii (a different type of consumer demand?)
The decision is possibly bad news for Hollywood movie producers whose revenues from selling the rights for airlines to show movies might take a hit. But much depends on whether other airlines follow suit. Demand for the next generation of super-light back of seat entertainment systems is likely to grow in the coming months.
An excellent resource on the global oil industry from the BBC - packed full of useful charts and background when teaching this market
The balance of power is tilting firmly towards buyers in the second hand car market to judge from new data which shows that the average forecourt price of second-hand cars has slumped more than 14 per cent in the past year.
The absence of buyers has left dealers worried about being stuck with excess stocks of cars and more buyers are not prepared to accept the advertised windscreen price. Demand has been hit by the loss of consumer confidence, the prospect of much higher vehicle excise duty on older less fuel efficient vehicles and by the rising price of fuel. And double-digit price deflation has been reinforced because many dealers are now able to source their vehicles more cheaply too as families with multiple cars on their drive way look to offload them as budgets are squeezed.
John Fingleton’s tenure at the competition watchdog the Office of Fair Trading has coincided with some huge fines for price collusion within oligopolistics markets and yesterday came one of the biggest with a tobacco manufacturer and five retailers agreeing to pay the biggest collective penalty yet imposed for price-rigging after admitting their role in efforts to boost the cost of cigarettes.The six companies agreed to pay £132m to settle the charges with Gallaher, one of two tobacco manufacturers involved in the case, shouldering the lion’s share of the burden after agreeing to pay £93m.The Times reports that “The six companies fined made prompt admissions of illicit competition practices in return for lenient fines.” - another example of game theory and the prisoners dilemma in action!
BBC news: Six firms fined in tobacco probe
The Telegraph: OFT’s hefty fines for tobacco price fixing
The Times: Supermarkets and tobacco firm are fined £173m for price fixing
Office of Fair Trading press release
There is a recent profile of John Fingleton here in the Times
“The Caterpillar 797B heavy hauler is the world’s biggest truck. It’s taller than a four-storey house, as wide as a tennis court and it removes nearly 35,000 tonnes of oily sand a day from a deep open cast mine in northern Alberta in western Canada.”
John Vidal heads to Canada to ask some tough questions of the oil industry and its intentions in northern Alberta in this Guardian video report. This video is backed up by this report. Some of the photos of the plant and equipment being used are truly stunning - I will certainly be using this when I teach about economies of scale next autumn. The size of the oil sands exploration is astounding and the economic boom hitting this northern wilderness in places such as Fort McMurray beggars belief. But so too are the environmental consequences of this black gold rush
“The downside is ecological devastation and soaring greenhouse gas emissions on a scale that is beginning to alarm Canadians and other western countries trying to reduce the intensity of their carbon economies to counter climate change. Canada, alone, of developed countries, is expecting to increase emissions for 30 years and ignore its commitments to Kyoto.”
Peter Day looked at this issue a couple of years ago and his In Business report is still available on the BBC web site
Image from creative commons licence on Flickr.com
Do speculators increase or decrease price volatility in markets? It is a pertinent question and one that I will be firing at my Oxbridge students in one of their essays when they return from a summer of reading on the beach! Tim Harford’s blog alerts me to some new research on futures markets and price volatility in the case of onions (it brought tears to my eyes) and Tim flags up an article he is writing on speculators for tomorrow’s Financial Times magazine.Here is Tim’s article: Why the world needs more speculators
Telegraph readers will be choking over their breakfast this morning if they catch sight of this article in the business section
“Britain is now in the midst of the worst housing slide since the Great Depression, economists declared after house price inflation dropped to the lowest level since comparable records began .........House prices have never fallen by more than 10pc over a year in recorded history, except in 1931, when Britain left the gold standard.”
Charles Goodhart is quoted in the article .... does Goodhart’s Law still have any resonance? I remember being taught it when I was a student and money supply targeting was all the rage!