Google Wave: Trade deficits and surpluses
We were back on Wave last night considering some of the wider arguments surrounding persistent trade imbalances. Are trade imbalances a problem?
We are hoping that - as more Economics teachers migrate to Google Wave - we will be able to schedule collaborative sessions (typically lasting between 45 to 60 minutes) where we can generate ideas, arguments and perspectives in real time and support eachother’s teaching on chosen topics or issues.
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Great examples of near pure monopolies
A big hat tip to one of my students Arno Albici for spotting a superb article in the Economist about a cluster of mid-sized Japanese manufacturers who continue to enjoy near pure-monopoly power in highly specific, high value-added businesses. decades of industry expertise and reinvesting profit to fund high levels of research and innovation continue to give these companies a remarkable competitive strength in the market. The barriers to entry for rival manufacturers are very high and this helps to explain the limited contestability in the global marketplace.
For example:
Shimano earns around $1.5 billion a year by supplying 60-70% of the world’s bicycle gears and brakes
YKK makes around half the world’s zip fasteners by value,
75% of motors for hard-disk drives in computers come from a firm called Nidec
90% of the micro-motors used to adjust the rear-view mirror in every car are made by Mabuchi
“Many technology products have become commodities, but certain components have not, since they require continual innovation. So entry barriers to the business of making them remain high, and although the margins on the final goods have deteriorated, the margins on specialised, high-end components are still juicy.: Much more here
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Taxing hot money - is Brazil getting it wrong?
Carl Mortished’s excellent world business briefing in the Times today covers developments in the Brazilian economy. Huge inflows of foreign direct investment have helped to drive their currency higher and the Brazilian Finance Ministry has responded with a 2 per cent capital tax on foreign ‘hot money’ inflows into stocks and bonds. The article suggests that Brazil might be better off in the long run by cutting import tariffs on capital goods thus reducing the price of imports of hi-tech machinery that will give her economy a major supply-side boost. In contrast to China, Brazil exports a relatively low percentage of her national output and it is largely self sufficient. The country has enjoyed a significant improvement in her terms of trade with strong world prices for many of her key exported commodites such as iron ore, coffee and orange juice. The boom in commodity exports has helped to increase the real purchasing power of millions of Brazil’s poorest people but a huge amount remains to be done and income and wealth inequalities are vast.
“Brazil is not China; it does not trade that much. Where China’s motor is manufacturing exports, Brazil is largely a self-sufficient economy, more like the United States, with a vast hinterland of eager, albeit poor, consumers.”
Gloomy summary
Here is a summary of four reports posted on the Business and Economics sections of the BBC News website over the last few days. Be warned - none of them are particularly hopeful, the green shoots of summer giving way to autumn mists.
Swine flu vaccines and elasticity of supply
The scale of the ordering of swine flu vaccinations by governments across the world is eye-wateringly large! GlaxoSmithKline plc - one of the world’s biggest pharma companies has reported that governments around the world have so far ordered 440 million doses of its pandemic swine-flu vaccine Pandemrix. GlaxoSmithKline has been engaged in a tense race to get new swine flu vaccines onto the market fighting the likes of Sanofi-Aventis, Novartis AG and AstraZeneca to win contracts for public health programmes. For students of the price mechanism it is a fascinating example of many supply and demand concepts at work:
The challenge of scaling up production to meet huge levels of demand - this has involved out-sourcing
The relative importance of fixed and variable costs in developing and manufacturing/distributing a new drug
The elasticity of supply of vaccines to meet short term health requirements
The oligopolistic race to win and protect market share
Economies of scale in production
The balance of power between the major buyers and the multinational drug suppliers
Price discrimination tactics
The Guardian reports that:
“The company makes the vaccine in Dresden and Quebec but the demand is so great – about 60% higher than for usual seasonal vaccines – that it is also outsourcing production to third-party manufacturers.”
According to the Wall Street Journal
“Glaxo hasn’t released information on cost per dose of the vaccine. However, Chief Executive Andrew Witty said in July that Glaxo was charging wealthy nations $10.26 per H1N1 vaccine shot and developing countries less. The drug maker is also donating 50 million doses to the World Health Organization.”
The Independent reports that
“The United States has begun a massive campaign aiming to vaccinate 250 million people against the illness by year’s end.”
And the Times reports that “total booked orders for the drug are worth about £2.2 billion — a significant sales and profit windfall as a result of the swine flu epidemic”
The trade impact of car scrappage
As expected, the UK government has announced an extension to the car scrappage scheme which will expand the consumer subsidy to another 100,000 cars.
The ‘clash for clunkers’ scheme has at least helped to stabilise domestic car production but four fifths of the new cars sold in the UK are imported from overseas. According to the Guardian “For the year to date, production has declined by 44.6%. But the slight improvement recorded last month has prompted some carmakers to hope that the slump is bottoming out.”
So the direct impact on UK car assembly plants is smaller than we might think. Factor in though the multiplier effects on the suppliers of car parts and the boost to retail and distribution businesses.
Stephanie Flanders is on excellent form in her latest Stephanomics blog. She argues that the much larger German car scrappage scheme may have had an even bigger effect on our own producers than the UK government’s modest version. The German subsidy is worth ten times that of the UK and around 40% of German car sales last year were imports. More here.
Sunday Selection
Here is a selection of recommended web articles and features
Robert Peston asks whether a slower recovery will be better for the UK than a rapid rebound from the trough of the cycle:
Nobel-Prize winning Economist Joseph Stiglitz considers the pitfalls of relying heavily on GDP as a measure of economic well-being and sustainability - “Chasing GDP growth results in lower living standards. Better indicators are needed to capture well-being and sustainability.”
Over at the Independent, Hamish McRae argues that the future of the British motor industry depends on creative and highly skilled designers rather than hanging on to the desire to keep mass manufacturing going at any cost
“There is no room for sentiment in the motor business. It is a really tough one and one that in the developed world will continue to be in slow decline. The world’s largest car producer now is China and that is the way the world will continue to go. There is room for a country like the UK in niches – of which the Mini is perhaps the best example and MG might have been – at the top end of the market where craft and design outweigh the cost of manufacturing in the developed world, and as a sterling base supplying the UK market.”
What is economics? Modern approaches
This looks like a very useful resource for ambitious A2 economists - a New Scientist special on Economics from earlier on this year
Volkswagen looks to China on the road to being the biggest car maker
Volkswagen has a hugely ambitious long term aim - by 2018 it wants to overtake Toyota as the world’s biggest car manufacturer.
With this in mind it makes clear sense to focus capital investment in countries where the projected growth of demand for new vehicles is strongest. The relatively mature markets of Western Europe and North America look less attractive compared to emerging economies such as China and Brazil.
This week Volkswagen has announced a Euro 4 billion plan to expand capacity and output in China. In the short term the commercial need is to have sufficient capacity in place to meet the surge in demand brought about by the deep cuts in taxes on new cars introduced by the Chinese government as part of its economic stimulus programme - there has been a temporary cut in the purchase tax on cars with 1.6 liter engines to 5%. In the first half of 2009 Volkswagen has already sold over 620,000 cars in China!
Long term however the market demand for automobiles is forecast to rise by more than 10% per annum. Volkswagen has engineered joint ventures with Chinese manufacturers to build cars at plants in Nanjing and Chengdu - it is not beyond the realms of possibility that within eight years, it could be assembling over two million cars a year in China - a staggering volume of production and one designed to maximise the economies of large scale production.
More here from the BBC news site
Sterling and the Economic Recovery
Despite a recent appreciation against the US dollar and the Euro, sterling remains well below its value of two years ago. But has the weakness of the pound - which has given the British economy a competitive boost at a time of recession - delivered the extra impetus for demand that we have been searching for? Edmund Conway considers this in his column in the Telegraph today - Weak pound might not be enough to rescue UK economy -
read more...»High and Low Marginal Cost Products
The concept of marginal cost: Our A2 micro course this term is starting with an exploration of cost - namely the nature of fixed and variable costs (and those expenses that blur the distinction) and then a discussion of sunk costs when businesses are weighing up whether or not to stay or leave a market.
We then moved onto marginal cost - the change in total cost from supplying an extra unit or supplying to an extra consumer. In some markets and industries there is a clear and often hefty marginal cost to producing for the next user. In others, the marginal cost is negligible, bordering on zero. How might this impact on the nature of supply and pricing?
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