Sterling and Exports - The Importance of Time Lags
Roger Bootle has an excellent article on the lagged effects of a competitive exchange rate in today’s Telegraph. One of his arguments is that the default behaviour of exporters is to take higher profit margins from their overseas sales rather than cutting prices to boost export volumes. Crucially the impact of a lower currency takes time to show through in the trade data and this is because switching production to countries where the exchange rate is favourable cannot happen overnight .... read this paragraph:
“Yet where export prices are not cut, this does not necessarily mean that the weaker currency will do no good. It is rather that the benefit will take longer to come through. In response to higher profit margins, firms will have more incentive to sell abroad. In the economic textbooks, selling abroad, or switching from European to Asia markets, is simply a matter of pressing a button. In reality it isn’t like this; sales networks have to be established, modifications to the products or services made; foreign relationships built up. These things do not happen overnight.”
More here: The competitive pound is one of the few things we have got going for us
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Crap avoidance rather than an orgy of optimisation
Some of the most interesting academic work comes from collisions and overlaps between diverse fields and disciplines. As the dust begins to settle from the financial crisis Economics IMO needs to listen and draw more from Psychology, History and Biology. We need less Maths and more humanity and we can do much from approaching knotty policy dilemmas from different points of view.
In this spirit, Rory Sutherland the “Fat bloke at Ogilvy” gave a fascinating and illuminating talk on some of the lessons of behavioural economics applied to the world of advertising and marketing in his talk at the LSE this afternoon - it was totally worth the train journey into London to hear a speaker whose positive engagement with his audience put others to shame. How refreshing it was to hear from a speaker undaunted and unaffected by the doctrines of classical economic thinking.
Here is a snapshot of Rory’s journey through some great microeconomics!
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Metal prices on the rise again
What do the following businesses have in common?
Anglo American
Antofagasta
BHP Billiton
Eurasian Natural Resources
Fresnillo
Kazakhmys
Lonmin
Randgold
Rio Tinto
Vedanta
Xstrata
Supermarkets accused of price gouging
The Guardian today carries a story about alleged price gouging by the supermarkets. Tesco and Asda refute the charge but they are said to have lifted the prices of a number of necessary purchases for many household goods in the lead up to Christmas.
“Both supermarkets, according to Bridgeman, would be able to use their sales data or information from loyalty cards to identify those purchases customers feel they have to make at Christmas and then target these categories for some steep rises “to extract maximum profit” from shoppers who have neither the time nor capacity to go elsewhere. So household cleaning goods, shaving products, toiletries, lightbulbs, batteries, pickles, sauces, herbs and spices typically consumed at Christmas, favourite seasonal drinks, hangover and indigestion pills, and must-have family presents were all categories seeing dramatic hikes on some lines”
Price gouging involves charging more for consumers whose demand is price insensitive, in other words the price elasticity of demand is low. This would allow the retailers to achieve a higher profit margin on their sales as they extract consumer surplus and turn it into extra producer surplus. The accusation is a strong one more so because many thousands of families on lower incomes may have suffered price hikes at a time when budgets are already under enormous pressure from the effects of the recession and rising utility and energy bills.
More here: How supermarkets can cut ‘thousands of prices’ but your bills may go up
Labour Peer attacks free care for the elderly
This is a really interesting comment piece by the Labour Peer and Economist David Lipsey who attacks the government’s plans for free care for the elderly. It builds the case that offering free care will generate a number of unintended consequences and risks leading to government failure. It could be a useful article to include when teaching health care and government intervention.
“Every now and again governments pass laws that make you think they must have lost their marbles. Think of the Poll Tax and Dangerous Dogs Bill. But these errors by past administrations pale into insignificance beside the grotesque folly of the Personal Care at Home Bill, which is being debated in the House of Lords........You don’t need to be much of an economist to know that if you reduce the price of something to zero, the quantity demanded will rise. As Adass also points out, the effect of free care will be that large numbers of people who are at present managing with the support of friends and relatives will start claiming for paid-for support.....”
50-year decline in housing affordability
The BBC website has a summary of the key points in a report issued by the Halifax about the housing market over the last 50 years. The main headline is that houses have become less affordable, with the average annual price rise of 2.7% outstripping the 2% annual rise in incomes over the period. There have been 4 periods of boom in house prices: 1971-73, 1977-80, 1985-89, and 1998-2007, with the greatest acceleration in the last decade. In 1959 the average house cost £2,507 (compared with an average price in December 2009 of £162,103 according to Nationwide Building Society) and about 14% of them did not have an indoor toilet (compared with 0.2% in 1996). In 1967 22% of houses did not have a basic hot water supply, and built-in central heating was a rare facility.
read more...»Bangernomics and asymmetric information
Another item from the Today programme relating to information was about MOT failure rates for cars and small vans, which have been published for the first time following a Freedom of Information (FoI) request by the BBC. Martin Rosenbaum, the BBC’s Freedom of Information expert, and James Ruppert, special correspondent for Autocar magazine and author of ‘Bangernomics’ discussed the data reluctantly published by the Vehicle and Operator Services Agency (VOSA). The agency had previously resisted publishing the data, saying it might be misleading – and I should think that it is likely to have an effect on the second-hand values of those models appearing at the top and bottom of the list. It may go some way toward balancing out asymmetric information in the market for second-hand vehicles, where the seller has more information than the buyer, thus distorting the price that they might arrive at between them for the vehicle.
Contestable Markets - Google launches the Nexus One
Google has launched the Nexus One a “super phone” designed to challenge the established dominance of smartphones such as the iPhone, Blackberry and Palm Pre. For £330 buyers anxious to own a Nexus One without locking themselves into a lengthy contract with one of the major mobile phone operators can have a phone delivered that can run on any network.
read more...»Is UK manufacturing turning a corner?
Whisper it quietly but there are signs of a rebound in orders and production in UK manufacturing industry. In recent weeks we have seen a cluster of articles suggesting that some of the industrial production that left the UK during an age of out-sourcing is now starting to return home. Having plunged last year manufacturing ouptu appears to have stabilised and today we heard news from the Chartered Institute of Purchasing & Supply’s purchasing managers’ index that UK manufacturing activity grew at its fastest pace in more than two years in December 2009. And last week Last week, a survey by the Engineering Employers Federation revealed that one in seven British companies had repatriated manufacturing operations to the UK in the past two years. Keep in mind that manufacturing contributes less than 12% of UK GDP - although many service sector jobs and businesses depend directly on the health of the industrial sector. Manufacturing may be making a comeback because of:
1/ Sterling: The weaker value of sterling against the Euro and the US dollar has given manufacturing industry a competitive boost
2/ Relative costs and supply issues: Higher than expected costs and quality problems have been cited by some businesses that have outsourced some manufacturing - high wage inflation in fast-growing emerging market countries has narrowed some of the unit labour cost gap between the UK and rivals
3/ Oil and transport costs: The high price of oil has increased the cost of shipping goods around the world encouraging producers to focus output closer to the market
4/ Overseas markets: Signs of a recovery in some of the UK’s main export markets - the majority of manufacturing production in the UK is exported, manufacturing industry in Britain is sensitive to the global economic cycle
Sunday Times (3rd Jan) Made in Britain: How manufacturing is returning to the UK
Scotsman: 15% of British firms switching production back to UK
Assorted Links (1 Jan 2010)
1/ Why, despite the financial crisis, do we still put our faith in economists? (Edmund Conway in the Telegraph)
2/ The price of liquids - a fascinating chart that shows how much HP printer ink costs compared to human blood, vodka, crude oil and other precious liquids.
3/ World price of raw sugar doubles in 2009 - poor harvests in Brazil explain some of the rise in price. This BBC news video explains some of the effects.
4/ UK house prices end decade 117pc higher, says Nationwide (Telegraph)
5/ US votes for Chinese steel duties (BBC Global Business) - Duties ranging between 10% and 15% are now set to be imposed on imports of Chinese steel pipes
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