IB Economics

Take Off for Air Asia - Finding Opportunities in a Recession

I have heard many presentations from business folk over the years and the last two years of our embryonic Entrepreneurship Society have been memorable for some superb talks. None has quite matched the impact and the quality of a talk given by Tony Fernandes, Founder and CEO of Air Asia last Thursday night.

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Junk Food tax?

The Economist has a good feature this week on taxing junk food. It is generating support in America, a country with rising obesity rates. Congress is considering a tax on sugary drinks to help pay for the planned expansion of health-care coverage. Some analysts would like to see broader duties on junk food. On July 27th the Urban Institute, a think-tank in Washington, DC, proposed a 10% tax on “fattening food of little nutritional value” that, it claimed, would raise $500 billion over ten years.

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Introducing free trade, protectionism and globalisation.

This 14 minute video from Alex Tabarrok will get students into a great discussion on free trade and protectionism and is an excellent resource to refer back to when teaching tariffs and quotas and then globalisation.

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Pure monopolies in Japanese manufacturing

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

The ECB

I have just finished a Higher Level Economics lesson with my U6th where we have been discussing the role of the ECB. Whilst putting together material for the lesson I discovered some superb video clips from the ECB website that provide an excellent insight into the history of the bank, its current role, policy tools, remit and future direction.

The About the ECB clip always provides some excellent material to spark a discussion on the arguments in favour of the single currency.

We finished the lesson in a light hearted way by watching the price stability cartoon. My students were especially amused by the inflation and deflation monsters!

United States sees rebound in output but few new jobs created

 

Here is a topical teacher presentation that provides a snapshot of, and commentary on key economic data from the US as the world’s largest economy starts to pick up from the depths of the recession. Many questions remain not least the durability of a recovery and the extent to which the US experiences a jobless recovery.

Launch streamed, interactive version - US Economy Rebounds

Download PowerPoint (ppt) version:

Mark Mardell reports on the latest US economic data in this BBC news video. Hamish McRae also reports on the state of health of the US economy in this piece from the Independent.

Tutor2u in Hong Kong

Eye weary and groggy from some fine Cathay Pacific house red, I have just landed hot foot from Hong Kong where I was the guest of Sha Tin College and a meeting of the Economics and Business Teaching Group from the English Schools Federation in Hong Kong.

The whistlestop tour was great fun and I must thank everyone there for their warm welcome and superb organisation, not least Paul Hoang and his colleagues who put on the two day student conference and CPD event at their fine school.

I will be posting some of the materials used in the Economics and IB blogs in the coming days….once the red leaves my system.

IB Higher Economics - Improving your Exam Skills

Here is a streamed version of the presentation I gave to the Hong Kong CPD day, focusing on how IB Economics students can improve their evaluation skills:

Improving Evaluation Skills

Paul Mason on the Wall Street Crash

Paul Mason - BBC Newsnight’s Economics Editor - is running a series of reports this week to mark the 80th anniversary of the Wall Street Crash. They are likely to be superb and a great resource for students and teachers. Here are the links to Paul’s output.

What caused the Wall Street Crash? (11 mins)

How the crash changed everything (13 mins)

Lessons of 1929

Fallind Demand for MAN

A short interview with the CEO of MAN group discussing falling demand in the truck market and the future for the business.

click here

Soros launches new economic think tank

For many years the billionaire George Soros has been a trenchant critic of neo-liberal free market fundamentalism. He has developed his own theory of reflexivity - a variant on behavioural economics thinking - which stresses the importance of perceptions in markets and powerful feedback effects. The FT describes his theory as one where ’ financial markets tend to influence perceptions of reality, which in turn feed back into markets.’

Now Soros has announced that he is putting $50m into a new think tank - the Institute for New Economic Thinking (INET) - one of the aims is a moving away from the dominance of high level mathematics in university courses (a seriously good move in my opinion) towards giving students stronger insights in behavioural traits and the importance of politics and history in driving how people operate in real markets. According to Soros “The (economic) dogma has lost touch with reality.”

NET’s founding Advisory Board members include Nobel laureates George Akerlof (famous for his work on the market for lemons and asymmetric information) and Sir James Mirrlees, Michael Spence and Joseph Stiglitz, Willem Buiter (from the LSE) Ian Goldin (seen here giving a talk at TED) Charles Goodhart (creator of Goodhart’s law)  Anatole Kaletsky (arch-contrarian from the Times) John Kay (from the FT) global economics experts Ken Rogoff and Jeffrey Sachs. Quite a powerful list of people - all of whom are never happy to accept the conventional wisdom.

This is an economics think tank worth keeping a weather eye on.

Bye Bye Big Mac

Iceland will say “bless” to the only 3 MacDonald’s restaurants in the country. The only franchisee in Iceland said it had become too expensive to operate the restaurants after Iceland’s currency, the krona, plunged in value.

The fluctuating currency has seen a great change over the last 10 months. In January 2008, it cost more than 95 Icelandic krona to buy one euro and on Tuesday that exchange rate shot up to more than 186 krona.

 

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Tata records sharp rise in profits

Tata Motors is part of the Tata Group - one of the most important industrial conglomerates to have developed in emerging market countries. It has started to build the Nano - a car that sells for around £1300 and is reputedly one of the world’s cheapest motor vehicles. Tata also moved into the luxury market in 2008 when it bought Jaguar Land Rover from Ford for $2.3bn. This BBC report looks at the latest profits news from Tata. Tata has said it will eventually make 500,000 Nanos a year.

Outline some of the economies of scale that can be exploited by producing such a huge volume of cars
Draw an appropriate cost diagram to show what might happen to Tata Motors’ long run costs of production
What factors will influence the level of market demand in India for their Nano vehicle?

Click here for BBC news articles on Tata

China

Nearly thirty of China’s smaller hi-tech but potentially fast growing businesses have been granted permission to list shares on a newly created stock market - it is already being called China’s Nasdaq index. This BBC video covers the launch and highlights some of the risks for investors looking to buy shares in these companies. What role can a stock market have in stimulating investment and economic growth and development? What are the risks?

HDI for selected countries

The Economist chose the release of new data on the Human Development Index as the subject of its chart of the day - available here together with a short commentary. It would make an excellent chart to use as part of a teaching handout.

“Mozambique has improved the most, scoring almost 50% higher in the 2007 index than it did in 1990. Many other African countries have also seen increases in their quality of life”

More here from the United Nations Development Programme

Lessons from an Ad Man - Superb Microeconomics

The wonderful Rory Sutherland wows the audience at the TED conference in Oxford with a superb sixteen minute talk on advertising and aspects of behavioural economics. It is an immensely watchable video that will allow you to discuss with your students concepts such as perceived value, symbolic value,intangible value, hedonic opportunity cost and some ideas for nudging personal behaviour in socially beneficial ways. We learn of the extraordinary value of placebos, the rebranding of the potato in Prussian Germany. That all value is subjective and that persuasion is better than compulsion. Some super examples too of Veblen Goods, price discrimination and how the framing of the Italian penalty points system for drivers in Italy has a different impact than for motorists in the UK.

Navigating our global future

Ian Goldin speaking at the TED conference in Oxford in 2009. A short but deeply interesting talk about globalisation and some of the systemic risks and systemic shocks that are likely to become more virulent.

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Supply problems in Ivory Coast drive cocoa prices higher

There is an excellent article in the Times today about the surge in the world price of cocoa. Cocoa prices have hit a 30-year high as poor weather threatens to drive the price of chocolate up again for Western consumers. Cocoa has reached $3,412 a tonne in New York as concerns deepened about demand outstripping supply for the first time since 1968. This is a really good article to use to consolidate students’ understanding of how shifts in supply and demand can lead to price volatility. And also the importance of price elasticity of demand and supply in shaping price changes.

“The surge in price also indicates that cocoa is increasingly being used for financial investment rather than merely sold to industry”

* What factors are limiting cocoa supply?
* Why is demand from western economies rising - even though many are still in recession?
* Will cocoa farmersd necessarily gain from higher world prices?

Surge in Chinese growth as domestic demand takes priority

China’s leaders have set ambitious targets for economic growth - with an aim of reaching 8% growth of real GDP in 2009, a year in which world trade has shrunk and much of the developed world has been mired in recession.  An enormous stimulus programme seems to be having an effect with the latest data showing a pick up in output and annualised growth of GDP climbing above 8.5%. Exports remain weak and many Chinese manufacturers are finding that the prices they are able to get from advanced economy importers continues to fall - the terms of trade have moved against them. Lifting domestic demand has become a key macroeconomic objective for the Chinese government. China has poured £354billion into spending on infrastructure in order to boost its domestic economy as exports have suffered.

This BBC news video reports on the latest Chinese growth figures.

The importance of capital spending to the Chinese economy is shown by the latest GDP figures. Investment contributed 7.3 percentage points to headline growth of 7.7 percent, and consumption accounted for 4.0 percentage points. Net exports subtracted 3.6 percentage points reflecting the weakness of external demand for China’s manufactured products.

See also

BBC: China economic growth accelerates

The Times: The dragon roars again after new figures put China’s output on a growth hat-trick

IT infrastructure and economic development

Access to and the speed and reliability of broadband infrastructure is one of the key institutional factors that impact on economic development. The lack of an affordable and cost-effective broadband network can be a huge barrier to economic growth especially in an age where companies in many rich countries are looking to outsource their back office and call centre services to countries where operating costs are lowest. The 2009 UNCTAD Information Economy Report provides a wealth of background information on the global digital divide. According to the latest report, businesses and consumers are 200 times more likely to have access to broadband in developed countries than in the poorest Least Developed Countries (LDCs). And the monthly cost of broadband access varies to an incredible degree - from over $1,300 a month in Burkina Faso, the Central African Republic to less than $13 in Egypt.

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Paul Romer on economic growth

BBC Radio’s Global Business this week sees Peter Day in conversation with Professor Paul Romer from Stanford University, Paul Romer is an expert in the causes of long run run growth and his current focus is on the economics of new cities in developed and developing countries. It is a programme well worth listening to, Romer is tremendously optimistic about the opportunities created by faster economic growth - especially growth built around innovation and appropriate rules systems.

Long run growth is closely asscociated with the discovery / implementation of new ideas

1/ technologies

2/ rules that govern how people interact and how the economy works

The two are closely inter-connected - Social rules often hold back the potential in new technology

Is growth good?

New technologies are potentially harmful if not accompanied by rules that make growth sustainable e.g. that limit pollution and over-fishing. Rules that put the right price on fuel and on carbon. Rules that set minimum standards for water quality and sanitation. Rules (or general principles on what types of transport are allowed and the size and pattern of properties).

Devices are getting smaller and using less energy per unit of output - this kind of growth that has a huge human value does not necessarily destroy the natural environment.

Cities 2.0

Romer’s current project is about building brand new cities - the entry of new cities that can be designed with very different sets of rules about transport patterns, density patterns and use of carbon.

In the developing world there are many new cities that will have to be built - this is an enormous opportunity. Successful cities are hubs of creative activity and chaotic innovation. But the framework of rules for new cities becomes even more important - government sets the framework of rules, the private sector operates within these rules. Rules can be enforced by law or by social custom.

The internet will ultimately speed up innovation in physical technologies and this leads Romer to be optimistic on sustainable growth. We will always face trade-offs, compromises and limits to consume less energy per unit of income. We face resource constraints and these will become ever more apparent as global living standards rise - but this will not stop progress. Indeed the price mechanism may accelerate experimentation, innovation and progress in finding some solutions to environmental crises.

Economic growth is ok if you have the right rules - more value, higher quality of life, more time with the kids, better investment in the things we care about.

The Rise of China and new Modernities

Martin Jacques address to the Royal Society of the Arts is available to view from their website.

Sugar prices and the terms of trade for exporters

World sugar prices are close to a 30 year high with values on the Chicago mercantile exchange hovering just under $30c per pound. For countries whose sugar exports account for a large proportion of their export earnings, the steep increase in world prices has brought about an improvement in their terms of trade and - because demand for many foodstuffs is price inelastic, a favourable change in their balance of trade. A good example of this is the African country of Mozambique, a nation almost destroyed by a long running civil war that eventually ended in the early 1990s but which has also been hit in recent years by severes drought hit many central and southern parts of the country, including previously flood-stricken areas. And where half of the population must survive on less than $1 a day.

This BBC news article reports that Mozambique’s government is planning to almost double its annual sugar production following soaring sugar prices and an abundance of available arable land. Helped by free access to the lucrative EU single market under the Everything But Arms (EBA) initiative, the issue is whether the sugar growing industry can scale up sufficiently to take advantage of a period of high prices to drive higher production, exports and lift average incomes for the thousands directly or indirectly employed by the sugar sector.

Sugar prices are inherently volatile and this poses big risks for investors in new supply capacity. Political risks and fluctuations in exchange rates must also be taken into account as Mozambique exports most of her sugar to European and American markets. In recent months the Mozambique currency has appreciated a little against the dollar which may make it slightly harder to sell sugar into US markets. But a weak currency against the Euro together with favourable trade arrangements is making Europe a good bet for a country desperate for higher foreign exchange earnings to boost her development.

Read more about the Everything but Arms Initiative here

Book Price Wars - Do They Improve Consumer Welfare?

A well publicised price war has broken out in the United States between Walmart and Amazon. Wal-Mart’s $10 promotion applies to the top 10 books coming out in November but the company is also selling 200 best-sellers for 50% of their list price. In a move that has sent shock-waves through the book industry, Wal-Mart has announced it will be selling 10 forthcoming books for just $10 each including Sarah Palin’s autobiography. As is often the case when an aggressive price war breaks out in an oligopolistic market, online bookseller Amazon matched the price cut within hours causing Wal-Mart to cut again to $9. Amazon returned the favour and Walmart has sinced shaved one cent to $8.99! The FT reports that Walmart’s website, the second busiest in the US after Amazon, has also cut prices by 50 per cent on 200 best-sellers.

The battle comes at a time when both Walmart and Amazon are under pressure from Google who are rolling out an online site capable of delivering e-books to any device with a Web browser, with an initial library of about half a million titles.

How long the price war will last is open to question. The October-December season is a hugely important time for all booksellers - the festive period is the peak time for sales and the intense battle for market share comes at a time of great change in the industry - not least the rapid growth of e-readers and online libraries. Some book publishers fear a price anchoring effect on their industry - namely that Walmart slashing prices and rivals following suit will lead book-buyers to expect new titles to cost $10, a low prices that would force the publishing industry to re-scale its entire business, including the advances paid to writers and ultimately affect the range of titles on offer.

For the giants of the book retailing industry, the economies of scale and drive for hyper efficiency in getting products to the market are simply a way of reinforcing their market dominance.

But what about the impact on smaller independent booksellers most of whom can never hope to compete on price but who provide light and shade in the book selling industry.

It is a reminder that there are different types of efficiency. Allocative, productive, dynamic and social. The latter two may be damaged if the price war escalates and many smaller booksellers go under. This BBC world service news interview focuses on some of the cultural issues of the rise of the giant retailers. Chris Doeblin from the independent Book Culture shop in New York City accepts that supermarkets will bring the price of books down - as they have with food prices - but at a (social) cost to many of us.

Speculative demand and exceptions to the law of demand

To what extent are speculators responsible for the increasing volatility of commodity prices? Expectations of price movements for globally traded commodities can have a huge impact on demand in the markets and the bets that speculators make on the forward prices of commodities such as oil can lead to rapid price hikes. We saw this with food and oil in 2008 - with enormous consequences for consumers and producers in developed and developing countries - and perhaps we are seeing this again as 2009 draws to a close. The world price of crude oil is already heading north again towardsa $90 a barrel.

This BBC world service audio report is a good resource on the impact of speculation and its possible links to exceptions to the law of demand where a rise in actual or expected prices can bring about an expansion of market demand.

“The International Food Policy Research Institute in Washington has studied price movements and concluded that they couldn’t all be explained by the fundamentals. And, perhaps most damning of all, a big-time speculator is now identifying speculation as one of the causes in the movement of the price of oil.”

More here

Brazil taxes hot money to control her currency

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.”

Here is his article

Location, Location, Location

London’s West End is the second most expensive place in the world to run an office, according to the latest report from Colliers International.  But which city tops the table for the most expensive place to rent an office?  Read on to find out…

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Current Affairs Quiz #2

Some current affairs questions from around the world for IB Diploma students…

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Cheltenham Saturday 10th October

Last night I was looking through the brochure for this year’s Cheltenham Literature Festival. Aside from it having a cracking range of speakers it is also my home town so I always look to go back for a day. This year Saturday 10th October looks a great shout.

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Interactive Resource

Also on The Guardian website is a fantastic interactive resource that plots how financial chaos spread across the globe last year. You may choose to use this when helping your students gain a greater understanding of the global credit crunch.

Business Week in Pictures

I have stumbled across an excellent resource on The Guardian website. I am always keen that my students have a good awareness of current goings on in the world of business and economics. I try to devote one lesson a week to examining the business news. Ways in which I do this vary from watching BBC news video clips to getting them to do a tutor2u Biz Quiz. The resource I have found is the Business News in Pictures- 10 pictures and a piece of text with each that highlight the business events of the week. They should provide a good stimulus for class discussion.

Keynes vs Friedman

As a follow up to yesterday’s blog on Keynes, today’s extract in The Telegraph from Edmund Conway’s new book looks at Milton Friedman and Monetarism.

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Keynes and the Multiplier

One of the first higher level topics encountered by students in section 3- macroeconomics is the multiplier.

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The Rise of Twitter

As an avid Twitter user I was pleased to read of the continued rise of the site this morning.

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Marvel ous Deal

Following on from yesterday’s blog it is revealed in today’s Telegraph that the man who led Marvel away from near Bankruptcy, Isaac Perlmutter, is set to new $1.5bn over the next decade, following Marvel’s sale to Disney. Around 60% of this figure will come in the form of cash with the remaining 40% paid in Disney shares. Not a bad outcome for Mr Perlmutter!

Is the deal a good or a bad thing?

Marvel Deal

I spent yesterday afternoon putting up 100 postcards of classic Marvel comic front covers in the boarding house that I have taken over. I was interested to read today on the BBC website that Disney is set to buy Marvel in a deal worth $4bn. The deal will mean that Disney will take ownership of 5,000 Marvel characters. This deal may prove slightly risky for Disney as its profits are down more than a quarter due to a fall in film and theme park revenues as customers tighten their belts.

There is a BBC news clip to accompany the original article.

Article from The Telegraph.

Book of the Week

I am currently sat at my kitchen table trying to start thinking about the term ahead. Slow progress so far, especially as I have just been distracted by Radio 4’s book of the week.

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Skildelsky and Conway

The Telegraph today has two pieces today by economists who have just had their new books published, books that Geoff has already flagged up in his Economics blog.

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Saxophone Recession

A nice little piece on the BBC website today looking at the different ways to describe the type of recession an economy may be experiencing. Traditional letters that have been used to mirror a recession have been U, W and L. The bath tub and saxophone are two of the more unusual ways of describing the shape of a recession.

Doug McWilliams, Chief Executive of the Centre for Economics and Business Research, has a more melodic interpretation of current events - comparing it to a saxophone.

“The line describing the progress of gross domestic product goes up, then sharply down, then comes back up sharply initially before levelling off, describing the rough profile of a saxophone,” he wrote.

Worth a read and may be useful during the first few weeks of term when looking at fluctuations in GDP with your students.

The Year Ahead

Following a blogging break that involved a wet trip to the west coast of Scotland and moving house I am raring to go for another blogging year. I am currently tweaking my schemes of work in readiness for the start of term in 10 days time. I am really keen to produce material driven by blog readers both students and teachers alike. Please do get in touch, with more and more schools teaching the IB I hope to see the range of material expand yet further this year.

Summer Reading

I have just read a light hearted piece in The Telegraph about ‘summer reading’.

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Great Peter Day Blog Post

There is a fantastic post by Peter Day on the Radio 4 blog looking back on his 21 years presenting In Business. He uses it as an opportunity to explore how the world of business has evolved over the last couple of decades. Well worth 5 minutes of your time.

Decline in German Beer Sales

The BBC reports today that the Germans have drunk less beer this year!

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Towels at the Ready

Thomas Cook is offering Germans the opportunity to pre-book sun loungers before they arrive at their hotel on their holiday. The tour operator is offering tourists the chance to pay in advance for a poolside lounger when they book a Mediterranean package holiday, The offer is open to Germans only and they can pre-book a spot by the pool for 3 euros a day. Hotels in Turkey, Egypt and the Canary Islands have signed up. Thomas Cook hopes the scheme will end the perceived “beach towel wars”. Towel wars may still occur during the summer months though as this offer is only available on winter holidays.

There is a further article on this in today’s Telegraph.

Botox Tax

I have just read on the front of The Telegraph that American’s wishing to have cosmetic surgery could be hit with a tax to help part fund Obama’s $1trillion reform of the US health system.

 

 

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Health Economics Radio 3

Following the daily dose of proms on Radio 3 this week at 11pm The Essay is considering the economic and social issues associated with the NHS. For those of you considering applying for PPE in September this mini series is well worth a listen.

To mark the sixtieth anniversary of the founding of the National Health Service in 1949, Prof Jonathan Wolff asks whether health really is an intrinsic good and can be measured and quantified as well as charting changing definitions of sickness and health, from Descartes to RD Laing.

Holiday Dilemma

There was a fantastic edition of The Moral Maze last night on Radio 4. If you get the time it is well worth a listen. Having just returned from a break in rainy Devon I felt rather smug!

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Start the Week

As regular readers will know one of my favorite radio programs is Start the Week presented by Andrew Marr. There was some interesting economic discussion a couple of weeks ago when Andrew’s guests included the Nobel prize winning economist Amartya Sen and Richard Sennett (Professor of Sociology at the LSE). Sen was discussing his new book The Idea of Justice and Sennett was presenting his recent thinking in terms of how new social and economic structures may emerge from the current economic gloom. Worth a listen.

Japanese Fishing Industry

Yesterday I revisited some childhood memories by going crab fishing! After a frustrating start we mastered the knack and the crabs were lured in by our quality bacon bait. We rewarded ourselves with a crab sandwich and a pint or two of local cider for lunch!

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2012 Toys

Hornby is the first hobby company to sign a lucrative deal to produce a huge range of London 2012 Olympic toys. The Airfix brand will produce kits of the Olympic Stadium, Scalextric will produce a velodrome cycling set (sounds fantastic, can I justify buying a set!?). The Hornby train set brand will produce miniature Olympic Park train sets.

Hornby is in need of a boost after profits plunged 32% last year.