Growth, Meritocracy, Apple(s) and Mangoes? – Let’s talk about that…

I wasn’t really sure which article to choose so I put them all in this post…

Growth – 

UK economy records fastest growth since 2007

The UK’s economy grew by 2.6% last year, the fastest pace since 2007 and up from 1.7% in 2013, official figures have shown. That was a slowdown from 0.7% growth recorded in the previous three months. Economists were mixed over whether the loss of momentum in the final quarter might be temporary or prolonged.

“The dominant services sector remains buoyant while the contraction has taken place in industries like construction, mining and energy supply, which can be erratic,” he said. – This is probably due to the implications of globalisation which resulted in the shift towards a more tertiary sector domination and thus de-industrialisation.

The services sector grew by 0.8% in the quarter, but construction contracted by 1.8%. Manufacturing grew by just 0.1%, its worst performance since the start of 2013.

Tuesday figures mean the UK was among the best-performing of the all the major economies in 2014. The IMF forecasts UK growth of 2.7% in 2015. However, Samuel Tombs, of consultancy Capital Economics, has predicted growth of 3%.

“With the recent halving of oil prices providing a timely boost to households’ discretionary spending power, credit still becoming cheaper and pay growth on an improving trend… the best days of the UK’s recovery may still lie ahead,” he said.

How significant do you think is the slowdown in the British economy, given that the dominant service sector is still booming, but construction is shrinking and manufacturing almost back to flat-lining? – Read the article to find out

http://www.bbc.com/news/business-30999206

Meritocracy – 

This article is probably less relevant to the course material, but in line with a discussion we had about inheritance and meritocracy in an earlier lesson, thus quite interesting. It basically offers a different angle to the argument based on statistical evidence.

“…More than ever before, America’s elite is producing children who not only get ahead, but deserve to do so: they meet the standards of meritocracy better than their peers, and are thus worthy of the status they inherit.”

http://www.economist.com/news/briefing/21640316-children-rich-and-powerful-are-increasingly-well-suited-earning-wealth-and-power

Apple – 

US technology giant Apple has reported the biggest quarterly profit ever made by a public company.

Apple reported a net profit of $18bn (£11.8bn) in its fiscal first quarter, which tops the $15.9bn made by ExxonMobil in the second quarter of 2012, according to Standard and Poor’s.

Apple’s impressive results represent a significant shift towards the massive untapped potential of China.

With a strong line-up of devices entering the final quarter, it was able to reap the fruits of its deal with the world’s biggest mobile network, China Mobile.

Currency woes

Apple’s revenue grew to $74.6bn in 2014 – a 30% increase from a year earlier.

However, on a conference call to discuss earnings, Mr Cook complained of “fierce foreign exchange volatility”, which added Apple to a growing list of US firms who have been hurt by the strong dollar abroad.

Apple said that currency fluctuations shaved 4% from its first-quarter revenue.

http://www.buzzfeed.com/tomgara/heres-how-big-apple-is#.ahX9p1zG3

http://www.bbc.com/news/business-31012410

Mangoes

Ban on Indian mango imports to EU to be lifted. “Today’s decision demonstrates the marked improvements India has made to its export system and it is important that these standards are maintained so that trade can continue and UK plant health remains protected,” – Increase in quality of the mangoes due to the protectionist measures and thus a potential increase in consumer surplus when the ban is lifted.

Even though India sells only a fraction of its mangoes abroad, Europe is a significant market for the industry. PRofits were more than halved after prices came down. Exports fell from $307.4m between April and November in 2013, to $291.4m in the same period last year.

However, imports of four other products – aubergines, bitter gourds, snake gourds and patra leaves – remain suspended subject to sustained improvements in plant pest control.

http://www.bbc.com/news/business-30898966


 

World Commodities Map

An interesting image to preview next week’s patterns of trade. – Every Country’s Highest Valued Exports

http://www.businessinsider.com/every-countrys-highest-valued-export-2014-5


 

 

 

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Wealth: Having it all and wanting more

It is estimated that by 2016, more than half of the world’s wealth will be owned by the top 1%.  Is it bad? Depends on if you’re in that 1% or not *cough* Kritika *cough*. For the other 99%, it’s pretty unfair that the hardwork put in isn’t rewarded with fat paychecks, giving the rich more power and leaving the rest with voiceless and uncared for.

More detail can be drawn from the (poorly copied – couldn’t do much about that sorry) figures. The figures have % share of global wealth on the vertical axis, and the years as shown on the horizontal one. The top figure (to be referred to as figure 1) shows the projected changes in inequality (the black line represents the top 1% in both figures). The bottom figure (2) shows how the distribution of wealth has changed over the past recent years. What’s interesting to see is that inequality was generally falling up until The Great Recession. Why?

2-8f768068e2

One possible reason could be through derived demand theory (world demand was falling, so this has a knock-on effect to labour). This impacted severely on households (not only did the income streams stop, but companies weren’t looking to hire). Workers had to be willing to accept lower wages in order to find a job (to pay bills), or, as most did, sacrifice your own home. So as a result disposable income, and thus income available to be invested in ways of increasing one’s wealth, fell. In contrast, the 1% flourished during this time (see my other article on hedge fund managers earning $1 billion+ in 2009). The tax reforms by governments didn’t help – in the UK and US taxes on the richest 1% actually fell, pushing them further away from the rest.

Other reasons include exploitation of monopsony power over labour in 3rd world countries, monetary policy, inflation, poor tax policies etc.

 

Can anything be done?

Yes, surprisingly.

Oxfam, the publisher of this eye-opening report, called on governments to adopt a 7-point plan, including points such as:

  • Clamp down on tax dodging e.g. transfer pricing
  • Invest in free health care and education (yet the UK government is reducing this at the moment)
  • Shifting tax from labour and consumption to capital and wealth
  • Introduction of national minimum wages
  • Introduce equal pay legislation and promote policies to give women a fair deal
  • Safety nets for the poorest people e.g. minimum income guarantees

Whilst these policies look fair, they have major set-backs. E.g. tighter regulation on transfer pricing or changing the tax policies may see brain drains from countries. Minimum wages will reduce demand for labour. What if people getting these minimum income guarantees waste them? How can we be sure that legislation on equal pay and giving women a fair deal will implemented effectively? What about rising government debts – shouldn’t governments be cutting spending and adopting austerity measures first, before pursuing other objectives?

There are some major opportunity costs here – on one hand we can try and reduce inequality in the short-run, but it will come at a cost in the long-run as governments hit debt ceilings. If we adopt austerity measures in the short-run, it is likely that inequality will worsen, until debts are paid off.

 

Sources:

Wealth

Richest 1% to own more than half of world’s wealth – guardian

Tackling Inequality @ WEF -guardian

 

 

 

Greece’s brain drain.

Europe’s economic woes don’t seem to be abating, but in comparison to Greece’s they appear trivial.  Since the Great Recession over 200 000 thousand Greeks have left for North America or other countries within Europe and it does not appear to be stopping.  The implications for the Greek economy are worrying and we can apply some useful diagrams to aid our analysis.  Obviously the long term unemployment here is a good starting point.  Unemployment is over 50% and unemployment hysteresis postulates that a temporary shock to aggregate demand (AD) can permanently lower the potential output of the economy and increase the equilibrium level of unemployment.  The diagram below shows that higher unemployment and reduced incomes results in an inward shift of AD but the structural unemployment, evident here, results in an inward shift of the LRAS.

For ease of explanation we can use the PPF diagram to help illustrate the effects of the above as well as the impact of a significant exodus of human capital from the Greek economy.

greece’s brain drain

 

The pros and cons of Walmart.

A fantastic article highlighting how deregulation has led to increased market concentration in the retail and food manufacturing sectors in the US and pretty much around the world.  It can be argued that monopsony power can increase econonic welfare through reduced prices for the consumer and higher profits for the monopsonist, but at what expense?  Depressed wages of the workers in the supply chain and possible reduced quality of products as suppliers attempt to cut costs.

Should government intervene and regulate the market to protect smaller businesses either competing or supplying the monopolist/monopsonist?  Is it in the interests of countries like India to let the likes or Walmart and Tesco have free reign?

A good opportunity to develop your chains of analysis and evaluation points.

Breaking up Walmart?

China’s Unproductive Production

Economic growth is the increase in the total production of goods and services within an economy (real GDP), and China seems to know all about it. In 2013, it produced “$9.5 trillion worth of goods and services, nearly 3 times more than that of 2007”. But how significant is this growth?

Growth in output can occur in two forms: through an increase in the total inputs, and/or an increase in productivity. When studying economic growth, it is important to consider this; therefore, we use the Total Factor Productivity (TFP) to measure the efficiency with which labor and capital are being employed. If a nation is simply increasing its output by increasing the total number of labor and capital it employs, it may not necessarily suggest economically efficient growth i.e the workers and machines are not being fully utilized. “As long as the amount by which labor and capital grow outpaces any fall in productivity, GDP will still increase.”

This type of growth cannot survive in the long run, especially in a world where factors of production are becoming more scare. For example, would countries during the mid-twentieth century really have cared about how efficiently they were using oil after major deposits had been discovered in the Middle East? Probably not, since they would be aiming to extract as much oil as possible versus efficiently employing the oil. However, today, firms are trying to utilize oil (and its products) more efficiently due to its increasing scarcity. Essentially, “in the long run, improving the productivity with which they (factors of production) are used is the magic ingredient for any economy, the only path to sustainable growth.” Moreover, this growth may not necessarily reflect an increase in living standards. If GDP grows at the same rate as employment, real wage rates (or income per capita) may not necessarily also grow.

Hence the concerns about China. A series of estimates published this year have all suggested that productivity is flagging. This may be even more detrimental to China’s future, as it could be signalling an end to it’s “catching up” rates of growth. “Catching up” is a phenomenon which allows countries like China to grow by 10% oer annum whilst the UK barely manages 1%. By transferring workers from low productivity sectors (eg. agriculture) to higher productivity manufacturing and service sectors, economic growth will substantially increase as the value of goods being produced per worker is greater. If a worker can produce $500 per year in output as a farmer, but $1000 working in a factory, then the act of transferring that worker from agriculture to industry will raise the growth of the economy tremendously. If China is entering a stage in its economic life where productivity cannot increase by transferring workers anymore, it could finally expose inefficiencies within the economy.

Take a look at the Economist’s article on China’s Unproductive Production. Ask yourself these questions:

Why is falling productivity harmful to China’s economy?

What limitations are there to measuring total factor productivity (TFP)?

How does the “catching up” phenomenon distort the TFP figures, if at all? What could this suggest will happen to China’s economy in the future?

What can China do to improve its productivity?

-Krish

AR, MC and Scottish independence.

Scottish independence is an emotive subject and the results of the referendum this coming Thursday will potentially have huge ramifications for the future of Scotland and UK economy. As economists we attempt to remain objective in our analysis and evaluation of events and one could argue that the debate on Scottish independence is awash with normative statements such as  Alex Salmond stating independence would make Scotland better off.

The article below analyses and evaluates the potential pitfalls of an independent Scotland based on the premise that oil will be able to sustain economic development. David Smith argues that the marginal cost of producing a barrel of oil has increased 500% in the last 10 years while revenues have fallen and are predicted to keep falling for the foreseeable future, (A2 students should be able to illustrate this diagrammatically).

What implications does this have on fiscal policy?  Will the Scots be able to continue to spend 14% more per head than the remaining UK population?

Then there is currency.  Will an independent Scotland be able to survive without a ‘lender of last resort’ or will the EU club be too much of a temptation to turn down (if indeed their application is successful)? And if an application is successful what really is the difference in being governed from London or Brussels?

Scottish Independence

China to overtake ‘Murica

A while ago an article was posted on here talking about how China’s economic growth was unsustainable, and that in the long-run, the Chinese economy would run out of steam and fail to overtake the US of A, remember that?

Well, things changed.

According to some new calculations made by’ The Economist’ and the IMF, the size of the Chinese economy has been underestimated greatly. So much so, that the forecasts now suggest that China will be the world’s largest economy by the end of the 2014!

Crowning the dragon