Milk seems like such a nice friendly product, but in New Zealand the rising cost of the essential good is getting everyone annoyed. In the past 5 years the price of dairy products in New Zealand has risen by 50%. Most assume that because of New Zealand’s comparative advantage (good weather, soils, grass growth and livestock) farmers produce milk in such great quantities that it should therefore also be cheap for consumers at the local shop. Our understanding of international trade is that it alters the domestic market, might suggest that firms who export on the global market are focused and motivated by world prices.

The NZ milk market

Fonterra is a virtual monopsony in New Zealand. This is like a monopoly except that the cooperative it is the sole buyer of raw milk products in New Zealand. It then sells 95% of its production of refined milk products to consumers around the world. The company supplies around 40% of global dairy product exports, and is by far New Zealand’s biggest company.

Related posts:

1. The problem with price controls in Europe’s agricultural markets
2. McAfee on Price Discrimination: a must-read for teachers of Microeconomics
3. Product differentiation in imperfectly competitive markets – the MacBook Wheel

ahj

All IB schools who are part of the the May examination session are now in the last week of class, before the study sessions and final examination period begins. Exam strategy is now perhaps even more important than actual study and can lift your marks. These comments refer to SL – Paper 2 and HL Paper 3 commonly known as the Data Response papers. These hints are obviously of my own opinion and reflections and not those of the IB Organization.

Here is my top 10 hints…

Before the exam…

1. Revision. As for all of the other papers, make sure you have been through the syllabus and have throughly checked and know that you understand each part of the curriculum. I encourage my students to create bit size revision notes on the essentials of each subtopic throughtout the duration of the course.
2. Definitions. Consider what key words are required to explain the definition. Try rote learn the 10 most important definitions for each big topic, and ask you teacher to for a list of what concepts might be covered in each section of the course. Make sure you consult a good textbook for clarification on definitions.
3. Practise reading articles: Ask your teacher for some practice data response questions. Practise reading the questions and then searching the article for some supporting data to help explain your answer. The articles have been chosen because they highlight certain events. You need to find the piece of data or a quote that could pick.

During the exam…

1. Manage your time: In the data response examination you have to complete three questions, each worth 20 marks. Therefore you have 60 marks in total over 120 minutes. Therefore try not spend more than 2 mins per mark. So for the evaluation question d, try to allow about 16 minutes, but not too much more. Remember this exam requires lots of reading time, so factor this in to your time management.
2. Pick the questions early: You need to obviously choose 3 of the 5 options to answer. I encourage my students to read the part d question of each paper first, and then gauge if you can answer the question. If you are less confident in the question d questions available then perhaps choose a different question. These questions are worth 8/20 and therefore carry a slightly higher importance.
3. Read each question carefully: Within the question there are always trigger words. If the question is about currency then you probably need to analyse the foreign exchange market. If the question mentions recession then consider drawing a NeoClassical diagram with a recessionary gap. The command word will usually be explain which means examine and describe the component parts of the concept.
   
4. Labeling Graphs: Graphs are a crucical part of questions b and c. You need clearly label graphs to ensure that they relate specifically to the material in the extract. Remember each graph has a particular set of labels. Try revise the difference between, exchange rate graphs, AD/AS graphs, Labour Market diagrams or a Lorenz Curve.
5. Explaining Graphs: Question B and C are always worth four marks and follow an standard format. Two of these four marks will be attributed to the graph and two to the explanation. Therefore check that you have explained the graph by identifying the related causes that have lead to the change. For instance… the demand for exports has fallen, leading to a fall of the demand of the currency, leading to a shift of the Demand for Euro to the left, which ceteris paribus, will lead to an appreciation of the Euro against the Yen as illustrated on the graph. The explanation does not need to be long but precise and use appropriate terminology.
6. Evaluation: Question D will always ask you to evaluate a statement or policy that is mentioned in the extract. The question will be graded according to criteria levels. To attain Level 1 you need to have recognized the concepts in the question and perhaps attempted a definition, or discussed the idea. To attain Level 2 you need to explained these concepts in some depth and have tried to apply the concept to material presented in the extract. Evaluate means that you have to go further than purely explaining the concept this is required for a Level 3 response. For instance if the question is about “evaluating the introduction of tariffs into Malaysia” you will need to explain the effects of the decision on stakeholders such as consumers and domestic producers, perhaps consider the long run and short run impacts and consider the advantages or disadvantages. Finally to attain the highest grade to need to make some judgement on what the main point of arguement is. All of these aspects are considered effective evaluation. Given the time constraints of the exam you will be rewarded for using one or more of these approaches, but I think the final judgement and using material from the extract is most important. Without references to the data you wont attain higher than Level 2.
7. Proofread: If time permits try go back and double check your graphs for any obvious glaring errors and fix labels and arrows. Try to fix any common mistakes such as suggesting that the curve shifts to the right instead of the left.

If you have any further comments, questions or other hints please add them below

Criteria for Question D – Data Response 

Related posts:

1. 2008 Macroeconomics Free Response Questions – first impressions…
2. 2007 AP Free Response Questions- a few surprises!
3. AP and IB Exam Questions of the Week

There are two conflicting opinions on the effectiveness of aid. Many of the aid agencies and some economists claim that aid that is focused and purposeful can be a strategy to lift people out of poverty. Other economists claim that development aid throughout African has been wasted over the past 50 years, and has only served to fuel corruption and a culture of dependency.

What is aid…

Foreign aid consists of financial flows from the developed world to less developed countries. It can be bilateral (between two countries) or multilateral (between multiple countries, through aid agencies) Some of these flows are soft loans, which receive more favorable interest rates and terms; others are grants which don’t need to be repaid. They can be further classified as tied aid when the money flow needs to be spent purchasing goods from the donor nation.

What are the motives for providing aid?

Nations can offer aid for a variety of reasons. Many developed countries grouped together at the Earth Summit in the 1992 and pledged to donate 0.7% of thier nations total Gross National Income (GNI) as foreign aid. The graph below shows how successful northern Europe has been in reaching these targets and how far the rest of the world still has to go.

• Political and Strategic Motives: Historical links have provided the key motive for bilateral aid between many countries. Some of the colonial links between France and parts of Africa have informed thier aid strategies. In parts of Asia the spread of communism promoted USA to support countries as the USSR supported the pro-communist regimes.
• Economic Motives: Aid is used by many developed countries to support the development of closer economic ties. China’s investment into the Democratic Republic of Congo is a good example of this as explained in this article Africa, Business and Development – Times.
• Humanitarian Aid: In the days after any natural disaster such as the Haiti Earthquake or Japanese Tsunami, countries have pledged grants to support the redevelopment of countries. Developed nations have also supported the drive towards the Millennium Development Goals to alleviation of poverty in parts of Africa by granting vast sums of money in an altruistic fashion.

How is aid helping?

For many countries, aid is the key tool to breaking the poverty cycle. Increased foreign grants can be used for loans, therefore breaking the savings/investment constraint that low income societies face. Small loans allow families to invest in capital, fertilizer or education. In many countries aid makes up a large percentage of social spending, such as in Tanzania up to third of total social spending comes from aid. Local government do not have the tax revenues to replace aid and therefore need it to supply basic services such as education and healthcare. The two videos below help explain how targeted aid can be effective tool in the development of countries.

What are the problems with foreign aid?

There are numerous critics of foreign development aid, who claim that trade is a more sustainable path to prosperity. The following video is perhaps the best intellectual critique of the issue. The main argument against aid are as follows.

• Aid is a breeding ground for corruption: There are numerous cases of governments using funds for personal gain or to fund armies. The government of Haiti was once considered the most corrupt in the world and after the earthquake in 2009 lead many government to be skeptical about the effectiveness of their donations given the politician historical record.
• Aid substitutes for rather than complements domestic government revenues: Many governments need to develop the tax system so that they can collect sufficient revenue to provide essential services. Too often aid is used in the place of tax revenue which is a short term solution and breeds a culture of dependency.
• Aid does not reach those in need: Sometimes aid is tied to projects that do little to support development. Cases of countries developing miles of fiber-optic broadband internet connections when people starve is a prime example. Sometime corruption by local official prevents all of the money reaching those in need.

Questions – borrowed from the original blog post below – post answers as a comment at bottom

Worksheet with Questions

Part 1:

1. What factors does Paul Collier point to that contribute to the “poverty traps” many African nations find themselves in? [3:07]
2. What have the two main goals of foreign aid policy been over the last 50 years, according to Dambisa Moyo? [4:45]
3. What are the “four horsemen of the African apocalypse?” How does Moyo think these four obstacles to development can best be overcome? [5:14]
4. What is Paul Collier’s opinion of the role of free trade in promoting human and economic development in Africa? What does he think about Africa’s traditional dependence on primary products and commodities? [7:45]
5. Before economic growth and development can occur, security must be achieved. Why is security, according to Collier, the number one obstacle to achieving meaningful development in Africa? [8:30]
6. In a dissenting view, Dr. Jeffery Sachs argues for more aid to Africa. What types of aid does Sachs believe is absolutely crucial for Africa to continue to receive? [10:39]

This is an excellent post by Jason Welker, that goes into the evaluation of aid and trade in more depth. The Bottom Billion: Aid and strategies for achieving economic development It also contains the second part of the above video.

The economic concepts and definitions in this post are borrowed from the detailed textbook – Economics for the IB Diploma by Ellie Tragakes

Related posts:

1. The “bottom billion”, aid, and strategies for achieving economic development
2. Education, Sanitation and Entrepreneurship – a WISER approach to Economic Development

The business cycle is an economic phenomenon which describes changes in the level of economic output compared to a long run average. A simple set of data illustrating the business cycle is shown below. The level of Real GDP in most countries increased by a positive rate each year from 2000 – 2008, before the Global Financial Crisis caused the most significant recession and then recovery in recent history.

In Macroeconomics we can model changes in the level of economic activity using the Aggregate Demand and Aggregate Supply model. This theoretical idea is shown on the following diagram, which explains the link between the business cycle and the level of aggregate demand and aggregate supply in the economy.

When the actual GDP line is above the potential GDP line the economy is said to have a positive output gap as at the peak point. Aggregate Demand exceeds the potential capacity thus demand". Occurs when the price is below the equilibrium level, for example, when a government imposes a price ceiling in a market.');" onmouseout="tooltip.hide();">shortages occur and prices rise (inflation) also called an inflationary gap. Factors of production such as labour, land and capital are fixed in the short run, and wages can not change. Therefore the inflationary gap will remain in the short run.

When the actual GDP line is below the potential GDP line the economy has a negative output gap as in a recession. At this point there is spare capacity, higher then average unemployment leading to less inflationary pressures in the aggregate economy.  Also called a recessionary gap. We can relate this concept back to the Real GDP data, which explains a dramatic fall in the level of economic activity in 2009.

Each of these two simple scenarios is caused by changes in Aggregate Demand. As we studies last week, changes in Aggregate Demand can be caused by a variety of factors which influence each component

Components of Aggregate Demand (AD)

C – Consumer Spending

I – Investment

G – Government Spending

(X-M) – Net Export Receipts

The two following videos highlight changes to the level of Aggregate Demand and the resulting inflationary and recessionary gaps. The first video explains how the Chinese government is boosting aggregate demand by increasing government spending and investment. It is a likely response to boost economic activity, and to reduce unemployment.

Click here to view the embedded video.

The second video is a quick look at the UK government budget. A government budget explains the countries spending and taxation decisions for the coming year. The UK was forced to reduce government spending due to the countries very high levels of public debt. The UK has been forced to borrow money to pay for current spending, which increases the nations debt to the rest of the world.

Click here to view the embedded video.

Discussion Questions and Activities:

1. Explain any changes to Aggregate Demand that would result in an inflationary gap occurring?
2. When a country is experiencing an inflationary gap, what happens to price levels and the level of unemployment?
3. Video 1: What are the impacts on level of economic activity due to the government investment? Evaluate if you think this is an effective form of investment.
4. Video 2: The UK government is planning to increase VAT tax rates and decrease spending on national defence. Explain the likely effect of the level of economic activity (Real GDP), unemployment and the price level using the AD/AS model.
5. In your notes draw an AS/AD model to explain the impacts of the events shown in each video. Be careful to fully label each diagram with any changes.

Related posts:

1. Fiscal policy and the “vicious” business cycle
2. The business cycle rears its ugly head!
3. From the Help Desk – business cycles in command economies?

Singapore is a flush with different examples of price discrimination. The city’s population is a melting pot of different groups of people who have contrasting spending habits. Many of the local firms have embraced price discrimination to boost profits and a bar called Brewerkz seems to be the best example.

Brewerkz sells mugs, pints and jugs of beer at a desirable location beside the river. At different times of the day tourists and locals are charged different prices for exactly the same product. I arrived last weekend after our school graduation to enjoy a beer with my colleagues at 1pm and was very pleased with the price, $10.00 for a jug of beer. If I had arrived later in the evening at 8pm, I would have parted with $37.00 of hard earned cash for the same privilege. At this price I would have tempted to stick to the water.  A sample of prices from the menu is below.

Note: $1 SGD = $0.50 Euro or $0.70 USD
This practice is very common in Singaporean bars and is the extension of the ‘happy hour’ concept. People can also sit and drink the same beer at local hawker food markets for around $6 dollars for a 750ml bottle. Singapore has extreme differences in income levels and high-income inequality. Wealthy investment bankers mingle with poor immigrant helpers and builders living on subsistence wages.

Discussion Questions:

1. What are the necessary conditions for the practice of price discrimination to occur?
2. Explain how customers in each different time slot may have different price elasticity’s of demand?
3. What would occur if the bar could not stop customers from stockpiling and then reselling at a later time (arbitrage) slot to their friends?
4. Explain how a bar could also use first and second degree price discrimination to maximize profits.

Related posts:

1. Price Discrimination 101

I have lived in Singapore for two years now and am always interested in the nuances of the city state’s economy. In some measures Singapore has the one of the highest levels of Gross Domestic Product per capita in the world. As measured using Purchasing Power Parity, Singapore is ranked 7th in the world with $53,900 GDP per capita

Singapore also has a high, and growing level of income inequality which has been associated with the form of rapid economic growth. In 2009 Singapore was ranked as having the second highest level of income inequality in developed countries, with a Gini Coefficient score of 0.425. Hong Kong was 1st and USA 3rd. In most rapidly developing economies (China, Brazil, India) strong economic growth is leading to growing income inequality. The gains from growth are not being shared equally between all citizens and the rich continue to get richer at the expense of the poor. Here are some economic indicators from Singapore.

• During 2010 Singapore’s Gross Domestic Product expanded by 14.7%. This is the fastest rate of economic growth in the world.
• Since 1989 it’s GDP per capita has risen from $16,000 to $48,000.
• Total Gross Domestic Product in Singapore Dollars has increased from $56 Billion in 1989 to $265 Billion.
• The bottom 10% of the population now account for only 5% of the national income, compared to the top 10% of people who account for 49% of the income.

Each of the above statistics support the economic goals of Singapore except for the last bullet point. Singapore believes in inclusive growth and attaches a high degree of importance on the ideals of social cohesion. These statistics are a challenge to the goals of the country, which aims to allow all families to live in dignity and with material self sufficiency.

Therefore one possible way to increase the income of the lowest people is to introduce the concept of a minimum wage. Currently the free market determines the market wage. For some occupations such as cleaners, constructions workers and domestic helpers the market is awash which cheap labour from neighbouring countries such as the Philippines, Indonesia, India and Bangladesh. This drives down the market wage. The average domestic live in helper in Singapore would make $120 a week and construction workers slightly more. These workers also have the lowest bargaining power and are often unable to negotiate for higher wages. Thus free market wage seems to disadvantage low income workers in Singapore.

Introducing a Minimum Wage:

The minimum wage is a wage floor. In Singapore, employers would not be allowed to pay their employees a rate below the minimum wage and this presumes the minimum wage was binding and set above the prevailing market rates. Some would call this a living wage and would be set to enable citizens to enjoy a basic standard of life and subsistence.

The negative aspects of the minimum wage legislation would be an increase in unemployment. After the introduction of the minimum wage the market demand for workers would fall to LD. At a higher wage firms have less incentive to hire workers. The other important feature is that Labour Supply would increase at the level of the new minimum wage. More workers would be attracted into the workforce. This therefore creates a disequilibrium where Labour Demand does not equal Labour Supply. In the Labour Market this is known as unemployment. In Singapore potential foreign investors could be less willing to invest in a country with higher labour costs and the nations competitiveness with other economies could fall. After the introduction of minimum wages in Japan (1959), South Korea (1988) and Taiwan (1956) researches found no evidence of a fall in foreign investment or economic competitiveness.

Positive aspects of introducing a minimum wage?

1. To reduce poverty: To help reduce poverty for the bottom 20% of households in Singapore, a binding minimum wage set above the market wage would lift incomes. The lifting of incomes should also reduce the level of income inequality for low income households.
2. Taxes and Benefits: If workers begin to earn higher wages then tax receipts should increase. At the same time the level of financial support for such families will likely fall as they become more self sufficient. This could also help reduce government spending. Both of these effect will likely have a positive impact on the government budget.
3. The effect on worker productivity: Some economists believe that the increased wage might improve labour productivity. Workers may respond to their higher wage rate by working harder, possibly as a result of worrying about losing their job now that the increased wage rate has made it a more ‘sought after’ job. Employers may force through productivity improvements. Some workers will work shorter hours and achieve a greater work life balance and hopefully be more productive during these hours at work.

Market interventions are obvouisly not the only way to improve the incomes of low income households. Singapore currently does many small things to improve the quality of life for low income households. In my opinion in the long run the economy needs to think of other ways to increase incomes of low income households so that Singapore holds the value of social cohesion and does not become a infamous country of unequal incomes and  extremes of wealth and poverty.

• Subsidized Housing and Grants for first home buyers – HDB Scheme
• Free education from Kindergarten to Secondary School.
• Subsidized health care
• Various financial assistance schemes including the Workfare Income Supplement

Resources and Background :

• Minimum Wage Theory – S-Cool UK | Economics
• “Don’t knock the minimum wage yet” | Tommy Tan – see commentary here (The Straits Times, A32, November 11th 2010)
• CIA Factbook | Singapore Overview

Discussion Questions:

1. Describe the kind of tax system which could be developed to reduce income inequality?
2. Outline the difference between income and wealth?
3. What is the more concerning problem for governments, the inequality of wealth or income? Explain.
4. Evaluate the methods available to government to reduce income inequality.

Related posts:

1. Income inequality as a Market Failure
2. The role of taxes in income re-distribution – another preview of my textbook
3. Recession’s effects on small vs. large companies: some evidence in support of the Classical view of self-correction

The elasticity, or perceived necessity of different products can influence the decision to introduce a tax. In Russia, two products, Beer and Vodka are being looked at as a potential sources of new government revenue. A proposed increase in the tax duties on beer, will potentially increase retail prices by between 20-30%. An increase in the price of one form of alcohol (beer) could shift demand towards other close substitutes, such as vodka or home brewed spirits. Hopefully, increased tax revenue will support the government finances and in the long run, the money could be reallocated to treat alcoholism.

An Economist article from last week gives a good analysis of this issue. Russia is a country where people drink 30 litres of hard liquor alcohol each year, six times more than the average European. Alcohol taxes are a sensitive subject, and the implications complex, but they need to be addressed.

The Economist – Russia raises tax on beer: Sin-Tax Error

Discussion Questions:

1. “Pushing up beer prices is far more likely to encourage drinkers to swallow even more vodka.” What does this quote suggest, about the cross elasticity of beer and spirits in Russia. Use evidence from the article so support your explanation.
2. The Russian government is suggesting adding a tax to beer.  What effect do you think this will have on the market price and market quantity of beer consumed.
3. The government wishes to impose a tax on these products. Assume a specific tax is imposed on each product. Assume the demand for beer is relatively elastic and the demand for vodka relatively inelastic and draw two graphs to show the effect on consumers and the relative tax burdens.
4. Explain what the aim of introducing taxes on vodka and beer is. Evaluate if the taxes will achieve the aims of increasing government revenue and reducing the social harms related to alcohol consumption in Russia.

Related posts:

1. Elasticity Haikus
2. The role of advertising in determining price elasticity of demand
3. Negative externalities of consumption: Britain’s “inebriated hooligans”

We are currently studying and analysing some of the trade blocs that exist around the world.  Three East African countries; Uganda, Tanzania and Kenya formed a Customs Union in 1967 with the lofty aims of developing free trade. An article in a past edition of the Economist, explains the evolution of trade in this part of Africa and also explains how the group of nations is attempting to revitalise and strengthen the agreement.

An East African Federation – PDF download

Each of the nations who are members of this trade bloc are at different stages of development, thus have different things to gain or lose through the expansion of the trade bloc. Uganda is rich with natural resources such as oil, Tanzania lacks the same educated workforce of Kenya, which inturn has high levels of endemic corruption. The risk for all three nations in a free trade agreement is the exploitation of resources across national borders.

This is a good video which introduces the new Common Market.

Click here to view the embedded video.

Have a read of the article at the link above and complete the following discussion questions.

Discussion Questions:

1. What kind of trade bloc exists between the existing members of the East African Community?
2. Who are the original members of the EAC?
3. Describe how the East African Communtiy (EAC) has changed overtime?
4. What are the advantages of altering the EAC to become a customs union and common currency union, with a bigger population base, and to include nations such as Somalia, South Sudan and Congo
5. What are the disadvantages of such a policy?

Louris Yamaguchi – CC Commons – Flikr

Related posts:

1. Trading blocs and economic integration – IB student case studies
2. SAS students organize swimathon to help fight malaria in Africa – here’s how you can help!
3. Global fiscal stimulus and the plight of Africa: what’s really needed, more aid or more trade?

Also posted at economic and eLearning – digging a little deeper

The Danish people are a notably generous and happy group of people and for many years they have had the most extensive welfare system in the world. Danish citizens pay nearly 50% income tax, which allows its citizens to enjoy a high quality of life, free education, healthcare and lavish unemployment benefits.

Click here to view the embedded video.

Since the Global Financial Crisis in late 2008 unemployment in Denmark has more than doubled from 1.7% to 4.2% now. This is still far below levels in other parts of Europe, such as Spain with 19% unemployment. The Danish government is however evaluating the level the unemployment benefits, as the government budget tightens. An unemployed worker in Denmark is entitled to an unemployment benefit which is between 70-90% of their prior salary. Currently they can receive this compensation for up to four years.

High unemployment puts two specific strains on the governments budget during a recession. There are decreased tax receipts as workers are forced out of work, but at the same time expenditure on transfer payments to the unemployed workers will simultaneously increase. Therefore a swift rise in unemployment in the recent recession, lead to some governments such as the United Kingdom falling into a deep budget deficit very quickly. The opposite effect occurs in an economic boom where transfer payments fall and tax revenue increase, leading to a swelling of the budget surplus.

Policy makers in Denmark are therefore planning to trim the generous safety net provided to its workers,

Having found that recipients either get work right away or take any job as their checks run out, officials are also redoubling longstanding efforts to move Danes more quickly out of the safety net.

“The cold fact is that the longer you are out of a job, the more difficult it is to get a job,” Claus Hjort Frederiksen, the Danish finance minister, said during an interview. “Four years of unemployment is a luxury we can no longer allow ourselves.”

New York Times – Liz Alderman – 16th August 2010

Statistics from Denmark show that in the Global Financial Crisis of late 2008, 100,000 Danish people were registered as unemployed. Approximately 62% of these people found another job within two months, and only 6% of these people had been unemployed for longer than two years. This highlights the fact that Denmark has a very flexible labour market. Meaning in simple terms, that workers can freely move between jobs, and can be hired and fired more easily than in comparable European nations such as Germany or Sweden. The flexibility and security of the Danish system is nicknamed “flexicurity”. The following comments highlight the elements of the flexicurity culture.

“It’s no surprise the government is saying that programs that are highly expensive and give a Rolls-Royce treatment to citizens have to be trimmed,” said Iain Begg, a professor at the London School of Economics. “So the search will now be on for labor market policies that deliver more people in work with less money, which has an inevitable air of the holy grail about it.”

In Denmark, employers have carte blanche to hire and fire, and in most cases laid-off people are guaranteed about 80 percent of their wages in benefits, a figure capped for high earners. In turn, they must participate in retraining and job placement programs tailored to get them back to work, which the government has intensified.

Each year, a remarkable 30 percent of Danes change jobs, knowing the system will allow them to pay rent and buy food so they can focus on landing a new position. About 80 percent belong to unions, which manage the workplace, help run the unemployment insurance program and press the laid-off into retraining.

New York Times – Liz Alderman – 16th August 2010

If 30% of workers are willing to change jobs each year, this would have a positive effect on the economy. This proportion is high because workers are not scared into becoming unemployed and poor. Some like myself, would consider the opportunity cost of receiving 80% of my previous wage and an unemployed holiday a great trade off. Of course, workers also consider issues such as social dislocation, loss of skills in the decision making process and are therefore keen to get back into work as quickly as possible.

Within Denmark and the flexicurity system; it would suggest that workers are prepared to accept new challenges and develop skills that are required in new jobs. This also opens up jobs to younger graduates each year. During a recession the same system allows firms to reduce thier demand for labour quickly and to restructure the business to the new economic climate. The supporting welfare structures in Denmark which help unemployed people with training and job applications is an important spoke in the system. These elements are considered labour market supply side policies.

Discussion Questions:

1. Describe the concept of “social safety nets”
2. If the Danish government continued to allow up to four years unemployment benefit, what could be the potential impacts on the Supply of Labour within Denmark?
3. Describe why Denmark has the one of the lowest Gini Coefficient scores in the world (0.29, CIA Factbook 2007)
4. How does labour flexibility or the Danish system of flexicurity, improve economic growth?
5. Evaluate the relative merits of Denmark having one of the highest income tax rates in the world.

Related posts:

1. When Spain’s unemployment problem gets ugly
2. Unemployment and How To Avoid It! You May Not Need Another Degree!
3. 3 million job openings! Good news… or is it?

The launch of the iPad earlier this year, heralded a new period of competition in the market for tablet and slate computers. The three videos below, suggest that although Apple may have seized the lead the in the growing market, many other competing firms will be launching new products to entice customers to part with their money.

Click here to view the embedded video.

Click here to view the embedded video.

Click here to view the embedded video.

From first impressions, the market seems to be oliogopolistic in nature, where a few large firms (Apple, HP, Lenovo/IBM) share a large portion of the total market. At the moment it appears that Apple has the lead, and has created a product with unique selling points such as touch capability and a book reader. You can envisage from the video that HP will closely follow developments and try introduce other selling points eg. USB ports, built-in camera.

Discussion Questions:

1. What are the key difference between an oligopoly and monopolistic market structure?
2. What do you think will happen to Apple’s profits once more and more firms begin releasing their own version of the iPad? What must Apple do to try to maintain its profits in the tablet PC market?
3. What are “barriers to entry”? What are some of the barriers to entry that exists in the market for tablet computers?
4. Do you think firms in the tablet market would opt for price competition or product differentiation strategies to gain market share? Explain the advantages of each.

Related posts:

1. Non-price competition in the market for… WIKIS!! Wetpaint makes a move to gain market share
2. Does Apple stand a chance?
3. Is Nokia in denial?

Infographics are a great way for students to dig a bit deeper and explore an issue. They are typically a combination of graphs, maps, visuals, charts and texts that can be explored through the internet. The New York Times has produced a wealth of these resources over the past few years and this week they are showcasing their best exhibits. It is important for students of Economics to be able to read and interpret visual information, to learn about the world around them. Some of my favourites from the NY Times website are here. Click on the images to explore

For an overview of infographics

For a full list of relevant infographics for Economics, Social Studies and History – NY Times

Click on the images to explore

Can a President Tame the Business Cycle?

How Different Groups Spend Their Day

#3a

All of Inflation’s Little Parts

#4a

Debt Rising in Europe

#5a

What Your Global Neighbors Are Buying

#6a

Related posts:

1. AP students to major in Economics
2. Pacing in the new IB Economics Syllabus – a special post for IB Economics teachers
3. Economics in plain English: Understanding Argentina’s budget woes

With more than four million Spanish people out of work this week, the eighth largest economy in the world finds itself once more in a perilous position. In the last twelve months the number of unemployed people in Spain has doubled. Spain now has as many unemployed people as France and Italy combined, and the unemployment rate is nearing the historic highs of 1993.

Click here to view the embedded video.

The type of unemployment in an economy can be classified in different ways. The main types are cyclical or demand deficient unemployment but other forms exist such as real-wage unemployment and equilibrium unemployment. Some economists also refer to unemployed people as structural, frictional, seasonally or cyclically unemployed.

From the graph below we can see that unemployment in Spain has been high for at least the last 20 years, compared to other countries within the European Union.

Source: OECD Factbook 2009: Economic, Environmental and Social Statistics

The cause of growing Spanish unemployment in 2008 to 2010 is related to the collapse of the domestic building boom and the wider global recession. In 2006, Spain enjoyed low interest rates and therefore cheap loans, this allowed developers to build new apartment blocks, houses and commercial buildings with a relatively low cost of borrowing. Spanish people could afford mortgages at low interest rates and therefore purchased houses contributing to the building boom. However, when the flow of “cheap money” ran out in mid 2008 the building stopped and the flow on effects of spending dried up. Falling tourism receipts and less foreign investment have also exacerbated the issue leading to unemployment doubling between 2008 – 2010.

We can classify the form of unemployment, illustrated in the Spanish example as demand-deficient unemployment. It is related to a downturn in the economic cycle. This concept is explained below.

#2aEffects and Solutions

The social and economic impacts of 20.7% unemployment are obvious, but the solutions are less so. Climbing unemployment creates two evils; falling tax revenue as workers no longer earn wages and the increased burden of paying benefits to the four million unemployed citizens. In addition, a series of social problems are often intertwined with high unemployment, these include depression; lose of skills, poverty and higher crime rates. Spain therefore has a few problems to solve this summer. Whilst Spanish people may enjoy a summer by the beach, and a glass of sangria, the government will be hitting the books to find a solution to the problem. Here are a few suggests to get the politicians thinking.

• Use fiscal stimulus to boost consumer and government spending, thereby increasing the demand for jobs. Spain could plan for a budget deficit (expansionary fiscal policy) and fund spending increases though increased government borrowing. Spain’s current level of public debt is 67% of GDP, which is well below stricken Greece at 124%. However, Spain now has to borrow money from international bond markets, which are skeptical about Spain’s ability to pay back this debt. This is despite assurances and favourable rates offered from the European Union this week. Increasing government debt in a period of European financial crisis is a risky option.

• Use loose monetary policy (lowering central bank interest rates) to encourage Spanish people to increase their consumer spending through increased borrowing. If you understand the complexities of the European Union, you understand that all 21-member countries use the same currency and follow the lead of one central bank. Despite one country wishing to lower interest rates, other countries may think differently. Europe can be compared to a train rolling along on a set of rails, with 21 separate carriages. Each European country must follow behind the big engine, there is no room to deviate from the central banks interest rates and all of the countries must move together. Many people have wondered how long the European train would run, before one of the carriages derailed.

• Force Spanish firms to employ more people. Firms have no requirement to hire more people. They may choose to employ more people but will logically offer everyone lower wages to maintain profitability.

• Use supply side policies to bring greater efficiencies to firms though increased on the job training and worker education. This is a long-term solution, which will require large structural adjustments, how Spain produces goods and services and exactly what is does produce. A startling statistic is that the average Spanish university graduate will find their first job at the age of 27, long after they have graduated.

Discussion Questions:

1. How do economists measure unemployment?
2. Explain the causes of increased unemployment in Spain?
3. Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?
4. How could supply side policies be used to reduce the level of unemployment in Spain?

Related posts:

1. The business cycle rears its ugly head!
2. Unemployment and inflation: understanding the Fed’s balancing act
3. The U.S. National Debt: How Bad is the Problem?

As the Singapore economy rebounded spectacularly this week ,the government moved to limit inflationary pressures. This was after year-on-year economic growth reached 13.1% in the first quarter of 2010.  This strong performance was related to the increased demand for electronic components and growth in the pharmaceutical industry.

The Singapore government operates a managed exchange rate regime. The Singapore dollar is pegged to a trade-weighted index of five currencies. The exact make-up of the index is kept secret, but the rate is allowed to fluctuate within a four percent target range. This ambiguity leads to less speculation by currency traders, and what is known as a basket, band and crawl method of currency management. Overtime, this has allowed the government to steadily appreciate the currency as demand for exports surged. Since 1980’s the value of the Singapore dollar versus the US Dollar has appreciated by nearly 80%.

This exchange rate mechanism is also how the government controls the rate of inflation in the small city-state. Because Singapore’s net exports make up over 100% of GDP, a subtle appreciation of the exchange rate leads to less imported inflation and less demand for exports. The effect of a 1.3% appreciation of the currency band this week, is expected to reduce inflationary pressure over the next 12 months.

The approach is something that the Chinese government is maybe looking towards. The Yuan is pegged directly to the US Dollar and has been since mid-2007. China has been able to maintain this peg by selling vast amounts of yuan to purchase US Treasury Bonds, and to thereby create large foreign currency reserves. As widely reported, the Chinese government has been under pressure to appreciate the yuan by anything up to 60% compared to the US dollar. How the government achieves this shift is complicated but may lead to a significant loss of export competitiveness and imported inflation.

However as Wei Gu from Reuters reports,

“This (Singapore) approach is not open to China, whose inflationary pressures are home-grown, and whose exchange rate looks more undervalued. Nevertheless, Beijing can learn from Singapore’s model, which offers a better balance between stability and flexibility”

Of course, there are huge differences between a city-state and the world’s third-largest economy. Singapore, whose foreign trade is three times its GDP, has to allow enough freedom in its exchange rate to achieve domestic price stability. China, where foreign trade accounts for 50 percent of GDP, that incentive is much smaller.

Moreover, China could not adopt Singapore’s approach without a one-time appreciation in its currency. Otherwise it would be hard to create a two-way trade: China currently restricts the yuan’s movement against the dollar to just 0.5 percent every day. Nevertheless, as China considers making its exchange rate more flexible without abandoning stability, the Singaporean model is worth studying.”

Discussion Questions:

1. What are the advantages and disadvantages of a floating exchange rate?
2. What are the advantages and disadvantages of a fixed exchange rate?
3. What is the common tool used by many governments to control inflation. Why can’t all countries use the Singapore approach?
4. Can a country use both Monetary Policy and a managed exchange rate to control inflation? Do trade-offs exist?
5. Evaluate the effects on the Chinese economy of an appreciation of the yuan.

Related posts:

1. How do changing interest rates affect exchange rates? The example of the RMB
2. Exchange rates, currency manipulations, and the balance of trade
3. Exchange rates and trade: a delicate balancing act, currently out of balance!

Singapore is an economy which is operating at a level which is very close to its full potential. The island has no natural resources, very little spare land and a small but educated workforce. The recent global financial crisis, highlighted Singapore’s vulnerability to changes in the global economy. Singapore is very export dependent country with a large positive trade balance.

The latest government budget was announced here last week and the focus has shifted towards improving productivity in the economy to make it more resilient to these external shocks in the future. The shift has been from Demand Side Policies a year ago, at the depths of the recession, to Supply Side policies in the recovery phase.

Singapore has always been considered one of the original Four Asian Tigers. The four tigers (Hong Kong, South Korea, Taiwan and Singapore) were economies, which shared the free market policies and outward looking, export orientated philosophies. All four countries were newly industrialized, and throughout the period between the 1960’s and 1990’s  they all experienced exceptionally high rates of economic growth. More recently other countries tried to follow this model on a road to development.

A picture of the CBD from near my apartment.

A full description of the budget is here. Most of this is copied below, along with my comments. When you read the article think about the four discussion questions at the end of this post.

S’pore unveils Budget aimed at helping country become advanced economy: By Imelda Saad, Channel NewsAsia | Posted: 22 February 2010 link

SINGAPORE: Finance Minister Tharman Shanmugaratnam has unveiled a Budget aimed at helping Singapore become an advanced economy.

A key theme of the Budget: raising the quality of jobs, skills and the workforce so that workers can continue to earn higher incomes, and the economy, grow.

Singapore emerged from the global financial crisis better than expected, with an overall budget deficit of S$2.9 billion for FY 2009 – much lower than the original S$8.7 billion shortfall projected a year ago.  This year, it is expecting a deficit of S$3 billion, as it spends on areas to boost productivity. The government’s key focus is to raise productivity by 2 to 3 per cent a year over the next decade. This will allow Singapore to maintain a healthy rate of economic growth of 3 to 5 per cent a year, even with a slower growth in the labour force.

The government has therefore managed its spending and revenues in the previous 12 months so is now in a position to spend money to boost the future prospects of the economy. This is unlike some other nations such as the United Kingdom which is searching to cut spending to reduce future budget deficits.

The finance minister said the Budget 2010 set out ways to help Singapore succeed with new growth strategies. Hence the plans seemed to focus more on the long-term growth and health of the economy, and not just the short-term position. The government has set aside S$5.5 billion over the next five years to help enterprises and workers raise productivity.

Mr Tharman said: “Raising skills and productivity is the only viable way we can achieve higher wages and is the best way to help citizens with low incomes. If we achieve this goal, we can raise real incomes by one-third in 10 years.”

The Finance Minster is focusing on long-term growth and the health of the economy. This suggests that Singapore is using supply side policies to increase the potential capacity of the economy and shift the Long Run Aggregate Supply curves towards the right. From a Keynesian perspective, supply side policies are effective when the economy is approaching it’s full potential. The policies are considered ineffective when the economy is a recession with depressed aggregate demand. This idea is illustrated below. (note: the same policies can also be illustrated slightly differently, using a neoclassical perspective of LRAS)

The minister signalled that some painful decisions may have to be taken. Less-efficient industries may have to exit Singapore, as the economy continues to restructure. Mr Tharman said the government must rely on the market to achieve this restructuring. Industries and companies will be given help to upgrade through tax benefits and grants to help to innovate and raise productivity, and invest in R&D and automation.

More will be pumped into raising the skills and tapping the potential of every worker. But this will have to be offset by reducing Singapore’s dependence on cheap foreign labour. To encourage companies to rely less on foreign workers, the government is imposing higher levies on foreign workers in phases over the next three years.

The government will pump in S$2.5 billion in over 5 years to enhance Continuing Education and Training.

It will also set up a high-level National Productivity and Continuing Education Council – to be headed by Deputy Prime Minister Teo Chee Hean – to develop a comprehensive system for lifelong learning. In addition, there will be help for older and low-wage workers in a new Workfare Training Scheme. The scheme is aimed at incentivising employers to send older workers for training by providing companies with up to 95 per cent funding for absentee payroll and course fee outlays.

For companies, there will be a Productivity and Innovation Credit so they can get tax deductions for investments in R&D and automation. There are also a slew of measures to help grow more globally competitive Singapore companies. These include tax deductions for angel investors, growth capital for SMEs and incentives to expand sectors with high growth potential.

The government also wants to ensure that no one is left out as it pushes for more inclusive growth, by taking care of the lower and middle income. For example, property tax will be tweaked to be more reflective of the annual values of homes.

Mr Tharman said: “Taking all our measures together, we will be spending S$1.4 billion this year in direct transfers for households. While most Singaporeans will receive some benefits, more will go to those with lower and middle incomes.”

In wrapping up the nearly two-hour speech, Mr Tharman said while the government will commit substantial resources to support the national effort of restructuring the economy and improving the quality of jobs, the success of this will depend very much on the ingenuity and drive of Singaporeans and companies here.

Discussion Questions:

1. Explain why in Singapore demand side policies were favoured during the recession, but now Supply Side policies are being introduced.
2. Explain how one of the suggested policies will affect the labour market and therefore the level of aggregate supply in the economy.
3. What does the finance minister mean by the phrase “no one is left out as we push for inclusive growth” and how does the government support inclusive growth?
4. Evaluate the short run and long run effectiveness of supply side policies to increase the level of Real GDP in Singapore.

Related posts:

1. Deflation: why lower prices spell doom for any economy!
2. Stagflation – a blast from the past could mean trouble for US economy
3. Doom and gloom in the headlines as US economy teters on edge of recession…

John Maynard Keynes was an economist whose opinions have shaped government policies throughout the 20^th century. Joseph Sternberg of the Wall Street Journal explained an interesting link this week, between Keynesian policies and the fate of bankrupted Japan Airlines.

Keynesian policies suggest that during a period of depressed economic growth, a chronic lack of the demand is a core problem that couldn’t be solved with supply side policies. Instead he advocated for demand stimulus packages including infrastructure developments.

The Japanese economy has experienced a turbulent past. Throughout the 1960’s, 70’s and 80’s the level for GDP grew at impressive rates, but growth began to slow in the 1990’s due to the effects of an asset bubble. An asset bubble was caused by an abundance of cheap credit caused by exceptionally low interest rates. This lead to the prices of shares, houses and land rising very quickly as buyers speculated and outbid each other. The government responded by sharply raising interest rates in 1989, which crushed the bubble and stalled the economy.  Depressed wealth caused spending to stall, and the Japanese thrift and savings culture to return.

In the 1990’s the government attempted to stimulate the economy but this was largely unsuccessful. The result was low real growth (compared to the past), zero percent interest rates set by the Central Bank and a deflationary spiral. Politicians used a variety of policies, including Keynesian ideas to boost aggregate demand.

During the economic boom, the development of the aviation industry was an important pillar of the countries infrastructure development as Joseph Sternberg of the Wall Street Journal explains.

Starting in the 1960s, successive governments concocted aviation plans focused on building new airports. Perhaps this was justifiable back then, when Japan was an Asian tiger economy with a growing population. But in 1964, even before the bulk of the airport construction, the bullet train appeared. At that point, and especially as the shinkasen high-speed-rail network developed, it might have been prudent to ask whether air would invariably be the most efficient way to connect domestic destinations.

Unfortunately, by then the airport boom had taken on a life of its own. During the lost decade of the 1990s, airport construction popped up in many stimulus plans. National and local politicians, not to mention the politically powerful construction lobby, wanted to put an airport in every prefecture. And ordinary airports wouldn’t do. Because Japan’s relatively small flat surface area is in such high demand, one airport after another was built on reclaimed land in the middle of the ocean at enormous expense. Despite periodic public fulminations about out-of-control costs, in practice “expensive” seemed to be viewed as a net positive.

Boosters touted airports as creators of short-term construction jobs and longer-term boons to their areas. This airport binge has continued right up to today. Japan’s 98th airport opened last year: Shizuoka-Mt. Fuji, roughly 50 miles from the famous mountain. California, with a larger land area, has around one-third as many airports in regular commercial service, with another 35 or so “reliever airports” to handle business jets and general aviation.

The author reflects on the cost of the Keynesian stimulus. Whilst in the short term, development of the airport network provided jobs and helped the construction industry; in the long term the projects have created an inefficient and expensive transport network. Japan Airlines has been forced to offer flights from each of these 98 regional airports, often paying high landing charges, and operating flights at below capacity. Overtime this pressure may have caused Japan Airlines to slide into bankruptcy.  Perhaps this is a unique one off case, but the author predicts some interesting links to current developments in China.

Lest anyone think this is a uniquely Japanese problem, consider all the other places in the world currently undergoing their own Keynesian infrastructure booms—and especially China. For instance, a new high-speed rail line is due to connect Beijing to a station an inconvenient 45 minutes from the downtown commercial center of Guangzhou in southern China. The train will take somewhat less than eight hours to connect cities reachable in under three by air. Will enough passengers ever make that trek for the train to operate in the black?

Discussion Questions:

1. Why does John Maynard Keynes suggest that demand stimulus is an appropriate response, for a country stuck in a deep recession, with depressed demand?
2. If central bank interest rates are very close to zero, what other policies could the government use to stimulate growth?
3. How could supply side policies actually make the recession worse in Japan?
4. Outline the advantages and disadvantages of demand-side policies used in Japan.

Related posts:

1. Keynes versus Hayek 101 – the debate continues
2. The battle of ideas: Hayek versus Keynes on Aggregate Supply