Alcohol:

Evaluate policies to reduce consumption of alcoholic drinks:

Average British consumes about 450 drinks a year. Over 70% of these is beer, strong alcohol drinks (vodka, whiskey) stand for about 15% of this amount. Although through last 5 years there is a significant decline on alcohol drinks consumption, still many scientists alarm the public on dangers it brings. Additionally alcohol is a demerit good, so people do not actually reasilse how harmful it can be. What policies may be introduced by the state in order to reduce alcohol consumption?

Increasing taxes:

VAT on alcohol in the UK is 17,5%. Increasing it would make alcohol more expansive and unaffordable for some consumers. From mathematical/economical point of view this reasoning may be actually right. Higher price - lower demand, but this policy could actually hit the most vulnerable. Low income earners are those who consume the most and a significant group of them is alcohilics. Increasing VAT on alcohol could cause that they would give up spending on things like food in order to get a drink. This would cause even worse damage to national health, which means that demand on expensive alcohol related deseases treatment would rise.

Education:

In order to reduce consumption we should prevent young generation to start drinking. Therefore, at schools some alcohol education calasses could be provided. Children would learn about negative externalities and harms, which alcohol brings, so maybe they would think tice before having their first shot. This would increase costs of education, but in long term run could reduce the consumption. Additionally, this method worked with cigaretts, so it is efficient.

Advertising:

Alcohol is cool, especially for the young people. Teens feel that they need to drink in order to be popular and have friends. Changing this fashion could significantly decrease the consuption of alcohol, especially among kids.

Econimic question:

Comment on the effectiveness of one policy which could be used by a government to reduce income equality:


Progressive tax is the most obvoius answer. It means that earners are divided into groups and the tax level is rising with the income. It means that richer give back higher proportion of their income to the state, and poorer give lower.

Some say that this policy is fair, because it causes that richer actually supply poorer, and the income inequality is partialy leveled.
However, it might be inefficient, as higher income groups are usually mobile and they can move to countries with lover income tax. People also may feel discouraged to work harder and, therefore, get promoted, because they will pay higher taxes after a pay rise.
There also is a moral problem with progressive tax. Some say that, through p.t., state actually punishes these people, who are hard-working and clever, and promotes less efficient and less gifted. After all, why someone who had been working hard has to give his money to someone who was lazy.

Next Homework:

1) What are the arguments for a rise in Bank rate at the current time?


The current Britain inflation rate is 3,3%. Current Bank rate is 0,5%. Such a difference makes further inflation increase possible and probable. The threat of higher inflation is high and, therefore, some say that increase in interest rate is inevitable.

2) What are the arguments against a rise in Bank rate at the current time?


Higher interest rates may decrease the demand. After all, the higher they are the more expensive the mortagages. British economy is already vulnerable, so increasing the i.r. is a risk of another economic slow down.

3) What information would you require to decide which of the arguments was the
more powerful?


The type of inflation has to be considered. Todays inflation comes from indirect taxation, food and energy, which , as experts argue, the MPC has not real influence on. So increase of increase rates may be actually a worse solution, regardless the current rate of inflation.

4) Why is it difficult to decide the size of the output gap?


Because in such difficult and unpredictable economic times it is hard to guess what potential GDP is going to be.

5) To what extent do the arguments for and against a rise in Bank rate depend on
the factors determining expectations, and what expectations are important here?


Most of all the increase of the wages is to be considered. If wages are to increase, than the increase of i.r. would be more likely, as people would afford more expensive mortgages.

6) To what extent are exchange rates relevant to the effectiveness of interest rate
policy?

Next Homework:

1) Why may relative income tax rates between countries give only a partial picture
of the international competitiveness of these countries? What else would need to
be taken into account?


Firstly, the income tax may be just one factor in considering whether a country is competitive or not. There are also some social fees, like the insurance. In Germany, for example, high income earners (over 200 000$ per annum) additionally need to pay high social services fees. The aim of this social contract is to take more from the rich and give some of that to poor, so low income earners (below 25 000$ per annmum) are given nearly full healthcare. In U.S. there is no obligation to buy the national insurance, which makes living there cheaper for the citizens. European countries reguraly rob good and hard-working earners and redistribute their money to less gifted and less clever. It definitely does not make these countries attractive...

2) Does making taxes more steeply progressive necessarily act as a disincentive to
output? Explain.


No, if people do not decide to leave their country. Scandinavian countries are great examples. The exorbitant taxes are being paid by citizens without protest, but in exchange everyone is rewarded with high-quality state services. One of the best state education levels in the world and exeptional quality of NHS are supplied to everyone in need. It shows that when a country spends peoples money well, they are not discouraged to stay there and keep earning more.

3) What factors are likely to determine the relative size of the income and
substitution effects of tax changes?


When taxes are increased, people may not feel encouraged to work. They may give up working overtimes or trying to get promted. Simply because their work is less rewarding. Another phenomenon linked with tax increase is "brain drain"- most mobile and talented move out to work abroad.
Opposite things happen when the taxes are decreased.


4) How progressive are income taxes in the UK compared with other countries?
Give examples.


They highly vary. From 0-50%. It is a lot, even coparing to other EU developed states. In Germany it is 14-45%.

5) What externalities (positive and negative) might result from steeply progressive
income tax rates?


Positive: there is nothing good about progressive tax

Negative: Lack of incentive to work, increase of tax-avoiding crimes, brain drain.

6) What determines the international elasticity of supply of labour?


Tax levels, training system, education system, inwood investments, level o benefits etc...

7) What is the Laffer curve? How will the shape of the Laffer curve be affected by
the international mobility of labour and international tax rates?


The Laffer curve is a theoretical representation of the relationship between government revenue raised by taxationand all possible rates of taxation.

The higher the taxes and the higher the mobility, the less revenue. That is because people would simply move abroad with thei earnings and pay less.

New Homework:

1) What special ‘one-off’ factors help to explain why the underlying growth in
2011Q2 may have been higher than 0.2%?

• Hopefully, there will be no natural catastrophy next year in any of Brotain's major trade partners (referring to Japan).
• Also, next summer is more likely to be "mild" rather than extremely hot.
• Finally, there is no royal wedding planned for next year. (unless Pippa marries Harry:)

2) Why is the output gap rising? How may supply-side changes affect the size of

the output gap?

New jobs are being created, and no "special circumstances" are being taken intoaccount. Government also aims to increase pending in subsidies for businesses and hopefully they will cut the benefits and increase the retirement age. These factors of supply side policy create a more positive predictions for the future output indexes.

3) Why is the recovery from recession in the UK slower than in most other

countries? Why is it slower than the recovery from previous recessions?

Mostly because of the size of the crisis. This global economic slow down causes that not only the UK is in crisis, but also all of their major trade partners. Additionally, the UK is in the EU, where some countries (PIGS) are slowing down the rest. These deeper economic interdependences cause slow down of the recovery pace.

4) How may automatic fiscal stabilisers affect (a) economic growth and (b) the size

of the public-sector deficit if the output gap widens?

Automatic Stabilisers

Definition Automatic stabilisers: Automatic stabilisers refer to how fiscal instruments will influence the rate of growth and help counter swings in the economic cycle.
Example of Automatic stabilizers

High Growth - In a period of high economic growth, automatic stabilizers will help to reduce the growth rate. With higher growth, the government will receive more tax revenues - people earn more and so pay more income tax (note the tax rate doesn't change, the % just becomes higher). With higher growth, there will also be a fall in unemployment so the government will spend less on unemployment benefits.

Recession - In a recession, the economic growth becomes negative. However, automatic stabilisers will help to limit the fall in growth. With lower incomes people pay less tax, and government spending on unemployment benefits will increase.

Source: Economicshelp.com




5) Distinguish between demand-side and supply-side causes of the slow rate of
economic growth in the UK.


Supply side: High benefits and powerful trade unions. Limited training of the nemployed.

Demand side: Lack of confidence, therefore lower borrowing. People are not sure about their futore, so even if they are not wore-off, due to the crisis, they are rather paying their debts back and save for taugher times (Keyns's Paradox)


6) Compare the likely effectiveness of demand-side and supply-side policy measures
to stimulate economic growth, referring to both magnitude and timing.


In long short term run, it is more important to restore confidence and demand. The economy has, therefore, more "fuel" to run. For long term stability, supply side policy is crucial. Some reform and new mechanism need to be applied, combining with consolidation of public expenditure. For example, more training of the unemployed, higher quality of education (especially for demanded jobs) and some major gov. investments (f.e. London Olympic Games).

Thursday's homework:

1) Think about how we define abundance. Is body heat an abundant resource?


Abundant means plenty. I is hard to describe a body heat in terms of quantity. We know, however,  that the b.h. is fully renewable so we might describe it as abundandt.

2) Why are energy and oil prices so high? How does scarcity affect their price?


The demnad for oil is: VAST and inelastic, which means that producers can increase the price and still sell virtually the same amount. That is why the oil prices are so high. Another factor is that crude depositis, as an unrenewable resource, will eventually end so the less it will be, the more it will cost.


3) Could this source of heating be described as a market failure? If so, how could we illustrate this on a diagram?


Well we might describe body heat as a positive externality, but only in the case when it is used in some economic purpose, otherwise it is getting wasted.

Here is the diagram showing positive externalities. It is labeled for condoms, but it also works for the body heat:

4) Consider the Swedish firm’s profit-maximising price and output. The new heating method is said to reduce their costs – will it affect their average and/or marginal costs? Show the impact on a diagram. What happens to the firm’s profits?

Yes it will but i cannot really draw any diagram on this thing.

5) Is this heating method something other firms could benefit from? How could they decide whether it is cost-effective?


It can be used to heat every building, providing that enough people will pass through it. It works best, however, when the outside temp. is relatively low and the gas price high (as in the case of cold and expensive Sweden).

6) Is there a role for the government to encourage more firms to use this method? Explain your answer.


Definitely yes. It might be an efficient alternative to gredually more expensive and unrenewable oil. This technology should be developed, mainly due to its simplycity. People just need to be in a building and the rest is going to do itself. I might also be a good idea to instal such a energy creator in places, where people generate more heat. For example gyms.

Wednesday homework:

1) Outline the measures agreed at the eurozone heads of government summit on 21 July.

• Greece, Portugal and Ireland will have the interest rate on the money borrowed from the European Union cut to 3.5%.
• An agreement by private-sector creditors to accept a writedown on their Greek debt.
• Boost economic growth in Greece, with the deployment of "structural funds" under a European "Marshall Plan". The members said they would "mobilize all resources necessary in order to provide exceptional technical assistance to help Greece implement its reforms".

2) Explain what is meant by a ‘haircut’ in the context of debts. What types of haircut were agreed at the summit?

Haircut  – the private financial sector to offer facilities such as bond exchange, rollovers and buybacks "on conditions comparable to public support" but on a voluntary basis

3) How big a reduction in Greece’s debt stock will result from the deal? Why may it not be enough?

"More than expected but not enough to make us sleep comfortably" - According to some Berclay specialists the deal lacks of details in areas like private sector involvement for Greece and collateral requirements. Also, the overall project will not be sufficient until the whole debt of PIGS will decresase, which suggest that the case of Greece cannot be solved without a greater action in Southern Europe economy.

4) Explain how the European Financial Stability Facility (ESFS) works? How will this change as a result of the agreement?

EFSF is authorised to use the following instruments linked to appropriate conditionality:

• Provide loans to countries in financial difficulties
• Intervene in the debt primary and secondary markets. Intervention in the secondary market will be only on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability
• Act on the basis of a precautionary programme
• Finance recapitalisations of financial institutions through loans to governments

To fulfill its mission, EFSF issues bonds or other debt instruments on the capital markets.

The main change after the agreegement is that the interest rates for Greece were lowered to 3,5% .

Also the EFSF will be allowed to "intervene in the secondary markets". It may fund "recapitalisation of financial institutions through loans to governments including in non programme countries", code for Italy and Spain. The full weight of the German-led creditor bloc will stand behind south Europe's banking system.

5) What vulnerabilities remain in the eurozone?

The overall economic crisis. Economies of all eurozone are at the slow dow, in terms of the GDP growth. Some other, major eurozone countries are getting closer to the bankrupcy line, for example, Italy. The national debts are simply to high.

6) What are the arguments for closer fiscal union in the eurozone? Is more required than merely a return to the Stability and Growth Pact?

The main arguement is that closer fiscal integration will prevent net crises to so easily appear. When each country's finances were more severely controlled, states would not be able to run into massive debts anymore. The natural trade-off is a certain decrease of member state's soveregnity. 

Ed Balls's plan:

Ed Balls, a shadow chancellor in Ed Miliban's SC proposed a Labour economic plan, which aim is to boost British economy.

• slashing VAT to 5% for home improvements and a one-year small firms national insurance tax holiday for taking on extra workers.
• reversing VAT rise from 17.5% to 20% and promised a repeat of this year's bankers' bonus tax, using the money to guarantee 100,000 jobs for young people and building 25,000 affordable homes.
• bringing forward genuine long-term investment projects covering schools roads and transports

There was no costing for his overall proposals but his aides said the targeted VAT cut for the housing industry would cost between £100m and £500m, adding similar targeted VAT cuts were being tried in France. The national insurance holiday for small business taking on extra staff would be funded from money left over from the government's failed national insurance rebate fund. Ministers had originally set aside £1bn for this fund.
(by guardian.co.uk)

another essay

Analyse what other difficulties the leaders of parties in Opposition are likely to encounter.

Being in the opposition is certainly uneasy for the political leader. After a defeat in the elections he has to face many difficulties in the party and patiently wait for the next, in order to gain power.

The major problem for the opposition party leader is to sustain the leadership. It is the leader who takes responsibility for party result, so after a defeat many of his fellow party members may question his competences and try to replace him. That is what happened in 2010, in the Labour Party, where after a defeat Gordon Brown was replaced with Ed Miliband.

Especially after a high defeat the morale in the opposition party may be low. It may lead to wide conflicts inside the party or even withdrawals of some members. An example of this may be the 1997 elections, when the Conservatives, under the leadership of John Major were virtually destroyed by Blair's New Labour. After that Major had resigned and the Conservative Party remained in opposition until 2010. In such a situation leader has to remain strong, reorganize his people, start to expose the governmental weaknesses and do everything to prevail in the next elections.

The leader of the opposition party needs to form a Shadow Cabinet. It is an equivalent of the cabinet, where the opposition proposes counterparts for each of the current Minister. It is a difficult task, because when the Shadow Cabinet members are not as competent or as popular as the real Cabinet members, they may actually damage the image of their party.

Being in Her Majesty's Loyal Opposition is definitely not a dream of any party leader. It has many difficulties and little privileges. Leader of the opposition party has to not only fight with the government leader, but also with his fellows, who want to overthrow him. 

essay homework

Direct democracy is back in fashion, seen as a way of restoring trust in politics. But are the referendums a bad idea?

Direct democracy is the oldest form of this political regime. It was born in 5^th century before Christ.

It is direct, which means that people get in one place and decide. It is unmediated – all the people are the government and a separate political class does not exist and continuos, which means that people regularly engage in political life. Today the most common form of direct democracy is the referendum, but is this form of political participation a good or bad idea?

Referendums might have a positive impact on the society, when they are a result of a longly built consensus for a particular case. An example can be the 1997 devolution referendum for Scotland, Wales and Ireland, which gave these countries some political autonomy. Scotland established a National Parliament and Wales and Ireland established their National Assemblies. This result united peoples and strengthened their national identity.

Referendums may also improve the political education and awareness in the society. When people, by the referendum, are given some more power, there is a chance that they will learn about the voted issue. For example, in 2003 there was a EU accession referendum in Poland. At first the society had been sceptical, but a massive information campaign were organised and people realised that the accession was beneficial for Poland and eventually agreed. It clearly shows that referendum is an opportunity for the people to acquire a lot of useful knowledge.

On the other hand, the idea of referendum lowers the responsibility of the governments. Letting people to decide might be used by the politicians as a way to avoid consequences. For example, a referendum in the controversial cases such as abortion or euthanasia it is comfortable for the politicians not to expose themselves on conservative people criticism by voting pro or liberal people criticism, by voting contra.

To many referendums in important issues may also destabilise the political scene. In the California for example, constant recalls and referendums made many people redundant, many hospitals bankrupt and civil liberties threatened. It shows that in some cases ,where the expert knowledge is required, masses simply are not competent enough to make right choices.

The institution of referendum certainly has some advantages. It may unite the people and improve their knowledge. On the other hand, giving people too much power leads to destabilization of the system. Therefore, I conclude that the referendum should be used only in some general cases, such as EU accession or devolution. In other cases, people should leave the decision to the experts.  

Monday Homework:

1) What information failures are there in the market for higher education places?

2) What externalities are involved in higher education and will this lead to an over or

underprovision of higher education in a pure market system?

3) Apart from externalities and information asymmetries, what other market failures

apply to the market for student places in HE?

4) What are the arguments for subsidising non-STEM subjects (as well as STEM ones)?

Should these subsidies vary from course to course and from university to university?

5) What is the best way of tackling the problem of unequal access to higher education?

I am deeply sorry but I do not understand these questions at all. 

essay homework

Is the world reverting to a struggle between great powers? Or is the democratising spirit of 1989 still alive?

Today, after over two decades of post cold war period, we can see all set of changes in the World, which surrounds us. The biggest totalitarian regime collapsed and new democracies emerged. The current global political situation definitely did not reach “the end of history” status. Authoritarian states still exist and become gradually more powerful, sometimes more powerful tan anyone has been expecting. What will be the direction of todays World political evolution? Will we come back to the struggle between great powers or maybe the democratisation spirit of 1989 will keep spreading all around?

The advocates of the first thesis claim that the democracy will not necessarily prevail in the whole civilised world. Giving the examples of China and Russia, they prove that autocratic powers are becoming overwhelmingly powerful in the economical area and have gradually more influence in the international relation aspect (After all both of the mentioned non - democracies have places in the Permanent Security Council of the UN, which consist of the most influential states in the World). Additionally, new and naturally hostile powers, such as Iran or Pakistan, grow in power, and do not seem to be in favour of transforming into democracies. There are also new, religion conflicts such as Islamic Jihad, which aim is to fight the (un)Holly War against the West, mainly by the terrorism. After the cold war the main division axis collapsed and the democracy prevailed, but some new divisions emerged and still lead the people to the fight.

The followers of the more optimistic way of seeing the current World say that the democracy will finally win, because it simply has to. That is because democratic states allow their citizens to develop and are technologically more advanced. Their societies are simply better at each aspect so how can they lose. The states like China or Russia will also become democratic, simply because the wealthier and more aware societies will demand it. China, for example, is claimed to be slowly, but constantly democratising. Other examples, confirming that there is gradually less place for the dictators, is the Northern- African revolution, where old satraps like Mubarak or Gaddafi were overthrew after decades of ruling. It shows, that the democratisation may not be quick, but it eventually comes.

I think that, although there are still many autocratic regimes, the democratising spirit is still growing and will eventually prevail. It is true that today not only the Western democracies play the key role in the international politics, but gradual transformation among the other powers proceeds. Today we live in a globalised World and the nations can no longer be separated from the rest. People will always fight for their best and will always desire freedom and democracy is the only way to provide both of these qualities.

Monday Homework:

1) Explain why oil prices have been rising. Use a diagram to illustrate your answer:

The oil prices rise, due to the increasing demand, which has recently gone up due to the cold weather forecasts. When it is cold, people will have to turn their oil-consuming central heating on, so they will need more of this resource.  The prices also rise because of the SE speculators.

Here are the oil prices (in USD $):

Date Value
1998 12.28
1999 17.48
2000 27.6
2001 23.12
2002 24.36
2003 28.1
2004 36.05
2005 50.64
2006 61.08
2007 69.08
2008 94.45
2009 61.06
2010 77.45
2011 107.42

2) How can the concepts of price elasticity of demand, income elasticity of demand and price elasticity of supply help to explain the magnitude of oil price movements?

Demand for the oil is little elastic. It means, that whatever the price is, people will have to buy it. This fact comes from the reason that there is no equally efficient and common source of acquireing energy as petrol. That is why the prices of the crude, over the longer time period, gradually rise (data above).

3)  Examine what is likely to happen to oil prices over the coming months. What are likely to be the most important factors in determining the direction and size of the price movements? Distinguish between demand-side and supply-side effects in your answer.

Experts claim that by the end of the year, the price of oil will have increased to 100$ a barrel. It is mostly because the winter in the developed countries is aproaching so the demand for oil will increase. The OPEC countries have the limits of production, and the demand for oil constantly increases, so in order to sustain thecurrent price levels, they will have to increase it.

4) What are ‘crude futures’? Explain how actions in the futures market are likely affect spot prices.

5) To what extent can OPEC control oil prices?

As an organisation, which provides 40% of World's petrol, OPEC has a considerable influence on the oil prices. Thay can limit the production, in order to lower the supply, which will make the oil more expansive.

6) If crude oil prices go up by x%, would you expect petrol station prices to go up by approximately x%, or by more than or less than x%? Explain.

I would expect the prices to go up more than x%, mainly because the market crude prices do not involve the processing to petrol and transport costs. 

7) Why have central heating oil prices risen by around 70% of over the past three months? What are the implications of your answer for the type of market structure in which central heating oil companies are operating?

The oil companies, which have plently of oil on stock, wait until winter and together increase the prices at the same time. They know that people will need the heat so they can do whatever they want. This people do not cara, whether smoe poor old people will freeze themselves to death because they only thing relevant for them is the profit.

List of Oxford MP's:

Rt Hon Andrew Smith:

General election 2010 result (Oxford East) :  21938/42.34%

Electoral history:

Oxford East 1983. Member for Oxford East 1987-2010, for Oxford East (revised boundary) since 6 May 2010 general election

Parliamentary career:
Opposition Spokesperson for Education 1988-92; Opposition Frontbench Spokesperson for Treasury and Economic Affairs 1992-96; Shadow Chief Secretary to the Treasury 1994-96; Shadow Secretary of State for Transport 1996-97; Minister of State, Department for Education and Employment (Minister for Employment, Welfare to Work and Equal Opportunities) 1997-99; Chief Secretary to the Treasury 1999-2002; Secretary of State for Work and Pensions 2002-04

Select committees:
Member: South East 2009-10

Councils, public bodies:

Councillor, Oxford City Council 1976-87

Political interests:

Car industry, education, retail industry, housing, employment






Nicola Blackwood


General election 2010 result (Oxford West and Abingdon): 23906/42.24%


Electoral history:
Member for Oxford West and Abingdon since 6 May 2010 general election

Party groups:
Commissioner, Conservative Human Rights Commission 2006-; Social Action Manager 2007; Vice-chair for Social Action -2010; Vice-chair (social action), Conservative Party 2010-

Select committees:
Member: Home Affairs 2010-

Councils, public bodies:
Governor, Northern House School 2009-

Political interests:
Civil liberties and human rights, home affairs, international development, universities, science and environment

Countries of interest:

Afghanistan, Democratic Republic of Congo, Iran, Rwanda, Sudan

Wednesday homework

1) What are the most powerful driving forces behind the demand for energy?

These are mostly the World's largest economies. By the 2030 China will have been the fossil fuels boggest consumer. Other highly industrialized countries, such as US or India will also need more energy, which naturally increases the demand. 

2) Why does the report forecast virtually no increase in energy demand in developed countries? What assumptions are made about growth rates in OECD and non-OECD countries?

That is because population and income growth are the two most powerful driving forces behind the demand for energy. The OECD countries populations virtually do not grow, and the income growth slows down. Additionally, the OECD countries promote a "green" lifestyle, which is all about saving the energy. 

3) What factors would lead to a substitution of sustainable energy sources for fossil fuels? What would detrmine the size of such substitution?

Since the fossil fuels are non-renewable and constantly become more expensive, people try to find some alternative sources of energy. That is why the wind, solar, bio-fuels and other renewables continue to grow strongly, increasing their share in primary energy from less than 2pc now to a projected level of more than 6pc by 2030. Biofuels will provide 9pc of transport fuels, and nuclear and hydropower will grow steadily and gain market share in total energy consumption.

4) What is the role of the price elasticity of demand for and supply of oil and the income elasticity of demand for oil in determining oil consumption in different parts of the world?

5) Why may high energy prices not necessarily mean ‘doom’? 

Because a high price of the energy can rationalise the demand, create an innovation and drive both efficiency and investment in new sources of supply.

Tuesday homework:

1) Why have the prices of gold and silver risen so much recently?

Mainly due to the weakness of the US currency, the Dollar. The US trade the precious metal reached a record of $1,569.30 an ounce, which is a new record. The same factor has an impact on the silver prices, which have recently reached a level of about 47$.

2) Why has silver risen more than gold?

Whereas gold is mainly used for the jewelery, silver's rally has been driven by its use in industry, particularly in electronics. The demand for silver increased significantly (21% last year) and, therefore, its price incrased more.

3) Why may higher rates of world inflation make investors turn to precious metals for investment?

Because the precious metals are considered to be a hedge against inflation. That is because these are the real assets. There is a bit of history in that:

Historically, gold and money have been pretty much synonymous so pure Gold was immune to inflation. But that didn't stop currency inflation. In the early days kings discovered that they could "extend" their money supply by adding just a bit of lead to the melting pot. Unfortunately, as the percentage of lead increased the value of the coins decreased causing the first cases of inflation. (And also creating the habit of biting coins to see how soft they were and thus how much lead they contained).

So, in general terms, we can name the gold a "the essence of the money".

4) How are future decisions by the Fed likely to affect the price of gold?

Prices of gold respond the inflation, so if the FED increases the interest rates, the gold will cost less.

5) According to the efficient capital markets theory (strong version), the current price of a commodity should already reflect all knowable factors that are likely to affect the price? Does this mean that speculative buying (or selling) is pointless?

No, because they can speculate on the future events (so far noone can confidently predict the future) . For example, on the situation in the Middle East, which effects the oild prices. The real hard-core speculants may also try to pretend to have some info, which noone other does, and spread the rumours among the investors.

Taxes

1) Why may relative income tax rates between countries give only a partial picture of the international competitiveness of these countries? What else would need to be taken into account?

Factors such as the social security chrge also matter. Sometimes it is more profitable to pay higher income tax in a country, where the social payment is lower. 

2) Does making taxes more steeply progressive necessarily act as a disincentive to output? Explain.

It depends on the rate of taxes. If the low income workers (25 000 $ a year or less) have to pay a very low tax, and the tax rate progressively rises, but not to a very high level, then itt does not necassarily have to act as a disincentive output.

3) What factors are likely to determine the relative size of the income and substitution effects of tax changes?

4) How progressive are income taxes in the UK compared with other countries? Give examples.

The UK taxes vary in their rates between 0-50%. It is a significant difference in comparison to other major eonomies. For example, in th US the tax rates vary between 15-35%, Germany 14-45% or France 5,5-40%.

5) What externalities (positive and negative) might result from steeply progressive income tax rates?

People, disencouraged by the too high tax rates might try to alocate their income in other countries, where the taxes are lower (such as Dubai, where the income tax does not exist).  Therefore, a hi-tax state, instead of a high input, might actually get less. Also this form of taxation may discourage people to work longer or to get promotion (in order to pay less). Positive thing is, that somoe societies claim the progressive income tax to be fair, and thanks to that people will feel more content.

6) What determines the international elasticity of supply of labour?

a) The real wage rate on offer in the industry itself : higher wages raise the prospect of increased factor rewards and should boost the number of people willing and able to work
b) Overtime: Opportunities to boost earnings come through overtime payments, productivity-related pay schemes, and share option schemes and financial discounts for employees in a certain job.
c) Substitute occupations: The real wage rate on offer in competing jobs is another factor because this affects the wage and earnings differential that exists between two or more occupations. So for example an increase in the relative earnings available to trained plumbers and electricians may cause some people to switch their jobs. In recent times, the British media has been fond of stories of people leaving jobs in academia (including high level university research) and moving in household services because the basic rates of pay and potential earnings are so much greater.
d) Barriers to entry: Artificial limits to an industry’s labour supply (e.g. through the introduction of minimum entry requirements or other legal barriers to entry) can restrict labour supply and force average pay and salary levels higher – this is particularly the case in professions such as legal services and medicine where there are strict “entry criteria” to the professions. Indeed these labour market barriers are partly designed to keep pay levels high as well as being methods of maintaining the quality of people entering these professions

The labour supply curve:

7) What is the Laffer curve? How will the shape of the Laffer curve be affected by the international mobility of labour and international tax rates? 

In economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation.

Wednesday homework

1) Illustrate with examples what is meant by secured and unsecured debt.

a) Secured Debtv- Debt backed or secured by collateral to reduce the risk associated with lending. An example would be a mortgage, your house is considered collateral towards the debt. If you default on repayment, the bank seizes your house, sells it and uses the proceeds to pay back the debt.

b) Unsecured Debt - When you carry an unsecured debt, your creditor does not hold any collateral that they can take back if you fail to pay. For example a credit card or the legal bills.

2) What factors might help to explain the longer-term growth in secured and unsecured debt over recent decades?

During the last decades we had a gradually increasing boom on the housing market. People thought that the value of their property will never fall, but only increase. Therefore, when their houses (they already had a mortgage on) theoretically grew in value, they run into another debt in order to buy some cars or a new TV. Unfortunately, the main factor why the both types debt level increased is humans' greed and recklessness.

3) What factors might help to explain the more recent patterns in secured and unsecured debt?

The lack of activity in the housing market. People, who already have mortgages pay them, but those who do not have house loans, do not take them. It mainly stems from a lack of confidence and the fact that, in general terms,  people have less money.

4) What do you understand by the term housing equity withdrawal?

It is borrowing that is secured on the housing stock but not invested in it, so it represents additional funds available for reinvestment or to finance consumption spending. So I borrow some more money, but instead of trying to multiply them and make profit (by f.i. developing my own business), I buy a better car.

5) What is meant by negative HEW?

It means that people gave up borrowing additional money on their houses.

6) What factors might help to explain the negative HEW observed for the past twelve quarters?

It is mainly due to the willingness of people to clear their debt. The current time is unsure for peoples' wallets so they want to have a clear financial situation and, therefore, they try to get rid of their debts.

7) What implications might there be for economic growth of negative housing equity withdrawal (HEW)?

If people have less money on spending the demand is going to fall. Therefore, the production will drop as well. The unemployment is more likely to increase as well. Generally, the GDP might be negatively effected due to that phenomenon.

Homework w/c 12 th September 2011

1) What is aggregate demand? Which component is the biggest engine of growth for an economy?

Aggregate demand is the amount of goods and services in the economy that will be purchased at all possible price levels. It consists of the invesments, government spendings, consumption and the export minus income.

AD = I+G+C+(x-m)

The AD's biggest element is the consumption, since it is the largest figure.

2) Why did markets decline following the data on US jobs?

Because the companies do not have confidence in political class in the US and also no confidence in the whole economy. Although the companies did well, taking a profit into account, the are not sure whether the finantial situation in States is stable. Therefore, enterprises did not hire new workers.

3) Why is the economic situation in America so important to the economic recovery of other countries across Europe?

The US economy is the biggest in the world. Additionally, it is highly linked with the European countries economies. Therefore, the goings-on in America have such a big impact on Europe.

6) What action could the government and the Fed take to boost confidence in the US economy and stimulate economic growth? Can any of this be done without causing inflation?

Government should immediately declare a wilingness of implying some job support meassures. The Fed should pump some more money to the system, in order to stimulate the economy. Certainly, the general rule is that the higher employment, the higher inflation but this is a trade off, that the government has to take into account.

Policies towards transnational corporations

Multinational Corporation have become a very important factor, in the development of global economy. In 1999 the MNC's generated 25% of the worlds GDP (UNCTAD estimates). Therefore, their impact on particular countries economies is a big issue. Some say, that the MNC's highly contributed to the economical growth of states or that they boosted technological improvements in developing countries.
Others claim that the MNC's are creating "race to the bottom" around the globe, and that they provide profits only for the local elites. Taking that into concideration, governments should ask themselves a question of what policies should be aplied to this transnational companies.

Advocates of MNC's claim, that the best policy for the host countries is total liberalisation and opening their econimies. According to them, the regulation attempts would provide less foreign direct invetments (FDI's) and that would lead to the decrease in GDP growth. They also say that countries should compeete with each other, by providing more economical "privileges", in order to attract foreign investors. By that they mean tax reductions and, in some cases, labour standards decrease. All that to get more FDI's.

Opposers of the total liberalisation claim that the regulation and control of the FDI's does not necessarily lower their level. They give examples of Southern Asia countries, who actually increased the control, and still atracted more foreign investors. It turns out that it is the education, the infrastructure or other public services that the country offers, which really brings the investments to the country. What is also proven, the lack of regulation and to many privileges lead to increase of the inequality of profit distribution.

I reckon that in general terms, a certain degree of liberalism is highly required to provide the FDI's. Some regulations, however, shall remain in order to fit the invesments within the countries overall development strategy. A "healthy" balance between these two policies would be most positive for the societies, that could benefit more from the FSI's and for the MNC's, because whey would be able to operate in well prepared countries.

The unexpected cut in Brazil homework:

1) What is the relationship between the macroeconomic objectives of inflation and economic growth?

The governments general aims are to decrease the inflation and keep the economic growth. In Brasil the GDP has been rapidly increasing since last years. The supply however has not been growing proportionally fast, which naturally led to the inflation increase. That is why The Monetary Policy Commitee, in orderd to keep the inflation under control, would keep increasing the interest rates.

2) Why are there concerns that the recent reduction in the interest rate may worsen inflation? Do you think that a decision has been made to sacrifice Brazil’s inflation-targeting regime to protect its economic growth?

The previous increases of the i.r. were supposed to prevent the Brasilian economy from over-heating.  The slash of the interest rates, implied mainly due to the political reasons, seemes to have been rather irrational and dangerous for the society. That is because the prices and the cost of living will most likely grow. The government should not only focus on the GDP statistics, but also remember that it is responsible for the whole society. Maybe the investments would  develop quicker, but the people will for sure be affected, spend less and, therefore, the countrys GDP might actually fall. 

3) Why are there questions over the independence of the central bank and how will this affect its credibility? What are the arguments for central bank independence?

The questions over the independecnce of the Brasilian Central Bank are naturall. This institution, under a high political preassure, changed its reasonable policy into a risky, pro GDP-developement strategy. Cenral Bank and MPC are separated from the government to prevent such a situations from happening. When these institutions give in the political preassure its credibility fall, because they are no longer being concidered as a independent and, therefore, competent body.

4) Growth in Brazil, although lower this year, still remains very strong. Why has the Brazilian economy been able to continue its strong growth, despite worsening economic conditions worldwide?

Brasil owes its good economical situation mainly to the vast natural resourcess. The oil being exploit, makes Brasil self-sufficient in the petrol area. Moreover, Brasil is a Worlds major agrcultural goods exporter. Due to the wonderful climate conditions, this country grows tropical friuts, potatoes, sweet corn and many more. Brasil has also very big industry, including green energy industry (of which Brasli is one of the leaders) and car industry ( f.i. Mercedess-Benz factories).


5) What type of inflation are emerging economies experiencing? Explain how continuous hikes in interest rates have aimed to bring it back under control.

Emerging economies often face a demand pull inflation. That is because their GDP grows quickly, their people start to make more money, but the supply is not sufficient. Keeping the interest rates at the high level makes the loans more expensive, therefore, the investment developement is slower, consequently, the GDP rises slower and that decreases the demand. 

6) What is meant by overheating? How will the central bank’s past and current policies contribute towards it?

Overheating means that the demand is bigger than supply. It naturally causes the demand pull inflation (see paragraph above).  When Brasilian Central Bank lowered the interest rates, the investments level grew, the GDP could increase faster and ,therefore, the demand increased. So too high demand, in comparison with supply.

labour standards

I reckon that imposing international labour standards could, to certain degree, be realistic and benefitable for the economy and society.

The spread of globalization wealth seems to be uneven. Companies make more porfit, but some workers still earn next to nothing and work in unacceptable conditions. Lowering the day time work limit could actually be benefitial for the companies. That is because the workers would rest more and, therefore, be more efficient. Imposing or increasing the minimal wage might also have a positive impact on the efficiency, since the better rewarded stuff is more eager to work harder. From the macro-economical point of view, there are also some advantages of improving the labour standards. Better paid workers would spend more, consequently, the demand would increase and that would have positive result in the GDP growth. A certain level of improving the labour standards would also not necessarily make the companies to withdrawn, as long as it would be cheaper to pay the workers more than mooving the entire factory.  Also imposing some working standards might not have a negative impact on emplyment, since the mainly exported agricultural products are sold at "world prices" irrespective of the costs of production. It means that a slight increase in payment would not affect the global demand on certain products.

There are number of evidences which confirm the thesis, that imposing the labour standards could actually be a positive phenomenon. I think that nowadays governments should focus on solving that problem and change the current thinking patterns.

Globalization: Who benefits/Who loses?

Globalization is a great opportunity for countries to improve in many areas. It might potentially offer developing countries new opportunities for accelerating economic growth and internal development. But is the globalization profit divided equally, and does this phenomenon actually have a positive impact on everyone?

The west, in genereal, has greatly benefited from the globalization. The production was moved to cheaper countries, companies started to make more profit, people started to make more money and we are all happy. However, some people in the west lost their job due to that reason. Many miners, for example, were made redundant, because it is cheaper to import coal from China, than to exploit it in "expensive" UK or Germany, where labour cost are high. A lot of companies and manufactures had to quit, because they simply couldn't compeete with big corporations, that significantly lowered the proces.

The developing countries also suffered from the globalization. The foreign industry highly affected their eco-system. People, who frecquently work two times longer than in Europe,  have very low sallaries. In addition, the workers cannot even demand better conditions, because they are under the constant threat of loosing job. After all, the corporations can move whereever they want.  So we can say, that corporations have grown in power so much, that they can virtually blackmail the entire governments. "You want to rise the minial wage in India? Ok, so we are moving to Bangladesh." - for expample.

Globalization is not only about economy. There are many dimensions of it. From cultural point of view I rekon, that we have all benefited to certain degree. Thanks to the comunication and transport developement it is easier to travel and learn about diffrent civilisations. The social portals like facebook or tweatter allow us to stay in touch with people from all arround the world. The fact that todays world is "smaller" than 100 years ago, which makes our lifes much simpler is, to some extent, a result of globalization too.

As everything, the globalization has its plusses and minisses. Unfortunately, the wealth it brought is not distributed equally. it's the ritcher who gained most of that phenomenon, whereas the poor actually lost. 

Crisis in Poland

In 2009, Poland was one of the very few countries, that has not been affected by the recession. Polish indexes and statistics in the economic area improved; even though, all its neighbours were on decline. Does it mean that the economic turbulence did not reach Poland?

The answer is certainly no. Mainly due to the decrease in foreign investments and increasing difficullties in getting bank credit, the GDP growth in Poland slowed down. Also th fact that confidence level dropped, negatively affected the economy. The EU coutries, Germany in specific, are major partners for Polish enterpices. Therefore, the export fell and the unemployment level (still lower than the average EU's) slightly increased.

Poland owes the relatively comfortable situation in its economy to the major native investments (boosted by  vast EU founding), increasing consumption and stable export. However, if the situation on foreign markets will keep deteriorating, there will be no way for Poland to avoid negative effects.

Political decisions also allowed Poland to resist the crisis. During its strongest wave, Polish government seemed to act rather reasonably. The public spendings were slightly cut, when others seeked sollution in stimulation policy.

Greed is good, but to an extent...

We do not have to look very deeply to see, that the global crisis had affected particular states unequally. US and UK were hit the most, whereas others like China or Brasil did not suffer so badly. That situation stems from the fact, that governments of those countries had different approach towards the finantial policy. Americans led a deregulation policy. Basing on solid GDP growth figures and constant boom they came to the conclusion that the less they will control the financial companies, the more profit they will make. The wild capitalism therefore was increasingly getting "hi". People started to think that it will last forever. Unfortunately someone underestimated the power of human's greed. In order to make more profit, wall street pals started to lend money to people that could not give them back. The subprime mortgages issue was virtually gambling with peoples savings. We all know what happened then, in 2007... Even someone without degree in economy, who analisies the whole crisis issue, can easily say that it was just a matter of time for the system to collapse. The question is why the wall street experts acted so recklessly? Because they could. They could legally gamble with someone else's money for their own profit. In the mean time, China or Brasil had a tighter control over the system in order it wouldn't drive out of control. As a reward, they suffered less. Maybe, or most likely if Americans did the same, the crisis would not happen.  Governments should belive in free market, but should always remember that the free market is created by people and people cannot be free of the supervision. That is an essential assumption that each gocenrment should make to form any of its economical policy

Thank you Lehman Brothers

What caused the credit crunch?

Due to the boom on housing market american mordgage lenders were giving money to people that did not actually have enough to give them back (ninja credits; no income, no job). The more they sold, the more they earned so obviously the sellers didn't care about nothing else but numebrs of given credits. In order to sell more risky mordgages, companies borrowed money from banks. Than other finantial companies bought those debts. The subprime (unsure) mordgages have usually a high risk rating, but vast companies that owned those mordgages paid the rating companies (S&P, Fitch and Moody's) billions of dollars in orderd to get the AAA rating (highest one). It is worth mentionig that it was legal. The financial system then didn't recognise the risk. A grat deal of the mortgages had an introductionary period, when the interest rates are much lower. After some time (1-2 years) the i.r. get higher so the mortgage got more expensive for those who paid them. In 2007 US government rised he interest rates, because of the inflation. It made the mortgages even more expensive so many howsowners, whose introductionary periods ended, were virtually affected by the double increase of their installments price. A lot of people could not afford to pay back any more which ment that banks simply stopped receiving money. That caused a chain reaction, many financial institutions stopped receiving founds from their lenders and eventually went bankrupt. Major banks, like Lehman Brothers, lost their customers savings. Some insurance institutions, like AIG, which imperfed the subprime mortgages fell too. The wave of collapsion spread all over the world and that is how the crisis was created.

Trade offs

Economy is a very complex domain. Each action and alteration might have a major impact on various areas of the economy. Sometimes, while trying to solve one issue, government might cause series of other problems. This situation, that involves loosing one quality or aspect of something in return for gaining another quality or aspect is called a trade off.

Here are some examples of this phenomenon:

Economic growth and inflation:

When the economy developes quickly, companies will most likely have to hire more well - qualified stuff. That leads to deficit on the employment market, which eventually results in payment inflation and price increase.

The inflation is linked with unemployment (diagram below) so a rapid economic growth migh actually reduce the number of jobs.

Diagram of Phillips Curve

Economic growth and the balance of payments:

When the economy grows, people usually earn more so the spend more. They tend to take more loans.

So the higher the cenomic growth is, the bigger the peoples account deficit.

Economic growth and the budget deficit:

So when the government tries to lower the budget deficit, it might higher the taxes and reduce spendings. But when they save to much the AD will decrease, which will lead to decrease in economic growth. Government cuts might may also cause an employment reduction. Therefore, the state will have to spend more on the wealthfare so as a result, the attempts ofreducing the budget deficit may actually increase it.

Economic growth and the enviroment:

The bigger the economy is, the more harm to the enviroment it causes. Polluted enviroment affects the quality of living. So as we see, in some aspect the economic wealth lowers our actuall standard of living.

What is economy all about...

Although seemingly, this video has nothing to do with the economy, it actually explains the essecnce of this scientific discipline. At first bushman had nothing, apart from the natural goods (trees, roots, animals and water). However, when a single  coca cola bottle appeared suddenly problems occured. Those problems come from the fact, that there is not enough goods for everyone - a lack of supply. Here is when the most basic concept of the economy appears "the scarcity". It means: unlimited wants and needs but limited recourcess. Everyone needs a bottle, but there is only one. That is exactly the problem that the economy examins.

The phenomenon of globalisation

Globalisation has become a very fashionable word. We hear it on the news, we read about it in the newspapers. But what exactly is the globalisation? Can we define it in a singular, coherent way? And finally, which spheere of life does it actually concern?

In terms of economy the globalisation,  understood as a highly developed trade network, is an udeniable fact. We should only look at the labels of our clother, bags or furniture. They are most likely being produced all over the world and they are mostly available in our local stores.

Lets try to check whether the globalisation also regards our societies. The answer is obviously yes. Just go through the street and look arround you. Do you see people of only your race, speaking only your language?  Nowadays societies are multicultural and multiracial. Due to the transport developement we can, easier than ever, change our place of living and moove to virtually each country on Earth.

How about politics, is the globalisation also a political phenomenon? Whatever country you come from (maybe except the North Korea), you can be sure that it beloneges to some treaty or organisation. Today the political cooperation between states in, areas like economy or culture, is a common and effective way of developement.

In terms of technology, I would say that it is developement of such sectrors like telecommunication, transport or IT, that actually run this whole globalisation. Lets concider once more the society topic. Due to the well developed transport people can moove arround the world easily. We are more or less familiar with different cultures, cause we can see and learn about them in media. Developemnt of modern technologies helped in creation of the multi-national corporations, that produce and sell their prodcts on every 5 continents.

I rekon that the modern technology developement it's the key factor on which the global world relies on. Devices like the internet, mobile phones or sattelite TV allowed this phenomenon to exist. The globalised economy, society and politics are mechanisms, which have beed engeenered with the tools, that todays science created.

Globalisation

Globalisation is a phenomenon we experience each day in almost each area of our lives. We meet people from all around the world, we recive information from each part of the globe and finally, we buy goods which come from different countries. Today, advances in technology and computer networks, as well as a transport developement, have led to a worldwide globalization of the economy. Does the high level of global economic and other movements and relations mean that individual countries have been replaced as the key economic actor by the global economy?

There are examples that confirm this theseis. For instance, worlds largest international companies. The majority of them belonge to private investors, not states, which means that goverments influence on their policies is relatively small.  It is then the heads and managers of vast corporations, and not the countries that have the real power of making decisions that concern certain sectors of economy . That leads to situations, when companies can literally blackmail the goverments in order to get some profits. For instance, in USA in 2008, banks and car companies said that if the goverment won't help them financially they will fire their employees and therefore, conciderably increase the unemploymet level. Obamas cabinett decided to pump billions of dollars from budgett to private banking sector and car manufacturers to save them. I am not arguing that it was right or wrong, but the fact is that American peoples money ended corporation accounts.

Global economy also defines the relations between countries, not other way round. Lets give example of USA and China. Americans buy most from China so they are their key customer, and China supplies USA with a lot of cheap goods, so America can develop faster. Theese two are addicted to each other. They can't efford any hostile moovement's towards each other in terms of politics, cause the stock exchanges would react instantly and make them loose a lot. It is another example that its the global economy that runs countries and not countries that run economy.

States combine and merge their economies in order to develope faster. The European Union is an graphic example of the globalisation phenomenon. Although EU consist of 27 states, in many cases it's being concidered as one superstate. Countries are being more dependent on each other by the expand of trade and miggration so they prefere to run common politics. In order to strenghten its possition, European states try to run the fiscal, monetary and international policy together. The proceeding unification of Euroland clearly shows that the meaning of particular states gets less important.

In terms of society, the graduall globalisation proceeds. Due to transport and information technology developement people easily moove from one country to another in order to get a job or learn. Borders disappear and societies are getting multicultural, multiracial. Some local economies base on cheap emmigrant labour. So again, from economical reasons societies change and become global and both states and people benefit from that fact.

There are however some areas, where its the countries that have the key influence on economy. The natural recourcess sector is mainly controlled by states. Worlds biggest earth gas company - the Russian Gasprom in fully depemndent on the authorities and its frecquently being used as an international politics device. There is a similar sitation regarding oil. OPEC countries petrol industry is mainly nationalized.

To sum up, the countries possition in the economy arena gets weaker, whlie the globalisation expands. Liberal economy simply doesn't like the borders. Obviously there are more and less powerful states, but none of them is fully independent on the rest. The complicated network of trade links all over the world created a situation where every change has a bigger or smaller impact on each economy, and it seems that whether we like it or not there is no way out of it.

Holiday 4 over 50's

A travel agency which offers holidays in Poland for upper age people. The service seems to be easy and understandable for older people, who are usually not familiar with modern technology. The only problem is that the place of holidays is not well enough described. People don't know much about Poland and its cities. Although Gdansk (city where everything is being organised) is a nice place at the Baltic sea, it will be most likely unknown to most of foreign tourists. The company should focus more on pointing the advantages and values of spending a free time in that particular place, rather than just mentioning its name. The next drawback is the lack of acomodation info. The facilities are mentioned, but no hotel links are given. People should be able to see whether the living conditions are suitable for them or not.