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Monday, 30 September 2013

UK and Foreign Capital

Last week it was reported that 53.2% of shares of UK-listed companies are foreign owned. This post sees globalisation rearing its head again, discussing further impacts of globalisation on the UK economy.

More than half of all shares in UK-listed companies are owned by foreigners which shows the UK’s greater integration with the global economy. One reason for this is that people in emerging economies such as China and India are investing more abroad as they become wealthier. Another reason for this is that foreigners tend to look for investment opportunities in other countries, particularly rich countries, as a safe place to put their money, thus their attraction to the UK.

An increase in foreign capital coming to the UK can help us reduce our current account deficit. Investment is a component of aggregate demand, and so increasing investment can increase demand and help reduce the effects of the financial crisis.

(Evaluation point: it could, however, be showing that many UK-listed companies are foreign and conduct little business in the UK)

One negative consequence of foreigners owning shares in UK companies is that board level decisions are more difficult to make because directors are scattered all around the world. This point is key as it links micro with macro, something examiners relish to find in top exam answers.

Thursday, 22 August 2013

China - Case Study II

China's E-Commerce Market

Following on from the Chinese Case Study I post, these notes explain how China is moving in a positive direction to achieve three of its future growth targets (increase innovation, increase the global presence of Chinese companies and increase growth coming from domestic consumption).

By 2020 China’s e-commerce market is forecast to be bigger than the existing markets in America, Britain, Japan, Germany and France combined (from The Economist)


  • Alibaba is a business to business e-commerce company that sells Chinese goods to overseas suppliers.
  • The company understands the spending habits of Chinese consumers
  • Alifinance is microlender to small firms (planning on expanding to normal customers too)
  • Insurance

Increase the global presence of Chinese companies: Alibaba is looking to become public (i.e. be listed on a stock exchange), and looking to expand to other emerging economies.

Domestic consumption: ‘Bamboo Capitalism’ is the term used to describe the efficiency of private firms opposed to Chinese state-owned enterprises. Growth in private sector firms drives domestic consumption.

Bottom line: E-commerce is driving future growth in China.


Sunday, 18 August 2013

China - Case Study I

Key Questions:

·         Is growth increasing incomes on the average Chinese?
·         Is growth lifting people out of poverty?
·         Is minimum wage industrialisation the best way to achieve growth?

QUALITY of growth matters

·         Average income for a Chinese worker is (USD)$8000
·         By 2020, it is estimated that average Chinese wages would have risen to (US) $14,000. This level is considered to be the upper income level that moved countries such as Singapore, South Korea, Greece and Portugal, to ‘rich’ country stats - the level that moved these countries past the boundary

Five year plan

·         China’s growth has been, on average, 9.6% over the past 30 years
·         The five year plan is the government’s 12th five-year plan used to set the future growth agenda for China
·         Renewed in 2011, the priorities for this plan are sustainable growth, industrial upgrading and the promotion of domestic consumption
·         Criticism: there is no implementation plan

·         Half of china’s growth comes from adding capital. Bear in mind that growth quality is now becoming the most important thing to think about rather than growth quantity

Total Factor Productivity (TFP) is measured by innovation, allocative efficiency (re-allocation of factors, e.g. rural to urban, state owned to private) and human capital. TFP is the contribution of all factors of production to growth. When TFP increases, the growth rate increases. This means that one or more of the factors of production has been changed.

Innovation - micro level data shows that ⅔ technology comes from imitation, most developing countries imitate first to gain enough wealth to then invest it into R&D for new product development. Imitation leads to innovation - creating an increase in growth.

Human capital - China’s investment in human capital is geographical unevenly distributed. Rural parts of China are under-invested in. If China invests in human capital all round, it has a better chance competing with other economies. Human capital is beneficial because:
·         Skill levels increase. E.g. they will be more qualified to perform tasks and will do so quicker
·         Creates a flexible economy - workers have a greater capacity to adapt to changes in the economy, i.e. seize new opportunities for wealth creation
·         Increases occupational mobility of labour and geographical mobility of labour as because of the previous point
·         High levels of education can increase a worker’s ability to use foreign technology, their ability to absorb new information and acquire technical skills

Middle Income Trap

China needs to avoid the middle income trap. The middle income trap is the trap that developing countries fall into when trying to make their transition from a developing country to a developed country. They are not low income by definition, i.e. they experience high growth rates and make money, but they are not high income countries because they do not have technological advantages. China’s wages are starting to increase, as shown here, demonstrating that what was once the most popular destination for cheap manufacturing, is now losing to countries such as Bangladesh and Singapore.

Key points:

·         Wages are increasing
·         Poverty is slowing decreasing
·         Innovation is creeping up
·         Chinese firms are expanding globally
·         Without the prospect for cheap labour, firms will be deterred from investing in China
·         Only urban members of the workforce are educated, also potentially deterring firms
·         The Chinese economy is still imitating

These points suggest that China is heading for the middle income trap, a limbo between the rich and poor, unable to progress. There are criticisms of the middle income trap, read the Economist article here to gain other perspectives, which will help you build your argument in your exam. Remember that providing alternative views are brownie points. Read the sources at the bottom as well.

The Future

·         Focus on overcoming the middle income trap
·         Increase own market reliance, e.g. US consumers are increasingly buying domestically produced goods
·         Increase domestic demand by lowering exports. E.g. exports are only a fraction in the US - China needs to get to that
·         Privatise. State owned companies are not as productive. They distort the allocation of lending and bank credit. State owned enterprises account for 30% industrial output and ¼ of urban jobs
·         Increase innovation
·         Increase opening - more Chinese firms should go global.
o        We have seen Chinese investment in African natural resources, which is a start. They are building infrastructure in poor African countries and providing jobs (however a negative is that they are competing with local firms and undercutting them, making it difficult for locals to make a living)
o        China should focus on moving up the value chain by producing things that is most competitive
o        The government should push to create Chinese multinationals
o        At the moment, Europe in particular can benefit from the additional investment that Chinese firms can offer
·         Services are important - increase job creation, create a high skilled labour force and help China rebalance
·         Raise consumption as a share of GDP, not rising it in absolute terms
·         Restructure the economy: more services, quality of growth needs to increase
·         Productivity and innovation: compete to produce the best products in the world. Join the ranks of rich countries, e.g. Samsung (South Korea) competing with Apple (US)
·         Political reforms are required to sustain a prosperous middle class

Thursday, 14 February 2013

The Economics of Valentine's Day

Happy Valentine's Day everyone!

Have you ever wondered about the economics of Valentine's Day? What does it mean?

This video (strangely) puts into context for us:

It explains three economic principles associated with Valentine's Day:
1. Free markets
2. Signalling
3. The seen and unseen

This video puts these key principles into context for us, hopefully you will understand them clearer after watching it.

Wednesday, 9 January 2013

Case Study/ Example of Public Sector and Private Sector Cooperation

The UK Driving Standards Agency recently set out plans to run driving tests from Halfords branches around the UK. 15 Halfords branches are set to become test centres to improve accessibility to those who do not live close to a test centre. The driving tests will still be conducted by DSA examiners, so Halfords is simply playing host.

This provides a good example of private firms contributing to social welfare in a positive way, and has been the first for a long time (e.g. remember G4S?). Both examples can be used to describe the benefits and costs of PPPs or private sector involvement with government.

Top Posts of 2012

Happy new years everyone! Like last year when I posted the top 10 posts of 2011, its time to reveal the most viewed posts of 2012.

10. Once again its Trade Unions, posted on 16 November 2011

9. Word of the Day: Economic Growth posted on 3 August 2011

8. New entry Production Possibility Frontier and Long Run Aggregate Supply posted on 5 August 2011

7. Oligopoly, up from last year posted on 21 April 2012

6. Negative Externalities posted on 16 September 2011

5. Monopoly posted on 23 August 2011

4. Another new entry! Unemployment notes posted on 22 January 2012

3. Non mover Word of the Day: Elasticity posted on 13 August 2011

2. Another non mover Perfect Competition Long Run Equilibrium posted on 11 August 2011

1. A further non mover! The most viewed entry in 2012 was Perfect Competition Short Run Equilibrium posted on 10 August 2011

Seems market structures are popular topics that a lot of you are struggling with, but I'm glad that my posts are being viewed to help you out.

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