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.

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.

Government Policies to Reduce Market Failure

If you've watched the news recently, you guys should know that the government are considering changing the packaging on cigarettes to discourage new smokers. Use this as a case study in your exam to demonstrate government policy to reduce market failure caused by demerit goods (See notes on Negative Externality and Market Failure. These notes specifically apply to negative externalities, but it is relevant because the consumption of demerit goods causes negative externalities, e.g. second hand smoke).

The new plain branding is being considered to deter youths from starting to smoke, but critics say that the branding will make no difference to those who are already in the habit of smoking. What is your view? Good idea? Tell the examiner!

Another Contribution to the Business Cycle

Read an interesting article on the BBC about the cost of bank holidays, according to research from The Centre for Economics and Business Research (CEBR).

Each bank holiday costs the economy £2.3m and that means the economy could gain an extra £19bn if bank holidays were scrapped. This can be a contribution to the business cycle (see here) because bank holidays reduce GDP. If the economy was suffering a downturn, the loss of GDP can cause the economy to worsen from a downturn to a recession. For the UK, especially at a time where we are not experiencing strong growth, forecasters are predicting the worst from the working days that are lost.

15% of the economy, which includes pubs, clubs, restaurants, cafes and visitor attractions, do well on bank holidays and 45% of the economy suffers, which includes offices, factories and building sites, where people do not go to work on the bank holiday. The areas that benefit do not balance out the loss of productivity from the services sector of the economy.

Do read the full article for more information.

Cigarettes on the Black Market

This post is an example of the Law of unintended consequences. One in three cigarettes sold in London in the beginning of this year is illegal, in contrast to the one in five that it was at the end of 2011. The black market for tobacco is responsible a loss of revenue to the Treasury accounting to more than £2billion, going to smugglers and criminal gangs instead. 


Key points to remember from this case study: 


1. Increasing taxes on demerit goods may not provide incentives for people to give up/consume less, instead giving incentives for people to sell illegitimate 'illicit whites'. 


2. They are bought and shipped from China very cheaply and sold cheaply for people to consume (Black Market). Evidence against free trade and China?


3. Taxation is designed to raise money for government expenditure, however £25million is spent by the government to reduce black market activity. 


4. Demand for tobacco (as with any demerit good) is inelastic, meaning that the proportionate rise in price will lead to a less proportionate fall in demand, because consumers are satisfied with illegitimate copies.

Smugglers can make approximately £1.65million from bringing in a container of 10million counterfeit cigarettes. Each packet is made for just 20p and they have been found to contain substances such as asbestos (a harmful substance known to cause lung cancer and other illnesses). 

Inflation for January 2012

Inflation fell to 3.6% in January, as forecasters predicted. Read more on the Financial Times. The ease in inflation may give signs that this 'stagflation' that the economy has been experiencing may be shifting away. The coming months will tell how unemployment will change in response (Phillips Curve). Inflation faces downward pressure from the effects of higher unemployment, slow exports markets (due to the Eurozone) and lower energy prices (causing a rise in imports).

A further £50bn Quantitative Easing that the MPC authorised earlier this month shows that there is still deficient demand in the economy and it may continue to stay low. Thus economists are predicting more QE to keep inflation from falling below the government's 2% target.

Bad News for Britain

The UK's budget deficit (amount by which government expenditure is in excess of tax revenues) rose above £1 trillion (£1,000,000,000,000!) for the first time, in December 2011. This spells bad news for us because:

1. It means the government's deficit reduction plan is not working, which could mean deeper cuts for the rest of 2012.

2. The Eurozone crisis

Use this as a case study for what happens if the government uses Keynesian policies to increase economic growth (Labour's government policies....). Unemployment rose the same time as the deficit reaches an all time high, evidence for crowding out?

Government Policies to Reduce Unemployment

For government to use the correct policy to reduce unemployment, they must first recognise the cause of unemployment (see here). Using Keynesian fiscal policy to increase AD may be ineffective if structural unemployment is taking place, for example, since this will simply result in inflation.

Free market view

Government policies should only be aimed at reducing structural, frictional and real wage unemployment. Cyclical and seasonal unemployment can be resolved through the market mechanism. Setting markets free can encourage competition and enterprise culture, creating more jobs. Supply can create its own demand.

Keynesian view

The government should intervene to correct the market failure that causes unemployment. They should try to make markets function better, giving them a greater role that the free market economists believe.

Case Study – Government ‘Work Programme’

·       Aimed at reducing long term unemployment and tackling youth unemployment

·       It is a partnership with private companies

·       More information: http://www.dwp.gov.uk/policy/welfare-reform/the-work-programme/

Unemployment Notes

Full employment is, according to the Beveridge definition, when 3% or less of the work force is unemployed. At current, the unemployment rate is 8.4% of the labour force, indicating that the UK is performing far from full employment and full productive capacity. More detail can be found from notes published on 5th August.

The Natural Rate of Unemployment (NRU) is the rate of unemployment that occurs even when the aggregate labour market is in equilibrium (AD_L = AS_L). Below is a diagram illustrating NRU.

Point X is the equilibrium, AD_L = AS_L, the market going wage rate is W_FE and full employment occurs when E_FE workers are hired. AS_LN shows how many more workers are willing and able to work at different wage rates but cannot due to frictional (geographical immobility) and structural unemployment (lack of skills). The NRU can be calculated by E_FE – E₁.

NRU can also be linked with inflation. NRU is also known as the Non- Accelerating Inflation Rate of Unemployment (NAIRU). This means that it is the only rate of unemployment that does not alter the rate of inflation.

Causes of unemployment

·     Frictional unemployment relates to the time taken to find a new job, the period between switching from one job to another. Frictional unemployment is caused by:

Ø  Occupational immobility of labour: Workers need more time to switch between jobs because they don’t have new skills to offer new employers. Lack of training courses, for example, makes the search period longer. Along with that, the longer the search period, the less employable the worker gets because they are losing their employability skills (work ethics, behaviour…).

Ø  Furthermore, new employment practices such as laws on equality (race, gender, sexual orientation...) can prevent perfectly capable workers from finding a job. This is one case against government intervention in the economy.

Ø  Geographical immobility of labour: The difficulty of moving to another location to find a new job. For example, the North South divide in the UK means house prices are too high in the South where more jobs may be available. Other reasons that cause difficulties are family ties and attitudes towards moving to new and unknown locations.

Ø  Search theory of unemployment: Those who are unemployed will continue to look for the ‘right’ job, comparing their old job with the other jobs available, for example, pay, travelling distance….etc. Because of this, workers may reject job offers, leading to a longer period of unemployment.

·   Structural unemployment means that workers lose their jobs due to changes in the structure of the economy. For example, the UK’s economy moved from an industrial one in the early 1900s to one based on providing financial services now. This led to the loss of jobs in the manufacturing sector (read this article: http://www.guardian.co.uk/business/2011/nov/16/why-britain-doesnt-make-things-manufacturing?newsfeed=true).

·   Seasonal unemployment occurs because of changes in the weather. When the UK’s climate changes, it affects the agricultural and tourism industries, leading to job losses in the winter.

·   Cyclical unemployment is caused by deficient aggregate demand. Also known as Keynesian unemployment or demand deficient unemployment, the diagram below displays a fall in  AD_L after a fall in AD. This causes employment to drop from E_FE to E₂. See a more detailed explanation as posted on 3rd October.

·   Real wage/classical unemployment is caused by wage stickiness. Collective bargaining by trade unions (see here) causes wages to remain high, causing unemployment.

Ø  The diagram shows that point X is the equilibrium point. The real wage rate is W_FE and employment is E_FE. When trade unions cause the real wage rate to rise, wages become W₁. This causes an excess supply of labour because at W₁, E₁ workers are willing and able to work at this wage rate. However, demand for labour is only E₂, more workers are willing to work than firms wish to hire, thus creating unemployment equal to E₁ – E₂. W₁ is known as the disequilibrium wage rate.

Ø  Free market economists believe that labour market competitiveness would drive down wage levels in time, however trade unions cause wage rigidity preventing it from going back to equilibrium.

It is important to note that unemployment is a waste of human capital. The disadvantages of unemployment are shown in the table below.

One positive of unemployment that classical economists believe is that it brings a downward pressure on inflation. But that’s up to you to decide whether you agree and be sure to write your opinion in the exam. See tomorrow’s post on government policies aimed at reducing unemployment.

Evidence of Price War

Following 16th October's post giving you an oligopoly case study, forecasters have predicted that over the Christmas period Tesco lost market share while Asda, Sainsbury's and Morrisons grew market share. This just shows how price wars can adversely affect companies within a market. The 'Big Price Drop' campaign was matched by Asda's '10% cheaper' and others from the competitors. However a counter-argument is that the price led to increased market share for all the major firms regardless that Tesco has lost.

Channel 4: Unemployment Video

This video, http://www.youtube.com/watch?feature=player_embedded&v=dWn6rjEXpSk, provides a good case study about unemployment in the UK and highlights the inequality between the North and South. Sorry if it is slightly outdated, but there are still some very useful points you can pick out.

The World Tonight on Boxing Day!

Merry Christmas to everyone!!! Hope that you all got what you wished for, but also that you've have been busy revising for January exams!

The World Tonight had a special report on the global economy and the free market. Listen here from 7 minutes  30 seconds. Listen out for case studies and recent news to back up your arguments in the exam.

BBC Radio 4 - The World Tonight

'The World Tonight', a BBC Radio 4 programme, yesterday, touched on the UK economy, discussing the following:

• Slowing growth and rising unemployment
• The importance of moving the economy from services to manufacturing
• Case Study: Starbucks: increasing training opportunities, education in management, job creation and career pathing 
• Vicious circle: 
• Manufacturing declines à Training and development of people to go into this sector declines à Manufacturing declines further
• Euro sovereign debt crisis
• The look into the future in 2012

Listen from 0:11:40 to 0:28:00 for the programme on 20/12/11 on this link: BBC R4 The World Tonight

Recent inflation figures!

Once again, the new inflation figures have come out for November and the CPI has fallen 0.2% from the previous month. The RPI also fell from 5.4% to 5.2%.
Reasons for the slight fall in inflation include:

• Supermarket food prices (bread and vegetables) - price war
• Transport costs - fuel prices fell

However, the rate at which prices are rising is still twice that of the rate of increase of wages, making society worse off. Wage rises are not keeping up with inflation, thus in real terms, salaries are falling.

What does the UK's economic growth tell us about the impact of cuts?

This blog was created to help you find resources for your exams, as well as providing specific exam revision notes, so below is the link to an article that talks about government cuts and their impacts on society.

http://www.rsablogs.org.uk/2011/adam-lent/growth-data-impact-cuts/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+rsaprojects+%28RSA+blogs%29

 
Make notes about what you read, and notice that the view of Adam Lent conveys that government cuts have not yet stifled growth.

Autumn Statement

Following the Chancellor's Autumn Statement yesterday, I found this excellent summary available on the BBC for you guys to read. It explains the key points and breaks down what he discussed into sections of the economy. Click here to view it.

There are also many pages on the FT from yesterday's statement. There are videos and interactive graphics so do look at them. The FT would have a more critical analysis of the issue and critique some of the policies and schemes introduced so read them to develop a better evaluation for the exam. Click here for it.

The Andrew Marr Show

This morning the Chancellor, George Osborne and the shadow Chancellor, Ed Balls, were on The Andrew Carr show talking about the economy and the government's fiscal position. The Chancellor outlines the new schemes that are being introduced to help small medium sized businesses and Britain's position in the Eurozone crisis.

Here is the link for BBC iplayer to watch it:

http://www.bbc.co.uk/programmes/b01803z5

Next week Nick Clegg is on the show, so for those of you who are still interested in what he has to say, watch the show next week as well. Alternatively, I will post up the iplayer link next week as well.

BBC programme called 'Your Money and How They Spend It'

There is a really good programme by the BBC's political editor, Nick Robinson. It concerns itself with the fiscal policy of the UK in the past and the future. It describes the government's decisions in the allocation of resources and how the government spends our money. The programme is on the link here and is broadcast every Wednesday at 9pm on BBC2.  The issues discussed include:

• Politics
• UK's budget
• Ageing population
• Winter fuel allowance
• Pensions
• NHS
• Financial crisis 2008
• Tuition fees
• Inequality
• Infrastructure spending

Please watch it, there are case studies that you can use in your exam and some statistics that, if you learn, will make your exam answers different than others. It is also useful to know about previous governments' fiscal policies. The extra knowledge that you will receive will definitely be beneficial.

Trade Unions

A collective association of workers whose aim is to improve the pay and conditions of member workers.

Aim to:

·     Improve real incomes

·     Working conditions

·     Pensions

·     Security

·     Unfair dismissal

·     Counter monopsony power

·     Protect against discrimination

Trade union membership has declined to less than 30% of all those employed in the UK (2007). Reasons for this include:

·     Membership is considered to be a waste since the economy was in a boom creating less of a need to bargain for higher wages

·     Tougher employment laws

·     Little evidence for significant mark-ups in wage levels bought about by trade unions

·     You become less employable if you belong to a trade union

·     Changes to the labour market: decline in jobs in heavy industry to more service sector based, shifts towards shorter employment contracts and more people working part-time/flexible hours

·     Some employers restricted trade unions in their work place

Unions influence pay by:

Ø     Collective bargaining

o      negotiate pay levels above the current levels that exist. This is only effective if the union has control over the total labour supply available in the industry.

Ø     Closed shop agreement – employer and union agree that all workers be part of the union

o      Pre-entry: workers must join the union before starting employment

o      Post-entry: non trade union members get the job but have to join to keep the job. This prevents free-riders benefiting from the mark up bought by the union on wages

o      This was considered to be a labour restrictive practice and is now illegal in the UK

Pre-entry closed shop

The diagram below briefly displays a pre-entry closed shop agreement made by unions.

S1 shows the supply for labour in the market before the closed shop agreement. Supply shifts to the left and becomes more inelastic because the increase in wages has minimal effect on employment if the workers have already been employed by the firm. Employment still, however, falls from L1 to L2 when wages rise from W1 to W2.

Perfectly competitive market

To refresh your memory of the PC market, click on the revision notes of the PC market in the short run and long run.

This diagram shows the effects of a trade union in a perfectly competitive market. The equilibrium wage rate is W1 where the number of workers employed is L1. The effect of the trade union is that wages are pushed up to W2 à the acceptable wage rate for union members. The supply curve becomes W2XS. From W2X, the supply curve is perfectly elastic. Along XS, the curve is upwards sloping because more workers are attracted to higher wage rates. The employer wishes to hire L3 workers but the number of workers willing to work at the wage rate of W2 is L2. Thus there is excess supply of labour, causing classical unemployment between L2- L3. 

This diagram argues that the trade union causes unemployment, however one can counter-argue, as in the Keynesian view. It is unrealistic to assume that demand conditions remain unchanged because higher wages would normally increase demand for output, thus increasing output and increasing demand for workers to produce more output.

This diagram can also be used to explain the effect of the National Minimum Wage, as well as trade union mark-ups.

Look out for more on the effects of trade unions in a monopsonistic market soon! (To prepare yourself, you could read Word of the Day)

Case Study for Supply Side Economy

A new government scheme has been launched today to tackle our sluggish economic growth. 'Business Link' (for more information and research, visit their website) has started a new scheme called 'My New Business' to give advice to potential entrepreneurs. Could this be a potential supply side policy aimed at shifting our LRAS curve rightward?

Read this short article which explains the potential benefits the scheme will bring to our economy. Click here.

To find out more about supply side policies and supply side economics, see my notes posted here!