Saturday, August 30, 2008
Malaysian Budget 2009: Macroeconomic Views & Critics
Malaysian Budget 2009
The Prime Minister has embarked another round of ambitious spending which puts the Federal Government’s fiscal deficit to an estimated level of 4.8% this year, up 1.6% compared to 3.2% in last year. Government’s revenue in 2008 is around RM 161.6 billion but this round spending cost us about RM207.9 billion (G > T, therefore budget deficit)
Overall the government expenditure increased by 5.1% this year compared to previous
What is unveiled & how can it help Malaysian economic growth?
(1) Public transport improvement. New LRT line of 42 km will be constructed from Kota Damansara to Cheras. This is expected to be completed by 2014. Meanwhile Kelana Jaya LRT line & KTM Komuter will be upgraded with more trains to cater the increased capacity of passengers. In Sabah & Sarawak, a total amount of RM 6.3 billion will be allocated for construction of federal roads & rural roads. This increase in G will lead to an increase in AD. Through multiplier effect, this initial increase will eventually lead to a multiple increase of AD
In long run, if it is effectively implemented, road congestion will be less severe & this can help firms to reduce transportation costs. From supply side argument, AS curve will shift right & national output will further increase
(2) Schools & universities. Additional 110 primary & 181 secondary schools will be built. More funds will be given for universities to conduct R&D. This increase in G will initially lead to increase in AD & therefore enabling Malaysia to achieve higher economic growth.
In long run, AS curve will shift rightward as we will have more productive & educated workforce
(3) Costs saving for bus operators. Toll discounts & sales tax can help to boost profits of bus operators. Having more profits they will be more inclined to spend onto investment e.g. upgrading & improving existing service, increase efficiency etc. The increase in I will lead to increase in AD
However in long run, AS will shift right as productive capacity of the economy has increased e.g. more capital goods like busses
(4). Social safety net. Eligibility for welfare assistance is raised from RM 400 to RM 720 in Peninsular, RM830 for Sarawak & RM 960 for Sabah. As a result more people will be eligible for this welfare payment. On the other hand, minimum monthly pension of RM 720 are being passed out. Also disabled people who are unable to work will receive RM 150 monthly allowance. These three will help to boost household expenditure. Increase in C will lead to an increase AD & therefore economic growth
(5) Tax rebate. Current tax rebate has been increased from RM 350 to RM 400 for people with taxable income of RM 35,000 & below. With this, it is estimated that 100, 000 workers will be tax exempted. These people will have more disposable income & as such more can be spent into the economy. AD shifts right, enabling us to attain higher economic growth
From supply side, tax rebate should be able to increase employees’ incentive to work harder. Increase in productivity will lead to more output at lower costs as costs are being spread over a larger range of output. AS curve will shift rightward
Critics
1. Most of the fiscal measures sound nice on the paper. Whether all of it will materialise is another issue. Given the heavy red tapes in government administration, some policies had been delayed for ages e.g. LRT systems to Subang-USJ & Kinrara Puchong which was talked about in somewhere in 2005 (implementation lags)
2. Bus operators claim that they will still demand for 100% fare increase. This is upon 2 bases. Not all busses will go through tolls. Most travels within the city. As for sales tax, bus operators will only benefit if they buy new buses. Nothing had been addressed about the operating costs of existing fleet
3. Welfare assistance is insufficient to compensate for the increase in cost of living. For e.g. nothing much can be spent onto with a meager allocation of RM 150 allowance to non-working disabled. Also, effect of tax rebate is likely insignificant in boosting spending as it affects only 100, 000 individuals
4. Electricity bill exemption if it is lesser than RM 20 will not affect majority households even the poorest. With an increase in tariffs, even low consumption of electricity will likely surpass RM 20
5. Nothing was mentioned regarding the reduction of corporation tax although we have one of the highest tax rates in the region. This will likely discourage investment spending
6. More financial assistance for the poor may not even change their consumption pattern. In the period of high inflation, consumer confidence remain low & as income increase, they may likely save rather than spend. This defeats the objective of spurring economic growth. Unless these welfare payments are of significant amount
Tuesday, August 26, 2008
How Effective Is Fiscal Policy In Countering Inflation?
The government can choose to execute either or both of these
How fiscal policy helps to counter inflation?
(1) Fall in G. When government spends lesser on public services such as on infrastructure, transport, education & health, this directly means a fall in G which also translates to leftward movement of AD curve. Therefore there will be lesser inflationary pressure in the economy
(2) Fall in G which affects C. As government spends lesser into the economy, in the way of lesser development projects, there will be lesser job opportunities too & income may fall. As such overall household spending into the economy will decline & this is followed by leftward movement of AD.
(3) Fall in G which affects I. When there are lesser projects, it may adversely affect profitability of firms or contractors engaged to run it. As profits are lower, these firms will be less willing to invest in R&D, capital goods & business expansion resulting in the fall of I. As such it will ease the inflationary pressure in economy
(4) Increase in income tax. Working people will have lower disposable income & this translates to lower level of spending into the economy. Fall in C will cause AD to shift left
(5) Increase in corporation tax. Firms will have lower level of retained profits & this will discourage investment. Fall in I will be followed by leftward movement of AD
Evaluation
(1) The task to manage the inflation so that it falls within the target range of CPI 2% +/- 1% is the premier role of Monetary Policy Committee (MPC). The main aim of fiscal policy is to ensure economic growth & low unemployment in economy. Combating inflation may be viewed as ‘secondary goal’
(2) Monetary policy is more effective than fiscal policy in combating inflation as it does not suffer from implementation lags. BOE is independent from UK government since May 1997 & therefore any decisions can be executed immediately with minimal or no political intervention. Furthermore meetings are held every month. Unlike fiscal policy, policies may take months to years to be instituted. By then economic circumstance may have changed & the policy is futile
(3) Fiscal policy is able to ease inflationary pressure but at the expense of lower economic growth. As such supply side policy is the best since there is no inflationary pressure & yet higher output can be attained
(4) Fiscal policy is more suitable to counter demand-pull inflation. If the inflation is due to rising costs of input, supply side policy would be more favourable
(5) Fiscal policy will not be an effective mean to counter inflation if the tax reduction or cut government spending is not significant. Having said that, it must be exercised with great caution too as strong tightening policy may cause deflation to UK economy which is normally followed by contracting economic growth
(6) If the UK economy is near to full employment, tightening policy would be able to bring price level down significantly without much damage to economic growth
(7) Reduction in government spending such as on health & education will have an adverse effect on price level in the long run. In the short run, the government is able to ease inflationary pressure. But since productive capacity is affected too, AS will shift backward in the long run causing price level to climb back
Saturday, August 23, 2008
Will Japanese Economy Slips Back To Recession?
(1) Large fall in trade surplus. The latest data released shows that trade surplus had shrunk by 91.15 billion yen or a steep fall of 86.6% from last year in the same period. The main reason is falling export & increasing import. Japan main export destination, US had slowed down significantly & this has hampered the lust for its manufactured goods like cars & electronics. This is worsened by the falling dollar against yen which means relatively more expensive to buy from Japan. Meanwhile, import is surging on value due to high crude oil prices which hit a record high of $147 in July, leading more outflow of income from Japan. This can be a threatening situation as exports account for 15% of its GDP
(2) Consumer confidence is at 26-years low. CPI is creeping to 2% (is considered high for Japanese economy) & this is unhealthy as it is not demand-driven but rather cost-push. As a result, consumers have cut their expenditure. Fall in C will lead to a fall in AD & this is unhealthy as C accounts for 50% of its GDP. Furthermore people have been so use to falling prices after years of deflation.
(3) Stock market plunging. Nikkei 225 stock index has continuously slipped from 2007. Major stocks like Matsushita Electrical Industrial, Toyota Motor, Honda Motor, Mizuho Financial Group have been in red-line. Falling share prices translates to fall in wealth. This may worsen private consumption. Again fall in C will lead to fall in AD.
(4) Ageing population. Japan could be on the brink of collapse if nothing is done to tackle the population issue. Japan has the greatest proportion of elderly people in the world with nearly a quarter or 27 million of its population having an age of more than 65. Meanwhile it also has the lowest proportion of children under age of 15. According to research, the current 127 million population may fall to between 82 & 99 million by 2055 & by then the economy will come to a halt
(5) Not much space for expansionary monetary policy. The current interest rate is 0.5% & this gives Bank of Japan limited space to use the interest rate maneuver to revive the economy. Unlike Bank of England or the Fed, interest rates are standing high at time of crisis & this gives them space to adjust interest rates downward comfortably
No (Evaluations),
(1) China taking the lead. The fall in the export markets due to weakening US economy, is somehow being offset with the increase in demand by China. Recently, China has taken over the position of US as the largest export destination for the first time since World War II. The prospering & growing Chinese market by then will always ensure a steady appetite for Japanese goods. However some argued that this surge in demand could be temporary particularly linked to Olympics. It may slip back after that
(2) US dollar has strengthened again. The recently rebounded US dollar could be a good sign for the faltering export market. Stronger dollar means stronger purchasing power for Americans & it may induce them to spend more on Japanese goods. However some criticised that this is short lived. Given that US financial market is still in a mess, it may induce Fed to further cut interest rates. By then dollar will fall back
(3) Self-sufficient. Throughout the world, inflation is mainly caused by rising food & fuel prices. Somehow, the Japanese economy may be able to minimise the impact as it is self-sufficient particularly on the rice & fish which is their staple food. The Japanese rice crop yields are among the highest in the world. Also it has world largest fishing fleets & accounted for nearly 15% of global catch
(4) Strong base of capital goods. Traditionally, Japan has continuously devoted large percentage of its GDP onto fixed capital investment spending even in times of difficulty. Based on supply side argument, this will greatly shift the AS curve to the right in long run, thus increasing the national output & yet at the same easing inflationary pressure
(5) Increasing foreign labor. Due to ageing population & yet shrinking number of birth rates, Japanese officials will be desperate for measures like increasing the number of immigrants. There have been proposals to have immigrants making up of 10% of the population in 50 years time. The first will go for higher number of foreign nurses as carer in old age homes & hospitals. However, critics argue that this could be difficult since Japan has very tough law on immigration. Though some laws have been relaxed, other new laws have been imposed at same time
Thursday, August 21, 2008
Common Agriculture Policy: Schemes & Flaws (Unit 2/5B/ 6)
The initial objectives of CAP were set out in Article 39 of the Treaty of Rome:
(a) To increase productivity, by promoting technical progress & modern farming and ensuring the optimum use of the factors of production especially labour
(b) To ensure a fair standard of living for the agricultural community;
(c) To stabilise markets
(d) To secure availability of supplies
(e) To provide consumers with food at reasonable prices
The most important goal is however to increase farmers’ income (2nd point), based on the following reasons:
(1) The farming sector has always experienced lower incomes, causing relative poverty in national economies. This is very true in nations that have high proportion of its people working on farm like France, Germany, Spain & Italy. One reason to explain this is that agriculture goods have low income elasticity of demand. That is having YED<1, an increase in demand will be less than proportionate of the increase in income
(2) Demand for food is inelastic. With variations in supply conditions (up & down), it means prices for agriculture good will suffer from wild fluctuations. Therefore interventions are needed to stabilise farm incomes
(3) Also since its demand is inelastic, government needs to intervene to prevent problems like current global food shortage which may happen in EU. Also it is aim to ensure that food prices are not that high
(4) Farming is more susceptible to problems caused by bad weather & disease compared to other sectors. Drought & BSE or commonly known as Mad-Cow Disease could easily wipe off farmers’ income
Economic effects of different schemes:
(1) Minimum guaranteed prices. The government will set a higher than equilibrium price. This will result in surplus as consumers tend to buy lesser while farmers have the incentive to produce more. If without further intervention, there will be strong pressure for them to sell below minimum price & therefore prices will fall until market is cleared. To ensure effectiveness of minimum price, government must buy up the surplus & store it or sell it to other countries
(2) Buffer stocks. Often use together with minimum guaranteed price. It seeks to stabilise the market price of agriculture products by buying up supplies when harvests are plentiful & selling stocks of the product into market when supplies are low. By doing so price will increase or decrease to the targeted level (It works the same way, when Bank Negara intervened in the foreign exchange market to buy or sell RM so as to maintain it at RM3.80 = $1 USD)
(3) Import taxes. Imposing tariffs on agricultural goods produced outside EU, causes these cheap goods to become expensive once entering EU. Farmers benefit because the market price inside EU will remain high due to the absence of price competition. There are also many other type of barriers other than tariffs for e.g. EU has been accused of using safety & welfare standards to keep cheap imports out of EU area (Could the recent ban threat on Malaysian seafood imports has connection with this? To protect their fishery industry)
(4) Export subsidies. From (1) & (2), any surplus will be purchased by government to meet possibility of shortfall in future. Sometimes, the amount purchased exceeds storage capacity. To deal with this, the government can either increase storage capacity with additional cost, disposing it or dump it in Third World countries by giving export subsidies to EU farmers. With this, agricultural produce can be sold at much cheaper price & the gap is covered by subsidy. Farmers can still enjoy the high price
Good examples are dumping of sugar that damages Mozambique economy & dumping of dairy produce that hurt the Indian economy though both have comparative advantage in it
(5) Quotas. Quotas on milk production were introduced in 1984. Each member country of EU was given a maximum amount of milk that can be produced. This was then divided between farmers. Quotas were transferable. In other words, a dairy farmer can sell all or part of it to another farmer. The intention of quota is to restrict supply thus raising the equilibrium price.
(6) Set aside schemes. Was introduced in 1992 under Macsharry Reform. Introduced onto cereal farmers. They were paid for setting aside a certain proportion of their land. Those lands have to be rotated every year to avoid setting aside the least productive land. In other words preventing farmers from using only the best land to produce, which may ends up with greater surplus. By reducing the lands in used supply of cereals will fall, thus an increase in its price. Also farmers received payment from EU for each acre set-aside
What supporters of CAP have to say?
(1) EU farmers had created Europe which is broadly self-sufficient in food. In times when a country was at war, food self sufficiency was a strategic objective
(2) EU farmers provide high quality of food with minimum guaranteed levels on animal welfare. By implication some food that is imported to the EU is below acceptable standards & comes from unacceptable farming practices
(3) Farmers help to preserve the rural environment & preserving it for future generations
(4) Supporters argued that it is needed to preserve rural economy. Without CAP, some rural areas would become completely depopulated because there were no jobs or income in the area. When more people left to find jobs in towns & cities, there would be more pressure on the urban environment which would have to expand to accommodate these migrants
(5) Supporters argued that EU is still somehow major importer of food from countries round the world including poorer developing countries. The EU has helped millions of farmers establish a market fro their products
(6) Radical reforms have taken place & will continue for the next 10 years. Any further quickening pace of reform will have serious consequences for the farming sector & rural economy
What critics have to say? (Point 1-6 is to equivalently counter point 1-6 above)
(1) Critics point out that in no other commodity does the EU attempt to be self sufficient. There are no objectives to be self sufficient in production of television sets, microchips, clothes or foreign holidays. In an era of globalisation, self sufficiency in food could be argued to be an outdated goal
(2) Critics argue that the quality of food produced in the EU is on average no better than that produced elsewhere in the world. To be sold in EU, imported goods have to follow certain standards anyway. EU can also impose wide variety of conditions upon meat imported to EU & also has the power to prohibit imports if there are good reasons to do so (like current EU ban on Malaysian seafood)
(3) Critics said that agricultural sector is the major polluter of environment. Animals are the major source of methane gas which contributes greatly to global warming. Farmers are said to use fertilisers & pesticides that pollute the environment. In southern European, farmers overuse the scarce water resource for irrigation which could later turn to environmental problem
(4) Urban areas have been expanding to take in people from rural area for centuries. If towns & cities created large costs for their inhabitants, people would not have migrated to them in first place
(5) EU is accused of damaging farming markets around the world. 2 reasons to explain this. First, through its system of protection for farmers, EU has denied access to farmers outside EU to export themselves out of poverty. Second, dumping of large surplus onto world markets at low prices has hurt small time farmers in a way that they are not being able to compete in terms of pricing
(6) Pace of reform is too slow & timid. There are many areas which include dairy sector, wine, fruit & vegetables where there are no current plans to for reform. Exports subsidies & tariffs on imported food remain too high. Consumers are paying more than they should & this result in allocative inefficiency. Also taxpayers have to pay for the heavy costs of running the CAP
(7) Quotas on milk production is ineffective as it had been set higher than the ‘self-sufficient’ level. As a result, this will still cause overproduction & it defeats the original purpose to cut surplus
(8) CAP has caused farmers to be inefficient in their production owing to the reason that there is a ready market for their produce & that is the government. As such there is little incentive to improve their production method which often resulted in higher costs. Also there is a tendency to overproduce due to the high guaranteed price
Sunday, August 17, 2008
Supply Side Policies In UK Context (Unit 3)
Source: http://www.economicshelp.org/
How to increase AS?
(1). Reducing or dismantling minimum wage. If there is a minimum wage set above the equilibrium wage rate, then unemployment will be created. Minimum wages prevent some workers who would be prepared to work for lower pay from getting jobs. Hence some economists argue, by abolishing minimum wage, AS can be increased
(2). Relaxation of immigration rules. Net migration into UK will affect both AD & AS. It affects AS in the way of greater number of labour & thus output in the economy. It will also affect AD in the way of greater spending into the economy & more tax collection for government
(3). Encouraging FDI. Increase in the number of foreign firms especially from Japan is good to local economy as they often bring along new technology & better management. Other than creating new jobs, both these can help to improve UK’s productive capacity. Furthermore UK has always been lagging behind its major rival like US, France & Germany in terms of capital spending
(4). Improving education system & training. Courses taught in universities must be relevant to industrial needs & new courses must be introduced to teach modern skills. Also more training centres should be established. By doing so, UK will have more well-trained workforce with high productivity. This will shift AS to the right & higher real output can be attained
(5). Privatisation & deregulation. When firms go private, there will be incentive to increase efficiency & cut costs as now there is profit motive. This will result in higher productivity & lower prices. State owned firms which were privatised like British Gas, British Telecom, British Airways, British Steel, British Leyland etc. Privatisation was largely carried out during the era of Margaret Thatcher
(6). Tax reduction. This will affect both AD & AS. Here, when there is a cut in income tax, working individuals will be more inclined to work hard & increase their productivity as their disposable income increased. For firms, lower corporation tax will be a great incentive for them to increase their investment spending onto new production techniques which may lead to increase in productivity & output. As such AS will shift right
(7). Labor union reforms. This is important to curb the power of trade union to call for strikes, bargain for high wages & any action that can disrupt the operation of a company. Measures introduced were like 50% votes needed before a strike, firms can fine their workers if they cause losses to firms etc. As such, weaker labour unions will always encourage more employment & therefore higher output in economy
(8). Reduction in unemployment benefits. By doing so, there will be a great disincentive for unemployed people to stay idle. They will be forced to look for job. Increase in employment will mean more output in the economy
Evaluations,
(1). Most firms in UK have been privatised & as such there is not much space for further privatisation. Meanwhile labour union has been under control. As such UK government should consistently focus on education & training as supply side maneuver
(2). Tax reduction may not be helpful in boosting individuals & firms productivity if the reduction is minimal. Furthermore more new tax been introduced along the way such as landfill tax in 1994, climate change levy etc which had somehow affected the operation of firms. However one can argue that lower tax will benefit government more as there is lesser incentive to evade it
(3). Supply side policies are more effective in countering stagflation & raising the real output in economy. Unlike both monetary & fiscal policy, output can be increased without the concern for higher inflation
(4). Weaker labor union does have its downside. Some firms may take advantage by paying lower-than-market wages & this will lead to greater inequality
(5). However, immigrants can also lead to worsening structural unemployment in UK economy. Not all of them are highly skilled labours & there could also be problem like communication in English. On the demand side, they may not even help to increase overall spending into the economy as most of them will send money back to their families in home country
(6). Reducing or even abolishing minimum wage maybe advantageous to some minority of unemployed people. Rest assured most people in working market with decent wages rely heavily on it. Without it, they will be pushed into greater inequality & purchasing power eroded by inflation
Tuesday, August 12, 2008
Economic Fields You Can Choose To Major
This will be a helpful guide in giving the current A-Level students to gauge what area they would like to major in their future undergraduate studies shall they choose to study Economics
(1) Econometrics. This field applies mathematical & statistical concepts in analysing economic data. For example, a theory may hypothesize that a person with more education will on average earn more income than a person with less education holding everything else equal. Through economoetric modeling, one can estimates the magnitude and statistical significance of the relation
(2) Agriculture economics. Agricultural economics is one the oldest and most established fields of economics. It is the study of the economic forces that affect the agricultural sector and the agricultural sector's impact on the rest of the economy
(3). Development economics. Branch of economics which deals with economic aspects of the development process in low-income countries. Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example, through health and education and workplace conditions, whether through public or private channels
(4). Environmental economics. Environmental economics is concerned with issues related to degradation or preservation of the environment. In particular, public bads from production or consumption, such as air pollution, can lead to market failure. The subject considers how public policy can be used to correct such failures (somewhere related to our Unit 2, but greater detail)
(5). Financial economics. Is concerned with the allocation of financial resources in an uncertain (or risky) environment. Thus, its focus is on the operation of financial markets, the pricing of financial instruments, and the financial structure of companies
(6) Industrial organisation. Studies the strategic behavior of firms, the market structures and their interactions. The common market structures studied include perfect competition, monopolistic competition, various forms of oligopoly, and monopoly (our Unit 4)
(7). Information economics. Branch of microeconomic theory that studies how information affects an economy and economic decisions. An important focus is the concept of information asymmetry, where one party has more or better information than the other. The existence of information asymmetry gives rise to problems such as moral hazard & adverse selection. The economics of information has relevance in many fields, including finance, insurance, contract law, and decision-making under risk and uncertainty
(8). International economics. International trade studies determinants of goods-and-services flows across international boundaries. It also concerns the size and distribution of gains from trade. Policy applications include estimating the effects of changing tariff rates and trade quotas
(9). Labour economics. Seeks to understand the functioning of the market and dynamics for labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demanders of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income
(10). Managerial economics. Managerial economics applies microeconomic analysis to specific decisions in business firms or other management units. A unifying theme is the attempt to optimize business decisions, including unit-cost minimization and profit maximization, given the firm's objectives and constraints imposed by technology and market conditions
(11). Welfare economics. Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine the allocative efficiency within an economy and the income distribution associated with it. It attempts to measure social welfare by examining the economic activities of the individuals that comprise society
(12). Energy economics. Studies the role of energy within economy. Issues include supply & demand of energy, economic growth, environmental conservation & alternative source of energy
(13). Economic systems. This field studies a variety of economic systems, particularly their transition from one system to another e.g. socialist system to market economy
Monday, August 11, 2008
Depression In Japan Explained (Unit 3)
Everything began with the Plaza Agreement which was signed by 5 countries namely West Germany, Japan, France, US & UK. As a result, US dollar was depreciated against the Yen & Deutsche Mark by consistent intervention in the foreign exchange. The purpose was to help US to reduce its current account deficit which hit 3.5% of its GDP by the way of lowering the purchasing power of US dollar.
After the 1985 Plaza Accord, yen appreciation has somehow hit the export sector hard as strengthening yen means more expensive to import from Japan. This caused the economic growth to fall from 4.4% (1985) to just 2.9% (1986). Bank of Japan, responded by conducting expansionary monetary policy & interest rates were slashed from 5% (Jan 1986) to 2.5% (Feb 1987).
This caused the asset prices & stock market to inflate to an unprecedented level, creating the biggest bubble in history. The BOJ responded immediately by raising interest rates 5 times to 6% between 1989 & 1990. After the increases, the market collapsed
Nikkei stock market index fell more than 60% from 40, 000 end of 1989 to just under 15, 000 by 1992 & continued to fall below 12, 000 by 2001. Prices of property also plunged by as much as 80% from 1991 to 1998
Why the recession is so long?
(1). Inefficient allocation of government funding. Japan has the Fiscal Investment & Loan Programme (FILP) which gives financial aid to firms. However during that time, much of this money was not allocated to the most efficient projects, but rather to most of those construction firms which had political connections with governments without proper consideration of the costs & benefits of such projects
Shortages of funds then further pushed interest rates higher, thus contracting investment by those most efficient firms & consumption by households
(2). Improper implementation of monetary policy. Perhaps the Bank of Japan could be blamed for contracting the monetary expansion too quickly which caused the economic slowdown. Interest rates were raised 6 times within a year to 5%
(3). People anticipating much lower price. In the period of recession where prices are falling rapidly (deflation) people & firms tend to postpone their expenditure into the economy in an anticipation that the prices will further fall. This explains why recession in Japan is prolong
(4). Banks reluctant to increase borrowing. Because of the increase in bad loans with poor collateral and the fall in other asset values, increased funds injected from the BOJ or additional deposits from savers have been used to hold as cash reserves against bad loans, instead of being used to extend loans to worthy borrowers. Difficulty to obtain loan also helps to explain why households & firms spending into the economy had greatly decreased thus worsening recession
What Can We Expect In Period Of Recession? (Unit 3)
(1) Greater savings. Savings will increase upon 2 reasons. First, as consumer confidence fall, they are unlikely to spend on big ticket items such as property, cars, expensive imported goods etc. This has something to do with job security. Second, people increase their savings to meet unexpected events
(2). High unemployment. During recession, businesses do not fare well. As such they may not need as many workers as before & this leads to unemployment. It’s also part of cost-cutting measure. To the government, it has to spend more on unemployment benefits such as the Jobseekers Allowance
(3). Lower interest rates. Depending on the severity on the recession, Bank of England may consider to lower the base rate, to boost spending into the economy
(4). London Stock Exchange plunging. Performance of shares is closely connected with the profitability of firms. Fall in the number of projects & capital expenditure often being regard as bad news for investors leading to heavy selling thus the fall in prices of share
(5). Expansionary fiscal policy. The government will pump in more money onto the public sector & at the same time will likely consider a cut in tax rates on working individuals & firms. Shall the government spending exceed the tax revenue, we call it as fiscal deficit. The shortfall will be covered by borrowing from the private
Source: http://news.goldseek.com(7). Weaker currency. Depreciating pound translates into weaker purchasing power. People will consume lesser of imported goods & this may lead to fall in the standard of living. Also weaker currency leads to problem like imported inflation
Saturday, August 9, 2008
Why Students Did Better In Maths Than Econs?
Alright, thanks for asking. Here it goes:
(1) Too much of reading. Econs is generally known as a heavy-reading subject. If you don’t read up, chances are you can’t write anything especially for essays in Unit 5 & 6 (Edexcel specifications). For Maths, remembering even just few formulas can enable you to answer thousands of questions without even requiring you to read up. Besides, few paragraphs of Econs won’t help anyway
(2) Too many jargons. This is also a strong barrier for students. Long-winded text is already a great turn-off & is worsened with the so called ‘economic language’
(3) Have to keep updating yourself. Maths is not as ‘alive’ as Econs. Again, knowing a handful of formulas is sufficient. However Econs is ‘much alive’ & if you do not keep yourself updated, you will be unable to argue on certain issues
(4) Writing skills. Majority if not all are having the problem of expressing their thoughts in words. This has lots to do with command of language than anything else. For Maths, the answers are pretty structured & everyone will produce the same frame of answer. For Econs, different students will express themselves differently. Some just write 3 sentences while some have to struggle up to 8 sentences on a similar point. This is wasting time & students will end up not finishing the paper on time. As such many would end up saying Econs is a tough subject
(5) Late exposure. Students are exposed to Maths even when they were in pre-school unlike Econs only in Year 10 & 11 (Form 4 & 5). Furthermore, some may perceive it as a ‘low class’ subject since it is taught in BM
(6) Less homework & practice. I have to admit that marking Econs assignments is much tougher & it takes longer than marking Maths (which may take weeks & Maths in days). As such the turnover in homework will be definitely higher for Maths than Econs e.g. in a month 2 assignments for Econs & perhaps 5 for Maths. Students are said to be more prepared in Maths than Econs accruing for this reason
Solutions
(1) Soft reading. Students have to be wise in picking up reading materials that they are comfortable with. I would suggest daily news rather than magazines. This is crucially important to help students to understand the subject better, realise how it affects their daily life & ultimately nurture their love for the subject. Interest is the key of learning. Once you’re interested, you’ll automatically take it to greater heights by reading more challenging materials
(2) Brainstorm. To achieve ultimate evaluation skills, students must brainstorm economic issues & that is coming up with as many points & arguments as possible. I personally call this as ‘mental-muscle exercise’. E.g. students can ask themselves questions like ‘What is the impact of inflation?’ ‘What happens in recession?’ Then check those arguments with their lecturer
(3) Reliable textbooks. To me I strongly feel that good Econs textbook is scarce. Most of the books out there are such a turn-off even for a lecturer & personally I rely more on downloaded notes. Try to look for textbooks that really explain economic theories with case studies from beginning to the end. You may need to discuss with your Econs lecturer on this
What Happens When Interest Rates Increase? (Unit 3)
The interest rate decision is made by BOE’s Monetary Policy Committee which is made of 9 members. The MPC will conduct meeting every month & it’s a 2 days affair, where decision upon interest rate will be made in the second consecutive meeting at 12 noon.
The primary role of BOE is to set an interest rate that can enable the inflationary target of 2% to be met
Now in UK, the interest rates are 5% (July 2008) & the inflation rate is 3.8%. Therefore real interest rates are 1.2%
Since the inflation rate is at 10-year high, there is a possibility that the MPC will revise it upward in the coming meeting. So what is the impact?
(1) Consumption (C). An increase in base rate means an increase in the cost of borrowing. As such consumers will be less willing to borrow, say on buying houses, personal loans, credit cards etc. Also consumers with variable mortgages will have to incur higher monthly payment to banks resulting in lesser money left for consumption. Also, higher interest rates indicates that saving money is more interesting & the opportunity costs of using the money will increase. All this contributes to fall in C thus AD
(2) Investment (I). Similarly, firms will be deterred from taking loans to finance new projects or purchase capital goods. For some, it means lesser profits for reinvestment. Both contribute to fall in I thus AD
(3) Net exports (X-M). As interest rates increase, there will be large influx of foreign currency into UK coming from foreign fund managers & wealthy foreigners. This will result in surge in demand for pound. As pound appreciates, it means relatively more expensive to buy from UK thus a fall in exports. Meanwhile, for UK stronger pound translates into stronger purchasing power & this leads to increase in imports. Net effect will be fall in net exports. So AD falls too
Source: economicshelp
The combination of all these 3 will lead to a fall in AD, thus a fall in price level & economic growth {refer diagram above}.
However in reality, economy will still grow, but at a slower pace
Before arriving at any interest decision, MPC will at least consider the following factors:
(1) Level of unemployment in economy
(2) Current account & Balance of Payment as whole
(3) Present economic growth
(4) Earnings growth rate
(5) Personal credit figure
(6) Consumer & business confidence index
(7) Strength of pound
(8) Prices of house
(9) Level of firms’ investment
(10) Level of savings in economy
Wednesday, August 6, 2008
Why Wet Markets Lose Out to Hypermarkets?
(1) Economies of scale. Hypermarkets often purchase goods in huge bulk. As such they are in a better position to negotiate for discounts from their suppliers. This in turn translates to cheaper costs of production which can be passed on to the consumers in the form of lower price. Traders in wet market do not order in bulks, or else it will mean sizable stocks left at stall at end of day
(2) Rise in transportation cost. Increase in oil price hurt small traders more than hypermarkets. For e.g. additional RM 30 a day is insignificant to hypermarts’ total operating costs but to small traders, that amount is a lot for a day. Both (1) & (2) explain why they must increase the price of food e.g. vegetables, poultry, fish etc to remain profitable. But by doing so, they lose large number of the customers. This explains that demand for their goods is elastic & hypermarket is a strong substitute to wet market
(3) Promotion. Hypermarkets have creative ways to attract customers & maintain customers’ loyalty. For instance:
(i) Tesco Clubcard which allows customers collect points on their daily purchases for vouchers in return
(ii) Giant has collaborated with Citibank to give card members who shop at its stores a 2% rebate on purchase
(iii)Jusco has its JCard which offers discounts to card members on certain products weekly
(4) Availability of price tag. Most people feel uneasy by having to bargain & haggle over prices. Some are worried of being shortchanged or cheated by unscrupulous traders. In hypermarkets, all the prices & the weights of the products are clearly stated & there is no need for bargaining or arguing over the price
(5) Ability to mark down prices at end of day. Some stores e.g. Giant & Jusco would mark down the prices for fish, vegetables, fruits or even bakery items normally 1-2 hours before closing down. Wet traders are unlikely to give such offer as it means giving out of their wallets. Most of them will choose to operate longer hours to in an attempt to sell off everything
(6) Choice. Hypermarkets offer wide range of choice ranging from local fresh food produce to imported frozen foodstuff. Besides, customers have option to shop for other goods at other sections if they want to. Everything is available under one roof
(7) Freshness. Hypermarkets have more proper techniques to preserve the freshness of the food. Stocks are brought daily at 6am to the stores where it is transported straight to the cold room to preserve its freshness. Also the cold chain is not broken as fresh produce are always placed at the right temperature
(8) Comfortable. Consumers, especially modern housewives prefer to shop in an air conditioned & clean environment instead of getting their feet dirtied by the stinking wet walkways. Besides, strong stench from poultry & fish sections is a huge turn-off
(9) Parking facilities. Hypermarts like Giant, Carrefour & Tesco provide their customers with free parking space. For those who frequent the wet markets (in some areas), more often than not have to pay parking charges to local councils
If prices of goods are so cheap, how hypermarkets make profit?
Through large quantities. Let me illustrate:
Total Revenue = PQ = RM10 x 50 = RM 500, but if each item is sold at RM5 then (fall in price leads to increase in demand)
Total Revenue = PQ = RM 5 x 100 = RM 500
Are hypermarkets really that good?
(1) YES, but only to customers. Their existence somehow helps to mitigate the impact of rising inflation by offering cheap goods
(2) NO to wet market traders, grocery stores & suppliers. Small businesses such as corner shops or even wet traders may be forced out of business very soon. On the other hand, suppliers e.g. farmers may be consistently pressed to supply at a low price to these super stores given that they are large-time purchasers (monopsony power). These two scenarios are very common in UK. There the market is dominated by Tesco, ASDA, Sainburys & Morrisons
Sunday, August 3, 2008
My Experience: Advantages & Disadvantages of Being An Economist
1. Better informed of the complexity out there. An Economist is able to address questions like
(a) What caused the sub prime mortgage market crisis?
(b) Has US & UK run into a recession?
(c) What triggers hyperinflation in Zimbabwe?
(d) What is the impact of continuous oil subsidy by Malaysian government?
(e) How does console industry like Xbox, PS3 & Nintendo Wii survive in a competitive price-war industry?
(f) Will the tax rebate in US helps to revive its economy?
If you can give a clear answer to more than half of the queries above, rest assured you’re one of the most knowledgeable person on the street.
2. Advantageous in making certain financial decision. Some people may think that they can make more money again by investing in the same trust funds that previously provide them with high return. Feeling curious, I had personally run the data of the funds & come up with several statistical models. All the models report the same finding & that is, it will not do so again this year & I’m right (I could be lucky). Finance & Statistics are also part of Economics
3. Profession. We have Economist everywhere. They can be in colleges & universities, banks, rating agency, securities firms etc. Some of these pay an experienced Economist up to 5 figures. They are an asset to the society given their high ability to influence the standard of living of an average man on the street. For e.g. increasing the interest rate can put a borrower into worse debt, reducing personal income tax if done significantly can help businesses everywhere to grow etc.
4. Social tools. Believe it or not, sometimes to get hook up with influential people you seriously need some economic knowledge. Why? These people can be prominent businessmen or influential politician that talks about economics, interest rates, oil price etc all the time
5. Potentially gain influence. If you are really an experienced & knowledgeable Economist, you can talk your way out & gain respect from people from all walks of life. It can be in a small office, forums to huge international conference or even during political campaign. Some Economists or politician can also manipulate the current economic issues to their own interest
Disadvantages of being an Economist:
1. Running into arguments too soon & too often. Normally Economists have their sophisticated view regarding any issue which may be completely different from how an ordinary person on the street perceive. E.g. many oppose me when I say that oil subsidy is not a good thing, India is the main concern rather than China, property price will fall etc despite I’m able to prove the facts & the figures. Worse case scenario is debating with another Economist. Rest assured it is a long battle
2. Think too much. Sometimes an Economist thinks too much & simple issues are being twist wired despite they are not. This arise as the subject has endless possibilities & Economist will try to look at it from various angles like the pros & the cons. May also bring private costs to the bearer e.g. not having enough sleep as think too much over the night
3. Some may feel you’re boring. This is very true. Some people just want nothing but leisure in their life & they just can’t take it once you cross over to topics like politics, oil price, banks increasing interest rate again etc.
4. Wrong decision. Economist will sometimes make a mistake. This is largely due to too much of assumptions & over simplifying. E.g. I may from time to time tell people that now it is the best time to own a property in UK or even advise some parents to send their child to UK for higher education as our RM has strengthen against pound sterling. However I could have oversimplified the situation as there are just too many hidden costs that we couldn’t possibly think off at the moment e.g. legal issues, opportunity costs of money etc
The Oligopoly Perspective: Nintendo Wii vs. Xbox vs. PS3
“Microsoft is cutting the Japanese price of its Xbox 360 games console by 13% as it struggles to match sales of rivals Nintendo Wii & Sony PlayStation 3”
Statement 2
“Earlier this month, Sony also cut the cost of the PlayStation in the US & introduced a cheaper version. Both the Xbox 360 & PlayStation 3 are now trailing behind sales of the Wii”
Statement 3
“In the first half of 2007, Microsoft sold 122.565 units of Xbox 360 in Japan, compared with 503, 554 PlayStation 3 units & 1.78 million of the Wii”
Source: BBC, 22nd Oct 2007
PS3, Nintendo Wii & Xbox are best represented by the oligopolistic market structure where:
(a) The industry is dominated by few large firms. In UK, definition of an oligopoly is a 5 firms concentration ratio of more than 50%
(b) Strategic behaviour/ interdependence among firms. An oligopolist firm will be affected by how other firms set their price & output
(c) There are barriers to entry but less than monopoly
(d) Products sold are differentiated
Believe it or not, this form of market structure is the most common in reality
From Statement 1 & 2, there is a strong indication that those 3 firms are likely to engage in price competition to enlarge their own market share. Somehow in oligopoly market structure, it is never healthy for firms to do so. This can be explained using either the kinked demand curve or game theory. I’ll show you the first one here (we’ll do the game theory later for another analysis)
Some firms may think that by selling at a higher price they may make more profit per unit sold. However this may not be applicable to an oligopolist. Say, Xbox attempts to increase the price beyond the current level of P1. In this case, its rivals will not follow suit. So, Xbox will lose a large share of the market & suffer losses too as they become uncompetitive compared to other firms. The upper part is elastic, & any price increase will lead to fall in total revenue
However, if Xbox reduce its price from P1, its rivals will follow suit this time. As such, the inelastic demand curve (AR) means fall in price leads to fall in total revenue. This is because, the quantity of its sales will only increase by fraction given that other firms retaliate by doing the same. In the end, they do not enjoy much increase in sales & yet earn lesser than what they could actually earn before price cut
Conclusion
Price war is never a good strategy for these firms as it will just lead to lowering down their profit margin which is already thinning due to high capital reinvestment onto sophisticated technology.
It is best if they can engage in non-price competition such as:
(a) Product innovation e.g. better graphics & bigger processors
(b) Effective advertising with appealing themes e.g. ‘Larger than life’ etc
Also, non-price strategy is more difficult to model compared to pricing strategy
