Employment – The Africa Effect

September 1, 2014 Leave a comment

Employment AfricaA common feature in the labour market of many Africa countries is the high rate of low-productivity and under-employment in their economies. Furthermore firms in southern Africa take on 24% fewer employees than is the norm in other countries. So what are the constraints in these countries that put a stop to firms hiring more workers?

One of the main reasons is the informal economy that exists in many of these countries. It is estimated that nine out of ten workers have cash jobs, mainly in the primary sector, and therefore are not part of the employment figures. Their choice makes it harder for Africa to reduce poverty because increases in revenue in this sector do not mean that wages will also become greater. The size of firms will also impact on employment numbers as small firms will want to maintain that status. A firm below 50 workers is classified as small and therefore will not have the burden of government regulations that a large firm (over 100 workers) will have to contend with. In Nigeria and Liberia firms with more than 100 employees have to spend 14% longer in its communication with government officials than their smaller counterparts. Additionally where a company has fewer employees government officials are less likely to allocate time in search of tax fraud and bribes than would be the case with large firms – the latter being more inclined to pay up.

Labour in Africa should be cheap as income levels are very low – World Bank Classification low income country is less than US$766 per person. However unit labour costs on average are higher in Africa than in China as the productivity of the workforce is much lower. In comparison to other countries of less developed status outside Africa, the wages are 80% higher which makes employers less inclined to hire more workers.

The issue of trust between employer and employee is another reason for the low employment numbers. As firms start to grow bigger they switch away from family-only employees to those in the labour force and this lack of trust can play a role in limiting the size of the firm.

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The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.

econoMAX

Categories: Labour Market, Unemployment Tags:

China’s new exchange rate policy

August 31, 2014 Leave a comment

The US Treasury officials are not happy about the recent depreciation of the Chinese renminbi after a period of appreciation from 2010. Chinese authorities want to avoid the influx of ‘hot money’ into the economy and therefore the central bank has been keen to trick speculators who are getting used to a steady appreciation. This can put doubt in the minds of foreign exchange dealers who can take the hint and sell renminbi which in turn depreciates the currency further. Nevertheless the depreciation of the renminbi is greater than you think once you consider inflation.

How do they set the renminbi exchange rate?

Each day at 9.15am Bejing time the Peoples Bank of China – the Central Bank – in conjunction with the State Administration for Foreign Exchange (SAFE) issues a circular to all the banks in China stating the reference rate for the US dollar against the renminbi. However authorities are now experimenting with allowing the renminbi to move within a daily limit either side of a benchmark set by the central bank.

How does inflation affect the value of the currency?
What has little exposure in the media is the impact of relative rates of inflation in different countries when working out if a currency has depreciated and appreciated. The depreciation of the renminbi is actually greater than what you think. Figures that are widely used to show the level of depreciation are stated in nominal terms and does not account for the difference levels of inflation in both countries – in this instance the US and China. When you consider the real value you find that between December 2013 to April 2014 the renminbi actually fell 3.2% rather than 2.8% – see table below. However if you consider the period June 2010 through to November 2013 the renminbi actually appreciated 18.5% in real terms as against 12% in nominal terms. Inflation makes a difference because if there is higher inflation in the US than in China in takes more renminbi to buy the same number of goods so the renminbi is worth less. The opposite applies if the inflation rate is higher in China.

China US Inflation

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The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.

econoMAX

Categories: Exchange Rates, Inflation Tags: ,

How manufacturing the iPhone Impacts on the World

August 24, 2014 Leave a comment

Here is a great infographic about the iPhone that I got from colleague David Parr. It shows the impact the iPhone has had on the global supply chain, jobs and the world in general. Some statistics from it are as follows:

1. To assemble 1 iPhone = 600 workers
2. 500,000 iPhones produced in 1 day (at peak)
3. 307,250 jobs have been created by Apple
4. 44% are sold in North, Central and South America. 9% are sold in Japan alone.
5. There are 330 manufacturing locations in China.

iPhone Manu

Oligopoly and the kinked demand curve – download

August 22, 2014 Leave a comment

I alluded to in a previous post that one model of oligopoly revolves around how a firm perceives its demand curve. The model relates to an oligopoly in which firms try to anticipate the reactions of rivals to their actions. As the firm cannot readily observe its demand curve with any degree of certainty, it has got to estimate how consumers will react to price changes.

In the graph below the price is set at P1 and it is selling Q1. The firm has to decide whether to alter the price. It knows that the degree of its price change will depend upon whether or not the other firms in the market will follow its lead. The graph shows the the two extremes for the demand curve which the firm perceives that it faces. Suppose that an oligopolist, for whatever reason, produces at output Q1 and price P1, determined by point X on the graph. The firm perceives that demand will be relatively elastic in response to an increase in price, because they expects its rivals to react to the price rise by keeping their prices stable, thereby gaining customers at the firm’s expense. Conversely, the oligopolist expects rivals to react to a decrease in price by cutting their prices by an equivalent amount; the firm therefore expects demand to be relatively inelastic in response to a price fall, since it cannot hope to lure many customers away from their rivals. In other words, the oligopolist’s initial position is at the junction of the two demand curves of different relative elasticity, each reflecting a different assumption about how the rivals are expected to react to a change in price. If the firm’s expectations are correct, sales revenue will be lost whether the price is raised or cut. The best policy may be to leave the price unchanged.

With this price rigidity a discontinuity exists along a vertical line above output Q1 between the two marginal revenue curves associated with the relatively elastic and inelastic demand curves. Costs can rise or fall within a certain range without causing a profit-maximising oligopolist to change either the price or output. At output Q1 and price P1 MC=MR as long as the MC curve is between an upper limit of MC2 and a lower limit of MC1.

Criticisms of the kinked demand curve theory.
Although it is a plausible explanation of price rigidity it doesn’t explain how and why an oligopolist chooses to be a point X in the first place. Research casts doubt on whether oligopolists respond to price changes in the manner assumed. Oligopolistic markets often display evidence of price leadership, which provides an alternative explanation of orderly price behaviour. Firms come the conclusion that price-cutting is self-defeating and decide that it may be advantageous to follow the firm which takes the first steps in raising the price. If all firms follow, the price rise will be sustained to the benefit of all firms.

If you want to gradually build the kinked demand curve model download the powerpoint by clicking below.
Oligopoly

A2 Micro – Price Discrimination

August 19, 2014 Leave a comment

Below is a video from the Economics Online website that focuses on Price Discrimination. Useful for A2 micro. Here are some notes from the website:

First-degree price discrimination, alternatively known as perfect price discrimination, occurs when a firm charges a different price for every unit consumed. The firm is able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surplus for itself. In practice, first-degree discrimination is rare.

Second-degree price discrimination means charging a different price for different quantities, such as quantity discounts for bulk purchases.
Third degree

Third-degree price discrimination means charging a different price to different consumer groups. For example, rail and tube travellers can be subdivided into commuter and casual travellers, and cinema goers can be subdivide into adults and children. Splitting the market into peak and off peak use is very common and occurs with gas, electricity, and telephone supply, as well as gym membership and parking charges. Third-degree discrimination is the commonest type.
Necessary conditions for successful discrimination

Price discrimination can only occur if certain conditions are met.

1. The firm must be able to identify different market segments, such as domestic users and industrial users.

2. Different segments must have different price elasticities (PEDs).

3. Markets must be kept separate, either by time, physical distance and nature of use, such as Microsoft Office ‘Schools’ edition which is only available to educational institutions, at a lower price.

4. There must be no seepage between the two markets, which means that a consumer cannot purchase at the low price in the elastic sub-market, and then re-sell to other consumers in the inelastic sub-market, at a higher price.

5. The firm must have some degree of monopoly power.

Categories: Uncategorized

Aussie still relying on consumer sector

August 17, 2014 Leave a comment

The graph from National Australia Bank below shows the components of Australian GDP March Quarter 2014. This is particularly useful when doing GDP Expenditure approach in Unit 5 of the A2 Cambridge course where you can breakdown the equation C+I+G+(X-M).

C = Private Consumption
I = Business Investment
G = Government Demand
(X-M) = Net Exports

Consumption is still the largest contributor to Australia’s GDP. Over the next couple of years GDP  is expected to grow around 3% but key to meeting that target is a solid consumer sector. Household consumption growth in recent quarters has been solid, contributing 0.3 percentage points to growth in Q1 – only exports have contributed more to growth over the past year. However sustaining solid consumption growth in years ahead requires the labour market to improve and consumer confidence levels to recover from their recent lows.

Aus GDP Components

Categories: Growth Tags: ,

Petrol Tax in New Zealand

August 17, 2014 Leave a comment

The New Zealand Parliamentary Library “Monthly Economic Review” published a feature on taxes and levies on petrol.

Taxes and levies on a litre of petrol in New Zealand account for approximately 43 percent of the overall price.

July 2014 – Retail price = 223.9 cents per litre

A forecast $1,702 million is expected to be raised through the excise duty on petroleum in the year ended June 2015. This includes:

- $936 million in petroleum excise duty on domestic production
– $766 million on petroleum imports.

The following diagram shows the taxes and levies on a litre of petrol (including GST).

Petrol Tax NZ

Categories: Transport Tags: ,
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