With the dairy industry accounting for approximately 25% of NZ’s export market, a reduction of dairy prices by 46% from last year will definitely slow growth over the next year. Lower prices will also mean a deterioration in the terms of trade and a bigger current account deficit.
The BNZ have identified 3 factors that have influenced the global dairy market:
1. Ongoing very strong growth in global milk supply – lagged response to previous high prices, favourable weather, and low grain prices. Low grain prices mean that feed for farmers is cheaper and relative to milk prices makes it worthwhile to produce even more milk;
2. Disruption caused by the Russian trade ban on dairy products from the EU, US among others;
3. Question marks around Chinese demand amid reports of high inventory levels.
The graph below suggests that there will be $5.5bn less revenue coming into the economy – 2.3% GDP.
From The Economics of Seinfeld website. Useful look at externalities and cost-benefit analysis.
A Kenny Rogers Roaster restaurant opens across the street from Kramer. He can’t stand the red glare from Kenny’s neon sign, and moves into Jerry’s apartment. But he becomes hooked on Kenny’s chicken, and eventually accepts the red glare in exchange for access to the chicken. When Kenny’s shuts down, the lights go out, and Kramer’s overall welfare falls—the benefits of the chicken outweighed the cost of the glare.
I went through this graph with my A2 class today. Note that the firm’s short-run supply curve starts at P4. Useful for multiple-choice questions.
Here is a videographic from The Economist showing the top three economies throughout history. Does China have the world’s largest economy? Is China’s economy bigger than America’s? Interesting how history repeats itself.
A new BRICS development bank has been established with its headquarters in Shanghai. The focus of the bank will be on infrastructure in developing countries. China has used infrastructure spending as a extensive part of its own development strategy – China’s national trunk highway system of 35,000km of highways was built between 1992 and 2007 at a cost of $120bn. It has spent 8.5% of its GDP investing in infrastructure from 1992-2011 and according to McKinsey the developing country norm is 2-4% of GDP.
Although it is difficult to measure the precise effect of infrastructure spending, it is the long run impact on an economy that is the most important. The Economist identified two benefits from infrastructure spending:
1. It can generate a rise in incomes if reduced transaction costs promote trade.
2. It can raise growth rates if it leads to greater information sharing and thus improved productivity.
Recent research into the high-altitude railway connecting the Chinese province of Qinghai to Tibet provides a natural experiment. The region was one of the poorest in China meaning that prior growth did not prompt investment. The results showed a 33% increase in GDP/person in counties that got the railway = 12 billion Renminbi extra GDP a year, exceeding its 33 billion Renminbi cost in just 3 years. The main positive out of this railway network was the ability of local manufacturers being able to sell to the national market. However there is a downside as local industry find it hard to compete with goods from more advanced areas and this can lead to a contraction of its economy and ultimately a loss of jobs.
Deflation has emerged as a major risk to the global economy with it being particularly evident in Europe and Japan where leaders have found it hard to come up with any solutions to generate economic growth. In Europe inflation was just 0.3% in September well below the 2% target of the European Central Bank. With this low rate any weakness in the Germany economy could tip the Euro economy over the edge into a deflationary downturn. The extent of the concern with deflation was evident by the ECB’s record low interest rates – 0.05% – and a negative rates for deposits. With austerity measures in place in France and Italy one wonders about their ability to bring about any sort of growth and ultimately some mild inflation.
Why is deflation a concern?
1. Holding back on spending: Consumers may opt to postpone demand if they expect prices to fall further in the future
2. Debts increase:
• The real value of debt rises when the general price level is falling and a
higher real debt mountain can be a drag on confidence
• Mortgage payers on fixed mortgage interest rates will see the real cost of servicing their debt increase
3. The real cost of borrowing increases: Real interest rates will rise if nominal rates of interest do not fall in line with prices
4. Lower profit margins: This can lead to higher unemployment as firms seek to reduce their costs.
5. Confidence and saving: Falling asset prices such as price deflation in the housing market hit personal sector wealth and confidence – leading to further declines in AD. Higher savings can lead to the paradox of thrift
I was surprised to read in the NAB Australian Markets Weekly that for the past three years real income per person in Australia has been falling and is now back to levels that were evident in late 2008. The graph shows the level of real income per person with the recessionary periods marked in grey. From the last recession in 1991 up to the Global Financial Crisis in 2008 Australians have experienced a continued rise in the level of their real incomes. Nevertheless how can it be that with GDP growing at about 3% a year real levels of income have been falling?
1. Growth in aggregate real GDP has been boosted a great deal by the sharp growth in the population – Australia’s population grew 1.7% in 2013.
2. While Australia are seeing good growth in the “volumes” of GDP, particularly as some of the new mining capacity has been coming on stream, they are receiving lower prices for this output due to falling commodity prices.