Many thanks to colleague David Parr for this animation on how the stock exchange works from the visual.ly site. Well worth a look.
From National Public Radio (NPR) in the US. Part of their website has a section called “Planet Money – The Economy Explained”. In the clip below they talk about the whole process of making a T shirt.
The Planet Money men’s T-shirt was made in Bangladesh, by workers who make about $3 a day, with overtime. The Planet Money women’s T-shirt was made in Colombia, by workers who make roughly $13 a day, without overtime. The wages in both places are remarkably low by U.S. standards. But the gap between them is huge. Workers in Colombia make more than four times what their counterparts make in Bangladesh. In our reporting, we saw that the workers in Colombia have a much higher standard of living than the workers in Bangladesh.
You can view the Interactive documentary by clicking the link below:
Deep Sea and Foreign Going is an account of a 5 week trip from Felixstowe in the UK to Singpaore. Rose George explains how on a train journey that most items of clothing, electronics, food etc are brought to the UK by ship. The reason being that shipping has become so cheap that it makes sense to import items. She uses the example of cod – it is less costly for Scottish cod to be sent to China to be filleted and then exported back to UK restaurants than it is to pay the (small) salaries of Scottish filleters. Some interesting facts from the review of the book in the Guardian Weekly:
* Containers are the largest man-made moving objects on the planet;
* Triple-E class boats are around 400 metres in length and can carry 18,000 boxes;
* In 2011, 360 commercial ports in America took in international goods worth $1.73tn – 80 times the total value of all US trade in 1960;
* Even in the UK, whose sense of itself as a seafaring nation has long waned, the shipping industry employs nearly 635,000 people;
* Port authorities inspect less than 10% of boxes, making them of great interest to counterfeiters and drug barons.
Very good video from Ray Dalio in which he believes that the three main forces that drive most economic activity are:
1) trend line productivity growth,
2) the long-term debt cycle and
3) the short-term debt cycle.
What follows is an explanation of all three of these forces and how, by overlaying the archetypical short-term debt cycle on top of the archetypical long-term debt cycle and overlaying them both on top of the productivity trend line, one can derive a good template for tracking most economic/market movements. While these three forces apply to all countries’ economies, in this study we will look at the U.S. economy over the last 100 years or so as an example to convey the Template.
What is the Trade Weighted Index (TWI)
• An index that measures the value of $NZ in relationship to a group (or “basket”) of other currencies. The currencies included are from NZ’s major export markets i.e. Australia, USA, Japan, Euro area, UK. – $A, $US, ¥, €, £.
• Each of the currencies included in the TWI is “weighted” according to how important exports to that country are ( = % of total exports)
• From the TWI we can see if the $NZ has appreciated or depreciated against our major trading partners currencies overall.
Another video by Paul Solman in which he discusses how the NYSE record high doesn’t reflect the fundamentals of the US economy. With interest rates at virtually 0% the US Federal Reserve is trying to lower unemployment by stimulating the economy. But, by doing so there has been a tendency for it to overstimulating the stock market in the process. And also lending to stock investors, whose margin debt to buy shares on credit has been hitting record highs. Last week the Dow ended above 16000, another record for the headline index of 30 major companies.
The last record was set in 2007, a few months before the Dow’s previous high watermark.But for all the talk of the Fed’s role there’s an alternative way to understand a record Dow and higher profits: a shift of power from workers to owners. The stock market would actually be much higher if the unemployment was much lower. I think the economy is still really fundamentally weak, and that slack that’s in the economy right now, with all the unemployed people, all the unemployed businesses, would actually bring up the stock market even further.
THE Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries.
Here is something that I put together using the the Big Mac index (July 2013) from The Economist website. Students have to complete the table below:
1. In which country was their actual exchange rate on July 2013 closest to their Big Mac exchange rate?
2. Which country’s currency is suggested by your calculations above as being
a) the most undervalued against the dollar, and
b) the most overvalued against the dollar?
3. What factors could have an influence on exchange rate values on a given date as shown in the table above.
4. In which country was their actual exchange rate on July 2013 closest to their Big Mac exchange rate?
In October Spanish authorities reported a 0.1% decrease in the general level of prices which has suggested a repeat of a Japanese style stagnation. With the ECB cutting rates to 0.25% earlier this month to avoid such an issue it could be too little too late. Also with rates as low as they are they are starting to run out of ammunition to stimulate the economy. With little support in the eurozone area for quantitative easing or fiscal stimulus one wonders how they avoid the slide in prices.
The US Fed has used three rounds of quantitative easing to avoid a deflationary environment and Fed Chairman Ben Bernanke alluded to this in 2002 when he said:
“Deflation is in almost all cases a side effect of a collapse of aggregate demand – a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending – namely, recession, rising unemployment, and financial stress,”
Speaking before the Global Financial Crisis Bernanke debated the idea of QE as a potential solution after the lowering of interest rates. But the biggest worry for low inflation countires in the eurozone is deflationary expectations as cosumers delay purchases which ultimate reduces demand.
From The Economist – Trading in foreign-exchange markets averaged $5.3 trillion a day in April 2013, reports the BIS in its latest “Triennial Central Bank Survey”. This was up from $4 trillion in 2010 and $3.3 trillion in 2007. The US dollar was the dominant currency: 87% of deals contained the dollar on one side. The euro, the second-most-traded currency, was involved in 33% of deals, down from 39% in April 2010. The third-most-traded currency, featuring in 23% of all trades, was the Japanese yen; its market share has risen by four percentage points since the previous survey. Several emerging-market currencies rose sharply in global importance. The Mexican peso and Chinese renminbi made it into the top ten for the first time.
The NZ$ is the 10th most traded currency totalling around US$27 trillion
In early August this year fast-food workers across the US staged a walkout in protest about their levels of pay – they were demanding an increase from $7.25 (Federal Minimum Wage) to $15 an hour. Under the current minimum wage a worker’s income is $15,000 per annum which is below poverty level pay. Although the minimum wage has increased it is still below its peak in 1968 when it was worth approximately $10.70 an hour in today’s dollars. As well as the low pay, workers in the fast food industry get few benefits and also prospects for full-time work are limited. Add to that a weak job market and ultimately bargaining position, the prospects for these workers look bleak. Although this low pay has been prevalent for many years why is it that is has become such a political issue?
Why are older workers in fast-food and retail jobs?
Historically these part-time jobs have been filled by students or parents looking for work to supplement the family income. However with the downturn in the US economy and increasing unemployment, many in the labour force have had no choice but to try and pick-up any available work. This includes major income earners for families and today low-wage workers provide up to 46% of their family’s income. This is in contrast to forty years ago where there was no expectation that fast-food or retail jobs would provide the living wage as they were not the jobs that the main breadwinner in the household was employed in. In the 1980s profitable companies like Ford, General Motors and other manufacturing industries were big employers in the US economy. Workers were well paid and also had the benefit of pension plans and medical cover. However globalisation and the drive for lower costs have seen a number of US firms looking to locate overseas in countries such as Mexico and China.
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.
This is a fun game to help students who hate writing or revising essays/short answers for IGCSE, AS Paper 2 and A2 Paper 4 .
I see this as both a formative tool that can be used in normal teaching as well as a revision exercise in Term 4.
I am sure you will have your own ideas and I would be interested as to how you adapt and modify to meet the nature of your individual teaching style and syllabus.
1. Brainstorming key ideas related to the essay (Team 4)
• Divide class into 2,4 or 6 groups of approx 4 students. You may try to mix abilities or academically stream depending on your cohort.
• Each team to elect an ‘Examiner’. This person will rotate and change with each game.
• Choose an essay (Most Eco essays have two parts A & B). Half the teams will start with essay A, while half start with essay B.
• Prior to the essay game you may wish to revise the topic and / or give students time as a team to do so.
• The teams get 2 mins to try to name as many mark points as they can. The Examiner cannot help the teams but can simply tick and confirm when they get a mark point.
• The Bonus round!
At the end of 2 minutes the Examiner A swaps with Examiner B. Hence all teams have seen both essays. The new team is read the question as well as the mark points already gained by the previous team. Any extra mark points that they brainstorm are bonus points. (You may wish to give these double value!)
• Marks are collated both as a team of 4 students as well as a Super Team of 8 students ie the 2 teams that work together on the same essays A & B.
• Team Points can me collated over a lesson or a term. You may wish to offer a prize to the best team and/ or the best Super Team.
2. Essay Plan (Team 2)
• In pairs, they have 2 mins to plan a logical chain of thought that links the mark points they individually understand.
• Do not encourage them to use point that they do not understand. Remember than aiming for B/C grades do not need full marks.
3. Writing a draft essay (Team 1)
• Students have 1 min in silence to revise the essay.
• Students have 4 min in silence to revise the essay.
• Student pairs then mark each others essays.
Central Banks have often used the term ‘the neutral rate’ which refers to a rate of interest that neither stimulates the economy nor restrains economic growth. This rate is often defined as the rate which is consistent with full employment, trend growth, and stable prices – an economy where neither expansionary nor contractionary measures need to be implemented.
In most economies post GFC the neutral rate of interest fell as they have required lower rates to try and encourage growth. See table below of current rates of Central Banks and approximate neutral rates.
What indicators shoud you look at as to whether neutral interest rates might have changed? Here are 4 that are identified by John McDermott, Assistant Governor of the Reserve Bank of New Zealand:
1. World Conditions
Gowth of the major trading partners of any country can put pressure on aggregate demand which consequently causes inflationary conditions. With this and inflatinary expectations there could be pressure on a central bank to increase interest rates
2. Domestic productivity growth
A continued decrease in productivity growth will lower returns to investment, whcih means that investment is less attractive. If the desire to invest falls and the desire to save remains unchanged, a lower neutral interest rate will be required reconcile savings and investment plans.
3. Population growth
Lower population growth decreases the number of people in the labour force, meaning less investment is needed to provide the necessary capital stock to employ the average labour force. As investment falls, a lower neutral interest rate – the one that equalises the supply of and demand for funds – will be required.
4. Preferences for savings and investment
If people decide to save more and consume less a lower interest rate would be required to boost the pace of activity and inflation and reconcile saving and investment plans.
An implication of a lower neutral interest rate is that households and businesses will face lower interest rates ‘on average’, but this should not be read as a promise of lower interest rates all the time. Interest rates will need to be adjusted in response to the state of the economy. For times when demand in the economy is expanding more rapidly than the economy’s ability to meet that demand interest rates will need to be above neutral. Moreover, there is no reason to suppose how far interest rates move from trough to peak will be any different in the next business cycle than they moved in previous cycles. John McDermott, Assistant Governor of the Reserve Bank of New Zealand
Many thanks to A2 student Emersen Tamura-Paki for this paper on Currency Wars by Fred Bergsten which was delivered in May this year. Although it is a long document it is very readable and contains some interesting points.
* Virtually every major country is looking to keep its currency weak in order to strengthen its eocnomy and save/create jobs.
* Over 20 countries have been intervening in foreign exchange markets to suppress their currency value which has led to the build-up of reserves totaling over US$10 trillion.
* It has been led by China but includes a numer of Asian as well as several oil exporters and European countries. They account for two-thirds of global current account surpluses.
Global surpluses of currency manipulators have increased by $700-900 billion per year – see Figure 1.
* The largest loser is the USA – current account deficits have been $200bn – $500bn per year as a result. Estimate that 1 – 5 million jobs have been lost under the present conditions and likely to continue.
* Japan this year talked down its exchange rate by about 30% against the US$.
* France has called for a weaker euro – which seems the only feasible excape from many more years of stagnation. This favours, in particular, the German economy with its export growth.
However some countries have been justified in their intervention. Some countries currencies have become overvalued and produced external deficits due to widespread manipulation. Brazil and New Zealand are countries which have been justified in their intervention. Our neighbours Australia have also expressed concerns as the appreciation of the AUS$ has been the result of the significant demand for minerals from China. This does leave other exporters struggling to maintain competitiveness especially if their goods/services are elastic in nature.
The systemic problem arrises when there is continued intervention and undervaluation of currencies. Fred Bergsten illustrates the application of these principles in grid where the orange coloured cell constitutes the objectionable behaviour.
According to Bergsten the practice is widespread and the flaw in the entire international financial architecture is its the failure to effectively sanction surplus countries, especially to counter and deter competitive currency policies.
Another article by James Surowiecki in the New Yorker came up with some interesting statistics about the New York economy. The financial industry accounts for approximately 40% of all wages paid in Manhattan and 25% of the city’s GDP – that doesn’t include the legal industry which services the financial hub. Wall Street’s dominance curtails what can be done to reduce inequality but it is noteworthy that the top 1% of earners pay 43% of the NYC’s income tax.
Bill de Blasio, who won the Democratic mayoral primary in September, argued that to reduce inequality you need to increase the New York’s middle class which has fallen dramatically in the past few decades.
Where did the middle class jobs go?
For 30 years between 1969-99, NYC lost 400,000 jobs and ultimately workers. This was due to improved infrastructure and cheaper labour being enticed to the Sun Belt (a region of the United States generally considered to stretch across the South and Southwest) – latterly jobs in the manufacturing industry have gone overseas. Also with city policies designed to focus more on the financial sector and real estate, 51% of the remaining manufacturing jobs were lost in the last decade.
What does constrain the creation of middle income jobs is the cost of living – energy costs, taxes are steep, and rent is three times the national average. 30% of New Yorkers pay more than 50% of their income in housing costs.
Read the full article by clicking link below:
Below is an image from a website that shows how the heights of the buildings reflect the net worth of the people that are in them. There are a lot more images like this on the website below:.
I was directed to this article on the New York Times website by A2 student Annie Huang. In October this year, a truck dumped 8 million coins (see photo) in front of the Swiss Parliament along with 125,000 signatures in support of a minimum monthly wage. The coins represented the citizens of Switzerland, and the petition was enough to trigger a referendum, voting on whether Swiss citizens should receive a monthly minimum income of $2,800, no questions asked. Each Swiss person would recieve this money from the government no matter what age they are, if employed or unemployed.
Although this seems rather radical there are some interesting points made as to why it has been proposed. The proposal is the work of German Enno Schmidt who is a leader of the basic-income movement. Here are some of the reasons:
* Basic income would provide dignity and security to those underemployed and unemployed
* Empower the labour force to work they want to, rather than just getting by
* Basic income through the tax code would be fairer than band aid programmes such as benefits, housing allowances, child benefits etc.
* The one basic income would replace and reduce welfare bureaucracy that is apparent with numerous welfare schemes
* Reduce poverty and increases social mobility
Research has shown that where the basic income has been implemented not only did poverty disappear but secondary school completion rates increases, hospitalisation went down and the community values started to change.
However there are some strong arguments against:
* The cost is too great
* It creates a disincentive to work
* The basic income might be enough to live on but at a very low standard
With the record earnings in the corporate sector but still no increase in the living standards of many, guaranteed incomes have resurfaced. Millions of workers have had no real increase in earnings since the late 1980’s. Below is an extract from the article:
The advocacy group Low Pay Is Not OK posted a phone call, recorded by a 10-year McDonald’s veteran, Nancy Salgado, when she contacted the company’s “McResource” help line. The operator told Salgado that she could qualify for food stamps and home heating assistance, while also suggesting some area food banks — impressively, she knew to recommend these services without even asking about Salgado’s wage ($8.25 an hour), though she was aware Salgado worked full time. The company earned $5.5 billion in net profits last year, and appears to take for granted that many of its employees will be on the dole. New York Times – 12th November 2013
This is a market structure in which there are a large number of firms selling commodities which are very close substitutes. There are weak barriers to entry and firms may enter the industry with ease. Notice on the diagram that the firm initially makes supernormal profit at Q0 – at MC=MR Price = P0 and Cost = AC0. However with weak barriers to entry these profits are competed away and they now produce at Q1 where at MC=MR and the Price and Cost = AC1
Modern capitalism is characterised by a large number of ‘limited’ monopolies. They are sole suppliers of branded goods, but other firms compete with them by selling similar goods with different brand names. This is the market structure described as monopolistic competition. Thus the commodities produced by any one industry are not homogeneous; the goods are differentiated by branding and the use of trade marks. The individual firm has a monopoly position, but it faces keen competition from firms supplying very similar goods. It has, therefore, only a limited degree of monopoly power – how much depends upon the extent to which firms are free to enter the industry. Product differentiation is emphasised (some would say, created) by the practice of competitive advertising which is, perhaps, the most striking feature of monopolistic competition.
Advertising is employed to heighten in the consumer’s mind the differences between Brand X and Brand Y. It is important to realise that we are concerned with the differentiation of goods in the economic sense and not in the technical sense. Two branded products may be almost identical in their technical features or chemical composition, but if advertising and other selling practices have created different images in the consumer’s mind, then these products are different from our point of view because the consumer will be prepared to pay different prices for them.
‘The True Cost’ is a documentary film exploring the impact of the global clothing industry on people and the planet. While the price of clothing has been decreasing for decades, human rights and environmental costs have grown dramatically. It is the goal of this film to make those costs vividly clear as we explore how we got here, the damage being done, and the hope filled prospect of choosing a different future.
We have taken a first step in creating the teaser and building a growing team of experts around the world. We are now raising this money to begin full production on the final film. Funds will go to principal photography and the post-production process.
The film will feature interviews with top industry leaders from the international clothing industry, illuminating this complex dilemma. In addition to these professionals, the audience will get to see the human side of the issue as we take cameras around the world to capture the lives of the people affected by these issues every day. More than just underscoring the problem, this is an effort to highlight real solutions that we can all take part in. The road we are on is not sustainable, but there is an opportunity here; a defining moment in history for us to set a new precedent for the future we will create.
Here are some charts and commentary from the BNZ which are particularly useful for New Zealand Trade and the potential growth of the agricultural sector.
NZ’s most significant exports to China are dairy products (39% of total), forestry (24%), tourism (12%), and meat (10%). With the possible exception of forestry, all of these sectors stand to benefit from ongoing urbanisation in China, the continued rise of the middle class, and rising household income and consumption levels. Not only is Chinese demand expected to strengthen further, but domestic production in many cases will fall well short of consumption. Exports from NZ will have a big opportunity in helping make up the shortfall.
Chinese protein demand soaring
There is a strong and well proven link between rising incomes and changes in diet (see chart below). The gradual westernisation of the Chinese diet has seen per- capita consumption of protein soar over the past decade or so. In contrast, per capita consumption of traditional foods such as rice is in decline.
Urbanisation has further stepped up Chinese demand for protein. Compared with the less diversified diets of rural communities, city dwellers have a varied diet richer in animal proteins and fats, and characterised by higher consumption of meat, poultry, milk and other dairy products.
Data from the Chinese National Bureau of Statistics shows per capita consumption of dairy products (excluding butter) has climbed from 7kg/person in 1992 to 20kg/person in 2012. Meat consumption has risen from 13kg/person to 23kg/person over the same period.
Per capita protein consumption for urban households is roughly three times that of rural households.
Recently John Cassidy in the New Yorker wrote a piece about Alan Greenspan’s new book “The Map and the Territory: Risk, Human Nature, and the Future of Forecasting” in which Greenspan admits to flaws in the neo-classical model that people and financial institutions act in their own self-interest. He has finally come round to admitting that people’s actions are often driven by “Animal Spirits” (originates from Keynes) and rather than behaving like calculators they respond to fear, greed, euphoria, and impatience. He identified 10 traits which he calls “Inbred Propensities”. It seems that during his tenure as Fed Chairman Greeenspan rarely mentioned Keynes although he studied it at Columbia University in the 1950’s. As John Cassidy points out by the time he met Ayan Rand he was of the neo-classical orthodox. The article is worth a look – plenty of good debate.
Remember the difference between the two schools of thought
Historically China’s economic model was based on export-led growth, massive government injections into the economy and access to cheap money. This is not sustainable and although you can keep blowing up bridges and build cities that nobody lives in at some point it becomes unsustainable. Furthermore since the global financial crisis economies have increased protectionist policies to look after their own economy. Therefore the Chinese government need to refocus the growth of the economy on domestic consumption rather than building things – Gross Fixed Capital Formation. So much more C than I in the GDP Expenditure equation. EG:
GDP = C↑+ I↓+ G + (X-M)
The chart below from the BNZ shows that Consumption ( C ) accounts for just 35% of the Chinese economy which is significantly below what is apparent in the developed world. Domestic Consumption in the US economy is over 70% of GDP. It will take many years for China to get near this level of consumption.