Nationalisation v Privatisation – Britain’s railways

August 22, 2017 Leave a comment

public privateIn the Cambridge AS Economics syllabus a new topic was introduced in 2016 which looks at the areas of privatisation and nationalisation in an economy. Below are some notes on the topic and a good video on the renationalisation of British railways.

Rising fares, overcrowded trains and delayed services have led to increasing anger over how Britain’s railways are run. According to a YouGov survey last year, 60% of the British public support renationalising the railways. The main reason cited – that they want the railways to be accountable to taxpayers, rather than shareholders. This begs the question, could we see a renationalisation of Britain’s railways in the future?

Nationalisation is when a government chooses to take an industry into state ownership in order to safeguard the supply of a good or service.

Privatisation is the transfer of ownership of property or businesses from a government to a privately owned entity.

Potential Benefits of Privatisation

  1. Improved Efficiency – private companies have a profit incentive to cut costs and be more efficient.
  2. Lack of Political Interference – Governments are motivated by political pressures rather than sound economic and business sense.
  3. Short Term view – A government many think only in terms of next election
  4. Shareholders – a private firm has pressure from shareholders to perform efficiently
  5. Increased Competition – more firms mean greater competition and efficiency
  6. Government will raise revenue from the sale – only a one off benefit and future dividends are lost.

Potential Benefits of Nationalisation

  1. Natural Monopoly – Many key industries nationalised were natural monopolies. This means the most efficient number of firms is one.
  1. Externalities – Some of the nationalised industries had significant positive externalities. A government can run public transport system could invest in public transport to help improve the economic infrastructure.
  1. Welfare Issues – Some industries play a key role in the welfare of consumers and citizens. Government provision means that needy groups can be looked after and provided with basic necessities.
  1. Industrial Relations – Labour unions often favour nationalisation because they feel they may be better treated by the government – rather than a profit maximising monopoly.
  1. Government Investment – Some industries require long-term investment to improve services over time. This long-term investment may not be profitable in the short-term, so without government intervention they may suffer from lack of long term investment.

Reserve Bank of Australia – Neutral Rate

August 20, 2017 Leave a comment

An article in the Sydney Morning Herald last month looked the Reserve Bank of Australia (RBA) and the neutral interest rate. For almost a year the RBA has kept Australia’s official interest rate at 1.5% and uses this instrument to control the overnight cash rate to try to manage the economic activity of an economy. EG.

Expansionary = Lower interest rates = encourages borrowing and spending
Contractionary = Higher interest rates = slows the economy down with less spending

How do we know that 1.5% is either expansionary or contractionary? Central banks indicate what they believe is the neutral rate of interest – this is a rate which is defined as neither expansionary or contractionary. In Australia the neutral is estimated to have fallen from 5% to 3.5% since the GFC. RBA deputy governor, Dr Guy Debelle, explains that the neutral rate aligns the amount of nation’s saving with the amount of investment, but does so at a level consistent with full employment and stable inflation. In Australia this equates to 5% unemployment and 2-3% inflation.

Aus - Neutral rate

The level of a country’s neutral interest rate will change with changes in the factors that influence saving and investment.

More saving will tend to lower interest rates
More investment will tend to increase interest rates

Debelle indicates that you can group these factors into 3 main categories:

1.The economy’s ‘potential’ growth rate – the fastest it can grow without impacting inflation.
2. The degree of ‘risk’ felt by households and firms. How confident do they feel about investing. Since the GFC people are more inclined to save.
3. International factors – with the free movement of capital worldwide global interest rates will influence domestic interest rates.

“We don’t have the independence to set the neutral rate, which is significantly influenced by global forces. But we do have independence as to where we set our policy rate relative to the neutral rate.” Dr Guy Debelle

QE unwind? Yeah right

August 18, 2017 Leave a comment

Another very informative clip from the FT. Some of the salient points include:

  • Since the global financial crisis the Bank of England, US Fed, Bank of Japan and European Central Bank have bought assets and printed US$12 trillion.
  • Can interest rates return to what has been normal in the past – say 5% instead of close to 0%.
  • US Fed plans to shrink its balance sheet later this year – monthly reduction US$6bn in its assets. But this is a very small amount when you consider that the Fed holds US$4.5 trillion
  • But this is not happening elsewhere. Bank of Japan and European Central Bank are still printing money and buying assets. With Brexit the Bank of England faces huge uncertainties regarding their balance sheets.
  • Interest rates will remain low partly due to: ageing population, low productivity growth and a savings glut. This has reduced the attractiveness of capital spending.

Teaching MC=MR with M&M’s

August 15, 2017 1 comment

Having just completed Perfect and Imperfect Competition with my Year 13 class I used a couple of packets of M&M’s to drum home the concept of marginal analysis MC=MR. It has always been something that students have struggled with but I am hoping this experience of creating graphs with M&M’s might help their understanding and when to use the concept.

Profit is maximised at the rate of output where the positive difference between total revenues and total costs is the greatest. Using marginal analysis, the firm will produce at a rate of output where marginal revenue equals marginal cost. Below are a few of the graphs done using M&M’s.
MM1MM3MM4.jpegMM2

 

Retail stores now target consumer body language.

August 12, 2017 Leave a comment

Keeping on the behavioral economics topic I was interested to read about shoppers emotions being used by retailers to try an increase sales. Companies now pay large sums of money for software that identifies the following:

  • shoppers’ movements
  • facial expression
  • dissatisfaction
  • surprise
  • eye-tracking
  • dilating pupils
  • thermal-imaging

Body language.pngSome research has shown that when a person who is smiling enters a shop they are on average likely to spend 30% more than others who are more neutral position in their emotion. Conventional research states that when people are interviewed or fill in surveys they tend to edit their responses to make them sound like a ‘rational person’. However a lot of purchases are driven by the subconscious emotions. There are various companies out there today that are trying to get in the mind of consumers namely:

We have all heard of retail therapy which involves people going on a spending spree when they tend to be feeling down. The challenge for all the companies out there is to spot when a person is in this state when they enter their shop. The key to it is tracking the unconscious mind in shoppers.

Try this exercise with your class and see how many stages they can get through. If we make persistent errors in things we are very good at like colours how likely is it that we are also subject to persistent, predictable errors in areas of consumer decision-making?

Categories: Behavioural Economics

Deflation – why is it a concern?

August 9, 2017 Leave a comment

Here is a good video from DW on deflation. Deflation is seen as negative for an economy for the following reasons:

1. Money made today will be worth less tomorrow so investment is discouraged
2. Goods cheaper tomorrow reduces consumption and therefore aggregate demand
3. Central banks struggle to set real interest rates which are stimulatory
4. People who borrow money find that what they owe is worth more in real terms
5. Demand runs below the economy’s capacity to supply goods and services leaving an output gap. This can lead to unemployment and wage cuts which worsens the situation

One of the main problems at present is the fact that Central Banks are running out of ammunition – interest rate cuts – as rates are close to 0%. Therefore in order to stimulate demand they now have to use fiscal policy and more government spending would assist especially in areas that are in need – e.g. roads, bridges etc.

 

 

Categories: Deflation

IMF World Evaluation from the FT

August 8, 2017 Leave a comment

Below is a very good video put together by the FT which summarises the recent IMF Report on the World Economy. Includes:

  • Better growth in China and the Euro zone makes up for slow US growth.
  • US infrastructure spending and tax reform still has to be approved by the senate.
  • Europe looking stronger than expected.
  • Emerging economies still face tough conditions.

Categories: Economic Cycle, Growth Tags:
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