New Zealand – China trade update

May 29, 2016 Leave a comment

Below are some statistics showing the changes in trade between New Zealand and China.

On 7th April New Zealand became the first OECD country to sign a free trade deal with China. However this is not the only first with regard to the relationship between the two countries. New Zealand was the first to negotiate a WTO accession agreement with China as well as the first to recognize China as a “market economy”. With this in mind, the Chinese government have acknowledged the support of New Zealand by granting them the first bi-lateral agreement with a western nation. The table below shows how the value of trade has increased as well as the ranking of particular goods and services.

Main goods exports to China:

  •   milk powder, butter, and cheese ($2,419 million)
  •   logs, wood, and wood articles ($1,551million)
  •   meat and edible offal ($1,211 million)

Main services exports to China:

  • personal travel ($1,528 million)
  • education travel ($673 million)
  •  transportation services ($161 million)

 

NZ Trade with China 2010 2015

Source: Statistics New Zealand

Categories: Trade Tags: , ,

New Zealand Workforce Participation Rates 1996 – 2016

May 24, 2016 2 comments

The participation rate is defined as the proportion of the working age population who are in the labour force. Individuals who are out of the labour force fall into one of a number of categories. They include those who go to school beyond the compulsory school age, retired people whether or not they are of retirement age, and people who are not willing to work in the marketplace because, for instance, they are raising a family. This suggests that participation rates will be low for the age group 15 – 24 years because of higher education, for those aged 55 – 64 because many of them will take early retirement, and for females because more women stay at home to raise children than men.

NZ Labour Market

However if you look at the data from 1996 – 2016 (see table below) there have been some significant changes which were addressed by Brian Gaynor in the New Zealand Herald last Saturday (21st May 2016).

  • Those aged over 65 years in employment increased dramatically from 23,800 to 139,0900
  • Those aged between 15 to 24 years of age increased only from 324,200 to 347,700.

Brian Gaynor identified three major workplace changes in recent decades:

  1. an ageing society as post-WWII baby boomers reach their sixties;
  2. the transformation of the New Zealand economy from one based on manufacturing and manual labour, to a service and white collar based workforce; and
  3. the huge increase in female workforce participation.

The transformation of the New Zealand economy from one based on manufacturing and manual labour, to a service and white collar based workforce; and the huge increase in female workforce participation.

NZ Participation rates

This economic transformation has benefited older workers and females.

  • 26 per cent of manufacturing workers are women
  • 45 per cent of female workers represent the professional and administrative support services workforce,
  • 82 per cent of healthcare and social assistance workers and
  • 59 per cent of retail employees.

Since 1996 has been the increase in the female participation rate, from:

  • 56.1 per cent to 63.6 per cent,
  • The male participation rate has remained steady at just over 74 per cent.

As with the rest of the world, individuals in New Zealand in the 15 to 24 age group are struggling to find work because of their lack of skills and /or qualifications. Statistics below:

Unemployment % 15 to 24 age group

  • New Zealand – 14.6%
  • Greece – 50%
  • Spain – 45.5%
  • Italy – 36.7%
  • Portugal – 30.7%

UK needs to address declining manufacturing sector

May 22, 2016 Leave a comment

The UK economy is paying the price for the severe imbalance in its economy with the over-emphasis on the financial sector at the expense of the manufacturing. The UK hasn’t recovered from the 2008 Global Financial Crisis with real income per person only increasing 0.2% since its peak in 2007 – this is less than the per person increase in Japan during its lost decades of 1990’s and 2000’s.

What is alarming is that since the GFC the Pound has depreciated by around 30% make UK exports more competitive and imports more expensive. Within most countries a depreciation of this magnitude would give a huge boost to manufacturing sector but in the UK the impact was minimal which is indicative of the state of the sector itself. It is the poor performance of manufacturing that has seen UK’s deficit grow to 5.2% of GDP in 2015.

Global Manufacturing output

Although the UK is the 8th largest producer by output value but if you look at the per head output and % of national output it is much further down the pecking order – see table. Also of note is that the UK’s manufacturing output as a % of national output has dropped from 27% in 1970 to 10% in 2013. Although some have tried to play down the role manufacturing sector there has been a fundamental misunderstanding of the role of manufacturing in economic prosperity.

1. Manufacturing is the main source of productivity growth and economic prosperity – machines and chemical processes raise productivity. Also most  R&D is carried out in this sector so recent increases in the service sector came about by using more advanced units in the manufacturing sector. This includes fibre-optic cables, routers, more fuel efficient cars, GPS recorders etc.

2. Many knowledge based industries have been around for a number of years – they include research, engineering etc. The vast majority of them used to be conducted by manufacturing firms and have become more visible as they have been ‘spun off’ or ‘outsourced’. Changes in a firm’s organization should not be confused with changes in the nature of economic activities.

It is important to note that the majority of this knowledge-intensive services sell to manufacturing firms, therefore  their success is dependent on the state manufacturing sector.

Reversing three and a half decades of neglect will not be easy but, unless the country provides its industrial sector with more capital, stronger public support for R&D and better-trained workers, it will not be able to build the balanced and sustainable economy that it so desperately needs.

Source: The Guardian

Categories: Growth Tags: ,

A2 Revision – Cost Curves

May 20, 2016 Leave a comment

Firms, according to the analysis we use predict their behaviour, are very interested in their marginal cost. Since the term marginal means additional or incremental, marginal costs refer to those costs that result from a one-unit change in the production rate. We find marginal cost by subtracting the total cost of producing all but the last unit from the total cost of producing all units, including the last one. Marginal costs can be measured, therefore, by using the formula:

Marginal Cost = Change in Total Cost ÷ Change in Total Output

Average Fixed Costs (AFC) : they continue to fall throughout the output range. The gap between ATC and AVC = AFC
Average Variable Costs (AVC) : the form it takes is U-shaped: first it falls; then it starts to rise. It is certainly possible to have other shapes of the AVC.
Average Total Costs or Average Costs (ATC or AC) : similar shape to the average variable cost. However, it falls even more dramatically in the beginning and rises more slowly after it has reached a minimum point. It falls and then rises because average total costs is the summation of the AFC and the AVC curve. Thus, when AFC plus AVC are both falling, it is only logical that ATC would fall, too. At some point, however, AVC starts to increase while AFC continues to fall. Once the increase in the AVC outweighs the decrease in the AFC curve, the ATC curve will start to increase and will develop its familiar U-shape. Where MC = ATC this is the lowest point on the ATC curve and is therefore the cheapest production for the firm. This is called the technical optimum.

Marginal Cost (MC) : it cuts ATC and AVC at their lowest points. The firm will supply where the price is greater than or equal to MC. Thus the individual firm’s supply curve consists of the firm’s MC curve, but only the portion above AVC. The reason for this is that where P=AVC the firm will shut down operations because they are barely covering avoidable costs.

Cost Curves

Categories: Exam revision Tags:

Venezuela – Cost Push to Demand Pull Inflation

May 18, 2016 Leave a comment

Zim Venez InflationBelow is an informative clip from Al Jazeera which looks at the worst performing economy in the world – Venezuela. With oil accounting for 95 percent of Venezuela’s export earnings, plummeting world prices have severely hit the government’s revenue stream. GDP is forecast to contract 5.6% and inflation to hit 700% in 2016. The Economist has likened it to Zimbabwe and produced a graph showing the similar acceleration in inflation.

With 80% of all food items being imported and most of its agricultural land abandoned there are now major food shortages in the country – decrease in supply – cost-push inflation. As a consequence of this consumers are trying to stockpile goods as the prices increase – this shifts the demand curve to the right – demand-pull inflation.

Authorities are trying to clamp down on shoppers stockpiling goods by taking fingerprints before buying their ration of price-controlled goods. However the law of supply and demand is never far away as speculators use the black market to sell goods at a higher price as people becoming desperate for the essentials. Furthermore, producers can get around price controls by adding ingredients to staple food which therefore makes it unregulated – Venezuelan firms have added garlic to rice, called it “garlic rice”

Categories: Inflation Tags: ,

A Level Revision: Comparing living standards over time and between countries

May 16, 2016 Leave a comment

National income figures, usually GDP at factor cost, are the man figures used to compare living standards. This is because most countries keep and publish detailed national income data.

However, care has to be taken in using national income figures to compare living standards both over time and between countries. It is important to use GDP at constant prices (i.e. real national income) so that a misleading impression is not given because of the effects of inflation. It is also important to take into account differences in population size. A country with a large population is likely to produce more than a country with a small population. However, this output has to be shared out among more people so living standards are not necessarily higher. This is why economist divide output by population and compare real GDP per capita. Even when adjustments have been made for inflation and differences in population size, national income figures as a measure of living standards have to be interpreted cautiously.

A rise in real GDP per capital may have resulted from an increase in the output of capital goods. In the longer run this will increase productive capacity and result in more consumer goods being produced. However, in the short run people may not feel any benefit from more capital goods being made. An increase in weapons will also increase GDP but, again, may not necessarily improve living standards. If more police are employed and crime is reduced, the quality of people’s lives will be improved. However, if more police are employed to keep pace with rising crime, people will be feeling worse off. So economists have to look not only at the amount of goods and services produced but also at the composition of those goods and why the quantity has changed. In addition, the quality of goods and services produced should be examined. The same quantity could be produced this year as last year or five years ago but if the quality of the output has risen, living standards will have improved.

The distribution of income also has to be taken into account. National income may rise but if it is concentrated in the hands of a few, the living standards of the majority may not rise. See graph below from The Economist showing the Gini coefficient of income inequality.

Gini Coef Nordic

National income figures also fail to take into account some items which affect the quality of people’s lives. A certain amount of economic activity is not declared, either to avoid paying taxes or because it is illegal. If there is an increase in, say, people providing home hairdressing services but not declaring them, people’s living standards may rise, although this increase will not be reflected in the official figures.

Differences in working hours and working conditions are also not taken into account. If output remains constant but working hours fall, people are likely to have a higher quality of life.

National income figures only take into account economic activities for which a payment is made. They do not take into account externalities and non-marketed activities. So, for example, an increase in pollution will reduce living standards while an increase in people decorating the homes of old people, on a voluntary basis, will improve the quality of life of the elderly. Neither of these will be recorded in national income figures.

All of these factors have to be taken into account in using national income figures to make comparisons both over time and between countries. However, some additional factors have to be considered when making international comparisons. Different statistical methods are employed in some countries and the degree of accuracy can vary. Tastes and needs can be different in different countries. For example, people living in a cold climate have to spend more on heating than those in warm countries, merely to enjoy the same standard of living. There is also the problem of selecting a rate of exchange to make the comparison. Exchange rate fluctuate and do not always reflect relative prices in compared using purchasing power parities which compare the cost of a given basket of goods in different countries.

A2 Revision: Monopolistic Competition Long-Run

May 15, 2016 Leave a comment

Monopolistic LRHere is a quick revision note on monopolistic competition. 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.

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