China’s youth unemployment – a mismatch

Reading about the high levels of youth unemployment in China there has been a move to encourage university graduates to take jobs in areas outside their degree e.g. manual work. China Central Television has published profiles of university graduates who have made their money doing manual work like selling street food or farming rather than embarking on a career in their area of study at university. Graduates though are criticising the Government on social media in not creating enough jobs for the growing youth population. Unemployment for those between the ages of 16 and 24 has reached close to 20% in contrast to the overall rate of approximately 5%. Traditionally a university education has been a way of improving your standard of living but it seems that a degree is no longer a way out of poverty. This year 11.6m college graduates are expected to enter the labour market but China-based employers are expected to offer fewer jobs than the previous year. Although a mismatch is usually referred to in structural unemployment you can assume that Chinese university graduates have the skills to do manual work but not the desire.

The International Labour Organisation (ILO) highlighted some of the many ways that countries could tackle the youth employment challenge:

• Recommending that government policies support employment and lift aggregate demand, including public employment programmes, wage and training subsidies, sectoral programmes, counter-cyclical fiscal policies and youth entrepreneurship interventions.
• Labour-market training and work experience programmes targeting young people so that they don’t leave the labour force. To achieve this there needs to be quality apprenticeships, informal or formal, is another solution for ensuring school-to-work transition. In countries where apprenticeship systems are strong, youth unemployment rates are no higher than those for adults.
• Forging partnerships for scaling up investments in decent jobs for youth. Combining the strength of international organisations, governments, employers and workers to implement global policies can really make a difference.

Source: Financial Times – China urges jobless graduates to ‘roll up their sleeves’ and try manual work. 23 April 2023

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Argentina – CPI 109% interest rates 97%

I blogged back in April about Argentina’s inflation rate and interest rates. Since then both inflation and interest rates have increased further – inflation 109 percent last month and this week the Argentine central bank increased interest rates to 97 percent. In this environment, paying for everyday needs becomes a constant worry and running a business especially challenging. Some good interviews with Argentinian business owners and the general population about the impact of inflation on their lives. Worth a look.

Sky TV and the Paradox of Choice

Flicking through the TV channels one evening one found that what was supposed to be a time of relaxation was actually quite tiring. Surely with more choice and freedom to chose what to watch I would be a lot more content. In the age of the Internet, smartphones etc  there is a paradoxical effect in that we have access to an endless amount of movies, TV programmess, documentaries, sport etc.

My mind went back to Barry Schwartz’s animation “The Paradox of Choice” and what he calls the “official dogma of all western industrial societies” – see below. This is the common belief that by maximising one’s choice, we are maximising their freedom, and therefore their welfare. A clear intuitive example is a medical doctor offering a patient certain treatment options. The patient has choice, but he/she would most likely lack the knowledge and physical state of mind to make the best decision. Obviously, it should be better if the doctor, with all their experience and knowledge, makes the decision, even though it restricts the patient’s choice.

However freedom can do more harm than good in that it paradoxically causes paralysis in decision-making. When people have a lot of freedom, they have to spend time and effort considering the many options and making a decision. Should I watch Super Rugby, Heineken Cup rugby, IPL cricket, Ashes, NRL league, Premier League Football or ESPNFC on Sky? What about PBS News, CNN, Fox, Al Jazeera or Discovery? Some will say just record the programmes you didn’t watch but what you end up doing is filling your disk so that you can’t record anything else. These rather futile, yet difficult decisions make us indecisive, slow, and permanently pre-occupied in our lives, all thanks to the “problem” of having a bit too much freedom. Growing up in Ireland we had access to BBC1 Match of the Day (two games of highlights from English Football Division 1 – Premier League now) and it was something that you really looked forward to – 10pm on a Saturday night. Here there is limited choice and because of this maybe more satisfaction in that I didn’t have to worry about who or what to watch. In fact the pleasures of anticipation of Match of the Day on Saturday built throughout the week and provided more happiness – research shows that waiting for something – a chocolate – makes it taste better when we get it.

However, there are some more subtle cognitive effects that come with more freedom. First, it is very easy to imagine that there was a better choice than the one that you had chosen – i.e. the opportunity cost can take away your happiness from your current decision. This causes us to regret our own decisions (even if the option we took was the best choice), and this can seriously damage how satisfied we are with something. And with more freedom, comes more capacity to imagine that the grass is greener on the other side.

Finally, in this “choice-full” world of today, people are bound to choose an option that is almost perfect. Schwartz talks about how there only used to be one kind of jeans that you could buy, compared to the many different colours, fabric, fit, and size that you can buy today. He claims that by being able to buy such near-perfect jeans, you have such high expectations for the next pair that you can’t be completely satisfied. He jokes: “the secret to happiness is low expectations.”

Maximizers and Satisficers

With so much choice today we tend to fall into two categories of consumers.

Maximizers are those people that spend all their time exhaustively search for every piece of information about a product in order to make what they believe to be the perfect choice. However it can lead to nagging doubts about their choice and they can become unhappy.

Satisficers are those people that settle with the decision that is good enough and seem to be happier with their decision.

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US debt ceiling and why it is important.

In 1917, the US Government passed a law that set a limit on the total amount of debt that the government can incur – initially set at $11.5bn. However Government debt has increased under every President and now stands at $31.4trn. In January this year debt hit this latest level which means that the Government cannot legally borrow anymore money. In order to increase the debt ceiling it must be voted through the House of Representatives which the Republicans have a majority. Although the ruling party is the Democrats, the Republican majority can pressure President Joe Biden to agree on cuts to the budget. In the past, under the same scenario, there have been hastily arranged agreements at the 11th hour to avoid a default. Below is a good video from the WSJ explaining the debt ceiling and the consequences of it not being raised.

CIE A2 and NCEA Level 3 Economics – Perfect Competition mindmap

With most schools approaching their mid-year exams in both CIE and NCEA here is a mindmap which covers the main points when studying perfect competition. This can be a popular essay in CIE Paper 4 making a comparison with imperfect competition and NCEA AS 3.2 – 91400 Demonstrate understanding of the efficiency of different Market Structures using Marginal Analysis

Adapted from CIE A Level Revision by Susan Grant

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Higher interest rates by US Fed hits developing countries currencies.

Contractionary monetary policy by the US Federal Reserve to keep inflation in-check has impacted African currencies. With higher interest rates in the US and a volatile global environment investors tend to run to the safety of the US dollar and higher paying US treasury bonds. This has led to a depreciation in African currencies and inflation as import prices increase. For most African countries more that 60% of imports are priced in US dollars and a 1% depreciation against the US dollar = an average of 0.22% increase in inflation.

The graph below from the IMF shows the extent of the depreciation. Two countries’ currencies depreciated by more than 45% – Ghana and Sierra Leone. Some central banks have used their supply of foreign reserves in an attempt to prop up their currencies – giving foreign exchange to importers.

Weaker currencies push up debt – approximately 24% of public debt in most African countries in denominated in US dollars so with a weaker currency they have to find more of their currency to pay back the US dollars. Furthermore, the weaker currency has meant that public debt has risen on average by 10% of GDP in the region. Below is a mindmap showing the impacts of a falling currency.

Source: IMF Blog

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Internal flights in Africa – cheaper to fly out and then back in.

An interesting podcast from the BBC’s Business Daily looked at why internal airlines prices in Africa are around 45% more expensive than equivalent trips elsewhere. So why are they so expensive and what impact does this have for a lot developing economies that are dependent on tourism? In many cases if you want to travel domestically in Africa it is not possible to get direct flights between major cities and in some cases the cheaper option is to fly out of the continent and then come back in eg:

Nairobi to Cape Town – cheaper to fly to Dubai and then to Cape Town than flying direct.

In Africa there are: 54 countries – 1.5 billion people – 18% of world population – but less than 2% of global air traffic is in Africa
With no discounts, no budget airlines and no direct flights to destinations Africa is losing a lot of commercial opportunities as well as tourism. Aviation directly impacts an economy’s GDP through employment, tourism (bringing in foreign currency) and trade which Africa is missing out on. Add to the fact that a lot of the African countries are landlocked and with limited road / rail networks it is essential that there is a functional airline network. A further problem is that most airlines in Africa are bankrupt.

The distance from Kinshasa (DR of Congo) to Lagos (Nigeria) is comparable distance to flying from Berlin to Istanbul. The prices in the two continents are as follows:
Berlin to Istanbul.
US$140 one-way – direct flight – 2 hours and 50 minutes

Kinshasa to Lagos
US$700 one-way – via Jo’burg (South Africa), Kigali (Rwanda) – 18 hours

One of the issues about the carriers in Africa is that the vast majority of them are in financial bankruptcy. Africa airlines are bounded by bi-lateral agreements between countries which leads to restrictions if a country is not part of an agreement. This would include taxes, restricted flight times etc. Also standalone carriers are not viable as the cost structure is very inefficient. There needs to be some sort of African alliance between national carriers if the sector is to be capable of survival and stimulate growth in the African economy. If you look at the whole of Europe they have essentially just 3 carriers:

IAG – International Airlines Group
Aer Lingus – British Airways – IAG Cargo – Iberia – Iberia Express – LEVEL – Vueling – Avios Group

Lufthansa Group
Air Dolomiti – Austrian Airlines – Brussels Airlines – Eurowings – Lufthansa Cargo – Lufthansa- Swiss International Air Lines – Edelweiss Air

Air France / KLM Group
Air France – KLM

You also have the low-cost airlines like Ryanair and Easyjet.

Ethiopian Airways – a success story
In 2004 they looked at a new strategy focusing on the future growth of Africa and Asia – they now fly 45 destinations / week. They also appointed people into senior positions from within the company and although government owned it is run like a business. Ethiopian Airways were one of the few airlines not be bailed out during the COVID-19 crisis and reconfigured 35 of their passenger aircraft into cargo and became the go-to airline for PPE globally. Back in 2003 they employed 4,000 employees, today 17,000 and they own 6 other airlines in Africa.

If 12 key countries of Africa work together to open up markets, the increased connectivity could boost GDP by over $1bn and create 150,000 jobs across the continent. In 2000 Ethiopia was one of the poorest countries in the world but now fastest growing economies in the world – third largest GDP in subsaharan Africa. Ethiopian airlines is now the largest carrier on the continent therefore a lot of the passengers pass through the capital Addis Ababa which adds to the GDP as well as bringing in foreign currency

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Economics of COVID-19 – mindmap

Looking back at the start of the coronavirus, the mindmap above looks at the three different shocks that were/are prevalent and the policies that were implemented by governments. Could be a useful way of introducing the topic.

Supply shock – will become more visible in the coming weeks as importers from China maybe unable to source adequate supply given widespread shutdowns across Chinese manufacturing.This loss of intermediate goods for production of final products cause a decline in revenue and consumer well-being. A good example of supply shocks were the oil crisis years of 1973 (oil prices up 400%) and 1979 (oil prices up 200%).

Demand shock – is already affecting consumer demand as travel slows, people avoid large gatherings, and consumers reduce discretionary spending. Already many sports fixtures have been cancelled which in turn hits revenue streams. With the uncertainty about job security demand in the consumer market will drop – cars, electronics, iPhones etc. Also tourism and airline industries are also exposed to the fall in demand.

Financial shock – although the supply and demand shocks will eventually subside, the global financial system is likely to have a longer-lasting impact. Long-term growth is the willingness of borrowers and lenders to invest and these decisions are influenced by: increased uncertainty regarding the global supply chain; a loss of confidence in the economy to withstand another attack; and a loss of confidence regarding the infrastructure for dealing with this and future crises.

Policy options

Monetary policy is limited to what it can do with interest rates so low. Even with lower interest rates this does not tackle the problem of coronavirus – cheaper access to money won’t suddenly improve the supply chain or mean that consumers will start to spend more of their income. The RBNZ (NZ Central Bank) could instruct trading banks to be more tolerant of economic conditions.

Fiscal policy will be a much more powerful weapon – the government can help households by expanding the social safety net – extending unemployment benefit. Also the guaranteeing of employment should layoffs occur. Tourism and airline industries are being hit particularly hard. Although more of a monetary phenomenon the ‘Helicopter Drop’ could a policy tool of the government. A lot of governments already have introduced ‘shock therapy’ and unleashed significant stimulus measures:

• Hong Kong – giving away cash to population – equivalent NZ$2,120.
• China – infrastructure projects and subsidising business to pay workers.
• Japan – trillions of Yen to subsidising workers. Small firms get 0% interest on loans.
• Italy – fiscal expansion and a debt moratorium including mortgages
• US – congress nearing stimulus package
• NZ – stimulus package industry based

Source: The Real Economy Blog

The 3 different waves of a business cycle.

According to Lacy Hunt, chief economist at Hoisington Investment Management the “business cycle” is actually three different waves occurring in a specific order. They peak and trough in that sequence

1. Financial cycle – lose and tight monetary policy influence the movement
2. GDP cycle – monetary policy then impact inflation and risk-taking
3. Price/labour cycle – this later makes wages and prices rise

Source: Hoisington Investment Management

Can the US Fed stimulate growth?

Although central banks can control the money supply, the velocity that it moves in an economy is very important to the business cycle – creating more money has little effect if people don’t use it. Velocity in the US is now lower than it was in the great depression. This is a serious problem for the US Federal Reserve’s attempts to stimulate growth.

There is also the problem of Marginal revenue product of debt – this is the amount of GDP growth generated by each additional dollar of debt. That has been falling for years and is set to fall even more as higher rates divert a bigger part of the revenue from debt-funded projects to interest payments instead of more productive uses.

Source: Mauldin Economics: Thoughts from the front line – 6th May 2023

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Why do Fortuna Düsseldorf FC offer free tickets

Dan Ariely in his book Predictably Irrational, stated that consumers behaviour changes when the word ‘free’ is mentioned. Free is zero price it is a powerful emotional trigger that is very tempting.

Fortuna Düsseldorf of the Bundesliga second division have decided to offer free tickets to all fans for at least three games next season in a move to try and get greater connection with the fans. The cost will be covered by sponsors with companies having signed up for a five-year deal worth €45m. 20% of those revenues will go to youth and women’s football and another 20% will go to digital infrastructure and the stadium. Fortuna have average home attendances of almost 30,000 in the second division this season although the capacity of their home ground Merkur Spiel-Arena is 54,600. Germany’s top-flight Bundesliga is the world’s best-attended football league with more than 42,000 fans on average a match.

Why give away free tickets?

• A capacity crowd means a better atmosphere not only for the spectators but also to those watch on TV. There is more tension and excitement.
• Spectators buy merchandise, food, drink etc at the ground and there maybe more hospitality opportunities.
• A good experience at the ground might mean those spectators that are willing to pay for future games or even become a season ticket holders.

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New Zealand’s tight labour market but do all benefit?

Figures out yesterday show that unemployment in New Zealand remained at 3.4% which makes for a very tight labour market. One wonders if this figure is beyond the maximum sustainable levels with the RBNZ worried about the pressure on private sector wages feeding into inflation. The RBNZ would like labour market pressures to ease – i.e. they want unemployment – as this should bring down inflation. However on 18th May the government deliver the Budget and no doubt there will be some fiscal stimulus that the RBNZ will need to be aware of – Expansionary Fiscal Policy vs Contractionary Monetary Policy. It seems the Government want to put money into the circular flow especially as it is election year but the RBNZ want to keep inflation between 1-3%. Ultimately it is Politics vs Economics.

Full employment doesn’t mean all workers benefit
Full employment has normally been the concept that has been used to describe a situation where there is no cyclical or deficient-demand unemployment, but unemployment does exist as allowances must be made for frictional unemployment and seasonal factors – also referred to as the natural rate of unemployment or Non-Accelerating Inflation Rate of Unemployment (NAIRU). Full employment does suggest that the employee has a lot of bargaining power as the supply of labour is scarce relative to the demand. In theory a tight labour market should lead to higher wages and improved conditions of work as the employer has less labour to chose from. We have seen in the labour market incentives for employees in recommending potential candidates for vacancies in the company. Other incentives for potential employees include shorter working weeks, hiring bonuses and special leave days.

Michael Cameron’s article in The Conversation suggest that this doesn’t apply to all workers. A lot depends on the bargaining power of the worker and the elasticity of supply of labour. If the supply is very inelastic for a particular job (higher skilled) it is harder and most likely more expensive for the employer to find an alternative worker. This is evident when unemployment is low as the worker can easily look around at other job opportunities. On the contrary if the supply of labour is more elastic (lower skilled jobs) the worker has less bargaining power and the employer will have more potential workers to chose from. The graph below shows the elasticity of supply of labour – high skilled has a steeper curve (inelastic) whilst low skilled as a flatter curve (elastic)

Source: Economicshelp

ANZ New Zealand Labour Market Review | March 2023 Quarter
Michael Cameron writes in The Conversation

Chelsea and the most expensive substitution in football

There has been a lot of talk in football circles about the size of the Chelsea squad. There are currently over 30 players in the the first-team squad and they recently had to increase the size of the changing room to accommodate everyone. This squad size has come to the attention of the Financial Fair Play (FFP) authorities and it will necessitate a sale of some players. With a squad this size there are significant bills to pay not least the transfer fees for a number of top players.

The Price of Football is a podcast that I listen to regularly and it is presented by University of Liverpool football finance lecturer Kieran Maguire and comedian Kevin Day. They discuss some of the financial issues behind the world of football.

A recent episode – click here – looked at the most expensive substitution which was made at Stanford Bridge. The game was between Chelsea and Brighton and Hove Albion and took place in the 57th minute on Sunday 16th April 2023. The total transfer value (what Chelsea paid for these players) was those being substituted = £281.5m and those coming on to the field of play = £84.6m giving a total value of both = £366.1m. This is a sizeable amount of money and you wonder how clubs/owners can afford it.

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The Lithium version of OPEC

A lithium cartel is being considered by Argentina, Chile, Bolivia and Brazil as electric vehicle (EV) market grows and with it the demand for mined lithium to turn into batteries. Bolivia, Chile and Argentina share part of the region which is rich in lithium reserves – known as the lithium triangle. Although Brazil is still establishing its extraction process, they do have experience in car manufacturing with low carbon emissions with the use of ethanol, biofuels and natural gas. With the opening of its Grota do Cirilo lithium mine in April, Brazil will have one of the few companies globally that has proven its ability to produce lithium in an environmentally sustainable manner.

Argentina is expected to produce 16% by 2030 that is up from 6% in 2021. They would overtake Chile as the No. 2 lithium producer in the world by 2027, behind only Australia.

A cartel could mean a higher cost for lithium which would then be passed onto EV buyers which could reduce the demand for EV cars. But a higher price could encourage a cheaper substitute material sodium-ion batteries for the EV market. However the cartel would most likely increase supply with a commitment from member governments. Below is a short video from the FT on the future of the lithium supply chain and how China controls about 60 per cent of global lithium processing. There is also mention of Latin American countries and their contribution to the global supply.

A2 Level Economics – Cartel notes.

A cartel operates in the Oligopoly market. It is a mistake to believe that ALL oligopolists face a KINKED DEMAND CURVE. Oligopolists may either:

• a) COMPETE VIGOROUSLY or
• b) COLLUDE (e.g. in cartels) or
• c) PLAY SAFE (as in Kinked Demand Curve Theory)

Collusion in oligopoly

Where oligopolists agree formally or informally to limit competition between themselves they may set output quotas, fix prices, or limit product promotion or development. A formal collusive agreement is called a cartel. A cartel can achieve the same profits as if the industry were a monopoly. Covert (formal) collusion occurs where firms meet secretly and make decisions about prices or output. Tacit (informal) collusion is much more difficult to control. This is when firms act as if they have agreements in place without actually having communicated with each other.
Collusion between firms whether formal or informal is more likely when:

• there are only a few firms in the industry, so reaching an agreement is easier and any cheating can be spotted quickly.
• they have similar costs of production and methods of production making any agreement on price easier to reach.
• the firms produce similar products. Cartels have been common in industries such as cement production in recent years.
• the products have price inelastic demand meaning that a rise in price by the cartel will lead to a rise in sales revenue for the firms.
• the laws against collusion in a country are weak or ineffective.

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New Zealand tax report and the Laffer Curve

Just been covering the Laffer Curve with my Yr 13 class and it was very apt that the Inland Revenue Department (IRD) published a report that shows wealthy New Zealanders pay much lower tax rates than other earners. Based on the 311 of the wealthiest New Zealand citizens, the data shows that the average person in this group pays 8.9% tax on their income which includes capital gains on investments.

Robin Oliver an expert in tax economics was interviewed on Radio New Zealand’s “Morning Report” programme this morning and he is suggesting that changes are needed to income tax thresholds to make them fairer. Looking at the current tax rates and thresholds in New Zealnd (see table below) the jump in the tax rate from 17.5% to 30% when you hit the income bracket $48,001 to $70,000 is significant and the assumption is that this is a high level of income which it may well have been 20 years ago. However looking at the cost of living today this is well below what could be considered an income which should be taxed 30%. Click here to listen to the interview.

Laffer Curve

The laffer curve (named after American economist Arthur Laffer) indicates the relationship between the tax rate and the revenue gained by the government. If you charge a high tax rate it is unlikely that you will encourage people into work and therefore the tax revenue for the government is a lot lower if taxes had been lower. The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.
Economists have long used the Laffer curve to justify tax cuts, including:

• Ronald Reagan in 1981 – resulted in lower revenues
• George W. Bush in 2001 – resulted in lower revenues.
• Donal Trump in 2017 – resulted in lower revenues

The Congressional Budget Office, a government watchdog, now reckons that US national debt will hit 95% of GDP by 2027, up from 89% two years ago before the tax cuts.

America (see graphic above) is not the only country that appears to be on the wrong side of Mr Laffer’s curve. A paper published in 2017 by Jacob Lundberg, estimates Laffer curves for 27 OECD countries. He found that only Austria, Belgium, Denmark, Finland and Sweden have top income-tax rates that exceed their revenue-maximising levels. However only Sweden could meaningfully boost revenue by cutting tax rates on high-income earners. Most countries, in other words, appear to have set their highest tax rates at or below the optimal rate suggested by the Laffer curve.

Source: The Economist – 19th June 2019 – Graphic detail

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Brian Eno and Ha-Joon Chang in conversation

Below is a discussion between musical innovator and artist Brian Eno and award-winning author and economist Ha-Joon Chang that was screened on Al Jazeera. It is well worth listening to and they both raise interesting points about inequality, climate change, the inertia of economic policy, They talk of challenging the status quo, the development of paths to a fairer society and the lack of political leadership to challenge the economic orthodoxy. Ha-Joon Chang also talks about his latest book, Edible Economics, one ingredient at a time.

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What determines the Neutral Rate of Interest?

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.
The neutral interest rate is the rate of interest where desired savings equal desired investment, and can be thought of as the level of the OCR that is neither contractionary nor expansionary for the economy.

OCR > Neutral Rate = Contractionary and slowing down the economy

OCR < Neutral Rate = Expansionary and speeding up the economy

This neutral rate dictates when the RBNZ end their tightening or loosening cycle. If the neutral rate is seen to be 3% it is the expectation that the RNBZ will increase the OCR to 3%. The graph below shows the difference between the estimated neutral rate and the OCR. Note that:

2008 – positive gap as RBNZ trying to bring inflation under control – contractionary level
2019 – the gap narrows and monetary policy becomes less stimulatory as the neutral of the OCR is likely lower.

What determines the neutral rate of interest in an economy?

Supply of loanable funds (people who save money) and Demand to borrow money – neutral rate generates a level of savings and borrowing that delivers the economy to maximum sustainable employment and inflation – 2% in NZ but with Policy Target Agreement of 1-3%.
Potential growth rate of an economy – if people expect more growth = higher incomes = higher borrowing = upward pressure on neutral rates. Economists tend to look at the production function and how much we can produce in the long-run therefore impacting aggregate supply. With higher potential growth rates investment spending is expected to increase and with it interest rates.
Population growth – strong population growth = larger labour force = larger national output which supports the neutral rate of interest.
Age and life expectancy – higher life expectancy increases the amount that people save during their working years. If consumers buy now rather than later = potentially either lower saving rates and/or higher borrowing = neutral rate of interest rises.
Superannuation / retirement age – burden of funding retirees fall on a smaller working age population. This could require higher taxes which leads to less spending putting downward pressure on interest rates.
Debt – with low mortgage rates, debt servicing have been at record lows. People have therefore borrowed a lot money and now have high level of indebtedness levels. Therefore higher mortgage rates mean that consumers disposable income will be reduced.
Government debt – COVID-19 has led to increased government spending and bigger budget deficits. New Zealand economy is probably as sensitive to higher interest rates and an increase in rates by the RBNZ will be very influential, limiting how far interest rates have to rise. And with households and the Government already loaded up on debt, future borrowing capacity is now reduced, which will put downwards pressure on interest rates too.
Overseas investment – as New Zealand comes a more attractive place to invest it increase the supply of loanable funds to New Zealanders. The investment will also strengthen the dollar which make exports less competitive but imports cheaper. Global capital flows mean that we can’t get too far out of sync with other advanced economies – as long as global neutral rates continue their relentless move south, so too will New Zealand’s.

Outlook
In New Zealand, as in most economies, estimates of the real neutral interest rate have been trending downwards over several
decades. In recent years, the RBNZ indicator suite suggests that the real neutral interest rate has stabilised at low levels. The RBNZ current average estimate for the real neutral OCR is around 0 percent. However, the wide range between the maximum and minimum values of RBNZ estimates demonstrates that there is significant uncertainty about the level of neutral interest rates, particularly since the beginning of the COVID-19 pandemic. RBNZ Monetary Policy Statement – November 2022. P. 30

Source: NZ Insight: Neutral interest rates – 20th August 2021 – ANZ Bank

Profit-led inflation

Most textbooks cover cost-push and demand-pull inflation but I have yet to come across profit-led inflation. Paul Donovan, Chief Economist at UBS in London, wrote about the inflation in the last couple of years of which profit-led inflation has been prevalent.

There have been 3 upsurges in inflation of since the COVID-19 outbreak.

1. There was transitory inflation as the fiscal stimulus led to people wanting to spend more as supply chains were struggled to keep a pace with this demand for durable goods.
2. The war in Ukraine saw a spike in energy prices as economic growth recovered from the pandemic. This was independent of transitory inflation.
3. Profit-led inflation – this is when companies tell consumers a convincing story that allows them to increase their price with out reducing demand for the product and therefore making it more inelastic. Consumers believe the price increase is ‘fair’ or ‘justified’.

Two types of companies.

• Those that raise and lower profit margins and prices as demand fluctuates which means that inflation is demand driven.
  These are companies that have weaker pricing power but strong brand values and need repeat customers.
• They convince customers that something has happened outside their control or the customer doesn’t hinder stand the companies’ true costs. Stories about agricultural prices increasing, climate change etc makes it seem fair but the majority of the cost is in labour and they haven’t been rising as much

To control profit-led inflation raising interest rates is one option in that it should reduce demand and squeeze prices. Convincing customers that they are being taken advantage of, is a faster and less damaging way of reducing inflation. Also social media has a role to play here by facilitating customer thoughts on the product.

Source: What profit-driven inflation might mean

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Economics assessment and ChatGPT

At the end of last year OpenAI launched ChatGPT – Generative Pre-trained Transformer. It has the ability to impact traditional assessment methods by generating answers to questions which are often indistinguishable from a student response.

ChatGPT operates using algorithms that process data, allowing it to string words together in response to a prompt. Unlike humans, ChatGPT has access to vast troves of information available on the internet and uses large language modelling to recognise patterns in the words in each prompt to mimic human writing when dispensing knowledge.

A recent research paper entitled ‘ChatGPT has Aced the Test of Understanding in College Economics: Now What?’ by Wayne Geerling; G. Dirk Mateer; Jadrian Wooten; Nikhil Damodaran (2023), looks to evaluate if ChatGPT could outperform the average undergraduate student in economics using the Test of Understanding in College Economics (TUCE) which has been in use in US Universities for more than 50 years. There are two multiple-choice tests of 30 questions covering micro and macro economics.

The two tests were conducted with thousands of economics students from US universities and were sat before the start and at the end of the semester. The pre and post results would enable educators to measure the impact of particular pedagogy over this time period. The results were as follows with most students answer around 40–50% of questions correctly. The authors then put the two tests through ChatGPT and found that it answered 19 of 30 microeconomics questions correctly and 26 of 30 macroeconomics questions correctly, ranking in the 91st and 99th percentile, respectively – see graph for microeconomics test.

Some interesting findings regarding ChatGPT answers include:

• Choosing all 4 options as an answer to a multiple choice question
• Being unable to process images
• Questions answered wrong in the micro exam include: Supply and Demand x2, Factors of Production, Utility, Elasticity, Comparative Advantage, Externalities, Market Structure and it did not answer Profit Maximisation. Profit Maximisation not applicable
• Questions answered wrong in the macro exam include: Components of GDP, Tools of Monetary Policy x2, Exchange Rates.

Where to from here?
Using software tools such as Turnitin may not be sufficient to spot a student answer using ChatGPT therefore educators need look at designing assessments that focus on critical thinking and analytical skills that cannot be easily duplicated by AI.

• Assessments need to reward students that know the content and not those that are able to source answers through classmates or ChatGPT. By introducing time restrictions those students who have knowledge of the material are in a much better position to answer more questions.
• It is important to highlight that although ChatGPT looks to be very valid in its response to a question it doesn’t mean that it is correct. A popular recommendation amongst teachers is to produce ChatGPT with errors and have students to identify as many as they can.
• There are other ways to engage students in learning experiences that can’t be replicated through ChatGPT namely classroom presentations, data response type questions, in-class writing assignments, collaborative learning project with students in different countries, quizzes etc. This goes beyond the simple memorisation of notes and theory and addresses the complex nature of economics with a deeper understanding.
• Tools like ChatGPT are likely to become a common part of the writing process, just as calculators and computers have become essential tools for learning mathematics and science. The challenge of universities is to adapt their curriculum to this new reality and to embrace the new era with innovative and effective assessment strategies.

Source:

ChatGPT has Aced the Test of Understanding in College Economics: Now What?’ by Wayne Geerling; G. Dirk Mateer; Jadrian Wooten; Nikhil Damodaran (2023)

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Regional GDP in New Zealand – March 2022

Stats NZ has released its Regional gross domestic product: Year ended March 2022 report, which provides a geographical breakdown of economic activity within New Zealand. New Zealand’s value-added output:

• 78% within the North Island
• 22% within the South Island

Auckland region contributing close to 38% of New Zealand’s annual GDP with Wellington coming in second at 12.5%

• Highest GDP per capita is the Wellington region $82,772 per capita, followed by the Auckland region $80,328 per capita.
• Lowest GDP per capita was the Northland region, at $46,611
• The Taranaki region recorded the highest nominal GDP per capita growth over the year (+14.3 percent), followed by the Auckland region (+11.4 percent).

A good exercise with your class is to get them to match the figures with the area of New Zealand. Figures below are in $m

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Development economics – ‘China build airports but the US lecture us’

Former US Treasury Secretary and Harvard Professor Larry Summers stated at the recent IMF Meetings:

“Somebody from a developing country said to me, ‘what we get from China is an airport. What we get from the United States is a lecture,’”

Although China does build a lot of infrastructure in the developing world there have been concerns about the debt these countries incur, in particular the Belt and Road project. China has been spending billions of dollars to bail out countries who have struggled to repay loans used to build this infrastructure although the money has been ultimately used to save China’s own banks. Some key stats from the DW report below.

• China’s Belt and Road Rescue Lending to countries = US$240bn between 2008-2021
• 80% of the rescue lending was between 2016-2021
• Involved 22 countries – main benefactors were Argentina – US$111.8bn Pakistan – 48.5bn Egypt – 15.6bn

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