BBC Podcast – How do we stop high inflation?

This is a very good podcast on inflation and for anyone new to the subject it explains a lot concepts in very simple language. Concepts like fiscal policy, monetary policy, recession, stagflation etc. Click link below:

BBC – The Real Story – How do we stop high inflation?

The question that the economists try and answer is will the global economy go through a recession in order to get inflation down. Both central banks and governments cushioned the economic shock of the pandemic with low interest rates and spending respectively but this action has been blamed for increased inflation.

Larry Summers suggested that the US Fed had mistakenly seen the inflationary problem as transitory but there is a bit more stubbornness about price increases today. As he put it – some central banks need to go through their ‘full course of antibiotics’ (interest rate hikes) to control inflation as failure to do so means that inflation will return promptly and another course of antibiotics will need to be administered. The longer you leave it the more damaging the downturn/recession will be. He also states that every time the US economy has had an inflation rate greater than 4% and an unemployment rate below 4% the US economy has gone into a recession within two years. Those figures align with US inflation 8.5% and unemployment 3.6%.

Some great discussion and would be useful for a macro policy essay at CIE AS or A2 level. Good for revision of policies and their usefulness today.

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on Inflation. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

Global GDP per capita – income up but unequal

If you are studying the Growth unit at CIE or NCEA the image below – from the ‘Visual Capital’ site which is well worth a visit – is a good discussion starter for your class. It has an interactive chart where you can elect individual countries and look at the GDP per capita form 1820 to 2018. The graph below shows the major groups of countries with New Zealand added.

  • 1800 – 80% of global population lived in extreme poverty
  • 1975 – incomes were 10 times higher on average. Post WW2 growth was rapid as Europe etc rebuilt after the war.
  • 2015 – incomes rose faster in developing countries with many lifted out of poverty. Between 1975 and 2015 saw the fastest decline in poverty.

In the 19th Century there was much more equal distribution of income across regions of the world – $1,100 per capita. Many lived below the poverty line but the world had less wealth. Today the GDP global average is approximately $15,212 but although there is more wealth the distribution is less equal.

At the highest end of the spectrum are Western and European countries. Strong economic growth, greater industrial output, and sufficient legal institutions have helped underpin higher GDP per capita numbers. Meanwhile, countries with the lowest average incomes have not seen the same levels of growth. This highlights that poverty, and economic prosperity, is heavily influenced by where one lives.

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on Real GDP. Immediate feedback and tracked
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Global Economic Outlook

Below is a look at economic conditions in leading global economies. Unemployment is surprising low and with the rise in the cost of living (see inflation figures) this should put pressure on wages. The unemployment rate within the OECD area fell to 5.2% in February, the first time it has fallen below the pre-pandemic unemployment rate (which was recorded in February 2020). The unemployment rate within the OCED had peaked at 8.8% in April 2020.

Inflation, Unemployment and Interest Rates
Annual inflation within the OECD area rose to 8.8% in March 2022, its highest annual increase since 1988. Energy prices have risen by over a third during the past year, while food prices have risen by ten percent within the OECD area. Most central banks have already commenced a tightening programme with the on-going threat of inflation. The Australian Reserve Bank commenced tightening their cash rate in early May, increasing the cash rate by 25 basis points to 0.35%. It is expected that the RBNZ will increase the OCR by 50 basis points next week.

Outlook
If you look at conditions in the major economies you find the following:

  • China – limited growth potential with severe lockdowns
  • USA – higher interest rates could lead to a bust scenario
  • Euro Zone – cost of living crisis
  • Emerging markets – food crisis / famines.

With the indicators looking at recessionary conditions the best news for the global economy would be a withdrawal from Ukraine by Russian troops and an end to a zero-Covid strategy in China. These actions should reduce food and energy prices and therefore save government spending on raising benefits and subsidising food and energy. Economists are fairly optimistic that we will avoid a recession in 2022 as they still have the tools to stimulate if things get worse. However with no end in sight for the Ukraine conflict and interest rates on the rise a recession is on the cards.

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on Inflation and Unemployment. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

eLearnEconomics – Natural Monopoly

Below are some notes from the eLearnEconomics site. For more information click on the link.

A natural monopoly is when one firm has the ability to supply the entire market at lower prices than two or more firms. A natural monopoly faces downward-sloping average cost (AC) for the entire range for which demand is applicable. The reason for its downward-sloping AC curve is usually that the initial investment in the infrastructure of the firm is large, but once it is in place, the marginal cost (MC) of production is low, for example hydro power. This high establishment cost is a strong barrier to entry and a natural monopoly could undercut any would-be competitor so they could not survive. Natural monopolies often involve some kind of network, for example water, gas,phone, rail.

Equilibrium Output-Natural Monopoly

The rule for maximising profit or minimising a loss (the equlibrium) for a natural monopoly is the same as any other firm. The most profitable output or smallest loss is where marginal revenue (MR) equals marginal cost (MC). Any other position will result in a smaller profit or greater loss. Therefore, the equilibrium output is at a price of Pe and quantity Qe (determined from the intersection of the marginal cost and marginal revenue curves). At the equilibrium output Qe the natural monopoly is making a supernormal profit (of $100m) and produces less than what society or consumers desire. Operating at the equilibrium output position creates a deadweight loss of BFG because consumer surplus and producer surplus are not maximised. The natural monopoly is charging a price in excess of marginal cost (P > MC), this is called mark-up pricing. At the equilibrium output in perfect competition, price and marginal cost are the same. Sellers cannot charge higher prices because they would immediately lose sales to competitors. This is called marginal cost pricing and occurs in perfect competition where at the equilibrium output position price equals marginal cost (P = MC). A natural monopoly charges more and produces less than would be the case if the firm operated as a perfect competitor.

Policies concerning natural monopoly

One way a government can regulate a monopoly is by administering price controls that do not allow a natural monopoly to operate at its preferred equilibrium output position where marginal revenue equals marginal cost. For this monopoly the equilibrium output is at a price of $7 (Pe) and quantity of 50m (Qe). The aim of price controls is to benefit the consumer with lower price and a greater quantity. Average cost pricing is a way that the government can improve resource allocation because it increases total surpluses in the market and reduces the deadweight loss that would be associated with a natural monopoly operating at its equilibrium position (MR = MC). Average cost pricing regulates the firm to charge a price equal to average costs (P = AC). In this instance the price would be $4 (Pn) and the quantity would be 80m units (Qn). The natural monopoly would no longer be maximising profits because the marginal revenue is less than marginal cost, the firm is making marginal losses on the increased output. The firm would make a normal profit instead of a supernormal profit. Normal profit is a return to the entrepreneur sufficient to keep them in their present activity. A natural monopoly regulated to a situation where price equals average cost is able to earn a fair rate of return. The net deadweight loss to society is reduced but not eliminated, the deadweight loss is now the area HKG. The natural monopoly is making a normal profit so they may lack the funds to do R & D and be less innovative, this could be viewed as a negative impact on resource allocation of fixing the price. A price set to equal average cost is more socially desirable than the equilibrium output position because consumers experience a significant increase in consumer surplus due to the lower price and higher quantity consumed. Average cost pricing has the advantage over marginal cost pricing of not having to provide a subsidy to a natural monopoly to keep the firm operating.

Read more at: elearn Economics – https://www.elearneconomics.com/

AS & A2 Economics Revision – Monetary Policy Mind Map

Going over monetary policy with my A2 class and have modified a mind map done by Susan Grant from a CIE Economics Revision Guide. Useful for those who are sitting the June AS and A2 Economics papers.

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on Monetary Policy. Immediate feedback and trackedresults allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

Strong US$ bad news for global recovery

The recent tightening of monetary policy by US Fed Chair Jerome Powell to combat inflation has seen higher borrowing costs and financial-market volatility. The US$ has risen 7% against a series of major currencies since January this year – a two year high. It has always been a safe haven currency and with a rising Fed Rate and market rates even more capital could flow into the US increasing the demand for US dollars and therefore appreciating its value. See mindmap below for the theory behind a stronger currency.

Adapted from: CIE A Level Economics Revision by Susan Grant

A high value of a currency makes exports more expensive but does lead to cheaper imports especially of the inelastic nature. But to foreign economies it does drive up import prices further fueling inflation. For developing countries this is a concern as they are being forced to either allow their currencies to weaken or raise interest rates to try and stem the fall in value. Also developing economies are concerned with the risk of a ‘currency mismatch’ which happens when governments have borrowed in US dollars and lent it out in their local currency. However it is not just developing countries that have had currency issues. This last week saw the euro hit a new five-year low with the US Fed’s aggressive tightening of monetary policy. The real problem for some economies is that they are further down the business cycle than the US so in a weaker position.

“While domestic ‘overheating’ is mostly a US phenomenon, weaker exchange rates add to imported price pressures, keeping inflation significantly above central banks’ 2% targets. Monetary tightening might alleviate this problem, but at the cost of further domestic economic pain.” Dario Perkins – chief European economist at TS Lombard in London

Source: Bloomberg – Dollar’s Strength Pushes World Economy Deeper Into Slowdown. 15th May 2022

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on exchange rates and monetary policy. Immediate feedback and tracked
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Global Inequality – 10% of population own 76% of wealth

The Lorenz curve is a useful tool used by those interested in statistics and economics to give a picture of income distribution. Its plots the % of household income on the vertical scale against the % of households on the horizontal. See opposite

The Gini Coefficient is derived from the same information used to create a Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg.

Area between the Lorenz Curve and the 45° line ÷ Total area below the 45° line

Below is a graphic from the World Inequality Report 2022 published by the World Inequality Lab. Useful figures especially with the top 1% and 10% of world population and the distribution of wealth, income and carbon emissions. Much can be done about inequality and that it is always a political choice, with better policy design inevitably leading to fairer development pathways.

Source: IMF Blog

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on the Gini coefficient. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

Food and fuel prices impact on Sub Saharan Countries

Just finished completing policies for developing countries with my A2 class and invariably with all my economics classes you cannot get away with not talking about the war in Ukraine and the inflationary problems that the global economy is experiencing. The increase in food and and fuel prices hits the developing world the most and could not have come at a worse time as economies around the world are starting to open up after the COVID pandemic. For the developing world, especially in Sub-Saharan Africa (SSA) there is a significant erosion in living standards and macroeconomic imbalances – see graph below. The IMF has identified 3 main areas that the war is impacting countries:

  • In SSA food accounts for 40% of consumer spending with 85% of wheat supplies being imported. Add to that higher prices for fuel and fertiliser.
  • Higher oil prices mean adds $19bn to the regions imports which worsen the current account balance. However the eight petroleum exporting countries do benefit.
  • SSA countries are not well placed to cope with the need for increased government spending which means using more tax revenue. Increasing oil prices have a direct fiscal cost through fuel subsidies and rising interest rates globally make it more expensive to borrow money to keep the economy ‘above water’ let alone for actual development.

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on inflation. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

The Headwinds and the economic system

I came across this graphic by Bruce Mehlman in ‘Thoughts from the frontline’ from Mauldin Economics. It looks at the change that was already evident before COVID-19 and the war in the Ukraine but have accelerated because of these events. The tailwinds for 30 years since the fall of the Berlin Wall are starting to slow/stop and it seems that there are now headwinds rising and reversing the process. The trust element in the global economy is probably at all time low and survey data between 1979 and 2021 saw that the military gain trust. All others—media, religion, courts, schools, labor, business, Congress—lost much and sometimes most of their credibility since then.

However in times crisis humanity can usually conjure up accelerating innovation and change: faster productivity, entrepreneurship, smarter healthcare, and a transition to next-generation energy sources.

NZ Supermarket Duopoly – will there be more regulation?

With this duopoly in the news again I thought it timely to look at an older post explaining duopolies- also added a ONENEWS report on the matter.

The supermarket duopoly in New Zealand (Foodstuffs and Woolworths NZ) has been in the news lately and I thought about explaining the strategy of companies in this market structure. Part of the NCEA Level 3 and the CIE A2 economics courses look at market structures – monopolistic, oligopoly, duopoly, monopoly, and monopsony. A duopoly refers to two firms in a market whilst an oligopoly has a small number of firms but greater than two. Therefore we can say that Oligopoly and Duopoly are very similar market structures and they can co-ordinate their behaviour to exploit the market by lowering competition which in turn leads to greater profits for all.

Bernard Hickey from The Spinoff made some salient points about the Commerce Commission report on the duopoly:

  • Foodstuffs and Woolworths NZ have been protected by 150 covenants that stop competitors getting access to the best locations for supermarkets.
  • Their profits are at least twice as much as is normal for the international supermarket sector,
  • The beneficiaries of these super profits have blamed global forces – eg bad harvests, limited global supply for high prices. Aotearoa had the fifth most expensive groceries in the OECD and households spent the fifth most per capita per week on groceries in 2017.
  • Profits on the supermarket sector’s $22b worth of sales each year are around double what they would be if the market was properly efficient and competitive.
  • Both Foodstuffs and Woolworth NZ use their buying power to shift costs and risks back onto suppliers, while also threatening to pull suppliers’ products and blocking them from supplying the other group.
  • NZ needs to look at what Joe Biden is doing – limiting market power in certain industries – technology, meat-packing, airlines and pharmaceuticals.

The Commerce Commission said

“We consider that the New Zealand market could sustainably accommodate at least one more large-scale rival, and that reducing current constraints on entry and expansion would help to facilitate this. In the long term, actual entry or expansion is likely to be the greatest driver of competition”

How do duopolies exploit the market?

Using the example of the supermarket duopoly Foodstuffs and Woolworths. Each company has two options – high price or low price. Obviously if they both price low they stand to be worse off and if they price high they are both set to gain. The outcome and payoffs are illustrated below:

Maximax – riskier strategy
A maximax strategy is one where the player attempts to earn the maximum possible benefit available. This means they will prefer the alternative which includes the chance of achieving the best possible outcome – even if a highly unfavourable outcome is possible. This strategy, often referred to as the best of the best is often seen as ‘naive’ and overly optimistic strategy, in that it assumes a highly favourable environment for decision making.

In this case, for both food providers, the aggressive maximax strategy is $140m from a low price and $120m from a high price, so a low price gives the maximax pay-off.

Maximin – conservative strategy
A maximin strategy is where a player chooses the best of the worst pay-off. This is commonly chosen when a player cannot rely on the other party to keep any agreement that has been made – for example, to deny.

In terms of the pessimistic maximin strategy, the worst outcome from a low price is $100m, and from a high price is $70m – hence a low price provides the best of the worst outcomes.

Again, lowering price is the dominant strategy, and the only way to increase the pay-off would be to collude and increase price together. Of course, this requires an agreement, and collusion, and this creates two further risks – one of the food companies reneges on the agreement and ‘rats’, and the competition authorities investigate the food companies, and impose a penalty.

Nash equilibrium
Nash equilibrium, named after Nobel winning economist, John Nash, is a solution to a game involving two or more players who want the best outcome for themselves and must take the actions of others into account. When Nash equilibrium is reached, players cannot improve their payoff by independently changing their strategy. This means that it is the best strategy assuming the other has chosen a strategy and will not change it. For example, in the Prisoner’s Dilemma game, confessing is a Nash equilibrium because it is the best outcome, taking into account the likely actions of others.

For more on Duopoly view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

Business cycle or volatile booms and busts? The four stages of the bubble.

I blogged on this topic last year but below is a useful video from the Wall Street Journal (WSJ) on how bubbles are so difficult to predict with some examples from Gamestop to Tulips. A graphical explanation follows after the video.

I picked up this graphic and explanation from The Geography of Transport Systems by Jean-Paul Rodrigue (2020)

It is apparent that business cycles aren’t those smooth ups and downs as depicted in a lot of textbooks but more volatile with booms and busts. Central banks appear to play their part in this process with the low cost of borrowing feeding the boom phase of the cycle. Instead of economic stability regulated by market forces, monetary intervention creates long-term instability for the sake of short-term stability.

Bubbles (financial manias) unfold in several stages, an observation that is backed up by 500 years of economic history. Each mania is obviously different, but there are always similarities; simplistically, four phases can be identified:

  • Stealth – emerging opportunity for future prize appreciations of investments. Investors have better access to information and understand the wider economic context that would trigger asset inflation. Prices tend to increase but are unnoticed by the general public.
  • Awareness – many investors start to notice the momentum so money starts to push prices higher. There can be sell-offs but the smart money takes this opportunity to reinforce its existing positions. The media start to notice that this boom benefits the economy.
  • Mania – the public see prices going up and see this a great opportunity to invest with the expectations about future appreciation. This stage is not so much about reasoning but psychology as money pours into the market creating greater expectations and pushing prices up. Unbiased opinion about the fundamentals becomes increasingly difficult to find as many players are heavily invested and have every interest to keep asset inflation going. At some point, statements are made about entirely new fundamentals implying that a “permanent high plateau” has been reached to justify future price increases; the bubble is about to collapse.
  • Blow-off – everyone roughly at the same time realises that the situation has changed. Confidence and expectations encounter a paradigm shift, not without a phase of denial where many try to reassure the public that this is just a temporary setback. Many try to unload their assets, but takers are few; everyone is expecting further price declines. Prices plummet at a rate much faster than the one that inflated the bubble. Many over-leveraged asset owners go bankrupt, triggering additional waves of sales. This is the time when the smart money starts acquiring assets at low prices.

For more on the Business Cycle view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

Yen depreciation is good for Japan and its trading partners.

A weaker currency will make exports cheaper and imports more expensive – see mindmap below. As for Japan’s falling yen it is positive for its economy as a whole as it tries to get closer to its 2% inflation target.

The weak yen is also a chance to stimulate exports, even if Japan is no longer the currency-sensitive export machine it once was. Although it has meant more expensive oil and food imports, wages have hardly risen in response to higher prices. It used to be the case that the world was concerned with cheap Japanese exports but this means that it is exporting deflation which is what most developed countries want. The FT article on this topic is very good

Source: CIE A Level Revision – Susan Grant

For more on exchange rates view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

Difference between the IMF and the World Bank

Teaching external debt and the role of IMF and World Bank which is part of Unit 4 of CIE A2 syllabus. This is area where students get confused as to the role of each organisation.

The International Monetary Fund (IMF) (http://www.imf.org) promotes international financial stability of the world’s monetary system. Lends to countries with balance of payments problems and aims to promote development by restoring short run stability and by supporting long term adjustment and reform

The World Bank (http://www.worldbank.org) promotes institutional, structural and social development by providing low interest loans and technical assistance for domestic investment projects. It’s goal is to reduce poverty by offering assistance to middle-income and low-income countries. It aims to help countries meet the UN Millennium Development Goals.

Below is a useful video from CNBC on the differences.

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on developing economies and the IMF/World Bank. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

Green economy – who are the winners and losers?

The Economist had a piece in their Finance and Economics section on the new energy superpowers. As the world attempts to switch to cleaner energy sources – the International Energy Agency (IEA) forecasts that wind and solar could account for 70% of power generation by 2050. This means a huge increase in demand for copper, lithium, nickel, cobalt etc. Who are the winners and losers from the move to green energy?

Invariably with any economy being able to exploit a natural resource there is the danger that investment is channelled into a commodity to the detriment of diversifying their economy. Economists refer to this as the Dutch Disease which makes reference to Holland and the discovery of vast quantities of natural gas during the 1960s in that country’s portion of the North Sea. The subsequent years saw the Dutch manufacturing sector decline as the gas industry developed. The major problem with the reliance on oil is that if the natural resource begins to run out or if there is a downturn in prices, once competitive manufacturing industries find it extremely difficult to return to an environment of profitability. See flow chart below.

According to the UN a country is dependent on commodities if they are more than 60% of its physical exports – in Africa that makes up 83% of countries. One of the major concerns for resource rich countries is the wild fluctuations in commodity prices which can lead to over investment – Sierra Leone created two new iron-ore mines in 2012 only for them to close in 2015 as prices collapsed. However the amount of jobs created in the mineral extraction industry is limited – across Sierra-Leone of 8m people, about 8,000 work in commercial mines. A major problem in these countries is that when there is money made from resources it tends to go on government salaries rather than investing in education. infrastructure and healthcare etc. The flow chart below outlines the problems of resource dependence.

Source: The Economist – The New Superpowers – March 26th 2022

More inflationary problems with Shanghai port chaos

Shanghai is one of the world’s busiest ports and is usually a well-choreographed operation. Containers ships drop off component parts, empty containers and pick-up exports etc. However with the port in total lockdown the number of ships waiting offshore to be loaded and offloaded of goods is quite staggering – see image from Scott Gottlieb (Twitter).

This is the accumulation of 3 weeks when the port is not operational – workers are in lockdown. The effect of this will be to clog up other ports as ships arrive at the same time and are completely out of sync with what is normal.

The graph below shows that twice as many ships are waiting near Shanghai ports as opposed to last year, which was already above average.

Although consumer and business spending has remained strong, the delays will add to inflationary pressure as goods arriving late from China will mean a short supply in the shops. Add to this the Ukraine war and rising energy and food prices and we have a major inflationary problem on our hands. It’s time to ‘batten down the hatches’.

Source: Thoughts from the Frontline – 23rd April 2022

Inflation – should central banks hold off on tightening?

In New Zealand the recently published CPI figures published yesterday saw the yearly inflation rate climb to 6.9%. The main points to note are:

  • Tradeables inflation (imported) – makes up 40% of CPI – 8.5%
  • Non-tradeables (domestic) – makes up 60% of CPI – 6.0%
  • Housing and household utilities increased 8.6 %,
  • Transport increased 14 %,
  • Food prices increased 6.7 %,
  • Petrol prices 32.3%

The continued rise in domestic inflation means that the RBNZ will probably look at another 50 basis points rise later in the year.

Source: IMF

Ukraine War adds another supply shock – are higher interest rates the way to go?
With a second supply shock and inflation globally on the rise (see graphs) central banks have raised interest rates. However the Russian invasion of Ukraine and the subsequent increase in food and energy prices has asked questions of how central banks should approach monetary policy in what is unusual circumstances. Martin Sandbu in the FT suggest that they should rethink how they look at the operation of an economy. He made 3 main points:

  • Are central banks committed to aggressively increasing increasing rates every time there is a supply shock? This has a huge impact on households and businesses.
  • Do central banks know how their monetary policy works? Higher interest rates reduce aggregate demand and therefore easing the pressure on the supply side. However this is difficult to vindicate in that nominal spending has only just returned to pre-pandemic levels and still fell short in the EU and the UK.
  • These supply-shocks are ‘out of left field’. COVID caused greater spending on durable goods and non-durable goods by 25% and 10% respectively. Services remained depressed.

With the energy shortages arising from the Ukraine War there will be a movement away from production and consumption that use coal, oil and gas. Russian coal is already banned and it is likely that oil and gas will follow. Sandbu asks how monetary policy should approach a supply shock of this nature. If lower interest rates makes it easier to relocate resources then that is the best option for central banks. A tightening of monetary policy would make investments in new capacity both more expensive and less attractive as demand growth slows.

Today there are abnormal circumstances – COVID, Climate Crisis, Ukraine War, supply chain problems. These will mean huge structural shifts which can improve an economy’s productivity and lower inflationary expectations. If there are still higher interest rates productive potential would be reduced which would mean added pressure on inflation. Heading into a time of global supply chain problems monetary policy seems to be less effective.

Source: Central bankers should think twice before pressing the brake even harder – Martin Sandbu – FT 20th April 2022

Is German Football like the German Economy?

In teaching economics I try and relate as much as I an to the interests of the students. I have found that sport is one way of engaging a class especially in the macro indicators of a country – growth, unemployment, inflation, trade, inequality etc. The German economy has been the backbone of the EU for a number of years but has this corresponded to the success/failure of the national football team? The performance at the 2004 Euros were the catalyst to an overhaul of the German coaching system – outlined brilliantly in Raphael Honigstein’s book – Das Reboot. This came to fruition in the 2014 World Cup final when German beat Argentina 1-0 in extra time.

However a year earlier in 2013 there was an all German final in the European Champions League with Bayern Munich defeating Borussia Dortmund 2-1 at Wembley Stadium in London. In order to get to the final both teams beat Spanish counterparts – Real Madrid and Barcelona. What is fitting is that in economic terms German is the powerhouse of the European economy whilst in contrast Spain has suffered greatly from the euro crisis and austerity measures that have been imposed on it. If you look at post-war Germany you can see some correlation between the success of the national side and state of the economy.

The Economist looked at this and made the point that German has opened up its borders to not just traditional labour but also football players. Of the two squads on show at the Champions League Final at Wembley in 2013, 17 were from outside Germany.

Most visibly, Germany opened up. Just as immigrants flock to German jobs (more than 1m net arrivals in 2012), so players join German clubs. Between them Bayern and Dortmund have four Brazilians, three Poles, a Peruvian-Italian, a Serb, a Croat, a Swiss of Kosovar extraction, an Austrian of Filipino/Nigerian stock, a Ukrainian and two Australians—and so on. Of the German players, several have dual citizenship or a “migration background”. If the choice is between a German Europe or a European Germany, as the novelist Thomas Mann once put it, football points to the second.

2014 onwards

The 2014 World Cup victory, almost 25 years since they last won it, was achieved largely through the restructuring of German coaching system. The style of play was transformed from a defensive minded ‘park the bus’ attitude to one of free flowing counter attacking style. However the economy was not as buoyant as in previous years with unemployment 6.6% and the spectre of deflation rising its head. Roll on the 2018 World Cup and the defending champions had a disastrous campaign with not even getting out of pool play. This coincided with weakest growth in Germany for five years. The Euro 2020 (played in 2021 because of covid) saw Germany going out to England in the last 16. With regard to the club scene Bayern Munich did win the Champions League in 2020 but no German team made it to the semi-finals in 2021 as both Bayern Munich and Borussia Dortmund were knocked out in the quarter finals.

As with most countries the German economy failed to return to its pre-covid growth rate as shortages of manufacturing inputs have hampered any recovery. However, there are plenty of orders on the books for German companies for a potential rebound when supply constraints ease. On the football side of things under new manager Hansi Flick, ex Bayern Munich, the national side breezed through qualifying for Qatar 2022 in what was a weak group, but are still ranked only 12th in the world which is an improvement on 16th in 2018.

Regional GDP in New Zealand for March 2021

Some recent stats – geographical breakdown of nominal GDP within New Zealand for year ended March 2021. Out of all 15 regions only Taranaki (-5.8%) and Otago (-2.2%) contracted from the previous year.

Highest GDP per capita
– Wellington $75,319
– Auckland $70,952
– Taranaki $70,626

Lowest GDP per capita
– Northland $43,931
– Gisborne $45,545
– Manawatu/Wanganui $49,932

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

Economics Correspondent – Peter O’Hanraha-Hanrahan

A lighthearted look at EU quota rates with the United States. This is part of the programme ‘The Day Today’ back in the 1990’s which was a take-off of the BBC 2 Newsnight programme hosted by Jeremy Paxton. I usually show this once I have done barriers to trade in Unit 4 of the AS course. It will be interesting to see if students find it funny.

Inflation today – what is the best response?

The Inflation globally has been on the increase and above the target band in most developed economies. This applies to both Headline and Core inflation.

Headline Inflation – all goods and services
Core Inflation – all goods and services excluding food and energy.

Economic theory suggests that inflation could accelerate and return to levels seen in the 1970’s. A lot will depend how policymakers react to the challenge of bringing inflation down to their specific target level – RBNZ 1-3% but CPI in NZ is 5.9%. See chart for inflation breakdown in OECD countries.

Source: IMF

Key reasons for inflationary pressure.

Supply chain bottlenecks: Lockdowns and shipping problems (container shortages) but latterly the demand side has accelerated – economic recovery and demand for durable goods as well as panic buying.

Demand for more goods than services: Much of the inflation has been in durable goods whilst service inflation has only seen a small increase. This is dependent on which country – for instance demand for used cars in the US has soared.

Fiscal and Monetary stimulus: Approximately US$16.9trn of government spending has been injected into the global economy. This is accompanied by expansionary monetary policy (low interest rates) is conducive to more spending and higher inflation. Savings that accumulated during the lockdowns were now being spent. There was a debate between leading economists whether the inflation would be transitory or persistent. It seems that the data now supports those of the persistent camp. Whether it persists depends on central banks.

Labour supply: Labour participation rates have dropped – for instance for every job opening in the US there is only 0.77 unemployed people per job. See previous post – US Economy – potential for wage-price spiral. This is due to continue meaning that there is a job seekers market where there is likely to be pressure on wages.

Russian invasion of Ukraine: Russia and Ukraine are big exporters of food and major commodities so higher prices have been inevitable with major disruptions to the supply either through sanctions or conflict areas. They supply 30% of global wheat exports so prices have been increasing.

Source: IMF

What should central banks do?

Mainstream policy by central bankers should ignore supply-side shocks like higher commodity prices as this is only temporary. When central banks have intervened and raised interest rates they have ended up worsening economic conditions – ECB raising rates post GFC in 2008 and 2011. Already inflation globally is increasing but there is little central banks can do with higher global energy prices. A focus on home grown inflation (core) might be a better indicator to watch as well as the labour market – fast wage growth might mean higher interest rates. Economist John Cochrane argues that bringing down inflation through higher interest rate is a blunt tool, especially when prices have risen predominately through a loose fiscal policy. He states that inflation might get worse if people doubt the government’s ability to repay its debt without a discount from inflation.

Ultimately the outlook for inflation depends on how determined central banks are to rein in inflation and the confidence of the bond market to governments willingness to pay their debts. Below is a good video from the IMF on the inflationary problem.

Sources: IMF – Will Inflation Remain High? The Economist – ‘War and Price’ – March 5th 2022