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Econfix now hosted by elearneconomics

January 21, 2018 Leave a comment

For your information Econfix moved to elearneconomics last month. All Email, Twitter and LinkedIn subscribers were automatically redirected to the new site. If you have come across this blog and want to subscribe please go to the elearneconomics site – the link is below:

http://blog.elearneconomics.com/

Screen Shot 2015-10-07 at 9.00.18 PM

 

Categories: Uncategorized

Spotting a Financial Crisis

November 30, 2017 Leave a comment

Below is another great video from PunkFT. Financial crises start with significant increases in asset prices followed by a severe correction and a collapse. But with more debt and more credit the market is unstable and although they have never been higher the yields have never been lower.

Thanks to more and more debt driving yet more and more credit, making everything more and more unstable. Today, for example, markets have never been higher. Yields have never been lower.

The early warning signs
These economic crises are easy to spot and they follow a familiar pattern. The warning signs are:

1. A bank grows very quickly and issues poor quality loans against nominal yields. It uses leverage to do this and fails to be aside reserves for possible future losses.

2. Normally the share price of these banks would plummet but in fact the opposite happens – the share price is driven up. As the bank takes more and more risk to generate more return, the market gets giddy, and they drive up the share price.

3. We don’t learn from our mistakes. The Global Financial Crisis suggests that the economy is following the contours of typical recession but that it is more severe. Subsequently forecasters who have tried to make resemblance to post-war US recessions are “barking up the wrong tree” and are of the belief that conventional tools like expansionary fiscal policy, quantitative easing and bailouts are way to go. The real problem is that the global economy is badly leveraged and there is no quick fix without a transfer of wealth from creditors to debtors. Ken Rogoff (co-author of ‘This Time is Different’) suggests that the ‘Second Great Contraction’ is a more realistic description of the current crisis in the global economy. The “First Great Contraction” was the Great Depression of 1929 but the contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete.

If everybody else is doing it and getting rich, why, the CEO asked himself, shouldn’t I? The real cause of banking failures and systemic collapse lies with ethics at the top. And human nature tells us that bad ethics drive out good ethics.

What are the highest paid sports leagues?

November 24, 2017 Leave a comment

NBA basketball has the highest average salary of any sports league followed by IPL cricket with baseball coming in third. Over half of the highest paid leagues were football with the EPL and the Bundesliga being above US$2 million. It is interesting that La Liga is third within the Football category even though a Spanish team has won the Champions League 5 times in the last 7 years.

In cricket the Twenty20 format has proved to be very popular with television viewers and gets very good attendances most notably in the IPL (India), Big Bash (Australia) and T20 Blast (England). In September this year IPL signed a five year contract worth US$2.55bn (US$510m per year) for broadcast and digital rights with Star India – a TV network owned by 21st Century Fox. The IPL competition involves just 60 matches which equates to US$8.5m per game which is 400% higher than the NBA per game and 66% greater per game than that of the EPL.

Cricket in the USA
Although cricket is globally very popular it has very limited uptake in the USA – both players and spectators. Sport in the USA has a high income elasticity of demand which means a change in income results in a greater percentage increase in demand. An Indian Media firm – Times of India Group – are hoping to tap into the American market and put on high profile cricket matches with the leading players in the game. The games generally take place in baseball stadiums but the firm is considering building cricket stadiums.

Highest paid sports leagues 2014-2015 season.

Top paid sports leagues.png

Source: CIE AS & A Level Revision Guide by Susan Grant

OMD – The Punishment of Luxury

November 16, 2017 Leave a comment

I came across this new album by Orchestral Manoeuvres in the Dark (OMD) – The Punishment of Luxury. For those of you are unfamiliar, OMD are a band from Merseyside Liverpool and have been long remembered for their hits “Electricity”, in 1979 and the 1980 anti-war song “Enola Gay”. The band achieved broader recognition via their seminal album Architecture & Morality (1981) and its three singles, all of which were international hits.

The “Punishment of Luxury” album is specifically about the global divide. Today the world is more unequal than at any time in world history which is due largely to the fact that 200 years ago everyone was poor. But the increasing wealth of the higher income group has been alarming – America’s top 10% now average more than nine times as much income as the bottom 90%. The fact that people are much better off materially doesn’t seem to translate into a better mental condition – they seem to be unhappy. If you are in this situation you have undoubtedly got on the hedonic treadmill and the marketing people have got under your skin. It seems that if you don’t have the latest brand of a product you are less worthy of being recognized by your peer group and have less self-respect.

It seems that the very wealthy have the same problems as the rest of us but only on a much larger scale. A research paper from Boston College entitled “Secret fears of the super-Rich found that the top fears of the rich are:

  • The rich need increasing amounts of money to make them feel financially secure.
  • They feel isolated and don’t share their concerns or stress as they will sound ungrateful.
  • Thy worry that their children will become spoilt by inheriting so much wealth or resentful if its too little.
  • You are unsure if your friends genuinely like you or your money
  • There is constant dissatisfaction with consumption as something better / new is always being launched. They can’t get off the hedonic treadmill
  • Parents are concerned that money will rob their children of ambition and getting a job.

The title track is below. It is very OMD for those of you who are familiar with the sound of the band.

Paradox of Thrift – Great Depression & GFC

November 14, 2017 Leave a comment

Although the paradox of thrift has been a regular part of the CIE A Level syllabus it is has only become more relevant since the Global Financial Crisis (GFC). It has its origins in the 1714 book entitled ‘The Fable of Bees’ by Bernard Mandeville but it was John Maynard Keynes who really popularized this concept during the Great Depression of the 1930’s. Classical economic theory suggests that greater levels of saving will increase the amount of loanable funds in the banks and therefore reduce the cost of money – interest rates. This allows people to put off consumption to a later date thereby avoiding the risk of taking on debt and thereby give people security if their jobs became threatened during a recessionary period

Keynes’ beliefs
Keynes argues that saving was not a virtue from a macroeconomic view as he believed that negative or pessimistic expectations during the Depression would dissuade firms from investing. Cutting the rate of interest is supposed to be the escape route from economic recession: boosting the money supply, increasing demand and thus reducing unemployment. He also suggested that sometimes cutting the rate of interest, even to zero, would not help. People, banks and firms could become so risk averse that they preferred the liquidity of cash to offering credit or using the credit that is on offer. In such circumstances, the economy would be trapped in recession, despite the best efforts of monetary policy makers. The graph below shows a liquidity trap. Increases or decreases in the supply of money at an interest rate of X do not affect interest rates, as all wealth-holders believe interest rates have reached the floor.

Liquidity Trap

All increases in money supply are simply taken up in idle balances. Since interest rates do not alter, the level of expenditure in the economy is not affected. Consequently, monetary policy under these circumstances is futile.

Keynes saw the 1930’s as a time when aggregate demand needed boosting – C+I+G+(X-M) – as the economy was in underemployment equilibrium. With the help of the multiplier, output and employment would increase – GDP. But with increased saving leading to reduced consumption and a fall in aggregate demand, a recession will worsen.

The fact that income must always move to the level where the flows of saving and investment are equal leads to one of the most important paradoxes in economics – the paradox of thrift. Keynes explains how, under certain circumstances, an attempt to increase savings may lead to a fall in total savings. Any attempt to save more which is not matched by an equal willingness to invest more will create a deficiency in demand – leakages (savings) will exceed injections (investment) and income will fall to a new equilibrium. In the graph below, the point of equilibrium is at E where the saving curve SS and investment curve II intersect each other. The level of income at equilibrium is OY and saving and Investment are equal at OH. When the aggregate saving increases, the saving curve shifts upwards from SS to S1S1. The new equilibrium point is E1 with OY1 level of income. Saving and investment are equal at point OT. As the level of saving increases, national income decreased from OY to OY1. Similarly, the volume of saving and investment also declined from OH to OT.

Paradox of Thrift

Negative Multiplier

People save more → spend less → another’s reduced income → negative multiplier → reduces demand → unemployment ↑ → incomes ↓ → AD↓ therefore planned increase in savings makes a recession worse.

Paradox of thrift today

The relevance of the paradox of thrift today is different from that during the Great Depression in the 1930’s. Back then consumers weren’t in as much debt as they are today and the government played a much smaller role in the economy with little or no welfare state to provide automatic stabilizers. Also the financial system wasn’t an interconnected as it is today and the financial engineering that evolved in the 2000’s allowed for the creation of instruments that had no real value to the economy – CDO and CDS. But after the GFC the expectations of consumers became very negative and as workers became fearful of losing their jobs what followed was an increase in savings as they wanted less exposure to debt, which negatively affected consumption.

Categories: Debt, Growth Tags:

AS Economics – Inflation Revision

November 13, 2017 Leave a comment

With the Cambridge AS and A2 multiple-choice papers on Wednesday here are some revision notes on inflation and a diagram that I have found useful. As well as cost-push and demand-pull inflation remember:

Inflationary Expectations

In recent years more attention has been paid to the psychological effects which rising prices have on people’s behaviour. The various groups which make up the economy, acting in their own self-interest, will actually cause inflation to rise faster than otherwise would be the case if they believe rising prices are set to continue.

Workers, who have tended to get wage rises to ‘catch up’ with previous price increases, will attempt to gain a little extra compensate them for the expected further inflation, especially if they cannot negotiate wage increases for another year. Consumers, in belief that prices will keep rising, buy now to beat the price rises, but this extra buying adds to demand pressures on prices. In a country such as New Zealand’s before the 1990’s, with the absence of competition in many sectors of the economy, this behaviour reinforces inflationary pressures. ‘Breaking the inflationary cycle’ is an important part of permanently reducing inflation. If people believe prices will remain stable, they won’t, for example, buy land and property as a speculation to protect themselves.

A2 Revision – Imperfect Competition AR, MR and TR curves

November 13, 2017 Leave a comment

fig08-11You should note the following from the graphs:
• to sell an additional unit of a commodity, the monopolist must reduce the price of all units sold. This therefore means the AR curves falls.
• as the price on all units must be lowered to sell the higher output, MR is lower than the price of the marginal unit(AR)
• TR at first increases with output but as price is reduced to sell more goods and services, eventually falls.
• where MR = 0 TR is at a maximum.

A2 Economics: Two ways of calculating the equilibrium level of income

November 10, 2017 Leave a comment

Went through an A2 multiple-choice question on calculating the equilibrium level of income with my A2 class. There are two ways that it can be worked out. Here is the question:

In a closed economy with no government C = 30 + 0.8 Y and I = 50, where C is consumption, Y is income and I is investment.

What is the equilibrium level of income?

A 64                B 80              C 250               D 400

Below is the most common way of working the question out:

Y = C + I

Y = 30 + 0.8Y + 50

0.2Y = 80

Y = 400

Here is the other way that you should be able to work out the equilibrium

Remember: Savings = Income – Consumption

S = Y – C

S = Y – (a + cY)

S = Y – a – cY

S = -a + (1-c) Y

So if we put the figures into the equation you get:

50 = -30 + (1-0.8) Y

50 = -30 + 0.2Y

80 = 0.2Y

Y = 400

Supreme and Economics

November 8, 2017 Leave a comment

SupremeStudents have long been talking about brands and none other than that of Supreme. Supreme was created in the 1980’s and was originally a brand which associated itself with the skateboard industry. There are currently 11 stores worldwide with three in the USA and six in Japan as well as store in Paris and London. In January this year Louis Vuitton held a fashion show featuring LV and Supreme as the two brands joined forces. Since then pop-up stores featuring the collaboration were opened on June 30, 2017 in Sydney, Seoul, Tokyo, Paris, London, Miami, and Los Angeles. It was the London pop-up that was recently the focus of an article in 1843 magazine of The Economist.

At 10am on Day One of the sale, a queue of about 600 people stretched down the Strand and along Surrey Street. Martin, Richard, Alex and Adita were all there. Running the queue for Louis Vuitton was security specialist Lex Showumni. “This is my first experience with Supreme. I was told it was going to be crazy, a lot of people pushing and shoving, but we haven’t experienced that so far.” The Supreme faithful have their own, slightly dubious, process of queue-management based on attendance and standing. It mostly works, but some people were unhappy: a trader had left the head of the queue to withdraw £12,000 from an ATM. He returned without the cash having lost his number 1 spot; eventually, after some animated discussion, he slipped back in near the front.

Each customer was admitted to the store for 15 minutes and allowed to buy six items. Successful trophy hunters included Ari Petrou, with a flipped T-shirt (around £400), that he was definitely keeping. Jeremy Wilson bagged a coveted red-logo baseball shirt (£730) that he planned to resell.

Within an hour, three main secondary exchanges had been set up outside the official store: one in the Pret A Manger, the other beneath a tree, and the third next to a municipal toilet. One dealer, who asked not to be named, explained that he had paid ten people a set fee to get early places in the queue and would give them a cut of the resale value of anything they could get their hands on. “It’s business!” he laughed. Wodges of cash were exchanged and stashed in newly acquired Louis Vuitton bags.

Invariably the hype that surrounds the pop-up store and the limited supply creates a situation where people get extremely anxious and are prepared to pay significant amounts of money for what could be classed as normal consumer goods.

There are certain economic concepts behind this.

Inelastic Demand – people who buy Supreme are are not price sensitive to purchasing items – a flipped T-shirt (around £400) seems quite excessive. A higher price has little impact on the quantity sold. In fact it maybe a Veblen Good – see below.

Limited supply – there is an artificially low supply of the product to maintain its uniqueness and ultimately it becomes very scarce. This creates excess demand which drives up the price

VeblenVeblen Goods – Conspicuous consumption was introduced by economist and sociologist Thorstein Veblen in his 1899 book The Theory of the Leisure Class. It is a term used to describe the lavish spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status. So-called Veblen goods (also as know as snob value goods) reverse the normal logic of economics in that the higher the price the more demand for the product – see graph.

 

A2 Revision: Multiple-Choice question on shape of Total Cost curve

November 8, 2017 1 comment

WebBeen doing some A2 revision courses this holidays and this question came up. In the last two November A2 exams there have been multiple choice questions concerning the point on the Total Cost curve when MC, AVC, and ATC are at their lowest point. In the graph note the corresponding points on the Total Cost. They usually ask you where on the Total Cost line is the lowest point on the MC curve/AVC curve etc.

Remember:
MC 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.

Categories: Exam revision Tags:

A2 Revision – Pareto Efficiency

November 6, 2017 Leave a comment

In the A2 exam there is usually one multiple-choice question on Pareto Efficiency and part of an essay.  The idea of Pareto Efficiency is named after the Italian Economist Vilfredo Pareto. For a given set of consumer tastes, resources, and technology, an allocation is Pareto-efficient, if there is no other feasible allocation that makes some people better off and nobody worse off. See also a previous post – Pareto Optimality and the perfect wave.

fig15-01

The figure above shows an economy with only two people, Susie and David. The initial allocation at A gives David QD goods and Susie QS goods. Provided people assess their own utility by the quantity of that they themselves receive, B is a better allocation than A which in turn is a better allocation than C. But a comparison of A with points such as F, D or E, requires us to adopt a value judgment about the relative importance to us of David’s and Susie’s utility. It is important to note from the figure the following:

  • If you move from A to B or A to G it is a Pareto gain – A to B both Karen and John are better off. A to G Susie is better off, David no worse off.
  • If point B or G is feasible then point A is Pareto-inefficient – more goods can be consumed
  • A move from A to D makes David better off and Susie worse off. However we need to make a judgment about the relative value of David’s and Susie’s utility before we can comprehensively state that David is better off. Therefore the Pareto principle is limited in comparing allocations on efficiency – it only allows us to evaluate moves to the north-east and south-west

fig15-02

Therefore, we need look at the economy as whole and how many goods it can produce. In the Figure above the frontier AB shows the maximum quantity of goods which the economy can produce for one person given the quantity of goods being produced for the other person. All points on the frontier are pareto-efficient. David can only be made better off by making Susie worse off and vice versa. The distribution of goods between David and Susie is much more equal at point C than at points A or B. Note that:

Anywhere inside the frontier is Pareto-inefficient – some can be made better off without making the other worse off.

The economy should never choose an inefficient allocation inside the frontier. Which of the efficient points on the frontier (A, B, C) is the most desirable will depend on the value judgment about the relative value of David and Susie utility.

Source: Economics by Begg

Categories: Micro Tags:

Recession Recovery or He-cession She-covery?

November 2, 2017 Leave a comment

Radio NZLast Sunday there was a very good interview with Canadian economist Armine Yalnizyan on Radio New Zealand’s ‘Sunday’ Programme (with Wallace Chapman). She mentions that the neoliberal policies of the last 30 years have seen income inequality grow and the collapse of consumer spending (C) the main driver of any domestic economy. There has been an increase in the proportion of income accruing to assets which worsens inequality in many countries. China would be an economy that has relied a lot on its export sector (X) for growth but is now trying to drive domestic demand (C) to generate growth. Remember that Aggregate Demand = C+I+G+(X-M). She makes the point that corporates favour the return for shareholders rather than for example
the wages of employees.

“We have this very unusual situation here where corporations are gaining in strength for a host of reasons, similar to the type of corporate power 100 years ago, in key sectors of the economy with less ability to either tax a proportion of the profits they make or regulate their activities.”

Boosting the minimum wage is stimulatory

She also mentions an increase in the minimum wage being stimulatory with lower income groups spending a much higher proportion of their income and thereby increasing consumption. And the vast majority of this spending happens in the domestic economy – C↑. Some have talked of wage inflation by increasing the minimum wage but with the fall in trade union membership and bargaining power this has been significantly reduced. In fact we have seen wage compression.

He-cession and She-covery

However later on in the interview I was interested to her explanation of He-cession and She-covery during the interview.

Recession = “he-cession” – more men tend to become unemployed as areas that are initially impacted by the downturn are manufacturing, mining, construction etc which are likely to be male dominated.

Recovery = “she-covery”: men who lose $30 an hour jobs wince at accepting $15 an hour offers, but women grab them to make sure the bills get paid.

Indifference Curves – Mindmap

October 30, 2017 Leave a comment

With a bit more time on my hands I was able to produce a mindmap on Indifference Curves – a topic that students find quite difficult. The mindmap covers all the main features – what is meant by the Income Effect, Substitution Effect and most importantly how they are characterised in Normal, inferior and Giffen goods. Particularly useful for a theoretical essay on utility and consumer choice. You can download a full size copy by clicking here.

Mind Map 13 indifference curves.jpg

Categories: Micro Tags:

Have Central Bankers’ got it wrong?

October 30, 2017 Leave a comment

Below is very good video from the FT – here are the main points:

  • Central Banks – by lowering interest rates they could make savings less attractive and spending more attractive
  • After GFC low interest rate and asset purchases increased lending and avoided a global depression.
  • Now the world economy is not behaving as the central bankers’ said it would
  • Their theory was that with lose credit (lower interest rates) the economy would grow and inflation would rise.
  • Inflation is stagnant (unlike the 1960’s – see graph below) and this is worrying as a little inflation is required to lubricate the economy. It allows prices to fall in real terms.
  • The missing inflation may mean that the bankers’ theories are wrong.
  • Cheap money may have encouraged high asset prices and debt levels but it may undermine the economy without doing much for growth.

Inflation Unemployment.png

A2 Revision – New Classical to Extreme Keynesian

October 27, 2017 Leave a comment

The main competing views of macroeconomics (Keynesian vs Monetarist) is part of Unit 5 in the A2 syllabus and is a popular topic in the essay and multiple-choice papers. Begg covers this area very well in his textbook. In looking at different schools of thought it is important to remember the following:

Aggregate Demand – the demand for domestic output. The sum of consumer spending, investment spending, government purchases, and net exports
Demand Management – Using monetary and fiscal policy to try to stabilise aggregate demand near potential output.
Potential Output – The output firms wish to supply at full employment after all markets clear
Full Employment – The level of employment when all markets, particularly the labour market, are in equilibrium. All unemployment is then voluntary.
Supply-side policies – Policies to raise potential output. These include investment and work incentives, union reform and retraining grants to raise effective labour supply at any real wage; and some deregulation to stimulate effort and enterprise. Lower inflation is also a kind of supply-side policy if high inflation has real economic costs.
Hysteresis – The view that temporary shocks have permanent effects on long-run equilibrium.

There are 4 most prominent schools of macroeconomics thought today.

New Classical – assumes market clearing is almost instant and there is a close to continuous level of full employment. Also they believe in rational expectations which implies predetermined variables reflect the best guess at the time about their required equilibrium value. With the economy constantly near potential output demand management is pointless. Policy should pursue price stability and supply-side policies to raise potential output.

Gradualist Monetarists – believe that restoring potential output will not happen over night but only after a few years. A big rise in interest rates could induce a deep albeit temporary recession and should be avoided. Demand management is not appropriate if the economy is already recovering by the time a recession is diagnosed. The government should not fine-tune aggregate demand but concentrate on long-run policies to keep inflation down and promote supply-side policies to raise potential output.

Moderate Keynesians – believe full employment can take many years but will happen eventually. Although demand management cannot raise output without limit, active stabilisation policy is worth undertaking to prevent booms and slumps that could last several years and therefore are diagnosed relatively easily. In the long run, supply-side policies are still important, but eliminating big slumps is important if hysteresis has permanent effects on long-run equilibrium. New Keynesians provide microeconomics foundations for Keynesian macroeconomics. Menu costs may explain nominal rigidities in the labour market.

Extreme Keynesians – believe that departures from full employment can be long-lasting. Keynesian unemployment does not make real wage fall, and may not even reduce nominal wages and prices. The first responsibility of government is not supply-side policies to raise potential output that is not attained anyway, but restoration of the economy to potential output by expansionary fiscal and monetary policy, especially the former.

A2 Revision – Oligopoly and the kinked demand curve – download

October 25, 2017 Leave a comment

With the A2 Essay paper next week I thought something on the kinked demand curve might be useful. I alluded to in a previous post that one model of oligopoly revolves around how a firm perceives its demand curve. The model relates to an oligopoly in which firms try to anticipate the reactions of rivals to their actions. As the firm cannot readily observe its demand curve with any degree of certainty, it has got to estimate how consumers will react to price changes.

In the graph below the price is set at P1 and it is selling Q1. The firm has to decide whether to alter the price. It knows that the degree of its price change will depend upon whether or not the other firms in the market will follow its lead. The graph shows the the two extremes for the demand curve which the firm perceives that it faces. Suppose that an oligopolist, for whatever reason, produces at output Q1 and price P1, determined by point X on the graph. The firm perceives that demand will be relatively elastic in response to an increase in price, because they expects its rivals to react to the price rise by keeping their prices stable, thereby gaining customers at the firm’s expense. Conversely, the oligopolist expects rivals to react to a decrease in price by cutting their prices by an equivalent amount; the firm therefore expects demand to be relatively inelastic in response to a price fall, since it cannot hope to lure many customers away from their rivals. In other words, the oligopolist’s initial position is at the junction of the two demand curves of different relative elasticity, each reflecting a different assumption about how the rivals are expected to react to a change in price. If the firm’s expectations are correct, sales revenue will be lost whether the price is raised or cut. The best policy may be to leave the price unchanged.

With this price rigidity a discontinuity exists along a vertical line above output Q1 between the two marginal revenue curves associated with the relatively elastic and inelastic demand curves. Costs can rise or fall within a certain range without causing a profit-maximising oligopolist to change either the price or output. At output Q1 and price P1 MC=MR as long as the MC curve is between an upper limit of MC2 and a lower limit of MC1.

Criticisms of the kinked demand curve theory.
Although it is a plausible explanation of price rigidity it doesn’t explain how and why an oligopolist chooses to be a point X in the first place. Research casts doubt on whether oligopolists respond to price changes in the manner assumed. Oligopolistic markets often display evidence of price leadership, which provides an alternative explanation of orderly price behaviour. Firms come to the conclusion that price-cutting is self-defeating and decide that it may be advantageous to follow the firm which takes the first steps in raising the price. If all firms follow, the price rise will be sustained to the benefit of all firms.

If you want to gradually build the kinked demand curve model download the powerpoint by clicking below.
Oligopoly

Revenue of European Football Leagues – money doesn’t mean success.

October 21, 2017 Leave a comment

The English Premier League (EPL) is by far the richest in Europe with its revenue around €5bn in 2017 with only La Liga (Spain) and the Bundesliga (Germany) coming in at just under €3bn. However if you look at the performance of EPL teams in the Champions League their performance hasn’t been that good – no EPL team has reached the final of the Champions League since 2012. One reason for this might be that fees paid by the TV companies are divided more equally amongst all EPL teams which prevents a monopoly situation from emerging. In other major leagues in Europe the more successful teams have taken a greater share of their leagues profits.

Between 2003 and 2012, UEFA paid out €5.6 billion in prize money to teams competing in the Champions League. Some 45% of that prize money went to just 10 teams, which competed in almost every season and received an average €256 million each over the decade, or €25.6 million in every season. By contrast, there were another 85 clubs that participated over the decade but only for 2.7 seasons on average and they received only €3.6 million on average for each season they played. This means that these clubs received only €10 million on average over the entire decade. To put it another way, each of the big clubs every year gets more than two and a half times as much Champions League broadcast revenue as each of the remaining teams can expect to make in a decade. As a result of this it is not surprising in 2016 the German, French and Italian leagues endured a fourth consecutive year with the same champion, while Leicester City lifted the title in England. However La Liga have recently introduced a much fairer system of distribution of income amongst teams.

Sources:

  • The Economist – The wealth and mediocrity of English football. 2017
  • Money and Soccer: A Soccernomics Guide: By Stefan Szymanski. 2015

Football Revenues.png

Categories: Sport Tags:

Black Monday – 30 years on

October 20, 2017 Leave a comment

Black Monday refers to Monday, October 19, 1987, when stock markets  around the world crashed, shedding a huge value in a very short time. In New Zealand and Australia it is sometimes referred to Black Tuesday because of the different time zone. By the end of October stock markets around the world fell significantly:

  • Canada – 22.5%
  • USA – 22.68%
  • UK – 26.45%
  • Spain – 31%
  • Australia – 41.8%
  • Hong Kong – 45.5%
  • New Zealand – 60%

Unlike other countries the effect of the crisis was compounded by the Reserve Bank of New Zealand’s inaction to lower interest rates and therefore reduce the value of the NZ dollar. This is in contrast to the USA, Germany and Japan whose banks loosened monetary policy to prevent a recession. Below is a video from the FT looking back at the events 30 years ago. Also a useful graph to put the crash in perspective – the two circled ares are the dot.com crash and the GFC.

Black Monday in context

 

Transition Economies – Challenges

October 17, 2017 Leave a comment

A new part of the AS Level syllabus in 2016 is Transition Economies. What have been the formidable challenges facing eastern European countries (command) embracing capitalism? Here are some thoughts as well as an informative video from the IMF:

  • In planned some goods are provided free but not in a market economy
  • Corruption – widespread in communist countries in eastern Europe – Oligarchs
  • Inflation ↑ – privatised firms began to charge prices that reflected high costs
  • Lack of entrepreneurial experience
  • Rising unemployment as owners of businesses try to them more efficiently.
  • Labour relations – Poor as workers are in a new environment – Job security?
  • Consumer sovereignty – some industries decline/expand
  • Resources – surplus and shortage
  • Self-Interest – fewer merit goods and more demerit goods
  • Time Gap before framework of government controls can be developed
  • Expansion of industry – potentially for greater externalities
  • Old/disabled – vulnerable with the change of government role
  • Welfare system – limited support for unemployed etc. will take time to develop
  • Provision of public services – disruption to police and other public services
  • Moral Hazard – the state insure workers against risks of losing their job

 

Categories: Transition Economies

AS Revision – Economic Systems

October 15, 2017 Leave a comment

With the AS Data Response and Essay Paper next week here is some revision material on economic systems. It goes through the features of the market, command and mixed economies. Below is a screenshot of the information but you can download the word document by clicking on the link – ECONOMIC SYSTEMS.

Eco Systems

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