‘The Trinity College VIII’ – amusing book on rowing

Getting away from economics and with my interest in rowing, I can recommend a very entertaining book written by my brother-in-law David Hickey. David was a member of the Trinity College (part of Dublin University) VIII that won the Ladies Plate at the Henley Royal Regatta in 1977 – the Ladies Plate is seen as the World Championships for University VIII’s.

One of the 1977 Ladies Plate crew members has written a lighthearted account of the crew’s three year campaign to try to win the event. While it deals amusingly with some of their outrageous non rowing adventures, the sections on the changes within Trinity College during those years, and especially the descriptions of rowing in general, and racing in particular, are dealt with in a far more serious vein.

Below is an interview with David about the book on the Rowing Chat podcast.

You can purchase the book from the Dublin University Boat Club website which means that they get to keep 50% of the proceeds which they can then put towards their boat funding needs.

https://duboatclub.com/book/

If you are in New Zealand just email me – m.johnston@kingscollege.school.nz – and I can arrange for delivery. You will therefore save on significant postage costs.

Africa’s resource curse lingers on.

Africa may have enormous natural reserves of oil, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from oil. This refers to the fact that once countries start to export oil their exchange rate – sometimes know as a petrocurrency – appreciates making other exports uncompetitive and imports cheaper. At the same time there is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. It is estimated that for every extra dollar in foreign currency earned from exporting resources reduces non-resource exports by $0.74 – Torfinn Harding of the NHH Norwegian School of Economics and Anthony Venables of Oxford University.

Economists also 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.

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.

Norway – has a different approach.
In Norway hydrocarbons account for half of its exports and 19% of GDP and with further oil fields coming on tap Norway could earn an estimated $100bn over the next 50 years. Nevertheless there is a need to wean the economy off oil and avoid not only the resource curse that has plagued some countries – Venezuela is a good example as approximately 90% of government spending was dependent on oil revenue – but also the impact on climate change. Norwegians have been smart in that the revenue made from oil has been put into a sovereign wealth fund which is now worth $1.1trn – equates to $200,000 for every citizen. This ensures that they have the means to prepare for life after oil.

Source: The Economist – ‘When you are in a hole…’ January 8th 2022

Holiday reading 2021

That time of year when we hopefully head to the beach in NZ and out of internet range. Here are some books that have had very good reviews. We do live in uncertain times and one doesn’t know what might be around the corner – stay safe.

The Box (Second Edition) – Marc Levinson. The Box tells the dramatic story of the container’s creation, the decade of struggle before it was widely adopted, and the sweeping economic consequences of the sharp fall in transportation costs that containerization brought about.

Anthro-Vision – How Anthropology Can Explain Business and Life – Gillian Test (FT). how anthropology can make sense of people’s behaviour, in business and beyond. She outlines how anthropology helps explain consumer habits – revealing the ‘webs of meaning’ that underpin how we shop, and unpicking the subtle cultural shifts driving the rise of green investment.

Economics in One Virus – An Introduction to Economic Reasoning through COVID-19 – Ryan Borne. answers all these pandemic‐ related questions and many more, drawing on the dramatic events of 2020 to bring to life some of the most important principles of economic thought.

The Vietnam War – Geoffrey Ward and Kenneth Burns. This book is based on the acclaimed documentary by PBS in the US. It is a fresh and insightful account of the long and brutal conflict that reunited Vietnam while dividing the United States as nothing else had since the Civil War.

Value(s) – Building a Better World for All – Mark Carney. Former Bank of England Governor draws on a truly international perspective to our greatest problems, this book sets out a framework for the change needed for an economic and social renaissance in a post-Covid world.

Brazil – rapid fire with interest rate rises.

Brazil’s inflation rate is now at 10.25% from the previous year which is well above the target rate of 3.75% for 2021 – their target for 2022 is 3.5%. To counter this increase in prices the Central Bank of Brazil have been extremely aggressive with interest rate rises and since 17th March 2021 they have increased the benchmark Selic rate by 575 basis points which leaves interest rates currently at 7.75%.

This contractionary monetary policy is in response to higher prices and it is hoped that the increase in cost of borrowing and the higher return for saving will lead to a reduction in aggregate demand. However one has to be dubious about the level of savings in the economy and whether the return you get on interest in the bank outweighs the increase in the level of prices.

Political events look to destabilise the economy even more. There are concerns that an increase in government spending on welfare will fuel further inflation as President Bolsonaro seeks re-election. The so-called fiscal “ceiling” limits budget increases in line with inflation and is regarded as a pillar of the country’s economic credibility.

See table and graph below showing Selic rate rises.

Source: Central Bank of Brazil
Brazil’s Inflation Rate

A2 Revision – Oligopoly and the kinked demand curve – download

With the A2 Essay paper tomorrow 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

Synchronous vs. Asynchronous learning and the laundry test.

As we are back in lockdown in New Zealand I thought I would share a post that I did last year relating to the challenge of finding the right balance between synchronous and asynchronous material. My ‘Webex’ lessons were predominately asynchronous in that I wanted to get through material and also the fact that a lot of the more engaging aspects of my teaching are difficult to do through the Internet. Although you could do some engaging activities through chat forums nothing beats the energy and engaging nature of face-to-face in the classroom environment.

An article which I picked up from Michael Cameron’s blog ‘Sex, Drugs and Economics’ makes for very good reading.

Dan Levy ‘The Synchronous vs. Asynchronous Balancing Act’ Harvard Business Publishing Education. 7th August 2020.

Asynchronous learning is better when you think it is important to have the following:

  • Students developing a common foundation before class (especially of basic ideas or concepts).
  • An assessment of your students’ perspectives or background on the subject, as this will affect how live classes would be conducted.
  • Students being able to engage with the material at their own pace. This is especially useful if prior knowledge of the material varies a lot across students.
  • Students spending a substantial amount of time pondering and reflecting.

Synchronous learning is better when you think it is important to have the following:

  • Exchanges of perspectives among your students.
  • Students learning from each other.
  • Interactions in which you’re playing the role of facilitator or mediator.
  • Opportunities to build community.

Levy comes up with a novel way of looking at synchronous v asynchronous delivery.

Where I teach, online classes generally get recorded; students can watch the recorded videos if they cannot attend the live session. I recently asked a student how she decided whether to engage in the live class or watch the recording later. Her answer was revealing. She said, “When I am trying to decide, I ask myself, ‘Is this a class I could attend while folding my laundry?’ If the answer is yes, I watch the recording. If the answer is no, I attend the live session.”

While I think that, in general, we should design both synchronous and asynchronous experiences that students find so engaging that they cannot fold the laundry at the same time, I think the spirit of this question might help inform your decision of what to reserve for asynchronous learning. If the students can conceivably fold their laundry while engaging in the experience, my advice is to either eliminate it or reserve it for asynchronous learning.

As Cameron points out if a student could be folding laundry in your class you need to look at how you deliver your lessons / lectures. Class time is an opportunity to engage students in learning experiences and getting them to think for themselves. For this to work not only has the teacher got to have energy but the course / assessment at the end of the year has to encourage a type of thinking.

“Real thinking does not install knowledge in the brain: rather it evokes potential that exist in the student, developing innate talents and abilities.” Mind Over Water: Lessons on Life from the Art of Rowing by Craig Lambert 1999.

US Inflation on the rise?

There have been signals from investors that they are worried about the increasing threat of inflation in the US economy. With the supply bottlenecks already prevalent from the pandemic and although the Suez Canal is now operational the impact of it being blocked to shipping will inevitably lead to increasing costs for businesses. Furthermore the huge stimulus that has been injected into the circular flow by governments is expected to put pressure on prices i.e. lower interest rates and increased government spending

Below is a diagram that I have found useful to show the differences between cost push and demand pull inflation.

Game Theory and online cheating in tests

Michael Cameron’s blog Sex, Drugs and Economics had an interesting post regarding game theory and cheating in online assessment. He mentions a paper by Eren Bilena Alexander Matros entitled ‘Online cheating amid COVID-19’ in the Journal of Economic Behavior and Organization. They use a simple game theory model below to show the payoffs of the student and the professor with the student cheating or being honest.

Sequential-move game
In the sequential-move game, the student chooses to either cheat or be honest. The professor observes the student choice and decides either to report the student for cheating or not. There are four outcomes in this game, but the professor and the student rank these outcomes differently – see table below.

The table (right) gives an example of players’ payoffs. This game has a unique mixed-strategy equilibrium, which means that the student and the professor should randomise between their two actions in equilibrium. Thus cheating as well as reporting is a part of the equilibrium.

To find the Nash equilibriums you use the ‘best response method – for each player, for each strategy, what is the best response of the other player. Where both players are selecting a best response, they are doing the best they can, given the choice of the other player (this is the textbook definition of Nash equilibrium). In this game, the best responses are:

  1. If the student chooses to cheat, the professor’s best response is to report the student (since 3 is a better payoff than 2);
  2. If the student chooses not to cheat, the professor’s best response is not to report the student (since 4 is a better payoff than 1);
  3. If the professor chooses to report the student, the student’s best response is to not cheat (since 2 is a better payoff than 1); and
  4. If the professor chooses not to report the student, the student’s best response is to cheat (since 4 is a better payoff than 3).

A Nash equilibrium occurs where both players’ best responses coincide – note that there isn’t actually any case where both players are playing a best response.

In cases such as this, we say that there is no Nash equilibrium in pure strategy. However, there will be a mixed strategy equilibrium, where the players randomise their choices of strategy. The student should cheat with some probability, and the professor should report the student with some probability.

Source: Sex, Drugs and Economics – Combating cheating in online tests

Elearneconomics

Do consider eLearneconomics for your students and a resource for you and your students to use. The site has over 130 topics with comprehensive key notes with coloured diagrams, extensive flash/cue card questions based the notes, written answers that students can do that they can compare with model answers. Printable PDFs with answers are available to fully subscribed members. It also has 10 000 plus MCQs. The site assists learning allowing students to improve results. To find out more about eLearneconomics and how it can assist students with Economics please click on the link below:

Elearneconomics

Models of Capitalism – LMEs vs CMEs during COVID-19

The Economist Free Exchange recently ran an article looking at the various taxonomies that are used to categorise models of capitalism. The book entitled “Varieties of Capitalism” (2001), distinguished between liberal market economies (LMEs) and co-ordinated market economies (CMEs).

LMEs’ rely on market mechanisms to allocate resources and determine wages, and on financial markets to allocate capital. E.G. America, Britain and Canada
CMEs, like social organisations such as trade unions, and of bank finance. E.G. Germany, Sweden, Austria and the Netherlands

Western economies tend to sit on a continuum between these two models – below is a table outlining the main criteria each:

Source: Wikipedia

Which system is better during a pandemic?

During the pandemic, CMEs have generally had a more sound strategy for containing the spread of the virus. This may be generated by unity and consistency than by the strength of the intervention that is chosen. Some countries, e.g. Sweden, avoided lockdowns completely but seemed to get a lot of public support and relied on voluntary social distancing. New Zealand implemented a lockdown policy from the outset and relied a lot on contract tracing as well as strict system of managed isolation. LMEs such as the USA and the UK have had a policy which have been on the whole disorganised and not taken the virus seriously.

However in such situations and because of their innovative nature LMEs are more likely to focus on treatments and vaccines.

Of 34 vaccine candidates tracked by the World Health Organisation
CMEs = 4
LMEs = 13
(AstraZeneca, an Anglo-Swedish drugmaker working with Oxford University, straddles both categories).

CMEs are likely to have a lower death count but LMEs seem to hold the upper hand with regard to a vaccines. Maybe a global coalition and co-ordination is needed in future to get the best of both systems.

Source: The Economist – Which is the best market model? 12th September 2020

RIP – Pete Lyons

Very sad to hear the passing of Pete Lyons – economics teacher at St Peter’s College in Auckland. He was well-know amongst economics teachers and produced some great resources – I have his Banquet of Beauties publication which has been very useful at all levels. Always prepared to challenge the economic theory in course syllabuses and had a great passion for the subject. As well as teaching he wrote very erudite pieces in the NZ Herald and the Otago Daily Times. See tribute below from the NZ Herald

https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12354498&fbclid=IwAR1B1cCuHssdUhcADGJdgTK0pyNtUUXwLTCMJClEatUxd2IKrzU0kAWHt9s

Gold reaches record high.

Good clip here from the FT that looks at why Gold which has been getting up to record levels. Should we be buying gold today?

Gold’s ascent continues as real yields have to continue to fall. This requires that inflation expectations keep going up at the same time as low growth expectations keep nominal yields pinned right where they are – this leads to stagflation.

Back in 2011, in the last crisis, like today, the Fed was intervening strongly in a sluggish economy and Washington was in turmoil. Investors then made the same bet on stagflation and gold. As it turns out, they were wrong. The price of gold got cut in half in the years that followed. In fact, all predictions of inflation since the last crisis have turned out to be similarly wrong. And all efforts by the Federal Reserve to get inflation up to its two per cent target have failed. So a bet on stagflation and gold now is a bet against recent history. That many investors are willing to take that wager shows just how frightened they really are.

Barriers to trade not the answer during the pandemic

The WTO has warned that the reduction in global trade could be bigger than that following the GFC in 2008 – see graph below. For countries to start reducing the volume of imports because export volumes have been decreasing is not seen as the right way forward. With countries dependent on the global supply chain for PPE and pharmaceuticals, it would be wrong to focus on being self-sufficient in these essential products.

Source: WTO

As Martin Wolf of the FT pointed out the issue is not with trade but a lack of supply. Export restrictions merely relocate the shortages, by shifting them to countries with the least capacity. The natural response might be to become more self-sufficient in every product but free trade and globalisation does have its advantages:

US dollar under pressure as the reserve currency.

In doing most introductory courses in economics you will have come across the four functions of money which are:

  • Medium of exchange
  • Unit of Account
  • Store of Value
  • Means of deferred payment

Since the Bretton Woods Agreement in 1944 the US dollar was nominated as the world’s reserve currency and ranks highly compared to other currencies in the above functions. As a medium of exchange the US dollar is very prevalent:

  • 60% of the world’s currency reserves are in US dollars
  • 50% of cross-border interbank claims
  • After the GFC, purchases of the US dollar increased significantly – store of value.
  • Around 90% of forex trading involves the US dollar
  • Approximately 40% of the world’s debt is issued in dollars
  • n 2018 banks of Germany, France, and the UK held more liabilities in US dollars than in their own domestic currencies.

So why therefore is there pressure on the US dollar as the reserve currency?

The COVID-19 pandemic has closed borders and will inevitably lead to more regionalised trade, migration and money flows which suggests a greater use of local currencies. However China has made its intention clear that the Yuan should become a more universal currency. Some interesting facts:

  • Deposits in yuan = 1trn yuan = US$144bn
  • Yuan transactions have grown in Taiwan, Singapore, Hong Kong and London.
  • Investment by Chinese firms into Belt and Road project = US$3.75bn which was in yuan
  • China settles 15% of its foreign trade in yuan
  • France settles 20% of its trade with China in yuan
  • 2018 – Shanghai sock market launched yuan-denominated oil futures.
  • The IMF suggest that the ‘yuan bloc’ accounts for 30% of Global GDP – the US$ = 40%

However if the past is anything to go by the US economy has gone through some very turbulent times but the US dollar has remained firm. This suggests that how we perceive the US economy doesn’t seem to relate to the value of its currency.

Source: The Economist – China wants to make the yuan a central-bank favourite
7th May 2020

Revision note – Investment and MEC

Investment is spending on capital goods by firms and government, which will allow increased production of consumer goods and services in future time periods. Be careful not to confuse the economists’ definition of investment with another interpretation – that investment involves putting funds into financial assets such as stocks and shares. Marginal Efficiency of Capital Theory – As investment increases, the return on the last unit of capital employed will be less and less as a result the Law if Diminishing Returns (i.e. The MEC falls). 

The theory states that it is profitable to invest so long as the MEC (the % return) is greater than the rate of interest (the cost of funds needed to finance the investment). The OPTIMUM level of Investment is where:

% MEC = the rate of interest

At this point, the last unit of investment is covering its costs, and all previous units are profitable.

Gross and Net Investment

An important distinction to make is between gross and net capital investment spending

Net investment is positive when gross investment is higher than depreciation or capital consumption. Then there will be an increase in the nation’s stock of capital.

  • Fixed Investment – is spending on new capital machinery and plant, construction, housing, vehicles, etc.
  • Working Capital – is spending on stocks/inventories of finished goods and raw materials. The accumulation of stocks by firms, whether voluntary or involuntary, is counted as investment.

Gross Domestic Fixed Capital Formation (GDFCF) – is expenditure on fixed assets (buildings, vehicles and plant) either for replacing or adding to the stock of fixed assets.

Gross Domestic Investment Spending + Stockbuilding = Total Gross Investment

Other factors that affect investment demand

1. Expectations – the key to understanding investment decisions
The central message of economic theory and the evidence from business surveys is that capital investment is determined by the relationship between the expected returns from investment and the expected cost of financing the investment.

2. Returns to an investment project

The expected returns from capital investment are determined by the demand for and the price of the output of goods or services generated by an investment and also by the costs of production. A rise in demand for the output that capital is purchased to supply will increase the potential revenue streams that a business can expect from a new project. Similarly, a change in the costs of purchasing the capital inputs the costs of training workers to use new capital and in maintaining the capital stock will also affect the expected rate of return.

3. The importance of business expectations and uncertainty

Expectations of demand, prices and costs over the lifetime of the investment are key determinants of expected returns. There is always uncertainty about the expected rate of return particularly when demand is volatile and sensitive to changes in interest rates, the exchange rate and incomes.

The rate of return from an investment is also influenced by the rate at which an investment project is assumed to depreciate over time.

The cost and availability of internal and external finance is important, as higher costs of finance (e.g. higher interest rates) require greater returns from the investment to ensure that it is profitable.

At this point, the last unit of investment is covering its costs, and all previous units are profitable.

  • If profit levels rise, firms will have more money to spend on investment and will have a greater incentive to do so.
  • Advances in technology may encourage firms to replace less productive capital equipment.
  • The government may also encourage investment by cutting corporation tax on firms’ profits and by giving investment subsidies.

EU’s uncommon Common Agricultural Policy

At the outset of the EU, one of the main objectives was the system of intervention in agricultural markets and protection of the farming sector known as the common agricultural policy – CAP. Throughout most of its four decades of existence, the CAP has had a very poor public relations image. It is extremely unpopular among consumers, and on a number of occasions it has all but bankrupted the EU. The EU’s seven year budget (2021-2027), also known as the ‘multi-annual financial framework (MFF) is currently being discussed and agricultural subsidies are once again a controversial issue although have been reduced from previous years – 70% of the EU budget in 1980 to 37% in 2018 – see graph right from The Economist.

The aim of discussions is to reduce the amount to between 28% and 31% of the MFF. EU support levels are very high when compared to other countries. The graph below shows the support that other countries receive – producer support estimate (PSE), as a share of total farm income. EU is 20.% (2018) above the OECD average and well ahead of China, USA, Russia, Canada, Brazil, and Australia. Norway is at 62.36% whilst New Zealand is 0.48%.

Source: https://www.cgdev.org/publication/new-estimates-eu-agricultural-support-un-common-agricultural-policy

Who gets what from EU farm subsidies?

Source: https://www.cgdev.org/publication/new-estimates-eu-agricultural-support-un-common-agricultural-policy

There is wide variation in the support provided to agriculture within the “Common” agriculture policy. Latvia does the best of any country in the EU with a lot of other more recent eastern European entrants into the EU – of the top 10 Greece and Finland are the only non East European countries. The Netherlands gets a mere 7% of their income from EU support and traditional supporters of agriculture spend like Ireland, Luxembourg, Italy, and Poland are all below the EU average

  • Despite being a vocal critic of the CAP (and receiving a separate rebate) UK support is broadly the same as the EU average
  • France’s support is only just above average, while Germany’s is in the bottom quarter
  • In terms of the “market price support” element—which inflates EU food prices—Belgium, Hungary, Malta, Poland, and UK producers benefit most

The variation seen here reflects a combination of factors, few of which relate to a policy objective. Most payments are distributed on the basis of a farm’s size in hectares—though per hectare rates vary and were often based on the historical value of production. Other payments relate to sustainability of farming methods, numbers of young farmers, or how much farms produce. With agriculture seen as a significant contributor to global emissions should subsidies be tied to those farmers reducing their impact on climate change?

The economics behind CAP intervention price

An intervention price is the price at which the CAP would be ready to come into the market and to buy the surpluses, thus preventing the price from falling below the intervention price. This is illustrated below in Figure 1. Here the European supply of lamb drives the price down to the equilibrium 0Pfm – the free market price, where supply and demand curves intersect and quantity demanded and quantity supplied equal 0Qm. However, the intervention price (0Pint) is located above the equilibrium and it has the following effects:

  1. It encourages an increase in European production. Consequently, output is raised to 0Qs1.
  2. At intervention price, there is a production surplus equal to the horizontal distance AB which is the excess of supply above demand at the intervention price.
  3. In buying the surplus, the intervention agency incurs costs equal to the area ABCD. It will then incur the cost of storing the surplus or of destroying it.
  4. There is a contraction in domestic consumption to 0Qd1
    Consumers pay a higher price to the extent that the intervention price exceeds the notional free market price.

Figure 1: The effect of an intervention price on the income of EU farmers.

The increase in farmers’ incomes following intervention is shown also: as has been noted, one of the objectives of price support policy is to raise farmers’ incomes. The shaded area EBCFG indicates the increase in the incomes of the suppliers of lamb.

Sources:

New Zealand labour market – unemployment gap around zero.

The unemployment rate gap is the unemployment rate minus the estimate of the natural rate of unemployment. The natural rate of unemployment is the difference between those who would like a job at the current wage rate – and those who are willing and able to take a job. In the above diagram, it is the level (Q2-Q1).

The natural rate of unemployment will therefore include:

Frictional unemployment – those people in-between jobs. Structural unemployment – those people that don’t have the skills that fit the jobs that are available.

It is also referred to as the Non-Accelerating Inflation Rate of Unemployment (NAIRU) – the job market neither pushes up inflation nor holds it back.

The size of the gap gives us an idea about the amount of capacity in the labour market, and hence pressure (or otherwise) on wages and inflation. ASB estimate that the NAIRU is currently hovering just above 4%, the bottom of the RBNZ’s recently estimated range (4.0-5.5%). With the current HLFS unemployment rate at 4.2%, a NAIRU of 4% suggests the unemployment gap is currently around zero. In other words, the labour market is neither particular tight nor loose. This is of course quite a change from a few decades ago when a 4% unemployment rate would indicate a super tight labour market and strong pressure on wages to rise. Broadly, what we have seen is a fundamental change in the capacity and inflation trade-off, not just in the labour market but economy-wide.It could be that increased globalisation and technological change are facilitating a shift in these trade-offs, which likely explains why inflation both here and abroad has been so low despite historically-low rates of unemployment and elevated measures of resource utilisation. Source: ASB Bank Economic Note

Market structures and Netflix

Covering this topic with my A2 class and fortuitously came across a very relevant blog post from Michael Cameron’s blog Sex Drugs and Economics. He talks about Netflix increasing its subscription price by 19% (now $21.99) for the premium plan and how Kiwi subscribers are going to social media to announce their departure from the streaming service.

However although people are voting with their feet it is highly likely that Netflix are not too perturbed by this. With the law of demand a higher price will reduce the demand for the service – simple Law of Demand.

The diagram below from the Cameron Blog shows a horizontal MC=AC curve which means that the cost of producing one more unit of output is the same. Some would suggest that it could be close to zero as the additional cost of providing one more subscriber with the service doesn’t involve significant costs.

Let’s assume that Netflix originally charged a price of P0 and sold a quantity of Q0 before the increase. Note here that they still make a supernormal profit rectangle – P0 C H F.

However they are not producing at the profit maximisation which is where MC=MR. Therefore although Netflix is increasing their price it is unlikely that they are charging a price at profit maximisation output as Netflix has too many subscribers to maximise profits. If they did produce at profit maximisation output Q1 and charge price P1 they would make profits of P1 B E F. So at a price of P1 – they gain profit of P1 B G P0 but lose the area G C H E. However the former area is bigger than the latter.

So with the market power that Netflix has it is not surprising that they are increasing their subscription price. With the video stores like Blockbuster, Video Ezy, United now struggling to survive and in some cases out of the market, they are less alternatives out there for the consumer.