World Cup – the economics of faking an injury.

With the end of a long first term (11 weeks) approaching I try to add a bit of humour to the classroom as generally people are tired and add to that the numerous disruptions to COVID. Later this year the football World Cup takes place in Qatar and I hark back to the last World Cup where we saw the same old tricks played by players to try and influence the decision of the referee.

  • France’s Lucas Hernandez admitted to flopping in France’s 2-1 win against Australia in an attempt to get Australian midfielder Mathew Leckie sent off.
  • Spanish defender Gerard Piqué accused Portugal’s captain Cristiano Ronaldo of exaggerating a fall to secure a penalty kick in their 3-3 nail-biter. Piqué said Ronaldo has a habit of “throwing himself to the ground.”
  • Neymar rolling around in what seemed to be excruciating pain when there was contact on his ankle and that was on the sideline. What would he have done if it was in the penalty area and Brazil were 0-1 down?

That being said it was hoped that the VAR system would start to see this sort of tactic removed from the ‘beautiful game’. Some of the techniques of faking an injury are below – HT to Kanchan Bandyopadhyay.

The Economist has looked at this area and I thought that I would delve a little deeper. There is no doubt that if you study the costs and benefits of faking an injury there are certain sports where it is perceived as quite worthwhile – i.e. the benefits outweigh the costs. Cost benefit analysis is part of Unit 3 of the AS Level course. What is cost-benefit analysis (CBA)?

Cost Benefit Analysis (CBA) refers to estimating the private and external benefits of an investment project – airport, rail link, road etc against the private and external costs. Once these costs/benefits are established a decision is made as to whether the project should go ahead.

CBA can be applied to any decision you make and below is a table outlining the cost and benefit of faking a peanalty or injury in particular sports. I see the benefit in soccer of diving in the box and being awarded a penalty outweigh the costs by a significant amount. Firstly, if the appeal for a penalty is turned down it is very unlikely that the referee will administer any punishment to the player faking a foul. In too many cases they are happy to let the game play on as they feel under so much pressure anyway for not awarding it. Whilst in ice-hockey a suspension of either 2 or 4 minutes has acted as a deterrent to those caught “embellishing”. I have put some values in the end column which will no doubt encourage a lot of discussion – remember Warren Gatland, the Welsh coach in the Rugby World Cup 2011, considered informing a player to fake an injury so there would be no pushing in the scrums. This was after their captain, Sam Warburton, was sent off early in semi-final against France.

However, with the perceived benefits of diving in soccer it does encourage players to even practice this activity. This reminded me of a great advertisement run by the Guardian Newspaper for the Euro 2004 Soccer Cup – see below

For more on Cost-Benefit Analysis 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.

Teaching Monetary Policy – Every Breath You Take – Every Change of Rate (Fed Funds Rate)

Here is a really funny video by the students of Columbia Business School (CBS) – you may have seen it before but I find it very useful when you start teaching monetary policy and interest rates.

Back in 2006 Alan Greenspan vacated the role of chairman of the US Federal Reserve and the two main candidates for the job were Ben Bernanke and Glenn Hubbard. Glen Hubbard was (and still is) the Dean at Columbia Business School and was no doubt disappointed about losing out to Ben Bernanke. His students obviously felt a certain amount of sympathy for him and used the song “Every Breath You Take” by The Police to voice their opinion as to who should have got the job. They have altered the lyrics and the lead singer plays Glenn Hubbard.

Some significant economic words in it are: – interest rates, stagflate, inflate, bps, jobs, growth etc.

Putin demanding gas be paid in roubles. Can the church help?

This is a useful piece of economic theory which I will be discussing with my classes. After the Russian invasion of Ukraine the Russian currency the Rouble collapsed:

  • Before the invasions 1 euro = 85 Roubles
  • After invasion 1 euro = 110 Roubles
  • After central bank intervention 1 euro = 94 Roubles

This means that it cost post invasion 110 roubles to buy 1 euro, compared to 85 Roubles pre-invasion. The Russian central bank did intervene in the foreign exchange market by using its foreign exchange reserves to buy roubles – demand for roubles goes up. The plan is to sell US$ and euro denomination investments to buy roubles. However a ban on the central bank using swift payments to access reserves overseas has meant that intervention was not an option.

At such low levels the Russian exports are going to bring in less money to ultimately subsidise the war effort. A stronger Rouble will bring in more cash and enhance the image on the country – the value of a country’s currency is a good indicator of how the world views that country.

How will it work?

Putin’s order makes Gazprombank the intermediary in the gas trade. A foreign buyer of gas is required to transfer foreign currency to a special account (so-called K) at Gazprombank. They would then buy roubles on behalf go the gas buyer to transfer roubles to the another special (K) account at Gazprombank – see flow chart.

Why does it matter?

Europe is heavily reliant on Russia for its energy needs, with around 40% of its gas coming from the country. If Moscow decides to turn off the taps it could trigger supply shortages, factory closures and crippling energy costs across the region.

Call in the church to stop the slide in the Rouble

However, a last resort could be a repeat of 2014 (see previous post ‘Russian economy – Priests to halt slide of Rouble?’) when priests blessed the servers at the Central Bank with holy water to reduce the then collapse of the Rouble – see below.

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.

Plenty of jobs but no workers.

The COVID pandemic has been prevalent in the global economy for just over two years now but although there seems to be plenty of job opportunities where is the available labour? According to a recent report from the IMF there are various reasons for this:

  • Reduced labour force participation: disadvantaged groups, the low-skilled, older workers, or women with young children—have yet to fully return to the labour market.
  • The pandemic: health concerns and favourable pension plan valuations have contributed to a lot of older workers departing the labour force
  • Worker preference: workers are moving away from some low-pay jobs. A lot workers in contact -intensive, physically strenuous and less flexible jobs are moving into other areas or have left the labour force.
  • Occupational mismatch: due to COVID some industries and firms have cut back on production due a lack of demand for their products/services or can’t function in the pandemic environment. As a result in a mismatch between those that are looking for work and the requirements of the labour market.
  • Border restrictions means limited immigration: this has led to large shortages of labour especially in primary industries and other low-paid jobs
  • Changing job preferences: COVID-19 affected hospitality work in particular and although the industry maybe recovering health concerns may be discouraging workers from keeping such jobs and job seekers from taking them up, leaving many vacancies unfilled
Source: Deloitte Insights – The global labor shortage

For more on Unemployment 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.

Putin and the Russian Economy

Below is a very informative interview with David Remnick of The New Yorker and the historian Steve Kotkin discussing Vladimir Putin and how authoritarian regimes are pushed into misguided foreign wars. Although the interview is mainly focusing on Russian history there is a mention of the Russian macro economic policy and sanctions. Well worth a listen when you think of what is happening in the Ukraine currently.

It’s a military-police dictatorship. Those are the people who are in power. In addition, it has a brilliant coterie of people who run macroeconomics. The central bank, the finance ministry, are all run on the highest professional level. That’s why Russia has this macroeconomic fortress, these foreign-currency reserves, the “rainy day” fund. It has reasonable inflation, a very balanced budget, very low state debt—twenty per cent of G.D.P., the lowest of any major economy. It had the best macroeconomic management. The New Yorker

The shock is that so much has changed, and yet we’re still seeing this pattern that they can’t escape from,” Stephen Kotkin – Russia expert

For more on Transition Economies 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.

Quantitative Easing – put your printer by the window and press Enter.

Doing quantitative easing (QE) with my A2 class last period today and showed a humourous video with the late John Clarke about ‘What is Quantatitive Easing?’ – Point your printer out the window and make sure the wind is blowing in the right direction. Below is an explanation but Clarke and Dawe have an interesting take on it.

Quantitative easing (QE) is a type of monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. Governments and central banks like there to be “just enough” growth in an economy – not too much that could lead to inflation getting out of control, but not too little that there is stagnation. Their aim is the so-called “Goldilocks economy” – not too hot, but not too cold. One of the main tools they have to control growth is raising or lowering interest rates. Lower interest rates encourage people or companies to spend money, rather than save.

But when interest rates are almost at zero, central banks need to adopt different tactics – such as pumping money directly into the economy. This process is known as quantitative easing or QE.

Quantity Theory of Money – you can’t have your cake and eat it

I blogged on this topic last year but I thought it appropriate to look at it again especially I have just completed it with my NCEA Level 2 class and about to start the topic next week with my CIE A2 class. – it refers to Unit 4 of the CIE A2 Economics course and the Inflation topic at NCEA Level 2. Velocity of circulation of money is part of the the Monetarist explanation of inflation operates through the Fisher equation:

M x V = P x T

M = Stock of money
V = Income Velocity of Circulation
P = Average Price level
T = Volume of Transactions or Output

For example if M=100 V=5 P=2 T=250.   Therefore MV=PT – 100×5 = 2×250
Both M x V and P x T are equivalent to TOTAL EXPENDITURE or NOMINAL INCOME in a given time period. To turn the equation into a theory, monetarists assume that V and T are constant, not being affected by changes in the money supply, so that a change
in the money supply causes an equal percentage change in the price level.

The speed at with which money goes around the circular flow is a significant indicator as to the economic activity of an economy. Money’s “velocity” is calculated by dividing a country’s quarterly GDP by its money stock that quarter – the bigger GDP is relative to the money supply, the higher the velocity.

Recessions – dampen the velocity by increasing the attractive of a store of value. People tend to save rather than spend. E.G. The Great Depression and the GFC. See graph for US velocity of money.

Covid-19 – with the closure of a lot of businesses and people worried about job security personal savings increased to 33.6% of disposable income. Also consumers didn’t have the money to spend.

The stimulus measures and the glut of dollars could cause problems once the consumer confidence starts to become prevalent. Inflation will inevitably rise again – which is not a bad thing considering the threat of deflation that we are currently experiencing. But the major concern is if the increase in spending spirals out of control with high inflation. It seems that central banks want the velocity of money to increase to kick-start the economy but they will need to consider how to control it if it gets above the ‘speed limit’. “You can’t have your cake and eat it”.

The concern now is that inflation is at very high levels around the world caused by both supply and demand issues. Velocity of circulation is increasing but also major supply chain problems and still expansionary monetary conditions – low interest rates – are contributing to higher prioces.

The table shows the global problem of inflation. The OECD area climbed to 7.2 percent in January 2022 – the highest level in the area since February 1991. In the US inflation has risen to 7.5% – main cause being petrol up 40% and cars/truck up 40.5%. In New Zealand the CPI is 5.9% above the 1-3% target range. The outlier is Japan who has had deflationary concerns for a number of years.

Source: Why money is changing hands much less frequently – The Economist 21-11-20

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

Consumption Function Cake

Went through the consumption function this morning with my A2 class and I recalled the superb cake that A2 student Lara Hodgson made for the class a few years ago – here’s hoping for a similar cake this term. Remember that the standard Keynesian consumption function is written as follows:

C = a + c (Yd) – where:

  •   C = total consumer spending
  •    a = is autonomous spending
  •    c (Yd) = the propensity to spend out of disposable income

Autonomous spending (a) is consumption which does not depend on the level of income. For example people can fund some of their spending by using their savings or by borrowing money from banks and other lenders. A change in autonomous spending would in fact cause a shift in the consumption function leading to a change in consumer demand at all levels of income. The key to understanding how a rise in disposable income affects household spending is to understand the concept of the marginal propensity to consume (mpc). The marginal propensity to consume is the change in consumer spending arising from a change in disposable income. The higher the mpc the steeper the gradient of the consumption function line. As you can imagine the consumption of cake was fairly rapid.

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

Could war in Ukraine lead to economic crisis?

From Al Jazeera – Counting the Cost. Main discussion points:

  • Ukraine and Russia are expected to experience a severe recession this year. But the sanctions imposed on Russia and the increasing energy price can inflict inflation on other countries.
  • IMF to cut its growth forecast on the Global Economy.
  • Russia to turn to the Chinese Yuan to survive and are counties dumping the US$ as the global reserve currency?

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

How Roman Abramovich bought Chelsea Football Club.

I can recommend listening/subscribing to the David McWilliams podcast – an Irish economist who popularises economics and explains quite complex issues in understandable language. I might be a bit bias here being Irish. He recently held a live podcast to a sold out audience of 1,200 in the 3Olympia theatre in Dublin. This theatre is more used to rock concerts, plays etc so for an economist to have a sold-out gig is quite impressive. Colin Peacock of Radio New Zealand recently interviewed him on Radio New Zealand

A recent podcast looked at Russia and how the oligarchs got their money – he used the example of Chelsea Football Club owned by Russian Oligarch Roman Abramovich. Below is a mind map and a timeline of events.

  • 1990 – Germany reunites – fall of Berlin Wall
  • 1991 – Yeltsin – first president of Russian Federation
  • 1992 – ‘Shock therapy’ economic reforms – spiralling inflation
  • 1992 – Massive privatisation programme of state assets- every citizen 10,000 ruble voucher
  • 1993 – Oligarchs bought vouchers off confused public – very cheap
  • 1996 – Yeltsin offers oligarchs (22 individuals) key state assets (40% of country) for media support and financing re-election
  • 1997 – Government tries to curtail ‘sweetheart deals’ with oligarchs
  • 1997 – Oligarchs get money out of Russia – buy yachts, property, companies, football teams etc
  • 1999 – Yeltsin steps down and Putin becomes prime minister – the rest is history

Estimates of oligarchs worth outside Russia

  • $920bn of net private Russian wealth located offshore
  • $2bn stake in the London property market
  • $11bn in Swiss bank accounts500
  • Russian multimillionaires living in the UK

2020 report from the Atlantic Council on Russian dark money, Vladimir Putin and his closest associates control around one-quarter of the estimated $1 trillion worth of assets stashed away in the West and beyond Russia’s borders. Source: David McWilliams Podcast

For more on economic systems 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.

A2 Economics – Multiplier

Just been looking at the multiplier with my A2 class and here are some notes and a mindmap. An initial change in AE can have a greater final impact on equilibrium national income. This is known as the multiplier effect and it comes about because injections of demand into the circular flow of income stimulate further rounds of spending.

Multiplier Process

Consider a $300 million increase in business capital investment. This will set off a chain reaction of increases in expenditures. Firms who produce the capital goods that are ultimately purchased will experience an increase in their incomes. If they in turn, collectively spend about 3/5 of that additional income, then $180m will be added to the incomes of others. At this point, total income has grown by ($300m + (0.6 x $300m). The sum will continue to increase as the producers of the additional goods and services realize an increase in their

incomes, of which they in turn spend 60% on even more goods and services. The increase in total income will then be ($300m + (0.6 x $300m) + (0.6 x $180m). The process can continue indefinitely. But each time, the additional rise in spending and income is a fraction of the previous addition to the circular flow.

The value of the multiplier can be found by the equation ­1 ÷ (1-MPC)

You can also use the following formula which represents a four sector economy

1 ÷ MPS+MRT+MPM

MPS = Marginal propensity to save

MRT = Marginal rate of tax

MPM = Marginal propensity to import

MPC = Marginal Propensity to Consume (of additional income how much of it spent)

e.g. $1m initial spending; MPC=.8

=> income generated = 1/(1-.8) = 1/.2 = 5

=   $5m

=> $4m extra spending ($1m initial, $4m extra spending, $5m total)

Use different equations depending on the information given.

e.g.: a) if the MPC is 0.5 – 50% of the income will be spent, 50% will be saved.

then MPS is 0.5 then the multiplier is 2 = 1/0.5 = 2

b) if the MPC is 0.8 – 80% of the income will be spent then MPS is 0.2 then the multiplier is 1/0.2 = 5

c) if the MPC is 0.9 – 90% of the income will be spent then MPS is 0.1 then the multiplier is 1/0.1 = 10

What is the effect of MPT – the marginal propensity to tax or t.

  • greater MPT would lead to less income being spent in the economy

Below is a very informative mind map that I copied from an old textbook.

Multiplier.png

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

Surge in food prices hits developing countries

With the war in Ukraine there have been serious concerns about global food supply especially when you look at the graph below. Main points to consider:

  • Russia and Ukraine are both major grain and sunflower oil exporters
  • Spring planting near impossible for farmers in battle zones
  • Sanctions on Russia agricultural goods
Source: Thoughts from the Front Line – Another Strange Recession By John Mauldin | March 12, 2022

How will it impact developing countries.
The staple diet of many developing countries relies on imports of wheat and sunflower oil – for instance Egypt imports 85% of its wheat and 73% of its sunflower oil from the Ukraine and Russia. Countries in these circumstances have no choice but to not put sanctions on food imports. The Food and Agricultural Organisation of the UN Food Price Index – meat, dairy, cereals, oils, and sugar – rose 24.1% in February compared to a year ago. This price shock will impact developing countries as food takes up a greater percentage of a person’s income in the developing world. In the developed world food costs 17% of consumer spending in contrast to those in poorer countries where it takes up 40% of income.

IMF Blog

Many developing countries subsidise food prices to maintain law and order and avoid its population from starving but with higher food prices how are they going to afford subsidies? There is also the problem of repaying debt as feeding the population will the priority rather than servicing foreign debt. Furthermore there is an opportunity cost – money won’t be spent on eduction, healthcare, infrastructure etc which it was originally intended for.

In getting out a recession consumers and producers make adjustments sufficient to reinstate growth. I can’t see that happening soon. The entire world order is experiencing a shock adjustment — economically, geopolitically, and otherwise. John Mauldin

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.

Stagflation – 1970’s v Today

The Financial Times had a good piece about the current state of the global economy and the likeness of the stagflation of the 1970’s. Using that article and other sources I have attempted to differentiate between what was happening then and the current situation with the war in the Ukraine. With oil still having an impact in an economy today this could be the catalyst needed for more greener technologies but this is not going to help in the short-term. Therefore, for global oil prices to stabilise there needs to be an increase in the output of OPEC countries and the likes of Venezuela which could add 400,000 bpd to oil output – the US has been in talks with President Maduro. However, there is a dilemma here in that you may reduce oil prices by getting Venezuela to increase production but you are also assisting an authoritarian regime that is closely linked with Russia.

Source: War brings echoes of the 1970s oil shock. FT 12th March 2022

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.

Russia: Goods and services trade with New Zealand

The NZ Parliamentary Library produced some data on the New Zealand’s trade with Russia. The most recent figures for the December 2021 quarter are:
Exports of goods and services to Russia – $75 million
Imports goods and services from Russia – $14 million

Total dairy exports to Russia were $168.9 million for the year ending June 2021. Of this total, butter represented $147.9 million, comprising 5.5% of New Zealand’s total for this commodity – Russia was New Zealand’s 4th largest butter destination in 2021.

Trade with Russia 2019 – 2021

Exports are mainly made up of dairy whilst imports are mineral fuels and oils – crude oil (well over 90%) and Russia was a moderately important source of crude oil imports (16% of New Zealand’s crude imports in 2020). With Marsden Point oil refinery coming offline in April, Korea and Singapore will in future become the main source of refined fuel. The last significant crude oil shipment from Russia was in January 2021. As at 31 March 2021 New Zealand’s total investment in Russia was worth $14 million, a decline from $48 million as at 31 March 2020. During the same period total Russian investment in New Zealand increased from $29 million to $40 million. The graphic on the right (click on it to expand) shows the origin of imports into New Zealand in 2020. Note that Russia has 0.53% of all imports into NZ.

The largest economic impact on New Zealand of the invasion would therefore be mainly indirect, through higher import fuel and commodity prices, instability of financial markets, and the impact on global economic activity.

Sources:

  • Potential impacts of the Russian Invasion of Ukraine on the New Zealand economy, February 2022. New Zealand Foreign Affairs.
  • New Zealand Parliamentary Library – Monthly Economic Review March 2022.

For more on Trade 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.

Global Inequality – 1820-2020

Most secondary school economics syllabus include the topic of inequality and the gini-coefficient which has now become more prevalent in the minds of government policymakers. 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. The resulting number ranges between:

  • 0 = perfect equality where say, 1% of the population = 1% of income, and
  • 1 = maximum inequality where all the income of the economy is acquired by a single recipient.

The global Gini increased from 0.60 in 1820 to 0.72 in 1910, again 0.72 in 2000 and 0.67 in 2020 (see Figure 2.3). The decline in inequality was prevalent after the 2008 financial crisis. In all cases, global indicators indicate very high inequality levels in 2020 (close to those observed around 1900-1910, and substantially larger than those observed in 1820).

Source: World Inequality Report 2022

The graph below (Figure 2.1) gives the basic breakdown of the shares of world income going to the global top 10%, middle 40% and bottom 50% groups between 1820 and 2020. The main points are:

  • Global inequality has always been prevalent
  • Top 10% income approximately 50-60% of total income between 1820 and 2020
  • Bottom 50% share remained between 5-15%
Source: World Inequality Report 2022

Share of National Income by Country

Note that South Africa has the most unequal distribution of income whilst New Zealand is 142 out of 167 countries.

Source: World Inequality Report 2022

For more on Inequality 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.

Inequality Policies – Predistribution vs Redistribution

One of the main areas of concern from the COVID-19 is the increasing level of inequality. Low-skilled workers have lost jobs as the pandemic has been the catalyst for rapid automation which could make jobs obsolete. Policies need to focus not just on redistribution but also predistribution – see image.

Predistribution – government policies aimed at narrowing differences in market incomes at their source, e.g. education, health
Redistribution – public intervention through transfer payments and taxes related to unemployment, disability, sickness etc.

Source: IMF – Tackling Inequality on all fronts. March 2022

In order to tackle inequality a mix of these two policies is required to try and achieve a level playing field before people enter the labour market. Countries that spend more on social security an have a more redistributive tax system tend to be more successful on average in reducing inequality. Fiscal policy seems to be the most effective policy instrument to achieve this.

In many developing and developed countries there are big differences between income groups and their access to quality education. Also government spending can compensate lower income groups with better infrastructure – clean water, sanitation and basic health services. These policies can increase intergenerational mobility. Progressive taxation has potential to reduce inequality if countries have relatively low rates in terms of its overall burden. However, no government will have enough money to throw at the inequality problem and invariably there will be an opportunity cost – more money spent on education means less on healthcare etc. While fiscal policy has helped reduce inequality in countries it has come at the cost of very high debt levels which now need to be addressed by policies to bring deficits to sustainable levels.

Social Mobility and Education
Education is generally seen as one of the vehicles for increasing social mobility. Research has shown that public expenditure on school education is strongly linked to the degree of income equality. Norway – 97.8% of money spent on school education is part of public expenditure USA – 68.2% of money spent on school education is part of public expenditure. This is likely to have a substantial impact on social differences in access to higher education. America now has lower social mobility than Denmark, France and Germany – see graph below with spending on education, health, and social protection.

In unequal societies, young people from poor families are more likely to drop out of school. More parents struggle with mental health problems, long working hours and debt. Income inequality in the USA is 39 (100 is complete inequality – 1 person owns all the income of the country) Denmark is 25. New Zealand Gini Index is 35 with spending on education, health etc lower than Denmark as a % of GDP.

Source: IMF – Tackling Inequality on all fronts. March 2022

What does Denmark do?

  • University education is free and childcare is well funded
  • The biggest boost to social mobility is wealth distribution. The Personal Income Tax Rate in Denmark stands at 55.8%. It averaged 60.66 percent from 1995 until 201

Across the West rising inequality hampers innovation and entrepreneurship. A study of 21 countries showed that as inequality rose the number of patents fell. Reducing inequality is one of 17 of the United Nations Sustainable Development Goals.

Source: IMF – Tackling Inequality on all fronts. March 2022

For more on Inequality 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.

High commodity prices but also high input costs for NZ agricultural sector

New Zealand commodity prices have been on the rise over the last year. Global dairy prices have increase by 14% this year with beef and lamb prices setting record highs. Some economists have said that it is the perfect storm of supply and demand factors.

Supply
As it does every year, the weather has influenced the price of dairy prices especially. A wet start to the dairy season accompanied by a very hot summer has reduced the supply of milk and therefore increasing its price. Also Covid has impacted the supply chains especially that of sea freight (see below) which in turn have impacted feed, fertilisers which has reduced supply. Although the NZ inflation rate has hit a 30 year high at 5.9% this is nothing compared to the costs down on the farm. This year farming cost have increased by:

  • Fertilisers 200% (breakdown in the graph below)
  • Chemicals 50%
  • Sea Freight 500%
  • Diesel 40%
  • Electricity 21%
  • Winter grazing 36.9
  • Cultivation, Harvesting & Animal Feed Cost 18.9%

Fertiliser price inflation

Source: Westpac Economic Overview – February 2022

Demand
The Chinese recovery has mainly been responsible for the rebound in demand as well as other countries coming out of Covid restrictions. Another factor helping the primary sector is the weaker NZ$. It is now trading around the US$0.66 from over US$0.70 in late 2021. Remember that a weaker dollar makes it cheaper for consumers overseas to buy our currency and therefore more price competitive goods

Carbon Prices influence farmer’s investments
In the past year the recent doubling of carbon prices to around $85/unit has encouraged some farmers to focus their attention on tree plantations to the detriment of sheep and beef supply. What is noticeable about investment is that with the high returns on commodity prices farmers are repaying debt rather than re-investing back into their business – although still very high agricultural debt fell from $64bn in July 2019 to $62bn today.

Source: Westpac Economic Overview – February 2022

For more on supply and demand 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.

Economic Theory v Economic Reality

Invariably I get the question in class “Does this economic theory actually happen in the real world?” We then proceed to discuss upward sloping demand curves, trickle down theory, the GFC and the fact that few economists saw it coming and how Japan ran a massive stimulus programme but inflation was stagnant.

Most theories in economics rest on the premise that people, companies, and markets behave according to the abstract, two-dimensional illustrations of an introductory economics textbook, even though the assumptions behind those diagrams virtually never hold true in the real world. To understand economics you have to understand human nature.

Below is a table that I found in James Kwak’s book “Economism”. It takes theories found in most introductory economics textbooks and suggests what actually might happen to these theories in the real world.

For more on secondary school economics courses 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.

Global Stagflation and the threat to democracy.

In my economics classes this week one cannot get away from what is happening in Ukraine and the impact of that geopolitics will have on the global economy. Already I wrote a blog post on Russian interest rates and the collapse of the rouble but what are the challenges ahead for the global economy?

Before the invasion central banks worldwide were tightening monetary policy (interest rates) to reduce the increasing inflation pressure in their economy’s. The price of oil has increased to over US$105 adding to the inflationary problem as policy makers still have to deal with the slow recovery from the COVID pandemic. However the US Federal Reserve (US Central Bank) and the European Central Bank (ECB) have indicated that they intend to continue with their tightening policy of 25 basis points (0.25%) increase in interest rates this month but may have to be less aggressive in their future tightening. Their major concern now is that the war in Ukraine has increased the chances of a period of stagflation – stagnation and inflation at the same time. Therefore it is important that central banks are more sensitive to tightening their monetary policy as adding the Ukrainian crisis (with higher oil and food prices) to the present supply chain issues would increase the chances of stagflation and a significant downturn in the global economy.

Stagflation
In economic textbooks there are two main cause of inflation – Demand Pull and Cost Push (see graph below).

Source: Eleareconomics

The inflation that New Zealand is mainly experiencing is of a cost push nature especially when you look at the recent CPI figure of 5.9%. The major driver of this inflation is:

  • 30.5% rise in the cost of petrol
  • 15.7% rise in the associated cost in buying a new dwelling.
  • 4.1% increase in the food group

What you notice from the graph is that when the AS curve shifts left not only does inflation increase but also output and employment decrease. The last major stagflationary period was during the oil crisis years of 1973 (oil price up 400%) and 1979 (up 200%) – see video below from the Philadelphia Fed.

But when will these cost pressures ease in New Zealand? With a 5.9% inflation rate employees will put significant pressure on employers for wage increases and this is when there is already a very tight labour market (3.2% unemployment).

Final thought
2022 is going to be a very difficult year for the economy with both demand and supply issues:
Demand: higher inflation will mean a tightening of interest rates which will reduce spending and increase the debt burden.
Supply: higher energy costs, supply chain problems, increase in material costs and availability of parts for industry.

Add to this the war in Ukraine and we are in for a rocky ride. However the possible suffering is necessary if it nullifies the threat on global democracy.

For more on Stagflation 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.