Skills needed to achieve UN Sustainable Development Goals

An article from the IMF publication ‘Finance & Development’ tackled the question of how can the UN bring about the 17 SDGs? Economic development depends a lot on the skill levels of the population and this requires considerable investment and time. The IMF highlighted 3 issues:

  1. Skill differences account for three-quarters of cross-country variations in long-term growth.
  2. The global skill deficit is immense, as two-thirds or more of the world’s youth do not reach even basic skill levels.
  3. Accordingly, reaching the goal of global universal basic skills would raise future world GDP by $700 trillion over the remainder of the century.

Long-run growth depends primarily on the skills of the people. According to Hanushek and Woessmann 2015 relevant economic skills are captured quite well by international student achievement tests in math and science. The graph below shows the relationship between long-term growth and achievement. Skills are measured by two international assessments:
Programme for International Student Assessment [PISA]
Trends in International Mathematics and Science Study [TIMSS]

Growth and achievement are closely linked: countries with high-achieving populations grew fast; those whose people lag in achievement hardly grew at all. Achievement explains three-quarters of the variation in growth rates across countries. Moreover, years of schooling have no bearing on growth after accounting for what has actually been learned.

Although international achievement tests were first developed in the 1960’s the majority of poorer countries have never participated. The IMF define basic skills as those necessary to participate productively in modern economies. These are represented by mastering at least the lowest of the six skill levels of the PISA test – at this level students are able to carry out obvious routine procedures. However at this level they cannot solve simple problems involving whole numbers. These skills are imperative in the ever changing world of employment. 66% of the world’s young people fail to compete in the international economy. According to the IMF there are 6 development challenges by global deficits in basic skills:

  • At least two-thirds of the world’s youth do not obtain basic skills.
  • The share of young people who do not reach basic skills exceeds half in 101 countries and rises above 90 percent in 37 of these.
  • Even in high-income countries, a quarter of young people lack basic skills.
  • Skill deficits reach 94 percent in sub-Saharan Africa and 90 percent in south Asia, but they also hit 70 percent in Middle East and North Africa and 66 percent in Latin America.
  • While skill gaps are most apparent for the third of global youth not attending secondary school, fully 62 percent of the world’s secondary school students fail to reach basic skills.
  • Half of the world’s young people live in the 35 countries that do not participate in international testing, resulting in a lack of regular foundational performance information.

It is not enough for young people to be at school – low quality education is prevalent in most poorer countries. The last few years have not helped with school closures and reluctance to return to the classroom which will not disappear simply by restoring schools to their January 2020 performance. The pandemic has impacted the poorer children in both developed and developing countries.

Improving student achievement is the goal and a possible way of doing this is incentives related to educational outcomes, which is best achieved through the institutional structures of the school system. Notably, education policies that develop effective accountability systems, promote choice, emphasise teacher quality, and provide direct rewards for good performance offer promise, supported by evidence.

Source: IMF F&D The Basic Skills Gap – September 2022

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Economics of Coronavirus – mindmap

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

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

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

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

Policy options

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

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

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

Source: The Real Economy Blog

Difference between the IMF and the World Bank

Updating the new CIE AS and A Level syllabus for 2023 and external debt and the role of IMF and World Bank are part of Unit 11 of CIE A2 syllabus. This is an area where students get confused as to the role of each organisation.

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

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

Below is a useful video from CNBC on the differences.

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Qatar and the economic significance of hosting the world cup

Very good video from The Economist about Qatar hosting the most expensive World Cup ever – approximately $300bn. Why has this small, gas-rich kingdom chosen to host football’s most prestigious event, and how does it fit into its broader plans for economic transformation? The video below explains the history behind Qatar,

The tournament is a big deal for a country that has fewer than three million residents. For the 2018 tournament, held in Russia, football’s governing body, FIFA, says more than one billion people tuned in to watch at least some of the final game between France and Croatia. However, academic research into the economic impact of hosting the World Cup suggests any advantages gained are at best hard to perceive and at worst non-existent. Since it won the bid to host Qatar has built eight new stadiums, more roads, hospitals and a new metro system. However the criticisms on human rights are not going away.

For Andrew Zimbalist, the author of Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup, the evidence is clear: “There is virtual unanimity in the scholarship that on the question of the economic impact of mega events, they don’t promote economic development.”

World Cup Hosts, Winners and Political/Economic Systems

Keeping with the World Cup theme, I read a very interesting book a few years ago by Franklin Foer entitled “How Soccer Explains the World” in which he outlines that soccer is not merely a pastime but often an expression of the social, economic, political, and racial composition of the communities that host both the teams and their throngs of enthusiastic fans. I thought it worthwhile to look at the past hosts, winners of the World Cup and the political/economic system that prevailed in these countries at the time.

Source: The Thinking Fan’s Guide to the World Cup.

Command Systems not so successful.

According to Foer the Communist countries have the better of the results against the non-communist countries. Played 118 Won 46, Drawn 32, Lost 40. However a Communist country has yet to win the World Cup. He suggests that the reasons for this are as follows:

  1. Coaches thought that science could provide the information to win games – i.e. evaluating teams on the number of passes, tackles, shots etc. This might work in athletics or gymnastics but doesn’t include the individual skill and risk-taking involved in winning games.
  2. The harsh conditions of communism also meant that a lot of players defected to other countries that were more democratic.

Fascism as a driving force

The existence and adoration of a single, omnipotent leader is conceivably the best known characteristic of fascist governments. In Italy Benito Mussolini was always seeking to use popular culture in his quest to grasp authority and to convert Italian society, and sport was a key part of this strategy. Fascists took control of football in Italy and by the mid-1920s had proceeded to revolutionise the game, building stadiums all over the peninsula and creating a national team which was to dominate the international game for four years, winning two World Cups (1934 and 1938) and an Olympic gold medal.

Under leader Francisco Franco, Spain was also a fascist regime although it was described as an autocracy rather than a totalitarian state like those of Italy and Germany. This might explain why Spain’s fascist dictatorship endured from the 1940s into the 1970s. Franco was an avid Real Madrid supporter and, according to some, the regime provided decisive aid in the club’s signing of the best player of the fifties, the Argentine Alfredo Di Stefano, even though Barcelona had already agreed terms with him. Franco viewed the triumphs of Real Madrid and of the Spanish national team as in some way
his own.

However he did face serious opposition from the Basques and the clubs Athletico Bilbao and Real Sociedad were the only venues where the Basque people could express their cultural pride without ending up in jail. In the south of the country FC Barcelona was the heroic centre of the resistance to Franco’s military dictatorships. Their home ground, Camp Nou, provided an environment for Catalans to voice their strong disapproval of Franco’s military dictatorship.

Brazil – 5 World Cup wins.

Brazil is the most successful country in terms of performances in the World Cup. Three out of their five World Cup wins have come about under military/fascist regimes. Also Argentina in the 1970s and 1980s achieved soccer’s golden prize under the watchful eye of the fascist generals. Since 1934, no fewer than seven World Cups have been won by countries with some form of fascist ideology.

Freedom House stated the 2018 tournament hosted in Russia was not ‘free’ with autocratic control by Vladimir Putin. Same can be said for Qatar where democratic elections or political parties do not exist. Freedom House states that “While Qatari citizens are among the wealthiest in the world, most of the population is made up of non-citizens with no political rights, few civil liberties, and limited access to economic opportunities.”

According to Franklin Foer, in spite of the common modern assertion that civilisation is in discord, football provides substance to the argument that a civilised world order is possible. But globalisation single-handedly cannot be seen to achieve this objective. In order to achieve a world environment where citizens have tolerance and respect for each other the institutions of a vivacious domestic liberalism must also be created and sustained.

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World Cup – is German Football like the German Economy?

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

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

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

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

2014 onwards

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

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

2022 – recent results and economic outlook

Recently their poor run of form in the Nations league with just one win in six games and a home defeat to Hungary has left new manager Hansi Flick with a big challenge to get the best out of a talented squad. However, the lack of a real number 9 is a concern and although they can beat other teams it is their lack of consistency that could let them down. As for the German economy it is still a gloomy outlook – high inflation, constant supply chain problems and weaker global demand have impacted their manufacturing industry. Although unemployment figures are low there is pressure on wages which could put further pressure on inflation.

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A2 Multiple-Choice Revision – the Multiplier

Below is a type of question which has been quite popular in the last couple of exam sessions. I have changed the data from the original CIE question.

The table shows the values of selected macroeconomic variable over a two-year period.

What is the value of the multiplier?

A. 3 – B. 4 – C. 6 – D. 12

From the data both years are in equilibrium
Year 1 NI = 3800  –  Injections = 260+160+200 = 620 Withdrawals = 300+140+180 = 620
Year 2 NI = 4600  –  Injections = 360+210+250 = 820 Withdrawals = 350+210+260 = 820
 
The increase in injections has been 200 but the increase in NI has been 800 (4600-3800) – therefore the multiplier is 4 – (4 x 200 = 800).

The Multiplier
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 realise 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

Source: CIE A Level Revision Guide – Susan Grant

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A2 Economics – National Income Equilibrium – Multiple Choice

In preparation for the CIE A2 multiple-choice paper on Thursday here are a couple of A2 type multiple-choice questions that some students have struggled with.

Question 1

In a closed economy, where the full-employment level of income is $90 million, C = 2/3 Y and I = $(40-3r) million, where C = consumption, Y = income, I =investment and r = the rate of interest. If planned government expenditure is $20 million, what rate of interest would be required for there to be full employment?

A  10% per annum B 12% per annum C  14% per annum D  16% per annum

Answer: A

Y = C + I + G

90 = 2/3(90) + (40 – 3r) + 20

90 = 60 + 20 + 40 – 3r

3r = 30

r = 10%

Question 2

In a closed economy with no government sector, there is no autonomous consumption and the marginal propensity to consume is 0.7. At the beginning of a time period firms set production targets of goods worth $1000 m of which planned sales to consumers = $800 m and planned additions to stocks = $200m.

Which one of the following statements is correct?

A       The economy is in equilibrium, with planned savings and investment equal to $200m.

B       The economy is in disequilibrium, with planned investment greater than planned savings.

C       The economy is in disequilibrium, with planned aggregate demand of $800 in, and planned aggregate supply of $1000m.

D       There will be an unplanned increase in stocks in $100in.

Answer

D       NY = $1000m and MPC = 0.7, thus planned consumption is $1000 x 0.7 = $700m while planned sales by firms = $800. This will lead to an increase in unplanned stocks by $100m.

Paradox of Thrift – Great Depression & GFC

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 and the GFC

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.

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US dollar strength a problem in fighting inflation

The US dollar hasn’t been stronger since 2000 – it has appreciated:

  • 22% – Yen,
  • 13% – Euro,
  • 6% – emerging market economies.

The dominance of the US$ has serious implications for the macroeconomy of almost all countries. Although US share of world trade has declined from 12% to 8% the US$ share of world exports has remained around 40%. Therefore imports denominated in US$ into countries have become more expensive and it is estimated that for every 10% US$ appreciation adds 1% to the country’s inflation figure. For developing countries with a high dependency on US$ denominated imports this is particularly worrisome.
Furthermore almost 50% of cross-border loans and international debt securities are in US$ and although emerging market governments have made progress in issuing debt in their own currency, their private corporate sectors have high levels of dollar-denominated debt. As the US Fed continue to raise interest rates with a fourth consecutive 75 basis points rise on 2nd November financial conditions have tightened and the strong US$ only compounds these pressures especially for many low income countries that are close to defaulting on their debt.

What should countries do?
Some countries and intervening in the foreign exchange buying their own currency with US$ reserves – foreign reserves fell by over 6% in the first half of this year to support their currency. Intervention should not be a permanent policy as it could mean a loss of foreign reserves as well as alerting markets to your intentions which could play into the hand of foreign exchange dealers. Monetary policy needs to keep inflation close to its target rate and the higher price of imports should reduce demand and therefore prices but a lot depends on the elasticity of demand for a country’s imports – if inelastic there is increasing pressure on inflation. Fiscal policy should provide some support to those that are most vulnerable without jeopardising the inflation target.

Source: IMF Blog – How Countries Should Respond to the Strong Dollar.

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AS – Subsidy Graph – Multiple-Choice questions

The AS multiple-choice paper (P1) is in two weeks and a popular question is either a subsidy or indirect question. Below is a typical subsidy graph and the question usually asks students to identify a particular area of the graph. I have put some options below with the corresponding area.

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Why are airline prices so high? Supply and Demand

In the news of late has been the outcry from consumers of the increase in the price of domestic airline fares, in some case 300% higher than they were pre-pandmeic. So why have they gone up so much? It’s a simple matter of supply and demand.

Below is an interview with Air New Zealand CEO Greg Foran talking about what is driving up airfare prices. Pick the supply and demand causes.

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Nordic equality and the bumblebee

Always been interested in the Nordic economies especially when you look at their standing in HDI and other indicators like happiness, trust and ease of doing business etc. There is a series of three books that looks at the fundamental features of these societies whether it be Equality, Economic Performance and Happiness – see image.

The Nordic countries rank amongst the best for equality in society. How is it possible that these economies are some of the richest and the most equal? Many people compare the Nordic model of equality to a bumblebee. The bumblebee tends to go against the laws of aerodynamics – a very big body with tiny wings. The Nordic countries model of inequality is very expensive but there is still economic growth in the economy. Carsten Jensen talks of 3 aspects of Nordic society that makes this possible.

  1. The flexicurity system – flexibility and security. This is where employment regulation is fairly lenient (ability to make employees redundant) combined with a generous welfare programme The welfare support has two main aims: to protect against loss of income that come with losing your job and ensuring that you have the right skills to better fit the labour market. Should be noted that the government play an important role in the provision of free education at the tertiary level in Nordic countries. This leads to the golden triangle of flexicurity – flexible labour markets, training and retraining, and unemployment protection – see fig below.
  2. The business friendly environment. The World Bank’s Ease of Doing Business Index ranks countries according to how conducive their regulatory environment is to establishing and running a company. In the 2020 Index Denmark were 4th, Norway 9th and Sweden 10th. However this does not imply that equality is somehow intrinsically good for a country’s commercial environment.
  3. Social trust – this is important for growth as it make cooperation between individual citizens and companies easier. The lower transaction costs from social trust mean the environment is more conducive to investment from entrepreneurs and banks. Those countries that have less social trust spend more time and money on monitoring employees, other companies and consumers.

Source: Equality in the Nordic world – Carsten Jensen – 2021

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Brexit and the costs of leaving a free trade area.

This is an excellent video from the FT about Brexit. It goes into detail about the costs of leaving a free trade area and how Brexit has impacted small business and investment in the UK. Below are some quotes from the video – useful for the barriers to trade topic.

A French company will buy from Germany because they’ll probably be able to get the same product easier and without any of the extra costs that we’re having to apply to get it out of the UK

We couldn’t ship anything to the EU, nothing. It’s 27 countries, they all have different borders, they all have different rules.

Signing a free trade agreement with New Zealand or Australia has ups and downs of the UK economy, and is probably very, very marginally positive. But it’s nothing like losing a free trade agreement and losing the frictionless trade you had with your biggest trading partner that’s only 20 miles away across the channel.

We lose 4 per cent of our GDP by Brexit. We gain 0.08 per cent by the government’s own estimate through this trade deal with Australia.

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BRICS – acronym to strategic bloc

The acronym started as “BRIC” in 2001, when Goldman Sach’s then-chief economist Jim O’Neill predicted that the economic weight of Brazil, Russia, India and China could eclipse the world’s biggest economies in the next decade. A decade passed, and that didn’t happen. But leaders of BRIC nations did hold their first official summit in Russia in 2010, with South Africa joining the group a year later. Since then, they have met regularly to discuss cooperation on global issues. Video below is from CNBC International. Good viewing for A Level Developing Economies.

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Economics essay writing – sticking to the assessment objectives.

With the A2 Economics essay exam paper next week examiners will be marking scripts to the assessment objectives. As an examiner too often essay-style answers fail to maintain relevance to the precise question set and students revert to the safety of repetition of their notes. In most Economics AS and A Level Syllabus there are four assessment objectives:

Knowledge and understanding  – Demonstrate knowledge and understanding. 30%

Application – Interpret and apply knowledge and understanding to information presented in written, numerical or graphical form. 20%

Analysis  – Analyse economic issues and arguments, using relevant economic concepts, theories and information, and communicate conclusions in a clear, reasoned manner. 30%

Evaluation  – Critically evaluate economic information, arguments, proposals and policies, taking into consideration relevant information and economic principles and distinguishing facts from hypothetical statements and value judgements. 20%

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A2 Worksheets – Perfect and Imperfect Labour Market

Following on from my previous post about the labour market here is an activity. When covering Labour Markets with my A2 level classes I put together an exercise which tests them on calculating MCL, MRPL etc and also showing why MCL = MRPL is the number of workers a firm should employ. There is an exercise for both Perfect and Imperfect Labour markets – see ‘Word’ document. The excel document is a model answer showing the data in a table and a graphical format. Hope it is of use.

Imperfect Competition in the Labour Market
ACL MCL of Labour

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A2 Revision – Monopoly and Deadweight Loss

A topic in the A2 syllabus is Market Failure with special emphasis on Monopoly and Deadweight Loss.

In Perfect Competition we stated that the force of supply and demand establish an equilibrium situation in which resources are used most efficiently – MC (Supply) = AR(Demand) . Furthermore, in perfect competition the firm produces at MC = MR (profit max) which is also the same as producing at MC = AR (allocative efficiency). This is because AR and MR are the same in perfect competition. Therefore the same output represents allocative efficiency and profit max. Remember that long-run Perfect Competition is a significant output as it is where:
MC = MR – Maximum Profit or Minimum Loss
MC = AR – Allocative Efficiency (Supply = Demand)
AC = MC – Technical Optimum – Productive Efficiency

However for a monopolist because the AR and the MR curves are different we get separate outputs for Allocative Efficiency and Profit Max. The graph below shows that at profit maximising equilibrium, output Q2 is less than that in a competitive market (Q1), and the demand and supply (MC) curves do not intersect. Q1 represents the Allocative Efficiency level of output and P1 the price. The shaded area therefore represents the loss of allocative efficiency or the deadweight loss.

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A2 Economics – Marginal Revenue Product Theory

Marginal Revenue Product of Labour

Marginal revenue productivity (MRPL) is a theory of wages where workers are paid the value of their marginal revenue product to the firm.

The MRP theory outlined below is based on the assumption of a perfectly competitive labour market and the theory rests on a number of key assumptions that realistically are unlikely to exist in the real world. Most labour markets are imperfect, one of the reasons for earnings differentials between occupations which we explore a little later on.

  • Workers are homogeneous in terms of their ability and productivity
  • Firms have no buying power when demanding workers (i.e. they have no monopsony power)
  • There are no trade unions (the possible impact on unions on wage determination is considered later)
  • The productivity of each worker can be clearly and objectively measured and the value of output can be calculated
  • The industry supply of labour is assumed to be perfectly elastic. Workers are occupationally and geographically mobile and can be hired at a constant wage rate

Marginal Revenue Product (MRPL) measures the change in total output revenue for a firm as a result of selling the extra output produced by additional workers employed. A straightforward way of calculating the marginal revenue product of labour is as follows:

MRPL = Marginal Physical Product x Price of Output per unit

Therefore the MRP curve represents the firm’s demand for labour curve and the profit maximising condition is where:

MRPL = MCL (Marginal Cost of Labour) where the revenue generating by employing an additional worker (MRPL) = the cost of employing an additional worker (MCL).

Mind Map below adapted from Susan Grant’s book CIE A Level Revision Guide

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A2 Economics – Economic Rent and Transfer Earnings

Economic Rent and Transfer Earnings To most of us “rent” is defined as a periodical payment made for the use of a particular asset – usually a residential or commercial property. However, the concept is not limited to land or buildings because it can also be applied to the other factors of production. When a factor is earning more than its supply price, it is receiving a part of its income in the form of economic rent. This situation arises when demand increases and supply cannot fully respond to the increases in demand. For example, labour already employed will experience an increase in income so that they must be earning more than their supply prices.

Present Wages – Wages when initially employed = Economic Rent

The minimum payment required to prevent a person transferring to another employer or another occupation is know as transfer earnings. It is determined by what the factor could earn in its next best paid employment. Transfer earnings may be regarded as the opportunity cost of keeping an employee in their present job or it may be regarded as the employee’s supply price in their present occupation. For example, if the minimum weekly wage that would persuade someone to work as a shop attendant is $200 but he or she actually receives a wage of $250, then the transfer earnings amount is $200 and he or she is receiving $50 in the form of economic rent. Therefore, economic rent can be defined as any payment to a factor of production that is in excess of transfer earnings.

The graph below shows the demand and supply for labour. The equilibrium wage is $120 with a quantity of 50 units. Total earnings is equal to $120 x 50 units of labour = $6,000 and employees receive the same wage of $120. However, all workers except the last one taken into employment were prepared to offer their services at wages less than $120. Therefore, provided the supply of labour slopes upwards (i.e. it is less than perfectly inelastic) an increase in demand will give rise to rent payments to those factors that were already employed at the original wage of $120. The area of economic rent and transfer earnings is shown in the graph below. Only the last labour unit employed earns no economic rent because the wage of $120 is the supply price to that particular labour unit.

Inelastic and Elastic labour supply

The amount of economic rent and transfer earnings in the return to labour depends upon the elasticity of supply and the level of demand. The greater the occupational mobility of labour, the smaller the element of economic rent. If labour can do a variety of occupations then quite small changes in the wage rate will cause large movements of labour into an industry when wages rise, and out of that industry when wages fall.

Very specialised labour has an inelastic supply curve. This includes surgeons, top CEOs, scientists and jobs that require high skill levels or involve significant danger and skill, eg, deep sea divers. The relatively high rewards to this labour are due to the fact that they are in very scarce supply relative to the demands for their services. Their transfer earnings will be much less than their salary because the market values outside their own specialised professions are probably very low. A frequently quoted example of earnings that contain a large amount of economic rent are those of top sports people. Today these people can earn significant amounts of money in a short period of time. A footballer such as Christiano Ronaldo earns €326 923 per week because of his ability to attract big crowds, merchandise sales and sponsorship deals when he was at Real Madrid Football Club. His skill levels are unique and in very limited supply when considering other players. This reflects a very high marginal productivity leading to a higher wage.

Some other occupations that are held in high regard by society do not command such high salaries because of their low marginal productivity. This includes nurses, firefighters, teachers, etc. Furthermore, the supply of labour for these jobs tends to be elastic because there are many people to choose from, unlike their footballing counterparts who have unique skills.

Quasi rent

Where the supply of labour is less than perfectly elastic an increase in demand will lead to some workers receiving economic rent. This rent may be of a temporary nature, however, because the higher wage may lead to an increase in supply, which in turn, lowers the wage. Increased wages might entice other workers to undertake the necessary training. The economic rent that is earned during the period before supply can be increased is referred to as quasi rent. True economic rent refers to the remuneration of factors that are fixed in supply.

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