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Welcome to the Sloman Economics News Site. This blog contains links to topical stories in the news discussing key economic issues and concepts.

Each news item starts with an introduction to the issue. This is followed by several links to relevant news articles – some to videos or podcasts. The item finishes with discussion questions that can be used either for self-testing or for use in class.

Scroll down below to read the latest articles posted, or use the search facilities on the left-hand side to search the articles by date, keyword and your chosen textbook.

Most of the postings are by Elizabeth Jones, John Sloman, Dean Garratt, Matt Olczak, Jon Guest and Alison Wride.

We also welcome guest posts from lecturers using one or more of the books in their teaching – see the About this Site section on the left for more details.

For registration and access to companion websites, MyEconLab products or lecturer resources accompanying your Sloman textbooks click here to access the Sloman textbook online resources page.

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Tackling the UK’s poor productivity

As we saw in the blog post The UK’s poor productivity record, the UK’s productivity, as measured by output per hour worked, has grown much slower than in other major developed countries since the financial crisis. In fact, output per hour is lower now than in 2008. In France and Germany it is around 3 per higher than in 2008; in Japan it is nearly 6% higher; in the USA it is over 8% higher; and in Ireland it is 12% higher.

The chart below shows international comparisons of labour productivity from 2000 to 2014. (Click here for a PowerPoint of the chart.)

And it is not just labour productivity that has fallen in the UK. Total factor productivity of labour and capital combined has also fallen. This reflects the fall in business investment after the financial crisis and, more recently, meeting the demand for extra output by employing more labour rather than by investing in extra capital.

In his first major speech since the election, the Chancellor of the Exchequer, George Osborne, told the CBI that the government was intent on tackling the problem of low and stagnant productivity. This would require investment in infrastructure, such as high-speed rail, better roads, superfast broadband and a new runway in the south east. It would require investment in education, training and research; it would involve cutting red tape for business; it would require making it easier for both parents in a family to work by cutting the cost of childcare. The details of the government’s policies would be made clear in the soon-to-be published Productivity Plan.

But how much difference can the government make? Are there intractable problems that will prove virtually impossible to overcome? How much, indeed, can a government do, however much it would like to? The articles explore the issues.

Articles
Will George Osborne’s productivity plan help make Britain a world-beater? The Guardian, Larry Elliott (24/5/15)
UK productivity has stayed stubbornly low for years. Dare we hope for better? The Guardian (24/5/15)
Osborne says low productivity key economic challenge BBC News (20/5/15)
Solving the productivity puzzle BBC News, Duncan Weldon (20/4/15)
Osborne faces up to productivity challenge BBC News, Robert Peston (20/5/15)
Osborne makes priority of boosting UK productivity Financial Times, George Parker (20/5/15)
The Bank of England is living in cloud-cuckoo land on wages Independent, David Blanchflower (18/5/14)
Cameron’s Plan Hasn’t Cracked Productivity Slump Flagged by BOE Bloomberg, Jill Ward (14/5/15)

Report
Inflation Report: Chapter 3, Output and Supply Bank of England (May 2015)

Questions

  1. Define (a) labour productivity; (b) capital productivity; (c) total factor productivity.
  2. Why has the UK experienced lower productivity than other developed countries?
  3. Why may the UK’s lower unemployment than other countries in the post-recession period be the direct consequence of lower productivity growth?
  4. For what reasons might it be difficult for the government to achieve a significant increase in UK productivity?
  5. How might demand-side policy negatively impact on the supply-side policies that the government might adopt to increase productivity?
  6. How might the period up to and beyond the referendum in the UK on continuing EU membership impact on productivity?
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The end of globalisation?

The period from the end of the Second World War until the financial crisis of 2007–8 was one of increasing globalisation. World trade rose considerably faster than world GDP. The average annual growth in world GDP from 1950 to 2007 was 4.2%; the average annual growth in world merchandise exports was 6.7%.

And there were other ways in which the world was becoming increasingly interconnected. Cross-border financial flows grew strongly, especially in the 1990s and up to 2007. In the early 1990s, global cross-border capital flows were around 4% of world annual GDP; by 2007, they had risen to over 20%. The increasing spread of multinational corporations, improvements in transport, greater international movement of labour and improved communications were all factors that contributed to a deepening of globalisation.

But have things begun to change? Have we entered into an era of ‘deglobalisation’? Certainly some indicators would suggest this. In the three years 2012–14, world exports grew more slowly than world GDP. Global cross-border financial flows remain at about one-third of their 2007 peak. Increased banking regulations are making it harder for financial institutions to engage in international speculative activities.

What is more, with political turmoil in many countries, multinational corporations are more cautious about investing in such markets. Many countries are seeking to contain immigration. Fears of global instability are encouraging many firms to look inwards. After more than 13 years, settlement of the Doha round of international trade negotiations still seems a long way off. Protectionist measures abound, often amount to giving favourable treatment to domestic firms.

The Observer article considers whether the process of increased globalisation is now dead. Or will better banking regulations ultimately encourage capital flows to grow again; and will the inexorable march of technological progress give international trade and investment a renewed boost? Will lower energy and commodity prices help to reboot the global economy? Will the ‘Great Recession’ have resulted in what turns out to be merely a blip in the continued integration of the global economy? Is it, as the Huffington Post article states, that ‘globalization has a gravitational pull that is hard to resist’? See what the articles and speech have to say and what they conclude.

Articles
Borders are closing and banks are in retreat. Is globalisation dead? The Observer, Heather Stewart (23/5/15)
Is Globalization Finally Dead? Huffington Post, Peter Hall (6/5/14)

Speech
Financial “deglobalization”?: capital flows, banks, and the Beatles Bank of England, Kristin Forbes (18/11/14)

Questions

  1. Define globalisation.
  2. How does globalisation affect the distribution of income (a) between countries; (b) within countries?
  3. Why has the Doha round of trade negotiations stalled?
  4. Examine the factors that might be leading to deglobalisation.
  5. What are the implications of banking deglobalisation for the UK?
  6. Are protectionist measures always undesirable in terms of increasing global GDP?
  7. What forces of globalisation are hard to resist?
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Stiglitz, Hilton and Gessen

You may be used to these types of blogs by now … On my commute to work on the 18th May, I listened to Start the Week on BBC radio 4 and happened upon a fascinating discussion on inequality.

Of those discussing the issue, one certainly needs no introduction: Joseph Stiglitz, a prominent economist, author and commentator on economics, in particular on inequality. He was joined by Steve Hilton, who has worked for David Cameron for many years in providing advice on a range of issues, including inequality and strategy and has written on existing institutions and their effectiveness. The final panellist was Masha Gessen, who has written extensively on Russia and in particular on the journey of the infamous Boston Bomber.

Though the discussion covers a variety of areas relevant to economics, one key area that is addressed is inequality and the policies that are being used to address the causes and the symptoms. You can access the 45-minute discussion at the link below.

Joseph Stiglitz and Steve Hilton on inequality BBC Radio 4 (18/5/15)

Questions

  1. How would you measure inequality?
  2. Why is it important to distinguish between the causes and symptoms of poverty when designing government policy?
  3. To what extent do you believe that education is an essential requirement for growth and development?
  4. Why has inequality grown in some of the most developed nations?
  5. How is it possible that inequality in the developed world has grown, while global inequality has fallen?
  6. Why does the report argue that the reforms they suggest would help boost growth?
  7. Do you agree that existing institutions are not suitable for society today?
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Negative inflation or deflation? What’s the UK experiencing?

The CPI index fell by 0.1% in the 12 months to April 2015. This is partly the result of lower air and sea fares, as the upward ‘blip’ in these fares at Easter last year was not present in mid-April this year as Easter fell outside the period when the statistics are collected. What is more significant is that fuel, commodity and retail food prices have fallen over the past 12 months, and the exchange rate has risen, especially against the euro.

But how do we define what’s happened and how significant is it? It might seem highly significant as it’s the first time in 55 years that the CPI has fallen over a 12-month period. In fact, the effect is likely to be temporary, as fuel prices are now rising again and commodity prices generally are beginning to rise too. What is more, the pound seems to have peaked against the euro. Thus although aggregate demand remains relatively dampened, the main causes of falling prices and potential rises in the coming months are largely to be found on the cost side. This then brings us on to the definition of a falling CPI.

A falling CPI over a 12-month period can be defined as negative inflation. This is unambiguous. But is this ‘deflation’? The problem with the term ‘deflation’ is that it is ambiguous. On the one hand it can be defined simply as negative inflation. In that case, by definition, the UK has experienced deflation. But on the other, it is used to describe a situation of persistent falling prices as a result of declining aggregate demand.

If an economy suffers from deflation in this second sense, the problem can be very serious. Persistent falling prices are likely to discourage consumers from spending on durables (such as fridges, TVs, cars and furniture) and firms from buying capital equipment. After all, why buy an item now if, by waiting, you can get it cheaper later on? This mentality of waiting to spend leads to falling aggregate demand and hence falling output. It also leads to even lower prices. In other words deflation can get worse: a deflationary spiral.

If we define deflation in this second, much more serious sense, then the UK is not suffering deflation – merely temporary negative inflation. In fact, with prices now falling (slightly) and wages rising at around 2% per year, there should be an increase in aggregate demand, which will help to drive the recovery.

Videos
Should Britain Panic Over Negative Inflation? Sky News, Ed Conway (20/5/15)
UK inflation negative for first time since 1960; BoE says temporary Reuters, Andy Bruce and William Schomberg (19/5/15)
UK inflation negative for the first time since 1960 CNBC, Dhara Ranasinghe (19/5/15)

Articles
UK inflation rate turns negative BBC News (19/5/15)
Why there’s little to fear as the spectre of deflation descends on UK The Telegraph, Szu Ping Chan (19/5/15)
UK inflation turns negative The Guardian, Katie Allen (19/5/15)
Is the UK in the early stages of deflation? The Guardian, Larry Elliott (19/5/15)
Is the UK in deflation or negative inflation? Q&A The Guardian, Katie Allen and Patrick Collinson (19/5/15)
Market View: Economists unconcerned on temporary deflation FT Adviser, Peter Walker (19/5/15)

Questions

  1. Is negative inflation ever a ‘bad thing’?
  2. Explain the movement in UK inflation rates over the past five years.
  3. How do changes in exchange rates impact on (a) inflation; (b) aggregate demand? Does it depend on what caused the changes in exchange rates in the first place?
  4. Why is the current period of negative inflation likely to be short-lived?
  5. Would you describe the negative inflation as negative cost-push inflation?
  6. What factors could change that might make negative inflation more persistent and raise the spectre of deflation (in its bad sense)?
  7. If inflation remains persistently below 2%, what can the Bank of England do, given current interest rates, to bring inflation back to the 2% target?
  8. What is meant by ‘core inflation’ and what has been happening to it in recent months?
  9. What global factors are likely to have (a) an upward; (b) a downward effect on UK inflation?
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A new look for New Look?

New Look was founded in 1969 and is an iconic budget retailer found on most British high streets. In its history, it has been a family business; it has been listed on the London stock exchange; returned to a private company and then had the potential to be re-listed. Now, it is moving into South African ownership for £780 million.

90% of New Look will now be owned by Christo Wiese who controls Brait and who has been linked with other take-overs of British retailers in recent years. The remaining 10% will remain in the hands of the founding family. The company has been struggling for some time and in 2010 did have plans to relist the company on the London Stock Exchange. However, volatile market conditions meant that this never occurred and the two private equity firms, Apax and Permira, appeared very eager to sell. New Look’s Chairman, Paul Mason, said:

“This is an ideal outcome for New Look. The Brait team demonstrated to us that they have the long-term vision to help Anders and the team grow this brand.”

It is not yet clear what this move will mean for the retailer, New Look, but with an estimated £1 billion debt, it is expected that changes will have to be made. It is certainly an attractive investment opportunity and New Look does have a history of high rates of growth, despite its current debt. Furthermore, the debt levels are likely to have helped Mr. Wiese obtain a deal for New Look. Fashion retailing is a highly competitive market, but demand always appears to be growing. It is still relatively ‘new’ news, so we will have to wait to see what this means for the number of stores we see on the high streets and the number of jobs lost or created. The following articles consider this new New Look.

South African tycoon buys New Look fashion retailer BBC News (15/5/15)
South African tycoon enters UK retail fray with New Look purchase Financial Times, Andrea Felsted, Clare Barrett and Joseph Cotterill (15/5/15)
New Look snapped up by South African tycoon The Guardian, Sean Farrell (15/5/15)
New Look sold to South African billionaire for £780m The Telegraph, Elizabeth Anderson and Andrew Trotman (15/5/15)

Questions

  1. Why might a company become listed on the London stock exchange?
  2. How would volatile economic circumstances affect a company’s decision to become listed on the stock market?
  3. What do you think this purchase will mean for the number of New Look stores on British high streets? Do you think there will be job losses or jobs created by this purchase?
  4. How do you think the level of New Look’s debt affected Christo Wiese’s decision to purchase New Look?
  5. Which factors are likely to affect a firm’s decision to take-over or purchase another firm?
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