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Fancy a hundred trillion dollar note?

The term hyperinflation is almost an understatement when it comes to describing the level of inflation in Zimbabwe. In July 2008, inflation was estimated to be 231 million per cent. In January 2009, two estimates were made: one of 5 sextillion per cent (5 and 21 zeros); the other of 6.5 quindecillion novemdecillion per cent (65 and 107 zeros). These figures are simply mind-boggling for most people living in low-inflation economies.

Commentators say that prices can double in a single day and this can render banknotes useless very quickly. In fact, local banknotes are scarcely used as people turn to overseas currencies that offer more stability. Recognising this, in late January 2009 the government officially allowed foreign currencies to be used in Zimbabwe as well as the Zimbabwe dollar.

In an attempt to stabilise the currency the Zimbabwean central bank on more than one occasion has tried dropping several zeros from the currency. But this has had little effect and in January 2009 a new series of banknotes was issued, including a Z$100 trillion note. This is unlikely to be the last issue though, but what comes after a trillion?

Zimbabwe rolls out Z$100tr note BBC News Online (16/1/09)
ZIMBABWE: Inflation at 6.5 quindecillion novemdecillion percent IRIN News (United Nations) (21/1/09)

Questions

  1. Define the term hyperinflation.
  2. Analyse the main causes of hyperinflation.
  3. Discuss policies that the Zimbabwean government could adopt to try to reduce the level of inflation in the economy.
  4. Assess the impact of hyperinflation on the other major macro-economic targets.
  5. Research another instance of hyperinflation and write a brief summary of the cause(s) and the solution(s). You may find the Wikipedia entry on hyperinflation a good starting point.

Keeping it in the family – nationalisation

Nationalisation has been coming back into fashion lately with the UK bank bail-outs. In other parts of the world though, it has been back in fashion for longer and the articles below look at two recent cases in Latin America: the nationalisation of the Chaco energy company and the renationalisation of Spanish-owned airline, Aerolineas Argentinas (AA).

Bolivia nationalises energy firm BBC News Online (24/1/09)
Argentina renationalises airline BBC News Online (18/12/08)

Questions

  1. Explain what is meant by nationalisation.
  2. Discuss the arguments for and against nationalising (a) an airline and (b) an energy firm.
  3. Assess why nationalisation has become more prominent in the media recently than privatisation.
  4. Discuss the arguments for and against privatisation.

Recession – it’s official at last

Given all the attention that the recession has had for months in the media, it may be surprising to find out that in fact Britain only went into recession officially today (January 23rd 2009). This is because, as economists, we have a more precise definition of recession than much of the media. A recession is when there is two successive quarters of negative economic growth. Figures released by the ONS today, show that this is finally the case. The links below give a flavour of the media attention dedicated to this announcement.

Recession Britain: It’s official Guardian (23/1/09)
Countdown to recession Guardian (23/1/09)
No end to the melodrama Guardian (22/1/09)
Recession: we knew it was coming, but we didn’t know it would be this bad Times Online (24/1/09)
Recession: Sector-by-sector breakdown Times Online (23/1/09)
It’s official – Britain is in recession Times Online (23/1/09)
UK in recession as economy slides BBC News Online (23/1/09)
Recession figures heighten the gloom Independent (23/1/09)
UK recession: It’s official and the worst since 1980 Telegraph (23/1/09)
UK recession: How does this one compare to those since 1945 Telegraph (23/1/09)
UK recession: It’s now official Telegraph (23/1/09)

Questions

  1. Explain the principal reasons why the UK has fallen into recession.
  2. Discuss the extent to which the UK recession is likely to be worse than in other countries in Europe.
  3. Analyse whether the policies adopted by the UK government will reduce the length and depth of the UK recession.
  4. Evaluate two further policies that the governmnt could adopt to reduce the depth of the recession.
  5. Assess which sectors of the economy are likely to suffer (a) the most and (b) the least, as a result of the recession.

Milking subsidies

The European Commission is concerned that the economic downturn may have put the livelihoods of dairy farmers at risk. To try to prevent any problems for farmers, the Commission has re-introduced export subsidies for dairy products. The last time subsidies were paid to dairy farmers was June 2007 and the EU insists that the payment will meet World Trade Organisation (WTO) rules.

EU gives boost to dairy exports BBC News Online (23/1/09)

Questions

  1. Using diagrams as appropriate, illustrate the impact of the EU export subsidies on the market for milk.
  2. Additional support for dairy farmers comes in the form of EU intervention – European Commission purchases of surplus produce at a guaranteed price. Using diagrams as appropriate, illustrate and explain how this ‘guaranteed price’ scheme will work.
  3. Explain the role of the WTO in determining world trade rules.
  4. Discuss the likely reaction of other countries to the EU’s payment of export subsidies to dairy farmers.

Somali pirates and the tuna catch

Somali pirates have been much in the news recently with their high profile captures of oil tankers and other ships. The impact on shipping in the area is clear and this has disrupted trade in the region, but an unforeseen impact has been on the total worldwide catch of tuna. The Indian Ocean is one of the richest sources of tuna in the world and the pirate activity has led to a fall of around 30% in the total tuna catch.

Somali piracy ‘reduces tuna haul’ BBC News Online (22/1/09)

Questions

  1. Using diagrams as appropriate, show the impact of Somali pirate activity on the market for tuna.
  2. Suggest likely values for the price elasticity of demand and supply of tuna. Analyse the extent to which these values are likely to affect the price rise in the market for tuna.
  3. What substitutes are available for tuna? Assess the extent to which the availability of substitutes will affect the rise in the price of tuna.

Building – from boom to bust!

One of the industries always hard hit by any economic downturn is the building and construction industry. The three articles below look at different aspects of the construction downturn. The building industry in Spain (article 1) has been particularly hard hit, perhaps because of the previous scale of the boom. When there is a recession, different industries are always hit in different ways, depending on the nature of the demand they face. Construction and building can be very badly affected as much of the expenditure on them is ‘investment’ expenditure and this will often be delayed in times of economic downturn.

Building boom reduced to ruins by collapse of Spain’s economic miracle Guardian (19/1/09)
Housing starts lowest since 1924 as construction bears brunt of recession Guardian (15/12/08)
UK construction activity slumps to record low Times Online (5/1/09)

Questions

  1. Write a short paragraph explaining the current state of the construction industry in the UK.
  2. Explain the accelerator theory.
  3. Discuss the extent to which the accelerator theory might help to explain the current state of the construction industry in the UK and Spain.

Peak oil – closing fast?

Peak oil is an important concept for the oil market. Peak oil is the moment in time at which the maximum extraction rate of oil is reached. From this moment on, production will decline. Basic economics tells us that the oil price will tend to rise from then on (unless demand were to fall faster), but the complexities of the demand and supply for oil dictate that there will not be a simple inverse relationship between the supply of oil and the price. In the articles below George Monbiot interviews Faith Birol, the Chief Economist of the International Energy Agency and the Asia Times article looks at the extent to which world economies rely on oil for energy and other needs. Oil prices may be low at the moment and the market may be awash with excess oil and not enough demand for it, but this is a short term phenomenon; there is little doubt about the long-term direction of the price.

When will the oil run out? Guardian (15/12/08)
Be careful what you wish for Asia Times (15/1/09)

Questions

  1. Write a short paragraph explaining what is meant by peak oil.
  2. Using diagrams as appropriate, explain the changes that took place in the oil price in the last six months of 2008.
  3. Analyse the likely impact on the UK economy of arriving at peak oil output in (a) the short term and (b) the long term.
  4. Discuss when peak oil is likely to arrive.

Interest rates – the road to economic salvation?

Governments and central banks around the world are trying hard to minimise the impact of the economic downturn on their economies. One means of doing this is to cut interest rates. The aim is to boost aggregate demand by giving people more disposable income and making borrowing and investment cheaper. But how responsive will people be to the interest rate cuts? The articles and podcasts below look at the issues.

Combating the recession The Economist (8/1/09)
Economic downturn: ‘Interest rates may not be such a useful tool any more’ Guardian (9/1/09) Podcast
Beyond rate cuts Financial Times (15/1/09)
Beyond retail therapy Guardian (8/1/09)
Uncharted territory for interest rates BBC News Online (8/1/09)
Latest cut in interest rates will not revive flagging economy Times Online (9/1/09)
Interest rates – the setting of the LIBOR rate BBC Biz Daily (9/1/09) Podcast – Tim Harford

Questions

  1. Explain the process by which lower interest rates boost aggregate demand.
  2. Explain what is meant by the LIBOR rate. Listening to the BBC Biz Daily podcast above may help in answering this.
  3. Assess the importance of the LIBOR rate in determining the levels of borrowing and investment in the economy.
  4. Discuss the relative effectiveness of fiscal and monetary policy in boosting the level of aggregate demand in the UK economy.

China – is the economic miracle fading?

The World Economic Forum has warned that 2009 may see a ‘hard landing’ for China. In the context of China, this does not necessarily mean a recession, but the WEF report does identify a significant possible slowdown in Chinese growth. Given that high growth in China has led to a high level of demand for imports from other countries, especailly for raw materials and semi-finished goods, any slowdown in Chinese economic growth may have significant repercussions in the rest of the world. Any hopes that China and the emerging economies may help the rest of the world through their recessions have been dashed by data showing that even exports from China have been falling in October and November 2008 by 2.2% and 2.8% respectively. This has meant that aggregate demand in China is falling and may cause further problems, not only for China, but for the whole world economy.

China slowdown ‘big global risk’ BBC News Online (13/1/09)
China’s exports in record decline BBC News Online (13/1/09)
China’s exports slump in sharpest decline in decade Times Online (13/1/09)
World Economic Forum highlights Chinese slump as biggest risk to global economy Telegraph (14/1/09)
Chinese exports fall by the biggest margin in a decade Telegraph (14/1/09)

Questions

  1. Explain the significance of the fall in Chinese exports for the Chinese economy.
  2. Analyse the principal causes of the fall in the level of Chinese exports.
  3. Assess how the changes in China’s trade position will affect the exchange rate of the Chinese currency, the yuan.
  4. Discuss policies that the Chinese government can implement to try to minimise the impact of the fall in exports on economic growth.

Back to barter

The origins of all economic activity lie in barter. Barter is the exchange of goods directly without the use of money as a medium of exchange. A barter economy is one that uses just barter to organise economic activity. Many subsistence economies will use barter as the main method of trading. We might be forgiven for thinking that, given the sophistication of a modern economy, barter is a long-dead medium of exchange. As the article below shows, we would be wrong. In fact, ironically, the very sophistication that has brought us this economic growth and technical development may also be bringing barter back into fashion. There is a wide range of web sites dedicated to swapping goods and services. Seedy People may not be a website you would immediately think of visiting, but in fact, it is an exchange for gardeners and allotmenteers to swap seeds. The author of the article (John-Paul Flintoff) may have failed to pay his council tax through bartering, but in these cash-strapped times, there may be lots of other opportunities to bypass the conventional market economy.

Money is dead – long live barter Times Online (11/1/09)

Questions

  1. Identify two weaknesses of organising economic ativity through barter.
  2. Explain why barter may be coming back into fashion.
  3. Identify the various functions of money.
  4. Discuss the implications for economic efficiency of more economic activity being organised through barter.