Category: Economics 10e: Ch 26

Oil prices have seen a relentless rise in recent weeks with much speculation that they will go over $100 a barrel in the near future. The high oil price has seen the average price of petrol go over £1 per litre in the UK, shortages and rationing in Tehran and violence in Yemen. So what is causing oil prices to rise and what impact is this likely to have on the global economy?

Tempests, truckers and tribesmen – another week in the oil market Guardian (10/11/07)
Steep decline in oil production brings risk of war and unrest, says new study Guardian (22/10/07)
The high oil price may begin to take its toll Times Online (12/11/07)
What is driving oil prices so high? BBC News Online (6/11/07)
OPEC: the oil cartel in profile BBC News Online (18/10/07)
Oil price rises after OPEC summit BBC News Online (19/11/07)
Oil markets explained BBC News Online (18/10/07)
Oil prices BBC News Online – Evan Davis blog (10/11/07)
Super-spiked The Economist (1/11/07)

Video

The OPEC statement on oil prices BBC News Online – video link (19/11/07)

Questions

1. Using supply and demand analysis, show the reasons why oil prices are rising.
2. Using diagrams as appropriate, assess the likely impact of rising oil prices on the level of economic growth in the UK.
3. Discuss the extent to which OPEC has been the main cause of the rise in oil prices.

Transfer pricing is a technique used by multinational companies to avoid tax liabilities in countries they regard as having high levels of taxation. The articles below from the Guardian give the results of an investigation by Guardian journalists into the elaborate structures that have been created by multinational companies in the banana industry to funnel their profits through tax havens like the Cayman Islands, Bermuda and the British Virgin Islands. In some cases they have paid an effective tax rate as low as 8% when the tax rate in their home country is 35%.

Revealed: how multinational companies avoid the taxman Guardian (6/11/07)
Bananas to UK via the Channel islands? It pays for tax reasons Guardian (6/11/07)
‘I get up at 4am, work to 6-7pm – it doesn’t feel like a life’ Guardian (6/11/07)

Questions

1. Define the term ‘transfer pricing’.
2. Explain how multinational banana companies use transfer pricing to reduce their tax liabilities.
3. “The trend in the last 30 years has been to shift the burden of tax away from companies on to the consumer and labour. Capital is increasingly going untaxed.” Discuss the advantages and disadvantages of this shift in the method of taxation.

The article linked to below from the Guardian by Larry Elliott argues that there are significant global imbalances in the world economy and that the IMF has to an extent ignored these imbalances. He argues that the sub-prime mortgage crisis, exchange rate movements and the rapid rise in oil prices are creating significant problems for the world economy.

Questions

1. Explain the main global imbalances identified by Larry Elliott in the article.
2. Analyse the likely impact of these imbalances on the global level of economic growth.
3. Explain the statement in the article: “Like many other countries in the region, the lesson China learned from the Asian financial crisis of 1997 was that it needed to build up a war chest of foreign exchange reserves that could be deployed in the event of a speculative attack.”

In the article below, Irwin Stelzer argues that Congress has adopted a more protectionist stance towards trade policy. Not all would, however, agree. Why not have a look at the comments after the article to see some of the discussion that has taken place about the article?

The end of free trade as we know it Times Online (20/5/07)


Questions
1. Assess the extent to which the new trade agreements under discussion are likely to improve the position of workers globally.
2. Analyse two policies that the US administration could put in place to reduce the level or protectionism.
3. Discuss the extent to which the new trade agreements referred to in the article will represent a more protectionist approach to trade.

The UK and global labour markets are changing significantly. In the UK we have faced a level of immigration of around 500 – 600 thousand people (the government does not know the exact figure), while in the global economy the International Monetary Fund (IMF) has estimated in its latest World Economic Outlook that the global labour force has quadrupled in the last quarter of a century. So what is the impact on the UK labour market? Many assume that the effect is negative, but as is always the way with these things, you will find plenty of economists who will argue the opposite. The article below from the Times Online looks at these national and global issues.

Workers count cost of a global labour flood Times Online (29/4/07)
Migrants create job market slack Times Online (20/5/07)


Questions
1. Using diagrams as appropriate assess the impact of recent immigration on the UK labour market.
2. Discuss the extent to which changes in the global labour force and UK immigration have affected the level of wages in the UK labour market.
3. Discuss the extent to which the global labour force is likely to change in the next decade.