Category: Essential Economics for Business 5e

News articles can give us the impression that the world is both more warlike (with fighting in various countries) but also more peaceful and prosperous. To try to explain this confusion, an American economist with the Teal consultancy group, Richard Aboulafia, has developed a unique index; the Guns-to-Caviar Index. By mapping how much the world spends on fighter jets (guns) against how much the world spends on executive private jets (caviar) for the last 17 years, Aboulafia has given us an interesting view of the state of the world.

Obscure Economic Indicator: The Guns-to-Caviar Index MSN Slate(14/12/06)


1. What is meant by a production possibility frontier.
2. Draw a production possibility frontier to illustrate the underlying theory behind the Guns-to-Caviar index. Use the diagram to illustrate the changes that have taken place in the index during the 1990s and the early part of this century.
3. Critically assess whether the Guns-to-Caviar index can really help explain changes in the current geopolitical/economic climate.

A United Nations report on wealth distribution has found that the world’s richest 1% own 40% of the world’s wealth. Europe, the US and some Asia Pacific countries account for most of the world’s wealthiest with 30% of them living in the US. So is this a problem and should we, or indeed can we, do anything about this. The article below from the Guardian looks at these issues in more detail.

World’s richest 1% own 40% of all wealth, UN report discovers Guardian (6/12/06)


1. Examine whether the fact that the richest 10% in the world own 85% of all world assets is likely to cause problems for developing countries.
2. Suggest two policies that a developed country could use to narrow wealth distribution and evaluate the likely impact of these policies on the level of economic growth.
3. “”In some ways, wealth is more important to people in poorer countries than in richer countries.” Discuss the extent to which this assertion from the article is likely to be true.

The issue of road pricing has been simmering in the background of the environmental debate for many years and has, this month, gained greater prominence with the publication of a draft version of the Road Transport Bill that will allow local authorities to run pay-as-you-drive trials in their local areas. A number of local authorities will be interested, though all will be wary of the policy given the recent petition on the Downing Street website against road pricing that got nearly two million signatures! London Mayor, Ken Livingstone, has meanwhile extended the reach of the London congestion charge with his plans to create a low emission zone (LEZ) in the capital and charge more for older, and therefore dirtier, vehicles to enter the zone.

Draft bill starts Britain down the road to pay as you drive Guardian (21/5/06)
Livingstone to charge older, dirtier lorries £200 per day Guardian (8/5/06)

1. What are the external costs and benefits resulting from increased use of the roads?
2. Discuss the extent to which the policy of charging more for older, dirtier vehicles is likely to reduce the external costs of driving.
3. Using diagrams as appropriate, show the likely impact of pay-as-you-drive schemes on the social equilibrium in the transport market.

Ever keen to boost his environmental record, Ken Livingstone, the Mayor of London, has decided to extend the London congestion charge westwards into areas like Kensington and Chelsea. Residents are up in arms, but will the larger congestion zone help further with the management of traffic and carbon emissions in London?

Congestion zone could fuel voter revolt against Livingstone Guardian (19/2/06)
London congestion zone (interactive map) Guardian
London congestion zone (podcast) Guardian
London C-charge zone spreads westwards Times Online (19/2/06)
Livingstone praises congestion zone extension Guardian (19/2/06)
Bigger new congestion zone launched Guardian (19/2/06)
London’s Lefty Mayor Fights Traffic Guardian (18/2/06)
Leafy Kensington shows its anger BBC News Online (17/2/06)


1. Using diagrams as appropriate, show the impact of the extended congestion zone on traffic levels in London.
2. Discuss whether the implementation of a larger congestion zone will help move closer to a socially optimal position in this market.
3. Assess other measures that the Mayor of London could introduce to meet emissions targets for the city..