Trade is generally argued to be good for economic growth, as it allows countries to specialise in those goods in which they have a comparative advantage and thus produce and consume more of all goods in total. However, trade inevitably leads to winners and losers, especially as countries impose tariffs on imports in order to protect domestic industries. This has been the case in the banana industry.
Banana growers in the former European colonies have long been protected by EU tariffs, helping to prevent competition from their Latin American banana growers. But, now things could be about to change. In December 2009, most of the nations concerned reached an agreement in Geneva for tariffs imposed by the EU to be gradually reduced.
The European Union had imposed no duty on bananas from their former colonies, but had imposed tariffs on banana imports from other countries. This meant that those countries now benefiting from zero import duty could sell their bananas for a much lower price, therefore restricting the other nations (who did have to pay an import duty) from competing effectively.
With the World Trade Organisation in attendance, an agreement was signed that puts an end to this trade dispute dating back over 2 decades. The Director General of the WTO, Pascal Lamy said:
‘This is a truly historic moment … After so many twists and turns, these complicated and politically contentious disputes can finally be put to bed. It has taken so long that quite a few people who worked on the cases, both in the Secretariat and in member governments have retired long ago.’
This trade war has been ongoing for many years and this agreement represents a big step in the right direction. With a fairer playing field in this banana market, countries in Latin America will now be much more able to compete with other nations. As economists argue that trade is good, a reduction in protectionist measures should be seen as a good thing and will benefit the countries concerned. The following articles consider this trade resolution.
Banana war ends after 20 years BBC News (8/11/12)
WTO: Historic signing ends 20 years of EU-Latin American banana disputes 4-Traders, WTO (8/11/12)
EU, Latin America nations mark end of ‘banana war’ Fox News (8/11/12)
Banana war ends after 20 years The Telegraph (9/11/12)
Infamous banana dispute ends Sky News (9/11/12)
Questions
- What is comparative advantage and how does it lead to gains from trade?
- How does a tariff help protect a country’s domestic industry?
- Using a diagram, illustrate the effect of a tariff being imposed on banana imports from Latin America. Is there a cost to society of such a policy?
- Now, show what happens when this tariff is removed by the EU. Who benefits and who loses?
- What is the role of the World Trade Organisation?
- How does a tariff affect a country’s ability to compete with other nations?
For those looking to buy larger electrical appliances at cheaper prices, things might be looking up, as Comet have begun heavy discounting after entering administration. Deloitte, as the administrator, will now begin the search for a buyer for this retailer, while Comet aims to raise the funds to rescue the company.
Comet was bought by OpCapita last year, but with poor performance continuing across the 200+ stores, we could be about to see the demise of this retailer. Over 6,000 jobs are now at risk, although Deloitte has maintained that stores will continue to trade and that redundancies will not be made. One of the administrators said:
‘Our immediate priorities are to stabilise the business, fully assess its financial position, and begin an urgent process to seek a suitable buyer which would also preserve jobs.’
The retail environment has inevitably suffered over the past few years, with well-known companies such as Woolworths, Optical Express and JJB Sports (to name a few) entering administration. Comet, therefore seems to be the latest in a long line of sad trading stories. So, which factors have contributed towards the collapse of this giant retailer?
Over the past few years, online retailers have gained a larger and larger market share. These internet retailers do not have the same overhead costs that Comet and other high street retailers face. To open a store in an area where customers are in high supply, premium rents must be paid and this adds to the cost of running any given store. In order to cover these higher costs, higher prices can result and this, together with consumers facing tight budgets, has led many customers to look at the cheaper alternatives online. Deloitte has also said that Comet has been suffering from a lack of credit, which has meant that it has not been able to purchase stock in the run-up to Christmas. Deloitte commented that:
‘The inability to obtain supplier credit for the peak Christmas trading period means that the company had no realistic prospect of raising further capital to build up sufficient stock to allow it to continue trading.’
Concerned customers are naturally emerging, wondering whether items they have ordered and paid for will actually turn up. However, Deloitte’s reassurance that trading will continue may go some way to relieving their concern. The following articles consider how Comet has fallen from the sky.
Comet officially enters administration, stores re-open for expected firesale The Telegraph, Graham Ruddick and Helia Ebrahimi (2/11/12)
Comet calls in Deloitte as administrators BBC News (2/11/12)
Apple sky-high as Comet falls to earth The Guardian, Zoe Wood (2/11/12)
Comet enters administration, Deloitte seeks buyer Reuters (2/11/12)
Comet electricals administrators formally begin search for saviour The Guardian, Zoe Wood (2/11/12)
Comet goes into administration Financial Times, Andrea Felsted (3/11/12)
Comet collapse: Deloitte blames internet and lack of first-time home buyers The Telegraph(2/11/12)
Collapse of Comet puts 7000 jobs in danger Independent, James Thompson (2/11/12)
Questions
- Why does the retail environment remain very weak?
- Explain why Deloitte suggest that a lack of first time home buyers has played a part in the demise of Comet.
- Why has a lack of credit contributed towards Comet’s downfall?
- Should customers be concerned about how Comet’s demise (if indeed a buyer is not found) might affect prices in other retailers such as Currys, given that they will now have a larger share of the market?
- Why has online trading contributed towards the harsher retail environment for the high street stores? You should think about fixed and variable costs in your answer.
- Why are companies such as Apple doing so well relative to other companies, such as Comet and JJB Sports? Is there a secret to their success?
- What impact might this collapse have on local labour markets, given Comet employs so many people? Think about the effect on wages, unemployment and on claimants of benefits.
The story of the UK economy over the past few years has been one of bad news and worse news. With a double-dip recession having kept confidence low in the UK, positive news for the economy was seemingly a distant hope of government ministers. However, official statistics show that that in the 3 months from July to September, the UK economy emerged from recession, with growth of 1.0%.
This positive GDP figure (click here for a PowerPoint of the chart below) was undoubtedly helped by the London Olympics over the summer, which may have added as much as 0.2 percentage points to GDP, according to the ONS. Millions arriving in London and other venues, spending money on countless things. Yet, other factors have also contributed to this welcome growth. Stephanie Flanders said:
The positive ‘surprise’ in these figures is largely to be found in the service sector, which is estimated to have growth by 1.3% in the third quarter, after shrinking by 0.1% in the three months before.
Further to this, in Stephanie Flanders’ ‘Stephanomics’, she says that ‘it confirms that the last three months of this latest recession were brought to you by the Queen. Or at least, the extra Bank Holiday to celebrate her Jubilee.’ The Bank of England suggests that the Jubilee took 0.5 percentage points from official GDP statistics. So, the news so far is positive, but the economy is far from being back to its pre-recession size.
The 2008-2009 recession knocked 6.4% off the UK economy. Since then, the total growth (over the past 4 years) has reached only half of that – 3.2% and that includes the 1% figure just published. Thus, while we may be on ‘the right track’, there is still a long way to go. Economists differ in their interpretations of what this means for the overall recovery: some say that this is a sign of what’s to come; others argue that this recovery has been driven by one-off factors.
What is certain is that government policy over the next few months will be crucial in keeping the economy on the right growth path. The following articles consider the implications of this new economic data.
A special recovery BBC News, Stephanomics, Stephanie Flanders (25/10/12)
UK GDP rises 1pc: economist reaction The Telegraph (25/10/12)
Nick Clegg warns economic recovery will be ‘fitful’ The Guardian, Daniel Boffey (28/10/12)
GDP figures set to show UK economy has exited double-dip recession The Telegraph, Philip Aldrick, Emma Rowley and Jessica Winch (25/10/12)
UK economy returns to growth with help from Olympics BBC News (25/10/12)
U.K. posts quarterly gain in GDP, lifted by Olympics Wall Street Journal, Cassel-Bryan Low (25/10/12)
GDP figures show UK emerging from recession: full reaction The Guardian (25/10/12)
UK growth signals move out of recession Financial Times, Sarah O’Connor and George Parker (25/10/12)
Questions
- How do we define a recession?
- How is GDP calculated and what does it measure?
- Which factors have contributed towards lower GDP data towards the beginning of this year?
- Which factors have helped boost GDP in the 3 months from July to September?
- Why is there disagreement about the likelihood of positive GDP figures continuing throughout the rest of the year?
- Prior to the official release of the GDP figures, David Cameron hinted at positive news. Given that the market is so sensitive, what effect might this suggestion have had?
- Given this positive figure, what implications does this have for the government’s quantitative easing programme?
- If we translate this latest growth data onto an AD/AS diagram, how would you show what has recently happened?
Although every recession is different (for example in terms of length and magnitude), they do tend to have a few things in common. The focus of this blog is on consumer income and how it is affected in the aftermath of (or even during) a recession. According to data from the ONS, real national income per head has fallen by more than 13% since the start of 2008.
This latest data from the Office of National Statistics shows that in the aftermath of the 2008 recession, UK incomes have fallen by much more than they did in the 2 previous recessions experienced in the UK (click here for a PowerPoint of the chart). We would normally expect consumer incomes to fall during and possibly directly after a recession, as national output falls and confidence tends to be and remain low. However, the crucial thing to consider with falling consumer incomes is how it affects purchasing power. If my income is cut by 50%, but prices fall by 80%, then I’m actually better off in terms of my purchasing power.
The data from the ONS is all about purchasing power and shows how UK consumer incomes have fallen at the same time as inflation having been relatively high. It is the combination of these two variables that has been ‘eating into the value of the cash that people were earning’. Comparing the incomes in the four years after the 2008 recession with similar periods following the early 1980s and 1990s recession, the ONS has shown that this most recent recession had a much larger effect on consumer well-being. Part of this may be due to the rapid growth in incomes prior to the start of the credit crunch.
It’s not just the working population that has seen their incomes fall since 2008 – the retired population has also seen a decline in income and according to a report from the Institute for Fiscal Studies, it is the wealthiest portion of older households that have taken the largest hit since 2007. According to the IFS, the average person over 50 has experienced a fall in their gross wealth of about 10%, or close to £60,000. Of course for these older households, the concern is whether they will be able to make up this lost wealth before they retire. The concern for everyone is how long until incomes and purchasing power increase back to pre-crisis levels. The following articles consider this latest data on economic well-being and the impact the recession has had.
UK wellbeing still below financial crisis levels Guardian, Larry Elliott and Randeep Ramesh (23/10/12)
National income per head ‘down 13% in four years’ BBC Newsd (23/10/12)
Financial crisis hits UK retirement income Financial Times, Norma Cohen (23/10/12)
Over 50s ‘left £160,000 out of pocket by the financial crisis’ The Telegraph, James Kirkup (23/10/12)
Those near retirement in UK hit hard by crisis Wall Street Journal, Paul Hannon (23/10/12)
Living standards down 13pc since start of recession The Telegraph (23/10/12)
Questions
- Why is net national income per head said to be the best measure of economic well-being?
- Why is it so important to take into account inflation when measuring wellbeing?
- What explanation can be given for the larger fall in consumer incomes following the 2008 recession relative to the previous 2 recessions?
- According to data from the IFS, the richest portion of older households have suffered the most in terms of lost wealth. Why is this the case?
- What is meant by purchasing power?
- GDP has fallen by about 7%, whereas national income per head, taking inflation into account is down by over 13%. What is the explanation for these 2 different figures?
- How can recessions differ from each other? Think about the length, the magnitude of each.
- Is GDP a good measure of economic well-being? Are there any other ways we can measure it?
As resources become scarce, the price mechanism works to push up the price (see, for example, Box 9.11 in Economics 8th ed). If you look at the price of petrol over the past few decades, there has been a general upward trend – part of this is due to growth in demand, but part is due to oil being a scarce resource. Many millions have been spent on trying to find alternative fuels and perhaps things are now looking up!
Air Fuel Synthesis, a small British company, has allegedly managed to make ‘petrol from air’. Following this, the company has unsurprisingly received finance and investment offers from across the world. However, the entrepreneur Professor Marmont has said that he does not want any company from the oil industry to get a stake in this firm. This doesn’t mean that investment is not needed or on the cards, as in order to increase production of petrol from thin air financing is needed. Professors Marmont said:
We’ve had calls offering us money from all over the world. We’ve never had that before. We’ve made the first petrol with our demonstration plant but the next stage is to build a bigger plant capable of producing 1 tonne of petrol a day, which means we need between £5m and £6m
Whilst the process appears to be a reality, Air Fuel Synthesis is a long way from being able to produce en masse. However, it does offer an exciting prospect for the future of petrol and renewable energy resources in the UK. At the moment oil companies appear to be uninterested, but if this breakthrough receives the financing it needs and progress continues to be made, it will be interesting to see how the big oil companies respond. The following articles consider this break-through.
Company that made ‘petrol from air’ breakthrough would refuse investment from big oil Independent, Steve Connor (19/10/12)
British engineers create petrol from air and water Reuters, Alice Baghdijan (19/10/12)
Petrol from air: will it make a difference? BBC News, Jason Palmer (19/10/12)
British engineers produce amazing ‘petrol from air’ technology The Telegraph , Andrew Hough (18/10/12)
Questions
- Explain the way in which the price mechanism works as resources become scarce. Use a diagram to help your explanation.
- As raw materials become scarce, prices of the goods that use them to work or require them to be produced will be affected. Explain this interdependence between markets.
- Why is investment from an oil company such a concern for Professor Marmont?
- Why is there unlikely to be any impact in the short run from this new breakthrough?
- If such a technology could be put into practice, what effect might this have on the price of petrol?
- How might oil companies react to the growth in this technology?
Trade is generally argued to be good for economic growth, as it allows countries to specialise in those goods in which they have a comparative advantage and thus produce and consume more of all goods in total. However, trade inevitably leads to winners and losers, especially as countries impose tariffs on imports in order to protect domestic industries. This has been the case in the banana industry.
With the World Trade Organisation in attendance, an agreement was signed that puts an end to this trade dispute dating back over 2 decades. The Director General of the WTO, Pascal Lamy said:
