The two biggest world exporters have signed trade deals worth $15bn (£9bn). The Chinese Premier and German Chancellor were targeting an increase in bilateral trade to £178bn over the next five years. Premier Wen has also offered support to some of the European countries struggling with their debt. Despite this offer of support, there is something in it for the Chinese economy. China’s foreign exchange reserves are at a record high, but about 25% are invested in euro-denominated assets, hence China has a very strong interest in preventing the collapse of the euro. Furthermore, it is also interested in diversifying its export market to reduce its reliance on US markets. This is particularly important given the growth in protectionism in the US economy. Mr. Innes-ker said:
“China’s dependence and exposure to the US dollar creates issues for its own economy to the extent that it’s a hostage to US monetary policy.”
China’s interest in the European economies may provide an opportunity for the UK economy, as it is a country with ideal investment conditions and is already one of China’s most important trading partners. David Cameron, in a meeting with Wen, has said he wants bilateral trade to increase to £62bn by 2015. The amount is nothing in comparison to the trade deal between China and Germany, but still a significant potential sum for the UK economy. The following articles consider the Chinese economy and its role in the global environment.
Self-interest in China’s helping hand Asia Times Online, Jian Junbo (30/6/11)
China and Germany ink $15bn trade deals as leaders meet BBC News (29/6/11)
Chinese leader’s visit to Germany ends with large trade deals The New York Times, Judy Dempsey (28/6/11)
China offers helping hand to Eurozone Guardian, Helen Pidd (28/6/11)
Rights, trade to dominate Germany-China talks Associated Press, Deborah Cole (28/6/11)
China promises EU ‘helping hand’ with debt crisis Reuters, James Pomfret and Stephen Brown (28/6/11)
We still don’t grasp how little we matter to China Independent, Hamish McRae (29/6/11)
Questions
- What are the benefits of trade?
- Why is it important for the Chinese economy to diversify its export market?
- What does it mean by the statement that China is hostage to US monetary policy?
- Why are China’s foreign exchange reserves at a record high?
- What are the reasons behind China’s interest in Europe? Is it more of a ‘helping hand’ or more to do with furthering China’s own ambitions?
- What might the trade deal between China and Germany mean for trade between China and other nations? Is the deal to the benefit of everyone?
Economic assessment of real-world issues relies heavily on data. It is the same with economic policy recommendations. Both public- and private-sector organisations gather data, which are then used for analysis, often presented in a report. These reports are then often used as the basis for policy, whether by the government, local authorities or the private sector. Sometimes the data are those collected by national statistical agencies, such as the Office for National Statistics (ONS) in the UK; sometimes they are collected by private agencies; sometimes by individual researchers.
Clearly the analysis and the suitability of any policy recommendations depend on the quality of the data. But how much can we rely on the data? A problem is that people have an interest in gathering and/or selecting data that support their opinions. As a result, the data used for analysis and policy recommendations may be unreliable and incomplete.
This is not to say that the data collected by reputable agencies such as the ONS are wrong. Rather, it is the selective use of them that can be highly misleading. Sometimes, however, the data that some agencies produce may indeed be unreliable, with too small or unrepresentative samples. If they rely on surveys, the survey questions may be poorly framed or lead the respondent into giving a particular answer.
Newspapers make use of data and reports all the time to make a particular case – a case in line with the newspaper’s political stance. The lesson for economic students is that we need to be alert all the time as to just how reliable data are; and to whether the conclusions drawn from them are correct.
The following two articles by Ben Goldacre, from the Guardian’s Bad Science series, look at the misuse of data. The first looks at the case of the Health Service; the second at the possibility of savings by local government in their procurement activities.
Articles
How far should we trust health reporting? Guardian, Ben Goldacre (17/6/11)
Misleading money-saving claims help no one Guardian, Ben Goldacre (24/6/11)
Report
Realising Savings through Procurement Optimisation Opera Solutions
Questions
- According to the first article above, how much newspaper reporting based on the use of data is unreliable?
- What are the reasons for the unreliability of newspaper reporting?
- For what reasons might the ONS and other reputable agencies periodically have to amend time series data?
- “Council incompetence ‘costs every household £452 a year'”. Critically examine this claim by the Daily Mail.
- Why may Opera Solutions be seen as not wholly independent in reporting the possibilities of cost savings by local government?
- In the absence of reliable data, can any economic policy conclusions be drawn from economic models? Explain.
Following a 38% increase in profit margins made by energy companies towards the end of 2010, Ofgem (the energy and gas regulator) began an investigation into the activities of energy companies. The review by Ofgem was aimed at determining whether or not consumers should be better protected from the powerful energy companies, many of whom had previously raised prices, forcing some consumers to pay an extra £138 per year. At the time, it was believed that Ofgem might request support from the Competition Commission, but it seems as though the big size energy companies have had a lucky escape. They will not be referred to the Competition Commission, even though critics, in particular First Utility – Britain’s largest independent energy supplier – suggest that Ofgem’s proposals are unlikely to be effective. It seems that the big six have shown sufficient co-operation with Ofgem.
A key reform that Ofgem hope to implement will try to reduce the power of this oligopoly by making it easier for new entrants to gain market share. One such proposal would see the big six auctioning off up to a fifth of the electricity they generate. As the owners of Britain’s power stations, new companies cannot buy gas and electricity on the open market and this reform aims to change that. However, there are concerns that this will be ineffective, as the big six may simply outbid the smaller companies or even just buy and sell electricity from each other, thereby keeping their dominant positions in the market. Although the big six have received constant criticism from all sides, the lack of government support for a Competition Commission inquiry may be related to the need for these companies to invest £200bn in Britain by 2020 to help create and build new energy sources, including wind farms and nuclear power. Without this investment, Britain’s energy supply could be in jeopardy. The following articles consider this energetic debate.
Articles
Ofgem may be blown away by the power of the ‘Big Six’ energy companies Telegraph, Rowena Mason (23/6/11)
Ofgem pledges to get tough with ‘big six’ energy companies Guardian, Miles Brignall (22/6/11)
Scottish power investigated over ‘misleading’ marketing campaign Independent, Sarah Arnott (23/6/11)
Ofgem and ‘Big Six’ need to put some energy into cleaning up their acts Telegraph, Richard Fletcher (23/6/11)
In search of a coherent energy policy Independent, David Prosser (23/6/11)
UK suppliers face tough power auction reforms Reuters (22/6/11)
Ofgem: ‘We are watching energy companies closely’ BBC News (22/6/11)
Data
Energy price statistics Department of Energy & Climate Change
Energy statistics publications Department of Energy & Climate Change
Questions
- What is the role of Ofgem? How does it relate to the Competition Commission?
- What factors have contributed to the investigation by Ofgem into the ‘big six’ energy companies?
- How much power does Ofgem actually have to implement reforms?
- What are the characteristics of an oligopoly? To what extent does the energy market fit into this market structure?
- What are the main barriers to entry that prevent new companies from competing with the ‘big six’? Are the reforms likely to help them?
- What other proposals have been suggested by parties other than Ofgem in bid to help new competitors and customers? Are any likely to be more effective than those proposed by Ofgem?
Approximately 1.6 million past and present female employees of Walmart have had their sex discrimination case dismissed by the US Supreme Court. This case began almost 10 years ago with claims by 5 female workers that they were paid less than their male counterparts and had been passed over for promotion. Despite statistical evidence suggesting a case of sexual discrimination, it was ruled that Walmart was not discriminating against women, as promotion decisions were made by individual managers, hence there was no common element between the plaintiffs. Justice Antonin Scalia said that a common element was ‘entirely absent here’.
Discrimination of any kind will have an impact on the demand curve for labour (or the marginal revenue product curve). As such, the equilibrium wage rate will also be affected: if a firm believes that women are less productive than their male counterparts, the MRP curve will shift inwards, pushing down their wage. The key to this case was that there were so many plaintiffs and so it was practically impossible to determine whether or not pay differentials and promotions were based on legitimate grounds. The following articles consider the case against Walmart.
Supreme Court decision in Walmart class-action claim brings praise, anger FoxNews (20/6/11)
Walmart wins class action ruling Financial Times, Barney Jopson (20/6/11)
Wal-Mart women denied discrimination class action BBC News (20/6/11)
Walmart sex discrimination class action rejected Guardian, Dominic Rushe (20/6/11)
Questions
- Why might a firm engage in discrimination?
- Use a diagram to illustrate the impact of discrimination against women by a firm on the marginal revenue product curve for women.
- Following discrimination against women and in favour of men, what happens to the men’s marginal product curve?
- Given your answer to the above 2 questions, what would you expect to happen to the equilibrium number of male and female workers and the male and female wage rate?
- Are there any adverse effects to a firm of engaging in discrimination of any kind?
Today (16/6/11) in Greece, the Prime Minister is trying to form a new government that will help the country tackle its large and growing debts. Austerity measures have been put in place by the Greek government and these cuts and subsequent job losses (unemployment now stands at 15.9%) have resulted in massive riots.
Critics of the eurozone and Greek membership are suggesting that the price Greece has to pay to remain a member might be too high. Billions of euros have already been given to the bankrupt country and yet it seems to have made little difference – more money is now needed, but Finance Ministers have so far been unable to agree on how best to finance another bailout. These concerns have adversely affected financial markets, as investors sell their shares in light of the economic concerns surrounding Greece. The trends in financial markets over recent weeks suggest a growing feeling that Greece may default on its debt.
If an agreement isn’t reached between European leaders and/or Greece doesn’t accept the terms, then it could spell even more trouble and not just for the Greek economy and the eurozone. Banks across Europe have lent money to Greece and if an agreement isn’t reached, then this will mean losses for the private sector. Whilst these losses may be manageable, further trouble may arise due to contagion. Other countries with substantial debts, including Spain, Ireland and Portugal could mean a significant increase in these potential losses.
As the crisis in Greece continues, doubts remain over whether the European leaders even know how to deal with the crisis and this creates a lack of confidence in the markets. Activities over the coming weeks will play a large part in the future of Greece’s eurozone membership, trends in financial markets and the direction of the UK economy. The following articles consider Greece’s debt crisis.
Greece debt crisis sends financial markets reeling BBC News (16/6/11)
Euro slumps vs Swissie, Greece intensifies concern Reuters (16/6/11)
EU and IMF agree Greek debt deal Financial Times, Peter Spiegel (16/6/11)
Greece crisis: Commissioners fear ‘future of Eurozone’ BBC News, Joe Lynam (15/6/11)
Stocks slump as Greece crisis turns violent Bloomberg Business Week, Pan Pylas (15/6/11)
Euro slides as Greek default fears deepen Financial Times, Peter Garnham (16/6/11)
Germany insists all of EU must pay for Greece bailout Guardian, Ian Traynor (15/6/11)
US stocks slump on US, Greek woes Associated Press (16/6/11)
More time to argue about Greece BBC News, Stephanie Flanders (16/6/11)
Greece: Eurozone ministers delay decision on vital loan BBC News (20/6/11)
Greece crisis: Revolution in the offing? BBC News, Gavin Hewitt (19/6/11)
Greece crisis: Not Europe’s Lehman (it could be worse) BBC News, Robert Peston (20/6/11)
Greek debt crisis: eurozone ministers delay decision on €12bn lifeline Guardian, Ian Traynor (20/6/11)
Eurozone must act before Greek crisis leads to global meltdown, IMF warns Guardian, Larry Elliott (20/6/11)
Greece: Private-sector voluntary aid may be impossible BBC News, Robert Peston (21/6/11)
Greece crisis and the best way to cook a lobster BBC News, Stephanie Flanders (22/6/11)
Questions
- What is meant by contagion and why is this a potential problem?
- What are the options open to European leaders to finance the bail out?
- If an agreement is not reached or Greece do no accept the terms, how might the UK economy be affected?
- What has been the impact of recent events in Greece and Europe on financial markets and currencies across the world? Explain your answer.
- Why are critics suggesting that the price of Greece remaining in the Eurozone might be too high? If Greece was not a member state what would it mean it could do differently to help it deal with its mounting debts?