Category: Economics 10e

In March 2007, the pound reached a record high against the dollar. This made it an excellent time for UK tourists to visit the USA with prices appearing relatively low thanks to the exchange rate. These exchange rate values also affected the balance of payments of both the USA and the UK and the article below looks at the economic impact of the high exchange rate against the dollar.

Why everything’s almost free in America (and why it won’t last) Guardian
(23/4/07)

Questions

1. Explain the principal reasons for the change that has taken place in the exchange rate in recent years.
2. “On a PPP basis, a pound should buy $1.60”. Explain what is meant by this statement.
3. “My bet is that within a year the rate will be closer to $1.60 than $2. Maybe a lot closer.” Assess the impact of this possible outcome on economic growth and inflation in the UK.
4. Examine the likely impact of the high exchange rate on the balance of payments situation of (a) the USA and (b) the UK.

You do perhaps need to check the date for this story, but once you have established that it wasn’t written on April 1st, you can start to take it a little more seriously. An alliance of an American oil company and food producer is to turn pig fat into diesel fuel. The fuel will apparently have the same chemical properties as diesel but a lower carbon dioxide content and zero sulphur, so should be beneficial for the environment the companies argue.

Pig fat to be turned into diesel BBC News Online (19/4/07)

Questions

1. Using diagrams as appropriate, compare and contrast the environmental impact of conventional diesel and the new pig fat bio-diesel.
2. Discuss the extent to which the new pig fat diesel will be better for the environment than conventional diesel.
3. Evaluate two policies that the government could implement to encourage the use of alternative fuels like the new pig fat bio-diesel.

It was over 25 years ago that £1 was worth more than $2 on the foreign exchange markets, but that important psychological barrier was broken again this month as the value of sterling crept above $2 on foreign exchange markets. The continuing weakness of the dollar is making life difficult for UK exporters and also for firms in the Eurozone as the weakness in the dollar also affects the Euro and other major currencies.

Pound reaches 26-year dollar high BBC News Online (18/4/07)
UK pound goes through $2 barrier BBC News Online (17/4/07)
Yen hits record low against euro BBC News Online (16/4/07)
Pound hits 25-year dollar high Guardian (18/4/07)
British pound breaks through $2 International Herald Tribune (17/4/07)

Questions

1. Explain the impact of the weak value of the dollar on international markets on the price of UK imports and exports.
2. Assess the likely impact of the high value of sterling on the major UK economic targets.
3. Assess policies that the government could use to try to reduce the value of sterling against the dollar if they chose to.

Dutch brewers including Heineken and Grolsch have been fined a total of nearly £185m between them for stifling competition and sharing price information with the intention of fixing prices. This cartel was discovered by EU investigators and the fine has been imposed by the EU competition commission.

Dutch brewers fined over cartel BBC News Online (18/4/07)
Beer makers fined in Dutch price probe Business Week (18/4/07)
EU fines Heineken for fixing beer prices Business Week (18/4/07)
Heineken and Grolsch fined for price-fixing Guardian (18/4/07)
Heineken fined 219m euro for fixing beer prices Times Online (18/4/07)

Questions

1. Explain the conditions required for a cartel to develop.
2. Explain the methods used by the brewing firms to fix prices in the beer market.
3. Evaluate two policies that could be used by the EU competition commission to try to prevent cartels reemerging in the future in the brewing industry.

In what is being heralded as a historic deal, the EU has reached agreement with the USA on what is termed an ‘open skies’ deal. This will allow EU-based airlines to fly from anywhere in Europe to anywhere in the USA and US carriers can operate to any European destination. So what will this deal mean for travellers, the environment and the airlines. The articles below look at the issues and also at the detail of the agreement, which still maintains many of the previous limitations on airlines and their ownership.

EU backing for ‘open skies’ deal BBC News Online (22/3/07)
Q&A: Open skies BBC News Online (22/3/07)
EU agrees open skies deal Guardian (22/3/07)
Open skies: Q&A Guardian (22/3/07)
Transatlantic fares set to tumble after ‘open skies’ deal Times Online(22/3/07)

Questions

1. What criteria should be used to assess the success of the ‘open skies’ deal?
2. Assess the extent to which the ‘open skies’ deal will increase the level of competition in the transatlantic market for air travel.
3. Discuss the options available to the EU to increase competition further in the market for air travel.