The traditional macroeconomic issues are well-known: unemployment, inflation, economic growth and the balance of payments. However, the environment, and specifically climate change, have become increasingly important objectives for the global economy. Over recent months, many countries have announced new policies and measures to tackle climate change.
The costs of not tackling climate change are well-documented, but what about the costs of actually tackling it? Why is a changing climate receiving such attention and what are the economics behind this problem? The articles below consider this important issue.
Tougher climate target unveiled BBC News (16/10/08)
Brown proposes £60 billion climate fund BBC News (26/6/09)
EU says tackling climate change will cost global economy €400 billion a year Irish Times, Frank McDonald (26/6/09)
Obama makes 11th-hour climate change push Washington AFP, Ammenaul Parisse (25/6/09)
UK to outline emission cut plans BBC News (26/6/09)
What’s new in the EU: EU examines impact of climate change on jobs The Jerusalem Post, Ari Syrquin (25/6/09)
Climate change: reducing risks and costs The Chronicle Herald, Jennifer Graham (25/6/09)
Obama to regulate ‘pollutant’ CO2 BBC News (17/4/09)
Billions face climate change risk BBC News (6/5/07)
Obama vows investment in science BBC News (27/4/09)
Japan sets ‘weak’ climate target BBC News (10/6/09)
Questions
- Why is climate change an example of market failure?
- Apart from imposing limits on emissions, what other interventionist policies could be used? What are the advantages and disadvantages of each of them?
- According to the EU, the cost of tackling climate change is very high. So, why are we doing it? See if you can carry out a cost-benefit analysis!
- Why is climate change presenting a problem for insurance companies? Can it be overcome?
- Why is finance such an issue between developed and developing countries in relation to tackling climate change?
- What is the likely impact of climate changing policies on the labour market? Will we be able to adapt in the current economic crisis?
Many industries are struggling in the current climate and, in particular, car sales have been at an all time low. General Motors was the biggest car company in the world, but recently we have seen them becoming the biggest industrial bankruptcy, which will have consequences for many car manufacturers around the world. UK car sales were 25% lower in May 2009 than at the same time last year and Chrysler will sell most of their assets to Fiat when they form a strategic alliance in a bid to help them exit bankruptcy protection.
The troubles of the carmakers have passed up the production chain to automotive suppliers, component manufacturers and engineering firms, and down the chain to the dealerships at a time when consumer confidence has taken a knock. The following articles look at some of the recent developments in the car industry and consider their likely economic impact.
UK new car sales 25% lower in May BBC News (4/6/09)
Creditors cry foul at Chrysler precedent The Wall Street Journal, Ashby Jones, Mike Spector (13/6/09)
The decline and fall of General Motors The Economist (4/6/09)
GM pensioner’s fears for future BBC News (1/6/09)
Opel staff face wait for job news BBC News (2/6/09)
From biggest car maker to biggest bankruptcy BBC News (1/6/09)
GM sales executive lays out company’s direction Chicago Tribune, Bill Vidonic (14/6/09)
Chrysler and Fiat complete deal BBC News (10/6/09)
Fiat gambles on Chrysler turnaround Telegraph, Roland Gribben (1/6/09)
Obama taskforce faces Congress over car industry rescue Times Online, Christine Seib (10/6/09)
Has pledge of assistance revved up the car industry? EDP24, Paul Hill (10/6/09)
Questions
- What is a strategic alliance and how should it help Chrysler?
- What are some of the methods that governments have used to help stimulate the car industry? Consider their advantages and disadvantages.
- Think about the consequences beyond the car industry of the decline of General Motors. Who is likely to suffer? Will there be any winners?
- General Motors was established in 1908. How were they able to expand so quickly and what do you think are the main reasons for their current decline?
- The article in The Economist suggests that, despite the current problems in the car industry and the global recession, selling cars will never really be a problem. What do you think are the reasons for this?
Recent evidence from the Institute of Economic and Social Research shows that the UK economy grew in April and May and that 2009 Quarter 2 figures will also show a rise in output. Although annual growth in GDP will still be negative, as the previous three quarters were all negative, recent growth suggests that the recession might have ‘bottomed out’ and that recovery is beginning.
Of course, it’s early days to tell whether these are real ‘green shoots’ or whether the economy will slide back into negative growth once more, but confidence is returning. One sign of this is the recent appreciation of sterling (see). The following articles look the rise of the pound, why it is occurring and whether the green shoots will flourish or wither.
Pound hits 2009 high against euro BBC News (11/6/09)
Sterling: what’s the outlook now? Telegraph (11/6/09)
Sterling hits year’s high versus euro ThisIsMoney (11/6/09)
Sterling leaves euro in its wake on hopes of UK recovery The Herald (11/6/09)
Jeremy Warner: Recession may be over but not the pain Independent (11/6/09)
Taking stock of the different economic signals Times Online (11/6/09)
Questions
- Why has the pound been appreciating?
- What are the implications of an appreciation of the pound for the UK economy?
- Why is the dollar likely to fall as the prospects for the world economy brighten?
- What evidence is there that the UK economy is now beginning to recover? What will determine whether or not the recovery will be sustained?
With the world economy in recession, major exporting countries are suffering more than many, especially exporters of high-quality manufactured products, many of which have a high income elasticity of demand. Germany, the world’s largest exporter, has been particularly hard hit. In the year to April 2009, the value of German exports fell by 28.7 per cent. The following articles look at the data and some of the explanations.
German exports in April 2009: –28.7% on April 2008 Destatis (9/6/09)
German exports plunge amid economic slowdown DW-World (9/6/09)
Weak German economic data dash early recovery hopes Monsters and Critics (9/6/09)
German industry output disappoints, falling 1.9 pct Guardian (9/6/09)
See also this video on the recession in the EU: EU recession ‘deeper than expected’ BBC News (15/5/09)
Questions
- Why have German exports fallen considerably more than German GDP? How can the accelerator theory help to explain the fall in German exports?
- If economic sentiment recovers in Germany, how will this affect (a) aggregate demand; (b) imports; (c) exports?
- Find out what has happened to the euro exchange rate index and assess whether movements in the euro have contributed to Germany’s export performance (see for example the Bank of England Statistical Interactive Database).
Forecasting the future state of economies is difficult at the best of times. Forecasters frequently get it wrong. To see this, just look at forecasts for the current point in time made two or three years ago – or even six months ago, given the current dire circumstances. They were often way-off mark.
But why are forecasts often so inaccurate? The problem is that in the short run the state of the economy depends on the level of aggregate demand; and that, in turn, depends crucially on confidence – both of consumers and business. But confidence is a ‘will-o’-the-wisp’ thing. Confidence can evaporate with bad news, making the situation much worse. Likewise, good news can lead to rapidly growing optimism, which in turn stimulates consumption, investment and growth. Humans are fickle creatures – and the media do not help here, playing on fears or hyping-up good news.
The following articles look at forecasts made in April 2009, when economies around the world were deep in recession. Was this recession the start of something much worse? Or were economies soon to bounce back, taking up the slack created by the recession? Forecasters were being sorely tested. It will be interesting to see in a year’s time just how accurate, or inaccurate, they were.
Are there any signs of recovery? BBC News (16/4/09)
Merkel debates economic woes amid grim forecasts Guardian (22/4/09)
IMF is being unduly alarmist: Jeremy Warner Independent (24/4/09)
What the experts say: the shrinking economy Guardian (24/4/09)
Economic surveys signal that worst could be behind Europe EarthTimes (24/4/09)
Darling’s economic forecast “unrealistic” Moneywise (23/4/09)
Crisis deepens in Europe, Japan AsiaOne News (24/4/09)
IMF warns that worldwide slump will be deeper than thought Times Online (23/4/09)
World Economic Outlook: April 2009 IMF (24/4/09). See also webcast.
Questions
- Why do forecasters differ so markedly from each other?
- Other than an unexpected rise or fall in confidence, what else could make forecasts turn out to be wrong?
- To what extent is economic forecasting similar to and different from weather forecasting?