Category: Economics 10e: Ch 10

When anyone buys assets – shares, a house, a car or whatever – one important consideration is their likely future value. But the future is uncertain. Your decision to buy, therefore, depends not just on the direct return of the asset (the rate of interest or the pleasure from using the asset) but also on your predictions about the future value of the asset and your attitudes to risk. But with the future of markets so uncertain, or at least the timing of market movements, what’s the best thing to do? The article below considers some of the issues.

The irrelevant future Investors Chronicle (6/4/09)

Questions

  1. Distinguish between ‘risk’ and ‘uncertainty’.
  2. What is meant by a ‘bear’ in the context of investing in shares? Explain why ‘intelligent bears’ would ‘leave some money in the market’.
  3. Faced with uncertainty, why might sticking to a simple ‘do nothing’ rule be the best policy?
  4. If capital markets were efficient in the strongest sense, where everyone has perfect information about the future, would people be able to make large returns on investing in shares and other assets?

The first linked article below is from the American business magazine Forbes. It looks at the economics of football (‘soccer’) signings and, in particular, that of Robinho by Manchester City. In September 2008 the club was bought by an Abu Dhabi investment fund, controlled by Sheikh Mansour bin Zayed Al Nahyan, for £210 million. But does the investment in new players make good business sense?

Also, what should determine whether a club sells a player? The third link below considers this issue. The link is to the Embedding Threshold Concepts (ETC) site at Staffordshire University. ETC was funded by the Higher Education Funding Council for England’s Fund for the Development of Teaching and Learning (FDTL). The site has a number of teaching and learning resources.

City of Dreams Forbes (8/4/09)
Man City beat Chelsea to Robinho BBC Sport (1/9/08)
Selling footballers: the economic viewpoint ETC reflective exercise

Questions

  1. Was it consistent with the goal of profit maximisation for Manchester City pay Real Madrid £32.5 million for Robinho? Was it consistent with the goal of profit maximisation for Real Madrid to sell him?
  2. If Real Madrid had decided to keep Robinho, how would you estimate the cost of doing so?
  3. What difficulties are there in developing Manchester City into a ‘global brand’?
  4. In what sense are the top Premier League clubs a ‘self-perpetuating oligopoly’?

Since Labour has been in power the gap between rich and poor has remained more or less unchanged – a fact that might be surprising given a Labour government and fiscal policies that have become increasingly redistributive in nature. In fact income distribution in the UK has not changed since 1991 according to Office for National Statistics figures. Economists measure income distribution in various ways, but two of the key indicators are the Gini coefficient and the Lorenz curve. For more information on income distribution and some useful data, you may like to download an income data spreadsheet from the IFS (zip file). If you are interested in where you fit into the income scale, then you may also like to try the Institute for Fiscal Studies interactive income model. Why not try a range of different scenarios to see where different levels of income fit into the overall income scale.

UK income gap ‘same as in 1991’ BBC News Online (16/12/08)

Questions

  1. Define the terms (a) Gini coefficient and (b) Lorenz curve.
  2. Using diagrams as appropriate, show how the Lorenz curve will change when income distribution becomes (a) more equal and (b) less equal.
  3. Explain how the value of the Gini coefficient will change as income distribution gets more equal. With reference to the IFS spreadsheet (linked to above) descibe how the Gini coefficient has changed in recent years.
  4. Discuss reasons why income distibution in the UK has stayed the same since 1991 despite a series of redistributive measures adopted by the Labour government since 1997.

In a remarkable turn around, the current financial crisis has seen mentions of Karl Marx and Marxism creeping their way back into the economic media. Whilst no-one expects a resurgence of Marxist economics, the current financial crisis has led people to wonder whether his work may have some relevance in trying to analyse the current instability in the capitalist and financial system. Even the Archbishop of Canterbury has argued that Karl Marx was right in his assessment of capitalism. So is Marx turning in his grave, or is he due for a revival of fortunes?

Banking crisis gives added capital to Karl Marx’s writings Times Online (20/10/08)
The red Archbishop? Guardian (25/9/08)
Marx is dead: don’t resuscitate him Guardian (27/9/08)

Questions

1. Summarise the key tenets of Marxist economics.
2. Step 5 of Karl Marx’s ten essential steps to Communism was “Centralisation of credit in the hands of the state…..“. Assess the relevance of this as a possible solution to the current financial crisis.
3. An over-expansion of credit can enable the capitalist system to sell temporarily more goods than the sum of real incomes created in current production, plus past savings, could buy, but in the long run, debts must be paid”. Discuss the extent to which this quote from Marx is relevant in the analysis of the current financial crisis.

The article linked below looks at the extent to which economic downturn and rising inequality are likely to affect crime levels in the UK. Traditionally the view has been that an economic downturn will raise crime, but is it necessarily the downturn that is causing the increased crime?

Consumed by crime Guardian (24/9/08)

Questions

1. Explain why an economic downturn may lead to increased levels of crime.
2. Discuss the extent to which deregulation of markets may have exaggerated the relationship between crime and the level of economic growth.
3. Assess the view espoused in the article that “a culture obsessed with material goods” and “competitive individualism” have led to stronger link between crime and economic growth.