I found this interesting article on the BBC News website about three students in Nigeria who have created an online job search company. Only five years later, this company now is valued in the millions and employs over 100 people.
The article below contains some interesting insights into the Nigerian job market and the key to success for this company. In particular, they note the effect of the multiplier through job creation and how this has been used to benefit the wider economy. This is particularly pertinent given the severe unemployment problem that has affected this African economy. It has helped 35,000 people to find jobs in the past two years.
How three students created Nigeria’s online jobs giant BBC News, Jason Boswell (2/9/14)
Questions
- What are the main causes of the unemployment problem in Nigeria?
- The company itself employs hundreds of people, but indirect employment effects have also occurred. How has this happened?
- How important are entrepreneurs in African countries as a means of helping their development?
In 2009, interest rates in the UK were cut to a record low of 0.5%. Since that point, there has been almost unanimous agreement amongst the members of the Monetary Policy Committee to keep rates at this low. It is only in the last couple of months when some have even voted to raise rates. However, this month, interest rates were once again held at 0.5%.
The low interest rates have played a key part in creating an economic stimulus for the UK economy. With low interest rates, some of the key components of aggregate demand are stimulated and this in turn is crucial in creating a growth environment. However, with the recovery of the UK economy, there are now expectations that interest rates may soon begin to rise. Perhaps adding to this expectation is the fact that the bank’s stimulus programme has remained unchanged at £375bn. As more data is released that continues to show the positive progress of the UK economy, it becomes increasingly likely that interest rates will soon rise.
Despite the fact that interest rates will inevitably increase, Mark Carney has said that any increase will be slow and gradual to minimise the effect on consumers, especially home-owners. Mortgage payments are typically the biggest expenditure for a household and so any increase in interest rates will certainly put added pressure on home-owners and with wage growth still remaining slow, there are concerns of the impact this may have. Perhaps this may continue to deter some of the Committee for voting in favour of interest rate rises. There does appear to be some conflict between economists as to what the next step is likely to be. Yael Selfin is the economics director at KPMG and said:
With inflationary pressures still subdued, it is no surprise that rates have been held … Despite recent revisions to GDP and productivity, there is still room for further improvements in productivity, to mop up some of the rise in demand over the coming months. Steady falls in unemployment and strong economic growth are likely to see rates rising in February next year.
However, Andrew Goodwin, who is the senior economic adviser to the EY ITEM Club commented that:
On one hand, the stronger performance might convince some members that the economy is sufficiently robust to withstand the steady tightening of policy, although it should be noted that the Bank routinely builds into its forecasts the expectation of some upward revisions to the recent historical data … On the flip side, the revisions also provide some ammunition for those of a dovish persuasion, with evidence that a stronger productivity performance has had little feed through into inflationary pressures.
The key question therefore appears to be not whether interest rates will increase, but when. The MPC certainly considers inflation when making its decisions, but over the past few years, it is economic growth which has probably been the biggest influence. The data for the UK economy over the coming months, as well as the fast-approaching General Election, will prove crucial in determining exactly when interest rates increase. The following articles consider this monetary policy change.
UK interest rates held at record low of 0.5% BBC News (4/9/14)
Bank of England holds interest rates at 0.5pc for 66th month The Telegraph, Szu Ping Chan (4/9/14)
Timing of UK interest rate hike mired in UK services sector conundrum International Business Times, Lianna Brinded (3/9/14)
Interest rates expected to hold Mail Online, Press Association (31/8/14)
Bank of England holds rates despite robust recovery Reuters, Andy Bruce (4/9/14)
Bank of England keeps record-low rate on weak inflation Bloomberg, Scott Hamilton (4/9/14)
Questions
- By outlining the key components of aggregate demand, explain the mechanisms by which interest rates will affect each component.
- How can inflation rates be affected by interest rates?
- Why is there a debate between economists and the MPC as to when interest rates should be increased?
- If interest rates do increase, how is this likely to affect home-owners?
- What are the advantages and disadvantages of a slow and gradual rise as opposed to one big rise?
The eurozone recorded 0.0% growth in the second quarter of 2014. While the UK and USA are now experiencing relatively buoyant economic growth, the eurozone as a whole is stagnating. Some of the 18 eurozone countries, it is true, are now growing, including Spain, Portugal, Ireland and the Netherlands. But the German and Italian economies contracted in the three months to the end of June, while France experienced zero growth.
This will put growing pressure on the ECB to introduce quantitative easing (QE) through the direct purchase of government bonds or other assets. Although this has been a key policy of many central banks, including the Bank of England, the Fed and the Bank of Japan, up to now the ECB has focused mainly on providing cheap funds to banks to encourage them to lend and keeping interest rates very low.
In June, the ECB did announce that it would explore the possibility of QE. It would also introduce €400 billion worth of targeted long-term lending to banks (targeted longer-term refinancing operations (TLTROs)), and would cease sterilising the extra liquidity injected through the Securities Markets Programme, which involved the purchase of existing bonds on the secondary market.
These plans and their implications are examined in the blog post, The ECB: tackling the threat of deflation.
But even if it does eventually introduce QE, this is unlikely before 2015. However, the first €200 billion of TLTROs will be introduced in September and the remaining €200 billion in December. The ECB hopes that these measures in the pipeline will give a sufficient stimulus to rekindle economic growth. But increasingly there are calls for something more dramatic to be done to prevent the eurozone as a whole slipping back into recession.
Articles
Eurozone economy grinds to halt even before Russia sanctions bite Reuters, Michelle Martin and Martin Santa (14/8/14)
ECB under pressure to boost growth, analysts say BBC News (14/8/14)
Eurozone growth at zero as Germany slumps, France stagnates Deutsche Welle (14/8/14)
Eurozone crisis: The grim economic reality BBC News, Gavin Hewitt (14/8/14)
Eurozone growth splutters to a halt as crisis enters new phase The Guardian, Larry Elliott (14/8/14)
Eurozone can learn from George Osborne and Bank of England stimulus The Guardian, Larry Elliott (14/8/14)
Broken Europe: economic growth grinds to a standstill The Telegraph, Szu Ping Chan (14/8/14)
One-in-three chance the ECB conducts quantitative easing next year – Reuters Poll Reuters, Sumanta Dey (13/8/14)
Eurozone’s Unravelling Recovery: What’s Going Wrong Across Troubled Currency Bloc International Business Times, Finbarr Bermingham (14/8/14)
France calls on ECB to act as eurozone growth grinds to a halt The Guardian, Larry Elliott (14/8/14)
That sinking feeling (again) The Economist (30/8/14)
Data
GDP stable in the euro area and up by 0.2% in the EU28 eurostat euroindicators (14/8/14)
Statistics Pocket Book ECB
European Economy: links to data sources Economics Network
Euro area economic and financial data ECB
Questions
- Explain how quantitative easing works.
- Why has the ECB been reluctant to introduce QE?
- What is meant by sterilisation? Why did the ECB sterilise the effects of the assets purchased under the Securities Markets Programme? Why did it cease doing this in June?
- How have events in Ukraine and political reactions to them influenced the eurozone economy?
- Should QE be ‘fast tracked’? Would there be any dangers in this?
- What is the ‘Funding for Lending’ scheme in the UK? Is the planned introduction of TLTROs similar to Funding for Lending?
Every year thousands of entrepreneurs will have another great idea that is sure to take off and bring in millions of customers. However, most of these great ideas will turn into another business failure. But, in the case of Dropbox, it is multiple business failures that eventually created a huge success, giving hope to millions of budding entrepreneurs.
With 300 million users, the file sharing ‘Dropbox’ is certainly a success, estimated at a value of $10bn. But it didn’t happen immediately and was preceded by a few failures. So, what is the secret to success in this case? The co-founder of Dropbox, Drew Houston, said that it is all about providing something that customers want. In the case of Dropbox, customers are crucial: the more people use it, the easier it becomes for others to use it too, as it allows file sharing on a much larger scale. Perhaps here we have a case of network externalities.
With Dropbox people would tell their friends about it and collaborate. So when you go into work and work on a project with colleagues you recruit them in essence to become Dropbox users because you’re all working on a project together.
No doubt there are many other examples of businesses that have proved a success after several failed attempts. Providing customers with what they want, at the time when they need it is clearly a key ingredient, but so, it appears, is business failure. The following article from BBC News considers the rise of Dropbox.
Dropbox and the failures behind it BBC News, Richard Taylor (1/7/14)
Questions
- Customers are clearly crucial for any business to succeed. How can a new entrepreneur find out if there is a demand?
- Why was timing so important in the case of Dropbox?
- Given that customers can actually use Dropbox for free, how does this company make so much money?
- What are network externalities? Explain them in the context of Dropbox.
- Drew Houston says that ‘distribution’ is another key ingredient to success. What do you think is meant by this and how will it help create success?
The most commonly used measure of economic performance is GDP and while there is agreement that it is an important and useful measure, there is also agreement that there are some big problems with it. Does it measure welfare or quality of life? What is and isn’t included? Do some things add to GDP which actually make us worse off?
One criticism often levelled at GDP is that there are many aspects that go unmeasured – often known as the underground economy. Some areas are typical everyday things – DIY, looking after your own children rather than paying someone to do it, or even giving yourself a haircut. But, there are other activities, often illegal, which go unrecorded, such as the selling and distribution of drugs and prostitution. In countries like the Netherlands, their GDP figures get a boost, as some drugs and prostitution are legal. In other countries, such data is not recorded and as such, the contribution of these markets is under-estimated or even completely omitted.
However, this aspect of the calculation of GDP statistics is changing across Europe, which will allow much easier and more meaningful comparisons of relative GDP across countries. This extra production will therefore offer a positive contribution towards our GDP and perhaps suggest to the untrained eye that the British economy is growing, which can only be good news. But, for the trained economist, we are looking at extra data being added, which will boost total output and the question will be does it really indicate that the economy is better off? The following articles consider this change to GDP.
Small data: The way drugs and prostitution boost the economy BBC News (4/4/14)
Small data: Calculating the sex and drugs economy BBC News (2/6/14)
UK economic output to be revised up after ONS updates BBC News, Anthony Reuben (10/6/14)
UK economic output will get near 5 percent boost from data changes Reuters (10/6/14)
Accounting for drugs and prostitution to help push UK economy up by £65bn The Guardian, Katie Allen (10/6/14)
Questions
- What does GDP measure? Is it good at measuring it?
- Explain the pros and cons of using GDP to measure the welfare of an economy.
- Why are there problems using GDP to compare output between countries?
- Is it a good idea to include markets such as sex and drugs in calculating a nation’s output?
- What other measures of welfare do we have?
I found this interesting article on the BBC News website about three students in Nigeria who have created an online job search company. Only five years later, this company now is valued in the millions and employs over 100 people.
