Category: Essential Economics for Business: Ch 13
Transfer pricing is a technique used by multinational companies to avoid tax liabilities in countries they regard as having high levels of taxation. The articles below from the Guardian give the results of an investigation by Guardian journalists into the elaborate structures that have been created by multinational companies in the banana industry to funnel their profits through tax havens like the Cayman Islands, Bermuda and the British Virgin Islands. In some cases they have paid an effective tax rate as low as 8% when the tax rate in their home country is 35%.
Revealed: how multinational companies avoid the taxman Guardian (6/11/07)
Bananas to UK via the Channel islands? It pays for tax reasons Guardian (6/11/07)
‘I get up at 4am, work to 6-7pm – it doesn’t feel like a life’ Guardian (6/11/07)
Questions
| 1. |
Define the term ‘transfer pricing’. |
| 2. |
Explain how multinational banana companies use transfer pricing to reduce their tax liabilities. |
| 3. |
“The trend in the last 30 years has been to shift the burden of tax away from companies on to the consumer and labour. Capital is increasingly going untaxed.” Discuss the advantages and disadvantages of this shift in the method of taxation. |
The article linked to below from the Guardian by Larry Elliott argues that there are significant global imbalances in the world economy and that the IMF has to an extent ignored these imbalances. He argues that the sub-prime mortgage crisis, exchange rate movements and the rapid rise in oil prices are creating significant problems for the world economy.
Questions
| 1. |
Explain the main global imbalances identified by Larry Elliott in the article. |
| 2. |
Analyse the likely impact of these imbalances on the global level of economic growth. |
| 3. |
Explain the statement in the article: “Like many other countries in the region, the lesson China learned from the Asian financial crisis of 1997 was that it needed to build up a war chest of foreign exchange reserves that could be deployed in the event of a speculative attack.” |
The article linked to below is an extract (printed in the Guardian) from a new book by Dan Atkinson and Larry Elliott (economics editor for the Guardian). The introduction to the article summarises its theme quite effectively:
“We don’t manufacture anything any more. Most of the world won’t buy our records or watch our films. Only our gift of the gab is keeping Britain’s economy ticking over. But how long can the hot air last, ask Larry Elliott and Dan Atkinson “
Talk is cheap Guardian (18/5/07)
Questions |
| 1. |
Explain the underlying trade performance of the UK in recent years for (a) trade in goods and (b) trade in services. |
| 2. |
“Labour believes Britain is at the cutting edge of the knowledge economy and that Britain’s well-educated (sic), highly skilled (sic) and entrepreneurial (sic) workers are ready to kick German, American, Japanese and Chinese butt all round the global village.” Discuss the extent to which this is true. |
| 3. |
Assess the extent to which the theory of comparative advantage can help explain the differences in trade performance outlined in the article. |
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. |
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. |