Category: Essential Economics for Business 7e and 6e

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The fuel crisis in Bolivia

Bolivia may have the second largest gas reserves in Latin America but it also has an acute shortage of diesel. People have blamed a variety of causes: smugglers, the government and nationalisation. In truth, the cause may be a combination of all these factors, but whatever the cause, the diesel shortage is acting as a significant constraint on further economic development and is an ongoing headache for the President Evo Morales.

Fuelling Bolivia’s crisis BBC News Online (8/11/07)

Questions

1. Use supply and demand analysis to illustrate the reasons for the shortages in diesel in Bolivia.
2. Explain the impact that fuel subsidies may have had in causing the shortages of diesel. Use supply and demand analysis to illustrate your answer where appropriate.
3. Discuss the underlying factors that may be leading to the shortages in diesel.
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Avoiding the global taxman

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.
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On the buses with Evan

The article linked to below from Evan Davis’s blog starts with the following multiple choice question:

“What effect do you think it has, if a British bus company employs a bus driver from overseas?

a) it takes away the job of a British bus driver?
b) it increases the number of bus drivers we have?
c) it undercuts the wages of British bus drivers?
d) it reduces bus fares for British passengers?”

What is your answer?

On the buses BBC News Online (5/11/07)

Questions

1. Explain what is meant by the phrase “lump of labour fallacy”.
2. Assess the extent to which the most appropriate answer to the multiple choice question is “(e) all of the above”.
3. Discuss the extent to which the answer to the above multiple choice question may differ in a perfectly competitive and imperfect labour market.
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The return of price controls

Price controls – limiting the price of goods through government intervention in a market – have fallen out of fashion to a great extent as an economic policy tool in the past couple of decades, but they may be making a comeback in Argentina, Russia and China according to the article below from Slate magazine.

Cry for me Argentina (and Russia and China) MSN Slate (30/10/07)

Questions

1. Using supply and demand diagrams as appropriate, illustrate the ways in which price controls have been used to influence prices in Argentina and Russia and China.
2. Examine the reasons why the Argentinean government has chosen to implement price controls for energy.
3. Discuss the likely effectiveness of price controls in combating inflation in Russia, China and Argentina.
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The IMF remains blind to global imbalances

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.”