Category: Essentials of Economics: Ch 10

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.

In the early days of monetary policy, money supply targeting was a core element of anti-inflation policy. This approach was slowly dropped during the 1990s, but the underlying growth of the money supply has remained an important issue for policy makers and recent growth in the money supply has led to concern from some commentators that higher inflationary pressures may yet emerge.

King sees money growth as danger sign Times Online (3/5/07)
Bank’s inflation controllers leave the NICE decade to enter the not-so-nice Guardian (3/5/07)
Should letter-writing be a thing of the past? Times Online (30/4/07)


Questions
1. Explain the relationship between money supply growth and inflation.
2. What were the main factors that led to money supply targeting being dropped as a core element of monetary policy?
3. Assess the extent to which the MPC should pay more attention to the level of money supply growth.
4. Should letter-writing be a thing of the past?

The Office of Fair Trading (OFT) is to set up an investigation into the reality of ‘free banking’ to establish whether greater transparency in charging would benefit consumers. The articles linked to below consider the scope of this investigation and look at what some consider the ‘myth’ of free banking.

OFT probe into bank charges could mean end of ‘free banking’ The Scotsman (27/4/07)
‘Free’ banking could end as overdraft charges challenged Guardian (27/4/07)
Watchdog probes cost of banking BBC News Online (27/4/07)
Charges inquiry may spell end of free banking Telegraph (28/4/07)
OFT considers ending ‘free’ banking Times Online (27/4/07)
Q&A: Banking investigation and you BBC News Online (26/4/07)
Calling banks’ bluff BBC News Online – Robert Peston blog (26/4/07)
Free banking ‘myth’ to be probed Guardian (26/4/07)

Questions

1. Explain the reason why some people consider free banking to be a ‘myth’.
2. Examine the likely impact of the market structure in the market for banking on the level of competition.
3. Assess two policies that the government could implement to ensure that consumers get a fairer deal from their banks.

Adam Smith is the face on the new £20 note. This could be used as an argument that economics has moved into the mainstream, but many people may not be aware of the influence that he has had on modern classical economics. The articles below may help reveal his ongoing economic influence.

What you should know about Adam Smith BBC News Online (13/03/07)
Why Brown reveres the man on the new £20 note Guardian (19/03/06)

Questions

1. Assess the impact of Adam Smith on classical economic theory.
2. Summarise the main works and theories of Adam Smith. (You may find the information in the Biz/ed Virtual Economy on Adam Smith helpful. For a complete list of works of Adam Smith, many online, see website C18 in the hotlinks section of this site.)
3. Discuss the extent to which Gordon Brown has been influenced by Adam Smith in his policies.

The death of cash has long been forecast, but not yet happened, but is it the case that the next generation technology may finally sound the death knell? With the advent of prepaid cards (e.g. Oyster card in London), payment by mobiles and the continuing growth of ‘plastic’, it may be that cash is on an inexorable downward slide. The articles below look at a range of issues around the possible death of cash (and the introduction of the £20 note with Adam Smith on it).

Why I hate sticky electrons BBC News Online – Robert Peston Blog (19/2/07)
Cash used to be king, but now we pay for paying up Telegraph (9/2/07)
March launch for Smith £20 note BBC News Online (21/2/07)
A cash call The Economist (subscription) (15/2/07)

Questions

1. Explain the main functions that any form of money has to fulfil.
2. Assess the extent to which smartcards (like the Oyster card) can fulfil these functions of money.
3. Discuss the implications for the level of consumer spending of increased use of cash substitutes.