Previous posts on this blog have discussed key principles of thinking like an economist and also whether this always makes sense. Highly relevant for this question, on her excellent Economists do it with models blog, Jodi Beggs has recently highlighted the fact that the cognitive costs of obtaining the information required to make decisions in this way can sometimes be excessive.
As an example she cites this scenario from the Cheap talk blog:
“You are planning a nice dinner and are shopping for the necessary groceries. After having already passed the green onions you are reminded that you actually need green onions upon discovering exactly that vegetable, in a bunch, bagged, and apparently abandoned by another shopper. Do you grab the bag before you or turn around and go out of your way to select your own bunch?”
I won’t go through the details of the 12 steps (see the above link) taken to infer from where the onions were abandoned that they were either:
“the best onions in the store and therefore poisoned, or they are worse than some onions back in the big pile but then those are poisoned.”
Based on this inference, the conclusion is that you should go for a take-away instead! As Beggs suggests, the level of effort undertaken to make a decision should depend upon the likelihood that this results in a more informed choice. In the above example this is highly questionable! She then provides the following example suggesting that when you obtain cash back in a store it is much better to ask for the money in small denomination notes. Whilst on face value this again seems like a strange conclusion, the economic logic provided suggests that it may be a much more rational decision than in the onion example.
Article
Just for fun: reasons not to data an economist (thanks guys)…Economists do it with models, Jodi Beggs (25/10/12)
Questions
- Can you provide some examples of decisions where the cognitive costs of obtaining relevant information is very high?
- In these examples, would this information typically result in a better decision?
- What might be the opportunity cost of shopping in the manner described in the article?
- Explain how a rational economic actor should evaluate whether to obtain more information in order to facilitate making a decision.
- The article above suggests that there are a number of benefits from requesting small denomination notes, but what might be the costs involved in this strategy?
European wine producers have seen one of the worst grape harvests for decades. With exceptionally wet weather in the northern European growing areas and exceptionally hot and dry weather in the southern ones, yields are well down in most countries.
In France, the world’s largest wine producer, wine production is forecast to be 19% down on the previous year. In Italy and Spain, Europe’s second and third largest producers, production is forecast to be 3% and 6% down respectively. Production in the EU as a whole, which produces some 57% of world output, is expected to be 9% down and at a historically low level. What is more, the past five years in the EU have all seen modest harvests.
And the poor harvests are not confined to Europe. Argentina’s production is some 24% down on 2011, with New Zealand’s 17% down. And despite a few countries expecting an increase, including the USA and Chile, overall world production is expected to be 6% down on 2011 and more than 7% down on the average for 2008–11.
So is this good news or bad? At first sight it would seem to be bad, especially for the countries with large falls in output. It would also seem to be bad news for the consumer, with prices set to rise.
But for some it’s good news. If prices rise, then producers experiencing an increase in output will have a double gain. And a fall in output is only part of the story. For some producers, the smaller yield has been accompanied by an increase in quality. And then there’s the question of stocks. For several years, global production of wine has exceeded consumption. Indeed the gap widened after the financial crisis and recession of 2007–9 as consumption of wine fell. This year’s poor global harvest should help to slow down the increase in stocks or may even lead to a reduction in stocks, depending on the extent to which demand recovers.
Articles
World Wine Output to Fall to 37-Year Low, Depleting Stocks BloombergBusinessweek, Rudy Ruitenberg (30/10/12)
World wine drought after weather ruins harvests The Telegraph, John-Paul Ford Rojas (31/10/12)
Wine Experts: Drought, Cold Bring Worst Harvest in 50 Years Skye (30/10/12)
Wine experts: worst grape harvest in half century Washington Examiner (17/10/12)
Small 2012 harvest sparks supply fears thedrinksbusiness.com, Gabriel Savage (30/10/12)
Wine shortage to follow poor 2012 grape harvest BBC News (31/10/12)
Hot summer cools business prospects for Madrid vintners BBC News, Jaime Gonzales (24/9/12)
World awash in wine, so Europe’s poor grape harvest won’t hit Edmonton goblets just yet Edmonton Journal, Dan Barnes (17/10/12)
Data
Wine in figures Wines from Spain
2012 global economic vitiviniculture data Wines from Spain (Note that the countries in Table 1 have been entered in the wrong order.)
Questions
- Illustrate the effect of the global wine harvest on a demand and supply diagram.
- Will a fall in grape production of x per cent lead to a rise in the price of wine of more or less than x percent? How is the price elasticity of demand relevant to your answer?
- What elements are there in the supply chain from planting vines to consuming wine?
- How does the holding of stocks affect (a) the profitability of wine production; (b) the price volatility of wine?
- The Greek grape harvest is predicted to be higher in 2012 than in 2011. How will this affect the prices of Greek wines in (a) Greece; (b) outside Greece?
- How is the fallacy of composition relevant in assessing the benefits to owners of vineyards of a good grape harvest?
10 of the 17 eurozone countries have agreed to adopt a financial transactions tax (FTT), often known as a ‘Tobin tax’ after James Tobin who first proposed such a tax back in 1972. The European Commission has backed the proposal, which involves levying a tax of 0.1% on trading in bonds and shares and 0.01% on trading in derivatives.
The 10 countries, France, Germany, Austria, Belgium, Greece, Italy, Portugal, Slovakia, Slovenia and Spain, and possibly also Estonia, hope to raise billions of euros from the tax, which will apply whenever at least one of the parties to a trade is based in one of the 10 (or 11) countries.
On several occasions in the past on this site we’ve examined proposals for such a tax: see, for example: Pressure mounts for a Tobin tax (update) (Nov 2011), A ‘Robin Hood’ tax (Feb 2010), Tobin or not Tobin: the tax proposal that keeps reappearing (Dec 2009) and A Tobin tax – to be or not to be? (Aug 2009). Tobin taxes are also considered in Economics (8th ed) (section 26.3) and Economics for Business (5th ed) (section 32.4).
As we noted last year in the blog Is the time right for a Tobin tax?, the tax is designed to be too small to affect trading in shares or other financial products for purposes of long-term investment. It would, however, dampen speculative trades that take advantage of tiny potential gains from very short-term price movements. Such trades account for huge financial flows between financial institutions around the world and tend to make markets more volatile. The short-term dealers are known as high-frequency traders (HFTs) and their activities now account for the majority of trading on exchanges. Most of these trades are by computers programmed to seek out minute gains and respond in milliseconds. And whilst they add to short-term liquidity for much of the time, this liquidity can suddenly dry up if HFTs become pessimistic.
Supporters of the tax claim that it will make a major contribution to tackling the deficit problems of many eurozone countries. Critics claim that it will dampen investment and growth and divert financial business away from the participating countries. The following articles look at the arguments.
EU Commission backs 10 countries’ transaction tax plan Reuters, Jan Strupczewski (23/10/12)
EU ‘Robin Hood’ tax gets the nod fin24 (23/10/12)
European financial transaction tax moves step closer The Guardian, Larry Elliott (23/10/12)
Financial transaction tax for 10 EU states BBC News (23/10/12)
Rejecting a Robin Hood tax would be a spectacular own goal The Guardian, Max Lawson (11/10/12)
More than 50 financiers back Robin Hood Tax The Robin Hood Tax (23/10/12)
Topical Focus – Transaction Taxes Tax-News (23/10/12)
Could a transactions tax be good for capitalism? BBC News, Robert Peston (3/10/11)
A Tax to Kill High Frequency Trading Forbes, Lee Sheppard (16/10/12)
Questions
- Explain how the proposed financial transactions tax will work.
- Why would many parties to trades who are not based in one of the 10 participating countries still end up paying the tax?
- What are likely to be the advantages and disadvantages of the proposed tax?
- Is it appropriate to describe the proposed FTT as a ‘Robin Hood Tax’?
- How does a financial transactions tax differ from the UK’s stamp duty reserve tax?
- Explain why the design of the stamp duty tax has prevented the flight of capital and trading from London. Could a Tobin tax be designed in such a way?
- What are HFTs and what impact do they have on the stability and liquidity of markets?
- Would it be desirable for the FTT to ‘kill off’ HFTs?
Two of the biggest publishing companies, Pearson of the UK and Bertelsmann of Germany are to form a joint venture by merging their Penguin and Random House imprints. Bertelsmann will have a majority stake in the venture of 53% and Pearson will have 47%.
The Penguin imprint, with a turnover of just over £1bn, has an 11% share of the English language book publishing market. Random House has a 15% share, with turnover of around £1.5bn. The new ‘Penguin Random House’, as it will be called, will have nearly 26% of the market, which should give it considerable market power to combat various threats in the book publishing market.
One threat is from online retailers, such as Amazon, Apple and Google, which use their countervailing power to drive down the prices they pay to publishers. Another threat is from the rise of electronic versions of books. Although e-books save on printing costs, competition is driving down prices, including the prices of paper books, which may make publishers more reluctant to publish new titles in paper form.
There has been a mixed reception from authors: some are worried that an effective reduction in the number of major publishers from six to five will make it harder to get books published and may squeeze royalty rates; others feel that an increased market power of publishers to take on the online retailers will help to protect the interests of authors
The following videos and articles look at the nature of this joint venture and its implications for costs, revenues and publishing more generally.
Videos and webcasts
Penguin and Random House merge to take on digital giants Channel 4 News, Matthew Cain (29/10/12)
Penguin and Random House confident merger will be approved BBC News, Will Gompertz (29/10/12)
Penguin Books and Random House to merge BBC News, Matt Cowan (29/10/12)
Articles
Random House and Penguin merge to take on Amazon, Apple Reuters, Kate Holton (29/10/12)
Pearson’s Penguin joins Random House Independent, Amy Thomson and Joseph de Weck (29/10/12)
Penguin and Random House sign merger deal Financial Times, Gerrit Wiesmann and Robert Budden (29/10/12)
March of the Penguin The Economist, Schumpeter blog (29/10/12)
Penguin chief: News Corp can’t derail Random House deal The Guardian, Mark Sweney (29/10/12)
Penguin and Random House confident merger will be approved BBC News, Anthony Reuben (29/10/12)
And so I bid Penguin a sad farewell Independent, Andrew Franklin (29/10/12)
Questions
- How does a joint venture differ from a merger?
- What types of economies of scale are likely to result from the joint venture?
- How are authors likely to be affected?
- Will the joint venture benefit the book reading public?
- The relationship between publishers and online retailers can be described as one of ‘bilateral oligopoly’. Explain what this means and why it is impossible to determine an ‘equilibrium’ wholesale price of books in such a market.
- What criteria would the competition authorities use to assess whether or not the joint venture should be permitted to proceed?
- What is likely to be the long-term outlook for Penguin Random House?
- Assess the benefits and costs of a News Corporation takeover of the Penguin division? This was an alternative offer to Pearson had it not gone with Bertelsmann. (News Corp. has the Harper Collins imprint.)
The story of the UK economy over the past few years has been one of bad news and worse news. With a double-dip recession having kept confidence low in the UK, positive news for the economy was seemingly a distant hope of government ministers. However, official statistics show that that in the 3 months from July to September, the UK economy emerged from recession, with growth of 1.0%.
This positive GDP figure (click here for a PowerPoint of the chart below) was undoubtedly helped by the London Olympics over the summer, which may have added as much as 0.2 percentage points to GDP, according to the ONS. Millions arriving in London and other venues, spending money on countless things. Yet, other factors have also contributed to this welcome growth. Stephanie Flanders said:
The positive ‘surprise’ in these figures is largely to be found in the service sector, which is estimated to have growth by 1.3% in the third quarter, after shrinking by 0.1% in the three months before.
Further to this, in Stephanie Flanders’ ‘Stephanomics’, she says that ‘it confirms that the last three months of this latest recession were brought to you by the Queen. Or at least, the extra Bank Holiday to celebrate her Jubilee.’ The Bank of England suggests that the Jubilee took 0.5 percentage points from official GDP statistics. So, the news so far is positive, but the economy is far from being back to its pre-recession size.
The 2008-2009 recession knocked 6.4% off the UK economy. Since then, the total growth (over the past 4 years) has reached only half of that – 3.2% and that includes the 1% figure just published. Thus, while we may be on ‘the right track’, there is still a long way to go. Economists differ in their interpretations of what this means for the overall recovery: some say that this is a sign of what’s to come; others argue that this recovery has been driven by one-off factors.
What is certain is that government policy over the next few months will be crucial in keeping the economy on the right growth path. The following articles consider the implications of this new economic data.
A special recovery BBC News, Stephanomics, Stephanie Flanders (25/10/12)
UK GDP rises 1pc: economist reaction The Telegraph (25/10/12)
Nick Clegg warns economic recovery will be ‘fitful’ The Guardian, Daniel Boffey (28/10/12)
GDP figures set to show UK economy has exited double-dip recession The Telegraph, Philip Aldrick, Emma Rowley and Jessica Winch (25/10/12)
UK economy returns to growth with help from Olympics BBC News (25/10/12)
U.K. posts quarterly gain in GDP, lifted by Olympics Wall Street Journal, Cassel-Bryan Low (25/10/12)
GDP figures show UK emerging from recession: full reaction The Guardian (25/10/12)
UK growth signals move out of recession Financial Times, Sarah O’Connor and George Parker (25/10/12)
Questions
- How do we define a recession?
- How is GDP calculated and what does it measure?
- Which factors have contributed towards lower GDP data towards the beginning of this year?
- Which factors have helped boost GDP in the 3 months from July to September?
- Why is there disagreement about the likelihood of positive GDP figures continuing throughout the rest of the year?
- Prior to the official release of the GDP figures, David Cameron hinted at positive news. Given that the market is so sensitive, what effect might this suggestion have had?
- Given this positive figure, what implications does this have for the government’s quantitative easing programme?
- If we translate this latest growth data onto an AD/AS diagram, how would you show what has recently happened?
Previous posts on this blog have discussed key principles of thinking like an economist and also whether this always makes sense. Highly relevant for this question, on her excellent Economists do it with models blog, Jodi Beggs has recently highlighted the fact that the cognitive costs of obtaining the information required to make decisions in this way can sometimes be excessive.
