Food prices often rise or fall with good or bad harvests or because of a change in demand. A recent example is the price of brazil nuts, which by May this year had risen over 60% on European markets.
Part of the reason for the price rise has been on the demand side. Consumption of brazil nuts has increased as more people switch to healthier diets. This includes the purchase of the nuts themselves and as part of healthier snack foods. With supply being relatively inelastic, any rise in demand tends to have a relatively large effect on price.

A more acute reason is on the supply side. There has been a very poor harvest of brazil nuts. The nuts are grown largely in the Amazon basin which has been hit by drought linked to the El Niño effect. This, however, is only a temporary effect and future harvests should increase again as rainfall returns to normal. However, in the longer term, rainfall patterns may change with the effects of global warming.
The price rise in the UK has also be aggravated by the depreciation of the pound since the Brexit vote, which has fallen some 13% against the dollar since June 2016. A rise in the dollar price of brazil nuts has thus led to an even bigger rise in their sterling price.
Articles
Brazil nuts are rocketing in price – here’s why The Conversation, Iain Fraser (24/10/17)
Brazil nut prices soaring due to reduced harvests after droughts Independent, Zlata Rodianova (16/5/17)
Data
Index Mundi commodities Linked from Economics Network site
Commodity Markets World Bank (see Excel file of monthly prices)
Questions
- Explain the specific supply conditions that have affected the price of brazil nuts in 2017.
- Why did prices rise ahead of the change in supply?
- How has the size of the price rise been affected by the price elasticity of demand for brazil nuts?
- What determines the price elasticity of demand for brazil nuts?
- Find out what other food prices have risen or fallen a lot in recent months and explain why.
- How do real food prices (i.e. prices after correcting for inflation) compare today with 10 and 20 years ago? Explain why.
Thirty years ago, on Monday 19 October 1987, stock markets around the world tumbled. The day has been dubbed ‘Black Monday’. Wall Street fell by 22% – its biggest ever one-day fall. The FTSE 100 fell by 10.8% and by a further 12.2% the next day.
The crash caught most people totally by surprise and has never been fully explained. The most likely cause was an excessive rise in the previous three years, when share prices more than doubled. This was combined with the lack of ‘circuit breakers’, which today would prevent excessive selling, and a ‘herd’ effect as people rushed to get out of shares before they fell any further, creating a massive wave of destabilising speculation.
Within a few weeks, share prices started rising again and within three years shares were once again trading at levels before Black Monday.
Looking back to the events of 30 years ago, the question many fund managers and others are asking is whether global stock markets are in for another dramatic downward correction. But there is no consensus of opinion about the answer.
Those predicting a downward correction – possibly dramatic – point to the fact that stock markets, apart from a dip in mid-2016, have experienced several years of growth, with yields now similar to those in 1987. Price/earnings ratios, at around 18, are high relative to historical averages.
What is more, the huge increases in money supply from quantitative easing, which helped to inflate share prices, are coming to an end. The USA ceased its programme three years ago and the ECB is considering winding down its programme.
Also, once a downward correction starts, destabilising speculation is likely to kick in, with people selling shares before they go any lower. This could be significantly aggravated by the rise of electronic markets with computerised high-frequency trading.
However, people predicting that there will be little or no downward correction, and even a continuing bull market, point to differences between now and 1987. First, the alternatives to shares look much less attractive than then. Bond yields and interest rates in banks (at close to zero), unlike in 1987, are much lower than the dividend yields on shares (at around 4%). Second, there are circuit breakers in stock markets that suspend dealing in cases of large falls.
But even if there is a downward correction, it will probably be relatively short-lived, with the upward trend in share prices continuing over the long term. If you look at the chart above, you can see this trend, but you can also see periods of falling share prices in the late 1990s/early 2000s and in the financial crisis of 2008–9. Looking back to 1987, it seems like a mere blip from the perspective of 30 years – but it certainly didn’t at the time.
Articles
Three decades since Black Monday – are markets on the verge of another tumble? The Telegraph, Lucy Burton (19/10/17)
Black Monday: 30 years on from the 1987 crash Citywire, Michelle McGagh (19/10/17)
30 Years Ago: Lessons From the 1987 Market Crash U.S.News, Debbie Carlson (12/10/17)
Black Monday: Can a 1987-style stock market crash happen again? USA Today, Adam Shell (19/10/17)
Black Monday anniversary: How the 2017 stock market compares with 1987 MarketWatch, William Watts (19/10/17)
30 years after Black Monday, could stock market crash again? MarketWatch, William Watts (19/10/17)
The Crash of ’87, From the Wall Street Players Who Lived It Bloomberg, Richard Dewey (19/10/17)
Questions
- Explain what are meant by ‘bull markets’ and ‘bear markets’.
- Share prices are determined by demand and supply. Identify the various demand- and supply-side factors that have led to the current long bull-market run.
- What caused the Black Monday crash in 1987?
- For what reasons may global stock markets soon (a) experience, (b) not experience a downward correction?
- Distinguish between stabilising speculation and destabilising speculation on stock markets.
- What determines when a downward correction on stock markets bottoms out?
- Explain how stock market circuit breakers work. Can they prevent a fundamental correction?
- Does the rise in computerised trading make a stock market crash more or less likely?
The latest edition of the IMF’s Fiscal Monitor, ‘Tackling Inequality’ challenges conventional wisdom that policies to reduce inequality will also reduce economic growth.
While some inequality is inevitable in a market-based economic system, excessive inequality can erode social cohesion, lead to political polarization, and ultimately lower economic growth.
The IMF looks at three possible policy alternatives to reduce inequality without damaging economic growth
The first is a rise in personal income tax rates for top earners. Since top rates have been cut in most countries, with the OECD average falling from 62% to 35% over the past 30 years, the IMF maintains that there is considerable scope of raising top rates, with the optimum being around 44%. Evidence suggests that income tax elasticity is low at most countries’ current top rates, meaning that a rise in top income tax rates would only have a small disincentive effect on earnings.
An increased progressiveness of income tax should be backed by sufficient taxes on capital to prevent income being reclassified as capital. Different types of wealth tax, such as inheritance tax, could also be considered. Countries should also reduce the opportunities for tax evasion.
The second policy alternative is a universal basic income for all people. This could be achieved by various means, such as tax credits, child benefits and other cash benefits, or minimum wages plus benefits for the unemployed or non-employed.
The third is better access to health and education, both for their direct effect on reducing inequality and for improving productivity and hence people’s earning potential.
In all three cases, fiscal policy can help through a combination of taxes, benefits and public expenditure on social infrastructure and human capital.
But a major problem with using increased tax rates is international competition, especially with corporation tax rates. Countries are keen to attract international investment by having corporation tax rates lower than their rivals. But, of course, countries cannot all have a lower rate than each other. The attempt to do so simply leads to a general lowering of corporation tax rates (see chart in The Economist article) – to a race to the bottom. The Nash equilibrium rate of such a game is zero!
Videos
Raising Taxes on the Rich Won’t Necessarily Curb Growth, IMF Says Bloomberg, Ben Holland and Andrew Mayeda (11/10/17)
The Fiscal Monitor, Introduction IMF (October 2017)
Transcript of the Press Conference on the Release of the October 2017 Fiscal Monitor IMF (12/10/17)
Articles
Higher taxes can lower inequality without denting economic growth The Economist, Buttonwood (19/10/17)
Trump says the US has the highest corporate tax rate in the world. He’s wrong. Vox, Zeeshan Aleem (31/8/17)
Reducing inequality need not hurt growth Livemint, Ajit Ranade (18/10/17)
IMF: higher taxes for rich will cut inequality without hitting growth The Guardian, Larry Elliott and Heather Stewart (12/10/17)
IMF Fiscal Monitor
IMF Fiscal Monitor: Tackling Inequality – Landing Page IMF (October 2017)
Opening Remarks of Vitor Gaspar, Director of the Fiscal Affairs Department at a Press Conference Presenting the Fall 2017 Fiscal Monitor: Tackling Inequality IMF (11/10/17)
Fiscal Monitor, Tackling Inequality – Full Text IMF (October 2017)
Questions
- Referring to the October 2017 Fiscal Monitor, linked above, what arguments does the IMF use for suggesting that the optimal top rate of income tax is considerably higher than the current OECD average?
- What are the arguments for introducing a universal basic income? Should this depend on people’s circumstances, such as the number of their children, assets, such as savings or property, and housing costs?
- Find out the details of the UK government’s Universal Credit. Does this classify as a universal basic income?
- Why may governments reject the IMF’s policy recommendations to tackle inequality?
- In what sense can better access to health and education be seen as a means of reducing inequality? How is inequality being defined in this case?
- Find out what the UK Labour Party’s policy is on rates of income tax for top earners. Is this consistent with the IMF’s policy recommendations?
- What does the IMF report suggest about the shape of the Laffer curve?
- Explain what is meant by tax elasticity and how it relates to the Laffer curve?
We have reported frequently in our blogs about concerns over rising debt levels among UK households. We previously noted the concerns expressed in July 2014 by the Prudential Regulation Authority (PRA) that the growth in consumer credit (unsecured lending) was stretching the financial well-being of individuals with implications for the resilience of lenders’ credit portfolios. Now the Chief Executive of the Financial Conduct Authority (FCA), Andrew Bailey, in an interview to the BBC has identified the growing problem of debt among young people.
In his interview Mr Bailey stresses that the growth in debt amongst younger people is not ‘reckless borrowing’ and so not borne out of a lack of willpower or ‘present bias’ (see John’s blog Nudging mainstream economists). Rather, it is borrowing simply to meet basic living costs.
In his interview Mr Bailey goes on to identify generational shifts in patterns of wealth and debt. He notes:
There are particular concentrations [of debt] in society, and those concentrations are particularly exposed to some of the forms and practices of high cost debt which we are currently looking at very closely because there are things in there that we don’t like.
There has been a clear shift in the generational pattern of wealth and income, and that translates into a greater indebtedness at a younger age. That reflects lower levels of real income, lower levels of asset ownership. There are quite different generational experiences.
Mr Bailey goes on to echo concerns expressed back in July by the Prudential Regulation Authority in relation to the growth in consumer credit. The chart illustrates the scale of the accumulation of consumer credit (unsecured lending) across all individuals in the UK. In August 2017 the stock of unsecured debt rose to £203 billion, the highest level since December 2008 when the financial crisis was unfolding. (Click here to download a PowerPoint of the chart).
In concluding his BBC interview, Mr Bailey notes that credit should be available to younger people. Credit helps individuals to ‘smooth income’ and that this is something which is increasingly important with more people having erratic incomes as the gig-economy continues to grow. However, he notes that credit provision needs to be “sustainable”.
BBC Interview
Financial regulator warns of growing debt among young people BBC News (16/10/17)
Articles
Young people are borrowing to cover basic living costs, warns City watchdog Guardian, Julia Kollewe (16/10/17)
Britain’s debt timebomb: FCA urges action over £200bn crisis Guardian, Phillip Inman and Jill Treanor (18/9/17)
FCA warning that young are borrowing to eat shames Britain Independent, James Moore (16/7/17)
Young people are ‘borrowing to cover basic living costs’ and increasing numbers are going bankrupt, warns financial watchdog Daily Mail, Kate Ferguson (6/10/17)
More and more young people are falling into debt – but it’s not their fault Metro, Alex Simpson (20/10/17)
Data
Bankstats (Monetary and Financial Statistics) – Latest Tables Bank of England
Statistical Interactive Database Bank of England
Questions
- What does it mean if people are financially distressed?
- What do you think Mr Bailey means by ‘sustainable credit’?
- In what ways might levels of debt impact on the macroeconomy?
- How does credit help to smooth spending patterns? Why might this be more important with the growth in the gig-economy?
- What is meant by inter-generational fairness?
- Of what relevance are changing patterns in wealth and debt to inter-generational fairness? What factors might be driving these patterns?
- What sort of credit is unsecured credit? How does it differ from secured credit?
- Are there measures that policymakers can take to reduce the likelihood that flows of credit become too excessive?
The annual Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, normally known as the Nobel Prize in Economics, has been awarded 49 times since it was founded in 1969. Many well-known economists have been recipients of the award. This year it had been awarded to Richard Thaler for his research in behavioural economics. The award recognises his work in integrating economics with psychology.
Richard H. Thaler has incorporated psychologically realistic assumptions into analyses of economic decision-making. By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes.
In total, Richard Thaler’s contributions have built a bridge between the economic and psychological analyses of individual decision-making. His empirical findings and theoretical insights have been instrumental in creating the new and rapidly expanding field of behavioural economics, which has had a profound impact on many areas of economic research and policy.
Instead of making the assumption that people are rational maximisers, behavioural economists look at how people actually behave and respond to various incentives.
For example, people may be motivated by concepts of fairness and be prepared to make personal sacrifices for the sake of others. Such concepts of fairness tend to depend on the social context in which choices are made and can be influenced by the way choices are framed.
Also people may not weigh up costs and benefits but use simple rules of thumb, or heuristics, when making decisions. This might be an example of rational behaviour when time or information is limited, but the use of such heuristics often becomes engrained in behaviour and the rules become just habit.
People may also suffer from a lack of willpower or ‘present bias’. They may spend more than they can afford because they cannot resist the temptation to have a product. They may overeat because of the short-term pleasure it brings and ignore the long-term effects on their health.
Understanding how people make choices and the temptations to which they succumb can help policymakers devise incentives to change behaviour to achieve various social goals.
One type of incentive is nudging. A well-known example is people’s choice about whether to become an organ donor in the event of their death. If people are required to opt in to such a scheme, they may never get round to doing so. However, if they are required to opt out if they do not want to participate, many more people would thereby be donors and more organs would become available.
Another form of nudge is making desirable things fun. A well-known experiment here was encouraging people to use the stairs rather than the escalator when exiting a subway by making the stairs like a musical keyboard. See here for more examples.
The UK government set up a Behavioural Insights Team – also known as the Nudge Unit (now independent of government) to find ways of encouraging people to behave in their own or society’s best interests.
But it is not just governments which use the insights of behavioural economists such as Thaler. The advertising and marketing industry is always examining the most effective means of influencing behaviour. A classic example is the loss leader, where consumers are tempted into a shop with a special offer and then end up buying more expensive items there rather than elsewhere.
Firms and advertisers know only too well the gains from tempting people to buy items that give them short-term gratification – such as putting chocolate bars by the tills in supermarkets.
Understanding consumer psychology helps firms to manipulate people’s choices. And such manipulation may not be in our best interests. If we are being persuaded to buy this product or that, are we fully aware of what’s going on and how our tastes are being affected? Would we, by standing back and reflecting, make the same choices as we do on impulse or out of habit?
And governments too can seek to manipulate people in ways that some may find undesirable. Governments may try to influence us to follow their particular political agenda – as may newspapers. Certainly, during election or referendum campaigns, we are being nudged to vote a particular way.
It is important then for us to understand when we are being nudged or otherwise persuaded. Do we really want to behave in that way? Just as it is important, then, for governments and firms to understand individuals’ behaviour, so too it is important for individuals to understand their own behaviour.
Articles
Richard Thaler’s work demonstrates why economics is hard The Economist, RA (11/10/17)
Nobel in Economics Is Awarded to Richard Thaler The New York Times, Binyamin Appelbaum (9/10/17)
The Making of Richard Thaler’s Economics Nobel The New Yorker, John Cassidy (10/10/17)
Nobel prize in economics awarded to Richard Thaler The Guardian, Richard Partington (10/10/17)
Richard Thaler is a controversial Nobel prize winner – but a deserving one The Guardian, Robert Shiller (11/10/17)
What the mainstreaming of behavioural nudges reveals about neoliberal government The Conversation, Rupert Alcock (17/10/17)
This year’s economics Nobel winner invented a tool that’s both brilliant and undemocratic Vox, Henry Farrell (16/10/17)
How a critic of economics became the disciplines Nobel-winning best friend The Guardian, Tiago Mata and Jack Wright (25/10/17)
Podcast
How Richard Thaler changed economics BBC, More of Less, Tim Harford (14/10/17)
Questions
- For what reasons may individuals not always weigh up the costs and benefits of purchasing an item?
- Give some examples of the use of heuristics in making consumption decisions?
- Is the use of heuristics irrational?
- Explain how people considering that they have behaved fairly is influenced by the social context of their behaviour?
- Find out what is meant by the Dictator Game and how it can challenge the assumption that people behave selfishly. How is the ‘dictator’s’ behaviour affected by the possible payoffs?
- Thaler suggested that Brexit could be an example of behavioural economics in action. Find out what he meant by this. Do you agree?
- Give some examples of ways in which the government can nudge people to persuade them to behave in socially or individually desirable ways.
- Find out what is meant by the ‘endowment effect’ and how it influences people’s valuation of items they own.
- Why may nudging by governments be undemocratic?