For some people, a pint of beer is a regular thing each week. Add all your pints of beer together, then add your friend’s pints, their friends’ pints and … you get the idea. Once you’ve done that for the entire population, you have an estimate of total beer consumption in the UK. This can then be compared with total consumption of beer in other countries and between continents.
Prior to 2007, Europe and the Americas were the biggest beer drinking continents, but since then, Asia has emerged as the leader of pints of beer consumed, drinking 67bn litres of beer compared with the Americas’ 57bn and Europe’s 51bn in 2011. In per capita terms, Asia is still some way off, with Japan leading the way as the highest Asian country in 41st place, consuming 64 litres of beer per year per capita of the population. So how is this relevant to economics and business?
Consumption of anything provides jobs – bar workers, manufacturers and in the case of beer, probably law enforcement! It probably also increases utility – after all, why consume it if it’s not going to give you some degree of satisfaction!
We can analyse the demand for beer and see how it varies with changes in price and income. Minimum prices for alcohol have been proposed as a means of reducing consumption, and tax and excise duties are always linked to alcoholic beverages and clearly have an effect on demand. In this case, however, we can also consider the emergence of Asia and how tastes have changed. It is the fastest growing beer market in the world; so what can we deduce from that? As the BBC News article states, it is ‘a sign of a young, upwardly mobile, and increasingly hedonistic population.’
Experts also say that the increased consumption of beer in Asian countries is closely correlated with growing incomes and prosperity. A consumer research analyst from Standard Chartered, Nirgunan Tiruchelvam, said:
“Beer has a clearer correlation with strong economic growth … People tend to drink beer in times of growth. They drink spirits when times are good and when times are bad.”
Data suggest that when a certain level of prosperity is reached in a nation, beer sales begin to rise. As many Asian economies begin to develop rapidly, beer sales have taken off. This could be regarded as a good thing for Europe. With stagnant Western economies, beer producers within Europe may be grateful for a growing demand in Asia. Indeed, many of the world’s biggest breweries are expanding rapidly, providing jobs and income. Consumers in Europe will also be happy to see that beer production remains profitable in other parts of the world. With unemployment still high and recession ongoing, a pint of beer will be a much needed pick-me-up for many people. At least, that’s what the evidence from the Great Depression of the 1930s suggested!!
It’s not good news for everyone, however. Beer production has also increased in Asian countries, most notably in China, which now leads the world as the largest beer producer. This clearly reduces the export potential for European beer producers.
Also, many argue that the growing consumption of beer in Asia is simply an illustration of growing Western influence and it is likely to create severe medical problems in the future. Binge drinking and under-age consumption is already a big problem in Western countries and this could soon begin to extend across the world. The following articles consider the growth in consumption of beer.
Brewers thirsty for expansion as taste for beer grows in emerging markets Guardian, Simon Neville (3/9/12)
Beer in Asia: the drink of economic growth BBC News, Saira Syed (6/9/12)
Study says world beer production hits new high Long Island Business News, Associated Press (8/8/12)
Global beer sales go up for 27th year running News Track India (9/8/12)
Questions
- Use a supply and demand diagram to analyse recent trends in beer consumption across the world.
- Which factors have caused demand in emerging markets to increase? Based on your answer to the previous question, how might that have affected equilibrium prices?
- How has growth in beer consumption throughout Asia benefited Western producers?
- What would you expect the price and income elasticities of demand to be for a product such as beer? Explain your answer.
- To what extent do you think this trend in beer production is a sign of globalisation?
- Evaluate the extent to which the growth in consumption and production of beer in Asia is a good thing. You should consider everyone who and everything might be affected!
With tight incomes, the first things that families tend to cut back on are the more luxury items. Extensions to houses are delayed, interior refurbishments are put off and the old car that was going to be traded in becomes something you can live with for another few years.
Car sales have been adversely affected during the recession, but data for May 2012 show a positive turn. Manufacturers have said that car sales are up by 7.9% compared with May last year. According to the Society of Motor Manufacturers and Traders (SMTT), much of the increased demand has come from private sales, where the increase has been over 14%.
This data may not be the answer to the economic troubles, but it is perhaps an indication that confidence is beginning to return. However, should things go from bad to worse in the eurozone, it isn’t hard to see data for the coming months showing the opposite trend. One other key piece of information to take from this data is the growth in the sales of lower-emissions vehicles. Sales of these were up 31.8% in May 2012 compared to the same time last year. Jonathan Visscher from SMMT said:
‘The green sector is growing fast…Every car manufacturer is going to have a hybrid model on its lists by the end of this year, even Ferrari.’
The continuing upward trend in car sales is by no means guaranteed to continue, especially with things like the expected rise in fuel duty later this year and the ongoing crisis in the eurozone, with Spanish banks potentially looking for help via a bail-out in the not too distant future. The following articles consider the acceleration in car sales.
UK sees biggest annual rise in car sales for nearly 2 years Reuters (8/6/12)
New car sales accelerate ahead Press Association (8/6/12)
UK new car sales accelerated in May, say manufacturers BBC News (8/6/12)
New car sales accelerate ahead Independent, Peter Woodman (8/6/12)
Car registrations accelerate in May Financial Times, John Reed (8/6/12)
Questions
- How would you define a luxury good? What is the relationship with income?
- How could an increase in car sales benefit the economy? How could the multiplier effect have an impact?
- Which factors have contributed towards the growth in low-emissions cars?
- Sales of low-emissions cars have significantly increased. However, why is this increase
- What are some of the key things that can help to bring a recession to an end? Into which general category would you place this increase in car sales?
- Fuel duty is expected to rise later this year. How might this affect the number of new car registrations? What does your answer tell you about the cross elasticity of demand?
Petrol prices have been a bone of contention for some time. With household incomes remaining low and the cost of living rising, the fact that average petrol prices have reached their highest level of more than 1.37p per litre on average will undoubtedly put growing pressure on the approaching budget.
There have already been calls for the Chancellor to reduce fuel duty and with this latest data, the pressure will only mount. The problem is, if fuel duty does fall, so will tax revenues and as one of the Coalition’s key objectives has been to cut the budget deficit, this could pose further problems. Even the calls to cut VAT on fuel will also put a dent in the budget deficit.
Although everyone is undoubtedly feeling the effects of these higher prices, the key thing with petrol is its elasticity of demand. Whether the price of petrol was 0.90p or 1.37p per litre, I continue to buy the same amount. Therefore, for me, the price elasticity of demand for petrol is highly inelastic – at least between those prices. After all, if the price increase above say £3 per litre, I might think twice about driving to work!
So what has been driving this increase in prices? Petrol prices are hugely dependent on the cost of oil and on the demand for any product that uses fuel. With growing demand from countries like India and China, as they continue to develop and grow very quickly; the continuing concerns with Iran’s nuclear programme and the political problems in the Middle East, oil prices have been forced up. The future trend in prices will depend on many factors, not least whether or not there is any change in fuel duty in the 2012 budget and whether something like a regulator is introduced to monitor increases in fuel prices. This is definitely an area to pay close attention to in the coming months.
Petrol prices reach record high Independent, Peter Woodman (3/3/12)
Petrol prices hit record high with further rises expected Guardian, Hilary Osborne (2/3/12)
Appeak to regulate petrol prices This is South Wales (3/3/12)
Plea to slash duty as fuel costs soar to record high Scotsman, Alastair Dalton (3/3/12)
Petrol prices hit record high The Telegraph, David Millward (2/3/12)
Diesel prices predicted to reach 150p as petrol hits new record Guardian, Terry Macalister and Hilary Osborne (2/3/12)
Questions
- Which are the factors on the demand side that have pushed up the price of oil and hence petrol and diesel?
- What are the supply-side factors that are causing the rising price of fuel?
- Use a demand and supply diagram to illustrate the effects you have explained in the first two questions.
- In the blog, I mention that my price elasticity of demand is relatively inelastic between 2 given prices. What does this suggest about the shape of my demand curve for petrol? How does this shape affect prices following any change in demand or supply?
- Why is petrol a relatively price inelastic product?
- There have been calls for the government to cut VAT or reduce fuel duty. What are the arguments for and against these policies?
- How effective do you think a petrol price regulator would be?
Cutting the budget deficit is a key government objective, but at the moment it seems to be in conflict with another objective, namely economic growth and thereby avoiding a double-dip recession. In order to raise tax revenue and meet the cries for more equity, the 50% tax rate above £150,000 was imposed, affecting some 310,000 people. However, in a recent letter from some top economists to the Financial Times, they called for the scrapping of the top rate of tax. They argue that it is hindering entrepreneurship and encouraging potential top rate tax payers to leave the UK, thereby hindering the economic situation. George Osborne has asked HMRC to evaluate just how effective the top rate of tax has been at generating government revenue.
In contrast to these calls for scrapping this top rate of tax, some of the richest people in the world have said that they would be happy to pay this rate of tax. In the words of Sir Stuart Rose, the ex-boss of Marks and Spencer:
“How would I explain to my secretary that I would pay less tax on my income, which is palpably bigger than hers, when her tax is not going down.”
Those against scrapping the tax argue that it will be ‘monstrously unfair’ and ‘phenomenally immoral’. This, combined with official figure that suggest by 2015/16 the top rate tax will bring in an extra £3.2bn more revenue than had the tax remained at 40%, certainly adds weight to their argument. In total, over the five year period, it is predicted to bring in an extra £12.6bn.
The policy to increase the tax threshold to £10,000 will meet with the critics’ approval, but less so, if it is accompanied by a scrapping of this top rate tax. Furthermore, the government’s coffers will take a significant beating if both of the above occur!
Another option to replace the 50% tax rate is a higher tax on high value homes – the so-called ‘mansion tax’. Whatever happens with taxation, one thing is clear: the government needs to find a way to generate tax revenue, without putting the economy back into recession. If the 50% tax rate encourages people to leave the UK to avoid the tax or to forego entrepreneurship, it will directly be acting as a disincentive. Fewer jobs will be created due to a lack of entrepreneurship, output may be lower and hence growth will not reach its potential. Crucially, the international competitiveness of the UK economy is being badly affected, as it becomes a less attractive place for investment and talented workers. The following articles consider the 50% tax rate and the controversy surrounding it, despite it only being a temporary policy.
Stuart Rose ‘would pay more tax’ BBC News (9/9/11)
Lawson: ‘dangerous’ and ‘foolish’ to keep 50p tax rate Telegraph, Louisa Peacock (10/9/11)
Rose calls 50p tax rate ‘only fair’ Financial Times, Elizabeth Rigby (9/9/11)
Top 50p tax rate damages economy, say economists BBC News (7/9/11)
George Osborne loses nerve on plan to cut 50p top tax rate Independent, Nigel Morris (8/9/11)
Top tax rate will raise £12.6bn more in revenue, official figures reveal Guardian, Polly Curtis (7/9/11)
Laffer curves and the logic of the 50p tax Financial Times, Tim Harford (9/9/11)
Row over ending of 50p tax rate threatens to spark Tory rebellion Guardian, Patrick Wintour and Polly Curtis (7/9/11)
I’d happily pay more tax, says former M&S boss Sir Stuart Rose Independent, Andy McSmith (10/9/11)
Questions
- What are the main arguments in favour of keeping the 50p tax rate?
- What are the main arguments in favour of scrapping the 50p tax rate?
- What does the Laffer curve show? Is it relevant in the case of the 50p top rate of tax? What does it suggest about the ability of the tax to generate income?
- How does the top rate of tax affect the international competitiveness of the UK economy?
- Why is there a trade-off between raising tax revenue and boosting economic growth through the use of the 50p tax rate?
- Why is there concern about the highest rate of tax actually causing tax revenue to fall?
- What are the equity arguments concerning the scrapping of the 50p tax and raising the tax threshold? Is there an equity argument in favour of the 50p tax rate?
As the new tax year begins, many changes are taking place. In order to cut the large budget deficit, sacrifices have to be made by all. The tax and benefit changes could make households worse off by some £2bn this year – definitely not good news for those households already feeling the squeeze. However, the Coalition say that the poorest households will be made better off relative to the rich.
Personal allowance is increasing by £1,000, which is expected to benefit £800,000 people who will no longer pay any tax. At the same time, the 40% tax bracket is being reduced from £43,875 to £42,475, which will bring another 750,000 people into this higher tax bracket, bringing in much needed revenue for the government. Employee’s national insurance contributions will rise by 1% and according to Credit Action, this will leave households £200 worse off per year. Benefits do rise with inflation, but they are to be indexed against the CPI rather than the RPI. The RPI is usually higher and hence benefits will not increase by as much, again leaving some people worse off. Child benefit will be frozen for all and will then be removed for higher rate tax payers from 2013. According to the Treasury, it is the top 10% of households who will lose the most from these needed changes. However, as Justine Greening, the Economic Secretary to the Treasury said:
‘Labour left behind a complete mess with no plan to deal with it, apart from to run up more debts for the next generation to pay off.’
In order to cut the deficit, which stands at an estimated £146bn, spending must fall and tax revenue for the government must rise. The government argues that if cuts are not made today, even higher cuts will be necessary in the future and this will harm the poorest even more. Whilst the Treasury have accepted that there was a ‘marginal loss’ across the population, it is the highest earning households that will suffer the most.
Wednesday of woe as the taxman bites: Changes could leave you £600 worse off Daily Mail, Becky Barrow (6/4/11)
Benefit cuts: Labour warns of ‘Black Wednesday’ BBC News (6/4/11)
Tax and benefit changes: row over financial impact BBC News (6/4/11)
Black Wednesday will hig millions in tax changes and cuts Metro, John Higginson (5/4/11)
Taxman to take extra £750 from families this year Scotsman, Tom Peterkin and Jeff Salway (6/4/11)
Tax and welfare changes will hit women and children hardest, says Ed Balls Guardian, Helene Mullholland, Polly Curtis and Larry Elliott (6/4/11)
Black Wednesday for millions of British families Telegraph (6/4/11)
Majority of households ‘better off’ The Press Association (6/4/11)
Questions
- Where does the term ‘Black Wednesday’ come from?
- What is the likely impact of the 1% rise in NICs? Think about the income and substitution effects. Can you illustrate the effect using indifference analysis?
- Why are Labour arguing that women and children will be hit the hardest and the coalition arguing that it is the highest income households who will lose the most? Can both parties be right?
- What are the arguments (a) for and (b) against bringing in tax and benefit changes today rather than in a few years?
- How might these changes affect the economic recovery?
- Is it equitable that child benefit should eventually be removed from those paying the higher rates of income tax?
- Why has the government indexed benefit payments to rise in line with the CPI rather than the RPI?
For some people, a pint of beer is a regular thing each week. Add all your pints of beer together, then add your friend’s pints, their friends’ pints and … you get the idea. Once you’ve done that for the entire population, you have an estimate of total beer consumption in the UK. This can then be compared with total consumption of beer in other countries and between continents.
Consumption of anything provides jobs – bar workers, manufacturers and in the case of beer, probably law enforcement! It probably also increases utility – after all, why consume it if it’s not going to give you some degree of satisfaction!