Port Talbot & A’level economics

A’level economics students frequently moan  that what they have been taught is not relevant to what is going on around them while economics teachers complain that students do not relate what they have been taught to the real world!

The recent events at Port Talbot provide an ideal example to use economics concepts.

The multiplier can be used in assessing the costs to the area should Port Talbot close since not only will steel jobs be lost if the plant closes, additional jobs will also be at risk as steel workers suffer lower disposable income and cut back on expenditure,  particularly in non-essential areas.

In considering the type of unemployment created, one can use the idea of structural unemployment since many of the steel workers affected will not have the skills needed in newer, growing industries.

The possible closure of the plant is relevant to the arguments about the benefits of free trade and the theory of comparative advantage whereby UK steel purchasers benefit from cheaper steel imports from China which need to be set against the  job losses among UK steel producers. This aspect can be expanded to consider whether the Chinese are dumping steel on the world market and, if so, what action should be taken, especially in the light of the tariffs on Chinese steel imposed by the USA and those imposed by China on imports of steel from the EU and elsewhere.

A final example is in the  field of market failure where Tata have complained that the UK Government’s environmental policies have raised energy prices and helped make UK produced steel (and heavy industry generally) uncompetitive. UK electricity prices are almost double those in the rest of the EU and more than double those in China and while these high prices help to subsidise renewable forms of energy, they make life difficult for UK firms.

BREXIT- more questions than answers

Over the next two months there will be increasing discussion about whether we will be better off in or out of the EU. Some of this will focus on the political aspects, for example the potential gains in sovereignty and our ability to gain greater control of our borders  versus our loss of influence were we to leave the EU. However the purpose of this article is to focus on the economic arguments.

In theory the case for and against leaving the EU should be an ideal opportunity to apply cost-benefit analysis, weighing up the monetary costs of leaving and comparing them with the monetary benefits and then seeing which are greater. However, in practice, this will not be easy to do. Even our contribution to the EU is not clear with the Leave Campaign focussing on the £18.3bn we paid in 2014/15 (which sounds a lot) while the Remain Campaign concentrate on the net contribution which is about £9bn, which, when divided by the population, works out at less than 40p per day (which sounds very little). There is little consensus on the overall cost or benefit of being a member. The National Institute for Economic & Social Research suggested, in 2004 that membership of the EU contributed about 2% to GDP, the CBI is suggesting that each household benefits by £3,000 per year while the  Institute of Directors thinks it costs us 1.75% of GDP to belong.

Even assuming that we could agree on the amount of our net contribution to the EU, we are not going to be able to quantify the costs and benefits we will face if we leave. Crucial to this figure will be the type of trade deal we are able to negotiate if we leave. Will the EU be keen to encourage trade with us and therefore allow us to negotiate a favourable deal or will they be keener to discourage others from leaving and therefore impose significant tariffs on UK goods entering the EU? Possibly a more important question, given that non-tariff barriers are of increasing importance,is whether or not we will be able to gain easy access for our services, particularly financial services, if we leave the EU? It is true that we run a deficit with the EU but we cannot infer from this that we will be able to negotiate  a favourable deal. Almost half our exports go to the EU while only about 7% of theirs come to us, therefore a favourable deal is far more important to us than them.

Furthermore,  the deal we eventually agree will involve us making a financial contribution to the EU as Norway and Switzerland do. How much will this be and how many of the regulations we currently have to meet will we need if we leave and how much will it cost us to do so?

Another key question is what sort of trade deals we will be able to agree with non-EU countries? We would have less influence negotiating individually than we would as part of the EU given that the EU market is almost five times as large as the Uk’s.

[An unbiased analysis of the various claims and a good source of data is thr Channel 4 Factcheck (http://blogs.channel4.com/factcheck/tag/eu)%5D

India 1 China 0?

Does the economic rise of India make it the country to watch instead of China?

There has been much talk of the BRICs [Brizil, Russia, India and China] and then the  MINTs [Mexico, Indonesia, Nigeria and Turkey] –  newly-industrialised countries which were going to be instrumental in driving the world economy. Of these, Russia and Brazil have suffered from slow growth and falling commodity prices and the MINTs also seem to have faded from the economic horizon and so only China and India remain.

Last month China’s growth fell and India’s GDP growth rate overtook it. Previously China had consistently outpaced India so that China’s average income per head which was approximately equal to India’s in the 1970s is now four times as high. Although the change in relative growth rates is currently more to do with a slowdown in China than an increase in India’s growth, the future is bright for the latter country. China is currently facing up to the need to look after a rapidly aging population while India has a much younger population and so will not face the burden of dealing with an aging population for some time.

Economic Data

The collection of data about the economy is possibly not the most exciting element of economics however it is one of the most significant since, without accurate data, the Government and the Bank of England are unable to accurately assess the state of the economy and hence manage the economy.

Last week there were two interesting developments in the statistical world. The first was the announcement of two new measures of inflation which might shortly  replace the Consumer Price Index (CPI) which previously replaced the Retail Price Index (RPI). The new measures are CPIH – the consumer prices and housing index – and HHI – the household inflation index which aims to reflect the costs that households face so includes interest payments as well as the prices of goods and services. It is possible that CPIH might soon replace the CPI as the indicator used by the Bank of England. It is likely that CPIH will be slightly above CPI since housing costs tend to exceed the average rate of inflation. Therefore, if the measure is adopted, it is possible that the 2% target will change as well.

The other development involved an Old Brentwood, Sir Charlie Bean, who was interviewed on Radio 4 on Thursday. He was previously Deputy Governor of the Bank of England, and is now head of independent review of economic statistics, set up by the Chancellor of the Exchequer after problems with some government data, leading to many revisions.. His view is that economic data has not taken into account the changes which have taken into account the way the digital economy has changed we operate. For example,  a few years ago, when I booked a holiday, I would have gone to a travel agent and booked my holiday through them, paying them a commission which would have been counted in the UK’s GDP. Today I will go online and book my own flights and then go to Airbnb to book my accommodation. I might even avoid eating in restaurants and, instead, try one of the new schemes to eat in private homes. Similarly the way I obtain my home entertainment has changed – no longer do I buy CDs (or gramophone records!) but download music and, similarly, do not buy DVDs but use catch-up services for my TV viewing.  Not all of these transactions will be included in the GDP and Sir Charlie believes that the inclusion of such transactions might add as much as 0.66% per year to the UK’s GDP.

 

 

The UK Foreign Exchange Market

Too often in the study of economics, what is learnt in the classroom bears little resemblance to reality. Thus when learning about what determines a country’s foreign exchange market, one talks  about the demand and supply of currency and how these can be affected by confidence in the currency.This week’s movements in the foreign exchange market provide an example of this.  Following the EU negotiations and the announcements by Michael Gove and Boris Johnson that they were in favour of Brexit, thereby increasing its likelihood and the probability of increased uncertainty over the next few months, there was a significant fall in the value of sterling (from £1 = $1.44 to $1.41 once the markets opened over the weekend and a further fall this week to £1 = $1.38, the lowest rate against the dollar in 7 years.

The implications of the fall in the exchange rate for the economy are significant. Exporters will gain, particularly if they import relatively few components and raw materials. However consumers, particularly if planning a foreign holiday will lose out, as will retailers who sell imports and travel companies dealing in the overseas market.

Possibly most worrying should be the impact of the increased uncertainty and fall in the value of the pound on the financial account of the UK’s balance of payments (the section dealing with such things as lending, borrowing and the sale and purchase of financial assets). We have been able to run a current account deficit because foreigners have been happy to buy UK property, government bonds, shares, etc. If these flows start to diminish and the fall in the exchange rate is not enough to significantly reduce imports and increase exports, the impact on the exchange rate could be very interesting indeed.

The £:$ xchange rate over the last week

 

The Balance of Payments

The UK deficit in goods reached a record last year at £125bn. Therefore, despite a services surplus of £90bn, the overall trade deficit was £35bn. This has been partly explained by the slow-down in China, since they are now buying fewer of our exports but more significantly, these record deficit figures reflect the competitiveness of the UK economy. Possibly, if one feels optimistic, one could argue that the recent fall in the value of sterling will make us more competitive and our exports will increase. However evidence about the price elasticity of demand for exports is not promising. Our invisible surplus has declined in recent years, largely because of the falling contribution from net overseas income (interest, profit and dividends which have fallen as interest rates have dropped and  earnings from dividends and profits have been hit by the recession).

We have had a current account deficit for over thirty years so does it matter? If a country has a deficit, it must either  use its reserves, sell assets or borrow  to pay for the deficit. Fortunately foreign banks and individuals are happy to purchase UK assets, buying shares and government securities, and investing directly in the UK. However what might happen if the UK economic position deteriorates, the currency weakens (possibly because of fears of a possible exit from the EU) and banks start to sell sterling?

Long Term Growth Prospects

As oil prices continue to fall, stock markets collapse and the world economic recovery falters, it is worth thinking occasionally about what is in store over the next thirty years rather than the next thirty months.

Some economists suggest that continuous, rapid world economic growth is a thing of the past since we will never again experience the waves of technological change which boosted growth over the last 150 years. In the late 19th and early 20th centuries life changed out of all recognition. The basic tasks of living, for example collecting water and washing clothes took much effort; speed and travel were totally different – journeys considered normal today, such as travelling from London to Birmingham or from London to New York were major expeditions. Communication  relied largely on the delivery of mail. It is difficult for us to understand how the gradual spread throughout the population of things today considered commonplace, such as the telephone, railways,  washing machines and the motor car transformed everyday living in developed countries.

Recently there has been concern that the world is not going to get the same positive external shocks from technology to boost economic growth that it has previously experienced. Some believe that information technology will provide the stimulus while others suggest that such things as driverless cars will provide less of a stimulus than the original invention of the car itself. To quote Peter Thiel, a major venture capitalist “We wanted flying cars but instead we got 140 characters”.

Possibly we should not be worrying about the long and focus on ensuring that the world does not head into another major recession. As Keynes said “In the long run, we are all dead.”