a) Channelling savings towards investment
Showing posts with label Reading ahead!. Show all posts
Showing posts with label Reading ahead!. Show all posts
2.6.2. Policy Instruments
The nature and impact of the following on the economy,
firms and economic agents:
a) Fiscal policy:
o adjusting levels of government spending and
taxation to affect aggregate demand
b) Monetary policy:
o adjusting interest rates to affect aggregate demand
c) Supply-side policies:
o taxes, benefits, education and training, grants and
subsidies infrastructure
d) Exchange rate policy:
o floating rate
2.5.4. Employment and Unemployment
b) Measures of unemployment:
o the claimant count
o the International Labour Organisation (ILO) measure
c) The causes of unemployment:
o structural unemployment
o occupational immobility
o geographical immobility
o technological unemployment
o demand deficiency and cyclical unemployment
d) The impact of unemployment on firms and individuals
2.5.3. Inflation
a) Inflation, deflation and disinflation
b) Interpret price indices (RPI and CPI) and the rate ofinflation
c) Real and nominal values, constant and current prices
d) Causes of inflation: o demand pullo cost push
e) The impact of inflation on firms: o uncertainty o loss of international competitiveness
f) The impact of inflation on individuals: o loss of real income o savers and borrowers
b) Interpret price indices (RPI and CPI) and the rate ofinflation
c) Real and nominal values, constant and current prices
d) Causes of inflation: o demand pullo cost push
e) The impact of inflation on firms: o uncertainty o loss of international competitiveness
f) The impact of inflation on individuals: o loss of real income o savers and borrowers
Double-check!
Just make sure the syllabus is fully known, you have defined key terms and you know exactly where you are and what is left to do...
2.5.2 Circular flow of income, expenditure and output
o changes in the cost of inputs and resources
o changes in productivity
2.4.3 International trade
2.4.3 International Trade
a) Specialisation and international trade
b) Trading blocs
c) Trade and growth
d) Imports and exports: visibles and invisibles
e) Impact of cheap imports on standards of living
a) Specialisation and international trade
b) Trading blocs
c) Trade and growth
d) Imports and exports: visibles and invisibles
e) Impact of cheap imports on standards of living
Mean and median incomes
| What is the mean? |
The mean is an average, one of several that summarise the typical value of a set of data. The mean is the grand total divided by the number of data points.
| What is the median? |
The median is the middle value in a sample sorted into ascending order. If the sample contains an even number of values, the median is defined as the mean of the middle two.
| Which is better? |
Is it better to use the mean or the median? This may sound like an obscure technical question, but it really can matter. The short answer is "it depends" - to know which you should use, you must know how your data is distributed. The mean is the one to use with symmetrically distributed data; otherwise, use the median. If you follow this rule, you will get a more accurate reflection of an 'average' value.
This question was at the heart of a UK news story in 2005, where the use of median or mean was at the bottom of substantial national confusion. The following paragraphs tell the story.
In early April 2005 there was considerable debate in the UK media about whether 'average' incomes had gone up or down. The Institute for Fiscal Studies produced a report in which they stated that the mean 'real household income' fell by 0.2% over 2003/04 against the previous year. This sounds very authoritative, but it is worth pausing to consider if the mean is really the most appropriate measure.
The mean is calculated by adding together all the values, and then dividing them by the number of values you have. As long as the data is symmetrically distributed (that is, if when you plot them on a frequency chart you get a nice symmetrical shape) this is fine - but the mean can still be thrown right out by a few extreme values, and if the data is not symmetrical (ie. skewed) it can be downright misleading.
It only takes a moment's thought to realise that more people earn low salaries than high ones, because a fairly large proportion of the population works part-time - so the data will not be symmetrically distributed. Therefore the mean is not the best 'average' to use in this case.
The median, on the other hand, really is the middle value. 50% of values are above it, and 50% below it. So when the data is not symmetrical, this is the form of 'average' that gives a better idea of any general tendency in the data. The same report from the IFS states that median real household incomes rose for the same period by 0.5%.
The slightly shocking thing is that where this was reported in the media, some commentators were glorying in this apparent reduction of average incomes as an opportunity to criticise the government. (Gordon Brown, who was the chancellor at the time, was very frustrated trying to explain that the median is the measure you use for things like income, because the distribution is skewed.)
Either the media commentators didn't know that it was wrong to use the mean in this case or they assumed that their audience wouldn't know, so they could gloss over it, present a more dramatic report and score some unwarranted political points. Neither state of affairs does them credit. To be fair to the media, the IFS report does include the sentence "This is the first time that incomes have fallen since the recession in the early 1990s." when perhaps it would have been more accurate if they had said "This is the first time that meanincomes have fallen..." After all, median income increased. However, despite this, even a brief reading of this section of the IFS report gives the true picture. It would have been nice if the next week's headlines had read 'Media mean median'.
We are all much more familiar with the mean - why? People like using the mean because it is a much easier thing to deal with than the median, mathematically, particularly in more complex situations: but as we have seen, it carries an assumption with it that the distribution is symmetrical. A great deal of data is symmetrical; the normal distribution is so named for this reason. But unfortunately because the mean is seen so frequently this distinction gets forgotten - in many people's minds the 'average' is the mean - and then the mean is wrongly used to summarise non-symmetrical populations.
So remember:
Always use the median when the distribution is skewed. You can use either the mean or the median when the population is symmetrical, because then they will give almost identical results.
Emerging markets - opportunity or threat?
1: Are Emerging Markets an Opportunity or a Threat?
The most obvious debate on this topic would be the potential benefits and problems involved with targeting emerging markets:
Opportunities
Strong Economic Growth
Rising consumer incomes and growing ‘middle-classes’
Opportunities for joint ventures with local businesses
Strong Economic Growth
Rising consumer incomes and growing ‘middle-classes’
Opportunities for joint ventures with local businesses
Threats
Culture/varying customer needs
Difficult to protect ideas from competition due to inadequate laws
Infrastructure could be poor, making distribution and marketing difficult
Students can build strong evaluative arguments, using examples of successes and failures in emerging markets and then considering the factors that success might depend upon. A good compare and contrast here would be Coca Cola (who recently announced their largest areas of sales growth to be India (+20%), China (+9%) and (+4%) from Brazil); against businesses like Kellogg’s who failed to attract enough sales in India due to cultural and lifestyle differences.
Culture/varying customer needs
Difficult to protect ideas from competition due to inadequate laws
Infrastructure could be poor, making distribution and marketing difficult
Students can build strong evaluative arguments, using examples of successes and failures in emerging markets and then considering the factors that success might depend upon. A good compare and contrast here would be Coca Cola (who recently announced their largest areas of sales growth to be India (+20%), China (+9%) and (+4%) from Brazil); against businesses like Kellogg’s who failed to attract enough sales in India due to cultural and lifestyle differences.
2: What makes emerging markets attractive? Push and Pull factors
Another interesting evaluation point could be to consider the motives behind a strategy of targeting emerging markets. These can be grouped under headings of ‘push’ and ‘pull’ factors:
Push Factors
Reasons for wanting to grow outside of domestic country:
• Restrictive and costly legislation
• Weak UK/US/EU economies
• High levels of competitive rivalry
• High wage costs and operating costs in UK/US/EU
• Restrictive and costly legislation
• Weak UK/US/EU economies
• High levels of competitive rivalry
• High wage costs and operating costs in UK/US/EU
Pull Factors
Factors that make emerging markets attractive:
• Strong economic growth
• Large and growing populations
• Growing middle classes
• Less competitive pressure
• Cheaper wages and operating costs
• Strong economic growth
• Large and growing populations
• Growing middle classes
• Less competitive pressure
• Cheaper wages and operating costs
Students here can evaluate the relative influence on businesses of the ‘push’ and ‘pull’ factors, and which of the factors are likely to be the most significant behind a strategy of targeting emerging markets. Nestle for example have recently announced that their sales in their main US and European markets have grown just 3.1% versus 13% growth in emerging markets.
3. Will the BRIC ‘Bubble’ Burst?
Students might also consider a number of recent reports suggesting that growth is slowing in emerging markets, which might mean the BRIC ‘goldmine’ could have limited appeal in the future. It was announced this month that China’s GDP had grown at a rate of 8.1% for the first quarter of 2012, which is the slowest pace of growth for almost three years. The Indian economy only grew by 6.9% in the financial year to 31 March 2012, also the slowest pace in three years. Students could here question if businesses are likely to be investing as much in these markets with such economic uncertainty, backed up by a recent news release on Tesco’s website:
“With the slowing economy in China, a combination of persistently high inflation and wage cost pressures are making the environment for mainstream retailers much more challenging. This background has led us to take a more cautious stance on the market, at least for the time being. We had already taken a more measured approach to substantial new capital commitments to freehold shopping centres and we have also decided to hold back on the pace of new hypermarket development this year – with plans to open 16 stores, instead of stepping up the pace of expansion as we had intended”
Emerging markets is a very topical area of the BUSS4 specification, and considering evaluation from a number of angles with a number of compare and contrast examples, should be useful for preparation for essays on this subject.
Characteristics of emerging markets
Definition: Emerging markets, also known as emerging economies or developing countries, are nations that are investing in more productive capacity. They are moving away from their traditional economies that have relied on agriculture and the export of raw materials. Leaders of developing countries want to create a better quality of life for their people. Therefore, they are rapidly industrializing and adopting a free market or mixed economy.
Emerging markets are important because they drive growth in the global economy. Furthermore, their financial systems have become more sophisticated thanks to the 1997 currency crisis.
5 Characteristics of Emerging Markets
Emerging markets have five agreed upon characteristics. First, they have a lower-than-average per capita income. The World Bank defines developing countries as those with either low or lower middle per capita income of less than $4,035. (See World Bank list)
Low income is the first important criteria because this provides an incentive for the second characteristic, rapid growth. To remain in power, and to help their people, leaders of emerging markets are willing to undertake the rapid change to a more industrialized economy. In 2015, the economic growth of most developed countries, such as the United States, Germany, the United Kingdom and Japan, was between less than 3 percent.
Growth in Egypt, Turkey, and the United Arab Emirates was 4 percent or more. China and India both saw their economies grow around 7 percent.
Rapid social change leads to the third characteristics, high volatility. That can come from three factors: natural disasters, external price shocks, and domestic policy instability.
Traditional economies that are traditionally reliant on agriculture are especially vulnerable to disasters such as earthquakes in Haiti, tsunamis in Thailand, or droughts in Sudan). But these disasters can lay the groundwork for additional commercial development as it did in Thailand.
Emerging markets are more susceptible to volatile currency swings, such as the dollar, and commodities, such as oil or food. That's because they don't have enough power to influence these movements. For example, when the U.S. subsidized corn ethanol production in 2008, it caused oil and food prices to skyrocket. That caused food riots in many emerging market countries.
When leaders of emerging markets undertake the changes needed for industrialization, many sectors of the population suffer, such as farmers who lose their land. Over time, this could lead to social unrest, rebellion and regime change. Investors could lose all if industries become nationalized, or the government defaults on its debt.
This growth requires a lot of investment capital.
But the capital markets are less mature in these countries than the developed markets. That's the fourth characteristic. They simply don't have a solid track record of foreign direct investment. It's often difficult to get information on companies listed on their stock markets. It may not be easy to sell debt, such as corporate bonds, on the secondary market. All these components raise the risk. That also means there's greater reward for investors willing to do the ground-level research. (Source: "The Difference Between Developed, Emerging and Frontier Markets, NASDAQ, May 11, 2012.)
If successful, the rapid growth can also lead to the fifth characteristics, higher-than-average return for investors. That's because many of these countries focus on an export-driven strategy. They don't have the demand at home, so they produce lower-cost consumer goods and commodities for developed markets. The companies that fuel this growth will profit more, which translates into higher stock prices for investors. It also means a higher return on bonds, which cost more to cover the additional risk of emerging market companies. (Source: Ashoka Mody, "What Is an Emerging Market?" IMF Working Paper, September 2004,)
It is this quality that makes emerging markets attractive to investors. Not all emerging markets are set up to become breakout nations, and, therefore, good investments. They must also have little debt, a growing labor market, and a government that isn't corrupt.
Emerging Markets List
The MSCI Emerging Market Index lists 23 countries. They are Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Qatar, Peru, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey, and United Arab Emirates. This index tracks the market capitalization of every company listed on the countries' stock markets.
Other sources also list another eight countries. They are Argentina, Hong Kong, Jordan, Kuwait, Saudi Arabia, Singapore, and Vietnam. (Source: Tarun Khanna, "How Companies Break Into Emerging Markets," Harvard Business School, )
The main emerging market powerhouses are China and India. Together, these two countries are home to 40 percent of the world's labor force and population. Their combined economic output ($27.8 trillion) is greater than that of either the European Union ($19.18 trillion) or the United States ($18.0 trillion). Therefore, any discussion of emerging markets must keep in mind the powerful influence of these two super-giants. (Source: CIA World Factbook, 2015 statistics.)
Investing in Emerging Markets
There many ways to take advantage of the high growth rate and opportunities in emerging markets. The best is to pick an emerging market fund. Many funds either follow or try to outperform the MSCI Index. That saves you time, so you don't have to research foreign companies and economic policies. It reduces risk by diversifying your investments into a basket of emerging markets, instead of just one.
Not all emerging markets are equally good investments. Since the 2008 financial crisis, some countries took advantage of rising commodities prices to grow their economies. They didn't invest in infrastructure, but instead spent the extra revenue on subsidies and creating government jobs. As a result, their economies grew quickly, their people bought a lot of imported goods, and inflation soon became a problem. These countries included Brazil, Hungary, Malaysia, Russia, South Africa, Turkey, and Vietnam.
Since their residents didn't save, there wasn't a lot of local money for banks to lend to help businesses grow. Therefore, the governments attracted foreign direct investment by keeping interest rates low. Although this helped increase inflation, it was worth it in return for significant economic growth.
In 2013 commodity prices fell. These governments either had to cut back on subsidies, or increase their debt to foreigners. As the debt-to-GDP ratio increased, foreign investments decreased. In 2014, currency traders also began selling their holdings. As currency values fell, it created a panic, leading to mass sell-offs of currencies and investments.
Others invested revenue in infrastructure and education for their workforce. The people saved, so there was plenty of local currency to fund new businesses. When the crisis occurred in 2014, they were ready. These countries are China, Colombia, Czech Republic, Indonesia, Korea, Peru, Poland, Sri Lanka, South Korea, and Taiwan. For more, see Breakout Nations.
Human Development Index
The Human Development Index (HDI) is a composite statistic of life expectancy, education, and per capita income indicators, which are used to rank countries into four tiers of human development. A country scores higher HDI when the lifespan is higher, the education level is higher, the GDP per capita is higher, the fertility rate is lower, and the inflation rate is lower. The HDI was developed by the Pakistani economist Mahbub ul Haq working alongside Indian economist Amartya Sen, often framed in terms of whether people are able to "be" and "do" desirable things in their life, and was published by the United Nations Development Programme.
The 2010 Human Development Report introduced an Inequality-adjusted Human Development Index (IHDI). While the simple HDI remains useful, it stated that "the IHDI is the actual level of human development (accounting for inequality)," and "the HDI can be viewed as an index of 'potential' human development (or the maximum IHDI that could be achieved if there were no inequality)."
Does economic growth bring increased happiness?
Increasing the rates of economic growth has long been the holy grail of conventional economics and politics. To a large extent, most developed economies have been highly successful in increasing economic output. But, has such an impressive increase in national output actually improved people’s standard of living?
To decide whether economic growth has increased happiness is highly subjective, and it is difficult for economists to make concrete arguments. However, it is worth noting the various side effects of growth and consider there impact on general living standards.
Benefits of economic growth
1. Increased consumption
Consumers can benefit from consuming more goods and services. An assumption of economics is that consumption is related to utility, so in theory, with higher consumption levels, there is greater prosperity.
2. Improved public services
With increased tax revenues the government can spend more on important public services such as health and education. Improved health care can improve quality of life through treating diseases and increasing life expectancy. Increased educational standards can give the population a greater diversity of skills and literacy. This enables greater opportunity and freedom. Education is seen as an important determinant of welfare and happiness.
3. Reduced unemployment and poverty
Economic Growth helps to reduce unemployment by creating jobs. This is significant because unemployment is a major source of social problems such as crime and alienation. However, despite rapid increases in economic growth since the Second World War, areas of high unemployment in the EU remain. For example, in France and Spain there are currently high levels of structural unemployment. This kind of unemployment may not be reduced by economic growth.
Why economic growth may not bring increased happiness
1. Diminishing returns
If a section of the population is living in absolute poverty, economic growth enables people to have higher incomes and therefore they will be able to afford the basic necessities of life such as; food, and shelter. When economic growth can overcome this type of poverty there is a clear link with improved living standards. However, when incomes increase from say $35,000 a year to $36,000 the improvement in living standards is harder to justify. Diminishing marginal utility of income and wealth is a basic economic concept, which suggests the tenth unit of a good will give much less satisfaction than the first. If we already have 2 cars, does our living standards really improve if we now have the capacity to own 3 cars? Often as economic growth increases incomes, people increasingly save their money (higher marginal propensity to save) this is basically because they struggle to find anything meaningful to spend their money on.
2.Externalities of growth.
Economic Growth with involves increased output causes external side effects, such, as increased pollution. Global warming from pollution is becoming a real problem for society. The economic and social costs could potentially be greater than all the perceived benefits of recent economic growth. However, it is worth noting that economic growth doesn’t necessarily have to cause pollution. The benefits of growth could be used to develop better technologies that create less pollution. It is just at the moment this has been a low priority.
2. Economic growth can cause increased inequality.
It is perhaps a paradox that higher economic growth can cause an increase in relative poverty. This is because those who benefit from growth are often the highly educated and those who own wealth. In 1980s and 1990s higher growth in the UK and US has resulted in increased inequality. (1) However, it depends on how growth is managed; economic growth can be used to reduce inequality, for example the economic growth which occurred in the 50s and 60s helped reduce inequality.
3. Increase in crime and social problems
It is another paradox that as incomes increase and people are better off the level of crime has increased as well. (2) This suggests that crime is not motivated by poverty but perhaps envy. One reason why crime rates increase is that quite simply there are more things to steal. Back in the 1930s auto theft, mobile phone theft e.t.c were rare or non-existent. Economic Growth has created more goods to steal. However the link isn’t absolute for example in recent years crime rates in US have reduced from their peak. But there has been a general association between growth and crimes.
5. Higher economic growth has led to more hours worked
In the beginning of the industrial revolution, higher growth led to people working lower hours.(3) However, in the past couple of decades higher incomes have actually led to people working longer hours. It seems people are unable to enjoy their higher incomes. Feeling the necessity or preferring to work longer hours. This suggest people are valuing earning money more than leisure. However, this trend may also be due to companies wanting people to work longer hours.
6. Diseases of affluence
Economic Growth has enabled improved health care treatments, but at the same time there has been an unexpected rise in the number of diseases and illnesses related to increased prosperity.(4) One example is obesity. Modern lifestyles and modern diets have created an epidemic of obesity, with significant proportions of the population expressing a desire to lose weight. It could be argued that problems such as obesity and stress related illnesses are not a direct consequence of growth. This is true, but, it is symbolic of the fact increased prosperity has created as many new problems as it has solved
References
- Gary Burtless, Senior Fellow, Economic Studies Program “Has Income inequality really increased in US?” The Brookings Institution, January 11, 2007
- The United States Crime Index Rates Per 100,000 Inhabitants went from 1,887.2 in 1960 to 5,897.8 in 1991. By 1991 the crime rate was 313% the 1960 crime rate.
- A new study by the Organization for Economic Cooperation and Development (OECD) confirms that on average, people in the U.S. are putting in 20 per cent more hours of work than they did in 1970. See: Spark
- Obesity related illnesses rise with economic development Disease of Affluence
Conclusion
There are clearly some benefits of economic growth. These benefits are most visible when for low income countries. Economic growth enables the possibility to deal with many serious problems of poverty, homelessness and lack of basic amenities. However this paper is more interested in whether economic growth in developed economies is actually increasing living standards. Does rising incomes equal rising satisfaction? The answer is not clear-cut. However there are clearly several issues, which suggest that economic growth, has contributed to serious social, environmental and economic problems, which have reduced living standards. This is not to say economic growth is doomed to bring unhappiness. In fact the challenge is to harness the potential of economic growth to make sure it really does increase sustainable living standards.
Subscribe to:
Posts (Atom)