What is wrong with our economy?

Many people will have different answers to this question and in a way, there are many answers, but for me there is one answer in particular that screams out the loudest, maximising short-term  profits. 

Since looking at this in our current A2 syllabus I have come to believe that those who are not prudent and forethought may be better off themselves but as Pareto's theory suggests, it is impossible to make any one individual better off without making at least one individual worse off. 

This is what is happening; Multinational corporations (MNC's) are obsessed with maximising their profits that long-term growth is something of the past. It is the employees of these companies that are suffering the most. Employees are people who devote their lives to creating money for customers, shareholders, and colleagues. Therefore, in return, at least in theory, they share in the rewards of the value created by their team. 

However in reality, it is far from this. Employees aren't regarded as people of a team anymore. Businesses nowadays see their employees as "costs" due to the ever increasing obsession towards maximising short term profits.  For the greatest profits costs are to be kept at a minimum. In order to do this, reducing costs as much as possible is something that has to take place (expect the "costs" of salaries to senior management and shareholders). 

The problems with this increasing short-term profit maximising is what it leaves us for the future? If these MNC's -of which some could be referred to as monopolies- are more focused on creating abnormal profits which pays for the luxury lives of those that run them then how are the firms to develop? Abnormal profit is supposed to create money towards R&D (Research and Development), so without this firms cannot progress. In the long-run this is likely to cause competition that would diminish these abnormal profits being earned but this will take time to happen. 

More so, cutting "costs" to create this short-term profit is having a huge affect on the working class population. For those lucky enough to be kept in labour, their wages are still reduced to keep costs at a minimum. This is effectively removing their purchasing power, coincidentally stunting the growth of these same corporations making the choices. 

If consumer expenditure is being reduced then businesses can't grow. Right now, firms aren't concerned about the growth of their companies but more so maximising their short-term profits. In the overall aspect of an economy, aggregate supply is likely to decrease due to the fall in labour force, thus resulting in an overall decrease in economic growth and the development of these companies in the future. 

Rising Energy Prices in the UK

Rising energy bills have been a major political focus in the last few months, as the Labour and Conservative parties look to offer differentiating policies to reduce the increase in energy bills for households as each of the "big six" energy firms (British Gas, SSE, Scottish Power, E.On and EDF) announce significant price increases. 

The domination of the big six firms in this market means that energy can be considered to be an oligopoly market structure. This is a market dominated by a few large firms where the firms are interdependent (the actions by one firm will produce counter-action by others). 

The price rises within the energy market in the UK could potentially be considered a form of collusion. The first announced price rise was by SSE, who on October 10th announced an 8.2% increase in domestic bills from 15th November. The other 5 firms were soon to follow, with E.On being the last of the big 6, announcing on 6th December that a 3.7% price rise was set to take place. This could be considered a tacit collusion, where although there is no formal agreement between the firms, the firms are observing each other's behaviour and refraining competing on price by following price increases. 

It may be arguable as to whether the major energy suppliers' profits are excessive or whether the price rises are justified. Energy companies claim that prices are rising as a result of a rise in the international price of energy. They also claim that their profits are around 5%, which is much lower than that of major supermarkets.

Regardless as to whether price rises can be justified, the proposed response by the government and opposing political parties is likely to be  a major influence on the 2015 election if energy prices continue to rise as households' discretionary incomes fall and consumers demand a solution for falling standards of living. 

The Proposed Solutions

1.Domestic Fuel Cap

Ed Miliband has promised to freeze the price of gas and electricity bills for 20 months if Labour win the 2015 election. He also promised the restructuring of firms by forcing the big companies to split power generation from their retail businesses (which he believes would encourage greater competition) and to replace Ofgem, the existing regulator, with a more powerful body that would force firms to pass savings in the market on to customers.

However, major energy companies, as well as the Conservatives and Liberal Democrats argue that this is unrealistic because of the varying and unpredictable international costs of gas and other fuels. In addition, reduced profits for the big 6 firms would be likely to lead to a lack of investment in technological improvements. Any reduction in profits could also lead to a reduction in investment in firms as a result of shareholders receiving less dividends. This could increase the cost of fuel production in the future. 

2.Reduction of Green Levies

David Cameron has proposed the reform of the Energy Companies Obligation (ECO), which provides subsidised insulation to households in areas of low income. The ECO scheme costs firms £1.3bn a year and adds about £50 to every household bill. A reform in the ECO would involve reducing its key energy efficiency targets by 30% and extending the ECO by an additional 2 years to March 2017. 

Diluting the target, however, means that the government will be doing much less to reduce carbon emissions, a backward step in progression towards a more environmentally sustainable energy supply. Furthermore, building groups argue that this would severely damage the green energy industry and means there will be much less free insulation for fuel poor households.

Is the penny worth it?

In the UK, there are 11.3 billion 1p coins in circulation, together worth £113 million. This accounts for nearly 40% of all coins in the system. In the US, an estimated 150 billion 1 cent coins are being circulated, that if stacked on top of one another, would stretch 60% of the distance to the moon. 

In Canada however, the production of the one-cent coin was stopped earlier this year as it was determined by the government that the costs of its production were not worthwhile. According to the Royal Canadian Mint, the producers of the coin, each one-cent coin was costing 1.6 cents to produce. This meant every penny minted represented a loss for tax payers and resulted in a net loss of C$11m (£6.9m) a year for the Canadian government. This, as well as the hoarding of pennies and handling costs placed on retailers were enough to convince Canada that pennies just aren't worth it. Since February, change in retail has been rounded up or down to the nearest five cents. 

Canada are not the first country to have done this and are following in the footsteps of countries including Australia, Sweden, Brazil and New Zealand (who's also scrapped two and five cent coins). There are also many sceptics of the one cent coin in the US (which costs 2.4 cents to produce), and in Russia the central bank is pushing for the 1 kopek piece to be removed. 

In the UK, for many people the British penny seems like a beloved piece of history, as our older generation reminisce on childhood trips to the sweet shop to spend their pennies and half pennies. Half pennies were scrapped in the UK in 1984 to account for inflation. With the majority of transactions in sweet shops now priced by weight, and single items costing 2-3p, is it only a matter of time before pennies disappear too? 

The reality is that the purchasing power of pennies has been eroding rapidly and they are now nearing worthlessness. A 1p coin is now worth less than one-twelfth of its original value in 1971. Spending 1p in 1971 would be the same as spending 12p today. It seems the penny's existence is running a losing race against inflation.

It's not just the depreciating value that's turning people against the penny, for many people, pennies are simply irritating, weighing down their pockets and cluttering their purses. Research suggests that one-quarter of Britons would happily get rid of copper coins, while a similar proportion admit to hoarding them in jars and various scatterings around the house. Another poll found that up to one in five British adults aged 18-24 throw small 1ps and 2ps in the bin because they think it’s a nuisance. Consumers aren't alone in considering the pennies literal value to be less than their handling value, as many retailers feel the time and money spent handling and counting small change just isn't worth it.  

Despite this, unlike other countries, the cost of production of the penny in the UK is less than its face value, at under 0.3p to produce each penny. This is as a result as the penny being changed to be produced from steel, with a copper plating rather than purely from copper. This differs from the US, where one cent is produced from zinc, a more expensive metal. In the UK, the existence of the penny therefore doesn't seem to be damaging the economy, but it's disappearance could have some negative effects. Arguably the largest argument against the scrapping of the penny is the millions of pounds raised by charity through the collection of pennies and small change. Moreover, for those who do hoard pennies at home, when they are eventually cashed in a large enough stash of near worthless pennies will accumulate to a total that is certainly worthwhile. If the penny was scrapped, the cost of a good that was previously £9.99 would inevitably be rounded up to £10. Firms, in retail in particular, would face the "menu costs" associated with changing information on price tags and online. 

It therefore seems that as things stand, the removal of the penny from circulation is not worthwhile, despite the actual value of the penny growing exceedingly closer to worthlessness. The removal of the single cent in the US, however, seems much more feasible as a result of its higher production costs. Some people argue that we are more likely to see the end of coinage in general than the end of the penny alone as digital transactions are becoming increasingly popular. Currently, tangible money is still popular enough with the majority of transactions below £10 using cash. The increasing use of digital transactions, whether it be online or via credit or debit cards seems more likely to be the bigger threat of the UK's current spending normalities.

The Lipstick Effect

When studying A level Economics, you learn the difference between a luxury good and an inferior good. A luxury (normal) good is a good for which an increase in income leads to an increase in demand. The good is not necessary for living, but is deemed as highly desired within a society. An inferior good is a good for which an increase in income levels leads to fall in demand.

The lipstick effect is the theory that during periods of recession or economic downturn, consumers will be more willing to buy less costly luxury goods over more expensive luxury goods. For example, rather than splashing out on a new fur coat, women are more likely to seek material solace in small indulgences such as lipstick. L'Oréal saw its UK sales grow 5.3% in 2008, the heart of the most recent recession. People still buy luxury goods during economic hardships, but they are more likely to choose goods that will have less of an impact on their discretionary incomes. 

It explains why it is often the case that restaurants and entertainment industries do well during a recession. Consumers that want to treat themselves during a time of financial difficulty settle for a relatively cheap night out, for example through a cinema trip or meal out, over a more expensive experience such as a holiday.

In May of this year, "China Daily" reported that the lipstick effect had hit China as the Chinese economy began to slow. China's GDP rose 7.8% in 2012, the first time that the country's growth rate was below 8% since 1999.As the industrial and manufacturing sectors declined last year, fashion brands soared. The retail value of the beauty and personal care sector grew from 184.1 billion yuan in 2011 to 202.1 billion yuan in 2012. Again, L'Oréal saw its market share grow from 10.8% in 2011 to 11.2% in 2012. 

Is UK Economy on the Road to Recovery?

The past week has seemed to have brought with it vastly optimistic news for the UK regarding progress within the economy. This suggests that the country is finally recovering from a prolonged slump in the economic cycle, after being faced with a double-dip recession.

A macroeconomic objective that is currently being met within the UK is price stability. The UK is currently within it's target of a 2% rate of inflation, plus or minus 1%. Households can celebrate a fall of inflation, from 2.7% in September to 2.2% in October. This is a measure of the consumer price index (CPI- a measure of changes in price of a representative basket of consumer goods and services).

It was forecast for the inflation rate to be at 2.5%, but fell below this. The largest spur in this decline in the rate of inflation was the fall of transport costs by 1.5% between September and October, which occurred as a result of falling fuel prices. There has also been a fall in the rate of inflation in both education and food costs. However, the relief felt by households is likely to be short lived, as price rises by energy firms have yet to take affect on inflation rates.

Another key economic indicator is the level of unemployment.The unemployment rate of the UK has fallen by 0.2% to 7.6%, the lowest rate in over three years. This brings the rate closer to the 7%, which is the level at which the Bank of England has said it will not consider raising interest rates from 0.5% until the employment rate falls below this 7%. Reaching this rate does not guarantee an automatic change of interest rates. As interest rates are used to control inflation, there is currently no obvious pressure for an interest rate rise.

The governor of the Bank of England, Mark Carney says that the UK recovery has "taken hold" and that unemployment will fall sooner than it had forecast. Annual economic growth is expected to be 2.8%, rather than the 2.5% that was predicted in August. Could it be that after the high levels of economic hardship that have been felt in the UK since the financial crisis of 2008, that finally the country has pulled itself together and is on the road to recovery? It is progress over the next few months that is likely to determine whether or not things are being to look up for firms and households of the UK. 

Will Greece Ever Recover?

There is no exact answer to the direct cause of the EU crisis as many different factors have had an effect. Debts throughout European countries have been growing over the last decade as interest rates remained low and spending increased. Greece however, are a different story. Joining the EU required countries to keep “sound fiscal policies, with debt limited to 60% of GDP and annual deficits no greater than 3% of GDP”. Countries such as Italy, Germany and France were of the first to break the 3% rule. Spain, although now seen as a major concern within the Euro, remained within the guidelines issued up until 2007.

Greece in this case did not ever meet the criteria of the Maastricht Treaty and in fact falsified their data (Statistics of their budget deficit were changed to meet the demand of the fiscal policy) in order to receive entry into the Euro. Once a member, they continued to manipulate their data until it was revealed in late 2009, government debt had reached 300bn euros (129% of GDP). In 2002 the euro replaced all existing currencies of the countries who had joined. Being part of the euro made it easier for them to borrow money and had allowed them to go on a debt-funded spending spree, despite already misrepresenting their current account balance. High-profile projects such as the 2004 Athens Olympics went well over budget, causing public debt and deficits worse than ever before.

Things have gone from bad to worse. Greece’s GDP growth is nonexistent. Hardship has become a serious problem with reports that a fifth of their nation are living below the poverty line. Corruption within their economy has also become endemic. Tax avoidance and evasion is more common and public spending -with an increase in civil servants despite their- grew out of control. Between 2002 and 2008 private debt rose by nearly 100%. Joining the Euro gave them the access to cheap money with very little interest. The increase in their wages fuelled a strong consumer-led growth over the seven year period as the graph shows wages nearly increased by three times the amount they were at in 2000. Because of this, the people of Greece used their savings to purchase normal goods which in hindsight is seen as an impetuous decision.  "A couple of years ago, there were more Porsche Cayennes circulating in Greece than individuals who declared and paid taxes on an annual income of more than 50,000 euros, a figure only slightly above the vehicle's list price". 

The European Crisis is an ongoing debate with many different political, economic and social points of view. Skeptics argue that leaving the Euro would be Greeces best solution while many suggest remaining part of the currency is their only chance of recovering from such states of depression. Would following guidelines similar to Latvia’s severe austerity programme help Greece recover from the state they find themselves in now, or are things too late?

Behavioural Economics (and digital marketing)

In my previous post, titled "Auditing firms are branching out", I mentioned investment that is taking place into digital marketing firms. Today I am exploring the application of digital marketing to a relatively new field of economic theory- behavioural economics.

Behavioural economics is a method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making. A standard economic theory assumes that consumers make rational, informed decisions that reflect their own self-interest. Assuming this, market forces will result in the best producers (in terms of service and quality) to be the most successful. Behavioural economics does not make this assumption. Instead, the theory aims to develop models that account for the irrationality that occurs within economic decision making. This includes varying habits, instincts and interpretations, as well as the subjectivity of decisions to psychological biases. Behavioural economics is used in an attempt to better understand decisions made and biases exhibited by consumers.

Four concepts of behavioural economics can be particularly applied to digital marketing:

1. The Mere-Exposure Effect: this a mental bias where people tend to develop a preference to things merely because they are familiar with them. This is seen in ecommerce, where familiarity in the store layout and the online purchasing process means people tend to prefer to use online stores that they've used before. The mere-exposure effect can be exploited in ecommerce by encouraging customers to return through email marketing and social media.

2.Habituation and Defaults: Consumers generally prefer to sticking to processes they know over adopting new ones. For example, it is a greater cognitive effort to learn how to use and purchase from an unfamiliar website. Because of this, simple navigation and processes are necessary to limit cognitive obstacles to new customers. It is also useful to prevent any sense of risk with purchasing online, which is often done through safe checkouts and the use of well-known payments methods such as PayPal, used on a vast amount of ecommerce websites.

3. Customer Loyalty: If a consumer has had a positive experience purchasing through a particular online website, they are more likely to purchase from the website again. Special deals, and loyalty rewards are often used in ecommerce in order to develop long-term relationships with consumers.

4. Social Proof and Contagion: It is common for people to follow the trends of behaviours and actions shown by others. Consumers will gain more trust in websites with higher customer reviews and satisfaction by previous customers. This can convince new customers to a business is trustworthy, and may sway their purchasing decisions from a firm with worse or less reviews.

Latvia's Story

After becoming independent from the Soviet Union in 1991, Latvia joined the European Union in 2004. Their economy in the middle of 2007 was of the fastest growing in Europe with GDP growing by 10%. After the crisis struck in 2008, Latvia took one of the greatest economic downfalls in world. The last quarter figures of GDP in 2008 showed a contraction of 10.5% in comparison to the figures from 2006. Through both 2008 and 2009 Latvia was regarded as one of the worst countries in Europe economically. 

Unemployment rose to 19.7% in 2009 and economic output fell by almost a quarter. The real-estate (consisting of buying, selling, or renting land, buildings or housing) bubble burst was one of the main causes of the Latvian economic crisis. Prices plummeted by up to a half in certain areas of the country.  

Since the crash and economic collapse Latvia have received bailout, an act of giving financial assistance to a failing business or economy to save it from collapse. For the first year of recovery, Greece -who will be discussed in tomorrow's blog- in fact were in a better state than Latvia. Austerity measures were introduced, the Latvian protests against it were never sizable in numbers. Even the national radical forces themselves couldn’t stage big enough protests. There was only one anti-governmental riot which took place on 13th January 2009. However, Latvia’s short term loss has lead to a long term benefit and what IMF quote as an “Incredibly impressive achievements”. They are now considered as one of the fastest growing economies with one of the highest GDP growth rates out all of European countries. 

After completing all Maastricht objectives in order to join the Euro they are set to become the 18th member on 1st January 2014 by giving up their currency, the Lat. Although Latvia have achieved such a success with their tough austerity measures, is joining the Euro really going to be an advantage to them? They already have the benefits of a single market through being part of EU so with what's happening in the Euro at this current time would it not be best to stick with the Lat? Only time shall tell. 

Auditing firms are branching out

As the big four auditing firms in the UK continue to grow, Deloitte and KPMG have begun expansion into technology, social media and data provision.

Deloitte founded a independent division of the firm- Deloitte Digital in 2012. After its acquisition of Ubermind Inc. (an innovative mobile agency) last year, Deloitte Digital is now buying the social media firm Banyan Branch who provides digital marketing solutions through services such as social analytics and insights, and community management. This acquisition is a part of Deloitte's strategy to add "a full suite of digital marketing services" to its current business and technology services.

KPMG is now also diversifying into data and analytics. Today, the firms first investment fund (of $100 million) was launched. The fund, formed by KPMG capital will invest primarily in firms through strategic acquisitions and technology partnerships. Investment is set to take place in multiple areas of business, such as enhancing business flexibility, regulation and compliance, improving workforce productivity and customer and revenue growth. It will also sponsor other news firms in growth sectors including energy and telecommunications.

As the diversity of these firms are widened, could it only be a matter of time before other large firms, such as the remaining members of the big four, PwC and Ernest & Young, follow Deloitte and KPMG into a new era of substantial social media and data provision investment?

The future doesn't look so bright for Twitter. #sad

A couple of days ago Twitter released its shares on the NYSE. Initially their prices rocketed to way above what had been expected, with shares climbing to a pinnacle of $50.09 during the first day of trading. From the rapid increase in value on the first day of the stock market (79% of IPO), shares dropped by 7.24% during the second to a value of $41.69.  It will be interesting to see what happens today and throughout the rest of the week as to whether prices continue to decrease. 

Since the creation of Twitter in 2006, the micro-blogging platform has yet to make profit. Twitter posted they had made a loss of $134 million in the first 9 months of this year, in comparison to Facebook which had profits of over $1 billion before taking to the NASDAQ stock market. 

Twitters future isn't looking as bright as some may expect. The strict constraint of the 140 character limit and the fact it is used as a means of promotion, whether that be through self-advertisement or unattractive promotional links has put users off, like myself. For exhibitionists it is a perfect way to reflect their lives and address the public but realistically, it is nothing more than a marketing platform. Facebook still prioritizes over links with close friends and the increasing number of mobile phone apps, such as WhatsApp and the newly introduced BBM messenger (now available on the App Store?) has given Twitter the backseat. 

The total monthly active users on Twitter sums to 20% of Facebook's.  The company also claim that more than 75% of their activity is users accessing their accounts through mobile phones. Despite the popularity, Facebook still receives over four times the amount through mobile use compared to Twitter.  The most followed celebrity, Katy Perry is also no match for the 80 million likes Rihanna has received on Facebook.  

Considering all this, it will be hard for Twitter to begin making money. I suspect, if they are to start making a profit it won't be for another few years. Its best chance to help boost growth is by using the $2 billion available to them and make some strategic acquisitions, preferably through companies that already know how to make money.

Reforms Within the UK Audit Market

In the UK, the auditing market is largely dominated by the "big four" firms- EY, KPMG, PricewaterhouseCoopers and Deloitte, which audit 90% of the UK's largest stock market-listed companies. After being criticised during the financial crisis for not doing enough to warn companies and then a two year inspection of the market by the Competition Commission, reforms have been published that will allow for greater competition within the auditing market. 

On the 15th October, the Competition Commission published it's final report on its statutory audit services market investigation which ruled that major UK-listed companies must allow accountancy firms to bid for (tender) their audit work every ten years. The CC had at first planned to allow auditors to compete every five years for FTSE-350 companies (the largest 350 companies by capitalisation, which have their primary listing on the London Stock Exchange), but the head of the Commission's investigation stated that after listening carefully to both shareholders and the Financial Reporting Council (the regulators of the audit industry), ten years seemed the appropriate backstop period.

The CC recommends, however, that companies go out to tender every 5 years and if companies choose not to this frequently, the Audit Committee will be required to report which financial year it plans to put the audit engagement out to tender and why this date is in the best interest of shareholders. The Financial Reporting Council's Audit Quality Review team will review every audit engagements in the FTSE 350 every five years (on average).

The aim of this reform was to open the door to other auditors, giving them a better chance to regularly compete for business. The impact this reform has on the auditing market on the UK may not be seen for several years, but it is the beginning of further potential changes within the market, as the EU proposes the mandatory switching of auditors and is also investigating the audit industry. 

Understanding the Competition Commission

The Competition Commission is a body I'd come across in studying Economics and on the news on numerous occasions before now, but had never been informed of its purpose within the economy. After recent news of the Competition Commission's audit market reforms, I thought it necessary to research the CC's roles.

The Competition Commission (CC) is an independent public body with an aim of ensuring healthy competition between companies in the UK for the ultimate benefit of consumers and the economy. In order to do so, it conducts investigations of great depths into mergers and markets. 

A merger is the combining of two firms on roughly equal terms into one new legal entity. If the merged entities were competitors, the merger is called horizontal integration, if they were supplier or customer of one another, it is called vertical integration. They are referred by the Office of Fair Trading (OFT) to investigate whether there is a realistic prospect that a merger will lead to a substantial lessening of competition. If such a prospect exists, the merger will be referred to the CC (unless the merging party addresses the concerns of the market is sufficient of importance). Once referred to the CC, the Commission can address the concerns by exercising their powers, for example through requiring a company to sell off part of its business or by preventing a merger from going ahead. 

A market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The buyers must have something they can offer in exchange for there to be a potential transaction. The OFT investigate markets for competition problems and if there is a concern that these exist, the market is referred to the CC for in-depth investigation to decide if any feature of the market prevents competition. If features of market harming are found, the CC either introduces remedies (undertakings) itself or recommends actions by others. 

The CC also has functions regarding the major regulated industries, for example the supply of gas, electricity, water, sewerage, rail, air traffic services, airport services, postal services, electronic communications and public health care. Other authorities may refer regulatory matters to the CC, such as disputes concerning proposed price controls.

Happiness is the best measure of development.

Most people strive for economic wealth in an attempt to pursue happiness. Those who manage to succeed tend to live a comfortable life. However, for the majority of us, we always seek to achieve more. This makes us upset, miserable and unhappy. In the ruthless hunt for money huge parts of the environment are destroyed. The negative externalities that evolve from this are far greater than what some may realise. This is where the concept of GNH (Gross National Happiness) came about. The ideology behind it is that, every human being aspires for happiness, therefore countries should be measured in terms of citizen happiness. 

GNH is based around nine main indicators which are broken down into categories of further detail. These indicators include: Living standards, Psychological Well-being  Ecological Diversity and Resilience  Community Vitality, Good Governance, Cultural Diversity and Resilience, Education, Time Use and Health. Research into "What makes people happy?" evidently showed being around people with similar interests and through supporting local traditions and cultural heritage led to both a stronger community feeling and increase in positive energy. 

GDP (Gross Domestic Product) can be defined as:

"The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory."

For most data comparisons this measurement is used. The benefits are that it can assess all aspects of the economy, such as investment and government expenditure, while other methods don't. Also, if Real GDP is used then inflation rates are not accounted for and true values of growth can be measured. This is all well and good for finding out how productive an economy is, but, what it doesn't determine is the happiness of an economy. 

This leads me on to ask the question, are these so-called developed countries as advanced as they seem? Or, are such renowned measures equivocating in order to hide the truth behind a melancholy nation? 

Extended Project Qualification- the HIPC Initiative

As well as my three A-level subjects, I am completing the Extended Project Qualification (EPQ) which, in terms of UCAS points, is roughly equal to an AS Level. I decided to complete this project in order to better my university application, but also as it was one of my first opportunities to study a subject of my choice in depth. I chose to focus my project on the effectiveness of debt relief and in particular for Zambia. The title of my project is "Is the HIPC Initiative a Successful Method of Economic Reform? The Case of Zambia". The project will involve writing a dissertation which attempts to answer my research question. I will also have to complete an activities log and present my project once completed, all of which will be assessed. 

In order to complete the dissertation, I have had to complete large amounts of research as before I began the project I knew next to nothing about both the Zambian economy and the HIPC initiative. When starting my research, I found it challenging to find a source of information on the initiative and how it works, as most sources were either too vague or unreliable. After much more further research, I feel I was successfully able to compose a summary of the process. 

The World Bank provides debt relief to the poorest nations through the Heavily Indebted Poor Countries (HIPC) Initiative which was launched in 1996 by the World Bank’s International Development Association (IDA) and the International Monetary Fund (IMF). Its formation occurred as a result of the unsustainable debt burdens carried by many low income countries, which was sparked by a mass increase in global oil prices that began in 1973.

The initiative calls for the voluntary provision of debt relief by all creditors, and it aims to provide a fresh start to countries with a foreign debt that places too great of a burden on export earnings or fiscal revenues. It aims to reduce the constraint on economic growth and poverty reduction that had previously been imposed by debt build-up in these countries.  

The first stage of qualification for debt relief through the HIPC Initiative is the decision point. At this point, the country must have a current record of satisfactory performance in IDA and IMF supported programmes, a Poverty Reduction Strategy in place and debt burden indicators that are above thresholds set by the HIPC Initiative. Creditors, including the World Bank and the IMF begin to provide debt relief at the decision point of relief, however many of the creditors maintain the right to revoke relief thus far in the process. The provision of the debt relief, as well as further relief depends on implementing policies within the relieved country in order to ensure that money that would have otherwise been spent on debt payments is then redirected to poverty alleviation efforts. 

Debt relief then becomes irreversible at the completion point. The country agrees on measurable objectives that will trigger entry to the completion point, some of which will relate to progress in social sectors such as education and healthcare and others which relate to improving governance or fighting corruption. This is done to ensure that the assistance of debt relief will be beneficial. Once a country has successfully passed the completion point, it will graduate from the Initiative.

As of April 2013, 35 of the 39 countries eligible for the HIPC Initiative had reached the completion point. If all 39 eligible countries reach completion point the total debt relief provided by the World Bank and participating creditors is estimated to be US$38.9 billion and $112.8 billion respectively.

Is Germany's future bright?

With the election taking place today, the odds are for another so called,"Great Coalition" between Merkels party (CDU) and Social Democrats (SPD), her main opponents. Both parties have very different views about Germany's future so will a change in parliament have an effect on their economic growth?

It was revealed last month that Germany had an increase in GDP for the second quarter of 2013 putting them as the world's fastest growing industrialised economy. This has came at the right time for Merkel and her campaign. Many voters have been uncertain with what she is more focused on, her country or the Eurozone. The statistics will help put people at ease along with demonstrating her party are not just concerned for what is happening elsewhere in Europe but also care for the growth of their country too. 

Despite this, lack of investment in infrastructure, education and development is a concerning issue that will need to be addressed. It's also apparent that there's an excessive reliance on their export market. A collapse or downfall in this would have catastrophic consequences which is something Germany cannot afford to happen. 

This leaves us with the question of, will a change in parliament help to abate these problems listed above and enhance growth, or, do very much the opposite? 

My verdict:

I feel that the German people have strong trust in Merkels campaign and what she has already achieved for the German economy so far as leader. If she can take care of the problems within the German economy, such a improving education (an example of a supply-side policy) this will benefit the future of their workforce and increase the number of skilled workers. At this point in time, Germany have not one university in the worlds top 50. 

However, with a new "grand" coalition looking to be the likely result of the vote, it could cause potential threat to Merkels plans for the future of not just Germany, but Europe. Merkel and Steinbrueck  (Leader of Social Democrats) have worked together, with him being Merkels finance minister during 2005-09. Could this bond from four years ago be re-sparked? Is a bright future for Germany to follow? I guess time shall tell. 

The Cobra Effect

Throughout completing my Economics A-level, there are four topics that I study. These are: Markets in Action, The National and International Economy, Transport Economics and The Global Economy. Although generally, the syllabus covers a very broad range of economic concepts and theories, there are many that without extra reading, I otherwise would never have heard of. An example of this is the Cobra Effect, which I was not aware of before listening to this Freakonomics podcast: http://freakonomics.com/2012/10/11/the-cobra-effect-a-new-freakonomics-radio-podcast/

The cobra effect occurs when an attempted solution to a problem actually makes the problem worse, therefore creating unintended consequences.

This concept was named after a failed initiative in colonial India. The government were concern about the number of venomous cobras in the Delhi and so offered a bounty (reward) for every dead cobra. However, people soon began to breed cobras in order to later receive the money. When the government became aware of this they scrapped the initiative which led the cobra breeders to release all of their cobras that were now worthless. As a result, the cobra population was actually increased. 

An example of the Cobra Effect occurring is mentioned in the Freakonomics podcast. In Mexico City, a policy was implemented in order to attempt to reduce the pollution caused by the large number of cars being driven in the city. The system meant that cars could only drive on certain days, depending on its number plate. For example on Monday, no cars were allowed to be driven with number plates ending with 1-4. The unintended consequence of this policy was that people who needed to drive every day bought a second car in order to be able to do so. Second cars being brought were often older, and less clean than newer cars. As a result, pollution in the city was increased rather than reduced.  

Why cosmetic brands always win

I was walking home the other day listening to a song by passenger with the lyrics "Ain't it funny how the kids walk by they’ll do anything to make themselves look older. While the women spend their money on anything that makes them look young".

When I arrived home I did a little research on the topic and there were hundreds of articles and posts about the subject, this one in particular was very interesting: http://www.mint.com/blog/consumer-iq/splurge-vs-save-which-beauty-products-are-worth-the-extra-cost-0413/?display=wide

The beauty industry itself is worth nearly 400 billion US$ with 85% of it being female consumer based. But it's not just the amount that's spent it's how inelastic certain products are. Because quality is a key factor to these products, cheaper versions aren't necessarily more appealing (pardon the pun). Therefore, if the industry were to raise their product prices it isn't likely to affect the consumption of their goods. In terms of consumer surplus, it will still remain high even if prices rise. 

For the older generations anti-ageing products is a big market. Such products as anti-wrinkle creams and serums to nourishing hand lotion are expensive. Some top brands charge well over £100 for a 30ml tub of cream which shows how good advertisement really is and how any sort of biased statistic or well memorised phrase from a good-looking celebrity in a photo-shopped television advert can grasp a woman's mind (and money).

The Unconventional Use of Economic Theory

I have recently read the book “Freakonomics” written by Steven Levitt and Stephen J. Dubner.  This book showed me for the first time an unconventional use of economic theory, much differing from that I was used to from following the syllabus of my AS levels. The book successfully makes economics interesting to non-economists and explores topics such as the role legalised abortion has played in reducing crime and the economics of drug dealing, such as the surprisingly low earnings of crack cocaine dealers. Such diverse, controversial and somewhat bizarre studies and comparisons have broadened my initial idea of what economics as a subject contributes to society.

Since reading the book a few months ago, I have become increasingly interested in studies and theories similar to that of Steven Levitt.  One article I have found that differs from that of “traditional economists” is called Why Do Tall People Make More Money? and is written by Steven E. Landsburg, an unconventional economist much similar to Levitt.  This particular article focuses on the relationship that exists between a person’s height and salary, and Landsburg attempts to provide an explanation for the peculiar relationship and via the work of three economists from the University of Pennsylvania.  

“So, what's the deal? Why do the tall tower over the short in more than just physical stature? Does height breed respect, so that tall people get showered with riches? Or does height breed self-esteem, so that tall people are more likely to assert themselves? In other words, do tall people succeed because of how others see them, or do tall people succeed because of how they see themselves? “

The work of the students seemed to suggest that it is self-esteem in adolescence, in this case caused by being a tall adolescent, that led to such people to be more likely to grow up as high paid workers. The logic behind this seems to make sense; tall teenagers think of themselves as leaders amongst their peers and resultantly end up with a leader position in later employment. However as with many economic theories, this is difficult to prove.  Persico, Postlewaite, and Silverman, the three economists from the University of Pennsylvania that are mentioned in the article seem to come as close as possible to achieving this without the use of a drastic and very long-winded experiment.

Does having a motor vehicle affect your academic performance?

Does having a motor vehicle affect your academic performance? 

Having done some research on this topic I've found a lot of information stating that there is a logical belief that good grades relates to driving privileges. However, if I'm to be controversial, I feel that owning a car or moped potentially is not advantageous for achieving high grades. People I know who had been driving since last year and through year 12 didn't obtain the grades they were predicted or had wanted to attain. 

I myself have been wanting a car ever since passing my test in March but due to the financial side of things its been out of the question. Running costs, maintenance and of course insurance are all drawbacks. Those lucky enough to have a car will need some sort of way to fund these elements of owning a vehicle. The majority wouldn't have parents willing to pay for everything so a job would be needed. Having a job will then take up at least one day of your weekend and possibly a weeknight that could mean work doesn't get finished on time or to the best standard possible. 

The benefits of having a car are numerous. Getting to college/school becomes easier and less stressful and gives you the freedom that you don't necessarily have when relying on your parents or public transport. 

Does this freedom actually entail long-term drawbacks? Is the independence of having your own car really that beneficial if it compromises your chances of future success? 

Exam Results

Fall in high achievers, increase in Economics Students

After reading some articles on this years A2 results and noticing economics increased it's take up of the subject since 2007 by 50% has made me realise a lot more people of my generation have an interest in the subject far more than they used to despite the current crisis of the EU and the recession that hit us in 2007. I feel this increase has made university places for the subject a lot more challenging than ever before as well as the increase of required grades from many universities. I look forward to myself in this position next year and to see what will be the final outcome of my overall A level results.

Getting started with my first post...

Why have I bothered to do this?

Today I'd received my AS results and have realised I would actually really like to study Economics at University. With this decision I've decided to start a weekly blog on Economics and applying things I learn throughout the year in all my a levels I take to create posts which are hopefully interesting and enjoyable to read. Not sure how I'm to get started on this but I'll see how it all goes.