Whats that? WhatsApp. Is it worth the $19bn takeover?

The majority of phone users from my generation will have at least heard of this App. It's a "cross-platform mobile messaging app which allows you to exchange messages without having to pay for SMS." The advantages it has over iMessage or BBM (now available on iPhone and Android) is that WhatsApp Messenger is available for iPhone, BlackBerry, Android, Windows Phone and Nokia. In addition to basic messaging WhatsApp users can create groups, send each other unlimited images, video and audio media messages. It now has around 500 million users world wide and of which 70% use the service everyday. 

Before we go into the details as to why Facebook believed Whatsapp was worth the $19bn they paid, lets put in perspective how much that is. Three days ago  the worlds most wanted man was arrested in Mexico, Joaquin Guzman. He has been listed on Forbes 100 richest men in the world (ranked 41^st in 2009) and said to be worth $1bn. WhatsApp has now been sold for 19 times the value of him. When you're to think of it this way, considering the company had made only $20 million in sales last year, it's laughable. Is there a bigger picture? 

Mark Zuckerburg spoke on behalf of Facebook at a press conference in Barcelona yesterday and believes that WhatsApp is a "rare platform that has the potential to reach out to 1 billion mobile users". The real majesty of web dynamics and most obvious is the colossal global reach at nearly zero marginal costs. Whatsapp has around 50 employees. It has no marketing costs. No Washington lobbyists. No stores. No global campus. No sponsorship of the local symphony. With the introduction of voice calling becoming available in the next few months, at what is said to be free, potential add-ons to this feature are endless. Adaptations of the iPhone's FaceTime or extra emoticons at low prices will help create the revenue the company is needing and make the sum of $19bn seem a lot more reasonable. What most new users don't realise, like myself, is only the first year of WhatsApp is free. After 12 months your account will expire and you will be asked to pay prior to your subscription end date.

But what has Facebook really got to lose? Zuckerburg bought WhatsApp because it gives him a hook into hundreds of millions of customers, who may get shoved over to Facebook, and its ad platform, in ways even he's not dreamed of yet. As of yet Whatsapp is ad-free but who's to say they won't start displaying them on this platform? It's now in Facebooks hands to do what they like. There's been so little precedent for business at this scale that all we can do is wait to see what comes of it and if the takeover really was worth the price they've paid. 

Fiscal Multipliers (A2 Macroeconomics)

If you are currently studying A2 Economics through OCR you are likely to already be fairly familiar with the pre-release stimulus material. Within each section of this material a variety of key terminology that you will not necessarily study in depth in class are used. In the introduction of the stimulus material, fiscal multipliers are mentioned:

"Later in 2012 the IMF published research which suggested that fiscal multipliers in a number of countries were much higher than previously thought and estimated these to be in the range of 0.9 and 1.7"

A fiscal multiplier measures the final change in national income (real GDP) that results from a deliberate change in either government spending and/or taxation. For example, if a government spends £1 million on a project that causes GDP to increase by £1.5 million then the fiscal multiplier for this project was 1.5. Several factors affect the size of the fiscal multiplier. Some of these include:

• The nature of the fiscal policy. In terms of fiscal stimulus, Keynesian economists believe that the size of the fiscal multiplier effect is higher for government spending than for tax cuts.
• The Availability of credit. As demand rises, it will be necessary for credit to be easily available to those firms that require it in order to fund production increases and capital investment. 
• Monetary Policy. For example, government spending through borrowing that leads to higher interest rates may result in a smaller fiscal multiplier as firms may feel less inclined to borrow and consumers may increase their marginal propensity to save (MPS).
• Levels of international trade. The more open an economy is, the greater the extent to which higher government spending or tax cuts will feed into rising demand for imported goods and services, lowering the impact on domestic GDP.  
• Confidence. Consumers MPS might be higher if there is uncertainty about job prospects, future income and inflation. 

It is possible for the fiscal multiplier to be less than one, as seen in the extract from the introduction to the pre-release material. This is the case if the change in government spending or tax rates is greater relative to the change in national income. This could occur if initial injections into the economy are saved rather than consumed. It may also occur if spending was received by foreign MNCs rather than by domestic firms. 

A Day for the Bookies

Earlier this week figures showed that 1.7 million square ft of retail space had been sold off last year to bookmakers. In total, 106 new betting shops have opened up around the country as retail space had been re-allocated to such companies. 

Is this necessarily a bad thing? During the recession betting-shops were not as hard hit as general retail outlets and in some cases, gambling increased. The use of high-stake roulette machines have raised by around 5% from 2008. According to the LGA (Local Government Association) the number of betting shops in some parts of London have doubled in the past decade.

The LGA have called for councils to increase the difficulty of Bookmakers to purchase such retail space as they believe it is having a negative impact among local communities. A spokesman from LGA said in an interview with the BBC last week "Councils aren't anti-bookies but need powers to tackle the damage that can be caused to High Streets and town centres". He believes that they have became "far too concentrated" in certain towns and cities around the UK and added "Licensing laws must be updated to allow councils to consider the impact a new betting shop would have on their local economy and existing businesses. This would protect the power of local communities and democratically-elected councillors to shape their area.".

However, in a submission to a particular government consultation it highlights social and economic benefits from betting shops which include the following:

• The Centre for Economic and Business Research (Cebr)’s study reveals that betting shops contribute £3.2 billion to UK GDP, support 100,000 jobs and pay £1 billion in taxes.
• For every £1 of Gross Value Add (GVA) generated by betting shops, an additional £0.61 of GVA is generated in the wider economy through indirect and induced impacts.
• Bookmakers have already invested about £2 billion in local economies through the opening new and refitted betting shops.
• Betting shops employ 14,000 young people aged 18-24 (25%), an age group with 20% unemployment currently.

Nevertheless, yesterday Ladbrokes confirmed they are to be closing down 40-50 shops around the country as it looks to optimise its retail estate in “secondary locations”. They believe this is likely to be a common move amongst other high street bookmakers in the UK as the industry looks to reduce the number of retail outlets it has opened in the past few years. 

The question local councils need to be asking is if they are to tighten their laws the approval of betting shops to use retail space, what will be the opportunity cost? Clearly the data above proves that despite the stereotypical view on bookmakers, there are clear advantages to both the local and national economy. Dead-weight loss would arise if these areas of potential shop space were unused. This may therefore generate a negative multiplier throughout the economy as employment decreases and ultimately cause a fall in Real GDP. 

Should we pay more to use roads? (A2 Transport Economics)

Roads are an example of a quasi-public good. This means that they have many but not all of the characteristics of a public good. They are semi non-rivalrous (additional consumers will eventually cause congestion) and semi non-excludable (legally, only those holding licences can drive on roads).  The use of roads result in negative externalities (the bad spillover effects resulting from a transaction between a producer and consumer on a third party, usually society). The negative externalities that result from the use of cars on roads includes congestion, air pollution, noise pollution and car accidents.

Road pricing is an indirect tax that charges drivers for the use of roads. It is a market based policy that aims to directly reduce the demand for road use and so correct the resulting negative externalities. Ideally, the size of the tax should equal the (estimated) monetary value of the negative externalities of road use. For this to occur, the tax should be representative of where its being paid, when the road is being used and how polluting the vehicle being used is. For existing examples of road pricing in the UK this is not the case. The London Congestion Charge is a fee of £10 for the majority of vehicles operating within the Congestion Charge Zone in central London, despite the length of time in the zone, the time of day or how highly polluting the car being taxed is. 

Currently in the UK cars are required to pay Vehicle Excise Duty (VED), an annual indirect tax on car use. However as car ownership increases and roads become more congested, is this enough?

The arguments for the use of further road pricing include that it will be successful in achieving its main aim: reducing the negative externalities of road use. By internalising external costs, road pricing would cause a contraction in the demand for road use and thus reduce congestion. For those willing to pay the tax, journey times would decrease. Levels of noise and air pollution that result from congestion would also be reduced. Revenue generated from road pricing could also be used to fund investment into substitute forms of public transport such as the rail and bus networks. This will be particularly beneficial if hypothecation (a situation where revenue from a tax is directly allocated to spending within the area taxed, in this case transport) occurs.

If it was that simple road pricing would be an obvious solution to the negative externalities produced by road use, however, arguments against road pricing also exist. The first of these is that for firms that use roads as a means of transporting freight, a tax on road use will increase the cost of production of these firms and result in lower profit margins or higher prices (that could cause cost-push inflationary pressure). This will led to a reduced ability to be price competitive against rival firms who operate in areas where road use is free. The effectiveness of the tax may also be questionable due to the price inelastic nature of the demand for road use. In order to address this, vast amounts of government spending would be necessary to improve public transport, a possible substitute to car use (the initial implementation costs are also likely to be high).

Another argument against road pricing is the social exclusion that it is likely to incur. Road pricing is a regressive tax, meaning that low-income individuals will be harder hit by the tax than high-income individuals, as the tax will be the same level for both groups. This makes roads more excludable and they therefore become a more private good.

It is potential costs (particular the social costs) that generally lead to road pricing to be an unpopular option within the UK population. It is for this reason that it seems that, despite its potential benefits, any implementation of further road pricing is unlikely to be drastic or widespread. It is too politically unpopular for any government to publicly back the idea. It seems that here in the UK people would rather queue to use roads than pay for it and while owning a car continues to become increasingly fashionable, these queues are only going to get longer. 

Is Economic Growth always desirable? (AS Revision)

Economic growth is defined as the increase in the productive potential of an economy. Short-run growth is an increase in the use of available resources within an economy. This is best shown on a PPC (Productive Potential Curve). The shift from A-B represents short-run economic growth. This would result in greater levels of consumption, employment and investment. Short-term growth is also defined as the annual % change in real national output. 

PPC curve showing Short-Run economic Growth

From short run growth many benefits arise. An increase in the Real GDP will result in higher levels of income thus resulting in a boost in average living standards. The positive multiplier will ultimately lead to improved confidence throughout the economy for both households and businesses. As stated above this leads to higher levels of investment which will in turn generate long-run economic growth. Tax revenue  will also increase which means projects that may necessarily not have been able to be carried out beforehand could now proceed due to larger sums of funding available. More so, if a country (for example the UK) had a large budget deficit then in times of prosperity, governments can aim to pay this off. 

PPC curve showing Long-Run economic Growth

Long-term economic growth is the increase in an economy's maximum possible output. This can illustrated from the diagram with the shift of B-C. Before, the economy's maximum productivity was at B but due to long-run economic growth and the advantages it brings, the productive potential shifts outwards, forming a new curve. This can be because of a number of reasons. 

The increased confidence in firms and investors will lead to R&D (Research and Development) taking place. If this is successful among firms then the introduction of new technology can consequently increase the productive capacity of an economy. Newer and more efficient capital equipment may lead to a rise in production levels, thus a rise in the supply of both public and private goods.

Despite all these benefits of economic growth, costs still exist. The environmental impact it can have on a country may eventually result in long-term disadvantages to future generations. Using up non-renewable energy sources will increase pollution levels whilst damaging the landscape from the extraction of these goods. Sustained economic growth would be more advantageous as it avoids the negative externalities that arise from market failure (this being the damage from pollution and loss to future generations). Furthermore, quality of life may be reduced due to the increase in working hours and stress put on employers to maintain such high levels of output. In terms of GNH (Gross National Happiness), economic growth that is not sustainable is not in anyway beneficial to an economy. This would mean as an economic indicator, countries achieving long-term economic growth that is unsustainable would be one of the lowest on this measure. Income inequality may also increase and widen the gap between the rich and the poor. This again is the opposite to sustained economic growth which has the desire to reduce the economic, social, environmental and political costs that result from economic growth. 

To conclude, economic growth, even if not sustainable gives firms the money to help improve the environment and develop research for newer, cleaner fuels and technology. Fundamentally resulting in sustained economic growth. 

3 Hours of Sex, Drugs and Economics

If you haven't seen this 180 minute extravaganza yet, it's definitely worth a watch. 

The story is of a Wall Street broker (Jordan Belford) who loses his job after Black Monday and with no other great opportunities available to him, a career in Penny Stocks is the best way forward. 

From securing an IPO at Stratton Oakmont (His own brokerage firm) to the simple concept of demand and supply for a pen, this film consists of all aspects of basic economic theory to complex laws and regulation of money transferal. 

Stratton Oakmont is known in the finance world as an over-the-counter brokerage house. This simply means a trade that is carried out between just two parties and their is no supervision of the exchange. Therefore this allowed Stratton Oakmont to con those involved by taking their money and not paying them back. Jason Belford wasn't a stock broker, he was a salesman. His ability to persuade the rich that he was selling them something worth buying made him a multimillionaire. The use of an illegal trading scheme, known as the 'pump and dump' allowed his firm to make money both easily and quickly. A pump and dump scheme consists of artificially inflating or 'pumping' the price of a stock to benefit those that own it. Once the price has been pumped up, owners quickly sell off the stock or 'dump' it at a huge profit causing the price to plummet. Jordan Belfort would often buy large amounts of worthless stock and then, using his flock of stockbrokers at Stratton Oakmont, spread rumors and positive statements about the company. This caused the price of the stock to rise rapidly. Once the stock reached record highs, he and his associates would sell it off, causing the price to reach record lows.

The ability of making money effortlessly didn't last forever. Joseph Borg, a financial administrator who served for the securities comissioner of Alabama, investigated the firm from 1994 due to overwhelming number of complaints regarding Stratton Oakmont. Following an investigation into their illegal trading schemes they were taken to court and prosecuted soon after. Belford spent 22 months in prison and was ordered to pay over $100 million in restitution to his victims (which he has apparently failed to do). As the film depicts, he became a motivational speaker after leaving prison; at the seminar in the movie, DiCaprio as Jordan is introduced by the real Jordan Belfort.

As well as the record breaking number of F-bombs being dropped, the film contains numerous scenes of nude women and prostitutes. Drugs are the norm throughout and being sober is a rarity. For those wanting to work in the city, take a leaf out of Jordan's book. 

(Sorry to those of you who thought this may have been about the book; Sex, Drugs and Economics. Sadly, it is not.)