Tag Archives | economics

The Economics of Doping in Cycling

Apart from economics my big interest is in cycling. This weekend, I’m  doing the UK national hill climb championships, a short race up a steep hill in Ramsbottom (the Rake). First prize is a nice cloth cotton cap and a pat on the back. It is unlikely there will be any dope tests (though there are sometimes dope tests at national championships) because they are really expensive and the race is so low key, there isn’t the sponsorship money to pay for them.

doping

However, across the pond, professional races, such as the Tour de France, are a little more well known than amateur UK races I compete in.

I’ve been following the Tour, ever since I’ve been interested in cycling in the early 1990s. I’m sure there was a time when I looked upon cycling with rosy spectacles and admired only the heroic efforts of riders battling through the mountains with nothing more than bread and water. But, alas the doping culture of professional cycling was so deeply embedded that revelations about EPO and other wonder products slowly seeped through – no matter how much you didn’t want to hear it.

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World Financial Crisis AD/AS diagram

Readers Question: how to illustrate the world financial crisis by using the graphs of aggregate demand and aggregate supply?

The financial crisis has essentially caused an unprecedented fall in aggregate demand.
AD fall

Aggregate demand has fallen because:

  • Bank lending decreased due to the credit crisis and shortage of bank funds. The shortage of bank lending has reduced investment and consumers spending (both components of AD)
  • Falling house prices. The credit crisis has reduced the availability of mortgages and therefore reduced demand for buying houses. Also house prices were overvalued. So with less mortgages available prices have been falling significantly.  The fall in house prices has caused a negative wealth effect. This has led to lower consumer confidence, lower equity withdrawal and a decline in consumer spending.
  • Fall in global growth. The decline in economic growth has caused a decline in exports and world trade, further reducing aggregate demand.
  • Decline in confidence. The well publicised problems of the banking sector and stock market falls have reduce consumer confidence and led to a change in attitudes. Rather than spending on credit people are trying to improve their savings and reduce their debt.

In  early 2008, there was an increase in oil prices which led to cost push inflation. This caused AS to shift to the left and encouraged Central Banks to keep interest rates relatively high. This possibly aggravated the recession. But, I don’t think it was a major factor.

For more details see: Financial Crisis explained

Why Are UK Retail Sales Increasing?

Readers Question: explain why two sectors of the UK economy are growing faster than other sectors ?

According to the Office of National Statistics for March 2008

  • Retail Sales Volume Seasonally Adjusted (2000=100) increased to 140.3 an annual growth rate of 4.7%
  • Manufacturing grew at only 0.9%
  • Services grew at 3.2%

latest statistics at ONS

I have to admit I was a little surprised to see retail sales increase at 4.7%. Anyway it seems that retail sales and the service sector are still doing much better than manufacturing and production. These are some potential reasons.

Exchange Rate. Against the dollar, at least, the Pound has been strong. This makes our exports more expensive reducing demand. Manufacturing goods are often exported so would explain weakness of manufacturing sector. Imported goods become cheaper so may boost sales on the high street.

  • However, the pound has been weak against the Euro, our main trading partner, so I doubt how important this factor is.

Interest rates. The Bank of England has cut interest rates to 5%. In theory this should boost spending because it makes borrowing cheaper. This would explain increased retail sales and services because consumers will have more spending power.

  • However, the cuts in base rates have often not been passed on by banks. The credit crisis has led to a tightening of lending restrictions. This is why I was a little surprised to see retail sales growing so strongly.

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