Economics help blog – Page 166

How Much Bargaining Power Do Workers Have?

2 November 202118 July 2014 by Tejvan Pettinger

Readers Question: How much bargaining power do workers have? Bargaining Power is the ability for firms or workers to get what they want. An example of bargaining power is related to the power of trades unions. If a part-time worker works for a firm with monopsony power, they will have very low bargaining power. However, …

The economics of Hollywood

18 November 201718 June 2014 by Tejvan Pettinger

Readers question: Why does Hollywood make so many superheroes movies nowadays? What can be the economics behind it?

I’m not really a movie goer. I think the last Superhero move I watched was the original Superman back in the days when Coal miners were still a political force and people used to rent videos to watch in VHS tape players.

One reason I don’t like the usual Hollywood movies is that they are so predictable, and frankly you can get soon bored of the same formula – good guy goes down on his luck, but when things look really bleak – Superman comes back from the brink, defeats the bad guy and everyone lives happily ever after.

So, if they are so depressingly predictable, why do so many super-hero style movies get made by Hollywood?

Risk vs solid reward

Making movies is a risky business. But, ultimately studios are interested in making a profit – not in producing artistic films which may appeal to hard bitten film critics. You have to put a lot of money in, and you need to guarantee that you get a good return. With superhero style movies, they have a strong track record of getting decent revenues. If Superman 1,2,3, and 4 all made a profit. Then you could make an approximation that Superman 5 has a good chance of making profit too.

Suppose some new film director came along with a risky plot – something very independent, different, ‘artistic’ and challenging. – It could be a great success, but equally it could be a flop. You could make slightly higher than usual profits, but equally you could make a loss. Given the choice between a risky new style film and a guaranteed ‘banker’ – there is a strong economic incentive for you to choose the ‘safe’ option of another superman hero movie.

A good example, is the TV series ‘Breaking bad’ – It is critically acclaimed as one of the most innovative and well produced TV series of all times. But, when the creator approached TV networks, no one wanted to touch it. TV producers couldn’t see any track record for successful / profitable TV based on a chemistry teacher cooking crystal meth. It was very successful in the end, but the success was unexpected. Generally, TV producers would rather commission something with a more certain audience (like minor celebrities eating worms in the jungle)

Advertising and brand loyalty

One difficulty with producing films is that you have to gain strong brand loyalty in a short space of time. If nobody has heard about the subject of the film, it will be harder to attract interest. The advantage of producing a superhero movie is that there is an instant brand loyalty and awareness of the superhero like Spiderman / Superman. By using well known comic characters, you have effectively got a lot of free advertising – from the long period of customer awareness of the superhero.

The most successful film franchise – James Bond has a huge advantage because the brand of the film series is so well known. You know a James Bond film may be quite predictable, but at least you know you are going to see some good action shots, fast cars, beautiful women and spectacular backdrops.

It is one reason why books are often made into films. Awareness of the books, helps with the advertising for the film.

Does an increase in wages cause a loss of competitiveness?

6 February 202012 June 2014 by Tejvan Pettinger

Readers Question: Given the current environment, is it a valid argument of companies that increasing workers salaries will cause a loss of competitiveness? For example, cutting entry-level and middle-level workers salary while increasing management salaries will not change the profit levels of a company much. Wages are a part of a firm’s costs. If wages …

Economic reasons for long school vacations

18 November 201711 June 2014 by Tejvan Pettinger

Readers Questions: I want to know the economic reason behind:

Summer/Winter vacations in school?
or: Why we have summer/winter vacations in school.

This is an interesting question, especially as I have just finished teaching for the year and begun the long summer holidays myself.

Oxford students on their way to their last exam in May. Oxford only have 24 weeks of teaching per year.

Possible economic reasons

Non-monetary benefit for teachers. Generally, teachers pay is relatively low for the standard of their qualifications. Teachers with good degrees could probably choose a career with higher monetary benefits (and less stress) if they moved to the city or something like that. Most teachers are paid by the government, so pay is not dependent on market forces, but government’s tight budgets. Giving teachers a six week summer vacation could be seen as a non-monetary benefit to compensate for the relatively lower pay. I’ve heard some teachers say the long summer holidays are one of the best perks of the job. I’m sure if the summer holidays were just one week, there would be an even bigger rush to leave the profession, and the government would have to raise salaries to attract teachers. The government wouldn’t want to have to increase teachers pay, so it’s easier to leave the long holidays.

Education has little short term productivity. Education is not like a factory producing cars. A car factory couldn’t afford to have a six week summer break because output would immediately fall, and average costs rise (less output, less economies of scale). However, education is very different. If students take long holidays, there is going to be little change in long-term productivity of the economy. In the short term, there will be no change in the productivity of the economy. Education does not directly increase GDP. Therefore, long school holidays do not directly reduce real output.

More productive use of time. You could argue that long summer holidays are a useful opportunity for students to work in temporary summer jobs – helping the tourism industry. Summer holidays also enable teachers to work marking examination papers (I did this for a few years before I could take it no longer)

Diminishing returns from teaching longer hours. If we switched from 6 week to 2 week summer holiday – would we really get a more productive and highly educated workforce? I doubt it. Students are hard to teach by the end of May, let alone trying to teach them into mid August. Teaching students for long hours has diminishing returns. Increase the number of school weeks by 10%, may only give a 1% increase in the standards of education.

Therefore, extending the school year would have little benefit to the economy in terms of improved education standards and higher productivity.

House Price Inflation – Pros and Cons

10 September 20219 June 2014 by Tejvan Pettinger

Readers Question: Why is house price inflation considered good while other forms of inflation are considered bad? Or are all forms of inflation bad for the economy?

House price inflation has a mixed impact on the economy depending upon the extent and timing of the rise in house prices.

This graph shows house price inflation in the UK since 1981. It shows the volatility of house price inflation in the UK.

Benefits of Moderate House Price Inflation

A rise in house prices increases the wealth of householders. This can lead to increased consumer spending. Householders can take equity withdrawal from the increased value of their house.
House price inflation doesn’t reduce the value of savings like ordinary inflation. For homeowners, wealth actually increases.
House price inflation doesn’t indicate the economy is at full capacity and overheating, it just reflects demand is greater than supply in this particular market.

Problems of House Price Inflation

Rising house prices are good for homeowners, but it can reduce living standards for those who don’t have a house. In the UK house price inflation has made homes unaffordable for many first time buyers – see: House price to income ratios. Rising house prices have also had an impact on increasing rents. House prices inflation, in the UK, has increased inter generational inequality; those buying houses in the 1970s and 80s have done very well, but young people facing a very difficult housing market.

House Price Inflation and Boom and Busts

The most serious problem of house price inflation is that in booms, the rise in house prices often prove to be unsustainable. In the 1980s, rising house prices contributed to an economic boom – rising consumer spending and rapid economic growth. However, this economic growth and rise in house prices both proved unsustainable. When interest rates were increased to reduce inflation, it caused a collapse in house prices. This fall in house prices left many with negative equity. The subsequent fall in house prices was a factor in contributing to the recession of 1991. Volatility in house price inflation has a big impact on economic instability. Similarly falling house prices post 2008 (as a consequence of the overheating in house prices) has been a big drag on the US and European economies.

Napoleon, eggs and capturing consumer surplus

18 November 20179 June 2014 by Tejvan Pettinger

On campaign in the early 1800s, Napoleon approached a hostelry on the slopes of Col du Pin Bouchain near Roanne. (BTW: the Col du Pin Bouchain at 759m was the first mountain ever used in the Tour de France in the 1903 edition.) Napoleon was shocked at the price of eggs, and so he asked …

Should we worry about a trade deficit?

1 February 20206 June 2014 by Tejvan Pettinger

A trade deficit implies the value of imports of goods is greater than exports. (M>X) The trade deficit is an important component of the current account on the balance of payments. Sometimes people use a trade deficit and a current account interchangeably, but in the UK this is not correct. The current account also includes …

Bond Spreads

10 February 20202 June 2014 by Tejvan Pettinger

Readers Question: How do bond spreads affect the value of the Dollar or Euro?

A bond yield refers to the interest payment that you receive from holding the bond yield. If the yield is 4%, you can expect £4 a year from a £100 bond.

A bond spread refers to the differences in bond yields. For example, it could mean the spread between different government 10 year bond yields. In the US bond yields may be 2%, whereas in the Eurozone, bond yields may be 4%.

There could be many different reasons for this bond spread (difference) But, if markets are concerned that one country is at risk of debt default or liquidity shortages, investors may be unwilling to hold those bonds and therefore bond yields go up to try and attract investors. (See inverse relationship between bond price and bond yield)

EU bond Yields — A time when Italian and Spanish bonds had a large bond spread over UK and German.

If investors are nervous about holding Eurozone bonds, due to fears of illiquidity, then international investors will be demanding less Euros – they would prefer to hold dollars and buy US bonds. Therefore, in this case, we would expect to see an appreciation in the US dollar and a fall in the Euro.

If you look at government bond yields (FT) – Greece has a high bond yield 6%. If Greece had its own currency, you would expect the Greek Drachma to fall.

Argentina has had periods of high bond yields because investors are nervous about holding Argentinian debt due to fears of a debt default. This corresponded with a fall in the Argentinian currency.

However, high bond yields are not necessarily a reflection that markets are nervous about the state of government finances. Bond yields can rise when markets are optimistic about future economic growth. See: Factors affecting bond yields

However, it is worth bearing in mind, many other factors determine exchange rates, apart from bond spreads, such as:

Higher interest rates can attract hot money flows. If people are confident of a country and they see high interest rates, they may move their currency to benefit from better interest rates.
Relative inflation rates. If inflation is relatively low in a country, then demand for the currency will be higher in the long-term as their goods will become more competitive.
See: Factors influencing exchange rate

Narrowing of bond yields on Eurozone

The ECB decision to purchase bonds and intervene in the market (since 2012) to provide liquidity has calmed investors and lead to lower bond yields amongst members of the Eurozone