Tesco Value Goods – Why are they Unattractive?

Why do Firms Make some Goods Unattractive/difficult to buy? It may seem strange but sometimes firms purposefully want to make a good unattractive. Why is this? Tesco value products have an unattractive design. It shouts out “I’m cheap and low quality”. What happens is that customers with inelastic demand, – people who give importance to …

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Chinese Inflation and how to reduce it

Readers Question: How about the case of cost push inflation like that of China? there’s high inflation and yet the economy is not operating at its full level of employment and due to the fact that its exchange rate is fixed, monetary policies would not be effective but fiscal policies would further increase unemployment. What policies can be implemented to reduce this cost push inflation in a fixed exchange rate system?

Comment on post: Economic Policies to reduce inflation 

It’s a good question. Inflation in China has recently reached an 11 year high of 7.1% (inflation China)

The Chinese blame rising food prices and rising oil prices. However, I would also blame the Chinese government for allowing demand to rise too quickly.

Loose Monetary Policy. The benchmark interest rate in China is currently 7.4%. Although it has been increased several times in the past 12 months, it still represents a very low real interest rate 0.3% (7.4-7.1%) Compare that to the UK, where real interest rates are closer to 3.0%. The low cost of borrowing is encouraging a boom in borrowing, but often the borrowing is badly directed and it could contribute towards a boom and bust in the Chinese property markets.

Undervalued Exchange Rate. Although the Yuan has appreciated in the past couple of years (although the exchange rate is supposed to be fixed it has been allowed to be gradually revalued) However, it is arguably still undervalued. The Chinese government is keen to keep it artificially low to stimulat export led growth. The weakness of the Yuan is indicated by the size of the Chinese Current account surplus.

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Should we tax the plastic bag?

Ireland has introduced an interesting law, which has placed a 15 cent tax on the plastic bag. Combined with an advertising campaign to make the plastic bag unacceptable, use has fallen between 90-94%. Within a few weeks, there was a visual improvement in the number of plastic bags littering the environment. Other countries such as Bangladesh and China have gone further and banned the plastic bag.
Due to its relative success, many are suggesting we should implement this policy in the UK. These are some of the economic, social and environmental arguments in favour of banning the plastic bag.

Advantages of Plastic Tax

  1. Reduces costs to shops. Usually, shops are reluctant to charge for plastic bags. But, if they have to charge, people will be increasingly likely to use alternatives and reuse old bags.
  2. Reduces Litter. Around Oxford, I see a real problem with litter, 50% of which seems to be plastic bags. They get blown into hedgerows and get stuck for years, causing visual blight to the environment. If plastic bag use was discouraged the amount of litter would significantly be reduced.
  3. Plastic Bags not Biodegradeable. Plastic bags take 1000s of years to disintegrate, therefore our landfills are full of plastic bags which don’t breakdown
  4. Bad for Wildlife. Because plastic bags can float around they can often cause problems for wildlife.
  5. Reduce dependence on oil-based products. Because plastic bags are made from the oil they increase our dependence on oil imports. With rising prices of oil, there is an increased desire to avoid oil products where necessary.
  6. Aesthetically pleasing. For those who yearn for the good old days of high street shopping in paper bags, before the advent of the out of town supermarket, banning the plastic bag would encourage people to go back to the basics of shopping.
  7. Tax Raises Revenue. An estimated 10 million Euros
  8. Tax makes people pay the social cost. Using plastic bags creates negative externalities, a tax will make people pay the social cost. At the moment, plastic bags are usually free and therefore, firms subsidise the use of goods with negative externalities.

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Nationalisation of Northern Rock – What it Means

Although, the government has tried for several months to avoid this option, Alastair Darling admitted that the government had decided to nationalise the beleaguered bank Northern Rock. It means the government is responsible for over £100m of mortgages and savings. What Nationalisation Means Shareholders are likely to get very little in compensation. They have threatened …

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Recovery in Housing Market – Who benefits?

Readers Question: Which businesses are likely to benefit from a recovery in the housing market?

I think it is a little premature to talk of a recovery in the housing market. But, nevertheless when there is a recovery in the housing market the following firms will benefit.

  • House Builders. At the moment there is a surplus of unsold houses. This is contributing to falling profitability for many large homebuilders. A recovery in the housing market would benefit these firms very significantly.
  • Mortgage Lenders. The Council of Mortgage Lenders in the UK have reported a significant drop in mortgage lending. This reduces the profitability of banks and building societies who lend money to potential home buyers.  An upturn in the housing market would increase demand for mortgage products enabling profitable mortgage loans to be made. If conditions in the housing market improved, mortgage lenders would see an additional benefit of declining mortgage defaults which has been causing significant losses to mortgage lenders and banks who bought the securitisation products.
  • Estate Agents. Estate agents benefit from the number of transactions and the value home sales. An upturn would increase the number of house sales and increase the value of houses meaning that their % share would improve.

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Who Sets Interest Rates – Markets or B of E?

Readers Question: Interest rates are determined by the markets and not by the Bank of England-where’s the truth?

An interesting question.

Firstly, it is worth bearing in mind that there are different interest rates in an economy.

Bank of England Base Rate. This is the most important interest rate because it is the rate at which other commercial banks need to borrow from the Bank of England. Therefore, the base rate is an important determinant of other rates in the economy.

Generally, speaking the Bank of England is free to set base rates to achieve its target of low inflation CPI 2%+/-1. At certain times markets may pressurise the Bank of England to change rates, but largely the Bank of England is free to set rates depending on how it sees fit.

  • ERM crisis. in 1992, the government increased interest rates to 15% to try and protect the value of the £ (which was then in the ERM) However,  the markets felt this interest rate was unsustainable in a recession. Therefore, people continued to sell pounds effectively forcing the £ out of the ERM and making the UK cut rates. This is an example of market forces forcing the monetary authorities to change interest rates, but, it is relatively rare.

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Higher London Congestion Charge for Gaz Guzzlers

It is interesting to note that Ken Livingstone has introduced a higher rate of the London congestion charge for cars which have high levels of fuel consumption (band G vehicles, which emit more than 225g of carbon dioxide per km) These are said to make up 15% of cars. It is clear that the policy is aimed at targeting the ‘chelsea tractors’ and encouraging people to buy energy efficient cars.I agree with this step, as I have always found that large SUVs 4WD to be unnecessary in London. They take up more space, are more dangerous (to pedestrians and cyclists) and contribute to higher levels of pollution. Therefore, it is good step to introduce a higher tax on these cars to take into account their higher social cost.

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What is Most Serious Economic Problem Facing the UK 2008?

I asked my Economics students to conduct a questionnaire, asking people in the street various questions about Economics. One Question was:

What do You consider to be the Most Serious economic problem Facing the UK at the moment. These are the most popular responses to far.

  1. House Prices (50% of responses)
  2. Government Debt
  3. Ignorance because of fear
  4. no response
  5. No Problems

What I would consider the most serious Economic Problem:

  1. High levels of consumer debt / bankruptcy

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