Thank You

Dear followers,

It has been a long time since I posted anything here and I'm sorry to say that I'm not sure I will upload the frog's equation anytime soon. As some of you may know, I recently got the opportunity to continue my studies in Singapore, and am now in the midst of my International Baccalaureate there. As this programme is somewhat more demanding, I sadly find that I have little time and energy left to dedicate to this blog, and that my interest for economics is satisfied through actual economics classes that I am taking. Maybe, if circumstances allow it, I will start posting again sometime in the future. For now, I just want to thank all of you for making this journey interesting and exciting, for sharing your opinions, and most of all for giving a young amateur the chance to satisfy her curiosity and learn about economics in a fun way.

Eurocrisis

For some months now there have been worries and discussions about Europe’s economy.  More and more countries are going into heavy debt crises and now it’s not only Greece that’s in problems, but larger countries like Spain and Italy are also becoming problematic. Debts are soaring and talks about bailouts and ways to reboot the economy are taking place non-stop.

To add to this situation, the German economic figures have been published and show that Germany, that seemed to be the one country holding on quite well, is actually not doing as well as expected.

Between April and June growth in the German economy slowed noticeably; it grew by just 0.1% according to the national statistics office. This shows that even though Germany has been driving recovery in the Eurozone, it is actually not as strong as it may seem, and this can cause many problems if further bailouts of European countries are needed. In general, the economic growth in the Eurozone has fallen from 0.8% to 0.2% in the last quarter, which reflects the state that our economy is in.

Angela Merkel and Nicolas Sarkozy have been meeting up regularly in the post weeks to try to find a solution to the Eurozone debt crisis. There have been rumours about discussions regarding the introduction of Eurobonds. These would be bonds backed by the whole euro block rather than individual countries and might be helpful to push the economy up again. However, both the French and German have said that Eurobonds are not an option at the moment and will not be discussed in the crunch talks.

Agricultural subsidies

Agricultural subsidies are amounts of money given to farmers to support their operations.

Subsidies may be provided directly, as cash payments, or as indirect support.

For example, a government might provide low-cost crop insurance, keep prices at an artificial level, or assist farmers in other ways. Agricultural subsidies are a feature of many government budgets, and a topic of hot debate in some regions of the world.

In the case of a positive agricultural subsidy, a farmer is rewarded for growing a crop, with the subsidy usually being based on the amount of crop being grown, or the amount of the harvest.

With negative subsidies, farmers are encouraged not to produce a particular crop or product. For example, if milk production is extremely high, farmers might be paid subsidies not to raise dairy cows, to reduce the amount of dairy on the market.

An agricultural subsidy is a governmental subsidy paid to farmers and agribusinesses to supplement their income, manage the supply of agricultural commodities, and influence the cost and supply of such commodities. Examples of such commodities include wheat, feed grains, cotton, milk, rice, peanuts, sugar, tobacco, and oilseeds such as soybeans.

Bank Stress Tests

A few days ago, the results for bank stress tests of european banks were published. A Bank Stress Test is an analysis carried out in crisis situations to determine wether a bank has enough capital to withstand the impact of these economic scenarios. The tests are used to find and highlight weak spots in the banking system at an early stage so that preventive action can be taken. These tests are carried out by the banks themselves or supervisory authorities as part of their regulation of the business.

Seven out of the 91 European banks that underwent these stress tests have failed them, five of them Spanish (Diada, Espiga, Banca Civica, Unnim and Cajasur). The others were the german Hypo Real Estate and the greek ATEbank.

These failed banks would need a total of 3.5 billion euros of new capital to meet the required standards and now have to agree with their supervisors a plan which will explain how the weakness will be resolved.

These results may seem relatively positive seeing as only a few irrelevant banks failed, but there has been a lot of talk about the severity and the way these tests are done. In the critics opinion, the stress tests are inaccurate as they do not show the depth of the actual debt crisis and are not carried out in a clean way.

The Final Countdown

Anyone who has been in New York sometime might have walked by this peculiar clock on Sixth Avenue. This is the National Debt Clock, which constantly updates to show the current US gross national debt and each American family’s share of this debt.

Back in April, the rating agency Standard & Poor downgraded the US credit outlook, meaning that the long-term outlook on US credit has decreased, but the AAA credit rating stays.
Now, the rating agency is close to downgrading the US credit rating from its Triple-A status. The US debt limit lies at $14 294 trillion, and the US has reached that ceiling on the 16^th of May. Under the law, the Treasury Department is not allowed to borrow money unless Congress gives its approval by raising the limit on borrowing. For now, the Treasury Secretary Geithner said he could keep the US out of default until August 2^nd.
So now American lawmakers are considering whether to raise the debt ceiling, an act that according to the president would not help the economy in the long-term, but seems like the only momentary solution. In respect to this, the democrats are striving to save budgets for large areas of government spending, while the Republicans are refusing to accept anything to do with a tax increase.
The urgency of this American debt ceiling crisis is that if the Democrats and Republicans in Congress do not reach a deal on the negotiations by August 2^nd the American government will basically go bankrupt. The United States will not be able to pay its bills in full as it will have run out of money.

Christine Lagarde; New IMF Managing Director

Last Tuesday, on the 28 of June, the IMF’s Executive Board announced to the world that Christine Lagarde has been selected Managing Director of the IMF for a term of five years, taking up her new position on July 5.
Christine Lagarde, the first woman to lead the IMF, has been the French finance minister during the global financial crisis and so she  is seen to be very familiar with the problems in the euro area.
A new Director needed to be appointed since the former Director, Dominique Strauss-Kahn, resigned in May due to being accused of abuse.
Therefore, starting on May 20 a month-long selection process was carried out to find a new Managing Director to lead the IMF.
There has been a lot of talk about the new choice for this position. Many people find that it would do the IMF and the global economy well,  to choose a non-European Director, as would have been the other candidate, the Mexican Agustín Carstens. Others are of the opinion that it is better to have an European, who is close to the actual debt crisis  Europe, to help to find  a solution for the problems in the Euro zone.
There are many goals that the new Managing Director has for the IMF, like pressing further reforms in the institution to achieve a balance of power in the world’s economies, creating a more effective IMF and strengthen diversity.

Impact on Business Activity

IGCSE BS: Impact on Business Activity

Blue chips

Blue chips are stocks of well known companies that are internationally recognized. These sell widely and are financially stable. Usually blue chips companies sell high quality, widely used and sold products or services. They are generally more volatile that other stocks and have less risk at failure; they demonstrate the ability to pay dividends in both good and bad times. Generally, all Dow Jones stocks are considered blue chips.

The name blue chip comes from the game of poker, where the blue chips have the highest value. Similarly, blue chip stocks are considered to be more valuable.

The BSE SENSEX

The BSE SENSEX is a value-weighted index composed of 30 stocks and was started on January 1, 1986. The Sensex is regarded as the pulse of the domestic stock markets in India. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. These companies account for around fifty per cent of the market capitalization of the BSE. The base value of the Sensex is 100 on April 1, 1979, and the base year of BSE-SENSEX is 1978-79. As of 5 April 2011, market capitalisation of Sensex was just under $600 billion.

Portugal; Economic crisis, Educational crisis

These days, one of the large problems in Europe is Portugal. The poorest country in Western Europe is on the brink of an international bailout, which would be the third in the euro zone after Greece and Ireland.

To this, adds the fact that Portugal’s Prime Minister José Socrates resigned on Wednesday after the parliament rejected his plan for spending cuts and tax increases.

Supposedly, Portugal is going to run out of money this year and will need an international bailout. Portugal’s main problem has been huge amounts of debt that the country could no longer hold. This year, the government debt will reach 90% of the GDP.

One of the most important problem in Portugal is the human capital. It is the least educated country in Western Europe, with just 28% of its population (25 to 64 years) with a high school degree. There is a 37.1% high school drop-out, which is way higher than the average 20% and Germany’s 2.8%. This has emerged as a huge problem in Portugal now. As Portugal has large debts that it needs to pay off with long-term growth,  an unskilled work force makes this very hard.

The issue about education is not one that can be solved quickly. The cuts that come in relation with a bailout and that are necessary for the recovery only make this task harder. It is, however, on the top of the list of the reforms needed to fix the economy and Mr. Sócrates made it clear that investing in education was a priority for the country.

The real cost of nuclear energy

We’ve all heard about the tragic events in Japan in the last weeks. First of all, I would like to express my grief and also encourage anyone to try to help the people affected by the events.

The events in Japan have brought on heavy discussions about the ethics of nuclear energy and what threats it supposes. It is not the first time that incidents like these happen, everyone remembers Chernobyl well enough.

Clearly, the nuclear energy market has gone down heavily these days. After the first incident with the nuclear station at Fukushima the shares related to any nuclear energy has experienced steep losses. In response to these events, a  rise of stocks for renewable, clean energy has also been seen. 

So, what is clear is that many people are not prepared to accept the risk of this "relatively" cheap energy.

Global increase in cotton prices

For the last months, we have been experiencing a heavy rise in cotton prices, which have already hit a 140-year high.

The main reasons for this global shortfall that has pushed the prices up so much are a string of bad harvests and the high demand for this commodity from fast developing countries like China and India.

This sudden and unexpected rise in prices has alarmed many retailers and manufacturers in the apparel industry who are worrying about being forced to push prices up in times of weary consumers due to higher production costs.

Another concern that is talked about due to this rise in cotton prices is the dollar. The “paper” bills are actually made up to 75% of cotton (and 25% linen). Money printers all over the world are therefore facing higher production costs as the cotton prices have been rising for the last year. In 2010, the production costs of the dollar bills leaped to 50% from 2008 (currently at 9.6 cents)

This even comes to the point where there is talk about producing $1 dollar coins, which would be more durable and do not need to be replaced as often. 

Agflation

Agflation is the inflation by agricultural commodity prices, i.e. by food.

For some time now, we have been experiencing a rise in food prices and food shortages. The food prices are currently at an all time height and production is slowest since the Green Revolution. Still, farmers produce more than twice the minimum needs for most people on the world.

Why does the price of food rise?

Normally, the main reasons for a rise in food prices are that not all food is in right place available for everyone, that many people can’t afford food, that a significant part of produced food is used for biofuels and government mandates.

The food prices are usually set by the amount of food relative to the population and the change in supply and demand over time.

What is said to have caused the current agflation are supply shocks. These include natural disasters like drought and large scale fires like in Russia, China and Australia and floods like in Canada and Pakistan. Food supplies have been affected severely by these disasters, nevertheless they are not the only supply shocks. Factors outside agriculture like a fall in the dollar have made it cheaper to buy from other countries. Panic buying and trade bans have also contributed to the supply shocks in the food market that is causing agflation over the world.


This increase in food prices supposes greater problems for those people living in the developing world who might face starvation due to food shortages and high food prices. 

Unrest in Egipt, unrest in the oil price

In the last weeks we have seen many disruptions and anti-government protests in Egypt. This has had many consequences on the world's economy. However, I feel it is important to point out that it would be frivolous  to go about this topic looking only at the economic impact.

The events occurring in Egypt at the moment are of a huge political and social impact. It is, in my opinion, highly remarkable how the use of the internet and social networks has aided in these disruptions in the government policies and has gathered people to fight for their freadom.

Going back to the economic part of this conflict, we can see its effect  mainly on the oil prices. The oil price has risen twice above $100, hitting a two-year high. The slowing down of the transport on the Suez Canal and the risk of this even closing are of an immense importance to the economy and our everyday lives. Every day, about 2.5 million barrels of oil pass through the Canal, and the fear about this has caused a downturn in the oil market.

On a more local aspect, the Egyptian stock market went down 10 % - the largest one-day drop in some years. Some rating agencies have also downgraded Egypt, showing again the fear that is raised by these disruptions in the economy.

Inequality and income distribution

Income distribution is how a nation’s total economy is distributed amongst its population.

The distribution of income within a community may be represented by the Lorenz curve.

The Lorenz curve is closely associated with measures of income inequality, such as the Gini coefficient.

The Gini coefficient is a measure of the inequality of a distribution, a value of 0 expressing total equality and a value of 1 maximal inequality. It is commonly used as a measure of inequality of income or wealth.Worldwide, Gini coefficients for income range from approximately 0.23 (Sweden) to 0.70 (Namibia) although not every country has been assessed.

Davos 2011

The World Economic Forum  is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas

Their Annual Meeting in Davos-Klosters is perhaps best known to the world at large simply as "Davos".

This year the annual meeting will convene under the theme Shared Norms for the New Reality.

"We are now living in a completely digitalized world and a completely globalized world, so we have to find some new mechanisms and values to deal with this post-digitalized and post-globalized world," Klaus Schwab, WEF founder

Are people better than banks?

Social lending Web sites pair willing lenders with entrepreneurs and other cash-strapped borrowers.

The sites charge fees to broker and service the loan--around 1% from the lender and 2% to 4% from the borrower--as well as penalties for late payments (to cover the costs of chasing deadbeats).

The Internet enables a new infrastructure for participation, reducing the transaction costs of matching the wants and needs of people and giving them the opportunity to coordinate.

The opportunity of wealth - Microcredits

What are they?

Microcredits are small amounts of money loaned to poor people in developing countries that do not have the conditions for a usual credit.

These loans are given to people in extreme poverty in the compromise that they will start a small business and be able to pack back a small amount of interest rate.

What for?

The purpose of these credits is to stimulate the growth of businesses in these countries and thereby potentiating the growth of the economy. These credits are supposed to engage self-employment and therefore allow them to create an income, generate wealth and help to escape the extreme poverty.

 “Give a man a fish and he will eat for today; teach him how to fish and he’ll eat for a lifetime”

Problems?

• People say that it isn't as successful as they thought it would be
• Issuers give them out for a profit, not the greater good
• They put poor people in debt 

PPP (Purchasing Power Parity) or the Big Mac Index

The Purchasing Power Parity allows you to compare prices of goods or services in different countries taking into account exchange rates. It is usually used to compare the standard of living of different countries.

The Big Mac Index is an example of this. It compares the price of a Big Mac around the world. The price varies according to some local factors.