NO: 216 - The economic benefits of legalizing the drug industry.

By: Kahyee Liew Elena

Critics argue that the battle in the “war on drugs” has been long lost and the government should find other alternatives to fight this war. The “war on drugs” has forced the state to spend billions of dollars on drug interdiction forgoing other crucial aspects such as education, health etc.

The argument presented today, is why shouldn’t government just legalize drugs all together given the perceived benefits? There are some states such as California that has decriminalized marijuana use, but not as far as every drug.

Some argue that it is due to the government losing support. Clearly, it is a controversial decision that has differing opinions in society and it is likely that the conservative and religious vote is lost. The following article will look at the pros that drug legalization brings economically.

According to the National Drug Intelligence Center, this is the government spending on health and crime related to drugs in 2011.

NB: Values in red are calculated in thousands

 

The amount of funds used for drug interdiction as seen at the table above is a considerable amount. These funds are used for the police force, legal enforcement etc. However, this can be used to subsidize other crucial aspects such as health or education. If the government is the seller of the drugs, they can tax the narcotics industry and that tax can act as further subsidies. Government can also significantly lower drug related deaths, as the government would most probably carry out quality controls as drug users normally die due to impurities in the drugs and not the drug itself. Prohibition has led to the stigmatization and marginalization of drug users, there are strict access to needles causing high rates of diseases such as HIV and Hepatitis C which leads to man social costs. Users discount future costs.

By legalizing drugs, it also collapses a very big industry that has been long dominated by gangs. It would arguably, lower drug related inter gang rivalry and killings. Hence improving public policy. A prime example of how prohibition failed leading to an eruption of crime and violence could be seen when the USA decided to prohibit alcohol. If it wasn’t for that, organized crime might not even grow big and the situation with drugs today is pretty much the same

These are some of the arguments brought forth that economically, drug legalization is justifiable and that governments should pursue such a policy in order to emerge victorious in the current “war on drugs” that is seemingly failing. However, this is most likely not going happen due to the social problems and consequences that come with it.

No 215 INDIA'S ECONOMIC HURDLES TO SUCCESS

By: Cheng Yi Xuan

THE GLOBAL ECONOMIC RECESSION of 2008 has affected the economic growth of many countries around the world. The United States for instance faced a maximum negative GDP growth of 8.9% in 2009 and in the same year, the GDP growth rate for the United Kingdom was at negative 2%. The global economic recession also affected fast growing developing economies such as India with a GDP growth rate drop of 3.9% between 2008 and 2009. In 2010, the Indian economy seemed to have recovered from its lower GDP growth rate with a peak of 9.4% growth in that period. However between India's peak GDP growth in 2010 and the present year of 2012, we can see a trend similar to that of the 2008 economic recession, in contrast to IMF's projections of GDP growth of 8.7% for 2011. In this post, we are going to look at the cause recent decline of the Indian economy.

Recently several news articles reporting on the rapid decline of the Indian economy has surfaced on the Internet. A report published by the AFP on 6 June 2012 states that India's prime minister, Manmohan Singh, admitted that the Indian domestic economy is heading into 'turbulent weather'. In the report, the prime minister indicated that the economic slow down in India is mostly due to the eurozone debt crisis and the rising international petroleum and commodity prices. (Article:Put cap on public debt, RBI tells Government)On the other hand, an article published on The Economist magazine blamed India's economic slowdown on problems within the country. It states, "The state is borrowing too much, crowding out private firms and keeping inflation high. It has not passed a big reform for years. Graft, confusion and red tape have infuriated domestic businesses and harmed investment. A high-handed view of foreign investors has made a big current-account deficit harder to finance, and the rupee has plunged."(Article:Farewell to Incredible India).

First we are going to look at how the eurozone debt problem could affect the Indian economy. Firstly the eurozone debt problem was the result of countries like Greece having too much government spending. Before the financial crisis of 2008 which started in the United States, they were able to sustain their spending. However, past the 2008 crisis, people started questioning some of Europe's economies. When people lost confidence in the Greece economy, other European countries like Spain and Italy also saw more people being cautious in spending.

At the present stage amid government bailouts, government spending cuts and increased taxation, the many of those European economies currently affected by the crisis are seeing little or no growth in their economy. As such, import growth rate in to the European union faced a steep decline in import growth, falling from about 32% in January 2011 to 0% in December 2011. With imports into the European Union being so severely affected by the eurozone debt crisis, India's export industries are likely to be affected as well. With exports declining, India will ultimately see a decline in growth of its economy.Another problem that might cause a decline in growth for India's economy would be the rising commodity prices between the period of December 2011 and March 2012.

 



 Indicated by the graph above showing an index of commodity prices. Rising commodity fuel prices meant that firms would face increased productions costs and thus their profits is reduced. Hackett's research conducted a survey among firms affected by the rising commodities and fuel prices and respondents reported that they will pass half of the costs to their buyers while the other half is absorbed by their individual firms. Either way, we can see that quantity in the market will be reduced. Firms will reduce the supplied quantity when there is less profit to be made by supplying at the current quantity. On the other hand, some buyers will choose buy the products at a higher price while others leave the market. It is possible to visualise this situation by having the supply curve shifting inwards in a supply and demand graph. Thus the overall reduced quantity will affect the growth of the GDP.

Another problem that could affect India's GDP growth is the large public debt to GDP ratio. According to an article on The Economist website, India's public debt currently stands at about 60%(using data from the IMF) and its fiscal budget deficit is currently standing at 5.9% up from 4.8% a year ago. At the second search conference held in Mumbai in February, Dr. Subbarao governor of the Royal Bank of India stated that excessive deficit will militate against growth and that government debts should be capped at a percentage of GDP. At the conference, Dr. Subbarao also mentioned that the government should improve the quality of government expenditure, such as spendings on merit and public goods that will improve social and human capital and also physical infrastructure.

Furthermore if India's government keeps spending on things that will not benefit long term growth, such as on loss making state owned enterprises, then we can only see an increasing misallocation of scarce resources and thus will not facilitate the growth of the Indian economy. Since the Indian government have been accumulating more debts to fund its revenue shortfall, a side effect of such an action would be the crowding out of private sector credit. Since there is a likelihood that private sector borrowing rates will increase as the result of the government borrowing, we might also see businesses choosing to look overseas to fund their operation where the borrowing rates are more favourable and thus exposing them to the volatile rupee.

However, in my opinion, the problems that India is currently facing whether internal or external should only affect India's economy in the short term. If India's government could streamline their spending and introduce new measures to make more efficient use of their human capital and natural resources, there is a good chance India's economy can match or exceed its previous high.

No 214 NATURAL GAS RESERVES

By Thanh Thien Nguyen


IN MY OPINION, economics and environment is quite interesting. It is familiar to our lives and many people care about the environment they are living in. In this article, I will talk about a recent issue which is related to energy.

According to the Economist: demand for natural gas has increased .Gas can be used for many purposes: transportation, power generation (such as gas turbine is used to generate electricity), domestic use (cooking and heating), fertilizers, or aviation …. However, there may not be enough supply in industry.

To solve this problem, some countries have started a new invention which can be substituted for natural gas. That is unconventional gas which occupies 45% of the world’s gas. They are shale gas, tight gas and coal-bed methane. The unconventional gas helps full fill the gap of the conventional one which can not be supplied as quickly as needed. It can be found in China, America or other gas- importing countries while Russia and the Middle East have the largest stock of conventional gas. As can be seen from the graph, China had the largest reserve for renewable gas. Russia had the highest rate but mainly was conventional gas.

 One of the advantages of making this new kind of gas is that it creates new jobs and hence reduces the unemployment rate. It can be a substitute for coal which releases large amount of pollution when being used.

The diagram above shows the increasing demand for gas in the next 30 years in different regions and types of natural gas. Gas has lower emissions. However, green energy sources still need to be improved.

There is also fear that the resources of unconventional gas will run out and the process of extracting them can pollute the environment (as chemicals are needed). Moreover, there is negative health impact for people and cattle living near gas exploration areas (chemicals released, methane contaminates water, and some think the process could lead to earthquakes)

(according to  CNN). The cost of producing is considered higher than the one of natural gas. France and Bulgaria have banned producing for environmental reasons. Greens in America and Australia are also rallying against the industry. The clip below is Australian news which shows the influence of unconventional gas on the health effect.

                                     

No 213: UCL Conference. Global Economic Outlook. Part 2.

A FORECAST of future economic situation considering whether there might be a new global economic crisis was an important part of the speech held by Dr. Linda Yueh. 
This possible forecast was based on summing up different aspects of economic growth.

In our view, one of the most interesting data was a comparison of nowadays’ recession with recessions during different economic situations the humanity has already experienced.

The graph clearly illustrates that the pattern the world economy is following during current recession is between crises of 1991 and the Great Depression. It can seem not as bad as it could be, however, if during the first year of the recession its speed was the same as Latin American crisis (which would have meant that economy could have been relatively easy to be restored), nowadays the speed of the recession is closer to the Great Depression rates. This means that in order to restore global economy with the lowest costs, fast measures should be taken to not allow the economy fall as it did during the Great Depression.

These worries can be supported by another graph shown by Dr. Yueh.

This illustrates the output gap during the last 30 years. We can compare the output gap of European countries in the begging of the 90ies when Europe was experiencing exchange crisis mentioned in the previous graph and the figure for these countries nowadays.

As can be seen, European countries shown in the graph had mostly positive output gap. The United Kingdom had a negative one, however the figure was not so significant as it was slightly above -1 per cent, compared to -6 per cent that it had in 2010. Other countries had their gap lower than -5 per cent in 2010. 

However, in 2009 all the figures stopped dropping and the whole pattern had flattened a little.

by Galeeva Dariya

No 212: UCL Conference. Global Economic Outlook. Part 1.

   On 10 December the economic conference was held in UCL and some Bellerbys students found it particularly interesting to visit. One of the presentations was made by Dr. Linda Yueh who was investigating the global economy and the engines of growth of countries nowadays.
   In her presentation "Global Economic Outlook: Engines of growth", Dr. Yueh discussed several issues of modern economy that we found really important.

  As can be seen from this graph, the recession in the period between July 2008 and March 2009 mostly affected high income countries that managed to start recovering far later than developing countries. However, it is evident that the speed of recovery was almost equal in all the countries covered by the research. Moreover, if to compare the patterns of developing countries before and after July 2008, it was Chinese economy that made their economic growth slower before the crisis, nonetheless, it was Chinese economy that caused the most part of development afterwards.
  It is remarkable that according to the World Bank data, high income countries have entered the stage of new recession, whereas developing countries are continuing to grow. Yet, it is quite difficult to predict whether  these trends are going to continue in the future or not.
By Galeeva Dariya and Zaytseva Alina.

No 211: What's been happening and what's going to happen

HI there folks!

I know that some of you have been visiting over the past few months, and that it seems like this blog has taken a rather long holiday.

I was very busy getting ready for the Maths exam from hell in October, and since then I have had a lot of other things to be getting on with.

I do plan for this blog to continue, but unfortunately I cannot carry on doing it all myself.


I'd love it if some of you wanted to write something for the blog. Please let me know if you are interested at.....

sirspottiswoode@gmail.com

On Summer Holiday: Back on 16th August (just before A-level results!)

No 210: Govt spending v Govt Borrowing

EITHER of these topics could be in the exam tomorrow. However, be careful, they are not exactly the same.

Think about yourself for a moment: are the reasons you spend money the same as the reasons why you might need to borrow money? For example, are you likely to borrow money just to buy food? Are you likely to need to spend money every day? Are you likely to need to borrow money every day?
 

In other words, governments need to borrow money to spend only on certain things, and only at certain times.

We know that govt borrowing is necessary when G > T. Therefore a govt will need to borrow if there is a sudden increase in G and/or a sudden fall in T. What could cause such situations to happen? 

In a question about the effects of government borrowing, you can refer to some arguments about the effectivess of government spending. I would say, "some economists argue that since govt spending for demand mangement is ineffective, therefore they should not borrow money to finance this" and give some reasons for it. 

But what you are really looking for are the effects of the borrowing itself. These could be: 

• higher interest payments mean govt has to reduce other areas of spending or raise taxes (as we have seen with Cameron's spending cuts);
• possible need for bail-out (ECB and/or IMF) which would lead to even tighter fiscal policy;
• reduced confidence in the govt's ability to manage the economy sucessfully, particularly affecting future government borrowing;
• inflationary risk if govt increases money supply to pay borrowing or deliberately causes inflationary pressures to reduce the real cost of borrowing;
• financial crowding out;
• an unacceptable burden of debt passed on to future generations.

Try to read about what is happening in Greece at the moment to give you a sense of the real-world consequences of excessive govt borrowing.

Also be careful not to mix up the base rate of interest and the rate government pays on bonds.

The first is the rate offered by govt to buyers of govt debt. The second is the rate govt lends to banks. 

The rate on bonds affects the amount of interest govt will have to pay back in the future. It does not affect the other interest rates in the economy, particularly those for households and firms. It might though affect the attractiveness for banks of lending to govts or to businesses/consumers. It could affect the exchange rate too, as described next.
 
If the govt wants to borrow a lot more, possible lenders become worried since they are more concerned about the govt's ability to pay back its debts. In order to attract them, the govt offers a higher rate of interest (called the yield) on its bonds. 

This might attract foreign investors if the bonds are thought by them to be a good mixture of reward compared to risk. In such a case demand for the currency would increase, causing an appreciation. 

However, at the moment no-one wants to buy Greek govt bonds, even though, for example, the yields on 2 year bonds are 28.24%!!!
  

No 209: tutor2u prediction of key areas for Module 4

THIS morning tutor2u contains a prediction of possible contexts that could turn up in the exam:

• The consequences for the UK economy should the US economy experience a double-dip recession

• The economic consequences for the UK of natural disasters such as flood, drought, tsunami (external shocks) and economics of global price volatility

• The fast-changing role of the Chinese economy and its implications for the UK

• The impact on the UK economy of major instability of the euro

• The impact on the UK economy of the newer membership of the EU 

This link connects to the tutor2u post, which also contains links to presentations about the above topics and exam advice.

tutor2umodule4advice

On exam advice, this is what they say about ending your essay:

A conclusion is essential and should not just repeat earlier points.
A supported final judgement is a criterion in the Level 5 mark band (i.e. to get 22+)
Leave yourself 4-5 minutes for a final judgement of 5-6 lines. This is time proportionately well spent. Try to incorporate a new idea, e.g. how a policy may impact on different parties; how the policy may have different short v long run effects.

No 208: A useful TV programme

IF you need a break from revising, there is a useful TV programme being shown tomorrow (Monday 20th) on BBC2 at 9 o'clock.

It is now available on BBC iplayer:

http://www.bbc.co.uk/iplayer/episode/b0125v5h/Made_in_Britain_Episode_1/

"Made in Britain"

Episode 1

Who says we don't make anything any more? In the first of a three-part series on how Britain pays its way in the world, Evan Davis busts the myths that we were wrong to let so much of our manufacturing go abroad, and that we have become a nation of shopkeepers, bankers and estate agents.
As he flies in the world's most revolutionary jet and drives one of the world's fastest supercars, he discovers Britain still makes a lot it can be proud of. But post crash, he asks is it enough to meet the country's bills.

No 207: A few ideas about Module 4

ONE of my students has just e-mailed me to ask whether I have any ideas about topics for the Module 4 exam. I thought it might be useful for all of you to see my reply:

Dear (student),

A number of us teachers think that issues relating to government borrowing and budget   deficit (what the newspapers call "sovereign debt") may come up. It might be a good idea to read about what is happening at the moment with regard to Greece and its debts.

In addition, Mr Bowen thinks the topic of "rebalancing" may come up. This means the shifting of an economy from one area to another in order to improve its performance: e.g. from relying on domestic demand to expanding exports, from one particular industrial specialisation to another, from producing goods to producing services, etc..

As always though, these are just guesses so don't neglect other areas of the syllabus. On Monday I am going to send everyone a list of the key areas of Module 4 compared to Module 2 so you can check you have covered all the main areas in your revision.

I hope the Module 3 exam went ok today. If you have time to write back, I'd like to hear about your thoughts regarding the exam.

Please e-mail me if you have further questions and please come along to lunch next Friday!

Best wishes,

Mr Spottiswoode

 In addition here are some pictures that might help you....

No 206: Some last minute stories of interest

HI there! Hope your revision is going well!

Here are some last minute stories before the exams that might be worth reading.

1) Chancellor announces new banking regulations and sale of bank shares
New regulations are going to be introduced to force banks to "ring fence" (separate) the retail and invstment parts of their organisation. The government is also planning to sell the shares in Northern Rock that were bought during the Credit Crunch, thereby privatising it.
 http://www.bbc.co.uk/news/business-13770746

http://www.bbc.co.uk/news/business-13783765


2) MS fine 
Microsoft has been fined £178 million by the US courts for using a patented piece of code in its Microsoft Word software.
http://uk.news.yahoo.com/microsoft-must-pay-copyright-cash-084855404.html






 3) Worlds most valuable currency

 It's called the "bitcoin". Have you heard of it?
http://uk.finance.yahoo.com/news/The-world-most-valuable-yahoofinanceuk-945291950.html






4) China inflation
 Inflation in China is set to rise to 6% next month. This is first time since China has been the second largest economy in the world that it has experienced sustained infaltionary pressure. How will this effect the global economy?
http://uk.news.yahoo.com/china-inflation-may-top-6-percent-june-expert-044616876.html

No 205: North Korean TV produces happiness index

No 204: Key issues and stats for macroeconomics

THE table below summarises the important economic indicators and the most important current issues about them.

	Now	B4	Current Issue(s)
Economic Growth	0.5% (Q1 2011)	-0.5% (Q4 2010)	2011 total growth forecast to be 1.4% - is this sign of a recovery?
Inflation	4.5% (CPI April)	4.0% (CPI March)	Should interest rates be raised to control inflation, or will this endanger recovery?
Unemployment	7.7% (Q1 2011)	7.8% (Q4 2010)	Will government job cuts be replaced by private sector jobs? 20% of 16-25 year olds are unemployed.
Current Account	-2.9%   (of GDP Q4 2010)	-2.4%   (of GDP Q3 2010)	Can exports (low exchange rate / manufacturing) help lead the recovery?

No 203: Some very useful last minute resources

HERE are two very useful resources for you to look at before the Module 2 exam tomorrow, both from tutor2u.

This links to a post which talks about how important it is to provide some context in your answer. That is, to connect your general economic analysis with some current events in the UK economy.

Advice on use of context     

As you should all know, the basic economic background in the UK at the moment is that we are just about starting a recovery after a very deep recession, although it is uncertain how quickly the situation will improve.

The next link below is about tutor2u's prediction for the exam. They think that inflation may feature in the exam tomorrow, since it has not in recent exams and the rate of inflation is very high at the moment.

What you should revise about inflation

Good luck tomorrow and remember......

No 202: Revision notes on unemployment

THIS links to a post on Tutor2u which briefly summarises all the main information on unemployment for both the AS and A2 exams:



tutor2u unemployment notes

Hope you enjoy! Hope you're enjoying revision and exams......

If you need some relief, watch this video:

http://uk.news.yahoo.com/diet-coke-and-mentos-stunt-goes-wrong.html

No 201: Slight fall in unemployment (of one type)

UK unemployment (labour force survey measure) has fallen by 36,000 to 2,46 million.

 
  This is over the 1st quarter of 2011. The percentage rate of unemployment is now 7.7%, down from the previous figure of 7.8%.

However, the rate of unemployment among 16-24 year olds is still very high - 20%.

Also, there was a rise in the Claimant count by 12,400 in April up to 1.47 million. This is explained by a movement of people from economically inactive categories such as those on sickness benefit and income support, on to unemployment benefit.

No 200!!!!!!!!!!!!!!!!!!! Oh dear, inflation

CPI inflation rose to 4.5% in April, compared to 4% in March. This was a surprisingly big increase.

(Note: this means prices were 4.5% higher in April 2011 compared to April 2010.)

The rise is blamed on increasing transport costs and rising prices for alcohol and tobacco. In his letter of explanation for the continued failure of inflation to meet the Bank of England target, Mervyn King said it was also due to the "increase in VAT to 20% in January, higher energy prices and increases in import prices".

On the other hand, RPI inflation fell a little from 5.3% to 5.2%, indicating some weakness in the housing market.

Read more about it here: http://www.bbc.co.uk/news/business-13421614

No 199: Useful revision presentations from Tutor2u

HERE are links to the Tutor2u revision presentations.

First, this link will take you to AS Micro (Module 1):

http://www.tutor2u.net/blog/index.php/economics/comments/as-micro-revision-resources-collated/

Second, this link will take you to AS Macro (Module 2):

http://www.tutor2u.net/blog/index.php/economics/comments/as-macro-revision-resources-collated/

No 198: Are you the 10,00th?

WE are very near to having the 10,000th visitor.

If you are the 10,000th, contact me or or the blog with some evidence of this - like a screenshot - and I'll organise some kind of prize!