1. What were the major reasons for global food price inflation in 2007/08?

There are many explanations for the food price inflation in 2007 and 2008. Firstly, the population growth put pressure on the scarce resource which was food. Countries like for example in India the population increase is 1.548% (2009 est) while countries population is about 79,217.401 (2009 est).
This combined with the increase in the amount of urban population – which in last five years increased by 3% puts huge pressure on the scarce resource – food.
Moreover, there was an increase in production of bio-fuels, and as the supply for food and the bio-fuel is joint the increase in demand for the latter puts inflationary pressure on the former.
Another supply side reason for the increase in the food prices is the fact that in 2007 there was a very poor harvest because of the drought.
One might argue that because the developing countries were depended on the imports of cheap, subsidised food from the developed countries, when the trade was liberalised, poorer countries had a big problem with producing enough food themselves. Moreover, Restrictions were removed from Japan which contributes to lack of balance in the rice prices.

2. Is there is a link between rising oil prices and food price inflation?

Yes there is. The increase in the price of oil (demonstrated on the diagram on the left) lead to increase in demand for the substitute good, which was bio-fuel. As, noted above, increase in demand of bio-fuel leads to an increase in price of food, because those are joint supplied

3. Why are rising food prices such a concern for lower income consumers

Lower income consumer are most vulnerable to increase in food prices, because food is much greater part of their spending. As food is a necessity, and important part of what we spend, it can not be replaced by anything, and the closest substitute - cigarettes is expensive.

4. Why have the global cereal stocks been declining for the last decade?

Firstly, because of the reform of the common agricultural policy.
Moreover, the demand for food at that time exceeded the supply.
Much of the anticipated decrease in global cereal output in 2005 is in developed countries, mainly reflecting smaller coarse grain crops.

5. What happens to the price elasticity of supply for cereals when stock level fall?

The more there are stocks the bigger is the elasticity of supply, as the supplier can increase supply when the price rises. Therefore, when the cereal stocks fall the supply becomes more and more inelastic.

6. Why are the global food supplies susceptible to demand and supply side shocks?

Because they are price inelastic. When there is an increase in demand, or in some areas there is an decrease in supply it is very hard to increase the production overnight, as most often a change in output takes more than a year.

7. Can buffer stocks help to reduce the food price volatility

Yes they can, especially in the short run. If they are managed by the government which aims at making the prices stable they can be efficient in reducing the price volatility. They decrease the supply when there is an oversupply and increase it when there is undersupply. However, in the long-run this leads to an overproduction and the stocks are growing to big.

8. What are the key problems of running buffer stocks programs

Firstly the fact that these often are expensive. The storage and buying the food can cost a lot.
However, the main problem with the buffer stocks is that it unnaturally increases the demand for food, hence leads to an overproduction that does not fits the demand, hence wasted scarce resources.

9. What is the economic conflict between global transport demands and attempts to reduce the number of people below the poverty line

The poverty threshold, or poverty line, is the minimum level of income deemed necessary to achieve an adequate standard of living in a given country. The global demand for transport is putting inflationary pressure on most of the products, especially on food. It is because of increased demand for biofulels which, as discussed above increases the prices of food.

10. Explain what is meant by income elasticity of demand. Why might the income elasticity of demand for meat and diary products be different for consumers in China than in the UK?

The elasticity of demand is the responsivnes of demand to chanes in other variables, those might be income, price of other goods etc.
The difference outlined in the question may stem from the fact that the Chinese have different eating patterns than the British.

11. Should governments consider a tax on meat so that more land can be freed up for human food rather than animal food?

Given that the demand for oil will constantly rise, while the supply is most likely to fall, there will be more and more land used for production of bio-fuels. There fore it is crucial to look for possible increase in the supply of food, for the sake of those who barely can afford it.
Because production of one kilogram of food takes about ten kilograms of food, if the tax reduced the amount of consumed meet, it would be very efficient in diminution of the hunger in the world.

12. ‘Higher food prices are good god for farmers and bad for consumers’ assess the validity of the statement

This statement is valid as long, as the high prices of food are not resulting from the problems of the farmers to produce their food

notes up till the bank of england

The national economics

National income

Calculating national income:

- Expenditure method
o C+I+G+X-I
- Output method
o Self-employed people
o Trading profits
o Rent
o Interest
o = total domestic income – stock appreciation
o = GPD
- If the spending of all groups is added it does not reflect the actual income of the nation but the spending at the current prices – including the indirect taxes
o It does not takes into account the indirect taxes
o It does not takes into account subsidies – which would decrease the market price
- Income method

- OUTPUT = INCOME = EXPENDITURE
-
- GNP – the value of final goods and services produced by factors owned by the citizens of the state
- GNP – Depreciation = NNP (Net National Products)

- Problems in comparinf the national incomes
o The currency – often change
o Accounting techniques
o It is important to take the price level into account
o Take climate into account
o The distribution of income may vary
o Do not takes into account the black markets and barter
o D

Aggregate Demand

- Injections
o Investment
o Government spending
o Exports
- Withdrawals
o Savings
o Taxes
o Imports
-
- Keynesian consumption function: DO NOT UNDARSTAND IT
- Savings are influenced by:
o The interest rates
o The income level
o The expectations
o The inflations
- Marginal propensity to consume depends on:
o Level of income, the more you earn the more you are likely to save
o Interest rates
o Expectations
o Taxations
o
- MPC – the Marginal Propensity to Consume – additional amount of money spend for every additional pound earned
- APC = C/Y -
o It shows the amount of consumed on average out of each pound
- According to Keynes consumption is the function of national income
o When the income level is low the consumers are dissaving, when it is higher they are saving. It is because autonomous consumption
- Other factors influencing consumption
o Relative income – how others spend money, or how we are used to live
o Expectations
o Interest rates
o Wealth
o The distribution income. If the income is redistributed from high income families, then the MPC is higher
- Friedman theory of consumption
o People base their consumption on expectations of future income. IE if somebody expects to inherit money of his father he will take a loan and spend money
o You will dissave when your young, you will save when your are old (the consumption depends on the stage in life)
- Investment
o Increase in the stock levels and capital
o Gross and NET
 Gross total level of investment
 NET Gross minus depreciation
o Planned vs. actual
o Autonomous vs. induced
 Autonomous – unrelated to the level of national income
 Induced – it is related to the changes in the level of national investment
o Real and money investment
 Real – investment in capital goods
 Money investment – investment in shares, bonds etc.
o Factors influencing investment
 The rate of return – if its greater than the cost of borrowing the
• Marginal Efficiency of Capital – shows the rate of return on each unit of capital
 The expectations – very important
 Taxation
 Fall in price of capital goods
o Investment increases the capacity of the economy
o Movements along the investment schedule
 Are caused by the rate of interest
o Accelerator
 Shows the relationship between the investment and the rate of change in national output
 It assumes that the increase in investment will be greater than one in output
o The interest rates are determined by \
 Suuply
• People’s willingness to save
• The ability of banks to lend
 Demand
• From households, companies, from the government to finance deficit


Government policy and objectives

- Privatisation – transferring assets from the public sector to the private sector
o Contracting out – When activities undertaken by public sector are sold off to the private sector
o Deregulation
o Sale of assets
o Examples: 1981 British Aerospace, 1986 British Gas, 1989 British Steel
o Each industry that has been privatised is controlled – OFTEL – telecommunication, ORR – Rail
-

Fiscal policies

- Revenues
o Taxes
o Profit from privatisation
o Rents from government building and land
o Profits from nationalised industries
o Dividend from any private enterprise in which the government share

- Tax

o Direct tax
 Income tax
 Corporation tax
 National Insurance contribution
 Petroleum revenue
o Property taxes
 Inheritance tax
 Capital gains tax – paid when an asset increases in value and is sold of with gain
 Council tax – local tax paid by a member of a council
o Indirect tax
 VAT
 Tax on tobacco
 Excise duties on alcohol
o A good tax system
 Horizontal equity should be paid in similar circumstances
 Cheap to administer
 Have vertical equity
 Be difficult to evade
 Be easily understand by the taxpayer
 Have a limited disincentive effect
o Unemployment trap
 When people are worse off when working
 Because they lose benefits when they start to work
o Poverty trap
 When people are worse off when they earn more, also because of benefits
o Fiscal stance
 Refers to whether the government is pursuing an expansionist or contractionary policy, whether is increasing or decreasing the aggregate demand
• Deflationary policies – increase in the AD
• Deflationary policies – decrease in the AD
o Automatic stabilisers
 Progressive taxation is an automatic stabiliser, the more people earn the more taxes they pay, therefore the multiplier effect is reduced
o Ways of financing the deficit:
 Treasury bills
 Bonds
 National Savings certificates
 The Bank of England can lend to the government
o Discretionary stabilizers
 Actions deliberately undertaken by the government to regulate the economy

 You can increase the taxes or increase the government spending
o The impact of Fiscal policy on money supply
 The existence of increased national debt leads to an increase of the money in the market
 However, if the government is sells the debts to the non-bank public and encourages people to use the National Savings this will take excess money out of the market
 If the government sells its long run debt to the banks it reduces banks’ liquidity, there reduces the supply of the money
 If the government sells Treasury bills to the banks they are so liquid that it will most likely increase the amount of money on the market
o The national debt
 If the national debt is domestically financed it is just taking money from one group of people to another
 If the government finances it from oversees than it can become a burden
o Problems of the fiscal policy
 The time lag
 The imperfect information
 Fiscal drag
 Crowding out – Increase in expansionist fiscal policy, leads to increase in the demand for money. Given the money supply that increases the interest rates, therefore leads to a situation in which the private sector is investing much more!!!
• The monetarists argue that money is interest elastic, and shift in money demand will have a relatively large impact on interest rates. They also argue that investment and aggregate demand is interest elastic, therefore it is decreased if the interest rates are high
o Fiscal policy is likely to be more effective if:
 Money demand is interst elastic – so changes in the money supply will have bigger impact on the interest ratesx
 The marginal efficiency of capital is interest inelastic
o Keynesian fiscal policy
 The economy is not necessairy at the full employment in the equilibrium – the government has to boost the demand/intervene to increase the employment
 Fiscal policy is effectice
 BY having a deficit the government can increase AD to achieve full employment
 Fiscal policy can be used to fine tuning of the economy.
o Balanced Budget multiplier
 If the government takes from the AD Ł100 and gives it to a DO NOT SEE LOGINC IN THIS NEED HELP\


Money and banking

- The functions of money:
o The medium of exchange
o A store of value
o Unit of account
o Standart of deferred payment – people are willing to accept money as payment as payment in the future
- Financial institutions
o Discount houses: Intermediaries between the bank of England and the commercial banks. Specialise in very short-term borrowing. Borrow money for the short term from the commercial banks and for the short-term from the Bank of England
o Commercial Banks: Owned by the shareholders. They specialise in providing banking services to the individuals
o Merchant Banks: Ie. Rothschild’s; These banks specialise in advising large companies on raising money and are involved in issuing shares for them
o Finance houses. Help to buy to stuff like TV, or a computer. They borrow you money for that
o Building societies: Firstly just to lend money for houses, but now increasingly competing with banks
- Functions of the bank of England:
o Control the country’s currency: sole power to issue banknotes
o Agent for the government exchange rate policy (buy and sell currency reserves)
o Oversees the financial system
o Banker to the retail banks – holds deposits of retail banks and will lend funds for them
o Supports financial institutions – lender of last resort
o The banker of the government: issues government bonds
- Credit creation and credit multiplier:
o Some of the money is stored in the Banks
o Rest is lent out, and increases the supply of money, this known as ‘credit creation’
- From narrow to broad money
o M0 – notes and coins and the operational balances held in the banks
o M1 – notes and coins in circulation, and private sector sight deposits measure dropped in 1989
o NIMB – Non interest Bearing M1 – excludes all sight deposits which pay the rate of interest
o M2 – NIMB + all other retail deposits held in banks and building societies
o M3 – M1 plus all private sector time deposits in banks plus private sector holdings of bank certificates of deposit
o DO I REALLY HAVE TO KNOW ALL THIS STUFF??? I WONT BE ABLE TOREMEMBER THIS ANY WAY.
- From the mid 1980s the Government is trying to control demand for money rather than the supply for money
- Controlling the money supply:
o Open market operations – the Bank of England sells Government debt (short term treasury bills; long term – bonds). The bank honours the check by paying the Bank of England and this reduces the their reserves and so reduces their liability to lend
o Liquidity: (or reserve) ratios: By forcing the bank of England to keep more funds in reserve, you can force the commercial banks, to do the same. However, the Goodhart’s Law states that if Bank of England tries to control one type of lending than, banks will find other ways of increasing other types of cash.
o Funding: this involves changing a short term debt into a long term one. B y selling longer term debts to the banks the bank of England reduces their liquidity and ability to lent
o Cut the amount the Government borrows: the PSBR increases the money supply if it is financed by selling treasury bills or borrowing from the Bank of England
o Special directives and special deposits: banks can be forced to deposit a certain percentage of their liabilities
o Moral suasion

National economic:

Introduction to economics:

- PPF: most often convex to the origin due to the law of diminishing returns. The more of good B is sacrificed for the increase in the production of good A, the extra output for A becomes smaller,
- If the returns are constant the PPF line is straight.


Demand:

- The demand curve shows the quantity the consumers are willing and able to pay far a certain good.
- Change in price leads to movement along the demand curve
- Shift in demand my be caused
o Change in price of substitute
o Change in price of compliment good
o Advertisement
o Change in lifestyle
o Population change
o More credit is available
- It is downward sloping because:
o The diminishing utility, the more we have the products the less useful they are
- It is upward sloping
o Giffen good
o ‘ostentious goods’
- Utility = Satisfaction
- MU = marginal utility – extra satisfaction of consuming another good
- Law of diminishing marginal utility: states that successive units of consumption will eventually lead to a fall in their marginal utility
- Price elasticity and a straight line demand curve
o At the left the demand is price elastic – price ish big therefore small % change will influence the demand curve
o At the right demand is price inelastic relatively big change change in price will lead to a relatively small change in quantity demanded

Supply

- Joint supply beef and cow skin
- The price elasticity of supply:
o %change in quantity supplied/%change in price
o
o
o

1. Account for the fact that, even though food accounts for a relatively low proportion of consumer spending in the EU, rising food prices are adding to the measured rate of inflation.

Even though food is a relatively small part of the basket of goods, the increase in the food prices lead to an increase in inflation in the eurozone, from 2.1% to 2.6%. It is because the food prices are so big, the price of butter for instance raised by 40%. Moreover the rise in prices of food are pushing the inflationary expectations, which is also leading to an increase in inflation.

2. Using data from the stimulus material analyse the possible reasons for the increase in the food prices.

The extract 4 provides variety of possible reasons for the increase in the food prices. It firstly points that the UN are arguing that the increase was a result of increase in the price of oil, which is a necessary factor in production process of food. It is demonstrated in figure 4.1 that the price of oil raised from $50 per barrel in January 2007 to $85 in November. It also put forward the extreme weather that decreased the supply of food. The most important factor however was an increasing demand for the bio-fuels, and the fact that increasing amount of farmers would switch to production of this substitute of normal fuel. The farmers in the US – the greatest supplier of grain switched 20% of their land to bio-fuel production.

3. Why does the food inflation particularly affect the low-income people?

Because the money spend on food by them is a greater part of their income.

4. Comment on the consequences of the inflationary expectations

The increased inflationary expectations, ceteris paribus lead to an increase in the rate of inflation. Firstly, because the trade unions and ordinary workers will start to bargain higher wages to outweigh the loss resulting from an increase in inflation. Moreover, many may spend more, expecting fast deterioration of the purchasing power of their money. On the other, hand the increased inflationary expectations may lead to a greater uncertainty, and therefore increase in savings and shift of the aggregate demand curve to the left. This would case a reduced inflationary pressure. However, most likely to be outweigh by the other factors leading to an increase in inflation.

5. What is meant by the social consequence of inflation?

The social consequence of inflation is firstly the increased inflationary expectation, resulting in even higher inflation. If the inflation is cost-pushed and is leading to a significant increase in the cost of living. This would therefore lead to a situation in which the poorer part of the populace cannot afford basic foodstuff. This leads to an increasing frustration, and depending how severe is the inflation in some places where the administrative apparatus is weak and the rule of law weak may lead to riots, dangerous for the political order and therefore the state of the economy. The example of Russian politicians who try to diminish the effects of the inflation by imposing minimum price of food demonstrates the political response to an increase in the rate of inflation.

6. Analyse alternative explanations for food price rises other than those referred in the stimulus material.

Other possible causes of the food inflation are; the impact of trade liberalisation, distorted global rice market, and financial speculation. Financial speculation in commodity futures following the collapse of the financial derivatives markets has contributed to the crisis due to a "commodities super-cycle." It therefore means that the investors moved from financial derivatives to food, which increased the demand, hence the price of food.

One might argue that because the developing countries were depended on the imports of cheap, subsidised food from the developed countries, when the trade was liberalised, poorer countries had a big problem with producing enough food themselves.

Moreover, Restrictions were removed from Japan which contributes to lack of balance in the rice prices.

7. Why despite the opposition from agricultural interests, has reform of the Common Agricultural Policy been forced on the EU?

Because, the former way of functioning of the CAP lead to a disproportional increase in the supply. In the long run it meant that the money of taxpayers were allocated in stocks, and unused and crops. The oversupply of food was a typical example of market failure

8. With reference to intervention in agricultural markets, discuss the concept of government failure.

Government failure occurs when the government leads to misallocation of resources. It is when the resources, are allocated in impropriate way – if somebody could be better of without making others worse of.

The CAP was an example of a government failure. It lead to a situation in which a lot of resources were used to food production, while there was an oversupply of food.

Another example is the undersupply of food resulting from intervention of Kremlin into food market. It lead to an undersupply of food.

9. Why have economists warned that centralised controls are not appropriate ways of dealing with the food inflation?

Because, the government intervention tends to be inefficient. Moreover, it often results in unanticipated consequences, which lead to a misallocation of resources – example is the CAP.

10. Analyse the case for increasing the welfare benefits to enable people to cope with price rises.

The increase in welfare benefits has some pros. It is helping the group of people that are most severely hit by the inflation. Moreover, it does not interfere with the price mechanism.

On the other hand, it is not dealing with the causes of the problem, but only with the effects. In this term, it is ineffective.

11. Why would monetary policy in the form of interest rates rises only have a ‘very limited effect on food prices’? Identify and discuss the unintended consequences.

Monetary policies would have a very limited impact on the inflation, because of the fact that it is a cost-push inflation. Hence, the shift of the aggregate demand curve to the left, resulting from the increase in the interest rate, would have a very limited impact on the increase e in prices resulting from the shift of the aggregate supply curve to the left.

Additionally, the increase in the interest rates would lead to decrease in demand for durable goods, not needs of everyday need which is food.

The unintended consequences of an increase in the rate of interest, would be ceteris paribus increase in the exchange rate, therefore loss of competitiveness of given economy.

Other unintended consequence would be the loss in the pace of increase in the GDP.

12. To what extent do price controls tackle the problem of food inflation?

The food controls tackle to a vary limited extent the problem of social consequence of the increase in the food prices, by appeasing the poorest part of the society.

However, the decrease in the price of food, would result in the contraction on the supply curve, which would lead to a decrease in the quantity of produced food.

It would also lead to emergence of a black market economy.

13. Analyse the possible link between the food inflation and the monopoly.

Monopoly is an industry in which there is only one company. It can reduce output, which results in an increase in prices of produced product. This therefore leads to an increase in prices and allows the monopolist to enjoy the abnormal profits.

According to Vladimir Putin, the monopolists were abusing the food price inflation, and were restricting the output to gain more money. In this way the former president of Russia would justify imposition of minimum price of food.

If the monopolies were real, it would be possible that their existence contributed to the high prices of food.
14. Using a diagram to support your comments, explain why economist would be concerned about market becoming more monopolistic




The main problem with monopolies is that they tend to restrict output, to increase the price of the product. This action is profit-maximising, as demonstrated on the diagram, there profit maximising output (MR=MC) is where the price is relatively high. This leads to increase in the economic profit, as demonstrated on the diagram.

This is an obvious misallocation of the resources as the industry is not producing where the MC=AC

15. Analyse the consequences of interference in the price mechanism.

If the government interferes in the price mechanism this is most likely to a misallocation of resources, hence the government failure.

It is so because if the price is not settled by the demand and supply, there would be either over or undersupply of a good. Example is the interference of the of Kremlin, which by setting the maximum price for food, created a situation in which less food is produced than is actually demanded. This is demonstrated in the diagram below.


As demonstrated above, setting the maximum price – Max P leads to an under supply – Q2 minus Q1. It is because there is a contraction over the supply curve and expansion over the demand curve.

Setting a minimum price, most often for labour results in oversupply and in the example of labour, to unemployment. This is demonstrated on the diagram below.



Because of the contraction on the demand curve and the expansion over the supply curve there is an oversupply.

transport questions

Given the UK’s dependence on car transport, why should people be concerned about the dominance of private car transport?

There are several reasons for that. Firstly, the car transport is unsustainable if compared with most other modes of transport. Average car is producing from around 160 grams of CO2 per kilometre, if take into account that most of the cars are travelling with one or two people inside, while A city bus on average consumes as much fuel as 15 passenger cars (or 15 one family houses).

Moreover, the high reliance on cars results in the low efficiency of the transport. It is estimated that the British are spending more than 25% when going to work than in France and Netherlands.

How do you encourage people to turn to alternative modes of transport, other than the car?

Firstly, by providing disincentives to use cars. The government to do this can tax fuel, introduce congestion charge. It can also encourage the usage of busses and trains. It can do so by creating programs that which provide an incentive for the usage of busses. Such as subsidising companies to increase the quality of their service.

What do you understand by the phrase ‘integrated transport’?

Is a policy that aims to increase the cooperation between different modes of transport. It is supposed to integrate different types of transport, promote greater integration of transport with the environment - so that our transport choices support a better environment, integration with land use planning – at a national, regional and local level, so that transport and planning work together to support more sustainable travel choices and reduce the need to travel.

Prepare arguments either in favour or against building more roads

In favour Against
More flexible labour It promoted usage of cars, the most unsustainable mode of transport
Cars are the most important means of transport Usage of railway is cheaper and more efficient
Busses – more sustainable form of transport is also promoted and more efficient This is only a short term solution to the problem of conjestion – there is still a lot of people that can potentially buy a car
The externality resulting from the traffic congestion will be reduced



Summarise the difference between the UK and other EU states in terms of transport policy and the alternative modes of travel available for the citizens of those countries.

In the UK there are less cars per personne than in most Western European countries. (437 per 1000 in 2001)
However, the UK occupies a relatively smaller land area, and therefore there are more congested roads. Average British worker spends 46 minutes each day commuting, while in Italy and France this takes ten minutes less.
Although car drivers are safer than the European ones, the pedestrians and cyclist are more likely to die because of car accident.