Icelanders can't afford Big Macs anymore

McDonald's is to close its business in Iceland because the country's financial crisis has made it too expensive to operate its franchise. The fast food giant said its three outlets in the country would shut - and that it had no plans to return.

Besides the economy, McDonald's blamed the "unique operational complexity" of doing business in an isolated nation with a population of just 300,000. Iceland's first McDonald's restaurant opened in 1993. The franchises are run by a firm called Lyst, with owner Jon Gardar Ogmundsson saying the decision was "not taken lightly". He said that the restaurants imported the goods from Germany, but that costs had almost doubled, with the falling krona making imports prohibitively expensive.

Mr Ogmundsson said the restaurants had "never been this busy before... but at the same time profits have never been lower". "It just makes no sense. For a kilo of onion, imported from Germany, I'm paying the equivalent of a bottle of good whisky," he added. He now plans to run the restaurants under another name so that he is able to buy cheaper Icelandic products.

Iceland's banks collapsed at the height of the global credit crisis - wrecking the country's economy and forcing it to rely on an $10bn (£6.1bn) international aid package.

David McWilliams discusses the pullout here.

Recession ending for some

Brazil has come out of recession after its economy grew in the April-to-June quarter. The largest economy in Latin America expanded by 1.9% in the second quarter from the previous three months.

Data also showed Sweden emerged from recession on Friday, a sign that economies are starting to recover from the global economic downturn. Other countries that have come out recession include the eurozone's largest economies, Germany and France. Japan, the world's second-largest economy, also grew by 0.6% in the second quarter, less than the 0.9% growth the government initially estimated.

Stupid bankers!

Q: What's the question most bankers are asking these days?
A: "Do you want fries with that?"

Q: What's the difference between a bank manager and a pigeon?
A: A pigeon can still put a deposit on a Ferrari.

Q: How do you get a banker out of a tree?
A: Cut the rope.

Q: What’s the definition of optimism?
A: A banker who irons five shirts on a Sunday evening.

A banker said he was going to concentrate on the big issues from now on. He sold me one in the street yesterday.

Q: What is the difference between a banker and a large pizza?
A; The pizza can still feed a family of four.

Q: What's the difference between a banker and a couch?
A: The couch can support a family of four.

Q: What do you call a banker without a girlfriend?
A: Homeless

An Bord Snip Nua report is out

As a result of Ireland's financial crisis there were calls before Christmas for the formation of a new body to identify areas for cut-backs in public expenditure. A group of experts was called together at the behest of the Minister for Finance Brian Lenihan. The group's formal title is "Special Group on Public Service Numbers and Expenditure Programmes". It is a four person group, headed by University College Dublin economist Colm McCarthy (pictured above). Colloquially, it is referred to as "An Bord Snip Nua".

Today, the Department of Finance published An Bord Snip Nua's recommendations for around €5.3bn worth of public spending cuts. The 80-page report includes hundreds of proposals, including the abolition of the Department of Community, Rural and Gaeltacht Affairs.

It recommends a reduction of up to 5% in social-welfare rates, an increase in the retirement age, a reduction in the number of Irish embassies and increases in hospital charges. Other proposals include a cut of 500 in Defence Forces personnel, an amalgamation of small primary schools, means tests for home-care packages and reduced spending on road maintenance. An Bord Snip is also recommending the abolition of Sports Campus Ireland and the Irish Film Board, a 33% reduction in the number of VECs and the discontinuation of the rural transport scheme.

Euro cities cheaper to live in

A new survey released today has shown that Dublin has dropped out of the top 20 most expensive cities in the world, due to lower rents and the euro's fall against the US dollar. The cost of living survey for 2009, carried out by consultants Mercer, puts Dublin as the 25th most expensive of the 143 cities covered. This compares with 16th last year. Tokyo has knocked Moscow off the top spot.

In Mercer’s survey, New York is used as the base city for the index and scores 100 points, all cities are compared against New York and currency movements are measured against the US dollar.

Standing room only?

Ryanair Holdings may offer free flights to passengers willing to stand up during flights of less than 90 minutes, Sky News reported, citing chief executive Michael O'Leary.

Ryanair is asking Boeing about converting planes or delivering a new fleet with a section of “vertical seating”' that would allow passengers to stand or to sit on bar stools similar to those in trains' dining cars, Sky reported Mr O'Leary as saying in an interview.

July Quiz!

Today is the day we start our monthly competition. Still not sure of the prize but rest assured, it will be decent. All you have to do is answer the following five questions correctly. Send your answers along with your name (and address if I don't teach you) to bleconomics@gmail.com. Closing date is Friday, 31st July. The answers are all on the site somewhere! Good luck!

1. Which famous British economist, currently back in fashion, believed the way to stimulate an economy in a recession (or depression) was for the government to reduce interest rates and also to invest in infrastructure?

2. NAMA is to be run under the control of which body?

3. Which economist, known affectionately as Dr. Doom, coined the term 'stagdeflation' in 2008?

4. Where and when was the IMF founded?

5. Which company announced in February that it is entering the residential electricity market, with a guarantee to customers that its prices will be at least 10% lower than the ESB?

Is privatisation dead?

There is an excellent article by Richard Wachman and Tim Webb in this morning's Guardian, which asks whether the idea of privatisation is now dead. I have abridged it as it's quite long but you can read the full piece from the link at the bottom.

Have we reached the end of the line for privatisation?
First it was the banks, now the government is taking over a key rail service. But it may not be enough to reverse the process begun by Thatcher.

Nationalisation used to be a dirty word, but now it's back in vogue. The government's move last week to nationalise the east coast rail franchise comes in the wake of the state's takeover of parts of the UK banking system, all of which has raised fundamental questions about the success of market-driven capitalism. That may seem strange given that over the past quarter of a century, it has been a one-way street with the transfer of assets from the public to private sector, a process that was the centrepiece of Margaret Thatcher's governments in the 1980s. For years, no one questioned the prevailing orthodoxy that the running of companies was best left to the market and that managers would perform better if they were answerable to shareholders rather than civil servants.

...

But since the collapse of the banking system and the state rescue of capitalism itself by government and central banks, the wind is blowing from a different direction. That doesn't mean that British industry is about to undergo wholesale nationalisation, but many believe that the pendulum has swung too far the other way. Blind faith in global market forces over three decades is viewed as just as short-sighted and dangerous (more so, it seems) as over-dependence on the discredited socialist ideologies that played out in the 1970s. No one should be under any illusion that the world has changed a great deal since Margaret Thatcher left Downing Street 20 years ago. Nationalisation, raising taxes and Keynesian economics are back in fashion. And many of the virtues that she claimed for the market place have been shattered by the greed and stupidity of bankers, and the short-sightedness of politicians on both sides of the divide.

Source: The Guardian 05 July 2009

Why Study Economics?

Obviously, because it's the best subject out there and the Leaving Certificate course is very manageable. But apart from the obvious, I saw this on YouTube this evening and liked it. Nice video!

Dragons' Den is back

The BBC has confirmed that the new series of Dragons’ Den will start on Wednesday 15th July at 9.00 p.m. on BBC2.

Live register up again

The seasonally adjusted Irish Live Register total increased from 402,100 in May to 413,500 in June, an increase of 11,400 in the month. This is the smallest monthly increase since last September (see graph above). The standardised unemployment rate in June was up to 11.9% - the highest rate since April 1996.

Remember, the Live Register is not designed to measure unemployment. It includes part-time workers (those who work up to three days a week), seasonal and casual workers entitled to Jobseekers Benefit or Allowance. Unemployment is measured by the Quarterly National Household Survey and the latest seasonally adjusted figure, for January to March 2009, is 223,400 unemployed.

Taoiseach Brian Cowen on Wednesday forecast that the number of dole claimants will rise to 500,000 by Christmas and grow further into 2010. It's clear, given the expected international backdrop of years of slow growth, that Irish unemployment will remain elevated for an extended period.

Ramsay's own kitchen nightmare

Profits at Gordon Ramsay's UK restaurants fell by 87% in the last year, forcing the chef to inject £3.5m of his own money into the business. His father-in-law and partner Chris Hutcheson also pumped in £1.5m to help cope with mounting debts and tax bills.

The latest accounts showed that in 2007-08 pre-tax profits plummeted £3.05m to £383,325. At the same time, net debt soared from £4.06m to £9.48m.

The closure of two of Ramsay's London restaurants alone accounted for a £9.5m drop in revenue. The Savoy Grill was shut because of refurbishment of its host hotel, while the Connaught's lease expired. A third venue, La Noisette, ceased trading in January this year, and was said to have been a "consistently underperforming site".

Ramsay has told how he had to sell his Ferrari to help raise funds, blaming the company's problems on his own over-ambition. Some 25 staff also lost their jobs as part of the restructuring efforts.

Universal phone charger on the way

Life could soon be easier for millions of mobile phone users across Europe. A deal's been done between industry bosses and the European Commission in Brussels to work towards a 'one size fits all' charger. It would mean an end to users having to hunt around for the right type of charger for their handset and should help cut waste.

The deal isn't legally binding though and, at this stage, is only voluntary. But it means a universal charger, which will use a micro-USB connection, should be available by next year. Under the accord, the companies, including Nokia, Sony Ericsson, Apple, Motorola, Research in Motion and Samsung, are committed to developing the charger.

This is an excellent example of why more choice is not always good, but actually less choice does benefit the consumer at times.

80 jobs go in Belmullet

Up to 80 full-time and part-time job losses have been announced in the Mayo Gaeltacht with the closure of a major call centre. Eurotel Marketing Limited, which is based in the Udarás Na Gaeltachta Industrial Estate in Belmullet (above), has informed its workforce by letter that it will have closed down completely by October I.

The economic crisis and the increasing use of automated technologies is being blamed by the company for the difficulties which are leading to the shutdown. At its peak, Eurotel employed over 100 full-time workers in Belmullet but this has decreased significantly in recent years because of problems caused by the weakening dollar. Recently, the company closed its customer contact centres in Dublin and Athlone.

The 2009 Q1 results are in...

Official figures show that there was a dramatic contraction in the economy in the first three months of this year.

The Central Statistics Office said economic output, as measured by GDP (gross domestic product), fell at an annual rate of 8.5%. The decline in GNP (gross national product) - which excludes profits from multi-national companies based here - was even bigger at 12%. The CSO describes these figures as 'unprecedented' and they are weaker than economists had expected.

Consumer spending was more than 9% lower than the same period in 2008, while capital investment plummeted by 34%. Industrial output dropped 10.5% over the year, including a fall of 31.4% in construction output. New housing was down by 47%, and there was a 20% fall in other building and construction projects.

Other CSO figures showed a fall in the Balance of Payments current account deficit in the first three months of this year. The deficit was €2.53 billion, down from €4.18 billion a year earlier. The surplus on goods surged to €8 billion, mainly due to a slump in imports. The balance of payments measures flows of trade and income into and out of the country.

China getting worried about the strength of the US Dollar

China has renewed its call for the creation of a super-sovereign currency to reduce the US dollar's domination of the world's monetary system. It is believed they want the Special Drawing Right, the International Monetary Fund's unit of account, to eventually displace the dollar as the principal reserve currency.

In its annual financial stability report, China's central bank did not mention the dollar by name but said it was a serious defect that one currency should tower over all others.

'An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis,' the People's Bank of China said.

In a veiled call for the US not to erode the value of the dollar through excessively loose monetary and fiscal policies, the PBOC urged closer supervision of those countries that issue the main reserve currencies.

China is no doubt getting worried about the $1.95 trillion in official currency reserves it has in US dollars. Any further big US budgetary and monetary stimuli may well generate inflation, in turn lowering the purchasing power of the US dollar and handing Beijing big losses on its large portfolio of dollar-denominated bonds.

IMF releases its report on the Irish economy

A new report released yesterday on the Irish economy says that it was perhaps the most overheated of all advanced economies. The detailed analysis by the International Monetary Fund says the collapse of tax revenue could push the budget deficit up to 12% of national income this year, compared with a Government target of 10.75%.

The IMF says Ireland's seemingly unstoppable economic growth of recent years masked serious problems - including the fragility of the public finances. It says generous rises in public sector wages pushed up wages elsewhere, making Ireland less competitive. In recent years, the IMF says, Ireland became the most expensive economy in the euro zone with the possible exception of Luxembourg.

The report says losses now faced by the banks could be about €35 billion by 2010 - although the bulk of that would be absorbed the banks' reserves. The IMF is broadly supportive of the Government's NAMA project to buy back bank debt. But it says setting a price for the purchase of those assets could be easier if the banks are nationalised. Not paying the right price, it says, opens the taxpayer to huge risks. The report says nationalisation could also be used to effect necessary mergers.

The IMF is projecting that the Irish economy will shrink by 8.5% this year, with another 3% drop in 2010. It says unemployment will reach 15.5% of the workforce next year.

Setanta Sports closes down

The long-running battle to save Setanta's substantial UK business finally collapsed yesterday as administrator Deloitte moved in and shut down the business. The move triggered the loss of 200 jobs across Setanta's bases in England, Scotland and Wales, while another 19 jobs were shed in Dublin after new media wing Setanta Media was wound up.

But there was a reprieve for the sports giant's Setanta Sports Ireland, which employs 160 locally, and Setanta Sports International, which has 50 staff.

This is how Setanta Sports News closed down yesterday evening at 6.00 p.m.

More cost saving measures by Ryanair

According to this morning's Irish Independent, Ryanair is considering banning check-in luggage as part of a new system where passengers would have to carry their bags all the way to the tarmac beside the aircraft. Yesterday, chief executive Michael O'Leary detailed proposals where customers would pass all of their bags through security checks, currently used just for hand luggage, and then carry them through terminals to their flight.

The budget airline says the plans could save €20m, through not paying baggage handlers, which would be passed on to consumers. The airline claims 70pc of its passengers do not check in any baggage when travelling. However, there is no timeline on when the plans could be introduced, nor what airports the system could operate in.

Mr O'Leary sold €19m worth of shares in the company less than three weeks ago. Ryanair also said it is suspending expansion at its nine UK bases as part of its lengthy campaign against government-imposed passenger taxes. The no-frills airline claimed that a combination of a stg£10 passenger tax introduced in the UK and what it described as high airport charges levied by airport operator BAA have resulted in 4.5 million fewer passengers at UK airports within the past five months.

WHAT IS... NAMA?

What is it?

NAMA stands for the National Assets Management Agency and its creation was first announced in the April 2009 Budget. It is to be run under the control of the National Treasury Management Agency. The Governmant line is that NAMA is firstly an asset management company dealing with assets transferred from banks. NAMA will not be a bank as it will not be taking deposits from the public and will not have a banking licence. The idea is that the NAMA will buy all of the land and property development loans of the six Irish banks of covered by the State guarantee. In May, the Government approved the appointment of Brendan McDonagh as interim managing director of NAMA.

Why was it created?
By taking problem property loans off the hands of the banks, the Government hopes to put those institutions in a position where they can resume lending with a clean bill of health, their balance sheets strengthened and uncertainty over their bad debts reduced. NAMA will probably become the biggest landowner in Ireland. Developers might not yet realise it - but every single land and investment property they own which has outstanding debt could end up in the new National Asset Management Agency.

So, the banks give over their bad debts. What do they get in return?
NAMA will give the banks government bonds, which it is hoped will result in a freeing up of credit within the economy. NAMA will then manage the bank’s bad loans over a considerable period of time.

How big will the transferred loans be?
The total potential value of the loans which will be taken on by NAMA will be between €80 billion and €90 billion. It is expected that the top 50 borrowers will account for some €40bn–€50bn of the expected total due to be taken over by the new state agency.

Even if the total debts are bought by Nama at two-thirds of their face value – the bill could be in the region of €60 billion. (Ireland’s national debt is currently €54 billion).

What is the time-scale for NAMA?
It could be 12 to 18 months before NAMA gets going properly - although it is expected to be legally rubber-stamped in the autumn. It may need to exist for another 10 to 15 years - it is definitely no short-term fix.

No change in interest rates for the rest of 2009?

There will be no change in interest rates before next year, the Austrian member of the ECB Governing Council said yesterday. "While there are first signs that the pace of economic weakening is decelerating, we must remain alert. Banks know the ECB is following a policy of the steady hand, so they don't expect rapid changes in the interest rate. And I think banks more or less also share our expectations regarding the economic outlook."

The unusually clear statement from Bank of Austria Governor Ewald Nowotny backed up a similar message from ECB President Jean-Claude Trichet in more careful tones, as the ECB official said the bank was likely to keep interest rates steady for at least the rest of the year. "We are in uncharted waters, and there are still risks of a sudden emergence of unexpected financial turbulence," Mr Trichet said at a weekend conference in Madrid.

Thousands of jobs in the food industry at risk

Today, a body representing food and drink companies says 2,000 jobs have been lost in the industry so far this year and 'many thousands more' are at risk. Food and Drink Industry Ireland (FDII), part of employers' group IBEC, said firms' competitive position had been damaged by high business costs and the sharp fall in the value of sterling.

It called for Government action to reduce business costs, particularly energy. The body also urged the Government to seek EU approval to set aside its rules on state aid in order to provide grant aid to firms hit by the fall in sterling. FDII also wants an export credit scheme with a state-backed guarantee.

Now that's a vending machine!

Shoppers in Germany will soon be able to buy gold as easily as bars of chocolate after a firm announced plans to install vending machines selling the precious metal across the country.

TG-Gold-Super-Markt aims to introduce the machines at 500 locations including train stations and airports in Germany. The company, based near Stuttgart, hopes to tap into the increasing interest in buying gold following disillusionment in other investments due to the economic downturn.

Gold prices from the machines – about 30 per cent higher than market prices for the cheapest product – will be updated every few minutes. Customers using a prototype "Gold to go" machine at Frankfurt Airport on Tuesday had the choice of purchasing a 1g wafer of gold for €30, a 10g bar for €245, or gold coins. A camera on the machine monitors transactions for money laundering controls.

Thomas Geissler, who owns the company behind the idea, said: "German investors have always preferred to hold a lot of personal wealth in gold, for historical reasons. They have twice lost everything. "Gold is a good thing to have in your pocket in uncertain times."

McJobs back on the menu

Sean Poulter in the Daily Mail writes on how jobs in McDonald's are in demand again.

In the UK, fast food giant McDonald's is being swamped by more than 2,200 job applications every day, including from bank workers, graduates and teachers. The level of applications suggests the stigma surrounding the 'McJob' has been swept aside by people who are desperate for work and an income.

Among the few sectors that are bucking the recession and rising unemployment are fast food chains and some supermarkets. While these sectors can provide useful, flexible jobs and income, they are not the international wealth creators such as manufacturing and financial services that will drive the UK out of the economic mire.

McDonald's said that it is currently hiring 140 people a day to flip burgers, cook fries, serve customers and run its restaurants. In the past month alone it received 305 trainee manager applications from people with a wide variety of backgrounds in finance and banking, education, hospitality and the retail sector.

David Fairhurst, senior vice president McDonald's UK & Northern Europe, said: 'Given the current levels of unemployment, it's no surprise that we are attracting thousands of applications each day. We are hiring up to 140 people each day, and those employees are choosing to remain with us for considerably longer thanks to the range of opportunities we offer.'

Mcdonald's has struggled to overcome a negative stereotype of the jobs it offers, which have been labelled in the past as the 'McJob'. The Oxford English Dictionary currently describes a McJob as 'an unstimulating, low-paid job with few prospects, especially one created by the expansion of the service sector'. Mr Fairhurst has slammed this definition as 'out of date and insulting' and has campaigned, unsuccessfully, to have it changed. He said: 'The current definition is extremely insulting to the 67,000 people who work for us within the UK.

Source

Ten million log on to Facebook to claim their own 'vanity' web addresses

Insomniac entrepreneurs stand to profit handsomely from Facebook's "vanity URL" giveaway, after millions snapped up the choicest profile addresses in the hours after they became available in the middle of Friday night.

While most people who logged in made a beeline for their own names, before any rivals could take them, many enterprising users took URLs such as facebook.com, /digitalcameras, and /besthotels in the hope of selling them on to others with related businesses. Already these profile pages are turning up for sale on online marketplaces such as Assetize in the hope of attracting bids in the hundreds of thousands of dollars.

Facebook said personalised addresses will make it easier to find people. Users can direct friends to a simplified web address, such as http://www.facebook.com/username. Previously, those addresses had strings of letters and numbers. The change also makes it easier to find Facebook members through search engines such as Google. Although the URL giveaway only brings Facebook into line with MySpace, which has long allocated users their own distinctive addresses, the move generated substantial new traffic to the social networking leader. Within 15 minutes of the addresses becoming available, over a half million users had signed them up. The number clicked over 10 million within five days. Facebook is understood to have contemplated auctioning the addresses, but worried that the move would infuriate those who lost out to more wellheeled namesakes.

Source

What to expect when the recession ends.

Time magazine has a very interesting piece this week, written by Justin Fox. In it he wonders how life will be different after the current recession. He pins it down to five major areas.

* Bear in mind, the article is written very much from an American viewpoint.

1. Frugality
This is an extremely fashionable topic at the moment. Some cultural observers even think Americans are due for a prolonged shift away from the consumption obsession of the post–World War II era. That strikes me as an iffy bet, but it is clear that the debt-fueled consumer spending binge of the past couple of decades is over. The household debt-to-income percentage more than doubled, from 65% in 1982 to 135% in 2007. That turned out to be way too much for us to handle, and now the leveraging process has gone into reverse. The latest household debt-load reading from the Federal Reserve is 128%, and while nobody knows exactly where the percentage will end up, a lot lower seems like a safe prediction. Which means that for years to come, American households will be spending less than they take in.

2. Bear Markets
The long boom in stock prices from 1982 to 2000 and the shorter one in housing prices from about 1997 to 2006 were fueled by rising debt. Ever easier mortgage terms and falling interest rates provided a brisk tailwind for home prices. In the stock market, higher profits pushed along by bigger consumer and corporate debt loads brought higher stock prices. Start ratcheting the indebtedness down and throw in slower growth, and both of these processes go backward. For the long-term health of the economy, that's good — as we've learned, debt-fueled growth is not indefinitely sustainable. It means, though, that both the stock market and the housing market will be confronting headwinds for years to come.

3. Volatility
The Great Moderation was a name economists gave to a post-1982 era marked by only two mild recessions and long stretches of uninterrupted growth. That's over, and the transition to whatever comes next will, if history is any guide, be messy. From 1970 to '82, the U.S. economy was hit by four downturns, two of which (1973-75 and 1981-82) until recently competed for the title of "worst since the Great Depression." The current recession has undisputed claim to that title. And while we may be about to climb out of it, don't be surprised if we endure more downturns. Think of a W shape — maybe multiple Ws — not a V.

4. High energy prices
Saying energy prices would stay high was one of the great forecasting errors of the late 1970s and early '80s — so it's a little scary to predict that they will stay high this time around. But the fact that even the slightest hint of a turnaround in the global economy has sent oil prices skyrocketing from $35 a barrel to more than $70 ought to be a sign that the upward price cycle that started a decade ago isn't played out yet. The crucial element may be that the struggling U.S. no longer drives the global demand cycle — China and India do.

5. Higher taxes
There's just no way to square the cost of current recession-fighting efforts, future Medicare commitments and the various goals of the Obama Administration with the current level of taxation. Taxes are going to have to go up, and raising rates on just the very richest won't be enough. The only alternative is what some call the inflation tax — reducing the relative size of the country's debts by letting prices rise across the board. But that has its costs too. The free-lunch era is over.

Full article

Setanta to go into administration?

An administrator (probably Deloitte) is expected to be appointed to sports broadcaster Setanta as early as Monday after talks with a white knight investor broke down and the company failed to stump up a £10m payment due to the English Premier League. Setanta strongly denied reports in the UK last night that their talks with US billionaire Len Blavatnik had collapsed due to significant tax liabilities, both in the UK and in Luxembourg.

Setanta employs 200 people in Ireland and the ownership structure here is different to the UK. It is 20% owned by promoter Denis Desmond while the remaining 80% of the company is owned by the parent firm Setanta Sports Holdings Limited. Unlike the parent group, the Irish company made a small profit last year.

Setanta boasts around 1.2 million subscribers — but that is still short of the reported 1.9 million it needs to break even and customer numbers have been hit by the recession. The Premier League will now go ahead and market the three-year rights which Setanta had to 46 UK Live Matches per season from the 2009/2010 season. While BSkyB can purchase some of the matches it cannot buy them all thanks to EU law. ESPN, the sports cable channel owned by Walt Disney, confirmed yesterday it is sitting in the sidelines and will take up the rights if "it makes business sense" in a move that would pitch it against BSkyB. It is understood that Britain's leading football clubs could lose at least €30m if Setanta fails and the League is forced to sell on the 46 games.

WHAT IS... the IMF?

This is the start of a new series called "WHAT IS...?" in which I'll explain some term, event, institution in simple terms. We will begin with the International Monetary Fund (IMF).

What is the IMF?
The International Monetary Fund is a global organisation founded in 1944 at Bretton Woods. It aims was to help stabilise exchange rates and provide loans to countries in need. Nearly all members of the United Nations are members of the IMF with a few exceptions such as Cuba, Liechtenstein and Andorra.

What does it do?
It has three central activities:

1. It monitors national, regional and global economic and financial developments. It advises members countries on their economics policies. This is termed their 'surveillance role'. A list of IMF reports on member countries can be viewed here.

2. It lends members strong currencies to help them design programmes to redress any Balance of Payments problems.

3. It offers technical assistance - such as training for government and Central Bank officials.

Where does it get its money?
The IMF is financed by member countries who contribute funds on joining. They can also increase this throughout their membership. The IMF can also ask its member countries for more money. IMF financial resources have risen from about $50 billion in 1950 to nearly $300 billion in 2007, sourced from contributions from its 183 members. This initial amount depends on the size of the countries economy, e.g. the US deposited the largest amount with the IMF. The US currently has 16% of voting rights at the IMF, a reflection of its quotas deposited with IMF. The UK has 4% of IMF Voting rights. Loans are also available to developing countries to 'deal with poverty reduction.'

Is there any criticism of the IMF?
There are many critics of the IMF. Most of the criticism centres on the following:

1. Conditions of Loans -
On giving loans to countries, the IMF make the loan conditional on the implementation of certain economic policies. These policies tend to involve:

• Reducing government borrowing - Higher taxes and lower spending
• Higher interest rates to stabilise the currency.
• Allow failing firms to go bankrupt.
• Structural adjustment. Privatisation, deregulation, reducing corruption and bureaucracy.

The problem is that these policies of structural adjustment and macro economic intervention often make the situation worse.

2. Lack of Transparency and involvement -
The IMF have been criticised for imposing policy with little or no consultation with affected countries.

3. Exchange Rate Reforms -
When the IMF intervened in Kenya in the 1990s, they made the Central bank remove controls over flows of capital. The consensus was that this decision made it easier for corrupt politicians to transfer money out of the economy (known as the Goldman scandal). Critics argue this is another example of how the IMF failed to understand the dynamics of the country that they were dealing with and insisting on blanket reforms.

4. Free Market Criticisms of IMF -
Some criticise the IMF for being too interventionist. Believers in free markets argue that it is better to let capital markets operate without attempts at intervention. They argue attempts to influence exchange rates only make things worse - it is better to allow currencies to reach their market level.

5. Moral Hazard Criticism -
There is a criticism that bailing out countries with large debt only creates 'moral hazard', i.e. the possibility of getting bailed only encourages those in debt to borrow more.

Will the Irish Government ask the IMF for help?
It is quite likely, I believe. Over the New Year there was much speculation (reported by RTÉ amongst others) that Taoiseach Brian Cowen had been talking about IMF intervention with the social partners - Cowen immediately dened this. In January 2009 the IMF said it did not think Ireland needed such financing.  However, Ireland will be looking for IMF assistance later in 2009 or 2010, in my view.

IMF Report is downbeat

The Irish Independent is reporting this morning that an imminent report on Ireland from the International Monetary Fund (IMF) is likely to stress the unprecedented nature of the economic challenge the country faces.

Sources say the IMF's projections on the budget deficit and medium-term recovery in the economy may be somewhat gloomier than those of the Government. Official figures put the underlying deficit at around 8pc of output (GDP) this year, but budget projections see a return to growth of more than 3pc in 2011.

The IMF is believed to have calculated that the "structural" deficit could be as much as 10pc of GDP, or €18bn, and that correcting this will require very difficult choices on public spending. It will endorse the widespread view that most of the correction must now come on the spending side, rather than through more tax rises. This would include serious examination of public sector wages.

The IMF's report is likely to repeat previous views that Ireland needs to target its welfare benefits more precisely, in view of the pressures on public spending. Even if it is not spelt out directly, this will be taken to include the universal payment of untaxed child benefit.

The report does not find fault with the Government's approach to the crisis, or its controversial plans to set up the National Asset Management Agency (NAMA) to remove development loans from the banks' balance sheets. But the report does emphasise the amount of effort it will take to solve these problems. The Government's plans see a return to borrowing of less than 3pc of GDP by 2013, from this year's level of around 11pc. Such an ambitious plan will require sustained action on the Government's part, the analysts in Washington say.

On bank rescue, it is likely to emphasise that it is essential that NAMA pays the correct value for the banks' development loans. This has been a political bone of contention, with opposition politicians claiming the Government is planning to bail out the banks and developers, by paying too much for the loans. Taoiseach Brian Cowen has insisted the loans will be valued by experts on an independent basis.

The IMF recognises that the Government has moved quickly on the banking crisis in comparison with some other countries, and that guarantees, re-capitalisation and removal of bad assets must all be part of any re-structuring. Such is the scale of the twin budgetary and banking challenges that the report is expected to state clearly the risks that the Irish economy still faces and the lack of any certainty that the ambitious recovery targets can be met.

Source: Irish Independent 19-Jun-2009

Effects of youth unemployment

There's a good article by Ian King in this morning's London Times dealing with the impact of youth unemployment. Here's a slightly abridged version. You can read the full version in the source link at the bottom.

While all forms of unemployment are bad, youth unemployment is probably the most searing because of its corrosive effects throughout society. Research by organisations such as the Prince’s Trust and the Joseph Rowntree Foundation have proved that “young adulthood” is a period of heightened vulnerability in a person’s life. Unemployment adds to the risk of drug abuse, criminality and, ultimately, incarceration. Work by the Institute of Criminology at Cambridge University, which has been studying the subject for nearly 50 years, established long ago that young people are more likely to commit crime when they are out of work. That crime is often petty but it can turn into something more serious. The summer riots of 1981 in inner-city areas were strongly linked to high rates of joblessness among young people.

For school-leavers or university graduates, going straight on to the dole queue is damaging psychologically, because of the harm it does to self-esteem at a key age. It can also have a lasting effect on careers because a gap on a person’s CV, particularly straight after school or college, can raise awkward questions about their employability. Just ask people aged 48 to 50 who, as new graduates, struggled to find jobs between 1980 and 1982. Youth unemployment is not just a problem in Britain, though. According to official statistics, 20.4 per cent of people aged 15 to 24 in France were unemployed at the end of last year, compared with 16.5 per cent in Britain. In Qatar and Saudi Arabia it is almost 25 per cent. If this all sounds very bleak, it is. There is only one consolation. Much of the great popular music of the past 35 years has been born in eras of unemployment and frustration.

Source: London Times, 18 June 2009

Sample Solutions: LC HL 2009 Short Questions

Here are sample solutions to the nine short questions asked in this year's Economics exam. I'll try to get solutions to the long questions up as soon as I can.

Remember, these are sample solutions only. Some questions here could have many different answers, so if you wrote different points than I did in answering some of these questions you may still receive full marks

Q.1. Outline two uninsurable risks faced by entrepreneurs?

- Strikes
- Entry of rival firms


Q.2.
The demand curve is perfectly elastic.

Reason: The firm can sell all of the output that it wants at this price because it is a relatively small part of the market. As a price taker, the firm cannot charge a higher price or demand will drop to zero and has no reason to charge a lower one. The market price facing a perfectly competitive firm is also average revenue and marginal revenue.


Q.3. Ireland has a mixed economy. What do you understand by this term? State one economic advantage and one economic disadvantage of this type of economic system.

This is an economic system in which both private enterprise and a degree of state monopoly coexist.

Economic Advantage: There are many freedoms in a mixed economy. People may go into business for themselves, decide what they will produce or sell, and set their own prices.

Economic Disadvantage: The state may have a monopoly in some industries and be unwilling to give up power by opening the market to competition.


Q.4. Define 'Cost push inflation'. Identify two sources of this form of inflation in the Irish economy.

Cost push inflation occurs when firms suffer a rise in their costs of production and they then pass on these higher costs to the consumer through increased prices.

Source 1: Increased labour costs (e.g. wages)
Source 2: Increased cost of raw materials


Q.5. The demand for land is 'derived demand'. Explain this term with reference to land.

- The demand for all factors of production is derived demand. This means the demand is not for the factor of production in itself but rather because the factor is necessary for the production of some good/service which people want.
E.g. a property developer will not buy land because he likes to watch the grass growing on it - he will use the land to build houses etc.


Q.6. Outline two possible economic effects of UK Sterling (£) falling in value relative to the euro (€) for the Irish economy?

Effect 1: Consumers may travel to Northern Ireland to buy products which are cheaper there because of the fall of Sterling. This can have grave consequences for producers in the Republic whose sales are likely to drop as a result.

Effect 2: It becomes more difficult to export Irish products to the UK as their prices rise. This can lead to a general lack of competitiveness by Irish firms in that export market.


Q.7. (a) State the Law of Diminishing Marginal Utility.

Diminishing Marginal Utility states that as increasing amounts of a good/service are consumed, the extra utility (satisfaction) received by the consumer from each extra unit will eventually reduce.


(b) The point where DMU sets in is when the third unit is consumed.


Q.8. Define ‘economic development’. Explain two social costs of economic development.

Definition: Economic development is an increase in output per worker accompanied by a change in the structure of society.

Social Cost 1: Increased pollution. The most economically developed countries are often also the ones placing the heaviest environmental burden on society. USA has 4.5% of world population yet emits 22% of the world's carbon dioxide.

Social Cost 2: Large scale migration. Moving away from rural to urban areas in search of work will cause some upheaval in peoples' lives and may mean the loss of the traditional way of life to which they had become accustomed.

Q.9. Economists have commented on Ireland’s ‘greying population’, i.e. the structure of Ireland’s population is getting older. Outline two economic effects of this development for the Irish economy.

Effect 1: Increase for the state in health care costs.
Effect 2: Increase for the state in the cost of state pensions.

Latvian economy on the brink

Latvia is in danger of becoming the first European Union member to face total economic ruin, experts have warned. Their economy, driven by consumer demand, was hit hard last year amid the global economic downturn. In December the International Monetary Fund approved a 7.5bn euro rescue package for Latvia. Now, the tiny Baltic state has been urged to devalue its currency or risk the collapse of its economy - despite fears such a move could cause turmoil elsewhere in Europe.

Although devaluation would damage Latvia's ambitions of joining the euro, analysts said it was the only hope of avoiding a catastrophe after an international bailout failed to reverse the country's fortunes. One economist said Latvia's economy shrank 18pc in the first three months of the year. "The IMF medicine hasn't worked," he said. "Without a devaluation, you end up in the same place. It just takes longer to get there."

When Latvia joined the EU, expectations were high that the country could soon join the euro and living conditions would improve. It fixed the lat to the euro, allowing it to move within a small band. A small and open country, Latvia quickly attracted investment. The big Swedish banks established subsidiaries and an influx of foreign capital helped sustain a real estate boom.

Rising domestic consumption, a thriving property market and capital inflows all helped spur growth. But says Ed Parker at Fitch Ratings, "one of the problems was that a lot of this foreign capital was directed to real estate development and mortgages rather than building an export oriented manufacturing base. This was in contrast to countries like Poland, where a lot of FDIn(foreign direct investment) was used to set up manufacturing plants. A lot of the development in Latvia went into the real estate sector."

At the same time, its fast growth and a fixed exchange rate pushed prices higher. Latvia became an expensive place to do business. "This excessive optimism plus the entry and aggressive lending policies of foreign banks, led to a huge credit boom and huge current account deficit," said Fitch's Parker. When the capital stopped flooding in, as the credit crunch forced banks to tighten lending, the economy froze.

Swine flu destroys Mexican tourism

Mexico is going through what is the biggest drop in its tourism revenue since records began in the 1980s because of the swine flu scare. Tourism officials are speaking of a "lost summer" after visitors, particularly from the US and Canada, cancelled their holidays.

They are not expected to return in large numbers until December. Some airlines have dramatically reduced flights to Mexico, and cruise liners are still avoiding Mexican ports. Luxury hotels in the capital said just 4% of their rooms were occupied at the height of the crisis, which broke in April.

Tourism represents 8% of Mexico's GDP and directly employs two million people. Analysts say the slowdown is an additional challenge for the country, which has been hit badly by the global economic recession. The drop in tourism will be sorely felt as a drop in U.S. demand for Mexican manufactured goods has pushed Mexico into its most severe recession since a 1995 financial crisis. Tourism is one of Mexico's top sources of foreign currency, accounting for about 8% of the economy. The sector employs about 2m people across the country. The Mexican government is preparing a major campaign to entice visitors back. Privately, officials say that the fact swine flu has now spread around the world might benefit Mexico because potential tourists will realise they risk catching the virus whether they stay at home or travel to Mexico.

Desperate to lure back vacationers, hotels in Cancun and down the Caribbean coast have cut rates by up to 70 percent. Some are even offering three years of free vacations to any visitor who catches the new flu from a visit to Mexico!

Aer Lingus Cuts

Aer Lingus has announced it is scrapping some transatlantic services from its winter schedule.

The airline says the moves are being made to address 'significant losses' generated over the winter period on some routes. Aer Lingus says these are now being exacerbated by 'extremely weak' demand and lower fares. It comes just one month after Aer Lingus said it was suspending flights from Belfast International Airport.

The airline is stopping Shannon flights to Chicago from September 1, while services from Dublin to Washington and San Francisco are being dropped from October 25. It says the restart of these services in summer next year will be 'subject to review'.

John Morris on RTÉ

Those of you doing the Leaving Cert are no doubt aware the 2FM had an ongoing series every evening dealing with the Leaving exams. Last Wednesday evening, John Morris spoke about preparing for the Economics exam.

The podcast is here.
John's notes are here.

Final Class Saturday Morning 11a.m.

In preparation for the Economics examination on Wednesday morning, the final Leaving Cert class will be held this Saturday morning at 11.00 a.m. in Mr. Reynolds' room. It should last approx. 2hrs and we will go over certain topics again and discuss exam technique.

Economic Indicators for the L.C.

Here are a list of some up-to-date economic data, which Leaving Cert Economics students usually want at this time.

Unemployment May: 11.8% (2nd highest in 'Eurozone' after Spain)
GDP 2008: €184bn (a drop of 6.9% forecast for 2009)
GNP 2008: €154bn (a drop of 7.1% forecast for 2009)
Inflation May: -4.7% (or term it as Deflation = 4.7%)
Interest Rates currently: 1%
Exchequer deficit: €12.71bn

How can Real really afford him?

This morning, Manchester United accepted a monumental bid 0f £80m from Real Madrid for their star Portuguese player, Cristiano Ronaldo. The fee will be a new football transfer world record. The question though is, how can Real Madrid afford to outlay such an amount on a player - especially considering they bought another star, Kaka, on Monday for £56m?

It's a combination of a number of factors: namely, growing match-day revenues, increasingly shrewd and global marketing, healthy commercial income, and a ground-breaking domestic TV deal, which have all catapulted the club to the peak of the Deloitte's Football Money League this year. In fact, they have topped it for the past four straight years. For the 2007/08 season, the club saw its revenue hit £290m. Whilst Real Madrid's 4% revenue growth in 2007/08 was more modest than in preceding years, it meant that across a six year period the club had doubled its annual revenues since 2002.

Matchday revenue has also increased significantly in the past couple of years thanks to the reconfiguring of areas of the club's stadium to increase corporate hospitality capacity and hence revenues.

After the purchase of David Beckham from Manchester United in 2003, Real Madrid cleverly projected their brand into East Asia, on the back of the England star's appeal. Real are targeting the world's best players - who are also the world's most marketable players. In emerging markets fans may swap allegiance, from - for example - Manchester United to Real Madrid, simply because they prefer to support star players rather than clubs. But it is not about Real looking to sell more merchandising in places like China, in fact they would not make a great deal from doing that. They are looking to make money from these signings by maximising their future overseas TV rights.

Since 1997 Spanish clubs have sold their own TV rights individually. Real Madrid signed its latest deal in 2006 - for a reported record 1.1bn euros - with Spanish film and TV company Mediapro for seven seasons of broadcast rights. That works out at a huge 150m euros a year.

But overseas merchandising, domestic and TV rights, and matchday earnings are not Real's only income streams. It also has a number of high profile sponsorship partners - Bwin.com, Adidas, Coca-Cola, Audi, and Spanish beer brand Mahou. An image rights deal with Adidas alone in early 2007 garnered them 762m euros. Another benefit, one that helps attract top name players, is the fact that tax legislation allows their foreign players to pay tax at about 23% for the first five years that they are in the country.

In its latest report, Deloitte said it would be difficult to see anyone topping Real Madrid at the top of the money league next year, but added "it will be interesting to see how the club copes with the loss of the Brand Beckham effect." It appears Real are now answering that question by plugging that gap with the purchases of Kaka and Ronaldo.

Source: BBC

Zero Coca-Cola in Venezuela

Venezuela has banned the sale of the calorie-free Coke Zero, calling it harmful to people's well-being. "The product should be withdrawn from circulation to preserve the health of Venezuelans," said Health Minister Jesus Mantilla. Mr Mantilla did not say what the specific problem with Coke Zero was. Coca-Cola said it would stop production of the drink in the country, but also added that Coke Zero contained no harmful products.

Venezuela's President Hugo Chavez is a vocal critic of the US, and is in the process of nationalising much of the economy. Venezuela is the world's ninth largest oil producer and has already ationalised much of its oil and gas sector since Mr Chavez came to power. Recently he took over its third largest bank, Banco de Venezuela.

Deflation runs deeper

The annual rate of deflation in Ireland fell to 4.7% in May. The figures released by the CSO relate to the period June 2008 - May 2009. This was the biggest fall since 1933 and compares with an annual deflation rate of 3.5% in April. Directly compared with April prices fell by 0.5%. The main reasons for this were falls in mortgage repayments (due to as April's interest rate cut by the ECB). Rents also fell, while there was a reduction in electricity and gas costs.

We're back!

First of all, sorry for the long absence. I intend to get back to posting every day over the summer. There will also be a section next Wednesday on the Leaving Certificate paper. Time permitting I will try to get as many solutions up to the questions as I can.

An economist is something to be...

The Irish Independent has an interesting article where they report that the current recession is making economics a cool subject again (wasn't it always?!) and how the numbers studying it will increase substantially. Fourth Years - I told you, you chose well when you joined Economics! :o)

There has never been a better time to be an expert in the subject once known as the "dismal science''. Economists are in constant demand in the media, and some faces -- most notably David McWilliams and George Lee -- are now as well known in Ireland as film stars and footballers. But will their popularity, and the constant discussion of the country's beleaguered economy, rub off on a new generation of students?

Colm Harmon, professor of economics at UCD, predicts a boom. "In my experience, enrolments in economics go up as the economy goes down,'' says Professor Harmon. "In the '80s, they had to use two lecture theatres for the subject in UCD, because there were so many doing it. "Our worst time for enrolments was early in this decade, at the height of the boom.'' It is too early to say whether there has been a significant growth in CAO applications for economics courses in universities, but college authorities report a surge in interest in the subject, particularly at graduate level.

Dr Alan Ahearne (pictured above), lecturer in economics at NUI Galway, has emerged as one of the most respected commentators during the current recession. He has noticed a big increase in the number of applicants to NUI Galway's masters degree in international finance. "The course covers a lot of the issues around international economics and banking. These have been constantly in the news over the past few months, and that is having an effect. "We are getting a lot of interest from students with backgrounds in business studies, law and engineering.'' Dr Ahearne almost stumbled upon economics as a subject when he was studying for his Leaving Cert at St Clement's College in Limerick. "When I was doing my Leaving, it was a choice of physics and economics. Economics was the least worst option. "Then, when I actually started the Leaving Cert course, I became fascinated by the subject and I carried that into college. "At school, we learned early on about micro-economics, such things as supply and demand. You could be looking at apples or bread. I loved the rigour of the subject.'' Ahearne studied business studies at the University of Limerick, and only specialised in economics as a post-graduate. His career thus far shows where studying economics can lead. As a PhD student at the US-based Carnegie Mellon University, one of his mentors was Finn Kydland, winner of the Nobel Prize for Economics in 2004. After stints teaching at a number of universities and working for accountants Coopers and Lybrand, and Bank of Ireland Treasury, he worked for the US Central bank -- the Federal Reserve. Among his tasks was the preparation of research notes for Alan Greenspan, one of the most influential global financial figures of the past 20 years.

Jim Power, economist at Friends First and lecturer at DCU and the Smurfit Business School, came to the subject by a similar haphazard route at the Leaving Cert. "After my Inter (now Junior) Cert, I was studying three science subjects but after a month I decided to drop one of them. I chose economics over biology and I grew to love the subject.'' The graduate of economics and politics at UCD believes the subject will grow in popularity in the near future. "We have a problem of economic illiteracy at the moment. You only have to look at the Government to see it. So, the skills of economists are likely to be in greater demand in the near future. "People are fascinated by the death of the Celtic Tiger, and how it happened. There was a similar surge in interest in economics during the currency crisis of the early '90s. That was a turning point for economics in this country. "Students are realising how useful economics is as a training. With few jobs out there at the moment it is a good general discipline.'' Most of those who study economics do not actually become economists. "It can be used as a stepping stone into many different careers, including politics, journalism and accountancy," says Mr Power.

Many economics graduates work in financial services. "It is a very broad subject that applies to different areas,'' says Professor Colm Harmon of UCD. "It is relevant to health, education and transport. When you think of a single mother deciding to join the workforce, that is an economic issue.'' While a new generation of economists is likely to emerge from the current global recession, Thomas Conefrey of the Economic and Social Research Institute, said that his interest was sparked, in part, by the Celtic Tiger boom. The Trinity College graduate says: "Just as there is immense interest now in analysing our difficulties and how we can overcome them, similarly, at that time, there was great interest in finding out what had caused this economic boom and how long it was going to last.''

Full article

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