Debate: This House is for CAP

CAP is a very controversial policy and has undeniably resulted in  some form of government failure. The CAP began in 1962 as a way to increase food production. It costs around Euro 55 bn per year in subsidies to farmers, funded by taxpayers. The Commission wants farmers to earn some of their subsidies, for example by protecting the environment, but farm ministers are fighting back. The subsidies available to some of the largest farm businesses can top Euro 1 million each year.  Below are some interesting links to help you develop your understanding of the scheme and therefore aid you in your preparation for next week’s debate.

 

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Home Alone – Budgeting while at Uni

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                            https://www.youtube.com/watch?v=rV3srd3ss34
                            https://www.youtube.com/watch?v=Gunxiibceg8
                            https://www.youtube.com/watch?v=WpgFYNcz54M
                            https://www.moneyadviceservice.org.uk/en/videos/managing-money
                            https://www.youtube.com/watch?v=1izMDidvJtE
 
 
 
 
General advice
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Tutor2u comes to Dubai 2015

830 825More than 70 students from 7 schools in the UAE and around the Gulf united on March 28th and 29th 2015 at Dubai College for this year’s much anticipated Tutor2u AS and A2 Economics Intensive Revision Workshop – a rigorous two day course that reviewed important economic concepts and trained us with vital exam techniques.

Indeed, there were no lies when it came to the word ‘Intensive’, giving an exciting and challenging element to the workshop which kept us interested and focused. Topics covered all the material that we had learned during the year with more in-depth discussions and valued tips for the exam.

Despite the intensity of the learning, the general atmosphere was quite relaxed thanks to the cheerful and pleasant approach of the instructors Geoff and Nicky. With the right blend of interactive exercises, lectures and friendly instructors, the workshop was thoroughly enjoyable and extremely rewarding. Tutor2u’s workshop along with the resources provided, has truly equipped us well to triumph in the greatest battle ahead, that is our economics exams this summer. Not only was the revision workshop a venue to sharpen our economic understanding and skills but also provided us with a great chance to meet and network with various students from around the Gulf who share the same enthusiasm towards economics. I am looking forward to next year´s A2 workshop already!

 Jessica Lattouf Year 12 AS Economist

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Global Decline in Oil Prices – Why?

An economical insight into the global decline of Oil Prices, and how OPEC, whose mission is to coordinate the policies of the oil-producing countries, is reacting to the ‘oily situation.’
Link: Global_Decline_in_Oil_Prices_-_Why_

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THE MARKETPLACE OF PERCEPTIONS

In recent times, sub fields in economics such as “neuroecononomics” and “behavioral economics” have garnered much spotlight among both psychologists and economists. Recent articles by the the financial times as well as Harvard magazine have emphasized the growing importance of understanding irrationality in order to analyze the economy and design public policy.

Harvard magazine: http://harvardmagazine.com/2006/03/the-marketplace-of-perce.html

The Financial times: http://www.ft.com/cms/s/2/9d7d31a4-aea8-11e3-aaa6-00144feab7de.html#axzz3IjrHebmI

These two articles reminded me of a Tedx talk I recently watched by the famous behavioral economist: Dan Ariely called: Are we in control of our decisions?

Ariely conducts experiments that analyse how humans make decisions. I found this video particularly interesting because his findings regarding human irrationality significantly undermine the value of the simplified models that are currently used to make predictions about the economy (Non-stochastic models, Qualitative models). The main problem with these models is that they are derived from the neoclassical paradigm which assumes that consumers are rational (Homo Economicus). Of course, we know that these assumptions are neither realistic nor plausible because predictions made from these models are not consistent with real outcomes. Neoclassical economics is often criticized for having a normative bias that “demonstrates the social optimality if the real world were to resemble the model”, but that does not “explain the real world as observed empirically”

The fallacy of these models were analysed by Joseph Stieglitz (won the Nobel Memorial Prize in Economic Sciences in 2001):

 “I only varied one assumption – the assumption concerning perfect information – and in ways which seemed highly plausible. … We succeeded in showing not only that the standard theory was not robust – changing only one assumption in ways which were totally plausible had drastic consequences, but also that an alternative robust paradigm with great explanatory power could be constructed. There were other deficiencies in the theory, some of which were closely connected. The standard theory assumed that technology and preferences were fixed. But changes in technology are at the heart of capitalism. … I similarly became increasingly convinced of the inappropriateness of the assumption of fixed preferences. (Footnote: In addition, much of recent economic theory has assumed that beliefs are, in some sense, rational. As noted earlier, there are many aspects of economic behaviour that seem hard to reconcile with this hypothesis.)”

Ariel’s Research

Ariely’s Tedx talk briefly outlines two characteristics of irrational decision making: asymmetric dominance and the Opt in vs. Opt out system.

One of my favourite examples of asymmetric dominance in the video was the Rome vs. Paris experiment which quite aptly highlights our inability as consumers to objectively value a product’s price without being able to compare it to other products. Consequently, the experiment exposes how firms are able to manipulate our financial decisions through their pricing strategies.

Another interesting case study in the video was the “Opt out vs. Opt in” system in Europe where Ariely demonstrates the importance of understanding human cognitive limitations in order to design effective and favourable healthcare policies: “It’s not because we don’t care, it’s the opposite. We care, it’s difficult and it’s complex. And it’s so complex we don’t know what to do and because we don’t know what to do, we just pick whatever it was that was chosen for us.”  

Is there hope for the future?

Of course the word “irrationality” portrays the human mind as erratic and convoluted. However, Ariely’s research has often concluded that we make “systematic biases” which suggests that irrationality can be predictable.

Thus, quantifying these systematic biases would enable us to incorporate them into future models that will improve the quality of the predictions we make. This would reduce the need for the data that we generate to constantly be revised as well as allow the government to create better policies in order for them to steer the economy more effectively. Moreover, economists like Ariely and Stieglitz are emphasizing the sheer degree to which psychology is fundamental to our understanding of the economy which has drawn recent attention to behavioural economics and other related fields such as neuroeconomics. To take their findings forward, the next steps would be to further quantify their analyses in order for them to be implemented into both policies and economic models on a macroeconomic level.

Further reading   

Predictably Irrational by Dan Ariely

Thinking Fast and Slow by Daniel Kahneman

For more information about Ariely’s research or personal life, visit his website:

http://danariely.com/

Or you can watch his Tedx video:

By Sara Kachwalla

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Forget the 1% – It’s the 0.1% who are really getting ahead in America.

A recent article published by The Economist this week outlines the high level of economic inequality in one of the world’s most developed economies – America.  This article reminded me of a TED Talk I watched recently where the speaker discusses the rise of the “Plutocrats” – the small percentage of the most economically powerful people in the economy.  The top 0.1% of families hold almost 25% of wealth.  Many economists suggest that globalisation and advancing technology are responsible for fuelling the global income gap and that they only serve to help the rise of the Plutocrats by taking away jobs from the middle class.  Advances in technology and globalisation, although having lifted people from emerging markets out of poverty, have outsourced more jobs from the developed western economies.  So although countries and companies are becoming richer, jobs are not being created and people, on the whole, are not being paid more in the middle class contributing to the fact that there is no real rise in the income level of the middle class whereas there has been a huge rise in income of the plutocrats.  The level of wealth held by the bottom 90% of households has been decreasing over time while that of the top 0.1% has been steadily increasing.

Link to Economist article:  http://www.economist.com/news/finance-and-economics/21631129-it-001-who-are-really-getting-ahead-america-forget-1

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Automation – a little more depth

In the 1900s, the assembly line concept first came into power and due to that invention, many workers in the manufacturing industry of cars lost their jobs and as a result unemployment rose by a significant percent. Whilst it is completely true that automation of cars has increased efficiency and productivity, there are many negative effects like unemployment. Thus is automation considered to have a negative, positive or a neutral effect? Most people in our world today would have diverse opinions as each of them have been affected in different ways by automation. For example a CEO of a successful car company would favour automation as it increases productivity and efficiency of his products, thus increases his profits which is his main goal. However, an employee who worked on building the cars would see automation as a threat as he would in turn lose his job.
Automation over the past few decades has been a real scare to employees of the manufacturing industry but now the scare expands to the tertiary sector as well. Over the last few years this scare has become more prevalent in our society due to the evidence of technological unemployment. For instance such as, Larry Summers, a former American treasury secretary, looked at employment trends among American men between 25 and 54. In the 1960s only one in 20 of those men was not working. According to Mr Summers’s extrapolations, in ten years the number could be one in seven.
Moreover, the constant innovation of technology is helping it become more and more advanced and in the future companies will be able to replace more and more human labour with capital. Software these days is not only replacing low-skilled jobs like manufacturing but fairly well-paid jobs such as travel agents, bookkeepers and even secretaries. For example, Watson, the supercomputer developed by IBM won against Jeopardy’s best contestants. If a supercomputer can win against humans, what will technology do next?

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America’s Economy: Not sputtering anymore

New figures released by the Bureau of Labour Statistics showed the unemployment rate in America to be lower than 6% – the first time since 2008.  Total employment increased by 248,000 in the month of September.  Last month’s job growth was broad-based, with professional and businesses services such as accounting and engineering leading the way, followed by construction, retail and health care.  Large investments in fracking, leading to a surge in the US energy supply, seems to have helped America’s previous decline in manufacturing to be reversed, causing a rise in demand for labour in the manufacturing sector.  If the US economy continues on its upward trajectory, rising demand should begin increasing wages soon, as unemployment reaches a level where employers have to start paying more to find workers.

The revised growth figures have also resulted in the Federal Reserve saying that they might increase interest rates earlier than expected if the economy keeps growing (Interest rates have been kept near zero since the recession to fuel economic recovery).  Furthermore, since the report was published, the dollar has surged to a 4-year high as investors have interpreted the data to mean that the Federal Reserve will soon begin to tighten monetary policy.  Will America continue to see falling unemployment?  Should the Federal Reserve tighten monetary policy or is it still too early?

http://www.economist.com/blogs/freeexchange/2014/10/americas-economy

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How far will Hong Kong go?

Thank you to AS Economist

Recent decisions by Beijing to “vet” political candidates for the 2017 chief executive elections have sparked protests throughout Hong Kong. These pro-democracy protests have dominated political and economic headlines over the past week.  Beijing’s decision is alarming as Hong Kong is accustomed to freedom. The reasons for this oddity are explained in this video:

So as many speculate, China has been slowly planning or the 2040’s confrontation (explained above) and one way to ease the looming transition is to slowly gain influence over affairs in Hong Kong. One plan is to eventually make Shanghai the economic capital of China, slowly overcoming Hong Kong. But at what cost? Is the outcome worth it?

The main question for  people concerned is, will Hong Kong’s protests dent its economy? There certainly has been evidence of that as it is estimated that Hong Kong protests may cost retailers HK$2bn. Moreover, there has been a growing lack of confidence with foreign investors and current stockholders. This has decreased the strength of the HK$ which is a further economic burden.

All of this is due to the Chinese government trying to secure its grip over its liberal island. Whatever the outcome, it would be a shame to see one of the most successful free market economies fall due to increased censorship and less economic freedoms.

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Year 12/13 – Business Growth – Motives, Objectives and Conflicts: Facebook Floatation

Facebook launched its much anticipated floatation on the NASDAQ stock market in the summer of 2012, with the social networking giant valued at a worth of around $100billion ($38 per share).

Back in 2012 the site made a small profit bringing in £1billion in revenue, or £312million in net profit. Indeed, FB admitted that generating a profit from the site’s mobile phone users in particular, is an “uncertain” process which “will take time” to master. In addition FB received a lot of flak for what was perceived on many fronts to be a grossly overvalued floatation.

With hindsight, these worries appear to have been unfounded. For the full year for 2013, Facebook reported profits of $1.5bn and said its daily active users grew by 22%. “It was a great end to the year for Facebook,” said Mr Zuckerberg in a statement. And it looks like the company is getting even stronger. Its Q1 2014 earnings show it beat expectations, earning $2.5 billion in revenue. It now has 1.28 billion total monthly users, 802 million daily users, and 609 million daily mobile users. Facebook continued its march to become a mobile ad company with 59% of ad revenue coming from portable devices. Wall Street had expected $2.36 billion in revenue and earnings of 24 cents per share.

Compared to Q4 2013, Facebook’s total user count is up 4% from 1.23 billion total monthly users, total daily user count is up 5.9% from 757 million, and daily mobile user count is up 9.5% from 556 million. Mobile ads made up 53% of ad revenue in Q4, the first time they peaked over 50%, and now account for 57% of ad revenue.

Total ad revenue hit $2.27 billion, up 82% from a year ago. Payments revenue including games and apps reached $237 million this quarter, down slightly from $241 million during the holiday Q4. GAAP costs and expenses reached $1.43 billion, up 32% YOY, driven by headcount and infrastructure expenses. Capital expenditures reached $363 million in Q1 2014.

Task 1

Facebook “floated” in 2012 or in other words embarked on an “IPO”. In your own words what exactly do these terms mean?

Task 2

Thinking of the reasons why firms may be interested in floating, briefly outline how firms are owned and controlled from sole proprietor to multinational PLCs including the main motivations for changing ownership status.

Task 3

After reading the following articles and watching the related video clips, answer the questions below.

Facebook buys Instagram for $1bn

Facebook to make billionaires as float draws close

Facebook valued at $104bn as share price unveiled

Facebook loses adverts from General Motors

Facebook raises float price after being ‘swamped’ by investors

Microsoft’s $240 million equity stake in Facebook

a)     Define stakeholder

b)     Who are the principal stakeholders in the Facebook float

Task 4

There has been a lot of criticism about FB’s IPO and the way it was handled.

Some claim there was a conflict of interest between various stakeholders in the deal and questions about ethical business practice has been raised.

Read the following articles and then explain in your words what short selling means and in the FB example, which stakeholders does it involve?

Facebook’s IPO: Morgan Stanley’s Conflict of Interest

Short selling – What on earth does this ACTUALLY MEAN?

Short Sellers Find Friends in Banks

Task 5

There has been a lot of press coverage in recent months of another conflict of interest.

The return of the activist shareholder

Shareholder activism and the banks: A new kind of outrage

The ratio of CEO to worker compensation – Are they worth it?

a)     Outline the details of this particular “conflict”.

b)     Read the article below, in particular “Reason number 5”. Why does FB supposedly hate its shareholders?

5 signs Facebook hates its shareholders

Task 6

Watch and read the following video links and answer the questions below:

Takeovers and Mergers: Facebook & Instagram in News Clips

a)     What were the proposed motives behind the deal?

b)     Where did FB intend to gain revenues from the deal?

Task 7

a)     Facebook’s overheads are made up of fixed and variable costs. What’s the difference?

b)     What’s the formula for FC, VC, TC. Plot them on a graph

c)      What’s the formula for AFC, AVC and ATC. Define and plot them on a graph.

d)     Where possible, under each of these cost categories, provide examples of the costs that FB faces.

e)     In your own words explain why they are shaped as they are.

Task 8

In the light of what you have read, evaluate the effectiveness of the float 2 years ago on the fortunes of FB’s customers and investors.

Use the sources below.

Present your argument in the form of a PPT or Prezi presentation.

Additional Sources

Facebook timeline: the social network’s life story

Facebook IPO: as it happened

Facebook Has Spent $22 Billion on Acquisitions. That’s Equal to the GDP of Uganda.

The Facebook economy

Facebook Floatation – Advantages and Disadvantages of Facebook Advertising Platform

Google and Facebook’s Fight for the Future of Tech

Facebook will Introduce Ads to Mobile Apps

7 Controversial Ways Facebook Has Used Your Data

Criticism of Facebook

Facebook Beats In Q1 With $2.5B In Revenue, 59% Of Ad Revenue From Mobile, 1.28B Users

 

 

 

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