IB Economics Real World Examples

Negative Consumption Externality

Smoking (second hand smoke) Singapore has a 71% tax on cigarettes

Subsidies

European agricultural subsidy (CAP- common agricultural policy, 30bn a year

Price floor (Minimum Price)

Scottish alcohol price floor 50p per unit

Price ceiling (maximum price)

New York (Bronx) price ceiling on rent for housing and apartments- rent control

Positive Consumption Externality

Eg. Vaccinations, education

Singapore training schemes, 95% subsidized for low wage workers

Positive Production Externality

Research and development- developing new technologies that benefit society or can be used by society

Bee farming (pollination of multiple species)

Advertizing/Persuasion to limit Negative Externalities

Switching to public transport, less smoking, changing to greener companies, decreasing consumption of unhealthy foods (Singapore healthy eating campaign)

Cap & Trade Policy

EU emissions trading system

Limitation of Carbon Tax

Harms economic growth (US and China refuse)/ international competitiveness, Norway considering scaling back carbon tax due to failing oil sector investment

Limitation of switching to biofuel

Conflict with food (Brazil uses 25% ethanol in gasoline)

Low interest rates

UK 0.25% in 2016

Unemployment rate

2.3% in Singapore in 2017

Swaziland: around 40%

Cyclical unemployment

(recent example) Eurozone crisis- 11.5%, due to inability to devalue euro and low AD

Spanish youth unemployment rate 56.2% in 2013

Structural unemployment

The manufacturing industry, for example, has been in significant decline in Australia over the last few years. As Car manufacturers such as Ford, Toyota, Holden and Mitsubishi have stopped manufacturing in Australia, this means that manufacturing skills are less demanded whilst other jobs requiring different skills are more demanded. This means that structural unemployment increases for those previously in manufacturing jobs.

Detroit dude... how did you miss that

Perfect Competition

Night markets in Thailand/Cambodia

Hawker centres

Monopoly (competitive branding)

Apple - 40% of US smartphone market

Oligopoly

Singtel, Starhub, M1

Singapore buses (they have identical fares and they haven't changed in decades)

US Airline Industry: 5 airlines have over 70% market share of industry

Monopolistic competition

(perfect comp except there is room for diversification/branding)

Barbers, hairdressers, beauty salons, restaurants

Common access goods

Fishing in international waters (South China Sea)

Formal collusion

OPEC (Organization of the Petroleum Exporting Countries)

Informal collusion

Virgin Airlines and British Airlines fixing fuel surcharges

Regulatory Barriers

French Government ordering all Japanese video imports to be inspected in Poitiers - took too long etc. + effectively reduced imports

VERs (Voluntary export restraint)

Following the end of the FMA, EU and US asked China to restrict its textile exports.

import substitution

Latin America: by the early 1960s, domestic industry supplied 95% of Mexico's and 98% of Brazil's consumer goods

Exchange rates

1 USD = 1.4 SGD

Current Account Deficit

The U.S. current account deficit was $469 billion in 2016.

Centrally Planned Economy

SOVIET RUSSIA (in soviet russia you do not plan your economy, your economy plans you)

Privatizations (making government businesses private)

SMRT privatized, bought by Temasek Holdings

Nationalisations (making private businesses government owned)

Nationalization of airport security in the US post 9/11 to form the TSA

Mergers/acquisitions

Tiger Airways was bought by Singapore airlines in 2016

Stagflation (increase in inflation and increase in unemployment simultaneously)

1973- US oil crisis. The 1973 oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo (ban on trade). By the end of the embargo in March 1974, the price of oil had risen from US$3 per barrel to nearly $12 globally; US prices were significantly higher. The embargo caused an oil crisis, or "shock", with many short- and long-term effects on global politics and the global economy. However, this spike in oil prices meant that wages could not keep up, and people lost their jobs as there was very little supply and demand of oil because of the spike in price.

Zimbabwe in 2004

Inflation rate

-0.5% in Japan 2016

0.7% in Singapore 2017

Supply side policies- Labour market reforms

Minimum wage- In December 2015, the state of Kentucky lowered the minimum wage from $10.10 to $7.25 USD in order to reduce unemployment.

Singapore- one single government controlled workers union (NTUC- National Trades Union Congress)

Supply side policies- trade liberalization

Canada/EU CETA deal - lowering tariffs on EU agriculture

Supply-side Policies - Investments in Human and Physical Capital

2008 Financial Crisis, the Obama Administration increased its spending on public projects such as road building in an effort to boost aggregate spending

Expansionary fiscal policy

Japan's post 2014 (8% tax too high) recovery- 3 point stimulus package: monetary, fiscal, structural reform, $276bn fiscal spending in 2016

Failure of Expansionary Fiscal Policy

Failure of expansionary fiscal policy in Greece.

However, it may not always achieve its intended effect. For example, consider the situation of Greece. Any reduction in tax would probably not lead to increased consumer spending, as people would be more inclined to save than spend in a recession. Investment would also be highly doubtful as it requires business confidence, and Greece simply doesn't have that from it's investors. Also, government spending requires the government to have substantial funds - or it would require borrowing money. This could exacerbate an already worsening situation. Etc.

Contractionary fiscal policy

Iceland in 2012 cutting spending and reduced their deficit

expansionary monetary policy

following the uncertainty of Brexit, the UK lowered its interest rates to a record low of 0.25%

Contractionary Monetary Policy

Austerity measures in the EU post 2008 recession

Marginal Propensity to Consume (MPC)

Some wealthy nations, such as Japan and Germany, have relatively low marginal propensities to consume. Likewise, many poor African and Asian countries have relatively high marginal propensities to consume.

Asymmetric Information

VW Diesels

- VW cheated on emissions tests

- Consumers believed that the VW diesel cars were more environmentally friendly than they actually were

- Demand (MPB) with asymmetric information was greater than it would have been if buyers had correct information

- More VW Diesels were bought and sold at a higher price than what was socially optimal

Cost push inflation

OPEC increasing prices of oil thus increasing costs of production

Increase of minimum wages in Washington to $15

Demand pull inflation

increasing household income increases AD (China)

Automatic stabilizers

unemployment benefits, welfare payments (transfer payments)

Progressive taxation

French citizens whose income is over 1 million euros will be taxed at a rate of 75%.