Thursday, May 21, 2009

WORLD ECONOMY

An Overview of Global Economics and an Introduction to International Economic Profiles


The world economy grew 5.2% in 2007 powered by growth in China (11%), India (9%) and Russia (8%). The global economy faces a real risk of 1970s style stagflation however, with resource constraints tighter than ever before. Things could scarcely have looked rosier for the world economy at the start of 2007. The Emerging Markets, led by the giants of China, India, Russia and Brazil (the BRIC countries) had been posting 7%-10% grow rates for years. Property and stock market booms had brought consistent growth in North America and Europe. Investment was bringing economic development to much of the Middle East and Africa, and even Japan was recovering from its deflationary ‘Lost Years’.Economic conditions within these countries play a major role in setting the economic atmosphere of less well-to-do nations and their economies. In many aspects, developing and less developed economies depend on the developed countries for their economic wellbeing. Theories were even circulating that thanks to the growth of the developing world, we might enjoy years of unfettered growth, as new markets would go through successive growth spurts and counter the effects of slowing growth elsewhere. It was suggested that Asia was ‘decoupling’ from the US and able to grow under its own steam thanks to its two ‘Awakening Giants’. What a difference a year makes.

The global economy has been hit by a rapid one-two punch that may be setting the stage for stagflation to make a come-back. It started with the sub-prime crisis in the US, caused by loans to risky or ‘sub-prime’ mortgagees who did not have strong credit histories. While house prices were rising there wasn’t a problem. But as house prices slowed and then crashed to earth, default rates started to rise. To add fuel to the fire, sub-prime loans had been packaged and re-packaged in a range of derivative financial instruments such as Collateralized Debt Obligations (CDOs). It was not always clear what the contents CDOs consisted of, as they were combined, sliced and re-sold between financial institutions and funds, and which in some cases allowed risky debt such as sub-prime loans to be packaged as part of low-risk instruments. Vast swathes of CDO investments had to be written off, and banks became suspicious of investment, borrowing and lending, since it was not always clear what the underlying security was. Once banks stopped lending the Credit Crunch hit. We then witnessed extraordinary scenes of government regulators in US and UK having to help save collapsing banks in order to avert a meltdown of the financial system, and to Sovereign Wealth Funds (SWFs) from the developing world taking large stakes in venerable western banks like Citibank and UBS in return for keeping them liquid. With house prices having fallen more than 20% in many areas of the United States, even prime mortgage holders now find themselves with negative equity. The federal government has been forced to step in and assume responsibility for both Fannie Mae and Freddie Mac, who between them back over half of all American mortgages. The second part of the one-two punch has involved the rise of commodity prices. Just before the dawn of the 21st century, oil average $16 a barrel. By July 2008, less than 10 years later, oil hit a high of $146 a barrel – a stunning rise of more than 800%. From early 2007 to mid 2008 alone the price has risen more than threefold from the mid $40s. During the Oil Crisis of the 1970s, oil spiked at a nominal peak of $38. In today’s prices (adjusted for inflation), that is $106, a figure that we blew past in early 2008. The price of food has also started spiraling. Rice and other grain prices have doubled from 2007 - 2008, leading to food riots in a score of developing markets. Most agricultural and farm produce prices have been going through the roof. In fact almost all commodities, including those used for energy, construction and consumption, have been rising rapidly. Price rises have been fueled by the demands of the emerging markets, particularly the BRIC nations, who together account for nearly 3 billion people. In order to maintain their high rates of growth and help lift more of their populace out of poverty, they require more and more commodities. A bigger worry for economists, however, is whether the natural resources exist to meet these burgeoning demands. A similar crisis was faced in the 1970s. After a period of strong global economic growth, when the world economy was averaging 5% a year GDP increases, the world hit supply constraints in oil and food. For the next fifteen years, global GDP growth slowed to an average of 3.2% per year. This became known as the stagflation era. Growth opportunities were limited, but prices continued to rise with a continued lack of supply. A great debate ensued as to whether we had reached the limits of the earth’s ability to support our growth. In 1972 the Club of Rome famously argued exactly that, saying that the global economy would collapse. And yet the opposite happened. According to Jeffrey D. Sachs, Director of the Earth Institute at Columbia University, world crude oil production grew from 21 million barrels per day in 1960 to 56 mbd in 1973, a growth of 166%. The stagflation crisis also brought about a ‘Green Revolution’ through fertilizer and irrigation development, and through the development of stronger seed strains. This led to much higher agricultural productivity levels. Since 1970 however, crude oil production has only grown 30% worldwide. More worrying still is that crude oil production in the Middle East has peaked at 21 mbd in 1974 and remained stagnant, while mature fields in the North Sea, Norway and Alaska are all in decline. In fact there is a growing school of thought known as ‘Peak Oil’ that believes we have – or will soon – reach peak oil production capabilities. In the 1950s Dr M. King Hubbert correctly predicted peak oil and decline rates for the mainland US oil industry. His model came to be known as The Hubbert Peak Theory. It predicts that world peak oil production will be reached sometime between 2000 and 2010, and will decline thereafter. This impending crisis has also helped to raise the price of food, since increasing amounts of land are being devoted to biodiesel crop development, and since higher oil prices raise the cost of fertilizer (for which petroleum is a key ingredient) and food transportation. It seems increasingly likely that a massive investment in renewable energy sources will be needed in order to avert another stagflationary period in the world economy, or even a global recession. The jury is still out as to how quickly oil supplies will decline or how fast alternative energy sources can be brought online. World Economic Statistics at a GlanceWorld GDP (PPP): $65 trillionGDP Growth Rate: 5.2%Growth Rate of Industrial Production: 5%GDP By Sector: Services- 64% Industry- 32% Agriculture- 4%GDP Per Capita (PPP): $9,774Population: 6.65 billionThe Poor (Income below $2 per day): 3.25 billion (approximately 50%)Millionaires: 9 million (approximately 0.15%)Labor Force: 3.13 billionExports: $13.87 trillionImports: $13.81 trillionInflation Rate – Developed Countries: 1% - 4%Inflation Rate – Developing Countries: 5% - 20%Unemployment – Developed Countries: 4% - 12%Unemployment & Underemployment - Developing Countries: 20% - 40%Sources: CIA World Factbook, IMF, UNDP
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Tuesday, May 19, 2009

ECONOMICS

Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία (oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)".[1] Current economic models developed out of the broader field of political economy in the late 19th century, owing to a desire to use an empirical approach more akin to the physical sciences.[2] A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."[3] Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.

Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business, finance and government, but also in crime,[4] education,[5] the family, health, law, politics, religion,[6] social institutions, war,[7] and science.[8] The expanding domain of economics in the social sciences has been described as economic imperialism.[9][10] Common distinctions are drawn between various dimensions of economics: between positive economics (describing "what is") and normative economics (advocating "what ought to be") or between economic theory and applied economics or between mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutions-history-social structure nexus"[11]). However the primary textbook distinction is between microeconomics ("small" economics), which examines the economic behavior of agents (including individuals and firms) and macroeconomics ("big" economics), addressing issues of unemployment, inflation, monetary and fiscal policy for an entire economy.

Monday, May 11, 2009

Economy – overview

Global output (gross world product) (GWP) rose by 3.2% in 2008, led by China (9%, equal to 21% of global growth), the US (1.1%, or 12% of growth), the European Union (0.9%, for a 10.5% share of growth) and India (7.3%, equal to 5.6% of the total rise). The 12 largest economies (the US, Japan, China, Germany, France, the United Kingdom, Italy, Russia, Spain, Brazil, Canada and India) contributed just over half of all economic growth in 2008.[2]

Growth results in the wealthy, or “advanced” economies, slowed by two-thirds, from 2.7% in 2007 to just 0.9% in 2008. Emerging Asia slowed from 9.8% to 6.8%; Emerging Europe from 5.4% to 2.9%; the Commonwealth of Independent States from 8.6% to 5.5%; the (non-OECD) Western Hemisphere from 5.7% to 4.2%; the Middle East from 6.3% to 5.9%; and Africa from 6.2% to 5.2%. [3]

Externally, the nation-state, as a bedrock economic-political institution, is steadily losing control over international flows of people, goods, funds, and technology. Central governments are losing decision making powers and enhancing their international collective power thanks to strong economic bodies of which they democratically chose to become part, notably the EU. The introduction of the euro as the common currency of much of Western Europe in January 1999, while paving the way for an integrated economic powerhouse, poses economic risks because of varying levels of income and cultural and political differences among the participating nations.

Internally, the central government often finds its control over resources slipping as separatist regional movements - typically based on ethnicity - gain momentum, e.g., in many of the successor states of the former Soviet Union, in the former Yugoslavia, in India, in Iraq, in Indonesia, and in Canada

World economy

The world economy can be evaluated in various ways, depending on the model used, and this valuation can then be represented in various ways (for example, in 2006 US dollars). It is inseparable from the geography and ecology of Earth, and is therefore somewhat of a misnomer, since, while definitions and representations of the "world economy" vary widely, they must at a minimum exclude any consideration of resources or value based outside of the Earth. For example, while attempts could be made to calculate the value of currently unexploited mining opportunities in unclaimed territory in Antarctica, the same opportunities on Mars would not be considered a part of the world economy – even if currently exploited in some way – and could be considered of latent value only in the same way as uncreated intellectual property, such as a previously unconceived invention.

Beyond the minimum standard of concerning value in production, use, and exchange on the planet Earth, definitions, representations, models, and valuations of the world economy vary widely.

It is common to limit questions of the world economy exclusively to human economic activity, and the world economy is typically judged in monetary terms, even in cases in which there is no efficient market to help valuate certain goods or services, or in cases in which a lack of independent research or government cooperation makes establishing figures difficult. Typical examples are illegal drugs and other black market goods, which by any standard are a part of the world economy, but for which there is by definition no legal market of any kind.

However, even in cases in which there is a clear and efficient market to establish a monetary value, economists do not typically use the current or official exchange rate to translate the monetary units of this market into a single unit for the world economy, since exchange rates typically do not closely reflect worldwide value, for example in cases where the volume or price of transactions is closely regulated by the government. Rather, market valuations in a local currency are typically translated to a single monetary unit using the idea of purchasing power. This is the method used below, which is used for estimating worldwide economic activity in terms of real US dollars. However, the world economy can be evaluated and expressed in many more ways. It is unclear, for example, how many of the world's 6.6 billion people have most of their economic activity reflected in these valuations.

he Economic Psychology of Stock Market Bubbles in China

Shujie Yao 1 and Dan Luo 1
1 University of Nottingham

A first draft of this paper was presented by Shujie Yao as the inaugural 'The World Economy China Lecture' at the University of Nottingham, Ningbo, China, in November 2008. The authors thank the Leverhulme Trust for supporting this research (grant number F/00765/A). They are also indebted to Professor David Greenaway and conference participants for their valuable comments, but remain solely responsible for any errors or omissions herein.

Copyright Journal compilation © 2009 Blackwell Publishing Ltd

ABSTRACT

The Chinese stock markets were extremely volatile during the period 2005–08. The Shanghai Stock Exchange (SSE) Composite Index increased more than sixfold from 1,012 in 2005 to 6,124 by the end of 2007. It then declined continuously to reach a low of 1,929 on 17 September 2008, or a drop of 70 per cent from its peak in less than 10 months. Although the market downturn may have been affected by the financial crisis in the United States and the rest of the world, the extreme fluctuations of stock prices signify a big market bubble, and the burst of that bubble must be explained by intrinsic characteristics or the economic psychology of Chinese investors. Based on a detailed market data analysis, this paper attributes the development of the stock market bubble to three key psychological factors: 'greed', 'envy' and 'speculation', and the burst of the bubble to three contrasting factors: 'fear', 'lack of confidence' and 'disappointment'. It concludes that only after Chinese companies become really commercialised and profitable and investors become rational can the stock markets become stable without extreme volatility as seen in the past. Government policies can play a role in soothing market volatility detrimental to shareholders and the wider economy, but investors should not depend on government for making their own investment decisions.