Additional case study: Government intervention In Germany in 2009 there was considerable debate about the extent to which

the government should be intervening in the economy. For example, its citizens were worried about the future of Opel, a German car brand that was part of the ailing General Motors. Some wanted the government to make sure jobs were saved no matter what. Others, however, were more hesitant and worried about becoming the government becoming too interventionist. Traditionally since the Second World War the German government has seen itself as a referee in market issues and has avoided trying to control parts of the economy. It would regulate anti-competitive behaviour, for example, but not try to run many industries. However in the recession of 2009 when the economy was shrinking the government was forced to spend more to stimulate demand and had to intervene heavily to save the banking sector from collapse. The government also had to offer aid to businesses to keep them alive. Questions 1. What are the possible benefits of a government intervening in an economy? 2. What are the arguments against government intervention in an economy? 3. What prompted greater intervention by the German government in 2009? 4. What would determine whether the German continued to intervene on this scale in the future?

Additional case study: Supply of salt At the start of 2010 the UK was hit by extremely cold weather including snow and ice. As a result there was a major increase in demand for salt to put on the roads to make them safer. However, the supply of salt in the UK comes mainly from three salt mines; one in Cheshire, one in Cleveland, and one in County Antrim. The shortage was so great that at one point the government ordered councils to use less grit on the roads and stopped gritting the hard shoulder of the motorways. Problems in the past meant councils had been instructed to hold a few days worth of stock of salt but this was not enough to make the roads safe in what was the coldest period since 1963. Questions 1. Sketch a supply curve that represents the supply of salt in the short run. Explain your diagram. 2. Why do councils keep stocks of salt? 3. Add to your first diagram a long run supply curve for salt; explain your diagram.

Additional case study: China targeting 8% growth in 2010 At the beginning of 2010 the Chinese government announced that it was targeting 8% growth for the economy again, despite the global recession. The target had been 8% for a number of years and the government had always met it. About 9% growth is expected in 2010 thanks to huge government fiscal and monetary stimulus measures. The Chinese economy is the third largest in the world. Forecasts for

economic growth made by the International Monetary Fund for 2010 included China 9.2%, UK 0.9%, Japan 1.7%, US 1.5% and India 6.4%. However government officials in China recognized that growth was not guaranteed. China relies heavily on exports and so is vulnerable to economic change elsewhere in the world. Questions 1. Why is economic growth often important to governments? 2. 8% is relatively fast economic growth. Why does China set such as high target? 3. Why is China predicted to grow faster than many other economies? 4. What types of fiscal and monetary stimulus might have been used to help the economy grow? 5. Why does the reliance on exports make Chinese growth vulnerable to changes in other economies? 6. Could the government make the economy less reliant on exports?

THE COFFEE MARKET Show in terms of supply and demand why coffee has fallen so much in price recently? Answer The supply of coffee has increased (supply curve has shifted outwards) with countries like Vietnam producing a great deal now, but also the demand has fallen (demand curve shifting inwards) as substitute goods have increased in popularity. Therefore the price has fallen Why would the ending of the ICA lead to a drop in price? Answer Until 1989 the coffee market was managed by the International Coffee Agreement (ICA) producers and consumer nations agreed supply levels via export quotas for producers and the aim was to keep price high and stable inside a band or corset of 1.20lb to $1.40 lb which could only be exceeded if the price rose above the ceiling level. But this agreement went the way of most such agreements and disagreement between members led to its breakdown in 1989 a major factor being opposition from US which left the ICA subsequently. Now although the agreement still exists it has little power to control supply and prices. For the producers the agreement meant good and stable prices between 1975-1989 futures prices were rarely below $1.20 floor. But once the agreement broke down prices dropped and apart from 1995/1997 (which were due to frost ruining Brazil crop and causing shortages) prices have fallen very low sometimes below the cost production. Prices are now determined on the 2 big futures markets in London and NY London deals mainly with robusta and NY arabica. The price is controlled by the large number of contracts for coffee which far exceeds the physical amount changing hands. Supply and demand factors are part of these contracts and affected the prices set (see above). What would happen if producers produced less coffee?

Answer Basically this is cutting supply and pushing up price. In 1993 coffee growers agreed to hold back from the market and force up the price. But the problem is there are lots of growers and it is hard to keep them all in line especially with prices rising the old cartel problem of cheating is shown here. This is what happened in 1989 when the previous agreement broke and the price of coffee dropped by 33% in one week. Also you cannot actually just stop supply (the bush is growing and need supply later) so have to store and this costs money.

4 What are the alternatives for coffee producers? Answer Other crops should diversify often there are other crops eg. Uganda has cotton, tea and tobacco and has started to diversify into various other products but the problem is so is the rest of Africa when one spots a new opportunity, all the others start joining them and so the price collapses. Alternatives are often also in crisis eg sugar, rice, cotton also have long-term price falls and similar problems to coffee. Also takes time to change and the costs of replacing their coffee tress is high even if land is suitable, they could lack the skills/training to grow the new crop and also they have little savings so they can wait until the crop bears fruit. Furthermore there are longstanding problems of rural underdevelopment poor transport infrastructure, lack of credit, restricted access to markets and so limited information about best prices. Most likely other crop drugs in Peru, Colombia, Bolivia conditions for growing coffee are very similar to those for cocaine and have been under high pressure to move from latter to former but fall in coffee price does not help encourage this. Process own coffee 2000/1 94% of all coffee exported was green bean state of the 6% remaining most came from 3 countries Brazil, India and Colombia problem of low value added. Reason is to process own is difficult in practice. Once you roast a bean then it starts to go off and lose its freshness, which is why coffee is roasted, ground etc in the North. Also need complex machinery which is expensive to build processing plan for soluble coffee = approx $20m plus roasting and grinding is cheaper but would still suffer from such things as ability to produce quality packaging locally.