Economics newsletter edition #2

NOVEMBER 30, 2014

DUBAI COLLEGE

Japan Slips Into Recession

Selfielastic Demand:

THE END OF ABENOMICS?

WHY CONSUMERS ARE IDIOTS

!

!

China’s Economic Slowdown

DC ECONOMICS Japan Slips Into Recession: The End Of Abenomics?

Abenomics is the name given to a suite of measures introduced by Japanese prime minister Shinzo Abe after his 2012 re-election to the post. His aim was to revive the Japanese economy with “three arrows”: fiscal stimulus, monetary stimulus, and structural reform to boost Japan’s competitiveness. At first, the moves seemed to work a miracle as Japan’s stock market soared however, the blow came on Monday when figures showed that the world’s third largest economy shrank 1.6% - a second straight quarter of economic contraction: the definition of a recession. Most economists agree that the immediate cause was the increase in sales tax from 5% to 8%, a move approved by the previous government that was intended to curb Japan’s immense government debt. The increased tightening of consumer spending has raised concerns that after years of sluggish wage growth, consumer confidence is too weak to handle to handle the tax increase. Consumer spending barely picked up from its depressed levels after the first tax increase in April, while indicators of housing and business investment declined. Japan’s recession could also have an impact on many US companies that rely on Japan for sales. The best example of this would be the diamond company Tiffany, who relies on Japan for 10% of their sales. Japan’s unorthodox strategy was also supposed to offer a road map for other troubled economies, notably Europe. Europe must now decide whether to follow Japan’s lead by injecting more money into the economy, as the region’s central bank considers a similarly aggressive bond-buying campaign known as quantitative easing.

Ashna Gupta

SELFIELASTIC DEMAND: WHY CONSUMERS ARE IDIOTS 2014, a year that has truly amplified the popularity of the selfie. Other than the cute charm that this trend possesses, it has also unintentionally, completely changed the market for phones and cameras; it has not only changed consumer tastes, a factor that affects demand, but it has also changed a plethora of other factors regarding the two markets. Let’s take a look at one particular phone, the HTC One M8. The M8 is an excellent example of a company (HTC) giving the consumers exactly what they want; the "1

NOVEMBER 30, 2014

ultimate selfie camera, at 5MP. Excluding all other factors, the demand curve for the M8 naturally shifted to the right. In fact, the HTC One M8 alone has been the provider of 80% of all of HTC’s sales in 2013, at an impressive $83.5m as of October 31st 2014. Is it a result of a good selfie camera? That is something that cannot be inferred from data alone, so we must turn to more information! This further information lies in the sales of the iPhone 6. At a whopping 2700 AED, it features a pathetic 1.2MP Camera (front-facing) which is absolutely nothing in comparison to the HTC One M8. But, in this era of selfie crazed teenagers, what effect does this have on sales? The answer is, shortly: absolutely no change in sales. The iPhone 6/6 Plus has already sold a ludicrous 39 million smartphones since its launch in September, with profits at a stupendous $8.5bn. Even if just 1% of all of this profit is a cause of the iPhone’s sales, it would still run circles around the HTC One M8’s profits. So have selfies truly changed this particular market? One might look at the iPhone’s paltry front-facing camera and high profits and think ‘’No, absolutely not’’. However, just because the iPhone 6 has a poor front facing camera doesn’t mean that the millions of people who have purchased one don’t care about selfies, it simply means that another factor that affects demand is of more importance than the factor that regards the quality of the selfie camera.

Apple is a well-established brand; one might argue that the gaggle of idiots who lined up outside of stores at midnight to purchase one may well be ‘addicted’ to iPhones. In this scenario, regardless of how much better the specifications of the HTC One M8 are, the irrational consumer doesn’t really care: as long as it has the word ‘iPhone’ in it, we can compromise on the perfect selfie we deserve. It’s very strange when you think about it, and it links to the concept of ‘’Homo Economicus’’, which believes that consumers rationally achieve their subjectively defined ends.

The phone market is a great example of how Economics isn’t just black and white. In the phone market, the iPhone isn’t particularly outstanding specification wise or appearance wise, yet for some strange reason, it’s the most popular phone on the market. In conclusion, this article is solid proof that consumers are idiots; economists, firms, everyone must take this into account when performing any type of business whatsoever.

DUBAI COLLEGE

Recent News Headlines That Have Caught Our Eye… ‣ China’s central bank cut benchmark interest rates for the first time in 2 years, in response to both a slowing global and domestic economy. ‣ OPEC decides to leave its production ceilings unchanged following it’s recent meeting in Vienna. The decision has sent oil prices tumbling to $72.58 a barrel. Russia will be hit hard by this decision as it is already suffering from an economic slowdown and feeling the effects of both lower oil revenues and Western sanctions imposed because of the Ukraine conflict. Energy stocks also fell on Wall Street as a result of the falling prices. ‣ The eurozone’s inflation rate fell to 0.3% in November, from 0.4% in October, suggesting that deflation remains a threat fro the 18-nation bloc.

Aditya Prakash

"2

NOVEMBER 30, 2014

DUBAI COLLEGE

China’s Economic Slowdown The question that many economists have been speculating about is why is China’s economy is slowing down and more importantly what are the effects? There are many people who strongly believe that a slowdown was inevitable for an economy that advanced as rapidly as China and that a slowdown was carried out deliberately in order to pursue a goal of sustainable long term growth. With GDP at 7.4%, China’s economic growth is the lowest since mid 2012. Looking at the PMI index, purchasing manager index, China is currently 49.6. For this index, a Pigure above 50 indicates expansion of the manufacturing sector thus, the 49.6 exempliPies a contraction in the manufacturing sector, which is another signal that the Chinese economy is slowing down. Furthermore, the nation’s newly built home prices only grew by 2.5% in July after surging by 10% at the beginning of the year. So why is China’s economy is undergoing a slowdown? There was a recent article that stated that in an economy like China’s where “debt has exploded to more than 200% GDP, it is not easy to reign in growth gradually without triggering widespread failure of ambitious investment projects.” This statement is a valid justiPication because in order for China to grow they must rebalance the economy to be able to grow at a sustainable pace in the future. In turn, it is difPicult to label this as a “bad” or a “good” slowdown. It is important to assess the effects of this slowdown on China and other countries. Due to the slowdown, imports have also slowed and especially for goods such as oil. Falling oil prices can partly be explained by China’s slowdown, as China is demanding less oil. China alone consumes 6.2 million barrels of oil everyday thus, a slowdown in its economy would affect demand immensely. Overall, whether China’s economy’s slowdown will have positive or negative effects cannot be determined as in the short term it can be seen as a disadvantage but in the long term investment into China’s economy and the growth of the economy will be more stable.

Anurati Sodani

In The UAE: The UAE economy is looking strong as the economic recovery witnessed over the last few years has continued its momentum, having a notable positive impacts on business and consumer confidence. The local hospitality industry has continued to record substantial growth as it prepares to welcome visitors from around the world for the Dubai Expo 2020, which is one of the driving factors behind the optimism fuelling growth. The event is expected to attract several million visitors creating alongside it thousands of jobs as well as enormous demand for new facilities, including housing and hotel rooms. As we are approaching the end of 2014, the real estate market has reached or even crossed the peak levels of 2008. UAE’s economic outlook remains strong despite the sharp decline in oil prices as a result of our diversified economy, in which oil accounts for less that 30% of GDP. Ashna Gupta "3