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Looks like inflation might hit 2% in New Zealand

The ASB Bank produce a very good Economic Report and below are some of the points they make with regard to inflationary pressures – useful for NCEA Level 2 and 3 as well as CIE AS and A2 level. The CPI will be on the rise with higher global commodity prices (see graph below) as well as the weakening NZ dollar which in turn makes imports more expensive.

  • Commodity-price related influences are expected to directly contribute around 1 percentage point to annual CPI inflation over 2018. The direct impact is expected to wane.
  • The period of retail deflation looks like it might be coming to an end. The lower NZD and pending increases in wage costs could see this component add to inflation. The extent to which prices will firm will depend on retail margins.
  • Administered price increases will add roughly half a percentage point to annual inflation despite the impact of the free tertiary fees policy. Higher prices for tobacco and local authority rates seem to be a fact of life: one driven by health objectives, the other by perennial infrastructure demand and a lack of competitive pressure.
  • The labour market is likely to become more of a source of price increases. We note that higher wages need not impact on consumer prices if they are offset by a corresponding increase in labour productivity/trimming in producer margins.
  • Price increases from the housing group are expected to subside. It is no longer a sellers’ market for existing dwellings. The balance of power for building work looks to be increasingly shifting towards the customer and away from the provider. Rental dwelling inflation is expected to remain moderate.

Breakdown of CPI Weighting

Source: ASB Bank – Economic Note – Inflation Watch 26 July 2018

Indifference Curves – Mindmap and Video

Been covering this topic with my A2 class and it is one of the more complex parts of the micro course. The video is particularly useful.

Income and Substitution Effects with Indifference Curves
Any price change can be conveniently analysed into 2 separate effects – the INCOME EFFECT and the SUBSTITUTION EFFECT.

Income effect of a price change: – when there is a fall in the price of a product, the consumer receives a real income effect and is able to buy more of this and other products in spite of the fact that nominal income is unchanged. If the consumer buys more of the good when the price falls it is a Normal good. If the consumer buys less of the good when the price falls it is seen as an Inferior good.

Substitution effect of a price change: – when there is a rise or fall in the price of a product, the consumer receives a decrease or an increase in the utility derived from each unit of money spent on the product and therefore rearranges demand to maximise utility. This is distinct from the income effect of a price change. For all products, the substitution effect is always positive such that a fall in price leads to an increase in demand as consumers realise an increase in the satisfaction they derive from each unit of money spent on the product.

Remember for normal goods, both the income and substitution effects are positive. But the income effect can be negative: if a negative income effect outweighs the positive substitution effect, this means that less is bought at a lower price and vice-versa. This good is therefore known as a Giffen good.

Giffen goods are generally regarded as goods of low quality which are important elements in the expenditure of those on low incomes. A good example is a basic food such as rice, which forms a significant part of the diet of the poor in many countries. The argument, not accepted by all economists, is that when the price of rice falls sufficiently individuals’ real income will rise to an extent that they will be able to afford more attractive substitutes such as fresh fruit or vegetables to makeup their diet and as a result they will actually purchase less rice even though its price has fallen.

New Zealand smokers affected most by inflation.

Smokers in New Zealand are particularly vulnerable to the inflation because the price of cigarettes has been increasing much more rapidly than earnings and the CPI. Māori households are worst affected as the New Zealand Health Survey showed that, in 2016/17, 35% of Māori adults were current smokers, while 15.7% of all adults smoked.

Cigarette and tobacco prices have been subject to annual increase in excise duties since 2010 as a measure to prevent smoking – see graph below. However the addictive nature of the habit – very inelastic demand – makes it very difficult to quit. The majority of smokers would like to stop smoking, and each year about half try to quit permanently.  Yet, only about 6 percent of smokers are able to quit in a given year.  Most smokers will need to make multiple attempts before they are able to quit permanently.

Rather than taxing the product a more realistic solution could be to prevent people from smoking i.e. focusing on the demand side rather than the supply side of taxing cigarettes. I blogged on this last year when discussing the war on drugs. War on drugs: Supply or Demand – that is the question

Demand-Side interventions seem to be a better option and they are also a lot cheaper. Weighing up reducing supply by destroying coca crops in remote areas against drug education in schools and you find the latter is a much more plausible option – see graph below. A dollar spent on drug education in U.S. schools cuts cocaine consumption by twice as much as spending that dollar on reducing supply in South America

Status Quo as the NZ Government makes too much money.
However the Government does make a lot of money from the excise tax – $1,710 million last year which was up $1,068 million from 2010: an increase of 60%. Only 61.7 million was spent on the national control programme in 2014/15 which equated to just 4.1% of the tobacco excise duty collected that year.

Source: BERL NZ

USA China trade war – who would win?

After a third round of trade talks between China and the US ended in stalemate a US$100bn trade war is on the horizon. America has published a list of 1,300 Chinese products which it proposes to hit with a 25% tariff. China has it own list covering 106 categories. As the Chinese embassy in Washington DC said “As the Chinese saying goes, it is only polite to reciprocate.” See graph below from The Economist.

US list covers Chinese products worth – $US$46bn in 2017 – 9% of exports to USA.
Chinese list covers US products worth – US$50bn in 2017 – 38% of exports to China

Historians of trade have an advantage over those who study wars of the military kind. Each side is a trade dispute lays out in detail the products to be affected. That makes it easier to analyse their strategies. Trump’s blunt attack targeting of a particular industry – steel and aluminium – is to supposedly make the industry in the US stronger. China retaliated by placing tariffs on US$0.2bn-worth of iron and steel tubes, pipes and hollow profiles, and US$1.2bn-worth of aluminium waste.

The US face a trade-off between protecting their own industries with import tariffs at the same time as increasing the cost of goods for its consumers. There is also the likelihood of causing disruptions to the US economy by increasing the cost of intermediate goods (aircraft parts, robots, semiconductors) which ultimately leads to higher prices.

Good long-run deal for China

It seems that China has the dominant position for the following reasons:

  • China can stop purchasing US aircraft
  • Impose an embargo on US soybean products
  • Dump US Treasury Bills and other securities
  • Chinese companies could reduce demand for US business services
  • The government could persuade firms not to buy US products

China is indirectly one of America’s biggest employers. China could look to buy all it commercial aircraft from European consortium Airbus rather than Boeing. That move alone wold cost 179,000 US jobs. China controls key components in global supply and production networks

Initially a trade war would mean job losses for both countries but in the long-run with China looking to develop a more domestic led consumption model the export market becomes less significant – Project Syndicate. See video below:

Source:                                                                                                                                                        The Economist – Blow for Blow – April 7th 2018

New Zealand’s regional and per capita GDP.

From the New Zealand Parliamentary Library – April 2018.

  • Auckland region has the largest regional GDP at $101,370 millionWellington region
  • ($35,603 million), and the Canterbury region ($34,933 million). Economic output in the North Island accounted for over 77 percent of total economic output in New Zeala
  • Old with the South Island providing the remaining 22.7 percent.
    The economy expanded by 6.2 percent over the year in nominal terms (not to be confused with real economic growth of 3.7 percent over the year). The Bay of Plenty region grew the most in percentage terms, expanding by nine percent in nominal ter
  • ms, followed by the Northland and Waikato regions (8.2 percent each). In contrast, the Wellington region expanded by 4.6 percent over the year.

The region with the highest GDP per capita was the Taranaki region ($70,863), followed by the Wellington region ($69,851), and the Auckland region ($61,924). The region with the lowest GDP per capita was the Gisborne region, at $39,896 for the year ended March 2017.
The following table shows nominal GDP, the annual percentage change, and GDP per capita for the year ended 31 March 2017 by region.

Source: New Zealand Parliamentary Library. April 2018



Aussie Cricketers, Sandpaper and Game Theory

You will no doubt have heard of the ball tampering episode at the third cricket test in Cape Town between South Africa and Australia. Australian cricketer Cameron Bancroft was caught by a TV camera roughening up the ball with some yellow sandpaper that was kept in his pocket. He was seen later getting rid of the sandpaper down his trousers so that when the umpires asked him about he produced a sunglasses bag. Later on that day at the post play press conference Australian captain Steve Smith came clean with what was a premeditated plan to roughen one side of the ball and so that the Australian bowlers could take advantage of reverse swing. Tampering with the ball is illegal in cricket and the ICC (cricket’s governing body) banned Steve Smith for one game

I have blogged previously on game theory in sport looking at – Penalty Kicks in Football and How doping impacts Athletes, Organisers and Supporters. As prize money and sponsorship deals get bigger, so do the incentives for coaches and players to find ingenious ways to cheat. So how would the sandpaper incident at the third cricket test in Cape Town lend itself to game theory?

Game theory deals with differences of opinion between groups who know each other’s inclination but not their genuine objective or choice. It then concludes the optimum course of action for any rational player. In this scenario the parties involved are the competing cricketers and, although both are better off if neither tampers with the ball, they cannot trust each other so both engage in ball tampering – Prisoners Dilemma. If you introduce an authoritative figure – the International Cricket Council (ICC) – to observe cricketers with many camera angles, the fear of getting caught should ensure that no ball tampering takes place. This is referred to as the inspection game. However as you know it wasn’t the ICC who took strong action over the video footage but Cricket Australia.

Another party that is crucial to cricket is sponsors and the spectators. Their critical role is the potential withdrawal of support which could see the cricket’s demise. Wealth-management company Magellan has terminated its three-year sponsorship agreement with Cricket Australia in response to the ball-tampering scandal worth around AUS$20 million.

A withdrawal of one of these three parties can trigger the withdrawal of the other two. Cricket cannot survive without sponsors, withdrawal of the media restricts the access to the customers, and finally cricket is only attractive for sponsors as long as there are customers. Therefore the strategies of the three parties looks like this:

Cricketers – Ball tamper or Don’t ball tamper (B D)
ICC – Video or No Video (V N)
Sponsors / Spectators – Stay or Leave (S L)

The assumptions are as follows:


B-N-S > D-N-S = cricketers prefer to ball tamper if not videoed.
D-V-S > B-V-L = cricketer prefer not to ball tamper and be videoed = customers stay, over being ball tampering and videoed = customers leave (assuming that customers don’t like ball tampering scandals)


B-N-S > D-V-L = a scandal combined with a loss of customers is worse for organisers than undetected video where customers stay.
D-V-S > D-N-L = videoing and non ball tampering actions with customer support is better for the organisers than not videoing other cricketers when customers leave.

Sponsors / Spectators
B-V-L > B-V-S = customers prefer to withdraw support after a scandal
B-N-S > B-N-L = customers prefer to stay if there is no scandal.
D-V-S > D-T-L = customers prefer to stay if there is no scandal.
D-N-S > D-N-L = customers prefer to stay if there is no scandal.

Ball tampering & Video = Scandal
Ball tampering & No Video, Don’t ball tamper & Video, Don’t ball tamper & No Video = No scandal

Final thought
The vast majority of authorities in today’s sports events would state that their regimes to combat cheating are very stringent. However the likelihood of human deceitfulness is very realistic and in some cases it’s not those that tamper with the cricket ball who are the real cheats but those who have generated an environment where players would be foolish not to.

Venezuela’s hyperinflation and collapsing currency

I have blogged in the past about the ongoing problems in Venezuela of hyperinflation, food shortages and social unrest. One of the consequences of hyperinflation is the loss of confidence in its economy which leads to an outflow of money and a lack of foreign investment. The result of these events is the fall in the Venezuelan currency – the bolívar. One way of monitoring its decline is the use of The Economist’s Big Mac index – it is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad – the video explains PPP and shows how undervalued / overvalued an exchange rate is relative to a Big Mac exchange rate.

According to the Big Mac index the price of Big Mac in
Caracas = 145,000 bolívars
USA = US$5.28

Purchasing Power Parity
Purchasing power parity (PPP) is when an amount of money in one country can be exchanged for a quantity of foreign currency, and the two amounts will buy identical baskets of products in both countries. So if we take the above example the PPP exchange rate is:

145,000 bolívars ÷ US$5.28 = 27,462 bolívars

However the Big Mac index seems to underestimate the slide in the Venezuelan currency as the black market is estimated to be around 260,000 bolívars. A US based website called DolarToday provides black market exchange rates that are updated daily for Venezuelans who cannot exchange currencies with the Venezuelan government for the dwindling supply of the US dollar. According to DolarToday, the estimated exchange rate is 230,228.36 VEF/USD in Venezuela’s free market as of 21 February 2018, which makes it the least valued circulating currency in the world – see graph from Wikipedia. Notice the reduced time for the bolívar to lose 90% of its value.

The company bases its computed exchange rates of the Venezuelan bolívar to the Euro or the United States dollar from the fees on trades in Cúcuta, Colombia, a city near the border of Venezuela. Currently, with no other reliable source other than the black market exchange rates, these rates are used by Reuters, CNBC, and several media news agencies and networks.

Therefore traders in Caracas check the DolarToday rate before presenting the bill to their customers. But local goods have no reference price and don’t keep up with the collapsing value of money – a monthly mobile phone tariff is 38,000 bolivars = 15 cents and a haircut is 25 cents. The minimum wage has increased regularly and it now stands at 800,000 bolívar = less than US$4 at the black market exchange rate.

If wages were perfectly indexed, it would serve only to speed up inflation. But their slow and uneven adjustment means the pain of hyperinflation is shared haphazardly. As Juan Perón of Argentina supposedly said, if prices take the lift, wages cannot take the stairs.

The Economist – Hyperinflation in Venezuela – January 27th 2018
Wikipedia – Venezuelan bolívar

Are smartphones causing a loss of productivity?

A recent article on the Bank of England blog written by Dan Nixon caught my attention as it is something that I have long been concerned about – that is the amount of time we spend on our phones / devices and its impact on people’s productivity in the workplace.

Smartphone use and the amount of notifications that we get is enormous. Research in 2015 found that on average we check our 150 times a day – roughly 6½ mins – and spend 2½ hours each day on the phone, spread across 76 sessions. From this the ‘attention economy’ emerges as a scarce and valuable resource and is seen as one of the greatest problems of our time – American philosopher William James noted, our life experience ultimately amounts to whatever we had paid attention to.

The attention economy and the workplace.

The graph below makes for interesting interpretation – productivity growth has been very weak whilst shipments on smartphones has increase by 10 fold. You would expect that the output of a worker would depend on his/her ability to focus and be able to pay attention to the task in hand. However research into observing inner states (attention) and mapping those outcomes with attention (productivity) is fraught with difficulty.

Cyberslacking – The US Chamber of Commerce Foundation finds that people typically spend one hour of their workday on social media – rising to 1.8 hours for millennials. Another survey, meanwhile, found that traffic to shopping sites surged between 2pm to 6pm on weekday afternoons. An influx of emails and phone calls, for example, is estimated to reduce workers’ IQ by 10 points – equivalent to losing a night’s sleep.

Frequent distractions – might lead to a persistently lower capacity to work, over and above the direct effects. What is the argument for this being the case?

1. There’s habit formation – what we do is designed by smartphone apps which make us be as addictive as possible – to ‘hijack the mind’, as Tristan Harris puts it. The psychological mechanism at play here – “intermittent variable rewards” – is the same as the one that gets people hooked on slot machines.

2. The more choice of notifications we have the more time we will spend scanning them looking for instant gratification. Cal Newport goes so far as saying that media like email, far from enhancing our productivity, serve to ultimately deskill the labour force.

Algorithms and attention
Ultimately what we look at is determined by algorithms – so the more technology the less we make the decisions ourselves and our suggested we buy certain goods or services because of out previous behaviours. There has been a lot of talk about artificial intelligence and machines that will be capable of an increasingly wide set of tasks. But most agree on the need to cultivate our distinctively human skills in order to differentiate ourselves from machines. And the human ability to empathise – central to the work of social workers, performers and nurses, among others

But is technology all bad?

IT does help business for the following reasons:

  • Speeds up communication
  • Allows documents to be shared remotely
  • Easier to find information own the Internet.

From the above productivity surged in the late 1990’s and early 2000’s as email, databases and the Internet have had a significant effect on the productivity of business processes.

Is the cause of weak productivity distraction?

Distraction is not the whole story with regard to weak productivity. Industries such as manufacturing and construction have had disappointing productivity rates but this can hardly be due to workers being on their smartphones. As pointed out by The Economist ‘Free Exchange’ productivity is also a consequence of the movement of workers from industries with relatively high rates of growth to more stagnant ones. For instance in the US productivity half of total employment growth since 2000 has been in low productivity areas such as education and health care.

Final thought

According to Dan Nixon constant notifications results in workers becoming less empathetic which is a serious side-effect in an economy where human connections with customers are cast as a defense against automation. Distraction also appears to reduce happiness which ultimately impact on worker productivity. Must end this post now – better check my email accounts, twitter, Facebook and Linkedin.



Dan Nixon – Bank Underground blog

Free Exchange – The Economist.


New Zealand election: economic impact of new Government’s policies.

Since the election businesses seem to be unsure of the new direction of government policy and therefore this has led to a reduction in business confidence. This is not unusual especially with a change of political ideology and the more left leaning government which could make things – regulation, taxes etc – harder for businesses. The government plans to cancel next year’s scheduled tax cuts even though it would have added 0.4% to GDP. This could be partly offset by an increase in expenditure on Working For Families and the free tertiary education for first year students.

The new Government plans to spend more than the national government which is not unusual considering its position of the political spectrum – see graph. This will be partly funded by tax revenue and borrowing $7bn more over the next four years – this is a borrowing and spend fiscal stimulus. The impact of this spending will be influenced by the fiscal multiplier.

Fiscal Multiplier.
It refers to the change in GDP that is due to a change in government fiscal policy – taxes and spending. For example, if increased government spending of $1bn causes overall GDP to rise by $1.5bn, the multiplier effect is 1.5.

There are problems for the new Government in that:

1. Some of this extra spending will go on imports and this will mean an outflow of money from the New Zealand economy and therefore making no contribution to GDP. Remember that GDP expenditure approach = C+I+G+(X-M).

2. There is also the crowding out effect – this is when government spending fails to increase overall aggregate demand because higher government spending causes an equivalent fall in private sector spending and investment. This could include: extra spending on public healthcare leading to less spending on private healthcare; government employment creating labour shortages for firms; and government employment creating labour shortages for firms. Crowding out can also happen indirectly via fiscal stimulus increasing interest rates and consequently the exchange rate making exports less competitive and imports cheaper.

Ultimately the government debt must be repaid by the use of government revenue from taxation. A labour coalition government usually increase taxes during their time in government and this has the tendency to discourage private sector investment. The government’s borrow-and-spend plans will not necessarily make the economy any larger in the long-run but it is expected that government spending (G) will be a larger share of the economy with consumption (C) and investment (I) having a lower share – see graph below. Interesting to note the government spending as a % of GDP for Labour and National – goes up as a % of GDP when Labour are in office and goes down as a % of GDP when National are in office.

Source: Westpac Quarterly Economic Overview – November 2017