This Economics HL IA gives us three articles that talk mainly constitute the quantity-price relation by giving us actual news reports in different countries around the world and graphs to support the relationship.
Table of Contents
Economics commentary number: 1
The Cost of Getting Down Is Going Up
Consumers Face Markups on Puffy Jackets, Comforters,
Pillows as Manufacturers Pass Along Increases
By DANA MATTIOLI
In the world of obscure commodities, down is the new up. An increase in the price of down filling is forcing apparel and bedding makers to re-engineer their goods, search for alternatives, or warn retailers they'll have to pass along the higher costs to consumers.
It may seem odd to worry about down prices amid a warmer than usual spring, but stores are already planning to price for their winter assortments, and puffy down jackets and vests remain a fast-selling staple everywhere from low-priced L.L. Bean and Uniqlo to luxury retailer Moncler.
The North Face, an outdoor brand owned by clothing maker VF Corp. that is famous for its down-filled jackets, is expecting to raise the price of its products for the first time in five years, said VF Chief Executive Eric Wiseman.
Hollander Home Fashions LLC, one of the largest bedding and pillow manufacturers in North America, has seen its margins on pillows and comforters shrink as down prices floated higher.
It has replaced goose down with less-costly duck down in some products to offset the increases. But said CEO Chris Baker, whose company supplies Macy's, Bloomingdales, Kohl's and other retailers, higher-end chains insist on a goose. As a result, he has had to mark up his prices to them by between 50% and 60%, he said.
"It has been a real challenge trying to stay ahead of rising costs," Hollander's Mr. Baker said. And for Lands' End, Chief Executive Edgar Huber warns down "is a bigger problem than cotton."
Prices of the feathery insulation are ascending just as retailers are starting to move beyond last year's spike in the price of cotton, which raised apparel makers' costs on everything from T-shirts to denim. Retailers tried to mark up tags, but only a few were able to make them stick. Most stores took a hit on margins for several quarters. There are no exchanges that trade contracts for down, but soundings from companies reveal a steep price increase in the last six months that has yet to fade. A pound of white goose down that cost about $12 in 2009 sells for around $28 today. Prices of other down varieties and grades also have increased. Duck down, around $9 a pound in 2009, now costs about $19 a pound.
Behind those increases change in demographics and diet. China is one of the largest producers of down, a byproduct of raising geese and ducks for food. As the country's wealth improves, more people are moving from farms to cities, reducing farming, said Daniel Uretsky of Allied Feather & Down, a down distributor based in Vernon, Calif. Dietary changes around the world that favor meat and fish also are undercutting demand for geese and ducks, he said.
Meanwhile, clothing makers want more of it. Down jackets, once reserved for cold-weather sports like skiing and climbing, have become a winter fashion item around the globe. Last year, as prices began soaring, Lands' End, a Dodgeville, Wis., unit of Sears Holdings Corp., called a strategy meeting to discuss what to do. In October 2010, Lands' End was paying the equivalent of about $13 a pound for down in China. This past October, the price had risen to about $23 a pound, said Kasey Mazzone, senior vice president of global sourcing for Lands' End.
"The strategic decision we had to make is, 'Are we going to still be famous for down?'" said Chris Kolbe, Lands' End brand president. "The answer is, yes, but we can't be dependent." This fall, the Sears brand will roll out new offerings like merino wool coats to lessen its reliance on down. Columbia Sportswear Co. is taking a similar approach. It created a new, synthetic insulation product in 2010 before it became apparent how much the cost of down would rise. Now, the company will try to use it more in product designs, said Matthew Hoeferlin, director of materials. Mr. Hoeferlin said higher-end outdoor jackets and sleeping bags that use white goose down will see retail prices rise. Now planning its fall 2013 assortment, Columbia will likely pass some of the increase along, he said.
This article is about the increasing prices of goose down, as a capital good (used in the production process), and a possible increase in prices of final goods made of it. With today’s price being around $28 per pound, which is 233% higher than it was in 2009, the apparel and bedding makers are either forced “to re-engineer their goods, search for alternatives or warn retailers they'll have to pass along the higher costs to consumers”. While some of the alternatives are being synthetic fillings, the major one is duck down which despite its price also increasing, remains cheaper than goose one. The reason for both increases is the shrinking supply of goose, and duck, down from China – one of its biggest producers. The down is the byproduct of the production of meat and is connected with two factors shrinking it: Chinese farmers moving into cities and consumers’ tastes slowly eliminating meat.
A decrease in the supply of goose down from S1 to S2 caused the equilibrium price to go higher, from Pe1 to Pe2. Because goose down is a capital good, and therefore one of the production factors, its price has a direct impact on costs of production and the price of final goods, e.g. pillows and winter jackets.
Most of the companies want to keep their prices on the same, lower level as they fear that higher would result in decreased sales. On the other hand, if they keep those prices, their revenues from one item sold will shrink. That is why clothing and bedding companies decide to switch, at least in some part of their goods, to substitute commodities: duck down or synthetic materials. They are cheaper and allow the producers to keep both the prices of their goods and the revenues from them unchanged - the supply curve goes back to its former place (because the quantity of those substitutes is not decreasing). What is important to add, is that the producers are sure that the demand will not change unless the price changes. “Down jackets [...] have become a winter fashion item around the globe”. This means that the demand for them not only will not fall but also is very likely to rise.
However, not all firms will switch to cheaper alternatives. The more luxurious ones, whose consumers are richer, will keep using the more expensive goose down - it is of higher quality and prestige. Bearing in mind that such down outwear is fashionable, they will raise the prices of their goods despite its possible impact on the demand curve – they know their consumers can afford such changes.
When the supply becomes decreased from S1 to S2, the price is raised from Pe1 to Pe2. Because the demand is rather inelastic (rich consumers are not susceptible to price changes), the price increases by a larger amount than the quantity fall – an equilibrium is obtained. Then, the demand from D1 to D2 rises, due to the winter jackets being fashionable. It results in establishing a new equilibrium, with the price increase slightly smaller than quantity increase. The diagram illustrating the market for expensive down jackets shows that a big increase in the price of the jackets will not badly affect the quantity of them sold. This allows the producers of those jackets to pass all the costs of more expensive goose down to consumers without losing any revenue or switching to alternative capital goods. Such a solution would not be possible with companies aiming at poorer customers, because the demand curve, in that case, would be much more elastic and any drastic changes in price would result in large changes in the quantity of the goods sold. Therefore those producers will avoid passing any extra costs to consumers, by switching to cheaper commodities.
Economics commentary number: 2
Title of the article: “UK inflation rate eases in August, ONS says”
September 18, 2012
UK inflation rate eases in August, ONS says
The pace of price rises slowed in August compared with the previous month, official figures have shown. The annual rate of inflation in the UK, as measured by the Consumer Prices Index (CPI), fell back to 2.5% in August from 2.6% in July, the Office of National Statistics said. The fall was partly due to smaller rises in furniture and gas prices. The Retail Prices Index (RPI) inflation measure, which includes housing costs, fell to 2.9% from 3.2% in July. The ONS said there would be a consultation on possible improvements to the RPI from 8 October to 30 November.
The latest CPI figures show that prices were 2.5% higher in August than they were in the same month last year.
Apart from two monthly rises, the rate of inflation has been falling steadily since peaking at 5.2% in September last year.
The ONS said smaller rises in the price of clothing had also contributed to the fall in the rate of inflation - the price rises recorded in July had been the largest on record. This helped to offset bigger rises in the price of petrol and a rise in the cost of rail travel, which had fallen a year earlier.
Analysts had expected the CPI rate to fall following the rise to 2.6% in July, which was also down to rising airfares and an early end to sales due to the Olympics.
Looking ahead, the ONS said several factors could put upward pressure on prices. "Some of the utility companies are talking about price increases in the next few months, [while] there have been reports of poor harvests in many parts of the world, which could have an impact on food prices," said ONS director Richard Campbell.
"Finally, if the oil price continues to go up, we expect that to feed through to petrol and diesel prices."
However, many economists say weak demand in the UK economy will outweigh these pressures, meaning the inflation rate will continue to fall towards the Bank of England target of 2%.
James Knightley from ING told the BBC that, despite upward pressure from commodity, fuel, and food prices, he expected inflation to be "a little bit lower by the end of the year".
Peter Dixon from Commerzbank agreed: "From here on we should be looking at lower rates for some time".
Some commentators suggested there could be a sharp drop in prices in September as energy price increases fall out of the equation. "Next month's figures should be even better, with the headline CPI falling towards 2% as last year's utility price rises fall out of the year-on-year index," said Graeme Leach, chief economist at the Institute of Directors.
Analysts suggested that the falling inflation rate eased concerns that the Bank's policy of pumping money into the economy to stimulate demand - known as quantitative easing (QE) - could lead to inflation picking up. The UK economy has contracted for the past three quarters and the Bank announced another £50bn of QE in July, taking the total amount of money it has injected into the economy under this program to £375bn. Some analysts suggested this total could rise again later this year, as the economy struggles to exit recession. "We doubt that the outlook for inflation will dissuade the [Bank] from announcing more asset purchases later this year," said Samuel Tombs from Capital Economics.
This article is about the falling rate of inflation (persistent increase in the average price level), called disinflation, observed after comparing the inflation rates from August 2012 with July 2012, and from August 2012 with the year 2011, in the United Kingdom. The rate for August was 2.5%, while for July it equaled 2.6% and for September 2011 the inflation rate was reported to be around 5.2%. The text looks for explanations of the presence of such data, as well as its outcomes on the British economy. The author of the article explains the difference between the inflation rates between August and July 2012 by falling prices of some of the types of goods such as furniture and gas. The disinflation on the year level, however, is said to happen due to decreasing demand in the economy, and any increases in prices of, for example, commodities were unable to change the falling trend.
On the graph above, in the macroeconomic short-run (SRAS) - that is the period when the prices of production factors do not fully adjust to changes in the price level of final goods and services – a decrease in aggregate demand (AD; total potential spending on goods and services in a period of time at a given price level) is confirmed to cause the price level to fall steadily yearly, so in this case disinflation. As also stated in the text, this situation results in smaller real output of the economy.
Although a high level of inflation has some negative consequences for the economy, such as loss of consumer purchasing power and savings and interest rates becoming less worth (one can buy fewer, as savings do not increase together with the price level), it is often an indicator of the expansion of the economy (demand-pull inflation). Disinflation, which can later become deflation, on the other hand, is usually caused by the contraction of the economy - the fall of aggregate demand. It means the fall of one or a few of its components: consumption, investment, government expenditure, and net exports (export revenue minus import spending). AD is one of the basic indicators of the state of the economy because with decreasing consumption companies cannot afford to invest in capital or hire new labor. Additionally, with smaller revenues from indirect taxes, the government is not able to spend extra money on services such as health care or education, or subsidies to firms.
To stimulate AD, the Bank of England uses its monetary policy – a set of official policies governing the supply of money and the level of interest rates. The aggregate demand in the United Kingdom is so low that many experts claim increases in prices of many important commodities, like oil or food, not to have a significant impact on the falling rate of inflation – cannot increase the rates. In the article, the Bank of England is said to have been creating money, by buying financial assets from commercial banks, and injecting it into the economy - increased the supply of money by quantitative easing. This type of monetary policy usually comes with a quick increase in the inflation rate. In a weak economy, such a measure would result not in recovery, but its further contraction. With consumption being already small, a rapid price increase would make the economy even smaller. This policy would also have similar effects on the remaining components of AD, for example, uncertainty aroused by it harms investment. However, the analysts who are cited in the article predict that quantitative easing would not result in higher inflation. For the Bank of England, it means that it can further pursue this policy, to stimulate the British economy, especially the aggregate demand, and possibly get out of the recession.
The British economy is contracting and the reason for this is the decreasing aggregate demand as well as short term aggregate supply, as the article says. For it to be growing again, the government should not only depend on Central Bank’s monetary policy but also should resort to expansionary fiscal policies. These are policies that relate to the government’s spending on public services and taxation rates. By lowering income and corporate taxes, they encourage either greater consumption or investment. Adoption of these measures, combined with quantitative easing already introduced would have a much more positive impact on the growth of the British economy.
Economics commentary number: 3
The U.S. Slaps High Tariffs on Chinese Solar Panels
By KEITH BRADSHER and DIANE CARDWELL
Published: May 17, 2012
The United States on Thursday announced the imposition of anti-dumping tariffs of more than 31 percent on solar panels from China.
The move by the Commerce Department is certain to infuriate Chinese officials already upset after recent bilateral frictions over China’s human rights policies and its increasingly confrontational approach toward American allies like the Philippines and Japan.
The antidumping decision is among the biggest in American history, covering one of the largest and fastest-growing categories of imports from China, the world’s largest exporter. The department said the United States bought $3.1 billion worth of Chinese solar cells last year, giving China more than half the American market for the devices. Many solar panel installers in the United States have opposed tariffs on Chinese panels, contending that inexpensive imports have helped spur many homeowners and businesses to put solar panels on their rooftops. The new tariffs are likely to mean a substantial increase in the price of solar panels here.
Chinese officials have been indignant at American criticism of their solar power industry, pointing out that the United States has urged China for years to embrace renewable energy as a way to reduce air pollution, combat climate change and limit the need for oil imports from politically volatile countries in the Mideast. Government support for solar energy is an important feature of China’s current Five-Year Plan, which runs through 2015, although Premier Wen Jiabao publicly cautioned in March that he was becoming concerned about overcapacity in the sector. Li Junfeng, an energy policymaker and regulator in the Chinese government who is also the president of the government-controlled Chinese Renewable Energy Industries Association, responded angrily to the American decision.
“This is a surprise,” he said in a telephone interview. “It’s dangerous.” Mr. Li said that Chinese companies would “certainly” retaliate by filing a trade case at China’s
commerce ministry accusing big American chemical companies of dumping polysilicon, the main ingredient in solar panels, on the Chinese market.
The American decision was made by civil servants in a quasi-judicial process that is heavily insulated by law from political interference and does not represent a deliberate attempt by the Obama administration to confront China on trade policy. But that distinction has been largely lost in China, where the solar panel issue has been one of many causes embraced online by the country’s vociferous ultranationalists, who put heavy pressure on Chinese officials to respond forcefully to perceived snubs to China.
Further complicating matters is a similar case against China and Vietnam over the manufacture of steel towers for wind turbines, charging that steep government subsidies were giving foreign companies an unfair advantage over American manufacturers. A preliminary ruling is due on May 30 in that case.
The solar tariffs, which are retroactive to 90 days before the decision is officially published in the next several days, are in addition to antisubsidy tariffs of 2.9 to 4.73 percent that the department imposed in March.
SolarWorld Industries America, which led the coalition of manufacturers that filed the solar dumping case, welcomed the department’s ruling. The decision “is a very positive step in the process. It’s also in line with what we expected,” said Ben Santarris, a company spokesman. “We consider this a bellwether case. It underscores the importance of manufacturing to the U.S. economy.”
Alan Price, a partner who heads the international trade practice at Wiley Rein, the law firm representing the United States companies in both the solar and wind cases, said that China posed a particular threat to America’s developing green energy sector.
“China’s method is straightforward: it sets forth industry-specific Five-Year Plans and then uses all forms of national and local subsidies and other governmental support to quickly transfer jobs, supply chains, intellectual property and wealth, to the permanent detriment of the U.S. and global manufacturers,” he said. “China’s ability to ramp up and overwhelm an industry is unique and particularly devastating with new and emerging technologies, where global competitors may be less established and can be knocked out more easily and quickly.” Several large Chinese manufacturers expressed disappointment with the decision and said they would try to convince the Commerce Department that it was unjustified.
“Limiting trade in solar products will cause panel prices to increase, defeating America’s goal of driving down costs,” said Shawn Qu, chief executive of Canadian Solar, which makes panels in several Chinese plants and does a brisk business in the United States. “Our priority should be to support the health of the industry as a whole through the financing and installation of solar, which is the key driver for expanding jobs in the U.S. solar market.” According to a report from the Solar Foundation, an advocacy group, the solar industry employed about 100,000 workers last year, up almost 7 percent from the year before. More than half of the jobs were in installation, with about a quarter in manufacturing.
Isabelle Christensen, the marketing director of JinkoSolar, another Chinese manufacturer, said that her company had already established a factory in Canada and could probably shift production there if necessary. “We can begin ramping up our manufacturing facility in Canada fairly quickly,” she said, matching what the company produces in China for the American market in a matter of months.
But while Chinese solar panel manufacturers may threaten to set up production elsewhere, they may face another obstacle: their bankers. State-owned banks have already lent heavily to the Chinese manufacturers under pressure from the government, producing a capacity glut in China that has prompted factories to slash prices as they fight to maintain market share. A senior Chinese banker, who insisted on anonymity to avoid political repercussions, said that Chinese banks were not eager to lend heavily for another round of solar panel factory investments on the large scale needed to supply the American market.
In the United States, solar panel trade cases have divided the industry in much the same way that automotive trade disputes in the 1980s split the American auto industry when Detroit automakers seeking import restrictions were opposed by American car dealers who were making large profits from selling and servicing cars imported from Japan.
Opponents of the tariffs say that the United States benefits from cheap Chinese production. They point out that Chinese companies often turn to American companies to buy the factory equipment and polysilicon they need to make solar panels, and installers hire local American workers to set up and service rooftop systems.
Like the antisubsidy tariffs, the antidumping decision on Thursday is preliminary. But if solar panel importers win a final review of both tariff decisions by the Commerce Department later this year, the preliminary tariffs could be reduced or even entirely refunded, although they also might be increased.
The Commerce Department calculated the 31 percent tariff by estimating Chinese manufacturers’ costs and then determining how far below cost the solar panels were being sold in the United States. But the department’s methods for calculating costs are controversial for countries that it designates as nonmarket economies, where the government plays such a large role in allocating land, credit, and other resources that the true costs of any given product may not be apparent.
In Thursday’s decision, the Commerce Department sided with SolarWorld in using solar manufacturing costs in Thailand as a proxy for costs in China. The Chinese industry had wanted to use India as a proxy instead.
This article is about the USA deciding to impose a tariff (a tax charged on goods from import) on the Chinese solar panels. The tariff is one of the protectionist measures (policies aimed at reducing or eliminating trade between two or more countries) also called trade barriers. This particular tariff was specified to be antidumping, which means that the Chinese solar panels are allegedly sold on the U.S. market at a lower price than the production costs. Also, the number of panels imported from China made up more than half of the supply in the American market, substantially decreasing the price level. The diagram below represents the consequences of an imposition of a tariff.
At first, when trade with antisubsidy tariffs (2.9 – 4.73%) occurs, American producers – represented by S domestic – are selling 0Q1 number of panels. At the same time, Chinese importers – marked with S (China) – are selling Q1Q2 of their goods, which means that the imports exist from Q1 to Q2. The price level is at the PC. After the tariff is imposed, the supply curve of Chinese producers shifts by the amount of the tariff – 31%, and the new supply is now S (China with tariff). This decreases the number of imports to Q3Q4 and increases domestic production to 0Q3; the quantity demanded falls from Q2 to Q4. The new market price is established at PC+t.
Concerning the revenue changes for each party involved, Chinese producers experience a quite big loss of revenue, as it shrinks from h+i+j+k to i+j only – occurs due to decreased demand and the necessity of paying the tariff. However, the domestic producers increase their revenues from g to g+h+a+b+c, because they charge the Pc+t price while not paying the tariff. The general effect is that the market shrinks and the price level rises (consumers lose).
What speaks for using protectionist measures in that case, is the fact that China was selling solar panels at a price lower than their cost of production. The article says that through intensive use of government and local subsidies Chinese producers managed to develop their production process as well as charge prices far below the American price level. Because of their presence on the American market and their dumping prices, the domestic producers were highly disadvantaged or could have been eliminated. Without generous subsidies, American producers would be forced to shut down their firms (because of the low prices) and the foreign firms would be the only ones operating. This situation could allow the Chinese to increase the price and therefore disadvantage American consumers. The imposition of the tariff would protect the market, by allowing the domestic producers to remain competitive. The article also mentions that due to the decreased demand for solar panels (because of the raised price), many American companies that install those panels on their clients’ rooftops will not only be unable to develop but also will experience loss of revenue. What is also important to state is that more than half of the people employed in the solar industry work in the installation, which could mean that a lot of them will lose their jobs. It can be perceived as a flaw in the argument, as not all American companies and employees connected with the solar panel industry will be protected. The U.S government which at first will increase its revenue (fields marked with d and e on the diagram), after a while will also experience decreased revenue from tax (income tax from the panel installers and indirect tax put on all panels sold in the USA). The imposition of the tariff may not result to be as effective in the reality as it is in theory, because of threat from some of the Chinese firms moving their production to Canada and therefore avoiding the payment of all the tariffs – because of Canada is a member of NAFTA. If they do so, they will find themselves in a position similar to the domestic producers – they will enjoy higher market prices without the necessity to pay the tariff. That is why the imposition of a tariff may have negative consequences on all the parties involved.