Europe denies China market economy status over steel exports


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Europe has denied China market economy status after raising concerns that China is dumping steel into the global market which is creating a real threat to Europe’s steel industry. It is claimed that granting China market status would further threaten local markets as the price of goods such as steel can be determined by demand and supply that is also created by China. The Economic Policy Institute concluded that if China was recognised as a market economy, it could endanger 3.5 million jobs in the EU including almost all of its steel jobs.

How does this relate to the HSC syllabus?

  • A market economy is one where investment, production and distribution decisions are made on the basis of the market forces of supply and demand (Preliminary Topic 3 – Markets). In this case, prices will be determined by supply and demand.
  • Europe’s denial of China’s market economy status comes in response to allegations of steel dumping by the Chinese economy. Dumping involves the Chinese selling the steel produced to other economies at lower than production price which pushes down the price of steel (HSC Topic 1 – The Global Economy). This is a serious threat to the European local steel industry as producers would have to either lower their prices of steel and sacrifice profit or maintain their profit margins and lose market share (Preliminary Topic 2 – Consumers and Business; HSC Topic 1 – The Global Economy).
    • Note: The US and Australia have raised similar concerns about Chinese steel dumping and the effect on their steel industries. US Steel Corp, the largest US steel producer is already experiencing reduced profitability as a result of the supply of cheaper Chinese steel.
  • From Chinese steel dumping, Europe is also concerned about its labour market. Decreased competitiveness of Europe’s local steel industry would reduce the demand for the steel produced. Since labour is a derived demand, this would mean that unemployment in this industry will increase as it becomes more uncompetitive (Preliminary Topic 4 – Labour Markets; HSC Topic 3 – Economic Issues).

Consumer confidence strikes two-year high


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The Westpac-Melbourne Institute Index of Consumer Sentiment rose 8.5% in May. A dominant driver in this rise was the rate cut, which was reflected in the rise of consumer confidence in those who had a mortgage by 15%. This figure is the first to be released after the rate cut and release of the budget on Tuesday 3rd May and assuages concerns of negative consumer sentiment stemming from negative reactions to the budget.

How does this relate to the HSC syllabus?

  • A decrease in the cash rate has led to an increase in consumer confidence. This can be explained by the fact that a reduction in the cash rate makes credit cheaper and more easily accessed by consumers. This was reflected in the fact that there was a 15% increase in confidence for those who already have mortgages. Easier access to credit means that consumers can acquire more funds and incur less interest to increase consumption (HSC Topic 4 – Economic Policies and Management).
  • An increase in consumption will increase aggregate demand, leading to an increase in economic growth (HSC Topic 3 – Economic Issues). However, Westpac expects another cut in August to further increase growth and address weak inflation figures.

Government needs to take up inflation fight, say McKibbin


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There has been criticism as to whether loosening monetary is sufficient to stimulate growth and inflation in the economy. Former Reserve Bank board member Warwick McKibbin has stated that rather than rely on monetary policy, the government should increase infrastructure spending since it is more likely to boost nominal economic growth. Former Reserve Bank governor Bernie Fraser also comments that fiscal stimulus should be made a priority and the Reserve Bank should have undershot inflation targets. The RBA has cut inflation forecasts which can see returns on investments trend lower, borrowing rates to reach record lows, delay in reaching budget forecasts and increase the age when people would retire.

How does this relate to the HSC syllabus?

  • There has been criticism around the world that economies have become too reliant on monetary policy to stimulate growth and inflation. Considering that the advantage of monetary policy is to curb inflation, the policy mix, including fiscal policy, needs to employed more effectively to stimulate the economy (HSC Topic 4 – Economic Policies and Management).
  • A reason for the ineffectiveness of monetary policy in stimulating inflation now is that businesses have lost their power to raise prices when demand for goods and services increase as a result of increased consumption by consumers due to the prevalence of digital disruption and competition (Preliminary Topic 3 – Markets). For example, Woolworths and Coles have been persistently lowering their prices in response to the entrance of Aldi and Costco which will subdue food prices going forward.
  • One of the factors that contributed to slowing inflation in Australia is slow wage growth. Slow wage growth is partially being caused by the fact that productivity gains in the labour market have been slowing. This can be rectified in the long term through implementation of microeconomic policy, pursuant to McKibbin and Fraser’s calls for increased fiscal expenditure. Expenditure on education and training programs will improve the human capital in the economy and make the labour force more productive which will likely stimulate wage growth (HSC Topic 4 – Economic Policies and Management).
  • One of the reasons why economies around the world, including Australia, are tightening fiscal policy despite falling inflation and slow growth is because of stability concerns. With Greece suffering from sovereign debt issues, economies are endeavouring to avoid the same situation by lowering their fiscal deficits. Governments are further under political pressures to reduce their deficits in reaction to issues in Greece (Preliminary Topic 6 – Government and the Economy; HSC Topic 4 – Economic Policies and Management). However, by tightening fiscal policy, governments contract the economy, causing income in the economy to decrease. This would decrease their tax revenue as a result of the automatic stabiliser component of the budget, which will make it harder for the budget to reach a surplus.
  • The article argues that the low inflationary environment is likely to cause people to stay in the workforce for longer. This can be explained by lower wage growth and lower returns on investment. Lower wages, as previously mentioned, is a factor in lowering inflation which decreases the income of people in the labour force. This is further exacerbated by the fact that when people invest by making deposits in commercial banks, they earn lower rates of interest so that their wealth increases more slowly. This would require people to work for longer so that they can earn enough to bring them into retirement. This will increase the supply of labour in the economy which will further lower wages (Preliminary Topic 4 – Labour Markets).

Theresa Dang THERESA DANG

Theresa Dang is an economics mentor at Keystone Education. She attended Sydney Girls High and achieved an ATAR of 99.70 in 2012. She is now studying Commerce and Law at the University of Sydney. She has experience in a global technology firm and a mutual fund.

Gary Liang GARY LIANG

Gary Liang is the founder and director of Keystone Education. He attended Sydney Boys High and achieved an ATAR of 99.95 in 2012. He achieved 5 state ranks in Mathematics, Mathematics Ext 1, Mathematics Ext 2, Chemistry and Economics. He is now studying Economics and Science (Advanced Mathematics) at the UNSW Australia, where he is the recipient of four scholarships.

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