More on exchange rates and international trading

Yesterday I talked about how some exogenous factors such as exchange rates might not affect trade between countries because trade depends on the countries’ comparative advantages rather than absolute advantages. However, in the real world, we often can see some cases where the exchange rate changes affect the exports. Then how does exchange rates affect the trade under the comparative advantage theory?

This is because the theory of comparative advantage plays a more significant role in inter-sector trade rather than an intra-sector trade. In the real world, trade between some countries is intra-sector trade, as they exports the goods and services that have some differences but belong to similar categories to each other, such exporters gain revenues from product differentiation. For example, Germany, France and Britain export cars to each other, such trade is an intra-sector trade and car exporters gain revenue from their differentiated cars can gain different types of consumers. However, when prices change, the oligopolistic power created by market differentiation would be weakened, so when the exchange rate changes, the prices change accordingly, then the sales would be affected. Moreover, the costs and revenues of exporters are calculated by different currency units, when the exchange rates change, the ratios of revenues to costs change, this would affect the exporters’ strategies, even would change the decisions whether they would continue to export their products.

To conclude, exchange rate will not affect the inter-sector trade as significantly as it affects the intra-sector trade.

Some thoughts about international trading

Comparative advantage is a very concept in the international trading, and what is amazing is that this concept was first raised by David Ricardo around two centuries again. There are still many economists studying this concept nowadays. Comparative advantage suggests that countries compare the advantages across other countries but also across their domestic industries. This could be seen as a process of difference in difference. Based on the comparative advantages, the factors that change the absolute advantages between two countries will not influence the trade between countries. This is because these factors will not change the structures within their domestic economies, the relatively more efficient industries will not be changed by these exogenous factors. Based on this belief, the factors like exchange rates will not change the trading positions between two countries since their comparative advantages will not be changed by the changes in exchange rates.

Moreover, trade is good for economies in general, as the aggregate returns are positive (trade is not a zero sum game). However, trade may hurt sovereignty, as trade means cooperation with other countries. Because of trade, countries would lose some of their dependence, especially when the trade between countries is mostly inter-industry trade. Once there are two countries that have different levels of dependence with each other, the one with the lower level of dependence could have more bargaining power when they are on the negotiation table. 

(Inspired by Peter Neary’s lecture)

What is the effect when universities go to the capital markets for seeking funding?

Oxford university plans to sell 100-year bonds worth £250 million; it will be the first time for Oxford university to turn to the capital markets. Due to the cut in government funding, more and more UK universities sell bonds in the capital markets. What would be the impacts when the capital markets become the major financing source of the higher education sector?

Universities have several functions, and the two major functions are educating students and conducting research. Both functions can be sold; however, for universities, their products are not like ordinary goods or services that can be sold freely in the markets. For example, students pay equally tuition fees to receive education when they meet the entry requirements (ordinary goods and services do not requests buying permits from their customers). Moreover, the demand for research does not match the supply of research. The values of research are like the values of investment that the returns are uncertain, especially for theoretical reserch. This is why the demand side is more likely to demand more empirical research relatively. Theoretical research has lower private benefits but higher public benefits than empirical research. 

When universities enter the capital markets, the investors are more interested in the profit abilities of the universities rather than things like their reputations (of course, reputations can improve the profitabilities). Therefore, to improve profitabilities, unversities are likely to expand their sizes to seek more overseas students who pay higher tuition fees. Of course, receiving alumni’s donations is another source of financing; therefore, in the future, more and more universities’ facilities will be named after sponsors and students would become more selective and those who are more likely to make donations will be offered places first. Moreover, research of the universities would focus more on empirical research than theoretical research, as empirical research is easier to seek funding. In addition, the cooperation between universities and the business sectors would become more frequent.

There is one possible issue that due to the increasing influence from the private sector, the reports made by universities may lose their neutrality. 

The value of certainty

Almost a decade ago, many investors were afraid of the collapse of the Eurozone following the European supreme crisis; however, since th ECB and the German chancellor firmly supported the Eurozone and made a statement that they would do whatever necessary to keep the Eurozone, the fear in the market disappeared almost immediately. This is the power of certainty. Of course, some people made a gain due to this certainty announcement and some made a loss. 

Certainty has a value, and it is often calculated by measuring how much an individual is willing to pay to avoid a potential risk. In the real world, the prices of insurance could be seen as the market prices for certain uncertainties, for example, the value for paying for possible car accidents. So we pass our uncertainties to insurance companies, and the insurance companies also pass their uncertainties to others, so they find reinsurance companies. After several steps of insurance, the uncertainties do not disappear, they spread among the entire population. The idea is while we spread uncertainties wide enough, each individual bear less uncertainty. Although the prices of insurance are still the values of uncertainties, individuals bear more uncertainties than they actually realize. They do not only bear uncertainties that they want to pay insurances on or are willing to bear, they also bear the exogenous uncertainties due to the results of the uncertainty pooling by the insurance sector. This is the individual level of certainty value.

There is an aggregate value of uncertainty. If we assume there are always some people betting against all available states and everyone involves in the betting, then the total aggregate returns are unaffected by uncertainties, but the standard deviation changes due to uncertainties. However, from a longer time, the aggregate returns could change due to uncertainties, when we assume the marginal propensities of investment and consumption are diminishing, it means that the side which makes a loss due to uncertainties potentially produce more values in the economy than the side which makes a gain due to uncertainties actually produces in the economy, and the production gap is the value of certainty.

Should small and medium companies be given more funding and resources?

There are many governments that have made many policies to help small and medium businesses, especially in some countries, the majorities of their populations work in small and medium businesses. However, is it reasonable to encourage financial intermediaries to provide funding for the small and medium businesses above their previous levels?

Firstly, we have to assume that financial intermediaries make their financing decisions completely rationally. Once governments impose any policies, financial intermediaries still behave rationally, so in order to make financial intermediaries lift their lending (financing) levels, the governments have to increase the financial intermediaries’ possible profit rates or low the financial intermediaries’ risk levels. To increase the financial intermediaries’ profit rates, the governments can provide subsidies for the financial intermediaries when they lend to small and medium businesses. However, to lower the risk levels, the governments transfer some of the risks taken by the financial intermediaries to the governments themselves. Therefore, governments need to choose whether they are willing to bear more risks or expand their spendings. 

To conclude, when governments want financial intermediaries to lend more than they usually do, the governments have to increase the risks taken themselves and increase the budget deficits, which only involves large public costs.

What makes you impatient?

Some people are more patient than the others; of course, this could be caused by different people have different personalities. However, when living in different environments and receiving different education, people's personalities are more likely to be different. I would like discuss what factors make individuals impatient.

Firstly, what kind of behaviour is considered as impatient behaviour? Impatient behaviour is those who have to be done as soon as possible. Then why do people want to take such impatient behvaiour? It is because these people have large discount rates, which means the value they gain from tomorrow is significantly lower than today's value. Therefore, it is clear that to find out what makes people impatient, we just need to find out what enlarges the discount rate.

It is much more straightforward that there is one main factor that influences the discount rate, which is risk. There are two sources of risk. One source of risk directly impacts on individuals themselves. For example, if one individual believes that he or she is highly likely to die tomorrow, then his or her discount rate is very close to negative 100% that he or she does not care about the possible utility he or she can gain tomorrow. The other source of risk impacts on the individuals' targets. For example, if there is a hyperinflation in the economy, people are more likely to spend all their money today rather than to spend in the future. 

Therefore, when we see some people seem much more impatient than the people surrounding them, it possibly implies that these people have more sources of risk that directly impacts themselves.

How much wealthier will you feel when your house prices increase?

In economics, there is a belief that when housing prices increase, people would feel wealthier so they would consume more. This belief is usually used in policy making or to explain economic performance. Today I would like to discuss whether this belief could be explained based on microeconomics.

The important concept in microeconomics is that individual demand relies on two factors, price and wealth, (usually denoted as x(p,w)). If we only look at one time period, housing prices increase, the wealth increases, so individuals are likely to consume more. When we consider the aggregate demand, the population consumption will increase when housing prices increase. However, in the real world, we cannot only consider one period, when we are thinking about infinite time periods, we have to consider the changes in our wealth and the changes in prices, as individuals do not only make their consumptions on this period's prices and their net wealth, but they would also consider their future wealth and the prices in the future. Under such circumstance, the factors that influence housing prices increase. Moreover, considering the increase in wealth caused by housing price rise could be a temporary change or a permanent change in wealth. For example, in some large cities, particularly in China, the housing prices keep increasing over the time, such housing price rise could be seen as a permanent increase. Such change would cause one time permanent increase in individual's consumption; to generate more consumption boosts, it is necessary to have surprising increases in housing prices.. Of course, an one time increase in housing prices is a temporary change in wealth, this will increase individuals' consumption for only one period and in the next periods, the consumption will fall back to its previous level.

Therefore, the increase in housing prices could have impacts on consumption, but the effect is rather limited.

Street interview: the most unreliable reference

From TV programmes and some online media, we often see there are many street interviews which are used to support the media’s opinions or observations. Then here comes a question that how reliable these street interviews are.

My answer to this question is that street interviews are the most unreliable sources that you can trust. The major reason is street interviews have serious selection bias issues. Firstly, the population who are willing to answer street interviews, particularly those involve very sensitive questions, share similar characteristics; therefore, the interviewees are not randomly selected, the results generated by street interviews cannot reliably reflect the entire population’s opinions. Secondly, the interviewers usually conduct street interviews within limited regions due to cost concerns and other constraints, so the sample is selected based on their geographical characters. Thirdly, we do not know whether we watch all conducted street interviews or a selected sample of street interviews, and the media does not tell us either.

Moreover, many studies have found that the ways to answer questions can largely influence the interviewees’ answers to the questions. Therefore, it is possible for interviewers to design their questions to ensure they are more likely to get the answers they want. 

Since street interviews are so unreliable, when we are watching those, we should ignore the messages they send and focus on the data coming from a much larger and randomly selected sample.

What makes Japanese exports so special?

According to the latest report, Japan’s trade surplus rose by 21% in October compared with the previous month. In column terms, Japan’s exports increased by 3.8% on a year ago, and the imports increased by 3.2%. Despite the fact of a weaker yen, the increase in its exports to China is another important factor that caused such increase in Japan’s trade surplus. Japan’s exports to China rose 26% on a year ago, and the demand from China has been shown very solid and would continue to contribute the Japanese economy. Although Japan’s exports to other nations also increased that the trade surplus with the US increased by 11%, the enormous demand from China is a major drive of the Japanese economy. China is a large international exporter, and often referred as “the world manufacturer”; then what makes China demand so many Japanese products, even when China is a large manufacturer already?

In China, there is still a myth that foreign products, especially those from more developed countries, have better qualities than domestic products do. In Asia, the economies that are more developed than the Chinese economy may only be the Japanese economy and the Korean economy. When comparing the Korean economy and the Japanese economy, the Japanese economy is more diversified that the Japanese economy is able to provide all types of products and services while the Korean economy seems to be more specialised in several particular sectors. Therefore, if Chinese want to demand products from these two countries, the demand for Japanese products and services is much more likely to be higher than the demand for Korean products and services. Moreover, standing at the Chinese people’s position, when they are comparing products and services across the world, the Japanese products and services are more preferred than the Western products and services, this makes the Japanese companies more likely to provide products that better match the Chinese people’s preferences. The culture differences seem narrower. For example, both Chinese people and Japanese people love eatin sticky rice, so the Japanese companies are more likely to produce the right type of rick cooker for the Chinese customers. Moreover, Asian people look different from people from other races, in terms of height, weight and skin colour and etc. Therefore, especially for clothing, the Japanese companies are more likely to design products that fit the Chinese people than the Western companies. Such biological difference does not only have impacts on the clothing and fashion industries, it also plays a role in other sectors as well, especially when ergonomics is becoming more and more important in our product designs. Moreover, when more people like using Japanese products, according to herding effect, more and more people would like to buy Japanese products. There is another important factor that makes people like using the Japanese products. It is that Japan still has a culture of craftsmanship, that it is able to produce handmade unique products. Under today’s highly industrialised environment, craftsmanship becomes an attractive selling point that matches the nature of people that we like to be different and unique from others.

However, it does not mean that the Japanese economy has no worry. The Chinese economy’s performance is able to affect the Japanese economy significant, as the demand from China is enormous. In addition, once the Chinese people become more confident in their domestic products and services, the growth in the demand for the Japanese products and services may slow down and even turn negative. But it is undeniable, in the Chinese economy, the Japanese products and services face relatively limited competitions at the moment, due to the natural advantages.

Are individuals more risk adverse when their wealths increase

There is a common belief that individuals become more risk adverse when their net wealths become greater. However, in the reality, we often see that many phenomenon show many wealthier people are more risk loved than ordinary people. For example, due to regulations, those highly risky investment projects only accept high net wealth individuals to participate, such as PE. Moreover, the investment in the emerging markets (except China) is conducted by wealthy investors and financial institutions. Investment in some emerging markets is very risky, as the economic performance in the emerging markets is highly volatile. In addition, wealthy investors are also willing to become angel investors or participate in venture capital. For example, the famous NBA former player, Kobe Bryant, opened his own venture capital fund, serving other retired wealthy basketball players.

If we consider that wealth helps us to gain our happiness (utility), some wealthy people may have already been wealthy enough to afford everything that ordinary people can imagine, so they would like to find something more interesting. After they leave themselves the wealth that is able to afford their luxurious lifestyle, the wealth remained is used as the wealth to create additional excitement. Gambling is a source of pleasure or excitement; similarly, risky investment could be seen as a type of gambling. However, risky investment does not mean the probabilities of winning and losing are totally dependent on the natural probabilities, it can depend on the careful measure of investors. This means when investors win their investment bets, they can feel a greater victory. 

To conclude, considering people like gambling, when people become wealthier, the wealth they are able to afford for gambling-liked investment becomes greater, this may cause when people's wealth reaches a certain level, their risk preferences become more and more preferring taking risk.

The danger of “Free Cash Flow” evaluation

Free cash flow is very important in terms of value investment, which is a very popular investment strategy endorsed by Warren Buffett. Free cash flow represents the cash held by a company after maintainence or other ordinary operation costs. It is a key figure to look at when making value investment, as it provides a measure about how much this company is able to provide more opportunities to benefit its shareholders. Amazon is a successful company and focuses more on its free cash flow rather than profitability. However, many people are confused with the term “free cash flow” and “cash flow”, “free cash flow” is not directly shown on companies’ balance sheets and “cash flow” is required to be included in public companies’ balance sheets. There is a traditional way to calculate free cash flow; however, some investors have also invented other ways to calculate free cash flows.

More cash held by a company is definitely a good thing for its shareholders; however, it doesn’t mean making profits is not important. If a company is at its fast growth trend, it is not a big deal to look at its profitability other than its free cash flow. However, a sudden stop for a company’s growth can be a disaster. Because this company does not make profits, is used to a large amount of free cash flow, this company could lose its growth potential. Although the cash held by this company is large, since the growth stops, the company has to try something different to generate growth, and this is a risky moment for the company when it moves to a new field, especially when the company is large. Of course, it can pay dividends to its shareholders by the free cash flow. However, while the shareholders receive extra dividends, the values of their share will depreciate dramatically, as the company completely loses its growth momentum.

Economic growth and stability

Many governments tend to smooth their economies’ growth trends by trying to lower the deviation in their economies. For example, rthe Chinese government now focuses more on stabilisation of the Chinese economy rather than the economic growth that the Chinese central government recently axes a local government’s spending on a construction building project and the regulators also push the financial sector to lower the leverage ratios. Other countries have also imposed similar policies to tackle the issue of violatility in their economies. The central banks have been playing very important roles in stabilising economies. Inflation is an important measure of the violatility in the economy. Central banks tend to control the inflation rates within a reasonable range by imposing effective monetary policies.

However, from history, black swan events are far more dangerous than observable violatility. For observable violatility, it is more likely for policy makers to impose effective policies to tackle the issue; however, for black swan events, it is impossible for policy makers to do anything before a black swan event takes place, as it is unobservable.

If we are able to find a link between the black swan events and the violatility, it will definitely help us to find an indirect possible solution to lower the likelihood of black swan events taking place in the economy. To find the relationship between black swan events and violatility can be done by observing the economic violatility when a swan event take places. However, it has several issues to make the finding less credible. Firstly, the sample size is not big enough. Secondly, it does not provide a clear direction of causality between the two variables. Thirdly, there has been enough theoretical work to support the model building.

To conclude, governments and policy makers tend to lower the violatility to smooth the economic growths; however, black swan events have been the worst source hurting our economies.

Job market and future economic performance

The economic performance and the labour market performance are interacted with each other. that employers make their hiring decisions based on their expectations about the future economic performance and their market future development, on the other hand, the labour market is also an important factor that could affect the economy. When more people are hired in the labour market, it could lead to an increase in the entire population income.

Therefore, employers have to analyze the factors that cause the economic growth. If they find that the economic growth is mainly driven by an increase in the employment rate, they may slow down their hiring speeds, as such expansion of production (an increase in hiring is a type of expansion of production) may lead to overproduction.

Recently the stock markets (particularly the US and the UK) have achieved their historical peaks; however, many traders and fund managers have been very cautious about the current market situations. This is because the real economic growth has been lagged behind the financial market growth. People expect huge bubbles have been created in the financial market.  Bubbles are very likely to be created when the economy is only dependent of very limited economic drivers. When the key driver stops its growth, the economic growth will stop, and all the previous investment based on the expectation of the continuously growing driver will become useless and investors will suffer huge losses. This will create a fear in the market and stop the hot money flow in the economy. This leads to a financial crisis.

The globalised business cycle and the regional tax system

Nowadays, there have been many large multinational companies that are operating over the world. However, the business environment is different across different regions. One of the most important factors is the difference in the tax systems that different countries do not have same tax rates; therefore, despite the differences in the capital market and labour market prices, the tax rates could significantly determine how much profit they can receive from their revenues. Multinational companies are able to pay fewer taxes than small and medium companies in terms of proportions, especially in those countries with high corporate tax rates. This is because multinational companies have very professional tax sufficient teams that enable them to transfer profits to those countries with extremely low tax rates.

Therefore, apart from those companies which are founded and grow inside the countries, the governments are hardly collecting revenues from those foreign multinational companies. The current global tax environment is kindly exploiting small and medium companies and giving away huge benefits to those large companies. Such environment encourages those small and medium companies with huge potentials to keep growing to become mutlinational companies. On the other hand, the disagreement between countries will make the current global tax system unlikely to change over the coming year.

Therefore, it seems that the unglobalised taxi system is a drive to encourage companies to grow the become mutlinational companies and contribute to the globalisation.

Is an oligopoly market more desirable than a perfectly competitive market in the future?

I think that in the future an oligopoly market may be more desirable than a perfectly competitive market. This is because of the possible replacement of human labours by machinery and AIs. Many people are afraid that the rapid development of AI may replace labours' jobs, and the unemployment rate could increase dramatically. However, if the economy is dominated by oligopolistic companies, such worry could be mitigated or even disappear.

When an economy is dominated by oligopolistic companies, it means the companies in the economy are able to have some degree of market power, which means they are able to have more control of their revenues and profits. On the other hand, in a perfectly competitive market, companies are the same as consumers that they are all price takers; therefore, companies only have to choose between producing at the lowest possible costs or leaving the markets. Such difference means companies in an oligopolistic market and in a perfectly competitive market have different attitudes when making hiring decisions. Companies in a perfectly competitive market have to hire labours with the lowest costs; however, oligopolistic companies are able to become more flexible when making hiring decisions, so they do not have to hire the cheapest labours or replace labours by cheaper machines or AI. In addition, when an economy is dominated by oligopolistic companies, their employees are also their consumers; therefore, if they do not pay their workers well, their consumptions would become less capable to consume their products, thus reducing their profitabilities, so they would like to balance the labour costs and their consumers' consumption abilities.

Therefore, if an economy is dominated by oligopolistic companies, workers in the economy are likely to receive higher incomes and less likely to be replaced by machines and AIs, as they are also their employers' important consumers.

Why is Apple IOS more user friendly than Android?

The title may sound like a commercial electronic product article that compares the differences between Apple IOS and Android, but I would like to discuss the economic intuitions behind this issue. On the market, apart from Apple, the majority fo smartphones are using Android as their operation systems, some manufacturers have made some amendations to the operation systems as well. Overall, the experience of using IOS, the iPhone operating system is nicer than the experience of using Android, at least this is my personal experience and opinion.

Though IOS can be updated without any charges and seem free, while the consumers buy their iPhones, they also buy the operating system as well and the operation system cannot be replaced by other operating systems. As IOS has a higher price than Android (IOS has a hidden price and Android is free and open), IOS has to have a better quality in order to be competitive. In addition, there is an imperfect information in the market of Android, that the developer of Android does not know the manufacturers of the smartphones. When there is an information asymmetry, the market outcome cannot be as good as the market outcome without an information asymmetry. However, for IOS, there is no such issue that IOS’s developer is also the designer of iPhone, the developer knows the perfect information about the smartphone. From this point of view, the smartphone designed by Google is likely to be more compliant with Android than other smartphones. Thirdly, IOS targets a much more limited range of products than Android, this makes the design of IOS can be more specialised. More specialised products are more likely to meet the requirements of their target demanders (in this case, smartphones and tablets).

To conclude, IOS is better than Android because it has to have a better quality to counter its price disadvantage and perfect information about its target products and more specialised design make it possible to develop a more user friendly operating system. Therefore, if in the future, Apple is trying to use the same operation system on more platforms, it is likely to reduce the compliance of its operation system.

Strategies on the negotiation table

Some media point out that the UK Prime Minister, Theresa May, is ready to increase Britain’s offer to the EU over the Brexit divorce bill. The maximum amount that the UK is willing to pay is the difference between the economic gains from joining the European single market and the economic gains after leaving the European single market. However, the UK itself may not know the actual difference exactly, even if the UK government knows, it will not make it public, otherwise, Britain may have to pay the full price. Of course, Britain will not be the only one who will lose after Brexit; other EU countries may also lose after Britain leaves the EU, since Britain is one of the three major economies in the EU. Therefore, Britain technically only needs to pay the gap between what Britain would lose after it leaves the EU and what the rest of the EU would lose after Brexit.

Negotiation strategy is basically strategies that build on information set and expectation. Information set means the parties on the table do not know each other's information for certain; therefore, the parties make their decisions based on their own expectations about the outcomes of their opponents according to their estimated probabilities. However, in addition to the traditional game theory model, in the real world, bluffing is a common strategy that tends to mislead their opponents' estimation. Though people tend to know their opponents are likely to use bluffing strategy, it increases the difficulties of making precise estimations about their opponents. Moreover, in the real world, the money is not the only bet that can be put on the table. The valuation of other bets makes the negotiation much more difficult. 

To conclude, there is not a perfect negotiation strategy, as information is unknown and bluffing is very common, the estimation is very likely to be distant from the correct answer. Therefore, there is no perfect negotiation strategy but there are definitely bad strategies.

The gender pay gap

In almost all countries, there is a culture of differentiating women from men; and based on the culture, women are considered to have different social responsibilities from men, and this has been critiqued by feminists. However, there is a gender discrimination in the labour market that even when doing the same job, men usually get paid higher than women, such gap is very significant in the developed world as well. Recent years, this issue has attracted much attention. One of the reasons that this problem has started to be mitigated is that the communication is faster. When people talk with each other more frequently, they are more likely to realise the pay gaps between them and their male coallegues. Moreover, when they are changing their jobs more frequently, they can feel different companies have different attitudes towards the existing gender gap. With more comparisons, the issue of the gender differentiation can be realised by more people. Secondly, the types of jobs have been changing over the past years. More and more jobs do not require labours to have physical strength to complete their jobs, this makes men and women equally productive when they have similar levels of experience and knowledge. Since the men and women are similarly productive, there is no reason that men and women should be paid differently. Thirdly, when more and more women become the leading groups of the society, they have more incentives to change the situation and close down the gender gap. Fourthly, the market force may close down the gender pay gap as well. In the labour market, as women are paid less even when they are as productive as men, women are more preferred by employers, so the demand for female workers will increase till the wage level for women is equal to the wage level for men. Of course, people can argue that women need pregnancy holidays and need to take care of their families; however, recent years, in some countries, men also take pregnancy holidays to be with their families, and some men have left their jobs to take care of their families.

To conclude, the gender gap in the labour market will be closed automatically by the market force as well as the social force, it is just a matter of time.

global warming could be more harmful than what we think

Many individuals and countries have realised the importance of environment and the danger of global warming. However, some of the side effects of the global warming have not been discussed frequently though they could cause serious impacts on our economy as well as our society. 

The temperature change caused by the global warming could cause serious and immediate impacts on us. There is a study that finds that increasing the temperature by 1 degree could increase the probability of a civil war in a African region by 1 percent and also have a lagged effect of 0.9 percent in the coming year. As we know that the political stability has a very close relationship with the economic development. When a country’s economy is largely dependent of its agricultural industry, the impact of the temperature on its economy could be very significant, a lower production in the agricultural sector due to the climate change could lead to a political instability due to the poor economic environment. In addition, the temperature change could have a multiplier effect as well. When the temperature is higher, we do not feel very comfortable, so we need to use industrial tools, such as air conditioners, to help us to live under a comfortable environment, while the industrial tools potentially could increase the temperature further more. This means the temperature increase rate could be accelerating when the temperature is higher. Moreover, as we all can feel that temperature can easily affect our mood, when it is hot, we are more likely to be impatient; when we become impatient, our attitudes in our daily activities including consumption and investment change (many economic theories have pointed out the consumption and investment behaviour differences between patient and impatient people), so our society and economy would also change systematically. 

Oil price and its future trend

Today the oil price climbs above 64 dollars a barrel after Saudi Arabia’s domestic political changes. Saudi Arabia recently arrested dozens of princes and business tycoons under its anti-corruption crackdown, it has raised the financial market’s concerns about the political stability of Saudi Arabia, the world’s largest crude oil exporter. The future oil export policy and its political continuity closely rely on its domestic political stability.

Earlier the king of Saudi Arabia visited Russia and discussed the policy of crude oil exporting. It may imply that the two major crude oil exporters are likely to collude in terms of the future energy policy, especially when many countries have been putting lots of efforts on developing new alternative green energy. The development of new energy will lower the oil price in the long run; to slow down the speed of replacing crude oil by other alternative energy, the oil price has to be low in order to make the idea of replacing crude oil less attractive; however, at the same time, when the oil price is low, the profits these crude oil exporters can get are certainly low as well, though the sales may increase due to the lower price.

Therefore, there is a paradox here that exporters want to increase the oil price so they can get more profits but meanwhile they also want to lower the oil price in order to make oil more competitive when comparing with other alternative energy.

While the price of using other alternative energy is lower, the oil price will drop again significant. Once the oil price is low, there is not much room for it to increase any more unless there is an event that makes the oil production drop dramatically.

The US tax reform and the future US society

The new US tax reform has been released, and this could be seen the first major policy since Trump became the US president earlier this year. The tax reform focuses on the two parts, one is tax cuts, the other is simplifying the taxation system. Trump presented how the new tax form would look like, and from the photo posted, the new form would be much shorter and neater than the current one. The simplification of the taxation. This is very necessary as when the tax form becomes too complicated, the efficiency for taxpayers as well as the government would be poorer, it is more likely for taxpayers to pay miscalculated amounts of taxes.
However, the tax cuts need to be analysed more. The tax cuts could also be divided into two parts: one is the cuts in cooperation tax, the other is the cuts in income tax, especially for those who are very wealthy.Firstly, the cooperation tax is going to be cut, it means the profits gained by companies in the US are likely to increase. This encourages multinational companies to transfer their profits back to the US; however, considering there are some countries which have zero cooperation taxes, this effect may not be as great as the US government wants. However, this is definitely bullish for the stock market, as the costs for American companies will be lowered under the tax reform. Here comes with another issue that how the companies are going to do with the extra profits they get under the tax reform. Are they going to invest in production to boost the market supply? It depends on the individual incomes (which could be also influenced by the tax reform). If they do not find any investment opportunities in the economy, they may just use the cash they hold to conduct some buy back programmes, like what Apple did over the past several years. This could make their shareholders richer, but would not be necessarily helpful for the whole economy. Secondly, from individuals’ perspective, the tax reforms may benefit many middle and upper classes who are likely to save lots of money due to the tax cuts. Moreover, the minimum wage required for paying taxes is lifted, this is beneficial for many poor people. However, the issue of widening the wealth gap in the US society could not be ignored. Under the tax reform, the wealthiest people are benefited the most, the wealth gap between the wealthiest and the poorest would be larger and larger. This could increase the likelihood of social unrest when the gap is too wide.
To conclude, the cut in cooperation taxes would benefit the shareholders the most, and the cut in income taxes would benefit the wealthiest people the most; therefore, the wealthy people would become even richer under the new tax reform and the social wealth gap in the US would be widened.

How important is the chair of the US Fed?

In the US, the central bank is independent from the US government; however, just like the supreme court, the chair of the US Fed is named by the President, so the US government definitely has some influence over the central bank. Of course, though the US government cannot directly ask the US Fed to make certain monetary policies, the US government could send signals to the market about their wanted monetary policies or at least future policy directions. The naming of the nominee for the chair of the US Fed is a great tool to send signals to the market. The candidates for the chair of the US Fed are usually well respected in the financial sector; however, they hold different opinions about the future monetary policy decisions, some of them may love to loosen the policy and focus more on the economic growth, and some could focus more on limiting the inflation in the economy. Based on the candidates’ different opinions about the future monetary policy, the US president could name the one whose opinion matches the best; therefore, the policy opinion of the nominee pointed by the President also represents the opinion of the White House. Of course, once the nominee officially becomes the chair, he or she could adjust the policy plan, but the main direction of the future monetary policy is very likely to stay the same, because unlike a supreme court judge, the chair of the US Fed has a term, they are less likely to be fully neutral and independent.

In general, the chair of the US Fed can smoothly finish his or her job in his or her term, as he or she also present the opinion from the US government.

Why is iPhone X sold much better than iPhone 8?

The answer to the question that why iPhone X is sold much better than iPhone8 can be concluded by one simple answer, that iPhone X is much better than iPhone 8. However, I would like to answer this question from a different angle, consumption decision making (the demand side factor), rather than the quality differences of the products (could be seen as the supply side factor).

There are two main factors that consumers concern about when making their consumption decisions: one is the price, and the other is the utility. The prices between iPhone 8 and iPhone X are different; however, in my opinion, such price difference has not been significant enough to differentiate the two products’ target consumer groups. Once both phones target the same consumer group, the two phones compete with each other. Since the utility gained from an iPhone X is so much greater than the utility gained from an iPhone 8, consumers of course prefer iPhone X over iPhone 8, unless consumers are extremely inpatient that they could not wait for one more month after iPhone 8 is available (of course, the time could be longer as the consumers need to wait another several weeks after they place their orders for iPhone X). Therefore, when the demand for iPhone 8 is low, it also implies that the demand for iPhone X is much greater, as the total demand for higher-tier iPhone is relatively fixed.

In addition, the utility gained from buying a iPhone does not only come from the functions that an iPhone has got, but also comes from the signals sent from buying an iPhone. The signal effect of buying an iPhone is sometimes more important than the actual functions that the machine gives to is. Owning an iPhone can signal others that you are a fashionable, cool person from a good background (such as having relatively higher incomes, wealthy family backgrounds, being young and energetic). When consumers are trying to choose between iPhone X and iPhone 8, the effective signalling effect of buying an iPhone 8 only lasts for a month before iPhone X appears in the market, so the average cost of buying the signalling effect of an iPhone 8 is a lot more expensive than the average cost of buying the signalling effect of an iPhone X.

Therefore, from customers’ perspective, it seems more cost efficient to buy a relatively more expensive iPhone X, as the signalling functions gained from the two products are incomparable and the signalling function is the most important function for many consumers.