MGEC71H3 Study Guide - Currency Crisis, Financial Institution, Loanable Funds

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ceriseshark594

22 Jun 2014

School

UTSC

Department

Economics for Management Studies

Course

MGEC71H3

Professor

Melanie Parkin

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Document Summary

Utsc: ecm c48 midterm (do all six questions) King and levine do argue that financial market development is beneficial to a country in certain ways such as faster economic growth presently and in the future. Their research did not directly speak for or against government regulation. As such some might argue that king and levine have nothing to say on this topic but this need not be the case. While king and levine did not argue for government regulation they did not argue against it either. In fact, while some government regulations may pose an impediment to economic growth such regulations do not impose significant limits on economic growth these regulations work to foster (more) financial market development. Similarly, king and levine do not claim that countries with high levels of financial market development are not open to sudden shocks that can have permanent effects on the economy.

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Few fields of empirical economic research offer virtual unanimity of findings. Yet, independent work on the economic impact of stadiums and arenas has uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development (Baade and Dye, 1990; Baim, 1992; Rosentraub, 1994; Baade, 1996; Noll and Zimbalist, 1997; Waldon, 1997; Coates and Humphreys, 1999). These results stand in distinct contrast to the promotional studies that are typically done by consulting firms under the hire of teams or local chambers of commerce supporting facility development. Typically, such promotional studies project future impact and almost inevitably adopt unrealistic assumptions regarding local value-added, new spending, and associated multipliers. They often use a regional input-output model that depends on outdated technical coefficients which are treated as invariant to shifts in supply and demand (Center for Economic and Management Research, 1991; Deloitte & Touche, 1994, 1996; KPMG, 1996; Economic Research Associates, 1996; KPMG, 1998; C.H. Johnson Consulting, 1999). The academic work on the economic impact of sports facilities and teams does not rely upon projection. Rather, it compares the local economic performance of areas with and without stadiums, arenas, and teams, controlling for other variables that affect local economic conditions. Among cross-section studies, for example, Baade (1994) found no significant difference in personal income growth from 1958 to 1987 between 36 metropolitan areas that hosted a team in one of the four premier professional sports leagues and 12 otherwise comparable areas that did not. Looking at 46 cities over the 1990-94 periods, Waldon (1997) found that higher high school graduation rates and more spending on police are what encouraged economic growth, while the presence of a major league sports team actually put a drag on the local economy. Both Baade and Waldon controlled for other factors affecting underlying trends in economic growth. Time-series studies confirm the cross-section results. Baade and Sanderson (1997), for example, found no perceptible net increase in economic activity or employment in 10 cities that acquired new sports teams between 1958 and 1993 after factoring out other economic trends affecting each area. They did observe a reordering of leisure expenditures within the cities that acquired new teams, but there was no evidence that the new sports teams brought output or employment growth to the local area. A more recent study, by Coates and Humphreys (1999), finds that new stadiums and sports teams actually reduce per capita income in the host communities. This result is consistent with a higher (negative) multiplier for the displaced leisure expenditures than for the expenditures on a new team or in a new stadium because the latter likely involve substantial leakages from the local economy to the remote residential locations of some players and team owners. The conclusion that sports teams and facilities do not stimulate economic growth is surprising to many people. With live telecasting of games, daily coverage on television news and in the sports sections of newspapers, professional sports play a huge role in U.S. culture. Yet sports teams are small businesses. Yearly average team revenues in 1999 are around $55 million in the NHL, $75 million in the NBA, $85 million in MLB and $100 million in the NFL. For a medium-sized city like St. Louis, the baseball team accounts for less than 0.3 percent of local economic activity; for a large city like New York, a baseball team contributes less than 0.03 percent of economic output. Sports teams typically employ between 70 and 130 people in their front offices. Beyond this, they hire approximately 1000-1500 day-of-game personnel who work in unskilled, low wage, temporary, part-time jobs. An NFL team is assured of playing 10 home games a year (including preseason games). At four hours of work per game, an NFL team provides day-of-game employment for the equivalent of 20 to 30 full-time, year-round jobs. As we shall see, however, it is problematic to attribute even these jobs to the sports team. Of course, the controversy about the economic impact of professional sports teams on their local economy is not just about the teams themselves, but also about how specific local restaurants, hotels, and other businesses might be affected. However, even if one assumes, optimistically, that on average people spend as much outside the sports facility as they do inside, the economic impact of sports teams in proportion to a typical metropolitan economy is diminutive. Apart from their relatively small size, there are three key reasons why professional sports teams do not promote economic development: the substitution effect; extensive leakages; and the likely negative effect on local government budgets. The analysis of these three effects that follows describes the situation when a team or a facility is new to an area. Of course, in many cases, the choice is whether or not to build a facility for a team that is already there. In such a case the incremental consumer surplus, external benefits or new spending will be considerably less. From the city's perspective, however, the opportunity cost of not building a facility with public funds may be perceived to be the loss of the team and all of its attendant benefits.

-------------------------------------------------Question

1. . The authors discuss the role of leakages in determining the impact of sports teams on the local economy. What are they talking about? Be specific so as to convince me that you read the article carefully

raspberryarmadillo231

SUMMARIZE WHAT I HAVE DOWN BELOW IN ONE OR TWO PARAGRAPHS

IM WILLING TO GIVE MORE POINTS:-

"China cut interest rates for the third time in six months on Sunday in a bid to lower companies' borrowing costs and stoke a sputtering economy that is headed for its worst year in a quarter of a century.

Analysts welcomed the widely-expected move, but predicted policymakers would relax reserve requirements and cut rates again in the coming months to counter the headwinds facing the world's second-largest economy.

The People's Bank of China (PBOC) said on its website it was lowering its benchmark, one-year lending rate by 25 basis points to 5.1 percent from May 11. It cut the benchmark deposit rate by the same amount to 2.25 percent.

"China's economy is still facing relatively big downward pressure," the PBOC said.

"At the same time, the overall level of domestic prices remains low, and real interest rates are still higher than the historical average," it said.

Sunday's rate cut came just days after weaker-than-expected April trade and inflation data, highlighting that China's economy is under persistent pressure from soft demand at home and abroad.

While the PBOC acknowledged the difficulties facing China's economy, it said in its statement accompanying the announcement that it wants to strike a balance between supporting growth and deepening structural reforms.

As part of these reforms, it lifted the ceiling for deposit rates on Sunday to 1.5 times the benchmark level, the biggest increase in the ceiling since it began to liberalize the interest rate system in 2012.

MORE EASING AHEAD

Economists had said it was a matter of when, not if, China eased policy again after economic growth in the first quarter cooled to 7 percent, a level not seen since the depths of the 2008/09 global financial crisis.

Indeed, some analysts have even said recently that the PBOC had fallen behind the curve by not responding aggressively enough to deteriorating conditions.

With China set to publish more key economic data on Wednesday, including industrial output and investment, the timing of the rate cut could add to worries that figures may disappoint across the board again, as they did in March.

For now, however, some were confident that policymakers can arrest the slide.

"Intensified policy loosening will help effectively halt the economic slowdown," said Xu Hongcai, a senior economist at China Centre for International Economic Exchanges, a well-connected think-tank in Beijing.

A cooling property market and slackening growth in manufacturing and investment have weighed on the Chinese economy. Annual growth is widely forecast to sag to 7 percent this year, down from 7.4 percent in 2014.

In an attempt to energize activity, the PBOC has now lowered interest rates and relaxed the reserve requirement ratio (RRR) five times in six months, and many economists believe more policy loosening is in store.

This is partly because despite the steady drum roll of policy easing, there are indications it has not benefited the real economy. Some data suggests banks are not passing on lower interest rates to borrowers, and credit is still not flowing to the sectors in most need of the funds.

"The effectiveness of the rate cut won't be very big," said Li Qilin, an economist at Minsheng Securities. "The PBOC has already cut benchmark interest rate by a total of 65 basis points, but borrowing costs have only fallen marginally."

STRUGGLING BANKS

Banks are also struggling as the economy founders. Lending has slowed, bad loans are piling up, and profits margins are getting squeezed as China liberalizes its interest rate market. Banks' earnings reports last month showed profit growth hit a six-year low in the first quarter.

Given these challenges, the PBOC said it does not expect banks to pay savers the maximum deposit rate allowed by authorities.

And with the prospect that borrowing costs may stay stubbornly elevated, government economists told Reuters earlier this month authorities may ramp up state spending to shore up growth, in the hope that fiscal policy would work where monetary policy hasn't.

But Li Huiyong, an economist at Shenwan Hongyuan Securities, cautioned against thinking that lower borrowing costs would not trickle down to businesses and consumers at some point.

"Don't underestimate the cumulative effect of the cuts in interest rates and RRR," Li said. "This won't be the last cut. "The rate could be lowered to 2 percent at least, and we expect the economy to gradually stabilize in the coming two quarters."

(Additional reporting by Michael Martina; Writing by Koh Gui Qing; Editing by Kim Coghill and Rachel Armstrong)"

Russian case study:

Russia has long been a preeminent global producer and supplier of gas, but the recent evolution of global market dynamics has begun to erode this status. Now, it finds itself at a crossroads that could determine its fate in this evolving market. Faced with the US shale gas revolution, competition from global LNG suppliers and new pipeline projects, an uncertain demand outlook in Russiaâs once captive European market, and slow penetration of high growth Asian markets, Russia may no longer be able to thrive at status quo and must take decisive steps to devise a strategy that addresses these challenges and ensures its continued role as a leading global gas producer and exporter. Russia undoubtedly has made some early progress on this front by making forays into liberalizing its gas export market, facilitating the rise of a handful of non-Gazprom producers, and pursuing options that begin to shift its strategic focus to Asian consumers. However, given Russiaâs heavy budget dependency on oil and gas revenues, coupled with the recent introduction of tax breaks to incentivize new high-cost resource development, the countryâs success in expanding gas production and capturing key export market share will depend first and foremost on sustained high oil prices to support government spending. The current system allows Russia to muddle through, but a more drastic price shock could have significant, detrimental knock-on effects for Russiaâs gas sector (five years ago the budget could balance at $50-55/bbl oil while breakeven prices were $117/bbl in 2012 and expected to remain at over $100 through the end of the decade).

Over time, Russia will have to introduce still more reforms from additional tax incentives to greater contract pricing flexibility and increased access for foreign investors if it hopes to remain a dominant global gas player. Russiaâs market position will become more difficult and uncertain post-2017 as competition rises from global LNG and unconventional producers. Russiaâs gas modernization efforts to date do not appear adequate to brace the industry for this uncertainty, and Russiaâs position increasingly will come under pressure absent more comprehensive reform of the domestic gas sector, additional tax incentives to expedite the development of key projects, and reconsideration of pricing mechanisms in contracts.

Arguably the greatest challenge to the Russian gas market in the future is the abundance of new gas suppliers and export options coming online over the next decade that will provide significant new volumes of gas at competitive prices, which could undermine Russiaâs current supplier relationships. At the center of this gas glut is the US shale revolution and the prospects for USLNG exports, which have had an immediate impact on Russiaâs market share and pricing. First, the abundance of new US shale-derived gas supplies has resulted in Russia losing the US market as a potential customer for exports from its Arctic LNG projects. In addition, Russia has been negatively impacted by flows of cheap LNG into the European market since 2008â2009, which has triggered a series of pricing renegotiations between Gazprom and its main European customers.

Russia has faced myriad challenges in its core European market: the reputational impact of its dispute with Ukraine, the Eurozone crisis causing a decline in gas demand, growing gas competition, and change in the EU regulatory framework. These changing dynamics have triggered an ongoing antitrust investigation on the grounds that Gazprom restricts European buyersâ rights to sell gas to one another and unfairly raises costs by linking prices to oil. The investigations have heightened tensions between Russia and the European Union.

EU policymakers are eager to diversify away from Russia, but the opportunity to do so is limited until Europe experiences far more rapid demand recovery. In the interim, poor economic performance, the availability of cheap coal, environmental regulations, and promotion of renewable technologies have taken their toll on European gas demand. While Gazprom has begun to experience some demand recovery in Europe and ongoing production challenges at Statoilâs Troll field in Norway have leant some near-term support to volumes of Russian gas exports to Europe, overall European demand remains weaker than in pre-crisis years, and the outlook is still uncertain.

In September 2012, the European Union launched an investigation into anti-competitive Gazprom practices. Russia, which feeds 26 percent of European gas consumption, did what it said it never would and, motivated by a combination of weaker demand and arbitration, rewrote long-term contracts to include a new price formula for certain European buyers. This move came at the expense of several billion dollars in budget revenue at a time when Russiaâs overall economic growth has slowed and the country has had to introduce considerable tax breaks to incentivize development of more difficult hydrocarbon plays.

Now, as Russia races against the clock to seize additional Asian market share and redirect volumes to these high-growth markets ahead of its competitors (namely LNG from incumbents like Australia and Qatar as well as new participants from North America and East Africa and pipeline gas suppliers like Turkmenistan, Uzbekistan, and Kazakhstan), its strategy is to employ both pipeline and LNG export options to tap into as much additional Asian market capacity as possible. But Russia faces a challenge on the implementation front. LNG projects have faced delays and even indefinite postponement in the case of Shtokman, and Russia has been unable to close on the Power of Siberia pipeline due to its challenges securing a pricing agreement with China. Other options include direct pipeline options to Japan and Korea, but these proposals also face political and security risks that could delay or prevent realization of these plans. Putin gradually has pivoted to Asia, both politically and economically, and Russia hopes to expand energy and trade ties not just with China, but also more broadly with Asia. However, the impact of changes in energy markets could subtly alter the relationship between Russia and China in ways that also could escalate tensions in the bilateral ties. While Russia sees China as a key partner in constraining US prerogatives, China sees Russia mostly as a source of energy and natural resource supply and a great power in decline.

Gas exports remain one of Russiaâs most effective political weapons. But the power Russia wields through its gas sector also comes at a tremendous cost. Gazpromâs relative stranglehold over the domestic and export market until relatively recently has hindered entry of foreign investors who could bring capital and technical expertise and limited sources of Russian budget revenue. On the export side, Russiaâs disregard for disruptions and the impact on customers further down the line in Western Europe has driven a wedge in the Russian-European gas relationship and compelled Europe to look into alternative supply sources from abroad as well as to its own un-conventionals potential to displace Russian supply over the next decade. Despite widespread bans on fracking in Europe, even the partial development of European shale resources or a growth in LNG imports could force further contract pricing revisions on Gazprom, underscoring the increasingly brittle state of Russiaâs traditional gas sector development model.

The Russian budget is nearly 50 percent dependent on oil and gas revenues, and while the dependence is far greater on the oil sector, the recent push by oil companies into more challenging plays, including tight oil and the Arctic, has required significant tax concessions from the government. By default, heavier burden has been transferred to the gas industry and expressed in the form of MET hikes to prevent a significant blow to budget revenues.

Case Study 1

What is the Russian political climate? How it is going to impact its LNG exports?(50 words)

How the government policies are hindering development of the LNG industries? ?(50 words)

If you were an investor would you invest in Russian LNG? ?(100 words)

MGEC71H3 Study Guide - Currency Crisis, Financial Institution, Loanable Funds

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