The Rotting Apple

Apple inc. is one of the most successful, valuable, and well-known company's in the world. After they overtook Exxon Mobile, the Texas Oil corporation giant, back in 2011, with a market capitalization value of $337.2 billion for Apple compared to the Exxon Mobile's $330.8 billion, it seemed like there was no looking back for Apple, they could only look forward. It is truly one of the amazing success stories for any enterprise; from a failing group of innovators on the verge of bankruptcy in the late 1990's after record-low stock prices and crippling financial losses, to software and technological pioneers with record profits. Even Microsoft, the software and computer technology public corporation superpower that dominated the computer OS industry for years running (even described as a monopoly), has had several issues dealing with the rapid increase in Apple inc.'s market share for computers/laptops and smartphones.

*" 'A' is for Apple inc." - Apple inc. has transformed into one of the world's most respected and reputed technological companies

Apple inc.'s amazing performance in the consumer market this past half decade were down to several factors. Their pioneering corporate strategy for technological 'Concorde' moments such as nano technology in the iPod nano, touch screen technology in the iPhone 3G, iOS smartphone/mobile platform, OSX computer platform, iTunes, and some pretty geeky and amazing new software/hardware. Despite the success, Apple inc. have not been sitting down like couch potatoes, in fact they continued to strive for the Apple CEO Steve Jobs' main objective to create the perfect product. Many more noteworthy products have followed on, including the iPhone 4, 4S and 5, the Macbook Pro, and Macbook Air, the iPad, and even the iPad mini!

In our current society, technology is now the main impetus that is driving the economy forward. Communications technology itself is one of the largest markets currently, and its importance cannot be denied. Efficiency in communication is important for business operations, consumers for product information and overall economic development and growth. Several decades ago we were still using air mail to communicate with others in far away countries, now we can call them (pretty damn expensive!), send emails or SMS (I prefer Whatsapp), or even video call them for free (Skype <3)!


*"Wherever you want, whenever you want" - Communications technology is the very important for today's society economically.

It all seems very good then; with consumer tastes' driving the mercurial technological goods market, and Apple continuing to bring out the goodies, it seems like nothing could stop the blooming harvest of Apple.

However, in an interesting turn of events just this year, the Market Value of the NASDAQ AAPL stock has since taken a very large dip, from the company's highest ever recorded market share value of $702.5 to $520.17 as of today (25/12/2012).

Fluctuations in the market share price is a common every day occurrence, but this is truly mysterious and has baffled many people. Although things are not turning out for the best, please do not interpret this information as a sign of Apple's downfall; in Q4 this year, the company announced record profits of $8.2 Billion USD and revenue of $36 Billion USD. So why this significant drop? There have been numerous explanations for this phenomena, so lets get down to it!

The first, and main reason for this drop, is the rising competition. When Apple inc. started to dominate the market around 2007, there were virtually no substitutes for some of its products, including the iPhone 3G and some of its nano technology. But now, Apple's competitors have really stepped up a gear; their technological prowess is arguably on par, if not better nor worse than Apple right now. Through what I have heard from many smartphone users, their preferences range from simply being pro-Apple to a dislike of the new CEO Tim Cook. Some of the less extreme factors that lead to this shift in power in the smartphone market include:

• Screen size - Apple has been quite weak in addressing this point. Even the larger 4-inch screen in the new iPhone 5, is no match for the 4.8-inch screen in the Samsung Galaxy S3, and the 4.7-inch HTC EVO 4G LTE. . Consumers have constantly expressed their desire for larger screens. Notable benefits include larger texts for reading and better game play experience
• Processor Speed - there is no doubt that speed is one of the most important things in technological devices. While the new iPhone 5 boasts a powerful dual core 1.2GHz A6 chip, it's competitors the Samsung Galaxy S3, LG Nexus 4, are coming out with quad core beasts running at 1.5GHz.
• Apps - The Apple App Store is features free apps, most of which are Lite versions, and paid apps whic are full versions. Android apps however offer full versions of these apps that can be downloaded from the Internet for free. Of course, Jailbreaking the iPhone is always an option, but it is quite hassling, and you will lose the warranty, so you cannot replace it when it breaks. I myself have Jailbroke my iPhone 4, and my phone's performance dropped considerably. Consideration of the opportunity costs, it is not as good as the Android Apps.

If Apple inc.  wants to improve their current market performance, they will need to at least meet what their competitors product specification, before dealing with them on the software level. Experts predict that strong competition from other technology companies, mainly Samsung, would further lead to Apple inc.'s market share to deteriorate.

The second problem are the questionable product launches and decisions from the hierarchies of the company. The recent release of the iPad Mini, a product with the goal to compete with the Samsung Galaxy Note, was met with confusion and criticism. People claimed that it was a poor attempt to make something that is similar to a small tablet or large smartphone. It's flaw lies in its lack of a calling function; a function that is basic in communications technology. To me, it seems like Apple is no longer the pioneer, it may be starting to be imitative of Samsung's products. Furthermore, Apple's decision to replace the Google Maps, one of the most universally recognized, useful, and consumer-friendly apps, is plain stupid. In its place, the Apple Maps seemed good at first with the 3D buildings and nice graphics, but they seem to get the most important, and yet the most basic information such as street names, addresses, building names wrong. It is difficult for any business, no matter how advanced, to replace established ones. I can safely say that Google completely monopolized the maps/location market with the Google Maps; no other maps have the same quality and convenience as it, truly a service with no close substitutes.

Changing consumer tastes and requirements, and increasingly elastic demand have also contributed to  Apple inc.'s falling market share price. When Samsung came out with the Galaxy S, there is a notable sense of hype about it, indicating tr start of the power struggle. And what happened next? The most significant market change is its dynamism (dynamic efficiency). The time difference in the release of improvements in original product has gotten shorter, and it is predicted that it will continue to be shorter. It's not that Apple's products are low-tech, this is in fact the problem of human behavior. When the iPhone 3 came out, it was an extremely huge breakthrough, a Concorde moment no less. But this monumentous structural change has gotten us wanting more, expecting the same excitement as when the iPhone 3 came out. The iPhone 4 was able to meet the same level of vibe, if not more, with a brand new design, many more functions, and an awesome retina display.  Then when the iPhone 4S was introduced, it started to raise some questions. Even though amazing stuff such as the Siri voice assistant came out, everyone was hoping for the iPhone 5 and hence the reaction was quite dull. For the iPhone 5, it lacked any breakthrough as far as technology is concerned, and the introduction of Apple Maps was simply disastrous, but it is still selling well.

Product differentiation and marketing maintain the strong points of Apple because they are efficient in using their resources. Their advertisements focus on adapting a low-cost, minimalist, directly-to-the-point approach. Efficient and low cost, the epitome of being economical. Moreover, product differentiation for Apple is one of their most important and observably significant missions as pioneers and entrepreneurs because there are no substitutes for Apple software, hoping to make their products more price inelastic. For example, while Samsung, HTC, Son, and LG are using Android OS (food names: honeycomb, ice-cream sandwich etc.), and Nokia using the Windows 8 OS, Apple uses its own iOS. To an extent, Apple inc.'s strive for product differentiation is justified, but too much might come back to haunt them for their efforts. In the aforementioned paragraph, Apple's attempt to get rid of Google backfired, leaving them with a slightly dented reputation, and proving that Google is best for maps. Additionally, Google have been quite cheeky in dealing with this situation, creating a free maps app available for free on iTunes similar to the Apple Maps with 3D buildings and spoken route directions. I myself have downloaded it, and it is significantly better.

Patents and Copyrights are the current protectionist measures Apple inc. are using against the other tech giants. One of the most significant lawsuits Apple have filed against was Samsung, in the Spring of 2011. This lawsuit targeted the Android smartphones and tablets, with Apple claiming Samsung had copied their ideas.  Apple's multinational litigation over technology patents became known as the mobile device patent wars: extensive litigation in fierce competition in the global market for consumer mobile communications. In total (July 30 2012), Apple and Samsung carried out their legal battles over 50 lawsuits, 12 courts in 10 countries in 4 continents. Apple prevailed and Samsung had to pay US$1 Billion for all damages. In the complex business world, copying someone else's idea, especially new inventions, is similar to cheating in an exam; zero tolerance and all measures are taken to preserve the individual's efforts. Apple inc. is extremely pedantic when it comes to copyrights and patents. In the Apple Store located in IFC (International Finance Centre), Central Hong Kong, the spiral glass staircase is also copyrighted. Truly unf***ing-believable.

Lastly, the company is suffering from internal conflicts between staff and authorities. On October 29 2012, senior vice-president of the iOS software, Scott Forstall, resigned from his position in the company. The mastermind behind all the ingenious iOS software up-to-date will no longer be here to serve the long-standing community of Apple lovers. According to various sources, Forstall has recently came under fire for the Maps app, Siri, and the skeuomorphic design of the phone. Forstall's stubborn defiance of these criticisms has led to CEO Tim Cook "[deciding] to lance the boil as internal politics and dissent reached a key pitch." On a general note, members Apple team loathe each other; Forstall had such a bad relationship with Jonathan Ive and Bob Mansfield that they could not hold a meeting without the CEO overseeing the meeting. These internal conflicts have indeed damaged Apple's significantly, unless they resolve these issues, Apple would not stand a chance in the later stages of the corporate war.

Apple's recent problems have fortified their other troubles. Other tech giants are finding opportunities to undermine Apple of its status as the number one technology company, and therefore the number one market capitalization company in the world. Apple have to tread carefully, and smartly to avoid further pitfalls that may ultimately lead the company to its 'rotten' end.

China and Japan: Battle for Diaoyu Islands

China and Japan have had many conflicts with each other in the past, ranging from minor squabbles to World War II. The Nanking/Nanjing Massacre or the 'Rape of Nanking', a mass murder and war rape that occurred during the six-week period following the Japanese capture of the city of Nanking/Nanjing, the former capital of the People's Republic of China, is still very much remembered to this day as the epitome of war violence. On 7th September 2010, a Chinese fishing trawler collided with two Japanese Coast Guard patrol boats in disputed waters near the islands, resulting in the Japanese sailors arresting the captain Zhan Qixiong. The current internal conflict between these two economic powerhouses is not what one might expect; who gets ownership of several small islands between these two countries. The islands are called Diaoyu Islands in China, and Senkaku Islands in Japan. The 5 islands, or islets, rest in the East China Sea, with close proximity from Japan and China, sizes ranging 800m² (smallest) and 4.32 km² (largest).


*"The New Battlefield": China and Japan reenact their old rivalry and battle for the Senkaku/Diaoyu Islands

Political tension between these two countries have escalated through this dispute. Both China and Japan are claiming Diaoyu Islands as their own, through evidence of past records of land ownership. History teaches us that the Japanese people originated from Chinese people. Early Japanese ancestors left China to look for new land, that is how they stumbled upon Japan. So logically, shouldn't China rightfully claim Diaoyu Islands? It's not as simple as that. At least now it isn't. On September 11th, the Japanese Government took the initiative and agreed to pay ¥2 billion ($26m) for the 3 remaining islands from their private owner. That must have certainly outraged Chinese Officials and locals.


*"Fight off the Japanese Demons": Protesters stormed the streets, demanding Diaoyu Islands ownership to the Chinese.

On September 16th, in a anti-Japanese protest, around 3000 protesters, draped with the Chinese flag while carrying portraits of Chairman Mao, stormed the streets of Shanghai and into the front door step of the Japanese Consulate. The shrieking chants of "Get the hell out of China!" (In Chinese of course) resonated and rung the surroundings, directed at the Japanese Officials. After the protest, they left in an orderly fashion. Elsewhere things have been less peaceful.

Both countries are arguing over the ownership of the islands. Here is what the two respective countries' arguments and counterarguments are currently standing:

China

• Evidence of early records of discovery in maps and travelogues.
• The islands were a Chinese frontier off-shore defence from Japanese Pirates. Early depictions of Chinese and Japanese Maps indicate the territory as Chinese.
• While the Japanese took control of the islands during the First Sino-Japanese wars, it was formally ceded by Treaty of Shimonoseki, to which China claims the Japanese knew that the islands were not terra nullius (land belonging to no one).
• The Potsdam Declaration stated that "Japanese sovereignty shall be limited to the islands of Honshū, Hokkaidō, Kyūshū, Shikoku and such minor islands as we determine", and "we" referred to the victors of the Second World War who met at Potsdam, the USA, the UK and the Republic of China. Japan accepted the terms of the Declaration when it surrendered.
• China formally protested the 1971 US transfer of control to Japan

Japan

• The islands were uninhabited and there is no evidence of Chinese ownership and control prior to 1895.
• The islands were ceded to Japan by the Qing Dynasty of China in Article II of the May 1895 Treaty of Shimonoseki. And later, was not renounced by Japan under Article II of the San Francisco Peace Treaty.
• Though the islands were controlled by the United States as an occupying power between 1945 and 1972, Japan has since 1972 exercised administration over the islands.
• China and Taiwan's only started claiming ownership of the islands in 1971, following a May 1969 United Nations report that large oil reserves may exist under the seabed of the islands. Hence, the motive is selfish gain.

Boring politics is not what we want, so let us do some economic analysis. Why are China and Japan going to such great lengths to rightfully claim Diaoyu Islands? The main reason is resources; the Senkaku Islands is land, a factor of production. 'Land' in economics is not really the land itself, but it refers to the resources that the land has available. In comparison to the size of China and Japan, the total area the 5 islands boasts is absolutely tiny! So to spend so much effort to buy these islands, just goes to show how important natural resources are. Every country, in fact the whole world runs on energy produced by natural resources like crude oil and coal. Businesses are only able to operate because there is energy. So upon finding out that large oil reserves exist under the islands, it is no wonder a fight broke out between the 2 countries.

Oil is an essential natural resource that has a virtually perfectly inelastic demand, but is however severely limited in supply due to our enormous consumption. The scarcity of land and the outrageous demand for resources prompted land to be bought through financial means. So it is hardly surprising to see sovereignty of the Senkaku Islands handed over to the Japanese because they were willing and able to cough up the money before China did. It is opportunity costs all over again: Japan's short term leakage of funds could well be rewarded with long term gains to recover the sacrifice made.

The purchase of islands is very common nowadays; it is just like any investment you make! For example, a Philippines factory owner, and my mother's business partner, this year has bought two islands near the coast of Manila for $20 million HKD each. He is developing the islands into resorts, using tourism as the medium for financial returns for his investment. One thing that is quite weird, is that it is not expensive, while the Senkaku Islands are quite expensive. Coming from Hong Kong, a city with ruthlessly expensive housing prices, it is not overwhelmingly expensive for islands since one can only buy a regular sized apartment in Hong Kong for that money! The reason for expensive land in Hong Kong is due to the lack of land and strong demand. Any old island on the other hand, is relatively cheap because of the excess supply. The Senkaku Islands are quite special; it has a great location, oil reserves nearby, and other resources, hence the reason for its high cost. It just goes to show how important land is as a factor of production.

*"Islands on the Market": The buying and selling of private islands is commonplace in the modern society. Pictured above is the Real Madrid owned artificial island in the United Arab Emirates.

Price competition is the main form of competition for fixed assets like land, and the other supplements such as heritage, paper evidence of ownership etc. can represent the non-price factors for this case. But the non-price factors play such a small role in the current economic environment. Believe it or not, our world is quite poor. Economies continue to struggle by poor consumption, trade, and political problems. Having money is a great deal to all economies. On a micro scale, profit is what drives rational entrepreneurs and businesses forward, people work to receive money to satisfy their needs and wants, and gangsters who rob people will most likely demand money and possessions that are valued highly.

The second reason is trade improvements. Both Japan and China's trade are continuing to do quite well. In August this year, Japan recorded a current account surplus of 455 billion yen. China, as all of you might have guessed, recorded a current account surplus of $59.7 billion USD in the second quarter this year. Even though both countries are doing well, with their GDP's continuing to rise, they want to continue to improve for security reasons to survive unprecedented economic recession backlashes. The Senkaku Islands arre located in a very good spot; right between two economic superpowers. More ports are available, which can improve the capacity of imports and exports. For Japan's relatively weak currency, the reduction in price of exports would lead to a proportionately greater increase in the demand for the exports. This would further increase the net exports and current account surplus. Also, Japan is often prized for its innovation for technological goods. The modern society revolves around technology, so Japan would also benefit from the expanded trade area. On the other hand, the demand for Chinese made goods is significantly higher than Japanese made goods, hence the reason why China wants to continue expanding its trade.

A third reason is the food source. The waters of the East China Sea are rich fishing grounds. Both Chinese and Japanese cuisine highly prize seafood in their dishes. For example, the Japanese sushi and sashimi, and the Chinese steamed Garoupa and fish maw soup. With food becoming more expensive due to the high demand and depleting supply, Japan and China have to look elsewhere for food.

The final reason would be the expansion of the EEZ (Exclusive Economic Zone). Although the two nations have roughly the same coastline, Japan claims 4.5km²  of the EEZ, which is 5 times more than China. The EEZ is a seazone prescribed by the United Nations Convention on the Law of the Sea, over which a country as exclusive right over exploration and use of marine resources. Given the potential resource and territorial gain, it is no wonder Japan and China are both hysterical about ownership of the Senkaku Islands.

Japan and China have a rich history of conflicts, some long term ones, and some short term ones. With the current rocky relationship between these two countries, and the many benefits for the country who is able to obtain that ownership, it seems this is going to be another long one...

The Opportunity Costs of Education

Many, many years ago, quality education is considered to be a luxury; only children from rich families are able to get education. Now, education is an essential component in our lives and considered a norm to society. The importance of education cannot be denied; our modern society revolves around the qualifications and degrees earned in order for us to pursue a worthwhile career with a handsome paycheck. For this reason alone, education has now become an industry in it own; the number of learning centers and university counselors has tripled as of this year compared to only 5 years ago. The industry of education is now full of opportunities for wealthy careers, as education continues to be valued very highly to society. Each year, hundreds of thousands of students compete against each other from around the world to apply for a possible placement in a higher education facility (i.e. University) in a brutal application process, whereas it is much more easy to get into a University 20 years ago. Parents now place education and academic results as the top priority for their children.


*"Education=Future - New Equation?": Education is valued very highly in modern society, the gateway to a desirable future.

One of the reasons why Education is so valued is because it is now much more accessible to low income groups. For the average low income family, they view education for their children as a ticket out of poverty and access to better living conditions. Also, governments view education as a merit good; something that is deemed to be socially desirable and can benefit the society. However, private firms view education to be something that would not be profitable, as rational firms aim to profit-maximize. So education will be under-provided and under-consumed in society. As a result, governments have improved the access to education through direct provision or subsidize consumers and suppliers alike. For example, La Salle college in Hong Kong gives free education to many low income families. In many places, education is free with many state-run schools, and in comparison only few private schools.

So why has education propelled to the top spot in the list of priorities of parents for their children? Firstly, as we have mentioned above, the accessibility of education. Secondly, the increase in the competitiveness of students. If I and many other high school students were to become parents in the near future, what would we be concerned about most of all? Our children's future. The society is now dominated by the desire to earn money and be positioned in a good job, as money allows people to fulfill their needs and purchase economic goods. Education in the eyes of many parents translates to a higher chance of their children being able to get a good job, hence the reason why they believe that education and the opportunity to study at a world-renowned higher education institute means a good future. Thirdly, job requirements. All firms want to recruit the best possible individuals to join their company, as high quality factors of production is very important to the success of business, whether it is increase in productivity of output. With so many people now having access to education, firms have detailed job specifications and requirements, making the parents feel that their children must have good education in order to acquire essential qualifications to have access to more job opportunities.


*"The most important piece of paper of our lives": Certificates and University Degrees are now the main requirement firms want for anyone applying for a job placement. 

Lastly, the competition between parents. Parents may not like to admit it, but it is extremely relevant to this discussion. Every parent, whether they like it or not like to boast about their children's achievements, especially the mother. My real world example would be the housewives at Pacific Club. These ladies would usually play tennis in the morning, and the first discussion, other than judging other people is to talk about their children's grades, University, subject of study etc. In this instance, we can modify 'price competition' to 'education/grade/University competition', whatever to make this easier to understand. In the eyes of those housewives, whoever's 'grade competition' is higher means that they will win, and the others will lose. Nobody likes to lose; this instinctive human response as a result of competition induces the desire for the parent's to invest in their children's education to come out as victors in the 'grade competition'. Winning and losing is part of economics, which makes this point very important.

People often express that "your children are your biggest investment." I personally agree with this viewpoint, several years back in the Hong Kong news, an average parent will spend about $40 million HKD on their children until they graduate from University. And similarly to stock markets, the success of the investment is very difficult to anticipate. One moment you are earning a fortune, the next day your stock drops like an anvil, inherently like the nature macroeconomics. If we compare the students to the stocks, we can infer that that it is difficult for the parents to anticipate whether their children will be successful or not in the future.

                 
*"Turn out which way?": Child's success and future is extremely difficult to anticipate

Next, let's look at the student's response to education. Question yourself this, do you like to go to school every morning, dressed in uniform (casual for University and possibly high school seniors) sat down in a room full of other students while the teacher bombards you with knowledge? Not really, no. While the governments and society think that education is beneficial to society, to us students, education is not exactly pleasurable. As human beings, we want to do things that will maximize our benefit, for example leisure, going on a vacation, gaming, hang out with friends at Theme Parks etc. Education does not go into that list, not now, not never. How many times have you heard your friends curse the IB, SATs, teachers or anything school-related? Many times is what I had experienced, and our school produces some of the best results in the world. If we don't like education, then why do we still do it? Do students want to get into University simply for the fact that they want to study at a higher educational facility? Firstly, education has developed into a essential good for job access into many industries. Secondly, education is now a social norm and requirement. Thirdly, and this is very much related to myself, respect and recognition gained through education  It is a human instinct and desire to want to be respected by other people by being better than them in any competition, whether athletic or academic. Education is the perfect medium to accomplish this. I know this seems more psychology than economics, but economics has deep roots in psychology as it is a study of human behavior (social science). So because education is now easily accessible to everyone, it has changed from a want, to a need.

What about the University themselves? The admissions process can be one of the most frustrating and cruel stages students need to undergo through their academic careers. So how do Universities decide who are the able applicants and those who are not? We hear about the American's "holistic approach" and others think that its subjective. This is a job mainly for the students to do. If we imagine that each of us are particular firms with our own unique brand name and identity, we have to "differentiate" ourselves to get noticed, as we are competing for limited University spaces, who act as the consumer, hence this is similar to "product differentiation." Ever understand why our parents make us learn musical instruments and participate in sports? The main reason is that they want us to be different from other students so that we could effectively "sell" ourselves to the Universities. Furthermore, if we were to represent the students as a market, then the market structure would be monopolistic competition. We are heterogeneous goods since we differentiate ourselves; each of us have a "price setting" ability since we can control over how we value ourselves as products by which Universities will consider. To a large number of Universities, we are imperfect substitutes for each other, and extreme competition between every student affect the degree of differentiation. Switching roles now that we students are the consumer and the University the firm, then we are subjected to "Price Discrimination". Price Discrimination is a practice by which firms charge different prices to different consumers for identical goods and/or services. The market segments in this case are local students and international students, where international students have to pay more to 'subsidize' the local students, as international students are often wealthy. Universities are able to do this because they each have 'monopoly power', they are able to prevent the resell of the good/service since applications identify particular students, and are able to separate different market segments.

*"Masked elegance and beauty": Prestigious Universities in appearance, a plethora of economic activity going on the inside.

University rankings have indirectly taken the role of market share to a certain degree. I recently opted to do a survey of Hong Kong students. When I asked them, "which Universities do you know or have heard of?" 100% have heard or knows about the top 3 Ivy League Schools (Harvard, Princeton and Yale), 100% knows about Cambridge and Oxford. 90% of the students know the top 10 Universities in the world, but 17.6% do not know anything about the courses or anything specific about the top schools including location. Unsurprisingly, only about 5% know about the Seven Sister Colleges (Bryn Mawr, Wellsley, Mount Holyoke, Vassar, Smith, Radcliffe and Barnard), and 0% have even heard of Rensselaer Polytechnic University located in the US. To understand the extent of the problem, someone from my school, King George V School, thought that Harvard was in the UK!

     
*The Thinker: "Harvard in the UK?", John Harvard: "No! What person would think that!?" : Universities are recognized by their name first, before getting information about the institution.

To be honest, if one does not know whether Harvard was in the US or UK then that already explains the problem doesn't it? Only the best Universities get recognized; implying that its admissions officers are going to be drowned in applications. From this, we can see that there are a few Universities that dominate the market, since they have the greatest ability to attract students.

Economists always use a simple but fundamentally important process when making decisions, unlimited wants, limited resources, scarcity and opportunity costs. Opportunity cost is the value of the next best alternative foregone after an economic decision is made. Decisions regarding education have many factors to consider: the University you wish to attend, what subject you want to study, what career paths and choices do your subject give you access to, the high school course you should take, whether to focus on SATs or the school curriculum etc. Let us consider some simple examples where opportunity costs play a role in influencing the choice we make.

• University - Cambridge or Harvard? UCL or Imperial College London? Choosing between such top Universities can be a real headache for students, considering that offers are given. Imagine the students as consumers and the Universities the firms. Assuming that the prices to attend each University are equal, this means that each University will compete against each other with non-price competition. The types of non-price competition include the name of the University (of course), their place in the rankings, the types of courses they offer, the employment figures upon graduation, the student experience, the location, the food etc. Usually, the brand name of the University and the ranking plays the largest role in the student's choice. For example, one of the teachers from my school got an offer from both the University of Michigan and Columbia University to do her masters degree in Mathematics. She preferred the rigorous course at UMichigan, but in the end opted for Columbia University because she wanted that brand name and qualification from a well-reputable Ivy League School.

• Subject Choice - this factor very much relates to the one above. Let the student in this example be from Hong Kong. He had received offers to study Economics at the University of Cambridge and Medicine at the University of Hong Kong? If he were to choose Economics at Cambridge, then the opportunity cost would be to study Medicine in Hong Kong. The opportunity costs include: being with his parents in his home, having a sense of security in a city he has lived for all his life, paying less expensive school fees, nearing 100% employment (since HK has an insufficient supply of doctors), having a high social ranking occupation, lacking language barriers, staying with familiar friends, eating familiar food etc. On the other hand, if he were to choose HKU Medicine, then the opportunity costs include: the once-in-a-lifetime experience studying at one of the most internationally recognized Universities in the world (2012 Ranked #1: QS World University Rankings), learning to be independent, having freedom from parents, making new friends, staying in a place with a favourable timezone for Premier League and Champions League Matches, countryside experience away from the polluted city, Fish & Chips! etc. Very hard indeed, but the final decision depends on what you personally like, since everyone's desires and what benefits them are different. Moreover, different subjects have different types of opportunity costs, or advantages and disadvantages. For example, if one chooses medicine to study at University, then there is guaranteed employment, high pay if successful and higher social recognition, but it is a life long commitment to continual knowledge enrichment; it does not stop after graduating from medical school. Next, if one chooses to do Fine Arts, then it should be comparatively easy to study, but the modern society's demand for Fine Art students is considerably weak as opposed to a 100 years ago, so it is difficult to find jobs as it is not very popular in many industries.

• Undergraduate, Masters or PhD? - The opportunity costs with these are usually related to time and the career path. Doing Masters Degree or PhD will require a lot more time, therefore the opportunity cost is finding a job and starting to earn money earlier. Another opportunity cost by studying a Masters Degree or PhD is job mobility. As we become more professional in a particular field of study, our job mobility declines, hence we become only tailored to a specific career path. Alternatively, choosing to only have an Undergraduate qualification means that you become less competitive against other students who have better qualifications, and with the population of students continuing to increase, an Undergraduate Degree may not be enough.

The best way to evaluate opportunity costs are consideration into the short term and long term gains, with long term usually being the more favourable one. For example, eating junk food everyday; you get short term pleasure through the taste, but you then experience long term build up of cholesterol and the possible arise of health problems. Similarly, you work hard and focus on studies in the short term, in the long term you do well in exams and get into a top University. Of course, the notion of success through prowess in education has elements of uncertainty.

Having brought that up in the above paragraph consider this: "Is education really worth all the money and effort?" An individual's education does not completely decide what career path he/she follows and success. For example, the most popular Japanese comedy duo, Downtown. The boke (funny man) Matsumoto Hitoshi san (松本 人志) and tsukommi (straight/rational man) Hamada Masatoshi san (浜田 雅功) both did not attend University and are high school drop outs. Yet, they are arguably the most successful and well-known comedians of their time and revolutionized manzai (traditional style of stand-up comedian in Japanese culture) forever. Additionally, there have been many people who are graduates from top Universities but have entered the television industry, for example comedians Ben Miller, Simon Bird and Joe Thomas have all studied at the University of Cambridge in Physics, English and History respectively. It may seem ridiculous to go into comedy after studying at Cambridge, but consideration of the opportunity costs may indeed favour the comedy career path.


*Pictured above: Comedy Duo Downtown's Matsumoto Hitoshi (Left) and Hamada Masatoshi (Right)

To conclude, education is a necessity in the modern society through the increase in competition between people for scarce job opportunities and money. Often viewed as something that would determine success in careers, education's importance is undeniable, but is not strictly true. Consideration of the opportunity costs, short term and long term gains, and general economic analysis, we have shown that education is not as simple as we may first think. In actual fact, it is very complex. The value of education is the highest as it has ever been, and its only going to go even higher.

Invisible Money Part II: Artificial Consumption

If you have not read the previous article, then you can read it here. If you have read it, then just a quick summary of the Invisible money. You should know that Invisible money is an issue to all our economies in terms of using invisible assets to pay for real assets, the illusion of an equivalent exchange of goods for money. Other issues include the formation of a bubble economy and the quick deterioration of both investment and commercial banks' money supply. Now, lets examine part two of the problem.

If we refer to our original example of an individual who earns $10,000, yet is able to purchase many things of a monetary value above that of his/her income. This is attributed to the wealth of the person, who has invisible assets; this is a reason for why many people are able to purchase well above their income levels. Here is the exact problem: since our purchasing capability is so much greater than our actual income, then this must also mean that we are consuming at a level above our income level. When we purchase goods, most of the time we do not exchange real money for real goods, in reality, we exchange invisible money for real goods. Invisible vs. Real? I'm sure we know what the problem is now: We are consuming at a level that does not reflect the overall income of our economies, hence the term artificial consumption.


*"What?? I didn't buy my laptop?": Invisible money allowed us to purchase goods that we couldn't buy with real money, creating a purchase illusion.

Computers, television sets, books, a lot of what we own, that a lot of us do not realize is actually a luxury that we might not even have in the first place given our income. At first, it may seem ridiculous to think that the capital, electronic or expensive goods in general that we buy are not paid for with physical money. Each good or service is assigned a monetary value that changes with the price mechanism; the forces of demand and supply. But when we purchase notably expensive goods, then we use credit cards. Effectively, we are using future finance through borrowing money from the banks. So the banks help us pay the firm and we get to pay back in small amounts until the debt is paid back in full with interest.

The main problem with artificial consumption is that we are consuming at a much higher level than our income allows us. If we were to only use physical money to purchase goods, then this means that we may not be readily able to buy a place to live, laptops, smartphones etc. But since we are able to, that means that we are consuming at an artificially high level beyond the money available in the whole economy. If we relate this to prices we see today, since the world aggregate demand is abnormally high, wouldn't this induce demand pull inflation so that every good or service should be priced much more than it is currently? As this is not the case, then this must suggest that there is an illusion of cash flow, alluding people to think that they are wealthy, but in reality are much poorer than they believe. Also, it would be troublesome in the current social environment to suddenly increase the prices of goods as governments would like to prevent social unrest and riots that is an example of market failure; causing unwanted costs to the society. Furthermore, the social and moral dangers of invisible money means that we are using our resources at a much greater, unsustainable rate than our money supply allows us. China now purchases 40% of the world's copper supplies and that the BRIC developing countries (Brazil, Russia, India and China) will consume 3.7 million more barrels of oil a day in 2012 than they did in 2008. The main consequence? Increasing rate of Global Warming and environmental destruction.


*"Please help me!": A result of us humans demanding and consuming at an artificially high level; the rate of Global Warming is much faster than expected.

Credit is the main cause of artificial consumption. The concept of being able to borrow a vast amount of money from a creditor, then return the money little by little is majorly flawed. Not only is the bank putting themselves in danger to borrow money for perceptibly small returns given the enormous figures in an average banker's paycheck (if it is even real money at all!),  Personally, the existence of credit has its benefits of making the cash flow around the economy more efficient. But in the long term, it could well be the biggest problem that lies in the economies of the 21st century, and there is no going back...

Invisible Money: Uncovering the truth

Ever since the introduction of the credit card and the idea of borrowing from financial institutions, people's access to money has never been so great. A credit card is a payment card issued to users as a system of payment. It allows the cardholder to pay for goods and services based on the holder's promise to pay for them. The idea of borrowing and lending money became integrated into the cash flow system of our respective economies. Economists would say that the idea of credit and debt is responsible for granting the efficiency of cash flow around the economy, ranging from cheap loans to expensive investments. If you want to open up a new business nowadays, you simply pop over to your local bank, ask for the required sum of money, sign several documents regarding the mortgage payments, and you would be on your way to set up your business. It is so easy to borrow money nowadays, almost too easy...


*"Out with the money, in with the credit cards": Credit card usage have changed the way we humans purchase goods and investments

However, I believe that credit in itself is a very faulty, and dangerous concept that has the potential to cause detrimental effects to current economies dominated by financial means. Now, before we are able to move on to the term "Invisible Money", we have to establish one concept that people often find hard to distinguish between.

Income vs Wealth

Income represents an individual's consumption and savings opportunity within a specific time frame expressed in monetary terms. In layman terms, it means the person's real assets. Wealth, on the other hand, is a measure of everything that has value owned by a country, an individual or even the individual himself is worth something. There is no universal definition of wealth, but we often find that one person's wealth is greater than that person's income. For example, how does an office worker, who earns $10,000 HKD, be able to pay for a high-quality Armani Suit and still have money to pay for rent, food, transportation, a Rolex...the list could go on and on. From this, we can see that the person's income does not reflect the value of goods he owns. However, as economists, we know that everything has a monetary value that changes through the price mechanism, so there must an invisible force of money that allows the person to expand his consumption beyond his available means, hence the term "Invisible Money". If we go back to our original concept of income vs wealth, then we can see that income represents real assets, whereas wealth includes both real and invisible assets.

Having distinguished between income and wealth, we will now move on to the problem of borrowing money from financial institutions. It is important to realize that majority of our wealth does not come from our income. Actually, much of the money we use is artificial or what I call "future finance". Future finance essentially means that an individual is using more money than his/her actual income by borrowing money. Borrowing money is already using future money, as one is using money that is not originally from his/her own source of income, and has to pay back the money little by little with interest until its returned to the creditor (bank).

The problem with future finance, in my opinion, is the quick deterioration of the bank's liquidity. The frequency of borrowing and lending will pose potential unwanted risks associated. Investment banks like JP Morgan and commercial banks like HSBC are not doing very well recently; on 13th of July, JP Morgan record losses of about $5.8 Billion USD, while HSBC is cutting thousands of jobs in the UK to cut down costs and may receive $700 million USD fine from the US government by financing terrorists and other criminal activities, and money laundering. Another, more 'cheeky' indicator for how badly banks are doing is in the amount of bonus the respective banks' CEO's are earning. If the banks are doing well, then the CEO's will receive a lot of bonus. So how much did they earn this year? No bonus. To show you what the problem is across all banks, please take a look at the diagram below:

1. The public, who want to save money to either receive interest from the bank to his/her account or has too much money to spend (Not likely, except if the individual has a high marginal propensity to save), will choose to put their money in the bank. Hence, the money supply increases in the bank.
2. Firms or individuals who want to invest, or purchase fixed assets or start up new retail outlets will need a large amount of financial backing to support the investments they are going to buy. In most cases, these small firms and individuals will not have saved enough money from their income in order for them to buy the investment, hence they need to ask the bank to lend them money. If the bank gives the firm or individual the green light, the money is transferred and the investment is made. *Note that the borrowed money that the bank gives to the investor is the money savings from our bank accounts!
3. Over time, for about 20 years (this is for my family's apartment flat) or less, the firm or individual pays the bank back in fixed amounts with interest (a percentage of the borrowed money as a "commission" to the bank), which is the bank's profit. This is called a mortgage.
4. When the people who made the bank deposits to their savings accounts decided to spend again and are short of physical money (bank notes), then they will need to withdraw their money from the bank via ATM machines. The bank has no choice but to give them their money.

The bank's return is paid over the long term, whereas the money that the bank borrows to the investors and the money that the people withdraw are immediately transferred, hence the short term. Overall, this leaves the bank with a deficit in their money supply. This lack of liquid assets poses a real danger to banks who profit from interest. It is especially to the banks to lend money to firms who do not have much security or are not as "credit worthy" compared to the large firms. Irresponsible lending leads to the huge problems of large losses; Lehman Brothers had this problem, and was bankrupt since 2007, causing many problems to the worldwide economy. The only way to fix this problem if there was an equilibrium established between the rate at which people withdraw money and the bank receiving their mortgage payments, which is extremely difficult to obtain in the free market. Imagine if all the banks were to go bankrupt, it would be a total disaster.

Of course, we don't really see it happening in everyday life; banks still remain quite positive. For example, UA finance, Promise Ltd., and other financial firms' advertisements tell us how people are happy with credit, well it is quite pathetic in my opinion.

As a Hong Kong resident, I find that there is an issue with the mortgage system, which is called, in Chinese "銀主盤". Essentially, this has got to with the ownership payments to an investment. This banking program helps to pay 70% of the money for an investment, while the owner pays 30% of it. If the owner dies, then the bank, because it owns more of the payment share, has to pay the full 100% and therefore lose money on its investment. Also, the debt will not pass on to the relatives unless stated on the official document. Now we will move on to the US. Unlike other countries, the US has a really loose banking security due to the many issues of unpaid loans over the years. HSBC found out about this and immediately closed down and left the US market in March 2009, only leaving the credit card business to continue operating. It may be to do with cultural issues from " the land of the free", too bad they actually thought it applied to banks.

The final problem is the invisible money itself. We always hear these abnormally large figures of Government debt, such as US's $1.7 trillion USD external debt, or money that the central bank borrows to countries such as the 13 billion euros the ECB austerity package to Greece. Is it possible to transfer such a large amount of money, or rather, is there even so much real money in the first place? Maybe, maybe not; we can't be so sure. The amount of money, as in physical bank notes are definitely could struggle to match the figures that are recorded to be at. Is there such a way for a country to cough up so much money with physical money alone? Even when the central banks print much money to regulate to the economy, it is nonetheless difficult. My theory is that this transfer of money is numerical, as in computers assigning a value to every bank account. For example, if we use credit cards to pay, a numerical value gets deducted from our bank account, rather than money. It would be quite a shock to most people that we don't actually have as much money that we think we do, rather our wealth is determined by a numerical value. The advantage to this is that banks can have some form of flexibility over their money supply by utilizing all of their monetary power to fund large investments while maintaining the numerical value in every individual's bank accounts. However, there are 3 main disadvantages associated with invisible money. Firstly, is that if by some chance that a computer genius is able to hack into the Bank's operating system and mess up all of the values, then it would be difficult to recover one's money. Secondly, if the bank lends money to insecure investors, and are unable to return the money, then it would lead to some people, whose money was used to finance the investment, to not be able to recover their money. Thirdly, invisible money could lead to the formation of a "bubble economy". An economic bubble can be described as the trade in products and assets at inflated prices. One of the main causes of this is liquidity; there is excessive monetary liquidity purchasing too few assets, resulting in the inflation of the good in question to an unsustainable level. Basically, there are no real assets to support borrowing and lending. The Asian financial crisis is an example of this. Printing money may have an effect, but the illusion of an increase in money and income will stimulate spending, causing immediate inflation, further causing problems.

If credit were to continue in this state, we may be seeing an increasing number of economic recessions and banking problems. When we did not have credit, using the only money to purchase goods, then we would not have had so many financial problems occurring. So to conclude, if there is more invisible money, the greater the fragility, and the danger it poses to banks and economies alike.

Australia's strengthening economy: potential for global recovery?

If we look at any current news about economics, they would usually be focusing on China, Europe or America. The European sovereign-debt crisis news are still hot; there are many new articles regarding the worsening economic performances or even the break up of the Euro itself, famously dubbed the "Grexit". However, there weren't many people paying attention to Australia's bustling economy. Australia is the 13th largest economy in the world in 2011, with a GDP of approximately US$1.6 trillion. It is one of the most modern and developed economies in the world, as is with Europe and America. So, nothing really special is happening to its economy, or is there?


*"Not making the headlines": Australia's economy is overshadowed by many people who focus on European, American and Chinese economies

Well, to make my point, here is something to for you readers to digest; the International Monetary Fund (IMF) forecasts that Australia's economy will have the most significant growth this year, in 2012 and the subsequent year, in 2013, by 3.0% and 3.5% respectively. It would certainly be surprising to most people that with the global economy powering down, all of the countries would be affected by this, even China for that matter due to weak demand from Europe and America, China's largest trading partners. Australia is an exception to this trend in global economic performance, with growth very strong in the first quarter and a slower second quarter at 4.3% and 1.3% respectively. If there is an analogy to describe this situation, it would be a sprinter and a jogger. We will represent the economic superpowers, such as China, America and Europe, as the sprinter, while Australia as the jogger. A sprinter will run his fastest and hardest, whereas the jogger will run in a consistent speed and aims for endurance. Alas, the sprinter cannot maintain its speed for a very long time and will eventually succumb to the fatigue and stop. Meanwhile, the jogger is able to maintain his/her speed for a much longer time and possibly pass through the sprinter while he's at it. Likewise, Australia to my mind has not always been spectacular, but it has always produced a good and consistent set of year end economic figures. With America and Europe continuing to perform badly and China's trade starting to soften, Australia may just jump out of nowhere and leap to the top of economic prominence.


*Sprinter vs Jogger: Australia's consistently growing economy rewarding for long term. Source: http://addisabram.wordpress.com/tag/curiosity/

Of course, we should now analyze why Australia is doing so well even in a global recession. The first reason is that Australia is self-sufficient. It has the ability to be able to rely on itself to cater for the public with its own resources and food supply. For example, the agricultural industry makes up 12% of GDP; Australian farmers and graziers own 135,996 farms, covering 61% of Australia’s landmass. It does not need to rely on other countries heavily for financial backing. The next reason, is that the banking system in Australia is independent from other countries. Foreign banks wishing to carry on a banking business in Australia must obtain a banking authority issued by APRA under the Banking Act, either to operate as a wholesale bank through an Australian branch or to conduct business through an Australian-incorporated subsidiary. Also, its reserve assets are very sufficient. Even though its external debt is around $1.37 trillion Australian Dollars, only a fifth of the debt is from the Government (lack of indebtedness to other countries) while the rest is from national companies. It is able to preserve its money supply very responsibly, unlike America who just keeps on borrowing money. The overall effect of this is that Australia would not be greatly influenced by other countries economic performances. Another reason is Australia has a large supply of resources. Many experts have asserted that Australia's abundant supply of natural resources, such as coal,bauxite, iron-ore and opal (worlds largest producer and exporter, 95% of the opal originated from Asustralian mines), is a major factor in its growing economy. The mining industry represents around 10.8% of GDP, which infers that the recent mining boom in late July has had noticeably positive effects to its exports. The increase in exports leads to an increase in aggregate demand, translating it to economic growth. Also, natural resources are essentially commodities. The commodity market is a very stable market due to near perfectly-inelastic demand for them. The constant demand for commodities and natural resources allows Australia to generate a constant source of income, backing it up well with monetary capacity and liquid assets.


*"A gift from the Gods": Australia's mines and land are full of natural resources, envied by many countries. Pictured above: Rio Tinto Mine. Source: http://www.nytimes.com/imagepages/2007/02/26/business/27miner2.ready.html

Lastly, Australia's cities are all coastal areas. Coastal areas are usually much more wealthy because the ports are good trading areas, as can be seen from China. From the east to west, the wealth of each city gradually declines, a good indicator that coastal cities are much more wealthier. Australia's trade heavily relies on ports and container ships, hence a large trade volume, stimulating economic growth.

Of course, this all seems very good. Arguably, this economic model is a near perfect one. The RBA has said the Australia's resource-driven economy has the potential to lift the global economy out of recession. However, they may be a bit too optimistic about Australia's economy bringing up the world economy, not even China could. First of all,the natural resources is not going to suffice in the long run. Official statistics from the government shows that Australia's multibillion-dollar spending boom on resources is losing momentum unexpectedly rapidly, with several projects on hold or canceled as commodity prices fall and banks become less willing to lend. This can be associated to consumer and investor confidence dropping because of uncertainty in markets. The resource boom has led to the deflation of commodity prices as weakening demand further lessens producer profits. As a result, mining companies are now laying off workers and cutting production in the hope of getting better prices for their resources. Like the "domino effect", this would not only effect Australia, but effect other countries output, thus we will likely be seeing falling GDP figures.

Carbon intensive countries, such as Australia would likely see supply side shocks in their agricultural production due to global warming. Australia's emissions of carbon dioxide during the past 25 years have risen more than twice the world average rate. The Great Victoria desert and the Gibson desert covers around 18% of the entire Australian mainland, leaving Australia unable to grow its agricultural production capacity. The increasing frequency of droughts and the depleting ozone layer leaves further uncertainty in Australia's agricultural sector.


*"A hole in the agricultural future, literally!": The depleting ozone hole layer and CFC/CO2 emissions poses uncertainty in Australia's agricultural future

Another issue that recently came in place on July 1st, was the imposition of two new taxation systems; a mining levy and a carbon tax. These two tax systems were very controversial when it came out, partly because it does not make sense to aim the tax bills towards one of their prospering industries, but also partly because it will influence consumer confidence and spending. It makes sense that most countries with cash-strapped governments are looking at the top of the income groups for money with progressive or retroactive tax systems, but Australia is looking down under, low income groups. Because Australia is carbon intensive, we could argue that the main goal of these taxes are to benefit the society by reducing the negative externalities in the form of air pollution. But if we were to use opportunity costs to illustrate this, then it means Australia are sacrificing a large potential economic growth to raising government revenue. Another problem with carbon taxes are that it is difficult to give an exact price on it (The economic cost of emitting carbon dioxide cannot be measured accurately). It forces people to bear more of the cost of carbon than it is actually worth, including its unpriced contribution to global warming. Australia, which now emits more carbon dioxide per head, is now charging A$23 (equivalent to $24USD) per tonne of carbon dioxide, which is higher than the European Union trading scheme. So overall, not many merits to these two tax systems.

No one likes taxes, if there is one stakeholder that likes taxes, then it is the government. Benjamin Franklin once stated, "In this world, nothing can be certain, except death and taxes." This may seem to dramatize the effects of tax, but they are indeed very undesirable. For instance, income taxes discourage work, corporate taxes inhibit enterprise and creates disincentive to invest, and indirect taxes may obstruct mutually beneficial economic transactions. These taxes deprive consumers from spending, and firms from raising sales revenue, meaning the amount of tax received by the government is not as much as expected. A solution to this problem is not taxing on the mining and carbon themselves, but the "rents" that producers earn. These returns on resource exports are much greater than the minimum cost required to attract the factors of production needed to extract the resources. Since commodity prices are rising, the returns have grown favourably. Therefore, it makes sense to tax the excess in returns, as it would help the government raise revenue, without demotivating producers.

Australia is a modern, developed country with a strong monetary base. Its economy has the potential to grow very much because it has been responsible with its resource management, not exploiting and using them up at a unsustainable rate. However, we have also shown that for one economy to lift up all the other economies is not very realistic. Nevertheless, if Australia's growth to is to continue, it should expand and support its enviable supply of resources and not make any controversial moves to hinder its industries.

Commodity Prices: The inevitable rise

In the past decade, our consumption of natural resources has gone up by so much that it is not even surprising to know that its still going up. Environmentalists predict that by 2020, we would have consumed roughly 80% of the world's natural resources. While the price of manufacturing goods have remained fairly stable, it is the commodity market that we should be looking out for. Commodities are marketable goods and services that are produced to satisfy wants and needs. More specifically, commodities are essential raw materials. The starting point of nearly everything we consume, comes from commodities. For example, coffee beans to...coffee, cotton to clothes and oil for energy.


*Commodities galore: Several examples of common commodities we humans consume to a large extent.

Consumption of commodities vary from country by their development and economic performance. For example, China purchases 40% of the world's copper supplies, and its economy is performing considerably well despite the global recession. Harry Colvin of Longview Economics calculates that the four largest developing countries (Brazil, Russia, India and China) will consume 3.7 million more barrels of oil a day in 2012 than they did in 2008. In stark contrast, it was calculated that America and debt-stricken Europe would consume 1.5 million less barrels of oil a day, and both their economies are still performing quite badly.

If we are only talking about oil, then China should be the central focus point of our discussion. China consumes more oil than anywhere else in the world, and with economic growth still their main incentive, that figure will only continue to increase. One main reason for America and Europe's decreased and China's increased oil consumption is to do with politics. With oil supplies in the oceans declining at an increasing rate, countries had to turn towards middle eastern countries for their oil, its no wonder cities like Dubai and Abu Dhabi and Qatar got rich so quickly and be able to take over football clubs and ruin the game with overpowered signings! The thing with middle eastern countries in predominantly western countries are that they are usually associated with the common stereotypes for terrorists and nuclear weapons, especially Iran. Because America and Europe are so pedantic about this, they have tightened economic sanctions against Iran with the aim of forcing it to curb its nuclear ambitions. Meanwhile, China has continued to strengthen its links with the Islamic Republic. Iran’s oil, which generates around 80% of government revenues, is increasingly flowing towards refineries in China, which is now its biggest trading partner. Iran's oil is responsible for over 10% of China's oil consumption, which is very important to them.


*"Digging for black gold": Countries now look towards middle east countries for oil supplies

However, in general, why have commodity prices kept increasing? There are several notable factors. The first factor, inevitably is population growth. The concept is very simple; with more people, the more resources we need to consume to meet the needs of everyone. Population is one of the largest factors for the increase in commodity prices not only qualitatively, but also quantitatively. Our current world population is 7.06 billion, and it is continually increasing by the second, with our net population growth predicted in the region of 60 million this year. Our next factor is economic development. Economic development should not be confused with economic growth. While economic growth means the increase in a country's total output, economic development takes many different factors into account, for example: increasing the people's freedom, improving standard of living and reducing poverty, providing the public with education and health care etc. The list goes on to until we reach the end of what we humans desire, of course which is unlimited wants. When economic development goes forward, we cannot go backwards, or rather we do not want it to go backwards, very much like technology.  Once again, the concept is easy to grasp: once we live in better conditions for a long period of time, we do not want to go back to living in worse conditions. So if we use more natural resources to meet our needs, then we will continue to sustain that level of consumption of those resources. Then once economic development increases once more, we will use more resources again; the overall effect is demand pull inflation. Because economic development and economic growth are very much directly correlated, we can link them together. As a country experiences economic growth, it will induce inflation. The next factor is the consumers' price elasticity of demand towards commodities. Price elasticity of demand is the measure of the responsiveness of quantity demanded to the change in price. Because commodities are essential goods that we use for majority of the things we consume, our price elasticity of demand would be extremely close to perfectly inelastic. So if the prices increase in an attempt to curb our consumption, tough luck. Our demand may not even fall, in fact it could still increase since commodities are what they are, there are none if few substitutes. Also, the commodity industries are usually monopolized by large firms, or even ran by a collusive oligopoly (cartel) such as OPEC (Organization of Petrol Exporting Countries). Monopolies are characterized as price-setters, as they have nearly full control of the market. When they realize that our price elasticity of demand is so inelastic, they will make more profit by charging higher prices. Often, governments would have set price ceilings on commodities.

The last factor is undoubtedly the main one; global warming. The main factor of global warming is human development of course. Cars, air-conditioning, washing machines, hot water showers, all you can name. All of these have increased our energy consumption and carbon dioxide emissions. So how does this effect commodities? Well, we should realize that majority of commodities are agricultural products such as vegetables and wheat, and these require optimal growing conditions to give the greatest yield. Global warming can affect the yield in two ways: directly and indirectly. Directly is through temperature increase itself; the droughts and more extreme climates negatively affect the yield of crops. Indirect means is through the changing climate. The rising sea levels will increase the chances of flooding low-lying areas, warmer seas increase the chances of typhoons and hurricanes, and droughts and dry climate increase the chances of forest fires which destroys crops and desertification swallowing up grasslands. Supply side shocks have damaging effects to the supply of commodities, which causes cost push inflation. The persistent strength of commodity prices helps to explain why headline inflation rates have been stubbornly high in many countries, despite their struggling economies. With wages weak, the result has been a squeeze in real incomes.


*"The world is burning up": Global Warming is the biggest crisis that is befalling our world in the present. Can we stop it??"

But hold on a minute, the implication of the analysis mentioned above is that commodity prices should continue to increase. However, it turns out that commodity prices have been falling sharply in July following from May—the S&P GSCI index dropped by 13% in May alone, the biggest monthly decline in two years. The average price of a gallon of petrol in America has fallen to $3.47 from almost $3.88 in early April. There are a two viable reasons for the uniform decrease. First, is that commodities have become investment-class. This would be the better reason as the price decrease may simply reflect the whims of speculators, who have little confidence in the market's future. The other worse reason is that the decrease in commodity prices may well be an indicator for the economic recession. Why? Well, if economic growth is very little or even shrinking, then the demand for commodities will contract, causing deflation. Of course, this is not a very reliable measure because prices were still very strong in the summer of 2008, after the Lehman Brothers bankruptcy. Actually, even China is not doing that well after it had cancelled a whole load of raw material import orders in spring. Those cancellations can be explained by strategic bargaining tactics rather than slumping demand, since China's oil and copper imports are still going strong with a 12% increase throughout the year. Also, weather forecasts have also predicted mild weather is leading to the expectation of bumper harvests in the northern hemisphere, agricultural product prices fell by 9.3% in May.

Commodity booms usually dissipate after the storm of high prices bring forth new supplies. People may be affected by the illusion that the fall in commodity prices may imply that we are using fewer resources. Actually some of it may be true, with many countries now putting in place new measures for sustainable development, technology to make our products more environmentally friendly and global projects to counteract global warming (E.g. GreenPeace org.). Of course, this is only considering the ideal case. Unfortunately, the ideal case may not necessarily work. All the factors that lead to inflation of commodity prices aforementioned besides the consumer will occur for a long time. And, it is going to take even longer before we are able to make our world a sustainable place to live in, since commodities have already became a fundamental part of our lives.

Our consumption of commodities can only go up. With the ruthless presence of global warming continuing to inch closer towards us at an increasing pace, we will only continue to consume more. So the final verdict: commodity prices will continue to go up. Unless we find a way to veer our way towards a new path of sustainable energy and resources, commodities may change from being a necessity to a luxury.