Financial Market Advancements, and The Decline of State Manipulation [Published on November 2015]

On September 17, 2015, traders from all over the world sat at their desks nervously in anticipation of Federal Reserve Chairman Janet Yellen’s press conference, where she announces the FOMC’s interest rate decision. Anticipation and nervousness are, at best, euphemisms to describe the build-up; never in history has the Federal Reserve’s decision on monetary policy drawn so much attention and debate from finance professionals and influential economists due to uncertainty and weakness in emerging markets from the commodity slump, persistently low inflation, and the strength of the dollar.

Eventually, the Federal Reserve chose to keep interest rates unchanged at 0.25%, ending a long-drawn saga of speculation and predictions, and continuing on an even longer saga of historically low-interest rates. Given the outlook for the world economy and some negative U.S. indicators, the majority of analysts on Wall Street predicted that rates would stay the same, despite the Federal Reserve making it strictly clear under their forward guidance policy that rates would increase in September. Janet Yellen and the Federal Reserve board members were not going to make a misstep in their efforts to ensure the U.S. economy is healthy enough to endure a dose of basis point increase after nearly a decade.

However, one fundamental issue gets raised through this episode. Before elaborating on this issue, it’s essential to understand the advance developments in financial markets. Financial markets are at the pinnacle of sophistication in the modern age; information, speed, and efficiency of trading and the range of financial products undoubtedly make this one of humankind's greatest and biggest innovations since the digital revolution. Equities, bonds, currencies, commodities, options, futures, derivatives; anything you want to trade, you can find in this comprehensive library, all at the click of a button on your computer or smartphone. Apart from the initial monetary investment, barriers to entry for financial markets are almost non-existent; everyone has the capacity and freedom to trade. With the flood of newcomers hoping to profit from the markets, information services such as Bloomberg and Thomson Reuters, along with specialized forecasting tools as part of technical analyses, have established their necessity to investors, and increased transparency of financial markets. Long story short, financial markets have come a long way since its humble beginnings.

Financial markets also shine a light on information about the economy. Stock market indices, for example, the S&P500, Dow Jones Industrial or FTSE100, to some degree reflect business cycles; performances from large, public corporations strongly influence consumption, inflation, investment, and unemployment to name a few, and these indices are comprised of these big players. Similarly, the trends in relative strength of a currency to another highlight expectations in future economic performance, for example when China announced a slowdown in growth during the second half of 2014, emerging market currencies that rely heavily on commodity exports slumped, with the AUD, NZD, and CAD having fallen by 22.4%, 22.3%, and 20.4% respectively against the USD as of 17 October 2015.

(Source: Bloomberg)

With this amount of symmetric information, investors speculate and take action in the market based on their expectations of price ups and downs. To profit from speculation, investors have to trade long or short (otherwise it is no different from fortune-telling), and depending on demand and supply, prices will change. With confidence, we can state that investor speculation is dependent on data and information, but could the same be said for government intervention after what had happened last month?

Therefore, the issue is this: “who manipulates markets, investors or the Central bank (representative of government intervention)?” Back to the situation that caused this issue to arise. The Federal Reserve had intended to raise rates on September following sustained improvements in U.S. data but stayed put in the end by unfavourable conditions outside, and incomplete conditions inside of the U.S. economy. However, Janet Yellen maintained her view that a rate hike is still on the cards for this year. Treasury traders, on the other hand, think otherwise, now expecting the increase would be delayed until March 2016, according to the 10 year U.S. government bond yield term structure shown below.

(Source: Bloomberg)

As written on Bloomberg, “The benchmark 10-year note yield fell seven basis points, or 0.07 percentage point, to 1.97 percent as of 5 p.m. in New York, the lowest on a closing basis since April 27, according to Bloomberg Bond Trader data.” (Full article here). Bond markets, the largest financial market by value, illustrates the market, and therefore investors’ expectations in interest rates.

On the other side of the world in Europe, ECB President Mario Draghi is losing credibility from traders that his monetary policy strategy is weakening the Euro. Neo-classical economics tell us that expansionary monetary policy such as ‘Quantitative Easing’ would depreciate the currency since investors search for higher yields elsewhere, but the Euro has recently experienced a resurgence, up 8.2% from the lowest point ($1.046) as a result of strong data from the Eurozone.


While Mr. Draghi has asserted his intentions for further QE which should keep the Euro in-check, ultimately, the market consensus says otherwise. Even before the QE was announced, the Euro depreciated nearly 33% against the dollar, which implies that investors predicted this move by the ECB. Moreover, investor’s were just utilizing another law from international economics; under the UIP arbitrage theory, the domestic interest rate (i.e. Euro) must be lower than the foreign interest rate (i.e. USD, but other currencies can take its place) by an equal amount of the expected appreciation. Investors speculated that QE would revive the Euro (future appreciation), hence the Euro needed to depreciate in the current period. The same, but the reverse situation could be expressed for the U.S. dollar, where it has outperformed most currencies after the Federal Reserve’s forward guidance indicated an interest rate lift in 2015, and is now experiencing slight downward fluctuations, vexing dollar bulls.

Investors act upon data and forecasts; this is undeniable. Paradoxically, economic-wide data, the most important set of data, is provided by official government agencies. Data on unemployment, nonfarm payrolls, GDP, and inflation, for example, always receive investors’ full attention whenever they are announced. It is difficult (bordering on impossible) to verify the accuracy or legitimacy of data provided by the state; China has raised suspicions upon its GDP statistics on several occasions before. Does this, conversely, suggest that investors are being manipulated by the state? Not necessarily. For example, if the data was bad, what message does the government get across to the public? “I’m not terribly well at doing my job” is the likely opinion. Good data is always merit, and bad data is always bad unless there is merit for the government to publish fabricated data that does not meet expectations.

Investors move the markets, and government intervention significantly affects their decisions; in the past this relationship is one-way. However, with sophisticated analytical techniques, a plethora of instantaneous information and the pressure on economic superpowers to avoid another financial crisis, investors now have a degree of influence over how the economy and financial market plays out.

Wages and Inflation - Purchasing Power Factors

Many economies have gone to great lengths, many times excessively, to achieve economic objectives. One of the most focused and discussed, other than unemployment and economic growth, is inflation. The magic number '2.0' is commonplace knowledge among those who follow economic news closely, which refers to universal inflation target of 2%. Governments have introduced numerous policies in order to achieve this target; they are so obsessed with this figure that the Bank of England even organised a policy competition called 'Target 2.0' where contestants devise policies based on the use of monetary policies (interest rates and money supply).

"Target 2.0" - Unanimous target inflation rate of 2%

Why is the target inflation rate 2%? Taken from an extract in the offcial website for the Federal Reserve, "[t]he Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve's mandate for price stability and maximum employment." I do not know whether this target is derived mathematically or intuitively, but I do know that inflation is a pro-cyclical with the business cycle, meaning that inflation moves in line with GDP growth. Ultimately, economic growth is the main objective of the government regardless of the complex economic situations; modest inflation, low unemployment, positive balance of payments, and sensible fiscal and monetary policies are key determinants of GDP growth.

What affects inflation? Monetary policy. Monetary policy is a set of government policies that focus on the use of interest rates and money supply. The 2007/08 financial crisis, which led to one of the worst recessions in history since the Great Depression through multiple defaults on subprime mortgages that triggered the fall in value of mortgage-backed securities, destroyed $26 trillion U.S. Dollars worth of the financial markets; to put that figure into perspective, it is the equivalent to more than 5 times the UK economy! Policy makers had to act fast amidst the chaos and generate an effective response to the recession. The unanimous decision was to stimulate the economy's consumption and spending through Quantitative Easing (QE), an unconventional monetary policy which aims to keep long term interest rates low. QE first started in Japan back in 2001, when the Bank of Japan tried to fight of a decade of deflation for reasons including aging population, low-priced imported goods, fallen asset prices, and insolvent banks. Low interest rates generate very cheap credit, thus aiming to increase lending by financial institutions and borrowing by consumers and investors that were hit hard by the crisis. It steered America back on course for economic growth, inflation, and low unemployment. After five years of QE, the Federal Reserve decided to halt its asset purchase program after injecting around $4.5 trillion U.S. dollars into its economy. QE is still adopted in the EU and Japan, to fight of economic weakness and deflation respectively.

"Continuous flow of money" - Quantitative Easing has allowed for much cheaper credit

I would like to direct everyone's attention to the idea of purchasing power and real income. Purchasing power is the value of a currency expressed in terms of the number of units of goods and services that one unit of money can buy. Real income is the amount of income an individual earns adjusted for inflation. These concept is important in showing why the effects of inflation can be countered with increases in wages. For the consumers, the effects on inflation will not have any effect on nominal income (expressed in terms of currency), but would reduce their real income (expressed in terms of purchasing power). In the inflated price environment, consumers would purchase fewer goods with their current income. The only way to reverse this drawback is to increase wages and likewise real income which enables the consumer to continue purchasing its original basket of goods.

This is very similar to the Long Run Phillips Curve, an economic theory which shows that any expansionary policy that aims to lower unemployment would have inflationary effects when unemployment reverts back to its natural rate. Let us look at the correlation in the US economy:

• QE is an expansionary monetary policy
• Unemployment rate increased to 10.8%, the highest since the 1980s. Therefore, one of the Federal Reserve's main objective was to lower unemployment rate.
• Unemployment rate gradually lowered because 10.8% is greater than its estimated rate of 5.2%.
• US experienced deflation throughout the majority of 2009. Inflation fluctuated between 1% and 4% between 2010 and 2014, with an average of 2%.

This also applies, probably even more so, for the EU as it produced weak economic figures throughout 2014, with the European Central Bank already setting up another flood of money into the European countries.

Increases in income can become pointless when the inflation increases. So why is inflation still relevant? The logic behind inflation is that it implies that people are consuming, which further implies a higher standard of living and economic growth. While I have no doubts about inflation and its correlation to economic growth, a proportional and simultaneous increase in wages for the consumer gives the same purchasing power and real income, and hence the standard of living should, in principle, remain the same. The Central Bank can print virtually infinite supply of fiat money and inject into the economy whenever its not doing well, so standard of living can remain at the same level in the long term with equal and simultaneous increases in wage while keeping technology constant. Furthermore, inflation does not necessarily imply demand-pull inflation, but maybe cost-push inflation in which prices increase due to shortages in supply for the commodity. For example, the price of agricultural goods such as coffee beans and cocoa are expected to increase due to bad weather conditions, more so in the future with stronger climate change effects.

Of course, this principle is not completely accurate because the consumption goods' price are influenced by many other factors, such as protectionism policies (tariffs and quotas)  (e.g. Sales Tax, Import Tax, Environmental Tax, Red tape etc.) and other barriers to free trade. Another argument could be that quality of goods are improving, hence the higher prices may not be a result of either supply or demand shocks.

On a side note, has anyone ever experienced going to another country, for holiday, business or academic purposes, find that particular goods were significantly more or less expensive than the goods back at home? Depending on which country you go, the price of foreign goods to your domestic equivalent can vary greatly. There are too many reasons behind the price difference, but what changes can we make to avoid this? For argument's sake, let us assume that there is free trade and no transport costs, for true equality in the world, identical goods should be the same in terms of purchasing power with regards to the country's wage and exchange rate. Queue in the economic theory of purchasing power parity (PPP). PPP is a theory that aims to determine the necessary exchange rate adjustments of two particular currencies in order to make the purchasing power on par with each other. In a perfect world, this economic theory supplemented with the strong assumptions would be an ideal representation of equality in purchasing power of identical goods in different countries across the world.

To conclude, I would like to address a more worrying issue is whether this cycle can be sustained; prices keep increasing due to inflation, then wages also keep increasing to counter this effect and maintain real income levels. In face of an ever increasing human population in our world economy with an ever scarcer amount of resources, maintaining the standard of living for everyone is incredibly difficult. Eventually, inflation would have to outpace wages, meaning that only the strong will survive in the next generation economy. This is not an easy problem to solve...

Efficiencies of Facebook

Social-networking sites have taken the internet by storm in recent years; the likes of Facebook, Twitter, MySpace etc. have become integrated into the lives of many, many people across the globe. The desire to 'connect' with friends, and sharing your every detail with people who may or may not have interest in your lives have become a social norm among people, particularly between the ages of 17-24. Facebook is still topping the charts for number of users in 2013, ever since its introduction back in 2004, with Blogger and Twitter marginally close behind. Facebook, with its iconic thumbs up sign, is a commercial success in its own right, with around 1.11 billion active users globally. Expect this number to keep on increasing.

*"Like this, Like that": Facebook's iconic Thumbs up sign

Its uses are extremely varied and versatile due to the nature of the site being the 'middle-ground'/platform for many other technologies. One of the most common examples is Instagram, an online photo-sharing and social-networking service that allows users to take photos, apply filters to them, and post on their profiles with whatever hashtags the user deems 'suitable' for the photo. (E.g. #Yolo, #swag). It has become so popular that Facebook announced its integration into the sites' system. Hashtags have been around for quite some time in other social networking sites, particularly Twitter who fueled the trend. To start off, why did Facebook decide to do this? If you thought it was to do with money from advertisements, then you're correct.

In many cases, the one sharing the instagram photo will always put many hashtags, hardly ever putting only one. What incentive is there to spend time typing many hashtags? Is there a common relationship between the number of hashtags and the person's social behaviour? Humans are rational; they respond to costs and benefits, and appropriately change their behaviour and actions. Thinking it this way, the benefits of putting hashtags outweigh the costs of putting hashtags, or simply put, the pleasure of making up funny hashtags is worth the persons' time spent doing it.

There are many questions regarding the usage of Facebook. Two example questions include: "On average, how often would you post something on Facebook?". "How many people do you have as friends are actually friends?". In this post, I will be exploring the common functions used and common behaviours shown by Facebook users, and their relations to efficiency.

The first type of efficiency (or more accurately, productivity in this case), is the most obvious and simple: time spent. The time spent on Facebook varies very differently between individuals. Many people will think that those who spend more time on Facebook is much less efficient in browsing through his/her news feed, other people's photo etc., and conversely the ones that spend less time are more efficient. That's not necessarily true is most respects unless all the internal factors that would affect browsing time are identical averaged across a number of times used (examples include: number of posts on news feed received, number of posts made by the user, number of photos viewed etc.). In the ideal case above, a direct comparison is possible and easy to compare browsing efficiency between the two users, however, it is difficult in real life for such a perfect scenario to occur. Overall though, the important thing to know is that the frequency of activity on Facebook per time spent will differentiate the productivity between different users.

The next type of efficiency is information filtering. Information is important for efficiency in any market regarding the consumers because it allows for a more allocatively efficient market system, or how the majority interprets, a more useful and convenient browsing experience. Though, not all information you receive on your news feed or notifications are particularly interesting or suitable. Imagine how dull the user experience is when you scroll down your news feed and nothing interests you, and even if you eventually find one thing interesting, you may have had spent surplus time looking through a hundred statuses, adverts etc. Facebook arranges the news feed chronologically sorted into two arranged sets: "top stories" or "most recent", neither of which are particularly effective in filtering useful information actually. So is there a way to improve this function?

Well actually there already is. Users have the option to select 'close friends' or 'family' among their friends, and then click on the 'Friends' sidebar to rearrange the news feed according to the user's choice. Another option is to make a default news feed that arranges your news feed so that the people you have the most frequent activity with (sorted by number of page views, chat messages, photos tagged, pokes, birthday messages etc., or through the manual selection of friends the user wishes to place priority on the news feed) will have priority in the news feed arrangement. It should be relatively simple to do, so the Facebook development team would not be too troubled while improving prioritized information flow for users.

Other than for leisure/entertainment, Facebook offers a platform for firms and individuals to create pages that showcase themselves, their qualities, or promote what each of them has to offer to the public. Additionally, it is essential that the page provides a worthwhile service to those who use it, and most importantly, be worthwhile to the firm or individual for providing the service. For example, my Economics blog offers a service to people who are interested in Economics, IB students taking Economics or doing an Economics Extended Essay, or people and friends generally interested what I write (praise or criticism). All the above points are viable justifications for my page having a beneficial effect on Facebook users of those market segments, so I can assume it is efficient for the viewers (consumers). However, what benefits do I, the producer, get from writing articles and posting it on Facebook? Psychologically, it feels very rewarding when others commend me for the effort I put in. Objectively, continually analyzing and writing allows me to broaden my horizons to develop my thinking abilites. Other potential benefits include differentiating myself as a applicant from other competitors when I apply to universities or jobs, and making money through blogging (not yet). Overall, I think it's safe to say that my blog is efficient for both my target Facebook users and myself.

The third efficiency is inspired by the legendary "Undercover Economist", Tim Harford. In chapter 2 of his awesome book, he defined an efficient situation as "a situation in which it is impossible to find a change that would benefit an individual(s) without making someone else worse off." We can isolate each of the categories as a potential service to the Facebook user who looks at them. Each of these services can be beneficial, neutral, or harmful to the Facebook user. For example, reminding or telling someone of an important event he must attend is a merit service that benefits that person without causing any negative effect to others, therefore the service it offers will make the Facebook user experience more efficient. However, offending someone via messaging, or posting a particularly embarrassing photo of that person will upset them, thus it can be argued that it is not efficient to that person. You will notice that for both scenarios, the respective positive and negative effects mainly affect the individual subjected to the primary effects of receiving the information. If we look at the embarrassing photo example from an indirect/outsider point-of-view, although the person on the photo is the subject of cyber-bullying, others may find it very amusing and reward the photo with a 'like' in the form of a payment. If efficiency in this case represents the information received, there will be a mixture of positive and negative things, thus dulling the overall efficiency to the user. The most common form is analyzing the content to look for positive or negative effects to the user. Of course, the effect will vary from one user to the other. This type is more complicated to analyze as the time lag in between posting, liking or sharing will have any secondary effects in the future.

After combining the above points, it seems that the entire concept of Facebook is a market system in itself. Posts, Statuses, Shares, Photos are goods/services from producers (or providers) that become accessible to consumers via news feed, then receive a payment by people liking or commenting. Overtime, this one-dimensional market process evolved into a two-stage transaction process. A perfect example for this is: "Like for a tbh ("to be honest", but everybody knows that)". For those that have never came across this, here's how it works. First, the person types "like for a tbh", then waits for the likes to come in, and finally spends quite a lot of time (or little time depending on the number of likes) writing tbh's for everyone. And as an added bonus, if the tbh is good, it may be rewarded with a few likes as gratitude. In essence, the transaction goes from the producer to the consumer twice: firstly offering the service, then acting upon the consumers who accepted the service. However, like with any market system, there exists imperfections. Here are some examples:

1. Some people who you have as friends on Facebook may be a complete stranger to you, so whatever they post may not be relevant to you at all. 
2. Chats are private and conceal information to a third party. (Not exactly a bad thing, we like our own privacy)
3. Occasionally when you complete any Facebook activity, you may feel that you did not receive the optimal payment for the quality and/or quantity of your post or whatever. 
4. Asymmetric information between the friends of an account may occur as a result of different levels of access and transparency to information like photos. Remember, not all friends are treated the same!
5. False information: not everything about that particular person profile details are accurate like date of birth, education, and workplace.
6. Inaccurate payments: for any type of FB activity, the producer may receive insufficient or excessive payment for what it's worth.

The most efficient scenario only occurs when Facebook is perfectly efficient in terms of the content observed, the minimal time one spends relative to the amount of relevant content to that individual, and the perfect allocation of payment. The allocative efficiency is determined by factors such as the content. Realistically, it seems impossible for social-networking sites like to achieve perfect efficiency; that is the unfortunate truth. One rather unfeasible solution is to set a quota of content the user is allowed to post on his/her page daily. Limiting the content would potentially reduce the amount of irrelevant information observed, and thus makes one's visit more worthwhile. But posting statuses, photos, web-links is what makes Facebook what it is. With much fewer posts by your friends, or conversely posts by you to share with your friends, your news feed would look bare and unappealing. If that happened, Facebook would not have become so successful. Another solution may be not to use Facebook at all; this would minimize the time wasted in front of your computer, gives people an incentive to become more active instead of remaining desk-chair potatoes, and cut off cyber-malice directed through harmful posts. But losing a significant means of communication greatly reduces access to information, whether good or bad, thereby widening the asymmetric information gap. Also, if one person quits, that is hardly going to generate a domino effect where it makes everyone quit, so in the end, it is a pointless exercise.

Hope everyone enjoyed this long post and forgive my long absence (summer hoilday chill time!). It is the start of the new school year for many students, good luck!

Site Changes: Introducing TN Economics

Hello everyone!

Noticed the new site background? I hope it looks better than the original one. Anyway, I have been thinking hard for a while, and I decided that the name 'IB Economics Blog' was too...dull, and boring. Furthermore, since I do quite a bit of personal writing other than IB material, I renamed it after my initials.

The site url has also changed to: bigtuniteconomics.blogspot.hk

I will be attending LSE next year studying economics. Hopefully I could improve my own economic analyses over the time spent at university. Thank you for your consideration.

Niseko Snowboarding Holiday

Half a year ago, I and many other students endured another stressful term in the IB curriculum. The first term of Year 13 is unanimously the most stressful; in my case, I had 6 major coursework and examination deadlines all in the minute space of 3 weeks. So it was time for a breather, and since it was the winter season after that stressful period, what better activity to do than snowboarding down the slopes of the Niseko ski resort mountain in Hokkaido, Japan? It was my ideal holiday, no doubt.

Why is Japan so fantastic? Quite simply, they are the whole package. Personally, I love their range of delicacies (sushi, ramen, yakitori, tempura tendon, yummy snacks etc.), well-mannered and friendly people, services, technology, culture, and their remarkable attitude to be on time. However, from an economists' point-of-view, the most impressive thing about Japan is that their economy is very robust. All three of their sectors, Primary (raw materials/commodities), Secondary (manufactured goods), and Tertiary (service-related industry) sectors are  mature, meaning low-risk investment and high percentage of profitable returns once the recession has subsided, and producers attempt to resuscitate the economy by generating greater export revenue. In the past, Japan has been very protective of its specialty products. Today, this trading behavior is still seen but to a lesser extent. What's the reason? Simply to increase exports wherever they can, even if it meant making it accessible to consumers outside of Japan and decreasing the novelty of their products.

*"Access to the ultimate luxury" - Last year, 1,500 Kilograms of rarely exported Japanese Kobe beef were exported to Hong Kong supermarkets. All the Kobe beef were sold out in a matter of hours.

Japan has always been conservative when it comes to local traditions and products. In the current economic climate, one could say that it was the correct strategy, as Executive chef of the HK Intercontinental hotel, Erik Idos deemed that Japan were "wise" to open and expand their beef export market. But more importantly, why did they excise this 'closed-off' trading behavior in the first place? Two reasons come to mind. Firstly, it creates a sense of exclusivity of its resources. Japan understands the importance of protecting, and controlling its resources, thus maintaining its availability to locals. Although exports can increase revenues and access to worldwide markets, the producers produce at a limited volume and only sell them locally. Why? Because products that go overseas do not necessarily reflect the potential profit gain from exporting. For example, goods such as foods/snacks, which have a relatively short shelf life, that go overseas may spoil and result in waste. The same could be said for electronics. With the product life cycle becoming ever-so short, and rapid improvements in technology, goods that were unable to make if off the shelf may never be able to, therefore another source of waste is created. Secondly, and this is quite ingenious, is that all sectors in the Japanese economy could potentially make more money! If the producers decide to export, then the foreign consumers would only spend the amount the good costs, plus an additional cost to the Japanese producers by import tariff. In order for foreigners to access these products, they would have to travel to Japan. Let us map out the journey, during the peak winter season. An average family of four travels by air to Japan, after a merciless price discrimination by the airline companies (peak season flight tickets are more expensive than non-peak season tickets). In Japan, they immerse themselves in the snowy mountains for a week of endless fun and delicious local cuisine. On their last day, they go shopping around in the heart of the city centre for unique goods that are only available in Japan. And finally, they reached the end of their holiday, and hop onto the return flight back home. In comparison, the consumers spend much more money; producers from different industries (e.g. aviation, ski resorts, hotel, food etc.) all acquire a share of the consumption revenue, and the Japanese government receives greater tax revenue. In essence, Japan's reluctance to export certain local specialties eliminates the first option, and because there is only one choice, there is no opportunity cost. Anyway, it seems that this is no longer the case due to the convenient services of internet purchasing.

Since the financial crisis way back in 2007, Hong Kong tourists have had to dig deeper into their pockets to purchase Japanese goods and services because the exchange rate ratio between the two countries were slowly but steadily growing in Japan's favour. It was not actually Japan's economy that was going strong that led to the expanding difference in the exchange rates, but was US's the monetary policy of printing and increasing supply of US$ into the currency exchange market which contributed most. Since the HK$ is pegged to the US$, we couldn't do much about it, and just watch as the yen appreciates relative to the dollar. This was definitely not favourable to Japan as this meant losing competitiveness against other countries, especially in the technology market when large companies like Sony and Panasonic fall behind South Korean technology giants LG and Samsung. With exports and services making up 15% of the economy, it would land a very hard blow to its economy. Furthermore, not only do Japanese exports become more expensive, imports become cheaper too, hence further deteriorates the current account balance sheet.

As a result of the US's manipulation of the exchange rate market, the highest currency ratio of Japan compared to the Hong Kong dollar was around 0.1018 (HKD) : 1 ¥; which means that it requires a little more than $10 to acquire ¥100; that is quite ridiculous considering the high price of Japanese goods.

Moreover, during this period of time, and ever since the 1980's, Japan is actually suffering from deflation! Their first major deflation came from the liquidity trap as a result of over-investment and Japans' failure to cut interest rates quickly enough in the 1980's. Despite Japan's efforts to stimulate the economy by the "public works" project, their economy just would not seem to get going. Through this debacle, Japan has opted for "Quantitative easing" (QE'x', where 'x' is the quarterly period of the economic year), a policy based on the famous Princeton economics professor, Paul Krugman's idea to raise inflation expectations by cutting long-term interest rates, which should theoretically promote spending and investment. Quantitative easing did provide some help by easing the rate of deflation so that prices did not experience a complete sky-fall, but overall it was a menial act considering its ineffectiveness to create inflation. Japan still remains optimistic about the prospects of inflation, as the officials decided to double the economy's inflation rate target to 2%.

With the growing technological prowess from South Korea, and continually strong exports from China, Japan could not afford to lay back and watch their economy crumble under the competition. Fortunately enough, in the last month, Sony announced that it made its first net profit of ¥43 billion in over 5 years in the 2012 financial year. Although the profit figure is very small compared to the company's loss of ¥457 billion from the previous year, it bodes well for the long-term health of the Japanese economy. Lowering interest rates increases the supply of money into the currency exchange market, thus should have the effect of decreasing the value of the yen. As seen this year, it reached its lowest value in recent years of 0.075 (HKD) : 1 ¥. However, with the US irked by Japan's currency value manipulation, and new technology exports like the PS4, economists forecast that the value of the Yen would increase substantially. So for those that are visiting Japan on holiday this summer for the big summer sale (July 1st-27th), this could be the perfect opportunity to buy some before it becomes too expensive. Though that being said, Japan should be quite resilient to US complaints, and US growth is currently outpacing Japan's growth. Overall, to a certain degree, Japan has control over its currency valuation. It is forecasted that with US economy continuing to grow, the yen will drop in value relative to the US, and Hong Kong. This was illustrated by the decrease in value from 0.083 (HKD) : 1 ¥ to 0.079 (HKD) : 1 ¥ (as of 22/06/13).

Japan's new prime minister Mr Abe's 'Abenomics' pro-inflation policies are starting to show some effect. Instead of just continually lowering interests rates close to zero, the Japanese Central bank is aiming to increase the circulation of money within the economy, hoping to interest investment opportunities, and increase consumption. As with any policy, its effect would not be instantaneous, but it will be interesting to see if there will be any observable effect to the Japanese economy in the coming years. For now, whether the Japanese economy improves depends on local investments from domestic producers. If they do not act, "there is likely to be no positive contribution to gross domestic product", says UBS global economist, Paul Donavan.

Anyhow, back to my Niseko snowboarding trip. To my mind, Niseko is a wonderful place to explore the difference in the economics between winter and summer. Basically, Niseko can be divided into two conditions. Firstly, on the winter end of the spectrum, Niseko is a truly magical destination for any winter sport lovers. But why? How different is the snow compared to other ski resort areas? Looking more closely, snow is a natural occurrence that arise from a drop in temperature that converts what is originally rainfall into frozen water. If we treat snow as a natural resource, then there is no difference in the actual snow anywhere else in the world. So what makes Niseko different from other Japanese ski resorts that certain individuals crave so much for? The quantity of snow plays a large factor. On average, the Niseko ski resort area receives an average of 14m of snowfall, with a 10% standard deviation; statistical comparison also shows that Niseko averages the highest snowfall throughout the winter season. Additionally, in the 2011/12 ski season, out of 147 days of snowfall, only did it not snow in 27 days (percentage total of 94.5%). A frequently snowy resort keeps the place busy with tourists, thanks to the special powder snow experience and spacious mountain. They indeed market this mountain feature very well through variety of means such as on their website, posters, television advertisements.

*"Snowy heaven": Skiers immerse themselves into the powdery goodness Niseko has to offer.

Another quite interesting economic feature in the Niseko village is the competition between convenient store giants: Seicomart and Lawson. Below are some initial observations of the two stores:

• Seicomart and Lawson are similar in size
• Seicomart and Lawson typically sell the same goods. Key difference is that Seicomart has more raw ingredients (eggs, ham, vegetables etc.), while Lawson sells hot, ready-made foods (e.g. deep-fried chicken, yakitori etc.)
• Both stores have a carpark facility in front of the store
• Relative price of Seicomart goods are slightly more expensive than Lawson
• Seicomart has 5 times the number of customers

At first, it seems strange that Seicomart have that many more customers than Lawson; in fact, I'd prefer the attractive lower priced goods in Lawson. Most features apart from some deviations in price, and the selling of raw and/or cooked foods, are identical. So what makes Seicomart have such a great advantage over Lawson? It does not seem that brand name or personal preference affect the market conditions between the duopoly. Answer? Location. Stores that sell either commodities or similar goods, who position themselves strategically to draw in demanding customers will have an overwhelming advantage.

From above, we can see that although both Seicomart and Lawson are located on the main road, Seicomart is within the perimeter of concentrated tourist areas while Lawson is on the outskirts of the Hirafu villlage. Tourists want convenience, and the short distance from their residence to Seicomart provides that convenience. Walking/Jogging/Running/Crawling to Lawson is not exactly what tourists want to do, especially during winter, and after a muscle-aching, full day of skiing/snowboarding.

Furthermore, Seicomart's insistence on selling raw ingredients is very perceptive. In the not so distant past, in an attempt to develop the Niseko area (and to raise money), the Japanese hierarchies sold a significant proportion of the land to private investors, thus transforming the Hirafu area into a property hotspot. As a result, there are many people that have purchased private property (houses and apartments) as holiday homes. There are also many people who prefer to rent a house rather than to stay in hotels since there is much more freedom to explore the shopping and dining places. Meals are usually not provided if one chooses to rent houses. Although there is a satisfactory number of dining places, majority of these restaurants are Japanese, and more suited to lunch and dinner. That leaves the problem of the most important meal of the day: breakfast. Since there isn't any fancy breakfast buffet like you get in most hotels, they would have to cook there own breakfast, using raw ingredients from Seicomart. Despite the slightly higher prices, consumers wouldn't mind not being too frugal with their money. Overall, Seicomart trumps Lawson in the battle of convenience due to its location, as well as tapping into the needs of the consumers.

Another option is to head for the nearest train station town, Kutchan-cho (倶知安町). There, the town has a very large supermarket with a plethora amount of goods, much more substantial than Seicomart and Lawson combined. Aside from the supermarket, there are also several restaurants (ramen, yakiniku etc.), bookstores, and shopping malls to name a few. Even before that, how do people get there from Hirafu? There are only two options; either take a taxi (around ¥4000 for round trip), or the scheduled bus for ¥100 (free for return trip). Although the taxi is much faster, it becomes the 'marginal' choice in this case due to it not being economically viable compared to the bus.

"All aboard the big red bus!": Hirafu and Kutchan-cho bus link transport

Because the Niseko bus is perceived, and treated as a public transportation service, the price is generously low. It fits the requirements of a quasi-public good/service; the bus service is non-excludable, but is rivalrous since there are limited bus seats available. What I find most extraordinary is the ¥100 price. Are they hoping to be socially efficient? Is is in the nature of Japanese people to be altruistic? Maybe maybe not. Ski resorts are seasonal, so any type of producer should aim to maximize his/her profits before closing in the summer. With the price difference being so large, frugal consumers would almost always choose to ride the bus. Once the bus service has established its dominance as a necessity to those who wish to enter Kutchan-cho, we realize that our demand is very inelastic. So why not raise the price to ¥200, ¥300? It will undoubtedly still be less expensive than cabbing. The only plausible reason I could think of is that the comparison between Hirafu and Kutchan-cho is minimal in terms of necessities. Sure, Kutchan-cho has a large supermarket, but Seicomart and Lawson can meet all our necessities during our trip. Moreover, Hirafu also have many high quality restaurants, so there is no specific need to go there to savour delicious Japanese cuisine.

"Japanese cuisine under the culinary spotlight": Local Japanese restaurant along Hirafu main street. Appetizing appearances in harmony with the fantastic, fresh flavours.

So this gives rise to the question: what will I benefit from going to Kutchan-cho when everything I need is already in Hirafu? I will leave it to you to answer this one.

The next issue is equipment rentals. Renting snowboards, skis, and their respective shoes are fantastically expensive. Below is a link to the Niseko 'Ski Japan' rental prices:
http://www.nisekobase.com/rental-pricelist/

Let us focus on snowboarding. After researching various snowboard prices from experts, the average cost of a snowboard package is around $500 USD, or around ¥47200-¥47300 following the current exchange rate. Is it better to buy your own snowboard equipment or rent it? To start off, most people who snowboard are unlikely to view it as a one-off experience. Usually, failures from trying something could create an incentive to try again until they succeed. Judging from this possibility, it should be assumed that those who snowboard are likely to mark it as a long-term activity. Next, let us consider the rental price of 5 days (proper holiday should be around at least one week or so) of snowboarding for standard adults (¥22500). Taking the above prices, and the possibility of repairs on purchased boards, one would expect to more than cover the cost of buying a board by renting equipment only 3 times. Furthermore, by buying a board, you can guarantee its quality, and suitability to the individual's specification. Rent involves a temporary use of an asset. For short term usage, then renting is favourable. However, since we expect these activities to be long term, having ownership of a fixed asset becomes less expensive.

Immediately, we see that there is third-degree price discrimination between adult and child board prices (identical activity of different size, assume same quality and type, and no difference in supply). This price-discrimination arises from the amount of materials used to produce boards of different sizes, and the choice of activities available. For families with children, they could either send them to ski school, or if all of them have capable ability to ski/snowboard, then the family could ride the mountain routes together. The former scenario grants the parents with several activity choices (e.g. sight-seeing, horse-riding etc.) other than skiing/snowboarding, since their children are left in the care of certified instructors. However, the latter scenario narrows their choice to two; either proceed with the activity together, or not at all. Either way, a parents' top priority in a foreign country is to ensure the safety of their children. Given that the family spends so much money to come to a ski resort and not ski, is quite similar to paying for a prostitute but not having intercourse. Therefore, the adults' course of action is driven by their children, which is no surprise really. There is also a similar second-degree price discrimination because the the average price of renting the equipment decreases per day. These organizations are undoubtedly skilled in extracting consumer surplus.

So what about summer? Seasonality is once again playing it's natural, crafty role. When I went during the 2012 summer Hokkaido road trip, Hirafu was eerily quite. All the shops, hotels, and restaurants are closed for business, and the mountain slopes are being repaired. It feels like staying in a ghost town! Seasonal unemployment would increase initially in all the Japan ski areas for nearly all types of labour. Overtime, some of these labour would relocate to other ski areas, or other part-time occupations where their labour skills are utilized. For example, store clerks could find employment in other stores as salesmen/women, and ski instructors on the northern hemisphere can continue their jobs on the southern hemisphere, though the labour workforce demand is much less due to the lesser number of ski resort destinations compared to the nothern hemisphere. Nevertheless, we should expect employment increase in other industries during winter to summer transition. To combat the seasonality problem in the summer, people would shift the factor of production, mountain land, for other purposes. In Hanazono (花園), the small ski resort area to the east of Hirafu, their summer activity club involves mountain biking, rafting, hiking, golfing, canyoning, the zipline, and the infamous bag jump. Despite the attractive activities, since they marketed themselves as a ski resort, these activities become somewhat out-of place. There are many other places to do these activities for much cheaper prices; therefore, the need to go to Japan becomes obsolete. And because of this psychological mentality, it too is subjected to the effects of seasonality.

But as the saying goes, "all good things must come to an end." That's right, one week of snowboarding just flew by in the blink of an eye. On board the big tourist bus to New Chitose airport. The departure floor was full of souvenir shops, selling the local snacks I love. Personally, I think the best thing about these shops are that consumers could sample the snacks. Usually with all types of snacks, our sources of information are limited to the appearance and information on the packaging. It is important in gastronomy that we obtain information of the foods' sensory qualities (especially taste, smell, texture). In an economic sense, we as the consumers will have acquired more information about the goods in the market, hence narrowing the disparity of asymmetric information. That being said, almost all the snacks are so delicious that it does not matter whether I taste or not. Nevertheless, it is economically favourable to have more information of a product.

But even more interesting, is the competition between rival stores. The competition almost resembles perfect competition. This scenario is made possible from the homogeneous goods, identical prices, and same service. Actually, these stores act as retail wholesalers, and I have confirmed that all the goods come from the same producer, so we can assume that all the goods are of same quality. Below are some pictures of these shops.

For the second row of pictures, all the shiroi koibito, 白い恋人 (chocolate sandwich biscuits) are ¥1100. Then for the third row, the Royce Chocolate potato chips are ¥693, and Royce Chocolate popcorn are ¥525. From this, we can see that three different shops sell exactly the same goods for the same price. There is no choosing between them; you can pop into your closest shop, having the confidence and knowledge that whatever good, it is the same everywhere else. Or is it? If you happen to have time and someone who can carry a lot of things after you've gone through customs, then you could reap the benefits of less expensive duty-tax free goods.

 After the duty tax was alleviated, the Royce Chocolate popcorn is ¥500 (original price = ¥525), and the Royce Chocolate potato chips is ¥660 (original price = ¥693). Both goods become 4.762% less expensive.

Similarly, the 白い恋人chocolate biscuits is now ¥1058 (original price = ¥1100); meaning that the price decreased by 3.812%.

Well that is it for my Japan holiday. Thank you all for the continued support, and I hope you have enjoyed reading this, I must say, rather long post.

Tackling the IB Economics Examinations

At this point in time,  IB candidates sitting the May 2013 examinations (me included) would have finished their Economics exams. As mentioned on my blogs' most viewed page "IB Economics Syllabus", starting from this year, the format of each paper is different. So this page is dedicated to future IB Economics candidates so that when you enter the exam room on the fateful day, you are 100% certain on:

1. The Examination Techniques

2. The common but effective points

3. Key important points to use during the exam
Read More>>>>>

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.