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Econoception 2014

Econoception Issue 30: 3rd August 2014

Table of Contents

1. Micro: The rise of e-commerce

2. Macro: European Central Bank

THE RISE OF E-COMMERCE

1. Commercial Property Stores of value
http://www.economist.com/news/business/21610288-rise-e-commerce-has-set-boom-market-warehouses-storesvalue

The Economist Aug 2nd 2014 Print Edition

Content from H2 Economics being applied:
Demand and Supply
Employment
Investment
In the 2012 A-levels, there was a market structure question on online retailers.
Though still short of extending their reach to Singapore, companies like Amazon
have already fundamentally changed the way people in the developed world
shop and consume. Being a student in the UK, I can attest to the cost savings
and incredible conveniences Amazon and other forms of online retailers bring to
consumers. My favourite offering of theirs is kindle e-books; they are especially
great for foreign students like me who love to read but do not want to deal with
physical storage problems. Whats more they are significantly cheaper than
books in traditional bookstores.
This weeks article in The Economist focuses on e-commerces impact on the
real-estate market. The subtitle: The rise of e-commerce has set off a boom in
the market for warehouses suggests a causal relationship between ecommerce and the market for warehouses. One that you should be able to
explain using H2 economic principles and concepts by now.
Take a moment to think and perhaps even draw some diagrams before reading
on.
Done?
I will wait.



Okay. The relationship between the two is best summed up by the term derived
demand. Warehouses are an important factor of production (i.e. a form of
capital) for e-commerce firms because these firms require the storage space to
house their products. The expansion of e-commerce is associated with a rise in
the number of retailers (supply), a rise in the number of consumers (demand)
and most importantly a rise in total quantities of goods sold (equilibrium
quantity). This expansion leads to a rise in derived demand for
warehouses. Evidence of this can be found in the article, which states: since
2012 the amount of industrial space (of which 75% is warehousing) used in
America has grown at an annual rate of 14.5m square metresdouble the pace
in 2008, the year the property market went south.

Micro -> Macro

And the article goes on further to point on that these warehouses are different
from traditional, older warehouses: Such fulfilment centres also employ far more
people than older warehouses: around Christmas each may have up to 3,000
staff working on shifts. Another plus for the economy and again a sort of
derived demand, except in this case its for labour. Thats not all a sector that
creates job and is highly scalable is for sure to come under the radar of the
government. Sure enough we have China trying to jump on the bandwagon.
Chinas local governments, which control land use, were once reluctant to
authorise new warehouses, because they generate little tax revenue. But they
are realising that e-commerce warehouses create lots of jobs, and are now
readier to give them planning permission. Its all about the incentives. The
political party wants to get voted in, and to do that they have to create jobs and
keep the economy healthy. It fits nicely. Here we see how micro can merge into
macro.

Investment
Employment is not the only macro concept implicated. Investment is the other
one. The rise of e-commerce in Europe and China will spur the development of
better infrastructure and greater spending in investment, both of which will
increase current actual output (by boosting AD) and also potential output (by
boosting AS). One example of infrastructure development that is needed for ecommerce is access to broadband internet, which brings with it a host of other
benefits to citizens and the economy. A positive feedback loop can be created:
growing e-commerce incentivises governments and firms to invest in more
infrastructure that will in turn attract more firms to set up e-commerce
operations. Ultimately, consumers will be the ones who benefit from lower
prices, greater convenience and more product variety and choice.

EUROPEAN CENTRAL BANK

1. The Exceptional Central Bank
http://www.economist.com/news/finance-and-economics/21610262-european-central-bank-should-adopt-quantitativeeasing-now-rather

The Economist August 2nd 2014 Print Edition

Content from H2 Economics being applied:
Inflation
Monetary Policy
Exchange Rate
The article coins a new term: lowflation inflation that is below the central
banks target, accompanied with a significant risk of deflation. First let us
establish why lowflation is bad. The article hints at two reasons briefly:
1. Lowflation hurts borrowers. The level of inflation is closely linked to price-led
nominal profit and wage growth. Debt is denominated in nominal terms. If
inflation is lower than expected, incomes will grow slower than expected, this
means that the real (i.e. income adjusted) level of debt is growing faster than
expected and this can wreck havoc to firms and consumers cash flow and
balance sheets.
2. Lowflation may be a foreshadow of deflation, which is a malady for any
economy. The article cites Japan as an example: Deflation crept up on Japan in
the 1990s even though inflation expectations remained positive.
For these reasons, the article takes a strong stand in recommending the ECB
pursue QE. I will ignore the arguments for and against QE because those are
very much out of the syllabus. Instead I will focus on the sole mention of
conventional monetary policy (albeit carried out unconventionally in this case)



in the article: lowering interest rates In June it (ECB) brought its main lending
rate down to a new low of just 0.15% and became the first big central bank to
introduce negative interest rates, which in effect charge banks that leave
deposits with the ECB. The article goes on to suggest a causal implication:
This has helped lower money- market rates in the euro zone almost to zero
and cap the appreciation of the euro, which was contributing to disinflationary
pressures. Lets break the above argument down further into a few parts:
1. The ECB lowering lending rates and interest rates led to lower money-market
rates.
2. Lower money-market rates in the euro zone capped the appreciation of the
euro.
3. The appreciation of the euro is contributing to disinflationary pressures.
4. Therefore, ECBs monetary policy helped to reduce disinflationary pressure.
(1) There are many types of interest rates in the economy. Some examples are
the central bank interest rates, housing mortgage rates, to credit card interest
rates and moneylender interest rates. The central bank can influence all of these
interest rates (to a certain extent) by setting the benchmark interest rates.
(2) Lower money-market rates reduces the foreign value of euro. Money-market
funds are fairly liquid what you would call hot money in H2 economics.
When interest rates on these funds are lowered, investors will shift their
monies into other non-euro money markets. The effect might be small but it
definitely increases the supply of euros in the foreign exchange market.
(3) Appreciation of euro worsens the current account if we assume the
Marshall Lerner condition holds. The effect of this is disinflationary by simple
H2 macroeconomics.

(4) The conclusion naturally follows if all of the above three premises are true.
I will end this piece with a quote from the article: The ECB draws comfort from
the consensus among forecasters that inflation will return to the target in five
years time, but that view is more a vote of confidence in the ECB than a reading
of the economic tea leaves.
Predicting the future is a tricky business, whether it be by tea leaves or by
economics. Even though QE has worked well for the US and Britain so far, it is
unclear if there are any long-term side effects that have yet to come about.
Moreover for something as complex as the economy, what has worked well in
the past may not work in the present.