Commentary 1

Title of the article:“‘$15 pint’: biggest tax hike in 30 years paints sobering future for

Australia’s beer drinkers”

Source of the article:The Guardian

https://www.theguardian.com/food/2022/aug/01/15-beers-biggest-tax-hike-in-30-years-p

aints-sobering-future-for-australias-ale-drinkers,

Date the article was published: Aug 2nd, 2022

Date the commentary was written: Nov 23rd, 2022

Word count of the commentary: 779

Unit of the syllabus to which the article relates: Microeconomics

Key concept being used: Choice

 Commentary 1

The article talks about the Australian government setting a new tax on alcohol. Alcohol,

as a demerit good, creates negative consumption externalities that spill over to third parties in

the economy. Many Australians are heavy drinkers and spend more time drunk than any other

nation, negativily impacting productivity. High ealth care costs is another concern due to adverse

impact of overconsumption of alcohol on drinker’s health. The Australian government’s goal is to

decrease people’s demand for alcohol. It raises the alcohol tax to influence people's choices by

utilizing the signalling and incentivising function of prices.

The Australian economy was affected by a negative externality caused by the

overconsumption of alcohol. The marginal social benefit (MSB) curve lies below the marginal

private benefit (MPB) curve, meaning society would be better off with less alcohol consumption.

Figure 1: Imposing alcohol tax in negative consumption externality (Australia, 2022)

The triangle formed between the original supply curve and the marginal social benefit curve at

the market quantity is the deadweight loss caused by the negative consumption of externality.

The marginal social cost (MSC) and marginal private cost (MPC) curves are the same since

only consumers' choices affect the negative consumption externality of alcohol.

By setting the alcohol tax, the price of alcohol per liter increases from $1.51 to $39.27,

forcing consumers to decrease their spending on alcohol since they need to spend more to get

the same amount. This is shown by a leftward shift of the MPB curve moving closer to the MSB

curve. For the MPB curve to shift exactly onto the MSB curve, the government would need to

calculate the actual value of the external cost per unit shown by the vertical distance between

the two curves, which is impossible.

Producers also receive lower revenue because of the decrease in consumer spending,

which makes them produce fewer alcohol. Therefore, indirect taxation on alcohol both

discourages consumers from buying alcohol and optimizes the allocation of resources,

Figure 2: Welfare effects of indirect tax on alcohol (Australia, 2022)

which effectively changes their choice and solves the overproduction of alcohol as a demerit

good, eliminating the deadweight loss caused by negative externalities. However, by imposing

the alcohol tax, another deadweight loss forms between the original supply curve and the MPB

curve at the optimum quantity.

As a result of imposing an alcohol tax, all stakeholders in the economy are affected.

Initially, the consumer surplus is the area a+b+c, and the producer surplus is the area d+e+g.

After the tax was imposed, the consumer surplus only remained the area a, and the producer

surplus only remained in area g. Their lost areas were contributed to the government, which is

area b+d, and the welfare loss in area c+e. Therefore, consumers, producers, and workers will

all get worse off and suffer because of the indirect tax in both the long run and the short run.

Consumers are worse off because as the price of alcohol increases, they need to spend more

compared with how much they spent on alcohol before. As a result, the demand for alcohol

decreases. The regressive nature of indirect tax makes low-income earners get mostly hit and

takes a larger portion of their income, which leads to inequity. Producers are also worse off

because the quantity of alcohol they sold and the price for each alcohol they sold both

decreased, so their total revenue decreased.

The tax burden is usually shared between consumers and producers. Since alcohol is an

addictive good and the demand for it is price inelastic, consumers will bear the most of the burden.

For workers, since producers gain less revenue, they will have a lower income or be unemployed,

indicating an increase in the unemployment rate. The government, however, will be better off in the

short run, because they do not cost anything and gain government revenue from consumers and

producers through the alcohol tax. But in the long run, the high alcohol tax may let consumers

decide to buy alcohol in the parallel market; therefore, if the government does not solve the problem

of the rise of the parallel market, the economy will suffer continuously.

From the article, it appears that the Australian government has already imposed a very

high alcohol tax in the past, but the problem of alcohol abuse among people has not been
alleviated. Alcohol's negative consumption externality is maintained due to its addictive nature.

To tackle the problem at its root, the government may need to use the tax collected to promote

education on the negative effects of alcohol, such as through anti-alcohol advertisements. The

government may also consider legislation and regulation. They should not stop at one way to

force people to change their thoughts and choices, but guide their choices in multiple ways.

Word Count: 779

 Commentary 2

Title of the article:“Bank of England expected to hike interest rates to 33-year high”

Source of the article: The Evening Standard

https://www.standard.co.uk/business/bank-of-england-interest-rate-rise-cost-of-living-mo

rtgage-b1036234.html,

Date the article was published: Oct 1st, 2022

Date the commentary was written: Nov 27th, 2022

Word count of the commentary: 799

Unit of the syllabus to which the article relates: Macroeconomics

Key concept being used: Intervention

2022/11/7 10:06 Postlight Reader

standard.co.uk

Bank of England expected to

hike interest rates to 33-year
high
Oct. 31st, 2022 Send to Kindle

he Bank of England is poised to unveil the biggest hike in interest rates

for 33 years next week as the central bank continues its efforts to tame
inflation.

The key Monetary Policy Committee (MPC) meeting comes amid

warnings that spending cuts and tax hikes under new Prime MinisterRishi
Sunak could lead to a deeper and more enduring recession.

Most economists think that the MPC is likely to rise interest rates by
0.75 percentage points to 3 per cent at the meeting on Thursday
November 3.

It will be the eighth consecutive jump in interest rates by the Bank

but will represent the biggest increase since 1989.

Earlier this month, markets had predicted the interest rate increase could
be as much as one percentage point but sentiment has calmed
somewhat after the change of Chancellor and Prime Minister and Bank of
England bond purchases pushed down on the cost of borrowing.

Markets have also witnessed a decreased appetite for large hikes

globally, with the Bank of Canada increasing its interest rate by 0.5
percentage points, below the 0.75 percentage point rise which had been
 widely predicted.

Nevertheless, earlier this month, Bank of England Governor Andrew

Bailey said it was likely the hike in interest rates could be bigger than the
0.5 percentage point increase to 2.25% seen at the previous meeting.

https://www.standard.co.uk/business/bank-of-england-interest-rate-rise-cost-of-living-mortgage-b1036234.html 1/2
2022/11/7 10:06 Postlight Reader

He said on October 15: “As things stand today, my best guess is that
inflationary pressures will require a stronger response than we perhaps
thought in August.”

Analysts at Deutsche Bank have said they expect the Bank of England to
opt for a 0.75 percentage point rise with a split vote.

Experts at the firm said they expect latest forecasts from the Bank of
England, which will also be revealed on Thursday, to show that “the
economic outlook has deteriorated further”.

They added: “Conditioned on market pricing, the UK economy will

likely fall into a deeper and more prolonged recession.”

The Bank will also confirm its inflation expectations for the longer term,
which are due to show that the cost of living will be much higher than the
central bank’s 2 per cent target next year.

James Smith, developed markets analyst at ING, also had a

downbeat prediction for Bank’s latest economic outlook.

“The new set of forecasts due, which crucially are based on market
interest rate expectations, are likely to be dismal – showing both a deep
recession and inflation falling below target in the medium term,” he said.

“That should be read as a not-so-subtle hint that market pricing is

inconsistent with achieving its inflation goal.”
https://www.standard.co.uk/business/bank-of-england-interest-rate-rise-cost-of-living-mortgage-b1036234.html

https://www.standard.co.uk/business/bank-of-england-interest-rate-rise-cost-of-living-mortgage-b1036234.html 2/2
 Commentary 2

The article discusses the tightening of BoE on its contractionary monetary policy to

tame inflation. The interest rate keeps increasing at a rapid rate while the Prime Minister

Rishi Sunak worries that the spending cuts and tax hikes imposed to tackle inflation could

lead to a deeper recession. Since a high inflation rate will harm consumer and business

confidence through increased uncertainty abou the economy, the sustained increase in the

general price level of essential goods also raises inequality by mostly hurting lower income

earners’ purchasing power. Thus, intervention in the workings of the market by the BoE

to achieve one of the macroecononomic objectives,a low and stable level of inflation,

though carrying out contractionary monetary policy to curb it.

Governor of BoE Andrew Bailey said the interest rate hike needed to be higher to

be effective, as at the end of October the inflation rate kept increasing. The interest rate is

already high at 2.25 percent, but the inflation rate does not show any signs of decreasing.

This might be caused by the low business and consumer confidence weakening the power

of the change in interest rates to affect the behavior of consumers and investors. The time

lag of monetary policy also needs to be taken into consideration, even though it is shorter

compared with fiscal policy.

According to Andrew Bailey the interest rate would increase above 2.75%,

suggesting an aggressive move. However, in the the case of monetary policy it does not

poise an issue since its is flexible, incremental and reversible in case of overtightening.

The BoE increases the interest rate by lowering the supply of money, in the UK money

market. The aim is to decrease aggregate demand (AD) through its consumption and

investment components as shown in teh AD/AS diagram in (Figure 1).

 Figure 1. Impact of monetary policy on AD (UK, 2022)

AD shows the sum of all spending to buy final goods and services produced within

a country for a certain period, which can be shown as AD = C+I+G+(X-M). The interest

rate is a determinant of the consumption and investment components. An increase in

interest rates raises the cost of borrowing, which forces consumers and businesses to

reduce their consumption and investments financed by borrowing. Since an increase in

interest rates also raises the exchange rate, it indirectly determines the net export (X-M).

Thus now the UK could import more goods, but loses price competitiveness in

international markets, thus resulting in net export reduction. If effective monetary policy will

shift AD1 to AD2.

Figure 2. The impact of contractionary monetary policy on AD, and Cost-push inflation (UK, 2022).

The UK economy is in stagflation, a type of inflation caused by the leftward shift of

the SRAS, which leads to a rise in the price level and a fall in the real GDP with higher

unemployment. The UK's stagflation is caused by a supply shock that leads to increasing

cost of production for firms. The stagflation is shown by the intersection of AD1 and SRAS,

where Y1 is less than YP and PL1 is higher than the long-run equilibrium price level, which

indicates recession with inflation. The BoE intervenes to implement contractionary

monetary policy to lower the price level, thus tackling inflation. Monetary tightening will

shift aggregate demand to the left from AD1 to AD2, forcing the price level to decrease PL1

to PL2, aiming at an equilibrium in the intersection of AD2 with SRAS, which returns to the

long-run equilibrium price level.

 The BoE intervenes in the economy and raises interest rates to maintain economic

stability and credibility, but it comes with costs. What Rishi Sunak worries about the

contractionary fiscal policies also applies to the contractionary monetary policy, since both

are demand side policies. In stagnation that is caused by the leftward shift of SRAS, the

contractionary monetary policy that shifts AD rightwards may return the price level to its

original level, but the greater difference between Y3 and Yp indicates the economy is in a

deeper recession. The decrease in real GDP also represented an increase in

unemployment. If this problem is not solved in the long run, LRAS may shift leftward,

causing economic recession in the long run.

Even if the cost of contractionary monetary policy is large, curbing inflation to reach

its target remains a first priority for the economic participants to maintain their economic

well-being, since inflation also lowers the purchasing power of people who receive fixed

incomes hurting low income households the most.

By reviewing the positive and negative effects of BoE’s contractionary monetary

policy, even though the increase of the interest rate may seem risky that may lead to a

deeper recession in the long run, BoE’s intervention is necessary to prioritize battling

inflation in the short run.

Word count: 799

 Commentary 3

Title of the article:“Yuan gains value against US dollar, appreciating nearly 3% in

January alone”

Source of the article: The global times

https://www.globaltimes.cn/page/202302/1284606.shtml

Date the article was published: Feb 1st, 2023

Date the commentary was written: Mar 30th, 2023

Word count of the commentary: 791

Unit of the syllabus to which the article relates: Global economics

Key concept being used: Economic Well-being

4/11/23, 4:37 PM Yuan gains value against US dollar, appreciating nearly 3% in January alone - Global Times

Yuan gains value against US dollar, appreciating nearly 3% in January alone

globaltimes.cn/page/202302/1284606.shtml

SOURCE / ECONOMY
Yuan gains value against US dollar, appreciating nearly 3% in January alone

By GT staff reporters Published: Feb 01, 2023 06:48 PM

Chinese yuan Photo:VCG

The Chinese yuan rose against the US dollar for the third month in a row with its value appreciating nearly 3 percent in January. Analysts expect that
yuan's upward trajectory would continue in 2023, fueled by a resurgent Chinese economy, depreciation of US dollar and market expectations that the US
Federal Reserve will slow down the pace of interest rate hikes.

The yuan's spot rate closed at 6.7400 to the US dollar on Wednesday, up 2,114 points from 6.9514 at the end of 2022, gaining nearly three percent in value
against the greenback.

In January, the spot rate of the yuan once rose to an intraday high of 6.69 against the dollar, an 8.6 percent appreciation from the low reached in November
2022. Meanwhile, the central parity rate of yuan has appreciated by 2.93 percent against the US dollar in January, marking the third consecutive month the
yuan has kept strengthening.

The recent appreciation of yuan is mainly due to the rebound of the Chinese economy and the depreciation of the US dollar, Tan Xiaofen, an expert at the
School of Finance at the Central University of Finance and Economics, told the Global Times on Wednesday.

"One or two more Fed rate hikes are expected by the market in the first half of 2023, but they should be modest, probably by 25 to 50 basis points apiece,"
said Tan.

China's policies to stabilize its economy, optimized anti-coronavirus measures and easier credit lines to support the real estate sector has supported an
economic rebound since late 2022, analysts claimed.

"Based on past appreciation cycles and overall expectations for 2023, the exchange rate of yuan could rise to around 6.5 against the greenback in the most
optimistic scenario," said Tan.
 https://www.globaltimes.cn/page/202302/1284606.shtml 1/2
4/11/23, 4:37 PM Yuan gains value against US dollar, appreciating nearly 3% in January alone - Global Times

The basis for a stable yuan value is stronger in 2023 than it was before the pandemic, although the yuan will still be influenced by the US dollar's trends,
Dong Shaopeng, a senior research fellow at the Chongyang Institute for Financial Studies at Renmin University of China, told the Global Times on
Wednesday.

Analysts said they are optimistic about financial stability in China, which will further support the country's economic recovery. "It has

become a firm orientation of the central government that the financial sector should focus on serving the real economy," said Dong.

Dong noted that China has ample room for monetary management. The country will continue to fine-tune financial policies for small, medium and micro
sized enterprises and industries related to people's livelihood.

Meanwhile, confidence toward China's economic recovery can be seen from the volume of overseas capital inflows to purchase yuan-denominated assets,
which will also bolster China's financial fundamentals, analysts said.

Net foreign capital inflows are expected to reach 200 billion yuan ($29.7 billion) to 250 billion yuan in 2023, read a report by Yuekai Securities, while CICC
expected inflows to reach 300-400 billion yuan.
https://www.globaltimes.cn/page/202302/1284606.shtml 2/2
 Commentary 3

The article talks about the rise of the Chinese yuan against the US dollar due to

several reasons, and predicts the yuan will keep appreciating. Since November 2022,

the yuan has appreciated by 8.6 percent. In January, the value of the yuan against the

dollar rose to a peak of 6.69, with an appreciation of 2.93 percent against the dollar in

this month, showing that for the third consecutive month, the yuan has kept

strengthening. The sustained and increasing appreciation of the yuan against the dollar

will affect the economic well-being of the Chinese economy.

The rising interest rate of the yuan is caused by several reasons: the resurgence

of the Chinese economy and expectations of further growth, together with the

expectations that the Fed will slow down the pace of interest rate hikes.

China’s policies aim to stabilize its economy, and optimized coronavirus

measures increase its production efficiency and inward foreign direct investment (FDI).

An increase in inward FDI shows foreign multinational corporations buy Yuan to invest;

the increase in the demand for Yuan leads to a rightward shift of the demand for Yuan

curve (Figure 1). The resurgence of the Chinese economy and optimized coronavirus

measures also attract tourists from abroad, which represents an increase in exports of

services that increase the demand for Yuan. Furthermore, the resurgence of the

Chinese economy also leads to the speculation that the Yuan will appreciate, so

currency speculators buy Yuan in the hope of selling it after the Yuan’s appreciation,

which also increases the demand for Yuan that appreciates yuan against dollar (Figure

1).
 Figure 1. Appreciation of the Chinese yuan against the US dollar due to changes in its
demand.
On the other side, the depreciation of the dollar is caused by the market

expectation that the Fed will slow down the pace of interest rate hikes. The deceleration

of the increase in Fed interest rates shows the demand for dollars in portfolio

investment decreases because it is now less attractive for foreigners to change their

deposits and bonds into dollars. Therefore, the decrease in the dollar’s demand is

equivalent in terms of value to the increase in the yuan’s supply, shown by a leftward

shift in the supply of the yuan curve (figure 2). In addition, since the Fed still imposes

interest rate hikes that are used to fight inflation, that means that US residents who own

dollars have higher purchasing power, meaning they are willing to buy imported goods

that are relatively cheaper, supply dollars, and demand yuan, which is another factor

that shifts the demand for yuan curve to the right.

 Figure 2. Appreciation of the Chinese yuan against the US dollar due to changes
in its demand and supply.
The appreciation of the yuan positively affects China’s economic well-being.

Despite the policies that stabilize the economy and optimal coronavirus measures, the

easier credit lines in the real estate sector encourage people to own houses. An

appreciation of the yuan also increases Chinese local residents’ purchasing power

when buying foreign products; the cheaper price of imported goods improves people’s

living qualities and standards. Local producers also experience increasing purchasing

power, resulting in lower prices for raw materials and imported energy, such as oil, that

lower their cost of production. The rightward shift of the aggregate supply curve leads to

a decrease in the general price level, which encourages people to consume and

promotes economic growth.

On the other hand, the appreciation of the yuan may also negatively harm its

economic well-being. As a leading exporter, China's economy is highly dependent on

its export performance, and a sustained appreciation of the currency could largely

damage its export competitiveness. A decrease in exports with an increase in imports

decreases the net export, which is one of the components of aggregate demand. The

leftward shift of aggregate demand may put the economy back into recession. Even

though there is a rightward shift in aggregate supply, because the Chinese economy

relies heavily on exports, the recession will still occur. The potential recession also

shows an increased unemployment rate since producers cannot gain profit from

exports, they dismiss their employees.

However, the decrease in price competitiveness may have some positive effects

on economic well-being that will be seen over time, because it forces producers to

improve their production efficiency and workers to increase their working efficiency to

save or find their jobs. At the same time, China has relied on quantitative cheap

labor-intensive products for a long time. Appreciation of the yuan promotes export

producers to raise their technological level and improve products’ qualities, thereby

promoting China's industrial restructuring and improving its economic well-being.

Overall, the appreciation of the yuan has many positive effects on economic

well-being, but the Chinese government still needs to take care of the potential threat

posed by declining net exports that may lead the economy back to recession, even with

huge foreign capital inflows and an increase in the aggregate supply.

Word Count: 791