Economics Case Study Questions And Answers

Answers to case study questions

CASE STUDY 1.2 KARSTADT UNDERTAKES INVESTMENT FOR SURVIVAL

  • What has led Karstadt to divest itself of some of its parts?

    There are many reasons for divestment, one is to refocus the business, another is to reduce costs by selling off under-performing parts of the business. A third driver might be to obtain revenue from the sale of various parts of the business for expansion and development elsewhere. Finally, divestment might allow a business that has grown haphazardly to be re-focused. The divestment at Karstadt is probably explained by poor growth performance, falling profits and an attempt to restructure itself because of falling sales. The divestment process would also lead to an injection of income that would help with store refurbishment and through the divestment process the problems with the management structure of Karstadt could also be addressed.
  • What is the danger behind such an divestment strategy?

    Divestment can be very successful if it achieves its aims, One of the problems is that the divestment that takes place does not addressed the core issues facing the company and a further round of divestment occurs. In this process, chief executives can be seen as not working and are quickly replaced. The money that is raised may be spent inappropriately. As the organisation gets smaller it may lose its competitive edge and be more open to being taken over. Its range of products and markets may be reduced. For shareholders this may be a signal that they should place their investments elsewhere and the shareholders may be more willing to sell out to another organisation making the takeover operation more feasible.
top

CASE STUDY 1.3: EUROPE’S INTERNATIONAL TRADING FUTURE?

  • Do you agree with the report that Europe still needs manufacturing industry?

    Answer

    Does Europe need industry? Article lists:

    - Share of GDP maintained recently
    - Fall in value added and jobs due to price changes and productivity gains and greater competition
    - Services need manufacturing
    - Wages are higher
    - Technology, innovation, productivity gains, strategic role etc – comes from manufacturing
  • Outline what the report states as the reasons for poor growth in manufacturing. Can you think of any other reasons?

    Answer

    Reasons for decline – comparative advantage has shifted – to China, India, Brazil etc. Future of manufacturing in EU is due to threat of low wage competition; plus low transportation costs, better communications, opening up of trade, more flexible technology which means MNCs can take better advantage of the lower wages. But two issues identified:

    Technology – Europe still lags behind Japan and US
    The institutions are holding back low wage competitors which keeps costs low and keeps them competitive. Should incomes grow the chance for more intra industry trade with Europe (in higher quality goods), would increase and boost EU industry. The EU needs to push for this to help its industry.
top

CASE STUDY 2.1: PORTER’S DIAMOND: KEY FACTORS OF SUCCESS FOR CASE STUDY REGIONS

  • How well do these success factors fit Porter’s Diamond analysis?
Answer
See in examples below (these are suggestions)

Firms’ strategy, structure and rivalry

1) Oberbayern – entrepreneurial culture
2) Sterea Ellada – presence of large, high productivity companies with high R& D spend
3) Ile de France – national leader in defence and network of support companies; strong presence of foreign owned companies
4) Niederosterreich – critical mass of untraded interdependencies; emphasis on internationalization; emphasis on collaboration; innovation and technology upgrading to reduce labour cost pressures

Demand conditions

1) Oberbayern – modern manufacturing base and expanding services
2) Darmstadt – leading financial sector and strength elsewhere
3) Ile de France – cultural hub and centre

Factor endowments

1) Oberbayern – public support in infrastructure, good transport links, immigration supplying labour, special industrial sites
2) Darmstadt – immigration supplying skilled workforce and employment, well developed transport and telecommunications, University links, active government policy to promote region
3) Sterea Ellada – innovation system supported by EU funding, training relevant applied technologies; proximity to capital and good communications.
4) Niederosterreich – education and research base; geographical position

Related and supporting industries

1) Oberbayern – clusters in ICT and spillover effects
2) Darmstadt – clusters of life science research institutes: links to University
3) Sterea Ellada – agencies to support innovation & technology transfer
4) Ile de France – Centre of transport network, research centres, policy of locating clusters, network of supporting companies
5) Niederosterreich – presence of regional innovation system
  • What could other regions learn from this?

    Strong emphasis on clusters, government support, good transport links/infrastructure (often with government support), innovation, culture, education – these are key themes coming out.
top

CASE STUDY 2.2: THE COFFEE MARKET

  • Show in terms of supply and demand why coffee has fallen so much in price recently?

    The supply of coffee has increased (supply curve has shifted outwards) with countries like Vietnam producing a great deal now, but also the demand has fallen (demand curve shifting inwards) as substitute goods have increased in popularity. Therefore the price has fallen
  • Why would the ending of the ICA lead to a drop in price?

    Until 1989 the coffee market was managed by the International Coffee Agreement (ICA) – producers and consumer nations agreed supply levels via export quotas for producers and the aim was to keep price high and stable inside a band or corset of £1.20lb to $1.40 lb which could only be exceeded if the price rose above the ceiling level.

    But this agreement went the way of most such agreements and disagreement between members led to its breakdown in 1989 – a major factor being opposition from US which left the ICA subsequently. Now although the agreement still exists it has little power to control supply and prices.

    For the producers the agreement meant good and stable prices – between 1975-1989 futures prices were rarely below $1.20 floor. But once the agreement broke down prices dropped and apart from 1995/1997 (which were due to frost ruining Brazil crop and causing shortages) – prices have fallen very low sometimes below the cost production.

    Prices are now determined on the 2 big futures markets in London and NY – London deals mainly with robusta and NY arabica. The price is controlled by the large number of contracts for coffee which far exceeds the physical amount changing hands. Supply and demand factors are part of these contracts and affected the prices set (see above).
  • What would happen if producers produced less coffee?

    Basically this is cutting supply and pushing up price. In 1993 coffee growers agreed to hold back from the market and force up the price. But the problem is there are lots of growers and it is hard to keep them all in line – especially with prices rising – the old cartel problem of cheating is shown here. This is what happened in 1989 when the previous agreement broke and the price of coffee dropped by 33% in one week.

    Also you cannot actually just stop supply (the bush is growing and need supply later) so have to store and this costs money.
  • What are the alternatives for coffee producers?

    Other crops – should diversify – often there are other crops eg. Uganda has cotton, tea and tobacco and has started to diversify into various other products but the problem is so is the rest of Africa – when one spots a new opportunity, all the others start joining them and so the price collapses.

    Alternatives are often also in crisis eg sugar, rice, cotton also have long-term price falls and similar problems to coffee. Also takes time to change and the costs of replacing their coffee tress is high – even if land is suitable, they could lack the skills/training to grow the new crop and also they have little savings so they can wait until the crop bears fruit.

    Furthermore there are longstanding problems of rural underdevelopment – poor transport infrastructure, lack of credit, restricted access to markets and so limited information about best prices. Most likely other crop – drugs – in Peru, Colombia, Bolivia conditions for growing coffee are very similar to those for cocaine and have been under high pressure to move from latter to former but fall in coffee price does not help encourage this.

    Process own coffee – 2000/1 94% of all coffee exported was green bean state – of the 6% remaining most came from 3 countries Brazil, India and Colombia – problem of low value added. Reason is to process own is difficult in practice. Once you roast a bean then it starts to go off and lose its freshness, which is why coffee is roasted, ground etc in the North. Also need complex machinery which is expensive – to build processing plan for soluble coffee = approx $20m plus – roasting and grinding is cheaper but would still suffer from such things as ability to produce quality packaging locally.
top

CASE STUDY 3.1: SUGAR INDUSTRY

  • Explain using graphs, the subsidies and tariffs which protect the sugar industry in the US and EU and the effect on the more efficient world producers (for example Brazil and Thailand) of the dumping of excess sugar production.

    The graphs needed are those in the book – figure 3.2 gives the effect of tariffs in the DCs (US and EU). Production Subsidies are shown in Figure 3.3

    For LDCs – subsidies which bring dumping means the supply curve shifts out and the world price falls (and therefore the price for Brazil and Thailand falls).

    Tariffs will reduce demand for their product and excess supply on the world and home market (as they cannot sell abroad), so pushing down price
  • Identify the effects on the differing economic agents for example, consumers and producers on these diagrams? Are there any other effects?

    Need to look at consumer, producer and government effects (those for DCs are in the books). For Brazil & Thailand – consumers get lower price but producers suffer from this lower price and greater (subsidized) competition. Governments probably cannot afford to subsidize in similar fashion, and competition from US and EU is unfair (and protected by tariffs at home).
  • What do you think is the economic justification for the US and EU undertaking such protectionism?

    1) Protect Agricultural jobs
    2) Protection vital industry for strategic/defensive reasons
    3) Could argue sugar should be restricted as not good for you – health reasons (but still why should it be EU based?)
    4) Powerful and vocal farm lobby – political reasons
top

CASE STUDY 3.2: FSC DISPUTE

  • i) Illustrate the effect of such a subsidy for the EU and US producers – this is an export subsidy and illustrated in figure 3.4 (EU) and 3.5 (US)

    ii) Illustrate the effect of sanctions on US imports into the EU market – shown in figure 3.1 effect of a tariff (this would be the EU market)

    iii) What are the motives for this action by the EU? Are there any hidden motives?
  • Answer

    EU motives:

    1) Trying to prevent unfair competition – subsidy gives US companies unfair advantage (problem = not much support for this from EU businesses and some EU businesses gain via it eg BP, ICI, Unilever, BASF and Daimler)
    2) Retaliation – for losses at WTO over bananas and beef and latest moves due to steel tariffs

    US motives/points for FSC

    1) Had agreement under GATT (claimed came from earlier GATT challenge by EU re the forerunner to FSC (domestic international sales corporations, Discs), which was also successful and that this was in footnote of Subsidies Agreement
    2) Is countering EU system where VAT is recoverable. Also some EU have similar schemes eg Netherlands (Disputed by EU). Prior to FSC, it is claim, EU imports flooded the US in late 1960s and 1970s (due to their subsidies and tax exemptions) – so just countering this.
top

3.3 BEEF HORMONES

  • The European Union claims there is still a potential risk but has little scientific proof – does it have the right therefore to protect its consumers in this way? Should the consumer have the right to choose (ie if the beef was labelled)?

    Science is in debate still. The EU feels potential risk but no proof (or should the US provide the proof. What scientific evidence is necessary? What degree of risk is allowable? The EU feel there should be no risk allowable. Also the threat of destabilizing the market is very real – if the newspapers found US beef hormone treated beef was being sold in the country, there would soon be a scare and little to no beef sold? (or would this happen? – something for discussion) Labelling was suggested but the US felt it would be like labelling the beef as“risky” “don’t eat me”. However some labels are ignored eg does it stop smokers to label packets in the way they do!
  • Is this really a means of protecting the EU farmer?

    US – reason = consumer pressure and Euro politics. Also the fact EU consumer has no confidence in food authorities is part of the problem – the EU should deal with this rather than ban the beef. US consumers have no problem eating the beef because they trust their regulators. EU should have independent regulators with transparent procedures. (But are US as aware as EU?)
  • Ultimately, what is the dispute really about?

    Ultimately – isn’t this a fight between two of the major lobbying groups in the US/EU ? The US farmers v the EU farmers - but in the EU there is another increasing power group – the consumer. Other questions raised are: what scientific proof is needed to ban a product? Is it right to impose further sanctions on un-related farmers to put this right? Are there other ways?
top

CASE STUDY 4.1: SEM EFFECTS ON BUSINESS.

  • Highlight what have been the major effects of the SEM on businesses. Are there any surprises?

    Major effects on business have been:

    1) Elimination of administrative tasks in customs and VAT procedures at borders – success in opening borders
    2) Positive effect on pricing and purchasing policies within the EU
    3) Aided expansion, distribution and marketing
    4) But the EU had become more demanding and costs of admin were rising
    5) Forced companies to become more ambitious
    6) Cost of finance had become less of a constraint
    7) The table suggests the biggest impact has been on trade (not surprisingly).
    8) It also suggests that many firms now work in more than 5 EU countries and less are concentrated in the national market.

    Surprises:

    1) little effect on productivity and sales
    2) little labour mobility to help with labour shortages
    3) The table identifies that in some areas eg construction the impact has been less significant (possibly not surprising) but service based companies 53% say it has had little impact which is surprising.
    4) And also 47% of Industry says there is little impact.
  • Do you feel the European Union is right in the last statement above? Is there any way it can be more proactive?

    The statement suggests that further legislation is unlikely in the near future.

    The case suggests there is still work needed in helping labour mobility (especially from the more recent members from the East of Europe who still face barriers in my EU countries).

    There are still gaps in legislation and the enforcement on some EU legislation in some countries.

    The impact does seem to be limited in services which could either suggest they were already fairly open, or that they remain very closed. In finance the former is likely to be the case, in other areas (eg more personal type services like education and the classic hairdressing), the latter is more likely. In some cases there is little the EU can do, but in others perhaps there is more.
top

CASE STUDY 4.2: AFRICA’S ECONOMIC INTEGRATION

  • What reasons are listed for the proliferation of trading blocs in Africa? 

    Reasons behind the proliferation of trading blocs in Africa.

    1) Colonial past
    2) New blocs imposed on existing blocks in 1960s to 1980s
    3) Late 1980s – ideals of pan-Africanism via regional cooperation
    4) Now – the Constitutive Act of African Union is next stage
    5) What is the prospect of building an Africa-wide trading bloc?
  • Consider these and can you think of any other reasons?

    - To understand the possible future you have to ask: Why so unsuccessful?
    The case study suggestions are:
    1) Ignored political aspect and little shared vision and stability
    2) Too much concentration on institutions and structure which were far too great in number.
    3) Most integration is between non-industrial countries, reliant on agriculture and little intra-regional trade (compare with Europe where there was already a lot of intra-regional trade pre EEC)
    4) 800m people but GDP of less than France – very low income area
    5) Economic concentration in certain area – needs structural funds but see (d)
The first two are ways that African integration was handled in the past and so could be corrected in the future. The last 3 are very long term and major economic problems which Africa would need a great deal of help dealing with.
top

CASE STUDY 5.1: THE EFFECT OF EXCHANGE RATES ON BUSINESSES – THE US DOLLAR

  • Identify the differing effects the low dollar has had on US and UK businesses.

    a) US business

    i) More tourists – greater spending on hotels, in restaurants and in shops (these are imports to UK or exports of US – when the dollar falls, US exports get cheaper and UK imports more expensive)

    ii) Increased exports boosts demand in the US

    iii) Generally lower dollar makes US exports more competitive. It also raises the price of US imports which could be inflationary (but little sign of this) 


    b) UK business

    i) Less tourists – less spending on hotels, in restaurants etc – US holidays in Britain are UK exports and more expensive (US imports)

    ii) But as the article says “only rich Americans go abroad” and these are not sensitive to price changes – so how much is US demand for UK exports affected by price changes in the tourism sector?

    iii) More affected would be the more price sensitive sectors eg semi manufactured goods, non-luxury items
  • What does the article suggest about the elasticity of supply and demand for sterling and dollars?

    Elasticity of demand for sterling (for luxury items) – see (b.ii above) – appears insensitive to changes in the exchange rate therefore inelastic demand. Similarly those who buy UK holidays will supply US dollars – suggesting an inelastic supply.

    The fact that the article suggests UK tourists are responding to price changes due to the lower value of the dollar suggests a more elastic demand for dollars (and supply of pounds).
top

CASE STUDY 5.2: REAL EXCHANGE RATES IN THE EURO-ZONE

  • Why do you think German labour costs grew more slowly over this time period than tose in other European countries?

    During this period German unemployment was at very high levels which encouraged wage moderation. This effect was boosted by the fact that the federal government at this time was a Social Democrat/Green coalition with good links to the trade unions and also perhaps by some of the labour reforms which were brought in by this government. However, relative labour costs do not just depend on money wage levels but also on productivity growth. The other reason why labour costs grew more slowly in Germany than elsewhere was that labour productivity was growing faster there in response to the competitive stimulus resulting from the introduction of the euro.
  • What do the changes described in the case study imply about the relationship of the nominal exchange rate of the euro to its PPP value? Are the developments in the article consistent with the theory of PPP?

    The theory of (absolute) PPP suggests that real exchange rates should remain constant since that any change in nominal exchange rates should be matched by an opposite change in price levels. In this case the real exchange rate of the euro has risen by 18 percent so the figures are not completely consistent with PPP. However, there does seem to be some movement in the direction predicted by PPP in that the dollar fell by 50 percent in nominal terms against the euro from 2002 to 2005. If prices had remained constant in the euro-zone and in the USA during this period then the value of the real exchange rate would have changed proportionately, but in fact it only rose by 18 percent so the fall in the dollar does seem to have been counter-balanced by higher price rises (actually higher rises in labour costs because that is the date being used here) in the USA than in Europe. So, just as in the results quoted in the text of the chapter, we see some adjustment in the direction of PPP but the adjustment is not as quick or as absolute as the PPP theory predicts. We do not have the data to say whether the euro is now above or below its PPP value. The rise in the real exchange rate could mean one of three things: (a) it was below its PPP value and has now risen up to it (b) it was at or above its PPP value and has now risen further above it (c) it was below its PPP value and has now risen above it. We would need further empirical investigation to decide between these three possibilities.
  • On the basis of what happened to the real exhange rate of the euro over the time period described in the case study, what would you expect to have happened to the nominal value of the euro from spring 2005 onwards? Do your predictions coincide with what did actually happen?

    The rise in the real exchange rate for the euro indicates a worsening of competitiveness for European business so, unless labour costs continued to decline sharply in Europe relative to elsewhere, we would expect to see the nominal value of the euro stabilise or even decrease as European companies faced increasing pressure in world markets. In fact the euro did drop against the dollar during 2005 and 2006 indicating that perhaps it had overshot its PPP value in the earlier rise and needed to adjust back. The problem with this in global terms was that the decline in the value of the euro during this period did not help the USA to reduce its record deficit on the current account of the balance of payments.
top

CASE STUDY 6.1: SEC TO RETHINK POST-ENRON RULES

  • Outline what you see as the arguments for and against foreign firms operating in the United States having more relaxed governance rules than those applying to US firms.

    The argument for non-US firms having less stringent rules for registration are basically as outlined in the case. That is to say that if foreign companies wishing to do business in the US have to carry such high compliance costs for secondary listings then they may go elsewhere. This argument has some interesting back up. Firstly a recent report (Independent on Sunday 2006) suggests that not only may foreign firms object to SOX compliance costs in the US, but further that a number of US companies are currently considering quitting the New York Stock Exchange in favour of the London Stock Exchange’s Alternative Investment Market or AIM. Secondly, and perhaps more significantly, the new US Treasury Secretary Hank Paulson, previously Goldman Sachs CEO until his move to government in July 2006, is reported (The Observer 2006) to be considering major changes to the SOX rules. He is reported to have said that “the regulatory pendulum has swung too far.” Foreign firms have been granted extra time to meet the SOX rules. The latest deadline for compliance was extended to July 2006 (BBC 2006).
  • How do you think Lynn Brewer might have come by ‘evidence’ that corporate corruption is ‘still rife’ in the United States? Would you be inclined to believe her, or should she be treated as a ‘hostile witness’, and likely to exaggerate the facts?

    It is impossible to know exactly Lynn Brewer’s sources. However since she blew the whistle on Enron, and published her Confessions of an Enron executive (2004) Brewer has become something of a celebrity and would have access to a great deal of relevant information. As a ‘witness’ she would clearly be hostile towards Enron and the malpractices with which it has now become synonymous. Whether her views are extreme is another matter. Even Ernst and Young the huge accountancy and consultancy organisation are concerned about business standards at the moment. They say corporate governance has become the shareholders’ mainstay, but the legacy of corporate wrongdoings has created a situation which previous generations of directors could scarcely have imagined. (Ernst and Young 2006).
  • Former WorldCom chief executive Bernie Ebbers was found guilty of conspiracy and fraud (in March 2005) and faces up to 85 years in prison. (He is now 63 years old.) Do you think that ‘white collar’ crime like this should carry such long prison sentences? Are fraudulent executives really a danger to society?

    Whether white collar criminals should be given long prison sentences is clearly a normative issue. However there is no doubt that the US authorities certainly do believe that business executives should get long prison terms for serious offences. Bernie Ebbers was in fact given 25 years in jail when sentenced in July2005. Jeffrey Skelling, one time CEO of Enron was found guilty, in May 2006, on 19 counts including conspiracy, insider trading and securities fraud. He is to be sentenced in October 2006; observers expect him to get 25-30 years. Ken Lay, Enron Chairman and CEO from 1986-2001, was similarly convicted in May 2006 on 10 counts and was expected to be given 25-30 years. Lay died of a heart attack in July 2006. Are fraudulent executives really a danger to society? Clearly the US authorities believe them to be, and Ernst and Young are worried about the ‘legacy of corporate wrongdoings’.

    Independent on Sunday (2006) ‘Sarbanes (SOX) refugees heading for AIM‘, Miranda McLachlan, 20 August 2006.

    The Observer (2006) ‘The “hammer” from Goldman’s’, Edward Helmore, 13 August 2006, Business and Media section p 7.

    Brewer, L. (2004) Confessions of an Enron executive: a whistleblower’s story, Authorhouse, Bloomington Indiana.

    Ernst and Young (2006) ‘Corporate Governance’,www.ey.com/global/content.nsf/UK/Corporate_Governance, accessed August 2006.
top

CASE STUDY 6.2: A CONTROVERSIAL NEW EUROPEAN DIRECTIVE

  • On behalf of the Commissioner for the Internal Market suggest arguments in support of the Bolkestein Directive. Which parts of your case would be most important?

    The European Commission and the Internal Market Commissioner could argue, with a considerable force of logic, that freedom of movement for services, as well as people and goods, is a fundamental part of the original Treaty of Rome, 1957. Thus this sort of enabling legislation, to allow for the free movement of services is simply long overdue. If the Lisbon Agenda (see chapter 10) is to come to fruition, with the European Union becoming the most competitive economic area in the world by 2010, then competition in services must be increased and improved. Far too many barriers to competition in services exist in the EU today. For example : in some countries the distance between opticians has to be fixed at 350 metres, or there can be no more than one driving school per every 1,500 people, in Greece they require that all diving instructors must speak Greek whether their clients (typically from UK,USA or Australia) do so or not etc. However many silly instances could be cited the key point is the imperative desire to increase competition and thus standards and choice for consumers. Furthermore 600,000 jobs could be created and economic growth could be stimulated say Bolkestein supporters. (BBC 2006).
  • Prepare an argument, to be put to the European Commission, that the Bolkestein Directive should be scrapped. Amongst your points should be the subsidiarity principle, and the general need for more, not less, regulation of MNCs. Outline your argument carefully, and indicate what you think the most important points to be.

    The strongest arguments against the directive have focussed on the country of origin principle. According to this concept a company offering its services would be governed by the rules and regulations applicable in its home or base market. The subsidiary principle, entrenched in the EU`s ways of thinking and spelled out in the Maastricht Treaty, says that decisions should be made as locally as possible, unless there is an overriding EU wide issue at stake. So, Bolkestein advocates argue, let the governance and regulation of service companies be done where they are based and thus keep things simple. Others would argue the exact opposite. Subsidiarity should give decision making power to the most local authority, not some regulatory body which could be hundreds or thousands of miles literally and culturally from the market in which the services are being provided. How on earth can a regulatory authority in one country try to maintain inspection standards and other controls on service provision in 10 or 20 other countries each with their own culture, language and tradition? It could not be done. Therefore individual member states should, or must be allowed to monitor and regulate affairs within their borders. Monitoring of service standards is totally different from monitoring production quality of manufactured goods.
  • The MAI (Multinational Agreement on Investment) was put on hold, at least, by the power of publicly state opposition. Considering all the pros and cons, as in Questions 1 and 2, do you think the Bolkestein directive should also be put on hold?

    The arguments against the directive seem, now, to have prevailed. In the spring of 2006 the European Parliament voted a significant number of changes to the directive as originally suggested. Many industries will be covered by the directive, but many are now to be exempt from it. Those exempted include broadcasting, postal services, audiovisual services, temporary employment agencies, legal services, social services, public transport, public health services 9but not private health care services0 and gambling. Industries which will be covered include hotel and catering, car hire, construction, advertising agencies, estate agents and architects. The directive, as now amended, is not expected to become operative before 2009 at the earliest. (BBC 2006). Thus the directive is noiw very much changed in form and -almost- ’on hold’.

    BBC News (2006) Questions and Answers on the services directive, 29 May 2006, news vote.bbc.co.uk/mpapps/page tools/print/news.bbc.co.uk/1/hi/world/Europe/…, accessed August 2006.
top

CASE STUDY 8.1: CROSS-BORDER BANKING BIDS IN ITALY

  • Why do you think that Antonio Fazio wanted to see Italian banking consolidate before allowing foreign takeovers to take place?

    Italian banks represented a major business opportunity at this point with indications of strong market growth in the future coupled with current poor returns meaning low share prices and potential vulnerability to takeover. Fazio’s motivation was largely nationalistic – he wanted to ensure a strong Italian banking system, both for the sake of the financial sector in Italy and also to guarantee continuing close links with the non-financial sector. Consolidation was seen as a way of making foreign takeovers more difficult, both by raising the size of potential targets and by giving the banks more time to raise their return on equity.
  • Do you think that the European Commission was right to criticise the Italian central bank for its attitude towards such takeovers?

    There is no definite right or wrong answer to this question. Most economists would argue that they were right because the benefits of a competitive market in banking services to Italian consumers and to corporate customers of Italian banks would outweigh the losses to the owners of those banks and some of their existing customers. Theoretically, if some people lose out as a result of the freeing up of the market they could be compensated out of the gains made by others. However, there are two potential counter-arguments to this view. Firstly, the takeovers might adversely affect certain groups, especially small and medium sized companies, who would not have any effective safeguards in a newly competitive market. Secondly, there is some controversy amongst economists about whether takeovers actually do ensure economic efficiency. It might be that allowing foreign competition to enter the Italian market and compete against domestic banks would give all the benefits available to consumers and there would be no need to go further and allow international transfers of ownership.
  • What advice would you have given Mr Fazio in April 2005 about whether to allow the bids to take place or not?

    Again there is no right or wrong answer to this question. Fazio’s obstruction of the takeovers eventually led to his resignation. In the light of this probably the best approach might have been to allow the bids to proceed but also to have energetically encouraged restructuring in the banking sector in order to ensure that future takeover targets would be valued at a reasonable price.
top

CASE STUDY 8.2: THE FUTURE OF THE LONDON STOCK EXCHANGE (LSE)

  • Do you think the shareholders in Deutsche Börse were sensible in forcing the exchange to abandon its bid for the LSE in favour of higher dividend payments?

    There is no definite right or wrong answer to this question. The key question is whether the LSE was over-valued or not. If so, then it would have been better for the shareholders to receive a dividend which they could have invested elsewhere. If not, then they may have been overly short-termist in demanding a dividend. The correct approach would have been to work out the expected future dividends from the LSE and then discount them at an appropriate discount rate, which reflected the risk involved in this kind of business. A major difficulty in valuing this kind of business is the role of the competition policy authorities. One reason for buying the LSE might be to use it as a springboard for future consolidation in the market, but the opportunities available for this would depend heavily on the stance taken by these authorities. The risk involved in this might be difficult for shareholders to assess properly. Another reason why the shareholders might have been wary of the takeover bid was that it did not really involve an explicit strategy for developing the LSEs derivatives business.
  • What attitude do you think the European Commission should take in the event of a US exchange launching a bid for one of the major European exchanges?

    In terms of the short-term impact of such a takeover there is no real reason for the European Commission to worry about whether ownership of exchanges lies in Europe or elsewhere – shares can be traded as before. Also the merger would not lessen the degree of competition between exchanges within Europe (and might well involve less of a threat of monopoly power in the European market than a takeover of the LSE by either of the European bidders mentioned). However, if the European Commission were to believe that the long-term future of European stock exchanges lies in their coming together as a single exchange (in the way that within individual countries national exchanges replaced regional exchanges in the nineteenth century) then a takeover from the USA would cause a problem. It is basically a question of whether the Commission sees itself simply as maintaining a competitive marketplace for the benefit of consumers of financial services or whether it is trying strategically to develop European finance to compete globally.
  • What advice would you have given the Competition Commission in April 2005 with regard to the proposed merger between the LSE and Euronext?

    The key worry here is the growth of monopoly power which seems potentially a real problem given the size and market share of the two merged exchanges. Regulating prices would be difficult given the general trend in recent years towards financial deregulation. However, one possible approach might be to approve the merger subject to the new merged exchange divesting some of its business – for example bonds or derivatives. The difficulty here is that the packaging of different kinds of financial instrument together appears to be one of the main things motivating the bid here in the first place. So attempts to split products in order to ensure competitive diversity might well make the bid unattractive to pursue. In fact in November 2005 the Competition Commission approved bids from Euronext and Deutsche Bőrse, subject to structural and behavioural conditions. However, neither takeover actually took place for other reasons and Euronext entered into merger discussions with the New York Stock Exchange (NYSE) while the rival American exchange NASDAQ took a substantial shareholding in the LSE largely in order to stop any rival bids, especially from the NYSE.
top

CASE STUDY 9.1: BACK TO BREAD AND BUTTER FOR EUROPE

  • Why is the European Union worried about its employment growth?

    The US is seen by a number of EU countries as one of the world's most dynamic economies where participation rates of both men and women are much higher than in the EU and where economic growth and productivity outperform that which exists in the EU. Greater participation by workers in the EU would aid equality and improve the overall growth performance of the EU and help it catch up the US. Employment growth in Europe would improve social inclusion and greater social cohesion. For some of the new member countries unemployment is much greater than that which exists in the EU15 and employment growth would help to embed these countries more into the EU. Higher levels of unemployment can also lead to bigger labour migratory flows and this can prove problematic both for recipient countries and for those countries who are losing labour. In addition higher levels of unemployment can be seen as a waste of valuable labour resources and an increased cost on individual state's social security systems.
  • Is making EU labour markets more flexible the way to improve employment growth prospects?

    There is no clear answer to this question. There are a group of countries within the EU (led by the UK and Spain) who would like to see increased labour market flexibility. These countries consider that there are too many constraints on EU labour markets that result in higher costs of labour and that levels of red tape need to be reduced. These countries often consider that trade unions are too powerful and this restricts the natural flow of the labour market. They might also point to a variety of supply-side constraints that have impacted on labour markets such as high income tax, high non-wage costs of labour, poor levels of training, poor levels of labour market flexibility etc. The need for training, the giving of incentives to get people off the unemployment register and improvements in education would also be seen as ways of increasing labour market flexibility. However, there are countries such as France and Germany along with a number of continental trade unions who consider that labour market flexibility is very one-sided placing most of the flexibility on labour and not on employers. In this respect the balance of power is shifted from employees to employers and there is the fear of social dumping. In these countries' view a better solution would be for the state to work with employers and for there to be no erosion of the social packages that have been agreed with the labour force.

    Finally improving labour force productivity is only one of many factors that can be used to improve the EU's growth prospects. Other factors include, improving education and training, improving R&D, increasing the level of business investment, and the opening up world markets to more trade in both manufacturing goods and services.
top

CASE STUDY 9.2: PRODUCTIVITY IN EUROPEAN AND INTERNATIONAL LABOUR MARKETS

  • What explanations have been put forward to explain the European Union's poor productivity performance?

    The answer to this question should initially consider what is meant by productivity in terms of the debate between output per employee and output per hour worked and the difficulty in measuring productivity in the manufacturing and service sectors. The case study suggests that lack of ICT investment and its "subdued" impact in Europe can be put forward as explanations, as can the inability of some of the EU's labour markets to adapt to rapid change in the way things are done. Other factors include:

    - Selective skills shortages;
    - IT consumption
    - Particular sectoral imbalances with the US
  • What policies can be used to improve the European Union's level of productivity?

    There have been many suggestions as to the ways in which EU productivity can be imrpoved;

    - Increased labour market flexibility;
    - Improved level of state and company investment;
    - Improved introduction of ICT into EU organisations;
    - Increased levels of R&D;
    - Lower tax rates on individuals and organisations;
    - Increased use of enterprise and competition policy within the EU;
    - Reduced levels of state aid;
    - Opening up markets to competition, and;
    - Improved level of education and training.
top

CASE STUDY 11.1: POORER EU AREAS LOSE FUNDING

  • What reasons are given for the decline in UK regional funding from the European Union?

    One of the main reasons for the decline in UK regional funding is the issue of EU enlargement. Some of the more recent countries to enter the EU are relatively poor compared with the EU15. Given the tight budgetary constraints faced by the EU almost the same amount of regional funding for the EU15 is now available for the EU25 and therefore some poor regions in the EU15 now have been classified as relatively well off compared with the regions in the new EU states. For those regions in the EU15 that will lose their regional funding status there will be transition arrangements but in the long term their regional funding will cease. An alternative approach would have been to increase the regional funding budget but this could have only been undertaken by either reducing other areas of budgetary support e.g. agriculture or by increasing the amount of revenue all of the EU25 paid to the EU. Both of these possibilities are unlikely to happen.
  • What might be the implications of this reduced funding for the United Kingdom?

    Not only will the UK see its regional funding reduced as its regions are reclassified but Regional Selective Assistance (RSA) that could be used in those regions designated for regional support will now not be available. The case study suggests that this is in the order of £300-£500m per annum. The government has argued that this type of funding was particularly important in attracting Nissan to the North West of England and that without this type of funding some of the UK’s regions will not be able to attract high quality foreign direct investment (FDI). Nonetheless, critics argue that RSA has been made available to some firms such as LG from South Korea, but this was not sufficient to stop them going elsewhere. In other words RSA is of only marginal importance to FDI. Furthermore how many organisations who have now operated in the UK for many years might have come to the UK without RSA ? We don’t know. However, the case study also raises a further interesting fact; in many prosperous regions there may be pockets of lower income areas which may now find it difficult to access regional funding from the UK government. Finally if the UK government cannot spend their matched part of regional funding maybe this can be put to other forms of productive use?
top

CASE STUDY 11.2: A DIVERSE APPROACH TO CURBING GREENHOUSE GASES

  • Will business change its view about pollution without the Kyoto Agreement?

    The case study notes that even before the Kyoto Agreement was in place businesses began to adapt to a post Kyoto world. Often companies that are located in countries that have signed up to the Kyoto Agreement, will wish to deal with other “green” businesses. Even if this is not their own strategic view their shareholders may demand it of them. Moreover, knowing that some form of environmental agreement is likely to be in place in the future requires a longer term strategy to prepare companies for that date. They are unlikely to wait until an agreement is in place before addressing their green image.

    As the case study notes getting ready to do something because of environmental legislation is different from actually doing something. However, it is institutional investors and shareholders that may force companies to behave ethically even before environmental agreements come into operation.
  • Why might businesses in countries that have signed up to the Kyoto Agreement consider that they are at a competitive disadvantage?

    Changing production processes because of environmental legislation can be costly and this can put those organisations that trade within a country that has signed up to the Kyoto Agreement at a competitive disadvantage. The case study notes that Japan considers it will face considerably more abatement costs than its US and European counterparts, and this will be much higher than other countries who may do very little in terms of environmental control. However, this might be a short-sighted view in that companies who do change their environmental production processes earlier can sell their expertise to other companies. Furthermore EU companies know that many countries with which they trade have signed up to the Kyoto Agreement and they have built their operating strategies around this. US companies on the other hand do not know when, or if, the US will sign up to the Kyoto Agreement and this means that may be at a disadvantage strategically.
top

CASE STUDY 12.1: EUROPEAN AND US ENTREPRENEURSHIP ACTIVITY

  • Why is the level of entrepreneurship greater in the United States?

    There are many factors that can be included here. The extent of state or government involvement in the EU may stifle the level of entrepreneurship (though the case study would have us believe the opposite). The fear of failure may be lower in the US as might be the stigma associated with bankruptcy. Entrepreneurship may be taught at an earlier age in the US as might the ideas of individual self-sufficiency. In Many EU countries the state is so big that many jobs opportunities are to be found there, therefore there is less need to set-up as a sole trader. The level of taxation and red tape may also be less in the US and the funding system for start-up and existing small firms may be better developed.
  • What policies have been put forward to stimulate the level of entrepreneurship in the European Union?

    One set of policies that might be advocated would be to examine the policies in the US and consider whether these can be used in the EU. Reducing the level of red-tape and the level of interest rates faced by EU SMEs might help encourage entrepreneurial activity within the EU, as would an increase in the available of finance for SMEs at all stages of their business. Providing information and making sure that SMEs know that it exists and use it would also be beneficial to EU SMEs. Reducing the level of the state in the economy and promote entrepreneurship within schools may also be important. As the case study suggest the EU has sought to look at the ways the state can aid entrepreneurship rather than the approach of reducing the level of state involvement in the economy as generally pursued by the US. A range of the policy measures is shown on pages 362-365 of the text.
top

CASE STUDY 12.2: EU ENLARGEMENT AND THE SME SECTOR

  • Why do some SMEs not share the government’s enthusiasm for enlargement?

    The expansion of the EU in 2004 to include a number of Central and Eastern European countries into the EU offers a number of opportunities and threats to the EU15’s SMEs. The removal of trade barriers to the new EU10 members is compensated for by the removal of barriers within the EU15 for the SMEs in the new EU10 countries. The newly enlarged market might provide new trading opportunities and access to labour but SMEs in the EU15 fear the increased level of competition in their own domestic markets from the EU10 SMEs through their use of lower cost labour. UK SMEs may also see export markets within the EU15 lost to SMEs from the new EU10 (the same process would apply to other EU15 countries' SMEs). The case study also reveals that many SMEs see more threats than opportunities from the enlargement process in particular pointing to the issue of increased taxes and red tape. Part of their negative feelings about enlargement comes from their lack of preparation for enlargement. The answer to this question might also consider which sector(s) might be the major beneficiaries or losers of the enlargement process
  • What opportunities does an enlarged European Union offer for the SME sector?

    Enlarging the EU provides new markets for SMEs and access to skilled labour, an area of great concern for EU15 SMEs. The extent of the opportunities depends upon the sector in which the organisation exists and the size of the SME. It is likely that medium sized firms will benefit more than small firms, which themselves may benefit more than micro firms. The SMEs that are likely to benefit the most will be those that operate in the more liberated trade sectors. The threat of increased competition in the EU15's domestic market following enlargement can also be seen as an opportunity for SMEs to improve their products/services, productivity and management. Pages 365 and 367 of the text indicate the SME sectors that are likely to benefit more from enlargement.
top

  Buy this book



Session 2 — The Basic Economic Challenge

©2000, JELD-WEN, inc. Thinking Economics is a trademark of JELD-WEN, inc. Klamath Falls, OR


Case Study:

CS Question #1: What are the most important factors you consider when making a purchasing decision?

 

How much money do you have in your purse or wallet? How much money is available to you in credit cards, in your bank account or from your parents? Your response to these questions tells you about the scarcity of your financial resources. The amount of resources that you have is limited. Your financial resources change from time to time, and therefore your ability to purchase products or services also changes. In the next paragraph, you will be presented with a situation regarding scarcity. As you review the situation and answer the questions, think about what caused you to make certain decisions.

CS Question #2: Can you think of a resource that is not scarce? What resource can you identify that is extremely scarce?

 

You have just arrived at college and received your college loan money. With the money, you need to buy books, buy school supplies, buy a computer, pay your bills for the semester and save some money for entertainment. You have $3,000. The following is a list of the projected cost of each item:

  • books: $300
  • school supplies: $50
  • computer: $1200 - $2000
  • bills: $200
  • entertainment: $50 - $1000.

CS Question #3: Which of the items do you consider important to achieve success in college? How would you spend your $3000?

 

The process of deciding how you will spend your money is often referred to as budgeting. Any resource that you have can be budgeted. The resources most often budgeted are money and time. Scarcity is an issue that you will constantly face. You must make choices that affect your happiness and satisfaction now and in the long run. In the above situation, you must decide what you are willing to sacrifice for what you can gain. Is it more important to have a great computer or money for entertainment? You might decide that the computer could be your entertainment. Today, you have an infinite amount of choices. A smart purchasing decision considers both your available resources and your values.

CS Question #4: How can you solve the problem of scarce resources when you want to purchase something but you don't have enough money?

 

Further Thought:

  1. When you make a choice to purchase a product or service, what are you losing, besides the money required to purchase the item?
  2. How do you think scarcity influences the amount of money a person is paid for a job?
  3. How do you think scarcity affects your household's budget?

©2000, JELD-WEN, inc. Thinking Economics is a trademark of JELD-WEN, inc. Klamath Falls, OR

0 Replies to “Economics Case Study Questions And Answers”

Lascia un Commento

L'indirizzo email non verrĂ  pubblicato. I campi obbligatori sono contrassegnati *