EPQ Preview

Hello,

As aforementioned a couple of posts ago, I've been very busy writing my EPQ, a 5000 word essay / dissertation on Corporate Tax Avoidance. The EPQ is supposed to take 80 hours, and as such I've been doing a great deal of research on international Corporate Tax issues.

One of the things which I was surprised and interested to learn and find out about was Transfer Pricing /Mispricing and the damage it causes to developing countries.

Transfer pricing occurs when two related companies, or companies owned by the same entity, trade with each other. This transaction occurs at an artificial price, that is to say one which is not determined by the supply/ demand equilibrium for the good/ service, and hence is designed to siphon profits made by the corporation into a lower-tax jurisdiction.This causes an estimated $150 billion a year to be channeled out of Africa per annum, and is one of the leading issues regarding to international tax laws.

I have written around 2500 words thus far, and completed the pertinent research for my EPQ Project. Hopefully you'll enjoy reading it once finished !

Jack.

EPQ Piece on Tax Evasion

Hello all !,

Apologies for the lack of posts recently. I have been busy writing an EPQ ( Extended Project Qualification, essentially a 5,000 word essay  ) on Corporate Tax, entitled " The Methods, Morality and Effects of Corporate Tax Avoidance " . I'm enjoying the project thus far, and it's proving to be a fascinating insight into corporations and an excellent preparation for University. I will be sure to post the completed EPQ soon !

Upcoming Spread Betting piece

Hi all,

Over the last couple of months a friend and I have been using quantitative methods to experiment with spread-betting on the NYSE and FTSE stock indices. Thus far, the results have been overwhelmingly successful ( Of course, other than when Bernarke calls another meeting and the NYSE again plunges ! ). Based on a £1000 investment, we have achieved a 200 % return in three months. We are currently writing a long article based on the methods we use to analyse trading patterns, and as of now, we have completed an intro, shown below !

Spread-betting and Day-Trading 

Short term spread betting is one of the most dramatic and fast-paced subsets of trading, with many people considering it to be one of the most dangerous due to its high levels of volatility. However, hidden amongst its dangers, there exists a wealth of opportunities to be seized in the short term fluctuations of major indices, which if capitalized upon will generate arguably the highest return per unit time in the current economic climate.

Watch this space !

Gordon Brown's Gold

After a five day hiatus enforced by work, I am back, to discuss one of the most well-known and contentious economic decisions in memory, namely Gordon Brown's short-sighted and ill-thought out decision ( in my opinion ) to sell 395 tonnes of the country's reserve of 715 tonnes of gold bars between 1990-2002.

The reason that this decision is so short-sighted and costly for the Treasury, and by extension the , is that the price of Gold rose exponentially in the years following, reaching a peak of $1900 per ounce in August 2011. In stark contrast, Brown sold the Gold for between $256-296 per ounce, which even accounting for inflation, is a discrepancy of enormous proportions. Current estimates chart the cost to the taxpayer as being £9 Billion , a figure which, whilst small in relation to Britain's £1500 billion Gross Domestic Product, makes the cost to the taxpayer from Organised Crime, for example, pale in comparison.

One can of course argue that Brown was not palpable to anticipate the rampant increase in price of gold, as he, like most others, could not anticipate or predict the financial crisis of 2007 onwards. The financial crisis was instrumental in raising the price of gold, as financial institutions, governments, and private individuals alike switched to gold-heavy asset portfolios as confidence faltered in alternative financial products such as derivatives. Simple supply and demand theory hence dictates that the price of gold rose accordingly.

However, Gordon Brown broke with accepted convention within the global gold market by announcing the sale of the gold well in advance. As a result, the supply of gold rose , and by extension the price fell. Not only this, but the gold was sold via auction, again reducing the price.

To any sane observer without a detailed knowledge of inter-bank gold trading, Brown's decision sell the gold at the lowest price of the last 20 years would have seen nonsensical . In many respects it was, but in all actuality the depletion of Britain's gold reserves was merely a rudimentary version of the state bailouts that were not only televised with the hundreds of savers queuing outside Northern Rock, but were also symbolic of a system that was beyond control and reproach, a system in which financial firms were given free-reign to act recklessly and gamble with the livelihoods, and indeed lives ( suicides in Greece have risen 40 % since the beginning of the financial crisis, which, whilst not being the greatest of Greece's economic woes, certainly preceded them ) . The Gold Carry Trade needed a bailout in the form of the gold sell-offs, in the same way that reckless lending and mortgage-backed securities necessitated state intervention in 2007-8 onwards.

The truely tragic element in this tale of corporate irresponsibility is not that the taxpayer has been ripped off twice, but that the banks and other financial institutions did not learn from their mistakes earlier.

Aggregate Demand ( Simple Economics )

Hello all,

Part of the aim of my blog was to make Economics and Business accessible for anyone and everyone who doesn't have any experience or education in either field. As such, I will be posting a couple of my early AS Economics essays. Enjoy : )

N.B - Graphs cannot be displayed- Please Google AS/AD Graphs for examples.

Discuss the extent to which an increase in Aggregate Demand (AD) affects output, unemployment, and inflation (18)  

The equilibrium reached by aggregate supply (AS) and aggregate demand (AD) determines several characteristics of an economy, such as output, unemployment, and price  rises ( inflation). An increase in AD can have varying consequences on these, dependent on several factors such as potential increases in AS and the position upon the AS curve that the AD reaches equilibrium with.

At the elastic section of the AS curve, resources are abundant and prices for these resources are low, due to the abundance of supply resulting in a supply/demand disequilibrium. During the elastic part of the AS curve, output is low, due to the low amount of factors of production being utilised. As labour is one of these four factors of production (Land, Labour, Capital, Entrepreneurship), unemployment will be high, again due to the low output meaning less factors of production being utilised.

If AD were to rise during the elastic part of the AS curve, output would increase, as more factors of production would be employed to meet this demand, increasing the economy’s output and hence Gross Domestic Product (GDP). Unemployment would decrease disproportionately, as the cost for labour will be low, due to the supply/demand disequilibrium forcing wages, i.e the price for labour, to be low. Due to these low wages, more people can be employed for the equivalent price as if wages were higher and less people were employed. However, price will remain constant, due to the aforementioned abundance of factors of production meaning that overall cost of production remains low. This can be displayed on the following graph :

 Following the initial increase in AD, the multiplier effect will begin to take effect, due to the circular flow of income. As such, the initial increase in AD will multiply the long term effect on AD, assuming injections are greater than leakages. When injections = leakages, the multiplier effect will not take place, and AD will stop increasing due to the multiplier effect, although other externalities may cause further increases in aggregate demand. The multiplier effect exerted upon the initial increase in AD at the aforementioned elastic AS/AD equilibrium may push AD outwards to meet an equilibrium with the increasingly inelastic section of the AS curve, as demonstrated in the following graph :

 During the period of increased inelasticity, factors of production become more scarce and hence cost more due to the supply/ demand disequilibrium. The increased scarcity of factors of production also means that less efficient factors of production are employed due to the more efficient factors of production having already been allocated. As a result, the cost of production is increased due to the increased cost of factors of production and increasing inefficiency, and this increased cost of production is reflected in the increased price for goods and services. Unemployment decreases, although the aforementioned increase in the cost of labour means that less extra people can be employed relative to the aforementioned AD increase along the elastic part of the Aggregate Supply curve, as shown by the above graph.

If AD was to increase at this point but remain within the increasingly inelastic , and AS was to stay constant, unemployment would decrease as more factors of production would be required to meet this demand, and hence more people would be employed. Price would also rise as there would be greater competition for these factors of production, which would also be more inefficient as the more efficient factors of production will already have been allocated, as aforementioned. Output would rise, due to the increased amount of goods and services sold within the economy and the greater capacity utilisation of the overall economy. This can be demonstrated within the following graph :

 However, if firms believe that the rise in AD will be permanent, they will invest in capital goods, one of the four factors of production, in order to expand their Production Possibility Frontiers (PPFs), hence shifting AS outwards. If AD rises faster than AS, a situation called overheating will occur in the economy, i.e price rises, i.e inflation. Unemployment should decrease, due to the outward shift in aggregate supply, although much of this outward shift will be accounted for by the increased capital, hence unemployment may only decrease by a small amount. Output will also increase, again due to the increased factors of production and demand allowing more goods and services to be created and sold within the economy. This can be shown within the following graph :

 If AD increases as much as AS, price will remain constant due to the increased availability of factors of production meaning that they compete to offer lower prices, keeping cost of production and hence price low. Unemployment will decrease, due to the increased AS meaning improved quality and/or quantity of factors of production, one of which is labour. Output will also rise, again due to the increased factors of production and demand allowing more goods and services to be created and sold within the economy, shown below :

 The final part of the AS curve is the perfectly inelastic section. If AD meets an equilibrium with the AS curve here, output is at it’s maximum amount with the supplied factors of production. As such, unemployment is also at it’s minimum, that is, full employment, which, under the Keynesian school of thought, 3% unemployment. Therefore, at the perfectly inelastic section of the AS curve, an increase in AD will only bring about an increase in price- Output and Unemployment cannot change with the given factors of production, as the economy is already at it’s full output given the factors of production supplied. This can be shown as follows :

To conclude, an increase in AD can alter output, unemployment and price, dependent on the position and potential shift or movement along AS. An increase in AD, can to the fullest extent  influence all three of these indicators, through supply/demand disequilibriums  and the multiplier effect, although the power of the increase in AD is dependent largely on the position and equilibrium met with the AS curve.

Is the Eurozone crisis showing genuine signs of abatement ?

Thoise taken to following developments in the European economy may well have noted several encouraging signs with regards to recovery.Equity markets have risen, the Euro has strengthened, and there has been a renewed air of stability in response to not only an increase in European manufacturing, crucially passing the benchmark deemed necessary for growth, but positive comments from senior European officials, such as the European Council President, Herman Van Rompuy.

As such, the European economy is ostensibly improving on a macro-economic basis, with the pertinent improvement in manufacturing output not only providing a solid base for growth, but underpinning a much-needed sense of stability.

However, one must not be fooled into thinking that these facts alone constitute any mitigation in the endemic recession that has swept across Europe in the midst of the financial crisis. The first, and perhaps most important indicator of the lack of abatement is the continued high unemployment. Unemployment across the Eurozone as a whole has yet to peak, yet stays at 12 %. In comparison, unemployment rates between 1930-38, in the fallout of "The Great Depression " were 8.8 % in Germany, and 9.8 % in the UK, for example. Furthermore, youth unemployment is incredibly high at 24 %, with highs of near 60 % in Greece and Spain. With an aging population, one must question whether young people, the future drivers of the economy, will have the skills and experience to drive economic growth in the long-term.

In the short-term, these very same people will struggle with regards to entrepreneurship, one of the four factors of production ( Land, Labour, Capital, Entrepreneurship), as credit for small and medium businesses, the life-blood of most economies, remains at best difficult to procure, a problem exaserbated as banks aim to raise capital reserves to safer levels following the crash of 2007-8. As a result, societies will continue to lack jobs, and investment will be slow to recover as both  individuals and corporations remain wary to back the investment that is crucial for long-term, sustainable growth and prosperity.

Even without mentioning the fragile governments of Greece, Italy, Portugal and Spain which continue to threaten the current tranquility, we can see that despite some stabilisation and encouraging blips, the Eurozone economy is not demonstrating any abatement ; Rather, we remain in the midst of the Second Great Depression.

Welcome !

Hello all,

Welcome to my blog. I'm a 17 year old student from Bristol, in the South West of England, who is looking to study Accounting and Finance at University. I have just finished Year 12, in which I studied Mathematics, Economics, Physics and History. In year 11 I studied ICT AS Level concurrently with my GCSEs , achieving a Grade A, and 7A*s, 2As at GCSE.

The blog is mainly to serve as preparation for my intention to study Accounting and Finance at University. I'll be writing about my thoughts and opinions on topics pertaining to Accounting, Finance, and Economics, as the title suggests :)

Thanks,
Jack.