What Happened To Freddos Being 10p? Deflation; Part Two

So, in the previous article we looked through the negative effects of inflation- how it can spiral, leave people impoverished, and so on- and we also looked at a positive if you like borrowing.
However, let's talk deflation- the reduction of general prices in the economy.

What causes deflation? It's exactly the opposite of inflation. Inflation is caused by an oversupply of money in the economy- deflation is caused by an undersupply of money. Whereas inflation decreases the value of money, deflation increases it, causing things to become cheaper. Sounds good, right?

There are many consequences of deflation however that can be damaging- profit loss for businesses being the root of the major ones. Dropping prices to an extent are beneficial- it can grant more people access to essentials such as heating, which, as discussed in the previous article, can save lives.

However if deflation gets out of control, falling prices will mean profits of businesses will fall- and thus most businesses will cut down on costs, leading to people being made redundant, factories and offices shutting down, work being outsourced, and so on.
Unemployment would increase, and even those fortunate enough to keep their jobs would see their pay decrease.
Unemployment can be devastating- it would lead many to default on any loans or mortgages taken out, it can cause people to lose their homes (though this is more likely in the USA than the UK).

You may be thinking, why have we heard so much more about inflation in the news than deflation? Well deflation can often be more easily controlled by governing authorities. In the USA, the Fed (the central bank) prevents deflation by flooding the market with money, thus increasing prices. The UK follows a similar protocol- we mentioned previously the idea of Quantitative Easing.

So should we be happy that the price of a Freddo has increased over the past two decades? Not really- but perhaps the fact that it didn't drastically fall in price is something we should also be well aware of.

What Happened To Freddos Being 10p? (Part One).

The humble Freddo. Once the posterchild of the consumer chocolate boom, the first word in affordable sugary snacks, one of the only things you could actually buy with a 10p coin. Almost every British child has fond memories of the little sugary frog-shaped friend.
But fewer such memories are being gifted to the youth of today. No, the Freddo has been attacked viciously in recent years.

Since the introduction of the Freddo as we know it in 1994, the price has risen from a humble 10p to a more maverick 15p, to a dangerously inconvenient 17p (who carries around exactly 17p change) to its frankly outrageous current retail price of 20p. That's a 100% increase- a double in price!
There's been an outrage over this price change- a quick glance at the numerous facebook pages on the subject would confirm this.

But why has the price increased? One might say the greed of Cadbury itself- perhaps rightly so, however considering the presumably low profit margins on such a low-priced chocolate, it would be a questionable business decision to increase the price for no reason other than hope for more profits.

The answer in fact is one that you will have heard of- it affects all of us, and not just products like the Freddo- INFLATION.

Charting the scandalous Fredd-flation.

Inflation, simply put, is the increase in price of products or services.
A decade ago, 10p in your pocket could buy you a tasty little Freddo- but today, 10p cannot buy you the Freddo. So, because of inflation, your purchasing power, the possibilities of what your money can do, has decreased. You're worse off- you have to pay more than you did before, but you're not getting a larger, tastier Freddo; it's the same thing.

But inflation is not all that bad, especially if you're of the borrowing type. Let's have a theoretical (simplified) example. Say you buy a house in a period of low inflation. You pay with a fixed interest rate mortgage you've taken out from the bank. If a period of high inflation follows, your house price will rise (theoretically, as inflation=higher money supply=more money to spend, HOWEVER often other minor factors affect house price), and while you have the option available to profit from this increase (you can sell your house and make a profit), the total amount you have to pay the bank is still the pre-inflation price.
So, by the end of the mortgage payments, if inflation is still up, you've paid less than the market value of your home. So inflation has helped you!

But of course, inflation can lead to terrible consequences. Inflation is gas and energy prices has been reported to have fatal consequences on the poorer members of society (according to the Office for National Statistics, unaffordable energy bills contributed to 24,000 deaths in the UK in the winter of 2011), and that an inflationary spiral can occur- due to higher prices in the market, usually profits of companies will increase- meaning they can hire more staff- meaning more people will have income to buy products/services- meaning prices will continue to inflate as demand rises.

Inflation can also be caused by the government. You may have heard of the programme of quantitative easing- essentially money is pumped artificially into the economy to try to stimulate spending. One of the strong arguments against QE is that pumping more money into the economy causes inflation.
To understand this, think of money as a commodity- think gold. The more abundant gold there is, the less its value- and the less abundant it is, the more the value.

Money was easy to come by in Weimar Germany.
Too easy.

Of course a balance must be struck- but QE decreases the value of money, and historically some extreme QE-style programs have led to hyperinflation (think wheelbarrows of money in 1920s Germany), where money became so abundant due to printing of cash that it became worth more in paper than actual purchasing power.

So excess inflation does not sound too appetising- but neither does its opposite, deflation.
But take a nice rest. Have a nap, a little reflection and come back on Tuesday for part two, where we'll expand on deflation and more good stuff. 

SOURCES
24,000 'died because of cold homes' last winter http://www.dailymail.co.uk/news/article-2240716/24-000-died-cold-homes-winter-Fears-grow-figure-higher-year-spiralling-bills.html

investopedia.com

On digital piracy. (Part Two)

VIDEO: https://www.youtube.com/watch?v=vjm6Hv4JBYw&feature=youtu.be

In our previous article we discussed the attractive nature of digital piracy, especially with consideration to the difference in our attitude between outright shoplifting and online illegal downloads.

Now to answer the question- does digital piracy really matter?

Glancing at some of the statistics, the effects do certainly seem alarming.  We mentioned them in the previous article- how in 2011 the International Federation of the Phonographic Industry claimed 95% of the music in the world was illegally downloaded, and how 42% of software running in the world was illegal. With digital piracy continuing to spread and diversify, these statistics are likely to be even higher right now.

But let's put the statistics aside for a while, and get a real life case study of digital piracy and its effect on content producers. Who better to choose than creator of the UK's most pirated music album of 2012, Ed Sheeran. In 2012, in the UK his debut album + had sold 1.2 million copies- while there were reportedly 8 million illegal downloads of the same album. This sounds a horrific imbalance, but Sheeran himself has shrug (honestly or not, only he knows) the statistic off- he instead lauds the fact that over 9 million have his music, but more importantly he claims that it does not have too much of a negative impact on the economic aspect of his career- he cites increasing ticket sales as something to balance the money 'lost' to piracy.

And there is valid reason to this- digital piracy is very effective in spreading the talent of new artists to the music scene. Clearly, many people were not prepared to pay full price for Ed Sheeran's debut album, and perhaps rightly so (not many people knew of him at the time)- but the spreading of his album via digital piracy opened it to a huge audience. Once people heard his full songs, those who liked them would then be more willing to pay the price of a concert ticket, or buy future songs (of course, the latter would not be reflective of all fans).

This opinion is part of a view that the music industry is changing- that the function of the music album is changing from an ends itself to more of a means- a means to attract people to pay for concert tickets, to buy merchandise, etc.

One could say that Ed Sheeran is not representative of the music industry as a whole- he is indeed one of the most popular and thus wealthiest artists in the world. Digital piracy may not damage him too badly, but what about the smaller artists trying to make their big break? Won't illegal downloads damage them and make their desire to make music financially unsustainable?

Well, no doubt this has happened to artists- however a simple response to this (as well as the aforementioned potential benefits of piracy) is that few small artists have their content available online to illegally download in the first place. Whereas you can easily find an illegal download of Ed Sheeran's latest album, finding one of a new, independent artist is definitely more of a task.

You wouldn't want to cross the Expendables cast by
illegally downloading their films....

It is possible to say that digital piracy has a positive, promotional effect on the movie or games industry too. Illegal viewings of 'The Expendables 2' may have encouraged many people to shell out for a cinema ticket to watch 'The Expendables 3' if they liked it. However in most cases where there is only mild interest in a film or a game, perhaps an illegal viewing may encourage someone to wait until they can illegally download the sequel.

However the effect of digital piracy on movie industry revenues has been almost invisible. A famous study by the London School of Economics stated “Despite the Motion Picture Association of America’s (MPAA) claim that online piracy is devastating the movie industry, Hollywood achieved record-breaking global box office revenues of $35 billion in 2012, a 6% increase over 2011,”. 

This growth in the face of rising internet piracy can be attributed to numerous reasons- perhaps better (and/or more) films, people recovering economically and spending more on entertainment, growth in more expensively-ticketed 3D films. It also suggests that piracy does not have a profound effect on the industry- not as many sales are 'lost' as believed.

I put 'lost' in quotation marks because it is another question we must consider- is a sale really 'lost' every single time an illegal download occurs? Globally speaking, the answer is no in many cases. A 16 year old boy illegally streaming the latest Fast and Furious film in an internet cafe in Botswana is not a 'lost' sale- it is likely that the film would not be showing in his locale anyway, or he would have more urgent things to spend money on than a ticket even if there was a showing. 

A Chinese university student illegally downloading Command and Conquer Generals wouldn't count either- because even if he wanted to purchase it legally, the game is banned in his country. 

We must be wary that such instances are included in the global statistics that we hear- and the globalised, developing nature of the world means that countries such as China do account for a large amount of the digital piracy we hear about, and in many of these cases legal sales are not possible, and thus not 'lost'. 

So we must consider all sides and dimensions of this debate. Yes, income is sometimes damaged by digital piracy, but then again income can be boosted by the positive promotional effects of pirated content. Piracy makes media widely available to all, and can be a launching pad for a music artist to become the favourite of millions, whereas perhaps if piracy was unavailable they may not have received the widespread reach that gave them their big break. 

The effects on the movie and game industries are arguably similar but of less strength- though statistics often exaggerate the cost of 'lost' sales due to piracy, and these industries are in fact flourishing (due to various reasons).

So, that's an overview of the economic effects of digital piracy- it is a matter that is certainly not as clear as it first seems.

What do you think? Comment below with your opinions and thoughts! 

SOURCES (and recommended reads):
LSE Report http://www.scribd.com/doc/172985274/LSE-MPP-Policy-Brief-9-Copyright-and-Creation
http://www.cbc.ca/news/business/digital-piracy-not-harming-entertainment-industries-study-1.1894729
http://www.bbc.co.uk/news/technology-19599527

On digital piracy. (Part One)

(Photo credit to Schwadron)

In the past, pirates were known as the squashbuckling, one-legged, eyepatch-wearing Captain Jack Sparrow-type of sailors who would brave the seas in search of precious treasures (or 'booty', as it was known). They were the outlaws of the sea, the mavericks who were both celebrated and deplored by many in their time.

However now, the digital age has brought along its own (rather less exciting) type of 'pirate'.
The treasure for today's pirates is no longer a chest of fine precious jewels, but instead perhaps an entire series of 'Game of Thrones', Ed Sheeran's latest album or the Football Manager video game- all of which are accessible easily via 'torrents', files that direct your computer to download larger ones, be it an MP3 album, a film, or anything.

Whereas to purchase Football Manager 14 from a shop, I'd have to locate the item and travel to my nearest game stores (leaving the house, oh!) to lump out 35 of my pounds, via torrenting I can get this for free, completely. All without leaving my house, right on my computer, not a pound lost from my pocket.

That's largely where the appeal of digital piracy lies- you can get something of value that you desire for free. And in the day of almost all media (even books) now being on digital platforms, you can get quite a lot.

To many, this practice raises serious moral issues, and perhaps rightly so. Is there really a difference between torrenting Fast and Furious 6 and simply walking into my nearest HMV, grabbing a copy of it from the shelves and walking out without paying? On the surface, there is little difference- in both cases you have obtained something of value that was not given willingly to you for free by the creator(s).

However, many people fail to take into account such a link, the reason why digital piracy is far more widespread than shoplifting- and it's unsurprising why many of us do not see digital piracy, perhaps irrationally, as a direct equivalent to shop theft.

The internet has hugely affected our behaviour- most notably due to the fact that it provides a proxy between communicators, it provides an environment in which relationships are usually more detached, separated by a screen.
This separation is clear in how confidence is gained by many internet users who, in the real world, have very little- cyberbullies, 'trollsters' and whatnot are largely of this type.

The lack of interpersonal communication during the process of torrenting makes it a much more appealing prospect than outright shop theft; when on the internet alone, you feel there is no one watching you (something in fact untrue), so there's no one that provides a reaction to your torrenting, there's no one to catch or stop you. This is an environment that is far more conducive to theft.

This nature is shown in the statistics- as of 2011, 42% of software running in the world was pirated, 95% of music downloaded online was pirated, and two-thirds of all torrents were illegal. Three years on, illegal downloads have continued to grow in popularity. It's clear- the world is full of digital piracy.

At the end of the day, digital piracy is the same as theft from a store. We have all been guilty of it, but perhaps we need to change our attitudes towards it; we wouldn't steal directly from a shop, so why should we steal online?

But actually, on the other hand, does digital piracy actually matter? Does your downloading of a piece of media really have any negative impact on the multi-millionaire producers of the things we download?

We'll be exploring that in the next article. Stick around.


SOURCE(S):

Online Piracy in Numbers – Facts and Statistics [Infographic] www.go-gulf.com/blog/online-piracy/ (2011)

German Cars: What Makes Them Special?

If you were to ask someone on the street what car they would like to own, without doubt among the most popular brand selections would be BMW, Mercedes or Audi.

These three German manufacturers have taken the global car market by storm in recent decades, and are now the epitome of the well-built, high quality yet mass-marketable luxury car.

VIDEO: http://bit.ly/XHupq2

Of course all their cars are not necessarily of the best quality on the market- the likes of Aston Martin and Ferrari to name just two produce cars closest to perfection- however the crucial aspect to why BMW, Mercedes and Audi are more successful and relevant to this discussion is because they are open to the mass-market. The average middle-class family cannot afford a four-door £150,000 Aston Martin Rapide; though a £23,000 BMW 3-Series is within the reach of many, an achievement highlighted best by how it has consistently maintained a spot in the ten top-selling cars in Britain since 2004. 

The success of the German car industry can especially be noted when compared to that of Britain's. In 2011, Germany produced 5.9 million cars, the highest number in Europe- Britain a paltry 1.3 million- many of these not for British brands but for foreign ones such as Nissan and Honda. 
And the domination of the Germans extends much further- two typical 'British' car makers, Bentley and Mini, are in fact far from British; Bentley is owned by Volkswagen, Mini by BMW. 
There are in fact no longer ANY mass-market 'purely British' brands- Jaguar, Vauxhall, Land Rover, even Aston Martin, are all foreign-owned. 

Germany's success in the car industry must also be put into perspective- consider that less than a century ago the nation was facing huge economic turmoil, the sort that provides textbook examples of hyper-inflation: the wheelbarrows of cash, the 200 million mark loaves of bread, the extremely volatile prices, the lot. 
Post-war reparations had put Germany in a terrible state in the early 20th century- but looking at Germany now, with such economic might that makes it the most influential state in the EU, it is clear that the German system has produced fantastic results.

There are numerous reasons for the Germans' successful car market, but one key reason is the industrial mindset, the 'manufacturing culture' that is fostered by the Bavarians. 

Britain's manufacturing industry has had a rough last 30 years- in this period shrinking by two-thirds. Margaret Thatcher's time as PM during the 1980s to many killed the secondary industry in Britain. I'm sure you've seen the images of striking factory workers, unhappy at Thatcher's crushing of worker unions and the closures of numerous car factories throughout the nation. 

Meanwhile, Germany has only been growing since the Second World War- whereas British car factories became a battleground for a class war between management and labourers, German factories were tight-knit, harmonious and therefore far more efficient. 

The closer relationship between workers and management is part of Germany's attention to what is known as the 'social market economy'- a type of capitalism that does not co-ordinate market activity itself, but at the same time provides support for society- be it in the form of universal healthcare, unemployment insurance and, most relevant in this discussion, trade unions. German workers enjoy among the highest secondary sector wages in the world, and are provided good working conditions. In contrast to the system in the USA for example, where entry-level factory wages were halved from $28 to $14 an hour, the Germans' higher investment in the workers pays off, creating a more co-operative and committed environment, where workers develop loyalty to their company, an idea almost lost in the US labour economy. 
German workers are in fact the most loyal in Europe- the job market is far more stable, meaning companies can afford to invest more in long-term training, and crucially it means workers on the production line are experienced and efficient in their job.

Output is also helped by the power given to the workers on the German production line. Almost all German factories will have members of the regular workforce on the executive committee of the factory- as a result the workers are given a voice in the running of the factory, and have the power to suggest changes that may improve efficiency. 
To those who may believe this system can be abused to benefit the workers at the cost of the company, this is where the German system really makes a difference. Loyal German workers who are decently paid already are more likely to not abuse their power to push such agendas.
This system making workers a part of the running of their factories increases the workers' morale, making them feel more empowered as part of a democratic operation.

The education system is arguably the biggest factor in German industrial success. Whereas in Britain all youths are pushed through the same educational system until the age of 16, after which they are offered either further education or half-heartedly the option of vocational education- such as BTEC, or Apprenticeships.
These being relatively young programs, they are not well-established and are avoided by many students, partly as they are seen as for those intellectually inferior to the further educationers (certainly not always the case).

Meanwhile Germany offers more choice to specialise at an earlier point. After the age of 10 (or 12 in some areas) student can study at the Gymnasium to pursue higher education such as university, or can opt for the Realschule or Hauptschule, schools that will provide education in core subjects such as Maths but have a heavier focus on vocational education and practical work experience.

These extra years provides a head-start for German workers and has created skilled, respected workers, ready-made to enter the world of manufacturing at the age of 18. German factories have had no shortage of skilled workers- and as a result the production lines are efficient and smoother than most others in the world.

Germany have certainly set the benchmark for efficiency in the manufacturing industry. It must be noted that Japan are similarly capable in car production. 
Worker empowerment, the social market economy and an established, effective specialist education system have propelled Germany to the top of the global car industry- and while other countries may not be able to fully translate German practices into their own car industries, it is certain that they can learn lessons from it.

SOURCES (And recommended reads): 

How German cars beat British motors - and kept going bbc.co.uk/news/magazine-23406467 (BBC, 2013)

Mercedes Benz, BMW and Audi Seen as Top Three Car Manufacturers in Terms of Overall Brand Quality By Europeans, According to New Harris Interactive Survey prnewswire.co.uk/news-releases/mercedes-benz-bmw-and-audi-seen-as-top-three-car-manufacturers-in-terms-of-overall-brand-quality-by-europeans-according-to-new-harris-interactive-survey-155096425.html 

Why doesn't Britain make things any more? www.theguardian.com/business/2011/nov/16/why-britain-doesnt-make-things-manufacturing (The Guardian, 2011)

Manufacturing lessons from Germany

www.tradegood.com/en/insights/viewpoints/market-features/manufacturing-lessons-from-germany.html

German Lessons: DEVELOPING INDUSTRIAL POLICY IN THE UK www.tuc.org.uk/sites/default/files/tucfiles/germanlessonsedit.pdf

US carmakers cut pay as Australia's hourly rates soared www.theaustralian.com.au/national-affairs/us-carmakers-cut-pay-as-australias-hourly-rates-soared/story-fn59niix-1226779288772?nk=7680174eef8fa1a758fb359ff5cd292a (The Australian, 2013)

Consumer confidence drives record year www.smmt.co.uk/2004/01/consumer-confidence-drives-record-year/ (SMMT, 2004)

German workers 'most loyal in Europe' www.thelocal.de/20121014/45553 (The Local, 2012)

German School System www.howtogermany.com/pages/germanschools.html