Are taxis an unfair market?

An article discussing whether taxi companies are destroying consumer surplus (what consumers are willing to pay for a good and the market price).

Taxis have long been a mode of transport that have helped the relatively wealthy move from place to place. From back in the Victorian age with a growing middle class where taxis consisted of horse-drawn carts, to now in Oman where they are using Ferrari Enzo’s. With a further growing middle class in most countries the demand for taxis is likely to increase.

In the UK regulation on taxis is controlled by the council and to start-up a taxi company you need an operating license. You also need to comply by the laws of the local council, for example in London which is operated by the Transport For London (TFL) (who controls the ‘black cabs’ of London) makes licensed cab drivers take background checks, medical tests and they have to pass a “topographical skills assessment test”. All this regulation increases the cost not just to the cab driver but it is passed on to the consumer, in the form of higher fares.

The main reason they do this is safety. Unlicensed cab drivers commit 11 sexual assaults in London a month, and TFL with the use of posters such as the one below put off the use of unlicensed cab drivers for the general public.

I think this is a very valid point, and sexual assault should not be found in any society. However I do feel there maybe other solutions to the problem such as organizing deals with local cab drivers, booking the taxi before going out, the use of messaging the customer with the car and number plate and when it has arrived, cracking down on sex assaulting cab drivers and more information in public places allowing people to gain access to numbers that are reliable and safe.

If you think of why you would pick an unlicensed (or what you thought was licensed) driver over a black cabby it would be usually due to the price. Lots of people just have that in mind rather than the potential negative implications which could take place getting in an unlicensed cab. Therefore if the TFL wanted to reduce sexual assaults they should monitor the price the black cab drivers are charging, as more consumers would then pick them over unlicensed cabs.

Furthermore most taxis in local councils in the UK are also incredibly fuel-efficient with cars such as the Toyota Prius being a common sight on roads. Yet taxi prices have stayed the same or in some cases increased (potentially due to wage inflation). These high prices put off consumers, potentially reducing spending in the economy, creating the negative multiplier effect.

Another argument against the deregulation of taxis is that they maybe seen as a demerit good due to the increase in congestion (with more taxis on the road) and the more pollution given off. Both these negative externalities are used often promoting the regulation of taxis, however as mentioned in the previous paragraph cars such as the Toyota Prius are also highly environmentally friendly and give off very little pollution in the form of greenhouse gases. Therefore this may dismiss the pollution externality. Congestion due to more taxis on the road is highly valid but I do not think that should be an underlying factor at why the price of a taxi is so high.

In my local area, I asked to get a taxi 300m up a hill, the car was a Toyota Prius and the rate was £7.00. It wouldn’t even cost £1 to get up the hill in petrol and would take 3 minutes max. I understand there is a fixed cost pricing system of the wage of the driver, the training he has to go through and the initial investment of buying a car, but I do not feel that a sufficient reason to charge £6 for a 1 and a half-minute drive there and back. I then asked him ‘why it was so high?’, in which he responded with ‘it’s the meter mate, it starts off at £3.50’. The meter on a taxi is meant to prove how fair a taxi driver’s charge is, yet initially it isn’t fair.

This article is not against taxi drivers, who on average have a salary of around £23,000 after expenses working a 40 hour week according to easier.com, which is no investment banker’s salary but is still a large amount of money. This article is against the colluding taxi company owners and the local council for reducing the levels of competition and allowing them (a few individuals) to benefit out of the abnormal profit they receive. There needs to be change to allow for an increase in consumer surplus and also to help benefit the actual taxi drivers who see little of the abnormal profit obtained.

Balance of payments

This is an article about balance of payments including the current account and capital/investment account

Made up of the current, financial and capital account.

Current account:

Is where payments for the purchase and sale of goods and services are recorded. It has numerous properties affecting it including trade in goods balance, trade in service balance, investment income and current transfers (which is the least important as it makes a marginal proportion of the current account).

Trade in goods balance:

Often known as the ‘trade in visibles’ as they are tangible.

It is measured by the value of goods exported minus the value of goods imported. In an export, the tangible good is going to another country but there is an inflow of money into the host country. And it’s a common mistake to think that the export is the money going out of the economy. An import is just the opposite. So a tangible good comes into the host country and an outflow of money goes to another country. It is the value (money inflows and outflows) measured and not the volume of the goods.

There is said to be a surplus when the value of goods exported is greater than the value of goods imported.

There is said to be a deficit when the value of goods imported is greater than the value of goods exported.

Trade in services balance:

Funnily enough it is known as the ‘trade in invisibles’ as they are intangible.

(It is similar to the trade in goods just with services)

It is measured by the value of services exported minus the value of services imported. In an export, the intangible service is going to another country but there is an inflow of money into the host country. An import is once again just the opposite. So a intangible service comes into the host country and an outflow of money goes to another country. It is the value (money inflows and outflows) measured and not the volume of the services.

There is said to be a surplus when the value of services exported is greater than the value of services imported.

There is said to be a deficit when the value of services imported is greater than the value of services exported.

Investment income:

It is measured by the income flows into country from non-residents minus the income flows out of the country by residents. A major influence on the value of investment income is the number of assets owned abroad, such as houses or plots of land. Another major influence is repatriation of earnings from national workers in foreign counties.

There is said to be a surplus when the income flows into a country are greater than the income flows out of the country.

There is said to be a deficit when the income flows out of a country are greater than the income flows into a country.

Current transfers:

Consist mainly of government transfers to organisations such as the EU with it’s common agricultural policy (CAP), but it also includes aid from government and Non-Government Organisations (NGO’s).

Capital/financial account:

Comprises of transactions associated with changes of ownership of the UK’s foreign financial assets and liabilities.

It is measured by a change in foreign ownership of domestic assets minus a change in domestic ownership of foreign assets. The main influencing factors include:

• Foreign Direct Investment (FDI) – which refers to the long term capital investment on machinery or buildings. If foreigners choose to invest in a country, that is considered an inbound flow and creates a surplus on the capital account for the host country. If domestic investors reallocate investment to another country that creates a deficit on the capital account.
• Portfolio investment –  refers to the purchase of stocks and shares. If you chose to invest into the S&P 500 (American share system) from a different country, there is a flow of income to the American economy, reflecting on there capital account.
• Changes in foreign exchange reserves – These include numerous currencies (US$ being the main currency)  and reserves in gold. For example the Federal Reserve Bank of New York contains 7,700 tonnes of gold, roughly 5% of all the gold ever refined throughout human history.
• Short-term capital flows – These are referred to as ‘hot money’ flows as they are associated with speculative buying. Seen mainly in exchanges like Wall Street.

As you can see there are a lot of aspects which make up the balance of payments, therefore meaning that there are a lot of factors that alter it. But generally if there is more money/income flowing into the economy it is known as a trade surplus. And if there is more money/income flowing out of an economy it is known as a trade deficit.

Main contributing factors influencing balance of payments:

• Exchange rate – A rise in exchange rate will tend to increase imports and reduce exports (creating a deficit). A fall in exchange rate will tend to reduce imports and increase exports (creating a surplus).
• International competitiveness – If a country has lower labour costs, skilled workers, good infrastructure, key geographical locations or specialisies in certain industries it will be attractive for FDI which may possibly create an export market as they are providing a good or a service. A great example is the UK who in the last 20 years could be seen to have lost international competitiveness in the manufacturing sector seen by the closing down of northern steel factories due to the competitive nature of South-East Asian countries such as  China.
• Trade cycle – If imports are high and exports are low, this creates a trade deficit (known as a bust in the trade cycle). This causes Aggregate Demand (AD) to fall which means that people are willing to spend less money on imported products. This means that the trade deficit is neutralised and even a possible surplus is created (known as a boom in the trade cycle). This then causes AD to rise and more money spent on imported products, which negates the surplus. This is a cyclical cycle and over the long-term changes vastly.
• Economic situation in different markets – In a world recession, this will effect exports of countries as there is less trade and therefore meaning there is a rise in trade deficit, however this may be counteracted by a fall in in imports due to a loss of trade.
• External shocks – A shock that is beyond the country’s power to control such as a disruption in oil areas will cause a large price rise, this is further emphasised by the good being highly inelastic due to the lack of substitutes.
• Government intervention – Use of fiscal policy, monetary policy and supply side policies to manipulate imports and exports. Also tariffs, quotas, subsidies to local industry directly effect imports and exports.

The balance of payments are a major factor in any economy especially with the large increase in world trade and globalisation. You can also see it has a lot of factors affecting it, too many.

Buffettology – Book Review

Book review on Mary Buffett’s book on Warren Buffett (most famous value investor of all time and ranked 4th on Forbes Rich List).

Summary : This book gives the perfect insight into long-term investment.

It is a relatively simple read unlike numerous business books, and even if you are not comfortable with your mathematical ability this has a very clear step by step guide of figuring out the formulas.

If you have had no experience in investing in shares this is a fantastic way to get an understanding of how the system works. Yet at the same time if you carry a knowledge of the share market it may be useful, as it could influence your share portfolio.

The fundamental idea it publicises is Compound Annual Growth Rate (CAGR), this is a great way of predicting the future value of a company in years to come, therefore giving you a low risk decision to either invest or not invest. It is built on two main principles, the price of the share and the ‘business economics’ of the company.

In the price of the share principle it goes through a process using earnings per share (EPS) and the price-earnings ratio (P/E) to predict the future value for the investment, and it uses numerous examples, which makes it relatable and not just a hypothetical theory. The examples produced contain a mixture of Warren Buffett’s moves in the market and additionally other applications the long-term idea may be used in. Furthermore it includes issues which long term investors face (taxation and inflation), and presents how the value of the shares circumvent these barriers.

The other principle of selecting a company with good ‘business economics’ is key. Mary Buffett shows the way in which Warren avoided risky businesses by employing certain rules, such as not investing in commodity companies, or aiming to pick a company which contains monopolistic properties.

A major feature in this book is the unfavourable view on Wall Street short-term ‘gambling’, it suggests the reason why this long term investment works is due to the short term fluctuations. It reiterates the idea that the undervaluation and overvaluation of shares comes from the short term risk takers.

A possible issue with this book is that it mainly covers American companies in American markets such as Coca-Cola. However it can still be easily interpreted and used in other markets across the world.

All in all this book hits the nail on the head with its easy-read format, use of numerous life examples, tackling issues which the long-term investor faces and incredible story of how Warren Buffett created a $53,000,000,000 empire by just starting off with $100,000. I hope you enjoyed this brief book review but if you want more information go out and buy it! But I leave you with this joke:

Q: Why did God create share analysts ?
A: In order to make weather forecasters look good.

Growth in companies (integration)

Article explaining motives for growth and expansion of growth mainly via integration of companies.

Firms all have 5 main different motives for growth, these include:

1. Profit motive: Grow to achieve higher profits to benefit incomes (possibly increase standard of living).
2. Cost motive: Increase in economies of scale means that there is a reduction cost which in turn increases profit.
3. Market Power motive: May wish to increase market dominance which in turn increases profit in long run.
4. Risk motive: Viewing other markets and taking a risk in order to seek a reward, in most cases it is profit.
5. Managerial motives: Behavioral strategies to either benefit the company’s profit or benefit themselves.

They all come back to the main motive of profit. You could argue that there are other motives such as becoming a legacy, having the largest positive impact on other people’s lives or fame, but the general view is that companies expand due to profit. In order for companies to expand they have a selection ways to grow.

First of all there is organic (internal) growth, these consist of:

• Expansion of existing production capacity via new technology.
• Developing and launch of new products.
• Growing a customer base through marketing (global branding).

But today I am focusing more on inorganic (external) growth which consists of mergers and takeovers.

Mergers are when two firms join by agreement.

Takeovers are when a company buys a set amount of shares of another company listed in the stock exchange (usually over 50%). These can be friendly takeovers, in which the board of directors recommends the offer to be accepted by the shareholders. However they can turn hostile, and the management and share holders can refuse a takeover, creating a difficult situation for the bidder.

Both takeovers and mergers are forms of integration, to complicate it more there are also different forms of integation (This isn’t even maths!)

Horizontal Integration

When the products are complementary or competitive to one another then companies can merge to monopolise more of the market share.

Examples include — Nike and Umbro — NTL and Telewest (Virgin media).

Advantages:

• Increases share of market.
• Increase in economies of scale, reduction in costs and therefore improved profits and competitiveness.
• One large firm may need fewer workers and therefore process of rationalization (cutting jobs) achieve cost savings.
• Mergers often justified by existence of synergies (1+1 =3).
• Increase range of products (diversification).
• Opportunities for economies of scope, which is the lowering of average cost by producing two or more products.

Vertical Integration

Advantages:

• Greater control of supply chain – reduction in costs and greater output.
• Improved access to raw materials.
• Greater control over retail distribution channels.
• Economies of scale in long term.

Vertical backward integration

When a company purchases a supplier company. So they can control the price and either damage competitive companies or increase revenue in the long run due to economies of scale + diversification.

Examples include – Glaxosmithkleine which was from a service sector business and outsourced into the manufacturing sector.

Vertical forward integration

When a company purchases a consumer company. So they can influence who they supply the products to to increase production and get more of a share of the general market.

Examples – Glencore which is a mining company but it has expanded into the manufacturing sector.

Lateral (conglomerate) Integration

Companies joining together which have similar properties but are not competitors due to different markets.

Examples include — Microsoft and Skype — Google and Youtube — Richard Branson with Virgin.

Advantages:

• Economies of scale.
• Increases capital of companies for possible investment in other companies.
• Greater spread of risk.

In conclusion companies grow mainly for the profit motive and they do this by organic or inorganic growth. These different ways in which to grow give the firm a choice of how to maximise their revenue and deflate costs. As you can see mergers is one of the best ways as it contains numerous advantages including monopolising the market, reducing long run costs and increasing output.

Globalisation

Article discussing definition, causes and impacts of globalisation.

Globalisation or Globalization has numerous different definitions, the one I’m using is more economically based:

“the increasing economic interdependence of national economies across the world through a rapid increase in cross-border movement of goods, services, technology and capital to create a single market.”

The key word to pick out here is “interdependence“. Interdependence in this case refers to countries being reliant on one another due to the interconnectedness between them. This reliance is beneficial in the sense that there is greater economies of scale, thus reducing costs for the consumer and maximising profits for the producer. However this reliance was a contributing factor to the global recession in 2009 and it also augmented the effects of disaster. For instance if an American Bank loaned money to a struggling British bank that would never be able to pay off the loan,  the American bank realises and then loses so much money that it turns into a struggling bank or even worse it collapses (Lehmann Brothers), this has a knock on effect on people with savings in this bank, other banks loaning to this bank will also struggle and collapse effecting the customers with savings in that bank, and so on. All in all the system collapses.

Another main concept for globalisation can be found in the words, “single market“. Making the world more united under one platform is beneficial as it reduces the threat of wars (partly due to the interdependence) and allows the ease of movement of capital and labour, which in turn increases innovation and development. Yet western culture and ideas could be seen as the overpowering culture trying to dominate the world (capitalism over everything). Capitalism has its flaws in that the inequality between different classes is so much greater, which could possibly reduce living standards of the poorer class. This overpowering western culture also diminishes other cultures, this can be seen in western trans-national corporation’s such as McDonald’s (classic example), which with its franchise stores it earns $32 billion in revenue making it the 68th biggest economy (larger than Ecuador).

Globalisation is caused by numerous factors including:

• Fall in transport costs due to new technologies, causing an increase in imports and exports and therefore an increase in globalisation. For example the new technology of containerisation.

• Decline in cost of communications and increase in availability such as the internet.

• Lowering of trade barriers, WTO has been brought in to negotiate reduction in tariffs such as the most recent Doha round which is to further lower trade barriers and revise old trade rules.

• Collapse of communism has increased the number of countries who are trading i.e emerging markets.

• Opening up of China. China has had high export-led growth due to cheap labour intensive work.

• Increase in Trans-National Corporations (TNC’s), who have reduced trade barriers by using/exploiting the cheap labour available in middle income countries.

Impacts of globalisation economically and socially:

Positive economic:

— Goods and services are cheaper and higher quality due to an increase in competition benefiting consumers.

— Increase in employment especially in to developing economies due to the ease of access to emerging markets.

— Increase in Foreign Direct Investment (FDI) which creates a multiplier on the local economy, produces revenue which can be taxed benefiting the government and also reduces the price of goods and services due to economies of scale. It also helps increase infrastructure within that economy due to the investment and capital it brings in.

— Spread of new technologies has allowed developing economies to benefit as it increases revenue and reduces costs and therefore increase the quality of life furthermore the standard of living. An example is the Green Revolution in the 1980’s which saved millions of lives due to a reduction in famine.

— Increase in growth due to new technologies being implemented in emerging markets. This has moreover brought on a reduction in absolute poverty and people across have seen an increase in the standard of living.

— Increase in income creates a positive wealth effect which in turn increases consumption expanding aggregate demand and then real output.

Negative economic:

— High volumes of FDI can damage local businesses as they cannot compete and if they have a motive aiming for high employment and little profit maximization then unemployment rate within the country increases.

— Interconnectedness means strong markets can be driven down by other markets meaning unemployment (in the form of cutting jobs) and also lower levels of profits to be taxed by corporation tax.

— Ease of movement of production, means firms can relocate to other countries with low-wage workers. This damages the origin country as they lose tax revenue on the business, causes structural unemployment (manufacturing + mineral extraction companies in the UK left in 1980’s due to cheap labour in developing countries) and also creates a sunset (declining) industry.

— All this job loss and reduction in national real income causes a negative multiplier effect which reduces spending and therefore reducing growth.

Positive Social:

— Spread of culture has meant that cultural flaws are being tackled. An example is the animal cruelty in bull fighting in Spain has reduced possibly due to globalisation.

— Spread of education, this increases the volume of new technologies increasing innovation and also has a positive effect on the standard of living due to being a skilled worker.

— Reduction in crime, criminals can no longer seek asylum in foreign countries due to international courts of justice and also a reduction in terrorism as countries work together to tackle these extremists. Such as the CIA working with MI5.

Negative Social:

— Overpowering western culture (read 5th paragraph)

— Exploitation of cheap labour by TNC’s reduces standard of living in these countries

— Relocation of family members to urban areas in hope of a better life, causes families to split and often there is a lower standard of living in cities in developing economies due to overcrowding, high levels of pollution and exploitation.

— This need to work in Low Income Countries (LIC’s) can cause children to drop out of education (reducing human capital) and go into child labour.

Conclusion:

Globalisation has increased trade which in turn has boosted income and standards of living of a large population of the world, for this reason it can be viewed as a highly beneficial movement. On the other hand it has nasty side effects which may reduce income and standards of living in specific communities, so it may be time for change, an idea such as localisation is becoming highly popular and may be the next step.

Twitter’s IPO (economist)

Taken from the Economist

Twitter’s IPO

Feathering its nest

Nov 4th 2013, 21:00 by M.G.| SAN FRANCISCO

JUST a few days ahead of its planned initial public offering on the New York Stock Exchange, Twitter has raised the price range for its shares to $23 to $25, up from the original target of $17 to $20. The microblogging service and its bankers have hinted that strong demand for its stock justifies the increase. But the move, which could value the company at up to $13.6 billion, means that investors should be even more wary of taking a flutter on the firm’s stock.

True, the IPO market is hot right now, with quite a number of firms raising their initial price targets. True, too, Twitter has increased fast both the size of its audience (some 230m people visit it on average at least once a month) and its revenues. But, as we noted in last week’s issue, there are good reasons to think the firm’s shares will be overpriced.

At a valuation of $13.6 billion, Twitter would have a market capitalisation-to-trailing-12-month sales ratio of roughly 26, which is higher even than those of Facebook and LinkedIn when they went public. Yet Twitter has been coy about how exactly its advertising machine will be able to generate the billions of dollars of future revenues to justify such a lofty multiple. Rett Wallace of Triton Research, which analyses private companies, points out that Twitter has provided far less granular information about its sales activities in its regulatory filings than, say, LinkedIn did when it went public in 2011.

Those who think Twitter’s share price will soar over the long term point out that it hasn’t increased the number of shares it intends to offer and that its existing owners with big stakes aren’t cashing out en masse in the IPO. Both of these things, they say, should reassure nervous punters who fear a re-run of Facebook’s IPO. The giant social network’s share price plummeted following its debut on the stockmarket and it was many months before it rose above the initial $38 offer price again.

But one thoughtful estimate published on the same day that Twitter increased its price range concluded that the firm is in fact worth no more than $17 to $18 a share. BIA Kelsey, which analyses advertising markets and firms operating in them, says that Twitter faces some very big challenges just to get to the $5 billion of revenue a year it will need to generate by 2020 to justify a share price today of $17. Among other things, it notes that Twitter’s growth in America is slowing and that it is generating far less revenue from foreign users, who account for about four-fifths of its audience. Perhaps the hype around the IPO market right now will still make Twitter’s shares fly in the short-term. But they are unlikely to stay aloft for long.