The term ‘nominal’ means before we allow for inflation. The term ‘real’ means after allowing for inflation. For example, a company might spend £500m more on new investment this year compared to last year. However, if the costs of investment have increased by £400m over this time period, the real increase in investment is only
£100m.
■ What do you think?
1. What are the main functions of OPEC?
2. What are the main economic reasons that the oil companies could not respond to the signal of higher prices and increase production much more quickly?
3. Why can it be very difficult to maintain a cartel in the long term?
4. Why might you expect to see a fall in oil prices as a result of the slowdown in inter- national economic activity?
5. The article reports that there has been a sharp surge in nominal investment in new oil
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Article 2 Supply-side squeeze explains oil’s relentless rise into record territory
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exploration projects. Why has this not translated into a large increase in real invest- ment spending?
6. Why might the new market in biofuels not contribute as much as expected to meeting the needs of energy consumers?
■ Data exercise
At the time of writing this article the level of fuel duty was set at 47.1p/litre of unleaded petrol. The retail price includes VAT charged at a rate of 17.5%.
If the retail price of unleaded petrol in a UK garage is set at 90p/litre:
1. How much is the total level of tax paid to the UK Treasury on a litre of petrol?
Hint: work out the VAT payable/litre and then add this to the fuel duty.
2. If it costs the garage 23.2p/litre to buy the petrol what is the profit per litre. In addition calculate the percentage margin.
■ The Web
Go to the official website of the International Energy Agency.
This can be found atwww.iea.org. Read the latest ‘oil market report’.
Produce a short summary (one page of A4) outlining the current position in the crude oil market.
■ Research
Begg, D. and Ward, D., (2007)Economics for Business, 2nd edition, Maidenhead: McGraw-Hill.
You should look at Chapter 6. A cartel is discussed on page 126.
Begg, D., Fischer, S. and Dornbusch, R., (2008)Economics, 9th edition, Maidenhead: McGraw- Hill. You should look at Chapter 9. There is a good discussion of the activities of cartels starting on page 171.
Gillespie, A., (2007)Foundations of Economics, 1st edition, Oxford: Oxford University Press. You should examine Chapter 5 to see the concept of supply explained. In addition Chapter 4 has a good discussion of the elasticity of demand.
Sloman, J., (2007)Economics and the Business Environment, 2nd edition, Harlow: Financial Times Prentice Hall. Chapter 5 has a good explanation of cartels on page 136.
Sloman, J. and Hinde, K., (2007)Economics for Business, 4th edition, Harlow: Financial Times Prentice Hall. You should look at Chapter 5. There is a useful discussion of ‘adjusting to oil price shocks’ on pages 96–97.
Fee-paying schools have long played a giant part in public life in Britain, though they teach only 7% of its children. The few state-educated prime ministers (such as the current one) went to academically selective schools, now rare; a third of all MPs, more than half the appointed peers in the House of Lords, a similar propor- tion of the country’s best-known journalists and 70% of its leading barris- ters were educated privately. There is no sign that the elevator from independent schools to professional prominence is slowing: nearly half of the undergradu- ates at Oxford and Cambridge were privately schooled too.
Many ambitious parents would like to set their children off on this gilded path.
But there is a problem: the soaring cost.
Fees at private day schools have more than doubled in the past 20 years, in real terms; those at boarding schools have risen even faster (see chart). Since 2000 fees have risen by at least 6% every year,
according to Horwath Clark Whitehill, a consultancy – double retail-price inflation and half as much again as the growth in wages. If this continues, a four-year-old embarking on a career in private day schools this autumn will have cost his It is safe to say that if you were eavesdropping on a typical middle-class dinner party the main topics of conversation would be either the rise and fall of house prices or some aspect of the British education system. As one previous prime minister famously said, ‘education, education, education’ is the priority of most families. The puzzling thing is that at a time of ever-increasing government spending on education there has still been a record amount spent on private education. It seems that many parents see this as a good-value purchase. It is seen to be a way of securing for their children access to the best universi- ties and later on to the most lucrative careers.
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The economic price of a perfect education
Is it worth it? As the cost of private
schools soars, we look at what parents get for their money
Economist, 28 February 2008
Article 3
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More for the money British schools’:
Pupil/teacher ratio State Private
Average annual fees*, £’000 Boarding
Day 25
20 15 10 5 0
1981 85 90 95 2000 06
25 20 15 10 5 0
Source: Centre for the Economics of Education
parents around £170,000 ($335,000) in today’s money by the time he completes secondary school. So even though more Britons than ever before describe them- selves as comfortably off, the share of children being educated privately is barely higher than it was two decades ago.
Yet as the cost grows, so do the incen- tives. It is increasingly hard to be sure of securing an acceptable alternative. State- financed schools for the gifted are now scarce. Other time-honoured routes, such as finding God (and a place in a religious school packed with the offspring of simi- larly provident parents) or buying a house next to a good state school (the price will be hefty, but can be recouped by selling once the children have grown), are becoming harder. Ed Balls, the schools secretary, has signalled a shift away from increasing state-funded religious edu- cation, and many schools are thinking of choosing students by lottery rather than proximity.
On March 3rd parents all over England will get letters telling them which schools their 11-year-olds are to go to – and many will be watching with interest to see what happens in Brighton, on the south coast.
For the first time, places in its eight sec- ondary schools will have been allocated randomly within each catchment area.
Already the benefits are being felt by local private schools. Brighton College, in the town centre, has seen the number of 11-year-olds taking its entrance test rise by almost half. Its head teacher, Richard Cairns, says he is thinking of expanding.
Just what will these refugees from ran- domness be getting for their money?
Researchers at the Centre for the Economics of Education have used data on earnings, social class and education to distinguish the effects of private schooling from other advantages that students at such schools may enjoy (such as having richer, better-educated parents). Those who left private schools in the 1980s and
early 1990s can expect to earn 35% more in life than the average product of a state school, they found, around half of which can be attributed to education, not back- ground. That, they calculated, means parents achieved an average 7% return on their investment in fees.
If that were the entire benefit their children received, it would not be bad – but there is more, says Francis Green, one of the researchers. ‘Private education is a consumption good, not just an invest- ment. Long gone are the days of spartan dormitories and cold showers – kids in the private sector now have fabulous science labs and sports facilities, and access to a huge range of subjects and activities.’
The researchers also managed to pin- point the way private schools work their magic: through better exam results, rather than through networking oppor- tunities or better teaching of soft skills, such as etiquette or leadership. Once they compared state- and private-school leavers with identical qualifications, the earnings premium disappeared. ‘In the past few decades, private schools have transformed themselves into highly effec- tive exam-passing machines,’ says Mr Green. They hire better-qualified teachers, and more of them, offering higher salaries to lure those with qualifi- cations in difficult subjects such as physics, mathematics and foreign lan- guages, and now have twice as many teachers per pupil as state schools do.
Whether today’s parents can expect similar returns on their investment depends partly on whether fees continue to grow at a similar pace. One insider thinks this unlikely: many parents have remortgaged to pay fees, and with house prices shaky and banks tightening their lending criteria, this route is fast closing off.
But parents willing to take a riskier route could reap greater rewards. Another group of researchers interviewed parents
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Article 3 Is it worth it? As the cost of private schools soars, we look at what parents get for their money
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■ The analysis
There is no doubt that paying for a private education has never been so expensive. AsThe Economistarticle reports, the level of fees at private day schools has more than doubled in the past 20 years while those at boarding schools have been rising even faster. Indeed, the fees have risen way above the annual rate of inflation. A quick survey around the Net reveals that the average fees for private day schools are running at £10,000 per year as compared with more than £20,000 for boarding schools. Assuming a child was entirely educated in the private system from age 5 to 18 (13 years) this could amount to a total cost of around £250,000 (including extra costs) in today’s money. Despite the cost the article reports record demand from families wanting to buy their children what they believe are the best educational opportunities. In response to this the private sector is looking to increase the supply of private school places with schools like Brighton College looking to expand to meet the higher demand.
So what are they buying? A quick survey of a few friends with children in the private system suggested that the following are the key factors:
■ smaller class sizes (less than 20 compared to 30+ in the state system);
■ better exam results (virtually everyone achieving good exam grades compared to the upper percentile, or the high achievers, in the state system who achieve a similar stan- dard);
■ less tied into a rigid curriculum and strict testing regime;
■ superior extra-curricular activities and resources (e.g. sports, drama and music);
■ better chances of securing a good university place;
and children from 124 well-off white middle-class families in three English cities. The parents had made the decision to send their children to poorly- performing local comprehensives. The children did well, with excellent exam results and plenty of places offered by highly-regarded universities, including Oxford and Cambridge.
One reason for their success, the researchers suggest, is that the schools, mindful of their positions in official league tables, were keen to keep these valuable clients. Teachers paid the youngsters more attention in class than they did to dozier students and arranged extension activities for them. One school, desperate to keep a bright child in the sixth form,
even ran an A-level drama course especially for her.
The parents were delighted by their huge savings. But they had to work hard.
More than half became school governors, and all monitored their children’s progress relentlessly. ‘They thought their children would do well being exposed to a more socially and ethnically diverse edu- cational experience,’ says David James, one of the researchers. ‘But as people must do with more volatile, risky invest- ments, they watched closely and were ready to pull out if needs be.’ So parents inclined to take this route must ask them- selves two things: what their risk profile is, and whether they are willing to be activist investors.
■ improved career chances;
■ a school’s stated aim of developing skills and confidence of each individual pupil is more likely to be realised in the smaller setting of a private school;
■ networking opportunities later in life through the ‘old boy (or girl) network’ may be of benefit particularly in the world of work.
The above list reveals education to be both a consumption and an investment good. It is a consumption good in the sense that it can be viewed as being an end in itself. Pupils can simply enjoy the process of being educated well without any thought being given to their future economic success. They might for example enjoy being taught to appreciate great literature or to have access to superb sports facilities. At the same time the attraction of a private education definitely suggests that buying this service has been viewed by many parents as an investment in their children’s economic future. They clearly see the years spent on ‘the playing fields at Eton’ as being useful in getting their children into a top university and later into a career that is well paid. It may be the perfect route to becoming a barrister, a City financier or even a future prime minister.
Economists try to measure this benefit by investigating the ‘earnings premium’ enjoyed by privately educated pupils compared to their state-educated counterparts. This article intriguingly suggests that private schools achieve this success by increasing the ‘value added’ for their pupils which equates to a significant improvement in their exam results.
They quote the economist Francis Green as saying that ‘private schools have transformed themselves into exam-passing machines’. How have they done this? They have hired better-qualified teachers and employed many more of them than a state school could ever afford. According to the article, their consumers (the pupils) get more individual attention and support and better-quality teaching.
Is there any hope for the pupils left behind in the state system? The answer is a definite
‘yes’ as long as they can maximise the opportunities available at their schools and achieve good exam results. The article suggests those children who can secure those excellent GCSEs and three top-grade A-levels within the state system perform just as well as those educated privately at great expense. However, this requires much more effort by the pupils and their parents. The latter must spend time ensuring that their children remain well motivated and that the performance of the state schools that they use is adequate. The article adopts a term widely used in economics and describes these parents as ‘activist’. It is vital that those families that keep their faith in state education continue to assess the risks involved and, in extreme circumstances, be willing to withdraw their children from a school that is failing.
■ Key terms