Blockbusters goes bust

Like many people I have great childhood memories when I’d borrow games and DVD’s from this legendary store every Friday night. In those days, there was no Love Film and Netflix, so there were no alternatives to having high quality media at cheap, affordable rates. When I heard the news that Blockbusters was closing it really hit home that the physical retail sector was dying and was rapidly being replaced by a new virtual market online.

For those who don’t know Blockbusters is an international provider of movie and video game services with 60.000 employees worldwide, many of them operating in the 1000 store strong American subsidy of the firm. They first opened their doors in the United Kingdom in 1989, after being successfully received by Americans since its launch in the USA four years earlier in 1985. Blockbusters were a very successful business before the emergence of internet competitors such as LoveFilm, now owed by the Internet giant Amazon.co.uk. Also due to the popularity of DVD piracy, the demand for DVD’s is very low, even though some of the most commercially successful firms of all time have occurred in the last decade (Slumdog Millionaire, Avatar, etc). Many people can now watch nearly any widely known film online almost instantly by typing the phrase “Watch (movie name) free online” for free and without leaving their home. Due to this and probably mismanagement too, Blockbusters UK was taken into administration on Wednesday 16^th of January 2013 by Deloitte, a member of the big four audit firms. The firm has shed around 100 stores in the last few years and is set to do so to 160 more of their stores. Its highly likely that 760 people will face redundancies and will be added to the UK’s staggeringly high unemployment pile and unfortunately it is also likely that another 4000 people could risk unemployment if the administrators fail to find a buyer.

Deloitte has said “Having reviewed the portfolio with management, the store closure plan is an inevitable consequence of having to restructure the company to a profitable core which is capable of being sold.”

Blockbusters aren’t the only retailer to be hit by the Internet powershouses, HMV and Jessop’s have also gone into administration. It could be argued that the demand for Camera’s has decreased as these are now incorporated at a high standard into mobile phones, however I'm pretty sure that more people than ever before listen to music, so  ITunes and Amazon MP3 must be the cause for HMV's downfall.

Recently its come to light that Apple, the ITunes Owner only paid 2% in Corporation tax outside the US, which is advantageous in a competitive sense as it means they can afford to reduce prices whilst retaining their profit margins whilst firms like Blockbusters who actually pay the required amount are penalised for doing so. I think tax avoidance is a major issue in the UK, maybe the coalition government wouldn’t have to make as much of their lethal “necessary cuts” if they stopped these multi-national firms stealing openly from Britain’s purse.

Does Reducing Interest Rates always stimulate short term Economic Growth?

Consumption and investment are both major components of Aggregate Demand accounting for almost 80% Aggregate Demand. An important determinant of the AD components value is interest rates which is controlled by the Independent Bank of England using monetary tools. Low interest rates encourage consumers to borrow money from banks due the cheaper cost of repayment, this extra money makes consumers feel wealthier (wealth effect) therefore they’ll be willing to buy more goods from the Market. This causes the AD curve to shift to the right where there is a higher price level, inflation.


Similarly a reduction in interest rates will encourage firms to take out loans, as again the repayment cost will be lower. IN addition lowering interest rates will reduce the incentive of firms to keep money in Banks as the rate of returns will be lower. This money is invested in capital and training of existing and new staff so inefficiency can be decreases. This is shown on the graph below. The productive potential of the economy moves from Point A to Point B, which is closer to the PPF, where ideally where firms and the Country should be operating at.

Cheaper loans are ideal for business confidence s they reduce total cost which is very important for the profit maximising firms which exist in the Capitalist world. This is because cheaper cost will raise the profitability profile of potential business opportunities (Profit= Revenue - Total Cost). This surge of new investments will shift the AD curve to the right, also because of the multiplier effect the curve will shift even further than anticipated. (Multiplier Effect – Initial change in AD causes a greater final impact on the level of national income).

However surely it’s idiotic to believe that a simple change in interest rates will always stimulate short run Economic growth. This has been demonstrated quite well in our economy, the Bank of England committee set interest rates to record low figures. But despite this there wasn't much economic growth and this premature reduction prevented further reduction in the future that could've actually resulted in growth.

Another reason why I fail to agree is because if the interest rate is reduced dramatically consumers won’t be able to respond if they aren't made aware (Information failure) n. Also consumers and firms won’t respond to the reduction tot the reduction if it’s not significant enough and the interest rate is still relatively high. For example if it was cut by only 0.1% to 4.75%, this may not be enough of an incentive for firms and households to take risks on their future capability to pay it back. Also the interest rates set by the Bank of England for high street banks who might decide not to pass these savings onto potential customers to increase their profit margins for its shareholders.

In addition, a fall in interest rates may not always result in short run economic growth of other AD components change. For Example consumption and investment may increase, but this might be countered by a dramatic fall in net exports, which could happen if the newly acquired loans are used to purchase import goods. This will reduce the x-m figure and cause the AD curve to shift to the left if the change is significant enough. This will actually result in a short run decline, not the intended growth.

There are circumstances in which a drop in interest t=rates will result in growth but id largely depends on the position i which the economy is operating on the AD/AS curve. In this example growth has occurred (Y1 to Y2) as the economy isn’t at its optimum, so the price isn’t at its optimum so the price level P1 remains relatively constant, with no inflation occurring. However if the AD curve was originally at AD3, then an increase to AD4 will produce virtually no economic growth but will cause inflation, as the price level rises from p2 to p3.

A fall in interest rates may cause business confidence to increase as profit expectations will be higher. Due to this more investments will occur which will stimulate growth by raising national output and decreasing unemployment. This is most likely to occur if it happens in conjunction with improved tax policies (from firm perspective) and less government market intervention which can result in Government failure. One example of this is the excessive health and safety rules.

In conclusion i strongly believe that reducing interest rates won’t always result in a rise in economic growth due to the complexity of the economy. Therefore it’s wrong to be absolutely certain about economic policies because of this.