Saturday, September 6, 2014

A great site by Bloomberg for IB Economics students

I recently found Bloomberg's 'Quick Take' section which has very many entries that could prove helpful to IB Economics students.

I will introduce this section with a Quick Take on Deflation.  Deflation is under section 2.3 of the IB economics syllabus ('Low and Stable Rate of Inflation') where candidates are asked not only to distinguish between inflation, disinflation and deflation but also to discuss the possible consequences of deflation.

Quoting from the site:
The ogre stalking Europe’s weak economy isn’t the one people have learned to fear. The monster isn’t inflation but its opposite: falling prices. Its name is deflation and it appears friendly. Why be afraid when the cash in people’s wallets buys more fuel and televisions, not less? Because when deflation grabs hold, companies and consumers stop spending. It strangles borrowers because their debts get harder to repay — a menace for countries struggling to exit the worst recession in a generation
and:
Having prices go up more slowly helps consumers and can boost purchasing power. But when they actually drop, economic activity screeches to a halt. Households hold off making purchases as they anticipate further price declines; companies postpone investment and hiring as they are forced to cut prices. Sliding prices eat into sales and tax receipts, limiting pay raises and profit margins. They add to the debt burdens of companies and governments that would otherwise be eroded by inflation.
Students will also find excellent examples and reference material.

Also:

In this New York Times article the latest policy initiative by the European Central Bank is presented: Europe's Bank Takes Aggressive Steps.















Friday, September 5, 2014

Price controls considered in Argentina

An important part of the IB Economics Syllabus (HL and SL) is section 1.3 on Government Intervention which includes indirect taxes, subsidies, price floors (minimum prices) and price ceilings (maximum prices).

The Wall Street Journal has an article titled Argentina's Government Is Considering Price Controls.  Apparently, Argentina's government is considering '...legislation letting the government regulate private-sector prices, profit margins and production levels'.

Quoting from the article:
Business groups say the legislation would be ruinous for an economy already in recession, with companies curbing production, laying off workers and struggling with inflation thought to be around 40% annually.
"This is absolutely ridiculous. It's part of a very primitive ideology that says government officials should decide what people should make, how much they should make and how much they should charge," said Congressman Federico Pinedo of the opposition Pro party.
Supporters say the bill is unpopular among big business because it would prevent monopolies from abusing their power.


and
As written, the bill would allow the government to "establish, at any stage of the economic process, profit margins, reference prices, maximum and minimum prices, or all or any of these measures."
It would also let the government close businesses for up to 90 days and fine them up to 10 million pesos ($1.2 million) if they raise prices abusively or cause scarcity by hoarding essential goods.
Opposition to the bill is so intense it has united many of the country's disparate business interests, leading big business chambers to speak out in unison.
"We already know exactly what it is like to suffer from these kind of interventionist economic policies," said Luis Etchevehere, president of the Argentine Rural Society, the country's top farm group. "This will lead to divestment and possibly even supply shortages of some products like is now happening in Venezuela."

You can also read on this issue an article from Bloomberg titled Argentina Says It’s No Venezuela as Price Cap Law Debated.

Remember that to earn top marks (L4), examples are expected in Paper 1 (HL and SL) in both part (a) and part (b).  These articles could thus prove useful.




Wednesday, August 27, 2014

Section 2.3: Equity in the distribution of income (IB Econ Syllabus)

Inequality, its causes and its effects, is an important topic in the IB Economics course for both HL & SL (syllabus section 2.3 Equity in the Distribution of Income)

This article will help candidates understand the issues better and equip them with examples.  It's written by Michael Spence and is titled Good and Bad Inequality.

...Nonetheless, experience in a wide range of countries suggests that high and rising levels of inequality, especially inequality of opportunity, can indeed be detrimental to growth. One reason is that inequality undercuts the political and social consensus around growth-oriented strategies and policies. It can lead to gridlock, conflict, or poor policy choices. The evidence supports the view that the systematic exclusion of subgroups on any arbitrary basis (for example, ethnicity, race, or religion) is particularly damaging in this respect.

The distinction between good and bad inequality is also made by Branko Milanovic (see his book The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality. This is from the New York Times review of this book:
“There is ‘good’ and ‘bad’ inequality,” Milanovic writes, “just as there is good and bad cholesterol.” The possibility of unequal economic outcomes motivates people to work harder, he argues, although at some point it can lead to the preservation of acquired positions, which causes economies to stagnate.

There is also this February 2014 IMF paper by Ostry, Berg, and Tsangarides: Redistribution, Inequality, and Growth where in the Executive Summary we read:
While considerable controversy surrounds these issues, we should not jump to the conclusion that the treatment for inequality may be worse for growth than the disease itself. Equality-enhancing interventions could actually help growth: think of taxes on activities with negative externalities paid mostly by the rich (perhaps excessive risk-taking in the financial sector) or cash transfers aimed at encouraging better attendance at primary schools in developing countries, as examples. The macroeconomic effects of redistributive policies will reflect a balance between the components of the fiscal package, and it is an empirical question whether redistribution in practice is pro- or anti-growth.

This article from the Guardian discusses the above paper (perhaps though, only parts of it):
IMF study finds inequality is damaging to economic growth.

Remember that to reach Level 4 (highest marks) in the Paper 1 essays '...examples are used effectively'.

And, yes, back to school on the 11th of September in Greece: Καλή χρονιά σε όλους!

Monday, August 11, 2014

Griesafault...

Griesa is the name of the US federal judge who ordered that Argentina could not repay creditors who had accepted its restructuring until it fully paid those who had rejected it.  Joseph Stiglitz and Martin Guzman wrote an interesting article on Argentina's default and Griesa's decision.  They write at some point:
Argentina restructured its debt in two rounds of negotiations, in 2005 and 2010. More than 92% of creditors accepted the new deal, and received exchanged bonds and GDP-indexed bonds. It worked out well for both Argentina and those who accepted the restructuring. The economy soared, so the GDP-indexed bonds paid off handsomely.
But so-called vulture investors saw an opportunity to make even larger profits. The vultures were neither long-term investors in Argentina nor the optimists who believed that Washington Consensus policies would work. They were simply speculators who swooped in after the 2001 default and bought up bonds for a fraction of their face value from panicky investors. They then sued Argentina to obtain 100% of that value. 
NML Capital, a subsidiary of the hedge fund Elliot Management, headed by Paul Singer, spent $48 million on bonds in 2008; thanks to Griesa’s ruling, NML Capital should now receive $832 million – a return of more than 1,600%.
The figures are so high in part because the vultures seek to earn past interest, which, for some securities, includes a country-risk premium – the higher interest rate offered when they were issued to offset the larger perceived probability of default. Griesa found that this was reasonable. Economically, though, it makes no sense. When a country pays a risk premium on its debt, it means that default is a possibility. But if a court rules that a country always must repay the debt, there is no default risk to be compensated. 
...Its (America's) courts have been a travesty: As one observer pointed out,it was clear that Griesa never really fathomed the issue’s complexity.
The part that this piece, in my opinion, forgets is what did the local (Argentinian) government and elite did with the borrowed money.  Judging from what has happened in Greece,  I doubt that it was well spent and invested.  Most of it, I fear, must have lined ' ...the pockets of some (local) billionaires'.

The article can be found here.

Thursday, July 31, 2014

Michael Spence on global instability

Again, from Project Syndicate (link), a phrase of interest by Michael Spence (Prof. at the Stern School of Business, NYU; link):


'...in a way, the current global environment is a classic case of negative externalities. The localized costs of suboptimal behavior – the ones one might expect to be internalized – fall well short of the overall global costs.'

A interesting analogy.  

The article 'The Global Security Deficit' can be found here.



Development recipes (by Ricardo Hausmann)

The other day I read a very interesting article on Project Syndicate (link) by Ricardo Hausmann (Director of Harvard's Center for International Development and Professor of the Practice of Economic Development at the Kennedy School of Government; link).

The title of the article is 'The Real Raw Material of Wealth' and he argues that mineral beneficiation (also referred to as value-added processing, '...the transformation of a primary material to a more finished product, which has a higher export sales value'; see link) is not the (only or best) way to go for developing countries.

...The moral of the story is that adding value to raw materials is one path to diversification, but not necessarily a long or fruitful one. Countries are not limited by the raw materials they have. After all, Switzerland has no cocoa, and China does not make advanced memory chips. That has not prevented these countries from taking a dominant position in the market for chocolate and computers, respectively.
His argument is powerful and he illustrates with excellent examples.  At one point he writes that...
...the more promising paths to development do not involve adding value to your raw materials – but adding capabilities to your capabilities...

Anyone listening in Greece?

(the link to the article is here)




Wednesday, July 30, 2014

It's been a long, long time....!

This blog, dedicated to IB HL and SL Economics students, is again 'functional'!

I will be posting whatever seems to be of interest to IB economics students.  Interesting articles, new developments in the world economy, help for essays and for data response questions and of course tips for the P3 stuff for HL guys.




Tuesday, June 4, 2013

Just a chart...

Check this out:

You teach your 16 and 17 year old high school kids the costs of unemployment:
...that it's a terrible waste, since resources are limited and wants are unlimited...
(...right after you've explained the 'fundamental' economic problem that necessitates 'choice' and blah-blah, blah)

...that it implies 'output lost forever' with the economy producing inside its production possibilities...

...that it entails other huge economic, personal and social costs 

...and, of course, they realize that the concept is thus pretty much absurd....

Then you got to go ahead and teach (IB syllabus) the Monetarist/New Classical view but without the 'elegance' (for many) and numbing effect of the math models involved...

...which means that you have to hit them directly in the face with the...

 '...but in the long run, they assume that money wages are flexible and fully adjust so that the real wage rate is restored and the economy will return to its natural / normal rate of unemployment and thus to potential output'.

Hey, what about 'when'?
How about how how much money wages fall (is, say, a 20% cut ok, or is it not enough to restore competitiveness??  Would, say, a 50% cut be perhaps better?)

Hey, what about these numbers (from the chart above) on the extent of youth unemployment? 
62.5%
56.4%
42,5%
40.5%
26.6%
26.5%
20.2%

Are we serious?  

How far should money wages fall for labor markets to clear?  
Who decides how much they fall?  The impersonal market?
What are the implications of these figures for the stock of human capital of these countries?  
Will a 23 year old be able to make a living?  To have get married and raise kids?  To buy a house or a car?  

What about the demographics and pensions in 10 or 20 years if the best and the brightest leave the country?

A Krugman post followed by a Coppola Comment by Frances Coppola got me going.

The original posts are better.

Go to the Krugman post  here

Go to the Coppola post here

And copying from the last one:
CEO of Berlin Stock Exchange Artur Fischer has told #newsnight most jobs will not be available in Greece, Greeks need to leave the country...
So that Mani, Paros, Sifnos, Zagorohoria, Skopelos, Karpathos, Kythera, Tzia, Kefalonia, Pilio etc etc are all sold to ___________________ retirees (fill in the blank...).

And, what was it about institutional frameworks?  Did someone say extractive?

I am so worried about my/our children.

Saturday, April 27, 2013

The structural transformation in China (...what it means and why it's important to all)

An easy to understand piece in project-syndicate by Stephen S. Roach on the structural transformation that the Chinese machine is (perhaps) undergoing and what it means for sustainability (an all time favorite IB economics topic), the resource rich exporters, the US and job creation with slower growth:

Long live China's slowdown 

Wednesday, April 17, 2013

The price tag of a shirt: with or without the tax?

Well, for a rational consumer, it shouldn't make a difference if a shirt became more expensive because A&F decided to up the price or as a result of a higher indirect tax.  Guess again!  It does make a difference!  This is what  Raj Chetty, the 2013 John Bates Clark award winner found in his paper Salience and Taxation: Theory and Evidence:




In Chetty’s most cited study, “Salience and Taxation: Theory and Evidence,” he hypothesizes that sales taxes are less salient to consumer behavior than the posted price, and provides two examples.  First, he shows using state-level data on beer sales that sales tax changes have smaller effects than posted prices.  Second, the authors convinced a large retail store to post the sales-tax-inclusive prices of selected relatively high-cost items, alongside other products posted with the pre-tax price.  Using a difference-in-difference-in-difference design, they found that posting final tax-inclusive prices led to lower sales.  Randomly selected individuals were aware of the existence (and magnitude) of the sales tax, so ignorance of the tax cannot explain the results.  Finally, Chetty shows that because of this salience effect, customers bear far more of the burden of the sales tax than conventional public finance formulas predict. (quoted from the AEA link above)
This is a New York Times piece on Chetty worth checking out: Raj Chetty Wins the John Bates Clark Medal (photo from article)




Green GDP and China's epic pollution

Green GDP is a 'new kid on the block' in the IB economics syllabus.  The key phrase is '...environmental degradation and natural resource depletion...'!  But it would be nice to be aware of some real world examples as the issue is closely related to negative externalities of production and sustainability.

This article is from the New York Times:  Cost of Environmental Damage in China Growing Rapidly Amid Industrialization. Quoting an economist from the article the issue China has is '...how to transform from the explosive growth of the past 30 years to the sustainable growth of the next 30 years...'.

And this is another quote that illustrates the size of the problem:
'The discovery of at least 16,000 dead pigs in rivers that supply drinking water to Shanghai has ignited alarm there. This week, China Central Television reported that farmers in a village in Henan Province were using wastewater from a paper mill to grow wheat. But one farmer said they would not dare to eat the wheat themselves. It is sold outside the village, perhaps ending up in cities, while the farmers grow their own wheat with well water.'
You could also read this article from the Guardian China's 'cancer villages' reveal dark side of economic boom where this video is found:

video


Sunday, April 14, 2013

Greece entering deflation territory...

The latest report from ELSTAT (the Greek Statistical agency) clearly indicates that in Greece the average price level fell.  Prices in March decreased by 0.2% compared to March 2012.  This was the first recorded decrease in the CPI in almost 50 years.

A detailed account of what is going on can be found here.  It is the April 9th press release of ELSTAT (if you happen to be an IB Economics student please also read the methodological notes at the bottom of the page - they are pretty illuminating on how the CPI is constructed).

This was something widely expected as Greece is in a deep-deep-deep recession.  Output has been contracting for more than 5 years, official unemployment is over 27%, youth unemployment is over 50%, money wages are cut and it is more of a surprise that deflation is happening now and not a lot earlier..  The answer lies in the very concentrated and still over-regulated product markets where collusive behavior seems to have been the norm.  It is in the service sector where prices are now dramatically falling pulling the average price level down (see the ELSTAT press release above).  We shouldn't also forget the successive increases in indirect taxes as well as the role of energy prices.

These articles are good for anyone interested in the issue:
Deflation takes hold in Greece (from the FT)
Greece enters deflation for first time in 45 years

(photo is from the Telegraph article)

Monday, November 19, 2012

Catastrophic consequences if average world temperatures rise more than 4 degrees Celsius...


An article on the dire effects of global warming caught my eye today.  It can be found here:
World Bank warns of ‘4 degree’ threshold

It comes with some amazing (and scary pictures) that are worth looking at.  Makes me feel how limited (albeit analytically correct) our analysis of negative production externalities is (sure...it's just a matter of slapping a tax equal to the external cost or to determine the maximum acceptable level of pollution and hand out tradable permits - and presto, there goes global warming...yeah, sure). For the more ambitious of IB Economics students here is the executive summary of the World Bank research:
Turn down the heat: why a 4 degree warmer world must be avoided

You can always just look at the gallery of pictures here.

Wednesday, November 14, 2012

Shifts in demand and maximum price Prezi presentations by my students

Another student of mine in my HL year 1 class has prepared a presentation on the factors shifting a demand curve.  An improved version of the previous one on maximum price is also here to click (it works this time).

I am providing the links for whoever interested to enjoy.  Many thanks to Dimitris Th. and Alexis S.!

Prezi on why demand for a good or service shifts

Prezi on maximum price (price ceiling))

Sunday, November 11, 2012

Editorial from the New York Times on Greece

The NYT published the other day an editorial on the current situation Greece which I found very interesting, sad, true and useful for my IB year 2 IB economics sections.

Quoting (almost all) the article:

Greece’s Parliament did what it had to do on Thursday. Despite some defections from the ruling centrist coalition, lawmakers narrowly approved a $23 billion package of new austerity measures, including further spending cuts to social services, pensions and public salaries, as well as tax increases demanded by Greece’s European lenders. In return, the troika of official creditors — the European Commission, the European Central Bank and the International Monetary Fund — promise to consider, but not guarantee, reducing the punitive interest rates they charge Greece for bailout loans and unlocking a $40 billion aid payment Athens needs to avoid a default on its debts. No responsible Greek lawmaker could have ignored the terrible consequences of voting no. But no one can dismiss the threat to social stability from these cuts

The fact is, just about everything in this austerity package has been tried before and failed disastrously. These unpalatable steps will do nothing to make Greece’s debts more payable, bring its budgets closer to balance or help make the structural reforms Greece needs to revive its economy. Instead they will almost certainly further shrink an economy that has already shrunk by an astounding 25 percent over the past few years, making fiscal improvement nearly impossible. 


Greek lawmakers know this but feel compelled to do as their European creditors ask. And, we suspect, many of those creditors also know that more austerity is not the answer. But so far, they have been unwilling to challenge the leader of Europe’s biggest economy, Chancellor Angela Merkel of Germany, who continues to believe that only economic punishment will push Greeks to reform.

It may be a winning political formula in Germany, where Ms. Merkel stands for re-election next year. But it is a profound, and profoundly unnecessary, tragedy for Greece. 


The article can be found here... 

Sunday, October 28, 2012

On maximum prices (price ceilings)

This is another prezi created by another student, Alexis Syriopoulos, on price ceilings!  Prezi seems a fun way to engage IB economics students and to organize the structure of a lecture.  I'm sure as we become more and more proficient the end result will be more and more stunning and more and more useful.

Here it is:



Enjoy!

Saturday, October 27, 2012

My first prezi...ahh! (on indirect taxation)

This is a prezi presentation I created to use in my IB economics higher level year 1class this week.  It's on indirect taxation:




The Role of the Price Mechanism in Resource Allocation...

My students and I have (re)discovered Prezi and they are working small wonders preparing sweet and short presentations on IB economics topics.  I found this jewel (by Danai Michalakaki) on the role of the price mechanism in resource allocation.  Enjoy it!