Back again....(once more)
I would like to thank my dear colleague Jeff from the IBDP V2 WhatsApp forum for IB Econ teachers for (indirectly) incentivizing me to kick-start this now!
economics is a dirty job but someone's got to do it
Back again....(once more)
I would like to thank my dear colleague Jeff from the IBDP V2 WhatsApp forum for IB Econ teachers for (indirectly) incentivizing me to kick-start this now!
Mr. Powell delivered a nuanced speech signaling the Fed was committed to a “risk management” approach, of adjusting policy to try to prevent bad things from happening. His words kept the Fed’s options open.But he made clear that a breakdown of global trade relations was not the kind of thing that the Fed’s interest rate policies were well suited to addressing.“While monetary policy is a powerful tool,” Mr. Powell said, “it cannot provide a settled rule book for international trade.” The central bank can only adjust policy to try to respond to the ways trade policy changes affect the overall outlook. The implicit message: If erratic trade policy undermines the economy, the Fed’s tools are likely to have only limited ability to overcome the damage. Interest rate cuts in that situation would be like giving pain relievers to someone with a broken bone — better to have than not, but unable to solve the underlying problem.
Food for thought!Also speaking at the Jackson Hole symposium was the Bank of England governor, Mark Carney, who described a limited ability to use monetary policy to offset the damage from Britain’s potentially messy exit from the European Union this fall.“In the end, monetary policy can only help smooth the adjustment to the major real shock that an abrupt no-deal Brexit would entail,” Mr. Carney said, and that ability would be constrained by the need to keep inflation under control.
"students will work with new quantitative and qualitative data demonstrating a deeper understanding of a real-world issue scenario, using the theories, models, ideas and tools of economics and culminating in policy advice"
Argentina’s central bank ramped up interest rates by 15 percentage points on Thursday in a bid to slow the fall of its plunging peso, part of a sell-off among emerging market currencies. (I like the use of 'ramped up!)The Peso is depreciating rapidly (making imports much pricier and thus feeding inflationary pressures as a result of 'fears the country would not be able to make its debt payments'. These fears explain the 'sell-off' mentioned above.
This is an interesting development for many reasons. It may be interpreted as a winner for US President Trump and his aggressive policy stance ('...may please the Trump administration'). But is also forces the US to play by the EU's bold proposal: will the US auto industry be able to thrive in an zero car tariff world? We'll see how this one plays out.Cecilia Malmstrom, the European commissioner for trade, told members of the European Parliament that the bloc was willing to reduce “car tariffs to zero, all tariffs to zero, if the U.S. does the same.”“It has to be reciprocal,” she said. “We would do it, if they do it. That remains to be seen.”
Using demand and supply analysis, explain how resources are allocated through changes in prices in a market economy; Using diagram(s), explain the signaling and incentive functions of price; Explain the role that prices play in the allocation of resources in free market economies; Explain how changes in price work to reallocate resources in a market; Explain how scarce factors of production are allocated by the free market.Focusing now these, what is the crux of these questions? What does the examiner expect for sure?
In 1993 a study by NASA, America’s space agency, stated: “While no single food can supply all the essential life-sustaining nutrients, quinoa comes as close as any other in the plant or animal kingdom.” But it took adulation from the likes of Oprah Winfrey (who in 2008 included it in her 21-day “cleanse” diet) to give the grain global appeal. Now, wherever yuppies can be found, it can be too, usually lurking near Puy lentils or goji berries in a salad. (see Quinoa: Against the grain)Demand for quinoa, in other words, increased dramatically! Its price started rising, and candidates have to explain here the ‘signaling’ role (that this increase in price emits information to market participants) and then to explain the ‘incentive’ role (that producers as a result of higher profit margins have the incentive to offer more quinoa -extension of supply- while some consumers cut back or drop-out - contraction of demand…blah, blah, blah).
Explain the difference between short run equilibrium and long run equilibrium in monopolistic competition; Explain why firms in monopolistic competition can make economic (abnormal) profits only in the short run; Explain why a firm in monopolistic competition will make only normal profit in the long run.
I kept asking ‘how much more time do I have’? (was checking the time I had left very often)
and, while writing my response, I was reading the question again and again
The Turkish currency, the lira, has lost about 30% of its value against the US dollar since the New Year.
The stock market has fallen 17%, or if you measure it in dollars as some foreign investors would do, the decline is 40%
Turkey has a deficit in its international trade. It imports more than it exports. Or to put it another way, it spends more than it earns.
The central bank has an inflation target of 5%. A year ago, inflation was well above that, at about 10%. Since then the situation has deteriorated further with prices now rising at an annual rate of about 15%.
Unemployment is on the high side - the most recent figure is 9.9% - but it has been relatively stable.
In some respects the recent performance of the Turkish economy looks reasonable. It has grown every year this century apart from 2001 (the country's last economic crisis when it received an IMF bailout) and 2009 (in the aftermath of the global financial crisis). In some years growth has been very strong.On the other hand:
(The trade) deficit has to be financed, either by foreign investment or by borrowing. In itself that is neither unusual nor dangerous. But Turkey's deficit is quite large at 5.5% of national income, or GDP, last year.
...Credit rating agency Moody's says that economic growth has been boosted to unsustainable levels by spending and tax policies. Policies for long-term growth have been sidelined, the agency says, given the focus on election cycles
...many Turkish companies have borrowed in foreign currency. Those loans become more expensive to repay if the value of the national currency declines - which it has.
The currency weakness also aggravates Turkey's persistent inflation problem. The weaker lira makes imports more expensive.
Credit rating agency Fitch estimates that Turkey's total financing needs this year will be almost $230bn.... Even borrowing in dollars is expensive for Turkey at a cost of around 7%And:
There is an obvious policy option open to a central bank that wants to bear down on inflation - raising interest rates. That can curb inflation in two ways. It can weaken demand at home, and by increasing financial returns in Turkey encourage investors to buy lira - which strengthens the currency and reduces the cost of imports. What bothers the markets is the president's well known - and most economists would say, ill-informed - opposition to higher rates.
Turkey is also at risk from developments in the US. The Federal Reserve continues to raise interest rates, which encourages investors to pull money out of emerging markets.
..and:China plays the globalization game by what we might call Bretton Woods rules, after the much more permissive regime that governed the world economy in the early postwar period. As a Chinese official once explained to me, the strategy is to open the window but place a screen on it. They get the fresh air (foreign investment and technology) while keeping out the harmful elements (volatile capital flows and disruptive imports).In fact, China’s practices are not much different from what all advanced countries have done historically when they were catching up with others. One of the main US complaints against China is that the Chinese systematically violate intellectual property rights in order to steal technological secrets. But in the nineteenth century, the US was in the same position in relation to the technological leader of the time, Britain, as China is today vis-à-vis the US. And the US had as much regard for British industrialists’ trade secrets as China has today for American intellectual property rights.
Five minutes to check out!The fledgling textile mills of New England were desperate for technology and did their best to steal British designs and smuggle in skilled British craftsmen. The US did have patent laws, but they protected only US citizens. As one historian of US business has put it, the Americans “were pirates, too.”
Economists have long believed that improving the supply side of the economy—reducing barriers to entry in product markets and making labor markets more flexible are notable examples—is the key to sustaining growth...
In work undertaken several years ago, we found strong support for the idea that structural reforms conferred sizable benefits for economic growth.
Since the global financial crisis of 2008, however, economists and policymakers have begun to question whether supply-side policies alone can ensure sustained growth. They point to mounting evidence that growth tends to be more fragile and less resilient when it is not inclusive and its fruits accrue mainly to the wealthiest.
This could reflect the fact that—when adverse shocks occur—there is less support in unequal societies for the kinds of policies that help right the economic ship, because the short-term pain doesn’t bring broadly shared longer-term gains.(or, as I write in my SG, but much less succinctly... (p. 96): With a more equitable income distribution, '...social tensions will be lower, so governments can more easily undertake important economic reforms requiring a high degree of consensus within the population. If people feel that they enjoy the fruits of economic growth then they will be willing to work harder and sacrifice more now in order for them or their children to enjoy more at a later date'.)
It could also simply reflect the fact that these societies don’t offer equal access to education, health care, nutritious food, credit markets, and even the political process (equality of opportunity for short), making them less resilient in general.(or, 'inequality can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus required to adjust in the face of shocks, and thus that it tends to reduce the pace and durability of growth', from 'Redistribution, Inequality,
And:
We argue (Ostry, Loungani, and Furceri 2018) that policymakers’ faith in their ability to get growth going through supply-side measures and deal with distributional issues later is a dangerous gamble, and that they should instead focus simultaneously on the size of the pie and its distribution. I call this a macro-distributional view for short.Concerning the trade-off between equity and efficiency that is often discussed, Ostry has the following to say:
Economists have generally frowned upon paying attention to distributional issues. (This) is evident also in the modern work of Nobel laureate Robert E. Lucas Jr., who wrote in 2003 that “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.” The basis of this view is the so-called trickle-down theory, which holds that a rising tide lifts all boats, so that if growth is assured, there is no need to worry about distribution.But...
...if healthy growth is undercut by excessive inequality, then even the policymaker who has no qualms about the moral or social implications of inequality should be concerned about the economic cost.Ostry continues, and in his last paragraph, concludes...
The task of policymakers is to ensure that the disadvantaged also have the opportunity to succeed in the modern, hyperglobalized economy, by designing reforms and globalization with an eye to their distributional effects. If they fail, pro-growth reforms will lose political legitimacy, enabling destructive nationalist, nativist, and protectionist forces to gain further traction and undermine sustainable growth.I hope you are now more interested in reading all of Ostry's (short) article. In case you are really in to the importance of inclusive growth (for your country, not just for the May/Nov final exams...), then you could also check out this: Redistribution, Inequality, and Growth Prepared by Jonathan D. Ostry, Andrew Berg, Charalambos G. Tsangarides, April 2014.
The key point when you look at real GDP is that the economy’s actual output depends both on its capacity – the amount it is capable of producing on a sustained basis – and the rate at which it is using that capacity. That is,
Output = capacity * capacity utilization
...you can look at the ratio of actual GDP to potential, which is an indication of how hot the economy is runningand,
...Why does capacity utilization fluctuate? Mainly because the economy sometimes suffers from periods of inadequate demand, as it did after the 2008 financial crisis. Sometimes, also, the economy overheats, reaching levels of capacity utilization that will lead to rising inflation.The equation above is a slightly stylized (and more compact) version of what the IB syllabus states, namely that growth can result from greater use of existing resources (=capacity utilization) and from more / better resources becoming available (=capacity).
Portugal took a daring stand: In 2015, it cast aside the harshest austerity measures its European creditors had imposed, igniting a virtuous cycle that put its economy back on a path to growth. The country reversed cuts to wages, pensions and social security, and offered incentives to businesses. The government’s U-turn, and willingness to spend, had a powerful effect. Creditors railed against the move, but the gloom that had gripped the nation through years of belt-tightening began to lift. Business confidence rebounded. Production and exports began to take off...And, the Prime Minister explains:
“What happened in Portugal shows that too much austerity deepens a recession, and creates a vicious circle. We devised an alternative to austerity, focusing on higher growth, and more and better jobs.”But:
Mr. Costa (the Prime Minister) made up for the givebacks with cuts in infrastructure and other spending, whittling the annual budget deficit to less than 1 percent of its gross domestic product, compared with 4.4 percent when he took office. The government is on track to achieve a surplus by 2020, a year ahead of schedule, ending a quarter-century of deficitsAnd, if you wonder about the importance of the level of confidence households and businesses have (the 'feel good' factor as we say in class), look at this:
While discouragement lingers in Greece after a decade of spending cuts, Portugal’s recovery has pivoted around restoring confidence to get people and businesses motivated again.“The actual stimulus spending was very small,” said João Borges de Assunção, a professor at the Católica Lisbon School of Business and Economics. “But the country’s mind-set became completely different, and from an economic perspective, that’s more impactful than the actual change in policy.”
Of course, 'good governance' is needed for such a path to prove successful. But, good governance is not necessarily available in all debt-ridden countries...Elaia says it generates 14 percent of Portugal’s olive oil today, contributing to a renaissance in Portuguese exports, which now constitute 40 percent of economic activity. Drones buzz over vast olive groves, precision-planted with 2,000 trees per hectare, or roughly 2.5 acres, compared with around 150 trees for a traditional farm, monitoring crops for insect infestations, water levels and optimum harvesting time. Olives are picked by machine. Instead of field hands, the company hires technicians to operate the robots, and it has teamed up with universities for research.
Pollution of any
type
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Deforestation,
overfishing (CARs)
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Taxation of liquor /
tobacco
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Subsidies on farm
products
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On health care /
education
|
Rent control;
gentrification
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Minimum wage
|
Collusion
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Price wars
|