IB Economics HL (and SL): Two interesting articles on International Economics for Year 2 candidates

I am enjoying the last few days of my summer vacation reading articles from several news sources (not fake at all, IMO...).  Two of these I would like to share with my Year 2 students as they relate to the material we will be covering this fall.

The first one is Argentina, Combating Plummeting Currency, Raises Interest Rate to 60% from the New York Times. The first paragraph clearly explains the issue:

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. 

What is also a driving force behind the depreciation of the Argentinian Peso, the Turkish Lira and the South African Rand is that the Chairman of the US Fed (the US central bank) has credibly signaled that the US is sticking to its decision (see Fed's Powell Just Wants to Be Understood) to increase interest rates (which makes US bonds and dollar deposits more attractive to financial investors): Pesos, Liras and Rands are sold, to buy US dollars, driving the value of the dollar up and the value of these currencies down.  Add to this the debt issues Argentina is facing and the unwillingness of Turkey to tighten monetary policy and you get the plummeting currencies.  A pretty typical story for the currencies of emerging economies.

The second article, again from the New York Times, is E.U. Says It’s Ready to Abolish Car Tariffs, Shifting Position.  Quoting:

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.”

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.

IB Economics: Advice on essay writing (paper 1) continued...

In the first part of this post (August 12) I focused on my so-called 'Type A' candidate, a 'candidate who is aiming to achieve a 6 or a 7 in Economics and to study in a top university after graduation'.  This candidate was very well versed in theory, had practiced a lot of essay writing but often was not able to achieve top marks in a P1 essay, i.e. achieve even Level 3 or especially Level 4.  From my experience, this was either the result of poor time management and/or of not embedding their response within a real world context.  They would define, draw, explain and discuss beautifully, but, often,  all of their work was "in a vat" i.e. they never related it to the real-world.

I define Type B IB Economics candidates as individuals who have not studied much and, most importantly, have not practiced much essay writing.  How can one help these guys?

One thing that I have been doing for many tears is to hand out (to all of my students) my file with all past IB Econ essay questions (the file goes back to 1998 for the HL essays and to 2005 for SL). 

If these essays are grouped together by syllabus section or, even in much smaller syllabus chunks, (say, all essays that relate monopolistic competition or even, to why in monopolistic competition firms earn only normal profits in the long run; or, all essays that relate to unemployment or, just to structural unemployment) then, (interested; a sine qua non condition) students, realize that question setters really have a limited choice set!  There is only so much variation that the learning outcomes of our syllabus permit.
 
For example, let us look at two groups of questions:

Group I:

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?

Well, all these questions Group I deal with how free (competitive) markets manage to allocate scarce resources.  I would suggest that the answer in a nutshell relates to the signaling and incentive roles of prices.  Without these two terms, the question cannot really be answered (in my opinion, at least). 

What terms should one necessarily define?  I think that it would be a good idea to define resources, allocation of resources, a free (competitive) market as well as demand and supply. 

Which diagram?  A simple demand and supply diagram pertaining to some specific market with the demand shifting to the right following an increase in demand for this product.

How about the real-world example?  I encourage my students to use a great example (again, in my opinion), the case with quinoa.  Quinoa was/is a staple food of the populations of the Andes which became very fashionable to eat in the US and later Europe and Asia when an American TV persona, Oprah Winfrey, made it known to her zillions of viewers. Quoting from the Economist:

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).

Eventually, the new equilibrium Q is greater than the original one and, since you can’t produce something out of nothing, more scarce resources (land, workers, machines) are channeled into quinoa production.  The end.  But, this example is great, as of course (…see the articles below for a nice story that can be used to illustrate tons of econ concepts)

So, it may be a good idea to ask candidates to:

a. Think of the ‘answer’ in a nutshell (usually, but not always, possible)
b. Think of the relevant terms to define
c. Think of the diagram(s) to use and to explain
d. Think of the real-world example within which (hopefully) the response may be embedded

Now, for the Group II essays.

Group II essays:

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. 

What is the answer in a nutshell to pretty much all of these?  I think that the examiner expects candidates to explain how entry of new firms (or, also, exit of some existing firms) in such a market ensures that in the long run monopolistically competitive firms earn only normal profits.

What terms should one necessarily define?  I think that one must define carefully a monopolistically competitive market (and within this, define differentiated product using a couple of examples as well as barriers to entry) and provide a couple of generic examples.

Which diagram(s) should one use?  Well, I think that one definitely needs to carefully draw a monopolistically competitive market where the firm in focus makes supernormal (abnormal) profits (i.e. positive economic).  This would illustrate the short run equilibrium position.  And, then of course, one where this monopolistically competitive firm is making only normal profits (and define this term correctly – see below) i.e. zero economic profits. This would be the long run position (one could draw also the case of losses BUT…see below). 

How about the real-world example?  Well, I would suggest that students narrow down the generic example used to an actual real-world example they are aware of.  For such questions I guide my students to a specific restaurant-café market in the northern suburbs of Athens where there were initially only few firms, but their number has increased (and somewhat, stabilized).  Or, I like the story of the frozen-yogurt fad in my city where the number of sellers surged and then, when the fad was over, it decreased and seems to have also stabilized.  Any food market in any (US) mall could also help or the food stalls in many cities around the world. 

So, my advice to my Type B kids:

Group similar essays together.  This for me is the single most important task for these (all, really!) students.  Then, help them find the (at least the most important) relevant terms that must be defined, Then, guide them to think of the diagram(s) for each group; and, to think of a real-world example for each group.

So, these guys must during the last couple of months have outlines for the limited number of essay groups they come up with.  Teachers may of course facilitate the process.

There is, unfortunately, in many schools, a third type of candidates.  These guys may go through the 2 DP years doing almost no work.  I am usually fortunate enough not to have such a group (even though occasionally, there is a kid who can rightfully claim membership…). In this case, I have been forced to focus mostly on macro (as it has significantly fewer essays to worry about): unemployment, inflation and growth (perhaps, somethings on income distribution that may even be useful for P3).  Perhaps also on a few micro topics (like comparing PC and monopoly; pollution; alcohol). And, then pray a lot! 

Now:

Issues I have seen related to the concept of economic profits in the IB:

Normal profit is defined as the minimum return a firm (an entrepreneur) requires to earn to be willing to remain in the present line of business.  This minimum is equal to what this firm (these resources) could have earned in the next best alternative with the same risk. 

It follows that supernormal (or, abnormal) profits are any profits above this minimum. 

If supernormal profits exist, then other firms (entrepreneurs) will want to take advantage of this opportunity and try to enter this market (here: role of barriers). 

If more firms do enter then:
(a) in the PC setup, the market supply increases (shifts to the right), decreasing the price and squeezing economic profits down to zero.  If losses exist (so firms are making less than what they could have earned in their next best alternative), then exist will decrease market supply, raising the price until no more firms have the incentive to exit

(b) in a MC setup, since there is NO supply curve, the induced entry of new firms will “shrink and tilt” the demand that the incumbent firms face for their product (decrease and flatten it - i.e. make it more price elastic as consumers face more and closer substitutes) until these supernormal profits are competed away.  With losses, the opposite, of course.

Kids always ask why is it that firms making normal profits i.e. zero economic profits are willing to continue to operate? 

They must understand that normal profit is an element of economic costs, as normal profits represent the minimum required to be earned to secure the 4th scarce factor of production, entrepreneurship!  Remember, to secure the scarce factor ‘labor', wages have to be paid and all realize that wages are an element of cost!  This is a point of course that requires quite a few examples (and, some time…) but, in the end (usually), candidates really understand the idea and its implications.  So, one cannot define normal profits as zero economic profits!  This is just a condition: if economic profits are zero, it means that the firm (the entrepreneur) is earning the minimum required to remain in this line of business!

Lastly, concerning the trade-off mentioned above on whether to include a 3rd diagram in the Group II essays.  Diagrams must be drawn in the same manner as in a Grand Prix, Ferrari car mechanics change tires: very fast and very precise.  But, in my experience, students take longer than necessary.  So, I would advise against using (drawing) a 3rd diagram and, instead, briefly explaining that if there are losses, then exit will take place until supernormal profits are competed away.  The opportunity cost of drawing a 3rd diagram may be too high and not worth paying it.

PS: Some interesting articles on the quinoa story include: Quinoa brings riches to the Andes, Overproduction and Consumption Threatens Andes Superfood Haven, The Quinoa Boom Goes Bust in the Andes

PS2: Interested IB Economics teachers can access my files with all past IB Economics essays (for HL Economics and for SL Economics) at MyIB.

IB Economics: Some advice on essay writing (paper 1)

The question how to help students write top-notch essays in IB Economics examinations was again, very recently, asked by a colleague.

Paper 1 is perhaps the most difficult paper for IB Economics students to deal with, especially if English is not their native language.  So, how can one assist candidates in this task?

Let’s assume two broad types of candidates:  Type A is the candidate who is aiming to achieve a 6 or a 7 in Economics and to study in a top university after graduation.  Such a candidate has prepared very well and is well versed in theory.  So why does he or she often earn L3 or L2 marks i.e. 4 to 8 out of 10 in part (a) or 6 to 12 out of 15 in part (b)? Why is it so difficult to achieve a Level 3 response and almost impossible to achieve Level 4?

In my experience, the following are the two typical reasons for our Type A candidate:

Some run out of time, having spent too much time in parts (a) and in the first essay attempted (out of the two expected).  And, many others, fail to effectively use real-world examples.  They all define properly the relevant terms used, they all explain well the relevant economic theory and they all manage to draw, correctly label and explain all relevant diagrams.  After all, we are assuming Type A candidates!

So, what advice would I offer to these guys?

Let me tell you a real story.  I was asked a few years ago (2013 syllabus) by students to write in front of them on my laptop (and project what I wrote on the classroom screen) an essay that they chose (I’ve since done this a number of times). I initially objected explaining that it seemed like a total waste of our precious time.  Eventually, I succumbed.  They asked me to write a specific micro essay.

After 800 years of teaching and a Ph.D. in Economics, I did a pretty good job.  But two things struck me and my students:

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

Why?

Because it is important to pace yourself.  You simply cannot invest too much time on any single point you explain, on any single definition you provide, on any single diagram you draw, on any example you use to illustrate.  You must always be aware of how much more time you have left.  One is not expected to write everything they know on a topic! 

This brings me to the 2nd point.  I kept reading again and again the wording of the specific question to make sure I didn’t go off on a tangent.  It is very tempting for a Type A candidate to think that the exam time is the time for a ‘tour de force’ of his or her knowledge on the issue!  Examiners simply want a clear response to the specific question not a chapter from your favorite textbook or study guide!

As a matter of fact, just this past year I had a student who was extremely strong (a straight ‘A’ student) but who scored (relatively) poorly in our first few exams which was devastating to her.  She would protest how could I not award her full marks when she wrote everything on the relevant topic! I tried to explain to her (at one point I wrote a 3-page word document for her!) that this was exactly her problem:  there was no way for the examiner (moi…) to ascertain that she really had understood the question! 

According to the assessment markbands found in the 2013 syllabus (my students have access to these) examiners need to determine that ‘there is clear understanding of the specific demands of the question’.  If the Type A candidate writes everything under the sun, I cannot be sure that there is ‘clear’ understanding of the ‘specific’ demands of the question!  She eventually understood the point and her essay writing improved significantly (she earned a 7 this May and was accepted at one of the best US colleges).

Concerning the use of real world examples, candidates must try to be aware of what is going on in their country and in the world.  This blog also aims at providing some help on this issue.  But students could work alone or in groups of 2 or 3 with or without the guidance of their teacher to build a file with as many real-world examples as possible on as many learning outcomes of the syllabus as possible.  A shared google doc could also be used (or course, in my experience, there is always the free-rider problem but not much we can do about this!).  Class presentations of real world examples once or twice per month could also be organized with each student (or group) responsible to illustrate an issue.  If the teacher has provided students with a file of all past IB Economics micro and macro essays (I do that at the beginning of the year) then these essays can be grouped and real-world examples can be found by the student(s).

Bottom line for Type A candidates:

Keep track of time – know how much more time you have left (remember: if you have no extra time, I advise my kids to invest no more than 20 minutes on part (a) in order to have at least 25 for part (b))

Read the question again and again to remain focused and avoid going off on tangents

...and, of course:

Effectively use (not just mention) real world examples in your response

(obviously provide clear definitions of relevant terms, draw and label and explain relevant diagrams, clearly explain and apply relevant theory)

Separate posts will follow for Type B candidates as well as for some tips specifically for part (b) essays.

PS: Please follow your own teacher's advice as he/she knows his/her class best

IB Economics: A Macroeconomics Primer - The BBC on the Turkish Economy

I was watching BBC a few minutes ago and there was a running banner (is that what it's called?) at the bottom of the screen reading 'Turkish economy heading for a crisis'.  I got curious so I logged on to BBC site and I found an article ('7 hours ago') with the same title: Is Turkey heading for an economic crisis?, by Andrew Walker, a BBC World Service economics correspondent.

I read the article and I immediately realized that it is perfect to discuss much of IB open economy macroeconomics with my class this fall.

First some of the reported facts:

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. 

Could there be more to discuss in one article?

Causes of growth (types of growth to avoid; short-term and long-term growth)
Debt and credit rating
Sustainability of growth / debt
Inflation
Monetary policy
Independence of central bank
External sector as a constraint in achieving domestic policy goals
Factors affecting the exchange rate
Consequences of a depreciating currency
Policies to correct a widening trade deficit
Political business cycle

...and, more.

Read the full article!

Britain the US and China: Dani Rodrik explains

I have been following Dani Rodrik for quite a while.  Much of what he writes is (rather) accessible to all and that is very important for IB Economics students.  I just read a very short and very interesting article he wrote titled The Double Standard of America’s China Trade Policy. There are zillions of articles on the US - China trade conflict and for us it is a conflict worth paying close attention to.  Rodrik's article is great because he puts it in context.
I quote:

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. 

 ..and:

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.”

Five minutes to check out!

Growth or Inclusion?

The syllabus for IB Economics (both HL and SL), expects candidates to examine 'the relationship between equity and efficiency', to 'discuss the possible consequences of economic growth on the distribution of income' as well as to 'examine how income distribution may contribute to economic development'.

A great resource for me in my teaching over the past several years has been the quarterly magazine Finance and Development  published by the IMF.  It is free, it is accessible, and most articles are highly relevant to the IB Economics syllabus.  I highly recommend it to both students and teachers.

In the latest issue (June 2018) there is a most interesting and useful article for us by Jonathan David Ostry, the deputy director of the research department at the IMF.  The title of the article is Growth or Inclusion? With the right policies, countries can pursue both objectives.  It is available also in pdf format (to email to students perhaps).  Definitely worth reading- 3 pages, not more than 20 minutes of careful reading.

Here are a few excerpts that I found interesting (to whet your appetite?):

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 Growth', see bottom of this post)

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.

IB Economics: a 101 on growth (by Krugman)

Paul Krugman is a heavyweight in Economics.  No doubt about that. He was the winner of the John Bates Clark in 1993 (while at MIT '...given biannually by the American Economic Association to the economist under 40 who has made the most important contributions to economics'; see MIT on Krugman's award) and the winner of the 2008 Nobel Prize in economics (while at Princeton, '...for insights into international trade patterns that overturned longheld theories about the global economy'; see Princeton on Krugman's Nobel prize).  He is also a 'media columnist and commentator' writing for the NYT and, of course in this respect, you may agree or disagree with him.

In this latest column he discusses the recent strong 2nd quarter US growth rate.  I will not focus on the 'politics' of this opinion, but on some simple analytics that all IB Economics students should be aware of.

Quoting Krugman:

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

An estimate of 'capacity' is “potential GDP” (which in the US is published by the CBO, the Congressional Budget Office).

He continues...

...you can look at the ratio of actual GDP to potential, which is an indication of how hot the economy is running

and,

...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). 

And another point Krugman makes (read the whole article if interested) also ties well with this LO from the IB Economics syllabus: 'Evaluate the view that increased investment is essential to achieve economic growth'.  What is missing, according to Krugman, to determine whether high growth rates are sustainable, is an 'investment surge'.

The other point he makes that 'wage gains' are also missing, ties in well with our discussion on income distribution (this fall for candidates 2019 at a theater near you: 901 in Athens).  The point relates to how a satisfactory growth rate number should be evaluated.  If curious, see Emmanuel Saez Berkely lecture here.

Lastly, I was curious about the word 'nothingburger', so had to check dictionaries.  Did so.  I think I will use this word as a comment when marking some (few, I hope) school essays, instead of the standard IB: 'NAQ'...

Portugal and austerity: lessons in 101 Economics?

My wife, who is half Portuguese, brought to my attention an article on Porto and how lovely it is.  In searching for the article (as she rarely bookmarks sites...), I found a NYT article that caught my attention.  The article's title is telling: Portugal Dared to Cast Aside Austerity. It’s Having a Major Revival.

Portugal decided to ditch austerity and instead pursued a more Keynesian (?) stance:

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 deficits

And, 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.”

Lastly, the description of the production technology of a olive oil producer featured in this article is interesting:

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.

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...

BTW, the article my wife alerted me to on Porto, and how beautiful it is, is this one: Pret a Porto: Portugal’s second city is ready for the limelight.

The OECD Better Life Index

I was reading an article on the shortcomings of per capita income as a measure of living standards (see the Stiglitz-Sen-Fitoussi Commission: Measurement of Economic Performance and Social Progress) and I came across a number of interesting alternatives that try to capture the well being of people.  One of these is the OECD Better Life Index which covers the members of the OECD, plus Brazil, Russia and South Africa. 

The Better Life Index includes 11 'dimensions' or indicators of well-being (see Better Life Index - Edition 2017):

Housing
Income
Jobs
Community
Education
Environment
Governance
Health
Life Satisfaction
Safety
Work-life balance

You can fool around with the BLI.  For example, you can choose which indicator(s) is/are the most important for you, to see how countries rank.  You can easily check out gender differences.  And you can check-out How's Life in each of the countries the BLI covers. The latest for Greece is here, pretty dismal, I may say.

The latest BLI is found here.

On Central Bank independence

Just read that the US President has criticized the Fed, the US central bank, for tightening monetary policy: "I don't like all of this work that we're putting into the economy and then I see rates going up," Trump said, 'a rare rebuke by a sitting president that upends longstanding executive branch protocol to avoid commenting on monetary policy'.

Interesting.

A few weeks ago I had read several articles reporting that Turkey's President Erdogan has described high interest rates as “the mother and father of all evil”.

So much for central bank independence.

Check out:
Trump Takes a Rare Presidential Swipe at the Fed
but, also: Trump says he’s “not thrilled” by Federal Reserve interest rate hikes
(as, many may argue convincingly that there is no real need yet for tightening; the issue though now is CB independence)

and:
Turkish bankers try to drag Erdogan toward monetary sanity to no avail
and: Turkey to prioritize lowering inflation, interest rates

To write a “good” (i.e. Level 4) economics essay for the IB:

I handed out (emailed, actually) once again for my IB Economics students the following on how to prepare a 'good' economics (paper 1) essay (based, of course, on the official IBO criteria).

To satisfy the criteria for Level 4, you must:

1.       Show clear understanding of what exactly the question is about

2.       Clearly define ALL the relevant terms

3.       Clearly explain the relevant economic theory involved

4.       Carefully draw, label and effectively explain any appropriate diagram(s)

5.       Effectively use examples, preferably from recent from the real world; not just mention but ‘use

  ….and, for part (b): there must be evidence of appropriate synthesis or evaluation

The essay must also be clearly structured.  It should never be a ‘blob’.  It should include several, clearly distinguishable, paragraphs; each paragraph must be separated from the next with a blank line. 

You may start by defining the central term(s) of the essay (probably in its wording).  You may include, especially in a part (b), a concluding, summative paragraph, where a summary of the information you provided is presented.

Read the question many times before you start. Do so, even while you are answering it.  It will help you remain focused.  Very often, candidates go off on (irrelevant) tangents.  Writing everything you know on a topic is also a recipe for disaster as this approach does not reflect clear or any understanding of the "specific demands" of the question. 

Don't forget to read your work again before handing it in.  If it is a homework assignment and you decide you do not like what you did, do it again.  It will save you lots of time in the long term.

Also, before staring to write a specific homework essay, make sure you know very well the underlying theory.  It is preferable that you read again before you start a question the relevant pages from the textbook or the study guide your teacher has assigned as well as your class notes (as recent, real world, examples may have been mentioned in class).

Needless to say, if it is an exam, you must keep track of time!

Notes to help IB Economics students with their Internal Assessment

The Internal Assessment in Economics is a most interesting exercise.  It is also very useful.  It is useful, first of all, because you have to search (quite a lot) to find a 'convenient' article (see below for what I mean by 'convenient').  You will thus be forced to read quite a few articles to arrive at the one that you feel will permit you to best fulfill the requirements (make sure you save all articles you read as long as they are interesting and related to what you cover in class.  This will help you write better essays in Paper 1 where real world examples are a must to achieve high marks)

The Economics IA  exercise is also useful as it permits you to apply the knowledge you gain.  You will be reading articles under a total different light than if you had read them before starting this course.  You will have a framework of analysis which will help you make more sense of what you are reading.  You will have the opportunity to write your own 2 cents on the issue when discussing the issue at hand.  This way, whatever theoretical knowledge you gained in class will become embedded in the real world.  You will see the power of theory as well as its shortcomings.

Below is what I gave this year my Year 1 (Candidates 2019) students on how to go about writing their first commentary.  Hopefully, these notes could be useful for students all over the world who are taking IB Economics (Higher and Standard level). 

Some notes on the IB Economics Internal Assessment

Search for a ‘convenient’ article:

è Preferably, not more than 3 months old (max 6 months)

è Preferably, between ¾ of a page and 3 pages long

è Definitely, on a topic that you can employ at least one (perhaps, two) diagram(s)

è Convenient topics include

Pollution of any type

Deforestation, overfishing (CARs)

Taxation of liquor / tobacco

Subsidies on farm products

On health care / education

Rent control; gentrification

Minimum wage

Collusion

Price wars

è Article should be of a ‘reporting’ nature, not an opinion, as you will have less to write / explain

è Avoid the Economist (usually analysis is already there – not much for you to explain / analyze / discuss)

è Avoid blogs

è Article MUST be in English

Once article is found

è Make an outline

o   Jot down the terms you may use

o   Determine the diagram(s) that you may employ

o   Think of the points to explain / evaluate / discuss; make notes on each of these

o   Find the 4-5 quotes that you will use

On the actual writing

è Do not use bullet points

è 1^st paragraph may present what the article is about

è In the next few paragraphs explain the points using a diagram and quotes

è Your explanation / analysis must be ‘applied, applied, applied’: never lose sight of the article; make constant references; use 4-5 quotes as they show that your analysis is APPLIED to the specifics of the article chosen; title of diagram(s) must be focused on the specifics of the article title of diagram(s) must be focused on the specifics of the article: if there are figures (values; numbers) in the article, then use these on the diagram!

è Must be less than 750 words

o   Note that words in the title of diagrams (up to 10 words) do NOT count

o   Words on labels of the diagrams up to (5 words) each do NOT count

è Avoid footnotes: if a footnote is included then it must be a reference

è Terms have to be used, NOT defined; define only one or two wicked crucial terms – no more

 

On the diagram(s)

è Use whichever software you want but make sure diagram is ‘anchored’ i.e. it does not move around when re-editing (‘grouped’)

è ‘Paint’ (also available for Mac) is recommended (but many others prefer Word or Drawing in Google docs – your choice)

è Use on the labels the same fonts that you are using in the commentary

è Labels should be article related (e.g. price of gasoline) 

Where to search

è Any news source you fancy; reporting articles are preferable so that you have more to explain and discuss

è I like the New York Times and the Washington Post (school subscription exists)

è Easy solution: use Google

o   Type search terms e.g. alcohol tax or tobacco tax or gentrification or collusion or price war etc.

o   Click on News

o   Click on Tools

o   Click on Recent

o   Click on Custom and insert date range

Read the handouts on the rubrics

è Each of the 3 commentaries must be from a different news source (i.e. you can only use the New York Times once)

è The 3 commentaries must be from 3 different areas of the syllabus (i.e. one from micro, one from macro (next year), one from trade (next year))

Key to success:

APPLIED, APPLIED, APPLIED

 ALSO

• If you do not have a Mac then it may be a good idea to download an extension for Chrome called “Mercury Reader”.  This ‘cleans-up’ (most, not all) articles from ads and ‘noise’ and produces a clean file that is easily read which can be saved as a pdf and printed out (right click: print, as pdf file (not at connected your printer))
• In PAINT (for PCs or for Macs), by pressing CTRL+SHIFT a line you draw is a perfectly straight (vertical, horizontal or 45-degree only)
• Make sure when you ‘select’ an image (or a label) you choose from the drop-down menu ‘transparent selection’ so you don’t mess-up the diagram

Where is the trade-off?

Many IB year 2 HL Economics students will soon be discussing with their teachers the so-called Phillips Curve literature.  The basic idea is that there is a trade-off between the rate of unemployment and the rate of inflation:  if unemployment decreases then inflation will increase (and vice versa).

This inverse relationship was first detected by a New Zealand economist (first a crocodile hunter then an electrical engineer and later an economist at the LSE - see Wikipedia) when studying the UK annual unemployment rate and the annual percentage change  in money wages:  when the labor market was tight (so unemployment was low) then money wages would tend to rise.  If prices were a mark-up on costs / wages, then if unemployment decreased, prices would tend to increase.  This pattern was detected for many countries but if the trade-off was stable then policymakers could 'choose' the most desirable unemployment-inflation combination and with demand side policies try to achieve it.  Some started talking even about 'fine-tuning' the economy which was anathema to Milton Friedman and the monetarists (this always sounds to me like a band...).  In any case, Friedman's ingenuity came up with the 'expectations-augmented Phillips curve' where there is no trade-off in the long run (defined as when expected inflation and actual inflation are equal).  In the long run there is only one rate of inflation compatible with non-accelerating inflation and that is the 'equilibrium' unemployment rate which (again, ingeniously) Friedman called the 'natural rate of unemployment'.
To make a long story short, the US unemployment has been steadily decreasing for some time and for many has approached or even exceeded the NRU so many have been expecting increases in money wages as well as increases in the average price level i.e. inflation.
But...not the case!  The question is what should the Fed do?  Should it slowly tighten monetary policy to avoid a jump in inflation and thus a greater increase in interest rates? But if there is still no risk of inflation for whatever reason?  Then growth would just slow down and people who could have found a job will remain unemployed.  The Fed has increased interest rates a bit but unemployment was still deceasing while inflation was still below the (totally arbitrary - see this excellent article) 2% goal!
Which bring us to this New York Times editorial Why is the Fed so scared of inflation which is definitely worth reading.

This is from the article:

As Fed officials try to make sense of how low unemployment, which should drive up wages and prices, persists side by side with low inflation, most simply assume that inflation will rise by next year as labor demand lifts wages and higher wages lead to rising prices. This belief has led to two interest rate increases so far this year, in effect tapping the brakes on growth to fight inflation, with another rate increase expected this year. A more plausible view is that persistently low inflation shows the economy is more fragile than policy makers want to admit, and needs to be helped, not handicapped. (the photo is from an FOMC meeting)

A simple exposition of the basics of the Phillips Curve for the IB HL Economics candidate can be found at my Economics Study Guide here or here or here (Oxford University Press)

On the history and shortcomings of GDP

A very interesting and useful article I found in Project Syndicate today.  The short article is titled Why GDP? and is written by Philipp Lepenies, a visiting professor of political science at the Free University of Berlin.

Quoting from the article:

Given GDP’s seeming indispensability today, it may come as a surprise that until the 1930s national governments’ only aggregate statistical measurement of the economy was tax estimates. This all changed on October 29, 1929 – Black Tuesday.

Congress recognized the need for an aggregate statistical picture of the economy, but it didn’t know how to produce one. It turned to Simon Kuznets, a Soviet émigré economist and future Nobel laureate, who was asked to define and calculate what was then called “national income.”

The focus thus initially was on National Income (and its breakdown).  Kuznets found that incomes had shrunk by half compared to pre-Depression levels and 'raising national income and ensuring that people earned more became the top priority.'

But...

...when the US entered World War II, the focus shifted. Next to the material production needs of the war effort, how much money people were taking home was no longer a pressing issue. Consequently, policymakers deliberately changed national income to gross national product, which merely showed the total dollar value of goods produced. National income and GNP were numerically identical – overall income generated is, by definition, equal to the value of goods produced. The crucial difference is that GNP doesn’t take into account how income is distributed.

And this hasn't changed.  Growth (increasing GDP through time) became...

...a universal goal for those in power because, by focusing on ever-expanding output, it avoids politics. As John Kenneth Galbraith pointed out in his 1958 book The Affluent Society, “… inequality has ceased to preoccupy men’s minds.” Enlarging the pie, the thinking went, meant everyone would get a bigger piece.

The full article can be found here.

(useful info for IB economics essay questions, given the Learning Outcome: 'Evaluate the use of national income statistics, including their use for making comparisons over time, their use for making comparisons between countries and their use for making conclusions about standards of living.'  For example, info from this article could be used in this (Specimen 2013) essay question: ‘Using real GDP data is a very useful means of comparing economic activity between countries.’ Discuss this statement.' Or, from this November 2015 question: 'Discuss the view that economic growth always raises living standards in a country.')

All past HL and SL IB Essay Questions collected from past papers

I've been doing this for quite a few years.  I collect past IB essay (P1) questions sorted by exam period and by syllabus section to help my students prepare for school and final (May) exams.  I have also been uploading this onto the OCC, the forum for IB teachers, for too many years to remember.

I have also just uploaded these files onto my Wiki space, available for downloading.

This is the link (check the bottom of the page): Past IB P1 HL and SL essay questions.

Hope these files prove helpful!

Helicopter money drop, Corbyn and how to accelerate British (and, not only) growth

In your IB class you probably had heard of Milton Friedman's 'helicopter money drop'.

When the causes of inflation were discussed, it was explained that one of the causes of demand-pull inflation was 'excessive monetary growth'.  Milton Friedman had said that 'inflation is a purely monetary phenomenon' and it will result if 'too much money is chasing after too few goods/'  He illustrated this with his 'helicopter money drop':  Army helicopters ('Black Hawks'...) fly over the Athens' sky (...I tell my students), and they open up their bellies and start dropping zillions of bags full of money -dollar or euro bills.  People go nuts.  They grab  garbage bags, pillow cases, suitcases etc and fill them up frantically with as much money (100, 200 and 500 euro or dollar bills) as they can get hold of.  I will do the same but only for a few minutes. When I fill up one large garbage bag I will run to the closest jewelry store and buy myself watches, golden bracelets, diamond rings etc. but also, from the  kiosk next to my house, a cold beer.  I will then sit and watch sipping my beer as people frantically continue collecting zillions without realizing that after a little while, prices will surge!

But...

...now, economies are suffering from deflation or near-deflation; they have not been growing; unemployment statistics may underestimate true unemployment (because of discouraged workers, involuntary part-timers etc.).  So?

Given that the unconventional monetary policies used these past few years, like QE (quantitative easing) and even negative interest rates (see on negative interest rates) have not really worked (they are thought to have inflated asset prices increasing income inequality and increased private debt), Friedman's idea sounds pretty sensible.  The Central Bank will hand cash directly to households and firms (I read somewhere that you could, for example,  receive in your mail a $1000 check to spend on whatever  you fancy, or the government could finance with such newly created money infrastructure projects (that also have a long run supply side effect).

Quoting:
WSJ article (see below):

Helicopter money seeks to remedy this problem by bypassing the financial system as an intermediary of monetary policy and opening a new channel directly to the wider economy. By printing up new money and putting it into the hands of firms and individuals to spend rather than to hold, prices will rise and so, it is hoped, will output.

and,

There are even bolder versions. Last Thursday, 35 economists wrote to the Guardian newspaper to say that “the money [created by the Bank of England] could be used to fund either a tax cut or direct cash transfers to households, resulting in an immediate increase of household disposable incomes.” More likely perhaps, the economists also proposed that “a fiscal stimulus financed by central bank money creation could be used to fund essential investment in infrastructure projects—boosting the incomes of businesses and households, and increasing the public sector’s productive assets in the process.”

The Guardian article (see below):

Direct cash handouts to households would be a better way of boosting Britain’s flagging economy than the interest-rate cuts expected from the Bank of England on Thursday, according to a group of progressive economists.

In a letter to the chancellor, 35 economists have urged Philip Hammond to ditch the approach that has been followed by the government since the recession of 2008-09 and give the Bank the right to try more radical options.

The letter, to be printed in Thursday’s Guardian, suggests that the Bank should be allowed to create money to fund key infrastructure projects. Alternatively, the group says the Bank could pay for tax cuts or direct payments to households.

These ideas can be used in Paper 1 HL and SL essays related to policies that could lift an economy out of recession or accelerate flagging growth (see OECD calls for urgent action to combat flagging growth) or fighting deflation, or, in an essay on evaluating monetary policy etc. etc..

The articles that provided the stimulus for this post are:
Wall Street Journal:
Central Banks are all 'Corbynistas' now

The Guardian:
Cash handouts are best way to boost British growth, say economists