Sunday, November 22, 2009

On microcredit (IB econ syllabus topic)

I was checking out this morning the Bedeutung blog (maintained by our graduate Alexandros Stavrakas) when I came across this post: 'Loans to the Poorest: Where Does the Money Really Go''.

It is related to microcredit / microfinance (a concept figuring in our syllabus). Read it!

Thursday, October 15, 2009

More on Elinor Ostrom

This is another very easy to read piece on Elinor Ostrom's work that was written by Kevin Gallagher (professor of International Relations at Boston University and a research fellow at the Global Development and Environment Institute) for his Guardian column.

The title is 'Elinor Ostrom breaks the Nobel mould'.
In a nutshell, Ostrom won the Nobel prize for showing that privatising natural resources is not the route to halting environmental degradation.

In most economics classes the environment is usually taught as being the victim of the "tragedy of the commons". If one assumes, like many economists do, that individuals are ruthlessly selfish individuals, and you put those individuals onto a commonly owned resource, the resource will eventually be destroyed. The solution: privatise the commons. Everyone will have ownership of small parcels and treat that parcel better than when they shared it.

Many environmental experts also reject the tragedy of the commons argument and say the government should step in.

Ostrom says the government may not be the best allocator of public resources either. Often governments are seen as illegitimate, or their rules cannot be enforced. Indeed, Ostrom's life work looking at forests, lakes, groundwater basins and fisheries shows that the commons can be an opportunity for communities themselves to manage a resource.

In her classic work Governing the Commons: The Evolution of Institutions for Collective Action, Ostrom shows that under certain conditions, when communities are given the right to self-organise they can democratically govern themselves to preserve the environment.

We will be discussing these issues in a few weeks when we start to focus on so-called market failures and, as I mentioned in one of my two sections, her work will help me provide a basis for evaluating the typical conclusions derived from analyzing the 'tragedy of the commons'.

The whole Guardian article is found here. Enjoy.

PS: An interesting account of her work is found here.

Tuesday, October 13, 2009

5 Easy Steps to Stay Safe (and Private!) on Facebook

5 συμβουλές για να προστατευτεί κανείς από τη φόρα φιγούρα στο facebook.


At last, some Economics...

First of all, apologies to those who have complained that nothing has been posted for quite a while. I am embarassed to say that the only reason was summer inertia. But, there is no better way to start the fall semester at school (and it is fallish today, even in Athens!) than to make a short post on the 2009 Nobel Prize in Economics.

Two economists shared the prize, Oliver E. Williamson and Elinor Ostrom. BTW, 'Elinor Ostrom is the first woman to have been awarded the Prize in Economic Sciences in its forty year history'. (look at her CV here - it makes you dizzy..)

I am familiar with Williamson's work but I have to confess that I was not familiar with Ostrom's (I felt much better when I found out that Krugman wasn't either!)

You will get a first idea on why these economists deserved the prize by reading this.

An interesting piece on their work was written by another Nobel prize winner Michael Spence (Markets Aren't Everything) (which I became aware of through Greg Mankiw's blog).

Paul Krugman's piece 'An institutional economics prize' is also worth reading.

I promised my Tuesday class I would do some reading especially on Ostrom's work as it will be great when we discuss a bit later the Tragedy of the Commons.

This is from her Indiana University page:

Research Interests
How do we integrate the research findings in cognitive science into a workable set of models for exploring and explaining human choices in various institutional settings, including: social dilemmas, collective choice arenas, bureaucracies, and complex multitiered public economies?

How do institutions generate the information that individuals need to make decisions?

What biases or lack of biases are built into various ways of making collective decisions?

How are diverse preferences exaggerated or modified by interaction within diverse institutional structures?

For any ambitious IB Economics students around there, this is her paper :'Institutions and the Environment' (worth looking at to get a flavor).

Also, check out this 'supercourse': 'Beyond the Tragedy of the Commons'

Thursday, September 24, 2009

Still not IB Higher Level Economics....

What can I say, school year has started but I guess I'm still in 'summer mode'. So, neither is this (directly...) related to our course but I think it's worth posting as I just found out (thanks to my old student and friend Konstantinos L. and FB) that U2 have Athens in their plans. I've seen them many years ago in the Boston area and they do put on a good show, worth watching. Here's a clip:

Thursday, September 17, 2009

IB Higher Economics Class of 2011!!

Welcome, sweethearts!

We've already had a few classes and I think we'll have a good time together doing Economics (but, not only).

I mentioned today in class the TED site.

This is the Ken Robinon talk on creativity:

...and this one is the 'sixth sense' MIT Media Lab (Pattie Maes and Pranav Mistry) presentation:

...and this Barry Schwartz on the Paradox of Choice:


I guess the next post should be on IB Economics (or, should it?)

Tuesday, July 21, 2009

On externalities

Try correcting this one:

Kids' lower IQ scores linked to prenatal pollution

Researchers for the first time have linked air pollution exposure before birth with lower IQ scores in childhood, bolstering evidence that smog may harm the developing brain. The results are in a study of 249 children of New York City women who wore backpack air monitors for 48 hours during the last few months of pregnancy. They lived in mostly low-income neighborhoods in northern Manhattan and the South Bronx. They had varying levels of exposure to typical kinds of urban air pollution, mostly from car, bus and truck exhaust.

At age 5, before starting school, the children were given IQ tests. Those exposed to the most pollution before birth scored on average four to five points lower than children with less exposure.

And along with other environmental harms and disadvantages low-income children are exposed to, it could help explain why they often do worse academically than children from wealthier families, Breysse said.

On Joseph Stiglitz

Read this interesting Newsweek article on Joseph Stiglitz (which I noticed at free exchange, the blog):The Most Misunderstood Man in America.
Just to get an idea:
...Stiglitz is perhaps best known for his unrelenting assault on an idea that has dominated the global landscape since Ronald Reagan: that markets work well on their own and governments should stay out of the way. Since the days of Adam Smith, classical economic theory has held that free markets are always efficient, with rare exceptions. Stiglitz is the leader of a school of economics that, for the past 30 years, has developed complex mathematical models to disprove that idea. The subprime-mortgage disaster was almost tailor-made evidence that financial markets often fail without rigorous government supervision, Stiglitz and his allies say. The work that won Stiglitz the Nobel in 2001 showed how "imperfect" information that is unequally shared by participants in a transaction can make markets go haywire, giving unfair advantage to one party. The subprime scandal was all about people who knew a lot—like mortgage lenders and Wall Street derivatives traders—exploiting people who had less information, like global investors who bought up subprime- mortgage-backed securities. As Stiglitz puts it: "Globalization opened up opportunities to find new people to exploit their ignorance. And we found them."

Stiglitz's empathy for the little guy—and economically backward nations—comes to him naturally. The son of a schoolteacher and an insurance salesman, he grew up in one of America's grittiest industrial cities—Gary, Ind.—and was shaped by the social inequalities and labor strife he observed there. Stiglitz remembers realizing as a small boy that something was wrong with our system. The Stiglitzes, like many middle-class families, had an African-American maid. She was from the South and had little education. "I remember thinking, why do we still have people in America who have a sixth-grade education?" he says.

Those early experiences in Gary gave Stiglitz a social conscience—as a college student, he attended Martin Luther King's "I Have a Dream" speech—and led him to probe the reasons why markets failed. While studying at MIT, he says he realized that if Smith's "invisible hand" always guided behavior correctly, the kind of unemployment and poverty he had witnessed in Gary shouldn't exist. "I was struck by the incongruity between the models that I was taught and the world that I had seen growing up," Stiglitz said in his Nobel Prize lecture in 2001. In the same speech he declared that the invisible hand "might not exist at all." The solution, Stiglitz says, is to move beyond ideology and to develop a balance between market-driven economies—which he favors—and government oversight....

Sunday, July 19, 2009

The State of Economics

Must reading for IB1 to IB2 students of Economics as well as for any of my recent graduates (if you are ever checking out this blog...-I know that you are, Dimitri K.!!). A-level Economics candidates will also greatly benefit from reading it.

Reproducing from The Economist:

...Nor can economists now agree on the best way to resolve the crisis. They mostly overestimated the power of routine monetary policy (ie, central-bank purchases of government bills) to restore prosperity. Some now dismiss the power of fiscal policy (ie, government sales of its securities) to do the same. Others advocate it with passionate intensity.

Among the passionate are Mr DeLong and Mr Krugman. They turn for inspiration to Depression-era texts, especially the writings of John Maynard Keynes, and forgotten mavericks, such as Hyman Minsky. In the humanities this would count as routine scholarship. But to many high-tech economists it is a bit undignified. Real scientists, after all, do not leaf through Newton’s “Principia Mathematica” to solve contemporary problems in physics.

They accuse economists like Mr DeLong and Mr Krugman of falling back on antiquated Keynesian doctrines—as if nothing had been learned in the past 70 years. Messrs DeLong and Krugman, in turn, accuse economists like Mr Lucas of not falling back on Keynesian economics—as if everything had been forgotten over the past 70 years. For Mr Krugman, we are living through a “Dark Age of macroeconomics”, in which the wisdom of the ancients has been lost.

What was this wisdom, and how was it forgotten? The history of macroeconomics begins in intellectual struggle. Keynes wrote the “General Theory of Employment, Interest and Money”, which was published in 1936, in an “unnecessarily controversial tone”, according to some readers. But it was a controversy the author had waged in his own mind. He saw the book as a “struggle of escape from habitual modes of thought” he had inherited from his classical predecessors.

That classical mode of thought held that full employment would prevail, because supply created its own demand. In a classical economy, whatever people earn is either spent or saved; and whatever is saved is invested in capital projects. Nothing is hoarded, nothing lies idle.

Keynes appreciated the classical model’s elegance and consistency, virtues economists still crave. But that did not stop him demolishing it. In his scheme, investment was governed by the animal spirits of entrepreneurs, facing an imponderable future. The same uncertainty gave savers a reason to hoard their wealth in liquid assets, like money, rather than committing it to new capital projects. This liquidity-preference, as Keynes called it, governed the price of financial securities and hence the rate of interest. If animal spirits flagged or liquidity-preference surged, the pace of investment would falter, with no obvious market force to restore it. Demand would fall short of supply, leaving willing workers on the shelf. It fell to governments to revive demand, by cutting interest rates if possible or by public works if necessary.

The Keynesian task of “demand management” outlived the Depression, becoming a routine duty of governments. They were aided by economic advisers, who built working models of the economy, quantifying the key relationships. For almost three decades after the second world war these advisers seemed to know what they were doing, guided by an apparent trade-off between inflation and unemployment. But their credibility did not survive the oil-price shocks of the 1970s. These condemned Western economies to “stagflation”, a baffling combination of unemployment and inflation, which the Keynesian consensus grasped poorly and failed to prevent.
In the first months of the crisis, macroeconomists reposed great faith in the powers of the Fed and other central banks. In the summer of 2007, a few weeks after the August liquidity crisis began, Frederic Mishkin, a distinguished academic economist and then a governor of the Fed, gave a reassuring talk at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming. He presented the results of simulations from the Fed’s FRB/US model. Even if house prices fell by a fifth in the next two years, the slump would knock only 0.25% off GDP, according to his benchmark model, and add only a tenth of a percentage point to the unemployment rate. The reason was that the Fed would respond “aggressively”, by which he meant a cut in the federal funds rate of just one percentage point. He concluded that the central bank had the tools to contain the damage at a “manageable level”.

Since his presentation, the Fed has cut its key rate by five percentage points to a mere 0-0.25%. Its conventional weapons have proved insufficient to the task. This has shaken economists’ faith in monetary policy. Unfortunately, they are also horribly divided about what comes next.

Mr Krugman and others advocate a bold fiscal expansion, borrowing their logic from Keynes and his contemporary, Richard Kahn. Kahn pointed out that a dollar spent on public works might generate more than a dollar of output if the spending circulated repeatedly through the economy, stimulating resources that might otherwise have lain idle.

Today’s economists disagree over the size of this multiplier. Mr Barro thinks the estimates of Barack Obama’s Council of Economic Advisors are absurdly large. Mr Lucas calls them “schlock economics”, contrived to justify Mr Obama’s projections for the budget deficit. But economists are not exactly drowning in research on this question. Mr Krugman calculates that of the 7,000 or so papers published by the National Bureau of Economic Research between 1985 and 2000, only five mentioned fiscal policy in their title or abstract
Read the whole article here.

Friday, July 10, 2009

I just happenned to check out this and it's a bit shocking vis a vis Greece. Number 18? Above Italy, the UK, Germany? There's something very wrong with the HDI... It's not only the averages issue but also the question of data quality and reliability.

Human Development Indices: A statistical update 2008 - HDI rankings

15.United States
20.New Zealand
21.United Kingdom
22.Hong Kong, China (SAR)
25.Korea, Rep. of
27.Brunei Darussalam
31.United Arab Emirates

Saturday, July 4, 2009

A July post - will any IB students read it?

Well, tomorrow is the big day - the day results are out for all May candidates. Less than 24 hours away for my kids at 0346. So, what am doing with a 4th of July IB economics post? I just started reading the Economist debate on 'Sustainable development'. The motion: 'this house believes that sustainable development is unsustainable'. Defending the motion is David G. Victor, Law Professor at Stanford & Prof. of International Relations, University of California at San Diego. Against the motion is Dr. Peter Courtland Agre, M.D., University Professor and Director, Duke University (2003 Nobel prize in Chemistry).

You will find this most interesting discussion here.

I will only copy one paragraph from Dr Agre's opening remarks:
Our situation is indeed exceedingly grim—increasing release of toxins into the environment, energy gluttony and the appearance of epidemic obesity. Compounding these problems is the nearly total lack of thrift among Americans whose uncontrollable consumerism is sufficient to support multiple shopping channels on the television 24 x 7 x 365 at a time of unprecedented debt.

To have the world's biggest economy is irrelevant if we squander our wealth on fluff. Popular television advertising revenues alone could sustain significant educational reform in the US. Consider for example that one second of advertising during the Super Bowl retails for $100,000—twice the annual salary of a beginning schoolteacher. The wisdom behind the rising economy in China must be questioned, since they now have 3% of the world's paved roadways but 21% of the world's highway fatalities. If this truly reflects giving the public what it wants, we are most certainly doomed.

And, also:
Achievement of sustainability can only occur if the public demands it. My view is that a populist revolt for sustainability must be initiated, and it must include the young. Jefferson claimed that "Every generation needs a new revolution," and Franklin that "Many people die at 25 but are not buried until they are 75." Our younger generation will determine if the right decisions are undertaken by becoming engaged in the most important issue of our time.
Any questions, IB graduating class of 2009?

Thursday, June 4, 2009

Income distribution and the level playing field

Priviledge and a level playing field...
In America poor women are given subsidies for child care in order to allow them to work. But the study notes that women who go from welfare to work are more likely to have obese children. So subsidies that encourage employment may have the perverse effect of creating obese children.

Much depends on what type of care parents choose (care by relatives, school-based programmes, centre-base care, etc). Many poor women depend on centre-based care and the authors note evidence that "many child care centers in the U.S. fail to provide children with healthy foods and sufficient opportunities for physical activity." But there are often no other viable options. So in order to reduce obesity, perhaps additional subsidies need to go towards improving the quality of child care provided to struggling moms.
If you are thinking 'so what?', then check this one out:
It is extraordinary that there exists such a strong negative correlation between obesity and income. Fat was once a symbol of wealth. As David Leonhardt points out, fattening food tends to be cheaper. That makes taxing unhealthy food difficult because it can be a regressive tax.

The above are found at Free exchange, the blog (my home page on my browser)

The first one is How child care makes children fat and the second one is The biggest Loser. Click, enjoy (even if you are sipping your caipirinha at Anse Source d'Argent) and remember, income distribution matters in more ways than we can often imagine......

Sunday, May 24, 2009

In defense of deficit spending

Richard Lipsey (and James W Dean) defend in simple terms (easily understood by IB students of Higher and Standard Level Economics) the fiscal stimulus packages put together in the US and elsewhere and try to explain why conservative critics who claim that private spending will be crowded out or that these packages will prove inflationary may be wrong.

'The first is that spending will either be hurried and wasteful, or that it won’t come on stream until employment has recovered, and will therefore be inflationary.

The second is that deficit-financed government spending merely replaces spending by consumers and firms dollar for dollar; so-called 100 per cent ‘crowding out’. Critics often fail to point out that these two arguments cannot both be true. If government spending merely replaces private spending dollar for dollar, it does not affect total demand. As a result, it cannot be inflationary.

If “crowding out” is significantly less than 100 per cent, new spending will employ labour and capital that is now idle, and the earnings of workers and investors will re-ignite both consumer and investment spending. To be sure, stimulus programmes should target projects with productive potential. Economies from the US to China are in dire need of new physical and social infrastructure. But even “unproductive” projects are better than none at all if the alternative is to leave labour and capital unemployed.

And if stimulus spending for infrastructure comes into effect after the end of recession, when real resources and financial markets are re-employed, there are adequate monetary tools to contain such pressures. In other words, long-term plans for infrastructure planning can stand on their own merit.

So the key question is whether government spending that comes into action during recession is likely to crowd out new private spending, dollar for dollar. The answer depends on the extent to which real and financial resources are currently under-utilised.

“Real” crowding out occurs when labour and capital are already fully employed so that further spending exceeds capacity and leads to inflation. The logic of the harm done by inflation is well understood. But the logic of “financial” crowding out is less intuitive and more complex.

Simply put, financial crowding out results from rising interest rates when government deficits put pressure on bond markets. This kind of crowding out is most plausible in the US, which began the recession with the biggest deficit in world history. However, relative to national income, it is not nearly as large as that which Britain ran after the Napoleonic wars. And currently, the biggest as a percentage of national income is Japan’s: almost 200 per cent of its gross domestic product. It doesn’t seem to be crowding out private spending as the Japanese long-term interest rate is still only 1.5 per cent.

Nevertheless, skeptics argue that dramatic doubling of US deficits this year and beyond could leave little room for private sector borrowing. If the US deficit stifles rather than stimulates recovery of its private sector, prolonged worldwide recession is inevitable.'

The rest is here. BTW, Lipsey has written one of the all time best intro econ textbooks. A newer version is here.

The Crisis and How to Deal with It

This is great stuff to read for IB1 Economics students (higher and even standard level) who have just finished their macro. You'll see how different perspectives arise and I think you will be able to understand what makes sense and what pretty much is driven by ideology and wishful thinking.

'...excerpts from a symposium on the economic crisis presented by The New York Review of Books and PEN World Voices at the Metropolitan Museum of Art on April 30. The participants were former senator Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, and Robin Wells, with Jeff Madrick as moderator'

Here is the link.

Saturday, May 16, 2009

Krugman on China and pollution

The article is titled 'Empire of Carbon'. What I realize is that the Stiglitz idea which I had mentioned in class (and which I even think is written in that little purple book) that the rest of the world imposes a tariff on the US to force it to do something for the climate is picked up by Krugman. He proposes 'shoppers who buy Chinese products should pay a “carbon tariff” that reflects the emissions associated with those goods’ production'.

The article is here.

PS: Just checked that little book and here is what is written in one of those 'tips' boxes':
An interesting solution proposed by Nobel laureate Joseph Stiglitz is to consider the firms of such nations (as the US) as recipients of state subsidies. Not paying the full costs of production is equivalent to receiving a state subsidy. Since subsidies within the WTO trade system are illegal, other nations would have the right to impose trade sanctions on these nations, forcing them to cooperate and reduce emissions.

Friday, May 15, 2009

Lunch or dinner anyone?

Hi dorks! (I'm addressing my Econ Higher level Candidates 2009 of 0346...)

Our Chicago boy had a very good idea: lunch or dinner together soon!

I'm in. Anyone else?



Monday, May 11, 2009

0 Days, 0 Hours, 0 Minutes

Now, that looks weird!

You were a great class, my little dorks!

I hope I helped you a little bit to understand some basic Econ.

I hope I helped you understand the importance of trust.

I hope we stay in touch.

My best,


Sunday, May 10, 2009

OMG, 15 hours left!

Show time, guys!

Wish you all the best!

Stay calm and focused, make the right choices, and do what you got to do as best as you can. Make sure you read your work before putting down your pen....

This guy did it - so can you!


Wednesday, May 6, 2009

Stand by me!

Hope all you May kids are doing alright!

This was sent to me by my friend Yiannis A. and it's well worth a 5 minutes break.

Saturday, May 2, 2009

Can People Distinguish Pâté from Dog Food?

Couldn't resist posting this one!

It's the title of an AMERICAN ASSOCIATION OF WINE ECONOMISTS working paper......

Considering the similarity of its ingredients, canned dog food could be a suitable and inexpensive substitute for pâté or processed blended meat products such as Spam or liverwurst. However, the social stigma associated with the human consumption of pet food makes an unbiased comparison challenging. To prevent bias, Newman's Own dog food was prepared with a food processor to have the texture and appearance of a liver mousse. In a double-blind test, subjects were presented with five unlabeled blended meat products, one of which was the prepared dog food. After ranking the samples on the basis of taste, subjects were challenged to identify which of the five was dog food. Although 72% of subjects ranked the dog food as the worst of the five samples in terms of taste (Newell and MacFarlane multiple comparison, P<0.05), subjects were not better than random at correctly identifying the dog food.
You can find the paper here.

A big thanks to Tyler Cowen and the Marginal Revolution.

On the demand and supply side effects of increasing personal income taxes

Pointers on another interesting short: discussing possible effects on the demand and the supply side of an economy of increasing personal income taxes.

(caveat: not a model answer; just some thoughts)

This is the question:
A government decides to raise personal income tax rates. Using diagrams, explain one possible demand side consequence and one possible supply side consequence of this decision.

Taxes are divided into direct and indirect where indirect are taxes on goods and on expenditures while direct are taxes on income. Personal income taxes are thus a type of direct taxation which may affect consumption decisions as well as the incentive to work. (serves as a short intro that sets the framework of the answer and helps keep you focused)

Consumption is defined as spending by households on durable and non-durable goods and services per period of time. It depends on the level of disposable income which refers to income minus direct taxes plus transfer payments (i.e. pensions and unemployment benefits; Yd = Y – T + Tr).

If personal taxes increase then disposable income will decrease and thus consumption expenditures will also decrease. Aggregate demand (total spending on domestic goods & services per period of time; AD C + I + G + NX) will decrease and in the diagram below shift from AD1 to AD2. This will decrease the level of national income from Y1 to Y2 (or, slow down growth) and also may lower any inflationary pressures in the economy.

In this sense, this increase in personal income taxes may be part of a con-tractionary fiscal policy that aims at decreasing inflationary pressures.
(this wraps up the demand side consequence)

The rest can be found at our wiki here.

Elasticities: an oldie but goodie

May 11 and 12 are approaching pretty fast! I hope you are calm and and cool. I haven't seen you for a while but I've had several emails (Alex, Fro, M-N and others) which clearly suggest what I already know. That you are a bright and able bunch and that you know what to do to defend your interests, academic and broader.

I'm adding on our wiki some ideas on an 'easy' long essay.

Long essays on price/ income and cross price elasticities are not that common but they are usually a piece of cake. So easy, that many candidates get confused or do not remember the issues as they never paid much attention to the topic while revising.

I decided to jot down some pointers on this old Higher Level long essay that has also been asked in Standard Level exams. These pointers can be found here at our wiki.

This is the essay:
a) Carefully explain what is it that price, income and cross elasticities of demand are meant to measure. (10)
(b) Discuss the practical importance of the concept of price elasticity of demand for
(i) business organizations
(ii) the government (15)

Hope these pointers help...

Keep on walking...

Monday, April 27, 2009

Evaluating fiscal policy

When discussing fiscal policy most introductory texts focus on the potential problems that fiscal policy may have. This was probably a result of at least two things. On the one hand, since the early 80s there has been an anti-Keynesian wave in much of academia, in the press and in what most politicians said. On the other hand, the current crisis is the first one after quite some time that not only has resurrected Keynes but even Marx ('Worldwide sales of Das Kapital have shot up: one lone German publisher sold thousands of copies in 2008, compared with 100 the year before'; see this; thanks to my colleague John Tomkinson for bringing the article to my attention)

What are some of the potential advantages of expansionary fiscal policy?

If you were asked to evaluate demand side policies, what points could you make for employing expansionary fiscal policy? A student of mine asked the other day and here is what we came up with:

Fiscal policy is direct: any increase in government spending will automatically increase by at least as much, if not more, national income (but remember the Barro argument I pointed out in an earlier post)

If the multiplier is greater than one, then it is also a powerful tool to lift an economy from recession (but remember the Mankiw - Krugman/Romer disagreement that was pointed out in an earlier post; go to Mankiw and Krugman for lots on this)

In an economy in deep recession (or, depression) interest rates may be at or close to zero so monetary policy is totally ineffective; in such a case policymakers have only fiscal policy to turn to (in the US interest rates are already virtually zero, so there is no room for easier monetary policy)

If the institutional framework of the economy is equipped with unemployment benefits and a progressive income tax system then policymakers have the benefits of built-in stabilizers (concerning unemployment and other benefits, the EZ12 is more equipped than the US is; this was Germany’s and France’s argument against a ‘coordinated’ fiscal push even though they may be just hoping for the US leakages (US imports from the EZ) which are EZ injections (EZ exports to the US))

If the increased government expenditures of a stimulus package include spending on infrastructure (defined as physical capital typically financed by governments that create massive positive externalities i.e. roads, bridges, harbors, telecommunications etc), health and education, then a long run positive supply-side effect will also result

If the increased government expenditures of a stimulus package include spending on the development of ‘green’ technologies than an additional long run benefit will be the improved environment, giving a better chance to sustainable growth.

A decrease in taxes as part of an expansionary stimulus plan may also have beneficial supply-side effects as lower taxes may improve incentives to work and to invest (a well known albeit perhaps somewhat controversial supply-side argument)
Just some ideas. Comments are welcome....

Linking the multiplier and the accelerator...

Linking the multiplier and the accelerator creates problems to most IB economics candidates even though in our watered-down version of things it is pretty simple.

I have prepared and uploaded a few extra notes (beyond what you find in our guide) that may prove useful here.

A very long time ago there has been an essay that focused on exactly this issue:

'Explain how the multiplier and the accelerator might be linked to each other'.

You know when? Back in May 1993 (my 1st IB candidates faced it). Were you guys born?

(OMG, 14 days and 0 hours)

On the crowding out effect - ideas for a short essay

Darlings, in two weeks you will be taking HP1 and HP2 (and SP1, of course). I hope you are doing the work you are expected to do and that you are not sipping your soft drink on a beach....

Here are some ideas on crowding out that you may find useful. Many past IB economics examinations have focused on the issue so it is a good idea to have understood the logic of it. For example there has been this short essay:

Explain how an increase in government spending can lead to crowd-ing out.

Here are a few points to consider. Onnce again, this is NOT a model answer. If you are not my students, please follow the advice of your own teacher.

The essay together with the diagrams can be found at our wiki space if you click here.

Expansionary fiscal policy refers to increases in government expenditures and / or decreases in taxes in order to increase aggregate demand (defined as…) and thus increase economic activity and lower unemployment.

The increase in government spending is by many thought to be a powerful tool to lift an economy out of recession (defined as…). The current Obama stimulus plan whereby the US government is spending an extra 787 billion dollars is an example of such a policy (note that using an example is always a good idea). The expected increase in national income is larger as a result of the multiplier effect. The multiplier effect results from the fact that one’s spending is another person’s income as well as that economic activity takes place in successive rounds.

'Monetarists', on the other hand, claim that the increase in government expenditures is not as effective as described above as a result of the crowding out effect.

The extra spending will have to be somehow financed. In the loanable funds market the demand for loanable funds will thus increase as illustrated in diagram 1 below from D1 to D2. This extra demand for funds by the government will put pressure on the interest rate (the ‘price’ for using such funds) to increase. Since private investment (I) (defined as spending by firms on capital goods per period) is inversely related to the interest rate, it may decrease (diagram 2).

Aggregate demand which includes C + I + G +NX will thus tend to increase as a result of the increased G but tend to decrease as a result of the lower I. The net effect is that either AD will increase but by less than what the multiplier predicts (to AD’ instead of AD2 in diagram 3) or that it may not increase at all if private investment is completely crowded out.

The extent of the increase in interest rates is not necessarily large as a country may borrow from a much larger globalized loanable funds market (i.e. from foreigners). Also, the responsiveness of investment spending to the change in interest rates is important because if investments depend mostly on expectations any decrease will be small. Lastly, the type of government spending financed is important as if the government uses the funds to spend on infrastructure, education and health then there will be positive long run supply-side effects.

In addition to the above described 'financial crowding' out that works through the change in interest rates there is also the possibility of 'resource crowding' out. The increase in government spending implies that the government will command (use) more scarce resources (more labor, more capital) so less will remain available for the private sector (i.e. private firms) to use.

Hope this helps a bit!

Thursday, April 23, 2009

Ideas on another short essay: Macro (M08)

Here are some thoughts on another macro short essay from a past exam that may even be useful to IB1 students:

A government decides to raise personal income tax rates. Using diagrams, explain one possible demand side consequence and one possible supply side consequence of this decision.

(the file that includes diagrams can be found at our wiki here)

Taxes are divided into direct and indirect where indirect are taxes on goods and on expenditures while direct are taxes on income. Personal income taxes are thus a type of direct taxation which may affect consumption and saving decisions as well as the incentive to work. (serves as a short intro paragraph that sets the framework of the answer and helps keep you focused)

Consumption is defined as spending by households on durable and non-durable goods and services per period of time. It depends on the level of disposable income which refers to income minus direct taxes plus transfer payments (i.e. pensions and unemployment benefits; Yd = Y – T + Tr).

If personal taxes increase then disposable income will decrease and thus consumption expenditures will also decrease. Aggregate demand (total spending on domestic goods & services per period of time; AD C + I + G + NX) will decrease and in the diagram below shift from AD1 to AD2. This will decrease the level of national income from Y1 to Y2 (or, slow down growth) and also may lower any inflationary pressures in the economy.

In this sense, this increase in personal income taxes may be part of a contractionary fiscal policy (could define) that aims at decreasing inflationary pressures.(this wraps up the demand side consequence)

(now the supply-side consequence)
On the other hand, this increase in personal income taxes may have an adverse effect on Aggregate Supply (the planned level of output at different average price levels per period of time) shifting AS to the left from AS1 to AS2, (see diagram) as it may create disincentives to work.

This though is not a necessary consequence as it depends on the relative size of the substitution and income effects.

(description of the substitution effect):
If personal income taxes increase, then leisure becomes cheaper and thus people will tend to substitute leisure for work (they will tend to work less)

(description of the income effect):
On the other hand, the increase in taxes will lower disposable income and thus, as leisure is a ‘normal good’, people will tend to choose less leisure and work more.

It is thus not, a priori, known whether the substitution effect will dominate the income effect and thus decrease labor supply and consequently aggregate supply.

If it does indeed decrease AS, then the capacity of the economy to produce will decrease and any increase in AD will be more likely to prove inflationary.

Lastly, it may be worth noting that as a result of the disincentives that an increase in personal income taxes may create, tax revenues collected by the government may even decrease. This is illustrated by the Laffer curve below which shows that at the higher tax rate t2, tax revenues are lower at T2.

(the usual: not a model answer - the idea of a model answer is rediculous- just some thoughts on this question that may prove helpful)

Tuesday, April 21, 2009

A short essay from a past exam (May 1994.....)

Here are some points on an older short essay, one on buffer stocks:

Using supply and demand curves, explain how buffer stocks might be used to try to stabilize agricultural prices.

Prices of agricultural products (corn, wheat, coffee, corn etc) are characterized by significant short run fluctuations: they vary a lot from one period to the next. This is the result of their low price elasticity of demand (few substitutes for buyers) for farm products and the fact that short run supply is perfectly price inelastic (vertical) as a result of the long time lags of their production process and also greatly affected by random factors like weather. {this paragraph explains why agricultural prices fluctuate from period to period - in the short run}

In the diagram the price varies between P’ and P’’ as supply in the short run is unstable and varies between S’ and S’’.

(insert diagram here; a file these points and the diagram can be found at our wiki here)

As these price fluctuations create uncertainty and instability in farmers' incomes (and often these farmers are developing countries with a significant concentration of exports in only one or two primary products), buffer stocks have been used in attempt to stabilize these prices.

The idea is simple: an authority will buy and stock the good (coffee, for example) when there is oversupply (effectively increasing demand) or will sell from stocks when supply is below normal (artificially increasing market supply).

In the diagram it is assumed that the target price is at P*.

Given demand conditions, if output is at Q (supply at S) there is no reason to intervene as the market will lead to the desired target price P*.

If good weather leads to Q’ units (of cocoa, coffee, corn: some non-perishable product) produced (supply is at S’) then authorities must buy and stock QQ’ units (effectively increasing demand to D’).

If bad weather leads to only Q’’ units produced (supply at S’’) then for the price not to rise the authority would have to sell Q’’Q units from stocks (effectively shifting supply back to S).

In this way the price is, in principle, stabilized. Farmers’ incomes though are not. Incomes vary directly with output. Higher output means higher income for farmers. No matter how much they produce, someone will buy their output. If output is at Q’ then their revenues are at area (0Q’AP*) whereas if output is at Q’’ then they earn area(0Q’’BP*) i.e. less.

An incentive to overproduce is thus created and thus misallocation of scarce resources. The authority will have to continuously buy the commodity so it will run into financing problems. This explains why buffer stock schemes have all collapsed.

Keep on walking....

Thursday, April 16, 2009

Long Essay Micro Higher Economics November 2007

Final exams are approaching, there are no more classes so here are some ideas on an old higher level long essay. No diagrams are posted (as I don't know how to incorporate diagrams in a post...!). This is the question:

(a) Explain the difference between short run equilibrium and long run equilibrium in monopolistic competition (10 marks)

Monopolistic Competition is a market structure with:

• very many small firms (e.g. hairdressers etc)
• differentiated product (and the differences may be ‘real’ or ‘imaginary’)
• no entry barriers

Since each firm produces a differentiated product it faces a negatively sloped demand, as if it increases price it will not lose all of its customers. Short run equilibrium is thus analytically identical to that of a monopoly firm. If supernormal profits are made (explain the term), entry of new firms will be induced.

As new firms the market enter (as more hairdressers establish in the same area/ market) , demand for each firm ‘shrinks and tilts’ i.e. it decreases (as at each price, quantity demanded will fall) and it becomes more price elastic (as consumers will now face more substitutes to choose from). (Draw short run and long run diagrams - the long run one is a pain to get right; use a pencil and an eraser in the final May exams; REM that you can use a colored pencil BUT NOT A RED OR A GREEN AS THESE ARE USED BY EXAMINERS......)

The process continues until economic profits become zero i.e. each firm makes only normal profits (define).

(Conversely, if losses are made --> exit, so demand each faces increases and becomes more price inelastic until economic profits become zero i.e. normal)

The main difference is thus that in the SR a firm in such a market may make positive, negative or zero economic profits but in the long run it will be forced to make only zero (normal) as a result of free entry.

(b) ‘Perfect competition is a more desirable market form than monopolistic competition’. Discuss. (15 marks)

--> Explain perfect competition using diagrams: very many small firms, homogeneous product, meaning that the product is considered identical across consumers, no entry barriers as well as perfect information and perfect factor mobility; market demand and market supply determine the market price which each firm will take (‘price takers’) thus facing a perfectly elastic demand curve for its product which is also the marginal and average revenue curve; assuming profit maximization, the typical firm will choose that output level q for which marginal revenue is equal to marginal cost (and MC is rising); entry and exit ensure that in the long run profits are driven to zero which means that each firm is making normal profit (the minimum it requires to remain in business)

--> Explain the long run efficiencies that characterize perfectly competitive markets:
Allocative efficiency results because all units for which price (the valuation by consumers) is bigger than marginal cost (how much society sacrifices for the production of each extra unit) are produced up until and including that unit for which P=MC: just the right amount of the good is produced from society’s point of view and thus there is no resource misallocation

Productive (technical) efficiency results as production takes place with minimum average cost i.e. resource waste

--> Explain that in monopolistic competition neither allocative not technical efficiency are achieved (draw long run equilibrium diagram or refer to the one in (a) and that excess capacity characterizes such firms (empty tables in restaurants most of the time) (as neither condition holds)

--> But, consumers have variety and this is considered very important. Each consumer has a better chance of finding exactly what he or she wants. Higher average costs may be the result of differentiation and of (local) advertising and in this sense may not be as wasteful.

It seems that even though the efficiency properties of perfect competition make it theoretically more desirable, the product variety of monopolistic competition and the fact that the price charged can not exceed marginal cost by much while profits are driven down to normal make it an attractive alternative.

Neither though can lead to product innovation (new products and/or new processes) as both models require free entry.

This is not a 'model' answer. Remember that IB examiners are always instructed to accept any answer that is theoretically sound. More to come (perhaps..!)

Study hard, my dear friends - this is it!

PS: This essay with diagrams can be found at our wiki here

Sunday, April 5, 2009

Sen on the current crisis

My colleague Vassilis Kyrtatas brought to my attention an exceelent article by Amartya Sen published in the New York Review of Books.

I urge my graduating IB economic students to read it (or, at least save it and read it sometime later). This is just a short quote to whet your appetite:
While Adam Smith has recently been much quoted, even if not much read, there has been a huge revival, even more recently, of John Maynard Keynes. Certainly, the cumulative downturn that we are observing right now, which is edging us closer to a depression, has clear Keynesian features; the reduced incomes of one group of persons has led to reduced purchases by them, in turn causing a further reduction in the income of others.

However, Keynes can be our savior only to a very partial extent, and there is a need to look beyond him in understanding the present crisis. One economist whose current relevance has been far less recognized is Keynes's rival Arthur Cecil Pigou, who, like Keynes, was also in Cambridge, indeed also in Kings College, in Keynes's time. Pigou was much more concerned than Keynes with economic psychology and the ways it could influence business cycles and sharpen and harden an economic recession that could take us toward a depression (as indeed we are seeing now). Pigou attributed economic fluctuations partly to "psychological causes" consisting of variations in the tone of mind of persons whose action controls industry, emerging in errors of undue optimism or undue pessimism in their business forecasts. It is hard to ignore the fact that today, in addition to the Keynesian effects of mutually reinforced decline, we are strongly in the presence of "errors of...undue pessimism."
The article is found here.

Friday, April 3, 2009

A great resource for IB Development Economics!

Atlas of Global Development (2nd edition)
I just got my hands on a copy of the above 2009 World Bank publication. I think it’s fabulous for IB Economics (Higher and Standard Level) students. It is jammed with easy to read and understand data (uses maps of the world and tables) on a variety of issues that help the reader better understand the world we live in. The Table of Contents includes these headings:

• Classification of economies
• Rich and poor (measuring income; growth and opportunity; how poor is poor?)
• People (global trends in population)
• Education (education opens doors; children at work; gender and development)
• Health (children under 5 – struggling to survive; improving the health of mothers; communicable diseases – too little progress)
• Economy (Structure of the world’s economy; governance; infrastructure for development; investment for growth; the integrating world; people on the move; aid for development external debt)
• Environment (the urban environment; feeding the world; a thirsty planet gets thirstier; protecting the environment; energy security and climate change)
• Statistics (key indicators of development; ranking of economies by GNI per capita; the need for statistics; millennium development goals, targets and indicators; definitions, sources)

It is not a textbook but there is a page or two on each issue as well as a list of important facts. In addition there is a list of internet links which is very useful.

The book is about $23.00. The link is here.

Sunday, March 29, 2009

Angelina and Jeff Sachs

By popular demand! Sofia M. sent me an email with a good idea: why not bring to your attention the work that AJ has done with Prof. Sachs? I guess she's right, so here they are. Watch them - a picture (of Sub Saharan Africa) is worth a thousand words.

BTW, as embarassing as it may be, when I used the name Angelina in my IB Economics Guide (....Consider it a role-playing game: imagine yourself as a junior economist sitting at a round table discussing an issue with other fellow economists when the person in charge of the meeting turns around and asks you ‘what do you think, Angelina?’)I had in mind this Angelina...!


Sustainability is a key concept for IB Economics students. It is, for that matter, a key concept for anyone, young or old, on this planet. Earth Hour yesterday was successful in at least increasing awareness about the problems we all face. But even if Earth Hour was repeated on a daily basis, the problem that we, our children and our grandchildren face will only get worse, if the developing world is neglected. And the biggest cost of the current crisis may be exactly that what needs to be done in the developing world is shelved. No matter what the advanced economies do to promote sustainability it can never succeed if the developing world is left behind.

Jeff Sachs explains why and also what should be done in his opinion:
The global economic crisis will be with us for a generation, not just a year or two, because it is really a transition to sustainability. The scarcity of primary commodities and damage from climate change in recent years contributed to the destabilization of the world economy that gave rise to the current crisis. Soaring food and fuel prices and major natural disasters played an important role in undermining financial markets, household purchasing power, and even political stability.

Viewed in this way, an essential policy that developed and developing countries should pursue in overcoming the crisis is to build infrastructure suitable for the twenty-first century. This includes an efficient electricity grid fed by renewable energy; fiber and wireless networks that carry telephony and broadband Internet; water, irrigation, and sewerage systems that efficiently use and recycle fresh water; urban and inter-city public transit systems; safer highways; and networks of protected natural areas that conserve biodiversity and the habitats of threatened species.

These investments are needed in the short term to offset the decline in worldwide consumption spending that underlies the global recession. More importantly, they are needed in the long term, because a world crowded with 6.8 billion people (and rising) simply cannot sustain economic growth unless it adopts sustainable technologies that economize on scarce natural resources.

In practice, the global crisis means that sustainable investments are being curtailed rather than expanded in the developing world. As access to international bank loans, bond flotations, and foreign direct investment is lost, infrastructure projects talked about in the past are now being shelved, threatening the political and economic stability of dozens of developing countries.
Moreover, policymakers in the rich world believe that they can continue to neglect the developing world, or leave it to its fate in global markets. This is also a recipe for global failure, and even future conflict. Developed countries will have to do far more to help poor countries through the transition to sustainability
The above are from his commentary The Transition to Sustainability posted in Project Syndicate.

Read also this Vanity Fair article about Jeff Sachs and watch this short video on Ruhiira, a "Millennium Village, in Uganda.

Friday, March 27, 2009

Scary trade developments...

When international trade is collapsing we should all get worried:
Argentina's exports were down 35.8%. Canada's were off 34.6%. Chile's by 41.3%. China's were down 17.5%. Ecuador's fell by 47%. Germany's by 28.7%. France's by 30.7%. India's by 15.9%. South Korea's by 32.8%. Malaysia's by 35.3%, etc.
Read Trade is collapsing, everywhere posted in Free Exchange ( blog)

On automatic stabilizers etc

IB Economics students currently doing Macro will find plenty of what they have been learning on automatic stabilizers, discretionary fiscal policy, the impact of imports on the expenditure multiplier etc in this IHT article. Read it!
Europe, aided by safety nets, resists stimulus push

Thursday, March 26, 2009

Data Response Exam Preparation: HL P3Q Q2 May 2006

IB Economics - Higher Level - Data Response Question - May 2006, Paper 3, Question 2
(What follows can be soon found as a file -including the diagrams- at our wikispace here)

This one is a macro data with questions (a), (b) and (c) very easy and with (d) somewhat demanding but manageable.

Question (a)(i) asks you to define the unemployment rate. It’s the number of unemployed individuals in an economy expressed as a proportion of the labor force (the number of unemployed divided by the labor force). That’s it! No need to explain who is considered unemployed (BTW, it’s the individual actively searching for a job and unable to find one) or to define the labor force (the sum of those employed and unemployed).
Question (a)(ii) asks you to define the business (or, trade) cycle. A precise and concise definition is that the business cycle refers to the short run fluctuations of real GDP around its long run trend. Again, there is no need to define real GDP or trend output here. Mind you that you could sketch a diagram with real GDP on the vertical and time on the horizontal illustrating these ups and downs which could help you earn the 2 points if the definition you gave was vague.

Question (b) asks you to explain using an appropriate diagram how a government may attempt to close a deflationary gap. Well, the diagram here could be an AD / AS diagram with average price level (P) on the vertical and real output/income (Yr) on the horizontal. A vertical long run aggregate supply curve at the full employment level of output (Yfe) is necessary, an upward sloping short run aggregate supply and an aggregate demand that intersects the SRAS at some level of real output to the left of the full employment level of real output Yfe (below that is full employment; left of the vertical LRAS)). The distance on the vertical axis between the equilibrium level of real output and the full employment level of output is the deflationary gap (also referred to as the recessionary gap). You should also draw a second AD (call it AD’) such that it intersects the SRAS and the point the SRAS intersects the LRAS (so that the equilibrium level of output coincides with the full employment level of output). Remember the (correctly drawn and labeled) diagram earns you 2 points automatically. Now, for the remaining 2 points you could explain that a deflationary gap results when the economy is at equilibrium at a level of output/income below the full employment level (refer to the diagram at this point) and that it is a result of insufficient aggregate demand. It follows that if somehow aggregate demand increased to AD’ the gap would close. The government could thus use either expansionary fiscal policy (increasing government spending and/or lowering taxes) and/or easy monetary policy (lowering interest rates)

Question (c) asks you to explain why deflation creates conditions that make it ‘unfavorable’ for businesses to invest. Here you are not asked to illustrate using a diagram. Well defining deflation will not only set you up but help you organize your thoughts. Deflation refers to a sustained decrease in the average level of prices (negative inflation rates). Deflation is typically the result of AD decreasing. As such, periods of deflation are accompanied by falling output (recession). You could draw an AD/AS diagram with AD shifting left but there is no need to do so. Deflation is serious and is difficult to get rid off. (see Krugman, slide 7, here ). If AD (i.e. total spending) is falling then it will not be necessary for businesses to expand their capacity (to invest). If households and firms come to expect prices to continue falling then consumers will cut down on their purchases and firms will witness a fall in their revenues, hardly a time to invest. In addition, falling prices imply that the real debt of businesses (their debt expressed in terms of goods) increases thus making it unlikely to borrow more to make investments.

Question (d) asks you to evaluate (using the extract, as always) the extent to which unemployment would still be a problem if inflation were allowed to increase. One must read the question very carefully. It really asks whether rising inflation in Singapore would imply lower unemployment. It thus seems to ask you to evaluate whether and to what extent a (short run, at least) Phillips curve trade-off is present. I think that looking at the data of the table gives is quite some information (remember, always squeeze every bit of info out of whatever data is given). Looking at the 2000-02 3 year period seems to illustrate that the increase in unemployment from 3.1% to 3.3% and then to 4.4% was accompanied by a decrease in inflation from 1.3% to 1.0% and to -0.4% (deflation). This fits the original Phillips curve trade off (which you could describe). You could also draw a Phillips curve diagram with inflation on the vertical and unemployment on the horizontal making sure you use on the axes the figures above. The fact that in 2003 (expected) inflation picks up to 0.5% and unemployment further rises 4.7% can be explained by noting that the increase in the inflation rate is not accompanied by higher growth (growth drops from 2.8% in 2002 to 2.3% in 2003) so there is a chance that prices rose a bit because of cost-push factors. As a matter of fact something like that is hinted in paragraph 1 when it mentions that ‘increases in the cost of food, clothing and housing had resulted in the price index rising’. On the other hand one could note that when in 2000 Singapore registered a 10.1% growth rate unemployment was at 3.1% suggesting that 3% unemployment may be the natural rate for the country. You must explain the natural rate of unemployment concept here and perhaps draw a vertical Phillips curve (LRPC) at the 3% unemployment rate in your diagram. In paragraph 2 it mentions that ‘the increase in inflation is welcome’ and that the rise in unemployment is a result of low economic growth. You could also note that in paragraph 3 it becomes clear that there is a deflationary gap in Singapore as there is ‘excess productive capacity in Singapore’s economy, which is dependent on trade’. Singapore is in the ‘slump phase of the business cycle’ as ‘trade (read, exports) have fallen by 30% from the previous year’. One may thus argue that if trade (export demand from the US) picks up, then Singapore’s AD will increase (shift to the right) increasing prices and lowering unemployment, as to produce more exports they will need to hire more people.

One could of course conclude that you need more disaggregated labor force and industry related data to make a better evaluation of the labor market effect of higher inflation. On the other hand, both the extract and the table seem to suggest the existence of a clear short run trade off between the two variables so that it is reasonable to expect that unemployment will decrease if inflation picks up but not below the 3% rate which probably is Singapore’s NRU.

Hope this makes sense and helps you prepare! Remember, you should practice writing short and long essays as well as data questions at home. The more you write, the better your chances. Also, remember to practice under a time constarint. That's the real problem with the HP3 and SP2 paper.

Wednesday, March 25, 2009

All is well in candy land....

If tough times are here to stay for a while be prepared to gain a few kilos and add a few centimeters to your waistline!
The recession seems to have a sweet tooth. As unemployment has risen and 401(k)'s have shrunk, Americans, particularly adults, have been consuming growing volumes of candy, from Mary Janes and Tootsie Rolls to gummy bears and chocolates, particularly inexpensive ones, candy makers, store owners and industry experts say.
That's of course good news to candy companies:
Many big candy makers are reporting rising sales and surprising profits even as other manufacturers are struggling to stay afloat. Cadbury reported a 30 percent rise in profits for 2008 while Nestlé's profits grew by 10.9 percent, according to public filings. Hershey, which struggled for much of 2008, saw profit jump by 8.5 percent in the fourth quarter. Lindt & Sprungli, which specializes in high-end products like Lindt bars and Ghirardelli, said that even though it expected to close its luxury retail stores in 2009, it would remain profitable because of strong chocolate sales through middle-class retailers like Wal-Mart and Target.
Booming sales in recession times is an old story:
There may be historic precedent to the recessionary strength of the candy business. During the 1930s, candy companies thrived, introducing an array of confections that remain popular today. Snickers debuted in 1930. Tootsie Pops appeared in 1931. Mars bars with almonds and Three Musketeers bars followed in 1932.

Hershey, the dominant candy brand during the Depression, remained profitable enough through the 1930s that the company financed its own Works Progress Administration programs, said Pamela Whitenack, Hershey Community Archives director.

"Candy companies are relatively recession proof," said Peter Liebhold, chairman of the Smithsonian's work and industry division. "During the Great Depression, candy companies stayed in business."
So, better be careful as summer is approaching fast!

The full article is here.

Tuesday, March 24, 2009

Data Response Exam Preparation: HL P3 Q2 M08

IB Economics - Higher Level - Data Response Question - May 2008, Paper 3, Question 2
(What follows can be found as a file including the diagrams at our wikispace here)

We've done this one in class but as May approaches I'm posting some of our thoughts for you to have. Here it goes (May08, HP3, Q2):

You are asked in (a) to define ‘structural unemployment’ and ‘average costs’. Remember that definitions are worth 2 points each; it follows that you should try to be very precise and concise. No reason to explain at length – only to define. You only have 40 minutes for each data question. Never allocate more than 2-3 minutes to definitions!

(a)(i) The unemployment that results when there is a mismatch between the skills available by the unemployed and the skills demanded by firms in the labor market. (no reason to explain why there may be a mismatch of skills or how policymakers may deal with structural unemployment)
(a) (ii) Costs per unit of output; average costs are thus total costs divided by the number of units produced (no reason to explain the typical behavior of average costs; note though that if you felt insecure about your definition you could sketch a U-shaped average cost curve with Q on the horizontal and ATC on the vertical)

In (b) and (c) remember that if the question asks you to explain something using a diagram you earn 2 points for the diagram and 2 for the explanation. It follows that in such a case your explanation does not need to be extensive and should use the diagram you draw.

(b) This question asks you to explain how increased unemployment could lead to a fall in the output of a nation using a production possibility curve (PPC) diagram.
A production possibilities curve shows that maximum output combinations an economy can at the most produce if it fully utilizes its scarce resources (labor, capital etc) using available technology. The existence of unemployment implies that the economy is operat-ing at a point (a combination of goods X and Y) inside the PPF, such as point A in the diagram. If unemployment increases it means that the economy has moved to a new point (such as B) further away from the curve and closer to the origin (in a south-west direction). The reason is that higher unemployment typically implies lower output. (Your graph has a typical concave PPF with (units of) good X on the horizontal and (units of) good Y on the vertical. Choose two points inside the PPF, A and B, with B closer to the origin so that it reflects fewer units of both X and Y)

(c) This question asks you to explain why average costs in Canadian timber firms might fall in the long-run using an appropriate diagram. Since the question is about average costs in the long run that are falling you should recognize that we’re dealing with a case of economies of scale. The diagram would thus illustrate a (long run) average cost curve that is falling (perhaps you could show it rising after some level of output but it is not necessary). The relevant info from the extract is this sentence: ‘With production now concen-trated at the larger, more efficient timber firms, the industry’s average costs have fallen significantly’. Thus:

Average costs have decreased because the Canadian timber firms are enjoying economies of scale. Economies of scale refer to lower average costs that are a result of bigger size. The extract mentions that now production of timber in Canada is concentrated ‘at the larger, more efficient timber firms’. In the diagram, the typical firm has grown in size from SAC1 to SAC2 for which average costs are lower as illustrated by the downward sloping LAC curve. The larger size may permit these firms to buy inputs in bulk achieving better prices from suppliers or to use specialized machinery that was not available for smaller size firms.

(d) This question asks you to evaluate the effects of the removal of US timber tariffs on US consumers, US producers and the US government (using information from the text and your knowledge of economics, as usual). First note exactly what you are asked to evaluate: the effects of removing a specific tariff on 3 specific entities: US consumers, US producers and the US Government. Note one very important issue present in all such 'evaluation’ questions: you are not asked to simply mention the effects but to evaluate these. Evaluation in data questions is an informed, theory-backed and issue-specific judgment.

Next, carefully read the extract noting the specific phrases / sentences / points that you could use in your answer (a great answer in a ‘vat’ i.e. without reference to the specifics of the question can not earn you more that 5 of 8 points).

The points that may be used in your answer include
-- that the ‘US and Canada have ended a long-standing and bitter $4.5 billion trade row’ (paragraph 1). Frictionless international relations between countries decrease risks of trade wars and provide a conducive environment for more welfare enhancing trade to take place; this is a most important effect of removing the timber tariffs.

-- that ‘Canadian timber mills have been forced to close or cut their output because the demand for Canadian timber from the US has fallen. This has created an increase in struc-tural unemployment in Canada and a consequent fall in income, expenditure and output’ (paragraph 3). This point can be used when explaining that the removal of the tariff by the US government will create symmetric (short term at least) costs to US timber firms and to the workers it employs. If you draw the standard tariff diagram (remembering that here the tariff is removed and not imposed) the effect on US (domestic) timber firms is that production will decrease (and unemployment {structural} may increase. This definitely makes US timber firms worse off as they will witness lower profits and some may be forced to exit the market. Specialized US labor employed in the timber industry will also be hard hit. The US government may have to spend on training and re-training to lower the adjustment costs. On the other hand other US firms that use timber as an input (hous-ing construction, furniture makers etc) will be better off as the price of timber will de-crease. This means lower production costs. They may expand their output and increase their employment. The net overall US employment effect is thus not necessarily negative as a result of the tariff removal.

-- ‘However, despite this, the Canadian timber industry has emerged more competitive than before. With production now concentrated at the larger, more efficient timber firms, the industry’s average costs have fallen significantly’ (paragraph 3). This is perhaps the most important expected effect on the US timber industry of removing the tariff. US tim-ber firms will be forced to become more efficient. The least efficient will exit or be taken over by the more efficient firms so the average size of US firms will probably increase so that they too will probably benefit from scale economies.

-- ‘The removal of tariffs is bound to affect consumer welfare, producer efficiency and the ability of government to achieve its macroeconomic objectives’ (paragraph 5). As men-tioned earlier the buyers of timber are typically other firms using timber as an input. They will enjoy a larger consumer surplus (plus areas 1,2,3,4 in the typical tariff diagram) as price of timber will be lower. All US (household) consumers will be better off as lower prices may result for all wood using firms. Houses may become somewhat cheaper, boats (cruisers), furniture etc. Greater demand may thus be expressed for a variety of products even though the effect on US aggregate demand will probably by small. In this sense the macro objectives of growth, price stability and employment will probably be small. In ad-dition the US government will not be collecting anymore tariff revenues (area 3 in the standard tariff diagram) but this does not mean the overall tax revenues will be negatively affected as the increased economic activity in the timber using industries and the resulting profit and indirect taxes collected may more than offset this loss.

Bear in mind that you do not have to include all of the above points from the extract. You may include additional evaluation points for which there is no direct reference in the extract but please make sure that even then you refer to the issue at hand (i.e. the US timber industry stakeholders).

If you do draw a standard tariff diagram refer to it in your answer.

These are not 'model answers'! The whole idea of 'model answers' is counterproductive. The aim is to help you realize what examiners expect in paper 3 (and Standard P2). Rem.: HP3 is 40% of your grade and SP2 is a whopping 50%!

Monday, March 23, 2009

Protectionism is increasing - not surprised, are we?
Russia has raised tariffs on used cars. China has tightened import standards on food, banning Irish pork, among other things. India has banned Chinese toys. Argentina has tightened licensing requirements on auto parts, textiles and leather goods. And a dozen countries, from the United States to Australia, are subsidizing embattled automakers or car dealers.

The most vivid example of that policy is the "Buy America" provision in the stimulus package, intended to ensure that only American manufacturers benefited from public-spending projects. The Obama administration persuaded Congress to water it down, and Mr. Obama has taken up Mr. Bush's warnings about the dangers of protectionism.

But pressures are building on other fronts. Last week, the (US) energy secretary, Steven Chu, said he favored tariffs on Chinese goods if China did not sign on to mandatory reductions in greenhouse gas emissions — underscoring how the "green economy" could be the next trade battleground.
Read the article 'Trade barriers rise as the recession's grip tightens' in the IHT.

Sunday, March 22, 2009

Economics Is the 'Just Right' Liberal-Arts Major

That's the title of an article written by David Colander which was brought to my attention by Greg Mankiw (March 21 post).
'Like many liberal-arts institutions, Middlebury College, where I teach, has a problem: Too many
students want to be economics majors. Economics enrollments keep growing, and adding more faculty members to the department seems to only increase the demand. The rumor on the campus is that if the college actually provided enough professors to meet the demand for economics courses, it would have to change its name to the Middlebury School of Economics.Professors at other liberal-arts colleges confirm that the phenomenon is widespread and has been for some time. But what makes the economics major so appealing? As an economist I like to think that economics has become so popular because of its intellectual rigor, broad appeal, and importance to understanding the world. And those are clearly part of the answer, especially given the recent financial crisis. Modern economics is an exciting and dynamic field of study that has changed considerably in recent years; specifically, it has become more quantitative and scientific. Today's economists bring technical expertise to interesting and novel questions. They have also expanded their previous narrow vision of human behavior. Homo economus is now considered purposeful, not ultrarational, and pursues enlightened self-interest, not greed. Psychological insights and traditional economics are blended together in today's behavioral economics; because modern economists do not see the market as the answer to everything, they are able to be involved in all types of real-world policies, from changing default options for people's savings decisions to helping design search algorithms for Google. But as much as I'd like to think so, I suspect that those strengths and improvements are not the main reasons for the economics major's appeal.'
As you (my students - Candidates 2009) are about to enter college, reading this may have some value!

Dani Rodrik on ideologues and hubris

Most will agree agree that:
'without recourse to the economist’s toolkit, we cannot even begin to make sense of the current crisis.'

All will probably agree with his assertion that:
'The fault lies not with economics, but with economists. The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful. They forgot that there were many other models that led in radically different directions. Hubris creates blind spots.'

And even though many may disagree that:
'Macroeconomics may be the only applied field within economics in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigor. Sadly, in view of today’s needs, macroeconomists have made little progress on policy since John Maynard Keynes explained how economies could get stuck in unemployment due to deficient aggregate demand. Some, like Brad DeLong and Paul Krugman, would say that the field has actually regressed.',
this last point of his may explain why macro at the intro level had for many become most difficult as it was tough to reconcile the 'newer' macro theory taught without the elegance of 'technical rigor' to the real world the intro students witnessed around them. At least when teaching an advanced course you had the fun associated with elegance....
His article is here.

PS: Was just reading a note by Nicolas Vroussalis ('98) in his θεωρειν blog. Another side, well worth reading (in Greek). 'Η Ένδεια της Σύγχρονης Οικονομικής Ι: Κοινωνική Εξήγηση' and 'Η Ένδεια της Σύγχρονης Οικονομικής ΙΙ: Υποταγή του Περιεχομένου στη Μορφή'.

Sunday, March 15, 2009

Costs of Privatizaion: Increased mortality??

An article in a prestigious medical journal (Lancet) presents evidence that:
'Rapid mass privatisation was associated with an increase of 12.8% in mortality rates among men. Possible mechanisms? Rapid social change has been linked to psychological stress, decreased access to and quality of medical care, poverty, unemployment, social inequality, social disorganisation, corruption, and an erosion of social capital. Harmful consumption of alcohol may have been a major cause of increased disease.'
The artile is: 'Mass privatisation and the post-communist mortality crisis: a cross-national analysis' and a summary can be found here.

It came to my attention when receiving the Vox EU weekly digest. A forthcoming article in the (also, prestigious) Economic Journal ('Employment and Wage Effects of Privatization: Evidence from Hungary, Romania, Russia, and Ukraine') using a different methodology claims that there 'is no evidence that privatisation systematically lowered firm-level employment' and so the Lancet result is up in the air as
' is possible that some other link, not suggested by the article and unrelated to employment outcomes, could explain the observed privatisation-mortality correlation at the country level.'
Read the vox eu reply here by one of the authors of the EJ article. A summary of the forthcoming EJ paper is here.
My intuition is that the Lancet article may have a point. Worth checking out both if you have the background and the time!

For IB economics students the possiility of such a link as described above may serve as a possible argument in an evaluation of privatization policies.

(back to grading HP3 - OMG...)

Saturday, March 14, 2009

wow...pretty impressive stuff!

Just got an email from TED on a new MIT Media Lab (Fluid Interfaces Group) presentation titled 'Sixth Sense'. Sounded intriguing - and, it was! The guy behind it is Pranav Mistry.

'SixthSense' is a wearable gestural interface that augments the physical world around us with digital information and lets us use natural hand gestures to interact with that information. By using a camera and a tiny projector mounted in a pendant like wearable device, 'SixthSense' sees what you see and visually augments any surfaces or objects we are interacting with. It projects information onto surfaces, walls, and physical objects around us, and lets us interact with the projected information through natural hand gestures, arm movements, or our interaction with the object itself. 'SixthSense' attempts to free information from its confines by seamlessly integrating it with reality, and thus making the entire world your computer.