Saturday, April 27, 2013

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

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

Long live China's slowdown 

Wednesday, April 17, 2013

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

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

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

Green GDP and China's epic pollution

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

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

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

Tuesday, April 16, 2013


Homo Economicus Homo Hellenicus | ΣΤΕΛΙΟΣ ΡΑΜΦΟΣ

Bob Solow on Ben Bernanke, the art of Central Banking, bank runs and the 2008 crisis

This is a great piece by Bob Solow for IB economics students  on Ben Bernanke, the art of Central Banking, bank runs, the 2008 crisis and why financial intermediaries must be regulated. It is very clear and very informative (of course it is.  It's written by Bob Solow...!)

Click here How to Save American Finance from Itself: Has financialization gone too far? and enjoy.

Sunday, April 14, 2013

Greece entering deflation territory...

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

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

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

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

(photo is from the Telegraph article)