Friday, August 19, 2016

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 √©migr√© 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.'

...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.')

Wednesday, August 17, 2016

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!

Thursday, August 11, 2016

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..., 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).

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.
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

Sunday, July 31, 2016

Using the Prisoner's Dilemma in an Oligopoly Paper 1 Essay (IB Economics syllabus)

Just uploaded in my wikispace a pdf copy of a file where I try to explain how and when an IB economics student can use the Prisoner's Dilemma simple game in a Paper 1 essay question.

Here's the link.  Other hopefully helpful files are there to download.  Each is a concise explanation of an IB Economics topic.

Wednesday, January 20, 2016

China is slowing down. So what? So, quite a lot...for all of us

It's been in the news roughly for 2 years now.  The 'break-neck' growth rates are pretty much a thing of the past (see China's economic growth in 2015 is slowest in 25 years).  Does it matter to the rest? It does, and very much.
For years, China voraciously gobbled up all manner of metals, crops and fuels as its economy rapidly expanded. Countries and companies, fueled by cheap debt, aggressively broadened their operations, betting that China’s appetite would grow unabated.

China’s economy is slumping. American companies, struggling to pay their debts as interest rates rise, must keep producing. All the excess is crushing prices, hurting commodity-dependent economies across emerging markets like Brazil and Venezuela and developed countries like Australia and Canada.
And, '...weakness in China prompted a stock sell-off around the world'.
And, just '...oil companies, have laid off an estimated 250,000 workers worldwide'
And, 'coal mining companies have filed for bankruptcy protection'
And, 'Venezuela is struggling to meet $10 billion in debt obligations since 95 percent of export earnings depend on crude'.
And, 'a weakening global economy, lowering the value of trade worldwide and perhaps even pushing some countries into the same kind of deflationary spiral that has hampered the Japanese economy for decades'
(all of the above quotes from China’s Hunger for Commodities Wanes, and Pain Spreads Among Producers in the NYT)

How about the EU?
Well, if China's economy is rebalancing and manufacturing is slowing down then it will not only need fewer commodities but also fewer capital goods (machines and tools and equipment) to import.  Guess who is one of the biggest exporters of capital goods to China?  Yep, you guessed right, it's Germany.  And if Germany's exports slowdown then aggregate demand will decrease (or, increase at a slower rate) so Germany's growth will suffer (and it isn't that impressive right now)

See this for example: Global groups pay a heavy price for China’s slowdown.
China buys about 8 per cent of the EU’s exports, with Germany’s share by far the highest, followed by Finland, Austria and France.
Germany’s auto companies derive between 15 and 30 per cent of operating earnings and cash flow from Chinese sales.
And, won't that affect the ECB's next decision on interest rates and monetary policy?
This photo of Mario Draghi, President of the European Central Bank, is pretty suggestive:

See China Worries Weigh Ahead of European Central Bank Policy Decision from the WSJ.

Interesting times for IB Economics candidates!

Pollution, cap and trade, carbon taxes

This New York Times article is a jewel for IB Economics candidates, both HL and SL as it is short and sweet and is full of examples one can use in any essay on solutions (discussion; evaluation) of negative production externalities.

It provides examples of 'market based solutions', i.e. solutions (or better policy responses) whereby the incentive function of price changes are still the driving force of containing pollution.  Real world examples of both 'cap and trade' systems in the world and carbon taxes are presented with a short discussion of their effectiveness.

A must to read and take down a couple of notes for all IB Economics candidates!

Proof that a Price on Carbon Works