Monday, July 30, 2018

IB Economics: a 101 on growth (by Krugman)

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

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

Quoting Krugman:
The key point when you look at real GDP is that the economy’s actual output depends both on its capacity – the amount it is capable of producing on a sustained basis – and the rate at which it is using that capacity. That is,

Output = capacity * capacity utilization

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

He continues... can look at the ratio of actual GDP to potential, which is an indication of how hot the economy is running
...Why does capacity utilization fluctuate? Mainly because the economy sometimes suffers from periods of inadequate demand, as it did after the 2008 financial crisis. Sometimes, also, the economy overheats, reaching levels of capacity utilization that will lead to rising inflation.
The equation above is a slightly stylized (and more compact) version of what the IB syllabus states, namely that growth can result from greater use of existing resources (=capacity utilization) and from more / better resources becoming available (=capacity). 

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

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

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

Wednesday, July 25, 2018

Portugal and austerity: lessons in 101 Economics?

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

Portugal decided to ditch austerity and instead pursued a more Keynesian (?) stance:
Portugal took a daring stand: In 2015, it cast aside the harshest austerity measures its European creditors had imposed, igniting a virtuous cycle that put its economy back on a path to growth. The country reversed cuts to wages, pensions and social security, and offered incentives to businesses.  The government’s U-turn, and willingness to spend, had a powerful effect. Creditors railed against the move, but the gloom that had gripped the nation through years of belt-tightening began to lift. Business confidence rebounded. Production and exports began to take off...
And, the Prime Minister explains:
“What happened in Portugal shows that too much austerity deepens a recession, and creates a vicious circle. We devised an alternative to austerity, focusing on higher growth, and more and better jobs.”
Mr. Costa (the Prime Minister) made up for the givebacks with cuts in infrastructure and other spending, whittling the annual budget deficit to less than 1 percent of its gross domestic product, compared with 4.4 percent when he took office. The government is on track to achieve a surplus by 2020, a year ahead of schedule, ending a quarter-century of deficits
And, if you wonder about the importance of the level of confidence households and businesses have (the 'feel good' factor as we say in class), look at this:
While discouragement lingers in Greece after a decade of spending cuts, Portugal’s recovery has pivoted around restoring confidence to get people and businesses motivated again.
“The actual stimulus spending was very small,” said João Borges de Assunção, a professor at the Católica Lisbon School of Business and Economics. “But the country’s mind-set became completely different, and from an economic perspective, that’s more impactful than the actual change in policy.”

Lastly, the description of the production technology of a olive oil producer featured in this article is interesting:
Elaia says it generates 14 percent of Portugal’s olive oil today, contributing to a renaissance in Portuguese exports, which now constitute 40 percent of economic activity. Drones buzz over vast olive groves, precision-planted with 2,000 trees per hectare, or roughly 2.5 acres, compared with around 150 trees for a traditional farm, monitoring crops for insect infestations, water levels and optimum harvesting time. Olives are picked by machine. Instead of field hands, the company hires technicians to operate the robots, and it has teamed up with universities for research.
Of course, 'good governance' is needed for such a path to prove successful.  But, good governance is not necessarily available in all debt-ridden countries...

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

Sunday, July 22, 2018

The OECD Better Life Index

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

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

Life Satisfaction
Work-life balance

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

The latest BLI is found here.

Friday, July 20, 2018

On Central Bank independence

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


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

So much for central bank independence.

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

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

Thursday, July 19, 2018

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

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

To satisfy the criteria for Level 4, you must:

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

2.       Clearly define ALL the relevant terms

3.       Clearly explain the relevant economic theory involved

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

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

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

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

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

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

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

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

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