IB Economics (and, not only)

Two great blogs to check out

2010-12-05T17:44:00.003+02:00

I've been meaning to alert you to two great blogs, one for economics by Andrew McCarthy (elearning and economics) and another one for English by Eric MacKnight.

These are the links. I'll add them to my list on the right asap:

elearning and economics

english

Enjoy!

On QE, Germany, China and Friedman

2010-11-22T15:01:00.004+02:00

This is the link to Krugman's op ed piece today in The NY Times / IHT. IB Economics students should be able to understand it perfectly well. Useful for examples in long essays etc.

Food prices and poverty

2010-11-21T10:14:00.003+02:00

It's been a loooong time and I really am sorry to have neglected this blog but today, Sunday, even though I am still way behind in my work, I did tumble upon a very interesting post while browsing the Free Exchange Economist blog. It is an article by Timothy Wise in Triple Crisis (post link here)titled 'Are high agricultural prices good or bad for poverty'. I have always told my students that it depends upon whether the poor are net buers (net importers) or net sellers (net exporters) but is seems that this may be missing important issues.

Read the post!

(btw, I read there that Dani Rodrik is posting again which is great news in my opinion)

Hope to resume posting soon!

For IB Economics Year 1 students/ Candidates 2012

2010-09-16T14:51:00.003+03:00

I have already mentioned to some of you the importance of watching now (and again, later) the video 'Commanding Heights' produced by PBS a few years ago.

You can view the video here or here (choose captions 'on' here).

The link for the 'home' page is here.

Trust me and click on the links above!

Rehn, the European commissioner for economic and monetary affairs on Greece (WSJ)

2010-08-24T23:33:00.002+03:00

A ray of optimism - but we'll have to keep on eye on what happens in September and October in the streets of Athens:

Recall March 2010. Tensions over the Greek debt crisis were running high within the euro zone and among our international partners. People were talking about the end of the single currency. After weeks of intense consultations, phone calls, long days and even longer nights locked in meetings, a sense of determination and solidarity prevailed among European policy makers: "We swim together or we sink together."

Then came May 2010. Europe agreed on a joint euro area and IMF loan-support package for Athens, conditional on Greece's strict implementation of a credible fiscal adjustment program. Many outside critics doubted whether Athens could get the job done.

Now, August 2010. The Commission's first review of the program's implementation shows that, so far, Athens has proved the doubters wrong. Greece's ambitious and front-loaded adjustment program is on track to deliver a return to macroeconomic and financial stability, and stronger and more balanced growth in the medium-term.....

Read it all here.

'Needed: A New Economic Paradigm' / Stiglitz

2010-08-21T21:23:00.007+03:00

Stiglitz is always interesting and illuminating to read. In his Aug 18 FT piece titled 'Needed: A New Economic Paradigm' he once again argues (convincingly in my opinion) of why much of the toolkit available in Economics may be inappropriate / distorting and even dangerous.

...It is hard for non-economists to understand how peculiar the predominant macroeconomic models were. Many assumed demand had to equal supply – and that meant there could be no unemployment. (Right now a lot of people are just enjoying an extra dose of leisure; why they are unhappy is a matter for psychiatry, not economics.) Many used “representative agent models” – all individuals were assumed to be identical, and this meant there could be no meaningful financial markets (who would be lending money to whom?). Information asymmetries, the cornerstone of modern economics, also had no place: they could arise only if individuals suffered from acute schizophrenia, an assumption incompatible with another of the favoured assumptions, full rationality.

Bad models lead to bad policy: central banks, for instance, focused on the small economic inefficiencies arising from inflation, to the exclusion of the far, far greater inefficiencies arising from dysfunctional financial markets and asset price bubbles. After all, their models said that financial markets were always efficient. Remarkably, standard macroeconomic models did not even incorporate adequate analyses of banks. No wonder former Federal Reserve chairman Alan Greenspan, in his famous mea culpa, could express his surprise that banks did not do a better job at risk management. The real surprise was his surprise: even a cursory look at the perverse incentives confronting banks and their managers would have predicted short-sighted behaviour with excessive risk-taking....

...Fortunately, while much of the mainstream focused on these flawed models, numerous researchers were engaged in developing alternative approaches. Economic theory had already shown that many of the central conclusions of the standard model were not robust – that is, small changes in assumptions led to large changes in conclusions. Even small information asymmetries, or imperfections in risk markets, meant that markets were not efficient. Celebrated results, such as Adam Smith’s invisible hand, did not hold; the invisible hand was invisible because it was not there. Few today would argue that bank managers, in their pursuit of their self-interest, had promoted the well-being of the global economy....

...Changing paradigms is not easy. Too many have invested too much in the wrong models. Like the Ptolemaic attempts to preserve earth-centric views of the universe, there will be heroic efforts to add complexities and refinements to the standard paradigm. The resulting models will be an improvement and policies based on them may do better, but they too are likely to fail. Nothing less than a paradigm shift will do.

The full article can be found here (subscription required) or (most of it) here.

(one more reason why our 'evaluation'-mania in IB Economics is so important...)

On Fiscal Policy again...

2010-08-21T14:05:00.003+03:00

Well, the academic year is about to begin and, slowly, work effort is picking up! I checked out Project Syndicate and there was an article by Skidelsky titled 'Fixing the Right Hole" which concerns fiscal policy and why the position of the 'fiscal hawks' may not make all that much sense:

Yet the budget cutters have a fallback position. The problem with fiscal stimulus, they say, is that it destroys confidence in government finances, thereby impeding recovery. So a credible deficit-reduction program is needed now to “consolidate recovery.”

What is it about cutting the deficit that is supposed to restore confidence? Well, deficit reduction may lead consumers to believe that a permanent tax reduction is on the horizon. This will have a positive wealth effect and increase private consumption. But why on earth should consumers believe that cutting a deficit, and raising taxes now, will lead to tax cuts later?

One implausible hypothesis follows another. Fiscal consolidation, its advocates claim, “might” lead investors to expect improvement on the supply side of the economy. But it is unemployment, loss of skills and self-confidence, and investment rationing that are hitting the supply side.

We are told that the “credible announcement and implementation” of fiscal-consolidation strategy “may” diminish the risk premium associated with government debt. This will reduce real interest rates and make “crowding in” of private spending more likely. But real interest rates on long-term government debt in the US, Japan, Germany, and the United Kingdom are already close to zero. Not only do investors view the risks of depression and deflation as greater than those of default, but bonds are being preferred to equities for the same reason.

Finally, the reduction of governments’ borrowing requirements “might” have a beneficial effect on output in the long run, owing to lower long-term interest rates. Of course, low long-term interest rates are necessary for recovery. But so are profit expectations, and these depend on buoyant demand. No matter how cheap it is for businessmen to borrow, they will not do so if they see no demand for their products.

The ECB’s arguments look to me like scraping the bottom of the intellectual barrel. The truth is that it is not fear of government bankruptcy, but governments’ determination to balance the books, that is reducing business confidence by lowering expectations of employment, incomes, and orders. The problem is not the hole in the budget; it is the hole in the economy.

He makes reference to an article in the July issue of the ECB Monthly Bulletin ('The effectiveness of euro area fiscal policies', p. 67) and I would advise IB year 2 Higher Level (but even interested standard level) economics students to read carefully section 2 (pp. 68-71) titled 'Fiscal policy effectiveness: theoretical considerations". Skidelski's piece can be then thought of as an evaluation of the ECB position. The July issue of the ECB's monthly bulletin can be found here.

Fiscal 'hawks'

2010-07-02T00:02:00.003+03:00

The link to this was found at the Economist blog. It describes Alesina's position on how to tackle a crisis:

Quoting

This is Alesina's hour. In April in Madrid, he told the European Union's economic and finance ministers that "large, credible, and decisive" spending cuts to reduce budget deficits have frequently been followed by economic growth.

Alesina argues that austerity can stimulate economic growth by calming bond markets, which lowers interest rates and promotes investment. In addition, he says, deficit-cutting reassures taxpayers that more wrenching fiscal adjustments won't be needed later. That revives their animal spirits and their spending. Alesina says that as a way to shrink deficits, spending cuts are better for growth than raising taxes.

The last sentence is worth noting:

Clearly, economists are as divided as politicians. The problem is that if austerity budgets are pursued and they prove ill-advised, many more people will suffer than just a few economists.

Cross your fingers....

The post is found here

No comment - must watch

2010-06-19T15:21:00.000+03:00

Ken Robinson, again:

Wow!

2010-06-15T12:23:00.001+03:00

Always suspected it, but this 'confirms' it!

From Free Exchange:

Luck”, James Simons, the founder of Renaissance Technologies, a hedge fund, once said, “plays a meaningful role in everyone’s lives.” Mr Simons, a 71-year-old former university professor and a celebrated mathematician, has been blessed with the stuff. His flagship fund, Medallion, has had average annual gains of more than 35% for 20 years. Last year he was named the best-paid hedge-fund manager in America by Alpha, a hedge-fund magazine, reportedly earning $2.5 billion. Medallion gained 80% last year, and this year is up a further 12%.

and,

Where other funds might recruit employees with financial or economic backgrounds and have them test hypotheses against data, Renaissance employeed thinkers who had spent the bulk of their career in non-economic analytical fields, like mathematics, physics, and astronomy. Once at Renaissance, those thinkers would build data-processing models without any preconceptions about what should cause what, when. The firm's advantage is in its willingness to trade what doesn't necessarily make sense.

Read it here: 'If it works, bet it'

Rodrik on Germany's role in this mess

2010-06-10T12:01:00.002+03:00

Rodrik offers an interesting viewpoint on who may also be responsible and who has to act now before it is too late in this crisi.

Just a quote:

European growth is constrained by debt problems and continued concerns about the solvency of Greece and other highly indebted EU members. As the private sector deleverages and attempts to rebuild its balance sheets, consumption and investment demand have collapsed, bringing output down with them. European leaders have so far offered no solution to the growth conundrum other than belt tightening.

The reasoning seems to be that growth requires market confidence, which in turn requires fiscal retrenchment. As Angela Merkel puts it, “growth can’t come at the price of high state budget deficits.”

But trying to redress budget deficits in the midst of a collapse in domestic demand makes problems worse, not better. A shrinking economy makes private and public debt look less sustainable, which does nothing for market confidence.

In fact, it sets in motion a vicious cycle. The poorer an economy’s growth prospects, the larger the fiscal correction and deleveraging needed to convince markets of underlying solvency. But the greater the fiscal correction and private-sector deleveraging, the worse growth prospects become. The best way to get rid of debt (short of default) is to grow out of it.

So Europe needs a short-term growth strategy to supplement its financial-support package and its plans for fiscal consolidation. The greatest obstacle to implementing such a strategy is the EU’s largest economy and its putative leader: Germany.

Even though its fiscal and external accounts are strong, Germany has resisted calls for boosting its domestic demand further. Its fiscal policy has been expansionary, but nowhere near the level of the US. Germany’s structural fiscal deficit has increased by 3.8 percentage points of GDP since 2007, compared to 6.1 percentage points in the US.

What makes this perverse is that Germany runs a huge current-account surplus. Projected to amount to 5.5% of GDP in 2010, this surplus is not far behind China’s 6.2%. So Germany has to thank deficit countries like the US, or Spain and Greece in Europe, for propping up its industries and preventing its unemployment rate from rising further. For a wealthy economy that is supposed to contribute to global economic stability, Germany is not only failing to do its fair share, but is free-riding on other countries’ economies.

It is Germany’s partners in the eurozone, especially badly hit countries like Greece and Spain, that bear the brunt of the costs. These countries’ combined current-account deficit matches Germany’s surplus almost exactly. (The eurozone’s aggregate current account with the rest of the world is balanced.)

Read it here.

Αν - Δ. Μητσοτάκης & Ευδαίμονες.wmv

2010-05-18T21:30:00.000+03:00

2010-05-14T12:51:00.002+03:00

We did this essay in class the other day:

Using an appropriate diagram, explain how a government decision to decrease income tax rates could lead to a movement along the short-run Phillips curve. [Nov 09, 5]

I have posted the ideas discussed in my wikispaces site for any interested IB Economics (higher level) candidate to look at. If you are not my student, please keep in mind that what your own instructor expects is more important.

There are many ways to tackle this question. One could start off by mentioning that taxes can be distinguished into direct (e.g. taxes on income, on profits, on wealth) and indirect (taxes on goods and on expenditures).

You would then explain that a decrease in income tax rates would increase disposable income (defined as income minus direct taxes plus transfer payments). Consumption (spending by households on durables, non-durables and services per period) is thus expected to increase and, since consumption expenditures are typically a large component of aggregate demand (total spending per period on domestic output), AD is expected to increase and to shift to the right from AD1 to AD2 (you should, in my opinion include a simple AD/AS diagram):

(the rest of the stuff is found here)

Enjoy!

Joe Stiglitz on R. Skidelsy and his new book on Keynes

2010-04-23T09:47:00.005+03:00

Robert Skidelsky has published a new book, 'Keynes: The Return of the Master', and my ex-student Alexandros Stavrakas who is now editor-in-chief of Bedeutung, a magazine of Philosophy, Current Affairs, Art and Literature was kind enough to bring to my attention a review of the book written by Joseph Stglitz.

Here are the opening paragraphs:

It has become a commonplace to say, in the aftermath of the Great Recession, that ‘we are all Keynesians now.’ If this is so, then Keynes’s great biographer, Robert Skidelsky, should have much to say about the recession, its causes and the appropriate cures. And so indeed he does. I share with Skidelsky the view that, while most of the blame for the crisis should reside with those in the financial markets, who did such a poor job both in allocating capital and in managing risk (their key responsibilities), a considerable portion of it lies with the economics profession. The notion economists pushed – that markets are efficient and self-adjusting – gave comfort to regulators like Alan Greenspan, who didn’t believe in regulation in the first place. They provided support for the movement which stripped away the regulations that had provided the basis of financial stability in the decades after the Great Depression; and they gave justification to those, like Larry Summers and Robert Rubin, Treasury secretaries under Clinton, who opposed doing anything about derivatives, even after the dangers had been exposed in the Long-Term Capital Management crisis of 1998.

We should be clear about this: economic theory never provided much support for these free-market views. Theories of imperfect and asymmetric information in markets had undermined every one of the ‘efficient market’ doctrines, even before they became fashionable in the Reagan-Thatcher era. Bruce Greenwald and I had explained that Adam Smith’s hand was not in fact invisible: it wasn’t there. Sanford Grossman and I had explained that if markets were as efficient in transmitting information as the free marketeers claimed, no one would have any incentive to gather and process it. Free marketeers, and the special interests that benefited from their doctrines, paid little attention to these inconvenient truths.

The review is, of course, much more than a review so it would be a good idea to read it and get a sense of how things are in the profession and in the world right now.

On page 5 of the article Stiglitz discusses the situation that Greece and other PIIGS are facing:'

... There are speculative attacks against the weakest countries, which find themselves caught between a rock and a hard place. They worry that deficits will lead to higher interest rates, not because (as is usually argued) public spending will crowd out private spending, but because of growing ‘risk premiums’. But the effect is much the same: more government spending will force cutbacks in private spending, with the obvious adverse effects on the economy. The financial markets that caused the crisis – which in turn caused the deficits – went silent as money was being spent on the bail-out; but now they are telling governments they have to cut public spending. Wages are to be cut, even if bank bonuses are to be kept.

If markets were rational, there would be an easy policy response. Spending on investments that yielded even moderate real returns (say, of 5 to 6 per cent) would lower long-term debt levels; such spending increases output in the short run, thus garnering more tax revenue, and the future returns generate still more tax revenue. If markets could be convinced, for example, that European governments can and will meet their debt obligations, interest rates would fall, and even the countries with the highest levels of debt would find it easy to meet their obligations. But markets are not necessarily rational, and even when they are, they are not always well intentioned. The objective of a speculative attack is to generate profits for the speculators, regardless of the cost to the rest of society. They can make money by inducing panic and then feel pleased with their ‘insight’: their concerns were justified, but only because of the responses to which their actions gave rise.

Since the time of Keynes, the ability of markets to mount such speculative attacks has increased enormously. But governments are not powerless to tame them, and in some cases can counter-attack, as Hong Kong did in foiling Wall Street’s famous ‘Hong Kong double play’, when speculators simultaneously sold short both the currency and the stock market. The speculators knew that governments traditionally respond to a currency attack by raising interest rates, which lowers stock prices. If Hong Kong failed to raise interest rates, they would make money by shorting the currency. If Hong Kong did raise them to save its currency, the speculators would make money by shorting the stock market. Hong Kong outsmarted them by simultaneously raising interest rates and supporting the stock market by buying shares. Taxes on short-term capital gains, regulations on the ever more powerful speculative instruments (like credit default swaps), and – especially for developing countries – the imposition of barriers on the uncontrolled movement of short-term capital across borders, can reduce the scope for and returns from this kind of behaviour.

The article is found here.

PS: May 2010 IB candidtates taking the Higher or Standard Level Economics exam on May 19/20 should definitely read this and take down a couple of notes. Examples and awareness of what is going on in the world are always much appreciated by examiners. Do not forget that. Even a mediocre essay will earn higher marks if it includes some relevant examples.

oh, how true...

2010-04-22T12:18:00.002+03:00

Europe does not need the French plan for coordination of tax policies, or another IMF, but there does need to be fiscal discipline to prevent other countries from free riding, as the Greeks seem to have done. They apparently assumed that the rest of Europe would overlook continuing high deficits, and that, as eurozone members, the market would consider their debt to be just like German bonds, though issued by friendly and welcoming people in an agreeable climate, and with a glass of ouzo on the side.

The rest here.

On indutrial policy

2010-04-22T12:00:00.002+03:00

We are discussing supply side policies and we mentioned industrial policy as an interventionist and rather controversial type.

Dani Rodrik of Harvard recently wrote a beautifully enlightening short article on it.

British Prime Minister Gordon Brown promotes it as a vehicle for creating high-skill jobs. French President Nicolas Sarkozy talks about using it to keep industrial jobs in France. The World Bank’s chief economist, Justin Lin, openly supports it to speed up structural change in developing nations. McKinsey is advising governments on how to do it right.

Industrial policy is back.

In fact, industrial policy never went out of fashion. Economists enamored of the neo-liberal Washington Consensus may have written it off, but successful economies have always relied on government policies that promote growth by accelerating structural transformation.

China is a case in point. Its phenomenal manufacturing prowess rests in large part on public assistance to new industries. State-owned enterprises have acted as incubators for technical skills and managerial talent. Local-content requirements have spawned productive supplier industries in automotive and electronics products. Generous export incentives have helped firms break into competitive global markets.

Chile, which is often portrayed as a free-market paradise, is another example. The government has played a crucial role in developing every significant new export that the country produces. Chilean grapes broke into world markets thanks to publicly financed R&D. Forest products were heavily subsidized by none other than General Augusto Pinochet. And the highly successful salmon industry is the creation of Fundación Chile, a quasi-public venture fund.

But when it comes to industrial policy, it is the United States that takes the cake. This is ironic, because the term “industrial policy” is anathema in American political discourse. It is used almost exclusively to browbeat political opponents with accusations of Stalinist economic designs.

Yet the US owes much of its innovative prowess to government support. As Harvard Business School professor Josh Lerner explains in his book Boulevard of Broken Dreams, US Department of Defense contracts played a crucial role in accelerating the early growth of Silicon Valley. The Internet, possibly the most significant innovation of our time, grew out of a Defense Department project initiated in 1969.

Nor is America’s embrace of industrial policy a matter of historical interest only. Today the US federal government is the world’s biggest venture capitalist by far. According to The Wall Street Journal, the US Department of Energy (DOE) alone is planning to spend more than $40 billion in loans and grants to encourage private firms to develop green technologies, such as electric cars, new batteries, wind turbines, and solar panels. During the first three quarters on 2009, private venture capital firms invested less than $3 billion combined in this sector. The DOE invested $13 billion.
The shift toward embracing industrial policy is therefore a welcome acknowledgement of what sensible analysts of economic growth have always known: developing new industries often requires a nudge from government. The nudge can take the form of subsidies, loans, infrastructure, and other kinds of support. But scratch the surface of any new successful industry anywhere, and more likely than not you will find government assistance lurking beneath.

Read the rest here.

PS: required reading (and, note taking -for examples- for my own little dorks)

no comment.....

2010-04-21T13:36:00.001+03:00

Once again, doesn't look good...

on deregulation

2010-04-21T13:24:00.002+03:00

These days in class we are discussing supply side policies and we initialy discussed two ways of distinguishing them. One route is to make the distinction between interventionist and pro-market policies and another way is to divide them into policies that are commonly accepted and policies that are considered more controversial which, in my opinion at least, include the 'pro-market' set and industrial policiy.

In discussing 'deregulation' I mentioned that quite a few consider the US banking and financial deregulation of the 1980s as being to a significant extent responsible for the current crisis.

Today, I was reading in Project Syndicate a short article by Hector R. Torres, a former Executive Director of the IMF.

The whole article is of nterest but these paragraphs are especially interesting for us:

Let us now consider the second question – whether the Fund suffered from a mindset that blinded it to the causes of what was happening. As early as August 2005, Raghuram Rajan, the IMF’s Economic Counselor (chief economist) at the time, was warning of weaknesses in the US financial markets. Rajan saw that something potentially dangerous was happening, warning that competition forces were pushing financial markets “to flirt continuously with the limits of illiquidity” and concealing risks from investors in order to outperform competitors.

Perhaps most revealingly, though, Rajan nonetheless optimistically argued that “[d]eregulation has removed artificial barriers preventing entry of new firms, and has encouraged competition between products, institutions, markets, and jurisdictions.” In other words, he clearly believed that regulation created “artificial barriers,” and that “competition between jurisdictions” – that is, between regulators – was to be welcomed.

Such beliefs come naturally to those committed to the view that markets perform better without regulation, and Rajan’s statement is a good illustration of the IMF’s creed at the time. And it was this boundless faith in markets’ self-regulatory capacity that appears to be at the root of the Fund’s failure to find what it was not looking for.

Read the piece here.

revenue and profit maximization

2010-04-16T12:49:00.002+03:00

Ideas on past IB Economics HL P2 questions on profit vs. revenue maximization can be found here at the IB Freeway.

A short on trade

2010-04-16T09:45:00.002+03:00

If you are a May 2010 candidate and you are taking higher economics you should be comfortable with the analysis of a tariff.

These are 2 past IB questions relating to tariff analysis:

* How do tariffs affect economic welfare? (Short trade 3)

* Using an appropriate diagram, explain who gains and who loses from the introduction of a tariff (Short trade 34)

An analysis that may be considered useful can be found in my wikispace here. The usual warning: make sure you listen to your own teacher before adopting what I say to my students....

On Greece and the IMF

2010-04-16T09:27:00.002+03:00

The situation in Greece as it is unfolding doesn't look that good but one positive side effect is that you guys ('you' in a very narrow sense i.e. my year 1 students) will, by the time you graduate next year, know much more about the IMF than most other candidates from our school since 1993...!

Here is the transcript of an interesting IMF press briefing on what is going on right now between Greece and the Fund. Easy reading and you get an idea about the process.

The October 2009 World Economic Outlook can be found here. Downloading and skimming over Chapter 2 may be a good idea. Some stuff will sound familiar (and, as we move along the syllabus, you will understand more and more) but even just looking at some figures and tables and trying to 'read' them and make sense out of them is a good idea.

IB May 2010 Exams - Economics

2010-04-15T11:16:00.006+03:00

The May exams are approaching fast...

I had prepared this for my students and I think that it may be interesting (or, perhaps, even useful) to post here. The usual caveat: listen to your teacher and what he/she has to say before adopting someone else's approach.

Candidates are often asked to evaluate fiscal policy (in HP1 / SP1 or in HP3/SP2) so here are some thoughts:

Evaluating Fiscal Policy

Possible Strengths of Expansionary Fiscal Policy
* Fiscal policy is direct: any increase in government spending will automatically increase national income (Y) by at least as much, if not more
* If the government expenditure multiplier is greater than one (Christina Romer, the Chief Economist of Obama’s Council of Economic Advisors, estimates it at 1.6) then it is also a very powerful tool
* A decrease in taxes to reflate an economy (as part of an expansionary stimulus plan) may also have beneficial supply-side effects as lower taxes may improve the incentives to work and to invest
* 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
* 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’ (automatic stabilizers)
* If the increased government expenditures of a stimulus package include spending on infrastructure (roads, bridges, harbors, telecommunications etc i.e. physical capital typically financed by governments that create very significant positive externalities decreasing transaction costs across the board), health and education then a positive supply-side effect will also result
* If the increased government expenditures of a stimulus package include spending on the development of ‘green’ technologies then an additional long run benefit will be the improvement of the environment, permitting sustainable growth.

On the other hand (Possible Weaknesses of Fiscal Policy):
* The government expenditure multiplier may even be less than one as some economists claim (Robert Barro of Harvard, is one example)
* There are significant time lags associated with fiscal policy that may even end up destabilizing instead of stabilizing an economy
* Large deficit spending may increase national debt to unsustainable levels and may force significant tax increases in the future (so, in a sense the cost of such a policy is shifted on to future generations)
* There is also the chance that if the fiscal effect continues for longer than needed then inflationary pressures may arise
* There is always the possibility that the increased funding needs of a stimulus plan (remember the Government must borrow from the ‘loanable funds’ market to finance the deficit spending) may crowd-out private investment (and consumption) through a rise in interest rates or even directly (resource crowding-out)
* Also, fiscal policy suffers from an ‘expansionary bias’ because politicians often are irresponsible and prefer to spend more and tax less rather than spending less and taxing more as the former maximizes their short term re-election chances (Greece is now suffering from the ‘fiscal irresponsibility of governments of the last 30 years’….)

Lastly, contractionary fiscal policy to fight inflationary pressures is more difficult to employ compared to increasing interest rates (i.e. tight monetary policy).

On the size of the multiplier see Barro: ; for a more general discussion of the size of the multiplier read this.

Hope this helps.

PS: the word file that you can tweak can be found here at my wikispace as entry #9

Rogoff on the IMF and Greece

2010-04-12T13:51:00.002+03:00

An interesting to read short article by Ken Rogoff:

...Now, the eurozone countries have agreed that the Fund can come into Greece and, presumably, Portugal, Spain, Italy, and Ireland, if needed.

and:

...To be fair, the Fund’s reputation for imposing austerity is mostly an illusion. Countries usually call in the IMF only when they have been jilted by international capital markets, and are faced with desperate tightening measures no matter where they turn. Countries turn to the Fund for help because it is typically a far softer touch than private markets.

and:

The stakes for the IMF in Europe are huge. It is not going to be an easy balancing act. If the Fund attaches tough “German-style” conditions to its loans, it risks provoking immediate confrontation and default. This is the last thing that it wants to do.

Read the article here.

2010-04-07T21:50:00.000+03:00

Not bad!

Do Values Matter? (Complete)

2010-04-02T22:20:00.000+03:00

Do Values Matter? (Complete)

... a little bit of Bono bashing, a little bit of Harrod - Domar and ....

2010-02-28T21:19:00.002+02:00

....lots of evaluation of foreign aid!

A great, short, article (actually, a review by Bhagwati of a new book ) that is great for IB Economics 2010 candidates to read. Highly recommended.

Banned Aid: Why International Assistance Does Not Alleviate Poverty

Krugman in the New Yorker

2010-02-28T20:51:00.005+02:00

(in the picture, Krugman and his wife, Robin Wells, at home with their cats, Doris Lessing and Albert Einstein...(!))

....In recent years Krugman has also spent a great deal of time distilling his views into an undergraduate textbook. When he first signed the contract to write it, in 1994, he did it mostly for the money. Then he did no work on it for years. Finally, his publisher told him that he had to get moving, that he should work with a co-author who was better organized and more highly motivated than he was, and suggested his wife. It took them five years of intense work to write the first edition.

“It’s excruciatingly hard,” Wells says.

“You have to put yourself back in the mind of an eighteen-year-old,” Krugman says. “And it has to be impeccable. If you’re writing an academic paper, if you have some stuff that’s blurrily written, that won’t do too much harm. If you write a newspaper article and a third of the readers don’t get it, that’s a success. But a textbook has to be perfect.”

Even though they were doing it mostly for the money, they knew that, for the students who read it, their textbook might be the only time in their lives that they were exposed to proper economic thinking, which of course would have an influence on their political thinking.

“The books we’re competing with tend to be much more rah-rah about the market,” Wells says. “That’s partly because that reflects the views of the author, but also because it’s easy to do it that way—you just find where the lines cross and everybody’s happy. It’s more difficult to talk about how markets fail.”

“The trend when we were putting the latest edition together was to have less and less about the business cycle, and we said, ‘No, this is wrong, the business-cycle sections are still important,’ ” Krugman says. “That turns out to have been a really good bet.”

“We were the only textbook that incorporated the financial crisis, as we were chronically late. We were supposed to have the manuscript delivered in August or September, and by October we were still working, and we just said, ‘We can’t send it out like this, too much is going on.’ We were really in nail-biting territory, because you have to get it to the printers by a certain date or you miss the academic year.”

“We were right in the middle of that when the Nobel Prize committee called, and Robin’s reaction was ‘We don’t have time for this!’ The stress of the week or so after the announcement was crazy, so we actually went off to St. Croix. We were working frantically.”

Fun reading about the life of a Nobel Prize guy. Click here.

Myths and facts about Greece and the current crisis

2010-02-18T10:47:00.004+02:00

Prof. Charles Wyplosz, co-author of the most popular text "Macroeconomics: A European Text' which many of you (my students) may use in college (mostly those bound for UK schools), wrote these 'Myths and Facts" that will definitely enlighten you:

Myth 1: Greece is bankrupt. Countries cannot be bankrupt; their governments can only default on their debts. In the absence of internationally recognised resolution mechanisms, government defaults open up a messy situation as governments negotiate with their creditors.

Fact 1: There is no reason for the Greek government to default. It is not in its interest and it can service its debt, whose size is half that of the Japanese government and the same order of magnitude as that of many other governments, including soon the UK and the US (OECD 2010). Yet, markets can force the government to default if they refuse to refinance the parts of the debt that reach maturity. This is a pure case of self-fulfilling crisis.

Fact 2: This crisis started as a panic reaction to fears of default but, as usual, some market players now also bet on a default. The market reaction is both defensive and offensive.

Myth 2: Greece is being singled out because it cheated repeatedly. Reports of Greek data manipulation have occurred long before this crisis. The latest report was issued by the government elected in October 2009 while the risk premia have been large since October 2008.

Myth 3: The Greek government is particularly vulnerable because its debt is widely held internationally, in contrast with the Japanese debt. Crisis after crisis, post-mortem examinations reveal that residents act exactly like non-residents. They panic and speculate like all financiers do, independently of where they live and work.

Fact 3: The monetary union is an agreement to take monetary policy out of national sovereignty. Very explicitly the Treaties leave budgetary matters in national hands. There is no sense in which the current crisis is a “proof” that Europe has failed. The Greek (and Portugese, and Spanish…) debt situation is a Greek (and Portugese and Spanish…) problem.

Myth 4: This is a euro crisis, which could result in a breakup of the monetary union. There is no mechanism for transforming the debt crisis into a Eurozone breakup. No country can be forced out and it is in no country’s interest to leave (Eichengreen 2007). Had Greece not been part of the eurozone, it would have long undergone a major currency depreciation, like in Hungary in November 2008. The euro protects Greece.

Fact 4: A debt default by the Greek government, on its own, would be a non-event. Greece is a relatively small country (with 11 million people, its GDP amounts to less than 3% of Eurozone’s GDP). Contagion to Portugal, which is even smaller, would also be a non-event. Moving on to Spain and Italy is another matter.

Myth 5: Contagion, already under way, would be destructive. This statement is too vague. It cannot destroy the monetary union, as argued above. But contagion can bring the value of the euro down – but this would be mostly good news for the Eurozone as it is suffering from an overvalued exchange rate at a time of anaemic domestic demand.

Fact 5: The real worry is the banking system. Some European banks hold part of the Greek debt and, if still saddled with unrecognised losses from the subprime crisis, some might become bankrupt. Many governments have simply not pushed their banks to straighten up their accounts, and they are now discovering some of the unforeseen consequences of supervisory forbearance.

Myth 6: Other Eurozone governments should support the Greek government to avoid destructive contagion. I argued that contagion need not be destructive if banks can bear it, so the need for a collective bailout is not established. There is a huge moral hazard cost, on the other hand.

Fact 6: The Treaty strictly prohibits bailouts. Art. 100(2) states: “Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control, the Council may, acting unanimously on a proposal from the Commission, grant, under certain conditions, Community financial assistance to the Member State concerned. Where the severe difficulties are caused by natural disasters, the Council shall act by qualified majority.” This article has been written precisely to ban bailouts. Interpreting continuing fiscal indiscipline as “exceptional occurrences beyond its control” runs against the spirit of the Treaty. Violating the Treaty to rescue countries whose successive governments have made no effort to achieve fiscal discipline over the last decade (or longer) is indefensible.

Fact 7: If Greece, and other countries, needs support to refinance their public debts, they can and should call the IMF. In contrast to EU countries that have no instrument to impose debt discipline (the Stability Pact has failed over and again and is completely discredited by now), the IMF operates an effective conditionality machinery.

Myth 7: The IMF cannot intervene in this case because the euro is a shared currency; an IMF intervention would reduce the sovereignty of all Eurozone countries. This is a serious misunderstanding of what IMF routinely does. It deals with any financing problem, independently of currency difficulties. The IMF would impose conditions on fiscal policy, not on monetary policy. Besides, the Eurozone is not a member of IMF – it only has observer status – but individual countries are.

Fact 8: Greece, along with Spain, Portugal and Ireland suffer from a loss of competitiveness due to continuing higher inflation. This partly explains their widening current account deficits until the crisis. Yet, the budget deficits are unrelated to this evolution.

Myth 8: The loss of competitiveness is a threat to the monetary union that warrants collective support. It is true that the competitiveness situation represents a huge policy challenge but a bailout will not help and could well make matters worse if it means that unwarranted wage and price increases are supported by the rest of the Eurozone.

The remaining three can be found here.
(found at voxeu)

On Prof. Stiglitz once again

2010-02-17T10:13:00.004+02:00

The new IB economics syllabus will include bits fom the economics of information literature which a owes vey much to Joseph Stiglitz.

As I mentioned in one of my sections a few days ago, the latest issue of the IMF magazine 'Finance and Development' has a very interesting and readable presentation of Stiglitz and his work that you should read.

Realizing Stiglitz’s potential, his professors encouraged him to leave Amherst after his third year and start graduate work elsewhere; they were nevertheless devastated to see him go. “Frankly, seeing Stiglitz leave is like watching the disappearance of one’s right arm,” one of them wrote. The Massachusetts Institute of Technology (MIT), however, was overjoyed to get him as a student. The institution’s admissions committee sent his information to the economics department and asked what the amount of his stipend should be, listing choices ranging from no stipend to $12,000. The professor assessing Stiglitz’s application scribbled on the folder: “Offer him Department Head’s salary.”

and,

A common theme in his papers is the difficulty in getting markets to function properly when information is costly to acquire or when the parties involved in a transaction are not equally informed.

In a 1981 paper with Andrew Weiss, Stiglitz gave a powerful demonstration of how credit markets could malfunction when this was the case. In the textbook model of credit markets, interest rates work to bring about balance between supply and demand; if there is too much demand for credit relative to supply, interest rates rise to cut off the demand of some of the borrowers. But what if lenders don’t know which of their borrowers will work hard at their projects and repay the loan and which are going to shirk and simply hope that good fortune will enable them to pay off the loan? If there is excess demand for credit, raising the interest rate discourages the hard-working borrowers but not those who are intending to take a gamble with the loan. So, far from restoring balance between supply and demand as in the textbook model, the rise in the interest rate actually ends up tilting the composition of borrowers toward the undesirable type. Nalebuff says the Stiglitz-Weiss paper shows that “who you end up lending money to or what they do with that loan changes with the interest rate you charge . . . . Or, as Groucho Marx might have said: ‘I wouldn’t want to lend money to anyone who would borrow at that interest rate.’ ” The Stiglitz-Weiss paper helped develop a more realistic description of credit markets by showing why lenders might engage in credit rationing (i.e., limit the volume of loans) rather than raise the interest rate. In other papers, Stiglitz showed that such information gaps could also plague labor markets. In the textbook model, the wage rate is the lever that eliminates unemployment by moving up or down as needed to balance out the demand and supply of labor. But, just as in the credit market, there are informational deficiencies. Employers often lack accurate information about which of their workers will give the proverbial 110 percent to their job and which are inclined to shirk. They could of course monitor their employees to determine who’s been working hard and who’s been merely saying so. But such monitoring is costly in terms of the employer’s time and can lower employee morale.

Employers, Stiglitz argued, are therefore likely to use the wage rate as a tool to separate workers from shirkers. They may offer a wage higher than the going market rate as an incentive to induce hard work from those who are willing and able to supply it. Paying a wage higher than the competition means that the good workers have something to lose if their jobs are terminated; they thus have an incentive to work hard. But with wages set above a competitive level, the wage rate no longer acts a lever to eliminate unemployment. In fact, as Stiglitz demonstrated in a 1984 paper with Carl Shapiro, unemployment is necessary as a “disciplining device” to keep workers from shirking.

Stiglitz also questioned how well stock markets could work when their information was costly to acquire. A tenet of the textbook model of stock markets is that stock prices accurately reflect all publicly available information. But in a 1980 paper with Sandy Grossman, Stiglitz presented a paradox. If prices reflect all the market information perfectly, then no one should bother to collect information because they can get it for free from the prices. But if no one bothers to collect information, then prices reveal no information. “The paradox lays the basis for the argument that imperfect information is likely to be the rule, rather than the exception,” says Nalebuff.

Read the whole article here.

at a theater (very) near you.....

2010-02-16T21:37:00.002+02:00

Read this on our debt problem and the 'between a rock and a hard place' very uncomfortable condition for the Greek government:

Crisis to take a month off

on the optimal inflation target

2010-02-16T21:31:00.002+02:00

We're discussing this week in class the goals of macropolicy and we've just introduced the 'price stability - low inflation' goal realizing that the meaning of 'low' is pretty fluid (just as 'satisfactory' growth is pretty fuzzy).

To add to this fuzziness, skim through this (probably, better to save the link so we discuss a few of the easier issues in class):

What's the right inflation target?

Reorienting macroeconomic policy

2010-02-12T21:55:00.002+02:00

Thanks to Free Exchange:

Check out:
IMF Explores Contours of Future Macroeconomic Policy

Perhaps the most interesting quote (NB for IB2 candidates ready to sit the May exam):

IMF survey online: Central banks have chosen low inflation targets, around 2 percent. In your paper, you argue that maybe we should revisit this target. Why?

Blanchard: The crisis has shown that interest rates can actually hit the zero level, and when this happens it is a severe constraint on monetary policy that ties your hands during times of trouble.

As a matter of logic, higher average inflation and thus higher average nominal interest rates before the crisis would have given more room for monetary policy to be eased during the crisis and would have resulted in less deterioration of fiscal positions. What we need to think about now if whether this could justify setting a higher inflation target in the future.

On road pricing

2010-02-08T19:36:00.002+02:00

We've introduced the analytics of road pricing this week in class so do check out these:

London Congestion Pricing: Implications for Other Cities

Road pricing: Lessons from London (David Newbery Cambridge University and CEPR)

(full paper: here --> skim only, of course, to see the structure of a professional paper and only if something strikes you as interesting, make an attempt to read a bit)

In Greek: 'Σχεδιασμός, εγκατάσταση και λειτουργία συστημάτων οδικής χρέωσης σε κυκλοφοριακά κορεσμένες περιοχές'

and, read section 2: definition of tradable permits from here.

Carbon Trading (and airlines in the EU)

2010-02-08T19:26:00.002+02:00

In today's IHT, an article on carbon trading (tradable pollution permits - we were discussing the issue in class these days) with a couple of interesting points:

Carbon trading is a system that caps the amount of carbon dioxide, the main greenhouse gas, that companies may emit each year. Companies exceeding their quota can buy extra certificates from those companies that succeeded in shrinking their carbon footprint by adopting environmentally friendly technology or modifying production in other ways.

The system is the main tool used by the European Union to meet its ambitious pollution-reduction goals.

Many economists say trading provides the most economically efficient way to reduce pollution. They point out that environmental markets elsewhere in the world, including in the United States, have succeeded in bringing down levels of sulfur dioxide emissions, which cause acid rain.

and

Last week, the European Commission emphasized that the attack would not set back its plans to include international airlines in the system beginning in 2012, and it vowed to impose “high-security standards in its legislation to prepare for the inclusion of the aviation sector” in the system.

This is relevant to a data on the 'true cost of flying' we'll be doing later on in class!

See Fraud Besets E.U. Carbon Trade System

Rapping this time about Keynes - Hayek

2010-02-01T12:58:00.002+02:00

I found this at the Georgia Council on Economic Education and since we'll be staring soon our macro lectures I thought this video might provoke some questions:

For IB Economics students (macro short essays sorted by subtopic)

2010-02-01T10:39:00.004+02:00

I have just completed reorganizing my file with all past (May 1988 - May 2009) HP2 macro related questions (the short essay questions).

The file has been uploaded in our wikispace. You can find it and download it by clicking here.

Hope it helps your work!

Mark Danner's 'Stripping Bare the Body: Politics Violence War'

2010-01-29T11:47:00.002+02:00

Again back to Haiti. This time a review of Danner's new book 'Stripping Bare the Body: Politics Violence War' by Charles Simic in the New York Review of Books.

...History repeats itself in unhappy countries. The absence of respected institutions and well-established laws that a person can count on to protect him condemns these societies to reenact the same conflicts, make the same mistakes more than once, and bear the same horrific consequences of these acts...

How true.

Not IB economics but really interesting...!

2010-01-29T10:40:00.004+02:00

The Chess Master and the Computer (a book review by Garry Kasparov)

...The number of legal chess positions is 10^40, the number of different possible games, 10^120. Authors have attempted various ways to convey this immensity, usually based on one of the few fields to regularly employ such exponents, astronomy. In his book Chess Metaphors, Diego Rasskin-Gutman points out that a player looking eight moves ahead is already presented with as many possible games as there are stars in the galaxy. Another staple, a variation of which is also used by Rasskin-Gutman, is to say there are more possible chess games than the number of atoms in the universe. All of these comparisons impress upon the casual observer why brute-force computer calculation can't solve this ancient board game. They are also handy, and I am not above doing this myself, for impressing people with how complicated chess is, if only in a largely irrelevant mathematical way.

Read the whole review- worth your time - here.

On Haiti, the importance of history, the role of aid etc

2010-01-28T11:00:00.004+02:00

One more post on Haiti.

I'd like you, (my) IB Econ students, to read this op-ed from the NYT. It shows why it is so important to know a bit of history when discussing economics, especially development.

...And yet there is nothing mystical in Haiti’s pain, no inescapable curse that haunts the land. From independence and before, Haiti’s harms have been caused by men, not demons. Act of nature that it was, the earthquake last week was able to kill so many because of the corruption and weakness of the Haitian state, a state built for predation and plunder. Recovery can come only with vital, even heroic, outside help; but such help, no matter how inspiring the generosity it embodies, will do little to restore Haiti unless it addresses, as countless prior interventions built on transports of sympathy have not, the man-made causes that lie beneath the Haitian malady

...

...Hundreds of thousands of enslaved Africans had labored to make Saint-Domingue, as Haiti was then known, the richest colony on earth, a vastly productive slave-powered factory producing tons upon tons of sugar cane, the 18th-century’s great cash crop. For pre-Revolutionary France, Haiti was an inexhaustible cash cow, floating much of its economy. Generation after generation, the second sons of the great French families took ship for Saint-Domingue to preside over the sugar plantations, enjoy the favors of enslaved African women and make their fortunes.

Even by the standards of the day, conditions in Saint-Domingue’s cane fields were grisly and brutal; slaves died young, and in droves; they had few children. As exports of sugar and coffee boomed, imports of fresh Africans boomed with them. So by the time the slaves launched their great revolt in 1791, most of those half-million blacks had been born in Africa, spoke African languages, worshipped African gods.

In an immensely complex decade-long conflict, these African slave-soldiers, commanded by legendary leaders like Toussaint Louverture and Jean-Jacques Dessalines, defeated three Western armies, including the unstoppable superpower of the day, Napoleonic France. In an increasingly savage war — “Burn houses! Cut off heads!” was the slogan of Dessalines — the slaves murdered their white masters, or drove them from the land.

On Jan. 1, 1804, when Dessalines created the Haitian flag by tearing the white middle from the French tricolor, he achieved what even Spartacus could not: he had led to triumph the only successful slave revolt in history. Haiti became the world’s first independent black republic and the second independent nation in the Western Hemisphere.

Alas, the first such republic, the United States, despite its revolutionary creed that “all men are created equal,” looked upon these self-freed men with shock, contempt and fear. Indeed, to all the great Western trading powers of the day — much of whose wealth was built on the labor of enslaved Africans — Haiti stood as a frightful example of freedom carried too far. American slaveholders desperately feared that Haiti’s fires of revolt would overleap those few hundred miles of sea and inflame their own human chattel.

For this reason, the United States refused for nearly six decades even to recognize Haiti. (Abraham Lincoln finally did so in 1862.) Along with the great colonial powers, America instead rewarded Haiti’s triumphant slaves with a suffocating trade embargo — and a demand that in exchange for peace the fledgling country pay enormous reparations to its former colonial overseer. Having won their freedom by force of arms, Haiti’s former slaves would be made to purchase it with treasure.

...At its apex, the white colonists were supplanted by a new ruling class, made up largely of black and mulatto officers. Though these groups soon became bitter political rivals, they were as one in their determination to maintain in independent Haiti the cardinal principle of governance inherited from Saint-Domingue: the brutal predatory extraction of the country’s wealth by a chosen powerful few.

...Less and less money now comes from the land, for Haiti’s topsoil has grown enfeebled from overproduction and lack of investment. Aid from foreigners, nations or private organizations, has largely supplanted it: under the Duvaliers Haiti became the great petri dish of foreign aid. A handful of projects have done lasting good; many have been self-serving and even counterproductive. All have helped make it possible, by lifting basic burdens of governance from Haiti’s powerful, for the predatory state to endure.

...What might, then? America could start by throwing open its markets to Haitian agricultural produce and manufactured goods, broadening and making permanent the provisions of a promising trade bill negotiated in 2008. Such a step would not be glamorous; it would not “remake Haiti.” But it would require a lasting commitment by American farmers and manufacturers and, as the country heals, it would actually bring permanent jobs, investment and income to Haiti.

Second, the United States and other donors could make a formal undertaking to ensure that the vast amounts that will soon pour into the country for reconstruction go not to foreigners but to Haitians — and not only to Haitian contractors and builders but to Haitian workers, at reasonable wages. This would put real money in the hands of many Haitians, not just a few, and begin to shift power away from both the rapacious government and the well-meaning and too often ineffectual charities that seek to circumvent it. The world’s greatest gift would be to make it possible, and necessary, for Haitians — all Haitians — to rebuild Haiti.

Putting money in people’s hands will not make Haiti’s predatory state disappear. But in time, with rising incomes and a concomitant decentralization of power, it might evolve. In coming days much grander ambitions are sure to be declared, just as more scenes of disaster and disorder will transfix us, more stunning and colorful images of irresistible calamity. We will see if the present catastrophe, on a scale that dwarfs all that have come before, can do anything truly to alter the reality of Haiti.

The link to the aticle To Heal Haiti, Look to History, Not Nature by Mark Danner is here.

IB economics: short essays (HP2) broken down by topic

2010-01-27T13:56:00.002+02:00

As I mentioned in class, I just got done with re-organizing our file with all past micro short essay questions by topic. This means that all past short essay exam questions on, say, the shut down rule, are grouped together, all questions on externalities are together etc.

The file can be found at our wiki here.

On Haiti, explanations of poverty and the role of aid by N. Kristof

2010-01-25T09:45:00.004+02:00

A few quotes from the article:

Pat Robertson, the religious broadcaster, went furthest by suggesting that Haiti’s earthquake flowed from a pact with the devil more than two centuries ago. While it’s not for a journalist to nitpick a minister’s theological credentials, that implication of belated seismic revenge on Haitian children seems defamatory of God.

Why is Haiti so poor? Is it because Haitians are dimwitted or incapable of getting their act together?

Haiti isn’t impoverished because the devil got his due; it’s impoverished partly because of debts due. France imposed a huge debt that strangled Haiti. And when foreigners weren’t looting Haiti, its own rulers were.

The greatest predation was the deforestation of Haiti, so that only 2 percent of the country is forested today. Some trees have been — and continue to be — cut by local peasants, but many were destroyed either by foreigners or to pay off debts to foreigners. Last year, I drove across the island of Hispaniola, and it was surreal: You traverse what in places is a Haitian moonscape until you reach the border with the Dominican Republic — and jungle.

Without trees, Haiti lost its topsoil through erosion, crippling agriculture.

To visit Haiti is to know that its problem isn’t its people. They are its treasure — smart, industrious and hospitable — and Haitians tend to be successful in the United States (and everywhere but in Haiti).

A report for the United Nations by a prominent British economist, Paul Collier, outlined the best strategy for Haiti: building garment factories. That idea (sweatshops!) may sound horrific to Americans. But it’s a strategy that has worked for other countries, such as Bangladesh, and Haitians in the slums would tell you that their most fervent wish is for jobs. A few dozen major shirt factories could be transformational for Haiti.

So in the coming months as we help Haitians rebuild, let’s dispatch not only aid workers, but also business investors. Haiti desperately needs new schools and hospitals, but also new factories.

And let’s challenge the myth that because Haiti has been poor, it always will be. That kind of self-fulfilling fatalism may be the biggest threat of all to Haiti, the real pact with the devil.

This is the link to Kristof's column: Some Frank Talk About Haiti.

Come, listen, and ask stiff questions

2010-01-24T22:47:00.007+02:00

These are policy makers who have taken tough decisions while in office. It'll be interesting to hear what they have to say about the past, the present, and the future of the greek economy. You will have a chance to ask questions too.

ΠΡΟΣΚΛΗΣΗ

Η Διοικούσα Επιτροπή της ΔΡΑΣΗΣ
σας προσκαλεί την Πέμπτη 28 Ιανουαρίου 2010 και ώρα 17:30,
στο Εμπορικό & Βιομηχανικό Επιμελητήριο Αθηνών, στην αίθουσα «Ερμής»,
σε εκδήλωση που διοργανώνει με θέμα:

Προτάσεις για την Οικονομία και την έξοδο από την κρίση

Προσφώνηση:		Κωνσταντίνος Μίχαλος, Πρόεδρος ΕΒΕΑ
Ομιλητές:		Στέφανος Μάνος, Εκ μέρους της ΔΡΑΣΗΣ Μιράντα Ξαφά, πρώην Μέλος Δ.Σ. του Διεθνούς Νομισματικού Ταμείου (ΔΝΤ) Γιάννος Παπαντωνίου, πρώην Υπουργός και Πρόεδρος του Κέντρου Προοδευτικής Πολιτικής (ΚΕΠΠ) Γιάννης Στουρνάρας, Καθηγητής Οικονομικών του Πανεπιστημίου Αθηνών και Επιστημονικός Διευθυντής του ΙΟΒΕ
Συντονιστής:		Μπάμπης Παπαδημητρίου, Δημοσιογράφος

Online papers for the Internal Assessment

2010-01-24T13:52:00.003+02:00

We will be discussing in class the requirements for the internally assessed component for higher level IB economics soon. I will post here some pointers and I will also upload the full file at our ibecon wiki in a few days but for the time being, here are some useful links for all:

This is site with links to online newspapers of the world. It is in my opinion pretty good: onlinenewspapers.com

The google news site which can be useful:
news.google.com
and
the archives site here

Vilayanur Ramachandran, the phantom limb and empathy

2010-01-13T13:23:00.002+02:00

By popular demand, here are the 2 TED talks I mentioned in class:

and,

Uniquier....

2010-01-11T10:45:00.003+02:00

Absolutely worth your time.....(but fast forward to 4:58 - intro is boring)

Robert Sapolsky: The uniqueness of humans | Video on TED.com

Expelling Greece from the Eurozone....

2010-01-06T22:30:00.002+02:00

A very upsetting article in Project Syndicate on Greece, its debt and its governments. Even if the author is harsh he does, unfortunately, speak the truth.

The mentality and the practices he describes are so prevalent and so engrained even among the younger that it makes you wonder if there is any hope.

.....Moreover, the Greek government turned out to be untrustworthy. In 2004, Greece admitted that it had lied about the size of its deficit ever since 2000 – precisely the years used to assess Greece’s application to join the euro zone. In other words, Greece qualified only by cheating. In November 2009, it appeared that the Greek government lied once again, this time about the deficit in 2008 and the projected deficit for 2009.

....Ten years later, it seems as if time has stood still down south. Both the Greek and Italian public debt remain almost unchanged, despite the fact that both countries have benefited the most from the euro, as their long-term interest rates declined to German levels following its adoption. That alone yielded a windfall of tens of billions of euros per year. But it barely made a dent in their national debts, which can mean only one thing: massive squandering. That is evident from their credit ratings. Greece boasts by far the lowest credit rating in the euro zone. Standard & Poor’s has put the already low A- rating under review for a possible downgrade. Fitch Ratings has cut the Greek rating to BBB+, the third-lowest investment grade. Indeed, those scores mean that Greece is much less creditworthy than for example Botswana and Malaysia, which are rated A+ .

....A member of the euro zone cannot be expelled under current rules, allowing countries like Greece to lie, manipulate, blackmail, and collect more and more EU funds. In the long term, this will be disastrous for greater European cooperation, because public support will whither.

Europe should therefore consider bearing the high short-term costs of changing the rules of the game. If expelling even one member could establish a more credible mechanism for guaranteeing fiscal discipline in the euro zone than the SGP and financial fines have proven to be, the price would be more than worth it.

Sad.

The full article is found here.

On microcredit (IB econ syllabus topic)

2009-11-22T07:55:00.003+02:00

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!

Rap me, Mankiw...

2009-10-30T21:20:00.001+02:00

From our very own Athinagoras!

http://www.imeem.com/educationalrap/music/xY4REVq-/rhythm-rhyme-results-demand-supply/

Mankiw's '10 Economic Principles'.....

More on Elinor Ostrom

2009-10-15T09:23:00.003+03:00

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.

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

2009-10-13T19:30:00.001+03:00

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

Εδώ!

At last, some Economics...

2009-10-13T10:25:00.005+03:00

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'

Still not IB Higher Level Economics....

2009-09-24T12:12:00.005+03:00

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:

IB Higher Economics Class of 2011!!

2009-09-17T10:58:00.002+03:00

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:

Enjoy!

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

On externalities

2009-07-21T18:18:00.002+03:00

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

2009-07-21T09:47:00.004+03:00

Read this interesting Newsweek article on Joseph Stiglitz (which I noticed at free exchange, the economist.com 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....

The State of Economics

2009-07-19T12:52:00.004+03:00

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.
................................
................................

...and:

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.

2009-07-10T14:05:00.002+03:00

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

1.Iceland
2.Norway
3.Canada
4.Australia
5.Ireland
6.Netherlands
7.Sweden
8.Japan
9.Luxembourg
10.Switzerland
11.France
12.Finland
13.Denmark
14.Austria
15.United States
16.Spain
17.Belgium
18.Greece
19.Italy
20.New Zealand
21.United Kingdom
22.Hong Kong, China (SAR)
23.Germany
24.Israel
25.Korea, Rep. of
26.Slovenia
27.Brunei Darussalam
28.Singapore
29.Kuwait
30.Cyprus
31.United Arab Emirates
32.Bahrain
33.Portugal

A July post - will any IB students read it?

2009-07-04T17:05:00.003+03:00

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?

Income distribution and the level playing field

2009-06-04T18:08:00.004+03:00

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 Economist.com 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......

In defense of deficit spending

2009-05-24T23:48:00.003+03:00

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

2009-05-24T22:01:00.003+03:00

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.

It's

'...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.

Krugman on China and pollution

2009-05-16T17:31:00.005+03:00

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.

Lunch or dinner anyone?

2009-05-15T23:14:00.002+03:00

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?

xxx,

C.

0 Days, 0 Hours, 0 Minutes

2009-05-11T22:31:00.003+03:00

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,

C.

OMG, 15 hours left!

2009-05-10T20:30:00.004+03:00

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!

Filakia!

Stand by me!

2009-05-06T09:50:00.002+03:00

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.

Can People Distinguish Pâté from Dog Food?

2009-05-02T23:05:00.003+03:00

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

2009-05-02T22:07:00.004+03:00

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

2009-05-02T19:55:00.002+03:00

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...

Evaluating fiscal policy

2009-04-27T21:19:00.003+03:00

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...

2009-04-27T11:21:00.005+03:00

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

2009-04-27T10:56:00.002+03:00

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!

Ideas on another short essay: Macro (M08)

2009-04-23T22:02:00.004+03:00

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)

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

2009-04-21T21:20:00.002+03:00

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....

Long Essay Micro Higher Economics November 2007

2009-04-16T14:37:00.004+03:00

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

Sen on the current crisis

2009-04-05T19:21:00.002+03:00

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.

A great resource for IB Development Economics!

2009-04-03T22:33:00.000+03:00

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.

Angelina and Jeff Sachs

2009-03-29T20:06:00.002+03:00

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

2009-03-29T09:27:00.003+03:00

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.

And:

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.

Scary trade developments...

2009-03-27T22:45:00.002+02:00

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 (economist.com blog)

On automatic stabilizers etc

2009-03-27T11:45:00.002+02:00

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

Data Response Exam Preparation: HL P3Q Q2 May 2006

2009-03-26T09:41:00.005+02:00

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 http://krugman.blogs.nytimes.com/2009/03/07/teaching-macro-now/ ). 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.

All is well in candy land....

2009-03-25T10:55:00.002+02:00

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.

Data Response Exam Preparation: HL P3 Q2 M08

2009-03-24T08:54:00.008+02:00

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%!

2009-03-23T12:36:00.003+02:00

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.

Economics Is the 'Just Right' Liberal-Arts Major

2009-03-22T17:35:00.004+02:00

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

2009-03-22T15:03:00.003+02:00

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'.

Zeitgeist - The Addendum

2009-03-16T19:24:00.000+02:00

I may seem too un-American but Zeitgeist is a truly intriguing documentary.
For those interested in how our current economic system manipulates its members,
Zeitgeist can be enlightening. Unfortunately - better, fortunately - a lot of non-economic issues arise as well.

Personally, I consider these topics very rewarding. Issues such as the 9/11 attack and the way religion infiltrates our lives act as a thinking provocateur.

I know two hours may seem like a massive amount of time. But trust me, you wont regret it.
I have come to the conclusion that many of my classmates are living in a bubble. Not wanting to sound like a rebel, I believe this has to change. Zeitgeist is a wonderful beginning for such a journey. Not necessarily an un-American one. But a thinking one.

Enjoy your wake-up call.

http://www.youtube.com/watch?v=ECMJ2LBK90Q&feature=related

The above link is just a preview..
VC

Costs of Privatizaion: Increased mortality??

2009-03-15T15:06:00.002+02:00

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

'...it 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...)

wow...pretty impressive stuff!

2009-03-14T17:28:00.006+02:00

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.

What Is Gross Domestic Product?

2009-03-13T10:05:00.004+02:00

A Back to Basics article in the magazine Finance and Development that the IMF publishes explains everything an IB economics student needs to know about GDP.

"Many professions commonly use acronyms. To doctors, accountants, and baseball players, the letters MRI (magnetic resonance imaging), GAAP (generally accepted accounting principles), and ERA (earned run average), respectively, need no explanation. To someone unfamiliar with these fields, however, without an explanation these acronyms are a stumbling block to a better understanding of the subject at hand.

Economics is no different. Economists use many acronyms. One of the most common is GDP, which stands for gross domestic product. It is often cited in newspapers, on the television news, and in reports by governments, central banks, and the business community. It has become widely used as a reference point for the health of national and global economies. When GDP is growing, especially if inflation is not a problem, workers and businesses are generally better off than when it is not."

To continue reading the article, click here.

Another, interesting article found in the same issue of the magazine is 'The Crisis through the Lens of History':

"Economic history is back in vogue. In the first half of 2008, surging prices of oil and other commodities revived unhappy memories of the stagflation of the 1970s. More recently, the extraordinary intensification of the global financial crisis since the mid-September collapse of Lehman Brothers has brought back an even more ominous specter from the past—the Great Depression of the 1930s.

Comparing the present financial crisis to the deepest and most devastating economic cataclysm in modern history may seem a stretch, but there is now no question that the ongoing crisis has become the most dangerous of the post–World War II era. It is not so much the depth of the downturn in individual countries—devastating financial collapses have occurred before in advanced as well as in emerging economies—but its pervasive reach into all corners of the world economy that has created a threat to global prosperity not experienced in 70 years.

But how large is the present financial crisis by past standards? And, crucially, what will be its likely economic impact and what can be done to contain the damage and pave the way for economic revival? Economic history can help answer these questions, offering both a useful perspective for understanding the relative magnitude and seriousness of the current crisis and invaluable lessons that can be applied to resolving it."

Click here to continue reading it. PDF versions to download, save and print are also available. Do me the favor and check out the magazine site as I'm sure you will find other interesting (and often helpful for the May exams) material.

LA walkabout

2009-03-07T08:51:00.002+02:00

No IB Economics here - but since you are preparing for paper 3, the data response questions, here is something to check out when taking a (short) break....

(pic by Mathieu Young)

The real crisis? We stopped being wise

2009-03-04T21:37:00.003+02:00

This is Barry Schwartz (again) in a TED talk. Definitely worth your 20 minutes. If by any chance you are a teacher or you happen to run a school (especially in the greater Athens area), pay extra attention to the last few minutes...

Do you demand soft and comfortable?

2009-03-02T08:41:00.002+02:00

No forest of any kind should be used to make toilet paper," said Dr. Allen Hershkowitz, a senior scientist and waste expert with the Natural Resource Defense Council.

Externalities here, externalities here, externalities everywhere...Who would have thought that our 'soft-tissue habit' could be so deleterious to the environment? Read the article 'Americans' love of soft tissue is rough on forests' in the online edition of the IHT.

BTW, the author claims that

Other countries are far less picky about toilet tissue. In many European nations, a rough sheet of paper is deemed sufficient.

'Many' European nations?

The need for macroeconomic cooperation

2009-03-02T08:17:00.002+02:00

This is about the latest contribution to Project Syndicate by Jeff Sachs. He argues that the G-20 countries should seize the opportunity that the current crisis offers and to increase investment spending that will address the 'critical needs of the planet':

The world has yet to achieve the macroeconomic policy coordination that will be needed to restore economic growth following the Great Crash of 2008. In much of the world, consumers are now cutting their spending in response to a fall in their wealth and a fear of unemployment. The overwhelming force behind the current collapse of jobs, output, and trade flows, is even more important than the financial panic that followed Lehman Brothers’ default in September 2008.

There is, of course, no return to the situation that preceded the Great Crash. The worldwide financial bubble cannot and should not be recreated. But if the world cooperates effectively, the decline in consumer demand can be offset by a valuable increase in investment spending to address the most critical needs on the planet: sustainable energy, safe water and sanitation, a reduction of pollution, improved public health, and increased food production for the poor

His analysis focuses on developing countries and to the responsibilities of the G-20. Note the transmission of the crisis to the poorest countries: falling export revenues, falling remittances and falling cpital inflows:

There is a strong case for global cooperation to increase these public investments in the developing economies, and especially in the world’s poorest regions. These regions, including Sub-Saharan Africa and Central Asia, are suffering harshly from the global crisis, owing to falling export earnings, remittances, and capital inflows.

Poor regions are also suffering from climate changes such as more frequent droughts, caused by rich countries’ greenhouse-gas emissions. At the same time, impoverished countries have huge needs for infrastructure, especially roads, rail, renewable energy, water and sanitation, and for improved current delivery of vital life-saving services, including health care and support for food production

In his concluding paragraph he stresses why such a course of action would be a 'triple victory':

Cooperation can turn the sharp and frightening decline in worldwide consumption spending into a global opportunity to invest more in the world’s future well being. By directing resources away from rich countries’ consumption to developing countries’ investment needs, the world can achieve a “triple” victory. Higher investment and social spending in poor countries will stimulate the entire world economy, spur economic development, and promote environmental sustainability through investments in renewable energy, efficient water use, and sustainable agriculture.

I should mention that I'm not so sure how Sachs envisions the financing of such spending and whether he thinks such spending could pose a threat to the long term fiscal and overall health of the US, the EU or Japan. Given all the debates on the risks of huge debts I would have liked some discussion of this issue in his article.

The stand-up economist

2009-02-28T15:40:00.001+02:00

Yoram Bauman translating Mankiw's 10 principles of economics here

WHERE DOES YOUR MONEY GO?

2009-02-25T19:18:00.004+02:00

http://www.blackgoldmovie.com/CoffeeCalculator

Paul Krugman on the World Economy

2009-02-15T19:27:00.003+02:00

This is the Paul Krugman January 29 speech that I mentioned in class. We'll try to watch it in class but, to be on the safe side, here it is.

Mind you the site fora.tv is excellent and a tremendous resource to bookmark.

Negative externalities, pollution and Pigovian taxes

2009-02-15T19:07:00.002+02:00

I found a 2007 article by Greg Mankiw on Pigovian taxes which may prove useful in evaluating solutions to negative production externalities. May (and November) exams (HL and SL P1) often include questions on such issues. You will find it here.

Friends...(not 'Friends')

2009-02-08T20:27:00.006+02:00

This was sent to me by my dear friend and classmate at school Sokratis K. and it does have a relationship with IB Economics and what we do in class as well as with what we all too often witness in Greek society.

Try to think what 'friends' really means in this context, what are these 'friendships' based on, what is implied about the institutional framework of a society, what is the connection with corruption and what are the short run and long run implications (say, for your kids...)

click on it to enlarge