Thursday, August 30, 2018

IB Economics HL (and SL): Two interesting articles on International Economics for Year 2 candidates

I am enjoying the last few days of my summer vacation reading articles from several news sources (not fake at all, IMO...).  Two of these I would like to share with my Year 2 students as they relate to the material we will be covering this fall.

The first one is Argentina, Combating Plummeting Currency, Raises Interest Rate to 60% from the New York Times. The first paragraph clearly explains the issue:
Argentina’s central bank ramped up interest rates by 15 percentage points on Thursday in a bid to slow the fall of its plunging peso, part of a sell-off among emerging market currencies.  (I like the use of 'ramped up!)
The Peso is depreciating rapidly (making imports much pricier and thus feeding inflationary pressures as a result of 'fears the country would not be able to make its debt payments'.  These fears explain the 'sell-off' mentioned above. 

What is also a driving force behind the depreciation of the Argentinian Peso, the Turkish Lira and the South African Rand is that the Chairman of the US Fed (the US central bank) has credibly signaled that the US is sticking to its decision (see Fed's Powell Just Wants to Be Understood) to increase interest rates (which makes US bonds and dollar deposits more attractive to financial investors): Pesos, Liras and Rands are sold, to buy US dollars, driving the value of the dollar up and the value of these currencies down.  Add to this the debt issues Argentina is facing and the unwillingness of Turkey to tighten monetary policy and you get the plummeting currencies.  A pretty typical story for the currencies of emerging economies.

The second article, again from the New York Times, is E.U. Says It’s Ready to Abolish Car Tariffs, Shifting Position.  Quoting:
Cecilia Malmstrom, the European commissioner for trade, told members of the European Parliament that the bloc was willing to reduce “car tariffs to zero, all tariffs to zero, if the U.S. does the same.”
“It has to be reciprocal,” she said. “We would do it, if they do it. That remains to be seen.”
This is an interesting development for many reasons.  It may be interpreted as a winner for US President Trump and his aggressive policy stance ('...may please the Trump administration').  But is also forces the US to play by the EU's bold proposal: will the US auto industry be able to thrive in an zero car tariff world?  We'll see how this one plays out.

Wednesday, August 15, 2018

IB Economics: Advice on essay writing (paper 1) continued...

In the first part of this post (August 12) I focused on my so-called 'Type A' candidate, a 'candidate who is aiming to achieve a 6 or a 7 in Economics and to study in a top university after graduation'.  This candidate was very well versed in theory, had practiced a lot of essay writing but often was not able to achieve top marks in a P1 essay, i.e. achieve even Level 3 or especially Level 4.  From my experience, this was either the result of poor time management and/or of not embedding their response within a real world context.  They would define, draw, explain and discuss beautifully, but, often,  all of their work was "in a vat" i.e. they never related it to the real-world.

I define Type B IB Economics candidates as individuals who have not studied much and, most importantly, have not practiced much essay writing.  How can one help these guys?

One thing that I have been doing for many tears is to hand out (to all of my students) my file with all past IB Econ essay questions (the file goes back to 1998 for the HL essays and to 2005 for SL). 

If these essays are grouped together by syllabus section or, even in much smaller syllabus chunks, (say, all essays that relate monopolistic competition or even, to why in monopolistic competition firms earn only normal profits in the long run; or, all essays that relate to unemployment or, just to structural unemployment) then, (interested; a sine qua non condition) students, realize that question setters really have a limited choice set!  There is only so much variation that the learning outcomes of our syllabus permit.
For example, let us look at two groups of questions:

Group I:
Using demand and supply analysis, explain how resources are allocated through changes in prices in a market economy; Using diagram(s), explain the signaling and incentive functions of price; Explain the role that prices play in the allocation of resources in free market economies; Explain how changes in price work to reallocate resources in a market; Explain how scarce factors of production are allocated by the free market.

Focusing now these, what is the crux of these questions?  What does the examiner expect for sure?

Well, all these questions Group I deal with how free (competitive) markets manage to allocate scarce resources.  I would suggest that the answer in a nutshell relates to the signaling and incentive roles of prices.  Without these two terms, the question cannot really be answered (in my opinion, at least). 

What terms should one necessarily define?  I think that it would be a good idea to define resources, allocation of resources, a free (competitive) market as well as demand and supply. 

Which diagram?  A simple demand and supply diagram pertaining to some specific market with the demand shifting to the right following an increase in demand for this product.

How about the real-world example?  I encourage my students to use a great example (again, in my opinion), the case with quinoa.  Quinoa was/is a staple food of the populations of the Andes which became very fashionable to eat in the US and later Europe and Asia when an American TV persona, Oprah Winfrey, made it known to her zillions of viewers. Quoting from the Economist:
In 1993 a study by NASA, America’s space agency, stated: “While no single food can supply all the essential life-sustaining nutrients, quinoa comes as close as any other in the plant or animal kingdom.” But it took adulation from the likes of Oprah Winfrey (who in 2008 included it in her 21-day “cleanse” diet) to give the grain global appeal. Now, wherever yuppies can be found, it can be too, usually lurking near Puy lentils or goji berries in a salad. (see Quinoa: Against the grain)

Demand for quinoa, in other words, increased dramatically!  Its price started rising, and candidates have to explain here the ‘signaling’ role (that this increase in price emits information to market participants) and then to explain the ‘incentive’ role  (that producers as a result of higher profit margins have the incentive to offer more quinoa -extension of supply- while some consumers cut back or drop-out - contraction of demand…blah, blah, blah).

Eventually, the new equilibrium Q is greater than the original one and, since you can’t produce something out of nothing, more scarce resources (land, workers, machines) are channeled into quinoa production.  The end.  But, this example is great, as of course (…see the articles below for a nice story that can be used to illustrate tons of econ concepts)

So, it may be a good idea to ask candidates to:

a. Think of the ‘answer’ in a nutshell (usually, but not always, possible)
b. Think of the relevant terms to define
c. Think of the diagram(s) to use and to explain
d. Think of the real-world example within which (hopefully) the response may be embedded

Now, for the Group II essays.

Group II essays:
Explain the difference between short run equilibrium and long run equilibrium in monopolistic competition; Explain why firms in monopolistic competition can make economic (abnormal) profits only in the short run; Explain why a firm in monopolistic competition will make only normal profit in the long run. 

What is the answer in a nutshell to pretty much all of these?  I think that the examiner expects candidates to explain how entry of new firms (or, also, exit of some existing firms) in such a market ensures that in the long run monopolistically competitive firms earn only normal profits.

What terms should one necessarily define?  I think that one must define carefully a monopolistically competitive market (and within this, define differentiated product using a couple of examples as well as barriers to entry) and provide a couple of generic examples.

Which diagram(s) should one use?  Well, I think that one definitely needs to carefully draw a monopolistically competitive market where the firm in focus makes supernormal (abnormal) profits (i.e. positive economic).  This would illustrate the short run equilibrium position.  And, then of course, one where this monopolistically competitive firm is making only normal profits (and define this term correctly – see below) i.e. zero economic profits. This would be the long run position (one could draw also the case of losses BUT…see below). 

How about the real-world example?  Well, I would suggest that students narrow down the generic example used to an actual real-world example they are aware of.  For such questions I guide my students to a specific restaurant-café market in the northern suburbs of Athens where there were initially only few firms, but their number has increased (and somewhat, stabilized).  Or, I like the story of the frozen-yogurt fad in my city where the number of sellers surged and then, when the fad was over, it decreased and seems to have also stabilized.  Any food market in any (US) mall could also help or the food stalls in many cities around the world. 

So, my advice to my Type B kids:

Group similar essays together.  This for me is the single most important task for these (all, really!) students.  Then, help them find the (at least the most important) relevant terms that must be defined, Then, guide them to think of the diagram(s) for each group; and, to think of a real-world example for each group.

So, these guys must during the last couple of months have outlines for the limited number of essay groups they come up with.  Teachers may of course facilitate the process.

There is, unfortunately, in many schools, a third type of candidates.  These guys may go through the 2 DP years doing almost no work.  I am usually fortunate enough not to have such a group (even though occasionally, there is a kid who can rightfully claim membership…). In this case, I have been forced to focus mostly on macro (as it has significantly fewer essays to worry about): unemployment, inflation and growth (perhaps, somethings on income distribution that may even be useful for P3).  Perhaps also on a few micro topics (like comparing PC and monopoly; pollution; alcohol). And, then pray a lot! 


Issues I have seen related to the concept of economic profits in the IB:

Normal profit is defined as the minimum return a firm (an entrepreneur) requires to earn to be willing to remain in the present line of business.  This minimum is equal to what this firm (these resources) could have earned in the next best alternative with the same risk. 

It follows that supernormal (or, abnormal) profits are any profits above this minimum. 

If supernormal profits exist, then other firms (entrepreneurs) will want to take advantage of this opportunity and try to enter this market (here: role of barriers). 

If more firms do enter then:
(a) in the PC setup, the market supply increases (shifts to the right), decreasing the price and squeezing economic profits down to zero.  If losses exist (so firms are making less than what they could have earned in their next best alternative), then exist will decrease market supply, raising the price until no more firms have the incentive to exit

(b) in a MC setup, since there is NO supply curve, the induced entry of new firms will “shrink and tilt” the demand that the incumbent firms face for their product (decrease and flatten it - i.e. make it more price elastic as consumers face more and closer substitutes) until these supernormal profits are competed away.  With losses, the opposite, of course.

Kids always ask why is it that firms making normal profits i.e. zero economic profits are willing to continue to operate? 

They must understand that normal profit is an element of economic costs, as normal profits represent the minimum required to be earned to secure the 4th scarce factor of production, entrepreneurship!  Remember, to secure the scarce factor ‘labor', wages have to be paid and all realize that wages are an element of cost!  This is a point of course that requires quite a few examples (and, some time…) but, in the end (usually), candidates really understand the idea and its implications.  So, one cannot define normal profits as zero economic profits!  This is just a condition: if economic profits are zero, it means that the firm (the entrepreneur) is earning the minimum required to remain in this line of business!

Lastly, concerning the trade-off mentioned above on whether to include a 3rd diagram in the Group II essays.  Diagrams must be drawn in the same manner as in a Grand Prix, Ferrari car mechanics change tires: very fast and very precise.  But, in my experience, students take longer than necessary.  So, I would advise against using (drawing) a 3rd diagram and, instead, briefly explaining that if there are losses, then exit will take place until supernormal profits are competed away.  The opportunity cost of drawing a 3rd diagram may be too high and not worth paying it.

PS: Some interesting articles on the quinoa story include: Quinoa brings riches to the AndesOverproduction and Consumption Threatens Andes Superfood HavenThe Quinoa Boom Goes Bust in the Andes

PS2: Interested IB Economics teachers can access my files with all past IB Economics essays (for HL Economics and for SL Economics) at MyIB.

Sunday, August 12, 2018

IB Economics: Some advice on essay writing (paper 1)

The question how to help students write top-notch essays in IB Economics examinations was again, very recently, asked by a colleague.

Paper 1 is perhaps the most difficult paper for IB Economics students to deal with, especially if English is not their native language.  So, how can one assist candidates in this task?

Let’s assume two broad types of candidates:  Type A is the candidate who is aiming to achieve a 6 or a 7 in Economics and to study in a top university after graduation.  Such a candidate has prepared very well and is well versed in theory.  So why does he or she often earn L3 or L2 marks i.e. 4 to 8 out of 10 in part (a) or 6 to 12 out of 15 in part (b)? Why is it so difficult to achieve a Level 3 response and almost impossible to achieve Level 4?

In my experience, the following are the two typical reasons for our Type A candidate:

Some run out of time, having spent too much time in parts (a) and in the first essay attempted (out of the two expected).  And, many others, fail to effectively use real-world examples.  They all define properly the relevant terms used, they all explain well the relevant economic theory and they all manage to draw, correctly label and explain all relevant diagrams.  After all, we are assuming Type A candidates!

So, what advice would I offer to these guys?

Let me tell you a real story.  I was asked a few years ago (2013 syllabus) by students to write in front of them on my laptop (and project what I wrote on the classroom screen) an essay that they chose (I’ve since done this a number of times). I initially objected explaining that it seemed like a total waste of our precious time.  Eventually, I succumbed.  They asked me to write a specific micro essay.

After 800 years of teaching and a Ph.D. in Economics, I did a pretty good job.  But two things struck me and my students:
I kept asking ‘how much more time do I have’? (was checking the time I had left very often)
and, while writing my response, I was reading the question again and again

Because it is important to pace yourself.  You simply cannot invest too much time on any single point you explain, on any single definition you provide, on any single diagram you draw, on any example you use to illustrate.  You must always be aware of how much more time you have left.  One is not expected to write everything they know on a topic! 

This brings me to the 2nd point.  I kept reading again and again the wording of the specific question to make sure I didn’t go off on a tangent.  It is very tempting for a Type A candidate to think that the exam time is the time for a ‘tour de force’ of his or her knowledge on the issue!  Examiners simply want a clear response to the specific question not a chapter from your favorite textbook or study guide!

As a matter of fact, just this past year I had a student who was extremely strong (a straight ‘A’ student) but who scored (relatively) poorly in our first few exams which was devastating to her.  She would protest how could I not award her full marks when she wrote everything on the relevant topic! I tried to explain to her (at one point I wrote a 3-page word document for her!) that this was exactly her problem:  there was no way for the examiner (moi…) to ascertain that she really had understood the question! 

According to the assessment markbands found in the 2013 syllabus (my students have access to these) examiners need to determine that ‘there is clear understanding of the specific demands of the question’.  If the Type A candidate writes everything under the sun, I cannot be sure that there is ‘clear’ understanding of the ‘specific’ demands of the question!  She eventually understood the point and her essay writing improved significantly (she earned a 7 this May and was accepted at one of the best US colleges).

Concerning the use of real world examples, candidates must try to be aware of what is going on in their country and in the world.  This blog also aims at providing some help on this issue.  But students could work alone or in groups of 2 or 3 with or without the guidance of their teacher to build a file with as many real-world examples as possible on as many learning outcomes of the syllabus as possible.  A shared google doc could also be used (or course, in my experience, there is always the free-rider problem but not much we can do about this!).  Class presentations of real world examples once or twice per month could also be organized with each student (or group) responsible to illustrate an issue.  If the teacher has provided students with a file of all past IB Economics micro and macro essays (I do that at the beginning of the year) then these essays can be grouped and real-world examples can be found by the student(s).

Bottom line for Type A candidates:

Keep track of time – know how much more time you have left (remember: if you have no extra time, I advise my kids to invest no more than 20 minutes on part (a) in order to have at least 25 for part (b))

Read the question again and again to remain focused and avoid going off on tangents

...and, of course:

Effectively use (not just mention) real world examples in your response

(obviously provide clear definitions of relevant terms, draw and label and explain relevant diagrams, clearly explain and apply relevant theory)

Separate posts will follow for Type B candidates as well as for some tips specifically for part (b) essays.

PS: Please follow your own teacher's advice as he/she knows his/her class best

Friday, August 10, 2018

IB Economics: A Macroeconomics Primer - The BBC on the Turkish Economy

I was watching BBC a few minutes ago and there was a running banner (is that what it's called?) at the bottom of the screen reading 'Turkish economy heading for a crisis'.  I got curious so I logged on to BBC site and I found an article ('7 hours ago') with the same title: Is Turkey heading for an economic crisis?, by Andrew Walker, a BBC World Service economics correspondent.

I read the article and I immediately realized that it is perfect to discuss much of IB open economy macroeconomics with my class this fall.

First some of the reported facts:
The Turkish currency, the lira, has lost about 30% of its value against the US dollar since the New Year.
The stock market has fallen 17%, or if you measure it in dollars as some foreign investors would do, the decline is 40%
Turkey has a deficit in its international trade. It imports more than it exports. Or to put it another way, it spends more than it earns. 
The central bank has an inflation target of 5%. A year ago, inflation was well above that, at about 10%. Since then the situation has deteriorated further with prices now rising at an annual rate of about 15%.
Unemployment is on the high side - the most recent figure is 9.9% - but it has been relatively stable.
 In some respects the recent performance of the Turkish economy looks reasonable. It has grown every year this century apart from 2001 (the country's last economic crisis when it received an IMF bailout) and 2009 (in the aftermath of the global financial crisis). In some years growth has been very strong.
On the other hand:
(The trade) deficit has to be financed, either by foreign investment or by borrowing. In itself that is neither unusual nor dangerous. But Turkey's deficit is quite large at 5.5% of national income, or GDP, last year.
...Credit rating agency Moody's says that economic growth has been boosted to unsustainable levels by spending and tax policies. Policies for long-term growth have been sidelined, the agency says, given the focus on election cycles
...many Turkish companies have borrowed in foreign currency. Those loans become more expensive to repay if the value of the national currency declines - which it has.
The currency weakness also aggravates Turkey's persistent inflation problem. The weaker lira makes imports more expensive.
Credit rating agency Fitch estimates that Turkey's total financing needs this year will be almost $230bn....  Even borrowing in dollars is expensive for Turkey at a cost of around 7%
There is an obvious policy option open to a central bank that wants to bear down on inflation - raising interest rates.  That can curb inflation in two ways. It can weaken demand at home, and by increasing financial returns in Turkey encourage investors to buy lira - which strengthens the currency and reduces the cost of imports.  What bothers the markets is the president's well known - and most economists would say, ill-informed - opposition to higher rates.
Turkey is also at risk from developments in the US. The Federal Reserve continues to raise interest rates, which encourages investors to pull money out of emerging markets. 

Could there be more to discuss in one article?

Causes of growth (types of growth to avoid; short-term and long-term growth)
Debt and credit rating
Sustainability of growth / debt
Monetary policy
Independence of central bank
External sector as a constraint in achieving domestic policy goals
Factors affecting the exchange rate
Consequences of a depreciating currency
Policies to correct a widening trade deficit
Political business cycle

...and, more.

Read the full article!

Friday, August 3, 2018

Britain the US and China: Dani Rodrik explains

I have been following Dani Rodrik for quite a while.  Much of what he writes is (rather) accessible to all and that is very important for IB Economics students.  I just read a very short and very interesting article he wrote titled The Double Standard of America’s China Trade Policy. There are zillions of articles on the US - China trade conflict and for us it is a conflict worth paying close attention to.  Rodrik's article is great because he puts it in context.
I quote:
China plays the globalization game by what we might call Bretton Woods rules, after the much more permissive regime that governed the world economy in the early postwar period. As a Chinese official once explained to me, the strategy is to open the window but place a screen on it. They get the fresh air (foreign investment and technology) while keeping out the harmful elements (volatile capital flows and disruptive imports).
In fact, China’s practices are not much different from what all advanced countries have done historically when they were catching up with others. One of the main US complaints against China is that the Chinese systematically violate intellectual property rights in order to steal technological secrets. But in the nineteenth century, the US was in the same position in relation to the technological leader of the time, Britain, as China is today vis-à-vis the US. And the US had as much regard for British industrialists’ trade secrets as China has today for American intellectual property rights. 
The fledgling textile mills of New England were desperate for technology and did their best to steal British designs and smuggle in skilled British craftsmen. The US did have patent laws, but they protected only US citizens. As one historian of US business has put it, the Americans “were pirates, too.”
Five minutes to check out!

Wednesday, August 1, 2018

Growth or Inclusion?

The syllabus for IB Economics (both HL and SL), expects candidates to examine 'the relationship between equity and efficiency', to 'discuss the possible consequences of economic growth on the distribution of income' as well as to 'examine how income distribution may contribute to economic development'.

A great resource for me in my teaching over the past several years has been the quarterly magazine Finance and Development  published by the IMF.  It is free, it is accessible, and most articles are highly relevant to the IB Economics syllabus.  I highly recommend it to both students and teachers.

In the latest issue (June 2018) there is a most interesting and useful article for us by Jonathan David Ostry, the deputy director of the research department at the IMF.  The title of the article is Growth or Inclusion? With the right policies, countries can pursue both objectives.  It is available also in pdf format (to email to students perhaps).  Definitely worth reading- 3 pages, not more than 20 minutes of careful reading.

Here are a few excerpts that I found interesting (to whet your appetite?):
Economists have long believed that improving the supply side of the economy—reducing barriers to entry in product markets and making labor markets more flexible are notable examples—is the key to sustaining growth... 
In work undertaken several years ago, we found strong support for the idea that structural reforms conferred sizable benefits for economic growth.  
Since the global financial crisis of 2008, however, economists and policymakers have begun to question whether supply-side policies alone can ensure sustained growth. They point to mounting evidence that growth tends to be more fragile and less resilient when it is not inclusive and its fruits accrue mainly to the wealthiest.
This could reflect the fact that—when adverse shocks occur—there is less support in unequal societies for the kinds of policies that help right the economic ship, because the short-term pain doesn’t bring broadly shared longer-term gains. 
(or, as I write in my SG, but much less succinctly... (p. 96): With a more equitable income distribution, ' tensions will be lower, so governments can more easily undertake important economic reforms requiring a high degree of consensus within the population. If people feel that they enjoy the fruits of economic growth then they will be willing to work harder and sacrifice more now in order for them or their children to enjoy more at a later date'.)
It could also simply reflect the fact that these societies don’t offer equal access to education, health care, nutritious food, credit markets, and even the political process (equality of opportunity for short), making them less resilient in general.
(or, 'inequality can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus required to adjust in the face of shocks, and thus that it tends to reduce the pace and durability of growth', from 'Redistribution, Inequality,
and Growth', see bottom of this post)
We argue (Ostry, Loungani, and Furceri 2018) that policymakers’ faith in their ability to get growth going through supply-side measures and deal with distributional issues later is a dangerous gamble, and that they should instead focus simultaneously on the size of the pie and its distribution. I call this a macro-distributional view for short.
Concerning the trade-off between equity and efficiency that is often discussed, Ostry has the following to say:
Economists have generally frowned upon paying attention to distributional issues. (This) is evident also in the modern work of Nobel laureate Robert E. Lucas Jr., who wrote in 2003 that “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.” The basis of this view is the so-called trickle-down theory, which holds that a rising tide lifts all boats, so that if growth is assured, there is no need to worry about distribution.
...if healthy growth is undercut by excessive inequality, then even the policymaker who has no qualms about the moral or social implications of inequality should be concerned about the economic cost.
Ostry continues, and in his last paragraph, concludes...
The task of policymakers is to ensure that the disadvantaged also have the opportunity to succeed in the modern, hyperglobalized economy, by designing reforms and globalization with an eye to their distributional effects. If they fail, pro-growth reforms will lose political legitimacy, enabling destructive nationalist, nativist, and protectionist forces to gain further traction and undermine sustainable growth
I hope you are now more interested in reading all of Ostry's (short) article.  In case you are really in to the importance of inclusive growth (for your country, not just for the May/Nov final exams...), then you could also check out this: Redistribution, Inequality, and Growth Prepared by Jonathan D. Ostry, Andrew Berg, Charalambos G. Tsangarides, April 2014.