"A cut in interest rates is all that would be necessary ...": Remember that M05 HP3 question 'd'?

Well, check out this one on the importance of consumer confidence in spending decisions. The article is titled "Full of Doubts, U.S. Shoppers Cut Spending" and is published in today's NYT. The link is here and this is a quote from it:

Cowed by the financial crisis, American consumers are pulling back on their spending, all but guaranteeing that the economic situation will get worse before it gets better.

In response to the falling value of their homes and high gasoline prices, Americans have become more frugal all year. But in recent weeks, as the financial crisis reverberated from Wall Street to Washington, consumers appear to have cut back sharply. Even with the government beginning a giant bailout of the financial system, their confidence may have been too shaken for them to resume their free-spending ways any time soon.

Recent figures from companies, and interviews across the country, show that automobile sales are plummeting, airline traffic is dropping, restaurant chains are struggling to fill tables, customers are sparse in stores.

Beyond the obvious macro viewpoint, try to find the most income elastic goods and services in here and think of the importance of the level of income itself in determining the degree of income elasticity of demand!

Your Internal Assessment and other tales of ordinary madness..

Just a reminder (posted on the net so no one can claim otherwise - this one is for you Mr. 'Sorry for being late, I didn't hear the bell over there...')

I am expecting you to hand in Commentary #2 tomorrow, and we have agreed in class that:

The International Economics related exam will be after the OCT 28 short break (but, I am making NO commitments on the exact date: be prepared)

The big -pre end of semester- review exam (Micro, Macro, Trade & elements from Development) will be after the NOV 17 break (again, no commitments on the exact date: be prepared)

Commentary #3 is due the week before the NOV 17 break and commentary #4 right before Xmas break.

Have fun!

(and speaking of commitments, have you seen the movie?

The American Anti-Intellectual Threat / by Jeff Sachs

A very interesting article (again, not related to IB economics but very much within the IB spirit) worth reading!

Here is a quote:

Humanity’s only hope is that the vicious circle of extremism can be replaced by a shared global understanding of the massive challenges of climate change, food supplies, sustainable energy, water scarcity, and poverty. Global scientific processes like the IPCC are critical, because they offer our best hope of forging a consensus based on the scientific evidence.

Here is the link.

Read also the comment below that an anonymous reader of our blog was kind enough to make.

Letterman & Robin Williams

Not related to IB economics (or, is it?) but really good in my opinion:

Part 1:


Part 2:

What if the whole world could vote

You can 'vote' for McCain or Obama in the "Global Electoral College" that the Economist has set up. The count up to now is even more interesting if one considers who reads the magazine. It came to my attention through the Mankiw blog and I have to admit that at first I had no idea what the title of his post meant...!

For the bright and ambitious

My colleague, John L. Tomkinson, brought to my attention this letter published in today's issue of the International Herald Tribune:

Lost MBAs

The current financial debacle may herald the end of an era epitomized by three letters: MBA. The mad stampede among talented students and young entrepreneurs to earn an MBA from Harvard, Stanford and Wharton, and thereby get on the fast track to a job on Wall Street, has drained the pool of talent for other more essential but less lucrative professions. What a tragic waste when all that accumulated talent, energy and learning only produces a giant, burst bubble in the biggest casino in the world.

Clearly something must be missing in the magic mix that is being imparted on these bright young titans of the universe if they can throw themselves into such a selfish, unproductive world of financial brinkmanship on such a massive scale.

Do ethics or historical and social perspective have any place in their curriculum? We need to ask those charged with teaching our brightest and best whether the values they teach need to be rethought.

Robert Nadler, London

Difficult to disagree, isn't it?

Look what I got for you!

This is Joe Stiglitz of Columbia talking on why GDP is not a good measure of living standards (of, well being). Make sure you understand what he says when discussing the difference between GDP and GNP!

Always a pleasure to watch (only 8 minutes).


The full talk is at here (1:36):

Export Restrictions and the Food Crisis from the Aplia Blog

A good analysis (cum diagrams) of the food crisis from the Aplia blog. Try to understand the two diagrams. We have spent quite some time on the issue last year as it unfolded but this post can serve as a good review of some basic micro principles and it obviously has connections to development related issues which we will be discussing at greater length later this semester. The post is here. Read it.

Role of prices in a market economy

Please read this article by Stefanos Manos published a few days ago in Kathimerini (in Greek). It has to do with the distorted prices of energy in Greece. A good example of the incentive and signalling role of relative prices in a market economy.

Evaluating trading blocks

In a few weeks we will be discussing international economics in a more systematic fashion. Section 4.3 of the syllabus is on Economic Integration and Trading Blocks.

In a recent issue of The Economist there are two articles on regional trading blocks that are both interesting and useful. The first one is a leader titled 'A second-best choice' which discusses India's free-trade agreement with the ten fast-growing countries in the Association of South-East Asian Nations. The newspaper considers bilateral agreements inferior and dangerous compared to any resulting through the WTO led multilateral system. According to the Economist:

India dealt the multilateral trading system a blow by saying “no”. Kamal Nath, India’s trade minister, helped kibosh a breakthrough in the Doha round of global trade talks by refusing to compromise over demands for safeguard tariffs to protect more than 200m Indian farmers.

(obviously, I didn't know the word 'kibosh' so that explains the link above!)
The Economist is great in explaining complex economic theory in simple (but dense) words so I can't resist the temptation to copy the explanation offered for its position:

Multilateral trade rounds are the foundation of the trading system because they are based on the “most favoured nation” principle—that any tariff cuts offered to one country must be offered to them all. Regional and bilateral deals are based on discrimination. They lower tariff barriers between their signatories, but not everyone else. Discrimination means that, although regional deals create new trade among their members, they may also divert it from lower-cost outsiders.

(we will discuss trade creation and trade diversion later in class)

I also can't resist quoting Jagdish Bhagwati of Columbia:

In a new book Mr Bhagwati calls them (regional trading blocks) “termites in the trading system”

He has also referred to the complexity resulting from the differing rules of these bilateral / regional deals as the 'spaghetti bowl' of preferential agreements.

The second article in the same issue on regionalism vs multilateralism is titled 'Afta Doha' (if you can explain the title you will gain many kudos). Read it as it contains interesting facts that you could use in your final May (November?) exam.

Europe Slashes Growth Forecasts for 2008

A nice macro article full of concepts and issues that you should all know is in today's New York Times. The academic year starts on Friday and I'll be reviewing and wrapping up macro the first couple of weeks with my kids (Candidates 2009). This article is not only interesting per se but careful reading will force you to check on what you remember from year 1. Just read below the first couple of paragraphs:

The European Commission on Wednesday cut its forecast for economic growth this year, conceding that a slowdown in the United States, expensive energy and a global housing slump were exacting a heavier price than was expected even six months ago.

With an embattled prime minister in Britain struggling with a housing market slide, a German government under pressure to enact an economic stimulus package and a French government whose spending is hamstrung by a ballooning budget deficit, the gloomy figures only added to a darkening political mood in Europe.

For example, why would a slowdown in the US contribute to a decrease in European growth?What's the role of expensive energy? Through what possible routes does a slump in housing exact a 'heavier price'? What could the 'economic stimulus package considered by the German government include? Why are 'balooning budget deficits' feared so that now France can't spend its way out of trouble? What are the risks? Why does Europe have constarints on government spending? How much sense do they make when euro member countries have no monetary policy to resort to? Can you see why distinguishing between the short run and the long run may be important?

Read the whole article here. It's worth your time.

Doubling living standards in poor countries

At our school we subscribe (btw, for free) to Finance and Development, an IMF quarterly publication, and in the September 2008 issue:

F&D asked a number of opinion leaders around the world to answer the question"What’s the single thing most likely to double living standards in poor countries over the next decade?"

Here is what they chose:

Roads
Governance
National ownership of the development agenda
Investment in education
Tackling corruption
Boosting productivity
Delivering on promises to meet the MDGs

You should be able to think of reasons why each could be considered instrumental. I know we haven't discussed development proper yet but we have made many in class development related discussions from day one last year and your background in econ is (should be?) good enough to provide at least some reasons for each.

In any case, do check out the article here (page 28)

GDP and living standards

It's Sunday evening. I'm back from visiting the GAIA Center for Environmental Research and Education in Kifisia which is absolutely excellent and highly recommended. After enjoying a nice meal, what's better than checking out recent back issues of the IHT or the Economist? Actually, I can think of quite a few other activities that would rank higher up but... :-)

I did find this: Economists look to expand GDP to count 'quality of life'. It is well written and it explains the limitations of using GDP as a measure of overall well-being.
Print it out and read it. Most of the problems we mention in class are there, the most important being that GDP provides no information about the underlying income distribution and how it changes. Quoting from the article:

The U.S. gross domestic product grew robustly in the post-World War II years. Family incomes also went up, and a rising GDP came to signal well-being as well as expanding economic activity. But these days, while the value added in making cars goes into the total, same as always, the gain can be distributed in stock dividends or profits or multimillion-dollar chief executive pay more than in raises for workers. The GDP does not reflect the shift in distribution.

And over the past 15 years there has been just such a shift. While the GDP has continued to rise, wages have stagnated, pensions have shrunk or disappeared and income inequality has increased.

BTW, a very interesting account of how and why income distribution has become more unequal in the United States can be found in Paul Krugman's new book The Conscience of a Liberal.

A BBC article on the US economy

US economy 'facing stagflation' was the title of an online BBC article on September 4 that I am reading now, 2 days later. I am posting it as it is one of the many articles that can be found on macro issues in news sources all over.

The US economy is facing slow growth and higher prices, according to the most recent survey by the US central bank, the Federal Reserve.

Economic activity was "weak, soft or subdued" across the country, said the Fed's latest Beige Book report.

And spending slowed, with consumers concentrating on "food, staples and essential items" rather than luxuries.

Sounds like a classic case of stagflation, as mentioned later in the article. Note the adjectives describing the low growth rate of the US economy. Why are people spending less on luxuries?

The article continues with this:

The survey points to the same dilemma that is facing central banks around the world - the contradictory pressures of rising inflation and slowing growth.

What's contradictory about these pressures?

The Fed has kept interest rates unchanged at 2% for the past six months, and the market expects no change when the Fed's open market committee next meets on 16 September.

With interest rates at 2% (compared to 5% in the UK) why aren't US consumers splurging on durables?

Car sales were particularly weak, a trend confirmed by the latest industry figures, which show a double-digit drop in orders at Ford, GM, and Chrysler.

The answer ay have a lot to do with this:

However, with housing prices still falling at 15% annually, and financial firms restricting their lending, consumer confidence is at an all-time low.
The weak employment market, with nearly 500,000 job losses so far this year, is another drag on consumer spending

Lastly, what do you understand by this:

In addition, the dollar has halted its slide, and began the strengthen again on the back of weaker-than-expected growth in Europe.

What does 'halting its slide' mean and how does this affect the US AD? How could weaker than expected growth in Europe affect the USD/Euro exchange rate (2 routes are expected - one obviously dominates here)?

Isn't it fun when just a few months after taking the IB Economics course you can read so much more into an article?

The full article is here.

For my conceited group...

OK, boys and girls, HL Economics candidates 2009, here is your way out of May 09!

BTW, if you are taking SATs, here is conceited (and a great resource to have handy on your browser)

(bubble gum nail polish???????)

PS:if you're searching for a connection to our course, there isn't one :-)

Poverty, India and Hermes

Quite a few articles in today's IHT (NYT) that I found interesting for IB economics students!

"Trying to sell luxury goods amid stark poverty" is the first (here). Read this:

An old woman missing her top front teeth holds a tot in rumpled clothes - who is sporting a Fendi bib. At retail, the bib sells for about $100.

A family of three squeezes onto a motorbike for their daily commute, the mother riding helmetless and sidesaddle in the traditional Indian way - except that she has a Hermès Birkin bag prominently displayed on her wrist. It costs over $10,000, if you can find one.

Elsewhere, a toothless, barefoot man holds a Burberry umbrella costing about $200.

Welcome to the new India - at least as Vogue sees it.

"The swelling ranks of the very poor" is the second one (here)

There is a lot more poverty in the world than previously thought.The World Bank reported in August that in 2005, there were 1.4 billion people living below the poverty line - that is, living on less than $1.25 a day.
......
The poverty expressed in the World Bank's measure is so abject that it is hard for citizens of the industrial world to comprehend.
.......
India, which has more people in extreme poverty than it did 25 years ago....

...and, this year's IHT Luxury Conference "THE WORLD'S LEADING CONFERENCE ON THE BUSINESS OF LUXURY AND STYLE" will be held in (take a wild guess and register here!)

I can 'smell' the discussions we may have in class on this one!

(BTW, the new poverty count has to do with new PPP dollar estimates - we've talked about this last year)



(distasteful, isn't it?)

Demand for rat meat rises!

Talk about substitutes!

Well, from now on when discussing in class the (shift) factors affecting demand for a product my example will be the following:

If the price of beef rises then demand for rat meat will rise and as a result shift to the right!

I was reading today's Kathimerini (English edition here) when the following caught my attention:

The price of rat meat has quadrupled in Cambodia this year as inflation has put other meat beyond the reach of poor people, officials said on Wednesday.

With consumer price inflation at 37 percent according to the latest central bank estimate, demand has pushed a kilogram of rat meat up to around 5,000 riel ($1.28) from 1,200 riel last year.

Spicy field rat dishes with garlic thrown in have become particularly popular at a time when beef costs 20,000 riel a kg.

Here is also a clear example that inflation is not balanced (i.e. if inflation is, say, 4.7% it does not mean that all prices increased by 4.7%).

Question: If the price of rats (per kg....) increased from 1200 riel to 5000 riel in a year and the price of beef is now 20000 riel (/kg.) how much was beef at the most last year (given that people are switching from beef to rats.

Also, what is the staple food in Cambodia? I read somewhere that it is white rice. For the very poor in Cambodia who are now forced to switch to rat meat, is there any chance that white rice may behave as a Giffen good? Yes? No? Why or why not?

Mind you that this news may sound strange to many but it hides some dramatic facts that maybe we should be aware of:

...malnutrition in children 6-59 months old continues to be a major problem in Cambodia based on the three commonly used indicators. The prevalence of underweight was 52%, that of stunting was 56% and 13% of children were wasted.

If you are interested in finding out more about the nutrition profile of Cambodia read the summary of a FAO report here.

(the article in English about the rising demand for rat meat is found here.

High gas prices drive down traffic fatalities

In today's Yahoo! News an interesting article was found linking the rise in gas prices to a decrease in traffic fatalities. The article can be found here.

Read this quote:

Experts who have studied motor vehicle fatality trends said one reason for the dramatic decline is that people are reducing their nonessential driving first, which is often leisure driving at night or on weekends. That also happens to be riskier than daylight commuting on congested highways at lower speeds.

Teenage and elderly drivers — who also have higher accident rates — are more likely to feel the pinch of higher gas prices, and thus may be cutting back more than other drivers. Federal data also shows that driving declines have been more dramatic on rural roads, which have higher accident rates than urban highways.

And, some drivers are simply trying to save on gas by slowing down, which also decreases risk.

How about Greece? Did the rise in the price of gasoline have any such effect? Could this be a topic for an extended essay?


The above is due to a post in the Greg Mankiw blog:
Greg Mankiw's Blog: A Reading for the Pigou Club

What a guy, what a game!

It's all there! Shsss!

Olympic medals and a little bit of Economics...

Gary Becker in the Becker-Posner blog presents the findings of the paper "A Tale of Two Seasons: Participation and Medal Counts at the Summer and Winter Olympic Games", published in 2004 in the Social Science Quarterly. The authors of this paper tried to find variables that could explain why some countries collect more medals than others.
Quoting from Becker:

Their regression analysis shows that two very important variables are the total population and per capita incomes of different countries. Also important are whether a country has an authoritarian government-such as communism- a country's climate, and whether a country is the host country for a particular Olympics. These five variables taken together predict closely the total number of medals won by different countries in the winter as well as summer Games.

His discussion of each variable is interesting. How do you expect each of the above variables to affect the medal count? Can you think of any other variables that may have been included in the analysis (but did not prove significant)? I think I could come up with a couple!

Read also the economic arguments for government spending on athletes preparing for future Olympics. Does it make sense to you? Are there any significant 'externalities' involved that could justify government spending (i.e. subsidization of the process)?

You can read Gary Becker's post here. (Aug 17 post)

Richard Posner's comment below it is also (of course) intriguing!

The nationalistic fervor and great-power aspirations that Olympic competition stimulates seem to me a negative externality. In addition, some unknown but doubtless large fraction of the expenditures on training athletes have no social product, but are in the nature of "arms race" expenditures. If one nation spends very heavily on training its Olympic athletes, other nations, if they want to win a respectable number of medals, have to spend heavily as well. The expenditures are offsetting to the extent that the objective of competition is to win rather than to produce an intrinsically better performance. Economic competition produces better products at lower quality-adjusted prices, and this effect dominates the costs of competition in duplication of facilities and offsetting advertising. The balance in athletic competition is different, because the main product (as in war) is winning, and it makes little difference to the consumer whether the winner ran a mile in 3.05 minutes or in 3.01 minutes. Moreover, Olympic competition is inherently lopsided since, as Becker explains, success is largely determined by a nation's population, per capita income, and (in the winter Olympics) climate. Why should Americans feel good if an American team beats a team from Costa Rica?

And, who was it that said that IB economics is not interesting/useful?


PS: You should all be very much aware of Gary Becker (Nobel Prize 1992). Read about him here, here and here.

And, you should definitely also be aware of Richard Posner, especially if you are planning to do Law (and Economics - huh, Mr. Alex P.??!!). Read about him here and here.