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.

Inflation 11,200,000 percent (yes, eleven point two million percent!)

Well, we know that if the inflation rate exceeds (usually) the 3% mark, Central Banks get nervous and typically respond by tightening monetary policy.

Well, what about 11,200,00%?

From cnn.com:

Zimbabwe's inflation rate has soared in the past three months and is now at 11.2 million percent, the highest in the world, according to the country's Central Statistical Office.

Think of possible solutions. Remember that you need to consider the particulars: we're talking of Zimbabwe, an African nation, that has been in the news very often lately...

We also learn from the article that price controls don't seem to work:

Official figures dated Monday show inflation has surged from the rate of 2.2 million percent recorded in May, despite the government's price controls.

Replacing the Central Bank with another monetary authority that would strictly control the money supply had been proposed by U.S. economist Steve Hanke:

Hanke says that in order to halt its hyperinflationary spiral, Zimbabwe must replace the Reserve Bank with a new monetary regime imposing discipline on money supply

A discussion of solutions can be found at the Marginal Revolution blog here.

Some of the costs of hyperinflation are mentioned in this Guardian June 07 article when inflation was only 4,500%:

Hyperinflation is spreading poverty, as even basic goods become unaffordable. Supermarket trollies lie idle as few can afford to buy more than a handful of goods. Government regulations only permit the withdrawals from banks of Z$1.5m a day, which is not enough to buy a week's worth of groceries.

Golfers pay for drinks before they set off on their round, because the price will have gone up by the time they have finished the 18th hole. One Zimbabwean was recently told by a pension company that it would no longer send him statements as his fund was worth less than the price of a stamp.

"I can barely cope with inflation in the thousands, but millions? We will die," said Iddah Mandaza, a Harare factory worker, who added that some workers were now saving on transport costs by "going to their jobs on Monday and sleeping at the workplace until Friday. They all share their meals. That's what they do to get by."

Many Zimbabweans are resorting to bartering. "I traded some soap for two buckets of maize meal [Zimbabwe's staple food]. It was far much better than trying to buy it in the shops," said worker Richard Mukondo. "People in the rural areas are even worse off. You can see they are hungry and their clothes are in tatters. They trade in whatever they can produce: tomatoes, onions, chickens and eggs."

How bad then can a mere 4.4% be? Well, this is the latest figure for Greece and, trust me, it is pretty bad. Remember the particulars!

Great Jazz station online!

Not econ related but this is my blog so I reserve the right to post non-econ stuff that I find interesting!

Well, this is a great place to listen to jazz (in the background?): It's WBGO, Jazz 88.3.

The Doha Round stalemate: does it matter?

We will be discussing elements of trade this semester and one of our topics will be trade liberalization. The WTO (World Trade Organization)is responsible among other things for conducting multilateral trade negotiations and the latest 'round' of such trade negotiations is the Doha Round. It is the Doha round because it was officially launched back in 1991 in Doha, the capital of Qatar.These trade talks have reached a stalemate and the most recent attempt to revive them collapsed. Much has been written on the benefits of a successive round, especially to the developing countries. Many have doubted these benefits and Rodrik's latest Project Syndicate piece 'Don't cry for Doha' contains some very interesting points that I think you should be aware of (please save his article for later use):

But look at the Doha agenda with a more detached set of eyes, and you wonder what all the fuss is about. True, farm-support policies in rich countries tend to depress world prices, along with the incomes of agricultural producers in developing countries. But for most farm products, the phasing out of these subsidies is likely to have only modest effects on world prices – at most a few percentage points. This is small potatoes compared to the significant run-up in prices that world markets have been experiencing recently, and it would in any case be swamped by the high volatility to which these markets are normally subject.

While higher world farm prices help producers, they hurt urban households in developing countries, many of which are also poor. That is why the recent spike in food prices has led many food-growing countries to impose export restrictions and has caused near panic among those concerned about global poverty.

It is hard to square these fears with the view that the Doha trade round could lift tens, if not hundreds, of millions out of poverty. The best that can be said is that farm reform in rich countries would be a mixed blessing for the world’s poor. Clear-cut gains exist only for a few commodities, such as cotton and sugar, which are not consumed in large quantities by poor households

Read it here or here

Inflation in U.S. at a 17-year high (IHT)

I'd like you to note the following from this article:

..the news was distressing for investors

and, also

The Consumer Price Index, considered the benchmark gauge of U.S. inflation, rose 0.8 percent in July. Economists had forecast a rise of half that rate. In June, prices rose 1.1 percent. The index surveys prices of a basket of common consumer goods, among them toothpaste, prescription drugs, airfares and the cost of dining out.

Because food and energy prices can be highly volatile from month to month, the Labor Department also calculates a so-called core price index, which strips out those costs. In July, core consumer prices rose 0.3 percent, reaching a 2.5 percent annual rate.

..and, lastly, this:

The Fed has signaled repeatedly that it has no plans to lower interest rates, given the threat that inflation poses to the economy. Lowering rates could stimulate more economic activity, but such a move would risk inflating prices further.

The link for the article is here, but if you google the title in the google news facility you can find different versions of it with the emphasis differing.

Greg Mankiw's Blog: How to Write Well

Well, you are not members (yet..) of the CEA but some of you are doing their Extended Essay in Economics so perhaps this Greg Mankiw post is worth looking at and saving. It is his advice to his staff when he was the CEA chair some years ago.


Greg Mankiw's Blog: How to Write Well

Europe succumbing to global economic woes (IHT)

Starting today, I am beginning an attempt to regularly post links to articles that I find interesting. There will be no pattern or sequence or regularity to expect. The rule is: if I happen to see it and I find it worthwhile posting (and I have the time :-) ) I will go ahead and post the link, perhaps accompanied with a small 'something'.

Hope it proves useful for (my) kids doing IB Economics!


The first one is from the International Herald Tribune. It is about the slowdown of the European economy: "...The economy of the 15-nation euro area contracted 0.2 percent in the three months ended June 30, data released Thursday showed..."

It is interesting to note the stance of the ECB:

But the European Central Bank, which has bucked the trend of other major central banks by raising interest rates in July, appears determined to stick to its mandate to tame inflation, arguing that higher inflation is still a greater threat than lower growth.

Is it worth controlling inflation? What could be the costs of not doing so? Who gains and who loses from a tight monetary policy stance? Taming inflation, but at what cost? Is there a difference between the short term and the long term? In this case, what does the price of oil got to do with it? Why may credibility in policymaking be important? Is there something in this article pointing to its role? What is the role and importance of inflationary expectations?


Note also the distinction made in the article between a 'recession' and stagnation:

The data Thursday from the EU statistical agency Eurostat set off fevered head-scratching about whether Europe can formally dodge a recession, often defined as two successive quarters of shrinking economic activity. The consensus seemed to be that it still might - but just barely.
'We can probably scrape by and avoid another negative quarter,' said Julian Callow, chief Europe economist at Barclays Capital. 'But we are in for stagnation here.'

Anyway, any IB economics student interested can find the article here