Wu: Large yuan rise would hurt China — Shanghai Daily | 上海日报

China’s Vice Premier Wu Yi defends China’s currency controls in Washington:

The yuan’s value isn’t the cause of the deficit, Wu said yesterday at a
dinner in Washington attended by US Treasury Secretary Henry Paulson
and Federal Reserve Chairman Ben S. Bernanke.

About 85 percent of China’s surplus with the US is from foreign companies
exporting products no longer made in the United States, such as shoes,
she added.

So, America’s trade deficit is not because of a historically weak Yuan, rather because America imports shoes made in China. VP Wu should look more closely at her audience; she’s preaching to the choir with Paulson and Bernanke in attendance; and I doubt they’re swallowing what she’s dishing up. Of COURSE the trade deficit is because America imports “products no longer made in the United States”. But why do they do this? Uhm, could it be because of the historically weak Yuan? Looks like VP Wu could use a refresher in her principles of Macro course.

Now the US is threatening new trade barriers if the Chinese do not allow the Yuan to appreciate more on foreign exchange markets.

“Large scale yuan appreciation will have a negative impact on China’s
economy,” Wu said, adding that trade protection would hurt relations
between the US and China.

China’s increasing of the yuan’s flexibility may slow growth and cut into profits in Chinese firms. However, new barriers to trade with its largest trading partner will do the same. China’s liberalization of industry should now be accompanied by a similar liberalization of financial markets. A more balanced current account will allow China’s economy to begin growing at a more sustainable rate and help to allow China’s middle class access to the quality goods they demand from abroad.

Most importantly, American teachers in China will have access to more affordable breakfast cereal and quality coffee, which at current exchange rates cost more than I like to think about.

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Months ago I made a deal with my 35 AP Econ students. I vowed that at the end of the year, if they had decided that they would study economics in college, they would be rewarded with a small prize from Mr. Welker. My original intention was to get copies of my favorite “everyday” economics books and give a copy to everyone who intended to major in Econ in college, but then realized I would not have anyway of knowing how many students that would be. So, when I was in Bangkok a month ago, I picked up six copies (two each) of three of my favorite “fun” econ reads: Freakonomics, The Undercover Economist and Confessions of an Economic Hit Man.

As of this afternoon, eight students indicated their intention to major in Economics, so eight names went into the hat, and six came out. I’m proud to announce the winners:

• Heidi Chai and Chris Park won because they attended our Saturday review session before the AP Exams and were entered in a drawing there.
• Will Moeller (who will be returning to Michigan for his senior year next year) is the proud owner of Freakonomics.
• Vincent Lin (attending Johns Hopkins), Chris Eldred (Wharton Business School) and Helen Wu (Wellesley College) were the last three whose names came out of the hat. They’ll be given their books tomorrow at graduation!

Congratulations to you all. It’s been a great year and you’ll be missed! I hope you continue to enjoy your econ studies in college, and I hope you will keep in touch with your AP teacher in the great years ahead! -Mr. W

BBC NEWS | Talk about Newsnight | “Gis a McJob”

“An unstimulating low-paid job with few prospects, especially one created by the expansion of the service sector”.

That’s how the Oxford English Dictionary defines “McJob”. Yesterday McDonald’s launched a petition to change the definition, saying that the above definition is derogatory and hurtful to McDonald’s employees.

I heard a blurb about this story on BBC tonight and it got me thinking about a previous post I wrote about the stronger Chinese currency’s impact on the balance of trade between China and the US: Will a weaker dollar affect the balance of trade? It already has!. Elaine Witkowski, a teacher in North Carolina commented on this post:

“Few people mention that the jobs being created are lower paying jobs with less benefits than the manufacturing jobs that are going overseas. I teach in a rural county in NC where only 1 out of 8 people have a college education. When textile, furniture and other manufacturing jobs go away, these workers with a high school education or less do not find equivalent jobs. While going back to school to get new skills seems to be a solution, the reality of having money to pay for tuition and finding time while working many jobs and taking care of your children is slim. I know parents working two to three jobs and we have a food bank at our school for when times get rough for families. I believe the zero sum concept is alive for workers without the necessary skills to get better employment when the factories leave.”

In other words, globalization, outsourcing and off-shoring of traditional manufacturing jobs has left Americans in communities like Elaine’s with little left to choose from but McJobs.

Another thought that crossed my mind: What would most McDonald’s employees say about the work they do? My guess is, most probably would describe their jobs flipping burgers and scooping fries in a way similar to Oxford’s definition above.

If McDonald’s succeeds in removing “McJob” from the dictionary, what will be next? Where will the Orwellian restructure of our language stop? Will they go for McMansion next? If so, my students living across the street in Forest Manor may need a new word to describe their houses!

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Andrew Leonard of Salon.com writes an interesting piece about the implications of a bicycle friendly future on the global economy.

A bicycle built for a better world – Salon.com

People who know me know that I’m a bike guy. Here in China I own five bicycles. This may sound crazy, but allow me to explain: One is only for riding the 400 meters between school and home, this is my city bike (it’s name is Genghis). One is strictly for off-road, cross-country and downhill mountain biking, one is for strictly on-road, fast-paced, long distance riding while one is for touring (on or off road), and the last, my personal favorite, is not for riding at all, it’s only for looking at: that’s my Shanghai Yong Jiu bicycle, better known as the Forever.

So what do bikes have to do with economics? John Burke, president of Trek bicycles, made famous by Lance Armstrong who rode a Trek to six Tour de France victories, believes that that the future is bright for the bicycle industry:

“Looking at a United States plagued by obesity, traffic congestion,
urbanization and environmental woes, he sees “an incredible
opportunity” to sell bicycles.”

Growth of the bicycle industry may seem a simple, more localized alternative to the incredibly complex global automobile industry. In fact, the bike industry today is nearly as complicated in its global integration as that of automobiles. Leonard writes:

“A bicycle made in Taiwan by Giant or Trek or Specialized is an integral cog of the global economy, even when it is being ridden by a hippie in Berkeley pulling a Burley trailer full of locally grown organic produce behind him. You may help reduce U.S. dependence on foreign oil by riding a bike, but you’re a long way from opting out of the world-annihilating industrial megacomplex. Bikes are high-tech products manufactured according to the latest advances in metallurgical and plastics sciences in robot-run factories connected to globe-spanning supply chains and taking advantage of the differentials in labor costs between the developed and developing world. There’s nothing at all simple about the role Taiwan plays in the world economy, or how modern manufacturing processes enable precision machined parts from scores of countries to be assembled together and delivered to a bike store near you. I’m all for a more bike-friendly world, where every road has a bike lane (or at least a wide shoulder) and every city goes the extra mile to welcome bikers with open arms. But let’s not pretend that there’s something simple, or bucolic, about what we’re doing. It’s darn complicated and only getting more so.”

While I agree with Leonard that most of the bikes being ridden by Americans come from factories in Taiwan with components from China, Japan, and other Asian countries, I have to make an argument that growth of the bike industry presents more opportunities for entrepreneurs, craftsmen, and community stakeholders at home than continued growth of the automobile industry ever could.

I personally own two bikes that were built in the United States, one which was built in a welding shop in my tiny hometown in Idaho by a guy named Toby. How many people know the name of the guy who built their car? In fact, as cycling increases in popularity across the US, thousands of individuals who are passionate about the art of bicycle design and construction have tapped the growing market for tailor made, custom bicycles. Several of these garage-based welding operations have grown into large, economically competitive firms producing thousands of bikes each year for domestic buyers and for the export market (Cannondale, Titus, Seven Cycles, Moots, and many others).

While a world of Trek riders may not fit the Utopian image of local, home-grown, hippy, organic society Leonard imagines, more demand for bikes does mean greater opportunity for the re-emergence of an industry that with the growth of the auto industry over the last thirty years has slowly disappeared from America’s economy; that is, locally designed and hand-crafted vehicles for transporting people and products within and between communities.

By the way, If you doubt the utility of bikes for transporting products, visit Shanghai sometime, where bikes are used for FAR more than just recreation!

Bikes hand-made in the US of A:

Custom Bicycle Builder Portal: Listing over 40 builders
North American Hand Made Bicycle Show 2007

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High corn price mean pigs eat candy bars, french fries

Oh, the life of a pig… Due to the rising price of corn (thanks to increased production of corn ethanol), farmers all over America are substituting relatively cheap junk food to keep their porkies plump!

“Besides trail mix, pigs and cattle are downing cookies, licorice, cheese curls, candy bars, french fries, frosted wheat cereal and peanut-butter cups. Some farmers mix chocolate powder with cereal and feed it to baby pigs,” writes Lauren Etter.

My wife calls that last one “puppy chow” when she makes it! It’s mmm… good!

“California farmers are feeding farm animals grape-skins from vineyards and lemon-pulp from citrus groves. Cattle ranchers in spud-rich Idaho are buying truckloads of uncooked french fries, Tater Tots and hash browns.”

Mom’s, don’t let your kids read this article, you’ll never hear the end of it: “But MOOOMMM, even FARMERS let their animals eat french fries, peanut butter cups and licorice for dinner, why can’t you let ME??!!”

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Molly Saso, AP Econ teacher at the International School of the Sacred Heart in Tokyo, asked in an email to the AP Econ email list about Free Response Question #2 from the International exam (form B). The question reads:

2. (a) Assume that businesses are granted a tax credit on spending for machinery. Using a correctly labeled graph of the loanable funds market, show the effect of the business sector’s response on the real interest rate.

Here’s Molly’s email:

“The loanable funds market, in spite of its apparent simplicity, continues to throw up some ambiguities–or perhaps it’s just me who is perplexed.

What would be the impact on the market of a tax credit for spending on machinery? (Q2 on Form B, 2007–all the FRQs are already on AP Central.)

While the intent is indeed to increase planned investment, would firms increase or decrease their demand for loanable funds? To the extent that the tax credit means that there is a greater amount of post-tax profits available for investment, then the demand for loanable funds could decrease; but wouldn’t many firms need to supplement their post-tax profits with a greater demand for loanable funds?

Perhaps, if the impact on demand is indeterminate, the shift would be in supply, since firms would have a greater store of “savings” (retained profits). However, since a shift in supply was the answer to the second part of Q2, I somehow doubt that the examininer would be expecting a supply shift in part (a) as well.

The trouble is that the question asked for no explanation–only a graph to “show the effect”. I wonder what kind of shift was expected?

In perplexity,
Molly”

Molly’s question is a good one, and although I hadn’t spent much time reflecting on this question, her email got me thinking more about this interesting and challenging question. Here’s what I came up with and replied to Molly with. I don’t know if it’s correct or not, but I’d be interested to hear what others thought about this question:

Hi Molly,I’m in Shanghai, so my students also took form B (the international questions). I too found this to be a bit confusing. But as I teach my students, “don’t make the questions more complicated than they have to be, look for the most obvious answer.” Unfortunately, this one had no immediately obvious answer, as you explain below. I think what made it difficult was the term “tax credit on spending for machinery”. I don’t know about you, but this specific term never came up in my class!

Here’s how the question begins: “Assume that businesses are granted a tax credit on spending for machinery”. I interpret this tax credit as an amount deducted from federal income tax, calculated as a fixed percentage of expenditures on, in this case, machinery. In other words, the tax credit is not granted unless the firm undertake investments in new machinery. Your suggestion that the tax credit results in a “greater amount of post-tax profits available for investment” may be mistaking the credit indicated with a reduction in corporate profit taxes. I think if this were a corporate profit tax question then perhaps demand for loanable funds would go down since new investment could come from the now higher profit margins firms receive; in fact, the tax credit is not granted until new investment is undertaken by the firms in the first place.

I would explain this to my students by saying that essentially, the expected rate of return on investments goes up (since fewer taxes will be paid once new machinery is bought), shifting the Investment Demand curve out, thus the Demand for loanable funds, increasing the real interest rate.

That said, I cannot be certain that this is what the AP was looking for, so don’t hold me to it! Writing this email allowed me to really clear this one up, though, so thanks for the inquiry!

Jason

Anyone else have a better answer or something to add?

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Bloomberg.com: Calendar, Abacus Help Determine Size of Chinese Rate Increases

Here’s an interesting piece about Monetary Policy in China.

“The People’s Bank of China today raised its one-year benchmark lending rate by 0.18 percentage point and its one-year deposit rate by 0.27 percentage point. Why 18 or 27 basis points instead of the increments of 25 used by most other central banks?

The answer has to do with the Chinese calendar and superstition, as well as the ancient Asian counting device, the abacus.”

While “traditional” Chinese culture may seem to disappear with globalization, the superstitions of old are alive and well in the financial community:

“`Rates divisible by nine avoid rounding of interest and allow easier calculation by abacus,” said Wang Qing, chief China economist at Morgan Stanley in Hong Kong.

In addition, the number nine in Chinese shares a pronunciation with the word “longevity” and has long been considered a lucky number. Chinese wedding feasts have nine dishes; Beijing’s Forbidden City has 9,999 rooms.

`The number nine is very important in the Chinese society and business world,’ said Chan Mansing, associate professor at the School of Chinese at the University of Hong Kong. `Nine stands for longevity, abundance and masculinity. It also represents the highest attainable level in all human endeavors in the Book of Change, a Chinese philosophy book that has been read for thousands of years.’ “

Hey, who knew?!

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Gas hits record high price for eighth straight day – May. 20, 2007

According to CNN.com:

“The run-up in prices is a big concern for store chains, according to the retailers’ trade group. Its survey of consumers released early Friday found the average consumer believes that the price of gas will reach $3.32 per gallon by Father’s Day… As a result, 40.2 percent of consumers are taking fewer shopping trips, while 37.9 percent told the survey they plan to shop closer to home.”

“To offset the effects of higher prices, more consumers are giving their wallets a little extra cushion by cutting back on discretionary spending or choosing to frequent retailers closer to home.”"

And this is a bad thing? To big chain stores, perhaps, but what about the neighborhood businesses (are there still any of those?) that will benefit after years of losing business to big box retailers like Wal-Mart and Home Depot? Consumers driving less may harm major retailers whose stores tend to be clumped together in mega shopping strips on the outskirts of towns, but surely the benefits of less driving outweigh the costs.

Fewer cars on the road mean less traffic, less noise, more space for cyclists, less hazard to pedestrians and children playing ball in their yards, cleaner air and a deceleration of global warming, more customers at neighborhood businesses, and perhaps even more quality time with family and friends (if we can assume less time shopping means more time with each other).

So if high gas prices result in so many improvements in our environment, relationships, communities and health, why are they such a bad thing? Perhaps because higher gas prices overburden the poor. Since fuel makes up a larger proportion of a poor family’s budget than a rich one’s, higher gas prices put a bigger dent in the disposable incomes of the poor than the rich. Economic theory would indicate that the poor’s demand for gas is more elastic than the rich’s, meaning that price increases are met with a greater decrease in consumption than someone for whom gas makes up a relatively small part of their overall budget. This, again, may not be so bad. Perhaps the poor will begin limiting their outings to those that are deemed most necessary (such as to and from work, school, child care or clinic) and cut back on unnecessary trips (such as to mall, the movie theater, the go cart track or the Wal-Mart across town). Less consumption may not lower overall standard of living when we consider that much of the consumption going on by Americans (rich and poor alike) is frivolous and ostentatious.

Even acknowledging the regressive nature of the burden of high gas prices, it still seems to me that higher prices are necessary to achieving a cleaner, healthier, better functioning society. The problem is, if prices are kept artificially high through price gouging, as the Democratic leadership in Congress seems to believe, then the full benefits of higher gas prices are being passed on to oil companies rather than society, as could be achieved with an effective gas tax.

CNN presents their own solution to the problem of high gas prices:

From higher taxes to more drilling, ways to cut gas prices – May. 10, 2007

1- Pass a carbon tax
2- Increase efficiency
3- Push alternatives
4- Require oil companies to make more gas
5- Build a gasoline reserve
6- Drill more oil

It’s too bad my AP class has finished for the year. I think a great quiz would be to hand them this list and ask, “What’s missing?” Anyone who’s completed a semester in a Principle of Microeconomics course should be able to get an A on such a quiz. Can you tell what’s missing? If so, please post your comment here. (Hint- fill in the blank: Supply and ______?_______)

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The College Board released the Free Response Questions given to AP Econ students around the world on May 17 over the weekend. The links below should lead to the PDF files, but a user name for AP Central may be required to view them.

AP Free Response Questions for International Students:

• Macro
• Micro

And for American Students:

• Macro
• Micro

Upon first glance, I have to say both sets of questions were a bit harder than those from past years. First off, the long FRQs (number 1) in Macroeconomics tested a topic from a relatively minor section of the syllabus: Trade. Almost every past long FRQ from Macro started with a scenario where the economy was experiencing instability (recession or inflation), followed by a scenario where Fiscal or Monetary policy (or both) were used to correct the instability. This year’s question on both the international and the American exams asked nothing about correcting instability, rather focused on relative price levels in two countries, and how this would affect the balance of trade, output abroad, and self-correction from a recession at home (i.e. no government involvement). The last part of the international question 1 was tricky:

(d) Although recovering, Australia remains in recession and its government takes no action. Indicate whether each of the following curves will shift to the left, shift to the right, or remain unchanged in the long run in Australia.
(i) Aggregate supply
(ii) Aggregate demand

I think what the exam writers were looking for here is an explanation that Aggregate Supply will shift outward do to the flexibility of wages in the long-run. As the recession continues, high levels of unemployment will mean workers are willing to accept lower wages, which means lower resource costs for firms, and an outward shift in AS. This question breaks from the norm on AP FRQs, which as stated above usually involve the use of some corrective measures taken by government or a central bank to restore stability.

Questions 2 and 3 on the international Macro test covered more traditional topics, specifically: loanable funds market, real interest rate and investment (#2) and relative interest rates between two countries, flow of financial capital, exchange rates and net exports (#3). I am confident most of my students were prepared for these questions.

The Microeconomics FRQs were no less surprising in the topics covered and their difficultly. The long FRQ (number 1) covered monopolistic competition; while past long FRQs have covered this, a far more common focus has been pure competition or pure monopoly. In reality, a question on monopolistic competition seems appropriate given that it is a more realistic market condition; “pure” anything really only exists in theory, so this is no real shocker.

Question 2 on the international exam dealt with Game Theory and oligopoly. Fortunately, I has suspected this would appear on the exam and had focused much of my review on payoff matrixes, including an appendix in my Micro review guide dedicated to this topic. My students should have nailed this one.

Question 3 in Micro caught everyone off guard, as it was a True/False question. I hadn’t seen one of these on and AP exam since way back, somewhere in the mid-90′s. Granted, the question did ask for an explanation of why each was true or false. Still, one of them seemed particularly confusing for my students, many of whom have come to debate the correct answer with me:

(c) If a firm shuts down in the short run, its profits will equal zero. True/False. Explain

The logical answer seems to be TRUE, obviously a firm would not be shutting down if it were earning any profits (normal or economic). But what my students were unsure about was whether the AP expected an answer of FALSE, followed by an explanation such as: “A firm will shut down when it experiences a loss greater than its fixed costs, in which case its profits will be negative”. In this case, it’s profits will NOT equal zero, rather they will be negative. Anyone have a clarification on this one for us? What would YOU have answered?

Overall I thought the 2007 Free Response Questions were a bit more challenging than those from past years. Mostly this is because of the absence of any questions involving the use of Fiscal or Monetary Policies, which in the past have been quite prominent themes. One clear message I have taken away from this year’s exam is that Trade, Exchange Rates, Relative interest rates, and net exports seem to be taking center stage for the AP in the Macro area. I would not be surprised if in the next couple of years, these international topics become more of a focus in the Macro course. In the latest edition of the Acorn book (the official AP publication outlining the Econ courses) International Economics only consists of 10-15% of the syllabus. Don’t be surprised if in the next edition of this publication International Economics makes up a much bigger chunk. In my opinion (writing from an international school in China), this is a very good step forward for the Advanced Placement Economics course!

xkcd – A webcomic of romance, sarcasm, math, and language – By Randall Munroe

Okay, so maybe economics falls short of a “perfect universal truth”.

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