Aug 31 2007
Published by Jason Welker under
Just check this out: The World Clock
We’ll come back to this during our Development Unit in IB Economics. Very interesting to see the breakdown, makes you realize what kind of world we’re living in right now!
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Aug 31 2007
Published by Jason Welker under
IB students - As we begin unit 3.5 from our Macro syllabus, we will start to focus on the relationships between unemployment, inflation, economic growth, and further explore the policy measures available to central banks and governments to achieve macroeconomic goals. Over the weekend, you are to read chapter 16 from our text. In addition, you need to find an article that relates to the Phillips Curve, link to it, summarize it and offer a brief analysis on your own blog. Here are some articles I found by doing a quick search on Google News for “inflation and unemployment”.
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Aug 29 2007
Published by Jason Welker under
This article represents the perfect example of comparative advantage. Almost a textbook version of the concept of countries producing the types of products for which they have a lower relative opportunity cost than other countries. Read this very short article and discuss below how this illustrates the basic concept of comparative advantage, specialization and trade. What decision should the European Commission make and why should they make it?
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Aug 29 2007
Published by michelle.close under
China Chokes - New York Times, August 26, 2007
This article, one in a series of articles yet to come, is a must read for all IB and AP Economics students. The particular article investigates the effects of China’s massive growth on its population, its environment. and on its pollution levels. The authors present videos, photographs, interactive maps in their article in order to graphically illustrate the many ways that China is affected by its rapid economic progress.
As economists, we all know that there are opportunity costs to all decisions and this article looks at the “costs” of China’s massive economic growth. One video includes information about China’s attempt to apply a Green GDP formula to its own growth and sobered by the outcome. Another interactive map compares economic growth rate of different countries around the world while another looks at the carbon emission rate of different countries. The point is that this article is meant to be very interactive so that the reader can experience how China is choking on its own growth. It is your turn to find out.
Aug 29 2007
Published by Jason Welker under
TDeluxe: How Luxury Lost Its Luster - Dana Thomas - Books - Review - New York Times
Luxury goods “sold for profit”, author alleges | Free exchange | Economist.com
As our first unit in AP Economics winds down, we will soon begin studying the principles behind the function of product markets. A fundamental principle of product markets we will focus on is the interaction of supply and demand, and the importance of these factors in determining the equilibrium price in any particular product market.
In the above article from the NY times, the author reviews a book that exposes the diminished quality and attention to detail among manufacturers of luxury goods (think Prada, Gucci, etc…) The era of globalization and off-shoring of manufacturing has aided luxury firms in their quest for profits, as they’ve been able to significantly cut costs while maintaining exorbitant prices for their product. The reviewer, as well as the book she reviews, seems to have a serious issue with the alleged demise in the luxury market of attention to detail and craftsmanship, as competition and profit seeking behavior have led to an industry where the back alley workshops of Milan and Paris have been supplanted by the factory floors of Shen Zhen and Hoh Chi Minh City.
The reviewer seems to have a hard time coming to grips with her own inability to express her dissatisfaction with the way the luxury market has gone. Despite her accusations of poor quality and greedy executives in the industry, she just can’t resist buying the goods with the golden name tags:
When, I asked myself, did it become commonplace to charge several thousand dollars for a mass-produced handbag? How could the flimsy designer sundress I bought on sale — a “steal,†the saleswoman assured me — still wind up costing a whole month’s salary? Why is my favorite brand of lipstick more expensive than a nice bottle of Italian wine? When did these products’ values grow so distorted, and what is the would-be customer to make of it all?
The reviewer’s ignorance of how product markets function shines brightly in the above passage. Her lack of understanding of the interaction of supply and demand is further demonstrated when she speaks of the reviewed book’s author:
For Thomas, a cultural and fashion writer for Newsweek in Paris and the Paris correspondent for the Australian Harper’s Bazaar, the luxury industry is a sham because its offerings in no way merit the high price tags they command. Yet once upon a time, they most certainly did. In the 19th and early 20th centuries, when many of luxury’s founding fathers first set up shop, paying more money meant getting something truly exceptional. Dresses from Christian Dior, luggage from Louis Vuitton, jewelry from Cartier: in the golden period of luxury, these items carried prestige because of their superior craftsmanship and design. True, only the very privileged could afford them, but it was this exclusivity that gave them their cachet. Although they may have “cared about making a profit,†the merchants who served this pampered class aimed chiefly “to produce the finest products possible.†(Italics added)
It appears that neither the NYT reviewer nor the author of the reviewed book ever took an introductory economics course, such as the AP class you’re all oh so enjoying right now! If she had, she would clearly understand that price is not determined by the level of craftsmanship, the attention to detail, nor the level of exclusivity represented by a particular purse, shoe or dress. Rather, price is determined by the interaction of Demand and Supply in the market for all goods, EVEN luxury goods!
When she claims that “the merchents who served this pampered class aimed chiefly ‘to produce the finest products possible’”, the reviewer is forgetting some of the basic teachings of capitalism’s founding father. Adam Smith himself could have corrected the NYT reviewer when he said, “Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer…”. Smith knew as any economics student should know that exchanges in any market are rooted not in some obscure sense of artistic appreciation, rather in the producer’s desire to make a profitable exchange for his or her wares. In the case of luxury goods, Gucci and Prada never made high quality goods because they loved making high quality goods, rather they made them cause consumers demanded them and were willing to pay top dollar for them.
That they’re no longer made by hand in a back alley in Milan does not mean such products cannot command exorbitant prices in the market! After all, if the NYT reviewer were really so horrified by the price of the dress for which she gave up a whole month’s salary, then she would not have bought it in the first place! The fact that she still walked out of the store with the dress in her possession answers her very question of why luxury goods are still commanding the exorbitant prices they do despite the outsourcing of their production to massive factories in Asia: the DEMAND is still there!
What the author is missing is a basic understanding of the determinants of Demand. New wealth in Asia and the former soviet states means the size of the market for luxury goods has grown rapidly in recent decades. In addition, rising incomes in Western Europe and the USA and shifts in tastes and preferences towards high fashion, luxury goods as symbols of wealth have assured the industry an ever increasing level of demand. As any AP Economics student should understand, when Demand increases at a greater rate than supply, one thing is certain, and that is prices will go up! The price a good commands in the market has little to do with how much it cost to produce or where it was produce, and everything to do with the level of demand relative to the level of supply.
If only the author of book’s author and reviewer had sat through a semester of microeconomics in high school or college, they could have spared themselves such a humiliating misinterpretation of the luxury goods market!
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Aug 27 2007
Published by Jason Welker under
Capitalism and democracy: friends or foes? | Free exchange | Economist.com
How Capitalism Is Killing Democracy - Foreign Policy (abstract only)
When I last saw my students on Friday, I left them with a question to ponder and discuss on our class Wiki over the weekend (see “Student Thought Forum”): “Why is FREEDOM so important in a market economy? If people in society are not free, can a market economy truly succeed?”.
Friday’s class discussion focused on the different answers to the basic economic questions offered by centrally planned versus market economies. Here’s how my students explained the basic differences between free markets and command economies.
The question I left them to ponder over the weekend had to do with an apparent paradox visible in China today: that of a free market economy seemingly thriving in a society where political and social freedoms are severely limited by the communist dictatorship. It has long been claimed that free markets will be followed closely by political freedom, and vis versa. The two are thought to go hand in hand. According to the Economist.com blog, Free Exchange:
The late Milton Friedman emphasized that economic freedom promotes political freedom and is also
necessary for the sustainability of political freedom over time. His underlying logic is that competitive capitalism separates economic power from political power. One could point to Chile, Taiwan and South Korea as examples where Friedman’s logic seems to hold.
So if, as Friedman said, free markets lend themselves to free societies, then how has China’s thriving market economy not resulted in a freer society, even after 30 years of economic liberalization? Robert Reich of the Foreign Policy Journal examines the issue in some depth:
Conventional wisdom holds that where either capitalism or democracy flourishes, the other must soon follow. Yet today, their fortunes are beginning to diverge. Capitalism, long sold as the yin to democracy’s yang, is thriving, while democracy is struggling to keep up. China, poised to become the world’s third largest capitalist nation this year after the United States and Japan, has embraced market freedom, but not political freedom. Many economically successful nations—from Russia to Mexico—are democracies in name only. They are encumbered by the same problems that have hobbled American democracy in recent years, allowing corporations and elites buoyed by runaway economic success to undermine the government’s capacity to respond to citizens’ concerns.
Of course, democracy means much more than the process of free and fair elections. It is a system for accomplishing what can only be achieved by citizens joining together to further the common good. But though free markets have brought unprecedented prosperity to many, they have been accompanied by widening inequalities of income and wealth, heightened job insecurity, and environmental hazards such as global-warming.
What can explain the recent divergence of capitalism and democracy in countries like China, Russia and Mexico? The Free Exchange blog explains:
The cause of this divergence, Mr Reich contends, is that companies seeking an advantage over global competitors have invested increasing amounts of money in government lobbying, public relations and bribery. This process of corporations’ “writing their own rules†has weakened the ability of average citizens to have their voices heard through the democratic process.
So it appears that as capitalism and free markets have flourished, freedom of the individual has been trumped by freedom of the corporation to lobby and thus influence government into creating favorable environments for investment and growth, often times at the expense of society’s health and the best interests of the public as a whole. We will learn a term for this kind of activity in AP Economics: rent-seeking behavior. As firms grown larger and industrial and commercial power becomes concentrated in powerful multi-national corporations, the priorities of governments seem to be shifting away from individual freedoms and civil rights and towards the interests of the corporate world, whose money and influence run deep through the veins of the world’s governments.
So perhaps I was wrong. Maybe Milton Friedman was wrong too. Perhaps the 21st Century has bred a new relationship where free market capitalism is wed not to democracy, but to a new kind of corporatocracy, a term used by Noam Chomsky, in which governments bow not to the will of the people they govern, rather to the pressures from corporate entities. Freedom and justice for all (firms, that is). Gives you something to think about, huh? Any comments?
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Aug 26 2007
Published by Jason Welker under
Here’s what some of the Econ bloggers are saying about the Federal Reserve and its recent Monetary Policy moves. I encourage you post comments to the blogs you read, and then come back and share your impressions of the blogger’s views here.
And here’s what they’re saying in the news. Choose one of the articles below (or find one on your own) and blog about it on your own IB Econ blog.
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Aug 25 2007
Published by Jason Welker under
Command vs. Market economics in Zimbabwe:
Mugabe’s decree on prices puts Zimbabwe economy in a tailspin - International Herald Tribune
And a blog post commenting on the news:
Managing Globalization » Economics 101 in Zimbabwe
Our first unit in AP Economics (and Friday’s lecture) examined the differences between command economies and market economies. One of the main points of yesterday’s lecture was that markets work because they result in an efficient allocation of resources towards the right products, using least-cost production methods, and putting those products in the hands of the people whose resources command the highest value in the resource market. If too much of one good is being produced and not enough of another, the “invisible hand” of the market will reallocate resources from the over-produced product to the under-produced product.
One of the reasons command economies fail is that central planners who attempt to control output and price, even when their intentions are to help consumers by assuring enough stuff is produced and available at an affordable price, are in essence acting against a basic economic law: that of supply and demand. In Zimbabwe, where inflation has reached nearly 10,000 percent (that means a candy bar that costs $1 today will cost $100 in a year!!) the president recently attempted to place price controls on all products by forcing merchants to slash their prices in half. The result? Food has vanished from the shelves of markets in Zimbabwe:
Essentials like bread, sugar and cornmeal, staples of every Zimbabwean’s diet, have vanished, seized by mobs of bargain-hunters who denuded stores like locusts in wheat fields. Meat is nonexistent. Gasoline is nearly unobtainable. Hospital patients are dying for lack of basic medical supplies. Power blackouts and water cutoffs are endemic.
Manufacturing has slowed to a crawl, because few businesses can produce goods for less than their government-imposed sale prices. Raw materials are drying up because suppliers are being forced to sell to factories at a loss. Businesses are laying off workers or reducing their hours.
As our first AP unit “Basic Economic Concepts” winds down, this article and blog post seem timely to remind us of one of the core principles of Economics: the importance of prices and markets in allocating resources (land, labor, capital and entrepreneurship) towards producing the goods and services society most wants. Later in the year we’ll examine what happens when markets fail, which they often do; but at this point in the course it is important to understand that despite their failures and shortcomings, free markets rarely experience the chaos associated with command economies of the past, and even the present as the Zimbabwe example shows. In the words of Daniel Altman, the blogger linked above:
The Soviets, Chinese and some of their allies kept their tightly controlled economies going for quite a few decades, though not perhaps with unalloyed success (former backyard smelters in China will get the pun). Mugabe’s version hasn’t even lasted through a change of seasons. Now, there are still a few lingering arguments in academia and policy circles about the merits of command economies. But a poorly planned command economy - no one seems to want that. Can anything short of total collapse follow?
Any thoughts? Why did Mugabe’s attempt to help consumers by keeping prices low only make the problem worse? What does this say about markets versus planned economies? Discuss!
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Aug 25 2007
Published by Jason Welker under
Bank borrowing from the Fed surges in Aug. 22 week - Aug. 23, 2007
IB students, you should now be able to read this article and know exactly what it’s talking about! AP students, hopefully you’ll be able to come back to this one in a few months and get it too. Monetary policy is a tool used by a country’s central bank in which the supply of money in circulation in the economy is increased or decreased in order to stimulate or slow down economic growth. In the US last week, the Fed, America’s central bank, employed one one of the three tools of monetary policy with a particular goal in mind. After reading the article, discuss which of the three tools of Monetary policy were used, and what you think the Fed’s likely goal was.
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Aug 23 2007
Published by Jason Welker under
China’s economy grew by 11.9% in the second quarter of this year. Great, right? Well, not if that growth is accompanied by 5% inflation and increasing threats to the environment. The reporter says that China’s rapid growth “has increased speculation that the Beijing government will raise interest rates again to cool growth.” Watch the video and discuss the following questions.
Discussion Questions: After reading chapter 15 of your text, discuss the following.
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Aug 21 2007
Published by Jason Welker under
Managing Globalization: To reduce poverty, money isn’t everything - International Herald Tribune
Another great article on Economic Development; this one compares development in Venezuela and Brazil over the last decade:
Overall income is moving upward in both countries, if for different reasons. Venezuela is riding the black tide of high-priced oil, while Brazil’s relatively firm economic policies have built confidence in its business prospects among both locals and foreigners.
In Venezuela, president Chavez’s socialist inspired, oil financed command policies have provided access to benefits to citizens in exchange for political loyalty. This has skewed the motives of service providers and recipients, who often realize that improving peoples’ lives is secondary in importance to making the government think that peoples’ lives are improving:
One example of this problem was a program intended to improve literacy. “The government had no system of accountability to monitor performance other than the reports of its own administrators,” RodrÃguez said. “When program administrators learned that it was more important to show loyalty to the regime than to effectively run the program, any incentives that they had to administer resources efficiently, from a social point of view, disappeared.”
In Brazil, where monetary benefits for families are linked not to political affiliation but to “actions like attendance in school, prenatal care and childhood vaccinations”, development policies have proved more effective:
Figures compiled last year by Rômulo Paes de Sousa of the Ministry of Social Development and Fight Against Hunger, covering the period from 1999 through 2004, painted a rosy picture: School attendance was up, while illiteracy was down. Life expectancy was up, but hospital visits were down. Employment was up, and child labor was down.
The lesson here? When politics and economics are wed, it appears that development policies may take a back seat to political allegiance and thus prove less effective. Evidently, the top-down command system in Venezuela, where access to benefits requires utter loyalty to the all-powerful Chavez, has proven to achieve less than noteworthy improvements in the main indicators of human development (such as infant mortality, literacy and life expectancy). On the other hand, Brazil’s market-based system, where monetary incentives lead results in citizens gaining access more a wider variety of efficiently run development programs, have proven relatively successful in actually alleviating poverty.
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Aug 21 2007
Published by michelle.close under
Entrepreneurs From China Flourish in Africa- New York Time, August 18, 2007
One of my AP students recently asked me to explain why entrepreneurship was considered one of the four factors of production by economists. He questioned the nature of this “fourth factor of production” because unlike the other types of resources it was less obvious to him how this resource fit into the product market. In the product market, good and services are paid for directly by consumers. but how did entrepreneurs play a direct role in this market.
Part of the problem is that entrepreneurs truly belong in the factor market, a market that students new to economics are less acquainted with and one that both AP and IB students will be learning about this semester. Entrepreneurs are the “behind the scene” people. They are the “big ideas” people. They visionaries in business who figure out how to utilize all the other factors of production in order to make a good or service that will result in a profit.
I found the above New York times article about Chinese Entrepreneurs who have “taken the big risk” of moving to Africa in search of a better life and good profits extremely interesting. Chinese entrepreneur are moving into new territories in order to seek their fortunes, in places that many others have not dared to go before them because of a fear of violence, a fear of unfriendly governments or a fear of people. These are places where poverty and opportunity are rampant. Mr.Yang, an entrepreneur from the Fujian Province in China is a true risk taker and can teach all economics students about the meaning of entrepreneurship: the good, the bad and the ugly.
What set him apart was his destination. Instead of the traditional adopted homelands like the United States and Europe, where Fujian people have settled by the hundreds of thousands, he chose this small, landlocked country in southern Africa.
“Before I left China,†said Mr. Yang, now 25, “I thought Africa was all one big desert.†So he figured that ice cream would be in high demand, and with money pooled from relatives and friends, he created his own factory at the edge of Lilongwe, Malawi’s capital. The climate is in fact subtropical, but that has not stopped his ice cream company from becoming the country’s biggest.
Stories like this have become legion across Africa in the past five years or so, as hundreds of thousands of Chinese have discovered the continent, setting off to do business in a part of the world that had been terra incognita. The Xinhua News Agency recently estimated that at least 750,000 Chinese were working or living for
extended periods on the continent, a reflection of deepening economic ties between China and Africa that reached $55 billion in trade in 2006, compared with less than $10 million a generation earlier.
Today, in many of the countries where the new Chinese emigrants have settled, like Chad, Chinese-owned pharmacies, massage parlors and restaurants serving a variety of regional Chinese cuisines can be found; the Western presence, once dominant, has steadily dwindled, and essentially consists nowadays of relief experts working international agencies or oil workers, living behind high walls in heavily guarded enclaves.
At first, this new Chinese exodus was driven largely by word of mouth, as pioneers like Mr. Yang relayed news back home of abundant opportunities in a part of the world where many economies lie undeveloped or in ruins, and where even in the richer countries many things taken for granted in the developed world await builders and investors.
Conditions like these often deter Western investors, but for many budding Chinese entrepreneurs, Africa’s emerging economies are inviting precisely because they seem small and accessible. Competition is often weak or nonexistent, and for African customers, the low price of many Chinese goods and services make them more affordable than their Western counterparts.
Not everything that these entrepreneurs have touched is pretty. Some locals have come to resent Chinese entrepreneurs and accuse them of entering local markets where local business owners can not compete with such low prices.
Africans view the influx of Chinese with a mix of anticipation and dread. Business leaders in Chad, a central African nation with deepening oil ties to China, are bracing for what they suspect will be an army of Chinese workers and investors.
“We expect a large influx of at least 40,000 Chinese in the coming years,†said Renaud Dinguemnaial, director of Chad’s Chamber of Commerce. “This massive arrival could be a plus for the economy, but we are also worried. When they arrive, will they bring their own workers, stay in their own houses, send all their money home?â€
In Zambia, where anti-Chinese sentiment has been building for several years, merchants at the central market in Lusaka, the capital, said that if Chinese people wanted to come to Africa, they should come as investors, building factories, not as petty traders who compete for already scarce customers for bottom-dollar items like flip-flops and T-shirts.
“The Chinese claim to come here as investors, but they are trading just like us,†said Dorothy Mainga, who sells knockoff Puma sneakers and Harley Davidson T-shirts in the Kamwala Market in Lusaka. “They are selling the same things we are selling at cheap prices. We pay duty and tax, but they use their connections to avoid paying tax.â€
Whatever becomes of official Chinese-African economic ties, entrepreneurs like Mr. Yang will continue to take a leap of faith in the name of profit. He sounds like one “smart cookie” who as learned how to be a successful entrepreneur in Africa
After nearly seven years in Malawi, Yang Jie, the ice cream maker, seems to have learned better. Greeting his workers at the ice cream factory, he begins the day by asking, “How did you sleep last night?â€
One quickly replied, “Very well,†sounding a bit formal.
“Don’t tell me a lie,†Mr. Yang answered with a sly, friendly smile. “It’s O.K. to tell me your worries.â€
Be sure to check out the slide show in the article.
Aug 20 2007
Published by Jason Welker under
How the World Works: Who Invented Calculus? - Salon.com
IB students, here’s a blog post you’ll want to read closely once we start studying economic development later this semester. Andrew Leonard at Salon.com refers to a study titled “Does Economic Growth Reduce Fertility? Rural India 1971-1999″.
Interesting stuff. Leonard points out a peculiar paradox of growth in India:
India’s Green Revolution has been criticized by those who wonder if an agricultural model reliant on large inputs of fertilizers and pesticides is environmentally sustainable over the long run. But if in the short run these spikes in agricultural productivity contribute to population stabilization, then we have a nifty paradox: a (possibly) unsustainable agricultural model contributing to (possibly) sustainable population levels.
This article and the study it refers to might make for an interesting commentary for your internal assessment, or as a source for an extended essa
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