Archive for January, 2008

Jan 31 2008

Fiscal policy and the “vicious” business cycle

Alice Su, an AP Econ student, asked a very good question in class today during our discussion of the business cycle, which illustrates the tendency of national economies to fluctuate between periods of expansion and recession. Karen wanted to know what a government could possibly do to try and avoid the dismal prospect of repeated recessions on and on into the future that the business cycle seems to suggest is the fate of any economy.

To answer Alice’s question, we can look at the United States right now, where the Bush administration and the Democratic led Congress have teamed up to approve a fiscal stimulus package aimed at boosting consumer spending and business investment, thus putting the economy back on the path of expansion and economic growth.

A government can only try to stimulate aggregate demand and/or aggregate supply in times of recession. The tools at the government’s disposal include changing tax policies and increasing or decreasing government spending. In times of recession, tax cuts should encourage businesses and households to spend more, increasing GDP. Likewise, new government spending increases GDP directly. The current stimulus package approved by the White House and Congress focuses on the tax side. Listen to the excerpt from a recent episode of WBUR Boston’s OnPoint radio show.

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Jan 31 2008

An answer to Kevin Yeh’s excellent question about emissions monitoring…

Environmental Economics: From the Answer Desk: Monitoring Cap and Trade

Towards the end of our last Micro unit, which was on Market Failure, SAS AP Econ student asked a good question in a comment on my blog post “Reducing negative externalitites – the European market for carbon emissions”

I forwarded Kevin’s question to the two professors who write the blog Environmental Economics. Their response to Kevin’s question is in the link above. Here’s what was posted on their blog last week:

Reader Jason Welker received the following question from a high school student (Kevin Yeh):

“It’s very interesting how this whole marketing pollution rights works. In this way the “commons” in the tragedy of the commons becomes privatized, and companies are forced to take responsibility for their pollution which is being dumped into the atmosphere.I do have one question, though, and that is how does one regulate the amount of pollution a factory dispenses into the air? How can the government be sure that a firm is not violating the law by dumping more than its licensed amount?”

My question: Why do Jason’s high school students ask better questions than my PhD students?

Anyway, I’m getting ready for a lecture on the EPA’s Acid Rain Program and I happened across this answer…

“Emissions monitoring and reporting systems are critical components of a successful program. Since the Program’s inception in 1995, the emissions data – continuously monitored by sources, verified and recorded by EPA, and posted for public review on the Internet – has been among the most complete and accurate ever collected by EPA. Unlike traditional emissions limitation programs, the Acid Rain Program requires an accounting of each ton of emissions from each regulated unit to determine compliance. The Acid Rain Program requires units to install Continuous Emissions Monitoring Systems (CEMS) to continuously measure and record emissions. In order to ensure accurate emissions monitoring and reporting, regulations specify equipment certification procedures, periodic quality assurance and quality control procedures, record keeping and reporting, and procedures for filling in missing data periods. All affected units are required to report hourly emissions on a quarterly basis to EPA’s tracking system. EPA invests substantial time and resources into assuring that both the monitoring and reporting of emissions are occurring properly and efficiently. Conservative “missing data” procedures help ensure that emissions are never understated. Real-time electronic auditing by EPA helps to ensure that emissions data are accurate, consistent, and complete.”

There you have it, Kevin! Looks like SAS Econ students are asking better, more relevant questions that Economics PhD students! Ahh… you guys make me proud!

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Jan 31 2008

The business cycle rears its ugly head!

Salon.com: Economic growth slows from a sprint to near-paralysis – How the World Words

From the article:

However you slice it, a drop from 4.9 percent quarterly GDP growth to 0.6 percent is a bona fide cliff dive. There is now a very strong possibility that economic historians will say a recession began in December 2007, when consumer spending finally began to buckle, unable to stand any more pummeling by the housing bust.

But it’s not yet a done deal. There is some encouraging news on the jobs front, where the service sector is ticking right along, offering some cover to the dwindling band of optimists who think a recession can still be avoided. But pessimists have the heavier artillery on their side. The main component of the slump in GDP was the housing bust — residential fixed investment declined by 24 percent in the fourth quarter of 2007. And there is no evidence yet that the housing bust has hit bottom. The most recent statistics on new home sales, housing starts, and building permits all plumbed depths not seen in at least a decade.

the Business Cycle

Discussion Questions:

  1. Where on the business cycle does the US economy appear to be from the article?
  2. What component of GDP has most contributed to the slowdown in growth? Why has this component slumped?
  3. What options does the government have to try and turn around the recent decline in growth and the likelihood of a recession.
  4. What options does the Federal Reserve have for trying to turn the economy around?

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Jan 30 2008

Calling all Y1 and Y2 IB Economics students

Economics – Young Economist of the Year 2008

Want to have a chance at winning 1,000 GBP ($2000)? All you have to do is write an essay that answers the following question:

“Which economic idea or policy has the most power to improve our lives?”

The Royal Economics Society in the UK will select its recipient of the “Young Economist of the Year” Award based on the submission of a 1,000-2,000 word essay. This contest is open to all IB Econ students worldwide.

The Royal Economic Society and tutor2u are delighted to announce a competition to find the Young Economist of the Year 2008. This essay competition is open to all students studying for A Levels offered by UK Exam Boards (in any subject) or the International Baccalaureate. Entries from the UK and Overseas are encouraged. The RES is particularly keen to encourage students to enter the competition who are in the first year of their studies. In 2007 over 750 entries were submitted, with Zoe Hart from Colchester RGS taking the first prize.

Interested? Follow the link above for more details.

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Jan 30 2008

IB Econ research assignment – Wed, Jan 30 in class

Barriers to Economic Development:
For ONE of the developing country’s you’ve chosen, research the extent to which the following institutional, political, international trade, and international financial barriers hinder its economic growth and/or development:

Institutional and Political Barriers:

  1. lack of provision of education and health care
  2. the extent and quality of infrastructure
  3. poor financial services/banking system
  4. absence of sound legal system
  5. lack of political stability
  6. extent of corruption

International Trade Barriers:

  1. overdependence on primary products
  2. adverse terms of trade
  3. narrow range of exports
  4. Protectionism in international trade

International Financial Barriers:

  1. Indebtedness
  2. Capital Flight
  3. Non-convertible currencies

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