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.

OnPoint - Fiscal Policy Discussion [ 6:22 ] Play Now | Play in Popup | Download (3)

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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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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.

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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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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Recession prevention – Los Angeles Times

Much of the sub-prime debacle is hard to fathom, though the simplest explanation is probably the most correct: inadequate regulation led to excessively risky loans, which were then packaged attractively and handed on to the major financial institutions.

The policy responses, however, have been simple–right in line with a textbook analysis. Most fascinatingly, some free-market fundamentalists have called for Keynesian economic stimuli and the US government has responded. Moreover, those pursuing monetary policies have admitted that lags and the banks’ timidity in extending loans (which results in excessive excess reserves) may render the recent cut in the Fed Funds Rate ineffective.

A lot of good relevant articles are around, but you may like the following debate. What side would you be on? Continue Reading »

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

Inspired by my two favorite Economics bloggers, the professors at “Environmental Economics”, I have decided to add a “AP and IB Economics Help Desk” to my blog.

The purpose is to give blog readers (mainly my students of course, although anyone is welcome to submit economics-related questions) the opportunity to submit questions relating to our AP or IB Economics course directly to me at any time, from school or from home.

Too many students end up never asking the questions they need to ask because they are shy, too busy, or just don’t think of the right questions before, during and after class. From now on, I will encourage students to submit their questions via the “Help Desk”, which can be found in the upper left corner of this blog at all times, under the “Pages” box.

I will make it a point to reply to questions within one day of their submission. Questions that I feel all students should hear the answer to will be posted to the blog and I will share the answer in an article for the world to read. Please take advantage of this feature, especially in the coming months as AP and IB exams approach! – Mr. W

Bill Gates Issues Call For Kinder Capitalism – WSJ.com

“We could make market forces work better for the poor if we could develop a more creative capitalism…” – Bill Gates at the 2007 Harvard commencement address

Is capitalism capable of lifting the world’s 4 billion poor people out of poverty? Bill Gates, the world’s greatest beneficiary of capitalist markets, thinks the system that forms the foundation of our market economy requires some re-thinking. Gates is calling for “creative capitalism” in which firms respond to incentives aimed at developing technologies that serve the world’s poor.

Gates first expressed his interest in a capitalist system with a focus on helping the poor in his Harvard commencement address last year, and reiterated his vision last week at the World Economic Forum in Davos, Switzerland. Gates envisions a future where profits will motivate industies to create goods and services not just for the top 20% of the world’s income earners, those in the rich countries of the OECD (the “country club of the UN” as Hans Rosling calls it), but by developing products that are meant to benefit the world’s poorest people, those in the bottom 20%, who suffer most from poverty.

Watch the videos below and discuss the prospects of Gate’s vision becoming a reality.

June 2007 at Harvard

and January 2008 at Davos

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Economy in focus in Bush address – Jan. 28, 2008

A week into our unit on macroeconomics, we’ve already introduced why the study of macroeconomics is so important. The health of a nation’s economy is dependent on the achievement through macroeconomic policy of three major goals:

1. full-employment
2. price level stability, and
3. economic growth

The word most heard on the lips of economists and political pundits in the US today is recession, a macroeconomic condition in which all three of the above goals are jeopardized. Defined as “a decline in real output over time”, a recession usually leads to unemployment, negative economic growth, and sometimes inflation (a rise in the overall price level), or in some cases deflation (a fall in the price level).

Recessions are usually a result of a decline in consumer spending, which in the US makes up around 70% of GDP. In other words, out of the four types of expenditures (C, I, G and nX), households’ spending on goods and services produced within the US is the largest component of our nation’s national income. When consumers stop spending for some reason, recession is a likely outcome.

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Carbon tax bill in the mail – Canada.com

…then we’d be spared the naive statements that appear in our media and out of the mouths of our citizens when a basic economic principle plays itself out in the market place.

In Quebec, the provincial government levied a carbon tax on energy producers:

When the provincial government imposed the country’s first carbon tax last fall, it wanted producers to pay.

But just as oil refiners have already done, Gaz Métro started passing on the cost of the carbon tax (to consumers) this month.

Big surprise, right? Only in a market in which demand is perfectly elastic would the entire burden of a tax be born by producers, since raising prices at all would mean loosing all their customers. Clearly, electricity is not such a market, and given the inelasticity of demand for a necessity such as electric power, chances are a big chunk of the “0.67 cents per cubic metre of natural gas” tax placed on utilities is being passed onto consumers.

In market economies, tax incidence is shared between producers and consumers. This of course, is the way it should be. If the price stays low and output remains high, no externality has been corrected and just as much greenhouse gas will be emitted as before the tax. In order to decrease output to a more socially optimal level, the tax should be passed on to consumers, but also born by producers in the form of lower profits. Despite this economic reality, consumers still aren’t happy about it:

“I don’t care how much it is, even if it’s just half a penny,” said Leonard, a Laval resident who called to complain about his gas bill. He spoke on condition that his last name not be used.

“They said consumers would not pay for this – and now here we are, paying for it.”

Poor old Leonard… never got to take an economics class in school! If only everyone had taken AP Econ in high school, naivety like this could be avoided! Ask ol’ Leonard if he’s stopped using electricity due to the higher price, and I bet you can guess his answer. Why? Inelastic demand.

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