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 [6:22m]: Play Now | Play in Popup | Download

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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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Gapminder - Home

Hans Rosling, a Swedish professor of international health, has created a presentation that I would describe as the “Inconvenient Truth” of global poverty. Using software he developed to analyze data on human development called “Gapminder”, Rosling gives a mind-blowing presentation on the trends in economic and human welfare over the last thirty years, debunking several myths believed true by many in the first world about development and poverty.

The first video is from the 2006 TED Conference in Monteray, California. The second video is from 2007’s TED. Both have been viewed hundreds of thousands of times on the web. Watch and discuss…

2006 TED Conference:

2007 TED Conference:

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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Today in IB Economics, as part of our unit on Economic Development, our class had an interesting discussion about the barriers developing countries face in improving the lives of the average citizen.

One obstacle persistent in many poor countries is the average citizen’s lack of access to a dependable banking system. Entrepreneurs interested in getting financing for a business endeavor may find themselves unable to access credit, as domestic banks may be unwilling to loan small amounts of money to individuals without a credit history or even any formal education or training. Meanwhile, international banks operating in developing countries are often there only to serve international investors and corporations that want to open up shop in the country. These banks may not even allow a common citizen of the developing country through its doors, much less consider giving them a loan.

Marco, a student in my class, mentioned an organization he’d heard of that allowed citizens from the developed world to log in and make loans directly to entrepreneurs in the developing world. The very concept of this variety of micro-lending seemed so straightforward and ingenious that I had to fine out more. Luckily, Marco found the website and this video about the organization, which goes by the name Kiva.org. From their website:

Kiva lets you connect with and loan money to unique small businesses in the developing world. By choosing a business on Kiva.org, you can “sponsor a business” and help the world’s working poor make great strides towards economic independence. Throughout the course of the loan (usually 6-12 months), you can receive email journal updates from the business you’ve sponsored. As loans are repaid, you get your loan money back.

Discussion Questions:

1. Why is investment necessary for economic development to occur?
2. What institutional factors exist that prevent improvements in human capital in some developing countries?
3. I micro-lending in general and Kiva.org in particular a realistic solution to the problem of poverty in developing countries?

FT.com / World - Panic sparks plunge in global markets

While Americans enjoyed a national holiday in honor of Martin Luther King yesterday, its stock markets remained closed. Elsewhere, however, stock markets from Asia to India to Europe to the UK experienced the worst one-day fall since 9/11. London’s FTSE fell more on Monday than it had since 1983. In Germany the market fell 7.2%. Here in Asia the picture was equally as dismal:

In Asia, Indian shares on Monday ended 7.4 per cent lower, and trading was halted in Mumbai after the market fell 9.8 per cent in the opening minutes; Hong Kong closed down 5.5 per cent; and Japan’s Nikkei average slid nearly 4 per cent, falling a further 4.4 per cent by midday on Tuesday while South Korea’s Kospi index lost a further 3.9 per cent. In the morning session on Tuesday, Hong Kong skidded another 8 per cent while Shanghai was down over 4 per cent. Indonesian shares sank 8 per cent in morning action.

In one day, literally trillions of dollars was lost in the value of the world’s stock markets; many are already referring to yesterday as Black Monday.

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At this point in the course, you may find yourself asking, “what is the difference between microeconomics and macroeconomics?” It has been a long time since we first defined these terms at the beginning of the course. The purpose of this post is to introduce some basic Macro concepts help clear up the confusing and not so obvious differences between these two areas of economics.

A teacher of mine once explained the difference between micro and macro using the example of a tree and a forest. Microeconomics is the like the study of an individual tree, standing in a thick forest of thousands of individual trees of different species. A microeconomist might study the systems that make an individual tree function efficiently, providing it with the sustanence it needs to thrive in the forest. A macroeconomist, however, will take a broader look at the forest as a whole, and observe how the thousands of trees work together in conjunction with the sun, the soil, the oxygen, nitrogen, and H2O in the environment that make the entire forest function efficiently as one giant organism.

Put literally, the tree is like an individual market. This may be a product market like the market for apples, or a resource market like the market for apple pickers. Microeconomists will study the characteristics of an individual market: the firms and their costs, tradeoffs, challenges presented by competition or the inefficiencies that result from a lack thereof, and the buyers in the market: the alternatives and trade-offs they face, the utility they receive and the decisions they make based on these factors. Microeconomics concerns itself not with the health of the economy as a whole, rather with the individual markets, firms, and consumers within the economy, and the challenges of efficiency and resource allocation faced by those markets.

Macroeconomics, on the other hand, studies the health of the economy as a whole. Macro deals with aggregates, or “collections of specific economic units treated as if they were one. ” For example, instead of studying price of a product, as a microeconomist would, a macroeconomist looks at the price level in the whole economy. Whereas a microeconomist looks at supply and demand in a particular market, a macroeconomist studies aggregate supply and aggregate demand, assessing the collective marginal benefit of all consumers and marginal costs of all producers. Instead of quantity supplied, the macroeconomist examines aggregate output, or gross domestic product. Instead of underallocation and overallocation of resources, the macroeconomists concerns himself with unemployment and inflation.

When it comes to the role of government, macroeconomics has a lot more to say about the role a central government should play in managing the economy as a whole. One major theme of microeconomics is that competitive markets, when left alone by government, tend to achieve efficient allocations of resources. You’ll find that in Macro, however, the government often plays a central part in stimulating and slowing down the level of economic activity in the economy, using tools such as fiscal and monetary policy.

Also in macroeconomics, we’ll study in more depth the role that comparative advantage plays in the economic exchanges that take place between nations. International trade also involves the exchange of foreign currencies, which we’ll try to understand by studying exchange rates and the role that governments play in manipulating and controlling the values of their currencies.

Macroeconomics will prove to be particularly relevant to the events going on in the recent turbulent global economy.  If have listened to the news lately you’ve heard world leaders, political pundits and commentators from all political and economic leanings use words like “bailout”, “fiscal stimulus”, “monetary easing”, “deficit spending” and others; all concepts having to do with macroeconomics. In the next few months, you will begin to see the forest through the trees as we take on the exciting  and challenging field of macroeconomics.

Assignment: Using your economics text, attempt to complete the table below. On the left are microeconomics concepts you have already studied as part of the course. In the right column, brainstorm and identify the macro concept that corresponds with each of the micro concepts. For example, in microeconomcis a when there is a decrease in demand price falls and quantity decreases. In macroeconomics, when there is a decrease in AGGREGATE demand, _____________ and _______________ change. See if you can fill in the blanks! If you get stumped, Mr. Welker’s completed version of the table can be viewed by clicking here.

Check this out guys! Tonight I got a message on our Wiki from Antonio, an Econ professor from Africa. Here’s what he had to say:

Hi Jason,
I am Lecturer at the Economics Faculty in Maputo, Mozambique. I have recently come across your wiki and am really enjoying and learning a lot with it. I am creating my own wiki for my class, and your wiki provides a lot of insight. If you do not know Portuguese my wiki will not be of any use for you. In any case, I am the one who needs to learn with you. Thanks for the insights!
Best regards
Antonio

There’s globalization and education in the era of Web 2.0 at its best! International, teenage, Econ students living and going to school in Shanghai are helping African university professors and students learn economics. If you’re not convinced that the wiki’s effective, have a look at this. Here’s a map showing the last 100 visitors at Welker’s Wikinomics Wiki:

That’s right, guys, your wiki work is being seen, read, studied, and learned from all over the world! How amazing! Congratulations on all the great contributions you guys have made to the world on online economics education! You truly are teaching the world economics! 

Grinding poverty defies China’s boom - International Herald Tribune

Here at SAS my year two IB Econ students have started off the new year with a new unit: Economic Development. So far in the semester we’ve learned about what makes economic development different than economic growth. While gross domestic product may offer an indication of a country’s level of economic activity and output, it says little about the reality of life for the common person of developing countries.

To offer a more rounded figure for determining the level of economic development, the United Nations Development Program has created an alternative to GDP, the Human Development Index. The HDI accounts for the GDP per capita, the average level of primary and secondary education attained, literacy rates, and the life expectancy of citizens, to offer a glimpse into the reality of not just material wealth, but health and education in developing countries.

Continue Reading »

My Way News - Transit Panel Urges Gas Tax Increase

Looks like an increase in the gas tax might be on the horizon… but is it enough? Look at what the proponents of this tax want to do with the revenue:

Under the recommendation, the current tax of 18.4 cents per gallon for unleaded gasoline would be increased annually for five years - by anywhere from 5 cents to 8 cents each year - and then indexed to inflation afterward to help fix the infrastructure, expand public transit and highways as well as broaden railway and rural access, according to persons with direct knowledge of the report…

Okay, so driving places lots of strain on our physical infrastructure (i.e. roads, bridges, highways, etc.), surely we can consider that an externality that could be mitigated through a corrective tax. But does 40 cents over five years sound like enough to correct the negative externalities not identified here? What costs does America’s bad driving habit place on society beyond infrastructure degradation?

Thanks to Professor Haab for the link

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The Nano comes with its own moral dilemma. - By Anne Applebaum - Slate Magazine

Tata Motors of India recently launched the world’s cheapest automobile, the Nano.

“…meet the Nano, possibly the most significant new car of the decade. Small, cute, and snub-nosed, it fits four people and a duffel bag, has a single windshield wiper, travels at 60 mph, and it’s all yours for the princely sum of $2,500…”

Tata plans to build and sell 250,000 Nanos this year in India, spreading production to Africa, South America, and Southeast Asia. Clearly the company is targeting not the traditional auto markets of Europe and North America, rather the regions traditionally thought of as poor and thus not associated with auto sales.

What is the meaning of this “car for the masses”? At first glance, it looks like the perfect solution for bringing millions of the world’s poor (if not super-poor) closer to the dream of achieving a quality of life previously only accessible by the world’s middle class and rich. Great,  so what could possible be bad about fulfilling the dreams of so many of the world’s poor? The answer? Externalities…

“Though the small Nano uses less gasoline than many larger cars, the enormous potential numbers could mean an equally enormous environmental impact. Since it will be a long time before Nano drivers will be able to afford the $20,000-plus hybrids now on the market, let alone a Honda FCX Clarity, the prototype experimental hydrogen car thought to be worth as much as $10 million apiece, that means an exponential rise in carbon emissions as well as other kinds of pollutants. The United Nations’ top climate scientist, Indian economist Rajendra Pachauri—chair of the Intergovernmental Panel on Climate Change, which shared the Nobel Peace Prize with Al Gore—has said he is already “having nightmares” about precisely this scenario.”

Herein lies the moral dilemma of the Nano: where does society’s desire to improve the lot of the world’s poor come into conflict with society’s desire to to improve the environment and minimize the impact global warming?

What do you think? Do the social benefits of a $2,500 car exceed the social costs it will likely impose? Does the Nano’s $2,500 price incorporate the full costs that its existence places on society and the environment? Should we jump for joy at the thought of millions upon millions of the world’s poor finally having access to the convenience of automobile transport? Or should we pause with uncertainty to contemplate the effect on the environment and the social costs that millions of cheap cars will impose on the world?

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Matt Rothschild of Progressive Magazine concludes that global warming is one “giant market failure”, and argues that US president George W. Bush is making it too hard for regulators in the country that is the world’s largest emitter of greenhouse gases to impose limits on pollution.

Among the externalities caused by the emission of greenhouse gases that Rothschild points out:

• Rising sea levels
• Arctic free of ice
• Draughts  in Africa

 

 "Global warming is a giant market failure" [1:28m]: Play Now | Play in Popup | Download

Discussion questions:

1. Is Rothchild’s understanding of global warming as a market failure correct in an economic sense?
2. Is imposing new “limits on pollution” the best way achieve a long-term reduction in the emission of greenhouse gases?
3. What alternatives to direct government controls over firms’ emissions does the Bush administration have that may make use of “markets” to correct this “giant market failure”?

Michael Munger, Bosses Don’t Wear Bunny Slippers, If Markets Are So Great, Why Are There Firms: Library of Economics and Liberty

The other day when we introduced our unit on market failure, we began by revisiting the concept of free markets as mechanisms for allocating scarce resources efficiently. As I was reading blogs tonight, I stumbled upon this blog post by Michael Munger, professor of political economy at Duke University, where he shares an anecdote he uses when introducing the allocating power of markets through the price mechanism:

When I teach political economy, I start with the neoclassical theory of consumption, and then cover production. And I show students how miraculous is it that the actions of millions of people who have never met can be directed by prices. Resources move toward their highest valued use, and consumption goods are delivered to the consumers who want them.

For example, the United States promoted ethanol as an auto fuel. This sharply increased the price of corn worldwide. As Brazilian reporter Kieran Gartlan put it: “Higher prices are leading Brazilian farmers to plant more second crop corn this year, and the country’s modest corn exports are expected to expand [from 42 million tonnes to 48 million tonnes, an increase of 230 million bushels.]” (DTN, March 2, 2007, emphasis mine).

No one directed the Brazilian farmers to shift to corn production. The article puts it perfectly: “Higher prices are leading farmers….” The leadership comes from the prices themselves! The farmers may have had no idea why the price of corn had increased, to $4.00 per bushel. (After all, Brazil uses sugar, not corn, to produce its ethanol.) But Brazilian corn production increased within a year, by nearly 15%. No one made the farmers switch; they made choices. Other corn producers, in Argentina, Mexico, and several African countries, followed suit. No one talked about it, no one gave any orders; prices led them.

The reason I post this excerpt from professor Munger’s blog now is that it serves as a great response to a student who on the first day of our market failure class posited that perhaps the government could do a better job of deciding what goods and services and how much of them should be produced in an economy.

Yes, markets fail, and for many reasons: a concentration of power among a few large firms, an underallocation of resources towards goods that have spillover benefits, the over-provision of goods that have spillover costs, the failure of the market to provide public goods: these are examples of how market fail.

But when markets work, they really work! The efficiency of resource allocation that results from free, competitive, markets is unrivaled by any central planning agency. Munger’s example above is a simple illustration of this allocative power of markets and prices.

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