One of the many reasons that I find the study of economics so fascinating is that what so often appears to be a negative situation to the average citizen is actually a positive one. In other words: “down is often up” and “black is often white”. One of my favorite examples of this “180 degree moment”, and why I love to teach AP Macroeconomics, relates to the study of unemployment.

• Powell Center for Economic Literacy - 2008 National AP Economics Teacher Conference

  The Powell Center and the Federal Reserve Bank of Richmond hosts the annual AP Economics teachers conference. Keynotes include Tim Harford of the “Undercover Economist” and George Mason University’s Russell Roberts, host of the outstanding podcast EconTalk. I’m really hoping my new principal will support my attending this conference, all the way from Zurich!

  tags: powell center, economics, education, teachers, conference

2008 Sichuan Earthquake - Wikipedia

The following slideshow was sent to my colleague Brian Compton (who forwarded it to me) from his contact at Habitat for Humanity, China. The pictures were all taken in the last 72 hours since the magnitude 7.9 earthquake struck China’s Sichuan province on Monday afternoon this week.

This collection of images tells the story of suffering and despair experienced by the victims of this natural disaster.

| View | Upload your own

FT.com / Asia-Pacific / China - Economy escapes lasting damage from quake

While hundreds of thousands of Sichuan residents in China’s west await the arrival of relief and death tolls approach 15,000 following Monday’s 7.9 earthquake, analysts have begun to assess the quake’s potential economic impact here in China:

The biggest potential economic risk from the earthquake will be on inflation – 8.5 per cent in April – which has emerged in the past year as the principal threat to the economy. Sichuan is China’s largest pig producer – rising pork prices were the initial reason for the jump in inflation last year – and a big rice producer.

“We expect the earthquake to further fuel inflationary expectations in some parts of China due to possible supply shortages as a result of disruption in transportation,” said Ting Lu, an economist at Merrill Lynch.

However, although the earthquake would probably have a short-term impact on prices in the immediate region, economists said it would do little to disrupt agricultural production in the province.

Moreover, national food prices would be affected only if there was sustained disruption to the transport links between agricultural areas of Sichuan and the rest of the country, which appeared unlikely.

Shanghai’s stock market fell 1.8 per cent on Tuesday, and market regulators suspended trading in 66 companies that have significant operations in the region.

Companies that could be hurt by the earthquake include toll road operator Sichuan Expressway, China Telecom, which has a large fixed-line operation in the region, and those in the insurance sector.

Theory suggests that in times when inflation is already high, as currently in China, then a supply shock of even the slightest severity could trigger the expectation of future rice and pork price increases. This expectation may spurn a speculative bout of of food purchases just as supplies are tightened because of the earthquake. The simultaneous speculative increase in demand and quake-triggered contraction in supply may bring about just the price increases that analysis predict.

I won’t be surprised if inflation numbers for May reveal something greater than the 8.5% (22% rise in food prices) experienced in April. Despite economists’ optimism that the quake will have little effect in the long-run, I would predict that in short-run China’s already unstable price levels will see even sharper rises. Might inflation reach double digits in May?

On a personal note, we here at SAS are praying for the victims of the Sichuan quake. Last October my wife and I led 24 tenth graders on a five day cycling trip through the heart of the region where the quake struck. We started at the panda reserve in Chengdu (where thankfully all pandas survived) and rode 100 km northwest to Dujiangyan, the ancient city in the footills of the Himalayas where, sadly, 900 schoolchildren perished when their building collapsed.

Reports indicate that this beautiful city in the hills, home to the world’s oldest (2300 years!) irrigation project running through the heart of the city has been left in ruins. Below is a picture of me, my wife, and the lucky SAS students who cycled through this beautiful region of Sichuan Province last October. The bridge behind us was in the heart of ancient Dujiangyan, only miles from the earthquake’s epicenter. We hope that the suffering in Sichuan is quickly alleviated and that the victims find shelter and solace in the coming days and weeks.

Dujiangyan, Sichuan Province, China. October 2007. SAS China Alive

• Need to know - Times Online

  Facts and figures everyone needs to know about the economy in this time of economic hardship. (there are five pages, be sure to click through to read them all!)

  tags: economics, recession, inflation

• IDE - Enabling Prosperity

  IDE Myanmar has operations in practically all of the cyclone-affected areas in the Irrawaddy Delta, and is hence positioned well to provide aid where it is most needed. Here’s what we are doing:

  IDE has targeted 20 township areas that are affected, containing an estimated 8,000 -9,000 villages. About 125 staff have been mobilized to work in these areas - approximately six per township. The initial focus will be on providing immediate relief but rebuilding the agricultural and food security systems will receive equal priority and attention.

  tags: disaster relief, economics, Myanmar, SAS

• Justgiving - SAS Myanmar Relief

  The Shanghai American School service clubs held a joint meeting today to brainstorm how to help victims of the Burma Cyclone. We set up this website on justgiving.com to begin collecting donations to help the victims in Burma. Follow the link to show your support!

  tags: disaster releif, economics, poverty, SAS

The Associated Press: Gas prices knock bicycle sales, repairs into higher gear

Greg Mankiw has an ongoing series of posts linking to articles illustrating the impact that rising gas prices have had on demand in markets other than that of the automobile.

The concept of cross-price elasticity of demand measures the responsiveness of consumers of one good or service to the change in price of another. As gas prices rise, drivers tend to switch from automobiles to alternative forms of transportation. A few days ago I blogged about the switch from tractors to camels in India, one illustration of the concept of cross-price elasticity of demand. Mankiw has so far linked to articles about the impact of high gas prices on demand for bicycles, small cars and mass transit.

These three “goods” are all substitutes for the most common form of transport among Americans, the private automobile (often times a gas-guzzler in “the bigger the better” America). The principle of cross-price elasticity of demand says that when the price of a good like personal vehicular transport becomes more expensive (in this case due to the price of an input required in private cars, gasoline), the demand for a substitute good will increase.

In the case of bicycles, evidence indicates that just such a change in demand is already underway in America today:

Bicycle shops across the country are reporting strong sales so far this year, and more people are bringing in bikes that have been idled for years, he said.

“People are riding bicycles a lot more often, and it’s due to a mixture of things but escalating gas prices is one of them,” said Bill Nesper, spokesman for the Washington. D.C.-based League of American Bicyclists.

“We’re seeing a spike in the number of calls we’re getting from people wanting tips on bicycle commuting,” he said.

Interestingly, the increase in demand for bicycle travel in response to high gas prices might be even more pronounced due to America’s sluggish growth, 4% inflation and rising unemployment. Real wages have seen little gain in the last couple of years as growth has fallen close to zero while prices have continued to rise. It may be possible that a fall in real incomes in America has spurred new demand for bicycle transportation, which could be considered an inferior good, meaning that as household incomes fall, consumers demand more bicycles for transportation.

Since bicycles represent such a drastically cheaper method of transportation, high gas and food prices, a weak dollar, and falling real wages accompanying the economic slowdown have had a negative income effect on American consumers, leading to increases in demand for inferior goods such as bicycle transportation

That said, having worked in a bike shop myself for two years in college, I can say that most consumers looking at new bicycles are not doing so because of falling incomes. Quite the opposite, in fact, indicating that new bicycles are normal goods (those for which as income rises, demand rises). However, the article states that in addition to increases in new sales, “more people are bringing in bikes that have been idled for years”.

It may be that while new bicycles themselves are normal goods, bicycle transportation as a whole is an inferior good. The increase in demand for new bicycles could be explained by the substitution effect (as the price of motor vehicle transportation rises, its substitute, bicycle transport, becomes more attractive to consumers) and at the same time explained by the income effect too (as real incomes have fallen, demand for the bicycle transport has risen).

This phenomenon is an excellent illustration of how the income and substitution effects work in conjunction to explain the inverse relationship between price and quantity demanded for automobiles (the law of demand), as well as the concept of cross-price elasticity of demand between two substitute goods.

• Country’s own jumbo jet company takes off — Shanghai Daily | ???? — English Window to China News

  China has made its first steps towards competing with the giants of the jumbo jet industry, Airbus and Boeing. It will take a while to achieve the economies of scale required to compete in the global market, but a heavy dose of government backed investment may be enough to get the Shanghai based compnay off the ground.

  tags: economies of scale, oligopoly, China, economics

China’s inflation climbs to 8.5% - Times Online

Imagine how it feels here in China! Food prices are the main driver of overall inflation here. There appear to be both supply and demand factors at play. While the ever-growing middle class consumes more and more resource intensive meat, input costs are forcing producers to restrict their output and pass higher costs onto consumers:

Overall food prices increased by 22.1 per cent in April from a year earlier, while the price of pork, the most popular meat for most Chinese, was up 68.3 per cent over the same period.

Wen Jiabao, the Chinese Premier, said in March that the government wanted to keep inflation at 4.8 per cent this year.

The bureau said in a statement today: “Growth in consumer prices remains high. At the moment, we must pay close attention to future price trends and prioritise the control of price increases and inflation even higher.”

“It is linked to the fact that the international prices of primary products, and especially grain prices, continue to rise, impacting domestic food prices,” it said.

So rising global commodity prices increase costs to food producers here in China, who pass these higher costs onto consumers. But at the same time, the demand-side has seen ever increasing consumption of pork, beef and chicken, which historically were delicacies enjoyed only by China’s elite. With a middle class of around 300 million, today these meats are staples of the masses, come to be considered a normal part of the urban Chinese diet.

To compound inflationary pressures in China, net exports are expected to remain strong or even grow as China’s trading partners face inflationary problems of their own. Rising prices in the US and Europe make still relatively cheap Chinese imports more attractive to these foreign consumers, putting even more upward pressure on China’s price level as demand for its output remains strong abroad.

Premier Wen Jiabao says the government’s target inflation rate is a moderate 4.8%, but with three consecutive months of greater than 8% inflation, this now seems like an unlikely goal for China. The biggest threat inflation poses to the Chinese Communist Party is the undermining of the gains enjoyed by the average Chinese consumer from the 10% average nominal GDP growth the country has enjoyed for most of the last 30 years.

With inflation approaching double digits, much of the nominal income gains resulting from rapid GDP growth are eroded and the real effect of inflation may feel more like economic stagnation to the average Chinese worker. With its legitimacy hinging on continued improvements in economic well-being, the CCP has much to worry about with 8.4% inflation. Contractionary measures are needed to stabilize prices, perhaps even at the expense of continued growth.

• Trade Deficit Narrows in March, but Exports Fall - New York Times

  Weak dollar, rising unemployment and falling incomes in the states lead to weak demand for imports from abroad, shifting the US balance of trade away from deficit towards surplus. Here’s the Balance of Payment in action!

  tags: Balance of payments, trade deficit, economics

• Teachers feeling ‘frustrated’ over low pay, layoffs - May. 9, 2008

  Thousands of teacher could be laid off as state budgets are cut back… at the same time, there is a nationwide shortage of qualified teachers entering the profession. What’s missing here? Interesting article about the Catch 22 in the American education system today. It’s all about incentives… or the lack thereof in the teaching profession!

  tags: labor market, education, economics

Hat tip to Greg Mankiw.

All of Inflation’s Little Parts - The New York Times

This is really cool… The Bureau of Labor Statistics releases monthly data on prices to let Americans know just how much inflation affects their livelihoods. The Consumer Price Index, which is studied in both AP and IB Economics, consists of a “basket of goods”, that when bundled together represent the “typical” American consumer’s expenditures. The CPI is broken into a few broad categories:

Here’s the cool part, though… within each broad category the BLS tracks the prices of dozens of specific categories, around 200 to be precise. Each of these is then broken down into individual products, around 84,000 in total! The task of tracking the prices of 84,000 individual goods and services every month is daunting, and just thinking about the tedium of this job makes me glad I’m a teacher!

The New York Times has assembled what can only be described as a mosaic of consumption, organizing the 200 specific CPI categories into what looks like an ornate stained-glass window, in which the size of each piece of glass represents the percentage of Americans’ income that go towards each specific category. Some of the categories represented in this mosaic include items such as:

This graphic is a great tool for teaching and understanding the Consumer Price Index, not to mention a beautiful pattern for any stained-glass artist looking for inspiration!
nyt-cpi-graphic

• Economis Timeline: Econ 101.5

  From “econteacher.com” is a really cool timeline of the history of Economic thought, from Adam Smith to the Apple Computer. This website was created by a veteran Econ teacher and has some interesting bits for students and teachers of the “dismal science”.

  tags: economics, education, resources, history

• National Geographic Magazine - NGM.com

  We hear so much about China’s emergence as an economic superpower that we may forget what a naturally beautiful and geographically diverse country it is. This slideshow from National Geographic offers a little perspective of the true beauty of the fastest growing country in the world.

  tags: China, geography, economics

One week from today thousands of 11th and 12th grade students around the world will sit for four hours of AP Economics exams. The final push is on to review for this long day of micro and macroeconomics problem solving.

Many AP Econ teachers accessed and downloaded from the College Board’s website the free practice exams the board produced for teachers to use to help prepare their students for the real thing on May 15. While I cannot distribute these practice exams from my site, any AP teacher should be able to access these documents by clicking here.

On the Exam Prep page of this blog, I’ve uploaded unit by unit study guides as well as teacher notes for both the Micro and the Macro practice exams. Also included are links to the student created wiki pages for every unit in Micro and Macroeconomics.

With one week left to review, these resources should come in handy for both students and teachers looking for a good sources of material focused specifically on the AP Economics exams.

• BBC NEWS | Business | Oil price ‘may hit $200 a barrel’

  200 oil? Oh my! It seems like just yesterday everyone was speculating oil would ever reach $100, now some say it could hit $200 within six months! The primary culprit? China, where continued growth in output is expected to push energy prices ever higher

  tags: oil prices, economics, inflation

• Economics Roundtable

  Latest updates from 137 of the top economics blogs out there. If you following dozens of different blogs it too exhausting for you, this is the ONE place you can got to get updates from the best of the bunch!

  tags: economics, blogs

School kids feel the bite of high food prices - May. 5, 2008

A classic method of teaching the basic economic concept of the production possibilities curve is to illustrate the relationship between a nation’s decision to invest in military goods versus civilian goods. The model typically includes two “products” that a nation can choose to invest in: guns and butter. The goods themselves are not important, rather what they are meant to represent: the tradeoff between defense and civilian focused investment.

Today the United States faces a very real version of the old “guns vs. butter” model. Rising global food prices have put school districts in a bind: how to feed kids nutritious meals as the prices ingredients has risen at unprecedented rates:

Rising food prices are making it harder for schools to cook up ways to give kids the nutrition they need.

Right now, they’re taking shortcuts and shuffling ingredients to make up the difference, but that’s only a short-term solution with long-term consequences on the horizon.

“I’ve been in school service for 27 years and this is the worst it’s ever been,” said Sara Gasiorowski, food service director for Wayne Township Schools in Indianapolis. “I have never seen food prices jump up so far…

“Food prices nationwide have risen 4.5% between March 2007 and March 2008, according to the Bureau of Labor Statistics’ Consumer Price Index, with flour and eggs rising even more dramatically than milk. Grumbles said milk prices in her district are up 22% from last year, which means an increase of 3.5 cents for each of the federally required 16,000 half-pints she provides every day.

“For every penny on a carton of milk, it costs me $30,000 a year,” she said. “That’s $105,000 extra on my food bill.”

Flour prices have roughly doubled over the last year, according to Grumbles, to $19 per 50-pound bag. To make up for the difference, she substitutes canned peaches for fresh apples “to save a couple pennies” per meal, or she uses ground beef in place of chicken.

Unfortunately, federal funding for school lunches has increased at much slower rate than cost to districts of providing those meals:

Federal reimbursement programs cover all or part of school districts’ lunch tabs. Congress lifts reimbursement rates every year, but Gasiorowski said it hasn’t been enough: “We need to be looking at an increase of 12% to 15%, instead of our usual annual increase of 2 or 3%.”

The current federal reimbursement program is based on household incomes; the poorest American students receive $2.47 of federal funding towards their “free lunches”, while students from the highest income bracket only receive $0.23 per meal. The problem is, the average school lunch now costs $3.10, so these days no one is actually receiving a “free lunch”, not even the poorest American students.

This article struck me in that is truly does illustrate the concept of tradeoffs as illustrated in the production possibilities curve. Society must allocate its scarce resources towards the goods and services it deems most desirable based on the needs of its citizenry. Complications arise in this basic model, however, when government is involved.

The commitment to subsidizing school lunches is based on the idea that if the responsibility of feeding American school children were left to the free market, resources would surely be underallocated towards nutritious meals, representing a market failure. School lunches are a merit good, meaning they would be underprovided by the free market.

The same is true of national defense. In fact, some believe that if left completely up to the free market, national defense would not be provided at all, rather individuals who could afford it would hire private security forces to protect their private property. When a good would be totally neglected in a free market, it is called a public good. This is national defense, a good that were it not provided by the government would probably not be produced at all.

Clearly, both “guns” and “butter” create benefits for society. In the case of both national defense and nutritious school lunches, both goods are under-provided by the free market, and therefore should be subsidized or fully provided by the federal government. As this story reveals, however, the US is now in a situation where more resources need to be allocated towards “butter”, perhaps even if this means allocating fewer resources towards “guns”, or any of the other myriad public goods the government provides society with.

Update: I received an email message from a reader about the above blog post:

I have to say that your “guns and butter” diagram is “interesting.” I am not clear on why the United States should spend vastly more on school lunches than on defending the free world While government provided school lunches may have a place, most Americans feed their own children and do not depend on Federal financing.

Where did you get the notion that feeding our children would be “under-provided by the free market”

Here was my reply to this reader. I’m posting it here because I want to make it clear the the diagram above is not meant to make any political statement about US military spending:

Hello,

Actually, the PPC was included simply to illustrate the basic tradeoff that society faces when it chooses how to allocate its scarce resources.

Having taught at least for a short while in public schools, I can say that nutritious lunches are definitely “underprovided” by the free market, that is, many students in poor communities in America depend on the “free and reduced” lunches that are provided through federal and state funding programs… I once volunteer taught in a poor Elementary School in Spokane, Washington where 40% of the students ate only two meals a day, both provided free by the school district: one at 8 in the morning, one at noon. Many of these children had parents who were poor, unemployed, often addicted to drugs, who failed to put any food on the table whatsoever.

In other words, I do think that nutritious meals are a “merit good” which by definition is one that is underprovided by the free market, therefore requires subsidies from the government. Otherwise, why would the government offer such subsidies at all, if these meals were something the free market could adequately provide on its own?

Again, I was not making any political statement with the graph, only pointing out the basic economic concept of tradeoffs and the idea that society must allocate its scarce resources towards an “optimal” combination of goods and services. The article indicates that in this time of rising food prices, not enough of America’s resources are going towards providing nutritious meals for school children, indicating that a movement along the PPC might be in order. The degree of such a move is irrelevant, only the fact that a movement must occur if nutritious meals are to continue to be provided. In fact, the x-axis could have represented any other public good the government provides for society, I chose “military spending” so that the current example was consistent with the classic example of “guns vs. butter”.

Hope that clears things up…

Best,

Jason

• Guns versus butter model - Wikipedia, the free encyclopedia

  “Guns vs. Butter” from Wikipedia. Read more about the model used by many econ teachers to demonstrate the concept of tradeoffs, opportunity costs, production possibilities curve…

  tags: opportunity cost, economics, PPC, tradeoff, scarcity, resources

• FT.com | The Economists’ Forum

  A forum with articles and commentary from some of the leading economists in the world, including two Nobel Prize winners. There are some excellent discussions of very high quality here.

  tags: blogs, economics, news