• Do multinationals promote better pay and working conditions? – OECD Observer

  “The effect multinationals have on wages and working conditions can be positive, but there are conditions to bear in mind, not least for policymakers wishing to attract foreign direct investment.

  If ever there was a question to provoke impassioned debate between supporters and opponents of globalisation, the title of this article may be it. A harbinger of progress and higher standards of living, will say the yeas, a cause of underdevelopment and Western-style exploitation, will roar the nays. The protagonists rarely agree.”

  tags: economics

Posted from Diigo. The rest of my favorite links are here.

Robert Reich’s Blog: A Bottom-Up Bailout Rather Than Trickle-Down

Berkley professor and former Labor Secretary Robert Reich argues that the $300 billion or so of the Treasury’s $700 billion bailout of the financial markets has mostly been squandered, calling it “the worst type of trickle-down economics”. Reich hopes the Treasury will postpone further disbursements of the bailout funds until the new Administration takes office in the hope that it will go into the hands of consumers, not into the pockets of the big banks’ shareholders.

Click the “play” button to listen to Reich’s commentary on NPR’s “Marketplace”:

 

 Robert Reich - Trickle Up, not Down [2:21m]: Play Now | Play in Popup | Download

Discussion Questions:

1. What is wrong with the way the banks have used the funds the Treasury has given them? Why hasn’t the bailout worked so far?
2. What does Reich mean when he calls the bailout “the worst type of trickle-down economics”?
3. Who does Reich think the remainder of the bailout should go towards helping? What does he mean by a “bottom-up bailout”?

• News, Reviews and Articles On Economics

  A student in my IB Econ Year 1 class found this cool search engine that aggregates articles from different new sources based on specific economics search terms. Enter “elasticity” and the engine asks you whether you’d like articles about price elasticity of demand or income elasticity of demand, then shows you recent articles relating to these topics. Pretty cool!

  LookAhead™… the revolutionary way to search

  1. Start entering your search term in the News Index box above.
  2. Words “in the News” that match what you type are listed here.
  3. Select a phrase/word from this list and click GO.
  4. Or keep typing to narrow the list of phrases/words.
  5. If the word list goes blank, Backspace and enter other words

  tags: economics

• Who will replace Tim Geithner at the New York Fed? | Free exchange | Economist.com

  Earlier this month I attended an Economics Teachers Conference sponsored by the Richmond Federal Resrve Bank in Virginia. One of our keynote speakers was Federal Reserve Governor Kevin Warsh, one of the architects of Ben Bernane and Hank Paulson’s $700 billion bailout of the financial markets. So I was excited to see this story in the Economist’s Free Exchange blog this afternoon:

  “IF TIMOTHY GEITHNER becomes Barack Obama’s Treasury secretary, as is now being reported, there’s at least one big downside—it leaves a gigantic hole at the Federal Reserve Bank of New York, where he is now president. Mr Geithner has been a central player in all of the major rescues and aborted rescues since the crisis began.

  The New York Fed president is by tradition the financial system’s go-to crisis manager. Even in calm times the job places a premium on steady nerves, good judgment, stature, even temperament and an ability to learn quickly. That premium has been multiplied in the current environment.

  The Obama team and Ben Bernanke have almost certainly given the replacement a lot of thought. The leading candidate is probably Fed governor Kevin Warsh. Just 38 years old, Mr Warsh was one of the youngest governors in Fed history when named to the board in 2006. There was a lot of scepticism about his suitability given both his youth and his background (he was an investment banker before becoming an aide to George Bush). But his contacts in the financial world and closeness to Mr Bernanke, who puts great store in Mr Warsh’s political and market judgment, have made him an integral part of the crisis management team. He was a participant in many of the key bail-outs, including that of Bear Stearns and the failed effort to rescue Lehman, and he brokered the deal that saw Wells Fargo acquire Wachovia out from under Citigroup. Apart from his youth, the main strike against him is the fact that he is not an economist (he’s a lawyer by training). Still, in times like these, those issues may be secondary to his experience, his name recognition among the key players on Wall Street, and his widespread support from all the people who will have a say in the decision, including Mr Bernanke, Mr Geithner and, most important, Stephen Friedman, who is chairman of the board of the New York Fed (which makes the appointment, subject to the Fed board’s approval in Washington). Mr Friedman was once Mr Warsh’s boss, as director of Mr Bush’s National Economic Council.

  tags: Economics

Posted from Diigo. The rest of my favorite links are here.

Below is the explanation of the “Multiplier effect” from our class wiki, as explained by my Econ students:

• The multiplier effect shows that an initial change in spending can cause a larger change in national income and output.
• The multiplier determines how much larger that change will be; it is the ratio of a change in GDP to the initial change in spending.
• It measures the effect that any change in expenditure (Investment, Government spending, Consumption, or Net exports) will have on GDP

Multiplier = 1/(1-MPC) = 1/MPS
Multiplier = change in real GDP/ initial change in spending
Change in GDP = mutlplier x the initial change in spending

Rationale: The multiplier is explained based on the following facts:

• The economy supports repetitive, continuous flows of expenditures and income
• Any change in income will vary both consumption and saving in the same direction as, and by a fraction of, the change in income
• Initial change in spending will set off a spending chain throughout the economy
• Chain of spending, although of diminishing importance at each successive step, will accumulate and result in a multiple change in GDP

Harvard Economist Gregory Mankiw has applied the concept of the spending multiplier to the proposal coming from Barack Obama’s economic transition team to inject as much as $700 billion of goverment spending into the economy to stimulate aggregate demand and help America escape its recession. Mankiw quotes today’s Washington Post:

Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years….Obama has set a goal of creating or preserving 2.5 million jobs by 2011.

Mankiw, the Econ teacher that he is, applies the basic formula for the Spending Multiplier to the numbers coming from the Obama camp, and finds the following:

Dividing one number by the other, that (the $700b of government spending) works out to $280,000 per job.

What is going on here? Logically, it must be one of three possibilities:

1. The fiscal stimulus is going to be much smaller than is being reported.
2. The new administration is setting a low bar for itself when it comes to job creation.
3. The Obama team believes in very small fiscal policy multipliers.

Let me amplify the last point. The average weekly earnings of production and nonsupervisory workers is about $600, or about $60,000 over a two-year period. Granted, labor income is only about two-thirds of national income, and we have to add a few supervisors into the mix.

So let’s say each job created means $100,000 of extra national income. If we are generating $100,000 of income with $280,000 of government spending, the multiplier is only 100/280, or 0.36. Traditional Keynesian models suggest a multiplier closer to 2.0.

What Mankiw has found, using simple economic analysis understood by anyone who has studied AP or IB Economics, is that if we believe in the numbers given by the Obama camp itself, then government spending package of $700 billion will result in roughly $250 billion of new income for the nation.

How did we find this? Simply by applying the forumula given on our wiki above: Multiplier = change in real GDP/ initial change in spending, and plugging in the numbers calculated by Mankiw:

• Multiplier = 0.36.
• Change in spending = $700b.
• Therefore, the change in national income (or GDP) equals $700b x 0.36 = $252 billion

Perhaps Mr. Obama needs to consider the basic economic principle of the Spending Multiplier before he goes around throwing out numbers about the jobs that will be created or preserved from a new fiscal stimulus package. Clearly, 2.5 million jobs grossing an average of $100,000 each over two years, while SOUNDING good, in reality represents a truly unbelievable squandering of wealth and income by the US government.

Comedian Louis CK puts things into perspective for us in these hard economic times. As he says, “Everything is amazing right now, yet nobody’s happy.”

Louis CK “Everything’s amazing, nobody’s happy”

Much of what Louis jokes about here refers to technologies that members of my generation hardly remember and that my students had never seen. This video did make me think… with all the talk today of the Great Depression, a new period of prolonged economic hardship in America and the world, it is easy to forget just how amazing our innovative economy really is. The impact of technology on our lives is astounding, and the pace of change humans have witnessed in the last 50 years is unprecedented in human history.

Hat tip to Tim Schilling at MV=PQ Blog for the link!

• Special report: How our economy is killing the Earth – science-in-society – 16 October 2008 – New Scientist

  Consumption of resources is rising rapidly, biodiversity is plummeting and just about every measure shows humans affecting Earth on a vast scale. Most of us accept the need for a more sustainable way to live, by reducing carbon emissions, developing renewable technology and increasing energy efficiency.

  But are these efforts to save the planet doomed? A growing band of experts are looking at figures like these and arguing that personal carbon virtue and collective environmentalism are futile as long as our economic system is built on the assumption of growth. The science tells us that if we are serious about saving Earth, we must reshape our economy.

  This, of course, is economic heresy. Growth to most economists is as essential as the air we breathe: it is, they claim, the only force capable of lifting the poor out of poverty, feeding the world’s growing population, meeting the costs of rising public spending and stimulating technological development – not to mention funding increasingly expensive lifestyles. They see no limits to that growth, ever.

  Economists see no limits to growth – ever

  tags: economics

• Economics Revision Notes for IB Economics

  AS, A2 & IB Economics Revision Notes

  This is a new, comprehensive collection of free revision notes to support core topics on your AS, A2 or International Baccaleaurate Economics courses. Click on the relevant tab to find suitable notes.

  tags: economics

Posted from Diigo. The rest of my favorite links are here.

This week the CEOs of the “Big Three” US auto makers boarded their private jets in Detroit and touched down in Washington to beg and plead in front of Congress for a “low-interest bridge loan” from the US government to help them avoid bankruptcy. They are asking Congress for $25 billion of taxpayer money to give them the chance to re-structure and re-equip themselves for the future.

Below are eight arguments based on basic economic principles for why a bailout of the United States automobile industry is a bad idea and is bound to fail:

1. Incentives matter: A bailout of the US auto industry ignores the basic economic principle that incentives matter. Individuals and firms respond to incentives, pursuing behavior that is likely to bring them the greatest rewards. In the face of falling demand for their product and ever-increasing competition from more efficient foreign producers, providing a $25 billion bailout creates a disincentive to drastically reduce costs and increase competitiveness, and an incentive to continue using tired old techniques and providing the same old models for which demand has declined among Americans for over a decade.
2. Comparative advantage: The basic economic principle of comparative advantage states that in an era of free trade and globalization, countries should produce the types of goods for which they have the lowest opportunity cost. Since the average American car of a particular class costs the Big Three $2000 more in wages and benefits for workers than its Japanese counterpart, it makes sense that Japan (and other lower-cost countries) produce more cars, and the Big Three produce less.
3. Efficient allocation of resources: The United Auto Workers Union has a member ship of over 400,000 workers. Since the 1970s the union has lost over 1 million workers. Clearly the US auto industry has been in decline for decades, a fact that should be taken as a sign: resources employed in America’s car industry are inefficient and represent a over-allocation of resources. A drastic down-sizing of the auto industry, while resulting in short-run hardships for the hundreds of thousands whose jobs will be lost, will in the long run strengthen the US economy as labor and other resources will be freed up to be employed in sectors in which the US has comparative advantage.
4. Economic Darwinism or “the survival of the most efficient”: America has stood for free trade in the world since helping found GATT in 1948 and later the WTO. The gains from embracing free trade are shared among all stakeholders in the economy. Consumers enjoy lower prices (thus higher real income), firms enjoy access to cheaper inputs and larger markets for their products, and governments enjoy the increased tax revenues from rising incomes driven by export-led economic growth. To bail out an uncompetitive, inefficient, and long-declining industry is to spit in the eye of free trade and denies America any moral suasion it may hold in the future over potential trading nations in our attempt to open their markets to our nation’s products. To protect our own dying industry now will send a clear message to our trading partners. “America does NOT stand for free trade”. If we believe in free trade and the allocative power of markets, then we must let the dinosaurs of American industry meet the fate the natural selection of the marketplace has determined for it.
5. The benefits enjoyed by the few represent costs born by the many: A bailout by the US government of the auto industry will protect a few hundred thousand jobs for a few years at the most but spells a reduction in the disposable incomes and spending power of millions for years to come. The US does not have $25 billion laying around to give the Big Three, which means the money must be borrowed. Increased government borrowing raises interest rates now (further tightening the credit markets) and will result in increased taxes down the road. All government debt must eventually be paid off, and in the immediate future interest on this debt must be paid directly from tax revenue. A $25 billion bailout is the same as a subsidy, meaning it redistributes income and welfare from consumers to producers. Millions are asked to sacrifice for the continued survival of a few hundred thousand in an industry that has failed to evolve in a global auto market that has seen increased competition and efficiency from foreign firms for decades.
6. Moral hazard: Bailing out the Big Three today represent a classic case of moral hazard. When American industries fail to take steps to increase their efficiency and remain competitive in the face of increased global competition, they find themselves not surprisingly on the brink of collapse. To reward these firms by taking money out of Americans’ pockets and handing it to them to do as they will, we send the wrong message and create the wrong incentives in the American economy. The message is: “Don’t worry, the market doesn’t choose the winners and losers in the economy, the government does, and certain industries are too big to fail”.
7. Market failure, or Firm Failure?: The fate of the auto industry is in the hands of the US government. But so is the fate of the free market. My fear now is that the pendulum will swing too far to the left in America’s state of panic over the ill-fated downfall of the financial markets, rooted in the irrational exuberance and over-leveraging of big financial institutions. The failure of the financial markets, however, is an entirely different story from that of a dinosaur industry like automobiles. The Big Three have had decades to reform themselves, lower their costs, improve their products, and remain competitive. THEY have failed, NOT the market. Government intervention is necessary in instances of market failure, but NOT IN CASES OF FIRMS’ FAILURE TO COMPETE IN A WELL FUNCTIONING MARKET like the global auto industry.
8. Inflexible labor markets: I saw the president of the UAW on the news today giving 101 reasons why the government should approve a bailout deal for the Big Three. In fact, the unions that supposedly represent American Auto Workers are a big part of the problem the industry is facing. For decades the UAW has fought against wage and benefit cuts for auto workers, lobbying instead for higher tariffs and other barriers aimed at keeping foreign cars out of the country. This anti-competitive behavior is a major reason the Big Three cannot compete with European and Asian car makers today. Wage inflexibility leads to higher unemployment. Unions keep wages from going down, leaving the Big Three with one of two choices: Drastically downsize your workforce and employ fewer high paid auto workers, or beg the government for a multi-billion dollar subsidy to that the unions can be placated and you can survive for a couple more years until you’re in the same situation all over again. The unions helped cause the problem, now they should pay the price by experiencing the downsizing their demands inevitably foretold.

The US government should allow the free market to function and let the dinosaurs go extinct. Cars will still be made in America, they’ll just be made by the better, more efficient firms that emerge from bankruptcy when this is all over, as well as the numerous foreign firms already making cars in the US. Survival of the most efficient, that’s what markets are all about. Allowing the market to work will strengthen the US auto industry far more than a “short-term low-interest bridge loan” ever will, it will free up labor and capital resources to be employed by industries the country is better at, and make sure household income is NOT reallocated to inefficient firms to be squandered on the manufacture of a product for which demand has steadily declined for the last decade plus.

Should the US bail-out their car industry? – Welker’s Wikinomics Page

Web 2.0 never ceases to amaze me. Over at our class wiki, Zurich International School students regularly debate economic issues that relate to the topics we are studying in IB and AP Economics. The latest hot topic of debate was started by an 11th grade Brazilian student, Mark, who posed the following question:

Should the US bail-out their car industry?
Monday, 4:04 PM EST

In America, everyone believes that the American car companies like GM, Ford and Chrysler, which are nearly bankrupt, should be bailed-out by the government, to save their national pride. In this week’s “The Economist” magazine, they argue that bailing-out the car industry would be a grave mistake. Firstly, they argue that it would “open an invitation” to other companies to apply for aid to survive the recession. Banks qualify for this help because the economy depends on them; the car industry in the US failing would not be so disastrous. Secondly, they argue that the car industry is shifting from the saturated (full, at its peak) markets to the fast-growing emerging markets. This means, even if the car businesses fail in America, they would still have opportunities in other countries. In Brazil for example, Fiat has a plant where they produce 800,000 cars each year… that is a new car coming off the production line each 20 seconds! And they are not slowing the production; the plant continues operating with three shifts a day!

So, should the US government bail-out GM, Ford and Chrysler, save many lost jobs, and one of their nation’s prides, or should they be influenced not to, by economists that predict it would not help the economy at all?

I love to see students take an interest in the issues dominating our news that tie so closely to the topics we study in our principles classes at the AP and IB levels. The debates are interesting, insightful, and conflicting yet valid viewpoints on controversial issues.

If you’re interested in the economic issues dominating our news and want to join the debate, join the Discussion Forum at Welker’s Wikinomics Wiki and share your points of view.

FT.com | The Economists’ Forum | The case for forward-looking protectionism in the US

Free trade is an ideal. This is a theme of my IB Economics class which I emphasize repeatedly during year two of the course. Free trade, defined as the exchange of goods, services, resources, and financial assets based on the principle of comparative advantage, results in a more efficient allocation of the world’s resources, an increase in total world output and welfare, and increases the opportunity for growth and development for all countries that prescribe to its principles. This is the ideal, at least.

In the real world, free trade is rarely practiced. Free trade agreements between nations represent managed trade; the selected removal of protections such as tariffs, quotas and subsidies on the exchange of particular goods does not represent free trade, rather managed trade. The problem with free trade in the real world is simply that it has never been truly practiced, therefore the adjustments that both developed and developing countries would have to undergo to adopt widespread free trade would be extremely disruptive both economically and socially. Entire industries would disappear from the developed countries as manufacturing resources were reallocated to low cost countries. Poor countries trying to build their manufacturing industries would lose any competitive advantage offered by protectionism, forcing their “infant industries” to wither and die in the face of global competition from countries that long ago achieved economies of scale in manufacturing. Farmers used to heavy subsidies would see their livelihoods disappear as the world’s food would be sourced from the countries with true comparative advantages in agriculture. Simply stated, the social costs of the widespread adoption of free trade are not politically palatable, thus leaders have only hesitantly pursued this ideal on the world stage.

For decades, America has stood for the ideal of free trade, proselytizing its advantages and urging developing countries to reduce or remove their barriers to the free flow of resources and goods from nation to nation. Today, however, the United States faces the very fate free trade prophesized as its own automobile industries teeters on the edge of collapse. As many as 3 million American jobs stand to be lost if the auto industry goes under. Today, America faces the ultimate test of its will to stand for and defend free trade in the world. Should America erect new barriers to trade, bail out its auto industry, and save this dying sector from collapse to avoid the political hardships its death would incur? Or should America stand for the ideal of market liberalization and allow the auto industry to disolve as the principle of comparative advantage indicates it should?

The question is dire, and it’s one that Barack Obama will be forced to address early in his term as president. Cambridge economcis professor Ha-Joon Chang argues the case for protectionism by America in this time of economic turmoil:

Mr Obama’s trade policy… is already causing controversy. He has vowed to protect American jobs and even argued for re-negotiating the NAFTA. There is already some hand wringing among free-trade economists, worrying that his protectionist policies may destroy the world trading system in the same way the infamous Smoot-Hawley Tariffs of 1930 did after the Great Depression. They counsel that the US should maintain its historical commitment to free trade.

However, contrary to what most people think, the US is the true home of protectionism. Between the 1830s and the 1940s, against superior European competition, the US developed its industries behind literally the highest tariff wall in the world, with the average industrial tariff rate ranging between 35% and 55%. Even the Smoot-Hawley Tariffs were not an aberration – the average US industrial tariff in 1931 was, at 48%, well within the historical range.

Moreover, the theory that justified such protectionism, namely, the ‘infant industry’ argument, had been first developed by none other than the first Treasury Secretary of the US – Alexander Hamilton (that’s the guy you see on the $10 bill). Hamilton argued that producers in relatively backward economies needed to be protected and nurtured through tariffs, subsidies, and other government policies before they mature and can compete with producers from more economically developed countries.

Of course, the protectionism that Mr Obama is advocating is protection to ease the adjustment of mature industries, rather than to promote infant industries. The case for such protectionism is not as overwhelming as that of infant industry protection. However, well-designed and time-bound protection of mature industries can facilitate, rather than hinder, trade adjustment and industrial upgrading. Japan and some European countries in the aftermath of the 1970s Oil Shocks come to mind.

Mr Obama should use protectionism in a similarly forward-looking way. Industries that can be revived through re-tooling of its factories and re-training of its workers should be given protection, but only if they fulfill certain conditions regarding investment and training. Industries that have no future should be given strictly temporary protection to ease phasing-out through orderly liquidation and redundancy.

…Keeping its market open is not enough for the US to play a genuinely positive role in the world trading system. The US should also stop pushing for trade liberalization in developing countries and give them the chance to use (intelligently-designed, of course) infant industry protection, which it invented and benefited so much from. Mr Obama should take a lead in creating a world trading system that allows asymmetric protectionism between the rich countries and the poor countries, with the latter protecting their markets more and gradually opening up in line with their economic development.

All these call for a much more activist role for the US government than it has been the norm. Providing protectionism to facilitate structural changes, and not just to protect existing jobs, would require a much closer coordination between trade policy and those policies to upgrade American industries, such as R&D support and worker training. Redesigning the welfare state as a vehicle to promote skills upgrading and labor mobility would push the US government into an uncharted territory.

These are big challenges. However, the US cannot continue its peculiar mixture of free-trade mythology and uncoordinated, ‘reactive’ protectionism that has served ordinary Americans and the developing nations so poorly.

Mr Obama has turned a new chapter in US history by becoming the country’s first Afro-American president. He will turn a new chapter in world history if he can come up with a forward-looking protectionist strategy that that both protects American jobs better in the long run and help developing countries develop faster.

Discussion Questions:

1. What is the difference between the protectionism America needs today and the protectionism it used in the late 19th and early 20th centuries?
2. How could protectionism be used responsibly by developing countries to promote economic growth and development?
3. Professor Chang argues that responsible protectionism should allow industries with no future to be phased out “through orderly liquidation and redundancy”. What does he mean by this and why is such a policy so hard to accomplish politically?

Often we need to teach an economic idea that we do not have a thourough, practical understanding of ourselves. The old “Keep it Simple” model is usually the best method with which to confront this dilemma.

The idea of good investment strategies crops up from many angles during any economics class. Households need to make wise choices in spending their disposable income. Business firms need to be efficient in deciding their growth options. The government and the banking sectors have tremendous control on the “values of economics progress.”

One device that has aided me is the use of the accounting Ballance Sheet. Balance sheets are used in essentially all economics textbooks to convey the notion of “How the Banking System Creates Money.” Here’s a good example:

When my son Brian was nine years old, we started playing the Parker Brother’s popular game Monopoly. Both of us began with $1500 in CASH (Diagram 1).

• Items on the LEFT SIDE are things “Owned” – Assets. Notice initially all $1500 is in the form of CASH.
• The RIGHT SIDE contains things “Owed” – Liabilities. (Initially $0)
• Also on the RIGHT SIDE: by finding ASSETS minus LIABILITIES we find NET WORTH.
• The purpose of the game is to increase this NET WORTH.

As the game progressed, Brian’s strategy was to build up his CASH. For the first thirty minutes of the game, Brian had a huge smile on his face. He started to hoard the goldenrod colored $500 bills. Enamored by his cash stash, he even turned in smaller units of monopoly currency for more golenrod bills.

Brian, looking over at my side of the board, even as a nine year old, mockingly tuanted me. He noticed that I “owned” only a measly few white $1 bills, some pink $5 bills, and only one dull yellow $10 bill. Obviously, he thaught that he was winning the game over his dad. Zeroing in only on the CASH, he didn’t observe that I also “owned” three green, red and yellow property deeds. Also, he couldn’t understand the reason whyI had “spent” cash on those nine green plastic houses that were sprinkled around the board.

Our Balance Sheets now looked like Diagram #2. Brians’s strategy was to build his cash holdings. By landing on “PASS GO, COLLECT $200″, “You’ve Won a Beauty Contest, Collect $10″, and similar monopoly situations, Brian’s CASH grew and so did his NET WORTH (modestly).

However, the next thirty minutes were mine (I started to smile and Brian began to cry). As he landed on my “ASSETS” his goldenrod currency flowed my way as RENTAL REVENUE. It didn’t take long for Dad to win by bankrupting his son.

The final Balance Sheets showed the ory details (Diagram #3). Brian’s CASH was now in my possession; however, notice how my strategy of investing in REVENUE-producing assets enabled my net worth to expand. Brian was bankrupt, his net worth was zero.

This simple story has served me very well in both high school and universtiy level Economics and Accounting courses. By the way, Brian is now a 27 year old Emergency Medicine medical resident at Christiana Medical Center, Christiana, Delaware, and has bankrupted me in Monopoly ever since this first learning experience!

Kite Powered Ship Sets Sail for Greener Futhre – Guardian.co.uk

A German engineer has given an old technology new life to help make trans-oceanic shipping greener and least costly.

A cargo ship pulled by a giant, parachute-shaped kite will leave Germany on Tuesday on a voyage that could herald a new “green” age of commercial sailing on the high seas.

The owners of the MS Beluga, a 462ft cargo vessel, will try to prove that modern steel ships can harness wind power and reduce their reliance on diesel engines.

During the journey from Bremen to Venezuela, the crew will deploy a SkySail, a 160 square metre kite which will fly more than 600ft above the vessel, where winds are stronger and more consistent than at sea level.

Its inventor, Stephan Wrage, a 34-year-old German engineer, claims the kite will significantly reduce carbon emissions, cutting diesel consumption by up to 20 per cent and saving £800 a day in fuel costs. He believes an even bigger kite, up to 5,000 square metres, could result in fuel savings of up to 35 per cent.

Here’s a thought… reduced fuel costs to trans-oceanic shipping companies should shift the supply of such services out, as the marginal cost of shipping falls. Greater supply will mean lower prices to customers demanding such services, moving downward along the demand curve, increasing the equilibrium quantity of trans-oceanic cargo journeys.

Question: Assume all cargo ships in the world eventually incorporate the sail technology, increasing the supply and reducing the price of shipping by an average of 20% and reducing the emission of greenhouse gases of vessels by an average of 20%. What would have to be true about the price elasticity of demand for trans-oceanic shipping in order for a 20% reduction in price to result in an overall reduction of greenhouse gas emissions by cargo ships? Depending on the answer to this question, this “green” technology could actually result in greater emissions of greenhouse gases by cargo ships.

Explain…

Consumers are interesting creatures to study. Economics offers us a unique set of tools for understanding the behavior of consumers in various markets. Elasticity is one of those tools, one which helps us understand how consumers will respond to the change in price of some goods more or less than others. Some of the questions about consumer behavior elasticity helps answer are:

• Why do governments place such huge taxes on cigarettes?
• Why did Apple cut the price of the new iPhone in half from the original one, despite the fact that it had so many new features?
• Why do movie theaters seem to raise their prices so steadily over the years, rather than doubling the price of tickets each year?

These and other questions can be answered by knowing something about the relative price elasticities of demand for the goods in question. Price elasticity of demand refers to the sensitivity of consumers to a change in price. For some goods, even the slightest increase in price will scare consumers away, while for others, price can go up and up and up and the quantity demanded won’t budge!

Here’s just one illustration of a good for which consumers are extremely sensitive to changes in price: Every autumn, around the city of Shanghai thousands of small farms harvest the Chinese watermelon, a small, green, juicy melon that looks and tastes the same regardless of which farm it came from. The farmers sell their melons to one of the hundreds of melon vendors who drive their big blue trucks into the city of Shanghai during about two weeks in October to sell the watermelons to the city folk who love their refreshing taste.

During the two weeks of the melon harvest, there are hundreds of blue trucks parked two or three per block all over the city. The hundreds of melon vendors sell an identical product, acquired at identical costs from thousands of farms using identical techniques for farming. In other words, the melon market in Shanghai during these two weeks is close to being perfectly competitive.

The price of melons is established through competition at something very close to the exact cost to the vendor of getting the melons into the city. Consumers know this, and therefore if one vendor tries to sell his melons for more than the equilibrium price, consumers will respond by buying NONE of that vendors melons. Conversely, if a vendor were to lower his price at all, rationally EVERY consumer would want to buy from that vendor, but since the price is already at the cost to the vendor, no vendor is able to lower the price without losing money. The outcome in the market for melons in Shanghai is that demand for melons is close to being perfectly elastic, meaning that consumers are completely sensitive to changes in price of watermelons.

Not all goods are like watermelons. In fact, for some goods demand is close to perfectly inelastic. Study the graph below, showing the relative elasticities of five different products, then answer the questions below in your comment!

Discussion Questions:

1. For which product is demand pefectly inelastic? Perfectly elastic? Unit elastic?
2. What relationship exists between relative slopes of demand curves and elasticity?
3. What are two characteristics of cigarettes that make demand for them inelastic?
4. What are two characteristics of heart transplants that make demand perfectly inelastic?
5. What are the characteristics of a good for which demand is perfectly elastic?

• The Folly of Obama’s Tax Plan — The American, A Magazine of Ideas
  

  “Senator Obama’s proposed ‘tax cuts for the middle class’ are actually marginal rate hikes in disguise.

  Senator Barack Obama declared recently that he wants to “reform our tax code so that it rewards work and not just wealth.” We think that is a great goal if it means a simple tax system with low marginal tax rates. Unfortunately, a close inspection of Obama’s proposals reveals something disquieting: he would raise marginal tax rates for many middle-income taxpayers, a bad move for anyone seeking to promote economic growth.

  Although Obama is offering a new series of tax breaks, they undermine rather than improve economic incentives. First, whether or not you get those breaks will depend on your income. In Washington, taking away tax breaks as families work harder to make more money is called a “phase-out.” Economists have a different name for it—we call it a tax. Reducing a person’s tax credit as his income goes up also reduces his incentive to earn more income.”

  I just don’t know if I buy the whole “Laffer curve” argument this article seems to support. The disincetive to work hard when tax credits are phased out as a household moves into a higher income bracket. Of course tax credits need to be phased out as households become less dependent on them due to higher incomes.

  Referring to higher marginal taxes as “penalties to work” is a rhetorical trick. Higher income earners pay higher marginal taxes in every developed country the world over. The evidence that progressive taxes discourage hard work and professional advancement lacks empirical evidence, despite Arthur Laffer’s famous curve and the “trickle-down” Reaganomics of the ’80s.

  tags: economics

• Reasons to be optimistic about growth – International Herald Tribune

  As the daily procession of disheartening numbers continues, it’s clear that many bulwarks of the global economy are heading into recession. Even fast-growing countries in the developing world are preparing for a downshift. At moments like this, it’s worth asking: What will make the global economy grow again?

  Economic growth is the reason we are not living in shelters made from brush and collecting nuts and berries to survive. The first step was using experience and technology to improve the way we produced food. Once a person could make more than enough food for himself, he could trade some of it with someone else or spend some of his time producing something else.

  From those early days forward, economic growth has had only four sources: discovery of natural resources, a bigger or better labor force, innovations in technology and the linking of markets. The first two factors are self-explanatory. The third involves finding new ways to combine labor, tools and raw materials, either to make new products or to make old ones more efficiently. The fourth is a matter of scale and synergies.

  tags: Economics

Posted from Diigo. The rest of my favorite links are here.

A trading bloc is “a group of countries that join together in some form of agreement in order to increase trade between themselves and/or to gain economic benefits from cooperation on some level.”

Below is a list of some of the regional trading blocs. The assignment is to:

• Identify the nations involved in your assigned trading bloc
• Identify the kind of trading bloc (customs union, free trade area, common market, monetary union)
• Discuss the impact that membership in the trading bloc has had on the economy of one member nation

Research your assigned trading bloc, prepare a short summary of the points above, and post your findings as a comment below.

• Pacific Regional Trade Agreement (PARTA or PIF) – Christina, Myrthe and Manka
• European Economic Area (EEA) – Lisa and Pia, Lis and Livia
• Caribbean Community (CARICOM) – Catherine and Sean, Maddie
• Union of South American Nations (Unasur/Unasul) – Eithan and Wilhelm, Alex and Gorka
• East African Community (EAC) – Miguel and Ross, Nick and Dierdre
• Southern African Customs Union (SACU) – Horia,
• Greater Arab Free Trade Area (GAFTA) – Calvin, Magda and Robin
• North American Free Trade Agreement (NAFTA) – Nic
• Association of Southeast Asian Nations (ASEAN) – Matteo, Sebastian and Moritz
• Central European Free Trade Agreement (CEFTA) – Meri and Natasha
  
• African Economic Community (AEC) – Palmi and Celine
  

And this is what he said to the world.

…This election had many firsts and many stories that will be told for generations. But one that’s on my mind tonight is about a woman who cast her ballot in Atlanta. She’s a lot like the millions of others who stood in line to make their voice heard in this election except for one thing – Ann Nixon Cooper is 106 years old.

She was born just a generation past slavery; a time when there were no cars on the road or planes in the sky; when someone like her couldn’t vote for two reasons – because she was a woman and because of the color of her skin.

And tonight, I think about all that she’s seen throughout her century in America – the heartache and the hope; the struggle and the progress; the times we were told that we can’t, and the people who pressed on with that American creed: Yes we can.

At a time when women’s voices were silenced and their hopes dismissed, she lived to see them stand up and speak out and reach for the ballot. Yes we can.

When there was despair in the dust bowl and depression across the land, she saw a nation conquer fear itself with a New Deal, new jobs and a new sense of common purpose. Yes we can.

When the bombs fell on our harbor and tyranny threatened the world, she was there to witness a generation rise to greatness and a democracy was saved. Yes we can.

She was there for the buses in Montgomery, the hoses in Birmingham, a bridge in Selma, and a preacher from Atlanta who told a people that “We Shall Overcome.” Yes we can.

A man touched down on the moon, a wall came down in Berlin, a world was connected by our own science and imagination. And this year, in this election, she touched her finger to a screen, and cast her vote, because after 106 years in America, through the best of times and the darkest of hours, she knows how America can change. Yes we can.

America, we have come so far. We have seen so much. But there is so much more to do. So tonight, let us ask ourselves – if our children should live to see the next century; if my daughters should be so lucky to live as long as Ann Nixon Cooper, what change will they see? What progress will we have made?

This is our chance to answer that call. This is our moment. This is our time – to put our people back to work and open doors of opportunity for our kids; to restore prosperity and promote the cause of peace; to reclaim the American Dream and reaffirm that fundamental truth – that out of many, we are one; that while we breathe, we hope, and where we are met with cynicism, and doubt, and those who tell us that we can’t, we will respond with that timeless creed that sums up the spirit of a people:

Yes We Can. Thank you, God bless you, and may God Bless the United States of America

In the last three months, the Japanese Yen has appreciated 15% against the US dollar. At the same, the dollar itself has appreciated 25% against the euro.

The appreciation of these two major currencies seems strange in a time when both country’s economies are experiencing major slowdowns. In most cases, currencies appreciate when one of two things happens:

• If foreigners demand more of a country’s exports, demand for its currency drives up its value, causing appreciation.
• If a country’s interest rates rise relative to other country’s, then demand for its currency rises as investors want to buy assets in that country to earn the higher interest rates.

Lately, however, the Yen and the Dollar have seen staggering rises in the absence of rising exports or rising interest rates in Japan or the US. So what IS causing the rapid and drastic appreciation of these two currencies? The Economist newspaper explains:

Many investors have been following a version of the “carry trade”, borrowing money in a low-yielding currency. All they had to do was earn a higher return from assets than the cost of their financing. Since the two big currencies with the lowest yields over the past year have been the dollar and the yen, those were the natural ones to borrow.

When asset prices fall, however, this strategy is disastrous. Investors dash to sell assets and repay their debts. Since those debts were incurred in dollars and yen, that means they have to buy back those two currencies—hence their sharp recent rises.

In the midst of today’s global financial meltdown, it seems that every day, phenomena new to mainstream economic theory are being witnessed. It would seem that from now on, when we learn about the determinants of exchange rates, we may have to take a look at the “carry trade” example.

In this case, it would seem, LOW interest rates combined with falling stock prices can lead to a currency’s appreciation. An investor looking to make a deal would borrow Yen from a Japanese bank charging low interest rates, convert it to, let’s say Brazilian real, to buy stocks in a Brazilian company. As long as the stocks gain value at a rate higher than the interest rate in Japan, the investor is making an easy profit. He can pay back the money he borrowed from Japan at the low interest rate, earn a high return on his investment in Brazil, and pocket the difference.

The problem arises when the value of the assets the investor has bought in Brazil begins to fall. With stock markets plummeting between 20-50% this year in most countries, asset values have fallen through the floor, meaning those investors who borrowed yen to buy foreign assets have rushed to sell the falling assets as quickly as possible to pay back their Japanese lenders before it’s too late. This causes a huge increase in demand for Yen on foreign exchange markets in a very short period, hence the yen’s appreciation.

Recently, the Yen and USD have managed to appreciate for a reason not conventionally understood. The rapid and drastic appreciation of these currencies is further exacerbating the weak aggregate demand in Japan and the US. A strong currency, while good for consumers for whom imports appear cheaper, can have debilitating effect on a country’s export sector. Not surprisingly, both the US Fed and the Japanese central bank have both cut interest rates in the last week in the hope of slowing their currency’s appreciation and protect export demand.

Some profound insight on the interdependence of all men from Dr. Martin Luther King Jr:

“It really boils down to this: that all life is interrelated. We are all caught in an inescapable network of mutuality, tied into a single garment of destiny. Whatever affects one directly, affects all indirectly. We are made to live together because of the interrelated structure of reality. Did you ever stop to think that you can’t leave for your job in the morning without being dependent on most of the world? You get up in the morning and go to the bathroom and reach over for the sponge, and that’s handed to you by a Pacific islander. You reach for a bar of soap, and that’s given to you at the hands of a Frenchman. And then you go into the kitchen to drink your coffee for the morning, and that’s poured into your cup by a South American. And maybe you want tea: that’s poured into your cup by a Chinese. Or maybe you’re desirous of having cocoa for breakfast, and that’s poured into your cup by a West African. And then you reach over for your toast, and that’s given to you at the hands of an English-speaking farmer, not to mention the baker. And before you finish eating breakfast in the morning, you’ve depended on more than half the world. This is the way our universe is structured, this is its interrelated quality. We aren’t going to have peace on Earth until we recognize this basic fact of the interrelated structure of all reality. ” Dr. Martin Luther King, Jr. 1967

An endorsement of Barack Obama | It’s time | The Economist

From this week’s Economist:

For all the shortcomings of the campaign, both John McCain and Barack Obama offer hope of national redemption. Now America has to choose between them. The Economist does not have a vote, but if it did, it would cast it for Mr Obama. We do so wholeheartedly: the Democratic candidate has clearly shown that he offers the better chance of restoring America’s self-confidence. But we acknowledge it is a gamble. Given Mr Obama’s inexperience, the lack of clarity about some of his beliefs and the prospect of a stridently Democratic Congress, voting for him is a risk. Yet it is one America should take, given the steep road ahead.

Follow the link above to read about the reasons why the usually right-leaning publication has thrown its endorsement towards the Democratic candidate.

• Earth institute Event – Can We Save the World Economy?

  An open and frank conversation on the breakdown of financial markets around the world and if we can save the global economy. Will the Wall Street bailout plan work? What steps need to be taken in Europe and Asia to stem the market’s downward spiral? Are we headed for a global recession? Three of the leading minds in global economics will discuss the options.

  tags: economics

Posted from Diigo. The rest of my favorite links are here.

• The Wealth Report – WSJ.com : The Rich Support McCain, the Super-Rich Support Obama

  “According to a new survey by Prince & Associates, voters worth $1 million to $10 million are favoring Sen. John McCain, while voters worth $30 million or more are favoring Sen. Barack Obama. The survey of 493 families showed:

  More than three quarters of those worth $1 million to $10 million plan to vote for Sen. McCain. Only 15% plan to vote for Sen. Obama (the rest are undecided). Of those worth more than $30 million, two-thirds support Sen. Obama, while one third support Sen. McCain.

  The reason? Taxes.

  Among Lower Richistani’s, 88% cited tax policies as being “important” in making their decision. Only 11% cited the environment, 22% cited health care and 45% cited social issues.

  Among the Upper Richistani’s supporting Sen. Obama, tax policies ranked last, with only 16% citing them as important. “Social issues” ranked first, with “policies dealing with wars” ranking second (67%) and Supreme Court nominations and health-care issues ranking next.

  Of course, in today’s populist politics, the only thing worse than being the candidate of the wealthy is being the candidate of the superwealthy. You can bet this is one poll that neither candidate will repeat on the campaign trail.

  But the survey offers an important insight into the effect of wealth on personal politics. Perhaps the old saying should be changed to: If you’re ultrawealthy and conservative you have no heart; if you’re wealthy and liberal, you have no brain.”

  tags: economics

• Economy Forces College Hopefuls to Lower Sights – WSJ.com

  The credit crisis is striking home for American kids hoping to head off to the college of their dreams:

  “While many parents and students have long emphasized getting into a top school over financial considerations, families in recent months have seen the value of their homes decline, their investments dramatically shrink and sometimes monthly incomes lost due to layoffs. Other students who in the past would have taken on thousands of dollars in debt, are being stymied as lenders tighten access to loans amid the global credit crunch.

  Many college-age kids are setting their sights on less prestigious and lower-cost colleges or adding “financial-safety” schools to their lists as a backup. Some students are considering spending their first two years at a community college, while others are focusing on schools closer to home to save on fuel and housing costs. Students stuck on going to their top-choice colleges are trying to help out by getting after-school jobs and increasingly applying for scholarships.

  tags: economics

Posted from Diigo. The rest of my favorite links are here.