Archive for December, 2008

Dec 06 2008

Welker’s daily links 12/05/2008

Published by under Daily Links

  • This is an excellent tool for teaching microeconomics concepts using flash animations. Lessons include short-run production and costs, comparative advantage, profit maximization, and regulating natural monopolies. Great resource for AP and IB Economics teachers!

    tags: economics

  • The Journal of Economic Education offers original articles on innovations in and evaluations of teaching techniques, materials, and programs in economics. Articles, tailored to the needs of instructors of introductory through graduate-level economics, cover content and pedagogy in a variety of mediums. Editorial decisions are directed from the Executive Editor’s offices, in the Department of Economics, College of Arts and Sciences, at Indiana University. The JEE is published quarterly by Heldref Publications in cooperation with the National Council on Economic Education and the Advisory Committee on Economic Education of the American Economic Association.

    tags: economics

  • Here’s a study on the state of AP Economcis written a few years ago… interesting stuff!

    “Who Teaches AP Economics?

    Who is the typical AP economics teacher? According a survey conducted by Edward Scahill and Claire Melican. (2) the average AP economics teacher is a white male with 18.2 years of total teaching experience and 11.2 years of experience teaching economics. The macroeconomics teacher has taught AP macroeconomics for about 5.1 years, while the microeconomics teacher has taught AP microeconomics for about 3.6 years. Both are most likely to have been using the college-level principles of economics textbook written by McConnell and Brue. Less than seven percent of survey respondents indicated that they had not had a single economics class in college, while 22.6 percent indicated they had had three or fewer undergraduate or graduate level economics courses. Only 18.7 percent had majored in economics or economic education.”

    tags: economics

  • The financial crisis has made “the dismal science” more relevant and immediate to many high school and college students, and they are suddenly paying closer attention in class.

    “Now we can actually see the examples while they happen, instead of relying on history. It’s been the most engaging class ever,” said New York University junior George Schwartz, who dropped macroeconomics the first time he took it, but is so fascinated this time that he has decided to major in economics.

    tags: Economics

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

2 responses so far

Dec 05 2008

Welker’s daily links 12/04/2008

Published by under Daily Links

  • Paul Krugman has posted a nice note analyzing New Deal wage policies using the model of aggregate supply and aggregate demand familiar to teachers of undergraduate macroeconomics. The essence of Paul’s argument is that the economy of the Great Depression was in a liquidity trap, which implies that the AD curve is vertical, which in turn implies that policies that adversely shift the AS curve do not affect equilibrium output in the short run. Thus, a policy that under normal circumstances would be bad, such as cartelizing the supply of labor, is not bad under the extraordinary circumstances of the 1930s.

    tags: Economics

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

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Dec 04 2008

Are you prepared for the new alternate currency?

Published by under Currency,Humor,Money

xkcd – A Webcomic – Alternate Currency

Alternate Currency

8 responses so far

Dec 03 2008

American auto makers insult the intelligence of high school Econ students!

Automakers turnaround plans sent to Congress – Dec. 2, 2008

…and hopefully every other American with a functioning cerebral cortex. Ford Motor Company announced today its ambitious plan to cut costs and restore its profitability as it appeals once again to Washington for a $25 billion “low-interest bridge loan” (aka bailout).

The company announced that the salary of Ford CEO Alan Mulally would be cut to $1 a year if Ford actually borrowed money from the government. When Mulally appeared before the House Financial Services Committee last month, he did not agree to the suggestion of such a paycut…

Ford and GM also announced plans to get rid of corporate jets. Mulally, Wagoner and Nardelli were all roundly criticized at a House hearing last month when they admitted they had each flown their corporate jets to Washington to ask for help…

Mulally and Wagoner will be driving to Washington in hybrid vehicles made by their companies when they return to Capitol Hill later this week to make their case for loans. Nardelli is also not planning to fly to Washington but Chrysler has not disclosed any more specifics of his travel plans.

So the CEOs of the three largest auto companies are agreeing to be exploited for one year by accepting a salary of one dollar. The combined savings from the salary cuts of the three companies’ CEOs  equal roughly $6 million, or about 0.024% of the sum the companies are asking for from the government. Selling corporate jets during a recession when demand for such frivolous luxuries is at a record low will also do little to cut the costs of the incredibly inefficient US automakers.

As for any serious cost cutting plans, Ford had little to report:

…the Ford plan is perhaps most notable for what it did not include. The company did not mention that it would be dropping any brand or unprofitable models…

There was also no announcement of additional plants being closed or capacity being eliminated. Ford said it continues to work with its unions and dealers to achieve additional savings, but it did not set any cost savings targets for those discussions.

Ford highlighted many of the cuts it has already made, including closing 14 plants and reducing salaried personnel by 36% over the past three years. The company also touted labor cost savings that would bring the cost of factory workers’ pay and benefits close to those of the nonunion U.S. plants operated by Asian automakers

Real cost savings will only be achieved by the further closing of plants. With the economy in a deep recession and auto sales at their lowest in decades, the demand for new cars is just not there. Until Ford and its American competitors begin adjusting their plant capacities to the realities of market demand, the chances of achieving profitibility seem slim.

Allow me to make a connection between the situation faced by American auto makers and a basic economic concept we are currently studying in Microeconomics class. Firms, as any first year econ student knows, are profit maximizers. In fact, all companies are trying to make the same thing as all other companies, profits. When a firm experiences negative profits, or losses, as Amer auto makers are today, it can do one of two things to restore profitability: 1) Increase its revenues or 2) Lower its costs. Since demand for new cars is so low, the revenue increasing option is just not there, so American auto makers must reduce costs to restore profits.

There are two main types of costs we study in microeconomics. Short-run and long-run costs. In the short-run, which in the case of the auto industry we can consider the last few months since the financial crisis began, firms can do one thing to lower their costs: reduce the use of labor. Workers can be asked to take unpaid vacations, jobs can be eliminated, work hours can be cut back. In the short-run, plant size is fixed, meaning firms cannot add nor eliminate capital and land resources. The only variable resource is labor. By “reducing salaried personnel by 36% over the past three years” Ford has taken steps to lower its short-run costs of production.

Long-run costs must also be considered when firms are faced with negative profits. The long-run in the automobile industry is considered the period of time over which auto makers can either add new plant facilities or shut down existing facilities, lowering the costs of capital and land to firms. Long-run cost reductions have also been undertaken by Ford, including “closing 14 plants… over the past three years”.

Clearly, Ford has made an effort to reduce short-run labor costs and long-run capital costs by eliminating some of its work force and closing some of its factories in recent years. But today, as the US officially enters what is likely to be a deep, long recession, the announcement by Ford and its competitors that its new strategy for further cutting costs hinges on paying its CEOs one dollar and making them travel across the country in hybrid cars represents a laughable insult to the intelligence of high school Econ students.

Discussion Questions:

  1. What is the “variable resource” that firms can use less of in the short-run if cost reductions are needed?
  2. In Microeconomics, we sometimes refer to the long-run as the “variable plant period”. Explain the meaning of this concept.
  3. The law of diminishing marginal returns would indicate that if Ford were to close additional factories, it would almost certainly have to simultaneously lay off thousands of additional workers. What is the law of diminishing marginal returns and why does it require firms to lay off workers as plants are closed?

4 responses so far

Dec 03 2008

How the weak British Pound made my Himalayan ski fantasy a reality!

BBC NEWS | Business | Sterling rebounds from sharp fall

Americans, are you planning a vacation anytime soon? If so, why not visit LOVELY Great Britain! Why, you ask, would ANYONE want to visit the UK in during this wet, cold season? Well, here’s why I’m buying British this year:

I recently booked a Himalayan ski tour in Indian Kashmir organized by a British company. The price? 1400 GBP, which only three months ago was the equivalent of $2800 US! Today, with the newly weak British Pound, my ski trip to India will only cost me $2100*. In the span of just a few months, the dollar price of this amazing Himalayan ski adventure has fallen by $700! Naturally, Americans like myself now have an incentive to buy British!

POUND STERLING v UNITED STATES DOLLAR: December 2007 – December 2008


What has caused the slide of the Pound in recent months? Here’s the complicated answer:

“The environment of very weak sentiment regarding the domestic economic picture and potential rate cuts alongside equity volatility is keeping sterling very much on the defensive,” said Jeremy Stretch, strategist at Rabobank.

Strategists get paid lots of money to say stuff that 99% of people don’t understand the first time they read it. I get paid very little money to help those people better understand it, specifically, my students. Here’s what Mr. Stretch is trying to say:

A weak economy in Great Britain leads foreign investors to believe that the Bank of England may lower interest rates in the near future. Why would Britain’s central bank lower interest rates? Because lower interest rates create an incentive for consumers and businesses to take out loans from banks and spend money in the economy, which should create new jobs and help prevent a recession in the UK.

If the bank does lower interest rates, this puts “the sterling on the defensive”, in other words, leads to a weakening of the British Pound, as foreign investors looking to put their money where they can earn a decent return on it will be less likely to save in the UK when interest rates fall. “Equity volatility” is a fancy way of saying British stocks have been performing poorly, decreasing their attraction to foreign investors. When saving in British banks becomes less attractive due to expected interest rate cuts, and buying British stocks becomes risky due to their volatility, investors turn to the safest investment in the world, which is… can you guess? United States government bonds!

So how’s this all relate to exchange rates, you ask? Let’s leave this question for readers to answer and discuss in the comments:

Discussion Questions:

  1. How does the expected drop in British interest rates affect the demand for British pounds on foreign exchange markets? What does this do to the value of the pound?
  2. Why does the stability and safety of US government bonds lead to a strengthening of the dollar in times of global economic slowdowns?
  3. How has the recession in the United States further contributed to the weakening of the British pound?

*In fact, I’m too poor to take a ski trip to India this year, I will have to settle for the puny peaks here in the Swiss Alps!

20 responses so far

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