Swine flu fear leads to shortage of garlic in China – Telegraph.

My colleague this morning happened to ask if I had heard about the garlic bubble in China. A quick news search led me to the story:

Garlic prices have increased fifteen fold in China in under a year because Chinese investors are said to be attempting to create an artificial shortage and drive up prices.

Chefs and housewives in some cities are struggling to get hold of one of the nation’s favourite ingredients, which has passed gold and oil to become the China’s best-performing asset.

Several factors have led to the “garlic bubble” in China. Firstly, low prices of garlic last year:

Falling garlic prices last year have contributed to the shortage with many farmers discouraged from planting the crop again…

To compound the problem, supplies of garlic have been further reduced due to speculation. Yes, speculators are hoarding warehouses full of garlic to drive price up in the face of rising demand. Chinese believe that garlic has medicinal properties and is therefore a remedy for swine flu. This year’s unusually high level of demand is attributable to the flu epidemic and Chinese desire to consume more garlic to fend off the illness.

The result of all these combined factors is illustrated below. The low prices in 2008 led to farmers to cut back on production, reducing supply to S2009normal. What the farmers did not predict, however, is the rise in demand due to swine flu. The reduced supply is exacerbated by speculators buying up output and warehousing it, shifting supply further left to S2009w/speculation.

As can be seen, prices have risen, but shortages persist. It should be expected, therefore, that prices will continue to rise until the shortages are eliminated. On the other hand, the speculators may begin to release their hoarded supplies, shifting supply outward and restoring equilibrium closer to the current price.

A third possibility is that the swine flu epidemic will subside and demand will return to a normal level. This, of course, would spell doom for speculators who put millions of RMB into garlic who would then find themselves with “assets” that had lost their value. This would mean the proverbial “bursting of the bubble”. This final possibility seems unlikely anytime soon, for among the Chinese, traditional beliefs run deep, and with the lack of widespread access to a swine flu vaccine, garlic will likely remain the remedy of choice for the country’s masses.

AP Question of the week:

Refer to the graph to answer the questions that follow:

1. The graph above shows the (In macroeconomics): The period of time over which wages and prices are relatively inflexible. A fall in aggregate demand will lead to unemployment and recession in the short-run. Due to the inability of the nation's producers to reduce wages paid to worker, they must lay workers off to reduce costs as demand falls.');" onmouseout="tooltip.hide();">short-run costs faced by a firm in a perfectly competitive industry. Identify the cost curves that are denoted by each of the following:
   1. Curve 1
   2. Curve 2
   3. Curve 3
2. Explain why Curve 1 intersects Curves 2 and 3 at the precise points that it does.
3. Identify and explain the economic “law” that determines and HOW it determines the shape of Curve 1.
4. At which price(s) would this firm be earning economic profits when producing at quantity Q1? Explain.
5. At which price(s) would this firm shut down when producing at Q1? Explain

IB Question of the week:

1. Explain how, in theory, a flexible exchange rate system should lead to the automatic stabilization of a nation’s current account balance. Use supply and demand diagrams to illustrate your answer
2. Referencing the Marshal Lerner Condition, explain the possible effects of a depreciation of a nation’s currency on its current account balance.

Greg Mankiw’s Blog: Take Out Your Pencils 2

Harvard’s Greg Mankiw just keep them coming! Here’s another micro problem from the esteemed professor and textbook author’s blog. Several readers enjoyed challenging themselves with his last Micro problem, so I will re-publish Mankiw’s test question here to see if people can solve it in the comment section on this blog (sorry Professor Mankiw, you have comments turned off on your blog, so how are your readers to know if they have solved it correctly?)

The town of Wiknam has 5 residents whose only activity is producing and consuming fish. They produce fish in two ways. Each person who works on a fish farm raises 2 fish per day. Each person who goes fishing in the town lake catches X fish per day. X depends on N, the number of residents fishing in the lake. In particular,

X = 6 – N.

Each resident is attracted to the job that pays more fish.

a. Why do you suppose that X, the productivity of each fisherman, falls as N, the number of fishermen, rises? What economic term would you use to describe the fish in the town lake? Would the same description apply to the fish from the farms? Explain.

b. The town’s Freedom Party thinks every individual should have the right to choose between fishing in the lake and farming without government interference. Under its policy, how many of the residents would fish in the lake and how many would work on fish farms? How many fish are produced?

c. The town’s Efficiency Party thinks Wiknam should produce as many fish as it can. To achieve this goal, how many of the residents should fish in the lake and how many should work on the farms? (Hint: Create a table that shows the number of fish produced—on farms, from the lake, and in total—for each N from 0 to 5.)

d. The Efficiency Party proposes achieving its goal by taxing each person fishing in the lake by an amount equal to T fish per day and distributing the proceeds equally among all Wiknam residents. Calculate the value of T that would yield the outcome you derived in part (c).

e. Compared with the Freedom Party’s hands-off policy, who benefits and who loses from the imposition of the Efficiency Party’s fishing tax?

Externalities are a common concept, that we unknowingly encounter each day.

Externalities relate to the spillover costs or benefits that arise from the consumption or production of goods and services. To put this more simply, your friend’s consumption of products can sometimes have an effect on you. For instance his increased level of education can make him a valuable asset in quiz games, or his over-indulgence in caffeine can make him a hard person to work with in class. Sometimes society would prefer more social benefits and less of the spillover costs. The concept is called a social equilirium, where price and quantity reflect the social beliefs.

Spillover costs and benefits are things that exist in many nations. Governments for instance, work hard to discourage consumption of products with substantial spill over costs such as alcohol, cigarettes or chewing gum in Singapore. They will also aim to subsidize the production of goods, which generate positive spillover costs such as public gyms, swimming pools, running tracks or national immunization schemes.

Here are a few examples from Singapore to get you thinking about this new topic.

Negative Externality of Consumption – Cars

Living on a small island a mere 50km by 60km with 5 million people brings about many problems including traffic congestion. Whilst Singapore has an excellent system of public transport, including buses and a subway system, people still demand cars in ever increasing quantities. The spillover effects of private car use are traffic congestion and pollution. The government therefore has developed an array of policies to curb the rate of car ownership.

• When you purchase a new car you must pay, an additional 100% of the cars value to the government as an indirect tax. Imagine a new Audi, retailing for $50,000 now costing $100,000 including the tax.
• When you purchase a car you must also purchase a registration permit to drive it on the roads. These permits last for 10 years, after which you must sell the car overseas. A permit is sold through an auction system. When the demand for cars is high the price of the permit rises and demand for new cars may drop. A permit for a 2 litre engine car costs about $14,000 SGD for 10 years.
• Throughout the inner city and freeway system an electronic road-pricing scheme operates. When you drive you car under one of the gantry’s you pay a small congestion tax which is deducted from a debit card in your car. When congestion is high the early evenings the congestion tax is increased from $0.50c to $1.50 on bad days. An evening commute can result is five or six congestion charges, costing drivers anything between $6 and $12.

Negative Externality of Consumption – Chewing Gum
Chewing gum is a product, that to different people, brings either a cost or benefit to society. The consumption of chewing gum can boost the production of saliva and help reduce chance of tooth decay. On the other hand chewing gum is a sign of urban decay with pavements littered with sticky blobs and grey scars.

The Singapore government feels that society would to prefer to minimize the spillover costs of chewing gum. Instead of imposing a tax on a packet of gum, it has been banned. You can not buy gum at any supermarket in Singapore. The result is pristine pavements that allows council cleaners to focus on other tasks.

Funnily enough, the nicotine gum (used to help smokers kick the habit) is legal with a prescription from your doctor.

Discussion Questions:

1. Why is chewing gum not banned in every country, if it produces spill over costs?
2. What are some possible alternative government interventions to reduce traffic congestion in Singapore?
3. Can you apply the concept of externalities to the consumption of deodorant? Draw a graph to show the private and social equilibriums.

• LRB · John Gray · We simply do not know! – Annotated

  AP Macro and IB teachers should read this review of George Akerlof and Robert Schiller’s book “Animal Spirits”. There are some great points in this piece that can be brought into the AP or IB classroom with regards to the assumption of rational behavior and more importantly the Keynesian/Classical debate on Macroeconomic policy issues.

  tags: Keynes, rational behavior, free markets, markets, macroeconomics, animal spirits, fiscal policy, efficiency

  • The last two years, in which capitalism has suffered one of its periodic shocks, have given John Maynard Keynes a new lease of life. Events have demonstrated the limits of the theory that economies can be relied on to be stable if they are lightly regulated and otherwise left to themselves. There is now much talk of the paradox of thrift, whereby the rational choices of individuals can prove collectively ruinous, and of the need for government to counteract the inherently anarchic tendencies of markets. Keynes has been revived because he understood that markets are very often irrational. Unfortunately, few of those who urge that we go back to him seem to have understood why he believed this.
  • Apart from a brief postscript to one of the chapters and a few remarks in the preface, George Akerlof and Robert Shiller’s Animal Spirits was written before the current crisis. Yet, based on research undertaken over many years, it can be read as prefiguring the current disillusionment with economics. The trouble with prevailing theories, in Akerlof and Shiller’s view, is that they assume human beings are more rational than they actually are. ‘This book, which draws on an emerging field called behavioural economics, describes how the economy really works,’ they claim. ‘It accounts for how it works when people really are human, that is, possessed of all-too-human animal spirits.’
    • – post by jasonwelker
  • ‘Just as Adam Smith’s invisible hand is the keynote of classical economics,’ they write, ‘Keynes’s animal spirits are the keynote to a different view of the economy – a view that explains the underlying instabilities of capitalism.’ Here they are endorsing the caricature of Smith propagated by neoliberal ideologues anxious to confer a distinguished patrimony on an illegitimate intellectual offspring.
    • – post by jasonwelker
  • Shackle took Keynes’s argument a step further, and showed that no economic policy can ensure economic stability indefinitely. ‘Keynesian’ policies are no exception to this rule. Deficit financing and monetary expansion may have worked well in the conditions that existed after the Second World War. It is not clear that they will be so effective today, when globalisation has brought a freedom of capital movements that did not exist then.
    • – post by jasonwelker
  • Economics and politics are not separate branches of human activity, and economic life cannot be studied independently of social divisions and political conflicts among populations, along with their cultures and religions.

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

Always looking for new ways to help students and teachers better grasp and learn economics, I have decided to begin a new feature on this blog. Once a week, I will post sample examination questions similar to those found on both the Advanced Placement and the International Baccalaureate exams. The purpose is to provide teachers and students with original questions that they can use for discussion in their own classes or as warm-up activities to begin a class.

The sections of the syllabus covered will vary each week, and will most likely reflect the topics I’m currently covering in my four economics classes. Since I teach both year 1 and year 2 IB Economics, AP Macro and AP Micro, the questions could cover any and all sections of the IB and AP syllabi. I will make it clear which section each question covers, as well as whether it is an IB style or AP style question.

So, without further ado, your first “Exam Questions of the Week”

IB Question of the week: Unit 4 – International Economics

Explain why a country’s large current account deficit puts downward pressure on its exchange rate and and why this may be inflationary for the country.

AP Question of the week: Unit 2.2 – Elasticities

Assume that hamburgers and french fries are complementary goods. The government decides to begin taxing the production of beef, an input in the production of hamburgers.

For each of the following markets, draw a supply and demand diagram showing the effect of a tax on beef producers.

1. The beef market
2. The hamburger market
3. the French fry market

Assume that the demand for hamburgers inelastic in the (In macroeconomics): The period of time over which wages and prices are relatively inflexible. A fall in aggregate demand will lead to unemployment and recession in the short-run. Due to the inability of the nation's producers to reduce wages paid to worker, they must lay workers off to reduce costs as demand falls.');" onmouseout="tooltip.hide();">short-run. How will the tax on beef affect the revenues of hamburger producers.

In the long-run demand for hamburgers is elastic. Explain why this may be.

Greg Mankiws Blog: Take Out Your Pencils

I love that Harvard Economics professor Gregory Mankiw blogs, but I hate that has de-activated the comments on his blog. Yesterday he posted a question from his own Harvard introductory economics class.  Since he doesn’t allow comments though, I cannot tell if I’m solving it correctly. So I will re-publish it here and ask my readers to solve the problem in the comment section.

IB and AP students who have studied microeconomic should be able to put some of their basic algebra skills to work to solve this one.

Only one firm produces and sells soccer balls in the country of Wiknam, and as the story begins, international trade in soccer balls is prohibited. The following equations describe the monopolist’s demand, marginal revenue, total cost, and marginal cost:

Demand: P = 10 – Q
Marginal Revenue: MR = 10 – 2Q
Total Cost: TC = 3 + Q + 0.5 Q^2
Marginal Cost: MC = 1 + Q

where Q is quantity and P is the price measured in Wiknamian dollars.

a. How many soccer balls does the monopolist produce? At what price are they sold? What is the monopolist’s profit?

b. One day, the King of Wiknam decrees that henceforth there will be free trade—either imports or exports— of soccer balls at the world price of $6. The firm is now a price taker. What happens to domestic production of soccer balls? To domestic consumption? Does Wiknam export or import soccer balls?

c. In our analysis of international trade in Chapter 9, a country becomes an exporter when the price without trade is below the world price and an importer when the price without trade is above the world price. Does that conclusion hold in your answers to parts (a) and (b)? Explain.

d. Suppose that the world price was not $6 but, instead, happened to be exactly the same as the domestic price without trade as determined in part (a). Would anything have changed when trade was permitted? Explain.

Post your solutions below, I really want to know if I have solved it correctly!

Just a few weeks ago, the U.S. Government’s Commerce Department provided its first estimate of the country’s 3rd quarter (July-September 2009) gross domestic product or GDP, announcing an estimated annualized quarter over quarter growth of 3.5%. GDP reports are of special interest to countries since they provide an important macroeconomic measurement of how much an economy’s goods & services supply and income has grown, or recessed, compared to the last three calendar months.

Let me try and make the concept of GDP easy to understand and why it is considered perhaps the most important, single macroeconomic measurement.

GDP is simply a calculation that measures the market value (final price) of all the final goods and services produced within the borders of our country. Thus, U.S. GDP includes Toyotas produced in Alabama but excludes Cadillac’s made in Canada. GDP includes all U.S. exports but excludes all U.S. imports since imports, by definition, imports are produced in some other country and are a more direct employment benefit of the foreign country’s GDP.

If you think about it, ultimately our country’s economic satisfaction is best measured by the goods and services that are produced and that we have access to, which is why GDP is the measurement that is synonymous with “economic growth” or growth in goods & services for its citizens. In addition, rising GDP (more goods and services) is the ultimate economic goal of any economy which can best be accomplished through the means of the two other key macroeconomic measurements of employment and productivity, which are not the subject of this particular blog.

Let’s describe how the GDP calculation is made. Each quarter, the Government compares the final value of the domestic goods produced and services rendered in the current quarter to the final value of the goods produced and services rendered in the previous quarter. The calculation then takes the percentage gain, current quarter versus previous quarter, and annualizes the percentage. The comparison is always restated for inflation so that the figures are comparable from one period to the next. For purists, we call this “real GDP” which is the only GDP reported by the media, even though the word “real” is almost always dropped to avoid confusion with the average citizen. For example, the third quarter 2009 U.S. GDP report highlighted a 3.5% GDP annualized growth rate. This means that the second quarter final value of goods and services produced was approximately .87% or 3.5%/4.

Now let me get to my favorite point on GDP, which even many economists lose sight of. GDP growth is precisely the same as income growth! For example, in the second quarter of 2009 we can say that incomes for American households and American citizens grew by 3.5% restated for inflation. Said another way, our country’s purchasing power grew by 3.5% which represents the income to produce the increasing supply of goods and services. You probably never thought about it this way but every time you purchase something, every dollar you spend is going to someone as income, whether it is the workers as wages or benefits, the landlords as rent, a bank that has made a loan as interest income, or to the owners of the business as profits. I tell my students that Real GDP = Real Income and the only question is how that real income is dispersed among owners (profits), workers (employee wages and benefits), lenders (interest), and lessors (rent). Many citizens are unaware that the Government calculates GDP both in terms of the final market value of the goods and services PRODUCED (the “expenditure method”, which is the version that the media uses, as well as how that same production value under the “expenditure method” translates to higher incomes in a GDP version called the “income method”.

I find the preceding paragraph, GDP = Income, to be a break through moment for a lot of citizens, or first time economic students, in truly understanding the value of the GDP measurement. It is easier for most to think in terms percentage growth in income in lieu of a fuzzier wording like GDP percentage growth. Most citizens are surprised to find that our national incomes or GDP, restated for inflation, increased by 17.4% from 2000 – 2007, just prior to the onset of this current recession. This 7-year growth rate in GDP or incomes still equates to a below average historical average performance. More specifically, over the last 7 years our average annual GDP or income growth rate was only 2.2% versus our historical average growth rate of 3.2%. However, the final point of caution is that the GDP or income growth rate is a collective average, thus the growth in GDP or incomes does not indicate how those income gains are accruing to the various socioeconomic classes or professions. That is also a topic of a future blog on “income distribution” or equality.

Discussion Questions:

1. Have you ever thought about substituting the word “income” for “GDP” to understand GDP more simply? Why are the concepts of income and GDP inter-changeable?
2. Which four groups earn the income generated by the production of goods and services?
3. Although GDP has still risen this decade, despite the current severe recession, many analyses show that our nation’s middle class has made virtually no real income gains this decade. How could this be so if GDP = Income and our GDP has grown this decade?

• A special report on China and America: : Round and round it goes | The Economist – Annotated

  China and the US have a complicated relationship when it comes to trade. It may be changing in the future due to the recession in America, but for some that change can’t come fast enough!

  tags: economics, current account, capital account, protectionism, exchange rates, managed exchange rate, China

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

• YouTube – ACDCLeadership’s Channel

  Mr. Clifford and ACDC Leadership is dedicated to creating interactive programs, lessons, and activities that make learning exciting.

  tags: Economics videos, resources, review

• Knowledge Learning Corporation | Child Care & Education Services

  Are you looking for a great opportunity, a rewarding career, or the chance to make a difference? KC Distance Learning is hiring NCLB Highly Qualified High School certificated teachers to fill positions across the country. We currently have part-time and full-time positions available for qualified teachers who want to work from their home.  Working at KCDL you will enjoy a flexible work environment, utilize the latest distance learning and communications technology, and, best of all, you can help students from all walks of life achieve their individual potential.

  tags: teaching, Economics, Advanced, Placement, online, education

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