Teaching at an international school affords me the privilege of encountering and learning from truly unique and diverse individuals. Last week, my Economics classes were lucky to have as a guest speaker one very interesting and inspirational young man named Andrew Cunningham. Andrew, originally from Vermont, graduated from Duke University in 2008 and has helped co-found a non-governmental organization (NGO) focused on promoting grassroots strategies for economic development. WISER (Women’s Institute for Secondary Education and Research) serves a community of 35,000 in Kenya’s Muhuru Bay, an area where the per capita income is around $1 a day and 38% of the population is HIV positive.

Traditionally, less than 5% of young girls complete primary school in Muhuru Bay. In the town’s history, only ONE girl has ever gone to university (she would become the only Muhuru Bay native to complete her PhD and would eventually co-found WISER with Andrew). A combination of tradition, culture, and most importantly poverty had prevented improvements in the plight of woman in this poor corner of Africa. What was needed, decided Andrew and his founding partners, was an all-girls boarding school where opportunities for young women were promoted and academic achievement encouraged and fostered. WISER opened the community’s first all-girls secondary school in 2010 to 130 local girls who had made it through primary school.

Beyond female education, WISER have embarked on several other development projects in the last year and a half. In his visit to our IB Economics class, Andrew told the story of human development in Muhuru Bay as occurring primarily in three realms.

• Education, 
• health, and 
• entrepreneurship.

I will briefly summarize the three main development strategies WISER has employed in Muhuru Bay, starting with education.

Education as a development strategy:

Education is a primary and fundamental strategy for eradicating poverty. A nation’s human capital is its most vital resource, and the road to prosperity requires an effective education system that does not discriminate based on race, gender, or socioeconomic status. In Muhuru Bay, which is 14 hours by car across un-paved roads from Kenya’s capitol, the education system had failed to achieve meaningful results, both for boys and girls. Student performance on national examinations across the primary grade levels had historically averaged around 11% passing rates. Boys out-performed girls, but as a whole only about one in ten Muhuru Bay children passed the examination required for admittance to secondary school in Kenya.

WISER wished to improve this dismal statistic. If they were going to build a secondary school for girls, they would need to first get girls to pass the national exam for entrance to secondary school, or else their new building would be full of empty desks.

Andrew first talked to my class about the traditional development community (think World Bank, UNICEF, USAID) approach to promoting education in Africa. You are probably thinking the way to help these kids is to give them resources to improve their education. Build better schools, give them textbooks and school supplies, maybe uniforms, build a library, electricity in the classroom, chalk boards, heck, how about we give them laptop computers! All of these ideas represent the traditional development community’s approach to improving education in poor countries. The problem is that these strategies focus only on the inputs into education, and completely fail to look at the output.

Inputs and outputs are common topics of discussion in any Economics class. To produce anything, three resources are required: land, labor, and capital. The traditional approach to improving education in Africa focused primarily on the land and capital. Things such as pens, notebooks, laptops, and new libraries are great, but they have little actual impact on what gets learned in a school. The neglected factor was the labor (i.e. the teachers!) In Muhuru Bay, teachers were paid so miserably and worked in such dismal conditions that the incentive to actually improve their students’ results was just too weak! With passing rates at 11% on national exams, WISER set about figuring out how to use incentives to improve the outputs of education in Muhuru Bay.

A simple and relatively low-cost plan was put into action. Teachers were told that if their students’ scores increased by only 15% on the exams, they would receive a 100% increase in their salary. Andrew and WISER worked with the national education ministry to develop interim exams that could be given quarterly to help the teachers measure their students’ improvement before the annual national examination.

With only minimal investments on the land and capital resources (i.e. textbooks and classroom materials) in Muhuru Bay schools, and by spending less than $10,000 on teacher raises, the passing rate among Muhuru Bay schools increased in one year from 11% to 36%. Hundreds of students, boys and girls, who would not have been able to enter secondary school the previous year, instead passed the exam and were eligible for a secondary education, a crucial step towards a better future!

The teachers’ incentive pay program was such a success in Muhuru Bay last year that the state government has taken notice and intends to implement it in other rural communities throughout Kenya. By focusing on the outputs (student learning), rather than the inputs (classroom resources) WISER has assured that when their all-girls school opens in January, its seats will be filled with qualified students who successfully completed their primary education.

Health as a development strategy:

The second topic of Andrew’s discussion with my IB Economics classes focused on health and sanitation, specifically solving the problem of open defecation (“OD” is a technical term used in the development community referring to the fact that in many poor communities basic latrines are non-existent, and therefore people shit in the open). OD in Muhuru Bay contributed to the poor health and low life expectancy of locals; According to Andrew an estimated 60 people were dying each year of cholera, a disease spread via human waste.

In the health realm of traditional economic development programs, the same basic dilemma between focusing on the inputs or the outputs had stymied previous attempts to reduce OD in Muhuru Bay. Recently, an outside aid organization had made loans to the community to build 30 public latrines. Within a year, however, the latrines had fallen into disrepair and were essentially useless. When Andrew and his team asked the community members why they had let the latrines fall into such a poor state, their answer was predictable. These were not their latrines, they belonged to the aid organization that had built the latrines. If they were broken, the aid organization could fix them! Such logic reflects a common problem in economics, that of the tragedy of the commons. Because the latrines were public, no one owned them. Because no one owned them, no one cared for them. When the latrines fell out of repair, people quickly reverted back to OD, and instances of cholera and other diseases increased once more.

WISER decided to tackle this problem using a similar approach as the one used to fix primary education in Muhuru Bay, by focusing on the output, rather than the inputs. In this case, the goal was simple: create incentives for people to build their OWN latrines, which they would then have an incentive to take care of and use. The strategy for promoting personal latrines they decided to employ is one that has been successfully implemented throughout the developing world, and is now funded by UNICEF, which trains facilitators to go into a community and in a very short time, and at a very low cost, incentivize the locals to take sanitation into their own hands and build their own latrines.

Community Led Total Sanitation (CLTS) is a mind-blowing and shockingly blunt way to promote sanitation. Rather than spending thousands of dollars to build public latrines, the CLTS approach brings community members together for an afternoon of discussion and education about sanitation issues. Locals are asked to take an index card and go to “where they shit” and collect a sample of their own waste. A large pile of human waste is placed on a table in front of a room full of locals right next to a large selection of delicious foods. The facilitator then goes about discussing basic facts related to OD in the community, such as “If you added up all the shit your community produces in a year, how many donkeys would it weigh as much as?” or, “How many bags of rice would you have to eat to create this much shit?” In the mean time, of course, hundreds of flies have descended on the pile of waste in the front of the room, and the community members look on in utter disgust as the flies jump from the feces to the food and back again.

At the end of the lecture, the facilitator turns to the food and says, “Well, it’s time for lunch, who’s hungry?” In utter disgust, the locals ask the facilitator if he has gone mad. The lesson, of course, is that the food and water the community consumes is most likely being contaminated by the waste they produce and deposit in the open around their village. Within a few weeks of the CLTS project in Muhuru Bay, 256 new latrines were built by the community members themselves. Whereas previously, only around 15% of the locals used latrines regularly, after the CLTS project around 75% had access to the “facilities”.

The total cost of the CLTS sanitation project? Around $55, a tiny fraction of the cost of building the public latrines that had previously been neglected by the community. By focusing on the outputs rather than the inputs, real development in the health of the community was achieved at a very low financial cost.

Entrepreneurship and micro-lending as a development strategy:

The final approach to human development in Muhuru Bay Andrew discussed with my classes focused on the economic empowerment of community entrepreneurs. Micro-lending is a much talked about and widely used development strategy that provides financial credit or technology loans to entrepreneurs in poor communities to create small businesses, ideally ones with a socially beneficial purpose. Watch the first 12 minutes of the video below to get a better idea of the history and purpose of micro-finance as a strategy for achieving economic development.

In Muhuru Bay, the micro-lending scheme Andrew has pioneered involved not financial capital, but physical capital (i.e. technology).

WISER was able to secure several technology donations, including a copy machine, several laptop computers with cellular internet connections, a foot pump for water, and a digital LCD projector. WISER then solicited loan requests from several “young entrepreneurs”. Young men and women wrote business plans outlining how they would use the technology loans to generate income for themselves and the community, and provide services that would benefit others in the Muhuru Bay community. The technology would not be donated to the recipients; rather they would be required to pay back the value of the capital through their business revenues.

It is simply amazing how a few pieces of second-hand technology, items that we in the rich North would take for granted as relatively common and thus of very little social or economic value, can completely change a poor community in Africa for the better. Here’s how some of the capital Andrew and WISER loaned to young entrepreneurs were put to use to achieve meaningful development in Muhuru Bay:

• The copy machine was installed and powered by a generator. It was the first such machine ever installed in Muhuru Bay. Local businesses, students, job seekers and other could now, for a few cents, photo-copy their documents locally, avoiding the two hour drive previously required for such a service.
• The laptops were installed in an internet café and made available to local students and businesses. Farmers and fisherman could check product prices in the cities hours away, increasing efficiency and bargaining positions when middle-men came to town to buy their produce. Job openings in the city newspapers’ classifieds could be printed and posted for the local community to see, improving information symmetry between the poor countryside and the cities where job opportunities existed. The cost of access to these services was cheap, yet the entrepreneurs who were granted the laptop loan were able to pay back the cost of the technology in no time at all, and the community as a whole benefited from their existence.
• My favorite entrepreneurial venture involved the LCD projector. This piece of technology, which now hangs from the ceiling of thousands of classrooms around the rich world, had never before been seen in Muhuru Bay. You may think it ended up in a classroom or in an office building, but no; the entrepreneurs who received the projector hooked it up to a satellite dish which captured and projected English Premier League football matches onto the wall of a large room in a local building. The business was to sell tickets to local football fans who were more than happy to pay to watch English football matches in full color on a wall-sized screen. Before the projector, dozens would have huddled around a tiny television with poor reception to watch football matches. The “football theater” business was the most successful of all, and paid back its loan fastest.

All three of these entrepreneurial endeavors were very low cost, using donated technologies. The reason for their successes, however, must be attributed to the model for implementation. They were not simply “given” to the community. Such a strategy would certainly have led to the same “tragedy of the commons” experienced when the outside aid organization funded the construction of public latrines. The capital would have been neglected and fallen into disrepair. By lending the technology to businesses, however, the incentive for innovative and socially beneficial ventures was created, and a business model was developed to best utilize the resources in a profit-earning, sustainable manner. With very little inputs, fantastic outputs were achieved, enriching not only the entrepreneurs, but the entire Muhuru Bay community.

Economic Development the WISER Way:

Andrew’s visit to Zurich International School was eye-opening in many ways. He brought to light both the successes of WISER and other community projects in rural Kenya, but also shined a light on the failures of the traditional development community’s agenda. When I think about the hundreds of billions of dollars that have been committed to economic development in Africa over the past decades, and on into future decades, I wonder whether the diplomats and the politicians in the “aid community” have any idea how much has been accomplished on the ground in places like Muhuru Bay thanks to community-based organization like WISER.

With so little, so much can be accomplished. The poor of Africa and the world need resources, but more importantly they need education, health and sanitation, and business opportunities so that they can enjoy the benefits of development from the bottom up. Development aid, as it has traditionally been distributed, comes from the top down, funneled through national governments. Waste and corruption are rampant, and typically only a fraction of what has been given ends up on the ground in places like Muhuru Bay. Even when it does, the tragedy of the commons often results in inefficiency and waste, as the “inputs” are managed and distributed from the top down, leading to uncertainty of ownership and misaligned incentives once the resources are on the ground.

Perhaps aid from the outside is still needed, but Andy’s visit showed me and my students that something much more basic lies at the core of successful economic development. Education focusing on outputs rather than inputs, sanitation focusing on outputs rather than inputs, and entrepreneurship that empowers business leadership, have improved the lives of thousands in one Kenyan community. What could such a re-thinking of development strategies do for the rest of Africa and the developing world?

Related posts:

1. Does economic growth = economic development? Not for China’s rural poor…
2. The “bottom billion”, aid, and strategies for achieving economic development
3. Introduction to Economic Development – Myths about Development, debunked

As we study economic development in year 2 IB Economics, we examine different models for economic growth. Growth in GDP is not the only determinant of economic development, which in order to be measured effectively must account for human welfare determinants such as life expectancy, literacy rates, child mortality rates, distribution of income, and so on. However, it has been shown throughout history that economic growth, or the increase in real output and income, correlates directly with improvements in development factors like those above.

The reason? Increases in national income usually mean at least some levels of improvement in access to basic necessities for the average citizen in a developing country. Also, higher incomes mean more savings, which means greater access to capital for investment by entrepreneurs. More investment leads to greater productivity and rising incomes for those who join the emerging industrial and service sectors that usually accompany economic growth. Furthermore, rising incomes mean more tax revenue for governments, whose spending on public goods like education, health care, and infrastructure result in real improvements in standard of living for not just the emerging upper and middle classes, but the poor as well.

Of course, the following models can be observed to varying degrees among the world’s developing economies today. Some of these models will fail to play out if the institutional and political environment fails to create a stable atmosphere for savings and investment. What you should notice, however, is the underlying importance of savings in all three models. Poor countries suffering from low savings and, even worse, capital flight, are doomed to a cycle of poverty, where funds for investment leading to productivity increases are never made available due to instable institutions like banking and politics. To put a poor country on a path towards economic growth and development, a strategy is needed. Such strategies will be covered in a later post. For now, let’s look at the models:

Harrod-Domar Growth Model:

The model suggests that the economy’s rate of growth depends on:

1. the level of saving
2. the productivity of investment i.e. the capital output ratio

The Harrod-Domar model was developed to help analyse the business cycle. However, it was later adapted to ‘explain’ economic growth. It concluded that:

• Economic growth depends on the amount of labour and capital.
• As LDCs often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development.
• More physical capital generates economic growth.
• Net investment leads to more capital accumulation, which generates higher output and income.
• Higher income allows higher levels of saving.

Lewis Structural Change (dual-sector) Model:

Many LDCs have dual economies:

• The traditional agricultural sector was assumed to be of a subsistence nature characterised by low productivity, low incomes, low savings and considerable underemployment.
• The industrial sector was assumed to be technologically advanced with high levels of investment operating in an urban environment.

Lewis suggested that the modern industrial sector would attract workers from the rural areas.

• Industrial firms, whether private or publicly owned could offer wages that would guarantee a higher quality of life than remaining in the rural areas could provide.
• Furthermore, as the level of labour productivity was so low in traditional agricultural areas people leaving the rural areas would have virtually no impact on output.
• Indeed, the amount of food available to the remaining villagers would increase as the same amount of food could be shared amongst fewer people. This might generate a surplus which could them be sold generating income.

Those people that moved away from the villages to the towns would earn increased incomes:

• Higher incomes generate more savings.
• Increased savings meant more fund available for investment.
• Increased investment meant more capital and increased productivity in the industrial sector, higher wages, more incentive to move from low productivity agriculture to high productivity industry, the circle continues…

Rostow’s Model – the 5 Stages of Economic Development:

In 1960, the American Economic Historian, WW Rostow suggested that countries passed through five stages of economic development.

According to Rostow development requires substantial investment in capital. For the economies of LDCs to grow the right conditions for such investment would have to be created. If aid is given or foreign direct investment occurs at stage 3 the economy needs to have reached stage 2. If the stage 2 has been reached then injections of investment may lead to rapid growth.

Related posts:

1. Does economic growth = economic development? Not for China’s rural poor…
2. Lesson Plan: Sources of Economic Growth and Development
3. “Fair Trade” coffee and economic development

Since September 2011 I have been producing and publishing around three video lessons per week covering the topics I’m teaching in my three Economics classes at any given time. With an AP Macro class, a year 1 and year 2 class going on all at the same time, this means I’ve been making videos covering everything from linear supply functions to protectionist quotas to monetary policy.

This week I posted my 50th video lesson. Since I began producing lessons on my YouTube channel, they’ve been viewed over 35,000 times and nearly 200 people have subscribed to my YouTube feed.

If you haven’t checked out my new website, The Economics Classroom, consider subscribing to the weekly newsletter from that site. You’ll receive one email a week with links to the latest videos covering Micro, Macro and International concepts. In addition, I’ve been creating and posting free worksheets, practice activities and even unit quizzes and tests to the resource page.

If you’re wondering what my videos are like, check out the one I posted tonight to introduce the new IB Year 1 unit on Theory of the Firm, which I’ll start teaching on Tuesday this week!

Related posts:

1. A new website for Video Lectures – the Economics Classroom
2. Welker’s Wikinomics turns FOUR!
3. Welker’s Wikinomics celebrates its 1st birthday with exciting new features for Economics teaches and students

IB Economists,

For your final quiz on our market failure unit, you will not be sitting in class writing, as usual. Rather, you will answer one of two possible questions in a video dialogue using the software available through the website Xtranormal. Here’s an example of what you will create:

Market Failure Video Quiz
by: welkerjason

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The assignment is as follows:

1. Create a free account on Xtranormal.com or log in using one of your other online accounts.
2. Once logged in, click the “Create” tab.
3. Choose one of the themes for your video. Notice, however, that you have only 300 xp (xtranormal points) to use in the production of your video, so some of the themes you cannot use for free.
4. Once you’ve chosen a theme you can afford to make a video on, choose the question you wish to answer in your video.
5. Think about how to best answer the question in dialogue form. It is recommended that rather than simply answering the question like you would on a written test or quiz, you have your two characters engage in a conversation about the topic. Another suggestion would be to show a simulated transaction in which the main idea of the topic is illustrated.
6. Experiment with camera angles, expressions, gestures, sounds and so on. While your grade will be based wholly on the content of your dialogue, production quality can certainly add to the entertainment value of your video.
7. Keep your video between 4 and 5 minutes in length. Either of the two questions should be able to be addressed in this amount of time. Be sure to preview your video before publishing, otherwise you will spend your xp points and not have enough to make changes later on.
8.  When you have previewed the video and re happy with it, publish it to the Xtranormal site. After it has finished rendering, view your video and copy the embed code, then log into our class Posterous page (zis-economics.posterous.com) and past the embed code into the html screen of a new post. Publish your video on that page for your teacher to see. Make sure you name is included in the post.

The questions: You may chose ONE of the following questions to address in your video:

• Explain, using examples, how market failure may occur when one party in an economic transaction possesses more information than the other party. (10 marks)
• Explain why inequality in the distribution of income within a nation is sometimes considered a market failure and how government policy can help reduce income inequality (10 marks)

Related posts:

1. Market failure versus Government failure – what should we be more concerned about?
2. IB Economics Podcast Assignment – Market Failure Commentary
3. Market Failure and the role of government in the economy ~ an introduction to Environmental Economics

Students, check out the link below. The winner of this competition will receive a cash prize of 1,000 British pounds. The questions are very interesting this year, and I believe a year two IB Economic student has all the knowledge and skill to write an outstanding essay on any one of this year’s topics!

Economics – RES Annual Essay Competition for Students 2012

This year’s competition is open to IB Economics students. The essays must be below 2,500 words. This topic questions the student may chose from are:

1. Africa is well-placed to achieve rapid and sustainable development in the decade ahead. Do you agree?
2. Over a million young people in the UK are unemployed. What should be done to address the problem?
3. A breakup of the euro provides the best hope for a durable recovery of the European economy. Discuss
4. To what extent can we use ideas drawn from behavioural economics to help address specific social and economic problems?
5. Manufacturing’s share of the UK economy shrank from 19% in 1998 to 12% by 2007. Does this matter and, if so, how could policy revitalise British manufacturing?
6. Is there a better way out of the debt crisis than austerity?

If any of my students are interested in entering the competition, let me know and I would be happy to speak with you about the selection of topic.

Related posts:

1. Advice for an aspiring IB Economics Extended Essay author
2. ZIS Economics Student Podcasts – now online!
3. Calling all Y1 and Y2 IB Economics students

Gapminder – Home

Hans Rosling, a Swedish professor of international health, is well known for his animated presentations on Human Health and Development. Some would describe Rosling’s presentations as doing for Economic Development what  Al Gore’s “The Inconvenient Truth” did for global warming, in that they have spread awareness of the obstacles to and sources of economic development to a wide audience using powerful visual metaphors and data presentations.

Using software he developed to analyze data on human development called “Gapminder”, Rosling gives a mind-blowing presentation on the trends in economic and human welfare over the last thirty years, debunking several myths believed true by many in the first world about development and poverty.

Watch three of Rosling’s presentations below before beginning the assignment.

2006 TED Conference:

2007 TED Conference:

Hans Rosling’s Magical Washing Machine

Related posts:

1. Lesson Plan: Sources of Economic Growth and Development
2. Lesson Plan: Visualizing Economic Growth and Economic Development
3. Does economic growth = economic development? Not for China’s rural poor…

Over the last two weeks our IB Year 1 Economics students here at Zurich International School have been writing, recording, editing, and now publishing their own podcasts. Over the next two days these podcasts, covering several economics issues relating to Market Failure, will be published to the site below. If you have the chance, give them a listen; there are some very high quality examples of economic analysis and commentary here! Enjoy!

Related posts:

1. IB Economics Podcast Assignment – Market Failure Commentary
2. A new website for Video Lectures – the Economics Classroom
3. Economics student Essay Competition with a fat CASH prize!

Related Unit: IB Economics Unit 4.7 – Balance of Payments (Unit 3.3 in the new IB Economics syllabus)

Topic: The Marshall Lerner Condition and the J-Curve

Learning Goals/Objectives:

• For students to understand that the levels of price elasticity of demand for a country’s imports and exports determines whether a depreciation or devaluation of the country’s currency will move the nation’s balance of payments towards a surplus or a deficit.
• For students to understand the impact of time on the effect of a depreciation or devaluation of a nation’s currency on its balance of payments in the current account.
• For students to evaluate the argument that a country will always benefit from a weaker currency.

Test of prior knowledge:

1. Define ‘price elasticity of demand’ and explain how it is measured.
2. With the use of examples, explain why some products have low price elasticity while others have a high elasticity. With the use of examples, explain why the price elasticity of demand for some goods changes over time
3. Explain how the depreciation of a country’s exchange rate might affect its current account balance. IS THIS ALWAYS THE CASE?
4. How might the PED for exports and imports influence the balance on the current account following a change in the value of a nation’s currency?

Process:

• Each student should research the forex market for his or her home country in the United States. If you are American, research the forex market for the dollar in Europe.
• Complete three pre-readings:
  • From BizEd:
    The Marshall Lerner Condition and The Economic Effects of a Devaluation
  • From Welker’s blog: The Marshall Lerner Condition and the J-Curve
    
• Using Yahoo Finance, research exchange rate data from the two countries two years ago up to today.
• Use Yahoo’s software to create two a line graph plotting the value of your currency in terms of dollars. For your initial graph, show the exchange rates over a two year period. For example:

The exchange rate of Japanese Yen in the United States over the last two years:

Next create a Google Doc (shared with your teacher)  of your answers to the following questions. Include in the presentation the graph of the exchange rates created in the step above.

Questions to answer in your Google Doc:

1. Create a graph of your currency’s exchange rate in the US over the last two years. Take a screen shot and save it to your computer as an image. Insert the chart into your Google Doc. Write a one paragraph description of the changes in your country’s exchange rate over the last two years. (2 marks)
2. Focus on two specific time periods from during the last two years: One in which your currency appreciated noticeably and one in which it depreciated noticeably. These  could be periods of just a couple of days or longer periods of weeks or more. (4 marks)
   • In Yahoo Finance, narrow the range of dates shown on your chart to the distinct period in which your currency strengthened and another period during which it weakened. Take a screen shot of the new graphs you’ve created, save them to your computer and upload them into the Google Doc.
   • Under each new chart, describe what is happening to the value of your currency in the two periods identified.
3. Beneath your two new graphs, explain TWO factors that may have caused the currency to change in value. (2 marks)
4. Given the changes to the exchange rate you identified above, what would you predict would happen to your country’s current account balance over the two periods identified? Explain. (4 marks)
   • Following appreciation (2 marks)
   • In the short-run
   • In the long-run
   • Following depreciation  (2 marks)
   • In the short-run
   • In the long-run:
5. For both the period of appreciation and the period of depreciation you identified above, explain the impact of the change in exchange rates on the following (4 marks)
• a firm that imports its raw materials from the other country
• a firm that exports its finished products to the other country
• consumers who buy imports from the other country
• a firm that produces good for the domestic market and competes with firms from the other country
6. Why does the price elasticity of demand for imports and exports increase over time following a change in a country’s exchange rate? (2 marks)
7. Why will a depreciating currency worsen a country’s current account balance in the short-run? Assuming the currency remains weak,  how would the current account balance change over time. (2 marks)
8. Draw a J-Curve showing the likely change in your nation’s current account balance following the period of depreciation of its currency shown in your chart above and explain its shape, referring to your country’s currency. (2 marks)
9. Read the following article:  ‘How Far Will the Dollar Fall?’ by Richard W. Rahn. Based on the extracts below, answer the questions that follow.

Some applaud the dollar’s fall because they believe it makes U.S. exports less expensive and that higher demand will cut the trade deficit. The downside of a low-value dollar is that it makes all the imports we consume more expensive, including raw material and parts used by U.S. businesses, and makes it costlier for U.S. dollar holders to travel or invest outside the U.S. A continued drop in the dollar’s value could destabilize the international economy, leading to a worldwide recession.

• Why might the weaker dollar worsen the US trade deficit? Under what conditions would the weaker dollar improve America’s trade deficit? (2 marks)

Some argue our large trade deficit (or current account deficit) is responsible for the fall in the dollar’s value. They have it backward. It is the flow of foreign investment dollars (the capital account) into the U.S. economy that drives the trade deficit.

• How does a large financial (capital) account surplus allow the United States to maintain a large current account deficit? (2 marks)

The world now is actually on a two-currency standard — the dollar and the euro. China in effect has fixed its currency to the dollar for the last two decades, and the Japanese central bank only allows the yen to fluctuate within a limited range against the dollar.

• How do exchange rate controls by China and Japan reduce the likelihood that a weaker dollar will improve the United States’ current account balance? (2 marks)

So long as the U.S. continues to offer a higher return on capital than its foreign competitors, both foreign banks’ and private investors’ demand for dollars grow, and the current account deficit can be sustained.

• If investments in the United States began earning lower returns relative to investments in other countries’ financial and capital markets, what would ultimately happen to the US balance of payments in its current and financial accounts? Explain (2 marks)

Total 30  marks – You have two class periods to work on this assignment. It will be graded as a “coursework” grade and counted towards your semester 1 report. To earn full marks, it must be completed by the end of the second class period.

The above lesson was inspired by the Biz-Ed activity “International Trade: The Falling Dollar or Rising Pound?”

Related posts:

1. The Marshall-Lerner Condition, the J-curve, and the US trade deficit
2. Exchange rates and trade: a delicate balancing act, currently out of balance!
3. How do changing interest rates affect exchange rates? The example of the RMB

If you’re a regular visitor to this blog, you’ll notice that over the last month or so, I have begun posting many video lectures to YouTube and including them in lessons and activities on this blog. My adventures in the “flipped classroom” model of instruction has proven extremely successful, as I have heard much positive feedback from students who have found the videos useful reinforcement for our regular class activities and a helpful tool for revision.

As this project has developed, however, I have begun to notice that this blog has turned into more of a video hosting site and less of what it has always been, which is a written journal of economic analysis targeted at the high school economic student. While I have begun making video lectures, I do not want to neglect the traditional form of blogging that has guided my activities on this site for almost five years.

Therefore, I have decided to add a new site to the selection of resources already available through Welker’s Wikinomics. As of tonight, I have created The Economics Classroom, a website built exclusively for my video lectures. From now on, all video lectures uploaded to YouTube will be published on the new site, at www.econclassroom.com.

Videos will be organized in categories based on the five units of the IB Economics syllabus: Intro, Micro, Macro, International and Development Economics. Much like blog posts on this blog, videos posted to the Economics Classroom will include discussion questions or in-class activities for students to complete on their own or during class with their peers and their teacher’s help.

Please visit the Economics Classroom and enjoy the videos that are there. Currently, only about 17 video lectures have been posted, but I am recording on average three per week, and by the end of this year I anticipate there will be around 100 lectures available on the site. Over the next two years, I will record over 150 lectures covering every topic from the IB and AP Economics syllabuses.

Leave your feedback on the posts. Join the discussions that are already going on on some of the posts. Tell your friends, your teachers, and your students about the site! The more people who use it, the better it will become!

Thanks for everything!

Jason

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Once again, my IB Economics students are working on yet another Internal Assessment Commentary, this time on syllabus section 3, Macroeconomics. Since they found my sample Microeconomics commentary so helpful, I thought I’d punch out a quick sample of a macro commentary for them and for anyone else who is working on their IB Economcis Internal Assessment.

The commentary below (not including the selection from the article) is 749 words in length. This does NOT include words in the graphs, so let’s not have that debate in the comment section. The new IB economics internal assessment model (first examinations 2013) will not count words on graphs, so this sample commentary is perfectly suited for the new assessment model. If you’re a 2012 student, you would be wise to count words in graphs as part of your word count.

If you like what you see, or have any quesitons, please leave your comments below the post.

Article highlights:

An Impeccable Disaster – NYTimes.com

Paul Krugman clearly explains the problems faced by two or Europe’s largest economies today:

So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions.

Here’s how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.

Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. As a result, the threat of a self-fulfilling crisis is very real — and interest rates on Spanish and Italian debt are more than twice the rate on British debt.

Commentary:

The European Central Bank (ECB) is engaging in a new form of monetary policy in which it buys government bonds directly from the Spanish and Italian governments. Essentially, the goal is to bring down the interest rates on Italian and Spanish government bonds, which should reassure private investors that Italy and Spain will be able to pay them back and thus reduce the upward pressure on interest rates in the Eurozone, a situation which threatens to reverse the already sluggish recovery from the recessions of 2008 and 2009.

Monetary policy refers to a central bank’s manipulation of the money supply and interest rates, aimed at either increasing interest rates (contractionary monetary policy) or reducing interest rates (expansionary monetary policy). The ECB is currently buying government bonds from European governments, effectively increasing the supply of money in Europe with the hope that more government and private sector spending will move the Eurozone economy closer to its full employment level of output, at which workers, land and capital resources are fully employed towards the production of goods and services.

If successful, the ECB’s “quantitative easing”, as the new type of monetary policy is known, should bring down interest rates on government bonds and thereby reallocate loanable funds towards Italy and Spain’s public and private sectors.  The increase in supply of loanable funds should bring down the private interest rates available to borrows (businesses and households), making private investment more attractive.

The ECB’s bond purchases make it cheaper for Italy and Spain to borrow, lowering the interest rates on their bonds, restoring confidence among international investors, who may be more willing to save their money in Italy in Spain. The inflow of loanable funds into these economies (seen as an increase in the supply of loanable funds from S1 to S2) should bring down private borrowing costs (the real interest rate), encouraging more firms to invest in capital and more households to finance the consumption of durable goods, increasing aggregate demand and moving the Eurozone economy back towards its full employment level of output, from AD1 to AD2 in the graph on the right.

In certain circumstances, monetary easing like this could be inflationary, but in reality inflation is unlikely to occur given the large output gap in Europe at present (represented above as the distance between Y1 and the dotted line, signifying the full employment level of output). Any increase in aggregate demand will lead to economic growth (an increase in output), but little or no inflation due to the excess capacity of unemployed labor, land and capital resources in the European economy today.

With private sector borrowing costs increasing due to growing uncertainty over their deficits and debts, the Italian and Spanish governments will find expansionary fiscal policies (tax cuts and increased government expenditures) are unrealistic options for achieving the goal of full employment. The ECB, however, as Krugman argues, should continue to play an increasing role in the expansion of credit to cash strapped European governments, with the aim of keeping interest rates low to prevent the crowding-out of private spending that often occurs in the face of large budget deficits. Inflation, always a concern for central bankers, should be a low priority in Europe’s current recessionary environment. Only when consumer and investor confidence is restored, a condition that requires low borrowing costs, will private sector spending resume and the Euro economies can begin creating jobs and increasing their output again.

In the short-term, Italy and Spain should take advantage of the ECB’s bond-buying initiative, and make meaningful, productivity-enhancing investments in infrastructure, education and job training. If their economies are to grow in the future, Eurozone countries must become more competitive with the rapidly expanding economies of Asia, Eastern Europe, and elsewhere in the developing world.

In the medium-term, the Eurozone countries must demonstrate a commitment to fiscal restraint and more balanced budgets. Eliminating loopholes that allow businesses and wealthy individuals to avoid paying taxes, for example, is of utmost importance. Also, increasing the retirement age, downsizing some of the more generous social welfare programs and increasing marginal tax rates on the highest income earners would all send the message to investors that these countries are commited to fiscal discipline. Then, in time, their dependence on ECB lending will decline and private lenders will once again be willing to buy Eurozone government bonds at lower interest rates, allowing for continued growth in the private sector.

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It’s been a long road to this day, September 8, on which what I truly believe is the best IB – specific Economics textbook ships from Pearson’s warehouses in the UK. Pearson Baccalaureate’s Economics ships today, so if you haven’t already, order yourself an evaluation copy from the Pearson website. If you like what you see, consider ordering a set for your classes!

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The following lesson is a great way to start an IB or AP Economics class for the year. I just tried it this morning for the first time and it went great!

Instructions:

• Before your Econ students arrive for their first full class meeting, remove chairs until there are only half as many as you will have students. I stuck mine in the library, well out of view of the students coming to my class.
• Tell students that the custodian removed the chairs for repairs, or they were taken to another room for a presentation or something. Anyway, you don’t know when they’ll come back and it may be a couple of weeks.
• For now, we are stuck with this many chairs, and we have to figure out a way to resolve this problem!
• Tell the students it’s up to them to decide how our limited number of chairs will be allocated. Have them brainstorm solutions out loud while you write their suggestions on the board.
• Try to come up with 6-10 possible solutions, then have the students vote on the one they would like to see enacted. They can only vote once! Write the tallies next to each option on the board.
• If there is a tie for #1, have the whole class vote between the two or three options you’ve narrowed it down to until there is one clear winner.

Scarcity exists:

• When something is limited in supply and in demand, it is scarce.
• Everyone wants to sit, but the chairs were missing… chairs were scarce.
• Scarcity is a function of both demand and supply. The greater the demand relative to supply, the more scarce something is.

Choices must be made:

• Because scarcity exists, we must make choices about how to allocate our scarce resources
• We had to choose between competing systems for allocating the chairs

Rationing systems:

• When faced with scarcity, a system must be decided upon to ration the scarce items.
• The systems we decided upon ranged from a lottery to first come first serve to a merit-based system.

Something that is scarce has value:

• Everyone wanted a chair, yet they were limited. Because the chairs provide us with benefit, we value them, and are therefore willing to pay to have one.
• Value is a function of scarcity. The scarcer something is, the more valuable it becomes (gold), while less scarce items are less valuable (drinking water).

Consumer surplus:

• Consumer surplus is the difference between what you are willing to pay and what the price is.
• Sofia would have had lots of consumer surplus if she only had to pay $2 , because she was willing to pay up to $10.

Equity versus Efficiency:

• Equity means fairness, while efficiency requires that resources go towards their most socially optimal use, so that those who value something most end up getting that which they value. 
• The tradeoff between equity and efficiency is a major theme of the IB Economics course.
• What is most efficient (an auction to determine who is willing to pay the most for the chairs) may not be equitable (or fair).
• When the richest students end up in the chairs, those with lesser ability to pay feel that they’ve been treated unfairly.
• A lottery in which names would be drawn from a hat to determine who gets a chair is certainly more equitable, but is actually less efficient, since those who get the chairs may not be those who place the greatest value on having a chair.
• Auctioning the chairs assures that those who value them the most will end up getting them, therefore resources are allocated most efficiently.

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It has been quite some time since I have posted regularly to this blog, but that has been for good a reason. Over the last 15 months I have been working hard on two major projects, one IB Economics textbook and one AP Macroeconomics textbook. Both books will be published at the end of the summer and ready for students and teachers to use during the new school year.

With these exciting and exhausting projects now coming to an end, I have begun to turn my attention once again to this blog and the other online resources that presented me with the amazing opportunities to write two textbooks in the last year. You will notice right away that this blog, and my home page, have a new look to them. This is my attempt to improve this site’s “brand” and bring the design into the new decade!

In addition to re-designing the blog and the homepage, I have also begun to re-design the very popular Lecture Note / Study Guide sets that so many students and teachers have ordered over the last couple of years. The IB Economists out there will know that starting this fall, the IB will launch its new curriculum for the incoming 11th graders, who will sit for the new IB Economics exam for the first time in May of 2013. The text I am just finishing up, Pearson Baccalaureate’s Economics for the IB Diploma, is written specifically based on the new IB syllabus. With its launch, of course, my old lecture notes and study guides will be out of date, so my next project is to bring those popular resources up to speed with the new IB curriculum. The new bundle will include 24 separate PowerPoint Lecture Notes (also available in pdf format for students). I expect these resources to be ready by September or early October, so please stay tuned. Below is a preview of the new slide designs, from Unit 1.1 “Introduction to Economics”.

In addition to a new website design, updated PowerPoint Lecture Note / Study Guides, and two textbooks coming out, I have also recently created a new Facebook profile specifically for readers of Welker’s Wikinomics. If you’re like me, you probably get most of the important information in your life off of either Facebook or Twitter these days, and you can’t be bothered to go to some dude’s blog every day to see what he’s writing about. Now you follow Economics in Plain English through either Facebook, Twitter, or RSS. In addition to the weekly posts on the blog, I will also post many other articles and links to the Facebook page as I stumble upon them in my own online activity. Please friend Welker’s Wikinomics on Facebook, and if you’re not already, consider following me on Twitter too (jasonwelker).

In the mean time, enjoy your summer! I am looking forward to meeting my own group of new IB and AP Econ students in the fall, and also anyone else who happens upon the blog during the upcoming semester!

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I have decided to assign a summer reading to get my IB Econ students ready for our final two units. The books below are written by two of the preeminent development economists in the world, who also happen to be “intellectual rivals”. Jefferey Sachs is a professor at Columbia University, and he is known for his support for an increased role for development aid for eradicating global poverty. Paul Collier, of Cambridge University, argues that aid may actually limit the development prospects of poor countries, and instead sees an increased role for international trade in the development process.

Please choose ONE of the books linked below to read over the summer. Read the descriptions on Amazon, and the choice is up to you which one you’d like to read. I hope that in each class, there will be a selection of students who have read each book, so we can have a healthy debate next year about the roles of both aid and trade in economic development.

Both books cost around $10. You can buy them online and download them to any device (phone, computer, iPad, etc…). The links for the Amazin Kindle e-reader apps for all devices are below.

• Kindle App for the iPhone
• Kindle App for Android phone
• Kindle App for iPad
• Kindle App for your PC
• Kindle App for your Mac

Once you’ve downloaded the Kindle App to the device of your choice, please then read the descriptions of the two books and choose one to download and read over the summer.

E-books on Amazon.com:

Common Wealth: Economics for a Crowded Planet , by Jeffery Sachs

or

The Bottom Billion : Why the Poorest Countries are Failing and What Can Be Done About It , by Paul Collier

The books are available in print from Orell Fussli here in Switzerland:

Common Wealth

or

The Bottom Billion

At the beginning of next year I will ask students to submit a short paper summarizing their views on the issues addressed in the book they’ve read over the summer.

Enjoy these books, they are excellent books, easy to read, and well within your level of understanding after a year of studying Economics.

Enjoy your summer, too!

Mr. Welker

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