Feb 07 2013

## Lesson plan: Elasticity, exchange rates and the balance of payments – understanding the Marshall Lerner Condition

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?

Part 1:

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

Take a snapshot of your two-year exchange rate diagram in OneNote, then copy and paste the questions below into the page.

1. Write a brief 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. Highlight these in two different covers in your graph.
3. Describe what is happening to your currency during the two time periods you highlighted in your chart. (2 marks)
4. Explain TWO factors that may have caused the currency to change in value. (2 marks)
5. 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. Following appreciation – in the short-run and in the long-runFollowing depreciation – in the short-run and in the long-run. (4 marks)
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. 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)
8. 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

Part 2:

Read the following article:  . 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)

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

Nov 15 2012

## Advice for writing a strong IB Economics Internal Assessment on Macroeconomics

My IB year 2 students are in the process of writing their second Internal Assessment commentary (IA), a major component of their grade in the course. Last spring they wrote a commentary on a microeconomic topic, and this time around they are investigating macroeconomic issues to write about. I thought I’d write a quick post to offer some advice for conducting a solid commentary on a macroeconomic topic.

First of all, it should be pointed out that finding a good article to write a macro commentary on should be very easy. Pretty much any newspaper (print or digital) is bound to have a couple of macro-related stories on its front page any day of the week. The tricky part, however, is choosing an article on a topic that interests you, the student. One place to start to look for the perfect article is on the Welker’s Wikinomics Universe page, which includes over 40 live streams from different economics news sources. You can be sure that the articles you find here are current and that the sources have already been filtered by an experienced Econ teacher, so they can generally be considered appropriate.

WARNING: Make very sure that the article you are considering is NOT a blog post, a commentary or an editorial piece. It is strongly discouraged to write a commentary on another person’s commentary. One way to determine whether an article is a commentary is to look at the URL and if you see words like “blog” or “commentary” or “editorial”, or “opinion”, you should move on to another article.

I recommend my students choose an article about their own home country. This way, they have at least some vested interest in the issues they’re writing about.

Now, how to choose a good article. Below are some of the main themes in Macroeconomics that could serve as outstanding main ideas of an IB Economics commentary:

Economic growth:  The media is obsessed with GDP growth rates, perhaps because society seems to be equally obsessed. Any article about growth (or the opposite of growth, recession), can provide you with lots of points for analysis and evaluation.

• What are the sources of growth or recession?
• Who are the winners and losers?
• What is the government doing to promote growth (or reduce the chance of inflation)?
• What are the short-run and long-run implications of economic growth for society?
• Does growth really make us better off?
• Is growth sustainable?

The tradeoff between inflation and unemploymentThis relationship is best illustrated in the Phillips Curve model. It’s easy to find evidence of this tradeoff in the press, as inflation and unemployment are just behind GDP as the macroeconomic indicators most mentioned in the news.

• Why is there a tradeoff between these two indicators?
• What is the relationship between AD/AS and the Phillips Curve
• When should unemployment be the primary concern of policymakers? When should inflation be the primary concern?
• What are the effects of inflation on different stakeholders?
• What are the effects of unemployment on society?
• How can monetary and/or fiscal policy be used to reduce unemployment OR inflation, but not both?
• How could supply-side policies be used to bring down both inflation and unemployment?
• How might negative supply-shocks affect the SRAS and the short-run Phillips Curve?
• Does the tradeoff between these two indicators hold up in the long-run? Why or why not?

Income inequality: This is perhaps one of the MOST talked about economic topics in the news today. Rising Gini indexes in most developed economies indicate that inequality is growing, and this may be contributing to political and social discontent in the rich world.

• What are the sources of income inequality?
• What are the consequences of income inequality? (Economic, social, short-run and long-run)
• How does inequality affect economic growth? (positively or negatively?)
• How have government policies in a particular country contributed to growing inequality?
• How does the free market promote income inequality? (In other words, is it a market failure?)
•  How can a nation’s tax code and system of social safety nets be used to reduce income inequality?
• What is the difference between equality and equity?

Fiscal policies: This is a big one. With America’s “fiscal cliff” all over the news and the European debt crisis fresh on people’s minds, it is hard not to find articles about fiscal policy today.

• How have past fiscal decisions by government contributed to the growing levels of debt in Europe and America today?
• What role to automatic stabilizers in fiscal policy have in dampening the effects of fluctuations in aggregate demand (either inflationary or recessionary effects)?
• How does the theory of the Keynesian spending multiplier provide an argument for the use of expansionary fiscal policy during recessions?
• How does the theory of the crowding-out effect provide opponents of the Keynesian view with an argument against the use of expansionary fiscal policy? (Why might government deficits lead to less private sector spending).
• What role can fiscal policy play in the short-run and in the long-run in promoting or inhibiting economic growth?
• What types of fiscal policies (particularly government spending) will best promote long-run economic growth?

Monetary policies: It’s really easy to find news articles in which central banks are mentioned. Whether it’s the “Fed” in the United States, the ECB in Europe, the People’s Bank of China, the Banke of England or the Indian National Bank, central banks are the masters of monetary policy, and the media follows their every move closely.

• What are the tools of monetary policy and how can it be used to stimulate or contract demand in an economy?
• When is monetary policy likely to be most effective at reducing unemployment?
• When is monetary policy likely to be most effective at reducing inflation?
• Why might a central bank’s primary objective (low inflation) conflict with the macroeconomic objectives of government (low unemployment)?
• How can monetary policy be used to support a government fiscal policies?
• What is the risk associated with continually increasing the supply of money in a nation?

Supply-side policies: “Austerity” is a word heard often in Europe today. The fear over large budget deficits has led several European governments to reduce government expenditures drastically on public goods and social spending. This is having major impacts on the quality of life in many European countries, and leading to unrest (and even riots) in some cases.

• What is the short-run effect of deficit reduction on aggregate demand?
• What is the argument for deficit reduction? How might such policies help an economy “self-correct” during periods of recession?
• How will smaller budget deficits lead to lower interest rates in the economy?
• How does reducing expenditures on transfer payments to the unemployed and poor in the economy promote more flexible labor markets?
• How might the de-regulation of industry and lower business taxes promote investments that lead to long-run economic growth?
• How does the supply-sider’s view of the macroeconomy differ from the Keynesian’s view? Which view is more valid?

The ideas above only scratch the surface of the potential areas of investigation a student could pursue in a Macroeconomics commentary. There is one model that ALL macro commentaries should employ, however, and that is the Aggregate Demand / Aggregate Supply model. Nearly every topic in this section of the course requires AD/AS analysis. Otherwise, there are several other models that could be used depending on what specific topic you are investigating. These are:

• Phillips Curve (both short-run and long-run)
• Lorenz Curve and Gini index (for income inequality)
• The Laffer Curve (for income inequality or supply-side policy)
• The Money Market diagram (for monetary policy)
• The loanable funds market (for fiscal policy)
• Bond market diagrams (for fiscal policy)

Have you already written a strong commentary on a macro topic? Would you like to your ideas about the assignment? Please post your own thoughts on this assignment below. If you have published your own commentary, feel free to post a link for others to see it!

Aug 14 2012

## My first Economics lesson – Scarce Chairs!!

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.
The Economist’s Solution:
• Once the students have voted on their favorite solution, share with them the economist’s favorite solution. It is known as a sealed-bid auction.
• Give each student a slip of scrap paper and have him write two things: 1) His name, and 2) the maximum price he would be willing and able to pay each class period to have a chair to sit on.
• Collect the results, and in front of the students, organize their bids from highest to lowest. If there is a tie on the margin, have the students whose bids were identical bid again, writing their highest price on the back of the same slip of paper, then re-rank.
• The students with the highest bids will get a chair! For example, I had 17 students, and only 8 chairs. The highest bid was \$10, while three students were not willing to pay anything. Four kids were willing to pay \$1, but there were only two chair left at that point. When they re-bid, one was willing to pay \$2, one \$1.75, \$1.25 and \$1.20. Therefore, the two remaining chairs went to the students willing to pay \$2 and \$1.75.
• Finally, tell the winners that they can take a seat, and that everyone else must stand! At this point, of course, you can send the lowest bidders out to fetch the missing chairs and begin your debrief.
Economic concepts illustrated by the Scarce Chairs exercise:

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.

• 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.

Aug 09 2012

## Preparing for a new year of AP and IB Economics

Another summer has come to an end and I’m in my classroom preparing for another year of Advanced Placement and International Baccalaureate Economics. There’s a lot to be excited about this year, including the fact that the co-author of my textbook, Pearson Baccalaureate’s Economics for the IB Diploma, Sean Maley, has joined me at Zurich International School as a teaching partner. He will be taking two sections of IB Year 1, two of IB Year 2 and one AP Microeconomics this year. I will have the same IB load and one AP  Micro/Macro combined course.

I’m also excited because this year I will be using my brand new PowerPoints and Lecture Notes created over the summer, which are a huge improvement on their popular predecessors.

In addition to adding to the already large library of video lectures on The Economics Classroom created last year, I plan to produce even more 8-15 minute YouTube lessons covering the remaining topics from AP and IB Economics. For each new lesson I produce, I plan to create a practice activity to go with it (all of last year’s activities are already available for free here). I’ve received several requests from teachers and students for answer keys to go with each activity, which is also something I plan to create this year. By this time next year, I hope to have a workbook for AP and IB Economics available for purchase through my website.

Other exciting developments in Welker’s Wikinomics include:

• Flashcards on key terms from every section of the AP and IB course, developed late last school year to help my students study for their exams,
• A comprehensive glossary of over 330 Economics terms, also made for exam review last year,
• Floating definitions on the Economics Classroom, so that no matter what post you’re looking at, the definition of any key term can be read without having to leave the page,
• My free mobile app for the Android and iPhone, which provides convenient access to the mobile versions of both Economics in Plain English and The Economics Classroom, along with full access to the flashcards and glossary on your mobile device.

As always, I love hearing from students and teachers using my resources. Please feel free to post your comments to this blog or send me emails directly at welkerswikinomics@gmail.com. I love hearing suggestions and talking to teachers and students about Economics about any topic whatsoever!

Here’s to a new school year and another exciting year of Economic teaching and studies!

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Jul 18 2012

## New Economics PowerPoints and Lecture Notes for a New Syllabus!

Welker’s Wikinomics Lecture Notes-Order here
Over the last four years nearly 400 teachers and students have purchased and used my popular PowerPoints and Lecture Notes covering the  AP and IB Economics syllabus. I would like to thank everyone who has bought these, and I sincerely hope they served a valuable function in your teaching and learning Economics. Believe it or not, selling these resources it the only revenue I earn from the ever-expanding selection of  resources I provide through Welker’s Wikinimcs.
–
Now, five years since I first started making my PowerPoints and Lecture Notes available to students and teachers, I have completely remade them from the ground up. The new versions of the Microeconomics Lecture Notes are, as of today, available to buy online. I have been working hard in the last several months to completely redesign the PowerPoints and Lecture Notes, which now include interactive and multi-media features that will enhance your Economics teaching and your students’ studies.  Here are some of the features included the new Welker’s Wikinomics Lecture Notes:
• Quantitative Methods included: The new IB Economics syllabus includes several newly added sections requiring quantitative analysis. Every new topic is covered in detail, with worked solutions to IB-style problems included
• Video Lectures Embedded: The new Lecture Notes include embedded video lessons that I have been producing over the last year covering nearly every topic. Each lesson ranges from 7 to 15 minutes in length and includes illustrations and clear, spoken explanations of every concept from the syllabus. If you buy the PowerPoint versions of the Lecture Notes, the videos can be viewed right from within the presentation. If you buy the pdf versions, there are direct links to each of the videos, which can then be viewed from my website,The Economics Classroom.
• AP-only units included: AP teachers should not feel left out; I also completely remade the AP-only units on Consumer Behavior and Resource Markets!
• Links to Online Resources: The new Lecture Notes also include updated links to blog posts from Economics in Plain English and dozens of downloadable worksheets and practice activities to guide you to success on the Microeconomics exam.
• PowerPoint or PDF: Just as with the old versions, you have the option of buying the PowerPoints (these can be edited and adapted for individual teacher use) or the PDF (primarily for students) versions of the lecture notes. You now also have the option to buy class sets of the PDFs to distribute to your students to follow along during your lectures.
• Satisfaction guaranteed: If you buy a set of the lecture notes, and within one week decide they are not suited for your needs in the classroom, I guarantee a 100% refund of your purchase. Just shoot me an email and let me know of your concerns, and you’ll have your money back asap.
As a bonus, if you’re using my new textbook, Pearson Baccalaureate’s Economics for the IB Diploma, the Lecture Notes are an outstanding complement for your own instruction and for your students as they progress through the course.
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The new information and order page is now online. A free sample can be viewed there, along with a full description of what’s included and all the features the Lecture Notes offer. Please email me if you have any questions or need more information about how to order. Thanks for your time! ~Jason
Here’s just a tiny sample of what the new lecture notes have to offer!

• ## Order Welker’s books

for IB Economics

for AP Macro