Archive for May, 2007

May 25 2007

AP students to major in Economics

Published by under Education,Teaching

Months ago I made a deal with my 35 AP Econ students. I vowed that at the end of the year, if they had decided that they would study economics in college, they would be rewarded with a small prize from Mr. Welker. My original intention was to get copies of my favorite “everyday” economics books and give a copy to everyone who intended to major in Econ in college, but then realized I would not have anyway of knowing how many students that would be. So, when I was in Bangkok a month ago, I picked up six copies (two each) of three of my favorite “fun” econ reads: Freakonomics, The Undercover Economist and Confessions of an Economic Hit Man.

As of this afternoon, eight students indicated their intention to major in Economics, so eight names went into the hat, and six came out. I’m proud to announce the winners:

  • Heidi Chai and Chris Park won because they attended our Saturday review session before the AP Exams and were entered in a drawing there.
  • Will Moeller (who will be returning to Michigan for his senior year next year) is the proud owner of Freakonomics.
  • Vincent Lin (attending Johns Hopkins), Chris Eldred (Wharton Business School) and Helen Wu (Wellesley College) were the last three whose names came out of the hat. They’ll be given their books tomorrow at graduation!

Congratulations to you all. It’s been a great year and you’ll be missed! I hope you continue to enjoy your econ studies in college, and I hope you will keep in touch with your AP teacher in the great years ahead! -Mr. W

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May 24 2007

McJobs in America – under threat!

BBC NEWS | Talk about Newsnight | “Gis a McJob”

McJob

“An unstimulating low-paid job with few prospects, especially one created by the expansion of the service sector”.

That’s how the Oxford English Dictionary defines “McJob”. Yesterday McDonald’s launched a petition to change the definition, saying that the above definition is derogatory and hurtful to McDonald’s employees.

I heard a blurb about this story on BBC tonight and it got me thinking about a previous post I wrote about the stronger Chinese currency’s impact on the balance of trade between China and the US: Will a weaker dollar affect the balance of trade? It already has!. Elaine Witkowski, a teacher in North Carolina commented on this post:

“Few people mention that the jobs being created are lower paying jobs with less benefits than the manufacturing jobs that are going overseas. I teach in a rural county in NC where only 1 out of 8 people have a college education. When textile, furniture and other manufacturing jobs go away, these workers with a high school education or less do not find equivalent jobs. While going back to school to get new skills seems to be a solution, the reality of having money to pay for tuition and finding time while working many jobs and taking care of your children is slim. I know parents working two to three jobs and we have a food bank at our school for when times get rough for families. I believe the zero sum concept is alive for workers without the necessary skills to get better employment when the factories leave.”

McMansion - Shanghai's Forest Manor

In other words, globalization, outsourcing and off-shoring of traditional manufacturing jobs has left Americans in communities like Elaine’s with little left to choose from but McJobs.

Another thought that crossed my mind: What would most McDonald’s employees say about the work they do? My guess is, most probably would describe their jobs flipping burgers and scooping fries in a way similar to Oxford’s definition above.

If McDonald’s succeeds in removing “McJob” from the dictionary, what will be next? Where will the Orwellian restructure of our language stop? Will they go for McMansion next? If so, my students living across the street in Forest Manor may need a new word to describe their houses!

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May 23 2007

Bicycles: the solution to all our problems?

Andrew Leonard of Salon.com writes an interesting piece about the implications of a bicycle friendly future on the global economy.

A bicycle built for a better world – Salon.com

People who know me know that I’m a bike guy. Here in China I own five bicycles. This may sound crazy, but allow me to explain: One is only for riding the 400 meters between school and home, this is my city bike (it’s name is Genghis). One is strictly for off-road, cross-country and downhill mountain biking, one is for strictly on-road, fast-paced, long distance riding while one is for touring (on or off road), and the last, my personal favorite, is not for riding at all, it’s only for looking at: that’s my Shanghai Yong Jiu bicycle, better known as the Forever.

So what do bikes have to do with economics? John Burke, president of Trek bicycles, made famous by Lance Armstrong who rode a Trek to six Tour de France victories, believes that that the future is bright for the bicycle industry:

“Looking at a United States plagued by obesity, traffic congestion,
urbanization and environmental woes, he sees “an incredible
opportunity” to sell bicycles.”

Growth of the bicycle industry may seem a simple, more localized alternative to the incredibly complex global automobile industry. In fact, the bike industry today is nearly as complicated in its global integration as that of automobiles. Leonard writes:

“A bicycle made in Taiwan by Giant or Trek or Specialized is an integral cog of the global economy, even when it is being ridden by a hippie in Berkeley pulling a Burley trailer full of locally grown organic produce behind him. You may help reduce U.S. dependence on foreign oil by riding a bike, but you’re a long way from opting out of the world-annihilating industrial megacomplex. Bikes are high-tech products manufactured according to the latest advances in metallurgical and plastics sciences in robot-run factories connected to globe-spanning supply chains and taking advantage of the differentials in labor costs between the developed and developing world. There’s nothing at all simple about the role Taiwan plays in the world economy, or how modern manufacturing processes enable precision machined parts from scores of countries to be assembled together and delivered to a bike store near you. I’m all for a more bike-friendly world, where every road has a bike lane (or at least a wide shoulder) and every city goes the extra mile to welcome bikers with open arms. But let’s not pretend that there’s something simple, or bucolic, about what we’re doing. It’s darn complicated and only getting more so.”

While I agree with Leonard that most of the bikes being ridden by Americans come from factories in Taiwan with components from China, Japan, and other Asian countries, I have to make an argument that growth of the bike industry presents more opportunities for entrepreneurs, craftsmen, and community stakeholders at home than continued growth of the automobile industry ever could.

I personally own two bikes that were built in the United States, one which was built in a welding shop in my tiny hometown in Idaho by a guy named Toby. How many people know the name of the guy who built their car? In fact, as cycling increases in popularity across the US, thousands of individuals who are passionate about the art of bicycle design and construction have tapped the growing market for tailor made, custom bicycles. Several of these garage-based welding operations have grown into large, economically competitive firms producing thousands of bikes each year for domestic buyers and for the export market (Cannondale, Titus, Seven Cycles, Moots, and many others).Chinese dump truck

While a world of Trek riders may not fit the Utopian image of local, home-grown, hippy, organic society Leonard imagines, more demand for bikes does mean greater opportunity for the re-emergence of an industry that with the growth of the auto industry over the last thirty years has slowly disappeared from America’s economy; that is, locally designed and hand-crafted vehicles for transporting people and products within and between communities.

By the way, If you doubt the utility of bikes for transporting products, visit Shanghai sometime, where bikes are used for FAR more than just recreation!

Bikes hand-made in the US of A:

Custom Bicycle Builder Portal: Listing over 40 builders
North American Hand Made Bicycle Show 2007

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May 22 2007

Hog Heaven!

High corn price mean pigs eat candy bars, french friesAnother Reeces, please!

Oh, the life of a pig… Due to the rising price of corn (thanks to increased production of corn ethanol), farmers all over America are substituting relatively cheap junk food to keep their porkies plump!

“Besides trail mix, pigs and cattle are downing cookies, licorice, cheese curls, candy bars, french fries, frosted wheat cereal and peanut-butter cups. Some farmers mix chocolate powder with cereal and feed it to baby pigs,” writes Lauren Etter.

My wife calls that last one “puppy chow” when she makes it! It’s mmm… good!

“California farmers are feeding farm animals grape-skins from vineyards and lemon-pulp from citrus groves. Cattle ranchers in spud-rich Idaho are buying truckloads of uncooked french fries, Tater Tots and hash browns.”

Mom’s, don’t let your kids read this article, you’ll never hear the end of it: “But MOOOMMM, even FARMERS let their animals eat french fries, peanut butter cups and licorice for dinner, why can’t you let ME??!!”

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May 22 2007

2007 AP FRQ #2 – Tax credits and the loanable funds market

Molly Saso, AP Econ teacher at the International School of the Sacred Heart in Tokyo, asked in an email to the AP Econ email list about Free Response Question #2 from the International exam (form B). The question reads:

2. (a) Assume that businesses are granted a tax credit on spending for machinery. Using a correctly labeled graph of the loanable funds market, show the effect of the business sector’s response on the real interest rate.

Here’s Molly’s email:

“The loanable funds market, in spite of its apparent simplicity, continues to throw up some ambiguities–or perhaps it’s just me who is perplexed.

What would be the impact on the market of a tax credit for spending on machinery? (Q2 on Form B, 2007–all the FRQs are already on AP Central.)

While the intent is indeed to increase planned investment, would firms increase or decrease their demand for loanable funds? To the extent that the tax credit means that there is a greater amount of post-tax profits available for investment, then the demand for loanable funds could decrease; but wouldn’t many firms need to supplement their post-tax profits with a greater demand for loanable funds?

Perhaps, if the impact on demand is indeterminate, the shift would be in supply, since firms would have a greater store of “savings” (retained profits). However, since a shift in supply was the answer to the second part of Q2, I somehow doubt that the examininer would be expecting a supply shift in part (a) as well.

The trouble is that the question asked for no explanation–only a graph to “show the effect”. I wonder what kind of shift was expected?

In perplexity,
Molly”

Molly’s question is a good one, and although I hadn’t spent much time reflecting on this question, her email got me thinking more about this interesting and challenging question. Here’s what I came up with and replied to Molly with. I don’t know if it’s correct or not, but I’d be interested to hear what others thought about this question:

Hi Molly,I’m in Shanghai, so my students also took form B (the international questions). I too found this to be a bit confusing. But as I teach my students, “don’t make the questions more complicated than they have to be, look for the most obvious answer.” Unfortunately, this one had no immediately obvious answer, as you explain below. I think what made it difficult was the term “tax credit on spending for machinery”. I don’t know about you, but this specific term never came up in my class!

Here’s how the question begins: “Assume that businesses are granted a tax credit on spending for machinery”. I interpret this tax credit as an amount deducted from federal income tax, calculated as a fixed percentage of expenditures on, in this case, machinery. In other words, the tax credit is not granted unless the firm undertake investments in new machinery. Your suggestion that the tax credit results in a “greater amount of post-tax profits available for investment” may be mistaking the credit indicated with a reduction in corporate profit taxes. I think if this were a corporate profit tax question then perhaps demand for loanable funds would go down since new investment could come from the now higher profit margins firms receive; in fact, the tax credit is not granted until new investment is undertaken by the firms in the first place.

I would explain this to my students by saying that essentially, the expected rate of return on investments goes up (since fewer taxes will be paid once new machinery is bought), shifting the Investment Demand curve out, thus the Demand for loanable funds, increasing the real interest rate.

That said, I cannot be certain that this is what the AP was looking for, so don’t hold me to it! Writing this email allowed me to really clear this one up, though, so thanks for the inquiry!

Jason

Anyone else have a better answer or something to add?

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