May 15 2009

Welker’s daily links 05/14/2009

Published by at 12:28 am under Daily Links

  • Through interactive graphs, ThinkEconomics illustrates basic economic principles that are taught in a college-level introductory economics course. These graphs enable students to develop analytic and deductive reasoning skills by manipulating graphical elements of the economic models. Students also learn how to apply these models to analyze and understand economic phenomena.

    Economic models represent causal economic interrelationships that occur in a particular sequence or order. Textbooks offer written explanations accompanied by static illustrations, but they cannot capture or animate the step-by-step dynamics of an economic model. In a classroom, a professor typically draws a graph on the chalkboard, explains its construction, and then uses the graph to analyze the effects of various changes in the model’s parameters or variables. This classroom explanation and graphical manipulations happen only once and the total analysis can be very difficult to replicate in student lecture notes.

    With the interactive possibilities of Macromedia Flash and the anytime, anyplace nature of the Web, students can now experience the models as they were meant to be, and in the process, learn to “think economics.” Because of the vector capabilities of Flash, the models do not require a broadband connection for fast downloading and students can easily repeat each model as many times as necessary to understand the economic principle. Animation and interactivity combine to create a greatly improved learning environment.

    tags: economics

  • I thought it might be useful to re-explain why our current predicament can be thought of as a global excess of desired savings — which means that fiscal deficits won’t drive up interest rates unless they also expand the economy.

    Here’s what I imagine Niall Ferguson was thinking: he was thinking of the interest rate as determined by the supply and demand for savings. This is the “loanable funds” model of the interest rate, which is in every textbook, mine included. It looks like this:
    INSERT DESCRIPTION

    where S is savings, I investment spending, and r the interest rate.

    What Keynes pointed out was that this picture is incomplete if you allow for the possibility that the economy is not at full employment. Why? Because saving and investment depend on the level of GDP. Suppose GDP rises; some of this increase in income will be saved, pushing the savings schedule to the right. There may also be a rise in investment demand, but ordinarily we’d expect the savings rise to be larger, so that the interest rate falls:
    INSERT DESCRIPTION

    So supply and demand for funds doesn’t tell you what the interest rate is — not by itself. It tells you what the interest rate would be conditional on the level of GDP; or to put it another way, it defines a relationship between the interest rate and GDP

    tags: economics

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

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