Asking questions of Joseph Stiglitz
Today’s Independent carries an interview with Joseph Stiglitz who answers questions from readers. Well worth ten minutes of your time.
Interrelated markets and climate change
An article in The Times recently explored the economic implications of reducing demand for oil and energy in the West.
read more...»Caveman economics
I am greatly enjoying Predictably Irrational by Dan Ariely - who spoke at the LSE last week (there was a long queue of my students wanting to buy the book). Today’s Mail on Sunday previews another example of the new genre of popular books on behavioural economics written by Professor Pete Lunn from the Economic and Social Research Institute and given the enticing title Basic Instincts: Human Nature and the New Economics. It is published by Marshall Cavendish next month, few details available yet. I will keep my eye out and add to the blog when they are more widely known.
Revision: Expectations in Economics
Expectations are forecasts or views that decision makers hold about future prices, sales, incomes, taxes, or other key variables. Our expectations also shape today’s decisions – since expectations can become a “self-fulfilling prophecy.” There is no doubt that expectations play a really important role in determining consumer and business decisions. From speculative behaviour in commodity markets, to the carry trade in foreign exchange and to expectations of changes in tax policy, how our expectations are formed and the factors that might cause them to change matter a great deal. Students can score higher marks for critical evaluation if they bring in the concept of expectations into their discussions.
I have attached a revision mind map in pdf format on expectations in economics. There are many applications of the concept in both AS and A2 micro and macroeconomics.
The mind map includes sections on
Speculative behaviour in markets
Adaptive Expectations
Rational Expectations
Behavioural Economics
Expectations and Government Economic Policy
Expectations of inflation
Microeconomic applications of expectations
Mindmap file
Expectations.mmap
Pdf version of the mindmap
Expectations_in_Economics.pdf
A revolution at the Fed?
The current edition of Business Week has a special on Ben Bernanke’s leadership of the US Fed Reserve. As he drives real official policy interest rates into negative territory, this set of articles is good background reading for students in the UK who want to understand a little more some of the differences in approach between the Fed Reserve and our own Bank of England. How big a risk is the Fed taking that its enormous efforts to inject liquidity into the US financial markets and bolster confidence with aggressive rate cuts, will create further problems down the line?
Fashionable changes in preferences
A few weeks ago I blogged about information failure and the demand for plastic bags. This BBC news video clip considers just how powerful fashion statements can be in altering our preferences - there are signs that high street retailers are moving decisively away from the default option of offering a plastic bag to all customers.
Sachs pins blame on Greenspan
The easy money policies of the early years of this decade are one of the root causes of the credit crunch according to an article by Jeffrey Sachs in today’s Guardian. “Much blame for the current economic turmoil can be placed squarely at the door of Alan Greenspan and the Fed…Monetary expansion generally makes it easier to borrow, and lowers the costs of doing so, throughout the economy. It also tends to weaken the currency and increase inflation. All of this began to happen in the US.”
The rest of the article is here
Dioxin contamination and illegal dumping of waste
The Independent’s front page this morning offers a classic tale of externalities. For years residents of Campania have been found to be less healthy than residents in the rest of Italy. Mortality rates, particularly from some forms of cancer, are higher in the areas around Naples where the rubbish crisis is at its most severe. Now allegations are surfacing that the illegal dumping of waste in an area where waste management is under the control of the Mafia has caused excessive levels of dioxins to be found in Buffalo milk, one of the prime ingredients of mozzarella cheese beloved of pizza lovers around the world.
“The topping on a billion pizzas, the magic ingredient in a million salads, is at the centre of a major food scare involving pollution, corruption, the Mafia and southern Italy’s remarkable crisis in waste management.” In a separate piece, the Indy reports that “A recent report by Italy’s small business group estimated that the Mafia is the biggest business in Italy, with organised crime netting Mob bosses the equivalent of more than £63bn a year, or 7 per cent of the country’s gross domestic product.”
BBC news: Toxin scare hits mozzarella sales
New York Times: Italy’s Mozzarella Makers Fight Dioxin Scare
Revision Mind Map: External Economic Shocks
This is an important topic at A2 and you can also bring in useful ideas in AS macro papers too. A revision mind map is attached together with the original mind map for colleagues who might want to amend and develop further.
Notes to students:
All economies that are partof the global trading system are exposed to one or more exogenous shocks
They can be either demand or supply side
They can be positive or negative in terms of their impact on prices, output, jobs and living standards
It is important to be able to use AD-AS analysis to show some of the effects of shocks
Evaluation is key in these sorts of questions - how large is the shock? is it temporary or longer-lasting?
Consider how policy-makers can respond to shocks and understand the importance of economic flexibility in dealing with the aftermath
External_Economic_Shocks.pdf
Global_External_Economic_Shocks.mmap
Getting real…?
Despite continuing problems in the financial sector, UK consumers are defying the odds and doing what they know best - shopping.
read more...»Congratulations to Tiffin Girls School
Tiffin Girls’ School are celebrating their win in the 2008 Bank of England / The Times TwoPointZero competition. Many congratulations from everyone at Tutor2u. Read all about their triumph here
Flair for economics
1st: The Tiffin Girls’ School, Kingston-upon-Thames.
Nancy Chen, Georgia O’Donnell, Neshma Shah, Teresa Song
2nd: Loreto College, Coleraine, Co Londonderry
3rd: Leeds Grammar School, West Yorkshire
Other finallists: Peter Symonds College, Winchester, Hampshire; Tonbridge School, Tonbridge, Kent; Wolverhampton Girls’ High School, Wolverhampton
Now the attention switches to the Royal Economic Society’s Young Economist of the Year competition, there are just under two months to go before entries must be submitted for judging.
Tutor2u VLE in Economics
As the summer revision and exam season approaches, I will be spending a lot of time developing new resources for the Economics VLE available through Tutor2u.The system already provides a full range of study resources, online tests and assignments, glossaries and revision aids organised on a topic by topic basis for four separate courses: AS micro and macro and A2 micro and macro. I will also be developing the European Union and Housing modules in the coming days. Details of the VLE and group and individual subscription rates are available here.
Ethical Economics
First and foremost, the title is not an oxymoron. We dismal scientists get a pretty bad rep for being dispassionate. In fact, I was recently asked to give the most soulless example of an economic judgement that I can think of. I put forward the following:
read more...»UK Housing Market Update (March 2008)
Data for March 2008 shows a further deceleration in the pace of house price inflation and a sharp drop in the volume of completed property transactions. There are signs of a tightening of mortgage lending with some smaller building societies restricting the number of mortgages they are prepared to lend out. The value of new home loans is certainly falling and the share of fixed rate mortgages in the property market is sliding. I have attached a six chart summary of developments in the housing market used in discussion with my AS Economics students.
Revision Mind Map: Monetary Policy
Designed for AS and A2 Economics students, this mind map is attached below in mmap and pdf format.
AS_Monetary_Policy.pdf
Monetary_Policy.mmap
Credit Crunch Mind Map
I have updated my mind map on the credit crunch and now made it available to download as a mmap.file. If you have Mind Jet Mind Manager, please feel free to download it and amend if you find it useful.
The_Credit_Crunch.mmap
Union membership among teachers
I read in the Guardian a couple of days ago that “Only 55% of teachers in private schools are members of a union compared with 95% in state schools.” This came from a report on employment practices in the independent sector which hinted that many staff in the private sector operate without formal contracts or with employment contracts that are rarely if ever altered as circumstances change. I was surprised to hear that so few teachers in independent schools are unionised, after all, although every school is bound by employment law, teaching is a profession where trade union support can be crucial in matters relating to health and safety and employment protection. I was teaching about trade unions last week and gave my students a list of the acronyms of ten of Britain’s largest union organisations. The top number of correct identifications was three! Trade union membership has been in decline for many years, The most recent figures show that only one worker in four is now a member of a trade union.
2008 RES Conference - Press Releases
This is an excellent service from the Royal Economic Society’s 2008 Conference - a sizeable number of press releases on some of the research findings presented to the delegates. Nick Fawcett from Oxford University also recommends this document on the causes of the sub-prime crisis which was used in one of the lectures at the conference.
The audacity of hopelessness
Comedy Central has some great video clips on the dire state of the US economy. Here is one from the Colbert Report!
Zero unemployment - costs and benefits
Over at About Economics.com Mike Moffatt considers whether a zero rate of unemployment, even if it were attainable, might not be a good thing. He argues that “A positive rate of unemployment is the price we pay for technological development and for people chasing their dreams.” It is a good article for revising three of the main causes of unemployment and for thinking about the possible macroeconomic effects when the poll of surplus labour shrinks to a very low size. My AS revision presentation on unemployment is here and my A2 revision presentations are here: (1) Natural rate (2) Philips Curve and the NAIRU
Learning Lessons from: Dan Ariely
On Monday Dan Ariely gave an engaging lecture at the LSE on behavioural decision theory. Here was a branch of economics which borrowed aspects of neural psychology in order to investigate the reasons for human behaviour. Geoff already gave a detailed summary of the event here but I’d like to highlight and discuss some of the most interesting points Dan put forward. This entry might be more of an intermittent running commentary, and it would be extremely helpful if you listen to the podcast first, here.
read more...»Revision: Revising AS Macro for 2008
I have attached a pdf copy of the revision mind map I went through with our AS macro groups yesterday
Files to download
PDF copy of the mindmap Revising_Macro_2008.pdf
In a few days time, we will be providing some revision guides mapped to the revision resources available on the Tutor2u web site.
Dividing the spoils in the milk industry
“Supermarkets use their gigantic size and bargaining power to capture almost all of the profit from the milk industry, leaving farmers with a tiny proportion of the total: equal to only half a pence for each litre of milk. That is the central finding of new research by Drs Howard Smith and John Thanassoulis presented at the Royal Economic Society’s 2008 annual conference. Farmers are in the weakest position, only able to secure 0.5 pence per litre, or about 3% of the total supply chain profits from liquid milk.”
Many of us use the supermarkets as an example of monopsony power in markets - using their bargaining power to drive hard deals with their suppliers. New research presented at the March 2008 RES Conference provides evidence on how profits from each litre of milk sold are divided up among market participants. It is not good news for milk farmers struggling to make an economic profit and justify staying in the industry.
read more...»Foreign retailers help UK productivity
For some years there has been strong evidence that inflows of foreign investment into our manufacturing sector have served to drive higher output worker. But perhaps the same is happening on the high street and in the shopping malls? A new paper by Dr Dolores Anon Higon and Dr Nicholas Vasilakos presented at the Royal Economic Society’s March 2008 annual conference finds that foreign-owned retailers may improve the productivity of the retail sector as a whole if they are more productive than British retailers and they have the effect of forcing UK retailers to raise their own game with benefits for consumers in the longer term. A summary of their findings is available here from the RES web site.
Fragile Earth Gallery
A picture tells a thousand words. The Guardian’s new Fragile Earth picture gallery provides some wonderful and often disturbing images of our fragile natural resource base and the impact of man on the environment. This could be a good resource to turn to when teaching environmental economics? The paperback version of Fragile Earth: What’s Happening to Our Planet? is now available from Amazon and other main street booksellers.
Fed opts to leave a little powder left
It is a sign of the times when a decision to cut (slash) official short term interest rates by 0,75% (taking US rates to 2.25%) comes in below market expectations! The US Fed Reserve has cut the cost of borrowing in a fresh bid to limit the downside risks for the real economy as financial turbulence threatens to dent a huge hole in prospects for the US economy in the coming months. Loads of comment available on this one from virtually every commentator. Evan Davis, the former Economics editor of the BBC was on good form on TV this morning - explaining that cuts in interest rates from the central banks is not really where the problem lies for most consumers. It is the interest rate charged on the lending and borrowing that the banks do between each other which then feeds through into the market for mortgage and other retail loans.
One of the keys to coming out of this crisis will be for banks to recapitalise and improve their own block of funding before they start lending out again. In short, the banks need to attract fresh injections of capital - perhaps from encouraging more of us to save and also from external sources such as the petro-dollars being held by the sovereign wealth funds. Confidence in the different pieces of the financial system is ebbing away - stabilising the markets is the immediate issue and the problem.
Data charts on US and UK interest rates
US_Rate_Cut_March_2008.pdf
UK_Interest_Rates.pdf
Suggested links on the US rate cut
How is the rate of inflation calculated?
It’s not too big a problem if your income keeps rising, however. This has happened in Britain, where things are generally more expensive than in the past. The difference is that – mostly – people earn so much more money they really are better off. This is called an increase in ‘real’ (as opposed to ‘nominal’) income.
It’s quite hard to measure the level of inflation. This is for a variety of reasons. The main problem is that you will have noticed some prices rising, but a lot of others have fallen at the same time. The first clever bit of maths required is to come up with an average figure. To do so, you need an idea of the ‘average’ household and their ‘average’ purchases. Before long inaccuracies will creep in and you might not feel that you are average (and you’re not!).
read more...»
Credit crunch (pdf) slides
The credit crunch (or should it now be called a credit crisis?) will be dominating the headlines for some time to come. I was discussing aspects of it in my macro lesson this morning, we looked at the Bear Stearns share price; the sharp turning point in the US housing market, the need for a rebalancing of the US economy through higher domestic savings and the trends in the dollar-euro exchange rate and equity prices.
read more...»Common mistakes in daily decisions
The Old Theatre at the LSE was completely packed last evening for an entertaining and riveting lecture from Dan Ariely, the author of “Predictable Irrationality”. Dan Ariely has for many years used experimental methods to discover more about many of the biases apparent in our everyday behaviour. His lecture was rich in examples and encouraged us at all times to think counter-intuitively.
read more...»Macroeconomics in a nutshell
Or Iceland, anyway…
The following graphic from The Economist this week gives an excellent opportunity to link the concepts of growth, inflation, unemployment and the current account.
Starter questions for classes to revise some basic theory before the Easter break:
(a) Explain why strong growth in 2004-5 feeds into higher inflation (note the time lag) and a growing current account deficit?
(b) Or are there other causal factors at play?
(c) Why does unemployment appear relatively unresponsive to changes in growth?
Extension questions for the more ambitious:
(d) What factors allowed OECD countries to enjoy low-inflation growth and falling unemployment over the data range shown?
(e) Why would the current account position of all OECD countries be unhelpful? (Note it is the only graph where this comparison is not shown).
