Economics Planet - Daily Blog Posts about Economics

The Economics of the State of the Union Address...

As an economist, I was very pleased to see the number of references to actual economic research, findings and concepts in Tuesday's State of the Union address. As someone ...

Econbrowser

UK: Into Recession

So much for expansionary fiscal contraction in the UK. Not that that’s a surprise.

The UK Office of National Statistics has just released preliminary estimates for real GDP growth in 2011Q4. The 0.8% contraction (q/q SAAR) was large than consensus [1], and in fact larger than the 0.6% decline forecasted by Deutsche Bank on 1/18. Figure 1 illustrates the fact that a year and a half after the election of a coalition government bent on a path of austerity, the UK economy is likely to be entering a new recession (not that growth was so great even before the dip).

Figure 1: Annualized q/q growth rate of real UK GDP (blue), preliminary figure for 2011Q4; and Deutsche Bank forecast (red). Source: UK ONS, and Deutsche Bank, Global Economic Perspectives, 18 Jan 2012.

In my view, this is pretty much the nail in the coffin that an expansionary fiscal contraction will occur, even in a relatively small, open economy with a flexible exchange rate (see JEC/Republicans for an exposition, and this post for a critique).

Simon Wren-Lewis at Mainly Macro provides additional commentary, which I think advocates of austerity in the US would do well to heed:

The first estimate of UK growth in the last quarter of 2011 was negative. As these updated NIESR charts show, no other UK recovery has stalled in this way. Of course very little is ever certain, but we can be pretty sure that growth would have been significantly better if the current government had not imposed severe additional austerity measures beginning in 2010. (This is the counterfactual that matters, and just looking at GDP components can be a misleading way at getting at this for reasons I discussed here.) Of course growth might have been better too if the Euro crisis had not happened, but this government had no control over the Euro crisis, while it does decide fiscal policy.
I do not have anything very new to say about this, in part because many people predicted growth would be harmed before the policy was introduced. (See, for example, this letter from 80 economists published during the 2010 election campaign.) What was the reason for this major macroeconomic policy error? For some I think it was a political calculation that it would be advantageous to get as much of the cuts out of the way early, well before the next general election. However I think others in the coalition were genuinely spooked by events in Greece and elsewhere. Unfortunately the key difference between economies in the Eurozone and those with their own central bank was not appreciated. Today the claim that if these additional austerity measures had not been introduced UK interest rates on debt would have suffered the same fate as many Eurozone countries looks pretty implausible. In Denmark we even have an example of a country that has recently undertaken stimulus measures, and where interest rates have continued to fall in line with other countries outside the Eurozone (see David Blanchflower here).
So I believe we must add 2010 to a list of major macroeconomic policy errors made in the UK since the war. Like the failed monetarist experiment in the early 1980s, it is the result of a government adopting a policy which relied on a mistaken macroeconomic analysis that was not supported by the majority of academic opinion. And like that earlier failure, it will leave unemployment significantly higher than it need to have been for many years.

So, time for those in the US calling for an end to the payroll tax reduction, the reduction in food stamp programs, and cessation of stimulative monetary policies, to read a macroeconomics textbook. I suggest Greg Mankiw’s.

January 24, 2012

Econbrowser

In Search Of: Fiscal Responsibility

Given all the talk about taxes, I wondered how the Republican candidates plans stack up on the fiscal responsibility dimension, which Jeffry Frieden and I define thus:

[T]rue fiscal responsibility involves a willingness to raise sufficient tax revenue, over the longer term, to pay for the programs the government implements. Fiscal responsibility should not be equated with a small government, but rather with a commitment to pay for the government services provided. ...

... If the nation affirms that enhancing national defense and improving health care for the poor are legitimate goals, fiscal responsibility entails raising the revenue to fund these programs, rather than borrowing for them. (Chinn and Frieden, Lost Decades, 2011, pp. 202-03.)

Here is a summary of the scoring of candidates plans by the Tax Policy Center, as reported by Cooper and Kocieniewski in the New York Times (January 18, 2012).
Source: [link]

From the article:

It is not unusual for Republican presidential candidates to call for tax cuts that would expand the deficit: They argue the cuts will spur the economy. But they are now calling for tax cuts in a year in which Washington and many Republicans have been consumed by talk about reducing the deficit. It was only last summer that House Republicans balked at raising the nation’s debt ceiling, citing alarm about high deficits -- a move that brought the nation uncomfortably close to a default and led Standard & Poor’s to lower the nation’s credit rating.
By reducing the amount the federal government collects in taxes each year -- at a time when federal tax collections are already a smaller share of the economy than they have been in more than half a century -- the Republican tax plans will make it harder to balance the budget, said Robert L. Bixby, the executive director of the Concord Coalition, a nonprofit group that advocates fiscal responsibility.
"If the first thing you do is lower revenues by that much by extending all of those tax cuts, then you have a much bigger hole to dig out of to get back to a balanced budget," he said in an interview. "The hole they’re digging, to mix metaphors, is a self-inflicted wound."

The tax picture can be visualized by way of plotting the tax revenue to GDP ratio.

Figure 1: Federal government taxes and contributions to social programs (blue), and current expenditures (red), both as a share of GDP. NBER defined recession dates shaded gray. Source: BEA, 2011Q3 3rd release, NBER, and author’s calculations.

Note that total tax revenues (income taxes and contributions for social programs) are at very low levels. By way of contrast, expenditures are high, but not that much higher than those recorded during the Reagan Administration. That peak was at the end of recession, so the operation of automatic stabilizers and the defense buildup were important, while the current reading is several quarters into a plodding recovery. One can plot the tax and expenditure series against potential GDP. Then the prior peak in spending to potential GDP was in 1986Q3, several years into the recovery. What remains true is that the revenue to GDP ratio remains very low. And they have been trending lower ever since the 2001 and 2003 tax cuts implemented during the Bush Administrations (EGTRRA and JGTRRA, respectively).

Figure 2: Federal government taxes and contributions to social programs (blue), and current expenditures (red), both as a share of potential GDP. NBER defined recession dates shaded gray. Source: BEA, 2011Q3 3rd release, CBO, Budget and Economic Outlook: An Update (August, 2011), NBER, and author’s calculations.

Given these trends, it is implausible that any tax cuts of the proposed magnitudes can be reconciled with balancing the budget by way of spending cuts.

Unless, of course, one uses a simulation from the Heritage Foundation’s Center for Data Analysis [1] [2] [3] [4]. Then anything is possible.

January 23, 2012

Yeni Adres - New Address

Bu günlükteki yeni/güncel kayıtlara artık http://kibritcioglu.com/iktisat/blog/ adresinden ulaşılabiliyor.

January 19, 2012

Low Carbs, High Fat…High Prices?

"One box will cost you $740, but if you don’t like it, you could try your luck with the Russian smuggler down the street." There are plenty of goods that might be sold based on discussions like that, but would you ever expect to hear that said about butter? Residents in Norway are currently facing a market like that, according to recent reports.

A recent diet craze emphasizing high fat and low carbs has caused a change in Norwegian consumer preferences. Fads and trends will change the equilibrium price and quantity observed in a market by shifting the demand curve. In this case, the popular new diet increased the demand for butter (shifting the demand curve to the right), while leaving the supply curve unchanged. The standard supply and demand model says a rightward shift of the demand curve leads to an increase in the equilibrium price and quantity consumed. Both of those were observed in real life, as well.

Nonetheless, changes in tastes rarely result in price fluctuations of this magnitude, so how do economists explain why the cost of butter went so high? We see increases (and decreases) in demand every day, but prices rarely swing so wildly. A closer look at the details sheds some light on the source: the government is preventing the free market from doing its work. As the Swedish Dairy Association (Svensk Mjölk) noted, Norway has “very restrictive trading policies, borderline protectionist.” That means that the Norwegian government’s policies make it very difficult (or even impossible) for foreign goods to enter the domestic market.

Though the government does this in an effort to protect Norwegian producers, protective policies like those block markets from working efficiently. When a “shock” to supply or demand occurs (in this case, an increase in demand), protectionist policies prevent foreign producers from entering the market to capture new profits. Because the trend hit quickly, and the production time for agricultural goods isn’t exactly short (you can’t just go out and rent an extra 200 cows overnight), the Norwegian market for butter appears to be relatively inelastic in the short run (that is, even a small percentage change in the quantity supplied is associated with a large percentage change in price). If this trend in preferences continues, prices will remain high until producers have time to react by expanding their farms to accommodate more livestock, hire more workers, and install more processing equipment.

Does that mean that Norwegian consumers are going to continue facing these brutal prices for the coming months? Only time will tell, but if prices persist, it would be a testament to a population stubborn enough (or wealthy enough) to stick to the latest trendy diet, and a government dedicated to hard-line international policies, even at the cost of its own citizens’ welfare.

DISCUSSION QUESTIONS:

1) A change in preferences isn’t the only way that the demand for a good can change. What are some other factors that could cause the demand for butter to increase?

2) Rather than demand returning to where it was (the end of interest in the fad diet), the equilibrium price of butter could also decrease if supply shifts. Which direction would the supply curve need to shift for that to happen? What would happen to the equilibrium quantity? What are some ways that the supply could shift in that direction?

3) Suppose the Norwegian government feels pressure to help lower butter prices. Propose a policy that would help lower prices in the market. Is there a policy that the government could use to generate revenue for itself while lowering the price of butter?

January 17, 2012

A Penny Saved Is...

Which scenario would you prefer: (a) losing $30, or (b) losing $30, then losing $90, then regaining the original lost $30? While in most circumstances the first option is the unquestionably preferable, I recently found myself in a situation favoring the latter.

As a member of the Marin Sun Farms “meat club CSA” (community supported agriculture), I order a custom package of meats from a local farm that is delivered (frozen) once a month to a pick-up location near my home. While this arrangement offers me an excellent supply of local meat at a discounted price, the difficulty is remembering the monthly pick-up time. As disclaimed on the Marin Sun Farms website, “Packages not picked up promptly will be forfeited.”

This past Sunday I was sifting through emails when I discovered buried amongst online coupon offerings, eStatements, and a “Hello!” from mom, a reminder email sent the previous Thursday: “Pick up your CSA box today!” My heart sank as I pictured my box of grass-fed beef, lamb, and chicken slowly defrosting, decomposing, and ultimately being discarded. It had been a small shipment, only $30 worth, but nonetheless, I cringed at the waste.

Monday morning I awoke to another minor financial misfortune: a $90 parking ticket proclaiming my violation of section VC22500E – DRIVEWAY BLOCKING. D’oh! I knew when I parked that the rear of my car extended a few inches beyond the curb and into the neighboring driveway, but after half an hour searching for a spot I decided to take my chances (always thinking in economic terms, I figured that the expected cost of a ticket—equal to the true cost times the probability of actually receiving a ticket—was outweighed by the benefit from no longer looking for parking).

Chagrined by my back-to-back oversights, I called the number of the CSA pick-up location, just in case. To my surprise and relief, the woman in charge had managed to store my meat—not their usual policy—and I picked it up later that day.

By Monday night I had experienced the aforementioned $30 (perceived) loss, $90 loss, and $30 (perceived) gain, yet I felt better than I had felt on Sunday night when then I perceived only the $30 loss of meat. This may have had something to do with the order of events (after internalizing the loss of the ticket in the morning, the gain of $30 remained more salient at the end of the day), but I think it had more to do with how I perceived the true value of each loss. To a meat-loving economist, a discarded order constitutes a clear waste of resources—$30 of value—gone. The $90 parking ticket, on the other hand, represents a transfer of resources from me to the city of San Francisco, which ostensibly will put the money to use in the creation or maintenance of the public services I enjoy.

In introductory economics, we make a similar distinction between the deadweight loss and government revenue generated by taxes. Deadweight loss reflects the decrease in benefits to society (producers and consumers) resulting from fewer total transactions taking place. Economists view this loss to consumers and producers as different from the revenues a tax generates. Although both come at the direct expense of consumers and producers, the latter provides governments with the means to furnish public goods and services which indirectly benefit consumers, while the former—like rotten meat—is just no good.

Discussion Questions:

1. Why else might the $90 parking ticket be less painful than losing the meat shipment? Think about the “value” I got from time saved by parking illegally.

2. How does risk aversion factor into the decision of whether it’s worth taking the chance of doing something illegal? Consider a person who frequently speeds and occasionally gets speeding tickets. Ignoring the potential effects on others, might this too be a rational decision?

3. Consider other instances in which financial losses of the same dollar value might be felt in different ways (e.g. forgetting to take a $20 bill out of your pocket before washing it versus accidentally leaving an extra $20 as a tip on a restaurant bill?)

January 16, 2012

What's a Good Teacher Worth? Economists Can Tell You...

The issue of whether or not teachers (or, more specifically, good teachers) are underpaid is the subject of much debate in both education and politics. Economists are quick to point out that, in competitive labor markets, workers are paid their marginal product of labor- in other words, how much extra value they create. The market for teachers is not a competitive labor market for various reasons, but it would be nice to know nonetheless what the value-add for a good teacher is so that policymakers could examine whether teacher compensation is at least in the right ballpark.

...

January 12, 2012

macroblog

Keeping an eye on inflation

Where's inflation heading? Well, here's what the minutes of the December meeting of the Federal Open Market Committee (FOMC) had to say on the subject:

"Participants observed that inflation had moderated in recent months as the effects of the earlier run-up in commodity prices subsided . . . many participants judged that the moderate expansion in economic activity that they were projecting . . . would be consistent with subdued inflation going forward."

But not all FOMC meeting participants viewed these trends with equanimity:

"Indeed, some expressed the concern that, with the persistence of considerable resource slack, inflation might run below mandate consistent levels for some time."

According to Reuters, San Francisco Fed President John Williams said it this way:

"The data so far on the inflation front are confirming my view that inflation is ebbing and moving to be too low, and that is an important driver of my thinking about policy."

But as you might expect, some see the inflation risks weighing a bit on the other side of the scale. Again, from the December FOMC meeting minutes:

"Some participants were concerned that inflation could rise as the recovery continued . . . A few participants argued that maintaining a highly accommodative stance of monetary policy over the medium run would erode the stability of inflation expectations."

In fact, Philadelphia Fed President Charles Plosser had this to say in a speech earlier this week:

"I do anticipate that with many commodity prices now leveling off or falling, and inflation expectations relatively stable, inflation will moderate in the near term . . .

"But as a policymaker, my focus is less on the near term and more on the medium term. Looking further ahead, I believe we must monitor the inflation situation very carefully, particularly in this environment of very accommodative monetary policy. Inflation most often develops gradually, and if monetary policy waits too long to respond, it can be very costly to correct. Measures of slack such as the unemployment rate are often thought to prevent inflation from rising. But that did not turn out to be true in the 1970s. Thus, we need to proceed with caution as to the degree of monetary accommodation we supply to the economy."

What doesn't seem to be in dispute is that monitoring the data for any sign that the inflation trend is shifting—either higher or lower—is probably a good idea. And there are a lot of data to watch. In a speech last year to the Calhoun County Chamber of Commerce, Atlanta Fed President Dennis Lockhart had this to say about reading the inflation data:

"To achieve price stability, policymakers must detect inflation in its early stages before it is firmly established, especially in the psychology of consumers and businesses. This early detection is a challenge because inflation is not easily measured in the short term with any precision. No single price statistic enjoys a sufficient vantage point from which to assess inflation in the short term. With imperfect tools, inflation is more easily monitored than precisely measured."

The research department of the Federal Reserve Bank of Atlanta has taken pretty seriously the task of monitoring inflation developments. Where there are gaps in our information, we've been working to fill them with data, and we've aggregated it all into one place: the Inflation Project web page.

On the Inflation Project, we now report a sticky-price CPI statistic calculated from consumer price index data using only those components whose prices are slow to change. Joint research with the Cleveland Fed has shown this measure to be helpful when thinking about inflation expectations. Using Treasury Inflation-Protected Securities data, we now produce a weekly measure of the probability of a sustained deflation. And come January 27, we'll begin reporting the results of a monthly survey of business inflation expectations that examines firms' price-setting environment and the pricing pressures they face. From the responses, we'll generate a monthly measure of respondents' year-ahead unit cost expectations.

But of course, there are already a lot of data to keep an eye on. To make it a little easier to gain some perspective, we're also unveiling our inflation dashboard. The dashboard provides a platform for visualizing some of the data we commonly monitor to keep abreast of emerging inflation developments. It tracks 30 data series grouped into six major categories—retail prices, inflation expectations, labor costs, producer prices, material and commodity costs, and money and credit.

Our data and the inflation dashboard are available on the Inflation Project web page. Let us know what you think.

Mike Bryan, vice president and senior economist,

Laurel Graefe

Laurel Graefe, economic policy analysis specialist, and

Nicholas Parker

Nicholas Parker, economic research analyst, all with the Atlanta Fed

January 06, 2012

macroblog

In the interest of precision

As you may have heard, the minutes of the December 13 meeting of the Federal Open Market Committee (FOMC) contained the news that, starting with this month's meeting, committee members will be jointly publishing not only their personal projections for gross domestic product growth, unemployment, and inflation, but also the monetary policy assumptions that underlie those forecasts. In an article published earlier this week, the enhancement to these projections, known as the Summary of Economic Projections (SEP), was described in the Wall Street Journal this way (with my emphasis added):

"Federal Reserve officials this month will begin detailing their plans for short-term interest rates, a move that could show that the central bank's easy-money policies will remain in place for years and give the economy a boost."

A similar description appeared in the Journal yesterday (again, emphasis added):

"The Fed has just taken a historic step towards increasing its transparency and accountability by saying it will begin to release interest-rate projections several years out at the conclusion of its next policy meeting on Jan. 25. This means Fed officials will soon let the world know exactly what path they believe interest rates will follow—and they, after all, set the path of interest rates."

I added the emphasis in both of those passages because I think the highlighted language isn't quite right. Here is the actual language that appears in the FOMC minutes:

"In the SEP, participants' projections for economic growth, unemployment, and inflation are conditioned on their individual assessments of the path of monetary policy that is most likely to be consistent with the Federal Reserve's statutory mandate to promote maximum employment and price stability, but information about those assessments has not been included in the SEP.…

"… participants decided to incorporate information about their projections of appropriate monetary policy into the SEP beginning in January. Specifically, the SEP will include information about participants' projections of the appropriate level of the target federal funds rate in the fourth quarter of the current year and the next few calendar years, and over the longer run; the SEP also will report participants' current projections of the likely timing of the first increase in the target rate given their projections of future economic conditions."

The minutes are pretty clear about what this information is intended to convey…

"Most participants agreed that adding their projections of the target federal funds rate to the economic projections already provided in the SEP would help the public better understand the Committee's monetary policy decisions and the ways in which those decisions depend on members' assessments of economic and financial conditions."

…and what it is not intended to convey (here too, emphasis added):

"Some participants expressed concern that publishing information about participants' individual policy projections could confuse the public; for example, they saw an appreciable risk that the public could mistakenly interpret participants' projections of the target federal funds rate as signaling the Committee's intention to follow a specific policy path rather than as indicating members' conditional projections for the federal funds rate given their expectations regarding future economic developments. Most participants viewed these concerns as manageable…"

In fact, the first Journal piece mentioned above does document some of the expressed concerns near the end of the article. For example:

"… some might mistakenly see the forecasts as an ironclad commitment, rather than a projection that could change as economy evolves."

That caveat does speak to concerns of some FOMC participants that the projections would establish a specific policy path. But the issue is about more than maintaining flexibility in the face of changing economic conditions. The broader point is that the new information in the SEPs, according to the minutes, is not intended to be a device for signaling the policy path that the FOMC, by official vote, intends to pursue.

This may seem like a small detail. But when it comes to the central bank's communications tools, even the small details matter.

By Dave Altig, senior vice president and research director at the Atlanta Fed

December 31, 2011

New Articles This Week

Here are this week's new articles for you to check out:

The Short Run versus The Long Run - How do economists distinguish between the short run and the long run in compeittive markets?
The Costs of Production - How can business owners think about the different costs that they face?

Calculating Profit - How do businesses calculate profit? What is the difference between accounting profit and economic profit?

Cost Curves - How do economists show different costs graphically?

Enjoy!

December 29, 2011

Ronald Coase, the World's Oldest Living Economist

Okay, so technically I don't know for sure that that is true, but today is Ronald Coase's 101st birthday, so I feel pretty comfortable playing the odds. In honor of Mr. Coase's birthday, I have a few items of potential interest for you:

...

December 27, 2011

New Articles This Week

Here are this week's new articles for you to check out:

Measuring Unemployment - How do economists measure unemployment? Does the unemployment calculation measure what really matters?
Types of Unemployment - Why is all unemployment not created equal?

Enjoy!

December 26, 2011

The Hanukkah Production Possibilities Frontier, and an Economists' Hanukkah Song

Christmas may be over, but Hanukkah is still going strong for a few more days. Most of you know that Hanukkah is referred to as the festival of lights, but relatively few people remember exactly how that name came about. Basically, the Maccabees were trying to purify their temple after the Greeks had invaded it by burning ritual oil for eight days, but unfortunately they only had enough oil left to light the menorah for one day. The "Hanukkah miracle" is the fact that this amount of oil managed to keep the menorah going for eight days.

Economists would likely consider the Hanukkah miracle to be a temporary change in the production possibilies frontier- if one of the goods in a society is "days of light," or, technically, "days of temple purification," then the Hanukkah miracle could be represented by this sort of production possibilities frontier.

In addition, economists have even composed their own version of Adam Sandler's Hanukkah song. Who knew there were so many Jewish economists? (Okay, maybe I did.)

December 21, 2011

macroblog

In search of an agenda for job creation

In a macroblog post yesterday, Dave Altig, research director at that Atlanta Fed, discussed some recent research from the Federal Reserve Bank of Cleveland focused on the relationship between uncertainty and job creation by small businesses. That research, which is based on survey responses from members of the National Federation of Independent Businesses (NFIB), found that a high degree of uncertainty was correlated with a scaling back in hiring plans.

Yesterday's macroblog post also delved into the connection between small business hiring plans and actual job creation, pointing out that this connection requires further examination because job creation has not, contrary to popular conversation, been a broad characteristic of the population of small businesses. Instead, it has tended to be young businesses (and especially businesses less than seven years old) that account for most of the job creation. Most young businesses are small, but relatively few small businesses are young.

I believe that understanding the job creation challenges we currently confront may require that we increasingly turn our attention to the factors restraining the high growth sectors of the economy. Some evidence from this segment of the business universe came from a recent poll of fast-growing firms that the Kauffman Foundation conducted at the Inc. 500/5000 conference in September. This table summarizes the results of that poll, which are juxtaposed with roughly comparable responses from the NFIB survey.

(enlarge)

The interesting thing about the Kauffman survey is that the overwhelming problem reported by those companies that are in growth mode is the inability to find qualified workers. That observation is important because it bears on such questions as: To what degree is our elevated unemployment rate structural? How do we explain the observation that the number of unemployed workers appears to be elevated relative to the number of reported job vacancies? and so on.

It is obviously not appropriate to extrapolate from a single snapshot of a sample of fast-growing firms to the U.S. economy as a whole—and that is not the message here. But it is increasingly clear that the search for a single smoking gun that will clarify what is happening in labor markets is likely to be a hopeless quest. The answer to the question asking what a jobs agenda would look like is like your Christmas wish list: one size probably does not fit all.

Note: Today's macroblog post is the last for 2011. Look for macroblog's return in early January.

John Robertson, vice president and senior economist in the Atlanta Fed's research department

December 19, 2011

Scroogenomics, or Why Economists Aren't Popular at Holiday Gatherings...

Economists are probably not the best people to have around at the holidays- evidence shows that economists tend to be more Scroog-ey than most, and we're not particularly fond of gift giving due to its economic inefficiency.

...

December 13, 2011

The illogicality of plastic ear-swabs (or why some savings decisions make more sense than others)

While perusing the aisles of Safeway the other day, I pondered the rationality of my grocery selections. I bought the Q-tips brand ear swabs instead of kind with plastic stems which would have saved me about $0.70, but reluctantly opted not to buy my favorite kind of chocolate because it was selling for $3.99 rather than the frequent sale price of $2.99 a bar. I selected the grape tomatoes at $1.99 a carton instead of my preferred cherry tomatoes at $3.99 a carton, but bought a fancy bottle of salad dressing for $4.59 in spite of a myriad of cheaper alternatives.

Why did I spend the extra money on Q-tips when I could have used it to buy chocolate instead? Why forgo the expensive tomatoes but not the pricier salad dressing? The answers lie largely in the economic concept of elasticity. Price elasticity of demand describes how much a change in the price of a good affects the quantity demanded for that good. If a good has very elastic demand, then a small change in the price will have a large effect on how much of that good is demanded. Conversely, the price of a good with inelastic demand can rise substantially without having much effect on the quantity demanded. For example, my choice to stop buying chocolate bars in response to an increase in price suggests my demand for them is relatively elastic.

Cross-price elasticity of demand refers to how much a change in the price of one good affects the demand for another good. The switch from cherry to grape reflects a positive cross-price elasticity of demand, because my demand for grape tomatoes increased when the price of cherry tomatoes rose. This illustrates one determinant of elasticity: the availability of viable alternatives or substitutability. Although I do prefer cherry tomatoes to grape, it is a slight preference, so when cherry tomatoes are not on sale, I substitute grape tomatoes for cherry and save $2.

Another determinant of a good’s price elasticity is the percentage of one’s overall budget that a good requires. I eat a lot of chocolate; therefore, only buying it when it goes on sale adds up to far more savings over time than choosing to buy the generic Q-tips, which I only buy every six months or so. Because I find off-brand Q-tips mildly frustrating (the cotton doesn’t seem to stay properly attached), choosing the off-brand to save $1.40 a year would probably be one of the least worthwhile money-saving sacrifices I could make.

A third determinant of price elasticity is necessity. While food in general is perhaps the most necessary good I buy, my actual need for chocolate is (somewhat) less pressing. Reluctantly, I postponed my chocolate purchase in hopes that next time it would be on sale.

While normal people do not consider the elasticity of their demand for various grocery items, their actions are inevitably guided to some degree by the prices of alternatives, the weight of the expenditure in their overall budget, and the necessity of the good. But why stop at the checkout line? While it might be most natural to illustrate the elements of elasticity with groceries, economists believe the same decision-making behaviors apply when people buy any good or service. So, next time you’re considering whether to sacrifice or splurge on anything from cupcakes to cell phone plans, remember that some savings make more of an impact on your budget than others.

Discussion Questions:

1. Instead of talking about one type of tomatoes versus another, how does my demand for Roma tomatoes compare to my demand for tomatoes in general? How does a narrow or broad definition of a good relate to its elasticity?

2. The income elasticity of demand refers to the change in the quantity demanded that results from a change in the buyer’s income, rather than the price of the good. Suppose I got a raise. How would a dramatic increase in my income affect my demand elasticity for an expensive treat, like steak? Would the effect be the same on all goods? What about my demand for ramen noodles?

3. If the producers of a good have conducted research that suggests demand for their good is highly elastic, how might this affect their pricing decisions?

4. Recently, there have been “sin taxes” proposed in some states on a number of goods, including artificial tanning, tattoos, and sugary sodas. Economists call these Pigouvian taxes. They are taxes placed on goods that the government believes are socially unappealing. Suppose the demand for artificial tanning is very elastic, while the demand for sugary soda is not. Compare the effects of two equal sized taxes on the equilibrium market price, the equilibrium quantity consumed, and the tax revenue raised.

December 12, 2011

Another Treasure Trove of Economics Material, Reddit Style...

As an economist who works both inside an out of academia, one of my biggest frustrations is the fact that most research done by academic economists never really sees the ...

December 05, 2011

Why Percents and Percentage Points Are Cousins, But Not Twins

The distinction between percents and percentage points (or lack thereof) is easily on my list of top 5 pet peeves, so I very much appreciate this comic. This distinction is really important when writing or reading things that have to do with numbers, and the distinction can be shown via a simple example:

...

December 02, 2011

Not-so-sunken costs?

I recently had to decide between going to a concert for which I’d already bought a ticket and attending a dinner party with friends. Initially I was compelled to “get my money’s worth” by going to the concert (it was too late to sell the ticket to someone else), in spite of the fact that I would have preferred to go to the dinner (if I hadn’t bought the ticket). According to the economic theory of sunk costs, however, choosing to go to the concert under these circumstances would have been irrational.

Once a good or service has been paid for, the future costs and benefits of actually making use of the purchase should be compared to the future costs and benefits of alternative options—the cost of the purchase, paid in the past, is “sunk” and should not factor into the decision. Suppose that neither the dinner nor the concert would cost me any additional money, but I predicted the enjoyment I would get from the dinner would exceed the potential enjoyment from the concert. Because the expected future benefit minus the (nonexistent) future cost of the dinner exceeded that of the concert, I chose to go to the dinner.

Choosing to ignore sunk costs, however, is not always easy, in part because it can be difficult to distinguish situations in which the cost is truly sunk from those in which it shouldn’t be written off entirely.

Suppose instead I had been asked to bring a bottle of wine to the dinner. In that case, the fact that I had already bought the ticket meant that I was choosing between a concert that would cost no additional money, and a dinner that would cost me the price of a bottle of wine (say $15). Though I would have had a definite preference for going to the dinner and paying $15 for wine over going to the concert and paying $20 for a ticket, it could have been the case that I preferred going to the concert (at no additional cost) to going to dinner (and spending additional money). Although the $20 I’d spent on the ticket was gone either way, it had made one of the options free without affecting the cost of the other option. This would be particularly meaningful if I had a monthly budget for semi-luxuries like concerts and wine, and having spent $20 on the concert, I couldn’t justify spending $15 on a bottle of wine.

The moral of the story is that while you should never consider the “sunk cost” in itself when making decisions, it is relevant to consider how the sunken payment may have altered your current set of options.

Discussion questions:

1. Think about how this kind of analysis would be important to a company that has already invested considerable capital in a project, but later finds a different project that would have been better to invest in. When deciding whether to abandon the first project to invest in the second, how should the money already invested in the first project affect or not affect the decision?

2. Can you think of examples of sunk costs in your life that you might be tempted to not ignore because it can be difficult psychologically to not use things you’ve purchased?

Oz Economics: Will your silver shoes carry you over the desert?

For centuries, gold and silver served as money, but not anymore. Silver went out of circulation in the late 19th century. Gold was effectively banned from circulation in the United States by the Gold Reserve Act of 1934. The last attempt to revive silver in the US as a form of money was made by the Populist Party. In particular, W. J. Bryan, a three-time presidential candidate on the cusp of the 19th and 20th centuries, argued that adherence to the gold standard tightened the money supply and consequently limited access to credit. He claimed that this hurt the entire economy, especially the Midwestern farmers suffering from the deep and prolonged recession of 1890s.

The Populists’ solution was bimetallism – the use of gold and “free silver” – to increase the money supply, which in turn would help the farmers. Their efforts failed, but the debates of those days are immortalized in L. Frank Baum’s The Wonderful Wizard of Oz. According to Henry Littlefield’s famous interpretation of Baum’s fantasy, Dorothy’s silver shoes symbolize the silver money that had to be added to the gold – the yellow brick road – in order for Dorothy’s quest to succeed.*

Money is a special asset. It exists in multiple forms and serves different functions. For example, commodity money such as silver or gold has an intrinsic value, whereas fiat money or paper money has value only as a result of government decree or law. To be used as money, any asset (commodity or fiat) must fulfill the following requirements: It must serve as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. In the modern world, it’s much easier to use paper money than silver or gold coins or bars. However, silver and gold outperform paper money when it comes to the store of value function, because inflation can potentially turn paper money into useless pieces of paper.

Gold is widely used for inflation hedging, which means that when fiat money loses value due to inflation, gold retains its value. The importance of gold as a store of value is underscored by historical price data that shows spikes in the periods of greatest macroeconomic uncertainty. Although not used as a universal medium of exchange, gold still remains an important asset. Its price among pivotal financial market indicators is on a par with Dow Jones and other major stock price indices and Treasury bills.

What about silver? In the past hundred years, it has never come close to gold in importance. The use of silver for investment was negligible until 2008. It was mostly used for industrial applications and for jewelry. Recently, the role of silver has been changing as it becomes an increasingly attractive investment. In 2010, its use as an investment commodity increased to 17 percent of total production. This resulted in an increase in the demand for silver, and consequently, a higher price.

Since then, silver has been appreciating steadily relative to gold. In September 2010, the price of silver was about $20 per ounce, whereas the price of gold was approximately $1,250 per ounce. This yields the gold-silver price ratio of 62.5, which is close to the average for the past two decades. One year later, in September 2011, an ounce of silver was traded for $30 and an ounce of gold for $1,800. Thus the gold-silver price ratio fell to 45. This suggests that silver has begun to function as a store of value and is creeping up on gold. Moreover, current technology significantly increases the liquidity of both gold and silver as assets. Not only is it possible to open an online storage account without leaving your desk, but it is also possible to trade silver and gold shares online without knowing where the metals are physically located.

The quest for a safer investment didn’t just increase the demand for gold, it also dragged silver back into the spotlight. It restored, even if temporarily, silver’s position as a store of value. Even if modern investors don't believe that a pair of silver shoes alone will carry them over the desert of economic instability, they are certainly interested in giving them a try.

* Dorothy’s ruby slippers in the MGM classic movie make no sense economically. Ruby replaced silver for the film because the red ‘popped’ more in the new Technicolor technology.

DISCUSSION QUESTIONS

1. How would expanding the money supply have helped poor farmers at the turn of the 20th century?

2. Would you be willing to accept a gold or silver bar as a means of payment today? Do you think your favorite store at the mall would? Based on your answers, would you say precious metals serve as an effective type of money in our modern society?

3. If two similar investments (like gold and silver) show very different rates of return over the same time period, do you think the investment market is in equilibrium?

November 30, 2011

New Articles This Week

Here are this week's new articles for you to check out:

Introduction to Competitive Markets- What do economists mean when they refer to a "competitive market?"
Types of Money- How not all money systems are created equal.

Enjoy!

November 20, 2011

New Economist

Chart of the week: Spanish unemployment

Spaniards vote today, with opinion polls pointing to a change of government. Incoming conservative Prime Minister Mariano Rajoy faces unsustainably high sovereign bond yields, a depressed economy most likely sliding back into recession and, at 21.5%, the highest unemployment rate in the Eurozone. While the European Commission's autumn economic forecasts, published earlier this week, forecast tepid GDP growth for Spain of 0.7% in 2012, most market economists are more pessimistic. Without further austerity measures, JP Morgan economist Greg Fuzesi expects...

November 17, 2011

New Economist

Nudging behaviour: When incentives do (and don't) work

Behavioural economics has blossomed in recent years, to the point that the Fall 2011 edition of the Journal of Economic Perspectives can, along with articles on neuronomics, genetics and retirement, include a fascinating 20 page review paper on incentives. That's not surprising; a lot of people have taken an interest in them lately, including President Obama and Britain's prime minister. When and Why Incentives (Don’t) Work to Modify Behavior was written by Uri Gneezy from the University of California–San Diego,...

November 03, 2011

NFL Concessions Meet Economic Tradeoffs

While at the Patriots-Steelers NFL game earlier this season, I made a classic economics observation: tradeoffs are everywhere. It was partway into the second quarter, and dinner time was approaching. Because our seats were up in the highest section possible, this meant short lines at the concession stands, but the quality of food available was poor. The economist in me couldn’t help but see the natural connection to consumer theory, specifically indifference curves.

Indifference curves express how much utility, or happiness, comes from various combinations of goods. Any two points along the same indifference curve must represent two combinations of goods that make you equally happy. Additionally, points on different indifference curves represent different levels of happiness. In terms of the shape of indifference curves, economists make standard assumptions, such as more is better and averages are preferred to extremes. However, consider what the indifference curve mappings would look like if the goods being represented are quality of food and queue length (that is, the length of time you expect to wait in line .)

In this case, a long queue length is undesirable (economists call this a “bad”).That means that if you’re going to tolerate a longer line, the food quality must improve for you to be equally well off; this translates graphically into the increasing shape of the curve above. Also, for any given queue length, a higher quality of food makes you better off, so the level of happiness represented by IC2 must be higher than that of IC1. Finally, because averages are still better than extremes, the bowedness of the curves must be in the northwest direction. This is illustrated on the following graph:

A and C are two possible consumption bundles, while B represents the average of this bundle. Because B is preferred to A and C and you know that consumers are happier with better food and shorter lines (the southeast direction), the curve must be bowed in this way.

As you can see from the graph above, the choice as to whether or not it makes sense to travel throughout the stadium for better food is a simple consumer choice problem. My optimal decision rests on the relative happiness I get from higher food quality versus not waiting in line. What did I choose? A simple burger with french fries in exchange for a short line, so I could watch Brady and the Patriots blow it!

Discussion Questions:

1. What if instead of modeling “queue length” on the vertical axis, you want to show the indifference curves between “food quality” and the “amount of the game you watch from your seat.” How would the shape of the indifference curves change? Which direction represents a higher level of happiness from one curve to another?

2. Suppose that the value of watching the game diminishes because your team is crushing the opposition. How would this change the shape of your indifference curves between queue length and food quality?

3. What if averages are no longer better than extremes? How would that alter the shape of the indifference curves shown above?

August 30, 2011

Education Regulation

Across the country, students are returning to higher education institutions for the start of another semester, except it seems that the federal government may not want some of those students in classes. This summer, the Department of Education announced new rules that will limit federal loans and grants available to for-profit colleges in order to change the way these institutions do business. These rules base funding on how educational programs meet performance goals, and they have already had an effect; new student enrollments have fallen by nearly 50% at the University of Phoenix, the largest for-profit college.

While both the analysis of the performance policy and larger questions on the economic value of subsidizing education are relevant for economic debate, perhaps it is worth taking a step back and considering something much simpler: holding the initial funding constant, there was a market where buyers (potential students) were happy to trade with sellers (for-profit colleges), but the government chose to intervene and prevent trades that the market otherwise would have facilitated. Most of the time, economists endorse laissez-faire policies, literally “hands off.” This is because government intervention often distorts the market equilibrium and leads to lost surplus, thus lowering welfare for society as a whole. However, sometimes economic theory endorses government intervention, because some policies can correct for market failures and actually raise social welfare.

What are some examples of government intervention that can be economically beneficial?

1. Tragedy of the commons - When public resources are freely available to everyone, they can become overused and permanently damaged. When a government requires fishing licenses to fish in public streams, the intervention limits usage and preserves the environment by preventing over-fishing.

2. Externalities - In some cases, while the private costs and benefits apply to individuals, the consumption of goods can have far-reaching effects on society as a whole. By imposing fines for pollution, the government can make private firms internalize the cost to society of damage done by production.

3. Asymmetric Information - When sellers know more about their product than consumers can reasonably find out, they could exploit that information to rip consumers off. Governments can step in to level the playing field. Consider when a county’s boards of weights and measures routinely calibrate supermarket scales.

4. Incomplete Information - Economists typically assume complete information when analyzing markets. Welfare loss can occur if consumers do not know exactly what is for sale, or if a good fits their needs.

Returning to the case of new rules on for-profit education, perhaps the government has justified its intervention by suggesting that some students don’t know what they are getting themselves into, and are buying a product they don’t need or can’t use. In some cases, the federal government, along with four individual states, is taking things one step further. In August, they filed a lawsuit against another for-profit education company (Education Management Corporation), charging them with fraud. Based on information from whistleblowers, the government is charging:

"The company had a ‘boiler-room style sales culture’ in which recruiters were instructed to use high-pressure sales techniques and inflated claims about career placement to increase student enrollment, regardless of applicants’ qualifications. Recruiters were encouraged to enroll even applicants who were unable to write coherently, who appeared to be under the influence of drugs, or who sought to enroll in an online program but had no computer."

While the fraud case is early in the legal process, the metaphorical jury is still out on the government’s new policies. Regardless of the legal outcome, it’s important to consider the costs and benefits to the parties involved when the government considers intervention.

DISCUSSION QUESTIONS:

1) Will the government regulations related to for-profit education cause a pareto optimal change? Who is better off under these regulations? Is anyone made worse off by these new laws?

2) What should the government consider when debating laissez-faire policies versus intervention?

3) Do you think the government regulation of for-profit colleges is appropriate? Is this a positive or normative question?

4 ) How would the market react if students had to pay for their education entirely out of their own pocket, rather than receiving some government aid? Would you expect the same level of regulation to be introduced?

Crossing the Bridge: Do the Wealthy Live Longer?

A recent study on longevity provides intriguing data on life expectancy (LE) in the United States. Despite the U.S. having the highest health expenditure per capita, life expectancy in the US trails that in most other developed countries.

Life expectancy is a measure of a nation's or community's health that summarizes current mortality statistics by answering the following question: Assuming all current conditions remain unchanged, how long could children born this year be expected to live on average? In 2007, the US ranked 37th in the world in terms of LE at birth, with 75.6 years for men and 80.8 years for women. Across US counties, however, LE ranged from 65.9 to 81.1 years for men and 73.5 to 86.0 years for women. To assess the extent of these disparities, the authors used a benchmark based on ten countries with highest LE in the world. Then they ranked each US county based on how many years it is behind or ahead of the benchmark. For example, if county A has LE of 75 years and it took the benchmark countries years ten years to go from LE of 75 years to the current average of 80 years, then county A is ten years behind the benchmark.

The analysis determined that very few of the US counties are ahead of the benchmark, and most are behind. Some counties are decades behind, ranking close to less developed countries such as Peru and El Salvador. What is perhaps most surprising is that large disparities exist even between neighboring US counties. Take for example two California counties, both in the San Francisco Bay Area: Santa Clara, home to Stanford University, and Alameda, home to UC Berkeley. In 2007, based on LE for men, Santa Clara county was almost a decade ahead of the international benchmark and Alameda county was at least five years behind. An allegory comes to mind: By crossing the Bay Bridge, we jump 15 years back in time! For women, the time travel would be shorter, a decade.

The authors of the cited study are health researchers primarily interested in demographic factors and life style choices that create medically preventable deaths caused by obesity, smoking, and alcohol. Economists have a different interest in these statistics: the link between wealth and health. In 1975, demographer Samuel Preston first reported a positive relationship between GDP per capita and LE. The graphical representation of this relationship is now called the Preston curve. Two properties of the Preston curve are of special interest to policy makers: (1) Life expectancy at birth rises quickly at low levels of per capita income but flattens at high levels of income; (2) The Preston curve shifts upward over time, which is largely explained by improvements in health care technology. The shape of the Preston curve resembles that of a production function, suggesting that health, measured by LE at birth, is a product of a healthcare system where the only input of interest is per capita income.

Some factors that produce health from wealth operate on individual level. Higher income leads to better nutrition, which in turns creates better health outcomes, especially in children. Some operate on the community level (sanitation and other public health measures), and some on the national level (health care system coverage and production of medical knowledge). However, the causality in the Preston curve is unclear, and an alternative explanation is possible: The Preston curve may reflect an impact of health on income. That is, healthier people are able to work more and thus earn more, which enables them to take a better care of their children. Healthier children spend more time studying and thus become more productive workers, etc. This may explain the steeper slope of the Preston curve for the less developed countries where mortality is likely to affect productive members of labor force, while in developed countries, mortality largely affects retirees.

Regardless of the interpretation, the Preston curve remains an empirical observation that holds across countries and suggests that the link between health and income is more important for developing countries than for developed ones. In the case of the United States, does it matter at all? Quite a bit, it turns out. This graph shows a strong relationship between average personal income and LE across California counties. Specifically, average income per capita in Santa Clara county is 16% higher than in Alameda county, $36.5K versus $31.5K. In 2007, LE in Santa Clara county was 80.6 for men and for 83.9 women while in Alameda county it was 77.7 for men and 82.3 for women. So, the Preston curve is relevant even at the county level. Holding all else constant, baby boys and girls born in a relatively wealthier county are expected to live longer.

Discussion questions:

1) Why are researchers from different disciplines interested in life expectancy statistics?

2) What factors might be responsible for the US ranking 37th in the world?

3) What factors could be responsible for the differences in LE in two neighboring US counties with similar demographics and health care systems?

July 19, 2011

Raising the Roof... on the National Debt

For the past month, House Republicans and the White House have been in a bitter standoff over the national debt ceiling, the legal limit to borrowing that the U.S. government imposes on itself. The law establishing the ceiling has been in effect since 1917, but the ceiling has been raised many times over the past century. The current limit is set at $14.3 trillion. Government spending would have exceeded this limit on May 16th, but the U.S. Treasury has enacted emergency measures that will keep the government and its lenders funded until early August. Failing to increase the debt ceiling could lead to the U.S. being unable to fund military salaries, pay for programs like Medicare, or make interest payments to creditors. But increasing the debt ceiling won’t be easy either.

In the worst-case-scenario, an agreement to raise the debt ceiling would not be reached, and the U.S. government would risk defaulting on interest payments to lenders. The United States government has consistently served as a safe haven for lenders looking to store funds; historically it has never missed a payment. As a result of this reliability, the U.S. economy has been able to enjoy relatively low interest rates. If the U.S. were to consider defaulting on its loans, investing in the U.S. government would become riskier. To attract borrowers and accommodate for the increased risk of not being paid back, real interest rates would have to rise.

John Maynard Keynes wrote in The General Theory of Employment, Interest and Money that aggregate demand (composed of consumption, investment, and government expenditures) is the main determinant of an economy’s level of output. Investment spending, such as the purchase of a new home, is typically financed through borrowing. As real interest rates rise, borrowing becomes more expensive. Because investment is a component of aggregate demand, an abrupt decline in investment would theoretically shift the aggregate demand curve inward as in the graph below. With the US economy struggling to overcome the recession caused by the 2008-2009 financial crisis, a reduction in output and the corresponding fall in employment would certainly be viewed as an unfavorable outcome.

As part of the ongoing debt ceiling discussion, President Obama recently unveiled a plan to reduce deficits over the next twelve years that includes nearly $2 trillion in spending cuts and an increase in the debt ceiling. The government spends nearly $700 billion annually on national defense alone, and it also employs millions of people. As mentioned, government expenditure is a major component of aggregate demand. Economists would expect a reduction in government expenditures to shift aggregate demand inward in a similar manner as decreases to investment.

It is important to also consider the concept of “crowding out.” Whenever there is an increase in government spending, the resulting increase in incomes leads to increased spending and thus a higher demand for money. This increased demand for money causes increased interest rates. The opposite is also true. As government spending is reduced, so too are incomes, money demand, and interest rates. This reduction in interest rates makes borrowing cheaper, and thus stimulates greater private investment. Increased investment would therefore lessen the impact of a shock to aggregate demand from government spending cuts. Those in favor of spending cuts point to the increase in investment to suggest that the cuts won’t significantly decrease aggregate demand. Those opposed to the cuts note that interest rates are already very low so doubt that the cuts would spur much private investment.

It is relatively unlikely that US elected officials would be stubborn enough to permit a seemingly preventable crisis. Remember, the debt ceiling is a constraint that the government arbitrarily places on itself. No matter how the government chooses to proceed, the short-run economy is likely to see some negative consequences. Economists like to talk about optimal decision making, and recognize that sometimes even a “bad” option can be optimal if no other choice will lead to a better outcome. When it comes to the debt ceiling, let’s hope that our elected officials think like economists.

Discussion Questions:

1.) A number of nations around the world hold the U.S. dollar as their reserve currency. Others have periodically pegged their exchange rate to the U.S. dollar (China, for example). What would the implications of a U.S. credit default mean for foreign economies?

2.) Suppose that the debt ceiling remains unchanged. How might the US government prevent defaulting on its loans? How does this compare to the current plan suggested by President Obama?

3.) If you were President of the United States, how would you deal with the current level of debt? Would you increase taxes? If you were to cut programs, which ones would you cut? How might your view change if you were up for reelection?

June 10, 2011

Correcting Faulty Defaults to Improve Society?

California recently cut $170 million from the amount the state must pay toward 2012’s retirement benefits, according to an article in the Mercury News. With the uncertainty regarding the future of pension plans and social security, private retirement savings are more important than ever. Despite this need, many people have difficulty making consumption sacrifices today to provide for their future selves.

Recent changes to many private firms’ retirement savings programs seem to reflect this need for personal savings. In the past, employees had to actively opt-in to company savings plans by changing their monthly contribution amount from the default of $0 to some positive amount. Traditional economic models of savings assume that people are perfectly rational and will choose the level of saving that maximizes their utility over the entire course of their lives, therefore people’s decisions of how much to save should not be affected by something as small as the effort required to “opt-in” to a plan. Companies have found, however, that merely changing the default option from “no savings” to “X% of paycheck automatically saved” causes a significant increase in employee savings. One firm found that after switching from standard to automatic enrollment in retirement savings plans, the participation rate for new hires was 35 percentage points higher after three months on the job (as compared to those hired before the automatic enrollment). The participation rate remained 25 points higher after two years.

Why would something as seemingly trivial as changing the default setting have such a large impact on the decision of how much to save? The field of behavioral economics acknowledges that people do not always act according to the model of perfect rationality, which requires weighing all costs and benefits (present and future) and accounting for all available information. Deciding how much to save for retirement is an important life decision, yet the “easy” choice of accepting the default option often prevails against the rational action of giving it more serious consideration. Traditional economic models do not explain the widespread tendency to stick with defaults regardless of their suitability, but behavioral economists can replicate this behavior in controlled research environments.

Applying this understanding of behavioral economics to the savings plan structure is an example of “libertarian paternalism,” a school of thought that strives to maintain freedoms (libertarian) while still guiding people towards the choice that society deems best (paternal). The new default setting does not interfere with employees’ rights to do what they please because employees can easily “opt-out” by making a short phone call and signing a form. At the same time, it benefits society by encouraging more people to save, since those who do not sufficiently save for their future needs pose a problem not only to their older selves (who may have to work past their desired retirement age), but also for the government (and thus taxpayers) who may then have to help provide for them as well.

Discussion Questions:

1) Do you think that a company changing the default behavior for a retirement program infringes on employee's rights?

2) How do you make decisions about long-term financial planning? Do you research and model your finances, base your decisions on suggestions (from an employer, family, or friends), or ignore it entirely?

3) Are you surprised that changing a default value has an effect on what people select?

4) Imagine you are a freshman in college choosing a meal plan. You don’t know what the other food options on campus will be like, nor what your schedule will be. What advantages does a “default” option provide in this situation?

April 22, 2011

Revisiting the Reach of the BP Oil Spill

A year ago, cleanup efforts to recover from the Gulf oil spill were just beginning, but the effects of the spill were already finding their way into markets. While the debates and projections attempt to forecast how far the oil will spread, economists understand that the effects of the spill will reach further than the oil itself ever could. While many initial discussions focused on the local impact of the disaster, applications of the basic supply and demand model shed light on how a regional disaster can spread to national and global markets.

Soon after the disaster, the Associated Press reported that the price of shrimp started to climb in response to the spill. To begin to understand why, consider the direct effect of the spill on the supply of shrimp caught in the Gulf. The graph to the left reflects the market for Gulf-coast shrimp. As shown on the graph the oil spill reduces the supply of locally caught shrimp in the gulf as fishermen have been prevented from conducting much of their normal business. In response to the reduced supply, the equilibrium price rises, while the amount of shrimp sold falls.

Assume that shrimp caught in the Gulf and shrimp caught elsewhere are separate goods, though the markets for each are clearly related. Aside from the environmental problems associated with catching shrimp in the gulf, there may be variations in quality or style between shrimp caught in different locations. That said, shrimp are still shrimp, so even if consumers have a slight preference for one type or another, shrimp from other locations can be considered substitutes. When two goods are substitutes, an increase in the price of one of the goods causes an increase in demand for the other, all else held constant. When the market price for Gulf-caught shrimp rises (along with concerns that shrimp caught in the gulf may be contaminated) many buyers will look to purchase shrimp from other regions, like North Carolina, South Carolina, Georgia, and Texas. The second graph to the left illustrates how an increase in the price of a one good (Gulf shrimp) causes an increase in the demand for a substitute good (non-Gulf shrimp). The result here matches the reports by the AP: An increase in the equilibrium price and quantity of non-Gulf shrimp due to the effects of the oil spill.

Interestingly, the effects of the oil spill will also be felt by companies that have nothing to do with catching anything from the sea. For example, consider the market for tartar sauce. Many people like putting tartar sauce on their shrimp when they eat it, but have no desire to eat tartar sauce on its own. Economists would call tartar sauce a compliment to shrimp. When two goods are compliments, an increase in the price of one of the goods causes a decrease in demand for the other, all else held constant. On the final graph below, you can see the effect that higher equilibrium prices of shrimp have on the tartar sauce market. When the market price goes up, consumers will purchase less shrimp, and if less shrimp is consumed, consumers have less of a need for tartar sauce. This decreases the demand for tartar sauce, resulting in a decrease in the equilibrium price and quantity of tartar sauce.

There is still too much uncertainty about how much damage has been caused and the extent of the long-term effect on the environment for economists to reliably give exact figures on how these markets will change. However, the basic supply and demand confirms that the effects of this spill can be seen far beyond the Gulf region.

Discussion Questions:

1) How will the elasticity of supply and the elasticity of demand for non-Gulf shrimp affect the magnitude of the change in equilibrium price and quantity? How do economists describe the magnitude of a change in demand for one good in response to a change in the price of another?

2) What other markets do you expect to be affected by a change in the price of shrimp? What will happen to the equilibrium price and quantity in each of these markets? Are these goods compliments or substitutes?

3) Suppose that instead of an oil spill earlier this year, weather patterns had changed to make the shrimp season in the Gulf abnormally productive. If it were easier to catch shrimp in the gulf, what would you expect to happen to demand for shrimp caught in other regions? What about the demand for complementary goods like tartar sauce?

4) If you wanted to work on a shrimp fishing boat, all else held constant, which labor market do you think would be more favorable to join, one in the Gulf coast or one in South Carolina? Why?

5) Suppose the fishing industry is monopolistically competitive. Do you expect firms to enter or exit the market in the Gulf right now? In the long-run, assuming that fishing conditions return to their pre-spill levels, what can you say about the firms that will be in the market? Is it possible that any existing firms will be better off now than they were before the spill? If so, how?

April 11, 2011

Violent Torpedo of Falling Prices

We asked for the truth from Charlie Sheen, and we got it; well, with respect to his tour, that is. In mid-March, he tweeted that the first two concerts on his “Violent Torpedo of Truth Tour ” had sold out in a matter of minutes. Although Charlie Sheen was telling the truth about his first two concerts, the activity in the secondary market suggested that empty seats were still likely. Upon further analysis, it appears as if scalpers (not Sheen’s cadre of supporters) made up a large percentage of buyers at the box office, with high hopes that demand for tickets would soar in the secondary market.

Once there were no tickets left at the box office, interested customers who still wanted to see Charlie Sheen were forced to purchase resold tickets at prices higher than their original value. At first, some scalpers looking to make a quick profit posted tickets for Sheen’s performance online at heavy markups. Some scalpers sold their tickets and made a profit, while other scalpers held on to what they had or even bought more tickets in the secondary market with the expectation that ticket prices would continue to rise.

However, about a quarter of the tickets for Sheen’s first appearance were still available just days before the show. As the performance neared, there was a change in expectations, and thus behavior, by ticket holders. Since the scalpers were never interested in actually seeing Sheen perform, they were concerned that the window of opportunity to make a profit was closing. Prices were no longer expected to increase.

The graph to the left illustrates the initial supply (S1) and demand (D1) curves in the secondary market for Sheen tickets. The change in expectation by scalpers meant that ticket-buying scalpers left the market, causing a leftward shift in the demand curve (as seen in the shift from D1 to D2). As ticket prices fell and time was running out, those scalpers still holding on to tickets rushed to the market to get rid of their remaining tickets. This led to the increase in the amount of tickets supplied in the secondary market (as illustrated in the shift from S1 to S2). As a result, the price of resale tickets plummeted, and many scalpers ended up in the red. On stubhub.com, tickets for Sheen’s performance fell as low as $14. That is, they were selling for well below their original value at prices where many scalpers lost money on every ticket they sold. Clearly scalpers’ expectations about consumers willing to see Charlie Sheen were initially out of sync with reality. But with his wallet unaffected by fluctuations in the secondary ticket market, it is fair to say that Charlie Sheen is the one who ended up winning.

Discussion Questions:

Are ticket scalpers behaving optimally by agreeing to sell tickets for less than they paid? Explain the scalper’s profit-maximizing behavior.
Suppose beer is a complementary good to Charlie Sheen’s live show. If the price of booze went down significantly in Detroit the week before the show, what effect would this have on the demand for tickets to Sheen’s show?
Suppose a stand-up comedy show performed by Chris Rock would be a substitute good to Charlie Sheen’s live show. Suppose Rock already had one show scheduled in Detroit the night of Sheen’s show, but then Rock announced that he would add a second show that night. How would an increased supply of tickets to see Rock’s show affect the market for tickets to see Sheen?
Reviews of Sheen’s first show were reportedly quite bad, and Sheen was even booed. How would this news affect the market for Sheen tickets in other cities on his tour?

February 09, 2011

Technology, jobs, and creative destruction

In response to the recent approval of an all-electronic toll-collection system for the Golden Gate Bridge, many San Franciscans have voiced concern over the loss of toll workers’ jobs. The belief that new technologies are necessarily detrimental to employment, however, reflects a common misunderstanding regarding the interplay between technological advance, progress, and the economy as a whole. Though the introduction of electronic tolls will harm the toll workers in the short run by putting them out of work, they also enable the government to re-allocate the money formerly spent on toll-worker wages. These savings will either pay for other public goods and services (thereby employing workers in other sectors) or be used to reduce the deficit (thereby reducing the burden on the taxpayer).

Many balk at the notion of cutting jobs for the sake of “efficiency.” Consider, however, whether people would choose to move in the opposite direction—sacrificing efficiency for the sake of increased employment. Instead of using dishwashers and washing machines, individuals could hire others to wash their dishes and clothes by hand—that, too, would create jobs. It is tempting to separate such individual spending decisions from those made by the government, but ultimately the saving from automated tollbooths is no different from that provided by any other time- and money-saving device.

The process of old products or services dying out in the wake of new technologies, known as creative destruction, has been transforming the world for centuries. Many typewriter manufacturers went out of business with the advent of computers, yet few people would argue today that we should have repressed such technological advances for the sake of workers. Just as the computer industry gave birth to myriad of new jobs, the new tolls themselves create jobs in technology development, manufacturing, maintenance, etc. Thus, instead of widespread unemployment, the result of such technological progress is economic growth. People use technology to produce goods more efficiently, and those goods then become available for everyone’s consumption.

Does this mean new technologies never cause employment problems? Of course not. Those whose skills are made obsolete by new technologies may indeed suffer a period of unemployment, although often the money saved is even put toward job-training programs and unemployment insurance to ease the pain of transition (to quote The Economist, “Protect workers, not jobs”). While this is an unfortunate side effect of technological growth, the difficulty imposed on the unlucky individuals is typically outweighed by the widespread benefits to society that technology creates.

Discussion Questions:

1. Can you think of other industries where creative destruction is present and thus encourages the creation of improved technology on an ongoing basis?

2. Before the Golden Gate Bridge was built in the 1930s, cars had to cross between San Francisco and Marin County (the two ends of the bridge) on ferries. How is building the bridge like an improvement in technology, and how did it impact employment?

3. How does creative destruction affect the quality decision producers must make? Why is it that some goods are made with the intention of lasting decades while others are only designed to last a few years?

4. In this case, the tolls will reduce the number of workers in the toll-collecting industry, but is this always the case with new technology? What is an industry where technology acts as a complement to labor, and how is this different from technology as a supplement to labor?

February 01, 2011

Super Picks

My friend Kasie and I are both big football fans. We’ve tried to pick the winner in every NFL game since the start of the season, where each correct pick earns one point. With only the Super Bowl remaining, we’re a single point apart. Quite unfortunately, I happen to be trailing by that point, so my chance to avoid an offseason of taunting rests on picking the Super Bowl correctly and having Kasie pick incorrectly. Being an economist, I realized I could apply game theory to guide my strategy for making my final pick of the season in order to maximize my chance of beating Kasie. First, suppose my friend and I only care about if I tie or lose; losing by one point is exactly the same as losing by two. Also, as we have done all season long, our picks will be submitted before the football game starts and then revealed simultaneously.

For starters, assume that both the Green Bay Packers and Pittsburgh Steelers have a 50% chance to win, and further assume that when we make our picks, Kasie and I both know this.

The matrix on the right shows the utilities (or payoffs) associated with different combinations of picks. For example, if we both pick the Packers, I cannot gain any ground on Kasie for the season; therefore regardless of the outcome of the Super Bowl, I lose to her and get a utility of -2, while Kasie wins the picking game and receives a utility of 2. However, in the case where we do not pick the same team, no matter who I pick, I have a 50% chance of tying her for the season, and a 50% chance of losing by 2 points. Before the game starts, that gives me a utility of 1 unit, while Kasie gets a utility of -1 because she’ll have to sit through a now stressful game. Therefore, the utilities expressed in the payoff matrix when we play different actions represent ex ante payoffs—that is, they are our expected payoff before knowing the result of the game.

In this case, this is a complete information simultaneous game that has no equilibrium where either player can use a pure strategy. However, there is a mixed strategy Nash Equilibrium for this game where both players randomize their selection and pick either team with a 50% probability. When one player randomizes his or her selection by picking either team half of the time, the other player’s best response is to also pick each team half the time. If both players randomize this way, neither has an incentive to deviate from that strategy, and thus those strategies are an equilibrium.

There is at least one more complication, though, and it’s very important! I am a proud Pittsburgh Steelers fan, so I would prefer to root for my team knowing that I also have a chance to tie Kasie. It would not be as rewarding to root for the Steelers knowing that they must lose in order for me tie for the season. On the other hand, Kasie is a stinky New England Patriots fan, and she has no preference between the teams in the Super Bowl. Because I care about who I want to win, I now prefer not only to pick differently than Kasie but also to pick the Steelers so I can wholeheartedly root for them.

The matrix on the left now incorporates my rooting interest by updating my payoff if Kasie and I disagree, while leaving Kasie’s payoffs the same no matter who we both pick. Given the new payoff matrix, the mixed strategy Nash equilibrium is that I pick either team with equal probability, and Kasie picks the Packers 1/3 of the time, and the Steelers 2/3 of the time. If Kasie doesn't adjust her mixing, then I would always pick the Steelers since the expected payoff would be higher than any mixing strategy. My mixing strategy stays the same, however, because Kasie's payoffs are untouched.

Of course, Kasie is going to read this post as well, so now I’m going to need to account for the fact that she knows my preference for the Steelers. Looks like it’s time to update my strategy again!

Discussion Questions:

1. Consider the solution to the picking game when my rooting preferences are factored in. Despite my interest in the Steelers, why do I still only pick them half of the time? If I picked them more than half of the time, what would Kasie’s optimal response be?

2. What is your favorite sports team? Which is more important to you, seeing them win a championship or winning a competition with your friends? How do personal preferences of one player influence the decisions each player makes in this picking game?

3. Suppose one person picking has information about the game that the other does not. For example, if one person gets a tip on an injury to a star player that isn’t public knowledge, how would this new information change the informed picker’s strategy?

4. Some people actually prefer to bet against their favorite team, using the wager as a form of insurance. The logic being that “I won’t mind losing money if my favorite team wins, but if my favorite team loses; at least I’ll get some cash to make me feel better.” How would thinking like this change the way the picking game’s payoffs are described?

November 02, 2010

A Biter's Market

Halloween always brings back a lot of wonderful memories for me. Like so many kids, trick-or-treating may have been my favorite few hours of the year. And while costumes and free candy are always appealing, there was also some thrill to the hunt. At least for me, just getting the candy was satisfying, regardless of if I liked a particular treat, or if I already had more candy than I would ever be allowed to eat! If an economist assumes that kids get some utility from “the hunt,” or at least that it is costless to kids to continue to go to houses for as long as they are allowed, then the result is that kids will get as much candy as is offered to them, regardless of how much or little they value it. If kids end up with a bunch of candy, many people are concerned about the health effects associated with eating it all. One interesting attempt to work with the fact that kids will get candy but reduce their consumption has come from a very interesting program where dentists offer to buy Halloween candy back from their patients. By offering a monetary incentive, these dentists are accepting that kids will gladly gather as much candy as possible, but perhaps their consumption can be changed if they are given more incentives than just a promise of “healthier teeth.”

Most economists would look at this program and talk about how its organizers are trying to incentivize kids by increasing the payoff of an otherwise less desirable choice. At the frontier of current research, economists are developing models to analyze the fairest and most efficient way to do this. Some economists may also suggest that this program’s goal is to influence a child’s preferences so that she will make different (healthier) decisions in the future. However, the ability of programs to change preferences is currently an open question in economic research.

Discussion Questions:

1. What other sorts of behaviors might dentists want to subsidize? What are some other examples of when a healthcare provider tries to encourage a healthy behavior?

2. Why might a program, like the one above, be unsuccessful at reducing candy consumption?

3. How much money would you need to be paid to sell a pound of Halloween candy? How much candy would you sell if you had five pounds? What about fifty pounds?

4. Do you think the amount of money a child already has will influence his or her decision to sell some candy? In what way?

5. Right now, anyone choosing to sell candy can pick which treats they sell. How do you think participation in the program would change if the pound of candy was selected randomly from all the candy collected trick-or-treating? What if the most dentally damaging candies were priced higher?

September 21, 2010

D is for Demand: Sources of Success of 3-D Movies

According to the Wall Street Journal, 2009 was the first year since 2002 where sales at the U.S. box office beat those of DVD releases by passing the $10 billion mark. The success of Avatar has certainly ramped up the industry with its worldwide revenue of more than $2.7 billion; such an amount is comparable to the GDP of a small but affluent country like Barbados! Also interesting is the recent trend in increasing ticket prices: Prices of domestic movie tickets, according to the Los Angeles Times, have increased by more than 10% in the first few months of 2010. Specifically, not only is a 3-D movie ticket sold with an average surcharge of $4 over the 2-D ticket prices, 2-D tickets are also up by roughly 4%. Similar to books and cars, the market for movies is monopolistically competitive. Every movie is a separate product that faces competition from a multitude of similar but not identical products, namely, other movies. Entry of new products normally puts a downward pressure on the prices of existing products and the average market price overall. So, the question is: Why, despite the increased competition, have prices gone up for both formats? Why are people willing to pay significantly more to go to the movies?

Just as in the case of many other goods, the demand for movies is sensitive to the changes in ticket prices. The extent of sensitivity, which economists term price elasticity of demand, can be different for different movies because it is determined by a number of factors such as availability and prices of similar goods (substitutes), the number of consumers, and tastes and habits. The demand for goods that have many close substitutes is typically more elastic than for goods with fewer substitutes. The reason for this is that when the price increases, consumers have the option to buy other similar and potentially less expensive products. For example, when the ticket price of a traditional movie increases, more viewers are likely to decide to watch the film on DVD. This is especially true as improvements in technology have made such substitutes as DVDs, Blu-Ray Discs, On Demand products, and streaming Netflix accounts easily available. Thus, generally increasing prices of movie tickets might not boost revenues, as the decrease in sales (quantity demanded) may wipe out any gains that would arise from the price increase. But if this is the case, then how can we explain the fact that movie theaters are receiving record-breaking revenues while ticket prices are increasing?

For a long time, 3-D films have not made any noticeable impact on the industry, but James Cameron’s inventive cinematography created a new product, a dramatically different viewing experience, which shook the entire market for entertainment. Movie theater technology was updated to accommodate mass screenings, and other directors and studios followed suit. Since Avatar’s release, 3-D movies have generated more than one-third of all domestic movie revenue. At least some of the factors responsible for the price elasticity of demand for movies have changed. It is hard and relatively expensive to replicate a 3-D experience outside of the movie theater. Thus, the 3-D format has fewer close substitutes, as home theaters with 3-D capabilities are still rare and quite expensive to install, which lures more viewers out to 3-D screenings despite more expensive tickets. The demand for 3-D movies is, therefore, less elastic, which creates the opportunity for the producers and movie theaters who deliver these products to the consumers to charge higher prices.

At the same time, the 2-D and 3-D markets are intertwined as the number of movie theaters and seats is limited, at least in the short-run. Thus, the story would not be complete without taking into account theater operators’ decisions about prices and allocation of seats. The necessary reduction in the number of rooms where 2-D movies are shown shifts the supply of 2-D to the left, which drives the price of that traditional format up despite the reduction in its demand. So, ultimately, rising prices of both formats have different (although related) explanations. If the industry experiences more consumer interest in its new products, like we see with Avatar, the result is growing revenues along with higher average prices.

While it is possible that the spectacular success of Avatar was a sort of surprise attack on the consumer followed by a box office record, the systemic changes it brought to the movie industry suggest that the effects will be longer-lived. Due to the advent of the 3-D movie format that can show in regular theaters, more movies are money-makers now than before. This situation is likely to persist for some time until affordable home theaters catch up in quality and increase the competitive pressure on the movie theaters.

Discussion Questions:

1. Similar to how Napster was used as an illegal medium to download music, online services are emerging for downloading movies in theaters not yet released for home viewing. How might this affect the price elasticity of demand for movie ticket sales? How might 3-D movies be protected from this type of piracy?

2. The “second law of demand” implies that price elasticity of demand is greater in the long run. How and why might moviegoers’ behavior change in the long-run? What would this mean for theater owners?

3. The explanation offered here is based on the assumption that 2-D and 3-D movies co-exist in the market for entertainment. Do you agree or disagree? What would be an alternative approach to explain the rising average prices of movie tickets?

September 02, 2010

Cherry Picking: An Economist’s Guide to Used Cars

After recently moving, I needed a used car that was both well maintained and reasonably priced. However, there was a problem: I am not a car expert. The prospect of finding a cherry, or a used car that’s worth its price, among the thousands of available cars in my area seemed a little daunting. Fortunately, by turning my search into an economic exercise, I was able to demystify the process and ease my nerves about making such a significant investment choice.

Used cars have been a popular topic in economics since George Akerlof (who eventually won the Noble Prize in Economics for his work on the subject) described how the market for used cars can be affected by imperfect information. A key premise in Dr. Akerlof’s work is the idea of asymmetric information: a scenario where one party has access to information that the other party does not. In his most famous paper on the subject, “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” Akerlof argues that in any market where rational people are met with asymmetric information, eventually the only goods for sale will be those that are not worth buying. Economists use the term adverse selection to describe this idea. When a market suffers from adverse selection, skepticism affects the prices that buyers are willing to pay. The downward pressure on prices drives out the high-quality sellers. Ultimately, the only sellers left at a given price level will be those of low quality. When buyers eventually realize that the only cars available are of low quality, they will decide not to buy any cars at all. Now you can understand why I was feeling a little overwhelmed about the whole process of buying a used car.

Thankfully, the research didn’t end there. Joseph Stiglitz (who shared in Dr. Akerlof’s Noble Prize) developed the notion of screening as a method to get around the difficulties of asymmetric information. Screening is a way for both sides of a deal to use what they already know to learn about hidden information. By reducing the level of asymmetric information, Stiglitz argued that you could avoid situations of adverse selection. Knowing this, I started to put together some tools that would help me to screen my potential sellers.

I first used car-pricing guides to give me a general sense of when a seller was giving a fair price. If I couldn’t trust a seller to give an honest price, I certainly couldn’t trust the seller to be honest about other aspects of the car. I also requested reports that outlined what work had been done on the cars. In addition, I asked my car-savvy uncle to help me spot work that may have gone unreported. When requesting these reports, I judged the sellers’ reactions. Those with high-quality cars had nothing to fear from the increased inspection, while nervous sellers made me nervous. One desperate seller attempted to drop his price by nearly 20% when I told him I’d be back in a day with my uncle. Needless to say, we didn’t make it back to look at that car!

With patience, I found a nice prospect at a dealership that didn’t typically sell used cars. As it turned out, the previous owner had traded in her commuter car for a discount on something a bit more…luxurious. Before it was accepted as a viable trade-in, the car had to pass an inspection by the dealership, in addition to the standard state inspection. The dealer was also happy to meet my uncle and answer any questions he had about the vehicle. By exhibiting a willingness to provide as much information as possible on the car’s history, the dealer was using a technique called signaling. Michael Spence (who also shared in Dr. Akerlof’s Noble Prize) developed an explanation of how signaling is used by the person with more information in a particular deal to inform the other side about quality. In his willingness to let me explore the potential problems of the car, the dealer was trying to signal that he was confident about its quality and that it was worth my investment.

The inspections checked out, and the asking price was right on target with what my pricing guide suggested—I had found myself a car! By using my head and applying a little economic theory, a seemingly impossible task turned out to be fairly easy and nearly fun. Spread over about a week and a half, the process took about 15 hours. Only time will tell if it was worth the temporal and monetary investment, but, after a month of driving the car pretty vigorously, I’m confident that I found a cherry.

Discussion Questions:

1. How could car sellers that are really confident about the quality of their cars guarantee value? Why are used car sellers hard-pressed to offer such guarantees?

2. Signaling is a helpful tool when a transaction suffers from asymmetric information. Can you think of how signaling is used in the job market? What are some ways that prospective employees can use signaling to their advantage?

3. How do markets for products besides cars (like books or classes offered) suffer from asymmetric information? What tools have you have used to make more informed choices?

August 11, 2010

The Opportunity Costs of Relationships

Since it is generally easy to compare the price-tag cost of one good or service against another, people tend to consider only the monetary cost of a decision. However, what’s also important to consider is the whole value of what you are giving up when you make a decision. In economics, this is known as the opportunity cost. A simple textbook example describes a market that offers two goods for sale: apples and oranges. If an apple can be bought for $1 and an orange for $0.50, the monetary cost of buying an apple is $1, but the opportunity cost is equal to how much you value the two oranges that you give up if you choose to buy an apple. While this observation may not seem particularly important in this context, it can be applied far beyond the realm of monetary dealings.

Romantic relationships are obviously not regular commodities like apples and oranges in that you don’t just head to your local date market and buy a girlfriend or boyfriend. Despite this violation of the competitive hypothesis, relationships have opportunity costs too. That is, the opportunity cost of a relationship is comprised of all the things one foregoes to be in that relationship. While it is not difficult to see the many wonderful things you gain from having a romantic partner, it is easy to overlook the things you give up in exchange.

Here’s a list of some of the things that most people forgo to some degree to be in a relationship:

(1) Spending time with friends and family
(2) Going out and meeting new people
(3) Developing or engaging in hobbies
(4) Working
(5) Exercising

Some people may find that being in a relationship allows them to do more of some of these things (maybe you work out together or spend lots of time with mutual friends), but usually the time you spend with your significant other tends to edge out at least some of the things you like to do on your own.

In economics we represent such trade-offs using graphs like the one below. The red line is known as the budget constraint, and while it typically represents a monetary budget, in this case it represents a sort of time budget for an individual in a relationship with eight hours of leisure time per day (assuming eight hours of sleep and eight hours of work). The eight hours of leisure can be divided anywhere between spending all 8 hours with your significant other or all 8 hours doing other things. Regardless of what allocation a person chooses on the red line, any movement along the line represents a tradeoff of one activity for another.

Despite the perception of economics as dismal science, the point is not that the cost of relationships outweighs the benefits, but rather that there is an opportunity cost to everything. So if you’re single and accustomed to thinking about all the things you’re missing out on, take comfort in the things that you aren't giving up.

Discussion Questions:

1. Consider the graph depicting the time-budget constraint. If a person quits their job and suddenly has more time, how does this affect the person’s position on the line or the position of the line itself?

2. If person A and person B primarily give up time spent with friends when they are in relationships, and person B really likes being with friends, which person’s relationship comes at a higher opportunity cost? If you were to draw each of their indifference curves on the budget constraint graph, how would the two compare?

3. How would being in a relationship affect your overall consumption? If you are in a relationship, are there some goods or services that you would consume more or less of in a given week? Which of these goods would you say are “complementary goods” with relationships? Which are “substitutes?”

4. Sometimes when economists model consumption choices for goods that are consumed over longer periods of time, they introduce switching costs. What sorts of things associated with a break-up may be considered a switching cost? If you assume that breakups are costly, how might this change a person’s decision to allocate their time?

April 09, 2010

Economics of Flu Vaccines

In the last few months, the H1N1 influenza virus, or “swine flu,” has been dominating the news, and many people are worried about access to flu vaccines or “flu shots.” (That is, unless you work for Goldman Sachs, who got first dibs. But don’t they always?)

Unlike other viral diseases, flu viruses constantly mutate, or change into new “strains.” A vaccine that works to protect against a specific strain one year will probably not work to prevent against a new strain the next year. Because of this, hundreds of hours of lab work are devoted each year to identifying specific flu strains, developing a vaccine against them, and then producing that vaccine in large enough quantities to distribute to the population.

This year, the efforts of flu vaccination labs have been split, with only some of the labs producing vaccines against the "regular" flu, and the rest working on vaccines against the specific H1N1 swine flu strain. Because of this, the supplies of the regular flu vaccine are greatly reduced, and the supplies of the H1N1 vaccine are limited. Since both vaccines are necessary to completely protect against the flu, the amount of both vaccines is not enough to inoculate the same number of people who would normally have been covered by the "regular" flu vaccine alone in previous years.

Given the scarcity of both traditional and swine flu vaccines, how should the existing vaccine be distributed? If the goal is to maximize societal health, the flu vaccine should first be given to those whose health would benefit from it the most, who are people at risk of complications and death from the flu, including young children, the elderly, and the immuno-compromised. On the other hand, if the goal is to minimize the cost of the flu to an economy, the most productive and important members of society should get the first vaccine.

To a certain extent, extreme examples on both ends are small in number and easy to take care of. For example, health care employees are at greater risk of contracting any disease and, consequently, of infecting those whose health is vulnerable. So it’s clear they should be the first in line to get the vaccine. But what about people who don’t have such critical jobs (and keep in mind that you probably qualify as one of these people)? This topic relates not only to the health of the economy, but your personal health as well.

Discussion Questions:

1. Do you think that the goal of those who control flu vaccine policy should be to get the best health outcome, to minimize the cost to GDP, or some combination of the two? What public health policies would achieve your preferred policy goal?

2. Assume that society does want to maximize productivity in dollar terms rather than health outcomes. Now, take into consideration the fact that those who do get sick might require expensive medical treatment, the cost of which will be partially borne by society. How does this alter the analysis of who should receive the vaccines?

3. Economists often are fond of markets as allocation mechanisms because the forces of supply and demand determine a price that allocates goods to those who are willing to pay for them the most. How would a market for flu vaccine work? Why is it different from a market for non-life-affecting goods and services, like books or cars?

4. Firms (especially ones with high-productivity employees) value their employees’ health. It is estimated that that the total yearly economic cost of the flu in the U.S. is over $80 billion. Many companies have started to recognize this and have made attempts to protect their own economic interest by paying for or providing flu vaccines to their employees. As a result, employees who otherwise may not have been vaccinated (since the unsubsidized cost exceeds the expected health benefit) are more likely to accept the free vaccine. Is this efficient? Is it equitable?

5. Vaccines have a limited shelf-life – that is, they can only be used for a particular period of time if they are to be effective. For this reason, the timing of development, production, and distribution of flu vaccines in the United States is largely based on the pattern of the flu season in previous years. Go to Google Flu Trends to see a graph comparing the incidence of flu activity in the United States this year with previous years. How does the current flu season differ from previous years? If you were in charge of setting production policy for 2010, what might you change in order to produce the correct amount of vaccine for each strain of flu at the appropriate time?

March 09, 2010

Pigouvian Tax the Rich?

A millionaire in Switzerland was recently fined a world-record $290,000 for driving his Ferrari Testarossa 87 miles per hour in a 50 miles per hour zone. The amount was so high because fines for speeding in Switzerland are based on a driver's wealth (and, in this case, because the driver falsely claimed diplomatic immunity). The story got me thinking about the economics of speeding tickets.

To an economist, speeding tickets can potentially act as a Pigouvian tax: a tax that makes an individual's cost of engaging in an activity equal to the cost imposed on society. For a driver, the cost of speeding includes things like fuel, the increased likelihood of damaging one's car, and injuring oneself in an accident. For society as a whole, though, the cost of speeding also includes the increased likelihood of an accident that damages other people's property or injures other people. As a result, speeding (and driving in general) imposes costs on society above and beyond those incurred by the driver. Moreover, the other people affected by speeding aren't compensated for the risk by the benefits of speeding, which are enjoyed strictly by the driver. Economists refer to the costs from an activity that are imposed on other people without any compensation as negative externalities. By making an individual's costs equal to society's costs, a Pigouvian tax gives individuals incentives to act as if they were considering everyone's costs. By doing so, a Pigouvian tax internalizes the externality and decreases the activity to the level that maximizes net benefits to society.

It can be difficult to set the Pigouvian tax exactly equal to the external costs of driving because these depend on so many hard-to-estimate variables (such as the likelihood of accidents at different speeds and the monetary damage caused by injuries or death). It's easy to determine, however, that externalities don't depend on the wealth of the driver. For example, the potential consequences for others of a poor person driving a rented Ferrari at 87 miles per hour are the same as from a rich person driving his own Ferrari at the same speed. Thus, for speeding tickets to serve as a Pigouvian tax, the fine for driving the same speed in the same car in the same conditions should be the same for everyone, regardless of wealth.

One consequence of not basing them on wealth, however, is that wealthier people will likely speed more. In most cases, the richer you are, the more you are willing to spend to save time, and thus the more willing you are to speed and risk getting a ticket. Moreover, if the "pure desire for speed" (in the words of the Swiss court that sentenced the driver) is a normal good, wealthier people will consume more of it. From an efficiency perspective, this result is completely appropriate. As long as individuals act as if they were considering all the costs of an activity, their decision to engage in it means that there are net benefits to them and thus to society.

However, because speeding puts others' lives at risk, the idea that it is appropriate for wealthier people to speed more runs counter to many people's idea of fairness. Switzerland's law suggests that its citizens are willing to forego the efficient level of speeding in order to obtain an arguably more equitable result—everyone has similar incentives to speed, and endanger others, regardless of wealth. So, if you ever find yourself about to drive in Switzerland, be sure to check your bank account first: the less you have, the better.

Discussion Questions:

1. What if, considering its external costs, $290,000 was actually the appropriate fine for speeding, but that only extremely wealthy drivers paid that much, with most drivers paying considerably less. Who would speed at the appropriate rate, while who would speed more than was appropriate?

2. Consider what factors make speeding more or less dangerous for other people. On what variables could you base fines for speeding so that drivers internalized the external costs?

3. Are there variables used to determine fines for speeding where you live that have little or no relation to the external costs of speeding?

4. In addition to acting as a deterrent for speeding, fines for speeding can also serve as a source of government revenue. How does this consideration impact the efficiency and equity of basing the fines on wealth?

March 04, 2010

Larry Murphy: Hall of Famer, Champion, Economist?

Over his NHL career, Hall of Fame defenseman Larry Murphy was praised for his reliable defense, gifted offense, and his immense hockey skill. But until now, I doubt he has been lauded for his economic insight. Perhaps even Murphy is unaware that his recent comments about head injuries in the NHL perfectly illustrate a real-world example of moral hazard. Speaking to an NHL.com reporter, Murphy explained current players rely on referees rather than their own decisions to keep them safe on the ice. "You always had to be aware of where you are in relation to the boards and you had to stay close to the boards and protect yourself that way," Murphy said. "Now the play is to turn your back to a guy and it's like, hands off.” While it may appear that Murphy was simply talking about how his sport has changed, his logic rests on the same clear principles economists use when analyzing many situations with the concept of moral hazard.

First, let’s start with a bit of back-story for those not familiar with hockey. The rules of the game allow for a great deal of contact, called checking, during play on the ice. Legally, only the player who controls the puck can be checked, and contact is allowed anywhere on the ice, even near the boards. As modern medical understandings of head injuries and long-term brain damage have advanced, the hockey community, and specifically the NHL, has made efforts to further protect its players. In the past three seasons, a large emphasis in rule enforcement has been made to prevent hits from behind that would send a player head-first into the boards without warning. There is no debate in my eyes that the intent of this policy should be supported in every way. The economics in all this stems from the fact that players have begun to play the game differently due to a change in incentives.

Murphy outlined how current players now take a more aggressive position on the ice because they no longer have to protect themselves; rather, the players know that the referees will protect them by calling penalties. From an economic standpoint, defensemen now face different incentives than they did before the rule change occurred. The risks associated with being hit from behind can be viewed as the cost associated with turning around on the ice. Since the new rules make those dangerous hits less likely, they essentially lower the cost defensemen face when deciding if they should put themselves in a vulnerable position. Economists refer to a moral hazard as any time a change in the larger economic system designed to protect an individual causes that person to alter his behavior to be more risky.

Perhaps the most vivid illustration of moral hazard comes from a quip by an economist who realized that as safety features in automobiles have advanced, so have the number of accidents. He stated that technological advances that have reduced the number of fatal car accidents in the country (e.g. airbags, seatbelts, etc.) would be just as successful as removing all safety features from a car and installing a giant metal spike in the center of the steering wheel that would be sure to impale the driver even in a minor crash. While the comment is tongue in cheek, its underlying point is very valid. Consider if this alternate proposal were true. I imagine that drivers would be much more attentive when driving and make many more efforts to drive safely, such as reducing their speed and avoiding distractions like cell phones. Whether talking about new rules on the ice or safety changes on the road, the theme is the same: as technology changes the rules of the game to make people safer, they will respond by worrying less about risks and engage in more dangerous behavior.

Discussion Questions:

1. Suppose the NHL is unhappy with the change in the style of play that has occurred since hits from behind have been more carefully officiated. What sort of rules or incentives could they introduce to continue to keep protecting players, but return play to the way it was before?

2. Consider the following scenario: A baseball pitcher is traded in the middle of the season. His previous team was the worst defensive team in the league. However, now he has been traded to the team with the best defensive players. In his first start for his new team, his coaches are baffled when he starts throwing many more aggressive and risky pitches that could be hit into play. How would you explain the change in the pitcher’s behavior to his coaches? What would you suggest they do if they want him to continue to pitch the way he did for his previous team?

3. Suppose the U.S. government passes new legislation that provides free healthcare to everyone in the country. As an economist, apply the principle of moral hazard to predict what will happen to the number of doctor visits that patients choose to make in a year.

February 16, 2010

Econolympics

As a recurring Winter Olympics viewer, I am counting down the days until the games begin on February 12. As an economist, however, I am intrigued by the number of tools an introductory economics course provides students with to analyze the effects of the Olympic games on the local economy of Vancouver. Three topics in particular come to mind that most students will encounter in a basic economics course: consumer spending, negative externalities, and cost-benefit analysis.

A recent article reports that the winter games are expected to boost travel-related spending by $800 million in Vancouver thanks to the incoming surge of general spectators, friends and families of competing Olympians, and athletes themselves to the metro area. But where does this spending go? Hotels, restaurants, and transportation are the likely candidates to benefit from such a surge, so the leisure and tourism industry should receive the largest boost. Although this positive shock to the industry is temporary, Olympics-related spending in 2010 is expected to account for 0.8% of Vancouver’s economic growth, trailing only housing investment and government spending.

However, accompanying this boost in tourism are some negative externalities on locals. While you may not always need a reservation to your favorite restaurant on a normal weeknight, the increase in the number of visitors to the metro area is likely to cause long lines for restaurant-goers. Even getting to your favorite watering hole might be no small feat, as traffic congestion and parking dilemmas are likely to pick up due to the additional vehicles on the road at any given time. Finally, increased pollution and trash creation are also likely to impose a negative externality on residents during the winter games.

Setting up shop for the winter games comes at a high price. Holding the Olympics requires that the host city build the necessary facilities, hire additional security, and provide extra health care in the case of injury to athletes or spectators. This is likely to weigh on the spending budget for Vancouver’s economy. Therefore, standard cost-benefit analysis would require you to determine whether the benefits gained from having the Olympics in a particular city outweigh the costs.

In short, there is a plethora of economic topics you could use as a conversation starter regarding the Olympics. So pick your favorite concept, and analyze away!

Discussion Questions:

1. How would you value having the Olympics in your hometown? Would the benefits you receive from this outweigh the negative externalities imposed on you by the winter games?

2. How do you think the Olympics will affect things like hotel and menu prices during the winter games? Do you expect such a short surge in demand to affect other local pricing? Why or why not?

3. State how the following introductory economic concepts could be used to analyze the effect of the Olympics on Vancouver: the multiplier effect, the Tragedy of the Commons, and demand shocks.

February 11, 2010

Economics Goes Viral

Nothing gets me more excited than getting people with no formal background in economics to see how econ fits in their everyday life. In light of that, imagine my surprise when my good friend Eva Funderburgh, a professional sculptor, wanted to share some economics with me! Apparently she’s not the only one spreading the video above, because, as of this writing, the viral video above created by TV producer/director John Papola and economist Russ Roberts has already received over half a million views on YouTube! Papola and Roberts’ video does a wonderful job creating a new way to take a traditional economic discussion and make it more approachable and entertaining to a much wider audience. In my mind, every economics student should watch the video, and hopefully share it with others as well. For those with a little more time, NPR has put together a very entertaining look at how the project came to be.

The economic thoughts and ideas represented in the video are spot-on, and the lyrics are a fair presentation of the differing schools of thought. While the deeper issues behind the video are much larger than anyone could take on in a single blog post, I do see a place that might deserve a small footnote. I do not mean to take anything away from all the great work that went into this video, but I feel that Keynes’ introduction might deserve a bit of further discussion:

“John Maynard Keynes, wrote the book on modern macro”

Depending on how you define “modern,” an economist who died more than sixty years ago may no longer fit the bill. I think it is totally appropriate to say that Keynes wrote the book on 20th century macroeconomics, but the research frontier of the field is moving beyond his ideals. Starting in the 1970s, some members of the field have explored more complicated models based on critiques of Keynes’ work by Nobel Prize winners Robert Lucas and Milton Friedman, among others. These researchers worry that some of Keynesian economics’ critical assumptions oversimplify the world and make the model invalid. While Keynesian theory is still widely taught today and used by many people advising current policy decisions, some macroeconomists now advocate for models that are built on individual decision making, rather than only analysis based on total expenditure.

These “micro-founded” macro models seek to explain trends in data that defy Keynesian theory. One difference between these schools of thought centers on if household consumption decisions can change in response to fiscal and monetary policies. For example, Keynesian theory assumes that policy does not affect the fraction of net income spent and saved and that the amount of economy-wide consumption will simply change by the product of the tax’s size and the proportion of a household’s after-tax income spent on consumption (often referred to as the marginal propensity to consume, or MPC).

On the other hand, extensions of the micro-founded model proposed independently by Frank Ramsey, Dave Cass, and Tjalling Koopmans suggest that if the government were to lower taxes and give households more money, consumers may choose to change their entire consumption-spending decision based on having larger net income, thus resulting in a new MPC. Whether or not the assumptions made by Keynes are valid (or small enough to be overlooked) is a matter of personal opinion, but as the research horizon of economics extends more than half a century after his writing, it appears that there is still work to be done before macroeconomics can perfectly explain an entire real-world economy.

Discussion Questions:

1. Why should we “fear” booms and busts? Why might booms and busts be good? Is there an “optimal” level of economic fluctuation?

2. Who do the bartenders “Ben” and “Tim” represent in the video? Why are they pouring liquor? What does the liquor represent?

3. The chorus of the rap has Keynes saying “I want to control markets” and Hayek saying “I want to set [markets] free.” Is either of those positions right or wrong in all circumstances? Under what circumstances is more government intervention in markets warranted, and under what circumstances should the government stay out as much as possible?

4. What are the critiques that Keynes offers of Hayek? What are the criticisms that Hayek proposes about Keynes? Does one side seem to have a much stronger argument than the other, or do they both suggest that the theory’s view of the world is still incomplete?

5. Do you think the financial crisis of the past few years was caused by people who thought more like Keynes or more like Hayek? Why?

January 12, 2010

Fed Chairman Bernanke Chosen as Time Magazine's Person of the Year

In a December 16, 2009 article, Michael Grunwald details the reasoning behind Time Magazine’s choice of Federal Reserve Chairman Ben Bernanke for Person of the Year. The article delves into Bernanke’s background such as his working class roots and the consensus that he is “a leading scholar of the Great Depression.” It also details the unique nature of the crises of 2007-2008 to which the Fed responded in creative and beneficial ways.

Chairman Bernanke is currently awaiting a Senate vote to be confirmed for another term as Fed chairman. The vote is being held up by a Senator from the far left and another from the far right. The Time article is largely critical of those who oppose Bernanke, portraying them as nitpicky demanders of perfection who fail to realize that the Federal Reserve’s actions over the past two years most likely “prevented an economic catastrophe.” It is apparent that the Fed, like most people caught up in benefiting from the bubbles of those years, took too long to recognize the danger signs. Yet, the desire to criticize and rein in the Fed’s power now that the crises are largely history is short-sighted and will be harmful to long-run inflation rates. Most economics textbooks cover the extensive research that shows that greater central bank independence goes along with more stable and lower inflation rates.

As Bernanke is quoted in the article, "We came very, very close to a depression ..." That is because in the fall of 2008, the collapse of the financial sector and asset prices looked remarkably similar to the events that marked the start of the Great Depression. However, thanks largely to the bold actions of Bernanke’s Fed, the US experienced a severe recession rather than a depression. That distinction is significant and reason enough for the awarding of Time Magazine’s honor. Grunwald’s article gives evidence that Bernanke’s knowledge and research into the Depression made him the perfect man to hold one of the most powerful positions for influencing the world economy. As written by Grunwald, “He didn't just reshape U.S. monetary policy; he led an effort to save the world economy.”

Admittedly, the severe recession has caused significant hardship to billions of people. However, based on economists’ consensus definition of recession, the US economy has been in recovery and thus out of recession for several months now. Indeed, the figure to the right shows a picture of an economy that will most likely experience positive net job creation in coming months. Such positive net job creation has not occurred since the recession began in December 2007. This scenario looks much rosier than could have been hoped for back in the fall of 2008. This is an important reason why Bernanke is expected to be confirmed for another term:

Price for Will Ben Bernanke win Senate confirmation for a second term as Fed Chairman? at intrade.com

Finally, Bernanke’s critics need to understand that macroeconomics is not a true science. Despite the mathematical rigor required to publish articles in the field, macroeconomists cannot perform true experiments with a nation’s economy. Therefore, there is no comparison “control group” of a US economy run by someone who chose not to bailout AIG or who refused to dramatically expand the Federal Reserve’s balance sheet with risky assets. We will never know with any respectable precision what might have happened if it had not been for Bernanke’s bold leadership.

Perhaps someday a scientific genius will invent a time machine so that Bernanke’s critics can go back to the early 1930s to experience a collapsed economy. Most economists agree that the experience of those years is the best counterexample to show what we would have experienced without bold action by the Fed and our elected officials. Let the critics be reminded that the demand for perfection is all too often the enemy of good governance.

Discussion Questions

1. What is your reaction to Time Magazine’s choice of Federal Reserve Chairman Ben Bernanke for Person of the Year? Why?

2. Suppose that you were able to cast a vote in the Senate on Bernanke’s reappointment. How would you vote? Why?

3. Imagine you were currently chairperson of the Fed. What, if anything, would you be doing differently?

4. Do you approve or disapprove of the movement to rein in the power of the Federal Reserve? Explain.

December 21, 2009

Who Says There's No Such Thing as a Free Lunch

One of the most popular sayings associated with the “dismal science” of economics is “There’s no such thing as a free lunch.” The major idea behind this phrase is that even if you aren’t given a bill to pay, there is always an implicit cost associated with any action.

The economic concept supporting this statement is that of opportunity cost, which is defined as the best foregone alternative. Simply stated, it’s what you give up in order to do something else. Consider the following example: you have $10 that you can either spend on a movie or a pizza. The opportunity cost of going to the movie is therefore the pizza that you give up by attending the movie, and vice versa.

But what about when a good is free to consume? What is the opportunity cost in this situation? Usually in cases like this, the opportunity cost is associated with the value of your time or some other implicit cost. For example, if you work hourly, the time it takes to wait in line for a “free” offer is time that you could’ve spent working and earning money; “free” in this case simply means that there is no explicit monetary cost, but it says nothing about the implicit costs of waiting for the item. Another common example is when you receive a “free” weekend getaway, but the cost is that you have to sit through a 2-hour sales pitch with a timeshare organization.

I was thus astonished when I received something truly for free a few weeks ago at Auntie Annie’s pretzel shop. I was at the mall with my friend when the two of us realized we were getting pretty hungry. Wanting to avoid eating a fast-food meal at the food court, we decided to each grab a pretzel at Auntie Annie’s to hold us off for awhile. As we were waiting in line, one of the workers started giving out samples. My friend suggested that we try them since the line was pretty long and we were quite hungry. As I walked over to receive the samples and my friend stayed in line, the worker also instantly handed me a coupon: BUY ONE PRETZEL, GET ANOTHER ONE FREE. Having already committed to wait in line to purchase two pretzels before I got the coupon—it was my friend’s birthday so the two pretzels were on me—I actually received a free pretzel! After consulting with some other economists, none of us could find an implicit cost that I incurred in order to receive the free pretzel (though you could argue that my time to write this blog post is an after-the-fact cost associated with the pretzel purchase). In short, who says there’s no such thing as a free lunch?

Discussion questions:

1. Can you think of a time in your life where you actually received something for free? That is, there were no explicit monetary costs or implicit opportunity costs.

2. If I was just passing by Auntie Annie’s and received the coupon, why would the second pretzel not be free? What opportunity costs would be associated with using this coupon in that case?

3. Suppose you have a “Buy 10 pretzels, Get One Free” card for Auntie Annie’s. Does it distort your behavior in any way? Is the 11th pretzel actually free?

July 22, 2008

Tracing the Economic Transformation of Turkey from the 1920s to EU Accession.

Nas (2008): "Tracing the Economic Transformation of Turkey from the 1920s to EU Accession"

Nas, Tevfik F. (2008):

Leiden & Boston: Brill/Martinus Nijhoff Publishers.

Table of contents
1. Introduction

2. An Overview of the Turkish Economy: 1920–80

3. Stabilization and Restructuring during the 1980s

4. The Financial Crisis of 1994 and the April 5 Austerity Plan

5. Turkish Inflation

6. The Crisis of 2001 and the Program for the Transition to a Strong Economy

7. Economic and Policy Environment before the 2002 General Election

8. Macroeconomic Policies and Outcomes during the Post-2002 Election Period

9. Turkey and the EU

10. Starting the Accession Talks

11. Prospects for Full Membership: A Commentary

February 12, 2008

15th World Congress of the IEA, Istanbul, June 25-29, 2008

For more information on the conference:
http://www.iea-tek2008istanbul.org/

EconPapers: "Research on Turkish Economy"

More than 1615 documents matching "Turkish economy" or "Turkey" among working papers, articles, books, book chapters and software indexed in EconPapers Archive : please click here!

July 13, 2007

Macroeconomic Performances of Turkish Governments

"A Comparison of Macroeconomic Performances of Governments in Turkey, 1987-2007"
by Aykut Kibritçioğlu

Abstract:

In this paper, a macroeconomic performance index (MEP10) which consists of selected ten indicators is proposed to evaluate the relative performance of Turkish governments by using monthly data for the period of December 1987 – April 2007. According to the multi-staged evaluation process applied in the study, the governments are grouped in three classes:
(1) Relatively successful governments: 46. government (December 1987 – November 1989), 48. government (June 1991 – November 1991), 54. government (June 1996 – June 1997), and 59. government (March 2002 – April 2007),
(2) Relatively unsuccessful governments: 47. government (November 1989 – June 1991), 49. government (November 1991 – June 1993), 55. government (June 1997 – January 1999) and 53. government (March 1996 – June 1996), and
(3) Most unsuccessful governments: 50.-52. governments (June 1993 – March 1996) and 56.-57. governments (January 1999 – November 2002).The monthly performance index is also used to test some hypotheses regarding the relationship between the length of the governments’ term of office and their macroeconomic performances.

JEL Classification: E65 (Studies of Particular Policy Episodes), O53 (Economywide Country Studies: Asia including Middle East) ve C43

Key Words: Okun’s misery index, macroeconomic performance, macroeconomic stability, governments, political stability, general elections, economic crises, Turkish economy

Language: Turkish

Download: MPRA or Paper

March 15, 2006

Book: "Turkey: Economic Reform & Accession to the European Union"

Turkey: Economic Reform & Accession to the European Union
co-edited by Sübidey Togan & Bernard M. Hoekman
Publisher: World Bank Publications (May 15, 2005)
World Bank Trade and Development Series, Paperback: 400 pages, ISBN: 0821359320

March 06, 2006

World Bank: "Turkey: Country Economic Memorandum, 2006"

The World Bank launched "Turkey: Country Economic Memorandum - Promoting Sustained Growth and Convergence with the European Union". The study aims to contribute to the ongoing process of elaborating a strategic vision on Turkey's policy priorities during EU accession.
To download the full text of the report and/or get more information on it, you may visit:
http://www.worldbank.org.tr/cem2006

October 25, 2005

Prof. Uğur Korum has passed away... - Prof. Uğur Korum'un vefatı...

Professor Uğur Korum, one of the leading and most influential Turkish economists, has passed away on the 22nd of November 2004.
(Sevgili Hocamız, değerli iktisatçı, Ankara Üniversitesi SBF İktisat Bölümü'nün eski öğretim üyelerinden Prof Dr. Uğur Korum'u 22 Kasım 2004 günü kaybettik.)

October 09, 2005

Economia Exterior: "Special Issue on Turkey-EU Relations"

Economia Exterior, Primavera 2005, Núm.32, http://www.politicaexterior.com/economiaexterior/EconomiaExterior.php

October 06, 2005

"EU foreign ministers agree on membership talks with Turkey"

Economist: The European Union and Turkey have finally agreed on a negotiating framework that will allow formal talks on Turkish membership of the EU to begin.

EU's Press Relies

Worldbank: "Turkey has today crossed the bridge to Europe. This date will go down as one of the most important days in Turkey's history. The opening of accession negotiations with the EU represents an historic moment for Turkey and the EU. The negotiations will be long and cover many difficult subjects, however the end result will bring great benefits to Turkey, the EU and the wider world. The World Bank applauds the decision of the EU Council of Ministers to approve the Framework Agreement and looks forward to supporting Turkey and the EU during the accession process."

August 30, 2005

Forthcoming Book: The Turkish Economy

The Real Economy, Corporate Governance and Reform
Edited by: Sumru G. Altuğ and Alpay Filiztekin
London, UK: Routledge
For more information, please click here!

July 21, 2005

Nowak-Lehmann Danzinger et al.: "The Impact of a Customs Union between Turkey and the EU on Turkey's Exports to the EU: A Reassessment of the Paradox"

by Nowak-Lehmann Danzinger, Felicitas, Dierk Herzer, Inmaculada Martinez-Zarzoso, and Sebastian Vollmer (www.diw.de)
Series: DIW's Working Papers Series, No. 483, April 2005, 31 pages
For more information: please click here; PDF: download

wiiw: "Turkey: Macroeconomic Vulnerability, Competitiveness and the Labour Market"

by Josef Pöschl, Hermine Vidovic, Julia Wörz and Vasily Astrov (www.wiiw.at)
Series: wiiw's Current Analyses and Country Profiles, No. 21, April 2005
116 pages including 42 Tables and 26 Figures
For more information: please click here
Pdf: download

June 21, 2005

Report: "Turkish Agriculture in the 21. Century with Special Reference to Developments within the WTO and EU"

Çakmak, E. and H. Akder (2005): "Çakmak & Akder: "DTÖ ve AB'deki Gelişmeler Işığında 21. Yüzyılda Türkiye Tarımı". İstanbul: TÜSİAD.
Download: http://www.tusiad.org/turkish/rapor/tarim2/tarim.pdf

May 04, 2005