January 22, 2016
by lydiageorgieva
0 comments

Writing an Effective Commentary

The Internal Assessment in IB Economics is really a challenging task.  It is not done by rote learning; each one is unique.  As it involves reading an economic event in the news, this can be difficult enough just to understand it, as journalists love to use jargon and complex sentences.

A good way to prepare yourself is simply to read economic commentary in newspapers.  You can find them easily enough: look for “opinion” or “comment” in the business/economy section.  Here you will find the author is trying to make a point about what is significant or needing fixing.  In order to do that, the author will refer to some news that is reported somewhere else in the newspaper, and explain some economic theory. Your job is essentially to do the same.

You can also try to find old student commentaries, or simply use the example that you had to mark in the assignment. In our case the only difference compared to a news media commentary is that you have to “spell out” the details of how the actual theory works, including a diagram, and use all economic terminology – not business or other jargon.

So you start by simply browsing through a reputable news site.  USA and UK media are popular, but you are encouraged to use other publications around the world; English versions mean that you don’t have to translate it for the marker.  Look in the economy section and find an interesting article.

This is where you bring your skill: do you recognize the theory/concepts that is being discussed?  Since most journalists don’t want to bore their audience with spelling out relevant economic theory, this gives you the chance to show what you know.  That’s why you don’t want to pick an article that you can’t explain the theory behind the article.

You are not supposed to summarise or accept the author’s understanding.  Think of it this way: you are to explain – to the non-economic person – how economic theory explains some part of what the article is claiming. You don’t have discuss everything and you shouldn’t discuss anything beyond the article.  Here’s what to do:

  1. Prepare in rough:
    • on your article, underline/highlight specific information relating to economic theory
    • Translate into useful economic terms; you should be define the key terms
    • draw a diagram of the model using the information in the article
  2.  Explain the relevant theory
    • explain the how the model explains (or predicts) what happened (or will happen)
    • explain how factors (whether mentioned or not) impact the extent of outcomes.
  3. Discuss the importance, effectiveness or likelihood of the event. That is, you are to offer some kind of useful opinion that involves valuing Use the information in the article to decide which “approach”:
  • Has the article described the cause-effects as you would expect? If not, then explain what is wrong in the article (interpretation or (lacking) facts?)
  • Or do you have evidence against the theory? Explain what is expected and how the article shows that there are “limitations” of the theory.
  • Or what are the short-term vs. long term consequences? Which is more “important”?
  • Or are there solutions, based upon theory, you would recommend (or criticize)?
  • Or how does this event impact stakeholders differently? To what extent? How important is each impact?
  • See your official handout for further suggestions

 

In summary, you are simply to make an opinion about how economic theory works in the real world.  In a sense, its a research based extended response question like a Paper One exam question – only this time you are using real “data” from an article.  You’ll be quite impressed with what you can do, once you’ve done it right!

 

October 8, 2013
by lydiageorgieva
1 Comment

Comparative Advantage Theory

David Ricardo is the creator of the comparative advantage theory- a theory that is quite counter intuitive and challenging to understand in the context of international trade. Opposed to the theory of absolute advantage which is quite intuitive.

To understand the theory better, you should explore some of the links provided below:

The Theory of Comparative Advantage, posted by Steven Suranovic

The Theory of Comparative advantage, posted at Globalization 101

Some examples are also available on those sites and will help you understand the theory better.

September 24, 2013
by Glen Muir
0 comments

Why growth doesn’t always fix unemployment

The ongoing high unemployment rate in the U.S.A. has spawned a lot of research and discussion since the onset of the GFC (Great Financial Crisis) of 2007-2009.  Unemployment is still a big issue – perhaps even bigger than ever because, now in 2013, America and Europe (as elsewhere) continue to suffer high unemployment. This article from the N. Y. Times is still relevant.

Correctly answer just one question (or respond to somebody else’s comment, thus having a genuine discussion). Remember to refer to relevant terms and use economic models wherever possible.

The article: Companies Spend on Equipment, Not Workers is found by clicking below:

http://www.nytimes.com/2011/06/10/business/10capital.html?_r=0

Questions:

  1. Consider the effect on the labour market of capital resources becoming cheaper.  Explain the effect on wages and employment.
  2. Consider that GDP has returned to the level before the GFC.  How can the LRAS in the ASAD model be used to explain the decrease in employment?
  3. The article discusses the “hidden costs of hiring”.  How can this explain the decrease in employment using the labour market model?
  4. “Corporate profit, meanwhile, are at record highs, and companies are hoarding cash.”  What component of Aggregate Demand is negatively affected, and what does that suggest about which type of expansionary policy will be best to apply?
  5. What type of equilibrium unemployment helps explain the current problem why is this occurring?
  6. Explain 2 ways how government subsidies can be used to solve this kind of equilibrium unemployment.
Good luck in your comments

August 29, 2013
by lydiageorgieva
14 Comments

Barriers to growth and development

Go over the readings published on Global Envision website:

Debt Cancellation: A New Era for DRC?

Can Global Companies Save Africa?

Is Foreign Direct Investment an Investment in Children?

How Diamonds Became a Power of Good in Africa 

Discussion questions:

  1. What are some possible benefits of debt relief for a developing country like DRCongo?
  2. What is a Foreign Direct Investment (FDI)?
  3. Evaluate the role of FDI in the process of economic growth and development of developing countries. Give examples to support your arguments.
  4. How can government institutions help in making commodities a source of growth and development for a developing nation? Give examples to support your arguments.

 

August 29, 2013
by lydiageorgieva
34 Comments

Excuse me, China, could you lend us another billion?

The $1.4 Trillion Question/James Fallows/The Atlantic

American consumers are famous with their low levels of savings. Up until 2007, the average savings rate in the United States fell as low as 1%, and even was negative for a brief period. What does negative savings mean? It means that the average American consumer consumer more than they produce. Which is only possible if there is someone to borrow from, someone to pay for the additional consumption. The US is a nation of borrowers, but from whom do they borrow? China, for one…

China is a nation of ‘savers’, where national savings averages 30-40% of income. Rather than consuming more than they produce, the Chinese consume only about half of what they produce. What happens to the rest of China’s output? It’s shipped overseas for Americans and others in the West to consume. The irony is that the consumption of China’s products has been kept affordable and cheap thanks to the actions of the Chinese government  to suppress the value of the RMB, thus keeping its products cheap and attractive to American consumers.

China’s purchase of American assets has been keeping demand for dollars on foreign exchange markets strong, thus the value of the dollar high relative to other currencies, allowing American firms and consumers the benefits of a strong dollar.

A balance of payment is a record of a nation’s transactions with other trading partners. It consists of: the current account (the difference between a country’s expenditure on imports and its income from exports) and the capital account (the difference between the inflows of foreign money for the purchase of real and financial assets at home and the outflows of currency for the purchase of foreign assets abroad. In 2012 China had a $170.8 billion current account balance according to estimate. In the financial account, China maintains a deficit (meaning that China holds more financial and real assets than America does of China’s). to offset its current account surplus. The two accounts together, in theory at least, should balance out. Any deficit in China’s capital account that does not cover the surplus in its current account can be held as foreign exchange reserves by the People’s Bank of China. The PBOC, however, prefers not to hold excess dollars in reserve, as the dollar’s value is continually eroded by inflation and depreciation; therefore it invests the hundreds of billions of excess dollars it receives from Americans’ purchase of Chinese goods back into the American economy, buying up American assets, with the aim of earning interest on these assets that exceed the inflation rates.

The “assets” China uses the US dollars for are primarily US government bonds. The US government issues these bonds to finance its budget deficits, and the Chinese are happy to buy these bonds for a couple of reasons: They are secure investments, meaning that unless the US government collapses, the interest on US bonds is guaranteed income for China. And the primary reason is that the purchase of these bonds puts US dollars that were originally spent by American consumers on Chinese imports right back into the hands of American consumers (via government spending or tax rebates), so they can continue buying more Chinese imports.

The Chinese demand for dollar denominated financial assets, such as government bonds, corporate stocks and bonds, real assets like real estate, factories, buildings and so on, has resulted in a long period of a strong dollar. If the Chinese ever decided to stem the flow of dollars into American assets, the dollar’s value would plummet to record lows, leading to high inflation and eventually a balancing of America’s enormous current account deficit with China and the rest of the world.

However, a falling dollar is the last thing China wants to see happen, because: it would make Chinese imports more expensive thus less attractive to American households, harming Chinese manufacturers and slowing growth in China. And second, US dollars are an asset to China. Its $1.4 billion of US debt would evaporate if the dollar took a major plunge. To China, this would represent a loss of national wealth; in effect all that “savings” that makes China so unique would disappear if the dollar dived relative to the RMB. For these reasons, it seems likely that China will continue to be a willing buyer of America’s debt, thus the financier of Americans’ insanely high consumptive lifestyle.

Is the situation changing lately, though? The Economist article points out that the yuan RMB has appreciated in recent years and there is hope for the imbalances to balance.

The Economist/Fair Play or Foul

Discussion questions:

  1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
  2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
  3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
  4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
(Adapted from: Welkerwikinomics)

 

August 29, 2013
by lydiageorgieva
33 Comments

Exchange rates, currency manipulations and the balance of trade

FT.com: Imbalances and undervalued exchange rates: rehabilitating Keynes

The topic of exchange rates and balance of trade is an always relevant and challenging topic of economics. The market for a particular currency is pretty similar to product markets with upward sloping supply curve and downward sloping demand curve.

But the consequences of a change in the price of a currency ( the exchange rate) are much more powerful than a change in the price of a particular good or service on the product market.

The value of a currency is a powerful tool that influences a country’s balance of trade with other trading partners. Our purpose is to understand how this happens. Let’s look at an example:—-

When an American consumer wants to buy an iPad that was made in China she will have to pay for it in US dollars, since she earns her wages in US dollars from selling her  labour in  in the resource market. Apple now has the consumer’s $300, which gets split up to cover all the costs the company faced in the manufacture, distribution, marketing and sale of the iPad. Part of that $300 (say $100) will go to the manager of the factory in China where it was made.

The factory manager in China faces costs he must cover. He must pay rent on his factory space, interest on the loans he took out to acquire capital, and wages to the workers assembling iPads on his factory floor. The problem is, these costs are all in Chinese yuan RMB, but he’s holding the US dollars that Apple paid him for his iPad. In order to cover his costs, the Chinese factory owner must take the $100 to a Chinese bank and swap it for RMB. The local bank that changes his money now hands the $100 over to China’s central bank (the PBOC) which prints and exchanges RMB to the bank at whatever the prevailing exchange rate is at the time.

Ultimately, China’s central bank will decide what to do with its holding of US dollars. Most of the dollars are loaned back to the United States through China’s purchase of US Treasury securities (the IOUs the US government sells to finance its deficits). China’s voracious demand for US dollar denominated assets keeps the demand for (and the the value of) dollars high on foreign exchange markets, meaning the Chinese yuan RMB remains relatively cheap for Americans and therefore Chinese manufactured goods attractive.

China’s policy of exchange rate manipulation has upset many American politicians over the years, who often blame China for America’s shrinking manufacturing sector. A weak RMB means the cost of producing things like iPads in China is far lower than it would be in the US. By keeping demand for dollars high on the foreign exchange markets through its incessant demand for US treasury securities and other financial and real assets, while simultaneously hoarding vast reserves of US dollars in its central bank, thus keeping supply of dollars on foreign exchange markets low (see graph), China has prevented the RMB from appreciating, fueling the growth of the country’s export-manufacturing sector.

China’s currency manipulations may soon illicit a response from the United States as president-elect Barack Obama takes office next year. The attempts to deal with the recession and unemployment, combined with the recent appreciation of the US dollar, the pressure is on Obama administration to restore America’s manufacturing sector.

Discussion questions:

  1. How does China, continuing to undervalue its currency, threaten the industrial economies of its largest trading partners
  2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
  3. What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?

(Adapted from: Welkerwikinomics)

August 29, 2013
by lydiageorgieva
28 Comments

Fiscal Stimulus and Its Effects

 

Read the articles and blog entries linked below and comment on the discussion questions.

Fiscal Stimulus Packages: What are their Effects? Becker

The Fiscal Stimulus, Flawed but Valuable

The Role of Fiscal Stimulus in the Ongoing Recovery

Discussion Questions:

  1. In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not?
  2. Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?
  3. Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.

 

August 29, 2013
by lydiageorgieva
13 Comments

Income Inequality and Standards of Living – Does a Rising Tide Lift All Boats?

The idiom “a rising tide lifts all boats” is associated with the idea that improvements in the general economy will benefit all participants in that economy, and that economic policy, particularly government economic policy, should therefore focus on the general macroeconomic environment first and foremost. The phrase is commonly attributed to John F. Kennedy who used it in a 1963 speech to combat criticisms that a dam project he was inaugurating was a pork barrel project. However the phrase has been used more commonly to defend tax cuts and other policies where the initial beneficiaries are high income earners.

Income distribution in a nation is an important indicator of economic development. It is the government’s aim to ensure that the wealth is distributed equitably among all and thus one of the major macro goals.

TED Talk by Swedish Professor of world health Hans Rosling:

The debate over inequality and what government can or should do about it is at ther root of many other economic debates today. A recent study by the Political Economy Research Institute of the University of Massachusetts, Amherst, provides support for those who support the second argument above. Here are some of the main discoveries from the study, “Searching for the Supposed Benefits of Higher Inequality: Impacts of Rising Top Shares on the Standard of Living of Low and Middle-Income Families”.

Discoveries of the study:

Some believe that increased inequality leads to more growth, others argue that it leads to less growth.

A more interesting question is whether rising income inequality leads to a higher standard of living for everyone in society, or whether standards of living decline for those in the middle as the percentage of total income earned by the top 10% increases.

The study found that the higher the percentage of income earned by the top 10%, the incomes of those in the middle and bottom of the income distribution actually decreases. Not just the percentage of total income, but the actual incomes of these groups falls as the rich get richer.

The popular belief is that reducing taxes on the rich increases the amount of investment in the economy, creating more jobs and helping increase incomes of the middle and lower income households. This theory is sometimes referred to as “trickle down” economics, as the increased incomes and wealth at the top will “trickle down” and raise the incomes of the rest of society as well.

However, actual data shows that a 10% increase in the share of total income earned by the top 10% of income earners leads to a 2% decline in the incomes of households in the middle of the income distribution (based on data for the period between 1979 and 2005).

It’s not just that the rich get richer and the poor get poorer, rather that the rich getting richer makes the poor (and the middle income earners) poorer. This is a breakthrough discovery.

Possible explanations:

  • The rich contribute to growth abroad, rather than at home: Rich households’ higher incomes allow them to consume more domestic output and imported goods and services, but it also allows them to save more, which sometimes translates into more investment. But more investment does not always translate into domestic economic growth, since investment is now global. A rich American saving more does not mean American firms will have access to cheaper capital, as domestic savings may fuel investment in emerging markets or elsewhere abroad. Foreign investment resulting from savings among rich Americans counts as a leakage from America’s circular flow of income, leaving less income within America for the middle and low income earners. Essentially, much of the income earned by the rich is saved abroad, contributing to employment and growth overseas, reducing incomes of the middle class at home.
  • Reduced support for the provision of public goods: When examining living standards, more than just income must be considered, but also access to education, provision of health care and other public goods such as public safety and security. Richer households are less interested in things like public schools and social welfare programs, as they do not rely on these for their own well-being. Therefore, the richer the top 10% become,  the greater their incentive to work against efforts to fund public education, public health and public safety. The underprovision of these social welfare enhancing goods by govenrment further widens the gap between the living standards of the richest and the middle class. Economist Robert Reich refers to this phenomenon as  “the secession of the successful”.
  • Wage competition reduces incomes in the middle: Business owners, who make up a large percentage of the richest households in America, increase their own incomes to the extent that they can drive down the wages they pay their employees. In this way a higher share of national income is enjoyed by a smaller proportion of society. The minimum wage has barely increased over time, and workers have less bargaining power as fewer workers than ever are members of labor unions; this has allowed business owners to pay lower wages over time, concentrating an increasing share of national income in business profits, and less and less in wages for workers.
  • In the video below, the study’s author shares some of the findings discussed above. Watch the video and respond to the discussion questions that follow:

Article: A rising economic tide lifts all boats

  1. Summarize the argument against a government taking measures to redistribute its nation’s income to reduce the level of inequality between the rich and the poor.
  2. Summarize the argument for a government reducing inequality.
  3. Popular belief holds that “a rising tide lifts all boats”. In other words, if the total income of a nation is increasing, it does not matter if the rich are enjoying a larger percentage of the higher income than the poor and middle, because everyone is likely to be better off than if total income were not growing at all. Does the study discussed above support this popular view? Why or why not?
  4. What measures can a government take to assure that higher national income leads to higher standards of living for everyone in society, including the middle class and the poor? Why might the highest income earners be opposed to such attempts by government?
  5. Should government intervene to reduce the level of income inequality in society?

(Adapted from: Welkerwikinomics)

August 28, 2013
by lydiageorgieva
9 Comments

The potency of government spending and taxation

Government spending and taxation- how powerful those tools are in the hands of the government?

Here is the view of Gregory Mankiw on this topic: Is government spending too easy an answer?

  1. How do economists calculate the multiplier?
  2. What are leakages from the circular flow that reduce the multiplier effect?
  3. Explain the link between the accelerator model and the multiplier.
  4. What would multipliers for other injections such as export receipts or investment look like? Would they be higher or lower than multipliers for taxation or government spending?
  5. Evaluate the effectiveness of fiscal stimulus to increase the level of economic activity.

 

August 28, 2013
by lydiageorgieva
8 Comments

Surprise! Product prices have been falling

Economists use the term “inflation” to denote an ongoing rise in the general level of prices quoted in units of money. The magnitude of inflation—the inflation rate—is usually reported as the annualized percentage growth of some broad index of money prices. With U.S. dollar prices rising, a one-dollar bill buys less each year. Inflation thus means an ongoing fall in the overall purchasing power of the monetary unit.

Measuring Inflation

In the United States, the inflation rate is most commonly measured by the percentage rise in the Consumer Price Index, which is reported monthly by the Bureau of Labor Statistics (BLS). A CPI of 120 in the current period means that it now takes $120 to purchase a representative basketof goods that $100 once purchased. Because the CPI basket is not identical with the specific basket of goods and services that you consume, the percentage rise in the CPI is, at best, only a rough approximation of the percentage rise in yourcost of living. The same is true for any alternative measure of inflation, such as the gross domestic product deflator. The GDP deflator is arguably more representative of the economy as a whole, but is less relevant to ordinary consumers because its basket includes the prices of nonconsumer goods (such as new business equipment) that consumers do not buy, and excludes the prices of the many foreign-produced goods that consumers do buy.

But what happens when wages rise but prices rise even more? And if prices are falling due to technological advances or improvements in the productivity of labour and capital, can then deflation could be considered a sign of healthy economic growth?

Article: Real wages decline, US wages kept falling during the recovery, American workers losing ground on wages

  1. Inflation is bad, right? Well, what if average prices rise by 2% a year but average incomes rise by 3%. What happens to real income in this situation? Is the average household better or worse off in such a scenario?
  2. How have trade and globalization contributed to rising real wages in America?
  3. How have trade and globalization contributed to falling nominal wages in America?
  4. How do improvements in technology contribute to rising real wages in both developed and developing economies? What about health and education?
  5. What types of policies can government pursue to help raise the real wages of the nation’s workers?
(Adapted from: Welkerwikinomics)

 

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