MV=PQ: A Resource for Economic Educators

Honey...I May Have Shrunk the Economy

2012-01-18T06:33:00.000-05:00

Actor/writer Rick Moranis has a very amusing piece in the opinion section of today's edition of The Wall Street Journal. What struck me was how good it would be in setting up a discussion of opportunity cost. It really harkened back to Bastiat's "that which is seen and that which is unseen." I strongly recommend it and I hope you comment with your opinion.

The Mark of the Entrepreneur

2011-12-12T10:23:00.000-05:00

Which of Schumpeter's five roles of the entrepreneur is/are illustrated here?

Two Items of Interest

2011-12-10T13:11:00.000-05:00

First, I'm a bit late with this, but for those of you who haven't sought it out already, PNC Bank has it's CPI (Christmas Price Index) up and running, showing the price changes in the gifts from the carol, The Twelve Days of Christmas. As always, it's an interesting way to explore how an index works and how the various components fit together to provide a single measure. What's particularly interesting is how many of the components showed no change this year.

Second, today's edition of The Wall Street Journal had a great micro-parody of a macro-event (the recent financial crisis). It's well worth a look and good for a chuckle.

All of my classes are entering their last week of the semester. I suspect the same applies to many of you. So in case I don't get another chance to post before the new year, I wish you happy holidays and more good economic resources.

The Invisible Hand and Thanksgiving

2011-11-24T06:34:00.000-05:00

I suspect many of you are busy today. Our family had our dinner yesterday because one of my sons is working on Thanksgiving Day. But when you get a chance, you might want to review this column by Jeff Jacoby of The Boston Globe. (HT to Carpe Diem for the reminder.)

The market works wonders. And if you're thinking "but turkey was relatively expensive this year"; the market explains that, as well. Here's an item from Bloomberg.

Happy Thanksgiving.

Putting Things in Perspective ... Thanksgiving Edition

2011-11-22T08:41:00.000-05:00

As we approach year's end and the traditional holiday season, and with the failure of the Supercommittee to achieve anything of substance beyond finger-pointing, here is something courtesy of XKCD to fill those odd classroom moments.

From Last Night's 60 Minutes on CBS

2011-11-14T09:29:00.003-05:00

Captain Renault is shocked.

Rent-seeking 101

2011-11-14T09:21:00.000-05:00

Here's an editorial from today's edition of The Wall Street Journal that describes the process simply.

Happiness Can Make You Miserable

2011-11-13T09:08:00.001-05:00

Here is a link to a Luann comic strip that offers a chance to really explore choices, trade-offs, opportunity cost and even psychic income.

http://www.gocomics.com/luann/2011/11/13

Behavioral Economics and Tax Cuts

2011-11-13T09:00:00.000-05:00

Here is a piece from Bloomberg Businessweek (HT Arts & Letters Daily) on how behavioral economists may have shaped a tax policy. The summary of the research is that the plan didn't work. However, the study is based on survey data, which is not as reliable as actual expenditure data. It's a worthwhile read if you are entering the section of fiscal policy or spend time discussing behavioral economics.

In the Long-Run

2011-11-09T14:13:00.003-05:00

Courtesy of www.xkcd.com

Taxes and Halloween Candy

2011-11-03T15:56:00.000-04:00

Here's a funny video (HT Econlog) with a comedian explaining how to use Halloween candy to explain taxes. It's a great visual, although the last line is over the top.

Voting, Externalities and an "Invisible" Hand?

2011-10-26T19:36:00.000-04:00

I've been too busy lately. I've found some time to read, but precious little to blog. So this is about a week overdue. This article (HT to Marginal Revolution) is really a wealth of opportunity. You can connect all kinds of economic concepts to voting. The author makes some excellent arguments for voting and not voting. It is the latter that are most intriguing. In some instances, the author seems to be relying on normative judgments about what is a good policy. In other instances, the argument of common good runs up against rational self-interest.

Do you agree with the author?

Dual Mandate

2011-10-08T06:28:00.000-04:00

There is a very good short essay by Dan Altman over at Big Think.

It deals with the dual mandate faced by the Federal Reserve. For those of you who are unfamiliar with the term, the Federal Reserve is obliged by law to consider “maximum employment, stable prices, and moderate long-term interest rates.” The kicker is that first part. Many other central banks around the world are focused on stable prices only. This makes sense if you subscribe to the idea that money is neutral and understand the relationship in the equation of exchange M * V = P * Q (or P * Y as many prefer).

But the author points out that it complicates monetary policy when fiscal policy is ineffective. I even wonder if fiscal policy-makers are generally unwilling to face hard choices, hoping that monetary policy can solve the problem alone. If true, the tools in the monetary policy toolbox may not offer the solution that is being sought. This is not the time to use the old adage, “when all you have is hammer, treat everything like a nail.”

I look forward to your comments.

Decisions and Analysis

2011-10-04T11:45:00.000-04:00

Opportunity cost, cost/benefit and marginal analysis, it's all here.

Productivity, Structural Unemployment & Creative Destruction

2011-10-02T13:54:00.000-04:00

As we know, cyclical unemployment can become structural if prolonged. And as labor costs rise, there is an incentive for firms to increase the capital/labor ratio rather than hire workers. This can be part of the process of creative destruction. It's all explained rather well in this blog post at The Wall Street Journal.

What I like about the post is that it is short yet very clear. I would think you might want to use with your students as a discussion starter at the beginning of the period or to summarize a day's activity.

Trade Politics of Middle Earth

2011-10-02T13:52:00.000-04:00

This may have been more appropriate as an exam question in an earlier age; nevertheless, it is clever - even with the problems with details. (HT to Marginal Revolution)

Markets

2011-09-21T06:34:00.000-04:00

Russ Roberts at Cafe Hayek has generously made an essay available. It is a visual explanation of how markets use knowledge. For those of you teaching AP Micro or Principles courses, this will be very handy. For those of you teaching more traditional courses or who feel it might be beyond student reading ability, it might be good background for you to integrate into your lesson. Either way, it is worth your time.

Happy Birthday to MV=PQ

2011-09-20T12:31:00.000-04:00

It seems that today is the sixth birthday of this blog. Six years ago today, the first post went up. I can only guess at how many people have visited over the years. The current counter does not include the almost two years it ran under the auspices of the Chicago Fed. And it does not cover all of the time I was at the Powell Center for Economic Literacy, or since then. And I've gained a co-author since then.

Regardless, I thank all of you who are regular (or even irregular visitors). It's been great.

The Rule of 72

2011-09-19T17:10:00.000-04:00

When teaching about interest, it’s always useful to make an aside and familiarize students with the rule of 72. The rule allows for a rough approximation of doubling time once a rate of growth is known. One merely takes 72 and divides it by the rate; the result is a rough estimate of doubling time. Thus something that grows at 4% should take about 18 years to double in size. Something that grows at 6% will take 12 years, etc.

It is usually used when talking about compound interest. I’ve even heard it used when discussing inflation. The power of growth working on growth is impressive, when you start to talk about larger numbers. Conversely, small numbers make you wonder why you should bother, as seen in this XKCD cartoon.

However even smaller numbers, left on their own over long periods of time, can result in truly astronomical sums. Here’s a story from Lapham's Quarterly (HT to Arts & Letters Daily) on that very topic that can be used to wind up class when you have time.

And the government thinks it has troubles with the debt now….

Markets

2011-09-16T17:24:00.000-04:00

I know we tell students that the market exists where supply meets demand. But we also have consider what each of those mean. Demand is a willingness to buy. Supply is willingness to sell. If you don't have both, you don't have a market.

Soderbergh's "King of the Hill"

2011-09-16T04:54:00.003-04:00

The employment situation in our economy is like nothing we've seen since the Great Depression, both in terms of long term unemployment and median duration. Things are staggeringly bad, but we can try to find bright spots where we can.

One such bright spot is that one of my favorite directors, Steven Soderbergh, has just released a new movie, Contagion. Back in 1993, Soderbergh made a film of one of my favorite books, "King of the Hill", A.E. Hotchner's account of being a schoolboy in 1933 in St. Louis. I missed the film in the theaters, and have searched in vain for it in any format since. However, Amazon has just made it available through their new "Amazon Instant Video" feather. You can find it here.

It's a heartbreaking story of a family struggling to survive the Great Depression. It begins with Hotchner's family way behind on their rent in a single room occupancy hotel, with his father having to travel to scramble for work and his mother's health failing. Hotchner eventually has to stay as a squatter in their apartment so that they can't be evicted, while he plays mind-games with himself to deal with starvation. But through it all, he is a kid, and plays marbles and does other kid things, while trying to hide from his school friends how desperately poor he is.

We have a better social safety net these days, but with poverty at rising rates, I wonder about how many people I interact with each week who are quietly suffering like Hotchner did as a boy.

xkcd on Opportunity Costs

2011-09-16T04:50:00.003-04:00

This cartoon is often brilliant. And always be sure to run your cursor over the cartoon for an extra kicker punchline.

The Principal-Agent problem

2011-09-10T00:04:00.002-04:00

Yet another great example from Dilbert.

Marginal revenues and marginal costs of running an NFL team

2011-09-09T23:57:00.002-04:00

My favorite football (and policy) analyst is the tastefully named Gregg Easterbrook, who writes Tuesday Morning Quarterback for ESPN.com. He presents analysis that it's more profitable for NFL teams to lose cheaply than to spend a lot of money to try to win. The marginal cost of getting better players seems to greatly exceed the marginal revenue from increased revenues that come to teams with better winning records. If this is true, it would explain...a lot of bad teams.

I also wonder if in leagues where this is true, is there more turn-over at the top?

Jurgen Stark resigned from the ECB

2011-09-09T23:15:00.003-04:00

Wow, one of the hardest hardliners on the European Central Bank, Jurgen Stark just pulled a surprise resignation. He was unhappy about the degree to which the ECB was being accommodative to Greece, Italy, and Spain.

Efficient markets and football

2011-09-08T23:37:00.003-04:00

It's important to have our priorities straight. Tonight President Obama gave a major economic policy speech, but he made very sure that he was done in time for the Packers-Saints kickoff. (I suspect that part of the President's political base feels betrayed because, in a concession to Republicans, his speech preempted a re-run of Big Bang Theory.)

But back to priorities, and by that I mean football. Tim and I are in good moods because Michigan State and Northwestern won their first games of the year, and this makes us happier than fans of Oregon, TCU, and Notre Dame. However, as a fan of Northwestern, I have less hope for the future than do fans of these other teams (and not just relating to the specific history of Northwestern's post-season performance). And this gets to the Efficient Markets Hypothesis (EMH).

The EMH has been getting kicked around lately, but its basic idea is simple. It is that arbitrage takes away free lunches, that we shouldn't expect to find consistently profitable trades in asset markets. The simplest form of the EMH (usually called the "weak form") is that charting prices should be useless, that is, the current price of an asset is the best predictor of its future price, and adding information about past prices doesn't help our prediction accuracy at all.

Behavioral economists find some evidence for deviations from the EMH based upon "loss aversion", where people are sometimes reluctant to sell an asset for less than they paid for it. Perhaps this explains something that the brilliant Nate Silver documents about the power of pre-season NCAA football polls. In some fun econometric work, he finds that the final football rankings depend on how the teams did in terms of wins and loses over the season...but also on how they were ranked in the pre-season poll, before the first game is even played!

So, yes, if Michigan State ends up ranked ahead of Northwestern, I'm going to blame it on those pre-season polls.

Children

2011-09-02T16:55:00.000-04:00

During the past year or so, Bryan Caplan of George Mason University and the Econlog blog has been very visible as a result of his new book "Selfish Reasons to Have More Kids." Based on what I've read about the book, it applies economic thinking to child-rearing and one of the upshots is "it's less expensive and can be more fun than you think." (I've decided I need to read this book, even though my kids are basically in the final stages of growing up and I’ve already had fun.) This clearly connects to some of the early work on economics of family size, why we marry, have children, etc.

But my thoughts were moved to revisiting the issue after seeing this cartoon. I would welcome comments from anyone who has read Bryan's book.

You must see this econ video!

2011-08-31T23:50:00.003-04:00

Watch this, now!

(It's only four minutes long, but if you're like me, you'll be watching it and forwarding it a lot more.)

Sylvia Nasar had huge success with her book A Beautiful Mind about John Nash. Her follow up is due out this month and is Grand Pursuit: The Quest for Economic Genius. It concerns the effect of people (Dickens, Marx, Keynes, etc.) who worked on developing and applying economic thinking, and how this lead to the modern growth miracle.

It's Sylvia Nasar, it's a topic I like, I'd probably have picked up the book...but then I saw the promotional video, and now I feel like I'm waiting for the next installment of Harry Potter. Will I be dressed up as Alfred Marshall and be in line outside the bookstore at midnight the day the book comes out?

My only concern is who will direct the movie? I'll never forgive Ron Howard for screwing up the presentation of Nash Equilibrium in a move about John Nash!

Really?! Paperclips? REALLY!?!

2011-08-30T23:58:00.003-04:00

So the Onion glories in mocking the behavior of our government...but it's really hard to keep up with reality. Tyler Cowen in Marginal Revolution reports that the US paperclip market is dominated by domestic producers because the US has a comparative advantage in producing small, bent-wire, office supplies...hold on...no, domestic US paperclip producers have the advantage of huge protective import tariffs. Yes, on paperclips. Frickin' paperclips.

This makes for a nice essay question about the effects of such a policy; and Matt Yglesias does a nice stab at working some of it out. He hits on an issue that has long bothered me: the preference for government policies that have no budgetary fingerprints (i.e. minimum wage, conscription, regulation), even though their implicit costs may be much greater than an equivalent tax-and-spending system.

I do wish that one of them had given a hat tip to Mancur Olsen's idea of "concentrated benefits and dispersed costs" to explain how this sort of thing gets started and continues.

Krueger to the CEA! Does this mean the minimum wage will be going up?

2011-08-30T01:13:00.002-04:00

There’s been a big talent outflow from the Obama administration as various economists head back to their academic appointments. This included Christina Romer, Larry Summers, and now Austin Goolsbee. So, it’s great news that Goolsbee will be replaced as the chair of the Council of Economic Advisers by Princeton labor economics Alan Krueger.

Herb Stein, who chaired he council under Presidents Nixon and Ford, described the job as being one of articulating the president’s economic policies to the rest of the world, and to advocate on behalf of markets within the administration. Krueger is an exceptionally lucid writer and speaker on economic issues.

Krueger’s research has breadth, but he is known as one of the best applied labor economists in the field today. His work has been heavily involved with policy applications and also education.

Krueger’s most famous research was his 1994 American Economic Review paper with David Card on “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” It had not flashy theory or econometrics, but it was great, nevertheless. Early in 1992 Card and Krueger noted that the minimum wage in New Jersey was set to rise from $4.25 to $5.05, while across the river in Pennsylvania, the minimum wage would stay the same. They realized that this would create a wonderful “natural experiment”, where Pennsylvania would serve as a control group and New Jersey would be the treatment group. They surveyed fast food restaurants on both sides of the New Jersey-Pennsylvania border before and after the New Jersey minimum wage change, with some hope of estimating an elasticity of labor demand for the change of the minimum wage, but found that instead of the higher New Jersey minimum wage reducing employment, fast food jobs on that side of the border actually rose relative to what happened in Pennsylvania.

This was a fun result for many reasons. One, it’s a simple paper to understand, with a surprising result. Two, it was a fun question to ask, since it was something that almost everyone thought they were sure they knew they answer to. The workhorse model in almost every microeconomics textbook about messing with prices is that a higher minimum wage decreases employment! But here was a great example of where empirical work can challenge even the most widely accepted theoretical results.

Their result should not be interpreted to say that higher minimum wages would never have the predicted bad effects on employment, or even that there weren’t confounding effects or errors in measurement that might affect their results. Further, the mechanism by which increased costs of low wage labor lead to increased fast food employment aren’t particularly developed. However, this was strong evidence that increasing a low minimum wage by a bit wouldn’t have obvious terrible effects.

Short, accessible examples of some of Krueger’s writings can be found in his columns for the New York Times Economix blog and his Economic Scene columns. These make for nice class readings or discussion pieces.

Something You Can Use the First Day

2011-08-29T08:43:00.001-04:00

For those of you who have been gone all summer, I haven't been particularly prolific - too busy. But there are some very usable resources in the archive so you might want to spend some time back-tracking. Regardless, welcome back.

For those of you who are just starting school or haven't started yet, here's something to use on day one.

Team or Trade

2011-08-27T10:31:00.000-04:00

There is a thought-provoking article in today's issue of The Wall Street Journal (subscriber content at this writing). Matt Ridley discusses the work of evolutionary biologist David Sloan Wilson. Wilson has done some work on cooperative behavior and, according to Ridley, sees cooperation evolving from generosity or altruism. Ridley notes that others in the field see ideas like reciprocity and see groups of people agreeing to punish non-social behavior.

Ridley notes Adam Smith pointed out that this works among small groups of friends and family. But for larger groups of strangers, another mechanism is needed. Smith's idea of division of labor and the corresponding idea of specialization promotes cooperation because of interdependence. We need each other and we benefit from cooperating with each other. As Ridley states "trade dissolves hostility between groups."

This article caught my attention because it connects with insights from Adam Smith: An Enlightened Life by Nicholas Phillipson. In that book, the author recounts that Smith felt the origin of language resides in our need to convince one another of mutual benefit from cooperative behavior.

If you can find an un-gated version of the Ridley article, I strongly recommend it. If you can't, see if you can access it through a library or other legitimate source. Barring that, I again recommend Phillipson's book.

An Enlightend Life

2011-08-22T09:37:00.000-04:00

Almost a year ago, I linked to a review of Adam Smith: An Enlightened Life by Nicholas Phillipson. Twice more I linked to other reviews and even added it to my carousel at left as a result of the reviews. I received a copy and added the book to my “to be read” pile – and moved it up as a result of some of the reviews. I finally got to the book this month. I’m only sorry to say I didn’t get to it sooner.

While I’ve read many good biographies of Smith, this one stands near the top. I don’t say that because it revealed some interesting piece of trivia previously hidden. Rather my statement is based on the intellectual ground that is covered. This book reveals Smith’s intellectual foundations. It covers familiar ground about Smith’s debt to Hume and the French philosophers and economistes. But it also makes clear Smith’s grounding in his geography and time. Glasgow and Edinburgh had an effect on his world view, politics of England and Scotland social and intellectual climate in which he was raised. As such, much of his work takes on new meaning.

If you would acquaint yourself with the foundation of economics and the mind that helped shape it, I encourage you to consider this book. While not a beach read (it’s getting late for that anyway) the length is not daunting. And if, like me, you like to mark significant passages, you may find yourself stopping frequently to do so. For this volume offers much to think about and much to learn. Please share your thoughts.

Choice: Is Decision Fatigue Worth Talking About? (Your Choice)

2011-08-21T15:49:00.001-04:00

I suspect most of us don't go very far into the decision-making process. After all, most of us are teaching a specific curriculum and time is a scarce resource. We have to choose.

We probably discuss why we have to make choices and perhaps we introduce a decision-making model. But unless we're really into behavioral economics or we're enamored by categorizing people into optimizers or satisficers, we probably don't go much further. That's okay. Nevertheless, here's a recent article from The New York Times that discusses something called decision fatigue.

The research highlighted in the article looks at the types of decisions we make when we have to make a lot of decisions. The results may not be of much immediate use in our classroom. But students often ask why we don't always make rational decisions. I think the article goes well with this TED Talk on The Paradox of Choice with Barry Schwartz.

It may be something for an extra credit assignment. What do you think?

Business Cycles and Recession Measures

2011-08-04T10:38:00.000-04:00

One thing we do either in our macro courses or in our survey courses is discuss briefly the business cycle.

Many of us, along with some textbooks, fall back on the "two consecutive quarters of negative GDP growth" definition. We should all be directing our students to the indicators used by the National Bureau of Economic Research (NBER) definition.

Here is an interesting post from Calculated Risk (HT to Econlog) that speaks to the NBER definition. It also provides a sobering view of where we are in the current cycle. While we can definitely see we're past the trough, we still have a considerable amount of ground to cover to get back to the previous peak.

Externality

2011-08-02T08:37:00.000-04:00

Greg Mankiw relates something that I'm sure many of us can remember seeing. Whether we think it's touching or it's corny and embarrassing, Greg points out an aspect I know I hadn't thought of before.How many incidents like this have I seen at football games alone over the years?

Debt Rap

2011-07-28T16:15:00.001-04:00

Regardless of your politics, this contains lots of trigger words to use in your classes. (HT to Carpe Diem)

Nominal and Real

2011-07-27T06:39:00.000-04:00

Something on exchange rates from The Wall Street Journal.

Price

2011-07-25T08:51:00.002-04:00

Price isn't everything.

That Which Is Not Seen

2011-07-25T06:16:00.000-04:00

I know I'm not posting as often as I should. I promise to get on track in the near future. There are a lot of things hanging in the fire right now and, as we all know time is a scarce resource and opportunity cost is an operative concept.

Anyway, James Grant had an excellent article in this this past weekend's edition of The Wall Street Journal. It's about Frederic Bastiat and a new edition of some of his work. I always enjoy what Grant has to say, even when I don't agree with him. Fortunately, I agree with him about Bastiat. I've added the book to my carousel. Now I just need to find room for it on my growing "to read" pile.

What One Leave’s Out

2011-07-05T09:52:00.000-04:00

There is an opinion piece in today’s edition of The Wall Street Journal that might prove to be a

valuable addition to your “possible homework” file. The authors are addressing an investment gap – the difference between foreign capital inflows to the U.S. and domestic capital outflows to other countries. When I read it, I was reminded of a scene from a 1970s British sitcom called either The Good Life or The Good Neighbors.

In the scene, a visitor who is an artist talks about art and says “so often it’s not what one puts into a piece, but what one leaves out,” or something to that effect. That’s the case with the Journal piece. The authors have a valid concern about the falling flow of foreign capital into the U.S., and where it is directed in the U.S. However, for those of us who are teaching principles, the value to this piece is what is not mentioned.

Remember that net trade flows and net capital flows are closely related. In fact in principles courses we talk about two sides of the same coin. That idea would explain the previously large capital flows as a byproduct of our trade deficit.

What is left out (and what you can ask your students about) is the fact that the period of falling capital inflows seems to coincide with a period of a falling trade deficit. During the past couple of years, the value of the dollar has fallen as the government and the central bank have worked hard to stimulate the U.S. economy. The falling dollar has resulted in some reduction of the trade deficit. That reduction in the trade imbalance should result in a reduction in the net capital flow, if we are to believe the textbooks.

Add to that the authors’ concerns that much of the capital inflow is directed toward government debt. Take into account the state of uncertainty that remains the U.S. private sector, despite high profits and a generally rising stock market; and sources of unrest and unpredictability elsewhere in the world and you have the makings of a traditional “flight to safety.” (Although the status of negotiations on the U.S. debt limit may yet influence that perception.)

I think there’s a wealth of directions you take the piece, notwithstanding the authors’ real and valid concerns. I look forward to your comments.

Causation, Correlation or Coincidence

2011-07-03T09:39:00.000-04:00

And we were only talking about subsidies and their effects on markets the other day in my class. I wish I had this at that time. (HT to Division of Labour).

Examples of Transaction Costs and Inefficiency in Pop Music

2011-06-26T10:50:00.001-04:00

I was driving to conference session and was listening some music in my car. When Runaround by Blues Traveler came on. It occurred to me that the lyrics dealt with an efficient exchange. The fact that the parties were not trying to minimize the transaction costs, i.e. they were erecting impediments that kept them from reaching an agreement.

As I thought further, I thought of two more songs (both considerably older) that also dealt with the same issue to some extent.Those were Hello, Goodbye by The Beatles and Let’s Call the Whole Thing Off by George and Ira Gershwin. In both cases, the inability or unwillingness to communicate (transaction costs) is causing a failure of consensus and efficient “exchange.” None of the songs are perfect, but they may be helpful in setting up the discussion or topping off discussion. What are your thoughts? Will this work? Does it work? I know I’m going to try it. I'm also interested if you can think of more recent examples or songs from different genres.

Wealth and Income Effects of Monetary Policy

2011-06-24T10:56:00.001-04:00

Back when I worked for the Federal Reserve Bank of Chicago, there were a couple of issues that had to be dealt with repeatedly. One was the limitations of monetary policy – there were certain macroeconomic goals that were easier than others to address through monetary policy. The other was the fact that monetary policy was a broad tool. One could not really initiate policy to affect a narrow sector of the economy – too often it had effects on other areas.

This latter is illustrated well in an opinion piece (free content at time of this writing) from today’s edition of The Wall Street Journal . The piece is critical of the Fed’s monetary policy move referred to as QE2. The charge is that it was meant to have a specific effect on financial markets, but has had unintended consequences in other markets, such as commodities. While I don’t pretend to know whether this is true or not, the piece does explain how QE2 resulted in wealth effects and income effects. And it is there that it provides a service for those of us who teach.

In explaining the linkage between an accommodative monetary policy and prices (of both securities and commodities) it can be used to help students understand the wealth effects (confidence arising from rising stock prices) and income effects (falling real income) that accompany the changing value of the dollar.

You might want to take a look. Let me know if you agree.

Specialization and Trade vs. Self-Sufficiency.

2011-06-24T05:06:00.000-04:00

This is why trade makes us better off...we all can't be good at everything. Of course there is the satisfaction (utility) you receive from doing it yourself.

Vanity, Thy Name is License Plate

2011-06-23T07:04:00.000-04:00

If you look in today's edition of The Wall Street Journal, you will find this amusing "puzzle" to share with your students. The set-up, Marshall and other 19th century economists noted that producer cost was the sole basis of price. Consumer value had to play a part, as well. Essentially the consumer's willingness to pay had to relate to the utility they received.

What utility is received from a vanity plate? I was taught that there were three kinds of utility - form, place and time. I have my idea, but I'd be interested in your thoughts.

Changes in Economic Thought

2011-06-21T15:54:00.001-04:00

I know not everyone shares my interest in and enthusiasm for the history of economic thought. But for those who do, here is an article freom the most recent issue of Region Focus, published by the Federal Reserve Bank of Richmond. (HT to Cafe Hayek)

The author examines how the most recent crisis caught the economics profession napping, and suggests how the crisis may change the profession. It provides some basic insights into how economics has changed over the years as a field of study. And for those of you who regularly seem to have students who are enraptured by the subject, this might be something to share with them. I hope you find it as interesting as I did.

Out of Poverty: Financial Institutions and Economic Development

2011-06-16T07:08:00.001-04:00

Here's a news release (HT to Marginal Revolution) that could be useful a number of ways. It's about some research that came from data collected by Dr. Robert Townsend of MIT. It the article speaks to the role of saving in helping people out of poverty. But I think it would be useful when discussing financial systems, institutions (the importance of saving), and the formation of capital. There are links to various articles, working papers and a book on Dr. Townsend's page. I'm also adding the book in my carousel at left. I hope to pick up a copy soon. Then I will share my review.

For the Next Time You Teach Monopolies

2011-06-03T09:19:00.000-04:00

Here’s a very good article from The Economist on substitutes and why monopolies don’t have absolute power in the marketplace. (Thanks to Carpe Diem for the pointer.)

I know I’m constantly dealing with the perception that monopolies have ultimate pricing power. I face it with my high school students, my undergraduate students, and occasionally even with graduate students.

They seem to forget a factor in demand is the availability of substitutes. And as prices rise, the search for substitutes often gets more intense. Once those substitutes are found and economies of scale can kick in, (this can be a significant period of time) the monopoly may suddenly find itself the victim of creative destruction.

There are other factors to pursue, of course. But this has the potential be a great discussion starter or an anecdote to toss into discussion.

Elevator Externalities

2011-06-02T07:52:00.000-04:00

Here's an interesting little mind exercise courtesy of a couple professors at Northwestern. I think the set-up could be a great discussion starter, don't you?

HT to Marginal Revolution for the pointer.

If You Tax Something,

2011-05-30T07:46:00.000-04:00

you get less of it. I seem to remember reading that someplace...oh, yeah. It's in almost every economics principles text.

This article from The Independent in the U.K. (HT to Carpe Diem) could be very useful when you discuss tax wedges. It could also be used when discussing taxes and elasticity, willingness to sell and incentives.

I'm planning on using it. What do you think? Does it have potential for your class?

Exchange Rates

2011-05-27T13:50:00.000-04:00

Earlier this week, Greg Mankiw (HT) linked to an excellent column in The New York Times. It is by Christina Romer, former chair of the President's Council of Economic Advisors. In it, Dr. Romer gives as clear and lucid an explanation of exchange rates as I can recall in some time. She explains what it means for a currency (in this case the dollar) to be strong and what that really implies. Most importantly she makes a case of why discussion of the exchange rate is needed if people are going to understand the broader economic picture.

Too often our students lose sight of the fact that the exchange is the price of securing a tool - a tool necessary for conducting business in a different economy. And whether it is Americans seeking to conduct business elsewhere or foreign citizens seeking to conduct business in the U.S., it is necessary to have the right tools.

Please take a look and share your thoughts.

Non-Price Determinants of Demand

2011-05-27T13:34:00.000-04:00

I've been meaning to blog on an article for the past couple of weeks but just have not had the time. I have a few moments while one of my summer classes are taking an exam so I will try to do it now.

The article in question is from The Wall Street Journal. It discusses how buying patterns have changed among the wealthy as a result of the recent recession. It offers a chance for you and your students to discuss some non-price determinants of demand. How are non-price factors such as tastes, income, availability of substitutes/complements, expectations, and the number of buyers reflected in the article? You can also use it to discuss the price elasticity of certain goods. What are your thoughts?

What Is Economics?

2011-05-26T17:54:00.000-04:00

(I know I've been remiss. I'm hoping you all understand what end of school year means. It doesn't excuse - only explain.) Anyway, here is an interesting summation (HT to MarginalRevolution) for one of those last days of class or an introduction for the first day next fall. I'd be very interested in your comments.

The Story of Economics from Kate Burn on Vimeo.

HT Marginal Revolution

Rent Controls, Price Ceilings and Property Rights

2011-05-13T17:20:00.000-04:00

I've been meaning to post this for a number of days now. I apologize for not getting to it more quickly. Recently, I ran across this article about a landlord in San Francisco who is having trouble with the city's rent controls. This is not a new concept for those of us who teach economics. Rent controls are the classic example of a binding price ceiling creating shortages.

What made the article a little different was the fact that it mentioned a portion of the San Francisco law that limits what the owner can do with the property. In this case, the landlord/owner wants to evict a tenant so he can move family into the space. But if he does that, it limits his use of the building in the future. In essence his property rights are restricted in such a way as to make it hard for him to evict the tenant. At the same time, eviction impacts the tenant’s property rights. While the tenant is not the owner, there is an issue of possession.

This makes an excellent discussion piece if you want to tie property rights into price ceilings. I encourage your comments.

Decisions, Choices and Opportunity Costs

2011-05-13T17:18:00.001-04:00

Here is an example of a "non-economic" choice that is just full of potential for opportunity cost. (We will overlook the fact that they both say "price" when it's really "cost" they're talking about.)

Extreme Hyperinflation

2011-05-11T08:05:00.001-04:00

Zimbabwe must hold the record. See this story in today's edition of The Wall Street Journal. (And it only has that value as a "collector's item.")

The Value of Cutting Costs

2011-05-08T06:17:00.000-04:00

Recently, I took an online course that focused on economic development and poverty. One of the discussions we had questioned whether technological innovation benefited the rich, the poor or both. One of the conclusions was that, because of the cost of innovation, initial benefits tended to gravitate to the rich because they could pay a price that would compensate the producer. But over time, as the cost structure changed, the benefits were realized by those at lower income levels, as well. One of our classmates even noted that, because of the passage of time, the technology was actually better quality as well as cheaper by the time it became available at lower prices.

Yesterday, there was an opinion piece in The Wall Street Journal that dealt with that topic. It reinforces the point that the real value in innovation may not come in the initial stages - many innovations don't last very long. But for new products and technology that does last, the real benefit comes as producers find ways to reduce the cost. And I will add, improve the quality and reliability in the process.

This relates to my post from one week ago which linked to a discussion of poverty and choice. It also reminds me of a quote from Joseph Schumpeter who once said "The capitalist engine is first and last an engine of mass production which unavoidably also means production for the masses. . . . It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls."

I welcome your thoughts.

Opportunity Costs & Trade-Offs

2011-05-04T08:53:00.000-04:00

The Corps of Engineers’ demolition of a levee to relieve pressure and save the town of Cairo, Illinois but at the expense of farmers in Mississippi County, Missouri offers some great possibilities to review some of the most basic concepts. You can find The Wall Street Journal's version here with a slide-show, video and interactive graphics. But you can also find the story just about anywhere on most news sites.

According to the stories, there was a choice to be made. If nothing was done, the water could break through the levee at Cairo and put much of the town under 20+ feet of water. Or the Corps could blow a hole in the levee on the Missouri side of the River. This would save the town but flood farmland, farmland that was already planted.

One can examine the potential for economic losses (damage and lost business in the city vs. damage and lost crop revenue), but there are additional questions. What about the impact on commodity prices? These prices are already climbing. One story I heard hinted that the planted crops are a total loss and after the flood waters recede and the fields dry out it may be too late to plant a second crop? And there are now stories about the farmers being eligible for disaster relief. How does the relief to the farmers compare to the relief payments that would be made to the residents of Cairo? Would any of these qualify as “unintended consequences”? My inclination would be to say “yes” regarding the impact on commodity prices, but “no” to the disaster relief question.

What about political questions? How many voters would be affected on the Illinois side vs. the number of voters affected on the Missouri side? I don’t want to believe that was part of the calculation, but it does spring to mind.

Anyway, leaving the political issue out of the question, how do you see this story being used in the classroom, if at all?

Choice in Poverty?

2011-05-01T07:50:00.000-04:00

There is a very thought-provoking article in the new issue of Foreign Policy. (HT to EconomicsandEthics) The article examines recent research on food and poverty in much of the developing world and comes to some conclusions that are sure to stir up debate in development circles.

But there are some fundamental applications that you may want to consider. The article offers numerous examples of choices people make that many would consider questionable, especially when faced with poor diet. But the discussion of opportunity cost that can result from these examples may broaden your students' perspective of the concept.

There are also examples of inferior goods that can readily be used. Please share your thoughts.

Economic Concepts Described by Stevie Nicks

2011-05-01T07:47:00.000-04:00

Stevie Nicks has a new album coming out titled In Your Dreams and there is an interview with her on Spinner.com. The third question is particularly relevant for this blog. It shows how the concept of specialization works for song-writing. There evidently are benefits from cooperation and division of labor.

Keynes vs Hayek Rap, Part 2

2011-04-28T06:42:00.001-04:00

The second installment of the Keynes vs. Hayek rap video is here courtesy of Russ Roberts and John Papola at George Mason University. For more information, visit Econstories.

Atlas Shrugged, Some Critics Shrugged, I Didn't

2011-04-21T06:20:00.000-04:00

First, let me begin by saying it has been a number of years since I read Atlas Shrugged by Ayn Rand. Consequently, my memory of the details is faded, but I remember the story line.

With that in mind, my wife and I went to see Atlas Shrugged: Part 1 last night. I was aware of the reviews. Many main-stream film-critics have panned it. A few others have given it favorable reviews. But by quantity, the bad exceed the good. (Quality of review seems to be another issue. I am shocked but not surprised by the vitriol and dismissive attitude that seems to run through many of the negative reviews.)

I would have to say I liked the film. I had no problem with the acting (although the dialogue seemed a bit stiff), and given the nature of the production, I thought the cinematography was up to the story.

I have two criticisms. The first is that the film is not as good as the book. (What film ever is?) My second is the development of the story. Given that this is one of three proposed segments of a film based on a large novel, I walked out feeling glad that I had read the book. I felt too much had been left out. I am hard-pressed to give examples due to amount of time between reading and viewing. But the feeling I had was similar to that when I saw the wide-screen adaptation of the novel Dune. I'm glad I read the book before seeing the film.

My recommendation is the film is worth seeing. If you are true Rand fan or your memory regarding the book is clear you will enjoy it. If this is your first exposure to Rand, prepare to walk out asking a lot of questions. But that may be the way Rand would have preferred it.

I would welcome your comments, particularly if you read the book and saw the film.

Conservation as Conspicuous Consumption

2011-04-20T06:53:00.001-04:00

Yesterday, I heard a very interesting interview on Marketplace, the public radio program. The interview was with Stephen Dubner, coauthor of Freakonomics and host of Freakonomics Radio. Dubner talked about the idea of conspicuous conservation.

Now you probably know about conspicuous consumption. The phrase was coined by Thorstein Veblen who stated that one reason we spend money can be to show off our wealth. Basically what we buy can signal our wealth to others and can, presumably, have an effect on our status or how others view us.

I often ask my students why they buy certain brands of clothes, etc. when other cheaper brands would provide the same function. This leads to a discussion of utility and an understanding that many people place a high value on the perceived ability of certain products to impress other people.

This brings us back to the interview. As I said, Dubner was talking about conspicuous conservation - how certain people will buy certain things to show how "green" they are, and he cites some research by a pair of economists that indicates the payoff for making these choices can be quite high in certain communities. In essence, the purchasers may be willing to pay a higher price in order to secure higher prestige in a given community. This offers a great opportunity to discuss value and utility. Because certain choices may not necessarily be the best in terms of actual effect, but may have a higher value as "conspicuous conservation/consumption." Let me know what you think of the interview.