Changing Elasticity, Substitution & Income Effects

There is a very good article (free content at this writing) in today's issue of The Wall Street Journal. It should have high interest for students, given the subject matter and it is loaded with applications for micro concepts and even for the micro review before teaching macro.

The article is about declining gross sales for concert tours. There was a significant drop this year.  This may not be surprising.  My guess is that students and teachers would both say that concert prices are highly elastic.  Given the times, it would only seem logical that ticket sales would drop.  However, early in the article there is a statement that grosses had increased each of the last eight years. That includes 2008 and 2009. The statement goes on to say that the number of tickets sold held roughly even despite rising ticket prices.  That would indicate characteristics of a good that is highly inelastic. 

We know that elasticity can change.  But we can go into the reasons for the change.  The article gives us room to pursue both income effects and substitution effects. Of particular interest is the idea that older groups tend to be bigger draws than newer groups. Given the possible fan base, this would seem to indicate that it is people with more disposable income that are buying the tickets. That does not mean that only older fans go to see older groups, or that younger acts don't attract older fans, but there may be factors to consider in a discussion.

The article also has some useful graphics, a slideshow, and a video (downloadable) to accompany it.  I suggest you give it a look.

Ronald Coase & Externalities

Yesterday was the 100^th birthday of Ronald Coase who gave us the Coase Theorem.  I missed it (for which I apologize), but EconGirl, Jodi Biggs, did not. She put up a truly superb post explaining Coase’s importance and providing a great example of the Coase Theorem at work. 

I suggest you add this to your arsenal for discussion of externalities. It is clear. It is interesting. And it is real. And it’s hard to find examples that meet all those requirements.

On Friedrich Engels

About 15 months ago, I posted a link to a review of a then new biography of Friedrich Engels, Marx's General by Tristram Hunt. In the interim I received the book as a gift and just finished reading it. It was excellent.

I am not endorsing the book merely as one who studies the history of economics and the lives of economists. I also applaud the book for its historical and personal insights. Engels was a tireless, committed worker in the fields of the socialist movement of the mid-19th century. And he was a paradox.

The son of a wealthy manufacturer, Engels spent time on the barricades in the uprisings in the mid-1840s. But he would return to the world of commerce in order to finance Marx's writing. After Marx's death, Engels continued to move the socialist agenda forward, continuing to support members of Marx's family. All the while, his own life-style seemed to more closely parallel the bourgeoisie than the proletariat.

In fact, a quote from the epilogue may describe his view best:

"Neither a leveler or a statist, this great lover of the good life, passionate advocate of individuality, and enthusiastic believer in literature, culture, art and music as an open forum could never have acceded to the Soviet communism of the twentieth century, all the Stalinist claims of his paternity notwithstanding."

If you are looking for an interesting read to start off the New Year, I would recommend Marx's General. If you're still hesitant, I would suggest you might want to listen to a podcast of a lecture by the author on the London School of Economics (LSE) podcast series in April 2009.

For those of you who want go more deeply, here's Friedrich Engels' Conditions of the Working Class in England. I read it as a graduate student some (mumble mumble) years ago. It provides insights, not only into the impact of the Industrial Revolution in 19th-century Manchester, but provides a framework for The Communist Manifesto, of which Engels was a coauthor.

I welcome comments by anyone else familiar with Hunt’s book.

"Marginal" Thoughts

Today's issue of The Wall Street Journal has a keeper (subscriber content at this writing, but put the headline in your browser and you might find an ungated version). it contains a very good article that can be used when discussing marginal productivity of labor and marginal revenue product. It really is worth the effort to try and find it. The slideshow is "okay" but doesn't have the potential of the article.

The is about how the venerable fast-food chain is adding things to its menu to appeal to changing customer tastes. The problem is some of the investments are hefty and the additional revenue generate may not pay for the investment. In the article, one franchiser talks about how a certain piece of equipment wasn't paying for itself. Another franchiser discusses how an attempt to stay open 24 hours at a certain location didn't cover the labor costs.

At the same time, the article discusses how new ideas can drive productivity - a key aspect for profitability in the fast food business. The most obvious example is the addition of a second drive-thru lane at some restaurants.

As I said, you might want to spend some time trying to find this article. It has real potential to help when discussing those "exciting" cost curves in your micro classes. As always, I look forward to your comments.

For Those Who Celebrate Christmas....

I don't know what yesterday looked like at your house, but around here....

The "Evolution of Markets" in Seventh Grade

Today's Planet Money Blog has a great piece on how markets evolve and trade makes everyone richer.  It involves candy and a seventh grade class.  I won't go farther than that, but it's a great exercise about how trade maximizes surplus. It was also on Morning Edition this morning.

You can even use it to explain why gift-giving can be viewed as inefficient.

Measuring Trade

This past week, there have been a number of posts and articles that address the continuing fascination with trade imbalances. But the three that follow are particularly helpful if you want your students to really understand the nature of trade.

First I present a pair of links that are related. The first is an article in The Wall Street Journal that connects the iPhone to the trade deficit. If you are a devotee of that particular piece of electronic hardware, examine it. You will notice it says "Assembled in China." What you may not realize is that is equivalent to "Made in China" for purposes of measuring trade. But the article explains that while, for statistical purposes, the last shipping point is what counts. The bulk of the cost of an iPhone is actually due to the U.S.

This is made even clearer if you look at this blog post on Carpe Diem. Mark Perry provides a clear explanation of how the Chinese actually are responsible for the smallest portion of the cost.

Don Boudreaux at Cafe Hayek provides another view of trade. Too often, our students think of trade as a tied to a single event or product. What they need is a clearer understanding of the concept of interdependence. They need to think beyond the initial exchange and examine what the consequences of that exchange. What other exchanges does it make possible?

Information, Prices and Competition: A Bigger Threat to Mom & Pop?

There was a fascinating article in today's edition of The Wall Street Journal. The article (free content at this writing) was about how new apps on smartphones make it easier for people to comparison shop and the pressure that is putting on certain retailers. One anecdote had a shopper seeing a gift for his girlfriend at a big box electronic store. He whipped out his smart phone and found it at an online store for considerably less. He purchased from the online store while standing in the big box.

This article has a lot of potential for use in microeconomics. You can discuss the role of "perfect" or at least improved information in setting prices and making competition. You can discuss consumer and producer surplus, and willingness to buy and sell. You can even go into the idea of value and utility, and make a case that the higher price in the big box was because they offered better time and place utility for the item - delivery and "satisfaction" would have been immediate because of no waiting for delivery.

But I will suggest one more angle. What do these new apps bode for the “mom & pop” stores on Main street? If many of us are upset because various big box stores threaten to put small retailers out of business because of better pricing; how can those same small retailers compete with the lower prices that come with better information? Granted, not everyone has smartphones. But the history of technology suggests that as time goes by, the price of those devices will fall and competitive pricing information will be available to more and more people.

I look forward to your thoughts.

Creative Destruction: From Sci-Fi to the Palm of Your Hand

Today's edition of The Wall Street Journal has an engaging opinion piece by Orson Scott Card. For those of you who do not recognize the name, Card is the author of a very successful science fiction series that started with Ender's Game, a novel of young military genius who helps save the planet from a war with an alien species. The later volumes involve some moral dilemmas that come with "winning."

But Card's commentary is not about the book, but rather about how technology has changed our life in just one generation - call it creative destruction. The economist Joseph Schumpeter wrote about economic growth as creative destruction. He saw new enterprises, new opportunities, and new technologies always replacing older ones. The new created new jobs. The old took old jobs. And as the new jobs demanded new skills that society valued more; the wages improved. The old jobs, because they were connected with goods and services that were no longer valued as highly by society, saw wages languish.

Card talks about how changing technology has impacted how we communicate and how we even do research. But his piece reminded me of another. Mark Perry at Carpe Diem had a post on creative destruction last month. Specifically, he looked at all the devices that were being "replaced" by the smartphone. The list is impressive. And what about all the derived demand for labor that is being lost because we want everything at our fingertips? These might be useful when you next discuss the economic growth process. I welcome your thoughts.

Bowl Game Economics - Scalping Tickets

Last Friday, Mark Perry at Carpe Diem had a post that can be useful to those teaching about prices and markets.  Mark pointed to a rant by a University of Wisconsin student and football fan. The individual was upset because he or she did not get a ticket for the upcoming Rose Bowl game in Pasadena when they went on sale.  The ticket allotment for students through the University of Wisconsin quickly sold out.  So far, so good - we have an example of supply and demand at a price.  We can use it to illustrate consumer and producer surplus in a market with inelastic supply.

What happened shortly after the tickets sold out was the cause of the rant.  Within a few hours, tickets were becoming available on social networking sites (probably even on eBay and other e-commerce sites). And the price was considerably higher than face value.  Some students had purchased the tickets and were now selling them at a considerable premium.

Now we can integrate willingness to pay, inefficient markets, elasticity of supply and demand (remember timeliness can be a factor), budget constraints, and utility/value. Clearly, some people were willing to pay a higher price, but their opportunity cost may have prevented them from going through regular channels.  They may place a different value on being at the game and or have different budget constraints. There are a lot of different directions to go with this, and I welcome additional ideas or suggestions for sharing with the rest of the readers.

As a supplement, I point you to this excellent interview on the EconTalk web site featuring a discussion between host Russ Roberts and Duke University Professor Mike Munger, both big baseball fans, as they discuss the economics of ticket-scalping. I welcome your comments.

Competition, Rent-Seeking and the Role of Government

This has to be a quick post.  In today's edition of The Wall Street Journal (free content at this writing), there is a great story on food trucks in Chicago. The owners are trying to compete in slow economy. Existing restaurant owners are bringing pressure to bear on local government. And the city council is trying to decide whether and how to change the existing laws to allow trucks to prepare food in the vehicle. Current law says food must be prepackaged and not altered in any way. 

This is a great little piece to bring together a trio of topics for your class.

Rich and Lost: Learning about the Economy

I just finished reading an interesting piece of economic fiction.Rich and Lost in Prosperia by Doramas Jorge-Caleron is a fanciful exploration of basic economics set in the mythical tropical island of Prosperia. The two main characters have different views of the role of business. One of them seeks guidance from a renowned economics professor who, during the course of the book, teaches him the fundamentals.

The setting and character names are just fanciful enough to be corny. But this is part of the charm of the book. Those of us who teach and have taught high school know that corny often works with students - especially if the corn intellectually nutritious.

And this book has that merit. The economics lessons provide the brain food in an appetizing way. Through a series of meetings, one of the characters is given a crash course in economics. But the lessons are not boring, dry discussions of theory. Rather they are set in "real life" examples that illustrate the points - each morsel is something to mentally chew on. And the menu is diverse. There are discussions of prices, scarcity and value. But they also cover economic systems, globalization and even the environment.

I see this book as a useful ancillary to a basic economics course at the high school level. You should read it and consider it as such. I don't think it can be the "stand alone" text - I don't think it's meant to be. You can read it and decide for yourself. It's one dish for the meal that is your course.

Possible Rent-Seeking? Captain Renault Is Shocked

USA Today provides this story.  This is a good time to discuss coincidence, correlation and causation.  Regardless, Captain Renault is shocked...shocked.

On the Grinch, Pigouvian Taxes, Externalities and the Coase Theorem

Forbes magazine has this wonderfully entertaining take on a classic by Dr. Seuss. (Big HT to Greg Mankiw for this one.)

I'm going to share it with students. I hope you do, as well.

Choices and Opportunity Cost

Can information be too perfect? Can you have too much information when making a decision?  At what point does making the decision become an opportunity cost?


And this one is clearly about choice, but it's a groaner.

Measures of Growth

This can be filed under "old news" for some of you, but for others it may be helpful information. Hans Rosling, who developed Gapminder, has a new presentation linking economic growth to health over 200 years. (HT to Mark Perry because his blog is where I ran into it first. Since then I've seen it many times, many blogs.) When you talk about measures of progress in the early part of your macro classes, you might want to offer this as a way of explaining how economic progress affects in social progress. It also offers an entre for discussion of coincidence, correlation and causation. Regardless of how or even if you use this presentation, imagine a not too distant future when you can do something like this in your classroom.

This May Not Help...Much

There was a useful article in Monday's edition of The Wall Street Journal (free content at this writing) that discussed a pending deal in Congress. It would trade a temporary extension of the Bush era tax cuts temporarily for an extension of unemployment benefits. On the surface, this would seem to be a great example of classical Keynesian economic policy.

However, there are a number of additional directions you can go with this. One can use the fact that the extension of tax rates is temporary and that people know this. Essentially, they are being told that taxes will go up in the not too distant future. Consequently, what is the likelihood that people will spend the extra money vs. saving it to offset future tax increases? Does it make a difference that we are in a recession? Does the incentive to save differ for those who are still struggling - perhaps with part-time work because they can't find a full-time job? If you're still unsure about your job going forward, how will that impact your decision to spend vs. save?

As for the extension of unemployment benefits, there has been research that indicates the length of time the benefits are available has a connection to duration of unemployment - the longer the benefits period, the longer the duration of unemployment. Other economists believe that people who are unemployed try to seek employment quickly - even at lower wages or positions that would previously have been unattractive.

For either tool, a case can be made that passage will help the economy. And a counterargument can be made that it won't. At the moment, the discussion is basically academic because nothing has been passed. But that makes it a perfect intellectual exercise – lots of room to play. And as neither side is planning on cutting other programs to pay for what being proposed, it will add to the deficit. You can even begin discussion of "crowding out." What do you think?

PNC 12 Days of Christmas Price Index

If you have followed this blog for more than a year, you probably know about the PNC Wealth Management 12 Days of Christmas Price Index.  The index is based on the old Christmas carol wherein a true love showers the target of his or her affections with an assortment of presents – each corresponding to the 12 days of Christmas. I highlight it every year during the holiday season. I think it's a fun and interesting way to introduce economics and economic measurement.

As usual the folks at PNC have done a great job, providing explanations and teacher resources. My only concern this year is that those of you with slower systems or who lack certain computer capabilities in your classroom won't be able to enjoy it.

Nevertheless, I hope you enjoy it as much as I did.  I suspect you will be surprised by many aspects of the index this year. I know I was.

Author Interview: The Economics of Ego Surplus

We have something different for the readers of MV=PQ today – an interview with the author of a new piece of economic fiction. Now, before you ask why don’t I do it as an MP3 file or otherwise take advantage of technology, let me state that I know many readers don’t have the latest technology or the fastest access to make those options really attractive. (Plus, I’m still on the upside of the learning curve.) Nevertheless, I think you’ll like the interview and I hope you’ll provide some feedback so I know whether to do more. Now to our guest =>

MV=PQ: This is an interview with Paul McDonnold, author of The Economics of Ego Surplus: A Novel of Economic Terrorism. Paul has taught at University of North Texas, University of Delaware and North Lake College in Irving, TX.  Paul, welcome to MV=PQ

Thanks Tim. Happy to be here.


MV=PQ: Paul, there are a number of books that use fiction to set the stage for teaching economics. What attracted you to the field of "economic fiction"? And what do you think is the advantage of presenting concepts this way?

I learned from teaching that economics is one of those subjects where a subset of the population likes it very, very much, while outside of that group many view it with confusion, suspicion or even hostility. In trying to make problem sets more palatable to my principles students, I incorporated a fictional scenario involving a terrorist attack on the U.S. economy. The reaction I got was very positive, and writing was already a big hobby of mine, so I thought a full-out novel teaching economics would be a great thing to attempt. After that I found out about some of the other works in this little subgenre, like the Marshall Jevons mysteries. I also discovered Sophie's World by Jostein Gaarder, which is probably the ultimate model of success with a “teaching novel.” It teaches the history of philosophy and was a huge bestseller. For better or worse, we live in a culture where people demand to be entertained, so if you can teach them something valuable through entertainment you can really accomplish something.


MV=PQ: Who do you see as your primary audience with this book?

I made a decision while writing the book to keep the economics basic enough that it would have a wider potential market than just “econophiles.” I hope anyone who likes a good story and isn’t opposed to learning something new will give it a chance.


MV=PQ: I really enjoyed how you managed, for the greater part, to make the economic explanations flow into the narrative. In many cases, I wasn't even aware I was being "taught" until I was into the explanation. Were there other economic lessons that you considered and discarded because they didn't flow?

Definitely. A considerable amount of economics ended up on the cutting room floor, so to speak. I worked with an editor who is very much a literary person, not an economist. She impressed upon me the need to not turn some readers off with more involved economic digressions.


MV=PQ: This is kind of a follow up question to my previous one; I really thought this book passed quickly. Were you tempted to write a longer book?

Not really, I wanted the book to be economical in more ways than one! Also, as a reader I really like good shorter novels like The Great Gatsby, so I made that my target length.


MV=PQ: I noticed two of your supporting characters were named Smith and Marshall. I thought that was interesting. I was particularly impressed when, at one point Smith essentially told Kyle Linwood, the main character to do what he wanted. Was that intentional or accidental? And were there any other little bits I missed?

The funny thing is I spotted quite a bit of symbolism after it was written. So maybe it was operating on a subconscious level. I did think it made a lot of sense for Kyle to have a girlfriend named Smith. But the part where she tells him to do what he wants was not something I have considered. It is very interesting though!


MV=PQ: Do you use story-telling or current events to illustrate points in your courses?

Yes, it’s actually been a few years since I’ve taught, but I always tried to incorporate as much story-telling and current events as I could without watering the subject down. The classroom is a little different from a novel in that your audience is captive and you are tasked with teaching them a certain amount of the “meat” of the subject.


MV=PQ: So, are you a micro- or a macro-? I'm guessing macro because of the setting of your book.

Macro, definitely.


MV= PQ: And a follow-up to the setting question that I just have to ask, did you get to go to Dubai to do research?

I’m a little ashamed to admit I did not. I wrote the novel in my spare time, entirely on spec, so time and money was always a factor. But the power of the Internet is amazing. I researched extensively and was even able to use Google Earth to “fly” around areas where I envisioned the action happening!


MV=PQ: Well, I must say I enjoyed the book and I hope my readers will find it of interest. Once again, the title is The Economics of Ego Surplus: A Novel of Economic Terrorism and this was an interview with the author Paul McDonnold. Paul, thank you and I look forward to your next effort.

Thank you, Tim. If the readers want to test drive the novel, a pdf of the first 54 pages can be downloaded free at http://starvinganalyst.com/.


There you have it. The first MV=PQ interview. I know I’m not in the same league with some of the other great economic interviewers out there, but I hope we get the chance to improve. In the interim, let me point you once again to The Economics of Ego Surplus: A Novel of Economic Terrorism. I’ll also put it on my carousel at left. It would make a great little stocking stuffer for the economics student or teacher in your life. And we’re still in time for Cyber Monday.

I look forward to your comments.

Not Really a Whole Lot More to Say

Consumer, Producer and Total Surplus

Here's a little lesson in welfare economics that I'm sure most of us can identify with. 

I know many of you are out for the break already; but I will ask anyway. How many went with consumer surplus? How many went with producer surplus?  How many went with a socially optimal outcome?

Happy Thanksgiving and Thanks for Reading MV=PQ.

On the Homogeneity of Money

Today's lesson in money comes courtesy of the comic strip Frazz.



One of the fundamental characteristics of money is homogeneity. That essentially means each monetary unit is the same as every other unit. They are interchangeable. This concept is sometimes hard for some people to understand - especially the very young. They often view banks as warehouses. They may believe that if you deposit five $1 bills in your account, the teller takes those five bills and puts them in a drawer with your name on it. When you withdraw five dollars, the teller will give you the same five bills.

Those of us with more experience know that isn't true. That your five dollar bills are intermixed with others and they circulate. The chance of receiving bills is very, very remote.

But because money is homogenous, it helps to make a fractional reserve banking system possible. As long as everyone doesn't demand their money at the same time, money can be lent. Those wanting to withdraw funds can be given any cash on hand.

But when too much is lent and there's a demand for funds, a fractional reserve system can become illiquid. That's one reason for a central bank. The discussion can go much farther from here, but the lesson in the cartoon is that the money we put in is not necessarily the same money we take out. The deeper discussion may be why.

Institutions and Entrepreneurship

Regular readers of this blog know I find the idea of economic institutions interesting. Institutions have been defined as "the rules of the game." More specifically they are the set of rules and organizations (both formal and informal) that influence our decision-making by setting up incentives to action. They can include written laws, voluntary standards of conduct, even cultural beliefs. The last category is the subject of this post.

An article in today's edition of The Wall Street Journal (free content at this writing), discusses motorcycle taxis in Nigeria. Specifically, the article is about how dangerous the motorcycle taxis are. Evidently, there are so many accidents that one hospital has a ward specifically for people who were in motorcycle taxi accidents.

But attempts to get people to wear helmets have been unsuccessful, largely because of superstition (cultural belief). There is a belief among many that placing the helmet in contact with their head is bad "juju" which can have drastic consequences. People can disappear, lose their brains or their luck. People make choices, often tragic, because the belief presents a perceived cost that exceeds a perceived benefit. Thus, they make a "logical" choice.

Enter one entrepreneur who has developed a cloth liner that can be placed between the helmet and the wearer. It eliminates the contact and, for some at least, overcomes the cultural fear. There are other issues involved, including hygiene, but the fact is the entrepreneur was able to use his understanding of an institutional factor to identify and open a market. I don't know how successful he will be, given there are many inexpensive substitutes like personal handkerchiefs. And there are likely to be more commercial substitutes. But this remains an interesting example of entrepreneurship mixed with institutional economics.

I look forward to your comments.

Some Tools for Teaching Policy Tools

You may already be aware of both of these. But if you're not, it's worth your time to look at them.

The first is a new interactive on The New York Times website. (HT to Econlog.) It's a game on cutting the federal budget. You can cut certain spending categories and or raise certain taxes in effort to bring the Federal Budget back in line. It is rather simplistic and doesn't really show the complexity of the trade-offs, but it’s not bad for the venue. And I think that for a traditional high school economics course, it makes a great introduction.

The second resource is an opinion piece in today's issue of The Wall Street Journal. It's written by Princeton economics professor and former Vice-Chairman of the Federal Reserve Board of Governors, Alan Blinder. Dr. Blinder offers an interesting defense of the Fed and quantitative easing. I would think it would be usable for the monetary policy section in your AP or IB courses.

U.S. - China Currency Rap

You will want to watch this before using in class (HT to the folks at Chartporn). It may not be appropriate in some settings. I'm thinking high schools and lower will have more problem with it than colleges. There are also some oversimplifications; but I think it can be good discussion starter. I'm not going to embed it for now, but I may change my mind.

Consumer Surplus

I don’t know how much time you spend when discussing consumer and producer surplus; or how difficult your students find the concept. My experience is mixed.  Some classes seem to get the idea quickly and can transfer the concept to other topics easily. Others seem to struggle. But here is a short post from Econlog that not only explains consumer surplus quickly and efficiently, it offers a quick and easy way to expand the explanation into a discussion.  What do you think?

Structural Unemployment and the Beveridge Curve

One of the more interesting aspects of unemployment is how policy-makers choose to address it. But what many don't know is that the remedy needs to match the unemployment. That means you can't effectively address structural unemployment with programs mean to address cyclical unemployment.

This brings us to an interesting article from the Federal Reserve Bank of San Francisco. While it introduces a topic you probably don't cover, even in AP Macroeconomics - the Beveridge Curve - it provides a lot of information to help you through the section on unemployment.

China Isn't Solely a Major Exporter

When it comes to international trade, your students could get the idea from many media stories that China is strictly an exporting power. But this graphic (HT Chartporn) shows some interesting import flows. See if your students can account for them.

On Schumpeterian Ideas

The economist Joseph Schumpeter is known for a number of things. But for me, two of them stand out. He defined the role of the entrepreneur and he introduced the idea of growth as "creative destruction." Arts & Letters Daily recently had two links that focused on these ideas. Both are worth your consideration.

The first is a review of the book, American Colussus: The Triumph of Capitalism by H. W. Brands that appeared in The Wall Street Journal. It is a study of those entrepreneurs we first learned of as "robber barons" in early forays into American History. Reviewer Amity Shlaes finds fault with Brand's approach of pitting capitalism against democracy. And I understand why.

If we focus on "creative destruction" we may forget that it is the democratic choice (voting with dollars) of the majority that brings about true change, destroying one industry and creating another. While I have not read the book, I may have to add it to my holiday "wish list" despite Shlae's reservations.

The second link is an essay by Virginia Postrel on Big Questions Online. Postrel suggests that entrepreneurial spirit may be less about risk-taking and more about youthful optimism, or as she borrows it - irrational exuberance. That would seem to square with Schumpeter's views of the entrepreneur - one who opens a market, finds a new source of resources, develops a new product, develops a new product, or develops a new business organization. My only question is why Postrel didn't include him among the others she reference in her article. No matter - the idea is what counts in this case. And her article has an excellent idea.

I look forward to your comments.

More on Monetary Policy

A good friend and colleague in Chicago sent me this link to a post on National Public Radio's Planet Money blog. It offers a unique translater for the most recent FOMC statement.  I think you'll find it amusing...and hopefully useful.

Quantitative Easin'

This may not be appropriate for use with your class. You need to decide that.  But it is funny and it explains what is meant by quantitative easing.  (HT to Greg Mankiw)
 

A Good Graphic for Personal Finance

For those of you teaching personal finance, you might want to take a look at this graphic, courtesy of the folks at Visualeconomics. However, a better title might be "How Should You Save Your Money" because it doesn't really talk about investment options.

C+I+G+(X-M) - What Could Be Wrong with That?

Don Boudreaux of Cafe Hayek had this very interesting opinion piece in The Pittsburgh Tribune. In it, he discusses some of the shortcomings of the C+I+G+(X-M) model we teach our students in macro.

I don't think we should abandon the model because it provides some important insights regarding growth. But I agree with Boudreaux that it lacks detail that can lead us to miss important trends or jump to the wrong conclusions.

I'd be interested in your observations on the piece. Is it worthwhile to point out the shortcomings as well as the value of the data to the students?

Global Poverty

Finally, those of you with an interest in economic development should take a look at this article from Commentary magazine (HT to Arts & Letters Daily).

It summarized much of the current debate and, in some circles dismay, about fighting global poverty. It would be a good piece to summarize that last section about economic development in your macro class, or it might make an interesting discussion piece to use during one of those pre-holiday class days coming up.

As always, I welcome your thoughts.

Two on Fiscal Policy

Here are a couple of resources to go along with the teaching of fiscal policy. First, today's post on Greg Mankiw's blog lifts a bit from Life, the new biography by Rolling Stone Keith Richards. It seems that the members of the group make/made a number of decisions based on the tax effects. Needless to say, this means that they have used resources avoiding taxes that would have been available to governments had the policies been better designed.

Of course, this shouldn’t be a surprise given that Mick was a student at the London School of Economics. I’m sure he learned early on that You Can't Always Get What You Want (scarcity is fundamental).

This next bit is a bit over the top. It's a dark and somewhat disturbing advertisement about the national debt from the 1980s...oh, and it was directed by Ridley Scott, the person who gave us Alien. (HT to Marginal Revolution.)



HT Marginal Revolution

A Seasonal Example of Complementary Goods?

Or maybe it's not seasonal, maybe it's just interesting. 


There might be a cross-elasticity problem in here somewhere.

Another Example of Conspicuous Consumption

Thorstein Veblen's book The Theory of the Leisure Class introduced the term "conspicuous consumption". People use the purchase of high-priced items to signal their wealth, their "status" and a number of other things. Here is a cartoon you can use when introducing the concept.

Yada yada yada...

I know many of you are Seinfeld fans. You've probably lost track of how many times you've seen certain episodes. But the fact that certain phrases have worked their way into our collective consciousness is a testament to its pervasive influence. Not bad for a show "about nothing."

The folks at the Marginal Revolution blog inform us that there is a site that explores the economics of Seinfeld. I just thought you should know.

A Little Late for Some...Perhaps not for Others

Some of you have already covered monopolies and protection of research and government intervention to improve social welfare. But some of you haven't. Regardless, here's a comic strip that can be used to kick-off those ideas.



Please share your thoughts. Is this useful, or not really....and why?

Playing with Numbers

And for those of you who like to discuss how positive data can be used to support normative statements (on either side of the aisle) here's a very useful and interesting video (HT to Greg Mankiw).



I think this can be used a number of ways. But the most important lesson I would offer your students is "what data isn't being shown (on either side) and why?" Too often we (teachers and students) get caught up in an idea and neglect some aspect of the data that may enlighten. And just as often we add data that muddies the water. As always, I welcome your observations.

China's Central Bank and Currency

Earlier this week, The Wall Street Journal carried this story about a move by the Chinese central bank that sparked a sell-off in the market. The Chinese central bank had, unexpectedly, raised its short-term lending rate. Many saw this as a portent that the Chinese economy was being slowed and this would not be good for future growth as it would dampen Chinese demand for goods from around the world. This is a solid observation. But I want to raise two other points.

First, as long as the Chinese currency is tied to the U.S. dollar, or more accurately a basket of currencies that includes the U.S. dollar, the Chinese central bank is limited in its policy. Essentially, to maintain parity, it must match the policy of the countries to which it has tied its currency. This implies that as these other countries ease policy to fight recession, the booming Chinese economy is subject to a similar easing. This only invites inflation. Essentially, any nation that ties its currency to another's, must commit to a similar monetary policy. That's good if the business cycles are coincident. But when they diverge, it isn't a good idea.

Second, given the pressure on China to let the currency float, this might be a first step to do so. A higher interest rate will strengthen the currency which will help Chinese consumer buy imports and put a bit of a burden on Chinese exporters. It seems that is what many have been calling for. As a result, I'm surprised by the reaction.

As always, I welcome other insights. I do think this story is a great way to talk about monetary policy and its connection to exchange rates

How We Count

As long as we’re talking about China, here’s another good item. When we talk about trade and the topic moves around to trade deficits, I think it's always a good idea to talk about how trade is measured. Mark Perry at Carpe Diem has a good post that discusses that very idea.

The example Mark uses is the iPod. It is counted as "made in China" and is counted as an import. The reality is the components come from many countries and the final assembly is done in China. Of the $150 price tag, only about $4 of value is directly attributable to China. Yet, since that's the last stop before it finally comes to the U.S. It's counted as an import from China. But it really is a simplification.

I look forward to your comments.

Ruthless Capitalism and Alternative "Technology"

Dr. Mark sends this link as something to think about. I think it would make a great discussion starter. What do you think?

On Markets, Globalization and the Chilean Miners

Last week, Mark Perry at Carpe Diem put up this post with a video. The point was that globalization, capitalism (and trade) helped save the Chilean miners. I'm not one to say they were doomed without the forces of economics. But economic forces certainly helped. And it was capitalism in the best way - the way that Adam Smith intended when he wrote both The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations.

But, it was a profit motive that developed the technology. And it was also the idea that we best serve ourselves by serving others that led many firms in many nations to make the technology available. The idea was brought home, yet again over the weekend when this article appeared in my local newspaper, The Richmond Times-Dispatch.

It's just something to think about and discuss with your students. As always, I welcome your comments.

Trade

I've had several posts on trade lately, so I will continue in that vein.

Jeff Jacoby of The Boston Globe had a very good editorial last week about trade with China (HT to Cafe Hayek). As the title suggests, the enemy is not cheap goods. In fact, one of his phrases really struck home with me. He called Chinese manufactured goods one of the best "anti-poverty programs". I think this is an excellent image to use if you are explaining the real income model. Because dropping the cost of any one good in an individual market basket makes more resources available - increasing real income. You can also use opportunity cost and benefits of trade.

To go from global to local, Russ Roberts has a useful post on Cafe Hayek about "Buy Local." Roberts doesn't agree with the economic reasons some put forth for buying local. He uses an original line of thinking, in my opinion.  When we teach specialization and division of labor, we explain the extent that it's possible is dependent upon the size of the market.  Larger markets allow for more specialization and greater division of labor. These can, in turn, provide more opportunity for growth.  Artificially restricting trade to a "local" market limits possibilities. The idea of relating growth to size of the market is not new. But you may not have used the "buy local" movement as an illustration.  (I have to also mention that Roberts' comment "we tried buy local in the Middle Ages...it didn't work" is priceless.)

I recommend both of these as interesting ways to connect concepts and reinforce understanding.

A Captain Renault Moment

This is from today's edition of The Wall Street Journal.

I know Captain Renault is shocked.

Fiscal Policy

One of Ed Dolan's posts last week discussed Congress's passage of the continuing resolution to fund government operations. In it, he references an interesting paper from the recent Kansas City Fed Jackson Hole conference, and a rare speech on fiscal policy by Fed Chairman Ben Bernanke.

At the end of the post, Ed also provides some useful slides to accompany the artiicles. You might want to give them a look. I think they could be helpful.