Thursday, December 31, 2009

What is Globalization?

The Wikipedia version is here. It is excellent.

Mr. Greenspan's comments to the Federal Reserve Board are here.

Globalization can be quantified by looking at the Current Account in the Balance of Payments. Some reasons given for a -CA are adverse supply shocks, higher interest rates in the US, good business climate where contracts are honored, and preferences. In the next blog, I will show that the exchange rate plays a part in international capital flows and affects the current account.

Current Account Deficit

The Current Account balance is the sum of net exports of goods and services, net income from abroad, and net unilateral transfers. The CA has been negative for about 20 years. In Balance of Payment accounting, if the CA is negative then the Capital and Financial Account, CFA, must be positive. A positive CFA means that foreigners have "invested" in the US buying financial securities and real assets like land. What a -CA tells me is that we are selling off America. Not Good.

Why Women Pay More

An excellent article on MSN Money authored by MS Dunleavey. I think the answer to why women pay more is two fold: 1) the diamond-water paradox. 2) all of the value of a product is added by the consumer. Women value their products more and pay more.

Monday, December 28, 2009

Have Computers Helped Productivity

Robert Solow was the first to recognize that technology shows up everywhere but in the statistics. In this paper, Adam M. Zaretsky argues that metrics have not kept up with productivity gains.

As an educator, I wonder how much adding more computers helps learning. As a wrestler, I was lucky enough to be on the mat with and in the wrestling room with some of the greatest wrestlers in the world. I noticed that practice wasn't "fun". These men had to work hard and long to make extra productivity gains. I think educators and economists expect huge gains when technology is added when, in fact, the gains are small.

In my economics textbook, Paul Krugman reckons that an additional piece of capital adds .003 to output. I think that there needs to be a critical mass before significant gains show up in data. For example, the first computer added little. It wasn't until millions had a computer before the power of the Internet started to propel productivity.

Education is a long way from realizing a critical mass.

Utility Test for Alzheimer's Antidote

Keep your mind sharp and work through this problem instead of paying attention to your boss. Today's blog is motivated by watching a rerun of Boston Legal, Ala Denny Crane.

Mikey Mouse consumes cheese and wine. His utility function is: U(x1,x2) = x1^.5*x2^.5. For a total utility of 6, find the combinations of wine, x1, and cheese, x2, that satisfy the equation. What is the MRS for the fourth unit of x1?

Combinations of x1, x2 values that generate this indifference curve are: 3,12; 4,9; and 6,6. The MRS for the fourth unit is 3 units of x2.

Did you find this hard to do? This Christmas, my wife and I had a young college students from China spend the holiday with use. She is a finance major at Iowa State University. Wendi and I worked the problem in a minute. Wendi said, "Yeah, I learned this when I was 6 years old."

Wendi casually mentions that "Schools are very different in China."

Does it make sense for the United States to focus on ideas and China to focus on Math?

Sunday, December 27, 2009

Educational Reform

This video compliments of Penny Burger, an educational reformer in her own way. You might remember Sir Ken Robinson from his TED Talk on creativity.

The point taken in the video was that modern schools were based on preparation for an industrial society. Since the 1950s, there's been a shift towards technology. Technology changes rapidly and is disruptive. The video stresses the need to teach students how to adapt to this dynamic environment. One point taken was that students need to be highly creative.

Saturday, December 26, 2009

Rigor-Relevance Justification

In the Rigior-Relevance Model, Quadrant D thinking shows a high level of real life and higher order thinking skills. Dr. Willard Daggett reckons that 21st Century skills involve functioning at a high level of thinking. Since Dr. Daggett is an educational reformer, his theories often face Resistance. His model calls for collaborative skills. I was wondering if economists have been teaching this since John Nash postulated game theory.
If game theory is Quad D thinking, then that's high justification for teaching the rigor-relevance model.

Wednesday, December 23, 2009

Consumer Sentiment and PCE

This graph shows the relationship between consumer sentiment and personal consumption expenditures. As a forecasting tool, sentiment is not an indicator. There does seem to be a loose relationship between the two.

I really posted this blog so I could learn how to make dual Y-axis.

Cockroach Soup Lecture

A lecture on derived demand.

Sunday, December 20, 2009

What is Learning?

In his textbook, Microeconomics, Robert H. Frank writes in the introduction that after a semester ends, students rapidly forget the concepts they were taught in economics?

When I think of the skills and learning in my life, I think of a dependable set of behavior that I can reliably use in any environment. Thus, I say I have learned how to drive when I can get into a car and drive it anytime. Learning isn't a reaction such as blinking your eye. You don't learn how to grow tall--that's maturation.

Is learning making connections between two seemingly unrelated activities? Say that I have $100 and I trade it for food. Have I learned how to use money?

In Super Freakonomics, monkeys learned how to use money to buy grapes. One monkey traded money for sex. Is intuition learning?

In AP Microeconomics, if a student can reliably explain supply and demand concepts as those concepts apply to factor markets, product markets, public goods, and externalities, has that student learned supply and demand? Or does that student have to be able to apply those concepts to real-world situations?

Say that the goal of my AP Microeconomics class is a permanent change in behavior. For example, Tim Schilling, sees economics in everything. This is higher order thinking skills with real world application. I can attest that he is indeed an economist. Should this be my goal for every student?

Malcolm Gladwell writes in Outliers that it takes 10,000 hours of sedulous study to become an expert in a subject. For most learners, that would be about 10 years of work. An economics class is 90 hours plus whatever study a student completes outside of class.

In public education, is our goal to teach economics so students can "learn" or to teach economics so that students "appreciate" or "get a feel for" economics? Learning would require a career track. Most high school students aren't ready for a life major. It's no wonder they forget everything six weeks after the class ends.

Reformer, Willard Daggett, claims that using his rigor-relevance model will teach students how to compete in a global economy. He combine higher order thinking skills with real world activities. I have given extensive thought to this model, but I am unconvinced that applying this model to education results in learning. Many teachers misapply the model too. For example, many teachers at my high school think that any hands-on activity is Quad D. I point out that sweeping a floor with a broom is hands on but does not require synthesis, analysis, and evaluation.

What activities to you use in the classroom to teach economics at a high level, using hands-on activities that require higher order thinking skills?

Your comments are welcome.

Saturday, December 19, 2009

Misaligned Incentives in Teaching

Here is a letter I sent to the Des Moines Register this morning after read this letter to the editor.


Students, teachers, and administrative leaders suffer from a problem
of what economists call "The Principal-Agent Problem." Simply put, the
agents of the school, teachers-principals, teachers-students, have different

For example, Juan might take a math class because he wants to become an
engineer. Sophie might take the same math class because it fulfills a
graduation requirement. Thus, Juan might get an "A" while Sophie earns a
"C". Both students have different incentives and thus different outcomes in
the class. A similar principal-agent problem might be when a teacher
presents material because she thinks high school should be for college
preparation. Another teacher might believe that his class is for career
education. Thus, schools, parents, and school leaders fail to prepare
students because of misaligned objectives.

Basing teacher pay on student achievement is simply a misaligned incentive
to base teacher pay.


Mike Fladlien

Friday, December 18, 2009

Least-Cost Rule and Profit Maximization

This is the AP Microeconomics way of finding the least cost combination of labor and capital. I am just doing back flips that my Livescribe pen is working again after all of the software updates.

Thursday, December 17, 2009

How is Education Like the RONCO Veg-o-matic?

One can always cut an onion with a knife like its been done for centuries. The onion would be cut and the cutter would cry, but the onion would get diced for soups, dips, and tacos.

In the 1960s the RONCO corporation invented a kitchen dicing device to take the pain out of cutting onions. The device was the Veg-o-matic and is an example of technology in my opinion. One definition of technology is doing the same job faster. So now cutting onions was faster and the cutters didn't cry.

Teachers need to be like the Veg-o-matic. We have been teaching the same way for the past century and, perhaps, making our students cry. We are going to have to find a way to use technology to get more learning completed faster. Someone once said that, "Even if you are on the right road, you will get run over if you stand there." All of the techniques we are using to teach are right. We are just going to have improve.

I think teaching is labor-intensive. Therefore, teaching follows the Solow Growth Model experiencing diminishing marginal returns. A technological advance would lift the curve upward so that more could be learned with the same amout of labor. Like the mythical man in a barrel and a lantern looking for the truth, I am looking for how teachers can improve instruction without working longer.

What have you done to improve instruction? Please comment.

Monday, December 14, 2009

Technology and Education

How does a disruptive technology affect the composition of the labor force? My answer is that it depends on whether the technology is a gross complement or a gross substitute.

If the technology is gross complement, then the demand for skilled labor will increase as the price of the technology decreases.

If the technology is a gross substitute, then as the price of the technology decreases, the demand for labor decreases.

In education, teachers usually think technology assists in teaching. However, teachers love what technology can do for them, but they are slow to adapt. I think most teachers willingly accept new computers in their classrooms, but seldom adopt the software that can substitute for a teacher. I am wondering if the emphasis on teacher in-service should be on changing attitudes toward software in the classroom.

Sunday, December 13, 2009

Factor Market Pricing for AP Microeconomics

The firm in the perfectly competitive resource market will hire to the point where marginal revenue product equals marginal resource cost.

K/L and Solow Growth Model in Education

Merely adding more computers to a classroom does not increase student achievement. Training teachers how to use new technology does not increase student achievement. In order for student achievement to improve teachers must change the way they teach so that students use the computers in the way they are intended. The paper is here.

This is what happened at Muscatine High School. More and more technology was added to the classroom but teachers, including me, continued to teach in old ways. We have Smartboards, audience response systems, and projection lamps to use, but most teachers use books and worksheets. We continue to use technology in old ways. That is, email, PowerPoint, word processing. We do have a computer lab that that has content that is used for students who are behind in credits. Another conclusion of The Use and Misuse of Computers in Education was that just having a computer lab did not lead to student proficiency.

Using technology isn't just using Web 2.0 tools such as blogs and Wikis. Using technology is intelligent search for information and analysis, synthesis, and interpretation of the information applied to real-world situations. Just to produce a video and upload to YouTube isn't using technology in my opinion. Producing a video and upload to YouTube would be technology if my video was a contribution to the existing knowledge base. That's what Solow meant when he used A in his equation: A represented "total factor productivity" (Y= AF(K, N, eL). When total factor productivity increases, A increases, so how capital and labor interact combines to a higher output.

Using technology improves the current production with less inputs. One example in my life that has improved my efficient is PowerTeacher, a software program for teachers. We take attendance and use it as a grade book. If this is an acceptable example, then anything that allows students to get more done faster would be a technological advance. I have now digressed.

Saturday, December 12, 2009

Solow Growth Model and Education

Can the Solow Growth Model be applied to education?
Let's assume that the production function takes the form Y = F(K,L,H) where H is the ratio of skilled labor to unskilled labor. If this ratio is "1" then the economy approaches the steady-state shown in this graphic.
If society invests in more education, then both the investment and income curves will shift up and society will reach a higher steady state.
Both investment and income curves will shift up if more capital, (computers?) are given to each worker or student.
Just throwing computers at workers won't increase productivity. Workers must be taught. To paraphrase one economist, "When workers are given new technology, they use it in old ways." I think investment in best teaching practices with the best teachers will lead to continued growth. In other words, we should teach teachers to teach.
This is the goal of the Council for Economic Education. The goal is to give teachers the tools and the training to become effective in their classrooms.

Thursday, December 10, 2009

How to Plot the Lorenz Curve and Find Gini Coefficient

In a repeat of an earlier blog, I show an easier way to graph the Lorenz Curve and find the Gini Coefficient. I have learned much from this blog.

Wednesday, December 09, 2009

Willard Daggett on Globalization

This except is from Willard R. Daggett, “Globalization—Tipping the Scale of Economic Supremacy”, December, 2005:

“Before India began welcoming foreign trade and investors, its economic growth rate hovered around 3%. Three years after the 1991 reforms, the rate of growth jumped to 7% (Friedman, p.50), and since then, the country has experienced an overall 6% growth rate (Engardio, p.54).

Mr. Daggett is an educational reformer who espouses the Rigor-Relevance Framework. I believe the intent of his article was that America has to better prepare our students against foreign competition especially in the knowledge market.

At the time of this writing, the Economist projects GDP growth in the United States to be 2.5%. If you compare India’s 6% growth to US growth of 2.5%, it would appear that India is dominating the US. I don’t believe this to be the case. A look at the aggregate production function shows that most growth occurs when a country is an infant in capital accumulation. For example, the first tractor on a farm adds the most to productivity. The 10th tractor does little.

I believe that India is just playing catch up with the US and will hit a steady state. When India becomes an OCED country, it will have similar growth to that of the US as the two economies converge.

Mr. Daggett also writes that “Our ability to innovate remains unsurpassed.” America exports ideas such as Apple’s iPod. The iPod creates a demand for services like movies, music, and audiobooks. A increase in technology, an increase in human capital, or an increase in ideas will lead to higher productive growth according to the Solow Growth Model.

Comments such as the one at began this article are meant to instill fear and recruit converts into a reform.

Sunday, December 06, 2009

Lorenz Curve and Gini Coefficient

How do you calculate the Lorenz Curve and Gini Coefficient? In this video, I take raw data and show the steps to graph the Lorenz Curve and calculate the Gini Coefficient. This lecture is dedicated to Andrew Failor.

Saturday, December 05, 2009

Monopolistically Competitive Markets

A restaurant will often have empty seats or excess capacity. Seldom will every seat be in use by a patron unless the restaurant is at lunch time or other peak periods. This video shows that because many seats are often empty, a restaurant like Pizza Ranch operates at a higher average total cost than a perfect competitor.

Maslow's Hierarchy and Technology

Abraham Maslow postulated that human behavior can be modeled by a pyramid. In his model, basic needs are fulfilled first then more aesthetic needs such as acceptance are pursued. When a person reaches the top of this pyramid, the person is self-actualizing. As environmental dynamics change, a person moves up and down the pyramid seeking first to satisfy basic needs then higher wants such as love.

What happens when basic need satisfaction has little or no marginal cost of consumption? In other words, how do humans behave when there is an abundance of food, clothing, and shelter?

In Dan H. Pink's book, A Whole New Mind, Mr. Pink opines (I'm summarizing) that consumers will want value added to their life's in the form of "high touch" or greater artistic expression.

For example, Wal-Mart shoppers no longer want cheap clothing, but designer clothing. Automobiles are not only reliable, but safer and more stylish. I examined my own purchase of an iPod Touch and concluded that I bought the iPod for more reasons than the music I could listen to while working out. I bought the Touch because it was cool. It is for this reason that a "master of fine arts is now one of the hottest credentials in the world." (Pink, page 34.)

Technology has driven the cost of production to its marginal cost. Everything in an iPod is made in competitive markets according to the chief economist at Google, Hal Varian. Everything except the concepts or ideas about design and delivery of digitized products like music and movies. The concepts are made in the USA.

In a society where products are driven down to their marginal cost, only firms that can differentiate their products will retain profits in the long run. Firms wishing to remain competitive must constantly strive to innovate and add artistic value to their products or else find that the price of their product is being competed away in both domestic and foreign markets.

A goal for US schools, then is to teach creativity so our students will be able to compete in a global economy. Educational reformer, Willard Daggett, has stressed that learning should have rigor and relevance to the learner so as to develop skills such as creativity. There is no doubt in my mind that creativity is a 21st Century skill. How do we begin to teach creativity in AP Macroeconomics?

Perhaps, you will find, A Whack on the Side of the Head, a springboard in your life to being more creative. I found Thinkertoys to be brilliant. In this outstanding TED Talk, you will learn how play sparks creativity.

In the best-selling book, The World is Flat, author Thomas Friedman, makes the point that technology has changed the landscape of the world. As educators, we must prepare our students for the work place with skills that can not be digitized and competed away. Creativity is one of those skills.

I look forward to your comments.

Wednesday, December 02, 2009

What is Technology?

Technology is an idea that allows more to be produced with the same inputs. Technology isn't always a new capital good or capital improvement. When technology takes the form of an idea GDP or income increases. As an example, consider my iPod Touch.

The iPod Touch is a new capital good. But I didn't buy the iPod for the product itself. I bought the iPod for the services it can provide. I now watch my favorite television show, House, listen to any music I want any time, and attend iTunes U for classes from the best instructors in the world. The iPod as increased my demand for complementary products.

As the great Oliver Blanchard wrote in his book, Macroeconomics, production equals income equals demand. My demand creates income.

How has your demand changed after you've bought a new "product"? As automobiles become safer, do you drive more and demand more gas? As HDTV evolve do you demand better sound systems and more comfortable chairs?

Technology improves our life my making quality changes to a product. Economists often say that quality improvements are not captured in GDP. That might be true, but whatever our standard of living is, I would not want to return to the 70s and adopt that standard of living.