Sunday, July 31, 2011

Rap in Economics

The rap "Fear the Boom or Bust" is here.

My fingers can't type of this little netbook any more tonight.  This is it for this post.

Can't Legislate Recovery

Cartoonist, Dick Adair, drew this. 

I just don't see how anyone can think the government can legislate recovery.  A long time ago, the government mandated that the natural rate of unemployment should be 4% at a time when the natural rate was round 5%.  The economy saw inflation like never before.  Think about our traffic laws.  There are speeding laws yet people speed.  The economy doesn't respond to laws anymore than you or I when we are driving.

Elasticity of Supply

I was researching the Laffer Curve when I began to wonder about the elasticity of the supply for labor and the shape of the Laffer Curve. 

I usually use a mid-point formula but this time I wanted an exact supply elasticity formula.  Robert Frank uses 1/slope times the ratio of Price to Quantity for the point formula.  This makes a lot of sense to me because of the comparision between the x and y axis.  But why does this formula work? The formula is Price divided by (Price minus the vertical intercept).  As you can see from points A through D on the supply curve, the elasticities are the same as Mr. Frank's.  This formula only uses the y axis.  I'm dumfounded.

Saturday, July 30, 2011

Friday, July 29, 2011

Economics Jokes

Inspired by Economists do it with Models, by Jodi Beggs, I drew Lexi.  Lexi is an economist who does it in an Edgeworth Box.  Most men like her supply curves.  Lexi supplies on demand.

Without a doubt, the best source of jokes about the dismal science is at Econosseur.

My comics still have a way to go before I can call myself an artist.

Thursday, July 28, 2011

Jokes in Economics

One afternoon in 1974, Arthur Laffer drew the Laffer Curve on the back of a napkin.  Laffer’s curve showed that there was an optimal amount of taxation that would maximize government revenues.  It has been said that one of the great advantages of the Laffer curve is that you can explain it to a congressman in half an hour and he can talk about it for six months.

Economists simply have not been taken seriously most because they disagree.

The fact that economists often disagree encouraged George Bernard Shaw to quip, “If you laid all of the economists end to end, they still would not reach a conclusion.” 

Economics is the only discipline where two people can win a Nobel Prize for saying two exactly opposite theories. 

Even Winston Churchill also made light of economists tendency to disagree. “If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.”  This is a lot like the current debate on the national debt.  Democrats want to increase taxes and republicans want lower taxes.  If you are a Republican, you think a low-tax country is the right place to live, right? You might be interested to know that economist, Greg Mankiw, has proved that North Korea is the lowest tax country. (Laugh Track)

Yes, it’s true that economics is a social science and not an exact science.  I wish the wisdom of George Humphrey would have been listened to during the last one trillion dollar stimulus package.  George said, “I don’t think you can spend yourself rich.”

Harry S. Truman was often frustrated with economists. Harry noted that economists often give two answers to the same question. “Give me a one-handed economist!” Harry said.  “All my economists say, ‘On one hand.  On the other hand’”.

Economists don’t get respect even from one of their own.  One of the one of most famous economists, John Maynard Keynes said, “I’d rather be vaguely right than precisely wrong.” Sounds like Yogi Berra quoting Shakespeare doesn’t it?

Rodney Dangerfield once asked an economist for her phone number and she gave him an estimate. 

Yeah, economics is an imperfect science. 

Paul Krugman once said, “There are three kinds of liars.  There are liars, damn liars, and statistics.”

It’s also true that economists have predicted 9 out of the last 5 recessions. 

Here’s a story I would like to think is true.  When Obama asked some economists about growth rate in the economy, they said, “What do you want it to be?”

Finally, economists make assumptions when making their forecasts.  Here’s a true story by Anotol Rapoport as reported in the Scientific American, 1967.

"Two policemen are considering the problem of catching the bandit. One of them starts to calculate the optimal mixed strategy for the chase. The other policeman begins to protest.
'While we're doodling,' he points out, 'he is making his getaway.'
'Relax,' says the game-theorist policeman. 'He's got to figure it out too, doesn’t he?'" 

Humor often exposes the truth and makes us laugh.  I hope this pencast has helped you see the truth and made you laugh.



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Wednesday, July 27, 2011

Inputs and Outputs

My students have trouble understanding inputs and outputs especially in the factor market.  This cartoon is intended to show the process of turning a worm into an egg and providing a memory device.

The worm looks like an "I" so it's the input.  the egg looks like an "O" so it's the output.  the chicken has a production function, possibly a Cobb-Douglas that turns the worm into an egg.

Hope this works for you as well as it does for me.

Rational Prepping for School?

I drew Leah as a typical high school girl.  As a typical girl, she'll spend 45 minutes a day getting ready for school.  Is this rational?

Whenever one sums up the costs and benefits, normative value judgments come into play.  One must look at Leah's utility function and conclude that for Leah, the benefits outweight the costs. 

Liquidity Preference and Bonds

When households hold more money as a medium of exchange than they want, they will buy bonds.  This increases the price but lowers the interest rate.

When households want to hold more money for exchanges, they will sell bonds, lowering the price and increasing the interest rate.

Buying and selling bonds moves the market into equilibrium.


Garr Reynolds of Presentation Zen is a master at moving audiences with his deft use of visuals and story telling.  One of his blog posts about bamboo is a source of inspiration to me.  For those facing adversity and want inspiration, the post is here.

Bamboo is one of the four gentlemen of Japanesse culture.  My love for bamboo goes back to seventh grade when I first began to pole vault. 

Duration of Unemployment

The WSJ has an interactive graphic, article, and comment forum here.

This complex subject inspires heated debate in which debators chase red herrings, bring irrelevant topics to the table, and often make poigant comments. 

I checked Iowa's unemployment and according to the interactive, the unemployment in Iowa was 6.1%.  This is well below the national average.  The duration of unemployment seemed to fit historical data to me in which the average spell of unemployment is less than 26 weeks.

When my job becomes obsolete, I am structurally unemployed.  When I quit my job to move to a higher paying job or another job, I am frictionally unemployed.  When the economy dips into a recession and I lose my job, I am cyclically unemployed.  Construction jobs fall into the last category.  I believe, that 4% of the 9.2% unemployment rate is made up of thos cyclically unemployed.  The remaining 5% in my opinion are structurally unemployed.

A person whose job becomes obsolete will not return to the workforce.  There are exceptions, but this is why the length of long-term unemployment is lasting a year or more.  It's not that there are no jobs out there, it's that the skills of the unemployed do not match the skills needed in the workforce.  You can blame education for not preparing an agile workforce, you can blame globalization for competition, and you can blame the stimulus package.  But not all sectors have high unemployment.  Health, business services, and education are booming.  The workforce has to match what goods are being demanded.

The workers are losing bargaining power too the longer they are unemployed.  They lose skills too.  The psychic costs are huge.  Unemployment for those actively seeking employment is horrible.

Tuesday, July 26, 2011

Jokes in Econ a Repost

Interest Rate Effect

When the price level changes from 110 to 112, a 1.79% change, the AD/AS model predicts consumption of real GDP will fall from point 1 to point 2 as shown on the bottom graph.  This in interpreted to mean that AD has a downward sloping curve. 

It is possible to see how the interest rate effect is exogenously affecting the demand for real GDP by looking at the the money market shown in the upper quadrant of the diagram. 

When the price level rises, consumers demand more money to make purchases.  Their demand shifts from point 1 to point 2 and the interest rate rises to allocate a fixed amount of money supply. 

So the price level rises and people buy less.  I believe that the higher interest rate induced savings which I denote as an S in the lower diagram.  A change in the price level upward, also increases the nominal interest rate that induces savings.  Of course, if the price level were to fall, interest rates would fall.

Mechanics of Interest Rate Adjustment

The loanable funds market is a difficult market conce ptualizing and aggregating several interest rates in the credit market.  Interest rates for all loans both business and personal are modeled in this market.

We begin at point 1 where the nominal interest rate is 5%.  There's an increase in demand for funds.  (An increase in demand means businesses are issuing bonds or increasing the supply of bonds.)  The demand now shifts to point 2.  At 5%, point 2, demand is now greater than supply so there is a shortage of loanable funds at 5%.  Competition for scare funds forces people to make different choices and the rate now raising to point 3 where the interest rate is now 6%.

Note that there is a change in the quantity supplied.  That means that the higher interest rate induced lenders to buy more bonds and increase the quantity of LF supplied.  Those buying bonds and supplying credit are delaying their current consumption for more later.  This is evidenced by the higher interest rate given for their funds that will allow them to consume more in the future.

Monday, July 25, 2011

Emily Deschanel of Bones

GDP Effect on Loanable Funds

When households become more wealthy, the want a place to save their wealth.  If households demand more bonds at every price, then the demand for bonds shifts to the right.  This demand translates into an increase in the supply of loanable funds. In both cases the interest rate falls which intuitively means there are more investment opportunities.

Some economists might disagree.  My first reaction is that I believe there is a marginal propensity to save, MPS.  An MPS of .25 means that I save 25% of any change in income.  I believe I will buy bonds with this.

I also believe when GDP is expanding people feel optimistic about the future and begin to plan by saving.  So an increase in my savings translates into investment just as the model predicts.

Sunday, July 24, 2011

Ex Ante and Ex Post Positions

Jim Allen, a cartoonist, The Beauforts, has inspired me to use cartoons to teach economics this year.  This is a serious effort on my part to obtain baseline data and apply statistic analysis to the outcome.  I believe I will grow mathematically, artistically, professionally, and personally. 

Jim's model is outstanding and he has a book soon to be published based on empirical research. 

Our students have changed in cognitive ways.  One way, is their visual interpretation of material.  We must change as well.

A Google search revealed hundreds of research papers on the benefits of using cartoons in the classroom.  Why isn't it done?  Last year, I wanted to use Bit Strips to teach law and talked myself out of it.  I regret that.

Money Demand in the Loanable Funds Market

When prices rise, money income buys less.  Theory predicts that households will demand more money in the money market and the nominal interest rate, i, will increase.  This assumes that the supply of money stays constant.  In the graph on the left, money demand changes from point 1 to point 2. 

As households demand more money the demand for credit in the loanable funds market shifts to the left and the real interest rate, r, increases.  I believe that (1) the higher rate of interest induced a higher amount of savings (2) in the short-run when income is fixed and constant only a higher rate of interest would compensate lenders for the opportunity cost of delaying the use of the money now; (3) because the price level increased, the real rate of interest must increase or lenders will receive less in future buying power; (4) the effects are exaggerated here for teaching purposes; (5) in order for the interest rate to rise, the price of bonds would have to decrease meaning that inflation fears required a higher return on investment to offset the loss in purchasing power due to inflation.

On some level in my mind, choices between consumption in two time periods influences the interest rate.  If the two rates were not equal, then households and lending institutions would choose to either save or spend more in the current period. 

Supply and Demand Joke

Jokes have to have an element of truth to be funny and much of economics is supply and demand.  How does the joke explain intertemporal choice, uncertainity in the market, market failure, preferences, utility, and choice?  The joke only has an element of truth.

Saturday, July 23, 2011

Liquidity Effect

When the economy needs a boost into recovery, the FED buys bonds.  It's like when you buy items at the store, the store owner now has more money to buy and save.  So when the FED buys securities from banks, the banks now have more money to lend.  When there's more of anything, it's less scarce and the price falls.  In this case, the nominal interest rate falls in the money market. 

In the loanable funds market, buying a bond is the same thing as increasing the supply of loanable funds.  This is because buying a bond is making a loan or supplying credit.  Thus, the supply of LF shifts from S0 to S1 and the real interest rate falls assuming everything else stays constant.

In the language of AP macroeconomics this is called the liquidity effect. 

It's always customary to discuss the possibility of a liquidity trap and mention Japan's experience, but I am not going to go into it.  For students in AP I think just understanding how the transmission of FED buying adds liquidity to the market is enough.  Of course, FED selling would take money out of the economy, raising both nominal and real interest rates.

State of Education

Found on Chartporn.

The State of Education

Friday, July 22, 2011

Loanable Funds

Take a hypothetical case of saving.  Juan has a lot of money in his pocket and doesn't need or want to money to make purchases.  Juan wants to save part of his money so he goes to his broker and buys a bond.  Juan has demanded a bond.  By demanding a bond, Juan is loaning money to whoever issued the bond.  Juan's actions increase the amount of loanable funds.  In both cases the interest rate falls.  Let's look closer.

When Juan demanded a bond, the price of the bond when up, but the interest went down.  By supplying more loanable funds to the market, there's more to loan out.  When there's more to loan out, the price of the loan goes down.  In the loanable funds market, the price of a loan is the interest rate.  This is shown on the graph, LF, as a shift from S0 to S1, or a movement from 1 to 2.  It's important to notice that the demand for bonds corresponds to the supply of loanable funds.

This is not shown, but a decrease in the demand for bonds, would shift the supply of loanable funds to the left raising the interest rate.  This is intuitive because the price of bonds would decrease, so the interest rate on bonds must increase.

Wednesday, July 20, 2011

Story of the Fed

A comic book by the New York Fed is here.

I use this in class instead of the text.

A Penny Saved Comic Book

The New York Fed made a series of comic books available for free.  A Penny Saved is now unavailable.  You can download a copy from Google Documents here.

Perhaps this download will "save" you from having to go without.

Cartoons in Education

In this three panel cartoon, there's a problem, a decision making process, and a solution.  This type of cartoon is the brain child of Jim Allen, founder of Xtreme Cartooning.  A glimpse of his exciting work based on empirical data is here.  His book is due out soon.

I have been using cartoons in my classes for years but not in the way Mr. Allen shows in his book.  His technique is robust and vigorous.  It is my hope to learn the process before the start of the academic year and compile research.  I have much to learn.

Dr. "I've Had My Fill"

I drew this sketch of Dr. Phil in ten minutes.  I'm tired of seeing this man on television.  I know it's now time for me to get back to work.

Tuesday, July 19, 2011

Installment Loan Worksheet

Here is a worksheet I wrote to teach personal finance.  Specifically, it is a worksheet to help students understand an installment loan.  Here is the key.

I think these are excellent worksheets that require a high amount of rigor.  Let me know what you think.

Returns to Education

While leaving the Community Y today, I saw a young mother scolding her four-year old boy.  This is only speculation but I saw the mother and a kid come out of a class where apparently the class didn't offer the benefits that the pair expected.  I heard a friend of the mother say, "That was a waste of $20."

That sentence sums up for me a lot of what is wrong with public education.  That is, people will invest in their education if the benefits are greater than the cost.  The problem with comparing costs and benefits is that they arrive at different times.  But in this case, the mother and child didn't think the class was worth their time to complete.

So I think a class should offer benefits that the learner values above the cost of tuition.  If the teacher isn't offering instruction that is beneficial, the instruction will fail.  What if the instruction that we teachers are providing isn't preparing students for employment or providing benefits that incite a student to learn?  Then our schools are failing.

Monday, July 18, 2011

Exam Cram Now on Mall

My exciting macroeconomics review app is now on sale here.

My AP passing rate this year was 80% and this app was one of the reasons.  This app has all of the vocabulary you need and 70 multiple choice questions that challenge you.  You can take the app with you so you can study when and where you want to learn. 

Sunday, July 17, 2011

Many Moving Parts

The St. Louis Fed has a labor market report here that cannot be beat.

Income Elasticity for Food

This graph is taken from the website,   The graph shows the percentage of budget appropriated to food for those individuals that earn less than a $1 a day.  The point is: food is income inelastic.  That means that when income increases the quantity demanded  of food increases by less.  The elasticity that I remember in the book was .68.

The authors point out that hunger might not be the reason why the poor are stuck in poverty.  When given more income, the poor do not consume more food, but food with higher calories.  These foods with higher calories might not be high in micro-nutrients shown to improve productivity and health.

This book is superb and a fun read for those interested in economics.

Social Conservative Michelle Bachmann

Social Conservative presidential candidate, Ms. Bachmann, is being questioned by the GOP about her platform.  Where does she stand, they ask?  I think she is standing on clouds.  She's against gay marriage among many other issues that go against good old American values.  I think she's a strong candidate, but I don't agree with some of her issues.

Friday, July 15, 2011

Let's Get the Rich

This joke is more truth than humor.

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this: 

The first four men (the poorest) would pay nothing. 
The fifth would pay $1. 
The sixth would pay $3. 
The seventh would pay $7. 
The eighth would pay $12. 
The ninth would pay $18. 
The tenth man (the richest) would pay $59. 
So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20."

Drinks for the ten now cost just $80
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' 
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay! And so...

The fifth man, like the first four, now paid nothing (100% savings). 
The sixth now paid $2 instead of $3 (33%savings). 
The seventh now paid $5 instead of $7 (28%savings). 
The eighth now paid $9 instead of $12 (25% savings). 
The ninth now paid $14 instead of $18 (22% savings). 
The tenth now paid $49 instead of $59 (16% savings). 
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. 
"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man, "but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"
"That's true!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!" The nine men surrounded the tenth and beat him up. 
The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill! 
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

This article in Vanity Fair is about getting the rich.

I propose the following thought test.  Suppose you walk into a bar and someone tougher than you starts something.  Who do you want to defend you?  Do you want the average man/woman or the biggest and toughest man/woman?  Suppose you are in a tornado.  Which home would you want to shelter in?  The house made of straw or the the one made of stone.  The rich protect and contribute more than the poor.  They should get some breaks.

Uncertainity and Change

While waiting at the grocery store yesterday, I noticed that there were five lines each with a checker.  I thought that it would be a quicker checkout if the store used a "first available" checker format like they use at the post office.  At the post office there's one line and several windows.  When the next window open up the person at the front of the line moves to that window.  I was wondering if my age was making me risk adverse.

In my mind, I would rather have the sure thing of being served by the next cashier than to take a chance of getting in line behind a slow shopper or one who used coupons.  So I was wondering about my attituted toward risk and dynamic change in the workforce.  Would I rather use the same teaching methods I have always used or try something new?

I think that children have not changed very much in their ability to learn.  I think learning for anyone approaches the square root of x.  So trying a new technique is inefficient when you get 180 students a day like I do.  There's an old saying that says, "If you do what you've always done, you'll get what you always got."  I think that there is room for me to grow in education but given my risk adverse nature, I'm sure this is one reason why education has not evolved to the point where educational reformers think it should be.  I believe I am one of countless individuals who are educators and risk adverse.

As anecdotal proof that we are risk adverse, why is it that the hottest topic in education is insurance protection for our families? 

Wednesday, July 13, 2011

Calculators in Education

NBEA (Again)

The use of graphing calculators has shown that pupils reached higher levels of thinking and could explain their thinking better. Furthermore, the use of graphing calculators has shown to foster a progressive evolution of mathematical thought from concrete to abstract and from material to theoretical. Business teachers should be encouraged to use this technology to foster growth in financial literacy. Couple the empirical results of research on learning with graphing calculators and a desire for home ownership, and teachers will have a strong foundation for teaching personal finance in the business curriculum.

Home ownership represents one of the biggest financial investments a consumer will make as their decision will span decades of payments and impact the choices they will be able to make. Home ownership is part of the Iowa Core Curriculum mandating that students “make informed and responsible decisions about incurring and repaying debt to remain both creditworthy and financially secure.”

Amortization calculations provide an excellent opportunity to integrate technology into the business curriculum and develop workforce skills. The calculations involved in building an amortization table are rigorous and relevant and provide an entry for teaching personal finance that will impact students the rest of their lives. The concepts learned from teaching about home finance can be applied to accounting, law, and economics to round out the business curriculum. In addition, using technology can remove much of the worry about computational errors and allow students to focus on reasoning and problem solving.

Debt Ceiling

My latest contribution to the Muscatine Journal.

Obama should watch his head and perhaps duck as he approachs the debt ceiling and enters into negotiations on reducing the debt. 

I think the ceiling will be raised but there will be some serious concessions made.

I think that the government should listen to John Cummuta's Turning Debt into Wealth CD so we can begin economic recovery. 

Employment by Sector

The WSJ has an interactive here on job losses and gains here.

Business services, health care, and education lead the way in job gains, while construction in new home has seen the most job losses. 

Tuesday, July 12, 2011

Poor Economics

This book is reviewed by the best economic minds in the world.  Both Amartya Sen and Robert Solow reviewed this book with glowing reports.  In addition, the author has a website in which he has all of the tools to teach the book.  Russ Roberts had a podcast this week on 

I can't wait to read it and listen again to the podcast.

Monday, July 11, 2011

Many Moving Parts

Many Moving Parts is a publication from the St. Louis Fed on the labor market. Section III focuses on unemployment. 

Motor Fuel and CPI

Motor fuel only has a weight of 5.482 according to the BLS. I would think this relatively small weight would not be enough to push the consumer price index higher.  With gas prices changing to wildly, it looks to me like prices are steadkily increasing.  This shows a steady increase in all commodities and labor inputs. 

The latest observations for all items (FRED):

2011-05: 224.804

2011-04: 224.433

2011-03: 223.490

2011-02: 222.270

2011-01: 221.062

Sunday, July 10, 2011

Who is Unemployed?

Data complied by Haver Analytics shows that those who did not earn a high school dipolma have an unemployment rate approximately 16% as compared to 5% for those with a Bachelor's degree.  This data is consistent and confirms that education leads to employment.

Hystersis and Unemployment

My wife contacted poison ivy 10 years ago that has permanently scarred her.  Long after the itching has stopped and the oils have disappeared from her skin, she has changed her behavior to avoid any chance of contacting poison ivy.  What if the effects of unemployment were so scarring that a worker permanently became unemployed?  In my humble mind, this captures to concept of hystersis.  A Washington Post article is here that contains data.

Does the economy have a memory?  I think that much of unemployment comes from structural changes to the labor market.  For example, suppose Rosetta Stone replaces high school Spanish teachers and these teachers are either too old to be retrained or the teachers need an very long retraining time before they can reenter the workforce.  These teachers are structurally unemployed.  As technology destroys old jobs more jobs like teaching will be eliminated.  I see security jobs being replaced by drones and cameras and GPS chips.  I see management jobs being replaced by real-time data acquisition program that are examined in Excel on desktops.  I see a permanent increase in the natural rate of unemployment from 5.3% to 10%.  Even when GDP picks up, I believe you'll see a jobless recovery as waste and efficiency is removed from the labor market. 

I often wonder if unemployment hits sectors at different times.  For example, first it was manufacturing but next it will be teaching since our schools are tied to preparing students for manufacturing jobs.  But the technology sector will not be hit.  It will explode.  So unemployment doesn't affect everyone the same. 

Saturday, July 09, 2011

Unemployment Data

I'm mad.  The unemployment data shows an increase to 9.2% unemployment in the United States.  The republicans on C-SPAN blame the Obama Administration.  It's pretty simple to me how unemployment works.  Workers should get paid their marginal product.  Structural changes along with employers weeding out inefficiencies are resulting in what I call long-term unemployment.  I believe the natural rate will increase to 10%.  In the next couple of blogs, I want to discurss several theories of unemployment including Hystersis.  There are many theories.

Wednesday, July 06, 2011

Using an Amortization Table to Teach Business Education

The amortization table pictured is for a $100,000 home, financed at 6% for 30 years.  How can this partial table be used to teach business concepts?  Let's begin with the amount of the home mortgage, $100,000.

The amount of the mortgage is called the present value.

To calculate the monthly payment, one divides the interest rate, 6%, by 12 to get .005.  Use the formula: M = Principal[( i(1+i)^n)/((1+i)^n-1))] to obtain the monthly payment, M.  N = 360 or 12 times 30.

The monthly payment contains both principal and interest.  To find the amount of interest included in the monthly payment, multiply $599.95 times (.06/12).

The principal paid is equal to $599.95 - Interest paid.

To find the principal balance, subtract from the balance the amount of principal paid.

Students can use this table to see: (1) The part of their monthly payment that goes to paying interest and the part that goes to principal.  In the early stages of the loan, most of the payment will go toward paying off the interest.  In the later part, most of the payment will go to paying off the principal.  Students can see that making an extra payment will greatly reduce the amount of interest they pay.  (2)  After the table is built, students can change the interest rate and see how their monthly payment will change.  (3) If the interest rate changes, students might see that they can either afford a bigger house or a smaller one depending upon the direction of the change.  (4) student can see how their balance goes down by the principal not the payment.

Students can gain 21st Century skills by using Microsoft Excel to make the mortgage calculations.  Students are actively engaged in learning and can see immediately the results of their work so behavior is reinforced.  The visual data also aligns with the way today's learners learn.

The amortization table can be combined with hundreds of different business concepts such as the internal rate of return, ARM, APR, and effective interest rates to teach employment skills and personal finance.  The amortization table should be the backbone of the business math, business accounting, economics, and computer applications curriculum as the amortization table summarizes all of the major concepts in business.

Saturday, July 02, 2011

Peter Schiff on the 2008 housing crisis

This is from a documentary film by former econ student, Jimmy Morrison.

Friday, July 01, 2011

Strossel Thinks College is a Scam

Here's the link to make you think.

On so many levels is Mr. Strossel wrong.  People who attend college don't discount the future as much as those who don't and have different endowments.  All this show was was an attempt to gain media attention.  I think a degree from any public institution shows that the holder has the ability to network, abide by implicit rules, and produce under varying constraints.  Those who can't drop out of college and drop out of the workforce.

It's true that tuition has increased 900% since 1980 and this increase shows how inelastic the demand for post secondary education is.  Businesses demand education and high school graduates demand college.

Strossel said he didn't go to journalism school.  He's a briliant man, but there are few individuals who can accomplish what he did without schooling.  I think he applied the fallacy of composition to society as a whole and he would not have made that logical error if he had had a logic class in college.

Nominal or Real?

In AP Macroeconomics, I teach the Loanable Funds Market which is a credit market.  This is a conceptual market since there are hundreds of different interest rates.  On the LF Market graph, the real interest rate is graphed since creditors care about the real return they get.  The real return is a measure of how many goods can be purchased in the future.  Thus, a high inflation rate will erode the real return.  It's assumed that no creditor would make a loan in which they received a negative return since they creditor would be better off consuming the money now instead of lending it. 

So here's my argument.  The Fed Funds Rate is an overnight rate given to member banks to meet liquidity needs.  On the AP exam, we use nominal interest rate to describe this behavior since the member bank is obtaining a loan for other reasons than consumption.  It is for this reason that the nominal interest rate is used even though it's a credit market.

I'm writting an ebook on the Loanable Funds Market that will be completed in late August for a small fee of a $1 for those interested.  I will cover the bond market and both Fiscal and Monetary Policy. 

Predisposed Thinking in Microeconomics

While studying how risky assets equate with non-risky assets today, the author of my text, Hal Varian, derived a formula that resembed the same formula Oliver Blanchard used to describe the inflation expectations augmented Phillips Curve.  The two curves also resembled Okun's Law.  Since three saliant curves in microeconomics have the same mathematical foundation, I was wondering if economics are predisposed to analyze problems the same way since the tools are the same.

Maybe I've been watch too many episodes of Bones, but are our tools of economic analysis biased?  It's like the old saying that if your only tool is a hammer then your only problems have to be nails.  What I mean is that economists try to fit the behavior to existing models then to derive models that fit the behavior.  Human behavior is pretty much homogenious so maybe our tools are sufficient enough to predict rational behavior.  Yet, I wonder.

Let's take unemployment.  A brilliant model of unemployment postulated by British economist, Richard Layard, suggests that unemployment is the result of labor being paid a real wage greater than their marginal product.  In addition, unemployment benefits have been extended too long so incentives diminish.  His model, in my opinion, predicts but isn't the standard theory being taught.  I'm suggesting that economists are using the wrong tool, a hammer, to fix a problem that isn't a nail.  And I'm suggesting that economists are predisposed to think this way because the models lead them to the wrong conclusions.

When Paul Krugman wrote, A Return to Depression Economics, I think the title of his book sums up how economists think.  How can you compare the 21st Century to the 1930s?  He grabbed a hammer.