Daily Review -- AD Shift

We had a 10 minute discussion in my macroeconomics class yesterday about the difference between the real balances effect and the wealth effect.  Here's a question taken from AmosWEB.com.  See if you know the answer:

8: A decrease in consumption and a leftward shift of the AD curve is most likely caused by:

(A) an increase in interest rates.
(B) a decrease in physical wealth.
(C) an increase in financial wealth.
(D) expectations of rising inflation.
(E) a decrease in taxes. 

(A) is incorrect because a change in interest rates when the money supply is held constant would move the economy along the curve.  (B) is the wealth effect and is the correct answer.  (C) is the wealth effect but would move the curve to the right, not left.  (D) Expectations shift the curve too because people will buy now.  (I'm not sure that the AD curve moves because the Phillips Curve shows that the AS curve can move to the left.) (E) A decrease in income taxes would shift the AD curve to the right.

AmosWEB answer A, which is the interest rate effect and a reason for the downward sloping AD curve.  If the interest rate changes and everything else stays the same, then there would be a change in quantity of aggregate demand.  The question wants a shift in the curve so the underlying fundamentals had to change such as a change in the money supply or wealth.

Gas Prices

Gas prices are the result of supply and demand and not manipulation of markets as the GOP suggests.  Some factors that contribute to rising gas prices might be: Iran, imperfections along the supply chain,  state and local taxes, environmental regulations, and imperfect information.  The spot price of crude today immediately impacts the price of gas because the spot price determines the cost to replenish inventory.

In Iowa, Ethanol subsidies have expired and have added 10 cents to each gallon.  I believe that blaming the president for higher gas prices has several logical fallacies including Red Herring and Ad Hominen.

Logical Fallacies in Economics

This time of year is when my mock trial competes so I review my logic.  Here are a couple logical fallacies that I was thinking about.

Tragedy of the Commons.  This is a slippery slope.  If everyone starts doing something then the a whole bunch of bad things will happen.  This is the domino effect used to justify the Vietnam War.  When Bernanke contemplates changing interest rates, he often thinks of the consequences to the markets, consumers, and the world.  Is this a slippery slope?

Fallacy of Composition involves the reasoning that what is true of the part is true of the whole. As an example,  if I were to stand up at a baseball game, then I'll see better. Therefore, if everyone were to stand up, then everyone would be able to see better.


Logical fallacies often lead to some awesome jokes.  If you have any you'd like to share, put them in the comment section.

Jokes in Economics

The old man stood in front of my class and said, "My time is worth a lot more than your time.  Why?"
One of my students said, "Because you're a millionaire?"
Another said, "Because you run a big company?"
The old man, said, "No.  My time is worth more than yours because I have less of it."

Scarcity determines the relative worth of a good even time.

Daily Review -- Phillips Curve

This question was asked by a reader:

Which of the following could cause simultaneous increases in inflation and unemployment?

a. a decrease in government spending

b. a decrease in the money supply

c. a decrease in the velocity of money

d. an increase in inflationary expectations

e. an increase in the overall level of productivity

The correct answer would be "D" because inflationary expectations shift the Phillips Curve to the right which is the same as saying that the aggregate supply curve shifts to the left.  In other words, stagflation occurs.  A decrease in government spending would shift aggregate demand to the left as would a decrease in the money supply.  A decrease in the velocity of money would mean that the current quantity of money would have to turn over less to buy aggregate supply so this is another shift to the left in AD.  Productivity shifts the supply curve.

Reading is a great way to learn, but there comes a time when you must test your knowledge with questions.  My free app does that.  

Daily Review -- Unemployment

This graph, shows the relationship between higher education and earnings.    Identify the statistic for each formula below:

1.  Unemployed/Labor Force
2. Labor Force/Civilian noninstitutional population
3. Civilian noninstitutional population minus discouraged workers.


My answers are: the unemployment rate, the labor force participation rate, and the labor force.

According to the Bureau of Labor Statistics, the Labor Force Participation Rate is 63.7.  This is historically low.  The rate is falling as more drop out of the labor force.

Daily Review -- Debt or Deficit?

In the graph to the right from Scott Grannis, can you identify the years in which the Federal Government ran a budget surplus?

According to this graph, the government spent less than than what was collected in tax revenue from 1997 to 2002.  Since the national debt is the accumulation of all deficits, the national debt grew.  The green bars represent recessions.

In a recession, is it morally correct to have spending on welfare, unemployment benefits, and Title XIX increase to help those out of a job?  In the theory of the government, you expect deficit spending to increase during a recession and spending to decrease during recovery.  Some of the spending changes because of automatic stabilizers but I think it's hard to cut spending once people get used to it.

Daily Review -- Current Account

This quote is from the Economist, "Consumption Economics, The incredible shrinking surplus.

The corollary of a cheap currency is a large current-account surplus.

Can you explain the mechanism that results in a current account surplus?

Say the Yuan trades 2Y to $1.  A Yuan is worth fifty cents.  But if the exchange rate drops to 10Y to $1, now the Yuan is worth ten cents.  Now, goods in China become relatively cheaper for foreigners and China's exports increase.  The definition of a trade surplus is when exports are greater than imports.  So when the Yuan is cheaper, their current account moves toward surplus.

The article is in this week's economist.  If you are not a subscriber, you can read five articles a week for free.  The link is here. Reading the Economist is the highlight of my week as intelligence pervades every page.  Just get a subscription.

Daily Review -- Random Questions.

0. One country enjoys a comparative advantage over another in producing oil when
   1. it has more oil than the other country.
   2. it can produce oil at a lower opportunity cost than the other country.
   3. it does not need to import oil.
   4. it wants to export as much oil as possible.
      
1. Drought conditions create water shortages. Assuming that water consumption can be measured for each household, select the water policy below that is most likely to cause the greatest reduction in water use by urban households.
   1. Give water to users with instructions to use it wisely.
   2. Charge a flat (constant) fee of $50 per household, irrespective of the amount of water used.
   3. Raise the price of water from 2 cents to 50 cents per gallon with the biggest water users (per capita) paying the highest price per gallon.
   4. Charge $20 per month and limit household consumption to last year's monthly
      
2. As more labor is added to a fixed amount of input, the rate at which output goes up begins to decrease. This is called
   1. diminishing marginal utility.
   2. diminishing marginal productivity.
   3. diminishing marginal costs.
   4. diminishing marginal profit.
      
3. If the cost of sugar rises and sugar is a major ingredient in jelly beans, then the jelly bean
   1. demand curve shifts to the left.
   2. supply curve shifts to the left.
   3. supply curve shifts to the right.
   4. demand and supply curves both shift to the right.
      
4. Which of the following is most likely to benefit a debtor?
   1. unanticipated deflation
   2. anticipated deflation
   3. unanticipated inflation
   4. anticipated inflation
      

For the following question, choose the word to complete the sentence that most accurately reflects the relationship, definition, or similarity of the first pair of words in the sentence:

7. Parts are to the whole as C+I+G+X is to
1. trade surplus
2. gross domestic product
3. disposable income

0. C 1. A    2. B    3. B   4. B   7. B 

These questions were taken from http://score.rims.k12.ca.us/economics/sample_questions.html

Logistics -- Procurement

I wrote a reading strategy for Logistics.  This is for my class.

Learning Economics Through Jokes and Cartoons

Do our children have to pay for government spending now with higher taxes later?

I've been inspired by the book, Learning Philosophy Through Jokes, by Thomas Carthart, and I was wondering if the same would work for economics.

When a cartoon is used, a student can see what the teacher means.  If visual instruction is not effective, then why is the growth on Youtube.com so exponential?

I think cartoons appeal to the visual learner.  Of course there are other learners such as auditory, but I think with the media shifting to tablets, phones, and links the majority of learners are visual.  I know brain research confirms this last point.

Long Term Unemployment

60 Minutes has a 12-minute segment on the effects of long term unemployment.  The segment is here.

In the video you will hear about the psychological effects that unemployment imposes, the discrimination against those who have been out of a job for 99 weeks or more, and the hardships that the unemployed face.

Get the app.  Watch the show.

Merit Pay For Teachers

Freakonomics says it better than me.

Some of the main points are:  1.  Teachers respond to incentives.  2.  Asymmetrical information  3.  Schools are failing.

I'm against merit pay, but I wish there was a better way to reward dedicated teachers.  There are teachers who can find a reason to be gone at least once a week and teachers who stay all night working on a lesson plan for the next day.  Duties are unevenly distributed.  The teaching assignments are the same. For example, why does one teacher only get freshman English while another only gets AP Literature?  I think attempts at merit pay will not work for the simple reason that people maximize utility.

This is a fake example, but I think it will show what I mean.  Suppose there is a school in the middle of town and there's a new school on the edge of town.  As the infrastructure deteriorates in the school middle of town school, people move away.  The tax base deteriorates so that the building deteriorates along with it.  The students who remain come from families who can't afford an increase in taxes. The movement to the new school increases the demand for its service and along comes an increase in property value, tax revenues, and higher pay.

As students and parents try to get the best education possible, resources shift from the middle of the town to the edge of town.  Human behavior will defeat merit pay no matter what law or program is put in place.

For many cartoons about merit pay, search Cagle.com.

Ravi Batra and Social Cycle

Brilliant TCU economics professor, Ravi Batra, espouses a theor of The Law of Social Cycle.  The cycle is admittedly the life's work of P. R. Sarkar.

One of the stages of the cycles is characterized by rising wealth concentration, rising interest in materialism and money, and frequent warfare based on competition for resources and markets. (The New Golden Age, A Revolution Against Political Corruption and Economic Chaos, page 66.)

There are other indicators that this stage has been reached such as rising crime rates, but not all fit neatly into the model.  If the model predicts, then the model is valid.  If the model will predict a change in society, then the next stage should be a rise of the working force and political influence.  As the election nears, it is interesting to note how candidates pander to organized labor.

This post doesn't have a salient point, but is intended for me to deeply introspect on how social forces influence choice.  Since choice a a rational decision in economics, if forces outside of our influence make us behave differently, then economics should be a social science.

Do people behave differently in different states?  For example, how do you behave when there's someone in a group that doesn't like you?

Daily Review -- Classical Economics

Consider the economy below when answer the questions that follow.

1.  Is the economy in a recession or inflationary period?
2.  Assume that the economy is at point A.  If you are a classical economist, which curve moves, AD or AS.
3.  Where will the economy end up after wages contracts have expired, menu costs have been changes, and prices have had time to adjust?



Answers:  Recession, AS, and C.

Logistics -- Data Mining

How target found out a teen was pregnant before her father.  Right here.

From the NYT.  How companies learn your secrets.

Insanity

What's the definition of insanity?

It's doing the same thing over and over again and expecting a different result.

How long can Mr. Obama keep spending money to repair the economy?  It doesn't work.

Miscellaneous Link

Economix posted a nice graph on how subsidies distort consumer selection.  The post, "Why a Big Mac Costs Less Than a Salad" is here.

If you make something cheaper, people will buy more of it.  Can we make education cheaper and television, Facebook, and Tumblr more expensive?

Daily Review -- GDP

This question was pass on by Bobby Cranston.

Gross domestic product has been criticized as a measure of well-being because it fails to take into account which of the following?

A.  the distribution of income

B.  the value of services

C.  the value of intermediate goods

D.  the value of financial transactions and sales of used items

E.  the value of government services

A is the answer but why couldn't D also be correct?  Is it because the used items' values were counted in the original year they were sold?  How do you explain the value of financial transactions- like the sale of stocks and bonds- as being counted in GDP?

GDP is a measure of well being for the whole country.  GDP per capita measures the distribution.  Anyone who has ever heard of the 1% 99% debate on Wall Street knows that the income is not evenly distributed.  The distribution of income is one of the major criticisms of the GDP as a measure of well being.  Likewise, GDP doesn't count negative externalites such as pollution or the household production of a homeowner.

The question asked above is why letter D is not a correct answer.  My answer is that the purely financial transaction does not accure to a factor of production since money is not a factor of production.  In addition, the profits made from the sale of stock is counted.

A fantastic book that explains GDP in full is the Cartoon Introduction to Economics.

Logistics and Power Retailers

This link was shared by Jason Welker.  The PBS documentary is about how Walmart is a power retailer shaping the way logistics firms operate along the supply chain.  This link is for my logistics class.

The Economics of Seinfeld

This link was posted on the Council for Economic Education forum.  The following is from the website introduction.

Seinfeld ran for nine seasons on NBC and became famous as a “show about nothing.” Basically, the show allows viewers to follow the antics of Jerry, George, Elaine, and Kramer as they move through their daily lives, often encountering interesting people or dealing with special circumstances.

I like analysis like this because this kind of analysis shows principles in action.  I would warn that students must know the concepts prior to viewing to see the point.

This book explores the show using philosophy. I have been reading this book to gain insight in the honor killing of Hatun Surucu. When I read this book, I apply many of the concepts to economics. If you don't like Seinfeld, the Blackwell Philosophy and Pop Culture series offers many alternatives such as House.

Comedy

This was posted on the AP Listserve by Carl Herman.

COSTELLO: I want to talk about the unemployment rate.

ABBOTT: Good Subject. Terrible times. It's 9%. 

COSTELLO: That many people are out of work? 

ABBOTT: No, that's about 20%. 

COSTELLO: You just said 9%. 

ABBOTT: 9% Unemployed. 

COSTELLO: Right, 9% out of work. 

ABBOTT: No, that's about 20%. 

COSTELLO: Okay, so it's 20% unemployed. 

ABBOTT: No, that's 9%... 

COSTELLO: WAIT A MINUTE. Is it 9% or 20%? 

ABBOTT: 9% are unemployed. 20% are out of work. 

COSTELLO: IF you are out of work you are unemployed. 

ABBOTT: No, you can't count the "Out of Work" as the unemployed. You have to look for work to be unemployed. 

COSTELLO: But they ARE out of work!!! 

ABBOTT: No, you miss my point. 

COSTELLO: What point? 

ABBOTT: Someone who doesn't look for work, can't be counted with those who look for work. It wouldn't be fair.

COSTELLO: To whom? 

ABBOTT: The unemployed. 

COSTELLO: But they are ALL out of work. 

ABBOTT: No, the unemployed are actively looking for work... Those who are out of work stopped looking. They gave up. And, if you give up, you are no longer in the ranks of the unemployed. 

COSTELLO: So if you're off the unemployment roles, that would count as less unemployment? 

ABBOTT: Unemployment would go down. Absolutely! 

COSTELLO: The unemployment just goes down because you don't look for work? 

ABBOTT: Absolutely it goes down. That's how you get to 9%. Otherwise, it would be 20%. You don't want to read about 20% unemployment do ya? 

COSTELLO: That would be frightening. 

ABBOTT: Absolutely. 

COSTELLO: Wait, I got a question for you. That means they're two ways to bring down the unemployment number? 

ABBOTT: Two ways is correct. 

COSTELLO: Unemployment can go down if someone gets a job? 

ABBOTT: Correct. 

COSTELLO: And unemployment can also go down if you stop looking for a job? 

ABBOTT: Bingo. 

COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to just stop looking for work. 

ABBOTT: Now you're thinking like a politician. 

COSTELLO: I don't even know what I just said!

The point is that when you count workers in the civilian non-institutional labor force who are not looking for jobs, the unemployment rate is higher than the reported.  Shadow stats is a respected website.  Should the government use a different measure than the one they currently use?

Update for Mr. Herman.

January BLS U-3 unemployment data was reported at 8.3%, an apparent statistical improvement. 

The lie of omission is that a record 1.2 million Americans dropped-out of the labor force in the very same month, becoming the driver to the drop in unemployment, as Abbott and Costello just explained on this listserve.

Here are the data:

A month ago, we joked when we said that for Obama to get the unemployment rate to negative by election time, all he has to do is to crush the labor force participation rate to about 55%. Looks like the good folks at the BLS heard us: it appears that the people not in the labor force exploded by an unprecedented record 1.2 million. No, that's not a typo: 1.2 million people dropped out of the labor force in one month! So as the labor force increased from 153.9 million to 154.4 million, the non institutional population increased by 242.3 million meaning, those not in the labor force surged from 86.7 million to 87.9 million. Which means that the civilian labor force tumbled to a fresh 30 year low of 63.7% as the BLS is seriously planning on eliminating nearly half of the available labor pool from the unemployment calculation. 

Daily Review -- AD-SRAS

Do you remember which curve shifts on the Aggregate Demand-Aggregate Supply Model?

This two-page worksheet will help you to remember.  The worksheet was created in MS Word 2007, but it is stored as a Google Document.  Just make sure you download it and not view it to view it correctly.

For all of my apps, click here.  The Daily Review is a free app for the Android.

Cartoons in Economic Education

Dr. Jim Allen, forwarded this paper on cartooning to me. The title of the paper is, The Use of Cartoons as a Teaching Tool to Enhance Student Learning in Economics Education, by

Micheal M. van Wyk:

ABSTRACT Excellent and effective teaching demands a host of devices, techniques and strategies not only to achieve cross critical outcomes, but because variety, itself, is a desideratum. One teaching instrument which perhaps is too seldom used, is the economics cartoon. To encourage this development, learning activities become important. This paper investigates why Economics subject didactics students prescribed to cartoons as a teaching tool to enhance their learning. A survey was conducted to determine the use of cartoons as an effective teaching tool in Economics education. The results of the confirmatory factor analyses indicated that the six-factor-model shows a reasonable fit, since the two out of three conditions were consistently satisfied for the six-factor-model of this study. Further, interviews revealed that cartoons positively enhanced constructive learning, cooperative learning and collaborative learning amongst peers. Suggestions were made how to use cartoons as technique to creating interest and developing critical thinking and reflective teaching skills in Economics education.

 The use of cartoons contributes to the acquisition of skills beyond the curriculum.  I add to the list of factors in the paper, the use of different learning channels to develop both the right and left side of the brain and the deft use of computer technology in the design and public sharing of the cartoons.

I have further noticed that drawing a cartoon exposes huge gaps in students' prior learning.  Student gain respect for cross curricular subjects in art and industrial tech too.

I believe that one picture is work a thousand words and one picture is easier to remember.  Given the amount of curriculum that students need, it makes sense to me to reduce their load by using cartoons as a teaching device.

Dr. Allen and I are collaborating on an article on using cartooning to teach law.  The results so far have been encouraging.  I have had to stretch my abilities and dig deep beyond my compromise to make our study work.  I have yet to begin serious writing of the paper, but every day I have a reason to develop my professional skills and enrich students.

Daily Review -- Loanable Funds

1.        Circle the Budget  Surplus from the options below.

1.        G > T        2.   G = T        3.  G < T

Assume that the economy starts with a balanced budget, but then moves to a budget surplus.  Assume also that Exports equals Imports.  Show what will happen to the supply of Loanable Funds, SLF.

The partial circular flow diagram shows the amount of SPublic, SPrivate  Flowing into Financial Markets.  Show on the Market for Loanable Funds what happens when the Government increases public saving.

 

2.        What is the formula for calculating the real interest rate?

Answer:  When the government saves, T > G, then the supply of Loanable Funds increases, the supply curve shifts to the right, and the real interest rate lowers holding every thing else equal.  The real interest rate equals nominal minus the expected rate of inflation.  

In the Bond Market, the price of bonds must be going up to make the interest rate go down.  In this example, the real cost of borrowing decreases so more will be borrowed.

Immigration

The Dallas Fed and immigration report.

Highly recommended and easy to read.  It's also relevant.

Daily Review -- Multipliers

I created a two-page review of the spending and tax multipliers for my macro class.  This is a worksheet on Fiscal Policy, but if you are up to the task, the document is here.

I created the document in Word 2007, but the document is stored as a Google Document.  Just download it to view it correctly.

Daily Review -- Monopoly

This question has been making the rounds lately.  How do you answer it?

The profit-maximizing price for monopoly firms is a price that:

a. Exceeds marginal cost

b. Exceeds fixed costs

c. Exceeds average revenue

d. Equals marginal revenue

e. Equals fixed costs

I answer "a" because when price is greater than marginal cost resources are not being used efficiently.  Price could never exceed average revenue because price equals average revenue.  If price equals marginal revenue then the firm would be a perfect competitor.  When price is greater than marginal cost, then the firm is covering its fixed costs and if a firm wasn't covering its fixed costs, it would shut down.  

For all of my apps including a FREE app to get the Daily Review on your Android device, click here.  Look for my new app, Bottleneck, which has nothing to do with economics soon.  

Interview On "Talking Fin Lit"

My interview with Mark Gura about teaching financial literacy is posted here.

My thanks goes to Mark for making a difference in education.

89 Economic Cartoons

I  believe that cartoons provide an insight that rhetoric, prose, and textbooks cannot.  Cartoons use symbols and exaggeration to make point quickly.  As the saying goes, "One picture is worth a thousand words."  In the cartoons that follow, points about the debt are made in one panel cartoons.  There are 89 cartoons.  The link is here.

Made In China

I was wondering how much that is made in China is actually made by United States capital in China.

When a factory relocates to a foreign country, that is direct foreign investment.  HNI Corporation has an office furniture company in China but many US citizens work in the China plant.  I know that the output they make is counted in China's GDP but it is really made by US labor.

Logistics

 Logistics assignment.

For Monday, read this article.

Daily Review -- Automatic Stabilizers

In each case below, find the automatic stabilizer.

1.  Juan makes earns more income.  Juan notices that his take home pay increases but at a decreasing rate.
2.  Juan loses his job but gets a check from the unemployment office.


Answers.  1.  progressive income taxes.  2.  Unemployment benefits or transfer payments.

Who Owns The Debt?

The national debt clock is here.

A CNBC article is here.

Use the data below to make a pie chart.

1. Federal Reserve and Intragovernmental Holdings (U.S. debt holdings: $6.328 trillion). 2. China (U.S. debt holdings: $1.132 trillion.)  3. Other Investors/Savings Bonds (U.S. debt holdings $1.107 trillion)  4. Japan (U.S. debt holdings: $1.038 trillion) 6. Mutual Funds (U.S. debt holdings: $653.5 billion) 7. State and Local Governments (U.S. debt holdings: $484.4 billion)  8. The United Kingdom (The United Kingdom)  9. Depository Institutions (U.S. debt holdings: $284.5 billion)  10. Insurance Companies (U.S. debt holdings: $250.1 billion)

About what percent of the debt is held by the public sector of the United States? (The article indicates that 40% is held by the government.)