Wednesday, August 30, 2017

Continuum of Economic Systems

Labeling and characterizing particular countries economic systems based on how they are organized to allocate societies scarce resources can be a tricky proposition.  People tend to insert their own biases in assessing the label.

Here is a simple presentation of the "facts".  We can debate/argue the specifics of where a particular country falls on the continuum (I inserted select countries on where I think they fall), but the over-arching considerations should be what I outlined in the textbook:

1.  The level of government ownership/control of societal resources.
2.  The level of regulation and taxation over economic activity within the country.

These are broad, for certain, but I believe serve as a jumping off point for discussion.

For instance, take the US.

The Private Sector holds a vast majority of overall societal resources, but not all.  National Parks are one significant "land" resource that I can think of that the Federal Government owns outright.  Is this "socialism" in the context of all societal resources combined?  I think not so that is why I put it closer to Free Market than Socialism. Does the US regulate/tax economic activity?  Yes, to some degree so we cannot give it the full label "Free Market". With this one you have to consider "relative to what/who?"

In this case I choose the UK. In the UK the healthcare system is owned/operated by the government and they have a higher level of taxation compared to the US (this is a generalized statement on my part).

After understanding where you fall on this line, the debate becomes which way is "best" for your country to move---towards Free Markets to the left or Socialism/Communism to the right.  This is political tension that is derived from the economics.

Saturday, August 26, 2017

Dwayne "The Rock " Johnson understands TANSTAAFL. Video proof!

This from his Facebook page.  He is acknowledging a young mans heroics (rightly so!) but at the end of this video (about the 50 second mark) he makes a remark that stunned me.

A pretty solid reference to a basic economic concept we learn the fist day in economics! While he does not identify it directly, "TANSTAAFL", the intent is clear.

Made me smile.  Only a minute long. Worth it!




Friday, August 25, 2017

Potential Real GDP vs Actual Real GDP and the PPF.

Here is a  nice illustration of "Potential Real GDP" vs "Actual Real GDP.  Potential GDP is an estimate at a given point in time of an economy's potential to produce Real GDP given its available resources (Land, Labor, Capital, Entrepreneurship).  Gives me an opportunity to show how two important AP Macroeconomic concepts are related to each other.

The Congressional Budget Office (CBO) publishes a forward looking projection of Potential RGDP years in advance.  This graphic gives the estimated trajectory of Potential RGDP that was calculated in a given year (2007,09,11,13,15, and 2017).  The heavy BLACK line is the trajectory of the "Actual RGDP" that was recorded in the respective year.

It is evident Actual RGDP, since the advent of the 2008 recession has been below the projected Potential---the difference is known as the "Output Gap".

It is noteworthy that after 2008 the CBO consistently lowered the estimate of the US economy's potential to produce Real GDP.
Source: VOXEU
Below I paired this graphic with the Production Possibilities Frontier (PPF).  The PPF is an important model in AP Macro.

I color coded the PPF frontiers in a similar color as the one in the graphic to show the contraction of the US PPF over time (as calculated by the CBO).  I used Point "A" to represent the heavy black line and a consistent under-utilization of societal resources, shown as a point inside the PPF.

Both of these models show the same thing---an output gap that suggests more resources could be put into use before we reach our economic potential.

Sunday, August 20, 2017

Hotel price surge for the Eclipse: Price Gouging or Revenue Smoothing? Easy call for me...

If you are looking for a last minute hotel room in the path of the eclipse you will either find no availability or a shockingly high price for a one night stay.

Below is the price for a stay at a Days Inn hotel I found on Hotels.com in rural Kentucky.

The first price is the "normal" price they charge for a room, the second is for Sunday, August 20th (eclipse is Monday afternoon).  A mark-up of 5.66 times the regular price.

Is this price gouging or revenue smoothing?   Is it "fair"?


One justification is that the hotel business is seasonal.  Special events that a preponderance of people are "willing and able" to pay a premium over the regular market price to attend are one way hotel operators are able to reap extra revenue that allows them to keep prices lower (or even stay in business) for the rest of the year.

I believe in this case, the informed opinion is revenue smoothing and the, well, ignorant one is price gouging.

Think of it as "robbing rich Peter" (the the person who values the special event a lot) to "pay poor Paul" (the person who gets to enjoy a lower price during non-special event times which is most of the year).

Tuesday, August 15, 2017

Foreign Exchange Market presentation for AP Macroeconomics


Smartphone/Creative Destruction Cartoon. I see lots of consumer and producer surplus value. How about you?

Stop and think about ALL the separate and distinct products we used to have to purchase individually to do all the things a Smartphone can do today.

One way to think of Smartphones is it is a plus for the environment.  Think about all the resources, most non-renewable, that are not employed because they are contained in one small rectangular case.

I am not sure the real value of these devices is captured in the price we pay.  I have to think the surplus value far (?) exceeds the price.

What do you think?

Found on Twitter. No real source to cite.

Keynesian Multiplier Effect Illustrated

Here is a presentation I created that explains the Keynesian Multiplier Effect in as simple terms as I can make it.  I bit long in number of slides for that reason.

This is an important part in the Unit on Fiscal Policy.  The math, while simple, seems to be a stumbling block for many students. Hopefully this eases that tension!



Wording for Correct answers for Foreign Exchange Market (FOREX) on the AP Macroeconomics FRQ's

On the AP Macroeconomics exam you can be 99% certain you will be asked Foreign Exchange Market question(s) on the FRQ section of the test.

Precise and to the point answers are required.  They are looking for the proper linkages from the various cause and effect scenarios you are presented with.

Below I wrote out what would be the "best way" to respond to these questions.  You may be asked to identify and explain ALL the effects under each bullet point or maybe just one (for example, only what happens to Exports given an event---all the rest is implied and you have to understand it in order to get to what happens to Exports).

My advice is to memorize these until they "click".  Again, they contain ALL the key words/phrases that past FRQ rubics have required students explicitly mention.

NOTES:  BE CAREFUL with #3 through #6.  They seem very counter-intuitive what happens to the value of the dollar given the scenario.  These can easily trip you up.


1. “If the interest rate in the U.S. INCREASES relative to the Rest of the World (ROW), U.S. financial assets become more desirable.  The demand for the dollars INCREASES and APPRECIATES the value of the dollar internationally. “
Effect on Exports: When the dollar APPRECIATES in value, U.S. goods and services become relatively MORE expensive and Exports will DECREASE.
Effect of Imports: When the dollar APPRECIATES in value, Foreign goods and services become relatively LESS expensive and Imports will INCREASE.
Effect on Net Exports (N(x): If Exports Decrease and Imports Increase, then net exports will DECREASE.

2.If the interest rate in the U.S. DECREASES relative to the Rest of the World (ROW), U.S. financial assets become less desirable.  The supply of the dollars INCREASES and DEPRECIATES the value of the dollar internationally. “
Effect on Exports: When the dollar DEPRECIATES in value, U.S. goods and services become relatively LESS expensive and Exports will INCREASE.
Effect of Imports: When the dollar DEPRECIATES in value, Foreign goods and services become relatively MORE expensive and Imports will DECREASE.
Effect on Net Exports (N(x): If Exports Increase and Imports Decrease, then net exports will INCREASE.

3. If price levels in U.S. are LOWER relative to Rest of the World (ROW) then U.S. goods and services become MORE desirable. The demand for the dollars INCREASES and APPRECIATES the value of the dollar internationally. “
Effect on Exports: When the dollar APPRECIATES in value, U.S. goods and services become relatively MORE expensive and Exports will DECREASE.
Effect of Imports: When the dollar APPRECIATES in value, Foreign goods and services become relatively LESS expensive and Imports will INCREASE.
Effect on Net Exports (N(x): If Exports Decrease and Imports Increase, then net exports will DECREASE.

4. If price levels in U.S. are HIGHER relative to Rest of the World (ROW) then Foreign goods and services become MORE desirable. The supply of dollars INCREASES and DEPRECIATES the value of the dollar internationally.
Effect on Exports: When the dollar DEPRECIATES in value, U.S. goods and services become relatively LESS expensive and Exports will INCREASE.
Effect of Imports: When the dollar DEPRECIATES in value, Foreign goods and services become relatively MORE expensive and Imports will DECREASE.
Effect on Net Exports (N(x): If Exports Increase and Imports Decrease, then net exports will INCREASE.

5. If GDP INCREASES in the U.S. relative to the Rest of the World, then Americans will want to buy not only MORE domestic goods/services, but MORE foreign goods/services also. The supply of dollars INCREASES and DEPRECIATES the value of the dollar internationally.
Effect on Exports: When the dollar DEPRECIATES in value, U.S. goods and services become relatively  LESS expensive and Exports will INCREASE.
Effect of Imports: When the dollar DEPRECIATES in value, Foreign goods and services become relatively MORE expensive and Imports will DECREASE.
Effect on Net Exports (N(x): If Exports Increase and Imports Decrease, then net exports will INCREASE.

6. If GDP DECREASES in the US relative to the Rest of the World. then Americans will not only buy FEWER domestic goods/services, but FEWER Foreign goods/services also.  The supply of dollars DECREASES and APPRECIATES the value of the dollar internationally.
Effect on Exports: When the dollar APPRECIATES in value, U.S. goods and services become relatively MORE expensive and Exports will DECREASE.
Effect of Imports: When the dollar APPRECIATES in value, Foreign goods and services become relatively LESS expensive and Imports will INCREASE.
Effect on Net Exports (N(x): If Exports Decrease and Imports Increase, then net exports will DECREASE.

Monday, August 14, 2017

Calculating Comparative Advantage with Output and Input Methods Made Easy...I think.

One of the hardest concepts to intuitively understand in economics is Comparative Advantage. Seems like most of the time with students a deep understanding is elusive. It just takes practice and thought.

While we wait for those "AH HA!" moments, students still need to understand the "nuts and bolts" of the math behind the concept.  This can be elusive as well, especially for students who are not strong in math.

These two very short presentations will walk you through the basics so at least you can get the math right. It is important to get the "set-up" of the problems correct before proceeding with the math.

I hope this helps someone!

IOU Method to determine Comparative Advantage


"OOO" Method to determine Comparative Advantage

Absolute and Comparative Advantage for Dummies...like me.

Here is my very detailed look at how to calculate Absolute and Comparative Advantage for AP Economics.  Overkill? Maybe, but it is a step by step look at how to do it that I think would be helpful to teachers and students alike.  Kinda wish I had the "Trade for Dummies" breakdown when I was first learning it.

Hope it helps someone have a breakthrough.


Thursday, August 10, 2017

Ticket to Disneyland in 1955 vs 2017---which is a better "value"?

This ticket to Disneyland in 1955 cost $1.00.  In 1955 the minimum wage was $.75 (75 cents), so it took 1.33 hours of labor to earn enough to buy this one ticket in 1955.

Today, a ticket would cost you $105.00  to visit the Happiest Place on Earth.  In 2016 the minimum wage (although it varies in States and even some localities) is $7.25 per hour.  At that rate, a ticket would take 14.5 hours of labor (excluding labor taxes, of course).

A day at Disneyland in 1955 was definitely more affordable for a low wage worker 60 years ago. The only thing that really remains to be determined is the comparable quality of the experience.  The parks are vastly different in composition.

Has the quality of the visit improved by a large enough factor to make the extra hours worked to buy a one-day pass more "utility maximizing" in 2017 than in 1955?

Nice resource for illustrating "Increasing Opportunity Costs" and the concave nature of the PPF

Here is a nice article on the great productivity slowdown in the US, and in the developed world for the most part.

The article is interesting throughout but the excerpt below caught my eye.

It goes to the edge but does not explicitly mention the important concept of "Increasing Opportunity Costs" and the reason the Production Possibility Frontier (or Curve) is "bowed", or concave from the origin.

While Services Sector Booms, Productivity Gains Remain Elusive 

“The changing distribution of workers might be able to explain up to one-half of the slowdown in labor productivity growth from 2.5% to 1.5% per year since the 1960s," said Dietrich Vollrath, a University of Houston economist. Indeed, this effect has accelerated since 2000, when workers, in aggregate, started to move from higher to lower productivity sectors. 
Services productivity, besides its natural disadvantage, may be facing an added headwind: The sector is absorbing millions of workers whose underlying skills may not be well suited to the jobs they take on. 
If people start doing work they are relatively good at, and if manufacturers shed their least efficient workers first, manufacturing productivity will improve as it downsizes but services-sector productivity will suffer as it absorbs workers who are a poor fit. (Sections in bold are mine).
All resources, including labor, are not "perfectly adaptable" to a alternative uses.  If you employ/deploy resources to such alternative uses they tend to be less productive, hence more costly.
Simple example.  The decline of steel manufacturing coincided with a increased demand for truck drivers.  While some unemployed steel workers may make fine truck drivers, the "marginal" ones may not be so good. They may have more accidents or load mishaps and are more expensive (ceteris paribus) to employ.
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