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.

Wednesday, August 9, 2017

Negative Externality: Meat industry blamed for largest-ever 'dead zone' in Gulf of Mexico

suggests that the market quantity for meat products is greater than it should be.  The chemical run-off of fertilizers and other agricultural inputs that go into the production of meat products flow into waterways.  Its negative affects go much further than the borders of the farms and ranches. Some excerpts:
"Toxins from manure and fertiliser pouring into waterways are exacerbating huge, harmful algal blooms that create oxygen-deprived stretches of the gulf, the Great Lakes and Chesapeake Bay, according to a new report by Mighty, an environmental group chaired by former congressman Henry Waxman... 
...Nutrients flowing into streams, rivers and the ocean from agriculture and wastewater stimulate an overgrowth of algae, which then decomposes. This results in hypoxia, or lack of oxygen, in the water, causing marine life either to flee or to die... 
...America’s vast appetite for meat is driving much of this harmful pollution, according to Mighty, which blamed a small number of businesses for practices that are “contaminating our water and destroying our landscape” in the heart of the country..."
If the problem IS production over a more "socially optimal" level of production, how do we attain that optimal level?

The essential problem is that the cost of the externality is not being borne by the consumer or producer of the product.  Consumers are paying and producers are receiving only the money cost to make the product available. They are not paying for the residual costs of environmental degradation that affect others near and far (out into the Gulf of Mexico!).

Our task here is to use the basics of Supply and Demand to illustrate how markets respond to government intervention in order to require Producers and/or Consumers to "internalize" that "external" cost that has been imposed on the rest of society.

Internalizing that cost can take the form of an explicit tax on the good or some other "non-monetary" rule or regulation that de facto internalizes the cost of producing the good.

I put together a short-ish presentation to show you how this is modeled for AP Microeconomics. The key here is to correctly identify the "area of Dead Weight Loss" in the presence of a Negative Externality.


Tuesday, August 1, 2017

The most prominent determinant for a "change in supply" is a change in the cost of an input that goes into the production of an output (final good).

This article uses the example of the input cream that is used in the production of the output butter in the UK.

Rising price of cream squeezes Dairy Crest's margins

“Cream prices, which determine input costs for the butter business, have increased substantially during the first quarter,” the company said.
“This will put pressure on margins in our butter business. We have reduced our promotional activity on Country Life, which is adversely impacting volumes but mitigating some of the margin pressure.” (underlining mine)
Here are some slides to walk you through a basic demand and supply model to illustrated how this impacts the market for butter as described in the article.

Tuesday, July 25, 2017

How to answer basic Demand and Supply Problems in 3 easy steps.

Determining which curve to shift in the simple Demand and Supply model can be a challenge for students.

Students tend to rush and "over-think" the problem and/or they want to jump ahead a step or two and look at the subsequent effect a particular scenario has on a market.

My advice is "KISS!" (Keep It Simple Students!).

Here is my recommendation as to how to logically think about a given scenario and to get the curve shift right every time.  All in 3 easy steps.

First, you need to be familiar with the Determinants of Demand or Supply:

Factors that affect DEMAND (cause the Demand Curve to SHIFT):
  • change in consumer tastes
  • change in the number of buyers
  • change in consumer incomes
  • change in the prices of complementary and substitute goods
  • change in consumer expectations
Factors the affect SUPPLY*** (cause the Supply Curve to SHIFT):
  • change in input prices
  • change in technology
  • change in taxes and subsidies
  • change in the prices of other goods
  • change in producer expectations
  • change in the number of suppliers
***With SUPPLY, the primary reason you will encounter for Supply Curve shifts is a change in the COST OF PRODUCTION.  When the Costs of Production increases, Supply decreases (curve shifts LEFT). When Costs of Production decrease, Supply Increases (curve shifts RIGHT).

With these determinants in mind, here are the next questions you will want to ask yourself when confronted with a scenario that will shift either the Demand or Supply Curve.
1. Ceterus Paribus (holding all other variables constant--except the one we are addressing) ask yourself  "Is this scenario a function of Demand or Supply?"  Look at your Determinants listed above---make sure you confine yourself to these determinants and do not read more into it! 
2.  After determining which curve to shift ask yourself: ""Will this scenario have a POSITIVE ("good") or NEGATIVE ("bad") impact on Demand or Supply (whichever you decided in question #1)
3.  (a)  If it has a positive impact the curve will shift RIGHT.  This is true whether you    are shifting the Demand OR Supply Curve.
     (b) If it has a negative impact the curve will shift LEFT.  This is true whether you are          shifting the Demand OR Supply Curve.
After you shift the appropriate curve, simply locate the new equilibrium point where Demand and Supply intersect showing a new Price and Market Quantity.

Here is a link to a Google Doc that has some examples for you to work on. Once you establish a rhythm, these get very easy to do.

BIG CAVEAT:  This works well with basic introductory problems in Supply and Demand analysis. HOWEVER, when we go a bit deeper you will encounter at least one situation where the answers are counter-intuitive to the above explanation, especially on the Demand-side.  That is when the scenario suggests that the good is a "Normal Good" or an "Inferior Good" as it relates to a CHANGE IN INCOME (a function of Demand).  For instance, if the good is "Inferior" and incomes INCREASE, then the demand for that Inferior good will DECREASE (shift LEFT). If income Decreases, Demand for the Inferior good INCREASES.  Be careful with this one!

Tuesday, July 18, 2017

Bacon and Supply/Demand Graphs. What a great breakfast combination.

A nice article to practice graphing Supply and Demand.  

America’s Lust for Bacon Is Pushing Pork Belly Prices to Records


Once considered an unhealthy byproduct, bacon has become a guilty pleasure—with prices to match.

Excerpt for graphing:
""Some analysts say bacon, meanwhile, is becoming a yearlong staple that consumers are eager to procure. That voracious demand has left wholesalers in a squeeze. Retailers “have turned hand-to-mouth, buying only what they need, waiting for production to increase and prices to decline,” said Dennis Smith, a commodities broker at Archer Financial Services in Chicago. 
Pig farmers are struggling to keep up with demand. The national hog herd rose to a seasonal record of 71.7 million head in early June, according to the U.S. Department of Agriculture, up 3% from a year earlier. 
But it hasn’t been enough to satiate bacon demand. Stocks of pork bellies in commercial freezers fell to 31.6 million pounds in May, down 59% from a year earlier and the lowest figure for the month since the USDA began keeping track in the 1950s.""

Friday, July 14, 2017

A 1967 Wrigley Field Menu Board and Inflation.

Found this HERE

It shows a menu board for concessions and game tickets at Wrigley Field in Chicago for the year 1967 (relying on information from the source).

In order to see what these prices are in today's dollars, multiply each number below by 7.43 (using the Bureau of Labor Statistics (BLS) inflation calculator)




Example: An Oscar Mayer Hot Dog cost .30 cents in 1967. If the price of that hot dog simply increased in price at the pace of overall inflation, then it would cost you $2.23 (.30 cents X 7.43) at Wrigley today.

Go to Wrigley today and you will pay about $5.50.  That is a factor increase of 18.33 from 1967, or a 2.5 times (18.33/7.43) increase over stated inflation.

There are lots of comparatives you can do with this menu board over a broad range of goods shown here.  A nice way to help students understand the effects of inflation.



Wednesday, July 12, 2017

Tax Policy and the 1%. A nice illustrative video!

Here is an excellent video from the Wall Street Journal, with a simple illustration, of the tax share of the different quintiles (20% blocks) of US taxpayers and extends it to the top 1%.

It is a nice introduction for high school students to the progressive income tax structure and a discussion on income (as opposed to "wealth") inequality.

Wednesday, January 25, 2017

Healthcare Spending Graph. Easy to see the problem but how it "fix it"?

Here is a graphic regarding healthcare spending in the US I think is important but rarely talked about.

It is very clear that a small number of people relative to the whole population are responsible for a disproportionate share of heath care dollars. This from the JAMA article that contains the graph:
"...The core of the answer to this question can be read in the chart below, showing the highly skewed distribution of per capita health spending across the US population. The phenomenon is known as the “80-20 rule,” indicating that 20% of any large insured populations tends to account for 80% of all health care spending on that population...."

Health spending is highly concentrated among the highest spenders.

The cited paragraph seems to understate that data presented in the graph, but the point is well taken.

Why do we not discuss a "Marshal Plan" to address the needs of the few that cost us the most?

Rhetorical question, I guess.

The article is about why insurers are abandoning the ACA Exchanges.  It is written in layman's language enough that I think it would be a good read for students.

Monday, January 2, 2017

The Market for Bison Meat and a basic Demand and Supply Model. Fun times graphing!

Here is an excellent article that allows us to practice a "simultaneous shift" in our Demand and Supply Curves in our basic Market Model.

That Bison Burger Just Got Pricier Thanks to Canada Ranchers
""Bison prices have been rallying as demand for the niche product is rising among U.S. consumers amid a favorable exchange rate and as more people seek out organic foods and healthy alternative proteins. The grass-fed meat has fewer calories, less cholesterol and fat than beef, and the animals are raised without hormones or antibiotics.""
A nice description of factors that affect the Demand for a good or service: a "change is consumer tastes/preferences" and "change in number of consumers" with a dab of foreign exchange effect thrown in (US dollar stronger than Canadian dollar).

Using a basic Market Model from a starting equilibrium we can see that the Demand for Bison Meat increases as more consumers choose to, well, consume bison meat.  At each and every price, the Quantity Demanded for Bison meat is greater than is was before.

The Demand Curve shifts RIGHT.

Here is the tricky part in trying to relate this to "real life".  If we stopped right now, it appears that at the new equilibrium "B" that the Quantity Supplied is now greater than it was before (Q1 rather than Qe--we move up and along the Supply Curve) In this case it is an "illusion" because we have a simultaneous change in Supply as described here:
""As demand gains, Canada’s ranchers are becoming more reluctant to send animals to slaughter, and instead are holding them back in favor of herd expansion. As a result, fewer bison are being exported for processing in the U.S., Canada’s biggest market, and domestic production probably fell 25 percent in 2016 from a year earlier to 10,500 animals, Kremeniuk said.""

The assumption is that at "every price the Quantity Supplied is less" than it was before, by about 25%.

The Market Supply Curve for Bison shifts to the LEFT indicating a DECREASE in Supply ("S1").

We have to be mindful that the Quantity Supplied, hence our Market quantity, will be LESS than it was before at "Qe".
The new "final" equilibrium Price  is "P2" at a Market quantity of "Q2" at Point "C"

Let's clean that up a bit:


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