New Dancing Video

Hi All,
In case you're bored and want a bit of entertainment tonight, you can check out the new 49th Street and Other Stories dance video starring my sister, Michelle Joy, at the following web address:
http://www.kickstarter.com/projects/soundingline/49th-street-and-other-stories-a-new-dance-play

Midterm Scores pt. 2

Scores have been posted!  We can go over it tomorrow, as well as Chapter 5 problems.

For Chapter 6, you are only responsible for #1, 2, 3, 4, 6, and 10 (12 pts.).  After Chapter 6, we will learn about Game Theory.  There is no chapter in our book on Game Theory, but I have another resource that we will use.  This will be especially useful for those of you interested in political economy.  Maybe we will watch A Beautiful Mind about Steve Nash and those all-important Nash equations.  The next midterm will be week 9 (week of October 17th to the 21st), and will cover Chapter 4, 5, 6, and the Game Theory things.  Our other midterms will be in the second quarter on week 4 and 8 (Nov. 14th-18th & Dec.12th-16th).

Third, the Paul Krugman assignment (below) will be due Friday.  It is below for those who were absent today (Monday).

AP EconomicsSeptember 26, 2011Famous Economists – Paul Krugman Dr. Krugman is a Nobel-winning economist who resides at the Woodrow Wilson School for International Studies at Princeton University.  He also writes for the New York Times on a bi-weekly basis.  During the Bush administration, he was quite critical of the way that Mr. Bush and his advisors handled the sub-prime mortgage crisis and the economic downturn that started in mid-2007.  He was also a strong proponent of Mr. Obama’s candidacy and the measure Obama put in place shortly after taking office (such as the stimulus package passed in February 2009 and health care reform).  As such, Dr. Krugman is a standard bearer of neo-Keynesian economics.
 In the past, I have given you articles written by different economists to read, but for today I want to you to find articles and/or op-eds on your own.  Your assignment is to find at least two, summarize each one, and also write why or why not you agree with his underlying assumptions.  Finally, put yourself in either Mr. Obama’s position or the position of one of the person’s running for the Republican nomination.  If you were that person, would you hire Dr. Krugman to serve on your Economic Advisory Council?  What about inside the Federal Reserve Bank?  Why or why not?  

Thanks for your hard work!

Midterm Grades

I have ten more to grade.  Thanks for your patience.  Scores will be up before 11pm....I hope.

News for Last Week (WSJ)

Sept. 19 - 23

United States

The Federal Reserve launched a more aggressive package of measures than expected as the global economy drew closer to another recession. Fresh data pointed to a decline in manufacturing activity in both China, a critical engine of the recovery, and Europe, and rival parties in Europe and the U.S. remain divided on how to respond. The Fed's latest move was to shift its $2.65 trillion securities portfolio further than previously planned toward long-term U.S. Treasury bonds—the Twist, as it's called—and, in a surprise move, toward mortgage debt. The aim is to lower interest rates, boosting investment and spending and jump-starting the housing sector. Three of 10 voting Fed officials were opposed.

The weakened U.S. economy will depress housing prices for years, restraining consumer spending, pushing more homeowners into foreclosure and clouding prospects for a sustained recovery, economists, builders and mortgage analysts predict. Home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015, according to a survey released Wednesday. One in five Americans with a mortgage now owes more than his or her home's value, and $7 trillion of homeowners' equity has been lost in the bust. The fallout is broad. ShopperTrak said in a new forecast that national retail sales would rise by just 3% in November and December from a year earlier. Some parts of the country will do better than others: census data out this week showed that many of the nation's most educated people continue to cluster in a handful of dominant metropolitan areas such as Boston, New York and Silicon Valley, redoubling those regions' advantages. "In a knowledge economy, success breeds success," said a Brookings fellow of the findings.

The "Don't ask, don't tell" ban on gays serving openly in the military was lifted, the end of an 18-year policy under which more than 14,000 service members were discharged. "I think it will be pretty unremarkable across the military," said Gen. Carter Ham, who helped lead a study of the likely impact, "and I think that is the way it should be."

The U.S. accused leaders of the Full Tilt Poker website of defrauding thousands of online poker players out of more than $300 million in a "global Ponzi scheme," part of a broader crackdown on the industry. Before the crackdown, one research firm estimated there were 1.7 million active poker player accounts in the U.S. from players wagering about $14 billion a year online. And on the high-tech edge of law enforcement, the role of the "stingray" cellphone-tracking device in nabbing a hotly pursued man the FBI calls "the Hacker" is driving a constitutional debate about whether the Fourth Amendment—which prohibits unreasonable searches and seizures but pre-dates the digital age—is keeping pace with the times. The stingray mimics a cellphone tower.

Aboriginal Australians may be directly descended from the earliest of several human groups that left Africa and colonized the world, new genetic evidence suggests, in a challenge to a widely held model that argues for a single dispersal from Africa.

Politics

Obama set forth a new plan to cut the federal budget deficit by $3.6 trillion over 10 years, folding in his $447 billion jobs bill and including $1.5 trillion in tax increases. Revving up the campaign engines, he threatened to veto any bill that cuts Medicare benefits without raising taxes on corporations or the wealthy. Republican leaders have ruled out tax increases. To charges of class warfare over the plan's "Buffett rule," aimed at preventing millionaires from paying lower taxes than middle-class Americans, the president said, "This is not class warfare. It's math." It was a base-energizer, but the Buffetts of the world aside, most people with taxable income of $1 million or more already are taxed at a much higher rate than middle-class earners.

Congress needs to pass a funding bill before the fiscal year ends Sept. 30, but Democrats want to provide a lot more for disaster relief than Republicans. They're testing the limits of the antideficit push and hoping to show that government can play a crucial role in some areas; Boehner, for his part, is having more trouble mustering votes.

Obama is set to replace key planks of George W. Bush's signature No Child Left Behind law, allowing many schools to escape looming punishment if their states adopt a new set of standards.

Front-runners Perry and Romney clashed over Social Security and health care in a GOP presidential debate.

World

Economic output in the euro zone contracted for the first time in more than two years. European banks face about $411 billion in potential losses from the euro-zone debt crisis, the IMF said, as it urged them to raise capital to protect the global economy. Greece, scrambling to meet fresh austerity demands from its international creditors in exchange for aid, is to cut pensions, tax low-income earners and put some 30,000 government workers on 60% of their salary for a year.

The U.N. was a hothouse as Palestinian leaders pressed ahead with a bid for full membership. Obama, facing attacks on his foreign policy from leading Republican presidential candidates, implored the U.N. to hold off on a vote, saying Israel and the Palestinians must work out a peace deal on their own. Ahmadinejad told the General Assembly that Tehran wouldn't recognize Israel's right to exist, regardless of any U.N. move to grant statehood to the Palestinian people, even as Iran released on bail two American hikers who had been held for two years. With a series of close encounters between American and Iranian forces in the Persian Gulf, U.S. officials are considering a direct military hot line with the Islamic republic. The international community pledged to help rebuild Libya, as the country's new government took its place on the world stage. Libya started pumping oil again for the first time since the toppling of Gadhafi, but poor security and damage to the country's network of ports and oil terminals could delay the large-scale resumption of exports to Western markets.

U.S. Joint Chiefs Chairman Mullen said support for terrorism was part of the Pakistani government's strategy, in a rare public condemnation in the wake of last week's insurgent attack on the U.S. Embassy in Kabul. Afghanistan's intelligence agency accused the Taliban's top leadership in Pakistan of orchestrating the assassination of Burhanuddin Rabbani, Afghanistan's most prominent peace negotiator and a former president. Rabbani was killed at his well-protected Kabul home by a purported Taliban envoy. The slaying and the charges could make it increasingly difficult for Washington to pursue negotiations with the insurgent group. In eastern Africa, the U.S.—keen to follow up on its killing of bin Laden with operations to destroy his terrorist organization—is deploying a new force of armed drones, escalating its campaign to strike at militant targets of all kinds and expand intelligence on extremists. And continued violence in Yemen raised the prospect that the impoverished country could be nearing factional war.

A U.S. decision to sell Taiwan upgrades of old fighter jets, rather than new planes, reflected a fresh reality in the region. All sides are calculating that the island is increasingly indefensible against an attack by China and are banking on closer economic ties to help resolve historic tensions.

Business

Hewlett-Packard's board ousted CEO Apotheker and named former eBay chief Whitman to succeed him. Just last month, with the board's blessing, Apotheker announced a plan to revamp H-P by splitting off or selling its PC business and spending $10.3 billion to acquire British software company Autonomy, sending the company's shares plunging. "I think the strategy is right," said Whitman, 55. "I will obviously step back and take a hard look at this." Apotheker's brief but turbulent tenure, in which Hewlett-Packard's market value was nearly sliced in half, is the latest setback for a company buffeted by a decade of board acrimony, abrupt CEO departures and strategic drift.

Groupon said it was cutting its reported revenue in half, and its No. 2 executive left the company. Regulators have been scrutinizing Groupon's accounting since it filed for an IPO that could value the daily-deals pioneer at $20 billion. Elsewhere in tech, Schmidt acquitted himself pretty well as senators probed whether Google has abused its growing dominance of the Web. "Many of us in Silicon Valley have absorbed the lessons of that era," he said, alluding to the antitrust case against Microsoft, but saying of the lawmakers' concerns, "We get it." Netflixchief Hastings thinks he's learned some lessons himself, and said the separation of his DVD-by-mail business from his Internet movie-streaming service was essential, despite many angry customers.

A proposed four-year labor agreement between General Motors and the United Auto Workers points to a future in which workers trade the guarantee of gold-plated wages and benefits for job security and pay increases tied to the company's health. The agreement would give workers richer profit-sharing checks and restore thousands of union jobs. In exchange, workers would forgo cost-of-living increases, which have long been a way of life in Detroit. Higher-wage workers would get inducements to leave, paving the way for lower-paid hires, while lower-wage workers would get a bump. The union is now negotiating contracts with Ford Motor and Chrysler Group.

United Technologies agreed to buy aircraft-components maker Goodrich for $16.4 billion, its biggest acquisition ever and a signature deal for Chief Executive Louis Chenevert. The purchase strengthens UT's commercial aviation business at a time when the industry's order books are full and brings Chenevert a deal big enough to add measurably to a company that expects to reap $58 billion in revenue this year. It sets United Technologies apart from conglomerates like Tyco International, which announced plans this week to break into three. On the financial front, solid borrowers are getting ready access to M&A financing, as shown by the flood of loan offers to UT for the Goodrich deal.

News Corp.'s U.K. newspaper unit plans to pay about $4.7 million in connection with allegations that its News of the World tabloid hacked unto the cellphone voice mail of murdered teenager Milly Dowler in 2002, according to people familiar with the matter. It would be by far the company's largest payout tied to phone-hacking allegations.

Markets

Global investors dumped everything from stocks to corporate bonds to foreign currencies and fled to the relative safety of U.S. Treasurys, fearing a Greek debt default and another recession, even after leaders from the G-20 vowed a "strong and coordinate response" to preserve the stability of financial markets. The Dow industrials dropped 6.41%, their worst week since October 2008, a slide accelerated by a warning from FedEx on the pace of global trade. Currency traders rushed for safe havens, with the dollar and the yen emerging as islands of strength. The wave of selling even swamped gold and silver on Friday, as investors rushed to cash out of profitable investments to make up for losses elsewhere.

Prosecutors expanded the case against Kweku Adoboli, the accused UBS rogue trader, to include allegations that his illegal activity dated back to 2008. The total amount of losses involved also grew, to $2.3 billion. Meanwhile, the UBS board met in Singapore to discuss the bank's internal investigation as speculation swirled about the fate of the company's chief executive and the head of its investment-banking division. UBS wasn't the only bank worried about possible rogue trading. British regulators are reportedly looking at multiple cases of improper or unauthorized trading at banks there, and top executives are said to be scrambling to assess whether they are similarly vulnerable.

A new draft proposal of the so-called Volcker rule dilutes the provision's original ban on proprietary trading. By giving banks wide latitude to "hedge" positions, the new proposal takes much of the bite out of the original rule, which banks have lobbied against heavily.

Citigroup mailed out an estimated 346 million credit card offers in the third quarter, more than one for every man, woman and child in the U.S. The push is expected to make Citi the largest mailer of credit card offers in the country, and shows how the bank is trying to regain ground lost to rivals during the 2008 financial crisis.

Wall Street is taking a bruising. The biggest investment banks are seeing sharply lower revenue, which could result in job cuts and lower bonuses, further undermining a fragile economy. How bad is it? Goldman Sachs Group is at risk of posting only its second quarterly loss in its dozen years as a public company.

Securities regulators have sent subpoenas to hedge funds, specialized trading shops and other firms as they probe possible insider trading that may have taken place before the U.S. government's long-term credit rating was cut last month, people familiar with the matter said.

The SEC charged a Goldman Sachs employee with tipping off his father about market-moving trades the Wall Street firm was about to make, allowing the two to earn $57,000 in illicit profits. It was the first insider-trading case related to the $1 trillion market in exchange-traded funds, and comes as regulators are reviewing their controls on the increasingly popular funds.

By the Numbers

52

Number of countries with satellites currently in orbit, double what it was 20 years ago. NASA on Friday warned there was still a small chance that remnants of a plummeting research satellite could end up in parts of the U.S. Space junk is a big problem, though the risks posed by orbiting debris to satellites and astronauts are greater than to us on the ground here.

—Justin Lahart

Sources: OECD, AP

The Case for Free Markets and Decreased Protectionism

The Group of Twenty has, for all intents and purposes, replaced the G7 in the formulation
of global economic and political policy making, but much work still needs to be done.
While others in this space may discuss how the G20 must focus on the European debt
crisis, development in the under-developed parts of the globe, energy technology, climate
change, and currency, I think that protectionism, an undercurrent issue that affects
practically all else, continues to hamper the global economic recovery. Countries that
have large amounts of protectionist tendencies within the G20, such as China and Russia,
do so because their main concerns are domestic and their primary objective is to increase
the power of the state. China’s actions against Google in favor of Baidu demonstrate
this point, as does the lack of a strong and independent judiciary and respect for the rule
of law in both these countries. The bottom line is that protectionist tendencies restrict
international trade and undermine the ability of free-market economies to create jobs,
ironically undermining the global growth model that has been so successful in the past
sixty years. Proponents of the free market economies within the G20, such as the U.S.,
the E.U., and Japan, need to work more in synch to aptly demonstrate that the free-market
system still works, and that state-dominated economies cannot achieve the same amount
of market efficiency and technological growth as free market economies.

Academic Intergrity

Hi All,
As you know, there were a few people absent from the midterm today.  Out of respect for the process, please refrain from discussing the exam with your friends until everybody has had the chance to take it.  I will grade, but will not publish people's scores until all the midterms have been taken.  Thank you for your understanding.

While we have been busy writing and studying for the exam, the markets have been hit hard in recent days.  Trading was up today, but Wednesday and Thursday were down days as the possibility of a double-dip recession has crystallized in the minds of many investors and traders around the world.  The front cover of the Wall Street Journal today shows the YTD (year-to-date) performance of the Dow Industrials, the Hang Seng (Japan), the Euro Stoxx 50, Copper futures, 10-Year Treasuries, and the Dollar Index.

Also, in non-economic news, the Chairman of the Joint Chiefs of Staff Admiral Mike Mullen accused Pakistan at a US Capitol Hill hearing of aiding militants involved in an attack on the US Embassy in Kabul, Afghanistan.  Pakistan has since responded quite angrily to these comments.

Some Hints

Hi All, the midterm has been written.  I am working on it right now to iron out the kinks and solve all the questions.  It will be 100 points and will consist of five main problems.  Two of the problems are worth more than the other three.

I know you'll all do great!  See you in fourth period.

49th Street

Hi All,
Here is the link to Michelle's new play.  It is simply for your reference.
http://www.kickstarter.com/projects/soundingline/49th-street-and-other-stories-a-new-dance-play?ref=recently_launched

Video on the New Ketchup

Here's the WSJ video: http://trunc.it/ho57i


I hope that everybody gets their shots taken care of before Friday.  Otherwise it looks like I'm going to have to write a second test!

Gender Equality

The World Bank released a report today calling on countries to do more to promote gender equality.  See:
www.worldbank.org
http://www.worldbank.org/wb/slideshows/kenya-famale-farmers/index.html

This is a very important issue for developing countries in particular.  In developed countries, you should all be aware that there are now more female college students and graduates than males, and the percentage of females in higher education has been rising for decades.

Krugman in October 2008

Hi All,
Three years ago, when you were all Freshman, Wall Street and Washington were embroiled in a serious crisis that has not yet abated.  Here is a video from that moment featuring Paul Krugman.  This next chapter, Chapter 5, is an important one, but with the book being written in 2004, we need to supplement our learning to take the current situation into account.

Watch: http://www.charlierose.com/view/interview/9320

Just a note, in April 2009, when I was on the East Coast, I was able to attend a graduate level class taught by Dr. Krugman at Princeton.  It was on international trade policy.  When we cover that subject later in the year, I will attempt to use my notes from that lecture to lead our discussion.  He won the Nobel Prize in Economics for his work on international trade in 2008.

HW Etc

Hi All,
Your HW grades for Chapter 4 have been graded and put into TeacherEase.  Thanks for all of your hard work. Let me remind you that Chapter 5 HW won't be due until a week from Wednesday.  You have been assigned 1, 2, 4, 6, 7, 9, 10, 11, 13, 14, 15, and 18.  That's about 1 per day.  Having a good understanding of the US economy, which remains the largest economy in the world, is important no matter where you end working later in life.

The Wall Street Journal Marketplace section has some really cool articles today.  One is about how Heinz Ketchup has re-engineered the small Ketchup packages that you can get from any fast-food restaurant.  You know, the ones that are impossible to open and then create a huge mess once you do get them open?  Heinz has spent 3 years working on a new package called "Dip and Squeeze" that will make it easier for all of us clumsy-fingered consumers out there.  This is an excellent example of 'creative destruction.'

There's another story about alleged Chinese wind turbine (WTG) espionage, a story close to my heart as a former Chinese wind industry consultant.  The largest maker of wind turbines in China is a company called Sinovel, a firm my company, Azure International, refused to do business with because of intellectual property worries.  But the firm American Superconductor (AMSC) did do business with Sinovel, starting in 2006.  AMSC is now accusing Sinovel of paying an AMSC worker, a Serbian citizen, of paying him $1m dollars in exchange for complete access to important AMSC computer code.  That same worker is now being held in Austria on related charges.

Finally, back to consumer goods, CocaCola is starting to experiment with different sized containers, downsizing from its classic 20-oz bottles or 12-oz cans to 7.5-oz mini-cans and 12.5-oz bottles.  This is good for people that want a Coke but don't want a 20-oz bottle or a 12-oz can.  Coke controls 34.3% of the US soda market, with PepsiCo controlling 32.8%.  Other firms control 32.9%.

See you tomorrow!  Good luck studying for the midterm (better get used to this word!).

Study Guide

Midterm One Study Guide

The Nature and Method of Economics

§       Economics is the study of how people make choices under conditions of scarcity and the results of those choices for society.  Economic analysis of human behavior begins with the assumption that people are rational – that they have well-defined goals and try to achieve them as best they can.  In trying to achieve their goals, people normally face tradeoffs: Because material and human resources are limited, having more of one thing means making do with less of some other good thing.

§       Our focus in this chapter has been how rational people make choices among alternative courses of action.  Our basic tool for analyzing these decisions is cost-benefit analysis.  The cost-benefit principle says that a person should take an action in, and only if, the benefit of that action is at least as great as its cost.  The benefit of an action is defined as the largest dollar amount the person would be will willing to pay in order to take the action.  The cost of an action is defined as the dollar value of everything the person must give up in order to take the action. 

§       Often the question is not whether to pursue an activity but rather how many units of it to pursue.  In these cases, the rational person pursues additional units as long as the marginal benefit of the activity (the benefit from pursuing an additional unit of it) exceeds its marginal cost (the cost of pursuing an additional unit of it).

§       In using the cost-benefit framework, we need not presume that people choose rationally all the time.  Indeed, we identified four common pitfalls that plague decision makers in all walks of life: a tendency to treat small proportional changes as insignificant, a tendency to ignore opportunity costs, a tendency not to ignore sunk costs, and a tendency to confuse average and marginal costs and benefits.

§       Microeconomics is the study of individual choices and of group behavior in individual markets, while macroeconmics is the study of the performance of national economies and of the policies that governments use to try to improve economic performance. 

Core Principles – Scarcity Principle; Cost-Benefit Principle; Not-All-Costs-And-Benefits-Matter Equally Principle

The Economizing Problem

§       One person has an absolute advantage over another in the production of a good ifs he can produce more of that good than the other person.  One person has a comparative advantage over another if the production of a good if she is relatively more efficient than the other person at producing that good, meaning that her opportunity cost of production it is lower than her counterpart’s.  Specialization based on comparative advantage is the basis for economic exchange.  When each person specializes in the task at which he or she is relatively most efficient, the economic pie is maximized, making possible the largest slice for everyone. 

§       At the individual level, comparative advantage may spring from differences in talent or ability or from differences in education, training, and experience.  At the national level, sources of comparative advantage include those innate and learned differences, as well as differences in language, culture, institutions, climate, natural resources, and a host of other factors. 

§       The production possibilities curve is a simple device for summarizing the possible combinations of output that a society can produce if it employs its resources efficiently.  In a simple economy that produces only coffee and nuts, the PPC shows the maximum quantity of coffee production (vertical axis) possible at each level of nut production (horizontal axis). The slope of the PPC at any point represents the opportunity cost of nuts at that point, expressed in pounds of coffee.

§       All production possibilities curves slope downward because of the scarcity principle, which states that the only way a consumer can get more of one good is to settle for less of another.  In economies whose workers have different opportunities cost of producing each good, the slope of the PPC become steeper consumers move downward along the curve.  This change in slope illustrates the principles of increasing opportunity costs (or the low-hanging fruit principle), which states that in expanding the production of any good, a society should first employ those resources that are relatively efficiently at producing that good, only afterward turning to those that are less efficient. 

§       Factors that cause a country’s PPC to shift outward over time include investment in new factories and equipment, population growth, and improvements in knowledge and technology. 

§       The same logic that prompts individuals to specialize in their production and exchange goods with one another also leads nations to specialize and trade with one another.  On both levels, each trading partner can benefit from an exchange, even though one may be more productive than the other, in absolute terms, for each good.  For both individuals and nations, the benefits of exchange tend to be larger the larger are the differences between the trading partners’ opportunity costs.

Supply and Demand: An Introduction

§       Eighteenth-century economics tried to explain differences in the prices of goods by focusing on differences in their cost of production.  But this approach cannot explain why a conveniently located house sells for more than one that is less conveniently located.  Early nineteenth-century economists tried to explain price differences by focusing on differences in what buyers were willing to pay.  But this approach cannot explain why the price of a lifesaving appendectomy is less than that of a surgical facelift. 

§       Alfred Marshall’s model of supply and demand explains why neither cost of production nor value to the purchaser (as measured by willingness to pay) is, by itself, sufficient to explain why some goods are cheaper and others are expensive.  To explain variations in price, we must examine the interaction of cost and willingness to pay.  As we’ve seen in this chapter, goods differ in price because of the differences in their respective supply and demand curves. 

§       The demand curve is a downward-sloping line that tells what quantity buyers will demand at any given price.  The supply curve is an upward sloping line that tells what quantity sellers will offer at any given price.  Market equilibrium occurs when the quantity buyers demand at the market price is exactly the same as the quantity that sellers offer.  The equilibrium price-quantity pair is the one that which the demand and supply curve intersect.  In equilibrium, market prices measures both the value of the last unit sold to buyers and the cost of the resources required to produce it. 

§       When the price of a good lies above its equilibrium value, there is an excess supply of that good.  Excess supply motivates sellers to cut their prices, and price continues to fall until the equilibrium price is reached.  When price lies below its equilibrium, there is excess demand.  With excess demand, frustrated buyers are motivated to offer higher prices, and the upward pressure on prices persists until equilibrium is reached.  A remarkable feature of the market system is that, relying only a tendency of people to respond in self-interested way to market price signals, it somehow manages to coordinate the actions of literally billions of buyers and sellers worldwide.  When excess demand or excess supply occurs, it tends to be small and brief, except in markets where regulations prevent full adjustment of prices. 

§       The efficiency of markets in allocating resources does not eliminate social concerns about how goods and services are distributed among different people.  For example, we often lament the fact many buyers enter the market with too little income to buy even the most basic goods and services.  Concern for the well-being of the poor has motivated many governments to intervene in a variety of ways to alter the outcomes of market forces.  Sometimes these interventions take the form of laws that peg prices below their equilibrium levels.  Such laws almost invariably generate harmful, if unintended, consequences.  Programs like rent-control laws, for example, lead to severe housing shortages, black marketeering, and a rapid deterioration of the relationship between landlords and tenants. 

§       If the difficulty is that the poor have too little money, the best solution is to discover ways of boosting their incomes directly.  The law of supply and demand cannot be repealed by the legislature.  But legislatures do have the capacity to alter underlying forces that govern the shape and position of supply and demand schedules. 

§       The basic supply and demand model is a primary tool of the economic naturalist.  Changes in the equilibrium price of a good, and in the amount of it traded in the marketplace, can be predicted on the basis of shifts in its supply or demand curves.  The following four rules hold for any good with a downward-sloping demand curve and an upward-sloping supply curve:

§         An increase in demand will lead to an increase in equilibrium price and quantity.

§         A reduction in demand will lead to a reduction in equilibrium price and quantity. 

§         An increase in supply will lead to a reduction in equilibrium price and an increase in equilibrium quantity. 

§         A decrease in supply will lead to an increase in equilibrium price and a reduction in equilibrium quantity. 

§       Incomes, tastes, population, expectations, and the prices of substitutes and complements are among the factors that shift demand schedules.  Supply schedules, in turn, are primarily governed by such shifts as technology, input prices, expectations, the number of sellers, and especially for agricultural products, the weather.

§       When the supply and demand curves for a good reflect all significant costs and benefits associated with the production and consumption for that good, the market equilibrium price will guide people to produce and consume the quantity of the good that result in the largest possible economic surplus.  This conclusion, however, does not apply if others, beside buyers, benefit from the good (as when someone benefits from his neighbor’s purchase of a vaccination against measles), or if others besides sellers bear costs because of the good (as when its production generates pollution).  In such cases, market equilibrium does not result in the greatest gain for all. 

International Political and Economic News from Brookings

Got some good news from the Brooking Institute near Dupont Circle in Washington, D.C.  It is a non-partisan thinktank where members of both political parties often go to to give and receive expert advice from scholars and former administration officials.  Thinktanks are an important part of the Washington establishment, and Brookings is one of the most respected one of them all.

Meet the Press at Brookings - 9/11 and its Impacts Ten Years On
America's Political Dysfuctionalism Impacting its Position as the World's Sole Superpower?
Happiness Economics
US Political Dysfunction and its Impact on Asia
The PLA, the Pentagon, and Chinese Military Modernization

Happy Reading!

Thoughts on Possible Fed Action

Below is a link to a recently released New Republic article discussing further possible Fed action on economic stimulus.  Next chapter is on the role of the US economy, and the book was published pre-Great Recession.  Therefore, we need to have a good understanding on our own as to the state of the US economy so as to think critically on ways to improve it. 

Here is the link:
http://www.tnr.com/article/economy/94473/bernanke-federal-reserve-monetary-policy

Link to Sach

http://www.earth.columbia.edu/videos/watch/1

Here is the link to what we will be watching in class on Friday, Sept 16th.

Lessons from Mexico & Japan

By TOM ORLIK

Is China the next Japan or the next Mexico?

One worry for investors is that China will go the same way as Japan. Like Japan once did, China is playing a game of rapid catch-up with the U.S., with growth in output driven by high levels of investment and exports. As also happened in Japan, that growth model has led to the buildup of stress points in the domestic economy: a bubble in the real-estate sector and bad loans in the banks.

The crucial difference is the level of development. Taking 1990 as the date when Japan's growth faltered, gross domestic product per capita, measured in purchasing-power-parity terms, had already reached more than 90% of the level in the U.S. Capacity to grow by catching up was all but exhausted. The real-estate bubble burst when Japan's urbanization rate was above 60%. In an already predominantly urban society, fundamental demand wasn't strong enough to pick up the pieces.

In 2009, China's GDP per capita was 18% of that in the U.S., and the urbanization rate had just touched 50%. The contrast is clear.

Significant scope to grow by catching up to the world economic leader remains. If the ghosts towns that loom large in the bear case against China are a genuine problem, continued urbanization means fundamental demand should remain strong enough for China to grow through it at some point. A Japan-style lost decade doesn't appear to be in China's immediate future.

A more realistic threat is that China is the next Mexico. Mexico grew through exporting low-value-added goods to the U.S, without paying too much attention to niceties like improving human capital and developing an efficient financial system. But as lower-cost competitors entered the world economy, a weak education system and inefficient allocation of capital started to act as constraints on growth. China took export market share and growth stalled. Mexico's GDP per capita languishes at 28% of that of the U.S., a lower level than in the early 1980s.

Bloomberg News

Reform of the financial system has fallen by the wayside in China. Above, Chinese flags fly on boats in the Bohai New Area port zone of Cangzhou, Hebei Province, China.

Here, China might have more to worry about. Wages in the low-skill manufacturing sector are rising fast. On their current trajectory, they will double in the next five years. Low-skill jobs have already started to migrate elsewhere and will continue to do so. Public spending on education, at 3% of GDP in 2009, compares unfavorably to an average of 5% in the grouping of upper-middle-income countries to which China aspires. Reform of the financial system has fallen by the wayside as banks continue to funnel savings to low-yielding state-sponsored projects. (see Red Capitalism by Carl Walter)

To be sure, China's record of economic management is much stronger than Mexico's. And the government talks a good game about the importance of reform. But words have so far not been matched by action. In August this year, a move to bulldoze schools that provided education to the children of migrant workers in Beijing seemed emblematic of policy makers' priorities. With education part of the key to avoiding the middle-income trap, it is bulldozed schools, rather than ghost towns of empty apartments, that are the bigger threat to China's development.

Write to Tom Orlik at Thomas.orlik@wsj.com

Alternative College Ranking

Most of you are familiar with US News and World Report's National University rankings.  But here is a ranking system that takes into account public service and research expenditures.  This may not be especially relevant to our study of economics, but its relevant for me as my alma mater, UC San Diego, is at the top of the list.

http://www.washingtonmonthly.com/college_guide/rankings_2011/national_university_rank.php

Happy College Hunting!

Grading Done... So Quiz on Wednesday

I doubt anybody will check this before school in the morning, but the HW has all been graded and entered into TeacherEase.  There was one assignment that was turned in without a name on it.

Therefore, there will be a simply supply and demand quiz tomorrow in class.  Fourth period will run from 955am to 1020am.  That is just enough time to turn back the homework, take the exam, and field a question or two.

Furthermore, we need to decide which day we will take the midterm next week.  We can discuss it tomorrow and I will announce the date on Thursday.  It will consist of around five or six problems or so, maybe more.  Questions regarding Rogoff and Bernanke are also fair game.  We'll do a brief introduction to Keynes on Thursday or Friday.  Plus for Friday, we'll watch a presentation by Dr. Jeff Sachs of Columbia University's Earth Institute.

Flying after 9/11

Hi All,
Question 3 on the HW asks about flying after 9/11.  While the gasoline question is somewhat uncertain because of the increased supply of oil after 9/11 and the increase in demand from US military forces for its actions in Afghanistan, the number of people flying after 9/11 dropped significantly.  For future reference, please see www.bts.gov and this attached PDF from 2005.

http://www.bts.gov/publications/special_reports_and_issue_briefs/issue_briefs/number_13/pdf/entire.pdf

Commercial Campus

This email popped into my inbox this afternoon.  Enjoy!

Dear EPT colleagues, after receiving (and sharing) so many useful leads on EPT videos recently, I wanted to share a new one that I just used in class today, which prompted very lively discussion.  If your class addresses themes of consumerism and consumption as a driver of environmental challenges, you might want to use this, posted recently on the NY Times website:
http://video.nytimes.com/video/2011/09/10/business/100000001044175/the-commercial-campus.html 
Even if you don't wish to integrate it into your classes, it's definitely worth watching (and disturbing!)!
Best,John

Week Ahead

Hi Students,
I hope you are all finished with your Chapter 3 study questions.  You were to do 1, 2, 3, 4, 5, 7, 8, 9, 11, 13, 14, and 15.  Tomorrow there will be a quiz on production possibilities and absolute and comparative advantage Given that Wednesday is a super short period as well, it will be a good opportunity for another short quiz on Supply and Demand.

Chapter 4 is entitled "The Market System."  This chapter is not as long as the first three we have done, and there are fewer study questions associated with it.  But it is important because we first discuss the concept of private property.  Study questions to do are 1, 2, 3, 6, 7, 8, 10, 11, and 13, and will be due Friday.

Also, the Keynes piece was a rather difficult thing to go through.  So tomorrow I will go over the basics of Keynesian economic theory as compared to classical economic theory.  A good illustration of this is on page 188.  This upcoming week there will not be a paper to read, but rather we will spend some time in-class to listen to Dr. Jeff Sachs of Columbia University's Earth Institute.  We will listen to a speech he gave to the Carnegie Council for Ethics from 2010, and I will bring in my autographed copy of his book, Commonwealth.  I met Dr. Sachs in June 2009 after graduating from the University of San Francisco.  He is a big-time Keynesian and believer in government policy.  He was also instrumental in the formation of the Millennium Development Goals, which are now pillars of global development policy as followed by the United Nation's Development Program (UNDP).  Here is a second speech for you to listen to from the Asia Society with Sachs on US-China climate change cooperation:
http://asiasociety.org/video/policy/jeffrey-sachs-addressing-climate-change-complete

See you tomorrow!

Supply & Demand

Supply and Demand: An Introduction

§      Eighteenth-century economics tried to explain differences in the prices of goods by focusing on differences in their cost of production.  But this approach cannot explain why a conveniently located house sells for more than one that is less conveniently located.  Early nineteenth-century economists tried to explain price differences by focusing on differences in what buyers were willing to pay.  But this approach cannot explain why the price of a lifesaving appendectomy is less than that of a surgical facelift. 

§      Alfred Marshall’s model of supply and demand explains why neither cost of production nor value to the purchaser (as measured by willingness to pay) is, by itself, sufficient to explain why some goods are cheaper and others are expensive.  To explain variations in price, we must examine the interaction of cost and willingness to pay.  As we’ve seen in this chapter, goods differ in price because of the differences in their respective supply and demand curves. 

§      The demand curve is a downward-sloping line that tells what quantity buyers will demand at any given price.  The supply curve is an upward sloping line that tells what quantity sellers will offer at any given price.  Market equilibrium occurs when the quantity buyers demand at the market price is exactly the same as the quantity that sellers offer.  The equilibrium price-quantity pair is the one that which the demand and supply curve intersect.  In equilibrium, market prices measures both the value of the last unit sold to buyers and the cost of the resources required to produce it. 

§      When the price of a good lies above its equilibrium value, there is an excess supply of that good.  Excess supply motivates sellers to cut their prices, and price continues to fall until the equilibrium price is reached.  When price lies below its equilibrium, there is excess demand.  With excess demand, frustrated buyers are motivated to offer higher prices, and the upward pressure on prices persists until equilibrium is reached.  A remarkable feature of the market system is that, relying only a tendency of people to respond in self-interested way to market price signals, it somehow manages to coordinate the actions of literally billions of buyers and sellers worldwide.  When excess demand or excess supply occurs, it tends to be small and brief, except in markets where regulations prevent full adjustment of prices. 

§      The efficiency of markets in allocating resources does not eliminate social concerns about how goods and services are distributed among different people.  For example, we often lament the fact many buyers enter the market with too little income to buy even the most basic goods and services.  Concern for the well-being of the poor has motivated many governments to intervene in a variety of ways to alter the outcomes of market forces.  Sometimes these interventions take the form of laws that peg prices below their equilibrium levels.  Such laws almost invariably generate harmful, if unintended, consequences.  Programs like rent-control laws, for example, lead to severe housing shortages, black marketeering, and a rapid deterioration of the relationship between landlords and tenants. 

§      If the difficulty is that the poor have too little money, the best solution is to discover ways of boosting their incomes directly.  The law of supply and demand cannot be repealed by the legislature.  But legislatures do have the capacity to alter underlying forces that govern the shape and position of supply and demand schedules. 

§      The basic supply and demand model is a primary tool of the economic naturalist.  Changes in the equilibrium price of a good, and in the amount of it traded in the marketplace, can be predicted on the basis of shifts in its supply or demand curves.  The following four rules hold for any good with a downward-sloping demand curve and an upward-sloping supply curve:

§         An increase in demand will lead to an increase in equilibrium price and quantity.

§         A reduction in demand will lead to a reduction in equilibrium price and quantity. 

§         An increase in supply will lead to a reduction in equilibrium price and an increase in equilibrium quantity. 

§         A decrease in supply will lead to an increase in equilibrium price and a reduction in equilibrium quantity. 

§      Incomes, tastes, population, expectations, and the prices of substitutes and complements are among the factors that shift demand schedules.  Supply schedules, in turn, are primarily governed by such shifts as technology, input prices, expectations, the number of sellers, and especially for agricultural products, the weather.

§      When the supply and demand curves for a good reflect all significant costs and benefits associated with the production and consumption for that good, the market equilibrium price will guide people to produce and consume the quantity of the good that result in the largest possible economic surplus.  This conclusion, however, does not apply if others, beside buyers, benefit from the good (as when someone benefits from his neighbor’s purchase of a vaccination against measles), or if others besides sellers bear costs because of the good (as when its production generates pollution).  In such cases, market equilibrium does not result in the greatest gain for all.  

Jobs Discussion

Charlie Rose had our old friend Rogoff and some other respected journalists and economist on his show last night.  Check it out on hulu at:
http://www.hulu.com/watch/276600/charlie-rose-analysis-of-the-republican-debate-and-president-obamas-jobs-speech

Chapter 3 HW is due on Monday.  Good luck everybody!  Hope most of you are already finished, or a problem or two away from getting done.  Chapter 2 and 3 are perhaps the most important of this quarter.

WSJ Business & Econ News 09072011

Business & Economics

• Standard & Poor's held private meetings with large bond investors before it downgraded US government debt, leaving some believing that the chance of a rating cut was higher than they previously thought.  
• BofA shook up management, ousting the heads of the bank's wealth-management and consumer-banking divisions while naming new co-chief operating officers.  
• Switzerland's central bank put a cap on the surging Swiss franc, setting the stage for what could be a long battle with the financial markets.  
• The Dow industrials lost 100.96 points as investors again scrambled into investments perceived as safer.  The 10-year Treasury yield closed below 2% for the first time.  
• The SEC is looking into whether turbocharged exchange-traded funds amplified August's topsy-turvy swings in the stock market.  
• Groupon canceled its investor roadshow and is reevaluating plans for an initial public offering amid the current market volatility.  
• Carlyle Group filed documents to go public, with the private-equity firm aiming for an IPO in the first half of 2012 rather than this year.  
• An overhaul of the patent system passed a hurdle in the Senate and is expected to receive final congressional passage this month.  
• Manhattan prosecutors are pressing ahead with their inquiry into Goldman Sachs mortgage deals, issuing subpoenas to Morgan Stanley and other investors.  
• A UK Parliamentary panel heard testimony from four ex-News Corp. executives in the probe into the News of the World hacking scandal.  
• BP shareholders are demanding that the oil giant come up with a new growth strategy after the company suffered a string of setbacks.  
• Sunoco will exit the refining business, highlighting the squeeze facing the sector.  
• Competitiveness in advanced countries continues to stagnate, a study found.  
• International Paper agreed to buy Temple-Inland for $3.48 billion plus debt.  

The service sectors picked up a bit last month.  The Institute for Supply Management's non-manufacturing index - based mostly on service firms - rose to 53.3 in August from 52.7 in July.  Readings above 50 indicate expansion.  The index reached 59.7 in February, before the economic slowdown began cutting into service-sector growth.  

Various Photos to Reflect On

 This is a photo of downtown Pudong in China.  Most of these buildings were brand new, and most aren't fully occupied because of high rental rates.  Public money was used in the construction of all of these buildings.  The workers you see in the picture walking away from me lived where they worked in bunk-beds.  The recently finished China World Financial Center is just to the right of this photo.  They are now working on the Shanghai Tower, slated to be completed by 2014.  Because of the 'hukou' system in China, they are unable to bring their children with them, as those children must attend school in their hometown, like below.

This was not my class, but rather a class in a town called Guannan, Jiangsu Province.  This photo was taken on a Thursday at 730pm or so.  These students were 'Gao-1,' which is roughly US sophomore year.   The girl in the yellow jacket (front row) was the sister of my colleague in Wuxi.  Most of these students lived on campus in 6 or 8-person dorm rooms, as most of their parents work in more urbanized locations like Beijing, Shanghai, and elsewhere.  Guannan is near the Pacific Ocean, doesn't have a McDonalds or a major shopping mall, but is rather a major agriculture center.  Here is a link to it from Google Maps.

Finally, I snapped this photo in Tailai, Heilongjiang Province while visiting a friend for a wedding.  Agriculture is also a large part of the economy in 'DongBei' (East-North), and the temperature when this photo was taken was about -25F.  Most people in this community worked in small state-run factories or for the government directly, in addition to seasonal farming.  My friend's mother was a prison guard at the nearby prison.  Its south of Qiqiha'er in Heilongjiang Province.