GDP

For those who follow the financial news, Q4 2006 (advanced) GDP was released today posting a strong 3.5% increase. If you look at table 2 here you can see where growth came from (hint: not from housing investment). Growth was mainly driven by consumer spending, exports and government spending. (remember the equation GDP = C + I + G + NX).

The Fed isn't close to setting an inflation target

Proponents of an inflation target (including current Chairman Ben Bernanke) believe that the Federal Reserve should set an explicit target of inflation. The most likely target for the US would be a "core" rate (inflation minus food and energy) of 1-2%.

However, while this theory has wide support among academic economists, it does not look as if it will happen anytime soon, due to logistics and some opposition among Fed Governors.

Read more here.

Are americans saving too much?

This article says yes.

Is Income Inequality a problem?

Tyler Cowen argues in the NY Times today that income inequality in the US is not as much of a problem as is commonly thought.

The gist of the argument is this: Despite the fact the inequality is increasing, other measus of inequality--consumption, happiness--are not. Relate this to your own common experience. Bill Gates has earned billions over the past 2 decades. But has this prevented you from buying your new up to date cars, TV's, clothes and other goods? No. Granted, on a relative basis income inequality has increased, but on an absolute basis a vast majority of Americans are better off.

A counter response would grant this but say that relative inequality can dissolve social cohesion and foster jealosy. Cowen argues that this has been overstated as a concern for the US.

Supply Curves and Bush's Health Care Plan

This is an interesting application of basic supply and demand theory that we will be discussing this semester. Keep the following facts in mind: You have an upwards sloping demand curve and a downwards sloping demand curve (draw your basic graph here).

Now let’s apply this to the latest Bush proposal on health care. Essentially the plan boils down to this. Currently, if you get a health plan through your company that health plan is tax deductible. That is, the company (or you) pays the bills and then you can write if off on your tax returns (making it cheaper). But if you buy insurance on your own you do not get a tax break.

This creates a potential distortion because you have an incentive to get insurance through your employer rather than on your own. Those who cannot get insurance through their employer are thus at a disadvantage. The plan being proposed is to remove the distortion by creating a universal tax deduction regardless of whether you get insurance from your employer or on your own.

The debate on whether this is a good idea is a huge own and parts of it go beyond the purvey of this class. However, one aspect of the debate can be discussed using a simple supply and demand analysis. It runs something like this:

The tax break to get insurance through your employer is a subsidy. This subsidy allows people to purchase insurance. People with insurance go to a doctor, pay a small premium ($5-25 say) and then the insurance company picks up the rest. Since consumers do not pay any additional money if the doctor uses expensive equipment (if your doctor visit costs $200 or $500 you still pay a flat co-payment). Thus demand shifts to the right and prices go up, pricing other people out of the market.

The argument is advanced here. A counter argument is that the supply curve for medical services is actually flat. That is, prices rise in the short term but this induces people (doctors) to enter the market and shift the supply curve back down (think perfect competition). Therefore, prices do not rise.

Whether this argument holds is a tough question to answer. Personally, the limited supply of doctors (due to regulations and the difficulty of being licensed) means that the supply curve likely has an upwards slope.

Why are Oil Prices falling

Econbrowser has a good post on why oil prices are falling. It dispels a number of myths but honestly leaves me with the impression that there may have been a bit of a bubble (although the post resists this explanation).

Good article on Oil

The US economy is much less dependent on higher oil prices today than it was in the 70's and early 80's. This means that higher oil does not necessarily bring the economy to a halt. But, on the flip side, consumers are more dependent on oil now than previously due to bigger cars. This is the conclusion of the latest NY Times Economic Scene's column.

Why are median wages stagnating?

Jagdish Bhagwati has an interesting article on why median wages have not been increasing along with productivity here . His answer is to stop blaming globalization and to starting taking a look at technological change, which has been increasing at a faster rate in the past 2 decades.

The Economics of Christmas

Happy Holidays,

Did you know that there are actually economists who study theories about Christmas Presents. Greg Mankiw summarizes the research here.

The idea is that Christmas gifts are signalling mechanisms, because in theory giving money should be the optimal gift (since the person can spend the money on whatever he or she wants). However, if a gift is a signal to show how much you care about a person, giving money seems like a big cop out.

You can test this theory out on your boyfriend or girlfriend, give them a gift certificate and see how they like it. Next Christmas--if he or she is still around---you can give them a gift.

Flat Panel Discounting

The price war for Flat Panel TV's is hitting high gear, with Circuit City being the hardest hit so far. Read more here

The price war has been a boon for consumers who, in some cases, were able to snap up the sets over the Thanksgiving weekend at below retailers' cost.
But growing competition and plummeting prices are taking a heavy toll on many retailers. The consumer-electronics market has turned into a free-for-all as the nation's largest electronics retailer, Best Buy Co., has fended off attacks by giant discounter Wal-Mart, which is looking to electronics to help recharge its growth. Flat-panel TVs this season also have cropped up for sale in such unaccustomed venues as home-improvement outlets, office-supply stores and discount chains.

This would be the classic example of a price war among Oligopolists

"Not only did the electronics chain withstand Wal-Mart's initial onslaught, it has continued to gain share. After Wal-Mart publicly crowed about its plan to offer a glitzy Panasonic plasma high-definition TV set for $1,294 the day after Thanksgiving, Best Buy fired back by offering the same TVs for $1,000 and calling it an "unadvertised special.""

Sidebar

For some reason the sidebar has shifted to the bottom of the page. I don't know why. All the links are there, however, you just have to scroll to the bottom.

PS-If this fixes itself, please ignore

Market Assumptions

This is a recap of the review class and could serve as notes on what to keep in mind on the 4 market models. While 4 models may seem like a lot to memorize, try and think of everything as either flowing from or contradicting the assumptions of perfect competition.

Remember the 4 assumptions

1) Many buyers and sellers
2) Perfect information
3) Easy entry/exist
4) Homogenous product.

Monopolistic competition deviates from assumption 4.

Monopoly deviates from 1 and 3

and Oligopoly deviates from 1 and 3, though to a lesser extent (since there is more than one firm, and there is possible entry/exit). 4 is also likely violated, as in monopolistic competition (think the Video Console industry or Flat Panel TV's).

Study Hints for Final Exam

If I were you, I would be focusing on allocative efficiency and productive efficiency.

It is key to keep in mind that only under perfect competition is allocative efficiency (P=MC) and productive efficiency {min(ATC)} easily achieved.

In other markets, since some form of market imperfection exists (differentiated products, barriers to entry, small number of sellers, whatever) price does not necessarily equal marginal cost and ATC is not necessarily minimized.

Whether the government needs to step in and fix the problem, however, is another question, since the problem may be very small and may yield external benefits (in the form of product differentiation.)

Quiz 8

For those who missed Quiz 8, you can view the question set here

The answer key is here

The explanation for question 10 is here

Quiz 10

You can view the questions (and print them out if you would like) here

The answers are

C
B
A
D
C

Ice Skating and the Invisible Hand

This post illustrates the invisible hand via Ice Skating. Think about it: No one plans the traffic flow on an ice skating rink, yet ice skating is not complete chaos.

College Tuition and the "Baumol effect"

Take a look at this post by Professor Mankiw. Note in particular point 2, which explains the Baumol effect. The Baumol effect explains why wages can rise in a particular industry even if productivity growth in that industry is not rising. What matters is overall productivity, which ends up bidding up wages in all industries.

Quiz 10 - Comparative Advantage (Part I)

Quiz 10 - Comparative Advantage (Part I) Part II is 5 questions in class, which will be given on Thurs. The final is Tues 19th

1) (5 points) Below is the maximum amount of CD's or PC's that can be built by the US and Japan.


Pre-Specialisation

UK
Personal Computers
2,000
CD Players
500

Japan
Personal Computers
4,000

CD Players
2,000

1) Who has the absolute advantage in PC's?
2) Who has the absolute advantage in CD players?
3) Who has the comparative advantage in PC's?
4) Who has the comparative advantage in CD Players?
5) Based on this, who should specialize in CD Players and who should specialize in PC's?
6) Name and explain 2 objections to free trade and the counter argument provided by Economists.

Game Theory Application

This is a good application of game theory. Ever wonder why ATM fees persist in a brutally competitive banking industry? Or why hotels charge you $2 for a local phone call and $5 for a coke at the mini bar?

Various articles on Free Trade

Here is New York Times Columnist Nicholas D. Kristof on Sweatshops

Here is an article in the New Republic criticizing the Schumber/Roberts attack on free trade. The first few paragraphs give a good summary of what trade does to boost production. (Note: I would link to Schumer's original article but it is not available free online). But here is another blogger being less kind to Schumer on this issue.

If this is all confusing to you, let me try and explain comparative advantage using the following example. Let us assume there is a doctor and a secretary. The doctor has an absolute advantage in both surgeries and typing (he is the fastest typist in the world). In autarky (i.e. the position of no trade) he does a good number of surgeries but also a lot of time consuming typing. The secretary is unemployment or working at a lower wage job.

Comparative advantage says that it is advantagous for the Doctor to hire the Secretary to do his typing for him. This way he can concentrate on surgeries (boost his output on surgeries, where he makes a lot of money) and leave the typing to the secretary. It does not matter that the Secretary is a slower typist than he is. What matters is that by hiring the Secretary, he leaves more room to specialize in a field he can make a lot of money in and boost overall output. The Secretary is also better off because she is at a nice job with the Doctor whereas before she was either unemployment or working for much less money.

E-mail me if you are still having trouble.