May 2005 Archives

Two more days... Here's the batting order for today. These are the chapter titles from New Ideas from Dead Economists by Todd Buchholz. (There are two of you for the Smith, Marx and Institutionalists chapters.)

The Second Coming of Adam Smith
Malthus: Prophet of Doom and Population Boom
David Ricardo and the Cry for Free Trade
The Stormy Mind of John Stuart Mill
The Angry Oracle Called Karl Marx
Alfred Marshall and the Marginalist Mind
Old and New Institutionalists
Keynes: Bon Vivant as Savior
The Monetarist Battle Against Keynes
The Public Choice School: Politics as Business
The Wild World of Rational Expectations

20 multiple choice tomorrow. (Remember that you already have the review sheet.) You can find the problem portion below as well. Tomorrow, we talk about where you are at in terms of finishing up stuff and when we can expect that to be done...

Good morning. You know the drill for today. We'll have the "New Ideas for Dead Economists" tomorrow. You can use the time today as you see fit.

Exam #2 - Micro and International Economics

Problems: (10 points)

There is only one "problem" here, but it has a number of parts. In each case, your answer will simply be a graph of demand and/or supply. (Many answers are possible, so you simply need to reflect one logical outcome for the information you are given.)

a. 1 point - Draw a demand curve (label the two axes appropriately).

b. 1 point - Draw another demand curve. Label any point on the curve as "A". Assume the price of the good increases. Reflect one possible result of that change on the graph as "A2".

c. 2 points - Draw another demand curve. (It's for a fictional food product.) Assume that a new report has proven that this food increases both intelligence and physical strength. Show the effect of this report in terms of its impact on demand.

d. 2 points - Draw a pair of axes. Show four demand curves. Label them as elastic (E), inelastic (I), perfectly elastic (PE), and perfectly inelastic (PI). Make sure each curve reflects the appropriate defintion.

e. 2 points - Draw a simple demand and supply graph. Label the equilibrium price point with "E". Assume that income of consumers increases, and that this is a normal good. Show an appropriate new equilibruim point and label it "E2".

f. 2 points - Draw a simple demand and supply graph. Label the equilibrium price point with "E". (Assume that it is for rental housing.) The government institutes a "price ceiling" that is below true market value. Show a possible price ceiling and its effects on supply and demand on the graph.

Short answer: (20 points - 5 points each)
You need to do four of the following "short answer" questions. Choose any four that you would like from the list. Answers should be between 300 - 500 words or so. You can either print them out or submit them electronically to me as an e-mail attachement.

A. Through some sort of miracle, that little dude with the monocle from the Monopoly game comes to life and wants to talk to you. He doesn't understand why monopolies have long been regulated and/or broken up in the United States. Explain to him some of the reasons why. (Do not pass Go. Do not collect $200.)

B. You and one of your Economics classmates have recently been elected the leaders of two of the world countries. Using specific examples (names, products, and countries), demonstrate your understanding of the terms "absolute advantage" and "comparative advantage".

C. Assume that you are teaching a class of second graders some basic economic principles. You need to explain why the nations of the world benefit from trade. Keeping in mind that the authors of The Armchair Economist will sue plagiarists, develop an analogy or story that gets this point across. (By the way, The Armchair Economist was the source of the "Iowa Car Crop" story...)

D. You are the new headline writer for the StarTribune. Tomorrow's issue is a special edition devoted to globalization. You are in charge of writing five "headlines" for the pro-globalization forces and their best arguments and five "headlines" for the anti-globalization forces and their best arguments. What would those headlines be?

E. The rest of the world has gotten tired of arguing about globalization. They have left you to cast the deciding vote. Is gloablization helpful or harmful? Why?

F. You have been named the President of the World Bank. You unexpectedly have an additional $10 billion in funds to loan out for the purposes of development assistance. In broad terms, tell us what you would do with that money. Where would you spend it?

G. Any other bright ideas for questions that you would like to tackle? If so, let me know...

Exam #2 Problems/Questions can be found by clicking the link at the bottom...

Finishing up with GLOBALIZATION!!! Nice job yesterday. I'm curious if you have opinions (You ALWAYS have opinions.) on any of these questions:

* What have been the principal benefits of globalization?

* What have been the principal drawbacks of globalization?

* Was globalization inevitible?

* Is it possible to "avoid" globalization in the world today?

* Will the era of globalization be more or less stable than the Cold War era?

* Were the attacks of 9/11 a consequence of globalization?

* Is there a risk that democracy will be sacrificed in the name of globalization?

* If you could turn back time, would you work to slow or speed globalization?

Development Economics: This will be more discussion oriented than "lecture" based. You know a lot about inequality and the problems of poverty and related issues. For us, I'd like the bigger questions to be these:

What can be done to foster economic development?
What should be done to foster economic development?

First, I'd like to brainstorm a list of causes of global inequality and poverty.

There are a few terms and concepts that will be useful in this discussion:

World Bank: The World Bank is owned by 184 countries. In 2002, almost $20 billion in loans were provided to clients in more than 100 countries. The World Bank's focus is on development assistance.

Work your way through this overview of the World Bank's functions at "10 Things You Never Knew about the World Bank."

Here are the "Quick Reference Tables" from the World Bank. You can find a lot of information here.

International Monetary Fund: According to its own web page, the IMF "works for global prosperity by promoting the balanced expansion of world trade and stability of exchange rates..." Its functions complement those of the World Bank.

Structural Adjustment Programs (SAP): The IMF and World Bank at times require nations to "adjust" their economies in order to assure debt repayment. Many critics believe this only deepens the poverty of the people. Nations may be required to encourage foreign trade, shift to a cash crop focus, or otherwise be directed to act in a particular way. These are also referred to as "economic austerity" plans.

Causes of Poverty: This information comes from an individual's web site. It is very well done, but it also comes from a clearly liberal perspective. Browsing around here a bit will give you both good information and some opinions on what might be done differently.

Now, let's revisit the two questions from above...

What can be done to foster economic development?

What should be done to foster economic development?

Please read Chapter 12 from Naked Economics for tomorrow. I reprinted the exam questions below. Click on the "continue reading" link at the bottom...

Globalization Forum: We will come together for the Second Annual Mounds Park Academy Globalization Forum.

These people will be represented...

4 American representatives: 1 from government, 1 from "big" business, 1 consumer, 1 environmental activist

2 Europeans: 1 owner of a multinational corporation, 1 "displaced" worker

2 Africans: 1 resident of a resource-rich country, 1 person existing on less than $1 a day

4 Asians: 1 "sweatshop" laborer, 1 high-tech manufacturer, 1 peasant, 1 Chinese governmental official

2 Latin Americans: 1 manager of a foreign-owned factory, 1 manual laborer

Questions for discussion/ debate:

* What have been the principal benefits of globalization?

* What have been the principal drawbacks of globalization?

* Was globalization inevitible?

* Is it possible to "avoid" globalization in the world today?

* Will the era of globalization be more or less stable than the Cold War era?

* Were the attacks of 9/11 a consequence of globalization?

* Is there a risk that democracy will be sacrificed in the name of globalization?

* If you could turn back time, would you work to slow or speed globalization?

Here are some resources that you might consult:

Chapter 11 from Naked Economics

Think Global: Public Radio Collaboration 2005 This is a brand new site. There's a lot of good stuff here.

The Lexus and the Olive Tree There are some excerpts and reviews here that you might find interesting.

Globalization: Threat or Opportunity? This is an IMF report addresses many of the central issues in globalization.

The International Forum on Globalization This is the site of a group critical of many of the effects of globalization.

The World is Flat: A Brief History of the Twenty-First Century This is a talk by Thomas Friedman about his most recent book.

Globalization and Its Discontents - Joseph Stiglitz (He won a Nobel Prize for Economics...)

In Defense of Globalization - Professor Jagdish Bhagwati

Today's agenda:
Assignment reminders
News updates
Naked Economics: You should have chapter 11 read for today. (If not, be sure you get to it before Monday.) That's leaves us 9 and 12 and the epilogue for next week.
Taking Sides: Minimum wage, protectionism, sweatshops
Globalization Forum preparation

Note: The short answer parts of the exam are below...

Globalization Forum: Monday, we will come together for the Second Annual Mounds Park Academy Globalization Forum. Each of you will represent a different interest.

* You are allowed (within limits) to select your role for this forum. I do need certain perspectives represented, but you can take creative liberties within those limits.

These people will be represented...

4 American representatives: 1 from government, 1 from "big" business, 1 consumer, 1 environmental activist

2 Europeans: 1 owner of a multinational corporation, 1 "displaced" worker

2 Africans: 1 resident of a resource-rich country, 1 person existing on less than $1 a day

4 Asians: 1 "sweatshop" laborer, 1 high-tech manufacturer, 1 peasant, 1 Chinese governmental official

2 Latin Americans: 1 manager of a foreign-owned factory, 1 manual laborer

* You will be expected to provide an introductory statement of not less than ninety seconds. In this statement, you will tell other participants of your "situation", and you will offer your preliminary comments on events associated with globalization.

Obviously, you will need to "create" much of your own detail. Think about how your life has changed over the past decade. What are the advantages/ drawbacks of globalization in your world? What will the future hold?

* In order to help me know who is "who", I'd like you to prepare a "nametag" for our use. Give yourself a name and brief "title" or description. Make them big enough for us to read.

For example: "Adam Wilson - owner of Dell Computers" or whatever...

* Do whatever research in class that might help you create your "perspective" and better understand the issue of globalization.

Here are some resources that you might consult:

Think Global: Public Radio Collaboration 2005 This is a brand new site. There's a lot of good stuff here.

The Lexus and the Olive Tree There are some excerpts and reviews here that you might find interesting.

Globalization: Threat or Opportunity? This is an IMF report addresses many of the central issues in globalization.

The International Forum on Globalization This is the site of a group critical of many of the effects of globalization.

The World is Flat: A Brief History of the Twenty-First Century This is a talk by Thomas Friedman about his most recent book.

Globalization and Its Discontents - Joseph Stiglitz (He won a Nobel Prize for Economics...)

In Defense of Globalization - Professor Jagdish Bhagwati

Exam #2 - Micro and International Economics

Problems: (10 points)

There is only one "problem" here, but it has a number of parts. In each case, your answer will simply be a graph of demand and/or supply. (Many answers are possible, so you simply need to reflect one logical outcome for the information you are given.)

a. 1 point - Draw a demand curve (label the two axes appropriately).

b. 1 point - Draw another demand curve. Label any point on the curve as "A". Assume the price of the good increases. Reflect one possible result of that change on the graph as "A2".

c. 2 points - Draw another demand curve. (It's for a fictional food product.) Assume that a new report has proven that this food increases both intelligence and physical strength. Show the effect of this report in terms of its impact on demand.

d. 2 points - Draw a pair of axes. Show four demand curves. Label them as elastic (E), inelastic (I), perfectly elastic (PE), and perfectly inelastic (PI). Make sure each curve reflects the appropriate defintion.

e. 2 points - Draw a simple demand and supply graph. Label the equilibrium price point with "E". Assume that income of consumers increases, and that this is a normal good. Show an appropriate new equilibruim point and label it "E2".

f. 2 points - Draw a simple demand and supply graph. Label the equilibrium price point with "E". (Assume that it is for rental housing.) The government institutes a "price ceiling" that is below true market value. Show a possible price ceiling and its effects on supply and demand on the graph.

Short answer: (20 points - 5 points each)
You need to do four of the following "short answer" questions. Choose any four that you would like from the list. Answers should be between 300 - 500 words or so. You can either print them out or submit them electronically to me as an e-mail attachement.

A. Through some sort of miracle, that little dude with the monocle from the Monopoly game comes to life and wants to talk to you. He doesn't understand why monopolies have long been regulated and/or broken up in the United States. Explain to him some of the reasons why. (Do not pass Go. Do not collect $200.)

B. You and one of your Economics classmates have recently been elected the leaders of two of the world countries. Using specific examples (names, products, and countries), demonstrate your understanding of the terms "absolute advantage" and "comparative advantage".

C. Assume that you are teaching a class of second graders some basic economic principles. You need to explain why the nations of the world benefit from trade. Keeping in mind that the authors of The Armchair Economist will sue plagiarists, develop an analogy or story that gets this point across. (By the way, The Armchair Economist was the source of the "Iowa Car Crop" story...)

D. You are the new headline writer for the StarTribune. Tomorrow's issue is a special edition devoted to globalization. You are in charge of writing five "headlines" for the pro-globalization forces and their best arguments and five "headlines" for the anti-globalization forces and their best arguments. What would those headlines be?

E. The rest of the world has gotten tired of arguing about globalization. They have left you to cast the deciding vote. Is gloablization helpful or harmful? Why?

F. You have been named the President of the World Bank. You unexpectedly have an additional $10 billion in funds to loan out for the purposes of development assistance. In broad terms, tell us what you would do with that money. Where would you spend it?

G. Any other bright ideas for questions that you would like to tackle? If so, let me know...

We'll wrap up stuff from yesterday and start with a couple "visualization" exercises. (I don't know exactly what that means, but it will remind me what I want to do...)

Our look at globalization begins today. Many people argue that this force of integration will come to characterize this era as much as the Cold War had dominated the previous era. Author Thomas Friedman argues that the "Web" has replaced the "Wall" as the symbol of the era.

What is globalization? Simply put, this is the increasing integration of the world through the forces of global trade, business, and finance.

Thomas Friedman's book, The Lexus and the Olive Tree: Understanding Globalization, has become the most widely-cited book on the topic. He has a number of very useful metaphors and explanations. You'll be asked to read one of the chapters for Monday. (Most of tomorrow should be work time.)

A couple of Friedman's ideas:

The Title: The "Lexus" represents the forces of modernity and technology. It is the "drive for sustenance, improvement, prosperity, and modernization." The "Olive Tree" represents "everything that roots us, anchors us, identifies us, and locates us in the world... a family, community, tribe, nation, religion, or home."

There are three balances in the global system:

* Balance between nation-states: The United States has clearly emerged as the sole superpower.

* Balance between nations-states and global markets: Friedman calls the global market of investors the "Electronic Herd". They trade in the global financial centers he calls "Supermarkets".

* Balance between individuals and nation-states: The emergence of people that he calls "Super-empowered Individuals" is a new factor to consider. Some are very angry, others are wonderful.

The "Walls" come down... Friedman argues that the Cold War era gave way to the era of globalization as a result of three fundamental changes.

* Democratization of Technology: caused by advances in miniturization, computerization, digitization, etc. (Computer power has doubled roughly every eighteen months over the past thirty years.)

* Democratization of Finance: caused by computerization, investment technologies, access to financial markets, etc.

* Democratization of Information: spread through things like the Internet, satellite dishes, and television

Globalization Forum: Monday, we will come together for the Second Annual Mounds Park Academy Globalization Forum. Each of you will represent a different interest.

* You are allowed (within limits) to select your role for this forum. I do need certain perspectives represented, but you can take creative liberties within those limits.

We will need: (Take them on a first-come, first-served basis.)

4 American representatives: 1 from government, 1 from "big" business, 1 consumer, 1 environmental activist

2 Europeans: 1 owner of a multinational corporation, 1 "displaced" worker

2 Africans: 1 resident of a resource-rich country, 1 person existing on less than $1 a day

4 Asians: 1 "sweatshop" laborer, 1 high-tech manufacturer, 1 peasant, 1 Chinese governmental official

2 Latin Americans: 1 manager of a foreign-owned factory, 1 manual laborer

* You will be expected to provide an introductory statement of not less than ninety seconds. In this statement, you will tell other participants of your "situation", and you will offer your preliminary comments on events associated with globalization.

Obviously, you will need to "create" much of your own detail. Think about how your life has changed over the past decade. What are the advantages/ drawbacks of globalization in your world? What will the future hold?

* In order to help me know who is "who", I'd like you to prepare a "nametag" for our use. Give yourself a name and brief "title" or description. Make them big enough for us to read.

For example: "Adam Wilson - owner of Dell Computers" or whatever...

* Do whatever research in class that might help you create your "perspective" and better understand the issue of globalization.

Here are some resources that you might consult:

Think Global: Public Radio Collaboration 2005 This is a brand new site. There's a lot of good stuff here.

The Lexus and the Olive Tree There are some excerpts and reviews here that you might find interesting.

Globalization: Threat or Opportunity? This is an IMF report addresses many of the central issues in globalization.

The International Forum on Globalization This is the site of a group critical of many of the effects of globalization.

The World is Flat: A Brief History of the Twenty-First Century This is a talk by Thomas Friedman about his most recent book.

Globalization and Its Discontents - Joseph Stiglitz (He won a Nobel Prize for Economics...)

In Defense of Globalization - Professor Jagdish Bhagwati

Still catching up: Today is "mimimum wage" from Taking Sides. (Tomorrow is BOTH "protectionism" and "sweatshops.") We'll also briefly talk about chapter 8 in Naked Economics. Please have chapter 11 read for Friday.

Last time it was trade. This time it's money. More specifically, we'll look at international currencies and the role they play in the world's economy. Here are some definitions that you will need to understand:

Exchange Rates: The value of currencies worldwide is provided by exchange rates, which tell you what each currency is worth in relation to other currencies. In simple terms, a currency is worth what people will pay for it. Exchange rates are constantly adjusted to reflect markets.

* Fixed exchange rates: After the 1930s, most countries abandoned the gold standard. Instead, each country's government "fixed" the value of their currency, deciding what it would be worth. (For example, the British decided to exchange their pound into US dollars at a rate of $2.40 per pound.)

* Floating exchange rates: After 1973, international agreements on fixed rates expired, and currencies began to have their value decided in the market. A currency's value will "float" up or down. (An estimated $1.5 trillion dollars in currencies are traded every day in the world's foregin exchange markets.)

Purchasing Power refers to what money can actually buy in each country- calculating its purchasing "power". Purchasing Power Parity (PPP) would be when a currency can buy the same basket of whatever in any country.

"Burgernomics" is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country." (The Economist) In this case, the "basket" is simply a BigMac.

Playing with "Purchasing Power Parity (PPP): I think you'll like this stuff...

To do the following, you need a copy of "cross currency" rates. You can get one from the Benchmark Currency Rates page at Bloomberg.com. (Yes, that's the same Bloomberg as in the Mayor of New York City.)

Economists refer to purchasing power parity to describe why, over time, the dollar price of a good in one country should equal its dollar price in all other countries. The notion that a particular type of cordless telephone should sell for the same dollar price in the United States as it does in, say, Japan and Great Britain, makes sense if you think about supply and demand in world markets. Suppose that the telephone sells for $29.99 in the United States, 2500 yen in Japan, and 25 pounds in Great Britain.

Let's figure out in which country the dollar price of the cordless phone is lowest?

1. What is the exchange rate between the Japanese yen and the United States dollar?

2. What is the exchange rate between the British pound and the United States dollar?

3. Calculate the dollar price of the cordless phone in Great Britain.

4. Calculate the dollar price of the cordless phone in Japan.

5. In which country is the dollar price of the cordless phone the lowest?

6. In which country is the dollar price of the cordless phone the highest?

So, what does "purchasing power parity" suggest that an entrepreneur could do to earn profits?

Of course, purchasing power parity theory suggests that price adjustment will continue until the dollar price of cordless phones is the same in each country. This price equalization is an example of purchasing power parity. Note that it works best for close substitutes that can be traded among countries over long periods of time.

The "BigMac" Index: I did this exact same activity eighteen years ago in high school economics, but I didn't have a fancy laptop to make it easier... The Economist attempts to compare various currencies by using the "Big Mac" as the basis for consideration. The easiest way to make sense of this is to actually read their article and try the activity.

"Food for Thought": The Economist, May 27, 2004

This is, I believe, still their most recent full version of "Burgernomics". (Here is a snapshot of December 2004 data.) You need to read through the article to get a feel for how the concept works. After that, we can try a couple things. (I am bummed. They've removed data, so we can't do the computations ourselves. Ahh, progress.)

Here's another recent effort: The Starbucks index -Burgers or beans? The Economist, January 15, 2004

Coca-Cola map: If you liked the BigMac stuff, here is another one. Read the short article and examine the charts. What conclusions can you draw?

Foreign Exchange map: This is another service from The Economist. Once you get to the page, you have to "Luanch the Map". Give it a minute or so to load itself. After that, follow the directions from the first page. Try several comparisons between countries and over time periods.

FIRST THINGS FIRST: Discussion of chapter 7, "Financial Markets,' in Naked Economics, any news stories, and the "Taking Sides" discussions on minimum wage and protectionism.

We'll continue our look at the world economy with an examination of the United States and issues of trade.

There are a couple more definitions we need to make sense of this information we will consider today.

Balance of trade: Balance of trade data describe the exports of goods and services produced in the U.S. and sold abroad and the imports of goods and services produced abroad and sold to individuals, businesses, and governments in the U.S. To obtain the balance, imports are subtracted from exports and the result is described as a surplus if exports are greater than imports and a deficit if imports are greater than exports.

More commonly, you will hear of the trade deficit. This is exports minus imports.

bilateral trade negotiations: These are trade negotiations between two coutries only

most-favored-nation clauses: These extend the benefits of lower trade barriers granted to one country to all nations what have most-favored-nation status. This term is being phased out in favor of the terms, normal trade relations or permanent normal trade relations.

The Status of US Trade: Charts and graphs...

You can download this Powerpoint of September 2003 trade report graphs and charts.

Here's more current information from the US Government on our trade balance and situation.

Specific issues in US trade policy: We'll access resources from the "Public Citizen" web page. They call themselves a national, non-profit public interest organization. Ralph Nader helped found this organization 30 years ago, so there is a definite liberal perspective here.

We'll have you pick one of these issues. I want you to figure out the basics and report back to us. In addition, please consider what you think the "conservative" response might be...

World Trade Organization (WTO)
North American Free Trade Agreement (NAFTA)
Free Trade Area of the Americas (FTAA)
Central American Free Trade Agreement (CAFTA)
Offshoring

Hope you enjoyed the bridge-breaking. We've got some work to do.

Appetizers: Let's share what you found interesting in chapters 6 and/or 7 of Naked Economics.

These are the "Taking Sides" coming up this week...

Monday, May 16th
11. Is It Time to Abolish the Minimum Wage?

Tuesday, May 17th
13. Are Protectionist Policies Bad for America?

Thursday, May 19th
14. Should We Sweat About Sweatshops?

Left-overs: I want to begin with a brief discussion. Very often, discussions of trade center on "winners" and "losers". Let's consider the case of NAFTA, the North American Free Trade Agreement. NAFTA went into effect on January 1, 1994. Its goal was to limit trade barriers among Canada, the United States, and Mexico. (We'll forget about Canada, since we have long had very free trade with them.)

Who do you believe have been/ will be/ are the "winners" and "losers" under NAFTA?

We'll brainstorm two lists at the board.

Second, Let's make sure that you all understand this "advantage" stuff.

Third, let's work through an example of a simple economy. Download this Comparative Advantage handout, and work through the scenario with a partner.

Fourth, Let's talk about "The Iowa Car Crop."

Finally, let's think about the limits that are put on international trade. These barriers can take a number of forms.

* tariffs - taxes on imports (either for generating revenue or sheltering firms from competition)

* quotas - restrictions on the quantity of a good that may be imported or exported

* non-tariff barriers - regulations on labeling, packaging, and testing; customs restrictions

* embargo - This, of course, is a cutting off of trade with another country.

A couple questions with which to close:

What are the arguments in favor of restricting trade?
What are the arguments against restricting trade?
In your opinion, when are restrictions on trade justified?

In addition to sharing heart-warming stories about my daughter, we did get caught up on some miscellaneous things yesterday. Now, it's on to trade....

Let's share what you found interesting in chapters 6 and/or 7 of Naked Economics.

These are the "Taking Sides" coming up next week...

Monday, May 16th
11. Is It Time to Abolish the Minimum Wage?

Tuesday, May 17th
13. Are Protectionist Policies Bad for America?

Thursday, May 19th
14. Should We Sweat About Sweatshops?

We'll begin our look at the world economy with an examination of the basics of trade. The amount of hype and misinformation surrounding the issue of trade in the United States is truly staggering. Our goal is to cut through some of this lack of understanding.

First, I want to begin with a brief discussion. Very often, discussions of trade center on "winners" and "losers". Let's consider the case of NAFTA, the North American Free Trade Agreement. NAFTA went into effect on January 1, 1994. Its goal was to limit trade barriers among Canada, the United States, and Mexico. (We'll forget about Canada, since we have long had very free trade with them.)

Who do you believe have been/ will be/ are the "winners" and "losers" under NAFTA?

We'll brainstorm two lists at the board.

Second, we need to learn a bit of vocabulary that goes along with international trade. There are two fundamental terms that often cause confusion.

absolute advantage: When two countries can each produce a different good (or service) more efficiently than the other country, each of the countries has an absolute advantage in the good or service they produce more efficiently.

comparative advantage: When Country A can produce two different products more efficiently, but has a greater advantage in one product than the other, they have a comparative advantage in the product with the greater relative efficiency. Country B has a comparative advantage in the product in which the disadvantage is less large.

That seems like a mouthful, but let's try to make sense of it. Clearly, it is in both counties' best interest to trade in a situation of absolute advantage. What if we are talking comparative advantage?

Third, let's work through an example of a simple economy. Download this Comparative Advantage handout, and work through the scenario with a partner.

Fourth, I have a short (2 page) reading that I want us to do. It may be the single most effectively worded defense of trade that I have ever read. Let me hand it out... Read it and talk about it.

Finally, let's think about the limits that are put on international trade. These barriers can take a number of forms.

* tariffs - taxes on imports (either for generating revenue or sheltering firms from competition)

* quotas - restrictions on the quantity of a good that may be imported or exported

* non-tariff barriers - regulations on labeling, packaging, and testing; customs restrictions

* embargo - This, of course, is a cutting off of trade with another country.

A couple questions with which to close:

What are the arguments in favor of restricting trade?
What are the arguments against restricting trade?
In your opinion, when are restrictions on trade justified?

This will begin our shift from micro-economics to international economics (both micro and macro-level). This lesson will probably cover the next two days.

THINGS TO CATCH UP ON: Discussion of Chapter 6 in Naked Economics. We also need to do the "Taking Sides" on both Social Security and subsidizing sports. We can also talk news. Let's do all of these things first.

We'll begin our look at the world economy with an examination of the basics of trade. The amount of hype and misinformation surrounding the issue of trade in the United States is truly staggering. Our goal is to cut through some of this lack of understanding.

First, I want to begin with a brief discussion. Very often, discussions of trade center on "winners" and "losers". Let's consider the case of NAFTA, the North American Free Trade Agreement. NAFTA went into effect on January 1, 1994. Its goal was to limit trade barriers among Canada, the United States, and Mexico. (We'll forget about Canada, since we have long had very free trade with them.)

Who do you believe have been/ will be/ are the "winners" and "losers" under NAFTA?

We'll brainstorm two lists at the board.

Second, we need to learn a bit of vocabulary that goes along with international trade. There are two fundamental terms that often cause confusion.

absolute advantage: When two countries can each produce a different good (or service) more efficiently than the other country, each of the countries has an absolute advantage in the good or service they produce more efficiently.

comparative advantage: When Country A can produce two different products more efficiently, but has a greater advantage in one product than the other, they have a comparative advantage in the product with the greater relative efficiency. Country B has a comparative advantage in the product in which the disadvantage is less large.

That seems like a mouthful, but let's try to make sense of it. Clearly, it is in both counties' best interest to trade in a situation of absolute advantage. What if we are talking comparative advantage?

Third, let's work through an example of a simple economy. Download this Comparative Advantage handout, and work through the scenario with a partner.

Fourth, I have a short (2 page) reading that I want us to do. It may be the single most effectively worded defense of trade that I have ever read. Let me hand it out... Read it and talk about it.

Finally, let's think about the limits that are put on international trade. These barriers can take a number of forms.

* tariffs - taxes on imports (either for generating revenue or sheltering firms from competition)

* quotas - restrictions on the quantity of a good that may be imported or exported

* non-tariff barriers - regulations on labeling, packaging, and testing; customs restrictions

* embargo - This, of course, is a cutting off of trade with another country.

A couple questions with which to close:

What are the arguments in favor of restricting trade?
What are the arguments against restricting trade?
In your opinion, when are restrictions on trade justified?

We'll start with any news stories and with chapter 6 from Naked Economics. (Please have chapter 7 read for Thursday.) Next, we'll do the "Taking Sides" on social security.

I asked you to think about... a business that you believe is either a "success" story or a "failure". Tell us why you think that business is either succeeding or failing...

Competition and Business: Let's look at the different market structures that exist for the goods. Most economists hold that there are four basic types of market competition: perfect competition, monopoly, monopolistic competition, and oligopoly. (The last three are summed up as forms of "imperfect competition".)

These characteristics help determine the market structure for a given good:

* number of firms in the industry
* the presence (or absence) of product differentiation
* ability (or lack of ability) of any or all firms to influence the market price

Perfect competition: This is a theoretical market structure, but it is very closely approximated in an industry like agriculture. Here are the characteristics of perfect (or "pure" competition):

* There are numerous sellers in the market, all selling identical products. This means their are no quality differences, no brand names, no need for advertising, etc.

* There is free entry into and exit from the market. Anyone who desires to produce and sell goods in a given market can do so.

* No individual seller or buyer can influence market price. It is instead determined by market supply and demand. Firms in perfect competition are "price takers".

* All sellers and buyers are informed about markets and prices. Cost advantages will not remain secret for long...

In perfect competition, economic profits tend to be low because of the ease with which firms can enter the industry. Short term profits will attract more firms.

Monopoly: This is the market structure in which only one producer or seller exists for a product that has no close substitutes. The only true monopolies that exist are some government-regulated public utilities.

* The seller holds a large degree of control over price. The monopolist is a "price maker".

* The key to obtaining and maintaining a monopoly lies in erecting barriers to the entry of other firms into the industry.

* Sources of monopoly:
- Economies of scale
- There are some "natural monopolies" like bus companies and public utilities.
- Control of raw materials can lead to a monopoly. (For example, ALCOA controlled almost all the world's bauxite.)
- Patents- These give the exclusive rights to use, keep, or sell an invention for a period of 17 years.
- Competitive tactics- These would include pirating, pressuring, and predatory pricing.

Anti-trust legislation: As you probably learned in history, the federal government has passed a series of laws designed to maintain competition and prevent restraint of trade.

* Sherman Antitrust Act of 1890 - outlawed restraint of trade and attempts to monopolize

* Clayton Act of 1914 - outlawed certain business activities including price discrimination, tying contracts, exclusive dealings, interlocking directorates

* Federal Trade Commission Act of 1914 - created an organization to police unfair business practices

Oligopoly: This is a market structure in which relatively few firms produce indentical or similar products.

* The actions of any one firm in terms of price and output will be noticeable by others.

* There is interdependence among firms in setting their pricing policies.

* Firms may be reluctant to engage in price competition because of the possible reaction of competitors. Product differentiation is more often used. Firms may also rely on collusion or practice "price leadership".

Cartels are organizations of independent firms that agree to operate as a shared monopoly by limiting production and charging the monopoly price.

Monopolistic Competition: This is a market structure in which relatively many firms supply similar but differentiated products, with each firm having a limited degree of control over price.

* Product differentiation is the major characteristic. This is the practice of establishing real or imagined characteristics that identify a firm's produst as unique.

* Profits tend to be minimized as a lot of money is spent on packaging, advertising, etc. It is also relatively easy for firms to enter the market.

Questions to Discuss:

Why would a firm enter a market based on perfect competition? What are the system's advantages for the consumer?

How much monopoly is too much? (In what ways are monopolies beneficial?)

Should the government work harder to regulate potential monoplies?

If you were trying to gain a monopoly, how would you work to limit competition?

Are oligopolies necessarily bad for an economy? Why or why not?

How is product differentiation achieved? What methods do you believe are most effective?

Which market structure do you believe is best for consumers?

Reminders: Your Macroeconomic Exam Problems are due. Actually, they were due yesterday, but many of you seemed to have forgotten...

Chapter 6 of Naked Economics is up for discussion today or tomorrow. Chapter 7 should be read for Thursday.

Let's talk current events or stories if you have them. We'll also try to start the Taking Sides discussions today with sports stadiums and/or business ethics. Otherwise, check the schedule on the extended entry below...

Types of Business: We'll start by looking at the various classifications of businesses that you find in the economy. This matrix will help you fill in the necessary information.

What determines a firm's profits? To figure this out, we need to look at both costs and revenues.

costs: There are two types of costs - fixed and variable

fixed costs: These are the production costs that do not change with changes in the quantity of output. The largest of the fixed costs are usually those associated with depreciation. (Depreciation is the costs of buildings, machinery, tools, and equipment that are allocated to output over a given production period.)

variable costs: These are the costs that change with changes in the quantity of output. They would include the labor, raw materials, and other costs that change with the quantity of goods produced.

If you like to do math, you can get two more terms. Total costs are simply the sum of fixed costs and variable costs for a particular level of output. Average cost would be total cost divided by the number of units produced.

Marginal cost is the addition to total cost from increasing output by one unit.

SEE IT HERE: This is a useful webpage illustrating these ideas: Costs: Fixed, Variable, and Sunk. Let's look here for a minute.

revenue: This is simply the money that a firm receives from the sale of its products and services.

total revenues: This is the price of the product times the number of units sold.

Marginal revenue is the addition to total revenue from increasing output by one unit.

Profits are determined by subtracting total costs from total revenue.

Want to know if your business is doing well? It would help to know the normal rate of return. That's the rate of earnings on investment that is normal for a given degree of risk. Earnings in excess of that would be termed economic profits.

Tomorrow, we'll look at competition (or lack of) and how it affects business decisions.

For now, think about these questions:

When should a business produce? When should it decide to increase production? Decrease production?

How much profit does a business need to remain viable? How certain does profit need to be for a business to be viable?

DO THIS: Think of a business that you believe is either a "success" story or a "failure". Be prepared tomorrow to discuss the business and what you believe makes it work or not work.

Welcome back. We'll see if we can get class attendance into double digits today...

Your "problems" for the macroeconomics exam are due today.

Let's get caught up on any news stories and do the first of our "Taking Sides" presentations today. I'll copy the schedule on the extended entry below. (Click on the link at the bottom.)

I do want to take some time and talk about chapter 5 (and maybe 6) in Naked Economics today. There's good stuff in there.

Review "Problems": I know that it's been a couple days, so I want to review the supply and demand vocabulary. You and a partner have five minutes to come up with one or more situations for your classmates to work through. The more terms and concepts you can incorporate, the better. Remember to be informative, entertaining, and appropriate...

When Markets Fail: Heilbronner and Thurow identify a number of reasons why markets don't always operate according to the prinicples of Adam Smith and his "Invisible Hand." Since we're not reading the book this year, we should talk about it a bit.

Here are some examples of "failures" in the market:

* "Marketers" may lack information. Their decisions may reflect luck, accident, or ignorance. (Consider the role of advertising here as well.)

* Pure public goods", such as defense, national security, or lighthouses, cannot be effectively allocated. (The "free rider" problem is a version of this...)

* Externalities, such as pollution, are the effects that goods and services have on third parties.

* The public wants some goods and services, such as health care, to be distributed more equally than the market would.

In the mess that was last week, we didn't get to this online simulation. I'll reprint it here. ON-LINE SIMULATION ON DEMAND AND SUPPLY: The University of Omaha has done a neat on-line "tutorial" on using supply and demand. We'll spend some time trying to work thorugh that. I'd suggest doing it with a partner. Our goal will be to get through the 6 questions on the "quiz" at the end. Here are some things to look at on each part of the tutorial. The tutorial has six "pages" to work through and a self-quiz at the end.

Explorations in Economic Demand, Part I - The words in bold can be considered to be the "determinants" referred to in the discussion questions at the bottom. Consider how changes in each of those would affect his demand for blue jeans.

Explorations in Economic Demand, Part II - Be sure you understand the role of these terms and concepts: demand curve, income effect, substitution effect, diminishing marginal utility

Explorations in Economic Demand, Part III - Watch for the difference between shifts in the curves and movement along the curves.

Explorations in Economic Supply, Part I - Do the same as we did with the demand page, but you are on the "other side" this time.

Explorations in Economic Supply, Part II - Be sure you understand the role of these terms and concepts: supply curve, short run, long run, fixed costs, variable costs, law of diminishing marginal returns

Explorations in Economic Supply, Part III - Watch for the difference between shifts in the curves and movement along the curves.

Exploring Supply and Demand: Here's the quiz. Work through the problems and see how you do. Notice that the curves will actually move to help you better understand.

This is simply the day where I'm re-teaching the basic micro stuff to the people that have been gone all week. It's Lessons 17 and 18. Be sure to read 5 and 6 in Naked Economics. The problem portioin of the exam is due Monday.

Hi. No real entry today. We'll be going back through the stuff we were supposed to get to the last couple days... Start back on the Lesson #17 entry.

Thanks.

Wow. Only 6 people yesterday. We didn't do much. We'll go back to Lesson 17 first today, and we'll proceed from there... Let's chat Chapter 5 in Naked Economics. Have Chapter 6 read for Friday, please.

More on Demand and Supply: Link back to yesterday's definitions if you need a refresher. Today, we'll add a few more concepts, and then give you time to "practice" what you've learned with the on-line simulation below.

elasticity: repsonsiveness of demand or supply for a good given changes in price (Formulas are reprinted from biz.ed, a British website)

* price elasticity of demand: measures the responsiveness of demand to a given change in price and is found using the equation: (PED) = Percentage change in quantity demanded/Percentage change in price

Let's figure out how to tell if a good is elastic or inelastic...

A good or service is "unit elastic" if a one percent change in the price leads to a one percent change in the quantity demanded/ supplied.

* income elasticity of demand (YED): measures the responsiveness of demand to a given change in income

YED = Percentage change in quantity demanded/Percentage change in income

If YED is negative, then the good is "inferior." People use an increase in income to buy less of this good and more of a superior substitute.

If YED is positive then the good is "normal". Consumers use an increase in income to buy more of the good.

* cross elasticity of demand (XED): measures the responsiveness of demand for one good (z) to a given change in the price of a second good (w)

XED = Percentage change in quantity demanded of good z/Percentage change in the price of good w

If XED is positive then the two goods are substitutes.

If XED is negative then the two goods are complements.

Economic theory sideline - Giffen goods: There is some debate among economists as to whether or not these truly exist. A Giffen good is a commodity for which demand increases at higher prices and falls at lower prices. (They exclude what some call the "snob" effect of an item being trendy, etc.) Can you think of any possibilities?

OBVIOUSLY, YOU CAN RUN ALL THE SAME CALCULATIONS FOR THE SUPPLY PERSPECTIVE BY SIMPLY SUBSTITUTING TERMS. For example...

price elasticity of supply: measures the responsiveness of supply to a given change in price.

PES = Percentage change in quantity supplied/Percentage change in price

You get the idea...

ON-LINE SIMULATION ON DEMAND AND SUPPLY: The University of Omaha has done a neat on-line "tutorial" on using supply and demand. We'll spend some time trying to work thorugh that. I'd suggest doing it with a partner. Our goal will be to get through the 6 questions on the "quiz" at the end. Here are some things to look at on each part of the tutorial. The tutorial has six "pages" to work through and a self-quiz at the end.

Explorations in Economic Demand, Part I - The words in bold can be considered to be the "determinants" referred to in the discussion questions at the bottom. Consider how changes in each of those would affect his demand for blue jeans.

Explorations in Economic Demand, Part II - Be sure you understand the role of these terms and concepts: demand curve, income effect, substitution effect, diminishing marginal utility

Explorations in Economic Demand, Part III - Watch for the difference between shifts in the curves and movement along the curves.

Explorations in Economic Supply, Part I - Do the same as we did with the demand page, but you are on the "other side" this time.

Explorations in Economic Supply, Part II - Be sure you understand the role of these terms and concepts: supply curve, short run, long run, fixed costs, variable costs, law of diminishing marginal returns

Explorations in Economic Supply, Part III - Watch for the difference between shifts in the curves and movement along the curves.

Exploring Supply and Demand: Here's the quiz. Work through the problems and see how you do. Notice that the curves will actually move to help you better understand.

It sounds like we’ll be pretty short-handed today due to the AP exam, but we’ll make the best of it. We’ll introduce the two basic concepts of microeconomics: supply and demand. After that, we’ll talk chapter 5 from Naked Economics, and we’ll give you some work time.

Demand and Supply: These are the two basic concepts of microeconomics. We'll take a look at them today. Get out a piece of paper. You'll be doing some drawing... (Plus, I have a useful handout.) By the way, certeris paribus is Latin for something like "other things being equal".

demand: the relationship between the quantities of a good or service that consumers desire to purchase at any particular time and the various prices that can exist for the good or service

quantity demanded: the amount of a good or service that consumers would purchase at a particular price

demand curve: a graphic representation of the relationship between price and quantity demanded

law of demand: a rise in prices causes a fall in the quantity demanded, whereas a decline in price causes an increase in the quantity demanded. This affects people in two ways...

* income effect: the effect of a change in the price on the amount purchased that results from a change in purchasing power of a consumer's income due to the price change
* substitution effect: the effect of a change in the price on the amount purchased that results from the consumer substituting a relatively less expensive alternative

What determines demand?
* consumer tastes and preferences
* income
* substitutes and complements
* population
* perception of future prices

supply: the relationship between the quantities of a good or service that sellers wish to market at any particular time and the various prices that can exist for the good or service

supply curve: a graphic representation of the relationship between price and quantity supplied

law of supply: the quantity supplied of a good or service varies directly with its price; the lower the price, the smaller the quantity suppled, and the higher the price the larger the quantity supplied

What determines supply?
* capacity and technology
* costs of production
* (short run)- a period of time so short that the amount of some inputs cannot be varied
* (long run)- a period of time long enough that the amount of all inputs can be varied
* prices of substitutes and complements
* perception of future prices

equilibrium price: the price at which the market "clears"; the price at which the quantity of a good or service offered by suppliers is exactly equal to the quantity that is demanded by purchasers in a particular period of time

I'm guessing that we'll have only a partial class today due to the College Counseling gathering... I'm planning on starting with you at 9 AM.

Remember that the problems for the Macroeconomics Exam are due next Monday at the latest. I'll obviously take them earlier. Those are 30 points, as opposed to the 20 of the multiple choice portion.

READING: Please have have Chapter 5, "Economics of Information," in Naked Economics read for tomorrow. We'll dig into supply and demand basics then as well.

Well, it looks like the "experts" disagree with our recommendation from the FOMC simulation. What will the Fed say about the economy on Tuesday? Let's take a look at this and see what we think.

Taking Sides: Clashing Views on Controversial Economic Issues: These are the packets we handed out early last week. I've put a tentative schedule below. (I forgot who is doing what.)

Expectations: You are NOT expected to research beyond the chapter you have. (I won't stop you, but it is not an expectation.) Basically, you will be expected to set up the topic, one of you will take the "yes" or "pro" side, and the other will take the "no" or "con" side. We do not expect a polished speech, and you may use highlighted text, notes, etc. I'm thinking probably 3-5 minutes for each of the two sides. Following those presentations and any questions, we'll open it up to the larger group.

These are worth 25 points; based on evidence of preparation, your opening "speech" and additional participation.

Thursday, May 5th
1. Are Profits the Only Business of Business?

Monday, May 9th
2. Should Cities Subsidize Sports and Sports Venues?

Wednesday, May 11th
7. Should Social Security Be Privatized?

Friday, May 13th
11. Is It Time to Abolish the Minimum Wage?

Tuesday, May 17th
13. Are Protectionist Policies Bad for America?

Thursday, May 19th
14. Should We Sweat About Sweatshops?

Monday, May 23rd
16. Should Pollution Be Put to the Market Test?

Wednesday, May 25th
17. Has the North American Free Trade Agreement Hurt the American Economy?

REMINDER ABOUT REQUIRED ASSIGNMENTS: (100 points)

Current Events: (20 points) - We'll continue with our daily economic "current event" presentations. You'll get 10 points each for your two stories. If we've missed your day, we can reschedule.

Taking Sides: Clashing Views on Controversial Economic Issues: (25 points) This is as described above.

Blog "Journal": (30 points) - This is no big deal. Some of the activities or readings that we do in class are worth getting feedback from you regarding them. All I am asking is that you occasionally "blog" a response when asked. In most cases, a short reaction paragraph is what I will be expecting. So far, there have been three...

#1 - "How Statistics Lie" article
#2 - College budgeting exercise
#3 - Flat tax articles from the lesson on "Government and Taxes"
We'll add a couple more. Probably 7 or 8 total.

"New Ideas from Dead Economists" Panel: (25 points) - This is straight-forward. You'll represent an economist (or group of economists) from the book, New Ideas from Dead Economists. You will receive a chapter from me, and you'll be asked to produce a one-page outline or handout of the key information from the chapter. (We'll post those on-line.) You'll also represent your economist at a discussion/ round-table on economic ideas late in the quarter.

REMINDER ABOUT INDEPENDENT WORK: You will be expected to have completed 75 (or more) points of independent work by the end of the course.

I'm wide open to suggestions, but some standard options include...

Stock Market game: 25 points - You can use any of the many simulations out there that you would like. Anyway, if you want to do this, simply register and begin "investing". I'd ask you to keep your account active and then do a short (like a good paragraph) write-up the last week of the quarter about your reaction to the simulation.

Business interview: 25 points - You can do a maximum of two of these, provided they are not both concerning the same business. You may interview someone involved in running a business. (By this, I mean someone who owns their own business, manages others, or plays a vital role in the success of a business.) I would expect the interview to be around thirty minutes in length, and friends and family are certainly fair game. In advance of the interview, I want to know who you are interviewing, and I want to see a list of at least ten questions you intend to ask. Following the interview, I'd expect a write-up/ email of a couple paragraphs with your reactions to what you talked about and learned.

Speaker, television broadcast, or film watching: (points vary) - Let's say you want to watch a TV show about the stock market. Or, you know that Bill Gates is speaking at the dinner you're attending. Have you always wanted to watch Wall Street? You can get credit for this type of thing. Let me know in advance, tell me what you think it's worth, and what you will do to report/ react to it.

Readings: This assumes that you are doing reading other than what it requested for class... Basically, I'd like you to select reading (related to economics, business, investment, current issues affecting the economy, appropriate biography, etc.) that is of interest to you.

Let me know what you plan to read, and I will tell you what I think it is worth. I won't guarantee any number of points for things that have not been pre-approved. You'll be asked to either discuss what you have read with me or to do a short write-up. I may ask you to discuss what you've read with the class if it goes with what we are doing.

Longer articles, chapters, etc. are likely to receive ten points. Books could receive forty to fifty points, or perhaps even more. It depends on what it is. If you'd like some recommendations, talk to me.

Option: "Everyday Economics"- This is the on-line column that Steven Landsburg writes for Slate magazine. You can read columns of your choice. Do a short paragraph in response to each. These would be worth up to five points each...

Other ideas??? Again, let me know...

REMEMBER: You are allowed to do "extra" work in either of the "optional" categories to improve your scores. You do, however, need to receive "approval" for what you are doing or reading from me in advance. Work will be accepted until the day after Memorial Day, which is the first day of Senior Seminar.

I do not allow you to do additional work to raise your grade to an A+. "A" is as high as you can reach via the "optional" route...