January 2006 Archives

Employment and Unemployment Today's topic, in many ways, is the flip side of what we did Friday with inflation.

Naked Economics reading: Please try and get through Chapter 2, "Incentives Matter," by next class. I'll have your next blog entry posted by then. You'll have until Monday's class to get that posted for credit. The "grace period" (not to be repeated) on Entry #1 ends at the beginning of today's class...

Defining "unemployment": The unemployment rate is the percentage of the U.S. labor force that is unemployed. It is calculated by dividing the number of unemployed individuals by the sum of the number of people unemployed and the number of people employed. An individual is counted as unemployed if the individual is over the age of 16 and is actively looking for a job, but cannot find one. Students, those individuals who choose to not work, and retirees are therefore not counted in the unemployment rate.

The Current State of Unemployment: The most recent figures we have take us through December. This is a lot of numbers, but just browse it for a couple minutes.

Since I can't figure out how to get charts onto the blog, follow this link to my old page and scroll down to the charts... Here are the newest charts from the Bureau of Labor Statistics.

Questions to consider and discuss:

* What surprises you (if anything) about the statistics and graphs above? What explanations do you have for the discrepancies?

* In January 2002, a falling unemployment rate was accompanied by a significant fall in employment. How can the number of individuals employed fall and the unemployment rate fall at the same time?

Unemployment in your backyard (or anyone else's)... You can go to the Bureau of Labor Statistics website and check the Local Area Unemployment Statistics for your city and/or state.

Answer these questions:

1. Is unemployment in our area higher, lower, or roughly the same as the national average? What about your favorite vacation spot? Your grandma's hometown?

2. What factors contribute to our area's unemployment rate? (Think about recent news...)

Which industries have expanded?

Which industries have contracted?

3. Will the recent changes affect you?

4. If avoiding inflation were your highest concern, where should you move? If you like the idea of unemployment, what cities would you recommend for your next move?

Unemployment Insurance: Go to the website for the Minnesota WorkForce Center. Browse through the links and see what kind of benefits are available in this state.

* Do you think unemployment benefits are appropriate in Minnesota?

* What changes, if any, would you make?

* Do you think these benefits are a disincentive to work?

The Relationship between Inflation and Unemployment: The Phillips Curve- Economists have long claimed an inverse relationship exists between unemployment and inflation. This "Phillips Curve" quickly gets very technical, but you can see the basics at this link. Browse around for a bit.

BONUS SITE: Hey, Gorgeous, Here's a Raise... Here's a weird coincidence. I wanted a reason to link to a example from Steven Landsburg's Everyday Economics. I was looking at The Week (great periodical if you're busy but want to stay informed), and the work of Daniel Hamermesh and Jeff Biddle was mentioned. Here's Landsburg's take on the topic... Read it. We'll talk.

Inflation: We'll be looking at inflation today, since it might be the economic issue of most concern to policymakers and consumers. This topic will come up several times, but we'll get some of the basics out of the way.

Naked Economics reading: Please try and get through Chapter 2, "Incentives Matter," by next Thursday's class. (That's February 2nd.)

Defining "inflation": Inflation is a sustained increase in the overall level of prices. (The most widely reported measurement of inflation is the consumer price index (CPI).) You can go online to EconEd and read all about how you calculate CPI if you'd like...

The Consumer Price Index measures prices of goods and services in a market basket of goods and services that is intended to be representative of a typical consumer's purchases. The percentages that are currently used to describe the categories of goods and services that market basket are as follows.

Food and beverages 15 %
Recreation 6 %
Housing 42 %
Education 3 %
Clothing 4 %
Communication 3 %
Transportation 17 %
Medical care 6 %
Other goods and services 4 %

Inflation Update - December 2005: This is the text of the relatively recent inflation report from the National Council on Economic Education.

"The consumer price index (CPI) during the month of November decreased by .6 percent (six-tenths of one percent). The rate of increase in the consumer price index over the past twelve months has been 3.5 percent."

Much of the following information is simply copied from the EconEd website for our convenience in class today...

Causes of Inflation: Over short periods of time, inflation can be caused by a decrease in production or an increase in spending. We get the names for the two major types from this: demand-pull and cost-push.

Inflation resulting from an increase in aggregate demand or total spending is called demand-pull inflation. Increases in demand, particularly if production in the economy is near the full-employment level of real GDP, pull up prices. It is not just rising spending. If spending is increasing more rapidly than the capacity to produce, there will be upward pressure on prices.

Inflation can also be caused by increases in costs of major inputs used throughout the economy. This type of inflation is often described as cost-push inflation. Increases in costs push prices up. The most common recent examples are inflationary periods caused largely by increases in the price of oil. Or if employers and employees begin to expect inflation, costs and prices will begin to rise as a result.

Over longer periods of time, that is, over periods of many months or years, inflation is caused by growth in the supply of money that is above and beyond the growth in the demand for money.

The Costs of Inflation: Here's one short summary of some of the costs of inflation.

* High rates of inflation mean that people and business have to take steps to protect their financial assets from inflation. The resources and time used to do so could produce goods and services of value.

* High rates of inflation discourage businesses planning and investment as inflation makes the forecasting of prices and costs more difficult. As prices rise, people need more dollars to carry out their transactions. When more money is demanded, interest rates increase.

* The adage "inflation hurts lenders and helps borrowers" only applies if inflation is not expected. For example, interest rates normally increase in response to anticipated inflation. As a result, the lenders receive higher interest payments, part of which is compensation for the decrease in the value of the money lent. Borrowers have to pay higher interest rates and lose any advantage they may have from repaying loans with money that is not worth as much as it was prior to the inflation.

* Inflation does reduce the purchasing power of money.

* Inflation does redistribute income. On average, individuals' incomes do increase as inflation increases. However, some peoples' wages go up faster than inflation. Other wages are slower to adjust. People on fixed incomes such as pensions or whose salaries are slow to adjust are negatively affected by unexpected inflation.

Questions to consider: We'll get to them in a few days...

How does the US government work to prevent and/or control inflation?

What level of inflation should we aim for?

For one perspective on that issue, here's what Alan Greenspan had to say at a 1989 Congressional hearing:

"Maximum sustainable economic growth over time is the U.S. Federal Reserve's ultimate objective. The primary role of monetary policy in the pursuit of this goal is to foster price stability. For all practical purposes, price stability means that expected changes in the average price level are small enough and gradual enough that they do not materially enter business and household financial decisions."

Maybe a "non-answer," but it seems to translate into a 2 or 3 percent rate in practice.

Today we'll do the Economics class version of the MPA "5 x 10s." We have 5 chapters from Sex, Drugs & Economics: An Unconventional Introduction to Economics to learn from. Your job for next time will be to share the basics of the chapter you read with the rest of us. Try to show economics concepts in action and get us thinking like economists...

We'll do the chapters in the order they appear in the book... 5 chapters at 6 minutes each... You get 5 points for making some contributions when "your" topic comes up.

Sex
Drugs
Sports
Music
Food Fights

NEXT SMALL GROUP ASSIGNMENT: You and a "partner" will pick one of the selected chapters from "Taking Sides: Clashing Views on Controversial Economic Issues." Each chapter does a "yes/no" introduction to an important economic question.

Here are the ones we will choose from, as well as the small group session at which they will "appear."

Session #3
Are Profits the Only Business of Business?
Should Cities Subsidize Sports and Sports Venues?

Session #4
Are Protectionist Policies Bad for America?
Should We About Sweatshops?

Session #5
Has the North American Free Trade Agreement Hurt the American Economy?

You and your partner should make sure you can come to the same session the time you present (Session #3 or #4 or #5.) That will make things easier. Basically, you'll each get 4-5 minutes to outline the arguments for "your" side of the topic. Then, you can help guide the rest of us in a relatively short conversation/debate on the question. Feel free to mark up the article and use specific quotations/ evidence to support claims. These are worth up to 10 points for your preparedness and contributions on that day.

NOTE: As of now, there is a lag between your submitting a post and its appearance on the blog. Don't resend. I'll try and get that preference changed.

We can use the blog to hold “conversations” about reading in Naked Economics. We’ll certainly talk about some of the readings in class, but we’re tight on time those “A” days.

Here’s how we’ll do this. I’ll post several questions by the day a chapter is “due” to have been read. Each of you will be expected to post a comment before the NEXT large group section. (The following “A” day that we have class.) You may respond to one or more of the questions, and you can also react to comments posted by others. I’ll expect a comment of one good paragraph or more. (To me, that means 5-6 sentences at a minimum.) You do not need to worry about perfect grammar, spelling and punctuation, but they should be understandable. Remember that this is a public site, and you are responsible for the content of your postings.

I will credit people for their posts. I’m thinking something like this… If there are 12 chapters, I’ll pick 8 of them to “evaluate.” Assume that each comment is worth 5 points. If it’s a batch of comments I’m evaluating, I’ll give people credit for having posted by that next class session. (5 points for solid or better comments, 4 for comments somewhat short of expectations, 3 for last-minute, little to no effort postings, and no points for those who have not posted.0

So, let’s get started… At this time, you are supposed to have read the Foreward, Introduction and Chapter 1, “The Power of Markets.” You should post a response of at least one good paragraph to one or more of these questions. (You can also react to other posts.)

From the Foreward by Burton Malkiel:

A. “Why should we study economics? In other words, why do you believe an understanding of economic principles and theories is or is not necessary in our world?”

From the Introduction:

B. “Charles Wheelan uses a number of interesting examples here to begin his case for ‘naked’ economics. React to one or more of these examples.”

From Chapter 1, “The Power of Markets”
By the way, the baseball player on page 6 should be “Alex Rodriquez” not “Gonzalez.’ Oops.

C. “To what degree do you agree or disagree with this quote from page 7: 'Maximizing utility is not synonymous with acting selfishly.' Give an example to support your position."

D. “On page 11, Wheelan writes that ‘Firms … attempt to maximize profits.’ What are the ethical and/or moral limits (if any) that you believe apply to firms in this pursuit of profits?”

E. “Do you believe Wheelan is too positive in his defense of the role of markets? Use specific arguments and/or examples to explain why or why not.”

The Gross Domestic Product:

What is GDP (Gross Domestic Product)? GDP is the total dollar value of all final goods and services produced in a country during a year.

Things to note:

* Both goods and services are included.
* Current market prices are used to aggregate outputs. Government purchases, many of which do not occur on markets, are valued at their cost of production.
* Only final goods and services are included. This avoids "double counting".
* US GDP measures production by US citizens and foreigners alike inside the borders of the United States.
* GDP is an annual flow, a rate of production for the economy.

What's the difference between GDP and GNP (gross national product)? Many people, including your teacher, grew up discussing GNP. In 1992, the United States joined the rest of the world in using GDP as its national economic accounting system. GDP measures output produced inside the United States, whether by foreigners or US citizens. GNP, by contrast, meaures output of US citizens, no matter where they are located in the world. As a result, US GNP tends to be about .3% higher that GDP, but that gap has been shrinking.

What other names are used to refer to the nation's annual output of goods and services? Some you will find in the media include: output, total output, national output, income, total income, national income, and aggregate supply.

How do we estimate GDP? A formula created by John Maynard Keynes is used to total the four categories that make up the Gross Domestic Product.

GDP = C + I + G + NX (or X-M).

or Gross Domestic Product = Consumption + Investment + Government Expenditure + Net Exports

Don't forget the difference between nominal and real GDP values. Real GDP takes inflation into account.

Is it the "Gross Deceptive Product"? Here are some potential weaknesses in using GDP.

* Some things are produced but never sold, so they are not included in GDP. What examples can you think of?
* Some expenditures are hidden from data gathers, so they are unrecorded transactions. Examples?
* Some items are included in GDP that do not reflect net benefits to society. Consider the Exxon Valdez.
* Government expenditures are based at cost, despite the fact that market forces might value them differently.
* Cross-country comparisons are made difficult because of climate, cost of living, and other differences.

Let's test your understanding: Which of the following raise GDP by $500?

* A steel company sells $500 of steel to an auto manufacturer.
* You are hired by the government to shuffle paper uselessly for $500.
* You are hired by General Motors to shuffle paper uselessly for $500.
* A antique dealer sells a $5000 painting, pocketing her 10% commission.
* You receive $500 in an unemployment insurance check from the government.
* Your company's stored inventories of widgets falls by $500.
* You win $500 betting on the Mounds Park Academy soccer team.

The Gross Domestic Product - A Case Study This is from a lesson produced by the National Council on Economic Education.

This site is extremely informative, and it is worth a close examination. Check out the graphs closely. In particular, make sure you read "Explanations of GDP and its Components". Drop down to "GDP as a Measure of Well-Being." We'll discuss what you find there.

Finally, be sure to try and answer the "Questions" sections at the bottom. We'll go over them next time if you have questions.

SITE OF THE DAY: Wachovia College Budget Calculator

As I mentioned earlier, we'll do some "personal" or "consumer" economics throughout the course at different times. Sometimes, it will match up perfectly with what we are doing in class. Other times, I'll just stick it in when I feel like it. (This is one of those times...)

Since MPA's promotional literature touts our 100% college acceptance rate, I'll assume that most of you plan on doing that at some time in the future. Let's take a closer look at the costs. You can do this in a number of places on the web, but I thought this was pretty user friendly.

Before you begin: You may need to make some assumptions. For example, if you have applied to several schools, run the program with the various numbers. Or, try it each way depending on whether you do or don't get that "big scholarship". In many cases, you'll have to make estimates, but maybe I can help with those.

Remember, if you come up with "scary" answers, that is want college loans and other sources of financial aid are for. Don't just decide not to go...

DO THIS: Run through the activity first doing your best guesses on college you'll attend, costs, and income. (If you don't know the exact costs, the page says "you can use the 2001-2002 CollegeBoard average costs as a guideline: $12,771 for a public college and $26,093 for a private college".)

Now, do it for another of your college choices, or change another significant variable (live off campus, get a job, whatever). Share that new figure if you would like. We can discuss any of this today if you'd like. Alternatively, we can come back to it in the future.

READING: Hopefully, you've had a chance to look at the Forward and Introduction to Naked Economics by now. Please have "The Power of Markets," chapter 1 of Naked Economics, read for class on Wednesday.

"A Bird's Eye View of the Economy"- Our primary focus wil be to start looking at the "big picture" of the U.S. economy. We'll use a short chapter from Economics Explained, the textbook that I formerly used with this course. The figures are getting kind of old, but the point will still be clearly made. We'll divide up the chapter and then look at the main points together.

"Economic Indicators" activity: The National Council on Economic Education has done some very good lesson plans that we will make use of in class. Sometimes, we'll go to their site. Other times, I'll do some cutting and pasting as I did here.

First, let's take a look at what economic indicators are used to understand and explain the US economy. This note guide on ECONOMIC INDICATORS should be useful for you.

Information is a scarce resource. Hopefully, this practice will help you become more efficient in finding and interpreting macroeconomic information. Try this "scavenger hunt" activity using these four data sources:

Economy at a Glance

Gross Domestic Product (current and past figures)

Debt Clock

Economic Statistics Briefing Room

Use the above sites to try and answer the following questions:

1. What was the unemployment rate in February 2005?
2. What was the annual percentage change in personal consumption expenditures for 2003?
3. What is the amount of public debt as of today? To whom is the debt owed?
4. What has been the recent trend in the personal saving rate?
5. How much of a problem was inflation in 2004?
6. At what rate did Gross National Product increase in the 4th quarter of 1998?

A good general rule of thumb... When in doubt, consult DataLinks to start your search for economic information.

SITE FOR THE DAY: Here's the official website for Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. The book came out last spring and has been a New York Times bestseller for months.

Today, I want to equip you with some of the most basic "tools" of economics. You can download a sheet containing the "Top Ten Economic Questions" to guide you during this conversation. Add whatever notes that you feel are appropriate.

Naked Economics reading: We'll start with talking about anything you found puzzling or interesting from Foreward and Introduction to Naked Economics on Monday. You'll be asked to have read chapter 1, "The Power of Markets," for Wednesday's class.

Welcome. We'll do a little more work "organizing" our small groups, but then we'll try to get you started on a couple of activities.

First, we'll "test" your creative expression skills via writing/drawing or some combination...

FOR NEXT "SMALL GROUP" SESSION: We'll pay tribute to the MPA "5 x 10 program" with our own "Economics 6 x 5s." You will be asked to read a short chapter from Sex, Drugs & Economics: An Unconventional Introduction to Economics. Your job for next time will be to share the basics of the chapter with the rest of us. We're looking to see economic concepts in action and to begin to use some of the vocabulary of economists...

The chapters deal with these topics. (You may not get your first choice...)
Sex
Illegal Drugs
Risky Business
Sports
Music
Food Fights

Welcome to the “blog” for the Economics course at Mounds Park Academy. This is my fourth time teaching the course here at MPA, and we've done it under a different format each time. (Thanks for being willing to try this arrangement out.) I would definitely suggest bookmarking this site, because we will refer to it almost every day.

Course philosophy: Thomas Carlyle once described economics as "the dismal science." Too often, the way the subject is taught only reinforces this characterization. There can be a mind-boggling amount of math and graphing in advanced economics, and the vast number of terms and concepts can take years to fully understand. We'll try to avoid both of those pitfalls in the next few months. This course will aim to introduce you to the basics of economics with an emphasis on understanding the world around us. This study does not need to be "dismal." In fact, the study of economics can be interesting, controversial, and (hopefully) entertaining.

Course goals: Students will:

* understand the basic concepts of economoics
* learn key ideas in macroeconomics, microeconomics, and international economics
* use problem-solving skills to approach economic issues and problems
* investigate more deeply economic topics of interest to themselves
* better understand the role of economics in the world around them
* become more informed economic decision-makers

Resources: We will use a variety of resources in this course.

* An encouraging trend in recent years has been the publication of more books on economics aimed at general audiences. One of those books will be our required reading. Naked Economics: Undressing the Dismal Science is the resource we will use. I actually laughed out loud a couple times as I first read it. (Keep your comments to yourself about what that says about me...) You’ll need to have your own copy of this book and bring it with you each day.

* We’ll do some supplemental readings from Economics Explained: Everything You Need to Know About How the Economy Works and Where It's Going, by Robert Heilbronner and Lester Thurow. This is a very readable and informative introduction to economics.

* There is a wealth of economic information on the Internet. Some is simply raw data. Government, industry and particular businesses or interest groups sponsor others. Educational institutions and other teachers generate still more. We'll use simulations, "games," and other resources when appropriate.

* Of course, economics is happening all around us. To track current developments, we'll make extensive use of newspapers, magazines, and television news.

* Additional resources such as guest speakers, presentations, and debates will be incorporated.

On what will you be graded? I still have to figure this out given our new format this year, but you can expect it to look something like this... Give me a few days with the small group format to iron out all the specifics.

Attendance and Participation: (100 points)
Economics Exams: (100 points) - We will have two exams, each worth 50 points
Required Assignments: (125 points total) -
Current Events: (20 points)
Activities "Journal": (20 points)
"New Ideas from Dead Economists" Panel: (20 points)
Economic Issue Presentation and web page: (40 points)
"Taking Sides" Presentation: (25 points)
Optional (Choice) Readings and Assignments: (75 points required/ more available) - To get 100% on this item, you will need to earn 75 points. You are, however, allowed to do more to offset other scores you are not satisfied with. (You cannot, however, simply skip any of the required assignments. They are prerequisites to getting credit for the class. I make the call on this, so don't push your luck...)

Reading assignment – Please read both the Foreward and the Introduction in Naked Economics for next class. Be prepared to discuss main points.