Anyone who has been checking this blog for the last while may have noticed the drop-off in blog entries in recent months. My experiment with blogging is coming to an end, at least for now. As a posted back when I began the blog on March 8 2007, "The purpose of this blog is primarily to meet the needs of my students." I believe the blog has served this purpose very well. I've answered questions, written brief commentaries on economic events, and linked to news items that are relevent to my Macroeconomics students.
But for the next year I won't have any students! I'll be on leave from HKU, and will taking up a position at the Bank for International Settlements.
Thanks to those who have read the entries, emailed questions, and posted comments. I'll leave the site up, but for now, HongKongMacro will just have to languish in cyberspace....
Monday, April 28, 2008
Saturday, April 5, 2008
Candy Money.....
What happens when an economy runs out of fiat money? Just such an outcome has occured in Argentina. With coins in short supply, stores have taken to using candy in place of small change. If candy can in turn be used to make small payments in other stores, then candy has become a form of commodity money. But if it cannot be used as payment, then the only beneficiaries of this practice will be the dentists! See this Freakonomics link for more.
Wednesday, March 19, 2008
Measuring Growth...
When we talk about economic growth, we commonly focus on GDP. Implicitly, we think of an economy with rapid GDP growth as doing well, and one with only slow GDP growth is doing poorly. We do so because we associate rapid GDP growth as implying that living standards are improving.
But in a world in which some countries have rapid population growth (India and Brazil), others have very slow population growth (China, Europe) and others have falling populations (Japan, Russia), this may be a poor way of viewing the world. Once we adjust for population growth rates, by focusing on per capita GDP growth, India, Brazil, and Australia look a lot less impressive, while tardy Japan is actually doing just fine. See this link for more.
But in a world in which some countries have rapid population growth (India and Brazil), others have very slow population growth (China, Europe) and others have falling populations (Japan, Russia), this may be a poor way of viewing the world. Once we adjust for population growth rates, by focusing on per capita GDP growth, India, Brazil, and Australia look a lot less impressive, while tardy Japan is actually doing just fine. See this link for more.
Friday, March 7, 2008
Rent Seeking... US Style
"Rent Seeking"- using resources to try to influence governments (legally) to pass laws that assist you financially- leads to economic inefficiency, and ultimately lower economic growth. But rent seeking is common, even in high income economies. It also leads to some strange behaviours. For example, fruit and vegetable producers (who do not receive subsidies) lobby the US government to keep subsidies for producers of other crops as it means that fewer producers switch to producing fruit and vegetables, and therefore reduces the competition that they face! It sounds like a win-win for everyone, EXCEPT the consumer- who ends up paying a higher price for non-subsidised crops- and the taxpayer, who finances the subsidies! See this Marginal Revolution link for more.
US Recession...
Here's some excellent analysis on the US business cycle by James Hamilton. The news is bad.....
Thursday, February 28, 2008
Walmart and the Recession....
The US appears to be in recession, but not everyone is suffering. Yesterday we argued that the effects of the recession on China, for example, depend on the kinds of goods and services that China exports to the United States. If these exports are mostly necessities, there will be minimal effects.
Walmart may also buck the trend, as this Slate article suggests.....
Walmart may also buck the trend, as this Slate article suggests.....
Tuesday, February 26, 2008
China Trade and US Recession...
"If the US experiences a recession, might that not be good for China's exports? After all, China exports low-priced goods, and US households may consume more of these during a recession" - DuOo
You raise a good point. During a recession, consumption of luxury goods falls dramatically, while consumption of necessities may barely change. Thus depending on the kind of goods China is exporting, a US recession may not necessary hurt China's economy. I expect that a US recession will negatively impact on China, for two reasons:
1) There's a difference between low priced goods and necessities. Yes, demand for necessities is relatively resillient during a recession, but necessities are items like food and medicine. These are not the largest part of Chinese exports to the United States. Instead China's exports are mostly made up of consumer goods that, while (relatively) cheap, are not essential consumption items to US households.
2) China's exports are increasingly in the "luxury" and durable goods sector, which are highly vulnerable to the business cycle. There are very few cars, for example, that do not contain some parts that were made in China. An anecdote that I heard recently from a friend in the watch industry is that the mechanisms in nearly all "Swiss" watches are made in China. The watch is still assembled in Switzerland, so that it can still be claimed to be "Swiss" for marketing reasons, but much of the actual manufacturing is now taking place in China.
For these reasons, I expect that a US recession will negatively impact on China.
You raise a good point. During a recession, consumption of luxury goods falls dramatically, while consumption of necessities may barely change. Thus depending on the kind of goods China is exporting, a US recession may not necessary hurt China's economy. I expect that a US recession will negatively impact on China, for two reasons:
1) There's a difference between low priced goods and necessities. Yes, demand for necessities is relatively resillient during a recession, but necessities are items like food and medicine. These are not the largest part of Chinese exports to the United States. Instead China's exports are mostly made up of consumer goods that, while (relatively) cheap, are not essential consumption items to US households.
2) China's exports are increasingly in the "luxury" and durable goods sector, which are highly vulnerable to the business cycle. There are very few cars, for example, that do not contain some parts that were made in China. An anecdote that I heard recently from a friend in the watch industry is that the mechanisms in nearly all "Swiss" watches are made in China. The watch is still assembled in Switzerland, so that it can still be claimed to be "Swiss" for marketing reasons, but much of the actual manufacturing is now taking place in China.
For these reasons, I expect that a US recession will negatively impact on China.
Thursday, February 21, 2008
The US Recession will be Bad....
.... by Martin Feldstein, Harvard Professor and current head of the NBER, the organisation that dates US recessions. See this link on Calculated Risk for more.
Here's an earlier take by me on the US business cycle.
Here's an earlier take by me on the US business cycle.
Wednesday, February 20, 2008
China's inflation... good news or bad?
Is inflation procyclical or countercyclical? In China now, the inflation rate is too high so that some people predict it could be a sign of recession. Can you explain? -Amy
At it's base, increasing inflation can be good or bad. Thinking of the standard supply and demand diagram: prices rise when there is either too much demand or too little supply. Too much demand would tend to reflect a rapidly growing economy, which is good; too little supply would reflect a slowly growing (or even shrinking) economy, which is bad.
In the case of China, it's hard to tell. Yes, prices are increasing at the fastest pace for 12 years, and inflation now stands at over 7%. But prices have been pushed up partly by the recent bad weather, which reduced supplies. Now that the bad weather is passing, its effect on inflation should diminish as well.
But there's another sense in which China's inflation is bad. Much of China's recent growth has come from growing net exports. China, the "world's factory," has churned out huge quantities of manufactured goods for world markets, where demand has been growing based primarily on low prices.
But China will not be the lowest cost producer of these goods for much longer. Price inflation directly drives up the price of exports, and the increasing value of the RMB increases the price when converted to other currencies still further. Additionally, the cost of producing goods in China is increasing rapidly, with migrant wages increasing and workers able to be more particular about their working conditions.
But lets not overstate the threat here. The effects I've outlined above are likely to slow that rate of growth of the Mainland economy. In future, more of China's growth will have to come from producing higher valued products, as they will no longer be the world's cheapest source of manufactured goods. But don't expect the economy to completely stagnate anytime soon.
At it's base, increasing inflation can be good or bad. Thinking of the standard supply and demand diagram: prices rise when there is either too much demand or too little supply. Too much demand would tend to reflect a rapidly growing economy, which is good; too little supply would reflect a slowly growing (or even shrinking) economy, which is bad.
In the case of China, it's hard to tell. Yes, prices are increasing at the fastest pace for 12 years, and inflation now stands at over 7%. But prices have been pushed up partly by the recent bad weather, which reduced supplies. Now that the bad weather is passing, its effect on inflation should diminish as well.
But there's another sense in which China's inflation is bad. Much of China's recent growth has come from growing net exports. China, the "world's factory," has churned out huge quantities of manufactured goods for world markets, where demand has been growing based primarily on low prices.
But China will not be the lowest cost producer of these goods for much longer. Price inflation directly drives up the price of exports, and the increasing value of the RMB increases the price when converted to other currencies still further. Additionally, the cost of producing goods in China is increasing rapidly, with migrant wages increasing and workers able to be more particular about their working conditions.
But lets not overstate the threat here. The effects I've outlined above are likely to slow that rate of growth of the Mainland economy. In future, more of China's growth will have to come from producing higher valued products, as they will no longer be the world's cheapest source of manufactured goods. But don't expect the economy to completely stagnate anytime soon.
China and the Industrial Revolution...
Why did the Industrial Revolution (the original one, that started in Britain shortly before 1800) bipass China? See this link on Marginal Revolution.
Thursday, February 14, 2008
Unintended Consequences...
Yesterday I discussed the unintended consequences of making it difficult for firms to fire workers: increased unemployment, especially among youth. There are many other examples of unintended consequences as well- see the links below for examples:
Policies to reduce global warming may in fact cause global warming
Increased rights for people with disabilities hurt people with disabilities; and laws to protect the environment hurt the environment.
Policies to reduce global warming may in fact cause global warming
Increased rights for people with disabilities hurt people with disabilities; and laws to protect the environment hurt the environment.
Wednesday, February 13, 2008
Protecting Jobs...
"If a country passes laws that make it difficult for firms to fire workers, why will that generally increase the unemployment rate?" - Louis
That's an excellent question! Consider the problem of the firm. They face uncertainty about the future demand for their output. Suppose demand increases today. The employer may wish to hire additional workers, but must take into account that future demand will also vary. In particular, future demand may fall sufficiently that the firm may wish to lay off the worker that they've just hired.
Suppose the Government passes a law that states that firms cannot lay off workers under any circumstances. Now let's work backwards from this. The employer knows that if he hires a worker today he will need to pay that worker tomorrow, whether he needs the worker tomorrow or not. Because there is a non-trivial chance that he would want to fire the worker tomorrow, he will be more hesitant to hire the worker today.
Legislation the makes it difficult for firms to fire workers therefore result in higher unemployment, as employers in general will be more hesitant to hire workers. But not everyone losses: people in existing jobs are better off (they currently have jobs, and therefore cannot be fired), but people who currently do not have jobs but may wish to enter the labour market in future (like my students) are worse off: employers will be mush more hesitant to hire them.
This suggests another problem resulting from firms being unable to fire workers. Younger people already have the highest unemployment rates (for example, in Hong Kong the unemployment rate for 15-19 year olds is 16.6%; it falls to 4.4% for 20-29 year olds and 2.4% for 30-39 year olds). Also younger people are more likely to be freshly entering the work force. Thus restricting firms' ability to fire workers is likely to exascerbate youth unemployment. This is both socially and economically costly.
That's an excellent question! Consider the problem of the firm. They face uncertainty about the future demand for their output. Suppose demand increases today. The employer may wish to hire additional workers, but must take into account that future demand will also vary. In particular, future demand may fall sufficiently that the firm may wish to lay off the worker that they've just hired.
Suppose the Government passes a law that states that firms cannot lay off workers under any circumstances. Now let's work backwards from this. The employer knows that if he hires a worker today he will need to pay that worker tomorrow, whether he needs the worker tomorrow or not. Because there is a non-trivial chance that he would want to fire the worker tomorrow, he will be more hesitant to hire the worker today.
Legislation the makes it difficult for firms to fire workers therefore result in higher unemployment, as employers in general will be more hesitant to hire workers. But not everyone losses: people in existing jobs are better off (they currently have jobs, and therefore cannot be fired), but people who currently do not have jobs but may wish to enter the labour market in future (like my students) are worse off: employers will be mush more hesitant to hire them.
This suggests another problem resulting from firms being unable to fire workers. Younger people already have the highest unemployment rates (for example, in Hong Kong the unemployment rate for 15-19 year olds is 16.6%; it falls to 4.4% for 20-29 year olds and 2.4% for 30-39 year olds). Also younger people are more likely to be freshly entering the work force. Thus restricting firms' ability to fire workers is likely to exascerbate youth unemployment. This is both socially and economically costly.
Tuesday, February 5, 2008
Winners and Losers...
At every stage of the business cycle, there are both winners and losers. The standard example I use is bankruptcy lawyers. They do well when the economy is tanking, but risk requiring their own services when the economy is doing very well! The linked Freakonomics article considers the winners and losers of the housing crisis in the United States.
Discrimination is Costly in Football...
An excellent article by Tim Harford on the economic cost of discrimination....
Zimbabwe inflation... again
Another in a continuing saga.... inflation in Zimbabwe officially hits 24,000%, although it may actually be far higher....
For the previous installment, see here.
For the previous installment, see here.
Thursday, January 31, 2008
Exchange Rate Appreciation and Inflation....
" China is reported to be accelerating the appreciation of the yuan to combat inflaton instead of increasing its interest rates, in part because of expectations of further cuts in US interest rates. How does appreciation combat inflation?" - Jane
That's an excellent question! There are a number of avenues available for the central bank to try to combat inflation. They've already tried price controls, that I've argued elsewhere will ultimately fail. They've also raised interest rates a number of times as well, an avenue that is more likely to be successful. But perhaps the most effective way to combat China's inflation rate is to allow the currency to appreciate more quickly.
How would that work? Well, as I wrote here, inflation ultimately results from demand exceeding supply within the Chinese economy. An increase in the value of the currency makes Chinese goods relatively more expensive and foreign-made goods relatively cheap. Thus demand for Chinese goods will fall, reducing demand and therefore inflation pressure in China.
There's a related effect as well. China is accumulating foreign reserves at a rapid rate, which means that it is buying foreign currency with domestic currency. To do this, it is expanding the domestic money supply. As Milton Friedman famously said, "Inflation is Always and Everywhere a Monetary Phenonemon." Increase the price of RMB and the demand for RMB will fall- reducing the need for Mainland authorities to increase the money supply.
That's an excellent question! There are a number of avenues available for the central bank to try to combat inflation. They've already tried price controls, that I've argued elsewhere will ultimately fail. They've also raised interest rates a number of times as well, an avenue that is more likely to be successful. But perhaps the most effective way to combat China's inflation rate is to allow the currency to appreciate more quickly.
How would that work? Well, as I wrote here, inflation ultimately results from demand exceeding supply within the Chinese economy. An increase in the value of the currency makes Chinese goods relatively more expensive and foreign-made goods relatively cheap. Thus demand for Chinese goods will fall, reducing demand and therefore inflation pressure in China.
There's a related effect as well. China is accumulating foreign reserves at a rapid rate, which means that it is buying foreign currency with domestic currency. To do this, it is expanding the domestic money supply. As Milton Friedman famously said, "Inflation is Always and Everywhere a Monetary Phenonemon." Increase the price of RMB and the demand for RMB will fall- reducing the need for Mainland authorities to increase the money supply.
Tuesday, January 29, 2008
China.... consume or save?
"We're told that saving rather than consumption will ultimately lead to increased economic growth, as saving will encourage increased investment. However, some commentators insist that Mainland China take steps to increase domestic demand, which is the exact opposite. Why is that?" - Zheng
That's an excellent question! The issue with Mainland China is that it has developed very rapidly on the basis of ever increasing exports to the rest of the world. At the same time, the high level of domestic savings has financed increasing levels of foreign investment outside of China.
But this may be a fragile source of growth. There is growing resentment in some of the rest of the world as China's low-cost production drives foreign domestic producers out of business (irrational, in my view, since the rest of the world benefits on net from free trade with China), leading to increased talk of protectionism. (A by-product of China's massive trade surplus is its growing foreign currency reserves).
Also this makes China's continued development very dependent on the economic health of the rest of the world. Right now, with the US on the brink of recession, it is easy to see that this may not be in China's best interests.
Finally, and most importantly, China appears to be suffering from a serious imbalance. Why does the Chinese economy as a whole save up to 40% of total income (see here)- much higher than nearly any other economy? This suggests some structural problems that the Mainland Government would do well to try to rectify.
In sum, many commentators interpret China's high savings rate and massive trade surplus as symptoms that something is not right in the Mainland economy. It's the "something" that they'd like to see change, rather than the savings rate per se.
That's an excellent question! The issue with Mainland China is that it has developed very rapidly on the basis of ever increasing exports to the rest of the world. At the same time, the high level of domestic savings has financed increasing levels of foreign investment outside of China.
But this may be a fragile source of growth. There is growing resentment in some of the rest of the world as China's low-cost production drives foreign domestic producers out of business (irrational, in my view, since the rest of the world benefits on net from free trade with China), leading to increased talk of protectionism. (A by-product of China's massive trade surplus is its growing foreign currency reserves).
Also this makes China's continued development very dependent on the economic health of the rest of the world. Right now, with the US on the brink of recession, it is easy to see that this may not be in China's best interests.
Finally, and most importantly, China appears to be suffering from a serious imbalance. Why does the Chinese economy as a whole save up to 40% of total income (see here)- much higher than nearly any other economy? This suggests some structural problems that the Mainland Government would do well to try to rectify.
In sum, many commentators interpret China's high savings rate and massive trade surplus as symptoms that something is not right in the Mainland economy. It's the "something" that they'd like to see change, rather than the savings rate per se.
The Great Moderation
Here's an excellent discussion on the Freakonomics blog on "The Great Moderation," and why the probability of recession in the US may be overstated.
I'm not convinced.... a large housing correction as we are now seeing in the US has always predicted a recession in the past (see this post on the Calculated Risk blog, for example). I don't think the mechanism will be any different this time around.
Yes, the evolution of the economy and improved macroeconomic policy may have resulted in an increased ability of the economy to adjust to a range of different shocks, but that doesn't mean that it can avoid recessions under all circumstances! If the shock is big enough (as the current one appears to be), we'll still get a recession.
I'm not convinced.... a large housing correction as we are now seeing in the US has always predicted a recession in the past (see this post on the Calculated Risk blog, for example). I don't think the mechanism will be any different this time around.
Yes, the evolution of the economy and improved macroeconomic policy may have resulted in an increased ability of the economy to adjust to a range of different shocks, but that doesn't mean that it can avoid recessions under all circumstances! If the shock is big enough (as the current one appears to be), we'll still get a recession.
Thursday, January 24, 2008
Discouraged Workers and Unemployment...
According to the text, if discouraged workers are not counted as unemployed, the unemployment rate will be understated during recessions. Why is this? - Jane
The unemployment rate = 100* unemployment / (unemployment + employment). An increase in the number of discouraged workers decreases both the numerator and the denominator by the same amount. But because the numerator (unemployment) is much smaller than the denominator (unemployment + employment), in percent terms the numerator declines by more. Hence the measured unemployment rate falls.
The unemployment rate = 100* unemployment / (unemployment + employment). An increase in the number of discouraged workers decreases both the numerator and the denominator by the same amount. But because the numerator (unemployment) is much smaller than the denominator (unemployment + employment), in percent terms the numerator declines by more. Hence the measured unemployment rate falls.
Price Controls and Shortages...
One week ago, I discussed the likely consequences of the newly-introduced Mainland price controls here. I argued that "Price controls never have been, and in my view never will be, an effective policy to try to lower inflation." Previously, I've argued that price controls lead to shortages.
Well, guess what? From today's SCMP...
Worst-ever coal shortage sees stocks fall 40pc
Emergency measures taken as provinces ration electricity
The mainland has issued an emergency circular to ensure power supplies after an unexpected power shortage of nearly 70GW.
.....
In an effort to ease inflation, the State Council had announced this month that power producers would not be allowed to raise electricity prices in the short term, preventing them from passing on the rising cost of coal.
........
"It's a battle between power companies and the central government," said Great Wall Securities analyst Zhou Tao . "While coal prices are going up and an electricity price rise is ruled out by the government, the electricity companies are reluctant to buy much."
Electricity prices cannot be increased because of price controls, but the cost of generating electricity is rising due to rising coal prices. Profit maximising electricity producers respond by reducing the supply of electicity, resulting in power shortages.
The best response? Deregulate electricity prices, allowing these to move with the cost of production. The most likely response? Regulate coal prices, to reduce the cost of electricity generation. But this would not work: it'll merely result in shortages of both electricity AND coal, as profit maximizing coal producers respond to decreasing profit margins by decreasing the supply of coal.
I repeat: PRICE CONTROLS DO NOT WORK.
Well, guess what? From today's SCMP...
Worst-ever coal shortage sees stocks fall 40pc
Emergency measures taken as provinces ration electricity
The mainland has issued an emergency circular to ensure power supplies after an unexpected power shortage of nearly 70GW.
.....
In an effort to ease inflation, the State Council had announced this month that power producers would not be allowed to raise electricity prices in the short term, preventing them from passing on the rising cost of coal.
........
"It's a battle between power companies and the central government," said Great Wall Securities analyst Zhou Tao . "While coal prices are going up and an electricity price rise is ruled out by the government, the electricity companies are reluctant to buy much."
Electricity prices cannot be increased because of price controls, but the cost of generating electricity is rising due to rising coal prices. Profit maximising electricity producers respond by reducing the supply of electicity, resulting in power shortages.
The best response? Deregulate electricity prices, allowing these to move with the cost of production. The most likely response? Regulate coal prices, to reduce the cost of electricity generation. But this would not work: it'll merely result in shortages of both electricity AND coal, as profit maximizing coal producers respond to decreasing profit margins by decreasing the supply of coal.
I repeat: PRICE CONTROLS DO NOT WORK.
Negative Real Interest Rates...
From today's SCMP:
"HK slips into negative interest rates. With local lenders responding to Fed cut, prime drops below inflation level of 3.8pc.
....
The result is a negative interest-rate scenario, reminiscent of the mortgage rate from 1991 to 1994. At 4 percentage points below prime, the mortgage rate now stands at between 3.1 per cent and 3.25 per cent, below the inflation rate measured at 3.8 per cent last month."
Effectively, if you have a mortgage, the Bank is now paying you, rather than the other way around! That is, you will pay back your loan in future, inclusive of interest, with less real money than the loan is worth today. And the likely result?
"Property agents said negative mortgage interest rates would help bring the market back to 1997's peak levels faster....."
Does that mean you should buy property? Not necessarily. First there are the transaction costs, that amount to about 5% of the value of the property, and then there is the risk of future property price movements. IF the US recession spreads to Asia, expect property prices to decline significantly, which would wipe out any gain from negative real interest rates many times over.
"HK slips into negative interest rates. With local lenders responding to Fed cut, prime drops below inflation level of 3.8pc.
....
The result is a negative interest-rate scenario, reminiscent of the mortgage rate from 1991 to 1994. At 4 percentage points below prime, the mortgage rate now stands at between 3.1 per cent and 3.25 per cent, below the inflation rate measured at 3.8 per cent last month."
Effectively, if you have a mortgage, the Bank is now paying you, rather than the other way around! That is, you will pay back your loan in future, inclusive of interest, with less real money than the loan is worth today. And the likely result?
"Property agents said negative mortgage interest rates would help bring the market back to 1997's peak levels faster....."
Does that mean you should buy property? Not necessarily. First there are the transaction costs, that amount to about 5% of the value of the property, and then there is the risk of future property price movements. IF the US recession spreads to Asia, expect property prices to decline significantly, which would wipe out any gain from negative real interest rates many times over.
Wednesday, January 23, 2008
Zimbabwe Inflation, again....
Hong Kong Inflation
Inflation in the CPI is up to 3.8% in Hong Kong, according to the Census and Statistics Department. That is, the average price that consumers paid for consumer goods in December 2007 was 3.8% higher than than in December 2006. This is the highest level of consumer inflation since June 1998, almost 10 years ago!
The driving force behind Hong Kong's inflation is rapid growth across the border in Mainland China fueling increased demand here. As long as China's rapid develop continues, coupled with an appreciating RMB, increased demand for Hong Kong produced goods and services will put positive pressure on Hong Kong prices.
But now there is another force putting upward pressure on Hong Kong prices. Yesterday the US central bank cut interest rates by 75 basis points, or 0.75% (for an analysis of the rate cut, see James Hamilton's comments here). This implies that interest rates in Hong Kong will drop as well, as a result of Hong Kong's currency board system that effectively fixes the exchange rate between Hong Kong and the United States. (See earlier posts here and here to understand why).
These lower nominal interest rates imply cheaper mortgages and loans in Hong Kong, which will likely fuel further increased demand and therefore inflation in Hong Kong.
The bottom line: expect price increases in Hong Kong to accelerate further in the short run.
The driving force behind Hong Kong's inflation is rapid growth across the border in Mainland China fueling increased demand here. As long as China's rapid develop continues, coupled with an appreciating RMB, increased demand for Hong Kong produced goods and services will put positive pressure on Hong Kong prices.
But now there is another force putting upward pressure on Hong Kong prices. Yesterday the US central bank cut interest rates by 75 basis points, or 0.75% (for an analysis of the rate cut, see James Hamilton's comments here). This implies that interest rates in Hong Kong will drop as well, as a result of Hong Kong's currency board system that effectively fixes the exchange rate between Hong Kong and the United States. (See earlier posts here and here to understand why).
These lower nominal interest rates imply cheaper mortgages and loans in Hong Kong, which will likely fuel further increased demand and therefore inflation in Hong Kong.
The bottom line: expect price increases in Hong Kong to accelerate further in the short run.
Tuesday, January 22, 2008
Reading more....
"I want to read more about economics news. What do you suggest?" -Zheng
There are many excellent resources on the web. For detailed economic discussion of the business cycle, for example (something that we will cover in class later in the year), Econbrower is excellent- although it does focus almost entirely on the US economy. For more general reading, check the Freakonomics blog or the Undercover Economist. For slightly more eclectic discussion of all things economics, see Marginal Revolution. There's also the Economist website where you can read the latest edition of this excellent publication for free. And if you have any more time to spare after all that, don't tell me, or I'll assign more homework! :-)
If you do come across relevant stories that you think other blog readers would be interested in seeing, please send me the link, and I'll post them here as well.
There are many excellent resources on the web. For detailed economic discussion of the business cycle, for example (something that we will cover in class later in the year), Econbrower is excellent- although it does focus almost entirely on the US economy. For more general reading, check the Freakonomics blog or the Undercover Economist. For slightly more eclectic discussion of all things economics, see Marginal Revolution. There's also the Economist website where you can read the latest edition of this excellent publication for free. And if you have any more time to spare after all that, don't tell me, or I'll assign more homework! :-)
If you do come across relevant stories that you think other blog readers would be interested in seeing, please send me the link, and I'll post them here as well.
Measuring GDP...
1. GDP can be measured as total income in the economy. Is that before tax? If yes, are all kinds of taxes included?
2. Why are inventories included in final goods? -Guo
To answer your questions, remember that GDP is a measure of the total value of all production in the economy. When we measure this production by adding up income, we want to include all income earned in the production process, including that earned by the Government via taxes. So yes, we wish to include all taxes. Typically we do this by including income before taxes are deducted (i.e. gross income rather than net income), except for indirect taxes paid by firms which we add back to correctly calculate GDP.
Inventories are included as a way to match production correctly. Recall that Y=C+I+G+NX. If a good is produced in year1 but consumed in year 2, it is included in I (inventories, a part of investment) in year 1. When it is consumed in year 2, inventories decline by the value of the good, while consumption increases by the value of the good; these cancel out, so there is no net effect on GDP.
Of course if the good is sold for more than its value as inventory, then GDP will also increase in year 2, but only by the increased value of the good when it was sold. We can think of this as the value of the service of selling the good, which rightly belongs in year 2's GDP, not year 1's.
2. Why are inventories included in final goods? -Guo
To answer your questions, remember that GDP is a measure of the total value of all production in the economy. When we measure this production by adding up income, we want to include all income earned in the production process, including that earned by the Government via taxes. So yes, we wish to include all taxes. Typically we do this by including income before taxes are deducted (i.e. gross income rather than net income), except for indirect taxes paid by firms which we add back to correctly calculate GDP.
Inventories are included as a way to match production correctly. Recall that Y=C+I+G+NX. If a good is produced in year1 but consumed in year 2, it is included in I (inventories, a part of investment) in year 1. When it is consumed in year 2, inventories decline by the value of the good, while consumption increases by the value of the good; these cancel out, so there is no net effect on GDP.
Of course if the good is sold for more than its value as inventory, then GDP will also increase in year 2, but only by the increased value of the good when it was sold. We can think of this as the value of the service of selling the good, which rightly belongs in year 2's GDP, not year 1's.
Real vs. Nominal
"What is the real price (for example of oil)? What is the difference between the real and nominal price? Do real prices change over time?" - Phillip
A nominal price is measured in terms of units of money- for example, oil is currently $88USD per barrel. A real price is adjusted for changes in the value of a unit of money- for example, if prices had risen by 20% since 2000, we'd say that the real price of a barrel of oil is (88 x 0.8) USD per barrel in year 2000 USD. Real prices changes over time, but generally by smaller magnitudes than nominal prices.
A nominal price is measured in terms of units of money- for example, oil is currently $88USD per barrel. A real price is adjusted for changes in the value of a unit of money- for example, if prices had risen by 20% since 2000, we'd say that the real price of a barrel of oil is (88 x 0.8) USD per barrel in year 2000 USD. Real prices changes over time, but generally by smaller magnitudes than nominal prices.
Friday, January 18, 2008
China vs. India
China and India share many similarities. Both are rapidly developing, relatively poor, huge economics who are together changing the shape of the world economy. But they have some fundamental differences, and their economic growth is occuring in radically different sectors. According to Marginal Revolution, that's mainly down to different labour laws. Read more here.
Compensating the losers fo Free Trade agreements...
When international trade opens up, there are inevitably winners and losers. Inefficient domestic producers can no longer compete with efficient foreign producers, and end up closing shop. A common refrain from the anti-globalisation lobby is that this alone is a sufficient reason to resist free trade.
Economists don't generally buy this story, because it inevitably results in less efficient use of resources: the ineifficient domestic producers continue their inefficient production. They may instead favour compensating the domestic producers for their financial loss.
But does that make sense? As Steve Landsburg argues (quoted by the Undercover Economist reports), we don't compensate inefficient losers in other economic spheres, so why should we when it comes to international trade? Read more here.
Economists don't generally buy this story, because it inevitably results in less efficient use of resources: the ineifficient domestic producers continue their inefficient production. They may instead favour compensating the domestic producers for their financial loss.
But does that make sense? As Steve Landsburg argues (quoted by the Undercover Economist reports), we don't compensate inefficient losers in other economic spheres, so why should we when it comes to international trade? Read more here.
Thursday, January 17, 2008
Chinese Price Controls...
Prices are going up in Mainland China, so the Government has enacted price controls. From today's SCMP editorial...
"The tough measures introduced yesterday to cap soaring food prices on the mainland clearly signal that Beijing is seriously concerned about inflation - and determined to combat the problem. These are the most stringent controls on the prices of basic necessities for 15 years. Their introduction shows that even as the mainland continues to move ahead with free-market reforms, the government is not afraid to use tough administrative measures when it believes they are necessary."
The tone of the editorial suggests that price controls represent a difficult, but ultimately effective, policy to combat increasing inflation. I'm far more sanguine. Price controls never have been, and in my view never will be, an effective policy to try to lower inflation- see my earlier posts here and here for more.
"The tough measures introduced yesterday to cap soaring food prices on the mainland clearly signal that Beijing is seriously concerned about inflation - and determined to combat the problem. These are the most stringent controls on the prices of basic necessities for 15 years. Their introduction shows that even as the mainland continues to move ahead with free-market reforms, the government is not afraid to use tough administrative measures when it believes they are necessary."
The tone of the editorial suggests that price controls represent a difficult, but ultimately effective, policy to combat increasing inflation. I'm far more sanguine. Price controls never have been, and in my view never will be, an effective policy to try to lower inflation- see my earlier posts here and here for more.
Wednesday, January 16, 2008
The Coming Recession...
According to the Economist, one accurate measure of past recessions is the number of times the news media includes the term "Recession." And guess what's happened to the number of times you can find "Recession" in print in the US lately? See this link for more.
(There's actually a formal name for counting the number of times a particular word appears in print, and using this frequency as an explanatory variable. It's called "Textual Analysis" or "Content Analysis.")
(There's actually a formal name for counting the number of times a particular word appears in print, and using this frequency as an explanatory variable. It's called "Textual Analysis" or "Content Analysis.")
Taxes and GDP
"We can calculate GDP by summing total wages, interests, rent and profits received by householders. Should we include taxes as well?" - Mandy
Yes- we should include all sources of income that are derived from the production of goods and services, and that includes income received by the Government. Normally we capture this by summing up gross, or before tax, sources of income when we calculate GDP.
Yes- we should include all sources of income that are derived from the production of goods and services, and that includes income received by the Government. Normally we capture this by summing up gross, or before tax, sources of income when we calculate GDP.
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