You should note the following from the graphs:
• to sell an additional unit of a commodity, the monopolist must reduce the price of all units sold. This therefore means the AR curves falls.
• as the price on all units must be lowered to sell the higher output, MR is lower than the price of the marginal unit(AR)
• TR at first increases with output but as price is reduced to sell more goods and services, eventually falls.
• where MR = 0 TR is at a maximum.
Princeton economist Angus Deaton talks to the FT about his new book “The Great Escape”. He discusses a number charts including “Life Expectancy and GDP in 1960 and 2010″ which shows the significant increase in Inequality in 2010. Another shows the “height of women against national income” – it stresses the importance of health care in the early years. One of Deaton’s main themes is that economic growth does not necessarily produce improved quality of life, especially when income is distributed very unequally – as is the case in today’s United States. So for example, in spite of lower economic growth in France than in the United States, because of a less unequal distribution of income, “all but the top 1 percent of the French population did better than all but the top 1 percent of the American population”.
To measure policy-related economic uncertainty, the Economic Policy Uncertainty construct an index from three types of underlying components.
1. The first component is an index of search results from 10 large newspapers. The newspapers included in our index are USA Today, the Miami Herald, the Chicago Tribune, the Washington Post, the Los Angeles Times, the Boston Globe, the San Francisco Chronicle, the Dallas Morning News, the New York Times, and the Wall Street Journal. From these papers, they construct a normalized index of the volume of news articles discussing economic policy uncertainty.
2. The second component of our index draws on reports by the Congressional Budget Office (CBO) that compile lists of temporary federal tax code provisions. They create annual dollar-weighted numbers of tax code provisions scheduled to expire over the next 10 years, giving a measure of the level of uncertainty regarding the path that the federal tax code will take in the future.
3. The third component of our policy-related uncertainty index draws on the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters. Here, they utilize the dispersion between individual forecasters’ predictions about future levels of the Consumer Price Index, Federal Expenditures, and State and Local Expenditures to construct indices of uncertainty about policy-related macroeconomic variables.
They find that current levels of economic policy uncertainty are at extremely elevated levels compared to recent history. Since 2008, economic policy uncertainty has averaged about twice the level of the previous 23 years. See animation from The Economist below.
America’s debt row makes economic policy more uncertain than amid actual war.
A hat tip to colleague David Parr for this great graphic. It shows which administrations have been America’s biggest borrowers from 1940-2012. What is interesting to note is the level of borrowing during recessions – grey columns. During the 1970′s there was very little borrowing as the policy of the day was to reduce the inflationary pressure and cut the money supply. Compare that with 2002 onwards and you will see an increase in debt to get out of the recessionary periods. Click the link below to go to the enlarged image.
In the last two November A2 exams there have been multiple choice questions concerning the point on the Total Cost curve when MC, AVC, and ATC are at their lowest point. In the graph note the corresponding points on the Total Cost. They usually ask you where on the Total Cost line is the lowest point on the MC curve/AVC curve etc.
MC cuts ATC and AVC at their lowest points. The firm will supply where the price is greater than or equal to MC. Thus the individual firm’s supply curve consists of the firm’s MC curve, but only the portion above AVC . The reason for this is that where P=AVC the firm will shut down operations because they are barely covering avoidable costs.
The Lorenz curve is a useful tool used by those interested in statistics and economics to give a picture of distribution. Its plots the % of household income on the vertical scale against the % of households on the horizontal. An example is shown right.
The Gini Coefficient is derived from the same information used to create a Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg.
Area between the Lorenz Curve and the 45° line / Total area below the 45° line
The resulting number ranges between:
0 = perfect equality where say, 1% of the population = 1% of income, and
1 = maximum inequality where all the income of the economy is acquired by a single recipient.
* The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.
* The Lorenz Curve itself shows actual distribution of income. The further the Lorenz Curve is away from the 45° line, the more unequal is the distribution of income.
* Lorenz Curves are typically drawn from gross income. Once disposable income is taken into account, the Lorenz Curve will most likely move inwards. This is because, as we shall see, the net effect of taxes and other distributional measures of government is to bring everyone’s disposable incomes closer together.
* Those countries where the wealth is in the hands of a few, such as oil sheikdoms, will have Lorenz Curves extremely bowed.
Lorenz curves may also be drawn to show the extent of inequality in the distribution of wealth. Such curves are likely to be even further away from the line of complete equality than are those of the distribution of income. This is because most people have some disposable income while not everyone has assets.
Tools of Redistribution
If we are concerned with how well-off people are and how much inequality there is, looking only at individual or household disposable income is not enough. It is not simply a matter of how much cash income the government leaves us with. The use of taxes and transfers may be the main way of directly redistributing income, but this is not the only way by which government can influence well-being. A combination of approaches can better tackle the problem. In general we may consider that government influences the extent of inequality by:
• The way in which it raises taxes to pay for public goods that everyone has such as defence and parks. The tax system may be designed to take more from the higher income groups, while everyone gets similar benefits from the public goods.
• Giving transfers, such as family support and the sickness benefit, to those whose income is very low or who cannot earn.
• Providing collective goods mainly to the lower income groups.
• Providing targeted subsidies or subsidies received only by those with low incomes&emdash; e.g., housing loans and education grants.
• Providing general subsidies on basic goods such as bread, milk, GP services and electricity. These used to be far more important than they are today. Subsidies have the problem that they encourage waste.
• Ensuring that all employers pay a fair wage under minimum pay, equal pay and pay equity legislation.
• Ensuring that everyone has equality of opportunity. Those who wish to proceed to tertiary education, for example, should be given the opportunity.
• Encouraging training and acquisition of skills by all school leavers.
The New Zealand General Social Survey of 2012 showed some interesting facts regarding wellbeing:
An estimated 87 percent of people were ‘satisfied’ or ‘very satisfied’ with their lives overall.
Four aspects of life were important in determining people’s overall life satisfaction: health, money, relationships, and housing.
In 2012 an estimated:
* 60 percent of New Zealanders rated their health as ‘excellent’ or ‘very good’
* 52 percent had ‘more than enough’ or ‘enough’ money to meet their everyday needs
* 69 percent had not felt lonely in the last four weeks
* 67 percent had no major problems with the house or flat they lived in.
- 21 percent of New Zealanders had good outcomes in all four of these (ie excellent or very good health, more than enough or enough money, never felt lonely, and no major housing problems).
- 98 percent of those with four good outcomes were satisfied or very satisfied with their lives overall.
- 5.4 percent of New Zealanders did not have a good outcome in any of the four aspects of life. Of these people, 56 percent were satisfied or very satisfied with their lives overall.
Firms, according to the analysis we use predict their behaviour, are very interested in their marginal cost. Since the term marginal means additional or incremental, marginal costs refer to those costs that result from a one-unit change in the production rate. We find marginal cost by subtracting the total cost of producing all but the last unit from the total cost of producing all units, including the last one. Marginal costs can be measured, therefore, by using the formula:
Marginal Cost = Change in Total Cost ÷ Change in Total Output
Average Fixed Costs (AFC) : they continue to fall throughout the output range. The gap between ATC and AVC = AFC
Average Variable Costs (AVC) : the form it takes is U-shaped: first it falls; then it starts to rise. It is certainly possible to have other shapes of the AVC.
Average Total Costs or Average Costs (ATC or AC) : similar shape to the average variable cost. However, it falls even more dramatically in the beginning and rises more slowly after it has reached a minimum point. It falls and then rises because average total costs is the summation of the AFC and the AVC curve. Thus, when AFC plus AVC are both falling, it is only logical that ATC would fall, too. At some point, however, AVC starts to increase while AFC continues to fall. Once the increase in the AVC outweighs the decrease in the AFC curve, the ATC curve will start to increase and will develop its familiar U-shape. Where MC = ATC this is the lowest point on the ATC curve and is therefore the cheapest production for the firm. This is called the technical optimum.
Marginal Cost (MC) : it cuts ATC and AVC at their lowest points. The firm will supply where the price is greater than or equal to MC. Thus the individual firm’s supply curve consists of the firm’s MC curve, but only the portion above AVC. The reason for this is that where P=AVC the firm will shut down operations because they are barely covering avoidable costs.
The BNZ Markets Outlook reported an annualised increase in net immigration by 33,000 the highest since 2003. The boost mainly comes from the fall in migrant departures. This will impact on aggregate demand and the RBNZ have talked in monetary policy statements about increases in potential growth (like the housing market) and the impact it will have on a tightening of monetary policy later next year – remember also the Christchurch rebuild.
Here is a chart from WSJ Graphics which shows the level of interest rates in the US from 1980 to today. With the stagflation of the 1970′s Paul Volcker was faced with some very tough decisions. Below is an extract from an interview with him on the PBS Commanding Heights documentary.
It came to be considered part of Keynesian doctrine that a little bit of inflation is a good thing. And of course what happens then, you get a little bit of inflation, then you need a little more, because it peps up the economy. People get used to it, and it loses its effectiveness. Like an antibiotic, you need a new one; you need a new one. Well, I certainly thought that inflation was a dragon that was eating at our innards, so the need was to slay that dragon.
If you had told me in August of 1979 that interest rates, the prime rate would get to 21.5 percent, I probably would have crawled into a hole. I would have crawled into a hole and cried, I suppose. But then we lived through it.
BBC business correspondent Alastair Fee boards a Chinese container ship off the coast of England and reports on the enormous size of it – holds 13,500 containers. And they are getter bigger. More than 40% of the UK’s sea trade comes into the Southampton Dock and to meet increasing demand from container ships a new 500 metre birth is being dredged. However trade goes the other way as in 2012 the demand for cars from the growing Chinese middle class saw over 20,000 BMW Minis make their way to Chinese ports.
It is important that you are aware of current issues to do with the New Zealand and the World Economy. Examiners always like students to relate current issues to the economic theory as it gives a good impression of being well read in the subject. Only use these indicators if it is applicable to the question.
Indicators that you might want to mention are below. Notice how low global interest rates are as economic conditions have warranted greater borrowing and spending in the world economy.
The New Zealand Economy
New Zealand’s GDP expanded by 0.2 percent in the June quarter. The result was consistent with consensus forecasts, although some forecasters were expecting a decline in economic activity (due to the flow-on effects of the drought experienced earlier in the year). On an annual average basis the economy expanded by 2.7 percent over the year to the June quarter. The current account deficit totaled $9,099 million in the year ended 30 June 2013, equivalent to 4.3 percent of gross domestic product. Strong economic growth has been forecast for the second half of 2013 as the economy recovers from the drought conditions experienced earlier in the year. The annual rate of inflation is forecast to rise from its current low level back within the Reserve Bank’s medium term inflation target band of 1 – 3 percent over the coming year. The Bank is expected to commence tightening monetary policy (increase interest rates) next year as a result.
The Global Economy
The global economy continues to at very low levels. However most of the economies of the European Union remain in recession (two consecutive quarters of negative GDP). US growth has increased to 2.5% which indicates that the job market is now picking up and demand is more prevalent. Even considering the recent issue with the debt ceiling the US dollar (what is seen as the world reserve currency) has remained relatively stable – in fact it strengthened after agreement was made in Congress.
However the major emerging markets face slower growth and will take longer to come out of the downward cycle. Meanwhile, global financial markets have faced considerable volatility, owing to prospective changes in US monetary policy, a new policy in Japan, and instability in China’s banking system.
PBS Newshour Economics correspondent Paul Solman talks to Robert Reich about “Inequality for All,” a documentary about the former labour secretary’s personal crusade to explain to Americans why everyone should care about the nation’s growing economic disparity and divisiveness. Here is part of the interview in which Reich states what is bad about inequality.
Well it’s a bad thing in two regards, even if you don’t particularly worry about issues of fairness or public morality. It’s bad, number one, because no economy can continue to function when the vast middle class and everybody else don’t have enough purchasing power to buy what the economy is capable of producing without going deeper and deeper into debt. Seventy percent of the entire economy is basically consumer spending. And if consumers don’t have the wherewithal to spend because all the money’s going to the top, and the people at the top only spend a very small fraction of what they earn, then the economy is almost inevitably destined to slow.
If lawmakers fail to avert a debt default, there could be a devastating impact on the national economy: mortgages soaring, consumers unable to borrow, the government forced to pay more to borrow more, plunging us deeper into debt. PBS Economics correspondent Paul Solman reports on how the bond market is anticipating the situation. Features former IMF Chief Economist and now MIT Professor Simon Johnson.
Here is some revision material on economic systems. It goes through the features of the market, command and mixed economies. Below is a screenshot of the information but you can download the word document by clicking on the link – ECONOMIC SYSTEMS.
Since the GFC in 2008 the world seems a happier place to be than it was before the event. This is according to a Ipsos a research company which completed a poll of 19,000 adults in 24 countries. However the term happiness is self-reported and the term means different things to different people. According to The Economist two conclusions have emerged from the data:
1. Large, fast-growing emerging markets do not share share rich industrialised pessimism. The happy countries got even happier – Turkey, Mexico, and India. Incidently even considering the tsunami and the nuclear accidents Japan’s ‘very happy’ category increased.
2. Happiness levels tend to rise with wealth and then plateau – The Easterlin Paradox. This usually happens when a country’s national income per head reaches around $25,000 per annum. But the highest levels of reported happiness are in the poor and middle income countries – Indonesia, India, and Mexico. In rich countries the levels range from 28% in Australia to 13% in Italy and 11% in Spain. Most Europeans are gloomier than the world average.
Levels of income seem to be inversely related to happiness and one can see that happiness depends on a lot more than material welfare. One just has to look at the Bangladeshi cricket supporters in the recent test with the Black Caps. Plenty of happy faces with an average income of $1,883 per annum and ranked 151 by the World Bank.
Bayleys Real Estate Country magazine included an article on the outlook for New Zealand’s agricultural sector which was written by NZX Agrifax.
With regard to the Dairy Industry the effect of the drought in the latter part of 2012/13 season slowed production. This was also the case with other countries as the domestic market seems to have absorbed their output. So this lack of supply combined with a steady growth on demand has resulted in high dairy prices for a sustained period of time. With prices remaining high there is now the chance that milk production will increase especially in the US where their elasticity of supply of milk is fairly elastic. New Zealand is forecast to have a good milk production season as pastures have recovered from the drought. See graph below for forecasted milk prices.
The recovery in lamb prices has mainly been down to the increasing demand from the Chinese market. During the first 10 months of the season, over 80,000 tonnes of lamb was exported there which accounts for 29% of NZ’s total lamb exports. That’s up from 44,000 tonnes over the same period last year. There has been in particular an increase in demand for higher value items such as legs and shoulders. This led to an increase in price as supplies to traditional markets was now reduced.
With four months to go till the Winter Olympics in Sochi Russia the characteristics of a planned economy are still prevalent. In the old Russia of the communist-era concerns about corruption, the cost of a project, the effect on the environment and the working conditions of the labour force were brushed aside. However it seems that nothing much has changed, according to The Economist.
When the bid was placed Russia proposed to spend $12 billion. The estimated cost now is $50 billion – most expensive games in history. According to The Economist Olympics tend to have overruns of about 180% – Sochi is now at 500%
The closeness of the Government with the construction companies involved has led to corruption. Olympstroy, which oversees the construction, are run under the informal influence of a rent-seeking group of people for whom extraction of government funds is the main purpose. Furthermore one of Putin’s friends and judo partner has been awarded$7.4billion – more than the budget on the 2010 games in Vancouver. A road contract worth $9 billion went to the Russian Railways which is headed by a former KGB general and friend of Putin.
There has been little concern for the environment with construction waste polluting the Black Sea and protected forests being cut down to make way for facilities.
Low-skilled migrants get paid $500 a month and work 12 hour shifts. There is no protection for them in the form contracts, minimum wage, health and safety, and insurance. Wages are not always paid in full and sometimes not paid at all according to Human Rights Watch.
Former prime minister Yegor Gaidar once wrote about how the Soviet Union had wasted its money on construction projects whose main purpose was to utilise government funds. One wonders has much changed?
What is also quite strange is the fact that Sochi has a sub-tropical climate and is one of the few places in Russia where snow is scarce. This has led organisers to store snow.
The standoff between the President and the US Congress continues after the Government was forced to shut down non-essential services and stand down more than 800,000 employees.
US politicians appear no closer to resolving the deadlock. But while markets remain frustrated with the current situation, a resolution is hopefully not too far away. For Australia, the impact on the local economy is unlikely to be significant if the issue is resolved before too long. With over 80% of Australia’s exports destined for Asia, any hit to Australia’s trade accounts will likely be undetectable. Source: BNZ Australian Markets Weekly
Following on from my last post about Fed Chairmen I found this cartoon in The New Yorker. So who is calling the shots in the Bernanke home? Maybe the Fed Rate is influenced by domestic conditions as well. Should there be a home conditions indicator?