Dwayne "The Rock " Johnson understands TANSTAAFL. Video proof!

This from his Facebook page.  He is acknowledging a young mans heroics (rightly so!) but at the end of this video (about the 50 second mark) he makes a remark that stunned me.

A pretty solid reference to a basic economic concept we learn the fist day in economics! While he does not identify it directly, "TANSTAAFL", the intent is clear.

Made me smile.  Only a minute long. Worth it!

Potential Real GDP vs Actual Real GDP and the PPF.

Here is a  nice illustration of "Potential Real GDP" vs "Actual Real GDP.  Potential GDP is an estimate at a given point in time of an economy's potential to produce Real GDP given its available resources (Land, Labor, Capital, Entrepreneurship).  Gives me an opportunity to show how two important AP Macroeconomic concepts are related to each other.

The Congressional Budget Office (CBO) publishes a forward looking projection of Potential RGDP years in advance.  This graphic gives the estimated trajectory of Potential RGDP that was calculated in a given year (2007,09,11,13,15, and 2017).  The heavy BLACK line is the trajectory of the "Actual RGDP" that was recorded in the respective year.

It is evident Actual RGDP, since the advent of the 2008 recession has been below the projected Potential---the difference is known as the "Output Gap".

It is noteworthy that after 2008 the CBO consistently lowered the estimate of the US economy's potential to produce Real GDP.

Source: VOXEU

Below I paired this graphic with the Production Possibilities Frontier (PPF).  The PPF is an important model in AP Macro.

I color coded the PPF frontiers in a similar color as the one in the graphic to show the contraction of the US PPF over time (as calculated by the CBO).  I used Point "A" to represent the heavy black line and a consistent under-utilization of societal resources, shown as a point inside the PPF.

Both of these models show the same thing---an output gap that suggests more resources could be put into use before we reach our economic potential.

Hotel price surge for the Eclipse: Price Gouging or Revenue Smoothing? Easy call for me...

If you are looking for a last minute hotel room in the path of the eclipse you will either find no availability or a shockingly high price for a one night stay.

Below is the price for a stay at a Days Inn hotel I found on Hotels.com in rural Kentucky.

The first price is the "normal" price they charge for a room, the second is for Sunday, August 20th (eclipse is Monday afternoon).  A mark-up of 5.66 times the regular price.

Is this price gouging or revenue smoothing?   Is it "fair"?

One justification is that the hotel business is seasonal.  Special events that a preponderance of people are "willing and able" to pay a premium over the regular market price to attend are one way hotel operators are able to reap extra revenue that allows them to keep prices lower (or even stay in business) for the rest of the year.

I believe in this case, the informed opinion is revenue smoothing and the, well, ignorant one is price gouging.

Think of it as "robbing rich Peter" (the the person who values the special event a lot) to "pay poor Paul" (the person who gets to enjoy a lower price during non-special event times which is most of the year).

Foreign Exchange Market presentation for AP Macroeconomics

Foreign exchange market from Gene Hayward

Smartphone/Creative Destruction Cartoon. I see lots of consumer and producer surplus value. How about you?

Stop and think about ALL the separate and distinct products we used to have to purchase individually to do all the things a Smartphone can do today.

One way to think of Smartphones is it is a plus for the environment.  Think about all the resources, most non-renewable, that are not employed because they are contained in one small rectangular case.

I am not sure the real value of these devices is captured in the price we pay.  I have to think the surplus value far (?) exceeds the price.

What do you think?

Found on Twitter. No real source to cite.

Keynesian Multiplier Effect Illustrated

Here is a presentation I created that explains the Keynesian Multiplier Effect in as simple terms as I can make it.  I bit long in number of slides for that reason.

This is an important part in the Unit on Fiscal Policy.  The math, while simple, seems to be a stumbling block for many students. Hopefully this eases that tension!

Keynesian Multiplier Effect Illustrated. from Gene Hayward

Wording for Correct answers for Foreign Exchange Market (FOREX) on the AP Macroeconomics FRQ's

On the AP Macroeconomics exam you can be 99% certain you will be asked Foreign Exchange Market question(s) on the FRQ section of the test.

Precise and to the point answers are required.  They are looking for the proper linkages from the various cause and effect scenarios you are presented with.

Below I wrote out what would be the "best way" to respond to these questions.  You may be asked to identify and explain ALL the effects under each bullet point or maybe just one (for example, only what happens to Exports given an event---all the rest is implied and you have to understand it in order to get to what happens to Exports).

My advice is to memorize these until they "click".  Again, they contain ALL the key words/phrases that past FRQ rubics have required students explicitly mention.

NOTES:  BE CAREFUL with #3 through #6.  They seem very counter-intuitive what happens to the value of the dollar given the scenario.  These can easily trip you up.

1. “If the interest rate in the U.S. INCREASES relative to the Rest of the World (ROW), U.S. financial assets become more desirable.  The demand for the dollars INCREASES and APPRECIATES the value of the dollar internationally. “

Effect on Exports: When the dollar APPRECIATES in value, U.S. goods and services become relatively MORE expensive and Exports will DECREASE.

Effect of Imports: When the dollar APPRECIATES in value, Foreign goods and services become relatively LESS expensive and Imports will INCREASE.

Effect on Net Exports (N(x): If Exports Decrease and Imports Increase, then net exports will DECREASE.

2. “If the interest rate in the U.S. DECREASES relative to the Rest of the World (ROW), U.S. financial assets become less desirable.  The supply of the dollars INCREASES and DEPRECIATES the value of the dollar internationally. “

Effect on Exports: When the dollar DEPRECIATES in value, U.S. goods and services become relatively LESS expensive and Exports will INCREASE.

Effect of Imports: When the dollar DEPRECIATES in value, Foreign goods and services become relatively MORE expensive and Imports will DECREASE.

Effect on Net Exports (N(x): If Exports Increase and Imports Decrease, then net exports will INCREASE.

3. If price levels in U.S. are LOWER relative to Rest of the World (ROW) then U.S. goods and services become MORE desirable. The demand for the dollars INCREASES and APPRECIATES the value of the dollar internationally. “

Effect on Exports: When the dollar APPRECIATES in value, U.S. goods and services become relatively MORE expensive and Exports will DECREASE.

Effect of Imports: When the dollar APPRECIATES in value, Foreign goods and services become relatively LESS expensive and Imports will INCREASE.

Effect on Net Exports (N(x): If Exports Decrease and Imports Increase, then net exports will DECREASE.

4. If price levels in U.S. are HIGHER relative to Rest of the World (ROW) then Foreign goods and services become MORE desirable. The supply of dollars INCREASES and DEPRECIATES the value of the dollar internationally.

Effect on Exports: When the dollar DEPRECIATES in value, U.S. goods and services become relatively LESS expensive and Exports will INCREASE.

Effect of Imports: When the dollar DEPRECIATES in value, Foreign goods and services become relatively MORE expensive and Imports will DECREASE.

Effect on Net Exports (N(x): If Exports Increase and Imports Decrease, then net exports will INCREASE.

5. If GDP INCREASES in the U.S. relative to the Rest of the World, then Americans will want to buy not only MORE domestic goods/services, but MORE foreign goods/services also. The supply of dollars INCREASES and DEPRECIATES the value of the dollar internationally.

Effect on Exports: When the dollar DEPRECIATES in value, U.S. goods and services become relatively  LESS expensive and Exports will INCREASE.

Effect of Imports: When the dollar DEPRECIATES in value, Foreign goods and services become relatively MORE expensive and Imports will DECREASE.

Effect on Net Exports (N(x): If Exports Increase and Imports Decrease, then net exports will INCREASE.

6. If GDP DECREASES in the US relative to the Rest of the World. then Americans will not only buy FEWER domestic goods/services, but FEWER Foreign goods/services also.  The supply of dollars DECREASES and APPRECIATES the value of the dollar internationally.

Effect on Exports: When the dollar APPRECIATES in value, U.S. goods and services become relatively MORE expensive and Exports will DECREASE.

Effect of Imports: When the dollar APPRECIATES in value, Foreign goods and services become relatively LESS expensive and Imports will INCREASE.

Effect on Net Exports (N(x): If Exports Decrease and Imports Increase, then net exports will DECREASE.

Calculating Comparative Advantage with Output and Input Methods Made Easy...I think.

One of the hardest concepts to intuitively understand in economics is Comparative Advantage. Seems like most of the time with students a deep understanding is elusive. It just takes practice and thought.

While we wait for those "AH HA!" moments, students still need to understand the "nuts and bolts" of the math behind the concept.  This can be elusive as well, especially for students who are not strong in math.

These two very short presentations will walk you through the basics so at least you can get the math right. It is important to get the "set-up" of the problems correct before proceeding with the math.

I hope this helps someone!

IOU Method to determine Comparative Advantage

Comparative Advantage: "IOU" method from Gene Hayward

"OOO" Method to determine Comparative Advantage

"OOO" Method to calculate Comparative Advantage from Gene Hayward

Absolute and Comparative Advantage for Dummies...like me.

Here is my very detailed look at how to calculate Absolute and Comparative Advantage for AP Economics.  Overkill? Maybe, but it is a step by step look at how to do it that I think would be helpful to teachers and students alike.  Kinda wish I had the "Trade for Dummies" breakdown when I was first learning it.

Hope it helps someone have a breakthrough.

Absolute and comparative advantage from Gene Hayward

Ticket to Disneyland in 1955 vs 2017---which is a better "value"?

This ticket to Disneyland in 1955 cost $1.00.  In 1955 the minimum wage was $.75 (75 cents), so it took 1.33 hours of labor to earn enough to buy this one ticket in 1955.

Today, a ticket would cost you $105.00  to visit the Happiest Place on Earth.  In 2016 the minimum wage (although it varies in States and even some localities) is $7.25 per hour.  At that rate, a ticket would take 14.5 hours of labor (excluding labor taxes, of course).

A day at Disneyland in 1955 was definitely more affordable for a low wage worker 60 years ago. The only thing that really remains to be determined is the comparable quality of the experience.  The parks are vastly different in composition.

Has the quality of the visit improved by a large enough factor to make the extra hours worked to buy a one-day pass more "utility maximizing" in 2017 than in 1955?

Nice resource for illustrating "Increasing Opportunity Costs" and the concave nature of the PPF

Here is a nice article on the great productivity slowdown in the US, and in the developed world for the most part.

The article is interesting throughout but the excerpt below caught my eye.

It goes to the edge but does not explicitly mention the important concept of "Increasing Opportunity Costs" and the reason the Production Possibility Frontier (or Curve) is "bowed", or concave from the origin.

While Services Sector Booms, Productivity Gains Remain Elusive 

“The changing distribution of workers might be able to explain up to one-half of the slowdown in labor productivity growth from 2.5% to 1.5% per year since the 1960s," said Dietrich Vollrath, a University of Houston economist. Indeed, this effect has accelerated since 2000, when workers, in aggregate, started to move from higher to lower productivity sectors. 

Services productivity, besides its natural disadvantage, may be facing an added headwind: The sector is absorbing millions of workers whose underlying skills may not be well suited to the jobs they take on. 

If people start doing work they are relatively good at, and if manufacturers shed their least efficient workers first, manufacturing productivity will improve as it downsizes but services-sector productivity will suffer as it absorbs workers who are a poor fit. (Sections in bold are mine).

All resources, including labor, are not "perfectly adaptable" to a alternative uses.  If you employ/deploy resources to such alternative uses they tend to be less productive, hence more costly.

Simple example.  The decline of steel manufacturing coincided with a increased demand for truck drivers.  While some unemployed steel workers may make fine truck drivers, the "marginal" ones may not be so good. They may have more accidents or load mishaps and are more expensive (ceteris paribus) to employ.

Negative Externality: Meat industry blamed for largest-ever 'dead zone' in Gulf of Mexico

This article, Meat industry blamed for largest-ever 'dead zone' in Gulf of Mexico,

suggests that the market quantity for meat products is greater than it should be.  The chemical run-off of fertilizers and other agricultural inputs that go into the production of meat products flow into waterways.  Its negative affects go much further than the borders of the farms and ranches. Some excerpts:

"Toxins from manure and fertiliser pouring into waterways are exacerbating huge, harmful algal blooms that create oxygen-deprived stretches of the gulf, the Great Lakes and Chesapeake Bay, according to a new report by Mighty, an environmental group chaired by former congressman Henry Waxman... 

...Nutrients flowing into streams, rivers and the ocean from agriculture and wastewater stimulate an overgrowth of algae, which then decomposes. This results in hypoxia, or lack of oxygen, in the water, causing marine life either to flee or to die... 

...America’s vast appetite for meat is driving much of this harmful pollution, according to Mighty, which blamed a small number of businesses for practices that are “contaminating our water and destroying our landscape” in the heart of the country..."

If the problem IS production over a more "socially optimal" level of production, how do we attain that optimal level?

The essential problem is that the cost of the externality is not being borne by the consumer or producer of the product.  Consumers are paying and producers are receiving only the money cost to make the product available. They are not paying for the residual costs of environmental degradation that affect others near and far (out into the Gulf of Mexico!).

Our task here is to use the basics of Supply and Demand to illustrate how markets respond to government intervention in order to require Producers and/or Consumers to "internalize" that "external" cost that has been imposed on the rest of society.

Internalizing that cost can take the form of an explicit tax on the good or some other "non-monetary" rule or regulation that de facto internalizes the cost of producing the good.

I put together a short-ish presentation to show you how this is modeled for AP Microeconomics. The key here is to correctly identify the "area of Dead Weight Loss" in the presence of a Negative Externality.

Meat product social cost** from Gene Hayward

The most prominent determinant for a "change in supply" is a change in the cost of an input that goes into the production of an output (final good).

This article uses the example of the input cream that is used in the production of the output butter in the UK.

Rising price of cream squeezes Dairy Crest's margins

“Cream prices, which determine input costs for the butter business, have increased substantially during the first quarter,” the company said.

“This will put pressure on margins in our butter business. We have reduced our promotional activity on Country Life, which is adversely impacting volumes but mitigating some of the margin pressure.” (underlining mine)

Here are some slides to walk you through a basic demand and supply model to illustrated how this impacts the market for butter as described in the article.

How to answer basic Demand and Supply Problems in 3 easy steps.

Determining which curve to shift in the simple Demand and Supply model can be a challenge for students.

Students tend to rush and "over-think" the problem and/or they want to jump ahead a step or two and look at the subsequent effect a particular scenario has on a market.

My advice is "KISS!" (Keep It Simple Students!).

Here is my recommendation as to how to logically think about a given scenario and to get the curve shift right every time.  All in 3 easy steps.

First, you need to be familiar with the Determinants of Demand or Supply:

Factors that affect DEMAND (cause the Demand Curve to SHIFT):

• change in consumer tastes
• change in the number of buyers
• change in consumer incomes
• change in the prices of complementary and substitute goods
• change in consumer expectations

Factors the affect SUPPLY*** (cause the Supply Curve to SHIFT):

• change in input prices
• change in technology
• change in taxes and subsidies
• change in the prices of other goods
• change in producer expectations
• change in the number of suppliers

***With SUPPLY, the primary reason you will encounter for Supply Curve shifts is a change in the COST OF PRODUCTION.  When the Costs of Production increases, Supply decreases (curve shifts LEFT). When Costs of Production decrease, Supply Increases (curve shifts RIGHT).

With these determinants in mind, here are the next questions you will want to ask yourself when confronted with a scenario that will shift either the Demand or Supply Curve.

1. Ceterus Paribus (holding all other variables constant--except the one we are addressing) ask yourself  "Is this scenario a function of Demand or Supply?"  Look at your Determinants listed above---make sure you confine yourself to these determinants and do not read more into it! 

2.  After determining which curve to shift ask yourself: ""Will this scenario have a POSITIVE ("good") or NEGATIVE ("bad") impact on Demand or Supply (whichever you decided in question #1)? 

3.  (a)  If it has a positive impact the curve will shift RIGHT.  This is true whether you    are shifting the Demand OR Supply Curve.
     (b) If it has a negative impact the curve will shift LEFT.  This is true whether you are          shifting the Demand OR Supply Curve.

After you shift the appropriate curve, simply locate the new equilibrium point where Demand and Supply intersect showing a new Price and Market Quantity.

Here is a link to a Google Doc that has some examples for you to work on. Once you establish a rhythm, these get very easy to do.

BIG CAVEAT:  This works well with basic introductory problems in Supply and Demand analysis. HOWEVER, when we go a bit deeper you will encounter at least one situation where the answers are counter-intuitive to the above explanation, especially on the Demand-side.  That is when the scenario suggests that the good is a "Normal Good" or an "Inferior Good" as it relates to a CHANGE IN INCOME (a function of Demand).  For instance, if the good is "Inferior" and incomes INCREASE, then the demand for that Inferior good will DECREASE (shift LEFT). If income Decreases, Demand for the Inferior good INCREASES.  Be careful with this one!

Bacon and Supply/Demand Graphs. What a great breakfast combination.

A nice article to practice graphing Supply and Demand.  

America’s Lust for Bacon Is Pushing Pork Belly Prices to Records

(Article and Photo from the Wall Street Journal)

Excerpt for graphing:

""Some analysts say bacon, meanwhile, is becoming a yearlong staple that consumers are eager to procure. That voracious demand has left wholesalers in a squeeze. Retailers “have turned hand-to-mouth, buying only what they need, waiting for production to increase and prices to decline,” said Dennis Smith, a commodities broker at Archer Financial Services in Chicago. 

Pig farmers are struggling to keep up with demand. The national hog herd rose to a seasonal record of 71.7 million head in early June, according to the U.S. Department of Agriculture, up 3% from a year earlier. 

But it hasn’t been enough to satiate bacon demand. Stocks of pork bellies in commercial freezers fell to 31.6 million pounds in May, down 59% from a year earlier and the lowest figure for the month since the USDA began keeping track in the 1950s.""