Monday, January 19, 2015

Consumer and Producer Surplus: A Slideshow-Tutorial

Consumer and producer surplus are useful concepts for explaining many points of microeconomic theory and policy. Applications include gains from trade in both domestic and international markets, the incidence and excess burden of a tax, and the deadweight loss from externalities.

Unfortunately, producer and consumer surplus are not always explained well in introductory micro textbooks. One problem (this applies to my own text as much as to others) is that there is only room in a conventional textbook for a limited number of graphs. A slideshow format works better because you can explain the concepts step by step, building your graphs piece by piece as you go along.

I wrote a slideshow-tutorial on consumer and producer surplus several years ago when I was teaching an MBA economics course in Zagreb, but I never posted it anywhere for easy public access. Earlier today, while I was working on my post and slideshow on the soda tax, I realized it would be useful to make the consumer and producer surplus tutorial available as a backgrounder, so here it is.

Follow this link to view or download a classroom-ready slideshow-tutorial on consumer and producer surplus

The Economics of a Soda Tax

The idea of a soda tax is not new. Such a tax is supposed to have a double dividend by raising revenue and, at the same time, attacking the problems of diabetes and obesity.

Despite these features, soda taxes have been hard to implement. Washington State passed such a tax in April 2010 only to see it overturned by a ballot measure in November of the same year. Resistance to soda taxes has been fueled in part by heavy lobbying by the American Beverage Association, which is said to have spent $14 million to defeat the Washington tax and $10 million in an unsuccessful effort to derail the Berkeley version. Industry lobbying also helped quash New York Mayor Bloomberg's attempt to outlaw super-size servings of sweetened beverages.

In the classroom, the soda tax can serve as a vehicle to illustrate several key microeconomic concepts, including supply and demand, elasticity, tax incidence, consumer and producer surplus, excess burden, and externalities of consumption. I have just posted an updated version of my popular 2010 sideshow on the economics of the soda tax. Check it out: Cut-and-paste it into your lecture slides or assign it to your students as a reading. Enjoy!

Follow this link to view or download a classroom-ready slideshow on the economics of a soda tax.

Sunday, January 18, 2015

Prices are Falling in the Eurozone, but is it "Real" Deflation?

The Eurozone has been on the brink of deflation for months. The latest data show that for the first time, consumer prices for the currency area as a whole (and for 12 of its 19 member countries) were actually lower in December than a year earlier. But is it “real” deflation?

In a pair of posts [1] [2] last fall, when EZ inflation was merely low, but not yet negative, I explained that there are two kinds of deflation.
The nasty kind of deflation, which everyone rightly fears, is driven by falling aggregate nominal demand. As demand collapses, it drags both real output and the price level down with it. There is a serious risk of a self-reinforcing downward spiral in which debtors can’t repay their loans, defaults and falling asset prices undermine the financial system, zero interest rates render monetary policy powerless, and rising unemployment sparks social unrest.

However, there is also a benign kind of deflation, driven by rising productivity. In that scenario, conservative monetary policy restrains the growth of nominal GDP while real output surges ahead. The rate of inflation is negative, but growing output provides borrowers with the cash flow they need to repay their loans, rising productivity allows real wages to rise, and nominal interest rates, although low, do not need to fall all the way to the zero bound. In the US and UK, such productivity-driven deflation was the norm during much of the nineteenth century and reappeared again, more briefly, in the prosperous 1920s.

So which kind of deflation is Europe facing now? The bad, demand-driven kind,  or the good, supply-driven variety? A little of each, it seems. >>>Read more

Follow this link to view or download a slideshow-tutorial, "Why Fear Deflation?".


Saturday, January 10, 2015

As Unemployment Rate Falls to New Low, How Much Slack Remains in the Labor Market?

The Bureau of Labor Statistics reported today that the unemployment rate dropped to 5.6 percent in December, a new low for the recovery. For the first time in years, the unemployment rate has fallen to the range of 5.25-5.75 percent that the Fed considers consistent with its mandate to maintain full employment. A broader measure of unemployment, U-6, also fell to a new low.

In the same release, the BLS reported that payroll jobs increased by a robust 252,000 in December. On top of that, it made upward adjustments totalling 50,000 to the already-strong job gains for October and November. That brought the 12-month gain in payroll jobs to 2,952,000, the best annual gain since 1999.

These latest data raise a critical question: How much slack remains in the US labor market? Is it time to start tightening policy to forestall an outbreak of inflation, or is there room for employment to expand further without inflationary pressure? To answer these questions, we need to look beyond the headlines to some of the less familiar indicators of the employment situation. >>>Read more

Follow this link to view or download a slideshow with additional charts of the employment situation

Tuesday, January 6, 2015

Where has Fiscal Policy Been Worse, Greece or the US?

The snap election in Greece is shaping up as a referendum on five years of austerity that many Greeks view as a disaster. The US economy is much healthier, but that has not stopped many American economists from arguing that fiscal policy here has been little better than that of Greece (see this post by Paul Krugman, for example).

In both countries, critics charge that fiscal policies have been procyclical. By this, they mean that overly expansionary policy set up the crisis by amplifying the boom, while ill-timed deficit cutting since has deepended the recession and slowed the recovery. Are they right? The following charts tell the story.

The first indicator in each chart is the output gap. The gap is the amount by which real GDP is above or below a long-run trend, known as potential real output, that is estimated to be consistent with full employment and price stability.

The second indicator is the underlying primary budget balance (UPB). The UPB is the surplus or deficit of the budget that is adjusted for the effects of the business cycle on tax revenues and cyclically sensitive spending like unemployment benefits. It also omits interest payments on government debt, and one-off measures like privatization or tax amnesties. (Without the adjustment for one-off measures, the UPB is called the cyclicaly adjusted primary balance or structural primary balance. One-off measures are insignificant for the United States but important for Greece.) >>>Read more

Monday, December 29, 2014

The Opportunity Cost of Driving Your Car Has Never Been Lower

In August, I posted an item showing how many miles you could drive your car on an hour’s wages. At that time, the average US price for gasoline was $3.60 per hour. Based on an average wage for production and nonsupervisory workers of $20.61 per hour and an average fleet economy of 24.3 miles per gallon, it turned out that an hour’s wages would buy you enough gas to drive 139 miles.

That was a lot better than the “good ol’ days.” Back in the time of the Model T (17 mpg), a production worker earning 50 cents an hour could buy just 2 gallons of gasoline, enough for a pitiful 34 miles. By the depths of the Great Depression, that had crept up to 49 miles, mainly because gas was cheaper. A post-WWII Ford got even worse mileage than a Model T, but wages were up, so miles driven per hour worked had risen to 123. Miles driven per hour worked peaked at 284 in 1998, but after that, rising gasoline prices and stagnant wages sent the cost of driving up again.

Until now. Over the past several months, the price of regular grade gasoline has plummeted to $2.40 per gallon, according to government data for the week ending December 22. That puts the fleet average at 209 miles per gallon and rising. However, the fleet average includes all cars on the road—not just new models. Even if you don’t drive an electric or a hybrid, you can do a lot better than 24.3 miles per gallon if you drive the best of today's technology. Earlier this year I bought a peppy little Ford Fiesta with a high-tech, 3 cylinder, 1 liter, supercharged gasoline engine. The EPA rates it at 36 miles per gallon, although it does quite a bit better than that for me. At $2.40 per gallon, the average wage would buy you enough gas to drive the Fiesta 311 miles, an all-time record.

Here’s a new version of my chart. This time, just for variety, I’ve inverted the vertical axis to show minutes worked per mile driven, rather than miles driven per hour worked. Take a look at that trend line for selected Ford models, and get ready to hit the road. It’s never been cheaper!

Follow this link to view or download a slideshow version of this post suitable for classroom presentation

Saturday, December 27, 2014

Behind the Fall of Russia's Ruble: Inflation, Oil Prices, Sanctions, and More

Russia’s economy is in trouble. Growth has come to a halt. A recession looms in 2015. Inflation, interest rates,
and capital flight are up. The government’s budget is under strain. More than any of these, what makes the headlines is the plunge of the ruble, which, at one point in mid-December, had lost half of its value against the dollar in less than a year. What lies behind the weakness of the ruble? Is it harmful in itself, or is it better understood as a symptom of other problems? What options are open to Russian policymakers as they struggle to manage their currency’s descent?

Accounting for inflation
As in many discussions of macroeconomics, we first need to deal with the effects of inflation. Economists use the term nominal to refer to quantities stated in the ordinary way  and  real to quantities that are adjusted to for inflation. Real wages are the most familiar example: We all understand that if our boss raises our nominal wage from $10 per hour to $12 per hour, but at the same time inflation adds 20 percent to the price of everything we buy, our true purchasing power has not changed.

A similar principle applies to exchange rates. Other things being equal, a change in the nominal exchange rate of the ruble would mean change in the competitiveness of goods the country produces for export and those it produces for sale at home in competition with imports. However, inflation also has an impact on competitiveness—one that can either amplify or offset changes in the nominal exchange rate. >>>Read more

Follow this link to view or download a slideshow tutorial with more information on real and nominal exchange rates