Cartoons in Economics

Here Anna shows the business cycle heading into a recession.

Cartoons in Economics

AP Economics ace, Anna, drew this cartoon to show how inflation takes a bite out of savings.  Anna was showing the real balances effect of an unexpected change in the price level.

TSA Facts

This link was passed on to me. When people are asked if they will trade their privacy for security, most will say that they will. In this graphic, is it worth it?
Created by: Online Criminal Justice Degree

Dan Dolan for Congress

Mr. Dolan is a friend of mine who trusts me to teach his children.  He also built my home.  We often talk about economics.  Recently, Mr. Dolan gave a speech at the democratic convention.  After the speech someone asked Dan if he had just spoke at the wrong convention since Dan was a republican.  This story has made all of the major media including Fox New and Huffington Post.

Economists often talk about asymmetrical information.  Usually incomplete information leads to negative externalities, but in Dan's case positive.  I conclude that predicting human behavior isn't for me.

Okun's Law

Wow.  I'm blind.  The numbers don't seem to add up.

http://www.zerohedge.com/news/jon-hilsenrath-scratching-his-and-ny-feds-head-over-job-number-discrepancy

The WSJ ran the graphic to the left.  Okun's law suggests empirically that for every 1% decline in unemployment GDP grows at 2.5%.  So in the graphic GDP is on the Y axis and unemployment is on the X axis.  Notice that the unemployment rate is quarterly.  This is awful close to 1% so if two quarters are measured there should have been a 5% increase in GDP.  GDP actually increased by 1.6%.  The article claims that the government is misleading us.  I think the article is just making a stink.

Okun's law is an empirical relationship and not a law.  There can be several reasons why GDP didn't grow.  One reason is that machines have been substituted for labor.  Another is that employers are just working their labor force less and giving voluntary layoffs.  Unemployment is hard to measure any way.

Still, I love the relationship of the data.  It's a beautiful thing.

Daily Review -- Excess Reserves

This from the AP Listserv:

Suppose a commercial banking system has $240,000 of outstanding demand deposits and actual reserves of $85,000.  If the reserve ratio is 25 percent, the banking system can expand the supply of money by a maximum of ______.

So the math I did was .25 X $240k = $60k. Then $85k - $60k = $25k. Then $25k X 4 (money multiplier) = $100k.

This is correct.  When the excess reserves get loaned out, the money supply will expand by $100k.  The real question is will the excess reserves get loaned out?  That depends on how optimistic the bankers are.  Right now, reserves are piling up.

Median Voter Theorem

The Wikipedia entry is here.

A brilliant lecture from Professor Ben Polak is here.

I cannot stress enough how brilliant Mr. Polak's class is and it's free on iTunes.  If you want to grow, I highly recommend completing the game theory class.

After listening to "Iterative Deletion and the Median Voter" I am more convinced than ever that the Democrats will reelect President Obama for another term.

Daily Review -- Exchange Rates

This question off the AP Listserve:

If Mexicans increase their investment in the US, the supply of Mexican pesos to the foreign exchange market and the dollar price of the peso will most likely change in which of the following ways?

Supply of Pesos Dollar Price of Peso

A. Increase Increase

B. Increase Decrease

C. Decrease Increase

D. Decrease Decrease

E. Decrease Not change

My answer is B.  When Mexican investors demand more USD, they supply more pesos.  As a result, the Peso depreciates while the USD appreciates.

For teachers who want an excellent resource on teaching foreign exchange, the St. Louis Fed has an excellent lesson here.  The lesson is Econ Ed Live — Currency Crusaders of Justice.  

Laptops and Humans

This post shows how laptops could have been used to alter history.

HT: to Chris, a loyal reader.

Daily Review -- Interest Rates

This question was asked to the AP Listserv:

US dollars and the European Union's (EU) euro are exchanged in global currency markets.  Which of the following are true?

 

I.  If inflation is high in the EU and the price level in the US is stable, the value of the dollar depreciates.

 

II.  If the fed increases the money supply, the value of the dollar depreciates.

 

III.  If EU consumers are less inclined to purchase American goods, the dollar appreciates.

 

IV.  If US income levels are rising relative to incomes in the EU, the euro depreciates.

Here are my answers: The answers given on the Listerve are I and II.  The only way I could be true is if interest rates are higher in the US.  Otherwise, the USD would appreciate.  I disagree with this answer.  In answer II, an increase in the money supply would lower the interest rate in the US and might cause US investors to invest in world bonds. IV would see the value of the Euro to appreciate.  

Gas Prices

Blogger, Gene Hayward, passed this on to me.

In a country as large as the United States, it makes sense that different parts of the country pays different amounts for a gallon of gas.  Some reasons are state and local taxes, moving the gas to different regions have different costs, monopolized markets especially in trucking, and supply and demand fundamentals lead to the disparity.  Here's a breakdown for a gallon of gas.

For the absolute best in cartoons on gas prices, click here.

Snow in Hell -- Greece

Greece Austerity in Cartoon

A NYT article is here.

There doesn't seem to be an end to the vicious cycle of borrowing that Greece is caught in.  The definition of insanity is doing the same thing over and over and expecting a different result.  Something exogenous has to happen to shock Greece out of this cycle.

For the time being, Greece is bringing down the whole EU.

Mikeroeconomics: Greek Financial Crisis Through Cartoons

Mikeroeconomics: Greek Financial Crisis Through Cartoons: A haircut is the term economists use to describe a cut in bond principal when a country renegotiates its debt.  In March, 2005, Argentina ...

Daily Review -- Loanable Funds

Print off the market for Loanable Funds graph to the right.  For each question, determine what happens to the interest rate and which curve moves.

1.  The government uses deficit spending to finance a new public works program.
2.  The government runs a budget surplus.
3.  Investors become pessimistic about the future.
4.  There's a huge capital inflow.


My answers are: 1. D shifts right, interest rate increases; 2.  S shifts right, interest rate decreases; 3.  D shifts left, interest rate decreases; 4.  S shifts to the right; interest rate decreases.

Greek Financial Crisis Through Cartoons

A haircut is the term economists use to describe a cut in bond principal when a country renegotiates its debt.  In March, 2005, Argentina restructured their debt for 32 cents per dollar.

Greece just negotiated a 50% restructuring of their debt slicing off 100 Euros off the amount Greece owes.

If Greece defaults on their debt, economic turmoil could follow.  The banking system would be shaky and the public would lose confidence in the country.  Greece would have trouble borrowing for future growth.  I think the austerity that the pundits keep talking about is that Greek officials want to pay the loans back so they will have to raise taxes during a recession.  Greek officials will have to decrease government spending.

In the table to the left, I compare Greece, a country close to default, Argentina, and the United States who might default.  It is clear to me that Argentina has recovered.  I think Greece will go into default and the United States will experience a lot of problems but will never default.



Here is a link to Cagle.com where there are 15 cartoons on Greece.

My cartoon was drawn on paper with a mechanical pencil and Copic Markers.  I'm disappointed in my work.

Confidence

Does believing make it happen?  Econ predicts that investor optimism fuels growth?  The University of Michigan reports a consumer confidence index.  I believe that an strong belief can change aggregate demand and people's choice.  Just look at Obama's message of hope.  His message changed voter preferences and America.  I think America is becoming optimistic again.

About a quarter of million new jobs were added to the economy even as the unemployment rate stands at 8.3%, but structural unemployment is weeding itself out.

(Cartoon is from econ ace, Anna Kramer.)

Mixed Economies

Many economies are mixed -- that is they contain elements command, market, and traditional.  China seems to be eating up the world with it socialist form of government.  This is the start of an AP article on China's form of government.

BEIJING—China's government vowed Friday that it will not deviate from its socialist path, defending anew its authoritarian system and saying Western capitalist political systems are not suitable for China. 

It's interesting how an ideology frames the viewpoint of how resources are used, who gets the resources, and what is made from the resources.  Before embracing the socialist model of governing, one should consider the Solow Growth Model.  Is it possible that China is just beginning to converge with other developed countries?