What are Economic Models and why do we need them?

Economists love economic models!

An Economic Model is a simplified version of the ''real world" that can be used to explain, analyse and predict complicated economic systems. Examples of economic models that we study on our course include:

•               Demand and Supply curves

•               The Circular Flow of Income

•               The Production Possibility Curve

 

The real world is a very complicated place, and even the smartest people in the world cant predict the future! For example, most of the worlds richest and smartest people never predicted the recent Global Financial Crisis.

Economic models help up to explain, analyse and predict complicated 'real world' behaviour. Even though models didn't prevent the Global Financial Crisis, Governments did use them to plan for the world’s 

What is Economics, and why do we study it?

Economics is the social science that studies how a society uses its limited resources to satisfy its unlimited wants and needs.

Lets look at this definition a little more closely.

• ·     social science -  that is  - economics is the study of people, and how they behave.  

• ·     Limited resources – that is – every person and every country has a limited (or finite) amount of resources.

Resources are production inputs -  things used to make products. In economics we use the terms ‘resources’, ‘production inputs’ and ‘factors of production’ to mean the same thing – that is – they are all terms to describe things needed to make products.

• ·     unlimited wants and needs – that is – every person and every country has a unlimited (or infinite) wants and needs.

Another way to look at economics is by stating that ‘Economics is the study of scarcity’. 

This is simply the same idea stated in a different way. Economists state that products are scarce – that is – society cannot produce enough products to satisfy everyone. 


For example, ‘cars are scarce’ because society does not have enough resources to make cars for everyone who wants one. 


Because we have limited resources, we need Economics as a subject to help us decide 3 questions:

1. What we should produce with our limited resources
2. How should we produce the products 
3. Who will get the products we produce

Its important to study economics for many reasons – for example: it helps in

•  Understanding more about the world around us:  for example, studying economics helps us to understand why countries trade, why some people get are paid more than others. 
• Questioning the economic decisions made on our behalf by our leaders: for example  studying economics helps us to understand why Governments subsidise firms that produce certain products (e.g. public schools), but tax others such as cigarette companies  

If we didn't study economics, we would live in a very different world - perhaps resources would be 100% owned by the most powerful who would use them to meet only their own wants?. Perhaps there would be no trade, and so we would have to make everything for ourselves?  

How to win a Nobel Prize for Economics



 The 2010 Nobel Prize for Economics has been awarded to 3 economists Peter Diamond, Dale Mortensen and Christopher Pissarides for their research into markets where buyers and sellers don’t automatically find each other (or in more technical language “markets with search frictions”)

Their research has been used in lots of different markets, including the markets for used cars, for housing, and even for dating!. However, their ideas have been used most of all to help economists make sense of unemployment.


In this post you can see a short video explaining their theory

After watching the video, you can read more about their work by clicking this  economix blogsite article

What is GDP?

We are currently studying Gross Domestic Product (GDP) in class.

1) Start by watching the following video ....

2)Click on this BBC webpage that has all the remaining information you will need to answer our worksheet on GDP.

3) Find an online resource (eg post on another website, video etc) that helps explain the economic idea of GDP. Make sure that you show it to Mr Hartnett!!

4) Finally, if you have time .... does increasing GDP mean that people get happier? What do you think? Is there a better measure that economists could use?

Hong Kong's - a tale of 2 cities

Hong Kong Island has 7 million people, and very limited space to put them - two reasons why it has some of the most expensive properties in the world.

In Oct 09, a five bedroom luxury apartment sold for US$57m – a world record price that valued the space an amazing $US9,200 per sq ft.

This reading and video about Chan Hong Keung, a retired cleaner living in Monkok. Kowloon tells a different story….

By 2050, 25m more children to go hungry?

Environmental Objectives
This Guardian report describes how the International Food Policy Research Institute (IFPRI) has reported that if the world does not solve problems caused by global warming, then 25, 000,000 more children will go hungry by the middle of this century as climate change and leads to food shortages.

The Money Markets explained

A Short Video on how the Money Markets work

The Economic Impact of Swine Flu

A short video from Business Week Magazine - about the possible impact on macroeconomic objectives of Swine Flu. Wath this, but ....dont panic...!

Inside the world's biggest drain

2 recent examples of Demand Side Policies in action - both classic examples of how China is using Fiscal policy (increased government spending) to increase aggregate demand to keep key macroeconomic objectives such as low unemployment and high economic growth .

• Click here to watch a short video : Inside the world's biggest drain


• Click here to watch a short video : China's solution to economic woes

The Chinese Economy in 3 minutes

Great summary of the Chinese economy from The Economist

Revealed: the bid to corner world's bluefin tuna market

Read this link. It is a tragic story that illustrates some basic ideas in economics:

• Limited resources
  
• Unlimited wants
  
• How limited supply increases equilibrium price
  
• Business not being interested in the social costs of its actions
  

UK plans for minimum alcohol price

Binge Drinking is a term used to describe people who drink too much, too quickly to get drunk as fast as possible.

It has become a big problem in the UK where many people feel that alcohol is now too cheap.

This means that people are able to afford to binge drink, which then results in anti-social behaviour and damages their health.

Englands chief medical advisor, Sir Liam Donaldson has said that the UK Government should set a minimum price on alcohol.

Watch this BBC video on the idea and then answer the following questions:

1) How much does alcohol related illness cost the UK taxpayer each year?

2) How would the price of each bottle of wine be calculated?

3) If this plan was made law by the UK Government, what estimated percentage change in demand for alcohol is predicted?

4) Use a suitable economic theory to explain the effect of a minimum e price on alcohol. Use a suitable diagram to support your explanation.

5) Who is in favour of the minimum price, and who is against it?

6) Is alcohol Price elastic or price inelastic? Justify your answer based on the information in the video.

7) What social costs and social benefits can identify if the plan for a minimum price on alcohol is made into a UK law.

Critic hits out at car scrapping scheme

This BBC article looks at a new ‘car scrapping scheme’ from the British Government.

The idea has already been tried (successfully??) by the German Government. In it, people who own old, polluting cars are to be offered money by the Government to help them buy new, less polluting cars.

Read the article and answer the following questions:

1) Briefly explain the idea behind the original German ‘car scrapping scheme’
2) What information can you find that suggests that the German ‘car scrapping scheme’ was a success or a failure.
3) What economic terms would you use to describe George Monbiot’s argument that the scheme is…
“…an expensive way to cut carbon emissions "especially as there is a limited pool of money from the state. Money should be used to the best possible effect if we are trying to reduce the impact on the environment," he says.

"And that means as much carbon cut as we can for every pound that we spend."

4) How could you use this article to describe the TRUE cost of production (hint – define social costs and social benefits)

What is Quantitative Easing?

Two great articles from the BBC on Quantitative easing:

A cartoon guide to Quantitative Easing

Q&A - Quantitative Easing

Explanation
The Bank of England is not a high street bank. It is like a money shop that buys and sells money from banks and financial institutions on behalf of the UK Government.

It can lower the price of that money by lowering its ‘official bank rate’ (the rate of interest or “price” that the BoE charges for money). This of course makes it cheaper form banks to ‘buy’ money from the BoE.

The Government has been lowering the ‘official bank rate’ in the hope that the banks would come in, ‘buy’ the ‘cheap money’, and lend it to customers and business.

The customers and businesses would buy products with this ‘cheap money’, which would increase aggregate demand, reduce unemployment and increase the value of products produced in the UK (increase the GDP).

However, even at a 300 year low rate of 0.5%, the demand for the ‘cheap money’ has not increased, so the UK Government has now decided to use “Quantitative Easing” to try and get the UK economy out of recession.

Quantitative easing is a Government policy which allows the BoE to simply print money, and feed it into the UK economy in special ways – by
• Giving some to the Government in return for Government Bonds
• Giving some to banks and other financial institutions in return for bank assets
• Loaning some to banks and other financial institutions at a low rate of interest.

Why do we need economic growth?

Read this BBC article on the meaning, the advantages and the disadvantages of economic growth. Then answer the following questions:

1. Define the terms ‘GDP’ ‘Recession’ and ‘Inflation’ (use my glossary definition please!)
2. Explain why the figures (for calculating GDP) need to be corrected for inflation?
3. Explain the importance of using a base year (e.g. 2003) are used in the calculation of GDP
4. Why is spending ‘the crucial factor affecting growth’
5. Explain why the current economic situation may lead to a ‘recipe for recession’
6. What is the key to sustained economic growth in an economy? Why might inflation increase if ‘we spend beyond the capacity for an economy to produce?’
7. Identify 2 things that can happen to an economy if growth disappears and recession looms’
8. Explain why economic growth is important to reduce poverty in a country.
9. Explain 3 possible problems with economic growth.

Hong Kong Government Expects Further GDP Contraction

More bad economic news ...sorry!

Read this WSJ article on the latest Hong Kong Government budget and then answer the following questions.


1) Define GDP and Recession
2) Who is John Tsang, and what does he do?
3) Fill in the gaps: A Government budget is a financial plan published by a Government. It shows the expected Government revenue (that is - money the Government expects to get from its working citizens who pay _______) and Government _________ (that is – details how the Government plans to spend money on _______ sector work such as public education, and health).

Each year, the Hong Kong Government creates a new budget to cover the period from _______ to ________)

4) Why do you think that the Hong Kong Government plans to reduce its annual spending from US$38.66 to US 30.16 billion dollars?
5) Why are some people critical of the budget?
6) Mr. Tsang said his spending plans, including up to HK$39.3 billion on capital works, will boost domestic demand and create jobs. Use a suitable diagram to explain the planned impact on local jobs.
7) The Government plans to issue something called ‘sovereign debt’. What do you think it is, and why do you think it is needed?
8) What are 'externalities'? Briefly explain 2 reasons why Mr Tsang has chosen to increase the level of tax on cigarettes.

Opec: The oil cartel in profile

Another good BBC article on OPEC - the Oil cartel.  

Is the US heading for a depression?

Here is another depressing article on the state of the US economy (sorry!).

Read it, and then answer the following questions


Paragraph 1- Businesses hit
1a) What is the generally accepted definition of the word recession?
1b) Use the graph to identify when the US economy entered a recession?
1c) In the first paragraph, which industries are mentioned as having falling sales? As an economist, what do these industries have in common?

Paragraph 2- Businesses hit
2a) Identify one key macroeconomic objective that has been damaged by the recession?
2b) Identify 4 factors that have occurred as a result of the recession


Paragraph 3 - Consumers save
3) Construct aggregate demand and supply curves based on the information in this paragraph

Paragraph 4 - Government rescue?
4a) Explain how the US Government has decided to tackle the current recession?
4b) What problems are mentioned that may limit the effectiveness of their actions?

Paragraph 5 – Financial Squeeze
5a) Explain what the term ‘toxic debt’ means.
5b) How much toxic debt has been reported?
5c) What can you say about the accuracy of this figure?

World growth 'worst for 60 years'

Read this BBC article, and answer the questions:

1) How do economics measure economic growth?

2) The article says that the UK recently entered a recession. What does the word ‘recession’ mean?

3)What data in the 1st paragraph can you find to support the belief that the world economic situation is getting worse rapidly?

3) What is ‘protectionism”. Based on what you know of global trade , do you agree or disagree with the director of the World Trade Organisation that protectionism would be "a big mistake".

4) What does the ILO predict will happen to unemployment as a result of the current economic crisis? Explain briefly why the article says that unemployment is likely to increase in 2009?

5) What does the article predict for the world economy over the next 2 to 3 years?

6) Explain what a ‘bad bank’ is

Why is US unemployment rising?

Read this BBC article and answer the following questions:

1) What is unemployment, and what is the current US unemployment rate?
2) According to the article, what factors are causing unemployment to increase in the US?
3) Why can US businesses cut their workforce quicker than European businesses?
4) Explain what is meant by the phrase “unemployment is a lagging indicator”
5) Which US sectors are currently losing workers?
6) Describe how the US Government plans to reduce unemployment