Monday, January 18, 2010

AP Economics: 19 January 2010

Prayer (alphabetical):

Current Events:

Jan. 11 (Bloomberg) -- William Black, an associate professor of economics and law at the University of Missouri-Kansas City, talks with Bloomberg's Betty Liu about Treasury Geithner Timothy Geithner's role in decisions by the Federal Reserve Bank of New York in its dealings with American International Group Inc. Geithner was head of the New York Fed when the bank told AIG to withhold details from the public about the bailed-out insurer's payments to banks in 2008. The Fed says Geithner was not aware of the effort to limit disclosure. (Source: Bloomberg)

Analysis Results have been published for the Ch. 15 Test. Students did well.
We will pick up where we left off: Economic Growth Chapter 17

Chapter Overview

After discussing the classical model, the chapter presents material on the sources
of long-run economic growth (with particular emphasis on productivity growth)
and the importance of infrastructure. The chapter concludes with a section on innovation waves.

Chapter Outline
Aggregate Production Function, p. 455, 6:55

The Cobb-Douglas aggregate production function is explained along with constant returns to scale and diminishing productivity returns. The author discusses the role of technology on economic growth.

Product Markets, p. 456; Labor Markets, p. 456, 2:27

Mr. Clifford's (except for the spelling errors) 60 second explanation of the differences between a perfectly competitive product market and a perfectly competitive resource market. Notice that the firms both have a horizontal curve but in the product market it is demand and in the resource market it is supply.

Capital Markets: Saving and Investment, p. 458

Personal Savings and Investment are Important for the Economy, 6:44.

Dr. Demos Vardiabasis on the post WWII global economy

Implications for Economic Growth, p. 460

The unemployment rate held steady at 10 percent in December 2009. Paul Solman travels to Atlanta to gauge the hiring outlook in a down job market, 7:17.

Checkpoint: The Classical Model, p. 460
Sources of Long-Run Economic Growth, p. 460

Growth in the Labor Force, p. 461, 4:26

Changing Gender Roles at Home

The rapidly increasing number of women in the labor force has been both a cause and effect of the shift in gender roles in recent years. Women have had less time and energy to devote to their traditional role as homemaker. This has triggered a seismic shift in the division of labor in many households. From the series Our Families, Ourselves: Marriages and Families. Copyright 2007.

Productivity Is Important, p. 461
Sources of Productivity Growth, p. 462
Increasing the Capital to Labor Ratio, p. 462
Increasing the Quality of the Labor Force, p. 462
Improvements in Technology, p. 462
Modern Growth Theory, p. 463

What makes this recession different from others we've seen? - Robert Solow, 4:49

How over-leveraged financial institutions turned a housing slump into a global economic crisis (or how a bad mortgage in Oklahoma can sink a bank in Paris).

A Peaceful Method of Conquest? - Paul Romer, 4:45

Complete video at:

Economist Paul Romer uses the Chinese incorporation of Hong Kong as an example of peaceful conquest of territories. Romer argues that similar methods of entry can be used to rebuild troubled nations without the use of war.

His economic theory of history explains phenomena such as the constant improvement of the human standard of living by looking primarily at just two forms of innovative ideas: technology and rules. - The Long Now Foundation

Paul Romer is a Senior Fellow in the Stanford Center for International Development (SCID) and the Stanford Institute for Economic Policy Research (SIEPR). His contributions to the field of economics include being the primary developer of New Growth Theory, which reduces the traditional emphasis on the scarcity of objects and directs attention to the power of new ideas. His theory has brought renewed optimism about the potential for growth in both advanced and developing economies. For his work on the economics of ideas, Paul was named one of America's 25 most influential people by TIME magazine (1997), elected a fellow of the American Academy of Arts and Sciences (2000) and awarded the Horst Claus Recktenwald Prize in Economics (2002). He is a Research Associate of the National Bureau of Economic Research and a Fellow of the Econometric Society.

Checkpoint: Sources of Long-Run Economic Growth
Infrastructure and Economic Growth, p. 465, 7:17

Gov. Rendell discusses infrastructure, job creation on MSNBC's Morning Joe

12.7.09 Governor Ed Rendell (D-PA) discusses infrastructure and jobs on MSNBC's Morning Joe.

Rendell - along with Gov. Schwarzenegger (R-CA) and Mayor Bloomberg (I-NYC) is co-chair of Building America's Future (

Building Americas Future ( is a bipartisan and national organization dedicated to bringing about a new era of U.S. investment in infrastructure that enhances our nations prosperity and quality of life. Comprised of state and locally elected officials from around the nation, Building Americas Future seeks to advance a new national vision for infrastructure investment that focuses on economic growth and global competitiveness, job creation, and environmental sustainability.

Public Capital, p. 465
Protection of Property Rights, p. 465, 6:00

Instablogs global Report 28-August-2008

Increasing number of Sri Lankan students traveling overseas for education

The cycle of closures in Sri Lanka universities during the mid and late 90's, created a sudden boom of traveling overseas for study.

Another thing that followed was a large number of new graduates finding employment elsewhere. The reasons are conflict, lack of opportunity and political instability. On the other, lack of employment opportunities for some specialized fields is further complicating the problem.

In addition to this, Sri Lanka is facing extremely high rate of inflation which is resulting in a high cost of living. While Sri Lanka being a third world country, it could not provide salary scales equal to international rates to those who've paid large amounts of money for their education in other countries.
While economy is struggling due to bad policy, but some of the smart minds of the country are moving away. And while it would be a warm and nice feeling to ask them to stay out of patriotism, Sri Lanka Govt. also need to take steps to stem the flux of talent to other countries.

Malawi struggling hard to secure its economic independence

Despite government's efforts to boost the economic image of the country to global investors, economic freedom in Malawi remains poor. The legislatures have failed miserably to pass economic bills that would have made Malawi more competitive on the international trade arena.
Even politicians have delayed the passing of 2008/9 budget, which has created a climate of uncertainty thus slowing down the donors' inflows. Due to this, overall economic freedom or rather call it freedom to do business, is ranked poorly.
And the worst category for the country is freedom from corruption which is yet another reason that leads it to score poorly irrespective of high fiscal and labor freedom.
Malawi's economic problems, high inflation government subsidies are not widespread. A weak rule of law further jeopardizes the protection of property rights.
With all this going on, it remains a difficult struggle for Malawi to secure its economic independence and to take hold of their own economic destinies.

Israel's education system boosting religious studies

Israel's education is witnessing a change as religious schools get a boost. Students who haven't had a class in math, science, civics or English but only on religious studies believe this will equip them for any subject they might need to tackle later in life.

Cloistered at ultra-Orthodox schools defying the secular teachings that might shake their faith, thousands of Israeli boys and young men study to master the Torah and Talmud.

In a defining battle over the Jewish state's identity, the yeshivas are resisting pressure from secular politicians and educators to teach the basic subjects required at all Israeli secondary schools. They don't want to turn into what they see as "enlightened people who will integrate into Israeli society because of its many temptations."

Secular Israeli see the Haredim as an assault on the rational while the religious talk of a separation of Jews from Judaism and don't want to contaminate their children.

Nevertheless, one thing for sure is the increasing trend of these schools wields disproportionate political clout.

This is Duncan Citizen Journalist from Kenya

Kenya's iconic Maasai Mara is a crown jewel of Kenya's tourism industry. It is haven for migrating wildebeests that come rushing from the nearby nations and was recently considered as a world's "eighth wonder. But the wildlife haven has seen a sharp reduction in the wildebeests because of over-grazing, farming and mass tourism.

Though, Maasai Mara national park is a protected area, but the ecosystem around it is privately owned. In 2000 Kenya govt. move to subdivide land into small plots for Maasai families, the newly-acquired notion of land ownership has led to tensions between neighbors encroaching to find pasture for their livestock.

Whereas restricted for grazing in their shriveled estates, many Maasais opted for wheat farming or simply sold their plots to developers. And both outcomes contributed to choking the natural habitat of the lions and elephants so prized by the world's tourists.

The Maasai had to make a choice because the pastoralist lifestyle was no longer sustainable. The wildlife has one of the best exotic products in the world and it firmly needs commercial and philanthropic models to make the conservancy viable.

Enforcement of Contracts, p. 466, 3:40 discusses the economy in simple and easy terms, and what happens when the government applies irresponsible fiscal policy to the economy. Government, though it may paint a rosy picture, can never help to increase the actual level of prosperity in the nation through the redistribution of wealth. It only occurs when the government backs away from intervention, and focuses on the enforcement of contracts.

Stable Financial System, p. 466, 4:19

The financial system is crashing and action must be taken by the US government to convert debt into equity to produce a more stable environment, Nassim Taleb, author of "The Black Swan," told CNBC.

"You may have green shoots, whatever you want to call them, you may have temporary relief, but you are still in a world that's breaking," Taleb said on "Squawk Box."

Anything that's fragile like the financial system will eventually crash, he said.

"We're in the middle of a crash," Taleb said. "So if I'm going to forecast something, it is that it's going to get worse, not better."

The government needs to deleverage debt and not try stimulus packages that will inflate assets, he said.

"What makes me very pessimistic in not seeing any leadership or awareness on parts of government on what has to be done, which is deleverage $40-to-$70 trillion," Taleb said.

"The monkey on our back is debt," he added.

As an example, Taleb said banks should not be sending demands for larger and larger sums from homeowner in arrears on their mortgage. Instead the bank should offer to lower the monthly payments in return for part-ownership of the property.

"People would be able to start from scratch on a healthy basis. You don't want to wait for foreclosure," he said.

Economic Freedom Index, p. 466

Heritage's Ed Feulner on the 2009 Index of Economic Freedom, 5:53

Letting Be

Entry for the Fraser Institute Student Video Contest of 2009. "Letting Be", creatively examines the question "What is the appropriate role of government in the economy?"

Presented in this video are two of the main competing economic theories of our time, one founded on the concept of government intervention, the other on the principle of economic freedom.

A special focus is placed on illustrating how our lives are severely affected by the choice between the two.

Internet and Economic Freedom Boost Entrepreneurs Worldwide, 3:05

For more than a century entrepreneurs have brought innovation and change to the world. Today, modern technology, looser government controls and better access to capital have made it even easier for entrepreneurs to succeed. VOA's economics correspondent Barry Wood looks at entrepreneurship worldwide, profiling business risk-takers in Africa, the Middle East, the Americas, Asia and Russia.

Checkpoint: Infrastructure and Economic Growth
The Changing Face of Innovation Waves

Ideas for Your Classroom Audience
The best illustration of the importance of the rate of economic growth is the rule
of 72 (or 70 in some texts). Use different growth rates and illustrate how long it
takes for a countrys GDP to double. Follow this up with Question 7 from the endof-
chapter Questions and Problems (the question asks whether a 1.4% growth
rate is so different from a 3.4% growth rate).

The text mentions Somalia as a particular country that has suffered due to its
severe political problems. Take a virtual �gfield trip�h to Somalia on this website
from BBC News. See the Web site at

Chapter Checkpoints
The Classical Model
Question: The classical model relies on competitive markets for labor, products,
and capital to keep the economy near full employment and output. The United
States has enjoyed nearly 3 decades of high employment, high growth, and low
inflation, interrupted by two short and mild recessions. Has the recent growth in
globalization and trade liberalization introduced more competition into labor, capital,
and product markets, making our economy look and act like classical economists

The point is to check that students can: relate their understanding of the classical
model to changes in the global economy.

Sources of Long-Run Economic Growth
Question: In 2006, Warren Buffett, the world�fs second richest individual, announced
that over the next few years he would be giving 85% of his wealth, over $30 billion,
to the Bill and Melinda Gates Foundation. The foundation focuses on grants to
developing nations, helping the poorest of the poor. What suggestions would you
give the Foundation to help these developing nations grow?

The point is to check that students can: relate the factors that affect long-run economic
growth to the activities of a foundation like the Gates Foundation.

Infrastructure and Economic Growth
Question: Imagine a country with a “failed government” that can no longer enforce
the law. Contracts are not upheld and lawlessness is the order of the day. How could
an economy operate and grow in this environment?

The point is to check that students can: understand how important the legal framework
is to economic growth.

Extended Examples in the Chapter
The Changing Face of Innovation Waves
Looking back to Schumpeter’s creative destruction, this section argues that the time
between waves of innovation is becoming shorter. It cites the work of William
Baumol, who contends that capitalism’s ability to produce a steady stream of new
ideas and processes has made capitalism the most efficient growth machine and the
best economic system for generating growth.
The sources cited for this section are “Catch the Wave: The Long Cycles of
Industrial Innovation are Becoming Shorter,” from The Economist, February 19,
1999, and The Free-Market Innovation Machine: Analyzing the Growth Miracle of
Capitalism, by William J. Baumol (Princeton: Princeton University Press, 2002).

Examples Used in the End-of-Chapter Questions
Questions 4 and 7 reference growth rates in different countries. Question 11 references
per capita income (or output). To learn more about growth rates and per
capita income in different countries, visit the CIA Factbook Web site at
For Further Analysis
Immigration: Good or Bad for Productivity?
The example provided in the student handout can be used as a small group exercise
or as an individual exercise. It is also suitable to use as the basis for a classroom
debate. The exercise expands on the chapter’s coverage of the sources of long-run
economic growth by exploring the issue of immigration. Students are directed to
read two articles about different “types” of workers and use them as a basis for analyzing
the impact of immigration.

See the paper on guest-worker programs by Mark Krikorian, executive
director of the Center for Immigration Studies for a presentation of this viewpoint.

Web-Based Exercise
This example requires students to compare two different measures of economic
freedom and to assess what aspects of economic freedom they feel are most important.
This assignment builds on the discussion on the text and also provides an
opportunity to discuss the effects of corruption on economic growth.
The Dimensions of Economic Freedom
Visit the Web site of the Fraser Institute to read its Economic Freedom of the World
report. Compare it with the Index of Economic Freedom (from the Heritage
Foundation and The Wall Street Journal) by answering the following:
1) Which are the top ten countries according to each source? (Web sites are and http://www.
2) What categories are included in each definition of freedom? (You may consult
the list of categories in the text for the Fraser Institute; for the Heritage
Foundation, see the Web site at

The challenge with regard to this material is how much students may take for
granted about their freedoms and the economy in which they live. Trying to give
them another perspective will help them understand the strengths of the U.S. economy
and the challenges of other countries.


Immigration: Good or Bad for Productivity?
Growth in the labor force is listed as a major source of long-run economic growth. But what
causes the labor force to grow? As noted in the text, immigration is causing the U.S. population to
rise faster than anyone thought. Is this good for productivity?
Read the article titled “Keeping Out the Wrong People: Tightened Visa Rules Are Slowing the Vital
Flow of Professionals into the U.S.” by Spencer E. Ante in Business Week (October, 2004, pp. 90–
94, available on the Web at:
Then read “The Worker Next Door,” by Barry R. Chiswick in The New York Times, June 3, 2006,
p. A23. This article is available on the Web at:
Based on the two articles, assess whether immigration is good or bad for U.S. productivity.

"Mankiw's 10 principles of economics, translated for the uninitiated", by Yoram Bauman, . Presented at the AAAS humor session, February 16, 2007. For the record, the talk contains two unattributed quotes ("9 out of 5" is adapted from a line attributed to Paul Samuelson---although apparently he said it about Wall Street indices, not macroeconomists---and "wrong about things" is paraphrased from P.J. O'Rourke's Eat the Rich) and, of course, the Einstein "simple" quote is an intentional misquote. The talk is based on a published article in Annals of Improbable Research (see ), which sponsored my talk and to which you should subscribe ( ). In the paper you can see the "constructive example" of how trade can make everyone worse off (or you can just wait 50 years to see what happens with climate change). More info and other clips on my website ( ), and please sign up for my email list.

Email HW to

1. Define the Key Terms, p. 470.