Reviewer Quotes
Loading Quotes...
Looking for topics recently in the news? Search the Karlan/Morduch blog.
What’s New on the Blog

OJ & Price Elasticity of Demand

Posted on Nov 24, 2014 | 0 comments

Alexandra Wexler reports on the Florida OJ market in this WSJ article.

Here is the relevant paragraph: “… retail demand for the beverage continues to slide. U.S. consumers bought 37.05 million gallons of orange juice in the four weeks ended Oct. 25, down 9.4% from a similar period a year earlier, according to Nielsen data published by the Florida Department of Citrus this month. Average prices for the beverage rose 4.8% over the same period to $6.46 a gallon, while total revenue fell 5.1% to $239.24 million, the data showed.”

Discussion questions:

1) Calculate the price elasticity of demand for orange juice, over the four-week period ended October 25, using the data provided above.

2) Given your answer to question 1, does the data support the law of demand?

3) The reports also reveals that as the price of OJ increased, total revenue decreased. Does this make sense given the price elasticity of demand for orange juice that you calculated in question 1? Explain your answer in words and by using a diagram.

iPhones and Broken Bones

Posted on Nov 24, 2014 | 0 comments

Dean Karlan has an interesting Op-Ed in the NY Times. Click here to read it.

Karlan reports on new research out of Yale University by Craig Palsson.

He writes, “that the expansion of the 3G cellphone network led to more widespread adoption of the iPhone, which led to parents who discovered new apps and continual email on their cellphone; which led to parents who paid attention to their new toys at playgrounds and not necessarily to their small children; which led to 10 percent more accidents for those children from 2005 to 2012, including broken bones and concussions.”

This study appears to have captured an indirect cost induced by advances in cell phone technology.

China Cuts Key Interest Rates

Posted on Nov 24, 2014 | 0 comments

On Friday, the People’s Bank of China (PBoC) announced a surprise reduction in its benchmark lending rate by .4 percentage points to 5.6 percent and a reduction in its deposit rate by .25 percentage points to 2.75 percent.

This is the first rate cut since 2012. The rate cuts come after the world’s second largest economy grew at an annual rate of only 7.3 percent in the third quarter. The concern is that China’s growth rate will fall below 7 percent for 2014. The last time China observed a growth rate below 7 percent was during the Great Recession in 2007-9.

Read more here, here and here.

Discussion question:

Discuss why a central bank would cut its key interest rate.

Inflation News from Around the Globe

Posted on Nov 19, 2014 | 0 comments

Lots of inflation news in the papers today.

The NY Times reports that the U.S. producer price index (PPI) increased in October. The increase occurred “because of higher prices that companies received for new-model cars, beef, pork, pharmaceuticals and electric power.” The PPI increased 1.6 percent in the 12 months through September. Read the article here.

The Financial Times reports that the Bank of Japan has warned that inflation could fall below 1 percent. One percent is half of the Bank of Japan’s official target and it is below the Bank of Japan’s official full year forecast of 1.3 percent.  Read the article here.

The WSJ reports that Asian economies are seeing inflation slowing. Inflation appears to be stuck below 2 percent in Korea. In Vietnam, inflation is expected to remain below 5 percent for 2014–its lowest level in decades. And in India, inflation rose at an annual rate of 5.5 percent in October–down from double digits a year ago. See the figure below. Read the article here.

asia inflationDiscussion question:

Discuss why inflation appears to be slowing around the globe.

 

Once Again, Japan is in Recession

Posted on Nov 17, 2014 | 0 comments

Japan’s economy is in recession once again. Data released today show that Japan’s economy shrank 1.6 percent in the third quarter (on an annualized basis). The market was expecting growth of 2.2 percent.

The figures below, from the Financial Times, show Japan’s real GDP growth since 2004 and how Japan’s economy has expanded since 2008 relative to the US, UK and Eurozone.

Japan 1

Japan 2

Jobs Report: San Diego, CA

Posted on Nov 13, 2014 | 0 comments

The figure below shows the monthly year-on-year change in the number of nonfarm employees in the U.S. (blue line), California (red line) and the San Diego metro area (green line) between January 2004 and October 2014.

San Diego jobs

California has experienced monthly increases in this employment measure since August 2010, the San Diego metro area has experienced a monthly increase in this employment measure since June 2011, and the U.S. has experienced a monthly increase in this employment measure since August 2010.

The most recent data reveal that year-on-year employment growth continues in the San Diego metro area (2.6 percent, September 2014), California (1.9 percent, September 2014) and the U.S. (1.9 percent, October 2014).

As of September 2014, the number of nonfarm employees in the San Diego metro area is 30,500 greater than the peek level observed prior to the great recession in February 2008.

Japan’s Deflation Fight

Posted on Nov 11, 2014 | 0 comments

Jacob Schlesinger has a nice article in the WSJ on Japan’s deflation fight. Click here to read it.

Although Japan has stumbled for decades, it presently offers a tutorial on how a committed central bank can break the vicious cycle of falling prices. The chart below shows how Japan’s core consumer price index (CPI) has finally begun to accelerate–although still below its 2 percent target. At the same time inflation begins to pick up, real wages (adjusted for inflation) are falling.

Screen Shot 2014-11-11 at 9.05.48 AM

How did it happen? Beginning April 2013, Bank of Japan Governor Haruhiko Kuroda launched a massive bond purchase program to pump trillion of yen into the economy in an effort to generate inflation. And on October 31, Mr Kuroda announced round of bond buying to pump trillions of additional yen into the economy.

Here’s the bottom line: Governor Haruhiko’s stimulus programs are working. Deflation appears to have ended, and inflation is now moving towards it 2 percent target.

Discussion question:

Discuss why deflation is such a difficult program for an economy.

 

October Jobs Report

Posted on Nov 7, 2014 | Comments Off

The Bureau of Labor Statistics (BLS) released its October 2014 jobs report. Read the BLS report here.

The U.S. added 214,000 jobs in October 2014, compared with an average monthly gain of 222,000 over the prior 12 months.

The unemployment rate in October decreased to 5.8 percent.

Once again, the labor force participation rate in October was little changed at 62.8 percent and the employment-population ratio increased marginally to 59.2 percent.

Here are other highlights from the October report:

The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 2.9 million persons. The number of long-term unemployed has decreased by 1.1 million over the last 12 months. They account for 32 percent of the unemployed.

Individuals working part time because their hours had been cut back or because they were unable to find a full-time job, at 7 million persons, was little changed in October.

The number of discouraged workers in October 2014 was 777,000 persons, essentially unchanged from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.

Case-Shiller HPI: San Diego, CA

Posted on Nov 5, 2014 | Comments Off

San Diego’s Case-Shiller housing price index (HPI) from January 1989 to August 2014 is shown in the figure below.

Screen Shot 2014-11-05 at 10.41.22 AM

San Diego’s pre-recession housing market peak was March 2006. Similar to the rest of the U.S., San Diego’s housing market declined after 2006 and it has subsequently recovered.

If the San Diego housing market is split into thirds, the pattern observed is similar to that of other U.S. housing markets: relative to the high and middle tiers, the low tier experienced the greatest decline after the housing bust and is now experiencing the strongest growth rate.

The top third of San Diego’s housing market—the high tier segment—reached a maximum value of 225 in March 2006. The high tier declined 34 percent to reach its lowest HPI value of 149 in April 2009. As of August 2014, this segment of San Diego’s housing market has increased 27 percent from its 2009 low.

The middle third of San Diego’s housing market—the middle tier segment—reached a maximum value of 256 in February 2006. The middle tier declined 41 percent to reach its lowest HPI value of 152 in June 2009. As of August 2014, this segment of San Diego’s housing market has increased 33 percent from its 2009 low.

The bottom third of San Diego’s housing market—the low tier segment—reached a maximum value of 298 in April 2006. The low tier declined 53 percent to reach its lowest HPI value of 142 in June 2009. As of August 2014, this segment of the San Diego’s housing market has increased 58 percent from its 2009 low.

Daylight-Savings Time

Posted on Nov 3, 2014 | Comments Off

Jo Craven McGinty has a nice article on daylight-savings time in the WSJ. Click here to read it.

McGinty discusses a recent study by Hendrik Wolff, an economics professor at the University of Washington. The study took advantage of a policy change that forced two states in Australia to start daylight-savings two months earlier than usual for one year to accommodate the 2000 Sydney Olympic Games.

The main finding is summarized in the figure below. Bottom line: daylight-savings leads to decreased electricity use in the evening hours and increased electricity use in the morning hours. However, daylight-savings time has no impact on electricity use overall.

sunshine

U.S. GDP Grows 3.5% in 3rd Quarter (Advance Estimate)

Posted on Oct 30, 2014 | Comments Off

The U.S. Bureau of Economic Analysis (BEA) has issued the following news release today:

Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 3.5 percent in the third quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 4.6 percent.

Read the release here.

 

The Fed’s Dual Mandate

Posted on Oct 30, 2014 | Comments Off

Paul Solman has a nice report on the Fed’s dual mandate.

October FOMC Statement

Posted on Oct 30, 2014 | Comments Off

The Federal Reserve concluded its latest Federal Open Market Committee (FOMC) meeting on Wednesday. The Fed announced that it decided to conclude its asset purchase program this month.

Although new assets will not be purchased, the FOMC is maintaining its policy of reinvesting principal payments from its holdings of prior asset purchases and mortgage-backed security purchases and rolling over maturing Treasury securities at auction. This policy effectively keeps the FOMC’s holdings of longer-term securities at its current sizeable level.

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee’s longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.

Read the complete announcement here.

E-Commerce Price Discrimination

Posted on Oct 28, 2014 | Comments Off

A team of Northeastern University computer scientists have found evidence of price discrimination on popular e-commerce sites. Click here to read about the finding in the WSJ.

Here are a couple of the team’s findings: “Travel-booking sites Cheaptickets and Orbitz charged some users searching hotel rates an average of $12 more per night if they weren’t logged into the sites, and Travelocity charged users of Apple Inc.’s iOS mobile operating system $15 less for hotels than other users.

“Home Depot Inc. shows mobile-device users products that are roughly $100 more expensive than those offered to desktop-computer users. And Expedia and Hotels.com steer users at random to pricier products, the study said.

Click here to read the full paper.

Discussion questions:

Discuss why users might be charged more on Cheaptickets and Orbitz if they are not also logged into the sites.

Discuss why users of Apple Inc.’s iOS mobile operating system might be charged less than other users over at Travelocity.

Cost of Living Adjustments: Social Security

Posted on Oct 23, 2014 | Comments Off

The Social Security Administration (SSA) on Wednesday announced that existing social security recipients are to get a 1.7 percent annual cost of living adjustment (COLA) for 2015.

The social security COLA is determined by the changes in prices of urban wage earners and clerical workers, known as the CPI-W. The figure below shows three measures of inflation. In the top chart, the WSJ plots the annual change in the CPI-U and the annual change in the core CPI-U, which excludes food and energy price changes. Both of these indexes report an inflation rate of 1.7 percent.

In the bottom chart, the WSJ plots the annual change in quarterly average CPI-W. It also includes circles that represent the actual social security COLA since 2004. The data for September 2014 shows an inflation rate of 1.7 percent.

What is most interesting about the figure is the period just after the Great Recession: 2010-2012. Because COLAs cannot be negative, social security recipients received no COLA in 2010 and 2011 and a COLA less than the annual change in quarterly average CPI-W in 2012. During this three-year period, actual benefits increased in real terms.

SS inflationDiscussion questions:

1) Explain the difference between nominal and real price increases.

2) All else equal, is the COLA increase of 0 percent in 2010 better or worse than a COLA of 1.7% in 2015? Explain

Falling Oil Prices

Posted on Oct 15, 2014 | Comments Off

Global oil prices have fallen over 20 percent since June. The exclamation point came on Tuesday when oil prices declined 4.5 percent—the biggest one-day drop in nearly two years.

Two factors are at play in the oil market.

First, over the near term, worldwide demand is not expected to increase much, if at all. Indeed, the International Energy Agency forecasts oil-demand growth to be the lowest level in five years. Demand is stalling because of global economic worries.

Second, there is a glut of oil. Oil production continues to rise because hydraulic fracturing has made it a lot easier to extract hard to reach oil. Hydraulic fracturing has enabled the U.S. to become the number one producer of oil in the world. In addition, it appears that OPEC (organization of petroleum exporting countries) is no longer willing to cut their oil production to slow the price slide.

All together then, the figures below (from the WSJ; click here to read the related article) show the story: prices are falling while output is rising.

oil 1oil 2

Discussion question:

Sketch a supply and demand diagram for the global oil market. Demonstrate in your diagram how slowing growth in demand and an increasing glut of oil affect the market equilibrium price and quantity.

2014 Nobel Prize in Economics

Posted on Oct 14, 2014 | Comments Off

Goes to…Jean Tirole for his analysis of market power and regulation. Click here and here to read the announcements.

The prize committee writes that Jean Tirole is one of the most influential economists of our time. He has made important theoretical research contributions in a number of areas, but most of all he has clarified how to understand and regulate industries with a few powerful firms.

Click here to watch one of Tirole lectures on two-sided markets.

The Fiscal Multiplier

Posted on Oct 8, 2014 | Comments Off

A recent NBER working paper shows that to properly compute the fiscal multiplier in expansionary and recessionary periods, it is important to distinguish between increases and decreases in government spending. Click here to read the paper.

The fiscal multiplier tells us the amount by which GDP increases when government spending increases by a dollar.

The NBER paper shows that the long-run multiplier for recession and government spending going up is 2.3. On the other hand, when the direction (increase or decrease) of government spending was not controlled for, then the fiscal multiplier during recession was only 1.3.

Discussion questions:

1) Explain what it means to state that the fiscal multiplier is 2.3.

2) Discuss why the fiscal multiplier is greater than 1 for recession and government spending going up.

Global Economic Growth Struggles

Posted on Oct 8, 2014 | Comments Off

The International Monetary Fund (IMF) released its latest World Economic Outlook (WEO) this week. Click here to read the report.

The IMF writes, “[d]espite setbacks, an uneven global recovery continues. Largely due to weaker-than-expected global activity in the first half of 2014, the growth forecast for the world economy has been revised downward to 3.3 percent for this year, 0.4 percentage point lower than in the April 2014 World Economic Outlook (WEO). The global projection for 2015 was lowered to 3.8 percent.”

Here is a snapshot of the IMF’s latest projections.

IMF_WEO Forecast

Discussion question: Peruse the WEO report. Discuss a few of the reasons why global economic growth has been downgraded.

Is the Traditional Taxicab an Endangered Species?

Posted on Oct 3, 2014 | Comments Off

Paul Solman’s Making Sense of financial news piece looks at how the long-regulated taxi industry and its drivers are under siege from new technology and new competitors.

September Jobs Report

Posted on Oct 3, 2014 | Comments Off

The Bureau of Labor Statistics (BLS) released its September 2014 jobs report. Read the BLS report here.

The U.S. added 248,000 jobs in September 2014, compared with an average monthly gain of 213,000 over the prior 12 months.

The unemployment rate in September decreased to 5.9 percent.

Once again, the labor force participation rate in September was little changed at 62.7 percent and the employment-population ratio was unchanged at 59 percent.

Here are other highlights from the September report:

The number of long-term unemployed (those jobless for 27 weeks or more) was unchanged at 3 million persons. The number of long-term unemployed has decreased by 1.2 million over the last 12 months. They account for 31.9 percent of the unemployed.

Individuals working part time because their hours had been cut back or because they were unable to find a full-time job, at 7.1 million persons, was little changed in September.

The number of discouraged workers in September 2014 was 698,000 persons, down by 154,000 from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.

Case-Shiller HPI: Minneapolis, MN

Posted on Oct 2, 2014 | Comments Off

Minneapolis’s Case-Shiller housing price index (HPI) from January 1989 to July 2014 is shown in the figure below.

Minneapolis HPI

Minneapolis’s pre-recession housing market peak was April 2006. Similar to the rest of the U.S., Minneapolis’s housing market declined after 2006 and it has subsequently recovered.

If the Minneapolis housing market is split into thirds, the pattern observed is similar to that of other U.S. housing markets: relative to the high and middle tiers, the low tier experienced the greatest decline after the housing bust and is now experiencing the strongest growth rate.

The top third of Minneapolis’s housing market—the high tier segment—reached a maximum value of 168 in April 2006. The high tier declined 30 percent to reach its lowest HPI value of 116 in November 2011. As of July 2014, this segment of Minneapolis’s housing market has increased 17 percent from its 2011 low.

The middle third of Minneapolis’s housing market—the middle tier segment—reached a maximum value of 170 in April 2006. The middle tier declined 39 percent to reach its lowest HPI value of 104 in April 2011. As of July 2014, this segment of Minneapolis’s housing market has increased 32 percent from its 2011 low.

The bottom third of Minneapolis’s housing market—the low tier segment—reached a maximum value of 191 in April 2006. The low tier declined 55 percent to reach its lowest HPI value of 87 in May 2011. As of July 2014, this segment of the Minneapolis’s housing market has increased 64 percent from its 2011 low.

Jobs Report: Dallas, TX

Posted on Oct 1, 2014 | Comments Off

The figure below shows the monthly year-on-year change in the number of nonfarm employees in the U.S. (blue line), Texas (red line) and the Dallas metro area (green line) between January 2004 and August 2014.

Texas has experienced monthly increases in this employment measure since May 2010, the Dallas metro area has experienced a monthly increase in this employment measure since June 2010, and the U.S. has experienced a monthly increase in this employment measure since August 2010.

Dallas labor mkt

The most recent data (August 2014) reveal that year-on-year employment growth continues in the Dallas metro area (3.3 percent), Texas (3.5 percent) and the U.S. (1.8 percent).

As of August 2014, the number of nonfarm employees in the Dallas metro area is 985,300 greater than the peek level observed during the great recession in August 2008.

GDP Increases 4.6% in Second Quarter (Third Estimate)

Posted on Sep 26, 2014 | Comments Off

Real gross domestic product (GDP) increased 4.6 percent in the second quarter of 2014, according to the Bureau of Economic Analysis’s third estimate. Click here to read the BEA’s September 26 news release.

According to the BEA’s news release the increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures, exports, private inventory investment, nonresidential fixed investment, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.0 percent in the second quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.7 percent.

Behind the Fed’s Dovish Turn on Rates

Posted on Sep 23, 2014 | Comments Off

Alan Blinder has an interesting article in today’s Wall Street Journal on the battle that is ongoing at the Fed’s Federal Open Market Committee (FOMC). The battle is between the hawks and doves. Click here to read the article.

Hawks on the FOMC are concerned about rising inflation. Doves on the FOMC are concerned with too much slack in the U.S. labor market.

Blinder believes that the Fed’s September FOMC statement reveals that the doves won the battle in September. He points to the following three items.  First, the phrase “significant underutilization of labor” remained in the September FOMC statement. The hawks wanted that language removed; it stayed. Second, the FOMC statement tells us that interest rates will remain at their current superlow level “for a considerable time” after asset purchases end next month. The hawks had wanted that language removed; it stayed.  Third, the hawks want the Fed to stop saying that it expects to keep interest rates low “for some time” after the economy returns to normal. It too remained in the statement.

So, what does it all mean? It means there is a deep division at the Fed. Only time will tell how the story ends.

 

Evidence of Sticky Wages in the U.S.

Posted on Sep 19, 2014 | Comments Off

Brendan Greeley has an interesting article in Bloomberg Businessweek. Click here to read it.

Sticky wages is a concept stressed by John Maynard Keynes in the 1930s. The idea is that workers resist pay cuts even when times are bad, forcing businesses to save money instead through layoffs. Keynes argued that workers really dislike nominal wage cuts. But if wages remain the same while inflation increases, then employees become less costly to the employer, which in turn makes it easier to retain the workers. With an increase in inflation, workers are essentially fooled—they experience a real wage decrease, but no change in their nominal wage.

William Dickens, a Northeastern University economist, took at look at data from the great recession and calculated the percentage change in wages from 2007 to 2008. He found that of all the possible outcomes between a huge raise and a huge pay cut, the largest number of workers have seen zero change in their wages, according to “The Incredible Stickiness of Wages” (Bloomberg Businessweek, September 22-28, 2014). See the figure below. His results seem to support the sticky wage theory.

stickyDiscussion question:

Read the Brendan Greeley’s article. Discuss what economists have uncovered about sticky wages in the U.K and Ireland.

September FOMC Statement

Posted on Sep 17, 2014 | Comments Off

The Federal Reserve concluded its latest Federal Open Market Committee (FOMC) meeting on Wednesday. The Fed announced that it will reduce its monthly asset purchases by another $10 billion to $15 billion: $5 billion for mortgage backed securities and $10 billion of longer-term Treasury securities.

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective. Longer-term inflation expectations have remained stable.

Read the complete announcement here.

CPI: August 2014

Posted on Sep 17, 2014 | Comments Off

The Bureau of Labor Statistics (BLS) released its August 2014 Consumer Price Index (CPI) report. Click here to read the report.

The CPI increased 1.7 percent over the last 12 months (see the figure below). This reading is at the Fed’s inflation target of 2 percent.

Core CPI–which excludes food and energy prices–increased 1.7 percent over the last 12 months.

The following figure shows both CPI and Core CPI since August 2013.

CPI

Los Angeles Jobs Report

Posted on Sep 10, 2014 | Comments Off

The figure below shows the monthly year-on-year change in the number of nonfarm employees in the U.S. (blue line), California (red line) and the Los Angeles metro area (green line) between January 2004 and August 2014.

jobs-la

The U.S. and California have observed monthly increases in this employment measure since August 2010, while the Los Angeles metro area has observed a monthly increase in this employment measure since October 2010.

The most recent data reveal that year-on-year employment growth continues in the Los Angeles metro area (1.7 percent, July 2014), California (2.1 percent, July 2014) and the U.S. (1.8 percent, August 2014).

As of July 2014, the number of nonfarm employees in the Los Angeles metro area is 202,000 lower than the peek level observed prior to the great recession in December 2007.

Corn Prices Fall as Expected Supply Grows

Posted on Sep 9, 2014 | Comments Off

Jesse Newman reports on the state of the U.S. corn crop in this Wall Street Journal article. Corn prices have fallen to the lowest level in four years as expectations of a record harvest mount, according to the article.

Discussion questions:

1) Using the model of supply and demand, sketch how the corn market has changed relative to last year. Does it make sense that the price of corn has decreased as the expected supply has increased? Explain.

2) “Eventually, we’re going to have to send a signal to the world farmer: Don’t plant any more corn,” according to the article. If this statement is true, is the price elasticity of demand for corn likely elastic or inelastic? Explain how you know.