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Coase Theorem Case Study: Reclining Airplane Seats

Posted on Aug 28, 2014 | 0 comments

Josh Barro has a very interesting piece applying the Coase theorem to the problem of reclining airline seats. Click here to read the article.

Barro writes: he owns the right to recline, and if his reclining bothers you, you can pay him to stop. We could (but don’t) have an alternative system in which the passenger sitting behind him owns the reclining rights. In that circumstance, if Barro really cared about being allowed to recline, he could pay the passenger sitting behind him to let him recline. In either case, the same outcome would occur.  That is, unless the transaction costs are too high–a point Barro discusses in his article.

GDP Increases 4.2 Percent in Second Quarter (Second Estimate)

Posted on Aug 28, 2014 | 0 comments

Real gross domestic product (GDP) increased 4.2 percent in the second quarter of 2014 (see table below), according to the Bureau of Economic Analysis’s second estimate. Click here to read the BEA’s August 28 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 (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

New Steel Tariffs Confirmed

Posted on Aug 24, 2014 | 0 comments

On Friday, the International Trade Commission confirmed the imposition of steel tariffs on imported steel pipe and tube from South Korea, India, Taiwan, Turkey, Ukraine and Vietnam. Click here to read about it in the WSJ.

The heart of the matter is: foreign steel prices have been as much as 20 percent lower that U.S. steel prices. As a result of the significant price difference, there has been a surge in steel imports into the US. However, the impact of the steel tariffs will cause the price of imported steel to increase.

Discussion questions:

Reference Karlan and Morduch’s International Trade chapter for the following questions.

1) As imports increase, explain what happens to total surplus in the domestic economy.

2) As imports increase, explain how consumer surplus and producer surplus change.

3) As imports increase, are producers or consumers more likely to claim trade is unfair? Why?

4) If a tariff on imported steel is imposed, who are the winners and who are the losers in the domestic economy? Explain.

Monetary Policy Challenges

Posted on Aug 22, 2014 | 0 comments

The figure below shows average GDP growth over the previous four years, adjusted for inflation.


The second figure shows average consumer-price inflation over the previous four years.


The recent slowing of GDP growth and inflation comes at a time with central bankers in the U.S. and around the globe wrestle with making changes to monetary policy. Recent GDP and inflation data are making central bankers reluctant in some places (US, UK, China) and unable in others (EU, Japan) to dial back the easy money employed since the great recession.

Discussion questions:

1) Discuss why recent data make central bankers reluctant to dial back easy money policies in the US and UK.

2) Discuss why recent data make central bankers unable to dial back easy money polices in Japan and the EU.

CPI: July 2014

Posted on Aug 20, 2014 | 0 comments

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

The CPI increased 2.0 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 1.9 percent over the last 12 months.

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


The Eurozone’s Economy Stalls

Posted on Aug 14, 2014 | Comments Off

The Eurozone has slowed to a halt. Gross domestic product in the 18-member currency bloc was flat in the second quarter of 2014, compared with the growth of 0.2 percent in the first quarter of 2014. That translated into 0.2 percent growth in annualized terms, down from the first quarter’s 0.8 percent pace.

The figure below shows recent GDP growth for the Eurozone, Germany, France, Italy, and Spain.


Click here and here for related news articles.


Japan’s GDP declines

Posted on Aug 13, 2014 | Comments Off

Japan’s gross domestic product shrank 6.8 percent on an annualized basis in the second quarter of 2014. See the figure below.


It was the largest decline since the first quarter of 2011. The significant decline in GDP occurred in the quarter that the national sales increased 60 percent (from 5 to 8 percent). Click here and here to read related news reports.

Discussion question:

Discuss why a 60 percent increase in Japan’s national tax rate likely caused its GDP to decline.