Wednesday, May 14, 2008
The recent months saw an unprecedented increase in food prices. The price of rice, the most common staple in the world, soared by 141% since the beginning of the year, while other staples such as wheat and corn experienced similar price increases as well. How did this sudden spike in prices occur, if there weren’t any natural disaster (except the recent Cyclone Nargis, which happened after the price increase), nor any major crisis that threatened world food supply? This didn’t happen without rhyme or reason. In fact, we believe that a multitude of supply and demand factors, both short-term and long-term, have contributed towards the recent food price increases. An article that gives a clear overview of the current situation of food shortages is attached below, along with our own economic analysis of the issues raised.
Causes behind the price hike:
“Freak weather is a factor. But so are dramatic changes in the global economy, including higher oil prices, lower food reserves and growing consumer demand in China and India.”
The growing appetite of China’s and India’s consumers, following years of rapid economic growth resulting in greater purchasing power, has been frequently cited as the main reason behind the recent food price increases. These consumers are increasingly switching from basic staples such as rice to more luxurious ones such as meat and dairy products. The production of 1kg of beef, for instance, requires much more than 1kg of grain since livestock also need to consume food in order to provide us with their meat. This is known as derived demand, where the demand for grain increases as a result of an increase in demand for meat, eventually leading to higher grain prices.
“Among the driving forces are petroleum prices, which increase the cost of everything from fertilizers to transport to food processing.”
While seemingly unrelated, the increase in oil prices also has a profound impact on food prices. First and foremost, oil constitutes an important component for the production of fertilizers and also the transportation of agricultural products. An increase in oil prices causes the cost of agricultural production and transportation to increase, shifting the supply curve to the left. Also, as a result of higher oil prices, biofuel development projects in many countries are also picking up. Converting more food into fuel further aggravate the situation by decreasing the already-limited food supply.
“But attempts to control prices in one country often have dire effects elsewhere. China's restrictions on wheat flour exports resulted in a price spike in Indonesia this year, according to the FAO. Ukraine and Russia imposed export restrictions on wheat, causing tight supplies and higher prices for importing countries.”
To make matters worse, many governments and organisations adopt economic policies based on self-interest. Grain-exporting countries have already begun to cut exports in order to keep local prices low, while grain-importing countries began hoarding supplies, fearing higher prices and more limited supply in the future. Panic-buying by consumers, as well as speculators expecting prices to rise in the future, causes the demand for grain products to increase tremendously in the short-term. As a result, prices continue to rise at an unprecedented pace.
“The world's poorest nations still harbor the greatest hunger risk. Clashes over bread in Egypt killed at least two people last week, and similar food riots broke out in Burkina Faso and Cameroon this month.”
Most directly-hit are the ones who earn low wages, who are usually the ones to spend the largest proportion of income on foodstuffs. Already, many places in the world have seen strikes and clashes, sometimes fatal, as a result of rising food prices. Since basic staples such as rice, wheat and corn are also basic ingredients for many bakery and noodle products, increase in grain prices causes an almost universal increase in food prices (as seen in the article, even the price of escargot was not spared). In Singapore, import price-push inflation was experienced as a result of that.
Policy options: Free market or government intervention?
“In decades past, farm subsidies and support programs allowed major grain exporting countries to hold large surpluses, which could be tapped during food shortages to keep prices down. But new trade policies have made agricultural production much more responsive to market demands -- putting global food reserves at their lowest in a quarter century.Without reserves, bad weather and poor harvests have a bigger impact on prices.”
Many economists have argued that the best long-term solution to global food shortages is to allow the free market to take its course – allow prices to rise so that farmers will have more incentives to produce more. However, problems might arise if the free market is left on its own. Food, as a basic survival necessity, cannot be allowed to have its price rise too rapidly, as survival of the poor might be threatened. Furthermore, the supply of grain is price inelastic, as the quantity of grain supplied cannot increase overnight following an increase in prices, since farmers also need to take time before their output can meet market demand. These problems seem to point towards the argument that food, as a basic necessity, should be “spared” from the mechanisms of the free market and governments should heavily intervene with the supply and demand for food.
“Economists say that for the short term, government bailouts will have to be part of the answer to keep unrest at a minimum.”
However, long-term, heavy intervention should not be main focus of the government. The recent food scare represents a breakdown of the mechanisms of food supply and demand after years of government intervention. Huge government subsidies on food, coupled with the lack of investments in recent years to boost agricultural productivity, have created a chronic food shortage that hasn’t been discovered until recently. The role of the government, therefore, should be on cushioning the impacts of such price increases. In the short run, governments can choose to adopt a combination of food subsidies and direct financial aid to the poor to ensure their survival. In the long run, however, more things need to be done.
“In the long term, prices are expected to stabilize. Farmers will grow more grain for both fuel and food and eventually bring prices down.”
Firstly, agricultural productivity should be increased by providing farmers with more incentives for increased production (via price increases, gradually). There should also be more investments in developing higher-yield, more pest-resistant grain types. Introducing new technologies to traditional farms in less-developed countries also helps to increase agricultural productivity. The main emphasis of such development projects should be on the least-developed farms in the world since that would yield the greatest returns since the law of diminishing returns has not set in. To quote from the Economist, “it would be easier to boost grain yields in Africa from two tonnes per hectare to four than it would be to raise yields in Europe from eight tonnes to ten”.
Concluding remarks:
The use of short-term price controls, subsidies and exchange rate policies (in the case of Singapore) to cushion the impact of rising food prices, coupled with long-term supply-side policies of increasing agricultural productivity, will hopefully lead to a more painless transition to a new market equilibrium. Let’s all hope that Thomas Malthus was wrong.
ARTICLE
Taken from http://edition.cnn.com/2008/WORLD/americas/03/24/food.ap/index.html
MEXICO CITY, Mexico (AP) -- If you're seeing your grocery bill go up, you're not alone.
Protesters share a loaf of bread in Cairo, Egypt, while demonstrating against high food prices.
From subsistence farmers eating rice in Ecuador to gourmets feasting on escargot in France, consumers worldwide face rising food prices in what analysts call a perfect storm of conditions. Freak weather is a factor. But so are dramatic changes in the global economy, including higher oil prices, lower food reserves and growing consumer demand in China and India.
The world's poorest nations still harbor the greatest hunger risk. Clashes over bread in Egypt killed at least two people last week, and similar food riots broke out in Burkina Faso and Cameroon this month.
But food protests now crop up even in Italy. And while the price of spaghetti has doubled in Haiti, the cost of miso is packing a hit in Japan.
"It's not likely that prices will go back to as low as we're used to," said Abdolreza Abbassian, economist and secretary of the Intergovernmental Group for Grains for the U.N. Food and Agriculture Organization. "Currently if you're in Haiti, unless the government is subsidizing consumers, consumers have no choice but to cut consumption. It's a very brutal scenario, but that's what it is."
No one knows that better than Eugene Thermilon, 30, a Haitian day laborer who can no longer afford pasta to feed his wife and four children since the price nearly doubled to $0.57 a bag. Their only meal on a recent day was two cans of corn grits.
"Their stomachs were not even full," Thermilon said, walking toward his pink concrete house on the precipice of a garbage-filled ravine. By noon the next day, he still had nothing to feed them for dinner.
Their hunger has had a ripple effect. Haitian food vendor Fabiola Duran Estime, 31, has lost so many customers like Thermilon that she had to pull her daughter, Fyva, out of kindergarten because she can't afford the $20 monthly tuition.
Fyva was just beginning to read.
In the long term, prices are expected to stabilize. Farmers will grow more grain for both fuel and food and eventually bring prices down. Already this is happening with wheat, with more crops to be planted in the U.S., Canada and Europe in the coming year.
However, consumers still face at least 10 years of more expensive food, according to preliminary FAO projections.
Among the driving forces are petroleum prices, which increase the cost of everything from fertilizers to transport to food processing. Rising demand for meat and dairy in rapidly developing countries such as China and India is sending up the cost of grain, used for cattle feed, as is the demand for raw materials to make biofuels.
What's rare is that the spikes are hitting all major foods in most countries at once. Food prices rose 4 percent in the U.S. last year, the highest rise since 1990, and are expected to climb as much again this year, according to the U.S. Department of Agriculture.
As of December, 37 countries faced food crises, and 20 had imposed some sort of food-price controls.
For many, it's a disaster. The U.N.'s World Food Program says it's facing a $500 million shortfall in funding this year to feed 89 million needy people. On Monday, it appealed to donor countries to step up contributions, saying its efforts otherwise have to be scaled back.
In Egypt, where bread is up 35 percent and cooking oil 26 percent, the government recently proposed ending food subsidies and replacing them with cash payouts to the needy. But the plan was put on hold after it sparked public uproar.
"A revolution of the hungry is in the offing," said Mohammed el-Askalani of Citizens Against the High Cost of Living, a protest group established to lobby against ending the subsidies.
In China, the price hikes are both a burden and a boon.
Per capita meat consumption has increased 150 percent since 1980, so Zhou Jian decided six months ago to switch from selling auto parts to pork. The price of pork has jumped 58 percent in the past year, yet every morning housewives and domestics still crowd his Shanghai shop, and more customers order choice cuts.
The 26-year-old now earns $4,200 a month, two to three times what he made selling car parts. And it's not just pork. Beef is becoming a weekly indulgence.
"The Chinese middle class is starting to change the traditional thought process of beef as a luxury," said Kevin Timberlake, who manages the U.S.-based Western Cattle Company feedlot in China's Inner Mongolia.
At the same time, increased cost of food staples in China threatens to wreak havoc. Beijing has been selling grain from its reserves to hold down prices, said Jing Ulrich, chairwoman of China equities for JP Morgan.
"But this is not really solving the root cause of the problem," Ulrich said. "The cause of the problem is a supply-demand imbalance. Demand is very strong. Supply is constrained. It is as simple as that."
Chinese Premier Wen Jiabao says fighting inflation from shortages of key foods is a top economic priority. Inflation reached 7.1 percent in January, the highest in 11 years, led by an 18.2 percent jump in food prices.
Meanwhile, record oil prices have boosted the cost of fertilizer and freight for bulk commodities -- up 80 percent in 2007 over 2006. The oil spike has also turned up the pressure for countries to switch to biofuels, which the FAO says will drive up the cost of corn, sugar and soybeans "for many more years to come."
In Japan, the ethanol boom is hitting the country in mayonnaise and miso, two important culinary ingredients, as biofuels production pushes up the price of cooking oil and soybeans.
A two-pound bottle of mayonnaise has risen about 10 percent in two months to as much as 330 yen (nearly $3), said Daishi Inoue, a cook at a Chinese restaurant.
"It's not hurting us much now," he said. "But if prices keep going up, we have no choice but to raise our prices."
Miso Bank, a restaurant in Tokyo's glitzy Ginza district, specializes in food cooked with miso, or soybean paste.
"We expect prices to go up in April all at once," said Miso Bank manager Koichi Oritani. "The hikes would affect our menu. So we plan to order miso in bulk and make changes to the menu."
Italians are feeling the pinch in pasta, with consumer groups staging a one-day strike in September against a food deeply intertwined with national identity. Italians eat an estimated 60 pounds of pasta per capita a year.
The protest was symbolic because Italians typically stock up on pasta, buying multiple packages at a time. But in the next two months pasta consumption dropped 5 percent, said farm lobbyist Rolando Manfredini.
"The situation has gotten even worse," he said.
In decades past, farm subsidies and support programs allowed major grain exporting countries to hold large surpluses, which could be tapped during food shortages to keep prices down. But new trade policies have made agricultural production much more responsive to market demands -- putting global food reserves at their lowest in a quarter century.
Without reserves, bad weather and poor harvests have a bigger impact on prices.
"The market is extremely nervous. With the slightest news about bad weather, the market reacts," said economist Abbassian.
That means that a drought in Australia and flooding in Argentina, two of the world's largest suppliers of industrial milk and butter, sent the price of butter in France soaring 37 percent from 2006 to 2007.
Forty percent of escargot, the snail dish, is butter.
"You can do the calculation yourself," said Romain Chapron, president of Croque Bourgogne, which supplies escargot. "It had a considerable effect. It forced people in our profession to tighten their belts to the maximum."
The same climate crises sparked a 21 percent rise in the cost of milk, which with butter makes another famous French food item -- the croissant. Panavi, a pastry and bread supplier, has raised retail prices of croissants and pain au chocolat by 6 to 15 percent.
Already, there's a lot of suspicion among consumers.
"They don't understand why prices have gone up like this," said Nicole Watelet, general secretary at the Federation of French Bakeries and Pastry Enterprises. "They think that someone is profiting from this. But it's not us. We're paying." Food costs worldwide spiked 23 percent from 2006 to 2007, according to the FAO. Grains went up 42 percent, oils 50 percent and dairy 80 percent.
Economists say that for the short term, government bailouts will have to be part of the answer to keep unrest at a minimum. In recent weeks, rising food prices sparked riots in the West African nations of Burkina Faso, where mobs torched buildings, and Cameroon, where at least four people died.
But attempts to control prices in one country often have dire effects elsewhere. China's restrictions on wheat flour exports resulted in a price spike in Indonesia this year, according to the FAO. Ukraine and Russia imposed export restrictions on wheat, causing tight supplies and higher prices for importing countries. Partly because of the cost of imported wheat, Peru's military has begun eating bread made from potato flour, a native crop.
"We need a response on a large scale, either the regional or international level," said Brian Halweil of the environmental research organization Worldwatch Institute. "All countries are tied enough to the world food markets that this is a global crisis."
Poorer countries can speed up the adjustment by investing in agriculture, experts say. If they do, farmers can turn high prices into an engine for growth.
But in countries like Burkina Faso, the crisis is immediate.
Days after the riots, Pascaline OuÄedraogo wandered the market in the capital, Ouagadougou, looking to buy meat and vegetables. She said a good meal cost 1,000 francs (about $2.35) not long ago. Now she needs twice that.
"The more prices go up, the less there is to meet their needs," she said of her three children, all in secondary school. "You wonder if it's the government or the businesses that are behind the price hikes."
IrÇene Belem, a 25-year-old with twins, struggles to buy milk, which has gone up 57 percent in recent weeks.
"We knew we were poor before," she said, "but now it's worse than poverty."
Kok Wei
Li Hui
Wei Zheng
07S6E
Thursday, May 8, 2008
Wednesday, May 7, 2008
I want to pose a question to all of you. Suppose an essay question is worded as follows:
Explain how fiscal and monetary policy can be used to influence national income. (12 marks)
By now, all of you should have a clear idea how to structure your answer to the above question. Now, suppose the wording of the question is altered slightly to:
Explain how fiscal and monetary policy can be used to influence the circular flow of income. (12 marks)
How many of you will basically give the same answer for the second question as you would have given for the first one? For your information, the second question actually came out for the A level H1 Nov 2007 exam.
Interested students may discuss with their tutors how a simple alteration may lead to a slightly different essay focus and how important it is to answer the question as it is worded, rather than giving memorized answers. For my classes, it of course will be complusory to discuss this during tutorials.
Regards,
Mr Tan
In this article, the Federal Reserve (central bank in the US) policymakers are adopting an expansionary monetary policy due to worries about a deep recession in the economy. This recession, from my understanding of the article, is caused mainly by a fall in the AD curve, thus slowing economic growth in terms of Real GDP. The solution adopted was to cut its most important interest rate by three quarters of a percentage point to 2.25 percent and to pump more liquidity into the global financial system.
In this post, I will try to apply as many economic concepts as possible to the issues (especially liquidity ones) mentioned in the article as well as to give my own views.
Important points are underlined.
Background Information - Sub-prime Mortgage Crisis
Before going into that, the sub-prime mortgage crisis (underlined in blue) is mentioned as well and it is related to the fall in house rates and a credit slump (credit crunch) that was mentioned. This was due to adjustable rate mortgages made to higher-risk borrowers with lower income or lesser credit history than "prime" borrowers. Also, loan incentives and a long-term trend of rising housing prices encouraged borrowers to assume mortgages, believing they would be able to refinance at more favorable terms later.
From the article, "further restriction of credit availability and ongoing weakness in the housing market."
This problem accelerated in late 2006 and triggered the global financial crisis due to a drop in the prices of houses in 206-207 in many parts of ths US, thus making refinancing more difficult. This declination of the value of mortgage assets led to the unwillingness of the borrowers to make payments and incurred huge losses, thus causing lenders to reduce lending activity and leading to the credit crunch or to make loans at higher interest rates. In turn, fewer or more expensive loans decrease investment by businesses and consumer spending and it puts a downward pressure on the economy.
Expansionary Monetary Policy
As mentioned above, this policy has been adopted in that the interest rate has been cut. Also, from the last three paragraphs, we can see that the government is regulating (increasing) the credit demand and supply through Open Market Operations as well. This is made possible by "making as much as US$200 billion worth of Treasuries available". This simply implies that the government is lending Treasury securities by purchasing government securities. This can also serve to increase the liquidity ratio for banks and to increase their credit creating ability, thus increasing the money supply in the economy.
Although increasing the Money Supply can increase consumption directly as well through the direct mechanism, the policy was targeted mainly at increasing investments (indirectly) made by the firms by encouraging more lending and borrowing and hence more funds for worthy borrowers (investment firms). This serves to decrease the downward pressure on the economic growth by stimulating AD.
Setbacks - Inflation
However, as mentioned in the article, the two 'dissents' favoured a smaller cut in interest rates for fear of inflation. This is refering to demand pull inflation, i.e. if the huge cut in the interest rate lead to an excessive rise in AD curve much more than the AS curve in general. Here the article addresses the second problem that the US economy is facing and that the policymakers should take this into account as well, i.e. "soaring energy prices and high food costs."
The writer also mentions about inflation expectations and that people 'will act in ways that will make inflation worse.' This refers to the fact that consumers and firms will bring their anticipated consumption forward and that trade unions may start to demand for higher wages, leading to a rise in production costs and a decrease in the AS and an even higher increase in AD (wage-price spiral). These increases prices without really increasing Real GDP/ Income.
I feel that the pressure on inflation could be lessen if supply side policies were used as well. For example, competition could be encouraged, thus firms would need to cut production costs. This would serve to shift the LRAS to the right and to upkeep the shift in AD curve and hence to reduce the potential inflation.
Also, temporary price controls could be used (though risky) to reduce expectations, once the inflation rate is stabilised, they can be removed.
However, we can also see that there is an interplay of the expansionary monetary policy and supply-side policy in that encouraging investments wil not oly boost AD in the short run to counter recession, but also increases the productive capacity of the economy, causing LRAS to shift to the right.
Towards the end, it is also mentioned in the article that economists expect the Fed to lower interest rates in view of the faltering employment market and hence another problem in the US economy is identified. This (stimulating AD) will thus serve to reduce cyclical unemployment, which is caused by a lack of AD.
I find that by reading articles which we've actually found on our own, instead of only reading the examples in the notes and case studies in tutorials, we can further convince ourselves (and others) that what we learn in Economics, especially on macro, is indeed useful and applicable. The article above mentions about the recession, the central bank, monetary policy and the steps used in it to regulate money supply, and also inflation. Such concepts would be boring if we only learn it in theory without applying it to real life scenarios.
Furthermore, there is a sense of achievement when I find that I can understand what most parts of the article is addressing. For example, terms like 'Treasury securities' and 'restriction of credit availability' would have sounded totally unfamilar to me if I have not taken Economics. Also, I wouldn't have realised what the writer is talking about when mentioning that 'people will act in ways to make inflation worst' and that 'the Fed said it would make as much as US$200 billion worth of Treasuries available.' I must again say that I am glad to find an article in which the concepts we learn in a recent topic is directly applicable to a real economy. This serves as a means to consolidate my learning as well.
Damian Boh 07S6G
Monday, April 21, 2008
CHECKLIST on CRITICAL ‘A” Level Examination Skills :
- Candidates must have KNOWLEDGE & UNDERSTANDING of Economics at H2 level
Candidates must demonstrate greater depth of ANALYSIS and EVALUATION - Ability for INDEPENDENT LEARNING
Develop HIGHER ORDER THINKING and REASONING SKILLS with particular emphasis on CRITICAL THINKING - Demonstrate an ability to exercise independent JUDGEMENT and to carry out independent assessments
Implies a need for candidates to develop an ability to think for themselves and to work things out for themselves.
Not sufficient simply to recall what one has been taught or even what one has learnt
Implication for assessment of Paper 1 – CASE STUDY:
To assess candidates’ ability to work things out for themselves they will need to be:
Presented with at least some material with which they will not be familiar
Confronted with certain issues situations which they are unlikely to have encountered previously
CRITICAL THINKING for Better Grade
Emphasis on CRITICAL ANALYSIS, ASSESSMENT & EVALUATION in addition to
· “an UNDERSTANDING of fundamental economic principles, theories and concepts and of the methods of analysis used by an economist.”
[Aim of H2 syllabus – you need to be very familiar with the FUNDAMENTAL ECONOMICS THEORIES of H2 syllabus - outlined below for your ease of reference ]
Implications of adopting a CRITICAL APPROACH
Questions that encourage CRITICAL THINKING:
· What are the strengths and weaknesses of arguments/theories/explanations ?
· Are they logically sound and coherent ?
· How realistic are the initial/underlying assumptions/premises ?
· What evidence is there to support any conclusions/recommendations?
· How reliable/relevant is this evidence ?
· How convincing/plausible/robust are the conclusions /
· Are there alternative theories/explanations ?
· How objective are those promoting a particular line of argument/policy recommendation ?
· What are the advantages and disadvantages of particular policies ? (Need to present Balanced view)
· What is the magnitude of these advantages/disadvantages and to whom do they accrue ?
· How convincing are the arguments/evidence supporting the alleged advantages/disadvantages ?
· What criterion (eg goals of government: GEES – GROWTH, EFFICIENCY, EQUITY, STABILITY) is being/should be used to weigh up the respective advantages and disadvantages accruing to different groups ?
Challenging & Higher Order part of the question is designed to :
Presents candidates with a formidable challenge and an opportunity to demonstrate their ability to apply their knowledge of economic principles to a specific issue which they are unlikely to have encountered previously in the course of their studies.
Requires candidates to work out for themselves how the question should be answered. (Contrast this with the practice of reproducing answers prepared in advance – so use the model answers from published materials with care – these answers are only good for that specific question. You should put on your THINKING CAP when answering the exam questions).
Requires candidates to identify what are the relevant economic concepts and theories underlying the question. (Contrast with a standard lower order thinking question which asks candidates to explain a given theory and to illustrate how it might be applied to a particular issue or problem).
Requires candidates to apply critical thinking to a real world issue.
Provides candidates with an opportunity to demonstrate the INTER-CONNECTEDNESS between a wide range of different economic concepts and theories.
What are Economics Exams about ?
What exams try to test & how you should approach them ?
Majority of queries relate to understanding the needs of the questions and what to include and not include in answers.
§ What are the problems ?
Many of the mistakes relate not to the knowledge that students have, but to the way in which this knowledge needs to be used to address certain questions.
For “Advanced” Level Economics – Any notions that all you need is to memorise a body of knowledge in order to be OK needs to be banished at an early stage.
§ What is required of you ?
The examination paper is trying to provide you with the opportunity to demonstrate the range of skills you have developed.
These skills include knowledge of Economics Theories. But to get the higher grades at A Level, you will need to demonstrate that not only can you understand this knowledge, but you can also apply it in a variety of different contexts.
You must also need to show that you can break an issue down into smaller parts in order to analyse what is happening and to make some judgements on the issues you are dealing with.
The 4 Assessment Objectives
Knowledge & Understanding
In Economics, you will have to build up a lot of knowledge about the subject eg supply, demand, elasticity, consumer surplus, macroeconomic objectives, the Phillips Curve etc.
Selecting Knowledge
In examinations, you will be asked to apply the knowledge you have built up to a wide range of different contexts. These might range from congestion charging in London to the action taken against a business by the Environment Agency or policies made by the US government to promote the use of ethanol-powered cars.
In each case there is a different scenario but the knowledge you need to use stays the same. In this example it involves the use of the concept of externalities and market failure.
You are not expected to be an expert in any of these fields but you should be able to recognise the basic economic principles involved in each case and thus offer some development of the issue.
Developing Application Skills
It pays to keep abreast of key news items, as they are often used in exam questions.
Try to watch the news at least once a day or scan through the headlines of the newspapers. As you read, try to make some links to how these issues might relate to Economics.
Higher Order Skills
Analysis
Analysis means breaking down a topic or issue into smaller, more manageable parts to help us understand or explain what is happening.
Critical Thinking
This means basically, do not believe everything you hear or read. Be prepared to ask questions. In exams you will often read articles or be presented with evidence to consider that contain many opinions and views about an issue. Be prepared to try and recognise normative statements when you see them and question their validity.
With the example of externalities, you might be expected to analyse the issue of the London congestion charge. You might have to break it down to explain what the congestion charge consists of, what the effects of the congestion charge have been on different stakeholders and what the consequences might be on individual road users, the city of London as a whole, public transport and local businesses.
In other words, you are making a quite complicated issue more understandable. You will never be able to cover every aspect of a topic in the time you have but you should aim to identify the key characteristics, reasons and consequences of an issue.
In terms of critical thinking, if you read an article about a local business complaining that the congestion charge has cut its business by 45%, think whether this is likely to be typical of all businesses. Where is this business situated ? Does that make a difference ? What evidence is this person presenting to support their claim ? Forty-five per cent sounds a lot, but 45% of what ? Is this percentage of their turnover, profit, sales or passing trade ?
Making a judgement : Evaluation or Assessment
This skill is considered higher order because it is personal and because it necessitates your drawing together a range of information and ideas to arrive at informed conclusions. In other words, you are being asked to make judgements about issues.
In economics this is often made all the harder because there is rarely a right answer to anything. This may seem obvious but it is very important. Your view – provided it has some evidence to support it – is no less valid than that of the chancellor of the exchequer’s; it is just that he may be able to bring more evidence and detail to a discussion.
What the examiners are looking for is some evidence of independent, supported, creative thinking on your part and that does not come easily.
You can build this skill through debate and discussion but be prepared to listen to other views, think about them and consider them in the light of what you already know and think. You will be expressing a personal judgement and even though the examiner may not agree with your choice, that is not an issue. The examiner will be interested in trying to see what support you give for your choice.
Assessing & Evaluating in examinations
In examination questions, you will be asked to assess important issues. It might be that you have to assess the role of aid in relieving poverty or the efficacy of tradable permits in reducing pollution; you may have to evaluate the strength of the case for the Monetary Policy Committee (MPC) increasing interest rates etc.
In each case, if you have done the other parts well, the evaluation becomes easier as you will have the basis for arriving at your judgement. If you have identified that aid, for example, has tended to relieve immediate problems of hunger in 4 out of 5 cases you have referred to, but that the overall levels of absolute poverty have not changed in the last 25 years, then you might be in a very good position to conclude that aid is not the best solution to poverty in less economically developed countries.
“It depends”
With this last skill, therefore, it is important to be bold and brave and to keep at the back of your mind all the time the idea that your opinion is valid. It also helps to use what I refer to as the “it depends” rule. If you are asked about whether, given the data, a rise in interest rates is justified, you might want to ask what it depends on. It depends on how big the rise in the interest rate might be – a quarter point rise in the interest rate might send out the right signals but a 1% rise might be too heavy-handed and cause too much disruption to manufacturing or retail spending. It depends on how strong the indicators are of a possible rise in inflation. It depends on what the perceived effects might be on other parts of the economy and so on.
Remember that even the UK Monetary Policy Committee (MPC) has to make a judgement every month when it make its decision about interest rates. It has knowledge of the economy; it has to apply that knowledge, analyse the economy and make its judgement about the direction of rates. Many people might not agree with its analysis or judgement but that does not deter it from arriving at its decision.
Summary
Having gone through this process, it would be worth looking at a past examination question and trying to identify what knowledge you would use in answering it, how you would apply that knowledge to the context, what the key points in your analysis would be and how you might arrive at an evaluation. Such exercises are invariably more useful in honing and developing your skills than shutting yourself in your bedroom, reading your lecture notes over and over again.
By Andrew Ashwin
Extract from Economic Review Vol 23 Feb 2006
Please take note of the thinking skills which the H2 Economics syllabus 9732 aims to test as specified below:
Syllabus 9732 (H2 Economics)
AIMS
The syllabus is intended to provide the basis for a broad understanding of Economic. Specifically, the syllabus aims to develop in candidates:
1 an understanding of fundamental economic principles, theories and concepts, and of the methods of analysis used by an economist;
2 the ability to use the tools of economic reasoning to explain, analyse and resolve economic issues, and evaluate policy decisions;
3 the habit of reading critically, from a variety of sources, to gain information about the changing economic activities and policies at the national & international levels;
4 the ability to use evidence in making rational arguments in economic context and understand the roles of various economic agents.
ASSESSMENT OBJECTIVES
Candidates are expected to demonstrate:
Understanding of
1 the main concepts, principles and theories employed within the field of economics
2 methods of analysis in economics
Ability to
3 understand and interpret economic information presented in textual, numerical or graphical form
4 select and apply economic concepts and principles to explain and analyse contemporary events at the micro and macro levels
5 recognise unstated assumptions
6 Make interpretations and valid inferences from information presented and evaluate the reliability of information given.
7 Evaluate alternative theoretical explanations and perspectives of economic problems, issues and policy decisions
8 Organise and communicate economic ideas and arguments in a clear, logical and appropriate form
Saturday, April 12, 2008
In this video clip, Milton Friedman sets out to explain the power of the free market, as a superior way to central planning in allocating scarce resources to unlimited wants.
He uses the example of a pencil and how simple profit maximization has led to co-operation among people living around the world.
To me, many of the critics of the free market could actually benefit from viewing this video. Many of such critics only want to latch on the usual arguments that the free market does not ensure income equality.
They often forget that it is precisely because of the free market that everyone can purchase their goods at the lowest possible price. That itself is valuable even if you are a philantropist. For example, even if you are Mother Theresa, and you want to help the poor by donating blankets to them, using the free market would ensure that you are able to purchase the blankets at the lowest possible cost, allowing more of the poor to benefit from your deed.
In the following article from the New York Times, Paul Krugman attempts to explain some of the reasons why grain prices have increased recently.
As an economist, Paul Krugman is using the demand and supply model, which is the standard model for explaining price changes. Some of these reasons include
1) Derived demand: Demand for meat, a normal good, is growing as the income of the Chinese population is increasing. As it takes a huge amount of grain to feed animals to a certain weight before slaughtering them for the meat, an increase in the demand for meat leads to an increase in the demand for wheat as well.
2) Increase in cost of production: Oil prices are going up and since modern agricultural production requires the use of heavy machinery, this will decrease the supply of grains.
3) Climatic changes in Australia also lead to a decrease in the supply of grain production.
To me, I felt really enlightened by the first reason. It never occured to me that demand for meat has such an impact on the grain market. Some people might confused this with the term "externality", in the sense of arguing that the emergence of more meat eaters cause an externality to the vegetarians as it cause grain price to increase.
But in this case, it is not a true externality, as all these actions occur within the context of the market system. This will be called as a pecuniary externality.
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April 7, 2008
Op-Ed Columnist
Grains Gone Wild
By PAUL KRUGMAN
These days you hear a lot about the world financial crisis. But there’s another world crisis under way — and it’s hurting a lot more people.
I’m talking about the food crisis. Over the past few years the prices of wheat, corn, rice and other basic foodstuffs have doubled or tripled, with much of the increase taking place just in the last few months. High food prices dismay even relatively well-off Americans — but they’re truly devastating in poor countries, where food often accounts for more than half a family’s spending.
There have already been food riots around the world. Food-supplying countries, from Ukraine to Argentina, have been limiting exports in an attempt to protect domestic consumers, leading to angry protests from farmers — and making things even worse in countries that need to import food.
How did this happen? The answer is a combination of long-term trends, bad luck — and bad policy.
Let’s start with the things that aren’t anyone’s fault.
First, there’s the march of the meat-eating Chinese — that is, the growing number of people in emerging economies who are, for the first time, rich enough to start eating like Westerners. Since it takes about 700 calories’ worth of animal feed to produce a 100-calorie piece of beef, this change in diet increases the overall demand for grains.
Second, there’s the price of oil. Modern farming is highly energy-intensive: a lot of B.T.U.’s go into producing fertilizer, running tractors and, not least, transporting farm products to consumers. With oil persistently above $100 per barrel, energy costs have become a major factor driving up agricultural costs.
High oil prices, by the way, also have a lot to do with the growth of China and other emerging economies. Directly and indirectly, these rising economic powers are competing with the rest of us for scarce resources, including oil and farmland, driving up prices for raw materials of all sorts.
Third, there has been a run of bad weather in key growing areas. In particular, Australia, normally the world’s second-largest wheat exporter, has been suffering from an epic drought.
O.K., I said that these factors behind the food crisis aren’t anyone’s fault, but that’s not quite true. The rise of China and other emerging economies is the main force driving oil prices, but the invasion of Iraq — which proponents promised would lead to cheap oil — has also reduced oil supplies below what they would have been otherwise.
And bad weather, especially the Australian drought, is probably related to climate change. So politicians and governments that have stood in the way of action on greenhouse gases bear some responsibility for food shortages.
Where the effects of bad policy are clearest, however, is in the rise of demon ethanol and other biofuels.
The subsidized conversion of crops into fuel was supposed to promote energy independence and help limit global warming. But this promise was, as Time magazine bluntly put it, a “scam.”
This is especially true of corn ethanol: even on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains. But it turns out that even seemingly “good” biofuel policies, like Brazil’s use of ethanol from sugar cane, accelerate the pace of climate change by promoting deforestation.
And meanwhile, land used to grow biofuel feedstock is land not available to grow food, so subsidies to biofuels are a major factor in the food crisis. You might put it this way: people are starving in Africa so that American politicians can court votes in farm states.
Oh, and in case you’re wondering: all the remaining presidential contenders are terrible on this issue.
One more thing: one reason the food crisis has gotten so severe, so fast, is that major players in the grain market grew complacent.
Governments and private grain dealers used to hold large inventories in normal times, just in case a bad harvest created a sudden shortage. Over the years, however, these precautionary inventories were allowed to shrink, mainly because everyone came to believe that countries suffering crop failures could always import the food they needed.
This left the world food balance highly vulnerable to a crisis affecting many countries at once — in much the same way that the marketing of complex financial securities, which was supposed to diversify away risk, left world financial markets highly vulnerable to a systemwide shock.
What should be done? The most immediate need is more aid to people in distress: the U.N.’s World Food Program put out a desperate appeal for more funds.
We also need a pushback against biofuels, which turn out to have been a terrible mistake.
But it’s not clear how much can be done. Cheap food, like cheap oil, may be a thing of the past.
