tag:blogger.com,1999:blog-52969597683482521942023-11-15T22:50:29.845-08:00Economics for Everybody! Anonymoushttp://www.blogger.com/profile/03827583069018807964noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-5296959768348252194.post-76195120191469885912018-04-06T11:55:00.002-07:002018-04-26T18:03:40.858-07:00A Three Variable Macro Model : Estimation<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-kerning: none;"><span style="font-size: large;">We take simulated data from the three variable macro model in the last <a href="http://econforeverybody.blogspot.in/2018/04/a-three-variable-macro-model-simulation.html" target="_blank">blogpost</a> and try to estimate the parameters using Structural Vector Auto-Regression (SVAR). </span></span></div>
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<li style="-webkit-text-stroke-color: rgb(0, 0, 0); -webkit-text-stroke-width: initial; font-family: "Times New Roman"; font-stretch: normal; line-height: normal; margin: 0px; text-align: justify;"><span style="font-size: large;"><span style="font-family: "helvetica"; font-stretch: normal; line-height: normal;"></span><span style="font-kerning: none;">Graph, Summary Statistics & Correlations</span></span></li>
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<span style="font-kerning: none;"><span style="font-size: large;">Inflation is the annual increase in general prices measured in percentages. Nominal interest rates are also measured in % per annum. Output gap is usually calculated using some statistical filter (thus it has very small values). Typically a positive output gap implies that the economy demands for goods and services over and above its capacity. The quarterly data looks like this: </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">Visually, the graph shows that inflation, interest rate and output gap are stationary. Stationarity means that the series is likely to have constant mean- Inflation always seems to return to 4%, interest rates to 6% and output gap to 0. Further, each series seems to have a constant variance - fluctuations do not get wider or narrower but remain even throughout.</span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">We now look at the correlation between variables and their lagged values: </span></span></div>
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<span style="font-size: large;"><span style="font-kerning: none;">Lets look closely at this matrix - each (i,j) entry in this matrix tells us the correlation of the i</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sup>th </sup></span><span style="font-kerning: none;">row entry with the j</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sup>th </sup></span><span style="font-kerning: none;">column entry. All variables are highly correlated with their own lags, indicative of strong persistence. <b>Inflation & interest rates go hand in hand, while output gap moves against both of these variables. </b></span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">We go to our central bank’s website and find that it’s constitution says that <i>“…our main endeavour will be to keep the general rise in consumer prices to 4% per annum…”. </i>This means that the central bank was targeting inflation to be at 4%. The summary statistics confirm that inflation has been largely kept at the target of 4%. Further, <b>nominal interest rates have been about 6% on average, which indicates that average real interest rates have been about 2%. </b>This should correspond to the “natural” level of real interest rates - consistent with zero output gap. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">B. Structural Vector Auto Regression</span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">Let us assume that the “structural” model is given by: </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">The deltas form the constants in the regression, the gammas form the contemporaneous effects and the rest of the coefficients tell us how the variables are connected via lags. The “structural” shocks are independent of each other also. We cannot estimate the VAR in this form, we bring it to its “reduced form”:- </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">After estimating the “reduced form” we need to go back to the “structural form”. This is the <b>identification problem. </b>If we compare equation (1) and (2) we see that: </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">“Reduced form” shocks are not structural shocks but rather mixtures of structural shocks. There are many possibilities - output gap, inflation & interest rates all can effect each other contemporaneously - 6 free parameters (gammas). </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;"><b>When we move from the estimated VAR parameters to the SVAR we need to restrict a few parameters to achieve identification. In this case we impose restrictions on at least 3 out of 6 of these contemporaneous effects. </b>One plausible restriction is the Keynesian idea that firms don’t like to change prices that often and so inflation cannot respond immediately to output & interest rates. And sluggish output too does not respond to changed interest rates. This also fits well with the Monetarist idea that monetary policy suffers from transmission lags. In contrast, we allow inflation to effect output & interest rates without lag and output to effect interest rates without lag. So we impose: </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">After this we deal with the <b>question of how many lags. </b>More lags means better fit but more parameters. The goal is to explain more with less. These criteria give us the lag order for which there is maximum goodness of fit with least parameters. The results say that a lag order of 1 makes most sense. </span></span></div>
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<span style="font-family: "times new roman"; font-size: large;">We estimate the SVAR:</span></div>
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<span style="font-kerning: none;"><span style="font-size: large;"> Overall the model fit is excellent. But all contemporaneous effects are insignificant at 5 % level. Some lagged variables are insignificant at 5 % level. All those that were insignificant are force to zero in the final estimation. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;"> The estimates change slightly, and one term that was earlier significant becomes insignificant (the effect of lagged output gap on interest rate becomes insignificant). <b>The final estimates of parameters</b> are given here: </span></span></div>
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<span style="font-size: large;"><span style="font-kerning: none;">Further we can also say that inflation has a unit root. This corresponds well to the idea that expectations are adaptive</span><span style="font-kerning: none;">. The final estimates also show that the central bank is indeed a pure inflation targeter. It does not seem to respond to output fluctuations. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">D. Impulse Response Function (IRFs)</span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">The next step is to generate Impulse Response Functions (IRFs). These IRF plots tell us what <i>structural</i> shocks do to the economic system: </span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXh78E6m4Nm94C3BWg5tGT1tKbQ_ifM2yG8FD0CKOYpcvwkdlcoHLqfwIY_k07ISVQ_0d3mQSiee7IDMLgYtp_qg6bplMQ-30IRPN3xUq6_EBen35MbKUhPWJjQTDIkbp6TDdyPnPTMVs/s1600/Screen+Shot+2018-04-07+at+12.09.56+AM.png" imageanchor="1" style="font-family: -webkit-standard; margin-left: 1em; margin-right: 1em; text-align: center; text-indent: 0px;"><img border="0" data-original-height="530" data-original-width="733" height="462" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXh78E6m4Nm94C3BWg5tGT1tKbQ_ifM2yG8FD0CKOYpcvwkdlcoHLqfwIY_k07ISVQ_0d3mQSiee7IDMLgYtp_qg6bplMQ-30IRPN3xUq6_EBen35MbKUhPWJjQTDIkbp6TDdyPnPTMVs/s640/Screen+Shot+2018-04-07+at+12.09.56+AM.png" width="640" /></a></div>
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<ol>
<li style="-webkit-text-stroke-color: rgb(0, 0, 0); -webkit-text-stroke-width: initial; font-family: "Times New Roman"; font-stretch: normal; line-height: normal; margin: 0px; text-align: justify;"><span style="font-size: large;"><span style="font-family: "helvetica"; font-stretch: normal; line-height: normal;"></span><span style="font-kerning: none;">Top row - positive ‘supply’ shock - purely to inflation: Pushes inflation above target immediately - the central bank responds a quarter later by raising interest rates. Rising inflation expectations, lowers real interest rates, which lead to a temporary positive output gap but that is quickly reversed because nominal interest rates have been raised. </span></span></li>
<li style="-webkit-text-stroke-color: rgb(0, 0, 0); -webkit-text-stroke-width: initial; font-family: "Times New Roman"; font-stretch: normal; line-height: normal; margin: 0px; text-align: justify;"><span style="font-size: large;"><span style="font-family: "helvetica"; font-stretch: normal; line-height: normal;"></span><span style="font-kerning: none;">Middle row- positive ‘policy’ shock - purely to interest rates: leads to an immediate hike in interest rates which is quickly reversed, but which causes demand to fall in the next period and reduce inflation after another quarter. Interest rates are reversed, and through demand, bring inflation back up to target</span></span></li>
<li style="-webkit-text-stroke-color: rgb(0, 0, 0); -webkit-text-stroke-width: initial; font-family: "Times New Roman"; font-stretch: normal; line-height: normal; margin: 0px; text-align: justify;"><span style="font-size: large;"><span style="font-family: "helvetica"; font-stretch: normal; line-height: normal;"></span><span style="font-kerning: none;">Third row - positive demand shock - purely to output: which raises demand immediately. This has effect on inflation in the next quarter, which rises. And then interest rates rise in the 3rd quarter, to correct the rise in inflation.</span></span></li>
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<span style="font-kerning: none;"><b><span style="font-size: large;">Verdict</span></b></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">So did we get it right? <b>Yes</b>. All the coefficients were accurately identified, in terms of both direction and magnitude. And the Impulse Response Functions approximated the simulations carried out in the previous blog post. Just compare - </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">The True Model : </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">While this exercise was done in a very controlled environment we have demonstrated that advanced estimation techniques like the SVAR do work.</span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">STATA <a href="https://drive.google.com/file/d/16XOOuLOOi3obVsknMZQU7sMxjw-Y8n1C/view?usp=sharing" target="_blank">codes</a> to replicate, keep this <a href="https://drive.google.com/file/d/1yje2a7hKnpo9zu4szvYdDHZd34a2UBe-/view?usp=sharing" target="_blank">irf</a> file in working directory. </span></span></div>
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Anonymoushttp://www.blogger.com/profile/03827583069018807964noreply@blogger.com0tag:blogger.com,1999:blog-5296959768348252194.post-6773885544049643972018-04-04T16:10:00.001-07:002018-04-06T11:55:49.781-07:00A Three Variable Macro Model : Simulation<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-kerning: none;"><span style="font-size: large;">This blogpost shall <i>simulate</i> a simple 3 variable macroeconomic model of the business cycle. The first variable is the annual increase in general prices or inflation. The second is the “output-gap” which measures the log-difference between actual aggregate production and potential/full capacity GDP. It can also be thought of as a measure of excess demand for goods and services at the aggregate level. The third variable is the interest rate, which is the price of loans and credit in the economy, for both households and firms. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">These three variables are contenders for the most important variables in macroeconomics and influence each other over the business cycle. By <i>simulation</i>, I mean that I will run a virtual experiment. The system will start at rest, and I will introduce different types of ‘shocks’ at various locations, and then observe the dynamic movements of these three variables due to these shocks.</span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">Since this is a purely imaginary economy, I make very simplifying assumptions and am in complete control over what is going on here. STATA Codes to replicate are at the end.</span></span></div>
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<span style="font-kerning: none;"><b><span style="font-size: large;">The Model</span></b></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">The following 5 equations fully describe the economy. One unit time in this tiny model economy is a quarter. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">Here (1) is the Aggregate Supply (AS) curve which says that inflation is a function of inflation expectations, output gap and supply shocks. Firms observing excess aggregate demand for goods and services will raise prices in the next quarter. Workers’ expectations of inflation influences how they negotiate for wages; higher the inflation expectations, the higher the wage negotiated. This leads firms to raise product prices. Supply shocks cover unpredicted changes in inflation due to oil prices movements, monsoon & climatic conditions in agriculture, etc. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">(2) is the dynamic Investment-Savings (IS) schedule that says that ex-ante real interest rates effect output gap with 1 quarter lag. Ex-ante real interest rates is defined in (3) and are nothing but interest rates in the same period minus inflation expectations for the next quarter; and measure the real price of credit & borrowing. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">If State Bank of India offers a home loan today, for an interest of 5%, a 10 lakh home will cost half a lakh in interest above the instalments for the principal. But if prices rise 5% <i>tomorrow </i>(and consequently your wage rises 5% with it), you will effectively end up paying zero interest for that loan! Therefore the ex-ante cost of credit depends on the interest rate <i>today</i> and the expectation of inflation <i>tomorrow</i>.</span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">When the expected cost of credit is low consumers will execute plans take a home or car loans, investors and industrialists will take loans to invest in businesses. Therefore spending on goods and services will exceed the optimal capacity of the economy. However, transmission from interest rate to demand takes a full quarter. </span></span></div>
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<span style="font-size: large;"><span style="font-kerning: none;">(2) Also says that at some price of credit (r*) the excess demand is zero. This is the “natural” rate of real interest rate, consistent with the economy’s capacity to produce. Apart from ex-ante real interest rates, we also have 𝜂</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sub>t </sub></span><span style="font-kerning: none;">which is the demand shock. This could consist of unpredictable changes in spending due to varying preferences for savings, changes in wealth caused by variations in asset prices, exchange rate fluctuations causing adjustments in exports & imports, abrupt movements in consumer and investor sentiment, etc. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">(4) is a Taylor rule, which describes how the central bank behaves. In our imaginary economy, the central bank’s sole mandate is to try and keep inflation at a target (𝜋*). It has control over the interest rate, because it is the banker to all commercial banks and at what rate it lends to them governs how they price credit. </span></span></div>
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<span style="font-size: large;"><span style="font-kerning: none;">When inflation is on target (𝜋</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sub>t</sub></span><span style="font-kerning: none;">=𝜋*), the central bank keeps interest rates at r* + 𝜋*, so that (given inflation expectations are also equal to target), the ex-ante real interest rate is at its natural levels - and thereby there is no excess demand in the economy. If inflation is below its target, then the central bank lowers the interest rate below r* + 𝜋*. This raises the real interest rate, and according to (2) will create excess demand for goods and services. Excess demand will then, according to (1), raise inflation. The central bank will keep interest rates low until inflation is back on target. </span></span></div>
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<span style="font-size: large;"><span style="font-kerning: none;">Apart from this, interest rates also changes due to policy shocks (v</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sub>t</sub></span><span style="font-kerning: none;">) which can arise due to frictions in transmission of monetary policy through commercial banks, or simply if the central bank decides to break from its rule of strict inflation targeting. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">(5) tells us that households, investors and workers always expect inflation to be what it was a quarter earlier. This is a very rudimentary rule of thumb, because obviously inflation will not be what it was a quarter earlier, because of changes in demand (whether caused by the central bank or by demand shocks) and supply shocks. Thus agents overlook the behaviour of firms and the central bank in determining inflation outcomes. But this is a simplifying assumption.</span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;"><b>In summary</b>: Monetary policy, is entirely concerned about inflation, effects aggregate demand through interest rates with one period lag and demand pressure generates inflation one period later. All three variables are interconnected, across time, to each other. And shocks intrinsic to each of them (demand, supply, policy) generate or power the dynamics in the economic system. </span></span></div>
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<span style="font-size: large;"><span style="font-kerning: none;">Furthermore, we can describe the economic system in a more concise manner by solving (1) - (5) in terms of (𝜋</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sub>t</sub></span><span style="font-kerning: none;">,R</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sub>t</sub></span><span style="font-kerning: none;">,y</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sub>t</sub></span><span style="font-kerning: none;">)' the state vector, and writing in Vector notation: </span></span></div>
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<span style="font-size: large;"><span style="font-kerning: none;">Stability of the system occurs when the state variables (𝜋</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sub>t</sub></span><span style="font-kerning: none;">,R</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sub>t</sub></span><span style="font-kerning: none;">,y</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sub>t</sub></span><span style="font-kerning: none;">) always tend to return to their steady-state values (𝜋*, r* + 𝜋*, 0) regardless of the magnitude of the shocks. This is assured only for certain ranges of parameter values (β, ϕ,θ), in all other cases the shocks whack the state variables permanently away from their steady state values. Stationarity occurs when the coefficient matrix of the lagged state vector is such - that it’s eigenvalues are within -1 and 1. We ensure this in the simulation. </span></span></div>
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<span style="font-kerning: none;"><b><span style="font-size: large;">Simulations: Multiple Scenarios</span></b></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">We set the following parameters to be the following for the baseline case. The initial values for state variables are given to be their steady state values.</span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">First I introduce a positive supply shock of unit magnitude at quarter 5, which falls by 0.25 units every consecutive quarter till it reaches zero. What happens to the economy? The economy begins at steady state. Then in quarter 5, the supply impulse hits inflation, which rises above target. This has two effects in quarter 6. First, inflation expectations for quarter 6 rise. So anticipated real interest rate in quarter 6 falls. Thus demand rises in quarter 6, albeit temporarily. Second, the central bank responds to inflation overshooting target in quarter 5, by raising interest rates in quarter 6. This reverses the temporary increase in demand and causes a contraction in demand. This contraction in demand reduces inflation and brings it back to target levels. A negative supply shock, would reduce inflation first, then interest rates would fall after which demand would rise - restoring inflation back up to target levels. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">Next I introduce a positive demand shock at quarter 5, which also dies out like the supply impulse. In this situation, it is demand which rises first in quarter 5 (a boom). This is followed by rising inflation in quarter 6, which has two effects - one, it further bolsters demand by raising inflation expectations and lowering real interest rates and two, it forces the central bank to swing into action in quarter 7. Interest rates thus respond last in this schemata, but are pivotal in bringing the economy back to target. A negative demand would do the reverse: lower demand, then lower inflation, which would have the central bank lower rates, which would reverse the recession and deflation. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">A similar positive policy shock is generated at quarter 5. So the central bank raises rates from in quarter 5, which it only gradually reduces. This reduces demand in quarter 6, which in turn, reduces inflation at quarter 7. Now the central bank must quickly reduce interest rates to bring inflation back up to target.</span></span></div>
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<span style="font-kerning: none;"><b><span style="font-size: large;">B. A Dovish Central Bank</span></b></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">The parameter ϕ tells us how hard the central bank reacts to inflation deviations from target, therefore it is a measure of how dovish or hawkish the central bank is. We reduce the value of ϕ to 1.2 and re-simulate the impulses. The key differences (a) the state variables, once disturbed, take much longer to get back to long run equilibrium. (b) the dovish central bank, by responding weakly, allows inflation to climb well above target.</span></span></div>
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<span style="font-kerning: none;"><b><span style="font-size: large;">C. Disinflation: Gradualist or Cold-Turkey</span></b></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">Here we simulate two different strategies to bring inflation to a lower target level. The goal of disinflation is to bring inflation down from 4% to 2%. The first approach is mild (call it “Gradualist”) while the other is aggressive (call it “Cold-Turkey”). </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;"> The Gradualist approach seeks to first reduce the target to 3% from quarter 5 onwards and then further reduce the target to 2% from quarter 25. I also keep the the central bank dovish by setting ϕ = 1.2. Cold-Turkey is when a hawkish central banker goes for immediate dis-inflation. In our simulation I re-set ϕ = 1.5 and have the central bank immediately begins to target inflation at 2% from quarter 5 onwards. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">What are the main differences? Gradualism takes a lot of time. Interest rates are not raised very high. It also does not push aggregate demand far below potential. In contrast, Cold-Turkey goes for heavy rate hikes that cause recession. This recession is used to disinflation the economy. Due to adaptive expectations, Cold-Turkey ends up creating serious output loss but achieves the task quicker than Gradualism. </span></span></div>
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<span style="font-kerning: none;"><b><span style="font-size: large;">D. What a Dynamic Stochastic Economic System can look like</span></b></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">I re-simulate, bombarding the economy with random disturbances. The baseline parameters have been taken. The supply, demand and policy shocks that I have given are independent, identical and normally distributed with zero mean and certain variance. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;">The resulting dynamics are complex and fascinating - shocks push the system away from its equilibrium but causal forces keep the system stable. </span></span></div>
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<span style="font-kerning: none;"><span style="font-size: large;"><b>Disclaimer</b> - This is a purely imaginary economy. It borrows plot elements from the real world and plays out like a Bollywood movie. Any reference to any person or phenomenon, living or dead, is purely accidental and solely expositional! </span></span></div>
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<span style="font-kerning: none;"><b><span style="font-size: large;">Why Simulate? </span></b></span></div>
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<li style="-webkit-text-stroke-color: rgb(0, 0, 0); -webkit-text-stroke-width: initial; font-family: "Times New Roman"; font-stretch: normal; line-height: normal; margin: 0px; text-align: justify;"><span style="font-size: large;"><span style="font-family: "helvetica"; font-stretch: normal; line-height: normal;"></span><span style="font-kerning: none;">it is expositional, gives clarity and visualisation</span></span></li>
<li style="-webkit-text-stroke-color: rgb(0, 0, 0); -webkit-text-stroke-width: initial; font-family: "Times New Roman"; font-stretch: normal; line-height: normal; margin: 0px; text-align: justify;"><span style="font-size: large;"><span style="font-family: "helvetica"; font-stretch: normal; line-height: normal;"></span><span style="font-kerning: none;">tells you what effect each parameter or shock has on the systems dynamics</span></span></li>
<li style="-webkit-text-stroke-color: rgb(0, 0, 0); -webkit-text-stroke-width: initial; font-family: "Times New Roman"; font-stretch: normal; line-height: normal; margin: 0px; text-align: justify;"><span style="font-size: large;"><span style="font-family: "helvetica"; font-stretch: normal; line-height: normal;"></span><span style="font-kerning: none;">since we built it, we can do whatever we like - we are the omnipresent and omniscient gods - we can explore ideas! </span></span></li>
<li style="-webkit-text-stroke-color: rgb(0, 0, 0); -webkit-text-stroke-width: initial; font-family: "Times New Roman"; font-stretch: normal; line-height: normal; margin: 0px; text-align: justify;"><span style="font-size: large;"><span style="font-family: "helvetica"; font-stretch: normal; line-height: normal;"></span><span style="font-kerning: none;">is fun</span></span></li>
<li style="-webkit-text-stroke-color: rgb(0, 0, 0); -webkit-text-stroke-width: initial; font-family: "Times New Roman"; font-stretch: normal; line-height: normal; margin: 0px; text-align: justify;"><span style="font-size: large;"><span style="font-family: "helvetica"; font-stretch: normal; line-height: normal;"></span><span style="font-kerning: none;">helps test the power of estimation techniques - if estimation techniques are unable to figure out the parameters that were used to generate simulated data then they are probably not very useful against real world data</span></span></li>
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<span style="-webkit-font-kerning: none;"><span style="font-size: large;">The next blogpost will cover (e) where we will using only this very simulated data, and see if empirical techniques called the Structural Vector Auto-Regression (SVAR) can get us back to square one i.e where we started from! </span></span></div>
<div style="-webkit-text-stroke-color: rgb(0, 0, 0); -webkit-text-stroke-width: initial; font-family: "Times New Roman"; font-stretch: normal; line-height: normal; text-align: justify; text-indent: 14.2px;">
<span style="-webkit-font-kerning: none;"><span style="font-size: large;"><br /></span></span></div>
<div style="-webkit-text-stroke-color: rgb(0, 0, 0); -webkit-text-stroke-width: initial; font-family: "Times New Roman"; font-stretch: normal; line-height: normal; text-align: justify; text-indent: 14.2px;">
<span style="-webkit-font-kerning: none;"><span style="font-size: large;"><a href="https://drive.google.com/file/d/1FnLMDw3gfscT7XOgLhYP00aNHtN8KEgU/view?usp=sharing" target="_blank">Stata Commands to Replicate</a></span></span></div>
</div>
Anonymoushttp://www.blogger.com/profile/03827583069018807964noreply@blogger.com0tag:blogger.com,1999:blog-5296959768348252194.post-37942551502972109252013-08-16T12:38:00.000-07:002013-08-19T07:39:35.805-07:00What is Economic Geography? <table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://www.worldbank.org/content/dam/Worldbank/Feature%20Story/Egypt_Reshaping_Economy_Report.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="http://www.worldbank.org/content/dam/Worldbank/Feature%20Story/Egypt_Reshaping_Economy_Report.jpg" height="422" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">The Nile</td></tr>
</tbody></table>
<h3 style="text-align: center;">
<o:p><span style="font-family: Trebuchet MS, sans-serif; font-size: large;"> </span><span style="font-family: Arial, Helvetica, sans-serif; font-size: x-large;">Land and Man</span></o:p></h3>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Certain types of landforms are beneficial to
society in many ways. For example, how a river can <span style="mso-spacerun: yes;"> </span>help the economy depends on its stage of
development. A young river is usually not safe for transport or navigation but <span style="mso-spacerun: yes;"> </span>has great potential for generating power. A
well-situated dam or hydraulic power pipe can greatly help the economy of that
region.</span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span lang="EN-IN" style="background: white; font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Hydropower is used for irrigation and for the operation of various
mechanical devices, such as watermills, sawmills, textile mills, dock cranes,
domestic lifts, powerhouses and in paint making. </span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Similarly, a mature river does not have the force
to generate electricity without incurring heavy cost for such energy, but does
have the speed to allow navigation and transport. It also enables agricultural
activities by making the soil more fertile. This allows for trade and commerce
that greatly expands market activities and incomes together. Without the river
Nile, the Egyptian civilization could not have flourished. The Nile brought
vegetation, transport and agriculture upon which the Egyptians built their
civilization. The Indus Valley Civilization was founded on the banks of many rivers
- Jhelum, Chenab, Ravi, Satluj and Beas. The Chinese Yellow River Valley
Civilization (4000BC) also grew around the Huange He river, which enabled
agriculture.</span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<tr><td style="text-align: center;"><a href="http://www.socialstudiesforkids.com/graphics/huanghebw.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="http://www.socialstudiesforkids.com/graphics/huanghebw.jpg" height="250" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Development along the Yellow River</td></tr>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Temperature changes are also an important factor
that influences economic activity. There is a vast amount of literature that
claims that hot areas have lesser economic activity and development. A recent
study claims that in the poor countries, about 1 degree rise in temperature on
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Even in today’s world, the Indian economy is
sometimes called the ‘Monsoon Economy’ since it depends heavily on the seasonal
winds that blow from the Indian Ocean and the Arabian Sea that bring heavy rains.
This heavy rain in June and September has huge effect on the agriculture of
India. The impact is such that if the monsoon is delayed by over a week then
the Indian GDP growth slows down. Every year the country hopes for timely monsoons
and a favourable weather.</span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<tr><td style="text-align: center;"><a href="http://images.indiatvnews.com/mainnational/IndiaTva0bae4_FROG.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span style="font-size: large;"><img border="0" src="http://images.indiatvnews.com/mainnational/IndiaTva0bae4_FROG.jpg" height="260" width="400" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: large;">Indian kids pray for rain</span></td></tr>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The rock formation of the land is also has a major
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">To try and understand how distances have played a
large part in our evolution, we can take a look at the industrial revolution.
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innovation and production. This was characterized by two prominent
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">First, the incredible rise in average productivity
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western world increased <i>forty times</i> in just a hundred years.
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Second, the cost of transportation fell to almost a
tenth of what it was. The invention of the steam engine and the aeroplane
brought places and people much closer. The invention of the telegram made
communication a thousand times faster than before. The area where goods were
produced did not have to be close to people's homes anymore. Factories and
industries came up further from the city where production multiplied rapidly.
This tells us that transportation is extremely important for economic
activity. </span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<a href="http://www.industrialrevolutionresearch.com/images/train.jpg" imageanchor="1"><span style="font-size: large;"><img border="0" src="http://www.industrialrevolutionresearch.com/images/train.jpg" height="245" width="400" /></span></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif; font-size: x-large;">Emergence of Cities</span></h2>
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Economists use microeconomic tools to help understand crime, education, finance
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on how scarce resources are allocated as per locations in cities.</span><!--EndFragment-->
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<div class="separator" style="clear: both; text-align: center;">
<a href="http://static.persquaremile.com/wp-content/uploads/2012/02/von-Thunen-model-of-land-use.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-size: large;"><img border="0" src="http://static.persquaremile.com/wp-content/uploads/2012/02/von-Thunen-model-of-land-use.png" height="252" width="400" /></span></a></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">MONOCENTRIC CITIES</span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Imagine a circular city in a featureless plain. All
employment is in a central business district (CBD), which we take to be a point
at the city’s centre. All the workers live around the CBD and go to work every
day. The further they live from the city, the costlier it will be to travel to
work every day. However, the further they live from the city, the cheaper it is
to get a place to stay. Each worker also purchases other goods and services
that are important to them. In effect, the income the worker receives from the
CBD is used in three ways,</span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">· </span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Rent for housing services</span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">· </span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Transport to the CBD and back</span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">· </span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Purchase of other goods &
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">This model claims that workers want to try and
obtain as much housing services and other goods & services. And if the
income obtained from the CBD is fixed, the worker must try and choose a home
that is far enough to be cheap but at the same time close enough to the CBD to
have low transport costs. The question that this model answers is ‘<i>how far
from the CBD does the worker choose to stay?</i>’</span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqmYQp3dqjsmFWV_wPNFV1hkRWmAkv4rwVp8PNQhkgI3VwLklcAz_zqNZboBYQl7lrgbrRYrrlbvVCfg_FUdEi-B3UUk0MO8CfD6atjz1VQYZtpPdYnKyke05ctHHlVa0iqXhJYe7TGCA/s1600/Screen+Shot+2013-08-17+at+12.24.09+AM.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-size: large;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqmYQp3dqjsmFWV_wPNFV1hkRWmAkv4rwVp8PNQhkgI3VwLklcAz_zqNZboBYQl7lrgbrRYrrlbvVCfg_FUdEi-B3UUk0MO8CfD6atjz1VQYZtpPdYnKyke05ctHHlVa0iqXhJYe7TGCA/s1600/Screen+Shot+2013-08-17+at+12.24.09+AM.png" height="272" width="400" /></span></a></div>
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<br /></div>
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<o:p><span style="font-family: Arial, Helvetica, sans-serif; font-size: large;"><br /></span></o:p></div>
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<div class="MsoNormal" style="text-align: justify;">
<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The model also proceeds to answering the following
questions,</span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">does
the worker’s choice of residence change if: -</span></i><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<div class="MsoNormal" style="text-align: justify;">
<i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">1)</span></i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The housing rents per unit distance from the CBD <span style="mso-spacerun: yes;"> </span>change?</span></i><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">2)</span></i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The income obtained from the CBD changes?</span></i><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">3)</span></i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">If the costs of other goods and services change?</span></i><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">4)</span></i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">If there are frequent traffic jams in the city?</span></i><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">5)</span></i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">If the travel costs change?</span></i><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">This city goes on to become even more complicated
and tries to provide an explanation as to why cities expand and come up in the
first place. Monocentric city models gave way to Polycentric city models.
Cities are very complex things and we still have a lot to understand about them. </span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<a href="http://static.persquaremile.com/wp-content/uploads/2012/02/the-city-as-an-egg.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-size: large;"><img border="0" src="http://static.persquaremile.com/wp-content/uploads/2012/02/the-city-as-an-egg.jpg" height="272" width="640" /></span></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif; font-size: x-large;">Hotelling's Beach</span></h3>
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<a href="http://wodumedia.com/wp-content/uploads/2012/11/No-its-not-Bournemouth-beach-%E2%80%93-not-with-the-weather-weve-been-having-lately-%E2%80%93-but-a-crowded-scene-at-a-beach-resort-in-Qingdao-China-where-holidaymakers-flocked-to-spend-a-summer-weekend.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-size: large;"><img border="0" src="http://wodumedia.com/wp-content/uploads/2012/11/No-its-not-Bournemouth-beach-%E2%80%93-not-with-the-weather-weve-been-having-lately-%E2%80%93-but-a-crowded-scene-at-a-beach-resort-in-Qingdao-China-where-holidaymakers-flocked-to-spend-a-summer-weekend.jpg" height="424" width="640" /></span></a></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">This theory tries to understand how firms set up
shops. It was developed under Harold Hotelling and tries to understand how the
market arises. Sellers try to position themselves as far away from other
sellers and as close to the buyers. We can see interesting patterns and designs
in the way sellers behave. The theory incorporates a lot of ideas from Game
Theory since the sellers use competitive strategies to try and maximize profit.
We take the help of a simple illustration to explain Spatial Competition.</span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Hotelling’s Beach: Imagine a beautiful day at a
beach. One can observe many people sitting in the sand, just relaxing. It’s a
hot day and everyone really wants to have an ice cream. But, since the sand is
really hot, no one really wants to walk a lot. They'd all prefer if
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Along comes an ice cream seller and since she is
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right in the centre, where people have less discomfort in getting up and
reaching for the ice cream. This is the place where she can maximise her
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Now the interesting change occurs when another
seller joins her. Now in order to maximize profits they must adjust their
locations so that they reach out to as many people as they can, within the
competitive environment. The best possible scenario is when they divide the
market share equally and adjust their locations to cater to two groups of
consumers.</span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJPPlMYrNMXH1eJ8cOruaecbre6Yu0YNi_ONM_hFDKJjSEDnoEVwQSUqOjVa0aW3ZSDtlpRE8HbmhgjK0uOeMn0u6DbkOENmk128p8ADmJvTBPJrvljqWhEkR_jKaXpuCTzOi2wHD_Q4o/s1600/Screen+Shot+2013-08-17+at+12.38.40+AM.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-size: large;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJPPlMYrNMXH1eJ8cOruaecbre6Yu0YNi_ONM_hFDKJjSEDnoEVwQSUqOjVa0aW3ZSDtlpRE8HbmhgjK0uOeMn0u6DbkOENmk128p8ADmJvTBPJrvljqWhEkR_jKaXpuCTzOi2wHD_Q4o/s1600/Screen+Shot+2013-08-17+at+12.38.40+AM.png" height="151" width="400" /></span></a></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The theory goes on to explain what happens in
situation when there are more and more sellers in a larger region. This theory
is very evident in real life, especially in India where small shops are in
plenty. From the locations of</span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">panipuri</span></i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">stalls to</span><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">paan</span></i><i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span></i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">shops, we observe spatial
competition.</span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><br /></span></div>
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<b><span lang="EN-IN" style="font-family: Arial; font-size: 24.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The Economic Space</span></b><b><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></b></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">In most contemporary economic thought, geographical
distances have been largely ignored. Transport costs have not been given much
weightage and most economic theories consider transport costs to be zero. When
the classical economists studied the economy, they considered the distances
between cities, countries and people themselves to be irreverent. This is quite
clear when the famous economist David Riccardo constructed his theory of
‘comparative advantage’ by first assuming that there was <i>perfect
mobility</i> within countries. In a perfectly mobile environment, factors
of production like labor and capital can move freely without difficulty. Most
of the economists like Smith and Riccardo grew up in the British Empire. And
since Britain had already established trade routes all over the world, they and
their followers tended to ignore transport costs over the sea. Hence, most
classical economic theories consider the world to be “upon the tip of a needle”
as they all do not pay attention to space. Only a handful of mainstream
economic theories such as Hotelling's Competition and Urban Economics, take the
entire distances into consideration. </span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<br /></div>
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The only spaces that economists regarded
well were the <i>national borders. </i>Apart from this minor division
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and terrain. And as once Samuelson said,</span><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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<br /></div>
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<i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">‘Spatial problems have been so
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The concept of the economic space
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<i><span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">‘A good at a certain location and
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<span lang="EN-IN" style="font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">A good economic theory must
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<b><span lang="EN-IN" style="font-family: Arial; font-size: 24.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Insights </span></b><b><span lang="EN-IN" style="font-family: "Times New Roman"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></b></div>
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<span lang="EN-IN" style="color: black; font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Although Economic Geography is still
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<tr><td style="text-align: center;"><a href="http://liveintheplanetgreen.files.wordpress.com/2011/06/dhaka-traffic-jam.jpg" imageanchor="1" style="clear: right; display: inline !important; font-family: Arial, Helvetica, sans-serif; margin-bottom: 1em; margin-left: auto; margin-right: auto; text-align: center;"><span style="font-size: large;"><img border="0" src="http://liveintheplanetgreen.files.wordpress.com/2011/06/dhaka-traffic-jam.jpg" height="200" width="137" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: x-small;">traffic jam</span></td></tr>
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<li><span style="font-size: large;"><span style="font-family: Arial, Helvetica, sans-serif;">Transportation Costs play a major role even in today's fast moving world. Globalisation </span><span style="font-family: Arial, Helvetica, sans-serif;">has brought in a feeling that the world has become flat, but the truth is different. Physically, culturally and economically the world is still round. Distances and locations play a very important role in the modern economy.</span></span></li>
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<li><span style="font-family: Arial, Helvetica, sans-serif; font-size: large;">Factor Mobility or how easily labor and capital are moved to a desired location, is very important for the economy. Not only international mobility, but also national mobility matters. Economic Geography tells us that there is a growing divide between some people and others. This disparity of national mobility could pose a problem.</span></li>
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<ul><a href="http://www.scemagazine.com/wp-content/uploads/2013/06/international-trade.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><span style="font-size: large;"><img border="0" src="http://www.scemagazine.com/wp-content/uploads/2013/06/international-trade.jpg" height="131" width="200" /></span></a>
<li><span style="font-size: large;"><span style="font-family: Arial, Helvetica, sans-serif;">International Trade is good for everyone. Economic Geography helps confirm the belief that trade beyond barriers is good for both parties. It helps enhance the diversity and variety of goods and services available to us. </span></span></li>
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<span lang="EN-IN" style="color: black; font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Geography is one of the most
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one’s attention. It’s a very beautiful subject that made me imagine a lot.
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<span lang="EN-IN" style="color: black; font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">It is a pleasure to incorporate the
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activity without understanding the economic space it exists in. It is a
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<span lang="EN-IN" style="color: black; font-family: Arial; font-size: 18.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Geography is for everyone!</span><span lang="EN-IN" style="color: black; font-family: "Times New Roman"; font-size: 13.5pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p></o:p></span></div>
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Anonymoushttp://www.blogger.com/profile/03827583069018807964noreply@blogger.com0tag:blogger.com,1999:blog-5296959768348252194.post-43882510358935491552013-07-18T10:52:00.001-07:002013-07-21T10:01:50.126-07:00Games Worth Playing!<div dir="ltr" style="text-align: left;" trbidi="on">
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<a href="http://upload.wikimedia.org/wikipedia/commons/8/80/Game_of_go_-_placing_a_white_stone.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="516" src="http://upload.wikimedia.org/wikipedia/commons/8/80/Game_of_go_-_placing_a_white_stone.jpg" width="640" /></a></div>
What were the games that you played as a child? I used to play monopoly and chess! They were a lot of fun! Snakes and ladders, Ludo, Hide and Seek, <i>chor police </i>(thief-police) were just some of the games that Indian children grow up with. Every culture has its own games to entertain its children with. However, as we grow up we don't have too much time for these fun games anymore. So what kind of games do adults and large organizations play? The interesting thing is that as we grow up so do the games. They become rewarding to the winners and punishing to the losers. Firms and corporations play these games all the time but they don’t play for fun, they play to win. Lets start with a linear manner of thinking.<br />
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<i style="mso-bidi-font-style: normal;">What is a Game?<o:p></o:p></i></div>
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A game is any interaction between two entities (people, firms, micro-organisms) that have the power to make decisions (eat or sleep/produce or not produce/multiply or not multiply etc).<o:p></o:p></div>
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To understand every game we must ask four essential questions</div>
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<li><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="text-indent: -18pt;">Who are the players?</span></li>
<li><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="text-indent: -18pt;">What are the strategies?</span></li>
<li><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="text-indent: -18pt;">What is the information available to each?</span></li>
<li><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="text-indent: -18pt;">What are the payoffs for each outcome?</span></li>
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<i style="mso-bidi-font-style: normal;">Who are the players?<o:p></o:p></i></div>
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In the big world, the players are firms, households, countries, people’s groups and multi-national corporations. These players are constantly competing with each other to try and get a bigger slice of the pie. The concept of the player comes with ‘individual decision making’. If an entity can take its own decisions then it is ready to be a player in the many games that exist in the world.<o:p></o:p><br />
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<a href="http://www.trupphr.com/wp/wp-content/uploads/2012/09/strategy.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="133" src="http://www.trupphr.com/wp/wp-content/uploads/2012/09/strategy.jpg" width="200" /></a></div>
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<i style="mso-bidi-font-style: normal;">What is a strategy?<o:p></o:p></i></div>
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A strategy is a part of the large number of decisions that an individual can take. Samsung’s choice of pricing for its Galaxy S4 is one of the many possible strategies that it could have taken. A family’s decision to go for a movie on Saturday is one of its many strategies; they could have gone out for dinner or stayed at home too. Put simply, a strategy is an option, a plan and a possible choice.<o:p></o:p></div>
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<i style="mso-bidi-font-style: normal;">What is an outcome?<o:p></o:p></i></div>
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An outcome is a result. When you checkmate my king, the result is that you have won. When Neymar scores a goal in the last seconds in a football match and helps Brazil win the match, he has changed the outcome. Outcomes emerge from conflicting or co-operating strategies. Every player makes a move, either all together or one after another, to produce a result.<o:p></o:p></div>
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<i style="mso-bidi-font-style: normal;">What is a payoff?<o:p></o:p></i></div>
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Every outcome has different payoff for each player. If you have won the chess game then I will be sad and you will be happy. So the payoff for me is less than the payoff for you. If I had won (another outcome) then the payoff for me would be greater than your payoff. Similarly, when Brazil wins the match the payoff for the Brazil team is higher than the payoff for the losing team; Brazilian players are very happy!<o:p></o:p></div>
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<a href="http://www.healththeorganicway.com/wp-content/uploads/2013/04/Information.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="200" src="http://www.healththeorganicway.com/wp-content/uploads/2013/04/Information.jpg" width="181" /></a></div>
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<i style="mso-bidi-font-style: normal;">What is the information available?<o:p></o:p></i></div>
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In every game, there is some amount of information available to the other players. Sometimes when games are simpler, such as Hide and Seek, all the players know each other’s payoffs and possible set of actions. In this case, there is symmetry and <i style="mso-bidi-font-style: normal;">common knowledge. </i>However, in some other games there is a lot of asymmetry in the amount of information available. Some countries know more about other countries. Some firms hide some valuable information from others. Every game has a distribution of information that may or may not be equitable.<o:p></o:p><br />
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<i style="mso-bidi-font-style: normal;">What is Game Theory?<o:p></o:p></i></div>
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Game Theory is a mathematical theory that developed in the 1950s and tries to find solutions and reasons for certain solutions to games. These games can be economic, biological, logical or even political. What must be remembered is that game theory uses mathematical tools and not economic, political or biological tools to solve games.<br />
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Zero Sum Games</span></h3>
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Imagine a game between two players involving a cake. The payoff to each player depends on the amount of cake they eat. This means that if a player eats more cake, her payoff will naturally be more. Now the players divide the cake equally or unequally but no piece of the cake goes uneaten. If so, then how does one player try to improve her payoff? By getting more cake, which means that the other player must give up some cake. One’s loss is another’s gain. This is a <i style="mso-bidi-font-style: normal;">pareto optimal </i>because we cannot redistribute the cake seeking to improve one person’s gain without harming the other. This kind of situation is an optimal because the combined payoff to the two players cannot be improved. This optimal was named after Vilfredo Pareto who studied it.</div>
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Game 1: Cake Cutting</h4>
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<b style="mso-bidi-font-weight: normal;">OUTCOME 1</b></h4>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrqQ6cbX5k0D654eYoKG3C-MbZVKTlfrQIbhgGv46J6N4oh5QNvEF9VtKs8PqI9_6LYM9NcHHj5LoUJmN9m8Xzccc3XuTd6rG1ixQCyEfSMyKLqp6vJeQglg6MPAGS454f-pk7CcsXPM8/s1600/Screen+Shot+2013-07-18+at+10.24.12+PM.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrqQ6cbX5k0D654eYoKG3C-MbZVKTlfrQIbhgGv46J6N4oh5QNvEF9VtKs8PqI9_6LYM9NcHHj5LoUJmN9m8Xzccc3XuTd6rG1ixQCyEfSMyKLqp6vJeQglg6MPAGS454f-pk7CcsXPM8/s1600/Screen+Shot+2013-07-18+at+10.24.12+PM.png" width="400" /></a></div>
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Payoff to me: 300 Grams of Cake (Yummy!)<o:p></o:p></div>
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Payoff to you: 100 Grams of Cake<o:p></o:p></div>
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Total Payoff to us: 300+100=400 Grams of Cake<o:p></o:p></div>
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<b style="mso-bidi-font-weight: normal;">OUTCOME 2<o:p></o:p></b></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPUx5KdfW6wXwNY3TACgQQM_ZDCHPKHoCEsFcRhoY2rPNZkfr1iUkdEFTPCWPJRGW4xhr7TDh9A6XULi0iZ1F4SJIghan05Pe3pTIoV-8pU2ADz9lN82usIjNB2WzA13gR0ODB4DYLPx0/s1600/Screen+Shot+2013-07-18+at+10.24.27+PM.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="230" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPUx5KdfW6wXwNY3TACgQQM_ZDCHPKHoCEsFcRhoY2rPNZkfr1iUkdEFTPCWPJRGW4xhr7TDh9A6XULi0iZ1F4SJIghan05Pe3pTIoV-8pU2ADz9lN82usIjNB2WzA13gR0ODB4DYLPx0/s1600/Screen+Shot+2013-07-18+at+10.24.27+PM.png" width="400" /></a></div>
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Payoff to ME: 200 Grams of Cake<o:p></o:p></div>
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Payoff to YOU:200 Grams of Cake<o:p></o:p></div>
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Total Payoff : 200+200=400 Grams of Cake<o:p></o:p><br />
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<b style="mso-bidi-font-weight: normal;">OUTCOME 3<o:p></o:p></b></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRl1bfnWskZPGLPgww2Ra2eQEI9yP01G9ITefAnFcy9JuzMtpApFsqMqycNbZT2ZCs9x4UXig3YmjrOQ1oJaZGU4rz6JJiXcXKYEygdRMcaZt0hIGlmypbRpw8L3ppS3DMVNJvTK-0Kb4/s1600/Screen+Shot+2013-07-18+at+10.24.40+PM.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="230" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRl1bfnWskZPGLPgww2Ra2eQEI9yP01G9ITefAnFcy9JuzMtpApFsqMqycNbZT2ZCs9x4UXig3YmjrOQ1oJaZGU4rz6JJiXcXKYEygdRMcaZt0hIGlmypbRpw8L3ppS3DMVNJvTK-0Kb4/s1600/Screen+Shot+2013-07-18+at+10.24.40+PM.png" width="400" /></a></div>
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Payoff to ME: 50 Grams of Cake<o:p></o:p></div>
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Payoff to YOU: 350 Grams of Cake<o:p></o:p></div>
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Total Payoff: 400 Grams of Cake<o:p></o:p></div>
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<b style="mso-bidi-font-weight: normal;">Pareto Optimal: </b>All the outcomes 1,2, 3 are pareto optimal since the total payoff to both of us is the same for each outcome (400 grams). This is a zero sum game because what one player loses the other gains & what one-player gains the other loses. There is a net gain of zero and a net loss of zero.<o:p></o:p></div>
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Examples of Zero Sum Games : Poker, Matching Pennies, Go, Chess, Monopoly<o:p></o:p></div>
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(Try to prove why)<br />
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<span style="font-size: x-large; font-weight: normal;">
Non-Zero Sum Games</span></h3>
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Zero Sum games are a bit boring to economists. They represent Win-Lose type of games, whereas economists are looking for Win-Win type of games. This is why there is a lot of fascination with Non Zero Sum Games. These type of games have some outcomes that are better than the other outcomes. This is where Game Theory tries to find a <i style="mso-bidi-font-style: normal;">solution. </i>There can be many kinds of solutions depending upon who is using Game Theory. For example if a firm is using game theory, the solution it wants to find will be one that allows it to maximize profits, but if a government wants to use game theory to provide welfare for its people, the solution it is looking for is a <i style="mso-bidi-font-style: normal;">pareto optimal</i> that is equitable. On other occasions academicians want to just explain why games end up in the way they end up, so the solution that they are looking for involves finding an outcome that is a sort of equilibrium.<br />
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<h3>
Solution 1: Dominance</h3>
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A strategy is considered dominant if it is better than <i style="mso-bidi-font-style: normal;">all </i>other strategies available to a player <i style="mso-bidi-font-style: normal;">for any strategy played by other players.</i> Which actually means that if a strategy is dominant then all possible payoffs from playing that strategy is greater than the payoff from any other strategy. Here an example will explain best.<o:p></o:p></div>
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Game 2: Newspaper Wars</h4>
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<a href="http://kehilalinks.jewishgen.org/lyakhovichi/images/artDerFrayndYudaPen.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="253" src="http://kehilalinks.jewishgen.org/lyakhovichi/images/artDerFrayndYudaPen.jpg" width="400" /></a></div>
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Imagine two newspapers competing with each other- News of the World (NOW) and The Guardian. Lets assume that there are no other players but these two. There are only two events that could help these two newspapers win the market share. Either they write a story about a recent survey about AIDS that has broken out in a nearby town, or they write about the death of a major pop singer Justin. Each player has two strategies, either write about AIDS or about Justin. However, as we can all see, the AIDS story is much more significant than the other story. So if one of them writes about Justin when the other writes about AIDS, it will lose the market share. Here are the payoffs given in a <i style="mso-bidi-font-style: normal;">di-matrix.<o:p></o:p></i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEha1qkqWn72OeinirxwVdb2noM83EbkzMTrp20KTQ5swE49D3EbdBYE-k2Ct3I8-VoWnHQcrPiPAcElCkBsi42XfWp9NzX0ZB_mStO8pziERSY8G7siue6sehkfNYsbxdeiuV3XbT8KXro/s1600/Screen+Shot+2013-07-18+at+10.24.52+PM.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="114" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEha1qkqWn72OeinirxwVdb2noM83EbkzMTrp20KTQ5swE49D3EbdBYE-k2Ct3I8-VoWnHQcrPiPAcElCkBsi42XfWp9NzX0ZB_mStO8pziERSY8G7siue6sehkfNYsbxdeiuV3XbT8KXro/s1600/Screen+Shot+2013-07-18+at+10.24.52+PM.png" width="320" /></a></div>
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The payoffs are mentioned within the boxes. There are two numbers in each box. Within each box, the number to the left is the payoff for NOW and the number to the right is the payoff for The Guardian.<o:p></o:p></div>
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There are 4 outcomes to this game.<o:p></o:p></div>
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<li><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span></span>Both write about the AIDS scare, and receive about 50 Million each in profit.</li>
<li><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span></span>Both write about Justin, and receive about 10 Million each in profit.</li>
<li><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span></span>The Guardian writes about AIDS, receives about 30 Million in profit while the NOW writes about Justin and receives about 20 Million in profit.</li>
<li><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span></span>The NOW writes about AIDS, receives about 30 Million in profit, while The Guardian receive only 20 Million for writing about Justin.</li>
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What happens here is that writing about AIDS is better than writing about Justin, whatever the other newspaper may choose to do so. For every outcome it is better for any newspaper to write about AIDS because the payoff is <b style="mso-bidi-font-weight: normal;">always </b>higher. Hence, writing about AIDS is a dominant strategy. In this game if you notice for both NOW and The Guardian, writing about AIDS is proving to be better. Thus we have a case of a <i style="mso-bidi-font-style: normal;">dominant equilibrium. </i>The solution here would be that both the newspapers write about AIDS. The solution would be different if writing about AIDS was not the dominant strategy for <b style="mso-bidi-font-weight: normal;">both</b> of them. Since, luckily writing about AIDS pays off well we will not be hearing what happened to Justin, the poor pop singer.<br />
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Solution 2: Nash Equilibrium</h3>
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Sometimes in a game no strategy is dominant. If the other players play option A, maybe its best to play option B. And if the other players play option B, its best to play option B. In such scenarios there exist no dominance. So does that mean there is no solution? No! Sometimes solutions do exist without dominance, but then this is a different type of solution. Nash Equilibrium was named after John Nash, the Nobel winning mathematician who even had a movie made after him - A Beautiful Mind.<br />
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Game 3: Lover's Squat</h4>
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<o:p></o:p></h3>
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<a href="http://assets.nydailynews.com/polopoly_fs/1.1088316!/img/httpImage/image.jpg_gen/derivatives/landscape_635/lovers-fight.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="286" src="http://assets.nydailynews.com/polopoly_fs/1.1088316!/img/httpImage/image.jpg_gen/derivatives/landscape_635/lovers-fight.jpg" width="400" /></a><br />
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My girlfriend and I regularly play this game. We played this game just a few months back when Iron Man 3 released and I was desperate to go see it. She on the other hand wanted to see “Ashiqui”, a romantic Hindi film. The only thing worse than seeing the movie that we did not want to do was to see any movie alone.<o:p></o:p></div>
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So in this game there are two players, my girlfriend and I. </div>
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We have two strategies each, go see Iron Man 3 or see Ashiqui. Here are the payoffs.<o:p></o:p></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpb5imedAIk4B2jNJMLpugG0D4JtBXRAb4Um4lvUL-KMLFRLNLGSIMTOH0Dim9_TZGJsvo4gmd08C8Ld2EhwlZZMVnADyRlIjWQYS4u-Vd5BheYpBYPONkJsZwSbZES_K2sDQJ_vRzagU/s1600/Screen+Shot+2013-07-18+at+10.25.03+PM.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="117" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpb5imedAIk4B2jNJMLpugG0D4JtBXRAb4Um4lvUL-KMLFRLNLGSIMTOH0Dim9_TZGJsvo4gmd08C8Ld2EhwlZZMVnADyRlIjWQYS4u-Vd5BheYpBYPONkJsZwSbZES_K2sDQJ_vRzagU/s1600/Screen+Shot+2013-07-18+at+10.25.03+PM.png" width="400" /></a></div>
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As you can see we don’t like watching the movie alone. Also it should be observed that there is no dominant strategy in this game. It is better for me to go to Iron Man 3 if she goes to Iron Man 3 but it is better for me to go to Ashiqui if she is going to Ashiqui. It is the same for her.<o:p></o:p></div>
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Thus here we see a lack of dominance. Yet, a solution exists. Consider the outcome if both of us go to see Iron Man 3. In this case, none of us would want to change our strategy. This is Nash Equilibrium, since this is the best response to the other player’s response. It is mutually enforcing. There is however another Nash Equilibrium. Observe the other case wherein both of us go to see Ashiqui. In this case too, we have equilibrium. Neither of us would want to change plans.<o:p></o:p></div>
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Game Theory has offered us two solutions, either we see Iron Man 3 together or see Ashiqui together. The real world result was that we went to see Ashiqui because she made the game from a simultaneous one to a sequential game. Here she moved first and bought tickets for the movie beforehand so I had to comply. This is a move called a <i style="mso-bidi-font-style: normal;">commitment. </i>Where a player limits her options in order to disqualify certain Nash equilibrium.<br />
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Solution 3: Nash Equilibrium & Dominance</h3>
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Game 4: War and Peace</h4>
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<a href="http://zerotheabsolute.files.wordpress.com/2013/05/war-and-peace-nature.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="460" src="http://zerotheabsolute.files.wordpress.com/2013/05/war-and-peace-nature.jpg" width="640" /></a></div>
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In the 13<sup>th</sup> century there was born a child who would be one of the world’s greatest war strategist. He would burn down cities and empires, waging war on everyone and everything that he saw. His name was Genghis Khan. He was born at a time when countries lived in peace with each other. He was born in a time when people were happy with the peace. So why did he wage war? Game Theory has an answer.<o:p></o:p></div>
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Let there be two countries who are the players, Mongolia (Genghis Khan) and the Jin Dynasty. They have two strategies, go to war or stay in peace.<span style="mso-tab-count: 1;"> </span><span style="mso-spacerun: yes;"> </span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIfX8uLVXVDuai1xRgcMCblQslRFh8nNEsBV2uBH8cRG4KabDmuO5oKeX1qNo1nA61lAjK-zRcaTz-GqzmTfpacBkisjjTLQteD5ppnHNHhT35bff9kL70ACOn_LOPU9sma5elPViBFy8/s1600/Screen+Shot+2013-07-18+at+10.25.12+PM.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="121" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIfX8uLVXVDuai1xRgcMCblQslRFh8nNEsBV2uBH8cRG4KabDmuO5oKeX1qNo1nA61lAjK-zRcaTz-GqzmTfpacBkisjjTLQteD5ppnHNHhT35bff9kL70ACOn_LOPU9sma5elPViBFy8/s1600/Screen+Shot+2013-07-18+at+10.25.12+PM.png" width="400" /></a></div>
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The numbers within the boxes represent the relative benefit to the empires. There are 4 outcomes to this game, and each outcome has two payoffs for each Genghis Khan and the Jin Dynasty. The number to the left is the payoff for the Jin Dynasty and the payoff to the right is the payoff to Genghis Khan.<o:p></o:p></div>
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<li><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="text-indent: -18pt;">Outcome 1: Both go to war, both obtain a payoff of 1</span></li>
<li><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="text-indent: -18pt;">Outcome 2: Both stay in peace, both obtain a payoff of 2. And this seems like the best outcome (Pareto optimal).</span></li>
<li><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="text-indent: -18pt;">Outcome 3: Genghis Khan declares war (3) and Jin Dynasty does not declare war (0)</span></li>
<li><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="text-indent: -18pt;">Outcome 4: Jin Dynasty declares war (3) and Genghis Khan stays passive (1).</span></li>
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Outcome 2 seems to be the most beneficial to both, but as game theory tells us is that Outcome 1 is the Nash equilibrium. If one player wants to make war then the best strategy for the other player is to also make war. There is also dominance in this game. Playing War is a dominant strategy over Peace. This is one scenario where there is both mutual dominance solution and Nash equilibrium.<o:p></o:p></div>
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Here Jin Dynasty is a peaceful kingdom, usually preferring to live in peace. Genghis Khan is the aggressive one who gives into temptation and declares war. As we can see, the Nash Equilibrium is at (War,War) or (1,1) since war is a dominant strategy. Going to war is always better than being peaceful, regardless of what other player does. Hence, the Jin Dynasty became a player who was peaceful until Genghis Khan arrived. Just as how game theory predicts, the course of history was shaped by many wars of this kind.<br />
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<h3 style="text-align: center;">
<o:p><span style="font-size: x-large; font-weight: normal;">Sequential Games</span></o:p></h3>
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Till now we were only discussing games wherein players made their moves simultaneously. They didn't really know what the other person had played, and could only make an educated guess about it. But not all games are simultaneous. The dimension of time can make games a little more complex. Sometimes, a player plays first and then is followed by another player. Sometimes business firms act one after another instead of together or all at once. Countries make early moves that change the course of history. Games need not be <i>static</i>, but can be <i>dynamic</i> in nature.<br />
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Game 5: Price War without credible threat</h3>
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<o:p> </o:p>These sort of games are displayed in a <i>game tree. </i>At every decision the tree branches out. At the end of the branch, if no other player will play a move then the payoffs for each outcome are depicted. This is the <i>extensive form.</i></div>
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Imagine a situation where Firm A has a monopoly in a market. There is a Firm B which wants to enter the market and directly compete with Firm A. This would be harmful for Firm A since it would lose market share to Firm B. Firm A has an option in this case, it can begin lowering prices and attempt to begin a price war wherein both firms will compete to lower prices to attract customers. This is a situation which both firms will choose to avoid. Firm A uses this as a threat to try and dissuade Firm B from entering. Let us see how “threats” are found to be <i style="mso-bidi-font-style: normal;">credible </i>or not depending on the payoffs.<o:p></o:p></div>
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There are two players: Firm A and Firm B<o:p></o:p></div>
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They have different strategies: Firm B can choose to enter or not. Firm A can choose to start a price war or maintain status quo (not start a price war).<o:p></o:p></div>
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Here are the outcomes, represented on a game tree.<o:p></o:p></div>
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Figure <span style="mso-no-proof: yes;">1</span>: Price War<o:p></o:p></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs4fICA7h-alXdUPNfIQYx6Miu7AHMwb4fUwQ6KAO8OBGz_UH3Oju9cj8kKM8RNVvPu6shI0h1bX7LfC-9aV5Dl33zNBxwvOu6GJNDayA4WcZK9b7TIfxo_cipJgAjYMo78uPiiswVVY8/s1600/Screen+Shot+2013-07-18+at+10.25.22+PM.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="295" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs4fICA7h-alXdUPNfIQYx6Miu7AHMwb4fUwQ6KAO8OBGz_UH3Oju9cj8kKM8RNVvPu6shI0h1bX7LfC-9aV5Dl33zNBxwvOu6GJNDayA4WcZK9b7TIfxo_cipJgAjYMo78uPiiswVVY8/s1600/Screen+Shot+2013-07-18+at+10.25.22+PM.png" width="400" /></a></div>
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There are three outcomes,<o:p></o:p></div>
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<li style="text-align: center;"><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="text-indent: -18pt;">Outcome 1: Firm B Enters the Market, Firm A begins a price war and both firms are able to only collect 2 Million $ in profits each.</span></li>
<li style="text-align: center;"><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="text-indent: -18pt;">Outcome 2: Firm B Enters the Market, Firm A does not start the price war and both firms earn a profit of 5 Million $.</span></li>
<li style="text-align: center;"><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="text-indent: -18pt;">Outcome 3: Firm B does not enter the Market, Firm A need not begin a price war, and earns 10 Million $ while Firm B earns zero.</span></li>
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In case of Outcome 1, Firm A will want to change strategies and not start a price war since it will gain 5 M $ instead of 2 M $.<o:p></o:p></div>
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In case of Outcome 3, Firm B will want to change strategies since it may earn 2M$ or 5 M$ instead of the 0 M $ it is earning currently.<o:p></o:p></div>
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In this case, the Nash equilibrium would occur at outcome 2 (5 M, 5 M) since at this outcome neither Firms will want to change strategies. Hence, the threat of the price war is not <i style="mso-bidi-font-style: normal;">credible </i>enough and Firm B will enter the market.<o:p></o:p><br />
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Game 6: Price War with credible threat</h3>
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The rules and participants of the game remain the same but the payoffs are now changed. We will observe that since the payoffs are changing, the threat of price war may become credible.<o:p></o:p></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdKi69eWcHuSu4TTBHBOgJ6T86KJgp-1EInfoeuDqG0DibvWwarKuBAxVaaxQLFhdhc4qwjE-ijQiMon8cu07TA7Yx75s4yB1-2jUw4qWmdoLfOloELC5PRV3R8utE5vrJ1roWDP1JoV4/s1600/Screen+Shot+2013-07-18+at+10.25.39+PM.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="318" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdKi69eWcHuSu4TTBHBOgJ6T86KJgp-1EInfoeuDqG0DibvWwarKuBAxVaaxQLFhdhc4qwjE-ijQiMon8cu07TA7Yx75s4yB1-2jUw4qWmdoLfOloELC5PRV3R8utE5vrJ1roWDP1JoV4/s1600/Screen+Shot+2013-07-18+at+10.25.39+PM.png" width="400" /></a></div>
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Here we observe that Firm B will go into a loss when Firm A begins a price war. We also observe that Firm A obtains larger profit from starting a price war than from not starting one, in the event that Firm B enters the market. Here Firm B realizes that if it enters the market, Firm A will always start a price war. Here the threat is <i style="mso-bidi-font-style: normal;">credible </i>enough and Firm B stays out of the market fearing a loss of 1 Million $.<o:p></o:p><br />
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<span style="font-weight: normal;"><span style="font-size: x-large;">
Understanding ourselves...</span></span></h3>
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Game Theory is extremely important to our lives since we are always playing a game. We sometimes play a game with other players in our lives. These other players may be rivals, friends, family or even acquaintances. We keep an eye on our own payoffs and on the other players. We use the information available at present to determine which strategies might be better. Be it picking up an umbrella for the possibility of rain or playing poker at a table, the existence of games in our life cannot be undermined. We are able to understand ourselves and societal choices through game theory. We can gauge sometimes how society and the world will react to our actions. And also, we learn about how to improve conditions of all players in a non-zero sum game.</div>
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<a href="http://www.colourbox.com/preview/1600773-279279-victory-black-checkmate-in-a-chess-party-figures-of-a-chess-are-made-of-a-tree-manual-work.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="276" src="http://www.colourbox.com/preview/1600773-279279-victory-black-checkmate-in-a-chess-party-figures-of-a-chess-are-made-of-a-tree-manual-work.jpg" width="400" /></a></div>
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Games are for everyone!<o:p></o:p></div>
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Economics is for everyone!<o:p></o:p></div>
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-Pranjal Rawat</div>
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Anonymoushttp://www.blogger.com/profile/03827583069018807964noreply@blogger.com0tag:blogger.com,1999:blog-5296959768348252194.post-59559763852146986682013-06-20T13:17:00.002-07:002013-06-22T21:02:53.266-07:00Developing an Idea of Development <div dir="ltr" style="text-align: left;" trbidi="on">
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikOEUUPvRXnE5t9GSjNOz2BxSZwKVXid3rxU_HK4dlavAnIig8cOue3-iizY_pCIU9ugdYt8xg7j40UGq6DLANZiIoRaRzI9Hz-fhoUoe0YYlyOHHJGunJSDGXv6AtuCPeH69MSHB01g0/s1600/1_Development.JPG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikOEUUPvRXnE5t9GSjNOz2BxSZwKVXid3rxU_HK4dlavAnIig8cOue3-iizY_pCIU9ugdYt8xg7j40UGq6DLANZiIoRaRzI9Hz-fhoUoe0YYlyOHHJGunJSDGXv6AtuCPeH69MSHB01g0/s1600/1_Development.JPG" height="212" width="320" /></a><br />
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No two families are equally fortunate. Some have bigger
homes, while some are more literate and educated than others. Some families are
more dysfunctional than others, maybe due to failed marriages or angry
adolescents. Others always meet for every Holi or Christmas or Eid to celebrate
together. Even as individuals we are not all equally fortunate. Some of us cope
with physical difficulties, while some do not enjoy certain fundamental
rights. While some of us have ample food to eat and clothes to wear, we always
see some others in society that are without even these basic necessitates.
Regardless of which country we live in, we can see these differences among people, households and communities. </div>
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What is important to realize is that although the greatest
strength of all humanity is its diversity, some parts of the world are unable
to live up to their capabilities because they are <i style="mso-bidi-font-style: normal;">poor.</i> In reality, and if truth be told, we cannot really comprehend how
much people’s lifestyles differ across nations and regions. To truly understand
the differences in people’s preferences and options, one must travel to
villages and small towns to observe how people in fact live. There are both
subtle and distinct differences in the cultures of the rich and the poor. From the
food people eat to the manner of transport that they use, we can observe differences. </div>
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We use these words very often- rich and poor. </div>
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<span style="mso-spacerun: yes;"> </span>‘Oh, look at those <i style="mso-bidi-font-style: normal;">poor</i> children who don’t go to school’.</div>
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‘When the rich wage war, it’s the <i style="mso-bidi-font-style: normal;">poor</i> who die’. </div>
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‘The current government is focusing on helping the <i style="mso-bidi-font-style: normal;">poor</i>’.</div>
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What does it really mean to be poor? And what does it mean
to be rich? The answer to this question is complex. Yet, our minds are able to
quickly calculate a comparison between two people and tell who is poorer and
who is richer.</div>
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If we think a little about these words- rich and poor, we
will realize that these are <i style="mso-bidi-font-style: normal;">relative terms. </i>It is similar to how we compare people based on height
(taller or shorter), weight (lighter or heavier), skin tone (dark or fair) and
race (Mongolian or Aryan). However, we realize that in order to truly be able
to compare people we must have a scale of measurement. Therefore, we compare
height in meters and weight in kilograms and we use a measuring rod and weighing machine. </div>
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<i style="mso-bidi-font-style: normal;">Development Economics </i>is
the subfield of Economics that tries to calculate this poor-ness and rich-ness,
better off ness and worse-off-ness, and even to some extent
how-much-better-off-ness. This branch of Economics uses certain <i style="mso-bidi-font-style: normal;">indicators</i> that tell us the differences amongst cultures and countries. These indicators help us compare and
differentiate different regions that are influenced by different geographic,
political and economic conditions. Sometimes these indicators tell a different
story from what is believed and sometimes it reinforces certain preconceived
notions. Some of the major indicators are:-</div>
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<span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><b>Per Capita Income</b>: - The National Income as
divided by the total population. This tells us that if there was a perfect
distribution, then what would be the average income of a person living in a given country. The more the people, the less is their share of the total income. Since Norway ($96,591) has a higher per capita income than Ethiopia ($351), we may consider Norway as a country richer than Ethiopia. </div>
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<tr><td style="text-align: center;"><a href="http://upload.wikimedia.org/wikipedia/commons/2/2f/Gdp_per_capita_ppp_world_map_2005.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="http://upload.wikimedia.org/wikipedia/commons/2/2f/Gdp_per_capita_ppp_world_map_2005.PNG" height="210" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Per Capita GDP: Darker areas indicate higher Per Capita GDP</td></tr>
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<span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><b>Literacy Rate</b>: - This indicator tells us what
percentage of the population is able to read and write. It is an observation of
the amount of basic education that people of a country have received. A
country that has higher percentage of literate people (France-99%) is considered
better off than a country that has only very small percentage of literate
people (Somalia-38%). </div>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIc4nbKvQi0fFzkgsu4rneGhyphenhyphenkWvnh7STay7vS7NRWIdoCgOvnyZekG6MZxXkBEyR5k82Nqwgfrd5zc69a-fTU51jaUHvPFQag8orZ5RUBDJXm8X7Sv_v1_K1ZCoL4NmZ6-8p54HxN3Vc/s1600/r166498_618770-charters-towers.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIc4nbKvQi0fFzkgsu4rneGhyphenhyphenkWvnh7STay7vS7NRWIdoCgOvnyZekG6MZxXkBEyR5k82Nqwgfrd5zc69a-fTU51jaUHvPFQag8orZ5RUBDJXm8X7Sv_v1_K1ZCoL4NmZ6-8p54HxN3Vc/s320/r166498_618770-charters-towers.jpg" height="235" width="400" /></a></td></tr>
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A Good Education</td></tr>
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<span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span><span style="font-family: 'Times New Roman'; font-size: 7pt; font-style: normal; font-variant: normal; line-height: normal;"><b>
</b></span></span></span><b>Life Expectancy</b>: - This figure tells us the
average years of life that can be expected from a newborn baby. This indicator
is affected most by the amount of health care and medical facilities that people of a country enjoy. Countries that have higher life expectancy (USA 77)
are considered better off than the countries that have lower life expectancy
(India 65).</div>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJIi_IBhQeIOZEcMx34EMMoTqGQboPFLQXECw5tTGopVd3TpxtRI-Um4IPcBRayFomAzEIBF8e2TVjcoRfFOhFGDC1wOEKWIGNqqIpb5lZo79Fnl2fMdHgAyktcFxiHpeXkLSZOXmBcwM/s1600/5.webp" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJIi_IBhQeIOZEcMx34EMMoTqGQboPFLQXECw5tTGopVd3TpxtRI-Um4IPcBRayFomAzEIBF8e2TVjcoRfFOhFGDC1wOEKWIGNqqIpb5lZo79Fnl2fMdHgAyktcFxiHpeXkLSZOXmBcwM/s320/5.webp" height="257" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Adequate Healthcare</td></tr>
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These indicators are a very useful way of comparing and
measuring development. It is easy to understand the reasons for this. We are able to
contrast richness and poorness by observing <i style="mso-bidi-font-style: normal;">income,
health and education. </i>We evaluate people on the basis of these three indicators. If a person is wealthy, healthy and able to read and write, she is
truly rich. If she only has a large income but poor health and cannot read or
write well, we pity her and consider her poor despite her large income.
Similarly, any one indicator is not enough to make someone rich or poor. The
people of the mountains often have clean air and pure water to drink. They
might be healthier than people of the cities but since hilly areas are harder
to connect to the world and building schools is difficult, they might have low
education and low income. </div>
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In order to solve this difficulty, we take the help of the <i style="mso-bidi-font-style: normal;">Human Development Index (HDI). </i>This is
basically a number that combines life expectancy, literacy and income to create
a more <i style="mso-bidi-font-style: normal;">holistic </i> indicator.
We simply have to plug in values of life expectancy, literacy and per capita
income into a formula and lo and behold we have an indicator that enables us to
compare and contrast countries. Here is a list of countries compared ,using the HDI.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimYdQTdjLc44JCusmN0km1GdsAhyphenhyphenVer2-IdVqgIighX1E0-E8Xst8Tcu7pr2Vh5QopLHLi8eBODaWHD63WPg1qM9l5R4Q1hYkHNOTEOWQyUnB1n86mau3erJdF03687KihJAAtZpdkp8A/s1600/Screen+Shot+2013-06-16+at+10.02.09+PM.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimYdQTdjLc44JCusmN0km1GdsAhyphenhyphenVer2-IdVqgIighX1E0-E8Xst8Tcu7pr2Vh5QopLHLi8eBODaWHD63WPg1qM9l5R4Q1hYkHNOTEOWQyUnB1n86mau3erJdF03687KihJAAtZpdkp8A/s320/Screen+Shot+2013-06-16+at+10.02.09+PM.png" height="232" width="400" /></a></div>
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<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiqzDYrWYWtjgo_tqNtu8cUcvCgE8JD1KS8DQLx6xGJwfsnRIapJ_T8FlvynV88hfdd5KK-2RF3eVeyd1g1KJUkUp0eJrZsUOjJrJpp7E60Pq5KhddaOvBBPj-3uKSlGnAhMH1fDdUnBI/s1600/2013_UN_Human_Development_Report_Quartiles.svg.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiqzDYrWYWtjgo_tqNtu8cUcvCgE8JD1KS8DQLx6xGJwfsnRIapJ_T8FlvynV88hfdd5KK-2RF3eVeyd1g1KJUkUp0eJrZsUOjJrJpp7E60Pq5KhddaOvBBPj-3uKSlGnAhMH1fDdUnBI/s320/2013_UN_Human_Development_Report_Quartiles.svg.png" height="276" width="640" /></a></td></tr>
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HDI Chart: The darker areas have higher HDI</div>
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HDI reveals a lot...</h3>
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Usually we have certain established ideas about certain
kinds of people and countries. We count off certain nations just because they
have lower incomes. We often give lower weightage to education and health even
though these are very important indicators. Once we begin to evaluate countries
with education and health <i style="mso-bidi-font-style: normal;">along </i>with
per capita income, we make some startling discoveries. </div>
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<b>Cuba</b>: A communist country which is passed off
as not very successful and far behind even some developing countries, is in fact very high up on the HDI chart. Cuba’s
healthcare system is very effective in raising the life expectancy to levels that are higher than those of developed countries. Its people on an average live up to 78 years of age, and that places it on the 38th rank worldwide, in terms of life expectancy. </div>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjk8jDfnFHSWoTp3dg_GY33wSHJjAwIi1fsEJJRuvn1X_l_rn1FfHwBoNyCDUQx8ucFU3Q92inXyod_ioDyr-0yPFYvZM5wCZQyi96NElAdCl40-jKKYcN4RhH4bYn8FZP7PzI8rM0DvmI/s1600/More-DW-Experiences-edited.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjk8jDfnFHSWoTp3dg_GY33wSHJjAwIi1fsEJJRuvn1X_l_rn1FfHwBoNyCDUQx8ucFU3Q92inXyod_ioDyr-0yPFYvZM5wCZQyi96NElAdCl40-jKKYcN4RhH4bYn8FZP7PzI8rM0DvmI/s1600/More-DW-Experiences-edited.jpg" height="162" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Cuba is doing well.</td></tr>
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<b>China</b>: The world's second largest economy that has been growing incredibly fast since the last two decades is actually not so far ahead of the rest of the world health. It stands 85th on the HDI chart and this shows that it has a lot more to do in the fields of education a Although Chinese incomes may be rising, there is still much to be desired for its education and medical services.</div>
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<b>Russia</b>: The age old giant that formed the core of the USSR and had much prominence in the 20th century is now lagging behind at 62nd position on the HDI. This is mainly due to Russia's failing health care and medical facilities.</div>
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<b>Kerala</b>: Amidst the chaotic scenario of India lies a state that has been extremely successful in raising the standard of living. A person in Kerala enjoys a life expectancy of 74 years. 97% of the population in this state has received at least basic education and can read and write well. In these two fields, education and healthcare, Kerala has done outstandingly well.</div>
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<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhP2-JYBhGHDwroeWg3Ekwg50p_GtFYqoujsp5piQ4wnLZOHTKxu0uvKCriv3TKkBXqMcwWkM-1EvE-3K6kiBzMhQXOa1oaIgHA8uye033QC0j7qwVCV0qpmvEiyYwmFKjDnvyUdP_Hsq8/s1600/10423.land.jpg" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhP2-JYBhGHDwroeWg3Ekwg50p_GtFYqoujsp5piQ4wnLZOHTKxu0uvKCriv3TKkBXqMcwWkM-1EvE-3K6kiBzMhQXOa1oaIgHA8uye033QC0j7qwVCV0qpmvEiyYwmFKjDnvyUdP_Hsq8/s1600/10423.land.jpg" height="213" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Kerala</td></tr>
</tbody></table>
</blockquote>
</blockquote>
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<h3>
</h3>
<h3>
</h3>
<h3>
</h3>
<h3 style="text-align: justify;">
Development is not Growth, but Growth is Development</h3>
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<div style="text-align: justify;">
Economic growth only relates to the increase in GDP. As we
have understood in an earlier blog post, GDP is farther to human welfare
than we believe. Growth accounts only for increase in national income,
expenditure and production. What is much closer to the concept of human
happiness is the concept of Development. Development is an all round approach
to understanding human happiness and capabilities. Development not only looks
at income, but also at quality of education, healthcare, life expectancy,
political stability and many other factors that may influence a society.
Development is a more open and complex idea, while growth is a much duller
concept. There maybe a case where economic growth is incredibly high but
increases in income does not translate into happiness. Growth is a much smaller
concept and development a much larger one.</div>
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In the past decades, countries used to focus much more upon
economic growth while ignoring other basic concepts. Development is a much
newer concept that has gained importance over growth in today’s times.
Development lies in the upgrading of school education, with better
teachers, equipment and ultimately learning. Development lies in better medical care with free hospitals that can treat a wide variety of illness and disease.
Development lies in improving people’s lives and making life more worthwhile. A
major part of the world suffers from hunger, income, disease etc. These parts
of the world need development and not just growth. </div>
<div style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: justify;">
<a href="http://morelearning4morestudents.files.wordpress.com/2012/11/einstein-exam-cartoon.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://morelearning4morestudents.files.wordpress.com/2012/11/einstein-exam-cartoon.jpg" height="555" width="640" /></a></div>
Growth ain't for everyone!<br />
Development is for everyone!<br />
<br />
<br /></div>
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<br /></div>
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Anonymoushttp://www.blogger.com/profile/03827583069018807964noreply@blogger.com0India22.268764039073979 77.871093757.5818385390739795 57.21679675 36.95568953907398 98.52539075tag:blogger.com,1999:blog-5296959768348252194.post-89578765787689586282013-04-16T12:38:00.000-07:002013-08-20T10:49:26.715-07:00A brief history of Money<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxdIiD_J1kPtqe5ka6QdghqVNSaLBBebAMQezHMnOZ4jXin-xm7YrLX4GmhBLcU7qK7pH4Y7pbcTB_vM86EiqAHL3UrPH_tTSvgfNSp68O_ebwzwNRFeSxJyH2dEz5v65rY4iQNHs5xuI/s1600/Gold-Coins.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><br /><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxdIiD_J1kPtqe5ka6QdghqVNSaLBBebAMQezHMnOZ4jXin-xm7YrLX4GmhBLcU7qK7pH4Y7pbcTB_vM86EiqAHL3UrPH_tTSvgfNSp68O_ebwzwNRFeSxJyH2dEz5v65rY4iQNHs5xuI/s1600/Gold-Coins.jpg" height="480" width="640" /></a></div>
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<span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><br /></span></div>
<div class="MsoNoSpacing">
<span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Money has
its origins lost in the immense stretches of time. Its invention is almost as
legendary and fabled as the inventions of fire and the wheel. No less were its
impacts on the economic life of people, than of fire on the scientific life of
people. Money opened doors that have never closed, and gave us wings to fly.
Whether we flew too close to the sun or not, is a question for another time. The
legend of money rests in its ability to organize and structure the productive
activities of society. Without money, we would have never been able to procure
more than a few goods and services that we are able to procure today. The
concept of money is as old as the mountains and the trees, and probably more
important to our everyday lives. So where did it all begin?<o:p></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOngYQmWcdy-YBdXBwQRxWYEgq7D3Kb0Y5q0pwq_wvkHp0MGAfg3UzdWNgACEjVz1ku6zKJ896wBYQy9vvh0nTarGtzi3uq07VqV9_HPdZp4bGjGkrRg-p5aQBWZIrI-KjnHMHHHLWIbA/s1600/1-aztecs-trading-cocoa-beans.webp" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><span style="font-family: Trebuchet MS, sans-serif;"><br /></span></a></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><span style="font-family: Trebuchet MS, sans-serif;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOngYQmWcdy-YBdXBwQRxWYEgq7D3Kb0Y5q0pwq_wvkHp0MGAfg3UzdWNgACEjVz1ku6zKJ896wBYQy9vvh0nTarGtzi3uq07VqV9_HPdZp4bGjGkrRg-p5aQBWZIrI-KjnHMHHHLWIbA/s1600/1-aztecs-trading-cocoa-beans.webp" height="216" style="margin-left: auto; margin-right: auto;" width="320" /></span></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Trebuchet MS, sans-serif;">Barter</span></td></tr>
</tbody></table>
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<span style="font-family: Calibri; font-size: 14pt;">A good guess
would place the arrival of the first form of money, when a certain object or
animal finds itself very central to the society’s culture. This type of money
is called ‘Commodity Money’. Similar to how the cocoa bean was to the Aztec and
the African bull was to the Africans. Before the advent of money, the society
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<span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><i>“I give you what you want, you give her what she wants, and she
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<span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Cocoa bean
was abundant and important to the Aztec. It had great use for the family too.
Its first use might have arisen with the need to balance the value of barter.
When one party feels the barter is unfair, cocoa beans could be added to the
barter to make the trade fair. It’s similar to adjusting weights so that a beam
balance is at rest. Proceeding from this use of cocoa, society might have had
to evaluate every commodity available in terms of cocoa so that the balance may
be achieved. This is the way commodity money becomes a <i>measure of
value. </i>Soon, commodity money may be used to completely balance
the trade. This is the moment when the use of cocoa completely replaces barter,
and cocoa beans become money. Similarly, cows and other religious or important
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<tr><td style="text-align: center;"><span style="font-family: Trebuchet MS, sans-serif;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEip3u2VZzR0qdP93Aa3JCuM7Ktx1fPx4g8R-vv6Kpj-jvzhxv8T5rc4QzkUHPBDIqjC0QDZhwAg62UI7YzTqHfP5eTnecBQc9q-lmsBk-RJuGq7upDUSQt6OaMjQtpQClNVqhf7MCtkAlo/s1600/cowrie-shells-large.jpg" height="320" style="margin-left: auto; margin-right: auto;" width="307" /></span></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Trebuchet MS, sans-serif;">Cowrie Shells</span></td></tr>
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<tr><td class="tr-caption" style="text-align: center;">Cocoa Beans</td></tr>
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<span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Commodity
money had two major problems. One, often commodity money was irregular; cocoa
beans were not identical in shape and form. This lead to disputes in trade and
money had to be weighed each and every time a trade took place to
verify. Two, commodity money is not very durable. Cows and bulls die in a few
years, and cocoa beans turned bad in a few months. The Lydian Kingdom found the
solution to these two problems in 640 BC.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;">The Lydians
were the first to mint coin money using a combination of gold and silver. A
official stamp would be placed on the coin to ensure weight, value and
authenticity to all people of the society. This enabled people to trade and
carry out commercial activities very easily. It was no surprise that the
Lydians were very rich and commercially successful. Although the Lydians did
not survive long, their methods of coinage were adopted by the Roman Empire.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Coin money
although is more useful than commodity money, it has a few drawbacks. Coin
money is heavy and hence difficult to transport. It could be stolen easily on
highways and counterfeited. Coins could get irregular and worn out. The
solution to this came much later in the 1300’s when banks became popular.<o:p></o:p></span></div>
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<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><span style="font-family: Trebuchet MS, sans-serif;"><br /></span></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgpdFLBov3oUNGewKAUr4odYsEZzOMSInSKpF6AKa-kRvKJqXoo2-LqpDlRGKDcfqx3tRdjW6LFC4KTIF51TgBzmJthvKbnKDw6g-j87-DH1WuYvIFQfiUmsSMY3plNnQH1DukcnHNODjk/s1600/copper_coins_and_pennies.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Trebuchet MS, sans-serif;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgpdFLBov3oUNGewKAUr4odYsEZzOMSInSKpF6AKa-kRvKJqXoo2-LqpDlRGKDcfqx3tRdjW6LFC4KTIF51TgBzmJthvKbnKDw6g-j87-DH1WuYvIFQfiUmsSMY3plNnQH1DukcnHNODjk/s1600/copper_coins_and_pennies.jpg" height="150" width="200" /></span></a></div>
<span style="font-family: Trebuchet MS, sans-serif;">Copper Coins</span></td></tr>
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back with gold till the 1930’s.<o:p></o:p></span></div>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyBDGdN8_0hnZjc30FwcZCQi6boH7DNFmLajQM9P7fTIezXobXfoeimuYtLLRkbvUpRY8MMXcvtK3w28qY0BtvzeudmcAr8frusv3uSPiL0h5xDj2NRp5jTPktHAS6s41lSfCxrLQVW0g/s1600/b5.webp" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span style="font-family: Trebuchet MS, sans-serif;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyBDGdN8_0hnZjc30FwcZCQi6boH7DNFmLajQM9P7fTIezXobXfoeimuYtLLRkbvUpRY8MMXcvtK3w28qY0BtvzeudmcAr8frusv3uSPiL0h5xDj2NRp5jTPktHAS6s41lSfCxrLQVW0g/s1600/b5.webp" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Trebuchet MS, sans-serif;">Early Bank Note</span></td></tr>
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<b><span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Fraudulent
Fiat Money</span></b><span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><o:p></o:p></span></div>
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<span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;">The western
countries faced the great depression, which forced their governments to print
more and more of paper money, which was not backed with gold. It was an easy
way of having more purchasing power, in return for nothing. Soon the world had
too much paper money representing too less gold. Finally, most governments
decided to make paper money into fiat money. Fiat money is not backed by gold,
but on the promise that the current government will prevail. Fiat is Latin for
–“Let it be done”, and its value only lasts as long as the government. It
cannot be returned for gold or silver equivalents. Most governments of today
employ fiat money. However fiat money also has a major problem. Fiat money’s
value usually seems to fall, as the government creates more and more of it. The
more the money in the hands of the people the higher the resulting prices.
Often in places like post-war Germany or present-day Zimbabwe, fiat money loses
its value so fast that people must deal in hundreds and thousands of notes for
day-to-day transactions. Imagine if the cost of coffee rose by 10,000 units in
just a few days! When larger and larger piles of notes are needed, fiat money
is not very useful. <o:p></o:p></span></div>
</div>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEih0_sudNtyS6vQeveof3QUHp5yOT8bCGYROwvdr8_D_Ju6hMcZbr054j22raI5POU_UMmUFD9Ntv7Ajs5Hu4q244zY-slyRQHo8Su7DIkv_rvp-FKuwMOp73CGGzGgg5sOk3fxNXYfl14/s1600/KrTyL.webp" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><span style="font-family: Trebuchet MS, sans-serif;"><br /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"></td></tr>
</tbody></table>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEih0_sudNtyS6vQeveof3QUHp5yOT8bCGYROwvdr8_D_Ju6hMcZbr054j22raI5POU_UMmUFD9Ntv7Ajs5Hu4q244zY-slyRQHo8Su7DIkv_rvp-FKuwMOp73CGGzGgg5sOk3fxNXYfl14/s1600/KrTyL.webp" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span style="font-family: Trebuchet MS, sans-serif;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEih0_sudNtyS6vQeveof3QUHp5yOT8bCGYROwvdr8_D_Ju6hMcZbr054j22raI5POU_UMmUFD9Ntv7Ajs5Hu4q244zY-slyRQHo8Su7DIkv_rvp-FKuwMOp73CGGzGgg5sOk3fxNXYfl14/s1600/KrTyL.webp" height="400" width="640" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Trebuchet MS, sans-serif;">Currencies of the World</span></td></tr>
</tbody></table>
<span style="font-family: Trebuchet MS, sans-serif;"><b>Dashing Digital Money</b></span><br />
<span style="font-family: Trebuchet MS, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<div class="MsoNoSpacing" style="text-align: left;">
<span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;">The problem
of all physical money like commodity money, coin money, paper money and fiat
money was solved by the dawn of digital money. The era began in the 1960’s when
banks began to transfer money electronically. Banks were searching for methods
to simplify the huge workload involved in mue form of digital money began with
the development of powerful computers that would readily calculate, process,
manage and store thousands of electronic records. Digital money is stored in
the memory chips in computers and transferred via electronic pulses over cable
and air. Money is sent across continents and oceans with the press of a button.
Most of all large transactions are done via digital money and not fiat money.
Its easier and simpler to pay with a flash of a card. The VISA and MASTERCARD
are accepted globally, and are great relief to the daily traveller.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: left;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: left;">
<span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: left;">
<b><span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Dangerous
Debt Money</span></b><span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><o:p></o:p></span></div>
<div class="MsoNoSpacing">
</div>
<div style="text-align: left;">
<span style="font-family: Calibri; font-size: 19px;"><br /></span></div>
<span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><div style="text-align: left;">
<span style="font-size: 14pt;">It is a startling fact that most digital money is now mostly debt. This means
that you could donate 1000 Rs to me for writing this blog so well, even if you
didn’t have that in your bank account. I receive the thousand even if you do
not have that much with you at that moment. The transaction only means that you
will give me 1000 Rs in the future. The surprising fact about this debt is that
I can still use it to purchase anything. This second transaction implies that I
have passed the ownership of my money to someone else, and now you owe this
someone else the 1000 Rs. And so on and so forth the circulation proceeds. Although
it is widely used, some experts believe that using debt as money, is not very
good in the long run.</span></div>
<o:p></o:p></span><br />
<div class="MsoNoSpacing" style="text-align: left;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: left;">
<b><span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Old money,
New money</span></b><span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: left;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: left;">
<span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Although the
largest part of all transactions is done by digital money, all others forms of
money are still used in some areas of the world. Gold and silver coins are
still used in certain areas of the world. Fiat money also survives mostly for
the poor people who need small quantities of money everyday. Even commodity
money does exist in isolated tribal areas. This peaceful coexistence of the
various forms of money tells us that our needs and wishes have changed over
time and money changes to be able to address that need.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: left;">
<br /></div>
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<b><i><span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Money is a
promise that can mean everything or nothing…</span></i></b><span style="font-family: Calibri; font-size: 14.0pt; mso-ascii-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><o:p></o:p></span></div>
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<span style="font-size: 14pt;">Money has connected us in ways we do even yet understand. Right from the
beginning it has brought our society together by providing a way for each
individual to be useful to the other. There would be no way a carpenter and a
comedian could be useful to each other unless the poor carpenter really valued
a good laugh. Shortly after people found use for one another, society was truly
able to help itself produce more and consume more. Money allowed us to fully
utilize goodwill and trust in the form of credit and loans. People could help
each other even without having a single thing to do with the other person's
life. We rely on money so much that we barely notice. Money is just a promise
that society keeps with us. We all believe in this promise hence it exists. If
people lose faith in money, it has lesser value. Money can be everything- food,
shelter, education and prosperity or it can be nothing but an empty promise.</span></div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNi5s0L3qRAkwFuseeCVE3ctm2GeN5K7-VWCvcsVJoOvFuCbu-owCm3sJqwNc64RxgNFN-VIns2YWmOLGcUYqC9zIYPa9yinlGCf-WUf69PcYHJoMg3wywBEmr8QDTYnoG_cDULc66myc/s1600/modern-caveman.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span style="font-family: Trebuchet MS, sans-serif;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNi5s0L3qRAkwFuseeCVE3ctm2GeN5K7-VWCvcsVJoOvFuCbu-owCm3sJqwNc64RxgNFN-VIns2YWmOLGcUYqC9zIYPa9yinlGCf-WUf69PcYHJoMg3wywBEmr8QDTYnoG_cDULc66myc/s1600/modern-caveman.jpg" height="480" width="640" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Trebuchet MS, sans-serif;">Money is why</span></td></tr>
</tbody></table>
<div style="font-family: Calibri; font-size: 19px;">
<span style="font-size: 14pt;">Money is for everyone! </span></div>
<div style="font-family: Calibri; font-size: 19px;">
<span style="font-size: 14pt;">Economics is for everyone! </span></div>
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</h3>
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<a href="http://www.landmarkeducationnews.com/wp-content/uploads/2008/10/sustain-environment.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://www.landmarkeducationnews.com/wp-content/uploads/2008/10/sustain-environment.gif" height="512" width="640" /></a></div>
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<h3>
The Environment and Economics</h3>
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Most people would assume that good economic theories never take the environment into consideration. After all, aren't economic models all about output, capital or growth? </div>
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Wasn't Economics just about the economic man, and not about trees or birds? </div>
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<i>Not one bit. </i>Good economic policies have always been ecologically conscious. Every forward looking idea must be sustainable. By sustainable we mean that it must put forward a manner of using resources that leaves enough for future generations. Good policies must last longer than men & women themselves. We cannot continue cutting down trees for more area for cultivation. We also cannot continue to pollute rivers and oceans just because we cannot manage the industrial waste. These trends have to go someday, because they are unsustainable. Good economic policies must think about the environment and not just about the people they are affecting. <i>Environmental Economics </i>is the branch of economics that deals with all these issues. It tries to understand the costs and benefits of environmental laws.<br />
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<tr><td style="text-align: center;"><a href="http://assets.worldwildlife.org/photos/1174/images/story_full_width/natural-capital-overviewHI_46333.jpg?1345539110" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="http://assets.worldwildlife.org/photos/1174/images/story_full_width/natural-capital-overviewHI_46333.jpg?1345539110" height="240" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Natural Capital</td></tr>
</tbody></table>
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<div>
What Nature provides us is called <i>Natural Capital.</i> Natural Capital includes all the parts of our surroundings that can give us returns in the future. For example, lakes can provide fishing grounds for hundreds of years. Trees can provide food and habitat. Plants can cool homes and prevent the soil from eroding away. A large population of snakes keeps rats from multiplying. All these are Natural Capital.<br />
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Natural Capital can also cleanse the environment to make it cleaner. Trees remove carbon-dioxide from the air and supply oxygen. The branches and leaves on the trees catch dust and flying particles, they leave the air cleaner. Vultures eat dead decaying animals and worms consume rotton fruits. Bacteria can break down almost all types of organic matter. These creatures help clean up the environment.<br />
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Natural Capital unlike Physical Capital is not always renewable. It takes thousands of years for trees to become fossil fuel. Most components of our eco-system work together, hence the value of Natural Capital is only evident in the larger picture. <i>Ecological Economics </i>is the branch of economics that considers the economy as a small part of the environment and emphasises the role of natural capital.<br />
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<h3>
The GDP is all wrong!!!</h3>
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Physical Capital like machinery, houses and transportation vehicles lose value year by year due to wear and tear. Economist's call this <i>Depreciation. </i>The Traditional GDP does consider this wear-and-tear loss. But what about the wear and tear of aquifers, watersheds and forests? What about the degradation of ponds and lakes? The Traditional GDP cannot account for this depriciation because it does not consider Natural Capital at all!!!<br />
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<a href="http://www.le.ac.uk/urbanhist/images/general/pollution.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="http://www.le.ac.uk/urbanhist/images/general/pollution.jpg" height="212" width="320" /></a><br />
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Recently Beijing was in the news for emitting a lot of excess pollution. Now rising pollution would lead to failing health. Failing health would lead to a rise in the incomes of hospitals and the Chinese pharmaceutical industry. Hence the Traditional GDP would assume that hospitals are contributing more to the Chinese national income. However, as we can notice- the rise in expenditure on medicine was caused due to a rise in pollution. Thus this 'increase in medical expenditure' should be considered under 'damage to environment'. This rearrangement would not be necessary in the Green GDP. <br />
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Sustainable Development Indicators are those macro-variables that tell us whether a particular venture is equally helpful for both current and future generations. The Green GDP can be considered one of the most important indicator of sustainable development. The Traditional GDP is hardly even relavent for sustainability. It overlooks the unsustainable methods of production and does not account for the loss of productivity in the future. Cutting the entire forest down to make furniture would result in a high rise in the Traditional GDP but it also prevents future generations from enjoying the benefits of the forest.<br />
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The GDP is very much used in political debates and discussions. Focusing on the Traditional GDP diverts the energies of policy makers and general public in a direction that does not necessarily go in line with the environment. Politicians aim for high Traditional GDP growth which is not necessarily a beneficial thing.<br />
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<h3>
What is the Green GDP? </h3>
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The Green GDP is a part the SEEA (System of Environmental & Economic Accounts). The SEEA provides us with a lot of information and although it is a very recent development (1993) it tells us a lot about our interaction with the environment. It tells us the quantity of pollution that was emitted last year. The amount of energy, water and fuel that the country uses is also measured in the SEEA. The SEEA also includes the cost of environment deterioration in money terms. Out of many indicators, the Green GDP is the value of all production activity deducting the cost of environment damage. It presents a truer picture of our production, income and expenditure. It tells us if our total wealth is increasing or decreasing.<br />
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<a href="http://www.project-syndicate.org/default/library/96859054f07ee39650535a9c9f066579.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://www.project-syndicate.org/default/library/96859054f07ee39650535a9c9f066579.jpg" height="194" width="320" /></a></div>
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<a href="http://cseindiaportal.files.wordpress.com/2013/03/green-or-greed.jpg?w=290" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="http://cseindiaportal.files.wordpress.com/2013/03/green-or-greed.jpg?w=290" /></a><br />
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The Green GDP is instrumental in directing the focus of our policymakers and economists towards a greener ideology. The Green GDP is the actual amount of output that our private and public sector create. If we are trying to raise the production of goods and services at the cost of polluting rivers and cutting down trees, then the Green GDP will be low. On the other hand, if we use newer & cleaner technologies to raise the production of goods and services and at the same time manage our waste; the Green GDP will be high. The Green GDP is the future of the GDP, and it is surprising that it has taken so long to be recognised. Only in 2012 was the SEEA made an international standard by the UN, which means it has a similar status as the traditional GDP. </div>
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<h3>
A future made sustainable </h3>
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Although the future rests on many developments yet to come, the Green GDP is the logical next step. The countries of Germany, Norway and Sweden all try to account for environmental degradation. Soon they will be able to provide us with their Green GDP measures. Once public policy follows public sustainability the future becomes largely secure. At present, it is far from secure. We have many issues to tackle- war, famine, hunger- and the Green GDP is definitely a way forward. It could change the way we perceive our everyday lives! Individuals like you and me, might be able to understand the true cost of our actions and their repercussions on nature. We might be able to follow a lifestyle that goes hand in hand with nature's resources. </div>
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<h3>
<span style="font-weight: normal;">Paul Erlich -</span></h3>
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<i>"We must acquire a lifestyle which has as its goal maximum freedom and happiness for the individual, not a maximum Gross Domestic Product"</i><br />
<i><br /></i></div>
<h3>
<span style="font-weight: normal;">Confucius -</span></h3>
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<i>"The future generation is the most important thing"</i><br />
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<span style="font-weight: normal;">Terri Swearingen -</span></h3>
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<i>"We are living on this planet as if we had another one to go to"</i><br />
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<a href="http://otherwords.org/wp-content/uploads/2012/06/broken-planet-earth-pollution-rio-20-cartoon.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://otherwords.org/wp-content/uploads/2012/06/broken-planet-earth-pollution-rio-20-cartoon.jpg" height="456" width="640" /></a></div>
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<span style="font-weight: normal;"><br /></span></div>
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<span style="font-weight: normal;"><br /></span></div>
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<span style="font-weight: normal;"><br /></span></div>
Anonymoushttp://www.blogger.com/profile/03827583069018807964noreply@blogger.com0Bow Bazaar, Kolkata, West Bengal, India22.575345326048136 88.36163699626922622.574887326048138 88.361006496269226 22.575803326048135 88.362267496269226tag:blogger.com,1999:blog-5296959768348252194.post-88094422657343168622013-02-23T01:53:00.000-08:002013-02-25T23:21:22.395-08:00Consumption : Food for Thought<div dir="ltr" style="text-align: left;" trbidi="on">
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<br />
<div style="border-bottom: solid #4F81BD 1.0pt; border: none; mso-element: para-border-div; padding: 0cm 0cm 4.0pt 0cm;">
<span style="text-align: justify;"><span style="font-family: Times, Times New Roman, serif;"><br /></span></span></div>
<h3>
<span style="text-align: justify;"><span style="font-family: Times, Times New Roman, serif;">What is
Consumption?</span></span><span style="font-family: Times, 'Times New Roman', serif; text-align: justify;"> </span></h3>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">What
did you eat today? <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">Which
movie did you watch last week?<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">How
many bus tickets did you purchase last month?<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">How
much electricity did you use last year? <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">All
these questions are common to us. We live in a world where we continuously
‘use’ things. We eat food, watch movies, travel buying bus tickets and consume
electricity. Economists call this Consumption. Consumption is the act of
utilization of things. Before we can understand consumption we must understand
what are these ‘things’. The formal term for these ‘things’ in economics is <i>goods </i>and<i> services. <o:p></o:p></i></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">Goods
are objects or items such as cars, chocolates, footballs, pens, books, clothes
and everything that you see in your room right now. Services are provided to us
by other people. Doctors tell us how to be healthy, lawyers defend us in court,
night guards protect our homes and so on and so forth. Other people perform
acts for us; people ‘serve’ us in that sense. Goods and services never come
free as we have to pay for them. They are <i>scarce
</i>or<i> limited</i> and hence, we must
lose money to gain them. Consumption is also the outflow of money for these
goods and services.<o:p></o:p></span><br />
<span style="font-family: Times, Times New Roman, serif;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: right;"><tbody>
<tr><td style="text-align: center;"><div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDseyw3zP5nFyk0JmQPpdrL1RBhfhVb0kUgJeG1lxCFJTCIP5cXiRK8_Qe8KCcVCdod9n9YCAliUuHE0Axutap1jG_aUpv-YTArs0ZPuWVj9hGz73WlsK79VP_yEn3le3Kz2ze5u0b8XU/s1600/barack-obama-eating-frogs-0011.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDseyw3zP5nFyk0JmQPpdrL1RBhfhVb0kUgJeG1lxCFJTCIP5cXiRK8_Qe8KCcVCdod9n9YCAliUuHE0Axutap1jG_aUpv-YTArs0ZPuWVj9hGz73WlsK79VP_yEn3le3Kz2ze5u0b8XU/s320/barack-obama-eating-frogs-0011.jpg" width="320" /></a></div>
<br /></td></tr>
<tr><td class="tr-caption" style="text-align: center;">This is Consumption.</td></tr>
</tbody></table>
<br /></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">Consumption
is thus the way individuals like you and me use these goods and services. We ‘consume’
the scarce goods and services in order to live a happy life. If we do not
consume we will neither survive nor thrive. Consumption is extremely important
for all of us; we do it every moment of the day. We must also remember to note
the element of time. If we increase the time frame to a year from a month, we
will find that we have consumed more. The importance of Consumption becomes
visible when we understand the concept of <i>Income.</i><o:p></o:p></span><br />
<span style="font-family: Times, Times New Roman, serif;"><i><br /></i></span></div>
<span style="color: windowtext; font-size: 12pt; font-weight: normal;"><span style="font-family: Times, Times New Roman, serif;">Income is the inflow of money that every
person gets for the work he or she does. Laborers and factory workers are paid
daily, and that payment is called wages. Cooks and Economists, being better
off, are paid monthly and that payment is called salary. Both salaries and
wages are types of Income. What is important here is the element of time that
is involved. A laborer is paid by the day while an economist is paid by the
month. However, both of them get money over a period of time. Income is the
inflow of money over time.</span></span><br />
<span style="color: windowtext; font-size: 12pt; font-weight: normal;"><span style="font-family: Times, Times New Roman, serif;"><br /></span></span>
<br />
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">Incomes
are used in two ways. One part is used
for consumption or the usage of goods and services from the economy. The other
part is <i>saved. </i>That is how
economists’ have explained <i>Saving</i>.
Saving is the leftover part of the income that people keep for later use. This division
of income into consumption and saving is
a fundamental fact of our lives. If Consumption is the part of the pie that you have eaten then Saving is the part of the pie that is left.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="http://www.ibmadison.com/PieChart.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Times, Times New Roman, serif;"></span></a></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<b><span style="color: red; text-transform: uppercase;"><span style="font-family: Times, Times New Roman, serif;">Income
= Consumption Expenditure + Savings<o:p></o:p></span></span></b></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<b><span style="color: red; text-transform: uppercase;"><span style="font-family: Times, Times New Roman, serif;"><br /></span></span></b></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/proxy/AVvXsEj3cNLDqTdB0yFiBJeLCOUrVcjp29ACTQ8ueO3gdx3AVJuQxtjTb-KRpiKvjwfXuMj2cBElWiwIkJsTYnTO0kNGq_Pr6-lWgdiPJzJ7y43nfEojy1ClAuMB3HWXKq_5bYxure5mBA" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="263" src="http://www.ibmadison.com/PieChart.jpg" width="400" /></a></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<h3>
<span style="font-family: Times, Times New Roman, serif;">The Consumption
Function</span></h3>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">Apart
from separating income into consumption and saving, economists have tried to
find deeper relationships between the three. As you can see from your own life
also, different people with different levels of income have different
expenditure for consumption. Across generations, as incomes’ change for a
family, the pattern of consumption also changes. Apart from the simple separation
of consumption expenditure and saving that we read earlier, there exists another
<i>direct </i>relationship between
consumption and income. Consumption function is a mathematical formula to
obtain the level of consumption given a level of income. Economists tinker with
numbers to fit the consumption function for different countries and groups that
are being studied. J.M. Keynes, the famous American economist, emphasized this
relationship. <o:p></o:p></span></div>
<span style="font-family: Times, Times New Roman, serif;"><br />
</span><br />
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">For instance
imagine a small country where all the consumption expenditure is only for carrots.
Bugs Bunny is a resident of this country and earns 10 units of currency every
month. He also spends a certain amount on carrots while the rest is saved for
later. If the consumption function for Bugs Bunny looks thus:<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<div class="MsoNormal" style="margin-left: 36.0pt; text-align: justify; text-indent: 36.0pt; text-justify: inter-ideograph;">
<span style="color: blue;"><span style="font-family: Times, Times New Roman, serif;">Consumption
Expenditure = 2 +
½ x Income<o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">Then we can simply input Bugs Bunny’s income in the formula
and find out that he spends 7 units of currency on Consumption (carrots). We
also can see that he will save the rest i.e. 3 units of currency. The most
important feature of this formula is that it will tell us how much Bugs Bunny
will consume if he gets richer (higher income) or if he gets poorer (lower
income). We can easily input the value of income in the formula and obtain the
value for consumption. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgV4fhCi0XS_Ghw7ykcCW3PhEUqlEFJAKPa8W1yihiWt0ydBQd3PqEKjhcv2xqS5tIeHHG5ZtT55G4hf8_RF9cMTdISgRFBA0G_9wVHZX0md1iGMZCzl7oqFkbbLLSMY0ytU3nyqe7nyxI/s1600/Screen+Shot+2013-02-23+at+2.22.49+PM.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><span style="font-family: Times, Times New Roman, serif;"></span></a></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgV4fhCi0XS_Ghw7ykcCW3PhEUqlEFJAKPa8W1yihiWt0ydBQd3PqEKjhcv2xqS5tIeHHG5ZtT55G4hf8_RF9cMTdISgRFBA0G_9wVHZX0md1iGMZCzl7oqFkbbLLSMY0ytU3nyqe7nyxI/s1600/Screen+Shot+2013-02-23+at+2.22.49+PM.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgV4fhCi0XS_Ghw7ykcCW3PhEUqlEFJAKPa8W1yihiWt0ydBQd3PqEKjhcv2xqS5tIeHHG5ZtT55G4hf8_RF9cMTdISgRFBA0G_9wVHZX0md1iGMZCzl7oqFkbbLLSMY0ytU3nyqe7nyxI/s1600/Screen+Shot+2013-02-23+at+2.22.49+PM.png" width="343" /></a></div>
<div class="separator" style="clear: both; text-align: center;">
<br /></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">Similarly,
the way we use this formula for one particular person (Bugs Bunny), we can also
use it for all the people. If we know the National
Income we can calculate the total
consumption expenditure of the entire nation. Although sometimes it is difficult
to figure out what exactly is consumption function, economists have used it on
many occasions. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<h3>
<span style="font-family: Times, Times New Roman, serif;">Other Ideas on
Consumption<span style="text-align: justify;"> </span></span></h3>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">After
the basic foundation of consumption
function there were many more ideas on consumption and saving. The most
important concepts are two- the ‘permanent income’ and the ‘life cycle’ idea.</span></div>
<h4>
<span style="font-family: Times, Times New Roman, serif;">Permanent Income Idea</span></h4>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">This
theory suggests that people like to consume smoothly. This means that, people
don’t want to consume more in some years and less in some years. On a long time
scale, they want to maintain a similar
standard of living. While they are keen
to live better lives they certainly do not want to be worse off. It is because
of this feature that people do not trust ‘temporary income’ and rely more
on ‘permanent income’. Permanent income is that part of income that can be
expected to be regular. It is stable and does not increase or decrease
suddenly. Temporary income is that part of your income that you never expected.
For example, winning a lottery would be temporary income and earnings from a decade old farm gives you permanent income. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">Because
people trust the permanent parts of income much more than the temporary parts
of their income, they base their consumption on it. So in other words,
consumption depends on the permanent part of people’s incomes, not on the
temporary part. <o:p></o:p></span></div>
<h4>
<span style="font-family: Times, Times New Roman, serif;">The Life Cycle Idea<span style="text-align: justify;"> </span></span></h4>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">The
life cycle idea brings finance into our understanding of consumption and
income. What it basically says is that even though we as individuals maintain a
similar standard of living throughout life, our incomes vary a lot. We do not
earn as children and as students. Neither do we earn when we are old and
retired. We earn the bulk of our life’s worth between the ages of 20 to 60. In
this middle age, we earn enough to provide for ourselves and manage to keep
some income for later use. What the Life Cycle Hypothesis says is that when we
are young and old our consumption expenditure exceeds our income and thus we
must borrow. In our middle ages as we earn more than we need for consumption,
we must save. Banks help us connect the phases of our life where we are in need
of money and when we have too much money. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">The
life cycle hypothesis divides our lives into 3 parts. <o:p></o:p></span></div>
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<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt; text-justify: inter-ideograph;">
<!--[if !supportLists]--><span style="font-family: Times, Times New Roman, serif;">1)<span style="font-size: 7pt;">
</span><!--[endif]-->The Early Ages:
Between the ages of 0 to 20, we are mostly children and students who
need to borrow to maintain a standard of living. We are taken care of by family
and government. Our Consumption is more than our Income; hence we borrow to
maintain it. <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt; text-justify: inter-ideograph;">
<!--[if !supportLists]--><span style="font-family: Times, Times New Roman, serif;">2)<span style="font-size: 7pt;">
</span><!--[endif]-->The Middle Ages: Between the ages of 20 to 60 we
are usually earning. We do not depend on anyone and earn much more than we can
consume. Hence our Income is more than our Consumption and we are able to pay
our past loans and save for the next age.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt; text-justify: inter-ideograph;">
<!--[if !supportLists]--><span style="font-family: Times, Times New Roman, serif;">3)<span style="font-size: 7pt;">
</span><!--[endif]-->The Old Ages: After 60, we are too old to work
and once again need looking after. We use the money that we have saved in the
Middle Ages, or in other words we dis-save in order to survive.</span></div>
<h3>
<span style="font-family: Times, Times New Roman, serif;">It’s all about us…
really!</span></h3>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">Consumption
and Saving, are concepts defined to explain what you and I do. These concepts
try to tell us how we spend and how we save. Economists spend years trying to
figure out how we as individuals spend our money. It’s all about us… really!
Economics in this case is once more trying to explain the very basic elements
of what we do. Economics is not rocket science or even ‘dismal science’. It is only
trying to help you understand yourself. Consumption is important both at
national and individual level. Good Governments are concerned to enable people
to raise their incomes and this ultimately leads to consumption spending. If we
are able to consume more, our standard of living rises. In my opinion, study of
Consumption can contribute to the welfare of
people. Also higher levels of Consumption gives more opportunity for business to bloom. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;"><br /></span></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://sshorn.org/_wizardimages/030912cartoon.gif" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span style="font-family: Times, Times New Roman, serif;"><img border="0" height="316" src="http://sshorn.org/_wizardimages/030912cartoon.gif" width="320" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Times, Times New Roman, serif;">Helping the economy, bit by bit.</span></td></tr>
</tbody></table>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<br /></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">Consumption
is about everyone!<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: Times, Times New Roman, serif;">Economics
is for everyone! <a href="https://www.blogger.com/blogger.g?blogID=5296959768348252194" name="_GoBack"></a><o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
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In our world there exist a massive number of occupations. We live in a world where a wide variety of work is carried out simultaneously. Lawyers, doctors, factory-worker and government officials are only the tip of the iceberg. It possibly is impossible to list out all the types of occupations. Some of them are so unusual that you probably have never heard of them. For instance, have you heard of a computer-player factory in China that hires people to play through the difficult levels in online games for the computer nerds in the West? Probably not. It is interesting to note, the wild variety of jobs that arise from wild purposes. Everyday there are newer areas where people are needed. Who would've ever thought that there could be a market created by rich lazy gamers? </div>
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It is very easy to understand that when all the people in a country are working, the country will perform better. Also if many people are <i>unemployed</i> then that country will not perform as well as it can. Economics, provides a deep insight into the nature of this employment. The branch Macroeconomics, tries to study the total unemployment in the country. It observes how far from potential performance is the country. It tells us the structure of the people who are unemployed, and finally it advises the governments on how they can aid the people and help provide jobs. A stable job, as it turns out is the central feature for all adults. It provides a means of sustenance and survival for some, and the ability to thrive for others. The first thing that Macroeconomists do while studying employment, is to define it properly. Who in fact is employed or unemployed? And who is neither? </div>
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<h4>
The Labor Force</h4>
<div>
All the people who are able bodied, fit of mind, legally allowed and eager to work are considered part of the <i>labor force. </i>Labor in this sense does not mean 'hard work' or carrying bricks. Even industrialists and teachers are in this sense part of the labor force. The whole question of the labor force arises because not everyone in the entire population can work. It seems silly to call children in the primary school as unemployed. Also, if your grandfather is currently relaxing at his holiday home, it wouldn't be nice to poke his conscience by calling him unemployed. Also if we included retired people and children while calculating unemployment we would get misleading data. So we chose to exclude children, old people, people with a mental illness, students pursuing higher studies and even those lazy househusbands. Another interesting feature of the labor force is that it only includes those people who are <i>willing to look for work. </i>So this means that your Uncle _____<u> </u> (fill in the blank) who isn't even trying is <i>not </i>considered a part of the labor force. Apparently these <i>discouraged </i>people are not even that important to be considered while calculating employment.<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIVr2sCKeBoVieenyPuEciwDNqkj2WGTScq6NlHhTX7yYD547qfRKTSkDXcVTno0qxoJ0r_VMo0VwpoRAmao7NEoC1Dee5Is3IANtt0B28lkgz-my0QS2x2y9yZqoQSDybDYbmsoWPLoE/s1600/Screen+Shot+2013-01-12+at+8.57.06+PM.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIVr2sCKeBoVieenyPuEciwDNqkj2WGTScq6NlHhTX7yYD547qfRKTSkDXcVTno0qxoJ0r_VMo0VwpoRAmao7NEoC1Dee5Is3IANtt0B28lkgz-my0QS2x2y9yZqoQSDybDYbmsoWPLoE/s1600/Screen+Shot+2013-01-12+at+8.57.06+PM.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Data : 2010</td></tr>
</tbody></table>
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The <i>participation rate</i> finds out the ratio between the total adult population and the labor force. It is a percentage that tells us how much of the adult population is in some sense 'productive' and how many people who 'could have' been significant. A country with a high participation rate seems to perform better than one with a lower participation rate, all other factors being constant (commonly used economic phrase!). Also, the topic about homemakers not being a part of the labor force, is controversial and in my opinion a major flaw in the current method of calculating employment. It is hard to believe that stay-at-home-moms and cooking-dads add no value to the economy. </div>
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<h4>
Employment Rate</h4>
<div>
Within the labor force, after the necessary and sometime confusing deductions from total population, we have the <i>employed </i>and the <i>unemployed. </i>The <i>unemployment rate</i> is the percentage of people in the labor force who are unemployed. This data is extremely vital, and is studied intensely throughout the world. It is also one of the most important indicators of progress and welfare. This rate also helps us compare countries and the standard of living. This rate can make or break the careers of Politicians, and is a source for the never ending demand for economists (thankfully!). It is easy to see in the following table, that successful countries make the most of their resource and have a high employment rate.<br />
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<tr><td class="tr-caption" style="text-align: center;">Data : In and around 2010</td></tr>
</tbody></table>
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It is important to note, the dimension of time in this picture. Data for unemployment is usually found via a survey and hence the data corresponds to a time frame. So it makes more sense to say - "The employment rate Cuba in 1959 was 24%" than without mentioning the time of the survey.<br />
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<h4>
How does one calculate Joblessness? </h4>
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The approach taken to figure Joblessness is simple. There are two tried and tested method to determining the rates. If you want to know whether your cousin Rohan is employed or not, you either ask him or you ask his boss. Hence, elaborating from that, the employment level is found by either a <i> household survey</i> which goes from door to door people whether they have a job or not, or a <i>payroll survey </i>where the company provides details of its employees.<br />
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There are certain flaws of either method. For instance, a person holding two jobs might pop up twice on the payroll survey. A person who runs a small home based shop or business is said to be self-employed and is overlooked by the payroll survey. Also if you notice, the payroll survey only gives details on those employed and does not indicate 'unemployed'. This is like the joke, of a classroom teacher who wants to save herself the trouble of taking attendance by asking 'all those who are absent raise your hands'.<br />
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The household survey also yields other difficulties. If the information on the size of the population is incorrect then the information on employment is also. Legal and illegal immigration causes difficulties in collection of data. Some people might give incorrect information on their working status. They may choose to lie about their unemployment out of shame or lie about employment to reap the unemployment benefits that the government provides.<br />
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Some economists say one survey is better than other, and some say the opposite. This topic of employment also raises debate and controversy. </div>
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<h4>
Some Interesting Types of Unemployment </h4>
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<i>Frictional Employment </i>exists in the time period when a worker changes jobs. This transition time that he or she needs to search for another, is the cause for Frictional Unemployment. </div>
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<i>Long-term Unemployment</i> is the unemployment that has lasted more than a year or so. Larger amount of long term unemployment can be disastrous for the country. </div>
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<i>Structural Unemployment</i> occurs because of the unavailability of people to match the requirements of available jobs. For example, certain universities have vacant positions as the people who apply to become professors are not qualified enough. Structural Unemployment includes <i>Technological Unemployment </i>which is caused by the replacing of human workers by machines and automations. It is easy to see the emergence of this form of employment in the future. I have watched too many sci-fi movies to ignore the possible competition from cyborg economists. Structural Unemployment also includes <i>Seasonal Unemployment </i>which is caused by the losing of jobs because of seasons. Its easy to why umbrella-makers go out of work when the monsoon ends. Look at it this way : Santa is unemployed in Summer!</div>
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Unemployment brings grief and panic,making life harder for coming generations. Nations have been trying to tackle this problem since time immemorial. The great recession of 2007 brought a surge of unemployed into the picture and caused a massive slowdown of our economy. The great depression of the 1930's did much worse. A good government makes sure that its people have means of survival, and looks to lower its unemployment rate. For college students and young professionals these jobs are crucial. Low employment leads to high college dropouts and other problems. Be it getting a job or getting a friend one, the employment of an economy matters to each one of us.<br />
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Best of luck!<br />
Economics is for everyone! </div>
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Anonymoushttp://www.blogger.com/profile/03827583069018807964noreply@blogger.com2tag:blogger.com,1999:blog-5296959768348252194.post-15606260623889567592012-12-10T10:34:00.000-08:002012-12-10T10:34:06.083-08:00The Telescope of the World : Macroeconomics <br />
<h3>
<b>Peeking From Rooftops</b></h3>
Have you ever stood on top of a tall building and looked down at the people below? The random patterns, very busy yet very routine. Crowds of all sorts, carrying within them individuals. These individuals follow their own purposes but even then the view that you get seems to have common themes. None can change the <i>collective motion</i>, yet every one of them is part of the picture. As they say, 'what is an ocean but a multitude of drops.'<br />
Macroeconomics is the bird's view of the economy. It studies not one or two people but thousands or millions of them. It studies the collective forces of supply and demand, as well as total production levels in the economy. It sees content as an <i>aggregate</i><i>.</i> It looks at policies and their effects, laws and their repercussions and people and their choices. Not at the individual level but at the <i>societal</i> level. <br />
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<ul>
<li>Why did Japan's productivity boom in 1960? </li>
<li>What could really be the cause behind the Israel-Palestine issue? </li>
<li>Where would the electronic revolution of America lead to? </li>
<li>How did India manage to transform it's growth rate in just two decade? </li>
<li>How did the world pull out of the Great Depression of the 1930's? </li>
<li>How did the FIFA World Cup 2010 help South Africa? </li>
<li>Can we compare the 'standard of living' of two places in two different times? </li>
<li>Is the current growth rate of Russia, good enough to keep pace with the world? </li>
<li>What is the unemployment rate of Indonesia? </li>
<li>What is the worth of America? </li>
<li>How do we measure the economy of the Vatican? </li>
<li>Was the primary difference between the two superpowers of the cold war, just property rights?</li>
</ul>
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Macroeconomics is able to answer these questions to some extent, and gives us valuable insight into the economy <i>as a whole</i><i>. </i>In my opinion, it is Macroeconomics that influences government decisions the most. Economists are brought to study the vast economy and provide useful advice on increasing growth and reducing hunger. They crunch vast numbers into statistical models and with the help of certain <i>theory </i>they predict and analyse the happenings of the economy. A major part of the work done by Macroeconomists is to figure out the 'value' of an economy.<br />
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<h3>
<b> The Infamous Gross Domestic Product</b></h3>
<b><br /></b>
China took over Japan as the world's second largest economy in 2010.<br />
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What does that actually mean?<br />
Does it mean that Chinese live better than Japanese?<br />
What is this measure of '<i>economy</i>'?<br />
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The Gross Domestic Product acts as one form of measure for economies. In fact, there are many other methods of measuring an economy that nobody can say for sure that China really has a bigger economy than Japan. However, economists use the GDP to measure various kinds of economies and this has become the standard for the world. So what is the GDP?<br />
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The GDP of China, is the value of all things produced in China in a given period of time.<br />
Simple.<br />
<br />
Want a longer definition?<br />
<br />
'<i>GDP at market prices, is the total market value of all final goods and services produced within an economy in a given period of time.</i>'<br />
<br />
This means that the GDP of a economy is just the value of total production, in a given period of time. For example if China produces two goods in a year, cakes and cellphones. Then the GDP of China is merely the market value of cakes added to the market value of cellphones. We must note that all cakes or cellphones that were made last year are excluded. We only consider the final goods, that were made in that year itself.<br />
<h4>
What really is this market value of all goods and services?</h4>
Let us for one moment digress from tiring economic jargon, and come back to reality. What do we really mean when we talk about the market value of any product? By this we mean the amount any body would have to spend to acquire it. Also, this means the amount a seller must receive if he is to part with it. Hence, the market value symbolizes both <i>expenditure </i>and <i>income. </i>For the consumer, the market value is the amount he must pay and for the firm (fancy term for a producing unit) it means the income it must receive in order to sell it. Hence, due to the fundamental phenomenon that in every transaction the buyer's expenditure is the seller's income, and that this value is the market value of the product; we realise that the GDP of the nation is simply its expenditure or income.<br />
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<span style="text-align: left;">So, in simple terms, when we say that China has a larger GDP than Japan, we imply that the amount of expenditure in China is more than the amount of expenditure in Japan. Or we mean that the incomes of people and organisations </span><i style="text-align: left;">collectively</i><span style="text-align: left;"> are more than the ones in Japan.</span><br />
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Does this mean that everyone in China is better off? No.<br />
Does this mean that Chinese are more healthy? Not really.<br />
Does this mean that Chinese have more opportunity? Not really, no.<br />
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The GDP is simply a <i>quantitative </i>measurement, that does not include <i>quality. </i>Of course, there is some relation with how welfare of a country and the welfare of its people, but the accuracy and popularity of the GDP are beginning to be questioned. In fact, in the Kingdom of Bhutan, the official measurement is the <i>happiness</i>! The people of Bhutan believe that the <i>Gross National Happiness</i> is the real measurement of the economy. It is a novel approach at understanding its people, and a new direction for the world to shortly follow. However, the GDP remains the standard measurement for the world. Here are some countries and their respective GDP's.</div>
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Is it Real-ly Nominal? </h4>
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Time always plays tricks on us. Sometimes, it fools our interpretation of how well we are doing. If GDP is increasing along with time, so are prices. And if we want to believe that we are doing well at any one point of time, we must have some other time frame to compare it with. Not only must we compare the GDPs between countries, but also we must compare GDP of past countries and present. How well have we really done today, can only be told by how well we have done in the past. So do we compare the market values for today and yesterday and figure out how much better off we are. </div>
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BUT WAIT</div>
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There is a catch, do note, that the general price level has been rising for a long time. Items cost much more right now, than they did in their past. This <i>inflation </i>brought by time, can play tricks on our comparisons. If prices are usually rising, isn't the market value also rising. Hence, the GDP calculated at <i>current prices</i> is almost always increasing. Hence, how do we even actually account for an increase in total production? </div>
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The answer lies, in a simple trick, that economists use to compare two time frames. </div>
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They hold the <i>prices constant. </i><br />
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They catch hold of the prices, and quite roughly, make them sit still. In effect, if in need for comparison economists use identical prices while calculating the GDP. This is called <i>Real GDP</i> and uses the prices that used to exist at one selected <i>base year. </i>This tells us, what our economy is worth if the price level was still as it was in the base year. The earlier version of the GDP that was explained was the <i>Nominal GDP</i>. It gave the market value at the current prices. Usually, the Real GDP is treated with more importance when it comes to comparison. Many countries often find that with a lot of rising prices, their Nominal GDP rises. This can be very misleading about how well they are doing in fact. Their Real GDP however stays the same, informing us that prices are indeed rising.<br />
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Be it Mayans, Romans, Greeks, Germans, Indians, Chinese, Cubans or even Europan, the people of a country must know how well they are doing. Nations must understand their progress and their productivity. The GDP is one such method currently employed to measure progress. It definitely is a primitive method, and it reminds us that Economics as a subject has not evolved enough to find solutions without simplifying too much. The GDP is a simplification, that Economists use to measure different economies at different locations, both geographically and historically. What is important here, is to observe that the GDP is a attempt at finding <i>value generation </i>that happens when a economy functions. </div>
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Creating Value, depends on two things- quantity and quality. Quality, in some ways is represented by price, depicting scarcity. Quantity, here is representing by amounts of goods and services produced. Even today, more complex methods exist to measure economies and hopefully in the future even more detailed methods appear that would let us incorporate many more valuable concepts. Generating ideas or religious and cultural values are also a part that defines a nation. What about Unity? Honesty? Courage? Accountability? Maybe its a bit far-fetched to think about measuring such abstract concepts, but maybe one day it may be possible. One of the prime aspects of Macroeconomics, is finding the worth of economies. </div>
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Maybe one day everyone will know the <i>true</i> worth of economies.</div>
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Even then, Economics is for Everyone. </div>
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-Pranjal Rawat</div>
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<br />Anonymoushttp://www.blogger.com/profile/03827583069018807964noreply@blogger.com0Patna, Bihar, India25.621715959845751 85.15502929687524.70048595984575 83.891601796875 26.542945959845753 86.418456796875tag:blogger.com,1999:blog-5296959768348252194.post-85066091772457634132012-11-22T07:14:00.000-08:002013-08-20T11:07:47.121-07:00Choice, Preference and the irrational concept of Rationality. <div dir="ltr" style="text-align: left;" trbidi="on">
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Understanding Ourselves</h3>
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Everyday in our lives, we have thousands of choices before us. Each day, we subconsciously make quick logical decisions such as whether to eat a banana over an apple, or driving to work or taking the bus, or leaning in for a kiss or just embracing. Even as laymen, we make quick calculations on what we like and what we prefer and decide in a matter of seconds. Economics, surprisingly you will find, focuses on figuring out how this happens. <i>Consumer Behaviour Theory</i> is the incomplete attempt at explaining why we do what we do. Consumers as the name tells, are those economic agents ( not secret agents like Mr. Bond) that have the power to consume. We consume a variety of products that we see in the market. </div>
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In order to understand how we choose, we must first figure out what we like. Economists call this <i>preferences. </i>We must understand what we prefer, and to do so we must make a conclusion about our mindset. Our preferences come from our <i>rationality. </i>Rationality is the basis for all preferences. Hence, it becomes extremely important to try and figure out what exactly is "Rational Thinking". Once we do that we can form a model to explain what is the logic behind <i>choice. </i>And funnily enough, our choices, truth be told, tell us about our rationality. A circular pattern of human reasoning.<br />
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Rationality </span></h3>
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There are many views about Rationality, however most of them seem far from reality. Yet, apparantly, economists prefer to use a more simple but less real concept of rationality. This in my opinion, is an area where more research should be done in order to make models more realistic. </div>
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1) Self Interest Model of Rationality : The self interest model makes man a very selfish being. It says that man will only look for his benefit in every transaction. While shopping for shoes, he try to get the best shoe for the lowest price. This model says that man wants to get the maximum while losing the minimum. If the cost side is not taken into consideration, man will always prefer more to less. Hence man will prefer more of a comodity to less of the same. </div>
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2) Present Aim Model of Rationality : This model makes man a very spontaneous character. It says that, right at the moment of decision what man wants is what he will choose. If I want to eat a strawberry fruit cake right now, I will choose a strawberry cheese cake over anything else. The flaw here is not hard to see. What about the future? A working man knows he loves to sit on the couch all morning watching cartoons over going to the workplace, but he must realise the trade-off between now and later.<br />
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3) Bounded Rationality : This model makes man a slightly confused character. It says that man does not have the perfect knowledge of the market and about the possibility of cheaper/better goods, and hence makes a rational decision based on his current knowledge. Man's understanding is bounded and hence he makes perfect imperfect decisions. He tries to make do with what he knows.<br />
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So which model do you think economists use? Bounded Rationality? Well, no! The standard model, uses the Self-Interest model of Rationality. This means to say that more is better. If we are offered more of something, we will always choose it. This might not be true is many cases, and might seem a bit hedonic.<br />
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For example, for when we gift our loved ones on christmas or on their birthday, we do not follow this. We in-fact are ready to take a loss in order to see someone else happy. Also, sometimes we are not so greedy as the model says, even if offered we might not take ten mercedes cars, because we simply won't ever require them all. However, for simplicity and a focus, we accept this and proceed.<br />
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<b>Rational Behavior</b>, undergoes 3 steps.<br />
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First, we must chose a model of Rationality, which could be Present Aim or Self-Interest. It could even be a new special model that applies only to certain people like for example, 'Teen-cigarette-10-a-day model', that says that this particular teen follows self-interest model, but must have 10 cigarettes a day as a compulsion. Regardless of these distortions for 'standard models', what is important is to slap the label of some such model onto an individual and say that the individual will remain <i>consistent</i> within the scope of the model. Hence that poor teen cannot deviate from his own model, by having only 9 cigarettes per day.<br />
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Second, the individual must figure out what is actually possible for him to obtain. Here the underlying issue is that people cannot buy everything. We all have limited incomes and limited wealth. We are thus <i>constrained </i>by incomes,prices and other factors. Hence in this massive world of choices, most of them are well out of our reach. Some of these constraints may be brought about by age (some of us are too old for certain fun activities at the entertainment park, as for me, I cannot vote!), distance (I want a home in Mars, hardly possible), climate, natural elements, laws of our countries and even time! Usually economists consider only prices and incomes to be real constraints. Luckily, we aren't them.<br />
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Third, after deciding what is possible, the individual must decide what is BEST under his Rationality.<br />
Of all the things he purchases, he must measure all items bought to see where is the sweet spot. The balance between what is best and what is possible to buy. Note, the individual may also choose to save a little bit, for the future. This saving also has a certain sweet spot. Save too much and you cannot be happy now, save too little and you cannot be happy later. (Lazy mouse, industrious mouse story anyone?).<br />
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In very simple words, we decide how we might BEHAVE (step1), we see what we CAN choose (step2) and finally we choose the BEST of what we can (step3). </div>
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Preference & Indifference</h3>
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By preference, we imply taste. What are our tastes? What do we like over what ? The first problem that economists encountered was the problem of measure.</div>
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If we say that we prefer A over B, A must have a higher value to us than B. This value in use, in simple terms is <i>utility</i>. The utility we hope to derive in A is more than the utility we hope to derive from B, hence we chose A over B. This utility is more basically, just a scheme of ranking various options. If we rank A over B, we prefer A over B. </div>
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Again, there can be a case where we decide A is equally as good as B. Here, we are indifferent in our choice. We find A indifferent to B. In other terms, the utility of A is equal to the utility of B. </div>
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How do we measure and compare commodities so different as chocolates and shoes? <br />
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<li> The Cardinal Idea : This fancy name is simply short for giving a number to satisfaction or utility. For example, a chocolate can give us 10 utils of satisfaction and a pair of shoes can give us 15 utils of satisfaction. Utils, here is the unit of satisfaction. From the example it is easy to see that we will always choose a pair of shoes over a chocolate. However, as you can see, this is a very unrealistic way of comparing two goods. For every person, the utility for chocolates of shoes varies - I might value shoes at 10 utils and chocolates at 20. Hence this model takes us very far from real life, and we do not use it anymore. </li>
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<li>The Ordinal Idea : This idea says that utility can only be compared not measured. And from many comparisons, we can form a general idea about all the possibilities. If A is prefered to B and B is prefered to C, then A is prefered to C. By adding D, E, F, G and more, we can construct an entire table of preferences. </li>
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This was how the ordinal idea gave structure to preferences. This is the model that we use to understand consumer behaviour theory. The Cardinal Model is used, in other areas of Economics.<br />
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Now that we have defined preference we go on to the part which involves the larger part of economics. Choices are the actual deal, ultimately everything is life happens not by what we think, but by what we do. This is the real stuff, our choices. We choose our governments (in some countries), we choose the type of lifestyles we live, we choose our significant others and so many more. Robert Frost spoke of a very fundamental choice that he made in his poem, 'The Road not Taken', he however was not an economist and hence his poem was not labelled,<br />
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'Countless roads/crossroads not taken, taken, thought upon and some maybe chosen again, by countless people'<br />
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Phew. If you ever wondered what Economists really do, now you know. Ultimately every economist, sits with his mates, and thinks about what people might choose or have already chosen. Economics, here reminds us that ultimately it is people who influence <i>everything</i>. The prices, the laws, governments, fluctuations, inflations, recessions, wars, poverty, equity, incentive, etc. There are no aliens dropping from Europa who influence our economy. You may say, what about incomes and prices? Those certain constraints that influenced our decision. But once again, how really are incomes and prices decided? What about natural endowments like minerals, marine resource and population that constrain a country's choices? Well, the answer to that is, no country is 100% efficient and ultimately our fate is sealed by the hard work and<br />
co-operation of our people.<br />
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In short, our choices DO matter.<br />
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<b>ONE COMMODITY WORLD</b><br />
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Imagine, for example you are living in the island of Mordor, where only you and Legolas live. In this world, there is only one item that you intake as food, entertainment, medicine, leisure and everything else. This is called 'Jojoba' (pronounced Hohoba) and you are the buyer and Legolas is the seller. You being European, have 100 Euros with you and each Jojoba costs 20 Euros.<br />
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First, we assume that you are following the self-interest standard of rationality. From this we obtain your preference, you prefer having 5 Jojobas over 2 Johobas. The more the better.<br />
Next, we figure out what is feasible. As you can see, you can afford uptill 5 Jojobas. You cannot have 10 or 6 Jojobas. But you can have 4 or 3 of them.<br />
Next, with relevance to your selfish nature, and ignoring the effects of savings, etc; you will realize that you WILL buy 5 Jojobas. You have got the BEST from what you CAN.<br />
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This is your Optimal Choice.<br />
This is your Quantity Demanded. (With respect to the price i.e 20 Euro)<br />
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<li>What happens if Legolas, increases the price to 25 Euro per Jojoba?</li>
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<li>What happens if Legolas, reduces the price to 10 Euro per Jojoba?</li>
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Economists, would redraw that 'feasible set' and then use the preference structure to determine how demand changes. From every way we go, we will hit the Law of Demand. Economists use this approach in 2 Commodity worlds and even in N-Commodity worlds, to reprove the Law of Demand. They also figure our the interesting income effects and substitution effects (missing from above case).<br />
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Unlike us, they use complex mathematical models and utility functions to do this. Horrible sounding words like <i>Kuhn-Tucker Conditions</i> and <i>Strictly Quasiconcave over compact and convex domain, </i>are common in studies involving Consumer Behaviour.<br />
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However if you ignore the details, and be a little realistic even a child can figure out the inner clockwork design in the choices of people. Simple model building and logical ideas of Rationality, are easy to understand. The whole point of Economics is to simplify and explain beautifully how the world works. For that matter, any science should try to be simple.<br />
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<a href="http://tutorials.bitbucket.org/images/AlbertEinstein.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://tutorials.bitbucket.org/images/AlbertEinstein.png" height="480" width="640" /></a></div>
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Some of the people who write economics, write terrible economics. For example our dear Keynes, who saved a nation and probably the world. His General Theory is probably the single most important book in all of economic history and future. However, NO normal person outside the subject can EVER understand it. Even I can't go beyond 6 pages, without smashing it against the wall and slitting my wrists in agony. This book will go on to be an epic. Billions would have learnt so much, and understood something so fundamental, if only Keynes, would've remembered :-<br />
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Economics is for Everyone!<br />
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Anonymoushttp://www.blogger.com/profile/03827583069018807964noreply@blogger.comtag:blogger.com,1999:blog-5296959768348252194.post-49016135885257698312012-09-08T08:37:00.003-07:002012-12-10T10:35:18.597-08:00The Terrible Law of Demand<div dir="ltr" style="text-align: left;" trbidi="on">
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Most people begin their journey into the wonderful world of economics by stepping on demand. Also, this is the first step in into "<i>Microeconomics</i>" which basically is like standing in a garden and looking at one blade of grass. Microeconomics is easy, logical and definitely very interesting to beginners. It looks at one person going to a market and buying one or two things. It can also look at one person making something that can be sold to another. Microeconomics has grown a lot over the centuries and is now a very terribly complicated science. It uses difficult mathematical theorems and crazy assumptions to find what is "rational". By rational it means what is "common sense". So basically so much of work in Microeconomics has only told us how people apply "common sense" in everyday life. Great!<br />
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The other large part of Economics is <i>Macroeconomics</i>. Macro as we all should know stands for something that is large or gigantic. When we stand in the garden and study the entire neighbourhood, we are studying macroeconomics. I think they are two sides of the same coin, microeconomics studies how one person behaves and macroeconomics studies how all people behave. </div>
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Its interesting how each science defines it own definitions of certain everyday terms. "Abdullah went up to his father and demanded he let him go the football match", here demand indicates that Abdullah really badly wants to go for the football match but in the economic sense it means something else. Economists use "Demand" in the sense of buying and selling. How much do people of Japan want fish is the demand for fish in Japan. Wait! There is a catch. This is where the economic term deviates from the everyday sense. Demand in economics is incomplete without the power to demand it. This means that if Abdullah cannot convince his father, he is not demanding but merely wanting his father to let him go. In this case, the power to demand is money. If a person cannot afford something, he cannot demand it. Hence demand is incomplete without purchasing power. </div>
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So let us assume Abdullah is able to convince his father to a certain extent to let him go for the football match, he is able to demand. Now let us look at other part of the trouble. What does the father want in return? By this I want to bring your attention to the <i>Price </i>of something. As we all know, the price of apples is how much one pays for apples. Have you heard of the saying, "The best things in life are free", if so, I am referring to the things that aren't free. These second-best things in life have a price because they are not easily available. The beautiful sun on a beach is free because nobody can stop anyone from enjoying it. If someone covered the Earth with a blanket, she could charge a price on the enjoyment of the sun. Hence, the price of a something comes because it is difficult to obtain it on our own. This is <i>Scarcity. </i>When something is scarce or limited or not available easily, it has a price for it. </div>
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<tr><td class="tr-caption" style="text-align: center;">Abdullah's Dishes<br />
Price for a Football Match</td></tr>
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The Law of Demand or the Law of Common Sense, says that for higher price people demand lower amounts and for lower price people demand higher amounts. Is this not evident? If the price of lollipops became lesser, would you not like to buy a little more. If the price of petrol increases tomorrow, won't your demand fall and won't you try to manage with a little less. There are many reasons for this to happen, and many Economists have tried to make sense of the obvious. </div>
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One, because the money you hold in your pocket remains the same, you realise you can afford more lollipops if they are cheaper. If by bad luck they are more costly, you realise you cannot afford that many of them. This is called the '<i>Income Effect</i>'</div>
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Two, you look at the candy jar beside the lollipops. Normally you would buy some candy and some lollipops, because you like them so. Suppose lollipops have become costlier. Now you look at the lollipops twice and decide to take more of candy, because you can eat more. This is the <i>'Substitution Effect'.</i></div>
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Three, looking back at the demand for fish in Japan. If the fishes for some reason become more costly, lesser people can afford them. If fishes become cheaper, more people can afford them. This effect has no name, but I'd like to call it <i>'Now-I-Can-Afford-It-Yay! Effect'. </i></div>
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Think of it like this : Demand is the ugly princess, and Price is the beautiful princess.There is a tower where Demand keeps avoiding the beautiful one. The terrible law that we have just understood makes this happen. As Price climbs graciously to the topmost chamber, Demand descends to the bottom most. Price sometimes likes to come below to meet friends in the lower rooms, then Demand hurries to the upper chambers in tears. We must understand that Price is a free princess and Demand is the fleeing one. Demand avoids Price, but Price does not avoid demand. Pardon my crude anology, but it is easy to think of them like this.<br />
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According to me, Demand is beautiful concept. Economists study how it changes not only with changes in price but also in income, price of other things, taxation of government and many more. I have found that what people want is dependant on so many things, what I want is dependant on so many things. Here, Economics has helped me learn a little about myself and my wants. Economics goes on to teach us about other things about ourselves like our preferences, our reaction to various events and even what happens in our marriages!<br />
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Economics is for Everyone!<br />
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Anonymoushttp://www.blogger.com/profile/03827583069018807964noreply@blogger.comtag:blogger.com,1999:blog-5296959768348252194.post-35384540831603980022012-09-07T08:37:00.000-07:002013-01-20T14:23:46.901-08:00Econ is Easy! <div dir="ltr" style="text-align: left;" trbidi="on">
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Everyday life is buzzing with a billion ideas. Billions of actions, thoughts, feelings and emotions are played out by billions of people. We interact, we co-operate, we conflict and we compete throughout our lives. Our brilliant minds, analyse terrabytes of information regularly. We notice the laws and dynamics of nature and society and we go about our business without bothering too much. Science has apparantly developed from a small spark of fire to landing Curiosity on Mars. Social Science has transformed the way we think, and has carved out intellect, free and critical thinking from the clutches of our animal instinct.<br />
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The laws of gravity, the history of the Soviet Union, the notion of evaporation, the flow of rivers and the fact that living organisms can die are a part of the gigantic subconsciousness that we carry with ourselves everyday. We appreciate the advances and the efforts of people before us. Which one of us doesn't know Mother Teresa, Archemedes and Gandhi? Certain people and concepts have directly impacted our daily lives and that is why we know them, and we recognize them.<br />
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Economics, however remains in my opinion above the reach of the common people. When people hear the word "Economics" they probably begin to think about money dancing in complicated patterns or high business officials shaking hands or some very difficult mathematical theorems. Economics seems to me, out of the reach of the common people and out of their active subconsciousness. Maybe it has been displayed this way. Books on economics use complicated words such as "Marginal Product of Labour" and "Law of Diminishing Marginal Utility". I think, that economists assume that the subject cannot be explained without using fancy language and funny graphs.<br />
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It is not so. Economics is a science that brings together, a little bit of logic, a little bit of numbers, a little bit of common sense and most importantly a large bit of our everyday lives. It is a beautiful subject that has grown big and mature, and is just beginning to show the full extent of its scope in the 21st century. I want to believe that Economics can be taught in a simple and easy fashion. Can it be done? Complicated concepts such as utility maximization and envelope curves reduced to simple statements? The hardest of concepts must be made into simplest of statements. That is the mark of true insight.<br />
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Economics is for Everyone!<br />
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