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Marginal benefits and marginal costs are concepts that are associated with one more unit. Since the decision to purchase a house usually involves a choice between either purchasing zero, purchasing one, ALL benefits and costs would be marginal. The concept of “marginal” loses its meaning and importance. The strength of the economy can affect the benefits of home ownership because it would determine the future market value of the home. Since the home is probably the most expensive asset that a person will own, this will affect a person’s wealth greatly.

Marginal benefits and marginal costs are concepts that are associated with one more unit. Since the decision to purchase a house usually involves a choice between either purchasing zero, purchasing one, ALL benefits and costs would be marginal. The concept of “marginal” loses its meaning and importance. The strength of the economy can affect the benefits of home ownership because it would determine the future market value of the home. Since the home is probably the most expensive asset that a person will own, this will affect a person’s wealth greatly. The strength of the economy will affect the costs of home ownership in a number of ways. It will determine the market price that has to be paid at the time of purchase. It will be the most important factor in determining the interest rate, and therefore how much has to be repaid. It will even affect the requirements that banks and other lenders put on qualifying for a home loan, which would affect down payments and interest rates. It will determine whether the person will have enough income to afford the future payments. If any of the factors involved change “marginally”, this would change the balance between total benefits and total costs, but the decision itself would not be a marginal decision. For a given mortgage interest rate, eliminating the tax deductibility of the payments increases the after-tax cost, leading to a decline in demand for owner-occupied housing and ultimately reducing housing prices.  In other words, the simple experiment of removing the mortgage interest deduction, without changing anything else, has the result people seem to think it will. When there is more taxes, we reduce our spending. However government spending cannot be without first taking money from the private sector. Government spending and taxes reduces the amount of resources we have to spend.

 

 

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The advantage of international trade is countries with certain quantity, quality, and efficient production of goods and services can maximize their country’s wealth. Developing country’s increase sales and revenue through production expansion. International trade increases a country’s gross domestic product (GDP) by increasing the production of products sold to other countries.

 

 

 

 

International Trade Simulation and Report

XECO/212 ECONOMIC THEORY

John Cole

9/1/2012

 

 

 

The advantage of international trade is countries with certain quantity, quality, and efficient production of goods and services can maximize their country’s wealth. Developing country’s increase sales and revenue through production expansion. International trade increases a country’s gross domestic product (GDP) by increasing the production of products sold to other countries. The free trade agreement between Rodamia, Uthania, and Suntize allowed each country to more efficiently use their resources to increase wealth through the comparative advantage of their export commodity. The flipside of international trade is another country’s ability to produce an export more efficiently than the importing country, causing domestic producers and firms to lose revenue or the opportunity for additional revenue. For example, if Rodamia continues a free trade agreement with Uthania for imports of corn, Rodamia misses the opportunity to become a large producer and net exporter of corn – hurting domestic producers and firms.

To counteract the loss of increase revenue for domestic producers and firms, the Rodamia government can impose a tariff – place a tax on the corn or limit the amount of corn imported from Uthania – a quota. The government placing a tariff or quota on corn imported from Uthania protects domestic producers and firms from cheaper imports of corn and affords time to develop efficiency in the production of corn. In retaliation, Uthania may decide to impose a tariff or quota on exports from Rodamia. For both countries, the price of imports increases and consumer surplus decreases. Tariffs and quotas restrict free trade and diminish revenue.

Trade Simulation

Here are four key points that we found in our reading. First point is the Comparative Advantage and Trade. Comparative advantage is when a producer can provide a service or good for a lower opportunity cost than its competitors. An example of equilibrium in the market for foreign exchange is the currency exchange rate. For example, $1 equals 1.35835 Euros. It is the value of one item versus the other. The theory is that the exchange rates move to equalize the purchasing powers of different currencies is called the purchasing power parity. Last is, balancing of trade, the difference between the value of the goods a country exports and the value of the goods a country imports.

Absolute and Comparative Advantage

Absolute advantage is “the ability of an individual, firm, or country to produce more of a good or service than competitors, using the same amount of resources”. (Hubbard & O’Brien, 2010)  An example of absolute advantage would be if company A has five and produced 500 tires a day and company B has five employees but produces only 350 tires a day with the same resources.

Comparative advantage is “the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors”. (Hubbard & O’Brien, 2010) An example of comparative advantage is comparing company A and B for productivity of several items. Company A has better equipment, and is capable of producing all items faster than company B. However, by allowing company B to take on the items most efficient for company B and company a taking on the other items the total production output is optimized.

Foreign Exchange Rates

The influences affecting foreign exchange rates are currency appreciation, currency depreciation, shifts in demand for foreign exchange, and shifts in the supply of foreign exchange (Economics, Third Edition). Currency appreciation is an increase in the market value of one currency related to another currency, and currency depreciation is a decrease in the market value of one currency related to another currency (Economics, Third Edition). According to the text there are three factors that cause the demand and supply curves in foreign exchange market. 1. Changes in the demand for U.S.-produced goods and services and changes in the demand for foreign-produced goods and services. 2. Changes in the desire to invest in the United States and changes in the desire to invest in foreign countries. 3. Changes in the expectations of currency traders about the likely future value of the dollar and the likely future value of foreign currencies (Economics, Third Edition).

Shifts in the demand and supply curve can result in an increase or decrease in the foreign exchange equilibrium. An increase in the demand for dollars will increase the equilibrium exchange rate, and a decrease in the supply for dollars will decrease the equilibrium exchange rate (Economics, Third Edition). All of the factors that influence foreign exchange will cause an adjustment to a new equilibrium.

Debating International Trade Issues

Through the simulation “Applying International Trade Concepts” the group learned how to use and apply many important economic principals. Some concepts included using the Production Possibilities Frontier to determine the comparative advantage of Rodamia and the effect of imposing tariffs on imports from the neighboring countries, Alfazia, Uthania and Suntize, and the benefits of negotiating Free Trade Agreements with these countries.

The first step of the simulation was to use the Production Possibilities Frontier to determine if Rodamia would benefit most from exporting cheese or corn and DVD players or Watches. Individually the group conceded that exporting cheese and DVD players would give Rodamia the comparative advantage. Because Rodamia would export these items, it would be importing corn and watches. After choosing what products would be a part of the market, each member had to decide which country it would trade these exports and imports with. All members chose Suntize as the country that would be trading electronics with, but the decision of who to trade food products was split between Alfazia and Uthania.

After deciding which products would be traded, it was important to decide if creating tariffs would be beneficial or not. Although the exact numbers varied, most members of the group decided that it would be a good idea to impost a tariff. After the amount of the tariff was decided, the simulation provided a chart on how the decision of imposing a tariff affected trade. Rodamia’s balance in trade ended up close to 4% (plus or minus. 10%  depending on each team member’s tariff level).

Effect of Government Policy on Economic Behavior

The last major concept left to conquer was the decision to have a Free Trade Agreement or not and with which country, if the decision is yes. Universally, the group decided to negotiate a Free Trade Agreement with Uthania. By negotiating a FTA, it will increase trade, give consumers more products to choose from, and could open new markets for the future.

Most of the answers given by each team member throughout the simulation were similar. It seems clear that, the team members have a thorough understanding of these concepts and have applied them in the best way possible.

World Trade Organization (WTO)

The World Trade Organization is a forum where member governments can negotiate trade, settle disputes, and operate a system of rules. It is an organization for liberalizing trade. “At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations.” These documents provide the legal ground-rules for international commerce. The goal is to help producers of goods and services, exporters, and importers conduct their business while allowing governments to meet social and environmental objectives. It sets the legal ground rules, ratified in the member countries’ legislative bodies, for international trade. The system helps to promote peace, cut the cost of living, and make life more efficient on a global level.

The national treatment principle is a trade topic that the WTO debates. This topic is defined as giving others the same treatment as one’s own nationals. In 1995, Venezuela filed a complaint that the United States discriminated against foreign suppliers. The Clean Air Act of 1990 enforced restrictions on imported gasoline that it did not enforce on domestic refiners. Venezuela (and later Brazil) stated that the principle was violated because United States gasoline did not have to meet the same standards. The WTO’s Dispute Settlement Body agreed. After a process of appeal and debate the final ruling upheld the decision. The United States updated the legislation and reported the implementation back to the WTO. The policy keeps countries from holding imports to a higher standard than its own producers. This eliminates favoritism and a national advantage.

The WTO provides crucial support to the global economy. Growing economies are also given special consideration. They have longer to comply with regulations and make adjustments. This allows smaller economies to grow, and keeps the largest economies from taking advantage. Nations have the opportunity to compromise without escalating trade wars. The result is also a more prosperous, peaceful, and accountable economic world. The goal is to benefit the citizens of all member countries.

Conclusion

The study of international trade in the context of economics is interesting but chaotic. The United States with the free trade system between states is a huge  example of what many would want to see on a global scale. However, competing factors make free trade difficult to achieve.

References

Hubbard, R. & O’Brien, A. (2010). Economics (3rd Ed.). Boston, MA: Pearson Hall.

Economics, Third Edition, by R. Glenn Hubbard and Anthony Patrick O’Brien. Published by Prentice Hall. Copyright © 2010 by Pearson Education, Inc.

World Trade Organization (2010). WTO Website. Retrieved February 2, 2011 from http://www.wto.org/english/forums_e/public_forum09_e/info_e.htm

 

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“According to the economist’s definition, money includes only those few types of wealth that are regularly accepted by sellers in exchange for goods and services”(Mankiw, 2007, p. 642).This indicates that money would not have value if it were rejected regularly by sellers. Money’s first function is as an account unit. This means that all goods and services are valued in these terms. This is their common denominator. An antique shop, for instance, may carry a specific piece of furniture that the owner has placed a specific price on.

“According to the economist’s definition, money includes only those few types of wealth that are regularly accepted by sellers in exchange for goods and services”(Mankiw, 2007, p. 642).This indicates that money would not have value if it were rejected regularly by sellers. Money’s first function is as an account unit. This means that all goods and services are valued in these terms. This is their common denominator. An antique shop, for instance, may carry a specific piece of furniture that the owner has placed a specific price on. This is that item’s worth. The money that will be exchanged for that item is money’s secondary function. That is, the money is a means of exchange. Money replaces barter as the basis of exchange. Money takes us out of the barter system in which a person has to have direct contact with another person who each needs the services that the other has to offer. An example of this type of monetary exchange is the situation in which an individual travels to a store to purchase a new 50”High Definition Television(HDTV) that the store values at $1099. This individual must pay that price in order to receive that TV. The store is giving the TV for the funds instead of requiring that individual to provide some service or good that is worth the same value as the TV. This is the final function of money. It is a store of value for an item.The money itself has a constant value. This is why it can be saved. It is the goods that change in value. An individual who wishes to save their money for a period of time to hold it for a home payment may need a considerable amount of money to do so. They can store this money’s value for a protracted period until they reach their target goal, say $20,000.

ReferenceN. Gregory Mankiw. (2007). Principles of Economics – Chapter 29: Money and Prices in the Long Run.

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In Northlandia, there are no labor contracts; that is, wage rates can be renegotiated at any time. But in Southlandia, wage rates are set at the beginning of each odd year and last for two years. Why would equal-sized falls in aggregate output due to a fall in aggregate demand have different effects on the magnitude and duration of unemployment in these two economies?

Unit 9 Macroeconomics Homework Questions                           

 

Chapter 15

 

4. In Northlandia, there are no labor contracts; that is, wage rates can be renegotiated at any time. But in Southlandia, wage rates are set at the beginning of each odd year and last for two years. Why would equal-sized falls in aggregate output due to a fall in aggregate demand have different effects on the magnitude and duration of unemployment in these two economies?

 

The difference in magnitude and duration primarily depends on how long it will take for wages to react to the aggregate output change. “When aggregate output drops so does the demand for labor” (Krugman & Wells, 2006, p. 380) although the workers are still needed, employers are only willing to pay the lower wage.

 

For Northlandia; because wages can be renegotiated at anytime, employers will get the wages lowered through renegotiation, which will in turn shorten duration of unemployment. So when sales are slower wages are lower.

 

For Southlandia; because the wages are set at the beginning of each odd year, employers would be unable to lower the wages they are willing to pay and in times of slower sales the employers would have to continue to pay same wages or let the employees go, causing a higher and longer unemployment duration between the odd years.

 

 

 

10. Due to historical differences, countries often differ in how quickly a change in actual inflation is incorporated into a change in expected inflation. In a country such asJapan that has had very little inflation in recent memory, it will take longer for a change in the actual inflation rate to be reflected in a corresponding change in the expected inflation rate. In contrast, in a country such asArgentina, one that has recently had very high inflation, a change in the actual inflation rate will immediately be reflected in a corresponding change in the expected inflation rate.

 

  1.  What does this imply about the short-run and long-run Phillips curves in these two types of countries?  Japan is a country that can sustain the unemployment rate lower than the NAIRU for longer periods. I think this is because the Japanese take care of their middle to lower class families that basically drive the economy. That’s another subject. (Sheree this is just my opinion). However if the Japanese economy were to experience a higher inflation they would shift their expected rate upwards, which will shift their short-run curve upwards keeping their long-run curve vertical. I wish I had a scanner to show you with a graph. On the flip side Argentina’s short-run curve is vertical as well, because people are prepared to adapt to any inflationary increases. The unemployment rate below NAIRU here will quickly rise causing a rapid increase in inflation.

 

  1. What does this imply about the effectiveness of monetary and fiscal policy to reduce the unemployment rate? I think that Japanese monetary and fiscal policy will be more effective than Argentinean in lowering the unemployment below NAIRU. Argentinean monetary and fiscal policy will be ineffective in reducing unemployment below the NAIRU even in the short-run.

    (Krugman & Wells, 2006, p. 387-388)

 

 

 

Chapter 16

 

5. Concerned about the crowding-out effects of government borrowing on private investment spending, a candidate for president argues that the United States should just print money to cover the government’s budget deficit. What are the advantages and disadvantages of such a plan?

The only advantage I see here is per our reading this week this will enable the government to pay off our deficit quickly with no interest (Krugman & Wells, 2006, p. 397). The disadvantage would be that printing and releasing this money into circulation can lead to a massive increase in inflation, which will cause the money to depreciate (Krugman & Wells, 2006, p. 398). I actually can only see the disadvantage here although per our text the government and the FED work together doing this. It sounds like another borrowing from Peter to pay Paul.

 

 

 

6. Boris Borrower and Lynn Lender agree thatLynn will lend Boris $10,000 and that Boris will repay the $10,000 with interest in one year. They agree to a nominal interest rate of 8%, reflecting a real interest rate of 3% on the loan and a commonly shared expected inflation rate of 5% over the next year. (Hint: These are basic winners and losers scenarios, based upon effects of inflation. This is outlined beginning on p. 400.)

 

a. If the inflation rate is actually 4% over the next year, how does that lower-than-expected inflation rate affect Boris and Lynn? Who is better off? If the actual inflation rate is 4% then Lynn would be better off because Boris had expected to pay a real interest rate of 3%. But because the actual inflation rate is 4% (nominal – inflation = real) this means that the real interest rate has increased by 1% (8% – 4% = 4%) so basically Boris will pay more and Lynn will receive more than expected (Krugman & Wells, 2006, p. 400-401).

 

 

 

b. If the actual inflation rate is 7% over the next year, how does that affect Boris and Lynn? Who is better off? If the actual inflation rate is 7% then Boris is better off, Boris had expected to pay a real interest rate of 3%. But because the actual inflation rate is 7% (nominal – inflation = real) this means that the real interest rate will decrease by 2% (8% – 7% = 1%) so basically Boris will pay less and Lynn will receive less than was expected (Krugman & Wells, 2006, p. 400-401).

 

 

Krugman, P., & Wells, R. (2006). Macroeconomics. New York, NY: Worth Publishers.

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An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap—inflationary or recessionary—will the economy face after the shock, and what type of fiscal policies would help move the economy back to potential output?

Unit 7 Macroeconomics Homework Questions             

 

Chapter 12

 

3. An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap—inflationary or recessionary—will the economy face after the shock, and what type of fiscal policies would help move the economy back to potential output?

 

a. A stock market boom increases the value of stocks held by households.

When the stock market booms the stocks held by households will increase. Because of this increase consumer spending will increase too; the aggregate demand curve will shift to the right. Our economy will face an inflationary gap (aggregate output exceeds potential output) (Krugman & Wells, 2006, p. 296-298). The policy makers could use a contractionary fiscal policy; “reduced government purchases, an increase in taxes, or a reduction in government transfers” which will create a leftward shift in the demand curve, thus closing the inflationary gap and restoring the economy to its potential output (Krugman & Wells, 2006, p. 296-298).

 

b. Firms come to believe that a recession in the near future is likely.

If firms become concerned about a recession, they will decrease investment spending and the aggregate demand curve will shift to the left. The economy will face a recessionary gap (aggregate output falls below potential output) (Krugman & Wells, 2006, p. 296). Policy makers could use expansionary fiscal policy ‘increase in government purchases, a reduction in taxes, or an increase in government transfers” Which will create a rightward shift of the demand curve thus restoring the economy to its potential output (Krugman & Wells, 2006, p. 296-298).  

 

c. Anticipating the possibility of war, the government increases its purchases of military equipment. If the government increases its purchases of military equipment then the demand curve to shift to the right. The economy will face an inflationary gap. Policy makers would use a contractionary fiscal policy “reduced government purchases, an increase in taxes, or a reduction in government transfers” which will create a leftward shift in the demand curve restoring the potential output (Krugman & Wells, 2006, p. 296-298).

 

d. The quantity of money in the economy declines and interest rates increase.

When interest rate raise, investment spending will decrease and the aggregate demand curve will shift to the left. The economy will face a recessionary gap. Policy makers would use expansionary fiscal policies to create a rightward shift in the demand curve. Returning the economy to its potential output (Krugman & Wells, 2006, p. 296-298).

 

 

5. In each of the following cases, either a recessionary or inflationary gap exists. Assume that the aggregate supply curve is horizontal so that the change in real GDP arising from a shift of the aggregate demand curve equals the size of the shift of the curve. Calculate both the change in government purchases of goods and services and the change in government transfers necessary to close the gap. (Hint: This is where you need to take into account the multiplier effects of either government purchases or government transfers. Determining the multiplier for each is where you must begin. Beginning on p. 299, you’ll be able to find examples of how these formulas are applied. Note that government purchases and government transfers have different formulas to calculate the multiplier.)

 

a. Real GDP equals $100 billion, potential output equals $160 billion, and the marginal propensity to consume is 0.75. The economy is facing a recessionary gap because real GDP is below potential output (Krugman & Wells, 2006, p. 296).

Government Purchases = $15 billion = 1 / (1 – 0.75) = 4 (60 / 4 = 15) (Krugman & Wells, 2006, p. 301).This will increase real GDP by $60 billion closing the recessionary gap.

 

Government Transfers = $20 billion = 0.75 / (1 – 0.75) = 3 (60 / 3) = 20 (Krugman & Wells, 2006, p. 301). Real GDP needs to increase by $60 billion, so the government needs to increase transfers by $20 billion to close the recessionary gap.

 

 

b. Real GDP equals $250 billion, potential output equals $200 billion, and the marginal propensity to consume is 0.5. The economy is facing an inflationary gap because real GDP is above the potential output (Krugman & Wells, 2006, p. 296).

Government Purchases = ($25) billion = 1 / (1 – 0.5) = 2 (50 / 2) (Krugman & Wells, 2006, p. 301). A decrease in government purchases of 25 billion will reduce real GDP by $50 billion and close the inflationary gap.

 

Government Transfers = ($50) billion = 0.5 / (1 – 0.5) = 1 (50 / 1) = 50 (Krugman & Wells, 2006, p. 301). Real GDP needs to reduce by $50 billion, the government should decrease transfers by $50 billion to close the inflationary gap.

 

 

c. Real GDP equals $180 billion, potential output equals $100 billion, and the marginal propensity to consume is 0.8. The economy is facing an inflationary gap because real GDP is above potential output (Krugman & Wells, 2006, p. 296).

Government Purchases = ($16) billion = 1 / (1 – 0.8) = 5 (80 / 5) = 16 (Krugman & Wells, 2006, p. 301). A decrease in government purchases of $16 billion will reduce real GDP by $80 billion and close the inflationary gap.

 

Government Transfers = ($20) billion = 0.8 / (1 – 0.8) = 4 (80 / 4) = 20 (Krugman & Wells, 2006, p. 301). Since real GDP needs decrease by $80 billion, the government needs to reduce government transfers by $20 billion to close the inflationary gap. Sheree I hope I did the math right otherwise they are all wrong. J

 

 

6. Most macroeconomists believe it is a good thing that taxes act as automatic stabilizers and lower the size of the multiplier. However, a smaller multiplier means that the change in government purchases of goods and services, government transfers, or taxes necessary to close an inflationary or recessionary gap is larger. How can you explain this apparent inconsistency? According to our text it is true “many macroeconomists believe that it’s a good thing that government transfers reduce the multiplier” (Krugman & Wells, 2006, p. 302). Reducing taxes act as automatic stabilizers which affect the business cycle. When the business cycle is in an expansion stage there are increases in tax rates which in turn lead to contractionary policies. But when there is a decrease in demand and downfall in the business cycle, then there is a decrease in the tax rate and expansionary policies are created by the government to improve the economic condition.

 

 

 

13. In which of the following cases does the size of the government’s debt and the size of the budget deficit indicate potential problems for the economy?

a. The government’s debt is relatively low, but the government is running a large budget deficit as it builds a high-speed rail system to connect the major cities of the nation. I don’t see any potential problems here. Just like funding a war effort, it can be difficult to finance major improvements in a nations infrastructure without borrowing (Krugman & Wells, 2006, p. 312). But as long as the budget deficit ends with a building project, then there should be no long-run problems.

 

 

b. The government’s debt is relatively high due to a recently ended deficit-financed war, but the government is now running only a small budget deficit. Because the government’s debt is high but the government has reduced its budget deficit, then this should not indicate any potential problems for the economy. However, the government needs to be careful that the deficit does not become a persistent pattern otherwise like in our history we may never be able to repay the debt.

 

 

c. The government’s debt is relatively low, but the government is running a budget deficit to finance the interest payments on the debt. First off even if the debt is relatively low, running a budget deficit to finance the interest payments on that debt does pose a potential problem for the future. The government’s debt will continue to increase over time and with it the size of the budget deficit because the interest payments will continue to increase. This kind of sounds like a maxed out credit card if you only pay the minimum payment monthly but the minimum payment isn’t even covering the interest your bill will continue to increase because you are not even putting a dent in the actual owed amount (what you charged). To me this sounds like borrowing from Peter to pay Paul. All I have to say is NO WONDER..

 

This chapter was a challenge for me I believe I answered the questions. J

 

 

Krugman, P., & Wells, R. (2006). Macroeconomics. New York, NY: Worth Publishers.

 

 

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Your study partner is confused by the upward-sloping short-run aggregate supply curve and the vertical long-run aggregate supply curve. How would you explain this? First thing I would do is suggest to my study partner that she should re-read chapter 10 pages 236-250. LOL “The LRAS shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible” (Krugman & Wells, 2006, p. 242). “SRAS shows the relationship between AGL and the quantity of aggregate output supplied that exists in the short run when production costs can be taken as fixed” (Krugman & Wells, 2006, p. 238).

Macroeconomics Unit 6 Homework Questions                       

 

Chapter 10

 

1. Your study partner is confused by the upward-sloping short-run aggregate supply curve and the vertical long-run aggregate supply curve. How would you explain this? First thing I would do is suggest to my study partner that she should re-read chapter 10 pages 236-250. LOL “The LRAS shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible” (Krugman & Wells, 2006, p. 242). “SRAS shows the relationship between AGL and the quantity of aggregate output supplied that exists in the short run when production costs can be taken as fixed” (Krugman & Wells, 2006, p. 238).

 

4. A fall in the value of the dollar against other currencies makes U.S. final goods and services cheaper to foreigners even though the U.S. aggregate price level stays the same. As a result, foreigners demand more American aggregate output. Your study partner says that this represents a movement down the aggregate demand curve because foreigners are demanding more in response to a lower price. You, however, insist that this represents a rightward shift of the aggregate demand curve. Who is right? Explain. This would be a rightward shift in aggregate demand because more output is being demanded, because the foreigners want to buy, buy, buy because the price is low.  So I am right!

 

10. Suppose that the economy is currently at potential output. Also suppose that you are an economic policy maker and that a college economics student asks you to rank, if possible, your most preferred to least preferred type of shock: positive demand shock, negative demand shock, positive supply shock, negative supply shock. How would you rank them and why? As a policy maker my ranking would be; I would think the most preferred would be positive supply shock which “leads to higher aggregate output and a lower aggregate price level” (Krugman & Wells, 2006, p. 256) The government would not need to interfere with a change in policy. Negative supply shock would cause the economy to experience stagflation (lower aggregate output combined with higher price level or inflation), so that would make negative supply shock least preferred. I think that any changes in policy would worsten the state of inflation and further depress aggregate output. Positive demand shock “leads to a higher aggregate price and higher output” (Krugman & Wells, 2006, p. 257). A negative demand shock “leads to a lower aggregate price level and a lower output” (Krugman & Wells, 2006, p. 256). I would think that with either positive or negative demand shock as a policy maker would need to either use monetary or fiscal policies to counteract the effects of these shocks. I would rank the demand shock in middle positions.

13. Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, explain the process by which each of the following economic events will move the economy from one long-run macroeconomic equilibrium to another.  Illustrate with diagrams. In each case, what are the short-run and long-run effects on the aggregate price level and aggregate output? (Hint: You don’t need numbers for this question. You just need to show how the supply and demand curves will be affected by the events.)

 

a. There is a decrease in households’ wealth due to a decline in the stock market.

LRAS=Long-run aggregate supply

SRAS=Short-run aggregate supply

APL=Aggregate price level

AD= Aggregate demand

Household consumption drops as wealth declines. This decreases spending and the AD curve shifts in (left) and reduces the prices willing to be paid for goods. The falling price level along with wages raises the costs of hiring workers which causes output to drop to E2. (Krugman & Wells, 2006, p. 248-250) The combination of the dropping price level and fixed wages will raise real wage as the economy goes into a recession. The low demand for labor will put pressure on the nominal wage rate causing SRAS to shift down. Wages will continue to fall until the labor market equilibrium returns to its long-run levels identified as E3.

 


b. The government lowers taxes, leaving households with more disposable income, with no corresponding reduction in government purchases.

When households have more disposable income, an increase in spending occurs. This shifts out demand for goods and increases prices consumers are willing to pay for goods. The higher prices reduce the cost of labor. Falling wages cause increases in production which causes an upward shift to E2. When companies are producing an excess of output, the labor demand rises. This rise causes an upward pressure, which raises costs. The higher production costs are then passed on to consumers which reduces equilibrium demand. When wages have risen far enough that the excess demand for labor is in equilibrium real wages return to their equilibrium level identified as E3 at which time the economy has returned to its potential output. (Krugman & Wells, 2006, p. 248-250)

 

 

Krugman, P., & Wells, R. (2006). Macroeconomics. New York, NY: Worth Publishers.

 

 

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When one person saves, that person’s wealth is increased, meaning that he or she can consume more in the future. But when everyone saves, everyone’s income falls, meaning that everyone must consume less today. Explain this seeming contradiction.

Macroeconomics Unit 4 Assignment Questions                       

 

Chapter 6

 

2. When one person saves, that person’s wealth is increased, meaning that he or she can consume more in the future. But when everyone saves, everyone’s income falls, meaning that everyone must consume less today. Explain this seeming contradiction. This is called the paradox of thrift, (Business dictionary, paradox of (2010)) meaning that when people save their money less spending is the result, this in turn is slowing down production resulting in layoffs, unemployment and salary cuts. But what happens is the fall in consumption discourages investment, where investment can’t increase enough to make for the loss in consumption, therefore when total expenditures fall so does the GDP.

 

 

4. Why do we consider a business-cycle expansion different from long-run economic growth? Business cycle expansion (recoveries) happens when we put used resources back to work (Krugman & Wells, 2006, p. 144). “Long run growth rate refers to the growth of the economy over decades”   (Krugman & Wells, 2006, p. 149). I think they are considered in a different way because what actually matters is the average growth rate over long term and not the spikes and dips in growth.

 

Why do we care about the size of the long-run growth rate of real GDP versus the size of the growth rate of the population? These two are kind of related to each other. Real GDP is a measurement of purchasing power of economy or your living standard, where population growth depends on how fast it is increasing or decreasing. If the real GDP is growing at a slower rate than your growth rate then you will have a lower standard of living. That is why we should care the size of the long-run growth of real GDP. (I hope this explains what I am trying to convey here).

 

 

Chapter 7

 

2. A more complex circular-flow diagram for the economy of Macronia is shown below.

 

a. What is the value of GDP in Macronia? The value of GDP = C + I + G + (X – IM) GDP = $800 ($510 + $110 + $150 + $50 – $20)

 

b. What is the value of net exports? Net exports = X – IM = $30 ($50 – $20)

 

 

c. What is the value of disposable income?

 Disposable income = $710 income less taxes plus government transfers = ($800 – $100 + $10)

 

d. Does the total flow of money out of households—the sum of taxes paid, consumer spending, and private savings—equal the total flow of money into households? Yes they are equal $810 Sum of taxes paid, consumer spending, and private savings ($100 + $510 + $200), Flow into households = Wages, profit, interest, rent, + government transfers ($800 + 10)

 

e. How does the government finance its spending? Spending is financed with tax revenue and borrowing. Government spending = $160 ($150 purchases and $10 in government transfers) Financing = $100 in taxes + $60 in borrowing.

 

 

11. EastlandCollege is concerned about the rising price of textbooks that students must purchase. To better identify the increase in the price of textbooks, the dean asks you, the Economics Department’s star student, to create an index of textbook prices. The average student purchases three English, two math, and four economics textbooks. The prices of these books are given in the accompanying table.

 

 

 

  1. Create the price index for these books for all years with a base year of 2002. Market basket = 3 english books, 2 math books, and 4 economics books.

 

Cost in 2002 = (3 x $50) + (2 x $70) + (4 x $80) = $610

Cost in 2003 = (3 x $55) + (2 x $72) + (4 x $90) = $669

Cost in 2004 = (3 x $57) + (2 x $74) + (4 x $100) = $719

 

Index value 2002 = $610 / $610 x 100 = 100

Index value 2003 = $669 / $610 x 100 = 109.67 (109.7 rounded)

Index value 2004 = $719 / $610 x 100 = 117.86 (117.9 rounded)

 

 

b. What is the percent change in the price of an English textbook from 2002 to

2004? (Hint: To determine a percent change in price, you need to use the following formula…  (new price – old price)/old price x 100 …)

Percent change = 14% ($57 – $50 / $50 x 100).

 

c. What is the percent change in the price of a math textbook from 2002 to 2004?

Percent change = 5.71% (5.7 rounded) ($74 – $70 / $70 x 100).

 

d. What is the percent change in the price of an economics textbook from 2002 to 2004? Percent change = 25% ($100 – $80 / $80 x 100).

 

e. What is the percent change in the market index from 2002 to 2004?

Percent change =17.9% (117.9 – 100 / 100 x 100).

 

 

(2010) Paradox of thrift:Definition. Retrieved June 5, 2010 from

http://www.businessdictionary.com/definition/paradox-of-thrift.html

 

Krugman, P., & Wells, R. (2006). Macroeconomics. New York, NY: Worth Publishers.

 

0

Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes and catch fresh fish. The accompanying table shows the maximum annual output combinations of potatoes and fish that can be produced. Obviously, given their limited resources and available technology, as they use more of their resources for potato production, there are fewer resources available for catching fish.

Macroeconomics Unit 2 Questions                                                  

 

Chapter 2

1. Atlantis is a small, isolated island in theSouth Atlantic. The inhabitants grow potatoes and catch fresh fish. The accompanying table shows the maximum annual output combinations of potatoes and fish that can be produced. Obviously, given their limited resources and available technology, as they use more of their resources for potato production, there are fewer resources available for catching fish.

 

 

 

a. Draw a production possibility frontier with potatoes on the horizontal axis and fish on the vertical axis illustrating these options, showing points AF.

 

 

b. Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes? Explain. Where would this point lie relative to the production possibility frontier? No it can’t. If it produces 500 lbs. of fish then the most potatoes that can be produced is 600 lbs. The point would be considered not feasible and would lie outside the PPF to the right identified by the star.

                                                                                                        

c. What is the opportunity cost of increasing the annual output of potatoes from 600 to 800 pounds? (Hint: This is where the trade off comes in, which can be determined by referring to either the production possibilities frontier, that you created for part a, or from the original table provided in the question.) The opportunity cost would be 200 pounds of fish. In order to increase output of potato production by 200 you have to decrease output of fish production. If you produce 800 lbs. of potatoes you can only produce 300 lbs. of fish which is a decrease of 200 lbs.

 

d. What is the opportunity cost of increasing the annual output of potatoes from 200 to 400 pounds? (Same hint as for part c.) If you increase output of potato production from 200 to 400 then you must decrease fish production from 650 to 600. Opportunity cost is the decrease of 50 lbs.

 

e. Can you explain why the answers to parts c and d are not the same? What does this imply about the slope of the production possibility frontier? Because this is a trade-off the more potatoes you produce the more fish you have to give up (Krugman & Wells, 2006, p. 24). The implication is that the farther you move to the right on the slope the steeper the PPF becomes.

 

 

3. Peter Pundit, an economics reporter, states that the European Union (EU) is increasing its productivity very rapidly in all industries. He claims that this productivity advance is so rapid that output from the EU in these industries will soon exceed that of theUnited States and, as a result, theUnited States will no longer benefit from trade with the EU.

 

a. Do you think Peter Pundit is correct or not? If not, what do you think is the source of his mistake?

No I think he is wrong. I think he is confusing comparative and absolute advantage (Krugman & Wells, 2006, p. 29). Peter is implying that the EU does everything better than the US. There are always going to be things the EU does exceedingly better than the US and some things that the EU only does a little better. That being said then the EU will place most of its focus on producing the things that they know they do a lot better leaving behind the things that they only do a little better. The latter will be grabbed up by the US who will place most of its focus on producing, meaning that the US will soon be doing this latter item production much better than the EU. I say Peter is wrong because it sounds to me like the EU and the US will continue to benefit from trading with each other the items that they have comparative advantage in. (I felt like I was rambling on! Professor let me know if I am way off base in understanding.)   

 

b. If the EU and the United States continue to trade, what do you think will characterize the goods that the EU exports to the United States and the goods that the United States exports to the EU? I think they will both export the products that they each have comparative advantage in. I think I kind of covered this answer in part in question 3a.

 

10. Evaluate the following statement: “It is easier to build an economic model that accurately reflects events that have already occurred than to build an economic model to forecast future events.” Do you think that this is true or not? Why? What does this imply about the difficulties of building good economic models? Yes it is true. What has happened in the past is history and can be documented which means that an accurate economic model can be made depicting know facts. But we do not know what will happen in the future therefore we cannot make an accurate economic model without speculating the outcome of the model.  I think it implies that just like in financial projections, boards of directors and investors can look at past years to gain a sense of what the ups and downs will be telling them when to invest or not, but there can be  nothing definitive about an economic model depicting the future. The future is unknown.

 

11. Economists who work for the government are often called on to make policy recommendations. Why do you think it is important for the public to be able to differentiate normative statements from positive statements in these recommendations? Because positive statements are based on the analysis that describes how the economy actually works and normative statements are based on how the economy should work.  Positive = Description, Normative = Prescription (Krugman & Wells, 2006, p. 34) The differences are profoundly different i.e. I would like to be able to go into any shoe store and purchase a pair of name brand shoes for $20 because I know that they only cost $15 to produce, but the positive statement is although they cost $15 to produce the increase is from shipping and handling, taxes, and up to 70% mark-up from retailer. The normative statement is you should only have to pay a small mark-up on the purchase price.

 

 

 

Krugman, P., & Wells, R. (2006). Macroeconomics. New York, NY: Worth Publishers.

 

 

 

 

0

There has been a strong recommendation that the BLS explore the use of hedonic regression methods for quality adjustment in the Consumer Price Index (CPI). Until recently data limitations have made this goal difficult to implement for many categories of goods and services. This paper reports the preliminary results of employing data purchased by BLS from an outside source to produce hedonic regression-based quality-adjusted price indices for consumer audio electronics products.

The Hedonic Method

Issac J Williams

BA206 Macroeconomics

 

 

 

 

 

 

 

 

 

 

 


 

Abstract

There has been a strong recommendation that the BLS explore the use of hedonic regression methods for quality adjustment in the Consumer Price Index (CPI). Until recently data limitations have made this goal difficult to implement for many categories of goods and services. This paper reports the preliminary results of employing data purchased by BLS from an outside source to produce hedonic regression-based quality-adjusted price indices for consumer audio electronics products. The effects of hedonic-based quality adjustment are examined. Hedonic indices are derived directly from the regression coefficients, and compared to the adjusted CPI values. Issues of regression specification and practical problems for CPI quality adjustment are also addressed.

There has been strong recommendation that the BLS explore the use of hedonic methods for quality adjustment in the Consumer Price Index (CPI) for decades. The Price Statistics Review Committee (the Stigler Commission Report) in 1961 expressed the view that hedonic analysis would provide a “more objective” approach to addressing quality change than the BLS standard methods of dealing with this issue (Triplett (1990)). More recently, the Advisory Commission to Study the Consumer Price Index (the Boskin Commission Report, 1996) reiterated this recommendation, recognizing that accurate measures of quality change will enable a more accurate measure of pure price, or “cost-of-living” change. Categories of goods and services where quality changes are frequent and relatively easy to identify are the best candidates for using hedonic methods, given that data can be acquired.

A price index, such as the CPI, intends to measure the effects of price changes while holding other economic factors, such as the physical attributes of the goods available, constant. In the real world, however, goods and services are always changing in their physical characteristics. This makes it necessary to find some method of subtracting out the value of quality change when the market basket and prices change. Traditionally, the BLS has used several methods of quality adjustment. These include overlap pricing, direct quality adjustment using information from producers, and linking methods. Basically, all of these methods rely upon the subjective assessment of BLS personnel (commodity analysts) in selecting newly appeared products that most closely match the disappearing ones. Hedonic methods have been recently introduced into the BLS toolkit for housing (to correct for age bias) and apparel commodities.

Research is underway which considers the use of hedonic methods for quality adjustment for personal computers, televisions, VCRs, and even college textbooks, using or expanding the CPI sample to estimate the hedonic regressions. In the CPI, the sample size for a category of good or service is a function of the relative importance of that category in the average consumer household’s total annual average expenditures. For many types of goods and services where hedonic methods are likely to be useful, the sample of CPI data is too small for such an empirical application. Possible solutions to this problem are to collect additional observations on these goods for this purpose or to use supplementary data sources to provide hedonic coefficient estimates that may be used for quality adjustment when substitutions occur in the CPI sample.

For consumer audio products, the BLS is investigating the use of hedonic-based quality adjustment methods from detailed and extensive market data acquired from NPD (Intelect Group, Inc.). In this paper we present the preliminary results of this effort, examining the effects of quality adjustment on this CPI component by comparing adjusted index values to a simulated unadjusted CPI audio component. We discuss issues of regression specification, practical problems encountered in integrating results from other data sources into the CPI item structure, and also compare quality-adjusted results to a direct hedonic index from the NPD regressions themselves.

The purpose of a consumer price index is to measure the effects of price changes on consumer households. In a true cost-of-living index, substitution behavior in response to price changes is incorporated, and the index compares two price regimes with respect to a fixed reference level of satisfaction. If a fixed weight formula, such as the Laspeyres, is used for the index, relative prices of items are compared with respect to a fixed market basket of goods and services. In either case, it is assumed that the spectrum of products, and the available attributes of the goods or services from which the consumer may choose are the same in both the reference and comparison periods.

In practice, however, the specific items on the market are often changing. Models disappear and new, different ones appear to take their shelf space. Sometimes the differences between old and new models are minor, or are regarded as such by the consumer. Sometimes qualitative changes can occur which make the new products difficult to compare to the old ones. At the extreme are goods which are sufficiently different from other items on the market as to be categorized “new goods”, since they embody attributes, or specific combinations of attributes, which existing goods lack (e.g. cellular telephones, and recordable portable minidiscs). These physical changes in consumer products and services can be observed, but their value to the consumer must be excluded from a consumer price index measure. Thus, they must be identified, categorized and/or quantified, and their implicit value to the consumer estimated.

The treatment of quality changes in the CPI has varied according to the nature and degree of the change, feasible methods for making an adjustment, and available data resources. Whether implicitly or explicitly, these adjustments attribute the observed price change between two goods as: (a) entirely to price change, (b) entirely to quality differences, or (c) partially to price change and the balance to quality difference (Kokoski (1993)). Where the observed differences between a new and disappearing product are negligible (e.g. brand of bran flake cereal), the price collector usually simply substitutes the new product for the old one. This is termed a comparable substitution and it implicitly attributes all of any observed price difference between the two products to pure price change. Product “downsizing”, as when 16-ounce cans of tomato sauce are replaced by otherwise identical and similarly priced 14.5-ounce cans, also attributes all of the difference in price-per-ounce to pure price change (Kokoski (1993)).

When qualitative attributes between two goods are judged to be more important, then one of several methods of non comparable substitution is employed. One such method, used when both the old and new product are present in at least one time period, is overlap pricing. In that overlap period, say period t, the price change for the item category represented by these products is given by the price change for the old product between period t-1 and period t. The price relative for this item category between periods t+1 and t is represented by the new product. Empirically seamless, this method does not require direct comparison of the prices or attributes of the two products. It implicitly attributes all of any difference in price between the old and new products to real quality difference. Where information is available on the additional cost to producers of making a specific change in the attributes of a product, then a direct quality adjustment may be made. This cost is then subtracted from any observed change in the price paid by the consumer for the new instead of the old product (Triplett (1988)). This direct method assumes that the perceived value of the quality change to the consumer is the same as the cost incurred by the manufacturer to provide it.

In the absence of either overlapping prices or independent information from producers on the costs of qualitative changes, a linking method is employed to make non comparable substitutions. Aside from sample rotations, when entirely new and independent product samples are drawn for the CPI, linking techniques are the most prevalently used in the CPI (Armknecht and Weyback (1989), Fixler (1993)). In this case the old product makes its final appearance in period t-1 and the new product, which effectively replaces it on the retail shelf, first appears in period t. Since the two products cannot be directly compared in the same time period, the price change between period t-1 and period t for this good is proxy by the observed price change between these two periods by other goods in the same goods category. The new product then represents the good in the price index for subsequent time periods. This method assumes that pure price changes are likely to be the same for all goods in a class (e.g. price changes for cotton Oxford shirts will be the same as for other types of shirt). By implicitly imputing a price to the new product in period t-1, had it existed then, this method attributes some of the price difference between the new and old products to pure price change and the rest to quality differences between the two products (Kokoski (1993)). All of the above methods would miss any pure price change imposed by the producer at the opportunity offered by model changeovers.

In all these cases, some degree of judgment by the BLS commodity analyst is required. For comparable substitutions, the analyst selects the new item which most closely resembles the old one and judges any differences between them to be negligible. For non comparable substitution methods, the new item is still chosen on the basis of this criterion, and then quantitative adjustments applied as the new item enters the index.

The currently preferred method of quality adjustment is the hedonic method. This method (or class of methods (Triplett (1990)), relies on statistical techniques to estimate the implicit prices of product characteristics from observed prices and quantities sold in the marketplace. These implicit prices may then be used as measures of the value of observable qualitative differences in products to consumers, and thus help disaggregate the observed price difference between two products into quality change and pure price change. The first application of hedonic methods to the CPI was in the apparel categories (Armknecht (1984), Armknecht and Weyback (1989)). Initially, hedonic regressions were estimated on the CPI sample, and the coefficient values for the attributes used to provide a structured set of criteria for selecting the most comparable substitute for a disappearing item. For example, if the fiber content of a jacket was statistically significant and a quantitatively substantial attribute in determining the jacket’s price, then the new jacket chosen for the CPI sample would have to have the same fiber content as the old one. This procedure then advanced to using the hedonic regressions to provide estimates of quality change directly into the index (Liegey (1993), Armknecht, Moulton, and Stewart (1995)). For example, when a new jacket was brought into the index to substitute for a disappeared one, its introductory price was quantitatively adjusted based on the coefficients from the hedonic regression on that apparel category. The use of hedonic regressions in apparel employed the data collected by BLS for the CPI, and was facilitated by a fairly large sample, and relatively easily identified and empirically manipulated characteristics information from the CPI checklists.

Hedonic methods are now being proposed for other categories of goods and services in the CPI. These include personal computers, televisions, VCRs, refrigerators and other major appliances, and even college textbooks. In some cases, a larger number of price quotes is being collected to expand the sample and thus provide a sufficiently large database for estimating hedonic regressions. Because expanding sample size is not a costless endeavor, in other cases the BLS is considering the acquisition and use of data sources outside the agency for this task. These include data purchased from A.C. Nielsen, collected from electronic scanners in retail outlets, data gleaned from published sources such as Consumer’s Digest (Liegey and Shepler (1998)), and data purchased from independent firms which collect and process retail transactions information. For consumer audio products, data are being purchased from NPD. While large and detailed, these other data resources do present some additional issues for quality adjustment of the CPI: (a) the samples are not collected under the same probability sampling procedures used for the CPI sample, so the relative degree of representation of specific models in the respective samples will differ, (b) the item definitions, categorization, and attributes identified will differ, and c) the representative outlets from which the BLS collects price quotes for the CPI differs from those sampled by other data sources, thus effecting the product mix and prices.

Hedonic analysis has long been recommended as a preferred method of quality adjustment of the CPI. For many CPI components a hedonic approach will likely be adopted before the next scheduled revision in 2002. This paper presents the preliminary results of employing average price and quantity data from a private source to this end for consumer audio electronics products. We have used the hedonic regression coefficients from these data to supply quantitative estimates of quality differences for those situations when substitutions were made in the CPI sample. Also, we have compared the resulting index values to direct hedonic indices calculated from the time dummy variables in the hedonic regressions.

Analysis of these results suggests several interesting empirical issues worthy of further investigation. The quality adjusted indices indicate price decreases over the time period under study, but less so than their unadjusted counterparts. The differences are small, however, so it would be useful to continue empirical investigation, especially during periods where physical changes to audio products are rapid and pronounced. The regression specification with respect to characteristics variables appears to be stable and consistent over time. Interestingly, among the direct hedonic formulas compared, we observed that for all but one product category, the Laspeyres index value is below that of the Paasche index. Altogether, these results support the proposition that new products may be entering the sample at higher quality adjusted prices than those of extant models, an issue that bears further investigation.

Future research will continue to focus on issues of regression specification. Recognizing that the theoretical premise of the hedonic hypothesis is a comparative static model, it is advisable to examine the behavior of characteristics implicit prices in the dynamic market context. The importance of currently unobserved quality attributes in the hedonic model merits more research, especially given that the vintage variable appeared to be important to the numerical results.

References

Arguea, Nestor, and Cheng Hsiao (1993) “Econometric issues of estimating hedonic price functions,” Journal of Econometrics, 56, pp.243-267.

Armknecht, Paul (1984) “Quality Adjustment in the CPI and Methods to Improve It,” Proceedings of the Business and Economic Statistics Section, American Statistical Association, pp. 57-63.

Armknecht, Paul, and Donald Weyback (1989) “Adjustments for Quality Change in the U.S. Consumer Price Index, Journal of Official Statistics, 5, pp. 107-123.

Armknecht, Paul, Brent Moulton, and Kenneth Stewart (1995) “Improvements to the Food at Home, Shelter, and Prescription Drug Indexes in the Consumer Price Index,”

BLS Working Paper No. 263.

Court, Andrew (1939) “Hedonic Price Indexes with Automobile Examples,” in General Motors Corp. The Dynamics of Automobile Demand, New York: General Motors Corp., pp. 99-117.

Edmonds, Radcliffe (1985) “Some Evidence on the Intertemporal Stability of Hedonic Price Functions,” Land Economics, 61, pp. 445-451.

Epple, Dennis (1987) “Hedonic Prices and Implicit Markets: Estimating Demand and Supply Functions for Differentiated Products,” Journal of Political Economy, 95, November, pp. 59-80.

Fisher, F., and K. Shell (1972) The Economic Theory of Price Indices: Two Essays on the Effects of Taste, Quality, and Technological Change. New York: Academic Press.

Fixler, Dennis (1993) “The Consumer Price Index: underlying concepts and caveats,” Monthly Labor Review, 116, December, pp. 3-12.

Griliches, Zvi (1971) Price Indexes and Quality Change: Studies in New Methods of Measurement. Cambridge: Harvard University Press.

Kokoski, Mary (1993) “Quality adjustment of price indexes,” Monthly Labor Review, 116, December, pp. 34-46.

Kokoski, Mary, and Keith Waehrer (1998) “Hedonics and Quality Adjustment for Price Indices for Consumer Electronics Products,” draft presented to NBER Summer Institute Conference on Price Indices, July.

Liegey, Paul (1993) “Adjusting Apparel Indexes in the CPI for Quality Differences, in Foss, M., M. Manser, and A. Young (eds.) Price Measurements and Their Uses. National Bureau of Economic Research Studies in Income and Wealth, 57, Chicago: University of Chicago Press, pp. 209-226.

Liegey, Paul, and Nicole Shepler (1999) “Using Hedonic Methods to Quality Adjust VCR Prices: Plucking a Piece of the US CPI’s ‘Low Hanging Fruit’?” Monthly Labor Review, forthcoming.

Moulton, Brent, Timothy Lafleur, and Karin Moses (1999) “Research on Improved Quality Adjustment in the CPI: The Case of Televisions,” Proceedings of the Fourth Meeting of the International Working Group on Price Indices, U.S. Dept. of Labor, January, pp. 77-79.

Parker, P. (1992) “Price Elasticity Dynamics Over the Adoption Life Cycle,” Journal of Marketing Research, August, pp. 358-367.

Rosen, Sherwin (1974) “Hedonic Prices and Hedonic Markets: Product Differentiation in Pure Competition,” Journal of Political Economy, April, pp. 34-55.

Silver, Mick (1998) “Bias in the Compilation of Consumer Price Indices when Different Models of an Item Coexist,” paper presented to the 1998 Ottawa Conference at the U.S. Bureau of Labor Statistics, Washington, D.C, April.

Stavins, J. (1997) “Estimating Demand Elasticities in a Differentiated Product Industry: The Personal Computer Market,” Journal of Economics and Business, 49, pp. 347-367.

Triplett, Jack (1986) “The Economic Interpretation of Hedonic Methods,” Survey of Current Business, January, pp. 36-40.

Triplett, Jack (1988) “Hedonic functions and hedonic indexes,” in The New Palgraves Dictionary of Economics, pp. 630-634.

Triplett, Jack (1990) “Hedonic methods in statistical agency environments: an intellectual biopsy,” in Berndt, E.R., and J.E. Triplett (eds.) Fifty years of economic measurement: the Jubilee Conference on Research in Income and Wealth, NBER Studies in Income and Wealth, Chicago: University of Chicago Press.

0

Steel is one of the basic building blocks of the modern world. Automobiles, appliances, bridges, oil pipelines, and buildings, all are made with steel. While steel manufacturing has existed for centuries, the process for making steel continues to evolve.

 

 

TARIFFS

Issac J Williams

BA206 Macroeconomics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel is one of the basic building blocks of the modern world. Automobiles, appliances, bridges, oil pipelines, and buildings, all are made with steel. While steel manufacturing has existed for centuries, the process for making steel continues to evolve.

The goods and services establishments in this industry produce steel by melting iron ore, scrap metal, and other additives in furnaces. The molten metal output is then solidified into semi finished shapes before it is rolled, drawn, cast, and extruded to make sheet, rod, bar, tubing, beams, and wire. Other establishments in the industry make finished steel products directly from purchased steel.

The least costly method of making steel uses scrap metal as its base. Steel scrap from many sources—such as old bridges, household appliances, and automobiles—and other additives are placed in an electric arc furnace, where the intense heat produced by carbon electrodes and chemical reactions melts the scrap, converting it into molten steel. Establishments that use this method of producing steel are called electric arc furnace (EAF) mills. While EAFs are sometimes small, some are large enough to produce 400 tons of steel at a time. The growth of EAFs has been driven by the technology’s smaller initial capital investment and lower operating costs. Moreover, scrap metal is found in all parts of the country, so EAFs are not tied as closely to raw material deposits as are integrated mills and thus can be placed closer to customers. EAFs now account for well over half of American steel production and their share is expected to continue to grow in coming years as they move to produce more higher end products by adding virgin iron ore to the mix of steel scrap and other additives.

The growth of EAFs comes partly at the expense of integrated mills. Integrated mills reduce iron ore to molten pig iron in blast furnaces. The iron is then sent to an oxygen furnace, where it is combined with scrap to make molten steel. The steel produced by integrated mills generally is considered to be of higher quality than steel from EAFs. The higher quality production process is more complicated and consumes more energy, making it more costly.

The industry organization of the steel industry consists of EAFs and integrated mills that produce iron and steel from scrap or iron ore. Most of these mills also have finishing mills on site that convert iron and steel into both finished and unfinished products. Some of the goods produced in finishing mills are steel wire, pipe, bars, rods, and sheets. In these finishing mills, products also may be coated with chemicals, paints, or other metals that give the steel desired characteristics for various industries and consumers.

While wire, steel reinforcing bars, and pipes are considered finished products, rolled steel is unfinished, meaning it is normally shipped to companies, such as automotive plants, that stamp, shape, and machine the rolled steel into car parts. Finished products also are manufactured by other companies in this industry that make pipe and tubing, plate, strip, rod, bar, and wire from purchased steel. Competition from all these mills has resulted in increasing specialization of steel production, as various mills attempt to capture different niches in the market.

Also included in the steel manufacturing industry are firms that produce alloys by adding materials such as silicon and manganese to the steel. Varying the amounts of carbon and other elements contained in the final product can yield thousands of different types of steel, each with specific properties suited for a particular use.

The recent developments of the steel manufacturing is an intensely competitive global industry. By continually improving its manufacturing processes and consolidating businesses, the U.S. steel industry has increased productivity sufficiently to remain competitive in the global market for steel. Investment in modern equipment and worker training transformed the industry. Over the past 25-30 years, steel producers have, in some cases, reduced the number of work-hours required to produce a ton of steel by 90 percent.

To achieve these productivity improvements as well as product improvements, steel mills employ some of the most sophisticated technology available. Computers have been essential to many of these advancements, from production scheduling and machine control to metallurgical analysis. For workers, modernization of integrated, EAF, and finishing mills often has meant learning new skills to operate sophisticated equipment.

As countries around the world attempt to reduce emissions and produce cleaner energy, the need for structural steel will increase. Steel will be needed for support towers as well as reinforcing rebar toward the construction of new power generation facilities. In addition, the transmission infrastructure needed to transport electricity also will result in greater demand for steel. The expansion of clean energy production is expected to result in demand for many types of steel products.

The hour’s expense of plant and machinery and significant production startup costs force most mills to operate around the clock, 7 days a week. Nonsupervisory production workers averaged 43.8 hours per week in 2008 in iron and steel mills and 41.3 hours in steel product manufacturing; only 2 percent of workers are employed part time. Workers usually work varying shifts, switching between working days one week and nights the next. Some mills operate two 12-hour shifts, while others operate three 8-hour shifts. Overtime work during peak production periods is common.

The work environment of the steel mills evokes images of strenuous, hot, and potentially dangerous work. While many dangerous and difficult jobs remain in the steel industry, modern equipment and facilities have helped to change this. The most strenuous tasks were among the first to be automated. For example, computer-controlled machinery helps to monitor and move iron and steel through the production processes, reducing the need for heavy labor. Many key tasks are now performed by machines that are controlled by workers sitting in air-conditioned pulpits supervising the production process through windows and by monitoring banks of computer screens.

Nevertheless, large machinery and molten metal can be hazardous unless safety procedures are observed. Hardhats, safety shoes, protective glasses, earplugs, and protective clothing are required in most production areas.

The steel industry provided about 159,000 wage and salary jobs in 2008. Employment in the steel industry is broken into two major sectors: iron and steel mills and ferroalloy production, which employed 98,900 workers; and steel products from purchased steel, which employed 60,100 workers. The steel industry traditionally has been located in the eastern and Midwestern regions of the country, where iron ore, coal, or one of the other natural resources required for steel are found. Even today, about 42 percent of steelworkers are employed in Pennsylvania, Ohio, and Indiana. The growth of EAFs has allowed steelmaking to spread to virtually all parts of the country, although many firms find lower cost rural areas the most attractive. Although most steel mills are small, about 88 percent of the jobs in 2008 were in establishments employing at least 100 workers.

 

References:

–       American Iron and Steel Institute, 1140 Connecticut Ave., NW., Suite 705, Washington, DC 20036

–       Steel Manufacturers Association, 1150 Connecticut Ave., NW., Suite 715, Washington, DC 20036

–       Bureau of Labor Statistics, U.S. Department of Labor, Career Guide to Industries, 2010-11 Edition, Steel Manufacturing

–       American Iron and Steel Institute, 1101 17th St. NW., Suite 1300, Washington, DC 20036-4700