William J. Polley: January 2007 Archives
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Now there is an iPod index (Reuters). It is based on the same idea as The Economist's Big Mac Index.
One of Australia's biggest banks, the Commonwealth Bank, has used the latest version of Apple's music player -- the slimline Nano -- to compare global currencies and purchasing power in 26 countries.
Along the lines of the Big Mac index launched 20 years ago by The Economist magazine, the survey prices the 2GB Nano in U.S. dollars and found Brazilians pay the most for an iPod, shelling out $327.71, well above second-placed India at $222.27.
Canada was the cheapest place to buy a Nano at $144.20, while Australia ranked 19th at $172.36, cheaper than Germany ($192.46), France ($205.80), South Korea ($176.17) and China where the machine is manufactured. The U.S. was fourth cheapest at $149.
"Interestingly, especially with freight costs close to zero, China is middle ranked in terms of global prices at US$179.84," Craig James, the Chief Equities Economist at Commonwealth Bank, told Reuters.
You know what comes next, don't you?
James said the results suggested the U.S. currency had scope to rise against a range of major currencies except for the Hong Kong and Canadian dollars or the Japanese yen.
If this story was being read on SNL's Weekend Update, the "laughter" sign would be flashing about now.
However, the results could be influenced by different pricing policies that Apple might apply in different parts of the world, James said.
Ya think?
Ok. It's a clever idea and a good discussion starter, but not a serious test of purchasing power parity. In fact, it makes the Big Mac Index look methodologically sensible by comparison.
But if you tell people that you've got a test of purchasing power parity based on the iPod, people will stand up and take notice. It is clever, but don't take it too seriously.
To their credit though, it will be interesting to watch what happens to the index over time (more for what it will tell us about Apple and how they operate in each of these countries than for what it says about purchasing power parity, however).
UPDATE: Surfing around, I found this from three years ago. (Guardian Unlimited January 8, 2004)
Apple Computer is set to review the UK pricing of its iPod mini music player, launched on Tuesday, after complaints about a substantial mark-up for non-US buyers of the device.
The iPod mini will go on sale next month in the US for $249 - which would translate to a UK price of £162 including VAT if today's exchange rates were applied. Yet Apple's UK arm announced on Tuesday that it plans to sell the device for £38 more, at £199, immediately sparking an outcry from the company's European customers.
Now a senior Apple executive has said the company will review its pricing outside the US, and blamed the high pricing on the continuing weakness of the dollar against other currencies.
In an interview, Apple vice president Greg Joswiak told Online the price announcement was "subject to change" and that the company would settle on a UK price "closer to the availability date, simply because of the volatility of the currency exchange".
The exact pricing would depend on the strength of dollar relative to the pound, he said. "What we don't want to do is lock Europe into a price now, see the dollar continue to weaken, and have done all of ourselves a disservice by pricing too early," said Mr Joswiak.
Here is the $/pound exchange rate for the period between the time of this article and the present.
When predicting exchange rates, the most important thing is to be correct about whether the rate ends up above or below where the market (forward or futures) is predicting. Why? Because that determines whether you take a long or short position. In this pricing problem, the position you take is whether to price above or below what current market conditions imply (assuming that this price is sticky). Let's say they re-evaluated their position a year later. Did they get it right? Looking at exchange rates in 2005, you would say no. The iPod would appear to have been overpriced.
Indeed that was the case as we see in The Register in February 2005:
Tacitly acknowledging that the color iPod Photo was overpriced, Apple lopped $150 off the price of the high end 60GB model, which is now $449 (UK:£309), and replaced the $499 40GB iPod Photo with a 30GB version that's also $150 cheaper (UK:£249). The cheapest 4GB iPod Mini is now $199 (UK:£139), a price cut of $50. It's joined by a 6GB model at the old price of $249 (UK:£169). The UK prices quoted include VAT.
In fact, somewhere along the line it was cut from 199 pounds to 169 pounds (the U.S. price in early 2004) before dropping to 139 pounds.
Applying today's exchange rate to the Reuters story implies that the UK price is somewhere around 100 pounds. I saw a website advertising it for 128 pounds. Perhaps either the iPod index doesn't include the VAT (I would think that it would though) or it was based on exchange rates a few months ago when the dollar was a bit stronger than it is today (seems more likely).
Given that Apple has at least once in the last couple years been chasing changes in the exchange rate, it seems reasonable to suggest that the iPod index's indication of an undervalued dollar is more likely to be a sign that Apple will be adjusting its pricing policies than a sign that the dollar is likely to rise. I doubt that is what Commonwealth Bank had in mind when they constructed the index.
CLARIFICATION: The iPod Mini referenced in the older articles has been discontinued in favor of the newer iPod Nano. It is the closest comparison. Since the introduction of the Nano, similar stories of price cuts in the U.K. are readily found.
Posted by William Polley at 01:28 AM | Comments (0) | TrackBack
January 16, 2007
Scarcity: Part of the definition of economics or not?
Given that this is the first week of a new semester here, I thought this would be appropriate. Michael Mandel doesn't like using the word scarcity in the definition of economics. He offers an alternative:
Proposed definition: Economics is the study of the functioning-–and malfunctioning--of the economy, with the aim of improving living standards
First of all, saying that economics is the study of the functioning of the economy is in the same vein as saying, as Jacob Viner famously quipped, "Economics is what economists do." True, but not terribly helpful. That economics has the aim of improving living standards is, for me at least, a bit problematic as a definition. It opens up a can or worms over what you mean by "living standards". Not that we shouldn't open that can of worms. In fact, I think it would be useful to have precisely that sort of discussion at the introductory level. But that is precisely the point. I'm not sure it works to have a phrase that is open to so much discussion and interpretation as a crucial part of a definition. To define economics that way would require a lot of context. So, to be fair, I will end my criticism here until I see that context.
Back to the original question, it is true that nearly every textbook definition of economics uses the word "scarcity". But it is not universal. For example, The Economic Way of Thinking by Heyne, Boettke, and Prychitko uses this definition:
Economics is a theory of choice and its unintended consequences. (page 11 of the 10th edition)
Prominent among the unintended consequences in their definition is the emergence of spontaneous order. (You learn this if you read the introductory chapter carefully--again, the context provides a clue.) It's not a bad definition.
In a slightly different vein is this little title hoisted from a syllabus from one of my grad school courses back in the day. From memory (I'll hunt around for the actual copy to make sure I got it right), it was something like this:
Macroeconomics: A study of allocative (in?)efficiency
I've always liked that one. Then there is the definition that I have used for quite a number of years in teaching macro and micro principles. To my knowledge it is not in use anywhere else in precisely these words. I first put it on paper as a grad student and have used it ever since, maybe changing a word or two over the years. I was inspired to write this while trying to put the familiar "circular flow" into words.
Economics is the study of choices made by individuals, how markets coordinate those choices, and how governments influence those choices.
See how it reflects the circular flow that is part of nearly every textbook description of economics? Like Heyne, Boettke, and Prychitko, I give individual choice top billing in my definition. I dislike definitions that put it in terms of how "society chooses". Society doesn't choose. People choose. How those decisions are aggregated matters immensely.
Sometimes individual decisions are aggregated in markets. That implies certain outcomes. Other times, individual decisions are aggregated through direct voting or a representative form of government. That often implies different outcomes. Decisions made by firms are really the result of an aggregation process within the firm itself. Institutions matter. The "rules of the game" matter. (Here again, my thinking has been influenced by Heyne, et al.) What some might call society's choice is a particular combination of individual choices coordinated by markets and influenced though the law by government as well as the weight given to market and to government in the process. How much is market and how much is government is determined by many factors. Most of them are outside the scope of your average economics course, but are still worth thinking about.
My definition has three parts. Individual choice is the heart of all economics--even parts of economics that don't fit neatly into areas related to markets or government (e.g. game theory and bargaining). One could, I suppose, put a full stop right here and call it a day. It is beneficial, however, to single out the role of markets and the role of government as two identifiable arenas in which those choices play out. They are not the only such arenas, but they are the ones about which the body of knowledge in economics has the most to say. When I deliver this lecture in class, this is the context that I try to give my definition.
Let those of us who teach economics never forget that individual choices are the building blocks and that the manner in which an economy aggregates those decisions matters.
UPDATE: See the comments for more. PGL comments and expands on it over at Angry Bear. Arnold Kling at EconLog says this in response:
I am two-handed on this issue. On the one hand, just because food, say, has become more abundant does not mean that we can ignore scarcity. At any moment in time, for a given state of know-how, the conventional definition of economics as dealing with the allocation of scarce resources among competing ends applies.
On the other hand, some of the most interesting economic observations concern relative abundance. Look at our standard of living compared to 100 years ago. Look at South Korea compared with North Korea. Robert Lucas famously said that "The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them it is hard to think of anything else."
The Lucas quote has to be one of the most often quoted lines in all of economics. I quoted it in a different context in the comments to this very post.
However, I don't see "relative abundance" as being on a par with the fundamental problem of scarcity. I agree that the observations to which Kling refers are interesting (and I use those very examples every semester), but they are problems that can be addressed in the context of choices and institutions--which are the twin pillars of my definition above. Focusing on the relative abundance of South Korea and the implications of that abundance for the choices people make is an interesting side issue, but it misses the larger point. What is it about South Korea that is different from North Korea that can explain their relative abundance? In my preferred framework, the relative weight given to markets vs. government in aggregating individual choices is a good place to start.
Back to the original question. Scarcity implies choice. That's the bottom line. And it is my opinion that defining economics in terms of choice (rather than the word "scarcity") resonates more with students. It's not that I don't think scarcity matters, it's that I think there is a better way to word it to get the point across. Here's a slide from tomorrow's lecture to my principles class:
I've been using the same slide (updating the page number with new editions of the text) for I don't remember how long.
And the punch line several slides ahead (after talking about market vs. command economy and--time permitting in this lecture--a brief look at property rights and so forth):
This is a lecture/discussion that I really get into with my principles classes. Sometimes I think that it's the most important lecture of all. If you don't get hooked on economics by talking about these issues, I don't know what will get you. I guess it goes back to the Lucas quote again.
UPDATE 2: Link to EconLog corrected.
Posted by William Polley at 04:11 PM | Comments (11) | TrackBack
Mind the gap
Ok, this is one of the best animated graphs I've seen in a while. Play with it. You can change the variables on the axes. It was created by the Gapminder Foundation. I will definitely use this in my classes when I need to illustrate economic growth.
Hat Tip: Division of Labour
Posted by William Polley at 03:47 PM | Comments (2) | TrackBack
January 15, 2007
Not sure how this will go over, but...
I'm sitting here thinking about the first day of the semester tomorrow--trying to come up with some choice little bits to throw into the lecture. One of my classes is an advanced macro course for the MA program. I'm thinking of ending the intro to the lecture like this: "In Econ 502 we cover about 2 or 3 weeks worth of my intermediate macro course on the first day as a review... then things start to get interesting. Let's begin..."
UPDATE: I did say this, and the response was muted--a couple of smiles. They knew I was serious.
For those interested in what we cover, the first couple weeks are a review of static and dynamic optimization with macro applications, followed by growth (Solow, Ramsey, Romer, etc.) and concluding with real business cycles (overview of the literature along with critiques). I plan to sprinkle in a good dose of David Warsh's Knowledge and the Wealth of Nations to stimulate critical discussion. These students have (for the most part) already had exposure to IS-LM, an overview of New Keynesian macro, time consistency, and the permanent income hypothesis. This course is well suited to those looking to apply to a Ph.D. program after finishing their MA here.
Posted by William Polley at 09:28 PM | Comments (4) | TrackBack
In honor of Martin Luther King Jr.
Brad DeLong reprints the "Letter from the Birmingham Jail". This was required reading when I went to college. Is it still?
Posted by William Polley at 02:24 PM | Comments (0) | TrackBack
January 09, 2007
China raises reserve requirements
SHANGHAI, Jan. 5 — China’s central bank said late Friday that it had raised the reserve requirement ratio for banks, the fourth increase in six months, to further tighten the nation’s money supply.
The modest move, which takes effect this month, increases the reserve ratio by half a percentage point, to 9.5 percent. Analysts said it was the government’s latest warning that too much money in the financial system could ignite inflation and perhaps fuel a stock market bubble.
The reserve requirement is a blunt instrument of monetary policy. If open market operations are a scalpel, the reserve requirement is a chainsaw. That China is on such a trajectory with its reserve requirements says that they are clearly concerned about the inflation prospect. However, 9.5% is not extremely tight. In the U.S., the rate for most banks is 10% at the margin (see this table for details). That the Chinese economy has grown to an extent that higher reserve requirements are necessary is another encouraging sign that they are becoming a player in the international financial community. They are experiencing what the U.S. went through in the "roaring '20s." They are hoping to avoid their own 1929. Given the vigor with which money is flowing into China, I would not be surprised if they continue to tighten throughout the year ahead.
Posted by William Polley at 08:13 AM | Comments (0) | TrackBack
January 05, 2007
Off to the ASSA meetings
Hope everyone had a great New Year's holiday. I have been trying to catch up on things. Unfortunately blogging has suffered. Now I'm off to the ASSA meetings, so blogging will be light for a couple more days and then return to a more normal schedule.
Posted by William Polley at 01:40 AM | Comments (0) | TrackBack
