Priyanka's Econ Blog

Irrationaly Rational September 23, 2009

Filed under: Section 2 — priyanka821 @ 11:01 am

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The economy erupted in 2007 unexpectedly, and has been a debacle ever since. Economists were not able to to forecast the volcano-like eruption of the economy. While scholars have earned degrees and numerous economic theories have been formed, why were Economists not able to predict this nasty recession and warn monetary-policy makers?

Professor Robert J Shiller of Yale  tells us it all comes down to assumptions. In standard economics, we have models assuming that humans act rationally. In a perfect world, with perfect people, the recession or the “bubble” would never occur. However, in our less-than-perfect world we face several ambiguities, and people do not always act rationally. Our current theories assume that, “all people behave as if they knew all the probabilities and did all the appropriate calculations (Shiller, 2009).” We speculate prices in various markets until the prices crash dramatically.  Shiller says, “Bubbles are caused by feedback loops: rising speculative prices encourage optimism, which encourages more buying, and hence further speculative price increases (Shiller, 2009).” In our standard economic models, the assumption is that the only factor that influences human’s decisions are the facts and rational probabilities, which is of course invalid.

In another branch of economics, behavioral economics, psychology plays an essential role. Research indicates that we do not satisfy the axiom of rationality. We assume that each time will be different, and do not rely much on probabilities and rational statistics. Though the axiom that we are rational people, may be applicable to microeconomic issues, on the macroeconomic scale it is not applicable.We can now conclude,  “that different parts of the brain and emotional pathways are involved when ambiguity is present (Shiller, 2009).” Totally rational people definitely would not be buying Louis Vuitton bags, when similar bags are available for a tenth of the price- too bad we’re not perfectly rational.

Robert J Shiller on Irrationality and Economics

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Irony hits iPod

Filed under: Section 2 — priyanka821 @ 12:49 am

iPod vs. iPhone

iPod vs. iPhone

When Apple came out with the iPod in 2001, it saved Apple from destruction. Apple revolutionized the way the world listens to music within a span of five years and made a family of iPod video, iPod nano, iPod Mini, iPod Touch, and finally the iPhone. The iPod has been functioning in a vertical monopoly and any other competition, including Microsoft’s Zune,  has been eliminated quickly.

So that is causing this giant innovation a threat?

Ironically, the Apple’s launch of the iPhone has posed a severe threat to the iPod. Why have an iPod when all it’s features can be adapted on a cellphone? Furthermore, the iPhone is a cellphone, and not as innovative as the iPod and therefore giants such as Nokia and Soni Erricson are still big players in this market. The iPhone is available in a oligopoly market, where other big giants threaten its survival. In fact, the iPhone was not successful in Japan, as other companies provide cellphones with more capabilities and better technology. Only time will the effects of this internal Apple warfare. Will the iPod survive?

 

Goals in a Command and Market Economy September 17, 2009

Filed under: Section 2 — priyanka821 @ 9:14 am

After exploring, the broad social goals in a command and market economy, I believe it is fair to say both economies have their own benefits.

What does an economy strive for?

Economic Efficiency

Economic Equity

Economic Freedom

Economic Growth

Economic Securtiy

While all of these goals are important, in the two different types of economies, they are prioritized differently. For instance, a command economy such as North Korea will have economic security and equity as their highest prioritized goals. The government will make all decisions of allocation of resources, give everyone  jobs, house, health care and pensions. This provides a sense of security for the nation, but there is no incentive to work as the man who works hard gets paid just as much as the man who doesn’t work at all. The extreme inefficiency of this type of command economy led to the crumble of USSR.

On the other hand, countries such as the United States,who lean towards a more market economy, also have its benefits. They promote economic freedom, economic growth, economic efficiency and to a certain degree, economic growth. Though it supports more of the objectives, each citizen is required to take care of their own health care retirement benefits, income and housing. This is a problem for unemployment and low-income families. Also, the economic stability is not sustained.

 

1st Anniversary- Downfall of the Lehman Brothers September 14, 2009

Filed under: Section 2 — priyanka821 @ 9:23 am

Lehman Brothers

On September 15, 2008 one of the worlds most reputed banks, The Lehman Brothers, declared bankruptcy. The downfall of the great bank alerted every corner of the world about the deteriorating global economy. The reasons for the down fall are complex and inter-related, such as the credit crunch, the melt down in U.S. real estate market, and China becoming the world’s leading exporter and fastest-growing economy. Though  all these factors contributed to the final collapse of Lehman Brothers, what is the main reason for the crash?

I would definitely say the issue’s epic center lies at the melt down of real estate market in the United States. Much of the Lehman Brothers’ investments lie in mortgages and homes. Because of the recent crash in real-estate values, the value of the Lehman’s investments drastically decreased. Further more, Lehman had leveraged assets and they used these to clear their loans and then invested in homes and mortgages. This led to the downfall, because not only did they lose value in their investments, they were also obligated to pay interest to the money they borrowed. This led to a  great credit crunch, and therefore, the end of Lehman Brothers. When the bank asked for government support, the plea was declined by the  United States treasury.

SOURCES:

http://lehmanbrothers.wordpress.com/2008/10/10/did-democrats-cause-crash/

http://wiki.answers.com/Q/What_were_the_reasons_for_the_Lehman_brothers_bankruptcy

http://news.bbc.co.uk/2/hi/business/8235141.stm

http://www.economist.com/businessfinance/displaystory.cfm?story_id=12209384
 

1:1 Laptop Program September 9, 2009

Filed under: Section 1 — priyanka821 @ 12:01 am

Laptop Program

Laptop Program

When we were first introduced to the 1:1 Laptop Program I was actually thrilled because I just got a new MacBook Pro. I found it useful to have my own computer in other classes, not only Econ. Though I find this method very efficient and easy to work with, I find that it is a hassle to carry the  laptop around because it’s heavy and especially because we have class on Fridays and I have to carry it around after school as well.

One of my biggest concerns was that I would damage my laptop because I’m kind of clumsy. To avoid this, I leave my MacBook in my locker and only take it out during Econ or other classes that may need a laptop. This has worked perfectly for me so far, and it won’t get stolen if it is my locker majority of the time.

Surprisingly, I haven’t been distracted at all during class. I find this interesting because whenever I’m doing my homework I have a tendency to drift off into Facebook or constantly check my email. For some reason, during class I can focus on my work without being distracted or even tempted to go surf the web. I think this is because we are expected to take notes on the Power Point Presentation and when we are not supposed to be using computers, we are required to have the lid down.

Overall, I think that if all my classes were laptop based it would be much easier. I would only have to carry my laptop, and not two heavy Biology textbooks. I think this a great and very efficient way of learning because it saves time both time and paper.

 

INDIA: HUMAN DEVELOPMENT INDEX September 7, 2009

Filed under: Section 1 — priyanka821 @ 12:40 pm

Though most of the of world may be in depression, India is still developing rapidly. With a 6.1% economic growth over the last three months which was announced this week, the Slumdog Millionaire country is stepping up the ladder. Economic growth can be defined as an increase in GDP (Gross Domestic Products) or the country’s ability to produce more goods.

United Nations Human Development Index (India&Bangladesh)

United Nations Human Development Index (India&Bangladesh)

With a boom in economy, the economic development should increase too. Economic development differs from economic growth. Economic development can be defined as a country’s standard of living.

Above is a chart comparing India and Bangladesh’s economy and HDI. “The Human Development Report reveals how some countries do better than others in turning income into education and health opportunities and therefore into higher levels of human development. Select a country below to see how its Human Development Index (HDI) relates to its Gross domestic product (GDP) and how it compares to another country(United Nations, 2008).”

According to the chart above, India is doing fine to develop education and health opportunities in context with it’s GDP per capita ($3,100). However, it still stands 128 in the World Human Development Index. Compared to Bangladesh, India is doing relatively because they stand in similar places according to the Human Development Index, but Bangladesh has a much lower GDP per capita. Though better compared to Bangladesh, India can do much better in their GDP per capita.

The Human Development Index compares life expectancy, educational attainment and income. I don’t think this is a very accurate representation of a country. Each person in India definitely does not earn $3,100.  This is an average of all the wealthy citizens and the poverty of India. By stating that the GDP per capita is $3,100 it is a fallacy. India holds the world’s second largest population, and a lot of impoverished citizens. On the other hand, it also has millionaires, and therefore the GDP per capita averages out, yet is not completely accurate.The Human Development Index also does not deal with environmental factors such as pollution, which India has a lot of .

With economic growth, it is not necessary that the country’s  HDI ranking will increase (economic development). If the money is used to further education and build hospitals, then yes, the HDI will increase. However, if this capita is used to further business and industries, it will not directly affect the HDI.

Substantial development “meets the needs of the present without compromising the ability of future generations to meet their own needs(wikipedia, 2009).” If there is too much pollution and the future Indian generations cannot meet their needs, their HDI rank and GDP per capita will decrease.

 

The Production Possibility Curve September 1, 2009

Filed under: Section 1 — priyanka821 @ 11:44 pm
Production Possiblity Curve

Production Possiblity Curve

*Resources are limited

*Shows how efficient an economy is

*Economies must make choices between alternatives (trade-offs)

*Opportunity cost increases

*Outward shift of the curve indicates better technology or new resources