Investing in Africa's blog, Great Lake Economics, has been increasing the amount of space it gives to explanation and demonstration of new economic ideas in recent months. A motivation has been to bring these ideas to a wide audience in an accessible way. I think that explanation is likely to be more valuable than opinion for developing the region.
A plan for the site's future is to advance the process further, by bringing together and developing the ideas into a formal taught course, freely available online and focussing on Central African economic matters. There are economic courses already available online, and some economic commentary on Central Africa, but they have not been combined in an introductory course as far as I am aware.
I hope that some readers will find the course useful. If visitors, in or out of Africa, would like to see any other information provided on the site, please use the contact address on the site and your requests will be considered carefully.
Sunday, 30 August 2009
Friday, 31 July 2009
Where there is no employment advisor
The BBC has run features on Sierra Leone here in the UK in the last couple of days. Here is one of them. A radio report last night talked of the high rates of youth unemployment.
In a modern economy with reasonably efficient markets, school leavers enter into the workforce and can find work eventually by adjusting their wage demands. In a low income developing country, the jobs may not be available at any wage rate, if they are not created by the school leavers themselves. They often do; African cities are full of young entrepreneurs trying to survive any way they can. A problem arises if the demand for their services and products is not sufficient to provide them with enough to live on, which can happen if the market is not well developed.
Development assistance should aim to move the market to a state where it is well enough developed to allow everyone to earn a living wage. The aim is achieved by setting the economy on its way to economic growth, which involves continuous improvement in one of growth's determinants. The determinants include domestic capital accumulation, educational achievement, market networks, and infrastructure quality. The developmental quality of temporary aid should be judged on whether it starts sustained accumulation of domestic improvements in one or more of the determinants. The quality is not independent of conventional humanitarian aid quality - people are probably not accumulating if they are starving or fighting - but does not necessarily perfectly coincide with it.
In a modern economy with reasonably efficient markets, school leavers enter into the workforce and can find work eventually by adjusting their wage demands. In a low income developing country, the jobs may not be available at any wage rate, if they are not created by the school leavers themselves. They often do; African cities are full of young entrepreneurs trying to survive any way they can. A problem arises if the demand for their services and products is not sufficient to provide them with enough to live on, which can happen if the market is not well developed.
Development assistance should aim to move the market to a state where it is well enough developed to allow everyone to earn a living wage. The aim is achieved by setting the economy on its way to economic growth, which involves continuous improvement in one of growth's determinants. The determinants include domestic capital accumulation, educational achievement, market networks, and infrastructure quality. The developmental quality of temporary aid should be judged on whether it starts sustained accumulation of domestic improvements in one or more of the determinants. The quality is not independent of conventional humanitarian aid quality - people are probably not accumulating if they are starving or fighting - but does not necessarily perfectly coincide with it.
The micro-macroeconomic model with borrowing
Here is an extension to the small macroeconomic model described on Wednesday. It includes borrowing. Company profits are given by
P = I - C - R
and company income is given by
I = a*C + b*R.
a and b are constants that may be greater than, equal to, or less than one, depending on how the market and economic growth are interacting.
R is borrowing repaid by the company, and may increase the rate of output. If R falls, then rising inefficiency may be modelled as falls in a and b, decreasing profits. A high interest rate may be modelled as a fall in b, again lowering profits. A government may have a role to play here by increasing the availability of money through spending or printing money if the interest rate is stubbornly high for some reason outside of conventional supply and demand explanations.
P = I - C - R
and company income is given by
I = a*C + b*R.
a and b are constants that may be greater than, equal to, or less than one, depending on how the market and economic growth are interacting.
R is borrowing repaid by the company, and may increase the rate of output. If R falls, then rising inefficiency may be modelled as falls in a and b, decreasing profits. A high interest rate may be modelled as a fall in b, again lowering profits. A government may have a role to play here by increasing the availability of money through spending or printing money if the interest rate is stubbornly high for some reason outside of conventional supply and demand explanations.
Wednesday, 29 July 2009
A compact representation of macroeconomic models
Here's a compact way of representing some of the major variants of modern macroeconomic models.
Companies earn a profit equal to P = I - C where I is income and C is wage costs. Employees receive wages equal to C and spend an amount which generates company income of a*C for some number a. So I = a*C.
A classical analysis may view C as changeable without I changing much. So if a < 1, companies can be made profitable again by cutting wages.
A Keynesian analysis may consider I to be tied more tightly to C because of wage earners' spending preferences. So I falls if C falls, and if a < 1 companies will not be able to make a profit no matter how much they cut wages.
Modifications can be made to the two models, some of which bring them closer to each other. If in the classical model wages are linked to income because of labour market power, then we have the same outcome as for the Keynesian model. In the Keynesian model, if workers do not act on a wage fall - perhaps prices have gone up and they have not asked for a wage rise - the model should move closer to the classical one.
Companies earn a profit equal to P = I - C where I is income and C is wage costs. Employees receive wages equal to C and spend an amount which generates company income of a*C for some number a. So I = a*C.
A classical analysis may view C as changeable without I changing much. So if a < 1, companies can be made profitable again by cutting wages.
A Keynesian analysis may consider I to be tied more tightly to C because of wage earners' spending preferences. So I falls if C falls, and if a < 1 companies will not be able to make a profit no matter how much they cut wages.
Modifications can be made to the two models, some of which bring them closer to each other. If in the classical model wages are linked to income because of labour market power, then we have the same outcome as for the Keynesian model. In the Keynesian model, if workers do not act on a wage fall - perhaps prices have gone up and they have not asked for a wage rise - the model should move closer to the classical one.
UN refugee data
The UN data service is reporting data on refugees here. I am not sure whether it is a new arrival to the database. The data is of interest in itself, and also as an indirect measure of quantities like political repression in a source or recipient country.
Saturday, 25 July 2009
Estimating output equations using value data
Output equations are commonly used in macroeconomics. They have a leading role in explaining why some countries are rich or have large economies. The equations generally look like Y = f(K,L), meaning output depends on capital and labour. They are usually measured using financial values for output and capital.
The research paper here rejects a common interpretation of the equations when financial values are used in estimation. The argument, in my words, goes like this.
"It might be the case that output measured in physical goods is dependent on machines and physical goods used in production, as well as on labour. But the market value of the output, physical good inputs, and labour could be anything. For example, labour might have a great deal of market power and so be able to charge much more for their services than machine owners could. So the relation between output in physical goods and inputs in physical goods is not well measured by the estimation using values.
"What we do know is that total output is paid to capital and labour. This is an accounting equation, with little economic content. It accounts for the success of equations estimating the output equations; what they are measuring is the accounting identity in an approximate form. The estimated dependence of output on capital tells you little about how physical output varies with physical inputs, and a lot about how much those inputs are paid."
I have not worked out mathematically how people buying the goods would adjust their purchases of inputs faced with different market power of capital and labour suppliers. A non-precise argument is that they would tend to reduce the purchases of the expensive inputs, so the input prices would vary, and so as a result would their market values. Consequently, the equation estimation would be closer to the estimation of the effects on output of physical quantities. However, market values might not adjust perfectly to offset the change in prices - for example, a monopolist supplier of capital would likely see their income drop sharply if they sold part of their capital and broke up their monopoly. This loose argument suggests that the estimation of output equations gives the accounting identity but also partially the production equation.
Growth macroeconomists' research papers often include the assumption of perfect competition, which affects the relation between the physical and accounting equations. The implications of the above arguments are not generally used in analysis after estimations, although it would be a natural insertion into the "robustness section" that often occurs in empirical papers.
If you are interested in the previous arguments, one of the authors has a full directory of their research here, including alternative empirical estimates of the East Asian growth experience, which is helpful as criticism without a different empirical approach can be deflating.
The research paper here rejects a common interpretation of the equations when financial values are used in estimation. The argument, in my words, goes like this.
"It might be the case that output measured in physical goods is dependent on machines and physical goods used in production, as well as on labour. But the market value of the output, physical good inputs, and labour could be anything. For example, labour might have a great deal of market power and so be able to charge much more for their services than machine owners could. So the relation between output in physical goods and inputs in physical goods is not well measured by the estimation using values.
"What we do know is that total output is paid to capital and labour. This is an accounting equation, with little economic content. It accounts for the success of equations estimating the output equations; what they are measuring is the accounting identity in an approximate form. The estimated dependence of output on capital tells you little about how physical output varies with physical inputs, and a lot about how much those inputs are paid."
I have not worked out mathematically how people buying the goods would adjust their purchases of inputs faced with different market power of capital and labour suppliers. A non-precise argument is that they would tend to reduce the purchases of the expensive inputs, so the input prices would vary, and so as a result would their market values. Consequently, the equation estimation would be closer to the estimation of the effects on output of physical quantities. However, market values might not adjust perfectly to offset the change in prices - for example, a monopolist supplier of capital would likely see their income drop sharply if they sold part of their capital and broke up their monopoly. This loose argument suggests that the estimation of output equations gives the accounting identity but also partially the production equation.
Growth macroeconomists' research papers often include the assumption of perfect competition, which affects the relation between the physical and accounting equations. The implications of the above arguments are not generally used in analysis after estimations, although it would be a natural insertion into the "robustness section" that often occurs in empirical papers.
If you are interested in the previous arguments, one of the authors has a full directory of their research here, including alternative empirical estimates of the East Asian growth experience, which is helpful as criticism without a different empirical approach can be deflating.
Friday, 24 July 2009
What is hedonic price analysis?
Hedonic price analysis examines goods in terms of their components or characteristics. When shopping, people might consider a food's appearance and nutrition and be willing to pay a certain amount for each. So using hedonic analysis, the total cost of the food would be modelled as
price = appearance * price of appearance + nutrition * price of nutrition
Hedonic pricing helps with assessing how consumers value different aspects of a good. In the example just given, we may be interested in appraising how much people value a food's appearance relative to its nutritional content (some estimates for the valuation of various nutritional elements are given in the research here for United States consumers). If we know about the appearance and nutritional content of a new good that is soon to enter the market, we could estimate its price. The original hedonic equation might have to include a cross-term to make it accurate - consumers might value sweetness and they might value savouryness, but not together. A large negative cross-term sweetness*savouryness would capture their dislike of the combination.
Hedonic pricing also has applications in calculating price inflation and for comparing international prices. We might find that two countries have the same number of computers, but they have different computing speeds. We should make allowance for the different qualities, and hedonic analysis is one way of doing so. Some approaches are described here.
price = appearance * price of appearance + nutrition * price of nutrition
Hedonic pricing helps with assessing how consumers value different aspects of a good. In the example just given, we may be interested in appraising how much people value a food's appearance relative to its nutritional content (some estimates for the valuation of various nutritional elements are given in the research here for United States consumers). If we know about the appearance and nutritional content of a new good that is soon to enter the market, we could estimate its price. The original hedonic equation might have to include a cross-term to make it accurate - consumers might value sweetness and they might value savouryness, but not together. A large negative cross-term sweetness*savouryness would capture their dislike of the combination.
Hedonic pricing also has applications in calculating price inflation and for comparing international prices. We might find that two countries have the same number of computers, but they have different computing speeds. We should make allowance for the different qualities, and hedonic analysis is one way of doing so. Some approaches are described here.
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