The Rise of Digital Nomadism and Its Economic Implications
The Evolution of Work and the Rise of Digital Nomadism Office work has come a long way—from the rigidity of the nine-to-five office cubicle to the freedom of remote setups. The rise of cloud computing, tools like Slack and Zoom, and platforms like Upwork have enabled professionals to work from anywhere. The pandemic supercharged this shift, with 35% of US employees working remotely in 2023, up from 24% in 2019 (3). According to a 2023 study, over half the digital nomads surveyed worldwide were aged 30-39, with roughly 22% being aged under 30 (4) and working in fields like tech, software media, business and mathematical/data professions, that have embraced this lifestyle the most (5). Destinations like Lisbon, Bali, and Medellín have emerged as hotspots, offering a mix of affordability and strong infrastructure, as well as an appealing climate. Governments are also jumping on board, creating digital nomad visas to attract these workers while boosting local economies. Estonia, Croatia, and Barbados are just a few examples of countries that are making it easier than ever to work and travel. Macroeconomic Implications of Digital Nomadism Digital nomads bring foreign income into the communities they (temporarily) call home. Popular hubs like Bali and Lisbon see increased demand for co-working spaces, short-term rentals, and hospitality services. For instance, digital nomads contribute millions annually to Bali’s economy through tourism and service consumption (6). In Lisbon, thriving cafés, co-working hubs, and housing rentals cater to remote workers, reshaping local businesses. However, this boom comes with challenges. In popular hubs, living costs often rise, creating income inequality between nomads and locals. For example, in Lisbon, long-term residents have faced housing shortages as properties convert to short-term rentals for nomads and tourists. Carvalho a well-respected Professor of Economics at the University of Porto is hoping the Portuguese government can find a balance between attracting new entrepreneurs and ensuring the stability of the locals. It’s important to have an overview of the impact on Portuguese society, including ensuring local citizens aren’t priced out of their housing market (7). The strain on local infrastructure, such as transportation and utilities, also becomes an issue. Governments are responding with innovative policies, such as New Zealand easing visa rules to attract digital nomads as part of their post-COVID tourism recovery strategy (8). However, taxation remains a tricky issue, with challenges like double taxation and lost revenue for nomads’ home countries (9). Balancing the benefits and challenges of digital nomadism is a growing priority for policymakers worldwide. Microeconomic Implications for Individuals Digital nomadism presents unique microeconomic considerations for individuals, as it requires careful evaluation of budget constraints, opportunity costs, and utility maximisation. Nomads must balance the marginal benefits of travel and flexible work arrangements against expenses like accommodation, coworking spaces, and fluctuating living costs in different countries. Price elasticity is also a factor, as digital nomads adjust their spending based on income variability and local cost of living. The decision for nomads to live and work abroad is often about maximising income while minimising expenses. Relocating to low-cost destinations like Chiang Mai or Medellín can help nomads get more out of their budgets compared to living in high-cost cities like New York or London (10). For instance, a software developer earning $60,000 annually can enjoy a significantly higher quality of life in Bali, where rent and daily expenses are far lower. Additionally, the concept of consumer surplus applies, with individuals deriving varying levels of satisfaction from experiences depending on personal preferences and the perceived value of mobility and cultural exposure relative to their costs. Understanding these dynamics can help digital nomads make financially sustainable lifestyle choices while maximising their overall well-being. Broader Implications for Education and Skill Development To thrive as a digital nomad, certain skills are in high demand—both at the top for 2023 and on the rise are analytical thinking and creative thinking. Technological literacy is on the rise, perhaps because of the trend to work remotely (11). Although, yes, these skills are often looked for in ‘regular’ working environments, they enable digital nomads to thrive because of the ease and efficiency of being able to deliver remotely. Employers increasingly value professionals who can navigate remote work challenges and analyse opportunities in global markets. Analytical skills are especially in demand, which is good news for economists and data scientists, as this should be a core part of their skill sets. Online education platforms like Coursera, Udemy and DataCamp are stepping up to meet this demand. These MOOCs (Massive Open Online Courses) offer flexibility, affordability, and globally accessible skill development options. Platforms like INOMICS also collect online and on-site learning opportunities relevant to economics, data science and finance. According to Statista, the global e-learning market is projected to grow by 10% annually, reflecting the rising demand for tech-focused and skill-specific courses (12). For digital nomads, these platforms are essential tools for staying competitive in a fast-evolving global workforce. Data Science and Economic Research Opportunities Digital nomadism presents exciting opportunities for data-driven analysis. Researchers and analysts can use tools like web scraping from platforms such as Nomad List to study trends in population growth and geographic preferences. Geospatial data combined with income distribution metrics could assess the economic impacts of nomads on local economies. Predictive analytics can also uncover emerging hotspots for digital nomads by analyzing variables like cost of living, internet speed, and visa policies. A study done by the National Bureau of Economic Research serves as an example of an academic analysis of remote work using a data-science approach. Applying a similar methodology could offer valuable insights into trends and patterns surrounding digital nomadism (13). Conclusion Digital nomadism is more than just a trend—it’s a transformative shift in how work and economies function. From its roots in technological innovation to its ripple effects on local and global markets, this lifestyle is reshaping the modern workforce. As technology continues to advance, the sustainability of digital nomadism will hinge on balancing economic opportunities with policy frameworks that address its challenges. Cultural shifts and new tools are likely to make this lifestyle even more accessible. For students and young professionals in economics and data science, digital nomadism presents an exciting opportunity to shape the future of work. By analysing labour markets, designing policies, or developing predictive tools, you could play a vital role in this evolving landscape. Ready to dive deeper into the world of digital nomadism? Explore research opportunities, upskill through online courses, or analyse trends to predict its growth. The future of work is being written—why not be part of the story? Works Cited “Upwork Study Finds 22% of American Workforce Will Be Remote by 2025.” Upwork, https://www.upwork.com/press/releases/upwork-study-finds-22-of-american-workforce-will-be-remote-by-2025. “State Of Remote Work 2023.” Buffer, https://buffer.com/state-of-remote-work/2023?. Accessed 27 January 2025. Cohen, Mikaela. “The percentage of employees working remotely is dropping, but experts say it’s unlikely to reach pre-pandemic levels.” HR BREW, 2024, https://www.hr-brew.com/stories/2024/08/12/the-percentage-of-employees-working-remotely-is-dropping-but-experts-say-it-s-unlikely-to-reach-pre-pandemic-levels. “Share of digital nomads worldwide in 2023, by age.” Statista, 2023, https://www.statista.com/statistics/1298807/digital-nomads-by-age-worldwide/. “Top 5 Industries with the Most Remote and Hybrid Work.” Linkedin, 2024, https://www.linkedin.com/pulse/top-5-industries-most-remote-hybrid-work-ioptimizerealty-fbqmc/. Noviarini, Nurina, and Palupi Lindiasari Samputra. “Digital Nomad and Analysis of Regional Economic Resilience of Tourism Sector in Bali Province After Covid-19 Pandemic.” Jurnal Indonesia Sosial Teknologi. Researchgate, https://www.researchgate.net/publication/380893593_Digital_Nomad_and_Analysis_of_Regional_Economic_Resilience_of_Tourism_Sector_in_Bali_Province_After_Covid-19_Pandemic. Chamberlin, Victoria. “What Portugal got right about work-life balance.” Vox, 30 September 2024, https://www.vox.com/future-of-work/374273/portugal-remote-digital-nomad-work-life-balance Accessed 28 January 2025. “Tax policies for a new generation.” European Parliament, 2022, https://www.europarl.europa.eu/RegData/etudes/ATAG/2022/733697/EPRS_ATA(2022)733697_EN.pdf. Hausberger, Yasmin. “Learning from Multinational Enterprises: International Tax Strategies for Digital Nomads.” University Wein, Masters Thesis, https://services.phaidra.univie.ac.at/api/object/o:1787699/get. Cohen, Randolph B. “Unprecedented: Remote Work and the Strange Economy of 2023.” 2023. Harvard Business Review, https://www.hbs.edu/faculty/Pages/item.aspx?num=64685. “Future of jobs: These are the most in-demand skills in 2023 - and beyond.” The World Economic Forum, 1 May 2023, https://www.weforum.org/stories/2023/05/future-of-jobs-2023-skills/. Accessed 28 January 2025. “Market size of the global corporate e-learning industry in 2023.” Statista, 2023, https://www.statista.com/statistics/1232427/global-corporate-e-learning-market-size/#:~:text=The%20market%20size%20of%20the,billion%20U.S.%20dollars%20by%202030. Stephen Hansen, et al. “Remote Work across Jobs, Companies, and Space.” 2023. National Burea of Economic Research, https://www.nber.org/papers/w31007. “Global Labor Market Trends in Remote Work.” World Bank Group - International Development, Poverty and Sustainability, https://www.worldbank.org/ext/en/home. Accessed 28 January 2025. Cost of Living.” Numbeo, 2024, https://www.numbeo.com/cost-of-living/. “Tourism Policy 2024.” OECD Tourism Trends and Policies 2024, 2024, https://www.oecd.org/content/dam/oecd/en/publications/support-materials/2024/07/oecd-tourism-trends-and-policies-2024_17ff33a3/Tourism-Policy-Highlights-2024.pdf?. Accessed 28 January 2025.
Imagine waking up to a sunrise in Bali, working from a café in Lisbon, and closing your laptop for a hike in Medellín—all in the same year. Welcome to the life of a digital nomad. Digital nomadism is more than a lifestyle; it’s a transformative shift in how people approach work. Digital nomads are professionals who leverage technology to work remotely while travelling the globe, free from the constraints of a fixed office. This trend has gained massive momentum, driven by advances in communication tools, globalisation, and the COVID-19 pandemic, which normalised remote work across industries. The numbers back this up. According to Upwork, 36.2 million Americans will be working remotely by 2025—a staggering 87% increase from pre-pandemic levels(1). Buffer’s 2023 State of Remote Work report revealed that 91% of respondents have a positive experience with working remotely with 1% being dissatisfied and 8% feeling neutral. 98% of remote workers would recommend it to others (2). These trends show that technology and shifting work-life balance priorities are reshaping what it means to “have a job.”
Trade Balance (Trade Surplus / Trade Deficit)
The trade balance is an important macroeconomic variable: countries that trade can increase their overall welfare by consuming at a point greater than their production possibilities frontier in autarky would suggest, by making use of comparative advantages in production. Or in other words, they earn more by exporting (some of) their produce that they are relatively efficient in producing, and trading it for goods they are less efficient at producing themselves. However, trade imbalances can also pose problems for a country, such as increasing the amount of debt held by the domestic government, or making the domestic economy vulnerable to security issues or market fluctuations in other nations. Defining the trade balance The trade balance is a straightforward concept. It’s defined by the difference between exports (X) and imports (M). Exports are goods (or services) that are sold by domestic producers to foreign consumers, who pay into the domestic economy for them. Imports are foreign-produced goods and services that domestic agents purchase, sending their money abroad. The trade balance itself can be defined as NX, “net exports”, a term that appears in the equations for aggregate demand and certain approaches to calculating GDP. It should be clear to see that NX is negative when a country imports more than the country exports, which, according to the aforementioned equations, decreases economic output Y. This is because when imports are greater than exports, foreign consumers put less money into the domestic economy (to buy domestic goods) than domestic agents send outside of the domestic economy (to buy foreign goods). In other words, the economy shrinks because money is leaving it. This situation is known as a trade deficit. Conversely, if exports X are greater than imports M, NX is positive, and economic output Y is able to grow more than it would without trade. That’s because in this case, foreign investments add extra money to the domestic economy, allowing more economy-boosting savings and investment than would otherwise be possible. This situation is known as a trade surplus. How trade balance is related to economic growth Trade balance affects an economy’s capital accumulation, which is an important variable for economic growth (for example, see the Cobb-Douglas Production Function). When more capital is accumulated, the economy grows more (although this also increases the effects of depreciation and increases potential maintenance costs). When X > M there is a trade surplus, which causes a “net capital inflow”. When M < X there is a trade deficit, which causes a “net capital outflow”. In other words, a trade surplus allows an economy to accumulate capital faster than it would be able to otherwise (and vice versa for a trade deficit). Savings and the trade balance According to the savings-investment identity, savings and investment are two sides of the same economic coin. Savings fuels investment, which grows the economy. Funds entering the economy via foreign agents can be seen as additional savings entering the equation from an outside source. In the case of an open economy with NX ≠ 0, investment equals total savings by domestic and foreign agents. The equation for investment in an open economy is as follows: I = S = SD + (X – M), where I is investment, S is savings, SD is savings by domestic agents, and X – M represents net exports, which can be thought of as savings by foreign agents. When X – M is positive, there are more foreign savings flowing into the economy than domestic savings leaving it. When it is negative, domestic agents are sending more money abroad than foreigners are sending into the economy. Again consider the case of a trade surplus X > M. It’s clear from the discussion of savings and trade balances that this will cause S to rise. This means that I rises too; therefore investment is increased by a trade surplus. This conclusion is reversed in the opposite case where X < M, so investment is lowered by a trade deficit. Are trade imbalances good or bad? Surpluses and deficits affect more than just savings and investment. A trade surplus can actually reduce unemployment, as domestic industries expand to meet the demand for exports. Additionally, a trade surplus can result in a stronger currency, making imports cheaper for domestic consumers. However, while a trade surplus is often seen as a positive economic indicator, it can also indicate that a country is not consuming as much as it should domestically, suggesting an underutilization of resources. And, there are tradeoffs to consider, even from running a surplus. Export industries may actually suffer from a stronger domestic currency. That’s because a strengthening currency due to a trade surplus causes exports to be more expensive for consumers abroad, and therefore less competitive. A trade deficit arises when a country's imports exceed its exports, and notoriously may lead to an increase in the national debt. This can lead to a loss of domestic jobs and an increase in unemployment, as imported goods may be cheaper than locally produced ones. However, a trade deficit isn’t always bad, just like a surplus isn’t always good. A trade deficit can provide consumers with a wider variety of goods and services at lower prices, which in turn can help to keep inflation levels under control. And, exposing domestic industries to a higher degree of competition from foreign firms can force the former to become more efficient or innovative to survive. Further, a deficit can be the result of foreign entities clamoring to compete or invest in domestic markets, a sign that the domestic economy is seen as a strong investment. Fiscal and monetary policy implications for the trade balance The trade balance is closely interconnected with fiscal policy and monetary policy. Expansionary fiscal policies (for example, cutting taxes) can stimulate domestic demand. But, increased demand can lead to higher imports, as consumers and firms leverage their increased wealth to buy foreign goods! This can increase the trade deficit. Conversely, contractionary fiscal policies may help to reduce imports and narrow the trade deficit, but come at a cost of dampening the domestic economy. Monetary policy, which mainly involves managing interest rates and the money supply, can also influence the trade balance. For example, a higher interest rate may attract foreign investors looking to save their money, which can lead to a strengthening of the domestic currency. This can increase the trade deficit by making domestic exports more expensive, and therefore less competitive, in foreign markets. Overall, the trade balance is an incredibly interconnected macroeconomic variable that has wide-ranging implications across the economy. It can be difficult to determine if the trade balance itself is responsible for a changing economic situation, or if the myriad other related variables are culpable. The truth is that the economy is a complex and multifaceted entity. In some cases, economists may debate on whether a given surplus or deficit is good or bad for the current situation. Good to Know In the real world, the trade balance is a commonly debated topic among politicians, and it can be an important facet of international relations – for good or ill. Countries frequently engage in trade negotiations to address trade imbalances and promote fair competition, and free trade treaties are often heralded as major accomplishments. For instance, Canada, Mexico and the United States signed the North American Free Trade Agreement in 1992, taking effect in 1994. This reduced the barriers to trade (such as eliminating tariffs) among the three major North American nations, and led to a slight increase in trade among them. But, U.S. President Donald Trump – who rather (in)famously took an aggressive “America First” stance on trade issues – threatened to withdraw from NAFTA during his first term in office, complaining that it wasn’t beneficial enough for the US. Eventually, the agreement was replaced by the USMCA agreement under his administration, which includes additional provisions designed to help US industries compete more favorably against Canadian and Mexican competitors.
The “trade balance” is a term that appears often in everyday news about the economy and in politics. It refers to the amount of trade that a country conducts, and it can be in surplus, in deficit, or balanced.
Public Economics & Economic Policy (JEL H)
Macroeconomics and Monetary Economics (JEL E)
Women in Economics: Influential Voices and Rising Stars
Influential Female Voices in Economics Esther Duflo A Nobel laureate and professor at MIT, Esther Duflo has revolutionised development economics with her work on poverty alleviation. Duflo’s research employs randomised control trials to identify effective interventions in areas such as health, education, and agriculture. Her insights have influenced policies around the world, proving instrumental in the design of practical solutions to poverty. Alongside her contributions, Duflo co-founded the Abdul Latif Jameel Poverty Action Lab (J-PAL), a network aimed at reducing poverty through evidence-based research. You can follow her on X or read one of her Books ‘Poor Economics’ and ‘Good Economics for Hard Times’. Read our in-depth blog about her here. Janet Yellen Currently serving as the U.S. Secretary of the Treasury, Janet Yellen has been a pivotal figure in shaping modern economic policy. With a distinguished career that includes chairing the Federal Reserve, Yellen’s expertise in labour economics and monetary policy has been critical in guiding the U.S. through economic crises. Her approach to inclusive economic growth, as well as her emphasis on reducing economic inequality, continues to impact policy decisions at the highest level of government. You can follow her on X (@SecYellen) or read about her in recent articles from Forbes and The Financial Times. Claudia Goldin Renowned for her groundbreaking work on gender economics, Claudia Goldin has explored the evolution of women’s roles in the labour market, unveiling insights into wage gaps, labour force participation, and education. As a professor at Harvard University, Goldin’s contributions provide a deeper understanding of the economic forces shaping gender disparities, and her work has become a cornerstone of labour economics and social policy. You can read about her Nobel Prize Work or read one of her many books ‘Family and Career’ and ‘Understanding the Gender Gap’. Carmen Reinhart A distinguished economist specializing in international finance and macroeconomics, Carmen Reinhart currently serves as Vice President and Chief Economist at the World Bank. Her research on financial crises and sovereign debt has been instrumental in understanding economic stability. Reinhart’s influential book, ‘This Time Is Different’, co-authored with Kenneth Rogoff, remains a vital reference for analyzing financial crises and their historical context. Follow her on Linkedin, X and Instagram or read one of her many books ‘This Time Is Different’ and ‘The Decade of Debt’ Rising Female Stars Making Waves in Economics Alice Evans Alice Evans, a lecturer at King’s College London, focuses on the sociology and economics of gender equality. Her work delves into how social norms evolve and the impact of cultural shifts on gender dynamics, particularly in developing economies. Evans has become a voice of authority on the influence of social norms on economic outcomes, making significant strides in gender economics through her research and public engagement. Follow her on YouTube, Linkedin and X, or find some of her many scholarly articles. Stefanie Stantcheva A professor at Harvard University, Stefanie Stantcheva’s research examines taxation and its effects on inequality, innovation, and education. Known for her work on social economics, Stantcheva brings an empirical approach to understanding how tax policies influence economic behaviour and social mobility. Her insights are not only shaping economic theory but also influencing policy debates on equitable taxation and welfare. Follow her on Linkedin and X or read her contributions to scholarly articles. Harvard also has her biography and research published. Ulrike Malmendier An economist at UC Berkeley, Ulrike Malmendier combines behavioural economics with corporate finance, investigating how psychological factors influence economic decision-making. Her research, including the concept of the “experience effect,” explores how past economic environments shape individuals' financial choices. Malmendier’s contributions provide a deeper understanding of economic behaviour and have practical implications for both policy design and corporate strategies. Follow her on Linkedin and X or read her contributions to scholarly articles. Victoria Vanasco An emerging scholar in finance and macroeconomics, Victoria Vanasco is an assistant professor at Stanford Graduate School of Business. Her work centres on financial intermediation, systemic risk, and information asymmetry in markets. Vanasco’s research on financial institutions’ vulnerabilities and economic stability offers valuable insights into how information shapes market behaviour, making her an important voice in economic stability and financial regulation. Follow her on Linkedin, X and Facebook. Kyla Scanlon Kyla blends traditional economic insights with modern-day storytelling through her digital platforms. With a unique ability to simplify complex economic concepts, she has gained a significant following for her accessible, creative, and often humorous approach to economic education. She is also a strong advocate for financial literacy, particularly among younger audiences, making her an influential voice in engaging the next generation of economists and data-savvy individuals. Find her on Instagram, TikTok, X and YouTube or read her newly released book ‘’In This Economy? How Money and Markets Really Work’’. Tanya Van Court A visionary entrepreneur and advocate for financial literacy, particularly among children and families. As the founder and CEO of Goalsetter, a financial education platform, she has revolutionized the way young people learn about saving, budgeting, and investing. Tanya’s mission is to close the wealth gap by equipping the next generation with the tools and knowledge needed to make informed financial decisions. Her work combines elements of behavioural economics with technology, empowering families to build healthy financial habits early on. Find her on Instagram, and Linkedin or find out more about her in this Forbes article. The Importance of Diversity in Economics The contributions of these women exemplify the importance of diverse voices in economics. They have introduced broader perspectives and new areas of inquiry that perhaps are less likely to have developed within the confines of the old-school “men’s club” mentality that typified many economics departments in the past. Gender diversity among economists enhances the relevance and applicability of economic research, bringing in varied approaches to understanding issues such as inequality, poverty, and behavioural dynamics. As the field continues to evolve, fostering inclusive spaces within academia and policy institutions remains essential, not only for advancing women economists but also for enriching economic thought for all. Encouraging Future Generations The achievements of these trailblazing women in economics inspire future generations to pursue impactful careers in the field. By highlighting their contributions, we emphasize the critical role women play in advancing research, shaping policy, and fostering a more inclusive and innovative discipline. Their work serves as a powerful reminder of the value of gender diversity in driving progress across global economies and financial systems. Check out our other blog 'Does Economics have a Problem with Women?' for an interesting insight on this topic.
Men have long dominated economics, but female economists have made remarkable contributions in recent decades. The work of female economists, together with that of their male counterparts, has redefined academic and policy landscapes and paved the way for greater inclusivity within the discipline. Women continue to bring diverse perspectives that enrich our understanding of global financial systems, economic growth, labour dynamics, and policy interventions. These women are not only changing the economic landscape but inspiring future generations to follow in their footsteps. Here are some of the voices we should all be listening to.
Program and courses With this Master's program, one of the best Law Schools in the Netherlands (THE, 2025) opens its doors to students from anywhere in the world both on campus and online. The market requires experts who have knowledge of both the economic and legal aspects of taxation. That is why the program is based on two pillars: law and economics. After graduation, all students (including students with a background in economics) will be awarded with the Master in Law in International Business Taxation (LLM). Students with a Dutch Bachelor's in Law (LLB) or pre-Master's in Law can obtain the so-called “civiel effect” after graduation from this Master's. That means you will have the right to exercise typically legal professions in the Netherlands such as notary, judge, attorney, etc. This only applies to Dutch-speaking students. With this Master's degree, you qualify for prospective membership in the Nederlandse Orde van Belastingadviseurs (NOB) and can take the NOB professional program. As member, you can work as a tax advisor in an NOB recognized firm. Spice up your curriculum and broaden your horizon by participating in the prestigious EUCOTAX Wintercourse. Be inspired by internationally-reputed lecturers and celebrated scholars in a program that is affiliated with the Fiscal Institute Tilburg, one of the largest fiscal institutes in Europe. Typical courses are: International and European Taxation Tax and Technology Transfer Pricing Career prospects International Business Tax Economics offers you outstanding career prospects. Expect to get a job soon after you graduate, finding positions in the private sector (internationally-operating companies, consulting firms) as well as in the public and non-profit sectors. Graduates work or start for example as: Analyst International Corporate Income Tax at Deloitte International Tax Consultant at Ernst & Young (EY) Transfer pricing Associate at PricewaterhouseCoopers (PwC)
Combine legal and economic knowledge to become a tax expert specialized in international business. Gain the academic skills to fully understand the impact of taxation in combination with new technologies on a global scale. Understand the function of taxes as instruments to pursue sustainable development. The LLM International Business Taxation gives you the opportunity to join the program either online or on campus.
Economic Development, Innovation and Growth (JEL O)
The number of scholarships is limited and mainly targeted at students with excellent study results. Visit website for more info
The AD-AS model uses the concepts of aggregate demand and supply to build a comprehensive model of the entire economy. While imperfect (like all models!), the AD-AS depiction is a great starting point when studying macroeconomic models; it can show the effects of just about any economic factor or shock on the economy. Importantly, the model also depicts inflation and output clearly, which in turn strongly hints at the level of unemployment, three important macroeconomic variables for any model to account for. Full-employment output in the AD-AS model The basic form of the AD-AS model is shown in Figure 1. In this graph, equilibrium is at the point where the AD (aggregate demand) and SRAS (short run aggregate supply) curves intersect with both each other and the vertical LRAS (long run aggregate supply) line. This yields an equilibrium price level of P1 and output of Y1. Figure 1: The AD-AS model in long-term equilibrium When the economy is in this state, markets are in perfect harmony. We know this because when the three curves (AD, SRAS, and LRAS) intersect, the price level is steady, unemployment is as low as possible, and output (as measured by, say, GDP) is as high as is “safely” possible. At this three-way equilibrium, consumption and investment demands of consumers and businesses (AD) perfectly align with the production desires of suppliers (SRAS) at the current price level. In other words, the price level is steady because there is just enough supply to meet demand. And, because the economy is efficiently using all of its resources (equilibrium is on the LRAS curve), we know that output is maximized. Because of this, we also know that workers are being utilized effectively and there is no unemployment (save for the unavoidable and healthy natural rate of unemployment). Thus, when short-term AD-AS equilibrium rests on the LRAS curve in the AD-AS model, the economy is in a state known as “full employment output”. For deeper understanding, recall that the LRAS curve shows the maximum (healthy) potential output of the economy, and is unaffected by the price level. This is because the numeric price level doesn’t change how much real-world production factors – like raw materials, machines, and human intelligence – can actually produce. The LRAS curve, then, represents a Pareto-efficient usage of the economy’s resources. In fact, the LRAS curve can also be thought of as a point on the economy’s Production Possibilities Frontier (PPF). When the economy is efficiently using all of its resources, it will reach a production mix on the edge of the PPF, and in the AD-AS model it will be at equilibrium on the LRAS curve. Disequilibrium in the AD-AS model This situation is all well and good, but the economy isn’t always in equilibrium! Let’s examine how the AD-AS model depicts disequilibrium. First, consider a situation where the short-run equilibrium – the intersection of AD and SRAS – lies to the left of the full employment level. What does this say about the economy? Figure 2: The AD-AS model in recession This shows that aggregate demand and short-run aggregate supply are in equilibrium, but they are not at the full-employment level of output depicted by LRAS. Since LRAS shows where equilibrium should be if the economy is utilizing its resources effectively, this economy isn’t producing output to its full potential – it’s producing at a point somewhere under the PPF curve. It’s possible that the price level is too high, that there is too much unemployment, or that some negative shock occurred that made the economy less productive. In other words, Figure 2 is showing a recession! In this specific case, notice how the AD curve has shifted to the left, and the new levels of prices and output are both less than in Figure 1. Figure 3 examines the opposite case – where the short-run equilibrium is to the right of LRAS. Figure 3: The AD-AS model in an inflationary expansion Now, AD and SRAS are at an equilibrium output greater than the full employment output. This is, in fact, possible. However, this isn’t some cheat code that heralds infinite economic growth; as with everything in economics and in life, there are no free lunches. This inefficient overuse of resources comes with a serious cost: inflation! Notice how, compared to Figure 1, the AD curve has shifted to the right, leaving us with higher output and a higher price level. The economy could be over-producing for several reasons, but in any case, free markets will eventually correct themselves. They will respond to the excess production by raising prices or reducing output, such that the new intersection of AD and SRAS returns to the LRAS curve. One way this can come about is via an adjustment in the wage rate. Workers, noticing the increased productivity, will seek increased compensation. This upward pressure on the wage rate will eventually increase prices across the economy, as firms face higher labor costs, and by extension higher production costs. In this case SRAS shifts to the left, until it intersects AD at the point where both curves meet LRAS. The end result of the brief period of over-productivity, then, is the same long-run output as before, but at a higher price level. This is just one way that inflation can occur as a result of Figure 3’s over-production. Regardless of the exact reasons, economists describe this state of the economy as an “inflationary expansion”. That term – along with the terms “recession” and “full employment output” – define each basic state that the AD-AS model can be in, and tell us the position of the curves and likely state of the economy even without needing to see a graph. Dynamics of the AD-AS model Showing the state of the economy is helpful, but the true usefulness of the AD-AS model is that it can depict how the economy might shift into and out of equilibrium. In other words, it’s a tool that helps economists anticipate how real-world events will affect the economy, and why. When examining the AD-AS model for these purposes, it’s important to remember the factors that can shift either the aggregate demand or aggregate supply curves. In Figures 1, 2 and 3, the AD curve shifted, but in the real world either AD, SRAS, LRAS, or even two or three of the curves can shift! To recap, the equation for aggregate demand shows which factors can shift it: AD = C + I + G + NX (Where C represents consumption spending by individuals and firms, I is investment spending, G shows government spending, and NX represents net exports.) If anything occurs that shifts one of its components, aggregate demand will shift. A full discussion can be found in the linked article. Likewise, aggregate supply can shift too, and the linked article discusses how. The most common causes of a shift in aggregate supply include changes in the prices or availability of factor inputs, or changes in economic policy that make it easier (or harder) for firms to conduct business. Long-run aggregate supply can also shift. When it does, it signifies a change in the economy’s total potential output. Innovation is a major factor that can shift LRAS to the right; destructive events like warfare or natural disasters can shift it to the left. When any curve shifts, we can determine the likely effects on the economy using the graphs depicted in the last section. For example, suppose that a negative supply shock – such as an increase in the price of oil – hits the economy. This would cause SRAS to shift leftwards, as the cost of inputs is a major factor that can affect the supply of goods (LRAS does not shift in this case, since prices don’t affect long-run potential output). The leftward shift in SRAS corresponds to a movement left and up along the AD curve, bringing the economy to a new short-run equilibrium with lower output and higher prices – see Figure 4 below. Figure 4: Recession caused by a negative shock to SRAS But, in the long run, the economy will recover from the increased price of oil and return to its long-run efficient level of production. This can happen in many ways. In this example, it’s possible that the increased cost of oil incentivizes consumers and firms to find energy and input substitutes that don’t rely on oil. Suppose producers began to rely on solar power instead; eventually then, SRAS would return to the fully efficient level once firms had enough time to fully account for the increased cost of oil. Multiple curves can shift at the same time, too. Consider a case where innovation in a domestic economy produces a major technological breakthrough – for example, suppose that one country alone invents desktop computers. This would improve economic productivity, shifting LRAS to the right; it would also (most likely) lead to a surge in foreign demand for domestically-produced computers, before other countries are able to begin producing their own supply. This increase in the NX term of aggregate demand shifts AD to the right as well. The final equilibrium is likely to be a scenario where the economy has both higher output and a higher price level, since LRAS and AD both shifted rightwards (representing a movement upward along the SRAS curve). In these scenarios, the effect on the price level is clear. The likely effects on employment are easy to deduce from this model, too, although employment doesn’t appear explicitly on the graph. Consider the case just discussed, where LRAS and AD shifted rightwards. In response to the increased demand, firms would need to hire more workers and increase their capital stock, to increase production. Therefore, unemployment would most likely decrease. AD-AS and the effects of policy The articles on monetary and fiscal policy discuss the goals of the central bank and government when implementing policy. Generally, these institutions seek to boost the economy during times of recession, and slow the economy during times of (potentially inflationary) expansion. It may seem odd at first to learn that these institutions might actually want to reduce or discourage economic activity. But, the AD-AS model immediately shows us when this can make sense. If the economy is in an inflationary expansion (like in Figure 3), it might be necessary to shift AD to the left so that the price level doesn’t increase too much. After all, runaway inflation can lead to difficult situations like stagflation or hyperinflation, especially if unforeseen events shift SRAS or LRAS to the left. In order to affect the economy, the government can affect G (government spending) directly through fiscal policy. And, implementing laws and regulations can guide the economy in various ways, too. For example, if the economy is in a recession (like in Figure 2), cutting corporate taxes can shift SRAS to the right and encourage the economy to return to an equilibrium closer to the full-employment output level. Monetary policy affects the AD-AS model too. To see how, first realize that the money supply can affect aggregate demand. If the central bank increases the supply of money, AD will shift rightwards (since consumers have more money to spend; or, alternatively, the velocity of circulation increases). This causes the short-run equilibrium to reach an increased level of output and prices (assuming that monetary neutrality does not hold). In times of recession, this is a policy lever that may seem quite appealing to bring short-run equilibrium back towards LRAS. Depending on the country, the central bank also influences interest rates, which have important effects on the AD-AS model. Increasing interest rates encourages saving and discourages both consumption spending and (firms) borrowing to fund investment projects, which can shift AD leftward, and vice versa (nevertheless, the savings-investment identity continues to hold as the economy shifts). Further Reading The AD-AS model isn’t perfect, but it is a great starting point. Grasping this model will allow students to ace introductory macroeconomics courses, and build off of it to learn more complex models of the economy. For an advanced discussion of the AD-AS model’s shortcomings, numerous papers are available. Consider, for example, David Colander’s The Stories We Tell: A Reconsideration of AS/AD Analysis. Yet, the model is still widely used in economics today because it is useful, relatively straightforward, and robust. See Amitava Krishna Dutt and Peter Skott’s Chapter 6 Keynesian Theory and the AD–AS Framework: A Reconsideration for an example of argumentation in favor of its continued use.
There are a wide variety of macroeconomic models that aim to represent how economic activity works, and economics students will encounter many throughout the course of their studies. Arguably, the most common and important of these is the aggregate demand-aggregate supply model, or AD-AS model. Needless to say, you should be familiar with both aggregate supply and aggregate demand before continuing to read this article!
Planet Money Produced by NPR, Planet Money is a must-listen for anyone wanting to understand complex economic issues. This podcast covers topics like global trade, market changes, personal finance, and economic policies. It presents these subjects through engaging stories. Planet Money simplifies intricate concepts into relatable narratives, making it accessible to listeners of all backgrounds. Whether you're commuting, exercising, or just unwinding, it's an excellent way to stay informed without feeling overwhelmed. Check out a recent edition of Planet Money, following the re-election of Donald Trump as US President), about what markets bet President Trump will do (8 November 2024) : Your browser doesn't support embedded audio. Please follow the link above. 2. Freakonomics Radio Hosted by Stephen Dubner, Freakonomics explores the “hidden side of everything.” It uses economic theory to look at many unusual topics. This podcast looks at the economics of drug dealing and the effects of cheating on society. It encourages listeners to think differently about everyday events. They offer unique perspectives that push the boundaries of traditional economic discussions, making them intellectually stimulating and highly engaging. Check out a recent edition of the Freakonomics Radio Podcast asking whether Screen Time is as poisonous as we think (11 September 2024): <source src="https://stitcher.simplecastaudio.com/2be48404-a43c-4fa8-a32c-760a3216272e/episodes/6642f1c7-8948-4da0-8eb8-46dc5a073647/audio/128/default.mp3/default.mp3_ywr3ahjkcgo_114a0aa095f67f75ca66a9b698e66bc6_38865205.mp3?awCollectionId=2be48404-a43c-4fa8-a32c-760a3216272e&awEpisodeId=6642f1c7-8948-4da0-8eb8-46dc5a073647&nocache&hash_redirect=1&x-total-bytes=38865205&x-ais-classified=unclassified&listeningSessionID=0CD_382_336__c0b7a1ea2e25b39bfc1110e0ef9f7a882a4a5e43" type="audio/mpeg"> Your browser doesn't support embedded audio. Please follow the link above. 3. The Indicator A spinoff of Planet Money, The Indicator offers quick updates on work, business, and the economy. Each episode is short and easy to understand. Great for busy people, each 9-minute episode gives you a quick look at the latest economic trends and data. To stay informed without long episodes, The Indicator is perfect for daily updates. It keeps you in the loop with little time needed. Check out a recent edition of the Indicator Podcast about how Donald Trumps tariffs might work (2nd December 2024): Your browser doesn't support embedded audio. Please follow the link above. 4. The Economics of Everyday Things Journalist Zachary Crockett looks at ‘’quotidian things and finds amazing stories’’. This podcast is a spinoff from Freakonomics. It offers quick and insightful updates on everyday topics. It demonstrates how economics influences everything. Who decides where our coffee comes from every morning? How much is an oak tree worth and why? How did Girl Scout Cookies become a billion-dollar business? If you want to stay informed without long episodes, this podcast is perfect for short, daily episodes. Check out a recent edition of the "Economics of Everyday Things" Podcast about a resurgence in the popularity of sending greeting cards: <source src="https://stitcher.simplecastaudio.com/51058430-d98f-4830-b949-5d9a371523ce/episodes/fb5b1c52-706a-40fd-ae75-93a9d5cb917e/audio/128/default.mp3/default.mp3_ywr3ahjkcgo_0107875b1f12c0afa9298bb0b58aea6a_14916786.mp3?awCollectionId=51058430-d98f-4830-b949-5d9a371523ce&awEpisodeId=fb5b1c52-706a-40fd-ae75-93a9d5cb917e&nocache&hash_redirect=1&x-total-bytes=14916786&x-ais-classified=unclassified&listeningSessionID=0CD_382_336__971d8aafaa830770a2c8fec1516a5de779bec703" type="audio/mpeg"> Your browser doesn't support embedded audio. Please follow the link above. 5. Macro Voices Bloomberg-owned with weekly market commentary by Hedge Fund Manager Erik Townsend, Macro Voices is focused on macroeconomic trends. It includes interviews with leading financial experts and policymakers. They discuss global economic issues and offer expert insights. Their insights help listeners understand the bigger picture. Macro Voices is for those already with knowledge in Economics. Perfect for professionals and enthusiasts seeking expert insights into global economic developments and their implications. Check out a recent edition of Macro Voices (27 November 2024) discussing the markets after Trumps election victory, and energy/natural resource markets Your browser doesn't support embedded audio. Please follow the link above. 6. The Economist Podcasts From the renowned publication, ‘The Economist’ Podcasts cover a wide range of economic and political topics. Featuring interviews with journalists and experts, these podcasts offer high-quality and comprehensive coverage of current events. They post every weekday. Their global network of correspondents helps make sense of stories beneath the headlines. They share surprising trends and tales from around the world. Most of the podcasts require a subscription, but each week a selection of Economist podcasts are available for general access. 7. Odd Lots Joe Weisenthal and Tracy Alloway from Bloomberg host a show called Odd Lots. The show explores unique and interesting aspects of economics, finance, and the markets. The podcast delves into intriguing stories and features expert interviews, making complex topics both engaging and understandable. Odd Lots combines expert insights with fascinating narratives, offering a fresh take on economic and financial subjects. Check out a recent edition of Odd Lots about the demand for Chicken Sandwiches Your browser doesn't support embedded audio. Please follow the link above. 8. Capitalisn't Capitalisn’t offers a critical perspective on capitalism, exploring its impacts and alternatives through interviews and discussions. The podcast examines the strengths and weaknesses of various economic systems to compare with capitalism's effects in today's world. For listeners interested in a more nuanced discussion of economic systems, Capitalisn't present thoughtful critiques and explores potential alternatives to capitalism. Check out a recent edition of Capitalisn't (21 November 2024) about the fertility crisis, with guest Niall Ferguson Your browser doesn't support embedded audio. Please follow the link above. 9. EconTalk Hosted by Russ Roberts from the Hoover Institution, EconTalk features deep talks with economists and thinkers. They discuss many economic issues. The podcast is known for its thoughtful and comprehensive discussions on economic theory and practice. EconTalk is perfect for people who enjoy deep and thoughtful discussions. It explores important economic ideas and how they apply in real life. Check out a recent edition of EconTalk (21 October 2024) about why housing is artificially expensive, and what can be done about it Your browser doesn't support embedded audio. Please follow the link above. Conclusion Podcasts are an invaluable resource for anyone looking to stay informed about economic trends and theories. The podcasts shared here mix expert analysis, engaging stories, and deep discussions. They cater to many interests and skill levels. By listening to these shows, you will understand the changing economy better. This knowledge will help you make smart choices and stay ahead in your field. Image Credit: Pixabay (Free for use under the Pixabay Content License)
In an ever-evolving global economy, staying informed is more crucial than ever. Whether you are an economics student, a finance professional, or just curious, podcasts are a great way to learn. They help you understand economic trends, theories, and real-world applications easily and engagingly. So, we’ve assembled a list of some top economic podcasts you ought to have a listen to. You can find all these podcasts on Amazon, Spotify, and Apple Music. For your convenience, we’ve linked their web pages below. Happy listening!
Distribution effects in a perpetual Bitcoin bull market: Who really pays for the Lamborghini
1. Introduction The debate over Bitcoin’s utility and sustainability dates back to Nakamoto’s 2008 white paper. Many economists see Bitcoin as a speculative bubble that will eventually burst, causing social damage through high energy use and illicit payments (Rogoff 2017, Roubini 2018, Avoca 2021, Taleb 2021). Many Bitcoin supporters, however, have changed their primary interest in Bitcoin as they see it as an investment asset with the potential for everlasting capital gains, encouraging even latecomers to invest and assuming no harm to those staying out. Our paper explores both Bitcoin’s original promise as a payment system and its current role as an investment asset. We argue that Nakamoto's (2008) understanding of retail payments was inaccurate and that this explains why Bitcoin has never been significantly used in legal e-commerce. Likewise, Bitcoin lacks the traits of financial assets: It does not generate any cash flow like real estate, interest like bonds or dividends like stocks, and it cannot be used productively like commodities (Bindseil, Papsdorf and Schaaf 2022). <o:p></o:p> In fact, many supporters now dispense with any reference to economic justifications as to why the Bitcoin price should rise or reach a specific level. They simply take further price increases for granted and promote the idea of Bitcoin as a pure investment asset. The list of those in favour of this financial situation without “reason” ranges from politicians and financial giants to sportsmen and Hollywood stars (Hoffman 2024, Bent 2024, Coindesk 2021, Gerard 2024, Bitfinex 2024, CNN 2024).<o:p></o:p> We therefore conclude that Bitcoin’s appeal is based on self-fulfilling beliefs in its rising value, fuelled by new investments (van Oordt 2024), but not supported by economic fundamentals or legal social utility, which also implies that Bitcoin has no impact on the economy's production potential. This means that the wealth gained by early adopters comes at the expense of latecomers. It’s like filling a big barrel by draining water from many buckets. 2. Technology shocks, the increase of the production potential and wealth effects New technologies are key to economic growth and social welfare. The rapid rise in market capitalization of tech companies (Google, Tesla, Amazon, Apple, Nvidia) is seen as reflecting both the future production potential of the economy and their expected profitability. An aligned increase of equity wealth and production potential allows the wealth effect on consumption to be matched with a greater supply of goods and services without inflation. There are however cases without such a match. Increased competition from technology can reduce equity market cap despite higher production potential, and some firms may see equity values rise sharply from breakthrough technologies long before the economy benefits. Sometimes, expectations are wrong, leading to a tech equity bubble burst. Phenomena like Bitcoin, which don't enhance the production potential at all, may still aim for high market caps. In these cases, the neutral level of nominal interest rates and therefore monetary policy are likely affected. Tightening might become necessary when wealth effects outpace production growth, as with Bitcoin. If the central bank optimally tightens policy, it can prevent wealth-effect driven inflation and macroeconomic instability. In our simulation of Bitcoin’s redistributive effects, we assume the central bank successfully manages this. We also simplify by assuming a steady rise in Bitcoin prices and corresponding policy responses, ignoring short-term shifts between consumption and real investment. 3. The mechanics of redistribution We examine the redistributive effects of Bitcoin in a theoretical, Bitcoin-friendly scenario, in which the price of Bitcoin rises continuously and no “bubble burst” occurs. Since investing in Bitcoin doesn’t boost production, this consumption crowds out other spending or investment, potentially harming non-Bitcoin holders. Early investors, or ”Early Birds”, increase their consumption by selling Bitcoin to “Latecomers” - in our simplified model, society consists only of these two types. Early Birds sell Bitcoin to Latecomers, who fund these purchases by liquidating real assets and reducing their consumption. This transfer raises Early Birds’ consumption and wealth over time. We illustrate the simple model with specific parameter values, assuming for example 10% annual appreciation and 2% of Bitcoin being transferred each year, with one-half of this being financed by Latecomers’ reduced consumption and the other half by the transfer of real asset wealth. Under the assumption of unchanged investments, early adopters increase their real wealth and consumption at the expense of the real wealth and consumption of goods and services of those who invest in it only at a later stage. Initially, Early Birds dominated both Bitcoin and real assets, but over time, Latecomers’ share of Bitcoin increased, although Early Birds still hold more real assets. The simulations show that while Bitcoin ownership eventually converges, Early Birds maintain higher consumption due to their asset accumulation. Overall, even if Bitcoin prices were to continue to rise, wealth gains for early adopters come entirely at the expense of latecomers, leading to significant redistribution. Early holders’ wealth and consumption grow, while others become poorer. When Bitcoin converges to an equal distribution across the population, further price increases become neutral in every respect. Unsurprisingly, in the absence of positive effects on the production potential, proportionally distributed Bitcoin wealth increases cannot lead to an expansion of consumption. On the way to this state, the Lamborghini, Rolex, villa, and additional equity portfolio bought by early Bitcoin investors are financed by diminishing consumption and real wealth losses of those who initially do not hold Bitcoin, but only jump later the bandwagon. This means that Bitcoin’s redistribution effects go beyond the implications of good or bad timing of purchases and sales by investors amid a volatile price, or the risk of financial losses in case the Bitcoin bubble would eventually burst as predicted by many (e.g. Krugman 2013, Rogoff 2017, Roubini 2018). This redistribution bears the risk of destabilizing society. Latecomers, even if unable to pinpoint the cause [1], will feel frustration as their purchasing power erodes. It is important that current non-holders recognize that Bitcoin’s rise is driven by wealth redistribution at their expense, posing a threat to societal cohesion. 4. Bitcoin and the US election In the US, the crypto industry is celebrating itself as the real winner of the presidential election, as the new administration promises a more crypto-friendly policy. According to Strobel (2024), FairShake, the industry's largest super political action committee (PAC), won 48 out of 48 races in which it supported a candidate (with Fairshake supporting crypto-friendly candidates regardless their political camps). Interestingly, many of the ads didn't even mention crypto, technology or tech regulation. Rather, they were aimed at discrediting supposedly crypto-critical candidates (White 2024). No wonder markets are euphorically bullish in anticipation of rosy times: Since the US presidential election on 5 November, the Bitcoin price has risen by over 30% from USD 68,000 to above USD 90,000. What looks like good news for investors at first glance is a bleak outlook for social fairness and ultimately cohesion. With a market capitalization of Bitcoin having grown to above USD 1.8 trillion (as of 18 November 2024), the economic interests to continue the bull run and the financial fire power of the industry to spread the narrative of Bitcoin as an ideal investment asset are higher than ever before. Authors’ note: The views expressed in this column are the ones of the authors and not necessarily the ones of the ECB. We would like to thank Klaus Adam, Charles-Enguerrand Coste, Troy Cross, Kelvin Low, Omid Malekan, George Pantelopoulos, Dirk Schumacher, Bob Seeman, Oreste Tristani, Mika Tujula, Anton van der Kraaij,for useful comments. All remaining errors are ours. This blog post is an abridged summary of a full article, available here. About the Authors Ulrich Bindseil is Director General of Market Infrastructure and Payments (DG-MIP) at the European Central Bank. Mr Bindseil started working in the field of central banking in 1994 in the Economics Department of the Deutsche Bundesbank. He worked as an economist at the European Monetary Institute as of 1997 and was later on responsible for the Directorate General Market Operations at the ECB. Mr Bindseil received a PhD in economics at the University of Saarbrücken. Jürgen Schaaf is advisor to the Senior Management of the Market Infrastructure and payments business area of the ECB. In previous occupations he was Counsellor to the Executive Board of the ECB, Personal Adviser to the Governor of Banque centrale du Luxembourg (BCL), worked as ECB watcher at Börsen-Zeitung and as a Senior Economist at Deutsche Bank. He studied Economics in Marburg and Canterbury (Kent, UK), and received his PhD in Economics from the University of Marburg. References Avoca (2021), “Bitcoin: a trojan horse”, 14 October 2024.<o:p></o:p> Bent, M (2024), “Pensions are doomed without Bitcoin”, Marty’s Bent, 19 March 2024.<o:p></o:p> Bindseil, U, P Papsdorf and J Schaaf (2022), “Bitcoin – the encrypted threat”, SUERF policy note, issue 262, 7 January 2024.<o:p></o:p> Bitfinex (2024), “Where do US Presidential Candidates Stand on Crypto Policy?“.<o:p></o:p> Chernoff, A and J Jagtiani (2024), “Beneath the Crypto Currents - The Hidden Effect of Crypto “Whales””, Federal Reserve Bank of Philadelphia, Working Paper 24-14, August 2024.<o:p></o:p> CNN (2024), “RFK Jr. suspends presidential campaign and endorses Trump”, 23 August 2024.<o:p></o:p> Coindesk (2021), “Tom Brady Says He’s a ‘Big Believer’”, Crypto, 28 May 2024.<o:p></o:p> Gerard, D (2024), “Trump’s Crypto Turnaround Heralds an Economic Nightmare - The former president is pitching a new grift”, Foreign Policy, 30 July 2024.<o:p></o:p> Hoffman, N (2024), “BlackRock CEO Larry Fink says Bitcoin ‘Is An Asset Class That Protects You’”, Bitcoin Magazine, 12 January 2024.<o:p></o:p> Krugman, P (2013), “Bitcoin Is Evil.”, The New York Times, 28 December 2024.<o:p></o:p> Nakamoto, Satoshi (2008), “Bitcoin: A peer-to-peer electronic cash system”.<o:p></o:p> Rogoff, K (2017), “Bitcoin’s Price Bubble Will Burst under Government Pressure””, The Guardian, 9 October 2024.<o:p></o:p> Roubini, N (2018), “Crypto is the Mother of All Scams and (Now Busted) Bubbles”; Testimony for the Hearing of the US Senate Committee on Banking, Housing and Community Affairs On “Exploring the Cryptocurrency and Blockchain Ecosystem”; October 2024.<o:p></o:p> Strobel, Aubrey, “The many ways crypto won in this election”, CoinDesk, 15 November 2024. , <o:p></o:p> Taleb, N (2021), “Bitcoin, currencies, and fragility”, 22 July 2024.<o:p></o:p> van Oordt, M R C (2024), “On Bubbles in Cryptocurrency Prices”, 1 August 2024. <o:p></o:p> White, M (2024), “Cryptocurrency companies have raised over $135 million to influence US elections this cycle, and they’re just getting started, Citation Needed, Newsletter, 30 May 2024. <o:p></o:p>[1] Indeed, recent research confirms that cryptocurrency markets are often characterized by market manipulation or, at the very least, by a sharp distinction between large and sophisticated investors and small retail investors (Chernoff and Jagtiani 2024). <o:p></o:p>
We examine the redistributive effects of Bitcoin in a theoretical scenario where its price continuously appreciates. Early adopters benefit from rising consumption and asset accumulation at the expense of later investors, who fund Bitcoin purchases by liquidating real assets and reducing their consumption. The analysis reveals that even in the absence of a crash, Bitcoin causes wealth redistribution that enriches early investors while reducing the real wealth and purchasing power of non-holders and latecomers. This dynamic, if unaddressed, risks eroding societal cohesion. Amid a record high market capitalization of USD 1.8 trillion following the 2024 election in the USA, this risk is higher than ever.
2024 Nobel Prize in Economics- The Winners
The Research That Was Awarded the Prize The 2024 Nobel Prize in Economics recognised the transformative work of economists Daron Acemoglu, Simon Johnson, and James Robinson on the role of institutions in economic development. Their work explores how political and economic institutions influence a country’s success or poverty. Through their research, they argue that the legacy of colonial institutions has had long-lasting effects, shaping economic disparities worldwide. Nations where settlers established stable political institutions tend to have more successful economies, whereas countries where colonial powers primarily engaged in resource extraction often face economic struggles to this day. Their research has introduced a more nuanced perspective on economic development, highlighting the necessity for political and institutional reforms to address global inequalities. Their findings emphasize how inclusive institutions - those that allow broad access to resources and economic opportunities - are foundational to building stable and thriving economies. Detailing the Formation of Institutions and the Effect on Their Prosperity One of the core concepts of the combined work of this year’s prize winners is that of Extractive institutions versus Inclusive institutions. Extractive Institutions tend to centralize power and wealth in the hands of a few. They limit opportunities for the wider population and lead to slower economic growth and higher inequality in the longer term. Inclusive Institutions on the other hand allow a broad participation in the economy, protect individual rights and enable people to benefit more directly from their work. This leads to higher investor confidence and innovation and is associated with longer-term economic growth and prosperity. This builds on previous work by scholars working in the field of Institutional Economics. The 2024 winners expanded on this to explore how colonial history impacts today’s economies. A key aspect of the research was the identification of a link between the attractiveness of the environment for colonial settlers, and by extension the health of colonial settlers, and the types of institutions that developed. Empirically, Acemoglu, Robinson and Johnson identify areas that experienced lower “settler mortality”, for example North America, as more hospitable regions, whereas areas with higher settler mortality, typically due to environmental and health factors like higher disease prevalence (e.g. Malaria), were identified as less hospitable for colonial settlers, for example South America, parts of Africa and parts of Asia. They identified that in those places with a more hospitable environment, defined by lower settler mortality rates, institutions tended to develop as more inclusive and stable, promoting long-term prosperity for the settlers. In contrast, in those areas with higher settler mortality rates, assumed to be, broadly speaking, less attractive for (mostly European) colonizers in the longer-term, the colonizing nations tended to establish more extractive, resource (including labor) focused institutions, allowing for a faster short-term exploitation of local resources, but at the expense of the short-term and long-term inclusion and well-being of the local population. A final element of the research agenda is the legacy of these institutions, the forms in which they have persisted today, and how they have shaped, and continue to shape, economic patterns even generations after their establishment. Debate and Criticism As befits groundbreaking and fundamental economic research, the work is not without its critics. One point of controversy relates to methodology and data issues. Specifically, some experts argue that the prize winners’ use of “settler mortality” data may not fully capture the complexities of different historical situations. Further, emphasizing the state of institutions as a legacy of colonial times to explain the current challenges in certain countries and regions, while undoubtedly providing a useful framework, may risk glossing over other factors unique to a country or region. For example the impact of the Atlantic slave trade, the colonial exploitation of natural resources, and the economic and cultural trauma resulting from these that, many would argue, lasts to this day, surely played a role too. It should be noted that the prize winners do not argue that institutional legacy is the only explanation for levels of poverty today. As such, the “criticism” in this sense would perhaps more accurately be that the prominence given to the role of institutions by the winners, and more broadly by New Institutional Economics (NIE) as a subfield of economics, can divert from other (typically more qualitative social and political) factors. This prominence is of course increased by the Nobel Prize award, but is perhaps better viewed as a correction of too much emphasis on broader social, economic and political explanations, and a long-standing underemphasis of the role of institutions. In summary, as long as researchers and policy makers consider the institutional approach in context, without neglecting other factors, then it can of course contribute extensively to a more complete picture and, one hopes, better research and policy in future. Another criticism is that the approach is not entirely new. New Institutional Economics as a subfield developed in the 1960s and 1970s (the term is attributed to Oliver Williamson, himself a Nobel Prize winner from 2009). Its application to help explain the prosperity or poverty of national economies was arguably pioneered by economists like Douglass North, who died in 2015 and had already been awarded a Nobel Prize for his work in 1993. While he focused on the importance of institutions in the development of market economies, rather than making a correlation between institutions and poverty per-se, his work no doubt contributed enormously to the recognition of the importance of New Institutional Economics as a field, and of the role of institutions in national economic success. But again, this is not a criticism as such of the 2024 prize winners and their research. Between them, the new insight they have brought has strengthened the field and our understanding of the importance of historical institutional development in modern-day prosperity. Indeed, supporters highlight how the work of Acemoglu, Johnson and Robinson provides clear ideas on how countries can reform institutions for economic development, especially relevant for today’s emerging economies. The Winners' Biographies Daron Acemoglu specializes in economic growth, political economy, and institutions, he was born in 1967 in Istanbul, Turkey. He received his BA in economics from the University of York, UK, in 1989, thereafter receiving an MSc in econometrics and mathematical economics at the London School of Economics in 1990, and a PhD in economics in 1992. Later Acemoglu moved to the US and joined MIT in 1993 as an assistant professor where he worked his way up to full professor by 2000. His work focuses on how political decisions shape economic outcomes, analyzing issues like inequality, economic power, and the impact of technology on labor markets. He is highly regarded for his publications, including ‘Why Nations Fail’ co-authored with James Robinson, and ‘Power and Progress’, a recent book co-written with Simon Johnson. Acemoglu's research has gained attention from both academic and policy circles, establishing him as a significant figure in economic thought and reform advocacy. Simon Johnson, also a professor at MIT, is renowned for his expertise in macroeconomics and development economics. He was born in 1963 in Sheffield, UK, and received a first from Oxford University in 1984, and a Master's in economics from the University of Manchester before doing his PhD at MIT. Johnson’s career took off with a Chief Economist position at the International Monetary Fund (IMF). His research often explores the intersection of economic policies, institutional development, and global markets, frequently addressing how institutions can drive or hinder economic progress. In addition to his academic contributions, Johnson co-authored ‘Power and Progress’ with Acemoglu, a work that examines the effects of technology on economic growth and democracy. James Robinson is a British-American political scientist and economist who currently teaches at the University of Chicago. He received a BSc in Economics from LSE in 1982 and a Doctor of Philosophy in economic theory and labor relations from Yale University in 1993. His research primarily focuses on political institutions and their impact on economic and social outcomes, particularly in developing regions. Robinson has an extensive research background in Latin America and Africa, which has shaped his understanding of institutional dynamics in diverse socio-political contexts. His collaborative work with Acemoglu, including ‘Why Nations Fail’ , explores the historical and institutional roots of economic disparity, emphasizing how inclusive institutions are vital for fostering stable and prosperous societies. Together, Acemoglu, Johnson, and Robinson have built a significant body of work that not only advances economic theory but also provides practical frameworks for understanding—and potentially remedying—the institutional causes of global economic inequality. Their combined efforts continue to influence both the academic field and real-world policies. Works Cited Acemoglu, Daron, and Simon Johnson. Power and Progress: Our Thousand-year Struggle Over Technology and Prosperity. Basic Books, 2023. Acemoglu, Daron, and James A. Robinson. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown, 2012. North, Douglass. “Theory of Institutions: Lessons for Law and Development.” Hague Journal on the Rule of Law, vol. 8, no. -, 2016, pp. 373-419. Springer Nature Link, https://link.springer.com/article/10.1007/s40803-016-0028-8. Ricciuti, Roberto. “All Nobel Prizes 2024 - NobelPrize.org.” Nobel Prize, 2024, https://www.nobelprize.org/all-nobel-prizes-2024/. Accessed 7 November 2024. Header Image Credit: ScandinavianStories via Pixabay (Free for use under the Pixabay Content License)
The 2024 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, more commonly known as the Nobel Prize in Economics, has been awarded to three influential economists this year - Daron Acemoglu, Simon Johnson, and James Robinson. The prize – worth 11 million Swedish crowns, or about $1 million or roughly €950,000 – was awarded by the Royal Swedish Academy of Sciences for their ‘studies of how institutions are formed and affect prosperity’ (Ricciuti), providing critical insights into why some countries achieve higher per capita incomes and others struggle with persistent economic challenges. Their work also emphasizes the importance of establishing robust institutions to support sustainable economic growth and social stability.
The Top Economics Blogs to Follow in 2025
At INOMICS, we believe economics blogs offer a treasure trove of interesting, informative, and often unique perspectives. That’s why we’ve curated this list of our favorite blogs and podcasts to follow in 2025. Whether you're looking for real-time economic insights or a deep dive into economic theory, this list covers it all. Check out our top picks below and explore them for yourself! Staying informed and gaining new perspectives is important. It can give valuable insights into current economic trends, policy talks, and new research. Economic bloggers come in many types. 1. Marginal Revolution Written by George Mason University professors Tyler Cowen and Alex Tabarrok, Marginal Revolution is a top source for interesting ideas about economics. This covers policy discussions and cultural insights, making it essential for those interested in current economic topics. Their ability to connect economic theory to real-world applications makes this blog a crucial resource. 2. The Grumpy Economist John H. Cochrane is a Senior Fellow at the Hoover Institution. He provides clear and smart insights on economics, finance, and public policy. This blog is known for detailed data analysis and valuable discussions about financial and economic policies. He challenges conventional wisdom and encourages critical thinking. His clear, accessible writing style makes complex economic concepts coherent to a broad audience. 3. Calculated Risk Bill McBride’s "Calculated Risk" is a trusted source for understanding real estate, housing trends, and the economy. His detailed and data-focused approach helps readers, professionals, and academics grasp the complexities of the economy. This makes it a valuable resource for anyone interested in real estate economics. 4. Econ Log EconLog, run by the Library of Economics and Liberty, includes various contributors sharing ideas on economic theory, public policy, and classical liberal views. This blog offers a place for lively debate and different opinions. 5. VoxEU The Columns section on VoxEU is part of the Centre for Economic Policy Research which offers concise, research-based commentary on pressing economic issues. It features articles written by economists and researchers, covering a wide range of topics such as macroeconomics, finance, trade, labor markets, and policy debates. The columns distill academic research into accessible insights, helping readers, including policymakers, academics, and the general public, stay informed about the latest economic trends and evidence-based policy discussions. 6. Noahpinion Noah Smith’s "Noahpinion" offers engaging commentary on economic trends, technology, and policy. Smith has a background in finance and economics. He offers clear and helpful insights into current events and economic theory. He often looks at how technology is changing the economy. He also explores how these areas affect one another. His approachable style and ability to explain technical concepts make his blog a favourite among both novices and experts. 7. Bruegel Commentaries The Bruegel Commentaries, managed by the Bruegel think tank, is a great resource. It offers detailed insights into European and global economic policy. It includes input from various experts. They give clear comments on topics like EU economic rules, the digital economy, and global trade. The blog focuses on policy issues and has top contributors. This makes it an important resource for both policymakers and scholars. 8. The Undercover Economist Tim Harford’s "The Undercover Economist" continues to demystify economics for the everyday reader. Harford explains complex economic ideas with relatable stories. People enjoy seeing how these concepts apply to everyday life. 9. The Conversable Economist Timothy Taylor, author of "The Conversable Economist," offers comprehensive and accessible discussions on economic trends and policy. Taylor can explain difficult topics in simple ways. This makes his blog helpful for both experienced economists and new readers. 10. Econbrowser Econbrowser, managed by James Hamilton and Menzie Chinn, provides a detailed examination of macroeconomic and international economic issues. They focus on data and current economic trends. This makes it a useful resource. It helps anyone who wants to understand the complexities of the global economy. 11. Digitopoly Digitopoly studies how the digital world affects economics, covering innovation, competition, and technology's influence on markets. Joshua Gans and his co-authors provide expert insights into how the digital economy is reshaping traditional economic paradigms. 12. The Global Economy and Development Blog The "Research and Commentary" section covers global development issues and provides in-depth policy evaluations. Experts share views and research-driven reports on economic growth, poverty reduction, and global policy. This makes it a helpful resource for understanding global economic issues. 13. Naked Capitalism Naked Capitalism often provides critical analysis and commentary focusing on the flaws in mainstream economic thinking and corporate influence. It offers original articles and curated news links that discuss financial markets, banking, economic policy, inequality, and corporate governance. If you’re looking for alternative viewpoints on economic and political matters this blog is for you. 14. Enlightenment Economics Diane Coyle an economist, provides thoughtful commentary and analysis on economics, focusing on the intersection of economics, technology, and public policy. It includes reviews of economics books, reflections on economic theory, and insights on current economic issues, with an emphasis on how technological change is shaping the economy. 15. Focus Economics News The News section of FocusEconomics provides readers with up-to-date economic news and analysis, covering global economic trends, country-specific data, and key indicators like GDP, inflation, trade, and financial markets. It delivers concise reports on the latest economic developments from various regions, offering insights for businesses, investors, and policymakers. The section is valuable for tracking macroeconomic trends and forecasts across countries and industries. 16. INOMICS Blog Finally a shameless plug for our own blog, with a focus on economics careers and economics education, as well as insights into interesting areas of economics research that can guide and inspire economics students and young economics researchers. But then you are already here, so you already knew that! Conclusion We selected these top economics blogs for their expertise, quality content, and relevance to today's economic topics. Following them will keep you informed about the latest trends, debates, and research in the field of economics. These blogs provide useful information for students, teachers, and workers. They can help you understand the economy better. Each blog has its niche or specialty that it focuses on; use this to your advantage, and find the right blog for you! Keep being curious and explore these resources to learn more and stay updated in the changing world of economics.
Staying informed on economic trends, policies, and research is key to gaining valuable insights into the ever-changing global economy. Whether you're an economics student, educator, or enthusiast, exploring different viewpoints is essential. Economics bloggers and podcasters come in all forms—some are academics like Gregory Mankiw and Paul Krugman, while others are insightful thought leaders like John Cochrane and Tyler Cowen. Their expertise spans from real estate to public policy and macroeconomic trends.
How to better engage economics students in work placements
A typical work placement can be embedded within a degree programme either as an additional year (typically, the third year of a four-year course), or as a module within a year of study, where students get practical training and work experience in an organisation (e.g. a consultancy firm or a government institution). Work placement experiences can be crucial experiences for economics graduates. Even though economics degrees equip students with many skills that are desirable by employers – like data analysis and problem-solving skills – a shortage of certain skills and wider technological challenges have still been observed among graduates. In this article, we discuss why and how to encourage economics students to participate in work placement programmes. Work placements help students develop transferable skills There is a broad spectrum of benefits associated with the ‘real-world’ experience that students gain through placements. By being immersed in a professional environment, students develop valuable transferable skills across different broad areas, like communication, taking initiative, planning and organisation, and professionalism. Further, students develop and enhance subject-specific skills and knowledge during placements. For instance, they gain data analysis skills by working on ‘real’ data, using them to produce charts and statistics, and critically analysing them. Industry knowledge is important not only in economics-oriented sectors like consultancy or banking, but also in those that require expertise from other disciplines, like energy or telecommunications. The industry knowledge that economics students acquire during their placements in these sectors can offer a strong advantage for certain careers and graduate schemes, like the graduate development programme at Ofgem, Britain’s independent energy regulator. Image credit: Pixabay. Another notable benefit of work placements, perhaps one of the most important, is that students tend to gain confidence in their skills. This includes improving their understanding of their skills, how academic knowledge from their studies is applied to real world settings, and confidence in articulating those skills. For example, at university, students usually learn econometric methods and use economic modelling in the first and second year of their studies. These skills can then be applied in research-oriented roles, like those offered by the Bank of England or consultancy companies that carry out forecasting and risk analysis. What’s more, the placement year offers students the opportunity to apply economic theories to real-life situations in different sectors. For instance, students might use core economic concepts to understand international markets and the economic performance of a country and draw insights from macroeconomic indicators, such as inflation and economic growth. Other benefits of work placements Networking is another important benefit of placements. Students meet and interact with new and different people, including peers from other universities, colleagues and managers. Students not only gain knowledge and experience from their placement work, but they also create contacts with line managers and other employees, who can share their insights into careers and support students’ applications for future job openings. Further, placements can be a useful way for employers to identify graduate talent. There are potential monetary benefits of placements too. Most economics placements are paid, typically offering annual salaries of around £20,000, but there are occasions that these may exceed £30,000 and even reach £40,000 (for more details see Arsenis and Flores, 2020). Furthermore, graduates can reap monetary benefits by securing graduate jobs with their placement employers. These earnings can alleviate students’ debt or help them to save. Obviously, such earnings need to be considered in conjunction with the costs associated with the work placement (including the reduced tuition fee for the placement year, and the delayed entry to the graduate labour market), which vary depending on individual circumstances. Overall, economics placements can be an important first step in career progression. They provide students with the opportunity to trial the world of work, gain valuable skills, and discover potential career pathways. Our recent study shows that graduates who have undertaken a placement are more likely to find graduate jobs that are aligned with their careers than those who did not have such an experience. Engaging economics students Students often need to be aware of placement opportunities early in their degree, or even before they begin their studies, as these opportunities are often competitive. Students’ first-year performance matters for securing a placement, while prior school performance, particularly in economics and maths, does not seem to matter. This creates the additional spillover effect that students are incentivised to engage more with the first year of their undergraduate studies. In UK universities, this year often does not count towards their final degree classification, even though it provides key, foundational training that is built on throughout their degree. Universities and economics departments can improve student engagement in different ways. First-year induction sessions could cover basic features of the available placement programmes and highlight their benefits as well as challenges (for example, the time-consuming process of applying for jobs while attending classes and sitting assessments). Career fairs and employability sessions could also be organised during the year to further motivate students and show them ways to improve their employability. In addition to the general employability sessions that careers services typically offer to students (including careers information and advice on skills development), economics departments can provide a more tailored learning experience that addresses economics graduates’ career paths and aspirations. To this end, inviting alumni to share their ‘success’ stories and advice with the current cohort is a great way to raise students’ interest in improving their own employability. Economics graduates tend to be employed in a wide spectrum of job roles; thus, it is important that invited alumni reflect that diversity. For example, economics graduates working in technology, media, and pharmaceutical companies can be invited along with graduates that have followed more traditional pathways, like banking and wealth management. Covering both private and public sector opportunities is important too. Indeed, there are lots of public sector roles available for economics graduates, such as those in the Treasury or the Government Economic Service. Crucially, students would need a dedicated point of contact - staff who can advise and direct them to the appropriate resources and services. Ideally, this person should be economics staff with a relevant role, like an employability or placement director, who also regularly liaises with the university’s employability and careers service to organise and advertise relevant events and resources. Image credit: Pixabay. Academic support for placement success Academic support can be crucial for students’ success in securing placements. One type of support is the role of placement tutor. Placement tutors typically visit students on placement (or meet them online), keep track of their progress, advise them on tasks they need to perform to complete the placement year, and assess students’ performance on related assessments. The placement tutor also fosters links between the university and employer, and keeps track of skills that are necessary in the graduate labour market. That part of the placement tutor’s role is important as it can also help to shape curricula. These days, a diverse set of skills is expected of economics graduates, including knowledge of data analysis and visualisation, coding, even machine learning. By creating syllabi and assessments that help students develop these skills, not only are students better prepared for the graduate labour market, but they also have better chances of securing a placement (and eventually a job) too. Academic support is a crucial element of work placement degrees, where a supportive learning environment can be enhanced by the contribution of placement tutors. Indeed, there is evidence suggesting that student access to academic support throughout the placement is an important aspect of the design of such programmes. The placement tutor can also contribute to a smooth transition from university to the graduate labour market. Challenges While adopting these approaches may go a long way towards engaging students with placements, it may not always be enough. Nowadays, a rising number of students in higher education come from different socio-economic backgrounds and face different challenges. But unfortunately, it is noteworthy that the economics discipline performs particularly poorly in terms of inclusivity. For example, it has a remarkably low share of students from low socio-economic backgrounds and from neighbourhoods with low participation in higher education (relative to the average student). Economics educators should be concerned about these challenges, as university degrees have arguably become increasingly necessary to be competitive in the labour market. It is crucial to first acknowledge these challenges, and to take appropriate action. Acknowledging the issue suggests that economics departments should not present the option of placements as the only path to developing employability while studying. Instead, alternative pathways should be promoted, like paid internships, which require less time to complete and usually take place outside of term times. But importantly, they still offer some of the benefits of work placements, such as creating new professional contacts and gaining insights into careers. Another way to encourage employability is by designing a curriculum that explicitly addresses it; for instance, by introducing modules or changing existing ones to involve opportunities for self-reflection on skills that students developed while working on assignments. Taking appropriate action involves supporting students who may want to go on placement but face financial constraints. For example, bursaries can be offered to students who come from low-participation neighbourhoods or low-income families. Clear widening participation criteria should be set and advertised to promote inclusivity, and to encourage students from different backgrounds to apply for placements. Summary In this article, we have set out the benefits of work placements and showed ways to engage students with them. Economics departments should be actively involved in this process and tailor their information to economics students. Economics educators should also be aware of the challenges that many students face and adjust their engagement strategies and support accordingly.
Employability is a key concern for students, educators and employers in the UK. Indeed, many students want to see employability playing a bigger role in their courses. One way in which universities can foster graduate employability is through work-based learning (WBL) programmes, such as work placements.
The Economics of Pokémon: Development, Pricing, and Wealth
The world that Pokémon presents has won over the hearts of kids and adults alike for decades. Trading cards, video games, movies and TV shows, collectible plushies, action figures, and much, much more have been commissioned from the franchise, earning it an impressive (estimated) $98.8 billion since its inception in 19961. The way this fictional world functions has some interesting implications for the economics of the society living there. Let’s assume that the internal logic of the world – people and Pokémon living in harmony in a seemingly modern world, where Pokémon can battle but do no lasting harm – is reasonable, and examine the implications for the economy. Domestication and industrialization in the Pokémon world The clear place to begin is by examining the economic implications of the Pokémon themselves. The Pokémon world features an absolute abundance of these essentially magical creatures, and they’re both unquestionably friendly to humans and easy to domesticate. The existence of Pokémon should lead to a massive boost in economic productivity compared to a world without these creatures, leading to rapid industrialization with a fraction of the human population. In our world, domesticating creatures like oxen, horses, cows, and camels led to massive changes in our quality of life, allowing humans to cultivate consistent sources of wool, meat, and muscle power. Both livestock and work animals were major factors helping early humans build their societies and grow – in fact, according to Jared Diamond’s Guns, Germs and Steel and other research, having animals nearby that were domesticable and useful was a major factor in determining how rich societies would be centuries later. Now, just picture an ox that can control the weather in addition to pulling your plow, and you’ll have a good idea of why early Pokémon-world societies would have skyrocketed past our own in development. Many Pokémon have powers relating to one of the nineteen elements identified by the franchise. One of the most obviously beneficial to an economy is the Electric type. In numerous episodes and video games, it’s been shown that a small number of Electric Pokémon can produce a massive amount of power. In Pokémon Gold and Silver, for instance, a single Pokémon powers the lighthouse for the port city Olivine, and it was (evidently) so reliable that when it gets sick, the lighthouse shuts down. The city didn’t have any contingency plan for this single-Pokémon power generator, presumably because it hadn’t ever needed to worry about it. Energy is crucial to the function of the economy, and developing electrical systems that could efficiently power our society took hundreds of years of innovation. To this day, producing power cheaply and efficiently is a major concern for nations around the world, and the prices of energy are a major concern for consumers. If easily-domesticated, electricity-generating Pokémon were readily available, power would (very likely) be incredibly cheap across the board, and Pokémon society probably would have advanced to utilizing electrical energy with incredible speed compared to our own. Perhaps the Industrial Revolution would have skipped the usage of coal and other fossil fuels entirely, producing electricity by sustainably harnessing the friendly lightning monsters (though it’s worth noting that there is a rock-and-fire Pokémon made of coal that could have spurred the Industrial Revolution as we know it on its own, so they could have gone that route too). This may even explain why the human population in Pokémon appears to be pretty low compared to our world. In Pokémon, there are relatively few major cities spread wide across various continents, each populated with thousands of people (to give a generous estimate). But if it was far easier for people to industrialize – especially as Pokémon can help provide labor to actually build things – it’s feasible that a much smaller human population was able to modernize extremely fast, before exponential population growth was able to produce as many people as we have in our world today. In the Pokémon world, Thomas Malthus may even have been an optimist. Infrastructure and the environment Electricity isn’t the only benefit these creatures provide to their human counterparts, though. Other Pokémon have been shown to be consistently useful and reliable throughout the franchise’s history, providing services such as labor (helping with construction projects and moving services), helping with gardening, ferrying across water, digging, delivering mail, assisting with cooking, and much more. For example, flying Pokémon have been used to taxi people around entire nations free of charge, ensuring rapid travel (for example, the Corviknight taxis shown in Pokémon Sword and Shield). Although a bird probably can’t fly as fast as an airplane, having an accessible and free taxi service would be immensely useful as a supplement for riding the subway or driving. In fact, very few cars and roads are shown in the Pokémon world, probably because of the existence of these free taxis, and the fact that individuals can simply train their own flying Pokémon to take them around. But that’s not to say that the Pokémon world is bereft of infrastructure. Paved and unpaved roads, highways, and especially ferry, train and subway systems abound. There’s even a space station and a naval base housing research submarines in Pokémon Ruby and Sapphire. It just so happens that personal automobiles are relatively rare throughout the series, most likely because of the ease of transit that flying Pokémon willingly provide. This lack of cars and fossil fuels contributes to another factor that Pokémon seem to have helped with – environmental friendliness. The usage of Pokémon in many capacities such as power generation and travel has allowed the societies in the Pokémon world to become extraordinarily sustainable by our standards. Nature is abundant in almost every single Pokémon setting that’s been shown, and pollution is nearly unheard of. This is consistent in a world where neighborhood animals can be domesticated and harnessed to perform such a wide variety of useful economic functions. There are even poison-type Pokémon that eat trash as part of their diet, making cleanup even easier! As we’ve discussed on our blog before, nature is incredibly valuable to our societies, but is also very fragile. If Pokémon had existed in our world and helped us develop with such high levels of sustainability throughout history, it’s likely that global warming – one of the major challenges currently facing our generation – would be very mild or even nonexistent. While our world is still struggling to transition to green energy, the world of Pokémon was able to leverage domestic creatures to produce green energy from the start. And, the abundance of energy likely means that energy prices are very cheap. But certain goods in the Pokémon world are anything but… Interpreting Pokémon’s Odd Prices For Consumer Goods Clearly, the Pokémon world gained a myriad of benefits from the titular “pocket monsters” themselves that allowed society to flourish. One would expect the Pokémon economy to be doing quite well, then. But the prices seen throughout the world (especially via the games) often vary greatly compared to our own, and seem to make no sense on first glance. For example, in the original Pokémon games, a single bike costs one million “dollars”! The bike is completely unpurchasable, as the character can only hold up to $999,999 (the English translations call the currency “Pokémon dollars”, but the Japanese originals use yen – here we simply refer to dollars, and use the $ symbol). Other prices seem nonsensical too. Vitamins such as iron, zinc, and calcium are widely available for purchase, but often cost around $10,000. Meanwhile, many other valuable items are priced far cheaper than mundane objects like bikes. For instance, Pokéballs – the items used to catch and house friendly Pokémon – typically cost only $100, and valuables like a “big nugget” of gold typically sell for $10,000, while a high-quality pearl goes for $3,750. But, rather than throw this evidence away as the unrealistic manifestations of a kid’s fantasy world, if we assume that Pokémon prices are rational, we can learn why the Pokémon economy may have reached such a wildly different equilibrium than ours. There are some explanations for why these prices seem so odd, but could be legitimate. First, as cars are rare and Pokémon themselves often available for transport, bicycles may actually be a premium transportation option. Why buy a bike when you can just catch a small bird Pokémon for $100 that can fly you across the city, protect you from wild animals, and also be your favorite pet? Vitamins may be expensive for a different, very important reason: feeding your Pokémon vitamins makes them stronger. In a world where Pokémon are so ubiquitous and useful, items that can make them stronger are likely in high demand, especially because Pokémon themselves are so easy to domesticate. This would massively increase the demand for supplements like vitamins compared to our own world. And, as Econ 101 has taught us, high demand for a limited supply of goods will increase the price. Meanwhile, the ‘low’ prices for what we consider valuables like gold and pearls (only thousands of dollars compared to vitamins’ tens of thousands) can be explained by Pokémon, too. The cat-like Meowth wears a gold coin on its forehead, and has been depicted throwing a seemingly limitless supply of gold coins around. It even learns a battle move called Pay Day, which showers the participants in actual money that can be picked up by the Pokémon trainers, and spent (though this may be a herald of hyperinflation to come…). Similarly, Gholdengo is a Pokémon made of gold that also slings coins around with reckless abandon. What about pearls? Clamperl is a very common bivalve Pokémon that makes one pearl during its lifetime. But in our world, natural pearls are rare – occurring in only one in every 10,000 mollusks naturally. By comparison, the Pokémon world would have a massive supply of natural pearls, since there is a 100% chance for any random clam to supply a pearl at least once (compared to the paltry 0.01% chance in our world). Naturally, this would reduce the price of a high-quality natural pearl compared to our world, and relative to other goods in the Pokémon economy. More money, less problems These conclusions also imply that being rich is a huge advantage in the world of Pokémon; rich people can afford to travel to catch rare Pokémon across the world, perhaps Pokémon like Gholdengo or Meowth who can simply create gold for them whenever they want. And, rich trainers would be able to afford a pharmacy’s worth of supplements to make their Pokémon grow more powerful faster than an average Pokémon trainer would be able to. To that end, it’s worth noting that most of the professional Pokémon trainers shown throughout the series, like gym leaders and Elite Four members, often have no other job than to battle Pokémon and win tournaments. Meanwhile, most “regular” trainers that players in the Pokémon games encounter do have normal jobs – as janitors, chefs, daycare workers, actors, scientists, radio show hosts, and many more. This supports the idea that being rich allows someone the resources and time to “be the very best, like no one ever was”. Despite this advantage, wealth inequality in Pokémon doesn’t appear to be a big issue. This, too, is sensible. In real life, sustaining oneself requires a large expenditure of effort to farm and maintain a home (or, to hunt and gather). In modern society, participating in the labor force by working is necessary to sustain oneself – few people have the expertise needed to leave society, move to the wilderness, and survive on their own (if there was even land available for them to legally do so). But in the Pokémon world, the readily available aid of friendly creatures with (essentially) magical powers makes it much easier for individuals to support themselves. People could easily make a living with their Pokémon helping to support them, and protect them from wild animals. Further, the availability of widespread and free veterinary healthcare (in the form of Pokémon Centers) makes this even easier. Even tiny towns in Pokémon often have free Pokémon Centers. Therefore, wealth itself seems to be less important for Pokémon people than it is for us. In fact, everyone in the Pokémon world – average people, the greatest trainers of all, even schoolchildren – consistently fork over real money to the winner of a Pokémon battle. This is an unspoken norm, and seemingly never a problem for anyone – people simply pay what they can to the winner. This cultural norm can be likened to a form of friendly, low-stakes, buy-in poker. In our world, friends sometimes come together, put a small sum of money into a “pot”, and let the winner take all for a fun game night. But this practice or norm rarely extends beyond a group of trusted friends. The unspoken agreement to have a friendly wager in the Pokémon world for every battle, even between complete strangers, suggests both widespread trust and that wealth itself is simply less valuable for these people than it is for us. Few people seem bothered about losing some cash for the sake of a Pokémon battle, which seems very much like a sport for them. Pokémon Sword and Shield especially depicts Pokémon battles as a nationwide sport, and combatants are always depicted as friendly challengers – certainly more friendly than boxers in a ring. In the Pokémon world, people already have freely accessible transportation, booming economies, easily domesticable magical creatures, and more – so why worry about a bit of loose change? In summary Human society in the Pokémon world benefited greatly from its titular creatures. Their domestication spurred far-reaching and rapid economic growth, developing society to a modern-like level of technology, seemingly without a negative impact on the environment or even a difficult transition period to using green energy. The Pokémon’s abundance and friendliness further led to a prosperous society where people seem to have few needs, and where the creatures themselves – understandably – are a central feature of the culture. While we don’t have Pokémon in our world, we do have domestic animals, many of which are dearly beloved – and many of which carried our early societies on their backs. Remember, we owe a great debt to nature and to our livestock, even if they might not be able to summon rain or fly you to the supermarket. References 1: Highest-grossing media franchises on Wikipedia Header image credit: toxmendoza via Pixabay (Free for use under the Pixabay Content License)
Almost everyone has heard of Pokémon: it’s the highest-grossing media franchise in the world1. The core concept is also familiar to most people – in the Pokémon world, quasi-magical creatures live alongside people in idyllic, family-friendly harmony.
This means that individuals’ inflation expectations changing causes the nominal interest rate to fluctuate in parallel, keeping the real interest rate the same. Roughly speaking, a typical nominal interest rate, for example the interest rate offered by a bank for a loan, will reflect the real interest rate (the cost of borrowing the money), plus any expected changes in inflation. This is because the bank will want to compensate for the anticipated loss in spending power (inflation) of the money it is lending out, when it receives payment back a year later. Alternatively, the Fisher Effect can be stated in terms of actual inflation. In this case, nominal interest rates change to match the real level of inflation. This again means that real interest rates are stable. This case rests on slightly different assumptions, but students may encounter either version and the takeaways are largely the same. The effect is named after American economist Irving Fisher, who first proposed it. The idea of the Fisher Effect is similar to the economic theory of monetary neutrality in that real economic outcomes are said to be unaffected by “nominal” variables (like, in this case, the nominal interest rate). Defining the Fisher Effect again, with math! It’s important to understand the difference between nominal and real interest rates in order to study the Fisher Effect. For more on this difference, see the article on interest rates. The Fisher Effect states that the nominal interest rate is approximately equal to the real interest rate plus the expected future inflation rate. It can be easily described mathematically as follows: i ≈ r + 𝜋e, where i is the nominal interest rate, r is the real interest rate, and 𝜋e is the expected rate of future inflation. It’s important to keep in mind that this equation is only approximate. From this equation, it’s clear to see one of the core concepts of the Fisher Effect: that inflation expectations can change nominal interest rates. This makes sense. If rational economic agents expect high inflation, they will adjust the terms of their financial agreements. For example, a bank will set the conditions for loans while taking into account the (expected) decreased purchasing power of money by the time of repayment. Alternatively, the effect can be expressed as r ≈ i – 𝜋e. This is the same equation rearranged, showing more clearly that the real interest rate is defined by the nominal interest rate and the expected rate of inflation. There is another version of the Fisher Effect that you may encounter that uses inflation directly instead of inflation expectations. To acquire this formula, simply replace 𝜋e from above with 𝜋. In this version of the Fisher Effect, agents in the economy are able to perfectly adjust the nominal interest rate at the same time as inflation changes to achieve the desired real interest rate. Students may come across another, even more advanced formulation of the Fisher Effect as well (this equation is considered more accurate, however it is still an approximation): (1+i) ≈ (1+r) * (1+𝜋) In this formula, the real interest rate r is typically held constant by assumption. This leads to the same result as above, where changes in inflation (𝜋) are mirrored by changes in nominal interest rates (i) to keep the real interest rate (r) steady. Regardless of the specific equation used, the conclusions and implications of the Fisher Effect are the same. The main difference is that the assumptions powering the Fisher Effect are slightly different depending on whether actual or expected inflation is used. Specifically, in order for the Fisher Effect to be true, economic agents must be rational and have enough information to accurately predict (or measure) the rate of inflation. Further, financial markets must be efficient. These assumptions allow the nominal interest rate to mirror the (expected) inflation rate, preventing the real rate of interest from changing. But, if financial markets are inefficient or if economic agents lack information, the resulting frictions will cause the real interest rate to differ from the Fisher Effect equation. Implications of the Fisher Effect There are some important implications of the Effect to explore. First, if people expect a positive rate of inflation, then nominal interest rates will be higher than real interest rates. This means that the cost of borrowing money (which is the real interest rate) will be lower than what’s laid out in contracts (the nominal interest rate), and the benefit from saving or lending money will be lower as well. To see this, consider a scenario where a borrower takes out a $250 loan and must repay $20 one year after taking out the loan (i is 8%), while inflation is 5% over the course of that year. Since the purchasing power of money decreases by 5% over the year, $20 at the beginning of the year can only buy $19 worth of goods by the end of the year, since prices increased. Thus, although the nominal inflation rate (i) was 8%, the real interest rate (r) was only about 3%. You can verify this with the more precise version of the Fisher Effect equation above to find that r is roughly 2.89%. Conversely, if people expect deflation, nominal interest rates will be lower than real rates. This causes the cost of borrowing money to be higher than what’s laid out in contracts, and the benefit from saving or lending to be higher than what’s written as well – if inflation behaves as expected. Keep in mind that these are merely expectations of inflation. Actual “winners” and “losers” don’t emerge until inflation actually occurs. If inflation is higher than expected, the purchasing power of money declines more than expected over the period. This means that borrowers have to pay back less than expected in real terms and they are “winners”, while savers and lenders experience lower returns than expected and are “losers”. Meanwhile, if inflation is lower than expected, the opposite is true. To return to our example above, if the borrower spent their $250 immediately, but six months later there is an unexpected period of intense inflation, such that prices have doubled by the end of the year, the $20 owed would now be worth only $10 in “old money”. In this scenario, the borrower would “win”. The bank would “lose” because the $20 they receive back would be worth less than the $19 they expected and had calculated into the nominal interest rate. For more on winners and losers when inflation differs from expectations, the article on interest rates offers a more involved discussion. The Fisher Effect has important implications for monetary policy, as well. Central banks play a crucial role in setting interest rates through their monetary policies (though they can’t directly control interest rates across the entire economy). The Fisher Effect suggests that central banks must consider inflation’s effect when setting nominal interest rates to target the desired real interest rate. For example, suppose the central bank wishes the real interest rate target to be 5%, and inflation (or inflation expectations) is 2%. Then, the appropriate nominal interest rate to set according to the Fisher Effect equation is about 7%. But, if inflation is -10% (a case of deflation), the appropriate nominal interest rate is actually roughly -5%! Clearly, it seems economically irrational for someone to accept a financial agreement with a negative rate of interest: why should a lender pay a borrower to borrow their money? This illustrates the “zero lower bound” problem that central banks may face when attempting to implement very low interest rates. Evidence for the Fisher Effect in real life If the Fisher Effect held (approximately) true at all times, then central banks could easily manage inflation by changing nominal interest rates. A lower nominal rate would lower inflation, and vice versa. Unfortunately, the Fisher Effect does not always appear to hold in the real world. Over the years, economists have found mixed evidence for the existence of the Fisher Effect. Fredric Mishkin found that the Fisher Effect existed in the long term, but in the short term was negligible1,2. In 2018, Martín Uribe found that the Fisher Effect held true for temporary changes in the nominal interest rate, but when the nominal rate changed permanently, it actually led to inflation; the author dubbed this the “neo-Fisher Effect”3. The fact that there is some limited evidence makes sense. It’s likely that the Fisher Effect mechanism is taken into account by rational economic agents – since they must account for inflation as they make financial agreements. But, we’ve also seen in history how central banks cannot completely control inflation with their monetary policy tools, which include nominal interest rate adjustments – just look at the financial market crash of 2008 that prompted the Great Recession. The mixed evidence for the existence of the Fisher Effect suggests that policymakers should take the effect into account when designing policy, but should not be beholden to it, nor should they expect the economy to always behave as the Fisher Effect equation would predict. Good to Know The Fisher Effect has implications for the market for loanable funds; equilibrium in that market is determined partially by interest rates, after all. According to the Fisher Effect, when inflation expectations rise, the nominal interest rate will rise with it just enough to perfectly offset any effect on real interest rates. Since equilibrium in the loanable funds market is dependent on the real interest rate, if the Fisher Effect holds, changes in inflation expectations and the nominal interest rate have no effect on the market for loanable funds. But if the Fisher Effect does not hold, a change in inflation expectations can affect the market for loanable funds. Suppose that consumers expect inflation to increase in the future, but the nominal interest rate does not adjust to these new expectations quickly. This will cause more people to seek borrowing in the short term, before the expected increase happens, and fewer people to save, despite no change (yet) in the interest rate. That’s because they expect the purchasing power of money to diminish in the future, and can take advantage of this by borrowing money and paying lower-than-expected repayments (in real terms). This causes a rightward shift (increase) in the demand for loanable funds, and disequilibrium in the loanable funds market. Suddenly there is an excess demand for loanable funds, but a lack of supply to give out those funds (since borrowing became less expensive and lenders would reap a lower return). To restore equilibrium, the real interest rate must rise. References 1: Mishkin, F. (1991). Is the Fisher Effect for Real? A Reexamination of the Relationship between Inflation and Interest Rates. https://doi.org/10.3386/w3632 2: Mishkin, F., & Simon, J. (1995). An Empirical Examination of the Fisher Effect in Australia. https://doi.org/10.3386/w5080 3: Uribe, M. (2018). The Neo-Fisher Effect: Econometric Evidence from Empirical and Optimizing Models. https://doi.org/10.3386/w25089
The Fisher Effect in economics refers to the idea that inflation and expected inflation affect nominal interest rates, for example those offered by banks for savers or borrowers. Importantly, it implies that consumers’ inflation expectations are reflected in the nominal interest rate, which prevents the real interest rate from changing.
Money can take several different forms, both digital and physical. People can decide that any object is a form of money; societies in the past have used stones, seashells, and other objects for this purpose, though nowadays it’s most often paper, metal, or a combination of both. Digital money is becoming increasingly common, too. It’s tracked and stored in computers, accessible via plastic cards or smartphones, and is increasingly becoming preferred over physical money. It’s useful to understand what makes certain choices of money – seashells, for example – better or worse than other options. There are six characteristics that economists have identified that help make a certain material better or worse for use as money. Durability First, money should be durable. It should be easy to preserve and relatively difficult to destroy, or else having money for an extended period of time would be difficult. For this reason, items like ice cream or glass tokens would make for very poor forms of money, because they’re highly likely to be lost or ruined in a relatively short amount of time. Conversely, items like paper, stone, or digital currencies are much more durable and can be safely stored for long periods of time. Portability The primary use of money is to exchange it for goods and services. Therefore, it’s important that money can actually be carried around! Portability is thus important; items like paper and plastic cards are highly portable and make good forms of money. Meanwhile, items like stones or livestock make poor forms of money, since they’re very hard to transport (even though they may be durable or valuable in other ways). Uniformity Money ought to be uniform, that is, units of money (that are the same value) should be the same so that their value is not brought into question. To see this, picture a scenario where it’s agreed that stones are money. It would be hard to determine how much each rock was worth, since they vary greatly in size, shape, and composition. Conversely, paper bills and metal coins of the same value are the same size and shape, so there is no argument about their relative worth. Divisibility It’s helpful to be able to break money down into smaller components to make change. This allows agents in the economy to exchange goods and services for very precise amounts, and reduces transaction costs. Paper and coin money do this well – it’s easy to pay for something that costs exactly $3.47 with these types of money. But if something like stones or seashells were money, it would be very hard to determine where $3.47 worth of a stone was, and even harder to split the rock in just the right way to actually hand the other person $3.47 worth of the stone. Acceptability Money should be widely acceptable so that all economic agents are able to make use of it. This characteristic blends into some of the others, but is worth mentioning on its own. Again, paper and coin money do this quite well. But if peanuts were considered legal tender, some people would be unable to hold onto it or accept it due to their allergic reaction. Similarly, objects that are cumbersome may not be widely acceptable enough to become currency. If camels or shards of broken glass were money, many people may reject them and attempt to find easier forms of money to carry around. Supply-limited It’s important that money has a limited supply in order for it to function properly. If money was infinitely available – say, if blades of grass were considered money – then one unit of money would represent a tiny amount of work, and it would be very difficult to use money to pay workers a fair wage. Consequently, people would have to carry around massive quantities of the stuff in order to conduct even simple transactions – making even blades of grass essentially un-portable. Further, having a limited supply means that people can’t simply grant themselves an unfair bounty of money when they feel like it. The central bank (such as the Federal Reserve in the USA) often manages the money supply to ensure these problems are kept at bay. See the related article Money and the Money Supply for more. Further Reading The reason we use money is simple: it makes conducting transactions in the economy far more convenient, and it can allow us to save. This is aided by three core qualities of money, which directly follow from the six characteristics above. First, money is a convenient store of value. Because it is durable and portable, it’s easy to save. Second, money is a unit of account. Because it is uniform and divisible, it’s easy to tell exactly how much money is in a given amount, and how much exactly a certain item will cost. Finally, all six characteristics mean that money is an effective medium of exchange: it’s easy for people to carry around money and use it for transactions. These three qualities of money, and details on how the money supply works, are discussed further in the article Money and the Money Supply.
Money is both a key concept in economics and something that we use every day. We earn money by performing our jobs, and we use money to buy goods and services and to save for the future. In the modern world, it’s quite difficult to survive without using money.
Corruption Uniquely Alters How Institutions Promote Economic Growth
Welcome to the world of my research, where I explore this intricate relationship between institutional quality and economic growth. My work dives into how institutions shape economic dynamics, focusing on issues like corruption, the impact of the euro, and the role of institutional frameworks in economic convergence. Discovering Corruption’s Effect on Economic Growth When we think about the factors that drive or hinder economic growth, corruption often surfaces as a prime suspect. But how exactly does corruption influence the economic trajectory of a nation? Our recent study (Beyaert, García-Solanes and Lopez-Gomez, 2023) takes a fresh approach to answering this question, using innovative regression tree analysis and advanced econometric techniques to explore the nuanced effects of corruption on growth across 103 countries over the period from 1996 to 2017. Traditional economic growth models, like those developed by Barro and Sala-i-Martin (1992) and Mankiw et al. (1992), have typically treated corruption as a direct drag on growth. However, this study challenges that assumption by suggesting that corruption's impact is more indirect—and complex—than previously thought. Rather than applying a one-size-fits-all model, the researchers utilized regression tree methodology, which allowed them to segment countries into different subgroups based on specific characteristics (or "split variables") and then estimate distinct growth models for each group. The regression tree algorithm was allowed to determine endogenously whether the group divisions should be based on corruption, “Rule of Law”, or a combination of both. In particular, the analysis showed that separating countries into just two primary groups was best: those with high levels of corruption and those with low levels of corruption. This segmentation is crucial as it reveals how the impact of traditional growth factors—like capital accumulation and population growth—varies significantly across these groups. In nations with higher levels of corruption, these traditional growth determinants play a more significant role compared to countries with lower corruption levels. Essentially, corruption seems to exacerbate the influence of these factors, making them more critical in determining economic outcomes. Data for the study were sourced from authoritative references such as the International Country Risk Guide (ICRG) and the World Bank's Worldwide Governance Indicators. These sources provided key variables, including levels of corruption and the quality of the Rule of Law, which are essential for understanding the institutional landscape of each country. To enhance accuracy, we employed the GUIDE (Generalized Unbiased Interaction Detection and Estimation) methodology, which addresses the selection bias issues common in other analytical methods like the CART algorithm. The GUIDE method facilitated a more precise identification of split variables, leading to more reliable and nuanced results. It resulted in two groups, as detailed in Table 1. Table 1. Countries Grouped by Corruption Levels Detected by Regression Tree High Corruption Group Low Corruption Group Algeria, Angola, Argentina, Albania, Armenia, Belarus, Bangladesh, Bolivia, Burkina Faso, Cameroon, China, Rep. Congo, Cote d’Ivoire, Dominican Republic, Egypt, Gabon, Ghana, Guatemala, Guinea-Bissau, Honduras, Indonesia, India, Jamaica, Kenya, Latvia, Mali, Malawi, Mexico, Mozambique, Niger, Nigeria, Pakistan, Papua New Guinea, Panama, Paraguay, Philippines, Russia, Sierra Leone, Togo, Thailand, Tunisia, Turkey, Uganda, Ukrania, Zimbabwe Australia, Austria, Bahrain, Belgium, Botswana, Brazil, Bulgaria, Canada, Chile, Colombia, Costa Rica, Croatia, Czech Republic, Denmark, Estonia, Ecuador, El Salvador, Finland, France, Gambia, Germany, Greece, Hong Kong, Hungary, Iceland, Ireland, Israel, Italy, Japan, Jordan, Korea, Rep., Kuwait, Lithuania, Luxembourg, Malaysia, Madagascar, Morocco, Namibia, Netherlands, Nicaragua, New Zealand, Norway, Peru, Poland, Portugal, Romania, Singapore, Senegal, Slovak Republic, Slovenia, Spain, Sri Lanka, Sweden, Switzerland, United Kingdom, United States, Uruguay, Zambia Source: https://doi.org/10.1108/AEA-11-2021-0297. Copyright © 2022, Arielle Beyaert, José García-Solanes and Laura Lopez-Gomez. Published in Applied Economic Analysis. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) license. Subsequently, after dividing the sample into these two subgroups, a traditional cross-sectional Solow model was estimated, incorporating standard drivers such as investment, initial GDP per capita, and population growth. To ensure the robustness of these findings, the researchers utilized instrumental variable estimations, drawing on the methodology of Gründler and Potrafke (2019) to refine and enhance the instruments employed. This advanced econometric technique addresses the issue of endogeneity—a common challenge in growth studies—by ensuring that the identified relationships are truly causal rather than merely correlational. By improving the instruments and applying them within each identified subgroup, the study provides a more reliable estimation of the growth models. One of the study's key revelations is that corruption does not have a statistically significant direct effect on economic growth in either the most corrupt or least corrupt countries. Instead, its influence is more subtle, indirectly altering how traditional growth determinants operate; the algorithm revealed growth parameter differences between countries, showing that those with higher levels of corruption were farther away from reaching an economic steady state. These findings resonate with the work of Durlauf et al. (2001), which identifies parameter heterogeneity in the Solow model, suggesting that corruption contributes significantly to this variability. The evidence points to a clear pattern: the more corrupt a country, the more pronounced the effect of growth determinants. This means that corrupt countries are generally further from their economic steady state, and thus, experience a stronger impact from factors like investment. Interestingly, the study also highlights a developmental divide: more developed nations typically exhibit lower corruption levels, while less developed countries struggle with higher corruption. This finding emphasizes the dual challenge facing developing nations—not only must they fight corruption, but they must also focus on enhancing investment and managing population growth effectively. Geographically, the analysis identifies three major regions: Europe and North America, with low corruption; Africa and Latin America, characterized by higher corruption levels often linked to their colonial histories; and Asia, marked by significant corruption variability. Notably, China and Russia, despite both being part of the high corruption group, exhibit divergent growth trajectories. Russia’s corruption has been a drag on its growth, while China has managed to sustain rapid growth rates despite similar corruption levels. The difference is attributed to the more organized nature of corruption in China compared to Russia. In conclusion, this study urges policymakers and economists to reconsider how they model and address the effects of corruption on economic growth. It’s important for policymakers to recognize that improving institutional quality can help lower corruption. By recognizing that corruption's impact is largely indirect and varies significantly across different contexts, and by employing more sophisticated econometric techniques like improved instrumental variables, more tailored and effective strategies can be developed to foster economic development, especially in countries where corruption remains a significant hurdle. Regional Case Study: How the Eurozone Navigates Corruption and Institutional Quality While global discussions often focus on the broad impacts of economic integration, it’s essential to zoom in on specific regions to truly understand these effects. Shifting the lens to the Eurozone, my research delves into the influence of the euro on corruption control within this unique economic area. Using a counterfactual analysis based on the methodology of Abadie, Diamond, and Hainmüller (2015) and conducted by Beyaert, García-Solanes, and Lopez-Gomez (2023), we explored the hypothetical scenario of a Eurozone without the euro. Surprisingly, the findings suggest that the introduction of the euro has not worsened corruption control in southern Eurozone countries. Instead, economic integration and standardized practices seem to have a stabilizing effect on corruption levels. Still, the Eurozone has not achieved institutional convergence, as highlighted by Beyaert, García-Solanes, and Lopez-Gomez (2019) and García-Solanes, Beyaert, and Lopez-Gomez (2021). There are notable asymmetries in institutional quality among member states, creating macroeconomic imbalances, economic frictions, and inefficiencies, which potentially reduce the Eurozone's overall GDP (García-Solanes et al., 2023). This underscores the need for more uniform institutional standards to address these disparities. My research delves further into this economic convergence within the Eurozone. Using Phillips and Sul (2007, 2009) tests and a logit model, my findings suggest that successful economic convergence heavily depends on strong normative and judicial frameworks (Lopez-Gomez, forthcoming 2024). Countries with robust governance and legal systems tend to converge more effectively, while those with weaker institutions face persistent economic gaps. Finally, an analysis of income per capita and corruption control using panel Granger causality and cointegration tests (Lopez-Gomez, 2023) reveals no bidirectional causal relationship between economic growth and improved corruption control. The Great Recession further weakened this relationship, especially post-2008, with notable exceptions in Eastern Eurozone countries. Taken as a whole, the results of my research indicate that anti-corruption measures need to be tailored to the specific institutional contexts of each country, as a one-size-fits-all approach is unlikely to be effective. The Broader Implications Looking at the broader picture, my research consistently highlights one key theme: institutions are more than just background structures, they are pivotal in shaping economic behavior and outcomes. It’s a complex but crucial relationship, and unraveling how institutions interact with broader economic dynamics is essential for crafting effective solutions. Understanding these interconnections is key to developing policies that not only address immediate issues but also foster long-term stability and growth. So, where does this leave us? The future of economic growth and development hinges on our ability to enhance institutional quality. This means not just fighting corruption or reforming legal systems, but fostering environments where effective governance can flourish. The journey ahead is filled with challenges, but also immense opportunities. As we continue to piece together the puzzle of economic growth, one thing is clear: the role of institutions cannot be overstated. They are the hidden gears that drive economic performance. Thanks for joining me on this exploration of how institutions and economic growth intersect. It’s a journey through models, data, and analysis, driven by a passion for understanding and improving our economic systems. Here’s to the ongoing quest to piecing together the puzzle of economic growth! References Abadie, A., Diamond, A., and Hainmueller, J. (2015). Comparative politics and the synthetic control method. American Journal of Political Science, 59(2), 495-510. Beyaert A., García-Solanes J., Lopez-Gomez L. (2019). Do institutions of the euro area converge?, Economic Systems, 43(3-4), 100720. Beyaert A., García-Solanes J., Lopez-Gomez L. (2023). Corruption, quality of institutions and growth. Applied Economic Analysis. https://doi.org/10.1108/AEA-11-2021-0297 Beyaert A., García-Solanes J., Lopez-Gomez L. (2023). Did the euro really increase corruption in the eurozone?, Hacienda Pública Española-Review of Publics Economics, 3-36. García-Solanes. J, Beyaert, A and Lopez-Gomez, L. (2021). Clubes de convergencia en la zona del Euro, Papeles de Economía Española. García-Solanes. J, Beyaert, A and Lopez-Gomez, L. (2023).Convergence in Formal and Informal Institutions and Long-Run Economic Performance in the Euro Area. The Routledge Handbook of Comparative Economics Systems, 256. Lopez-Gomez, L. (2023). On the relationship between income and control of corruption in the Eurozone. The European Journal of Comparative Economics, 20 (1), 3-37. http://dx.doi.org/10.25428/1824-2979/020 Lopez-Gomez, L. (2024). The role of political institutions on the economic convergence process. Journal of institutional economics. Forthcoming. Phillips, P. C., and Sul, D. (2007). Transition modeling and econometric convergence tests. Econometrica, 75(6), 1771-1855. Phillips, P. C., and Sul, D. (2009). Economic transition and growth. Journal of applied econometrics, 24(7), 1153-1185. Header image credit: Aideon via Pixabay (Free for use under the Pixabay Content License)
Imagine this: you're trying to solve a complex puzzle where every piece represents a different facet of economic performance. Now, imagine that the shape of some of these pieces are influenced by the quality of the institutions in place—things like governance, legal frameworks, and anti-corruption measures. As it turns out, the fit of these pieces can make or break the overall picture of economic growth. Institutions, in this sense, are not just background players; they are fundamental to how the economic puzzle comes together.
Sustainability May Be Bolstered By Income: Household Cooking Fuel Choice in a Developing Country
The analysis revealed that an increase in durable asset accumulation heightens the likelihood of households adopting cleaner cooking fuels. Therefore, I find that the Ghanaian government could incentivize the adoption of clean fuels, consequently mitigating environmental pollution, by implementing policies aimed at augmenting household income. More broadly, this means that economic development can have positive effects on sustainability, something that policymakers in other regions should take note of. Introduction The seventh Sustainable Development Goal aims to ensure access to clean and affordable energy by 2030. This goal is crucial because reliance on unclean energy sources like firewood, charcoal, and kerosene cause significant environmental and health issues, including air pollution, deforestation, soil degradation, and harmful emissions that contribute to climate change. These sources emit harmful gasses such as CO2, methane, and nitrogen oxides, which adversely impact human health. Studies by Younger et al. (2022) and Amegah et al. (2012) reveal detrimental health effects from exposure to these gasses, including reduced birth weight and increased neonatal mortality in low-income countries like Ghana). In Ghana, the use of unclean energy stems from “energy poverty”, where households lack access to modern, clean and affordable energy sources. This forces them to resort to dirty and inefficient fuel sources. Factors contributing to this lack of access include low income levels, high prices of modern energy sources, and geographic location. Shockingly, energy poverty in Ghana is reported to be at a staggering 82.5% (Adusah-Poku and Takeuchi, 2019). This study aims to ascertain the impact of durable asset accumulation on the selection of household cooking fuels in Ghana. It posits that durable assets afford households greater financial capacity and purchasing power, enabling them to meet various needs, including access to cleaner fuels. The analysis distinguishes between rural-urban households and households headed by males versus females. The study acknowledges that the main obstacle hindering households from adopting clean fuels is their relatively higher cost. Consequently, households with elevated wages are more inclined to utilize clean fuels owing to their affordability. Moreover, the energy ladder hypothesis posits that as household wages rise, there is a corresponding transition towards cleaner fuel usage. In essence, lower-wage households tend to resort to dirty fuels, whereas those with higher incomes opt for clean fuels (Alem et al. 2016; Bofah, Appiah-Konadu, and Ngwu 2022). Thus, an upsurge in household wages is anticipated to increase the probability of households opting for clean fuels. Methodology Data The investigation relies on microdata extracted from the Ghana Living Standards Survey (GLSS) conducted in 2013 and 2017 by the Ghana Statistical Service (GSS). The sample size comprises 25,569 observations. The study categorizes various fuel types into two groups: dirty and clean fuels. The primary metric for gauging asset accumulation adopts the approach advocated by Filmer and Pritchett (2001), akin to the methodology employed in formulating the wealth index within the Demographic and Health Surveys (DHS). Empirical Model The study regresses the fuel choice of households on the durable asset accumulation index, controlling for household characteristics such as wage, size, location, and poverty status. The logistic regression technique is employed, with average marginal estimates. An instrumental variable estimation (IV) addresses the potential endogeneity problem, using the two-year lag of theft incidents as an instrument. To streamline the analysis, various fuel types were categorized into two groups: dirty and clean fuels. The dirty fuel category encompasses fossil fuel-derived sources such as firewood, charcoal, kerosene, sawdust, and crop and animal residue, while the clean fuel category comprises LPG and electricity. The study aims to discern how durable asset accumulation influences the probability of households opting for clean fuels, with a focus on facilitating the transition towards cleaner energy sources. An asset accumulation index was constructed by amalgamating various forms of durable assets with potential monetary value. These encompass items such as televisions, radios, sewing machines, refrigerators, fans, computers, cars, plots of land, and more outlined in Sections 12.4 and 12.5 of the GLSS. To ensure the index's consistency and avoid negative values, standardization was applied, rendering the index to range between 0 and 1. A model explaining the fuel choice of a household against factors that might influence this choice is given by: E(Fuel choices | Asset accumulation, Age of household’s head, Gender of household’s head, Household size, Household wage income, Geographical location, Father’s education, Household poverty status, Marital status, Expenditure on electricity) which leads to the following functional form: 𝑦 = 𝛽0 + 𝛽1asset_accumulation + 𝛽2age_head + 𝛿3female_head + ⋯ +𝜉i where 𝑦 represents fuel choice, and all other factors mentioned are represented in the ellipsis. Since the dependent variable is a dichotomous variable that lies between 1 and 0, that is, whether a household uses clean fuel or not, I use a logistic regression (Rodriguez, 2007). Supposing a linear model where the probability of 𝑦I is a linear function of its predictors, I estimate the log odds of energy fuel choice given by the following: logit(𝑦i) = 𝛽pXi+ 𝜉I As a result, the model assumes that the linear probability model is a function of natural log odds. To address the potential endogeneity problem associated with asset accumulation, a two-year lag of theft incidents is used. I argue that suffering caused by a theft case two years ago is associated with the current value of total household assets, but not directly on fuel choice in the present. The two-year lag of theft incidents will influence fuel choice only through its influence on the current value of assets. After fitting the model, the Pearson or Hosmer-Lemeshow goodness-of-fit test (gof) suggested that there is no significant difference between the observed and the expected values, indicating a good fit for the model. Further, the Link test returns a p-value of 0.000 for the variable of prediction, indicating that the model is properly specified. The same test also returns a p-value of 0.486 for the variable of squared prediction, suggesting no evidence of model misspecification since it is insignificant. These results suggest that the model does not suffer from specification errors. Results and Discussion The analysis revealed that a one-unit increase in the asset accumulation index increases the household’s likelihood of adopting clean fuels by approximately 7.32 percentage points. Higher income levels enable households to afford cleaner and more efficient cooking fuels like LPG or electricity. This finding is statistically significant at the 5% level. To ensure robustness and accuracy of this result, a bootstrapping procedure with 1000 replications was conducted. The bootstrapped standard errors and confidence intervals further validated the consistency of the estimated coefficient, confirming the reliability of the conclusion. Therefore, policies aimed at increasing household income and assets can incentivize the adoption of clean fuels, thereby mitigating environmental pollution and improving public health. A good strategy for achieving clean energy usage in low-income countries should therefore include economic development aspects. These findings provide valuable insights for policymakers and stakeholders working towards achieving sustainable energy goals; sustainability can be more easily achieved when the households making energy decisions have a sufficient level of income. The author is conducting more research into a related topic to deepen our understanding of the link between sustainability and other factors like education and inequality. First, with the upcoming paper “Female educational inequality and household cooking fuel choice: Evidence from the Ghana Demographic and Health Survey (2022)”, the author hopes to uncover whether better educational outcomes for women correlates with a higher likelihood of adopting cleaner cooking fuels. It is hypothesized that greater inequality in education would likely result in a continued reliance on traditional, unclean cooking fuels due to financial constraints. The author is also working on another upcoming paper, “Educational inequality and Child Stunting: Evidence from the Multiple Indicator Cluster Survey (MICS, 2018) in Ghana”. The study will investigate how education equips parents with better knowledge and resources to provide adequate nutrition and healthcare for their children, potentially reducing the incidence of child stunting. By focusing on these dynamics, the study aims to highlight the critical role of education in improving child health and development outcomes. References Adusah-Poku, F., & Takeuchi, K. (2019). Energy poverty in Ghana: any progress so far? Renewable and Sustainable Energy Reviews, 112, 853-864. Alem, Y., Beyene, A. D., Köhlin, G., & Mekonnen, A. (2016). Modeling household cooking fuel choice: A panel multinomial logit approach. Energy Economics, 59, 129-137. Amegah, A. K., Jaakkola, J. J., Quansah, R., Norgbe, G. K., & Dzodzomenyo, M. (2012). Cooking fuel choices and garbage burning practices as determinants of birth weight: a cross-sectional study in Accra, Ghana. Environmental Health, 11, 1-10. Ansong, E. (2015). The association between household consumer durable assets and maternal health-seeking behavior in Ghana. Women & Health, 55(5), 485-504. Bofah, R. O., Appiah-Konadu, P., & Ngwu, F. N. (2022). Transition to cleaner cooking energy in Ghana. Clean Energy, 6(1), 193-201. Filmer, D., & Pritchett, L. (2001). The effect of household wealth on educational attainment: evidence from 35 countries. Population and development review, 25(1), 85-120. Kafle, K. R., & Dean, J. (2015). Effects of asset ownership on child health indicators and educational performance in Tanzania. Rodriguez, G. (2007). Logit Models for Binary Data (p. Chapter 3). Retrieved from http://data.princeton.edu/wws509/notes/ Younger, A., Alkon, A., Harknett, K., Louis, R. J., & Thompson, L. M. (2022). Adverse birth outcomes associated with household air pollution from unclean cooking fuels in low-and middle-income countries: a systematic review. Environmental research, 204, 112274. Header image credit: Pexels from Pixabay (Free for use under the Pixabay Content License)
The Sustainable Development Goals advocate ensuring universal access to clean and affordable energy by 2030, prompting a global push toward transitioning from unclean energy sources to cleaner alternatives. In response, Ghana has subsidized the cost of clean energy; however, the financial burden of this transition remains substantial for households. The role of household asset accumulation in facilitating this transition has been underexplored in existing literature; examples include Kafle and Dean (2015) and Ansong (2015). Utilizing logistic and instrumental variables (IV) regression methods along with data from the Ghana Living Standards Survey (round 6 & 7), I investigated how durable asset accumulation influences households' choice of cooking fuels in the research paper "The Nexus Between Household Durable Asset Accumulation And Household Cooking Fuel Choice in a Developing Country".
Agricultural and Environmental Economics (JEL Q)
Extracurricular activities to help your economics career while at university
Being involved in extracurriculars at university can make your time there more enjoyable by enabling you to meet friends, develop intellectually, and stay fit. You may not have considered it, but relevant hobbies for economists can even be advantages in your career development, too! This article explores some suitable economics hobby ideas that you might find beneficial. Although lots of these suggestions will help you whatever career you decide to pursue, some may be a little more useful specifically for a career in economics. Browse our program listings for economics opportunities 1. Debate team Joining the debate team will give you the chance to practice your oral presentation, argumentation, and critical thinking skills – all of which will be a big asset to you in any economics job search. It's also a great way to practice your public speaking, which can be a helpful advantage in job interviews. The ability to think through a position and support it with facts and logic is incredibly relevant to any research you do, too. On a fundamental level, research is posing a question, and either supporting or detracting from that question using facts and logic – just like debate! In economics research, the facts may need to be taken from a literature review or generated by your own econometric analysis, but the fundamentals are remarkably similar. Debate will also help your communication skills, which are one of the most important soft skills to have, useful in all aspects of life. Being able to communicate your ideas and research effectively, or back up your economics findings in your career, is essential to being successful. 2. Student governance Almost every university will have some kind of students' union or student council which you could join. Doing so shows future employers that you are responsible and engaged with political and practical issues. It also gives you the chance to make real changes to the way that your university is run. Being a part of the students' union shows proactivity and leadership – that you have (productive) opinions and aren't afraid to voice them and fight for them. It implies you can speak your mind well in public, but also that you have a level of emotional empathy that enables you to listen to and appreciate – or at least respect – other points of view, even when they stand in direct contradiction with your own. Being involved in politics is also very useful for a job in economics, particularly policy-adjacent roles. 3. IT skills Students may have the opportunity to assist university staff and/or students with technical problems. Often, universities employ student workers in IT help roles as a first line of defense against tech issues, helping other students on campus resolve computer problems – and escalating to a more seasoned professional for non-routine fixes. These types of roles may also give you limited experience with coding, especially if your job includes performing functions for university webpages. Software proficiency is becoming increasingly important for economists, so demonstrating technical skill in this area is a bonus for most employers. Economists often need to use statistical software like R, SAS, Stata, and more for their work, and other tools like LaTeX will be useful in their careers. Showing employers that you have the skills needed to master new software tools quickly can be a big plus for your future job prospects. 4. Charity fundraising Volunteering can be a rewarding experience and can help you grow a lot as a person. It can also be good for your career prospects, even beyond just showing your strength of character. If you want to work in a non-profit after university, or conduct research, then the ability to bring in funding (either by typical fundraisers or by securing grants) is a big requirement of many jobs. Showing that you've already been successful at fundraising while you were at university can put you at the head of the pack. Moreover, charity fundraising can often give you the opportunity to travel. Plenty of charities work around the country and in other nations around the world. Travelling is one of the most rewarding things you can do, and employers like to see that their potential employees are well-rounded and have some life experience, which includes getting to know other cultures. Aside from this, charity work is simply a noble thing to do and can show that you're emotionally intelligent and tolerant, two essential skills to have in an ever more diverse workplace. And, you might even benefit from that “warm glow” that stodgy economists talk about when describing altruistic behavior. 5. Sports teams Sports teams are often a big part of university life, and most universities provide such a variety of sports clubs that almost everyone can find something that matches their interests and talents. These might offer the opportunity to travel around the country and occasionally the world, especially if you join something a little bit more niche like scuba diving. And of course, sports are a great way to meet new people who could become lifelong friends, improve your teamwork and social skills, and stay fit while doing it. Best of all, from a career point of view, if you are head of a team and organizing matches, you have already shown your ability to lead a group which is a great skill to demonstrate. 6. Student newspaper Student newspapers are great places to develop writing and editing skills, and to get used to a fast pace of work with tight deadlines. There are usually multiple areas of the newspaper you can work on, including design, editorial, and of course, writing and journalism. Many newspapers have local news, political reports, and comment sections that deal with more sensitive issues. Even if you just write a few times rather than having a set role at the paper, it means you'll slowly build your portfolio of written work (which can be useful if you’re asked for non-academic writing samples), have some interesting things to put on your CV – and of course, seeing your name in print is always a wonderful feeling. Some university papers may even pay for your work. Learning how to write well can be an essential skill if you're going to be communicating complicated economics ideas to non-economist audiences for whichever company or institute you're working for. Clear communication skills are an area that employers have already identified as important for economics graduates. Academic language is often impenetrable, so being able to show that you can present your ideas clearly and concisely outside of academic contexts is an invaluable skill. 7. Learning a language Learning a language is one of the most productive things you can do in life. With language skills, you can work in an international company and be an extremely valuable asset to them, or you could even move into specialized economist roles that require multiple languages such as international politics, working as Chief of Staff for an international development project, or conducting research with economists in other regions. It also means if you ever decide you want to live abroad, you have a head start; not only could you live, for example, in Germany, but many people report learning a third language easier once they have already learned a second. Reports have also come out that suggest learning a new language is one of the best favors you can do for your brain, with some studies suggesting it can even help prevent Alzheimer's. Many universities' language courses are of a high standard – as one would expect – and as they are generally diverse, multicultural environments, with plenty of opportunities to practice with other students. If you want to learn a language, adding a few courses to your schedule during your studies is an excellent way to get started. 8. Entrepreneurship For the really ambitious student, why not start your own business? It may not feel like it, but at university you'll be in an ideal environment with plenty of time and resources to develop your own ideas. That’s because adult life outside of uni is often much busier. Often, universities have entrepreneur challenges where students pit their ideas against one another in order to win a certain pool of money that might even help them get the idea off the ground. They also often offer advice and support for students who have business ideas, host entrepreneurship courses, and of course, you might have the opportunity to befriend a business professor to tutor you. Whether or not your business is successful, you'll learn a huge amount from trying to start a business before your peers have even got a foot into the workplace. Plus, it's a clear demonstration of your independence and self-motivation which employers will appreciate, especially if you plan to specialize in financial economics or wish to work in a policy analysis role related to business. 9. Chess Club or Go Club The age-old games of chess and Go both have massive followings, chess traditionally in the West and Russia, and Go more traditionally in East Asia – although both are now played worldwide. Aptitude in either game can be seen as a sign of strategic thinking, dedication, and intelligence. So, if you already enjoy chess or Go, joining a university club for the hobby or doing well in tournaments can be a perk on your future economics resume. Both chess and Go can develop your critical thinking and ability to improvise and adapt successfully, too. This idea extends to other strategic hobbies as well. Other strategy games likely help develop similar skills and show your acumen just like chess or Go can, but employers will likely only be impressed if they actually know what the game is. Header image credit: Lukas Prudil on Pixabay (published under pixabay content license)
Attending university can be a ton of fun, but it’s also supposed to prepare you for the next stage in your career. Normally, this involves a lot of studying. But breaks and hobbies are important to have, too.
Put simply, the multiplier effect is the macroeconomic phenomenon that causes the economy to grow (or shrink) by more than the amount of money that has been introduced into or taken away from it. This is possible because of a chain reaction caused by the fact that money can be used many times. The effect in action Let’s begin with an economic growth example, where the effect has a positive impact on the economy. Suppose that someone experiences an exogenous increase in wealth of $500, meaning that this $500 magically appears in the economy and is granted to one randomly-chosen person – let’s call him Frank. When Frank receives this magically generated $500, the total amount of money in the economy grows by $500 immediately. Thus, GDP (defined by the income method) has also grown by $500. But Frank hasn’t even done anything with the money yet! Let’s say he chooses to save $200 of it, and he spends the other $300 on a pair of limited-edition Air Jordan shoes from Nike. Now, although the amount of money in the economy hasn’t changed, the economy itself has actually grown by $800 (in total)! That’s because the $300 that Frank spent on Nike shoes just became new income for the owner of the Nike store. Now, suppose that the owner of the Nike store chooses to save $200 of Frank’s extra spending, and chooses to use the remaining $100 to have the store cleaned by Silva’s cleaning service. The $100 becomes income for Mr. Silva, the owner of the cleaning service. Now, the economy has grown by a total of 500 + 300 + 100 = $900, all from Frank’s magical $500. This process will continue, increasing GDP by much more than the original $500 that Frank acquired. Readers may wonder how this makes sense. Hasn’t the money just moved around, and Frank has become poorer? After all, once Frank spends $300, he only has $200 left. This question seems logical but is missing a key fact. Frank isn't poorer. Rather, he's just traded $300 in cash for $300 worth of goods (the Air Jordans), which theoretically increased his utility by at least $300 (since we assume he’s behaving rationally to maximize utility). Then, his $300 became income for another person, and the cycle continued. If the money changes hands faster, the economy grows faster; this is measured by the velocity of circulation. Mathematically-minded readers might realize at this point that there is technically no end to this ripple effect – just like an infinite series in math, the money will perpetually continue to circulate through and stimulate the economy. Of course, in economic terms, eventually the amount of money received is so negligible (fractions of cents) that we can ignore it. While most economics courses won’t test your calculus knowledge by asking you to solve a limit problem, it’s important to understand this concept as it filters through many layers of macroeconomic policy. Government spending, fractional reserve banking requirements, changes in national income, changes in consumer sentiment, and more can have massive ripple effects on the economy thanks to the multiplier effect. Multiplier Math From our example with Frank above, it’s clear that there are two factors controlling the size of the multiplier effect: the speed in which the money changes hands, and the amount of money that is saved by each person in this chain reaction. The former effect is determined by the velocity of circulation, and the latter by the marginal propensity to consume (MPC). The formula for the multiplier m is: m = 1 / (1 – MPC) where MPC is the marginal propensity to consume. To recap, the MPC is a proportion that determines how much money individuals will spend when they receive an amount of money. A high MPC means that there’s a lot of spending, but little saving. A high MPC also means that the multiplier m is high as well. The closer the MPC is to 1, the higher the multiplier m becomes. In other words, as people save less and less money, the multiplier effect causes the economy to grow more and more from an influx of new (exogenous) income. This is clear when considering our story with Frank earlier. The formula above accounts for the MPC, but we also mentioned that the velocity of money plays an important role. Although it doesn’t appear formally in the above equation, the velocity of money is partly determined by the MPC, and is proportional to m itself; when the velocity is high, m is high and MPC is also high. For a formal treatment on the derivation of the multiplier effect that also covers its mathematical relationship with velocity, see the Further Reading section. Implications for recessions and government spending The multiplier effect may also be referred to as the fiscal multiplier or the Keynesian Multiplier. The reason for this is simple: the multiplier effect was proposed by John Maynard Keynes, and is implied by his theories. In classical economics, individuals perfectly anticipate that an increase in government spending must be funded by taxes taken from them, and when they adjust their behavior to account for that, the economy is unaffected. For the rest of this section, we ignore the classical model and assume that the Keynesian model is correct. Recessions are one of the unfortunate realities of economic life. When a recession hits, people tend to cut back on their consumption spending (especially on things like luxury goods) and attempt to save as they seek to weather the economic storm. Unfortunately, this behavior can make recessions worse – and the multiplier effect shows how. Consider the case where Frank lost $500 instead of gaining it, perhaps because he had a $500 bill, but it was burned up on accident and ruined. This would reduce the money supply, and the future transactions with the Nike store and the cleaning company wouldn’t happen. In fact, because Frank is poorer now than he was before, Frank would cut back on his spending such that even fewer transactions happen in the economy than before he lost the money. This gives us a template for how recessions can occur and linger in the economy. An exogenous negative shock to the economy causes a reduction in income. Then, people tend to cut back on their spending, and because of the multiplier effect, even more people cut back on even more spending. The result is that the economy shrinks by much more than the original amount that was lost. Enter Keynesian economics. One of the tenets of Keynesian theory is that an increase in government spending (G in the aggregate demand formulation) can offset the downturn, and help the economy recover. The initial spending increase by the government first improves the economy by itself. Then, those who receive this spending as income will in turn save some and spend some – according to their marginal propensity to consume – and the multiplier effect will get to work, bolstering the economy by more than the initial amount of government spending. Good to Know Throughout this article, we have assumed that everyone has the same marginal propensity to consume. But, in the real world, people’s MPC varies greatly depending on many factors, like personality and how well-off they are. People with more money tend to have lower marginal propensities to consume. That’s partly because the proportion of money they need to spend on necessary items (like food and heating) is very low. Naturally, this also means that people with larger amounts of wealth tend to save more. This fact is one potential argument in favor of focusing government stimulus efforts – like giving out cash during a pandemic, or tax cuts – to poorer people rather than richer people. The former group is not only much more likely to spend their money in the local economy, but they also have higher marginal propensities to consume, bolstering the multiplier effect compared to a very wealthy person who would save more of that money. Further Reading For a formal derivation of the multiplier effect, along with an examination of its relationship with the velocity of circulation through the quantity theory of money equation (MV = PY), be sure to read Wang, Xu, and Liu’s “Keynesian multiplier versus velocity of money”, published in Physics Procedia, Volume 3, Issue 5 in 2010: https://doi.org/10.1016/j.phpro.2010.07.009.
Economic growth leads to higher income for everyone – at least in theory. This isn’t a surprising fact. What may be surprising, though, is that adding $500 to the economy can actually increase economic growth by more than $500. This is possible because of a phenomenon known in economics as the multiplier effect; let’s take a look at what the multiplier effect is and how it works.
Assumptions Mainstream economic theory is built upon a foundation of assumptions that are becoming increasingly outdated. For example, the way that businesses operate has changed drastically over the lifetime of the discipline, though many of the core assumptions of economics have remained unchanged. The shift towards the ‘knowledge economy’ and the idea of ‘economies of scale’ are proof of this business evolution. Both of these concepts have great appeal for capitalists – if companies get bigger, they benefit from cost savings. Bulk buying, advertising discounts, lower borrowing costs, and the ability to reduce fixed costs proportionally can all help bigger organisations reduce their average spend. Image credit: University of Bath. However, should companies get too large, ‘diseconomies of scale’ can set in. Perhaps production processes for different components can’t scale up at the same speed, communications get lost in translation, or workers start to feel less motivated. The theory implies that as businesses grow, they eventually hit limitations. This should mean that no company can grow large enough to corner the market. At least, that’s what we used to think. Grow – Continuously. While some companies still have scope for diseconomies of scale, in other cases, these forces can be offset by ‘increasing returns to scale’ which allow growing companies to reinforce their gains. Often described as ‘being ahead to get further ahead’, if a company grows by clever strategy – or even by chance – increasing returns can magnify this advantage. Therefore, the product, company, or technology can go on to lock in the market. In the new intangible economy, companies can grow – continuously. There are different sources of increasing returns, too. For example, the idea of ‘learning by doing’ (the more experience you have in doing something, the better you become) is one mechanism by which companies can experience increasing returns. Take the production of lithium-ion batteries for electric vehicles (EVs). According to Morgan Stanley researcher Michael Mauboussin, “cumulative output has moved Tesla down the cost curve faster than its competitors” for batteries and EV production. Morgan Stanley analysis finds that Tesla has benefited from lower battery costs and operates the most productive automobile plant in the US. Another example is ‘network effects’, when the value of a good or service increases as more people use it. Platform businesses are a good example of these. If a ride-share company such as Uber attracts more riders, they will find it easier to recruit more drivers, customers will be able to find rides faster, these effects will attract more customers, and so on. Image credit: University of Bath. The AI Catalyst: Accentuating Superstar Status The advent of artificial intelligence (AI) is poised to further entrench the position of larger companies, amplifying their growth in sales, employment, and market valuations. By leveraging the power of AI, these "superstar" companies could solidify their dominance and exacerbate existing power imbalances within the global economy. Counterbalancing Forces: Regulation and Complacency Despite their formidable advantages, the rise of knowledge companies is not unstoppable. Regulations and the threat of complacency could serve as counterbalancing forces, curbing their unchecked growth and dominance. Regulatory Oversight Regulatory bodies can intervene to prevent monopolistic practices and promote fair competition, as exemplified by the recent US antitrust lawsuit against Apple alleging "exclusionary, anticompetitive conduct." While tech giants often defend such actions as necessary for innovation, regulatory oversight remains a crucial check on their power. The Complacency Trap Success can also breed complacency, leading companies to become overly reliant on their "golden goose" and neglect innovation. As warned by experts, even technologies with powerful network effects, like the fax machine, can be superseded by better alternatives if companies fail to adapt and innovate. Embracing the Next Wave As the renowned economist W. Brian Arthur cautioned, "the ability to profit under increasing returns is only as good as the ability to see what's coming in the next cycle and to position oneself for it." While the current wave of technological advancements has enriched some companies to stardom and reshaped the global economy, their fortunes are not guaranteed. Complacency and a failure to anticipate the next disruptive innovation could render even the mightiest companies obsolete. As Arthur sagely advised, "Those who have made a killing on this cycle should not become complacent," for "technology comes in successive waves," and those who position themselves for the next wave may emerge victorious. Image credit: University of Bath. Fuel Your Mind. Transform Your Career. Packed with engaging, challenging, real-world content, you can further your understanding of the world of economics with the University of Bath’s Applied Economics (Banking and Financial Markets) online MSc. Find out how you can make strategic decisions that could impact the next wave of economic growth. Join the next student intake. INOMICS would like to thank the University of Bath for their support in the production of this article. Header image credit: University of Bath.
In today’s world, the discipline of economics finds itself at an inflection point. The mainstream orthodoxy, often criticised for being made up of half-truths, is starting to unravel. As a result, a transformative shift is happening.
In other words, information goods are non-rivalrous, i.e. one person consuming it does not affect another person’s ability to consume it, too. Further, as they can be freely shared, they’re considered non-excludable in “normal” circumstances, which means they can be accessed and consumed by people who have not paid for them. As such they can be considered a subset of public goods (since they’re both non-rival and non-excludable). Markets usually fail to produce the socially optimal level of public goods, since the incentives to produce them are very low compared to their benefits. This is one of the reasons why information goods are often patentable, subject to copyright, or considered intellectual property, which typically make them temporarily excludable for commercial use. These innovations in economic law allow markets to produce a healthy level of these goods – more on this later. For example, a book can be considered an information good. It contains knowledge, or simply a good story, that can be copyrighted and digitized for distribution, and it’s not depleted when consumers enjoy it. In the same way, movies, music, and video games can also be considered information goods. Many of these goods can take physical forms, too; books, CDs, and DVDs can be held, for example. But that doesn’t prevent them from being considered information goods, because what differentiates one book from another is the text printed into it. And, since that text can be digitized and distributed, it is an information good. There are many other examples: online courses, databases, software programs, algorithms like specific AI models, and even your private consumer data are all information goods. Information goods often have high fixed costs to develop, because someone must discover or invent the information that’s worth selling. Consider a pop song, for example. It takes years of training and many hours of hard work to write a high quality, record-breaking pop song. However, after development is complete, the variable cost to produce and distribute the song is almost zero (at least in modern times) – once recorded, it’s very easy and cheap to spread the music. These characteristics of information goods pose problems for the creators of the goods; recall that in a perfectly competitive market equilibrium, goods are sold where the price equals the marginal cost. But if that’s true, a seller of an information good might reasonably expect to make zero profit! How then can innovators be motivated to develop their products at all? Protections for information goods abound in modern society Because competitive markets usually have trouble reaching the socially optimal level of production for public goods like information goods, societies have constructed laws to allow innovators to make profit from them. These laws include copyright and intellectual property rights laws, among others. For simplification, let’s refer to all of these laws as simply a ‘protection’ for now. Governments may approve a protection immediately when a work is created, after a work or invention has been successfully proven to be unique and worthy of protection, or in other ways. These protections typically allow information goods to be legally excludable for a limited time (granting limited-time monopolies), thereby encouraging innovation. This solves many of the problems we’d normally expect from a market selling information goods, though it does create new problems. Monopolies are notoriously inefficient arrangements for markets, as they lower output to maximize profit. They also introduce the potential for price discrimination. The exact protections vary by the specific law and the country the information good is being traded in, but nevertheless offer similar benefits: the creator of the good is given the exclusive right to profit from their invention for a period of time. They may also allow others to profit from their work, for example by issuing licenses or collecting royalties, but they usually control the process of granting approval and dictate the terms of use. Despite the drawbacks of monopoly, these systems of protection are good for the economy, as they provide incentives for these public goods to be developed in the first place. Without them, innovation would be severely limited. Any company could steal proprietary code for a new software product, any pharmaceutical company could immediately and cheaply copy another’s discovery, etc. The high cost of development for low-to-zero payoff would incentivize individuals against developing these information-based innovations at all. In summary, without protections innovators and creators would be unable to profit from their creations efficiently and would have a much reduced incentive to innovate, which would drastically slow the pace of economic growth. Thus, having these protections in place encourages innovation without fully preventing society from reaping the benefits of widely shared information goods. Network effects and tipping points Information goods are often made better when many people experience the goods. That’s because they often create positive externalities, which are also famously under-provided by competitive markets. For instance, computer software products like Microsoft’s Windows operating system are often a better experience when more people use them (in other words, they have network effects). It’s easier to share files, troubleshoot, and develop applications when the majority of people are using the same system. Similarly, being a fan of a particular movie or TV series is more enjoyable for most people when their friends are also fans, and companies tend to produce more content for more popular series. Because of these positive externalities and network effects, buyers may decide that certain information goods aren’t worth purchasing unless there is a sufficient user base already. And, information goods with a higher number of users may attract more potential buyers simply because there’s already many people using them. In this way, the markets for information goods may feature a “tipping point” where all consumers suddenly want to be part of that ecosystem, and other products struggle to attract buyers. These tipping points can suddenly cause otherwise competitive markets to resemble monopolies or oligopolies – even without formal intervention. A classic example is the market for smartphones, which is dominated by Google’s Android (and also Apple’s iPhone in the United States). Other aspects of markets trading information goods But the markets for information goods pose other challenges for consumers. Some information goods can also be considered “experience goods”. This means that in order to know exactly what’s being sold, a potential customer must experience the information first – thereby eliminating their need to buy the good at all. Normally, it’s easy to inspect the product being sold. Buyers of pears, for instance, can easily tell if they’re in good condition, if they’re ripe enough, and how large they are before buying. It’s easy to tell if a pear is worth the price, even if you can’t bite it until you buy it. But experience goods don’t share this feature. For example, when looking to experience a movie or a novel, consumers won’t know the quality of the item at all until they buy it and have access to the full experience. This sounds highly problematic in theory, but in reality, markets have adapted quite well to this feature of information goods. Readers can likely already think of several market innovations that help to mitigate these aspects of experience goods. Movies and TV series frequently release trailers; books sometimes offer free previews, or can be rented from libraries; and sellers of software products (like video game companies) often provide demos for interested buyers. These previews allow consumers to get a taste of the good, and decide to purchase or not. “Shareware” is a similar concept, where developers release an information good for free, and ask consumers who enjoyed it to donate and support them. Further Reading For a more formal introduction to information goods, look no further than Dr. Michael Hutter’s Information Goods chapter published in the Handbook for Cultural Economics, https://doi.org/10.4337/9781788975803.00038.
Information goods are an important component of the modern economy. The definition of “information good” may vary, but it generally refers to goods that can be shared digitally (even if they haven’t been) and aren’t depleted when consumed.
It’s helpful to define the term “investment” in an economics sense before continuing. The word “investment” in finance and in everyday discourse usually refers to the buying and selling of assets like financial securities. However, in economics, investments are economic activities that have potential to grow the economy. They can be conducted by private firms, governments or other entities (like entrepreneurs) Examples include the building of a new university, the construction of a manufacturing facility, or the R&D expenses used to develop a new medication. When firms or other economic agents want to make an economic investment, they must typically take out a loan, usually with the help of a bank to act as an intermediary. The money comes from funds that economic agents have saved, which are then considered loanable funds since these are the funds banks can repackage and make available for borrowing as loans. So, the savings-investment identity holds true by necessity. The amount of money available for borrowing is equal to the amount of savings that economic agents have stored, because those savings are converted into loanable funds. Describing the identity mathematically We can show this identity mathematically by using the formula for GDP and making some assumptions. The relevant formula is: GDP = C + I + G + NX, where C stands for consumption, I stands for investment (defined just as we’ve discussed above), G is government spending, and NX represents net exports. As a side note, readers may notice that this is the same as the equation for aggregate demand (AD), and that’s because GDP is one measure of Y, or economic output. When the economy is in long-term macroeconomic equilibrium, Y as measured by GDP is equal to AD and both short-run and long-run aggregate supply. Returning to the equation, let’s assume that the economy under consideration does not trade with any others, so that the NX term is zero. Let’s also assume that aggregate demand and both short-run and long-run aggregate supply are in a stable long-term equilibrium, which means that GDP = AD = SRAS = LRAS = Y. These two assumptions allow us to replace GDP with economic output Y and ignore NX, transforming our equation to: Y = C + I + G. Now subtract the portions of GDP that account for spending activity, yielding: Y - C - G = I. This shows that economic output minus consumption and government spending is equal to investment. We can replace the term on the left-hand side with one “new” term: savings S. This gives us the savings-investment identity S = I. Macroeconomics courses may define Y - C - G = S straight away, but let’s walk through the logic behind this idea further. To see how S = Y - C - G, consider the following. When rational economic agents have money on hand, they must choose how to allocate that money among two basic options: spending it or saving it. Every use of money falls into one of these two basic categories. Money that is not spent must be saved, and vice versa, or else money is being irrationally lost or is going unused. While that is possible in the real world, it’s common and useful to assume that all money not used for consumption is put into savings, such that there is no money lost or “wasted”. (Even quite advanced economics courses typically assume this, since wasting money represents a Pareto inefficiency, and is an irrational “decision” facing no meaningful tradeoffs, making it economically irrelevant. It is always economically optimal to not waste money.) Considered from an economy-wide perspective, then, economic agents do not waste money and must choose between two basic options: save or spend the money they have. The total amount of money they have is Y (remember that GDP can be considered the sum of all income in the economy!). Then, the government, individuals (or households) and firms choose to spend some of their money on goods and services, increasing the spending categories C and G as they do. In this example, all spending falls into either C or G. Finally, any money that governments, firms or consumers have left over becomes savings, S, which is used in the loanable funds market to supply borrowers with loans. Then, these borrowers use those loans to invest in economic investment projects that will grow the economy. Thus, as long as money isn’t wasted or destroyed, S = I, and Y = C + I (or S) + G. See the diagram below for a depiction of this process. Incidentally, the proportion that consumers choose to save – which can change depending on people’s preferences and the state of the economy – is determined by the marginal propensity to consume. Readers interested in this effect should read the linked article. A note on taxes Taxes have been hidden in our analysis thus far, but it helps to include them formally. Before, we did not do so because in a closed economy without trade, all government spending G must be funded by taxes T taken from domestic consumers. So, in the previous section, G = T and Y is not affected by the level of taxes, since all taxes taken from consumers’ incomes (C and I) are used in G as the government’s income (of course, this assumes there is no deadweight loss from taxation). Another way to view the previous section’s equation, then, is: total national income Y equals consumption spending C plus savings S (aka investment) plus taxes T; Y = C + S + T. In other words, the total income for consumers Y is spent on either consumption, savings, or taxes. This corresponds to the income method of constructing GDP discussed in the linked GDP article. Now with trade: the identity in open vs. closed economies In this section, we consider “open economies” to be those that trade with other countries, while “closed economies” are those that are not open to any trade (they are autarkic). The above discussion is accurate for closed economies. The savings-investment identity works similarly as before for open economies, with one key difference: in open economies, foreign economic agents can invest in the domestic economy, and domestic agents can save in foreign economies. If the balance of these financial flows is not equal to zero, the NX term reappears in our equation: Y = C + I + G + NX. We can further break up NX into two terms, imports M and exports X, so that net exports NX = X – M. Now it’s clear to see that NX is negative when there are more imports than exports, decreasing Y. This means domestic agents are spending more money to acquire foreign goods (imports) than foreign agents are spending to buy domestic goods (exports). This lowers Y, and ceteris paribus means that there is less investment in the domestic economy. Instead, domestic agents are sending money abroad (by purchasing foreign goods). Conversely, if exports X are greater than imports M, NX is positive. This is the case when domestic agents are spending less abroad than foreign agents spend domestically. This grants the domestic economy more savings than it would have otherwise had, potentially increasing the amount of investment than would be possible with only domestic agents saving. Incidentally, the balance of imports and exports may be referred to as a trade balance. This also affects an economy’s capital accumulation. When X > M, it is said to be a trade surplus and it causes a “net capital inflow”, and when M < X it is a trade deficit and causes a “net capital outflow”. Mathematically, we must modify the closed economy version of the formula to account for these new possibilities. Now, our full equation is Y = C + I + G + X - M. Notice that if X = M (the case with an even trade balance), our analysis is exactly the same as before. And finally, before proceeding, note that S is now the total amount of savings in the domestic economy, from all sources. We have two equations for Y; the “aggregate demand” version just defined and the income equation Y = C + S + T. Setting these two equations equal yields C + S + T = C + I + G + X - M. Consumption spending cancels to yield: S + T = I + G + X - M. Subtract taxes to finally yield the savings equation in this open economy: S = I + G - T + X - M. Now, savings in the domestic economy equals savings by domestic agents I, plus government saving G - T, plus savings by foreign agents X - M. It’s also clear that if government income and spending are equal, and if the trade balance is perfectly even, savings equals investment as before. Readers may be confused by the above. How can the identity still hold, if the balance of trade isn’t even? To see this, recall that S in the above equation is total savings in the domestic economy. It’s possible for total savings in an open economy to be greater than the amount saved by domestic agents in a closed economy, if foreign agents save money in the domestic economy. This may seem like a violation of the identity. But, it isn’t, because foreign agents saving domestically represents income or investment for a domestic agent to utilize, growing the economy more than it could have on its own. In this article, we’ve assumed that foreign money only enters the domestic economy when foreign agents purchase domestic goods and services, increasing X. Yet in the real world, it’s possible (and quite common) to outright purchase foreign assets or save money in foreign economies. This doesn’t change our analysis, however; these activities can simply be considered a part of exports in our simplified model. Finally, note that the savings-investment identity must hold globally as well. If all savings and all investments in the world are summed, they will be equal. To see this, redefine the “domestic” economy as the entire world. In this case, there is no foreign trade, only trade among domestic agents. Then, the equation simplifies to the closed economy case above where I = S = Y - C - G. Further Reading The IS Curve is a concept that follows directly from this description of the savings-investment identity and the goods market. It describes in a single curve the equilibrium points for the goods market where investment equals savings, and is used as one of the main portions of the IS-LM model in macroeconomics. The liquidity preference model and the demand for money form the LM part of the IS-LM model.
The savings-investment identity in economics is a macroeconomic concept related to aggregate demand, the IS Curve and the market for loanable funds. This identity states that the amount of funds available for investment activities must be equal to the amount of money saved in the economy. It can also be thought of as an accounting identity, as it is true by definition.