The 'Recipe With No Ingredients' in Macroeconomics Textbooks
Almost fifty years ago William Nordhaus and James Tobin, both professors at Yale University and later Nobel Prize laureates in economics, wrote an article with which they intervened in the debate aroused by the well known Report to the Club of Rome, The Limits to Growth (Meadows et al, 1972)1. Among other things, they wrote: "The prevailing standard model of growth […] is basically a two-factor model in which production depends only on labor and reproducible capital. Land and [natural] resources, the third member of the classical triad, have generally been dropped" (Nordhaus and Tobin, 1973, p. 522). Nordhaus and Tobin made reference to an analytical tool largely used by the standard theory, the aggregate production function. That function is normally presented in the form Y = f(L, K), in which the determinants of product (Y) are labor (L) and capital (K) - the “factors of production”. Sometimes, along with labor and capital, “technology” or “efficiency” are considered causes of economic growth. One may wonder why natural resources, traditionally represented by “land”, were dropped from the production function. There are several answers. Firstly, some neoclassical economists in the late 19th and early 20th century included “land” in capital assets (see Daly and Cobb, 1989, pp. 109-113; Czech, 2013, pp. 91-116); so in the following years many economists didn’t see “land” in the function and simply “forgot” it, consequently forgetting natural resources. Secondly, after World War II the general atmosphere of economic optimism meant that many economists considered natural resources not scarce (see Nordhaus, 1974, p. 22, Daly, 1999a, p. 79), and so irrelevant for economics; if and when a single resource would became scarce, it could be substituted with another resource on the basis of the idea that "Nature imposes particular scarcities, not an inescapable general scarcity" (Barnett and Morse, 1963, p. 11). Moreover, many economists avoided the problem of absolute scarcity by admitting the substitutability of raw materials drawn from nature with man-made capital. According to my knowledge, the first explicit statement for this substitutability was made by Nordhaus and Tobin in the above mentioned paper (1973, pp. 522-3) and, despite the fact that for years ecological economists have repeated detailed criticisms on this point (see for example Daly, 1996, pp. 76- 8), the belief that capital may replace natural resources in production still remains widespread among neoclassical economists2. Finally, a not negligible reason for failing to consider natural resources was simply a matter of mathematical convenience, as the “two-factor model” is more manageable for mathematical processing and for explanations to students (Daly, 1996, p. 77; Czech, 2013, p. 87). Having cleared natural resources from the production function, standard economists neglected them from almost all their models and in general from their remarks, to such an extent that Robert M. Solow (emeritus professor at the MIT and Nobel Prize laureate) – author of the "standard model of growth" mentioned by Nordhaus and Tobin – came out with the following astonishing statement: "the world can, in effect, get along without natural resources" (Solow, 1974, p. 11)3. In this regard the ecological economist Herman Daly (former senior economist at the World Bank and emeritus professor at the School of Public Policy of University of Maryland - College Park) wrote: "His [of Solow] well-known work in growth theory is based on an aggregate production function in which resources do not appear at all, and which takes production to be a function only of capital and labor. […] Since the production function is often explained as a technical recipe, we might say that Solow’s recipe calls for making a cake with only the cook and his kitchen. We do not need flour, eggs, sugar etc., nor electricity or natural gas, nor even firewood" (Daly, 1999a, p. 77). In short, the neoclassical production function is a "recipe with no ingredients" (Daly, 1999b, p. 91). On the contrary, we know that production needs “ingredients”, namely raw materials derived from the stock of natural resources, transformed by labor and capital into products. Without natural resources the factors of production cannot produce anything, as everyone knows: "the smithy had been quiet for a month because they had no iron to make tools and horseshoes", wrote Ken Follett in a novel (Follett, 1996, p. 373); a neoclassical economist that reads that passage would think, instead, that the smithy could continue to produce only with blacksmiths (L), anvils, mallets and other equipment (K). The offhand attitude of standard economists towards natural resources is reflected in macroeconomics textbooks. In 1991 Herman Daly searched through the indexes of three leading (at that time) textbooks in macroeconomics and found "no entries under any of the following subjects: environment, natural resources, pollution, depletion" (Daly, 1991, p. 255)4. So professor Daly asked rhetorically: "Is it really the case, as prominent textbook writers seem to think, that macroeconomics has nothing to do with the environment?" (ib.). One can ask if nowadays, thirty years after the above mentioned Daly’s detection, the leading textbooks in macroeconomics recognize the fundamental role of natural resources in the production process and then for GDP growth. In general the answer is “NO”, even though some textbooks take a few steps forward. For example, “Economics” written by the late Paul Samuelson (professor at the MIT and winner of the Nobel Prize), renewed and updated by William Nordhaus, shows a production function with natural resources along with labor and capital (Samuelson and Nordhaus, 2010, p. 503). However this is not a satisfactory solution to consider natural resources, as Nicholas Georgescu-Roegen − one of the "pioneers of Economics of Sustainable Development" (Daly, 1996, p. 169) − showed (Georgescu-Roegen, 1979, p. 17; Georgescu Roegen, 1984). In brief, the reason is that raw materials (i.e. natural resources) perform a different role in the production process compared to labor and capital, as well explained by the following quote of Herman Daly and Joshua Farley: "Labor and capital are transforming agents, funds that transform the flow of resources into a flow of product, but are not themselves embodied physically in the product. Labor and capital are agents of transformation (efficient causes, or fund-services), while resources are that which is being transformed (material causes, or stock flows). The neoclassical production function abstracts from the difference between material and efficient causes of production and considers both to be equivalent […]" (Daly and Farley, 2011, p. 157). For this reason, considering raw materials a factor of production on the same level of labor and capital is incorrect. In the production function the factors of production are substitutable: we could produce something only by means of labor or only by means of capital (moving on the isoquant line). But in reality we couldn’t produce anything without raw materials: the baker cannot produce bread without water, flour and energy for heating the oven, precisely because production requires a flow of natural resources. The three-factor production function reported in Samuelson and Nordhaus’ “Economics” raises the logical and economic criticisms I mentioned, but at least it considers the importance of natural resources in the production process. Instead, other textbooks significantly underestimate the role of natural resources. For example, in the handbook written by two very authoritative Princeton University economists, William Baumol and Alan Blinder, natural resources and raw materials are rightly considered inputs of the production process (Baumol and Blinder, 2016, pp. 22, 430), however, when they develop their analysis using the production function, they consider only labor and capital, natural resources disappear and it seems that they are no longer needed to generate GDP: "The production function tells us how much output the economy can produce from the available supplies of labor and capital, given the state of technology" (Baumol and Blinder, 2016, p. 121; see also pp. 104ss.). The same goes for the book Macroeconomics published by Olivier Blanchard (MIT, former chief economist of IMF) and David R. Johnson (W. Laurier University): the aggregate production function is introduced stating that firms use "also raw materials" (Blanchard and Johnson, 2012, p. 122), but then these economists forget this statement and raw materials vanish5; in this book there are "no entries under any of the following subjects: environment, natural resources, pollution, depletion", just like in the textbooks examined by Daly in the early nineties. Let us examine now the interesting case of the textbook written a few years ago by Harvard professor N. Gregory Mankiw. We can read: "An economy’s output of goods and services - its GDP - depends on: (1) its quantity of inputs, called the factors of production, and (2) its ability to turn inputs into output, as represented by the production function" (Mankiw, 2010, p. 47). Therefore, according to this statement, production does not depend on raw materials and available energy resources derived from nature, which are not considered a factor apart, nor are they included in capital6: they simply “do not exist”. The only "natural" thing this text deals with is the unemployment rate. It is important to note, in the above Mankiw’s statement, the message launched to students according to which the economy "turns inputs into output". The concept is reiterated with these words: "[...] many economists consider the Cobb-Douglas production function a good approximation of how the actual economy turns capital and labor into goods and services" (Mankiw, 2010, p. 527). The same was stated by the aforementioned Baumol and Blinder: "It is useful to think of an economic system as a machine that takes inputs, such as labor and other things we call factors of production and transforms them into outputs, or the things people want to consume" (Baumol, Blinder, 2016, p. 22). The students who are trained on these texts, therefore, learn that the blacksmith who produces horseshoes and metal railings does not need either raw iron and coal to melt it (contrarily to what Ken Follett wrote): these materials can remain in mines, since what the good craftsman would do is to transform himself, the anvil, the mallet and other equipment ("labor and other things we call factors of production") into metal objects. And in a canned tuna factory, the workers and the canning equipment would turn, according to Mankiw, Baumol and Blinder, into tasty tuna steaks. Mankiw, as we have seen, affirms that "many economists" think so, but it seems quite obvious that they are wrong, given that, as we have said, are not capital and labor to be transformed into products, but raw materials, i.e. natural resources (and to make this transformation is necessary an input of energy). It should be added that fortunately this is the way it goes, because workers would not be happy at all to be transformed into goods or services! However, I must admit that the claims of Mankiw, Baumol and Blinder are sometimes verified: for example, in the Chicago of the early twentieth century, the workers who fell into the boilers used by the canned meat industry were actually transformed into products, as the writer Upton Sinclair recounted in his investigative novel The Jungle (1906). To confirm his vision Mankiw gives the following example: "… consider production at a bakery: the kitchen and its equipment are the bakery’s capital; the workers hired to make bread are its labor and the loaves of bread are its output. The bakery’s production function shows that the number of loaves produced depends on the amount of equipment and the number of workers" (Mankiw, 2010, p. 48). And not also from the quantity of flour, yeast, water and fuel for heating the oven? Fortunately, professor Mankiw in a more recent textbook remembered natural resources (or “land”) and considered them a factor of production (Mankiw, 2017, pp. 22, 242), in line with Samuelson and Nordhaus’ textbook. As we have seen, it is not a satisfactory approach, but at least natural resources are not completely neglected. Instead, in the textbook published by Charles I. Jones (Stanford University) we can read an example similar to that of Mankiw’s bakery, without any reference to the input of natural resources transformed to obtain products. Jones’s example concerns the production of ice cream: the "message" is that ice cream makers (labor) produce ice cream only by means of equipment (capital), without water, milk, sugar and chocolate (or powders); and in Jones’ ice-cream factory the equipment is still, since energy to operate the machinery is not mentioned (Jones, 2014, p. 70). Faced with arguments of this kind Herman Daly wrote the following words: "The neoclassical production function is worse than alchemy [...] Neoclassical economists, without blushing, write equations in which material output flows require no material input flows" (Daly, 1999b, p. 91). This fast survey of macroeconomics textbooks is very insightful regarding the attitude of standard economists about natural resources. Daly and Farley noted that "Ignoring the necessary role of natural resources in production is part of a pattern in neoclassical economics that has the effect of denying that nature has any role in economic life" (Daly and Farley p. 160). This pattern can be explained with the Kuhnian paradigm of neoclassical economics (ib., pp. 23-4), a paradigm that denies the absolute scarcity problem for natural resources in order not to question the dogma of infinite growth. The traditional production function is particularly suited to that paradigm. If the production function envisages only labor and capital, natural resources are neglected, with bad consequences on sustainability: if, just to say, to model the production of canned tuna one uses an analytical tool which considers only workers (the labor factor) and canning equipment (the capital factor) and not caught tuna, the problem of overfishing does not arise by definition. Moreover, if natural resources are inserted in the production function as a factor of production like labor and capital, they are automatically considered substitutable with these other two factors, and this is absurd, as workers and canning equipment cannot substitute tuna. To conclude, a correct representation of the production process implies the abandonment of the “recipe with no ingredients”. Metaphor aside, economics must stop using the traditional approach based on the production function in which natural resources are almost or completely neglected, and take an approach in which natural resources are explicitly represented as a flow of material taken from natural capital. This approach, which is that of ecological economics, should inspire textbooks used in universities. In this way young students in economics will not absorb misleading knowledge anymore and, once they become economists, they will be able to collaborate with other scientists and with all citizens to use natural resources correctly in order to preserve the ecosystem on which our economy and the life of all creatures depend. * The author is grateful to professor Herman E. Daly for the kind and helpful suggestions. This article reproduces with adaptations a paragraph of a more extensive paper published in Italian on the blog apocalottimismo.it. Notes 1 For an exhaustive overview of the content of the Meadow’s Report, of the criticisms it received and of the developments it has had, see Victor (2019, pp. 168-174). 2 In a treatise written in 2003 important environmental economists wrote that "… many economists believe that evidence points to reasonably high substitution possibilities (although there is by no means a consensus on this) […] between resources and reproducible capital" (Perman et al, 2003, p. 478). More recently an economist expert in these issues wrote that "In the majority of papers on economic growth and natural resource usage the assumption of substitutability between natural resource usage (as an energy source) and physical capital is made" (Malaczewski, 2019, p. 2207). 3 Georgescu-Roegen commented with the following words: "One must have a very erroneous view of the economic process as a whole not to see that there are no material factors other than natural resources. To maintain further that 'the world can, in effect, get along without natural resources' is to ignore the difference between the actual world and the Garden of Eden" (Georgescu Roegen, 1975, p. 361). 4 The three textbooks were: Dornbusch R. and Fischer S. (1987), Macroeconomics, McGraw-Hill, 4th ed.; Hall R. E. and Taylor J.B. (1988), Macroeconomics, W. W. Norton, 2nd ed.; Barro R. J. (1987), Macroeconomics, Wiley and Sons, 2nd ed. 5 Blanchard and Johnson only deal with oil in a box that shows the different effects of the increase in the price of crude oil in the 1970s and 2000s (p. 153). 6 From the definition given by Mankiw, it is clear that he does not consider raw materials as a component of capital: "capital is the set of tools that workers use: the construction worker’s crane, the accountant’s calculator, and this author’s personal computer" (Mankiw, 2010, p. 47). References Barnett H. J. and Morse C. (1963), Scarcity and Growth: the Economics of Natural Resource Availability, Johns Hopkins Univ. Press. Baumol W. J. and Blinder A. S. (2016), Macroeconomics – Principles and Policies, 13th ed., South Western, Cengage Learning. Blanchard O. and Johnson D. R., (2012), Macroeconomics, Pearson. Czech B. (2013), Supply Shock. Economic Growth at the Crossroads and the Steady State Revolution, New Society Publishers. Daly H. E. (1991), Towards an Environmental Macroeconomics, Land Economics, Vol. 67, No. 2, pp. 255-9. Daly H. E. (1996), Beyond Growth: The Economics of Sustainable Development, Beacon Press. Daly H. E. (1999a), Georgescu-Roegen versus Solow/Stiglitz, in Ecological Economics and the Ecology of Economics – Essays in Criticism, E. Elgar (orig. in Ecological Economics, Vol. 22, No. 3). Daly H. E. (1999b) A Note on Neoclassical Theory and Alchemy, in Ecological Economics […], op. cit. Daly H. E. and Cobb, J.B. (1989), For the Common Good […], Beacon Press. Daly H. E. and Farley J. (2011), Ecological Economics. Principles and Applications, Island Press, 2nd ed. Follett K. (1996), A Place Called Freedom, Fawcett Crest. Georgescu-Roegen N. (1975), Energy and Economic Myths, The Southern Economic Journal, Vol. 41, N. 3, pp. 347-381. Georgescu-Roegen N. (1979), Energy Analysis and Economic Valuation, The Southern Economic Journal, Vol. 45, N. 4, pp. 1023-1058. Georgescu-Roegen N. (1984), Feasible recipes versus viable technologies, Atlantic Economic Journal, Vol. 12, N. 1, pp. 21-31 Jones C. I. (2014), Macroeconomics, Third Edition, W. W. Norton & Company. Malaczewski M. (2019), Substitutes or complements? Relationship between natural resources and physical capital – a few stylised facts, Economic Research - Ekonomska Istraživanja, 32:1, 2195-2211. (https://www.tandfonline.com/doi/full/10.1080/1331677X.2019.1637762) Mankiw N. G. (2010), Macroeconomics, 7th ed., Worth Publishers. Mankiw N. G. (2018), Principles of Macroeconomics, 8th ed., Cengage Learning. Meadows D. H., Meadows D. L., Randers J., Behrens III W. W. (1972), The Limits to Growth, Universe Books. Nordhaus W. D. (1974), Resources as a Constraint on Growth, The American Economic Review, Vol. 64, No. 2. Nordhaus W. D. and Tobin J., (1973), Is Growth Obsolete?, in Moss M. (ed.), The Measurement of Economic and Social Performance, NBER. Perman R. at al. (2003), Natural Resource and Environmental Economics, Pearson. Samuelson P. A. and Nordhaus W. D. (2010), Economics, McGraw-Hill, 19th ed. Solow R. (1974), The Economics of resources or the resources of economics, The American Economic Review., Vol. 64, No. 2, Papers and Proceedings of the Eighty-sixth Annual Meeting of the American Economic Association, May. Victor P. (2019), Managing without Growth – Slower by Design, not Disaster, Second Edition, E. Elgar.
Production is interaction of man and nature Karl Polanyi, The Great Transformation
Macroeconomics and Monetary Economics (JEL E)
Total Surplus In a stylized model, the total market surplus denotes the total welfare of all participants in a market. It is the sum of consumer surplus and producer surplus, which can be understood as the net gain to society from all trades (or transactions) that are made in that market. An individual's consumer surplus is the difference between the highest price they are willing to pay for a product and the price they actually pay. The area below the demand curve and above the market price is the total consumer surplus summed up for all consumers in the market. A producer's surplus is the difference between the lowest price they would be willing to accept, considering production costs, and the price the product is actually sold for. The area above the market supply curve and below the market price is the total producer surplus summed up for all producers in the market. In the market equilibrium where supply equals demand (denoted by P* and Q* in the figure below), the sum of consumer and producer surplus – and thus total welfare – is maximized. Figure 1: Welfare maximized in a perfectly competitive market In case of market inefficiencies, where the quantity traded on the market diverges from the socially efficient outcome, social welfare remains below the optimal outcome. For example, if market power allows producers to charge a price P' > P*, this reduces the quantity traded to Q' < Q*. Figure 2: Welfare reduced in an inefficient market exhibiting deadweight loss In this situation, the consumer surplus (CS) is lower than in equilibrium: \begin{equation*} CS' = A < CS^* = A + B + D, \end{equation*} while the producer surplus (PS) is higher than in equilibrium: \begin{equation*} PS' = B + C > PS^* = C + E. \end{equation*} While area B is transferred from consumers to producers as a consequence of a price increase, areas D + E reflect the deadweight welfare loss; that is, the cost to society created by market inefficiency: \begin{equation*} W^* - W' = (CS^* + PS^*)-(CS' + PS') = D + E. \end{equation*} In situations where market failure leads to an inefficient distribution of goods and services – like the one illustrated above – it is possible to find an alternative allocation that makes at least one person better off, without making anyone else worse off – thus improving social welfare. In these situations, government intervention can potentially improve everybody’s welfare. In the above example, if prices and quantities were set at the equilibrium values (P*, Q*), the government could charge a lump-sum consumer tax of the size of area B. Then, it could provide this amount as a lump-sum subsidy to producers, increasing the consumer surplus by area D and the producer surplus by area E. This would eliminate the deadweight loss; the total surplus would be the same as in the competitive equilibrium. Pareto Efficient Allocations An allocation is said to be Pareto efficient (or Pareto optimal) when no further exchange is feasible that would make at least one person better off without making any other person worse off. The first theorem of welfare economics states that when there exists (1) no externality; (2) perfect competition; (3) perfect information (as opposed to asymmetric information); and (4) fully rational agents, then all competitive equilibria are Pareto efficient. These equilibria form the Pareto frontier (also called Pareto set). This is illustrated in the figure below for an economy with two agents (1 and 2). The blue-shaded area represents all combinations in utility (u) that would be feasible to attain, but are not efficient since resources are left unused. The orange line indicates the Pareto frontier where all resources are used and nobody can be made better off without making someone else worse off. Importantly, Pareto efficiency defines optimality only in a limited sense, as it does not allow "fairness" ranking between different Pareto efficient allocations. For instance, it does not distinguish between outcomes A and B in the figure below, even though outcome A generates substantial inequality compared to outcome B. Figure 3: a Pareto frontier Social Welfare Function To rank different resource allocations in terms of their social desirability, economists typically use a social welfare function, W(u1, u2,...,uH). The social welfare function is non-decreasing in individual well-being, W'(uH) > 0, and therefore achieves a maximum at some Pareto optimum. To give a more concrete example, imagine a situation at a daycare center. There are two children, Lisa (L) and Tom (T), and two toys, a book (B) and a puzzle (P). The teacher is thinking about how to allocate the toys between the children. Both children like both toys, but Lisa likes puzzles better than books, while Tom likes both equally. Let's assume that Lisa derives utility uL(P) = 5 from solving the puzzle, and utility uL(B) = 2 from reading the book. Tom derives utility uT(P) = uT(B) = 2 from either activity. The following allocations and utility combinations would be feasible, assuming an additive utility and social welfare function: \begin{equation*} \text{Lisa: B,P; Tom:} \emptyset \quad \Rightarrow \quad W = u_L(P,B) + u_T(\emptyset) = (5+2) + 0 = 7 \\ \text{Lisa: B; Tom: P} \quad \Rightarrow \quad W = u_L(B) + u_T(P) = 2 + 2 = 4 \\ \text{Lisa: P; Tom: B} \quad \Rightarrow \quad W = u_L(P) + u_T(B) = 5 + 2 = 7 \\ \text{Lisa: } \emptyset; \text{Tom: B,P} \quad \Rightarrow \quad W = u_L(\emptyset) + u_T(P,B) = 0 + (2+2) = 4 \end{equation*} In this setting, the second allocation would not be efficient. By exchanging the toys, a Pareto improvement can be reached: If Tom gives the puzzle to Lisa and Lisa gives the book to Tom, Lisa's utility increases, while Tom's utility stays the same. Similarly, the fourth allocation leaves room for improvement. If Tom gave the puzzle to Lisa and only kept the book, aggregate welfare would increase. However, this would not be Pareto efficient, because Tom's utility would decrease unless he was compensated somehow. Lisa could compensate Tom for giving away the puzzle, as her welfare gain from the exchange is larger than his welfare loss. For example, Lisa could offer to read the book to Tom, if he gave her the puzzle. If this compensation (C) brings a utility cost of uL(C) < uL(P) for Lisa and a utility gain of uT(C) ≥ uT(P) for Tom, then a Pareto improvement is reached by `trading' the puzzle for compensation. If, say, reading the book to Tom brings a utility cost of uT(C) = 2 for Lisa and a utility gain of uT(C) = 2 for Tom, aggregate welfare after the exchange would be W = uL(P) - uL(C) + uT(B) + uT(C) = (5-2) + (2+2) = 7. In a market with money, the obvious solution is to have adult Lisa pay adult Tom an amount of money x that satisfies (if utility is measured in terms of money) uT(P) ≤ x ≤ uL(P). Both the first and the third allocation in the example list above are Pareto efficient. No child can be made better off without making the other worse off. However, how these allocations are ranked depends on the functional form of the social welfare function. So far, we assumed an additive structure: Lisa's and Tom's utility are perfect substitutes. We could also assume a multiplicative structure, in which case Lisa's and Tom's utility are supplements, and inequality is penalized. This is typically true in real life, since there are diminishing marginal returns to the enjoyment of almost everything; a poorer person values an extra euro more than a rich person does. In this case, the third allocation maximizes the social welfare at the daycare center: \begin{equation*} \text{Lisa: B,P; Tom:} \emptyset \quad \Rightarrow \quad W = u_L(P,B) \times u_T(\emptyset) = (5+2) \times 0 = 0 \end{equation*} \begin{equation*} \text{Lisa: B; Tom: P} \quad \Rightarrow \quad W = u_L(B) \times u_T(P) = 2 \times 2 = 4 \end{equation*} \begin{equation*} \text{Lisa: P; Tom: B} \quad \Rightarrow \quad W = u_L(P) \times u_T(B) = 5 \times 2 = 10 \end{equation*} \begin{equation*} \text{Lisa: } \emptyset; \text{Tom: B,P} \quad \Rightarrow \quad W = u_L(\emptyset) \times u_T(P,B) = 0 \times (2+2) = 0 \end{equation*} According to the second welfare theorem, each Pareto optimum can be achieved via a competitive equilibrium, if lump-sum taxes and transfers are available to shift individual endowments. For instance, if initial endowments yield point A in the figure above and our social welfare function prefers point B, we can impose a lump-sum tax on individual 2 and give it to individual 1 to induce this shift in the resulting equilibrium. In the daycare example, if Lisa decided to take the book and the puzzle (allocation 1), the teacher could intervene and take the book away from Lisa to give it to Tom (allocation 2), thereby shifting between two Pareto efficient allocations to achieve the one that is socially optimal. Unfortunately, in practice, the government’s ability to use lump-sum taxes to improve the distribution of resources in a society is limited. A lump-sum tax is a fixed amount that individuals pay based on their characteristics, independent of their choices. For example, imagine an economy with 10 persons, of whom 5 have an initial wealth of €100, while the other 5 have an initial wealth of €0. Assume that social welfare would be maximized if those with €100 paid €50 to those who do not have anything. However, this reallocation may eliminate the individuals' incentives to generate future wealth, if all gains are redistributed to be shared equally independent of each individual's work effort. Moreover, the information on the initial wealth may not be directly observable to the government. Good to Know In practice, government decisions are rarely made in situations where Pareto improvements are feasible. Most often, the government will face a trade-off between different groups' needs and interests, and the implications of different decisions on aggregate welfare may not always be clear. For example, assume that the government is considering building a new highway. Those wanting to use the highway to arrive at work faster or transport their products quicker are willing to pay a user fee, which would cover the costs of construction and maintenance. At first glance, the construction of this highway may appear to be a Pareto improvement: It will clearly make some individuals better off. But, there will most likely also be individuals who are adversely affected by the highway. Traffic delays and congestion may bring negative side-effects during construction, and entire neighborhoods may remain negatively affected by the noise from the highway. In this case, it may still be possible for the government to reduce the negative effects (e.g., build a noise protection wall) and/or compensate those who remain negatively affected. Balancing conflicting interests will be yet more challenging in times of major crises, as the COVID-19 pandemic highlighted. Strategies used to manage public health risks themselves pose risks. The healthcare sector faced risks in non-pandemic areas due to the diversion of resources to treat and fight COVID-19. Meanwhile, businesses, potential victims of domestic violence, and children's education are all areas where pandemic response protocols may have complicated a situation and made some groups relatively worse off than the average. Expert advice can help to clarify some of these trade-offs, but comparing the individual gains and losses arising from each policy option, and finding the socially optimal solution, will be less straightforward than the simple examples introduced above may suggest.
Welfare economics is the study of how a given allocation of goods and resources in a society affects economic well-being. It seeks to guide public policy toward an allocation that benefits society overall. As such, it provides the tools to compare between different resource allocations and evaluate them from a social welfare perspective – or in layman's terms, to judge how "fair" those allocations are. There are three core concepts used in welfare analysis: total surplus, allocative efficiency, and the social welfare function.
Public Economics & Economic Policy (JEL H)
Policy or academic economist: Which should I become?
This might come as a surprise to someone outside the field, but economists come in different packaging. The two most common career options – policy and academia – offer widely different paths for economists. This begs the question, especially for the upcoming economics graduate: what are the differences? I have tasted both worlds myself: after working for an economic think tank, I returned to academia to pursue a PhD in economics. Although both paths offer an intellectually challenging environment, and my research continues to be policy-oriented, I clearly see differences in the research scope, working process, and the kind of outcome that is expected from me. Solving vs Finding Problems The most radical and noticeable difference between policy and academic economists is that the former work with the problem they are given, whereas the latter contemplate what problems are worth greater attention. For example, the government is not happy with the unemployment rate in the economy. It has increased by 2 percentage points over the past year. One of the options to bring people back into the workforce is to introduce active labor market policies, ranging from funded retraining in the workplace to career counseling programs for the unemployed. A policy economist would be hired to help design a solution. Thus, the problem is given to them. In academia, on the contrary, people have the opportunity to choose the topic they are genuinely interested in. They quest for a problem or a research question themselves, rather than have it dropped from above. So, they can choose between studying labor market policies or voting behavior of single mothers, for example. Or they may choose to study anything else within the scope of their expertise. Theoretical Mechanisms vs Practical Implementations When the problem is given to a policy economist, their task is to find a viable solution, often within the given budget constraint, so as to answer the how question. When an academic researcher faces the same issue, their task is to evaluate what works in principle, so as to answer the what question. Let’s say the government is still serious about combating unemployment. The task of a policy economist would be to study the evidence, including the world’s best practices, and propose an economic policy design that would best suit the country’s context. They do not have the luxury of time, and they have a strict budget they must adhere to. In contrast, the task of an academic economist would be to use large datasets, perhaps from other similar countries, to assess the effectiveness of each existing policy option (or perhaps theorize a new one). This is not a short project, neither is it context-specific. In academia, researchers are interested in the universal mechanism rather than the solution to a specific problem. Well-Rounded Professional vs Specialized Expert Policy economists should be equipped to tackle any problem that is thrown at them, so developing a working knowledge across a range of topics is vital. In academia, narrow expertise is valued, so an academic economist would go deeper in one direction. Considering the same unemployment issue, a policy economist is expected to be aware of the main theories and empirical evidence in Labor Economics, too. What is also expected is that they are well aware of the context: how the labor market functions in their country, including a good grasp of legislature, market trends, and existing government policies. An academic economist will devote much more time to a narrow slice of the issue, which often entails researching a pattern that fills in the patches in the literature. For example, they would research whether giving study vouchers to the unemployed increases their chances to get a job. That is why people in academia often specialize in one or two research areas, in this case, in Labor Economics. Persuasion Skills vs Methodological Precision The policy world is solution-oriented, so mobilizing as many people as possible around the policy idea is a success factor. Meanwhile, academia is expected to generate new scientific evidence, so focus is on the way the problem is approached. The task of a policy economist is to persuade a group of policymakers that the idea will solve the problem of their concern with a positive impact on the people and economy. As the stakeholders are often not economists themselves, a policy economist should know how to speak to them in a language that they understand with a degree of assertiveness. The goal is to push the idea through, as this is how a think tank makes its business; by having its policy proposals adopted and enacted. What academic economists are concerned with is how their analysis is implemented. Methodology plays an important role, and so does the way the hypotheses are framed. The output should shed new light on the old problem, methodologically or theory-wise, or discover a new phenomenon using known concepts. The goal is to share the result with the community of fellow, let’s say, labor economists, who speak the same language. Making Changes vs Furthering Knowledge Policy economists are hired to find a feasible solution to a time-specific economic problem, so the outcome of their work is a well-designed policy that brings the expected results. Academia, in contrast, produces new knowledge, so the outcome is measured in terms of the contribution that is being made to existing scholarship. Following our unemployment case, a policy economist will bring a paper to policymakers stating which of the options would work best and why. In addition to a detailed policy design, which is an obvious deliverable, a policy economist should estimate the costs and benefits of the initiative, and whether legislation needs to be amended to accommodate it. Ideally, a policy proposal turns into an act. Meanwhile, a major goal of academic output is publication in a reputable journal so that other members of the research community can get insights into a particular mechanism. Although some academic works explicitly discuss policy implications, they are often universal and not context-specific. My experience: the pros and cons of each Which career path to follow depends on one’s preferences for maintaining a wide view (policy economist) or developing a deep expertise (academic economist), changing projects quickly (policy) or slowly (academia), and communicating within (academia) or outside (policy) the professional community of economists. When I worked for a think tank, I often interacted with professionals from both the public and private sectors. Policies are made by people and for people, and as people differ, so did my approach to each policy – this required a lot of mental load and empathy. I genuinely enjoy communicating with people, so personally I found this a positive aspect of the job rather than a burden. In academia, interactions are less frequent and often within the same research communities, which is perhaps not so attractive for more extroverted people. On the other hand, as a policy economist, I did not have much of a choice of which topic to work on. Most projects were exciting and absorbing, while some just had to be done, and I could not say no or transfer my tasks to a colleague. Now that I have PhD status, I have the freedom of choice. I am responsible for the gratification I am getting from my intellectual work, and I can drop the projects I do not feel excited about. Loving what you research is crucial in academia. Although often treated as orthogonal, the paths of policy and academic economists have a lot in common. Both must have deep knowledge of economics, and both probably receive many comments about financial markets at parties. Moreover, one cannot exist without the other. Policy people need academics to generate new knowledge usable in real life, whereas academia needs real-world policy problems to evaluate, and to provide inspiration for new avenues of research. Trying out both worlds can help an economist know which they prefer, and gain an appreciation for both. What eventually matters is that one genuinely enjoys what they are doing.
“I am an economist,” I once proudly mentioned at a party, in a round of small talk. “Oh, so you do a lot of money counting and financial reporting?” was the reply I heard, like so many economics graduates before me. “Nah, let’s leave that to the business and finance professionals,” I answered. But what do real economists do exactly?
Drivers of inflation Economists distinguish three central causes of inflation: While the first and second describe imbalances on product markets, the third is the result of domestic monetary policy. Demand-pull inflation Demand-pull inflation occurs when consumer demand outpaces supply. That is, aggregate demand (AD) rises faster than production capacity and thus aggregate supply (AS). This type of inflation is typically associated with strong economic growth – or the anticipation thereof. When consumers are confident that the economy is performing well, they expect income and employment to rise, and increase spending (the AD curve shifts outwards, depicted below). Other causes of a rise in demand may include tax cuts, which increase consumers’ discretionary income, or higher government spending. Figure 1: A depiction of demand-pull inflation Cost-push inflation Cost-push inflation occurs when the aggregate supply of goods is reduced (the AS curve shifts inwards, as depicted below), while aggregate demand remains the same, thus driving up prices. This will often be caused by an increase in production costs, for example due to rising prices of raw materials. The higher production costs are passed on to consumers in the form of higher prices for finished goods. A common cause of cost-push inflation are rising oil or gas prices. These affect transport costs and thereby lead to higher prices for a range of products. Natural disasters can also cause shortages in the supply of goods that drive up prices. For example, droughts or floods affect crop and pasture production and thereby can cause spikes in food prices. Figure 2: a depiction of cost-push inflation Monetary inflation According to the quantity theory of money, excess money creation is the primary driver of inflation. If money supply outpaces output growth, there will be more money available in the economy to spend on the same number of goods, thus causing the value of money to fall. Central banks use monetary policy to affect the amount of money circulating in the economy. For example, common policy instruments to increase money supply include decreasing the interest rate, which reduces saving and increases spending; purchasing government bonds, which injects money to the economy; and lowering the reserve requirements for banks, which allows them to lend out more money. In principle, central banks can also print more paper currency. However, historically instances of printing too much money in order to pay off debts have been the primary cause of very high and rapidly accelerating inflation. This situation is described as hyperinflation. An alternative strategy used to increase the money supply is quantitative easing. This is where the central bank purchases long-term securities from the open market in order to increase the money supply. This strategy was recently used by the US central bank during the COVID-19 crisis to lessen the severity of the economic downturn. Costs of inflation and countermeasures Low and steady inflation can be a sign of economic growth. When the economy is performing well and unemployment is low, shortages in labor can occur. In this case, companies will increase wages to attract workers. This causes an increase in production costs, which translates into higher prices of goods for final consumption. At the same time, the rise in wages raises incomes and thus consumer spending, such that demand keeps up with the price increase. However, especially in cases of cost-pull and monetary inflation, the prices for goods tend to change faster than wages, which are usually set by employment contracts. If inflation outpaces wage growth, this reduces the purchasing power of consumers - that is, in an inflationary environment, the same amount of money allows consumers to buy less goods than before. This erosion of real income causes a decline in living standards and is the biggest cost of inflation. In cases of hyperinflation, prices increase by 50 per cent or more within a month, with devastating effects for the economy and governance. A low, stable, and predictable rate of inflation makes it easier for households and businesses to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy. This is why price stability is an important target of monetary policy. Governments and central banks use various instruments of monetary policy to control inflation. The most common measures are adjustments to interest rates. Higher interest rates reduce spending and increase saving. With less disposable income being spent, the economy slows and inflation decreases. Measures of Inflation The percentage change in the consumer price index (CPI) over a given period is the most widely used measure of inflation. The CPI measures price changes for a nationally representative basket of everyday goods – including items such as milk, fruit, cereal, and coffee, as well as expenses for housing, transport, clothing, health, education, and recreational activities. It is indexed to the cost of this basket in a base period and then tracks its evolution, to indicate whether prices are rising (inflation) or decreasing (deflation). An alternative way to calculate the inflation rate is the percentage change in the GDP deflator from the previous year’s GDP deflator value. The GDP gives the market value of all final goods and services produced within a country during a given time period, and the GDP deflator measures how the prices of these goods have changed over time, relative to a base period. The items and quantities that enter into the calculation of GDP vary year by year and are therefore more current than the mostly fixed CPI basket. GDP, however, also includes non-consumer items (such as military spending), which is why the CPI basket is the preferred indicator for changes in the cost of living in a country. Good to know The main task of the European Central Bank (ECB) is to maintain price stability. The Harmonised Index of Consumer Prices (HICP) is used to measure changes in the prices of consumer goods and services purchased by households in the euro area. It is 'harmonized' in the sense that all the countries in the euro area follow the same methodology to ensure comparability. Between 2000 and 2021, the average inflation rate in the euro area was 1.7%. Inflation was relatively stable at around 2% in the early 2000s, before rising to up to 4% during the financial crisis of 2007-2008. Since then, there have been stronger fluctuations. In September 2020, the euro zone glided into deflation (negative inflation) for the first time in four years, which was followed by a sharp rise to 5% inflation in December 2021. The pronounced rise in the euro area HICP inflation in late 2021 and the start of 2022 was caused by energy price developments. Rising energy prices pushed up expenses for housing (electricity, gas, etc.) and transport by about 10% from November to December 2021. Energy price inflation was driven both by oil price increases and by base effects linked to the COVID-19-related collapse in oil prices at the beginning of 2020.
Inflation describes an increase in the general price level in an economy over a certain period, usually a year. It is typically calculated for a broad basket of goods and services, reflecting changes in the overall cost of living. However, it can also be more narrowly defined for a set of specific goods, for example to reflect only price changes in the costs for food, housing, energy, or transportation.
To create the CPI, national statistical agencies usually use information from household surveys to construct a market basket of goods and services that are commonly consumed in the country. They then track the cost of purchasing this basket over time. The basket includes items of daily life like milk, fruit, cereal, and coffee, as well as expenses for housing, transport, clothing, health, education, and recreational activities. Calculating the CPI The CPI is calculated as the cost of this basket at a given point in time, Ct, relative to its cost in the base year, C0: \begin{equation*} \mathit{CPI}_t= \frac{\mathit{C}_t}{\mathit{C}_{0}}*100 \end{equation*} As an example, imagine an economy with two goods, A and B, that are consumed at two points in time, t = 0 and t = 1. The realized prices (P) and quantities (Q) are as follows: t = 0 (base) t = 1 Q P Q P Good A 10 €50 8 €55 Good B 80 €20 83 €22 How can we calculate the CPI for this economy? Let’s assume that the consumed quantities of goods A and B in t = 1 had remained at the same levels as in t = 0. We can then calculate the cost of the consumption basket as: \begin{equation*} \mathit{C}_0= \sum(\text{Q}_0*\text{P}_0) = (10 * €50) + (80 * €20) = €2,100 \end{equation*} \begin{equation*} \mathit{C}_1= \sum(\text{Q}_0*\text{P}_1) = (10 * €55) + (80 * €22) = €2,310 \end{equation*} The CPI would then be calculated as: \begin{equation*} \mathit{CPI}_0= \frac{\mathit{C}_0}{\mathit{C}_{0}} * 100 = 100 \text{ (base period)} \end{equation*} \begin{equation*} \mathit{CPI}_1= \frac{\mathit{C}_1}{\mathit{C}_{0}} * 100 = \frac{€2,310}{€2,100} * 100 = 110 \end{equation*} Keeping the items and their quantities in the consumption basket constant over time may seem odd, but this ensures comparability and allows us to isolate the price effect on what is purchased. In reality, consumers will react to these price changes depending on the elasticity and inelasticity of demand. Therefore, to account for changes in consumer habits and reflect changes in the actual cost of living, it is important to update the CPI basket periodically (ideally at least every five years). Updating the basket is costly, as it requires the collection of information from large household surveys, which is why this is usually only done in intervals of several years. For example, compared to the 1990s, in the 2020s CDs/DVDs and their players are no longer widely purchased and shouldn’t be included in the bundle anymore. Meanwhile, internet services and smartphones should enter the consumption basket as they are very commonly purchased nowadays. In the example above, we observe that the consumed quantity of good A decreased in face of the price increase, while the consumed quantity of good B increased in spite of the rise in prices. If we had calculated the value of the consumption basket at current quantities, this would be: \begin{equation*} \mathit{C}_1= \sum(\text{Q}_1*\text{P}_1) = (8 * €55) + (83 * €22) = €2,266 \text{ and} \end{equation*} \begin{equation*} \mathit{CPI}_1= \frac{\text{C}_1}{\text{C}_0} * 100 = \frac{€2,266}{€2,100} * 100 = 107.9 \end{equation*} In our example, accounting for changes in consumption patterns thus renders a smaller (and more accurate) rise in the cost of living than when the quantities are held constant. Measuring inflation The rate of inflation is easy to calculate once CPI is measured. It is the percentage change in the CPI between two points in time, where the CPI in the base year is indexed to 100. In our example, the CPI increased from 100 in the base year to 110 in the current year, which means that inflation is 10% over the period. Another method to calculate inflation uses the GDP Deflator, though the CPI method is more common. The GDP Deflator’s advantage over the CPI is that it is not based on a fixed basket of goods and services, since GDP always reflects current production patterns. However, it also takes account of some prices that aren’t relevant to consumers - like military spending - so the CPI is still preferred in many cases. Of course, every individual is likely to purchase a slightly unique basket of goods, which may differ a lot from the official average basket of goods used to calculate the CPI. Thus, when inflation is reported, while it normally represents a good indicator of the state of the economy at macroeconomic level, it may not be appropriate for everyone. Some people will have higher or lower personal inflation rates than others. Good to know Globally, consumer price indices fell between 1980s and 2000, particularly in high income countries, and remained relatively stable thereafter until the 2008 financial crisis. Since then, consumer prices have been more volatile, driven particularly by fluctuations in food and energy prices. Those categories have exhibited the highest rates of average inflation in recent decades, and make up an essential share of total consumer spending. In 2019, housing - including water, electricity, gas and other fuels - was the largest contributor to total household expenditure in the European Union (EU), accounting for 24 percent of total consumption. The second largest positions were food and beverages and transport, each accounting for 13 percent of total consumption.
The Consumer Price Index, or CPI, describes developments in the average cost of living in a country. The percentage change in the consumer price index over a given period is the most widely used measure of inflation.
Calculating the GDP Deflator The GDP deflator, Rt, is calculated as the ratio between the nominal and the real GDP, where the real GDP is measured in prices of a defined base year, t = 0: \begin{equation*} \mathit{R}_t= \frac{\text{GDP}_t}{\text{realGDP}_{t}}*100 = \frac{\sum(\text{Q}_t*\text{P}_t)}{\sum(\text{Q}_{t}*\text{P}_0)}*100 \end{equation*} As an example, imagine an economy that produces two final goods, A and B, that are consumed at two points in time, t = 0 and t = 1. The realized prices (P) and quantities (Q) are as follows: t = 0 (base year, 2018) t = 0 t = 1 (2019) t = 1 Q P Q P Good A 10 €80 15 €80 Good B 40 €20 40 €22 The nominal GDP in period t = 1 is the market value of all final goods produced in the economy in current prices: \begin{equation*} \text{GDP}_1= \sum(\text{Q}_1*\text{P}_1) = 15 * €80 + 40 * €22 = €2,080 \end{equation*} The real GDP in period t = 1 is the value of the production at constant prices of the base year, t = 0: \begin{equation*} \text{realGDP}_1= \sum(\text{Q}_1*\text{P}_0) = 15 * €80 + 40 * €20 = €2,000 \end{equation*} The GDP deflator is the ratio between the nominal and real GDP in t =1: \begin{equation*} \mathit{R}_1= \frac{\text{GDP}_1}{\text{realGDP}_1}*100 = \frac{€2,080}{€2,000} * 100 = 104 \end{equation*} The base year of the deflator is indexed at 100 and, in the example, the current value of the deflator is 104, so inflation is 4% between t = 0 and t = 1. This is easy to see in this simple example. The general formula for calculating the GDP Deflator inflation rate is as follows: \begin{equation*} \text{Inflation rate} = \frac{(\text{GDP Deflator}_{t =1}-\text{GDP Deflator}_{t =0})}{\text{GDP Deflator}_{t =0}} * 100 = \frac{(€2,080 - €2,000)}{€2,000} * 100 = 4\%. \end{equation*} Alternate method to measure inflation An alternative measure of inflation uses the consumer price index (CPI). Since the GDP Deflator reflects price changes in the prices of all domestically produced goods and services, it is a much broader price index than the CPI. While the CPI focuses on price changes in goods and services commonly purchased by consumers, the GDP deflator measures price changes purchased by consumers, businesses, and the government, and those sold for export. Thus, the key advantage the GDP Deflator has over the CPI is that the components of GDP are more current than the mostly fixed CPI basket of goods. However, it also includes non-consumer items (such as military spending), which is why the CPI basket is the preferred indicator for changes in the cost of living in a country. Good to know The two different measures of inflation (CPI and GDP deflator) have a slightly different economic interpretation and their relevance can change over time. The figure below shows the annualized inflation rate in the OECD area over the past two decades as measured by consumer prices and the GDP deflator. While both measures follow largely similar trends, there are important differences. When the 2008 financial crisis hit, average consumer prices rose by about 4 percent. After the stock market crashed and economic growth plummeted, the decline in economic activity was accompanied by a sharp decline in prices, followed by another increase up to 2011, attributable to surging energy and food prices. While the GDP deflator follows the same pattern, consumer prices have been remarkably more volatile. This deviation is also apparent in a general price decline attributable to the COVID-19 pandemic. The pandemic has had a strong impact on consumers, with demand almost disappearing for some goods and services and being temporarily in excess for others. The overall result of these opposing effects, in conjunction with volatile oil prices and increased government spending, was a stronger fall in consumer prices than in GDP. Test whether you understood the concept of the GDP Deflator... Exercises for you <use xlink:href="/themes/custom/venice/images/icons.svg#launch-18px"></use>
The gross domestic product price deflator, or GDP deflator, is a price index that shows how, on average, prices for all goods and services produced in an economy change over time. It is commonly used to estimate the rate of inflation. The GDP gives the market value of all final goods and services currently produced within a country during a given time period. The items and quantities that enter into its calculation vary year by year, so it is a very current way to estimate inflation.
Solidarity with Ukraine, ways to help and assisting international students fleeing war
How to help and donate It is difficult to know how best to concretely help those in need. Of course, donating money provides an immediate form of assistance. If you have the means, you can assist institutions like the Kyiv School of Economics, which is raising funds for humanitarian aid. You can support their campaign with a donation on their website. If your institution is offering assistance as well, please email ua-help@inomics.com and we will add your institution to the list below. We also wish to direct your attention to some of the major humanitarian aid organizations working in Ukraine right now: Red Cross special Ukraine fund UNHCR (The UN Refugee Agency) UNICEF (United Nations Children's Fund) The International Rescue Committee Doctors Without Borders Alternatively, there are multiple organizations and initiatives with a more specific focus for the support they are offering. Donate for Specific Types of Support Care.org has established a special Ukraine Crisis fund to provide food, water, hygiene kits, psychosocial support, and cash assistance — prioritizing women and girls, families, and the elderly. The Volkswagen Foundation is offering funding to Ukrainian academics and scientists who have fled their country and arrived in (or are in transit to) Germany. Doctoral students, postdocs, and established scientists have the opportunity to continue their work at a university or research institute in Germany for 6-12 months with the Foundation's help. Support Transport for People Fleeing Ukraine: Mission Lifeline are organizing transport convoys from the Ukraine Border. CARA, the Council for At-Risk Academics, provides help to academics in dangerous situations. They and their UK university partners are helping Ukrainians flee their country and find safe areas to continue their work. Support Journalism and Free speech: Ukraine Independent (English-language Ukrainian Newspaper) Fundraising Page Katapult Magazine (German/English language Ukrainian Online Magazine) Refugee Awareness Refugee Week is a UK-wide festival that encourages understanding of refugees and celebrates "the contributions, creativity and resilience of refugees and people seeking sanctuary". This year's Refugee Week is in late June. Helping students fleeing war We are additionally concerned about multiple reports - from PBS, CNN, The Guardian and others - of international students, especially those from Africa, the Middle East and Asia, facing discrimination and violence when attempting to flee the conflict. We implore for their safe passage and the chance to continue their education in safety. If you have information about resources for students fleeing the conflict, particularly international students, please email ua-help@inomics.com so we can advertise and circulate this assistance with our audience of economics students and practitioners. So far, we are aware of: HWR Berlin, Germany Charles Darwin University, Australia The University of Hamburg's UHHhilft program assists refugees who have been forced to interrupt or stop their education. Normally, German or English language skills are essential, but the program is working on a way to advise students in Ukrainian. This is a good option for refugees seeking to begin or continue their studies. Also, the Twitter account Science for Ukraine (@Sci_for_Ukraine) is collecting information about practical support provided by the global research community to Ukrainian researchers and students. This support covers all fields, not just economics. Other ways to engage Donations are not the only way to assist the humanitarian situation in Ukraine. Taking part in demonstrations or otherwise pressuring your lawmakers at home to take action will help change the dynamics of the conflict. Readers in Europe can even consider opening their homes via Airbnb, since the company has promised to host up to 100,000 refugees without charge. Finally, be alert of misinformation and do not mistake the actions of those in power as necessarily representing the will of the people. Misinformation is a common tactic used to drum up support or paint conflict in a good light, but there is nothing good about unnecessary armed conflict. Moreover, many Russian citizens have been protesting against the invasion in displays of solidarity, and many or most Russian people, both within Russia and internationally, are likely as concerned at recent events as you are. If you have additional information about helping people affected by the conflict in Ukraine, please email us at ua-help@inomics.com.
A historic tragedy like the war in Ukraine calls for historic measures of outreach and solidarity. There is an urgent demand for humanitarian aid and safe passage for the hundreds of thousands of refugees already created by the war. This includes thousands of students at Ukranian universities who have had to flee the conflict.
Economic Development, Innovation and Growth (JEL O)
Urban, Rural and Transportation Economics (JEL R)
Econometrics, Statistics and Quantitative Methods (JEL C)
Agricultural and Environmental Economics (JEL Q)
10 Qualities That Define A Good Economist
There are lots of skills that come with being an economist, some more important than others. Obviously, being able to sift through dense theoretical and scientific papers and acquire the information you need is one of the top skills an economist - and academics in general - should have. Seeing as you'll spend so much of your time reading, it's essential to be good at it. But there are other skills, both soft and hard, that are essential to your career as a successful economist. Read on for the ten we at INOMICS think are the most important. Remember, if you think you're a little weak in one area, there's always room to improve through courses (INOMICS may be able to help you here), persistence, and surrounding yourself with other successful people who have expertise in areas you do not. 1. Mathematical aptitude Numeracy is a key skill for an economist. From dealing with large datasets to interpreting visual data like graphs, you'll need to be comfortable handling numbers and working with mathematical principles. This is why many economists take preparatory classes in mathematics before beginning work or study in economics. 2. Knowledge of social sciences Economics also has a lot of common ground with other social science subjects like psychology, history, and sociology. Thus, having a working knowledge of these subjects and the methods used in them is highly beneficial. In recent years, economics and the other social sciences have become ever more interdisciplinary, meaning an understanding of these subjects is not only desirable but increasingly essential if you're to keep up to date on economic theory. Knowing a little about other, related areas will also benefit you in life in general; a bit of history knowledge gives people something else to ask you about at dinner parties, other than inflation rates or the stock market. 3. Good at understanding complex systems The unavoidable fact is that economics is a complicated subject which looks at complex and intertwined systems. To excel, you'll need to be able to pull together information from different sources and different fields to inform your theories. You’ll need to be comfortable examining data to look for trends and possible causations of a complex problem. Learning these skills requires time, effort, and a little patience. Like we mentioned before, it also entails reading a lot in order to get yourself up to speed with the latest developments in theory. 4. Curious In order to be successful as a student, professor, or researcher, you need to be interested in and engaged with your subject, so having a strong sense of curiosity will serve you well. What is unknown or unclear in your field? How do insights from other fields affect the understanding of your subject? What topics are up for debate, and what are the arguments on each side? Answering these questions is a great way to direct your focus and discover new areas of research or discovery to be had. 5. Independent thinker While curiosity will help you gain knowledge of other people's work and theories, to be truly successful as an economist you also need to have insights and ideas of your own. The ability to think for yourself and to question what you know will allow you to take new directions and to come up with original research which will make you a better economist. Being an independent thinker will also benefit you at conferences, seminars and lectures. It's engaging to have a controversial opinion shared, or at least to play the devil's advocate, as it facilitates discussion and encourages deeper thinking. Many things which are taken as common knowledge, or came to pass, were once derided as foolish and clearly wrong. Just ask economist Nouriel Roubini, who predicted the economic crisis of 2007-2008. 6. Comfortable with uncertainty You will need to be comfortable with uncertainty, as not every question in this field has a clear and unambiguous answer. Economics is good at throwing curveballs and doing things you hadn't predicted or expected. It also has the difficult characteristic of being one of those subjects in which there's rarely a 'right' or 'wrong' answer - many things are still being debated, and all is to play for. This can be a scary thought when going in, knowing that there will be people who disagree with you all the way down to your most fundamental assumptions. But this also means the discipline is varied and exciting - the curious and those who question everything shall be rewarded. 7. Writing skills It's no good having a great understanding of economics unless you can communicate that understanding to other people in a way which is meaningful. Good writing skills are essential for making sure that your articles, book chapters, and notes are useful and comprehensible to others. Unfortunately, in modern academia much writing is incomprehensible, made up of what linguist Steven Pinker calls 'academese', or the language of academics. Remember, simpler is always better, never use a long word where a short word will do, and remove any superfluous 'that's whenever you get the opportunity. (Read George Orwell for more on this). For any piece of writing, keeping its purpose and your audience in mind will help you determine how much jargon is appropriate. 8. Verbal communication skills Besides writing well, you'll also need to be an effective presenter so that you can speak at conferences and teach classes. You should be comfortable speaking in front of an audience and able to convey the essential points of your subject clearly and concisely. If you do this, and manage to become a clear and commanding speaker, people will take you more seriously and actually listen to you; there's nothing more disappointing than having a speaker whose ideas are brilliant but delivered in an underwhelming fashion. These skills also help with other social situations like job interviews, speaking to the media, or making contacts to build up your network at conferences and other events. These skills and contacts will be helpful in the future when you finally need to spread your work. 9. Open minded Fact-driven debate, and updating older views or models based on empirical evidence, are key means by which economics continues to evolve. A debate with a colleague can be a highly instructive experience, but only if you are open to hearing their views and to adjusting your own opinions where necessary. Depending on how the debate goes, you could have your opinion changed and be brought about to a new way of thinking, or you could successfully reinforce your own ideas - linking back to the idea of being an independent thinker. Thus, for success in economics (or any academic field), you need to be open-minded. It's important that you are open to new ideas and do not become too set in your perspective. You need to be able to hear the views of others and to engage productively with them even if you disagree with their reasoning. 10. Self-motivated Economists, particularly academic economists, need to be able to motivate themselves. From postgraduate studies onwards you will be expected to manage your own time and set your own priorities, so you need the drive and motivation to complete tasks without anyone else checking or supporting you. Of course, this is increasingly true from the Bachelor's level up; being self-motivated and able to get your work done will help enormously when slogging through long hours of theses, dissertations and PhDs. Remember though, that while it's important to be disciplined in work, don't forget to take time to yourself to unwind, relax, and refresh your mind for the next day.
Having helped so many economists take their next career step, we at INOMICS know full well how rewarding working in economics can be. When you find that solution you've been looking for, or contribute some research that actually seems to get read and make a difference, it can be the best feeling in the world. But this won't happen unless you work on yourself and the skills that are essential for becoming a successful economist in general.
No matter what type of economist you are, whether you’re an industry economist, a government economist, or an academic economist, you have to be getting inspiration at least sometimes to grow as a person and to excel in your field. It is what helps us come up with new ideas and motivates us to get out of bed in the morning and start working. For an academic economist specifically, inspiration plays a key role in your career. It is one of the most important main ingredients to your success as a researcher. From coming up with ideas and finding a research gap, to methodological analysis and writing style, inspiration is crucial every step of the way. Unfortunately, we all feel uninspired at times. The good news is that’s a natural part of the cognitive process that everyone struggles with. If you’re currently stuck in a slump, here is a list of 6 things you can do to get inspired again: 1. Wake up early Believe it or not, there’s something truly magical about the early morning. If you’ve ever woken up around sunrise, you would know that’s true. There’s something about the early hours of the day that give off positive vibes of absolute serenity, tranquility, and clarity of mind. During that time, your focus and energy are at their max. So use those hours wisely to think clearly, get creative, and find inspiration. 2. Get some alone time Being out in the hustle and bustle of everyday life, it’s easy to get lost in the noise and lose your focus and any form of inner thought that inspires you. This is why it’s important to disconnect for a while and spend some quiet time in solitude. See where your thoughts take you. Ponder. Give yourself some space for contemplation, and perhaps reflect on everything you’ve learned and accomplished and how you’ve made a positive difference in the world. Take a mental break to allow yourself to refocus. Write in a journal. Digging into your own mental processes can provide unexpected sources of inspiration. 3. Explore other fields; immerse yourself in learning something new Inspiration is not always going to fall upon you out of the blue. Sometimes you just need to break your old thinking patterns, and get a fresh new perspective. The easiest way to do this is by reading about something new! This is particularly good advice for economists working in academia or the research field. If you are trying to find inspiration for a new idea or trying to find a research gap, try reading about a new topic that is unrelated to your field. In order to think outside of the box you have to start getting into other, newer boxes! This will inspire your mind to think creatively, and you’ll more easily come up with new ideas or find a research gap. 4. Find a productive atmosphere, or create your own The modern age makes it easy for us to lose sight of what’s important. Especially with the rise of social media, a lot of people find that they struggle with scattered attention. This leaves many of our minds filled with shallower thoughts, leaving no space for the deep thinking that would otherwise be our source of inspiration. With your attention constantly exposed to superficial issues and distractions such as celebrity news alerts, smartphone notifications, and our preferred social media platforms, it is easy to lose focus. This often extends outside of social media and into our real lives too. Try to regain your focus and concentration perhaps by spending some time in a productive, enlightening atmosphere that becomes your go-to place for inspiration. This could be a library for instance, or any place where your mind can unwind and filter out everyday thought, allowing you to refocus and be purposeful and intentional with your time. 5. Explore some textbooks! For all the economics researchers out there, if you’re struggling to find the spark that will fuel your next research project, reading some textbooks is a great way to start! Needless to say, textbooks are a great source of information that simplify the roots of many concepts. This makes it easier for you to find a research gap, or to find your spark of inspiration. Reading through a few textbooks will help your mind spot some unique connections between certain subtopics, or in other words, identify a new relationship to be tested; and that could form your next research topic! 6. Don’t give up on yourself when you can’t seem to get inspired When you’re feeling sluggish or not in the right mood, it’s easy to start seeing yourself as a person who is incompetent and not at all skilled at what you do. That’s not necessarily true! Realize that there are some times in life when you won’t really feel inspired, and that’s absolutely normal. It’s alright to feel dull sometimes. Nobody is constantly productive and constantly being inspired with good ideas 100 percent of the time. So, remember that it’s okay to let your mind shut off for a while and just relax. You can be brought out of your stagnation phase under just the right conditions!
In a culture obsessed with measuring capabilities and results, we often overlook the important role of inspiration. As economists, inspiration awakens us to new possibilities within ourselves, allowing us to conquer our own limitations, and to succeed at doing what we do.
Breaking down this definition yields four key aspects to understanding how GDP is defined and measured: Market value: Goods are valued at their market prices. Non‐market activities like leisure, unpaid work (e.g. housework, childcare, etc.), and black market or illegal activities do not contribute to GDP. Final goods and services: GDP is the aggregate value of final goods and services intended for the end user. Intermediate goods and services used by other firms as inputs in production (i.e, fabric used to make a sweater) do not contribute to GDP. Currently produced in a given period: GDP only includes goods and services produced during the indicated time period, normally a year. Sales of goods that had been produced in the past do not contribute to GDP. Some countries also calculate quarterly GDP data. Within a country: GDP measures the value of goods and services produced within a country’s borders, whether by its own citizens or by foreigners located there. Calculating GDP GDP can be calculated using three alternative methods: the production, income, or expenditure approach. All three approaches should give the same result when calculated correctly. The circular flow diagram displayed below provides a simple model to illustrate the relationship between the three approaches. In this diagram, households own the factors of production that are supplied to firms in the production process, and earn the returns on these (factor markets). Firms use the production factors to produce goods and services, which households purchase for consumption (product market). In equilibrium, it holds that: production = income = expenditure. Figure 1: Circular flow diagram for calculating GDP As an example, imagine an economy with two companies that produce two goods: steel and cars. Steel is used as an intermediate good in the production of cars. In a given year, economic activity in the economy has been as follows: Steel Company Car Company Revenue from sales €100 Revenue from sales €250 -Expenses (wages) €80 -Expenses (wages) €70 -Expenses (steel) €100 Profit €20 Profit €80 What would be the GDP of this economy? 1. Production approach: The production approach aggregates the market value of all final goods and services. It is the sum of the “value added” (total sales minus the value of intermediate inputs) at each stage of production. Measuring value added at each stage of production avoids “double-counting” the contribution of intermediate goods. Following the production approach, GDP in our example economy is calculated as the value of steel produced, plus the value of cars produced, minus the value of intermediate goods used in production, so GDP = €100 + (€250 - €100) = €250. Note that if we had calculated GDP as the total value of all steel and cars produced (€100 + €250 = €350), then the value of steel would have been counted twice, as it is embodied in the value of cars. 2. Income approach: The income approach calculates value added as the income earned by the factors of production in the economy. Three core components enter into the calculation. The first and main component is domestic income, which is defined as: Domestic income = wages (income for labor) + rent (income for land) + interest (income for capital) + profits (income for firms) The second component of the income approach adds government taxes minus subsidies, to account for their effect on factor returns. The third component is depreciation, which reflects the decrease in the value of capital that results from its use. In our example economy, there are two sources of income: wages and profits. The production of steel generated wage earnings of €80 and firm profits of €20. The further processing to the final cars provided additional wage earnings of €70 and generated profits of €80. We thus have GDP = wages + profits = (€80 + €70) + (€20 + €80) = €250, which matches the value calculated using the production approach. Now, let’s assume this economy has a tax that earns the government €10 from the businesses’ operations. Let’s also assume we had €10 worth of depreciation for each business in the period. Then, the final calculation would be GDP = wages + profits + tax income + depreciation = (€80 + €70) + (€0 + €60) + €20 (tax income from each business) + €20 (depreciation from each business) = €250. 3. Expenditure approach: The expenditure approach is the most commonly used method to calculate GDP. It calculates the total domestic expenditure using the following formula (the same as for aggregate demand): GDP = C + I + G + (X – M) = C + I + G + NX, where C = Consumption (expenditure by households on consuming goods and services) I = Investment (expenditure on capital goods and additions to inventories) G = Government spending (government consumption expenditure and gross investment) NX = Net exports (value of exports, X, minus value of imports, M) The extended five-sector circular flow diagram displayed below illustrates the logic underlying the calculation. In this diagram, households do not spend all income on consumption expenditures, but also save money, pay government taxes, and purchase goods or services from abroad. Savings are reinjected into the economy as investment, taxes finance government spending, and products or services not sold domestically are being exported. Figure 2: Illustrating the expenditure approach for calculating GDP GDP vs. GNP As the term “Domestic” (in Gross Domestic Product) indicates, the inclusion criterion for the calculation of GDP is defined in geographic terms: It is the market value of all final goods and services produced within a country’s borders, regardless of the nationality of the producer. In contrast, the Gross “National” Product, GNP, defines the inclusion criterion based on nationality: It is the market value of all final goods and services produced by nationals of the country, regardless of whether the production occurred within or outside of the country’s borders. The relationship between GDP and GNP is thus defined as: GNP = GDP + income earned by citizens from working or investing overseas − income earned by foreign nationals in the domestic economy Nominal vs. real GDP and GDP growth rate Nominal GDP measures the value of production in current prices; that is, the prices that were realized in the economy during the period in which the output was produced. If prices increased from one period to the next while output remained unchanged, the nominal GDP would rise even though production remained constant. To improve comparability and provide a better basis for evaluating the performance of an economy over time, economists prefer calculating the ‘real’ value of GDP. Real GDP adjusts the value of output for inflation or deflation according to a defined base year, such that changes over time can be fully attributed to shifts in the quantity of production. If prices change from one period to the next but actual output does not, real GDP remains the same. The GDP growth rate is calculated as the percentage change in real GDP from one period to the next. Positive values indicate economic growth, while negative values indicate a contraction. As an example, imagine an economy that produces two final goods (A and B) at two points in time. The realized prices (P) and quantities (Q) are as follows: 2018 2019 P Q P Q Good A €80 10 €80 15 Good B €20 40 €22 40 Nominal GDP: Using the production approach, we can calculate the nominal GDP for each period t, GDPt, as the market value of all N final goods produced in the economy. This is: GDPt = P1tQ1t + P2tQ2t + … + PNtQNt. In our example, this would be: GDP2018 = €80 * 10 + €20 * 40 = €1,600, and GDP2019 = €80 * 15 + €22 * 40 = €2,080. Real GDP: However, a direct comparison of the two values may be misleading. From 2018 to 2019, we observe both an increase in the quantity of production of Good A, and an increase in the price for Good B. To assess how economic performance has changed, we may want to adjust for the price change by calculating the real GDP in period t, GDPt. It is derived as the value of the production in t at constant prices of the base year, t0. This is: realGDPt = P1t0Q1t + P2t0Q2t + … + PNt0QNt. In our example, this would be: realGDP2018 = €80 * 10 + €20 * 40 = €1,600 and realGDP2019 = €80 * 15 + €20 * 40 = €2,000. GDP Deflator: The ratio between nominal GDP and real GDP gives the GDP deflator. The GDP deflator shows how, on average, prices for all goods and services produced in an economy change over time and can be used as a measure of inflation. A full discussion of the GDP deflator is included in that article. Growth rate: Based on the real GDP value, we can then calculate the GDP growth rate between two points in time, t-1 and t, as: \begin{equation*} \text{growth}_t= \frac{(\text{realGDP}_t-\text{realGDP}_{t-1})}{\text{realGDP}_{t-1}}. \end{equation*} In our example, this would be: \begin{equation*} \text{growth}_{2019} = \frac{(\text{realGDP}_{2019}-\text{realGDP}_{2018})}{\text{realGDP}_{2018}} = \frac{(2,000 - 1,600)}{1,600} = 0.25 = 25\%. \end{equation*} GDP per capita Beyond the absolute value of GDP measuring total economic activity, economists are also interested in the average value of production (or income) generated per person in a country. Therefore, GDP per capita is calculated by dividing a country’s GDP by the total population of that country. Even though this is a rough approximation for the standard of living in that country—which is influenced by many other factors—it does give an indication of whether the country is materially better or worse off compared to others. Good to know Besides income, a society’s standard of living will be influenced by other factors that are not directly reflected in the calculation of GDP, such as levels of health, education, and environmental quality. Moreover, being calculated as an average value, GDP per capita does not account for the distribution of income in the country. To draw conclusions about the standard of living in a country and its development, it is useful to consider further metrics in addition to GDP, like the Gini index as a measure of inequality and the human development index (HDI). Test whether you understood the concept of GDP... Exercises for you <use xlink:href="/themes/custom/venice/images/icons.svg#launch-18px"></use>
What is the size of a nation’s overall economy? Is it growing or shrinking? And what sectors are driving these changes? Gross Domestic Product (GDP) is the most commonly used measure of economic activity that provides answers to these questions. It gives the market value of all final goods and services currently produced within a country’s borders during a given time period.
Its defining feature lies in the assumption that production, rather than demand, is the primary factor in creating and sustaining economic growth. To that end, its proponents advocate the lowering of taxes and removal of regulation. Less taxation, they claim, means more profits for businesses. Then, freed of red-tape and compelled by self interest, those businesses can reinvest their increased earnings to generate a larger supply of goods and jobs. It’s thus that the economy grows - tax cuts pay for themselves. Redistributing wealth by this means, creating circumstances advantageous for businesses and allowing wealth to 'trickle down', is thought meritocratic, ensuring an equity and efficiency that state intervention simply cannot match. Such conviction places it in direct opposition to Keynesianism, which, anticipating fluctuations of aggregate demand and inefficiencies in the market economy, prescribes an active government that intervenes in economic activity using fiscal and monetary stimuli to help manage moments of instability. <11an>limit:2;categories:jobs|courses|conferences|Professor;disciplines:Economic Systems (JEL P)|Economic Development, Innovation and Growth (JEL O)</11an> Reaganomics and the emergence of supply-side Keynesianism served as the standard economic model from the Great Depression onwards. But, its appeal began to fade in the 1970s, as it struggled to arrest the declining growth and rising inflation - known as stagflation - that plagued many advanced economies. Sensing an opportunity, neoliberals stepped in, pushing supply-side principles as the antidote. Most famously, the new theory became the bedrock of ‘Reaganomics’ - the economic policy pursued by the United States' first celebrity president - and since then, it’s remained highly favored, despite being shrouded in controversy. As journalist Bill Flax has described, ‘the notion that tax cuts increase tax receipts circled the globe, and was ultimately tried in such previously unimaginable locales as Euroland, Russia, India and China’. Its theoretical underpinnings and apparent authority derive from the infamous ‘Laffer Curve’, a graph accredited to conservative economist Arthur Laffer. Laffer’s legend began in 1974, at a late-afternoon meeting at the Two Continents Restaurant in Washington. He had been summoned by senior government advisers Donald Rumsfeld and Dick Cheney, and was protesting President Ford’s proposed tax increase that aimed to check the spiraling deficit. It was there, under the expectant gaze of these two Republican stalwarts, that he (allegedly) first sketched his economic vision, quite literally, on a napkin. With just a few strokes of his pen on a crumpled, coffee-stained serviette his curve came to life and the complexities of the tax system were distilled into one small graph. Despite its inevitable imprecision – the setting did not lend itself to mathematical theorizing – his company was impressed, Cheney, especially, readily converted. And with their endorsement, Ford’s proposals were reversed and the theory was assimilated into the Republican Party policy-making machine. By the time of Reagan, it had become its economic orthodoxy. The curve professes to plot the relationship between levels of taxation and government revenue. At one end, where the tax rate is 0%, revenue is zero. No surprise there. At the other, where the tax rate is 100%, the revenue is also zero - for people are presumed not to work without take-home pay. The interesting bit is the inverted U in the middle. Somewhere on the continuum, Laffer argues the existence of a ‘tipping point’, where the incentive to work and invest quickly decreases once tax rates cross this threshold. Explaining his already rather simple model, Laffer declared, ‘tax something, and you get less of it. Tax something less, and you get more of it’. As an actual tool, the curve is more theoretical than practical. Its claim of where the tipping point lies is non-specific, a vagueness that’s been one of its greatest utilities. In the hands of a government intent on tax cutting, the tipping point can easily be adjusted to ‘justify’ cuts, and prove that any loss in reduced tax revenue will be offset by an increase in growth. Big business was immediately taken by the idea, sensing how much it stood to benefit from the curve’s ‘versatility’. Persistent Republican loyalty, on the other hand, is harder to explain, existing in the face of mounting evidence suggesting the curve’s ineffectiveness. Whether a genuine belief in its efficacy or a cynical intellectual cover for vested interests, its motivation is a hard one to discern. Repeated failure Indeed, the evidence of supply-side economics' failings is persuasive: US tax cuts in the last 40 years have not been self-financing as promised. Reagan’s cuts, deep as they were, resulted in ballooning national debt, and although the economy grew in the mid-80s as it recovered from recession, there was little to no sustained economic improvement for most Americans. Instead, wealth concentrated at the top and inequality grew. By the end of his government, and after almost a decade of his economic policy, middle-class incomes were the same as they had been 10 years before; poverty rates had actually risen; and there had been no marked productivity growth. George W. Bush began his presidency in similar fashion introducing big tax cuts for the rich, promising that all would benefit and that wealth would trickle down. Rather than trickling down, however, the dividends flowed upwards, and by 2005, the top 1% had seen their after-tax household income increase by 80% compared with 1979, an increase over 10 times quicker than that experienced by the bottom 25%. As Bush left office some 4 years later, wages were lagging far behind inflation, living standards were stagnating, and employment growth was quickly falling - a stark contrast to the booming Clinton years. The optimism of the 90s had well and truly died. Old dogs, old tricks Obama’s administration made some modest attempts to better balance the tax burden, and estimates suggest the richest 1% paid more in tax in 2013 than they did in 1980. But it didn’t last. Any progress that had been made was quickly reversed, when, in 2017, Trump rolled out sweeping nation-wide tax cuts predicted to cost $6.2 trillion in just 10 years. According to economist Paul Krugman, these included ‘a cut in top individual tax rates; a cut in corporate taxes; and an end to the estate tax’. All, he was convinced, would ‘overwhelmingly benefit the wealthy, mainly the top 1 percent.’ The cuts also added more to the national debt than any other single American tax bill in the past three decades, sparking fears of future cuts to social security and Medicare, on which so many rely. In spite of the majority of economists standing in staunch opposition, supply-side economics remain inexplicably influential, central to the running of the world’s largest economy. And we shouldn’t forget that Trump’s endorsement is no outlying opinion; it's the glue that’s holding the Republicans together. The party that historically has prided itself on its empiricism now seems blind to evidence. Remember, doing the same thing over and over and expecting a different result is said to be a sign of insanity. Which prompts the question: what do they think has changed? With the answer unclear, the charmed life of supply-side continues.
​Supply-side economics. Since its conception in the 1970s, debating its merits – or lack thereof – has been at the heart of political discourse, demarcating Republican from Democrat, Tory loyalist from Labour devotee, and informing not just an economic outlook, but a world view.
Microeconomics vs Macroeconomics - Which Class Should I Take First?
What's the difference between macroeconomics and microeconomics? Before making any decisions about which classes to take, you need to understand what each subject refers to. Microeconomics is the study of economic systems on a small scale; how economic theories play out when they are applied to an individual, a group, or a company. Macroeconomics, on the other hand, looks at entire markets or economies of countries or the world. Microeconomics would include the study of supply and demand for a particular product, or examination of how a particular piece of legislation would affect an individual business in that area. A classic microeconomics topic is the study of how a single market changes due to monopoly. Macroeconomics, on the other hand, examines how economic theories apply to governments, markets, and international organizations such as NATO in the long run. Examples of the kind of topics studied in macroeconomics would include fiscal and monetary policy, economic development, or the economics of industrial organization and the labor market in a particular region. Both micro- and macroeconomics can deal with similar issues, but on different levels. Consider, for example, the cost of living in a particular area, and its relation to inflation. This is related to microeconomics – because it's about how much people have to spend on housing, food, entertainment and so on – and can therefore be described on the individual level. But it's also an important topic in macroeconomics, as inflation is affected by things like interest rates, which are, in part at least, set by the state. It can therefore also be analyzed on the national level as a subject of macroeconomics. The relevance of microeconomics and macroeconomics to economics in general<o:p></o:p> The two fields are often connected then: investigating the microeconomic parts of something often reveals important clues about the macroeconomics, and vice versa. One rough way of thinking about this is that microeconomics is 'bottom up', looking at how individual choices affect economic systems, while macroeconomics is 'top down', looking at how economic systems affect the people living within them. The complementary nature of the subjects is especially prevalent in discussions about creating macroeconomic models that have “microeconomic foundations”, one of the ongoing discussions in that field to this day. As an illustration: to understand a complex issue such as how a state should adjust interest rates, you need to understand supply, demand, and how people make economic decisions. This would be microeconomics. Then you need to understand how these principles apply to monetary systems and the financial market, which would be macroeconomics. Another difference between the two is that in microeconomics, there is little in terms of competing schools of thought; that is to say, economists generally agree on the principles. This is largely due to agreement on how to model human behavior- as fully rational individuals maximizing their own utility- which reduces many economics problems to a mathematical optimization. However, some fields of economics- like behavioral economics- study what happens when we relax that assumption. Meanwhile, the tenets and models of macroeconomics are much more widely debated. There is consensus on many aspects of the field, but the incredible complexity of macroeconomics, and the drive to include more “micro” foundations in “macro” models, means the field is more dynamic. This is especially true in terms of forecasting. Thus, macroeconomics can be a more challenging, and perhaps more intellectually stimulating, area of study. Should you take microeconomics or macroeconomics first?<o:p></o:p> Taking into account all of the above, most economics students are better off studying microeconomics first, and then progressing on to macroeconomics. That way, the principles of economics can be learned on an individual level, before being applied to the wider society and world. However, some would argue the principles of economics are better understood if first seen in practice – as in, first one must understand the financial system in order to make any sense of economics as a topic. These people would argue it can be helpful to study macroeconomics before microeconomics. Your university may also roll both subjects into one unit such as an Introduction to Economics course, removing any need, on your part, to make a choice at all. In all likelihood, any of these options will allow you to learn what you need to progress in your studies, but in general, most students will opt to begin with microeconomics first. And in most cases, it is the safest bet. A final point would be that the math used between the two fields varies, especially at the earlier stages of academic life. Microeconomics makes heavy use of optimization problems and some game theory, for example using derivatives to maximize utility or minimize loss. Macroeconomics places a much larger emphasis on analyzing growth rates and production function equations like Cobb-Douglas. This can take some getting used to as it is less immediately transferable from calculus class. In the end, if you're planning on taking both it may be worth studying microeconomics initially. However, if you're only planning on taking one of the two – which is a rather unusual position to be in – pick whichever you find more interesting.
When you're just beginning your economics degree, you'll quickly come across two very important branches – microeconomics and macroeconomics. It's highly likely that you'll study both at some point during your degree, as they are two of the foundational planks of the subject. It is also likely, however, that you will have to choose which to take first, prompting the question: which is the best theoretical starting point for your studies? Having just started out, this can be a tough question to answer. That's why we're going to give you a little run down of each, to help you make the most informed decision possible. So let's begin.
Moral hazard in insurance Insurance coverage is a standard example of a moral hazard situation. By covering the damage in case of negative events like fire, theft, car accidents, or sickness, insurance companies may be concerned that they are unintentionally encouraging their clients to engage in more risky behavior. For example, without dental health insurance, you may take extra time each day to floss and brush your teeth to prevent the cost of dentures and orthodontic treatment. However, if these costs are covered, you may exert less care. While the insurance company cannot observe your daily dental hygiene, it may charge a deductible payment to make you internalize costs and reduce your risky behavior. Importantly, moral hazard arises from a lack of shared information concerning the agent’s risky behavior. In this, it differs from the problem of adverse selection, which may occur in similar settings when information about the agent is unobservable. For example, a life insurance policy may attract clients with more serious health risks (adverse selection) but may also cause those covered to start engaging in more risky behavior (moral hazard). Similarly, theft insurance may attract clients living in neighborhoods with higher crime rates (adverse selection) but may also cause those covered to put less effort into reducing security risks, for example by leaving their doors unlocked (moral hazard). Deductibles are a common mechanism to resolve the moral hazard problem in the insurance industry. To illustrate this, consider the following example: Mr. Smith has bought an expensive racing horse worth 1 million Euro. Installing a gate and door alarm at the horse stable would cost x Euro, but it would reduce the risk of theft of the horse by 5%. How does this affect Mr. Smith’s choices under different scenarios, assuming that Mr. Smith is risk neutral (i.e. Mr. Smith focuses on the expected monetary value of his choice)? 1. No insurance: Without insurance, installing the alarm system pays off for Mr. Smith in expected terms if x < 50,000 (5% of 1 million). 2. Full insurance without co-payment: If the insurance company reimburses the full value of the stolen horse, independent of whether an alarm system had been installed (assume this information is not verifiable by the insurance company), Mr. Smith has no incentive to incur any extra security cost x > 0. 3. Insurance with deductible: If the insurance company decides to charge a deductible of 10%, Mr. Smith incurs a loss of 100,000 Euro (10% of 1 million) in the event the horse gets stolen. Being risk neutral, he would be willing to install the alarm system to reduce the likelihood of this event by 5% if x < 5,000 (5% of 100,000). In the above example, Mr. Smith is still willing to pay for an alarm when he gets insurance, but less than he would otherwise. As the amount of insurance coverage increases, Mr. Smith’s willingness to pay for an alarm decreases. Principal-agent problem Another common example of a moral hazard situation is the principal-agent problem. Here one party (the ‘agent’), who has superior knowledge, acts on behalf of another party (the ‘principal’), who has only limited information and no direct control over the agent’s actions. In this setting, the problem of moral hazard arises when the two parties have a conflict of interest, such that the agent has an incentive to take (unobservable or hidden) actions that are in their own, rather than the principal’s, best interest. Principal-agent problems commonly occur in situations where there is a separation of ownership and control- for instance, a shareholder (principal) who owns the assets of a business, and their hired manager (agent) who operates the business. The manager will have a higher incentive to pursue the shareholder’s goal of profit maximization if they benefit from the business’s success, for example via a bonus system. However, if the manager benefits from firm profits but cannot be held liable in case of losses, they may have an incentive to take on excessive business risks or reduce their effort on important tasks. See the following video for a concise explanation of moral hazard and the related asymmetric information and adverse selection topics. Good to know Moral hazard played a central role in the events leading up to the 2007-09 financial crisis. Normally, a bank grants a mortgage with the intention of holding it until maturity. It incurs a loss in the event of default and, therefore, has an incentive to carefully screen potential borrowers. However, if a bank generates a mortgage with the plan of selling it afterwards, this incentive to carefully screen borrowers fades. In the time leading up to the financial crisis, mortgage brokers increasingly granted mortgages to home buyers with low credit scores, known as subprime mortgages. The banks then sold these subprime mortgages packaged with standard ones to other banks. The purchasing banks were left with the bad debt when the housing market leveled off and many subprime mortgage borrowers started to default on their payments. This caused a domino effect of major losses across the financial system, and was a major cause of the Great Recession. Moreover, moral hazard was a central concern regarding potential side effects of interventions taken to ease the crises. The US Federal Reserve Bank stepped in to help some of the largest lending institutions that were on the threshold of bankruptcy during the crisis. When public money is used to bail out private companies that are considered “too big to fail,” this may incentivize those companies to take excessive risks, knowing that they will again be saved by the government in the event of failure in the future.
Moral hazard occurs in situations in which an economic agent chooses how much risk to take, while the potential negative consequences of these risky choices are (partly) borne by another party. The protection from risk is expected to induce the agent to change behavior—taking on excessive risk or exerting less effort to limit damages—thereby leading to suboptimal economic outcomes. The moral hazard problem arises because the risk-bearing party cannot directly monitor the agent’s behavior. It thus requires that there is asymmetric information concerning the agent’s actions.
Consider the graph below depicting two items, A and B, which are substitutes in consumption, i.e. an individual derives utility from both items and makes choices about how much to consume of each item depending on their relative prices. Initially, the consumer can afford up to QA of A or up to QB of B. Depending on the individual’s preferences over items A and B, a series of indifference curves can be plotted. Along each indifference curve, the individual achieves the same degree of utility for the various combinations of items A and B. It is assumed that the individual seeks to maximize utility and that utility increases with consumption. Thus the individual will choose to consume the combination of items A and B at the point where the budget line QBQA is tangential to the indifference curve IC. Here, the individual initially chooses to consume qA of A and qB of B. Figure 1: Illustrating the substitution and income effects from a change in budget Now suppose that the price of item A falls such that if the individual were to devote all income to item A, QA’ of A would be consumed. The new budget line for the individual is QBQA’, a higher level of utility is attainable (indifference curve IC’) and the individual now chooses to consume qA’ of A and qB’ of B, which is the point where QBQA’ is tangential to IC’. Note how the individual’s consumption of item A has increased from qA to qA’, while consumption of item B has decreased from qB to qB’. Because item A has become cheaper, the individual’s overall purchasing power has increased. Were the individual to continue to consume qA of A and qB of B in this new situation, they would have surplus income. Instead, in the grand quest to maximize utility, the individual moves from indifference curve IC to indifference curve IC’ for higher utility. The question remains, how much of the change in consumption from (qA,qB) to (qA’,qB’) is due to the change in the price ratio, and how much of it is due to the change in purchasing power? <11an>limit:3;categories:Master's Programs;disciplines:Economics</11an> To answer this, consider how much of each item the individual would have consumed at the new price ratio but at the original level of utility (i.e. remaining on the original indifference curve IC). This can be worked out by drawing an imaginary budget line parallel to QBQA’ that is tangent to the original indifference curve IC. In the graph, this imaginary budget line is the gray, dotted line. We now see a greater decrease in the consumption of item B, from qB to q–, and a lesser increase in the consumption of item A, from qA to q+. This change in consumption from (qA,qB) to (q+,q–) is attributable purely to the change in the price ratio; it is the substitution effect (also known as the Hicksian substitution effect after the economist John Hicks). Of course, the individual instead moves to the “better” indifference curve IC’ where (qA’,qB’) is consumed. A move from (q+,q–) to (qA’,qB’) is not due to a change in the price ratio. Rather, it is due to the change in the individual’s purchasing power brought about by one of the items becoming cheaper to consume. This is the income effect. Note how the income effect moves in the same direction as the substitution effect for the individual’s consumption of item A, while it does the opposite for the consumption of item B. The individual consumes more of item A both due to it replacing some consumption of item B and having greater purchasing power. However, the individual can also afford more of item B thanks to greater purchasing power, and thus the overall reduction in consumption of item B is dampened. It is conceivable that the income effect dominates the substitution effect and vice versa for different types of items and different individual preferences and indifference curves. Indeed, the shape of the indifference curve is closely related to the cross (or cross-price) elasticity of demand, which describes whether and to what extent items are substitutes or complements in consumption. Further reading For an introductory analysis of substitution and income effects with intuitive explanations, see chapter 8 of Hal Varian’s textbook, “Intermediate Microeconomics: A Modern Approach”. Good to know Understanding substitution and income effects is also useful in the theory of production when the price ratio between inputs changes. Indeed, as technology progresses and machines become cheaper or more efficient in terms of their output, labor becomes a relatively expensive input. Firms may thus seek to replace workers with machines (substitution effect; see also the article on elasticity of substitution). However if the technology has improved then the firms should also be more profitable (income effect) and workers can lobby for the creation of better jobs or higher pay!
When the price ratio between items changes it can induce a change in consumption. There are two reasons for this. First, reducing the relative price of an item makes consumers more likely to purchase it when compared to other options (as long as they are normal goods or inferior goods, not Giffen goods or Veblen goods, which we assume in this article). Second, a consumer can now buy more of the item with the same amount of money. The first part, attributable to the change in the price ratio, is known as the substitution effect. The second part, the change in consumption that is brought about by the change in purchasing power, is known as the income effect.
Job Market Scramble for Economists & Useful Resources for Postdoc Job Search
You can find the latest postdoc jobs in the USA on INOMICS. However, if you do not find a graduate position during the main econ job market recruitment window, do not panic! There are still options for you. <11an>limit:3;categories:PhD Programs;disciplines:Economics;countries:United States</11an> What is the Economics Job Market “Scramble”? At the end of each recruitment cycle there are always a number of post-doc vacancies left unfilled. This is because it is not always possible for institutions to find the right candidate for every position within the standard recruitment window. To help match prospective employers and job candidates, the American Economic Association (AEA) sponsors the Economics Job Market “Scramble” every spring to fill these recruitment gaps. The “Scramble” provides an online platform where candidates and employers can advertise their availability for new offers. Candidates can participate for free but must fill in an online profile and have all required documentation ready before registration. The Economics Job Market “Scramble” is only available for candidates who have not yet accepted a job offer, or employers with unfilled positions. If you have received a job offer but you have not accepted, then you can still participate in the “Scramble”. Nevertheless, consult with your adviser before joining. The next “Scramble” will begin in March 2022. More information about the AEA Job Market “Scramble” can be found on their website. Other Job Advice Resources for Economists With no in-person job interviews at the annual ASSA meeting due to COVID, online resources have never been more important to your econ job search. INOMICS has new job openings for economists posted online every week. Remember to subscribe to the INOMICS Email Alert to receive the latest jobs, training courses and conferences. We also have advice articles on writing an academic cover letter. There are plenty of other resources online that give you an introduction to the job market, preparation tips and statistics. A generous collection of resources is available on the website of the Harvard University Department of Economics. If you prefer empirical evidence rather than opinions and descriptions, have a look at The Job Market for New Economists: A Market Design Perspective. This is written by members of the AEA and presents statistics illustrating the formal US job market for economists. Even though the paper is from 2010, it gives a nice overview of the whole process. Finally, in Useful Resources for the Academic Job Market (free signup required), Ryan Cordell provides a fantastic list of articles and blog posts. Although not discipline-specific, the collection of resources is absolutely relevant and useful for young candidates in the econ job market.
The job market for economics postdoc jobs in the United States is highly seasonal. The primary recruitment phase for post-doc positions closes every year in February or March. It is therefore best to plan your econ job search early and apply well in advance of the deadline.
What kind of teacher do you want to be? Early on as an economics TA, whether inadvertently or by design you will establish what kind of teacher you are. Will your teaching style resemble that of a coach, an instructor or a taskmaster? And will you aim for an informal, friendly relationship with students or will you establish yourself an authority figure with a degree of professional distance? All this hinges on the choices you make and the actions you take during your first few weeks. Your classes are likely to consist of small groups of people of a similar age with similar interests, albeit a few years behind you in their education. If you are new to the university or city, and on the lookout for new friends, this might seem an obvious place to look. But depending on your character, that of the students, and your combined ability to separate work from fun, this may lead to awkwardness, or be considered inappropriate by others in your faculty. Indeed, while being friendly with your students can help foster a level of trust and openness that may make you a very effective teacher, be aware of the need, sometimes, for distance. Ultimately as a TA you are in a position of authority, perhaps in terms of age and certainly in terms of subject knowledge and professional position. Your ability to criticise a student’s work or work-ethic will be compromised if you know you will be at the same dinner party in the evening. Or not - but in preparing to start your TA role and in those first few weeks, be aware of the type of relationship you will have with students, the potential pitfalls of this, and try to work out to what extent you want to maintain a distance to your students. Be prepared A common motto not only for scouts, but for many people in many areas of life. But as an economics higher level teaching assistant it is especially important to be prepared. Despite your undoubtedly high level of competence, you are not (yet) an experienced lecturer who can convey complex economic theories in their sleep. Indeed, it may even be the first time you have had to explain an Edgeworth Box or a Gini Coefficient since your second year student midterms. Make sure you give yourself plenty of time to (re-) familiarise yourself with the concepts, and try to anticipate where students will struggle. Remember though, that whilst your prior experience and learning may be very different from others, you can use your own learning experience as an economics student to help inform your own explanation, exercise, or game to help your students. It is often helpful, before the class, to spend some time writing out an explicit plan for how you intend to approach the class. This plan may change during the teaching session, but the very process of planning gives you the opportunity to try to anticipate where students may experience stumbling blocks. And when (not if, when) you come across a topic in class or are asked a question that you are not sure about, do not blag the answer. Just because you are wearing a teacher’s hat does not mean that you are the source of all wisdom, and you will actually appear much more competent by admitting that you do not know something. Indeed, you can use what might have been an awkward moment as an opportunity to highlight reference tools or resources that help you, and by extension your students, fill the gap in your knowledge. It is also a good idea to think beforehand about how to react to a silent class. Do you single people out? This is kind of mean if they genuinely don’t know, and they might resent you. Or do you simply continue to lecture? This implies that it is okay if they do not answer - look forward to more awkward silences, a passive learning environment, and no-one doing the work you set. Or do you give the answer while gently mocking them for not listening / being hungover? In this case it is important to get the tone right, and to get across that their being prepared and contributing in class is the most effective way for them to actually learn. You will be neither the first nor the last teacher to experience students not responding to a perfectly reasonable question. Do not take it personally, but do have a plan how to deal with it without getting flustered. Don’t trip over the tech Tech issues are the bane of many a teacher and lecturer, and so it’s important to be able to think on your feet if you have any problems with presentations or related technology. If possible, visit the classroom before your first class to familiarise yourself with the multimedia and tech options available. And always have a backup plan. Learn names Learning the names of the students in your class shows that you’re engaged and interested. It may take some time, but it is worth it. Students will feel valued when they feel you have noticed them. Tools like a photo roster or name badges for the first few classes might seem juvenile, but they can also act as an icebreaker and help you avoid the awkwardness of calling someone by the wrong name. Teach. Don’t present. Teaching economics at university is not the same as making a presentation on an economics topic. Yes, you might use some slides on the wall to illustrate a point. Yes, a good lesson has a structure with an introduction, middle and conclusion. But a tutorial that relies on a series of slides is not only boring, it also fails to convey the subject matter in a way that actually helps students to learn. Even a classic lecture in front of a large audience should include moments for consideration and a connection to texts or exercises that students encounter before and after the class itself. As a TA in a seminar setting, you have a lot more opportunity to interact directly with students and include exercises, games and individual feedback that vastly improve the learning experience that can be gained from a thirty minute slideshow. One presentation skill that applies to teachers in the classroom, however, is not to turn your back to the class. Whether to write on the board, demonstrate something on a computer, or refer to a graph, practice your standing position so that you can act as a bridge between the students and the intended point of focus. Stand at the side, and keep an open line of sight between your class, yourself and your board. It can also be useful to periodically stop and check with students that they have understood and are paying attention, for example by asking a question or breaking up the lesson and changing the pace with a short activity or discussion round. Ask for help when you need it! If you feel that your teaching is uninspiring, tap into the vast experience within the economics department. Some departments have dedicated support staff. Or speak to the professor or course instructor for the course that you’re teaching, or ask other professors or TAs for advice. Perhaps you can even sit in on one of their seminars. Chances are that most lecturers once worked as economics TAs too, and many will be able to share their own relevant experiences. Find your teaching groove A few weeks in, you will have established your teaching style and role. You will be consistently well-prepared on the subject matter and have built confidence handling awkward moments in the classroom. You will have had some good lessons and some poor ones, and as an intelligent, self-reflecting individual you will be learning from your experiences. You will be in the process of establishing a support network among colleagues, and you will be well on the way to establishing yourself as a competent economics teaching assistant. The next stage will be to bring your own interest and innovation. Try bringing your own research and topics of interest into your lessons, when relevant for the class. Not only are you more genuinely an expert on the subject matter, but your students will gain, perhaps for the first time, insight into a “real” economist (yes, you) and the work that you do. Teaching economics to students as a TA can be insightful and rewarding as you watch your pupils progress. The experience will force you to be introspective about your own approaches to economics topics, both in the process of revising and preparing your lessons, and by interacting with the often highly intelligent young economists, for whom you, of all people, might turn out to be an inspiration.
Being a Teaching Assistant (TA) at a university is rewarding, but also tough, particularly when you’re just starting out and learning the ropes. Perhaps you might appreciate some guidance - roll on INOMICS top tips for econ TAs who are preparing for their first role. Oh, and congratulations by the way!
The Pros and Cons of a Career in Research
Travel and relocation One big difference between a career in research and most other fields is the expectation of relocation. The first step for a Master's student or PhD who wants a career in research is to find a position at a university in a town, city or country where they are willing to relocate. It is typical for researchers to move to a new city or country every few years, particularly when pursuing postdoc positions. This is the natural consequence of there not being very many jobs to go around. Pro: Moving around does have its advantages - it is a unique opportunity to travel to new places and experience life in different countries and cultures. One can meet new people and obtain contacts, both of which are extremely rewarding. Furthermore, moving offers the valuable experience of working at various institutions, which can give insight into how cultures vary across universities. Being part of an institution like a university provides you a pre-existing network to explore, both professionally and socially, which can make settling down in a new region or country a whole lot easier. Con: Arranging an international relocation is a lot of work, and it can be hard to make new friends and create a social circle in a new city. Moreover, relocating can be stressful on the mind, causing some to struggle, so having adequate support for a move is essential. Particularly for those with families, relocation may be demanding for other reasons- your partner may also need a job in your new city and new schools need to be found for children, which can be a challenge. If your partner is also in research, some institutions offer dual career programs which help find research positions for both members of a couple. Independence and interest Pro: One great advantage of a career in research is how interesting the work is, and the independence one is afforded. If you are able to secure third-party funding, you can organize your own working schedule and priorities, and choose the topics of research which are of most pressing interest to you. Within many research institutions there is also the possibility of flexible working hours, which can be especially advantageous to those with young children. Security and career prospects Con: One particularly difficult aspect of a research career is the lack of job security. Postdocs are typically employed on short-term contracts for two years, and at the end of this period they must find another position. For the ambitious and determined researcher, this can be an opportunity for fast career progression and the chance to work in a variety of labs. However, this insecurity can be a source of stress for many researchers as there is no guarantee of long-term stable employment. Progressing from a postdoctoral position to a professorship can be extremely competitive, and the number of professor positions can be reduced due to budget cuts, so in tough times there will be even fewer openings available. Overall, many more PhDs and postdocs are working than there are professorships available, so you must be extremely determined to follow this path. Transferable skills Pro: Although the competition for academic positions is so fierce that a career in research may seem risky, in fact the skills one acquires in the performance of research can be transferred to many other fields. Critical thinking skills are highly developed in researchers. Besides these, researchers may acquire expertise in mathematics or statistics, in written communication, or in poster and oral presentation. All of these skills can be put to use in other jobs, so if a research position is not available, then you still have other career options open to you. Whether a career in academia is for you or not will depend entirely on your own levels of determination and persistence, along with weighing the pros against the cons of research. In the end, only you can make the choice - but keep in mind the various advantages and disadvantages of going down this particular career path.
Soon after the completion of a Master's degree or PhD, everybody is faced with the big question: what next? Although it may seem like a natural progression to continue with further research, there are many other careers open to academics in business, education, communications and journalism, to name but a few examples. So how do you know if research is the right career choice for you? Well, like with most big decisions, a good way of figuring it out is to weigh the pros and cons of an academic career.
Owing to both the quality of scholarships listed, and increasing interest in funding opportunities in the past year, we have added the ‘Top Scholarship Providers’ award to our usual categories, which otherwise consist of: Top Employers, Top Training Courses, Top Master’s Programs, Top PhD Programs, Top Conference Organizers, and Top Summer Schools. In each category, we identify the Top 3 institutions as well as those in the Top 20. As always, our methodology reflects the interests and ambitions of INOMICS users. Winners were chosen by aggregating the total interest in offers publicised on INOMICS. as defined by how many users viewed the listings, and then went on to enquire further. We also explicitly acknowledge the difficulties international educators and recruiters faced as a result of the pandemic in 2020. To that end, special recognition has been paid to the summer schools, professional course providers and conference organizers that, thanks to great innovation and leadership, were able to continue offering their services online. To find out which institutions took home the gongs, download this year's Handbook here. In addition to the Awards, it also contains discussions on economic theory, the COVID-19 pandemic, working from home, and much, much more. It's a bumper issue – our biggest yet – and is not to be missed.
Now in their fifth year, the INOMICS Awards remain unique in their celebration of institutions committed to the career development of economists worldwide. The awards recognise the universities, research centres, economics schools, banks, think tanks, and government and private institutions which listed their career and study opportunities on INOMICS in 2020, and were the most popular among our users.
Best Countries in Europe to Do Your Economics Master’s Degree
The exposure to new peoples, conversations, and ways of life is thrilling, healthy, and a great thing to do while studying. Is it challenging? Well, yes, but the worthwhile things in life tend to be, and if you’re already considering studying economics abroad for your Master’s, you're likely up to the task. Fortunately, economics is a subject that is applicable no matter where you study it – economic truths, unlike legal systems and medical licenses, don’t change across borders. <11an>limit:3;categories:Master's Programs;disciplines:Economics</11an> Do you find the prospect appealing? Then the obvious first question is: where to go? There are many places around the world to consider, of course, though this article will focus on places to study abroad in Europe. Europe’s a big place, and the options may seem intimidatingly endless. To assist you with sorting through your options for this momentous decision, we’ve compiled a list of the best European countries where you can study abroad, paying particular attention to the costs (ever an important consideration!), and what the country has to offer. Netherlands The Netherlands, consistently rated as one of the happiest countries in the world, also happens to be a great place to study. However, the cost of studying is a bit higher than some other options on this list. For Dutch students, and those from EU/EEA countries, Switzerland or Surinam, most of the cost of studying at Dutch universities is covered by the government. That being said, all students are required to contribute a statutory tuition fee, also known as ‘collegegeld’, which typically comes to around 2000 euros (which is two thousand; take note, dear reader, that Europeans use periods and commas the opposite way that Americans do). For non-EU/EEA students these costs can be higher and dependent on your prospective institution, course, etc. English speakers may be interested to know that Dutch higher education institutions offer a very high proportion of courses taught in English. Though, if you speak Dutch, all the better for your immersion! Browse top economics Master's programs in Netherlands Italy In many respects, the prospect of living in Italy sells itself. Few places can match its natural beauty, architecture, historical sites, gastronomy, wine, and seductively slow way of life. If that wasn't enough, it’s affordable too, with living costs averaging about €1000-2000 per month (depending on lifestyle and your lodging situation, of course), and the average tuition for Master's degrees is between €850-2000 per year at public institutions. Rome is, of course, one of the most famous cities in the world. But many other Italian cities are very worth living in too, and have fewer tourists to boot. Don’t forget to check out study opportunities in Florence, Milan, Pisa, and more. Fancy some of la dolce vita? Yes of course you do. Browse top economics Master's programs in Italy France France has long been a favorite of the adventurous international student, for good reason. Paris sets the country’s tone, boasting exquisite art, fashion and food. If the city of love is little too pricey – living costs there are among the highest in Europe, after all – there’s also the gastronomic capital Lyon, the hub of the wine-growing region Bordeaux, and the Spain-bordering Toulouse, which are all far more affordable. English speakers will be pleased to note that there are many programs taught in English in the French higher education system. Still, we politely remind you that this is no excuse not to at least attempt to learn a little French – the locals will appreciate it. For EU/EEA citizens a Master's degree will cost you around €260 per year. If you’re an international student, however, owing to a recent change in the rules, it’ll cost you €3,770. Browse top economics Master's programs in France Spain As a country, Spain may just have it all. Great weather, diverse landscapes, fascinating history, delicious wine, and friendly, passionate people. And, in terms of getting by, Spanish is supposed to be an ‘easy’ language to learn, and is one of the most widely spoken languages in the world. As such, learning Spanish is always a good choice. Yes, the reasons to live – and study – in Spain are many! Now onto the study stuff. Citizens of the EU can attend public university in Spain without cost. For foreigners, tuition is set by the government, and calculated using the slightly unusual pay-per-credit format. A typical Master's degree costs between €900-3,500 per year depending on how fast you do it – so there is quite a range. Private universities can be quite expensive as well, up to €20000. And of course, you must consider living expenses, which can run another €1000 or so per month. Browse top economics Master's programs in Spain United Kingdom The UK houses some of the oldest and most esteemed educational institutions in the world: the Universities of Oxford, Cambridge, Glasgow and Edinburgh, take your pick. Graduate from one of these educational giants, and doors will open for you, that’s guaranteed. Interestingly, one in four world leaders studied in the UK at one time or another, so if its power you’re after, well, look no further. As mentioned, enjoying this privilege will cost you a pretty penny. On average, a taught Master’s degree in the UK is £11,000. Unfortunately, Brexit has disrupted many of the scholarship programs that were available to EU and international students. There are still some out there, but they are in dwindling supply... Better get saving. Browse top economics Master's programs in UK Germany Germany is renowned for its generosity when it comes to higher education. (Which more than one member of the INOMICS editorial team have personally benefitted from!). In 15 of its 16 states, public universities charge no tuition, regardless of degree or nationality. There are, however, some costs to consider. Some states in Germany may have additional fees for international students, such as the state of Baden-Württemberg, which recently introduced fees of €1,500 per semester for international (non-EU) students. Even so, Germany remains one of the cheapest places to study abroad in the world. Study in Germany and you’ll experience a country with a unique history and an unavoidably vibrant culture. Its nickname "Das Land der Dichter und Denker" (the country of poets and thinkers) is highly apt. Interested in studying in Germany, but don’t know how to get started? Check out our guide for applying to get your German student visa. Browse top economics Master's programs in Germany Ireland Ireland is one of the pricier places on the list. But similar to the UK, that should not rule it out of contention, far from it. Ireland boasts some of the best universities in Europe - think Trinity College Dublin and the National University of Ireland, Galway. Although widely varied, Master’s students from the EU/EAA tend to pay around €6000 per year, while international students pay upwards of €9000. Seem steep? A little, but the education you'll get is second to none. And, Ireland is famous for its beautiful landscapes like the Cliffs Moher, earning it the nickname “Emerald Isle”. Browse top economics Master's programs in Ireland Switzerland Famed for its neutrality and high gun ownership, Switzerland is also rare for being one of the few countries in the world, and the only one in Europe, with instruments of direct democracy. This gives citizens the right to instigate changes to the constitution and/or ask for referenda to be held on any law voted on at any level of government. To go along with this interesting fact, here’s two more that are relevant to your studies: Switzerland boasts four national languages (Romansch, Italian, French, and German) and is one of the most expensive countries to live in Europe. Master’s tuition fee ranges between CHF 3,000 to CHF 13,000, with Master’s programs in private institutions higher than that, naturally. If you're planning on doing an MBA expect to pay around CHF 24,000, with some reaching as much as CHF 85,000. This may sound a bit expensive but one should bear in mind, Swiss universities are prestigious and are routinely found in the worldwide top 200 list – the education you will receive will be first-class. Browse top economics Master's programs in Switzerland Portugal The Portuguese higher-education system has a reputation for being particularly research-oriented, though its polytechnics also offer students the chance to study in professional fields too. So there’s still plenty of choices for an economist interested in either academia, policy roles or industry positions. Studying abroad in Portugal is a bit more cheap than some of the other countries on this list. One should expect to pay between €950-1300 in yearly tuition for a Master’s, and living expenses range from €1000-2000 per month. Browse top economics Master's programs in Portugal Belgium Belgian chocolate may be all that’s needed to persuade some. For the others, read on! First, the housekeeping: tuition fees for Master's degrees in Belgium can be a little bit confusing, ranging from as little as €800 per year for EU students to as much at €3000 per year for those coming from outside of the European Union (at public institutions). To help offset that cost, though, the Belgian government has an array of scholarships available, many specifically aimed at international students. And some miscellaneous bonuses: Belgium has a high quality of education, offers great beer and amazing waffles, and it has three official languages – perfect for the polyglot. Browse top economics Master's programs in Belgium Austria Fancy doing your Master's degree in the birthplace of Freud, Mozart and Schwazenegger? Although not always the first country to spring to mind, there are numerous reasons to consider the homeland of these three giants. First, the standard of living is high: consulting agency Mercer has ranked the capital Vienna as the city with the world’s highest quality of life yet again in 2023. On top of that, If you’re an EU/EEA national, you won’t have to pay any tuition fees, come from outside Europe, and you’ll be obliged to pay a relatively small amount per semester. It’s also at the center of Europe – geographically speaking – so you’ll be spoilt for choice when trying to travel. A quick train or bus ride, and you can be anywhere. Cost of living index for comparisons: https://www.numbeo.com/cost-of-living/rankings_by_country.jsp?title=2023&region=150 Disclaimer: statistics have been taken from a variety of online sources including: Ministry of Education, Culture and Science, Campus France, France Expatica, UCAS, DAAD, Education in Ireland, Canapprove, University of Porto, Study in Belgium, Study in Austria. Header Image Credit: Tint Media on Shutterstock (licensed image - copyright)
Studying abroad: what an adventure! The majority who've done it usually say they loved it, and that despite some difficulties, the experience was unforgettable. It makes sense, too: for little can compare to the excitement of moving abroad, exploring a foreign culture, practicing a new language (perhaps), and meeting people that you would never have met otherwise.
INOMICS is a member of the Amazon Associates affiliate program and the Apple affiliate program. This article contains affiliate links, which means we may earn money through any qualifying purchases made after you click through. However, this is not a sponsored post. 1. Moneyball The film that got the whole world interested in statistics, Moneyball is based on a true story about the manager of the Oakland A's baseball team who used statistics to analyze and understand players' strengths and weakness. With these insights, he rebuilt the team by recruiting undervalued players and focusing on strategy rather than fielding superstar players. Because of this, the A’s rose from the bottom of the league to become a top team. Economists will enjoy seeing statistics being put to real-world use and the fact that the numbers guys are the real heroes of the movie. For more on statistics in sport, check out our article dedicated to the topic! 2. The Wolf of Wall Street Another movie based on a true story, this one chronicles the rise and fall of Jordan Belfort, a stockbroker in the 80s who made millions through fraud and corruption in the stock market. Showing the wildest decadence of the Wall Street boom years, this movie was a hit with the public for its moral ambiguity and an all-star cast headed by Leonardo DiCaprio. 3. Wall Street An earlier economics film with a similar theme to The Wolf of Wall Street, this 80s drama stars Charlie Sheen as a stockbroker who gets involved with a corporate raider's nefarious plans. Showing life as an 80s trader at its most gauche and excessive, the film delves into issues of morality, wealth, and power in the monied world of top corporations. 4. Arbitrage Arbitrage is a thriller drama starring Richard Gere as a hedge fund manager who has been engaged in shady accounting practices in secret. He tries to hide his losses and avoid being arrested for fraud. After a car accident nearly exposes his secrets, he must decide how to evade the police in order to protect his secret. 5. The Informant! For a light-hearted comedy crime film with an economics theme, try the 2009 Matt Damon movie The Informant!. Based on a true story of a whistleblower who reports a price-fixing conspiracy at his workplace to the FBI, the movie follows the life of the whistleblower as he tries to help gather evidence against his company. With a fun, ironic tone, the film looks at the way corporate malpractice occurs and the challenges in stopping it. 6. Too Big To Fail Too Big To Fail is a documentary based on a book that covers the 2008 financial crisis and how it came about. The film is presented from the point of view of the key players (including 2022 Nobel Prize winner Ben Bernanke) in various financial institutions who work to try to prevent a global economic meltdown. 7. A Beautiful Mind A Beautiful Mind is a fictionalized version of John Nash's life, the mathematician who is the namesake of Nash Equilibrium. Exploring both Nash's mathematical work and the schizophrenia that he suffered from, this film was a popular success as well as being highly rated by historians and those in the field of mathematics. Another economics movie about the 2008 financial crisis, this fictionalized drama is set over 24 hours at a large Wall Street investment bank as the crisis begins to unfold. A high energy and dramatic movie with a cast of famous names, this one is not to be missed. 9. The Big Short Another biographical film about the 2008 crisis, this one is worth checking out for the distinctive style in which financial instruments are introduced. Using cameos of well-known celebrities and fourth-wall-breaking chats into the camera, the movie explains concepts such as subprime mortgages and collateralized debt obligations in an accessible way. 10. Inside Job A top movie in economics about the financial system, this movie focuses on the US in particular and the way that the financial services industry has grown in power and has fostered corruption over the last few decades. Split into five parts, it briefly tackles the history of the finance industry before moving on to the early 2000s bubble, the crisis, and the state of affairs as of 2010.
Economics isn't something that can only be learned from degree programs, books or journals. As an important part of modern life, there are also a number of great movies about economic themes. From the 2008 financial crisis to the formation of game theory, movies have documented a variety of subjects that will be of interest to economists. Next time you're sitting down for movie night, try one of these 10 films that economists will love.