The Price of Love - A Valentine’s Day Look at the Cost of Romance
Valentine's Day spending reflects the economic climate, with key factors affecting consumer confidence, inflation and jobs affecting people's spending2. When the economy is doing well, unsurprisingly, people spend more, buying bigger gifts and planning grand celebrations. So let's get into the economics of Valentine's Day a bit more. The Rising Costs of Valentine’s Day Valentine’s Day has evolved into a multi-billion-dollar industry, with spending trends rising each year. Many would argue that it has become a commercialised celebration driven by consumerism, where businesses capitalise on romantic expectations to boost sales. Social media has magnified these romantic expectations, where individuals often showcase their gifts and experiences, creating a culture of comparison and competition. The desire to "outperform" others in demonstrating love and affection further fuels consumer spending. The costs associated with celebrating love include: Gifts and Flowers: The price of roses often surges in February due to increased demand, demonstrating classic supply and demand principles. Florists and retailers anticipate this spike, adjusting prices to maximise profits during this peak season. Dining Out: Restaurants capitalize on the holiday by offering special (and often pricier) Valentine’s menus. Many establishments introduce fixed-price dinners with curated courses, which are marketed as exclusive experiences, thereby justifying higher prices. Jewellery and Luxury Items: Retailers view Valentine’s Day as a peak sales period, aggressively marketing high-end gifts as ultimate expressions of love. Campaigns often emphasize that nothing says "I love you" like a sparkling diamond or luxury watch, reinforcing the association between material value and emotional significance. Spending statistics reveal the staggering scale of Valentine’s Day as an economic event. The US tops the chart by a significant margin for average spending per person, with an astonishing $192.50. According to Statista, it is predicted that in the U.S. alone, consumers will spend approximately $6.5 billion on jewellery, $5.4 billion on a night out, $5.4 billion on flowers and candy, and “only” $1.4 billion on cards3. These figures highlight how the holiday drives substantial revenue across multiple industries, from florists to fine dining to luxury retailers. In comparison, the United Kingdom ranks second, with average spending per person significantly lower at a predicted $52-$70 for 2025, less than half the amount spent by the average American 4. This stark contrast underscores the cultural and economic differences in how Valentine’s Day is celebrated across countries. Behavioural Economics and Romantic Spending Behavioural economics and psychology offer profound insights into why individuals often spend more than they intend on Valentine’s Day. This can be attributed to a complex interplay of cognitive biases, emotional drivers, and social influences that shape consumer behaviour in subtle yet powerful ways. One of the most significant factors is the influence of social norms and peer pressure. Valentine’s Day is culturally framed as a time to express love and affection through material gifts and special experiences. Societal expectations often create an implicit standard of what constitutes an appropriate display of affection, leading individuals to feel obligated to spend money to meet these norms. The fear of social judgment or being perceived as less committed can drive people to purchase extravagant gifts, not necessarily out of personal desire but to conform to the expectations set by their social circles and media portrayals. Loss aversion, a key concept in behavioural economics, further amplifies this tendency. According to this principle, people experience the pain of loss more intensely than the pleasure of an equivalent gain. In the context of Valentine’s Day, the potential “loss” is emotional—the fear of disappointing a partner, causing relational strain or appearing neglectful5. This fear can motivate individuals to overspend, as they aim to avoid the negative emotional consequences associated with perceived inadequacy or failure to meet their partner's expectations. The halo effect6 also plays a pivotal role in Valentine’s Day spending. This cognitive bias causes people to associate the quality of a gift with the depth of the giver’s affection. Expensive gifts are often perceived as indicators of greater love and commitment, leading consumers to equate higher spending with stronger emotional expression. This misconception can pressure individuals to choose costly items, believing that their monetary value will enhance the perceived sincerity of their sentiments. Another influential bias is anchoring7 where initial exposure to a price sets a mental benchmark that influences subsequent purchasing decisions. High-end advertisements and luxury brand promotions prevalent during the Valentine’s season establish these anchors, making moderately priced items seem more reasonable or affordable by comparison. This effect can subtly nudge consumers towards spending more than they initially planned, as their perception of value has been skewed by earlier price exposures. The scarcity principle8 adds yet another layer to the dynamics of Valentine’s Day spending. Limited-time offers, exclusive deals, and seasonal products create a sense of urgency and exclusivity. This scarcity effect taps into the fear of missing out (FOMO), compelling consumers to make impulsive purchases to secure what they perceive as rare or fleeting opportunities. Retailers strategically exploit this bias through marketing tactics that highlight the limited availability of certain products, thereby driving up demand and, consequently, consumer spending. Cultural Variations in Valentine's Day Celebrations Valentine's Day is celebrated differently around the world, reflecting diverse cultural norms and traditions. In Japan, for example, women typically give chocolates to men on February 14, with men reciprocating a month later on White Day9. In South Korea, the celebration extends even further, with couples marking the 14th of every month as a special occasion, such as Kiss Day and Rose Day10. In Finland and Estonia, Valentine's Day is more about celebrating friendship rather than romantic love, known as Friend's Day11. In contrast, countries like France and Italy emphasise romantic gestures steeped in historical traditions, such as exchanging love letters and symbolic gifts. These cultural variations influence how people spend money on the holiday, with local customs shaping the types of gifts, experiences, and economic behaviours associated with Valentine's Day. Conclusion: Balancing Love and Economics While love is priceless, the way we celebrate it comes with financial implications. Recognising the behavioural and economic factors behind romantic spending can help individuals navigate Valentine’s Day with both their hearts and wallets in mind. Perhaps the best investment is not in expensive gifts but in meaningful, lasting experiences that strengthen relationships without breaking the bank. Works Cited “The untold truth about Valentine's Day: From violence to modern-day romance.” NBC Washington, 2025, https://www.nbcwashington.com/entertainment/holidays/history-behind-valentines-day/3824661/. “The Cost of Valentine's Day in the US vs Other Countries.” Remitly, 2025, https://blog.remitly.com/lifestyle-culture/cost-of-valentines-day/. “Valentine's Day total expected spending on selected gifts in the United States in 2025, by category.” Statista, 2025, https://www.statista.com/statistics/285034/us-valentine-s-day-sales-by-category/. Barber, Sophie. “Valentine’s Day statistics 2025: What is the average spend? Source: https://www.finder.com/uk/credit-cards/best-credit-cards/valentines-day-statistics Analysis conducted by finder.com.” Finder, 2025, https://www.finder.com/uk/credit-cards/best-credit-cards/valentines-day-statistics. Tsipursky, Gleb. “Valentine’s Day Gift Giving with a Purpose: How to Make a Difference Together.” Intentional Insights, 2024, https://intentionalinsights.org/valentines-day-gift-giving-with-a-purpose-how-to-make-a-difference-together/. “Why do positive impressions produced in one area positively influence our opinions in another area?” The Decision Lab, https://thedecisionlab.com/biases/halo-effect. “Anchoring (heuristic).” Behavioural Economics .com, https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/anchoring-heuristic/. Chen, James. “Scarcity Principle: Definition, Importance, and Example.” Investopedia, 2024, https://www.investopedia.com/terms/s/scarcity-principle.asp. “White Day.” About Japan: A Teachers Resource, 2025, https://aboutjapan.japansociety.org/white_day#sthash.tsPqtrVT.dpbs. “Why the 14th day of each month in Korea is special.” Korea.net, 2021, https://www.korea.net/NewsFocus/HonoraryReporters/view?articleId=200941. Godin, Melissa. “Why Valentine’s Day in These European Countries Is All About Friendship.” The Times, 2020, https://time.com/5778265/valentines-day-finland-estonia/.
With Valentine’s Day approaching, it's intriguing to explore the economics of love—how much we spend, why we do it, and whether it’s worth the investment. Romance, like any market, operates on supply, demand and consumer behaviour with prices fluctuating based on cultural expectations and economic conditions. Valentine’s Day traces its origins to ancient Rome, where the festival of Lupercalia on Feb 13-15 celebrated fertility and matchmaking. Later, it was linked to Saint Valentine, a priest who secretly performed marriages against Emperor Claudius II’s orders and was executed on February 14, 269 AD. By the 14th century, poets like Geoffrey Chaucer romanticised the day, associating it with courtship. By the 19th century, mass-produced Valentine’s cards became popular, evolving into today’s global celebration of love, marked by gifts, flowers, and heartfelt gestures1.
IS-LM Model (Investment-Savings / Liquidity preference - Money supply)
The two major components of the IS-LM model are the “Investment-Savings” curve (or IS curve), and the “Liquidity preference-Money supply” curve (or LM curve). Where they intersect, the real interest rate and real economic output are balanced, such that the “product market” and the “money market” are in equilibrium; in other words, there is just enough money in circulation to facilitate all of the transactions that economic agents want to conduct. The model was originally developed in the 1930s by John Hicks, who was expanding on the ideas of John Maynard Keynes. At the time, controlling the money supply was seen as a more important lever for policymakers than it typically is today. Since the IS-LM model can help explain how the money supply influences economic growth (for instance, as measured by GDP), it became a key tool of macroeconomic policy until later that century. In the 1970s and 1980s, when inflation became more of a major economic concern, the IS-LM model fell out of favor and policymakers started to focus on inflation and interest rates more than the money supply. Despite the model’s limitations, however, economists usually agree that it’s a good foundation for students, and thus it’s still widely taught in introductory macroeconomics courses. Figure 1 shows the basic IS-LM model in equilibrium. The IS (Investment Savings) Curve The graph of the IS Curve shows every point in the economy where overall income and the real interest rate are “in equilibrium”. Thus, the real interest rate r is on the vertical axis and income (or output) Y on the horizontal axis. Yet, these quantities don’t directly affect each other; the curve is effectively hiding equilibrium in two different markets that determine its shape. These two markets are the “expenditures market” or “Keynesian cross diagram” (the top graph in Figure 2), which shows where income and expenditures in the economy are equal, and the “goods market” (the middle graph in Figure 2), where the real interest rate holds desired savings and desired investment in equilibrium. In a way, the IS curve is built by taking one axis from each of these two diagrams and smashing them together. This is best illustrated with Figure 2 below. The top graph in Figure 2 depicts an economic expansion where an increase in demand led to higher economic output. Due to the higher output, the amount of savings (equivalently, investment) in the economy increases, represented by a movement along the I(r) curve in the middle graph. Because there is a higher demand for savings, the interest rate falls, since it represents the return on savings that banks pay out. These two realities – increased output and a decreased interest rate – are represented by a single movement along the IS curve in the bottom graph. The IS curve is downward-sloping because as the interest rate falls, more investments are worth funding (remember that interest rates represent the cost of borrowing, too: in a falling interest-rate scenario, borrowing money is cheaper!). The increased amount of investments increases potential economic growth. Conversely, at a higher interest rate, fewer economic agents wish to borrow to fund productive projects; this decreases potential growth. Taken from another perspective, the IS curve in economics also shows combinations of the real interest rate and output where the economy is in equilibrium, which in turn determines, or can be used to help anticipate, the level of aggregate demand. The LM (Liquidity-Money) Curve The LM curve shows where the money market is in equilibrium. At every point on the LM curve, liquidity preferences, income, and the real interest rate are such that the amount of money demanded is equal to the money supply. Recall that the interest rate represents the return to savings, and therefore the “cost” of holding onto cash. As the interest rate increases, the demand for money decreases. Conversely, as income increases, money demand also increases. To see why, suppose someone is holding $1000 in cash. This would feel like a lot of money for a college student with a limited income – but to a wealthy capitalist, $1000 is worth much less compared to the money they have available. It probably feels more like pocket change. Generally, when incomes (and by extension wealth) rise, money demand also rises. The “liquidity preferences” part of the LM curve’s name reflects the amount of cash people are willing to hold in general, regardless of their income or interest rates. When people prefer to hold more cash, relatively speaking, the LM curve will be flatter (because it will take a larger increase in the interest rate to convince them to put their cash into savings), and vice versa. Figure 3 shows the derivation of the LM curve from the money market equilibrium. In Figure 3, the money demand curve slopes downward in the first graph because as the interest rate falls, there is less incentive to save money and less cost of holding cash. A shift in money demand (which can happen due to, for example, consumer preferences) shifts the interest rate in response. Note that since the money supply is exogenously determined by the central bank (and commercial banks), Figure 3 determines the interest rate that will result from the central bank’s monetary policy and the amount of money demand. When the economy expands and GDP increases, money demand will shift upwards, increasing the interest rate at the fixed money supply. This is due to classic supply and demand dynamics; with a higher demand for money but the same supply, the “price” of holding money (the interest rate!) must increase. The LM curve is upward-sloping in Figure 3, which is a facsimile of the curve in Figure 1. Note that on the left graph of Figure 3, the horizontal axis measures money demand/supply, but on the right side of Figure 3 (and in Figure 1) it measures income. Thus, the LM curve slopes upwards in Figure 1 because as income rises, money demand (and the interest rate) increases. This difference merely reflects a change in perspective, and should not be confused. The IS-LM Equation To consider the dynamics of the IS-LM model, it helps to look at the algebra behind both curves. The IS Curve is defined by the equation: Y = C(Y – T(Y)) + I(r) + G + NX(Y) where Y represents income (or output), C represents consumption, T shows taxes (as a function of income), I stands for investment, G is government spending, and NX is net exports. Students of macroeconomics will likely recognize this as very similar to the equations for aggregate demand and the expenditure approach of calculating GDP. But, there are a few key differences to discuss. Often in mathematics, parentheses are used next to a variable to denote what factors determine the level of that variable. Here, then, the terms I(r) and NX(Y) show that here investment is a function of the real interest rate r, and net exports are a function of income Y. This makes sense; as income increases, people buy more goods, including goods from abroad (imports). And, clearly, the level of investment responds to changes in the real interest rate. The C(Y – T(Y)) term shows that consumption in the IS curve is a function of both income and taxes (which itself is a function of income). This makes sense, too. The more income people have, the more they can spend and the more they’re taxed; and, taxes reduce discretionary income. The equation for the LM Curve follows: M / P = L(i,Y) where M is the money supply, P is the price level (such that M / P shows the “real” money supply) and liquidity preferences L are a function of the nominal interest rate i and income Y. A specific functional form for the liquidity preferences equation isn’t given, but we know that it’s negatively related to the nominal interest rate and positively related to income (since people hold more cash as the interest rate declines and as income increases). IS-LM Dynamics Keeping these equations in mind shows clearly what economic phenomena will shift either the IS curve or the LM curve. Changes in one of the IS curve’s components – consumption, income, taxes, government spending, investment, or net exports – will cause a shift in the IS curve and therefore change the IS-LM equilibrium. For example, consider a case where the government increases spending. While this must be funded by increases in taxes, which reduce consumption (in part due to crowding out), suppose that the multiplier effect is large and the increase in government spending ends up promoting growth. This increases income Y, and leads to an upward shift in the IS curve. The increase in income is represented by the upward shift of the IS Curve, leading to a higher real interest rate at the new intersection with the LM Curve. The economy’s output grows as income rises, and the equilibrium interest rate is higher than before. Suppose that, simultaneously, the central bank increases the money supply M such that M / P increases. This shifts the LM curve to the right, increasing output/income while reducing the interest rate. Figure 4 shows a possible result of these changes. In Figure 4, after both curves shifted, the economy ended up with a higher level of output and an unchanged interest rate. Of course, it’s possible for the interest rate to be higher (if the IS curve shifts more than the LM curve) or lower (if the LM curve shifts more than the IS curve). These simple examples represent two important levers for policymakers. The shift in the IS curve resulted from an act of fiscal policy, and the shift in the LM curve from an act of monetary policy. The usefulness of depicting these changes and predicting their outcomes led to the model’s former popularity. Good to Know However, the IS-LM model has fallen out of favor in recent years for several reasons. First, the model’s assumption that central banks focus on changing the money supply to affect the economy can be seen as outdated. Nowadays, central banks tend to focus on the interest rate itself (though there are notable exceptions to this, including “quantitative easing” policies in western economies prompted by the 2008 financial crisis) rather than the money supply, such that many economic models directly assume that the interest rate is set by the central bank. Second, and very importantly, the IS-LM model assumes that the price level is constant. Notice how the price level P appears in the denominator of the LM curve equation, and is not considered a function of any particular variable (it is exogenous). Further, the real money supply is depicted as a vertical line in the money market. It may seem strange now, since inflation is considered a critically important indicator of economic health, but until the 1970s (when stagflation reared its ugly head and stumped economists), it was much less of a concern for most policymakers. Obviously, this feature of the IS-LM model makes it unsuitable for studying inflation, and thus the model is unable to propose any policy solutions to combat inflation issues. This severely limits its usefulness, and macroeconomists have largely moved away from it. Yet despite these fatal flaws, the IS-LM model is still widely taught in macroeconomics courses (though it tends to disappear in advanced macroeconomics). It’s a fundamental model that brings together many important concepts, and that undergraduates will certainly be tested on.
The IS-LM Model is a foundational macroeconomic model of describing the relationship between the interest rate and economic output. Using two curves, it depicts an array of equilibria for the economy and can be used to assess the potential impacts of fiscal and monetary policies.
Public Economics & Economic Policy (JEL H)
Macroeconomics and Monetary Economics (JEL E)
Applying for a PhD: Should you do a Master of Research?
Introducing the Master of Research<o:p></o:p> The Master of Research (or MRes) is an advanced post-graduate degree that is considered a stepping-stone towards PhD study. Often, and perhaps confusingly, this type of degree requires applicants to have a Master’s degree in the relevant subject area already. Importantly, the two types of Master’s are often differentiated: a Master of Science in Economics is often referred to as a “taught” Master’s, while an MRes is referred to as a “research” Master’s. However, an MRes is still a Master’s degree and not a PhD-level certification.<o:p></o:p> These degrees can go by several different names, and are most commonly available in the UK, Australia, Ireland, Singapore, and Hong Kong. These programs may also be listed as MPhil/PhD programs (standing for Master of Philosophy/PhD), or “Master of Letters”, abbreviated M.Litt programs (typically in Ireland). Although this type of degree can be very helpful as a stepping-stone to a PhD, they can be little-known outside of the countries that offer them.<o:p></o:p> MRes programs aim to prepare their students for serious academic research work, and expect that students come already equipped with significant subject matter knowledge – hence why many outright require applicants to already hold a taught Master’s degree. These programs typically last one to two years and are rarely longer. Most programs also require students to write a Master’s thesis (even if you’ve already written one before!). After completing an MRes in economics, students will have training not only in economics subject matter, but in conducting economic research as well, something that Master of Science programs often don’t have much time for. Many MRes programs – as evidenced by the MPhil/PhD moniker – often expect their students to continue into a PhD program immediately afterward.<o:p></o:p> Is an MRes right for you?<o:p></o:p> Pursuing an Economics MRes (or equivalently, an MPhil/PhD or MLitt program) could be an excellent choice for your path to a PhD. However, it’s far from the only option. How to decide? One reason to pursue an MRes over immediately applying for PhD programs is that an MRes will help your academic profile become stronger. The additional training in research specifically shows that you’re serious about pursuing academic work, and a high mark on the MRes thesis could be a significant indicator of your suitability for an economics PhD. Thus, this could be a great option for former Master’s students with good, but not great, grades. Grades are very important when applying for PhD programs. High marks in an MRes could cover nicely for more average grades in a Master of Science, making you a more competitive PhD applicant.<o:p></o:p> More importantly – also for those with top grades in their previous economics degree – an MRes program is a gentler way to explore the rigor and lifestyle of conducting academic research than simply jumping straight into a PhD program. This makes it an excellent choice for students who are still “on the fence” with regard to a PhD, as you’ll get a strong sense of what PhD research would entail. If the MRes goes well, and the work is enjoyable, it’s a great sign, both for you and for potential PhD supervisors, that you’re ready for the rigor and discipline required to get your PhD. If not – perhaps a career in industry is a better choice for you. Finally, completing an MRes gives you more time to meet students and faculty and explore the field of economics. If you’re unsure of what specifically you’d like to research, this can be a great way to explore sub-fields on the frontier of economics research and the methods you must master in order to succeed. It can also help you build relationships with faculty, who can guide and advise you, and who may even become your future PhD supervisor if you choose to continue. It’s important to note that MRes students are typically expected to continue on to a PhD, but it’s also possible to leave after completing the MRes and seek a job in industry. Some research-intensive professions may appreciate the additional research experience without requiring a PhD. However, this situation corresponds to a minority of graduates. If you plan to work in industry after earning your MRes, it’s highly advisable to have specific positions in mind that would justify the MRes qualification, but not require a PhD.<o:p></o:p> RA vs MRes: similar benefits, different experiences Applying directly to a PhD is very possible, particularly for strong students with excellent grades who have had opportunities to participate in academic research during their studies. But, for those students who wish to spend some time gaining more research experience before diving into the full commitment of a PhD, it helps to understand the differences between doing an MRes or working as an RA. It’s worth noting that many of the benefits of earning an MRes have some overlap with the benefits you’d enjoy from working as a Research Assistant. If you want research experience before diving into a PhD, both are options you should strongly consider. Research Assistants help professors conduct actual academic work that will be published. It’s a great way to get your name out there and begin to add research credentials to your academic CV. However, being an RA limits your exposure to the project(s) that you’re given. If you don’t end up liking the sub-field of that specific research, it can be awkward to pivot to a new one. And, you will likely be very beholden to the needs of the project(s) and professor(s) leading them, with little room to explore your own research interests. An MRes offers less of a chance to have your name appear in published research, but is a more structured way to gain additional research experience. And, you’ll be able to write your Master thesis in a field that interests you the most, while building a potential foundation for your PhD thesis. Finally, the added benefit of earning high grades in an MRes shouldn’t be overlooked if you wish to improve your academic profile. Both RAs and MRes programs may be connected to a PhD program. In both cases, you may be able to start your PhD in parallel. Usually, for an RAship, the PhD is expected to be related to the project you are working with, and your supervisor is usually expected to be one of the professors you’ve been working for. For an MRes program, your eventual PhD topic may be more flexible – though it’s certainly advisable to do your MRes thesis on a topic you expect to explore via your future dissertation. Finally, one major difference between these two paths is funding. Research assistants are paid, while MRes students must often pay tuition (though of course, scholarships may be available). Financial considerations are of course very important, and you must make the right decision for your current situation and goals.<o:p></o:p> Concluding Thoughts<o:p></o:p> Overall, applying for a Master of Research program is a perhaps lesser-known but excellent option when preparing for a PhD. Whether or not it’s the right path for you depends on your own goals and personal situation. We hope this article was helpful. Here at INOMICS, we wish you all the best in your studies and future endeavors. Good luck! Image Credit: Atstock Productions / Shutterstock (licensed image, copyright) <11an>limit3;categories:PhD Candidate;Research Assistant / Technician;PhD Programs</11an><o:p></o:p>
There are many paths to preparing for an economics PhD. Most students apply for PhD programs soon after finishing their Master’s degree. Some even apply directly after their Bachelor’s degree. Others work first, for example as a research assistant before applying. There are benefits to all of these approaches, and depending on your academic accomplishments and personal goals, some paths may suit you better than others. In this article we look in depth at the merits of a Masters of Research (MRes) as an option for PhD hopefuls. We also compare the MRes path with a direct application for a PhD after your studies, or with a year or two of work experience before applying for a PhD.<o:p></o:p>
The Rise of Digital Nomadism and Its Economic Implications
The Evolution of Work and the Rise of Digital Nomadism Office work has come a long way—from the rigidity of the nine-to-five office cubicle to the freedom of remote setups. The rise of cloud computing, tools like Slack and Zoom, and platforms like Upwork have enabled professionals to work from anywhere. The pandemic supercharged this shift, with 35% of US employees working remotely in 2023, up from 24% in 2019 (3). According to a 2023 study, over half the digital nomads surveyed worldwide were aged 30-39, with roughly 22% being aged under 30 (4) and working in fields like tech, software media, business and mathematical/data professions, that have embraced this lifestyle the most (5). Destinations like Lisbon, Bali, and Medellín have emerged as hotspots, offering a mix of affordability and strong infrastructure, as well as an appealing climate. Governments are also jumping on board, creating digital nomad visas to attract these workers while boosting local economies. Estonia, Croatia, and Barbados are just a few examples of countries that are making it easier than ever to work and travel. Macroeconomic Implications of Digital Nomadism Digital nomads bring foreign income into the communities they (temporarily) call home. Popular hubs like Bali and Lisbon see increased demand for co-working spaces, short-term rentals, and hospitality services. For instance, digital nomads contribute millions annually to Bali’s economy through tourism and service consumption (6). In Lisbon, thriving cafés, co-working hubs, and housing rentals cater to remote workers, reshaping local businesses. However, this boom comes with challenges. In popular hubs, living costs often rise, creating income inequality between nomads and locals. For example, in Lisbon, long-term residents have faced housing shortages as properties convert to short-term rentals for nomads and tourists. Carvalho a well-respected Professor of Economics at the University of Porto is hoping the Portuguese government can find a balance between attracting new entrepreneurs and ensuring the stability of the locals. It’s important to have an overview of the impact on Portuguese society, including ensuring local citizens aren’t priced out of their housing market (7). The strain on local infrastructure, such as transportation and utilities, also becomes an issue. Governments are responding with innovative policies, such as New Zealand easing visa rules to attract digital nomads as part of their post-COVID tourism recovery strategy (8). However, taxation remains a tricky issue, with challenges like double taxation and lost revenue for nomads’ home countries (9). Balancing the benefits and challenges of digital nomadism is a growing priority for policymakers worldwide. Microeconomic Implications for Individuals Digital nomadism presents unique microeconomic considerations for individuals, as it requires careful evaluation of budget constraints, opportunity costs, and utility maximisation. Nomads must balance the marginal benefits of travel and flexible work arrangements against expenses like accommodation, coworking spaces, and fluctuating living costs in different countries. Price elasticity is also a factor, as digital nomads adjust their spending based on income variability and local cost of living. The decision for nomads to live and work abroad is often about maximising income while minimising expenses. Relocating to low-cost destinations like Chiang Mai or Medellín can help nomads get more out of their budgets compared to living in high-cost cities like New York or London (10). For instance, a software developer earning $60,000 annually can enjoy a significantly higher quality of life in Bali, where rent and daily expenses are far lower. Additionally, the concept of consumer surplus applies, with individuals deriving varying levels of satisfaction from experiences depending on personal preferences and the perceived value of mobility and cultural exposure relative to their costs. Understanding these dynamics can help digital nomads make financially sustainable lifestyle choices while maximising their overall well-being. Broader Implications for Education and Skill Development To thrive as a digital nomad, certain skills are in high demand—both at the top for 2023 and on the rise are analytical thinking and creative thinking. Technological literacy is on the rise, perhaps because of the trend to work remotely (11). Although, yes, these skills are often looked for in ‘regular’ working environments, they enable digital nomads to thrive because of the ease and efficiency of being able to deliver remotely. Employers increasingly value professionals who can navigate remote work challenges and analyse opportunities in global markets. Analytical skills are especially in demand, which is good news for economists and data scientists, as this should be a core part of their skill sets. Online education platforms like Coursera, Udemy and DataCamp are stepping up to meet this demand. These MOOCs (Massive Open Online Courses) offer flexibility, affordability, and globally accessible skill development options. Platforms like INOMICS also collect online and on-site learning opportunities relevant to economics, data science and finance. According to Statista, the global e-learning market is projected to grow by 10% annually, reflecting the rising demand for tech-focused and skill-specific courses (12). For digital nomads, these platforms are essential tools for staying competitive in a fast-evolving global workforce. Data Science and Economic Research Opportunities Digital nomadism presents exciting opportunities for data-driven analysis. Researchers and analysts can use tools like web scraping from platforms such as Nomad List to study trends in population growth and geographic preferences. Geospatial data combined with income distribution metrics could assess the economic impacts of nomads on local economies. Predictive analytics can also uncover emerging hotspots for digital nomads by analyzing variables like cost of living, internet speed, and visa policies. A study done by the National Bureau of Economic Research serves as an example of an academic analysis of remote work using a data-science approach. Applying a similar methodology could offer valuable insights into trends and patterns surrounding digital nomadism (13). Conclusion Digital nomadism is more than just a trend—it’s a transformative shift in how work and economies function. From its roots in technological innovation to its ripple effects on local and global markets, this lifestyle is reshaping the modern workforce. As technology continues to advance, the sustainability of digital nomadism will hinge on balancing economic opportunities with policy frameworks that address its challenges. Cultural shifts and new tools are likely to make this lifestyle even more accessible. For students and young professionals in economics and data science, digital nomadism presents an exciting opportunity to shape the future of work. By analysing labour markets, designing policies, or developing predictive tools, you could play a vital role in this evolving landscape. Ready to dive deeper into the world of digital nomadism? Explore research opportunities, upskill through online courses, or analyse trends to predict its growth. The future of work is being written—why not be part of the story? Works Cited “Upwork Study Finds 22% of American Workforce Will Be Remote by 2025.” Upwork, https://www.upwork.com/press/releases/upwork-study-finds-22-of-american-workforce-will-be-remote-by-2025. “State Of Remote Work 2023.” Buffer, https://buffer.com/state-of-remote-work/2023?. Accessed 27 January 2025. Cohen, Mikaela. “The percentage of employees working remotely is dropping, but experts say it’s unlikely to reach pre-pandemic levels.” HR BREW, 2024, https://www.hr-brew.com/stories/2024/08/12/the-percentage-of-employees-working-remotely-is-dropping-but-experts-say-it-s-unlikely-to-reach-pre-pandemic-levels. “Share of digital nomads worldwide in 2023, by age.” Statista, 2023, https://www.statista.com/statistics/1298807/digital-nomads-by-age-worldwide/. “Top 5 Industries with the Most Remote and Hybrid Work.” Linkedin, 2024, https://www.linkedin.com/pulse/top-5-industries-most-remote-hybrid-work-ioptimizerealty-fbqmc/. Noviarini, Nurina, and Palupi Lindiasari Samputra. “Digital Nomad and Analysis of Regional Economic Resilience of Tourism Sector in Bali Province After Covid-19 Pandemic.” Jurnal Indonesia Sosial Teknologi. Researchgate, https://www.researchgate.net/publication/380893593_Digital_Nomad_and_Analysis_of_Regional_Economic_Resilience_of_Tourism_Sector_in_Bali_Province_After_Covid-19_Pandemic. Chamberlin, Victoria. “What Portugal got right about work-life balance.” Vox, 30 September 2024, https://www.vox.com/future-of-work/374273/portugal-remote-digital-nomad-work-life-balance Accessed 28 January 2025. “Tax policies for a new generation.” European Parliament, 2022, https://www.europarl.europa.eu/RegData/etudes/ATAG/2022/733697/EPRS_ATA(2022)733697_EN.pdf. Hausberger, Yasmin. “Learning from Multinational Enterprises: International Tax Strategies for Digital Nomads.” University Wein, Masters Thesis, https://services.phaidra.univie.ac.at/api/object/o:1787699/get. Cohen, Randolph B. “Unprecedented: Remote Work and the Strange Economy of 2023.” 2023. Harvard Business Review, https://www.hbs.edu/faculty/Pages/item.aspx?num=64685. “Future of jobs: These are the most in-demand skills in 2023 - and beyond.” The World Economic Forum, 1 May 2023, https://www.weforum.org/stories/2023/05/future-of-jobs-2023-skills/. Accessed 28 January 2025. “Market size of the global corporate e-learning industry in 2023.” Statista, 2023, https://www.statista.com/statistics/1232427/global-corporate-e-learning-market-size/#:~:text=The%20market%20size%20of%20the,billion%20U.S.%20dollars%20by%202030. Stephen Hansen, et al. “Remote Work across Jobs, Companies, and Space.” 2023. National Burea of Economic Research, https://www.nber.org/papers/w31007. “Global Labor Market Trends in Remote Work.” World Bank Group - International Development, Poverty and Sustainability, https://www.worldbank.org/ext/en/home. Accessed 28 January 2025. Cost of Living.” Numbeo, 2024, https://www.numbeo.com/cost-of-living/. “Tourism Policy 2024.” OECD Tourism Trends and Policies 2024, 2024, https://www.oecd.org/content/dam/oecd/en/publications/support-materials/2024/07/oecd-tourism-trends-and-policies-2024_17ff33a3/Tourism-Policy-Highlights-2024.pdf?. Accessed 28 January 2025.
Imagine waking up to a sunrise in Bali, working from a café in Lisbon, and closing your laptop for a hike in Medellín—all in the same year. Welcome to the life of a digital nomad. Digital nomadism is more than a lifestyle; it’s a transformative shift in how people approach work. Digital nomads are professionals who leverage technology to work remotely while travelling the globe, free from the constraints of a fixed office. This trend has gained massive momentum, driven by advances in communication tools, globalisation, and the COVID-19 pandemic, which normalised remote work across industries. The numbers back this up. According to Upwork, 36.2 million Americans will be working remotely by 2025—a staggering 87% increase from pre-pandemic levels(1). Buffer’s 2023 State of Remote Work report revealed that 91% of respondents have a positive experience with working remotely with 1% being dissatisfied and 8% feeling neutral. 98% of remote workers would recommend it to others (2). These trends show that technology and shifting work-life balance priorities are reshaping what it means to “have a job.”
Trade Balance (Trade Surplus / Trade Deficit)
The trade balance is an important macroeconomic variable: countries that trade can increase their overall welfare by consuming at a point greater than their production possibilities frontier in autarky would suggest, by making use of comparative advantages in production. Or in other words, they earn more by exporting (some of) their produce that they are relatively efficient in producing, and trading it for goods they are less efficient at producing themselves. However, trade imbalances can also pose problems for a country, such as increasing the amount of debt held by the domestic government, or making the domestic economy vulnerable to security issues or market fluctuations in other nations. Defining the trade balance The trade balance is a straightforward concept. It’s defined by the difference between exports (X) and imports (M). Exports are goods (or services) that are sold by domestic producers to foreign consumers, who pay into the domestic economy for them. Imports are foreign-produced goods and services that domestic agents purchase, sending their money abroad. The trade balance itself can be defined as NX, “net exports”, a term that appears in the equations for aggregate demand and certain approaches to calculating GDP. It should be clear to see that NX is negative when a country imports more than the country exports, which, according to the aforementioned equations, decreases economic output Y. This is because when imports are greater than exports, foreign consumers put less money into the domestic economy (to buy domestic goods) than domestic agents send outside of the domestic economy (to buy foreign goods). In other words, the economy shrinks because money is leaving it. This situation is known as a trade deficit. Conversely, if exports X are greater than imports M, NX is positive, and economic output Y is able to grow more than it would without trade. That’s because in this case, foreign investments add extra money to the domestic economy, allowing more economy-boosting savings and investment than would otherwise be possible. This situation is known as a trade surplus. How trade balance is related to economic growth Trade balance affects an economy’s capital accumulation, which is an important variable for economic growth (for example, see the Cobb-Douglas Production Function). When more capital is accumulated, the economy grows more (although this also increases the effects of depreciation and increases potential maintenance costs). When X > M there is a trade surplus, which causes a “net capital inflow”. When M < X there is a trade deficit, which causes a “net capital outflow”. In other words, a trade surplus allows an economy to accumulate capital faster than it would be able to otherwise (and vice versa for a trade deficit). Savings and the trade balance According to the savings-investment identity, savings and investment are two sides of the same economic coin. Savings fuels investment, which grows the economy. Funds entering the economy via foreign agents can be seen as additional savings entering the equation from an outside source. In the case of an open economy with NX ≠ 0, investment equals total savings by domestic and foreign agents. The equation for investment in an open economy is as follows: I = S = SD + (X – M), where I is investment, S is savings, SD is savings by domestic agents, and X – M represents net exports, which can be thought of as savings by foreign agents. When X – M is positive, there are more foreign savings flowing into the economy than domestic savings leaving it. When it is negative, domestic agents are sending more money abroad than foreigners are sending into the economy. Again consider the case of a trade surplus X > M. It’s clear from the discussion of savings and trade balances that this will cause S to rise. This means that I rises too; therefore investment is increased by a trade surplus. This conclusion is reversed in the opposite case where X < M, so investment is lowered by a trade deficit. Are trade imbalances good or bad? Surpluses and deficits affect more than just savings and investment. A trade surplus can actually reduce unemployment, as domestic industries expand to meet the demand for exports. Additionally, a trade surplus can result in a stronger currency, making imports cheaper for domestic consumers. However, while a trade surplus is often seen as a positive economic indicator, it can also indicate that a country is not consuming as much as it should domestically, suggesting an underutilization of resources. And, there are tradeoffs to consider, even from running a surplus. Export industries may actually suffer from a stronger domestic currency. That’s because a strengthening currency due to a trade surplus causes exports to be more expensive for consumers abroad, and therefore less competitive. A trade deficit arises when a country's imports exceed its exports, and notoriously may lead to an increase in the national debt. This can lead to a loss of domestic jobs and an increase in unemployment, as imported goods may be cheaper than locally produced ones. However, a trade deficit isn’t always bad, just like a surplus isn’t always good. A trade deficit can provide consumers with a wider variety of goods and services at lower prices, which in turn can help to keep inflation levels under control. And, exposing domestic industries to a higher degree of competition from foreign firms can force the former to become more efficient or innovative to survive. Further, a deficit can be the result of foreign entities clamoring to compete or invest in domestic markets, a sign that the domestic economy is seen as a strong investment. Fiscal and monetary policy implications for the trade balance The trade balance is closely interconnected with fiscal policy and monetary policy. Expansionary fiscal policies (for example, cutting taxes) can stimulate domestic demand. But, increased demand can lead to higher imports, as consumers and firms leverage their increased wealth to buy foreign goods! This can increase the trade deficit. Conversely, contractionary fiscal policies may help to reduce imports and narrow the trade deficit, but come at a cost of dampening the domestic economy. Monetary policy, which mainly involves managing interest rates and the money supply, can also influence the trade balance. For example, a higher interest rate may attract foreign investors looking to save their money, which can lead to a strengthening of the domestic currency. This can increase the trade deficit by making domestic exports more expensive, and therefore less competitive, in foreign markets. Overall, the trade balance is an incredibly interconnected macroeconomic variable that has wide-ranging implications across the economy. It can be difficult to determine if the trade balance itself is responsible for a changing economic situation, or if the myriad other related variables are culpable. The truth is that the economy is a complex and multifaceted entity. In some cases, economists may debate on whether a given surplus or deficit is good or bad for the current situation. Good to Know In the real world, the trade balance is a commonly debated topic among politicians, and it can be an important facet of international relations – for good or ill. Countries frequently engage in trade negotiations to address trade imbalances and promote fair competition, and free trade treaties are often heralded as major accomplishments. For instance, Canada, Mexico and the United States signed the North American Free Trade Agreement in 1992, taking effect in 1994. This reduced the barriers to trade (such as eliminating tariffs) among the three major North American nations, and led to a slight increase in trade among them. But, U.S. President Donald Trump – who rather (in)famously took an aggressive “America First” stance on trade issues – threatened to withdraw from NAFTA during his first term in office, complaining that it wasn’t beneficial enough for the US. Eventually, the agreement was replaced by the USMCA agreement under his administration, which includes additional provisions designed to help US industries compete more favorably against Canadian and Mexican competitors.
The “trade balance” is a term that appears often in everyday news about the economy and in politics. It refers to the amount of trade that a country conducts, and it can be in surplus, in deficit, or balanced.
Women in Economics: Influential Voices and Rising Stars
Influential Female Voices in Economics Esther Duflo A Nobel laureate and professor at MIT, Esther Duflo has revolutionised development economics with her work on poverty alleviation. Duflo’s research employs randomised control trials to identify effective interventions in areas such as health, education, and agriculture. Her insights have influenced policies around the world, proving instrumental in the design of practical solutions to poverty. Alongside her contributions, Duflo co-founded the Abdul Latif Jameel Poverty Action Lab (J-PAL), a network aimed at reducing poverty through evidence-based research. You can follow her on X or read one of her Books ‘Poor Economics’ and ‘Good Economics for Hard Times’. Read our in-depth blog about her here. Janet Yellen Currently serving as the U.S. Secretary of the Treasury, Janet Yellen has been a pivotal figure in shaping modern economic policy. With a distinguished career that includes chairing the Federal Reserve, Yellen’s expertise in labour economics and monetary policy has been critical in guiding the U.S. through economic crises. Her approach to inclusive economic growth, as well as her emphasis on reducing economic inequality, continues to impact policy decisions at the highest level of government. You can follow her on X (@SecYellen) or read about her in recent articles from Forbes and The Financial Times. Claudia Goldin Renowned for her groundbreaking work on gender economics, Claudia Goldin has explored the evolution of women’s roles in the labour market, unveiling insights into wage gaps, labour force participation, and education. As a professor at Harvard University, Goldin’s contributions provide a deeper understanding of the economic forces shaping gender disparities, and her work has become a cornerstone of labour economics and social policy. You can read about her Nobel Prize Work or read one of her many books ‘Family and Career’ and ‘Understanding the Gender Gap’. Carmen Reinhart A distinguished economist specializing in international finance and macroeconomics, Carmen Reinhart currently serves as Vice President and Chief Economist at the World Bank. Her research on financial crises and sovereign debt has been instrumental in understanding economic stability. Reinhart’s influential book, ‘This Time Is Different’, co-authored with Kenneth Rogoff, remains a vital reference for analyzing financial crises and their historical context. Follow her on Linkedin, X and Instagram or read one of her many books ‘This Time Is Different’ and ‘The Decade of Debt’ Rising Female Stars Making Waves in Economics Alice Evans Alice Evans, a lecturer at King’s College London, focuses on the sociology and economics of gender equality. Her work delves into how social norms evolve and the impact of cultural shifts on gender dynamics, particularly in developing economies. Evans has become a voice of authority on the influence of social norms on economic outcomes, making significant strides in gender economics through her research and public engagement. Follow her on YouTube, Linkedin and X, or find some of her many scholarly articles. Stefanie Stantcheva A professor at Harvard University, Stefanie Stantcheva’s research examines taxation and its effects on inequality, innovation, and education. Known for her work on social economics, Stantcheva brings an empirical approach to understanding how tax policies influence economic behaviour and social mobility. Her insights are not only shaping economic theory but also influencing policy debates on equitable taxation and welfare. Follow her on Linkedin and X or read her contributions to scholarly articles. Harvard also has her biography and research published. Ulrike Malmendier An economist at UC Berkeley, Ulrike Malmendier combines behavioural economics with corporate finance, investigating how psychological factors influence economic decision-making. Her research, including the concept of the “experience effect,” explores how past economic environments shape individuals' financial choices. Malmendier’s contributions provide a deeper understanding of economic behaviour and have practical implications for both policy design and corporate strategies. Follow her on Linkedin and X or read her contributions to scholarly articles. Victoria Vanasco An emerging scholar in finance and macroeconomics, Victoria Vanasco is an assistant professor at Stanford Graduate School of Business. Her work centres on financial intermediation, systemic risk, and information asymmetry in markets. Vanasco’s research on financial institutions’ vulnerabilities and economic stability offers valuable insights into how information shapes market behaviour, making her an important voice in economic stability and financial regulation. Follow her on Linkedin, X and Facebook. Kyla Scanlon Kyla blends traditional economic insights with modern-day storytelling through her digital platforms. With a unique ability to simplify complex economic concepts, she has gained a significant following for her accessible, creative, and often humorous approach to economic education. She is also a strong advocate for financial literacy, particularly among younger audiences, making her an influential voice in engaging the next generation of economists and data-savvy individuals. Find her on Instagram, TikTok, X and YouTube or read her newly released book ‘’In This Economy? How Money and Markets Really Work’’. Tanya Van Court A visionary entrepreneur and advocate for financial literacy, particularly among children and families. As the founder and CEO of Goalsetter, a financial education platform, she has revolutionized the way young people learn about saving, budgeting, and investing. Tanya’s mission is to close the wealth gap by equipping the next generation with the tools and knowledge needed to make informed financial decisions. Her work combines elements of behavioural economics with technology, empowering families to build healthy financial habits early on. Find her on Instagram, and Linkedin or find out more about her in this Forbes article. The Importance of Diversity in Economics The contributions of these women exemplify the importance of diverse voices in economics. They have introduced broader perspectives and new areas of inquiry that perhaps are less likely to have developed within the confines of the old-school “men’s club” mentality that typified many economics departments in the past. Gender diversity among economists enhances the relevance and applicability of economic research, bringing in varied approaches to understanding issues such as inequality, poverty, and behavioural dynamics. As the field continues to evolve, fostering inclusive spaces within academia and policy institutions remains essential, not only for advancing women economists but also for enriching economic thought for all. Encouraging Future Generations The achievements of these trailblazing women in economics inspire future generations to pursue impactful careers in the field. By highlighting their contributions, we emphasize the critical role women play in advancing research, shaping policy, and fostering a more inclusive and innovative discipline. Their work serves as a powerful reminder of the value of gender diversity in driving progress across global economies and financial systems. Check out our other blog 'Does Economics have a Problem with Women?' for an interesting insight on this topic.
Men have long dominated economics, but female economists have made remarkable contributions in recent decades. The work of female economists, together with that of their male counterparts, has redefined academic and policy landscapes and paved the way for greater inclusivity within the discipline. Women continue to bring diverse perspectives that enrich our understanding of global financial systems, economic growth, labour dynamics, and policy interventions. These women are not only changing the economic landscape but inspiring future generations to follow in their footsteps. Here are some of the voices we should all be listening to.
Program and courses With this Master's program, one of the best Law Schools in the Netherlands (THE, 2025) opens its doors to students from anywhere in the world both on campus and online. The market requires experts who have knowledge of both the economic and legal aspects of taxation. That is why the program is based on two pillars: law and economics. After graduation, all students (including students with a background in economics) will be awarded with the Master in Law in International Business Taxation (LLM). Students with a Dutch Bachelor's in Law (LLB) or pre-Master's in Law can obtain the so-called “civiel effect” after graduation from this Master's. That means you will have the right to exercise typically legal professions in the Netherlands such as notary, judge, attorney, etc. This only applies to Dutch-speaking students. With this Master's degree, you qualify for prospective membership in the Nederlandse Orde van Belastingadviseurs (NOB) and can take the NOB professional program. As member, you can work as a tax advisor in an NOB recognized firm. Spice up your curriculum and broaden your horizon by participating in the prestigious EUCOTAX Wintercourse. Be inspired by internationally-reputed lecturers and celebrated scholars in a program that is affiliated with the Fiscal Institute Tilburg, one of the largest fiscal institutes in Europe. Typical courses are: International and European Taxation Tax and Technology Transfer Pricing Career prospects International Business Tax Economics offers you outstanding career prospects. Expect to get a job soon after you graduate, finding positions in the private sector (internationally-operating companies, consulting firms) as well as in the public and non-profit sectors. Graduates work or start for example as: Analyst International Corporate Income Tax at Deloitte International Tax Consultant at Ernst & Young (EY) Transfer pricing Associate at PricewaterhouseCoopers (PwC)
Combine legal and economic knowledge to become a tax expert specialized in international business. Gain the academic skills to fully understand the impact of taxation in combination with new technologies on a global scale. Understand the function of taxes as instruments to pursue sustainable development. The LLM International Business Taxation gives you the opportunity to join the program either online or on campus.
Economic Development, Innovation and Growth (JEL O)
The number of scholarships is limited and mainly targeted at students with excellent study results. Visit website for more info
The AD-AS model uses the concepts of aggregate demand and supply to build a comprehensive model of the entire economy. While imperfect (like all models!), the AD-AS depiction is a great starting point when studying macroeconomic models; it can show the effects of just about any economic factor or shock on the economy. Importantly, the model also depicts inflation and output clearly, which in turn strongly hints at the level of unemployment, three important macroeconomic variables for any model to account for. Full-employment output in the AD-AS model The basic form of the AD-AS model is shown in Figure 1. In this graph, equilibrium is at the point where the AD (aggregate demand) and SRAS (short run aggregate supply) curves intersect with both each other and the vertical LRAS (long run aggregate supply) line. This yields an equilibrium price level of P1 and output of Y1. Figure 1: The AD-AS model in long-term equilibrium When the economy is in this state, markets are in perfect harmony. We know this because when the three curves (AD, SRAS, and LRAS) intersect, the price level is steady, unemployment is as low as possible, and output (as measured by, say, GDP) is as high as is “safely” possible. At this three-way equilibrium, consumption and investment demands of consumers and businesses (AD) perfectly align with the production desires of suppliers (SRAS) at the current price level. In other words, the price level is steady because there is just enough supply to meet demand. And, because the economy is efficiently using all of its resources (equilibrium is on the LRAS curve), we know that output is maximized. Because of this, we also know that workers are being utilized effectively and there is no unemployment (save for the unavoidable and healthy natural rate of unemployment). Thus, when short-term AD-AS equilibrium rests on the LRAS curve in the AD-AS model, the economy is in a state known as “full employment output”. For deeper understanding, recall that the LRAS curve shows the maximum (healthy) potential output of the economy, and is unaffected by the price level. This is because the numeric price level doesn’t change how much real-world production factors – like raw materials, machines, and human intelligence – can actually produce. The LRAS curve, then, represents a Pareto-efficient usage of the economy’s resources. In fact, the LRAS curve can also be thought of as a point on the economy’s Production Possibilities Frontier (PPF). When the economy is efficiently using all of its resources, it will reach a production mix on the edge of the PPF, and in the AD-AS model it will be at equilibrium on the LRAS curve. Disequilibrium in the AD-AS model This situation is all well and good, but the economy isn’t always in equilibrium! Let’s examine how the AD-AS model depicts disequilibrium. First, consider a situation where the short-run equilibrium – the intersection of AD and SRAS – lies to the left of the full employment level. What does this say about the economy? Figure 2: The AD-AS model in recession This shows that aggregate demand and short-run aggregate supply are in equilibrium, but they are not at the full-employment level of output depicted by LRAS. Since LRAS shows where equilibrium should be if the economy is utilizing its resources effectively, this economy isn’t producing output to its full potential – it’s producing at a point somewhere under the PPF curve. It’s possible that the price level is too high, that there is too much unemployment, or that some negative shock occurred that made the economy less productive. In other words, Figure 2 is showing a recession! In this specific case, notice how the AD curve has shifted to the left, and the new levels of prices and output are both less than in Figure 1. Figure 3 examines the opposite case – where the short-run equilibrium is to the right of LRAS. Figure 3: The AD-AS model in an inflationary expansion Now, AD and SRAS are at an equilibrium output greater than the full employment output. This is, in fact, possible. However, this isn’t some cheat code that heralds infinite economic growth; as with everything in economics and in life, there are no free lunches. This inefficient overuse of resources comes with a serious cost: inflation! Notice how, compared to Figure 1, the AD curve has shifted to the right, leaving us with higher output and a higher price level. The economy could be over-producing for several reasons, but in any case, free markets will eventually correct themselves. They will respond to the excess production by raising prices or reducing output, such that the new intersection of AD and SRAS returns to the LRAS curve. One way this can come about is via an adjustment in the wage rate. Workers, noticing the increased productivity, will seek increased compensation. This upward pressure on the wage rate will eventually increase prices across the economy, as firms face higher labor costs, and by extension higher production costs. In this case SRAS shifts to the left, until it intersects AD at the point where both curves meet LRAS. The end result of the brief period of over-productivity, then, is the same long-run output as before, but at a higher price level. This is just one way that inflation can occur as a result of Figure 3’s over-production. Regardless of the exact reasons, economists describe this state of the economy as an “inflationary expansion”. That term – along with the terms “recession” and “full employment output” – define each basic state that the AD-AS model can be in, and tell us the position of the curves and likely state of the economy even without needing to see a graph. Dynamics of the AD-AS model Showing the state of the economy is helpful, but the true usefulness of the AD-AS model is that it can depict how the economy might shift into and out of equilibrium. In other words, it’s a tool that helps economists anticipate how real-world events will affect the economy, and why. When examining the AD-AS model for these purposes, it’s important to remember the factors that can shift either the aggregate demand or aggregate supply curves. In Figures 1, 2 and 3, the AD curve shifted, but in the real world either AD, SRAS, LRAS, or even two or three of the curves can shift! To recap, the equation for aggregate demand shows which factors can shift it: AD = C + I + G + NX (Where C represents consumption spending by individuals and firms, I is investment spending, G shows government spending, and NX represents net exports.) If anything occurs that shifts one of its components, aggregate demand will shift. A full discussion can be found in the linked article. Likewise, aggregate supply can shift too, and the linked article discusses how. The most common causes of a shift in aggregate supply include changes in the prices or availability of factor inputs, or changes in economic policy that make it easier (or harder) for firms to conduct business. Long-run aggregate supply can also shift. When it does, it signifies a change in the economy’s total potential output. Innovation is a major factor that can shift LRAS to the right; destructive events like warfare or natural disasters can shift it to the left. When any curve shifts, we can determine the likely effects on the economy using the graphs depicted in the last section. For example, suppose that a negative supply shock – such as an increase in the price of oil – hits the economy. This would cause SRAS to shift leftwards, as the cost of inputs is a major factor that can affect the supply of goods (LRAS does not shift in this case, since prices don’t affect long-run potential output). The leftward shift in SRAS corresponds to a movement left and up along the AD curve, bringing the economy to a new short-run equilibrium with lower output and higher prices – see Figure 4 below. Figure 4: Recession caused by a negative shock to SRAS But, in the long run, the economy will recover from the increased price of oil and return to its long-run efficient level of production. This can happen in many ways. In this example, it’s possible that the increased cost of oil incentivizes consumers and firms to find energy and input substitutes that don’t rely on oil. Suppose producers began to rely on solar power instead; eventually then, SRAS would return to the fully efficient level once firms had enough time to fully account for the increased cost of oil. Multiple curves can shift at the same time, too. Consider a case where innovation in a domestic economy produces a major technological breakthrough – for example, suppose that one country alone invents desktop computers. This would improve economic productivity, shifting LRAS to the right; it would also (most likely) lead to a surge in foreign demand for domestically-produced computers, before other countries are able to begin producing their own supply. This increase in the NX term of aggregate demand shifts AD to the right as well. The final equilibrium is likely to be a scenario where the economy has both higher output and a higher price level, since LRAS and AD both shifted rightwards (representing a movement upward along the SRAS curve). In these scenarios, the effect on the price level is clear. The likely effects on employment are easy to deduce from this model, too, although employment doesn’t appear explicitly on the graph. Consider the case just discussed, where LRAS and AD shifted rightwards. In response to the increased demand, firms would need to hire more workers and increase their capital stock, to increase production. Therefore, unemployment would most likely decrease. AD-AS and the effects of policy The articles on monetary and fiscal policy discuss the goals of the central bank and government when implementing policy. Generally, these institutions seek to boost the economy during times of recession, and slow the economy during times of (potentially inflationary) expansion. It may seem odd at first to learn that these institutions might actually want to reduce or discourage economic activity. But, the AD-AS model immediately shows us when this can make sense. If the economy is in an inflationary expansion (like in Figure 3), it might be necessary to shift AD to the left so that the price level doesn’t increase too much. After all, runaway inflation can lead to difficult situations like stagflation or hyperinflation, especially if unforeseen events shift SRAS or LRAS to the left. In order to affect the economy, the government can affect G (government spending) directly through fiscal policy. And, implementing laws and regulations can guide the economy in various ways, too. For example, if the economy is in a recession (like in Figure 2), cutting corporate taxes can shift SRAS to the right and encourage the economy to return to an equilibrium closer to the full-employment output level. Monetary policy affects the AD-AS model too. To see how, first realize that the money supply can affect aggregate demand. If the central bank increases the supply of money, AD will shift rightwards (since consumers have more money to spend; or, alternatively, the velocity of circulation increases). This causes the short-run equilibrium to reach an increased level of output and prices (assuming that monetary neutrality does not hold). In times of recession, this is a policy lever that may seem quite appealing to bring short-run equilibrium back towards LRAS. Depending on the country, the central bank also influences interest rates, which have important effects on the AD-AS model. Increasing interest rates encourages saving and discourages both consumption spending and (firms) borrowing to fund investment projects, which can shift AD leftward, and vice versa (nevertheless, the savings-investment identity continues to hold as the economy shifts). Further Reading The AD-AS model isn’t perfect, but it is a great starting point. Grasping this model will allow students to ace introductory macroeconomics courses, and build off of it to learn more complex models of the economy. For an advanced discussion of the AD-AS model’s shortcomings, numerous papers are available. Consider, for example, David Colander’s The Stories We Tell: A Reconsideration of AS/AD Analysis. Yet, the model is still widely used in economics today because it is useful, relatively straightforward, and robust. See Amitava Krishna Dutt and Peter Skott’s Chapter 6 Keynesian Theory and the AD–AS Framework: A Reconsideration for an example of argumentation in favor of its continued use.
There are a wide variety of macroeconomic models that aim to represent how economic activity works, and economics students will encounter many throughout the course of their studies. Arguably, the most common and important of these is the aggregate demand-aggregate supply model, or AD-AS model. Needless to say, you should be familiar with both aggregate supply and aggregate demand before continuing to read this article!
Planet Money Produced by NPR, Planet Money is a must-listen for anyone wanting to understand complex economic issues. This podcast covers topics like global trade, market changes, personal finance, and economic policies. It presents these subjects through engaging stories. Planet Money simplifies intricate concepts into relatable narratives, making it accessible to listeners of all backgrounds. Whether you're commuting, exercising, or just unwinding, it's an excellent way to stay informed without feeling overwhelmed. Check out a recent edition of Planet Money, following the re-election of Donald Trump as US President), about what markets bet President Trump will do (8 November 2024) : Your browser doesn't support embedded audio. Please follow the link above. 2. Freakonomics Radio Hosted by Stephen Dubner, Freakonomics explores the “hidden side of everything.” It uses economic theory to look at many unusual topics. This podcast looks at the economics of drug dealing and the effects of cheating on society. It encourages listeners to think differently about everyday events. They offer unique perspectives that push the boundaries of traditional economic discussions, making them intellectually stimulating and highly engaging. Check out a recent edition of the Freakonomics Radio Podcast asking whether Screen Time is as poisonous as we think (11 September 2024): <source src="https://stitcher.simplecastaudio.com/2be48404-a43c-4fa8-a32c-760a3216272e/episodes/6642f1c7-8948-4da0-8eb8-46dc5a073647/audio/128/default.mp3/default.mp3_ywr3ahjkcgo_114a0aa095f67f75ca66a9b698e66bc6_38865205.mp3?awCollectionId=2be48404-a43c-4fa8-a32c-760a3216272e&awEpisodeId=6642f1c7-8948-4da0-8eb8-46dc5a073647&nocache&hash_redirect=1&x-total-bytes=38865205&x-ais-classified=unclassified&listeningSessionID=0CD_382_336__c0b7a1ea2e25b39bfc1110e0ef9f7a882a4a5e43" type="audio/mpeg"> Your browser doesn't support embedded audio. Please follow the link above. 3. The Indicator A spinoff of Planet Money, The Indicator offers quick updates on work, business, and the economy. Each episode is short and easy to understand. Great for busy people, each 9-minute episode gives you a quick look at the latest economic trends and data. To stay informed without long episodes, The Indicator is perfect for daily updates. It keeps you in the loop with little time needed. Check out a recent edition of the Indicator Podcast about how Donald Trumps tariffs might work (2nd December 2024): Your browser doesn't support embedded audio. Please follow the link above. 4. The Economics of Everyday Things Journalist Zachary Crockett looks at ‘’quotidian things and finds amazing stories’’. This podcast is a spinoff from Freakonomics. It offers quick and insightful updates on everyday topics. It demonstrates how economics influences everything. Who decides where our coffee comes from every morning? How much is an oak tree worth and why? How did Girl Scout Cookies become a billion-dollar business? If you want to stay informed without long episodes, this podcast is perfect for short, daily episodes. Check out a recent edition of the "Economics of Everyday Things" Podcast about a resurgence in the popularity of sending greeting cards: <source src="https://stitcher.simplecastaudio.com/51058430-d98f-4830-b949-5d9a371523ce/episodes/fb5b1c52-706a-40fd-ae75-93a9d5cb917e/audio/128/default.mp3/default.mp3_ywr3ahjkcgo_0107875b1f12c0afa9298bb0b58aea6a_14916786.mp3?awCollectionId=51058430-d98f-4830-b949-5d9a371523ce&awEpisodeId=fb5b1c52-706a-40fd-ae75-93a9d5cb917e&nocache&hash_redirect=1&x-total-bytes=14916786&x-ais-classified=unclassified&listeningSessionID=0CD_382_336__971d8aafaa830770a2c8fec1516a5de779bec703" type="audio/mpeg"> Your browser doesn't support embedded audio. Please follow the link above. 5. Macro Voices Bloomberg-owned with weekly market commentary by Hedge Fund Manager Erik Townsend, Macro Voices is focused on macroeconomic trends. It includes interviews with leading financial experts and policymakers. They discuss global economic issues and offer expert insights. Their insights help listeners understand the bigger picture. Macro Voices is for those already with knowledge in Economics. Perfect for professionals and enthusiasts seeking expert insights into global economic developments and their implications. Check out a recent edition of Macro Voices (27 November 2024) discussing the markets after Trumps election victory, and energy/natural resource markets Your browser doesn't support embedded audio. Please follow the link above. 6. The Economist Podcasts From the renowned publication, ‘The Economist’ Podcasts cover a wide range of economic and political topics. Featuring interviews with journalists and experts, these podcasts offer high-quality and comprehensive coverage of current events. They post every weekday. Their global network of correspondents helps make sense of stories beneath the headlines. They share surprising trends and tales from around the world. Most of the podcasts require a subscription, but each week a selection of Economist podcasts are available for general access. 7. Odd Lots Joe Weisenthal and Tracy Alloway from Bloomberg host a show called Odd Lots. The show explores unique and interesting aspects of economics, finance, and the markets. The podcast delves into intriguing stories and features expert interviews, making complex topics both engaging and understandable. Odd Lots combines expert insights with fascinating narratives, offering a fresh take on economic and financial subjects. Check out a recent edition of Odd Lots about the demand for Chicken Sandwiches Your browser doesn't support embedded audio. Please follow the link above. 8. Capitalisn't Capitalisn’t offers a critical perspective on capitalism, exploring its impacts and alternatives through interviews and discussions. The podcast examines the strengths and weaknesses of various economic systems to compare with capitalism's effects in today's world. For listeners interested in a more nuanced discussion of economic systems, Capitalisn't present thoughtful critiques and explores potential alternatives to capitalism. Check out a recent edition of Capitalisn't (21 November 2024) about the fertility crisis, with guest Niall Ferguson Your browser doesn't support embedded audio. Please follow the link above. 9. EconTalk Hosted by Russ Roberts from the Hoover Institution, EconTalk features deep talks with economists and thinkers. They discuss many economic issues. The podcast is known for its thoughtful and comprehensive discussions on economic theory and practice. EconTalk is perfect for people who enjoy deep and thoughtful discussions. It explores important economic ideas and how they apply in real life. Check out a recent edition of EconTalk (21 October 2024) about why housing is artificially expensive, and what can be done about it Your browser doesn't support embedded audio. Please follow the link above. Conclusion Podcasts are an invaluable resource for anyone looking to stay informed about economic trends and theories. The podcasts shared here mix expert analysis, engaging stories, and deep discussions. They cater to many interests and skill levels. By listening to these shows, you will understand the changing economy better. This knowledge will help you make smart choices and stay ahead in your field. Image Credit: Pixabay (Free for use under the Pixabay Content License)
In an ever-evolving global economy, staying informed is more crucial than ever. Whether you are an economics student, a finance professional, or just curious, podcasts are a great way to learn. They help you understand economic trends, theories, and real-world applications easily and engagingly. So, we’ve assembled a list of some top economic podcasts you ought to have a listen to. You can find all these podcasts on Amazon, Spotify, and Apple Music. For your convenience, we’ve linked their web pages below. Happy listening!
Distribution effects in a perpetual Bitcoin bull market: Who really pays for the Lamborghini
1. Introduction The debate over Bitcoin’s utility and sustainability dates back to Nakamoto’s 2008 white paper. Many economists see Bitcoin as a speculative bubble that will eventually burst, causing social damage through high energy use and illicit payments (Rogoff 2017, Roubini 2018, Avoca 2021, Taleb 2021). Many Bitcoin supporters, however, have changed their primary interest in Bitcoin as they see it as an investment asset with the potential for everlasting capital gains, encouraging even latecomers to invest and assuming no harm to those staying out. Our paper explores both Bitcoin’s original promise as a payment system and its current role as an investment asset. We argue that Nakamoto's (2008) understanding of retail payments was inaccurate and that this explains why Bitcoin has never been significantly used in legal e-commerce. Likewise, Bitcoin lacks the traits of financial assets: It does not generate any cash flow like real estate, interest like bonds or dividends like stocks, and it cannot be used productively like commodities (Bindseil, Papsdorf and Schaaf 2022). <o:p></o:p> In fact, many supporters now dispense with any reference to economic justifications as to why the Bitcoin price should rise or reach a specific level. They simply take further price increases for granted and promote the idea of Bitcoin as a pure investment asset. The list of those in favour of this financial situation without “reason” ranges from politicians and financial giants to sportsmen and Hollywood stars (Hoffman 2024, Bent 2024, Coindesk 2021, Gerard 2024, Bitfinex 2024, CNN 2024).<o:p></o:p> We therefore conclude that Bitcoin’s appeal is based on self-fulfilling beliefs in its rising value, fuelled by new investments (van Oordt 2024), but not supported by economic fundamentals or legal social utility, which also implies that Bitcoin has no impact on the economy's production potential. This means that the wealth gained by early adopters comes at the expense of latecomers. It’s like filling a big barrel by draining water from many buckets. 2. Technology shocks, the increase of the production potential and wealth effects New technologies are key to economic growth and social welfare. The rapid rise in market capitalization of tech companies (Google, Tesla, Amazon, Apple, Nvidia) is seen as reflecting both the future production potential of the economy and their expected profitability. An aligned increase of equity wealth and production potential allows the wealth effect on consumption to be matched with a greater supply of goods and services without inflation. There are however cases without such a match. Increased competition from technology can reduce equity market cap despite higher production potential, and some firms may see equity values rise sharply from breakthrough technologies long before the economy benefits. Sometimes, expectations are wrong, leading to a tech equity bubble burst. Phenomena like Bitcoin, which don't enhance the production potential at all, may still aim for high market caps. In these cases, the neutral level of nominal interest rates and therefore monetary policy are likely affected. Tightening might become necessary when wealth effects outpace production growth, as with Bitcoin. If the central bank optimally tightens policy, it can prevent wealth-effect driven inflation and macroeconomic instability. In our simulation of Bitcoin’s redistributive effects, we assume the central bank successfully manages this. We also simplify by assuming a steady rise in Bitcoin prices and corresponding policy responses, ignoring short-term shifts between consumption and real investment. 3. The mechanics of redistribution We examine the redistributive effects of Bitcoin in a theoretical, Bitcoin-friendly scenario, in which the price of Bitcoin rises continuously and no “bubble burst” occurs. Since investing in Bitcoin doesn’t boost production, this consumption crowds out other spending or investment, potentially harming non-Bitcoin holders. Early investors, or ”Early Birds”, increase their consumption by selling Bitcoin to “Latecomers” - in our simplified model, society consists only of these two types. Early Birds sell Bitcoin to Latecomers, who fund these purchases by liquidating real assets and reducing their consumption. This transfer raises Early Birds’ consumption and wealth over time. We illustrate the simple model with specific parameter values, assuming for example 10% annual appreciation and 2% of Bitcoin being transferred each year, with one-half of this being financed by Latecomers’ reduced consumption and the other half by the transfer of real asset wealth. Under the assumption of unchanged investments, early adopters increase their real wealth and consumption at the expense of the real wealth and consumption of goods and services of those who invest in it only at a later stage. Initially, Early Birds dominated both Bitcoin and real assets, but over time, Latecomers’ share of Bitcoin increased, although Early Birds still hold more real assets. The simulations show that while Bitcoin ownership eventually converges, Early Birds maintain higher consumption due to their asset accumulation. Overall, even if Bitcoin prices were to continue to rise, wealth gains for early adopters come entirely at the expense of latecomers, leading to significant redistribution. Early holders’ wealth and consumption grow, while others become poorer. When Bitcoin converges to an equal distribution across the population, further price increases become neutral in every respect. Unsurprisingly, in the absence of positive effects on the production potential, proportionally distributed Bitcoin wealth increases cannot lead to an expansion of consumption. On the way to this state, the Lamborghini, Rolex, villa, and additional equity portfolio bought by early Bitcoin investors are financed by diminishing consumption and real wealth losses of those who initially do not hold Bitcoin, but only jump later the bandwagon. This means that Bitcoin’s redistribution effects go beyond the implications of good or bad timing of purchases and sales by investors amid a volatile price, or the risk of financial losses in case the Bitcoin bubble would eventually burst as predicted by many (e.g. Krugman 2013, Rogoff 2017, Roubini 2018). This redistribution bears the risk of destabilizing society. Latecomers, even if unable to pinpoint the cause [1], will feel frustration as their purchasing power erodes. It is important that current non-holders recognize that Bitcoin’s rise is driven by wealth redistribution at their expense, posing a threat to societal cohesion. 4. Bitcoin and the US election In the US, the crypto industry is celebrating itself as the real winner of the presidential election, as the new administration promises a more crypto-friendly policy. According to Strobel (2024), FairShake, the industry's largest super political action committee (PAC), won 48 out of 48 races in which it supported a candidate (with Fairshake supporting crypto-friendly candidates regardless their political camps). Interestingly, many of the ads didn't even mention crypto, technology or tech regulation. Rather, they were aimed at discrediting supposedly crypto-critical candidates (White 2024). No wonder markets are euphorically bullish in anticipation of rosy times: Since the US presidential election on 5 November, the Bitcoin price has risen by over 30% from USD 68,000 to above USD 90,000. What looks like good news for investors at first glance is a bleak outlook for social fairness and ultimately cohesion. With a market capitalization of Bitcoin having grown to above USD 1.8 trillion (as of 18 November 2024), the economic interests to continue the bull run and the financial fire power of the industry to spread the narrative of Bitcoin as an ideal investment asset are higher than ever before. Authors’ note: The views expressed in this column are the ones of the authors and not necessarily the ones of the ECB. We would like to thank Klaus Adam, Charles-Enguerrand Coste, Troy Cross, Kelvin Low, Omid Malekan, George Pantelopoulos, Dirk Schumacher, Bob Seeman, Oreste Tristani, Mika Tujula, Anton van der Kraaij,for useful comments. All remaining errors are ours. This blog post is an abridged summary of a full article, available here. About the Authors Ulrich Bindseil is Director General of Market Infrastructure and Payments (DG-MIP) at the European Central Bank. Mr Bindseil started working in the field of central banking in 1994 in the Economics Department of the Deutsche Bundesbank. He worked as an economist at the European Monetary Institute as of 1997 and was later on responsible for the Directorate General Market Operations at the ECB. Mr Bindseil received a PhD in economics at the University of Saarbrücken. Jürgen Schaaf is advisor to the Senior Management of the Market Infrastructure and payments business area of the ECB. In previous occupations he was Counsellor to the Executive Board of the ECB, Personal Adviser to the Governor of Banque centrale du Luxembourg (BCL), worked as ECB watcher at Börsen-Zeitung and as a Senior Economist at Deutsche Bank. He studied Economics in Marburg and Canterbury (Kent, UK), and received his PhD in Economics from the University of Marburg. References Avoca (2021), “Bitcoin: a trojan horse”, 14 October 2024.<o:p></o:p> Bent, M (2024), “Pensions are doomed without Bitcoin”, Marty’s Bent, 19 March 2024.<o:p></o:p> Bindseil, U, P Papsdorf and J Schaaf (2022), “Bitcoin – the encrypted threat”, SUERF policy note, issue 262, 7 January 2024.<o:p></o:p> Bitfinex (2024), “Where do US Presidential Candidates Stand on Crypto Policy?“.<o:p></o:p> Chernoff, A and J Jagtiani (2024), “Beneath the Crypto Currents - The Hidden Effect of Crypto “Whales””, Federal Reserve Bank of Philadelphia, Working Paper 24-14, August 2024.<o:p></o:p> CNN (2024), “RFK Jr. suspends presidential campaign and endorses Trump”, 23 August 2024.<o:p></o:p> Coindesk (2021), “Tom Brady Says He’s a ‘Big Believer’”, Crypto, 28 May 2024.<o:p></o:p> Gerard, D (2024), “Trump’s Crypto Turnaround Heralds an Economic Nightmare - The former president is pitching a new grift”, Foreign Policy, 30 July 2024.<o:p></o:p> Hoffman, N (2024), “BlackRock CEO Larry Fink says Bitcoin ‘Is An Asset Class That Protects You’”, Bitcoin Magazine, 12 January 2024.<o:p></o:p> Krugman, P (2013), “Bitcoin Is Evil.”, The New York Times, 28 December 2024.<o:p></o:p> Nakamoto, Satoshi (2008), “Bitcoin: A peer-to-peer electronic cash system”.<o:p></o:p> Rogoff, K (2017), “Bitcoin’s Price Bubble Will Burst under Government Pressure””, The Guardian, 9 October 2024.<o:p></o:p> Roubini, N (2018), “Crypto is the Mother of All Scams and (Now Busted) Bubbles”; Testimony for the Hearing of the US Senate Committee on Banking, Housing and Community Affairs On “Exploring the Cryptocurrency and Blockchain Ecosystem”; October 2024.<o:p></o:p> Strobel, Aubrey, “The many ways crypto won in this election”, CoinDesk, 15 November 2024. , <o:p></o:p> Taleb, N (2021), “Bitcoin, currencies, and fragility”, 22 July 2024.<o:p></o:p> van Oordt, M R C (2024), “On Bubbles in Cryptocurrency Prices”, 1 August 2024. <o:p></o:p> White, M (2024), “Cryptocurrency companies have raised over $135 million to influence US elections this cycle, and they’re just getting started, Citation Needed, Newsletter, 30 May 2024. <o:p></o:p>[1] Indeed, recent research confirms that cryptocurrency markets are often characterized by market manipulation or, at the very least, by a sharp distinction between large and sophisticated investors and small retail investors (Chernoff and Jagtiani 2024). <o:p></o:p>
We examine the redistributive effects of Bitcoin in a theoretical scenario where its price continuously appreciates. Early adopters benefit from rising consumption and asset accumulation at the expense of later investors, who fund Bitcoin purchases by liquidating real assets and reducing their consumption. The analysis reveals that even in the absence of a crash, Bitcoin causes wealth redistribution that enriches early investors while reducing the real wealth and purchasing power of non-holders and latecomers. This dynamic, if unaddressed, risks eroding societal cohesion. Amid a record high market capitalization of USD 1.8 trillion following the 2024 election in the USA, this risk is higher than ever.
2024 Nobel Prize in Economics- The Winners
The Research That Was Awarded the Prize The 2024 Nobel Prize in Economics recognised the transformative work of economists Daron Acemoglu, Simon Johnson, and James Robinson on the role of institutions in economic development. Their work explores how political and economic institutions influence a country’s success or poverty. Through their research, they argue that the legacy of colonial institutions has had long-lasting effects, shaping economic disparities worldwide. Nations where settlers established stable political institutions tend to have more successful economies, whereas countries where colonial powers primarily engaged in resource extraction often face economic struggles to this day. Their research has introduced a more nuanced perspective on economic development, highlighting the necessity for political and institutional reforms to address global inequalities. Their findings emphasize how inclusive institutions - those that allow broad access to resources and economic opportunities - are foundational to building stable and thriving economies. Detailing the Formation of Institutions and the Effect on Their Prosperity One of the core concepts of the combined work of this year’s prize winners is that of Extractive institutions versus Inclusive institutions. Extractive Institutions tend to centralize power and wealth in the hands of a few. They limit opportunities for the wider population and lead to slower economic growth and higher inequality in the longer term. Inclusive Institutions on the other hand allow a broad participation in the economy, protect individual rights and enable people to benefit more directly from their work. This leads to higher investor confidence and innovation and is associated with longer-term economic growth and prosperity. This builds on previous work by scholars working in the field of Institutional Economics. The 2024 winners expanded on this to explore how colonial history impacts today’s economies. A key aspect of the research was the identification of a link between the attractiveness of the environment for colonial settlers, and by extension the health of colonial settlers, and the types of institutions that developed. Empirically, Acemoglu, Robinson and Johnson identify areas that experienced lower “settler mortality”, for example North America, as more hospitable regions, whereas areas with higher settler mortality, typically due to environmental and health factors like higher disease prevalence (e.g. Malaria), were identified as less hospitable for colonial settlers, for example South America, parts of Africa and parts of Asia. They identified that in those places with a more hospitable environment, defined by lower settler mortality rates, institutions tended to develop as more inclusive and stable, promoting long-term prosperity for the settlers. In contrast, in those areas with higher settler mortality rates, assumed to be, broadly speaking, less attractive for (mostly European) colonizers in the longer-term, the colonizing nations tended to establish more extractive, resource (including labor) focused institutions, allowing for a faster short-term exploitation of local resources, but at the expense of the short-term and long-term inclusion and well-being of the local population. A final element of the research agenda is the legacy of these institutions, the forms in which they have persisted today, and how they have shaped, and continue to shape, economic patterns even generations after their establishment. Debate and Criticism As befits groundbreaking and fundamental economic research, the work is not without its critics. One point of controversy relates to methodology and data issues. Specifically, some experts argue that the prize winners’ use of “settler mortality” data may not fully capture the complexities of different historical situations. Further, emphasizing the state of institutions as a legacy of colonial times to explain the current challenges in certain countries and regions, while undoubtedly providing a useful framework, may risk glossing over other factors unique to a country or region. For example the impact of the Atlantic slave trade, the colonial exploitation of natural resources, and the economic and cultural trauma resulting from these that, many would argue, lasts to this day, surely played a role too. It should be noted that the prize winners do not argue that institutional legacy is the only explanation for levels of poverty today. As such, the “criticism” in this sense would perhaps more accurately be that the prominence given to the role of institutions by the winners, and more broadly by New Institutional Economics (NIE) as a subfield of economics, can divert from other (typically more qualitative social and political) factors. This prominence is of course increased by the Nobel Prize award, but is perhaps better viewed as a correction of too much emphasis on broader social, economic and political explanations, and a long-standing underemphasis of the role of institutions. In summary, as long as researchers and policy makers consider the institutional approach in context, without neglecting other factors, then it can of course contribute extensively to a more complete picture and, one hopes, better research and policy in future. Another criticism is that the approach is not entirely new. New Institutional Economics as a subfield developed in the 1960s and 1970s (the term is attributed to Oliver Williamson, himself a Nobel Prize winner from 2009). Its application to help explain the prosperity or poverty of national economies was arguably pioneered by economists like Douglass North, who died in 2015 and had already been awarded a Nobel Prize for his work in 1993. While he focused on the importance of institutions in the development of market economies, rather than making a correlation between institutions and poverty per-se, his work no doubt contributed enormously to the recognition of the importance of New Institutional Economics as a field, and of the role of institutions in national economic success. But again, this is not a criticism as such of the 2024 prize winners and their research. Between them, the new insight they have brought has strengthened the field and our understanding of the importance of historical institutional development in modern-day prosperity. Indeed, supporters highlight how the work of Acemoglu, Johnson and Robinson provides clear ideas on how countries can reform institutions for economic development, especially relevant for today’s emerging economies. The Winners' Biographies Daron Acemoglu specializes in economic growth, political economy, and institutions, he was born in 1967 in Istanbul, Turkey. He received his BA in economics from the University of York, UK, in 1989, thereafter receiving an MSc in econometrics and mathematical economics at the London School of Economics in 1990, and a PhD in economics in 1992. Later Acemoglu moved to the US and joined MIT in 1993 as an assistant professor where he worked his way up to full professor by 2000. His work focuses on how political decisions shape economic outcomes, analyzing issues like inequality, economic power, and the impact of technology on labor markets. He is highly regarded for his publications, including ‘Why Nations Fail’ co-authored with James Robinson, and ‘Power and Progress’, a recent book co-written with Simon Johnson. Acemoglu's research has gained attention from both academic and policy circles, establishing him as a significant figure in economic thought and reform advocacy. Simon Johnson, also a professor at MIT, is renowned for his expertise in macroeconomics and development economics. He was born in 1963 in Sheffield, UK, and received a first from Oxford University in 1984, and a Master's in economics from the University of Manchester before doing his PhD at MIT. Johnson’s career took off with a Chief Economist position at the International Monetary Fund (IMF). His research often explores the intersection of economic policies, institutional development, and global markets, frequently addressing how institutions can drive or hinder economic progress. In addition to his academic contributions, Johnson co-authored ‘Power and Progress’ with Acemoglu, a work that examines the effects of technology on economic growth and democracy. James Robinson is a British-American political scientist and economist who currently teaches at the University of Chicago. He received a BSc in Economics from LSE in 1982 and a Doctor of Philosophy in economic theory and labor relations from Yale University in 1993. His research primarily focuses on political institutions and their impact on economic and social outcomes, particularly in developing regions. Robinson has an extensive research background in Latin America and Africa, which has shaped his understanding of institutional dynamics in diverse socio-political contexts. His collaborative work with Acemoglu, including ‘Why Nations Fail’ , explores the historical and institutional roots of economic disparity, emphasizing how inclusive institutions are vital for fostering stable and prosperous societies. Together, Acemoglu, Johnson, and Robinson have built a significant body of work that not only advances economic theory but also provides practical frameworks for understanding—and potentially remedying—the institutional causes of global economic inequality. Their combined efforts continue to influence both the academic field and real-world policies. Works Cited Acemoglu, Daron, and Simon Johnson. Power and Progress: Our Thousand-year Struggle Over Technology and Prosperity. Basic Books, 2023. Acemoglu, Daron, and James A. Robinson. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown, 2012. North, Douglass. “Theory of Institutions: Lessons for Law and Development.” Hague Journal on the Rule of Law, vol. 8, no. -, 2016, pp. 373-419. Springer Nature Link, https://link.springer.com/article/10.1007/s40803-016-0028-8. Ricciuti, Roberto. “All Nobel Prizes 2024 - NobelPrize.org.” Nobel Prize, 2024, https://www.nobelprize.org/all-nobel-prizes-2024/. Accessed 7 November 2024. Header Image Credit: ScandinavianStories via Pixabay (Free for use under the Pixabay Content License)
The 2024 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, more commonly known as the Nobel Prize in Economics, has been awarded to three influential economists this year - Daron Acemoglu, Simon Johnson, and James Robinson. The prize – worth 11 million Swedish crowns, or about $1 million or roughly €950,000 – was awarded by the Royal Swedish Academy of Sciences for their ‘studies of how institutions are formed and affect prosperity’ (Ricciuti), providing critical insights into why some countries achieve higher per capita incomes and others struggle with persistent economic challenges. Their work also emphasizes the importance of establishing robust institutions to support sustainable economic growth and social stability.
The Top Economics Blogs to Follow in 2025
At INOMICS, we believe economics blogs offer a treasure trove of interesting, informative, and often unique perspectives. That’s why we’ve curated this list of our favorite blogs and podcasts to follow in 2025. Whether you're looking for real-time economic insights or a deep dive into economic theory, this list covers it all. Check out our top picks below and explore them for yourself! Staying informed and gaining new perspectives is important. It can give valuable insights into current economic trends, policy talks, and new research. Economic bloggers come in many types. 1. Marginal Revolution Written by George Mason University professors Tyler Cowen and Alex Tabarrok, Marginal Revolution is a top source for interesting ideas about economics. This covers policy discussions and cultural insights, making it essential for those interested in current economic topics. Their ability to connect economic theory to real-world applications makes this blog a crucial resource. 2. The Grumpy Economist John H. Cochrane is a Senior Fellow at the Hoover Institution. He provides clear and smart insights on economics, finance, and public policy. This blog is known for detailed data analysis and valuable discussions about financial and economic policies. He challenges conventional wisdom and encourages critical thinking. His clear, accessible writing style makes complex economic concepts coherent to a broad audience. 3. Calculated Risk Bill McBride’s "Calculated Risk" is a trusted source for understanding real estate, housing trends, and the economy. His detailed and data-focused approach helps readers, professionals, and academics grasp the complexities of the economy. This makes it a valuable resource for anyone interested in real estate economics. 4. Econ Log EconLog, run by the Library of Economics and Liberty, includes various contributors sharing ideas on economic theory, public policy, and classical liberal views. This blog offers a place for lively debate and different opinions. 5. VoxEU The Columns section on VoxEU is part of the Centre for Economic Policy Research which offers concise, research-based commentary on pressing economic issues. It features articles written by economists and researchers, covering a wide range of topics such as macroeconomics, finance, trade, labor markets, and policy debates. The columns distill academic research into accessible insights, helping readers, including policymakers, academics, and the general public, stay informed about the latest economic trends and evidence-based policy discussions. 6. Noahpinion Noah Smith’s "Noahpinion" offers engaging commentary on economic trends, technology, and policy. Smith has a background in finance and economics. He offers clear and helpful insights into current events and economic theory. He often looks at how technology is changing the economy. He also explores how these areas affect one another. His approachable style and ability to explain technical concepts make his blog a favourite among both novices and experts. 7. Bruegel Commentaries The Bruegel Commentaries, managed by the Bruegel think tank, is a great resource. It offers detailed insights into European and global economic policy. It includes input from various experts. They give clear comments on topics like EU economic rules, the digital economy, and global trade. The blog focuses on policy issues and has top contributors. This makes it an important resource for both policymakers and scholars. 8. The Undercover Economist Tim Harford’s "The Undercover Economist" continues to demystify economics for the everyday reader. Harford explains complex economic ideas with relatable stories. People enjoy seeing how these concepts apply to everyday life. 9. The Conversable Economist Timothy Taylor, author of "The Conversable Economist," offers comprehensive and accessible discussions on economic trends and policy. Taylor can explain difficult topics in simple ways. This makes his blog helpful for both experienced economists and new readers. 10. Econbrowser Econbrowser, managed by James Hamilton and Menzie Chinn, provides a detailed examination of macroeconomic and international economic issues. They focus on data and current economic trends. This makes it a useful resource. It helps anyone who wants to understand the complexities of the global economy. 11. Digitopoly Digitopoly studies how the digital world affects economics, covering innovation, competition, and technology's influence on markets. Joshua Gans and his co-authors provide expert insights into how the digital economy is reshaping traditional economic paradigms. 12. The Global Economy and Development Blog The "Research and Commentary" section covers global development issues and provides in-depth policy evaluations. Experts share views and research-driven reports on economic growth, poverty reduction, and global policy. This makes it a helpful resource for understanding global economic issues. 13. Naked Capitalism Naked Capitalism often provides critical analysis and commentary focusing on the flaws in mainstream economic thinking and corporate influence. It offers original articles and curated news links that discuss financial markets, banking, economic policy, inequality, and corporate governance. If you’re looking for alternative viewpoints on economic and political matters this blog is for you. 14. Enlightenment Economics Diane Coyle an economist, provides thoughtful commentary and analysis on economics, focusing on the intersection of economics, technology, and public policy. It includes reviews of economics books, reflections on economic theory, and insights on current economic issues, with an emphasis on how technological change is shaping the economy. 15. Focus Economics News The News section of FocusEconomics provides readers with up-to-date economic news and analysis, covering global economic trends, country-specific data, and key indicators like GDP, inflation, trade, and financial markets. It delivers concise reports on the latest economic developments from various regions, offering insights for businesses, investors, and policymakers. The section is valuable for tracking macroeconomic trends and forecasts across countries and industries. 16. INOMICS Blog Finally a shameless plug for our own blog, with a focus on economics careers and economics education, as well as insights into interesting areas of economics research that can guide and inspire economics students and young economics researchers. But then you are already here, so you already knew that! Conclusion We selected these top economics blogs for their expertise, quality content, and relevance to today's economic topics. Following them will keep you informed about the latest trends, debates, and research in the field of economics. These blogs provide useful information for students, teachers, and workers. They can help you understand the economy better. Each blog has its niche or specialty that it focuses on; use this to your advantage, and find the right blog for you! Keep being curious and explore these resources to learn more and stay updated in the changing world of economics.
Staying informed on economic trends, policies, and research is key to gaining valuable insights into the ever-changing global economy. Whether you're an economics student, educator, or enthusiast, exploring different viewpoints is essential. Economics bloggers and podcasters come in all forms—some are academics like Gregory Mankiw and Paul Krugman, while others are insightful thought leaders like John Cochrane and Tyler Cowen. Their expertise spans from real estate to public policy and macroeconomic trends.
How to better engage economics students in work placements
A typical work placement can be embedded within a degree programme either as an additional year (typically, the third year of a four-year course), or as a module within a year of study, where students get practical training and work experience in an organisation (e.g. a consultancy firm or a government institution). Work placement experiences can be crucial experiences for economics graduates. Even though economics degrees equip students with many skills that are desirable by employers – like data analysis and problem-solving skills – a shortage of certain skills and wider technological challenges have still been observed among graduates. In this article, we discuss why and how to encourage economics students to participate in work placement programmes. Work placements help students develop transferable skills There is a broad spectrum of benefits associated with the ‘real-world’ experience that students gain through placements. By being immersed in a professional environment, students develop valuable transferable skills across different broad areas, like communication, taking initiative, planning and organisation, and professionalism. Further, students develop and enhance subject-specific skills and knowledge during placements. For instance, they gain data analysis skills by working on ‘real’ data, using them to produce charts and statistics, and critically analysing them. Industry knowledge is important not only in economics-oriented sectors like consultancy or banking, but also in those that require expertise from other disciplines, like energy or telecommunications. The industry knowledge that economics students acquire during their placements in these sectors can offer a strong advantage for certain careers and graduate schemes, like the graduate development programme at Ofgem, Britain’s independent energy regulator. Image credit: Pixabay. Another notable benefit of work placements, perhaps one of the most important, is that students tend to gain confidence in their skills. This includes improving their understanding of their skills, how academic knowledge from their studies is applied to real world settings, and confidence in articulating those skills. For example, at university, students usually learn econometric methods and use economic modelling in the first and second year of their studies. These skills can then be applied in research-oriented roles, like those offered by the Bank of England or consultancy companies that carry out forecasting and risk analysis. What’s more, the placement year offers students the opportunity to apply economic theories to real-life situations in different sectors. For instance, students might use core economic concepts to understand international markets and the economic performance of a country and draw insights from macroeconomic indicators, such as inflation and economic growth. Other benefits of work placements Networking is another important benefit of placements. Students meet and interact with new and different people, including peers from other universities, colleagues and managers. Students not only gain knowledge and experience from their placement work, but they also create contacts with line managers and other employees, who can share their insights into careers and support students’ applications for future job openings. Further, placements can be a useful way for employers to identify graduate talent. There are potential monetary benefits of placements too. Most economics placements are paid, typically offering annual salaries of around £20,000, but there are occasions that these may exceed £30,000 and even reach £40,000 (for more details see Arsenis and Flores, 2020). Furthermore, graduates can reap monetary benefits by securing graduate jobs with their placement employers. These earnings can alleviate students’ debt or help them to save. Obviously, such earnings need to be considered in conjunction with the costs associated with the work placement (including the reduced tuition fee for the placement year, and the delayed entry to the graduate labour market), which vary depending on individual circumstances. Overall, economics placements can be an important first step in career progression. They provide students with the opportunity to trial the world of work, gain valuable skills, and discover potential career pathways. Our recent study shows that graduates who have undertaken a placement are more likely to find graduate jobs that are aligned with their careers than those who did not have such an experience. Engaging economics students Students often need to be aware of placement opportunities early in their degree, or even before they begin their studies, as these opportunities are often competitive. Students’ first-year performance matters for securing a placement, while prior school performance, particularly in economics and maths, does not seem to matter. This creates the additional spillover effect that students are incentivised to engage more with the first year of their undergraduate studies. In UK universities, this year often does not count towards their final degree classification, even though it provides key, foundational training that is built on throughout their degree. Universities and economics departments can improve student engagement in different ways. First-year induction sessions could cover basic features of the available placement programmes and highlight their benefits as well as challenges (for example, the time-consuming process of applying for jobs while attending classes and sitting assessments). Career fairs and employability sessions could also be organised during the year to further motivate students and show them ways to improve their employability. In addition to the general employability sessions that careers services typically offer to students (including careers information and advice on skills development), economics departments can provide a more tailored learning experience that addresses economics graduates’ career paths and aspirations. To this end, inviting alumni to share their ‘success’ stories and advice with the current cohort is a great way to raise students’ interest in improving their own employability. Economics graduates tend to be employed in a wide spectrum of job roles; thus, it is important that invited alumni reflect that diversity. For example, economics graduates working in technology, media, and pharmaceutical companies can be invited along with graduates that have followed more traditional pathways, like banking and wealth management. Covering both private and public sector opportunities is important too. Indeed, there are lots of public sector roles available for economics graduates, such as those in the Treasury or the Government Economic Service. Crucially, students would need a dedicated point of contact - staff who can advise and direct them to the appropriate resources and services. Ideally, this person should be economics staff with a relevant role, like an employability or placement director, who also regularly liaises with the university’s employability and careers service to organise and advertise relevant events and resources. Image credit: Pixabay. Academic support for placement success Academic support can be crucial for students’ success in securing placements. One type of support is the role of placement tutor. Placement tutors typically visit students on placement (or meet them online), keep track of their progress, advise them on tasks they need to perform to complete the placement year, and assess students’ performance on related assessments. The placement tutor also fosters links between the university and employer, and keeps track of skills that are necessary in the graduate labour market. That part of the placement tutor’s role is important as it can also help to shape curricula. These days, a diverse set of skills is expected of economics graduates, including knowledge of data analysis and visualisation, coding, even machine learning. By creating syllabi and assessments that help students develop these skills, not only are students better prepared for the graduate labour market, but they also have better chances of securing a placement (and eventually a job) too. Academic support is a crucial element of work placement degrees, where a supportive learning environment can be enhanced by the contribution of placement tutors. Indeed, there is evidence suggesting that student access to academic support throughout the placement is an important aspect of the design of such programmes. The placement tutor can also contribute to a smooth transition from university to the graduate labour market. Challenges While adopting these approaches may go a long way towards engaging students with placements, it may not always be enough. Nowadays, a rising number of students in higher education come from different socio-economic backgrounds and face different challenges. But unfortunately, it is noteworthy that the economics discipline performs particularly poorly in terms of inclusivity. For example, it has a remarkably low share of students from low socio-economic backgrounds and from neighbourhoods with low participation in higher education (relative to the average student). Economics educators should be concerned about these challenges, as university degrees have arguably become increasingly necessary to be competitive in the labour market. It is crucial to first acknowledge these challenges, and to take appropriate action. Acknowledging the issue suggests that economics departments should not present the option of placements as the only path to developing employability while studying. Instead, alternative pathways should be promoted, like paid internships, which require less time to complete and usually take place outside of term times. But importantly, they still offer some of the benefits of work placements, such as creating new professional contacts and gaining insights into careers. Another way to encourage employability is by designing a curriculum that explicitly addresses it; for instance, by introducing modules or changing existing ones to involve opportunities for self-reflection on skills that students developed while working on assignments. Taking appropriate action involves supporting students who may want to go on placement but face financial constraints. For example, bursaries can be offered to students who come from low-participation neighbourhoods or low-income families. Clear widening participation criteria should be set and advertised to promote inclusivity, and to encourage students from different backgrounds to apply for placements. Summary In this article, we have set out the benefits of work placements and showed ways to engage students with them. Economics departments should be actively involved in this process and tailor their information to economics students. Economics educators should also be aware of the challenges that many students face and adjust their engagement strategies and support accordingly.
Employability is a key concern for students, educators and employers in the UK. Indeed, many students want to see employability playing a bigger role in their courses. One way in which universities can foster graduate employability is through work-based learning (WBL) programmes, such as work placements.
The Economics of Pokémon: Development, Pricing, and Wealth
The world that Pokémon presents has won over the hearts of kids and adults alike for decades. Trading cards, video games, movies and TV shows, collectible plushies, action figures, and much, much more have been commissioned from the franchise, earning it an impressive (estimated) $98.8 billion since its inception in 19961. The way this fictional world functions has some interesting implications for the economics of the society living there. Let’s assume that the internal logic of the world – people and Pokémon living in harmony in a seemingly modern world, where Pokémon can battle but do no lasting harm – is reasonable, and examine the implications for the economy. Domestication and industrialization in the Pokémon world The clear place to begin is by examining the economic implications of the Pokémon themselves. The Pokémon world features an absolute abundance of these essentially magical creatures, and they’re both unquestionably friendly to humans and easy to domesticate. The existence of Pokémon should lead to a massive boost in economic productivity compared to a world without these creatures, leading to rapid industrialization with a fraction of the human population. In our world, domesticating creatures like oxen, horses, cows, and camels led to massive changes in our quality of life, allowing humans to cultivate consistent sources of wool, meat, and muscle power. Both livestock and work animals were major factors helping early humans build their societies and grow – in fact, according to Jared Diamond’s Guns, Germs and Steel and other research, having animals nearby that were domesticable and useful was a major factor in determining how rich societies would be centuries later. Now, just picture an ox that can control the weather in addition to pulling your plow, and you’ll have a good idea of why early Pokémon-world societies would have skyrocketed past our own in development. Many Pokémon have powers relating to one of the nineteen elements identified by the franchise. One of the most obviously beneficial to an economy is the Electric type. In numerous episodes and video games, it’s been shown that a small number of Electric Pokémon can produce a massive amount of power. In Pokémon Gold and Silver, for instance, a single Pokémon powers the lighthouse for the port city Olivine, and it was (evidently) so reliable that when it gets sick, the lighthouse shuts down. The city didn’t have any contingency plan for this single-Pokémon power generator, presumably because it hadn’t ever needed to worry about it. Energy is crucial to the function of the economy, and developing electrical systems that could efficiently power our society took hundreds of years of innovation. To this day, producing power cheaply and efficiently is a major concern for nations around the world, and the prices of energy are a major concern for consumers. If easily-domesticated, electricity-generating Pokémon were readily available, power would (very likely) be incredibly cheap across the board, and Pokémon society probably would have advanced to utilizing electrical energy with incredible speed compared to our own. Perhaps the Industrial Revolution would have skipped the usage of coal and other fossil fuels entirely, producing electricity by sustainably harnessing the friendly lightning monsters (though it’s worth noting that there is a rock-and-fire Pokémon made of coal that could have spurred the Industrial Revolution as we know it on its own, so they could have gone that route too). This may even explain why the human population in Pokémon appears to be pretty low compared to our world. In Pokémon, there are relatively few major cities spread wide across various continents, each populated with thousands of people (to give a generous estimate). But if it was far easier for people to industrialize – especially as Pokémon can help provide labor to actually build things – it’s feasible that a much smaller human population was able to modernize extremely fast, before exponential population growth was able to produce as many people as we have in our world today. In the Pokémon world, Thomas Malthus may even have been an optimist. Infrastructure and the environment Electricity isn’t the only benefit these creatures provide to their human counterparts, though. Other Pokémon have been shown to be consistently useful and reliable throughout the franchise’s history, providing services such as labor (helping with construction projects and moving services), helping with gardening, ferrying across water, digging, delivering mail, assisting with cooking, and much more. For example, flying Pokémon have been used to taxi people around entire nations free of charge, ensuring rapid travel (for example, the Corviknight taxis shown in Pokémon Sword and Shield). Although a bird probably can’t fly as fast as an airplane, having an accessible and free taxi service would be immensely useful as a supplement for riding the subway or driving. In fact, very few cars and roads are shown in the Pokémon world, probably because of the existence of these free taxis, and the fact that individuals can simply train their own flying Pokémon to take them around. But that’s not to say that the Pokémon world is bereft of infrastructure. Paved and unpaved roads, highways, and especially ferry, train and subway systems abound. There’s even a space station and a naval base housing research submarines in Pokémon Ruby and Sapphire. It just so happens that personal automobiles are relatively rare throughout the series, most likely because of the ease of transit that flying Pokémon willingly provide. This lack of cars and fossil fuels contributes to another factor that Pokémon seem to have helped with – environmental friendliness. The usage of Pokémon in many capacities such as power generation and travel has allowed the societies in the Pokémon world to become extraordinarily sustainable by our standards. Nature is abundant in almost every single Pokémon setting that’s been shown, and pollution is nearly unheard of. This is consistent in a world where neighborhood animals can be domesticated and harnessed to perform such a wide variety of useful economic functions. There are even poison-type Pokémon that eat trash as part of their diet, making cleanup even easier! As we’ve discussed on our blog before, nature is incredibly valuable to our societies, but is also very fragile. If Pokémon had existed in our world and helped us develop with such high levels of sustainability throughout history, it’s likely that global warming – one of the major challenges currently facing our generation – would be very mild or even nonexistent. While our world is still struggling to transition to green energy, the world of Pokémon was able to leverage domestic creatures to produce green energy from the start. And, the abundance of energy likely means that energy prices are very cheap. But certain goods in the Pokémon world are anything but… Interpreting Pokémon’s Odd Prices For Consumer Goods Clearly, the Pokémon world gained a myriad of benefits from the titular “pocket monsters” themselves that allowed society to flourish. One would expect the Pokémon economy to be doing quite well, then. But the prices seen throughout the world (especially via the games) often vary greatly compared to our own, and seem to make no sense on first glance. For example, in the original Pokémon games, a single bike costs one million “dollars”! The bike is completely unpurchasable, as the character can only hold up to $999,999 (the English translations call the currency “Pokémon dollars”, but the Japanese originals use yen – here we simply refer to dollars, and use the $ symbol). Other prices seem nonsensical too. Vitamins such as iron, zinc, and calcium are widely available for purchase, but often cost around $10,000. Meanwhile, many other valuable items are priced far cheaper than mundane objects like bikes. For instance, Pokéballs – the items used to catch and house friendly Pokémon – typically cost only $100, and valuables like a “big nugget” of gold typically sell for $10,000, while a high-quality pearl goes for $3,750. But, rather than throw this evidence away as the unrealistic manifestations of a kid’s fantasy world, if we assume that Pokémon prices are rational, we can learn why the Pokémon economy may have reached such a wildly different equilibrium than ours. There are some explanations for why these prices seem so odd, but could be legitimate. First, as cars are rare and Pokémon themselves often available for transport, bicycles may actually be a premium transportation option. Why buy a bike when you can just catch a small bird Pokémon for $100 that can fly you across the city, protect you from wild animals, and also be your favorite pet? Vitamins may be expensive for a different, very important reason: feeding your Pokémon vitamins makes them stronger. In a world where Pokémon are so ubiquitous and useful, items that can make them stronger are likely in high demand, especially because Pokémon themselves are so easy to domesticate. This would massively increase the demand for supplements like vitamins compared to our own world. And, as Econ 101 has taught us, high demand for a limited supply of goods will increase the price. Meanwhile, the ‘low’ prices for what we consider valuables like gold and pearls (only thousands of dollars compared to vitamins’ tens of thousands) can be explained by Pokémon, too. The cat-like Meowth wears a gold coin on its forehead, and has been depicted throwing a seemingly limitless supply of gold coins around. It even learns a battle move called Pay Day, which showers the participants in actual money that can be picked up by the Pokémon trainers, and spent (though this may be a herald of hyperinflation to come…). Similarly, Gholdengo is a Pokémon made of gold that also slings coins around with reckless abandon. What about pearls? Clamperl is a very common bivalve Pokémon that makes one pearl during its lifetime. But in our world, natural pearls are rare – occurring in only one in every 10,000 mollusks naturally. By comparison, the Pokémon world would have a massive supply of natural pearls, since there is a 100% chance for any random clam to supply a pearl at least once (compared to the paltry 0.01% chance in our world). Naturally, this would reduce the price of a high-quality natural pearl compared to our world, and relative to other goods in the Pokémon economy. More money, less problems These conclusions also imply that being rich is a huge advantage in the world of Pokémon; rich people can afford to travel to catch rare Pokémon across the world, perhaps Pokémon like Gholdengo or Meowth who can simply create gold for them whenever they want. And, rich trainers would be able to afford a pharmacy’s worth of supplements to make their Pokémon grow more powerful faster than an average Pokémon trainer would be able to. To that end, it’s worth noting that most of the professional Pokémon trainers shown throughout the series, like gym leaders and Elite Four members, often have no other job than to battle Pokémon and win tournaments. Meanwhile, most “regular” trainers that players in the Pokémon games encounter do have normal jobs – as janitors, chefs, daycare workers, actors, scientists, radio show hosts, and many more. This supports the idea that being rich allows someone the resources and time to “be the very best, like no one ever was”. Despite this advantage, wealth inequality in Pokémon doesn’t appear to be a big issue. This, too, is sensible. In real life, sustaining oneself requires a large expenditure of effort to farm and maintain a home (or, to hunt and gather). In modern society, participating in the labor force by working is necessary to sustain oneself – few people have the expertise needed to leave society, move to the wilderness, and survive on their own (if there was even land available for them to legally do so). But in the Pokémon world, the readily available aid of friendly creatures with (essentially) magical powers makes it much easier for individuals to support themselves. People could easily make a living with their Pokémon helping to support them, and protect them from wild animals. Further, the availability of widespread and free veterinary healthcare (in the form of Pokémon Centers) makes this even easier. Even tiny towns in Pokémon often have free Pokémon Centers. Therefore, wealth itself seems to be less important for Pokémon people than it is for us. In fact, everyone in the Pokémon world – average people, the greatest trainers of all, even schoolchildren – consistently fork over real money to the winner of a Pokémon battle. This is an unspoken norm, and seemingly never a problem for anyone – people simply pay what they can to the winner. This cultural norm can be likened to a form of friendly, low-stakes, buy-in poker. In our world, friends sometimes come together, put a small sum of money into a “pot”, and let the winner take all for a fun game night. But this practice or norm rarely extends beyond a group of trusted friends. The unspoken agreement to have a friendly wager in the Pokémon world for every battle, even between complete strangers, suggests both widespread trust and that wealth itself is simply less valuable for these people than it is for us. Few people seem bothered about losing some cash for the sake of a Pokémon battle, which seems very much like a sport for them. Pokémon Sword and Shield especially depicts Pokémon battles as a nationwide sport, and combatants are always depicted as friendly challengers – certainly more friendly than boxers in a ring. In the Pokémon world, people already have freely accessible transportation, booming economies, easily domesticable magical creatures, and more – so why worry about a bit of loose change? In summary Human society in the Pokémon world benefited greatly from its titular creatures. Their domestication spurred far-reaching and rapid economic growth, developing society to a modern-like level of technology, seemingly without a negative impact on the environment or even a difficult transition period to using green energy. The Pokémon’s abundance and friendliness further led to a prosperous society where people seem to have few needs, and where the creatures themselves – understandably – are a central feature of the culture. While we don’t have Pokémon in our world, we do have domestic animals, many of which are dearly beloved – and many of which carried our early societies on their backs. Remember, we owe a great debt to nature and to our livestock, even if they might not be able to summon rain or fly you to the supermarket. References 1: Highest-grossing media franchises on Wikipedia Header image credit: toxmendoza via Pixabay (Free for use under the Pixabay Content License)
Almost everyone has heard of Pokémon: it’s the highest-grossing media franchise in the world1. The core concept is also familiar to most people – in the Pokémon world, quasi-magical creatures live alongside people in idyllic, family-friendly harmony.
This means that individuals’ inflation expectations changing causes the nominal interest rate to fluctuate in parallel, keeping the real interest rate the same. Roughly speaking, a typical nominal interest rate, for example the interest rate offered by a bank for a loan, will reflect the real interest rate (the cost of borrowing the money), plus any expected changes in inflation. This is because the bank will want to compensate for the anticipated loss in spending power (inflation) of the money it is lending out, when it receives payment back a year later. Alternatively, the Fisher Effect can be stated in terms of actual inflation. In this case, nominal interest rates change to match the real level of inflation. This again means that real interest rates are stable. This case rests on slightly different assumptions, but students may encounter either version and the takeaways are largely the same. The effect is named after American economist Irving Fisher, who first proposed it. The idea of the Fisher Effect is similar to the economic theory of monetary neutrality in that real economic outcomes are said to be unaffected by “nominal” variables (like, in this case, the nominal interest rate). Defining the Fisher Effect again, with math! It’s important to understand the difference between nominal and real interest rates in order to study the Fisher Effect. For more on this difference, see the article on interest rates. The Fisher Effect states that the nominal interest rate is approximately equal to the real interest rate plus the expected future inflation rate. It can be easily described mathematically as follows: i ≈ r + 𝜋e, where i is the nominal interest rate, r is the real interest rate, and 𝜋e is the expected rate of future inflation. It’s important to keep in mind that this equation is only approximate. From this equation, it’s clear to see one of the core concepts of the Fisher Effect: that inflation expectations can change nominal interest rates. This makes sense. If rational economic agents expect high inflation, they will adjust the terms of their financial agreements. For example, a bank will set the conditions for loans while taking into account the (expected) decreased purchasing power of money by the time of repayment. Alternatively, the effect can be expressed as r ≈ i – 𝜋e. This is the same equation rearranged, showing more clearly that the real interest rate is defined by the nominal interest rate and the expected rate of inflation. There is another version of the Fisher Effect that you may encounter that uses inflation directly instead of inflation expectations. To acquire this formula, simply replace 𝜋e from above with 𝜋. In this version of the Fisher Effect, agents in the economy are able to perfectly adjust the nominal interest rate at the same time as inflation changes to achieve the desired real interest rate. Students may come across another, even more advanced formulation of the Fisher Effect as well (this equation is considered more accurate, however it is still an approximation): (1+i) ≈ (1+r) * (1+𝜋) In this formula, the real interest rate r is typically held constant by assumption. This leads to the same result as above, where changes in inflation (𝜋) are mirrored by changes in nominal interest rates (i) to keep the real interest rate (r) steady. Regardless of the specific equation used, the conclusions and implications of the Fisher Effect are the same. The main difference is that the assumptions powering the Fisher Effect are slightly different depending on whether actual or expected inflation is used. Specifically, in order for the Fisher Effect to be true, economic agents must be rational and have enough information to accurately predict (or measure) the rate of inflation. Further, financial markets must be efficient. These assumptions allow the nominal interest rate to mirror the (expected) inflation rate, preventing the real rate of interest from changing. But, if financial markets are inefficient or if economic agents lack information, the resulting frictions will cause the real interest rate to differ from the Fisher Effect equation. Implications of the Fisher Effect There are some important implications of the Effect to explore. First, if people expect a positive rate of inflation, then nominal interest rates will be higher than real interest rates. This means that the cost of borrowing money (which is the real interest rate) will be lower than what’s laid out in contracts (the nominal interest rate), and the benefit from saving or lending money will be lower as well. To see this, consider a scenario where a borrower takes out a $250 loan and must repay $20 one year after taking out the loan (i is 8%), while inflation is 5% over the course of that year. Since the purchasing power of money decreases by 5% over the year, $20 at the beginning of the year can only buy $19 worth of goods by the end of the year, since prices increased. Thus, although the nominal inflation rate (i) was 8%, the real interest rate (r) was only about 3%. You can verify this with the more precise version of the Fisher Effect equation above to find that r is roughly 2.89%. Conversely, if people expect deflation, nominal interest rates will be lower than real rates. This causes the cost of borrowing money to be higher than what’s laid out in contracts, and the benefit from saving or lending to be higher than what’s written as well – if inflation behaves as expected. Keep in mind that these are merely expectations of inflation. Actual “winners” and “losers” don’t emerge until inflation actually occurs. If inflation is higher than expected, the purchasing power of money declines more than expected over the period. This means that borrowers have to pay back less than expected in real terms and they are “winners”, while savers and lenders experience lower returns than expected and are “losers”. Meanwhile, if inflation is lower than expected, the opposite is true. To return to our example above, if the borrower spent their $250 immediately, but six months later there is an unexpected period of intense inflation, such that prices have doubled by the end of the year, the $20 owed would now be worth only $10 in “old money”. In this scenario, the borrower would “win”. The bank would “lose” because the $20 they receive back would be worth less than the $19 they expected and had calculated into the nominal interest rate. For more on winners and losers when inflation differs from expectations, the article on interest rates offers a more involved discussion. The Fisher Effect has important implications for monetary policy, as well. Central banks play a crucial role in setting interest rates through their monetary policies (though they can’t directly control interest rates across the entire economy). The Fisher Effect suggests that central banks must consider inflation’s effect when setting nominal interest rates to target the desired real interest rate. For example, suppose the central bank wishes the real interest rate target to be 5%, and inflation (or inflation expectations) is 2%. Then, the appropriate nominal interest rate to set according to the Fisher Effect equation is about 7%. But, if inflation is -10% (a case of deflation), the appropriate nominal interest rate is actually roughly -5%! Clearly, it seems economically irrational for someone to accept a financial agreement with a negative rate of interest: why should a lender pay a borrower to borrow their money? This illustrates the “zero lower bound” problem that central banks may face when attempting to implement very low interest rates. Evidence for the Fisher Effect in real life If the Fisher Effect held (approximately) true at all times, then central banks could easily manage inflation by changing nominal interest rates. A lower nominal rate would lower inflation, and vice versa. Unfortunately, the Fisher Effect does not always appear to hold in the real world. Over the years, economists have found mixed evidence for the existence of the Fisher Effect. Fredric Mishkin found that the Fisher Effect existed in the long term, but in the short term was negligible1,2. In 2018, Martín Uribe found that the Fisher Effect held true for temporary changes in the nominal interest rate, but when the nominal rate changed permanently, it actually led to inflation; the author dubbed this the “neo-Fisher Effect”3. The fact that there is some limited evidence makes sense. It’s likely that the Fisher Effect mechanism is taken into account by rational economic agents – since they must account for inflation as they make financial agreements. But, we’ve also seen in history how central banks cannot completely control inflation with their monetary policy tools, which include nominal interest rate adjustments – just look at the financial market crash of 2008 that prompted the Great Recession. The mixed evidence for the existence of the Fisher Effect suggests that policymakers should take the effect into account when designing policy, but should not be beholden to it, nor should they expect the economy to always behave as the Fisher Effect equation would predict. Good to Know The Fisher Effect has implications for the market for loanable funds; equilibrium in that market is determined partially by interest rates, after all. According to the Fisher Effect, when inflation expectations rise, the nominal interest rate will rise with it just enough to perfectly offset any effect on real interest rates. Since equilibrium in the loanable funds market is dependent on the real interest rate, if the Fisher Effect holds, changes in inflation expectations and the nominal interest rate have no effect on the market for loanable funds. But if the Fisher Effect does not hold, a change in inflation expectations can affect the market for loanable funds. Suppose that consumers expect inflation to increase in the future, but the nominal interest rate does not adjust to these new expectations quickly. This will cause more people to seek borrowing in the short term, before the expected increase happens, and fewer people to save, despite no change (yet) in the interest rate. That’s because they expect the purchasing power of money to diminish in the future, and can take advantage of this by borrowing money and paying lower-than-expected repayments (in real terms). This causes a rightward shift (increase) in the demand for loanable funds, and disequilibrium in the loanable funds market. Suddenly there is an excess demand for loanable funds, but a lack of supply to give out those funds (since borrowing became less expensive and lenders would reap a lower return). To restore equilibrium, the real interest rate must rise. References 1: Mishkin, F. (1991). Is the Fisher Effect for Real? A Reexamination of the Relationship between Inflation and Interest Rates. https://doi.org/10.3386/w3632 2: Mishkin, F., & Simon, J. (1995). An Empirical Examination of the Fisher Effect in Australia. https://doi.org/10.3386/w5080 3: Uribe, M. (2018). The Neo-Fisher Effect: Econometric Evidence from Empirical and Optimizing Models. https://doi.org/10.3386/w25089
The Fisher Effect in economics refers to the idea that inflation and expected inflation affect nominal interest rates, for example those offered by banks for savers or borrowers. Importantly, it implies that consumers’ inflation expectations are reflected in the nominal interest rate, which prevents the real interest rate from changing.
Money can take several different forms, both digital and physical. People can decide that any object is a form of money; societies in the past have used stones, seashells, and other objects for this purpose, though nowadays it’s most often paper, metal, or a combination of both. Digital money is becoming increasingly common, too. It’s tracked and stored in computers, accessible via plastic cards or smartphones, and is increasingly becoming preferred over physical money. It’s useful to understand what makes certain choices of money – seashells, for example – better or worse than other options. There are six characteristics that economists have identified that help make a certain material better or worse for use as money. Durability First, money should be durable. It should be easy to preserve and relatively difficult to destroy, or else having money for an extended period of time would be difficult. For this reason, items like ice cream or glass tokens would make for very poor forms of money, because they’re highly likely to be lost or ruined in a relatively short amount of time. Conversely, items like paper, stone, or digital currencies are much more durable and can be safely stored for long periods of time. Portability The primary use of money is to exchange it for goods and services. Therefore, it’s important that money can actually be carried around! Portability is thus important; items like paper and plastic cards are highly portable and make good forms of money. Meanwhile, items like stones or livestock make poor forms of money, since they’re very hard to transport (even though they may be durable or valuable in other ways). Uniformity Money ought to be uniform, that is, units of money (that are the same value) should be the same so that their value is not brought into question. To see this, picture a scenario where it’s agreed that stones are money. It would be hard to determine how much each rock was worth, since they vary greatly in size, shape, and composition. Conversely, paper bills and metal coins of the same value are the same size and shape, so there is no argument about their relative worth. Divisibility It’s helpful to be able to break money down into smaller components to make change. This allows agents in the economy to exchange goods and services for very precise amounts, and reduces transaction costs. Paper and coin money do this well – it’s easy to pay for something that costs exactly $3.47 with these types of money. But if something like stones or seashells were money, it would be very hard to determine where $3.47 worth of a stone was, and even harder to split the rock in just the right way to actually hand the other person $3.47 worth of the stone. Acceptability Money should be widely acceptable so that all economic agents are able to make use of it. This characteristic blends into some of the others, but is worth mentioning on its own. Again, paper and coin money do this quite well. But if peanuts were considered legal tender, some people would be unable to hold onto it or accept it due to their allergic reaction. Similarly, objects that are cumbersome may not be widely acceptable enough to become currency. If camels or shards of broken glass were money, many people may reject them and attempt to find easier forms of money to carry around. Supply-limited It’s important that money has a limited supply in order for it to function properly. If money was infinitely available – say, if blades of grass were considered money – then one unit of money would represent a tiny amount of work, and it would be very difficult to use money to pay workers a fair wage. Consequently, people would have to carry around massive quantities of the stuff in order to conduct even simple transactions – making even blades of grass essentially un-portable. Further, having a limited supply means that people can’t simply grant themselves an unfair bounty of money when they feel like it. The central bank (such as the Federal Reserve in the USA) often manages the money supply to ensure these problems are kept at bay. See the related article Money and the Money Supply for more. Further Reading The reason we use money is simple: it makes conducting transactions in the economy far more convenient, and it can allow us to save. This is aided by three core qualities of money, which directly follow from the six characteristics above. First, money is a convenient store of value. Because it is durable and portable, it’s easy to save. Second, money is a unit of account. Because it is uniform and divisible, it’s easy to tell exactly how much money is in a given amount, and how much exactly a certain item will cost. Finally, all six characteristics mean that money is an effective medium of exchange: it’s easy for people to carry around money and use it for transactions. These three qualities of money, and details on how the money supply works, are discussed further in the article Money and the Money Supply.
Money is both a key concept in economics and something that we use every day. We earn money by performing our jobs, and we use money to buy goods and services and to save for the future. In the modern world, it’s quite difficult to survive without using money.
Corruption Uniquely Alters How Institutions Promote Economic Growth
Welcome to the world of my research, where I explore this intricate relationship between institutional quality and economic growth. My work dives into how institutions shape economic dynamics, focusing on issues like corruption, the impact of the euro, and the role of institutional frameworks in economic convergence. Discovering Corruption’s Effect on Economic Growth When we think about the factors that drive or hinder economic growth, corruption often surfaces as a prime suspect. But how exactly does corruption influence the economic trajectory of a nation? Our recent study (Beyaert, García-Solanes and Lopez-Gomez, 2023) takes a fresh approach to answering this question, using innovative regression tree analysis and advanced econometric techniques to explore the nuanced effects of corruption on growth across 103 countries over the period from 1996 to 2017. Traditional economic growth models, like those developed by Barro and Sala-i-Martin (1992) and Mankiw et al. (1992), have typically treated corruption as a direct drag on growth. However, this study challenges that assumption by suggesting that corruption's impact is more indirect—and complex—than previously thought. Rather than applying a one-size-fits-all model, the researchers utilized regression tree methodology, which allowed them to segment countries into different subgroups based on specific characteristics (or "split variables") and then estimate distinct growth models for each group. The regression tree algorithm was allowed to determine endogenously whether the group divisions should be based on corruption, “Rule of Law”, or a combination of both. In particular, the analysis showed that separating countries into just two primary groups was best: those with high levels of corruption and those with low levels of corruption. This segmentation is crucial as it reveals how the impact of traditional growth factors—like capital accumulation and population growth—varies significantly across these groups. In nations with higher levels of corruption, these traditional growth determinants play a more significant role compared to countries with lower corruption levels. Essentially, corruption seems to exacerbate the influence of these factors, making them more critical in determining economic outcomes. Data for the study were sourced from authoritative references such as the International Country Risk Guide (ICRG) and the World Bank's Worldwide Governance Indicators. These sources provided key variables, including levels of corruption and the quality of the Rule of Law, which are essential for understanding the institutional landscape of each country. To enhance accuracy, we employed the GUIDE (Generalized Unbiased Interaction Detection and Estimation) methodology, which addresses the selection bias issues common in other analytical methods like the CART algorithm. The GUIDE method facilitated a more precise identification of split variables, leading to more reliable and nuanced results. It resulted in two groups, as detailed in Table 1. Table 1. Countries Grouped by Corruption Levels Detected by Regression Tree High Corruption Group Low Corruption Group Algeria, Angola, Argentina, Albania, Armenia, Belarus, Bangladesh, Bolivia, Burkina Faso, Cameroon, China, Rep. Congo, Cote d’Ivoire, Dominican Republic, Egypt, Gabon, Ghana, Guatemala, Guinea-Bissau, Honduras, Indonesia, India, Jamaica, Kenya, Latvia, Mali, Malawi, Mexico, Mozambique, Niger, Nigeria, Pakistan, Papua New Guinea, Panama, Paraguay, Philippines, Russia, Sierra Leone, Togo, Thailand, Tunisia, Turkey, Uganda, Ukrania, Zimbabwe Australia, Austria, Bahrain, Belgium, Botswana, Brazil, Bulgaria, Canada, Chile, Colombia, Costa Rica, Croatia, Czech Republic, Denmark, Estonia, Ecuador, El Salvador, Finland, France, Gambia, Germany, Greece, Hong Kong, Hungary, Iceland, Ireland, Israel, Italy, Japan, Jordan, Korea, Rep., Kuwait, Lithuania, Luxembourg, Malaysia, Madagascar, Morocco, Namibia, Netherlands, Nicaragua, New Zealand, Norway, Peru, Poland, Portugal, Romania, Singapore, Senegal, Slovak Republic, Slovenia, Spain, Sri Lanka, Sweden, Switzerland, United Kingdom, United States, Uruguay, Zambia Source: https://doi.org/10.1108/AEA-11-2021-0297. Copyright © 2022, Arielle Beyaert, José García-Solanes and Laura Lopez-Gomez. Published in Applied Economic Analysis. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) license. Subsequently, after dividing the sample into these two subgroups, a traditional cross-sectional Solow model was estimated, incorporating standard drivers such as investment, initial GDP per capita, and population growth. To ensure the robustness of these findings, the researchers utilized instrumental variable estimations, drawing on the methodology of Gründler and Potrafke (2019) to refine and enhance the instruments employed. This advanced econometric technique addresses the issue of endogeneity—a common challenge in growth studies—by ensuring that the identified relationships are truly causal rather than merely correlational. By improving the instruments and applying them within each identified subgroup, the study provides a more reliable estimation of the growth models. One of the study's key revelations is that corruption does not have a statistically significant direct effect on economic growth in either the most corrupt or least corrupt countries. Instead, its influence is more subtle, indirectly altering how traditional growth determinants operate; the algorithm revealed growth parameter differences between countries, showing that those with higher levels of corruption were farther away from reaching an economic steady state. These findings resonate with the work of Durlauf et al. (2001), which identifies parameter heterogeneity in the Solow model, suggesting that corruption contributes significantly to this variability. The evidence points to a clear pattern: the more corrupt a country, the more pronounced the effect of growth determinants. This means that corrupt countries are generally further from their economic steady state, and thus, experience a stronger impact from factors like investment. Interestingly, the study also highlights a developmental divide: more developed nations typically exhibit lower corruption levels, while less developed countries struggle with higher corruption. This finding emphasizes the dual challenge facing developing nations—not only must they fight corruption, but they must also focus on enhancing investment and managing population growth effectively. Geographically, the analysis identifies three major regions: Europe and North America, with low corruption; Africa and Latin America, characterized by higher corruption levels often linked to their colonial histories; and Asia, marked by significant corruption variability. Notably, China and Russia, despite both being part of the high corruption group, exhibit divergent growth trajectories. Russia’s corruption has been a drag on its growth, while China has managed to sustain rapid growth rates despite similar corruption levels. The difference is attributed to the more organized nature of corruption in China compared to Russia. In conclusion, this study urges policymakers and economists to reconsider how they model and address the effects of corruption on economic growth. It’s important for policymakers to recognize that improving institutional quality can help lower corruption. By recognizing that corruption's impact is largely indirect and varies significantly across different contexts, and by employing more sophisticated econometric techniques like improved instrumental variables, more tailored and effective strategies can be developed to foster economic development, especially in countries where corruption remains a significant hurdle. Regional Case Study: How the Eurozone Navigates Corruption and Institutional Quality While global discussions often focus on the broad impacts of economic integration, it’s essential to zoom in on specific regions to truly understand these effects. Shifting the lens to the Eurozone, my research delves into the influence of the euro on corruption control within this unique economic area. Using a counterfactual analysis based on the methodology of Abadie, Diamond, and Hainmüller (2015) and conducted by Beyaert, García-Solanes, and Lopez-Gomez (2023), we explored the hypothetical scenario of a Eurozone without the euro. Surprisingly, the findings suggest that the introduction of the euro has not worsened corruption control in southern Eurozone countries. Instead, economic integration and standardized practices seem to have a stabilizing effect on corruption levels. Still, the Eurozone has not achieved institutional convergence, as highlighted by Beyaert, García-Solanes, and Lopez-Gomez (2019) and García-Solanes, Beyaert, and Lopez-Gomez (2021). There are notable asymmetries in institutional quality among member states, creating macroeconomic imbalances, economic frictions, and inefficiencies, which potentially reduce the Eurozone's overall GDP (García-Solanes et al., 2023). This underscores the need for more uniform institutional standards to address these disparities. My research delves further into this economic convergence within the Eurozone. Using Phillips and Sul (2007, 2009) tests and a logit model, my findings suggest that successful economic convergence heavily depends on strong normative and judicial frameworks (Lopez-Gomez, forthcoming 2024). Countries with robust governance and legal systems tend to converge more effectively, while those with weaker institutions face persistent economic gaps. Finally, an analysis of income per capita and corruption control using panel Granger causality and cointegration tests (Lopez-Gomez, 2023) reveals no bidirectional causal relationship between economic growth and improved corruption control. The Great Recession further weakened this relationship, especially post-2008, with notable exceptions in Eastern Eurozone countries. Taken as a whole, the results of my research indicate that anti-corruption measures need to be tailored to the specific institutional contexts of each country, as a one-size-fits-all approach is unlikely to be effective. The Broader Implications Looking at the broader picture, my research consistently highlights one key theme: institutions are more than just background structures, they are pivotal in shaping economic behavior and outcomes. It’s a complex but crucial relationship, and unraveling how institutions interact with broader economic dynamics is essential for crafting effective solutions. Understanding these interconnections is key to developing policies that not only address immediate issues but also foster long-term stability and growth. So, where does this leave us? The future of economic growth and development hinges on our ability to enhance institutional quality. This means not just fighting corruption or reforming legal systems, but fostering environments where effective governance can flourish. The journey ahead is filled with challenges, but also immense opportunities. As we continue to piece together the puzzle of economic growth, one thing is clear: the role of institutions cannot be overstated. They are the hidden gears that drive economic performance. Thanks for joining me on this exploration of how institutions and economic growth intersect. It’s a journey through models, data, and analysis, driven by a passion for understanding and improving our economic systems. Here’s to the ongoing quest to piecing together the puzzle of economic growth! References Abadie, A., Diamond, A., and Hainmueller, J. (2015). Comparative politics and the synthetic control method. American Journal of Political Science, 59(2), 495-510. Beyaert A., García-Solanes J., Lopez-Gomez L. (2019). Do institutions of the euro area converge?, Economic Systems, 43(3-4), 100720. Beyaert A., García-Solanes J., Lopez-Gomez L. (2023). Corruption, quality of institutions and growth. Applied Economic Analysis. https://doi.org/10.1108/AEA-11-2021-0297 Beyaert A., García-Solanes J., Lopez-Gomez L. (2023). Did the euro really increase corruption in the eurozone?, Hacienda Pública Española-Review of Publics Economics, 3-36. García-Solanes. J, Beyaert, A and Lopez-Gomez, L. (2021). Clubes de convergencia en la zona del Euro, Papeles de Economía Española. García-Solanes. J, Beyaert, A and Lopez-Gomez, L. (2023).Convergence in Formal and Informal Institutions and Long-Run Economic Performance in the Euro Area. The Routledge Handbook of Comparative Economics Systems, 256. Lopez-Gomez, L. (2023). On the relationship between income and control of corruption in the Eurozone. The European Journal of Comparative Economics, 20 (1), 3-37. http://dx.doi.org/10.25428/1824-2979/020 Lopez-Gomez, L. (2024). The role of political institutions on the economic convergence process. Journal of institutional economics. Forthcoming. Phillips, P. C., and Sul, D. (2007). Transition modeling and econometric convergence tests. Econometrica, 75(6), 1771-1855. Phillips, P. C., and Sul, D. (2009). Economic transition and growth. Journal of applied econometrics, 24(7), 1153-1185. Header image credit: Aideon via Pixabay (Free for use under the Pixabay Content License)
Imagine this: you're trying to solve a complex puzzle where every piece represents a different facet of economic performance. Now, imagine that the shape of some of these pieces are influenced by the quality of the institutions in place—things like governance, legal frameworks, and anti-corruption measures. As it turns out, the fit of these pieces can make or break the overall picture of economic growth. Institutions, in this sense, are not just background players; they are fundamental to how the economic puzzle comes together.
Sustainability May Be Bolstered By Income: Household Cooking Fuel Choice in a Developing Country
The analysis revealed that an increase in durable asset accumulation heightens the likelihood of households adopting cleaner cooking fuels. Therefore, I find that the Ghanaian government could incentivize the adoption of clean fuels, consequently mitigating environmental pollution, by implementing policies aimed at augmenting household income. More broadly, this means that economic development can have positive effects on sustainability, something that policymakers in other regions should take note of. Introduction The seventh Sustainable Development Goal aims to ensure access to clean and affordable energy by 2030. This goal is crucial because reliance on unclean energy sources like firewood, charcoal, and kerosene cause significant environmental and health issues, including air pollution, deforestation, soil degradation, and harmful emissions that contribute to climate change. These sources emit harmful gasses such as CO2, methane, and nitrogen oxides, which adversely impact human health. Studies by Younger et al. (2022) and Amegah et al. (2012) reveal detrimental health effects from exposure to these gasses, including reduced birth weight and increased neonatal mortality in low-income countries like Ghana). In Ghana, the use of unclean energy stems from “energy poverty”, where households lack access to modern, clean and affordable energy sources. This forces them to resort to dirty and inefficient fuel sources. Factors contributing to this lack of access include low income levels, high prices of modern energy sources, and geographic location. Shockingly, energy poverty in Ghana is reported to be at a staggering 82.5% (Adusah-Poku and Takeuchi, 2019). This study aims to ascertain the impact of durable asset accumulation on the selection of household cooking fuels in Ghana. It posits that durable assets afford households greater financial capacity and purchasing power, enabling them to meet various needs, including access to cleaner fuels. The analysis distinguishes between rural-urban households and households headed by males versus females. The study acknowledges that the main obstacle hindering households from adopting clean fuels is their relatively higher cost. Consequently, households with elevated wages are more inclined to utilize clean fuels owing to their affordability. Moreover, the energy ladder hypothesis posits that as household wages rise, there is a corresponding transition towards cleaner fuel usage. In essence, lower-wage households tend to resort to dirty fuels, whereas those with higher incomes opt for clean fuels (Alem et al. 2016; Bofah, Appiah-Konadu, and Ngwu 2022). Thus, an upsurge in household wages is anticipated to increase the probability of households opting for clean fuels. Methodology Data The investigation relies on microdata extracted from the Ghana Living Standards Survey (GLSS) conducted in 2013 and 2017 by the Ghana Statistical Service (GSS). The sample size comprises 25,569 observations. The study categorizes various fuel types into two groups: dirty and clean fuels. The primary metric for gauging asset accumulation adopts the approach advocated by Filmer and Pritchett (2001), akin to the methodology employed in formulating the wealth index within the Demographic and Health Surveys (DHS). Empirical Model The study regresses the fuel choice of households on the durable asset accumulation index, controlling for household characteristics such as wage, size, location, and poverty status. The logistic regression technique is employed, with average marginal estimates. An instrumental variable estimation (IV) addresses the potential endogeneity problem, using the two-year lag of theft incidents as an instrument. To streamline the analysis, various fuel types were categorized into two groups: dirty and clean fuels. The dirty fuel category encompasses fossil fuel-derived sources such as firewood, charcoal, kerosene, sawdust, and crop and animal residue, while the clean fuel category comprises LPG and electricity. The study aims to discern how durable asset accumulation influences the probability of households opting for clean fuels, with a focus on facilitating the transition towards cleaner energy sources. An asset accumulation index was constructed by amalgamating various forms of durable assets with potential monetary value. These encompass items such as televisions, radios, sewing machines, refrigerators, fans, computers, cars, plots of land, and more outlined in Sections 12.4 and 12.5 of the GLSS. To ensure the index's consistency and avoid negative values, standardization was applied, rendering the index to range between 0 and 1. A model explaining the fuel choice of a household against factors that might influence this choice is given by: E(Fuel choices | Asset accumulation, Age of household’s head, Gender of household’s head, Household size, Household wage income, Geographical location, Father’s education, Household poverty status, Marital status, Expenditure on electricity) which leads to the following functional form: 𝑦 = 𝛽0 + 𝛽1asset_accumulation + 𝛽2age_head + 𝛿3female_head + ⋯ +𝜉i where 𝑦 represents fuel choice, and all other factors mentioned are represented in the ellipsis. Since the dependent variable is a dichotomous variable that lies between 1 and 0, that is, whether a household uses clean fuel or not, I use a logistic regression (Rodriguez, 2007). Supposing a linear model where the probability of 𝑦I is a linear function of its predictors, I estimate the log odds of energy fuel choice given by the following: logit(𝑦i) = 𝛽pXi+ 𝜉I As a result, the model assumes that the linear probability model is a function of natural log odds. To address the potential endogeneity problem associated with asset accumulation, a two-year lag of theft incidents is used. I argue that suffering caused by a theft case two years ago is associated with the current value of total household assets, but not directly on fuel choice in the present. The two-year lag of theft incidents will influence fuel choice only through its influence on the current value of assets. After fitting the model, the Pearson or Hosmer-Lemeshow goodness-of-fit test (gof) suggested that there is no significant difference between the observed and the expected values, indicating a good fit for the model. Further, the Link test returns a p-value of 0.000 for the variable of prediction, indicating that the model is properly specified. The same test also returns a p-value of 0.486 for the variable of squared prediction, suggesting no evidence of model misspecification since it is insignificant. These results suggest that the model does not suffer from specification errors. Results and Discussion The analysis revealed that a one-unit increase in the asset accumulation index increases the household’s likelihood of adopting clean fuels by approximately 7.32 percentage points. Higher income levels enable households to afford cleaner and more efficient cooking fuels like LPG or electricity. This finding is statistically significant at the 5% level. To ensure robustness and accuracy of this result, a bootstrapping procedure with 1000 replications was conducted. The bootstrapped standard errors and confidence intervals further validated the consistency of the estimated coefficient, confirming the reliability of the conclusion. Therefore, policies aimed at increasing household income and assets can incentivize the adoption of clean fuels, thereby mitigating environmental pollution and improving public health. A good strategy for achieving clean energy usage in low-income countries should therefore include economic development aspects. These findings provide valuable insights for policymakers and stakeholders working towards achieving sustainable energy goals; sustainability can be more easily achieved when the households making energy decisions have a sufficient level of income. The author is conducting more research into a related topic to deepen our understanding of the link between sustainability and other factors like education and inequality. First, with the upcoming paper “Female educational inequality and household cooking fuel choice: Evidence from the Ghana Demographic and Health Survey (2022)”, the author hopes to uncover whether better educational outcomes for women correlates with a higher likelihood of adopting cleaner cooking fuels. It is hypothesized that greater inequality in education would likely result in a continued reliance on traditional, unclean cooking fuels due to financial constraints. The author is also working on another upcoming paper, “Educational inequality and Child Stunting: Evidence from the Multiple Indicator Cluster Survey (MICS, 2018) in Ghana”. The study will investigate how education equips parents with better knowledge and resources to provide adequate nutrition and healthcare for their children, potentially reducing the incidence of child stunting. By focusing on these dynamics, the study aims to highlight the critical role of education in improving child health and development outcomes. References Adusah-Poku, F., & Takeuchi, K. (2019). Energy poverty in Ghana: any progress so far? Renewable and Sustainable Energy Reviews, 112, 853-864. Alem, Y., Beyene, A. D., Köhlin, G., & Mekonnen, A. (2016). Modeling household cooking fuel choice: A panel multinomial logit approach. Energy Economics, 59, 129-137. Amegah, A. K., Jaakkola, J. J., Quansah, R., Norgbe, G. K., & Dzodzomenyo, M. (2012). Cooking fuel choices and garbage burning practices as determinants of birth weight: a cross-sectional study in Accra, Ghana. Environmental Health, 11, 1-10. Ansong, E. (2015). The association between household consumer durable assets and maternal health-seeking behavior in Ghana. Women & Health, 55(5), 485-504. Bofah, R. O., Appiah-Konadu, P., & Ngwu, F. N. (2022). Transition to cleaner cooking energy in Ghana. Clean Energy, 6(1), 193-201. Filmer, D., & Pritchett, L. (2001). The effect of household wealth on educational attainment: evidence from 35 countries. Population and development review, 25(1), 85-120. Kafle, K. R., & Dean, J. (2015). Effects of asset ownership on child health indicators and educational performance in Tanzania. Rodriguez, G. (2007). Logit Models for Binary Data (p. Chapter 3). Retrieved from http://data.princeton.edu/wws509/notes/ Younger, A., Alkon, A., Harknett, K., Louis, R. J., & Thompson, L. M. (2022). Adverse birth outcomes associated with household air pollution from unclean cooking fuels in low-and middle-income countries: a systematic review. Environmental research, 204, 112274. Header image credit: Pexels from Pixabay (Free for use under the Pixabay Content License)
The Sustainable Development Goals advocate ensuring universal access to clean and affordable energy by 2030, prompting a global push toward transitioning from unclean energy sources to cleaner alternatives. In response, Ghana has subsidized the cost of clean energy; however, the financial burden of this transition remains substantial for households. The role of household asset accumulation in facilitating this transition has been underexplored in existing literature; examples include Kafle and Dean (2015) and Ansong (2015). Utilizing logistic and instrumental variables (IV) regression methods along with data from the Ghana Living Standards Survey (round 6 & 7), I investigated how durable asset accumulation influences households' choice of cooking fuels in the research paper "The Nexus Between Household Durable Asset Accumulation And Household Cooking Fuel Choice in a Developing Country".
Agricultural and Environmental Economics (JEL Q)
Extracurricular activities to help your economics career while at university
Being involved in extracurriculars at university can make your time there more enjoyable by enabling you to meet friends, develop intellectually, and stay fit. You may not have considered it, but relevant hobbies for economists can even be advantages in your career development, too! This article explores some suitable economics hobby ideas that you might find beneficial. Although lots of these suggestions will help you whatever career you decide to pursue, some may be a little more useful specifically for a career in economics. Browse our program listings for economics opportunities 1. Debate team Joining the debate team will give you the chance to practice your oral presentation, argumentation, and critical thinking skills – all of which will be a big asset to you in any economics job search. It's also a great way to practice your public speaking, which can be a helpful advantage in job interviews. The ability to think through a position and support it with facts and logic is incredibly relevant to any research you do, too. On a fundamental level, research is posing a question, and either supporting or detracting from that question using facts and logic – just like debate! In economics research, the facts may need to be taken from a literature review or generated by your own econometric analysis, but the fundamentals are remarkably similar. Debate will also help your communication skills, which are one of the most important soft skills to have, useful in all aspects of life. Being able to communicate your ideas and research effectively, or back up your economics findings in your career, is essential to being successful. 2. Student governance Almost every university will have some kind of students' union or student council which you could join. Doing so shows future employers that you are responsible and engaged with political and practical issues. It also gives you the chance to make real changes to the way that your university is run. Being a part of the students' union shows proactivity and leadership – that you have (productive) opinions and aren't afraid to voice them and fight for them. It implies you can speak your mind well in public, but also that you have a level of emotional empathy that enables you to listen to and appreciate – or at least respect – other points of view, even when they stand in direct contradiction with your own. Being involved in politics is also very useful for a job in economics, particularly policy-adjacent roles. 3. IT skills Students may have the opportunity to assist university staff and/or students with technical problems. Often, universities employ student workers in IT help roles as a first line of defense against tech issues, helping other students on campus resolve computer problems – and escalating to a more seasoned professional for non-routine fixes. These types of roles may also give you limited experience with coding, especially if your job includes performing functions for university webpages. Software proficiency is becoming increasingly important for economists, so demonstrating technical skill in this area is a bonus for most employers. Economists often need to use statistical software like R, SAS, Stata, and more for their work, and other tools like LaTeX will be useful in their careers. Showing employers that you have the skills needed to master new software tools quickly can be a big plus for your future job prospects. 4. Charity fundraising Volunteering can be a rewarding experience and can help you grow a lot as a person. It can also be good for your career prospects, even beyond just showing your strength of character. If you want to work in a non-profit after university, or conduct research, then the ability to bring in funding (either by typical fundraisers or by securing grants) is a big requirement of many jobs. Showing that you've already been successful at fundraising while you were at university can put you at the head of the pack. Moreover, charity fundraising can often give you the opportunity to travel. Plenty of charities work around the country and in other nations around the world. Travelling is one of the most rewarding things you can do, and employers like to see that their potential employees are well-rounded and have some life experience, which includes getting to know other cultures. Aside from this, charity work is simply a noble thing to do and can show that you're emotionally intelligent and tolerant, two essential skills to have in an ever more diverse workplace. And, you might even benefit from that “warm glow” that stodgy economists talk about when describing altruistic behavior. 5. Sports teams Sports teams are often a big part of university life, and most universities provide such a variety of sports clubs that almost everyone can find something that matches their interests and talents. These might offer the opportunity to travel around the country and occasionally the world, especially if you join something a little bit more niche like scuba diving. And of course, sports are a great way to meet new people who could become lifelong friends, improve your teamwork and social skills, and stay fit while doing it. Best of all, from a career point of view, if you are head of a team and organizing matches, you have already shown your ability to lead a group which is a great skill to demonstrate. 6. Student newspaper Student newspapers are great places to develop writing and editing skills, and to get used to a fast pace of work with tight deadlines. There are usually multiple areas of the newspaper you can work on, including design, editorial, and of course, writing and journalism. Many newspapers have local news, political reports, and comment sections that deal with more sensitive issues. Even if you just write a few times rather than having a set role at the paper, it means you'll slowly build your portfolio of written work (which can be useful if you’re asked for non-academic writing samples), have some interesting things to put on your CV – and of course, seeing your name in print is always a wonderful feeling. Some university papers may even pay for your work. Learning how to write well can be an essential skill if you're going to be communicating complicated economics ideas to non-economist audiences for whichever company or institute you're working for. Clear communication skills are an area that employers have already identified as important for economics graduates. Academic language is often impenetrable, so being able to show that you can present your ideas clearly and concisely outside of academic contexts is an invaluable skill. 7. Learning a language Learning a language is one of the most productive things you can do in life. With language skills, you can work in an international company and be an extremely valuable asset to them, or you could even move into specialized economist roles that require multiple languages such as international politics, working as Chief of Staff for an international development project, or conducting research with economists in other regions. It also means if you ever decide you want to live abroad, you have a head start; not only could you live, for example, in Germany, but many people report learning a third language easier once they have already learned a second. Reports have also come out that suggest learning a new language is one of the best favors you can do for your brain, with some studies suggesting it can even help prevent Alzheimer's. Many universities' language courses are of a high standard – as one would expect – and as they are generally diverse, multicultural environments, with plenty of opportunities to practice with other students. If you want to learn a language, adding a few courses to your schedule during your studies is an excellent way to get started. 8. Entrepreneurship For the really ambitious student, why not start your own business? It may not feel like it, but at university you'll be in an ideal environment with plenty of time and resources to develop your own ideas. That’s because adult life outside of uni is often much busier. Often, universities have entrepreneur challenges where students pit their ideas against one another in order to win a certain pool of money that might even help them get the idea off the ground. They also often offer advice and support for students who have business ideas, host entrepreneurship courses, and of course, you might have the opportunity to befriend a business professor to tutor you. Whether or not your business is successful, you'll learn a huge amount from trying to start a business before your peers have even got a foot into the workplace. Plus, it's a clear demonstration of your independence and self-motivation which employers will appreciate, especially if you plan to specialize in financial economics or wish to work in a policy analysis role related to business. 9. Chess Club or Go Club The age-old games of chess and Go both have massive followings, chess traditionally in the West and Russia, and Go more traditionally in East Asia – although both are now played worldwide. Aptitude in either game can be seen as a sign of strategic thinking, dedication, and intelligence. So, if you already enjoy chess or Go, joining a university club for the hobby or doing well in tournaments can be a perk on your future economics resume. Both chess and Go can develop your critical thinking and ability to improvise and adapt successfully, too. This idea extends to other strategic hobbies as well. Other strategy games likely help develop similar skills and show your acumen just like chess or Go can, but employers will likely only be impressed if they actually know what the game is. Header image credit: Lukas Prudil on Pixabay (published under pixabay content license)
Attending university can be a ton of fun, but it’s also supposed to prepare you for the next stage in your career. Normally, this involves a lot of studying. But breaks and hobbies are important to have, too.
Put simply, the multiplier effect is the macroeconomic phenomenon that causes the economy to grow (or shrink) by more than the amount of money that has been introduced into or taken away from it. This is possible because of a chain reaction caused by the fact that money can be used many times. The effect in action Let’s begin with an economic growth example, where the effect has a positive impact on the economy. Suppose that someone experiences an exogenous increase in wealth of $500, meaning that this $500 magically appears in the economy and is granted to one randomly-chosen person – let’s call him Frank. When Frank receives this magically generated $500, the total amount of money in the economy grows by $500 immediately. Thus, GDP (defined by the income method) has also grown by $500. But Frank hasn’t even done anything with the money yet! Let’s say he chooses to save $200 of it, and he spends the other $300 on a pair of limited-edition Air Jordan shoes from Nike. Now, although the amount of money in the economy hasn’t changed, the economy itself has actually grown by $800 (in total)! That’s because the $300 that Frank spent on Nike shoes just became new income for the owner of the Nike store. Now, suppose that the owner of the Nike store chooses to save $200 of Frank’s extra spending, and chooses to use the remaining $100 to have the store cleaned by Silva’s cleaning service. The $100 becomes income for Mr. Silva, the owner of the cleaning service. Now, the economy has grown by a total of 500 + 300 + 100 = $900, all from Frank’s magical $500. This process will continue, increasing GDP by much more than the original $500 that Frank acquired. Readers may wonder how this makes sense. Hasn’t the money just moved around, and Frank has become poorer? After all, once Frank spends $300, he only has $200 left. This question seems logical but is missing a key fact. Frank isn't poorer. Rather, he's just traded $300 in cash for $300 worth of goods (the Air Jordans), which theoretically increased his utility by at least $300 (since we assume he’s behaving rationally to maximize utility). Then, his $300 became income for another person, and the cycle continued. If the money changes hands faster, the economy grows faster; this is measured by the velocity of circulation. Mathematically-minded readers might realize at this point that there is technically no end to this ripple effect – just like an infinite series in math, the money will perpetually continue to circulate through and stimulate the economy. Of course, in economic terms, eventually the amount of money received is so negligible (fractions of cents) that we can ignore it. While most economics courses won’t test your calculus knowledge by asking you to solve a limit problem, it’s important to understand this concept as it filters through many layers of macroeconomic policy. Government spending, fractional reserve banking requirements, changes in national income, changes in consumer sentiment, and more can have massive ripple effects on the economy thanks to the multiplier effect. Multiplier Math From our example with Frank above, it’s clear that there are two factors controlling the size of the multiplier effect: the speed in which the money changes hands, and the amount of money that is saved by each person in this chain reaction. The former effect is determined by the velocity of circulation, and the latter by the marginal propensity to consume (MPC). The formula for the multiplier m is: m = 1 / (1 – MPC) where MPC is the marginal propensity to consume. To recap, the MPC is a proportion that determines how much money individuals will spend when they receive an amount of money. A high MPC means that there’s a lot of spending, but little saving. A high MPC also means that the multiplier m is high as well. The closer the MPC is to 1, the higher the multiplier m becomes. In other words, as people save less and less money, the multiplier effect causes the economy to grow more and more from an influx of new (exogenous) income. This is clear when considering our story with Frank earlier. The formula above accounts for the MPC, but we also mentioned that the velocity of money plays an important role. Although it doesn’t appear formally in the above equation, the velocity of money is partly determined by the MPC, and is proportional to m itself; when the velocity is high, m is high and MPC is also high. For a formal treatment on the derivation of the multiplier effect that also covers its mathematical relationship with velocity, see the Further Reading section. Implications for recessions and government spending The multiplier effect may also be referred to as the fiscal multiplier or the Keynesian Multiplier. The reason for this is simple: the multiplier effect was proposed by John Maynard Keynes, and is implied by his theories. In classical economics, individuals perfectly anticipate that an increase in government spending must be funded by taxes taken from them, and when they adjust their behavior to account for that, the economy is unaffected. For the rest of this section, we ignore the classical model and assume that the Keynesian model is correct. Recessions are one of the unfortunate realities of economic life. When a recession hits, people tend to cut back on their consumption spending (especially on things like luxury goods) and attempt to save as they seek to weather the economic storm. Unfortunately, this behavior can make recessions worse – and the multiplier effect shows how. Consider the case where Frank lost $500 instead of gaining it, perhaps because he had a $500 bill, but it was burned up on accident and ruined. This would reduce the money supply, and the future transactions with the Nike store and the cleaning company wouldn’t happen. In fact, because Frank is poorer now than he was before, Frank would cut back on his spending such that even fewer transactions happen in the economy than before he lost the money. This gives us a template for how recessions can occur and linger in the economy. An exogenous negative shock to the economy causes a reduction in income. Then, people tend to cut back on their spending, and because of the multiplier effect, even more people cut back on even more spending. The result is that the economy shrinks by much more than the original amount that was lost. Enter Keynesian economics. One of the tenets of Keynesian theory is that an increase in government spending (G in the aggregate demand formulation) can offset the downturn, and help the economy recover. The initial spending increase by the government first improves the economy by itself. Then, those who receive this spending as income will in turn save some and spend some – according to their marginal propensity to consume – and the multiplier effect will get to work, bolstering the economy by more than the initial amount of government spending. Good to Know Throughout this article, we have assumed that everyone has the same marginal propensity to consume. But, in the real world, people’s MPC varies greatly depending on many factors, like personality and how well-off they are. People with more money tend to have lower marginal propensities to consume. That’s partly because the proportion of money they need to spend on necessary items (like food and heating) is very low. Naturally, this also means that people with larger amounts of wealth tend to save more. This fact is one potential argument in favor of focusing government stimulus efforts – like giving out cash during a pandemic, or tax cuts – to poorer people rather than richer people. The former group is not only much more likely to spend their money in the local economy, but they also have higher marginal propensities to consume, bolstering the multiplier effect compared to a very wealthy person who would save more of that money. Further Reading For a formal derivation of the multiplier effect, along with an examination of its relationship with the velocity of circulation through the quantity theory of money equation (MV = PY), be sure to read Wang, Xu, and Liu’s “Keynesian multiplier versus velocity of money”, published in Physics Procedia, Volume 3, Issue 5 in 2010: https://doi.org/10.1016/j.phpro.2010.07.009.
Economic growth leads to higher income for everyone – at least in theory. This isn’t a surprising fact. What may be surprising, though, is that adding $500 to the economy can actually increase economic growth by more than $500. This is possible because of a phenomenon known in economics as the multiplier effect; let’s take a look at what the multiplier effect is and how it works.