CLIOMETRICS

During my reading i came across a new term and also a whole new dimension to economic history. Thought of sharing it.
The new economic history in which quantitative techniques including econometrics are used to make interpretations and reconstructions of the past. It was pioneered by Robert William Fogel and Douglass C North.

Lemon problem

This problem was noted byAkerlof in 1970. A popular example of the phenomenon is in the secondhand car market, where sellers know whether or nor their car is a lemon (i.e perform badly), but where buyers cannot make that judgement without running the car. Given that buyers can't tell the quality of the car they are buying, all cars of the same model will end up selling at the same price, regardless of whether they rae lemons or not. But the risk of purchasing a lemon will lower the price buyers are prepared to pay for any car and, because secondhand prices are low, people with non-lemon cars will be little inclined to put them on the market.
This problem is commonly referred to as an adverse selection.

Indian institutions of repute in economics

After all my search for the best schools to apply in India for economics, i have found the following institutions. I have chosen these, taking in account their international repute, number of students who have gone to top universities in the world for further studies and their number of quantitative electives which would help in further studies in economics. They are
1) Indian Statistical Institute(ISI)
2) Delhi School of Economics(DSE)
3) Jawaharlal Nehru University(JNU)
4) Indira Gandhi Institute for Development and Research(IGIDR)
All the above institutions offer a masters programme in economics which includes quantitative papers as compulsory and optional papers. So for those who are planning to do economics at an academic level, these would be the best options. The admission is through an entrance test comprising of both economics and math at the undergraduate level.
For those who wish to pusue a doctorate in economics, these institutions will get you on the right track. The entrance questions can get real tricky if you dont have your basics right. So start working on your basics from now. All the best!

Money

I was reading Paul Krugman's The Accidental Theorist and it came to my notice the impact money has had on humans is more than any other variable. There is nothing in this world which moves people as much as money. This is a danger to the whole world.
Recalling the origin of money; it was introduced as a medium of exchange so as to make life easier for man! Now it has become the sole motivating factor for any achievement either directly or indirectly.
Krugman has also criticised the pegging of a currency to the gold. When i went through this book it struck me that politicians cannot make rational decisions concerning a nation especially its economy. Thus economists are necessary.
Sadly, India has very few economists when compared to politicians. One more observation is that people are willing to sacrifice their non monetary benefits for acquiring more money. For example people work overtime, work for leave salaries, etc.
For a better insight go through Krugman's book.

Inequalities

A common feature of all economies in the world whether developing or developed is the presence of inequalities, not only in money terms but also mainly in real terms. Till now I believe inequalities have never been quantified but rather it is measured as a discrepancy between incomes.
Inequalities will never cease to exist. It can be narrowed but only to a limited extent through redistribution of incomes and wealth. Again this is against the notion of Pareto optimality as it brings down the welfare of the rich and redistribution does not seem to hold good in most economies.
The only remedy is growth-both economically and socially so that the welfare of the rich and the poor are improved; but concentrating more on the less rich by giving the poor more opportunities to work and develop. Government intervention is not the only remedy. The government has to oversee that a moderate level of competition should prevail for the provision of such opportunities. Provision of facilities in the rural areas should be given high priority and those enterprises that provide such facilities must be given incentives.

Joy of reading

I have been busy lately, though not with economics. I entered into my world just two days back. My internals are going on now. I have to start preparing for my entrance exam to get into a good masters program in Jawaharlal Nehru University(JNU) or Delhi School of Economics(DSE) as their standard of questions is very good.
I have been interested in Economic history and Economic thought lately. So explains my previous post and so will my future posts!
I am currently reading 'The end of poverty' by Jeffrey Sachs, which is a good book. Those who have finished reading it, please post your views on it.

Mercantilism

The forerunner of Mecantilism was Thomas Mun, a 17th century British merchant-economist. He proposed the following theories.

For Britain to prosper economically, it has to run trade surpluses.

Nations become wealthy for the same reasons that families become wealthy i.e when the income is more than the expenditure.

Importation of necessities was good, while luxuries were considered as bad, unless these luxuries could be re-exported and profits could be earned. Rich metals is an example of re-exportation.

Only international trade would bring about trade surplus and not domestic trade.

The money which Britain earned should not be spent for unproductive purposes. Nor should it go to the hands of individuals, because it would lead to an increase in the aggregate demand, leading to a price rise. In order to avoid that, it should be reinvested in the economy. Thus he stressed the importance of capital investment in an economy.

These are some of the principles he talked about. I feel, as students of economics, it is highly necessary for us to know about the works of the great economists.

Public good

A public good is good which can be used by all without paying a price. In most of the countries, the public goods are being produced by the respective governments by incurring high costs. For its usage an individual or a company does not pay a price. A typical example is that of a public road, where a fee is not collected for its usage. The burden of producing public goods falls on the shoulders of the government. Some costs are paid off using the government taxes such as road tax, sales tax etc.
I believe that it is the duty of the private in a developing country to offer such services owing to the already high burden on the goverment. The government can give the private entrepreneur high rates of subsidies on undertaking this kind of work as it requires a very high rate of capital investment.
Another type of good where a price is paid for the public good is known as a Merit good. Charging a small amount for building infrastructure can be justified as it accelerates development. Thus i am of the opinion of converting most public goods to merit goods.

Final year

I have only got a year left for my graduation. This semester we are being taught the following papers
1) Mathematical economics
2) Managerial economics
3) International economics
4) Fiscal economics
5) Monetary economics
6) Indian economics
At last i am so glad because i will have to study economics only. Lately there have been no posts owing to my lack of time to visit the web. I had been very busy as i was house hunting. I will get a house only on the first of the coming month.
I will do some economics posting only after i move into my new flat. I am planning to post on Behavioral economics and, the mobility of labour.

Pigovian fees

I had earlier mentioned about government intervention in the case of polluting by firms. One way to intervene is by imposing a tax. So i am introducing the concept of Pigovian tax. But there are more efficient ways of regulating pollution, one of the comments i recieved state a more market friendly way of reducing pollution; which i agree to.
Early in the 20th century, the English economist Arthur C. Pigou argued for the imposotion of taxes on generators of pollution. Since the social cost of pollution is in excess of the private cost (it is a negative cost since they save money by polluting) to the pollutor, the government should intervene with a tax, making pollution more costly to the pollutor. If the pollution is more costly to produce, the pollutor will produce less pollution. This tax has come to be called a Pigovian fee or Pigovian tax. The fee is generally paid to the government. The Pigovian fee is not any emission fee; it is the marginal savings from pollution at the optimum pollution level.
This fee is not a market friendly way of controlling pollution. It is imposed on the people. Offering these firms incentives on reducing their emission levels would help more rather than imposing a tax.
[pigovian fees]Economics

Game theory

For a time, one of the most exciting new developments in economic theory was John Von Newman and Oskar Morgenstern's Theory of Games and Economic Behaviour. It represents a unique approach to the analysis of business decisions; and these decisions make up the ultimate raw material with which economic theorists must work.The general object of game theory is to determine standards of rational behaviour in situations in which outcomes depend upon the actions of interdependent players. Game theory is a multi person decision theory. The outcome is determined by those actions independently taken by multiple decision makers.
Game theory deals with taking descisions so as to maximize our payoffs(benefits). A typical example in traditional game theory is the prisoner's dilemma.They are kept in two different cells. If one confesses, he is set free but the other suffers maximum imprisonment. If both tell the truth, they suffer sometime in the prison. But if both keep quiet, they undergo minimum sentence.Hence, it is best that both keep quiet. But if the prisoners do not trust each other, it is very likely that both will confess and end up serving sometime in the prison.
I have just introduced the topic so as to make the readers get to know what game theory means. It is a very vast subject which cannot be simplified by me. In most of the microeconomics texts, game theory is mentioned. But, surely it is an interesting paper to learn. In most good graduate programs, game theory is offered as a separate paper.

Economics of the environment

Well, the hype at present is on the Environment and its onus on the citizens of a country. As responsibility is concerned, we all have a lot to do which unfortunately is not being done anywhere and so the need arises to impose policies. During the process of development in a nation i.e. growth of its industries and building of infrastructure, environment is totally forgotten about. There is not much being done, which regulates the amount of pollution. And people in developed countries now prefer a region which is environmentally very well off because after all their monetary needs are met, they look for a pleasant atmosphere without noise and other pollutants. It is the responsibility of the government to make sure that its citizens are environmentally safe.
I have mentioned only the ill effects of air pollution, not because it is the most important but because it is more prevalent.
Air pollution is mostly concentrated in urban areas, due to concentrations of people both as the sources and victims of pollution. It leads to health problems and also reduces human performance. It damages materials, increases maintenance costs which erode the infrastructure of an economy. It incurs great loss to the economy.
In rural and semi-urban areas it damages crops; moreover it harms the forest and aquatic ecosystems. It also leads to global warming.Chloroflurocarbons (CFC’s), one of the major nonfuel air pollutants lead to depletion of the stratospheric ozone layer. These substances are primarily used as refrigerants. One economic problem which has resulted is the growing black market in illicitly produced CFC’s.The United States has spent approximately 2% of GDP on pollution abatement and control.

Presently, a survey conducted said that Kerala is getting warmer due to high deforestation rates as compared to afforestation and increased global warming. The reasons mentioned also include climate change and increased vulnerability to natural disasters. The survey was conducted by the Kerala State Council for Science, Technology and Environment (KSCSTE) with assistance from the Ministry of Environment and Forests. It says that on an average, Kerala has become warmer by around 0.5 degree Celsius over the last 43 years. Air Pollution by the emission of greenhouse gases is mainly due to increased consumption of firewood and petroleum products. The pressure of the large number of tourists is felt on the coastal areas. Sand mining, over exploitation of mangroves and the growth of housing and industries are the other reasons mentioned. Dredging in coastal areas is also a major reason.

To conclude, I would say that if the government does not have money to protect each persons environment, the collection of an Environment Tax is justified, provided it makes progress. I don’t think the government will do that in India because, as it is the people feel that the money they pay as tax is not being utilized properly.
This calls for some intervention. It is up to the private players to take up this job. Where the Government has failed the Public can win provided they are willing to take risks. They can set up organizations to provide environmental safety to its customers by paying those companies an amount based on the work done. For example, if an individual’s pond in his premises is dirty or the air is polluted, he/she can approach the above mentioned organizations and ask them to clean the pond and also plant more trees in order to reduce the incidence of pollution after paying a specified amount. This will bring about an increase in employment, mainly for the rural people as they would only be truly willing to do such cleaning. The salaries ought to be high because environmental protection is very important and the fees charged should be accordingly high in urban areas and low in rural areas. This will also help to reduce the inequalities between a city and a village.
Reference
1.Environmental Problems and Policy Solutions, Chapter 2, Environmental Economics, Charles Kolstad, Oxford University Press
2.‘Kerala getting warmer by the day, says survey, T Nandakumar’, Pg 2, The Hindu, June 5, 2005

VAT in Kerala

First let me pen down the impact and then the reasons as it will make the reader to think as to what the shortcomings are and for the reader to get an insight into how these policies affect the common man.
It is upon the Government to ensure that the benefits of all policies should accrue to everyone without any inequality. The major problem with VAT is traders and customers are uneducated on its computation. Or a VAT department ought to be set up which takes care of imparting knowledge on VAT to all and in its subsequent computation and also to study the impact it has on the lives of the people especially those BPL (below poverty line). It should conduct surveys and make the information public and freely accessible by all.
Impact on Kerala Economy

Hike in prices of snacks like chips and other fried items-which are felt among ordinary people.
Hike in prices of writing materials (4% tax levied) like ink, eraser, paper, etc which are very commonly used goods by the students.
Hike in prices of medicines, especially life saving drugs (supposed to be exempted).
Hike in prices of medical equipment, (costs more when compared to electronic goods) as a 12.5% tax is levied so poor patients will find it difficult to pay the bills. [Recently Delhi & Karnataka Governments cut down the tax to 4%]

Processed goods: Retailers charge more than before.
Branded goods: They are under priced as traders resort to unethical business practices.
Spurious goods: They will tend to flood the market.

The traders from states where VAT is not introduced take advantage of the price differential, thereby flooding the Local Kerala markets with their goods. Moreover these products are of questionable quality.

Till date the shop owners were collecting additional tax from the customers without paying the Government.

The commodities which enter from other states are procured without bills which in turn are sold without bills to the consumers. This results in a heavy loss to the exchequer.

Quality of products manufactured in Kerala is affected as they abstain purchasing from states where VAT is introduced, and they suffice by procuring from very near areas, so as to reduce cost, but it happens with the subsequent reduction in quality too.

Food products entering from other states are relatively cheaper as they are transported into Kerala using clandestine methods which reduce their transportation costs.

An overall rise in prices in the state, mainly felt among the ordinary people. It was introduced in April 2005.

Reasons for implementation

VAT is scientific in developed nations like Europe not in developing nations like India which is characterized with a lot of Cottage industries, because it becomes unscientific.

VAT proposed lower prices, wide spread tax compliance and equitable tax collection.

VAT or value added system is a multi-stage consumption/production tax computed on the value of purchase/sales made at various stages of its business activity.

It proposed to bring maximum benefits to traders, businessmen and customers.

Impact on neighboring states

In Lakshwadeep, almost all articles are imported from Kerala (VAT state) and Karnataka (VAT state) which is going to bring about an increase in the cost of living without a consequent/subsequent increase in the standard of living.

Suggested remedies

Issue of bills should be made mandatory.
ISI should standardize the quality of consumables.
The prices prevailing on that day should be displayed in shops like groceries. (As in jewellery shops)
The Food & Civil supplies department should make a regular inspection of quality.
It is feasible to set up an institute for Food technology as in Mysore which examines different food samples so as to ensure quality standardization.

Reference
The Hindu, Saturday, June 4, 2005-Peoplespeak.kochi edition.Pg 2.

Economic-tricks

Econometrics rectifies, actually minimizes the errors found in Mathematical models. So it is of extreme importance for Economists & Econometricians to have a proper knowledge about Math as well as Econometrics.For those who have not yet been introduced to the basics of Econometrics, i will give a brief introduction on what it means and the steps involved.
Econometrics is a social science where the tools of Economics and Mathematics are applied to Economic theories so as to determine the relationships between the endogenous variables, if any; or whether the mathematical model is in dearth of variables i.e the dependent variable depends on exogenous variables(not included in the model originally). This requires a rearrangement or the removal of the choice variables.
The methodology which is usually followed:
(1)Understanding the Economic theory in all its totality.
(2)Framing a Mathematical model based on the Theory containing variables and constants.
(3)Inserting an error/stochastic term (the term stochastic because of its randomness) thus converting the original model into an Econometric one.
(4)Collection of data(having a large Sample size is advantageous)(only some values are plotted using the samples, the rest of the values are generated using a Mathematical process known as Interpolation)
(5)Estimation of the coefficients;either Interval/Point estimation. Interval Estimation is mostly done because it reduces the error owing to estimation, the S.E(standard error)is minimized.
(6)Testing of Hypothesis.
(7)Used for Forecasting purposes
I understand that this is a very necessary course for all Undergrads.The tricks in Economics are many-all yet to come!

Of the division of process in Technology

Some thoughts taken from Adam Smith's masterpiece " The Wealth Of Nations" written in 1776. The example given by him is of pin making. A person is needed for straightening the wire,one for cutting,one for shaping it and many others are required for its completion. Suppose totally there are 10 distinctive processes; take the case where there are 10 labourers working independently towards making pins. The total output would be, say TQ. But when this distinctive process is distributed among the 10 labourers, labour gets divided and the total output becomes, say TQ + a,(where 'a' is a constant which has an expected value(E) of more than 2TQ.
The reasons for this increase as mentioned by him are mainly three:
1)Improved dexterity
2)Saving of time
3)Application of machinery invented by workmen
This division of Labour is also known as Specialization. This has creeped into all aspects of the economy -Medicine, Engineering and even Education. This also increases the employment opportunities in a nation. The opulent countries all are higly specialized in all aspects of their working, which has resulted in an increase in efficiency, known as X-efficiency which is caused about by Technology advances.
The latest of these as seen in the media, is BPO(Business Process Outsourcing) and KPO(Knowledge Process Outsourcing) whereby a particular firm Specialises in a business process fully and, mostly these Specialised firms are set up in developing nations and does work for the Developed countries thus letting the Developed nations have a share in their low costs, owing to the low level of wages prevailing. Presently there is a division of technology too! All this has been brought about by Globalization and Liberalization. Has this resulted in an Efficiency increase in the developing countries? Will it contribute in the near future? Are the Developing countries gaining by the Theory of Comparitive advantage(also Absolute Advantage)?
P.S.Only the example and the reasons for increase in production and productivity are taken from the book.

Recommended books

For an undergraduate and for those weak in Math in their masters can do their study with the following text books
1) Fundamentals Of Mathematical Economics BY Alpha C Chiang
2) Introduction To Mathematical Economics BY Edward T Dowling IN Schaum's series
They both form a very good combination. Schaum's series is amazing.I just got my personal copy of the 2nd book.
I am doing my reading on Mathematical Economics now.Very soon i will come up with a blog ranking the top 5 universities/institutions in UK, USA and India in economics

Inequalities

Well,there had been a paucity of posts as i just returned from a trip to Andhra Pradesh(AP), 5 days back. The situation there is very pitiable-the place i went to was a village. Kerala is very developed in comparison with AP. This has got to do mainly with the polity in power. The strength of communism is shown in kerala where the inequalities of income and wealth are kept to the minimum. It truly is an achievement.
The condition is as follows
no proper shelter
lack of electricity
very low wages
environmental externalities
On the whole the state of well being is absent.I heard that there the women are paid just Rs.30 for a days work as compared to a wage not less than 100 in kerala. Moreover it seems that, there, a labourer is willing to work for a whole year for a meager Rs.1800.
I was upset about the whole issue,it has been disturbing me ever since. The absence of education is very much felt.
The riches there are in lands and gold.The agrarian sector appears to be strong founded but i doubt this greatly as how can a sector be called as developing when the main factors-the labour, is inadequately remunerated!

Poverty lines?

The definition as given by the UN for poverty is a minimum intake of approximately 250 calories. so if u ask a statistician he would place the amount of those under the poverty line in india between 40 to 45 % but actually it comes to more han 60%! can you imagine that???its an astounding fact.well you mentioned food, shelter and clothing.do you not feel that education comes under the basic necessities, well it does and if the individual lives in polluted place but he has all the basic necessities????
first we i.e india needs to define the word poverty for itself as conditions in different places are unalike.in kerala the inequalities are the minimum regarding incomes.
well we indians have resources.all our brains are working in foreign countries , developing it, as they are being paid in dollars & euros. india spends so much of resources on education and this is what happens.very few of them do the opposite.money is not everything in life!
if the markets cannot give the remedy to the problems of the nation like poverty, unemployment then an external body has to involve itself and that is the GOI(govt of india).why do we pay taxes?because we are responsible.why are elections held?its a democracy and the people who rule us have been elected by us!
according to the UN human development report, indian has been ranked somewhere around 136. what a shame!HDI(human development index) takes into account life expectancy, infant mortality rate, sex ratio, etc.
we might be growing at about 7% of GDP but it can be either due to inflation or a population explosion.what do the lay men know of GDP, the intricacies involved,when it is seen that GDP has grown they think india is growing...where is the growth seen,the poor are still the same..its a saddening sight...hope we make a difference to this sad state as indians!

the answer lies in economics!

well,when i went to the railway station yesterday, i was told that things are real easy NOW because the railways are now computerised.has this really increased the efficiency of the people in a totalitarian sense.has these been made available to the public? the economists sitting in top of the ladder creates policies for welfare improvement......but as it climbs down, it falls apart...not reaching the bottom of the ladder!when ever a policy is introduced, be it railway concession or any other concession made so as to improve the welfare of people,it neither reaches the strata of population in penury nor are they aware of such a scheme.the rich class remains the same, if not richer.....but the middle class tends to gain.....what about the poor?resulting in the inequalities in the distribution of income and wealth increase(does the poor have wealth?) here in india we dont even have a proper definition for the poverty line!!!!
i feel an answer to this problem can be given by economists.......the local self goverments must be made more transparent......it should look after the welfare of the people under it by formulating policies applicable to that particular region only......i feel all LSG's should employ a graduate in economics who has experience in policy making!presently the panchayats are looked down upon...this has to undergo a transition!the presence of an economist in an institution helps in the transition!

A digression

well it suddenly dawned upon me to share some quotes which can be of help
1)no good deed goes unpunished!
2)to give anything less than your best is to sacrifice the gift!

economics is not an independent discipline, instead it is very much accomodative.it can be coupled with religion,philosophy and so on!economics is all about being a rational individual or group in makin choices.....rational meaning making the best possible choice(but not at the cost of others)this what Vilfredo Pareto's PARETO OPTIMALITY teaches us too....if we look deeply into economics and religion,we conclude that both strive to make the life here on earth go smoothly.....in equilibrium!

thoughts on indifference curves

ECON-me

IC(curves), here we refer it to as IC curves.....dont know how the repetition came about..well as i was goin through FERGUSSON & GOULDS MICROECONOMICS, it suddenly came to my notice as to how infinite number of IC can be drawn in a commodity space.....on looking at the diagram, we make out only finite lines can be drawn......fergusson made the revelation to me that " IC's HAVE NO WIDTH".i was surprised because of the fact that when it was taught in class neither the prof nor the students asked anything about this.....maybe thay knew...i most certainly did not know....feeling foolish about myself!

scheduling...

another man day .......planning to do some micro reading.......i am starting from the begining(DD & SS) so that i get an clearer picture......need to improve my math too..if i knew one concept in math very well, i could do wonders because knowing a concept fully allows you to make analysis easier..in economics, the usual concepts needed are(broadly) calculus,matrices,optimization.....there is another fantastic section known as econometrics,which deals with the use of statistical analysis in economic modelling-which contributes to the emperical verification of the theory or model.
the books in ascending order of reading in econometrics are
BASIC ECONOMETRICS by Damodar Gujarati
ECONOMETRIC ANALYSIS by W H Greene
Gujarati can take you through the basics very well.
in india, specifically south india,students doing their undergrad in economics dont know either about econometrics nor mathematical economics......at least hope they know both are different .
i am planning to do the following
MA eco from delhi university
Msc econometrics and mathematical economics from UK
PHd from USA
as of now these are my plans... not considering them to change in the future.for those who are planning to do a doctorate abroad, take as many math papers you can in your master's.score well too....mere opting is not enough.
hoping i make some progress with my micro today
cheers to all those pursuing economics

genesis

i am proud to be doin my BA economics . economics is all i wanted to do.the problem in india is that the teaching is carried on in a very theoretical way not relating the same to the economic phenomena. very little math is being taught.alas!planning to do a masters after this.i feel blogging is one way of putting ones thoughts to n number of persons.most people get bored by reading economics , what a sad state!