The electronic mail connections we have created will provide a useful method for you to ask questions that you'd prefer to formulate at your computer. If you send these to me, I will answer on this "hit" page.
Estimating the impact of Japanese trade policy
What implications do you see in today's discussion of QWERTY (and yes, that was easy to type - hahaha) economics regarding Japanese trade policy for stationarity? The way I see it, the Japanese government has (possibly) altered the structural parameters governing both domestic production in Japan and political parameters (specifically perception of Japan as a nation/trading partner by both government officials and businesspeople around the world). Thus, any standard techniques (i.e. econ 170 techniques) would be invalid, with the exception of the class of estimators used to measure the effects of change in regimes - but those are piecewise and - under most conditions - and in my opinion, obviously theoretically unsatisfying.
Your question on the empirical evidence of Japanese trade patterns is apt. If we simply regress trade flows on factors of production without recognizing the role played by government intervention, there will be an evident bias in our results. The best answer to such biases is to control for policy directly. The first method would be to track the trade pattern of a single industry over time. Given the interest in Qwerty characteristics, examination of the industry's average cost of production could be examined for indications of declining average cost with increases in production.
The contribution of the government in the form of subsidy could also be handled explicitly in this formulation. Once the evolution of average cost is derived, t hen the relation of average cost (in some numeraire, and preferably for two trading countries) to trade pattern can be examined. Note that the second stage will not be surprising: once you demonstrate the Qwerty nature of the average-cost curve, then no one will be surprised that comparative advantage (and thus the trade pattern) is changing over time.
Your general point is important: usually, what we observe in data is the combination of market structure and government intervention. Unless we control explicitly for the government intervention portion, we cannot use the evidence to speak of character istics of the underlying market.
Competitive equilibria and Pareto optimality
Is a competitive equilibrium always Pareto optimal?
Let's define terms.
A competitive equilibrium is one in which individuals freely compete for allocations of goods and factors of production. It is defined for given production technologies, preferences of consumers, and initial endowments.
A Pareto optimum (or equivalently, a Pareto-efficient outcome) is an allocation of resources such that any reallocation cannot make any one individual better off without making at least one individual worse off, given production technologies, preferences of consumers and initial endowments.
The question above cannot always be answered yes. It will be true if, for example, production technologies and endowments are constrained to ensure that no one actor has market power and that there are no externalities to the production technology or public goods in preferences. In these Arrow-Debreu competitive equilibria the competitive equilibrium will be Pareto optimal.
Is a Pareto-optimal allocation a competitive equilibrium?
This will be true for the Arrow-Debreu competitive equilibria for some combination of initial endowments. The Pareto-optimal allocation will correspond to one or more specific initial endowment; for other endowments, the statement will not be true. (The preferences of the individuals will also have to satisfy some restrictions; these will be satisfied, for example, if the indifference curves are truly curved as we draw them in class.)
Suppose we define a social welfare function. Is a welfare maximum a Pareto optimum?
Yes.
Are Pareto optima always maxima for the social welfare function?
Yes, if the welfare weights for specific individuals can be chosen appropriately.
The moral of this story: competitive equilibria are efficient under certain restrictions on technology and preferences. These efficient outcomes will be Pareto optima, but not necessarily for the income distribution that you might prefer. (The ability to reallocate endowments -- i.e., to change the income distribution -- is crucial to the second equivalence above.)
For further reading, check the Mansfield microeconomics text or the Varian text "Microeconomic Analysis" for a more mathematical discussion.
World Bank lending and economic development
In the last class, we said that structural transformation might involve growth in consumer goods. In what way, if any, does the WB encourage policies that would accomplish this?
When I think of policies encouraged by international financial institutions I think of export processing zones and tourism. I don't see how either of these things might encourage the growth in consumer goods or even make a substantial difference in the LDC's economy. To my understanding, EPZ's manufacture goods that go to advanced nations. I suspect that a very large part of the money generated by tourism goes to hotels, restaurants, and airports---businesses usually owned by transnational corporations. EPZ's and tourism increase employment, but do they really do much more than that for LDCs' economies? They might help to make the upper 5% or the rich richer, but do they really make the majority of people economically better off?
That's an interesting and perceptive question about World Bank lending activities. We stated in class that one structural transformation associated with economic development is the growth in provision of consumer goods for domestic citizens. It is also the case, as you point out, that much of World Bank structural adjustment lending is targeted at projects and programs that increase exports: export-processing zones and tourism (a service ex port) are good examples. These are not necessarily contradictory, but they do point out the niche that the World Bank has chosen to focus upon.
As we noted in class, World Bank structural adjustment lending is targeted most often at activities to improve the economy's response to changes in international economic conditions. One indication of maladjustment in this regard is an excess of imports over exports -- a trade deficit. Solutions to this maladjustment require either "balancing up" or "balancing down"; i.e., increasing exports or reducing imports. Most developing countries followed the "balancing down" strategy of import substitution dur ing the 1960s and 1970s, with increased support for domestic consumer-good industries. World Bank lending supported many of these initiatives. These unfortunately turned out to be uneconomical -- domestic producers could not in most cases compete with foreign producers. The "balancing up" strategy was designed to rely upon the comparative advantage of the countries to increase exports and thus finance the imports of consumer (and other) goods. The World Bank has also encouraged and reinforced this tr end through its lending.
Your question could be paraphrased: "What does this strategy have to do with economic development?" Exploitation of comparative advantage will be in the country's long-term interest, and creation of jobs will of course lead to increased welfare for tho se who obtain the jobs. It is not clear to me that this strategy is any more or less inegalitarian than the import substitution strategy that preceded it. It is more "free market" oriented, and this provides some economic discipline; however, it is also certain to benefit people of the favored region over those in non-favored regions.
Interview with a Banker: the Motivations of Apollo Trust
(Questions by Charles Duncan on 23 October 1995.)
What exactly is Apollo Trust's motivation in providing free internet access to its customers? Is this simply a gimmick to replace the toaster oven giveaways of earlier times in order to win over new customers? Is this seen primarily as a public service project to serve the community of which the bank is a vital part?
We are an economically challenged community. 25% of Apollo is on some type of government assistance. Furthermore, we were scorched in the local media in the Spring of '94 for having a site that made nuclear fuel rods. They made us sound like we were Chernobyl. In order to combat this bad publicity I decided to start a community BBS that would allow businesses, volunteer organizaitons, churches, etc. contribute files that the public could read. I wanted people to hear the good that we had to offer.
That was June of 1994 when I started with an old pc and a former ATM telephone line. The BBS grew and grew. I wish I could say that I was smart enough to think all this was going to evolve the way it did. Ok, I did think it. But anyhow, we began Pc banking and then Internet access. My goal was to educate the local citizenry. In educating the area folks, we had the opportunity to give people in our area something others had or may not have had. Anyhow, at least it would be a fair fight. Its funny that you should mention toaster ovens. In one of the articles written in a banking magazine, I was quoted as saying "some banks give away toasters, we give away information." That was good. BTW, I would be happy to fax you half a dozen articles if you leave me a fax number.
Can internet banking make Apollo Trust more competitive? It seems to me that the bank may be able to gain economies of scale by opening itself up to business with the whole world with only a paltry $25,000 investment.
Definitely, its funny how people think we have branches all over the place. We look like Bank of America to New Zealanders. The Internet is the great equalizer. You guys are reading about the economies of scale in school. I'm here to tell you about the diseconomies of scale. Our bank has check, document, and information imaging that blows all the big banks away. They don't get this Internet stuff. That's good.
Can the WWW site help you to compete more effectively with the goliath banks that seem to really dominate the industry today? If this is the case, will Apollo Trust be less suceptible to a merger with Mellon or some other big bank?
Yes, abolutely. Our goal is to stay independent. We are locally owned and managed. Why don't you get your University to deposit some money in our bank as your next project. You can watch your checks clear everyday over the Internet.
cya
Ray
Raymond E. Muth raymuth@bankswith.apollotrust.com
Apollo Trust Company (412)478-3151 (Work)
Box 247 (412)478-1118 (Fax)
Apollo, PA 15613 (412)478-1205 (BBS)
Come see the Ray Muth Home Page
or the Apollo Trust Home Page