Blast from the Past — Quasi-linear and Slutksy

Quasilinear Utility. Its linear, but not really. The numeraire good can be shown to sweep up all income effects by looking at Lagrangian Multiplier. What this means is that all additional income goes directly to buying more numeriare good. The rest of the goods’ demand are a function only of price. This has implications on indirect utility. The gain to consumers to non-numeraire good is the Consumer Surplus. So it stands to reason that changes in non-numeraire prices’ effects can be measured via Consumer Surplus. When it comes to welfare, and if we restrict our attention to changes in prices of non-numeraire, we can CV=EV=p*change(CS). Why is there a price in the last term? CV and EV are in money units, while CS is in terms of real numeraire goods. We need to convert it to money.

Lets translate this into regular terms. A numeraire good is all other goods, while the quasilinear good is say ballpens. A marginal increase in wealth leads to it going directly to all other goods. The gain in ballpen consumption is measured by CS, or WTP-price, summed over quantity bought. Lets say the price of ballpens fall. You consume more pens, and the gap between Willingness to Pay and the price grows even more. This is win for consumers, unambiguously. For the consumer, this ‘ballpen windfall’ has a conversion rate in terms of the numeraire. For example it could be ” for 100 more ballpens this year, for me, that would be equivalent to 5 units of a composite of everything else”. We make that translation, and multiply it by the price composite/index of everything else, to measure it in money. Viola! — the money value of 100 more ballpens.

Next, the Slutsky Equation. What happens to demand when the price rises? Two distinct effects. The substitution effect leads you to consumer less of the relatively more expensive good. The other effect is the wealth effect. Typicaly, higher prices lead to lower real wealth, which lowers quantity demanded too. But this is not the only case. Suppose that alot of your income comes from your selling of this good. When the price rises, you become richer, which causes you to buy more of everything, including the relatively more expensive good.

Classic example is leisure, and the price of leisure is wage. Higher wages lead to higher incomes, which encourage you to ‘buy’ leisure by not working. This leads to the backward bending supply curves. This effect is stronger the larger the weight of labor income in total income. Why? An increase in  wages increase total wages by 10% if all your income is labor income. But it increases it by only 1% if wages is just 10% of total income.

Teleportation!

Inspired by LOST, this is an intriguing case of teleportation by Gil Perez.

Street Strategist

I’ve uncovered his “Hyperwage Theory“. Its taken a while, and i had to read his rant about his grades and how smart he is, but I’m on finally on part 9, and he’s finally hit upon the secret of differing income per capita — productivity. I will read on to see what his other great insights are.

Hahaha…

I wish he’d come back, but his correspondent days are over.

from vodpod.com posted with vodpod

Maid of Honor

This is surely a sign of the times. The movie Made of Honor features a man as a comic lead, in the kind of role usually alloted for women. The first time i’ve seen such a thing. Its quite revolutionary actually. Women now have shown that they can invade traditionally male roles (action/fantasy/adventure hero). Now its the the men’s turn to take over as a lead in a romantic comedy, typically the bastion of women. In fact, he’s more than the lead, he is tasked to carry this movie as everyone else in this movie has a lesser profile. Basically Patrick Dempsy plays a ‘Julia Roberts’ kind of role; an otherwise successful person driven to desperation by love.

What has made this possible? Well, Grey’s Anatomy is one obvious factor. But this isn’t the first time there has been a breakaway leading man from TV. I think its Judd Apatow — he’s shown more than anyone that the male point of view of relationships is every bit as interesting as the female’s.

Kidney Donor Pools

An interesting article in abs-cbn online news on the doctor’s reaction to new DOH kidney donation rules. This is my comment:

the article on the kidney donation does not clearly lay out how the kidney specialists plan will help. The problem is that the pool of potential donors is tainted by donors who lie to be eligible for transplantation. but the kidney specialists’ plan is to restrict transplants (generally? or to foreigners– this too is unclear). Setting aside the issue of non-compliance by hospitals (mentioned in the article), how will a successful restriction

a)help the people who need kidneys,

b) help improve the quality of the donor pool?

Update: I found this nice link on kidney sales in Iran. Regarding poor donor pool, its important to align incentives. From the study:

If the long-term outcomes of organ vendors are formally included as a moral and financial responsibility of the vending system, then market forces will minimize costs by selecting a vendor population with the lowest risk…

Agreed. Make the system pay for post op care, and buyers will be more careful about who the ‘vendors’ are. This will restrict the number of operations to those foreigners that can afford it (kinda like what the DOH proposal is all about anyways), but it will go a long way towards solving the moral hazard in this market.

Slowly back away from my Bitterness… Slowly…

Obama last week made a few remarks about attitudes in the american heartland. Articles abound, but for starters, here is a link.

This is the achiles heel for democrats — snobbery and elitism. This also an example of the truism that if you aren’t part of the group, don’t judge the group without choosing your words very very carefully — and even then, think again.

Confused by CBCP

Whats up with CBCP? In a news bit from MSN i hear:

Roman Catholic bishops in the Philippines warned President Gloria Arroyo on Monday against granting a pardon to nine military officers convicted of mounting a failed coup five years ago.

The defence establishment on Sunday urged Arroyo to grant presidential clemency to the nine junior officers, who received heavy jail terms earlier this month after they pleaded guilty and apologised to the Filipino people.

“The government will not win any brownie points here because the public is not in favour of it,” said Rodolfo Diamante, executive secretary of the Catholic Bishops Conference’s episcopal commission on prison pastoral care.

So the government shouldn’t pardon soldiers because ‘the public isn’t in favour of it’? I’m confused because i didn’t know the church based moral decisions on its popularity (or lack thereof). Shouldn’t forgiveness be based on fundamental moral reasons, especially if your name is the Catholic Church? Who cares about brownie points?

What ever happened to consistency?

For example, I can understand how and why the church would be against contraception — because its against it on principle. Whether or not people are in favor is a separate matter (important, but in theory separate). Now the church is playing the popularity card, which tells me that the CBCP uses arguments based on whether it supports some kind of agenda (whatever that agenda is, which includes a hardline stance against coup plotters and women)

Product Space

As a country becomes rich, its exports become larger. Its exports increase via the intensive margin (value of what it already exports), and the extensive margin (supposedly, a measure of variety that a country exports).

Setting aside how to calculate the extensive margin, many papers have indicated how important this margin is.

Whats cool is that now there’s been a development of the notion of product space, in a paper by Hausmann and Klinger. All of the above literature have posited that as GDP per capita rises, more products are produced, but none of them looks at which goods. Not all goods are the same, not all goods are equally likely. Roughly, to be rich, you must produce and export goods that rich countries produce and export. For some developing countries, thats difficult (where HK define ‘difficult’)

Export Thoughts

Rough thoughts on trade theory.