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• 18 Jun 2024
• Research & Ideas

Central Banks Missed Inflation Red Flags. This Pricing Model Could Help.

The steep inflation that plagued the economy after the COVID-19 pandemic took many economists by surprise. But research by Alberto Cavallo suggests that a different method of tracking prices—a real-time model—could predict future surges better.

• 28 May 2024
• In Practice

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• 21 May 2024

What the Rise of Far-Right Politics Says About the Economy in an Election Year

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• 11 Apr 2024

Why Progress on Immigration Might Soften Labor Pains

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• 01 Apr 2024

Navigating the Mood of Customers Weary of Price Hikes

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• 29 Jan 2024

Do Disasters Rally Support for Climate Action? It's Complicated.

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• 10 Jan 2024

Technology and COVID Upended Tipping Norms. Will Consumers Keep Paying?

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• 17 Aug 2023

‘Not a Bunch of Weirdos’: Why Mainstream Investors Buy Crypto

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• 15 Aug 2023

Why Giving to Others Makes Us Happy

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• 13 Mar 2023

What Would It Take to Unlock Microfinance's Full Potential?

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• 23 Jan 2023

After High-Profile Failures, Can Investors Still Trust Credit Ratings?

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• 29 Nov 2022

How Much More Would Holiday Shoppers Pay to Wear Something Rare?

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• 21 Nov 2022

Buy Now, Pay Later: How Retail's Hot Feature Hurts Low-Income Shoppers

More consumers may opt to "buy now, pay later" this holiday season, but what happens if they can't make that last payment? Research by Marco Di Maggio and Emily Williams highlights the risks of these financing services, especially for lower-income shoppers.

• 01 Sep 2022
• What Do You Think?

Is It Time to Consider Lifting Tariffs on Chinese Imports?

Many of the tariffs levied by the Trump administration on Chinese goods remain in place. James Heskett weighs whether the US should prioritize renegotiating trade agreements with China, and what it would take to move on from the trade war. Open for comment; 0 Comments.

• 05 Jul 2022

Have We Seen the Peak of Just-in-Time Inventory Management?

Toyota and other companies have harnessed just-in-time inventory management to cut logistics costs and boost service. That is, until COVID-19 roiled global supply chains. Will we ever get back to the days of tighter inventory control? asks James Heskett. Open for comment; 0 Comments.

• 09 Mar 2022

War in Ukraine: Soaring Gas Prices and the Return of Stagflation?

With nothing left to lose, Russia's invasion of Ukraine will likely intensify, roiling energy markets further and raising questions about the future of globalization, says Rawi Abdelal. Open for comment; 0 Comments.

• 10 Feb 2022

Why Are Prices So High Right Now—and Will They Ever Return to Normal?

And when will sold-out products return to store shelves? The answers aren't so straightforward. Research by Alberto Cavallo probes the complex interplay of product shortages, prices, and inflation. Open for comment; 0 Comments.

• 11 Jan 2022
• Cold Call Podcast

Can Entrepreneurs and Governments Team Up to Solve Big Problems?

In 2017, Shield AI’s quadcopter, with no pilot and no flight plan, could clear a building and outpace human warfighters by almost five minutes. It was evidence that autonomous robots could help protect civilian and service member lives. But was it also evidence that Shield AI—a startup barely two years past founding—could ask their newest potential customer, the US government, for a large contract for a system of coordinated, exploring robots? Or would it scare them away? Harvard Business School professor Mitch Weiss and Brandon Tseng, Shield AI’s CGO and co-founder, discuss these and other challenges entrepreneurs face when working with the public sector, and how investing in new ideas can enable entrepreneurs and governments to join forces and solve big problems in the case, “Shield AI.” Open for comment; 0 Comments.

• 06 May 2021

How Four Women Made Miami More Equitable for Startups

A case study by Rosabeth Moss Kanter examines what it takes to break gender barriers and build thriving businesses in an emerging startup hub. Open for comment; 0 Comments.

• 20 Apr 2021
• Working Paper Summaries

The Emergence of Mafia-like Business Systems in China

This study sheds light on the political pathology of fraudulent, illegal, and corrupt business practices. Features of the Chinese system—including regulatory gaps, a lack of formal means of property protection, and pervasive uncertainty—seem to facilitate the rise of mafia systems.

UC Berkeley’s Premier Undergraduate Economics Journal

The Macroeconomics of Happiness: A Case Study of Bhutan

CHAZEL HAKIM – MARCH 2ND, 2021

EDITOR: SEAN O’CONNELL

Situated deep in the eastern Himalayan mountains, Bhutan is often overshadowed by its more prominent neighbors: China and India. But, despite its quiet status, the country has constantly made headlines for a variety of socioeconomic achievements. Bhutan remains, for example, the first and only carbon-negative country in the world, and they have also recently prevented the COVID-19 pandemic from overwhelming its population, with only one Bhutanese citizen  passing away from the virus to date. 

Nevertheless, it is the Gross National Happiness Index (GNH), Bhutan’s main macroeconomic indicator, that stands as the country’s most radical achievement to date. The GNH’s construction is simple: rather than measuring the aggregate spending from a country’s population, Bhutan’s GNH seeks to measure their total happiness. The “happiness” in this case is obviously a subjective concept, but the indicators for GNH are based on tangible statistics of measures ranging from economic development to environmental protection levels.

Bhutan is also not the only country to have shifted macroeconomic analysis towards more holistic social indicators, as several other countries such as the United Kingdom and New Zealand have incorporated wellness goals into their policies. However, no country has put the ideas of happiness as central to their public policy decisions as Bhutan does through their GNH. Particularly with the country’s recent success during the pandemic, it then might be worthwhile to ask: has GNH actually played a significant role in helping Bhutan thrive?

Bhutan’s Gross National Happiness Index 

The idea of a GNH index stretches back to 1972, when one of the founders of the European Union, Sicco Mansholt, first came up with the idea as a critical response to the world’s traditional budget reliance on Gross Domestic Product (GDP). For those unfamiliar with GDP, it is simply a measure of the monetary value of a country’s spending on goods and services, but its real worth lies in its use as an quantitative indicator of a country’s growth and national income. Policymakers rely on GDP to make informed decisions about policy, but over the years, many have criticized how GDP calculations ignore crucial aspects of people’s lives, including life-satisfaction and environmental degradation metrics (read this BER article for a detailed explanation of criticisms of GDP). 

Compared to GDP’s technical measures of spending and output, Bhutan’s own GNH index takes a more holistic approach to measuring a country’s growth. One of its most striking differences comes down to its equal weighting of economic and non-economic aspects of the country, as exemplified by the four pillars that the GNH index encompasses: sustainable and equitable development, conservation of the environment, preservation and promotion of culture, and good governance. One can break down the index even further into nine domains, which range from living standards to time usage (Figure 1). 

Figure 1: Pillars, Domains, and Indicators of GNH 2016  

Source: Centre for Bhutan Studies, Columbia University (2016)

In terms of the actual logistics, the GNH index consists of a decile numbered range from 0 to 1, calculated from a cross-sectional survey sent out to a random sample of the Bhutanese people once every five years, including 2008 (the pilot survey year), 2010, and 2015. The survey itself is structured in terms of the nine domains and contains around 148 variables—both qualitative and quantitative. Its data analysis specifically relies on poverty-measuring methods developed by Oxford University researchers Sabina Alkrie and James Foster. In short, however, The 2015 GNH report explains the GNH’s final tally quite nicely by defining the following equation:

GNH = H H + (H U * A suff U )

where H H is the rate or headcount of “happy” people, H u is the rate of “not-yet-happy” people (i.e. the complement of H H ), and A suff U is the average percentage of domains in which the not-yet happy-people have sufficient achievements. In other words, the GNH is the total rate of happy people plus the extent that not-yet-happy people “enjoy” their lives. 

Does the GNH Index Work?

Consequently, legislation that now passes through the Bhutanese government must be filtered through a “GNH policy lens,” so, since 2008, every policy decision has operated under the pretense of raising GNH rather than GDP. Based on this criteria alone, one might conclude that Bhutan’s public policy has moved towards effectively interpreting and addressing information from the GNH index. Indeed, GNH has increased from 0.743 in 2008 to 0.756 in 2015, a “statistically significant increase” by the 2015 GNH report (Figure 2). However, this conclusion is analytically insufficient, and more concrete evidence might be helpful.

Figure 2: Changes in the GNH Index

Source: 2015 GNH Survey Report, Center for Bhutan & GNH Studies (2015)

A better method to analyze GNH might be to observe how different variables in Bhutan have changed since the “GNH policy lens” became a guiding force of public policy. One of the most striking facts in this vein is that Bhutan, according to a World Bank report , has been able to cut poverty from 36 to 12 percent between the years 2007 and 2017: the steepest decline in poverty of any of its neighboring South Asian countries over that time. Furthermore, enrollment in both primary and secondary education has significantly increased, with the former jumping up by 30 percentage points between 2007 and 2017. And in terms of infrastructure, 91 percent of the Bhutanese population now lives within a one hour distance to a health facility compared to just 73 percent in 2007, while increased public investment has led to farm road networks to jump from 1700 km to 11200 km between 2008 and 2017.

However, this is still not conclusive as to whether the GNH caused all these changes for Bhutan. One of the most obvious criticisms of these numbers may be that these trends started before the implementation of GNH in 2008. For example, while educational attainment certainly increased over the past decade in Bhutan, it is easy to see that the trend extends back to the 1990s when comparing the education levels of 50-64 and 30-49 year-olds (Figure 3). Many of the World Bank report statistics, in fact, show positive trends that already follow from before the GNH index arrived. Perhaps Bhutan’s public policy didn’t line up with GNH, but rather GNH was just a product of good public policy.

Figure 3: Educational attainment improved dramatically over the past decades.

Source: Bhutan Systematic Country Diagnosis, World Bank Group (2017) 

A Possible Answer in Buddhism

A lack of an evident and significant difference from GNH may not actually be that surprising for Bhutan. Besides the fact that the positive trends might just be a result of sustained economic growth for the low-income country, one crucial aspect that might help make sense of GNH’s passiveness comes from Bhutan’s influence by Buddhist teachings. In fact, Buddhism is the state religion of the country, and about three fourths of the population are considered to be followers. Buddhist notions of collective harmony, both with others and the environment, have played an important role in the policy decisions made by the Bhutanese government. 

The country’s GNH is no different in this case. The whole definition of the “happiness” Bhutanese policymakers attempt to maximize in GNH has its roots in the Buddhist idea of cultivating the inner self, which Buddhist monk Khenpo Phunshok Tashi articulates in this paper on Bhutan’s GNH index: “Buddhist philosophy states that relying on such external factors as the source of happiness will only lead to unhappiness. The Buddha advised his followers that if they desired true happiness, they should concentrate on cultivating inner contentment.”

Implicitly, GNH focuses on the material and spiritual well-being of the Bhutanese people for the sake of helping them achieve happiness. The nine domains of GNH even exemplify this Buddhist  philosophy: balancing the conventional growth of living standards, for example, as a goal that is just as important as psychological well-being. Therefore, many of Bhutan’s success stories in the past decade might be due not only to GNH but Bhutan’s underlying Buddhist roots of emphasizing personal well-being. The Bhutanese GNH index may therefore just be a mathematical articulation of an attitude that already existed in the country for decades.

Bhutan’s COVID-19 pandemic response illustrates a good case of the collective Buddhist philosophy underlying the country today. The country’s COVID-19 numbers are astoundingly low : a surprising fact given that it only has only around 337 physicians and 3,000 health workers for its population of 760,000 people. But, according to the Director of the Centre for Bhutan & GNH Studies, Karma Ura, that success has depended on the country’s holistic response to the pandemic. The unemployed, for example, have received grants from the country’s king to cover a year’s worth of income, but private sector banks have also decided to forgive interest rates for six months. As Ura promptly puts, “this could only happen in a Buddhist country.”

Even if it is difficult to pinpoint whether many of Bhutan’s success stories have originated from GNH, it might be natural to ask whether other countries should adopt a similar, more holistic approach to economic development. In fact, there have already been attempts in smaller regions around the world to replicate the GNH index measurement, including the cities of Victoria , São Paulo , and Seattle . In 2011, the United Nations even published a resolution urging other countries to readjust their economic goals in terms of happiness, with Bhutan’s GNH included as an example.

However, focusing on administrative reform away from GDP and towards a GNH-type index might be missing the bigger principle. The concern is not whether a well-being index can fit a country’s macroeconomic goals but rather the converse. Adopting a GNH index may have been a natural consequence of Bhutan’s collective and spiritual values, and the country could perhaps perform just as well without one. On the other hand, for countries whose cultural values differ greatly from Bhutan’s, it could be more difficult to implement a development index solely based on the abstract value of happiness. 

If policymakers in other countries want to take a step in a direction similar to Bhutan, they would first need to find common ground on both the economic and social priorities. It is a daunting task, but Bhutan has shown this to be an achievable goal. Other countries might therefore be best served by looking to GNH not necessarily as a model to copy, but as a guide for how measuring socioeconomic prosperity can be redefined. 

Featured Image Source: Geographic Expedition Adventure 

Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty,  or the University of California, Berkeley in general.

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Case Studies

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Economics 201

Case of the day: the great depression, the broad outline.

The Great Depression of the 1930s has affected the study of macroeconomics more than any other event in history. Indeed, the founding of macroeconomics as a separate discipline largely coincided with attempts to explain the Great Depression. It wasn't until the 1970s and 1980s that mainstream macroeconomics emerged from being dominated by theories of recession and depression.

The most common association that the general public has with the Great Depression is the crash of the stock market that occurred in October of 1929. Stock prices did fall dramatically on the day of the crash and continued in a general downward trend for several years. However, the Great Depression was much more than a crash in financial markets. Although the crash had an impact on the Depression, it was less a cause of the Depression than a co-symptom of a collection of underlying problems.

Both because of its magnitude as a social phenomenon and because of its impact on the development of macroeconomics, it is important to understand some basic facts about what happened during the Great Depression. In the words of Milton Friedman and Anna Schwartz, from their Monetary History of the United States , "The contraction from 1929 to 1933 was by far the most severe business-cycle contraction during the near-century of U.S. history we cover [1867-1960] and it may well have been the most severe in the whole of U.S. history. Though sharper and more prolonged in the United States than in most other countries, it was worldwide in scope and ranks as the most severe and widely diffused international contraction of modern times. U.S. net national product in current prices fell by more than one-half from 1929 to 1933; net national product in constant prices, by more than one-third; implicit prices [a broad index of prices across the economy], by more than one-quarter; and monthly wholesale prices, by more than one-third."

The most commonly cited indicator of business cycles, the unemployment rate, rose from 3.2% of the labor force in 1929 to 24.9% in 1933. Unemployment fell to 14.3% in 1937, but then increased again to 19.0% in 1938 and was still 9.9% in 1941 before the military boom associated with World War II brought it down to 1.9% in 1943. Real gross national product (output of goods and services) per person did not until 1940 recover to the level it had achieved in 1929. As the quote from Friedman and Schwartz indicates, prices were falling steadily through the 1930s as well. Table 1 summarizes some major macroeconomic statistics for the period 1925 to 1940.

 Table 1

	(%)	(1958 prices)		(1958 = 100)
								30-year corporate bonds

Source: Historical Statistics of the United States, Colonial Times to 1970 (Washington, DC: United States Bureau of the Census, 1975).

Financial markets, banks, and the real economy

The stock-market problems—stock prices lost about three-quarters of their value between October 1929 and 1933—had significant repercussions for the banking system, which in turn affected the economy. At that time, it was common for investors to borrow from banks to purchase stocks "on the margin," using the value of the stocks as collateral on the loans. (Such margin loans are now much more carefully restricted.) A sudden collapse in stock prices reduced the value of the collateral, causing banks to make "margin calls," in which investors were asked to either repay their loans or provide additional collateral. In order to try to obtain enough liquidity to do one of these things, many investors attempted to sell their stock, which of course drove stock prices down even more rapidly in a self-reinforcing spiral.

Since many customers were not able to get enough liquidity to make their margin calls, defaults on bank loans soared, leading to a loss in confidence in the banking system. Meanwhile, as the economy soured, other bank loans were beginning to look less safe as well, raising the prospect of significant bank failures. At that time, bank deposits were not insured, so that if a bank was destined to fail, those depositors who were able to get their money out before it actually closed would be paid in full, while others would get their money back only in part and only after a delay (because the bank's remaining assets would have to be sold to determine how much could be paid). This gave depositors a very strong incentive to race to the withdrawal window to be first to get their money, starting a "run on the bank" any time a bank was thought to be in difficulty.

However, banks—then as now—keep only a small amount of depositors' money in the form of reserves (vault cash and readily available deposits at the Federal Reserve Banks). The rest is lent to customers to earn interest or used to purchase interest-bearing securities. A bank run can use up a bank's reserves very quickly, forcing it to either (1) sell off some of its loans and securities very quickly to get cash, (2) borrow cash from someone, perhaps the Federal Reserve, or (3) close down, at least temporarily. The securities (and even loans) of an individual bank may be quite "liquid" (commonly traded, so it is easy to find a willing buyer) during normal times, but when a whiff of crisis is in the air there are far more sellers in the market than buyers. If a bank is forced to sell into a frightened market, they may get very low "fire-sale" prices for the assets they are able to sell. If they have to sell assets at a loss, this worsens the bank's financial situation and may push it over the edge into insolvency, where the bank's liabilities exceed the value of its assets—the bank may fail.

When the Federal Reserve System was founded in 1913, its principal mission was to provide an "elastic currency" by acting as a "lender of last resort" for banks, lending to them through the "discount window" by purchasing their loans and securities for cash when the banks faced possible runs and needed liquidity. However, during the bank crises of the Great Depression the Fed put such strict rules on the kinds of assets that it would buy that emergency borrowing from the Fed failed to avert bank runs. Between 1929 and 1933, bank failures were so wide-spread that the number of commercial banks operating in the United States fell by over one-third.

The extraordinarily high rate of unemployment of the economy's labor resources was mirrored by underutilization of its capital. Industrial production declined by about half from 1929-33, leaving many factories, mines, and shops shut down and many others operating at far below their capacity. The economy had entered a vicious circle: aggregate demand for goods and services was so low that firms could not sell as much output as they could produce under full utilization of resources. Because production and employment were so low, households' incomes contracted severely so that they could not afford to buy many goods, which in turn kept aggregate demand depressed.

The apparent failure of the market system to coordinate households' and firms' economic decisions in an efficient way directly contradicted the fundamental efficiency implications of classical economics, which was based on the perfectly competitive model of general equilibrium. Moreover, the source of this coordination failure did not seem to lie in any of the classical causes of market failure such as externalities, public goods, or monopoly. Rather, the price system seemed to be ineffective at providing the appropriate signals to clear the markets for products and resources. Markets did not seem to clear; demand was apparently not equal to supply.

Explaining the nature of this failure was the task attempted by John Maynard Keynes, a brilliant but maverick British economist, in The General Theory of Employment, Interest and Money , published in 1936. Keynes focused on the key role played by aggregate demand in determining the overall level of economic activity in an economy. The refinement of models based on Keynes's insights and of alternative models exploring the relationships among economic aggregates led to the development of the discipline of macroeconomics.

Modern macroeconomists fall into two broad categories. Neoclassical macroeconomists think of the world as being primarily well explained by the competitive, market-clearing model. Keynesian (or New Keynesian) macroeconomists emphasize the imperfections of the market and the difficulties that may attend convergence to market clearing. Although there is much on which these two groups agree, they tend often to support different strategies for macroeconomic policy. Neoclassical economists usually favor a laissez-faire approach, relying on the self-correcting mechanism of the market to restore the economy to equilibrium. Keynesians tend to support a more active role for the government in managing aggregate demand either directly through fiscal policy (government spending and taxation levels) or monetary policy (using changes in the quantity of money to affect liquidity, interest rates, and hence aggregate demand).

The differences are highlighted in an amusing way by this video .

Questions for analysis

1. Macroeconomists classify variables as "procyclical" if they tend to be positively related to real output across the business cycle, in other words, if they usually rise in booms and fall in recessions. Variables that move in the opposite direction are called "countercyclical." Based on the evidence in Table 1, would you say that inflation was procyclical or countercyclical during the period shown? What about nominal interest rates? The unemployment rate?

2. Describe the pattern of nominal and real interest rates during the Great Depression. (Recall that the real interest rate is approximately the nominal rate minus the rate of inflation.) Why can't nominal interest rates ever be negative? What bound does this put on real interest rates when there is substantial deflation? Is it possible that this could prevent the loanable-funds market from clearing?

3. Can you explain why long-term interest rates moved down less in the Great Depression than short-term rates? The rates shown in Table 1 are rates on loans to extremely creditworthy borrowers: the U.S. government and the largest corporations. How do you think the "spread" between these rates and those of less reliable borrowers changed during the Great Depression?

4. If you operated a bank that had not (yet) experienced a run during the Great Depression, how would you change your lending and reserve-holding policies to try to prepare yourself for that possibility? Would these changes in lending, in turn, contribute further to the depression in aggregate demand?

Improving economics teaching and learning for over 20 years

Case study 1: First Year Economic Theory

Steve Cook and Duncan Watson Swansea University

Published February 2013

Part of the Handbook chapter on Assessment Design and Methods

When considering assessment methods in economics, arguably one of the most interesting potential case studies concerns introductory economic theory. Amongst the various challenges faced by those delivering such a module are the issues of setting the tone for subsequent years of study and addressing the transition between school and university education. For many years, first year undergraduate economic theory at Swansea University has been split into two modules. Both labelled Principles of Economics, the ‘A’ version of the module is taken by students arriving with post-GCSE experience of Economics (A-level, AS-level, foundation year, IB etc.), while students without such a background are enrolled on Principles of Economics B. These year-long modules combine both standard introductory microeconomic and macroeconomic content and are structured in such a fashion as to equally prepare students from differing backgrounds for the demands of their future studies. In an attempt to increase student engagement, 2009–10 saw the introduction of a new assessment scheme for Principles of Economics A. The ‘old’ scheme comprised of a mid-year January multiple-choice examination, an in-class disclosed examination and a standard summer (May/June) examination. [1] The weightings attached to these components were 30 per cent, 10 per cent and 60 per cent respectively. The new assessment scheme involved the introduction of six within-tutorial mini-assessments spread throughout the year with the best five marks to be included at weighting of 4 per cent each. The revised assessment scheme therefore involved a reduction in the weighting of other assessment components to accommodate the tutorial-based assessment, and consequently involved a corresponding change in the content of these components. The resulting structure was then: tutorial-based exercises (20 per cent), January examination (20 per cent), in-class examination (10 per cent) and summer examination (50 per cent). It should be noted that these summative assessment components are in addition to formative elements contained within the module.

The revised assessment scheme sought to achieve a number of objectives. First, it aimed to increase the extent to which students work consistently throughout the year by introducing an additional six elements of assessment within term. Second, it aimed to introduce a mechanism for students to gauge their understanding of topics and material as soon as possible. As a number of elements of the syllabus will be familiar to students from their earlier studies, there is always a possibility of students focusing their attention and efforts on those topics which are new and paying insufficient attention to previously considered concepts and terminology. Obviously this is not to be encouraged as, aside from the necessity for understanding to be refreshed, it will prove particularly problematic when material is presented in a different, extended or advanced manner to that previously experienced. However, this may only come to light when confronted with assessment which forces closer examination of topics in formal setting. The use of frequent lower weighted assessment allows any misdirection of efforts or gaps in knowledge to be addressed quickly ahead of becoming substantive issues detected in a more weighty assessment component. A third obvious intention of the in-tutorial assessment was to increase the preparedness of students for their more heavily weighted assessments later in the module. The regularity of testing not only ensures a familiarity with the ‘rules and regulations’ of examinations and settles students ahead of the more substantive latter assessment components, but also allows knowledge to build progressively through the year.

In terms of the structure or mechanics of the tutorial-based assessment, this was very straightforward to devise. The module already contained a series of fortnightly tutorials which involved students discussing and working through previously circulated exercise sheets designed to illustrate material presented in lectures. The expectation is that students attempt the exercises ahead of the sessions and then focus more closely with their tutor during tutorials on those elements they feel warrant further analysis to improve their understanding. The tutorial-based assessments were introduced to six sessions (three in each teaching block). This meant that time allocated to the circulated exercises sheets was reduced to allow time to undertake a 10-minute mini-assessment. In each instance, the assessment involved a series of very short questions which were very similar in nature to those covered in the circulated exercise sheet. This reveals a further objective of the assessment in its role as a further prompt to attempt the circulated exercise sheets and engagement with the tutor to resolve any uncertainties concerning material. An example of the nature of the tutorial-based assessment is provided below. This simple mini-test provides students and tutors alike with a quick means of assessing understanding of material covered. In this particular case, the four-part assessment picks up upon issues in consumer choice. Alternatively phrased the questions ask: ‘What is implied by the positioning of an indifference curve?’, ‘What is implied by the slope of an indifference curve?’, ‘What is implied by the shape of an indifference curve?’, ‘How can we construct/manipulate/employ budget lines/constraints’. It can be seen that the exercises provided are simple in nature to assess quickly understanding in a manner that goes beyond that afforded by multiple-choice examination. However, the demands on the tutor are minimal as the marking involved is very straightforward and hence feedback can be provided to all students extremely quickly. Importantly, these are crucial issues and the assessment of student understanding of them can be assessed quickly ahead of formalising the knowledge to move on to consider substitution and income effects.

The feedback on the revised assessment can be considered in two ways. First, changes in module marks can be considered. Information on this is provided in Table 1. However, before considering the figures provided, a number of issues must be recognised. The information to be considered provides broad measures of student performance on the Principles of Economics A module over a three-year period. Table 1 provides three sets of information on the two Principles of Economics modules. The first set of information simply provides the number of students taking the module each year. Clearly version ‘B’ is larger than ‘A’. The second set of information presents the change in the average module mark relative to the year before assessment on Principles of Economics A was revised. In this instance, the other module which does not have a revised assessment method acts as something of a control (albeit in a loose sense). The ‘Average Difference’ column provides information on average difference in the marks students obtain on this module and those they obtain elsewhere. By considering the relative performance both across modules for each year and then over a number of years, some control for cohort effects is present and a snapshot of the general impact of changes in assessment design can be inferred. However, it is recognised that a variety of factors (different students, different questions etc.) make it difficult to identify the true impact of a change in assessment.

Level-1 Economic Theory: Student Numbers, Mean Mark and Relative Module Performance

	Number	Change in Mean Mark	Average Difference	Number	Change in Mean Mark	Average Difference
2010–2011	131	10.1%	–3.2	261	4.9%	–9.2
2009–2010	137	8.5%	–1.4	304	4.9%	–6.8
2008–2009	122	N/A	–7.6	290	N/A	–6.6

An example of the Level 1 tutorial-based assessment

1. The indifference curves below (denoted as E, F and G) relate to differing levels of utility obtained from the consumption of Goods X and Y. One of the indifference curves corresponds to 2 utils, another corresponds to 8 utils, while another corresponds to 6 utils. Which curve depicts 8 utils?

2. Consider the indifference curve depicted in the diagram below. Annotate this diagram by marking two distinct points on this indifference curve. Label these points ‘C’ and ‘D’ in such a way that point ‘D’ corresponds to a lower marginal rate of substitution than point ‘C’. Using a single sentence, explain your answer.

3. It is known that the indifference curve for two goods is L-shaped. What does this tell you about the relationship between these goods?

4. Consider the budget line (BL) depicted in the diagram below for given prices of Goods X and Y and a given level of money income. Suppose that following the drawing of BL, the price of Good X remains the same, the price of Good Y doubles, and the level of money income doubles. Sketch the new budget line on the diagram below.

From consideration of the results presented in Table 1 it can be seen that a dramatic jump in the mean for Principles of Economics A occurred following the introduction of a revised assessment scheme. From inspection of the results for Principles of Economics B, it is apparent that this module experienced an increase in its mean mark at the same time. However, the increases in marks on the modules differ, with the module with in-tutorial assessment experiencing an increase of 8.5 percentage points in its first year following the change, in comparison to the increase of 4.9 percentage points on the other module. This is indicative of an increase above and beyond a cohort effect. Similarly, when considering the average difference between the marks obtained by students on this module and elsewhere, this narrowed for Principles of Economics A (from being an average of 7.6 percentage points below to only 1.4 percent points below) while it widened on the corresponding Principles of Economics B module (on average students scored 6.6 percentage points less in 2008–09, and 6.8 percentage points less in 2009–10). It should be noted that historically these theory-based modules do return lower marks than other application-based modules taken at Level 1. The results obtained in the second year of delivery of the module under the revised assessment policy (2010–11) make for interesting reading. On the one hand, it appears that the noted improvement in the previous year has been reversed, with the gulf between the mark obtained on the module and elsewhere widening (it increases to 3.2 percentage points). In combination with the increased average mark, this is indicative of a cohort effect, with marks increasing in general, but not by as much on this module as elsewhere. However, at the same time the corresponding gulf for the Principles of Economics B module has widened by more (2.4 percentage points from –6.8 per cent to –9.2 per cent). This would then suggest that a general disparity between theoretical and non-theoretical modules has been less acute for the module where a revised assessment policy has been implemented. Considering the results presented for all years available, the introduction of a new assessment structure has led to an increase in marks and a narrowing of the differences between the module concerned and others when considered from its time of implementation to the present day, while the module without changes in assessment has seen the gulf between it and others widen. In terms of qualitative feedback on in-tutorial assessment, its introduction has received favourable comment from students and staff alike.

Considering the level of assessment on the Level 1 economic theory module, the summative assessment is entirely based upon examination, although an element of it is disclosed (10 per cent), six elements are mini-assessment or quizzes (20 per cent) and a further element is multiple-choice examination (20 per cent). Therefore only 50 per cent is based upon an essay-based examination. To consider this assessment split relative to other Economics departments (or groups) in the UK, a survey was conducted involving 32 departments. [2] The information gleaned from this on the assessment of Level 1 economic theory is reported in Figure 2 below. This chart provides a breakdown of the examination/coursework split for analogous Level 1 economic theory modules along with a figure indicating the percentage of departments adopting this approach. It can be seen that the most popular form of assessment is via 100 per cent examination (28 per cent of surveyed departments adopting this approach), followed by 60:40 and 70:30 splits (both being adopted by 19 per cent of departments). However, the division of assessment between these two components could mask a range of differing numbers of assessments. This is of particular importance as to the extent that one of the aims of assessment should be to increase engagement, the frequency of assessment is of importance. For example, Principles of Economics A, has four forms of assessment but nine points of summative assessment are employed. Figure 3, containing the results for 32 UK Economics departments, surprisingly shows that a single element of summative assessment is the most popularly employed frequency of assessment (25 per cent of departments surveyed), followed by two and then three points of assessment (22 per cent and 19 per cent respectively).

Considering the outcomes noted above and the information contained in the survey of economics departments, the new assessment scheme has proved successful and has also led to a high frequency of assessment relative to the national norm. However, given the improvements in outcomes and student experience, along with the relative ease of implementation, the additional resources required for such a change are a very small price to pay for a huge return.

Figure 2: A survey of Level 1 Economic Theory assessment weightings

(Exam : Coursework; Percentage of institutions)

Figure 3: A survey of Level 1 Economic Theory assessment components

(Number of components; Percentage of institutions)

[1] The ‘disclosed’ examination involves the provision of two essay titles approximately six weeks ahead of the examination date. Students are asked to prepare for both, with the actual essay to be attempted not revealed until turning over the test paper in the examination venue.

[2] A survey of UK Economics Departments was conducted to consider provision relating to all of the case studies considered herein (Level 1 economic theory; final year dissertation; final year econometrics). Results are reported for instances where information was available for all areas covered by the case studies. The desire to use a consistent sample across all case studies resulted in the use of 32 departments.

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• An Overview

Microeconomics

Macroeconomics.

• What Do Investors Focus on?

The Bottom Line

Microeconomics vs. macroeconomics: what’s the difference.

• A Practical Guide to Microeconomics
• Economists' Assumptions in their Economic Models
• 5 Nobel Prize-Winning Economic Theories
• Understanding Positive vs. Normative Economics
• What Factors Influence Competition in Microeconomics?
• How Does Government Policy Impact Microeconomics?
• Understanding Microeconomics vs. Macroeconomics CURRENT ARTICLE
• Differentiate Between Micro and Macro Economics
• Microeconomics vs. Macroeconomics Investments
• Introduction to Supply and Demand
• Is Demand or Supply More Important to the Economy?
• Law of Demand
• Demand Curve
• Law Of Supply
• Supply Curve
• Price Elasticity of Demand
• Understanding Elasticity vs. Inelasticity of Demand
• Factors Determining the Demand Elasticity of a Good
• What Factors Influence a Change in Demand Elasticity?
• What Is the Concept of Utility in Microeconomics?
• What Is the Utility Function and How Is it Calculated?
• Total Utility
• Marginal Utility
• Law Of Diminishing Marginal
• What Does the Law of Diminishing Marginal Utility Explain?
• Economic Equilibrium
• Income Effect
• Indifference Curve
• Consumer Surplus
• Comparative Advantage
• Economies of Scale: What Are They and How Are They Used?
• Perfect Competition
• Invisible Hand
• Market Failure

Microeconomics vs. Macroeconomics: An Overview

Economics is divided into two categories: microeconomics and macroeconomics. Microeconomics is the study of individuals and business decisions. Macroeconomics looks at the decisions of countries and governments.

These two branches of economics appear to be different but they're interdependent and complement each other. Many overlapping issues exist between the two fields.

Key Takeaways

• Microeconomics studies individuals and business decisions. Macroeconomics analyzes the decisions made by countries and governments.
• Microeconomics focuses on supply and demand and other forces that determine price levels, making it a bottom-up approach.
• Macroeconomics takes a top-down approach and looks at the economy as a whole to determine its course and nature.
• Investors can use microeconomics in their investment decisions.
• Macroeconomics is an analytical tool used mainly to craft economic and fiscal policy.

Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources and the prices at which they trade goods and services. It considers taxes, regulations, and government legislation.

Microeconomics focuses on supply and demand and other forces that determine price levels in the economy. It takes a bottom-up approach to analyzing the economy. It tries to understand human choices, decisions, and the allocation of resources.

Microeconomics doesn't try to answer or explain what forces should take place in a market. It tries to explain what happens when there are changes in certain conditions.

Microeconomics examines how a company could maximize its production and capacity so it could lower prices and better compete. A lot of microeconomic information can be gleaned from company financial statements.

Microeconomics involves several key principles, including but not limited to:

• Demand, supply and equilibrium : Prices are determined by the law of supply and demand . Suppliers offer the same price demanded by consumers in a perfectly competitive market. This creates economic equilibrium.
• Production theory : This is the study of how goods and services are created or manufactured.
• Costs of production : The price of goods or services is determined by the cost of the resources used during production according to this theory.
• Labor economics : This principle looks at workers and employers and tries to understand patterns of wages, employment, and income. 

The rules in microeconomics flow from a set of compatible laws and theorems rather than beginning with empirical study.

Macroeconomics studies the behavior of a country and how its policies impact the economy as a whole. It analyzes entire industries and economies rather than individuals or specific companies. This is why it's referred to as a top-down approach. It tries to answer questions such as “What should the rate of inflation be?” or “What stimulates economic growth?”

Macroeconomics examines economy-wide phenomena such as gross domestic product (GDP) and how GDP is affected by changes in unemployment, national income, rates of growth, and price levels.

Macroeconomics analyzes how an increase or decrease in net exports impacts a nation’s capital account or how gross domestic product (GDP) is impacted by the  unemployment rate .

It focuses on aggregates and  econometric correlations . This is why governments and their agencies rely on macroeconomics to formulate economic and fiscal policy. Investors who buy interest-rate-sensitive securities should keep a close eye on monetary and fiscal policy.

John Maynard Keynes  is often credited as the founder of macroeconomics because he initiated the use of monetary aggregates to study broad phenomena. Some economists dispute his theories and many Keynesians disagree on how to interpret his work.

Investors and Microeconomics vs. Macroeconomics

Individual investors may be better off focusing on microeconomics but macroeconomics can't be ignored altogether. Fundamental  and value investors may disagree with technical investors about the proper role of economic analysis. It's more likely that microeconomics will impact individual investments but macroeconomic factors can affect entire portfolios.

Warren Buffett famously stated that macroeconomic forecasts didn’t influence his investing decisions. When asked how he and his partner Charlie Munger choose investments, Buffett said, “Charlie and I don’t pay attention to macro forecasts. We have worked together now for 54 years, and I can’t think of a time we made a decision on a stock, or on a company...where we’ve talked about macro.” Buffett also has referred to macroeconomic literature as “the funny papers.”

John Templeton, another famously successful value investor, shared a similar sentiment. “I never ask if the market is going to go up or down because I don’t know, and besides, it doesn’t matter,” Templeton told Forbes in 1978. “I search nation after nation for stocks, asking: ‘Where is the one that is lowest priced in relation to what I believe it’s worth?’”

Can Macroeconomic Factors Affect My Investment Portfolio?

Yes, macroeconomic factors can have a significant influence on your investment portfolio. The Great Recession of 2008–09 and the accompanying market crash were caused by the bursting of the U.S. housing bubble and the subsequent near-collapse of financial institutions that were heavily invested in U.S. subprime mortgages.

Consider the response of central banks and governments to the pandemic-induced crash of spring 2020 for another example of the effect of macro factors on investment portfolios. Governments and central banks unleashed torrents of liquidity through fiscal and monetary stimulus to prop up their economies and stave off recession. This pushed most major equity markets to record highs in the second half of 2020 and throughout much of 2021.

What Is a Global Macro Strategy?

A global macro strategy is an investment and trading strategy that centers around large macroeconomic events at a national or global level. “Global Macro” involves research and analysis of numerous macroeconomic factors, including interest rates, currency levels, political developments, and country relations.

What Is the Basic Difference Between Microeconomics and Macroeconomics?

Microeconomics is the study of how individuals and companies make decisions to allocate scarce resources. Macroeconomics is the study of an economy as a whole.

How Do Core Concepts of Microeconomics Such As Supply and Demand Affect Stock Prices?

Microeconomic concepts such as supply and demand affect stock prices directly and indirectly.

• The direct effect can be gauged by the impact of demand and supply disequilibrium on stock prices. The stock will rise when demand for a stock exceeds supply at a given point in time because there are more buyers than sellers. Conversely, the stock will fall when supply exceeds demand because there are more sellers than buyers.
• The indirect effect is based on supply and demand for the underlying company’s products. A company's products may be on a probable strong earnings trajectory that would likely translate into a higher price for its stock if its products are flying off the shelves because of robust demand. But the company’s earnings may disappoint and the stock may slump if demand is sluggish and there's excess inventory or supply of its products,

Does My Portfolio Performance Hinge on Both Microeconomic and Macroeconomic Factors?

Yes. Microeconomic factors such as supply and demand, taxes, and regulations and macroeconomic factors such as gross domestic product (GDP) growth, inflation, and interest rates, have a significant influence on different sectors of the economy and therefore on your investment portfolio as well.

Microeconomics and macroeconomics are related but separate approaches to studying the economy. Microeconomics is concerned with the actions of individuals and businesses. Macroeconomics focuses on the actions that governments and countries take to influence broader economies. Both will impact an investment portfolio but most investors focus primarily on microeconomic considerations when making their investment decisions.

CNBC, Warren Buffett Archive. “ Afternoon Session—2013 Meeting .”

David Andrews, ed., via Google Books. “ The Oracle Speaks: Warren Buffett in His Own Words .” Page 101.

Forbes. " Eight Lessons From Sir Templeton ."

Morningstar. " 2020 Market Performance in 7 Charts ."

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Microeconomic Case Studies

Economist Zone

Welcome to our in-depth analysis of microeconomic case studies. This blog post aims to shed light on the fascinating world of microeconomics through real-world case studies. We will explore different scenarios, dissect the economic principles at play, and understand how these principles affect individuals, firms, and markets.

The Power of Supply and Demand: The Case of the Housing Market

Let's kick things off with a classic example of supply and demand in action - the housing market. The housing market is a perfect illustration of how changes in supply and demand can dramatically impact prices.

When demand for houses increases (due to factors like population growth or increased income), and supply remains constant, house prices tend to rise. Conversely, if the supply of houses increases (perhaps due to new construction) and demand remains constant, house prices usually fall.

An interesting case study is the San Francisco housing market. The city has seen a significant increase in demand due to the tech boom, but strict zoning laws have limited the supply of new housing. The result? Skyrocketing house prices.

This case study underscores the importance of understanding supply and demand dynamics. Policymakers, for instance, can use this understanding to address housing affordability issues.

The Impact of Government Policies: Minimum Wage Laws

Next, let's turn our attention to government policies, specifically minimum wage laws, and their impact on the labor market.

Minimum wage laws set a floor for wages. Employers must pay their workers at least the minimum wage. While the intention behind these laws is to protect low-income workers, they can have unintended consequences.

Consider the case of Seattle. In 2014, the city decided to gradually increase its minimum wage to $15 per hour. Some businesses, unable to afford the higher wages, reduced their workforce or closed down altogether. This led to a decrease in employment opportunities for low-skilled workers - the very group the policy aimed to help.

This case study highlights the importance of considering the potential unintended consequences of government policies. It also underscores the role of elasticity in labor demand.

The Role of Elasticity: The Case of Luxury Goods

Elasticity is a key concept in microeconomics. It measures how much the quantity demanded or supplied of a good changes in response to a change in price.

Luxury goods typically have high price elasticity of demand. This means that a small change in price can lead to a large change in quantity demanded.

Take the case of luxury cars. If the price of a luxury car increases by a small percentage, the quantity demanded can decrease significantly. This is because luxury cars are not a necessity, and consumers can easily switch to cheaper alternatives.

This case study demonstrates the importance of understanding elasticity for businesses. It can help them make informed pricing decisions and predict how changes in price will affect their sales.

Market Structures and Competition: The Case of the Tech Industry

Now, let's explore different market structures through the lens of the tech industry.

The tech industry is often characterized as an oligopoly, a market structure in which a few large firms dominate the market. These firms have significant market power and can influence prices.

A notable case study is the rivalry between Apple and Samsung in the smartphone market. Both companies have a significant share of the market and continuously innovate to outdo each other. This competition drives technological advancements and benefits consumers.

This case study illustrates the dynamics of competition in an oligopoly. It also highlights the role of innovation in competitive markets.

Externalities and Public Goods: The Case of Vaccination

Finally, let's delve into the concepts of externalities and public goods.

Vaccination is a classic example of a positive externality - a benefit that affects people who did not choose to incur that benefit. When a person gets vaccinated, they not only protect themselves from disease but also reduce the likelihood of disease transmission, benefiting society.

This case study emphasizes the role of government in addressing externalities. In the case of vaccination, governments often provide vaccines for free or at a subsidized cost to maximize societal benefits.

The Role of Information: The Case of Used Cars

Our last case study focuses on the role of information in markets, using the used car market as an example.

The used car market often suffers from a problem known as "information asymmetry" - a situation where one party has more or better information than the other. Sellers often have more information about the car's condition than buyers. This can lead to a "lemons problem," where only low-quality cars ("lemons") are offered for sale.

This case study highlights the importance of information in markets. It also underscores the role of institutions (like warranties or certification programs) in addressing information asymmetry.

Wrapping Up Our Journey Through Microeconomic Case Studies

We've journeyed through various microeconomic case studies, each highlighting a different economic principle. From the power of supply and demand in the housing market to the role of information in the used car market, these case studies offer a glimpse into the fascinating world of microeconomics. They underscore the relevance of microeconomic principles in our daily lives and the importance of understanding these principles for decision-making, whether as consumers, business owners, or policymakers.

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