Principles Econ Micro Macro

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Lecture 1:
Eleven Principles of Economics
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In this chapter,
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Jos-Luis Peydr
What Economics Is All About

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Jos-Luis Peydr
The principles of
HOW PEOPLE
MAKE DECISIONS
Jos-Luis Peydr
PRINCIPLE #1:
People Face Tradeoffs
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Jos-Luis Peydr
PRINCIPLE #1:
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Jos-Luis Peydr
PRINCIPLE #1:
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Jos-Luis Peydr
PRINCIPLE #1:
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Jos-Luis Peydr
PRINCIPLE #2:
The Cost of Something Is What You Give Up to Get It
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Jos-Luis Peydr
PRINCIPLE #2:
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Jos-Luis Peydr
PRINCIPLE #2:
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Jos-Luis Peydr
PRINCIPLE #3:
Rational People Think at the Margin
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Jos-Luis Peydr
PRINCIPLE #3:
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Jos-Luis Peydr
PRINCIPLE #3:
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Jos-Luis Peydr
PRINCIPLE #4:
People Respond to Incentives
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Jos-Luis Peydr
Examples in newspapers/blogs on the 4 previous

concepts
Jos-Luis Peydr
Why Does College Cost So Much? Posner

The back page of the Education section of the Wall Street Journal for October 9 features a
very interesting debate among three economists; I have given the debates title to this blog
post. The economists are Rudy Fichtenbaum, Katharine Lyall, and Richard Vedder, all
experts on the economics of education and two (Fichtenbaum and Lyall) with considerable
practical experience in academic administration. They dont agree on the causes of the high
costs of an American college or university education; and though they agree that those costs
are a problem, they dont agree on the solution. That is characteristic of the academic and
journalistic literature on American higher education.
When I was an undergraduate at Yale College in the late 1950s, the cost of tuition plus room
and board was $2000 a year; it is now almost $60,000, which after adjustment for inflation
represents almost a fourfold increase. Yale is not unique, and the costs of a college education
are comparable to those of Yale and other Ivy League schools (and their counterparts
elsewhere in the United States, such as Stanford, the University of Chicago, and the
University of Texas) even at many much less prestigious colleges.
The causes are various. They include the enormousI am tempted to say the stifling
increase in legal and other regulation of colleges (and universities, but for simplicity Ill use
college to denote all higher education), the decline in financial subsidies to state colleges,
the increased cost of scientific equipment, and the expense of computerization and other
electronics. But another important cause,paradoxically, is the increased cost of college
education, which tilts the student body toward richer kidsand rich kids and their parents
expect superior amenities in the way of housing, food, athletic facilities, and police protection.
Such students expected to be treated as consumers, rather than as kids with no rights or
representation (the situation of students at Yale in the 1950s; there was no student
government, and no appeal from expulsion).
In addition, the availability of federal loans to students enables colleges to jack up tuition. This
is in part because the loans are subsidized, in part because young people tend to exaggerate
their future prospects, and in part because even very intelligent young people often have
difficulty comprehending interest rates. Still another cause is the very strong demand for
college education. Word has gotten out that the gulf in employment opportunities between
college and non-college educated young persons has widened and is likely to continue to do
so. Supply lags demand because it takes a long time for a new college to establish credibility
in the eyes of prospective employers, and because expansion of existing colleges, while of
course both feasible and common, is costly and slow; it requires enlarging faculty,
administrative staff, security, and physical plantthere are few if any economies of scale in
higher education. When demand outruns supply, price rises.
Another factor in the rising cost of college, perhaps an uncontrollable one, is the shift from a
professional to a business model of higher education, a trend similar to that observed in the
legal and medical professions. Colleges seem far more competitive than of old, as
symptomized by the big-business type salaries increasingly commanded by successful
college executives, where success is measured primarily in financial terms. This competition
has I think resulted in greater investment in intercollegiate athletics, greater attention in
admissions to the income of an applicants family, grade inflation, reduction in number of
required courses, and other pandering to student preferences. I worry that college trustees do
not have the same incentives to hold down costs as corporate directors, who are answerable,
at least to some extent, to shareholders. Private colleges (the majority of colleges and the
best colleges) dont have shareholders.
There is also a question about the value added of a college education. Although college
seems
a
good
investment, whether it is depends I think on the underemphasized factor of IQ. The average
IQ of Americans is (by definition) 100, and about one-sixth of Americans have an IQ of 85 or
less. And many kids who have a sufficiently high IQ to benefit, in principle at least, from a
college education have character or psychological or other personal problems (including
family responsibilities) that prevent them from deriving significant benefits from higher
education. Not every career track should begin with a college graduation.
It is relevant to note that college completion rates have declined even though colleges require
less effort by students to graduate. This is consistent with colleges enrolling more students
who cant benefit significantly from a college education.
I see hope, however, in the MOOCsmassive open online courses, which offer enormous
potential cost savings and quality improvements for colleges. They can eliminate most of the
living expenses associated with college (students can live at home, presumably cheaply)
while enabling a reduction in faculty size (because there is no limit to the number of students
in an online course) coupled with an increase in average faculty quality, since there is no limit
on the number of students that a superb teacher can teach online. The MOOCs are not a
panacea, but they are the most promising response to the problem of the high costs of a
college education in America.
Higher College Costs and its Consequences- Becker

As Posner discusses, tuition and other college costs have risen greatly during the past 30
years. So too have the many benefits from college, including the greater earnings, health, and
even marriage rates of college graduates compared to high school graduates. Moreover, the
return on a college education has also increased, as measured by the higher benefits of
college net of the increase in college costs. As a result, college is even a better deal than it
was 30 years ago for most of the students who can afford the higher tuition.
Hence despite the sizable growth in college costs, more students want a college education.
This increased demand for college education is obviously one factor that has pushed up
college costs. The growth in college costs means, however, that college may not be a better
deal now than in the past for capable high school graduates who have trouble financing
higher college costs. They and other students have turned to loans to ease the financial
burden of college, which, along with low interest rates, largely explains the sizable growth in
student loans. Many colleges, especially private ones, have also eased the financial burden
to students by increasing aid at a rapid rate.
Colleges are competing harder for better students, so that the financial burden of going to
college has grown more slowly for these students than for average students. This, combined
with the fact that the benefits of a college education have also grown more rapidly for abler
college graduates, means that changes during past several decades in both benefits and
costs of college have been much better for abler students. This increased financial cuddling
of better students is another factor that has increased the cost of college for the average
student.
Increased competition for better students has gone hand in hand with greater competition for
better faculty. Just as returns to college have increased more for better students, it is likely
(there is little quantitative evidence on this) that returns from college have also grown more
from an education with better faculty and a more effective education program. In any case,
the stronger competition for college faculty has been one important source of the growth in
college costs since faculty is by far the dominant cost of a college education.
Although the fraction of young persons who go to college has increased in all ethnic, race,
and gender groups as a result of the higher return from college, the increase has been rather
modest, especially for males. Part of the explanation is that some students have been
discouraged by higher tuition and other college costs, although this does not explain why
young women are now far more likely to complete 4 years of college than are young men.
To ease the burden of student loans, it would be wise to introduce on a larger scale loans that
tie repayments to subsequent earnings. Those who earn relatively little would effectively have
lower interest rates on their loans. One obvious challenge in running such a loan program on
a financially sound basis is that these loans are more attractive to students who do not expect
to earn a lot, either because they have limited skills, or expect to enter occupations that do
not pay well.
Students cannot go to college if they have not graduated from high school, and the fraction
that drop out of high school, especially young males, has remained stubbornly high during the
past 30 years (with some decline during past few years). Although the high dropout rate may
be indirectly related to the costs of a college education, it is puzzling since the plight of high
school dropouts has remained pretty dismal during the past several decades. They have low
earnings, high unemployment rates (as made clear during the past recession), poor health,
and bad marital prospects.
The best explanation for the large number of dropouts is that parents, teachers, and schools
have not prepared these students for a decent high school education, let alone for college.
This is being increasingly recognized as pressure grows on schools and teachers, and also
on parents, to improve the education of the mainly minority students who constitute the great
majority of high school dropouts. It is imperative to find better ways to help college students
cope with the large growth in tuition and other college costs. Yet, one should not at the same
time conclude that a college education has been oversold, since in virtually all dimensions of
life a 4-year college education generally pays off very well. !!
PRINCIPLE #4:
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Jos-Luis Peydr
PRINCIPLE #4:
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Jos-Luis Peydr
ACTIVE LEARNING
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Jos-Luis Peydr
ACTIVE LEARNING
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Jos-Luis Peydr
ACTIVE LEARNING
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Jos-Luis Peydr
The principles of
HOW PEOPLE
INTERACT
Jos-Luis Peydr
PRINCIPLE #5:
Trade Can Make Everyone Better Off
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Jos-Luis Peydr
PRINCIPLE #6:
Markets Are Usually A Good Way to
Organize Economic Activity
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PRINCIPLE #6:
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Jos-Luis Peydr
PRINCIPLE #6:
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Jos-Luis Peydr
PRINCIPLE #6:
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PRINCIPLE #6:
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PRINCIPLE #6:
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PRINCIPLE #6:
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PRINCIPLE #7:
Governments Can Sometimes
Improve Market Outcomes
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PRINCIPLE #7:
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Jos-Luis Peydr
PRINCIPLE #7:
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Jos-Luis Peydr
Minimum Wages and Employment:

A Case Study of the Fast-Food Industry
in New Jersey and Pennsylvania
On April 1, 1992, New Jersey's minimum wage rose from $4.25 to $5.05 per
hour. To evaluate the impact of the law we surveyed 410 fast-food restaurants in
New Jersey and eastern Pennsylvania before and after the rise. Comparisons of
employment growth at stores in New Jersey and Pennsylvania (where the
minimum wage was constant) provide simple estimates of the effect of the higher
minimum wage. We also compare employment changes at stores in New Jersey
that were initially paying high wages (above $5) to the changes at lower-wage
stores. We find no indication that the rise in the minimum wage reduced
employment. (JEL 530, 523)
How do employers in a low-wage labor

market respond to an increase in the minimum wage? The prediction from conventional economic theory is unambiguous: a
rise in the minimum wage leads perfectly
competitive employers to cut employment
(George J. Stigler, 1946). Although studies
in the 1970's based on aggregate teenage
employment rates usually confirmed this
prediction,' earlier studies based on comparisons of employment at affected and unaffected establishments often did not (e.g.,
Richard A. Lester, 1960, 1964). Several re-
cent studies that rely on a similar comparative methodology have failed to detect a
negative employment effect of higher minimum wages. Analyses of the 1990-1991 increases in the federal minimum wage
(Lawrence F. Katz and Krueger, 1992; Card,
1992a) and of an earlier increase in the
minimum wage in California (Card, 1992b)
find no adverse employment impact. A study
of minimum-wage floors in Britain (Stephen
Machin and Alan Manning, 1994) reaches a
similar conclusion.
This paper presents new evidence on the
effect of minimum wages on establishmentlevel employment outcomes. We analyze the
experiences of 410 fast-food restaurants in
New Jersey and Pennsylvania following the
increase in New Jersey's minimum wage
from $4.25 to $5.05 per hour. Comparisons
of employment, wages, and prices at stores
in New Jersey and Pennsylvania before and
after the rise offer a simple method for
evaluating the effects of the-minimum wage.
~~~~~~i~~~~ within N~~ jerseybetween
high-wage
paying
than the new minimum rate prior to its
effective date) and other stores provide an
alternative estimate of the impact of the
new lawe
In addition to the simplicity of our empirical methodology, several other features of
*Department of Economics, Princeton University,

Princeton, NJ 08544. We are grateful to the Institute
for Research on Poverty, University of Wisconsin, for
partial financial support. Thanks to Orley Ashenfelter,
Charles Brown, Richard Lester, Gary Solon, two
anonymous referees, and seminar participants at
Princeton, Michigan State, Texas A&M, University of
Michigan, university of Pennsylvania, ~niversitJ of
Chicago, and the NBER for comments and suggestions. We also acknowledge the expert research assistance of Susan Belden, Chris Burris, Geraldine Harris,
and Jonathan Orszag.
'see Charles Brown et al. (1982,1983) for surveys of
this literature. A recent update (Allison J. Wellington,
1991) concludes that the employment effects of the
minimum wage are negative but small: a 10-percent
increase in the minimum is estimated to lower teenage
employment rates by 0.06 percentage points.
772
PRINCIPLE #7:
Jos-Luis Peydr
PRINCIPLE #7:
Jos-Luis Peydr
PRINCIPLE #7:
Jos-Luis Peydr
PRINCIPLE #7:
Jos-Luis Peydr
Is Opportunity Declining? Becker

The United States has traditionally prided itself on being a country that provides equality of
opportunity. By that is usually meant that individuals with ability and ambition who are born
into families with modest means and education have a good chance of succeeding when they
become adults. The experiences of different generations of immigrants coming from many
countries have supported this view, for their children and grandchildren often succeeded very
well as they blended into the mainstream of American life.
That rosy view of opportunities in the US is being challenged by a growing belief that
opportunities are declining for children from modest backgrounds. This belief is partly based
on the strong evidence that human capital, including education, IQ and other measures of
ability, have become much more important in determining economic success than was the
case in the past. This new economic environment favors educated parents because they
have both greater schooling and also higher average cognitive and non-cognitive skills.
Better-educated and higher income parents have always spent more on their childrens
education and training, including quality of schools and after school activities. However, this
gap in spending between families has grown in recent decades as the relation between socalled enrichment expenditures on children and family income has become much steeper. In
addition, better off families complement their spending of money on their children by also
spending more time with children through teaching them, helping with homework, and in other
ways.
Countering this growing advantage of children from better off families is that different levels of
government are doing more than in the past to improve education opportunities from children
from poorer backgrounds. The many policies that work in this direction include subsidized pre
kindergarten activities, head start programs, and greater attention to the public schools
attended by poorer children.
Despite various claims about declining opportunities in the US, and the indirect evidence that
supports this conclusion, there is little direct supporting evidence. Many commentators have
confused the strong evidence that inequality in the distribution of earnings and other incomes
has increased greatly since 1980 with declining opportunity for children from poorer families.
This is a jump in logic since greater inequality of income is consistent with stable or even
growing opportunities for these children.
To be sure, in comparisons among countries, greater inequality of incomes in fact does tend
to go along with fewer opportunities for poorer children to rise up in the income scale.
However, this finding does not imply that countries that have growing inequality in the
distribution of incomes also have falling opportunities.
The direct evidence on what is happening over time to opportunities provides a mixed picture.
On the one hand is the evidence on the IGE, which measures the average effect on childrens
earnings of higher parental earnings. For example, an IGE of 0.5 means that when parents
earnings are say 10% above average, their childrens earnings tend to be 5% above average.
Most of the evidence suggests that the IGE in the United States changed little as inequality
grew during the past 30 years. This direct evidence is limited in part because different studies
provide a range for the IGE in the US from about 0.3 to about 0.7.
The other hand comes from work on what has happened over time between the
performances on achievement tests of children from families at the lower and upper ends of
the income distribution. In particular, a study in progress by a graduate student at the
University of Chicago, Eric Nielsen, compares the performances of children in the late 1970s
and 1990s that have parents in the top and bottom 20 percentiles of the income distribution.
To make the comparisons he uses scores on the Armed Forces Qualifying Test (AFQT), a
widely used measure of achievement. Using (ordinal) methods of comparison that he
developed, Nielsen finds a considerable narrowing over this time period between the
performances on this test of children from the high and low ends of the income distribution.
It is somewhat puzzling that the performance gap on achievement tests has apparently
narrowed while the gap between high and low income families in their spending of time and
money on their childrens human capital has apparently widened. One important piece of
missing evidence is on possible changes over time in the link between the AFQT
performance and adult earnings.
In summary, it is far from clear whether opportunities of children from poorer families have
been declining in the US. Still, since abundant opportunity for these children is an important
goal of an efficient and attractive society, more effort might be needed to improve their
opportunities through better schools, better teachers, and perhaps in other ways as well.
Equality of Opportunity-Posner
Income inequality in the United States has grown substantially since the 1970s, to the point
where today the bottom 20 percent of the nations households have 5 percent of total income,
the top 10 percent about 50 percent, and the top 1 percent more than 20 percent. The
question is whether such a high level of inequality is likely to reduce what is called relative
mobility, or the likelihood that members of one generation of a family and members of the
next generation will end up at different points in the income distribution. You are very likely to
earn more than your father; the question is how likely are you to be higher (or lower) in the
income distribution. If he is in the bottom quartile, for example, how likely are you to be in the
next higher quartile?
Income inequality in the parents generation might be expected only to create income
inequality in the next generation. Whether income inequality will affect relative mobility will
depend on why income inequality in the current population is so high. One possibility is that,
because of increased assortative mating as a result of declining discrimination and of the
efficiency of online search for potential mates, there are greater differences in IQ across
families than there used to be. Another possibilitycloser to a certaintyis that as a result of
automation in the broadest sense, the economic returns to IQ have risen relative to the
returns to strength and stamina, which are the qualities important to such vocations as factory
work, construction, mining, and farming.
The combination of assortative mating with higher returns to IQ could have dramatic effects
on relative mobility if the effect was to insulate to a significant degree a prosperous familys
children from economic risk. And it may be. The adults in high-IQ families are
disproportionately represented in the jobs (professional, managerial, financial, and so forth)
that pay well, and their income can and often is used to give their children a boostfor
example in the form of payment of tuition to high-quality (and very expensive) private schools,
payment to tutors, a variety of other educational enrichments, and entry into high-quality
colleges without need for their children to borrow to finance college (or graduate or
professional school) and thus assume debt. Colleges like to admit kids from high-income
families, seeing such kids as future donors. And high-IQ parents are likely to produce high-IQ
children, further enhancing the childrens attractiveness to first-rate colleges. These factors,
which loom larger the greater the inequality in the income distribution, because that inequality
creates a highly affluent tier of families (a proximed by the income shares of the top 10
percent and within that group the top 1 percent) are likely to reduce relative mobility, by
securing a disproportionate number of the top college and university admissions and top jobs
for children of the intellectual-economic elite.
These factors can be offset to a significant extent by immigration, because immigrants tend to
be more ambitious, bold, and determined than the average member of their nation of origin;
refugee immigrants are often drawn from the elite of their nation of origin. First-generation
immigrants tend not to have a high income, but to endow their children with the attitudes and
abilities that enable the children to achieve economic success. Certainly the United States
has
benefited
greatly
in
recent
years from immigration from countries like China, India, and South Korea. But relative mobility
that is the consequence of the artificially depressed income of first-generation immigrant
families does nothing to promote relative mobility for the children of low-income native-born
Americans.
A 2011 study by Scott Winship for the Brookings Institution reports that the likelihood that an
American will rank higher in the income distribution than his parents is lower than in most
other wealthy countries. The report states: If being raised in the bottom fifth [of the income
distribution] were not a disadvantage and socioeconomic outcomes were random, we would
expect to see 20 percent of Americans who started in the bottom fifth remain there as adults,
while 20 percent would end up in each of the other fifths. Instead, about 40 percent are
unable to escape the bottom fifth. This trend holds true for other measures of mobility: About
40 percent of men will end up in low-skill work if their fathers had similar jobs, and about 40
percent will end up in the bottom fifth of family wealth (as opposed to income) if thats where
their parents were. Income inequality is greater in the United States than in our peer
countries, and may be responsible for our lower relative mobility. In the limit, an income
distribution that produces a very wealthy top tier of earners and a very large bottom tier of
poor or low-income families may reduce movement between the tiers in subsequent
generations.
Becker points to Headstart and other government programs as possible counters to the effect
of income inequality on economic opportunities for children of families that are rank low in the
income distribution. This raises the question whether there may be a more efficient way of
dealing with the problem of relative mobility than spending government money. A natural
starting point would be to increase the very low federal income tax rate (15 percent) on
dividends and capital gains, which is a significant factor in the increase in income inequality.
ACTIVE LEARNING
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The principles of
HOW THE ECONOMY
AS A WHOLE WORKS
Jos-Luis Peydr
PRINCIPLE #8:
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to Produce Goods & Services
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Cross-country income differences as of 2008
Jos-Luis Peydr
Very large differences in income per capita and

output per worker across countries today
Jos-Luis Peydr
The evolution of income per capita 1960-2000
Jos-Luis Peydr
Evolution of GDP per capita 1820-2000
Jos-Luis Peydr
Evolution of GDP 1000-2000
Jos-Luis Peydr
PRINCIPLE #8:
A Countrys Standard of Living Depends on Its Ability
to Produce Goods & Services
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Jos-Luis Peydr
World Economic Davos Forums Competitiveness Index
Jos-Luis Peydr
Table 3: The Global Competitiveness Index 20132014 rankings and 20122013 comparisons
GCI 20132014
Country/Economy
Switzerland
Singapore
Finland
Germany
United States
Sweden
Hong Kong SAR
Netherlands
Japan
United Kingdom
Norway
Taiwan, China
Qatar
Canada
Denmark
Austria
Belgium
New Zealand
United Arab Emirates
Saudi Arabia
Australia
Luxembourg
France
Malaysia
Korea, Rep.
Brunei Darussalam
Israel
Ireland
China
Puerto Rico
Iceland
Estonia
Oman
Chile
Spain
Kuwait
Thailand
Indonesia
Azerbaijan
Panama
Malta
Poland
Rank
(out of 148)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
Score
(17)
5.67
5.61
5.54
5.51
5.48
5.48
5.47
5.42
5.40
5.37
5.33
5.29
5.24
5.20
5.18
5.15
5.13
5.11
5.11
5.10
5.09
5.09
5.05
5.03
5.01
4.95
4.94
4.92
4.84
4.67
4.66
4.65
4.64
4.61
4.57
4.56
4.54
4.53
4.51
4.50
4.50
4.46
GCI 20132014
Rank among
20122013
economies*
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
GCI
20122013
1
2
3
6
7
4
9
5
10
8
15
13
11
14
12
16
17
23
24
18
20
22
21
25
19
28
26
27
29
31
30
34
32
33
36
37
38
50
46
40
47
41
Country/Economy
Rank
(out of 148)
Croatia
Romania
Morocco
Slovak Republic
Armenia
Seychelles
Lao PDR
Iran, Islamic Rep.
Tunisia
Ukraine
Uruguay
Guatemala
Bosnia and Herzegovina
Cambodia
Moldova
Namibia
Greece
Trinidad and Tobago
Zambia
Jamaica
Albania
Kenya
El Salvador
Bolivia
Nicaragua
Algeria
Serbia
Guyana
Lebanon
Argentina
Dominican Republic
Suriname
Mongolia
Libya
Bhutan
Bangladesh
Honduras
Gabon
Senegal
Jos-Luis
Ghana
Cameroon
Gambia, The
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
Peydr
114
115
116
Score
(17)
4.13
4.13
4.11
4.10
4.10
4.10
4.08
4.07
4.06
4.05
4.05
4.04
4.02
4.01
3.94
3.93
3.93
3.91
3.86
3.86
3.85
3.85
3.84
3.84
3.84
3.79
3.77
3.77
3.77
3.76
3.76
3.75
3.75
3.73
3.73
3.71
3.70
3.70
3.70
3.69
3.68
3.67
Rank amo
201220
economie
75
76
77
78
79
80
n/a
81
n/a
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
n/a
107
108
109
110
111
112
113
2.1: Country/Economy Profiles
United Kingdom
Key indicators, 2012
GDP (PPP) per capita (intl $), 19902012
Population (millions) ........................................ 62.7

GDP (US$ billions) ..................................... 2,440.5
GDP per capita (US$) ................................. 38,589
GDP (PPP) as share (%) of world total ............ 2.81
United Kingdom
50,000
Advanced economies
40,000
30,000
20,000
10,000
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Global Competitiveness Index

Rank
(out of 148)
Stage of development
Score
(17)
GCI 20132014 ...................................................... 10 ..... 5.4
Transition
12
GCI 20122013 (out of 144) ....................................... 8 ......5.4

GCI 20112012 (out of 142) ..................................... 10 ......5.4
Transition
23
Factor
driven
Efficiency
driven
Basic requirements (20.0%) .......................................24 ......5.5
Innovation
driven
Institutions
Institutions ................................................................ 12 ......5.4

Infrastructure .............................................................. 8 ......6.1
Macroeconomic environment ................................. 115 ......4.0
Health and primary education ................................... 16 ......6.4
Innovation
Infrastructure
6
5
Business
sophistication
Macroeconomic
environment
4
3
Efficiency enhancers (50.0%) .......................................4 ......5.5
Higher education and training ................................... 17 ......5.5

Goods market efficiency .......................................... 14 ......5.1
Labor market efficiency .............................................. 5 ......5.4
Financial market development .................................. 15 ......5.0
Technological readiness .............................................. 4 ......6.1
Market size ................................................................. 6 ......5.8
Market size
Health and
primary
education
Higher education
and training
Technological
readiness
Financial market
development
Innovation and sophistication factors (30.0%) ...........10 ......5.2
Goods market
efficiency
Labor market efficiency
Business sophistication ............................................. 9 ......5.4

Innovation ................................................................. 12 ......4.9
United Kingdom
Innovation-driven economies
The most problematic factors for doing business

Access to financing ...........................................................20.7
Tax rates............................................................................11.0
Inefficient government bureaucracy ...................................11.0
Inadequately educated workforce ........................................9.2
Tax regulations ....................................................................8.9
Insufficient capacity to innovate ...........................................8.4
Inadequate supply of infrastructure ......................................7.8
Restrictive labor regulations .................................................6.7
Poor work ethic in national labor force ................................5.9
Policy instability ...................................................................5.8
Inflation ................................................................................2.5
Corruption ...........................................................................0.9
Foreign currency regulations ................................................0.5
Poor public health ...............................................................0.5
Crime and theft ...................................................................0.1
Government instability/coups ..............................................0.1
0
10
15
Percent of responses
Note:
From the list of factors above, respondents were asked to select the five most problematic for doing business in their country and to rank them between
1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings.
380 | The Global Competitiveness Report 20132014
20
25
30
2.1: Country/Economy Profiles
United Kingdom
The Global Competitiveness Index in detail
INDICATOR
VALUE RANK/148
INDICATOR
1st pillar: Institutions

1.01
1.02
1.03
1.04
1.05
1.06
1.07
1.08
1.09
1.10
1.11
1.12
1.13
1.14
1.15
1.16
1.17
1.18
1.19
1.20
1.21
Property rights ....................................................... 6.2 ..............4

Intellectual property protection ............................... 5.8 ..............8
Diversion of public funds ........................................ 5.7 ............13
Public trust in politicians ......................................... 4.2 ............22
Irregular payments and bribes ................................ 6.0 ............16
Judicial independence............................................ 6.2 ..............6
Favoritism in decisions of government officials ....... 4.3 ............17
Wastefulness of government spending ................... 3.7 ............39
Burden of government regulation ........................... 3.7 ............45
Efficiency of legal framework in settling disputes .... 5.6 ..............8
Efficiency of legal framework in challenging regs. ... 5.2 ..............8
Transparency of government policymaking............. 5.3 ............11
Business costs of terrorism .................................... 5.2 ............89
Business costs of crime and violence..................... 5.1 ............48
Organized crime ..................................................... 5.9 ............28
Reliability of police services .................................... 5.7 ............26
Ethical behavior of firms ......................................... 5.8 ............12
Strength of auditing and reporting standards ......... 5.8 ............16
Efficacy of corporate boards .................................. 5.2 ............21
Protection of minority shareholders interests ......... 5.2 ............15
Strength of investor protection, 010 (best)* .......... 8.0 ............10
2.01
2.02
2.03
2.04
2.05
2.06
2.07
2.08
2.09
Quality of overall infrastructure ............................... 5.4 ............28

Quality of roads ...................................................... 5.3 ............28
Quality of railroad infrastructure .............................. 5.0 ............14
Quality of port infrastructure ................................... 5.7 ............15
Quality of air transport infrastructure....................... 5.6 ............28
Available airline seat km/week, millions* .......... 6,326.3 ..............3
Quality of electricity supply ..................................... 6.7 ..............9
Mobile telephone subscriptions/100 pop.* ......... 130.8 ............40
Fixed telephone lines/100 pop.* ........................... 52.6 ..............9
3.01
3.02
3.03
3.04
3.05
Government budget balance, % GDP*..................-8.3 ..........140

Gross national savings, % GDP* .......................... 10.8 ..........123
Inflation, annual % change* .................................... 2.8 ..............1
General government debt, % GDP* ..................... 90.3 ..........136
Country credit rating, 0100 (best)* ...................... 86.7 ............15
4.01
4.02
4.03
4.04
4.05
4.06
4.07
4.08
4.09
4.10
Business impact of malaria ............................. N/Appl. ..............1

Malaria cases/100,000 pop.* ................................(NE) ..............1
Business impact of tuberculosis ............................. 6.5 ............21
Tuberculosis cases/100,000 pop.* ....................... 14.0 ............33
Business impact of HIV/AIDS ................................. 6.2 ............25
HIV prevalence, % adult pop.* ............................. 0.30 ............60
Infant mortality, deaths/1,000 live births* ................ 4.4 ............29
Life expectancy, years*......................................... 80.8 ............20
Quality of primary education ................................... 4.9 ............31
Primary education enrollment, net %* .................. 99.5 ............11
5.01
5.02
5.03
5.04
5.05
5.06
5.07
5.08
Secondary education enrollment, gross %* ........ 105.3 ............21

Tertiary education enrollment, gross %*................ 59.7 ............36
Quality of the educational system ........................... 4.6 ............26
Quality of math and science education .................. 4.4 ............50
Quality of management schools ............................. 5.9 ..............3
Internet access in schools ...................................... 6.2 ............10
Availability of research and training services ........... 5.6 ............11
Extent of staff training ............................................ 4.7 ............22
2nd pillar: Infrastructure
VALUE RANK/148
6th pillar: Goods market efficiency (contd.)

6.06
6.07
6.08
6.09
6.10
6.11
6.12
6.13
6.14
6.15
6.16
No. procedures to start a business* .......................... 6 ............47

No. days to start a business* .................................. 13 ............63
Agricultural policy costs.......................................... 4.2 ............33
Prevalence of trade barriers ................................... 4.9 ............17
Trade tariffs, % duty* .............................................. 0.8 ..............4
Prevalence of foreign ownership............................. 6.0 ..............4
Business impact of rules on FDI ............................. 5.5 ............11
Burden of customs procedures .............................. 5.2 ............18
Imports as a percentage of GDP* ........................ 35.1 ..........102
Degree of customer orientation .............................. 5.1 ............32
Buyer sophistication ............................................... 4.6 ............10
7.01
7.02
7.03
7.04
7.05
7.06
7.07
7.08
7.09
7.10
Cooperation in labor-employer relations ................. 5.0 ............26

Flexibility of wage determination ............................. 5.8 ............12
Hiring and firing practices ....................................... 4.5 ............27
Redundancy costs, weeks of salary* ...................... 8.4 ............26
Effect of taxation on incentives to work .................. 4.0 ............41
Pay and productivity............................................... 4.8 ............11
Reliance on professional management ................... 5.9 ..............9
Country capacity to retain talent............................. 5.0 ............13
Country capacity to attract talent ........................... 5.8 ..............4
Women in labor force, ratio to men* ..................... 0.85 ............55
8.01
8.02
8.03
8.04
8.05
8.06
8.07
8.08
Availability of financial services ............................... 6.1 ..............6

Affordability of financial services ............................. 5.3 ............18
Financing through local equity market .................... 4.8 ............12
Ease of access to loans ......................................... 2.7 ............82
Venture capital availability ....................................... 3.5 ............20
Soundness of banks .............................................. 4.3 ..........105
Regulation of securities exchanges ........................ 5.2 ............24
Legal rights index, 010 (best)* ............................... 10 ..............1
9.01
9.02
9.03
9.04
9.05
9.06
9.07
Availability of latest technologies ............................ 6.4 ..............5

Firm-level technology absorption ............................ 5.7 ............24
FDI and technology transfer ................................... 5.2 ............22
Individuals using Internet, %* ............................... 87.0 ............11
Fixed broadband Internet subscriptions/100 pop.* . 34.0 ............10
Intl Internet bandwidth, kb/s per user* .............. 188.9 ............10
Mobile broadband subscriptions/100 pop.*.......... 72.0 ............14
10.01
10.02
10.03
10.04
Domestic market size index, 17 (best)*................. 5.7 ..............6

Foreign market size index, 17 (best)* .................... 6.1 ............10
GDP (PPP$ billions)* ....................................... 2,336.3 ..............8
Exports as a percentage of GDP* ........................ 30.6 ............96
11.01
11.02
11.03
11.04
11.05
11.06
11.07
11.08
11.09
Local supplier quantity ........................................... 5.5 ..............9

Local supplier quality.............................................. 5.4 ............18
State of cluster development.................................. 5.1 ............13
Nature of competitive advantage ............................ 5.9 ..............8
Value chain breadth................................................ 5.2 ............12
Control of international distribution ......................... 4.8 ............16
Production process sophistication.......................... 5.6 ............14
Extent of marketing ................................................ 6.0 ..............1
Willingness to delegate authority ............................ 4.9 ............14
12.01
12.02
12.03
12.04
12.05
12.06
12.07
Capacity for innovation........................................... 5.2 ..............8

Quality of scientific research institutions ................. 6.2 ..............3
Company spending on R&D................................... 4.7 ............12
University-industry collaboration in R&D ................. 5.6 ..............5
Govt procurement of advanced tech products ...... 3.6 ............56
Availability of scientists and engineers .................... 4.8 ............23
PCT patents, applications/million pop.* ................ 90.6 ............18
7th pillar: Labor market efficiency
8th pillar: Financial market development
3rd pillar: Macroeconomic environment
4th pillar: Health and primary education
5th pillar: Higher education and training
6th pillar: Goods market efficiency

6.01
6.02
6.03
6.04
6.05
Intensity of local competition .................................. 6.0 ..............3

Extent of market dominance .................................. 5.2 ..............9
Effectiveness of anti-monopoly policy ..................... 5.0 ............16
Effect of taxation on incentives to invest................. 4.3 ............29
Total tax rate, % profits* ....................................... 35.5 ............65
9th pillar: Technological readiness
10th pillar: Market size
11th pillar: Business sophistication
12th pillar: Innovation
Notes: Values are on a 1-to-7 scale unless otherwise annotated with an asterisk (*). For further details and explanation, please refer to the section How to Read
the Country/Economy Profiles on page 97.
The Global Competitiveness Report 20132014 | 381
PRINCIPLE #9:
Prices Rise When the Government Prints Too Much
Money
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Jos-Luis Peydr
PRINCIPLE #10:
Society Faces a Short-run Tradeoff Between
Inflation and Unemployment
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Jos-Luis Peydr
PRINCIPLE #11:
Financial crises are very important for macro effects
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Jos-Luis Peydr
11 principles of economics
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Jos-Luis Peydr
Final part: crisis in US to understand better point 11

and a way to discuss the other 10 points
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Jos-Luis Peydr
Crisis in US
Jos-Luis Peydr
Crisis in US
Jos-Luis Peydr
Crisis in US
Jos-Luis Peydr
Crisis in US
Jos-Luis Peydr
Before the start of the crisis in US
Jos-Luis Peydr
Check http://www.globalpropertyguide.com/faq/guide-price-trends
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Before the start of the crisis and the crisis in US
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The start of the crisis in US
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Economic policy during the crisis in US
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Economic policy during the crisis in US, Euro, UK, JP
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PRINCIPLE #11:
Financial Crises are very important for Macro
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PRINCIPLE #11:
Financial Crises are very important for Macro
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PRINCIPLE #11:
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The curse of weak global demand - FT.com
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November 18, 2014 5:43 pm
The curse of weak global demand

Martin Wolf
Author alerts
Feeble economic performance has occurred despite the most aggressive monetary policies
avid Cameron, the UK prime minister, states that red warning lights are once again flashing on the dashboard of the global
economy. The lights are not as red as in 2008. Nevertheless, the difficulties caused by the fiscal austerity that his government
recommends have become particularly evident in Japan and the eurozone. These stagnant high-income economies are the weakest
links in the world economy. To understand why, one needs to analyse todays most important economic illness: chronic demand
deficiency syndrome.
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Jack Lew, US Treasury secretary, provided a sobering overview in a speech delivered in Seattle, en route
to last weekends summit of the group of 20 leading high-income economies in Australia. As he noted,
the world is far from achieving the strong, sustainable, and balanced growth, promised at the 2009
summit in Pittsburgh.
Global recovery has been uneven, with sharply different trajectories, he said. In the US, domestic
demand surpassed pre-crisis levels in the first quarter of 2012 and is now about 6 per cent higher than
before the crisis. Domestic demand in both Japan and the UK is about 2 per cent higher, he added. But
demand in the eurozone has yet to recover the ground lost during the crisis, remaining more than 4 per
cent below its pre-crisis level.
What Mr Lew did not add is that this feeble performance even the 6 per cent rise in real demand in the
US over more than six years is pathetic by historical standards occurred despite the most aggressive monetary policies in history. The
official intervention rates of the US Federal Reserve, the European Central Bank and the Bank of England have been not far above zero
since late 2008. The ECB struggled to raise rates above 1 per cent in 2011, but then succumbed to the pull of near zero. The Bank of
Japan has been offering near zero rates for two decades.
Yet this has not been nearly enough. All these central banks have increased their balance sheets sharply. In the US and UK, the balance
http://www.ft.com/intl/cms/s/0/3e4be7f8-6e4b-11e4-afe5-00144feabdc0.html?siteedition=intl#axzz3JoAAlzPT
Page 1 of 3
The curse of weak global demand - FT.com
23/11/14 20:04
sheet expansion has stabilised. In the eurozone, the contraction since 2012 is being reversed, while the Bank of Japans balance sheet is
heading towards the economic stratosphere, at 80 per cent of gross domestic product and counting.
How do we explain such weak demand, particularly in the eurozone and Japan? Only if we understand this do we have any hope of
deciding on the right remedies. One can identify three sets of underlying explanations.
The first set stresses the post-crisis overhang of private debt and the damage to confidence caused by the sudden disintegration of the
financial system. The by-now canonical response consists of cleaning up balance sheets and forced injection of capital into the banking
system, supported by stress tests, to convince the public that the financial system is again creditworthy. To this should be added fiscal
and monetary support for demand. In this view, a return to growth should be swift.
The second set of explanations denies this last proposition. It argues that the pre-crisis
demand was unsustainable because it relied on huge accumulations of private and public
debt the former associated with bubbles in property prices. Japan suffered such a postbubble reversal in private debt accumulation after 1990; the US, UK and Spain after
2008. The implication of this is that economies suffer not just from a post-crisis balancesheet recession, but from an inability to generate credit-driven demand on the pre-crisis
scale. Behind the unsustainability of pre-crisis demand lie global imbalances, shifts in
income distribution and structurally weak investment. A symptom is a chronic financial
surplus (excess of income over spending) in the private sector, as in Japan and the
eurozone.
The third set of explanations points to a slowdown in potential growth, due to some
combination of demographic changes, slowing rises in productivity and weak investment.
But this last set of explanations feeds directly into the second. If growth of potential
supply is expected to slow, consumption and investment will be weak. That will generate
feeble growth in demand. If central banks fight this, they get bubbles. If they accept it, weak growth of supply turns into a self-fulfilling
prophecy.
The high-income economies suffer from all three sets of ailments, to a greater or lesser
extent: the US less, Japan and the eurozone more. Even China, albeit enjoying a much
higher prospective rate of growth, also suffers from the second and third sets of concerns
even if it has not suffered a financial crisis. Its growth of recent years was driven by
unsustainably rapid accumulations of debt and unsustainably high rates of investment,
given the deceleration in its underlying growth.
The reason that extreme policy has been so ineffective is that the economies suffer from
such deep-seated ailments. It is not just about weak supply. But it is also not just about
weak demand. Nor is it just about the debt overhang or financial shocks. Each economy
also has a different combination of ailments.
As a more demographically dynamic and more innovative economy, with low rates of
private saving, the chances of escape into normal policy settings are better for the US than
for the eurozone or Japan. Similarly, as an economy with catch-up potential, China ought
to have a manageable adjustment. But the eurozone and Japan face far bigger challenges
in restoring healthy growth. This is because their private sectors are unable to use the
savings they wish to generate. This leaves them with unconventional policy choices,
probably even more unconventional than those they have tried. The consequences of
going further could be politically devastating, particularly in the eurozone. What those
possibilities are and why they are so painful will be the topic of my next column.
martin.wolf@ft.com
------------------------------------------Letter in response to this column:
A critical shift in consumer psychology / From Albion M Urdank
http://www.ft.com/intl/cms/s/0/3e4be7f8-6e4b-11e4-afe5-00144feabdc0.html?siteedition=intl#axzz3JoAAlzPT
Page 2 of 3
Summary
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What Economics Is All About

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World Economic Davos Forums Competitiveness Index

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GDP (PPP) per capita (intl $), 19902012

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Global Competitiveness Index

GCI 20132014 ...................................................... 10 ..... 5.4

GCI 20122013 (out of 144) ....................................... 8 ......5.4

Basic requirements (20.0%) .......................................24 ......5.5

Institutions ................................................................ 12 ......5.4

Efficiency enhancers (50.0%) .......................................4 ......5.5

Higher education and training ................................... 17 ......5.5

Innovation and sophistication factors (30.0%) ...........10 ......5.2

Business sophistication ............................................. 9 ......5.4

The most problematic factors for doing business

380 | The Global Competitiveness Report 20132014

2.1: Country/Economy Profiles

1st pillar: Institutions

Property rights ....................................................... 6.2 ..............4

Quality of overall infrastructure ............................... 5.4 ............28

Government budget balance, % GDP*..................-8.3 ..........140

Business impact of malaria ............................. N/Appl. ..............1

Secondary education enrollment, gross %* ........ 105.3 ............21

2nd pillar: Infrastructure

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No. procedures to start a business* .......................... 6 ............47

Cooperation in labor-employer relations ................. 5.0 ............26

Availability of financial services ............................... 6.1 ..............6

Availability of latest technologies ............................ 6.4 ..............5

Domestic market size index, 17 (best)*................. 5.7 ..............6

Local supplier quantity ........................................... 5.5 ..............9

Capacity for innovation........................................... 5.2 ..............8

7th pillar: Labor market efficiency

8th pillar: Financial market development

3rd pillar: Macroeconomic environment

4th pillar: Health and primary education

5th pillar: Higher education and training

6th pillar: Goods market efficiency

Intensity of local competition .................................. 6.0 ..............3

9th pillar: Technological readiness