Impacts of U.S. Oil Production & Falling Oil Prices

With the fall in oil prices and U.S. oil production reaching an all-time high, the U.S. has a huge advantage over many other countries. While many countries are getting slammed by declining oil prices, the United States oil imports fell to their lowest levels since November of 2009. The increase in U.S. oil production, as well as the falling of oil prices, may have a significant impact on businesses and individuals, GDP, and foreign policies. These topics show just how important oil production and prices can be when the world is dependent on it. Continue reading

The Growing Threat of Internet Piracy

Internet Piracy is defined as “the practice of using the internet to illegally copy software and pass it on to other people” and has become an increasingly controversial topic.  However, the fact remains that pirating some sort of entertainment has become widely accepted in society, and is relatively easy to do with a small amount of technological skill.  This has caused the music, movie, and other entertainment industries to be dragged kicking and screaming into the 21st century, facing the growing sophistication of pirating and file sharing.  While the digitization of thousands of goods has occurred over the last twenty years, so too have the methods to make illegal copies of those goods.

Figure 1

Figure 1

The figure above is an illustration of entertainment sales, which shows the decline since 2004 in all purchases.  It is questionable if this industry trend is directly correlated with piracy.  The rise of video games and other forms of media sales have caused the market structure of the industry to shift, making analysis more and more difficult.  A possibility is the average price elasticity of entertainment goods.  Thirty years ago, prices of CDs, VHS tapes, and other forms of entertainment were cheaper than they are today.  The decline in sales could be due to an elastic demand for the goods, with people simply resorting to file sharing because they do not feel the need to spend the extra money to purchase the goods legally.  Within the entertainment sector, this issue is especially pertinent to the music industry.

Figure 2

Figure 2

Looking specifically at the music market, the industry structure is rapidly shifting, as the concept of a CD album has unraveled into the digital purchase of singles.  It would be lacking to not discuss Apple when mentioning the current market structure of the music industry.  The largest music retailer in the world, Apple has revolutionized the digital singles industry, creating an efficient and profitable system that has flipped the structure of the market upside down.  However, despite the ease at which music can be downloaded through this system (legally), more and more people have resorted to file sharing, as figure two illustrates regarding the European market.  While the direct relation between file sharing and the decline in music sales is not yet widely accepted, empirical studies have been done to address the issue.  A study done by Alejandro Zentner from 2006 found: “Using measures of Internet sophistication as instruments, downloads may explain a 30 percent reduction in the probability of buying music” (Zentner, 2006).  However, another work by Anderson and Frenz does not show a negative effect after performing a first stage regression analysis: their results showed an insignificant relationship between CD sales and file sharing. (Andersen & Frenz, 2010)  In terms of the harm that pirating causes, the RIAA shows: “A credible study pegs the annual harm [of music piracy] at $12.5 billion dollars in losses to the U.S. economy as well as more than 70,000 lost jobs and $2 billion in lost wages to American workers.” (RIAA, 2014)  Such a tremendous effect surely catches the eyes of congressmen and other policy makers, but the question remains: how can the U.S. government stop the growing trend of internet file sharing?  The answer is unclear, as the technology to monitor and track these illegal downloads effectively is simply non-existent at the moment.

Looking at current events and moving forward, the use of streaming has become the latest mode by which more and more people are getting their entertainment.  How will this format transition effect sales?  With music streaming steadily taking away from digital downloads, the government is tasked with monitoring another new method of acquiring music.  Unfortunately for the entertainment industry moguls, it appears that for the time being the growing trend of piracy and file sharing cannot be contained by the government.

 

References

Andersen, B., & Frenz, M. (2010). Don’t blame the P2P file-sharers: the impact of free music downloads on the purchase of music CDs in Canada. Journal of Evolutionary Economics, 715-740.

Constine, J. (2014, July 3). Music Streaming Eats Downloads With On-Demand Up 42% Over 2013, Digital Sales Down 12%. Retrieved from techcrunch.com: http://techcrunch.com/2014/07/03/streaming-is-killing-downloads/

Facts/Figures. (n.d.). Retrieved from Online Piracy: http://piracy.web.unc.edu/factsfigures/

Karaganis. (2012, October 20). Die, Substitution Studies, Die II: Well, OK, Maybe Some Should Live. Retrieved from piracy.americanassembly.org: http://piracy.americanassembly.org/die-substitution-studies-die-ii-well-ok-maybe-some-should-live/

Pakman, D. (2014, March 18). The Price of Music. Retrieved from recode.net: http://recode.net/2014/03/18/the-price-of-music/

RIAA. (2014). Who Music Theft Hurts. Retrieved from RIAA.com: https://www.riaa.com/physicalpiracy.php?content_selector=piracy_details_online

Zentner, A. (2006). Measuring the Effect of File Sharing on Music Purchases. Journal of Law and Economics, 63-90.

 

Determinants of International Student Enrollment

Nik Arur

One of the biggest gripes amongst Americans today is the rise in costs for attending four-year universities. An interesting figure when contrasted with this increasing costs, however, is that the percentage of total students coming from outside the country was the highest it’s ever been in the 2013/14 academic year. These two facts are seemingly at odds with each other, since higher tuition rates in the United States should mean international students should be relatively better off attending domestic universities, or universities in countries outside the U.S. Econometric analysis of certain macroeconomic indicators could shed some light on why this is occurring. In my research I plan on focusing on three countries: China, India, and South Korea. Total enrollment of students from these countries in the United States will serve as the dependent variable. Exchange rates, unemployment rates, and per capita Gross National Income will serve as the explanatory variables. My hope is that this study could help understand why students from these countries are choosing to attend U.S. universities in higher numbers, even when the cost of their education here is rising with each year.

The Institute of International Education’s Open Doors Database provides the data for the dependent variable.

Pre-Model Hypotheses:

Exchange Rates:

Intuitively, the more favorable the exchange rate between a country’s currency and the U.S. dollar (the weaker the dollar), the more likely that a student from that country would choose to attend a university in the United States. This is because their currency is worth relatively more, and the rising real dollar cost of tuition in the U.S. is mitigated.

(Average annual exchange rates between each country’s currency and the U.S. dollar for each year between 2001 and 2012 were used as the independent variable.) Source

Unemployment Rate:

It is my thinking that, the higher a country’s unemployment rate, the more likely a student from that country is to migrate to a country that offers greater opportunity in employment. If this migration occurs before the student attends university, that would lead to higher rates of enrollment by international students.

(Total unemployed population for each country as a percentage of total labor force for each year between 2001 and 2012 was used as the independent variable.) Source

Per Capita GNI:

Logic dictates that, as a country’s per capita Gross National Income increases, the likelihood of a student from that country attending a university outside its borders increases. This is because the financial barrier to education in the United States becomes increasingly mitigated as income increases.

(Per capita GNI in current U.S. dollars using the World Bank Atlas method for each country between 2001 and 2012 was used as the independent variable.) Source

Results:

China:

Data:


Year Enrollment Exchange Rate Unemployment GNI
2001 59,939 8.2743 4.5 1000
2002 63,211 8.2669 4.4 1100
2003 64,757 8.2672 4.3 1260
2004 61,765 8.2664 4.3 1490
2005 62,523 8.1838 4.1 1740
2006 62,582 7.9646 4 2040
2007 67,723 7.5972 3.8 2470
2008 81,127 6.9404 4.4 3050
2009 98,235 6.8212 4.4 3610
2010 127,628 6.7605 4.2 4240
2011 157,558 6.4544 4.3 4900
2012 194,029 6.3034 4.5 5720

Equation:

Enrollment = 19,190 – 49,542(Exchange Rate) + 69,555(Unemployment) + 26.69505(GNI)

In China’s case, it seems that this limited model seems to yield the expected results. The coefficient for exchange rate indicates that, for each additional Yuan needed to equal one U.S. dollar, the total number of Chinese students enrolled in United States universities will tend to decrease by almost 50,000. This aligns with the hypothesis that an increased relative cost would price many students out of seeing U.S. universities as an option. The coefficient for unemployment indicates that each additional percent of the labor force that cannot find work is associated with an additional ~70,000 students heading stateside. This, again, aligns with the hypothesis that increased unemployment in a student’s home country leads to an increased desire to seek education elsewhere. Finally, the coefficient for GNI indicates that a dollar increase in a country’s per capita income is associated with a small increase in students exiting the country, again aligning with the pre-model hypothesis.

India:

Data:


Year Enrollment Exchange Rate Unemployment GNI
2001 54,664 41.341 3.9 470
2002 66,836 48.5112 4.3 470
2003 74,603 46.5009 4.1 530
2004 79,736 45.2015 3.9 630
2005 80,466 43.9785 4.4 740
2006 76,503 45.1769 4.3 820
2007 83,833 41.341 3.9 960
2008 94,563 43.6193 4.2 1050
2009 103,260 48.4238 3.9 1170
2010 104,897 45.7152 3.5 1290
2011 103,895 46.8466 3.4 1450
2012 100,270 53.4631 3.4 1550

Equation:

Enrollment = -12,589 + 2135.153(Exchange Rate) – 27,699(Unemployment) + 39.150(GNI)

India’s equation yields fairly confusing results. Unlike China (and the hypothesis) the coefficient for exchange rate is positive. This would mean that holding all else constant, as it gets more expensive to purchase dollars in Rupees, the number of Indian students enrolled increases. This is quite clearly illogical, and the coefficient is most likely a result of the sample size not being large enough or of the fact that there are numerous other factors contributing to student enrollment not included within the scope of this research. The coefficient for unemployment rate is negative, again conflicting both with the results from China’s data and with the hypothesis. However, one reasonable explanation for this is that unemployment rates could be a function of the condition of the economy. In other words, a high unemployment rate could be due to economic downturn, and in those instances attending universities in the United States becomes less likely. A positive coefficient is still yielded for per capita GNI, however, making intuitive sense.

South Korea:

Data:


Year Enrollment Exchange Rate Unemployment GNI
2001 45,685 1,287.50 4 11630
2002 49,046 1,243.29 3.3 12470
2003 51,519 1,187.52 3.6 13360
2004 52,484 1,141.63 3.7 15650
2005 53,358 1,021.12 3.7 17800
2006 59,022 940.334 3.4 19980
2007 62,392 922.814 3.2 22460
2008 69,124 1,096.74 3.2 22850
2009 75,065 1,272.68 3.6 21090
2010 72,153 1,153.26 3.7 21320
2011 73,351 1,105.73 3.4 22620
2012 72,295 1,123.02 3.2 26640

Equation:

Enrollment = 23,180 – 12.040(Exchange Rate) – 18,180(Unemployment) + 2.01(GNI)

South Korea’s equation yields curious results. While the coefficient for exchange rate is negative, as hypothesized, it is so small that it is of very little interest. The coefficient for unemployment is negative as well, and reasoning for this could again be that economic factors contributing to high unemployment in South Korea also contributed to a decrease in demand for U.S. education for financial reasons. Finally, per capita GNI again has a small, positive coefficient associated with it.

Conclusion and Policy Implications

Unfortunately, it seems that the relatively small scope of this study has yielded such conflicting results that any sort of unilateral conclusions cannot really be drawn, other than that in order to truly understand motivation for student migration a much wider study must be done. This of course would mean that the results have no true policy implications. However, I would still like to assess some solutions by isolating the results from China’s equation in relation to its exchange rate:

It has been a long-held belief that China’s significant stake in the global economy is largely due to efforts on their part to undervalue their currency, thereby making their exports more attractive. Although a weak Yuan is beneficial to the globalization of Chinese industry, it hurts their population. While China admittedly has little incentive to enact policies that would make it easier for its students to attend schools in the United States, artificially undervaluing their currency limits its citizens’ opportunities. This serves as a moral argument against undervaluation, rather than an economic one.

Research Objectives:

Applying macroeconomic reasoning to aggregate behavior: In this case the aggregate behavior is the trend of international students migrating to the United States for higher education. The macroeconomic reasoning behind this behavior was attributed to variations in exchange rates, unemployment rates, and national income.

Applying knowledge of economic theory, institutions, and cultural values to the formation and analysis of public policy: In this case, the only public policy analyzed was China’s artificial devaluation of its own currency. This has been done in order to incentive foreign investment.

Applying basic mathematical skills, quantitative methods and econometric tools to analyze models, quantify empirical relationships, and test hypotheses: In this case, the hypotheses related to each independent variable’s impact on international student enrollment were tested by estimating econometric models, however inconclusive they may have been.

Describing current national and international economic conditions and events: In this case, the current events unfolding are the increasing real costs of a college education in the United States coupled with increased enrollment of international students.

 

Macroeconomic Benefits of Legalizing Cannabis

“Hemp is of first necessity to the wealth & protection of the country.”                                                                                          -Thomas Jefferson

4th-cannabis-seed-logo.png

Legalizing Cannabis for recreational use has been a hot topic for many years throughout the United States and other countries, such as Germany, France, Switzerland and Italy. Marijuana is still illegal at the federal level, but in 2012 Colorado and Washington successfully became the first states to pass legislation legalizing the production, sale and consumption of Cannabis. The Legalization of Cannabis has the potential to help the U.S. Economy at both Macroeconomic and Microeconomic tiers. From a macro viewpoint we can expect an increase in GDP and tax revenues and decreases in government spending and unemployment. From a micro perspective we can assume there will be new firms entering in spin-off industries and decreases in common household goods.

Continue reading

Policy in the Agriculture Industry

There has been a trend lately in government policy to paint the agricultural landscape as it did decades ago. This has caused the government to play an active role in the regulation of food by trying to subsidize vegetables, stop biotechnology, and by promoting local farming. To exemplify this growing trend, U.S Senator Sherrod Brown introduced a bill was aimed at expanding local farming businesses and investing in regional food economies. This policy would be very helpful to local farmers, but the government did not seem to be taking into account the basic economic practices of specialization and economies of scale. These two practices would make this bill less beneficial to consumers due to these reasons. This article aims to shine a light on the negative implications of government promotion of local agriculture in policy rather than suggesting that there is anything wrong with buying local.
It has long been accepted that specialization can bring gains in welfare. This is especially important when there is agriculture involved. Most of the production costs a farmer is faced with are highly dependent on geography. Different goods have different factors for harvest such as temperature, sunlight, and soil quality. For example, California supplies 80% of America’s strawberries. Their climate and fields lead to a productive strawberry harvest which allows for healthy strawberries at a cheaper price in comparison to the farmers who do not have ideal climate factors. Similar examples include: Florida oranges, Georgia peaches, and Idaho potatoes. Macroeconomic study suggests that social welfare would be greatest if states or regions determined what goods hold comparative advantage among others and proceeded to specialize in that good. This would allow consumers to receive a variety of goods at the cheapest possible prices. Due to government promotion of local farming, however, the farms are under pressure to provide a wider range of goods that are more costly to produce given geographical factors. This ends in consumers paying for fruits and vegetables that were not produced as efficiently as they would have been under more ideal conditions.
When agricultural goods are made under optimal conditions, farms have low marginal costs due to a high yield and low operational costs. This gives farms an incentive to expand in size to allow for a greater production. Many of these farms have become commercialized, however, and the use of pesticides and synthetic fertilizers has become present. . The use of these pesticides and synthetic fertilizers are a large concern generally the cause for the praise of local farms. The study Scale, Diversification and Economic Performance of Agricultural Producers by Catherine Morrison Paul and Richard Nehring suggests that modern agriculture is largely organized by significant economies of scale due to technological changes. It shows that small local farms are high-cost operations and that many family farms grow multiple goods that bring on much higher costs compared to large farms that specialize in a single crop. The study states, “non-farm income sources now dominate net farm income in the U.S., and also finds that farm households relied heavily on off-farm jobs, with 55 percent of all farm households reporting that either the operator, spouse or both worked off-farm.” This suggests that the agriculture industry is being held down by small farms and that a shift to a larger concentration ratio may be probable long term.
Politicians should be more cautious on creating policy that supports local farming and let the market work freely. The industry is changing and the government is preventing the organization that would allow for a greater welfare. With obesity becoming a large national concern, the government has been trying to curve America’s gut by passing regulations such as the “fat tax”, which puts taxes of foods with large fat contents as well as the banning of large sodas. Although this is a growing epidemic, consumers are being left with higher prices on healthy food due to government policy promoting local farming. If the government were to allow the market to work freely, healthy fruits and vegetables would be cheaper and more accessible to the general population, which may be more beneficial than the regulations they currently have in place.

The Importance of the International Reserve Currency

It is estimated that currently forty to sixty percent of United States dollars are in circulation outside of the country. With this large amount of currency located outside of its borders, the United States is extremely susceptible to global currency risks. The main risk, as discussed in this blog, is the U.S. dollar losing its status as the international reserve currency (IRC).

Continue reading

How College is Increasing Income Inequality

Most Americans would agree that having more college-educated citizens is good for the nation. College graduates have higher incomes, invest wisely and are more civically engaged. Also, GDP and number of college graduates have a positive correlation. However, most Americans probably wouldn’t guess that that increasing number of college students is creating more income inequality in the United States. How can something so inherently good reinforce a national problem?

Continue reading

Illegal Immigration

Currently, there are roughly 11.3 million undocumented immigrants in the United States. Until 2007, there was a fairly stable upward trend in the number of illegal immigrants in the US, reaching a peak of 12.2 million in 2007. However, since 2007, due to the recession, the number has dropped to and stayed around roughly 11 million. From this, we can assume that more immigrants have left the country in the past six years, whether it be by force or choice, than have entered. When the recession hit, this especially hurt the construction industry, which has had a pretty slow recovery. Since many of these undocumented workers find jobs in the field of construction, this explains why there was a huge drop in the number of illegal immigrants in the US after 2007, and why the trend has continued to stay around 11 million since.

PH-2014-09-03-immigration-01

Continue reading

The capstone of economics