Canberra is the Best Place to Live in the World According to the OECD

Australia is the best country and the ACT is the best region in Australia. I checked the OECD website, and giving equal weight to each of the criteria the OECD ranks, the ACT is the highest scoring region in the world. Of course, that is not how most Australians see it. I met an Australian woman at JFK airport last week while waiting to take the train and she asked me where I lived. When I answered: "Canberra", she said: "Why would you do that to yourself?"

Inflation in China

As a follow up to my post on consumer price inflation in the US here are trends in the last couple of years in China:



Credit: CEIC.

Whereas the US chart showed the levels of price indices this chart shows the rate of inflation. Inflation is China is currently at 4.9%. The fastest rising category is food, which has a much bigger budget share than the in the US, as is typical of developing economies. In contrast to the US, the cost of housing is rising quite strongly too. Inflation in China is not much of a surprise given the policy of undervaluing the RMB (relative to market equilibrium). This tends to be inflationary. One way of understanding things is that what matters is the real exchange rate not the nominal one. Though the nominal exchange isn't adjusting to make prices more equal in China and its trading partners the real exchange rate is adjusting through higher inflation in China than in the developed economies.

For more commentary on China, inflation, exchange rates etc see Michael Pettis' blog.

Consumer Price Inflation in the USA

The graph shows the increase in consumer prices over the last decade for the eight subcategories in the consumer price index (CPI) in the US and energy. Energy isn't a separate subcategory in the CPI but is included in the transport and housing categories. As you can see, energy prices are very volatile but have increased by more than other spending categories over this decade. The graph gives the impression that prices are still rising but yet the headline inflation figure for the US is very low. This is because housing has a more than 40% weight in the CPI and the cost of housing has been declining since 2008.

Visit the article I took the graph from for more charts and information including a stunning chart of college tuition and fees...

iPad Pricing

Apple charges AUD 130 more for the 32GB iPad than for the 16GB iPad. Yet a 16GB flash memory card can be bought for as little as AUD45. The premium in the US is USD 100. Interestingly, the premium for a 64GB iPad relative to a 32GB iPad is also AUD 130/USD 100. The lowest price I found for a 32GB flash drive was AUD 89. It looks like Apple makes much more profit off the higher memory versions than the base model and that this is a form of price discrimination which is enabled by it not being possible to add flash memory oneself to the iPad. I think this can be analyzed as a case of "tying". Apple requires that you buy the extra memory from it, much as the movie theatre bans food apart from that they sell themselves. This would be a good case study or exercise for a microeconomics course.

More on iPad pricing from the Economist.

Survey Paper on Estimating Consumer Demand Systems

If you are looking for a nice survey paper on estimating static consumer demand systems (I was) Apostolos Serletis and William Barnett put one out a couple of years ago in the Journal of Econometrics. It's a nicely organized paper that should be understandable to anyone who's done the basic graduate level micro-economics and econometrics courses. In other words, it is really approachable compared to most papers published in the Journal of Econometrics :)

The beginning of the article reviews the basic neoclassical consumer demand theory. Following that, parametric approaches to estimating demand systems such as the Rotterdam model, flexible functional forms such as translog and AIDS, and "semi-non-parametric" forms such as the Fourier approach are covered. Next on the agenda are sections on revealed preference and on Engle curves. The final sections cover estimation issues, theoretical regularity - to what degree estimated demand functions meet the restrictions of neoclassical theory - and econometric regularity - mainly a discussion of non-stationarity - i.e. data with stochastic trends.

The only additional issue I would want the paper to cover, of course, is the question of how to interpret the estimated elasticities - are they estimates of short-run or of long-run elasticities - and how reliable the estimates from any single study are. The former is affected largely by the type (time series, cross section etc.) and properties (stationary, non-stationary etc.) of the data and the latter by sample size as I discuss for industrial interfuel substitution elasticities in my forthcoming paper and in my recent paper on estimating the emissions-income elasticity.

Shifts in the Composition of Output

This is the penultimate section of the paper that I'll post. Now I'm going on to rewriting the conclusions and then a massive edit. I've got 15,000 words and 179 references!

Shifts in the Composition of Output

Output mix typically changes over the course of economic development. In the earlier phases of development there is a shift away from agriculture towards heavy industry, while in the later stages of development there is a shift from the more resource intensive extractive and heavy industrial sectors towards services and lighter manufacturing. Different industries have different energy intensities. It is often argued that this will result in an increase in energy used per unit of output in the early stages of economic development and a reduction in energy used per unit output in the later stages of economic development (Panayotou, 1993).

However, there is reason to believe that the energy-saving effects of structural changes are overstated. When the indirect energy use embodied in manufactured products and services is taken into account, the US service and household sectors are more energy intensive than they first appear (Costanza, 1980). Service industries still need large energy and resource inputs. The service being sold may be intangible but the office towers, shopping malls, warehouses, rental apartment complexes etc. where the activity is conducted are very tangible and energy is used in their construction, operation and maintenance. Furthermore, consumers use large amounts of energy and resources in commuting to work, shop etc.

The effect of the Internet on the energy intensity of commerce has received increasing attention (Yi and Thomas, 2007). Obviously, individual technologies such as news websites vs. newspapers can greatly reduce emissions (e.g. Toffel and Horvath, 2004) but the effects on other activities could outweigh the gains. Romm et al. (1999) argue that the environmental costs of the greater dispersal of population engendered by telecommuting would not outweigh the reduction in commuting costs suggesting a strong energy-conserving Internet effect. But Matthews et al. (2002) and Williams and Tagami (2008) provide evidence that online book retailing use more energy than traditional retail while Herring and Roy (2002) show that electronic distance learning results in more energy use than traditional distance learning with printed material.

There may also be a tendency for consumers to use more energy directly over time as their consumption of the services appliances, housing, transport etc. increases. Judson et al. (1999) find that the consumer sector sees rising energy intensity over time, ceteris paribus, while the manufacturing sector sees decreasing energy intensity.

Furthermore, on a global scale there may be limits to the extent to which developing countries can replicate the structural shift that has occurred in the developed economies to the extent that this has occurred by outsourcing manufacturing overseas rather than simply from an expansion in service activities. However, the evidence shows that trade does not result in reductions in pollution in developed countries through the off-shoring of pollution intensive industries (Levinson, 2010, Aguayo and Gallagher, 2005; Kander and Lindmark, 2006). Additionally, if the service sector does require substantial material support, it is not clear whether the developed world can continue to shift in the direction of a growing service share of GDP indefinitely. In fact, as manufacturing prices have fallen relative to the prices of services (Baumol’s disease), even the relative decline of manufacturing in developed countries is exaggerated when the relative sizes of the sectors are computed in current prices (Kander, 2005).

Kander (2002) and Stern (2010) find a relatively small role for structural change in reducing energy intensity in Sweden (1800-2000) and the world (1971-2007), respectively. But, using a much finer disaggregation of industries, Sue Wing (2008) finds that structural change explained most of the decline in energy intensity in the United States (1958-2000), especially before 1980.

References
Aguayo, F., and K. P. Gallagher (2005) Economic reform, energy, and development: the case of Mexican manufacturing, Energy Policy 33: 829–837.
Costanza, R. (1980). “Embodied energy and economic valuation.” Science 210: 1219-1224.
Herring, H. and R. Roy (2002). “Sustainable services, electronic education and the rebound effect.” Environmental Impact Assessment Review 22: 525-542.
Judson, R. A., R. Schmalensee, and T. M. Stoker (1999). “Economic development and the structure of demand for commercial energy.” The Energy Journal 20(2): 29-57.
Kander, A. (2002). Economic Growth, Energy Consumption and CO2 Emissions in Sweden 1800-2000, Lund Studies in Economic History No. 19, Lund, Sweden.
Kander, A. (2005). Baumol's disease and dematerialization of the economy, Ecological Economics 55(1): 119-130.
Kander, A. and Lindmark, M. (2006). "Foreign trade and declining pollution in Sweden: a decomposition analysis of long-term structural and technological effects," Energy Policy 34(13): 1590-1599.
Levinson, A. (2010) Offshoring pollution: Is the United States increasingly importing polluting goods? Review of Environmental Economics and Policy 4(1): 63-83.
Matthews, H. S., E. Williams, T. Tagami, and C. T. Hendrickson (2002). “Energy Implications of Online Book Retailing in the United States and Japan.” Environmental Impact Assessment Review 22: 493-507.
Panayotou, T. (1993). Empirical Tests and Policy Analysis of Environmental Degradation at Different Stages of Economic Development. Working Paper WP238, Technology and Employment Programme, International Labour Office, Geneva.
Romm, J., A. Rosenfeld and S. Herrmann (1999). The Internet Economy and Global Warming: A Scenario of the Impact of E-Commerce on Energy and the Environment. The Center for Energy and Climate Solutions, The Global Environment and Technology Foundation, Arlington, VA.
Stern D. I. (2010) Modeling international trends in energy efficiency and carbon emissions, Environmental Economics Research Hub Research Report 54.
Sue Wing, I. (2008) Explaining the declining energy intensity of the U.S. economy, Resource and Energy Economics 30: 21–49.
Toffel, M. W. and A. Horvath (2004) Environmental Implications of Wireless Technologies: News Delivery and Business Meetings, Environ. Sci. Technol. 38(11): 2961–2970.
Williams, E. and T. Tagami (2008) Energy use in sales and distribution via e-commerce and conventional retail: A case study of the Japanese book sector. Journal of Industrial Ecology 6(2): 99 – 114.
Yi, L. and H. R. Thomas (2007) A review of research on the environmental impact of e-business and ICT, Environment International 33(6): 841-849.

Artificial Meat

I'm very skeptical that this would be an economic proposition any time soon. You'd think it would be a lot easier to produce artificial milk - engineer some micro-organisms to secrete cow milk. Instead we still go to the trouble of raising cows, milking them, and transporting the perishable product to market. I'd like this to be true - it has big environmental and possibly ethical advantages.