Day: June 27, 2016

Housing prices decoded

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In the previous post, we learnt about how governments sometimes have a say in what the price of a particular good is eventually going to be. However, in the case of other goods simple market forces determine the price.

Market forces refer to the forces of supply and demand, which we spoke about in the previous post. In this post, we’re going to speak about how those forces actually work in practice.

Most of us have in reading for a while about how real estate prices in some (but not all!) parts of the country have either been flat or falling. Now, in a nation of 1.3 billion people, less than half of whom stay in cities, that doesn’t really make sense. India’s growing steadily richer, more people are moving to the cities, and so more people should demand housing. More demand = higher price, right?

Well, most of the times, yes. But it turns out that in certain parts of India (parts of Pune, Gurgaon, Noida and Bangalore are good examples right now) many more apartments are for sale than there are buyers right now. And in particular, it turns out, there are many more “luxury” apartments for sale than there are buyers. So yes, there is strong demand, but there is stronger supply.

So apartments remain unsold, and that results in the kind of gimmicks and price discounts that you see builders resorting to these days. How do such situations tend to resolve themselves? Well, in any one of three ways: either builders reduce the price to entice more buyers to come into the market, or over time, more buyers enter the market in any case, or both.

This process isn’t always smooth of course – but that’s part and parcel of living in the real world. The real lesson of this blog post is actually quite simple: a change in the price of a particular commodity could be because of changes in supply, or changes in demand, or both.

And since real markets are always reacting to new information and since buyers and sellers are always adjusting to new information on a real time basis, it becomes quite difficult to figure out whether the price change is only due to supply or demand. When you add the government to the mix, as in the previous post, the situation becomes very messy indeed.

But that’s what makes economics so fascinating! Teasing out these effects (increased supply, reduced demand, government interventions) and therefore reasoning out your best response as a producer or consumer is an endlessly fascinating game that, if played well, can end up enriching you quite considerably. Try thinking about other markets this way: cellphones, college fees, the price of tur daal – and see where you go with your analysis.

Supply, demand… or both?

Who decides the price of petrol?

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It doesn’t matter when you’re reading this article. You’re likely pretty pissed because the government has gone and raised the price of petrol again. Or you’re pissed because crude oil prices are low (so you hear), but the government hasn’t reduced the price of petrol just yet. One way or the other, you’re pissed.

In this blog post, we’re going to unravel the mysteries of the pricing of petrol. What “should” the price of petrol be? How is this price “arrived at”? And finally, is everything priced the same way as petrol?

The price of anything is really dependent on two things. How much of that thing is the market willing to supply (and sellers will want to sell more if the price is high and rising), and how much is the market willing to demand (and buyers will want to sell more if the price if low and falling).

The price of a particular thing is simply the point at which these two factors (supply and demand) happily coexist. So if the price of petrol is too low, sellers don’t see the benefit of going through the whole routine of drilling for oil, extracting oil, refining oil and transporting oil. If the price is too high, you’re not going to want to tank up just so you can go on a weekend trip out of town. And so the price settles at a level that allows for happy coexistence of supply side factors and demand side factors.

Or at least, that’s how it is supposed to happen in theory. What happens in practice, here in India, is that the government decides what the price of petrol should be, on the basis of primarily one factor: on the price at which we import crude oil from abroad. The higher the import price, the higher the likely price of petrol.

What complicates the issue is the fact that the pricing of petrol is seen as such a politically sensitive issue. Keep it too high, and governments might lose the next election – and which is why governments in India like to meddle in the pricing of petrol, and have sometimes kept it artificially low in the past.

However, artificially managed prices have a nasty way of blowing up in your face. The folks you import from aren’t going to offer you a discount just because you are selling petrol cheaply. In other words, if the government is buying at a high price and selling at a low price, it must make up the difference by paying for this subsidy.

How high is this subsidy in India’s case? Well just this year, we’re slated to spend about twenty-six thousand crores on our petroleum subsidy. Fun challenge: try writing that number down, commas and all.

And that’s just this year! The government’s been subsidizing petrol for years! So, in a nutshell: the government decides the price of petrol in India, and does so for political reasons. But the price of those decisions, at the end of the day, must still be accounted for.

In the next post, we’ll look at how the price of other things materializes. Real estate, for example – that’s a good place to start.

In the meantime, let us know what you think by dropping a comment below.

Wrapping Your Head Around Brexit

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Everybody and their naani knows that Britain’s voted to leave the European Union. Everybody also knows that most people think this was a bad thing. This blog post attempts to explain why most people think this was a bad thing.

Three questions we need to answer in order to make sense of this particular brouhaha. One, what exactly is the European Union? Second, why exactly does Britain want to leave it? Third, from an Indian perspective: what my father goes?

First question ka jawaab: The European Union is an association of countries that try to pretend as if they’re really one big country. They all have a common currency, exactly the same way the states of Maharashtra and Orissa have a common currency, along with all the other states in India.

They also allow capital to move freely across their countries. Remember how Mr. Tata was able to move his Nano factory from West Bengal to Gujarat? In theory, the European Union makes it easy to move capital from Austria to France. They also allow labor to move freely across their countries. Notwithstanding Mr. Raj Thackeray and his attempts, most Indians are free to move  and work wherever they want across the country, and in principle, Europe was supposed to be the same thing.

However, and this is the fatal flaw in the way the European Union is structured, it’s not a fiscal union. Do you know, for example, what percentage of your income taxes went towards the construction of a road between Kanpur and Lucknow? No, you don’t, and nor should you know. We’re one country, and one of the reasons we elect our government is precisely because we expect those guys to handle issues like that. But German citizens care deeply about whether their income taxes are being used to fund unemployment benefits for Greek citizens. Remember how we said the EU is an association of countries that try to pretend as if they’re one country? Well, unfortunately it has turned out to be a bit of a halfway job. They’re more than separate countries, but less than a unified nation.

And that’s caused problems.

Second, why does Britain want to say sayonara. Well, the people who were in support of Brexit in Britain give out a lot of reasons, but it ultimately boils down to three. One, the Mr. Raj Thackeray effect. They really don’t want “other” people to come in to their nation. And that makes no sense for the same reason in EU as it does in India. Second, they think that Britain and its money should be separate, and it shouldn’t have to give any money to the Europeans. And third, they think Britain’s kinda culturally separate and removed from the mess that is the European Union today and don’t want anything to do with it.

If you ask us though, we get the impression it’s mostly reason no. 1.

Third, why should we care? Today, in the sixteenth year of the twenty-first century, the global economy is like a single organism. If Brexit is going to cause a slowdown in business between themselves and Europe (and you can bet that is going to happen), then you can expect our business with both Britain and Europe to suffer. Here’s a useful way to think about it: if the world was like the human body, it’s liver is now doing really badly. Saying that shouldn’t affect our overall health just doesn’t make sense, now does it?

How much will it affect us, and for how long, and when will the liver get better are all questions the patient really wants to get answers for – and we’re about to find out over time.

I don’t know about you, but hospital waiting rooms always kinda depress me.

Deciphering India’s GDP

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What is India’s GDP and why should I care?

As we discussed in our previous post, the reason you should care about India’s GDP is because it is a good way to get a quick, one-number estimate about how “well” India is doing. This post is about answering the first part of the question posed above: what is India’s GDP?

First things first: that’s an incorrect question. What people really mean when they ask that question is: what is India’s GDP growth rate. That last phrase is often missing, which is what can (and often does) cause confusion.

GDP is what you, I and literally millions of Indians produced in one time period. GDP growth rate is how much more did we produce this year, relative to last year. When we say that the Indian economy grew at 7.5% last year, we mean we produced 7.5% more of goods and services this year when compared to last year.

Why is that a good thing? Well, producing more stuff usually means selling more stuff. Selling more stuff means more of us earned more this year compared to last year – and since when was that a bad thing, huh?

Also, producing more stuff implies requiring more people to produce said stuff, which means (probably) more people were employed this year compared to last year. And that’s also a good thing, right?

So: a higher number for our GDP growth rate means richer Indians, and more jobs all round. That’s why economists, policy makers and the media watch the GDP number so closely – its because this number tells us whether India is getting richer over time, and gives us a rough idea about whether more Indians are with jobs this year compared to the previous year.

Where should you go to check out India’s GDP growth rate? Well, there are many sources out there, but the safest is go to the source: the Ministry of Statistics and Programme Implementation. (Fun challenge: spend the next five minutes coming up with a name that bores you more than this one did)

On the home page, under a column titled “Latest News”, look for a banner heading that runs along the lines of “Provisional Estimates of Annual/Quarterly Estimates of GDP”. Clicking on that link opens up a PDF, in which the growth rates of GDP will be given. 2016-06-20 (1).png

Be careful! You should look for the GDP growth rates in constant prices, not current ones. In a later post, we’ll explain what the difference between the two is, but for now, do note that its constant prices that matter, not current.

As you can see in the table to the right, we grew at about 7.6% for the period 1st April to 31st March 2016.

And that’s a (very!) quick introduction to GDP. We’ve hopefully managed to convince you of the need to know a country’s GDP growth rate, and where to find it in India’s case. In posts to come, we’ll talk much more about GDP. For now, we’ll do a follow-up post on our Facebook page about links relevant to this topic that you might want to check out. Let us know what you think by dropping us a note in the comments below!

GDP 101

Ashish1 Comment

True story:

This actually happened to an ex-colleague of mine. In his final year as an MBA student at MDI (Gurgaon), he had been elected as the placement coordinator. He and his team were doing well, and had sewn up quite an impressive list of companies that had agreed to visit their campus. All was cool and hunky dory, and they had even managed to book every single slot for placement week by September…

…10, 2001.

They got ditched more in the next month than I did in two years of asking girls out in college.

Remember, this was September. Companies were looking to hire students who would join by June 2002. But everybody just “knew” that the economy was going into a tailspin for at least a year, and that was that. No jobs.

It’s a question that bothered all of us when we were in college, and will no doubt be keeping students who’ve just joined college up at night: what will the economy look like when placement season starts?

And that, ladies and gentlemen, is one reason learning about GDP and its growth rate makes sense. It gives us a sense of where we, as an economy, are now, and where we are likely to be in the near future.

Outside of the specific trends in the sector that we are interested in, we are also very, very interested in how the “overall” economy is doing. It’s like a doctor taking a patient’s temperature. It’s a convenient way of quickly assessing the overall health of the patient.

Similarly, while there are literally hundreds of other ways of gauging what is up with the Indian economy, one quick, near-universal method is to take a look at what the GDP growth rate has been over the past four quarters or so.

High (say about 7% or so in India’s case) and steady (around 7% or so for the last four quarters running) is good. If either of those conditions aren’t met – that is to say, it’s either low now, or has been low in the recent past – you have cause for concern. If both of those conditions aren’t met, and you are the placement coordinator for your college, say hello to insomnia.

People who’re looking to launch a factory a couple of years from now, a company that has a half-built hotel that is going to come online six months from now, a person contemplating quitting her job and looking for a new one – anybody who’s thinking of their (economic) future would do well to take a look at what the economic thermometer called GDP growth rate is up to.

In the next post, we’ll take a look at how and where India’s GDP is reported, and how to go about making sense of it. We’ll also do a follow-up post on our Facebook page, where we’ll post additional links, videos and podcasts that would be good follow-ups.

Get a conversation started – do let us know what you think!

What is Econforeverybody all about?

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Welcome_Introduction.jpg

Hello everybody, and welcome to Econforeverybody!

As the name suggests, Econforeverybody is an outfit that aims to do one thing: make economics accessible to everybody. As anybody who’s been through even a couple of classes in economics will tell you, it has a tendency to bore the living daylights out of you in next to no time. We should know: we’ve been teaching economics for about eight years now, and we haven’t yet met a student who couldn’t wait for Econ 101 to start. Quite the opposite, in fact.

But it needn’t be so! Economics is, we believe, a fun, interesting and fascinating subject, with the potential to help anybody who learns it look at the world in a way that they haven’t before. And once you start looking at the world as an economist does, it’s hard to stop.

At this stage you might ask (and it would be a very reasonable question) why you should look at the world as people of our tribe do. Simple: it helps you make more sense of the world. And anything that helps us make more sense of this bewildering, often mystifying, globalized society that we live in can only be a good thing, right?

That’s our premise, and that’s why this blog exists: understanding economics is a way of understanding our society a little better.

So why us, and why not a textbook, or the hajjar other sources online?

Two responses. One, we don’t claim to explain everything about economics. We’d love it if you went and checked out other sources about the topics that we discuss here. In fact, as you’ll find out, we’ll share links that we think you’ll find interesting. Or to put it another way: humne theka nahi le rakha hai.

Second, here’s why Econforeverybody should be on your list of places to visit if you want to learn economics. Almost all textbooks and their online cousins teach you a theory, and then tell you how to apply it. Not us.

We take a real world problem, and tell you how to think about it using economic theory. And we do it using only simple everyday English. If you can read this post, you can understand economics.

Best of all: no math, and as short as possible. Promise.

That’s about it, really! Keep an eye out for our posts, please do get a conversation going about ‘em, and let us know what works and what doesn’t.

Buckled in? Here we go!