tag:theconversation.com,2011:/fr/topics/economist-1374/articlesEconomist – The Conversation2022-08-18T19:25:43Ztag:theconversation.com,2011:article/1889592022-08-18T19:25:43Z2022-08-18T19:25:43ZAn economist explains: What you need to know about inflation<figure><img src="https://images.theconversation.com/files/479711/original/file-20220817-11729-7y5aga.jpg?ixlib=rb-1.1.0&rect=0%2C7%2C4955%2C3315&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A number of factors have contributed to the recent rise in inflation, including supply chain disruptions, the Russian invasion of Ukraine and labour shortages.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/an-economist-explains--what-you-need-to-know-about-inflation" width="100%" height="400"></iframe>
<p>Inflation is one of the most pressing political and economic issues of the moment, but there are many misconceptions about how inflation is measured, where it comes from and how it impacts the average person. </p>
<p>In June, inflation in Canada reached a <a href="https://www.cbc.ca/news/business/canada-inflation-rate-1.6526060">40-year high of 8.1 per cent</a>. While there are <a href="https://www.cbc.ca/news/business/inflation-rate-july-1.6552298">signs inflation may be moderating</a>, many Canadians have dealt with the surging cost of living by <a href="https://www.cbc.ca/news/business/canadians-cutting-back-ari-study-1.6500505#">cutting back on expenses</a>, <a href="https://www.msn.com/en-ca/money/other/canadians-delaying-retirement-amid-surging-inflation-poll-finds/ar-AAYB2pY">working more to increase their income, drawing on their savings or taking on more debt</a>. </p>
<p>As an economics professor who conducts research on prices and consumption, I would like to provide some insight into how inflation is measured and how it is impacting Canadians and the economy at large. </p>
<h2>What is inflation?</h2>
<p>Inflation refers to a general increase in prices and the resulting decline in the purchasing power of money. While most of us can sense whether inflation is high or low from everyday purchases, <a href="https://www.statcan.gc.ca/en/subjects-start/prices_and_price_indexes/consumer_price_indexes">the inflation rate that gets reported in the press and discussed by policy-makers</a> is a specific measure created by a small army of statisticians and data collectors. </p>
<p><a href="https://www23.statcan.gc.ca/imdb/p2SV.pl?Function=getSurvey&SDDS=2301&lang=en&db=imdb&adm=8&dis=2">Statistics Canada constructs the Consumer Price Index (CPI)</a> used to track inflation through a two-step process. In the first step, Statistics Canada collects over one million price quotes on virtually anything purchasable in the country. </p>
<p>Prices are recorded in a variety of ways, and the frequency and geography of price collection depends on the item. For example, items with prices that change quickly like food or gasoline, or vary across locations like rent, are collected more frequently than items that are collected once a year, like university tuition or insurance rates.</p>
<figure class="align-center ">
<img alt="Gas prices are displayed behind a close up shot of a gas pump" src="https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=492&fit=crop&dpr=1 754w, https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=492&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=492&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">While constructing the Consumer Price Index, Statistics Canada collects price quotes on items with prices that change quickly, like gas, more frequently than items with steadier prices, like insurance.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick</span></span>
</figcaption>
</figure>
<p>In the second step, Statistics Canada aggregates these prices to generate the all-item Consumer Price Index by weighing each item’s price change by its share of total consumer spending. These weights are occasionally updated to <a href="https://www150.statcan.gc.ca/n1/pub/62f0014m/62f0014m2022009-eng.htm">reflect changes in consumer spending patterns</a>. </p>
<p>The most recent update in 2021 reflects some pandemic-related spending changes, such as a lower weight for food (15.75 per cent) and transportation (16.16 per cent), but a higher weight for shelter (29.67 per cent). </p>
<p>Statistics Canada and the Bank of Canada also measure “<a href="https://www.statcan.gc.ca/en/statistical-programs/document/2301_D64_T9_V2">core inflation</a>” which removes items with the most volatile prices (food and energy) from the CPI to provide a better sense of slower-moving, long-term cost pressures.</p>
<h2>What causes inflation?</h2>
<p>Prices are determined by <a href="https://www.britannica.com/topic/supply-and-demand">supply and demand</a>. High inflation is a sign that, across the economy, demand for goods and services exceeds their supply. </p>
<p>Demand has been strong due to <a href="https://www.scotiabank.com/ca/en/about/economics/economics-publications/post.other-publications.economic-indicators.scotia-flash.-december-3--2021-.html">strong employment and wage growth</a>, <a href="https://www.ctvnews.ca/business/hot-inflation-opens-rare-attack-on-bank-of-canada-1.5959770">cheap credit</a>, <a href="https://www.ctvnews.ca/politics/stimulus-not-the-cause-of-canada-s-inflation-problem-says-former-bank-of-canada-governor-1.5683699">pandemic-related payments from governments</a> and <a href="https://www.mckinsey.com/business-functions/growth-marketing-and-sales/our-insights/the-great-consumer-shift-ten-charts-that-show-how-us-shopping-behavior-is-changing">pandemic-related shifts in demand towards goods consumed at home</a>. </p>
<p>Supply has been disrupted by the pandemic’s effects on <a href="https://www.reuters.com/world/china/chinas-factories-opt-isolation-bubbles-beat-covid-curbs-keep-running-2022-03-17/">Chinese factories</a>, <a href="https://theconversation.com/why-are-prices-so-high-blame-the-supply-chain-and-thats-the-reason-inflation-is-here-to-stay-169441">international supply chains</a>, <a href="https://unctad.org/news/shipping-during-covid-19-why-container-freight-rates-have-surged">container shipping</a>, <a href="https://www.vox.com/22841783/truck-drivers-shortage-supply-chain-pandemic">trucking</a> and the Russian invasion of Ukraine that <a href="https://www.cnbc.com/2022/04/13/russia-ukraine-war-threatens-billions-un-warns-as-food-energy-prices-soar.html">led to recent spikes in food and energy prices</a> around the world. </p>
<h2>Inflation feels higher than it is</h2>
<p>Many Canadians <a href="https://www150.statcan.gc.ca/n1/pub/62f0014m/62f0014m2021017-eng.htm">feel like prices rose by more than 8.1 per cent</a> in the last year. Beyond <a href="https://www.scotiabank.com/ca/en/about/economics/economics-publications/post.other-publications.economic-indicators.scotia-flash.-december-15--2021-.html">specific criticism of the CPI methodology in Canada</a>, there are at least two reasons for this. </p>
<p>First, consumer spending is measured through surveys that capture the diversity of spending patterns in the population, but collapse this diversity into a single set of weights that treats each dollar of spending equally. <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/210122/dq210122b-eng.htm">Spending patterns vary</a> with age, income, location, household composition and taste, and your personal budget might bear little resemblance to the weights used for the CPI. </p>
<p>Second, we are more likely to <a href="https://www150.statcan.gc.ca/n1/en/pub/11-621-m/11-621-m2010084-eng.pdf?st=XOSSrt4k">notice price changes for items we purchase frequently</a>, and we <a href="https://www.bankofcanada.ca/2020/08/perceived-inflation-reality-understanding-the-difference/">tend to notice price increases more than decreases</a>. The items with the highest price increases in the last year — energy and food — have these characteristics, and we are less likely to notice the (lower) inflation rate for furniture, electronics, education and health goods that balance these out. </p>
<figure class="align-center ">
<img alt="Cereals and cereal products displayed for sale at a grocery store" src="https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">We tend to notice price increases for items we purchase frequently, like groceries.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick</span></span>
</figcaption>
</figure>
<p>We also pay a lot of attention to soaring house prices and interest rates — especially in big cities — but the <a href="https://www.bcbc.com/insights-and-opinions/how-do-house-prices-affect-the-consumer-price-index#_ftn7">cost of owned accommodation in the CPI</a> is based on historical averages of housing prices (25 years) and interest rates (five years) that reflect long-term financing costs for the average homeowner, not someone buying a house today.</p>
<h2>How does inflation impact us?</h2>
<p>There are <a href="https://www.economicshelp.org/blog/145181/inflation/who-are-the-winners-and-losers-from-inflation/">winners and losers</a> when it comes to inflation. While it can hurt businesses that <a href="https://montreal.ctvnews.ca/first-the-pandemic-now-inflation-quebec-s-small-businesses-are-slammed-again-1.5910932">end up passing cost increases onto their customers</a>, it can <a href="https://www.thestar.com/business/2022/07/09/supermarkets-are-hiking-prices-faster-than-necessary-and-profiting-from-inflation-star-investigation-suggests.html">benefit others</a> by allowing them to <a href="https://direct.mit.edu/rest/article-abstract/99/1/151/58363/Market-Structure-and-Cost-Pass-Through-in-Retail?redirectedFrom=fulltext">raise their prices</a> without customer backlash because “everyone else is doing it.” </p>
<p>High inflation is <a href="https://www.stlouisfed.org/on-the-economy/2022/feb/relationship-wage-growth-inflation-one-recession-later">often, but not always, accompanied by high wage growth</a>. Individuals who earn no or below-inflation wages are hurt, while individuals with wages indexed to inflation or <a href="https://globalnews.ca/news/8332153/wage-inflation-bank-of-canada/">who are able to negotiate better wages</a> can benefit. Individuals like seniors on fixed incomes are often hurt by inflation, although many <a href="https://www.canada.ca/en/department-finance/news/2022/06/deputy-prime-minister-outlines-governments-affordability-plan-for-canadians.html">government benefits are indexed to inflation</a>. </p>
<p>Some asset prices are better at keeping pace with inflation. Prices of housing, stocks, art and precious metals may go up, while assets with fixed dollar values like cash and bonds do not. </p>
<p>Inflation can make it easier to repay debts, as long as wages or other asset prices keep pace. Inflation <a href="https://budgetmodel.wharton.upenn.edu/issues/2021/10/21/can-inflation-offset-government-debt">can also benefit government finances as tax revenues rise</a> relative to the dollar value of the debt. </p>
<p>While the source of our current inflation is irrelevant to consumers, it matters for economic policy. Central banks and governments must decide whether to curb demand and risk recession <a href="https://www.ctvnews.ca/business/economists-predict-a-mild-recession-but-what-would-that-look-like-in-canada-1.6027857">by raising interest rates</a>, cutting spending or raising taxes, or wait and hope that supply-side inflation pressures ease up on their own. </p>
<p>We can only hope that it will not take a major recession to end this period of high inflation (unlike the <a href="https://www.bnnbloomberg.ca/bank-of-canada-ready-to-tighten-like-the-1990s-1.1751318">last major effort by the Bank of Canada to lower inflation</a>) and that Canada avoids “<a href="https://theconversation.com/1970s-style-stagflation-now-playing-on-central-bankers-minds-185868">stagflation</a>,” the combination of high inflation and high unemployment that afflicted many economies in the late 1970s.</p><img src="https://counter.theconversation.com/content/188959/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nicholas Li does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An economist provides insight into how inflation is measured, where it comes from and how it is impacting Canadians and the economy at large.Nicholas Li, Assistant Professor, Department of Economics, Toronto Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1818482022-04-30T17:03:21Z2022-04-30T17:03:21ZKibaki’s capitalist outlook on education in Kenya brought mixed results<figure><img src="https://images.theconversation.com/files/460279/original/file-20220428-14-qpi6gw.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Emilio Mwai Kibaki, the recently deceased third president of Kenya </span> <span class="attribution"><span class="source">Paula Bronstein/Getty Images</span></span></figcaption></figure><p>Emilio Mwai Kibaki, retired third president of independent Kenya <a href="https://www.reuters.com/world/africa/kenyas-former-president-kibaki-dies-90-2022-04-22/">who has died </a>, had a <a href="https://theconversation.com/mwai-kibaki-president-who-squandered-the-opportunity-to-fix-kenya-141631">rich and multifaceted legacy</a> as a long serving public official. </p>
<p>But it is in education that he left an indelible, but complex, mark. </p>
<p>Kibaki’s personal achievement as a highly accomplished intellectual looms large over his long policy and political career. A graduate of Makerere University College and the London School of Economics, he became <a href="https://worldleaders.columbia.edu/directory/mwai-kibaki">a member of parliament</a> at independence in 1963. This set the stage for his appointment in the executive. </p>
<p>He rose from an assistant minister of finance and chairman of the Economic Planning Commission in 1963 to become commerce and industry minister in 1966. He was appointed finance and economic planning minister in 1969, and became vice president in 1978. He held the finance docket until 1982.</p>
<p><a href="https://www.britannica.com/biography/Daniel-arap-Moi">President Daniel arap Moi</a> demoted him to health minister in 1988. Three years later Kibaki left the ruling party to form the Democratic Party. He became president in 2002, a position he held until his retirement in 2013.</p>
<p>Kibaki’s influence on education in Kenya became visible in the early years of independence when government spending on education rose steadily. By the 1970s, <a href="https://www.sciencedirect.com/science/article/pii/S2590291121000036">Kenya devoted 30%</a> of its budget to the sector. As chairman of the economic planning commission, he had a major role in drafting government policy plans that guided the country’s ideological and policy thrust.</p>
<p>Kibaki gave Kenya’s education a free market capitalistic orientation. Documents such as <a href="https://repository.kippra.or.ke/xmlui/bitstream/handle/123456789/2997/Development%20Plan%201964-1970.pdf?sequence=1&isAllowed=y#page=13">the 1964–70 Development Plan</a> and the 1965 Sessional Paper No. 10 show how he wanted to introduce cost-sharing through <a href="https://documents1.worldbank.org/curated/en/618851468765930700/pdf/multi0page.pdf#page=62">a loans scheme for university students</a>. </p>
<p>Many years later, Kibaki’s first major policy pronouncement as president was the declaration in January 2003 that <a href="https://www.theguardian.com/world/2003/jan/07/kenya.schools">primary education would be free</a>.</p>
<p>While he favoured mass education for all Kenyans, his capitalist orientation paved the way for entry of private providers. Also, although he generally supported provision of free basic education, especially at primary level, he disapproved of fully subsidised higher education. Instead, he favoured cost-sharing and privatisation. </p>
<h2>Free-market adherent</h2>
<p>As a free market adherent, Kibaki worked closely with the policy advisors from the World Bank and the International Monetary Fund. In the early 1970s, Kenya was among the non-oil producing countries that experienced budgetary constraints following the sharp rise of global oil prices. Kenya turned to the Bretton Woods institutions for financial support.</p>
<p>As was to become the norm, the institutions would only advance support on condition that governments reduced recurrent expenditure. Education was one of the areas targeted for cuts.</p>
<p>The IMF and the World Bank required that government implement the university loans scheme that it had outlined in its policy plans. Senior education officials opposed the scheme but were overruled by Kibaki, then Minister of Finance.</p>
<p>The scheme became official in July 1974. This marked a fulfilment of Kibaki’s desire to control higher education expenditure.</p>
<p>Under the scheme, the government would continue providing free tuition to university students. But it would advance them loans to cover expenses such as accommodation, food and books. The loan advanced to students attracted annual interest of 2% and repayment would commence 3 years after graduation. </p>
<p>The first university cohort to be advanced loans graduated in 1977, with their first loan repayments due in 1980. </p>
<p>But the scheme never succeeded. The main reason was due to failure by the ministry of education to enforce recovery. This failure marked the flagging political fortunes of Kibaki in the early 1980s. He steadily became eclipsed politically by the newcomers in Moi’s government. </p>
<p>The final blow to the loans scheme came in 1982 when Kibaki was transferred to the less glamorous ministry of home affairs. This ended a 13-year-run as minister of finance. He retained the vice-presidency until 1988. It was not until 1995 that Moi’s government revived the university loans scheme. This was done through the creation of the Higher Education Loans Board.</p>
<p>Kibaki would further reveal his free market inclinations in 1984. As the country’s vice-President, he contradicted the education officials who had refused to recognise degrees offered by two pioneering private universities. These were the United States International University and the Catholic Higher Institute of Eastern Africa (now the Catholic University of East Africa).</p>
<p>The Ministry of Higher Education had accused the United States International University of providing substandard education. And it had denied a request by the Catholic Higher Institute of Eastern Africa to convert to a university.</p>
<p>Kibaki insisted that government had no “restrictions on the setting up of private universities in the country.” This is documented by <a href="https://www.amazon.com/State-University-Experience-East-Africa/dp/1868888274">Michael Kithinji</a> in his investigation of the dynamics that influenced the development of university education in Kenya and East Africa before and after independence. </p>
<p>Kibaki’s intervention helped open the doors to the flourishing of private universities.</p>
<h2>Complex legacy</h2>
<p>During his presidency Kibaki pursued a duo policy of free basic education and largely unsubsidised higher education, with mixed results. </p>
<p>The introduction of free primary education had an immediate impact on primary school enrolment. The <a href="https://kessa.org/wp-content/uploads/2020/01/6.pdf">student population rose by more than a million</a> from 6.3 million in December 2002 to 7.6 million by the end of 2003.</p>
<p>Some analysts <a href="https://www.researchgate.net/publication/263389119_Education_Development_in_Kenya_Enhancing_Access_and_Quality">have faulted</a> Kibaki’s free primary education program for causing overcrowding and overburdening teachers. But criticism overlooks the existing neglect and decay of education facilities that Kibaki encountered when he became president. The challenges caused by free primary education only served to uncover the deep malaise that had hindered educational access to thousands of school age children.</p>
<p>Expansion of primary education exerted pressure on higher levels of learning. To accommodate the growing numbers of students completing primary education, the government and communities across the country established additional secondary schools especially for day scholars. </p>
<p><a href="https://ajoeijournals.org/sys/index.php/ajoei/article/view/149">Similar transformation</a> occurred at the university level where the number of full and constituent public universities increased dramatically and private sector ones from a handful to over 25.</p>
<p>But universities, both public and private didn’t live up to their calling as centres of excellence due to minimal research output. And university expansion under Kibaki happened at the expense of other tertiary institutions. The majority of vocational and technical institutes converted to universities. This meant that the 80% of students who missed university admission lacked opportunities to gain professional or artisanal skills.</p>
<p>Kibaki’s policies on education demonstrate his pro-market position that endeared him to the Bretton Woods institutions and the West in general. It is therefore not surprising that in 1974 Time Magazine ranked him among the top 100 individuals around the world with the potential to become head of state.</p><img src="https://counter.theconversation.com/content/181848/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Mwenda Kithinji does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Kibaki gave Kenya’s higher education sector a free market capitalistic orientation, endearing him to the World Bank and the IMFMichael Mwenda Kithinji, Associate Professor, University of Central ArkansasLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1008602018-08-07T10:41:03Z2018-08-07T10:41:03ZSave money when traveling abroad by thinking like an economist<p><a href="https://theconversation.com/quiere-ahorrar-en-sus-viajes-piense-como-un-economista-101219"><em>Leer en español</em></a>.</p>
<p>A <a href="http://www2.unwto.org/publication/unwto-annual-report-2017">record number</a> of tourists and business travelers visited a country other than their own in 2017, and this year is <a href="http://media.unwto.org/press-release/2018-06-25/international-tourism-exceeds-expectations-first-months-2018">already on pace</a> to exceed that tally. </p>
<p>One thing you definitely need when traveling abroad besides a passport is local currency, such as euros in Europe, yen in Japan or rubles in Russia. In the past, travelers would typically <a href="https://www.smartertravel.com/2017/06/19/atms-abroad-travelers-need-know/">withdraw what they need from an ATM</a> in the country they’re visiting or simply use a credit card, letting their bank calculate the cost in their home currency at roughly the market rate. There was usually also a foreign transaction fee. </p>
<p>Increasingly, however, retailers, restaurants and ATMs are offering travelers the option to pay or withdraw money in terms immediately converted into their home currency. <a href="https://seekingalpha.com/article/3651246-aci-worldwides-aciw-ceo-phil-heasley-q3-2015-results-earnings-call-transcript?part=single">Companies</a> <a href="https://seekingalpha.com/article/3971480-planet-payments-plpm-ceo-carl-williams-q1-2016-results-earnings-call-transcript?part=single">offering</a> the <a href="https://seekingalpha.com/article/3969132-cardtronics-catm-ceo-steven-rathgaber-q1-2016-results-earnings-call-transcript?part=single">service</a> call it “<a href="http://www.monexfs.com/solutions/dynamic-currency-conversion/">dynamic currency conversion</a>.” For example, an American tourist visiting Paris is able to use her credit card to pay for a fancy meal at a French bistro in U.S. dollars, instead of euros. </p>
<p>This may seem innocuous – or even convenient – but agreeing to use your home currency in a foreign land can significantly inflate the cost of every purchase. Thinking a bit more like an economist can help you avoid this mistake, and save a lot of money.</p>
<h2>Surge in tourists</h2>
<p>A century ago, international <a href="https://theconversation.com/longing-for-the-golden-age-of-air-travel-be-careful-what-you-wish-for-34177">travel was only for the rich</a>. These days, almost anyone from an industrialized country can see a bit of the world on a budget. </p>
<p>While people <a href="http://time.com/money/3992929/airline-complaints-airfare-service/">commonly complain</a> about “high” airfares, the real cost of flying has never been <a href="https://www.theatlantic.com/business/archive/2013/02/how-airline-ticket-prices-fell-50-in-30-years-and-why-nobody-noticed/273506/">less expensive</a> – it’s half what it was in the early ‘80s – or <a href="http://www.travelandleisure.com/articles/why-airplanes-are-safe">safer</a>.</p>
<p>And that’s one reason why a record <a href="http://media.unwto.org/press-release/2017-07-14/strong-tourism-results-first-part-2017">1.24 billion people</a> visited another country in 2016. Naturally, financial firms have sought to capitalize on all this wandering by inventing ever more ways to separate travelers from their hard-earned money.</p>
<h2>Buying things abroad</h2>
<p>Tourists rely on credit, debit or ATM cards to pay for hotels, restaurant meals and local trinkets. </p>
<p>A complex international computer network checks if a card is valid for the transaction and transfers the money. Traditionally, to help pay for this, banks and credit card companies have charged customers a <a href="https://www.nerdwallet.com/blog/banking/debit-card-foreign-transaction-international-atm-fees/">foreign transaction fee</a>.</p>
<p>However, banks are now offering more cards with <a href="https://www.nerdwallet.com/blog/top-credit-cards/no-foreign-transaction-fee-credit-card/">no foreign transaction fees</a>. At the same time, “free ATMs” <a href="https://www.ricksteves.com/travel-tips/money/cash-machine-atm-tips">are popping up</a> around the world that don’t charge local transaction fees (though your own bank may still do so).</p>
<p>So how do banks cover the costs of these transactions if they are increasingly letting consumers use the system for free? One way is offering the option to pay in a user’s home currency. <a href="https://www.americanbanker.com/opinion/stop-gouging-travelers-with-dynamic-currency-conversion">Even some bankers</a> warn against consumers <a href="https://www.ricksteves.com/travel-tips/money/card-fees">doing this</a> because the exchange rate used is much worse than the one your bank would offer.</p>
<p>For example, say you’re a Spaniard visiting New York City and shopping for some clothes at a department store. After scouring the store for the right sweater for your mother, you go to the cashier to pay the US$50 bill (tax included). After you swipe your Spanish credit card (which boasts no foreign transaction fee), the cashier asks if you’d like to pay in euros instead of dollars. </p>
<p>If you stick with dollars, your bank would convert the price into euros at about the market rate, €43 at the moment. If you choose to pay in euros, however, the currency conversion includes a fee for the privilege, which may be as much as 10 percentage points. So you might end up paying about €47 instead. </p>
<p>The same thing happens with ATMs. Last year, I was in London’s Heathrow Airport and needed some British pounds. In the old days, an ATM would simply offer a few denomination options, issue me money and my bank at home would eventually <a href="http://www.xe.com/currencycharts/?from=GBP&to=USD&view=1Y">calculate</a> the cost in U.S. dollars. Instead, the airport ATM asked me if I wanted to lock in the exchange rate and know exactly how many dollars would be debited from my bank account. </p>
<p>I wanted £100 and tried two different ATMs. The currency rate offered in dollars ranged from almost 4 percent to 10 percent more than what my bank charged (or about $134 to $142). I rejected both offers, did the transaction in the local currency and ended up with a total charge of just $129 from my bank.</p>
<p>I have observed numerous international travelers as they made this choice, such as an Italian family arguing about it at the next ATM, and most chose the dynamic conversion into their own currencies. </p>
<p>So why do travelers pay more by accepting a worse exchange rate when they could simply say no? </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=555&fit=crop&dpr=1 600w, https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=555&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=555&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=698&fit=crop&dpr=1 754w, https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=698&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=698&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">An ATM at Heathrow Airport offered to debit my bank account in U.S. dollars rather than the British pounds I was withdrawing. The rate it charged would have been $1.42 per pound, or 14 cents above the market rate that day.</span>
<span class="attribution"><span class="source">Jay Zagorsky</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<h2>Three functions of money</h2>
<p><a href="http://businessmacroeconomics.com/">Economists</a> consider any item as <a href="https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-9-functions-of-money">money if it performs three different functions</a>: unit of account, store of value and medium of exchange. Two out of three explain why so many international travelers act the way they do.</p>
<p>The first function of money is a <a href="http://money.visualcapitalist.com/tag/unit-of-account/">unit of account</a>, which is how people post and keep track of prices. This is why banks and credit card companies get people to agree to pay in the currency where they live, instead of using local money.</p>
<p>When people travel to a country with a different currency, they often mentally keep track of their spending using their home currency, converting all prices in their heads as they shop and eat. If an ATM or credit card terminal asks if you want to pay for something in the currency you use as your unit of account, your brain says yes. </p>
<p>Money also acts as a <a href="https://www.jstor.org/stable/1914465">store of value</a>. Items used as money provide the ability to make purchases now and also in the future. At the end of a trip, travelers not planning on returning to a country tend to spend leftover money in airports buying things they don’t really want. They don’t want to hold onto foreign bills since they are not a store of value. For the same reason, they prefer to be charged in their home currency when getting money from an ATM.</p>
<p>Money is also a <a href="https://www.jstor.org/stable/40657688">medium of exchange</a>, which is anything readily acceptable as payment to buy or sell goods and services. This is why people have to convert money when they travel abroad. In New York City, a dollar bill is a medium of exchange for food, drink or a ride on the subway. However, those dollars are not a medium of exchange in, say, China, where waving a wad of greenbacks would mostly get you stares. And that’s why travelers must convert money from one currency to another.</p>
<h2>How to save money abroad</h2>
<p>When faced with an ATM or credit card machine that asks if you want to convert to your home currency, I recommend you decline, especially if you went to the pain and effort to ensure you have a card or <a href="https://thepointsguy.com/2014/02/the-top-11-checking-accounts-for-avoiding-foreign-atm-fees/">bank with no extra foreign exchange fees</a>. Even if you don’t have one, and your debt card charges a fee, in most cases it still makes sense to use the local currency.</p>
<p>An exception to this rule, of course, is if your bank or credit card charges a very high fixed foreign exchange fee and you need only a little bit of money. If this is your case, then saying yes might save you money even if you get a poor exchange rate.</p>
<p>The main thing: Think it through. Resist your natural inclination to say yes just because it makes you feel comfortable. Don’t be fooled when asked if you want to complete a transaction using your home currency. Using the local currency can save you money, making your next trip abroad less costly.</p>
<p><em>This is an updated version of an <a href="https://theconversation.com/thinking-like-an-economist-can-make-your-next-trip-abroad-cheaper-81655">article originally published</a> on July 27, 2017.</em></p><img src="https://counter.theconversation.com/content/100860/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Global travelers are being increasingly asked if they want to pay for local purchases in terms of their home country currency. Here’s why you should resist the strong temptation to do so.Jay L. Zagorsky, Adjunct associate professor, Boston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/696202016-11-30T05:21:05Z2016-11-30T05:21:05ZBusiness Briefing: Former chief World Bank economist on inequality and doing away with big money<p>Doing away with big currency notes is a movement that is picking up all over the world, says Kaushik Basu, a professor of economics at Cornell University. While it may be a good idea in theory for tackling tax evasion and the black market in Australia, he says policymakers have to be cautious in implementing it.</p>
<p>Basu, a former economic adviser to the Indian government and chief economist at the World Bank, says the policy is an ineffective tool in India.</p>
<p>India’s Modi government <a href="https://theconversation.com/modis-surgical-strike-on-black-money-relies-on-uptake-of-electronic-payments-68675">recently decided to demonetise</a> RS500 and RS1,000 notes, giving citizens until December 31 to change them. It was designed to target corruption, the black market and tax evasion, but Basu says it could potentially hamper the country’s growth and have a disproprtionate negative effect on the poor and lower middle class.</p>
<p>Basu also weighed into the ongoing debate on addressing inequality in various economies around the world while still looking for economic growth. While growth is still important for economies catching up like India, some growth can be sacrificed to redistribute profit, he notes.</p>
<p>He argues policymakers, including in Australia, need to stop tinkering around the edges and come up with big ideas. Basu uses the example of profit sharing, where a pool of some share of all profits, for example 10%, goes straight to the workers.</p>
<hr>
<p><em>Also in this podcast, economist Richard Holden answers a question about Trump’s borrowing in business and in government for Ask an Economist.</em></p>
<p><em>If you’ve got a burning economics question you’d like to ask, write it down or record it and send it to ask@theconversation.edu.au – and be sure to include your name and where you’re from.</em></p><img src="https://counter.theconversation.com/content/69620/count.gif" alt="The Conversation" width="1" height="1" />
A former chief economist to the World Bank and economic adviser to the Indian government says doing away with big currency notes is a noble idea but an ineffective tool.Jenni Henderson, Section Editor: Business + EconomyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/59572012-03-25T19:17:58Z2012-03-25T19:17:58ZGiving advice for the greater good: why economists should work with charities<figure><img src="https://images.theconversation.com/files/8864/original/gcj772z4-1332377574.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's possible for economists and charities to enjoy a mutually beneficial relationship.</span> <span class="attribution"><span class="source">Kristopher Wilson</span></span></figcaption></figure><p>It is a well-established tradition in the legal and accounting worlds, where lawyers and accountants would provide pro bono legal and accounting services to the voluntary sector. It has also become common for businessmen like Richard Branson, Warren Buffett and Bill Gates to donate money or lend their skills to society. </p>
<p>However, this kind of engagement has not been seen in economics till recently.</p>
<h2>What is Pro Bono Economics?</h2>
<p>In September 2009, a group of prominent UK private and government economists, including <a href="http://en.wikipedia.org/wiki/Gus_O'Donnell,_Baron_O'Donnell">Sir Gus O’Donnell</a>, launched a project called <a href="http://www.probonoeconomics.com">Pro Bono Economics</a>. The concept is simple - matching volunteer economists with charities wishing to address questions around measurements, results and impact. </p>
<p>Few charities make use of economists. There are two reasons why this market is missing. First, most charities cannot afford to pay economists to analyse the effectiveness of their work. Second, there are information failures on both sides. On the supply side, economists are unaware that their skill sets can be useful in evaluating the effectiveness of charities. On the demand side, charities often do not understand the value of economic analysis to their business and hence do not seek it. </p>
<p>Pro Bono Economics is a UK-based charity. Currently, the organisation has in excess of 150 volunteers. Of these volunteers, over half are from the private sector, around a third are from the public sector, while the remainder are academics and individuals. The organisation has a relationship with the <a href="http://www.civilservice.gov.uk/networks/ges">UK Government Economic Service</a>, which allows them to find volunteers in various government departments. </p>
<p>So far, eight projects with a variety of charities have been completed. An example is the work done by the volunteer economists for <a href="http://www.barnardos.org.uk">Barnardo’s</a>. Barnardo’s work with those who have been sexually exploited is clear. However, using a rigorous research framework, the volunteer economists at Pro Bono Economics show that the benefits to the taxpayers of Barnardo’s interventions for young people who have been sexually exploited far outweigh the costs. There is a potential saving of either £6 or £12 for every £1 spent, depending on the assumptions made. There is now tangible, economic evidence of the necessity for specialist help, highlighting its value to the society as a whole. </p>
<p>A further check with Pro Bono Economics reveals that the organisation has only, so far, been able to engage about half of their volunteer pool with projects. In fact, the organisation has found that the interest from economists has so far exceeded the demand from charities, or the number of feasible projects from these charities.</p>
<h2>A non-zero-sum game</h2>
<p>Charitable giving by individuals is not rationally based and often personal and quirky. This is a conclusion that is well embraced by economists. Research has shown that donors want to be inspired and shown individual illustrations of the kind of good they can do for society. </p>
<p>However, this can be potentially a “win-win” situation for charities and economists. In the coming years, many charities around the world could face a financial squeeze as recession hits private donors and governments are forced to slash spending. This means that charities will need to fight to win funding, and individual charities will have to think hard about the best ways to present their causes and to appeal to donors. There will be an increasing need for charities to show that their projects are effective and delivering value for money. </p>
<p>This is where volunteer economists can help.</p>
<p>Getting involved with charities can help the dismal science as well. After all, economists are known to be inherently attracted to transactions that encourage self-interested behaviour, having been exposed to the “<a href="http://en.wikipedia.org/wiki/Homo_economicus">homo economicus</a>” model. The profession has suffered severe criticisms over the past few years for failing to foresee the credit crisis, which has been demoralising for some, particularly those working in the financial sector. If more economists could volunteer their skills and time for the voluntary sector, the image of economics might improve. For individual economists, such experiences in real-life scenarios could be inspirational and enhance day-to-day commercial work.</p>
<h2>Universal implications of pro bono economics</h2>
<p>According to the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/8106.0Main%20Features22006-07%20%28Re-Issue%29?opendocument&tabname=Summary&prodno=8106.0&issue=2006-07%20%28Re-Issue%29&num=&view=">Australian Bureau of Statistics</a>, there were 41,008 not-for-profit organisations in Australia at the end of June 2007.</p>
<p>The main source of income for these organisations was funding from federal, state and local government, accounting for 33.5% of total income. The latest statistics from the Australian Taxation Office showed that there were 53,773 tax concession charities at the end of October 2010. </p>
<p>Most charities took a hammering during the global financial crisis. In the 2008-09 income year, individuals claimed <a href="http://www.ato.gov.au/content/downloads/cor00268761_2009CH10CDG.pdf">$2,093 million in deductible gifts</a>, a decrease of 10.8% on the previous and the first decrease in the last ten years.</p>
<p>With 50,000 charities in Australia, it can be a challenge to decide which charities are worthy of your hard-earned cash. Besides, <a href="http://www.philanthropy.org.au/research/index.html#PA-research">Philanthropy Australia</a> has found that Australians are not as generous as their peers in the UK and Canada. The overall giving levels as a percentage of GDP are slightly lower in Australia than in the UK and Canada. </p>
<p>With evidence of <a href="http://www.news.com.au/business/australian-growth-remains-sluggish-westpac-melbourne-institute-survey/story-e6frfm1i-1226306244145">sluggish economic growth in Australia for 2012</a>, charities in Australia are likely to face a similar outlook as their peers in Europe and the United States. This would mean charities in Australia could possibly face a decline in government funding and would need to fight to win funding. </p>
<p>There would be an increasing need for charities to prove to their donors that their impact have been effective. Volunteer economists can help to evaluate the effectiveness of these charities.</p>
<h2>An “economists’ charity” for Australia?</h2>
<p>Pro Bono Economics is a UK-based charity and is only working in the UK at present. At present, the organisation is funded by a number of grant-giving bodies such as the <a href="http://www.citybridgetrust.org.uk/cbt/">City Bridge Trust</a> and a small number of individual donors. At the moment, the focus of the organisation is to ensure sustainable operation in the UK, before looking to expand internationally. </p>
<p>But the concept of “pro bono economics” is a universal one and can also be implemented in Australia. This is certainly by no means an easy concept to put to practice, but the project yields significant benefits: it seeks to improve the effectiveness of charities in Australia and allows economists to contribute both to society and to their professional development. </p>
<p>For some, pro bono economics may appear to be a concept where economists are seeking atonement for past sins. However, the truth is that economists have a skill set that the society can harness. More often than ever, it isn’t that economists are not charitably inclined; but they do not realise there are opportunities to contribute positively to society by using their skills. </p>
<p>Currently, pro bono economics engagements exist in Australia. However, such engagements occur on an uncoordinated basis. For example, Melbourne-based consultancy, <a href="http://www.ecolarge.com/">Economists at Large</a>, and academics like <a href="http://johnquiggin.com/">John Quiggin</a> do pro bono economics work from time to time. The pro bono economics consulting work done at Economists at Large is funded by their paid work and donations from clients.</p>
<p>The existence of such pro bono economics engagements indicates a market for providing economic services to charities in Australia. It would seem ideal to have an organisation, seen as the “economists’ charity”, that coordinate pro bono economics engagements in Australia. The objectives of such an organisation would be similar to what the <a href="http://www.nationalprobono.org.au/home.asp">National Pro Bono Resource Centre</a> does for the legal sector in Australia. The long-term sustainability of such an ambitious initiative is likely only to be achieved if it starts from within the profession. </p><img src="https://counter.theconversation.com/content/5957/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jasmine Zheng does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It is a well-established tradition in the legal and accounting worlds, where lawyers and accountants would provide pro bono legal and accounting services to the voluntary sector. It has also become common…Jasmine Zheng, PhD Candidate in Economics , Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/31942011-09-02T04:58:04Z2011-09-02T04:58:04ZLiveability prizes are nice but we have to … er … live here<figure><img src="https://images.theconversation.com/files/3299/original/PIC_-_Melbourne.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Melbourne has been voted the world's most liveable city: but for who?</span> <span class="attribution"><span class="source">flickr/glennnn</span></span></figcaption></figure><p>City leaders and media across the world have been celebrating or commiserating over <a href="http://www.smh.com.au/business/melbourne-judged-worlds-most-liveable-city-20110830-1jjaq.html?from=smh_sb">this week’s announcement</a> of the annual “world’s most liveable city” rankings. </p>
<p>Indeed, a resplendent Melbourne Lord Mayor Robert Doyle has waxed lyrical on just how important, and enjoyable, it is to be a part of the world’s most liveable city. </p>
<p>But as Vancouver’s leaders and many of its citizens begrudgingly hand over bragging rights to their Melbourne counterparts, the rest of us should stop and ask what exactly does a “liveability” ranking mean – and what is being overlooked amidst all of the hoohah.</p>
<p>The <a href="http://www.eiu.com/site_info.asp?info_name=The_Global_Liveability_Report&rf=0">Economist Intelligence Unit liveability survey</a> is designed to test whether the Human Resource Departments of major global corporations need to “assign a hardship allowance as part of expatriate relocation packages”. </p>
<p>The similar <a href="http://www.mercer.com/articles/quality-of-living-survey-report-2010">Mercer Quality of Living Index</a> aims to “help major companies place employees on international assignments”.</p>
<p>Both do an admirable job in these respects. Indeed, subscriptions to the intelligence that the EIU and consultancies like Mercer provide are those organisations’ bread and butter.</p>
<p>However, more recently politicians are relying on the rankings to benchmark cities against each other and possibly, to steer policy. The EIU recognizes that liveability (as they define it) is “increasingly used by city councils, organisations or corporate entities looking to test their locations against others to see general areas where liveability can differ”.</p>
<p>This is a problem, as one does not have to stretch the imagination too far to recognise that life in the world’s most liveable city is not all that it is cracked up to be. </p>
<p>For the un- and under-employed, many renters, pensioners, new immigrants, the disabled and relatively well-educated “creatives” living in the precarious “knowledge economy” on a contract-to-contract basis, such proclamations ring hollow. What the rankings offer is essentially a technical fix for an intuitive and existential set of questions that require real community debate.</p>
<p>Categorising the different dimensions of liveability into a ranking system begs the question of what should a city focus on to ensure that the quality of life which its residents share is maintained and improved. </p>
<p>In short, the liveability rankings are an exercise in technocratic over-reach, glossing over the complicated, shared experiences of what they purport to monitor: “liveability” and, increasingly, “sustainability”.</p>
<p>The EIU and Mercer indices say little about issues that may sit beyond their scope, such as economic distribution, social inclusion, the ecological footprint, working conditions, planning for the future or a range of other legitimate criteria. </p>
<p>The indices create conditions for a self-fulfilling prophecy of sorts, one that sets its own standards of success while casting failure simply as failing to live up to those measures.</p>
<p>The indices do not necessarily indicate whether a highly ranked liveable or sustainable city is providing anything beyond what lay within the unilaterally determined list of indicators – a list generally determined by a bunch of hot-shot City of London consultants. </p>
<p>But, as the index-ranking roadshow rolls on, the rankings are becoming politically important while public debate over what citizens feel should constitute measures of “liveability” is missing.</p>
<p>The growing momentum toward emphasising liveability among cities such as Melbourne and Vancouver is laudable, and the embrace by political leaders of the rankings contributes to this emphasis. Whereas in times past the focus was on “hard” issues such as social welfare, transport and building codes, contemporary urban policy emphasises a richer palette of issues: quality of life, cultural diversity, social inclusion, environmental sustainability, public participation.</p>
<p>But politicians and residents in places that are leaders in liveability (like Melbourne and Vancouver) could reach higher. </p>
<p>They could assert that fulfilling the demands of the rankings is only a small part of what a city should be striving for. </p>
<p>While ranking systems such as the EIU or Mercer’s add clarity to the job of politicians — raise and maintain the position of your city according to the rankings — they also place a responsibility upon the people lucky enough to live in these “liveable” cities.</p>
<p>We need to demand that our leaders move beyond rankings and actually consult us on what we think liveability means. That’s what should be driving planning and policy, not a listing aimed at the world’s HR managers.</p><img src="https://counter.theconversation.com/content/3194/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>City leaders and media across the world have been celebrating or commiserating over this week’s announcement of the annual “world’s most liveable city” rankings. Indeed, a resplendent Melbourne Lord Mayor…Meg Holden, Associate Professor of Urban Studies and Geography, Simon Fraser UniversityAndy Scerri, Assistant Professor, Dept of Politics, Virginia TechLicensed as Creative Commons – attribution, no derivatives.