Blog: Economics in Action

This week Princeton University economist Paul Krugman was announced as winner of this year’s Alfred Nobel memorial prize in Economics (PDF link, YouTube video). He is well known for his work on currency markets, including his advance prediction of the housing bubble and current financial crisis (YouTube link). However, this prize recognises earlier work in which he advanced our understanding of international trade.

Photo by noodlepie on Flickr

We find out via Marginal Revolution that, amongst other things, Krugman has used economic arguments to explain why British food used to be so bad.

An early paper by Krugman applies serious economic analysis to the admittedly silly topic of interstellar trade. Trade between star-systems poses special problems; for one thing, because of the huge travel times even for near-light speed freight vessels. Because of Einsteinian relativity, humans or aliens would experience time differently on the journey to those financial backers who remain on the home planet, so it’s not obvious how interest should be calculated. Those working on these problems, admits Krugman, are a small band, “but the Force is with us.”

Research by Steve Gibbons and Steve Machin confirms that there is a house price premium related to the performance of the nearest primary schools. But some of the findings of the study, published in the Economic Journal, run counter to common perceptions:

· A ten-percentage point improvement in the league-table performance (at age 11, Key Stage 2) can be expected to add at least 3% to the price of a house located immediately next to a school. As might be expected, houses further away are less affected.

· Despite this, primary schools are, in general not desirable local amenities. Only the 1-in-10 top performing schools tend to lift significantly the prices of houses close by.

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