Sunday, June 04, 2006

Is Bakwan Giffen?

Ujang has been provoking us to construct an index that can beat Big Mac Index. Many suggestions are noted. Coconut, latte, bread, maid, so forth. I’m not going to suggest another one now, but I’m interested in the common characteristic of all those goods mentioned. They are normal (which is necessary, should you create an index).

By normal good, we mean, when your income increases, your demand for it also increases. Of course, the term “normal” is an operative word: a lot of goods are like that. Or, put it another way, there are exceptions. Back in my college years, I used to eat in cheap warteg not because it tasted really good, but because I couldn’t afford fancier restaurants. I still ate at cheap, typical warteg when I already had my first job: with my salary, mall restaurant was still a luxury. Then I got a raise. Suddenly I could afford “more expensive” meals. My demand for warteg decreased.

In economics, we call the good that resembles my warteg story (demand decreases when income increases) inferior good. (No, we don’t have “superior good” – economists are lousy in picking up terms). There are some goods that are inferior. But among inferior goods some say there is yet another distinct species. It’s called "Giffen good".

Giffen good is an inferior good that is demanded more when its price increases. This is against the Law of Demand (when price of a good increases, the demand for it decreases) and that is why it is called (Giffen) paradox (after Robert Giffen, an English economist who observed this phenomenon in Irish potato consumption back in early 19th century).

Note that I just said “some say”. That's because I never really buy this idea of Giffen paradox. I probably will buy more warteg meal when its nominal price increase (that is, the money I pay for it). But take a further look, it’s not the same meal anymore. It’s now served in cleaner plates, packed in a fancier wrap, or fried in fresher oil, so forth. For this different, better quality meal, I am willing to pay more.

That’s why I usually don’t spend too much time explaining Giffen paradox in my microeconomics classes. But many teachers, especially those only rely on Samuelson or Lipsey seem to think Giffen paradox is important (and they put it in exam). I beg to differ. Law of Demand prevails.

Do you know any good that is Giffen?

For students: If you are interested in studying this subject (maybe a skripsi with intriguing title like: Is Bakwan Giffen?), here’s how you would do it.

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  1. Jensen and Miller (2002), using survey data from China, claimed that they have found some "preliminary finding" of Giffen goods: rice in the Southern part. Their finding is still open for debate, though. And they plan to do further research using instrumental variables.

    But I agree that Giffen goods may only be hypothetical. At best, we may find a Giffen good exist, but only for a certain time at a certain place.

  2. aco, Giffen good? umm, err,well.. economist! :-) even more, the chauvinist one :-)

  3. Rizal: frankly, i don't see how could it get any worse... a chauvinist economist? that should explained the coffee-lover-latte-hater-use-logics-only attitude... hahaha...

    and Aco dear, yes... i'm talking about you.. and is latte a giffen good??

  4. Is latte Giffen? Mmh, I don't know in general, dHani. Let's do fun research on this :-)

  5. deposit interest rate. is it? what's actually Giffen? it's beyond my rationale.