Walstad and Bosshardt on undergraduate GPAs in economics (and other subjects)

I've had this short 2019 article by William Walstad (University of Nebraska-Lincoln) and William Bosshardt (Florida Atlantic University), published in the journal American Economic Review Papers and Proceedings (sorry, I don't see an ungated version online), sitting in my 'to-be-read' pile for far too long (especially given how short it is!). Walstad and Bosshardt (incidentally, two of the top researchers in economics education) look at how GPAs differ across undergraduate majors, using data from the Baccalaureate and Beyond (B&B) project of the National Center for Education Statistics in the US. Their sample covers nearly 16,000 students who graduated in the 2007-08 academic year.

The results make for fascinating reading (albeit, as a snapshot of GPAs that is now over 15 years old). For starters:

The overall undergraduate GPA for all majors is 3.24, or between a B and B+ letter grade. The GPA for economics majors is only slightly below the average at 3.16.

...we also calculated an economics GPA for college graduates who completed a course or courses in economics. This economics GPA average is 2.9, or a B to B− grade.

It's not too surprising to learn that economics has a slightly lower GPA than other subjects, or that students who take an economics course (or more than one), but don't major in economics have a lower GPA in economics than students taking an economics major. I'm sure that the results would be similar for other subjects (with students taking a few courses in a subject having a lower GPA in that subject than students majoring in that subject).

Walstad and Bosshardt then look at the factors associated with GPA:

The most striking finding is that prior achievement or measured ability in high school is highly associated with success in the undergraduate coursework...

The only other variable that appears to be a fairly consistent predictor of GPAs is age. The age effect is nonlinear, with the youngest college graduates having the highest GPA, but it declines with age and then eventually increases.

The correlation of GPA with prior academic achievement is not surprising. Students who do well at high school tend to do better in university as well, on average. The better performing students tend to be highly engaged and motivated, both at high school and university. However, the effect of age is more interesting. The youngest students (those aged under 22 years at graduation) have the highest GPA (of 3.36), and GPA declines with age (to 3.19 for those aged 22 or 23, and 3.02 for those aged 24 or 25), until the oldest group (those aged 26 years or older at graduation), where GPA jumps back up (to 3.29). It is likely that this reflects that students who take longer to get to graduation have lower grades, having failed one or more courses along the way. However, the oldest group will include many 'mature' students, who tend to be more focused on their studies and do better on average. The other variable that stands out as associated with GPAs is gender, with female students receiving a GPA that is 0.14 points higher, on average.

Next, Walstad and Bosshardt look at the factors associated with GPA by subject. Focusing on economics, the factors that are statistically significantly associated with GPA in economics are being aged 24 or 25 at graduation (which is associated with a GPA that is 0.22 points lower, on average), having a high school GPA of 3.5 or more (which is associated with a GPA that is 0.24 points higher, on average), verbal and math SAT scores (which are both associated with higher GPAs), and graduating from a baccalaureate or Masters granting institution, rather than a doctoral degree granting institution. The latter is consistent across all subjects, which suggests that grades are simpler lower on average at doctoral degree granting institutions.

Walstad and Bosshardt, though, focus on the differences by gender, noting that:

Females earned significantly higher overall GPAs than males and in four subjects (biology, calculus, foreign languages, and psychology), but no significant difference is evident in three subjects (economics, business, engineering).

However, female students are less likely than male students to earn an A grade in their first economics course (and their first engineering course), which is not the case for any of the other subjects. Male students in economics get an A grade 3.1 percentage points more often than female students, so the effect is not large.

Given the known issues with grade inflation over time (see here and here), it would be interesting to know how things have changed since 2007-08, and especially whether the gender gap in economics achievement is still apparent. The B&B project does apparently have data for a cohort that graduated in 2015-16, so perhaps a follow-up project is forthcoming?

Mexico's agave farmers learn the lessons of dynamic supply and demand

The Financial Times reported earlier this year (paywalled):

But in 2018, the tequila boom in the US presented Antonio, who requested we not use his real name, with an opportunity to get back into the fields and connect with his father. With the price of agave, the key ingredient in tequila, reaching record heights, everyone with a patch of land was rushing to plant the crop, or to sell their land to others keen to do so. As it peaked at some 30 pesos ($1.45) per kilogramme, doctors, dentists, and many others piled into the business. The number of registered agave growers rocketed from 3,180 in 2014 to 41,000 in 2023. For several years, the region was abuzz with a sense of possibility, even among those without land to grow on. Opportunistic investment companies set up crypto-esque trading websites encouraging Tapatíos, people local to the area, to place bets that the price of agave would keep rising...

A couple of years after he planted his crops, Antonio secured a contract with a tequila producer promising to buy his plants. The deal gave him the confidence to plant more, but did not include any kind of price protection. In 2022, when his first crops were still a couple of years from maturity, he started to hear about falling prices. Within two years the spot price had plummeted to between 1 and 3 pesos per kg. “We started to plant all excited, making the investment when things were good without really knowing that it’s all cyclical,” he says.

Stories like Antonio’s are now crystallised into tequila industry lore: the hapless middle-class professionals who helped fuel the agave oversupply crisis that is now rocking Jalisco.

In my ECONS101 class, we teach a model of dynamic supply and demand that explains fluctuations in market prices such as those that the Mexican agave farmers have been experiencing. It isn't all bad news. As you will see, the farmers who can ride out the low prices and profits will likely find themselves in a period of higher prices and profits before too long.

Consider the market for agave, and assume that it is perfectly competitive - most importantly, there are no barriers to entry into the market or barriers to exit from the market. The market for agave is shown in the diagram on the left below. The diagram on the right will track changes in agave farmers' profits over time. Initially (at Time 0) the market is at equilibrium (where demand D0 meets supply S0) with price P0, and agave farmers are making profits π0. Now say there is a permanent increase in demand at Time 1, to D1. This increase in demand may be because of an increase in the production of tequila (as I noted in this post earlier this month). Prices increase to P1, and agave farmer profits also increase (to π1). There are no barriers to entry (this is a perfectly competitive market), so the higher profits encourage new farmers to enter this market (like Antonio). Supply increases to S2 (more producers) at Time 2. Price falls to P2, and agave farmer profits also fall (to π2). This is the situation that the Financial Times article describes.

What happens next? At Time 2 profits are low and some agave farmers will choose to exit the market (no barriers to exit because this is a perfectly competitive market). Supply will decrease to S3 (fewer producers) at Time 3. Price will increase to P3, and farmer profits will increase to π3. So, as I noted above, provided the agave farmers can ride out the low prices and profits, the market will recover as other farmers drop out of the market.

The problem for agave farmers like Antonio is that this was foreseeable. When prices and profits are high, and lots of farmers are moving into the market, that is not a good time to invest in an agave farm. The increase in supply is going to lead to lower prices and profits in the future. This is made even worse in this case because, as the FT article notes:

Although tequila remains the world’s fastest-growing spirit, the peak growth is over, and drinkers have been cutting back on boozing. That was already particularly true in the US, tequila’s largest export market, before President Donald Trump proposed launching a trade war. While large producers with long-held relationships with the tequila houses are able to ride out the cycle, farmers without solid contracts are now desperately trying to offload their agave in a saturated market. 

Mexico's tequila lake is doubling down on the cycle of low prices and profits for Mexican agave farmers. As I noted in the tequila lake post, the price of tequila will fall, and less tequila will be produced. That means that the prospects for agave farmers are even worse than portrayed in the market diagram above, because the demand for agave isn't going to stay high at D1, but will be decreasing back towards D0. That means even lower prices and profits for agave farmers.

The Financial Times wants us to feel sorry for the agave farmers like Antonio. But honestly, they should have done some due diligence. The clever business strategy when faced with a market that is heading into a cycle like that in the agave market is the 'hit and run' strategy. It is counterintuitive, but it says that when prices and profits are high, that is a good time to get out of the market. Forget selling agave, agave farms can be sold for a high price at that point in the cycle. The time to get into the market is when prices and profits are low, because the price to buy an agave farm will be much lower. Recognising that this market is perfectly competitive is important here, as is recognising what is happening in the market around you. If Antonio looked around, and realised that lots of other farmers were getting into agave farms, that should have made him curb his excitement. Hopefully, the farmers (and others) have now learned this lesson of dynamic supply and demand.

Read more:

• The rise and fall of craft beer?
• Just bought the farm (or rather not, if you understand dynamic supply and demand)

The increase in methamphetamine use in New Zealand has been driven more by supply than demand

The New Zealand Herald reported last month:

Prime Minister Christopher Luxon has asked his justice and police ministers to look at what more can be done to tackle methamphetamine use in New Zealand, which has nearly doubled in two years.

Police data shows an “unprecedented 96% increase in meth consumption when compared to 2023, with consumption increasing across all sites”...

The police report said the spike in methamphetamine use likely resulted from an increase in both supply and demand, along with a decrease in street-level pricing.

The changes in the market for methamphetamine described in the Police report are illustrated in the diagram below. In 2023, the market operated in equilibrium where the demand curve D0 intersects the supply curve S0. The equilibrium price (the street price of methamphetamine) was P0 and the equilibrium quantity of methamphetamine traded (and consumed) was Q0. Between 2023 and 2025, there was an increase in supply of methamphetamine (from S0 to S1) and an increase in demand for methamphetamine (from D0 to D1). The equilibrium quantity of methamphetamine consumed increased from Q0 to Q1 (an "unprecedented 96% increase" according to the article). The equilibrium price of methamphetamine decreased from P0 to P1 (a "decrease in street-level pricing: according to the article).

Ordinarily, when we see an increase in both supply and demand in a market, the increase in the equilibrium quantity is certain, but the change in equilibrium price is ambiguous. That's because an increase in demand causes an increase in the equilibrium price (ceteris paribus), while an increase in supply causes a decrease in the equilibrium price (ceteris paribus). In this case, the decrease in the street-level (equilibrium) price of methamphetamine tells us that the increase in supply of methamphetamine must have been larger than the increase in the demand for methamphetamine. So, the increase in methamphetamine use has been caused by both increases, but the supply side of the market is having a larger effect than the demand side.

Now, that doesn't mean that police should be targeting the supply side of the market. As I noted in this 2016 post, in the long run it is likely to be more effective to focus on the demand side, rather than the supply side, to reduce drug use. And that's what we should see now.

Read more:

• Police are not winning the P war - they need to focus on demand
• Evidence that the supply of methamphetamine is increasing
• The coronavirus lockdown and the New Zealand market for illegal drugs

This week in research #72

Here's what caught my eye in research over the past week:

• Bauer, Lakdawalla, and Reif develop a theoretical model for valuing health and longevity improvements, and show in calibrated simulation results that sick adults are willing to pay nearly twice as much per quality-adjusted life-year (QALY) to reduce mortality risk as healthy adults, and that reducing the risk of serious illness is valued similarly to reducing the risk of mild illness

In some exciting news, the latest issue of Australasian Journal of Regional Studies (AJRS) has just been published (although it is backdated to December 2024, as for the second year in a row we faced some unexpected issues with completing the issue). This issue has four papers, as well as the editorial:

• Shakir uses a microsimulation model to analyse the impact of two housing programmes that aim to help low- and moderate-income families into homeownership in Australia, finding that the “First home guarantee scheme” (FHGS) increases rates of home ownership by more than the “Help to buy scheme” (HTBS), and attributes the difference to the focus of the HTBS on younger and lower-income households (this paper won the John Dickinson Memorial Award for the best paper published in AJRS in 2024)
• Mangioni et al. looks at how residential land values and housing prices across regional Australia have changed over the past five years, and thematically analyses submissions to the NSW Regional Housing Taskforce 2022, identifying that a shift towards lifestyle living and second dwelling ownership, and a change in workforce demand have increased the demand for regional housing
• Sarkar and Tigga use bootstrap data envelopment analysis to evaluate the efficiency of health expenditures in improving child mortality outcomes across 127 low- and middle-income countries (LMICs), and find that 45 percent of LMICs exhibit decreasing returns to scale, meaning that increases in health inputs will generate less than proportionate reductions in child mortality
• Nguyen looks at the impact of the COVID-19 pandemic on the financial services sector across four regions of the US, and finds that before the pandemic, labour determined the revenue differences between regions, while during the pandemic, local, state, and federal taxes played a greater role