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    The Missing Sensor

    Mar 29 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Economic Thinkers, International Trade and Finance, Labor • 323 Views

    According to one estimate, worldwide auto production could slide by 30% because Hitachi Automotive’s Sawa Ibaraki Prefecture plant was debilitated by Japan’s earthquake and tsunami. Hitachi Automotive makes the air flow sensors that are crucial in autos for determining “how much fuel to inject, when to ignite the cylinder, and when to shift the transmission.”

    Translate sensor production into jobs, sales, related parts and you have a massive ripple from one $90 car part. In Shreveport LA, small pick-up truck production from GM stopped. As a result, GM’s Buffalo, NY engine plant had to lay off 10% of its workers. Similarly, in Spain, France, and Slovakia, Peugeot-Citroen announced cutbacks. 

    The Economic Lesson

    This returns us to the classic 1958 pencil essay by Leonard Read. Conveying how people and places around the world are necessary for a simple pencil, at the beginning of the essay, the pencil says, “I, Pencil, simple though I appear to be, merit your wonder and awe…Simple? Yet not a single person on the face of this earth knows how to make me…”

    It also reminds us that “made in …” labels are not entirely accurate. A t-shirt “Made in China” could include cotton grown in Texas. The iPhone is actually made by 9 different suppliers located around the world. And, a pick-up truck that is made in a U.S. factory could include a sensor that was manufactured Japan.

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    The Amazing Washing Machine

    Mar 28 • Developing Economies, Environment, Gender Issues, Households, Innovation, Labor, Macroeconomic Measurement • 306 Views

    In one wonderful 9 minute TED talk, Swedish professor Hans Rosling connects the washing machine to empowering women, educating children and diminishing world poverty.

    The Economic Lesson

    When women are empowered, not only is the gender gap diminished but also the health and education of the household increases. 

    In a Teaching Company lecture, about women and the global economy (lecture #31), Professor Timothy Taylor starts with explaining the world’s missing 100 million women; then he focuses on the importance of women being educated, of women having political power, and of women controlling household income.  

    You might also want to look at a brief IMF paper called “Smart Economics,” in which the authors conclude that “…giving women more access to education, to markets (labor, land, credit) and to new technology, and giving them greater control over household resources often translates into greater well-being for themselves and their families.”

    And finally, if you want lots of data, I recommend this 334 page, 2010 World Economic Forum Global Gender Gap Report. Ranking the gender gap for 134 nations, the report has Iceland with the smallest gap, the U.S. at #19, and Yemen last, at #134.

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    The Center of the Global Economy

    Mar 27 • Demand, Supply, and Markets, Developing Economies, Economic History, Financial Markets, International Trade and Finance, Macroeconomic Measurement • 334 Views

    Let’s start with a dot in the Atlantic Ocean, maybe 900 miles from Morocco. Then, follow that point, as it glides eastward toward Izmir, Turkey. According to London School of Economics Professor Danny Quah, you have just seen how the world’s center of economic gravity has shifted during the past 30 years.

    Explaining that he was not referring to a “cluster” of economic activity, Dr. Quah told readers, for example, to imagine a world with only 2 cities having economic activity. The cluster of economic activity could be found in each city. However, the center of economic gravity would be an inactive spot between the two. While there are many clusters, there is only one center.

    Dr. Quah has a wonderful map in his paper showing the actual and projected eastward trajectory for his world center of economic gravity (WCEG) between 1980 and 2050 (p. 13).

    More specifically:

    1980: 24 degrees west; 66 degrees north, 2800 kilometers beneath the surface of the Atlantic Ocean.

    2008: 27 degrees east; 74 degrees north. “…just south of Izmir Turkey, on the same longitude as Minsk and Johannesburg.”

    2049: 92 degrees east; 30 degrees north. “…no large city precisely but surrounding it are Urumqi, China, Kolkata, India, Dacca and Chittagong Bangladesh.”

    To calculate the WECG, Dr. Quah covered “GDP in all of the world economy.” You might want to look at his paper to see how he identified and then used data from 693 locations.

    The Economic Lesson

    NYU economist William Easterly tells us that we will all benefit from the growing wealth of poorer nations as worldwide production and demand grow.

    Dr. Quah meanwhile suggests that as we observe WECG march eastward, correspondingly, global inequality, political power, and monetary movement will also shift.

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    Looking Back at a Decision

    Mar 26 • Behavioral Economics, Businesses, Economic Debates, Economic History, Environment, Government, Regulation, Thinking Economically • 340 Views

    Testifying in 1978, one public official said that economists, citing cost and benefit, recommended using a lower level of levee protection against hurricanes in Louisiana than he thought was necessary. (p. 90 of the Congressional Report on Hurricane Katrina)

    Similarly, a WSJ headline tells us that “Japan Ignored Warning of Nuclear Vulnerability,” and the article then explains that, “doing so was likely deemed too costly and cumbersome.”

    Should we be concerned that economists’ considerations of cost and benefit are being criticized?

    The Economic Lesson

    It is crucial to remember that someone who uses cost/benefit analysis to make a decision does not have a crystal ball. We cannot use current consequences to evaluate a past decision. Also, please keep in mind that economically, cost refers to a sacrificed alternative. It does not have to refer to dollars.

    So, what to do after reading this article about the need for a high-tech disaster warning system? Will you consider cost and benefit?

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    Peanut Butter Prices

    Mar 25 • Behavioral Economics, Demand, Supply, and Markets, Households, Macroeconomic Measurement, Thinking Economically • 529 Views

    Let’s say that you saw the price of Skippy peanut butter, Tropicana orange juice, and Quaker oatmeal went up. Would you be concerned about inflation?

    In a recent paper, researchers from Yale and the University of Chicago said it is a bit more complicated than that. Stores, they said, were very aware that certain consumers tended to be “loyals” while others were “shoppers.” The “loyals” bought the same brand, no matter what. “Shoppers,” by contrast, were bargain hunters. If Peter Pan peanut butter were on sale, they would not only buy it (and abandon Skippy), but they would also stock up with extra jars.

    Knowing the character of their clientele, supermarkets adjusted prices to optimize purchases from “loyals” and “shoppers.” They made sure, for example, that sales were carefully scheduled so that they would minimize lost revenue from their “loyals.”

    Fluctuations in price, then, do not only reflect increasing costs of production or changes in the money supply. Instead, they might just be an example of business strategy.

    The Economic Lesson

    Consistently, price watchers from the Bureau of Labor Statistics monitor specific items in a “market basket” of goods and services to give us a picture of where prices are heading. The result is the Consumer Price Index (CPI). Through Social Security payments that are based on annual changes in the CPI and monetary policy decisions, the CPI can have considerable impact.

    But, what if, as these Yale and Chicago researchers suggest, price changes reflect a complexity that is not currently recognized by the CPI?

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