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    Airline Fees

    Jun 25 • Businesses, Demand, Supply, and Markets, Financial Markets, Government, Households, Labor, Money and Monetary Policy • 1297 Views

    Weigh baggage, tag it, and place it on the conveyor belt. No you are not an airline employee. You are flying the Australian Airline, Jetstar. Any human interaction will cost you. A question about your baggage? $10.

    Soon, all U.S. air carriers will be required to list their fees. On its website, Ryanair tells us that it charges for lap babies, baggage, name changes, sports equipment, priority boarding. They also charge for printing a boarding pass. Other airlines have us pay extra for legroom, snacks, and booking by phone.

    The Economic Lesson

    The airline industry can tell us a lot about how competitive market structure shapes a firm’s behavior. Before 1978 deregulation, airlines enjoyed government oversight that gave fliers high fares, labor high wages, firms were profitable and competition on interstate routes was minimal.

    The incentives changed after deregulation. Less government and more competition meant lower fares. How then to generate more profits? Fees are the current answer. Up by $22 billion, fees represent a huge source of airline revenue.

    An Economic Question: Picture a market structure continuum. Perfectly competitive small firms selling similar products are on one end, then monopolistically competitive firms, next oligopolies, and finally, monopoly. On this scale, where would you place the airline industry before deregulation in 1978? After?


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  • The Surprising Glass Ceiling in Sweden and France

    Saudi Women

    Jun 24 • Developing Economies, Gender Issues, Macroeconomic Measurement • 486 Views

    It is tough for a Saudi Arabian woman to get a driver’s license. Only in rural areas might you see women behind the wheel. Even with recent protests, imagine, to get to work, to pick up groceries, to take a child to the doctor, you need a man. And, if that man is not a relative, you have to pay him.

    A 2009 Time article tells about a female deputy minister of education who uses video conferencing to communicate with male colleagues. Among the lowest in the world, the labor force participation rate for Saudi women is 17%. And yet, literacy among Saudi women is high.

    The Economic Lesson

    For us, the key here is human capital. For an economy to grow and thrive optimally, the factors of production, land, labor, and capital, need to be appropriately allocated. When there is gender bias, women’s talents are underutilized. Consequently, economic growth is less than it might be.

    An Economic Question: To illustrate underutilization, economists can use production possibilities graphs. On production possibilities graphs, with the X-axis labeled consumer goods and the Y-axis, capital goods, a bowed out curve is drawn which illustrates a country’s maximum production capability. How would you display current production in a nation that constrains female performance?

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    A New Drachma?

    Jun 23 • Economic Debates, Economic History, Financial Markets, Government, International Trade and Finance, Money and Monetary Policy, Thinking Economically • 498 Views

    According to a 2002 BBC report, Greece was the least prepared to make the switch to the euro in 2002. During the transition only 1/6 of all businesses in Greece had received their euros.

    Now, Greece remains a dysfunctional euro nation. Can it leave? Not easily. (This NBER paper details the issues.

    If Greece were to leave the euro zone, it would have to…

    • create and print “new” drachmas.
    • switch all contracts from euros to new drachmas. Loans, mortgages, wages, bank deposits, taxes, bonds, all would need to change.
    • restock and reprogram all computers, vending machines, and ATMs.

    Also though, having power over its own monetary and fiscal policy, it could…

    • stimulate tourism and exports by depreciating its currency.
    • have more flexibility when spending and taxing.
    • unilaterally restructure its sovereign debt.

    But then…

    • French and German banks would have to “mark to market” the value of the Greek bonds that they own.
    • Other weaker euro zone nations might decide to copy Greece.

    Would the ripple lead to the demise of the euro zone?

    The Economic Lesson

    Countries typically use monetary and fiscal policy to affect domestic economic conditions. Monetary policy involves the supply of money and credit. Fiscal policy relates to spending, taxing and borrowing.

    Recession? Borrow and spend more. But euro zone nations are not supposed to let deficits exceed 3% of GDP. Lower interest rates? The euro zone makes the monetary decisions.

    An Economic Question: You can see the problem. Countries with different economic conditions lack the flexibility to respond to their own special needs. For example, how would fiscal policy differ for a nation with low unemployment and one with considerable joblessness? (Here, you can check unemployment statistics for the euro zone.)

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    Where Did Your Tuna Fish Come From?

    Jun 22 • Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Labor • 315 Views

    The tuna you had for lunch might have been caught in the Pacific, processed and canned in Thailand, and flown to a Wal-Mart warehouse in the U.S.

    Concerned about monitoring quality, a recent report from the Food and Drug Administration (FDA) tells us that almost 2/3 of the fruits and vegetables we eat, 80% of the key ingredients in our medication, 80% of our seafood, and 1/2 of our medical devices are made abroad.

    Also looking at the worldwide supply chain, a report from the International Labour Organization (ILO) focused on the income share that labor receives. For Kenyan fruit exports to the U.K., the producer receives 14% of the income. Meanwhile, the supermarket gets to keep 46%, airfreight and handling, 21%, packaging, 13%, and the importer, 6% (p.11).

    The Economic Lesson

    As economists, we should ask about cost. David Ricardo (1772-1823) stated the classic defense of free trade when he expressed the principle of comparative advantage. Trade, trade, trade, he said because each nation then can do what it does best and the whole world benefits through lower cost and greater efficiency.

    The FDA paper expressed concern that the quest for lower health care cost in the U.S. would lead to further globalization of the pharmaceutical supply chain. One result? More difficulty monitoring quality. On the other hand, more efficient resource use can fuel worldwide economic growth.

    An Economic Question: How does efficient resource use fuel economic growth?

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    Israeli Cottage Cheese Boycott

    Jun 21 • Demand, Supply, and Markets, Households, International Trade and Finance, Macroeconomic Measurement, Regulation, Thinking Economically • 484 Views

    News articles say that the Israelis are “cheesed off” and “curdled.” Angered by the soaring price of cottage cheese, a Facebook consumer group of 70,000 friends has agreed to stop buying it on July 1. The headline on the boycott page said, “Let it stay in the stores and spoil until the price comes down.”

    This “tempest in a tub” began when cottage cheese price caps were removed. You can guess the result. The price of a 250 gram (9 ounce) container soared from 4.82 to 8 shekels ($2.30).  A national breakfast staple, Israeli cottage cheese (just like Coca-Cola) has a secret small curd formula.

    The Israeli Facebook group appears to want a cottage cheese price cap.

    The Economics Lesson

    During the early 1970s, to control inflation, U.S. President Richard Nixon implemented wage and price controls. Like taking the cover off a pressure cooker, when the controls were lifted, prices immediately jumped.

    As economists, we can explain why with a demand and supply graph. With the demand curve sloping downward, the supply curve sloping upward, the Y-axis price and the X-axis quantity, the curves meet at an equilibrium price and quantity. The market pushes toward equilibrium. Above equilibrium? There is a surplus. Below equilibrium? There is a shortage.

    An Economic Question: Why are price controls called a ceiling?

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