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    89.7 Sextillion Percent Inflation

    May 12 • Developing Economies, Economic History, Government, International Trade and Finance, Money and Monetary Policy • 528 Views

    Imagine a country where supermarket employees have to raise their prices several times a day, maybe by placing one price sticker on top of the old one. Describing Brazilian inflation during the early 1990s, one woman said she raced to food markets to see if she could beat the price rise. As told in this podcast, Brazil’s inflation rate was high.

    However, it was nothing like Zimbabwe’s.

    One economist has estimated that, by the time Zimbabwe replaced its own dollar with foreign currency during 2009, its annual inflation rate was close to 89.7 sextillion percent. So, you might think that the Zimbabwe dollar is worthless. Not quite. On eBay, a $100 trillion Zimbabwe dollar bill recently sold for close to $5 and currency collectors, looking for more, could push price up further.

    Actually, Zimbabwe occupies second place for a world hyperinflation record. Hungary (July 1946) is #1 and Yugoslavia (January 1994) is #3.

    The Economic Lesson

    There are two basic ways that textbooks explain inflation:

    1) Let’s assume that changes in supply relate to land, labor and capital. So, if a central bank increases the money supply, it will not affect supply. More money? Constant supply? The result is inflation.

    2) Too many dollars chasing too few goods creates “demand pull” inflation; when the cost of land, labor, and/or capital rises, we have “cost push” inflation; inflation also can result when one item that is central to an economy, such as oil, becomes more expensive.

    An Economic Question: Imagine living through a hyperinflation as a consumer, as a worker, or as a business owner. How would you explain the different challenges?

     

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    Brand Matters

    May 11 • Businesses, Demand, Supply, and Markets, Developing Economies, Households, International Trade and Finance • 418 Views

    Not so long ago, an apple was just a piece of fruit and a “google’ (actually spelled googol) was 10 raised to the 100th power. Mention apple today and most of us think of iPhones and iMacs. However, Apple is not just a technology company. As with Google and Coca-Cola and McDonald’s, firms can be about more than a product. They are also an image and a message. They are a “brand.”

    Ranking the most valuable brands in the world, a global brands agency, Millward Brown, said that Apple, #1 on the list, had a brand that could be valued at close to $153 billion. That total, though, is not about sales nor profit nor revenue. It represents a cash value of what Apple means to us.

    Separate from what firms produce, a brand gives firms value. Directly, it adds to the firm’s assets. Also, a brand gives a firm more pricing power. As one branding executive explained, “Apple is breaking the rules in terms of its pricing model. It’s doing what luxury brands do, where the higher price the brand is, the more it seems to…reinforce the desire.” Perhaps corresponding to Apple’s #1 rank, Research in Motion’s Blackberry lost 1/5 the value of its brand and Nokia fell even further. You can read the report here to see how brand value was calculated.

    Finally, the top brands list illustrates the growing financial power of developing economies. China Mobile is #9 on the most valuable brands list. In a financial institutions valuable brands list, Chinese, Russian, and Brazilian banks were among the top 20, preceding Bank of America.

    The Economic Lesson

    From most competitive to least competitive, the four basic competitive market structures are: perfect competition, monopolistic competition, oligopoly, monopoly.

    An Economic Question: If you imagine a competitive market structure continuum, with perfect competition on the far left and monopoly on the far right, where would you place Apple? How does Apple’s “brand” affect its position and its price making capability?

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    Euro Problems

    May 10 • Economic Debates, Economic History, Financial Markets, Government, International Trade and Finance, Labor, Macroeconomic Measurement, Money and Monetary Policy • 409 Views

    This country had a national railroad that received $100 million euros a year in revenue but had expenses of $700 million. All public jobs paid an average of 3 times what the private sector paid. Beauticians, musicians and radio announcers were retiring with state support as early as age 50 (women) and 55 (men) because their work was classified as “arduous.” On the revenue side, “The people never learned to pay their taxes…because no one is ever punished.” And finally, the government itself really wasn’t quite sure how much its debt was soaring because its numbers were inaccurate.

    Described by Michael Lewis in an October Vanity Fair article, this country is Greece.

    So, doesn’t it make sense that the first bailout was not enough? And now, euro zone officials have to figure out once again, what to do about Greece.

    In “Greece Slips Farther Behind Budget Cut Target,” the WSJ tells us that the choice is either a debt default or “that Greece will be a ward of its euro-zone peers for years to come.” This NPR Planet money blog also explains the euro zone’s plight.

    The Economic Lesson

    Greek finances are so worrisome because they could trigger a banking emergency. It all began with Greek bonds. In order to borrow the money they needed to cover their spending, the Greek government borrowed money by selling bonds. Euro zone banks bought these securities.

    The big worry is a Greek default if they “restructure” and delay bond payments or refuse to pay what is due. A default could lead to a domino of financial failures because banks’ assets–their Greek bonds–will be worth much less.

    An Economic Question: How might the situation faced by the euro zone compare to the U.S. when the Articles of Confederation were the law of the land?

     

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    Europe Day

    May 9 • Demand, Supply, and Markets, Economic Debates, Economic History, Financial Markets, Government, International Trade and Finance, Money and Monetary Policy • 458 Views

    Can you imagine if every time someone from Brooklyn went to Manhattan, she had to use a different currency?  

    In an excellent NY Times Magazine article, economist Paul Krugman explains the euro zone. He tells how it began, describes the problems that have always existed, and presents 4 scenarios for the future. He also tells us why Iceland is better suited to having its own currency than Brooklyn, although Brooklyn has 8 times as many people.

    His point? Currency union can be helpful.

    His second point? Currency union can create big problems when nations need to deal with their own economic problems.

    Commemorating, the first steps taken toward a European Union on May 9, 1950, Europe Day is celebrated today. Euro zone members can smile on Europe Day because they have been able to enjoy the benefits of a larger market. Dr. Krugman wonders though, whether it can last. 

    The Economic Lesson  

    Monetary policy and fiscal policy are the two basic ways that nations guide an economy. Monetary policy targets the supply of money and credit. Fiscal policy involves spending, taxing, and borrowing.

    The euro zone facilitated a monetary authority but no fiscal unity. And therein lies the problem.

    An Economic Question:  During the recession in the U.S., using which tools did monetary policy and fiscal policy target the same goals? 

    Here, you can listen to a wonderful Teaching Company lecture from Dr. Timothy Taylor (Lecture 6, “America and the New Global Economy”) on the euro zone.

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  • For most economists, historians, social scientists, it is tough to avoid research bias

    Fictitious Billionaires

    May 8 • Economic Debates, Economic Humor, Gender Issues, Households • 451 Views

    Having amassed her fortune as CEO of an electronics empire and through her inheritance, The Office’s Jolene “Jo” Bennett is ranked #11 on this year’s Forbes Fictional 15. You might enjoy this (fictitious) Forbes interview of Ms. Bennett.

    Dominated by men, the list includes Carlisle Cullen (#2 ), who made his fortune primarily through a blood reagent manufacturer and Bruce Wayne (#3), affluent because of his shares of Wayne Enterprises.  The Simpsons’ C. Montgomery Burns (#12), Gossip Girls’ Chuck Bass (#13) and “investor” Gordon Gekko (#14) are also on the list. 

    The Economic Lesson

    With Jo Bennett the only woman in the Fictional 15, Walmart’s Christy Walton & Family (#4) and Alice Walton (#8) were the two women in the top 15 for Forbes richest in America. (4 Waltons were in the top 10.)

    Electronics, energy, security, and investing were among the industries that provided the fortunes of the Fictional 15. For Forbes Richest in America, Microsoft’s Bill Gates (#1) and investor Warren Buffett (#2) topped the list.

    An Economic Question: The conclusions from the following studies could be contradictory. Your opinion?

    Saying that education is crucial for income mobility, a 2010 study from the OECD concludes that U.S. intergenerational mobility is relatively low. In other words, fathers and sons, mothers and daughters remain close to the same rung on a social mobility ladder.

    By contrast, this 2007 report from the U.S. Treasury indicates that there is considerable income mobility in the U.S. Describing a hotel with luxurious rooms and shabby rooms, they say that, “…those in small rooms have an opportunity to move to a better one, and that the luxurious rooms are not always occupied by the same people. The frequency with which people move between rooms is a crucial aspect of the trend in income inequality in the United States.”

     

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