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    Luxury or Necessity?

    Jan 12 • Behavioral Economics, Demand, Supply, and Markets, Households, Macroeconomic Measurement • 308 Views

    Can you live without your TV? Cell phone? Dishwasher? A Pew Research survey discovered that your answer in 2006 might have been different from now.

    Cars were at the top with 88% of all respondents saying they needed one. But still, the number was 3% less than 2006. For microwave ovens, the recession created a massive switch with 21% fewer people saying they had to have one. For cell phones, as you might have guessed, opinion remained constant. For 2006 and 2009, 49% of all survey participants said that the cell phone was a necessity.

    And, whether or not the recession directly affected you, your opinion about luxuries and necessities probably changed.

    The Economic Lesson

    Difficulty with paying rent or the mortgage was experienced by 21% of all respondents, contact with joblessness by 27%, and losing more than 20% in investment accounts by 47%. Seeing that so many people were specifically impacted while even those who had not been hit directly had a new outlook conveys the severity of the recent recession.

    Do you feel that the 2009 stimulus package was an appropriate response?

     

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    Solar Panel Comments

    Jan 11 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Environment, Government, International Trade and Finance • 302 Views

    Sometimes there’s much more behind a solar panel than you would expect.

    Solar energy was in the news because the U.S. Congress, hoping to support U.S. production, has prohibited the Department of Defense from buying Chinese made solar technology. And yet, Chinese made solar equipment is 20% cheaper than U.S. made solar equipment.  Choosing between deficit concerns and “Buy American,” you can see the answer.

    Like China, Germany is a major producer of solar panel equipment while the U.S. is not. And, like the U.S., Germany subsidizes solar panel purchases. One problem, though, is that Germany is not quite the right place for the panels. As one researcher said, “The lasting legacy is a massive bill, and lots of inefficient solar technology sitting on rooftops throughout a fairly cloudy country.”

    The Economic Lesson

    Incentives seem to be everywhere when looking at solar power. U.S. consumers buy more because the U.S. government gives them money for buying solar technology. Meanwhile, the Chinese government makes the panels cheaper by subsidizing their manufacture.

    A demand/supply graph perfectly illustrates the results. With price the y-axis and quantity the x-axis, supply shifts to the right as subsidies lower cost and encourage producers to make more. Meanwhile, demand shifts to right because buyers also receive subsidies. The result? For Chinese made solar panels, price is lower.

     

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    Mothers and Human Capital

    Jan 10 • Households, Innovation, Labor, Thinking Economically • 288 Views

    In The Wall Street Journal, a Chinese mother discusses her rules for her children which include: 1) only A’s, 2) no play dates, 3) no parts in school plays, 4) no TV,  5) no sleepovers, 6) play the piano or violin for several hours daily. Continuing with her rationale, she explains that she helps her children feel good about themselves because she makes sure that they excel.

    By contrast, according to this article, “Western” style childrearing emphasizes treating children’s psyches gently. They compliment and encourage. They leave room for individual decision-making and choices.

    Your comments about the different approaches?

    The Economic Lesson

    Defined as the education that makes us more productive, human capital can develop at home, at work, at school. As economists, we know that developing human capital is crucial for economic growth.

    Calling the 20th century “The Human Capital Century” in The Race between Education and Technology, Harvard’s Claudia Goldin and Laurence Katz discuss the spread and impact of universal secondary education. As the United States moved from mandatory primary education in a handful of states to universal, non-gender education through secondary school for everyone, the benefits spread far beyond the schoolhouse. Economists cite the correlation between education and technological progress, between education and health, and the summary result, between education and growth.

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    Banana Worries

    Jan 9 • Demand, Supply, and Markets, Developing Economies, Economic History, International Trade and Finance, Thinking Economically • 318 Views

    The banana could be in trouble. According to a New Yorker article and video, a devastating banana fungus has struck banana plantations in Asia, Australia and the Pacific. We should note, though, that we are referring only to the Cavendish banana.

    Did you know that while there are multiple banana varieties, virtually all bananas that are imported here are the Cavendish? And, we only have the Cavendish because its predecessor, the Gros Michel, was eradicated by a fungus. At the time, growers scrambled to find a substitute and selected the Cavendish. Less tasty but unscathed by the fungus, it became our banana of choice. Indeed, many of us eat more bananas than apples and oranges combined.

    So, what will happen? This takes us to banana R&D (Research & Development). On plantations and in labs, growers and scientists are trying to develop resistant strains of bananas so that the Cavendish can survive. So far, Latin American plantations, including Ecuador, a major Chiquita supplier, have not been affected.

    The Economic Lesson

    Banana R&D represents much more than advancing banana technology. It takes us to who does research and its importance.  For example, government funds research at universities, in the Department of Defense, and the National Institutes of Health. Through tax policy and patents, it encourages research in the private sector. Meanwhile, pursuing their self-interest, businesses ranging from pharmaceutical firms to banana growers engage in basic and applied research.

    Basic research has no direct purpose except to discover something new. Applied research is directed toward a specific objective. The development part of R&D refers to methods that move from discovery to production.

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    The Value of a Price Tag

    Jan 8 • Behavioral Economics, Demand, Supply, and Markets, Thinking Economically • 271 Views

    Asking, “Do More Expensive Wines Taste Better?” a group of researchers decided to find out. They described the results of their study in a working paper for the American Association of Wine Economists (AAWE).

    The researchers introduced their paper by citing studies that concluded people expect a “positive correlation between price and quality.” They then explained that their experiment involved “blind tasting” of wines whose prices ranged from $1.65 to $150. The results?  They differed between the non-experts and experts. For the non-experts, drinking unidentified wines, the less expensive wine was more frequently chosen as better. For experts, the opposite was true.

    (While other studies from the AAWE include a paper on wine investing and carbon and the global wine trade, one title particularly captivated me: “Can People Distinguish Pate from Dog Food?“)

    I recommend the Freakonomics podcast that described the wine tasting experiment.

    The Economic Lesson

    As economists, how might we describe the connection between a price tag and enjoyment? We can refer to utility. If a higher price increases enjoyment then we can conclude that it also increases utility.

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