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    Venezuela’s Economic Problems

    Jul 20 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, International Trade and Finance, Macroeconomic Measurement, Regulation, Thinking Economically • 1050 Views

    Venezuela has 2 basic economic problems:

    1. The law of supply: Because price and quantity move in the same direction, if price goes down, then producers provide less. This takes us to Venezuela’s 27.1% inflation rate. President Hugo Chavez responded by controlling the prices of many consumer goods and services. One result? Importers pay the soaring world price for corn, they receive the Venezuelan government’s controlled price for corn oil, and supermarkets have shortages.
    2. The law of demand: Because price and quantity have an inverse relationship, consumers want to buy more when price goes down. Here, Marketwatch tells us that government subsidized gas prices are so low in Venezuela that President Chavez chastised Venezuelans for excessive driving. At $.12 a gallon, it costs $2.40 to fill a 20-gallon tank! Complementary products? Venezuela had unusually high Hummer sales.

    So, when, Transparency.org says that Venezuela ranks near the bottom on world corruption scores and the Index of Economic Freedom indicates business activity is limited by multiple government constraints, the results can be explained by supply and demand.

    The Economic Lesson

    This takes us to the three basic economic questions that every country needs to answer:

    1. What will be produced?
    2. How will goods and services be produced?
    3. Who will receive income?

    When government distorts supply and demand decisions by controlling prices, it changes the answers to the 3 economic questions.

    An Economic Question: How could price controls change the answers to the 3 economic questions?

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    Mixed Euro Zone Metaphors

    Jul 19 • Economic Debates, Economic History, Financial Markets, International Trade and Finance, Thinking Economically • 493 Views

    In this Economist podcast, journalists describe the euro zone debt crisis with a wonderful array of metaphors. (Directly and indirectly, I quote what they said.)

    • Minnows: The smaller peripheral nations in the euro zone, Greece, Ireland and Portugal are minnows.
    • The Big Fish: With the third largest economy in the euro zone, Italy is a big fish.
    • An Infected Core: The debt “illness” that has struck the euro zone has moved from the minnows on the periphery to a big fish at the core. Described as “too big to save; too big to let fail,” Italy has been a “stealth debtor” with sovereign debt close to 120% of its GDP.  Still though, like a family that has managed massive credit card debt for many years, Italy has successfully handled its obligations. However, if the Italian bond market has been “infected,” then the cost of borrowing could soar. The result? Italy will lose control of her fiscal responsibilities.
    • A Badly Dented Can: Thus far, euro zone leaders. coping with the tension between “political and economic imperatives,” have opted for short-term solutions. By “kicking the can down the road” they have badly dented it. Now, before it breaks, as the contagion spreads, they need a long-term resolution.
    • Fewer Days at the Beach: As a result, euro zone leaders will need to spend considerable time this summer developing a solution.

    The Economic Lesson

    Monetary policy involves the supply of money and credit. Fiscal policy takes us to spending, taxing, and borrowing. The euro zone oversees the monetary policy of its 17 member nations but not their fiscal policy. And therein lies the problem. Monetary policy and fiscal policy are closely related. Banks buy sovereign debt.

    An Economic Question: How are U.S. fiscal and monetary policy in the U.S. related and yet also separate?

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    Finding Food Deserts

    Jul 18 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Environment, Government, Households, Macroeconomic Measurement, Regulation • 515 Views

    Having just learned that the US Department of Agriculture (USDA) has a food desert website, I am not sure how we should respond.

    The USDA tells us that in a food desert most low-income households have limited access to a supermarket or grocery store. In the U.S. 13.5 million people live in food deserts. The USDA states that by knowing more about food deserts, we can facilitate private-public action to eliminate them. This map shows where we can find the food deserts in the U.S.

    Describing the food desert initiative, The Economist tells us that the USDA admits that they and other experts have uncovered no causal link between dietary habits and food deserts. Furthermore, a food desert might be home to healthy food stores but no supermarkets. In a food desert located close to Seattle, Washington, residents have easy access to organic food, grains, and fruits and vegetables at a roadside farm stand, a health food shop, and a “superstore.” Finally, based on obesity studies, we should ask whether people buy nutritious food when given the opportunity to purchase inexpensive processed foods and sodas.

    Although the food desert concept is flawed, it does return us to the problem of how Americans eat. With two-thirds of all adults in the U.S. overweight, medical care, productivity, transportation, and human capital suffer. Discussed in a recent Brookings Institution paper, whether looking at extra sick days, extra fuel costs, or less education, the cost of obesity affects our economy.

    The Economic Lesson

    An externality is the impact of a behavior or contract that is experienced by a third uninvolved party. When the impact on third parties is undesirable, as with obesity, we call the result a negative externality. A benevolent impact on an uninvolved third party is called a positive externality. A community experiences the negative externality of individual obesity.

    How to diminish a negative externality? Increase its source’s cost. Might food desert information assist us here?

    An Economic Question: Have you experienced a negative externality that relates to obesity? Explain.

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    Amazon vs. California

    Jul 17 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Regulation, Thinking Economically • 541 Views

    According to the Seattle Times, in 1996, Amazon’s CEO, Jeff Bezos said, “You have to charge sales tax to customers who live in any state where you have a business presence. It made no sense for us to be in California or New York.” Amazon’s home? Seattle.

    Bezos was referring to a 1992 Supreme Court decision that said states could not ask out-of-state retailers with no local physical presence to pay a sales tax. Consequently, Amazon pays sales taxes to Kansas and Kentucky, North Dakota, and Washington because it has stores or offices there. Amazon claims it has no physical presence in California.

    Using a broader definition, California disagrees.

    Because Amazon has relationships with in-state affiliates that direct business to it, California says that Amazon will owe local sales taxes. Amazon responded by eliminating those affiliate relationships. In addition, Amazon has petitioned California to schedule a June referendum. Once Amazon gets 500,000 signatures, voters can decide whether California can keep its e-commerce tax.

    You can see that we have here a much bigger issue. Should e-retailers charge sales tax? Local retailers say Amazon has an unfair advantage. The state of California desperately needs more revenue. On the other hand, as a growth sector of the economy, should e-commerce receive favorable treatment? And, through local taxes, are states obstructing interstate commerce?

    The Economic Lesson

    Citing the U.S. Constitution’s Commerce Clause, in Quill Corp v. North Dakota, the U.S. Supreme Court sought to limit when states could tax out-of-state businesses. Here, you can see the Court’s decision.

    An Economic Question: Referring to opportunity cost, agree or disagree with Amazon’s Los Angeles customers paying an 8.75% tax.

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    Grade Inflation

    Jul 16 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 566 Views

    Recent research indicates college students are studying less. Between 1961 and 2003, full time college students diminished their study time from 40 to 27 hours a week. And yet, they have been getting higher grades. In 1940, 15% of all students got A’s. In 2008, the proportion was 43%.

    Are we smarter? Researchers think not. Instead, they attribute the grades to more “consumer awareness” among professors. Professors who give higher grades are more likely to receive better student evaluations. Their course sign-ups rise. Their students have a better chance of getting into competitive graduate programs.

    There is only one problem. A grade conveys information. If 43% of all grades are A’s, what does it mean when a student gets an “A” in a course? Is that student doing the best work?

    The Economic Lesson

    During the 1950s, Brazil printed a lot of money to pay for building Brazilia, their new capital. With more currency circulating, too many Cruzeiros were chasing too few goods and inflation developed. Expecting it to continue, businesses raised prices, workers wanted higher wages, and consumers made purchases sooner. The result? Price and wage hikes accelerated. Finally, by the early 1990s, according to Planet Money, the monthly inflation rate was 80%. That meant that during 1 month, the price of a $1.00 carton of eggs would become $2.00.

    Like grades, prices convey information. When a monetary system is working well, a higher price means something–maybe better quality? Popularity? Shortages? With runaway inflation, Brazilian prices became meaningless.

    Brazil finally solved its inflation crisis by introducing an entirely new currency. Will grade inflation require the same solution if we want to “price” human capital more accurately?

    An Economic Question: Why and how would you control grade inflation?


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