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    Putin’s Economics

    Apr 29 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Thinking Economically • 476 Views

    Our story begins during February when Russian Prime Minister Putin decided to freeze gasoline prices. Oil companies had a predictable response.

    They left.

    Following the money, they redirected their supply to higher prices elsewhere. The result? Russian gasoline exports were 40% higher than last year at the same time.

    A second result? The Russians (almost) ran dry.

    So now, the Prime Minister is banning exports during May for “high octane petrol sold at the highest prices.” Also, he is upping export duties and cutting local sales taxes.

    The Economic Lesson

    Demand and supply graphs continue the story. With price our Y-axis and quantity the X-axis, draw an “X” as the lines on your graph. The downward sloping line is demand and the upward sloping line is supply. Next draw a horizontal line below equilibrium, the point where the demand and supply lines meet. This line, called a ceiling (because it stops prices from rising), illustrates why we get a shortage. The distance between the point that the ceiling crosses supply and the point that the ceiling crosses demand represents the size of the shortage. A shortage is precisely what Mr. Putin created.

    Now with export taxes, he is making supply more expensive. Then, typically, the supply curve shifts to the left and upward. And producers decide to supply less.

    An Economic Question: The Prime Minister’s goal is to make consumers happy. Will he be successful? Hint: Think about price and quantity.

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    Health and GDP

    Apr 28 • Developing Economies, Economic Debates, Economic History, Economic Thinkers, Households, Innovation, Labor, Macroeconomic Measurement • 464 Views

    We are taller, healthier, heavier, and living longer. In 1790, a typical Frenchman weighed 110 pounds. Now, the scale says 170. That 60-pound difference relates to a lot more than food.

    According to a new book from Nobel prize winning economist Robert Fogel and several colleagues, since 1700, as one generation became healthier and stronger, so too were their children. As the authors explain in their first chapter, “…increased health and longevity enable the members of that next generation to work harder and longer and to create the resources which can then, in their turn, be used to assist the next, and succeeding, generations to prosper.” (p. 2 in an Amazon preview)

    Connecting what we look like to what we have achieved is a fascinating thesis. Simple and yet complex, the book talks about height and weight and food and productivity, economics, biology, and technology. The NY Times tells us that it presents a wealth of data, potentially controversial conclusions, and implications for foreign aid. The Changing Body: Health, Nutrition, and Human Development in the Western World Since 1700 will be available during May. 

    The Economic Lesson

    Called anthropometric history, the history of human height has become an economic field of study. Economists use height data to form hypotheses about GDP.

    An Economic Question: During the 1930s, a typical life span was close to 60 years. Now, many of us will approach 80 and beyond. A result and a cause of increasing longevity, GDP positively interacted with better health. Now though, with baby boomers living longer, will our GDP growth diminish?

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    A Tank of Gas

    Apr 27 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Environment, Households, International Trade and Finance, Macroeconomic Measurement, Thinking Economically • 602 Views

    A tank of gas is not just a tank of gas.

    Isn’t it a spending decision? The national average for a gallon of regular is close to $3.88 and higher in California. July 2008 was the last time we dealt with 4 dollar gas. One economist estimated that 4 dollar gas cuts our discretionary income by 5%. That means less to spend on meals, vacations, clothing, and furniture.

    Also, a tank of gas represents much more than crude oil. If you imagined the price of gas as a pie, then a 68% slice is for the oil. Add in 12% for taxes, 7% for marketing and distribution, 13% for refining and you get the 4 dollar total.

    What else can an expensive tank of gas mean? With higher gas prices, AAA emergency gas deliveries to stranded motorists are soaring. Higher gas prices could lead to .5% less GDP growth. And, President Obama’s popularity is affected by gas prices.

    The U.S. Energy Information Administration website has great stats about any gas fact you need. Also, you might enjoy looking at this Washington Post poll about how high gas prices have to go before we drive less.

    The Economic Lesson

    Gas provides perfect examples for econ vocabulary. With the price of a gallon of regular gas close to $4.00, the opportunity cost of running on empty has diminished. 4.00 gas also affects our discretionary spending. And, of course, it all starts with elasticity. At what price will we buy less gas? Many have said that $5.00 is the point at which our inelastic demand becomes elastic.

     

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    Money and Happiness

    Apr 26 • Behavioral Economics, Developing Economies, Economic Debates, Households, Innovation, Thinking Economically • 405 Views

    It is possible, after all, that money can make us happy.

    A recent Brookings paper from 3 University of Pennsylvania researchers concluded that people experience greater “subjective well-being” or life satisfaction when they are more affluent. Comparing rich and poor individuals in countries, they found that the rich were happier. Looking from one nation to another, they concluded that people in nations with a higher per capita GDP were more satisfied than those in lower per capita GDP countries. And finally, with economic growth their third focus, they observed that people became more satisfied with their lives as the GDP increased.

    You might enjoy this CNBC interview of the researchers who concluded that money does make us feel better.

    How do you measure happiness? You could look at the World Values Survey a recent Gallup World Poll, or Eurobarometer information to see data that researchers have used. For example, they actually found that in richer countries, people smile more. (But they did not experience more love.)

    The Economic Lesson

     Not everyone agrees that money brings happiness.

    For economist Richard Easterlin, measuring the connection between money and happiness takes us to diminishing marginal utility. Easterlin says that as wealth accumulates, it bestows increasingly less extra satisfaction. Believing that that pleasure from wealth is relative, he also expressed the Easterlin Paradox. As long as you have more than your neighbor, you feel good.  Consequently, rich or poor, people just need to have more than someone else to feel good. 

     

     

     

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    “Buy Australian?”

    Apr 25 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically • 499 Views

    In Australia, concerned about the impact of twin disasters in Queensland this summer, Australia is saying, “Buy Australian.”  But they just faced an unexpected problem.

    The T-shirts they are using to publicize the campaign were made in Bangladesh and the U.S. Buying Australian made T-shirts would have cost up to $10.00 each. The Bangladesh T-shirts were $5.12.

    Is that bad?

    It depends on who you are. Shirts North, a T-shirt seller in Cairns, was unhappy. Consumers and taxpayers, though, should have been pleased.

    Nobel prize winning economist Milton Friedman (1912-2006) would have reminded Australians that buyers were saving money on cheaper imports while sellers would create new jobs in exporting industries. Commenting on publicity received by the local businesses harmed by floods, he would have called them “visible.” By contrast, consumers are “invisible.” Anonymous and invisible, the millions who benefit typically have no newsworthy evidence.

    The Economic Lesson

    David Ricardo (two hundred years ago) 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 (where it has the comparative advantage) and the whole world benefits through greater efficiency.

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