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    Disaster Economics

    Mar 19 • Businesses, Developing Economies, Economic History, Economic Thinkers, Environment, Government, Macroeconomic Measurement • 404 Views

    Assume an economy has been steadily growing. Then a natural disaster strikes, maybe a hurricane, an earthquake, or a tsunami. How is growth affected? While conclusions differ slightly, the consensus indicates that after 5 years and sometimes much sooner, previous growth levels return.

    Reuters and The Economist have good descriptions of why. In a disaster area, when physical capital is destroyed, potentially productive human capital remains.  Outside the area, underutilized plants and labor can compensate for lost capacity elsewhere. In addition, replicating productive facilities might be easier than designing new ones. And sometimes, destruction begets creativity that improves what had existed.

    We should ask, though, whether advanced economies are more likely to grow after a disaster because they have the resources to prepare for a crisis beforehand and recover after one. According to one study, advanced economies do fare much better after disasters than less developed economies. By contrast, a 2010 Inter-American Development Bank Study concluded that natural disasters do not ultimately change a nation’s growth trajectory unless radical political change occurred after the calamity.

    This NY Times Economix blog provides a good summary of existing articles.

    The Economic Lesson

    Born in Kharkov, Russia, a gentleman whose name was Simon Kuznets arrived in the United States in 1922. 26 years old, he soon went to work at the National Bureau of Economic Research.

    Dr. Kuznets became the Nobel Prize winning economist who developed the concept of national income accounting. National income accounting creates a national balance sheet that lets us know what is produced and the different incomes producers earn. Because of the work of Dr. Kuznets and his associates, we are able to calculate economic growth through the gross domestic product.

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    Soda Wars

    Mar 18 • Businesses, Demand, Supply, and Markets, Households • 674 Views

    Diet Coke just pushed Pepsi out of the #2 spot in soda sales.

    Other soda facts…

    As reported by Beverage-Digest, Coke (17%) remains the most popular carbonated soft drink with Diet Coke (9.9%) next and then Pepsi (9.5%) and Mt. Dew (6.8%). The number next to each brand is its market share. Fanta, a Coca-Cola brand, is last among the top ten names.

    As for each firm’s market share, Coca-Cola is at 42%, PepsiCo, 29.3%, Dr. Pepper Snapple 16.7% and Cott Corp., 4.8%. Among the “premium priced energy drinks,” Red Bull is first with a .8% share of the market.

    Total sales of carbonated drinks indicate that we are drinking less soda. Our consumption of the top three brands, Coke, Diet Coke and Pepsi declined. However, sales of Diet Mountain Dew and Diet Dr. Pepper were up. Similarly, we are buying more Dr. Pepper, Mt. Dew and Sprite.

    Should Pepsi have had a super bowl ad?

    The Economic Lesson

    Competing in an oligopolistic market, it is crucial for Coca-Cola, PepsiCo and Dr. Pepper Snapple to achieve product differentiation through non-price competition. An oligopoly is a market that typically has several large, mass producing dominant firms and many customers. Market entry and exit are difficult.

     

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    Presidential Pay and the GDP

    Mar 17 • Government, Households, Macroeconomic Measurement, Thinking Economically • 351 Views

     The Economist decided it would be interesting to know how a political leader’s pay compares to what a typical citizen from that country earns. Here are some of the numbers with salary first and then the multiple of per capita GDP next. I’ve approximated because the numbers are from a bar graph:

    Kenya: $486,000 (proposed), 240x

    Singapore: $2,183,516, 42x

    Indonesia: $124,171, 28x

    U.S. $400,000, 8x

    Israel $120,814, 4x

    China: $10,633, 2x

    You might want to look at this per capita GDP list to see worldwide poverty and affluence firsthand. Qatar is #1 ($145,300) while Burundi and Democratic Republic of Congo are last at #’s 228 and 229 ($300). The dollars are 2010 estimates.

    As a second step, you might check income distribution. In a list of 136 countries, Sweden is ranked as having the most income equality. Sweden ($39,000) is #23 on the per capita GDP list.

    The Economic Lesson

    GDP indicates the total value of goods and services produced in one nation during one year. Per capita GDP is GDP divided by population. Because these GDP figures are averages, it is helpful also to look at data that relates to inequality.

     

     

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    Selling Karma (With a Solar Roof)

    Mar 16 • Environment, Government, Innovation • 314 Views

    The Fisker Karma car has 2 electric motors, 1 Lithium-ion battery, and 1 internal combustion engine. Depending on the model, you can have a solar panel roof, do 0-60 mph in less than 6 seconds and reach a top speed beyond 125 mph.

    How?

    “…a small gasoline engine … turns the generator, which charges the lithium ion battery pack, powering the electric motor and turning the rear wheels.” The solar roof will help charge the car. 

    Soon, you can buy the Ecochic, Ecosport, or Ecostandard model. Here is the brochure.  Prices start at $95,900. Estimated annual cost saving (on gas) is $1500.00. The car looks amazing.

    In 2009, Fisker Automotive received a half-billion dollar loan from the U.S. Department of Energy to develop an affordable hybrid plug-in. The goal was a car that would sell for less than $40,000 that, Fisker says, will be available during 2012 or 2013.

    The Karma is the first step. 

    The Economic Lesson

    So, again we have the question. Through loans and outright spending, what should the federal government fund? Should Fisker Automotive have received a federal loan?

    This returns us to opportunity cost and how the money otherwise might have been spent or not spent. The most desirable alternative that was not selected is the opportunity cost of a decision. Choosing is refusing.

    We also should think about what you believe the federal government should and should not do. Should the federal government only fund necessities that the private sector would not support such as a transportation network? Or, should government pay for goods and services that a society wants? 

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    Now It’s Chocolate

    Mar 15 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance • 414 Views

    According to one recent news article, a Cadbury chocolate bar is missing 2 chunks but the price is the same.

    First we had a hedge fund trying to corner the cocoa bean market. Then came political turmoil in the world’s leading cocoa producer, the Ivory Coast. The result was the price of cocoa beans touching a 32-year high. Combine that with the rising price of sugar and you get either a smaller chocolate bar or one that is more expensive.

    With chocolate added to our list of soaring commodity prices, we can see that on the supply side, the reasons for soaring prices have varied. But, on the demand side, the response has been similar.

    The Economic Lesson

    For certain items, we buy much less when price rises and much more when it falls. At other times, our quantity demanded remains relatively stable, no matter where price goes.

    How we respond to a price change is called our price elasticity of demand. More technically, demand elasticity compares the proportional change in quantity demanded to the proportional change in price. We tend to display much greater demand elasticity for luxury goods than for necessities.

    Is chocolate a necessity?

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