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    The (GDP) Gap

    Jan 3 • Developing Economies, Economic History, Macroeconomic Measurement • 713 Views

    With the U.S. #1 and China #2, people are starting to wonder when the U.S./China GDP gap will disappear. Here, at the Economist, you can create your own prediction. Just input assumptions about GDP growth rates, inflation and the yuan’s relationship with the dollar and then watch where the 2 nations’ GDP lines cross.

    For more of an historical perspective, here, you can look at a new Peterson Institute book, “Eclipse: Living in the Shadow of China’s Economic Dominance.” Graphs on pp. 46 and 47 tell the whole story. In 1870, the top 3 economically dominant countries were the U.K., France and Germany. By 1929 though, the U.S. bar on the graph starts to soar. Russia makes a brief appearance after WWII but within several decades, the U.S., Japan and China remain.

    For further insight, you might listen to the Teaching Company’s “Why Economies Rise or Fall.”

    The Economic Lesson

    It can be tough to compare economies. Even if GDP comparisons use the same components (consumer spending, business investment, government spending, and exports minus imports), still we have to remember that purchasing power differs. Also, we can use per capita (per person) comparisons and other individual standard of living yardsticks.

    But, here are some comparisons:

    Ranked by 2010 GDP, the U.S is #1 (close to $15 trillion), China is #2 (close to $6 trillion), and Japan is #3 (close to $5.5 trillion). Completing a list of the top 11, then we have Germany, France, the U.K., Brazil, Italy, India, Canada, and Russia.

    An Economic Question: Using the Economist calculator, when do you predict that the Chinese GDP will surpass the U.S.?

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    Presidential Futures

    Jan 2 • Behavioral Economics, Demand, Supply, and Markets, Thinking Economically • 627 Views

    The prices of buy and sell contracts for the Republican presidential candidates in Iowa provide a good history of the beginning of the primary race.

    Romney contracts (max of $1) on the first and last day of each month since September 1 were:

    This is how the market works:

    The Iowa Electronic Market (IEM) indicates the probability that a candidate will finish in the top 2 in the Iowa caucuses. So, a 22-cent contract displays a 22% probability. Like any market, the price representing a Romney victory fluctuates because of supply and demand.

    Explained on the IEM website, “Contracts for the correct outcome pay off at $1; all other contracts pay off at zero. As a result, the price of the contract at any given time is the probability that the traders believe that event will happen.” The maximum investment is $500.

    Polls or Markets? This study says the markets were more accurate than polls 3/4 of the time between 1988 and 2004.

    The Economic Lesson

    Former Secretary of the Treasury Lawrence Summers said that the most important idea to learn about the U.S. economy is “the power of the market.” As a process that creates prices and quantities for goods and services, markets are a source of information and incentives for businesses and consumers.

    Through their price making mechanism, prediction markets might also be a forecasting tool.

    An Economic Question: Here, the Iowa futures are shown for the 2012 presidential election. What do the numbers display?

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    New Year’s Resolutions

    Jan 1 • Thinking Economically • 507 Views

    If one of your New Year’s resolutions is to “think economically,” please remember this top ten list:

    10. Whatever the question, always answer, “There’s no such thing as a free lunch.”

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    The Good Life…For Cows

    Dec 31 • Businesses, Demand, Supply, and Markets, Developing Economies, Environment, Households, International Trade and Finance, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 635 Views

    I suspect that the life of a cow producing organic milk got better last June. For their owners, though, business surely became more complicated.

    According to a new USDA rule, any milk labeled organic now has to come from a cow that spends much more time in the pasture. Their diet also has to have a pasture related minimum and, as always, no hormones, no synthetic pesticides, no genetically modified seeds. Described by the LA Times, these cows’ lives will be “au natural.”

    Organic dairy farmers, though, are not as happy.

    • Demand: It sounds like a roller coaster. When the 2008 recession hit, organic milk sales plunged and the industry had to cut back. Now, during the first 3 quarters of 2011, sales rose 17% compared to the same period a year ago.
    • Supply: In addition to complying with the new USDA rules, farmers have faced soaring feed costs. In the U.S., ethanol production, and in China, a middle class eating more meat, helped push corn prices upward. Pricy corn became the incentive for using other grains whose prices then increased also.

    With demand surging and supply more costly, price goes up. However, there is one more variable. Farmers claim that the cooperatives where they sell their milk are not paying them more. As a result, some organic farmers are switching back to conventional farming. So, in addition to the price rise, we have quantity descending and supermarket shortages.

    The Economic Lesson

    The history of organic farming is a classic cost/benefit story. Especially considering how antibiotics and pesticides spiked productivity and led to a cheaper and varied food supply, the costs and benefits of organic production are fascinating.

    An Economic Question: What demand/supply graph might you draw to illustrate the current plight of the organic dairy farmer?

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    Are X-Men Human?

    Dec 30 • Demand, Supply, and Markets • 658 Views

    The U.S. government had to decide whether X-Men are human.

    Our story starts with the U.S. Customs office. Included in a very long list of items that enter the U.S. are “dolls” and “toys.” According to Customs officials, any figure that clearly represents a human being is a doll; if not, then it is a toy. Importers care about the difference because the tariff on dolls (12%) is much higher than toys (6.8%).

    And that takes us to Marvel Comics. While we all can agree that Barbie is a doll, what about action figures? The U.S. Customs office said action figures are dolls; Marvel disagreed. This Radio Lab podcast wonderfully describes the issues.

    Marvel won its case in court. Similarly, because Luke Skywalker could resist the force and was captured by a Wampa, a court also said he was a toy. By contrast, G.I. Joe was declared a doll. 

    The Economic Lesson

    When looking at tariffs, as economists, we should check the cost of the jobs that were saved. This 2002 Dallas Fed report concluded that each year, a tariff on sugar costs consumers $1,868 million in higher prices. More specifically, each one of the 2261 jobs that was saved costs $826,104 annually.

    An economic question: Explain why tariffs generate considerable support even when their cost is high.

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