• The Panama Canal Project Facilitates World Trade.

    The Fabric of Free Trade

    Oct 14 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Thinkers, International Trade and Finance, Labor, Macroeconomic Measurement • 572 Views

    The roof of the big-box store near your home could contain fabric that was made in Greensboro, N.C. Transported in rolls that are 12 feet wide and 5,000 yards long, this material is also made in South Korea.

    Until now, U.S. textile firms could compete against a cheaper South Korean product through faster delivery and customer service. Explained by the NY Times, the U.S./South Korea free trade agreement that Congress just passed would eliminate any advantage U.S. firms had created because lower tariffs will mean even lower prices. 

    Here in a past econlife post is more about KORUS (Korean-U.S. Free Trade Agreement). And here, the U.S. government presents the benefits of free trade and details our free trade pacts.

    The Economic Lesson

    Free trade always seems to take us to the visible and the invisible. We can easily identify the lost jobs. However, it is tougher to quantify the jobs created by exports and the money consumers and businesses save from cheaper imports.

    Combining Adam Smith (1723-1790) and David Ricardo (1772-1823), we can see why most economists support free trade. In a factory, Adam Smith says specialize through division of labor. When each worker has a specific task, output multiplies. Increasing output requires bigger markets in order to sell what has been produced.  As mass production enables us to move from local markets to regional specialization to free world trade, as David Ricardo explained, the world benefits. Here is a great econtalk podcast that connects Smith, Ricardo and trade.

    In a 2006 survey, 87.5% of all PH.D members of the American Economic Association said yes to free trade by agreeing that “the U.S. should eliminate remaining tariffs and other barriers to trade.”

    An Economic Question: Would you support free trade if, by subsidizing its exports, a country made it impossible for U.S. firms to compete? Explain.

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    A Boost for St. Louis?

    Oct 13 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Households, Labor, Macroeconomic Measurement, Thinking Economically • 540 Views

    Business at Big Daddy’s tavern will spike 30% this evening during the Cardinals/Brewers playoff game and squirrel shirts are selling like hotcakes. Add hot dog and beer sales, parking revenue, gate receipts to the team, out-of-towners spending, and…you know. Demand will surge for all the stuff sold in and around Busch Stadium. The result? An economic boost.

    Yes? Not necessarily.

    Some sports economists believe spending is just shifting. One movie theater owner says his sales will plunge by 50%. He loves his team but, “The sooner they lose the better.

    Others say that the spending on hotels and car rentals is overestimated. In his “reality check” paper on mega sports events spending, economist Victor Matheson cites Denver’s projections for the National Basketball Association (NBA) All-Star Game in March, 2005. Starting with an estimated 100,000 visitors, local officials predicted a massive ripple of spending. Matheson points out that Denver had 6,000 hotel rooms and the Pepsi Center where the event would occur seated 20,000.

    The bottom line? For the Olympics, the Super Bowl, the World Series, for any “mega” sports event, spending might not be close to projected amounts. In addition, congestion, vandalism, and the cost of public safety could be considerable.

    The Economic Lesson

    To what extent can we assess benefit and cost for a major sports event? We tend to have a benefit bias when estimating spending and the pleasure and pride of the event is not quantifiable. And yet, the cost in switched spending and tax-payer funded public services could be high.

    An Economic Question: For a “mega” sports event would you agree or disagree with the people who say that economists know the price of everything but the value of nothing?

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    Peanuts or Cotton?

    Oct 12 • Businesses, Demand, Supply, and Markets, Thinking Economically • 579 Views

    Farmers decided to plant fewer peanuts when cotton prices soared. The result? Now peanut prices are skyrocketing. Here is the story.

    Perhaps it all began with higher cotton prices. Responding, peanut farmers switched some acreage to cotton. Combine that decision with an unusually dry growing season in Georgia, the leading peanut producer, and too many scorched nuts and what do you get? A peanut shortage.

    What will happen because of the peanut shortage? Peanut butter will cost us 40% more. And, to be sure they have enough of their basic peanut butter products, Smucker, the world’s largest peanut buyer, has temporarily stopped producing its reduced-fat creamy spread.

    The NY Times said we had an acreage war between food and clothing. And here, a past econlife post discusses cotton prices.

    The Economic Lesson

    The peanuts story is a classic economics tale. On a supply and demand graph, the supply curve shifts upward and to the left when producers switch to a more attractive alternative. The result is less supply and a higher price.

    An Economic Question: Now that peanuts are so pricey, what might you predict is the next supply curve move?

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    October Stock Markets

    Oct 11 • Businesses, Economic History, Financial Markets, Macroeconomic Measurement, Money and Monetary Policy, Regulation • 519 Views

    During October 1907, when the stock market crashed and the banking system panicked, we had no central monetary authority. We just had J.P. Morgan.

    • “Why don’t you tell them what to do, Mr. Morgan? (Belle da Costa Greene, J.P. Morgan’s personal librarian)
    • “I don’t know what to do myself, but sometime, someone will come in with a plan that I know will work; and then I will tell them what to do. (J. Pierpont Morgan)

    Here is a description of events that preceded the 1907 panic:

    “A … moralist was in the White House. War was fresh in mind. Immigration was fueling dramatic changes in society. New technologies were changing people’s everyday lives. Business consolidators and their Wall Street advisors were creating large, new combinations…The public’s attitude toward business leaders, fueled by a muckraking press, was largely negative. The government itself was becoming increasingly interventionist in society…Much of this was stimulated by…economic expansion.”

    Sounds familiar.

    (Quotes are from The Panic of 1907, pp. 2-3; 97)

    The Economic Lesson

    On October 1, 2008, the Dow Industrial Average closed at 10,831. Only 10 days later, it was at 7773.71.

    1907, 1929, 1937, 1987 also had October plunges. With 16 stock market crashes during the 20th century, October has had a disproportionate share.

    An Economic Question: During 1907 and 2008, the GDP declined. How might stock market crashes and banking panics relate to a contraction in the economy? 

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    Real Food Commercials

    Oct 10 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Households, Innovation, Labor, Regulation, Thinking Economically • 472 Views

    The place is a Manhattan film studio. The star could be a donut, ice cream, or a chicken nugget. For a spaghetti sauce shoot, the director says, “Lights. Roll. Action. Drip.”

    Described in this NY Times article, tabletop directing is a “micro-niche” segment of the advertising world. With Applebee’s, Papa John’s and McDonald’s the typical clients, the dollars for these TV commercials are massive.

    And so too are the challenges. Ice cream melts under hot lights and spaghetti is slippery. Showing the steam from hot soup can be as tough as differentiating a donut from everyone else’s.

    To create a new reality, the tabletop director replaces the ice cream with lard and glues the spaghetti to the fork. For piping hot soup, he uses steam-making machines while a mechanized food-tosser enables a donut to cascade through a spray of sugar. As a result, the food looks more authentic and appealing.

    The Economic Lesson

     Is tabletop directing a wonderful example of the market’s creativity or a truth-in-advertising issue? Here, again, we have a tension between the freedom of the marketplace and regulation.

    You might enjoy looking at this story about Campbell’s Soup, marbles, and a group of law students that called themselves Students Opposed to Unfair Practices.

    An Economic Question: To make food look real and attractive in commercials, to what extent should ad people be able to modify the product?

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