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    Grading North Korea

    Jun 11 • Developing Economies, Thinking Economically • 241 Views

    Just like teachers, the writers of the Index of Economic Freedom give grades. Instead of students, though, countries receive their grades after being “tested” on such economic issues as starting a business, tax policy, and private property. The highest grades are earned by the countries that give citizens the most freedom to produce and distribute goods and services without government interference.

    For the 2010 Index of Economic Freedom, Hong Kong, with a grade of 89.7 was first. Ranked last at #179, North Korea’s score was “1”. The United States was #8 with an average of 78.

    A recent NY Times article illustrated why North Korea fared so poorly. Demonstrating a citizen’s lack of monetary freedom, the North Korean government devalued its currency last November. Suddenly, a family’s life savings of $1560 became $30 (4,050 North Korean Won). In the business sector, with all factories run by the state, production is stagnant and workers, sometimes, are not paid. In agriculture, (as with the former Soviet Union) individual plots of land are far more productive than large state-owned collectives. The results? The North Korean economic system has produced massive poverty and inadequate food.  

    The Economic Lesson

    Countries produce and distribute goods and services through three basic economic systems: tradition, command, the market system. North Korea’s centrally commanded economic system is government controlled. While the United States primarily has a market system in which people are free to function economically, still there is some command whenever government policies affect market activity.  

     

     

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    Starbucks or McDonald’s?

    Jun 10 • Behavioral Economics, Businesses • 1922 Views

    A recent Pew Research Center survey asked 2260 adults whether they would, “prefer to live in a place with more McDonald’s or more Starbucks.” 43% said McDonald’s; 35% said Starbucks; 22% had no preference. According to the study, a key variable is your political inclination. Liberals tend to favor Starbucks over McDonald’s.

    More specifically, if you are female, politically liberal, 18-29 years old, earn more than $75,000 a year, a college graduate, or religiously unaffiliated, you probably prefer Starbucks. On the other hand, a McDonald’s loyalist tends to be male, to earn less than $30,000, to have a high school degree but not college, and/or to be Protestant or Catholic.

    The Pew survey reminded me of research about economics majors that was in the news. Discussing the connection between education and civic behavior, a New York Fed Staff Report concluded that students who majored in economics tended to be Republicans. Taking a huge analytic leap, does that means that economists prefer McDonald’s?

    The Economic Lesson

    McDonald’s and Starbucks compete in monopolistically competitive markets. The characteristics of monopolistic competition include many sellers with a similar product, sellers creating an individual, unique identity, and sellers having some control over price. The competitive behavior of beauty salons, supermarkets, and clothing manufacturers is also shaped by a monopolistically competitive market structure.

    From most competitive to least competitive, the four basic competitive market structures are: perfect competition, monopolistic competition, oligopoly, monopoly.

     

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  • The Washing Machine Empowered Women.

    The GDP and Happiness

    Jun 9 • Behavioral Economics, Economic History, Gender Issues, Households, Innovation • 186 Views

    Yesterday’s post about the impact of individual wealth on happiness started me wondering about flush toilets, washing machines, and cars. As our nation became wealthier and produced more goods and services, how did that affect our happiness? To get some answers, I looked at Stanley Lebergott’s Pursuing Happiness: American Consumers in the Twentieth Century.

    Talking about a typical housewife in 1900, Lebergott says that she needed approximately 7 hours each week to do the laundry. During one year, for one child, she washed more than 4,000 diapers. Lacking modern plumbing (15% of all families had flush toilets), she hauled 9,000 gallons of water into the house annually. To do a wash, this woman had to boil the water, use her scrub board, wring out the water, hang up the clothes, and carry out the dirty water. The Model T? Not yet.

    Statistically, today’s economy can be described through trillions, billions, and millions: trillions of dollars of production, billions of dollars of government spending, millions of business firms. Compared with 1900, we are talking about longer lives, better health, and many more labor-saving devices. Is this more happiness? Lebergott says, “Yes!”

    The Economic Lesson

    The GDP is the money value of goods and services produced in one country during a specific time period. The four components of the GDP are consumption expenditures (consumer spending), gross investment (primarily business spending and residential housing), government purchases, and exports minus imports (usually a negative number). The consumer component is the largest segment of the U.S. GDP.

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    Money and Happiness

    Jun 8 • Thinking Economically • 198 Views

    Does money buy happiness? A 2006 report from the Pew Research Center said yes and no.

    If we compare income groups, the answer is yes. Almost 50% of people earning more than $100,000 annually said they were happy. However, as income levels dropped, so too did happiness. Only 24% of those who earned $30,000 a year said they were happy.

    Pew researchers, though, have been asking the same question for three decades during which per capita income has risen. As a nation, we are richer and yet happiness levels have remained constant. They did discover, though, that when we discover we are earning more than others, we do experience a pop in happiness.

    In another study Richard Easterlin investigated whether we experienced increasingly more or less happiness each time our income grew. If, he hypotheisized, our behavior paralleled typical economic behavior (diminishing marginal utility), we would display less extra happiness with increases in income. Instead, he found no marginal utility. There was no increase in happiness.

    I do suspect though that the recession has affected happiness for many of us.

    Your interpretation?

    The Economic Lesson

    When eating chocolate chip cookies, our total utility (satisfaction) usually increases. However, economists like to point out that the increase-the marginal utility- for each additional cookie is less and less. Numerically, we could say the first cookie gives us 10 units of utillity as does the second one. Then though, a third cookie might provide 3 units of pleasure and the fourth one only one unit of pleasure. Adding them all together, our pleasure is ascending. However, as we eat more and more, pleasure rises more slowly. Economists call this phenomenom diminishing marginal utility.

     

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    Health Care Reform and Sausages

    Jun 7 • Government, Regulation • 244 Views

    Now that we have a health care reform bill, I wondered about the next step. After a law is passed, how are the provisions implemented? A recent Washington Post article provided the answers.

    The next step unfolds in government offices where staffers decide what each provision means and how it will be applied. With more than 2,000 pages of provisions, for health care reform, the decisions are countless and the logistics unfathomable. According to the Washington Post, government staffers are arriving earlier, staying later, and seeing White House officials oversee key timing and content decisions.

    Immediately, $250 checks have to be sent to seniors because of Medicare’s drug benefit coverage gap, small businesses will receive a tax break in exchange for their employees’ insurance coverage, and insurers will have to let families keep adult children on their policies. The law prohibits an “unreasonable” premium increase but what is “unreasonable”? Because the law says that insurers have to spend premiums on improving members’ health, insurers have begun to reclassify activities as improving members’ health. Who determines their validity? Even agency names are being debated. Creators of OCIIO (The Office of Consumer Information and Insurance Oversight), for example, have to decide what to call themselves, “oh-sig-oh” or “C-C-I-I-O”. And this is only the beginning.

    Reading the legislation (H.R.4872 and H.R. 3590), I recalled that Otto von Bismarck said, “Laws are like sausages. It is better not to see them being made.” And we should add, “and implemented”.

    The Economic Lesson

    Fiscal polcy can be defined as the activities of the President and the Congress that relate to spending, taxing, and borrowing. It sounds so concise and clear until we look at health care reform and see how complicated fiscal policy can be.

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