• 16780_magnifying glass.11.30.11_000017107230XSmall


    Nov 30 • Demand, Supply, and Markets, Economic History, Households, Labor, Macroeconomic Measurement, Thinking Economically • 671 Views

    One online inquiry resulted in a research scientist happily cleaning an overflowing compost bin for $31. Someone else fished keys out of a sewer.

    Calling it “web-serfing,” the WSJ explains that “micro-labor” sites are matching requests for doing chores with people who want to do them. At online marketplaces, you just need to state your “micro-task.” The compost query was satisfied within 11 hours. The keys were retrieved much faster.

    The Economic Lesson

    “Manage our worm bin,” was all the woman looking for a compost cleaner had to post. An economist would say that she experienced minimal “search friction.”

    Search friction was the focus of the 2010 economics Nobel Prize winners. Composed of transaction costs that involve multiple forms, countless phone calls and long distance communication, search friction can delay a match between the unemployed and a job opening. Similarly, potential mates in marriage markets and home sellers and buyers in housing markets might not find each other. By contrast, matches in online micro-job markets are relatively effortless.

    An Economic Question: When someone receives $31 to do a job that might have been unpaid housework, how is the GDP affected?

    No Comments on Micro-Jobs

    Read More
  • Tax Revenue

    Greek Taxes

    Nov 29 • Financial Markets, International Trade and Finance, Macroeconomic Measurement, Thinking Economically • 872 Views

    Having added property taxes to electric bills, the Greek government is shutting off the power to people who do not pay what they owe.

    The response?

    • In a northern suburb of Athens, a mayor has assembled a group of electricians to reconnect people who lose their power. He has also made municipal attorneys available to defend tax “scofflaws.”
    • The annual tax obligations of one 86 year old man more than tripled. But he might not get any more bills because unions are occupying the power company’s billing center.
    • While government ministries still owe the power company more than $135 million euros, there are no plans to cut off their electricity. So, union workers shut down the Health Ministry’s power for 4 hours.
    • Sales of generators have risen.
    • Out of the 16,974 pools that satellite photos revealed in one affluent Greek suburb, only 324 homeowners declared them on a tax form.

    The bottom line? Yes, these are random stories that might or might not be entirely accurate. However, with the Greek GDP cascading, the euro zone faces a gargantuan and perhaps unsolvable fiscal challenge.

    Here is Merle Hazard’s “Greek Debt Song.”

    The Economic Lesson

    Off the books transactions that sidestep taxation compose a shadow or underground economy. For Italy, the shadow economy is estimated to total close to 20% of all economy activity while for Greece, maybe even 30%. In the US, 8% is the number that has been cited.

    An Economic Question: Some say higher taxes solve a fiscal crisis by increasing government revenue while others believe that by discouraging business activity, they diminish revenue. Your opinion?

    No Comments on Greek Taxes

    Read More
  • 16738_housefire.11.27.11_000016225579XSmall

    The First Credit Default Swap

    Nov 28 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Financial Markets, Government, Innovation, International Trade and Finance, Money and Monetary Policy, Regulation • 1098 Views

    Some of the euro zone’s problems actually started with the Exxon Valdez oil spill.

    After the 1989 Exxon Valdez calamity, when an Alaska jury said that Exxon owed $5 billion in damages, they asked J.P. Morgan for a $4.8 billion line of credit. Concerned about so large a loan, J.P. Morgan wanted to protect itself.

    So, they invented the credit default swap in 1994 at a J.P. Morgan “team-building” weekend in Boca Raton, Florida. A new kind of insurance, the credit default swap (CDS), was sort of like fire insurance that you could buy for a house you do or do not own. Instead though, the J.P. Morgan product insured different kinds loans that included money borrowed by businesses and by countries.

    Let’s fast forward to today. The CDS market has grown to more than $15 trillion. In the euro zone, the CDS has become a complement to bond buying. Does a bank want to purchase an Italian bond? To minimize its risk, it needs a corresponding CDS. How did we get from Alaska to Italy? That is another story.

    Here is a more technical description of a CDS.

    The Economic Lesson

    Selling bonds called sovereign debt, Country A is the borrower and a bank could be the lender. However, like J.P. Morgan and the Exxon line of credit, the bank then enters Country A’s CDS market to reduce its risk. If Country A defaults, the CDS seller pays the bank that bought the insurance.

    When investors buy Greek, Portuguese and Italian bonds can they buy the corresponding credit default swaps and “eliminate” their risk? It all depends on what “default” means.

    An Economic Question: Explain how credit default swaps might be good and bad for a nation with a history of loan defaults.

    No Comments on The First Credit Default Swap

    Read More
  • 16774_4.20_000002550398XSmall

    Happy Pecan Farmers

    Nov 27 • Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically • 654 Views

    With soaring demand from China and less supply in the U.S., you have some very happy pecan farmers.

    However, they have one big problem. Theft.

    Armed with ladders, pecan snatchers are shaking the trees in Georgia’s pecan groves, catching the nuts and then selling them to small roadside vendors. Farmers have hired guards to protect thousands of acres of their property.

    Demand is up in China because pecans have become an aspirational nut. Consumed by the more affluent, they are associated with more wealth and good health. Meanwhile, in the southern U.S., dry weather has lowered the pecan crop yield. You know the result. Pecan prices are way up, from $7 to $11 a pound since 2009.

    Faced with a similar price spike, hog producers in Minnesota and Iowa have had 150 pound pigs disappear from their farms.

    The Economic Lesson

    So high a price has meant pecan and pig poaching was worth the risk. We could say that the cost of a felony became relatively smaller as the benefit of the crime increased.

    An Economic Question: Referring to determinants of demand and supply, draw and explain graphs that illustrate the higher price for pecans.

    No Comments on Happy Pecan Farmers

    Read More
  • Dynamic Pricing for Tickets Displays the Power of Prices

    Broadway and Airlines

    Nov 26 • Businesses, Demand, Supply, and Markets, Economic History, Innovation • 866 Views

    Have you ever hesitated to book an airline reservation and, within moments, the price changed? Or, could you have known that delaying your purchase of a ticket to God of Carnage in LA last summer would have saved you almost $70?

    The reason is “dynamic pricing.” Airlines do it, hotels also, and now theater owners.

    According to the NY Times, Broadway theater owners are using dynamic pricing to cater to the “haves” and “have-lesses.” For airlines, that has meant vacationers paying much less than business travelers. Even for certain restaurants, you could pay more for Saturday evening at 8:00 than Tuesday at 9:30. With the LA example, early ticket purchasers spent $120 but when demand plunged, the price did also.

    With dynamic pricing a seat is not just a seat. It becomes a commodity that has to be used when available because you cannot store it. Its customers have different needs, its future demand is uncertain, and its providers have pricing power. Implemented appropriately, dynamic pricing maximizes revenue.

    The Economic Lesson

    Dynamic pricing is all about price elasticity of demand. If price changes a lot and the quantity we buy remains almost the same, as with medication, then our demand is inelastic. By contrast, if price swings have a big impact on buying, then our response is elastic. With Broadway shows and airline seats, certain consumers have an elastic response to higher prices; when price ascends they say, “No.” Others, the inelastic group, will buy no matter what.

    An Economic Question: Thinking of “dynamic pricing,” we could say that we have 2 demand curves among Broadway theater ticket buyers. Explain and draw.

    No Comments on Broadway and Airlines

    Read More