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    Sounds Like Pistachios

    Dec 25 • Demand, Supply, and Markets, Economic Debates, Environment, Financial Markets, Thinking Economically • 350 Views

    “Remember the pistachios,” is a memorable line from a novel by economist Russ Roberts. In the first several pages of The Invisible Heart: An Economic Romance, a teacher says you have been given a room filled 5 feet high with pistachio nuts. The nuts are free, you are a nut lover, and you have only one rule to follow. The empty shells have to remain in the room. At first, you dive in. Eventually though, you are searching for uneaten nuts through mounds of empty shells. Finally, you stop looking. Why? It costs you too much time, energy, effort. It is “cheaper” to buy them.

    Reading “New Interest in Turning Gas to Diesel” reminded me of the pistachio nut story. With the price of oil climbing and natural gas still cheap, suppliers are developing the technology to turn natural gas into liquid fuel. As one commentator said, if oil climbs to $100 a barrel, “the conversion technology could be a ‘money- maker for whoever is a first mover in that space.'”

    Similarly, this Bloomberg article suggests that OPEC countries are concerned about $100 oil. Instead, they prefer a price that is closer to $80. Why? Sounds like pistachios.

    The Economic Lesson

    The price of a barrel of (light sweet) crude (for future delivery) varies on the supply side primarily because of production decisions from the Organization of the Petroleum Exporting Countries (OPEC). On the demand side, we have the world’s hunger for oil. In addition, some suggest that speculators investing in oil futures can have a significant impact on price.

    Responding to demand and supply determinants, the price of oil has changed considerably. On July 4, 2008, at $145.29, a barrel of light sweet crude futures touched a recent high. And yet, only 6 1/2 months later, on January 16, 2009, the price was down to $36.51.

    If the pistachio story is accurate, we will neither run out of oil nor have to worry about its price remaining high for too long. If supply is too low or demand is too high, price soars. Then, with so high an opportunity cost, we develop and use alternative fuels.

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    The Christmas Price Index

    Dec 24 • Demand, Supply, and Markets, Economic History, Macroeconomic Measurement • 348 Views

    You might want to check the CPI…the Christmas Price Index. Calculated by PNC for the last 27 years, it tells us the value of the items in “The 12 Days of Christmas.”

    This year, the PNC CPI totaled $23,439.38 for anyone purchasing one of each item. Repeating each item as the song suggests brings spending to $96,824. At the PNC CPI site, you can see a whimsical animation of the index here and check out how the index has fluctuated since it began.

    The Economic Lesson

    As economists, we should ask why the annual increase for the song’s gifts was 9.2% when the inflation rate has been closer to 1%.

    Looking specifically at the Christmas Index, we would see that most items were more expensive. The golden rings, for example, were up by 30%. We confirmed the increase here; the price of a troy ounce of gold, since January 2010, skyrocketed by 30% or so, moving from close to $1100 to approximately $1400. The biggest percent price jump, though, was the 3 French hens that, at $150, were 233% more than last year.

    By contrast, for the CPI, there was much more variety. Looking specifically, the contents of the CPI market basket appeared to offset each other. Fresh fruit, for example was cheaper while fresh vegetables were more expensive. The prices of new cars tended to decrease while used cars cost more.

    Using the rule of 70, a 1.1% annual inflation rate implies that prices will double (and currency value will halve) in 63 years. By contrast, an inflation rate of 5% means prices will double in 14 years. You can see why economists target an inflation rate that is closer to 2%.


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    The Cost of a Family

    Dec 23 • Economic History, Gender Issues, Households, Labor, Thinking Economically • 347 Views

    The cost of having a family has gone up and it has gone down.

    In its annual report on the average cost of raising a child in a middle income family, the Department of Agriculture said from 2008 to 2009, the amount has risen by 1%. A child born during 2009 is projected to cost $222,360 during its first 17 years.

    Looking at cost slightly differently, a recent report from Harvard tells us that some women are experiencing less of a cost in pay and flexibility when they select work and family. Summarized by the NY Times, the report says that technology related professions have the lowest “mommy penalties” and certain medical specialties come next. By contrast, the corporate and financial world lags.

    Still though, this report on wage trajectories for middle income women who work outside the home shows a flattening at child bearing. The overall wage loss during a lifetime is estimated at close to 30%.

    The Economic Lesson

    The opportunity cost of a decision is the next best alternative that is sacrificed.  We might say then that the opportunity cost of working and motherhood is working and not having children. Higher income and job promotions is what many working mothers sacrifice.

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    A Price Story

    Dec 22 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Households, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 422 Views

    Do you think that the BPP is more accurate than the CPI?

    Based at MIT, The Billion Prices Project (BPP) monitors close to 5 million items sold by approximately 300 retailers in 70 countries. Using the BPP, we can choose a country and then see, on a daily basis, what is happening to prices. In Argentina, for example, prices have been rising at an annual rate of 20% while in the U.S. the annual rate is closer to 2%.

    The Consumer Price Index, the more traditional yardstick of prices in the U.S., is a monthly statistic. Described in this Planet Money podcast, the data for the CPI is gathered by people who record prices for the same specific products, month after month. One person could be following a certain type of dress while another looks at grapefruits. With certain items given more (mathematical) weight then others, the goods and services in the CPI form an imaginary market basket whose price fluctuates. 

    Which type of yardstick should our government use for making policy decisions?

    The Economic Lesson

    When prices go up or down too much or too fast, they create problems. Businesses can’t plan for the future so they produce less. Consumers cannot plan so they buy less and save less. Workers experience vast swings in the purchasing power of the money they earn. When prices change too much, the information they represent becomes increasingly meaningless until, as in Zimbabwe, supermarkets refuse to stock their shelves.

    As discussed by Dr. Robert Whapples in a Teaching Company Lecture, economies function better when prices are relatively stable. To achieve price stability, monetary and fiscal policy makers need information from the CPI and other price indexes.

    So, when the price of gas rises from $1.40 to $3.00, drivers and policy makers respond.


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    Education Matters

    Dec 21 • Behavioral Economics, Economic Debates, Government, Households, Labor, Macroeconomic Measurement, Thinking Economically • 449 Views

    The NY Times tells us that students who graduate from “elite” colleges could be more likely than those at less elite schools to earn more and attend a prestigious graduate school. As a result, although the initial cost may be high, the benefit, during the long term, could be worth it.

    Moving from each of us to all of us, let’s ask which national education policies provide more benefit than cost. As economists, we will assume that the benefit of education is a more productive labor force that creates more economic growth. The cost would be the resources we allocate to education.

    Harvard professor Benjamin Friedman, in The Moral Consequences of Economic Growth tells us, “While there is widespread agreement that the quantity of schooling represents a good use of the nation’s resources, there is no consensus on how to improve the quality of education in America.” (p. 426) Yes, each of us would say that smaller classes, better teachers, up-to-date science labs are characteristics of a better education. However Friedman says, that “measurable aspects of schooling…such as class size…bore little…connection to students’ performance…on nationally standardized cognitive tests.” Instead, he suggests a greater emphasis on the appropriate performance incentives for teachers, students, and administrators.

    The Economic Lesson

    Benjamin Friedman and David Landes are two Harvard profesors who looked at the connection between education and economic growth.

    For Dr. Friedman, the connection takes us to a moral society. He believed that when the benefits of economic growth are shared by many, society will become more tolerant, more ethical, and more democratic. What fuels growth? Education.

    In The Wealth and Poverty of Nations, Harvard professor David Landes refers to education when he explained why certain nations have experienced an increasingly better standard of living than others. Among the variables he cites, physical capital (tools, buildings, machines) and human capital (education, entrepreneurship, and health) are most crucial for economic growth.

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