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    Banana Machines

    Oct 30 • Businesses, Economic Thinkers, Innovation • 353 Views

    It is tough to design a vending machine that will handle a banana gently. The temperature needs to be 57 degrees, a 4 foot fall to the consumer should be gentle, and they have to remain ripe for as long as possible. It gets even trickier when celery, which requires 34 degrees, is nearby. (It must have been even more difficult to make this vending machine for live crabs.)

    The first Post-It Note also was a developmental challenge. The problem was the adhesive. But when Art Fry, in new product development at 3M, heard about a temporary adhesive, the “sticky” was born.


    The Economic Lesson

    The private rate of return–the net amount a business gets from an investment–tends to vary considerably and can ultimately be nonexistent because of competition. Moving beyond its origin, as the impact of the innovation ripples through society positively and negatively, it creates a social return. Both are tough to calculate. Edwin Mansfield, a University of Pennsylvania economist (1930-1967) who studied the impact of innovation concluded that smaller innovations such as new industrial thread had a much greater social rate of return than products and processes that sound more dramatic.

    Maybe the banana vending machine will have more of an impact than we suspect?




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    Mankiw and Colbert

    Oct 29 • Demand, Supply, and Markets, Government • 342 Views

    For some smiles and econ also, the following links are fun.

    It all began with Harvard’s N. Gregory Mankiw’s NY Times op-ed column on higher tax rates. Explaining, he said that $1000 wisely invested, with no taxes, became $10,000 in 30 years. By contrast, letting the Bush tax cuts expire slices that $1000 to a $523 check which other taxes further deplete. The result? In 30 years, the amount grows to $1700. Knowing that he would have considerably less to save for his children could result, he said, in writing fewer columns.

    Stephen Colbert responded to Mankiw here. And, after that, Mankiw’s students replied to Colbert.

    Smiling at the exchange, we can also consider the debate about tax rates and see how Dr. Mankiw’s students used demand and supply to present the impact of Colbert on their teacher.

    The Economic Lesson

    In Teaching Company Lecture 3, from “History of the U.S. Economy in the 20th Century,” Professor Timothy Taylor describes a roller coaster of tax rates. Starting from a top 77% rate after World World I, rates then descended more than 40%. Taylor tells us that while tax rates fluctuated considerably, tax revenue remained remarkably constant then and at other times during the 20th century.

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    Dogs, Coach, and Cars

    Oct 28 • Demand, Supply, and Markets, Households, Innovation, Macroeconomic Measurement • 359 Views

    When you have extra income, what do you buy? In China, the more affluent consumer is buying dogs, Coach handbags, and cars.

    Banned in Beijing in 1983, only recently, the dog has returned as a new “best friend.” A stress reliever, a response to “one child,” and a status symbol, dog ownership in Beijing totals 900,000 and is rising. Correspondingly, dog treats, dog care, and pet parks all have growing sales.

    China’s middle class also is buying Coach handbags and cars. In its recent conference call, Coach said it is opening 4 new stores for a total of 49 in China. GM also identifies China as a source of sales growth.

    The Economic Lesson

    In the US, the consumer started to play a major role in the US economy during the 1920s. Buying cars, radios, and refrigerators for the first time, the consumer propelled economic growth.

    With their potentially gargantuan numbers, might a growing Chinese middle class stimulate growth at home and in the US?

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  • GPI Instead of CPI?

    Oct 27 • Financial Markets, Government, Macroeconomic Measurement, Money and Monetary Policy • 739 Views

    Your grandma cares about the CPI. If it indicates the price level is rising, then she will automatically get a COLA–a cost of living adjustment that elevates her monthly social security check.

    This video from NPR’s Paul Solman shows how CPI statistics are gathered. BLS (Bureau of Labor Statistics) staffers visit businesses. Every month they price melons, houses, cars and other goods and services. Try to imagine a CPI market basket filled with the typical things we buy. Look at where its price moves monthly and you have the CPI.

    Now, the FT reports that Google is doing something similar. Through virtually countless (virtual) transactions, they are creating their own price index. Rather then monthly, Google is collecting its data constantly.

    People complain about the accuracy of the CPI. Saying it affects everything from billions of dollars of Social Security payments to Federal Reserve decisions, they say it usually understates inflation. More accuracy would save us money.

    Is Google the answer?

    The Economic Lesson

    The CPI is one of the yardsticks used to measure inflation. Simply defined, inflation involves rising prices. If the same item has a higher price, then the money buying it is worth less. Typically, economists say an inflation rate of 2% or less is desirable. It is okay for something that costs $1.00 this year, to cost $1.02 next year and $1.05 the following year. With accurate inflation data, businesses can predict costs and revenue, consumers can easily adjust, and government can assess macroeconomic policy.

    Here, we discussed the other extreme inflation scenario.

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    The Price System: Pelicans, Professors, and Murders

    Oct 26 • Demand, Supply, and Markets, Environment, Thinking Economically • 396 Views

    Is a pelican worth $500? What is the value of a college professor? What does a murder cost us? Sometimes it’s tough to get a price.

    We know that BP owes money for wildlife lost on devastated wetlands. But how much? USA Today tells us that 2263 “visibly oiled dead birds” have been counted. A Planet Money podcast suggests that the $500 price tag for rehabilitating a pelican after the spill could indicate their price. Or maybe it’s the rate sheet for animal actors. Flying birds command $4500 a day (non-flying $1500).

    For college professors, the WSJ says that Texas is trying to calculate cost and benefit. The easy part is salary and expenses. The tough part is the benefit. Who is worth more, the researcher who attracts a million dollar grant, the philosopher, or the teacher who creates human capital that transforms the world. Aiming for fiscal prudence, some universities are looking for answers.

    One researcher tells us that one murder can cost society $17 million. Accurate? It all depends on whether you try to price the lost life, justice, prison, even new commuting routes when a sniper is sought. Why does it matter? Maybe it would be much more cost effective to do a better job preventing murders.

    The Economic Lesson

    The lesson here is not to take prices for granted. The price system provides crucial information. Prices tell us about value and efficiency and affordability. They let consumers and businesses and government decide what to do, what not to do, and what we can do better. Yes, “Absence makes the heart grow fonder.” Maybe we care more about prices when we cannot have them.

    Please note this post was slightly edited after it appeared.

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