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    Wheelbarrows of Money

    Apr 26 • International Trade and Finance, Money and Monetary Policy • 263 Views

    If your country’s currency is hyperinflating, then how do you buy bread? You can find a wheelbarrow or use another currency. During February, 2007, with an inflation rate exceeding 50% per month, the Zimbabwean economy experienced hyperinflation. Looking for purchasing power, people avoided Zimbabwean currency and turned to the U.S. dollar, the South African rand, Botswana’s pula, and the Zambian kwacha. One researcher estimated that in Zimbabwe, by November, 2008, prices were doubling every 24.7 hours. 

    With Zimbabweans just one of many people using U.S. currency throughout the world, and computers making counterfeiting increasingly simple, the U.S. government just issued a new, forgery resistant $100 bill. Yes, Ben Franklin is still there.  But, his shoulders were added, as you tilt the bill certain areas change color, and there is a blue 3-D “security ribbon”. On a government video, you can see the new bill. In a recent column, Floyd Norris pointed out that abroad, the $100 bill is preferred.

    The Economic Life

    Money has three basic characteristics. 1) It is a medium of exchange. 2) It is a unit of value. 3) It provides a store of value. Hyperinflation, the plunge in value of money, immediately affects whether money is acceptable as a medium of exchange, it diminishes the value of money, and it reduces its ability to store value. 

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    Can More Be Less?

    Apr 25 • Behavioral Economics, Demand, Supply, and Markets, Regulation • 246 Views

    At Starbucks, no one orders just a regular coffee, at the Gap, we look at easy fit or relaxed or straight leg, and when selecting health insurance, we think about deductibles and prescription drug coverage. Everywhere we have many choices.

    One experiment in a California supermarket focused on the impact of choice. Faced with six kinds of jam, 30% of the tasters bought a jar and walked out satisfied. By contrast, with 24 to sample, 3% made a purchase while 97% left with nothing. Why? The researcher concluded that there was too much choice.

    In a TED talk, psychologist Barry Schwartz suggests that too much choice leads to paralysis, dissatisfaction, and self-blame. His solution is income redistribution through which unhappy affluent consumers with too many choices transfer income to poorer groups with fewer alternatives. Disagreeing, libertarian writer Virginia Postrel says that satisfaction requires the choices that a market economy creates. 

    Your choice?

    The Economic Life

    Why should we care about choice research? Starting with health care reform, legislation can present the potential for many alternatives or few.

     

     

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    Creative Destruction

    Apr 24 • Businesses, Economic Thinkers • 315 Views

    Reading Ken Auletta’s recent New Yorker article on the iPad and the Kindle, I first thought of “the razor or the blade.” While Amazon loses money on books in order to sell Kindles, razors were precisely the opposite. Get a cheap razor, buy blades for a lifetime, and Gillette has an unending stream of revenue. Doing the opposite, Amazon has dominated e-book sales. 

    Amazon also broke other rules:

    Price taker or price maker? Six publishers control 60% of the business. These classic oligopoly stats mean that they should have control over price and yet Amazon was able to charge $9.99.

    A New Pie? According to Auletta, for a $26 hardcover book, the publisher gets 50% of each sale, pays the author 15% of its revenue, covers publishing expenses, and also accepts returned unsold copies. Now, with e-books selling for $9.99, the revenue pie has changed. 

    Which market? Instead of competing against other publishers, maybe now all media based activities have a toe in the same market with everyone vying for a piece of the consumer’s time.

    Perhaps the one rule that has not been broken relates to innovation. As entrepreneurs implement new ideas, existing firms will be forced to change or disappear.

    The Economic Life

    Joseph Schumpeter best explained the march of new ideas as creative destruction.  

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    The Ties That Bind Us

    Apr 23 • Economic Thinkers, International Trade and Finance • 176 Views

    Although Nairobi and London are 4228 miles apart, they actually are closely connected. The NY Times described the tie that was cut by volcanic ash.

    Kenyans supply gourmet vegetables and cut flowers to European supermarkets. When planes were grounded, so too were sugar snap peas, onions, and corn. Roses began to wilt and corn started to spoil. Daily shipments of two million pounds of produce were affected as were unneeded Kenyan packers and washers.

    Other trade connections we might not know? Please comment.

    The Economic Life

    Perhaps here we have a connection between Adam Smith, David Ricardo, the U.K. and Kenya. In his Wealth of Nations, Adam Smith explains the virtues of mass production and the need for “distant sale” which can only be achieved through a transport infrastructure and many buyers. Kenya developed so large a horticultural export sector because cargo planes could connect it with large affluent markets. And here is where Ricardo enters the picture. Markets that interconnect nations facilitate even more efficiencies through economies of scale and comparative advantage. 

     

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    Another Unregulated Market

    Apr 22 • Environment, Regulation, Thinking Economically • 241 Views

    Carbon offset markets are about thinking at the margin. Hoping to become the first carbon neutral state in the world, the Vatican bought carbon offsets. The U.S. House of Representatives funded an $89,000 purchase of carbon offsets. Before boarding, you can buy a carbon offset to compensate for emissions during a plane flight. In each example, someone was paying to create an “extra” environmental benefit (a forest that “inhales carbon dioxide”) in order to compensate for the marginal cost of environmental harm (airplane emissions). 

    Yes?

    Maybe.

    The market in which carbon offsets are sold is unregulated. Consequently, government is not directly checking whether sellers are actually creating the offsets that are purchased nor whether cost and benefit are connected. For example, in a recent Christian Science Monitor article, investigative reporter Phillip Martin found major deficiencies in the carbon offset market. Essentially he discovered that certain offsets never were created. 

    The Economic Life

    A market is a process through which demand and supply determine price and quantity of a good or a service. A recent paper from the Pew Center on Global Climate Change suggests that oversight of carbon markets should accompany current financial reform.

     

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