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    When is 60 a Good Grade?

    Feb 2 • Developing Economies, Economic Thinkers, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically • 433 Views

    At 60.8 percent, the Institute for Supply Management’s (ISM) measure of manufacturing activity was way up, far more than anyone expected. Reflecting expansion, any number above 50 is good.

    So robust a number takes us to a question. If production is healthy and the U.S is  the world’s biggest manufacturer, then why do so many people say we just don’t make things anymore?

    Actually we do. It’s just not what we used to make. A Planet Money podcast said it perfectly when they went to a failing button factory and a thriving electronics connector company. The former was replaced by plants in China while the latter, requiring innovation and technology, is perfect for the U.S.

    Similarly, according to “Made in the U.S.A. Still Means Something,” we no longer make inexpensive dress shirts and microwave ovens. However, we do produce health care technology, chemicals, aircraft and space-related equipment. 

    You see where this is going. We do not produce what low cost labor can do better. Instead, we use technology to make more technology. The result is fewer people making more goods. These graphs perfectly show the inverse relationship between jobs and productivity.

    The Economic Lesson

    Both David Ricardo (1772-1823) and Joseph Schumpeter (1883-1950) would be saying, “I told you so.” Referring to comparative advantage, Ricardo would say trade, trade, trade, because each nation then can do what it does best and the whole world benefits through greater efficiency. Meanwhile Schumpeter would remind us that progress necessitates creative destruction through which outdated industries are replaced by new firms.

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    The Economic Response to Riots

    Feb 1 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance • 348 Views

    When the rioting starts, where does economic activity stop?

    In Egypt, gas and food were immediately affected. One owner of an Alexandria Mobil Station said he had not gotten a gas delivery for 2 days. The price of certain foods soared. One kilogram (close to 2 pounds) of beans moved from 35 cents to $1.70. Government subsidized bakers were also affected. No subsidies, no bread.

    Meanwhile, large containers remained unloaded at major ports. Evacuating their employees, Coca-Cola and other multinationals, including banks, temporarily closed their offices. Volkswagen canceled deliveries and tour groups canceled their plans. Trying to prevent further declines, officials closed the Egyptian stock market while the country’s credit rating has been downgraded.

    Still though, the one impact that could reverberate around the world has not happened. The Suez Canal remains open. A closed canal would add 10 days and 6000 miles to the length of oil shipments and further fuel an increase in its price. But, as one Forbes article points out, “floating storage,” the oil that is “sitting in tankers in the high seas,” would initially compensate for late deliveries.

    The Economic Lesson

    To get a picture of the government’s impact on the Egyptian economy before the riots began you might want to look at the Index of Economic Freedom where Egypt ranks 96 out of 179 countries. Here, the World Bank’s “Ease of Doing Business” index places Egypt at #94 from 183 nations. Last year though, it was #99.


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    Grandma and the City

    Jan 31 • Developing Economies, Economic Thinkers, Households, Innovation, Regulation • 420 Views

    In the U.S. 81% of us live in a city. Saying that cities generate more wealth, productivity and innovation, Brookings’ Research Director Alan Berube and Harvard’s Edward Glaeser applaud urbanization.

    In China, though, Grandma might not be so happy. More urbanization means less family cohesion. Offspring leave the farm for the city and leave parents and grandparents behind. Imagine this, though. China’s Civil Affairs Ministry is considering making adult children visit their parents. According to one article, if approved, the new mandate means parents can sue adult children who are insufficiently attentive.

    The Economic Lesson

    Cities facilitate spillovers. A spillover is just the spread of something, such as a new idea, beyond the spot where it originated.

    When a new idea easily spreads because firms are interconnected and people communicate more easily, we would say the spillover created a positive externality. That just means that an accomplishment that originally involved 2 entities, rippled outward to benefit many.

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    When Is A “B” Bad?

    Jan 30 • Financial Markets, Government, International Trade and Finance, Money and Monetary Policy • 485 Views

    A state would not call a “B” a good grade. The grade is a credit rating that relates to a loan. Triple-A usually means not to worry. On the other hand, a “B” says you might not get paid back.

    As you know, recently, credit ratings have been problematic because borrowers with high grades have defaulted on their loans. So, sort of like changing the rubric for a test, Moody’s is (slightly?) changing the way it judges states. As a result, New York and California are among the states that may get higher grades while Connecticut and Hawaii are two of those whose “grades” will decline.

    To assess the economic health of different states firsthand, you might want to look at these interactive maps on tax revenue, unemployment, foreclosures, and stimulus oversight from Pew’s Center on the States. You also could go to Moody’s or Standard & Poor’s website to look up a state’s grades.

    The Economic Lesson

    If not all borrowers are attractive, then why loan them money? The answer is price. The interest rate is the price of money. When a loan appears more speculative, then its price–its interest rate–goes up.  How does it go up? In money markets, we can observe supply (lenders) and demand (borrowers) at work. For a more risky loan, the supply curve shifts to te left and crosses demand at a higher “price”–interest rate. So, a lender might accept the risk because he or she is getting a higher price.


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    Oscar Markets

    Jan 29 • Behavioral Economics, Demand, Supply, and Markets, Financial Markets • 489 Views

    Can a crowd be smarter than an individual? In The Wisdom of Crowds, business columnist James Surowiecki, says “Sometimes, yes.” Starting with a crowd betting on the weight of an ox and ending with the crowd and democracy, Surowiecki looks at “collective intelligence.”

    At intrade or Hollywood Stock Exchange (HSX), you can decide whether the collective intelligence of the crowd is correct about probable Oscar winners. Participating in a prediction market, someone purchases a “security” that reflects an opinion about a future event. Reflecting the group’s opinion, more purchases push price upward. Currently, in the intrade and HSX futures markets, The Social Network, with the highest price among the nominees, is the front runner.

    At the Iowa Electronic Markets run by the University of Iowa Business School faculty, you can even vote on future fed funds rates.

    The Economic Lesson

    Surowiecki divides “collective intelligence” into 3 categories: cooperation problems, coordination problems, and cognition problems.

    Cooperation problems focus on how people work together. The issues they look at include legislative compromise (or gridlock) and getting a large group together for a dinner.

    Coordination problems display how many independent individuals impersonally coordinate their behavior. Examples would take us to rush hour traffic and stock markets.

    Cognition problems involve information that makes one answer more accurate than another. Predicting future monetary policy, the future weight of an ox, and who will win the Oscars are cognition problems.

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