• GPI Instead of CPI?

    Oct 27 • Financial Markets, Government, Macroeconomic Measurement, Money and Monetary Policy • 902 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 • 453 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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    Stocks and Tweets

    Oct 25 • Behavioral Economics, Financial Markets • 409 Views

    An Indiana University researcher thinks he has confirmed that mood and stock market movement correlate. The results, though, were not what he expected.

    1) Originally, he and his students thought that they would discover a positive relationship between the direction of the Dow and Twitter sentiment. However, the connection was not sad tweets on down days and happy ones after the Dow went up. It was “calm vs. anxious.”

    2) The big surprise was that their original prediction was backwards. Looking at millions of tweets for emotional indicators, they discovered that the tweets came first. A slew of calm tweets meant the Dow would probably rise. Anxious tweets and it fell. Their accuracy? An 86.7% success rate.

    Can Twitter be used to predict the Dow?

    The Economic Lesson

    The Dow Industrial Average is an index number. Computed through a formula that uses the stock prices of 30 large companies, it provides an indication of the direction of financial markets for a specific time.

    Stock price movement is one component of the Index of Leading Indicators that is compiled by the Conference Board. As a “leading indicator” it helps predict where economic activity is heading.

    Is Twitter sentiment a leading indicator of a leading indicator? You might find an answer in A Random Walk Down Wall Street by Princeton professor Burton Malkiel.

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    Healthy Incentives

    Oct 24 • Behavioral Economics, Businesses, Macroeconomic Measurement, Regulation, Thinking Economically • 439 Views

    What happens in a school cafeteria when apples are placed in bowls rather than on a metallic pan? Sales more than double. Require trays? Students eat 21% more salads. Call corn “creamy” and more people ask for it. As displayed by the NY Times op-ed, “Lunchline Redesign”, school lunch decisions change when the incentives change.

    This takes me to a recent Brookings Institution paper on obesity. With two-thirds of all adults in the U.S. overweight and one-third obese, the impact is considerable. All of us would assume that medical costs are affected by obesity-related diseases. Also though, the paper explains that productivity, transportation, and human capital suffer. Whether looking at extra sick days, extra fuel costs, or less education, the cost of obesity affects our economy.

    Which incentives might make school cafeteria managers implement changes that encourage healthy eating decisions?

    The Economic Lesson

    An externality is the impact of a behavior or contract that is experienced by a third uninvolved party. When the impact on third parties is undesirable, as with obesity, we call the result a negative externality. A benevolent impact on an uninvolved third party is called a positive externality. A community experiences the positive externality of “lunchline redesign.”

    How to diminish a negative externality? Increase its source’s cost. How to encourage a positive externality? Make it cheaper to create.

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    Some Like It Hot?

    Oct 23 • Demand, Supply, and Markets, Economic History, Economic Thinkers, Environment, Innovation • 372 Views

    A warmer Detroit? A wetter New York? In the future world that UCLA professor Matthew Kahn describes, cities will adapt to climate change.

    Assuming that warming is gradual, populations will migrate and innovate. If San Diego becomes less habitable, people will leave for a more appealing climate in Detroit. Facing different weather conditions and a changing sea level, NYC would build new sewer and transport systems. Now in New Orleans, Brad Pitt’s “floatable homes” might spread to other water threatened communities. Worsened drought conditions in the Southwest could lead to water efficient technology. Market opportunities could abound for entrepreneurs.

    The Economic Lesson

    When Simon Kuznets developed national income accounting during the 1930s, for the first time the U.S. could more accurately determine its productive capacity. Consequently, during the Second World War, we were better able to determine how many tanks, for example, our land, labor, and capital could produce.

    With a global warming trend, economists again could play a crucial role, assessing newly created incentives, investigating resource allocation, and identifying new markets and mobility.

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