• Beer and pretzels.

    Beer: An Economic Indicator

    Jun 6 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Economic History, Households, International Trade and Finance, Macroeconomic Measurement • 1859 Views

    There appears to be a correlation between beer drinking and economic growth…up to a point. According to a paper from the American Association of Wine Economists (yes, really) the connection is an upside down “U.” As individual incomes increase up to $22,000, so too does beer consumption. Then, though, beer drinking drops.

    Specific examples? Between 1985 and 2007, China’s total beer consumption skyrocketed. For Russia, beer consumption starting rising in 1997. The AAWE paper indicates that in many emerging economies, beer consumption is up.

    Broader implications? Perhaps, this is not a beer story at all. Instead, we are considering the impact of higher income, increasing world trade, and economic liberalization on what we consume.

    In addition to the AAWE paper you might want to look at this NY Times blog and this Reuters blog.

    The Economic Lesson

    The AAWE paper refers to the “determinants of demand” for beer. Thinking of demand/supply graphs, the demand curve will shift when a determinant changes. So, for beer, as for all other commodities, the determinants relate to substitutes and complementary products, consumers’ income, utility and the number of consumers.

    An Economic Question: For beer specifically, what might shift its demand curve?

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  • Gasoline prices add 9/10 at the margin

    Higher Gas Prices

    Jun 5 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Thinking Economically • 744 Views

    How have we responded to higher gas prices?

    According to a recent study, our first response is to buy a lower grade of gasoline. Drivers, used to premium, opted for regular gasoline instead. However, because we have different “budget baskets,” we do not initially cut our clothing purchases or what we spend on food.

    We respond also by looking for lower priced gas. Using GasBuddy.com as one source of data, an Ohio State economist observed that traffic soared on the website when prices skyrocketed during 2008. When prices fell, traffic subsided. (This website lets you compute how far you can drive before the mileage offsets the savings.)

    And finally, higher gas prices affect how we respond to falling prices. We tend to select a “reference price”–an amount we associate with an item. For gas, if the reference price is the elevated amount, when price starts to fall, we do not shop around as much. Seeing less pressure to lower their prices, sellers delay. As a result, gas prices rise much faster than they fall.

    You can look here for more about higher gas prices.

    The Economic Lesson

    The “fast rise/slow fall” phenomenon for gas prices happens wherever competition is minimal. If retailers can price gasoline similarly, they are behaving like an oligopoly with some pricing power.

    An Economic Question: Imagine a competition scale or continuum. To the left is perfect competition with many small firms, identical products, and no pricing power. The market controls their behavior. At the other end is monopoly where the firm has considerable pricing power, is large, and has no competition. Where would you place gasoline retailers? Why?


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  • Inventions that Fuel Economic Growth

    Health Care and Steamboats

    Jun 4 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Government, Labor, Regulation • 620 Views

    Health care and steamboats are related. The link is the Commerce Clause of the Constitution.

    Hoping to promote a single national economy, the framers of the Constitution said that the Congress has the power to, “regulate Commerce with foreign nations and among the several states, and with the Indian Tribes.”

    But, what is “commerce?” In 1824, the Supreme Court had to provide an answer. And now, in Cincinnati, a federal court asked the same question.

    In 1824, the Supreme Court was asked to decide if New York State could give a monopoly to a steamboat operator. In his decision, Chief Justice John Marshall rejected the narrow “buying and selling” definition of commerce. Instead, he said that commerce included all economic intercourse. Consequently, New York could not confer an exclusive right to travel on interstate waterways because Congress had the power to regulate interstate transport.

    Fast forward to 2011. Obama health care legislation is being challenged in federal courts. The law’s opponents are saying that the Congress cannot require the uninsured to purchase medical coverage because of the Commerce Clause. Supporters of the mandate say Congress can require insurance purchases because of the Commerce Clause. The key again? A broad or narrow definition of commerce.

    Supreme Court Justice William O. Douglas (1898-1980) said that the Commerce Clause was the “fount and origin of vast power.” (p. 48) Used to strike down New Deal legislation and to support Civil Rights law, its history since 1824 has actually been varied. Now, with federal courts in different states disagreeing, again the Supreme Court will probably tell us what commerce means.

    The Economic Lesson

    The United States could have been like Europe before the euro zone was created. Remember the French franc, the German mark, the Italian lira? Send some French wine to Germany and foreign exchange is involved. Travel across Europe and you needed multiple currencies. The result? None of Adam Smith’s (1723-1790) economies of scale could be enjoyed. Economic growth and development were constrained.

    Not in the United States. After the powerlessness created by the Articles of Confederation (1781-1789), our founding fathers knew that Congress needed more power. One source would be the Commerce Clause. The Congress could stop one state from obstructing free movement of goods. A national market could evolve with specialization that would fuel economic growth.

    An Economic Question: Knowing that a broad definition of commerce gives more power to the Congress while a narrow definition tends to favor state power, explain which one you support.

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    Unemployment Insight

    Jun 3 • Businesses, Economic History, Households, Labor, Macroeconomic Measurement • 521 Views

    Would you like to see job winners, job losers, recession and recovery across the country? These interactive graphics are perfect.

    Here, you can see “jobs gained” and “jobs lost” across the U.S. in 100 metropolitan areas. As you move a cursor from 2004 to 2011, red dots representing jobs lost and green dots for jobs gained get larger and smaller. The visual for 2009 is unforgettable.

    This graphic provides a second way to see jobs and geography between January 2007 and now. Using data from U.S. counties, you can see an economically robust U.S. transformed as the colors of the graphic change from dark yellow (4%-4.9% unemployment) to black and purple (7% to 10% unemployment). Again, using 2009 as your focus, looking back and forward clarifies where we have been.

    The Economic Lesson

    But where are we going?

    This graphic connects jobs to economic growth. As the graphic progresses, you can see that 6% growth will bring unemployment numbers down to 5% next year. 3% growth means waiting until 2020 for 5% unemployment. First quarter real GDP growth for 2011 was 1.8%.

    An Economic Question: Looking at the jobs and geography interactive graphics here and here, where in the U.S. is unemployment decreasing and where is it remaining high?

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    Housing Prices in the U.S. and Abroad

    Jun 2 • Demand, Supply, and Markets, Government, Households, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 577 Views

    We have a double dip in U.S. housing prices. But, is it happening everywhere? A Goldman Sachs research report from mid-May provided an OECD (Organization for Economic Cooperation and Development) summary.

    1. The most troubled: Struggling euro zone countries remain the most distressed. Housing prices in Ireland, Spain, Greece, the Netherlands and Italy have continued to slide.
    2. Moderately declining: The U.S. falls into this category as well as Denmark, Korea, and many euro-area countries.
    3. Rebounding: Canada, Norway, and Australia have experienced double digit increases. Less robust but still rebounding, housing prices in France, Germany, and New Zealand have been going up.
    4. Steadily rising: There actually were countries that sidestepped the housing bubble cataclysm. Switzerland and Belgium have not seen any meaningful drop in prices and now, they continue to rise.

    The Economic Lesson

    How might a supply and demand graph illustrate the U.S. moderate decline in the housing market? The key is our equilibrium price, the point where the demand and supply curves meet.

    What is making this point move downward? Is it a shift in the demand curve because government policy is no longer fueling demand? Or, is it the supply curve sliding downward because of an ever increasing number of houses that people offer to sell each time prices appear to rise?

    An Economic Question: Using this Washington Post graphic of housing prices in 12 cities, create your own story of how the housing bubble popped in different places.

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