• Everyday economics and The GDP is not as dependable a statistic as it appears to be.

    Three Big Questions About the GDP

    Feb 12 • Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Government, Macroeconomic Measurement, Thinking Economically • 198 Views

    Two weeks ago, looking at World Bank growth rates for China and India, you would have seen that India is behind:

    GDP Growth Rates for India and China

    From: World Bank

     

    Not any more.

    Last Monday, India’s statisticians changed the way they calculate the GDP. Selecting a new base year, revising how they weight certain industries, and counting final prices rather than production costs, they elevated their numbers.

    Below, you can see that the new numbers nudge their fiscal 2013 growth rate up to 5.1 percent, for 2014 to 6.9 percent, and they have a new 2015 projection.

    GDP growth rate India revision

    As a result, at 7.5 percent and 8.2 percent for the second and third quarters, India’s revised numbers exceed a 7.3 percent Chinese growth rate.

    But, it is not quite that simple. India’s fiscal year is April 1 to March 31 and China’s is the calendar year. So, when we compare GDP growth rates for 2013 or 2014, we are not even looking at the same months.

    Where are we going? To how a GDP number is misleading.

    GDP Questions

    When we look at GDP numbers, they seem rather precise. We can get a total for the value of goods and services produced to get the GDP for a single year and then compare two years for a growth rate.

    Statistics, though, are rarely that simple.

    1. What to count?

    What Italy did in 1987 is one example of many that would display a counting problem. In 1987, Italy pushed its GDP up 18 percent and became the fifth largest economy in the world by including “off-the-books” transactions. And now, if we fast forward to 2015, Italy’s GDP will include illegal drugs and prostitution. But other countries like the U.S. exclude the “informal” economy (although medical and recreational marijuana are starting to creep into the data because they are legal in certain states).

    So, when we compare different GDPs, we are not comparing “apples to apples.”

    And, it gets worse…

    2. What actually gets counted?

    In his book Poor Numbers, economist Morten Jerven used a 2007 example from Zambia to show why African GDP numbers are problematic. Visiting the Zambian Central Statistical Office in Lusaka, he learned that their staff was composed of three people. The one person in the office pulled together cement purchases to estimate national construction. The value of agricultural production was based on crop forecasts for 8 crops. Growth for retail, wholesale and transport were taken from prior growth rates. The result, though, was one precise number, a GDP number.

    3. What should we count?

    Finally, a huge debate is unfolding about whether any GDP number can be accurate. Because it ignores positive and negative externalities that include happiness, education and resource depletion, and free services like Facebook and Twitter, the GDP data base has been challenged.

    Our Bottom Line: GDP Consistency

    When Nobel Laureate Simon Kuznets developed the concept of the GDP during the 1930s, he had to decide which goods and services would count. Concluding that the GDP had to measure the wealth of the country, he said to add together the prices of all goods and services that were legally produced during one year.

    GDP problems remind me of Winston Churchill (perhaps) saying that, “…democracy is the worst form of government except all the others that have been tried.”

     

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  • Everyday economics and drachma

    Why Greece Would Have a Tough Time With a New Currency

    Feb 11 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic Growth, Financial Markets, Government, International Trade and Finance, Labor, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 212 Views

    At an emergency meeting, today, European finance ministers are in Brussels to discuss Greece.

    Where are we going? To some thoughts about switching currencies.

    The Euro Launch

    It is difficult to create a new currency.

    Before selecting “euro,” officials considered the name of a basket of European currencies, the “ecu.” But the Germans resisted because it was similar to “kuh,” German for cow. Euro wound up being least objectionable even though the Greeks said it sounded like their word for urine—”ούρο”. As for currency design, they concluded that only generics were okay like unidentifiable bridges.

    Next, the logistics were daunting. Imagine having to deliver, across Europe, 10 billion notes and 52 billion coins. Thousands of vending machines—from soda to chips to cigarettes—needed recalibrating and reloading. The day before the launch, Coca-Cola said that only 46,000 of its 300,000 machines would accept the new currency.

    As for the launch on January 1, 2002, most of the 12 eurozone countries said the transition happened without a hitch. The exceptions were Greece, Spain and Italy with the BBC calling Greece the least-prepared country. During the early days of the transition, only 50,000 of 300,000 Greek businesses had been supplied with the new currency.

    And now, 13 years later, some people are asking whether Greece will reverse all of this.

    The new Greek government has said it does not want to exit the eurozone. However, having promised a 28 percent minimum wage boost by 2016, new jobs for low wage government workers, and a plan for a bridge loan until a new bailout can be negotiated from the EC, ECB and eurozone troika, Greece faces oppostion.

    So, we can ask, if it does not work out, what next?

    A New Drachma?

    Let’s assume for a moment that Greece has to return to a drachma—a “new” drachma. What are some of the issues?

    Let’s say you started with a banking holiday to facilitate the switch.

    Then, moving from big issues to little ones, first we have the contractual obligations. Loans and mortgages, wage agreements, bonds, all would need to change. Financial institutions would have to “mark to market” the value of their Greek bonds. Worldwide, few would be willing to loan Greece money and creditors (as with Argentina) would try to seize accessible Greek assets. For weaker eurozone economies, borrowing would become ever more challenging.

    And this is only the tip of the iceberg.

    Other issues would include restructuring international contracts, transitional timetables, and legal implications. Imagine being told that your euro life savings were now new drachmas that were plunging in value as inflation accelerated. On the business end, creditors would refuse Greek drachmas as repayment. It is also possible though that the Greek government can use the printing press to pay debts, pay workers and boost exports and tourism. Repaying a 100 debt with 100 drachmas that have less value, we could say they are inflating away their obligations.

    And finally, minor but a consideration, a different currency could mean that wallets might be too small or large. (It happened in Estonia when they adopted the euro.) Would ATMs function? Coca-Cola machines?

    Our Bottom Line: Sovereign Debt

    The Greek eurozone crisis is all about borrowing too much. According to a new report from McKinsey, many nations continue doing precisely what got Greece into trouble. McKinsey says that no one has made deleveraging progress during the past seven years.

    Below you can see that all countries positioned on the far right–Ireland, Singapore, Portugal and Japan–have a high debt to GDP ratio. And, those that are high on the y-axis also have made little progress deleveraging.

    Excessive sovereign debt is more than a Greek problem

    From: McKinsey

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  • everyday economics and Fed's punchbowl

    Why the Fed’s Dilemma Just Got Worse

    Feb 10 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Economic Thinkers, Government, Labor, Macroeconomic Measurement, Thinking Economically • 252 Views

    In a robust January employment report, we learned that job creation is the best since 1997, the unemployment rate is an encouraging 5.7 percent and average hourly earnings might even be starting to ascend.

    Trying to figure out how Fed Chair Janet Yellen might be pondering the new labor market data, I though we could look at what Brookings’ Hutchins Center calls her “dashboard.”

    Monetary Policy: Janet Yellen's dashboard

    From: Brookings

    The Jobs Dashboard

    The jobs section of the dashboard has indicators for unemployment, payrolls and labor force participation.

    Unemployment

    We can divide the unemployed into three groups.

    • Unemployed: people in the labor force who are looking for a job.
    • Long-term unemployed: unemployed who have been jobless for 6 months or more.
    • Underemployed: the unemployed, part-timers who prefer full time work, and people who have given up their job search.

    For all three groups, we have considerable improvement.

    Monetary Policy: Janet Yellen's dashboard and unemployment

    Nonfarm Payrolls

    Hoping for numbers exceeding 200,000, we keep an eye on the fluctuation in public and private nonfarm payrolls.

    Monetary Policy: Janet Yellen's dashboard and nonfarm payrolls

    Participation Rate

    This indicator is a mystery. Displaying a diminishing proportion of people who could be in the labor force, no one can definitely say why.

    Monetary Policy dashboard partipation rate

     

    Our Bottom Line: The Punchbowl

    In 1955, after the Fed increased the discount rate, Fed Chair William McChesney Martin told a group of unhappy investment bankers that “The Federal Reserve…is in the position of the chaperone who has ordered the punchbowl removed just when the party was really warming up.”

    And now, with jobs numbers improving, Dr. Yellen has the Fed Chair’s dilemma of deciding when the party needs to be restrained with higher interest rates.

     

     

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  • Everyday economics and human capital formation

    One Reason We Can’t Believe in Innate Talent

    Feb 9 • Behavioral Economics, Economic Growth, Economic History, Education, Gender Issues, Labor, Macroeconomic Measurement, Tech, Thinking Economically • 322 Views

    Wondering why there are fewer female philosophers than molecular biologists, scholars entered surprising territory. No, it was not about ability or interest. They discovered a correlation between disciplines that are associated with innate talent and the number of women in those areas.

    The Impact of the Talent Myth

    Surveying more than 1800 professors in 30 academic fields, researchers asked whether innate, raw talent was necessary for their success and if they had to work very hard. In the fields where the raw talent reply predominated, there were fewer women. The stunner, though, is that GRE scores show that those disciplines do not require any more innate talent than other demanding areas.

    Instead, it all might come down to self-fulfilling prophecies about talent. If you believe you might not have it, then you could avoid areas that appear to require it. Perhaps that is why African Americans are underrepresented in the same disciplines.

    In the following graphs, higher x-axis numbers indicate more of a belief in innate talent while the y-axis represents the proportion of women in the discipline. Far to the right on the x-axis and low on the y-axis, philosophy is a high-inborn-talent low female discipline. At the other end of the x-axis, we have education while neuroscience is more in the middle of both axes.

    Limiting human capital with the myth of innate talent

    From: “Expectations of brilliance underlie
    gender distributions across
    academic disciplines”

     

    Our Bottom Line: Human Capital

    Repeatedly, experiments have shown that expectations can shape results. When those expectations diminish performance, we all suffer because of the impact of diminished human capital development on economic growth.

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  • Ask Alexa Economic Advice from econlife.com

    Toothpaste Tube Torment

    Feb 8 • Ask Alexa • 401 Views

    Dear Alexa,

    This morning I did not hear my alarm and woke up late. Understandably, I was a little frazzled as I rushed to get ready for work. When it came time to brush my teeth, I struggled to get out the final drop of toothpaste. This was the last straw. Alexa, is it worth my time to squeeze out the last drop, or am I right in wanting to just buy more toothpaste when my supply begins to run low? — Minty Mandy

    Dear Minty Mandy,

    You are not alone! Just this morning I was grappling with the same problem. Is my toothpaste tube worth the frustration? In order to solve my problem, and yours, I turned to the experts, the economists. As it turns out, our toothpaste troubles revolve around the concept of marginal utility.

    In every life decision, we think at the margin. Explained economically, the margin is where we start with something extra. The marginal utility is the extra utility, or usefulness I will receive from every additional unit of something. If I am eating a chocolate bar and I decide to take one bite, my second bite is the extra at the margin. How much pleasure did I receive from eating that second bite of chocolate? Well that would be my marginal utility. Unfortunately, as stated by the law of diminishing marginal utility, every added bit “more” will decrease in extra usefulness.

    How does this concept relate to our toothpaste issue? Well, every drop that you squeeze out of the toothpaste tube is at the margin. How much more will I squeeze out by struggling for an extra few minutes every morning? According to the law of diminishing marginal utility, the harder and longer it is for me to get the toothpaste out of the tube, the less extra fulfillment I feel.

    What does this add up to? It means that, at a certain point, your time is more valuable than these last few drops of toothpaste. Buy a new tube of toothpaste. I hope that this helps you, Minty Mandy!

    Sincerely,

    alexa-sig

    P.S. H/T to Dan Ariely and his Ask Ariely entry titled “On the Last Drop of Toothpaste” for inspiring this question.

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