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  • Calculating the GDP involves many decisions and using it can be controversial as in Greece.

    Why the GDP is Much More Than a Number

    Jul 28 • Economic Growth, Economic History, Economic Thinkers, Environment, Government, Labor, Lifestyle, Macroeconomic Measurement • 239 Views

    The GDP measures a country’s production. Just add together the value of the goods and services that were produced during one year and you have the GDP? Not really. Like the Malaysian proverb that says we should not think there are no crocodiles just because the water is calm, the GDP is not as it appears on the surface.

    War was the original reason that countries wanted to know the value of their output. During the Anglo-Dutch War in 1665, if England knew more about its wealth then it could figure out how much to tax people. Fast forward to World War II and the United States. The same situation. With a war to wage, FDR needed to know how much land, labor and capital could be allocated to military production. From that task emerged the modern concept of the GDP…and all of its dilemmas.

    Calculating what a nation produces involves answering a host of questions.

    • Do you count illegal activity? 60 years ago the answer was no but now, not necessarily.
    • Should you include non-market home production? But that means if you marry your accountant then the GDP will decrease.
    • Would it be wise to adjust the GDP when prices fall but quality rises? After all, laptop prices are way down while computing power is up.
    • Are free online services a concern? Maybe Google searches are a service that should boost the GDP.
    • How to account for environmental harm that results from production? Should we subtract the value of the damage from GDP?

    You see where we are going. Depending on what you count, the GDP could go anywhere. And we have not even touched globalization and how much to include when an item is made in 5 different countries.

    Still though, we are in relatively calm GDP territory until we relate all of this to people. And that takes us to Greece.

    Brought in to overhaul the Greek statistics office, economist Andreas Georgiou concluded that the Greek deficit was higher than had been reported and its GDP was lower. The impact on the country was calamitous. Georgiou’s revised deficit and GDP figures necessitated an unheard of discipline in order to secure the bailout loans it needed from the international community. Gargantuan government spending had to be cut, government employees fired, government pensions slashed.

    The old numbers had been a useful fiction that let Greece adhere to eurozone guidelines. Because Georgiou injected some reality, he has been accused of doing the falsifying. The crime is called breach of faith and the sentence could be 5 years in prison.

    All because of the GDP.

    Our bottom line: I wonder whether the GDP returns us to fractal mathematician Benoit Mandelbrot. Yes, we can look at the coast of Great Britain from afar and see a lovely uninterrupted curving line. But move in to a closer view of the coast (or the GDP) and the hazardous jagged zigs and zags start to appear.

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  • Everyday Economics — Sunday Chart of the Week

    Three “Tear-Water” Graphs

    Jul 27 • Demand, Supply, and Markets, Economic Growth, Economic History, Labor, Macroeconomic Measurement • 289 Views

    Our Sunday Charts

    One of my favorite children’s stories is “Tear-Water Tea.” Located in a young readers’ book called Owl At Home by Arnold Lobel, “Tear-Water Tea” is about an owl who identifies sad things so that he can fill his teapot with his tears. Moving from “Chairs with broken legs” to “Songs that cannot be sung because the words have been forgotten” and “Mornings nobody saw because everybody was sleeping,” Owl cites a litany of heartbreakers until the pot is full.

    Sad Thoughts About Economic Recovery

    From: “Tear-Water Tea”


    If we were writing an economic “Tear-Water Tea,” the following graphs about the US recovery from the Great Recession of December 2007-June 2009 might be included.

    Sluggish GDP Growth:

    The value of goods and services produced during one year, the GDP can be a barometer of a recovery. When it soars, so too can employment, incomes and spending. With GDP growth hovering below 5% and also declining, you can see the opposite in this graph.

    Sluggish GDP growth in the US Economic Recovery
    A Worrisome Output Gap:

    Underutilizing our land, labor and capital means our GDP is lower than it could be. The result, below, is an output gap between actual and potential GDP that will jeopardize our attempts to minimize unemployment.

    Economic Recovery and the output gap

    Slowly diminishing Unemployment:

    You can see that compared to other recessions, high unemployment is creeping downward from an unusually high level at a tepid rate.

    Economic recovery and unemployment

    Our bottom line: Just contemplate an economic recovery with sluggish GDP growth, a worrisome output gap and slowly diminishing unemployment and you get an entire kettle of tear-water tea.


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  • From the Russian Embargo and Supply and Demand to The Cost of Raising Children

    Our Weekly Roundup: From the Invisible Hand to Invisible People

    Jul 26 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Government, Labor, Regulation, Tech, Thinking Economically • 304 Views

    Our Econlife roundup for the week

    Globalization and problems with a shrinking kilogram 7.21 All kilograms might not be the same weight…more


    Adam Smith's invisible hand makes the market system work. 7.22 Why the invisible hand was an idea that “stuck”…more


    The behind-the-scenes jobs that we ignore from highly skilled human capital can be called invisible. 7.23 From wayfinders to fact checkers, some jobs are almost invisible…more


    Everyday Economics and a wider and deeper Panama Canal will change the invisible lines that show the world's supply chains. 7.24 The Panama Canal is the reason for a line that slices the U.S into 2 pieces…more


    Everyday economics and the tire tariff had a visible benefit and a much greater invisible cost. 7.25 The cost of the tire tariff is everywhere but tough to see…more

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  • Everyday economics and the tire tariff had a visible benefit and a much greater invisible cost.

    The Inflated Cost of Car Tires

    Jul 25 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Economic Thinkers, Government, International Trade and Finance, Labor, Regulation, Thinking Economically • 440 Views

    Starting at $14 a week, you can walk out of Rent-N-Roll with a complete set of tires for your van, truck or car. The catch? By the time you have finished your weekly payments and the tires are yours, you probably will have given them more than twice the retail price. But, because Rent-N-Roll’s customers do not have the credit nor the cash to pay for 4 tires, renting is their only option.

    Rent-N-Roll says that during the past several years their tire rental business has grown. Because the recession eroded credit ratings and increased joblessness, fewer people had the $800 or so they needed for 4 tires. Also though, the price of tires was inflated.

    And that takes us to the tire tariff.

    5 years ago, the Obama administration said US jobs could be saved with a 35% tax on tires from China. The tax achieved what US tire workers wanted. It made imported tires that had been subsidized by the Chinese government so expensive that many fewer entered the US. As a result, the US tire industry added 1200 jobs and placed an extra $48 million in workers’ pockets.

    Elsewhere, though, the tariff took money out of our pockets. With tires costing us $1.1 billion more in 2011 because of the tariff, we could say that each additional job cost $900,000. Furthermore, other industries lost revenue and jobs—a 2,431 job loss total according to a Peterson Institute study—because spending on tires meant we had less to spend on other goods and services. Even Tyson and Purdue were affected because the Chinese retaliated with a tax on US chicken paw exports. (I have read that our chicken paws are unusually juicy—a fascinating tale we told at econlife.)

    This is where the tire tariff created a ripple of costs:

    The cost of a tariff exceeds its benefits.

    From: Peterson Institute for International Economics “U.S. Tire Tariffs: Saving Few Jobs at High Cost”

    Using an economic lens, we would see that tariffs increase price by crossing the domestic supply curve at a higher point:

    The impact of a tariff on supply

    Our bottom line: So very charmingly, below, Nobel laureate Milton Friedman explains that tariffs can appear attractive because the job numbers they boost are visible while the costs to consumers and other industries are invisible. However, that concentrated benefit is far less than the diffuse cost.

    Do watch the full 6 minutes. Dr. Friedman presents a wonderful banana example at the end.

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  • Everyday Economics and a wider and deeper Panama Canal will change the invisible lines that show the world's supply chains.

    How the New Panama Canal Affects Us

    Jul 24 • Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Labor, Tech, Thinking Economically • 359 Views

    When a desk destined for Ohio leaves China on a super-sized container ship, should it enter the United States in Los Angeles or New York?

    The Panama Canal could determine the answer.

    Imagine a jagged north south line dividing the US. Located somewhere between the East and West Coast, this invisible line determines where supertankers carrying Asian cargo will dock. All places to the east of the line will receive goods from NY/NJ or maybe Savannah or Charleston. On the west side of the line, maybe Los Angeles or Oakland.

    But here is where it gets interesting. When the Panama Canal’s renovation is completed, perhaps during the beginning of 2016, a newer, larger generation of Panamax container ships will be able to use it. As a result, some of the cargo heading for congested West Coast ports like Los Angeles will have a cost-effective alternative. By choosing a new destination, shippers will nudge that jagged north south demarcation line westward. One article I read suggests the line could shift from Memphis to Dallas.

    Pictured below in canal locks are the New Panamax and its predecessor, the Panamax. There is a Post Panamax that a deeper, wider Panama Canal will not be large enough to accommodate.

    New Panamax ships create economies of scale.

    From: MaritimeConnector.com

    New Panamaxes will also change the incentives that shape worldwide supply chains. Midwestern corn, sorghum and soybean growers who send their crops down the Mississippi River to Gulf Coast ports will be able to connect with much larger vessels that, for the first time, can reach Asia through the Panama Canal. Meanwhile, South American port cities will be able to send coal and iron ore to Asia more easily. It is even possible that more trade will evolve between the Western US and Eastern Brazil.

    Our bottom line: The more I read, the more I concluded that no one is positive about how a wider, deeper Panama Canal will affect international trade. So we really do not know where that desk from China will enter the United States. However, we can be sure that bigger vessels create economies of scale. Representing cheaper shipping costs, these new economies of scale will shift the invisible lines that represent the world’s supply chains.

    An excellent movie, Captain Phillips with Tom Hanks is the story of a container ship hijacking. From what I could discover, the ship, the Maersk Alabama, is smaller than a Panamax. The ship is in the trailer for the movie, below. (Please do note that there is some violence.):



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