Wednesday, January 31, 2018

I updated my 2007 in-class Stock Market Activity. I did pretty well in the over the last 10 years.

I recently found the companies I used for a stock market activity for class in 2007 and updated the value with current prices. The number of shares I purchased is in the second column.

I fictitiously invested $25,000 in each of these companies. You can see the results below.

Inflation was roughly 18% over that time span, so my overall rate of return is pretty darn good!

Wish I had the money at the time!  :)

Thursday, January 18, 2018

When is the value of an export not the value of the export?

Here is a graphic I found on Twitter (lost the source).  It is a vivid example of how the trade numbers are a bit of an illusion.

The graphic on the right is the one I am interested in. It shows the dollar cost to produce an iPhone to be $600.00. This is the total value as it leaves its final assembly point in China.

When it is shipped from China to the US, China is credited with $600 in exports and the US is debited $600 for importing the phone.  It appears the US has a trade deficit with China at this point---which is the case with the conventional way export and imports are accounted for.  The final producer gets the spoils of being the full value exporter of the good. However....(see you below the graphic)

Source HERE

The graphic on the right tells a more complicated story.  The inputs that go into making the output (finished i-phone) come from a vast network of the supply chain. The pie chart shows China adds only $6.50 of the $600 total cost of the i-phone (caveat: there could be other Chinese suppliers that supply inputs in some of the other categories in the pie chart).

$6.50!  But they get credit for a $600 export and we get dinged for the same amount as an import.

Keep in mind what is good for the goose is good for the gander---the same logic applies to goods we make in the US with imported inputs (intermediate goods).

Bottom line: We have to be careful when we hear reported in the media about the "trade deficit" we have with China (or Mexico or...).  The number is not what it appears to be.

Wednesday, January 3, 2018

Another reminder of the importance of the supply chain for a good.

Here is a graphic from a French publication that nicely illustrates the importance of the regional and global supply chain for inputs that go into making an output, in this case the Honda Civic assembled in the UK/EU region.

These supply chains are very tight and help contribute to efficiencies that keep prices low(er).

It is also a nice lesson in Comparative Advantage.

Source HERE

Wednesday, December 20, 2017

"The Sisterhood of the Traveling Pants" is not just a movie title---it is a story of International Trade. Those pants REALLY DO travel

Saw this graphic on Twitter HERE. It nicely illustrates the complexity of international trade. Trade is the sum of the supply chain that is necessary for the production of any good, from the simple to the complex. Regardless of the complexity of the good being produced, the supply chain is itself an eco-system that must be nurtured and respected.

Also, it serves as a reminder to me as to how deceptive trade numbers can be---not intentionally, mind you. However, they way exports and imports, hence the trade balance, are calculated and accounted for does not present the whole story.  Trade is a story of the travels of inputs that go into the making of outputs---the final good that will be purchased by the end-user.

Example: If we ship $80 in inputs to Mexico (not counted as US Exports!). Those inputs are assembled with $20 in Mexican labor (now value is $100) and exported to the US, then Mex is credited with $100 in exports and the US with $100 in imports. See the distortion?

Source: HERE

Do we buy stuff from Countries OR do we buy stuff from people? Here is a different look at US trade numbers.

Trade numbers are published on a national level---comparing country to country. No problem with that, but here is another way to frame the numbers.

We trade with the actual, real live citizens of the respective country. They buy our stuff and we buy theirs.

So, how do the national trade numbers look when we quantify them on a per person basis?

Below is a graphic I created to show the US trade balance with the Top 10 (plus the EU Area) trade partners as a balance nationally (yellow) and on a per person (capita) basis.

I took the value of US exports to the respective country and divided it by the population of that country. This gives the dollar value of US goods on per person basis the person bought. I then took the value of imports from a country and divided it by the US population. This gives the dollar value of the foreign goods US citizens bought. The difference between the two numbers gives a per person SURPLUS of DEFICIT in trade between the countries.

Notice nationally the US has trade DEFICITS with all trading partners, except the UK.  But if we look at it on a per person basis, we have trade deficits with only 3 countries (the EU as a whole, China, and India).

In other words, for the most part, in trade the US citizens buy less from foreigners than they buy from us---we run person to person trade SURPLUSES.  Only with the relatively poor countries of China and India do we buy more from them then they buy from us.

Wednesday, November 22, 2017

Thanksgiving Day meal adjusted for historical minimum and average wage. Are we better off?

The American Farm Bureau does an annual pricing of a Thanksgiving Day meal to illustrate the changes in prices over time. They use the following methodology:
 ""A total of 141 volunteer shoppers checked prices at grocery stores in 39 states for this year’s survey. Farm Bureau volunteer shoppers are asked to look for the best possible prices, without taking advantage of special promotional coupons or purchase deals, such as spending $50 and receiving a free turkey"" (American Farm Bureau)
Here is the graphic they post to show the nominal price of the meal and the inflation adjusted "real" price of the meal.  As you can see, the nominal price (current dollars spent) rises consistently while the "real" price (inflation adjusted) has been relatively flat for the given time span (1986-2017).

People buy stuff with the money they earn from wages--hourly wages, for the most part. While the Farm Bureau measures this market basket of food using current and adjusted prices, I would like to quickly show how the value of two measures of wages have retained their purchasing power over time: The minimum wage and the "average hourly salary of non-supervisory and production workers", which gives an idea of how much the typical worker earned per hour.

In 1986 (November) the average hourly pay for non-supervisory and production workers (source) was $9.00 per hour and the cost of the meal in nominal 1986 dollars was $28.74 (source).

So in 1986, it took a worker earning this wage 3 hours and 11 minutes ($28.74/$9.00 then converted the remainder to minutes) to make enough to pay for the meal.

In 2017. the hourly wage for the same category of worker was $22.22 (for October, the latest info available) and meal cost $49.12. It took this worker 2 hours and 13 minutes ($49.12/$22.22) to make enough for the meal, or one hour LESS in labor.

Now lets look at the other end of the labor/earnings market---minimum wage workers.

In 1986 the minimum wage was $3.35 (source) and the meal cost $22.74. It took this worker 6 hours and 47 minutes ($22.74/$3.35) to earn enough for the meal.

In 2017 the minimum wage is $7.25 and the meal cost $49.12.  It took this worker 6 hours and 46 minutes ($49.12/$7.25) to earn enough for the meal---virtually the SAME 30 years apart!

Bottom line. Using this VERY rough measure of purchasing power of a specific wage, the "average hourly earning" worker today is much better off, by 1/3, than his/her counterpart 30 years ago and the minimum wage worker has stayed the same with their counterpart.

Wednesday, August 30, 2017

Continuum of Economic Systems

Labeling and characterizing particular countries economic systems based on how they are organized to allocate societies scarce resources can be a tricky proposition.  People tend to insert their own biases in assessing the label.

Here is a simple presentation of the "facts".  We can debate/argue the specifics of where a particular country falls on the continuum (I inserted select countries on where I think they fall), but the over-arching considerations should be what I outlined in the textbook:

1.  The level of government ownership/control of societal resources.
2.  The level of regulation and taxation over economic activity within the country.

These are broad, for certain, but I believe serve as a jumping off point for discussion.

For instance, take the US.

The Private Sector holds a vast majority of overall societal resources, but not all.  National Parks are one significant "land" resource that I can think of that the Federal Government owns outright.  Is this "socialism" in the context of all societal resources combined?  I think not so that is why I put it closer to Free Market than Socialism. Does the US regulate/tax economic activity?  Yes, to some degree so we cannot give it the full label "Free Market". With this one you have to consider "relative to what/who?"

In this case I choose the UK. In the UK the healthcare system is owned/operated by the government and they have a higher level of taxation compared to the US (this is a generalized statement on my part).

After understanding where you fall on this line, the debate becomes which way is "best" for your country to move---towards Free Markets to the left or Socialism/Communism to the right.  This is political tension that is derived from the economics.

Saturday, August 26, 2017

Dwayne "The Rock " Johnson understands TANSTAAFL. Video proof!

This from his Facebook page.  He is acknowledging a young mans heroics (rightly so!) but at the end of this video (about the 50 second mark) he makes a remark that stunned me.

A pretty solid reference to a basic economic concept we learn the fist day in economics! While he does not identify it directly, "TANSTAAFL", the intent is clear.

Made me smile.  Only a minute long. Worth it!

Friday, August 25, 2017

Potential Real GDP vs Actual Real GDP and the PPF.

Here is a  nice illustration of "Potential Real GDP" vs "Actual Real GDP.  Potential GDP is an estimate at a given point in time of an economy's potential to produce Real GDP given its available resources (Land, Labor, Capital, Entrepreneurship).  Gives me an opportunity to show how two important AP Macroeconomic concepts are related to each other.

The Congressional Budget Office (CBO) publishes a forward looking projection of Potential RGDP years in advance.  This graphic gives the estimated trajectory of Potential RGDP that was calculated in a given year (2007,09,11,13,15, and 2017).  The heavy BLACK line is the trajectory of the "Actual RGDP" that was recorded in the respective year.

It is evident Actual RGDP, since the advent of the 2008 recession has been below the projected Potential---the difference is known as the "Output Gap".

It is noteworthy that after 2008 the CBO consistently lowered the estimate of the US economy's potential to produce Real GDP.
Source: VOXEU
Below I paired this graphic with the Production Possibilities Frontier (PPF).  The PPF is an important model in AP Macro.

I color coded the PPF frontiers in a similar color as the one in the graphic to show the contraction of the US PPF over time (as calculated by the CBO).  I used Point "A" to represent the heavy black line and a consistent under-utilization of societal resources, shown as a point inside the PPF.

Both of these models show the same thing---an output gap that suggests more resources could be put into use before we reach our economic potential.

Sunday, August 20, 2017

Hotel price surge for the Eclipse: Price Gouging or Revenue Smoothing? Easy call for me...

If you are looking for a last minute hotel room in the path of the eclipse you will either find no availability or a shockingly high price for a one night stay.

Below is the price for a stay at a Days Inn hotel I found on in rural Kentucky.

The first price is the "normal" price they charge for a room, the second is for Sunday, August 20th (eclipse is Monday afternoon).  A mark-up of 5.66 times the regular price.

Is this price gouging or revenue smoothing?   Is it "fair"?

One justification is that the hotel business is seasonal.  Special events that a preponderance of people are "willing and able" to pay a premium over the regular market price to attend are one way hotel operators are able to reap extra revenue that allows them to keep prices lower (or even stay in business) for the rest of the year.

I believe in this case, the informed opinion is revenue smoothing and the, well, ignorant one is price gouging.

Think of it as "robbing rich Peter" (the the person who values the special event a lot) to "pay poor Paul" (the person who gets to enjoy a lower price during non-special event times which is most of the year).

Tuesday, August 15, 2017

Foreign Exchange Market presentation for AP Macroeconomics

Smartphone/Creative Destruction Cartoon. I see lots of consumer and producer surplus value. How about you?

Stop and think about ALL the separate and distinct products we used to have to purchase individually to do all the things a Smartphone can do today.

One way to think of Smartphones is it is a plus for the environment.  Think about all the resources, most non-renewable, that are not employed because they are contained in one small rectangular case.

I am not sure the real value of these devices is captured in the price we pay.  I have to think the surplus value far (?) exceeds the price.

What do you think?

Found on Twitter. No real source to cite.

Keynesian Multiplier Effect Illustrated

Here is a presentation I created that explains the Keynesian Multiplier Effect in as simple terms as I can make it.  I bit long in number of slides for that reason.

This is an important part in the Unit on Fiscal Policy.  The math, while simple, seems to be a stumbling block for many students. Hopefully this eases that tension!

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