Friday, October 15, 2010

History of the the iPOD---If you are an APPLE fan you will like the info contained here...

Source HERE

According to the latest Big Mac Index, the Chinese Yuan has Appreciated in value relative to the dollar by 20%!...This should be BIG news in the Media, right??

     Here is the latest "Big Mac Index"(graphic below) produced by The Economist magazine AND one produced in January 2010 (click HERE and HERE for my explanations of how The Big Mac Index works).  Look at the cost of a Big Mac in the Euro area and then in China. How has the dollar price of a Big Mac changed in 9 months in each place?  In January it took $4.79 to buy one in the Euro area (they took a weighted average) and in October it took $4.84 to buy one.  So in dollar terms it became MORE expensive to buy a Big Mac. This implies the dollar lost value, or depreciated, relative to the Euro.  Indeed, depreciation relative to the Euro has taken place this year.  In China, a Big Mac cost $1.83 in January and in October it cost $2.18 (this is the amount we would give up to buy enough Yuan to purchase a Big Mac in Beijing).  This implies the dollar lost value, or depreciated, relative to the Yuan (Chinese currency). SAY WHAT? This is NOT what has been the political discussion as of late.  China has been criticized for NOT letting its currency appreciate relative to the dollar (as it SHOULD if it was traded in a flexible FOREX market) which would make its goods and services more expensive for us to buy and our goods and services less expensive for the Chinese to buy.  This presumably would lead to more balanced trade. 
     According to the Big Mac Index, from the two different time periods, Yuan appreciation HAS occurred. The dollar price of a Big Mac in China has INCREASED 19.6% ($2.18 minus $1.83 = $.35 divided by $1.83 times 100)!!  The following could be happening: the Yuan has significantly appreciated in value, which would be BIG news, or there is Big Mac Inflation in China, or a combination of the two. We certainly have not seen nearly 20% appreciation, so I have to suspect inflation. One product does not make a trend, but is inflation rearing its ugly head in China?  I pulled the thread---extra credit for doing the legwork to find out if this is the case...  

The Economist

Here is one previously published in January 2010:

Note: the price of a Big Mac increased in the US, from $3.58 to $3.71, which is an increase of 3.6%. Can we say we have had inflation in the US for the last 9 month? what else might contribute to the price increases in the US AND China for the Great Sandwich??  Extra-Extra Credit!!

Thursday, October 14, 2010

Chilean miners rescue is a triumph of Capitalism and Free Trade---What else did you expect me to say....

From Carpe Diem:
 ""It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.""
The Wealth Of Nations, Book I, Chapter I, p. 22, para. 10.

"It needs to be said. The rescue of the Chilean miners is a smashing victory for free-market capitalism.
If those miners had been trapped a half-mile down like this 25 years ago anywhere on earth, they would be dead. What happened over the past 25 years that meant the difference between life and death for those men? Short answer: the Center Rock drill bit, from a private company in Berlin, Pa. that has 74 employees."
          The drill's rig came from Schramm Inc. in West Chester, Pa.
The high-strength cable winding around the big wheel atop that simple rig is from Germany.

Japan supplied the super-flexible, fiber-optic communications cable that linked the miners to the world above.

Samsung of South Korea supplied a cellphone that has its own projector.allowing the miners to see films or videos of loved ones

Cupron Inc. in Richmond, Va., supplied self-sterilizing socks made with copper fiber that consumed foot bacteria, and minimized odor and infection.
In an open economy, you will never know what is out there on the leading developmental edge of this or that industry. But the reality behind the miracles is the same: Someone innovates something useful, makes money from it, and re-innovates, or someone else trumps their innovation. Most of the time, no one notices. All it does is create jobs, wealth and well-being. But without this system running in the background, without the year-over-year progress embedded in these capitalist innovations, those trapped miners would be dead." (HT: Carpe Diem)

Wednesday, October 13, 2010

Link between the price of corn and the price of beef and pork---Your " Baconator" at Wendy's is about to increase in price...better get it today!

Meat Market Corn Crunch Means Costliest Beef in Quarter Century
""Meat prices are poised to extend a 14 percent rally this year that drove U.S. retail costs to the highest levels since the 1980s as surging corn futures prevent livestock producers from expanding their herds.""
Corn is a necessary input that goes into raising cattle and hogs. If the price of an input increases then the cost of producing the final product will increase as well (assuming other costs are not cut to balance it out).  Example: Assume current market equilibrium price for a pound of beef and/or pork is $1.00 per pound ("lb") and the current equilibrium quantity (quantity demanded = quantity supplied) for beef/pork is 100 lbs. Embedded in the market price of $1.00 is the cost of all the inputs and a "normal profit" earned by the rancher.  This is shown in the graph below:
Now, assume the price of the corn feed increases by $.50 per pound of meat produced.  This means to produce the same 100 pounds of meat, the cost (price) is going to increase by $.50. So 100 pounds of meat will cost $1.50 to produce. What is true at 100 pounds is going to be true at ALL quantities of beef/pork supplied. At any point on the current supply curve we can add $.50 to the cost (price).  If we do that at every quantity supplied we will have a shift of the supply curve to the LEFT, indicating a DECREASE in supply ("Supply 1"). See graph below:

We cannot ignore out market demand curve!!  As the supply curve shifts to the left, we move along our demand curve up and to the left until we reach a new market equilibrium at $1.25 (NOTE: On the graph above I have "P1" at $1.50. IT SHOULD be $1.25 NOT $1.50!!).  Our demand curve tell us that at $1.00 our quantity demanded was 100 pounds of meat, BUT at $1.25 our quantity demanded is 75 pounds. This is consistent with the Law of Demand (price varies inversely with quantity demanded).

The food chain continues. Beef and pork are inputs into making a "Bacon-ator".  Well, I don't have to tell you what is going to happen to the market price of that bad boy!...Unless Wendy's (1) counters the increase of beef/pork with efficiencies and/or cutting some other cost or (2) takes a reduction in profit, then you will pay more for that menace to health and well-being in America.

#%#&#t^*(&# BLASTED Ethanol!! We are about to get more of it for our cars! That means less corn for food...I apologize in advance to all you starving people on "The Margin".

A nice example of interest group politics intersecting with economics.  Two interest groups (Farm Lobby and an ethanol lobby (fronted by a former presidential candidate) )exerting a disproportionate amount of influence over a policy that is roundly condemned by virtually everyone else on the planet, from the auto industry and consumer groups, to environmenalists. 

More Ethanol to Be Allowed in Cars

 "The agency's move is likely to be strongly challenged by livestock ranchers, auto makers and oil refiners. While the groups have varying motives for opposing greater corn ethanol production, they—along with many environmentalists—generally say the government hasn't conducted sufficient testing to warrant higher concentrations of ethanol in motor fuels...While the groups have varying motives for opposing greater corn ethanol production, they—along with many environmentalists—generally say the government hasn't conducted sufficient testing to warrant higher concentrations of ethanol in motor fuels. 
It is going to create a two-tier system at the pump...This won't cause any confusion...or will it?

"As early as Wednesday, the Environmental Protection Agency plans to announce it will allow ethanol levels in gasoline blends to be as high as 15% for vehicles made since 2007, up from 10% currently, according to two people familiar with the matter.  Anticipating such criticism, the EPA plans to also solicit comment on how gasoline pumps should be labeled, so as to avoid or reduce the potential that drivers will put the wrong fuel into their cars, the people familiar with the matter said."
So, pumps will have to be re-labeled and precautions taken by businesses to make sure people put the right gas in their cars depending on the year their car was produced.  When it is introduced, I am going to take a lawn chair over to my local Walmart and watch people figure out which gas pump to pull up to...I wonder if the warning label on the pump will  also have a number to call the EPA for inquiries...I would hate to be on the receiving end of those messages...

Monday, October 11, 2010

Trade flows between the US, European Union and China in one easy graphic...It made my night to find this! Ummm, yes I DO have a life, thank you very much!

       Trade flows between the US, China and the European Union...follow the arrows.  Start in the US. We export to China $69.5 billion worth of goods and services and import from China $296.4 Billion.  The E.U. exports $141.3 billion to China and imports $312.8 Billion from China. The next effect is China is a net gainer in terms of "foreign currency reserves" (see boxed inset below and to the right).  In other words, they have lots of dollars and euros.  Many of those dollars come back to the US to buy our national debt or to purchase other "financial assets", like home mortgages or car loans.  Yes, the Chinese govt may be the actual owner of all/part of your house or car! Strange, but true.  Should we be afraid of this?  If you listen to the politicians right  now campaigning for Congress, you would think so.  My bet is that right after the elections next month, you will hear very little about the Chinese financial threat.  Congress will have start to draw up a new Federal Budget and they are going to need those dollars from the Chinese (and other sources)...Best not to bite, or bite too hard, the hand that feeds you...

Source: The Big Picture Blog

Sunday, October 10, 2010

Gas prices getting you down? Want to know why it is increasing? Glad you asked....

    The price of gasoline has increased lately, if you have not noticed. There are several reasons for this, from refining problems, oil supply interruptions, price manipulation, and, well, the oil "man" is greedy.  All may be true in some capacity, but I want to focus on an actual contributor: The Depreciating US Dollar in the foreign exchange market. 
    Almost all major commodities (oil, wheat, cotton, copper, gold, etc) are bought and sold with dollars, regardless of the nationality of the buyers and sellers. In other words, if India wants to buy oil from Venezuela, or Canada wants to buy rice from Thailand, they must conduct the transaction using US dollars. The dollar is the currency of record for international business. I am going to use a very simple example to illustrate the problem of the dollars depreciation on the price of internationally traded commodities, specifically oil.
   I am the dictator of an oil producing nation and I depend on the revenues from MY oil to keep me in power.  My currency is known as "The Hayward, or the "TH"".  Right now in the foreign exchange market the exchange rate for the US Dollar to TH's is at parity, or $1.00 = 1.00TH (the reciprocal is also true, 1.00TH =$1.00).
    Assume currently the market price of a barrel of oil (about 42 gallons) is $50.00US.  So, when I sell a barrel of oil on the international market I get $50.00US. When I take that back home I can exchange it for 50.00TH and buy a new gun to protect myself for 50TH.  I am happy!
    What happens if the dollar DEPRECIATES relative to my currency?  If this were to happen then it means that it now takes MORE dollars to buy the same number of my currency, the TH.  Assume the new exchange rate is now $2.00 = 1TH. This means it now takes $2.00US to buy 1.00TH.  If I sell my barrel of oil for $50.00US on the open market and then exchange it back into TH's, then I will ONLY receive 25TH's! Not enough to buy another gun! Well, this is not acceptable.  The purchasing power of my currency has decreased. I am going to have to do something about it...
   I must raise the US dollar price of my oil to $100.00US just to get the same 50.00TH I got before ($2.00US fetches 1.00TH-- $100.00 divided by $2.00 equals 50TH).  I obviously cannot do this on my own. I don't have enough market power world-wide to do so.  The market forces of supply and demand (or market manipulation, if that is your perspective) will increase the dollar price of oil for me.  Other oil producers will face the same problem too.  The world price of oil increases, oil is a major input into making gasoline, hence the price of gasoline increases at the pump...Stuff rolls downhill...
   Most people don't link the value of the dollar to the price of gasoline.  Again, it is not necessarily the main cause, but it is contributor.  Feel smarter? You should--you now know something 99% of Americans don't know....

Supply and Demand analysis of the wheat and corn markets...What else are you doing on a Sunday morning? This weeks feature: Complements!!

This article (WSJ: Harvest Shocker Rattles Wall Street) is chocked full of basic supply and demand problems, including substitutes, complements, and the overall economic concept of opportunity cost.  This entry will focus only on a primary market and its affect on complements.

The commodities market reacted to a USDA report that downgraded its projections for the coming wheat, corn and soybean harvests. 
"The U.S. Department of Agriculture sliced its harvest projections for corn, soybeans and wheat, throwing fuel on a three-month-old commodity rally and deepening worries about rising food prices. The agency's decision to cut its month-old corn projection by 3.8% startled traders, who had expected a far smaller reduction. Prices of corn-futures contracts at the Chicago Board of Trade soared Friday by their daily permissible limit of 30 cents. The corn contract for December delivery settled at $5.2825 a bushel, up 6%."

For simplicity, in the first two graphs below I grouped wheat and corn into the same broad market since both are affected in a similar way.  The first graph show the market in equilibrium before the announcement:
Supply is affected mostly by the cost of the inputs that go into producing a good, such a labor, raw materials, and other production resources consumed.  However, there is one determinant of supply that is more general and does not directly affect the cost of producing --"extraneous factors".  This is a catch-all for anything else that changes supply--weather, terrorism, asymmetrical information, etc.  This scenario probably can be classified as the latter, because the market was not expecting this type of report on the projected crop yield. 

So, the USDA is expecting a smaller harvest, which would indicate a DECREASE in supply of wheat and corn. 

Graphically this would be shown by a shift of the supply curve to the LEFT representing a DECREASE in supply. 
The market quantity decreases and the market price increases because (1) we know the quantity supplied at every price decreases (relative to the previous curve) and (2) moving along our demand curve up and to the left we can see that the quantity demanded decreases as the price increases (Law of Demand).  We are now at a new equilibrium price of "P1".  The article suggests this is good for other businesses:
""The report sent ripples across Wall Street, where prices of stocks of food companies that buy large amounts of grain fell. Chicken giant Tyson Foods Inc. slipped 7.7% Friday. Meanwhile, the stocks of companies that supply farmers, such as tractor maker Deere & Co. and fertilizer maker Mosaic Co., rose 4.8% and 6.6%, respectively.""
There are SEVERAL supply and demand affects in this one paragraph! But we will only look at one--the affect on farm equipment producers such as Deere and Co. that makes and sells agricultural harvesting equipment.
""Economists expect farmers to respond to high grain prices by planting millions more acres of corn and wheat...""
If the price of wheat/corn increases, farmers will plant and harvest more of these two commodities.  At the margins they will need more farm equipment to harvest the crops.  Farm equipment is a complement, which means it is used in conjunction with another good, in this case wheat and corn.
""Meanwhile, the stocks of companies that supply farmers, such as tractor maker Deere & Co. and fertilizer maker Mosaic Co., rose 4.8% and 6.6%, respectively.""
Graphically, in the market for "Farm Equipment" we have an existing equilibrium (the first graph) . 

An increase in demand for Farm Equipment will shift the demand curve to the RIGHT as the graph below illustrates:
The market quantity increases and the market price increases because (1) we know the quantity demanded at every price increases (relative to the previous curve) and (2) moving along our supply curve up and to the right we can see that the quantity supplied increases as the price increases (Law of Supply). We are now at a new equilibrium price "P1".

 Want extra credit? Read the article and respond with a short analysis of other (1) supply and demand problems and/or other basic economic concepts you can find...Hey, it is like a scavenger hunt!  I think I will do this for my next birthday party!!

How many of you Americans could ACTUALLY pass the Citizenship test to become a US Citizen? HA! I thought so...See test here...

Can YOU pass this test to become a US citizen?  For many of us, it is a good thing we were born here, because we might not be able to get a passing score! Below is a small sample of the questions.  Go HERE to see the complete test and the answers..GOOD LUCK on becoming an American! :)

96. Who signs bills to become laws?
a) the Secretary of State
b) the Chief Justice of the Supreme Court
c) the Vice President
d) the President

95. What did Susan B. Anthony do?
 a) fought for women's rights
b) founded the Red Cross
c) the first woman elected to the House of Representatives
d) made the first flag of the United States

94. What ocean is on the East Coast of the United States?
a) Arctic Ocean
b) Indian Ocean
c) Pacific Ocean
d) Atlantic Ocean

93. What is the name of the Speaker of the House of Representatives now?
a) Hilary Clinton
b) Robert Byrd
c) Joe Biden
d) Nancy Pelosi

92. There are four amendments to the Constitution about who can vote. Describe one of them.
a) Citizens eighteen (18) and older can vote.
b) Citizens seventeen (17) and older can vote.
c) Only citizens with a job can vote.
d) Citizens by birth only can vote.

91. Who is the Commander in Chief of the military?
a) the Vice President
b) the Secretary of Defense
c) the President
d) the Attorney General

90. Why does the flag have 13 stripes?
a) because the stripes represent the members of the Second Continental Congress
b) because it was considered lucky to have 13 stripes on the flag
c) because the stripes represent the original colonies
d) because the stripes represent the number of signatures on the U.S. Constitution

85. How many amendments does the Constitution have?
a) ten (10)
b) twenty-three (23)
c) twenty-one (21)
d) twenty-seven (27)
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