## Wednesday, May 7, 2014

### Purchasing power of money and McDonalds. Let's go back to the Disco Era

This menu board I posted yesterday gives me food for thought (pardon the pun).  It makes it easy to compare the purchasing power of wages in different time periods if you have actual prices people paid for things at the time.

Using these prices I can quickly show the purchasing power of the dollars in (1) the prevailing minimum wage and the average wage paid to workers (that data can be found HERE at the St Louis Fed Reserve)

In 1974 the minimum wage was \$1.60 per hour (from HERE).  The cost in nominal (current) dollars to purchase a Big Mac, Large Fry and a Large Soft Drink in 1974 was \$1.31 (\$.65+\$.46+\$.20 from prices below).

It would take a minimum wage worker earning \$1.60 per hour (NOT subtracting payroll taxes) 49 minutes to earn enough to purchase the meal.

Today a Big Mac Combo Meal costs \$5.69 (Price HERE). At worker earning \$7.25 would have to work 47 minutes to get the meal deal.

The average wage for a "production worker and non-supervisory" job in 1974 was \$4.45. It would have taken this person 17 minutes to purchase the \$1.31 meal.

In 2014 the average wage for the same class of worker was \$20.49. It would have taken this person 17 minutes (16.8 actually) to purchase the combo at \$5.69.

By EITHER measure the purchasing power of the minimum wage AND the average worker wage are about the same, 40 years apart.

So, the conclusion? No great shakes, but by this measure the purchasing power of wages, minimum and average, have not lost ground BUT it have not gained either.

## Tuesday, May 6, 2014

### McDonalds menu board from 1974. Nice lesson on prices and selection change over time.

I saw this photo of an aged McDonald's menu on Twitter.  I spent about 2 minutes trying to confirm and the best I can find it is from 1974.

According the Bureau of Labors Statistics inflation calculator, \$1.00 in 1974 is equivalent to \$4.79 in today's dollars.  So, multiply the numbers you see below by 4.79 and you will get those prices in today's money.

For instance, a \$.65 Big Mac would be \$3.11 today.

Using pricing information HERE, a Big Mac today is priced at \$3.99 (not as part of a combo meal). This means the price of the Big Mac has increased 28% over the general rate of inflation for the past 40 years.

A fun-ish class excercise could be to do like I just did above and look at how, after adjusting for inflation, prices have changed over time.

Questions to ask would be how has portion size changed?  Quality and composition of the food? Competition in the marketplace?

Here is a recent one. Big difference, eh?  The simple life no more.

## Monday, May 5, 2014

### Short currency exchange rate lesson: Kia Motors and the Won

The trading of  goods and/or services internationally requires the exchanging of currencies to facilitate those transactions.  Consumers and producers are at the mercy of the prevailing exchange rates their currency has relative to another currency.

Any change in that exchange rate can have an impact on trade and the profits realized from that trade:

# Kia Motor Profit Rises on High-End Sales Despite Challenge of Strong Won

Exports of Kia's key models, including the Sportage sport-utility vehicle and the Soul wagon, rose 13% in the first quarter from a year earlier, contributing to a 7% increase in average export prices for the period, the company said.
Still, the company warned that the appreciating won could hurt earnings in the coming quarters.
"The won is maintaining its upward trend, while competition is intensifying with aggressive marketing activities by rival auto makers and a series of new launches," said Kia Chief Financial Officer Park Han-woo.
The won in 2013 reversed several years of weakness and has been on a steady rise against major currencies. It gained 1.5% against the U.S. dollar in the first quarter from a year earlier, and recently traded near a six-year high.
Korean Won is trading at 1030.14 Won (W) per US Dollar today.  This means the holder of \$1.00 US who wishes to exchange it into Korean Won would receive 1030.14(W) for it.

If tomorrow \$1.00 purchases 1020.14(W) then the purchasing power of the dollar has decreased ( I can buy 10 FEWER Won today than I could yesterday). This means that items in Korea price in Won will become MORE expensive for me to purchase--I have to now give up more than \$1.00 to buy the same amount of Won as I purchased yesterday. With rounding that would be \$1.01 US. It is only a penny but with BIG money a 1% difference adds up.

It can be said the Dollar has DEPRECIATED in value and the Won has APPRECIATED in value.

Kia can be hurt in 2 ways with an Appreciating currency.

(1) it makes a Kia produced in Korea MORE expensive for holders of dollars to purchase, as in the example above.  NOTHING regarding the vehicle made it more expensive ONLY the change in exchange rates between the two currencies did so.

Using the 1% example above, a Kia priced at \$30,000 US would now cost \$30,300 US (\$30,000 X \$1.01).

(2) any profits Kia earns in US dollars will now buy FEWER Won than it did before the Depreciation of the US dollar, so in profits in Won will be less than they other would have been.

Using the 1% again, profits of, say, \$500 million dollars would be effectively reduced to \$490.128 million (\$1.00/1020.14 X \$500M).

Bottom line: Exchange rates are another thing businesses have to account for in the course of doing trade across borders.

### PPF illustration with maps of Corn and Soybean acreage. Nice real life example.

In the first week of an introductory Economics students encounter the Production Possibilities Frontier (PPF) as the first formal model used in both Micro and Macroeconomics.

The PPF illustrates the productive capacity of an economy if it were fully-employing all of its useful resources (Land, Labor, Capital, Entrepreneurship). The model is flexible and can be used in a Macro sense comparing the production of the broad categories of Capital and Consumer Goods or in a Micro sense comparing the production of two specific goods such as Corn and Soybeans.

If the economy is producing ON (does not matter where) the PPF it is achieving "Productive Efficiency". This means it is fully utilizing its productive resources in the the most efficient and lowest cost way.

WHERE on the PPF, or the particular bundle of the two goods, the economy produces is called "Allocative Efficiency".  That bundle a society produces and consumes is determined by the economic system (market vs socialist vs command) or some combination thereof.  In the US, the price mechanism and/or government policy determines the Allocatively Efficient bundle of goods in the market place.

Nowhere is this more evident than in Agriculture.

Let's look at the two-good model---Corn and Soybeans.

Both require roughly the same climate, terrain and soil to grow.  The Opportunity Cost of switching from growing one to the other is minimal--an acre of land for growing corn will produce a maximum yield in either corn or soybeans.

So, our PFF for Corn and Soybeans, shown below, illustrating the trade-off between growing one or the other would be a straight line representing "constant opportunity costs".  Assume our initial equilibrium point in the year 2001 was at combination of Corn and Soybean planted and harvested acreage---Point "A".

However, in the mid-2000's due to a policy change we had a relatively massive "Allocative Efficiency" change and a re-allocation of land resource from the production of Soybeans to Corn--Point "A" to Point "B".  How do I know this?

See the map below.  The RED areas on the map on the left show the DECREASE in acreage planted for Soybeans and the BLUE areas on the right map show the INCREASE in acreage planted to Corn.

Matches up pretty well, wouldn't you say?

 Source:  From USDA Atlas Maps

What was the major the policy change that prompted this reallocation?  I will just leave you with a picture to ponder that one...

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