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.

What is that saying about Kissing Your Sister?

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.

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...

My Informal Lime Report Update: A price increase!! According to reports, this should NOT be happening...

I have been chronicling the price of Limes at my neighborhood Kroger (Northern Burbs of Columbus OH) for the past month or so. 

Today (May 3rd) they are $1.59 each.  Just last week they were $1.49.  This article HERE suggests that the price is about to pop and decrease in time for Cinco de Mayo.  Apparently the supply chain has been replenished enough for supply to align more closely with demand.

""This week's sharp move lower comes amid increased supply from Mexico, where the majority of fruit consumed in the U.S. originates, experts said. Falling demand has also contributed to the recent easing.""

This may be a nice illustration of prices being flexible upward but "sticky"on the way down.  Retailers may be capturing some lost profit as they lagged in raising prices in fear of alienating customers.

The supply certainly was adequate at this store on a Saturday afternoon.   :)

Nice graph showing Median Age of workers and an aging population. Is there something to see here?

Via Twitter and Micheal McDonough.

"Median" age means half of workers are older than 42.40 years of age and half are under (read that on the RIGHT SCALE).

The percent of the population that is over 65 is 14.2% (LEFT SCALE).

Both these numbers are all time highs, as you can see.

During the late 50's and part of the 60's we had a high in median age just a year or so below the current one but the percent of the population over 65 was significantly less (assumption--the graph does not show it).

So, we have an increasingly aging workforce taking care (in terms of entitlements) of an increasingly aging population.

Not sure my back can take it and my feet really hurt.  Hope we start trending young again sometime soon.

Source: Twitter via Michael McDonough

Nice graphic on revised employment reports from the St Louis Fed

This graphic comes from the St Louis branch of the US Federal Reserve Bank.

It is a nice illustration of (1) why we should pay only mild attention to INITIAL employment reports and (2) the importance of looking for longer terms trends in economic data reporting.

However, both might be of scant use because the employment report is a "lagging indicator".  It reports on what has already happened and may or may not be useful in assessing the current state of the economy.  But we have to dance with the partner we came with.

As the Bureau of Labor Statistics gathers more data about a particular time period they can revisit and update the number of jobs created

According to the numbers below, there was a +23% difference in the average number of new jobs reported initially and what an updated revised average number 3 or so months later.  That seems significant to me.

Does that mean you can just go ahead and add 23% more jobs to the next jobs report to extrapolate that out to a longer term trend? Nope. Only a good politician or a bad statistician would do that...

The revision could be biasd upward OR downward:

The pattern of the revisions shown in the chart is consistent with the evidence showing that revisions tend to be procyclical. That is, during an expansion, revisions to payroll employment tend to be positive; and, during periods of slow economic growth and recessions, the revisions tend to be negative.--St Louis Fed

Electric Car buying and subsidies. Who REALLY benefits?

Electric Cars are considered a net positive for a lot of reasons.  I know this can be a point of contention, but that is not what this posting is about.

The article link below is about a proposal to increase the Tax Credit for people who elected to purchase an Electric car.  The thinking is this will in effect make buying one less expensive and, at the margin, people would purchase more of them.

The suggestion is the market fails to supply enough of this type of car at a low enough price.

A subsidy, in this case at tax credit for buyers, is one way to correct for the "externality".

Electric cars tax credit should rise to $10,000, says Congressman:  

Electric cars: New legislation would increase the tax credit for the purchase of electric vehicles from $7,500 up to $10,000 as a way to make it easier for people to buy electric cars.

Here are my series of slides that illustrate how this might work AND how it is not as simple or effective as it is intended to be.  Things never are in Economics!

What do you think?  Constructive comments or corrections are welcome.  Feel fee to steal.

Electric car subsidy from Gene Hayward

Latest GDP report out. I see heating bills and transfer payments. What do you see?

The latest Gross Domestic Product report for the 1st Quarter of 2014 just came out.  Not a good one at all---GDP grew at a .1% pace (yes, POINT 1 percent!).  Stagnant for the most part.

However, I have seen commentary in a few places that suggest a bright spot is "Personal Consumption Expenditures" or "PCE" for short---spending by regular folk like you and me.  It is up 3%.

The US Bureau of Economic Analysis (BEA) has a nice interactive graph that more information can be obtained than is generally reported in the media.  See it HERE.

I wanted to see how the components within PCE's performed relative to each other.

This first graph show "Goods", broken down into Durable and Non-Durable categories, and Services.  You can see the GOLD line representing the broad category Services did very well compared to material good expenditures. YAY Services!!

Ok, this is good information. But if expenditures on Services as a category carried the economy, what exactly are those services that we collectively splurged on?  Glad you asked.

The graph below breaks down the category of Services into further broad categories BUT at least it is winnowed down a bit.

The BLUE line represents Services as a whole (just like the GOLD one did above).

The light-greenish line below the BLUE line represents "Health Care" spending as a category. You can see spending on health care related expenses was the majority of spending that occurred in the first 3 month of this year.

It was followed by expenditures on "Housing and Utilities".

Those two categories of expenditures carried the economy in the 1st Quarter.

Considering about 50% of health care dollars are "government transfer payments" and many/most of the dollars spent on Housing and Utilities were spent on heating bills that spiked in January and February, it seems like we pretty much did not do anything else.

Not a broad based recovery by any means.  At least not this early in the new year.

Is the US REALLY falling behind China in terms of measuring GDP? "Objects in mirror appear larger than they really are" is not just for rear view mirrors...

There is a new International Monetary Fund (IMF)  report out regarding China's imminent surpassing of the US as the worlds largest economy, as measured by Gross Domestic Product (GDP).

It centers around measuring GDP on a "nominal" basis (current exchange rates) or by a concepts called "Purchasing Power Parity" (normalizing exchange rates).

I think most people who see the headline will not understand the important distinctions between these two ways to measure the dollar value of a nations output.

The graphic below and the article that accompanies it (from the Wall Street Journal) is one of the better ones I have seen that explains the positives and negatives of each measurement.

As with ANY statistic, caution is advised!

China’s Economy Surpassing U.S.? Well, Yes and No

Source: Wall Street Journal

There are a number of reports around Wednesday (here and here) that China’s economy, by one measure at least, is likely to surpass the U.S. in size sometime this year.

The headlines will surprise many people, used to hearing China’s economy will overtake the U.S. sometime in the 2020s, or even later.

On Wednesday, the International Comparison Program, a statistical project coordinated by the World Bank, announced new data on the size of economies by purchasing power parity that suggests China’s economy is bigger than previously thought.

But the latest news is anything but surprising.

Nice graphic on the number of jobs lost during the recession then gained back, by wage range. Surprised?

This graphic on the losses and then gains in jobs in different wage bands is from The National Employment Law Project. (A liberal group). It has some other interesting graphics and explanations as well. Worth a read.

If you take the number of jobs gained since the end of the recession and divide that by the number lost during the recession you will get a "New job per Job Lost Ratio" for each of the wage categories.

For High wage industries the ratio is: .73 (every job lost we have gained .73 jobs back. 27 percentage points below parity)

For Mid-wage industries the ratio is: .70 (every job lost we have gained .70  jobs back. 30 percentage points below parity)

For Low-wage industries the ratio is: 1.94 (every job lost we have gained 1.94 jobs back.  94 percentage points ABOVE parity)

Not all income inequality is the same: The College Town Edition.

A nice example that illustrates the maxim "There are lies, damn, lies, and Statistics".

Five Thirty Eight (Ben Casselman) has a nice posting on how income inequality measurements can present a picture that is not a true reflection of the actual situation.

College Towns with a high number of college students are a prime example.

This graphic shows how misleading the measure of income inequality in some of the biggest college towns in the US can be.

The key columns to look at are "Students Included" and "Students Excluded" from the measurement. As you can see when students, who may be income poor but not cash or resource poor, are excluded from the measurement the areas "Median Household Income" rises significantly.

I encourage you to read the whole article.

Source: Five Thirty Eight (Ben Casselman)

How much stuff can you make from one bale of Cotton?

Saw this on Twitter from an organization called "American Farmers".  Thought it interesting. I like graphics that quantify and put into context the inputs that go into making finished good outputs.

Go HERE for the official size/weight dimensions for a standard bale of cotton.

Trade restrictions: The Quota Edition. Get primed with this primer!!

I put together a presentation on how a QUOTA (as opposed to a Tariff) put on Imports affects the market for a good.

This is meant as an introduction to the concept of a quota. It can get more complicated.  But I think I have been comprehensive enough to get you started for a basic economics class.

Quota from Gene Hayward

Nice set of 3 videos to teach Structural Unemployment due to technological change. Where did the jobs go? Oh, I see now...

When teaching Structural Unemployment it is quite common for teachers to use the auto manufacturing sector as a prime example of how advancements in technology reduce the need for assembly line workers.

I am not sure students today, who are used to technology and likely do not have parents who work on an assembly line, understand how significant the changes have been over just the past 100 years.

Here are a series of 3 videos that show the progression of technology and processes that went into making vehicles.

I find the one from 1936 the most intriguing.  I was surprised by the high level of mechanical engineering in the technology used on the assembly line.

It is interesting to compare/contrast the levels of employment you see in each of the time periods and the tasks that people performed.  You can vividly see how jobs were automated out of existence over time.

Very early 1900's:

From 1936:

Very recent video of a BMW facility (I think in Spartenburg, South Carolina)