The signs are not good...No, really, the signs are NOT good...Can't you see that??

ALL CAPS? Not OK on road signs, federal government says

In a nod to the fading eyesight of the nation's growing number of aging Baby Boomers, the federal government is requiring communities around the USA to change street name signs from all capital letters to a combination of capital and lowercase letters. The government says that makes them easier to read.


Cash-starved localities also will have to dig deep for new, more reflective traffic signs to make them easier to see at night, especially by older drivers.

Under Federal Highway Administration (FHWA) regulations, communities have until 2015 to improve the nighttime visibility of roadside signs — such as stop, yield and railroad crossing signs. The issue is how well a sign redirects light from an automobile's headlights back toward the vehicle. Signs that fail to meet minimum standards must be replaced. Communities will be allowed to change the street name signs as they wear out.

The changes are called for in the Manual on Uniform Traffic Control Devices, an 816-page (plus appendixes) behemoth that sets standards for traffic control devices — signs, signals and pavement markings.

Are the conditions ripe for Stagflation? The latest breaking news on "rare earth" minerals is dog piling on the cost of producing...

     Have we moved one step closer to Stagflation?  Stagflation a term used to describe the twin problems of stagnant GDP (hence increasing/high unemployment) and inflation.  We already have the high unemployment...This is the WORST thing that can happen to an economy in the short run because it is extremely difficult to get out of.  Traditional Aggregate Demand policies tend to exaccerbate the problem. 

     In the last week I have blogged about rising grain prices which affect many parts of the food supply, the depreciating dollar which increases the prices of globally traded commodities (oil, metals, minerals, agricultural products, etc) , and now this breaking news from China:

""China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted shipments of those materials to the United States and Europe, three industry officials said on Tuesday.

 ""China mines 95 percent of the world’s rare earth elements, which have broad commercial and military applications, and are vital to the manufacture of products as diverse as cellphones, large wind turbines and guided missiles. Any curtailment of Chinese supplies of rare earths is likely to be greeted with alarm in Western capitals, particularly because Western companies are believed to keep much smaller stockpiles of rare earths than Japanese companies. ""

This will only serve to increase the price of these minerals for the producers of the goods that use these "rare earth minerals".   All these things mentioned above increase the cost of producing a wide variety of goods.  This tends to shift the short-run Aggregate Supply curve to the left, decreasing GDP, increasing unemployment and increasing the average price level of goods---Stagflation...This is what the textbook says may happen.  I certainly hope it does not, but...

I-Pad price in selected countries...Useful in comparing retail price differences across borders

The price of an I-Pad in various countries.  It is also a good illustration on the differences in sales taxes in said countries as well. The price is across the top on the graph in increments of $100.  I am a little curious as to why it is so costly in China.  The Big Mac Index shows we can get a hamburger for less dollars, why not the I-Pad. I honestly don't know the answer...Any ideas???

The Economist

From The Economist: ""IF YOU fly from Hong Kong to Frankfurt or Paris and look suspiciously like a gadget lover, chances are that you will be searched by customs officers: an iPad with Wi-Fi and 16 gigabytes of memory costs $200 less in the former British colony than in Germany and France. Given the risk of having to pay extra duty (and the price of the flight), potential iPad buyers in both countries ought to consider a trip to nearby Luxembourg, where Apple's popular device is $35 cheaper. The sales tax is only one reason for such differences in price. Consumers in Hong Kong also get a better deal because iPads are assembled in mainland China. Buyers in Switzerland have to pay more because there is less competition between retailers. In China and Mexico, the device may be cheaper because people are poorer. Incidentally, if income is taken into account, consumers in Luxembourg get the best deal: they only have to spend about 0.8% of the city-state's GDP per person on an iPad.""

What do the following have in common: The i-Pad, Kids with Special Needs, Frederic Bastiat, and Adam Smith--More than you would think!

As a parent of a special needs child AND an economics teacher, this story from the WSJ: Using the iPad to Connect really inspired me.  The i-Pad is conferring "unseen" benefits on special needs children that even Steve Jobs admits he never saw coming:

""The rise of mainstream tablet computers is proving to have unforeseen benefits for children with speech and communication problems—and such use has the potential to disrupt a business where specialized devices can cost thousands of dollars.


Apple Chief Executive Steve Jobs said in an interview that he hopes the easy-to-use design of the iPad has helped children with special needs take to the device more quickly, but that its use in therapy wasn't something Apple engineers could have foreseen.


"We take no credit for this, and that's not our intention," Mr. Jobs said, adding that the emails he gets from parents resonate with him. "Our intention is to say something is going on here," and researchers should "take a look at this.""

Frederic Bastiat and Adam Smith commenting on the nature of why people work to produce a good, such as the i-Pad, and the residual benefits that society enjoys from that pursuit:

"By virtue of exchange, one man's prosperity is beneficial to all others."--Frederic Bastiat 

"By pursuing his own interest [every individual] frequently promotes that of the society more effectually than when he really intends to promote it...."--Adam Smith

This article is a great teaching tool as well---creative destruction, positive externalities, and competition come to mind first.  I highly recommend it to everyone to read....

The waste created from getting food from the field to the consumer--Wanna get rich? Figure out a way to eliminate it or at least minimize it...

Anyone who attempts to live the "economic way of thinking", waste and/or inefficiency is the bane of their existence.  I have been reading a thread from a blog by a terrific AP economics teacher, who also teaches a class on logistics.  He made a point that has stuck with me and when I saw the article below on the tremendous amount of food that is wasted from field-to-table, it brought it to life (paraphrased): "If you want to get rich, create a way to get goods from one place to another faster than it is being done now." Are you up to the challenge?  Extra credit if you can come up with a viable solution to this problem!! (Other than the solutions mentioned below, of course)

""From WSJ: The U.S. produces about 591 billion pounds of food each year, and up to half of it goes to waste, costing farmers, consumers and businesses hundreds of billions of dollars.In his new book, "American Wasteland" (Da Capo Press, 2010), Jonathan Bloom examines the story of discarded food, from vegetables left to rot in the field to unsold hamburgers shovelled into restaurant trash bins. He also offers potential remedies, such as taxes on landfills, expanded composting programs and incentives for farmers to harvest all that they grow and to donate what they can't sell.
Below, a look at the cycle of food waste.

LEFT IN THE FIELD
Food waste begins at farms. With lettuce, for example, the average harvest rate has been estimated at 85% to 90%. The rest of the lettuce—heads that don't look or feel perfect on quick inspection—are left in the field. One cucumber grower said that at least half of the cucumbers on his farms aren't harvested,mostly because they are too curved (making them hard to pack) or have white spots or small cracks. Farm losses are generally higher for hand-picked fruit and perishable vegetables than for machine-harvested commodity crops like corn and wheat; about 9% of commodity crops planted in the U.S. aren't harvested.

LOST IN TRANSIT
The average item in the produce section of your supermarket travels some 1,500 miles before arriving at its destination, either a wholesaler or a supermarket's regional distribution center. These journeys by truck, train, plane and ship bring more opportunities for lost food, as items decay or get damaged en route. In-transit losses reach 10% to 15% for some crops, with tomatoes, leafy greens and grapes among the most fragile.

SUPERMARKET SWEEP
U.S. supermarkets throw away an estimated 30 million pounds of food every day—damaged goods, expired products, dented boxes and the like. According to a recent study by the USDA, in 2006 supermarkets tossed out, on average, 8% of their fresh fruit, 8% of their fresh vegetables, 5% of their fresh meat and poultry and 9% of their fresh seafood. (Among the most frequently discarded items were mustard greens, at 61%, papaya, at 51%, and veal, at 28%.) Some of the unwanted food gets composted or donated, but most of it ends up in landfills. Researchers also estimate that American households waste 15% to 25% of the food that they buy, but the actual figure may be higher. A recent study in the United Kingdom found that British consumers throw away a third of the food that comes into their homes.

TODAY'S SPECIAL, TOMORROW'S TRASH
Commercial kitchens (in hospitals, schools and restaurants) throw away between 4% and 10% of the food that they purchase, for reasons like overproduction, spoilage, expiration, trimmings, burned items, catering leftovers and contamination. Up to 10% of the items at fast-food restaurants are discarded because they've sat too long after being prepared. The losses continue on the plate. A researcher from the Cornell University Food and Brand Lab found that diners leave an average of 17% of their meals uneaten, because of factors like large serving sizes or unwanted side dishes. And roughly 55% of major leftovers aren't taken home.

INTO THE LANDFILL
Food scraps are the second-largest component of the national waste stream, making up 19% of what we put into landfills. (Americans compost only about 2.5% of the food that they discard.) Food in landfill creates methane, a source of greenhouse gas. In addition, 2% of all U.S. energy consumption goes into producing food that is ultimately thrown out. Some cities and countries have taken action. Seattle and San Francisco made household composting mandatory in 2009, and last summer, Norway banned food and biodegradable waste from its landfills.""

Updated graphs for Studying/Analyzing Fiscal Policy---Very useful for teaching the topic

I am teaching Fiscal Policy this week and just came across these charts, which are more updated than the ones I have in my PPT.  (HT: The New Arthurian)...All charts from Tax Policy Center

Mmmm....Cheeeeese Burrrrgerrrr!! All you wanted to know but were afraid to ask.

Source: The Mint

Budget Planner - Mint.com

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? No...so what else might contribute to the price increases in the US AND China for the Great Sandwich??  Extra-Extra Credit!!

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)

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...

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

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!!