Nice comparison of National GDP to Metropolitan Statistical Areas (MSA's). Terrific learning tool for students.

Here is another way to quantify the size of the US economy (From US Mayors.org via CityLab).

Economies are measured using Gross Domestic Product (GDP)---the monetary (dollar) value of the production of goods and services within the borders of a country in a given year.  That total dollar amount is derived from each the individual 50 states Gross State Product (GSP). In turn, each states GSP comes from the sum of production from all its cities, towns, villages, etc.

The Census Bureau divides the country up into "Metro Statistical Areas" or MSA's.  MSA's could be all contained within a state OR they could be the combining of the population areas of a multiple of states.  For economic and social purposes you could consider these MSA's separate and distinct from the areas around them because of their concentration of people, commercial and social activities.

To get an idea of the economic impact these MSA's have, this report compares their economic output with countries around the world.

For example, the MSA of the New York, NJ, Pennsylvania has a GMP of $1.335 trillion dollars.  If this MSA were its own country, it would rank as the 13th largest economy in the world (below Australia, above Spain).

Here are the Top 90. Go to the report to see the whole list and find your MSA or country and see how it ranks!

Having fun with the CPI. I show how you can read this report quickly and actually get something out of it!

Looking at a government report can be overwhelming.  SO MANY numbers and categories!  In this blog posting I would like to offer a simple way of breaking down a report and getting something useful out of it.

The latest measure of consumer prices is out today (June 17th, 2014).  While we have a relatively low level of over-all inflation, not all parts of the market basket that the government uses to measure prices necessarily reflect it. Some prices have increased, some decreased and some stayed the same.

Here is a simple exercise I do when this report comes out.

I look at the how prices have changed over the past year.  Below is the first page of the whole report and it starts with "Food", my favorite subject.  Focus on the highlighted column in YELLOW.  This shows how the price of food has changed, in percentage terms, over the past 12 months.

The first line shows that "All Items" as measured the CPI have increased 2.1% in the last 12 months.  Food as a category has increased 2.5%.  From this we can conclude the price of food as a category has increased slightly faster than all the other items in the CPI market basket.  Now we can dig deeper.

Food as a category has two components:  "Food at Home" and "Food away from Home".  I only screen shot "Food at Home" to use for this but you can find the other category in the whole report.

Food at Home has increased 2.7%.  This is 29% higher than prices over-all (2.1%).

Now the fun part.  Use 2.7% as your baseline and compare it to all the other "Food at Home" prices. If the percentage number you see is below 2.7% than that category has risen slower than all items of food at home OR it has actually decreased in over the past year (see negative numbers).

If the number is above 2.7% then the prices of that category of food at home have increased faster than the category as a whole.

What do you see?  What has increased faster than the average? Slower?  Actually decreased in price?  WHY????  So many opportunities to tie in basic econ principles with current events.

Have fun!

Having fun with data. The change in hospitals and hospital beds since 1975 perplexes me. Explain to me what is going on.

In 1975 there were 7,156 hospitals (Federal and Non-Federal--which would be State, Local and Private) in the US.  In 2011 there were 5,747.  A decrease of 20%.

In 1975 there were 1,465,828 hospital BEDS (Federal and Non-Federal).  In 2011 there were 924,333.  A decrease of 37%.

In 1975 the US population was 216,000,000  . In 2011 it was 311,000,000.  An INCREASE of 44%

If you look at the line that is highlighted in GOLD you see the number of beds at very small facilities have increases by 2,000 BUT at every other bed range there have been decreases.  Some small, some large decreases but decreases nonetheless.

Our population is greater.  Demographics have trended much older. There are FEWER hospitals and beds when the demand, it seems to me, is effectively much higher.

Did this surprise you? Did me. I am kinda at a loss to explain it.  Any ideas?

Source: Centers for Disease Control (CDC)

China Cuts "Required Reserve Ratio" to stimulate lending and Investment. What does that mean exactly?

One of the tools modern Central Banks around the world have to affect money supply, hence interest rates that money is saved or borrow at, is the "Required Reserve Ratio (RRR)".

To prevent banks from lending out (or otherwise use) all of a deposit made by a customer they are required to with-hold a certain  percentage of that deposit in an account with the Central Bank.  After they with-hold the required amount banks put the remaining balance in their "Excess Reserve" accounts from which they can make loans.

China’s largest banks are currently required to hold 20 per cent of deposits as reserves at the central bank, while medium-sized lenders must meet ratios of 18 per cent. Rural banks and other small lenders are subject to a rate of 16.5 per cent or less. (Source: Financial Times)

Simple example: I make a $100.00 cash deposit in my bank. If the RRR is 20% then the bank puts $20.00 of that in their Required Reserve account and $80.00 in Excess Reserves.  The bank may loan up to $80.00 to a borrower.

At least that is the story that is told.  For now, we will go with it since it is a BIG part of the AP Macroeconomics curriculum.

You can see the constraint on lending in this scenario is the RRR.  If the RRR is LOWERED than banks are required to with-hold LESS of a deposit and the Excess Reserves to be loaned out are HIGHER. Banks tend to make more loans.  More loans are made to businesses for projects and/or capital equipment purchases. Economy boosted. Key vocab term for AP--"Expansionary or Loose Monetary Policy" designed to stimulate Aggregate Demand ("Investment" (I) in C+I+G +N):

Zhang Zhiwei, China economist at Nomura, described the move as “significant”. By his calculations, the new cut will inject about Rmb95bn ($15bn) back into the banking system. When added to other measures, such as the April cut, Beijing will have added Rmb545bn of fresh liquidity into the economy by the end of this month, equivalent to a 50 basis point cut to reserve requirements for all banks.

China has taken a fresh step to boost flagging growth by cutting the amount of cash reserves some lenders must hold at the central bank in a bid to boost lending to small businesses and the rural economy. 

The People’s Bank of China said it would reduce the “required reserve ratio” by 0.5 per cent for banks that mainly lend to small businesses and rural borrowers.(Source: Financial Times)

 At least that is the story that is told. For now, we will go with it since...

Corn, Wheat and Soybeans OH MY! I calculate "Economic Profit" for each. See which one gets planted.

In my last posting (HERE) I used USDA cost and crop yield data to show the different costs per bushel a farmer faces when choosing to produce Corn, Soybean or Wheat.  I balanced that against the Price Floor for each crop as established by the 2014 Farm Bill ("PLC or "Price Loss Coverage" provision) to show that the price floor amounts were enough to cover all the farmers Variable Costs but only some of the Fixed Costs. Please re-read that post for more clarification.

In this posting, I want to compare the two different cost numbers I calculated to the current market price for the respective commodity.  I used the table below from the USDA to show costs per acre for each crop.

The USDA projects yields for each of these crops to be (in 2013-14):

   Corn: 165 bushels per acre.
   Soybean: 43 bushels per acre.
   Wheat: 47 bushels per acre.

If we divide these projected bushels per acre into the "TOTAL ALLOCATED COSTS " (Variable PLUS Fixed and Opportunity Costs) for each commodity we will arrive at a "Cost per Bushel" for growing each of these crops:

    Corn: $4.18
    Soybean: 11.10
    Wheat: $6.78

If we divide the projected bushels per acre into just the "TOTAL OPERATING COSTS", or ONLY the Variable Costs then the cost per bushel would be:

Corn: $2.19
Soybean: $4.27
Wheat: $2.77

Here are the current market prices (per bushel) for these crops according to Agriculture.com:

The prices are highlighted in YELLOW and you should read them as follows:

Corn: $4.47 
Soybeans: $12.21 
Wheat: $5.86 

If we subtract "TOTAL ALLOCATED COSTS" from the market prices we find:

Corn yields an "Economic Profit" of $.29 per bushel
Soybean yields an "Economic Profit"of $1.11 per bushel
Wheat yields an "Economic LOSS" of $.92 per bushel

Result?

This year (2014) the projected plantings for:

     Wheat down 347,000 acres
     Corn down 3,674,000 acres
     Soybean UP 4,960,000 acres (yes, that is almost 5 million acres)

At $1.11 per bushel in potential "economic profit" the market has reallocated agricultural resources suitable to produce corn, wheat or soybean to its highest (or higher) value commodity.

As always, constructive comments on methodology are welcome.

Perfect Competition, Price Floors, VC's, FC's, Opportunity Costs, Farm Policy---this blog entry has it ALL!

I am going to attempt a layman's (VERY layman!) view of how farm policy, in terms of Price Floors, works in the US. I am using actual US Dept of Agriculture data to do my calculations.

Not claiming it is perfect and I am SURE I am leaving out some (a lot?) of details, but I think for the AP Microeconomics Unit on Perfectly Competitive firms AND Price Floors it will be instructional.  Any constructive criticisms are welcome.

First, here are the projected cost data (2014-15 growing season) for a typical farm growing either Corn, Soybeans or Wheat.

The costs are very conveniently divided up into "Variable Costs" (Operating Costs) and "Fixed Costs" (Allocated Overhead).

What make this a bonus for Economics teachers is the Fixed Costs include explicit money costs ("hired labor, taxes and insurance, general farm overhead") AND implicit "opportunity costs".  The opportunity costs are "Unpaid Labor, Rental Rate of Land and Capital".

This distinction will be important at the end of this lesson.

Source: USDA ERS

The USDA projects yields for each of these crops to be (in 2013-14):

   Corn: 165 bushels per acre.
   Soybean: 43 bushels per acre.
   Wheat: 47 bushels per acre.

If we divide these projected bushels per acre into the "TOTAL ALLOCATED COSTS" (Variable PLUS Fixed and Opportunity Costs) for each commodity we will arrive at a "Cost per Bushel" for growing each of these crops:

    Corn: $4.18
    Soybean: 11.10
    Wheat: $6.78

If we divide the projected bushels per acre into just the "TOTAL OPERATING COSTS", or ONLY the Variable Costs then the cost per bushel would be:

Corn: $2.19
Soybean: $4.27
Wheat: $2.77

The latest Farm Bill (2014), which dictates US farm policy through 2018, set Price Floors (called "Reference Prices") for these commodities at:

Corn: $3.70
Soybean: $8.40
Wheat: $5.50

The means that if the actual market price in any given year falls BELOW these floor/reference prices then the Federal government will compensate farmers for the difference between what they sell their crop for at market and the above reference price. In other words, the reference prices you see above are the guaranteed minimum per bushel the farmer will receive for their crop.  If the market price is ABOVE the reference price then the farmer receives that price and the reference price is "non-binding".

IMPORTANT POINT:  Notice how these Price Floor/Reference prices fall IN BETWEEN the two versions of costs I calculated above.

The Floor/Reference Price is higher than the farmers Variable Costs BUT lower than his/her TOTAL ECONOMIC COSTS.

So, the price floor guarantee helps the farmer cover ALL Variable Costs and some of their Fixed Costs, but not ALL of the Opportunity Costs of being a farmer.

Anyways, I think this is interesting and I have never seen it broken down like this before.

Makes me understand farm policy and the plight of the farmer a little bit better.

Again, any comments, corrections or guidance as to where I went wrong are welcome.

We are all fellow travelers on the road to knowledge.

NOTE: This particular aspect of the Farm Bill is called "Price Loss Coverage (PLC)".  There are other important programs that complement/substitute for the one I described above.  More on the PLC and these other programs can be found HERE.

Updated map showing US Gross State Product (GSP) vs the Rest of the World. Students love this!

Mark Perry over at AEI has quickly put together the latest (2013) "Gross STATE Product (GSP)" data onto a map that students find interesting every time I have shown it in the past. It gives a great perspective as to just how large the US economy is and will continue to be (hopefully!).

In place of the name of the US State it puts a country whose dollar value of Gross DOMESTIC Product (GDP) is equal/similar to the dollar value of output of that State.

For instance, Australia's GDP is roughly the same of that of Texas's GSP. Brazil similar to California, so on and so forth.

Source: Carpe Diem at AEI

Here is the accompanying data in Excel form that show the numbers used for each State.

The total acreage of which US State is used for fuel instead of food?

In the US in 2013 we planted 97.2 million acres of Corn. Of that, 37.78 million acres were used to produce ethanol (39%). (Source HERE--I did the calculations for acres based on data given for bushels per acre)

In the US in 2013 we planted 77.2 million acres of Soybeans.  Of that, 10.9 million acres were used for Bio-diesel (14%). (Source HERE--I did the calculations for acres based on data given for bushels per acre. Data on Soybean for bio-diesel HERE)

The total number of acres used to grow "food for fuel" was 48.68 million acres. That is 28% of the total planted Corn and Soybean crop.

How much is 48.68 million acres?

The State of Nebraska is a little over 49 million acres. In other words, we have an energy and agricultural policy that diverts the whole State of Nebraska to producing fuel instead of food.

Perspective.

Source of map HERE

Where the jobs are and wage range. A two for one graphic!

I saw these two informative graphics from two different sources and put them on one slide.

They tell a good story about the employment recovery in the US and the distribution of jobs among wage rates.

Here is the gist of it:

We lost a total of 6,819.000 higher and mid-wage jobs (maroon bars) and then gained back +4,885,000 (gold bars), for a net LOSS -1,933,000 jobs.

We lost a total of 1,973 low wage jobs but gained back 3,824,000 for a net GAIN of +1,891,000.

Subtract those two and you get a total jobs deficit of -82,000 jobs. (Note:Data for bar chart on RIGHT only goes to Feb of this year. Does not count March, April, May).

According the the Bureau of Labor Statistics, 417,000 of those 2.15 million "Health care and Social Assistance" jobs were in "Social Assistance" (19.4%).  Also, according to the BLS those jobs have a median income of $13.87 (just barely into the mid-wage category) so the bottom half for the most part fall into the low wage category.

Source: Wall Street Journal AND AEI

General Motors CEO asks workers to "Call Me". Is this unprecedented in the Corporate Boardroom?

Mary Barra, the recently appointed CEO of General Motors, has been criticized for her response to the ignition switch malfunction" that resulted in deaths of drivers of GM vehicles.  It is something that occurred before she became the CEO so I willing to cut her some slack.

According to an internal investigation this problem was an accident waiting to happen (forgive the pun) and completely avoidable. Bureaucratic inertia and territory protection (i.e. CYA) seem to have been at the forefront.

In her message to employees (FOUND HERE) about the results of an internal report she said the following:

"So if you are aware of a potential problem affecting safety or quality and you don't speak up, you are a part of the problem. And that is not acceptable. If you see a problem that you don't believe is being handled properly, bring it to the attention of your supervisor. If you still don't believe it's being handled properly, contact me directly."

 Odd a CEO telling rank and file employees to contact them directly with an issue.  Unprecedented, right?

No.  In a terrific book I read a year or two ago "The Power of Habit: Why We Do What We Do in Life and Business" by Charles Durhigg tells the story of former US Treasury Security Paul O'neil who became an unlikely CEO of the steel conglomerate ALCOA.

For instance, consider one event about six months into O'Neill's tenure, when he got a telephone call in the middle of the night. A plant manager in Arizona was on the line, panicked, talking about how a piece of machinery had stopped operating and one of the workers -- a young man who had joined the company a few weeks earlier, eager for the job because it offered health care for his pregnant wife -- had tried a repair. He had jumped over a yellow safety wall surrounding the press and walked across the pit. There was a piece of aluminum jammed into the hinge on a swinging six-foot arm. The young man pulled on the aluminum scrap, removing it. The machine was fixed. Behind him, the arm restarted its arc, swinging toward his head. When it hit, the arm crushed his skull. He was killed instantly. 

Fourteen hours later, O'Neill ordered all the plant's executives into an emergency meeting. For much of the day, they painstakingly re-created the accident with diagrams and by watching videotapes again and again. They identified dozens of errors that had contributed to the death, including two managers who had seen the man jump over the barrier but failed to stop him, a training program that hadn't emphasized to the man that he wouldn't be blamed for a breakdown, lack of instructions that he should find a manager before attempting a repair, and the absence of sensors to automatically shut down the machine when someone stepped into the pit. 

"We killed this man," a grim-faced O'Neill told the group. "It's my failure of leadership. I caused his death. And it's the failure of all of you in the chain of command." 

The executives in the room were taken aback. Sure, a tragic accident had occurred, but tragic accidents were part of life at Alcoa. 

Within a week of that meeting, however, all the safety railings at Alcoa's plants were repainted bright yellow, and new policies were written up. Employees were told not to be afraid to suggest proactive maintenance. And O'Neill sent a note to every worker telling them call him at home if managers didn't follow up on their safety suggestions.

Wish we had more CEO "brass" like this today.  Maybe we would not be in such a mess.

Read more about this particular incident and how workers calling him personally made a huge difference in the company turnaround---HERE from the author.

The whole book is worth a read too.  It covers a broad range of topics and is NOT a business book. More psychology I would say.  

Nice map illustrating the minimum wage and number of workers affected.

Here is a handy-dandy easy visual from The Brookings Institute to show students what the minimum wage is in each US State and an estimate as to much of the labor force earns up to 150% of that wage.

States without a number in them have utilized the Federal minimum wage of $7.25 as their floor wage

Each State CAN impose a minimum wage ABOVE the federal level (see those numbers in each State) but cannot set it below it.

The color coding shows, as a percent of that States labor force, the number of workers who earns LESS than 150% of that States required minimum wage.

For instance, in Texas 150% of the minimum wage is $10.86 ($7.25 X 150%) and between 27.1%-32% of the labor force earns that amount OR LESS (blue-ish area)

In California 150% of $8.00 is $12.00 and 32.1% or more earn that amount or less (purple area).

The authors of the study wanted to show how an increase in the minimum wage would impact many more workers than those just earning at or below the mandated wage (Federal or State).

The implication is those who now earn more than the minimum wage (up to at least 150% of it) will get a "bump" in pay as those at the lower end of the pay spectrum see a higher mandatory hourly wage.

They estimate about 16 million workers would be affected (in a positive way) by an increase in the minimum wage.

The authors are careful to explicitly mention they are not taking into account ANY employment OR dis-employment affects of a high minimum wage.  That is a BIG caveat!

Source: The Brookings Institute

Number of hours worked has returned to pre-recession levels. Must be good news, right?

Here is a graphic showing the number of hours worked by different sectors of the economy classified by how they have fared since 2007 (just prior to the recession---Dark GRAY area).  Go HERE for the short and informative article on the topic.

I inserted a RED line to show the point of the official end of the recession (late 2009) where hours worked SHOULD start increasing for all sectors, presumably, as the recovery got underway.

Total hours worked has returned to pre-recession levels (mentioned in the article). But there has been a reshuffling of those work hours from higher paying construction and manufacturing jobs to lower paying leisure and hospitality.  A significant part of healthcare job growth is in lower paying home health aides.

Construction jobs suffered the biggest drop as a result of the recession and has held pretty steady at its low point with only a tiny increase in hours worked in the past 4 years.

I believe construction will eventually pick up, but unless manufacturing is defined in a new way I do not believe employment in that sector will increase dramatically.  Technology is the pinch there.

Construction workers might experience a boom building manufacturing plants and infrastructure but they will be staffed by machines and robotics.

Source: St Louis Federal Reserve

Purchasing Power Parity (PPP)---as simple as I can make it for the novice (me!)

I have blogged several short mini-lessons on the concept of "Purchasing Power Parity (PPP)" but I am never satisfied that I explained it properly.  Heck, not even sure I explained it enough for ME to get it!

Here is another attempt.

Assumption #1: Today the actual market currency exchange rate in the Foreign Exchange Market is $1.00US will exchange for $1.00A ("A" is the Australian Dollar).   So, the reciprocal is $1.00A will exchange for $1.00US. The currencies are at "parity" with one another--there is an even one to one trade off between the two currencies.

Assumption #2:  An American decides to go on vacation to Australia to visit The Great Barrier Reef.  It costs $15,000 Australian dollars to do so.  An Australian decides to go on vacation to the US to visit Disney World.  It costs $10,000 US dollars to do so.  Everything about each vacation is the same except the experience, which we will assume yields the EXACT same satisfaction (or "utility") for the American and the Australian. They are equally happy, only in different ways.

Even though the vacations are priced differently in their respective currencies, Purchasing Power Parity suggests that buying power of one currency should be EQUAL to the buying power of the other currency when purchasing identical/similar goods and/or services. Whether that is in Australia or the US---does not matter.

Given the relative nominal prices of the vacations above, the PPP exchange rate would be $1.00 US = $1.50A and $1.00A = $.67 US.

In other words, when an America exchanges $10,000 they will receive $15,000 Australian dollars ($10,000US X $1.50A) and when an Australian exchanges $15,000A they will receive $10,000 US dollars ($15,000A X $.67US).

This is what the exchange rate SHOULD be but remember from assumption #1 the ACTUAL exchange rate is:  $1.00US = $1.00A, and vice versa.

Give the actual exchange rate, the American would have to give up $15,000 US in order to get the necessary $15,000 Australian dollars for the vacation.  That is $5,000 ,or 50%, MORE than at PPP!

The Australian would have to give up $10,000A to get $10,000 US.  That is $5,000, or 33%, LESS than at PPP!

Because the Australian has to give up FEWER Australian dollars to buy US dollars relative to PPP, the Australian dollar is said to be OVERVALUED relative to the dollar.

Because the American has to give up MORE US dollars to buy Australian dollars relative to PPP, the US dollar is said to be UNDERVALUED relative to the Australian Dollar.

What will happen in the "Long Run" according to PPP theory?

Because American vacations are cheaper for Australians they will take more of them. This will serve increase the Supply of Australian dollar in the FOREX and depreciate the Australian dollar.  The corresponding increase in Demand for Dollars will appreciate the US dollar in the FOREX.

Because Australian vacations are more expensive for Americans they will take fewer of them. This will serve to decrease the Supply of US dollars in the FOREX and appreciate the US dollar.  The corresponding decrease in Demand for the Australian dollar and will depreciate the Australian dollar in the FOREX.

The exchange rates will adjust so that, all else equal, the buying power of one currency will have the same buying power of the other currency, regardless of which of the two countries a purchase is made.

That's Purchasing Power Parity (PPP) as simple as I can make it.

Hope it  helps A LITTLE! :)

Nice data on food waste in the US. You won't believe how much of it YOU are responsible for!

Reference the data below.  According to the always informative USDA Economic Research Service, in 2010 the estimated amount of food available at the retail level was about 430 Billion pounds.  

Of that, 133 Billion pounds were wasted (not used, thrown away, rotted, etc).  Read that again.

That is 31% of the food supply.  Read that again.

The number circled in RED, 1,249 represents the per person (US) caloric loss from that 133 Billion pounds in lost food (based on population of 313 million).

That could supplement the diets of hundreds of millions people in the developing world and bring them up to developed world levels.

Sadly, this analysis is only a parlor game. Logistics, Logistics, Logistics.  It is a rubrics cube of coordination and will.

It is a nice reminder of the importance of reducing the consumption of perishable food items to what you, well, actually can consume, and to "reuse" the leftovers to avoid throwing away.

"Food Inflation" is on its way in 2014. But the reason for it is not what you may think it is.

"Food inflation" is likely on its way to the US, and the world for that matter.

When we here the word "inflation" the first thought is usually "too much money chasing too few goods (services)" and look to Monetary policy as the culprit. Maybe...but maybe not.  Sometimes the fundamentals of Supply and Demand in various markets are at play.

Here are data from the USDA ERS site that show the change in prices of the basic food groups for the past couple of years and projections for the remainder of this year.  Does not look encouraging at the checkout line.

If you go to the site they give a nice overview of the why prices in select categories are increasing.

The short story version is there seems to be a perfect storm of variables coming together to conspire to raise prices---weather and disease (plant and animal) working to limit or decrease supply on the Supply-Side. Demand from recovering developed economies (US, Europe) and emerging developing countries (China, India, etc) is putting upward pressure on the constrained food supply chain.

Source: USDA ERS

Here is one interesting point made in the USDA ERS analysis I think is important to understand as well.

Additionally, it appears as if supermarkets are maintaining minimal price inflation on packaged food products, possibly in an effort to keep prices competitive in light of rising cost pressures for most perishable items. Therefore, ERS has revised the forecast for sugar and sweets downward to 1 to 2 percent and for nonalcoholic beverages downward to 1.5 to 2.5 percent for 2014.

Competition serves to minimize, or at least soften, the REAL changes in prices of many goods at the actual point of purchase.

Grocery stores have to consider YOUR whole grocery basket of stuff you purchase when pricing their products AND what other stores are doing at the same time.  They may play a little "rob Peter to pay Paul" with the inventory.  In order to minimize the price increases of the perishable goods you see above, they will likely decrease prices of other non-perishable goods where they may have more pricing discretion.

So, market fundamentals are increasing the prices of many diverse individual food items at the same time, and competition between stores is working to minimize (albeit not stop) those price increases.

That is what I call a reasonable explanation.  Maybe not one that makes us happy, but more reasonable than the one I started out with.

It only took a little more work.   :)