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August 27, 2008

The Mediterranean and Economics

I spent the last three weeks with my three-year old on Croatia’s Dalmatian coast. We had a wonderful time enjoying sea, sun, and lots of ice-cream (sladoled). The sparsely populated island where we stayed has a smattering of small grocery stores that provide the basics. The owners of these stores don’t necessarily change what they sell during summer months when the tourist population soars, but they sure do seem to change (↑) the prices. Tourists inevitably comment about that and then move onto the issue that really gets them screaming in a half-dozen languages -- the outrageously long lines. But I posit that perhaps most of the folks in flip-flops fail to appreciate that for the other nine months of the year there are only about one-third as many people in the store.

I still have some family that lives on this very island and I wonder: Would building a bigger store to accommodate tourists be likely to raise prices all year long? Probably…and what should be the store’s strategy to smooth its revenue stream and/or to ensure against a bad tourist season? U.S. retailers often try to create new shopping seasons around specific time periods such as Memorial Day or “Back-to-School” to help smooth out the seasonality of their business, but the island’s merchants can’t attract new residents or tourists from late September thru May. All they have for nine months, literally, are old fishermen coming in to buy bread and milk!

My question to you more broadly -- how important is diversification for a small economy increasingly focused on tourism? And for those international trade buffs, what would the theories of free trade have us believe about specialization and how does that jive with the idea of economic vulnerability?

By: Cindy
By the way, I waited 15 minutes in line at the grocery store and paid 49 HRK (Croatian Kuna) for Mickey Mouse sunglasses ($1 = 4.8 Kuna). It was worth the wait. My son was happy as a lark!


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August 19, 2008

Deciphering Speeches

All of you Fed Challenge participants should take time to read the latest speech by Charles Evans, president of the Chicago Fed. It concludes with the following paragraph:

“The current economic landscape poses a three-front conflict for policymakers: sluggish economic conditions with depressed housing and auto markets, rising inflation risks with high oil and commodity prices, and financial distress that is restraining credit growth. To date, relatively accommodative monetary policy has taken out insurance against downside risks of disorderly financial adjustment turning into a severe economic downturn. But rising inflation risks at a time of economic weakness present some difficult challenges for policy. At this point many financial market liquidity problems are being addressed through our special lending facilities. These additional tools allow our policy actions with regard to the fed funds rate to focus on broader macroeconomic goals—these are our commitment to price stability and sustainable growth.”

As you prepare for the competition, your discussions have probably included many of the points president Evans makes above. And as you read the speech, I hope you realize how exciting and meaningful the study of macroeconomics is… It impacts all of our lives!


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August 14, 2008

International Trade

By Wade Rousse

The latest data about international trade in goods and services were released Tuesday by the U.S. Census Bureau and the U.S. Bureau of Economic Analysis. The information describes the trade situation in June.

The chart below illustrates the U.S. trade situation over about the past ten years. As you can see, the negative number indicates we export less than we import. Therefore, we have a trade deficit. Notice also that from around 1997 to 2006, the trade deficit was getting larger and larger (more negative).

U.S. Trade Balance over the past ten years

Now, remember that one component of GDP is net exports to foreigners (NX). From 1997 to 2006, this increasing trade deficit sometimes caused net exports to subtract as much as 1% off of GDP growth.

As you can see, the trade deficit appears to have bottomed out in 2006. It has been improving recently and has contributed positively to GDP growth (recall the 2.4% contribution mentioned in the GDP component link above). Tuesday’s data, which showed a surge in exports, cut the trade deficit by 4.1 percent to $56.8 billion. This improving trade deficit suggests net exports will continue to add to GDP growth in the upcoming quarters.


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August 7, 2008

Incentives Matter

By: Wade Rousse

Summer is here, and my commute is often a stroll across the Loop. As I walk, marveling at the city around me, I’m inevitably interrupted by someone asking for money, food, or something similar.

Being a transplanted Cajun and not very familiar with big-city life, I’ve fallen for my share of scams. The last straw came when a well-dressed gentleman at a gas station on Roosevelt Avenue asked me for help. He’d finished pumping his gas to realize he’d left his wallet at home. His wife in the suburbs was preparing to bring his wallet to him, but he would certainly miss a meeting with one of his biggest clients.

I didn’t want this guy to miss a payday just because he left his wallet at home. So I lent him twenty dollars to pay for his gas and he said he would mail me the money when he got home. Two years later, I’m still waiting for my $20.

Scammed again!

Thinking back to that day, I realize that although I often talk (and write) about economics, I don’t always apply its principles to my life. We all agree incentives matter, but is dropping a quarter in a guitar-case the wrong incentive? If the donations stopped, would this behavior stop? Would a more profitable one emerge? (Like going to school to study economics…a guy can dream, can’t he?)

I followed through on this thought process and stopped my street donations. Not much has changed. Maybe I need some help?


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August 6, 2008

Currency Fluctuations

By: Wade Rousse

A consistent “weak dollar” policy is not a good long-run growth strategy for the U.S. economy. Allowing the dollar to float freely in the foreign exchange market is more effective. But remember that when the dollar floats freely, fluctuations in its value will occur. Also remember that when a currency is depreciating, some market participants will benefit. And when a currency is getting stronger, others will gain.

The U.S. last year exported about $1 trillion worth of goods, up 39% from 2002 when the dollar started its decline, according to a recent article in the Wall Street Journal. A declining dollar is making U.S. goods relatively less expensive compared with goods from countries with stronger currencies.

Many American manufacturers are benefiting from the weak dollar. The citizens of the Wisconsin city of Manitowoc are a good example. The article I mention above explains how young people who had abandoned the town are returning to Manitowoc with business degrees and breathing new life into old factories. Many of the goods produced at these factories are exported.

My very simple point is that a declining dollar is not horrific for all Americans. Some benefit, and others don’t. It depends on which side of the equation you’re on.

Your thoughts?


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