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= = = = = = = = = = = = = = = = = = = = = = = = = = = = =__PRODUCT PRICES HAVE FALLEN FROM DECADES __=

=How many people in countries like Switzerland, Brazil, Canada, Russia, and China, and the United States would be surprised to learn that prices of products and services in their countries have become much less expensive over the years.= =Say what? You must be crazy, you say! Prices are rising way too fast!= =Most citizens see their purchases as becoming more expensive when, in actuality, things are becoming less expensive. Of course, the paradox is that although nominal prices (the actual price tag) are, in fact, increasing, nominal income (the average wage or salary) has been growing faster. This is a topic that in economics is called “real income” or a measurement that compares a nation’s income growth relative to the growth in prices that the same income buys.= =Some specific facts for the United States: In the United States real **median** household income grew from $41,318 to $50,811 from 1970 through 2006 for a total percentage gain of 23% (source: Pew Research Center). Both of the aforementioned median household incomes are stated in 2008 or current dollars which makes the comparison valid. Median household income is an attempt to quantify the progress that the “middle American” family or typical family has made. So, in short, the median household in America can buy 23% more with their income today than they could in 1970. In other words, relative prices are lower to income.= =If we look at the same United States income data over the same period for real **average** household income, there is real income growth of nearly 60%. The higher growth (60%) in real incomes for the //average// household versus the //median// (middle) growth rate (23%) is explained by the fact that much of the growth in United States’ real incomes has accrued disproportionately to the college educated & entrepreneurs driving up real income growth rates much faster for the //average// than the //median// or middle household. (Hint: continue your education!)=

=Now let’s get back to the main premise of the title of this Paragraph and the opening assertion that prices are lower than ever. What we are really saying is that you have to benchmark price increases to income increases to really understand whether things are becoming more expensive. The vast majority of products & services are cheaper today in all nations than they have ever been before, which helps explain, excluding the effects of the current recession, why more citizens than ever before can afford to own their own houses, drive more and better cars, and are likely to have cable, cell phones, and computers. The reason we are led to believe differently is because we are victims of our own human nature, which often causes us to focus on the problem areas (rising prices) and not the benefits (incomes that are rising faster). Most citizens’ focus expands out to the last dollar of their incomes and they quickly notice those select products that are rising faster than others like health care, gasoline prices, and education! Hey, even gasoline prices are not at an all relative price high. If gasoline prices in the United States are restated for inflation, or set to comparable 2009 dollars, they are $2.60 per gallon today vs. $3.17 in 1981 and $3.50 in 1918!= =Now, one may say to yourself that statistics can lie or mislead and you are sure in your gut that things are getting more expensive relatively. You can try to validate that incorrect “gut feeling” by examining whether your country’s middle class is enjoying less or more products and services. “Real income” really is just a measurement of the quantity and quality of products and services that you have. For example, the average American household has larger homes, more cars, more air conditioning, more gadgets, and better healthcare & prescription drugs than, say, 20 years ago.= =The important concern of this paprgraph. Although everything noted above is accurate, the pace of real income growth has been relatively slow over the last 10 years, especially for the middle class in the United States. Most of that growth in real income mentioned above has occurred up until this current decade. For the last 10 years, //median// //family// income growth in the U.S. has been very small and the //average// income growth has been higher but below the U.S. historical experience. There are many reasons for this slowdown in real income growth, but three big reasons are that= =**Discussion Questions:**=
 * 1) the U.S. has now had two recessions this decade (2001 and 2007-current, versus our historical average of only 1 per decade), and
 * 2) energy and health care prices have risen much faster, and
 * 3) foreign labor competition and technology advancement has kept the uneducated/unskilled U.S. workers real income relatively stagnant. More than ever before, a good education is the ticket to your economic future!
 * 1) Inflation is bad, right? Well, what if average prices rise by 2% a year but average incomes rise by 3%. What happens to //real income// in this situation? Is the average household better or worse off in such a scenario?
 * 2) How have trade and globalization contributed to rising real wages in America and Swizerland?
 * 3) How have trade and globalization contributed to falling nominal wages in America and Switzerland?
 * 4) How do improvments in technology contribute to rising real wages in both developed and developing economies? What about health and education?
 * 5) What types of policies can government pursue to help raise the real wages of the nation’s workers?

Just a few weeks ago, the U.S. Government’s Commerce Department provided its first estimate of the country’s 3rd quarter (July-September 2009) gross domestic product or GDP, announcing an estimated annualized quarter over quarter growth of 3.5%. GDP reports are of special interest to countries since they provide an important macroeconomic measurement of how much an economy’s goods & services supply and income has grown, or recessed, compared to the last three calendar months. Let me try and make the concept of GDP easy to understand and why it is considered perhaps the most important, single macroeconomic measurement. GDP is simply a calculation that measures the market value (final price) of all the final goods and services produced within the borders of our country. Thus, u.s.. GDP includes Toyotas produced in Alabama but excludes Cadillac’s made in Canada. GDP includes all U.S. exports but excludes all U.S. imports since imports, by definition, imports are produced in some other country and are a more direct employment benefit of the foreign country’s GDP. If you think about it, ultimately our country’s economic satisfaction is best measured by the goods and services that are produced and that we have access to, which is why GDP is the measurement that is synonymous with “economic growth” or growth in goods & services for its citizens. In addition, rising GDP (more goods and services) is the ultimate economic goal of any economy which can best be accomplished through the means of the two other key macroeconomic measurements of employment and productivity, which are not the subject of this particular blog. Let’s describe how the GDP calculation is made. Each quarter, the Government compares the final value of the domestic goods produced and services rendered in the current quarter to the final value of the goods produced and services rendered in the previous quarter. The calculation then takes the percentage gain, current quarter versus previous quarter, and annualizes the percentage. The comparison is always restated for inflation so that the figures are comparable from one period to the next. For purists, we call this “real GDP” which is the only GDP reported by the media, even though the word “real” is almost always dropped to avoid confusion with the average citizen. For example, the third quarter 2009 U.S. GDP report highlighted a 3.5% GDP annualized growth rate. This means that the second quarter final value of goods and services produced was approximately .87% or 3.5%/4. Now let me get to my favorite point on GDP, which even many economists lose sight of. GDP growth is precisely the same as income growth! For example, in the second quarter of 2009 we can say that incomes for American households and American citizens grew by 3.5% restated for inflation. Said another way, our country’s purchasing power grew by 3.5% which represents the income to produce the increasing supply of goods and services. You probably never thought about it this way but every time you purchase something, every dollar you spend is going to someone as income, whether it is the workers as wages or benefits, the landlords as rent, a bank that has made a loan as interest income, or to the owners of the business as profits. I tell my students that Real GDP = Real Income and the only question is how that real income is dispersed among owners (profits), workers (employee wages and benefits), lenders (interest), and lessors (rent). Many citizens are unaware that the Government calculates GDP both in terms of the final market value of the goods and services PRODUCED (the “expenditure method”, which is the version that the media uses, as well as how that same production value under the “expenditure method” translates to higher incomes in a GDP version called the “income method”. I find the preceding paragraph, GDP = Income, to be a break through moment for a lot of citizens, or first time economic students, in truly understanding the value of the GDP measurement. It is easier for most to think in terms percentage growth in income in lieu of a fuzzier wording like GDP percentage growth. Most citizens are surprised to find that our national incomes or GDP, restated for inflation, increased by 17.4% from 2000 – 2007, just prior to the onset of this current recession. This 7-year growth rate in GDP or incomes still equates to a below average historical average performance. More specifically, over the last 7 years our average annual GDP or income growth rate was only 2.2% versus our historical average growth rate of 3.2%. However, the final point of caution is that the GDP or income growth rate is a collective average, thus the growth in GDP or incomes does not indicate how those income gains are accruing to the various socioeconomic classes or professions. That is also a topic of a future blog on “income distribution” or equality.
 * Discussion Questions:**
 * 1) Have you ever thought about substituting the word “income” for “GDP” to understand GDP more simply? Why are the concepts of income and GDP inter-changeable?
 * 2) Which four groups earn the income generated by the production of goods and services?
 * 3) Although GDP has still risen this decade, despite the current severe recession, many analyses show that our nation’s middle class has made virtually no real income gains this decade. How could this be so if GDP = Income and our GDP has grown this decade?

A Case of chewing gum
Externalities are a common concept, that we unknowingly encounter each day. Externalities relate to the spillover costs or benefits that arise from the consumption or production of goods and services. To put this more simply, your friend’s consumption of products can sometimes have an effect on you. For instance his increased level of education can make him a valuable asset in quiz games, or his over-indulgence in caffeine can make him a hard person to work with in class. Sometimes society would prefer more social benefits and less of the spillover costs. The concept is called a social equilirium, where price and quantity reflect the social beliefs. Spillover costs and benefits are things that exist in many nations. Governments for instance, work hard to discourage consumption of products with substantial spill over costs such as alcohol, cigarettes or chewing gum in Singapore. They will also aim to subsidize the production of goods, which generate positive spillover costs such as public gyms, swimming pools, running tracks or national immunization schemes. Here are a few examples from Singapore to get you thinking about this new topic Negative Externality of Consumption – Chewing Gum Chewing gum is a product, that to different people, brings either a cost or benefit to society. The consumption of chewing gum can boost the production of saliva and help reduce chance of tooth decay. On the other hand chewing gum is a sign of urban decay with pavements littered with sticky blobs and grey scars. The Singapore government feels that society would to prefer to minimize the spillover costs of chewing gum. Instead of imposing a tax on a packet of gum, it has been banned. You can not buy gum at any supermarket in Singapore. The result is pristine pavements that allows council cleaners to focus on other tasks. Funnily enough, the nicotine gum (used to help smokers kick the habit) is legal with a prescription from your doctor.

Discussion Questions:
1. [|Market Failure and the role of government in the economy ~ an introduction to Environmental Economics]
 * 1) Why is chewing gum not banned in every country, if it produces spill over costs?
 * 2) What are some possible alternative government interventions to reduce traffic congestion in Singapore?
 * 3) Can you apply the concept of externalities to the consumption of deodorant? Draw a graph to show the private and social equilibriums.

A zero day in Haiti A week after the earthquake, the Haitian people now speak of day zero plus seven. Day zero was the day when an earthquake rumbled and shook the shallow bay near //Port-au-Prince// and crumpled the many fragile houses, hospitals, churches and hotels. The quake did not discriminate against the rich and the poor, but in the months and years to come the world needs to ensure that the country gets a fair chance to rebuild. Some consider the day of the quake, as the day a new nation began. As Economists we can offer insights about the path to improved living standards, through our understanding of what has worked, and not worked, in other countries.

Haiti has a history which is more turbulent than most. In 1697 when Spain ceded control of Haiti to the French, much of the land was deforested and the ecology wrecked as sugar fields were planted. In 1804 the republic was founded, and later the dominant political figure was Dr. François Duvalier, and his son who reined as Presidents of the country from 1957 – 1972 (François) and his son till 1987. In 1990 the ruling military junta gave up power and President Clinton sent in 20,000 troops to a country ravaged by HIV and entrenched poverty. Hurricanes in 2004 and 2008 displace hundreds of thousands of Haitian’s and ruined existing infrastructure. But the recent earthquake might be the biggest challenge yet for most fragile and poorest nation in the Caribbean. On the Human Development Index, Haiti is classified as one of the least developed nations in the world at 149th of 182 countries (HDI Report, UN 2009).

After the mourning and eventual stabilisation, the government will need explain what the future holds for Haiti. This is a window of unfortunate opportunity that the government will never see again and mustn’t squander. The developed world has made promises of aid to support the reconstruction, but health care and education, skills and employment must be offered to the people to help the nation grow from the depths of this disaster in a sustainable way. From our learning about Development Economics we can explain strategies appropriate to Haiti. Former President Bill Clinton who is the UN’s Special Envoy to Haiti, offered a good insight on the nations challenge in his excellent essay in last weeks Time Magazine.



What the economic strategy will be for Haiti will likely be influenced by the trade agreement with USA called the Caribbean Initiative. This has recently provided an impetus for the clothing industry in Haiti. Hanes, which sells T-shirts throughout North America, produces part of their stock in Haiti in the factories, which are now being protected from looting. These labour intensive industries are important in a nation with approximately two-thirds of labour force unable to find work. The quake and eventual rebuild also offer opportunities to build on existing plans as Clinton explains,

It is evident that Haiti can use this opportunity to develop the country as Clinton explains. In addition, there are many other ways that the country could improve the living standards of the Haitian people. These development and growth strategies could include; Nevertheless the task is daunting for Haiti. As a UN staff member recently explained to a New York Times reporter, the immediate recovery is complex. The future reconstruction and redevelopment will be difficult, and the road long.
 * The development of Fair Trade schemes to improve Haiti producer’s access to world markets.
 * Facilitating the provision of small loans through Micro Finance schemes
 * Developing the export sector by investing in the transportation infrastructure to transport products.
 * Exploring new trade agreements with nations.
 * Promoting foreign direct investment in Haiti by multinational companies.

[] [] – Haiti: An economic basket-case. [] – Transparency International [] – Haiti – CIA World Factbook [] – UN Photo stream, Creative Commons [] – New York Times, Haiti News.
 * Here are some interesting facts about Haiti**
 * 40% of the population is under 14 years of age.
 * The nations main exports are coffee, mango and other agricultural products.
 * 66% of all Haitian’s work in the agricultural sector on small subsistence farms.
 * Before the quake foreign aid made up a large proportion of national income. In 2004 over $1 billion was pledged by USA, World Bank and Canada and France. Partly in loans but also in direct assistance.
 * In 2006 Haiti was ranked as the most corrupt nation in the world by Transparency International, followed by Burma and Iraq
 * Sources:**

Discussion Questions:
>
 * 1) In your opinion, what is Haiti’s most valuable resource endowment? Explain.
 * 2) Choose two development or growth strategies and explain how these could be implemented in Haiti.
 * 3) Evaluate the strengths and weaknesses of each strategy.
 * 4) How could corruption be a barrier to the future development of Haiti?
 * 5) What do you think Haiti will be like in 20 years?