Archive for the ‘Economics’ Category

Real World Graduation: Question 7

RealWorldGraduation_Question_7   < PDF

A reputable economic research organization conducted a survey of prices in 2004. They found that median prices of the following items increased as follows:

  1. Unleaded gasoline, from $1.59 per gallon to $1.88 per gallon; an increase of 18.23% [1]
  2. Single-family homes, from $243,756 to $264,540; an increase of 8.52% [2]
  3. Soybeans, from $6.08 per bushel to $7.56 per bushel; an increase of 24.34% [3]
  4. Flour, 5-lb bag, from $1.55 to $1.65; an increase of 6.45% [4]

From these statistics, what is the approximate inflation rate from 2003 to 2004:

a) The inflation rate should include only the data for gasoline, soybeans, and flour, since those are common products that people use directly or indirectly every day; the inflation rate is approximately 16.3% = ((18.23 + 24.34 + 6.45)/3)

b) Only the data for single-family homes should be used, since homes are purchased on long-term mortgages (usually 30 years), and are therefore a better predictor of long-term inflation. The long-term inflation rate is the most important metric.  Therefore the inflation rate for 2003-2004 is approximately 8.5%.

c) Only the data for unleaded gasoline should be used because it is the only one of these that most people have to buy directly. Most people do not buy homes every year, and the prices of soybeans and flour are not useful because they are only components in items purchased by most people (i.e., flour is used in making bread, but there are other costs besides flour that contribute to the increase price of bread, such as sugar, butter, and fuel).  Therefore, the inflation rate for 2003 – 2004 is approximately 18.23%.

d) All of the data should be used, but not equally weighted, since some of these are purchased frequently, and some infrequently, and some are used more than others. For example, gasoline is purchased frequently, and homes infrequently.  No data was provided on the pro-rated amount of usage, so the most that can be inferred about inflation during this period is that was somewhere between 6.45% and 24.34%.

e) Only the data for soybeans and sugar should be used, since they are basic commodities that are used in a large number of products, and represent structural trends in the economy. Therefore, the inflation rate was approximately 15.39% (the average of 24.34 and 6.45)

[1]        Energy Information Administration

[2]        Federal Housing Finance Board; see about.com/US Government info (The New York Times Company)

[3]        farmdoc Project, College of Agricultural, Consumer and Environmental Sciences, University of Illinois at Urbana-Champaign

[4]        Wisconsin Farm Bureau Federation

(See answer on p. 2 of the PDF.)

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Real World Graduation, Question 5

RealWorldGraduation_Question_5   <– PDF

A study by the U. S. Department of Education in 2006 [1] reported that college tuition, fees, and room and board are continuing to rise. The data in Figure 5-1 shows the costs of tuition, fees, books, and room and board for in-state students attending public four-year universities, living on-campus.  A separate study [2] concluded that a college graduate with a 4-year degree in 2005 will earn 63% more than a person with only a high school diploma (approximately $57,000 per year vs. $35,000 per year).  This means, on average, that a college graduate earns approximately 75% more over their working lifetimes ($2.1 M vs. $1.2 M) as compared to a person with only a high-school diploma.  Given the costs of a college education shown in Figure 5-1, and the earnings benefits of a college education, what is a good federal policy regarding college costs?

  1. a) The federal government should ensure all tuition, fees, and room-and-board is free.
  2. b) Congress should enact price controls on tuition, fees, and room and board to keep the annual rate of increase at or below the rate of inflation.
  3. c) Congress should pass a law requiring that tuition costs be frozen at the rates that prevailed during the freshman year.
  4. d) Attendance at college should be mandatory so that everyone’s income will rise.
  5. e) Some combination of a), b), and c) should be adopted to improve the current system.

School Year    Tuition & Fees ($)    % Increase in Tuition & Fees     Room & Board ($)     % Increase in Room & Board

1998-1999          3640                                –                                             4985                                           –

1999-2000          3768                            3.52                                          5144                                         3.19

2000-2001              3979                        5.60                                         5342                                         3.85

2001-2002              4273                         7.39                                         5675                                         6.23

2002-2003             4686                         9.67                                         5918                                         4.28

2003-2004             5363                        14.45                                        6316                                          6.73

2004-2005             5939                         10.74                                        6649                                         5.27

2005-2006             6399                           7.75                                        7025                                         5.65

Figure 5-1

(Answer on p. 2 of the PDF)

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Real World Graduation, Question 3

RealWorldGraduation_Question_3   <– PDF

In 1979, a certain woman bought a large number of popular “collectible” dolls. It was commonly believed at that time that these dolls would increase in value over time, and as such, were considered by some to be a worthwhile investment. In fact, some were suggesting that a $5.00 doll purchased in 1979, if kept in its original packaging, would find buyers in 1999 (20 years later) at a price of $100.00 or more, far in excess of the effects of inflation. This means that these dolls were expected to increase in value about 16.1% per year (in so doing, their value would double every 4.47 years, and would be worth 20 times what they were purchased for at the end of 20 years). If the effects of inflation were also considered, the dolls would be expected to sell for a lot more in 1999.

However, in 1999, the woman who bought the dolls found that there was virtually no demand for them, other than their usual value as children’s toys. She has been offered $1.50 each by another collector, which will represent a considerable loss to her. What actions should be taken?
a) The woman should sell the dolls for $1.50 each, then sue the person who sold her the dolls in 1979 to recover the other $98.50 each (plus whatever extra is due owing to inflation).
b) The woman should sell the dolls for $1.50 each, then sue the person who sold her the dolls in 1979 for $3.50 each; that way, she at least recovers her investment.
c) This woman will have to take the loss, but the state or federal government should pass a law prohibiting the sale of “collectible” dolls.
d) Because collectibles always increase in value over the long run, she should hold onto them and make even more per doll than the original $100.00 estimate. Her inability to sell them at a profit now is only a temporary setback.
e) This was a case of questionable behavior by the original seller. This woman will have to take the loss. But, in order to prevent this from happening to other people, the state or federal government should pass a law requiring background checks and permits for anyone who manufactures or sells dolls.

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Barack H. Obama’s Legacy, Part 7

ObamaLegacyPart7 <– PDF

President Donald Trump recently withdrew the U. S. from the Paris Climate Accord, signed by President Obama. It was one of Mr. Obama’s foreign policies based on fundamental lies about the earth’s climate, one designed to ultimately transfer total governance of your life to government bureaucrats. The Paris Climate Accord was intended to reduce total carbon emissions by 2030, although Communist China and India, the two greatest polluters, were exempt. It is worse than that: the entire agreement is voluntary on the part of all the signatories. Now, if the various national signatories believed that climate change is man-made, and that we are all at risk of extinction if something isn’t done, why aren’t the emission reduction targets mandatory? Because the wealthy and powerful know that man-made climate change is a hoax. Even if the provisions were mandatory, and even if they are met, the net impact for the next 100 years was estimated to be about 0.2 degrees K, hardly worth the trouble. But, if the signatories are dumb enough to follow through on the reductions, there may be a significant impact to many peoples’ standard of living: at minimum, an increase in energy costs that would otherwise have been devoted to other needs and desires.

The activists clamoring for emission controls want you to believe that the recent warming of the earth’s temperatures has never occurred before. They are in effect demanding that you ignore all the history of the “little ice age” that occurred in the Northern Hemisphere from about 1350 to 1750 AD. During that time the earth was somewhat colder than it is now; in fact the earth was warmer than it is now during the period from about 750 to 1350 AD. Consider for example the history of Greenland. It was discovered by the Norwegian explorer Eirik the Red in 981. He stayed there, in a place called Snaefell (location unknown), then returned to Iceland, where he convinced a group of people to emigrate to Greenland. He called it Greenland, so the story goes, to give the illusion of a warm place where agriculture would pros-per. It was in fact, warmer than it is now. They eventually created two settlements, one in a place called Brattahlid (near present-day Qassiarsuk) and one called Godthaab (near present-day Nuuk). The historian Knut Gjerset [1] explains the early history as follows:

In spite of the cold climate and the dangers connected with navigation in these northern seas the colonies continued to grow until the Eastern Settlement [Brattahlid] had 190 farmsteads, twelve churches and two monasteries. The Western Settlement [Godthaab] had ninety dwellings and four churches. Together the two settlements probably had at the time of their greatest prosperity about 2000 people. The settlers found no native inhabitants in Greenland, though numerous traces of human habitation convinced them that the country was inhabited. The old Icelandic historian Ari Frodi says: “They found remnants of human dwellings both eastward and westward in the land, stone weapons and fragments of boats, from which it was evident that the same people who inhabit Vinland, and whom the people of Greenland call Skraelings, had also sojourned there”. But the Skraelings, or Eskimos, who inhabited this region must have moved to other hunting grounds, as they did not return until a later period. The climate and general conditions in Greenland were found to be much the same as in Iceland. The winters are long and cold, and the sea is usually strewed with icebergs even late in spring, but in the summer a green belt of vegetation stretches along the western coast. During this season of the year the weather is agreeable and the scenery is beautiful. No woods exist, but there is an abundance of grass, flowers, berries, and brush of dwarfed birch trees. The clear air and blue fjords, the glaciers and snow-covered mountains give the region in summer time a serene and tranquil beauty equal to that of any region in the far North. Fish are found in great abundance in the streams as well as in the sea; and seals, walrus, polar bears and furbearing animals are plentiful. Cattle, sheep, goats and horses thrived well and were kept in goodly numbers by the settlers. For want of other building material the houses were erected of stone, and as the dwellings were usually structures of considerable size, with separate stables for sheep, horses and cattle, many remnants are still to be seen in Greenland of the buildings erected by the early settlers. In the Eastern Settlement the ruins of several churches and of about one hundred dwellings have been found.

So, prior to year 981 AD, Greenland had become too warm for the Eskimos, who moved north. Greenland was warm enough to support grazing by cattle, horses, and sheep. The colonists disappeared by about 1450; the most common explanation is the reduction of trade with Norway, the Black Death of 1349, and the return of the Eskimos when the little ice age set in, who absorbed the few remaining colonists. Thus we learn that the global temperature changes occur in long protracted cycles spanning several centuries, and man has little, if anything to do with it. The warming from 750 to 1350 was certainly not caused by man’s industrial pollutants, as those did not begin to appear until about 1700.

The Paris Climate Accord is typical of Mr. Obama’s foreign policies: anything to appease the screeching activists, even if the entire theory is false, and anything to create an excuse to reduce America’s position in the global economy.

[1] Knut Gjerset, History of Iceland, New York: The Macmillan Company, 1925, pp. 95, 96

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