Wednesday, April 29, 2009

Public Good?

There are some goods that the market will not provide because incentives are missing. I like this doodle because it shows how some goods are beyond the control of the market participants.

Sunday, April 26, 2009

HI From Flad


If you are navigating from UNI for Kathy Oakland's class, this short video will give you a short introduction to me. I prefer to be called "Flad" and I'm high energy.

Friday, April 24, 2009

Shift in the Nominal Money Demand Curve

This link will take you to my profile page on Facebook where you can listen to me explain why an increase in the price level leads to an increase in the demand for money. I am proud of this.

Thursday, April 23, 2009

My Letter to the Muscatine Journal


Recently I bought an iPod Touch. iPod is the signature trademark of Apple, Inc., Cupertino, California, USA. I began to wonder where the iPod was manufactured. According to Hal Varian, the chief economist at Google, all of 451 parts that make up the iPod are outsourced. The most expensive part of the iPod is the hard drive that sells for $73. The rest of the mp3 player contains parts like screws that have razor slim profits because the components are produced in markets where the profits have been competed away. Mr. Varian studied an iPod that had a retail cost of $299. The total cost of making the iPod touch including labor is approximately $100. What remains after Apple sells the iPod is a profit nearly twice as much as the cost of manufacturing. The profit accrues to the American entity, Apple, Inc. Almost all of the value that is imputed into the product is given by the consuming American public. Another point is that all of the iPod is made overseas except for the idea.

One would be challenged to find any product that does have outsourced parts that are produced in markets where the profit margin is razor slim. One estimate on a GM auto shows that 65% of the GM car was produced in foreign markets. Robert Carbaugh writes that when passengers travel in a Boeing 777 they are riding in a jet where about 35% of the parts are manufactured in foreign nations. It is interesting to note that European Airbus manufactures its jet using about 40% American made parts. This means that many Americans make a living working for a foreign corporation. The implication of this statement is that if America wants to retain its competitiveness, it must develop the skills of its people and not worry about where the corporation is located.

Tuesday, April 21, 2009

Social State

I believe that you will see taxes increase and inflation over the next couple years.

Sunday, April 19, 2009

Governor's Scholarship Ceremony

Here's Flad, Mr. Chet Culver, and Tyler Hagy at the Scholarship Ceremony. Very cool.

Velocity and Nominal Interest Rates

Macroeconomics predicts that people will hold less liquid money at higher interest rates because of the opportunity cost of interest they could have earned by investing. Does the data fit the prediction? In the graph above, it appears that it does. When velocity, $Y/M1, is high, people are holding on to their money. This infers that the interest rate is high. Some data is unavailable for 2004-2008. I also used the mean values of velocity and one-year treasury bills.)

You can algebraically obtain a relationship between velocity and nominal interest rate. I used the equation for money demand (M = $Y(Func*i), divided both sides by $Y. Since velocity is $Y/M, I took the inverse to obtain $Y/M = 1/Func(i)). This equation shows that the two variables are inversely related.

Saturday, April 18, 2009

Velocity of Money Since 1960

John Maynard Keynes predicted that the nominal interest rate would determine how much liquidity one would demand. At higher interest rates, consumers would hold less cash. How has the introduction of debit cards and the use of credit cards changed this liquidity preference? People now hold less cash. Many buy all of their purchases with a credit card and make one payment at the end of the month. Many just go to the ATM machine when they need cash. Since there is less cash being held by the public, it makes sense that cash has to be spent more times to buy a nominal output. In the graph, this is what I show. I used the mean nominal GDP and mean M1 to calculated the velocity. Velocity equals nominal income divided by the M1. The M1 is composed of currency held by the public, money in checking accounts and money in traveler's checks. The next step is to prove the nominal interest rate determines the demand for money.

Thursday, April 16, 2009


While filling up her car with gas, my wife noticed hundreds of bags of mulch crowded into every available space in the parking lot. She wondered if mulch were a complimentary good for those who fill up with gas. Since I can't think of a thing to blog, I thought I would ponder the question.
1] For mulch to be a complimentary good, its demand would have to be increasing as the price of gasoline was decreasing. Gas has risen in price to a national average of $2.02.
2] Just because mulch is sold at the Kum and Go gas station doesn't make it a complimentary good. There are hundreds of items that are sold at the corner station including Starbucks coffee, candy, and lucky charms.
3] Mulch is seasonal and it is spring.
4] I think that mulch at the station is just profit maximizing behavior. As long as the mulch can easily be loaded into a pickup truck, gas buyers will purchase mulch along with gas. That might make it a complimentary good if the opportunity cost is considered.
5] I've been watching too much House, M. D. and have learned the art of saying something and saying nothing.

Saturday, April 11, 2009

Economics In Everything

Dan Pink writes that Symphony is a 21st Century skill. He means that today's thinkers will see connections between seemingly unrelated concepts. I snapped this picture at the Muscatine Art Center. The Mosaic Project had children interpret any abstract concept in a 6 X 6 frame. I looked for the economics in this picture and this is what I saw.

1] A lot of penguins. In a perfectly competitive market information is freely shared and copied. In a crowded art room, I imagine one kid made a penguin and every one copied the idea in a slightly differentiated way.
2] Resources were scare. In Garr Reynolds brilliant book, Presentation Zen he writes that the finite space created by the canvas actually develops creativity.
3] The art center held a monopoly on the showing. The tiles had to be bought for a $20 donation.
4] Some the the art was superior and some subpar. The expectations set by the teachers had a direct effect on the end product.

Friday, April 10, 2009

FED Game

This is an outstanding game where you can role play the FED Challenge. During my term, inflation increased to 5% while the unemployment rate fell to 3.9%. When I teach monetary policy, I'm going to use this game. I am not kidding--it's outstanding.

Saturday, April 04, 2009

Implicit National Debt

This graphic shows that spending on medical care is raising faster than spending on all other items. I intended to show that medicare and medicaid payments will have to increase in order to pay for the aging baby boomers. Thus, the national debt is larger than it seems. With almost zero inflation, .5%, all of the deficit spending will contribute to a real growth in the national debt held by the public.

Money Illusion

Is Juan better off? Suppose Juan receives a 2% wage increase but the inflation rate raises by 4%. Is Juan better off?
The phenonenon I just described is what economists call the "Money Illusion."
The money illusion refers to the fact that people see money as money, in nominal terms, not in what the money actually buys. Recently, our union accepted a 2% nominal wage increase, which I think is fair. The CPI has risen .5% since January, 2009. This implies no money illusion.