Economics Week in Review 10/24-10/28

10/24 Terms and Graphs:

GDP - The total output of products and services of a country in a year

Real GDP - The GDP value that is adjusted for inflation.

The 70 Year Rule - The number of years that it takes for Real GDP to double is calculated by the equation: 70/ (% growth rate of Real GDP).  

Measuring GDP:

• Expenditure method - Add up the component parts of goods and services produced in a year.
• Equation: Y = C + I + G +NX
• C = Consumption expenditures
• I = Investment spending (includes inventory, new houses (because they can be rented out))
• G = Government spending
• NX  = Net Exports

What’s Not Included in the GDP?

• Resold/used goods (resell a car)
• Transfer payments (allowance, parent to child)
• Intermediate goods (leather vs. leather shoes)
• Exchange of financial assets (Stock Market- buying/selling bonds and stocks)
• The black market

Business Cycle Graph:

Trend line = long-run real GDP Expansion/Recovery: Real GDP growth, when GDP moves from a trough to a peak.

Contraction/Recession: Negative GDP for at least two quarters.

Deficit: When spending exceeds revenue collected. Example: When the government spends more money than it collects in revenue from taxes.

Debt: Accumulation of deficits.

10/25 Terms:

Budget Airlines: A lost-cost airline with ticket prices that often cost half or a third as much as commercial airline tickets. They reduce prices by eliminating amenities (recliner seats, free food, jetways, etc.), buying only one kind of fuel efficient plane, reducing the crew and staff needed to operate the airline (ex. automation for tickets), landing in small, regional airports with lower landing fees that the budget airline can negotiate down.

Why commercial airline tickets are so expensive in general: Crew/pilot costs, expensive slots at major airports, security/customs fees, taxes, plane maintenance, insurance, fuel, etc.

Article 1: http://www.gnhcentrebhutan.org/what-is-gnh/the-story-of-gnh/

This article discusses why the world needs GDP reform, in the shape of Gross National Happiness (GNH). In 1970, the former King of Bhutan introduced the idea of GNH as a more comprehensive indicator of national health and happiness, believing that measuring development based on GDP fails “to serve the wellbeing of people or the planet.”  Additionally, GNH is concerned with environmental depletion because basing national development solely off of the ability to produce goods, without taking into account the natural resource reduction that production entails, is unsustainable. GNH suggests that instead of GDP, people should give subjective evaluations of their own happiness (based more on their relationships and community involvement than on money). Of course, there is opposition to subjective well-being (SWB) assessments as a replacement indicator for GDP. There are many flaws that arise from self-reported data. The Bhutanese agree that GNH has its limitations, but they think that it's a indicator that can help get the world on the right track, and to start thinking about development in a new way that’s disconnected from wealth. They suggest that the world needs both GDP and GNH reform, something that can go beyond solely economic or solely subjective indicators.

Article 2: http://www.wsj.com/articles/budget-airlines-spread-their-wings-across-the-atlantic-1476202844

This article connects back to the teach-a-class from this week about budget airlines and the general costs of commercial flights. I thought that this WSJ article was interesting because it explains that budget airlines are starting to do transAtlantic flights (between the U.S. and Europe), which means that budget airlines are encroaching on the territory of commercial airlines. Although budget flights provide fewer comforts than commercial flights, people who want a bargain and don’t care about traveling in style will be all over these new opportunities. As the article states, “we see long-haul, low-cost carriers as a growing threat to transAtlantic profitability.” Because of this threat, big name airlines will have to make some changes if they want to stay competitive, such as what Air Canada is doing by making “low-fare offshoots of its full-service carriers” that have “cheaper fares, fewer amenities and planes outfitted with more seats than their premium sister airlines.” The article also suggests, however, that transatlantic flights might be an unsustainable venture for budget airlines. For example, if fuel prices increase, it will be hard for budget flight tickets to stay low.

Takeaways:  

We learned that GDP neglects to consider many important aspects of national economic health (like economic disparity, poverty, unemployment), but I thought that the most interesting thing about our GDP discussion was that GDP fails to consider the negative environmental effects of factories, production processes, and products themselves. Here is a really cool quote from Robert F. Kennedy on the limitations of GDP as an indicator of national economic well being: “Our Gross National Product…counts air pollution and cigarette advertising…special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder…It measures everything, in short…except that which makes life worthwhile.” Although GDP looks at annual growth, it fails to look at the long-term picture of all of the resources that we are using up in order to make high levels of production happen each year. I think that factoring in environmental costs would be an interesting new way to calculate GDP. If we could assign some monetary value to the negative environmental impact of each country, we could then subtract it from its GDP and could call this new value the Eco-Conscious GDP, or something like that. But then more questions arise, like: how do we assign a value to lost natural resources? I don’t know the answer to this, but it is interesting to think about.
Additionally, I think that GNH is an interesting idea for an indicator, but I have some reservations about it as a replacement for GDP. I think there is some merit to having GDP and other economic indicators as the primary means of comparing development across countries. The biggest upside of GDP is that it’s not a subjective evaluation like GNH, it is an objective tallying up of all things produced in a national economy in a year. Objective data is generally more reliable than subjective data. Additionally, the U.S. and other developed countries are good at collecting data because they have the money, resources, and technology to do so. However, this is not the case in all developing countries. Therefore, it makes it less realistic that the global community can, one, decide on universal indicators of happiness that overcome societal and cultural differences, and, two, successfully collect this data because so many countries lack the funds for a nation-wide census. Therefore, it is in many ways easier to just look at a country's health by economic factors and GDP.