I wonder how many people in countries like the United States, Switzerland, Brazil, Canada, Russia, and China 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 too fast!

Yes, 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) 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.

Let’s take some specific facts:

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 rate (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 blog 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 why more citizens than ever before can afford to own their own houses, drive more and better cars, have cable and computers. The reason we are led to believe differently is because we are victims of our own human nature which tend to focus on the problem areas (higher relative prices) and not the benefits (lower relative prices). Most all citizens expand out to the last dollar of our incomes and quickly notice about those products that are rising faster than normal like gasoline prices! Hey, even gasoline prices are barely at an all relative price high. If gasoline prices are restated for inflation they are $3.50 today vs. $3.17 in 1981 and $3.50 in 1918!

Now, you 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. The median and average American continually has more actual products & services in the aggregate as U.S. income gains have averaged 3.5% per year outpacing higher price increases averaging 3.0% per year leading to a real gain in products and services. True, there are many individual products and services that have risen in price faster than incomes (and big ones like education, energy, and health care!) but we must look at the whole picture of all prices to understand how our citizens, on average, are becoming economically better off.

Made in China - The Atlantic Monthly

Here’s a great slide show and narrative about the manufacturing industry in the industrial city of Shenzen. After viewing the slideshow, discuss some of the questions below.

Discussion Questions:

1. What does the narrator mean when he says “Shenzhen is more or less an invented city?”
2. Why does the word “scale” come to the narrator’s mind as he explores Shenzhen? What key concept from our economics class includes the world “scale”? How does the growth of Shenzhen relate to this concept?
3. What is exported from Shenzhen to the US? What is being sent back to Shenzhen from the US? What does this suggest about the Chinese/US balance of trade? Why do you think this is happening?
4. Where do Shenzhen’s factory workers come from? Why do you think young women make up such a large percentage of factories’ workforces? Are the wages paid factory workers in Shenzhen “fair” wages? Why or why not?
5. Is manufacturing in Shenzhen labor intensive or capital intensive? What’s the difference?
6. What’s the significance of the last line about how Liam Casey, whose office overlooks the headquarters of the Shenzen communist party, has never “met anybody who was in there”. What does this say about communism in China today?

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Design That Solves Problems for the World’s Poor - New York Times

It is a luxury right now to sit back and peruse articles about economic topics that interest me. Economic development has been a passion of mine yet I have not had the opportunity to share my passion about economic development with my current AP students. The AP syllabus does not cover this topic and the Lorenz curve is about the closest that my AP student came to learning about income distribution and poverty. This was not an authentic study of or discussion about effective economic development.

So, I was pleased to read the article by Donald McNeil in today’s (5/29/07) New York Times which highlighted a show at the Cooper –Hewitt Design Museum where designers displayed the products that designed to serve the needs of the world’s poor. These products were created to enhance the quality of life of poor people world wide. They were designed as products that would assist the world’s poorest people in climbing the “self sufficiency” economic ladder.

“A billion customers in the world,” Dr. Paul Polak told a crowd of inventors recently, “are waiting for a $2 pair of eyeglasses, a $10 solar lantern and a $100 house.” The world’s cleverest designers, said Dr. Polak, a former psychiatrist who now runs an organization helping poor farmers become entrepreneurs, cater to the globe’s richest 10 percent, creating items like wine labels, couture and Maseratis. “We need a revolution to reverse that silly ratio,” he said.

The designers created new ways to transport water, created human powered water pumps to enable planting during the dry seasons, and designed an apparatus to clean water for drinking as you sip it directly from streams, rivers and lakes. So many inventors spend so much time designing goods and services for the rich that if in this ‘new revolution” were to take hold, the world’s poor might just find ways to make themselves richer.

What I like about this approach to economic development is that it involves giving the poorest members of our world community the tools that they will need to become independent entrepreneurs who will build their own economic success. This is not a “give them some food to eat”, “give them a dam that they don’t need” or a give them some “charity” type of economic development. It is much more than that…The artists and inventors themselves knew that:

“Interestingly, most of the designers who spoke at the opening of the exhibition spurned the idea of charity.

“The No. 1 need that poor people have is a way to make more cash,” said Martin Fisher, an engineer who founded KickStart, an organization that says it has helped 230,000 people escape poverty. It sells human-powered pumps costing $35 to $95.

Pumping water can help a farmer grow grain in the dry season, when it fetches triple the normal price. Dr. Fisher described customers who had skipped meals for weeks to buy a pump and then earned $1,000 the next year selling vegetables.

“Most of the world’s poor are subsistence farmers, so they need a business model that lets them make money in three to six months, which is one growing season,” he said. KickStart accepts grants to support its advertising and find networks of sellers supplied with spare parts, for example”

Now that is the kind of economic development revolution that I want to be part of. For more information about a truly successful worldwide economic development program for woman, check out the Grameen Bank and/or the Grameen Foundation. Both programs combine the power of microfinance, technology and innovative solutions to defeat global poverty. They too put tools in the hands of poor women. The Founder, Muhammad Yunus just won the 2006 Nobel Peace Prize for his work and for his foundation. His work inspires me..

Immigration: The Human Cost | The Onion - America’s Finest News Source

Free trade, labor mobility, globalization: scary words! Watch this harrowing story of the insufferable losses imposed on American workers due to immigration, then post your comments. What impact does immigration have on American jobs? Should the US take greater steps to protect Americans like Mr. Boyle from the threat of cheap labor from poor countries? Who is truly harmed by labor mobility and who benefits?

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