Archive for the 'Standard of Living' Category

Feb 12 2008

A macroeconomic mystery – the gap between America’s “rich” and “poor”

You Are What You Spend – New York Times

Fact:
The richest 20% of Americans earn 15 times the income of the bottom 20%.

Fact: The richest 20% of Americans only consumer 4 times as much as the poorest 20%.

Question:
Why don’t the richest 20% consume 15 times as much as the poorest 20%?
Consumption Gap
The author of this NYT opinion piece claims that the gap between America’s rich and poor is not as stark as the income figures suggest. While before tax income of the top 20% is around $150,000, the poorest 20% earn only around $10,000. Clearly these numbers indicate an enormous income gap in America.

However, when it comes to consumption, the poor consume an average of $18,000 on everything from food to housing to entertainment to transportation. The richest 20%, on the other hand, consume an average of only $70,000, less than half their before-tax income.

So the question is, is standard of living based on our income, or on our consumption? If it’s income, then there’s certainly a huge gap in standard of living between the rich and poor. But if we believe it’s consumption, then the gap is narrowed dramatically. The author claims the latter:

To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.

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Jan 29 2008

“Creative Capitalism”: Harnessing the power of markets to serve the poor – by Bill Gates

Bill Gates Issues Call For Kinder Capitalism – WSJ.com

“We could make market forces work better for the poor if we could develop a more creative capitalism…” – Bill Gates at the 2007 Harvard commencement address

Is capitalism capable of lifting the world’s 4 billion poor people out of poverty? Bill Gates, the world’s greatest beneficiary of capitalist markets, thinks the system that forms the foundation of our market economy requires some re-thinking. Gates is calling for “creative capitalism” in which firms respond to incentives aimed at developing technologies that serve the world’s poor.

Gates first expressed his interest in a capitalist system with a focus on helping the poor in his Harvard commencement address last year, and reiterated his vision last week at the World Economic Forum in Davos, Switzerland. Gates envisions a future where profits will motivate industies to create goods and services not just for the top 20% of the world’s income earners, those in the rich countries of the OECD (the “country club of the UN” as Hans Rosling calls it), but by developing products that are meant to benefit the world’s poorest people, those in the bottom 20%, who suffer most from poverty.

Watch the videos below and discuss the prospects of Gate’s vision becoming a reality.

June 2007 at Harvard

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and January 2008 at Davos

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Jan 17 2008

Does economic growth = economic development? Not for China’s rural poor…

Grinding poverty defies China’s boom – International Herald Tribune

Here at SAS my year two IB Econ students have started off the new year with a new unit: Economic Development. So far in the semester we’ve learned about what makes economic development different than economic growth. While gross domestic product may offer an indication of a country’s level of economic activity and output, it says little about the reality of life for the common person of developing countries.

To offer a more rounded figure for determining the level of economic development, the United Nations Development Program has created an alternative to GDP, the Human Development Index. The HDI accounts for the GDP per capita, the average level of primary and secondary education attained, literacy rates, and the life expectancy of citizens, to offer a glimpse into the reality of not just material wealth, but health and education in developing countries.

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Jan 15 2008

Behold the Nano – “the people’s car”

The Nano comes with its own moral dilemma. – By Anne Applebaum – Slate Magazine

Tata Motors of India recently launched the world’s cheapest automobile, the Nano.

“…meet the Nano, possibly the most significant new car of the decade. Small, cute, and snub-nosed, it fits four people and a duffel bag, has a single windshield wiper, travels at 60 mph, and it’s all yours for the princely sum of $2,500…”

Tata plans to build and sell 250,000 Nanos this year in India, spreading production to Africa, South America, and Southeast Asia. Clearly the company is targeting not the traditional auto markets of Europe and North America, rather the regions traditionally thought of as poor and thus not associated with auto sales.photo

What is the meaning of this “car for the masses”? At first glance, it looks like the perfect solution for bringing millions of the world’s poor (if not super-poor) closer to the dream of achieving a quality of life previously only accessible by the world’s middle class and rich. Great,  so what could possible be bad about fulfilling the dreams of so many of the world’s poor? The answer? Externalities

“Though the small Nano uses less gasoline than many larger cars, the enormous potential numbers could mean an equally enormous environmental impact. Since it will be a long time before Nano drivers will be able to afford the $20,000-plus hybrids now on the market, let alone a Honda FCX Clarity, the prototype experimental hydrogen car thought to be worth as much as $10 million apiece, that means an exponential rise in carbon emissions as well as other kinds of pollutants. The United Nations’ top climate scientist, Indian economist Rajendra Pachauri—chair of the Intergovernmental Panel on Climate Change, which shared the Nobel Peace Prize with Al Gore—has said he is already “having nightmares” about precisely this scenario.”

Herein lies the moral dilemma of the Nano: where does society’s desire to improve the lot of the world’s poor come into conflict with society’s desire to to improve the environment and minimize the impact global warming?

What do you think? Do the social benefits of a $2,500 car exceed the social costs it will likely impose? Does the Nano’s $2,500 price incorporate the full costs that its existence places on society and the environment? Should we jump for joy at the thought of millions upon millions of the world’s poor finally having access to the convenience of automobile transport? Or should we pause with uncertainty to contemplate the effect on the environment and the social costs that millions of cheap cars will impose on the world?

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Nov 20 2007

Exports, good – Imports, ALSO GOOD!

Foreign Policy: Why We Trade

Professor Russ Roberts, host of the EconTalk podcast, has an essay in the latest issues of Foreign Policy journal titled “Why We Trade”. In this piece, Roberts defends the benefits of trade from a broad perspective, beyond the popular political view of trade, usually along the lines of exports, good – imports, bad”. Roberts compares this line of thinking (characteristic of presidential candidates of both the Republican and Democratic parties), to the 14th century, pre-Adam Smith view of world trade, known as mercantilism.

Mercantilism was a view of global economic interaction that placed emphasis on the accumulation of gold and other precious metals from abroad in exchange for your country’s exports. The doctrine failed to recognize the importance of imports from abroad, as this was viewed as a loss of wealth to foreigners. Mercantilists viewed wealth in terms of bullion or the amount of precious metals a country owned. Today, of course, our understanding of wealth has evolved to account for the amount of output, or products (goods and services), we are able to consume. Herein lies the flaw in the rhetoric of modern politicians who, “are always talking about the necessity of other countries’ opening their markets to American products. They never mention the virtues of opening U.S. markets to foreign products.”

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