GDP Basics

There are three ways that economists use to calculate GDP. One is to look at the total income of all people in a country (or other area that is being looked at, being a state, region of a country, or an international collection of countries). The other way is to look at the total value of all the goods and services produced. The third and final way is to measure all the spending that flows into firms from the final users of the goods and services (Krugman & Wells, 2013, p. 192).

The focus on the final user is important because it does not inflate the final value of the GDP. If economists were to measure the price all firms added to the goods and services that are measured for GDP calculations, every layer of sales would add in more value. Therefore, the value of the Ritz cracker, for example, which is paid by the consumer, is what is calculated as being a component of the GDP. This avoids counting as sales what the company paid to the farmer in Kansas for the wheat and the farmer in Wisconsin for the butter.

Ultimately, there are four separate inputs that are counted as part of GDP and is shown commonly as the equation GDP= C + I + G + (X-M). The “C” stands for all the consumer purchases. The “I” stands for the investments businesses make to facilitate the creation of the goods and services. For example, the farmer who is growing wheat will pass on the cost of the seed to the end-user, but that same farmer might purchase a combine to help harvest the grain faster and more efficiently. All comparable purchases are included in the “I” component of the GDP calculation. The “G” part is the amount that the government spends on the goods and services it purchases, from the most cutting-edge fighter jets to the red pens at the IRS. The final part is shown as two letters, both “X” and “M,” but it is one term. “X-M” is the net balance of exports minus imports. Currently the United States is a world leader in both exports and imports, but the final value of the imports is greater than the final value of the exports, so this part has the effect to be an overall decrease in the GDP for the US (Krugman & Wells, 2013, p. 194).

Overall, the largest input in this GDP calculation comes from the consumers. With over seventy percent of the current calculation (Krugman & Wells, 2013, p. 195), a shift in the amount consumers are willing (or not willing) to spend has a huge effect on the economy. If businesses see consumers willing to spend, they will be able to make the investments for the future and the government will be able to reap more tax revenues. Perhaps the government would also prefer pay off debt or reduce tax rates. Conversely, if consumers pull back their spending, businesses will delay their investments and the federal government will have to fill the hole in spending or risk widespread penury and face political discontent. As illustrated, the governments have more options politically when the consumers are spending, so they are not just the larger part of the equation, but consumer response can drive many political responses.

References

Krugman, P. & Wells, R. (2013). Macroeconomics. New York, NY : Worth Publishers

 

The CPI: A Basic Introduction

If you live long enough, you will have the phenomenon where you go to a store and buy something, and you will realize that the price you paid now is much different from the price you remember paying for it as a youth. Live even longer and then you can regale the neighbor kids with all you memories of lower prices when you were their age. This is result of inflation, which is a general rise in the price levels. You are not necessarily better or worse off from inflation. Though that loaf of bread may have increased in raw value four times over your life, chances are that the amount you are paid for similar work has also increased in that time. 

Economists want more precision in their measures than the ranting of an parsimonious man. Instead, they base their judgments on the rise in the price level by putting together a list of things that people buy all the time for both goods and services.  This list is called a market basket. By watching the fluctuations in the change in prices of the market basket, economist can then compare what the prices of a standardized set of items have done in comparison with the previous year’s set of prices. Creating a ratio between the current year’s level of prices and the prices of the year you use as a baseline gives you a price index. Once you have a price index, you can compare the change in the price indexes and then you can come up with the rate of inflation (Krugman & Wells, 2013, p. 203). The change in the rate of inflation is important to track because there are many contracts tied to inflation so that the purchasing power of an individual is not lessened. Tax rates and social security benefits are some of the most visible examples of this. The federal government will usually increase the payment of social security benefits so seniors can afford the necessities of everyday living. Conversely, the IRS will peg also increase the income levels at which different tax brackets go into effect so as not to take too much away from the income of people who have more money through inflation.

The price level indicator that is used most in the United States is the consumer price index (CPI).The responsibility for creating the CPI falls to the Bureau of Labor Statistics, in the Department of Labor. They gather the prices of some 80,000 different distinct goods and services in 87 urban areas. If they cannot find the exact item, they substitute a new item and record the change in quality (‘How BLS Measures Changes in Consumer Prices”). The BLS has hundreds of employees, and they repeat this process every month to keep constant tabs on the shifting of the overall price levels, and the levels of prices in individual sectors such as housing and education (Krugman & Wells, 2013, p. 203). The measure of inflation as experienced by consumers is a lagging indicator, as the prices have already adjusted to whatever information that led to the increase, for example agricultural goods becoming more expensive in response to a drought (“Frequently Asked Questions”). There are other related indicators. There is a measure of the prices that suppliers are paying for their inputs, this is the producer price index (PPI). This indicator is closer to a coincident indicator because they firms are closer the signal and thus will react to price changes faster. There is also a competitive reason not to pass on price changes to consumers immediately; producers want their products to be competitive in the market. The PPP and the CPI move closely together though.

The relation between the CPI and overall growth in the GDP is somewhat difficult to unpack. The best explanation is that growth in the CPI reflects growth in the rate of inflation. Inflation is somewhat like salt in the human diet. Too much is detrimental, and not enough may be even worse. There is a goldilocks area where it is just right. The Federal Reserve targets a two percent rate in in inflation because any higher makes making future financial decisions difficult, and anything lower makes the specter of deflation raise its head (“Why does the Federal Reserve aim for 2 percent inflation over time?”). If the CPI contracts, this means that there has been a lowering of the price level, and thus deflation happened. This will mean that the GDP is on its way to shrinking. Conversely, if the CPI increases too much, the economy is over-heating with the proverbial “Too much money chasing too few goods”. The economy will be hot, and the GDP will be growing, but it is a signal that a bubble may be brewing and it could be cause for alarm in the long run. The graph below is a linear scale of the change in CPI from the Saint Louis Federal Reserve’s FRED website. Looking at the CPI for the last ten years, it is easy to see how during the Great Recession, the CPI first accelerated and then crashed. The current growth path is consistent with the steady recovery we have been in for the last five years. The forecast is that barring any outside shocks, the CPI shows that the trend is expected to continue.

Figure 1 From https://research.stlouisfed.org/fred2/graph/?graph_id=205692#

UPDATE: Changed Log to Linear referencing the graph.

References

Board of Governors of the Federal Reserve System. (2013). Why does the Federal Reserve aim for 2 percent inflation over time? Retrieved from http://www.federalreserve.gov/faqs/economy_14400.htm

Bureau of Labor Statistics. (2011).How BLS Measures Changes in Consumer Prices. Retrieved from http://www.bls.gov/cpi/cpifact2.htm

Bureau of Labor Statistics (2014). Frequently Asked Questions (FAQ). Retrieved from http://www.bls.gov/cpi/cpifaq.htm

Federal Reserve Economic Data. (2014). Consumer Price Index for All Urban Consumers: All Items, Index 1982-84=100, Monthly, Seasonally Adjusted Retrieved from https://research.stlouisfed.org/fred2/graph/?graph_id=205692#

Krugman, P. & Wells, R. (2013). Macroeconomics. New York, NY : Worth Publishers

An Econ 101 Look at Choices and the Magic of the Market

                Krugman does not phrase it this way exactly, but the generalized definition of the study of economics is that it is the study of how you allocate finite resources in the face of unlimited wants. There is in modern society almost anything that an individual could want, excepting jetpacks. The problem is that all these wants have some sort of cost, in terms of time and / or resources, so these costs add up. An individual economic actor only has so much time, and only so much money. This situation means that choices have to be made.

                These choices can seem minor. Somewhere a student is working on a paper instead of going out with his friends. The cost of writing that paper are not just the easily thought of accounting costs like the electricity to run the paper and the amortized portion of his Comcast bill. Instead the costs also include the things that were not done, in this example the fun that may have been had with the student’s friends, this cost is known in economics as the “Opportunity Cost” (Krugman & Wells, 2013, p. 7).

            `The choice to stay in and work on the paper the student makes is not made in a vacuum. An important part of the choices an economic actor makes is that the choices made are in response to incentives. The student likes to go out, but he knows that going out on the day he had set aside for working on his paper would be a detriment to his grade. Instead of a short-term myopia about what the student is missing out on, he is acting in response to a long-term incentive where he knows that the success in the class will be positively correlated with success in his academic program and it will help in his career (Krugman & Wells, 2013, p. 9).

            The choices are not just seen at the individual level. Companies and governments have the same issues, only writ larger. Just as the student is an accountant, and has worked hard at getting to the place in the career he is at, companies and governments also can specialize. GM has made cars for over 100 years, giving it an advantage and institutional knowledge on how to makes cars. The United States leads the world in healthcare, higher education and manufacture of airplanes. This specialization leads to advantages where those who are good at something are also less good at something else. They are able then to trade with other firms or states that have an advantage in manufacture of different items. GM can focus on the design and manufacture of their automobiles because they can import the tires from China, the manufacture of which does not require the specialized labor force the United States employs. Likewise, the US can send those finished autos abroad an import Bangladeshi clothing because the Bengal workers enjoy a comparative advantage in clothing. It is important to note that the US could also manufacture those clothes more efficiently than the companies in Bangladesh, but that would require giving up so much more than the Bengals give up. Because the imported clothes have a lower opportunity cost, they are cheaper overall. This is comparative advantage in action. This trade means that everyone is better off than if each country tried to be self-sustaining. Trade makes all economic actors better off (Krugman & Wells, 2013, p. 12).

            It sounds like all these individual choices would just make a mess, but the magic of the market and Smith’s Invisible hand means that it all works out. Markets move towards equilibrium, where the price people are willing to pay nicely intersects the amount of goods suppliers are willing to bring to the market. Over time, there are no shortages or surpluses and the market makes everyone better off through their choices – unless the government finds it politically expedient to stay the movement of the invisible hand (Krugman & Wells, 2013, p. 16).

Selling Aspirin

Aspirin is so potent that many in the health professions contend that if it were invented today, it would be only available by prescription. In 1897, Felix Hoffman chemically concocted the first synthetic aspirin compound, known as acetylsalicylic acid. At the time he was working for the Bayer Company. In 1899 Bayer Aspirin was introduced. It was the first tablet ever to be marketed as a water-soluble pill. Fifty billion aspirins are consumed worldwide annually. A variety of painkillers line the store shelves today, but only aspirin is proven to have long-term cardiovascular and anticancer benefits. In spite of these positive aspects to the product, a concern that aspirin might contribute to Reye’s syndrome in children, a disease that affects the brain and liver, has led to aspirin having an identity crisis. There is a generation of individuals who have grown up assuming other drugs have completely replaced aspirin. Ask someone for a aspirin these days, and you’re likely to receive a Tylenol or an ibuprofen-based tablet of some kind. Aspirin manufacturers are trying to educate people that simple aspirin can help keep them alive.

How can the aspirin industry integrate PR, Social Media and other digital technology to reach its goal to promote the benefits of aspirin in a manner that seems to keep the pharmaceutical industry our of the direct conversation/communication?     Chapters 16 and 17

You know why aspirin was derived before any of the other painkillers? It's because it is a rather simple derivation from natural compounds. There is a chemical in willow bark that salicylic acid. You throw an acetyl-group on there and then you have nice and save anti-inflammatory. Not only that, but it protects your heart. Those other pills are much less natural, they come from sterile labs where they were just making chemicals and guesses and not trusting nature. They also have negative side-effects on your liver. And then don't get me started on that time Tylenol  killed a bunch of people. Sure it wasn't the manufacturers, but that was nasty, right.

Bayer has the problem where aspirin has become generic in the way that Kleenex is now all tissues and Band-Aides are now all bandages, but there are also generics.  How do you differentiate yourself when you are twice generic? You need some sort of social media presence.  I just looked and I couldn't even find a fan page. Generic "aspirin" had a page, but there were only 79 likes. Aspirin looks like it fell down the memory hole in spite of being first, being more natural, safer, and being a product of German Engineering.  So fist thing is first, you get your name out there for what you're good at. Send the press releases that show that a daily aspirin regimen saves lives.  Get that written up. Journalists just want to transcribe your releases and go home and drink, help them out. Also get on the facebooks and the twitters. Let your fans know you're there, and make it interactive. Give away samples of your low-dose coated aspirin. Push yourself on doctors. Have them recommend the regimen. Buy the Aspirin adword so you are at the top of the search. "Painkiller" too. In no way mention that your company collaborated with the Nazis in WWII. If it comes up say BMW did too! Send out samples in the mail and with the sunday paper. Get Bayer Aspirin on the tips of their tongues and down their throats.

Positioning

Nearly every consumer electronics maker recognizes Apple Computer’s iPod as the gold standard for internet tablet devices. Apple has by far the largest market share (though they are not very strong in China) and its players are elegantly designed. The company prices competitively and yet still makes huge profits on this line of products. Sony, the consumer electronics mega-brand, considers Apple as its “opponent” in the personal music devices (MP3 player) category; Sony’s objective is to take away market share. Of the five general market-challenger attack options (frontal attack, flank attack, encirclement attack, bypass attack, or guerilla warfare), which would you recommend as the primary attack strategy and why?  Chapter 9

True story: I like stand-alone mp3 players but the market has been largely abandoned to Apple and cell phone. There is one company that makes very inexpensive and small players, but they are notoriously prone to breakage. Being like 30 bucks, you just buy a new one. I was tired of that, I did buy a Sony mp3 player a couple of years ago.  I couldn’t get it to transfer files and the customer service was horrible. I ended up returning it because they had a good product but the total package was wanting (I think in the end it was my fault. I bought a new version of the player that kep breaking and had the same transfer problem. Their CS suggested I try a new USB port. It worked. In 4 hours and at least three different reps, none of the Sony people thought of that solution -- nor did I).

I bought the Sony because of a couple of points of parity, I wanted a new player, but at the low end was the same thing I had been buying. I had spent probably a hundred dollars on replacing the cheap Sansa when I thought I could spend a hundred dollars for a name I was more comfortable with. I still think of Sony as a higher-end brand, in spite of some of the recent problems the company. The Sony was priced higher, but it had more advertised features.  The gold standard of the mp3 players were those in the Apple universe, from the Nano to the iPod to the iPhone. I stayed away from those because they were more expensive and then there is my perception of the cult of apple (grown much larger in the last decade) that I didn’t want to be a part of. Plus with apple, you have to buy the apple computer and the apple connectors and the apple chargers and the apple toilet paper or nothing works. I didn’t want to overpay to be in their walled garden.

So if you look at stand-alone devices, there is an untaped niche there, which Sony filled with its products. It has the name of Sony, and they’re solidly built, and you can be an anti-apple reactionary for whatever reason -- price, or snobbiness.  There is a market, so how do you market it?

In this example, Sony has ceded the bottom of the market.  That’s probably a good idea.  Judging on the quality of the build of those cheaper players, I am imagining the margins are quite thin there. They have a quality MP3 player at a lesser price than Apple, the biggest problem is that they’re not called Apple. They need to take market share away from Apple, and there are different approaches. The first is the frontal attack, matching Apple’s product, price, advertising, and advertising. Second is a Flanking attack, trying to fill gaps the competitor leaves. Third is an encirclement attack, trying to launch a grand attack on multiple fronts. Fourth is a bypass attack, which includes dissociation into products and territories as well as trying to shift the battleground. Finally there is a guerrilla attack, which are small and intermittent attacks in various manners.

Each possibility has its weakness. Sony is a large company, but Apple is larger, with larger margins. so neither a frontal nor a encirclement attack will work because apple has more financial firepower and we are told these attacks are for companies that are peers or stronger than the companies being targeted. The Bypass attack ignores the question at hand. We want to take Sony’s MP3 players up against the giant. The guerilla attack is too small and unsustained. It could be part of the advertising, but it’s not part of the engineering.  Ultimately, I would suggest that Sony do what it did. It created a product that fit in a gap that Apple wasn’t filling. I took its resources and aimed and hit the middle market. I would be a lot more excited about the outcome of that targeting if I walked my dog and mowed my lawn listening to a Sony MP3 player. What they did got the sale, but holistic marketing isn’t done even after the initial transaction happens. It goes on and on.