Starbucks Index

I guess most people would have known about the Big-Mac index. If you are not too sure, its the comparison of Big-Mac prices around the world and those prices are used to calculate the Purchasing Power Parity. Purchasing power parity like the currenry exchange rate. eg. How much is one USD worth in Japan.

You can take a look a it from this site : http://www.oanda.com/products/bigmac/bigmac.shtml
or the Economist site if you have an online subscription.

So here's my story. One day, I was drinking coffee at, you guessed it, Starbucks !!! I suddenly thought of doing a PPP comparison using the Mocha latte that I was drinking. A Starbucks Index. So I quickly jotted down the prices of coffee from the menu. And I asked my friends from around to world to check out the prices of their Starbucks coffee (most of them have not gotten back to me yet).

Little did I know, that the Economist had actually come up with a Starbucks index two year ago.
Here is how it looks like :

Well, this isn't gonna stop me from doing my own up-to-date version of a Starbucks index. Hang it there, hopefully I'll get most of the data soon. If you want to help out, feel free to do so :)

IMF, Corruption and Growth

I decided to talk about this topic in conjunction with the recent IMF meeting in Singapore. There has been a lot of talk about corruption and how it has affected the growth of countries.

Funds used to help the developing countries did not have a significant effect on economic growth due to corruption. This was one of the points that was brought up during the meeting.

Furthermore, in my last post, I have received some comments saying that countries with abundant natural resource would require good governance for it to be properly allocated. I supposed that it is the same scenario with the injection of IMF funds into developing countries.

Well, although corruption is bad for growth. Countries in the South-east Asian region actually have experienced robust economic growth from the 1970 till 2000. Though, corruption level there are quite high.

Here is the Corruption Perceptions Index for SEA.

Source : Transparency International

So we may wonder, to what point does corruption play a part in distorting growth ? I have heard people saying that if there wasn't corruption, the region would not be as progressive today. But is that really true ? What I think is that growth in the region was due to capital accumulation from the 1960s that has contributed to the robust growth. Capital accumulation works in a way that pre-1960 the region was without much capital, thus the accumulation of capital would enable increasing returns. What do you think ?

By the way, please check out this site : Transparency International . I think they are doing a pretty good job in fighting corruption. Keep it up !

Resource Abundance and Economic Growth

It seems reasonable to assume that countries that have a lot of resources (oil, gold, diamonds, etc.) would experience high economic growth . Looking at the high oil prices today, not many people will deny that statement.

But for the past 30 to 40 years, economic growth for resource abundant countries have been slower compared to countries that do not even have any resources at all. For example, oil rich countries like Nigeria, Venezuela and Iran have all experienced negative growth rate from the 1980s to 2000. Yet, resource-scarce countries like the Asian Tigers (Hong Kong, Taiwan, South Korea and Singapore) have experienced rapid growth during that time period.

There are several reasons that have been proposed on why that happens.

• Dutch Disease Model. Basically a resource boom will cause labour to move from manufacturing to the booming resource sector. Sees a decline in manufacturing industries. Growth is reduced since manufacturing accounts for a large portion of R&D and growth.
• Education. Resource rich countries tend to allocate less funds to education.
  
• Corruption
• Failure to Diversify. The dependency on oil would make the economy very volatile.
• Distribution of Wealth. Only a small portion of the economy benefits from the resource boom.
  

Question time. Venezuela is one of the major oil producers in the world. But its growth is slow from 1970s to the 1990s. Does the lack of focus on education explains that lack of growth ? How ? There is no prizes for this, but I'm just trying to increase the amount of discussion here :)


By the way, thank you all for the valuable comments so far. It has been interesting to learn from all the different perspectives.

Economics and Terrorism

September 11, 2001

It has just been 5 years since the deadly terrorist attacks on the World Trade Centre in New York. Never in our history, has terrorism affected us so much.

Since 9/11, many things has changed. More funds were allocated towards anti-terrorism, airport restrictions became extremely tight and revenue from tourism dipped. Changes in goventment policies and even international relations. Migration and labour generation.

As Economist, we have to ask ourselfs since terrorism affects so much of our daily lives today, what does it do to the choices that we make. What are the current changes in the government policies ? Our choices of travel destinations ? Where we choose to study ? To take public transport ? Where to live ?

I believe that terrorism should now be taken account into our economic policies, models and theories considering it significance in the world today. I am interested in how terrorism affects growth of countries and read up more in that area.


I would like express my condolences to those whose lives has been affected.

Diamond-Water Paradox part 2

Earlier I posted a question on why the value of diamond is so much higher than the value of water when water is more useful. I got some answers posted by the readers : scarcity, demand and supply. To some extent I do agree with those answers. Diamonds are more scarce than water which means they have a lower supply. Which explains its high value.

But the concept which truly explains this paradox is the concept of marginalism. The marginal utility derived from a product is the change in satisfaction gained as the quantity of the product changes. Applying this to the paradox. Diamond has very high value because the marginal utility is higher than water. And extra gram of diamond gives so much more satisfaction than an extra gram of water. Imagine haven a bit more water. It wouldn't have much or even any difference to your happiness.

That's it ! Do post your questions if you have any. :)

To the TSRs !

I just want to say a special thank you to the readers from the TSR for visiting my site and posting ideas as well as giving me encouragement. Thanks !

Economic Abundance and The Dutch Disease model

I have been slow with the postings lately because my workload is starting to pile up :(
Anyway, I am supposed to do a group presentation on "growth" for my economic class. I never like to do group projects in university because students tend to not do proper research and stick to very easy topics. So I'm quite happy with this group because they seem a more hardworking bunch. Later, I went around the web search for ideas and look what I found.

Did you know that countries with abundant resources actually grow slower than countries that are resource scarce ? I got this idea from an Economic paper "Natural Resource Abundance and Economic Growth" by Jeffrey Sashs and Andrew Warner for the NBER.

I'll quote them here :

"In the past 30 years, the world's star performers have been resource poor Newly-Industrialized Economies (Singapore, Taiwan, South Korea and Hong Kong). While oil-rich countries like Mexico, Nigeria and Venezuela went bankrupt"

There are a whole bunch of reasons and analysis to why this happens. One of them is the Dutch disease economic concept. Something on the line of resource abundance will cause countries to reduced their manufacturing sector and hence slow growth. I'm still reading up on that so I'll only post more information on the Dutch disease when I have them.

Diamond-water Paradox

They say that Diamond is a women's best friend. Yet, water which is so essential for life lacks that kind of valuation.

Why is this so ?

This is called the Diamond-water Paradox, which is set forth by Adam Smith in his book, The Wealth of Nations. He said :

"Nothing is more useful than water; but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it."

Adam Smith wasn't able to solve the paradox. But today the paradox has already been solved, leading to the discovery of one the most important theory in Economics.

Do you know what it was ? Give it a shot !

Tulips Trade !!!

The stories about Economic bubble are all too common to us. Who hasn't heard of the dot-com bubble in which the NASDAQ tumbled and caused a lot high-tech Internet companies to fold.

Believe it or not. One of the earlier economic bubble happened during the 17th century in Holland. And guess what. Its over tulips !

Yes, like those shown in the photos. Tulips were prized possessions those days. There were extremely high demand for tulip buds especially from the upper class people. That drove up prices of tulips to an extraordinary value. Of course, the rarer and prettier the tulip the higher the price.

Tulips were also traded in the stock exchange in Holland then. People also started selling futures on tulips.(it is like buying a flower that has yet to be planted !)

It was believed that the most expensive tulip was the Viseroij (Viceroy). One bulb was sold from 3,000 to 4000 guilders. How much is a guilder ?
Well... 3000 guilders would be able to get you eight pigs, four oxen, twelve sheep, twenty-four tons of wheat, forty-eight tons of rye, two hogsheads of wine, four barrels of beer, two tons of butter, a thousand pounds of cheese, a silver drinking cup (as well as clothes, bed and mattress, and a ship!)

Of course, the values for all these tulips were driven up by speculation. Until one day in 1637, the bubble burst and the value of tulips plummet. Many people lost all of the wealth was the bubble burst.

Interesting eh.