Thursday, May 22, 2014

Nice graphs of traffic fatalities, miles driven and recessions since the early 70's.

Saw this graphic in an article on why Southern cities have more pedestrian fatalities than other regions of the country.  It includes pedestrian and regular ol' traffic accidents that result in the death of someone.

Go HERE for the full analysis, but I was intrigued by the year 1974. Why the big drop-off from 1973? (I marked 1973 with the RED arrow as the high watermark for traffic fatalities).
Source: Washington Post

Here is a graph from Calculated Risk that shows miles driven over time (1971-Present). In addition it shows all the recessions, mild and severe, during that time span.

If you look at the periods of recession in this graph and line them up with the graph of fatalities above you will notice there is is dip in miles driven and traffic fatalities. The only exception is the recession in 2001-02.  Miles driven did not skip a beat.

The one I marked with arrow is the result of the Arab oil embargo that increased gas prices significantly and price controls made scarcity a problem (I remember those days as a teenager).  People were very careful in their consumption of fuel and (1) made fewer trips and (2) voluntarily slowed down on the highways to conserve even more.

I don't think this explains all of  the long term trend in decreased traffic fatalities.  There has to be more, right?

What do you think could be a contributing factor?

In terms of recent times, what correlation can you make with the leveling off of miles driven during and post-Great recession and the rapid decrease in traffic fatalities?  The recession is over so it should be trending up, right?

So many questions!  Do you have answers?

Tuesday, May 20, 2014

"Purchasing Power Parity for Dummies"---like me!

Purchasing Power Parity is somewhat of a difficult concept to grasp for the average high school student. Heck, I struggle with it.

I will try to make it as easy as possible with my explanation here. Sort of my personal "Purchasing Power Parity for Dummies".

Let's say we have a shopping list of various goods and services that are available in the US and in the European Union and these goods and/or services are identical in every way.  People in the US and the EU buy these items on a regular basis so they are important for daily/weekly/monthly consumption.

We have two baskets. One basket, "Basket 1", is labeled purchased in the USA and the other basket, "Basket 2", is labeled purchased in the European Union.   Let's go shopping!

The items in Basket 1 (USA) total $150.00 and are purchased using US dollars.  The items in Basket 2 (EU) total 100 Euros and are purchased using Euros.

What if me and my European friend wanted to change places--- I buy my stuff in Europe and he buys his in the US.  The first thing I would have to do is exchange my US Dollars into Euros and he would have to exchange his Euros into Dollars.  What would be the exchange rate so that we could buy the SAME goods and services as we did before?

Ratios, man, Ratios.

If you divide the value of Basket 2 (100 Euros) by the value of Basket 1 ($150)---100 Euros/$150--- we get an exchange rate .67 Euros cents PER dollar exchanged.  Meaning, for every dollar I exchange for Euros I get .67 Euro cents.  So in order for me to get the requisite 100 Euros to buy my basket of goods in Europe I will need to exchange $150 US dollars to do so ($150 X .67 Euros = 100 Euros).

The reciprocal is going to be true for my European friend.

If you divide the value of Basket 1 ($150) by the value of Basket 2 (100 Euros)---$150/100 Euros---we get and exchange rate of $1.50 PER Euro exchanged.  Meaning, for every Euro my friend exchanges for Dollars, he will get $150.  So in order to get the requisite $150 to buy his basket of goods in the US he will need to exchange 100 Euros to do so (100 Euros X $1.50 = $150 US dollars).

Purchasing Power Parity (PPP) is defined as:
    Purchasing-power parity theory. A theory which states that the exchange rate between one currencyand another is in equilibrium when their domestic purchasing powers at that rate of exchange are equivalent.
In short, what this means is that a bundle of goods should cost the same in Canada and the United States once you take the exchange rate into account. 

The exchange rate I calculated above would be the Purchasing Power Parity Exchange Rate.

Again, that is: $1.00 US = .67 Euros and/or 1.00 Euro = $1.50.  At this exchange rate, me and my friend can buy our basket of stuff in each others country and our currency will have the SAME purchasing power regardless if it is in Dollars or Euros.

Purchasing Power Parity is basically a reference point as to where exchanges rate SHOULD BE in the Long Run.  For the most part, the ACTUAL exchange rate between to currencies varies from the PPP exchange rate.

Today the exchange rate between the Dollar and the Euro is ACTUALLY:

$1.00 = .73 Euro cents and 1.00 Euro = $1.37 

 Compared to the PPP exchange Rate we calculated above:

$1.00 =.67 Euros cents and 1.00 Euro = $1.50

At today's exchange rate I can get .73 Euro cents per dollar exchanged which is $.06 cents more than PPP suggests.  So, for a holder of US dollars that basket of stuff is LESS EXPENSIVE to buy (I get MORE Euro cents than at PPP so the Euro basket costs me less).

For my European friend at today's exchange rate he can get only $1.37 per Euro exchanged which is .13 cents less than PPP suggests. So, for a holder of Euros that basket of stuff is MORE EXPENSIVE to buy (he gets FEWER cents than at PPP so the US basket costs him more).

This suggests, with my example, that the US dollar is OVER-VALUED compared to the Euro and the Euro is UNDER-VALUED compared to the US dollar, relative to the PPP exchange rate.

In the long run, according to PPP theory, the Dollar should depreciate in value and the Euro should appreciate in value so that the currencies used to purchase the stuff in the respective market baskets will have the same purchasing power.

Hope this helps somewhat.  Let me know if I went wrong anywhere---remember I am one of the Dummies myself.  :)

Monday, May 19, 2014

The Swiss proposed a minimum wage of $25 per hour...or is it $16? Depends on your definition of exchange rate

The Swiss held a nationwide vote to raise the minimum wage and it was soundly defeated.  In the US, the media reported that it would have been about $25.00 US Dollars had it passed.  Seems like a lot!  But is it REALLY that much?  It depends on what your definition of "exchange rate is".

For the Swiss the number they saw on their ballot was "22 Francs per hour".

The current official exchange rate(05/19/2104)  is $1.00 US will exchange for .89 Swiss Francs and 1.00 Swiss Franc will exchange for $1.12. The exchange rates are reciprocals of each other.

So, if we take 22 SF and multiply by $1.12 that equals $24.64.  Close enough for the mainstream media to round up to $25.00.

However, economists are hesitant to use current exchange rates because they are so volatile and can change for transient reasons on short notice. These fluctuations can distort the real economic picture within a domestic economy. They prefer to use an exchange rate based on "Purchasing Power Parity" (PPP).

PPP compares the actual price of a market basket of identical goods/services in Switzerland and the US. The idea is to establish a more realistic exchange rate that shows the purchasing power of one currency relative to other in terms of what it can buy in either country.

Purchasing Power Parity (PPP): $1.00 US will exchange for 1.37 Swiss Francs and 1 Swiss Franc will exchange for $.73 in 2013 according to official OECD data for 2013.

At this exchange rate, 22 Swiss Francs at $.73 equals $16.06. (Many media outlets are reporting it as about $14.00 PPP---I do not know how they arrive at that number)  I WELCOME ANY HELP ON MY MATH!!

So, at the market exchange rate the Swiss minimum wage would be $24.64 but at the PPP exchange rate it would be a $16.06.

That is still a very high minimum wage at $16.00 per hour, but I think it is important to put it in its proper purchasing power context.  Hope it helps...

REVISION:  There are 3 sets of PPP numbers available on the OECD website HERE.  You can see the categories on the LEFT side of page.  I used "PPP and Exchange Rates" to do the above calculation.  However, if you click on either of the other two links (PPP for Private Consumption or PPP for individual consumption) you will find HIGHER PPP numbers for Switzerland.   Using these numbers you get closer to $14.00 in US dollars.

Nice graphic showing "breakdown costs" for the physical/material inputs for Google Glass.

The Wall Street Journal has an article today regarding IHS's "break-down cost" of the much talked about wearable technology Google Glass.

Here is a chart showing the money cost of the tangible physical inputs---the stuff you actually see and touch.

The total material costs are roughly $152.47 (Google disputes this) and the suggested selling price is about $1,500. That is quite a profit, right? Not so fast..

Source: WSJ
Here is an excerpt from the press release from IHS (underline and emphasis mine):
“As in any new product—especially a device that breaks new technological ground—the bill of materials (BOM) cost of Glass represent only a portion of the actual value of the system,” said Andrew Rassweiler, senior director, cost benchmarking services for IHS. “IHS has noted this before in other electronic devices, but this is most dramatically illustrated in Google Glass, where the vast majority of its cost is tied up in non-material costs that include non-recurring engineering (NRE) expenses, extensive software and platform development, as well as tooling costs and other upfront outlays. When you buy Google Glass for $1,500, you are getting far, far more than just $152.47 in parts and manufacturing.”  
The portion I highlighted and underlined is a fancy way of saying these are Google's "Fixed Costs" for the anticipated production of glasses. The fixed costs cited above are costs incurred by Google before they produce even one unit of the wearable technology.

When we include all these up-front fixed costs and produce one set of glasses, well, that first set will be VERY expensive---we allocate the millions spent on research and development to that one set of glasses!

However, because those costs won't change as we produce the second, third...10,000th set of glasses then you can see the "Average Fixed Cost" of producing each additional unit is going to rapidly decrease.  More of that fixed cost is going to be spread out over a larger range of production.

Eventually the fixed costs will be an insignificant portion of the total cost of producing the glasses. The only remaining cost will the the firms "Variable Costs"---materials, labor, advertising, and all other overhead. 

If we add up Google's Total Fixed Costs and Total Variable Costs of producing the Glasses and divide by number they produce we will get the "Average Total Cost" of producing them. 

Compare that number to the number over all ranges of production and subtract it from $1,500 for each unit sold to get their "accounting profit".  

The future looks bright they gotta wear....Does Google Glass come in sunglasses too?
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