Chicken Soup for the Economy’s Soul (Or Lack Thereof)

5 06 2011

We, as members of a pseudo-capitalist society often find ourselves bombarded with stories in the newspaper, on TV among other places about economic problems we are planning to face in the future. While things may seem grim, many of these problems are not as bad as they seem. That said, there are several issues that we as consumers, investors and even members of government should keep in mind when planning out the future of our finances.

Shortages:

The Problem:

The very fundamental economic problem is scarcity. It is something we are taught in business class in the earliest of high school years; how much we do have, and how are we going to use it most efficiently. Since the advent of the Industrial Revolution, we as humans have gotten really good at ripping dull, useless things from the ground and turning them into shinier and more useful things for others to buy. The problem is, these 160-something years have taken a huge toll on the number of resources we have at our disposal. So much so, that experts say that if we continue to exploit our planet’s natural resources at our current rate, by 2050 we will have no resources left to use.

Earth’s population will be forced to colonise two planets within 50 years if natural resources continue to be exploited at the current rate, according to a report out this week.A study by the World Wildlife Fund (WWF), to be released on Tuesday, warns that the human race is plundering the planet at a pace that outstrips its capacity to support life.– Tyler Hamilton, The Toronto Star

Now, from a morality standpoint, the statistics are heartbreaking, but one must also consider the economic aspects of this issue. With decreasing supply of resources, manufacturers will start to pay more to produce these products and in turn the cost will be paid from the consumer. Having higher prices on these commodities will leave consumers with less disposable income, spending less on other consumer items and instead investing it. This has a negative effect on the economy as this directly relates to the “C” portion of the GDP formula and with lower level of consumer spending comes a lower GDP. The relationship can be graphed like this:

The solutions:

For the consumer:

In order to determine what you should do about scarcity as a consumer, you should determine the elasticity of the product. It goes without saying that scarcity for computer monitors should be treated a lot differently that that of water.

If the product has an inelastic demand, you have the choice of doing one of two things. Firstly, the easiest thing to do is to buy it anyways. If what you want is a necessity (thereby having a completely inelastic demand) for example water, because basic survival is key, you as a consumer should buy it anyways. Another option is investing into newer alternative technologies. The idea behind this is to reduce consumption of the more expensive product (in this case, fuel) by either lowering the amount required to use or requiring something else entirely.

For the business owner:

One of the few benefits of having scarcity in our economy is that it allows businesses the opportunity to get very, very rich. The logic behind this is that as resources that we use most commonly (fuel, lumber, etc) begin to become more and more scarce, prices will rise as a result. Because of this, consumers will naturally begin to try and look for cheaper and better alternatives and new markets for alternative products will arise, meaning big bucks for those who can find a viable substitute. An example of this can be found in fuel prices and alternative energy. Since the relatively recent rise in fuel prices, we’ve also seen an increase in hybrid and electric car sales. One thing to consider if you’re new to a business is trying to tap into these markets as they can prove to be very beneficial if done correctly.

Another step that businesses can take is attempting to increase their productivity by using their current resources more efficiently. Although this seems like something a business should strive to do regardless, when resources become more scarce, those who can use what they have most effectively will naturally be dominant.

For the Member of Parliament:

One thing to strive towards as a governments is being able to control the inputs and outputs of companies. By limiting the amount of resources able to be used in a market scenario, you not only help with the problem with scarcity, you also force businesses to re-evaluate themselves. By creating a pseudo -scarce environment in the marketplace, you raise the prices for that particular resource and businesses are forced to think about their production levels and innovate to use the resources more effectively. Systems such as the cap-and-trade are easy to implement, have low operations costs, allow insurance of resource usage and coax development of cost-effective technologies.

Conclusion:

As we inch closer and closer to completely exhausting our planet’s resources, we must constantly re-evaluate what we are doing and how we can improve on it. By creating and investing in newer, cleaner and more cost-effective technologies, we slow down the process of resource exhaustion and help to sustain our life on this planet. The interlocking between consumers, businesses and government is so strong that by working together, we can find a steady middle ground between profitability and responsibility.

Looney Loonies:

The problem:

The dollar value is a country’s staple. It reflects how strong their Canadian buying power is as well as how other countries stack up when buying Canadian goods. It also directly co-relates with the amount of products a country imports and exports. This is especially important now due to it’s recent increase in value over the past 4 months.

Exports were supposed to be the engine of Canada’s economic growth this year. Instead, they’re acting as a drag.

Exports tumbled 4.9 per cent in February, outpacing a 4-per-cent drop in imports and slicing the country’s trade surplus to just $33-million, trade figures showed Tuesday.

– Tavia Grant, Globe and Mail Business

In order to understand the entire issue of the dollar, though, one must see it from two sides: the Canadian consumer/Non-Canadian government side and the Non-Canadian consumer/Canadian government side. Canadian consumers and Non-Canadian governments prefer stronger Canadian dollars.

Canadian consumers/Non-Canadian Governments prefer stronger Canadian dollars for a variety of reasons. Canadian consumers with more valuable Canadian dollars have more purchasing power in the international market and are thus able to buy more of other countries products for the same number of Canadian dollars. Non-Canadian governments enjoy this for two reasons, firstly, with higher purchasing power from Canadians, they will be likely to spend more internationally and portions of money that once went into the Canadian economy now circulates into other governments in the form of foreign investment. Secondly, with higher dollar value for Canadians, many Non-Canadians will stop buying Canadian products as they are getting less for what they used to. This money that was once used for Canadian imports can then be used for purchasing goods from that country, helping the economy.

On the other side, Non-Canadian consumers and Canadian governments prefer a weaker dollar value for opposite reasons. Non-Canadian consumers are able to purchase more Canadian goods for the same number of their dollars, increasing the value gained from their foreign investment. Canadian governments reap the benefits of Non-Canadian consumer spending and money from around the world is caught in Canadian circulation.

The solution:

Although there are no real “solutions” that can be given to consumers as their buying decisions are based on rationality (buying what’s cheaper), my main advice goes out to the businesses. When the value of your countries dollar is high, take advantage of your purchasing power in order to try and reduce your cost of factors of production (by buying resources, machinery, etc). You can also further utilize this in the form of global expansion by using your purchasing power to buy companies for a cheaper price or even outsource labor and factories in these areas.

Conclusion:

The strength of the dollar is something that consumers should acknowledge and understand when making purchases as they may be paying more than should be. Businesses should also taking advantage of their ability to outsource at correct times in synchronization with the value of the dollar. Finally, governments should understand that printing more money in the economy does not necessarily make for richer people, only lower dollar values.

Boildown:

As a whole, there are many things that we should strive to understand about our economy especially in the future. I believe that scarcity will become a greater and greater problem in the future and that the strength of the dollar is particularly relevant to what has been happening in our economy lately. If following my advice, the economy still fails, I blame this.

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4 responses

16 06 2011
Christopher Lee: Posting Summary (categorized this time) « The Blog for WLMac Economics

[…] Journal 10- Chicken Soup for the Economy’s Soul (Or Lack Thereof) […]

18 06 2011
dylanhuber

First and foremost, I enjoyed that how this journal was organized. It a had easy to follow flow to it and the sourcing was very well done.There is almost a formulaic style of writing which kinda made it like a sorta how to guide to fixing the problems. The way you separated the solutions for consumers, business people, and members of parliament also enhanced this journal . If I were to improve this I would categorize this piece, add more sources, and add more practical examples to the solutions.

19 06 2011
aenamorado

Greetings Chris,

First of all, I think this applies to your writing style in general; I thoroughly enjoy your writing. There is a certain eccentricity about it, a certain good humor to it. It is also clear which is a welcome addition to writing with a lot of personality. I will comment on the problem of the high Canadian dollar very briefly since it is more of a short term problem than anything else. What I did find interesting was your unique take on the resources problem. You made it a very broad one of scarcity. This is a huge problem that I 100% agree with you with. Resources are running out and we need to take action and innovate or we may end up colonizing a whole new planet. I enjoy the moral aspect that you bring in. Most people in terms of the environment always mention leaving a world better for their kids, but your reiteration of this morality is very refreshing. I especially like all the sides of the solution that you explored, particularly the part about the consumer in how their demand can shift how companies operate. In the end, a well crafted read and one I quite enjoyed. Good job Mr. Lee, good job indeed.

-Alejandro

19 06 2011
Alejandro Enamorado: Posting Summary « The Blog for WLMac Economics

[…] Chris Lee’s Chicken Soup for the Economy’s Soul (Or Lack Thereof) […]

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