RS5: GDP and its Real Significance on Society

RS5: GDP and its Real Significance on Society

            Even though we should know how rich our country is compared to others, there is no way to find out the definite answer.  However, GDP is one way to somewhat solve that problem.  GDP stands for gross domestic profit, which is the total profit that a country brings in during a year.  Although GDP is not exact, it paints us a brief picture of how our country is doing economically.  Currently the United States leads all other countries with a GDP of 15.09 trillion dollars. 

            GDP is any product or service that a country produces that creates profit for it.  For example, Mary wants to hire a cleaning lady.  Once she hires that cleaning lady she is contributing to the US GDP.  However, if Mary ends up cleaning her house herself, she is not contributing to GDP.  GDP has a select few rules: it must be a new product, has to be made in the country, and cannot be counted multiple times.  If a ball is made in China, most of the profit will contribute to China’s GDP, but the profit that the store makes from selling that ball will go to the US GDP.  Also, if person buys a box of popcorn, the GDP is only counted once at the final purchase.  The company who buys the corn from the farmer does not contribute to the GDP, only the consumer does.

            In the United States, there are many things that contribute to the GDP.  Manufacturing contributes to 12% of the country’s GDP, and health care contributes to another 16%.  However the biggest contributor is real estate.  When you drive past a construction site that is building a new housing complex, each one of those houses will end up contributing to the countries GDP.  With the constant increase in our population and the need for more building, real estate is the one factor that keeps our GDP so high.  The only limitation here is that old houses do not contribute as much.  For example, when my parents bought my house they were not contributing the GDP in 1996 because the house was not brand new and was made in a different year.  However, there is such thing as imputed rent that does contribute to the GDP.  Imputed rent is a monetary “rent” amount that the government places on your house as if you were paying rent.  So if the government said that my house was worth $3,000 dollars in rent every month, $36,000 of imputed rent would contribute to the GDP for the year. 

            The gross domestic profit of a country is only a brief look at how the country is doing economically.  Although it gives us a figure of the profits the country is bringing in, it is not an exact or perfect way to examine the countries economic standing.  Currently the United States leads any other country with the highest GDP of 15.09 trillion dollars, but that does not mean that Americans are better off than other people.  GDP is just a glance at what the country is bringing in during the year, and is not the whole picture.  Even though it would be great to have a definite number, there is no way to figure it out when a countries economy is so large and complex.  

WHAT IS GDP?!?

RS4: Would You Let a Coin Toss Decide Your Future?

RS4: Would You Let a Coin Toss Decide Your Future?

            This Freakonomics podcast discussed the economic benefits of having a coin toss determine your future.  It began by telling the story of Daniel Harrington, an ex-professional racecar driver, who was indecisive about his career, quit and then got a job in the field of energy.  After working in that field he said he became unsure about his job again.  He said that he wished he could leave his big decisions up to a coin toss or rock, paper, scissors.  This got the guys at Freakonomics thinking, what if we left our major life decisions up to a coin toss?

            In a previous podcast, the guys at Freakonomics explained the benefits of quitting, and how strategic quitting can be a great thing.  They told the story of one woman who quit her stable job at an IT firm to become an escort, and another woman who left her Amish religion.  Both women were totally content with quitting, and were satisfied more after they decided to quit.  Steve Levitt, one of the guys at Freakonomics, said that he even promotes quitting.  He tells his children that if they are not good at something to quit because it prevents them from wasting their time.  Serra Mentessi, a female runner, told the story of how she was not sure if she wanted to quit running.  After years of running she lost her passion for it, but felt that she had to stick with it because she felt running defined who she was.  One day she began running when all of a sudden the “Upside of Quitting” podcast came on and she knew that would be her last run.  Here, Steve Levitt was explaining that decision-making is related to economics.

            In economics you have sunk costs and opportunity costs.  A sunk cost is cost that has already been incurred and cannot be recovered.  Opportunity costs are costs of an alternative decision that must be given up when one course of action is pursued.  Although some decisions involve money, not all decisions have to involve money in order for them to be a sunk cost or an opportunity cost.  If I had the decision whether to stay in my relationship or break up with my boyfriend, that would involve sunk costs and opportunity costs.  My sunk costs would be all the time that I spend contemplating the decision.  My opportunity cost would be all the things I gave up if I decided to break up with him.  All decisions involve sunk costs and opportunity costs, which is why Freakonomics thinks that it would be best to have this coin toss.

            The coin toss experiment would first begin with an in depth survey which would weigh out the pros and cons of both decisions.  The purpose behind this is to hopefully get you to make the decision for yourself.  If you are still indecisive at this point then you have the opportunity to participate in the coin toss, where you can choose the number of times the coin is tossed.  Freakonomics makes you sign a waiver saying that you promise to make the decision the coin toss determines for you, and then they send you a survey a few months later to see if you are content with the decision.  The whole point of this process is to eliminate the frustration and time consumption that it takes to make a decision.  By providing people with this service, they are giving those who use it a release so they do not have to continually fret over the decision-making process.

            Freakonomics provided listeners with an interesting podcast, whether or not we should leave our big decisions in the hands of a coin toss.  While at first I was against this, I definitely changed my mind about it.  I think, economically speaking, the coin toss would be the better decision because it gives you more time to do other things that matter.  For example, instead of freaking out about whether I should take one job over the other, I can let the coin toss decide for me while I worry about other important things.  Although it seems baffling to let a coin toss determine serious decisions, I think that economically it is the best choice.  

RS3: A New Mom and the President of Iceland

RS3: A New Mom And The President of Iceland

            Our country has suffered a lot when it comes to the economy and our ongoing financial crisis.  However the United States is not the only country who has financially suffered, Iceland has too.  The small country that lies in the middle of the United States and Europe in the Atlantic Ocean entered its own financial crisis in 2008.

            In early 2008 Iceland’s economy was flourishing.  In fact they had so much money that the prices of things started to go down.  The people of Iceland were living in a bubble that seemed like nothing can go wrong in.  However, that all changed later on in the year.  Once Landsbanki, a bank who offered savings accounts with high interest rates to people overseas, failed the entire Icelandic economy fell.

            Once the bank failed, the Icelandic government took over the bank.  The Icelandic government paid back its citizens who invested money in the bank, but when it came to the foreigners they were not paid back.  An agreement was made for the Icelandic government to pay the British and Dutch investors back.  This sent much outrage throughout the country, many people protested outside of the President's house by lighting bright red flares.  However when the bill was sent to the President to be signed, he vetoed the bill.  This sent the decision down to the Icelandic citizens.  The citizens had to vote yes to pass the bill which said they had to pay the British and Dutch people back, or vote no so they would not have to pay the British and Dutch back.

            The choices that these people had to make had huge impacts on Iceland.  If the majority voted yes, then the Icelandic government would be able to keep a good reputation, and the economy would be able to prosper.  If they said no, then the Icelandic government would look like dead beats and no one would want to make exchanges with the government.  In fact, one woman, Heiða Dóra Jónsdóttir, had such trouble in making her decision that NPR set up several interviews with her and other Icelandic people to give her some help in making the decision.  The opinions between the people being interviewed were split.  Some said that the Icelandic government had to pay back the British and Dutch people so they could maintain peace with their neighbors, and the others said that we didn’t owe those countries anything after the things they did to the people of Iceland in the past.  Those who said no to passing the bill said that they reason they didn’t feel sorry is because the foreigners were paid back by their own country, and that Iceland had a debt to the other countries, not the people.  It was this sense of confusion that kept people up in the air on what to do in the polls.

            When voting day finally came around, NPR went to the polls and followed Heiða to see what she had to say after she voted.  Heiða ended up voting no, and so did the majority of Icelandic citizens.  In fact 60% of citizens were not in favor of passing the bill.  Therefore, the decision had to be left in the hands of the international courts.  After the trial, the court favored with Iceland and said that they did not have to pay Britain or Holland back.  Although the Icelandic people were happy with this decision and said there were no negative effects, I think that this was the wrong decision.  In a time where government thinks war solves all problems, I think that Iceland should have paid Britain and Holland to prevent any future turmoil.  Even though things may seem alright for now, Britain and Holland may decide that they do not want anything to do with Iceland and cause more problems for them in the future.  Personally, I think the best decision would have been to pay back their debts and  keep the peace with their neighboring countries.

            Not many people know where Iceland is, nor do they hear much news publicity on the country.  That is why people found it so shocking when they heard that this country was in a very large economic downfall.  After the fall of the Landsbanki bank, things in Iceland took a turn for the worse.  Iceland owed Britain and Holland a lot of money after their citizens invested money in overseas savings accounts.  The Icelandic government left the decision on whether to pay the countries back or not in the hands of its citizens after the President vetoed a bill that would have had Iceland pay back the British and Dutch governments.  In 2011, the citizens voted that they did not want to pay the countries back, and the case went to the international court.  The court then decided that Iceland was not forced to pay back the other countries.  Although things worked out for Iceland in the end, things could have gotten even worse.  Luckily for them, the economy of Iceland was able to bounce back, and they were able to maintain peace with their neighboring countries.

News Coverage of Iceland Financial Crisis

RS 2: A Billion Dollar Bet

RS 2: A Billion Dollar Bet

            Herbalife is a company that sells weight loss shakes, teas, and vitamins.  Unlike other weight loss companies like Slim Fast and Hydroxycut, Herbalife does not spend money on advertising or sell their products in stores.  However Herbalife is still a company that has been around for thirty years and is worth 4 billion dollars.  In fact, their most competitive brand, Formula 1, is worth 2 billion dollars and competes with Slim Fast. 

            One day Herbalife held a conference to discuss the quarterly reports.  David Einhorn, a hedge fund manager, accused Herbalife of short selling.  Short selling is the “Sale of securities or commodity futures not owned by the seller (who hopes to buy them back later at a lower price)” (princeton.edu).  Once Herbalife was accused of this, their stocks dropped twenty percent.  Another hedge fund, Bill Ackman, heard this conference and made a one billion dollar bet against Herbalife, and the stock dropped even more.  Ackman and his colleagues then spent three hours attacking Herbalife.  Bill Ackman tried to prove that Herbalife was a pyramid scheme and was a company of fraud.  In defense of his company, Herbalife’s CEO, Michael Johnson took to TV to prove that his company was not a pyramid scheme. 

              To prove that Herbalife is a pyramid scheme, Bill Ackman began by explaining the questionable details about how the company works. He uses the example of the selling process.  It is very similar to Avon in the sense that the seller is in charge of selling the products and recruiting others to get involved in selling Herbalife products. One seller places his ads for the product on Craigslist, in order to collect his compensation.  Even another Herbalife seller recruited him, and she also makes money when he makes sales.  This chain continues on and on, which is how Herbalife makes money.  On YouTube another Herbalife seller explains how he went from totally poor to being wealthy just by selling Herbalife.  Bill Ackman stresses the point that it is this kind of action that makes Herbalife seem like a pyramid scheme.  If these sellers are selling products to people who do not really have a need or want for the product then they are committing an illegal action.  Ackman says that Herbalife is taking money from poor people and promising them they can make it by selling them on the hopes and dreams of becoming rich if they work hard and sell Herbalife products.

            To fight these accusations, Herbalife held a conference to explain that everything Bill Ackman was saying was false.  Herbalife’s main reason that Ackman was wrong was that they have small countries successfully selling Herbalife products; which would not be the case if Herbalife were a scam because everyone would know it was a scam.  Herbalife felt that it was wrong for Ackman to short their company.  Shorting a company is necessary because it helps bring companies that are fraud to the attention of the public.  For example, Bernie Madoff and his Ponzi Scheme would have continued going on if he were not shorted.  In the end, we cannot know whether Herbalife is a pyramid scheme because we cannot track where their products go and whether they are going to consumers who really want the product. 

Herbalife Commercial