GDP (Y)= C+Ig+G+(x-n)

     I know that this may seem like a bunch of gibberish, but in fact, this is a quite simple and straightforward formula for understanding the size and performance of our economy. Most of us hear the GDP (Gross Domestic Product) reports on the news and have some vague idea of what these reports actually mean, while others have no idea what GDP is. Let’s break it down:

     First off, GDP is just an accounting measure of all “final goods and services” sold in America (or whichever country you may reside in). “Final goods”. What does that even mean? Well, the easiest example of a final good is a new car. When a new car is sold it is counted toward GDP, but individual parts: tires, engine, airbags, etc… that make up the car are not counted in order to avoid double-counting.  Some countries, most notably China, calculate GDP by counting all goods produced, rather than sold. This method can lead to a distorted picture of how the economy is actually performing.

     Y=C+Ig+G+(x-n). The meaning of the letters in the formula is quite simple. ‘Y’ is National Income, or GDP. To get ‘Y’ we need to add up all of the other categories first. The four categories that comprise GDP are as follows:

      ‘C’ stands for consumer spending. Every dollar spent in the last year on goods and services. This is by far the largest portion of GDP, comprising more than 70% of the total.

     ‘Ig’ stands for capital investment* by businesses. * ‘Capital’ in economics means “things that make other things”, or tools that make money, such as a printing press, a new truck, or harvester, etc…

     ‘G’ stands for government spending.

     ‘(x-n)’ stands for exports minus imports.

Once you have all of these figures, all you have to do is simply add them up, and eureka! You have calculated gross domestic product. 

Russia's 'Humanitarian' Invasion of Ukraine

     It is no longer a question whether Russia is waging war against Ukraine; instead it is now merely a question about the extent of direct Russian military involvement. In today’s New York Times, a NATO (North Atlantic Treaty Organization) spokeswoman, Oana Lungescu, was quoted as saying that not only had Ukrainian rebels received direct material support from the Russian military, but also that there have been reports of active duty Russian military support “including Russian airborne, air defense and special operations forces in Eastern Ukraine,”. 

     The reports of Russian military units operating in eastern Ukraine come at the same time a Russian so-called “humanitarian convoy” illegally bearing the flags of the International Committee of the Red Cross has crossed into Ukrainian territory, in what the Ukrainian government has called a pretext for invasion. During the last few weeks, Russian military forces have been seen building up along the border with Ukraine. This military buildup has not deterred President Poroshenko of Ukraine from aggressively attacking and surrounding the final rebel redoubts of Donetsk and Lugansk, in what they term an “Anti Terror Operation” (ATO).

     The crisis in Ukraine started back in January, when then-President Victor Yanukovich spurned a planned economic partnership with the European Union, and instead accepted a Russian bailout on terms favorable to Moscow. People then took to the streets and the Maidan demanding that President Yanukovich back out of the Russian trade agreement, and instead, keep his former promise and sign the EU trade agreement. The protests culminated with the ouster of Yanukovich, who fled to Russia and was replaced by newly-elected President Poroshenko. The Russian trade agreement would have made Ukraine a member of the Eurasian Customs Union that has been a pet-project of Russian President Vladimir Putin. So far, the only members of the ECU beside Russia are Kazakhstan, and Belarus.

     With Poroshenko and Putin set to meet on Tuesday, it may be that the military buildup and incursions into eastern Ukraine are just Putin’s last-ditch effort to gain some leverage over Poroshenko concerning the eastern part of the country, which, for Russia, is a major economic/military asset. Indeed, fully one third of Russia’s military armaments are produced by factories in eastern Ukraine. Is this current escalation a ploy for leverage, or the beginnings of something larger and more ominous? Only time will tell.

A $15 Minimum Wage Will Not Turn Seattle into Detroit

     In economics, all models and theories come with a caveat: ceteris paribus, meaning “all things being equal”. So, ceteris paribus, an increase in the minimum wage will create a “deadweight loss” where there is a decrease in both consumer and producer surplus (the difference in what they actually pay vs. what they are willing to pay; essentially mental savings) due to the “price floor” the wage imposes on the market for labor, leading to a decrease in the labor demanded by companies.  So, at a minimum it should cause a decrease ALONG the demand curve (not a shift, which is a very important distinction).                                         

    That being said, all things are NOT equal. The cost of living has gone through the roof in comparison to wage growth, which has been stagnant, where there hasn’t been a decrease in real terms over the last thirty years. If the federal minimum wage (currently $7.25) were tied to inflation (Consumer Price Index: “cost of living”) it would be $10.55/Hour. If the federal minimum wage were tied to productivity gains in the economy, then it would be a whopping $21.16/Hour! (Productivity gains are essentially decreases in the Per unit Production Cost or  PPC -meaning workers are making a firm more money, at less of a cost to said firm) So in a sense, $15/Hour is the middle ground between productivity gains and the increase in inflation. This represents a so-called “living-wage”.

     Seattle also has a higher cost of living than the national average. While this minimum wage increase may decrease business demand for the lowest-skilled workers, it will be a boost for everyone who already makes more than the minimum. The increased minimum wage will put upward pressure on wages. For example, if you made $15/Hour before the wage increase, then you already have the expectation that you are paid and/or worth “more than minimum wage”. While there will be increased labor costs for most companies, the companies can pass the majority of the costs directly onto the consumer who will barely even notice the price increase because their wage just increased! It should also boost the local economy through increased demand and higher consumer spending, because people at the lower end of the income scale tend to have a higher MPC and a lower MPS, that is, they are much more likely to spend rather than save each additional dollar of income.

   

   On the whole, it really is a real life economic/social experiment, and we will have to wait and see what happens. But, keep in mind that when you hear these dire warnings from businesses about “going out of business”, “end of capitalism”,” Detroit”, etc…that business leaders said the same exact bullshit: when the minimum wage was first established, when child labor was abolished, when the 40-hour workweek was created, and on, and on they go with the same predictions of doom. And every time the end of the world has never come. Businesses will still make profits. 

Welcome to Big Trouble, Little Planet!

     For years now, I’ve been told by multiple people that I should start a blog. So, after much prodding from my wife and friends, here it is! I would like to give special thanks to my friend Audrey for providing the name (a big impediment to starting a blog is not having a name), THANKS!!!

     I will try to post here often and about interesting topics, people, and events on our little planet. If you have a subject that you would like to learn more about, or would just like to hear my thoughts on, feel free to email me @ scottbigtrouble@gmail.com with any ideas or suggestions that you may have.