The Economic Way of Thinking

1. The Economic Way of Thinking Vermont Teachers Financial Literacy Summer Institute August 2011 Art Woolf University of Vermont Vermont Council on Economic Education awoolf@uvm.edu

2. Plan 9:00-10:00 Introduction to Economics 10:00-10:10 Break 10:10-11:00 Trade, the standard of living, and saving: a simulation 11:00-11:10 Break 11:10 – 12:00 Applying economic concepts to the world: The housing and financial crisis

3. Defining Economics

4. Defining Economics What is Economics About? What is Economics Not About? Making money Business Greed • Way of explaining human behavior • Common sense • Way of looking at the world • Terminology and jargon

5. Why Should We Be Interested in Economics?

6. How Well Has Humanity Done?

7. 200,000 Years Ago

8. Life 200,000 Years Ago How did people save?

9. Agriculture 20,000 Years AgoWhat were the consequences of not saving?How did people save?

10. Harvesting Wheat 1500What were the consequences of not saving?How did people save? Peter Breughel the Elder, Wheat Harvest, Metropolitan Museum of Art

11. Harvesting Wheat 1860 Jean Millet, The Gleaners

12. Harvesting Wheat in U.S. 2010

13. Rice Harvest in India 2010

14. 1880 What were the consequences for the winter of not saving during the Montana summer?

15. Things Are Cheaper Today Than 100 Years Ago

16. How About Today vs 1975?Prices adjusted for inflation and in hours of work required at avg wage

18. Morning Coffee $151.03 7.5 hours $23.60 1.2 hours (12 cup)

19. Expensive TV $3,103.97 154 hours $239 12.6 hours 32” HD LCD 720p

20. Clock Radio $246.27 12.2 hours $11.00 35 minutes

21. $1,054.73 57.3 hours $999 52.6 hours MacBook Air

22. $860 42.7 hours $207 7.9 hours

23. Steel Belted Radial $168.66 8.4 hours $78 4 hours Bridgestone Potenza P195/60R-15

24. Microwave $1,820.93 90.3 hours $58 3.1 hours

25. $2,814 139.6 hours $1,124 59.2 hours Sears Best Home Depot 25 cu ft

26. 9 Principles of Economic Reasoning • Due to scarcity, people have to make choices

27. 2. Choices involve tradeoffs and costs Opportunity costs To Choose is to refuse

28. 3. People make decisions by looking at expected costs and expected benefits • What is the cost of saving? • What is the benefit of saving? • Where to save? • What investments to purchase?

29. Where to invest? • Microsoft in 1986 cost 11 cents/share. Today it is $28: Turn $1,000 into $250,000 • On January 1, 2000 it was worth $500,000 • Bear Stearns on March 12, 2008 cost $61.58/share • On March 16 cost $2/share

30. Stocks or Bonds? Returns on $100 Invested in 1928

31. When and how much to save:Saving and compounding at 6.5% return/year

32. 4. People respond to incentives (such as prices) in predictable ways

33. 5. The consequences of decisions are often in the future • 1 in five Social Security recipients have no other source of income • 1 in three Social Security recipients rely on SS for 90% of their retirement income • The average monthly Social Security check is $1,200

34. Americans’ Dismal Saving:Saving as Percent of Disposable Income http://research.stlouisfed.org/fred2/graph/?s[1][id]=PSAVERT

35. 6. Voluntary trade makes people better off and creates wealth

36. 7. Markets are a good way to organize economic activity and increase individual freedom

38. 8. People create economic systems and institutions that influence their choices and outcomes

40. Starting a Small Business Source: World Bank http://www.doingbusiness.org/data/exploretopics/starting-a-business

41. 9. The standard of living of a nation and its citizens is based on their ability to produce goods and services.

42. Same person, different income

43. Thinking about how an economy works: I was in discussion with a senior Russian official whose job it was to direct the production of bread in St. Petersburg. “Please understand that we are keen to move towards a market system,” he told me. “But we need to understand the fundamental details of how such a system works. Tell me, for example, who is in charge of the supply of bread to the population of London?” There is nothing naive about his question, because the answer, nobody is in charge, is astonishingly hard to believe. Only in the industrialized West, have we forgotten just how strange it is. --Paul Seabright, The Company of Strangers

44. Fun, and Interesting, Books About Economics Charles Wheelan, Naked Economics: Undressing the Dismal Science Tim Harford: The Undercover Economist: Exposing Why the Rich are Rich, the Poor are Poor—and Why You can Never Buy a Decent Used Car Steven Landsburg, The Armchair Economist: Economics and Everyday Life P.J. O’Rourke, Eat the Rich: A Treatise on Economics James Surowiecki, The Wisdom of Crowds: Why the Many are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations Russell Roberts, The Choice: A Fable of Free Trade and Protectionism Russell Roberts, The Price of Everything: A Parable of Possibility and Prosperity

45. Break time

46. Trade, Wealth, Income, and Savings: A Simulation(hour 2)

47. http://www.bls.gov/emp/ep_chart_001.htm

48. Education and Income Worldwide

49. Spot the rich nations http://apod.nasa.gov/apod/image/0011/earthlights2_dmsp_big.jpg