Gamma Ray Economics
The Intellectual Super-Hero Powers Endowed by Economics
THE FIVE POWERS
Foreknowledge
Preparedness
Persuasion
Engagement
Savvy
Disclaimer: Exposure to actual nuclear blast not required prior to onset of super powers!
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Gamma Ray Economics
The Intellectual Super-Hero Powers Endowed by Economics
SAVVY
Definition:
Discussion:
How to succeed in a world dominated
by instant communication,
international finance, and global trade
Let’s face it, it’s a complicated world out there and simply
knowing where to go to get a good price on a car repair or
how to stay with one employer for your whole career isn’t
enough anymore. You need to succeed in a world
dominated by instant communication, international
finance, and global trade. You need savvy.
A basic understanding of major economic topics provides
that power shot. For example, exchange rates, quantitative
easing, and direct foreign investment are all mystifying
topics unlocked by macroeconomics. Meanwhile in
microeconomics, we learn economic profits are available to
everyone through arbitrage, uncertainty, and innovation.
Finally, all of these have geographic components made
clear through urban and transport economics.
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As the world becomes ‘smaller’ due to the improvements
in communication and transportation technologies,
understanding more of the world is required. When you,
your competition, and your collaborators all wake, work,
and innovate on different continents, economics isn’t an
elective anymore. No matter what your vocation, finding
opportunities to benefit your business or your family in the
modern world requires the market savvy available only
through economics.
Gamma Ray Economics: Savvy
Today’s Global Business World
Communication: English, Mandarin Chinese, and French dominate global
business transactions. Chances are, if you meet a Greek, Russian, German,
Indian, South African, Colombian, or Japanese business woman, she will speak
to you in English.
Finance: Every country in the world buys bonds from many other countries.
This allows them to trade loan payments due for hard currency as needed. It
also means their banking systems are interdependent.
International Trade: Consumer products are manufactured worldwide. Shirts
might be from Honduras, software from Russia, computer animation from
Singapore, wind turbines from Mexico, luxury cars from Alabama, and
agricultural automation products from Israel.
Gamma Ray Economics: Savvy
Today’s Global Business World
“Globalization is good. And anyway pretty much unstoppable. It spreads
prosperity and makes us richer culturally.”
– Javier Solana, Secretary General of NATO
“Globalization has changed us into a company that searches the world, not just
to sell or to source, but to find intellectual capital - the world's best talents and
greatest ideas.”
– Jack Welch, CEO of General Electric
Conclusion: You will compete against the world for your job.
Gamma Ray Economics: Savvy
Looking at the Trees versus Looking at the Forest
Microeconomics: The trees. The study of human behavior and choices as they
relate to relatively small units, such as an individual, a firm, an industry or a
single market.
Macroeconomics: The forest. The study of human behavior and choices as
they relate to an entire economy.
Savvy: Savvy requires you can, as needed, exercise micro or macro economics
principles. You need to look at the forest and the trees.
Definitions from Economics, 10th Edition by Roger Arnold
Gamma Ray Economics: Savvy
The Business Cycle
A free market economy follows a business cycle, the natural ups and downs of
the market over time. The savvy businessperson understands where they are
in the cycle and incorporates this in their decision-making.
Gamma Ray Economics: Savvy
The Price of Money
The savvy businessperson, or consumer, understands that money has a price.
While it seems odd to talk about “buying” money, you have to understand that
money is also a commodity and learn how it is priced. Here are some
examples:
Exchange Rates: How many Dollars can I buy with one Euro? How many Pesos
can I buy with one Dollar? An exchange rate is the price of one type of money
in terms of another type of money.
Interest Rates: How much will you pay me back if I loan you money? This is
expressed in the interest cost of a loan. If I need to pay you back $110 dollars
after one year for the pleasure of borrowing $100 dollars from you, then
you’ve just earned $10 and you are starting to act like a banker. Interest rates
express the price of money over time and over various levels of risk.
Gamma Ray Economics: Savvy
International Trade and You
Domestic
Inputs
Foreign
Raw
Materials
Foreign
Goods and
Services
The savvy businessperson understands that
whatever they are selling, minimizing the cost
of producing the final product is the key to
keeping your customers.
After all, they will stop buying from you if
your version of the product is too expensive.
The
Product
You
Sell
So, don’t be afraid to look for foreign sources
for the inputs to your product. Likewise,
don’t forget about selling to international
markets.
This website for military veterans provides an
overview of international trade for the small
businessperson:
http://www.taonline.com/entrepages/entreintentry.asp
Foreign
Labor
Gamma Ray Economics: Savvy
Economic Profit Versus Accounting Profit
Accounting Profit: This is a comparison between the actual, direct costs of all the
inputs against the total revenue. If total revenue exceeds total direct costs, then you
have an accounting profit. This is good, but is it good enough?
Economic Profit: This is a comparison between the implicit costs or the opportunity
costs of all the inputs against total revenue. If the total revenue exceeds total direct
costs and the total opportunity costs, then you have an economic profit. This means
that all the resources in use are being used to their greatest benefit.
Example: Say you own a building that could be used either as an office or a
restaurant. Let’s assume office users are willing to pay $10 per square foot and
restaurant users are willing to pay $20 per square foot. If your mortgage and the
owner’s operating costs of the building average out to $9 per square foot, then you
make an accounting profit by leasing to an office user. However, that’s an economic
loss because you’ve given up on receiving the $20 per square foot you could have
received by leasing to a restaurant.
Savvy: The savvy consumer and savvy business person always considers the economic
profit, because they might need to allocate their resources to higher and better uses.
Gamma Ray Economics: Savvy
Sources of Economic Profit
It is not enough to want to “make money” you have to find a way to provide
value to someone else. If you want money, your product or service (perhaps
it’s sea shells or perhaps it’s your ability to write computer code) has to be the
highest and best use of some business’s or someone else’s money.
If your product or service is not the highest, best use, then you might not get
paid or they may not purchase your product.
Here’s three standard ways to make sure you make an economic profit:
Arbitrage
– buy low and sell high.
Uncertainty
– reduce risk for someone in the market.
Innovation
– be the first, or one of the first, who can provide an innovative
product or service.