Friday, November 5, 2010

Translation Services Offered for Fed Statements

Column by Martin Kennedy

All this talk of Quantitative Easing (aka QE2 or monetizing the debt) is a bit perplexing.  Planet Money (NPR) breaks it down superbly.  (Click on the Fed's statement line by line to get the translation). 

Meanwhile, the unemployment numbers came out today - still 9.6%.  The private sector added about 159,000 net new jobs.  So why didn't the unemployment rate fall?  Well, we need a monthly net gain of roughly 100,000 jobs just to maintain the unemployment rate due to increases in population.  The labor force includes all those working or looking for work.  Then there is the labor force participation rate.  Changes in the labor force participation rate have an impact on the rate of unemployment.  If someone enters the labor force by starting to look for a job after, say, being engaged in home production (perhaps being a full-time caregiver), then the unemployment rate goes up.  Here's a good, short explanation of the labor force participation rate: "Labor Force Participation Rate Drops To 25 Year Low, At 64.5%."  Note that it is low by historical standards.  Many people leave the labor force in a difficult job market.  They go back to school, a training program, focus on home production, or just give up because they are discouraged. 

Finally, a bit of microeconomics, or as an early professor of mine called it, "the non-fiction side of economics."  Price discrimination is when firms charge different consumers different prices.  We see this all the time.  Consider airlines that charge business flyers more than leisure flyers or early-bird specials at restaurants and matinee prices at the theatre.  Sometimes night clubs have "ladies' nights" where female consumers are not charged a cover.  Car dealers routinely sell their product at different prices to different customers. (Don't tell a salesman you're looking for a red car).  

Here is a particularly interesting example of price discrimination from J-Walk Blog.  It will take you 15 seconds to see it but a bit longer to explain it.  In the cases listed, it is easy to see that different customers have different demands.  To the extent that a supplier can segment the market and identify different types of consumers, he can charge different prices to different people for the same good or service.  Capital One, in this case, is quoting different lending rates.  The question here is whether users of different Internet browsers have different demands.  My guess is it's plausible.

Martin Kennedy teaches economics at MTSU. In this column he will discuss business news. Views expressed are not necessarily those of the Jones College. He invites reader input. 

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