Variety and Economic Growth

I remember growing up my parents were big coffee drinkers. They would buy a can almost every week from our local supermarket which had only two or three brands to choose from. Today, my local store has an entire aisle of coffee and I counted 27 brands in their various sizes, flavors, and packages. This made me think of whether and how the increase in coffee varieties is good for economic growth.

Economic growth is a much-used phrase. It simply means a sustained expansion of production capacity. More production means more jobs, and more jobs lead to an increase in overall household spending. As the demand for more goods and services increases, then the capacity to deliver those products has to increase beginning the cycle anew.

Fortunately, I found the answer in a paper written by the economist Christian Broda. Broda holds a Ph.D. in Economics from the Massachusetts Institute of Technology where he studied after graduating Summa Cum Laude from Universidad de San Andres in his native Argentina. He has also taught as a tenured professor of economics at the University of Chicago before becoming the managing direct of a hedge fund named Duquesne Capital Management.

What Forbes‘ Broda found was that the increase in variety has had a positive effect on our economy, which he quantified as roughly $260 billion dollars over the 28 year period he researched. This also ties in with another study Broda did that showed the influx of lower cost goods, mainly from China, increased the buying power of low to medium income households.

That latter study looked at the effect inflation had on different income levels. Top wage earners have been experiencing an inflation rate (the rise of prices of time) of around ten percent. Lower income household because of the variety of lower cost imported products has experienced a rate about six percent lower. The real effect of this is that lower income household have more purchasing power and can leverage that to generate more disposal income to buy other products.

Using coffee as an example, a lower income household can now select a brand of coffee with a lower price than a standard national brand. The few dollars saved adds up, allowing the family to eventually buy a new television without sacrificing other needs. The increased variety of goods, like coffee, also tends to keep the price down on the entire category. With the exception of premium priced brands, low-cost varieties make it hard for standard brands to price their products to much higher else they risk losing sales volume and whatever marginal revenue they would have gained now becomes a loss.

Macroeconomists study how all these pieces fit together and use models to predict and validate their assumptions. Sometimes these predictions lead to a change in economic policies so that the economy as a whole can expand and people can benefit by enjoying a more stable job market, higher wages, and an increased standard of living. Broda’s work on the effect of low-priced goods and increased variety point to the suggestion that restrictive import policies are not the best decision for our overall economy.

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