with richard gill, we'll investigate that problem on this edition of economics usa. david schoumacher. ♪ pepsi cola hits the spot ♪ 12 full ounces that's a lot... ♪ ♪ i'd like to buy the world a coke ♪ ♪ and keep it company ♪ that's the real thing... ♪ we made our choice ♪ make it a pepsi... soft drink companies spend millions advertising to make billions in sales. it's a $23 billion-a-year industry. with that many sales, every decision is crucial. ♪ you're the pepsi generation... ♪ the words i'm about to say will change the course of history-- coca cola has a new taste. it's the best ever. in 1985, the coca cola company announced to the world it was changing the coke formula. to millions of customers, the new taste was an outrage. the rest is history. five years earlier, a key ingredient was changed, and it went unnoticed. what was that change? why did the company risk it? in 1979, the coke company earned $420 million on sales of nearly $5 billion, but the giant corporation faced cost problems. the price of sugar was rising. donald ulrich is president of mid-atlanti

richard gill explains what water shortages teach us about consumer demand.arly, when you have a shortage of a commodity like water, you get very careful about how you use it. watering cemeteries and washing the dog are out. drinking water is definitely in. baths and showers? after a few weeks, when you have very little high of a commodity, an additional unit brings more added satisfaction, more marginal utility, as economists describe it, than if you have an abundant supply. at the height of the drought, additional water would have been used for high priority purposes-- drinking, cooking food. the added utility, the marginal utility of water, was very high. as the drought eased up, more water became available. the car got washed. the lawn got watered. additional water brought less added satisfaction, a lower marginal utility. the principle expressed here is usually called... graphically speaking, it would look like this. we measure the marginal utility of water on the vertical axis. along the horizontal axis, we measure the amount available. at the drought's

we asked richard gill why tight monetary policy caused such hardship.ing a benign view, one could argue the difficult times of the early 1980s reflected the success of our past policies. keynesian economics was directed at stabilizing the growth of real national income. comparing recent decades with decades before world war ii, the american economy did pretty well. here's the way the growth of our gnp fluctuated before world war ii. here's what happened from the 1950s to 1980. in real terms, the economy was more stable in the recent period. the suess of these policies undoubtedly contributed to recent inflationary tendencies and, perhaps more significantly, to the expectation of future inflation. by 1980, they'd created a general sense that the government would back down when it began to create recession and unemployment. people began betting on continued inflation. this made the government's task more difficult. the government had to act to break the back of these well-entrenched inflationary expectations. it had to fight inflation and a belief it woul

we asked analyst richard gill.nomists like terms like "velocity" because they suggest we're scientists, like physicists. well, perhaps we aren't quite that scientific, but we do have our own concept of velocity, specifically the income velocity of money. briefly, income velocity tells us how many times a year a dollar circulates through the economy to buy final goods and services. we measure it by dividing annual money national income by the stock of money in the economy. annual money national income equals the average price of a good, p, times the quantity of goods produced, q. this is really our old familiar gnp concept in money terms. if we now divide money national income by the stock of money -- our currency and demand deposits, m -- we get velocity, v. thus v equals... we can put the m on the other side and get... this is called the "equation of exchange." now, the economic question facing the monetary authorities like arthur burns was, what would happen to the economy when you changed the money supply, m? ro

with the help of analyst richard gill, we'll examine that question on economics usa. david schoumacher. captioning made possible by the annenberg/cpb project economists see the world in terms of supply and demand. put simply, demand is the appetite to consume. supply is the ability to produce. productivity holds the supply side together. as long as productivity continues to improve, our standard of living continues to improve. this is the classic widget factory. this machine will put the stick in a deodorant tube. it if works, we'll have more deodorant and fewer hours of work putting tubes together. that's productivity. american productivity has been an economic marvel of the industrial age. but by the late 1970s, our rate of productivity growth had slumped alarmingly. why did productivity grow so fast for so long and then suddenly decline? in the early 19th century, america was predominately a farm economy. buildings were made of brick and wood. by the year 1900, we were a nation of steel. vast deposits of iron and coal fed the furnaces of pittsburgh. immigrants pour

economist richard gill has an analysis.understand this question, we need some sense of how the money supply affects the economy's general workings and how the fed can affect the money supply. this diagram suggests the general nature of the answers to these questions. theoretically, in a depression situation, the fed should increase reserves available to the commercial banking system-- provide more reserves, as stated in the first box. the hope is that banks will lend more credit to businesses, thereby increasing the quantity of money in the economy. more money, in turn, should lead to more spending by businesses who have borrowed to invest in new machinery and factories, possibly also by consumers like ourselves. more spending, in turn, should lead to higher gnp and more jobs. it may also lead to higher prices, though that didn't seem a problem then. 1930s prices were generally falling. when the fed tried to stem the gold outflow by raising the discount rate in 1931, it was doing the opposite of what this analysis suggests.

we put that question to economic analyst richard gill.the old days, you used to be able to divide economists into two groups, those who worried about stagnation and those who worried about inflation. what the food and energy shocks of the early 1970s proved was that both were right. economics can be a bit unsettling that way. everybody's worries can come true. technically speaking, what was happening was a shift of focus from the demand side of the economy to the supply side. here we have aggregate supply and demand curves for the economy as a whole. we measure total output, gnp, along the horizontal axis, and the price level along the vertical axis. now, roughly speaking, we can think of stagnation as occurring whenever the economy moves towards lower gnp. that is, to the left here, along the horizontal axis. but by contrast, inflation occurs when we move upwards here along the vertical, or price, axis. now, in the days before the supply shocks, people tended to focus on changes on the demand side only. if demand went up to here, for exa

we'll investigate that question with the help of economic analyst richard gill on this edition of "economics." i'm david schoumacher. most of us have been taught that to spend more money than we earn is to court financial disaster, but the federal government seems to play by a different set of rules. almost every year the country runs a deficit. yet we're told that deficit is necessary, even beneficial. but deficits piled one on top of another create a growing national debt. and the interest payments on that debt add more dollars to the next year's deficit. during a five-year span back in the 1940s, our national debt more than quadrupled as we fought world war ii. how did we pay for that war? and why didn't it bankrupt us? early in the morning of september 1, 1939, german armies marched into poland, and the world exploded into war. by 1940, the germans controlled europe d were poised to attack britai a frightened american congress appropriated $37 billion for defense, more than the entire cost of world war i. how would the government raise these huge sums? that means taxes and bonds, and bon