Sunday, August 19, 2012

Hosting the Olympics: A Potentially Risky Investment

I would like to start out by saying that I love the Olympics. As I watch the the security, venue building, and ceremonies, however, the economic part of my brain fires off. Does the host country actually make all the money back, or are the Olympics a big public relations scheme?

After research, I found an answer on Businessweek. The conclusion is that the Olympics are a boon to cities that are "upcoming"- cities such as Seoul- because these places can be helped by the tourism and the exposure. For established cities that already draw tourists, however, hosting the Olympics may not make sense.

So what about London? London is definitely an established city, so it is speculated that the city will not fully recover all its expenses within a reasonable time frame (essentially, there is a high opportunity cost. London could have invested the money into more worthwhile investments)

Of course, there are strong arguments on both sides. Some sources say that no matter what, "hosting the olympics is a huge money suck". One person from made the following argument:

These days the summer Games might generate $5-to-6 billion in total revenue (nearly half of which goes to the International Olympic Committee). In contrast, the costs of the games rose to an estimated $16 billion in Athens, $40 billion in Beijing, and reportedly nearly $20 billion in London. Only some of this investment is tied up in infrastructure projects that may be useful going forward...."

Then, of course, there are others who adamantly argue the opposite. One person from made the following argument:
While almost everything has a price, there are some things in life - such as reputation and soft power - which remain priceless.

As you can see, there is no clear answer to the value of hosting the olympics; there are too many factors and too many different pieces of the puzzle to consider.

Personally, I think businessweek made a solid argument- upcoming cities should host the olympics.

If you do happen to come upon an interesting opinion piece on the olympics, please make sure you weigh in under the comments! It is interesting to read the different thoughts on the event.

Monday, August 13, 2012

Normative vs Positive Analysis

Economists tends to juggle between articulating facts and arguing what should be done with those facts. For example, one economist might say, "The American debt went up 3.8 billion dollars today, and we should therefore cut down on spending." Another economist might say "The American debt went up 3.8 billion dollars today, but those spendings are investments that helps America grow."
I used a very simple example, but you can see that both statements have two parts: the fact and the prescribed application of that fact.
The fact ("The American debt went up 3.8 billion dollars today") is the positive part of the analysis. It is a statement that can either be clearly proven to be right or wrong.
Each of the second parts of the sentence ("we should therefore cut down on spending" or "those spendings are an investment that helps America grow") are referred to as normative analyses. Those statements are opinions, and there are people who would both agree and disagree with that statement.

It's pretty simple, but there are a few things to keep in mind. For example, false statements can still be positive.
For example, "The American debt went up 3.8 billion dollars today, August 13" and "The American debt went up 100 billion dollars today, August 13" are both positive statements. One is right, and one is wrong. However, they are both positive because they can be easily proven or disproven.

Also keep in mind that there can also be disagreement over positive statements. One company may have calculated that there was a 3.8 billion dollar debt and another company may have calculated that the debt was 3.9 billion dollars- there can be a debate over whether good X, worth .1 billion dollars, should be accounted for. You can see how there is potential conflict over positive statements.

As you keep this concept in mind and potentially try to categorize statements into one analyses category, you will find there are a lot of grey areas. This is completely expected; as long as you understand the concept, however, you shouldn't worry too much.