FEDERAL RESERVE BANK OF DALLAS

Issue 2 March /April 2003

Southwest Economy
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What Wages and Property Values Say About Texas
Two principal factors determine which cities experience the most rapid economic growth: business investment and labor growth. Business investment is high in cities where productivity is high relative to the cost of production. Workers are most attracted to cities where the amenities and wages are high relative to the cost of living. Together, wages and property values convey considerable information about a city’s productivity and amenities, and therefore about its growth potential. Taken independently, however, neither provides a complete measure of amenities and productivity. Wages could be low in a city because productivity is low, but they could also be low because people are willing to accept lower wages to live in a place with so many amenities. High wages could indicate either high productivity or the need to compensate workers for a lack of amenities. Similarly, high property values indicate either that high productivity has attracted enough business to bid up property values, that high amenities have attracted enough residents, or both. A simple economics framework—one that takes into account the role labor and capital (Continued on page 2)

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Debunking Derivatives Delirium
INSIDE:
The Giant in Mexico’s Rearview Mirror
Banks have gotten a lot of bad press lately. Some commentators have gone so far as to declare a banking breakdown, brought on by the free market policies of the 1990s. At the heart of much of the controversy is the explosive growth in banks’ use of the sometimes complex financial instruments known as derivatives. Close examination, however, suggests the potential costs of derivatives are often exaggerated and their