Yesterday evening, I visited an old friend, who had a bright nephew, around 19 years old, over. During the discussion, which somehow turned to exchange rates, he asked, “what determines the exchange rate between currency X and currency Y anyways?” It was a great educational moment, always made simpler by real-world examples, which I love. After all, the great insight of economics is that it is not high-level theory that really makes up an economy, but just the sum of billions or trillions of decisions in the real world.
I had a great example of that recently. In our kitchen, we have a water filter attached to the sink. Although the utility water is pretty clean, we like filtering our drinking water through a special faucet. For the last few months, the faucet for the filter has had a small leak. Drip…. drip… drip. Being a responsible citizen, and more to the point aware of how much water can drip from a “small” leak over a period of time, and thus run up my expensive water bill, I resolved to change it. But being a student of numbers and metrics, I was curious as to whether it really paid.
So I performed an experiment. I put a measuring cup under this slowly dripping faucet, and set a 1 hour countdown timer on my watch. When the timer went off, I checked the measuring cup. Turns out “they” were right; a slow drip can leak a decent amount. The measuring cup had 1/4 cup of water in it after just one hour. Still not satisfied, I decided to check how much that would be in a month. 1/4 cup in one hour * 24 hours / day * 365 days / year = 2,190 cups of water per year. That seems like quite a bit. Since I am normally billed for water in cubic metres, each of which is 1,000 litres, it makes sense to convert it to cubic metres. Each cup is 0.000236588 cubic metres, so 2,190 cups / year = 0.518 cubic metres. While that seems like a lot, even my expensive water bill is only $4/cubic metre. Put in other terms, this terrible leak is costing me…. $2/year! The cost of a replacement faucet? $30 plus labour (although I would replace it myself). It would take 15 years to pay it back!
Moral of the story: read the numbers carefully, they are not always what they seem.