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The Ledger
Federal Reserve Bank of Boston’s Economic Education Newsletter

Also in this issue
4 Shared Knowledge:
The Economic Way
of Thinking
6 Web Wise: Equilibria
Chat Brings Econ
Teachers Together
on the Web
7 New England Focus:
Maine Council on
Economic Education
Has All the Right Tools
for Teachers
10 Working on
Opportunity Cost
11 A Question of
Economics: How Can
Sports Teams Afford to
Pay Superstars So
Much Money?

A New Look for
“Old Hicko r y ”
Redesigned $20 note
provides greater protection
against counter f e i t i n g
by Tom Diaz
Andrew Jackson was always popular with the
voters, so it’s only fitting that “Old Hickory”
should appear on one of the more popular Federal
Reserve notes—the $20 bill. But even old
favorites can sometimes benefit from a new look.
On May 20, Treasury Secretary Robert E.
Rubin, Federal Reserve Board Chairman Alan
Greenspan and U.S. Treasurer Mary Ellen
Withrow unveiled a redesigned $20 note. It is the
third Federal Reserve note to receive a facelift,
complete with new and modified security features
similar to those that already appear on the Series
1996 $100 and $50 bills. The new twenties will be
issued in the fall of 1998. (The $10 and $5 notes
may be redesigned and reissued simultaneously
some time next year, and the $1 note will be more
modestly redesigned—unless a dollar coin
replaces it altogether.)
The $20 note has special importance
because it is much more widely circulated than
$50s or $100s, and it is the highest denomination
dispensed by ATMs. About $88 billion worth of
$20 notes are currently in circulation; 80 percent
of them are in the United States.
In an effort to ensure a smooth rollout for the
redesigned $20, the U.S. Treasury and the Federal Reserve have undertaken an extensive public
information campaign. The effort includes
distribution of millions of brochures and other
educational materials to the public and direct

Fall 1998

outreach to 3,000 major retailers, 4,300 financial
institutions, 350 shopping mall outlets, and 4,000
small business organizations around the country.
And the publicity campaign is not limited to
the United States. U.S. embassies and consulates
around the world will conduct localized campaigns
to increase international awareness of the
redesigned currency. Educational materials are
being translated into fifteen languages including
Russian, French, Spanish, Bulgarian, and Chinese.
Another major reason for the extensive
publicity effort is the fact that the $20 note is the
most frequently counterfeited denomination in
the United States. (Outside the United States,
the $100 note is the most commonly counterfeited denomination.)
“The new $20 note will be an important tool
against would-be counterfeiters,” Secretary Rubin
said. “The introduction provides us with an
opportunity to educate cash-handlers and consumers about the importance of authenticating
The redesigned twenties will replace older
notes gradually. Old $20 notes that are still in good
condition will remain in circulation.
“We are most gratified with the successful
introduction of the new $100 and $50 notes and
look forward to the same success with the new
twenties,” Chairman Greenspan said. “Older
notes will not be recalled or devalued. All existing
notes will continue to be legal tender.”
New Features
The redesigned $20 bill has many of the
same security features as the new $50 and $100
A larger, slightly off-center
The enlarged portrait of Andrew

The Ledger • Fall 1998


Serial Numbers


Concentric Fine
Line Printing


The Ledger
Bob Jabaily, Editor
Research Department
Federal Reserve Bank
of Boston
P.O. Box 2076
Boston, MA
Or phone:
(617) 973-3452





The Ledger is the Federal Reserve
Bank of Boston’s newsletter for
educators and the general public.
Each issue features a variety of
short pieces about new economic

Test your powers of observation: There’s something very different
about the White House on the back of the new $20 note. Can you
spot what it is? Hint: Look just above the pillars.

education resources, useful
web sites, effective economic
education programs and
organizations, basic economic
concepts, questions related to
“everyday economics,” and
New England economic history.

The Ledger is published three
times a year. Subscriptions are
free. To get on the mailing list,
write to:

Bob Jabaily, Editor
The Ledger
Research Department
Federal Reserve Bank of Boston
P.O. Box 2076
Boston, MA 02106-2076
or e-mail:

Jackson is easier to recognize, and the added detail is more difficult to reproduce with clarity.
Relocating the portrait from the center, the
highest area for wear, will also reduce wear on the
portrait and provides room for a watermark.
A watermark: A watermark identical to
Jackson’s portrait is visible from both sides of the
bill when held up to the light.
Security thread:
A polymer security
thread embedded vertically in the paper to the
far left of the portrait indicates the $20
denomination. When held up to a bright light,
the words “USA TWENTY” and an American
flag can be seen on this thin security thread. The
number “20” appears in the star field of the flag,
and the polymer thread glows green when held
under an ultraviolet light.
Color-shifting ink:
The number “20”
in the front lower right corner of the bill looks
green when viewed straight on but appears black
when viewed at an angle.
Because they’re so
small, microprinted words are hard to replicate.
On the front of the note, “USA 20” is repeated
within the number “20” in the lower left-hand
corner, and “The United States of America” is

m i c r o p r i n t e d repeatedly along the lower edge
of the oval that frames the portrait.
Concentric fine line printing:
fine lines printed behind Jackson’s portrait and
the White House are very difficult to replicate.
Low vision feature:
A large, dark,
no-frills number “20” in the lower right corner on
the back of the note is very easy to read.
In addition, the new $20 note is the first bill
to incorporate a machine-readable capability
intended to assist the blind. This feature will lead
to the development of convenient scanning
devices that could, in the future, enable the use
of scanners to read denominations.
Serial numbers:
An additional letter
has been added to the serial number. The unique
combination of eleven numbers and letters
appears twice on the front of the note.
Federal Reserve indicators:
A new
seal represents the Federal Reserve System.
The new seal replaces the circular, saw-toothed
seal that had a letter indicating the issuing
Federal Reserve Bank. The letter and number
under the left serial number identify the issuing
Federal Reserve Bank.

Who Would You Choose?
The Federal Reserve Bank of Boston hosted a very successful “Take Our Daughters to Work Day” in 1998.
The program included a visit to our Cash Services Department, where we asked the girls the following question:

When the government finally decides
to put a woman’s portrait on our paper money,
which woman should it be?
There were three prerequisites: She must be famous, she must be American, and she must be dead. No living
people can have their portraits on U.S. coins or currency.

Here are the girls’ choices:
Four votes each
Susan B. Anthony
Clara Barton
(The Unsinkable) Molly Brown
Harriet Tubman

Three votes
Amelia Earhart

Two votes each
Helen Keller
Eleanor Roosevelt
Christa McAuliffe
Phillis Wheatley (poet, 1753-1784)

One vote each
Abigail Adams
Louisa May Alcott
Josephine Baker
Admiral Grace Hopper (inventor of Cobol
computer language)
Anne Hutchinson (advocate for religious
freedom in colonial America)
Marilyn Monroe
Betsy Ross
Harriet Beecher Stowe
Ruth Wakefield (inventor of Toll
House cookies)
Martha Washington

Teaching Materials
The Federal Reserve Bank of Boston has color posters, pamphlets, and information kits that provide easy-to-understand
information about the changes and new features on the Series 1996 $20, $50 and $100 notes. They are great for classroom
use, and they are available free of charge to teachers in the First Federal District. Contact:
Public & Community Affairs
Federal Reserve Bank of Boston
P.O. Box 2076
Boston, MA 02106-2076
Phone: 617-973-3459
Fax: 617-973-3511
And check out the Bureau of Engraving and Printing’s web site at
of information on U.S. currency.

for a wide range

The Ledger • Fall 1998


Shared Knowledge:

The Economic Way of Thinking
by John Morton
“The Economic Way of Thinking” originally
appeared in the Spring 1997 issue of ECONEXCHANGE, a joint publication of the E. Angus
Powell Endowment and the Federal Reserve Bank of
Richmond. John Morton, who was director of
educational programs at the E. Angus Powell Endowment for American Enterprise when he wrote the article, is currently executive director of the Arizona
Council on Economic Education. John, the Powell Endowment, and the Richmond Fed have kindly given us
permission to reprint the article.
Economics needs a press agent. Although it
is taught at every university and is a requirement
for elementary and secondary students in 32
states, economics and economists are still mocked
in the media and joked about everywhere.
Then why should students study economics?
One sort of answer touts economics as a body of
knowledge. In the introductory college course,
this body of knowledge is called the “principles of
economics.” In a list prepared for use in K-12
teaching, the National Council on Economic Education’s Frameworks for Teaching the Basic Concepts
summarizes 22 important concepts.
This content is important, but by itself may
not be enough to clinch a spot for economics in the
K-12 curriculum. After all, the school curriculum
is already crowded. Why does economics deserve
a spot in this “standing-room only” curriculum?
Our answer assumes that economics is much
more than a bundle of concepts. It is a unique way
of thinking that offers insights into the seemingly
chaotic confusion of human behavior in a world of
different values, resources, and cultures.
Note the emphasis on human behavior. Economics is not the study of money. Almost every
aspect of human behavior can be analyzed using
an economic approach. It is this distinctive approach, not a definite set of conclusions, that
According to John Maynard Keynes, “The
Theory of Economics does not furnish a body of

Fall 1998 • The Ledger

settled conclusions immediately applicable to
policy. It is a method rather than a doctrine, an
apparatus of the mind, a technique of thinking
which helps its possessor to draw correct conclusions.”1
Keynes doesn’t tell us exactly what this
“apparatus of the mind” is. But we will take up
this challenge and try to describe the essence of
the economic way of thinking.
Everything has a cost
This is the basic idea that “there is no such
thing as a free lunch,” meaning that every action
costs someone something—in time, effort, or a
lost opportunity to do something else. Opportunity cost is the value of the next-best alternative
or what someone gives up by choosing one alternative over another. The economic perspective
sometimes is unpopular because of its focus on
costs. Potential benefits are more fun to discuss
than potential costs. Many a party has been
spoiled by assertions of the economic perspective.
That perspective reminds us that this can be a
world of competing sorrows with more trade-offs
than solutions.
People choose for good reasons
This is the most important principle of
economic thinking. People always face choices,
and when they choose, they look for the most
advantageous combination of costs and benefits.
This behavior is self-interested, not selfish.
In his Nobel lecture, Gary Becker makes the
case this way:
“Unlike Marxian analysis, the economic approach I refer to does not assume that individuals
are motivated solely by selfishness or material
gain. It is a method of analysis, not an assumption about particular motivations.
“Along with others, I have tried to pry
economists away from narrow assumptions
about self-interest. Behavior is driven by a
much richer set of values and preferences.

“The analysis assumes that individuals maximize welfare as they conceive it, whether they be
selfish, altruistic, loyal, spiteful, or masochistic.
Their behavior is forward looking, and it is also assumed to be consistent over time.” 2
The key to this analysis is that only individuals choose; those individual choices drive society.
According to Paul Heyne, “All social phenomena
emerge from the choices individuals make in
response to expected benefits and costs to themselves.”3

and behavior change. For example, why have
market economies been successful? Market
economies depend on private-property ownership.
People work harder and use resources more wisely
when they own property. Private property thus
creates a whole structure of incentives. But rights
to own property cannot simply be asserted. Ownership of property depends upon rules that establish and protect property rights. The rules in turn
depend upon a system of

The Economic Way of

People gain from
voluntary trade
People trade when
they believe the trade will
make them better off.
When two people trade voluntarily, they each give up
something they value for
something else they want.
The trade is made when
both parties consider the
benefits of the trade to be
greater than the costs.

Incentives matter
Everything has a cost
Economics is
People choose for good reasons
really about incentives.
People create economic systems to
Economic theory is based
influence choices
on the idea that changes
and incentives
in incentives influence
People gain from voluntary trade
behavior in predictable
It is people, not countries,
ways. Incentives are
that trade
nothing more than
The price of a good or service is
changes in costs and
affected by people's choices
benefits, which in turn
Economic actions create
influence choices. Supply
secondary effects
and demand analysis is
It is people, not
about incentives. Price
countries that trade
controls are about incentives. Profits and business
International trade policy is hotly debated,
behavior are about incentives. Government decibut the logic of individual rules rarely is disputed.
sions are about incentives.
Everyone specializes and trades some of his or her
According to Steven Landsburg, “Most
labor for a vast array of goods and services. This
of economics can be summarized in four words:
system of specialization and exchange makes
‘People respond to incentives.’ The rest is
people better off. Any effective economic system
commentary. ‘People respond to incentives’
must encourage specialization and exchange.
sounds innocuous enough, and almost everyone
Self-sufficiency is the road to poverty.
will admit its validity as a general principle. What
distinguishes the economist is his insistence on
taking the principle seriously at all times.”4
People create economic systems to
influence choices and incentives
Economic activity doesn’t occur in a vacuum.
Cooperation among people is governed by written
and unwritten rules. As rules change, incentives

The price of a good or service is affected
by people’s choices
Goods and services do not have intrinsic value;
their value is determined by the preferences of buyers
and sellers. Economists describe these preferences,
and their effects, in terms of supply and demand.
continued at bottom of next page

1 Quoted in Paul Heyne, The Economic Way of Thinking (New York: Macmillan, 1994), p. 4.
2 Gary Becker, "Nobel Lecture: The Economic Way of Looking at Behavior," Journal of Political Economy, 101 (3) (1993): 385-6.
3 Heyne, The Economic Way of Thinking, p. 8.
4 Steven E. Landsburg, The Armchair Economist (New York: Free Press, 1993), p. 3.
5 Quoted in James D. Gwartney and Richard L. Stroup, Economics: Private and Public Choice, 6th ed. (Fort Worth: Dryden Press, 1992), p. 11.
The Ledger • Fall 1998


EquilibriaChat Brings
Econ Teachers
Together on the Web
Bob Graboyes has the kind of
playful intelligence that's all too rare in an
ever more earnest world. As editor of
Equilibria, the economic education bulletin of the Federal Reserve Bank of
Richmond, he looks at economics in a
way that prompts readers to smile and
think at the same time.
In a recent issue of Equilibria,
Graboyes observed that a high school
economics teacher could well be the
loneliest of all faculty members. There's
rarely an on-site mentor to guide the
novice; hardly ever a knowledgeable colleague to act as a sounding board.
But Graboyes and the Richmond
Fed have come up with a way of using the
World Wide Web to make life a bit less
lonely for economics teachers. Equilibria

The Economic Way of Thinking
continued from page 5

No supplier would willingly produce
something that could not be sold for more
than it cost to produce. However, consumers are equally important in a market
economy. Just as producers want to sell
at the highest price, consumers want to
buy at the lowest price. The actual price
is determined through the interaction of
buyers and sellers.
Economic actions create
secondary effects
Good economics involves analyzing
secondary effects. Frederic Bastiat, a 19th6 Fall 1998 • The Ledger







Chat is a Web-based discussion board
that gives economics teachers access to
one another, to economic education organizations, and to experienced economists. Graboyes calls it “A place on the
World Wide Web where economics
teachers can ask questions, give answers,
share ideas, spread news, and turn for
Teachers have already begun using
EquilibriaChat to ask a wide range of
questions, including:
• Are short-term interest rates a
good indicator of inflationary expectations?
• Can you recommend good starter
books for laypersons interested in economics?
• Where can you find certain basic
economic statistics?
• Does anyone know of econ lesson
plans on the World Wide Web?
• How good were the economic arguments in a recent Wall Street Journal article on the Fed?

• Was the Wizard of Oz an allegory on the
Free Silver Debate?
One of the nicest things about EquilibriaChat is that the format is non-threatening. A teacher can ask even the most
basic question without the fear of
seeming uninformed.
Membership in EquilibriaChat is
open to educators whose curriculum includes economics, regardless of whether
or not they live in the Richmond Federal
Reserve District. And it's free. Only
members can participate in the dialogue,
but anyone can view EquilibriaChat
F o r in fo rm at ion on j o in in g
EquilibriaChat, send an e-mail message to
Bob Graboyes (
And for a free subscription to
Equilibria, contact:

century economist, stated that “the difference between a good and a bad economist
is that the bad economist considers only
the immediate, visible effects whereas the
good economist is also aware of the secondary effects, effects that are indirectly related to the initial policy and whose influence might only be seen or felt with the
passage of time.”5 In this respect, an economic system is like an ecological system.
One action may create many unintended
consequences. For example, rent controls
make apartments more affordable to some
consumers, but those same controls make
it less profitable to build and maintain
rental housing. The secondary effect is a

shortage of apartments and houses to rent.
Higher taxes provide more revenue for government, but they also create negative incentives to work, save, and invest. A wise
policymaker considers both initial and secondary effects.
Can teachers really teach the economic way of thinking, or is this econ stuff
just too abstract to be practical? The principles of an economic way of thinking are
only a starting place for teachers to work
from. Teachers can’t just hand these principles to their students and say, “This is
economics.” They must use creative approaches to apply these ideas to all sorts of

E q u i l i b r i a: Subscriptions
Federal Reserve Bank of Richmond
Public Affairs, 21st floor
P.O. Box 27622
Richmond, VA 23261

New England Focus:

Maine Council on Economic Education
Has All the Right Tools for Teachers
The Maine Council on Economic Education is a thriving affiliate of the National Council
on Economic Education. EconomicsAmerica—the National Council’s nationwide network
of state councils and university-based economic education centers—conducts workshops and
in-service training for more than 120,000 teachers a year.
Bob Mitchell knows how to get the most out
of every resource. The front of his business card
reads: Robert J. Mitchell, President, Maine Council
on Economic Education. The back lists “Six Clues
to Economic Understanding.” Nothing goes to
waste, and that makes him a perfect fit for the

Taken from the back of Bob Mitchell's
EconomicsAmerica business card:
Handy Dandy Guide (HDG)
for Solving Economic Mysteries:
Economic Understanding
1. People choose.
2. People's choices involve costs.
3. People respond to incentives
in predictable ways.
4. People create economic systems
that influence individual choices
and incentives.
5. People gain when they trade
6. People's choices have consequences
that lie in the future.

Down East state where people still pride themselves on Yankee frugality.
Mitchell operates the Maine Council on Economic Education (MCEE) from a one-room office
on the University of Southern Maine campus. He
and Jill Jordan, the coordinator for Maine’s Stock
Market Game, work with teachers in a statewide effort to foster economic education. MCEE’s mission
is practical and straightforward: Teach people to
adopt an economic way of thinking so they can apply

it to the questions of everyday life. “Economic education,” says Mitchell, “is about learning to be an
effective member of the community.”
Bob brings what he calls a “toolbox mentality” to economic education. He tries to give
teachers an assortment of instructional tools so
they can say to their students, “Here are the tools
you can use when you're trying to decide what to
do with your life.”
But as every home handyperson knows, success often hinges on choosing the proper tools and
knowing which projects to tackle. The tools in
the MCEE toolbox are all geared to Maine’s
framework of “Learning Results” (statewide curriculum standards) for students in the elementary, middle, and secondary grades. Mitchell
teamed up with curriculum writers from the
Maine State Education Department to develop
Learning Results for economics based on the voluntary national content standards in economics
that came out of the Goals 2000: Educate America
Act of 1994.
MCEE concentrates its efforts on four main
initiatives, all of which are directly related to the
Learning Results:
1. The EconomicsAmerica Economics at Work
curriculum (in collaboration with the Maine
Association of Community Banks)
2. The Stock Market Game
3. Personal finance economics (in collaboration with the Maine Credit Union League)
4. Curriculum assistance for individual school
Economics at Work is a multimedia curriculum
developed by the National Council on Economic
Education and the Agency for Instructional Technology. Its five modules—Producing, Exchanging,
Consuming, Saving, and Investing—are designed
The Ledger • Fall 1998


Aroostook County teachers navigate the Web during an MCEE workshop
Photo by Robert Mitchell

for students who may or may not continue their education beyond high school. Print, video laser disc,
videotape, software, and simulations are all part of
the package.
MCEE makes a special effort to help
teachers get the most out of Economics at Work by
teaming up with the TechPrep Coordinators in
the Maine Technical College System to offer
teacher training. The outreach effort is made
possible by special funding from the Maine Association of Community Banks (MACB) and the resources and personnel of MACB member banks.
The Stock Market Game is another nationwide program with a unique Maine feature. The
investment simulation, developed by the Securities Industry Foundation for Economic Education,
is available throughout the country in a traditional
paper-based format and a new Internet version,
SMG2000. But Maine is the only state to conduct
the program solely on the web, thanks to the fact
that Bell Atlantic created a statewide fiber optic
cable system with a connection to every Maine

Fall 1998 • The Ledger

school and an e-mail address for every Maine
teacher. Maine’s SMG2000 serves nearly 10,000
students a year and is done in close collaboration
with the Newspaper in Education programs of The
Bangor Daily News, Portland Press Herald/Maine
Sunday Telegram, and the Lewiston Sun Journal. Jill
Jordan coordinates the entire statewide effort from
a single desk at MCEE.
A third component of the educational effort
is the personal finance literacy program MCEE
conducts in partnership with the Maine Credit
Union League, which provides funding and classroom assistance. The program consists of four
teacher-centered curriculum guides designed for
grades K-12: PocketWi$e, $mart $pending and $aving,
Money in the Middle Grades, and Wallet Wi$dom. The
program helps students to develop skills in personal money management and decision making.
MCEE’s fourth major educational initiative is
curriculum assistance for individual school districts.
Bob Mitchell travels the entire state to help
teachers master aspects of economic education that

For more information on EconomicsAmerica . . .
To find out more about the full
range of economic education
resources available through the
National Council on Economic
Education and its
EconomicsAmerica affiliate,
contact the Economic Education
Council in your state. In the
New England region,
Connecticut, Maine,
Massachusetts, and Rhode
Island have active and thriving
Connecticut Council on Economic
c/o Economic Education Center
University of Connecticut at Avery
1084 Shennecosset Road
Groton, CT 06340
Phone: (860) 405-9215
Fax: (860) 405-9009

Maine Council on Economic
P.O. Box 9715-159
Portland, ME 04104-5015
Phone: (207) 780-5926
Fax: (207) 780-5282

Rhode Island Council on Economic
Rhode Island College
Providence, RI 02908
Phone: (401) 456-8037
Fax: (401) 456-8851

Economic Education Council of
Bridgewater State College
Bridgewater, MA 02325
Phone: (508) 279-6125

If you live outside New England
and would like to find out the
address of the Economic
Education Council in your state,
you can look it up on the
National Council on Economic
Education web site

are not necessarily covered in existing programs
such as Economics at Work or the Stock Market
Game. A 1997 workshop took him on a 587-mile
round trip to Fort Fairfield in Aroostook County—
a destination that’s as remote as it sounds.
How can one person cover a state the size of
Maine? Technology helps. Bell Atlantic’s fiber
optic network made it possible for Mitchell to set
up the Fort Fairfield workshop with just two
phone calls and 15 to 20 e-mail messages. (Anyone
who has ever tried to telephone a teacher during
school hours knows what a difference e-mail
Of course, he still has to drive long distances
and contend with Maine's changeable and challenging weather, but that's a part of the job he
seems to relish. “One of the things I really like
about Maine,” says Mitchell, “is the hometown
feeling you get wherever you go.”
He's also quick to point out that MCEE has
been able to do so many good things because of
the support he's received from the University of
Southern Maine and the excellent cooperation
from his board of directors. “I’ve been fortunate

in that my board has been a great team. They
value the Council's mission, and they have been a
great source of encouragement.”
And finally, MCEE may be doing so well because it has managed to change with the times.
“One of the things we did,” explains Mitchell,
“was to adopt what worked for American business.
We looked at our core competencies and asked
ourselves “What do we do well?” and “What do our
customers want?”
The assessment seems to have worked well.
By all accounts, MCEE has a state full of satisfied
For more information on
MCEE programs, contact:
Robert Mitchell, President
Maine Council on Economic Education
P.O. Box 9715-159
Portland, ME 04104-5015
Phone: (207) 780-5926
Fax: (207) 780-5282
For more information on the Stock
Market Game in Maine, contact:
Jill M. Jordan, Coordinator
e-mail : jjord an@usm.mai
The Ledger • Fall 1998


When it comes to economics, one of the
challenges a teacher faces is identifying the major
concepts. The National Council on Economic
Education had this concern in mind when it developed A Framework for Teaching Basic
Economic Concepts. (Visit the National
Council on Economic Education web site at
Each issue of The Ledger highlights a
concept from the Framework. The last issue
looked at “Scarcity.” This time it’s “Opportunity Cost and Trade-offs.”

Opportunity cost:
You can’t necessarily
have it all.
•Should I work overtime on Saturday

or go out with my friends?
•Should I go to acting school or become a CPA and do community theater?
•Should we take the out-of-state job
or stay close to family and friends?
•Should we go to Paris or make extra
payments on the mortgage?
Advertisers might like us to believe
we can “have it all,” but, deep down, most
of us know better. The size of our paychecks and the number of hours in a day
force us to make trade-offs.
Opportunity cost is an economic
concept that gets at the notion of tradeoffs. Writer Susan Lee, in her book Susan
Lee’s ABZs of Economics, defines opportunity cost as “a measure of what could have
The fact that we live in a world of
limited resources means we can’t “have it
all.” When we choose to commit a certain



amount of money, time, or materials to
one thing, we leave ourselves with less to
devote to something else.
If you turn down four hours of overtime because you want to go to a party,
you give up four hours of overtime pay.
That’s opportunity cost. You could have
worked, but you chose to go to the party
instead. And you paid a price. You
“bought” the leisure time with the
overtime pay you turned down.
But the cost of making a choice is
not always an explicit cost in dollars and
cents. Suppose you turn down an out-ofstate transfer to a higher-paying job because you don’t want to uproot
your family. The opportunity
cost is fairly easy to calculate.
It’s the difference between the
higher salary at the job you
turned down and the lower
salary at your current job.
But what if you decide to
uproot your family and take the
higher-paying job? There’s still
an opportunity cost; it’s just tougher to
calculate. You give up the chance to be
close to family and friends. There can be
a monetary cost in that—maybe higher
child care costs. But there might also be
an emotional price to pay—you miss your
family and friends. By choosing to do one
thing, you give up something else.
Opportunity cost applies to every
aspect of life—personal consumption, career decisions, education, health care, national defense . . . even sports. Anyone
who is a fan of the Boston Red Sox knows
all about opportunity cost and the “measure of what could have been.” One

phrase says it all: The Curse of the Bambino.
Between 1915 and 1919, Babe Ruth
helped bring three World Series championships to Boston. The last one—the
very last one—came in 1918. The Red
Sox have never won another World Series.
Boston Globe sports columnist Dan
Shaughnessy blames the Red Sox World
Series drought on a “curse.” His book,
The Curse of the Bambino, advances the
theory that the Red Sox haven’t won
since 1918 because their owner, one
Harry Frazee, sold Babe Ruth to the arch
rival New York Yankees in 1920. (It’s as
good an explanation as any.)
Frazee was an avid
sportsman, but the Red Sox
were not his number one
priority. He was, first and
foremost, a theatrical impresario, and in 1919 he desperately needed cash to finance
his Broadway productions.
When Yankees owner
Colonel Jake Rupert offered to “buy” the
Babe for more than $100,000 in cash and
a $300,000 loan for a mortgage on Fenway
Park, Frazee took the deal.
The rest is history. Harry Frazee
enjoyed continued theatrical success,
most notably with No, No Nanette (hit song
“Tea for Two”). Babe Ruth went to
New York, became a sports legend, and
made the Yankees a baseball dynasty. And
you know what happened to the Red Sox.

You make the call . . .
How does the concept of opportunity cost
relate to Harry Frazee and Babe Ruth?
The Ledger • Fall 1998



of E c o n o m i c s

A Question of Economics focuses on
questions related to economics in
everyday life. Anyone can submit a question—students, teachers, anyone at all.
And the question need not be complicated. In fact, the more it pertains to
daily life, the better.

How can sports
teams afford to
pay superstars
so much money?

Boston, MA 02106-2076

BOSTON, December 1997 — A
voice from the radio announces that the
Boston Red Sox just signed pitcher Pedro
Martinez to a six-year, $75 million contract. Martinez is one of the top talents in
baseball, and, by all accounts, a very nice
young man. But how can the Red Sox afford to pay him that much money?
The short answer is that superstars
generate more than enough revenue to
cover their salaries.
What is revenue?
In generic economic terms:


Total Revenue=(Price) x (Quantity)

Since no one submitted a question
for this issue, we had to rely on family
members. But who knows if they'll come
up with one for the next issue? So, send
your questions about everyday economics to:
Robert Jabaily, Editor
The Ledger
Research Department
Federal Reserve Bank of Boston
P.O. Box 2076

Fax: (617) 973-3511

If we use your question, we'll send
you a bag of genuine shredded money for
each person in your class (limit 30).

For example, a team’s ticket revenue for one game is:
(Price per ticket) x (Number of tickets
sold for the game).

Professional sports teams have three
main sources of revenue:
• Television
• Ticket sales
• The sale of licensed goods (all
those products, from caps to computer
games, that carry an official team or league
Superstars earn big money because
they generate lots of revenue for their
teams. They are “marquee players” who
draw spectators to the game through a
combination of exceptional talent and a
certain star quality that is sometimes hard
to define but always easy to spot.
Think about it. What draws Chicago
fans to a Bulls game? Sure, some of them
enjoy cheering for the home team, but
many of them are buying tickets or
turning on the TV just to see Michael
Fannies in the Seats
Yankees owner George Steinbrenner had it right when he said superstars make big money because they “put
fannies in the seats,” but today that
means much more than just selling
tickets. The “fannies” that watch a televised game from the living room sofa may
be even more important than the “fannies” that fill the stands. (In 1950, approximately 75 percent of all team revenues came from ticket sales; by 1990
they accounted for less than half).
Television is the “golden goose” of
modern professional sports. It pumps
tremendous amounts of money into spectator sports, and it connects more fans to
the games and to the players than ever before. The National Football League offers
a striking example.
During the early 1960s, NFL Commissioner Pete Rozelle convinced team
continued on page 12
The Ledger • Fall 1998


A Question of Economics
continued from page 11

owners that they’d make more money if
the league negotiated a national TV deal
on their behalf. And events proved him
right. The first national TV contract—a
two-year, $28.2 million deal with CBS—
seemed like a fortune at the time. But
things just kept getting better, and by
1998 the NFL had TV deals with ABC,
CBS, ESPN, and Fox for a combined total
of $17.6 billion over eight years.
Why are television companies
willing to pay that much to sports
leagues? Because lots of fans are tuning in
to watch the games and see the superstars. And that means TV networks and
cable companies can charge advertisers
higher rates for commercial time during
the games. The 1998 Super Bowl alone
attracted 133.4 million viewers, and advertisers paid $1.3 million for 30 seconds
of commercial time.
Licensed goods are another important source of revenue. Official logos and
player endorsements often can persuade
fans to pay extraordinary prices for very
ordinary products. And every time

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Research Department
Federal Reserve Bank of Boston
600 Atlantic Avenue
P.O. Box 2076
Boston, MA 02106-2076

someone buys a team jersey, a pack of
baseball cards, or an official NFL keychain, a certain percentage of the money
goes to one of the leagues or one of the
player’s associations. Total 1997 sales for
NFL-licensed products were $3.6
billion. Total 1997 sales
for NBA-licensed products approached $3
billion, and NHLlicensed products
hit $1.2 billion.
Sales of Major
League Baseball-licensed products plummeted to $1.5 billion after
the 1994-95 players strike, but by 1997
the annual total was back to $2 billion and
Without the revenue from licensing
fees, TV contracts, and ticket sales, teams
couldn’t afford to pay superstars as much
as they do. The money just wouldn’t be
And without superstars, pro sports
wouldn’t generate as much excitement—

or as much revenue. The relationship between sports and superstars has benefited
Post-Game Wrap Up
• Superstars appeal to an audience
that extends far beyond their
“home” cities. Michael Jordan
plays for the Chicago Bulls,
but people in every corner
of the globe wear jerseys
that bear his number.
Mark McGwire plays for
the St. Louis Cardinals, and
Sammy Sosa is a Chicago Cub,
but baseball fans from Kansas City
to Korea followed their quest to break the
single-season home run record during the
summer of 1998. Why? What makes that
broad appeal possible?
• Babe Ruth was the original
modern superstar. People sometimes still
refer to Yankee Stadium as “the house that
Ruth built.” What do they mean?

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