Lipstick Theory

Proposed by Leonard Lauder, the chairman of Estée Lauder Companies.

After the terrorist attacks of 2001 deflated the economy, Mr. Lauder noticed that his company was selling more lipstick than usual. He hypothesized that lipstick purchases are a way to gauge the economy. When it’s shaky, he said, sales increase as women boost their mood with inexpensive lipstick purchases instead of $500 slingbacks.

Beauty brands remain true believers in the theory, even though in the last few years the lipstick market has fallen on hard times as its glistening cousin, lip gloss, has had robust sales.

Three sorts of products sell robustly during tough times, said Lou Crandall, the chief economist at Wrightson ICAP, an independent research firm.

The first is what economists call traditional inferior goods, what people have to buy when they can no longer afford their favorites. If you’re a salmon lover eating tuna casserole, you’re chewing on inferior goods.

Lipsticks aren’t inferior goods, economists say, but they could be small indulgences, an inexpensive treat meant to substitute for a bigger-ticket item. Or lipsticks could also be morale boosters, like Charlie Chaplin films were during the Depression. A warm shade that perfectly matches your skin tone might make you forget how far your 401(k) has tanked.

So why don't we use lipstick sales to measure economy? “ABC News samples consumer confidence every week,” Mr. Crandall said. “We don’t have lipstick sales on a weekly basis. This is because they are more granular. The smaller the economic data becomes, the more volatile it tends to be, and the harder it is to extract the underlying signal.”

Bathtub theorem

Bathtub theorem is an analogy that explains the effects of exports and imports on national income.

According to the analogy used in the bathtub theorem, national income level is the water in the bathtub. Exports, government spending, or investments inject extra water in the tub, and thus raise the level, while imports, savings, or taxes cause leakages.