Ask an Economist #3

[Atticus]

Thanks Mise!
I couldn't yet read them as I'm hungry and yearning for coffee, but I'll look at them soon.

Monthly = S * r/d * 1/(1-(1/(1+r)^T))

Total = S * r * T * 1/(1-(1/(1+r)^T))

Is this one of those formulas that programmers always rant about: hard to see where it comes from and therefore hard to update and support?

 

[Mise]

Thanks Mise!
I couldn't yet read them as I'm hungry and yearning for coffee, but I'll look at them soon.



Is this one of those formulas that programmers always rant about: hard to see where it comes from and therefore hard to update and support?

I think the guy who derived that formula is long since dead; the derivation, however, was too big to fit in the margin of his notebook. Perhaps one day, we'll figure it out......

 

[pau17]

It seems that you're talking about government debt. Assume a closed national economy (or a "world government") where all debt is internal. What you're saying is that debt is necessary in order to do good things everyone will benefit from. Well, that's the modern rationale for taxation. As debt cannot create new resources, only change the way existing resources are allocated, when you're saying that debt is good you're actually saying that the economic rules of your society distribute resources in a wrong way to start with, making reallocation by debt necessary. Since debt must be repaid, and it usually includes interest, the end result will be a return to the original wrong allocation of resources as debt is repaid.

Sure, the process is dynamic, so things are not this simple. But it should make people question the standard defense of debt as a good thing. Can it be, also, a sign that something is wrong to start with?

I suppose this is some deductive proof trying to uncover some "internal contradiction" in capitalism by showing that debt = "wrong" allocation and paving the way for some explanation of some alternate economic system?

What I said was simply that debt allows flexibility in shouldering burdens across generations. Of course things are distributed "incorrectly", since future people aren't around right now to help pay for stuff they will benefit from. We have to borrow and send them a bill.

Venture capital is another example. Borrowing money to develop something that you think will give a return. And this return could be all sorts of beneficial things for society, not just individual profit, so don't criticize the mechanisms by particular uses of it. (No, the current financial crisis does not mean that debt and capitalism are bad, it means that people who didn't know what they were doing took out debt they shouldn't have been allowed to take out.)

And besides, I think you are misusing the word "wrong." The main point is that the current allocation only becomes "wrong" when these burdens come up in the first place--war breaks out, new technology, new resources available, changing climate conditions, etc. So the fact that the system can adjust and use debt to change is more of a "right" than a "wrong," the latter being a non sequitur.

So tell me how communism would allocate resources better and allow the flexibility to deal with unplanned and necessary changes that capitalism and debt allow?

Remember that if you are going to argue in terms of an unmaterialized ideal (you aren't a Soviet Marxist, are you? That failed...), then you need to argue against the ideal of a better capitalism. Don't compare real-world imperfections with an abstraction and pronounce the latter to be better than the former; it's not a fair contest and is disingenuous.

 

[pau17]

I used to be considering an economics major but at this point I've largely abondanded it. I'm scared off my the math required since I'm fairly miserable at math. Hate it too. Is there much math in economics at the undergraduate level? And does economics really have any value at the undergrad level? Don't you at least need a masters or PhD to make it worthwhile in terms of career options?

I'm ditching it in favor of political science, I'm not sure that's the best choice either but meh, no math at least.

You don't need math to get the degree in many cases, but many people think this is wrong. My intermediate micro textbook by Varian separated the calculus from the non-calculus proofs and explanations, but the author wrote that he thought that econ students should really be doing the calculus.

The following is also enlightening:

http://gregmankiw.blogspot.com/2006/09/why-aspiring-economists-need-math.html

http://gregmankiw.blogspot.com/2006/05/which-math-courses.html

I don't know how much you have tried to get into math, but if you haven't pushed yourself and you do have some ability but just don't "like" math, you are doing yourself a disservice by letting that be an obstacle to what you really want to do. I also disliked math, until I realized how useful it was and how it related to my goals and interests. It's amazing how that can change your perspective and make you like math a lot more, and suddenly get "better" at it.

 

[really]

Which country could coca-cola be produced in? Brazil? India? Germany?

One of Ireland's biggest exports (in €/£ value) for many years was Coca-cola syrup.

 

[Cutlass]

One of Ireland's biggest exports (in €/£ value) for many years was Coca-cola syrup.

Soft drinks are high weight per value. As such, shipping them long distances is not cost effective. The result is that the business model calls for the syrup to be produced regionally and the finished product to be produced close to locally.

 

[really]

Soft drinks are high weight per value. As such, shipping them long distances is not cost effective. The result is that the business model calls for the syrup to be produced regionally and the finished product to be produced close to locally.

Yes, and then throw in a 10% tax rate on goods manufactured for export (pre mid-90s) and that is why the coca-cola company made it's biggest ever single investment at that time in a small town in the west of Ireland.

That or the CEO liked salmon fishing.

 

[BasketCase]

I used to be considering an economics major but at this point I've largely abondanded it.

Good call. Here's a reason you probably didn't consider: economics is DEPRESSING. There's a reason they call it "the dismal science".

 

[JerichoHill]

Hey I'm not depressed!!!

You need to know math to do anything above basic economic study

 

[SS-18 ICBM]

I've been reading this book, A Concise Economic History of the World by Rondo Cameron, and it has been informative. However, it ends in the mid-1980s. What else of the world's economic history am I missing aside from:
-the fall of communism and the end of the Cold War
-the expansion of the US economy in the 1990s
-the rise of Brazil, Russia, India, China, and many other developing nations
-the creation of the European Union and the introduction of the Euro

 

[WillJ]

Hey I'm not depressed!!!

You need to know math to do anything above basic economic study

You got an answer to my question on post #118? I'm dying to know for my research paper! (No pressure... )

I've been reading this book, A Concise Economic History of the World by Rondo Cameron, and it has been informative. However, it ends in the mid-1980s. What else of the world's economic history am I missing aside from:
-the fall of communism and the end of the Cold War
-the expansion of the US economy in the 1990s
-the rise of Brazil, Russia, India, China, and many other developing nations
-the creation of the European Union and the introduction of the Euro

That's enough to be missing, isn't it?

But one extra thing you're missing is the rise of Ireland (the "Celtic Tiger").

 

[Homie]

Thanks Mise and Stormbringer, your explanation of why the dollar has appreciated makes a lot of sense. I think you guys are essentially saying the same thing, only Mise's explanation was more thorough.
JH, your explanation doesn't make much sense: It got expensive because it got cheap?

 

[Mise]

I think the guy who derived that formula is long since dead; the derivation, however, was too big to fit in the margin of his notebook. Perhaps one day, we'll figure it out......

I derived it

EDIT: the definition of Xn is wrong -- it should read "Xn = amount outstanding after n months"! Also, I should have said "periods" instead of "months", for it to be a bit more generalised.......

 

[Yizume]

Sorry if this has been asked before and is too simple: Suppose you have loaned amount S of money and the annual interest is p% and it accumulates (is it compund interest?). How is the interest calculated if you pay the loan say after 102 days?

Mathematically the whole sum should of course be S (1+p/100)^(102/365), but I have suspicion that it doesn't work that way in real world. (And also that the practice varies in different countries, but I'd like to know at least one way it is done).

It all depends on how the interest rate p is defined, in particular how often it compounds, ie when the interest itself starts being charged interest.

The formula you stated would be the case if it is the force of interest, bascially it compounds instantly. Though it may be divided by 365.25

It is not uncommon to see rates of interest that compound daily, monthly or annually.

For example if it compounded annually the formula should be S(1+p%*(102/356).

For monthly compounding it gets more complicated as it may depend on how many days in the relevant months.

When you add in repayments it gets even more complicated.

 

[JerichoHill]

Here’s a quote from Card and Krueger's famous 1994 paper:

An alternative to the conventional competitive model is one in which firms are price-takers in the product market but have some degree of market power in the labor market. If fast-food stores face an upward- sloping labor-supply schedule, a rise in the minimum wage can potentially increase employment at affected firms and in the industry as a whole.

[emphasis mine] Do they actually need to specify the bolded part? Unless I’m mistaken, if firms have monopsony power in the labor market, regardless of the structure of the product market (whether it’s a monopoly, or monopsony, or whatever), less than the economically efficient quantity of labor will be purchased, at a lower wage, and it’ll be possible to have a minimum wage above this wage that will cause a greater level of employment (unless, of course, the minimum wage is set above the marginal productivity of the quantity of labor originally bought).

Am I right or wrong? Does it actually depend on the structure of the product market somehow?

Yes, you're right, but its a much simpler analysis to just hold the product market at some fixed point so that there are no cross effects coming from it. That's the reason why the condition is there.

 

[JerichoHill]

Thanks Mise and Stormbringer, your explanation of why the dollar has appreciated makes a lot of sense. I think you guys are essentially saying the same thing, only Mise's explanation was more thorough.
JH, your explanation doesn't make much sense: It got expensive because it got cheap?

No, that's not what I meant if that's how you took it. Just like many folks are jumping into the stock market right now because "its so cheap", I think some folks went into the currency market and bought US dollars because "its so cheap" Unless its a weird good, increased demand will raise the price.

Read "cheap" as "below its actual real value"

 

[WillJ]

Yes, you're right, but its a much simpler analysis to just hold the product market at some fixed point so that there are no cross effects coming from it. That's the reason why the condition is there.

Yeah, makes sense. Thanks.

 

[Homie]

No, that's not what I meant if that's how you took it. Just like many folks are jumping into the stock market right now because "its so cheap", I think some folks went into the currency market and bought US dollars because "its so cheap" Unless its a weird good, increased demand will raise the price.

Read "cheap" as "below its actual real value"

That's still saying it got expensive because it got cheap. People must have been selling dollars for a reason, driving the price down, gradually over a couple of years. Then you'd have me believe that people suddenly realized that the dollar was actually cheap, and bought lots of it, driving the price up? This is not even economically sound. If you were to draw this graphically, you'd have a demand curve shifting left causing the price to go down. Now that the price is low, that is not going to shift the demand curve to the right again, that makes no sense. The price of one good can influence the demand curve of another, but not of itself, because the price is a result of the good's demand and supply curves.

I think the explanation relating to the financial crisis makes more sense.

 

[Whomp]

That's still saying it got expensive because it got cheap. People must have been selling dollars for a reason, driving the price down, gradually over a couple of years. Then you'd have me believe that people suddenly realized that the dollar was actually cheap, and bought lots of it, driving the price up? This is not even economically sound. If you were to draw this graphically, you'd have a demand curve shifting left causing the price to go down. Now that the price is low, that is not going to shift the demand curve to the right again, that makes no sense. The price of one good can influence the demand curve of another, but not of itself, because the price is a result of the good's demand and supply curves.

I think the explanation relating to the financial crisis makes more sense.

It relates to risk, economic diversity and investor returns.
Many emerging market economies are not quite as diverse as some of the most developed markets, specifically the US, nor do they have the capability to address many of their issues as foreign banks go home. As quickly as investors put money in those markets over the last 7 years is just as quickly as they've come out over the last 7 months.

Loans in Eastern and Central European markets account for $1.6 trillion, Asia $1.5 trillion and Latin America $1 trillion. Most of these debts are held by European banks (~ 45%) with about 9% between Japanese and US banks. IIRC 90% of Hungarian mortgages are denominated in Swiss francs not forints.

Tack on the rising risk in sovereign debt. No surprise that Spain and Portugal are not ,and never have been, as safe as Germany bunds though the last 8 years would tell you something different. Spreads are widening on all higher risk credits and CDS' are rising fast on these debts. Russian sovereign debt CDS' are trading at 1000 bps and Ukraine around 2800bps.

The move in US treasuries has been a one way street straight up. Investors were getting paid less than 0.03% for a 30 day t-bill recently and 10 year note is paying a mere 2.95%. Add to that, the US and Japanese stock markets have been #1 and #2 this year in performance.

I think Keynes called it the "paradox of thrift" and everyone is hoarding cash in the "perceived" safest forms. Repatriate to dollars and yen.

 

[Ansar]

Hey Jericho,

Why do you think until now the govt. didn't say anything about us being in a recession?

Also, why does it not seem like a recession? Things seem fine... Or do I just live a spoiled life? >.<