Ask an Economist (Post #1005 and counting)

[lovett]

Lovett,

The released figures are for Real GDP growth, which is supposed to be adjusted for inflation.

Ah I see.
Thanks.

 

[innonimatu]

Supply and Demand determine price, basic economic theory. There is no backwards causality. Price is completely dependent on supply and demand in traditional economic models. This point isn't up for debate.

You are aware that a model is just that, an attempt at representing something? Not reality itself. And basic economic models have a long history of ignoring reality altogether.

Supply, demand, and price are indeed related. Changes in any one of these will affect the others, in real life there's no one-way causality here, the pretty supply vs. demand curves be damned. You might as well argue what came first, the egg or the chicken. Neither would be true.

 

[Homie]

You are aware that a model is just that, an attempt at representing something? Not reality itself. And basic economic models have a long history of ignoring reality altogether.

Supply, demand, and price are indeed related. Changes in any one of these will affect the others, in real life there's no one-way causality here, the pretty supply vs. demand curves be damned. You might as well argue what came first, the egg or the chicken. Neither would be true.

I think there is a simple misunderstanding here, that I think should be addressed. There is a difference between supply & demand and quantity supplied and quantity demanded. Supply and demand together determine price in a free market, not the other way around. But price determines quantity supplied and demanded, e.g. imagine the state of New York sets a max price for renting apartments (a price ceiling) which is below the market-determined price. This would result in less apartments (quantity) supplied and more apartments (quantity) demanded. So in this scenario price has determined quantity supplied and demanded, even though the supply and demand (curves) themselves have not changed.

 

[JerichoHill]

Thanks Homie. You wrote the response I would've made.

 

[scy12]

@@scy12;6769853]
That is what i said : If you consider that to be wrong you should address that statement. The problem is because one thing causes the other it doesn't mean we can't make a backwards relation.
Causality is directional. Especially so in this case. Supply and Demand determine price, basic economic theory. There is no backwards causality. Price is completely dependent on supply and demand in traditional economic models. This point isn't up for debate.


If the prices are now at an A level while before they where at a different one what does that say to you about supply and demand ?
That Supply, demand, or both changed.




I will but i must say that i prefer the exchange of an ideas in a forum where different ideas are introduced ,discussed can be put into a test since there is a more direct relation into the one who is receiving ideas and the object from which he receives the ideas.
That's all well and good when we delve into opinions, but you're asking a question that relates to a widely held tenet of economics. That's a simple answer.

The housing bubble blog was meant to read and learn the story. The short version of the story is:


1) Cheap borrowing costs (interest rates, loan products) drive up demand (people feel like they can afford more). Prices rise.

2) Builders respond to the price rise by building more. Supply increases.

3) This fuels the notion of a boom in housing. Cheap borrowing fuels more demand. Prices rise.

....

Then something happens to break the Ponzi scheme as price race up to a high artificial level. Borrowing costs rise. Something. Then its all over.

There is a wiki entry on this.
http://en.wikipedia.org/wiki/United_States_housing_bubble

Homie

Quote:
Originally Posted by innonimatu View Post
You are aware that a model is just that, an attempt at representing something? Not reality itself. And basic economic models have a long history of ignoring reality altogether.

Supply, demand, and price are indeed related. Changes in any one of these will affect the others, in real life there's no one-way causality here, the pretty supply vs. demand curves be damned. You might as well argue what came first, the egg or the chicken. Neither would be true.

I think there is a simple misunderstanding here, that I think should be addressed. There is a difference between supply & demand and quantity supplied and quantity demanded. Supply and demand together determine price in a free market, not the other way around. But price determines quantity supplied and demanded, e.g. imagine the state of New York sets a max price for renting apartments (a price ceiling) which is below the market-determined price. This would result in less apartments (quantity) supplied and more apartments (quantity) demanded. So in this scenario price has determined quantity supplied and demanded, even though the supply and demand (curves) themselves have not changed.

Thanks to both of you that was very informative.

@Jerichochill The backwards relation that i claimed here

If you consider that to be wrong you should address that statement. The problem is because one thing causes the other it doesn't mean we can't make a backwards relation.

And here

If the prices are now at an A level while before they where at a different one what does that say to you about supply and demand ?

where you said

That Supply, demand, or both changed.

is explained by Humme. So i would say that total negativity in the regards of prices not being able to allow us to make any conclusions by examining the price to be wrong . But the notion that only supply and demand influence price to be as right as the market we are talking about is a free market. It seems all agree.

 

[Godwynn]

What effect does homogeneity play in Economics? Why does having almost a uniform nationality improve the economy?

Question originates from here.

 

[innonimatu]

I think there is a simple misunderstanding here, that I think should be addressed. There is a difference between supply & demand and quantity supplied and quantity demanded. Supply and demand together determine price in a free market, not the other way around. But price determines quantity supplied and demanded, e.g. imagine the state of New York sets a max price for renting apartments (a price ceiling) which is below the market-determined price. This would result in less apartments (quantity) supplied and more apartments (quantity) demanded. So in this scenario price has determined quantity supplied and demanded, even though the supply and demand (curves) themselves have not changed.

I understand your point, and superficially it seems logical. However there is one problem with this model, and housing is one market subset where that problem becomes relevant: supply and demand curves are not static. Housing expenses have a significant effect on each individual's spending pattern. Changes in price here will cause individuals to alter their preferences/choices on how to spend their money, therefore moving the demand curve itself (this curve is an artificial construct based on indifference curves, which in reality can be expected to change over time as a result of price fluctuations). The sum of all individual curves will also change. The problem of creating an aggregate demand curve will then become even more intractable that it already is under the static preferences assumption, and that's why even the the basic model used to address supply and demand in microeconomics includes that assumption. It's the old tendency to simplify assuming that "all other things remain the same", as mentioned in post #645.

 

[innonimatu]

What effect does homogeneity play in Economics? Why does having almost a uniform nationality improve the economy?

Question originates from here.

I just wanted to mention that the author of the article strikes me as either naive or a propagandist (but then with what intentions, exactly?). Now Denmark's economic prosperity is attributed to "Danishness", "Denmark's size and homogeneity". But in the same text he mentions that 15 years ago the same "danish Denmark" (it didn't shrunk or became any more homogeneous in the meanwhile) was going through a crisis...

Boom and bust, the eternal cycle. Sweden also has its own bust in the early 90s, Ireland has had a long boom over that decade... I'm skeptical about any attempt to attribute these variations to some set of national characteristic. They're products of both domestic policies and international political/economic conditions, over specific time periods. And what works at one time in one place may not work somewhere else.

 

[JerichoHill]

I understand your point, and superficially it seems logical. However there is one problem with this model, and housing is one market subset where that problem becomes relevant: supply and demand curves are not static. Housing expenses have a significant effect on each individual's spending pattern. Changes in price here will cause individuals to alter their preferences/choices on how to spend their money, therefore moving the demand curve itself (this curve is an artificial construct based on indifference curves, which in reality can be expected to change over time as a result of price fluctuations). The sum of all individual curves will also change. The problem of creating an aggregate demand curve will then become even more intractable that it already is under the static preferences assumption, and that's why even the the basic model used to address supply and demand in microeconomics includes that assumption. It's the old tendency to simplify assuming that "all other things remain the same", as mentioned in post #645.

Yes, ceteris paribus is quite violated in that regard. Thankfully, with the field of experimental economics, we now have models that develop in , well, economic real-time.

 

[Fifty]

Do economists believe that Coase's theorem is true?

 

[JerichoHill]

No, many criticize it for not including X or Y. His assumption on transactions costs is particularly disputed. However, the basic feeling is that his idea was unique and insightful, but that the real world operates differently than his assumptions allow

Kind of the difference between a laboratory experiment and one outside of a lab

 

[JerichoHill]

http://www.breitbart.com/article.php?id=080501131837.zi29ul7a&show_article=1

The Bank of England said Thursday that commercial banks had overestimated their exposure to the collapsed US subprime home loan sector and the subsequent global squeeze on credit.

The bank did not quantify the overestimation, which it said could be a factor in a loss of confidence that has afflicted certain financial institutions.

A large number of global banks have declared heavy losses from US mortgage-backed securities, which were effectively bets placed on high-risk American borrowers repaying their mortgages.

The credit crunch erupted last August, as many subprime US borrowers failed to keep up with their home loan repayments, forcing major commercial banks to tighten up their lending criteria.

"Estimates of the ultimate losses to the financial system and real economy implied by current market prices are a significant overestimate," the Bank of England (BoE) said in a half-yearly report on financial stability.

"Overpessimism about these losses may itself be denting confidence and may be delaying the return of investor risk appetite and the recovery of asset prices."

Furthermore, the BoE said that commercial banks were becoming too cautious in their lending criteria.

"The pricing of risk in credit markets seems to have swung from being unsustainably low last summer to being temporarily too high relative to fundamentals," said John Gieve, BoE deputy governor for financial stability.

 

[Verbose]

What effect does homogeneity play in Economics? Why does having almost a uniform nationality improve the economy?

Question originates from here.

My guess would be highler levels of intrinsic trust between actors and less friction between them, a sense of "WE are all in the same boat" kind of thing, with less time spent negotiating and working out expectations of others.

 

[Mise]

The Bank of England said Thursday that commercial banks had overestimated their exposure to the collapsed US subprime home loan sector and the subsequent global squeeze on credit.

The bank did not quantify the overestimation, which it said could be a factor in a loss of confidence that has afflicted certain financial institutions.

From what I've read, the Bank of England estimated losses to be ~$200bn, whereas the price of the affected assets themselves suggest losses of ~$400bn. So while the bank didn't quantify the overestimation explicitly (for obvious reasons), you can kinda guess how much they had in mind...

BBC's Robert Peston's blog is quite good: http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/05/worst_over_or_not.html

 

[Brighteye]

I went to a talk yesterday about the perils and limitations of microfinance (a friend of mine, not an interest of mine). Is it really as popular as he suggested, or have most people moved on to regard it as a useful niche in promoting development, as he said they should?

How much oversight do donor organisations really do over their NGOs?

 

[pau17]

Jericho, your blog post on the gas tax holiday states that Clinton's profit tax on the oil companies would be passed on to the consumer in some part. Krugman says that it would be "in one pocket, out the other" and thus pointless. What's the difference? Or are you just saying that the price will come up anyway after the tax is repealed?

 

[Whomp]

Exxon Mobil will make tall cabbage whether it's in high price or low price environment. That has nothing to do with it. Until a candidate is willing to step up and say we need to dramatically change energy policy we'll get the b.s. that Clinton, Obama and McCain spew...

A gas holiday is a joke and doesn't address the ultimate issue. Consumer political marketing is all she's proposing.

 

[pau17]

Exxon Mobil will make tall cabbage whether it's in high price or low price environment. That has nothing to do with it. Until a candidate is willing to step up and say we need to dramatically change energy policy we'll get the b.s. that Clinton, Obama and McCain spew...

A gas holiday is a joke and doesn't address the ultimate issue. Consumer political marketing is all she's proposing.

I agree. I was wondering more specifically, though, on why he thinks the tax on windfall oil profits will be passed on to consumers to some degree, as opposed to Krugman saying that it won't affect anything and be pointless. Or whether he's simply to referring to the fact that the price will adjust and the companies will get the benefit of the tax holiday anyway.

 

[FriendlyFire]

Is this true ?

Not just the unemployment numbers but the inflation numbers, which EXCLUDE food, energy and health care.

 

[Godwynn]

Is this true ?

If it is core-CPI it excludes energy and food, I am not sure about health care.