Ask an Economist (Post #1005 and counting)

[WillJ]

Since people buy more, you're willing to supply more.

No, supply and demand are independent. People can go on demanding something all they want, but that doesn't mean diddly squat for someone's supply schedule.

Price is not a determinant of anything.

Yes it is. It's a determinant of the quantity demanded and the quantity supplied.

So you're confusing a shift in supply with a shift in quantity supplied.

No I'm not.

 

[Homie]

As I said previously, new gold supply can't keep up with economic growth (and trade growth). Therefore, to keep up, you'd have to revalue the dollar compared to an ounce of gold frequently.

This would be especially true if the United States continued with huge trade deficits.

I know there are arguments against the gold standard, I was wondering what JErichoHill would come up with though. But yeah, I didn't know that the value of the dollar fluctuated during the gold standard. Do you know this for a fact, could you provide me with a graph of the period or something? I thought the very reason for inflation was that that Governments/Central Banks increased the money supply, how could the dollar fluctuate in value if the money supply was constant?

 

[Homie]

For the reasons alluded to by The Yankee. A gold standard by itself isn't going to fix anything so long as you allow for frauds in the system such as fractional reserve banking. This is the sort of thing that led to Nixon removing us from the gold standard and thus ending the Bretton Woods agreement. If you print more dollars than gold to back it up, you've done nothing essentially different than print fiat dollars like we do today.
Well, obviously, but then you aren't really following the Gold Standard are you? I find it funny that an argument against the Gold Standard is that "if you don't follow the Gold Standard, the Gold Standard won't work".

In either case, inflation becomes a problem. You might be interested to learn more about the proposed Monetary Reform Act. If it could be coupled somehow to backing our money with something of intrinsic value without creating a disastrous contraction of the money supply, then I'd favor backing our money with something of value.

Sounds good to me.

Perhaps there is more gold and silver in the world than I think but it's hard to imagine that we could back every single dollar currently in circulation throughout the world with gold and silver. This is largely why we went off the gold standard.

Is it really? Or is it because governments wanted to pay for things, but didn't have enough money, so they decided to just print some more, but they had to get rid if the standard to do so.

 

[Homie]

Basically, yes. Especially since the US has been growing at 3% per year for the past two decades or so.

Jericho, congratulations on the second Economist thread! And apparently you got married a short while ago. Congratulations there too!

[Question]
Will the Slutsky equation ever be useful after Intermediate Micro? Because I get it, I understand what it does (break up a change in demand into income and substitution effects), but I'm not sure why that's so important. Perhaps a better way to phrase it is, does the Slutsky equation have applications in public finance, development, or international trade?

Or can I safely put it out of my mind after the midterm?
[/Question]
For those not in Intermediate Micro, this is the Slutsky equation.

You're in that class this semester too? I am, and my prof is confusing and boring, like most of the material (or maybe it is just the prof making the material seem so).

 

[LuvToBuild]

Is it really? Or is it because governments wanted to pay for things, but didn't have enough money, so they decided to just print some more, but they had to get rid if the standard to do so.

Well, true, but they had already been doing that before they dropped the standard. They had to end the standard because there wasn't enough gold in the Treasury to meet the demands of those who were redeeming the paper that had already been printed in excess of the gold on hand. Or at least that's the story and reason given.

My argument against the gold standard is based on the premise that it's not practical given the current supply of dollars in the system. You would have to contract the supply in order to bring it back in line with the physical supply of precious metals. There are also other issues that have arisen within our history having to do with the hoarding of gold due to it's value. I don't completely understand all of those arguments but they make sense on the surface.

I thought the very reason for inflation was that that Governments/Central Banks increased the money supply, how could the dollar fluctuate in value if the money supply was constant?

The money supply can't remain constant due to one simple fact of life. We procreate and die. If the money supply remained constant, you would have more and more people competing to grab their share of the same finite amount of money, driving down prices. This is why you need growth in the economy, among other things. That's how jobs are supplied to the increasing workforce. Of course the reverse is true. If you have a decreasing population and the supply remained constant, then the share amongst everyone would increase, driving up prices. Ideally, the money supply increases/decreases with the needs of the economy. Some would argue this is what the Federal Reserve does. I don't buy that argument.

I'm not an economist and tend to look at things simply but it makes sense to me. I'm sure someone with a PhD could "explain" it better,

 

[JerichoHill]

Prices are definately determinents, they are everything. If the market price is higher, more will be supplied.

To JerichoHill:

Why would it be a problem to return to the gold standard? Or some standard, as long as the money is backed by something tangible. It would restore the US currency to the most reliable and trustworthy in the world. Sure, it would tie up some physical resources (gold, if that is the backing), but isn't that a small price to pay? Imagine a world where 1$ is the same today as it will be a 100 years from now.

Inflation happens regardless. Its the easy way to get out of debt, make your currency worthless. Returning to a metals standard or commodoties standard wouldn't stop inflation.

The US currency has inflated because interest rates have now gone down and our economy is not growing as fast as others.

How is gold going to solve that?

 

[JerichoHill]

And even if it's a intuitive, linguistics thing, if you're going to talk about the determinants of supply and demand like an economist, you'd better talk like one. Or learn. You can't be sloppy in economics. =P

I'm gonna have to echo LightFang here. You have to be VERY specific in econo-talk, otherwise you'll say comething you didn't mean. Check out McCloskey and "The Rhetoric of Economists"

 

[JerichoHill]

Basically, yes. Especially since the US has been growing at 3% per year for the past two decades or so.

Jericho, congratulations on the second Economist thread! And apparently you got married a short while ago. Congratulations there too!

[Question]
Will the Slutsky equation ever be useful after Intermediate Micro? Because I get it, I understand what it does (break up a change in demand into income and substitution effects), but I'm not sure why that's so important. Perhaps a better way to phrase it is, does the Slutsky equation have applications in public finance, development, or international trade?

Or can I safely put it out of my mind after the midterm?
[/Question]
For those not in Intermediate Micro, this is the Slutsky equation.

Thanks Integral. Yes folks, I did get married, and she makes more than me! Economists make a comfortable, but no means lavish, living.

As for Slutsky, you probably won't see it in its mathematical form again, but the equation is very useful in discussions about economics and pricing. Especially if you're in the business world. You'd want to know which component of change is the biggest, substitution or income. It might help illuminate your target market demographic

 

[JerichoHill]

No, supply and demand are independent. People can go on demanding something all they want, but that doesn't mean diddly squat for someone's supply schedule.
Yes it is. It's a determinant of the quantity demanded and the quantity supplied.
No I'm not.

Thanks Will. I've deliberately skipped over the whole price/supply/demand thing as several of you have done a good job talking about it

 

[JerichoHill]

I know there are arguments against the gold standard, I was wondering what JErichoHill would come up with though. But yeah, I didn't know that the value of the dollar fluctuated during the gold standard. Do you know this for a fact, could you provide me with a graph of the period or something? I thought the very reason for inflation was that that Governments/Central Banks increased the money supply, how could the dollar fluctuate in value if the money supply was constant?

It fluctuated on the gold standard.
As for why inflation occurs, its really difficult to match perfectly the increase in the money supply to the increase the size of your economy. Any error introduces inflation (or deflation)

 

[JerichoHill]

For the reasons alluded to by The Yankee. A gold standard by itself isn't going to fix anything so long as you allow for frauds in the system such as fractional reserve banking. This is the sort of thing that led to Nixon removing us from the gold standard and thus ending the Bretton Woods agreement. If you print more dollars than gold to back it up, you've done nothing essentially different than print fiat dollars like we do today.
Well, obviously, but then you aren't really following the Gold Standard are you? I find it funny that an argument against the Gold Standard is that "if you don't follow the Gold Standard, the Gold Standard won't work".

Sounds good to me.


Is it really? Or is it because governments wanted to pay for things, but didn't have enough money, so they decided to just print some more, but they had to get rid if the standard to do so.

First we had a dual metals system, because debtors wanted silver because they were mining it (or something similiar) and silved caused inflation. and that undermined the dual metal standard as they kept having to refix the exchange rates.

Even if you fix your currency to a metal, you will have to adjust the rate every so often because there are more factors to the value of a currency other than its backing.

 

[Ansar]

Do you speak any other language than English?

Is it required to be able to speak at least 2 languages? If not, would it help?

 

[JerichoHill]

Do you speak any other language than English?

Is it required to be able to speak at least 2 languages? If not, would it help?

Yes, I do speak more than English. I'm conversant in Spanish (though I am much better at reading and writing).

Because I deal alot with demographic research, knowing Spanish has been very helpful for my career (and for doing my job). I'd surmise that most economist positions don't put that much emphasis on a second language

 

[LightFang]

No, supply and demand are independent. People can go on demanding something all they want, but that doesn't mean diddly squat for someone's supply schedule.
Yes it is. It's a determinant of the quantity demanded and the quantity supplied.
No I'm not.

Oh, we were talking about different things then. I think I was talking about demand and you were talking about supply.

No worries!

 

[Marla_Singer]

Supply and demand are linked by the elasticity of the prices.

Okay, to talk proper English, as you all know the price of a specific good or service is determined by the level of demand and supply. Now this being said, in some markets, demand is more sensitive to the prices than in other markets.

Let's take an example. As we can all notice, gas is very expensive, but despite this, it has only marginally discouraged people to fill their car tanks. The reason is very simple, people are dependent on their car and their car needs gas. As a result, even if it costs them a lot, the raise in gas prices has lead them to spend less on other purchases, because they still need to drive.

On the other side, something like chocolate is strongly dependent on prices. If chocolate is very expensive, people will buy less chocolate, liking better to eat other cheaper candies. Same is true for plane tickets. If flying wouldn't be cheaper when demand is low, no one would take the plane then. And if flying directly is more expensive than flying through a hub, than people will take the hub option.

All this to say that yes, supply can have an influence on demand, but this is true essentially in markets where the price elasticity of demand is high.

 

[Ansar]

How come the British pound is stronger than the dollar and how can we fix that?

 

[Fugitive Sisyphus]

How come the British pound is stronger than the dollar and how can we fix that?

I'm not an economist by I know it is always easier to sabotage the other guy than try to improve yourself.

 

[Abaddon]

Considering the dollar is so weak against the pound.. could i make money by buying loads of it now (£1000 ?) and then converting it back some other time?

 

[Godwynn]

Considering the dollar is so weak against the pound.. could i make money by buying loads of it now (£1000 ?) and then converting it back some other time?

Then at depends on if the dollar keeps falling or if it reverses its current trend.

Are you banking on a rise or fall in prime rates in the future?

You best bet would be to invest in an index fund and leave it there until retirement. I don't even think about commodities, futures, forex, or bonds for that matter.

 

[Abaddon]

well i'll poll it...