Ask an Economist

E.g., Thursday, February 22, 2018
E.g., Thursday, February 22, 2018
Question:
I am an Amerian citizen and have been considering applying to graduate school in London for a while now, and have finally found multiple programs of interest and have a plan in motion to raise enough money to be a financially stable unemployed student. Due to recent events (Brexit) I am trying to determine if it is financially feasible to continue pursuing obtaining a degree in London. Would school become more affordable for someone like me being an international student there? What about the cost of living? Or is it too early to determine all of this?
Answer:

It’s hard to answer your question since the situation in Britain is in flux. I can only mention a few considerations that may be relevant.

One is the exchange rate.  The British Pound has fallen in response to the Brexit vote. ...

Question:
I have a question about nomenclature related to resources and commodities. Am I right to say that a natural resource is something that is not refined or changed and sold on as a resource. Am I then also right to say that a commodity is a refined natural resource or product?

If possible could you folks better describe the raw product that comes from the ground as sold, vs the raw product that is transformed (in some way) then sold?

I think of wheat as a resource. I think of cereal as a commodity. Is that right?
Answer:

Here is a definition that I found on an OECD website https://stats.oecd.org/glossary/detail.asp?ID=1740. It is as good as any definition I have seen.

The...

Question:
It's said that printing more money causes inflation. What if the Federal Reserve printed a bunch of money and gave to someone secretly? How would that cause inflation? Thank you
Answer:

If the central bank printed some money and "gave to someone secretly" and that person did not spend it, nothing would happen. If they did spend it, it would add to the money already in circulation, which may or may not (if output went up) cause...

Question:
My wife and I live in the US and are trying to plan for a retirement abroad. We wish to retire to my wife's native Brazil, and one of my principal concerns while we save our nest egg is accounting for the relationship between inflation and exchange rates after retirement, which I do not understand well. The BRL has had fairly high inflation since it's inception in the mid 90's, on average around 7% per year. Due to the inflation of the Real, and my familiarity with investing in the US, I am inclined to leave our assets in USD, and transfer funds into BRL as needed for the duration of our retirement. The exchange rate between BRL and USD also seems to vary wildly, from R$1.50 per USD all the way up to just under $R4.00.

So if we're looking into the future and we predict that the BRL will have an inflation rate of 7% per year, and the USD will have inflation of 3% per year, obviously the cost to live in Brazil will grow much faster than in the US. If that's true, over a period of 30-40 years, in theory, should the exchange rate become more favorable to the USD as the value of the BRL is eroded due to inflation? If so, is there a way I can replicate that effect in my retirement planning? Thank you for hearing my question. Please reach out to my email address if any clarification is needed.
Answer:

First, a disclaimer. Whatever is written below is not actual investment advice; it is general economics discussion, a dinner table conversation, no more.

It is certainly a great thing to be planning your retirement to such a...

Question:
Hi, I gross $52,500 a year in Suffolk County Long Island, NY. How does my personal income compare to other income earners on Long Island? Somewhere in the middle or on the low side?
Answer:

None of us here have direct expertise on this issue. You may look at: http://www.longislandindex.org/data_posts/household-income-distribution/ for more...

Question:
A recent Economist article www.economist.com/news/finance-and-economics/21639587-beware-heavily-traded-stocks-drop-pops reports on an academic paper that seems to offer a mechanical rule for beating the stock market by a substantial margin. Is this a disproof of the efficient market hypothesis or is there some trick?
Answer:

Assume that you decide to buy a new cell phone. Are you going to buy iPhone or Xiaomi, some unknown brand? For a typical US consumer, you have about 40% chance to buy iPhone, but almost 0% chance to buy Xiaomi. An iPhone costs you about $600, but...

Question:
I came across a company recently which farms mussels off the coast of a small town in Bulgaria, and I started thinking about its structure in the economy. I know since it produces a homogenous product along with hundreds of other mussel farmers, it must be in perfect competition; however this mussel company also sold locally on top of selling to suppliers. This means it was the only mussel supplier (locally) in the town, and as far as I know that's a monopoly. My question is, what would this company's graphs look like? Would it be more like a perfect competition, or a monopoly? Although it is the only supplier in the town, it sells the mussels at the same price if not cheaper to locals as it does to suppliers, which I know unlike monopolies. Would there be any deadweight loss in a company like this? Is it inefficient or is it more efficient than normal? Consumers can buy mussels from the supermarket, but local supermarkets all get their supply of mussels from this one local company. Please help me understand!
Answer:

The local mussel farm has a cost advantage in supplying in its own town mostly because it saves on transportation costs. Even with that cost advantage, the local firm may not be able to fully exert monopoly power on the local market. It is easy...

Question:
When I attended ISU and graduated with an M.S. in economics in 1967, I was taught that government debt was largely a good thing, as it was (then) mostly money owed to ourselves. It also provided a useful tool for the Fed. to use for controlling the money supply by buying or selling bonds. Has general economic thought changed with the large amount of debt being taken on by government spending, quantitative easing, and a larger percentage of our debt being owned by foreign powers (China, etc.). Do we now believe that our national debt is not such a "good" thing?
Answer:

Your understanding is correct that government debt is “good” in the sense that it serves as a useful tool for conducting both monetary and fiscal policy. By allowing federal, state, and municipal governments to borrow, it lets these entities...

Question:
Hello!

I would humbly like to inquire whether this theory explains the drift apart of labor productivity and worker wage as a result of the progress of mechanization. And also I would like to know if it is new and worthy of exhaustive research.

"Increased productivity does not cause nor correspond with an increase in labor compensation. Wages increase in relation to the need for added and specialized skills and the relative scarcity of available labor possessing these. This carries over to skills needed to deploy and operate capital. If capital needs labor with added and specialized skills for it to operate, it will drive the need for higher paid, more specialized workers. The more autonomous the capital is corresponds with an increasingly inverse or stagnant relationship between real labor compensation and increased productivity. Productivity, in itself, is not a driver of added worth to labor." - Michael Nogle July 4, 2016

I am an avid student of history, and social studies, including economics, in my pursuit to gain my secondary teaching credentials. I also have two master degrees, one in liberal studies. I came up with this as a result of these studies. I believe the logic is sound and cannot think of specific areas where my model does not fit. My training in liberal studies has taught me that it is time to ask specialists for further insight.

I hope to hear from you soon.

Mike Nogle
Answer:

Your proposed theory of wage setting appears to be consistent with the way that most economists would approach this issue.  That is, most economists would accept that an individual’s wage is determined by the “human capital” – i.e., skills,...

Question:
Stock Market Question.

There is something very basic and fundamental about how the stock market works that I have never understood and always wondered about.

I understand that a company issues a certain fixed number of shares so the value of those shares are subject to the law of supply and demand. However, it seems like, at any given moment I, and anyone else, can buy or sell any number of shares at the current stock price. So what is the actual mechanism that determines the change in stock price?

If I look at the stock price of company X and see it is selling for $100 per share I, and anyone else, can decide to buy one share at the market price of $100, or one million shares at the market price of $100. So what actually makes the stock price of company X actually move up to $100.01 per share or down to $99.99 per share? It doesn't seem like the stock price would move up unless all available shares were already purchased, or down unless there were people willing to sell shares for less than the market asking price at any given moment.
Answer:

The answer is that stock prices are indeed determined by supply and demand. If you see no change in price when you trade, it is because the amounts you are trading are relatively small. If you try to buy or sell a particularly large amount at one...

Question:
I've read that the total bank bailout was just under 30 trillion dollars http://ritholtz.com/2011/12/bailout-total-29-616-trillion-dollars/ I don't understand the purpose of the bailout: why did the Federal Reserve give out money to the banks instead of buying up the bad mortgages? I thought that money doesn't trickle down, but instead grows and multiplies from below. Am I misunderstanding the purpose of the bailout?
Answer:

Without questioning the specific numbers cited in the study, I would argue that much of the total does not represent a bailout of banks in a conventional sense. For example, $10T in central bank liquidity swaps refers to agreements between the...

Question:
This is more of a speculative, hypothetical question. I’m working on a novel in which the wealth of the previous generation is distributed randomly into the next generation. The wealth isn’t distributed equally – in other words, there are the same number of wealthy people from one generation to the other, but there’s no predicting who those new people will be. Once the new generation has the money, they can spend it as they like. So I’ve been speculating – how would that economy look different than our own? Wealthy families wouldn’t be able to pass on wealth – instead, a young person in a slum could be the lucky recipient. What kind of economy would that create?
Answer:

Thank you for your question. The economies would look very different. Your hypothetical world seems analogous to one that imposes a 100% estate tax and uses a lottery to transfer any tax collected back to the economy. Naturally, individuals...

Question:
I was wondering if there are any threats that could cause regression or the stop of progression in the arena football league. I know the Arena football league is trying to expand in order to create more revenue but their business models have been poor in the past. Wondering what's your take on the subject and what environmental factors could prohibit this development
Answer:

If I understand your question correctly, you are asking about factors that will determine the success or failure of the Arena Football League.  As with any firm or industry, ‘economic’ success or failure depends on the ability of the firm or...

Question:
If budgets have to be approved by Congress before they get signed by the President, why does the Congress again have to approve an increase in the borrowing limits?

If govt debt is at $10 trillion, and Congress approves a budget with a budget deficit of $1 trillion, isn't it implied that the administration can implement the budget only by borrowing an extra trillion?
Answer:

Just to be clear, “the debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the...

Question:
I read a summary of perfect competition which said that:
1. All market participants have perfect knowledge.
2. Excess profit is only possible in the short run.

If all participants have perfect knowledge, wouldn't all producers instantly know about excess profit opportunities, causing all of them to switch to producing that product at the same time, causing the price to crash and all of them to experience losses? Or, with second-order knowledge, wouldn't they all know that they all knew about the opportunity, and none of them would switch?

Is there a resolution to this perfect market dilemma?
Answer:

"I read a summary of perfect competition which said that: 1. All market participants have perfect knowledge."

An assumption that a market M for a good Q is a "perfectly competitive market" is not a presumption of perfect knowledge...

Question:
What would be the economic impact of eliminating the federal income tax system and replacing it with a national consumption tax such as the FairTax?
Answer:

This policy change would redistribute income from lower to higher income households because the current income tax is progressive while the flat tax would not be as progressive, if at all.

The change would also lead to the double taxation...

Pages