Ask an Economist

Welcome to Ask an Economist, a public service of the Department of Economics at Iowa State University, designed to answer your economic questions.

Our talented faculty and alumni can answer questions on a variety of economic topics to help you make more informed choices about your day-to-day decisions--or to just add a more reasoned voice when talk of the economy comes up around the dinner table.

If we answer your question, we'll post it along with the answer here. (Questions may be edited or adapted from their original form.)

Note: We do not do homework, give financial advice, or provide research support.

Ask an Economist

Question:
A commodity (let's say a vegetable like squash or tomato) that is grown in Mexico and transported to the US and is being sold at 1.29/lb.
After about a month when the commodity has less than 2 weeks of shelf life it may be sold at .69/lb and then discarded after another week.

1) Why would the store not further discount these items at let's say .30/lb to clear the complete stock? ( I understand it is so as not to let the global/US prices of the commodity go down.)
2) Is wasting better for the store than to sell it at a discount?
3) Even if customers stop buying fresh commodity and start to wait until the price goes down to .30/lb. Isn't it economically profitable to the store to actually sell it than waste it ?

Thanks
Answer:

Food waste arises from preferences, incentives, and constraints. Retailers have time and other resource constraints which implies that it simply will not be worth it to sell every last item of food in every instance. It can be said that there is...

Question:
With the Trump administration intent on fiscal spending, there is opinion from bank economists that this shall cause weakness in the USD. If we assume the spending will be serviced by domestic bonds, is this really a credible argument in today's climate and why? Thanks
Answer:

An increase in government spending will increase the domestic interest rate. A lot depends on how analysts perceive future price levels and inflation. If the government spending is not expected to cause future inflation, an increase in interest...

Question:
If 25% of the US population left their 401k (and other retirement funds) alone, reduced contributions by 25%(50%, 75%, 100%), withdrew all non-penalized funds and kept personal savings out of their banks, did not otherwise invest their money, what would happen nationally, internationally, immediately, long-term?
Answer:

My best guess is that you are interested in the effects of investors withdrawing from the financial market (as opposed to the labor market or some other market).

If 25% of the US population suddenly changed their investment behavior as you...

Question:
One of the macro economic indicator that is monitored by organizations is "the contribution of construction to the GDP". This is measured in terms of percentage contribution of construction.

My question is:
What does this comprise? Does it include large infrastructure projects/oil refineries/nuclear plats etc or not?
Answer:

As you probably have seen already, you can find the measure of value added to GDP per sector of the US economy at the Bureau of Economic Analysis website, specifically at this web address: https...

Question:
In news and other articles it often is stated "the cost of something could reach billions" or some such statement. Do these statements mean anything?
Answer:

It means that once the dust has settled, insurance companies have paid out, homes have been rebuilt, infrastructure redone, people have moved out, businesses rebuilt, and so on, the total cost of all that would reach billions. These "billions"...

Question:
I'm writing a story about the impacts of incrementally raising the minimum wage each year, until it reaches $13/hour. Washington just passed the law and it goes into effect Jan. 1.

In my research I was surprised not to discover that not a single economic impact study had been done. Sure the state Office of Financial Management did theirs, and the restaurant/lodging lobbies did theirs. But there is no INDEPENDENT THIRD PARTY study out there ... that I could find.

The question is: Is that a kind of breach of sound fiscal management? Meaning, Washington citizens are sitting back and saying, "Well, let's just vote for it and see what happens?"
Answer:

Alas, your concern about lack of sound fiscal management is not only justified in this case but is justified far more broadly. Many policy changes are initiated without third party studies to back them up. One assumes the government agencies do a...

Question:
I work for the federal government as an auditor of costs proposed/incurred by government contractors, for goods and services for which there is no competitive market, and cannot be priced by the normal forces of supply and demand. We are supposed to help make sure the costs for the goods and services received are not unreasonable, or for purposes not allowed by the contract. My question is: What impact, if any, would it have on the economy if there weren't people in my position, and contractors could more easily charge the government unreasonable and unallowable costs for the goods and services provided?
Answer:

I am not sure I agree with the premise that the government buys a lot of goods and services which are otherwise not traded in a competitive market. (I suppose military expenses come under that description, to some extent.). If we assume that...

Question:
Although I studied economics at an undergraduate level and have spent almost a decade working for financial advisers, I've never understood the idea of target inflation ranges or why some countries are described as 'struggling with low inflation'. Is inflation a measure of the rising cost of living? Or is it a measure of the declining value of money? Perhaps it's both i.e. some sort of inverse relationship? Why do economies target an inflation range? I can't understand why we would want the cost of living to rise or want the value of our money to fall. If a country has low inflation, does that mean the cost of living is increasing at a low rate? And wouldn't that be a good thing for the population? Taking that a step further, wouldn't it be even better if the cost of living was declining over time (I believe that's called deflation)? Why is deflation a bad thing? Thanks in advance!
Answer:

If prices are not rising at all over time or even falling, it would act as an disincentive for firms to produce goods for the market. For durables, if people expect prices to fall, they will wait. Since most financial contracts are denominated in...

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:
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:
What would be the possible outcome if the President were to initiate a program that would buy up all bad credit for those with credit scores below, say 670. All those who participate would agree to an auto draft of $20 per month or something until they reach 65 to pay back the debt owed the govt via creditors. Would this not help to stimulate the economy with individuals now having more credit power? Most people who get a second chance in the credit score will more than likely take care of it. You said ask right?
Answer:

This is a very intriguing proposal that deserves to be researched. It can have a stimulative effect for sure, at least in the short run. Once the government has paid off the bad debt, presumably banks will start lending again and that help...

Question:
What are the fringe benefits of being an economist?
Answer:

Taken literally, fringe benefits are extra, non-monetary compensation, such as health insurance, etc. provided you by your employer.  I suspect, however, that the person who submitted this question is not interested in the package of...

Question:
From 1934 to 2015 the mean difference between the national debt and commercial bank assets has been as follows: National Debt = 0.94 x Commercial Bank Assets. There is a simplistic narrative of the national debt that goes as follows. The government spends into the economy and then removes some of the spent money and then spends more, etc and the amount the government does not take from the economy is equal to the debt. This simplistic narrative does not include the complexities of a central bank, an endogenous money supply system, etc. Is it possible that the narrative is true but the system enables commercial banks to "capture" the money as their assets?
Answer:

A fundamental principle of accounting is that the liabilities of one party are the assets of another. National debt is simply the amount owed by the federal government – that is, its liabilities. Some other party must hold these as assets, but it...

Question:
I work for a local government in Kansas and recently discovered FDIC deposit data by county, zip code, institution. I was wondering what an increase or decrease in deposits might indicate about a community? I couldn't find discussion on-line regarding how to interpret this FDIC data. Thanks for you help. -Mike
Answer:

Information on changes in deposits at commercial banks can be useful in gaining a better understanding of a local economy. However, determining whether an increase in deposits is positive, negative, or neutral can be difficult if the reason for...

Question:
What are the best reasons one should buy a new car instead of a used one with low mileage and an in tact warranty. I ask, because my wife wants to purchase a new car, while I would prefer to purchase a slightly used car at a lower price. (letting someone else take the depreciation hit)
Answer:

There are many things to consider in making the choice between purchasing a new or used car, including a comparison of sticker prices.  As you suggest, new car values depreciate significantly in the first few months of ownership, often...

Question:
Please disregard the implausibility of this question, I am curious on a purely hypothetical level. What would happen if all of the illegal immigrants and legal Muslim refugees were both deported and/or kicked out at approximately the same time. (As Donald Trump has sometimes suggested we should do) I would imagine that there would be significant negative impacts to the economy and specifically the housing market. But, I'm wondering how catastrophic those would be and if there would be any... Less obvious results?

Answer:

A 2012 United States Department of Agriculture Economic Research Service study used a simulation analysis to estimate the impact a 5.8-million-person reduction in the number of unauthorized workers—agricultural and nonagricultural. This was...

Question:
Do GDP figures include depreciation of infrastructure? What about other forms of depreciation, eg. consumption of non-renewable resources, or consumption of renewable resources at a greater than the sustainable rate?
Answer:

There is a large literature that attempts to adjust the various conventional measures of economic growth for the effects of environmental degradation. There is a useful Wikipedia page on the topic (...

Question:
I know that when there is too much of something the value of that item goes down. If the money supply of US Dollars goes up drastically that will that lead to or cause inflation of the US dollar or a decrease in its value. According to an article I am referencing *," When inflation starts to bubble up, Treasury inflation-protected securities can turn down the heat on your portfolio. Issued with the full faith and credit of the U.S. government, TIPS are one of the few investments guaranteed to earn, under normal circumstances, a "real," or after-inflation, return. Their principal value adjusts in sync with the consumer price index and, because the coupon payments on TIPS cue off this adjusted principal figure, the bonds pay an inflation-indexed income, too."
So my question is: if the US dollar loses 10 % of its value to inflation, how much will the bonds return? In dollar amounts- a $5000 investment in Treasury inflation-protected securities should yield how much?
* http://m.kiplinger.com/article/investing/T041-C000-S002-why-you-need-tips.html
Answer:

Suppose that $5000 is the face value or redemption value (not the market price at which an investor may have bought it) of a 5-year TIPs. Suppose that it promises to pay an annual coupon payment of 1% or the amount of $50 at the time of purchase...

Question:
Has the advent of the 401K retirement plan impacted the stock market? It seems to me that the massive flow of cash that must be invested immediately would drive up prices. I understand that prior to 401Ks, retirement plans tended to invest in the host company's stock rather than the general market.
Answer:

In principle, if most companies offering retirement plans switched to 401(k)'s simultaneously and no new stocks were issued (i.e., no change on the supply side of the stock market), I would expect a substantial increase in the stock prices, as...

Question:
There has been a lot of talk about how millennial college graduates have had difficulty finding work. As a millennial I find this topic very interesting. I have heard explanations such as the lack of job growth in the 21st century, or the fact that most kids do not graduate college with practical skills. Although the second reason makes sense, statistically college graduates used to have a much easier time finding jobs. That being said, what kind of jobs did people with liberal arts degrees get 20 years ago?
Answer:

In a recent study of U.S. Census data on individual earnings for those with a wide range of degrees for 2010-2011, liberal arts majors who have completed a baccalaureate degree (only) have the lowest median salaries early after graduation ($22,...

Question:
My name is Bob Galask and I grew up in Iowa (Fort Dodge). I've been in the diamond business in Los Angeles for over 35 years. Much of that time has been spent in Asia, particularly Thailand where I still have a diamond cutting factory. I've developed extensive connections in Thailand, Burma, India, Taiwan and Indonesia as well as a strong familiarity with most Asian countries and customs.

My question is, are there opportunities to purchase, process and export Iowa agricultural products? Pigs ears, gluten, chicken feet, ginseng, farm equipment etc., I'd be amenable to any opportunities.. I'll be in Iowa next week visiting friends and family. I'd appreciate any feedback be it positive or negative from any members of your staff.
Answer:

Yes, there are definitely opportunities to export Iowa agricultural products.  The U.S. Census Bureau currently calculates that Iowa companies exported $13.2...

Question:
I am part of a group of 5 students who wish to rent a house with 5 rooms of uneven size. We each have different budgets.

Initially, a suggestion was made that we just hunted for a house with a rental cost 5 times the person with the lowest budget and then allocate the rooms by lottery.

However, this seems a sub optimal approach, since some of us would happily pay extra if we could get a slightly larger house and then pay extra for the larger rooms.

Given some of us are prepared to pay more for a larger room in the house, how can we match the rooms with each person's budget and willingness to pay extra for a larger rooms?

Further it would be great if any solution was generic to a range of potential rental houses, each of which has rooms of varying size (as we are looking at a number of houses).

I originally thought that we could have an auction for the rooms, but noted that the aggregate bids must add up to the cost to rent the whole house. I then thought we could do relative bids (how much extra we would be willing to pay for the largest room compared with the second largest and so on), but this approach left the possibility that the solution would produce bids higher than someone's individual budget.

This seems to be an optimisation problem constrained by each individuals personal budget and the rental cost of the house as a whole.

Do you have any ideas how to solve this?

Regards

Justin
Answer:

Roughly speaking, you need to compute the aggregate valuation of the students for each house.  They should then rent the house for which the gap between their aggregate valuation and the house’s rent is the largest.  They can then...

Question:
http://money.cnn.com/2016/07/07/news/economy/japan-yen-options-brexit/index.html

- Is it a good time to invest in the Yen?
in part it's a bad idea since contractionary policies are/will be implemented to slow its growth rate, but on the other hand it's great because it's value is constantly growing despite the implemented policies.

- does having negative interest rates means that people need to pay in order to keep their money in the bank? is this a contractionary monetary policy?
Answer:

first part:

It appears from the news analysis that Yen has appreciated too quickly against dollars and policymakers are concerned. Implicitly, yen appears to be overvalued in the short run. It is never a good idea to invest in a currency...

Question:
Are there any studies that address the weighted effects of different causes for loss of manufacturing jobs such as automation secular changes in purchasing and international trade?
Answer:

You can try

David H. Autor & David Dorn & Gordon H. Hanson, 2016. "The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade," Annual...

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,...

Pages