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.

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E.g., Monday, December 11, 2017
E.g., Monday, December 11, 2017
Question:
Please advise my going to become an economist. I was an average mathematics major as an undergraduate with a G.P.A. of 3.19 overall with a bachelor's degree in applied mathematics. I have about the average IQ for economists, but I know nothing about economics. Now that I am 41 this year, I am thinking of starting anew in a brand new area of applied mathematics. Is this advisable this late in life to switch careers from mathematics to economics given that the two share a common bond in mathematical economics and are theoretical in microeconomics?

Would the transition be better if I pursued pure mathematics instead, because my experiences has been lately in proof making? What can I look forward to? How and what should I be looking into, to start off, if economics is a good choice? I am a highly curious person. Plus, I have worked hard, I have been doing pure mathematics on my own since 2004 until presently; but, it has been slow going; so, I thought that by going into something that has a better return in investments of my intellectual energy, I should try microeconomics?
Answer:

The prospect of a mid-life career change would be daunting for anyone.  In the end, you’ll have to make that difficult decision on your own.  But I can give you a few tips on how you might begin to explore whether a career in economics...

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:
Hi there,

Okay, so this is going to be a really stupid question but I need to know the answer to this. There is a message board about collecting video games and we got into a argument about the definition of the word "rarity." With these games, we all know the exact amount of copies printed for each title. Say Game A has 2000 copies printed and Game B has 5000 copies printed. Assuming that no copies are lost or destroyed, Game A will always be rarer, correct? Someone else is arguing that the availability of copies on the secondary market changes this.

If Game A has 20 copies available on the marketplace right now and Game B only has 2 copies, would Game B be considered to be rarer overall? At that moment in time, sure, but overall, I would say no. Are either of us correct? Would the monetary value of the game on the secondary market change the definition of rarity? Thanks for your time!
Answer:

In the strictest (or standard) sense of the word, you would be correct that game A is “rarer”, given that there are fewer of these in existence than game B. However, the other person is not totally wrong because, in the words of economists, the “...

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:
So, my question might be more philosophical than economical, but it's wracking my brain and I can't seem to find an answer.

It is about currency and how our money is no longer backed by "gold." Money (i.e. coins and bills) in essence is the same as chips at a casino. At the end of the day, if I choose, I could cash in my chips and get something of value for them. MONEY.

Back in the day, before Jimmy Carter, it was the same way, that, at any time, I could cash in my MONEY for GOLD. (which although has no intrinsic value, is determined to HAVE value.)

So, here is my question.....and I hope I explain it well. A lot of people out there are asking "why can't we just print more money and solve the poverty problem?" Terms like "inflation" and the "devaluing of the dollar" are the usual buzz answers to that question. Also, people give the example that if the government were to print more money and just give everyone $50,000, then everyone would go out and buy things, thus making THINGS more in short supply, thus driving up the price of things. (simple supply/demand economics) But this is where I'm curious. With TRUE unemployment probably somewhere around 15% in this country, if DEMAND rose, then companies would WANT to hire more people and build more processing plants to keep up with demand and raise their profits. So, the influx of cash (printed money) would seem to solve the unemployment problem.

So, here is where I'm confused.....if I apply the same idea of "printing more money and handing it out to the public" to my casino example, then that would be like the casino giving everyone at the poker table an extra $100 in chips to play with. But here's the catch. I understand the PROBLEM with doing that at the casino, because if you give people all these extra chips, then at the end of the night, when people CASH OUT, there will not be enough money in the vault to pay for all the chips. Hence the problem.

But how does that relate to American economics since there is no "cashing out" procedure. If the government gave everyone a bunch more money, there is no "checks and balances" since no one, at the end of the day, goes to the cashier station and exchanges their "chips" (money in this case) for something of value.

Exchanging your chips at the end of the day for MONEY back (which has value in our eyes) makes sense, hence why you can't give out more chips than the money you have in the vault. But it seems the American dollar is not a paper representation of the "money in the vault" no one goes to cash in their money in America.

So I don't understand how currency works and why we can't just print more money since it really isn't representative of anything of value.

Please explain, as I cant find a good answer anywhere online.

(I hope this question wasn't convoluted.)

Thank you so much for your time
Answer:

Let me try to remove some of the confusion. Imagine the only good in the economy is corn and corn costs $1 a pound, and imagine you and all others earn $100 a month. Each month you buy 100 lbs of corn exchanging $1 for 1 lb of corn; so the real...

Question:
What correlations exist, if any, between a country's age distribution and its economic output? Additionally, does the relative shape of a country's population pyramid seem to give any indication of future performance in (a sector of) the stock market? I have read that a country with an age distribution like an inverted pyramid (more older people than young people) requires a greater investment in healthcare, and the opposite shape (non-inverted pyramid) requires a greater investment in education. Therefore, is it a stretch to conclude that the healthcare sector in a country with an inverted pyramid age distribution will fair better than it would with a non-inverted pyramid in the same country?

Also, is there a name for the sub-field of economics that studies how demographics is related to economy?
Answer:

The question of how demographics relate to economic issues (e.g., poverty, economic growth) has been at the forefront of economics ever since its infancy as a science. For instance, Rev. Malthus (1766-1834) controversially suggested that...

Question:
In light of the recent layoffs at John Deere and its suppliers, how does the agriculture sector rate compared to the rest of the economy that seems to be rebounding? How long can we expect sluggish commodity prices?
Answer:

As the layoffs suggest, a large part of agriculture, in this case the crop sector of agriculture, has seen a significant reduction in prices and incomes over the past two years. This drop in prices and incomes can mainly be linked to a surge in U...

Question:
Why is the growth of GDP so important? I understand that we want living standards to go up in the aggregate, but if the economy produced the same amount of goods/services per year for, say, three years, would that be catastrophic in itself (i.e., aside from policymakers and economists freaking out about it)?
Answer:

The event that you are referring to is what economists call recessions. During recessions, GDP drops or grows significantly below normal times for a period of usually less than two years. Recessions are dreaded by many but not all economists....

Question:
Hello,

I was wondering whether a recession is the opposite of inflation or is it the opposite of economic growth. What is it, really, the opposite of?

Thank you
Answer:

A recession is a period of general economic decline, a contraction in the GDP for six months (two consecutive quarters) or longer. In that sense, they represent negative growth.

Question:
I would like to understand how the National Negotiated barrow and gilt price relate to Peoria and interior Missouri live hogs price, futures hog contracts and profit for the farmer, and if possible have a margin profit table from 2013 up to date.
Answer:

To explore the relationship between the Peoria live hog price, Interior Missouri live hog price, National negotiated prior day purchase base price, National negotiated slaughter base price, CME lean hog futures price, and farrow to finish profit...

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:
I have a question about the Federal Reserve system at the heart of our monetary system. I have heard many accounts and explanations. I am very wary of anything I read in the news, and even more wary of what our government does. Was the act actually concocted on a private island by powerful, wealthy bankers? Was president Wilson actually remorseful of the passage of the act and its effect? Was the act passed under less than the usual standard of congressional consensus and due process? Can you comment on debt as a dynamic within the Fed? Should the public be wary of the lack of transparency? I have absolutely no faith in our system's ability to promote anyone else's interest, except the wealthy and big business. Any cause for optimism otherwise? Can you suggest a good book on the Fed? Thanks.
Answer:

The Federal Reserve has a long history as the nation’s central bank. While there have undoubtedly been many changes in the U.S. economy, banking, and the financial sector since the passage of the Federal Reserve Act in 1913, much of the structure...

Question:
Hello economists! Regarding people who are unemployed --if every one of them went through the motions and started their own small business today (let's assume that part goes off without a hitch) would the economy benefit from the increased occupied jobs, or have no net change from a proportional increase in competition?

Or something completely different?
Answer:

There are many assumptions underlying your question. To begin with, we have to ask, why are people currently unemployed? assuming businesses are in it to maximize their profits, then if they are not hiring (which is why there are unemployed...

Question:
Would slowing down immigration and blocking illegals from working in the US automatically cause the minimum wage to rise on its own?
Answer:

Minimum wages are wage floors set by law, not by the market. They, however, are subject to political pressure from citizens. If, say, hypothetically, all immigration, legal or otherwise, was stopped, then there would be a stronger demand to hire...

Question:
I am working on a research project of agriculture cooperatives and their locations across the United States. I have found several sources that list the coops by name and give the main office corporate address, but I have been unable to find a list of cooperative and their operating branches. Does such a list exist?
Answer:

To my knowledge, a publically-accessible national listing of all the agricultural cooperatives and their branches does not exist. However, many states have cooperative associations or cooperative development centers that likely maintain a list of...

Question:
What would be the costs and benefits of returning to the gold standard?
Answer:

Under the gold system, either gold circulates as money, or there is a fixed relationship between the amount of currency in circulation and the amount of gold, given the dollar price of gold. In either case, it means that a valuable resource which...

Question:
If I run a manufacturing company and I pay people to do work, presumably those hours are in the manufacturing sector when it comes to measuring the nations's productivity. If I also pay consultants [who's hours belong in the service sector] to help with that manufacturing volume, are those hours counted as service or as manufacturing?
Answer:

The output determines which sector a particular activity falls under. If the output is a good (product), then it falls under the manufacturing sector. If the output is a service, then it falls under the service sector.

In your particular...

Question:
In a recent article in the New York Times about free trade, the author talks about the negative impact on the US of low cost Chinese goods entering the market not being experienced by Germany and other European countries. The article goes on to explain that part of the reason is low US interest rates caused in part by a low American savings rate.

Why would a low savings rate put downward pressure on rates? If savings is capital available to be borrowed, and less savings means less capital available, shouldn't that put upward pressure on rates (everything else being equal)? Isn't that a fundamental economic principle? Restricted supply in the face of fixed demand = increasing price (interest rates)?

http://www.nytimes.com/2016/03/16/business/economy/on-trade-angry-voters...

"Mr. Autor suggests that Americans’ low savings rate was a big part of the story, coupled with foreigners’ appetite for accumulating dollar assets, which helped keep American interest rates low and the dollar strong, in that way fueling a persistent trade deficit."
Answer:

To a certain extent, the quoted sentence is tautological.

As an accounting identity, from the GNP accounts, the Balance of Trade (positive is a surplus) = (Savings – Investment) + (Taxes – Government Spending)

Hence, a balance of...

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:
I am trying to better understand the concept of interest rates rising and its impact on the FED or BOE, ECB etc (i.e. the lender/creditor) themselves rather than everyone else which is often mentioned. The definition of an interest rate is as follows: An interest rate is the rate at which interest is paid by borrowers (debtors) for the use of money that they borrow from lenders (creditors). I feel I understand the principles behind why they raise and lower rates to stave off inflation, etc. I'm just trying to understand this part a bit more about where the money from increased (or decreased) interest goes (e.g the cycle from the other way around)?
Answer:

The implementation of monetary policy – e.g., how exactly a central bank raises interest rates – differs across countries and even over time within countries. These differences imply there is not a single answer to your question, but for...

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:
How does the government's disposal/burning of elephant ivory protect the market from illegal trading/poaching?
Answer:

If the government destroys ivory this year, then there is less of it this year which may cause price of ivory to rise. That may dissuade some current potential buyers. (I am assuming the government is destroying ivory that would otherwise be...

Question:
When speaking about social welfare in economics, they are referring to the allocation of resources and imperfect markets, NOT the social welfare of Medicaid, food stamps etc. Is this assumption right?
Answer:

Social welfare maximization in Economics typically refers to the correct allocation of scare resources to agents (firms, individuals) so as to generate the maximum possible utility (or other criterion) for the agents. The term has no negative...

Question:
I have a vegan friend who believes that the meat and dairy industry and all its affiliates and infrastructure could be phased out of the United States economy without causing it to collapse. In one year. I vehemently disagree. I found a statistic from 2009 by the meat industry saying they essentially make up 5% of the economy. I understand that if we include the dairy industry and all industries that exploit animals, it would be much higher, but let's stick with 5%. Would a sudden loss of 5% of the total US economy, with all those people being left jobless, all those companies going under, and all the ripple effects (Who needs a grill anymore?) (Where did fast food go?) destroy the economy? This is also assuming the animals would be harvested one last time; so there wouldn't be any costs concerning the animals themselves.
Answer:

Agriculture and agriculture-related industries contributed $777.0 billion to the U.S. GDP in 2012, a 4.7% share. The value of U.S. livestock production output (dairy products, milk; meat animals; miscellaneous livestock; and poultry and eggs)...

Question:
My friend and I have been engaged in a heated debate over the astronomical purchasing prices of apartments in New York (and even Shanghai, as we live in China) and what causes them to be so high. He believes they are solely based on supply and demand, while I believe there are other factors independent of supply and demand that determine why the prices are so astronomically high. Could you please inform us as to which is the case?
Answer:

As for the high price of apartments in China's big cities, I believe the supply and demand play the main role.

1. The supply in big cities is depressed by the heavy land regulation. There are two types of regulation. First, according to...

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