Ask an Economist

E.g., Sunday, October 25, 2020
E.g., Sunday, October 25, 2020
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:
I have been working for the past two years to break into the IT world, specifically in data analytics. So far, it hasn’t worked—there seem to be very few openings for entry-level employees.

The controversy over President Trump’s suspension of temp worker visas got me wondering if there might be a connection. I have seen both sides argue about the effect of H1B visas on employment and salaries, both in IT and in the nation at large, but I am wondering about the effect on entry into the field.

The reason I wonder is that IT skills are very transferable, and a citizen or green card holder is much more able to take advantage of that ability, while a worker on a temp visa may require a bigger benefit to justify the hassle and risk of leaving. In this hypothesis, corporations choose temp workers instead of potentially training their competition’s talent, and not because of a salary differential. Over time, this degrades the pool of local employees, justifying further temp worker visas.

My two questions are, one, is this economically plausible? And two, is there any evidence of it occurring in the US?
Answer:

I think the basic mechanism you describe could well be part of the complex story of how the H1-B visa affects domestic workers in IT. The H1-B visa program does expand the supply of workers for certain kinds of jobs, potentially reducing the...

Question:
CIF or FOB Price per Metric Ton of Yellow Corn No. 2 for Animal consumption
Answer:

The Iowa State University Estimated Livestock Returns (http://www2.econ.iastate.edu/estimated-returns/) provides estimates of cattle finishing and hog production costs and returns. The...

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:
Are there any positive effects of applying tariffs? Everything I hear in the news makes them seem like they are an objectively bad idea and are always a poor choice. If they’re so bad, why does China retaliate with their own tariffs when we apply tariffs to them? Would it not be better to just shrug them off and ignore them? Or respond in some other way?
Answer:

Tariffs, like many government policies, have both costs and benefits.  As your questions points out, we have heard much about the costs of tariffs in the ongoing trade disputes.  But there are also benefits that accrue.  For...

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:
There is a huge trend in uploading personal receipts to various apps, either for fundraising or rebates. Moreover, businesses are uploading invoices and such to be processed digitally for cost analysis. Who reads these receipts and invoices? Is it being done through automated technology or are there low-wage workers in India doing this for hours on end? I'm not sure how I feel about supporting technology that creates horrible, repetitive, and invisible jobs in other countries. I feel like we continually take advantage of workers in developing countries.
Answer:

Some of it is read by computers and some by humans. An online marketplace like Amazon's Mechanical Turk, employs millions around the world (including the U.S.) to work on these tasks at wages of 5 cents an invoice. The argument can be made that...

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:
My understanding of the Fed is that it must keeps its books balanced as follows:
value of securities held at central bank = amount of central bank money.

If the value of the securities rise, then the Fed needs to increase the amount of central bank money, which it does by passing its "profits" to the US treasury. Normally, the securities held at the Fed are US Treasury Notes, but starting with the Great Recession, the Fed began accumulating mortgage backed securities as well. Ultimately, these securities gave a profit, and these were passed on to the US treasury like always. However, what if that was not the case? What if these securities defaulted, and the Fed incurred a "loss"? Would it have to pass the loss onto the US Treasury as well? What would that look like? Would the US treasury simply give the Fed US Treasury Notes without getting central bank money in return?
Answer:

The following FEDS Note by Bonis, Fiesthumel, and Noonan (2018) provides detailed answers to your questions: https://www....

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:
Many years ago I remember a quote that said something along the lines of "Every job at Boeing supports 3 jobs in the community" meaning that wage earners spend their wages, which in turns supports other wage earners like grocery clerks, hair stylists, mechanics, doctors, etc. Is there a formula for this? How do I determine in Seattle, for example, how many jobs each $90K job at the City (a large employers) in turn supports in the community?
Answer:

It is common for industries to claim that they create jobs outside the industry, especially when they are seeking government subsidies.  A few years back, a consultant for the Iowa ethanol industry claimed that ethanol was responsible for 90...

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:
I live in a condominium which some time ago changed the rules that permitted dogs to one that forbade them unless grandfathered. I researched the issue a bit and discovered that 39% of households owned one or more dogs. I don't recall the source; don't know the veracity but I wonder how to calculate what impact that would have on the resale value of my condominium if every dog owner refused to purchase any unit prohibiting dogs. (I know that that's not 100% true. Just looking for a starting point.)
Answer:

It seems there are two markets for condominiums.  Units that allow dogs (Market Dog) and units that do not (Market Sad).  My black lab mentioned that the latter group are probably sad folks. Ok – my econ jokes in class aren’t any better...

Question:
Two friends go out for breakfast, each ordering eggs, toast and coffee. The total bill is $20.00. They agree to leave a 20% - $4.00 tip for the fast and friendly service. The following week, the same two friends go across the street to a comparable restaurant and again order an eggs, toast and coffee breakfast. This time the total bill is $22.00. When it comes to deciding the tip, one friend suggests that the tip should be the same as last week, 20% - $4.40. The other friend reasons that because the food, the service and the dining experience were essentially the same, the total amount paid, $24.00 should be the same, meaning a $2.00 tip. This friend further reasons that if the restaurant owner is charging 10% more for the same meal, the staff should be compensated accordingly higher. What are your thoughts? When all other factors are essentially equal, should comparative meal costs factor into tip consideration?
Answer:

The writer has already shown that a good argument can be made either way. There is no correct answer the way the question is framed. The friends will debate the question until the restaurant closes. So, let's give them something else to debate...

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:
I hope this email finds you well, I've heard a rumor on the web that the when a country's name includes the word "United" it adds to the country's success, examples such as the United Kingdom, the United States, and the United Arab Emirates, my question here is, can a country reach its success potential even if "United" is not in its name such as Canada, Australia, etc.? Maybe it has something to do with the way that country is governed? Thank you.
Answer:

Thank you for bringing this rumor to our attention.  First, it would be helpful to understand what you mean by “a country’s success” or “potential”.  I suspect you may be referring to a country’s growth in income (growth in GDP/economic...

Question:
What are the signs of a bubble about to burst, such as the housing market in San Francisco or tech bubble?
Answer:

It’s logically impossible to predict the bursting of a bubble. If it were possible, everyone would sell before the bubble burst. The selling would cause the bubble to burst earlier. But then people would anticipate the earlier bursting and sell...

Question:
If growth rate is measured as % of GDP, and inflation is also measured as % of GDP, wouldn't a growth rate of 2% be completely offset by a 2% inflation rate for the same period? That is, the GDP would experience 0% effective increase?
Answer:

Hello, and thank you for sending us a question! The GDP growth rate is measured relative to last year’s GDP. Usually the Growth numbers that make headlines on the news are of what economists usually call “Real GDP,” meaning that it is already...

Question:
I know if the minimum wage is increased to $15/hr consumer prices will increase. Will those with higher paying jobs see a decrease in their salary if the minimum wage is increased to $15 /hr nationwide?
Answer:

In theory, a stiff and swift increase in the minimum wage may result in less employment (of minimum-wage-eligible workers) and may increase prices to some extent as firms pass on higher wage costs to their consumers. But it does not follow that...

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:
If it could be shown that rising GDP is associated with rising levels of anxiety, would you favor deducting psychological costs to obtain the true value of GDP?
Answer:

Thanks for your very interesting question. GDP measures the market value of production. It is not intended to be a measure of aggregate well-being but it is often used as such. Economists generally recognize that GDP is an imperfect indicator of...

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