Ask an Economist

E.g., Friday, March 29, 2024
E.g., Friday, March 29, 2024
Question:
Hi. I studied economics at undergraduate level and have encountered the profit maximising rule of MR = MC; with the standard premise for such calculations involving the production of goods with a fixed price per unit. I currently work in the construction sector (demolition) where each of our projects have a different cost and revenue from other projects. As such, I would like to know if/how the above measure could be applied to the service sector? My current thinking is that the data must be manipulated to achieve the cost per square foot of a site. However, this will involve significant data manipulation just to run the calculations. Could you tell me if I am on the right track with this direction or whether there is an alternative way that I could calculate the profit-maximising output? My goal in answering this question is to determine the appropriate mark-up for our business when submitting a quote to a client. At present, we are charging a 10% mark-up which I currently believe to be too low to be sustainable. Any assistance on this would be greatly appreciated.
Answer:

Hello:

Suppose you have N projects, each of them with possibly different but constant marginal costs (MC). Since the marginal cost for each project is constant, the average variable cost is also constant, and your profits can be expressed...

Question:
When health care spending (or military spending or education) is tallied as a "percentage of GDP," doesn't that GDP figure include that same health spending? If you remove all that double-dipping, what would those percentages look like?
Answer:

Thank you for your question. Indeed, part of the expenditure in health expenditure and defense will count towards total GDP. The reason why the total GDP (including health expenditure or defense expenditure themselves) is used as a denominator to...

Question:
Why would China's central bank want to issue a digital yuan with an expiration date? Apparently, in 2021, China announced it was testing an expiration date feature on its digital yuan, which would allow money to expire if not used. I was wondering how this could impact the economy as a whole were this to become the dominant currency in China and how this would be in the interest of the Chinese central bank.
Answer:

The official digital Yuan issued by the central bank of China does not has the expiration date. The "digital Yuan" mentioned in the question should be the digital consumption voucher which is issued by the local government and has the expiration...

Question:
I apologize, as this will seem to be a very vague question. I don't know that it is so very vague, as it is nuanced and not so easily answered without a tremendous amount of effort and time information gathering.

I'm very curious what an economist thinks about the automotive repair trade. We aren't really a professional industry as there are no requirements or licenses to become a professional repair technician or work in a professional repair facility. Auto repair has become extremely high tech and sophisticated, in many areas, but also retained many of the same procedures from decades and decades ago with maybe a few changes. So, we have the need for two distinct types of individuals. The thinkers and the doers. Thinkers for the analyzing of systems and data for diagnostic decisions and dealing with technology (computers both on the car and to be used in the shop for scan tools, oscilloscopes, programming, coding, etc.). Doers to take it apart and put it back together efficiently and properly.

Most repair facilities are operated by former technicians. They are not businessmen/women. It is often discussed how, with the commoditization of our services, we are in a race to the bottom by greatly undervaluing ourselves and each other. Many are in this race and unwittingly standing on the gas.

This sounds like a rant and perhaps at some level it is. But I'm seriously interested in the opinions of those that are businessmen/women, who understand economics and game theory (most shops seem to operate on a zero-sum game principle, whether they know it or not).

Automobiles are getting more and more complex, the skill set required to service them is growing and becoming much more difficult to find and retain. Many other industries are looking for the skill sets, or a small fraction of the skill sets that many automotive technicians possess, that have far greater means to compensate for those skill than the auto repair trade currently has; a problem they've created for themselves with the constant undervaluing of their skills, knowledge, and services.

I suppose the easy answer is that it is a total "clusterf^&%" but will either solve itself or crumble altogether, I just wanted to hear what someone that knows what they are talking about thinks, and maybe even entice them to look into it and find out more about our trade.

Answer:

Auto repair is an example of a "credence good," which is a type of product or service where an expert knows more about the quality the consumers need than the consumers themselves. These kinds of markets can work poorly if consumers are unable to...

Question:
Hi
I am trying to calculate GDP for countries and the numbers don't seem to add up.
I am using the formula GDP = Consumption + Investment + Government spending + Imports - exports
I am using the example of France
It has a GDP about 2500 bn dollars per year.
Thus the components of C, I, G and X-Y should equal about 2500 right?
These are the figures that I have found
C = 1360, Investment = 20 per cent of GDP ie around 500, G= 1370
Frances trade balance is negative to about 55 bn per year and government borrowing is 85 bn
So if you calculate 1360 + 500 + 1370 - 55 - 85 you end up with 3090 which is more that 20 per cent more than the published figure.
So where am I going wrong in my calculations?
I was thinking it was something to do with PPP v nominal dollar values but the difference between the two is only 10 per cent whereas my figures differ by more than 20 per cent
Thanks for any help
Mick Cooke
Figures are from
C = https://en.wikipedia.org/wiki/List_of_largest_consumer_markets
I = https://en.wikipedia.org/wiki/List_of_countries_by_gross_fixed_investment_as_percentage_of_GDP
G = https://en.wikipedia.org/wiki/List_of_countries_by_government_budget
X-Y = http://atlas.media.mit.edu/en/profile/country/fra/
Answer:

The main problem with your calculation is that you are using as "G" the French government's budgetary expenditure, which most likely includes large transfer payments. Transfer payments are not part of GDP. Another problem is that you are...

Question:
What percent of hog firms use forward contracting or options? Why do hog producers not use futures or options?
Answer:

Unfortunately data are not readily available on the percent of hog firms using forward contracting or options. What is readily available through Mandatory Price Reporting (MPR) data provided by USDA’s Agricultural Marketing Service is the volume...

Question:
When the interest rate is rising investors sell bond or buy it? I think investors sell bond and consequently the price is falling and the yield is rising, people sell the bond because they want keep their money in banks for getting more interest, that is right? but I saw an article in seeking alfa site it said when interest rate is growing people draws capital out of the stock market and into the bond markets in this situation why bond yield is growing?
Answer:

At any point in time, there are *many* bonds traded: a vast majority are bonds that were issued in the past, but have not yet matured, and a relatively small number of bonds are bonds that are being newly issued. When interest rates increase,...

Question:
We live in Florida and the $15/hr passed. Does everyone else get screwed or is there some built-in scaling involved? For example, my daughter is a nurse's aide in Dayton, Ohio, and makes $12 an hour. With the increase she would be very happy jumping up $3 an hour, but what does that mean for the other nurse's aides who've been working longer than she has, who are making, say, $15.45 an hour right now? Do they get some kind of scaled bump to offset or are they just out of luck? And If they get a bumped scale, how does that impact the next profession one level up from them, which would be LPN, respiratory therapists, RNs and then physician's assistants? It seems to me that $15/hr has some overwhelming and far-reaching implications. It is going to be hard to go to work knowing the guy across from me is making $3/hr less than me and I have a degree and he just walked in off the street with no skills or experience.
Answer:

Increases in the minimum wage tend to cause firms to raise wages for those whose wages were initially above the new minimum in order to maintain the former pay hierarchy. The biggest effect is on workers closest to the minimum wage. There is also...

Question:
My bank wants to reorganize from a mutual savings bank to a mutual holding company. They have sent me a number of promotional items urging me to vote in favor of this reorganization, but I can’t figure out why I would or wouldn’t vote for this. What’s the difference? What are the pros and cons?
Answer:

A mutual savings bank (MSB) is a chartered financial intermediary that operates as an association of individuals who are depositors, also known as members.  MSBs are owned by their depositors, not stockholders, and this means that an MSB’s...

Question:
Given the increasing population migration to more urban centers - and maybe the possible validation of Richard Florida's 'creative cities' theory - what viable economic models are we seeing for smaller, rural Iowa communities, most of which are really struggling to maintain population and economic viability? In other words, is there any hope for these once thriving rural towns and, if so, what does that look like?
Answer:

It is useful to begin by noting that Nebraska has a higher proportion of its population living in urban areas (73%) than Iowa (64%). The reason is that Nebraska has only 4 metropolitan areas (Lincoln, Grand Island, Sioux City, Omaha), all of...

Question:
I have run into situations where getting goods from the source (i.e., the farm itself) costs substantially more than what a grocer is asking for for the same product. My understanding is that the grocer would often price up the item to make overhead, so what situations would lead to the source of a product asking for more than the grocer (reseller)?
Answer:

A few reasons livestock producers may be interested in selling locally include having:

  - an available market

  - potential to capture premium prices

  - a direct connection with consumers

  -...

Question:
I was just wondering if an optimum level of inequality exists for developing countries. I don't know that much about economics (I've had six months' of economics study) but I'm very curious.

I know lots of top economists say high inequality is bad but those are usually in the US or UK and not in developing countries. I thought maybe an initial 'spurt' of inequality may boost growth? I know Deng Xiaoping created some inequality in China, which eventually led to rapid growth. A similar thing happened in India. I also thought that maybe inequality shouldn't be looked down upon as maybe it reflects a higher standard of living in countries. Assuming migration laws stay relaxed, countries with higher standards of living should have higher inequality as poor people flock to them, right? South Africa has a high GINI whereas Malawi has one way lower. Paul Collier also says that developing countries should develop market economies to catch up with the rest of the world but this will further increase inequality, right?

But the evidence suggests the complete opposite of what I think. Africa as a continent is the second most unequal continent in the world and the poorest. Why do you think that is? Do you think decreasing inequality will benefit the region? A Kuznets curve suggests that a country may have to go through mass inequality before reaching a stable level, but the African continent defies this as it's highly unequal yet still underdeveloped. What do you think causes this?
Answer:

Income is the return of factors, such as labor, human capital and physical capital, that you own and exchange with other agents in the economy. Income inequality in different countries may arise for different reasons and thus it is difficult...

Question:
Hi, I am studying an introduction module for Economics on a business degree course. I have recently covered the theory of Comparative Advantage within International Trade. While the theory makes perfect sense to me, and I can see why it would benefit different countries to trade together and import/export different goods to maximize profitability and production costs etc., I am struggling a little to ever find real world examples. For instance, every example I ever see for this model, shows two different countries and two different products. For example USA and China, both producing Planes and Electronics. Usually the answer works out that it would be best for USA to export the planes and import Electronics and vice versa for China etc. However, I am sure International Trade does not involve the bartering of goods. All trade is carried out with normal currency transactions right? What about if USA produces 10 million products, and China produces 30 million products. Is the Comparative Advantage now worked out between all of these products or is it still maybe one or two products compared? This seems in the examples of books really easy, but then practically impossible if all products are compared?

Also, who carries out these imports/exports or who decides it's better to import/export certain products? Is it private sector industries or is it government influenced.

So back in the previous examples of USA producing planes and China producing Electronics both with comparative advantages over each other. We know in real world examples Boeing in the USA produces planes and Huawei in China (along with many others) produces Electronics.
Does this mean Boeing should export planes to China, but what has this got to do with the Huawei company in China? They don't necessarily care about planes at all? Their business is electronics?
Does it also mean Boeing should use Chinese electronics on their planes (which I'm sure they don't)? This is where I am struggling to see the real world examples of it all, and understand WHO works out what products should be Imported/Exported from specific countries etc.?
Also who works out what country would be best to import goods from and what countries are best to export goods to?

I live in Ireland, and obviously dairy farming and beef are big exports here. But is it down to the individual farmers to understand these economics, or would the government figure a lot of this out?
Answer:

Prices will drive the system. For example Ireland has a comparative advantage in cheese and butter due to climate and a large amount of land suitable for dairy cows.  China has a comparative advantage in electronics because it has an...

Question:
If banks create credit from thin air, when they issue loans, and make astonishing interest in doing so, why would it not be beneficial to have their government create the credit? Then the interest collected on those loans could be used to fund goodies for the people, instead of super-yachts for crooks! Cheap loans for the poorest, expensive loans for the richest. Narrow the wealth gap a smidge. I cannot see a down side. Was this not how it once was, to our great prosperity? Is access to credit not the true essence of opportunity. Only people create value, thus, credit can only be created by the people. When did private banks capture our credit? And whom is responsible?
Answer:

There are government owned corporations or government backed corporations that directly lend to households or foster lending to households in other ways, for specific purposes. For example in the US, GNMA (Ginnie Mae), FNMA (Fannie Mae) and FHLMC...

Question:
Hi, quick question: can a tariff be counted as a fiscal policy measure? Currently studying the great depression and curious to know if the Smoot-Hawley act which raised US tariff on 20,000 imports counts as a contractionary Policy fiscal policy. My thinking behind this is it did involve the raising of taxes on imported goods,and increasing taxes are usually considered a contractionary fiscal policy measure. Please help. Thanks.
Answer:

In discussing the impact of economic policy on aggregate demand and the balance of trade in open economies, international economists often talk about two types of (non-monetary) policies: “expenditure reduction policies” and “expenditure...

Question:
I'm currently a student and considering pivoting majors to economics, as it's a field I have some interest in, but I can't figure out what actually happens on the job. What does a typical day on the job look like?
Answer:

You can do a lot of different things with an economics degree so it's a bit of a tough question to answer. Of course, one thing you can do is be an economist. The Bureau of Labor Statistics has an overview of what that kind of position entails...

Question:
In the world of vintage car collecting, a frequent topic of discussion is whether prices for a particular model or type are rising or falling. Answering this question is made more difficult by the fact that very few transactions are documented. We know that a given car was listed for price X, but we don't know what price it actually sold for, or to whom.

Does economics provide any model by which one can infer anything about actual selling prices for something, based only on data obtained from published asking prices? For example, if we had a data set of ~3000 sales over 20 years, and we knew that asking prices in real dollars were basically flat, would that tell us anything about the selling prices? Would they also be flat? Or maybe instead would they be gradually approaching the asking price? I have no idea.

Thank you.
Answer:

The question you are asking is about the bid-ask spread.  The bid is what a buyer wants to pay for an item. The ask is what the seller wishes to receive.  You know the ask, you want to know the bid.  The bid would be demand, the...

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:
What is the impact of production being directed towards what appears to be endless product differentiation, for example multiple flavours of toothpaste or shampoo variations which ultimately do nothing to improve individual well being? Does this form of market operation generate employment or is it a waste of productive capacity that might be better directed towards activity that genuinely increases well being. For example, creating products that delivers a real benefit.
Answer:

Does the market provide too many or too few products, relative to some social optimum benchmark? It turns out that this question does not have a simple answer. It depends on whether or not consumers are well (perfectly) informed about products'...

Question:
I want to ask a question that why the producer of a good increases the price when the demand is high, isn't it unfair, he could have sell his good on same prices on first come first serve basis ,while increasing his goods production and selling on same price rather to increase it. I shall be thankful if u answer this. I personally consider it unethical.
Answer:

Economists start from the presumption that producers want to maximize their profits, and are not running a business to promote social welfare or social justice. If a producer can sell 1 unit of a good to Mr. A for $10, he would always prefer to...

Question:
Hello from New Zealand! I have a dataset of sales of products at auction from 1960-2020 in various countries. I have converted all of the sale prices to NZD but I would also like to adjust for inflation.My question is: since inflation is different in each country, should I adjust for inflation according to each country's inflation data before converting the values to NZD or should I just convert all of the values to NZD and then adjust for inflation based on New Zealand's inflation rates? The latter would be the easiest but would it result in bad data?
Answer:

The most correct way should be adjusting inflation according to each country's inflation data before converting the values to NZD if New Zealand is the baseline to compare with. The latter will not necessarily result in bad data as long as the...

Question:
I have noticed that Trillions of dollars of building during the Middle Ages went on in Europe from an agrarian/trading society. How did taxation of millions for farm labor become the basis of trade in Europe? It seems not rational that the food grown during the period 300 AD to 1780 was the basis of wealth. Therefore we know that mining silver, gold, copper allowed for coins but since there was no technology of the era that converts to the Trillions in Building out Paris, London, Prague, Austria, Russia. So, how was farm labor converted to the structures we see still standing today.....which architecturally are still the world standard for greatness.
Answer:

Medieval cathedrals and other structures are indeed impressive works of construction, and to look at them is to marvel at human ingenuity.  Medieval societies were in fact technological quite progressive, a fact documented for example in...

Question:
Here's what seems like a pretty fundamental one: Why do national government's now borrow exclusively from the private sector instead of from their own central banks and as a result pay high interest instead of essentially none, thereby greatly increasing the burden to the public and the national debt?
Answer:

If central banks are to lend to the government, they would have to print money and that is potentially inflationary. Forward-thinking countries try to control such a temptation by legislating in advance that their central bank be independent....

Question:
I am an optimist and see a very different future for Russia if it is defeated by Ukraine and Putin is out of power. IF, and that is an IF, Russia pivots to a western friendly government and embraces more a more free market, what would a US/Western influenced Marshall plan be for a Russian economy? Are there any works or writings that discuss this?
Answer:

I am unaware of any discussions pertaining to a Marshall-like plan for the Russian economy presently.

Question:
Hi, I hope to undergo a career change to graphic design. My question is, what are the chances of Artificial Intelligence taking over a design-related job, and how can it affect my employment?
Answer:

Artificial Intelligence is likely to impact all of our jobs, just to varying degrees. Specific tasks that we need to perform in our jobs, skills required, wages, and hours will all likely be adjusted. There will inevitably be winners and losers...

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