Ask an Economist

E.g., Sunday, October 25, 2020
E.g., Sunday, October 25, 2020
Question:
Can an economist call the economy good when there is low unemployment, good profits, but great income disparity? Is it within the realm of the social science of economics to consider social justice?
Answer:

Economists measure the economic health of a country by its G.D.P per capita. They see low unemployment as good because it means labor resources are not sitting idle. They also consider whether income disparities are good or bad. In fact, these...

Question:
Hi!

I wanted to value a high-tech start-up of which I have the cash flows of the coming 6 years. I am not a VC just a post-grad student, so I decided to use the discounted cash flow method. To do so, I calculated the discount rate. For a high-tech start- up the discount rate = Rate of equity (which can be determined by the capital asset pricing model). So I calculated my discount rate, used it in the DCF model, and found an approximation of the value of the high-tech firm.

But I didn't take into consideration that the company sells their products globally. This fact has an impact on its beta factor, and consequently on the discount rate, and finally on the value of the firm!

One option is to use the International CAPM model, but my company is going to sell globally, so how do I know the impact of that to the discount rate? Any help would be very appreciated.

Thanks
Answer:

If your company is based in the U.S., the valuation should be based on the standard CAPM. However, barring exceptional circumstances, one would expect the beta of such a firm to be closer to zero than the beta of an otherwise identical firm...

Question:
Using the worst case scenario (Illinois), what are the economic implications of underfunded pension plans?
Answer:

The problem of underfunded pension plans is complex. Some possible economic effects are as follows.

1. Plan beneficiaries will suffer economically in retirement unless they are bailed out by taxpayers. Whether and how much to bail them out...

Question:
At what point does it become profitable for the producer of an agricultural good to begin seeking alternative uses to its main product, similar to the way the corn, soy and cotton industries founded boards to research new uses for their product? If this principle has a name, what is it called for further reading on the subject?
Answer:

If the principle has a name, I suppose it would be DIVERSIFICATION. But, given the inclusion of the words “boards to research new uses for their product,” the questioner may also be asking about how do agricultural industries decide whether to...

Question:
In Canada, where I live, there has been much talk lately about the need to build more pipelines to export oil from Alberta. Western Canadian Select (WCS), the benchmark for bitumen from the oil sands, trades at a discounted price compared to higher quality products like West Texas Intermediate (WTI), for example. While the difference in quality accounts for most of the price differential between the two, the rest of the price discount can be explained by export bottlenecks, apparently. Since oil production in Canada exceeds the capacity of existing pipelines to export the oil to refineries in the US, oil producers turn instead to rail companies to export the oil.

1) Why does a transportation bottleneck cause Canadian oil to trade at a discounted price? Is it simply because rail companies have more leverage in this situation, as they have an effective monopsony as a buyer, a.k.a. near-monopoly over transportation? And if that's the case, is the oil sold to the rail company, who is able to negotiate a discounted price at which to purchase the oil from the producer?

I suspect it may have something to do with the fact that rail companies seek to secure long-term contracts with clients, so when oil producers want to use rail services just for the short-term, until new pipelines can be built, rail companies refuse to pay a high price for the commodity being transported (alternatively, rail companies demand a higher fee to transport the commodity). But again, I'm not clear about whether or not rail companies actually purchase the oil and then sell it on to refineries. And if a Canadian rail company does purchase the oil, then the revenue stays in Canada, doesn't it?

2) I have read that rail transport only adds marginal export capacity compared to what's needed, so perhaps the oil producer/rail transaction has a negligible effect on price? If that's true, then I'm really confused.

3) Is it simply just that a transportation bottleneck causes excess oil supply to build up, reducing its market price? But I thought that a bottleneck would equate to less supply, since it can't be exported as quickly, and therefore its market price should rise.
Answer:

Great question!  In general, we don’t need a monopsonistic setting to explain crude differentials between WCS and WTI.  In a competitive market, prices for the same product (oil, corn, etc.) can diverge in different markets for two...

Question:
My country is currently debating the prospect of banning live exports of sheep to the Middle East, due to the abhorrent conditions that the animals suffer on the journey over there. Our Agriculture Minister has come out and said "We should tighten regulations instead, because if we ban live exports entirely, then these countries will instead import from other countries with lesser regulations, and there will be no overall reduction in animal suffering."

Does his claim hold up? If other countries have enacted similar bans, what happened afterwards?

Context: https://www.theguardian.com/australia-news/2018/jun/09/live-export-opponents-should-check-their-moral-compass-minister-says

Cheers!
Answer:

I am not aware of any restrictions on live animal exports centered on animal welfare concerns. Concerns about animal disease outbreaks and food safety have primarily led to trade restrictions on live animals, meat, and animal products. A little...

Question:
How high can our national debt get (as a % of GDP) before it will be a threat to our financial stability? ie: dollar loses its status as the reserve currency.
Answer:

The national debt of the US is the amount owed by the US federal government and is the value of the Treasury securities that have been issued primarily by the Treasury and which are outstanding at that point of time. By far, the largest component...

Question:
I am familiar with Karl Fox et al. "functional economic areas" framework of regional modelling. I am also aware of REMI products. These latter models are widely used by state and local governments. But I am not aware of the availability of computer models that would use functional economic areas per se. Can you inform me if there are such models that might be an alternative to REMI? Thank you.
Answer:

Any subnational economic modeling includes two challenging components: data and structure.  Detailed subnational data for the US is automatically suspect because input-output tables are not collected at any subnational level. ...

Question:
If a business owner employs workers in a third world country, is it better (for the workers) to pay them in strong American dollars vs paying them with the local currency? Considering the American dollar will likely be stronger than that of a third world country, the workers will have more economic power with greenbacks than their own national currency.
Answer:

If the third world country has low and stable inflation, then it should not matter much; after all, there is a market exchange rate between say $1 and Indian rupees (these days, $1 = Rs. 60) and whether you pay an Indian worker $1 or Rs 60 should...

Question:
Why did China’s banking system grow so much since 2000 if the PBOC was actively increasing the RRR and withdrawing liquidity through FX Reserve purchases?
Answer:

First of all, I want to make it clear that, when a central bank increases its FX reserves, it supplies local currencies and increases liquidity in the money market. But this is certainly not the reason that China’s banking system grew so much....

Question:
Do Trump’s new tariffs affect things that were made in China, but were NOT sold from China? As in a toy from Xplus. They are made in China, but are sold and exported by Japan.
Answer:

Trumps tariffs are collected by U.S. customs officials when Chinese goods are imported into the US. They are not collected on goods imported from Japan. However, the tariffs have created worldwide perturbations and there may be modest second...

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:
Hi there, thanks for taking the time to answer my question.

I understand the basics of measuring GDP based on the product, income, and expenditure approaches, but I am stuck on a simple question: how are household savings accounted for using the expenditure approach if they are not invested?

In other words, say I earn $100, spend $98, and deposit $2 in a non-interest earning savings account. If the $2 (along with a lot more money, presumably) gets lent out to a company that builds a factory, then clearly that would be investment, but what if it just sits in the savings account? Does that count as “residential investment”?
Answer:

There are two components to investment in the national income identity. In addition to expenditure on capital equipment and buildings by firms, investment also includes additions to business inventories (goods that firms did not sell). So if you...

Question:
When Minimum Wage is increased by more than 5%, studies have shown a negative impact for one to three years - job loss, reduction of hours, and non-hiring to replace workers leaving - causing a reduction of pay of low pay workers, a 1-3% reduction in teenager hired, and failure of many start-up businesses. I have not found longitudinal studies showing where the economy rebounds from these losses and whether there is a long-term benefit at all for the lower or higher wage workers. Has there been studies going longer showing when the (a) teenage hiring returns to previous levels, (b) hours return to normal for the low pay workers, etc... Is Minimum Wage a permanent negative impact or temporary? ... I've seen what happens statistically for things like holidays - where a sick person will power through the holidays, but then die immediately thereafter, creating an average between "less deaths during the holiday" and "more death just following" matching normal death rates. And studies which show that capital punishment creates a permanent troth with an immediate reduction of several months after a criminal has been executed without a rebound increase afterwards ... just a return to normal levels. .... So which is it, a permanent loss to the economy when we have minimum wage raised that never recovers; a temporary loss to the economy which returns to the previous level but no further; a temporary loss to the economy but a rebound that balances and then return to average; OR a temporary loss to the economy but a long-term gain once everything is considered? Everything I have found indicates a permanent loss to the economy with no upside and that just doesn't make sense to me as yet. If there are longer studies, I would appreciate finding out about them. Asking because I would like to support a higher minimum wage, especially for tip-income wages, but based on the evidence I have found I cannot.
Answer:

The adverse effects of the minimum wage depend on how high it is compared to the prevailing wage in the area.  Because wages are higher in San Francisco than Des Moines, a $15 minimum wage in San Francisco, where the median wage is $25.11,...

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:
Why is it that the largest market fluctuations, by a large majority, mainly happen in September, October and November? What about those three months causes the massive fluctuations? It happened in 1929, 1987 and 2008.
Answer:

At present, I am not aware of a widely accepted academic research in economics and finance that would provide a definitive explanation for the exact calendar timing of major financial market fluctuations in the United States for the time period...

Question:
I here a bit more these days about our being a consumer economy. What other types of economies are there?

Thanks a bunch!
Answer:

Ours is called a consumer economy because consumption is nearly 70% of our GDP. Countries like China, are more investment-driven with investment (often by the public sector) at nearly 50% of GDP. 

Question:
What is the median family spendable income for families living in Fort Dodge, IA.
Answer:

The American Communities Survey provides information on median household income

This is before taxes and transfers

American Fact Finder

https...

Question:
I wonder what "reduced-form analysis" is, and a non-reduced form would be. To be more specific, I'm reading an article (www.clevelandfed.org/research/review/1996/96-q1-craig.pdf) which states the following:

"Economic data usually influence policy through a reduced-form analysis...Explicit assumptions about behavior that underlie the relationship are not emphasized; rather, the researcher asserts that the “data do the talking.”"

The author later specifies what he means by "reduced-form":

"We use the term in a wider context, where the pattern in the data — not an assumed behavioral structure — forms the point of departure for estimation."
Answer:

A “reduced-form” analysis, also often referred to as “non-structural” analysis, is the most common kind of econometric analysis performed by economists. The other kind, which you called “a non-reduced form,” is customarily referred to as “...

Question:
Hello!

1) What do economists think of the Lange model: https://blogs.cornell.edu/info2040/2015/10/19/the-lange-model-of-socialism/? Does it adequately address the economic calculation problem? Tying into this question, is is true that Robin Cox is thought to have won the debate around the ECP? Or was it Mises, Hayek, or James Scott?

2) Finally, I would appreciate any insight toward this economic system: Instead of prices, it uses calculation in kind. It accomplishes this by decentralizing economic decision-making, by means of turning firms into self-managed associations joined in horizontal federations, which assess how much is taken at distribution centers by means of book-keeping and assess how many physical quantities of the goods they particularly use are required. I know this is a bit brief, but the part of this comment that explains this further starts with "But now, there is still a question to answer, how could an economy not based in prices make rational decisions" (it's toward the end).": https://www.reddit.com/r/CapitalismVSocialism/comments/4ib76d/automation_capitalism_v_socialism/d2wx6la/?utm_source=share&utm_medium=web2xthat.

Any insight would be greatly appreciated!

Answer:

1.  A mainstream neoclassical synthesis economist would say that this system can be doable but it has what we would call a lot of incentive compatibility problems. It is not only the fact that the government needs to be accurate in...

Question:
Where did the money come from, what kind of economies, why did they run out of money?
Thank you
Answer:

Projects like temples and pyramids, as with public monuments today, represent a choice about how labor effort in a society is directed. Some labor is required to produce food, shelter and clothing that are necessities for sustaining life. Beyond...

Question:
I took an undergrad macro economics class at Drake University a few years back and I had a hard time understanding the professor on several issues. (I want to say that I'm not politically motivated here, or trying to make a political point). One issue was regarding national debt and deficit spending. In class we discussed how historically the USA general public and government hadn't looked favorably on holding debt until the 1930's. During this time through borrowing and spending on domestic projects the federal government helped pull the nation out of the grips of the depression. Since then it's been an accepted part of life that deficit spending by the federal government has more good than ill effects. Sometimes I think this works, but too often it's just assumed it works and we've worked ourselves into a massive financial hole by this unchallenged assumption. The rational he used was the debt was being bought by citizens and thus the interest on this debt was owed to ourselves, and when the gov repaid the debt and interest there was a gain somewhere in the US economy for purchase or investment in something else. I could buy this point of view if the Treasury sales were restricted to US citizens, but the fact is there are many international purchasers of our debt so we are actually paying out interest to England, Canada, Japan, China, etc. So the beneficiaries are not ourselves, but foreigners. I'm not sure if the professor was getting his point of view from a textbook or his own judgement, but I'm curious why these viewpoints are not scrutinized more in academia. Any insight would be helpful, thanks!
Answer:

Your understanding is correct that government debt allows governments to handle economic recessions better. When the private sector employment and therefore consumption demand is shrinking, the government can increase its public sector spending (...

Question:
Since the U.S. has "Fiat" currency, why does the Treasury sell securities?
Answer:

The sale of Treasury securities is the government's way of borrowing funds from the public. When the government sells bills, notes, and bonds, the public, the investors, become the government's creditors. The Treasury...

Question:
Is bitcoin meet the definition of money? if so How?
Answer:

Money refers to any asset that is widely used and accepted as a form of payment. It must be a medium of exchange, a unit of account, and a store of value (assets like stocks, bonds are all stores of value meaning they can be traded for goods at a...

Question:
Can you tell me a price range (per acre) that Central Iowa farmland sales have fallen within the last 6 months or so and is that price generally trending up or down? I am specifically interested in Webster County.
Answer:

Thank you for your question. Yes, we have recently developed a new Iowa Land Value web-portal which allows you to visualize the trends in Iowa land values at the county, district and state level. It is available at...

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