Ask an Economist

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:
I have no formal background in economics, not even a college ot high school course, so my question may be simplistic. I am given to understand that bank assets include loans and the value of those loans is one factor in determine the asset holdings of banks. If this is correct, is debt reflected as a net economic positive in the GDP because the banks assets include debt, which is construed as income? By extension, what gets measured in GDP, income from the loan during that year (my payments) or the total value of the loan? Or is it both?
Answer:

GDP is the $ value of the total value of final goods and services produced in a year. That is the income definition. There is an equivalent expenditure definition. Loans are financial assets and all financial assets and liabilities are not...

Question:
I have questions on China soybean import tariff.

1. Because of the tariff on US soybeans, China buy soybeans from other countries. How can other countries increase their production to accommodate this sudden increase of demand? You cannot just grow more soybeans by flipping a switch. Supply and demand suggests there was an equilibrium before. Those buyers who "lose" their orders to China have to find soybeans somewhere else. Does it mean they come back to the US farmers because they are the only producers left in town?

2. China is a big soybean buyer and can move the market. Soybean prices have been fallen since the tariff announcement, factoring in the impact of the tariff. Does it mean it hurts other producers like Brazil? But why there are reports saying Brazilian farmers are happy about increase in export? They don't suddenly produce more to sell at a lower price. According to Business Insider, Brazil is estimated to produce 3.5% more year-to-year. Is it enough to cover the loss in lower prices?

3. What happens to the US unsold China-bound-supposedly soybeans? Are they sold to other nations as mentioned above, or they are left to rot?
Answer:

The policy-driven increase in the import price of U.S. soybeans into China generated a change in relative soybean prices across the globe, making U.S. soybeans relatively more expensive and soybeans of other origins, such as Brazil, relatively...

Question:
I was watching a documentary about microfinance in developing countries. Many of the loans were 20-100 dollars. What would happen if people living in poverty were just given the money, and not expected to pay it back? How would that effect the economy?
Answer:

The need to pay it back would discipline the actions of the borrower, make them choose more worthwhile projects. This would raise efficiency. 

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:
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:
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:
I recently read a story about China stockpiling commodities.
https://www.agriculture.com/news/business/doud-china-is-stockpiling-world-s-grain-supplies

Mr Doud, the chief agricultural negotiator for the U.S. trade representative, has put out statistics saying that China has been stockpiling large amounts of the world’s residual supplies of grains and other commodities and says that stockpiling these commodities is “depressing prices for every other farmer across the globe,”. But why would stockpiling lead to depressing prices? It would seem to me that taking residual commodities off the market (stockpiling) would have the opposite effect; that it would create greater competition for the remaining supplies, which would lead to higher prices.
Answer:

The impact of stockpiling commodities on prices depends on the timeframe. While the stockpiling is occurring, your reasoning is accurate. The stockpiling is removing supplies from the market, creating more intense competition for the remaining...

Question:
Why do we need inflation? Could market prices just fluctuate according to supply and demand? It seems to me that the only real argument for inflation is that it is means for making the masses work just that little bit harder. By this I mean that companies and governments ensure that inflation rises a little bit more than wages when they want people to work a little bit harder, or to strive for that higher-paying job. In this situation, big businesses (as well as the progression of humanity's wealth) seem to be the only winners (eg. they can increase profits massively if they leave their workers' wages alone, while increasing the cost of their good/service in relation to inflation). Do we need inflation for anything other than this?
Answer:

Inflation is the natural outcome of price changes brought about by market forces and governmental forces. It is the rate of change in the price level that, in a country like the U.S., is entirely determined by market forces and the actions of the...

Question:
Bitcoin, a cryptocurrency notable for facilitating decentralized, peer-to-peer transactions, has caused controversy among some economists for its ability to allow unrestricted capital markets. Given that some countries rely on capital controls to restrict excesses of capital from flowing out of the country, does Bitcoin threaten the stability of these systems, and should it be regulated? Or have capital controls been rendered ineffective in the 21st century globalist economy?
Answer:

Bitcoin itself doesn't affect global financial markets very much now. It has been used with some unlawful activities such as purchasing drug and money laundering. It certainly can be and have been used to violate capital regulation law in some...

Question:
A group of ten people traveling in a bus from station A to Station B. The fare is Rs. 10/person with the total fare Rs. 100. But, the ticket master instead asks the group to pay only Rs. 50 and travel without tickets. He gives the assurance that the checking squad will not charge them for traveling without tickets. Here, the ticket master and checking squad know each other and will distribute the Rs. 50 among themselves, with an ultimate loss of Rs. 100 to state transportation and the people involved in this corruption go unnoticed. How can one prevent this economic loss to the state?
Answer:

You could allow the group to report this to the station master and get a Rs. 25 award. You could randomly check buses unannounced. You could offer a bonus to the ticket master for every ticket he has proof of having sold.

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:
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:
I just wanted to know if price changes how much quantity is supplied or demanded then what creates the price in the first place? If you say that price affects supply and demand and supply and demand affect price then this just sounds like circular logic to me.
Answer:

First, it is important to understand the difference between a few concepts. The demand is a function that describes that the quantity demanded (consumption) declines as the price increases. That is, the demand is the relationship between the...

Question:
I am a huge Duke Blue Devils fan and the NCAA basketball season has just recently started back up again. Currently, I am taking a microeconomics class and we just started covering oligopolies and cartels along with game theory. It got me thinking about whether or not the NCAA is considered a cartel or if it would be a monopoly. I looked into it and I have seen it referred to as being a cartel but also having monopoly power. Is monopoly power the same as a monopoly? If so, can the NCAA be a monopoly and a cartel?
Answer:

I teach an Economics of Sports class here at Iowa State University.  In my class, we discuss the economic structure of the NCAA and professional sports leagues in the U.S.  You are correct that the NCAA is a cartel and so is a...

Question:
I was just thinking about the massive economic dislocations resulting from World War I and their impact on Weimar Germany. But the dislocations spread well beyond there. The War had bankrupted England and France (though not so much the U.S.), to the extent that they forced Germany to pay such enormous reparations that Germany was a basket economic case in the 1920s. The U.S. economy boomed during that period, but it then crashed ten years later. After World War II, somewhat contrariwise, we had an unprecedented and never repeated period of growth and prosperity. After Vietnam, we had galloping inflation, followed (I think) by a recession. After seven years of a ruinous war in Afghanistan and Iraq, we had a Great Recession. Now I'm a political scientist, not an economist, but from the standpoint of political economy, it would seem that there must be correlations between massive military expenditures and economic cycles. The economy, that is to say, does not exist in a vacuum. So, Dr. Economist, is it possible that the famous "economic cycles" are not merely cycles that happen all by themselves, but rather sine waves that correspond with other fluctuations in military expenditures and war? As a political historian, I know that it has always been wars that have bankrupted nations and caused political upheavals. This is not new. Why not in our age? Why do we teach our students that there are recurring economic cycles without, in traditional economics, relating them to the military adventures of our own government, And that of others?
Answer:

There are really two questions here: (1) what are the causes of economic fluctuations, generally? And (2) what role do wars and military spending play in these fluctuations? 

Answering the first question is beyond the scope of this...

Question:
Hi
I am trying to calculate GDP for countries and the numbers dont 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:
I've worked with, or had my kids, in many organizations that rely on (and demand) contributions. They claim that 100% participation (even a single dollar) is important because other donors look at the participation levels when making their decisions. It seems plausible, but is there any ACTUAL evidence that (a) that is a wide-spread practice, and (b) that such institutions actually raise more money?
Answer:

This question is in two parts: 1) How prevalent is the requirement for 100% giving of any amount; and 2) Do organizations raise more money if there is a 100% giving expectation?

Let me begin by stating that I’m not aware of any research...

Question:
Burkina Faso has an employment rate of about 15%, give or take. Approximately 85% of the population is subsistence farmers. Does this mean the country's economy is supported by the 15% of the population who are receiving a wage (not including foreign aid)?
Answer:

The answer is no. It is not correct to conclude that Bukina Faso’s economy is supported by only 15% of the population. It is a common challenge in developing countries to appropriately account for employment and the economic contributions of a...

Question:
How can there be inflation at different rates within the same currency zone? For example, how can there be higher inflation in Greece than in Germany, despite having the same currency?
Answer:

Effectively, you are asking: how can there be different prices across countries within the same currency zone? This may sound surprising because within the Euro common currency, for example, we label regions as countries and there is a price...

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:
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:
I keep seeing this number used instead of actual dollar numbers. Isn't most government spending a part of GDP? If $1 billion spent on a battleship raises the GDP by $1 billion, doesn't that fatally skew the percentage formula?
Answer:

Let me start by reminding you that GDP is a measure of the total amount of goods and services produced in an economy, say the USA, in a year. So it sums the total value in dollars of everything that has been produced in the country in a given...

Question:
Can you see the number GDP per capita increase in the next year and subsequently cause an increase in commercial boat ownership within the United States?
Answer:

Let me start by saying that I have expertise in the economics of commercial fishing. I cannot speak to whether GDP will increase next year. If GDP does rise, there may be channels by which commercial boat building and therefore boat ownership...

Question:
Are goods and services purchased to comply with regulations included in GDP? For example, is money spent on preparing tax returns considered "production" in GDP calculations? It kind of feels like it should *not* be, but I suspect that it is.
Answer:

GDP is the final $ value of all final goods and services produced in a year. Even if a service exists to help compliance with a regulation, it is included because the provision of that service, such as that performed by a tax attorney, is income...

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