Ask an Economist

Question:
I understand that the balance of payments should be equal, and that the Current Account should equal the Capital Account. The U.S. imports more than it exports, so other countries have more of our currency and can use it to buy assets. What I don't understand is how that USD is categorized in the interim. If Company U.S. buys $1 million worth of goods from Company China, how is that cash categorized while it remains unspent in Company China's bank account? What if they just let it sit there and continue to save that cash, wouldn't this throw off the balance of payments and cause the Current Account to be greater than the Capital Account due to the unspent cash?

Thank you!
Answer:

The balance of payments accounts are maintained on a double entry basis. An import of $1 million will show as a negative $1 million entry in the Current Account. When the Chinese exporter receives and deposits this $1 million check in its Chinese...

Question:
Can you please explain the mechanics behind this statement from deutsche bank regarding potential market risks for 2019: "slowing growth in China may trigger substantial US dollar appreciation". Is this essentially saying that since growth will slow in china, American imports will increase and thus the demand for USD will increase causing the currency to appreciate?
Answer:

Fundamentally the change of the exchange rate reflects the difference of productivity growth between China and U.S.. In the past decade, the productivity of China grew faster than U.S. and therefore we see a long-term appreciation of RMB over U.S...

Question:
Dear Economists,

I recently had an argument in my fantasy football group that I believe an economist can answer. I need to define some terms and give some background before I get to the question.

I am in a 12 team league and we conduct a snake style draft every year to pick our players. A snake style draft is one in which teams are assigned a draft position and the draft is conducted 1-12 in the odd numbered rounds and 12-1 in even numbered rounds. Our rosters consist of 16 players. Every year your roster completely resets and we redraft in reverse order of standings (meaning that the team that finished last picks first and the team that finishes first picks last) with the following exception. You are allowed to keep up to 2 players, one player that you drafted (class B) and one player that went undrafted the previous year (class C). Provided that they are on your roster on Thanksgiving.

Players can be divided as follows:

Class A1 players cannot be kept by definition, and cannot be dropped from your roster.

Class A2 players cannot be kept, but can be dropped from your roster.

Class B players can be kept by giving up a draft pick that is 3 rounds earlier than where they were selected the year prior. i.e. If they were selected in the 5th round you would have to give up a 2nd round pick.

Class C players can be kept by giving up a draft pick that is three rounds later then where they are projected to be picked that year. i.e. If they are projected to be picked in the 5th round you have to give up an 8th round pick to keep them.

Generally speaking, Class A1 players are more talented than Class A2 players, who are more talented than Class B players, who are more talented than Class C players. Also, it is impossible to know how good a player will perform in future years, or what their projected draft position will be because those projections are not released until July of the following year.

As a result of these rules I adopted the following strategy after I was eliminated from this year's playoffs. I dropped all Class A2 and B players from my roster and picked up 16 Class C players using the following logic. Class A players are worthless for future years because I will lose them for nothing when the rosters reset. Class B players require me to pay a premium to keep them, and because they would need to vastly overperform expectations they are not worth the investment. Class C players are the least talented of the bunch, but I will have 16 chances to pick one that is in a good position to perform well, and I will get that player at a discount because I will be able to draft them later than when the market says they should be drafted. The other teams do not acknowledge this as a legitimate strategy. I believe that this illustrates relative value (valuable players that have no value considering my circumstance), opportunity costs (roster spaces that have worthless players but could have players with some value), and expected value (players who are worth very little now, but may have value later and can be drafted at a discount).

What do the economists think of my strategy?

As a post script, I tried to trade Class A players for Class C players before dropping them, but no team would trade with me because they thought I was giving up too much value for nothing.
Answer:

Thanks for your ‘Ask an Economist’ question. I will provide some thoughts, but may not be able to answer it completely to your satisfaction given I do not fully understand how your fantasy league operates. For example, you do not explain how...

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:
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:
Was it Truman's intention to begin paying down the debt after WW2? If so, what happened to prevent it? And was there any way that the public would have known that the debt was not to be whittled down to the same extent that had always been attempted previously? Was it the result of an announced policy, or simply something that was never gotten around to?
Answer:

To begin with, the premise of this question is somewhat mistaken.  As was true in earlier wars, WW II did cause a large expansion of federal government debt both absolutely and relative to GDP.  Indeed, the debt/GDP ratio reached about...

Question:
At the risk of sounding like a socialist, I wanted to ask about potential economic potential of a maximum wage. Sweden tried it with a 12:1 ratio, failed sadly, but I wondered if a less extreme idea would be viable. Say 100 times the minimum wage is the most anyone could earn in gross taxable wages. I'd probably say it would be fair to exclude athletes and entertainment industries. It would be a hard sell for congress so this is purely a theoretical question. Short of how the CEOs would feel, what is the viability and potential impact on the economy?
Answer:

I am not sure there is any deep reason why a government would want to set a cap on wages. What purpose would it serve, other than to curb income inequality by lopping off the top rungs of the ladder? If that is desirable, then there may be other...

Question:
This question may not be as clear cut as it sounds in my head, because people have different personal finance strategies based on their income and circumstance. However, the heart of it is that many people base their views on how the economy should work by how their personal budgets/finance strategies work. Can you explain in simple terms why personal finance strategies are not (or are) beneficial on a larger economic scale?
Answer:

Take a simple textbook example due to Keynes. If you are spending beyond your means, a financial advisor may recommend some austerity on your behalf: ask you t cut spending, pay off your debt, and stay within your means. At the level of a country...

Question:
I received my undergraduate degree in economics, with a hard focus on higher level and more mathematics. I did well with most everything up to advanced mathematics and real numerical analysis. I struggled greatly with those, much more than the others - and I'm not sure if I learned them well at all. So, with that kind of experience, should I consider applying to PhD programs in economics or calling it off, as all of my advisers told me "If you can't handle this, you won't make it to Christmas in a PhD program"?
Answer:

You are correct that modern economics requires a high degree of facility with mathematics, including probability and statistics.  The requirements for mathematical proficiency will vary somewhat from program to program.  That said,...

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:
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:
Hi, I am a nursing recruiter and am experiencing what I think might qualify as a cartel - I was curious of your opinion. Travel Nursing is a large business where hospitals pay recruiting firms to staff RNs by contract. The bill rates with the hospitals are negotiated in multiyear contracts, whereas the nurses negotiate their pay with the recruiter company per contract (typically 3 months at a time).

This has been quite an efficient market for many years until recently when the nurses started to compare pay for contracts on Facebook groups. Currently a group called Gypsy Travel RNs was created by an ex-nurse to help travel RNs find travel jobs - it has over 20,000 members.

Part of the information now being shared by the RNs is their pay package details quoted to them by the recruiter before accepting an assignment. They will compare what others are being paid and seek the opinion of any person in the group who makes an effort to respond, which is usually responded with "pay too low!"

Every person in this system acts on their own knowledge of the market. However, having hundreds of other RNs injecting their own views of an offer (accurate or not) seems to be artificially inflating the RNs side of the market, which drives up the costs for the hospital side.

It could be argued this is what other consumers do for other large purchases that might be negotiated. However, there are no established Facebook groups with 20,000+ home buyers all currently active at the same time in the market comparing offered prices.

These types of groups keep growing - would you consider this type of system a cartel? It this even legal?
Answer:

Let me first state that I cannot answer the legal part of the question. Antitrust litigations often involve economists to show empirical evidence of abuse of market power and to determine the extent of damage the cartel has caused to consumers...

Question:
My question is thus, If the U.S. has millions of jobs needing employees, how can any president take credit for the number of jobs being filled? i.e., Millions of unfilled jobs and people finally decided to fill those positions then obviously no president forced them to apply. So how can a president suddenly take credit for people deciding to rejoin the job market. Am I missing something here? The question is in reference to job growth vs millions already available jobs.

Additionally, when the job numbers are released, does it account for individuals working two jobs to make ends meet?
Answer:

Politicians can claim credit for whatever they want – and typically they do claim credit for everything that looks good and blame everything that looks bad on their opponents. 

The more pressing question is whether they should take...

Question:
My sister and I were trustees for our Mom's estate that was a two family house. For five years that our Mom was in assisted living my sister lived there and collected rent. The rent paid for all house expenses and any needs that Mom required. My sister had also lived there for the past 25 years. All house expenses during that time was paid for by Mom. When Mom recently passed the house became the estate to be shared by both. Rent is $650 per month equaling $7800 per year. Annual expenses cost $3400. That would provide a share of $325 per month or $3900 per year for each of us. My sister says I should pay for half the house expenses. I believe that because she resides in the house the rent will pay for the annual costs and that I should be entitled to my share of $3900. I believe that my paying half the annual expenses is subsidizing her living there. Can you please provide your opinion on what is the proper resolution to this matter? Thank you very much for any assistance you can offer.
Answer:

It is not possible to provide a very good answer to this question because because it is not very clearly posed and is not specific about the desired remedy. Also, the answer below represents some off-hand views of an economist and, under no...

Question:
When the GDP is calculated for a country, is inflation taken into account? What I mean is, if a country has 2% GDP growth, is that before or after inflation is removed from the equation.Because it seems to me that if a country's GDP grows by 2%, and inflation goes up 2% in that time, they may cancel each other out to actually have neutral growth.
Answer:

The difference is between real and nominal growth. The GDP of a country is the $ value of the goods & services produced by that country in a year. Say, the GDP of a country in 2010 is $100 and that in 2011 is $110. The increase could have...

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...

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