texts: Does different Base Year in Price Index affected conversion of nominal value to the real value?

texts:
I do not have any economics background, but currently I have some data sets regarding price index. I have some doubts regarding if my way of conversion is correct?

I have 4 data set. So let it be DS1, DS1 PI, DS2 and DS2 PI.

Note that DS1 PI and DS2 PI are both different variables price index.

DS1 is price index in Base Year 2012, while DS2 is in Base Year 2014.

I am using DS1 to convert the nominal value of attribute 1 to a real value. This adjustment is done to convert all DS1 variables to the current real value at May 2015. The formula is shown below.

$$Adjusted Price 1 =\frac{DS1 Variables}{DS 1 PI} \times DS1 PI_{May 2015}$$

Similarly, I am doing the same thing for DS2.

$$Adjusted Price 2 =\frac{DS2 Variables}{DS 2 PI} \times DS2 PI_{May 2015}$$

Then, I would make a comparison between these 2 adjusted price variables. So my question is since the base year are different, would the adjustment to May 2015 be correct?

Both of the adjusted/real price are now in the same current value and would be comparable. It does not matter if the base year are different in this case?

Sorry if the question is confusing. I would appreciate your help in this matter.

Thanks.


texts: Why is the Supply of Labour More Elastic in a Single Province/State then it is in the Country as a Whole?

texts:
Apparently, the federal government has a greater ability than provincial government to increase tax revenues by raising tax rates because the supply of labour is more elastic in a single province than it is in Canada as a whole.

However, why would supply of labour be more elastic in a single province than in the country as a whole?


texts: Theory of and studies on the long-term effect of governmental redistribution

texts:
Proposition 28 from this 2000 survey (Fuller and Geide-stevenson 2010) of American economists shows that 49% of American Economics Association members agree, and 31% agree with provisions, that it is a legitimate role for the government to redistribute wealth.

That was an increase over 1990.

Policy beliefs rely heavily on values, but is there substantial theory or evidence showing that the policy of governmental redistribution improves either long-term economic growth or long-term absolute well-being of poor people?


texts: What guarantees that endowed agents have non-zero prices in an Arrow-Debreu Economy

texts:
In my research I am trying to find minimal conditions to guarantee a quasi-equilibrium must always be a typical Arrow-Debreu equilibria in a rather specific production setting.

This may be rather trivial/maybe I'm misunderstanding something, but I am struggling to show that agents endowed with goods will never have zero-prices on their goods. This seems to intuitively be true to me because it makes no sense for an agent to give away a good for free if they might make profit on it/can just keep it for themselves otherwise, but I can't see why market clearing and optimal production would imply that consumers never have zero prices at a quasi-equilibria.

Long story short, could somebody explain to me what stops agents from having zero prices on goods in an Arrow-Debreu production economy? What types of assumptions are necessary? Again, sorry if this is a silly question. I'm a mathematician by trade and have only recently started working with economic models.


texts: If an economy has capital that is less than the golden rule level of capital, can we reach the golden rule without increasing the savings rate?

texts:
This question is in context of this problem I was trying to solve:

The answer given is (a). But I think the answer is (C). My arguments are as follows:

First, the golden rule level of capital corresponds to one and only one savings rate, $ s^* $.
Thus, to reach $ s^* $, we need to increase the savings rate (since the economy starts off below the golden rule of capital accumulation steady state).
Increasing savings reduces consumption initially.
But increased savings stimulate investment, which increases production, which ultimately increases income and thus **increases consumption in the long run.

Is my answer correct, speaking strictly in terms of academic Solow Model theory and with the information given in the question? If wrong, why?


texts:
Is it possible to have a negative gini coefficient?
In which situations is it possible?

Any help would be appreciated.


texts: How to prove that a utility function U(x,y)=min(x,2y) is quasiconcave?

texts:
I have a question that asks:
"Let there be two goods 1 and 2.Let $x$ and $y$ denote their respective quantities.$(x,y)$ represents a bundle. Suppose a consumer’s preferences over bundles in $R^2_+$  can be represented by the utility function $U(x,y)=min(x,2y)$. Prove that the consumer’s preferences over bundles in $R^2_+$ are convex by proving that the utility function is quasiconcave in $R^2_+$"
I was taught that if a utility function is quasiconcave, then $\begin{vmatrix} 0 & U_x & U_y \\ U_x & U_{xx} & U_{xy} \\ U_y & U_{yx} & U_{yy} \\\end{vmatrix} > 0 \forall (x, y) \in R^2_+$
However, when I start doing the partial derivatives, I notice that I get:
$\frac{\partial U}{\partial x} = \begin{cases}1, && x \le 2y \\ 0, && x > 2y\end{cases},$
$\frac{\partial U}{\partial y} = \begin{cases}0, && x \le 2y \\ 2, && x > 2y\end{cases},$
$\frac{\partial U}{\partial x^2} = \begin{cases}0, && x \le 2y \\ 0, && x > 2y\end{cases},$
$\frac{\partial U}{\partial y^2} = \begin{cases}0, && x \le 2y \\ 0, && x > 2y\end{cases},$
$\frac{\partial U}{\partial xy} = \begin{cases}0, && x \le 2y \\ 0, && x > 2y\end{cases},$
$\frac{\partial U}{\partial yx} = \begin{cases}0, && x \le 2y \\ 0, && x > 2y\end{cases}$
I then got $\begin{vmatrix} 0 & U_x & U_y \\ U_x & U_{xx} & U_{xy} \\ U_y & U_{yx} & U_{yy} \\\end{vmatrix} = \begin{cases}0, && x \le 2y \\ 0, && x > 2y\end{cases}$
This is where I am stuck. I am unsure if:
a) I made a mistake somewhere
b) my method is wrong
c) Everything I've done so far is correct, but I need to do another step
Please let me know if I need to provide more information, thanks


texts: Find change in gross profit after price change

texts:
How do you solve this question?

  A company has 3 products. They contribute to 30%, 30% and 40% of sales
  respectively.

  They have profit margins of 15%, 30%, and 50% respectively.

  If the client raises prices by 10% for Product A (assuming costs
  remain constant), what is the change in the company's total gross
  profit?

Is sales the same as total revenue (TR) or is it the same as profit ($\pi = TR - TC$)?

If it's the same as total revenue, I know that product A contributes 30% to the total sales, i.e.

$$
0.3 \cdot TR = TR_A
$$

Profit margin is given as $\tfrac{TR - TC}{TR}$, and if the profit margin of profit A is 10% then
$$
\frac{1.1 \cdot TR - TC}{1.1 \cdot TR} = 1 - \frac{TC}{1.1 \cdot TR}
$$

If the client raises prices by 10% for product A, the total revenue (TR) is now
$$
TR' = 1.1 \cdot P \cdot Q = 1.1 \cdot TR
$$

But how do i summarize? How can I conclude what the change in company's total gross profit is?


texts: Is information technology going to turn most "common goods" into private goods?

texts:
Common goods, (not public) are so because they are non-excludable and rival.  Often this reflects the impracticality of excluding some users, rather than an absolute impossibility. For example, a park is public because it's impractical to be charging everybody that derives a benefit from using it. However, if it becomes easy to track who uses the park,  for how long,  who looks at the parks,  etc. then the park could be financed privately!

Gadgets that track people's use of different goods could change which ones we deem to be excludable and which ones non-excludable....

A basic example is toll roads. If we mount GPS's on all cars and figure out how much tim they spend on the road, we could charge people for their use of streets directly. No more publicly financed road construction!


texts: Opportunity profits vs. opportunity costs

texts:
Having learned that

Opportunity costs = the costs for avoided profits

are a well established and quite useful economic concept, I wonder how its counterpart is officially called and investigated:

Opportunity profits = the profit by avoided costs

Costs can be avoided in many different ways:

by paying unfair wages
by not providing good working conditions
by paying too low taxes
by exploiting the environment without paying for avoidance or reparation of damages and pollutions.

My question is for

the official name of "profit by avoiding costs"
some standard references on this topic
esp. in comparison with opportunity costs

A useful article on opportunity costs is this one:

  Do Economists Recognize an Opportunity Cost When They See One?

One may as well ask:

  Do Economists Recognize an Opportunity Profit When They See One?

Side question (the other way around): Would

paying higher wages than normal or necessary
providing better working conditions than normal or necessary
paying higher taxes than normal or necessary
paying more for avoidance and reparation of environmental damages and pollutions than normal or necessary

count as opportunity costs?


texts: Book recommendation: agent based modeling?

texts:
Is there a book along these criteria?

introductory
discuss both theory and writing program
focus on social science (economics / politics / sociology)

There are bunch of tutorials on the Internet, but journal articles tend not to have code, and a lot of work is not relevant to social science. Thus I think I'll get better recommendation from Econs SE.


texts: how to measure the funding liquidity, i.e., equivalent U.S. TED spread, in the Australian market?

texts:
I'm stuck on how to estimate the credit (counterparty) risk in interbank lending in the Australian market. TED spread is usually measured as the difference between the LIBOR rate and the T-bill rate. However, when I use the same framework to calculate the Australian TED spread, it is often negative. I use two methods:
1. 3-month BBSW (bank bill swap rate) -  3-month bank bill rate (or cash rate)
2. 3-month LIBOR in Australian Dollar - 3-month bank bill rate (or cash rate)

The negative value definitely makes no sense as the former should always be larger than the risk-free rate.

Can anyone illuminate how this works? or did I use the wrong proxy?


texts: Economic effects of very large (>200%) household-debt-to-GDP-ratio in advanced economies

texts:
According to OECD figures, five OECD countries have houshold-debt-to-GDP ratios in excess of 200%:

Denmark  292.0%
Netherlands  277.1%
Norway   221.8%
Australia    211.8%
Switzerland  211.2%

Most of this is in mortgages, so for the sake of the question, assume secured loans.

Is there any consensus on the macro-economic effects  of very high household-debt-to-GDP ratios?  I imagine such economies should be excessively sensitive to price changes in the housing market?


texts: Question about constant relative risk aversion

texts:
The question:

Consider a person with constant relative risk aversion $p$.

(a) Suppose the person has wealth of $100,000$ and faces a gamble in which he wins or loses $x$ with equal probabilities. Calculate the amount he would pay to avoid the gamble, for various values of p (say, between $0.5$ and $40$), and for some values of $x$. For large gambles, do large values of p seem reasonable? What about small gambles?

(b) Suppose $p > 1$ and the person has wealth $w$. Suppose he is offered a gamble in which he loses x or wins y with equal probabilities. Show that he will reject the gamble no matter how large $y$ is if $p >= (log(0.5)+log(1-x/w))/log(1-x/w)$.

I'm not sure where to start with this. Am I solving for the risk premium and multiplying by $w$?

I know that for someone with CRRA utility $u(w)= (1/(1-p))w^(1-p)$ and that an individual will pay $\pi(w)$ to avoid the gamble if $u((1-\pi)w)=E[u(1+\epsilon \tilde)w)]$. But I'm not sure how to apply this information to solve the question.


texts:
Consider the buy-it-now price often included in online auctions. Suppose that 2 bidders in an ascending oral (English) auction bid for an object. Each has values i.i.d uniformly on $[0,1]$. Suppose the auction has a buy-it-now price of $B \ge 1/2$; either bidder can end the auction by paying $B$. Assume that there's an equilibrium when the bidding reaches $p(x)$ that a bidder with value $x\geq B$ will pay $B$ (i.e. $p(x)$ is the cutoff when a bidder with value $x$ pays the buy it now price). Also assume also that $p'(x)<0$. i) What price, conditional on winning, does a buyer with valuation $x$ expect to pay (as a function of $x$ and $p(x)$)?

It seems reasonable to assume that bidders will not bid more than $p(x)$. Hence, $b_1,b_2\in[0,p(x)]$. Then, it makes sense to consider two cases: where $x<p(x)$. Here the expected payment is simply the expected payment of the lower valuation bidder, namely, $\frac{p(x)}{2}$.

Secondly, we should consider the case where $x>p(x)$: the expected payment is here, the probability of facing a below-$p(x)$-valuation opponent, times their bid, plus the probability of facing an above-$p(x)$-valuation opponent times the probability of winning (ties are broken randomly) times $p(x)$

$$p(x)*\frac{p(x)}{2}+(1-p(x)*\frac{1}{2}*p(x))=\frac{1}{2}p(x)$$

  ii) Assuming risk neutrality, using the fact that the expected payment
  with valuation $x$ is the same without the buy-it-now option (namely,
  $1/2x$), what is $p(x)?$ (Note: you should get a quadratic equation; one root will be $p(x)=x$, but this is not the solution, given $p'(x)<0$)

I'm not sure how to solve this part, and I'm doubting my answer to the first part given that I don't know how it enables me to derive $p(x)$.


texts: If $x \succsim_i x_i^*$ then $p \cdot x_i\ge w_i.$ (MWG 16.C.2)

texts:
(MWG 16.C.2) Suppose that the preference relation $\succsim_i$ is locally nonsatiated and that $x_i^*$ is maximal for $\succsim_i$ in set $\{x_i \in X_i: p \cdot x_i \le w_i\}$. Prove that the following property holds: "If $x \succsim_i x_i^*$ then $p \cdot x_i\ge w_i.$"

Locally nonsatiation means that for every $x_i \in X_i$ and $\epsilon >0$, there exists $x_i' \in X_i$ such that $||x_i - x_i'|| < \epsilon$ and $x_i' \succ x_i$.
I think that I need to prove that if $x_i \sim_i x^*_i $ for $x_i \not= x_i^*$, then it is possible that $p\cdot x_i = w_i$ because I already know that if $x_i \succ x_i^*$, then $p\cdot x_i > w_i$.
I am stuck and  cannot proceed. Can anyone give me some hint for this question?


texts:
Say a firm is facing a budget line as stated below:($K$ stands for capital and $L$ stands for labor)
$$200K + 100L = 1000$$
Under this circumstance, a rational firm will look for ways to maximize its total production so as to lower its average total cost.
The current rental rate for capital is 200 dollars, and the going wage rate is at 100 dollars.
Now, assume that the marginal product of 1 unit of capital is $MPK_1$. And as the firm moves from ($K=0$, $L=10$) to ($K=1, L=8$), the number of outputs increases by $MPK_1$, and the number of outputs it forgoes should equal to the marginal product at the output level of 9 labors PLUS the marginal product at the output level of 10 labors, which could be denoted as ($MPL_9+MPL_{10}$).
My textbook says that if $\frac{MPK_1}{200} > \frac{MPL_8}{100}$, the firm will choose to purchase more capital. But the problem is, instead of $MPL_8$, the $MPK_1$ should be compared against ($MPL_9+MPL_{10}$), since the forgone product is ($MPL_9+MPL_{10}$) as the firm shifts from ($K=0$, $L=10$) to ($K=1$, $L=8$), right?
There's one more question I'd like to ask. My textbook also has this equality:
$\frac{100}{MPL} = \frac{200}{MPK} = MC$ when the firm has maximized its profit. But I don't understand. The total amount of money spent should remain constant under the constraint of the budget line.


texts: Contradictory FOC and maximizing solution

texts:
I have to maximize the following function -
$\max_{x \in (0,1)} (((p_1x)^{2r} + (p_2(1-x))^{2r})/2)^{1/r}$
where, $p_1$ and $p_2$ are drawn from uniform distribution [0,1] and are considered to be given for this maximization problem.
FOC are given as -
$\frac x {1-x}$ = ${(p_2/p_1) }^{2r/{2r-1}}$
My problem is -
Whenever $p_1$ > $p_2$, FOC argues that value of x should be < 1/2 but this doesn't maximize the function. Rather solution should be x>1/2. Why the FOC solution is not maximizing the objective function. What have I done wrong?


texts: When is expenditure function non-decreasing?

texts:
I have to find parameters m and d for which expenditure function is non-decreasing and homogeneous of degree 1.
My expenditure function is:
I think that I should find ∂e/∂p which has to be >= 0 but I have a problem with this because expenditure function is for n-good. Can someone help me?


texts: Return on Capital Invested - what to include in 'capital employed'

texts:
The formula for ROCE is:

ROCE = net profit before tax / capital employed

Where capital employed is long-term liabilities + share capital + retained profit.

However, I've only used this in very simple situations, so when I came across Samsung's financial report, I am somewhat confused (balance sheet at page 4, P&L account at page 7):

https://images.samsung.com/is/content/samsung/p5/global/ir/docs/2017_con_quarter04_all.pdf

Can I confirm that the values (in millions of Korean won) are:

Net profit before tax = 56,195,967

LTL = Total liabilities - total current liabilities = 87,260,662 - 67,175,114

Retained profit = 215,811,200

Share capital = preference shares + ordinary shares = 119,467 + 778,047

Also, should share premium be included in share capital?


texts: If you simply "copy" the trades of a professional trader, but with less money, isn't that *guaranteed* profits?

texts:
I keep coming back to this thought:
I just don't understand the complex "rules" or "patterns" of how the prices of Bitcoin (or any financial instrument) move up and down, so I will not "gamble" with my money to make money that way.
But then there are people who must know their stuff, because they make endless YouTube videos about it and seem to know so much. And they trade themselves.
If I simply copy their trades, except with much smaller sums, isn't that going to guarantee that I make profits perpetually? (Assuming that they will show me their trades.)
They are not going to suddenly make some crazy bet and lose all their money. If I just do what they do, every time, am I not going to keep making money, guaranteed? What am I missing? What is the flaw in this logic? It cannot be that simple...


texts: Why is the total wealth of the world not a conserved quantity?

texts: I have read that the GDP of the world is growing. I do not understand how this is possible. If I make profits out of a commodity or a service, somebody pays me for it. Hence, their wealth has to drop. So, shouldn't wealth only get redistributed? If so, how is it possible for the world GDP to grow?


texts:
Are services included in the calculation of a trade deficit?

Presumably measuring service exports is more difficult/less accurate(?) than for goods?


texts: Do you consider a house a normal NECESSITY good or normal LUXURY good?

texts:
I am trying to write my performance assessment about income and price elasticities of demand but I have a hard time figuring out if a house is a normal necessity good or a normal luxury good.

Everyone needs a house, however, no one needs a mansion. So which is it, is a house a normal necessity good or a normal luxury good?


texts: What does the Fed mean by "smoothening money market functioning"?

texts: In many recent interviews, Fed Chairman Jerome Powell has repeatedly mentioned that ensuring the smooth functioning of money markets is a key goal of the Fed's recent monetary policy actions. I want to know how exactly do their policy actions achieve this. Money markets are the markets that deal with short-term borrowing and lending in the economy and instruments traded in these markets include short-term treasury bills, commercial paper and mortgage- and asset-backed securities. What I interpret from what he said is that the price mechanism in these markets is not functioning optimally (i.e. some form of market failure) and that government intervention is required to restore proper market functioning. From the policy actions listed in this article, it seems that the most relevant ones would be the lowering of interest rates and the increase in asset purchases. In essence, I would like to know what problems in the money market is the chairman referring to and why the Fed's policy actions would resolve this problem.


texts: How does fed cutting federal fund rate affect student loan

texts: If fed cuts rate, it means it's cutting federal fund rate right? then why do loans like credit card and stuend loan? those aren't like Mortgage rate which the fed cuts its rate by buying MBS


texts: Continuity Axiom in Expected Utility Theory

texts:
Take the following definition of continuity.

  The preference relation $\succsim$ over the space of lotteries
  $\mathcal L$ is continuous if for any $L,L',L''\in\mathcal L$, the
  sets $$S_1=\{\alpha\in[0,1]:\alpha L+(1-\alpha)L'\succsim L''\}$$ and
  $$S_2=\{\alpha\in[0,1]:L''\succsim \alpha L+(1-\alpha)L'\}$$ are both
  closed.

Is it necessarily true that $S_1\cup S_2=[0,1]$? If so, why?


texts: What are some real-world examples of the different types of trading blocs?

texts:
The subsequent types of trading blocs have the following definitions:

Free Trade Area -- free trade among members
Customs Union -- free trade among members and common external tariff
Common Market -- free trade among members, common external tariff, and free movement of factors of production
Economic Union -- free trade among members, common external tariff, free movement of factors of production, and harmonization of all economic policies

What are some real-world examples of these different types of trading blocs?


texts:
The dynamics of Ramsey-Cass-Koopman growth model is usually summarized in phase diagrams with the 2 equations (conventional symbols apply):
\begin{align*}
\frac{\dot c}{c}=&\frac{r-\rho}{\theta}\\
\\
\dot k =& f(k) - (n+g+\delta)k
\end{align*}

From these equations you work out the equilibrium and whether it is a saddle path.

However this analysis is static; some of those parameters are time varying (e.g., 1950 population growth isn't the same as in 2017). How can you represent these changes in this essentially static graphical framework?


texts: What does the Federal Reserve intend to do with bonds it has purchased under QE?

texts:
In New York Magazine's interview with investor Mike Burry (made famous by The Big Short), he claims Quantitative Easing has left the Federal Reserve with an extraordinarily high leverage ratio:

  What makes you most nervous about the future?

  Debt. The idea that growth will remedy our debts is so addictive for politicians, but the citizens end up paying the price. The public sector has really stepped up as a consumer of debt. The Federal Reserve’s balance sheet is leveraged 77:1. Like I said, the absurdity, it just befuddles me.

What are numerator and denominator in that leverage ratio? What are the Fed's options for what to do with all of the assets it has purchased? Is it even clear what it intends to do?


texts: Original Work for Pareto Refinement of NE under Strategic Form

texts: Just looking to see if anyone has any knowledge of original work for pareto refinement of NE under strategic form. I want to give credit to the refinement in a paper I am writing. I pulled the refinement from Nachbar's notes on "Topics in Advanced Game Theory", but obviously that is not a reliable source to cite.


texts: I understand that a monopolist optimally sets a two-part tariff by pricing at marginal cost and then extracting CS as a lump sum fee.  However, wouldn't the lump sum fee induce a decrease in consumer demand?  Is the typical assumption made in two-part tariff problems that there is no income effect?


texts: Does the 2nd welfare theorem involve government intervention?

texts: How is the initial redistribution of resources carried out?


texts: If government impose price control, what happens?

texts:
I have this MCQ homework that I would like your opinion about

Suppose government chooses to impose a price control on a good. Which of the following is NOT a potential consequence of the restrictions on price?

Excess supply may occur.
Excess demand may occur.
No unexploited opportunities will exist.
People may spend a lot of time waiting in line to acquire the good.
Underground markets may emerge.

I think the answer is 3 because when black market exist with shortage and ppl will want to exploit the situation.


texts: Explaining the development of income inequality

texts:
I'm a syndicated writer working on an explainer about income inequality and I realized I didn't really understand how it can possibly develop in an economy where all dollars are spent. That is, let's take a hypothetical: I understand how it's possible where one person creates a product that everyone else purchases (creating a concentration of wealth). But, then, that person invests or saves the money, which ultimately gets circulated back into the economy. If total money is zero-sum (all saved money is spent, all received money is spent), how does any one actor in the system end up with more money than others?

As I see it, the only mechanisms by which income inequality could increase within a group of people is if the system included globalization, where wealthy people spend money outside of the system (i.e. sending the money to other countries which were previously poor)

I'm open to answers that include a closed hypothetical economy (with 3 actors) or some other explanation. Thank you and let me know if I can clarify this question.

Update: Some have suggested its a duplicate of "how wealth is created". This is different because im asking about income (money supply and distribution), not the distribution of outputs. I get how some people might produce more. I dont understand how money concentrates in a system where all savings is invested or spent.


texts: What are the differences between the older gold standard and the current fiat money standard?

texts:
My current limited understanding is that the gold standard was a system in which there was a fixed currency amount per unit of gold. For example, 1 ounce of gold might be 100 USD. Another country like UK might peg their currency to be 1 ounce of gold for 50 GBP.

This means that GBP and USD would also be fixed at 1 GBP for 2 USD?
What would be an example of how trade would occur between these two countries? Say that the US had oil that the UK wanted to buy. Would the UK give the US GBP in exchange for the oil? Then in return, the US would use this GBP and return it to the UK government in exchange for some predetermined amount of gold? So in the end US gold reserves would increase and UK gold reserves would decrease? But doesn't this then mean that the US would have to print more money to keep the gold/USD exchange rate fixed?
In today's fiat currency, how does trade occur? I understand that different factors like interest rates and inflation can affect exchange rates.
But why do countries hold currencies of other countries in "reserve"? Why is this necessary?


texts: Why is economic profit for a monopoly per unit demand minus ATC?

texts:
I understand that the P-ATC gives the per unit economic profit

Why is this the case? Why wouldn't we take price minus the marginal cost?


texts: is univerisity's scholarships a price discrimination?

texts: Many universities allocate financial aid to undergraduate students on the basis of some measure of need. Does this practice reflect charity or price discrimination? If it reflects price discrimination, do you think it lies closer to first-degree discrimination or third- degree discrimination?


texts: Calculating the amount paid for a loan in today's dollars

texts:
So I was trying to figure out the amount paid for a loan in today's dollars using two different methods but they give me different results. I was hoping that someone could explain which method is right (or if neither are) and what mistakes I was making in the other method.

The problem assumes a constant rate of inflation.

Method 1

Calculate the real interest rate using the Fisher equation: $i_{real} = \frac{i_{nominal} - inflation}{1 + inflation}$
Use the real interest rate instead of the nominal rate in the loan payment formula: $payment = \frac{i * A}{1 - (1 + i)^{-n}}$ where i is the interest rate, A is the amount borrowed, and n is the number of payments
Find the total amount paid by multiplying the payment by the number of payments $total = payment * n$

Method 2

Find the payment using the nominal interest rate. Again the payment formula I used is  $payment = \frac{i * A}{1 - (1 + i)^{-n}}$
Convert each year's payment to today's dollars. To convert to today's I did $dollars_{today} = dollars_{future} * (\frac{1}{1 + inflation})^n$. n is the number of inflation periods.
Sum up the results from step 2 to get the total paid.

An example where the methods give different answers

Loan Amount: = $1000
Nominal Interest: 10%
Number of payments: 20
Inflation: 5%

Using Method 1 we have

Real Interest Rate = $\frac{0.10 - 0.05}{1 + 0.05} = 0.048$
Each Payment = $\frac{0.048 * \$1000}{1 - (1 + 0.048)^{-20}} = \$78.63$
Total Paid = $\$78.63 * 20 = \$1572.61$

Using Method 2 we have

Each payment = $\frac{0.10 * \$1000}{1 - (1 + 0.10)^{-20}} = \$117.46$
Here is the spreadsheet with the work and a picture of it
The total paid is as you can see $1463.81

So you can see that the methods differ in amount by $108.80.

So can anyone explain which is right (if either of them is) and why the wrong one is wrong? My only guess so far is that

   the loan payment formula always gives results in nominal dollars and all I did is change the interest rate by using the real interest rate. Not sure if this is really the case because I studied CS when I was in school, not Econ.

Thank you for your help in advance.


texts: Real time data map about the amount of a currency that are held in the world ?

texts:
Where can I see in real time data about the amount of a currency that is held in central banks (and maybe other significant  places) ? A map would be great.

I would like to know if there is an institution that watches where the currency reserves are held for the different currencies out there.

I would specialy like to know where is US dollar held around the world

I have another related question : knowing that oil and US dollar are directly correlated : can oil reserves be considered as US currency reserves in a certain way ?

I quickly tried the FMI website but did not find anything.

FYI : I'm just trying to get myself a personal point of view about the recent  dollar value raise, and I know peanuts about economics and finance : don't hesitate to prove me wrong :) .

Thanks,
Julian


texts: If I fill a vending machine with \$0.50 sodas and sell them for \$1, am I creating 50 cents of wealth for the economy?

texts:
This is a very simplified example.
If I fill a vending machine with sodas that cost \$0.50 each and someone comes along and pays \$1 for it, am I creating an extra \$0.50 of wealth for the economy? The wealth being that I've taken the beverage and delivered it to someone in a convenient format.
I am referring to the idea that the economy is not a zero sum game. If I buy something and sell it for a higher price we are not just shifting money around the economy but actually creating new money (assuming I provide some value in the process, but that is determined by the consumer).
So in the above example with the vending machine, does the federal reserve have to create an extra 50 cents of the currency in order to avoid deflation?
Another example: the company I work for generates an extra \$10m in sales this year than last year. So people in the economy have transferred \$10m from them to us. That equates to the creation of \$10m of wealth, right? And the fed just then issue another \$10m to keep the currency at the same level?
Note: I am a total laymen without any education in economics. These concepts - currency values, value / wealth creation - are simply of interest to me


texts: How does an increase in USD money supply affect inflation?

texts:
Say an average american household is bringing in $50,000 a year.
Between ongoing quantitative easing and the drastic stimulus packages passed in February-May 2020, the USD Money Supply increased by 25% or 16% depending on if you look at M1 or M2, respectively. (I assume M2 is more directly related to inflation, but would love if anyone can provide clarity there)
Assuming 0 change in real output (not likely, but for simplicity) would the last 3 months actions to increase the money supply equate to a direct equivalent loss of value per USD?
Would this average American family's \$50,000/yr income in February become equivalent to a \$42,000/yr salary(in Feb \$'s) by May?
Or are there other factors in play? (outside increasing real output)
Adding this question and its answers as they're relevant here.


texts: IRF vs Autocorrelation function of AR(2)

texts: Will the impulse response function and autocorrelation function of an AR(2) coincide? I say that they will not, because $IRF_{t}(t+k)$ (that is, the effect of a unit shock at time $t$, on the process at $t+k$) will be 1 when $k=0$. However, $corr(y_{t}, y_{t})$ is the variance of the $y_t$ process, and will not necessarily be 1. Thank you.


texts: Utility maximization question setting up.

texts:
Consider a consumer whose preferences can be represented by the following utility function: $$u(x_1,x_2)=\dfrac{x_2}{(1+x_1)^2}.$$

    Assume the agent's income is $y=5$. The price of one unit of good $1$ is $p_1=1$. For each unit of good $1$ the agent buys, he qualifies to buy up to one unit of good $2$ at an additional price of $p_2=1$. In other words, to buy one unit of good $2$ the agent has to first buy one unit of good $1$. The agent must consume everything he buys. Using this information, sketch the feasible set. Is it convex? Derive the utility maximizing bundle.
    How does your answers to question 4. change if the agent does not have to consume everything he buys ("free disposal")?

For question (4)

The budget constraint is

$$x_1p_1+x_2(p_1+p_2)=y$$

My question is

1) my budget constraint is true?

2) what is the difference when budget constraint allow free disposal and not allow?

I don’t understand the part (5).

My solution also is posted.

Thanks a lot.


texts: modelling disutility from over consumption

texts:
In introductory economics courses the concept of marginal utility is illustrated through simple examples like how much benefit one gets from eating another slice of pizza (i.e first slice provides 100 utils, second slice 50 etc).

I was wondering if there exists a utility function that can allow for the possibility of over consumption (i.e. a function that would produce -50 utils from the 10th slice of pizza ).

I know there would be issues with this since utility functions are only defined up to monotonic transformations, and concavity in our utility functions would violate the "averages preferred to extremes" assumption.

Does such a function exist?


texts: Does the concept of Capitalism increase the net wealth?

texts:
I am currently going through a video by Peter Schiff from the occupy Wallstreet period where he is talking with the protestors at the time. I'm pretty early in the video and Mr. Schiff makes the following statement

"The way a capitalist gets rich is by enriching everybody else" - Schiff (4:21)

I take the above to mean that "Capitalism increases the net wealth of everyone. This is something that I have personally heard before, but never looked into. So, I tried to google the following

Does capitalism cause a net increase in wealth

What I was looking for was essentially an Econ101 level explanation of possibly the argument for and against this but the different links that appeared were:

How Capitalism Actually Generates More Inequality - evonomics.com
Is Capitalism To Blame For Inequality? - inequality.org
ECONOMICS AND CAPITALISM - capitalism.com

Which all by their article or website name alone seem like they would be biased.
So I ultimately want to pose the question here in two points. Firstly, did I interpret Schiff's own quote properly? Secondly, what is the basic Econ 101 explanation for the above-bolded statement?


texts: Weak axiom of revealed preference and choice coherence - how to show they are equivalent

texts:
$B$ and $B'$ are elements of the family of subsets of $X$

WARP
For every pair $x,y \in B \cap B' $ and if $x \in c(B)$ , then if $y \in c(B'), x$ must $\in c(B').$

Choice Coherence
For very pair $x,y \in B \cap B'$ and if $x \in c(B)$ and $y  \notin c(B)$, then $y$ must $\notin c(B').$

Are these two equivalent. If yes, how can we prove it?


texts:
Prove if $\succsim$ is rational then: if $x \succ y \succsim z$, then $x \succ z$

By definition of $\succ$,

\begin{equation} \tag{1}
x \succ y \iff x \succsim y, \; \neg \; y \succsim x
\end{equation}

Where $\neg$ is the negation symbol.

So we want to show both

$$ x \succsim z \; and \; \neg z \succsim x $$

We are given

\begin{equation} \tag{2}
y \succsim z
\end{equation}

By $(1)$ and $(2)$ and transitivity of $\succsim$ (since $\succsim$ is rational),

\begin{equation} \tag{3}
x \succsim y \succsim z \Rightarrow x \succsim z
\end{equation}

We also need $\neg \; z \succsim x$

Suppose the contrary that $z \succsim x$, but then

$$ z \succsim x \succ y \succsim z $$

Such that

\begin{equation} \tag{4}
z \succ z
\end{equation}

is a contradiction  (as $\succ$ is irreflexive) so it must be that

\begin{equation} \tag{5}
\neg \; z \succsim x
\end{equation}

Applying $(3)$ and $(5)$ we have the desired property

$$ x \succsim z, \; \neg \; z \succsim x \Rightarrow x \succ z $$

My question is if I am allowed to arrive at the statement $(4)$ from the line above it?


texts: Relationship between changes in Currency against basket of currencies and inflation

texts:
Sorry I'm not an economist, but I was wondering if there was a general country by country guide to how inflation there changes with response to a change in the currency's value against a basket of other currencies. I would naively expect an inverse correlation, but I'm not sure if this is proportional?

I'm just interested as after the Brexit vote, the UK pound has declined in value by 20% and am curious as to how much of this would be expected to show up in inflation.

I think it might be complicated by the state of the world economy (if no-ones able to sell, suppliers might have to lower prices), the state of employment (high unemployment might suppress any price rises, and the nature of the economy (ratio of services to manufacturing sector).


texts: Derivation of wage rate from nested CES production function

texts:
could anyone please help to explain how equation (4) in this paper is derived? I understand that it's an application of first order conditions using the chain rule from equations (1)-(3), but the notation is very confusing and I can't follow the math at all. Thankyou in advance to anyone that can help
For reference, equation (1) is:
$ Y_t = A_t[\theta_t L_{1t}^\rho + L_{2t}^\rho]^{1/\rho} $
Equation (2) is:
$ L_{et} = (\sum_{a}\alpha_{ea}L_{ea}^\eta)^{1/\eta},  e = (1,2) $
Equation (3) is:
$ L_{eat} = (N_{eat}^\delta + \beta_{eat}M_{eat}^\delta)^{1/\delta} $
And from this, equation 4 is derived as:
$ \ln W_{eat}^S = \ln A_t + 1/\sigma_E \ln Y_t + \ln\theta_{et} + \ln\alpha_{e\alpha} + \ln\beta_{eat}^S + (1/\sigma_A - 1/\sigma_E)\ln L_{et} + (1/\sigma_I - 1/\sigma_A)\ln L_{eat} - (1/\sigma_I) \ln S_{eat},  S = {M,N} $
Where
$ \sigma_I = (1/{1-\delta}), \sigma_A = (1/{1-\eta}), \sigma_E = (1/{1-\rho}) $


texts:
1) What does it mean that something (in this context the taxation) has (or doesn't) costs to first order?

So, below is an excerpt from Romer's Advanced Macro (p. 598) with such a statement that I've encountered and felt a bit lost. Altough the model developed later is pretty clear, I still don't get what the sentence with this 'costs to first order' really mean.

2) Also: how the last sentence is implied by the sentence before the last one? That is: what exactly (this first-orderness? how?) implies that $C \approx T^2$?


texts: Is the concept of limited liability in corporate law beneficial to economy

texts:
The concept of limited liability in corporate law is widespread all over the world. Limited liability means, that owners of a company can only loose their capital invested into the company - the shares - as opposed to being liable with their whole private equity. My question is simple:

Does this benefit the economy as a whole or is this just a legal trick by corporate crooks?


texts: Problem with a Hal Varian Question from chapter 5

texts:
Remember our friend Ralph Rigid from Chapter 3? His favorite
diner, Food for Thought, has adopted the following policy to reduce the
crowds at lunch time: if you show up for lunch t hours before or after
12 noon, you get to deduct t dollars from your bill. (This holds for any
fraction of an hour as well.)

(a) Use blue ink to show Ralph's budget set. On this graph, the horizontal
axis measures the time of day that he eats lunch, and the vertical axis
measures the amount of money that he will have to spend on things other
than lunch. Assume that he has 20 total to spend and that lunch at
noon costs 10. (Hint: How much money would he have left if he ate at
noon? at 1 P.M.? at 11 A.M.?)

(b) Recall that Ralph's preferred lunch time is 12 noon, but that he is
willing to eat at another time if the food is sufficiently cheap. Draw
some red indifference curves for Ralph that would be consistent with his
choosing to eat at 11 A.M.

The answer is given as

My question is, shouldnt the graph be perfectly parabolic? with both tangents at Time = 11 and 1.
Shouldn't eating at 11 be exactly as preferable to eating at 1?

Thanks for the help.


texts:
Suppose there is an airline that wants to sell 200 seats in a flight. It can either sell them as business class or as economy. Ideally it would sell all  as business class, but it is willing to give away seats as economy in case not all can be sold as business class.

Then there is a number of consumer, which all prefer economy seats, but each of them is willing to buy business class in case no economy seat is available.

Is this a well-known problem?
What is it called?

Edit:

I suppose this is roughly a "game of chicken". But I believe in real markets there will some equilibrium, but I don't know what it depends on.


texts: Calculating the real interest rate, why would my thesis supervisor want me to subtract inflation instead of dividing by inflation?

texts:
I'm writing my thesis and for the data I'm using I had calculated the real interest rate by dividing the nominal interest rate by the inflation rate. My supervisor recommended me to change it to instead just subtracting the inflation but I didn't want to ask him why since I've already asked him too many stupid questions.

I always thought dividing is the "real" way and IIRC one of my professors called subtracting the inflation rate a mere "approximation". So why would my supervisor want me to subtract it?


texts: why is aggregate demand equal to aggregate expenditure?

texts:
AD is how much the people in market demand (or want to buy) goods and services. On the other hand, AE is actually how much they end up spending.

AD = AE = C+I+G+X-M

I can demand and not buy? wouldn't that make AE unequal to AD? so how can it be equal?

Please, help. Thank you!


texts: Financial integration and connection between savings and investment

texts:
I'm having some difficulty to understand the following sentence:«(...) there's a tight connection between domestic savings and investments at the national level, but very little when we look at the subnational level. Limited spatial correlation is exactly what would be expected if the capital market was doing its job of allocating savings to the most productive investment projects - irrespective of where savings were generated.»

What they're saying is that if there's a high correlation, then there's no financial integration - as at the subnational level?

Any help would be appreciated.


texts:
Two firms can produce either low (L), medium (M) or high (H) quantity. The payoff matrix is given by:

What is the outcome of this game if firms play only once?
Suppose the game is played for infinite periods and $\delta = 1/2$. Is it possible for firms to collude and choose $(L, L)$? Is it possible for firms to collude and choose $(M, M)$?

From the picture we can see that if the firms play once then the outcome is $(H,H)$. However I don't really know how to solve the second part and would really appreciate some help. What I do know in repeated infinite games that may be useful for this problem is the following.

Lets take the case of deviating from $(H,H)$ to $(M,M)$ for firm 1.

Equilibrium payoff = $3+3\delta+3\delta^2...=\frac{3}{1-\delta}$

Deviation payoff (I think that if firm 1 deviated and played $M$ then firm 2 would play L since they have higher payoff $(10)$ and so we would have)= $5+2\delta+2\delta^2... = 5+\frac{2\delta}{(1-\delta) }  $

Where $\delta$ is the interest rate after the first round. I feel that this portion is irrelevant, however, since we are talking about collusion and should consider both firms, instead of just firm 1's strategy.


texts: Test: Part-time Workers Effect on Unemployment Rate

texts:
I want to test the causality of part-time workers on unemployment rate.

Should i use part-time workers as a share of total employment or total labour force?
If I run a regression of part-time workers on unemployment rate, there could be reverse causality. So I would have to use 2 stage least square. What are the possible instruments I could use?


texts: Why the difference in productivity and wage trend in the UK economy?

texts:
In reading this article from FT, we come across two graphs:

and

Shouldn't real wages have a similar trend to productivity? Why was there that discrepancy since the 2009 until 2014? Maybe some other factor that shifted the PS, or the WS curve? It's interesting to notice that in Jun 1st 2014 began the sharp fall in oil prices, which may be the cause for the increase in the real wage we've been observing until know. It seems that workers productivity has had little impact in the behaviour of real wages...

Any help would be appreciated.

Edit: I'm including a graph with CPI in GBR with data from OECD.


texts: Choice between dummy variables and Likert scale in Linear Regression

texts:
I want to run a linear regression based on the data gathered using a questionnaire. Several of the questions have the following form:
How much do you spend on xyz in a month?
a. Less than \$50
b. \$50 to less than \$100
c. \$100 to less than \$200
d. \$200 or more
This is ordinal data, with multiple categories. I am not sure how to code them.
Should I use code them like a Likert scale (though Likert scale data is interval data instead):
0 for a, 1 for b, 2 for c and 3 for d
Or should I use dummy variables like this:
3 dummy variables for options b, c and d, with the respective dummy variable set equal to 1 if the option is chosen and 0 otherwise. All dummy variables are set to 0 if option a is chosen.
In this case I am concerned that all sense of ordinality is lost and I am treating the options just as nominal data. In this case, I think I would not be able to comment on whether the more you spend on xyz, the more you gain weight for example.
Which one should be used? Or should some completely different coding be used?
I seek to use such variables only as regressors, my regressand is a ratio-scale variable.


texts: What are some growth theories that are considered the most correct at the moment?

texts:
In under grad intermediate macro classes they often teach the Solow model. While intuitively it makes sense, it seems like it no longer is really taken seriously anymore (I could be wrong).

From my understanding (which could I be wrong of course), there appears to be a move toward more endogenous growth theories that try to explain technology growth rather than taking it as a constant like the Solow model.

Can anyone provide me some examples of growth models that, at the moment, are considered the most complete or correct?


texts: Where are the payments for export in the balance of payment?

texts:
I know that when we sell some goods abroad, we credit Goods&Services part within Trade balance, which is a part of Current Account.

What part of the Financial Account is debited with the sum received for the exported goods?


texts: Net exports term in aggregate expenditure

texts:
This might be a basic question, which I don't yet understand. The aggregate expenditure (i.e., in my understanding, the total amount of inflation factored (i.e. real) money spent in the economy by its participants) can be expressed as: $$Y = C+I+G+X-M$$

where $X$ is exports and $M$ is imports. Why isn't it $Y = C+I+G+M-X$? Aren't we spending in imports while having a cash flow by exports, i.e. effectivly reducing our expenditures at the end of the day?

We can go through the logic that GDP plus the imports (total goods) go to consumption, investment, government spending and exports. Then use GDP=expenditure and arrive to the answer. I don't want to go by that route but instead to focus on real money spent. We spend on imports and receive money on exports, i.e. opposite of the formula above.


texts: Calculate Elasticity of demand in this example

texts:
Suppose that house prices increase by 10%, and the total quantity of homes purchased
decreases by 8%. What is the elasticity of demand of housing? Interpret your answer in the
context of a 1% change in home prices?

Is the answer just -0.8? Can someone explain this please, my professor really sucks.


texts: Economic Order Quantity w/ no set up costs

texts:
Is it possible to modify the EOQ model to work in a purchasing environment when ordering costs are effectively $0$?

The classic EOQ model is:
$$
Q=\sqrt{2aK/h}
$$

with $a$ being demand, $K$ ordering costs, and $h$ the holding costs. If $K$ is $0$ it yields an order quantity of $0$. Is there any optimal way of determining the order quantity when there are no order costs?


texts:
I'm thinking whether there exists cases where OLS estimator is closer to the true coefficient than WLS estimator in probability limit in a misspecified model.
Specifically, I'm working on a case where:
The true model consists of a dummy D, a control X and their interaction DX. But the misspecified model misses the interaction term.


texts: Price Changes in Factor and Product Markets

texts:
I think something is wrong in my reasoning, and I can't really find out what it is

Lets say the supply of labor decreases in a market. That would mean that the wage rate would increase in that market. Firms hiring out of that market will experience an increase in their marginal cost, and the supply in the market for the product which uses that labor will shift left, increasing the price of that product. But that would mean that the marginal revenue product of labor would increase because of that increased price and shift the demand for labor right. At that point the wage rate would increase and everything would cycle through again.

Where am I going wrong? How does the wage rate stabilize?


texts: Is it possible to sell a rival and non-excludable product?

texts:
The context pertaining to which I have asked this question is same as that of the question linked below

  Rival and non excludable products

In the linked question, a few examples of rival and non-excludable products were given like fish in ocean. But fish is a natural resource and nobody is selling fish to the fishermen. So my doubt is that whether it is possible to sell a rival non excludable product(not a service)?


texts: TFP estimation as residual and normality of errors

texts:
Economists normally calculate TFP as the residual of a regression on output against K, L, and maybe other variables.

However, a well behaved regression is expected residuals to be normal (https://en.wikipedia.org/wiki/Normality_test). This is at odds with a situation where TFP increases over time, as in real economies.

Is then the method of residuals flawed? What are some adjustments made to overcome this problem? Maybe adding a trend?


texts:
$$\ln(\text{pay})_{itj}= \alpha_{ij} + \beta\ln(\text{performance})_{jt} + \gamma X_{ijt} + T_t + ε_{ijt}$$
This fixed effects model was used to investigate the link between pay-performance throughout the corporate hierarchy. It controls for employee-firm match fixed effects ($\alpha_{ij}$). $i=$ employee, $j=$ firm, and $t=$ time.

How would the coefficients on performance from this table be interpreted.


texts: Assessing the ability of dividend yields to predict stock returns using out-of-sample forecast errors

texts:
In Introduction to Econometrics, 3rd Edition, by Stock and Watson, there is a short example about evaluating the ability of using dividend yields (current dividends over price) to predict future stock returns. The regression featured uses monthly data from 1960:1 to 2002:12 on the logarithm of the dividend-price ratio for the CRSP value-weighted index of stock returns. (See pp. 564-565.)

They present several regressions. The main one of interest is a ADL(1) regression (auto-regressive distributed lag regression)
$$
\text{excess return}_{t} = \rho_0 + \rho_1 \text{excess return}_{t-1}
+ \gamma_1 \ln(\text{dividend yield}_{t-1}) + \epsilon_t.
$$

The mention

  One way to evaluate the apparent predictability found in column (3) of Table 14.7 is to conduct a pseudo-out-of-sample forecasting analysis. Doing so over the out-of-sample period 1993:1-2002:12 provides a sample root mean square forecast error (RMSFE) of 4.08%. In contrast, the sample RMSFE of a "constant forecast" (in which the recursively estimated forecasting model includes only an intercept) is 3.98%. The pseudo out-of-sample forecast based on the ADL(1,1) model with the log dividend yield does worse than forecasts in which there are no predictors!

The regression results are given in the following table:

Question: Does anyone have a reference (a paper or something else) that calculates this same average out-of-sample forecast error on more recent data? Ideally, this would include data up until 5 years ago or so.


texts: Could a "Japanese-style strike" work as it's supposed to? Under what conditions?

texts:
This is an urban legend, mostly believed in Spain and some countries in South America.

The legend is based on the premise that their way to make a strike would be to work much more than usual in some goods production, this would cause prices to be lower due to increased supply in the presence of constant demand, so the owners of the business would end up losing money (or making less money) because of that, due to usually planning goods production with the "just in time" method. In addition they would have to pay employees for that day of work and storage costs for excess production, which might be high.

I don't think this would work for every case, but maybe for some it would be plausible.

Would such a type of strike be able to do something similar for at least some cases? If so, in which ones?

We can consider that legally speaking there's no limit to no the number of goods that can be produced.


texts: SAS: How to do ARIMA procedure with structural break?

texts:
So it seems like my data has a structural break in it, using Box-Jenkins methodology and evaluation such as ADF test wont give appropriate forecasts/results if I do not correct for the structural break in the data.

I don't understand how to go about fixing the structural break and then doing the ARIMA procedure of identification, estimation, diagnostic checks ext.

I know one way is to dummy out variables....however how do I include this in the proc arima step? I can create dummy variables in the data set but its not like including the dummy's in my data set will do anything to the ARIMA process because the arima process doesn't do anything about additional variables in the dataset except for the one variable I am trying to forecast.


texts: Interrelationship between inflation and foreign capital flow

texts:
For the below let's assume domestic currency is ₹ and foreign capital is in \$

Foreign Capital Inflow => ₹ Appreciates (Because of more \$)

But consider this,

Foreign Capital Inflow => More ₹ in circulation (Since \$ have to be exchanged into ₹ before actually using in India) => More Inflation => ₹  Depreciation

What is wrong in this second reasoning?


texts: What kind of contractual problem is this?

texts:
Oliver Hart, a Nobel Price winning economist, made the following case against privately founded prisons in an interview from 2017: “There are some things that are difficult to specify [in a contract between a government and a private prison]. One is the quality of the guards. A private company may have incentives to hire cheaper, less trained guards and yet still be within the contract.”

What is this type of contractual problem called? Why does it occur?

Hello everyone,

I'm struggling with the question above.
It is from and old exam in my lecture 'Organization and Management' (consisting mostly of contract theory).

I think the question is either aiming for:

'Incompleteness of contracts' since the "quality of guards is hard to specify". Probably because the quality is observable but not verifiable (or specifying the quality would be too costly) OR
'Adverse Selection' since the government does not know what kind of cost function a private company would have (for the quality of the guards) prior to signing the contract.

Now that I wrote that I feel like it must be the former just because it makes sense to me.

What do you think? May the contractual problem at hand also be something entirely different?

Thank you in advance,
Chris


texts:
I have 2 questions regarding ARIMA.

1st: How do we get the MA component - the et's (as we want to regress yt on lagged yt and also et and lagged et's)? If I want to regress yt on lagged yt's, I have them. But I do not have et and lagged et's.
2nd: what is the advantage of including et's in the regression - why is it better (if it is) than simple AR regression? Are there some efficiency gains from adding et terms?
Thank you


texts: Do import tariffs tend to increase a country's exchange rate (if so, why)?

texts:
From Prof. Stiglitz' Vanity Fair article:

  How, one might ask, is this possible, given Trump’s rhetoric, his
  determination to move against China with a 45 percent tariff? There’s
  a global macroeconomic variable that Trump left out of his calculus,
  and that’s America’s exchange rate—not just with China, but with the
  entire world. If America’s exchange rate increases, our exports become
  more expensive, and imports become cheaper.

He doesn't explicitly say that tariffs tend to increase a country's exchange rate. He leaves it as a standalone conditional. If it's simply a conditional, he could mean that there's a nonzero chance that the Dollar's value will increase independently. However, I felt like maybe he infers some causality.

I feel like a tariff would change the trade balance such that the US will import less, while exports are fixed.

Do import tariffs tend to increase a country's exchange rate? If so, why?


texts: In the UK, does the rate of annual price increases in food consistently beat inflation? How can we tell?

texts: Informally, I've often seen it claimed that the price of food always goes up. Certainly, I do notice when the price of my £5 food bag goes up 50p or when my £1 milk goes up 20p. Yet, whenever I've asked those with an interest in economics why they aren't investing in stockpiles of food, they laugh and tell me that doing so would be to bet against human prosperity and that over time, the price of food goes down. Clearly, both side cannot be correct. I've tried to look in to this on my own, for example I've tried to use the data available at https://tradingeconomics.com/united-kingdom/food-inflation however, I've noticed that the common measures of inflation are often based on food prices, and I suspect that the measures of "food inflation" will be somehow influenced by some other measure of inflation, so I've reached the point where I believe that I will need the help of the more skilled folks here. Is there an easy answer to this question?


texts: Objective criteria and judgement of models

texts:
How do professional economists 'judge' how valid or accurate a economic model is? What criteria do they use, and are these criteria objective?

Clearly, we don't know what the truth is. So a model can't be judged based on whether it predicts true things. So how is it judged?


texts: Rationale and Methodology for Discounting the Investment in an NPV Calculation

texts:
It is clear to me why the benefits accruing from an investment should be discounted. What I wish to understand is what the correct way discount the investment itself is.
Assuming zero inflation, consider that at a personal discount rate of $\rho$, the net present value of an investment $K$ can be computed as
$$
 \frac{R}{\rho - \mu} - K\ ,
$$
where $R$ is the expected revenue flow with trend $\mu$. If this quantity is positive, the investment is a good one. But suppose I pose the question of how much I stand to gain by delaying the investment to some later time $t$, say. The return term above is modified to $R_0 e^{\mu t}/(\rho - \mu)$, and if I leave $K$ as is, this new NPV will be strictly greater than the old value: a speculative bubble. I hence have two questions.

Should $K$ be discounted when computing the NPV of the investment at some future time? If so, what would the rationale be? I can understand the time value of money applied to the return, but why should a future investment (i.e. a future cost) be discounted?
If the answer to (i) is in the affirmative, would it make sense to use a different discount rate for $K$ than $\rho$? It seems to me that costs should be discounted differently (more gently) than returns.


texts: Are unemployment benefits considered to be an investment that may lead to a multiplier effect?

texts: I'm aware of the concept of the multiplier effect, and when I think about it, shouldn't it be possible that government spending on unemployment benefits create a multiplier effect?


texts: In which country does my money have the largest purchasing power?

texts:
To be honest i have literaly zero economic knowlegde so please treat me as a noobie in this case. Here is the questin: I live in Poland where my native currency is polish zloty (PLN), and i want to buy some comon product like 1 liter of milk, but i'm not bounded by national boundary. So i have let say 100 PLN, and my goal is to buy as much milk as possible in one selected country that maximizes the amount of milk purchased.
How to acchive this? How can i compare immanent value of my 100 PLN around different countries, and select one country that alows for maximal milk purchase? In this whole process i must convert my 100 PLN into national currency (in optimal country) and then go to shop (in that country).


texts:
Can someone please explain these things?  They show up all over the place and it seems people can't be bothered with documenting the labels.  Is this showing f(L) = W?  Is it showing f(W) = L?  If so, what's up with the labels (D) and (S) on the curve?  Is something else going on?  What's the dependent variable?  Are we trying to describe f(x,y) = S with a 2D graph?

Confused.


texts: What has been the reception of Posner & Weyl’s claim that property rights lead to market power?

texts:
Posner & Weyl claim that property rights lead to monopoly rents:
Property Is Only Another Name for Monopoly
Radical Markets
Have their claims been elaborated, tested, or peer-reviewed?
In situations with assets with unique attributes that cannot be substituted (e.g. a plot on a high street) this seems to be intuitive. An owner cannot be compelled to subject her property to market competition but she can hold out for a higher price than she values the property at. This generates an economic rent resulting from her market power over the plot of land in question. The claim seems to be less obvious where assets can be easily replicated (e.g. a pint of milk). That would imply that property rights may only lead to monopoly rents where they grant property over assets that generate monopoly rents (e.g. land).


texts: Leontief function marginal product of labor/capital

texts:
Find marginal product of labor of a Leontief production function.  For example,
$$f(L, K) = min\{\frac{L}{a}, \frac{K}{b}\}$$

MY ATTEMPT

Now as I understand it the marginal product of labor, $MP_L$ of this function cannot be found in the "normal" way because this function is not differentiable.  However, by definition, marginal product of labor means the extra output when one puts in an additional unit of labor.  We assume capital stays constant.

Say, we produce originally $q$ units of output.

Thus, if $\frac{L}{a}+\Delta L < \frac{K}{b}$ where we are increasing the quantity of labor, then we are on the vertical portion of the isoquant (Labor on the horizontal axis, Capital on vertical).  Thus, we would increase our output by $q+\Delta L$.

If $\frac{L}{a}+\Delta L>\frac{K}{b}$, we would still be producing $q$ units.


texts:
The CETA trade deal is supposed to involve only the EU and Canada, but Canada has already a trade deal with the USA and Mexico : I don't understand how this is possible.
For example, if I own one company in Paris, one company in Toronto and one company in New York, I can sell my product to myself from Europe to Canada and then from Canada to the US (or all in reverse). How could any tariff apply in such a case ? (my product never crossed a "trade border", yet it moved freely from EU to USA )


texts: Principal's beliefs in a repeated moral hazard problem

texts:
I have a question about models of repeated principal-agent models.

There is this famous piece by Bengt Holmstrom: Moral hazard and observability, 1979, The Bell Journal of Economics.
It presents the classical principal-agent model with moral hazard. Papers by Rogerson (ECTA 1985) or Spear and Srivastava (REStud 1987) extend his model to a repeated game.

The principal must choose an incentive-compatible contract. The agent has to choose an action $a$. The agent produces a random quantity $x$ from the distribution $f(x,a)$. The principal does not observe $a$ but it observes $x$.

My question is the following. In these models (and many other papers in this literature), the distribution $f$ is publicly known. Do there exist some results/articles assuming that $f$ is unobserved by the principal (or the agent). Instead, the principal may have a prior belief and update it over time as the game is repeated for instance.


texts: What is the exact relationship between the efficient-market and random-walk hypotheses?

texts:
The efficient-market and random-walk hypotheses are often discussed together as formalizations of the idea that "you can't consistently beat the stock market". But in my experience, they're often used interchangeably, and I've never seen anyone carefully explain the difference. (For example, Wikipedia says that A Random Walk Down Wall Street "argues that asset prices typically exhibit signs of random walk and that one cannot consistently outperform market averages. The book is frequently cited by those in favor of the efficient-market hypothesis." The Wikipedia article on the EMH says "there is a very close link between EMH and the random walk hypothesis" and the one on the RWH says that it "is consistent with the efficient-market hypothesis", but neither spells out a precise relationship.)

What is the exact distinction? Is either hypothesis a special case of the other? Put another way, could one imagine a stock market in which either hypothesis holds but the other does not? The EMH page says "Samuelson published a proof showing that if the market is efficient prices will show random-walk behavior", which seems to imply that the EMH is a special case of the RWH - so that one could imagine a stock market in which RWH holds but not EMH, but not the opposite. Is this correct?


texts: I have heard it claimed that amazon's retail business is actually not very profitable (it's claimed that most of their profit comes from their web services).  A rebuttal to this claim I have heard is that it only appears their retail business is not very profitable because they reinvest so much of their revenue, and that if they wanted to "turn on the tap" and stop reinvesting so much they would have to show huge profits from retail. I know next to nothing about accounting and cash flow statements and other public financial disclosures from corporations, so I wonder who is right? And is the rebuttal at least correct that it is not possible to deduce real profitability (as opposed to, I guess, "nominal" profitability) of amazon's retail business (or I guess any business that reinvests so much) from available information?


texts: Easy introduction to Heckscher-Ohlin model

texts: I'm looking for an easy introduction to this model. I have no background in economics at all. A bit of math is ok. I would prefer books, but pdfs are also ok. I searched after a few books, but I think many are too advanced for me (having no background in economics).


texts:
The Federal Reserve is the bank of banks in the US. While it cannot force banks to change their rates in order to monitor the economy, it has several other ways to influence. One way it by printing money.

Please forgive my questions, whose answers seem easy to be found online. It's a hot topic, so it's very hard to get validated information.

Questions:

Is the amount of money printed open knowledge?
Where to get a history profile of how much money has been printed by the Fed?
How validated is the info you provide, and in what sense?


texts: How to find data about earning per share of S&P 500

texts: I am working on a small project regarding PE ratio of SP500,for which I need historic earning per share data of SP500. I searched finance yahoo, but it has only prices data. Could anyone tell me the website where one can obtain it?


texts: Utility Maximisation Subject to Income and Time Constraints

texts:
The consumption of economic goods often takes time. Consider, for example:

Transport services, eg flights, rail journeys;
Leisure goods, eg watching a film, visiting a park.

I would like to explore models of consumer or household behaviour in which utility in a period is maximised subject to both income and time constraints.

From a Google search, two important (but rather old) papers on this topic appear to be:

Becker, G S (1965) A Theory of the Allocation of Time
De Serpa, A C (1971) A Theory of the Economics of Time

What are other (and more recent) key papers on this topic?

Addendum 31 May 2018

To give a simple example, suppose there are just two goods $X_1,X_2$ and utility $U$ is given by:

$$U = X_1^{0.5}X_2^{0.5}$$

Suppose further that the respective prices and time requirements are for $X_1 (1,2)$ and for $X_2 (2,1)$.  Thus the income and time constraints are:

$$X_1 + 2X_2 \leq I$$

$$2X_1 + X_2 \leq T$$

where $I$ is income and $T$ is available time. If $T$ is much larger than $I$ (low-income person), then the income constraint will be binding, and the time constraint will be slack, and vice versa if $I$ is much larger than $T$ (high-income person). Over an intermediate range, including $T = I$, both constraints will be binding. These different scenarios have different implications for the effect of a marginal change in price.  Perhaps time preference is relevant here but I can't immediately see how.

Addendum 23 July 2018

This book by Ian Steedman, reviewed here by Diane Coyle, looks relevant.


texts: Measuring income effect before knowing substitution effect

texts:
Suppose on the x axis we have shelter and on the y axis we have composite goods. Now, if the price of shelter increases, the optimal bundle changes from point A to point D. Standard textbook tells me to draw a line parallel to the new budget line B1, which is tangent to the indifference curve I0. In this way we can get the substitution effect. The income effect follows. My question is, can we reverse the two procedures and measure the income effect first by drawing a line parallel to the original budget line and tangent to the new indifference line?
Thanks!


texts: Effect of a US Federal Reserve rate hike on the Dow Jones Industrial Average

texts: There is speculation that the Federal Reserve of the United States will raise interest rates by 0.25% in the near future. What is the expected effect on the stock market if interest rates do rise by that amount? More specifically, what is the predicted effect on the Dow Jones Industrial Average?


texts:
I was reading a macroeconomics textbook and found two statements which seem kind of contradictory so I wish to ask how to correctly interpret this.

“When expected inflation is high, people increase their savings (such as buying bonds) due to the high nominal interest rate.”
“When expected inflation is high, people decrase their savings and increase their consumption because they expect that prices will become high in the future.”

If we look at the loanable funds market, the first statement will be represented by the rightward shift of the Savings curve (Supply of loanable funds), and the second statement will be represented by the leftward shift of the Savings curve (since increase in consumption means the same thing as decrease in savings as seen in the equation Y income = C consumption + S savings).

Thus the first statement and the second shows us completely opposite results, despite the fact that they come from the same stimulus - the rise of expected inflation.

So how should I understand this? what happens to the loanable funds market in the end (does the Savings curve shift rightward or leftward?) I would appreciate a detailed explanation :)


texts:
I am solving a signaling game where the manufacturer has private information about its production capacity. It can signal it using the wholesale price or limiting the order quantity of the buyer. Have you seen a paper or research using two signal, (in my case wholesale price and order limit)
Thanks


texts: Is the relation between expenditure and indirect utility in the Mascolell's diagram wrong?

texts: In page 75 of Mascolell's microeconomic theory, there is a diagram showing some relations. In particular, there is a relation saying $e(p,u) = v(p, e(p,u))$. I wonder if this is a typo? If not, how to interpret it so that it reconciles with the usual relation $v(p,e(p,u)) = u$?


texts: Framing effects and the use of subjective wellbeing measures in behavioural

texts:
In my first foray into behavioural economics I have encountered two themes;
- Self-reported subjective wellbeing (SWB) is commonly used as a measure of wellbeing. Survey based SWB measures are frequently used as regressors or dependent variables.
- Framing effects are also important. How a question or a choice is presented can influence the decisions made, perhaps radically.

Therefore there seems to be an obvious problem with using any particular survey based SWB measure for inference. How do we know that the SWB measure is the result of true SWB and not an artifact from framing?

Even using alternative surveys as a robustness check may not vitiate the problem if the two surveys frame the question similarly. For instance Proto and Rustichini (2015) use two measures of self-reported life satisfaction where people are asked to state their satisfaction on a scale between 0 or 1 (least satisfied) and 10 or 7 (most satisfied). Both these surveys present the choice fairly similarly. If you flipped things, i.e. made 10 least satisfied and 1 most satisfied, the results could be different.

Do you agree that this presents a problem? I have not seen the issue widely discussed (at least, not in the largely empirical papers I have read). How do behavioural economists address it?


texts: Currency triplets - arbitrage opportunity?

texts:
I have three currency pairs - USDEUR - 0.88, USDINR - 67.13 and EURINR - 75.88 , so simple math tells me that EURINR should be USDINR/USDEUR = 76.28 ...this is a fairly significant deviation from an exact conversion and i am sure i am forgetting something basic here.

Take the yen now and when i do a similar calculation USDJPY - 100.21 and USDINR - 67.13 and JPYINR - 0.67 ..result of USDINR/USDJPY gives me 0.6698 which is extremely close to the exchange rate.

Questions

a) what explains the difference in the first case? Is it because the factors impacting exchange rate between the pairs of countries are different ? (for e.g. US invests a lot more in India than Europe as a whole hence INR should be very reactive to changes in USD but not so for EUR ? )

b) How come there's a difference in the two cases shown? JPY seems to fit the equation rather nicely.

Apologies if this sounds confusing, I regret not paying attention to these classes in B school :(


texts: Limit of utility function in Ramsey-Cass-Koopmans model

texts:
I have given the utility function for the Ramsey-Cass-Koopmans model, as follows:
$$ u(c_t)=\frac{c^{1-\theta}-1}{1-\theta} $$
The claim is that as $\theta \rightarrow 1$, then the funciton is logarithmic, that is
$\lim_{\theta\to 1} u(c) = ln(c)$
I was told to use L'hôpital's rule, but I can't figure it out.
How can I prove this?
Thank you


texts:
As an answer to this question, it was stated that

  Economists believe that higher growth rates tend to also mean higher
  inflation rates.

As a non macro-economist, I am wondering if this is true? Is there any clear evidence on this relationship?

Higher growth may lead to higher demand and inflation but I guess this happens only if supply does not adjust and prices are not sticky.

The reverse causality running from inflation to economic growth does not seem to have much empirical support due to identification issues.

Moreover, this paper shows that inflation in industrialized countries is largely a global phenomenon. The results provide a good starting point for exploring the hypothesis that inflation should, to some extent, be modeled as a global rather than a local phenomenon. I would interpret these results as going against a connection between (local) economic growth and inflation.


texts:
link: https://research.stlouisfed.org/fred2/graph/?g=3big
I have watched this video where he explain this chart.
Basically he shows high correlation between Monetary Base and the Stock Market. But I cannot understand why he multiply the Wilshire for 47 and the "Federal Funds Rate" for 250 ?
UPDATE 2021:That correlation was true only for that time.


texts: Supply and Demand plotted on a three dimensional Cartesian coordinate system

texts: Is it possible ? if it's possible can someone give me a reference ? Thanks !


texts: How many of the world's workers are producing luxury vs necessary goods?

texts: Has there been any scholarship done on the proportion of producers producing high-end vs low-end goods? This could also be framed as the proportion of economic activity generated by wealth excess of a certain amount per person. Or is there a better way to understand this issue?


texts: Is there any statistics available on forecasting failures?

texts:
Like what percentage of financial/economical forecast fail?
Or how often do politicians create bad policies based on wrong forecasts?


texts: Dealing with Missing Data when Testing the CAPM

texts:
Question
How should I deal with missing data when trying to test the CAPM? Specifically, there are some stocks that are newly listed and/or delisted at any time. I don't want to exclude assets for which I don't have complete data because this would create a kind of survivor bias.  I know that CRSP provides delisting returns that should, but how do I manage the missing data in practice? For example, in the unconstrained model, the procedure looks like this:

(More details about the procedure are given below.) Now, if I wanted to take a bunch of random stocks at some point in time and look at them over some time period, what should I do with the values ($Z_it$) for these stocks that aren't listed at time $t$. Should I use the de-listing returns where appropriate and then fill in zeros everywhere else? But this would do weird things to the beta of the stock. Should I try to constrain the beta (the factor loadings) of the stocks to be zero in all the places where the stock is unlisted? This would require me to change the model (requiring a model that somehow allows for time varying factor loadings). How do people usually handle this problem? Is there an easy way (even if it is slightly more incorrect)?
Some Detail about the Estimation Procedure
For concreteness, suppose I wanted to test the CAPM using the time series regression framework outlined in chapter 6 of Campbell, Lo, and MacKinley (The Econometrics of Financial Markets). Some of the assumptions are listed in this image:


texts: financial crisis '08: what is it meant by the banks were saved by the states?

texts: Were banks literally saved with tax payers' money? Or is it that states borrowed the banks, consequently, the banks must return this money back at some point? Can someone please give me some references?


texts:
My problem involves measuring the impact of four activities undertaken by a population of 1,000 individuals that is attempting to lose weight.

The four activities are: (a) Eating healthy food; (b) Walking for an hour daily; (c) Meditation daily for 20-minutes; and (d) In-house physical exercise for 30-minutes.

For the sake of simplicity, let us assume that there are 1,000 participants who signed up on January 1, 2015, and their weights were measured then. Furthermore, let us assume that they will diligently commit to doing the same activity for the entirety of a quarter (i.e., if they commit to eating healthy food in Q1 they don't undertake any other activity; however they may change the activity at the start of Q2 or choose to continue what they did in Q1).

Finally, on December 31, 2015, I catch them before they head to Times Square to celebrate the onset of new year, and weigh them.

So my table looks something like :

Individual | Initial Weight | Q1 | Q2 | Q3 | Q4 | Final Weight

A-1 | 183 | A | B | A | C | 176
A-2 | 265 | D | C | B | B | 223
A-3 | 331 | A | A | A | D | 322
.
.
A-1000 | 257 | D | B | C | A | 228

My goal is to measure the impact of each activity's contribution to the weight loss across the population, keeping in mind that there is a distinct possibility that the order of activities undertaken could have an impact.

( In my real problem one of complexities that I haven't spelt out is that instead of doing the same activity throughout the quarter, individuals would have actually done any of those activity on a daily basis.)

Any thoughts would be appreciated.


texts: What is the relationship between real growth and stock market

texts:
I am interested in understanding when the stock market can influence real growth and the opposite, when real growth can influence the stock market. In other words, in which way causation is more likely to work?

In particular if stock market is growing, will GDP increase or will decrease?

After studying the Blanchard model, I found out that both ways are possible, in fact in its model there are two cases, good news and bad news, but it was never explained in my studies why in one particular market we are in the first case or in the second.

I only know that the answer depends somehow on market efficiency and if the country is still developing or not.


texts: Is there a conventional curve used to interpolate the Lorenz curves that model the distribution for calculating the Gini coefficient? Is it polynomial? But why? Which degree?


texts: Replicate Blundell and Bond (2000) results using R

texts:
I want to replicate Blundell and Bond (2000) Table III in R. I'm using the function pgmm from package plm, which (apparently) replicates the approach of Stata's xtabond2 (Roonman, 2009). The estimates I get are qualitatively similar, but not the same, the Arellano-Bond test of serial correlation suggests the moment conditions are invalide....and I'm sad to say I don't yet see how to recover the production function coefficients.
The authors of plm have a useful companion textbook: Millo and Croissant 2018 Panel Data Econometrics in R. I get the data from there (associated packaged pder), and follow section 7.5 for set-up and diagnostics. Here is a self-contained example:
library(plm)
library(pder) # contains the Blundell and Bond dataset
#detach(package:dplyr) # if loaded, dplyr::lag masks plm::lag

data('RDPerfComp')
str(RDPerfComp) #n.b. - variables already in logs (see ?RDPerfComp)

And now to replicate some of the columns from Blundell and Bond 2000 Table 3:
# "OLS levels"
ols<-plm(y~lag(y,1) + lag(n,0:1) + lag(k,0:1),
             data=RDPerfComp, index=c("id","year"),
             effect="twoways", model = "pooling")
summary(ols)

# "Within groups"
within_groups<-plm(y~lag(y,1) + lag(n,0:1) + lag(k,0:1),
                   data=RDPerfComp, index=c("id","year"),
                   effect="twoways", model = "within")
summary(within_groups)

# "SYS t-2"
sys_t2<-pgmm(
  y ~ lag(y,1) + lag(n,0:1) + lag(k,0:1) |
    lag(y,2:99) + lag(n,2:99) + lag(k,2:99),
  data=RDPerfComp, index=c("id","year"),
  effect="twoways",model="onestep",
  transformation="ld"
)
summary(sys_t2,robust=TRUE,time.dummies=FALSE) # both options can be provided directly in pgmm()

# "SYS t-3"
sys_t3<-pgmm(
  y ~ lag(y,1) + lag(n,0:1) + lag(k,0:1) |
    lag(y,3:99) + lag(n,3:99) + lag(k,3:99),
  data=RDPerfComp, index=c("id","year"),
  effect="twoways",model="onestep",
  transformation="ld"
)
summary(sys_t3,robust=TRUE)

The results are very similar for the pooled OLS model, almost identical for fixed effects/within model, and only "qualitatively similar" (magnitudes, signs) for the SYS-GMM models, with some exceptions (notable the estimate for the y_t-1 coefficient). More concerning, the Sargan-Hansen test appears to reject the null of valid instruments for both the SYS-GMM models:
sargan(sys_t2) # same statistic as reported by summary()
sargan(sys_t3)

...and the Arellano-Bond moment condition test appears to reject the null of no serial correlation, suggesting that the moment conditions are invalid
mtest(sys_t2) # you can make this robust using vcovc =
mtest(sys_t3)

So my questions:

Am I specifying these wrong (probably - my first try with gmm) or are we just looking at the results of different machinery?
What could explain the diagnostic test results, which appear to say the SYS-GMM models aren't valid?
How do we get Beta_n, Beta_k, and rho (the production function parameters, as given in the  middle panel of Table III) from these results? (EDIT: OK, as stated in the paper, via testing and imposing the coefficient restrictions using "a minimum distance estimator" see eq'n 2.3 and text below in original paper)

(yes these are 'advanced undergrad' type questions, no this is not coursework)


texts: Why does Dodd-Frank/Basel make large cash piles unattractive?

texts:
As several major banks disclosed their financial reports recently, there seems to be much interest in the financial community as to the implications of the large cash piles at US commercial banks. The issue appears to stem from the Fed interventions, which added liquidity to the market but also led to a large accumulation of deposits at commercial banks. In the cases of JP Morgan and BofA, the cash piles are in the hundreds of billions of dollars.
One view is that if demand for loans remains weak and deposits continue to grow, cash piles will increase. If the cash piles increase enough then Dodd-Frank/Basel regulations come into effect, imposing stricter capital requirements. From a business standpoint, this would be a negative for the affected US banks.
I can follow this line of logic, but I feel as though I'm missing something.
 Question
Surely, if a commercial bank has a larger cash pile, its capital adequacy is improved? If the cash comes from the Fed, that would not change things; the Fed would just be improving the banks' capital strength for them?


texts: The supply and demand of Virtual Products

texts: We know that the fundamental economic problem is scarce resources relative to unlimited wants. **Does this apply to apps and Ebooks?**They are essentially virtual products who have in theory have unlimited supply.


texts: I am starting on a research project that requires the measurement of subjective beliefs of subjects around uncertainty. Since I'm new in this field I'm looking for references that can help me get started. In this project we can survey the subjects but bringing them to lab might not be possible. I'll appreciate any leads in this direction. Thanks for your help.


texts: Change in the marginal utility of leisure with respect to a change in consumption

texts:
I am reading a paper that derives a theoretical retirement model. There is a utility function and a budget constraint forming an optimal control problem. The solution to this problem states that
\begin{align}
    U(C(t),0) &= \lambda \quad\text{for }0 \le t \le R,\\
    U(C(t),1) &= \lambda \quad\text{for }R \le t \le T,
\end{align}
where $\lambda$ is the Lagrange multiplier. $U$ is the utility function where the arguments of the function are consumption ($C$) and leisure ($L$). $R$ is the retirement age, and $T$ is the years the agent lives.

The first condition says that the utility is constant during the working years where leisure available during working years is $0$. The second condition says that the utility is constant during the retirement years where leisure available during retirement years is $1$.

The paper then mentions that "This implies that the individual chooses a constant level of consumption for his pre-retirement years, $C_0$, and another (perhaps different) level of consumption, $C_1$, for his post-retirement years. $C_1$ will exceed (be smaller than) $C_0$ if
\begin{equation}
    \frac{\partial^2U}{\partial C\;\partial L}>0\quad(<0)
\end{equation}
The last expression denotes "cross partial derivative of $U$ with respect to $L$ and then $C$".

I am struggling to interpret the inequality. That is, the cross partial derivative says that if the change in the marginal utility of leisure with respect to a change in consumption is positive, then the consumption level during retirement should be larger than that during the working years. Why?


texts: Are there economic policies that help countries fight corruption?

texts: Are there particular taxes or subsidies or public goods that a country's economic authority could implement to help in the fight against corruption? While the rule of law seems to be the first order issue, and often government is where a large part of corruption exists,  it's still seems like it's  phenomenon that could be affected by economic policy.  Taxes, expenditure rules, purchasing rules, etc, are potentially useful. Maybe!


texts: If a mixed strategy is strictly dominated, then there is a strictly dominated pure strategy in its support?

texts:
I am looking at the proof of NE survives the iterated removal of strictly dominated strategies (MWG, ex 8.D.2) and in the solution manual, authors say something like if a mixed strategy is strictly dominated (by another mixed strategy say s), then we can find a pure strategy in the support of that strictly dominated mixed strategy that is strictly dominated (by s).

My intuition told me that this statement is (of course) correct, but can someone give me a hint on how to show it formally?


texts: What distinguishes political economic models of dictatorship and democracy?

texts: It seems that fundamentally they are both driven by revolt risk. Is there some inherent difference in how the two systems are treated in political economics or are they more or less the same type of model?


texts:
If I wish to understand the competitive constraints of airline A on airline B, what sort of econometric relationship should I investigate ?. Immediately what comes to mind is to look at the impact of changes in B's fares on A's demand after controlling for factors such as market structure, nature of demand, cost etc across common routes. However, I recently saw a study that tries to approach this by looking at the impact of the entry of airline A on the fares of B. Which method is right ?.
Should I also look at whether the airlines indulge primarily in price or quantity competition when looking at this ?.


texts: Why CPI differs so much from consumption deflator?

texts:
Why are the two series so different for the US? Data is here: https://fred.stlouisfed.org/graph/?g=lqVJ and photo added below:

Private consumption in GDP should include all items consumer by households, whereas the CPI is a basket of "representative" goods. Is this part of the difference? For example, that goods not in the basket have become cheaper than those in the basket?


texts: mixted strategy that assigns positive weight to a pure startegy that is dominated

texts:
This problem is  of Fernando Vega Redondo(Economics and the theory of games)

Exercise 2.1
Let G be a game in strategic form. Prove that, for every player
$i\in N$, every mixted strategy $\sigma_{i}\in \Sigma_{i}$ that assigns positive weight to a pure strategy $s_{i}\in S_{i}$ that is dominated can be itself always be improved by another strategy $\sigma_{i}'$.

This is if $s_{i}\in S_{i}$ is strongly dominated for some $\sigma_{i}$$\in \Sigma$
with $\sigma_{i}(s_{i})>0$, $\exists$ $\sigma_{i}'\in \Sigma_{i}$ such that $\forall$$s_{-i}\in S_{-i}$$: \pi_{i}(\sigma_{i}',s_{-i})>\pi_{i}(\sigma_{i},s_{-i})$.

Q1: why they said that affirmation is obvious?

*I would like to know if anyone could tell me how to build that mixed strategy that dominates that strategy that assigns positive probability, since it is not obvious to me.

Thanks!


texts: Using an elasticity to evaluate changes in a dependent variable

texts:
Often in textbooks and online I see thte definition of an elasticity to be as follows:

  1) $\epsilon = \frac{\frac{\Delta Y}{Y}}{\frac{\Delta X}{X}}= \frac{\partial \log Y}{\partial \log X}$

Thus, when using an elasticity along with a percentage change in X to estimate a percentage change in Y, it would seem to make sense that one would multiply the percentage change in X by the elasticity as below:

  2) ${\frac{\Delta Y}{Y}}=\epsilon\cdot(\frac{\Delta X}{X})$

However, in one instance I've seen mention that it is more accurate to estimate the percentage change in Y as follows:

  3) ${\frac{\Delta Y}{Y}}=(\frac{X_2}{X_1})^\epsilon-1$

I'm seeking to apply elasticities derived by estimating log-log regression models and would appreciate some guidance as to whether formula #2 or #3 is more appropriate when evaluating impacts on Y resulting from changes in X.

Can someone please explain why formula #3 may be more appropriate than formula #2? And how does one get mathematically from formula #1 to formula #3?


texts:
In trade, the opposite of trade deficit is trade surplus. In other words, the negative deficit is called surplus.

And then, what is the term for negative debt?

Say for example Bank A owes 5 million dollars to Bank B.

And then Bank A has a debt of 5 million dollars.
And bank B has a negative debt of 5 million dollars.

I have the same question about negative liabilities, I'm not sure if I have to ask a separate question for that.


texts:
Let $y=x_1^\alpha x_2^\beta$ where $\beta=1-\alpha$ be a Cobb-Douglas production function.
Find the elasticity of the optimal demand functions (for minimizing production cost) for both goods wrt. $w_2/w_1$ ($w_1,w_2$ are the respective prices of the inputs). What does this say for our spending on $x_1$  compared to the total cost?
My try
I found the elasticity of $x_2^*/x_1^*$ wrt $w_2/w_1$ to be 1. Now, I have to find a value for the ammount spend on good $x_1$. How can I do that with my elasticity? I think it has to be constant, but still no clue on how to find such a value even though I have found the elasticity to be 1.
edit: I know it has to be constant.


texts: Creation and distribution of money from scratch in a country (USA as example)

texts:
Suppose in an alternate history, 21st century USA operated on the barter system... no system of money is used. It  has all the technology of the 21st century (computers etc). Just no money. The knowledge of "what money is" and economics is there, but for whatever reason they've chosen to stick with barter.

Now the government decides to introduce money. What would be the steps to create money, get it into circulation and then get people to use money instead of barter? ie: how do we get the current american financial system from scratch.

I ask this question because I've tried to understand money creation, but I'm always a bit puzzled because it starts with a money system already in place... I want to understand how it would be created from scratch.


texts:
In economics, economies of scale are "the cost advantages that enterprises obtain due to their scale of operation" (Wikipedia/User:Loraof).
There is a common type of scaling, mostly in services, where the cost input is negligible, but users are in turn expected to use a small amount of the resource compared to the potential maximum they are provided. Good example includes Internet service providers or cloud storage providers, or banking if we go with traditional services. This allows a service provider to manage a small amount of resources which, if everyone utilized the maximum they could at a given time, would make the service or provider collapse.
What is the term, if it exists, for this type of scaling/economics?


texts: Can I add a variable that varies only with time in Least Squares Regression model with a time-fixed effects term?

texts:
I'm estimating this equation for the trade flows between various countries at time t: ($i$ and $j$ are countries)

The last 3 terms are control variables, one of which is oil prices. Can I add oil prices as a control variable if I already have a time fixed effects term, $ \beta_3 $. Further, can I have country pair fixed effects, $\beta_6$, when I'm also controlling for variables that are fixed for two countries across time (for example, if the two countries were in a colonial relationship in the past, this variable wouldn't change with time and would stay fixed for the two countries for the entire period).