long run growth of money supply I am trying to understand how the money supply (bank deposits + currency) grows over time. That's the end goal. This is the first part of my awful struggle.
I'm superconfused, and almost everything I have read has made it worse.
Linked directly below is the first thing on this topic that made any sense to me, so I'm treating it as my starting point.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
My understanding is like this:

most money creation is done by commercial banks when they make loans
*each instance of loan issuance is directly responsible for a temporary increase of the money supply
*these issuances, in aggregate, are indirectly responsible for most of the growth of the money supply over time

Question : Is what I wrote above accurate? It seems logical, but I can think of an equally logical way in which it is wrong, hence my confusion. If correct-ish, please read on:
So I am looking at the loan as having 3 parts:

part 1: The bank makes me a loan. Bank deposits increase, and thus the money supply increases.
part 2: case 1: My account is credited, and I can spend it. But I don't. I just like that it is there.
part 2: case 2: My account is credited, and I use the money to fund some productive activities today, but I do things I would have done anyways, say, tmrw. Maybe I was impatient. Or derived utility from the today-ness.
part 2: case 3: I use the loan to fund additional productive activities (more than I had initially planned for today), without changing my plan for tmrw and tmrw+.
part 3: I pay back the loan, removing this loan's direct contribution to the money supply.

I guess what I'm getting at is: Is there some connection to the bank making loans, and those loans being used to fund additional productive activities* than otherwise possible (say, given the agent's initial budget constraints), and long run growth in the money supply? Ie. You can go to the bank and get a loan pretty fast - faster than prices can change. So having that extra money means you can do more stuff. That extra stuff, is that the key here?
Or am I just way off base?
*Like, say I had an apple farm and I was planning on hiring someone, Bob, for day labor for \$200 to help me pick the apples and sell them. I thot I'd have 500 apples to sell at \$1 each. So I estimated I'd get \$500 revenue with \$200 labor making \$300 profit. But it turns out I have 750 apples to pick. Me and Bob can pick and sell a max of 500 apples, so if I want to sell more apples, I need more help, but I can't afford it and it's day labor so I need the money by the end of the day. So I borrow \$200 from the bank, and hire an additional person for the day, Helen, and we pick all 750 apples. I make \$750 revenue w \$400 labor costs, so I make \$350 profit. So bc I took out the loan and used it to do productive things, I have more profit and Helen made a day of wages.
** If someone sees fit to answer, ideally, I'd like some math. Or if there is some model that can show the players (consumers, firms, banks etc.) and their interactions, that would be great. Supergreat, even.
That is all for now

Question : Is what I wrote above accurate?

There is a bit more nuance to it but 1-3 points are 'corect-ish'.

I guess what I'm getting at is: Is there some connection to the bank making loans, and those loans being used to fund additional productive activities* than otherwise possible (say, given the agent's initial budget constraints), and long run growth in the money supply?

Not in the long-run. There is a relationship between growth of money supply and economic activity but not in the long-run only in the short run. This is because in the long run prices are flexible and they will quickly adjust to increase in money supply (see further discussion of that in any standard macro text like Blanchard et al Macroeconomics ch 8-10).

If someone sees fit to answer, ideally, I'd like some math. Or if there is some model that can show the players (consumers, firms, banks etc.) and their interactions, that would be great.

It is possible to describe this with a model that is built upon individual interactions of consumers, firms and so on, but that would take too much space as even very simple micro founded macro models are quite large. For example, a basic microfounded (i.e. explicitely including interaction between households, firms etc) macro model introduced Woodford, M. (2011). Interest and prices, takes over 30 pages and that is a graduate text that does not explain basics that one would probably have to cover to explain it to someone with no economic training. Consequently, let me offer more concise model (which will not have qualitatively different results from more nuanced microfounded model) where I will skip description of individual interaction of individuals and just directly impose assumptions on behavior of aggregates that could otherwise be derived from individual interactions of individuals and firms (if you want more nuanced models look at above mentioned Woodford ch 3 or at Romer Advanced Macroeconomics Ch 6, 7 and 11).
Thus I will introduce simplified model based of above mentioned Blanchard et al. Let us start by description of money market. The money market can be described using:
$$M/P = L(Y,i) \tag{1}$$
Where $M$ is money supply, $P$ price level (so $M/P$ is real money supply), $L$ is money demand, $Y$ is real output and $i$ interest rates.
The money demand will be given as follows:
$$L= f_1 Y - f_2 i \tag{2}$$
Because money demand will increase with economic activity, and decrease with interest rates. This is what would normally be microfounded, but I will just assume it as a shortcut without proving it. However, intuitively it is not unreasonable assumption, when aggregate output (which is economically also equal to income) increases there is more economic activity so people will demand higher real money balances as there will be more transactions in the economy. Next if the interest rate is high people will demand less loans and thus also money, and will save more and thus hold less money balances.
Next, goods market will be given by:
$$Y = C + I +G \tag{3}$$
where $C$ is consumption, assumed to follow $C=c_0 + c_1 (Y-T)$ with $0<c_1<1$. Where $Y-T$ is income after taxes. Again aggregate consumption would typically be derived based on individual interactions, but it is reasonable to assume people consume more if their disposable income increases.
$I$ is the investment assumed to follow $I = \bar{I} +d_1 Y- d_2 i$. Once again this would normally be microfounded, but it is reasonable to say that investment increases when output increases, and investment decreases when interest rate $i$  increases as it is harder for firms to get loans and so on.
Finally $G$ is government spending, there will be no additional assumptions on its behavior for your question it is not relevant.
So given above assumptions we will have:
$$Y = c_0 + c_1 (Y-T) + \bar{I} +d_1 Y- d_2 i +G \tag{4}$$
Solving for $Y$ so we get expression for goods market equilibrium yields:
$$Y = \frac{1}{1-c_1 -d_1}\left( c_o + \bar{I} + G - c_1T \right)  - \frac{d_2}{1-c_1-d_1} i \tag{5} $$
Now finally, in an economy from a macro perspective both the goods market equilibrium and money market equilibrium above must be also in equilibrium together.
Recall that money market equilibrium was given by equation (1) substituting (2) into (1) we get:
$$  M/P=f_1Y−f_2i \tag{6}$$
Solving 6 for $i$, substituting into $5$  and once again solving for $Y$ so we isolate output we get:
$$ Y = \frac{1}{(1-c_1 - d_1) \frac{f_2}{ d_2} + f_1} \frac{M}{P} + \frac{1}{1-c_1-d_1}+d_2 \frac{f_1}{f_2} \left( c_o + \bar{I} + G - c_1T \right)  \tag{7} $$
Examining how $Y$ varies with respect to real money balances we get that:
$$\frac{dY}{d(M/P)} =  \frac{1}{(1-c_1 - d_1) \frac{f_2}{ d_2} + f_1} \tag{8}$$
So indeed increase in amount of money will increase output, in fact there even be multiplier effect because the higher the output is the more demand for money there will be etc.
However, note the above does not hold in a long run. This is not captured by the brief and simplistic model above but while in short run we can assume $P$ is fixed, in a long run $P$ will most certainly not be fixed, and in fact it will increase in response to increase in $M$ (see discussion of that in Blanchard et al ch 9). Hence, in a long run increase in money supply cannot stimulate output (which would via multiplier stimulate more demand for money and again more output). Consequently, and answer to your question is no (although I am not sure what you mean by long run - in economics long run is defined as time period where $P$ if flexible and can adjust).
In addition the reason why we can observe increase in money supply over long periods of time is that central banks try to maintain price stability, which many of them define as a yearly inflation of around $2\%$. For that to happen money supply needs to constantly increase as well. Consequently, even though it is correct to say that private banks create most of the money in our economic system, the central bank is ultimately ultimately in control in how much money is being created. They do this either through bank regulation, interest rate setting or by control of monetary base - this is also explained in the McLeay Radia, & Thomas (2014) you provide link to in your Q. If a central bank would be hell bent on it and would purposefully want to keep $M$ constant, they could do it (by unreasonably hiking interest rate, regulating borrowing in a such way as to make it nearly impossible etc). Conversely, if central banks think there is not enough money supply in the economy they can increase it regardless of bank lending (e.g. direct purchase and monetization of government debt). Note here that central bank can actually do this even without using private banks. For example, central bank can buy government debt which creates new money. Thus central bank can always move money supply wherever it want's to in principle (even if private banks would not want to lend).

Explicit Reasoning
This post is edited substantially in the hope of clarifying how credit flows increase, decrease, or do not increase or decrease the levels taken to be the statistical measures of the elastic money supply in the depository institutions.
The Financial Accounts Guide All Tables
https://www.federalreserve.gov/apps/fof/FOFTables.aspx
Scrolling down one observes financial statistics tables organized as Sectors: Transactions (links in the left side column) and Sectors: Levels (links in the right side column).
Transactions in these financial tables are classified as economic flows. These are financial flows caused by credit/debt deals.
Levels in these financial tables are economic stocks. The creditors own financial assets and the debtors owe liabilities or debts to the creditors. The flows of credit/debt deals increase or decrease the stocks of financial assets and liabilities because the financial tables are designed to be stock-flow consistent in accord with legal interpretations of credit/debt instruments and accounting customs for recording financial assets with matching liabilities.
Four Sector Model

Sovereign
All Other

Fed
Banks
Money Generators

Treasury
Nonbanks
Money Users

Sovereign sector consists of the monetary authority (Fed) and the Treasury branch of the central government. Money supply is mostly generated by the Fed and Bank sectors of the economy which respectively issue base money and bank money as liabilities on the respective balance sheet.
If the Treasury branch sells government securities to cover the deficit spent for a period, and if Treasury net redeems government securities to dispose of a surplus for a period, then the Treasury operates like a Nonbank Money User. The purpose of this activity in the United States is to neither add nor remove bank reserves via the deficit/surplus. This helps the Fed retain control over monetary policy by using its balance sheet to add or remove bank reserves in the aggregate Bank sector when necessary.
Nonbanks include any unit that is not classified as either Sovereign or in the  Depository Institution sector (Banks). Some economic papers refer to Nonbank financial firms as banks because they provide credit to hold a financial asset portfolio and issue a mix of debt and equity to hold the financial assets, just like banks, but these Nonbank firms do not increase or decrease the money supply by entries on their balance sheets (except for the inclusion of retail money market mutual funds in the definition of M2 money supply).
Money Users clear payments by the transfer of ownership claims to liabilities of the Bank sector, and Nonbanks make credit deals among each other, but these transaction mechanisms do not change levels in the money supply because Banks are not direct counter-parties when clearing payments.
Money Stock Measures
https://www.federalreserve.gov/releases/h6/current/default.htm
Base Money

Base Money
Issuer

Reserve Balances
Fed

Vault Cash
Fed

Currency outside Fed, Treasury, Banks
Fed

M2 Money Stock
Simplified model for M2 money stock defined as of May 2020. M2 includes components of M1 shown as M1/M2.

Component
Issuer
Notes

Currency
Fed
M1/M2 Currency held by Nonbanks

Checkable Deposits
Banks
M1/M2 deposits held by Nonbanks

Other Checkable Deposits
Banks (Thrifts)
M1/M2 liquid funds held by Nonbanks

Savings Accounts
Banks
M1/M2 savings accounts held by Nonbanks

Small Time Deposits
Banks
M2 time deposits held by Nonbanks

Retail Money Market
Nonbanks
M2 money market funds

Levels of Monetary Authority (Fed)
https://www.federalreserve.gov/apps/FOF/Guide/L109.pdf
Note three liabilities of the Fed are counted in the base money supply or monetary base also known as MB or M0:

Depository institution reserves
Vault cash of depository institutions
Currency outside banks

Currency Drain and Fed Securities Holdings

Prior to the financial crisis of late 2008 Fed buys securities in the open market which are roughly equal to the level of its currency liabilities. This means the Nonbank sector has the option of holding securities, which earn interest, or currency, which earns no interest, because Fed would do an asset swap with the Nonbank sector to satisfy its demand for currency versus other financial assets. Prior to late 2008 Fed would purchase primarily Treasury securities and other Agency debt issued by or guaranteed by the federal government. After 2008 Fed began large scale asset purchases and paid interest on excess reserves created via LSAP open market operations. Before 2008 Fed would service the currency drain to ensure banks did not become depleted of reserve balances and vault cash due to the net withdrawal of currency over time.
FRB H.4.1 Release shows Factors Supplying Reserve Balances including Reserve Bank credit and other assets listed on the Fed balance sheet:
https://www.federalreserve.gov/releases/h41/current/
FRB H.4.1 Release also shows Total factors, other than reserve balances,          absorbing reserve funds including currency in circulation and all Fed liabilities other than reserve balances.
So Fed manages the level of reserve balances by using Reserve Bank credit to supply reserve balances when necessary if other factors absorb reserve balances. Some items on the balance sheet are autonomous, or not under the control of Fed, and other items are control factors such as levels of Reserve Bank credit. The flow of Reserve Bank credit is used as a control factor to supply levels of reserve balances against factors absorbing reserve balances as necessary to support the monetary policy goals of the Monetary Authority.
Simplified Bank Balance Sheet and Income Statement
Loan Loss Reserve Accounting and Bank Behavior (4 pages)
https://www.richmondfed.org/~/media/richmondfedorg/publications/research/economic_brief/2012/pdf/eb_12-03.pdf
Levels of Private Depository Institutions
https://www.federalreserve.gov/apps/FOF/Guide/L110.pdf
Currently the first three lines are Total financial assets, Vault cash, and Reserves at Federal Reserve. Assume non-financial assets are negligible compared to the magnitude of financial assets. Then define Bank Credit:

Bank Credit = Total financial assets - Vault cash - Reserve balances

Bank assets are classified broadly as either Bank Credit or Total Reserves. In the paper above "Cash" would correspond to and contribute to "Total Reserves" of the Depository Institution sector. Bank Credit would include Loans and all other financial assets held by each bank but would specifically exclude reserves. The bank sector uses reserve balances at the central bank to clear interbank payments and uses vault cash to service withdrawals of currency from the bank.
This graph shows that US Bank Credit grows historically without a corresponding increase in Total Reserves prior to the US financial crisis of 2007-2008:

One may infer that the Bank sector, also known as Depository Institutions sector, does not require a net increase in total reserves to expand Bank Credit at least over the period shown prior to the 2007-2008 crisis. Then the question is how the depository institutions expand bank credit without a significant increase in total reserves?
Simplified Chart of Accounts for the aggregate Bank sector (Depository Institution) balance sheet.

Assets
Liabilities

Reserve Balances
M1/M2 deposits held by Nonbanks

Vault Cash
Money market borrowing from Nonbanks

Securities
Borrowing from Fed at discount window

Loans
Equity

Other

Accounting rules specify that Assets increase by a debit entry and liabilities or equity increase by a credit entry; also Assets decrease by a credit entry and liabilities or equity decrease by a debit entry. Transactions in the aggregate bank sector may or may not increase or decrease components of M1/M2 money depending on which accounts in the Chart of Accounts get debit and credit entries.
Reasoning by analogy to the Monetary Authority balance sheet, which gives the factors supplying reserve balances and the factors absorbing reserve balances, the Depository institutions balance sheet would have factors supplying M2 deposits and factors absorbing M2 deposits. We can write these factors in an identity as follows:

M1/M2 Deposits = Reserve Balances + Vault Cash + Bank Credit - Liabilities* - Equity

where a transaction in the aggregate bank sector can increase, decrease, or neither increase nor decrease M2 deposit levels due to double-entry accounting customs. Liabilities* include components of Bank liabilities that are not counted in aggregate measures of the M2 money supply.
Fed generates net new reserve balances and M1/M2 deposits when it purchases securities from Nonbanks. The aggregate Bank debits reserve balances for an increase and credits M1/M2 deposits held by the Nonbank sector for an increase to clear payment between Fed and Nonbank units. Before late 2008 Fed used these open market operations to offset the currency drain (withdrawal of currency) from the Bank sector and to provide banks with just enough reserve balances so a few banks would show up at the discount window to borrow overnight funds. By monitoring the discount window activity Fed has information about the efficiency of the fed funds market and by keeping the aggregate Bank sector a little short on reserve balances Fed can control the fed funds interest rate.
After late 2008 money markets were seriously disrupted, discount window borrowing went up significantly, and initially Fed sold Treasuries from its balance sheet to "sterilize" the increase of reserves provided at the discount window. However this strategy would deplete Fed of its best asset class, Treasury securities, if the aggregate Bank sector kept demanding more reserve balances via borrowing from Fed. So Fed went to Congress for authority to pay interest on excess reserves and switched to providing excess reserves via large scale asset purchases (LSAP) in late 2008 into early 2009. If Fed does LSAP purchase with Nonbanks then Banks would debit reserve balances for an increase and M1/M2 deposits for an increase caused by the increase of Fed Credit.
Fed generates net new reserve balances when it purchases securities from a Bank or makes discount window loans to a Bank. Banks do not debit or credit M1/M2 deposits when dealing directly with Fed so there is no change in M1/M2 money for these transactions. When Fed purchase securities, either from a Bank or Nonbank, this provides so-called "non-borrowed reserves". When Fed lends to Banks this provides so-called "borrowed reserves."
Nonbanks decrease vault cash and M1/M2 deposits via the long term withdrawal of currency from the aggregate bank. Banks pay for vault cash using reserve balances at Fed. So the long term currency drain would deplete banks of vault cash and reserve balances if Fed fails to service the currency drain (buy securities equal to or slightly greater than its currency liabilities) before late 2008. After late 2008 Fed provides excess reserves via LSAP and no longer needs to service the currency drain as shown in the graph above of securities held compared to currency liabilities.


Is it valid to assume that the international price of consumer durables is constant? While studying tariffs in International Trade, we often come across a Demand Supply diagram along with a world supply curve that is perfectly elastic. Here we assume that the international or the world price of that good is constant and based on this assumption we carry on with our analysis.

Considering commodities or goods such as wheat, it is safe to assume that the world price will remain the same as it is produced in huge quantities all over the world and no one country/producer can cause a shift in the supply curve.

However, consumer durable such as LCD or Plasma televisions are not produced in such abundance and are often produced by certain countries, say for instance Japan or China.

This reasoning has led me to question the assumption made while drawing the world supply curve in the tariff diagram. I would like to know whether this reasoning is valid or not and if not, then why?

The assumption almost never holds. Not for televisions, nor pretty much any other consumer durable (nor wheat, but that's not a consumer durable anyway).

It's a simplifying assumption that's used to make a particular problem easier to solve.

But in reality, the market changes continuously; furthermore there are often oligopolistic forces at play.

The least that should be done, when making the assumption, is to include a discussion about the possible implications on ones results, when the assumption does not hold. One could also do a sensitivity test with and without the assumption; and/or cite other studies that have gone deeper into the implications of using the assumption.

Classical economics has a long, disreputable history of making big claims on the basis of invalid assumptions. It's down to us to change these bad habits.


Extensive Form Representation Question: Represent the extensive form of the game:

Suppose, Nature chooses either Up or Down with probabilities 0.5 and 0.5, respectively.

Then Player 1 chooses either Right or Left and does not observe nature's choice.

Finally, Player 2 chooses either G or H. Unlike Player 1, Player 2 observes the choice of Player 1 prior to making his choice. Player 2 also observes nature's choice if Player 1 has chosen Right but does not observe nature's choice if Player 1 has chosen Left.

My take:

Is this correct? I am not really sure about the instructions in bold.

Imagine you're Player 2. What different "scenarios" could you find yourself in?

If Player 1 chooses Right, then Player 2 could observe if Nature played Up or Down. So you have 2 information sets there.
If Player 1 chooses Left, then Player 2 couldn't differentiate between (Up, Left) and (Down, Left). How many information sets should there be here?

So in total, you should have how many information sets? You currently have 4. Which one should you "combine"?

Put player 2's decision nodes after a Left move by player 1 into an information set to concur with the description in bold.


Is poverty a mathematical necessity? I recently saw a meme, and the content was something like:

  In the near future, a meteor will 'hit' the Earth, and there will be
  gold rain, and hence everyone will be rich

The ridiculous thing with this is that if everyone has tons of gold, then gold becomes worthless, so in terms of poverty, nothing would change.

This got me thinking!

It is clear that you cannot solve poverty by giving poor people money because than the money would loses its value, and prices go up (since also you would need to print heck a lot of money). However, one thing that might work is if everyone had a job with decent salary. Then, everyone would earn enough money to have decent life.

However, this got me thinking even more!

This solution implicitly assumes that in such a case, everything would be the same except now everyone has enough money to support themselves, but if everyone has a job with a 'decent' salary, say a job with at least paying \$1000 per month, then the values of the money would (or could) drop because everyone has that \$1000, so then \$1000 wouldn't become a 'decent' pay, and not everyone would be able to support themselves with that much money now.

(same thing ...) even more!

Question: Is not having and poor people mathematically possible ?

If you think about it, the very fact that something is valuable, such as gold, depends heavily one the fact that not everyone has that item. Moreover, if all the wealth was distributed equally, and not allowed any imbalances, then we wouldn't be event survive as human species, but any imbalance would results in someone getting richer and some other getting poorer; and this means with some extreme exceptions, the existence of poverty is ensured mathematically.

Edit:

Guys, you are obscuring the core problem in here by dealing with specific details; forget money, thing in terms of wealth. There is some total wealth in the economy, and assume that there is some poverty threshold of in terms of wealth (it does not matter how this wealth is distributed or kept in practice i.e in terms of some money, gold, or silver; it does not matter.) What is this threshold.? we don't know, and we don't have to know for the time being. The analysis will show in what conditions, such a threshold can exists, and there can be no poor with respect to that threshold (of course, we then have to check, when we interpret our results in terms of real money whether that threshold corresponds to a "decent" one).

American economic theorist Henry George wrote about precisely this issue in his famous work Progress and Poverty published in the late 1800s, and based on his observations on the economic development of San Francisco during the gold rush.  His argument was that increasing economic development primarily benefitted landowners, at the expense of both capital and labor.  (However, since landowners were often also holders of large amounts of capital, it was primarily labor that ended up losing out.)  In a nutshell, the leverage that landowners held over the workers allowed them to push wages ever lower, creating poverty as a result of economic progress.  He theorized that taxing economic rent (at/near 100%) would eliminate speculation and thus stop the boom/bust cycle endemic to market economies, as well as providing ample revenue to the government to fund social welfare programs and to develop infrastructure.

In the U.S. the poverty threshold is 3 times the minimum food requirement and it is adjusted for CPI inflation.

Link to the source.

The person that determined this threshold was a government economist at the Social Security Administration. That means the poverty threshold is politically determined. Why is it 3 times but not 3.14 or 2.718. The former number was politically acceptable. That means that the resulting level of government generosity was politically acceptable. Since the threshold is politically determined it would require setting the threshold to a very low number to eliminate almost all poverty. This would be politically unacceptable but I sense that consideration might not be relevant to your inquiry. It seems you just want an answer to a logic problem involving math.

If we redistribute within countries but not across borders, there would be a threshold for each country. There are probably countries that do not define a poverty threshold. If a threshold is undefined it is difficult to say if people are in poverty or not.

If all world income were redistributed equally, even across borders, you would still face the problem that the prevalence of poverty depends upon a politically determined threshold.

Addendum

Implied by the foregoing, there is no empirical fact of poverty until a standard is defined and one example of a standard is an income threshold T. The threshold can be compared to arithmetic mean income I. You have indicated that you believe income is relevant.

The existence of poverty is not mathematically ensured. (The non-existence of poverty is mathematically feasible.) In some circumstances T < I. One circumstance is where political forces set T low enough.  This answer is relevant to your inquiry because you posed a question of mathematical possibility.

Another circumstance is where T is left "unchanged" or perhaps changing only by the amount of CPI and CPI calculation is outsourced to a disinterested agent free from political influence. Technology will enable productivity changes over time so that I will increase so that T < I becomes true.

Another circumstance is where T is left "unchanged" or perhaps changing only by the amount of CPI and CPI calculation is outsourced to a disinterested agent free from political influence and I is already higher than T.

I do not agree with your comment about wealth: that when everyone has 1000 dollars the amount has more or less no value. I claim that it has the value that can be purchased with 1000 dollars. I also claim that, after an equalizing global wealth redistribution, wealth still exists and money will still have some purchasing power. I do not even need to have a theory about inflation for my claim to be true. In fact, I made no claim about inflation, other than that it is not infinite inflation. Unfortunately you implied infinite inflation will be a result of equalization.

You made a similar (but less extreme) statement about gold wealth. Since it is less extreme I do not want to address it directly. However, I will say that your statement about the 1000 dollars (of wealth, not income) and your statement about gold wealth, both seem to suggest wealth must diminish when there is equality. Yours is an inflationary theory that I think is wrong. I am not saying that there will not be inflation as a result of redistribution. I am saying there does not necessarily have to be inflation. I am also saying there does not have to be extreme inflation.

The bottom line is that I think you have not justified your claim about the connection between equality (of wealth or of income) and a resulting extreme inflation.


Theoretical economy calculation of closed country Is there any well-known theoretical solution to the problem as described below? I am considering an ideal very simplified case.
There is a closed country/community of N people. All people are working. Let's say they have A% out of N people producing food, B% out of N people working in the industry (producing everything from the phones to cars), C% work in government, D% work in the service like a haircut, cleaning, etc. Initially, the GDP of this community is G or maybe it is better to tell, that initially, they have G amount of money. Let's assume that everything that is produced will be bought by others.
In other words, I can formulate it like this. N people decided to leave this planet and move to Mars/another planet because they fed up with unfair live on The Earth :) They decided to take with them things with total costs G (initial GDP). Let's assume they have everything on the other planet like air, water, Sun, good climate, resources, etc. the same as on The Earth. They divided the people between different occupations as mentioned above.
The questions:

I am not an economist, but I would expect this kind of problem was solved already a long time back and it is well-known and has some specific name. Is not it?
How this economy (GDP) will depend on time G(t)?
Are there any conditions when it will grow or it always will go down at some point?
Does G(t) depend on how big is N?

You are basically asking for a growth model and yes there are plenty of them the two most popular are:

Solow-Swan growth model.
Endogenous growth model.

I will go over simplified version of both in order to answer how 'G' depends on time and also how 'N' plays a role but I will change the name of all variables to follow standard economic terminology and notation as your non-standard terminology is bit confusing and all over the place. Furthermore, I will present only the most simplest versions of such models, skipping some derivations for the sake of brevity, for more advanced versions and full treatment I would direct you toward Romer Advanced Macroeconomics or Barro & Sala-i-Martin Economic Growth.
Solow-Swan Model
The Solow-Swan model is currently the more dominant model in mainstream economics as the latter endogenous growth model, while theoretically appealing, is very hard to empirically test.  A long story short in this model evolution of GDP (real output - denoted by $Y$) would depend on a) exogenously given technology (denoted by $A$) growth ($g$) and also population ($L$) growth ($n$). However, living standards depend not just on total of $Y$ but on $Y$ per head (country with 100 GDP but 10 people is arguably richer than country with 100 GDP but 100 people).
The model goes as follows:
We need to start with specifying some production function as we need to have some way of determining the output $Y$. A classical example would be:
$$Y = F(K,L) = K^{\alpha}AL^{1-\alpha}$$,
where $K$ is the stock of capital and $L$ the labor which is for simplicity assumed to correspond to population. Furthermore, the production function will be expressed per unit of effective worker ($AL$):
$$\frac{Y}{AL}= F(\frac{K}{AL},1) = (\frac{K}{AL})^{\alpha} = f(k) = k^{\alpha}$$
with $0<\alpha<1$ and $f(0)=0, f'(k)>0$ &  $f''(k)<0$. The evolution of population and technology in the model would be given by $\dot{L}(t) = nL(t)$ and $\dot{A}(t) = gA(t)$. Furthermore, the evolution of $K$ is given by $\dot{K}(t)= sY(t) -\delta K(t)$ where $sY(t)$ is the proportion of output saved under savings rate $s$ and $\delta$ is the depreciation rate -i.e. the rate at which capital breaks down.
I will skip most of the derivations but under the above conditions it can be showed that the capital per person has following dynamics: $\dot{k}=sf(k(t))-(n+g+\delta)k(t)$. Given this conditions in a steady state (a state where $\dot{k}=0$) it can be shown that the evolution of capital ($K=ALk$) will be given by:
$$\frac{\dot{K}}{K} = n+g \implies \frac{\dot{Y}}{Y}=n+g  $$
The reason why above implication holds is because in this case production function implies constant returns to scale. When expressed in per capita terms the growth of $Y/L$ will simply be $n$.
Hence, your closed martian economy will grow at the rate of $n+g$ in absolute terms and in per capita terms at the rate of $n$. Hence, In this model the output/GDP of your martian economy would grow as long as combined growth of population and technology is bigger than zero ($n+g>0)$ and would shrink if the inequality would go other way. In per capita terms only the growth of technology would matter.  The stock of $Y(0)$ and population $L(0)$ as well as capital $K(0)$ (which you dont mention) that people will bring to the mars will determine the initial conditions but not the growth rate of the colony.
As mentioned by Giskard in his +1 comments the exact solution depends on assumptions about the production function. For example, if we would not have constant returns to scale there would also the $Y$ would not grow exactly at $n+g$ but generally speaking the  growth rate of total output would still be a function of $n$ and $g$ and per capita output of $g$.
Endogenous Growth Model
I wont cover endogenous growth model in such explicit detail as Solow-Swan model as endogenous growth model is far more complex and even surface level treatment would take several pages. However, I will cover some departures from the above Solow-Swan model.
In endogenous growth model the rate at which technology grows ($g$) is not just exogenously given but determined by the model. For example, according to Romer's textbook mentioned above a simple endogenous model inspired by the works of Romer, Grossman and Helpman and Aghion and Howitt would use the following production function:
$$Y(t) = ((1-a_k)K(t))^{\alpha} (A(t)(1-a_L)L(t))^{1-\alpha}$$
with the change in technology given by:
$$\dot{A}(t) =B(a_k K(t))^{\beta} (a_L L(t))^{\gamma}A(t)^{\theta}$$
Translated to plain English the first equation says that the output will be given by the share of capital and people devoted to production of goods and services   ($(1-a_k)K(t)$ and $(1-a_L)L(t)$ respectively as well as technology $A$ - this is really just modified version of production function in the first part.
The next equation in plain English says that the change of technology in time depends on how much capital and labor is devoted to production of this new technology as well as on the current stock of technology ($a_k K(t)$,  $a_L L(t)$ and $A(t)$) respectively.
I wont provide rigorous solution to this problem but the solution would show that depending on exactly what are the parameters of the model - especially the $\theta$ parameter which tells us what the effect of current knowledge and 'success' of future R&D will be. If past knowledge makes generating future knowledge easier $\theta>1$ if harder $\theta<1$ and if its effect is constant $\theta=1$. I will grossly oversimplify here but generally if $\theta<1$ the model will predict virtually the same result as Solow model. If $\theta>1$ the model will exhibit ever increasing rate of economic growth and in such case having more people will have dramatic impact on speeding up economic growth. If $\theta=1$ the population growth will still matter but the effect wont be as dramatic as in the previous case and even if population growth is zero the saving rate will play a crucial role in determining long run growth.
To sum it up, in this case depending on what are the parameters of the model we can either say that the result will be similar to the one from Solow model or that here population growth and choose savings rate will also matter for the growth of economic output in your Mars colony. As in the previous case growth would cease or output would decline if either technology or factors of production would decline.
Furthermore, again endogenous growth models have many variants but general takeaway from these models is that population growth or peoples decisions to invest in R&D can also affect the rate of per capita growth of output. Hence in this case the rate of growth of your martian colony would also depend on the number of people on mars and how many of them are engaged in 'production' of R&D or more generally how much they decide to invest resources in such endeavor.

PS: You will note that none of the models above really care about how people are distributed between different sectors of economy (your A, B, C and D) - aside from the fraction of factors of production devoted to R&D in endogenous growth model or how much money economy has. Money stock should be not confused with output or GDP and since in the long run money is considered by most economists neutral most economic growth models will not even explicitly include stock of money as it is not considered important.
Moreover, the treatment here is surface level just to showcase some different ways how you could think about the problem. For more full treatment you should refer to sources I cited and sources cited therein.

Science-fiction, at least that of genre type, has been characterised by psychologists as escapist fiction in that it avoids the very real human dilemmas that the very best literature succeeds in facing. (it's worth noting that one of the golden age SF authors, Isaac Asimov faces the dilemma of SF as escapism and the human, represented by the earth in his own fictioneering).
Given that you are modelling an economy where the massive costs of terraforming a planet is a given, I would suggest that what you are modelling is escapist economics. This is very far from the study of  the economy of a nation or a civilisation that for example Adam Smith examined in his Wealth of Nations.
This kind of escapist economics is actually well-known as perpetual growth. This idea, of perpetual motion, has taken a serious knocking in a sister discipline - physics - where now, even to raise this question is considered to be completely misconceived and demonstrating a hopeless lack of understanding in the fundamentals of physics. You would be very quickly labelled a crackpot, if not worse.
Economics is not something that we can escape as has been recently realised by the IMF. After accounting for the so-called free lunch given to us by the environment, that is our own planet, our home. And then factoring in all the attendant costs
of cleaning up pollutions and mitigating the effects of climate change they have, in their most recent report, pointed out that the global economy is heading for a crash that will make all past crashes look like a storm in a tea-cup.

Theoretical economy calculation for a closed country

There isn't one, ie closed country,  in our globalised economy which climate change only underlines.


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

Within finance, there is interest in attempting to replicate the positions of strongly performing funds. So your basic premise has some merit. However, most funds attempt to obscure what they are doing to foil copycats.
However, what you describe has risks.

The investors you are copying may lose money themselves. In particular, there is no reason that people making videos on spreading them online are telling the full truth about their performance. Securities laws generally prohibit giving unsolicited investment advice, and professional investors are generally aware of those laws.
If you get information with a lag, you are not going to replicate their results. In the worst case, they buy before the price rise, and then recommend others buy at the higher price (allowing them to sell). This is a common feature of fraudulent stock trading schemes in penny stocks.
Even if you can avoid the previous problems, a smaller investor may not be able to trade all the instruments a larger investor can, and face higher transaction costs. If positions are actively traded, higher transaction costs (as a percentage of the portfolio size) can mean the difference between a profit and a loss.

This 20 minute video provides an example of how to buy, hold, and sell a stock when applying one particular commercially available stock trading system:
https://youtu.be/PEOjBcn3GKw?list=PLL9UyG1oknHQewkbgP_g-IEODgAQAkSRu
Notice there is risk of loss shortly after the buy decision. The risk is reduced by making efforts to recognize patterns where you buy on the way up during a strong price advance and reduce the odds of taking a loss. Then the down side risk is further managed by setting a sell rule called a stop loss.
Notice also no one who is trading their own portfolio will disclose how to buy, hold, and sell all their stock positions in real time since it would adversely impact their own profits and potentially trigger compliance costs via legal regulations or criminal charges due to legal violations.


How to engineer the economic system, so that an individuals self interest leads to fulfilling collective interest So it is said that Adam Smith said that self interest leads to collective interest.

This is obviously not the case. We do not have a society that maximises the collective good*.

My question is, Is there a way to engineer society such that self interest will lead to a collective interest?

*It can be argued that the very poor are not as poor as they were a short time ago, but this is not what I am asking about.

Well, there's mechanism design. We use game theory to study what people do and then reverse it and ask ourselfs what set of rules induce people to rationally choose to do what the mechanism designer wants them to do.

In an auction, we charge the second highest price to the winner, that's a Vickrey-Clark-Groves mechanism. In voting, one might want to apply the Goeree-Zhang mechanism, for example.

Redefine self interest to be LONG TERM self interest. The rich do much worse off in a demand starved economy, with something like 50% of the population living paycheck to paycheck.  The post war Golden age was strong, because employers felt a sense of community with their employees.  Then Friedman revived that Greed is Good stuff, leading to the shareholder revolution, and then the government supercharged it by allowing companies to pay executives in stock options and allowing firms to do stock buybacks.  Which meant that absolutely no one running large corporations had any incentive to invest, and expand the business which would pay back in years, if at all. It was much easier to just monkey around with the stock price and IBGYBG.

It would also help if economists remembered that there is no such thing as a market that isn't created, or at the very least allowed to exist because of government rules and new rules aren't always bad.

But there is always power dynamics too:

  We have considered the political reasons for the opposition to the
  policy of creating employment by government spending. But even if this
  opposition were overcome — as it may well be under the pressure of the
  masses — the maintenance of full employment would cause social and
  political changes which would give a new impetus to the opposition of
  the business leaders. Indeed, under a regime of permanent full
  employment, the ‘sack’ would cease to play its role as a ‘disciplinary
  measure. The social position of the boss would be undermined, and the
  self-assurance and class-consciousness of the working class would
  grow. Strikes for wage increases and improvements in conditions of
  work would create political tension. It is true that profits would be
  higher under a regime of full employment than they are on the average
  under laissez-faire, and even the rise in wage rates resulting from
  the stronger bargaining power of the workers is less likely to reduce
  profits than to increase prices, and thus adversely affects only the
  rentier interests. But ‘discipline in the factories’ and ‘political
  stability’ are more appreciated than profits by business leaders.
  Their class instinct tells them that lasting full employment is
  unsound from their point of view, and that unemployment is an integral
  part of the ‘normal’ capitalist system.


Are state owned enterprises really inefficient? The typical right wing/free market argument, that leads to privatisation of government assets is that the government assets will be far more efficiently managed when in the hands of profit seeking capitalists, rather than being owned by the government.

Certainly it's fair to say that government departments are inefficient - a department that is directly funded by the government can't go bankrupt, so long as the government keeps funding it.

However, for a SOE the company still needs to stand on its own right, the SOE doesn't receive funding directly from the government.

The SOEs management structure is exactly the same as a privately owned company, except that the government is choosing who the board of directors is.

So the question is, unless the government is electing a board of directors that have different priorities to profit seeking capitalists, how is it that a SOE would be less efficient than a privately owned company?

Is there any research showing that SOEs are less profitable than privately owned companies?

SOE's don't have to perform worse that private enterprises, but they often do.  The reasons are manifold:

Some SOE's are not set up for profit motive, but rather to seed strategic industries for a nation (e.g. Port of Singapore, or Huawei Telecom).
Frequently, state influence at market-oriented is counterproductive because politicians placed in leadership positions are not good business managers (different skillsets), and political contacts can have a detrimental effect on competitiveness (overreliance on government contracts, etc).
Even if the SOE is run by market-selected managers and employees, states often have different shareholder incentives and objectives as owners, so they may not exercise market-driven ownership which leads private firms to attempt maximizing equity value and earnings.

Note that it's not true that SOE's are not funded directly by government.  Many SOE's receive partial funding through government, and many others receive heavily subsidized contracts from governments.

There is quite a lot of research on SOE performance.  Do a search.  For example, McKinsey did a study on Chinese SOE's and concluded that on average they deliver less than half the return on assets as their public counterparts:

http://www.forbes.com/2004/11/04/cx_1104mckinseychina6.html

I agree to the assumption that soe are inefficient. In most cases these firms leaders are not business people but a chance created for one to be paid. The point that the managers did not invest even a single cent, breeds the I don't care attitude provided Iam paid. Lack of monitoring gives room to employees to be truent. This practice will have negative impact on production of the firm.


If I gain, then someone else loses. Correct? On a very small scale, it's certainly true that if I gain, somebody else might lose. If I take away my brother's chocolate, then he will lose it, and will most probably not get anything comparable.

But on greater scale, say, nationally, if one person (e.g. successful start-up founder) makes a fortune, will this generally be bad for the other players? Or can it be beneficial (e.g. if the money is not saved up)? Does it entirely depend on the rich person's spending behavior?

I completely agree with denesp's answer, however I think you can make it even simpler.

  On a very small scale, it's certainly true that if I gain, somebody
  else might lose. If I take away my brother's chocolate, then he will
  lose it, and will most probably not get anything comparable.

OK, let's say I prefer chocolate to wine gums and my brother likes wine gums better than chocolate. Then taking his chocolate away and giving him my wine gums is good for both of us, so we both win and no one loses. So the answer is no.

You could even consider the extreme case in which your brother hates chocolate and you are doing him a favor by taking it. (Works not as well with chocolate, but you might think of recycling.)

In general these "trades" are called Pareto improvements.

But this is only one example, if you are interested in the subject, you might be interested in one of the following basic economic ideas:

Trade between two countries in which one of them is more efficient than the other: Ricardo's comparative advantage example
Your brother likes to give: altruism / warm glow (I really don't like the wiki page here, but was not able to find a decent non-scientific explanation of it.)
Or maybe other other-regarding preferences, for example fairness (your brother has a lot of chocolate and feels better if he gives you some): Theories of Fairness and Reciprocity (On page 3 is a brief "Non-technical summary" which might be interesting.)

As you can see there are many examples for a "win-win" situation and there are many many others, depending on the situation.

I would say yes, I know everyone else is saying NO but it wont let me comment. So an Answer must be the way..

In given example

  OK, let's say I prefer chocolate to wine gums and my brother likes wine gums better than chocolate. Then taking his chocolate away and giving him my wine gums is good for both of us, so we both win and no one looses.

well the guy selling chocolate looses cause now he lost a possible sell to you. And the wine gum seller lost a possible sell to your brother due to your trade. So yes someone lost

Next example

  Your fridge is broken and you want to fix it. Let's say you know the
  problem, but it will cost you 100 dollars to fix it yourself. This can
  be because you do not have the tools to fix it or because you need to
  take time off from work to do so. Suppose the cost of fixing is merely
  60 dollars for a repairman, because he already has the tools and/or
  has a lower hourly wage. Then if you pay him any amount between 60 and
  100 dollars and he fixes your fridge you both benefit.

The guy you would of paid the 100 to for the tool did not benifit. Thus someone loss..If you had to take time off work, then someone else must pick up your work load for the day, or the company you work for is down 1 employee for the day.. either way someone loses

and the last answer, just cause two people gain from there trade does not mean someone else did not gain a loss...


How do Marxists account for fiat money? LTV predicts that fiat currency, which requires zero labor to produce, should have zero value. Empirically, fiat currency does not have zero value. How do Marxists account for this. The to responses I have gotten so far are that labor does go into printing(though very little in comparison to the price) and that fiat currency is merely a token of money. In which case what is the money in this regard and how can any of this be empirically tested?

Marx's theory of product-value is often called a "labour theory of value" though he never used it himself to describe his "law of value". He also had a theory of exchange-value to try to explain market phenomena.

Marx did have a theory of the materialisation of labour in gold. But fiat or credit money has no intrinsic value (if it did then it would not be fiat), though it does have an exchange value, broadly speaking the value that can be acquired by spending it.  Marx argued that the use of money obscured the real value ("congealed labour-time") involved in transactions and exchanges.

That is not really testable, but what may be testable is the extent that relative prices of different commodities reflect the labour involved in their production, and if so whether these reflections are of average or marginal labour, and what causes changes in relative prices over time.  Whether you would want to is another question: it is all a bit 19th century.

There is nothing which exists in the human world, which does not require labor. Fiat money is by far no exception to that. It requires an state with many institutions to secure the money, so people can trust in the value of it. It requires bank houses and a lot of technology and real work to manage the financial processes. Marxian economics is very materialistic. The material background of most "pure" econonomic phenomens, is often ignored by the mainstream. For marxian economics fiat money has definitely value of "congealed labour-time" and not only the value of the printed paper.
Today we live in the age of information and data. So we know a lot things similar to fiat money. How a society determines the value of something is in the power of the society, not in the thing itself. The average required  labour time is an theoretical more philosophical tool, which still is not easily applicable to known, maybe any, economy.


Is there a good way of assessing an estimated absolute value of a currency? If we want to figure out the strength of a currency relative to another currency, we look at the exchange rate between the two. However, I'm wondering what is the most accurate way of assessing the absolute value of a currency?

I suppose commodities or gold could be used, but there can be variations on the value of those over time (i.e if there is a new use for gold in electronics, the value is obviously going up.) So have economists found a better way?

Actually there is an effort by IMF that indirectly offers a common unit of measurement to express the value of the major world currencies homogeneously.

It's called SDR (Special Drawing Rights) sometimes abbreviated as XDR. It's a sort of meta-currency whose value is calculated as follows:

  The value of the SDR in terms of the U.S. dollar is determined daily
  and posted on the IMF’s website. It is calculated as the sum of
  specific amounts of each basket currency valued in U.S. dollars, on
  the basis of exchange rates quoted at noon each day in the London
  market.

  The basket composition is reviewed every five years by the Executive
  Board, or earlier if the IMF finds changed circumstances warrant an
  earlier review, to ensure that it reflects the relative importance of
  currencies in the world’s trading and financial systems IMF website

I don't think absolute value exists. Every valuation is relative, because these valuations are made by people/by the market. For example: if you'd offer the choice between a ferrari and an icecream to a little kid, the kid might choose the icecream. If you'd offer the same choice to an adult, the adult would probably choose the ferrari. But maybe the adult is very rich, and he already has 10 such ferraris, so he doesn't care and chooses the icecream cause he's very hungry at the moment...

Also with currencies, absolute value doesn't exist, only value relative to other things. I do think that gold/silver are possibly the best measures for currency-value. Everyone always talks about gold going up or down in currency-value. I think we should take a different approach and talk about currency going up or down in gold value cause gold can't be created ad infinitum and at almost no cost.

I don't think that measuring one currency against another has any merit... both currencies can be printed at will. It's like measuring length in centimeters, but every day there are more centimeters in one meter...

So no, in my opinion there's no better way, cause absolute value doesn't exist here...

Anyway, the Austrians have a lot to say about 'subjective value': https://mises.org/library/subjective-value-theory

best regards


When a stock market crashes, how does money just disappear? I looked it up online (here), but I find it hard to believe that money literally "disappears".  For example, if I buy 10 stocks of a toaster company for \$100 per share, and then the stock value drops to \$10, I've lost \$900, but the entities I bought from have gained \$900 collectively.  I understand that money is supposed to be an abstract concept, but we should be able to trace where the dollars go.

So how does money just disappear when the stock market crashes?

Stocks are not money.

The valuation of a company - the market captialisation - is the number of shares multiplied by the share price.

The share price is the price people are willing to trade at right now. It does NOT mean all the shares have been traded at that price.

If a company issues 1 million shares, at a starting price of £10, the market cap is £10 million. They may only sell a few of these shares, so much less than £10 million actually changes hands. If the price rises to £20, only a few of the shares changed hands at that price - but the market cap is reflected in all the shares, and is now £20 million. People have commented on the flaws in this methodology.

The same happens in a crash. Only a fraction of the shares actually change hands, but the media report on the change in the market cap.

If you want an analogy, consider a house burning down. You buy the house for £200,000. Then it sadly burns down (and without insurance). It is now worth £0. However, no money has been created or destroyed; it's a loss of value of an asset.

Here is the narrative that I've arrived at:

1) Banks "create" money by lending recursively. This is called the "Multiplier Effect" which is a consequence of the "Fractional Reserve Banking System".

This artificial money can only exist if we assume that all lenders will pay back their loans.

2) When there is an economic recession the public stop spending as much (why this happens is another discussion), so borrowers stop getting revenue and default on their loans. The asset (a debt security) issued by the lending bank is now worthless and written off. There is a domino effect in that if that lending bank's assets decrease, the entity that this lending bank itself borrowed from also loses assets. The money that remains is equal to the "real" assets in the system (used to be gold) and this is why the economy is said to "reset" during a recession.

This begs the question of why allow a fractional reserve banking system instead of insisting on a full-reserve banking system. I would guess that it just makes for a very limited economy, even if it results in less spectacular market crashes. Apparently no country in the world sticks to a full reserve banking system.


How much do real-estate prices correlate with apartment rental prices? I've been trying to find sources that mention this, and have tried to find graphs of data so I can compare myself, but I haven't been able to. Do real-estate sale prices correlate positively, negatively, or not at all with apartment rental prices? A more nuanced answer than that is also appreciated.

In theory there should be a direct positive correlation (especially in countries where house prices are a part of the index which is used to define rental rates), but in reality there is a lot of variation in the results for this question depending on the country, possible effects of different laws, the business cycle, whether new housing is being built or not, etc.

For Italy, Manganelli, Morano and Tajan (2014) in "House prices and rents. The Italian experience" study response functions and conclude:

2)  Rents depend on real-estate prices, the short-term interest rate and the differences between actual and expected GDP with a one year delayed reaction.

On the other hand, Ambrose, Eichholtz and Lindenthal (2013) in House Prices and Fundamentals: 355 years of evidence, Journal of Money, Credit and Banking find that when housing prices stray from equilibrium growth, rental rates do not react the same way even if it takes decades for the prices to return to steady growth.

For a recent study on U.S. data (model built to match trends from 1960-2013), I'd check Gelain and Lansing (2014): House prices, expectations, and time-varying fundamentals, Journal of Empirical Finance

A apartment is usually a set price for all the same units as for real estate pricing they usually base what the monthly payment will be from how much was put down on the house and how many years you choose to pay it off. Not saying that there can't be similar in pricing which depends on where you are living such as city and state.Indaina Reia provide a new real estate guidlines.


If the economy is not always on the Price setting curve, can the Central Bank target unemployment? In the usual textbook model, in which there's imperfect competition, the economy is always on the Price-Setting(PS) curve, and to have a target unemployment level, above equilibrium unemployment, will cause an inflation bias.

First, is it possible for the economy to be on the wage-setting curve every time, but only in the PS curve in the medium-run? In this setting, would there be some leeway for a central bank to target also an unemployment level different from the equilibrium one, instead of just inflation, without causing inflation bias?

Any help would be appreciated.

The role of the central bank is solely to enact monetary policy, not government (fiscal) policy. Monetary policy of the central bank is independent (in the legal and political sense) from government.


Why did the Swiss National Bank abandon its currency peg so suddenly? There are many theories about why the Swiss National Bank (SNB) abandoned its currency peg a few days ago.

My question is more specific:  why did they make the change so sudden?  Why not reduce the peg to 1.19 (Francs needed to buy one Euro) one month, 1.18 the next month, and so on, until a reasonable balance is found, taking into account all of the factors that the bank would want to consider in targeting an exchange rate?

Disambiguation update: Some of the commentary/responses below maybe should be directed at the following related questions:

Why did some call maintaining the peg "expensive"?
Why did the SNB decide to end the currency peg?

Just to synthesize the other two answers together a bit and "join-the-dots".

Setting the Scene

Since 2011 SNB had decided that it wanted to prevent the CHF from strengthening past 1.2 CHF per EUR.  In order to do this it had to do either or both of:

Discourage people from buying CHF.  One way to try do this is to keep rates low.
Sell CHF by the bucket load.

Keeping rates low at the short end is easy enough - that's the base rate.  But that was scuppered by the low EUR short rates.  Keeping rates low at the long end is trickier, but can be done by not issuing too many bonds.

Selling CHF is fine, but that means buying other currencies.  By the end of December the SNB had bought 85% of GDP worth of foreign currencies.

At this point the SNB decided that it did not want to keep expanding the balance sheet.  Why it decided this is a different question (as the question points out).  The question is how to end a cap once you hold a huge Euro position.

The Sudden Act

Once the SNB had decided it could not defend the cap, it had three ways it could act.

Stop supporting the cap, but not tell anyone
Tell people at the same time that it stops supporting the cap
Tell people before it stops supporting the cap (or as in your example, schedule a reducing cap).

The third case would have almost certainly bankrupted the SNB.  If they had, as you suggest, let everyone know in advance what was going to happen, then everyone in the world would just arbitrage the situation into the ground.  Everyone would just buy CHF from the SNB at the cheap rate while they support the cap, and sell as soon as the cap is dropped.

The first case is a little dishonest, and would almost certainly get found out (the worst kind of dishonesty!).  As soon as they stopped supporting the cap, the FX rate would drift slowly down from 1.2.  Once people realised that this was not "supposed to happen" and therefore the SNB must have stopped defending it, then it would probably snap anyway.  There are two dubious plus sides to this approach I see though

The SNB could have started offloading some of its 85% holdings before the market realised.  This is called front running and market abuse, and would land a stock trader in jail, but for a central bank trading FX, it would not technically come under any legal challenge (at the moment...).
The reputational damage to the SNB would be huge, which would go some way to undermine investment in the country, causing a weakening in the CHF!

As you can see this would be a rather dubious strategy, but I have often wondered if Thomas Jordan (chairman of SNB) could simply address the world with underpants on his head and his willy hanging out as a way to depress the CHF.

The strategy they opted for was the "ripping off a bandaid" style.  The sudden shock is estimated to have cost the SNB about 13% of GDP due to all those foreign holdings.  Since the SNB made a massive profit in 2014 (see: http://www.bloomberg.com/news/2015-01-09/snb-sees-2014-profit-of-38-billion-francs-resumes-dividend.html) it probably saw this as an opportunity to get out before things got any worse.  Hold out longer and have 100+% GDP in foreign currency, and the bank might not have survived the jolt itself.

An unpredictable player usually holds the advantage of being unpredictable when all other players are reasonably predictable. Most central banks are predictable. Now the move last week was as unpredictable as it can be precisely because it has been so sudden.


Why should $dp_2=dm =0$ in this problem? I am studying Essential Mathematics for Economic Analysis and in chapter 12 problem 10 there is a problem that I can solve but I do not understand why the solution works.
The problem asks us to differentiate the following system from consumer demand theory:
$$U'_1(x_1,x_2) = \lambda p_1 \\ U'_2(x_1,x_2) = \lambda p_2 \\ p_1 x_1 + p_2x_2=m $$
where system defines $x_1, x_2$ and $\lambda$ as differentiable functions functions of $p_1,p_2$ and $m$. We are asked afterwards find expression for $\partial x_1 / \partial p_1$.
Now I have no problem with the first step - the differentiated system will be:
$$U^{''}_{11}(x_1,x_2)dx_1 + U^{''}_{12}(x_1,x_2)dx_2 = \lambda dp_1 + p_1 d\lambda   \\ U{''}_{21}(x_1,x_2)dx_1 + U{''}_{22}(x_1,x_2)dx_2 = \lambda dp_2 + p_2 d\lambda \\ p_1 dx_1 + x_1 dp_1 + p_2 d x_2 + x_2 dp_2=dm $$
Now my first attempt was to solve 2nd equation for $dx_2$ substitute it into the first and solve for $d x_1 /dp_1$ but I got wrong result. Afterwards in the solution in the back there is a hint that says that to solve this we should put $dp_2=dm=0$ after I follow this hint I get the correct solution:
$$\partial x_1 / \partial p_1 = \frac{[\lambda  p_2^2 + x_1(p_2 U^{''}_{12}-p_1U^{''}_{21})]}{(p_1^2 U^{''}_{22} -2p_1p_2U^{''}_{12} + p_2^2 U^{''}_{11})}$$
But I don't get why we can simply assume $d p_2 = dm = 0$ that seems so arbitrary, how come that  is necessary  to find the correct solution?

The assumption $dm =0$ says that we examine the behavior of the consumer under a fixed nominal income, and this is something interesting to study, because it aligns to a large degree with the observed reality of many people that have approximately constant income.
The assumption $dp_2=0$ assumes away general equilibrium effects, since we are looking at changes in $p_1$ which is price in one market, while $p_2$ is the price in another market, presumably of a different good. So while formally the justification here is that "we do partial equilibrium analysis", the vindication of partial equilibrium analysis is that the effects from changes in one goods market to another goods market take some time to materialize, so partial equilibrium analysis has relevance to the real world.
So we see that the assumption $dm=dp_2=0$ is not "necessary to find the correct solution" (there is not one correct solution, but solutions each consistent with the corresponding assumptions made). But it is neither an "arbitrary" set of assumptions, on the contrary, it has a specific logic and purpose for which it is imposed.
The OP asked in the comments

"Then why not also assume that $d\lambda=0$"?

But the optimal value of lambda is endogenous to the model, and it summarizes aspects of the consumer's optimal behavior. So whether it changes or stays constant is for the model to tell us.

Del lambda is also 0 when you find dx1/dp1 as seen in the equation. Why are you getting confused?  When you find dx1/dp1 you set all the other partial derivatives =0. This is the rule of partial differentiation. Similarly when you find dx1/dm you set all the other partial derivatives =0. Hope u understand now.


Why does local non satiation imply the constraint is binding? Local non satiation says that for any $x \in X$ and $\epsilon > 0$, there exists $y \in X$ such that $d(x,y) < \epsilon$ and $U(x) < U(y)$.

I don't understand why this implies that $px^* = m$ if $x^*$ sovles consumer problem. If we think of $x \in R^2$, it implies that you can find a $y$ that is strictly preferred in the small neighborhood of $x$. In that case, even $x$ is on $px = m$, LNS seems to imply that there is a $y$ that is strictly preferred than $x$, and that $y$ may not be on the boundary since LNS only says there's a increasing direction but doesn't say which direction it is increasing.

The OP is correct in pointing out that "Local Non Satiation (LNS) only says there's a (utility) increasing direction but doesn't say which direction it is increasing". Namely, we entertain the possibility on dealing with "bads" also, not only with "goods". MWG Microeconomic Theory book page 43 Figure 3.B.1 depicts exactly such a situation.

But it is the case that, when the bundle set is $\mathbb R_+$, under LNS not all items can be bads. Because then, the zero vector will be a point of satiation (and so it would violate the LNS assumption).

So using non-negative quantities of items and imposing LNS forces us to consider only the cases where at least one item in the bundle is a good and not a bad, in which case "more is better" for this item.

Then, we can prove that local non-satiation implies exhaustion of the available budget.

Ad absurdum, assume that $px^* < m$. Under LNS for every $\epsilon >0$, there exists a $y(\epsilon)$ that is more preferred to $x^*$. If some $y(\epsilon)$ is feasible, $py(\epsilon) \leq m$, then $x^*$ cannot be the optimal choice in the first place.

So the question is : Is it possible that all $y(\epsilon)$ that are preferred to $x^*$ under LNS, are infeasible, $py(\epsilon)>m,\;\; \forall \epsilon>0$?

I guess the OP can take it from here.

There are two situations with us when we know that preferences are locally non satiated.
1) Preferences are monotonic - In this case we know that we have "good" goods which necessarily means that more of every good is better, and thus the consumer would want to exhaust his income
2) Preferences are non monotonic - This permits the existence of "bad" goods but that doesn't mean that all goods are bad because that would mean that there is no bundle in the neighbourhood of origin (no good is consumed because all are bad) that is preferred to origin, thus we reach at a bliss/satiation point, violating LNS assumption. So, we need atleast one good which is not bad. In this case, the consumer would not spend anything on all the "bad" goods and exhaust his/her entire income on that one good which gives him/her positive utility.


What separates "rich" developing nations from "poor" developed nations? What separates relatively high income developing nations, such as Argentina, from relatively low income developed nations, such as Portugal?

If you look at things like HDI numbers, Argentina and Chile are classified as very high and even rank above Portugal. If you look at per capita GDP then Argentina, Chile and Portugal are all pretty close and fall between 22K and 27K.

Despite this, Argentina and Chile are generally considered developing countries despite being on par with or exceeding some countries that are generally considered developed.

This makes me wonder, what exactly separates developed countries from developing countries?

When comparing the United Kingdom and Uganda the answer is obvious, however it isn't as obvious (at least not to me) when comparing countries like Portugal and Spain to Chile and Argentina.

All country classifications are conventions, which depend on the rule used by the particular institution. There is no hard (ontological) rule on any classification. There is no even consensus on the definition of categories. Advanced/rich/developed/industrialized economies are sometimes used interchangeably, but who is in each of them depend on who is talking. Let see an example:

International Labor Organisation (ILO)

(I had to cut it because it is too long. See the full list in page 67 of this report).

Citigroup

(Report here).

Conclusion

As you can see, ILO puts Czech Republic, Greece, Argentina, and Chile as developed countries, whereas Citi puts them as emerging countries (Argentina as emerging can be seen in other reports). (ILO even distinguishes between emerging and developing).

This shows that there is no hard-coded rule about classification of countries. It all depends on the institution.

I am no expert, however I've known those countries, I think the difference relies somewhere on the fact that Argentina and Chile 5-10 years ago was nowhere compared to Spain or Portugal, they have sort of a sustained growth with some years even been of "negative growth" , however , Chile and Argentina owe their success to recent achievements and the expantion of tourism, this is clearly reflected on what their currencies were worth 10 years ago and now


What is the economic purpose of increasing the minimum wage? It is generally accepted among economists that minimum wage warps the equilibrium point between the supply and demand of labor by instituting a price floor and increases unemployment for unskilled laborers (while increasing the wage for the individuals who continue to work).
However, I have noticed that politicians continue to advocate an increase in the minimum wage.  Politics and political maneuvering aside, is there an economic reason as to why a higher minimum wage would benefit the economy?

Opinion of Economists

What makes you think that economists are so aligned against the minimum wage? Take a look at the IGM Forum that polls top academic economists. There is substantial disagreement about the effects and welfare implications of a minimum wage hike.

IGM Forum: Minimum Wage
NYTimes Blog Post about it

Theory about the minimum wage

Also, it's worth pointing out that besides empirical studies (like Card and Krueger), there are in fact theoretical reasons why a minimum wage might be welfare improving---see Lee and Saez (2012). (I'm just saying they exists, not commenting on the strength of the results.) In the Handbook of Public Economics, chapter 7, "Optimal Labor Income Taxation", they say this about that paper:

  Lee and Saez use the occupational model ... with endogeneous wages and prove two results. First, they show that a binding minimum wage is desirable
  under the strong assumption that unemployment induced by the minimum wage hits the
  lowest surplus workers first. ...

  Second, when labor supply responses are along the extensive margin only, which is
  the empirically relevant case, the co-existence of a minimum wage with a positive tax rate on low-skilled work is always (second-best) Pareto inefficient.A Pareto improving policy
  consists of reducing the pre-tax minimum wage while keeping constant the post-tax
  minimum wage by increasing transfers to low-skilled workers, and financing this reform
  by increasing taxes on higher paid workers. Importantly, this result is true whether or not
  rationing induced by the minimum wage is efficient or not.This result can also rationalize
  policies adopted in many OECD countries in recent decades that have decreased the
  minimum wage while reducing the implicit tax on low skill work through a combination
  of reduced payroll taxes for low skill workers and in-work benefits of the EITC type for
  low skill workers.

I am not an economist but I have had a very firm opinion about this since I first considered it as a young worker who has witnessed the increase of minimum wage and the increase in inflation over a 15-year period:

The fundamental problem with this is that if a significant amount of a population require a minimum wage increase, the economy will adjust in order neutralize this increased buying power after a very short time.

For example: Once it is determined by 'an industry' - computers, food, transportation, etc. that a significant amount of the population is now receiving more money (albeit 50 cents an hour), then surely their prices will soon reflect this increased buying power of the poor and the effect of the wage increase will then be effectectively neutralized. Can you blame the manufacturer?  After all, they are now having to pay some of their workers more and are seeing a loss because of it. Some call this type of thing 'inflation'. This increase will continue indefintely, much like a worm which stretches out their head farther than he can normally reach, the rest of the body will soon follow. Only the worm actuallly gets somehere, I do not believe the same is true for society or the economy.

To further this point: how far do you think we can keep increaing the minimum wage? Indefinitely?  Without unchecked inflation, soon we would find ourselves in a position where a loaf of bread costs one million dollars... but the minimum wage is 2 million so we can still buy our loaf of bread for a half-hour's worth of work. Of course, there was a short period before the bread manufucters increased their bread prices from $900,000 to 1 million, so for a short time those receiving minimum wage saw an increase in their buying power, but it was fake/forced/temporary.  They didn't do anything to truly increase their buying power: their skills were the same, their lives were the same, and so naturally the rest of the economy will adjust to keep everything else just the same.

In conclusion and to answer your actual question: I believe inreasing the minimum wage is nothing more than a facade used by a political party or politician to increase their reputation amongst those who would benefit the most, the recipients of the wage increase, and garner votes from those who do not realize how futile the politician's attempts are in the long term at making peoples' lives any better. It's a shortcut, which omits any of the hard work that is really required to accomplish anything in the real world. Like most shortcuts, their effects are usually "short-term".

NOTE: my answer is based on logical progression, not economical principles. If you disagree with something I've said, please leave a comment after downvoting. Thank you.


Is there a difference between deadweight loss and welfare loss? I've heard these two terms crop up quite frequently, and suspect they may be interchangeable. Deadweight loss - I'm sure I've encountered this in tariff evaluation; for effects of indirect taxes, I've seen textbooks that use deadweight loss. Welfare loss - I've seen textbooks refer to the social costs of profit-maximising monopolies who set prices higher and output lower than that of perfectly competitive firms as welfare loss. Is there really a difference between deadweight loss and welfare loss?

I would say all deadweight loss is welfare loss but not all welfare loss is deadweight loss.

For example an unregulated polluter causing a negative externaly results in a welfare loss compared to the social optimum. There is no 'missing production' and hence no deadweight loss in this case.

Edit: According to Wikipedia, the loss created by externalities is also classified as deadweight loss.

A little observation from the answer above: Externalities do generate deadweight loss.

deadweight loss has to do with levels of output, so any level of output that is beyond or below social optimal generate deadweight loss. Every deadweight loss is a welfare loss. However, you could lose welfare due to changes in quality of some goods, which may still be the social optimal level, but society is losing utility due to quality decay.


Is there an economic reason why employees don't share salary information with each other? In Western society, one's salary is often a taboo topic and people tend to not tell other people what they earn.

In China by contrast, I have been told that asking one's salary is fairly normal social discourse.

It seems that employees being aware of each other's salaries would be an advantage, as they have more information about what the organization is willing and able to pay.

Is there an economic reason why people don't reveal their salaries, or is this entirely a cultural taboo?

dwjohnston,

To answer your question briefly: no, because it is rather a social or psychological matter than it is an economic matter.

There is already asked a good question about this subject in The Workplace community: https://workplace.stackexchange.com/questions/15397/why-is-discussing-pay-such-a-taboo-how-can-i-get-people-to-talk-about-concrete/15431#15431

Feel free to read the (also good) answers. The answer section also contains some handy tips and tricks that you and your co-workers could try.

I hope this will be useful for you.

No there shouldn't be an economic reason. As the previous answer says, it regards mainly sociological/cultural aspects. Anyway, if you want to be a bit "abstracted", if you'd live in a World where everyone knows very perfectly your salary, at parity of jobs, he would demand more if he earns less, and who earns more would earn less. Information asymmetries contributes to let companies discriminate better salaries because they have a lot information more than the single worker and because they live in a more "colluded" framework. It could be a NON DEMONSTRATED explanation that in China, with a sort of modern Communist thinking, people tend to be more "standardized" (only in an economical view, without any other meaning) while in capitalism discrimination is more frequent and convenient.


How can I best estimate a company's contribution to GDP? Would revenues be a good proxy variable? If not, what are the other proxy variables that I can use?

As a comment noted, value-added is the way to go. And how do we measure value added at the level of an individual firm?

It is

$$\text{Value-added} = \text{Wages and Salaries incl. Insurance}+\text{Depreciation}+\text{Profits before Taxes}$$

"Wages and Salaries including social security fees" is the reward of Labor, while "Depreciation plus Profits before Taxes" is the (gross) reward of Capital.

This makes sense because if one views GDP from the "income" angle, it goes to these two aggregates of productive inputs, "Labor" and "Capital".

All other expenses that appear in a company's Profit & Loss Statement are "third-party costs", or value that other productive entities create.

Depending also on the jurisidiction, in most cases Labor costs, Depreciation and Profits before Taxes can be found as separate items in the financial statements of a company.

EBITDA would be a good proxy for your answer, coming straight off the income statement. However nowadays, many companies are reporting adjusted EBITDA (not GAAP), i would reckon you could reconcile between the two.


Can one use the standard deviation of a variable as a regressor? I am wondering if you could use the standard deviation of a variable as a regressor in an econometrics model? Consider the following hypothetical model:

$$y_{it} = \alpha_0 + \alpha_{1}T_{it} + \alpha_{2}\sigma_{it}^T + u_{it}$$

Where $y$ is the some outcome variable (e.g. crop yields) in country $i$ at time $t$, $T$ is temperature, and $\sigma^T$ is the standard deviation of temperature. Could one interpret $\alpha_2$ in such a way that would indicate how increased volatility in temperature would impact crop yields?

i.e. testing if countries with greater temperature volatility $\implies$ more severe weather $\implies$ negatively impacts yields

What comes to mind is the use of volatility indices as independent variables, and I wonder if this would lead to a similar interpretation.

By including both regressors, you are effectively trying to find the partial effect of either the temperature level, or variance, on crop yield. That is, the effect of the one, after holding the other constant. Does that approach make sense? Do you need to know the effect of a rise in temperature, for a constant variance in temperature? Or, do you need to know the effect of a change in the deviation in temperature, for a given level in temperature?
The multivariate approach finds those partial effects. The coefficients can be biased if the two variables are correlated with each other—you can test multicollinearity by regressing the one regressor on the other (or, for higher numbers of regressors, one would look at the Variance Inflation Factor).


Where the economic growth of a society come from? I'm thinking about value generating. I hear it a lot in a innovation context, i.e. one should create a new product that a lot of people want to buy.

I can see how a new product can value more than the sum of its parts, but I don't understand how this can increase the wealth of a society.

The point of view that raised this question for me was: let's say a person can spend only what she earn as wage, so when a new product come out, this product is competing with all the pre existing products, someone should lose to someone else to win.

Where the economic growth of a society come from?

I can see how a new product can value more than the sum of its parts, but I don't understand how this can increase the wealth of a society.

The wealth of society, in material sense, consists of what it can produce. Production of more products or services is the wealth. Economic growth is by definition a continuous increase in production. In fact the way how we most commonly measure economic growth is to just measure output per person by measuring GDP per capita.

Wealth is not money, money is just a measurement stick for value, storage of that value, and tool to simplify exchanges, but it’s not wealth in itself. However, because it is so ubiquitous many non economists equate it with wealth itself but that is just ‘money illusion’. If you would have billion \$ but could not buy even a loaf of bread with it you would be poor compared to a person with 0 dollars who has access to any goods or services they wish.

  let's say a person can spend only what she earn as wage, so when a new product come out, this product is competing with all the pre existing products, someone should lose to someone else to win.

In competitive market economy people  earn approximately what is their marginal product. When you go to work you either create goods or services for someone directly or indirectly and in competitive market you will get for that money equal to the worth of your marginal product. If you can produce more with  the same or less inputs you will also earn more money.

The reason why for example Solow-Swan model shows that economic growth depends on technology is that technology makes people continuously more productive year after year and allows them to produce more. This increases production is the real wealth, but besides that if people are more productive they also get pay more.

In real life not all markets are competitive so the above holds only approximately but empirical evidence shows that real wages indeed track net productivity over long term.

Besides increases in technology endogenous growth theory suggests that also savings rates and support for basic R\&D and human capital can accelerate economic growth. The mechanism there is different than in Solow model but ultimately again what delivers growth is how the above boosts the productivity and output.

Growth comes from resource consumption.  There are certain factors like demographics which inflate gdp. However the actual long term growth is always related to physical  reality.


Did (or can) quantitative easing cause an "everything bubble"? Wolfstreet claims that

  It’s true that despite QE globally – not just in Japan – there has been relatively little consumer price inflation in the countries whose central banks perpetrated it. But it has caused enormous asset-price inflation. We call it the “Everything Bubble” where practically all asset classes globally have become ludicrously inflated.

Is this correct? I'm having doubts because what is a bubble is usually hard to define. How is this "everything bubble" different from just growth that QE is supposed to stimulate?

It’s an editorial opinion, and it’s hard to give it a technical meaning.

The distinction being made in the text is between growth in the “real economy” - which would be measured by GDP and/or consumer price inflation - and growth in asset values. For example, there could be no direct job creation because of QE, just equity prices going up.

However, this is an opinion/claim that is hard to evaluate. One argument is that QE would first lower term interest rates (by reducing the stock of debt outstanding and/or signalling that the policy rate would be lower for longer), and this should raise other asset values by decreasing discount rates. (Please note that how QE affected interest rates was the subject of some theoretical controversy; I believe that other questions here discuss this. I am summarising one standard interpretation.)

The idea is that there is a link between rising asset prices and economic activity (known as the wealth effect). Since we do not know how many jobs would have been created in the absence of QE, we cannot be sure how large this effect is.

While it is difficult or impossible to prove that QE has created the Everything Bubble, look at it the other way around. Don’t look at the consequences, but look at what’s changed in the financial world.

Rates are near zero in the rest of the world. US has raised rates a little since crisis and considers stopping or even lowering.

Investors have heavily invested into real estate since crisis. Europe which has negative or near zero rates has rapid increases of property prices.

A larger proportion of the general population is investing into stocks, and convinced it’s the right thing to do. Stocks have been only going up since crisis (at least in US). The general public is fed the lesson that the share market is the place to invest and put your money if you want any return for the future.

This has fed social investing apps like BUX, Robinhood, eToro etc. Investing in general helped by Internet 3.0 has exploded. Margin Trading is en vogue.

This scenario shares some similarity to the financial crisis from the 1920‘s.
Back then the officials even were promising a golden age of wealth through shares. People were borrowing money to buy shares posting the shares in return as collateral.

More specifically QE directly increases money supply, thereby devaluing the USD. The route taken by Europe was different — lower rates and debt buyback and pushing rates lower on long terms. Devaluing the USD and increasing money supply had to have created some kind of asset inflation. That’s just simply economics. Now why it is not noticeable in common inflation numbers is not known and open to debate. Some argue that the way the CPI figures for instance are calculated is skewed and not calculated correctly to represent inflation. Also CPI is only one subset of everything. It’s a fact that real estate is getting too expensive for the regular workers, people are getting priced out of the market, and rents are rising too fast compared to wages. There is inflation there for sure!

TLDR;:

Yes. It is very likely this is the Everything Bubble.
In which way this will burst and what will be the trigger  — no one is able to say yet. Most likely candidate is corporate credit, since low rates have fueled a corporate credit expansion unlike any time before (think Netflix, Tesla and unicorns).


How could Pablo Escobar earn so much money? I read it's about 30 billion. But I read there were 6 million users in 1985. Let's say he gets 10 percent of the sales price, it means each person paid 50000 dollars for cocaine. It sounds way too much. Any calculations how they reached this amount?

Not sure an economist can answer this particular question about Escobar's wealth and not only because all the given estimates are uncertain. A more interesting question for an economist (or at least for me) would be: What is Escobar's (a drug firm) mark-up? Or what is the economic size of the international market for cocaine?

The most serious source of information I was able to find is the 2012 World Drug Report of the United Nations Office on Drugs and Crime (UNDOC). UNODC estimates suggest that

The total retail market for cocaine amounts to some US $85 billion in 2009 (p.70).
Columbian production proxied in terms of hectares is around 89% (based on 2009's estimates (68,000+73,000)/158,800 - Table 12).

So, if you assume that all Columbian production is produced by Escobar's cartel his total benefit is about USD $75 billion for the year 2009.

Edit: However, we cannot assume that Escobar's cartel got 89% of the retail value (thanks to @Alecos Papadopoulos for this point). The USD 75 billion is the equivalent of the "box office" for a movie - but the producers of the movie (i.e. Escobar's cartel) do not get all the box office.

Then, the question is what is the proportion retained by the Escobar's cartel? I have no clue! However, Levitt and Vetakesh QJE paper document that "earnings within the (drug) gang are enormously skewed (..) with high-level gang members earning far more than their legitimate market alternative." So, by extrapolating from this result and assuming that the drug market is vertically integrated and controlled by the Escobar's cartel, we may speculate that the latter (and Escobar himself) may get a big part of the box office.

In this report, you may also find more reliable estimates about

The total number of cocaine users: 16 million (Table 7)
and the estimates per region.
Purity-adjusted prices per gram in those regions

So if you find some data on consumer's average consumption and Escobar's production you may get a better estimate of his wealth.

I didn't go through all that thinking and analysis as I see in this post, but while watching Narcos (both seasons so far), listening to the narration it seems the drug business is really just a logistics business, the value lies in insuring that the end user gets the product all cost even in human casualties.Every possible cost is factored into that value, so if you the manufacturer control every aspect of the supply chain, including insurance on the product. You can have a mark up as high as you want 1000%, 5000% if you want. Target a market that has the cash to burn, literally like the US or some specific areas of it, it really is that simple to be extraordinarily wealthy.