What is the producer surplus given the price the consumer paid + price they are willing to pay, and the marginal cost of producing the product? Linda is willing to pay $6 for a cereal box. Linda bought a cereal box for $4.  The marginal cost of producing that cereal box is $3 per box. Assuming the price Linda paid was the equilibrium price, what is the producer surplus?
I've been wracking my head trying to wrap my head around this topic but I'm getting really confused, mostly about how this would look on a graph. My notes tell me Producer Surplus = (Market Price - Marginal Cost) * Quantity Sold, but I don't think it can be that easy...Producer Surplus is only $1, while Consumer Surplus would be $2? Could anyone please explain how this would look graphically? Thanks very much in advance!

Yes in this case producer surplus is $\\\$1$ and consumer surplus is $\\\$2$. Your calculations are thus correct.
Generally, producer and consumer surplus are not just willingness to pay minus market price times quantity, and market price minus marginal cost times quantity, but in this case they are.
Generally producer and consumer surplus are defined as area under the demand curve and above market price (for consumer surplus) and area under market price but above supply curve for producer surplus (see Mankiw Principles of Economics for undergraduate explanation or Varian Microeconomic Analysis for more rigorous info on the definition). More rigorously they are given as:
$$CS =  \int^{q_m}_0 D(q) dq − p_mq_m $$
where $D(q)$ is arbitrary demand curve, $p_m$ is price consumers have to pay in the market, and $q_m$ quantity sold at the market.
$$PS =  p_mq_m - \int^{q_m}_0 S(q) dq $$
where $S(q)$ is arbitrary supply curve.
However, in your special case you can use formulas $CS=(W-p_m)\cdot q_m$ and $PS=(p_m-MC)\cdot q_m$, because in your special case both CS and PS are rectangles and area of an rectangle is given by $ab$ and here the expressions in the brackets give you the hight of the rectangle ($a$) and quantity gives you the base of rectangle $b$ (you could still use the integrals that would give you same results but it would be overkill and waste time in this simple case).  Graphically your problem looks like:


Auction with one buyer and multiple sellers In the standard auction model, there are one seller and multiple buyers, the bidders are the buyers.
Consider now an auction with one buyer and multiple sellers, where the bidders are the sellers. Does it fundamentally changes the nature of the auction compared to the standard model? What changes does it make?

Such a setting is called a "procurement auction" or "reverse auction."
It does not fundamentally change anything. Instead of buyers with privately known valuations, the auctioneer faces sellers with privately known costs. Hence, bidders underbid each other. An efficient auction is then (typically) one where the bidder with lowest costs wins. An optimal auction is one where the winner has the lowest virtual cost, $c + \frac{F(c)}{f(c)}$, the procurement analogue to Myerson's virtual value, $v-\frac{1-F(v)}{f(v)}$, where $F$ is the cdf of the private type (valuation or cost). The first paper on procurement auctions that comes to my mind is Luton & McAfee, JPubE 1986, but I am sure people were aware of reverse auctions as a "mirror image" of standard forward auctions long before that.


Symmetric Cournot equilibrium: suffciency without second order conditon Let $q_i \in Q = \mathbb R_+$ denote the quantity produced by firm $i \in \{1,2\}$. Further let $\pi_i(q_1,q_2)  = (1-q_1-q_2)q_i$ denote the profits of $i$. A Nash equilibrium $(q_1^*,q_2^*) \in Q^2$ satisfies
\begin{align}
&\pi_1(q_1^*,q_2^*) \geq \pi_1(q_1,q_2^*) \quad \forall q_1 \in Q\\
&\pi_2(q_1^*,q_2^*) \geq \pi_2(q_1^*,q_2) \quad \forall q_2 \in Q.
\end{align}
We are considering symmetric equilibria of the form $q^* = q_1^* = q_2^*$ and therefore apply the symmetric opponents form approach.
Define $\pi(q,q^*) = \pi_1(q,q^*)$.
There exists a unique symmetric root to the first order condition $\pi_q(q^*,q^*) = 0$ given by $q^* = \frac{1}{3}$.

Claim The candidate $q = \frac{1}{3}$ is the unique symmetric maximizer of $\pi(q,q^*)$.

Problem: The candidate might be a minimum or saddle.

The idea: In economic settings equilibrium quantities are basically restricted by individual rationality, i.e. $\pi(q^*,q^*) = (1-2q^*)q^*$ implies $q^* \in [0,\frac{1}{2}]$. Since $\pi(\frac{1}{3},\frac{1}{3}) = \frac{1}{9} > 0$, the claim follows.

Edit I edit the question to further clarify the issue. Suppose I don't have any information about concavity of $\pi(q,q^*)$ w.r.t. $q$.

A general argument:
We need to distinguish 4 cases.

$q^*$ is a saddle and $\pi(q^*,q^*) > 0$ and $\pi(\infty,q^*) = \infty$.
$q^*$ is a saddle and $\pi(q^*,q^*) < 0$ and $\pi(\infty,q^*) = -\infty$.
$q^*$ is a minimum and $\pi(q^*,q^*) < 0$ and $\pi(\infty,q^*) = \infty$.
$q^*$ is a maximum and $\pi(q^*,q^*) > 0$ and $\pi(\infty,q^*) = -\infty$.

Since case 4 is considered here $\frac{1}{3} = \arg\max_q\pi(q,q^*)$.

How can it be a minimum or saddle since for every $q_2$ the profit function is strictly concave? If anything, the implicit non-negativity constraints might be binding, for example, if $q_2\geq 1/2$.

When the objective function is strictly concave, the first order conditions are necessary and sufficient, and the maximum is unique.

Not sure if I'm answering your question, but hopefully it helps.


Why is depreciation added to the GDP with the income approach? In my economics textbook, it states that when calculating GDP using the income approach, depreciation should be added. Specifically, GDP = Employee Compensation + Taxes less subsidies on businesses + Net operating surplus on businesses + Depreciation.

The example it provides is that if some people are running a fruit stand, their capital will endure some wear and tear. As a result,"some of their income is implicitly a compensation for this wear and tear", which is depreciation.

I am confused about how adding depreciation fits into the idea of the income approach. How does the capital stock depreciating fit into the incomes of households? It seems like depreciation has nothing to do with the income of the fruit stand, for example.

In national income and products accounting (NIPA), the word gross (usually*) means including depreciation, while net means excluding depreciation. We have:

Gross domestic product (GDP) = Employee compensation + Taxes less subsidies on businesses + Gross operating surplus on businesses
Net operating surplus on businesses = Gross operating surplus on businesses - Depreciation

And hence:

Gross domestic product (GDP) = Employee compensation + Taxes less subsidies on businesses + Net operating surplus on businesses + Depreciation

You are exactly correct when you wonder why we include depreciation in National Income. Conceptually, what we are more interested in is Net domestic product (NDP), which excludes depreciation:

Net domestic product (NDP) = GDP - Depreciation = Employee compensation + Taxes less subsidies on businesses + Net operating surplus on businesses

However, depreciation is difficult to estimate. And so often, we simply look at GDP. This is why GDP is the more frequently quoted, even though conceptually we'd prefer to use NDP.

Example. In 2018, a country had 100 workers (labor) using 100 tractors (capital) to produce agricultural products. We find that in 2018, the country produced \$1M worth of agricultural products and paid out \$800,000 to the 100 workers.

Hence, in our NIPA accounts, we have:

Employee compensation = \$800,000.
So, Gross operating surplus on businesses = Total income - Employee compensation = \$1M - \$800,000 = \$200,000.

This \$200,000 goes to the owners of capital, i.e. the 100 tractors. The key is to understand that "gross operating surplus" is the residual (the leftover term) after any compensation paid out to employees and any taxes (less subsidies) paid. (For simplicity we assume there are no taxes/subsidies.)

And now we have:

GDP = Employee compensation + Gross operating surplus on businesses = \$800,000 + \$200,000 = \$1M.

We now have to estimate depreciation (i.e. wear and tear on the tractors), which in the real world is difficult, but in our made-up example here we'll just say is \$50,000. Then:

Net operating surplus = Gross operating surplus - Depreciation = \$200,000 - \$50,000 = \$150,000.
NDP = Employee compensation + Net operating surplus = GDP - Depreciation = \$950,000.

*Confusingly, there is also another sense in which the words gross and net are used in NIPA (and also more commonly in daily life) — example: Net lending = Lending - Borrowing. See 2.72 in the UN System of National Accounts (2008).


Universal basic loan I'm looking for feedback and critiques of an idea. Universal basic income is an increasingly popular idea, but most agree that it would be terrifically expensive. Assuming that the goal of UBI is to provide everyone with enough liquidity to participate in the economy, would a universal basic loan work just as well without costing as much on paper?

Specifically, the government would make available a no strings attached personal loan to every citizen, to be paid back at some future date (e.g. 12 months in the future), with the interest rate set according to whatever monetary policy makes sense at the time. The interest rate may also carry with the size of the loan, the term, previous good repayments etc.

Optional follow up: could this also replace the tax system, in that the interest rate could be set high enough to be used as the money drain in the economy instead of income tax?

This website is supposed to be technical questions and not opinion-based, so I will try to respond to two technical questions I can extract from the question.

The first question: is the loan “less expensive”? The obvious response is: how big is the loan? Note that if the loan is not too large, it would be similar to student loans, an existing programme. The analysis of the programme would overlap that of student loans. However, the loan programme being cheaper is an apples-to-oranges comparison: what happens when a person cannot pay back the loan? They are cut off from support, which is what the UBI provides.

There are other questions here about Universal Basic Incomes, which may help answer questions.

The second question I see is whether the loan rate could replace taxes. This seems implausible with the current size of government. The US Federal government has a current tax take that bounces around 20% of GDP. (Other countries will have a larger tax burden, but there are also state and local taxes in the US.) At a loan rate of 5%, that would require the loan principal to be 400% of GDP to match amounts. A debt level of 400% of GDP is well above private sector debt levels seen in practice, and would probably unsustainable (could not be paid back). Although my comparison is somewhat apples-to-oranges, it indicates that taxes are much larger flows than plausible interest payments.


How to handle the missing values' issue of newly listed stocks? I am trying to test some asset pricing models on 10 portfolios for the period of 2010-2020. The problem is that three of these portfolios included stocks that are newly listed in 2017 and 2018, so I only have three years of historical data for these stocks. Can anyone help how to solve this problem? I don't want to exclude these stocks; does imputation makes sense for such a long period?

I have found some posts to help answer your question.   In a post on ResearchGate.net,
https://www.researchgate.net/post/How-to-deal-with-missing-value-in-a-time-series-stock-market-data
One of the responses that I think has the best answer for your is to carry forward the previous data . However,  as the person stated,  there is a problem with that method.    “--- if you are developing a trading system, for example, and assume that prices are "tradable", then your analysis will be flawed since you can't trade at a "carried forward price." My solution to this problem is this: create a 'locf' price and as a separate variable, a "tradable price", which when data is missing, is (approximately) the next price you could have realized. “
However,  Mazin A. M. Al Janabi  posted a link on that page which has a better answer for you.  https://www.researchgate.net/profile/Mazin-Al-Janabi/post/How-to-deal-with-missing-value-in-a-time-series-stock-market-data/attachment/5b73a9633843b0024405fcb1/AS%3A659744100450305%401534306659149/download/Dealing+with+the+Problem+of+Missing+Data-+A+short+Note.pdf
He states that you either not include the missing data or you can calculate the price from a geometric mean of the previous and other price data. However using average prices will underestimate the volatility of the stock price data.
Here is another response to a similar question on Stackexchange: https://quant.stackexchange.com/questions/41171/how-to-deal-with-missing-value-in-a-time-series-stock-market-data
I have also posted a similar answer on missing data but not missing stock price data How do I fill gaps in my data?
Either case I think it is VERY important that you document that you have missing data, report which observations are missing, and what method you used to remedy it.


Blackwell order of information structures Consider a model where a decision maker (DM) has to choose action $y\in \mathcal{Y}$ possibly without being fully aware of the state of the world.
The state of the world has support $\mathcal{V}$.
When DM chooses action $y\in \mathcal{Y}$ and the state of the world is $v\in \mathcal{V}$, she receives the payoff $u(y,v)$.
Let $P_V\in \Delta(\mathcal{V})$ be the DM's prior.
The DM also processes some signal $T$ with support $\mathcal{T}$ distribution $P_{T|V}$  to refine his prior and get a posterior on $V$, denoted by $P_{V|T}$, via the Bayes rule.
Let $S\equiv \{\mathcal{T}, P_{T|V}\}$ be called "information structure".
A strategy for the DM is $P_{Y|T}$. Such a strategy is optimal if it maximises his expected payoff, where the expectation is computed using the posterior, $P_{V|T}$.
Question: consider two information structures, $S$ and $S'$. We can compare them by using Blackwell Theorem which says that $S$ is more informative than $S'$ if the maximal expected payoff under $S$ is al least equal to the maximal expected payoff under $S'$. Is this correct? If yes, then it seems to me that I can rank any information structure using this criterion. Hence, why the Blackwell order is a partial order?

Its for all priors and all utility matrices. Its possible for $p_1,u_1$ and $p_2,u_2$ to rank $S$ and $S'$ different.


In Austrian theory, does constant, predicted deflation distort credit markets? Many leading Austrian thinkers propose a 100% reserve gold standard banking.  They agree that such a system leads inevitably to monetary deflation if productivity continually improves.

Austrians also believe that markets free of distortions are optimal.

Thus, some Austrians must either believe that (a) the monetary deflation resulting from the proposed monetary system doesn't distort credit markets, or (b) it does, but there is no practical alternative that does provide for free credit markets, or (c) something I've not thought of.

Which do they believe?

I am having trouble seeing how deflation could NOT distort credit markets, since if the free-market real interest rate for a given loan, as determined by time preference for consumption, is less than the expected deflation rate, no transaction will take place even though both parties would benefit by making one.

But then which rationale is given for 100% reserve banking with gold standard?

As with inflation, so long as deflation is expected, there is no distortion. The expected deflation is simply built into interest rates.

For example, if I expect deflation to be 1% per year and I am looking for a 5% real return on an investment, then I'll look for investments with a 4% nominal return.


Intuition of Shephard's Lemma in Reverse I am not sure how to word this question. I understand the envelop theorem pretty well and as a result Shepard's Lemma. The proof is relatively straightforward. I am getting stuck on the intuition behind integrating the Hicksian demand function and getting the (total) expenditure function as a result. It seems like this would be some sort of reversal of the envelope theorem.
Suppose we have a two good world. A typical Hicksian demand function can be written as a function of p1, p2, and utility. Using the fundamental theorem of calculus and the envelop theorem, I know that integrating this function over an interval with respect to p1 or p2 will give us back the total expenditure function. So if we integrate over a range with respect to p1, for example, it gives us the change in total expenditure. What's not clear to me is how expenditures on good 2 are being included (intuitively).
In a single-variable integral, it is easy to understand this intuitively. If we have x and we integrate a function f(x) over an interval it is easy to understand this as adding up the infinitely small changes times the rate of change of f'(x) to get the "total" change in f(x). In the Hicksian case, we seem to be adding up the infinitely small changes in price of good 1 times the rate of change (Hicksian demand for good 1) and assuming expenditures on good 2 are constant when they almost certainly wouldn't be. Is there a better way to understand this? Are expenditures on good 2 implicitly included?

Expenditures on good $2$ are, indeed, included and can vary.
We know from Shephard's lemma that whenever the marginal change in expenditure for good $1$
with respect to its price varies with the price of good $1$, the Hicksian demand for good $1$ must vary too. But since utility is fixed, changes in the Hicksian demand for good $1$ require changes in the Hicksian demand for good $2$, a move along the indifference curve. And since we do not change the price of good $2$, the expenditure on good $2$ must vary too.


Are bank reserves part of M1 or only part of M2, and why? (1) Toyland earns $$100,000 revenue in cash this week.  Toyland managers use this $100,000 to pay down a short-term loan from Bank One.  Bank One keeps the cash in reserve.   As a result of this transaction M1 [x] and M2 [y]

(2) Bank of America takes $25,000 from reserves and makes a loan to Sissy.  Sissy uses the funds to purchase a Mini Cooper.  The funds are then deposited in the car dealer's checking account.   As a result of this transaction M1 [x] and M2 [y]

The answers for these 2 are:

(1) [x] = decreases, [y] = decreases

(2) [x] = increases, [y] = increases

I had gotten both of these questions incorrect because I considered Bank Reserves to be that part of the money that the money keeps in vaults, etc. in a fractional reserve system.
Usually the bank reserves would be considered about 10% of the total bank's worth.
Am I correct? Or wrong? If so, why?

Using the Federal Reserve's definition for M1 (warning, M definitions can vary between countries, so always check the local definition):

  "M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions)."

Note, reserves are not counted as part of M1. The explanation for that is in the answer here:

How does a cash deposit change the M1 Measure of the Money Supply

So in question 1) we are told that Toyland earns cash and uses it to pay down a short term loan from Bank One. Critically we are not told where Toyland has its account. Note, we can't assume that Toyland doesn't have a bank account, since the bank would have insisted on it having one to receive the loan. We'll assume to make things simple it was Bank One.

If it receives cash from the public that was not in the banking system, then Bank One's cash reserves would increase. At the same time so would Toyland's deposit account, so there is no change to M1 at that point in time. The decrease in the 'cash held by the public' outside the system is matched by the increase in the deposit account at Bank One.

Now Toyland pays off its loan. There is no change to the cash reserves, Bank One simply decreases its loan book, and removes the money from Toyland's deposit account. So M1 decreases, because the loan is repaid and the liability deposit money is removed from the banking system. M2 is essentially M1 + some savings deposits and money market funds, so M2 will decrease as well.

2) Bank of America takes $25k from its cash reserves and makes a loan.

Actually, Bank of America doesn't do that. Bank of America makes a loan by creating a liability deposit account/entry for that amount, and a matching entry in its loan book. Creating that deposit money increases M1 (and M2). Whatever Sissy does with the money subsequently is irrelevant.

Bank Nerd Trivia... 10% is the figure used for reserves in the example Keynes wrote for the 1931 Macmillan report, which has been subsequently copy and pasted into the textbooks. I've never seen an actual banking system that uses 10% - in 1930's reserve ratios were usually 20%+, whereas these days they are down to 1-2% in Europe. Although the US has a 10% reserve rate on "Net Transaction Accounts", it has a 0% rate on all other accounts, which makes the actual rate open to account classification decisions by the US banks.

Keynes has a lot to answer for btw., the textbook description is horribly confusing, and also partially incorrect. (Try applying loan repayments to the examples it uses.)


A basic question about supply and demand graph i have some basic knowledge on economics ,and i had an argument with a friend ,so  my question is this , as we all know
(If we ignore all the outside factors) that the price of any product is governed by it's quantity in the market. So the more from that product existing in the market the lower the prices and vise versa.
Is there a method or formula that works backwards i mean from the price of that product you can find the quantity that represented in the market ??

Update:
I saw a gold graph once and the price was changing according to time not the quantity. And people start to draw as they call it trend lines (upward and downward ) so if the trend is up they call it Supply if the trend is down it is a demand graph, is this right ? Is there  a way to find the quantity of gold that traded in this example from the graph it self ? Of course we still ignoring the other factors that could change market direction we talk only supply and demand.
Maybe it is a silly question .... sorry.

Yes, typically we would like estimate these curves’ functional forms. If we estimate a demand function $P=10-2Q$ we can rearrange it such that $Q=5-\frac{1}{2}P$.

This, just changes the way we interpret the relationship. For a given quantity how does price change? Compared to, for a given price how does quantity change? This begs even further questions however because in the market we typically just observe equilibriums and “shocks” that determine prices typically also affect quantity. This makes estimating these functional forms difficult from an econometrics point of view.


EOQ - how to calculate holding cost This is very simple, however, I have the following setup

Suppose that the company ABC has a product that shows a constant
annual demand rate of 3600 items. One item costs £3.
Ordering cost is £20 per order and holding cost is 25% of the value of inventory.

What I want to do is calculate the EOQ

$$
EOQ = \sqrt{\frac{2DS}{H}}
$$

Where

D = annual demand (here this is 3600)
S = setup cost (here that's £20)
H = holding cost
P = Cost per unit (which is £3 here)

I figured that I would have

$$
H = 0.25 \times 3 = 0.75
$$

I'm sceptical about this result though.

So your EOQ expression is suggesting that the optimal order size is for about $438$ items each time.

You can check the result if you wish.  Suppose you order in batches of $Q$:

The average annual number of batches ordered is $\dfrac{3600}{Q}$ so the average annual cost of ordering is $£\dfrac{72000}{Q}$
The average number of items held in inventory is $\dfrac Q2$ worth $£\dfrac{3Q}{2}$ at a holding cost of $£\dfrac{3Q}{8}$
So the combined ordering and holding cost is  $£\dfrac{72000}{Q}+£\dfrac{3Q}{8}$
For $Q=437$ this gives about $£328.6347$; for $Q=438$ this gives about $£328.6336$; for $Q=439$ this gives about $£328.6341$. This suggests that $438$ may indeed be the best order size
You can check the calculus: the derivative of $\dfrac{72000}{Q}+\dfrac{3Q}{8}$ is $\dfrac{3}{8} - \dfrac{72000}{Q^2}$ which is a increasing function of $Q$ and is zero when $Q^2=192000$ i.e. $Q \approx 438.178$, and this would minimise the combined cost


Solutions for the de-dollarization of the Democratic Republic of Congo While reading this article, I was wondering about the policies the DRC's government could employ to make the congolese franc appreciate. To appreciate the currency, the DRC by decreased investment in the mining sector which decreased the supply of the currency -> Appreciation. On the other hand, the decrease in investment caused inflation to happen, countering the original beneficial effects of this policy.

My question is: what would the implications be if the DRC simply pegged its value to the dollar or revalued it? Why hasn't it done that?- there must be reasons...

I am learning high-school economics so pardon my limited knowledge.

I look forward to your answers!

Yes, it is possible to peg any currency to the USD. The big question is: at what rate? To peg the Congolese franc to the USD, the central bank needs USD reserves. This is necessary to maintain the peg. (If the currency depreciates, the central bank will sell some of its USD reserves and buy the currency to prop up the exchange rate and thus uphold the peg). As per the article cited in the question, the Congolese central bank doesn't have much foreign currency reserves.

Based on the chart below, it appears to me that the Congolese franc was in fact pegged to the USD until early 2016. It seems the central bank couldn't maintain the peg at that rate and had to let the franc slide.

To have a strong currency, the central bank needs to limit the money supply. However, the government will often pressure it to do the opposite, i.e. pressure the central bank to print money and buy government bonds, so the government has money to spend. (The article mentions plans to slash the government budget in order to limit the supply of francs in the economy). For this reason in advanced economies central banks are typically strictly independent from government.


While calcluating GNP, the overall income of a citizen working abroad is considered or only his/her remittances? Suppose a citizen of Country A is working in Country B with income X USD, and he sends Y USD as remittance to A, what is considered while calculating GNP? X or Y? (X is inclusive of Y)

GNI (Gross National Income) is the current description of what used to be called GNP.  It is GDP (Gross Domestic Product) plus net primary income from abroad (primary income receivable from the rest of the world less primary income payable to the rest of the world)

Assuming this individual is a long-term resident (1 year or more) in Country B, than none of this counts as Country A's GNI (Gross National Income is the current description of what used to be called GNP).  The earnings count in Country B's GDP (as part of the income measure) and GNI, while the remittance is part of Country A's secondary income from Country B and affects the Balance of Payments current accounts of the two countries.  See chapter 12 of the IMF Balance of Payments manual.  Something similar happens with the self-employed

If however this individual is a short-term resident (less than a year) or a cross-border worker, employee compensation counts as primary income and so is part of Country A's GNI though Country B's GDP (as part of the income measure).   Any goods or services this individual pays for in Country B is counted as a export from Country B to Country A. See chapter 11 of the IMF Balance of Payments manual. For short-term self-employed migrants, income counts as an export of services from Country B to Country A, and so counts in Country A's GDP and GNI, but again anything spent in Country B counts as trade the other way

Measuring these flows and making these distinctions are difficult for national statistical services, especially for migrant workers who do not know how long they will be staying in another country


Non-cooperative Nash Equilibrium in political game I have difficulties deriving the non-cooperative Nash Equilibrium of this problem.

The objective function is to maximize the expected total rent over the two periods, that is:

\begin{align}
\max_{S_i} (1-e_i S_i + P_i(S_i, S_j) \delta(1-\underline{S}))
\end{align}

with $P_i(S_i, S_j)=\frac {S_i}{S_i+S_j}$, and $i,j \in \{A,B\}$, and $e_A=1-d$ and $e_B=1+d$

$S_i$ denotes the quality of the service, $e_i$ is a parameter that captured the spending needs in $i$, $P_i(S_i, S_j)$ is the re-election probability, $\delta$ is the discount factor and $\underline{S}$ is the minimum service quality.

The solution of the Nash Equilibrium of the game is
\begin{align}
(S_A^*, S_B^*)=\Big(\frac{\delta (1+d)(1-\underline{S})}{4}, \frac{\delta (1-d)(1-\underline{S})}{4}\Big)
\end{align}

I have tried but I don't get that same solution.

This is what I have done:
I solve the maximization problem
\begin{align}
\frac {\partial{U_i}}{\partial{S_i}} = -e_i+\dfrac{\delta(1-\underline{S})S_j}{(S_i+S_j)^2}\stackrel{!}{=}0
\end{align}

and get the best respond function for $i$ and $j$ respectively as follows
\begin{align}
\delta(1-\underline{S})S_j=e_i(S_i+S_j)^2 \\
\delta(1-\underline{S})S_i=e_j(S_i+S_j)^2
\end{align}

I impose symmetry $S_i=S_j=S^*$ to the reaction function and I get this:
\begin{align}
\delta(1-\underline{S})S^*&=e_i(2S^*)^2 \\
S^*&=\dfrac{\delta(1-\underline{S})}{4e_i}
\end{align}

I am not sure though.

You could add up the equations
\begin{align}
\delta(1-\underline{S})S_j=e_i(S_i+S_j)^2 \\
\delta(1-\underline{S})S_i=e_j(S_i+S_j)^2
\end{align}
to get
\begin{align}
\delta(1-\underline{S})(S_i+S_j)=(e_i+e_j)(S_i+S_j)^2
\end{align}
which simplifies to
\begin{align}
\delta(1-\underline{S})=(e_i+e_j)(S_i+S_j).
\end{align}
This gives you $(S_i+S_j)$. From the initial equations
\begin{align}
\delta(1-\underline{S})S_j=e_i(S_i+S_j)^2 \\
\delta(1-\underline{S})S_i=e_j(S_i+S_j)^2
\end{align}
you can also get
$$
\frac{S_j}{e_i} = \frac{(S_i+S_j)^2}{\delta(1-\underline{S})} = \frac{S_i}{e_j},
$$
which gives you
$$
\frac{S_j}{S_i} = \frac{e_i}{e_j}.
$$
Now you have both the sum and ratio of the variables $S_j,S_i$. Calculating their individual values should be a straightforward matter.


Local vs. foreign currency denomination for Emerging Market Bonds For emerging market governments, why is it safer to issue bonds in local currencies than in foreign currencies to raise money? Given that both are invested in by foreign investors, couldn't both potentially lead to exchange rate risk and currency fluctuations, say if there is a sell-off?

I was confused about this while reading 'Pragmatic Approaches to Capital Market Liberalization' (2008), a paper by Raghuram Rajan and Eswar Prasad. It comes up on page 13.

I tried looking at Investopedia and a Financial Times article on the topic of emerging market bonds, but they seemed to look at it from the perspective of investors and not public policy (I'm not suggesting its a tradeoff but maybe there's different perspectives, I thought).

https://www.investopedia.com/articles/03/073003.asp
https://www.ft.com/content/56cb690e-c6a8-11e1-963a-00144feabdc0

Thank you for your help! I would really appreciate if to the extent possible, the answer is in layman(ish) terms.

An EME's government collects taxes in domestic currency. If it issues debt in foreign currency and the domestic currency depreciates, the value of foreign currency-denominated debt increases. For example 1 000 000 000 USD is due at some date. If the exchange rate is 1 peso per dollar the government has to collect 1 000 000 000 pesos to pay it off. If the exchange rate becomes 1.25 pesos per dollar the domestc government has to collect 1 250 000 000 pesos. If the debt was denominated in pesos all along the government would still need only 1 000 000 000 pesos.

If debt to GDP is high such a depreciation may cause the EME government to default.


What is the government's ideal rate of growth for property prices? If property prices raise too quickly, it can price people out of the market, cause mortgage stress and financial hardship and create a property bubble.

If property prices fall too quickly, it can be devastating to the economy as property investors have investments worth less than their loan.

So ideally, does the government want property prices to go up or to go down and at what rate?

I can't speak for the rate at which you should set your prices.

However, borrowing some knowledge for my class of monetary economics, I would say pricesetting has a lot to do with expectations.

Just like in the exchange market, when people expect prices to rise a certain self-fulfilling prophecy occurs which raises prices. Why is that? When people expect prices to rise it gives them time to adjust themselves to the rise in prices.

For instance: Let's suppose that the dollar is at 1,5dollars/€
For some reason people expect the exchange rate is going to rise. when I say rise I mean an exchange rate of  for instance 1$/€ . Eventhough when the number becomes smaller because you need to spend more dollars to get the same quantity of euros.

People expect the exchange rate to rise. Well some people are scared of the price rise so they anticipate that by buying the euros at the current low price. This in turn raises the demand for euros and therefore raises its price. This is the self-fulfilling prophecy mechanism I was talking about.

I realise I haven't answered your questions completely. But I hope it helped you to know that even if you do you at which rate you should set the prices, it is still important to factor in the expectations of the population, however difficult that can be.


What is core government debt? In fixed income, the yield on the 10-year US Treasury fell 0.07
  percentage points to 0.56 per cent as investors retreated to the
  safety of core government debt

From : https://www.ft.com/content/26ea5ef9-0619-4e50-b605-58e36d3fc4d9

What is 'core government debt' and how is it raised, since the quoted statement seems to imply it is different from US Treasury bonds.

There’s no formal meaning, but it would be the perceived safest government bonds. The quote indicates thar US Treasury bonds are part of that core. The 10-year yield fell, which meant that price went up.


Barro's (2009) rare disaster model in the AER: How to derive equation (10)? In Barro (2009) Rare disasters, asset prices and welfare costs Barro develops a Lucas tree model with Epstein-Zin preferences.

My question concerns the paper's equation (10). In this equation Barro states that under the optimal solution utility $U_t$ is proportional to consumption $C_t$ rased to the power of $1-\gamma$, where $\gamma$ is the coefficient of relative risk aversion, i.e.

$U_t=\Phi C_t^{1-\gamma}$

While I understand the logic of this result, I do not understand how he derives the constant $\Phi$, which is shown in footnote 7 of the mentioned paper:

  Alberto Giovannini and Philippe Weil (1989, appendix) show that, with
  the utility function in equation (9), attained utility, $U_t$ , is
  proportional to wealth raised to the power $1-\gamma$. The form in
  equation (10) follows because $C_t$ is optimally chosen as a constant
  ratio to wealth in the i.i.d. case. The formula for $\Phi$ is, if
  $\gamma \neq 1$ $\theta \neq 1$, $$\Phi  =
 (\frac{1}{1-\gamma})\{\rho+(\theta-1)g^* - (1/2)\gamma(\theta
 -1)\sigma^2 - (\frac{\theta-1}{\gamma-1})p[E(1-b)^{1-\gamma} - 1 - (\gamma  - 1)Eb] \}^{(\gamma-1)/(1-\theta)}$$

Barro quotes the 1989 NBER paper by Giovannini and Weil. In this paper I can derive the constant. However, it looks completely different than Barro's version, because I end up with an expression that includes $E[R_t^{1-\gamma}]$, where $R_t$ is the return on equity. I believe Barro has replaced $E[R_t^{1-\gamma}]$ with the equilibrium solution of  $R_t$. However, his expression does not include any logs or exp expressions.

I would be grateful for a solution or any hints to the solution.

I think Barro means in the footnote that Giovanni and Weil find the same equation, $U_t=\Phi C^{1-\gamma}$, but using the optimal path of $C_t$.
In Barro's paper, the approach is different given that the dynamics of $C_t$ is exogenous: $C_t=Y_t$ by assumption.

Barro uses the limit case when the length of a period gets close to 0. Maybe what may bother the reader is that the model is defined as discrete.

Rewrite the model

First, we can rewrite the model with a length of period $\delta$ and then use $\delta\to 0$.
The GDP dynamics write
$$\log(Y_{t+\delta})=\log(Y_t)+g\delta+u_{t+\delta}+v_ {t+\delta}$$
with $u_{t+\delta}\sim \mathcal{N}(0,\delta\sigma^2)$, and $v_{t+\delta}=0$ with probability $1-p\delta$ and $\log(1-b)$ with probability $p\delta$.
The utility satisfies
$$
U_t=\frac{1}{1-\gamma}\left\lbrace C_t^{1-\theta}+\frac{1}{1+\rho\delta}\left[(1-\gamma)E_tU_{t+\delta}\right]^\frac{1-\theta}{1-\gamma}\right\rbrace^\frac{1-\gamma}{1-\theta}.
$$

1) Find $\Phi$ as a function of $E_t\left[\left(\frac{C_{t+\delta}}{C_t}\right)^{1-\gamma}\right]$

From now suppose there is a $\Phi$ such that $U_t=\Phi C^{1-\gamma}$ (note that $\Phi$ depends on $\delta$ a priori).
Define $H(U)=[(1-\gamma)U]^\frac{1-\theta}{1-\gamma}$, the utility satisfies
\begin{align}
H(U_t)= C_t^{1-\theta}+\frac{1}{1+\rho\delta}H(E_tU_{t+\delta}).
\end{align}
We substitute $U_t$:
\begin{align}
H(\Phi)C_t^{1-\theta}= C_t^{1-\theta}+\frac{1}{1+\rho\delta}H(\Phi)\left(E_t\left[C_{t+\delta}^{1-\gamma}\right]\right)^\frac{1-\theta}{1-\gamma}.
\end{align}
Hence, we obtain for $C_t\neq 0$,
\begin{align}
\frac{1}{H(\Phi)}= 1-\frac{1}{1+\rho\delta}\left(E_t\left[\left(\frac{C_{t+\delta}}{C_t}\right)^{1-\gamma}\right]\right)^\frac{1-\theta}{1-\gamma}.
\end{align}

2) Find $E_t\left[\left(\frac{C_{t+\delta}}{C_t}\right)^{1-\gamma}\right]$ fromp the GDP dynamics

The trick is to find the expectation in the right-hand side from the GDP dynamics.
\begin{align}
\left(\frac{Y_{t+\delta}}{Y_t}\right)^{1-\gamma}= \exp\left((1-\gamma)g\delta\right).\exp\left((1-\gamma)u_{t+\delta}\right).\exp\left((1-\gamma)v_ {t+\delta}\right).
\end{align}
Taking the expectation and using the independence between $u_{t+1}$ and $v_{t+1}$, it follows
\begin{align}
E_t\left(\frac{Y_{t+\delta}}{Y_t}\right)^{1-\gamma}= \exp\left((1-\gamma)g\delta\right).E_t\exp\left((1-\gamma)u_{t+\delta}\right).E_t\exp\left((1-\gamma)v_ {t+\delta}\right).
\end{align}
The expectation of $\exp(X)$ where $X$ follows $\mathcal{N}(0,\sigma^2)$ is $\exp(\sigma^2/2)$. $\exp\left((1-\gamma)v_ {t+\delta}\right)$ is a random variable equal to $1$ with probability $1-p\delta$ and $(1-b)^{1-\gamma}$ with probability $p\delta$.
We substitute the expectation operator:
\begin{align}
E_t\left(\frac{Y_{t+\delta}}{Y_t}\right)^{1-\gamma}= \exp\left((1-\gamma)g\delta\right).\exp\left(\frac{(1-\gamma)^2\sigma^2\delta}{2}\right).\left(1-p\delta+pE[(1-b)^{1-\gamma}]\delta\right).
\end{align}
Finally, we use $C_t=Y_t$ to compute an equation for $\Phi$:
\begin{align}
\frac{1}{H(\Phi)}&= 1-\frac{1}{1+\rho\delta}\left\lbrace\exp\left((1-\theta)g\delta\right).\exp\left(\frac{(1-\gamma)(1-\theta)\sigma^2\delta}{2}\right)\right.\\
 &\left. .\left(1-p\delta+pE[(1-b)^{1-\gamma}]\delta\right)^\frac{1-\theta}{1-\gamma}\right\rbrace.
\end{align}

3) Take the approximation $\delta\to 0$

The last step consists in taking a first-order approximation (I abusively keep the equal symbol):
\begin{align}
\frac{1}{H(\Phi)}&= 1-(1-\rho\delta). \left(1+(1-\theta)g\delta\right).\left(1+\frac{(1-\gamma)(1-\theta)\sigma^2\delta}{2}\right)\\
 & .\left(1-\frac{1-\theta}{1-\gamma}p\delta+\frac{1-\theta}{1-\gamma}pE[(1-b)^{1-\gamma}]\delta\right).
\end{align}
Pursuing the first-order apprixmation (all the $\delta^i$ with $i>1$ can be neglected), we have
\begin{align}
\frac{1}{H(\Phi)}&= \rho\delta -(1-\theta)g\delta-\frac{(1-\gamma)(1-\theta)\sigma^2\delta}{2}\\
 & +\frac{1-\theta}{1-\gamma}p\delta-\frac{1-\theta}{1-\gamma}pE[(1-b)^{1-\gamma}]\delta.
\end{align}
Substitute $g$ using $g^*=g+\frac{\sigma^2}{2}-pEb$,
\begin{align}
\frac{1}{H(\Phi)}&= \rho\delta -(1-\theta)g^*\delta+(1-\theta)\frac{\sigma^2}{2}\delta -(1-\theta)pEb\delta -\frac{(1-\gamma)(1-\theta)\sigma^2\delta}{2}\\
 & +\frac{1-\theta}{1-\gamma}p\delta-\frac{1-\theta}{1-\gamma}pE[(1-b)^{1-\gamma}]\delta.
\end{align}
We take $\delta=1$ and invert function $H$ to find the solution in the footnote 7 of the paper. The right-hand side of this equation "simplifies" to the within braces in the formula.


Data analysis with GARCH modeling I'm currently analyzing the relationship between stock, bonds, and real estate returns in Germany. I've gathered my data and am planning on estimating this equation:

$\sigma_t = \beta_0 + \beta_1 R_{t+} + \beta_2 R_{t-} + y_t$

through a GARCH model. In the article where I found equation 1 (Chan and Chang, 2014), they
    have delineted the parameters as so: $R_{t+}= \max [0, R_t]$, $R_{t–} = \min
[0, R_t]$, and $R_t$ is the monthly return of stock, bond, or real
    estate. We use a three-month rolling return to calculate the
    standard deviation of the return." Does this mean they use the Max
    and Min of the series as parameters or the Max and Min of each
    rolling average across the series?

Well I havent read the paper but this is what it looks like to me:

Compute $R_t$ - the rolling average for month t.
$R_t > 0 \Rightarrow  R_{t+} = R_t \wedge R_{t-} = 0$ and$R_t < 0 \Rightarrow  R_{t-} = R_t \wedge R_{t+} = 0$


Can a rescue package be considered as a subsidy to the industry? In the BBC article, France announces €8bn rescue plan for car industry, it is mentioned that the car industry will be given a rescue package to avoid unemployment. Would this be considered as a subsidy given to the car industry?

If not, what is this microeconomics concept called?

Also, I read the statement:

"government would also give people upgrading to a less polluting car a €3,000 bonus, as part of a scheme open to 75% of French households".

I want to know what is this concept called in microeconomics;

the concept of giving money to the consumer for purchasing a good(the car), or rather an upfront discount by the government.
I don't think this can be considered as part of the subsidy as well because it doesn't reduce the production cost.

Link to article:

https://www.bbc.com/news/business-52814074?intlink_from_url=https://www.bbc.com/news/business/economy&link_location=live-reporting-story

It can be considered subsidy, especially if you are asking for the quoted passage. Although looking at it directly the subsidy seems to de jure be on the consumption (this being said some or maybe even most of the benefit will be most likely captured by carmakers through the economic incidence of the subsidy).

For example, following Mankiw and Taylor, economics 3ed subsidy is defined as:

  payment to buyers and sellers to supplement income or lower costs and which  thus encourages consumption or provides an advantage to the recipient

Under this definition the policy you explicitly mention above would definitely qualify as a subsidy.

In different textbooks wording will change but not in any drastic way (to the best of my knowledge).

However, a rescue package itself is not an economic term. It is possible that the plan also includes policies that could not be considered subsidies as well.


Why are prices of stocks not very very high with very very low r? The theory of present value states that the price of a stock is the discounted value of the infinite stream of future income of the company.

Several countries have had very very low interest rates, very close to zero. Yet, stock prices have not gone to very very high values, or even infinity.

Why is this the case? Is this a proof that the theory of present value is incorrect? Or maybe investors think companies will not last "forever" (which they cannot, as earth's lifespawn is finite)?

Equities and some other asset classes have gone up in price.

However, just because interest rates are very close to zero, does not mean discount rates are very close to zero.

Discount rates account not only for the price of money, but also for future uncertainties.

The extended period of depressed demand in many nations has added considerably to the uncertainty.

Hence, some asset classes have increased in price, but not to extreme values.


Euler equation guess and verify So I have the Euler condition written as follows: $$\frac{1}{k_t^a-k_{t+1}}=\frac{a\beta k_{t+1}^{a-1}}{k_{t+1}^a-k_{t+2}}$$
and it says that $k_{t+1}$ takes the form $gk_t^a$, where g is an unknown to be determined. I know the result is $k_{t+1}=a\beta k_t^a$, but don't know how the derivation goes to reach this result.
From the hint, I got that $$\frac{k_{t+2}-k_{t+1}^a}{k_{t+1}-k_t^a}=a\beta k_{t+1}^{a-1}$$
So I guess the LHS is g=$a\beta k_{t+1}^{a-1}$?
Am I doing it right or not?

Hint:
Note that
\begin{equation}
k_{t+1}=gk_t^a \quad\Rightarrow\quad g=\frac{k_{t+1}}{k_t^a}=\frac{k_{t+2}}{k_{t+1}^a}.
\end{equation}
Rearrange your Euler condition into a form such that you can use $g$ to sub-out the above ratios. Then it should be straightforward to solve for $g$.


Robinson Crusoe Production Economy Robinson Crusoe’s preferences over coconut consumption, C, and leisure, R, are represented by the utility function U(C, R) = CR. There are 48 hours available for Robinson to allocate between labor and leisure. If he works L hours, he will produce the square root of L of coconuts. He will choose to work.

The answer is 16 and I known this but confused to its working out. Can some give me a step by step?

The utility function is $U(C,R)=CR$ and the time is restricted: $48=R+L$. Now we know that $C=\sqrt L$. $C$ can be replaced by $\sqrt L$. Therefore the langrarian is

$\mathcal L=\sqrt L\cdot R+\lambda (48-L-R)$

The (partial) derivatives are the following. They have to be set equal to zero.

$\frac{\partial \mathcal L}{\partial L}=\frac12 L^{-0.5} R-\lambda=0$

$\frac{\partial \mathcal L}{\partial R}= L^{0.5} -\lambda=0$

Putting $\lambda$ on the RHS

$\frac12 L^{-0.5} R=\lambda \quad (1)$

$L^{0.5} =\lambda \quad (2)$

Dividing (1) by (2):

$\frac12\cdot \frac{R}{L} =1 \Rightarrow R=2L$

The expression for R can be insert in the time restriction

$48=2L+L$


What are the uses of overnight loans? As far as I understand an overnight loan is a loan that is settled the next day.
Who are the entities that would find it useful to take a loan just for a day? and, what would they use an overnight loan for?

Main users of overnight lending are banks. Banks have large in- and out-flows from customers on a daily basis. They typically borrow to meet a temporary outflow.
There is a term premium for borrowing at longer terms. By implication, borrowing overnight is theoretically the cheapest financing cost. Financial entities will borrow overnight to finance portfolios.


Is Investopedia wrong about a Collar's maximum loss and profit? Are the last two paras. below correct? Shouldn't they be reversed?

Isn't your maximum profit when $P \le 77$? Then you can exercise your 77P, but the call holder can't exercise his 97C. Your profit $= 77 - P -$ options premiums.
Isn't your maximum loss when $P \ge 97$? Then you can'texercise your 77P, but the call holder can exercise his 97C. Your loss $= P - 97 +$ options premiums.

  Collar Example

  Assume an investor is long 1,000 shares of stock ABC at a price of \$80 per share, and the stock is currently trading at \$87 per share. The investor wants to temporarily hedge the position due to the increase in the overall market's volatility.

  The investor purchases 10 put options (one option contract is 100 shares) with a strike price of \$77 and writes 10 call options with a strike price of \$97.

  Cost to implement collar (Buy Put @ \$77 & write Call @ \$87) is a net debit of \$1.50 / share.

  Break even point = \$80 + \$1.50 = \$81.50 / share.

  The maximum profit is \$15,500, or 10 contracts x 100 shares x ((\$97 - \$1.50) - \$80). This scenario occurs if the stock prices goes to \$97 or above.

  Conversely, the maximum loss is \$4,500, or 10 x 100 x (\$80 - (\$77 - \$1.50)). This scenario occurs if the stock price drops to \$77 or below.

The Investopedia article is correct.

Isn't your maximum profit when P≤77? Then you can exercise your 77P, but the call holder can't exercise his 97C. Your profit =77−P− options premiums.

You haven't accounted for the loss on the stock (Investopedia did).  It is:

stock price + strike price - collar cost (-80 +77 -1.50)

Isn't your maximum loss when P≥97? Then you can't exercise your 77P, but the call holder can exercise his 97C. Your loss =P−97+ options premiums.

You haven't accounted for the gain on the stock (Investopedia did).   It is:

stock price + strike price - collar cost (-80 +97 -1.50)


What does it mean to "kickstart the economy"? This answer claims that:

  the central banks have been lowering and lowering [interest] rates, desperate to kickstart the economy, but it's not been working

What does "kickstart the economy" mean here? What exactly are central banks desperate to achieve?

In short, the belief this reflects is that cheap money is spent more freely.  Since GDP counts the sum-total of value-added transactions in the economy, in principle this means that monetary policy affecting the velocity of money can in turn affect GDP.  Theoretically, this is valid to the extent that debt-servicing costs are a significant friction in the economy.

Thinking of money as blood in the circulatory system of the economy, lowering rates is like taking blood thinners to avoid clots.

Whether it works out that way in practice or not is difficult to ascertain, and in practice there are countervailing forces (lower interest rates discourage household savings, high inequality suggests a high degree of misallocation, etc.) that simple changes to interest rates cannot address.


How do I best prevent cheating using a credible threat in a two-person, non-cooperative, positive sum game? I'm playing around with a situation in which there are two possible scenarios.

Scenario 1

This involves a transaction between two persons, Supplier and Consumer, who have the option of either behaving honestly or behaving corruptly. One thing to note is that a corrupt transaction is only possible when the Consumer is corrupt. If the Consumer is honest, the transaction will always be honest. The payoff matrix is shown below. (For convenience, I call the agents Supplier and Consumer. Don't worry about what these mean).

(In the images that follow, the Nash equilibrium is highlighted in the green box. I've highlighted the Supplier's best strategy and the Consumer's best strategy in RED and BLUE respectively).

Now comes the tricky part (tricky for me, that is). I'm trying to model an altered version of Scenario 1, called Scenario 2, described below.

Scenario 2

Here, there is a credible threat to the Supplier. The credible threat is that if both Supplier and Consumer act corruptly, and the Consumer gets caught (in my model, we can only detect corruption by the Consumer), then the Supplier will be punished, along with the Consumer. Basically, I want to discourage corruption even before it happens. If I only punished the Consumer, then Suppliers would feel free to latch onto the next corrupt Consumer that comes along. Since I am punishing both Supplier and Consumer, the Supplier might have to think twice before colluding with a corrupt Consumer.

I have a tentative payoff matrix below. I'd like to know if my reasoning in the matrix is correct.

I'm confused because there are two possible payoff matrices for Scenario 2. The only I've shown is the one in which they do get caught. What about the situation where they don't get caught? Do we need to take this into account? And most critical to me, is my reasoning (in italics above) about the double punishment (to Supplier and Consumer) in case of collusion being more advantageous for the system than simply punishing the Consumer a good strategy, assuming a system with a huge pool of Consumers and Suppliers?

There aren't two payoff matrices. If there's a random choice between the two payoff matrices, then the overall payoff matrix will just be a linear combination of the two matrices you've presented, according to the probabilities. For instance, if the probability of getting caught is 10%, then each entry in the overall matrix is .9 times the corresponding entry in the first matrix, plus .1 times the entry in the second matrix. Since the two matrices are identical but for the bottom right, only that square will depend on the probability. If the probability of getting caught is $p$, then the payoff in that square will be $4(1-2p)$. More generally, if they have probability $p$ of getting a fine $f$ instead of the regular payoff, then the overall payoff will be $4(1-p)-pf=4-4p-pf=4-(f+4)p$. As you say, a higher probability of getting caught means less of a fine is required, and vice versa.

You have the payoffs for both players being equal, but suppose the Supplier and Consumer have different expected payoffs for the bottom right, SEP and CEP respectively. For the Supplier, any positive SEP will be an incentive to choose Corrupt. But for the Consumer, they need a CEP>2 to have an incentive to choose Corrupt. So we can remove the Nash Equilibrium by punishing just the Conusmer, and the required probability/size of the punishment for the Consumer will be lower than for the Supplier.

You say that even if you disincentivize the Consumer from Corrupt, the Supplier can go to another Consumer, but if the other Consumer has the same payoff matrix, then from a game theory point of view, as soon as we get a matrix for which the Consumer will choose Honest, the Supplier shouldn't be able to find any Consumer to be Corrupt.

Keep in mind that any game theory analysis will be based on only what's in the payoff matrix, so if there's some phenomenon that you think will affect the result, then for it to be included in the analysis, the payoff matrix needs to reflect it somehow. One way to analyze a party's ability to move on to another counterparty is opportunity costs. Suppose I have a painting, and one potential buyer might pay 100k, while another might pay 90k. You might think that the payoff for getting the first buyer to buy it is 100k, but by selling it to the first buyer, I'm giving up the opportunity to sell it to the second. So making sure the first deal goes through might be worth only 10k to me. Similarly, even if a Supplier gets 2 units of utility for selling something, if they're giving up the opportunity to sell it to someone else, then it might be appropriate to consider their payoff to be less than 2.

Besides subtracting a NE we don't like, we can also look at how we can add one we do like. Currently, the Supplier's choice matter only if the Consumer chooses Corrupt; otherwise, they are indifferent. Thus, the only way to induce them to choose Honest is by changing the payoffs when the Consumer chooses Corrupt. If the Supplier's payoff in the bottom left corner were less than 2, then they would have an incentive to choose Honest when the Consumer chooses Honest. This would make (Honest, Honest) a Nash equilibrium. So if the Supplier had a chance, no matter how small, of being punished every time they choose Corrupt, regardless of whether the Consumer chooses Corrupt, then the upper left would be a NE.

They would then be in a situation where are two NE. They would prefer the bottom right one, while you prefer that they be in the top left. Such a situation is heavily history-dependent: once they're in one NE, getting into another requires coordination. So one strategy would be to first put a lot of effort towards catching and punishing the Consumer, lowering the payoff in the bottom right and eliminating it as a NE. Once they're in the top left NE, you could reduce the enforcement. This would re-introduce the bottom right as a NE, but they would now be in the upper left NE and would have to coordinate getting to the other one. You can then put in some effort into punishing the Supplier whenever they choose Corrupt but the amount of effort to keep that a NE would be less than that need to keep (Honest, Honest) a NE would be less than that needed to keep (Corrupt, Corrupt) not a NE.

An even better solution would be adding a "Snitch" option; if Honest players had the option of snitching on Corrupt ones, and were rewarded for doing so, then that would make Corrupt much less attractive.


What are the benefits of UBI? UBI - universal basic income (everyone gets a set amount per period)

  If you've heard anything about me, it's that there's an Asian man
  running for president that wants to give every American $1000 dollars
  a month

Andrew Yang 2020 Candidate (#YangGang)

But would this really make a difference?

Alaska is already experimenting with UBI, and it's working great! Every year, Alaskans get around $1000, and this has actually contributed to people working more often, and businesses opening up more jobs. Whatever the case, the important thing is that UBI is a success in Alaska, but why not the entirety of America? Two reasons.

America's population is 450 times that of Alaska
There are just too many difference factors (opposing parties, different state laws, etc.)

So when we give American's $1000 every month, what will this actually achieve? Well first, paying it won't be a problem. Yang has clearly laid out a very specific plan on where he would get all this money, but the real question is how would people react?

I have a few ideas on this, and I'm not sure if it's correct or not.

1) More immigration? People see UBI as a benefit for living in the States

2) Bad environment? Lower class people will buy more drugs, alcohol, and stuff like that, creating a negative atmosphere or a bad stereotype in America

3) Help renew the economy? More money is now into circulation through shops and businesses, creating a more stable and expanding economy***

Recap. What I think will happen is when UBI is put into place, we should see a lot of immigration to America. In addition, some low class people will buy more abusive substances, therefore creating a bad rep for the country. But the positive side is that America's economy can now renew itself since people are buying more goods, therefore circulating more money into the system. Am I right? Probably not. What am I missing here?

Any advice would be highly helpful. Thanks!

***The 4th industrial revolution is here. Robots are replacing millions of jobs across America, causing people to not have enough money. When people don't have enough money, they reduce their spendings. On what exactly? Groceries, clothes, fast food, etc. This causes a chain reaction of events that leads to the economy becoming dry since no one is spending their money. Am I correct here?

This is a huge question and I doubt any SE answer could address this fully, but I would like to elaborate on a few points.

Effects of the Alaska Permanent Fund Dividend

I would argue that the primary success of the Alaska Permanent Fund Dividend is its positive effect on decreasing poverty. The effect on employment seems to be more neutral. Here is an exerpt from the latest research paper by the National Bureau of Economic Research related to the subject,

  The employment to population ratio in Alaska after the introduction of
  the dividend is similar to that of synthetic control states. On the
  other hand, the share of people employed part-time in the overall
  population increases by 1.8 percentage points after the introduction
  of the dividend and relative to the synthetic controls. The
  unconditional cash transfer thus has no significant effect on
  employment, yet increases part-time work.

  Given prior findings on the magnitude of the income effect, it is
  somewhat surprising for an unconditional cash transfer not to decrease
  employment. General equilibrium effects could explain why we do not
  find a negative effect on employment. Indeed, in our unique setting,
  the whole population in the state receives the dividend. Therefore, it
  is plausible that the dividend increases labor demand through its
  effects on consumption. And indeed, we find that the non-tradable
  sector shows more favorable effects than the tradable sector. In the
  tradable sector, employment decreases and part-time work increases,
  while in the non-tradable sector the effects on both employment and
  part-time work are close to zero and insignificant. Overall, the
  evidence is consistent with positive macro effects offsetting any
  negative micro effects, and leading to an overall null effect of an
  unconditional cash transfer on aggregate employment in the long-run.

In my opinion, that employment didn't decrease is surprising and positive. But I have heard some people spin its effect on jobs negatively by mentioning how it didn't increase employment. My guess is as time goes on people will spin this data in whatever way they see fit.

On the 4th industrial revolution

Yang asserts that millions of manufacturing jobs have disappeared in the Midwest and that is how Donald Trump got elected. As the following chart shows manufacturing jobs have declined in number since 2000 without much recovery,

But stagnant wages have been an issue since 1970, and I think this has caused some push back among many economists that argue the effects of automation have been over-amplified over the effects of de-unionization. That said UBI could act as an expensive large scale form of unionization.

On the framing of payments

I hear a lot of people talk about how the government would "pay for something" and personally I don't like the framing of this question. It often weakly implies that the government can't run a budget deficit. In the Fifteen Fatal Fallacies of Financial Fundamentalism, William Vickery eloquently addresses this as follows:

  Deficits are considered to represent sinful profligate spending at the
  expense of future generations who will be left with a smaller
  endowment of invested capital. This fallacy seems to stem from a false
  analogy to borrowing by individuals.

  Current reality is almost the exact opposite. Deficits add to the net
  disposable income of individuals, to the extent that government
  disbursements that constitute income to recipients exceed that
  abstracted from disposable income in taxes, fees, and other charges.
  This added purchasing power, when spent, provides markets for private
  production, inducing producers to invest in additional plant capacity,
  which will form part of the real heritage left to the future. This is
  in addition to whatever public investment takes place in
  infrastructure, education, research, and the like. Larger deficits,
  sufficient to recycle savings out of a growing gross domestic product
  (GDP) in excess of what can be recycled by profit-seeking private
  investment, are not an economic sin but an economic necessity.
  Deficits in excess of a gap growing as a result of the maximum
  feasible growth in real output might indeed cause problems, but we are
  nowhere near that level.

Note that while the above was written in 1996, the last sentence still applies in the year 2019. Notably, inflation is still below the 2% target. Instead we should always be asking does this expenditure make sense? "Make sense" is of course a broad term but vaguely we are concerned with whether it would increase GDP, increase life expectancy, decrease child mortality, etc. Or to put it differently, is this the best way to spend trillions of dollars?

On the effects of UBI

    Bad environment? Lower class people will buy more drugs, alcohol, and stuff like that, creating a negative atmosphere or a bad stereotype in America

I think this is an unjustified fear. None of the UBI pilots so far have seen increased drug rate use in participants.

    But the positive side is that America's economy can now renew itself since people are buying more goods

UBI implemented through a VAT tax and debt monetization is effectively a redistribution mechanism from those who consume more and those who hold more cash. Broadly, poor people should get more money to consume, which should boost GDP:

  The IMF report said the way income is distributed matters for growth. "If the income share of the top 20% increases, then GDP growth actually
  declines over the medium term, suggesting that the benefits do not
  trickle down. In contrast, an increase in the income share of the
  bottom 20% is associated with higher GDP growth."


Production Possibility Frontier and Opportunity cost The following is a list of data points on a PPF, answer questions regarding opportunity cost.

What is the opportunity cost of producing the first 500 Toyota?

The opportunity cost of producing the first 500 Toyota is 600.
Calculations: 5000-4400

What is the opportunity cost of moving from producing 3725 Lexus to 3950 Lexus?

Opportunity cost = 1500-1000 = 500 Toyotas

What is the opportunity cost of producing 5000 Lexus?
The opportunity cost of producing 5000 Lexus is 0.

I am currently learning economics and I came across a homework question I am uncertain about my answers.

Your answers in the first and second questions are correct, as another post noted. However, the last question cannot be answered: we would have to know what would be the number of Toyota produced when production of Lexus is zero, in order to answer that.

By the way the Labels in your graph are wrong - it should read "Lexus" in the vertical and "Toyota" in the horizontal axis.


What is the loss of productivity of not using the international system of measurments (SI) The USA and some other countries are not using the SI-system. Are there any estimates of how much productivity is lost because of having to convert numbers? (non-SI countries, SI-countries)

I imagine that the loss not only affects the non-SI countries, because the SI-countries wanting to export to non-SI countries would also use time for conversions in order to comply with local laws and customer demands.

The costs are probably difficult to measure because they are small amounts that are across every industry. For example car companies having to switch the km/h to mph speedometer; schools that have to spend much more time on explaining the non-SI system; or the the many goods that need double labelling.

This is a good example of "transactional costs" -and of the small "menu costs" as Mankiw has once called them. His paper Mankiw (1985) "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly" The Quarterly Journal of Economics, 100(2):529-537 contains a model where in his own words, shows that "sticky prices can be both privately efficient
and socially inefficient."

The basic mechanism of the model is as follows: a monopolistic firm has to set the selling price one period in advance, based on expectations about future demand. If demand is realized lower than expected, the firm can reduce its price but at a "menu cost" (alluding to the costs that restaurants have to bear in order to re-print their catalogs with new prices).

Mankiw shows that even though this cost may be small, still it may prevent the firm from adjusting the price. So prices become sticky, which is socially inefficient.

Of course this is an underlying theory that justifies the existence of inefficiency due to such "transactional costs". Actually measuring and estimating them would require a detailed audit approach as regards the time spent and other costs involved to change measurement units.


Unique features of Property & Urban Economics The real estate sector represents a substantial share of the economy. Analysing such a sector provides it's own unique challenges. For example, it is important to variables such as population forecasts, proximity to CBD, rental rates among others.

What are the main tools, metrics and considerations used in property market analysis?

There are many different models used in this field, depending on the question being asked. For example, commercial and residential properties have very different needs. That said, there is a key model which can be the framework for a broad analysis:

The monocentric model

The key model in urban economics is the monocentric model, which is a derivation of the rural land price theory and has industry concentrated in the central business district (CBD). Start with closed model (a city in isolation). Then look at the open model (allow for movement between cities) and competition between cities (inter - regional equilibrium). Density and distribution of population and sectors. Interaction with the labour market – why wages are higher in larger ‘skilled’ cities but real wages are not.

This model has extensions which can help explain why some industries choose to operate outside of the CBD.

There are some special considerations often used for analysis of property:

Spacial externalities

Cities offer advantages and disadvantages. Amenities are more available (both publicly and privately provided) but there are also negative externalities such as congestion, pollution and cost of living.

Development and speculation

Speculation has a large role in the property market. There are many external factors which encourage such speculation. For example, zoning limits supply of available land very quickly. With good population growth forecasts, it is very easy to anticipate demand growth for land.

Public policy and government intervention.

In many economies, it is a highly regulated industry for a few reasons. Often times it is highly politicised (housing affordability is very important for many voters), policy decisions in this sector have direct and salient impacts in the day to day lives of residents. Think: rent control, public housing, zoning.

Wikipedia on real-estate is pretty well resourced. Included in there (among others) is information on:

Demand for housing
Supply of housing
Real estate financing

In such a diverse field, there are many other factors to consider. The importance these variables are vary dependent on the type of analysis required.


How and on what basis the inflation target is determined? I have a question at the intersection of Economics and Politics.

Every country has her own inflation target. But who, how and on what basis is it determined? Of course, we know that too big inflation is bad and deflation is bad, but why it's around 2% (depending on a country) and not around 1% or 3% or any other? Maybe a little deflation (around 1%) would be better?

I am trying to understand why the inflation target is set to some exact value. What is the process of setting this value. Who is responsible for this task and what data does he work with.

Are there any scientific publications explaining the process of determining the inflation target?

Recently, at the 2017 Money and Banking Conference at Buenos Aires, the Governors of the Central Bank of Peru and Paraguay talked about this same thing. Those two countries successfully brought inflation from double-digits to ~2% in recent times and they said the changes were opportunistic: if they were sure they'd be able to meet the IT, they changed it.

Also, Peru has a constitutional amendment that allows for Peruvians to have a savings account in any currency they want and indeed around ~70% of deposits were in dollars which implies they aimed at something close to US' inflation.

This is in stark contrast to the host's (Argentina's) strategy, mainly to reach a 1-digit inflation around mid-2019, just before the presidential elections. The bands are:

14.5% ±2.5 for 2017 (they already failed, it will end up around 20%)
10.0% ±2.0 for 2018
5.0% ±1.5 for 2019.

While the targets are aggressive and they already surpassed this year's band, market's inflation expectations consistently have a downwards trend.

Finally, what's so special about 2%? An unexpected deflation has a negative short-term effect on growth. High inflation also has a negative effect on growth. So, being stable around 2% is a nice "Goldilocks" zone.


Effect of a change in quality on price elasticity of demand I am interested to know how one would expect a change in the quality of a product to affect its price elasticity of demand. Two example will illustrate my confusion:

Example 1

Suppose a producer is selling tap water at price P with quantity demanded Q. Let us call this good 'Beverage v1'. The producer changes the recipe; adding some grape juice and carbon dioxide to make Champagne. The producer continues to sell at price P but now with demand Q2>Q (in the short-run, which is probably not an equilibrium). Let us call this good 'Beverage v2'.

We would, I think, expect the price elasticity of demand for Beverage v2 to be lower than that of Beverage v1. The common intuition is that 'essential' goods have lower PEoD than 'luxury' goods.

Example 2

Now suppose a producer is selling a medicine ('Medicine v1') which treats the symptoms of an illness pretty well. It is the only medicine for this illness so patients must choose between going untreated (feeling pretty awful) and buying the drug, which makes them feel 50% better than going untreated. The medicine is sold at price P with quantity demanded Q. The producer then makes some changes and now the medicine makes patients feel 100% better. It is not quite a cure, as patients have to keep taking the medicine, but it is pretty close. Let us call this 'Medicine v2'. The producer continues to sell at price P but now with quantity demanded Q2>Q (in the short-run, which is probably not an equilibrium). Bear in mind that Medicine v1 is no longer available and that there are no other alternatives available either (except going untreated).

This seems to be similar to the beverage example above, but I feel as if the intuition is less clear in this case that PEoD for Medicine v2 would be higher than for Medicine v1. Is feeling 100% better more of a luxury than feeling 50% better? It is certainly better, but I am not certain that is therefore less essential. What do you think?

It seems that your confusion is more about classifying goods into necessities vs. luxuries. In economics, the criterion for such classification is to look at whether the income (not price) elasticity of demand is "high" or not. If a good has a high (and positive) income elasticity, then it's a luxury; if it has a low (but still positive) income elasticity, it's a necessity. What counts as "high" or "low" is an empirical matter. Investopedia suggests $1$ as a threshold (high if $>1$ and low if $<1$).

Coming back to your question about price elasticity and quality improvement. The answer is: it depends on how you model the demand curve of the good. Recall that the price elasticity of demand is given by
\begin{equation}
-\frac{\mathrm dQ}{\mathrm dP}\frac{P}{Q}=-\frac{1}{\text{slope}}\frac{P}{Q}
\end{equation}
where the slope is evaluated at the point $(Q,P)$. The quality improvement shifts demand curve to the right (since consumer is getting more value for each dollar spent, so they are willing to pay more for each unit or buy more units at the same price). If price remains unchanged (as you assumed), then quantity demanded must increase, say from the original $Q$ to a higher $Q'$.

If the slope of demand stays the same at $(Q',P)$, then price elasticity would fall according to the formula. If demand becomes much flatter at $(Q',P)$ (with a magnitude greater than the increase in quantity), then price elasticity would increase instead.


Purchasing Power Parity (PPP) and Law of One Price (LOP) If PPP were to be satisfied in reality, does that mean the Law Of Price is satisfied for all goods in a basket of goods used to generate the price levels of the country? Or, since PPP uses only average price of basket, is there possibility of "accidentally" PPP is satisfied without holding LOP for each good?

If PPP holds, so does the LOP.

The law of one price (LOP) is an economic concept which posits that "a good must sell for the same price in all locations". The law of one price constitutes the basis of the theory of purchasing power parity and is derived from the no arbitrage assumption.


Is it constant returns to scale if the output of a production function is purely a function of one variable? For $Y=F(K,L)= 2L$

If I multiply them by an constant $z$:

$Y= F(zK,zL0)$, i'll get $2(zL) = z(2L)$. Inputs increase proportionally therefore constant returns to scale.

This doesnt seem right because the outputs are determined by one variable.

Returns to scale is a concept that we use to think about how output changes as we continually add more inputs. It does not matter if your production function takes one input or $N$ inputs. All that matters is how inputs behave within the function itself. Another way to think about this is to consider that a production function with a single input can exhibit decreasing, constant, or increasing returns to scale.

For example:

$f(L) = L^2$ exhibits increasing returns to scale.
$f(L) = L$ exhibits constant returns to scale
$f(L)= L^{\frac{1}{2}}$ exhibits decreasing returns to scale

Your production function is linear in its one input [case number 2 above] and so it exhibits constant returns to scale. That is, the answer to your question is yes.


Oil as a function of GDP In Mankiw, N. (2012). Principles of Macroeconomics (6th ed.)., on pg 456 Mankiw says "The amount of oil used to produce a unit of real GDP has declined about 40 percent since the OPEC shocks of the 1970s."

How would one measure that?

That's unfortunately just kind of dropped at the end of a chapter as the second to last sentence in a five paragraph side note about OPEC, and I've been curious for years now if that reduction was because the mix of energy supply changed (rise in natural gas consumption?), or production is simply more energy efficient, or what.

Can someone clarify the claim, the process, or point toward primary sources (US EIA maybe?), rereading this book has reminded me how frustrating that bit was.

I don't think it's any more complicated than looking at the ratio of global oil consumption and global Gross Domestic Product. The OECD, World Bank, IMF and others produce estimates of each.

There is some fuel-switching: for example, the world burns much less electricity from oil than it used to: in 1973 (the first oil crisis started around October that year) 251 million tonnes were used for electricity; by 2000, this had dropped to 110; by 2012, to 70 (table 7A on IV.81 of the IEA Electricity Information 2014).

There's several decades of energy efficiency, kickstarted in large part by the oil shocks of the 1970s.

The share of services (relative to physical goods) within global GDP has increased; IIRC services require much lower energy inputs than goods, on average, even though transport is one of the services (I'll check this and edit later - please nudge me in comments if I haven't after a week or so). The World Bank only gives services as a share of global GDP from 1990 onwards: this share grew from 60.7% in 1990 to 70.2% in 2011.

The combination of energy efficiency and the increase in the share of services (relative to physical goods) within global GDP, means that energy consumption per unit of global GDP has fallen: J. Bradford DeLong gives global GDP at \$12 trillion for 1970 and \$41 trillion for 2000 (preferred measure, 1990 international dollars). The BP Statistical Review of World Energy 2014 gives 1970 energy consumption at 4.9 billion tonnes of oil equivalent (btoe) and 9.3 btoe for 2000. So energy per unit global GDP almost halved (44% reduction) over those thirty years 1970-2000.

Understanding an individual country's changes are harder, because we then have to unpick whether oil intensity of GDP has dropped because of energy-efficiency & fuel-switching, or because oil-intensive goods are now imported rather than produced domestically: for further reading on this, see papers by John Barrett and by Dieter Helm.


Why do falling prices hurt debtors? The argument goes that if there is deflation, the real interest rate rises, and so the burden on debtors increase (Paul Krugman says so in https://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/).

I understand why the real rate rises, since $r = i - \pi$, but why does that mean there's more of a "burden" on debtors?

If I take out a loan for 1000 dollars today, and have to pay it back a year from now, why would it affect me negatively if suddenly everything became cheaper? Sure, the money I'd be paying back (1000 dollars + interest) is "worth more", in the sense of being able to buy more stuff, but ... so what? Those 1000 dollars + interest had to be paid back no matter what. Who cares if its "worth more"? It's not my money anyways, and is due to be paid back? How exactly has my "burden" increased?

If the borrower is a firm, lower prices means your output is selling for less, so you need to sell more units in order to repay the debt (assuming a constant profit margin).

For an individual, the buried assumption is that wages are also falling in the deflation. In which case, the debt is increasing relative to your wages. However, if your wages have not fallen, falling prices will make it easier for you to repay the debt (you can consume the same amount, and have more money left over to repay debt).

It makes more sense at the macro level, as deflation is normally associated with lower growth and a higher unemployment rate.


Rosen's uniqueness theorem: Why is the Jacobian Square? Rosen's paper (J. B. Rosen. Existence and uniqueness of equilibrium points for concave n-person games. Econometrica, 33(3):520–534, 1965) presents a condition for the uniqueness of the Nash Equilibrium in $n$ players game. The setup is described in simple details by this other economics exchange post. My curiosity is why is the Jacobian of $g(\mathbf{s},\mathbf{z})$, where $g(\mathbf{s},\mathbf{z})$ is the pseudogradient of the function $\sigma$, a square matrix?  If $s \in \mathbb{R}^m$ and there are $n$ players, it seems to me that the matrix would be $n \times m$ instead of $m \times m$. I have left out many of the details of the problem set up as they are covered in the other post; however, I can restate the set up or provide additional information if necessary.

While there are $n$ players, a player's strategy is not single dimensional.  The total dimension of the strategies is $m$.  So the vector of strategies $s$ is $m$ dimensional.  $g(s,z)$ is also $m$ dimensional, which is why the Jacobian is $m \times m$


Generally speaking, shouldn't GDP roughly increase equivalent to population growth? With all things being equal: shouldn't the GDP roughly increase equivalent to population growth (as a minimum, setting aside GDP increases resulting from technology, education, and all other factors).

Obviously there are a lot of factors that affect GDP.  However, in general, GDP in one way measures the 'productivity' of a certain population.  If that population increases, shouldn't it naturally follow that the overall productivity will increase proportionally (assuming normal population growth, rather than an influx of invalids, etc).  I assume there would be time-delay in the response of the GDP, dependent probably on the nature of the population growth.

Basically the answer is yes

Population growth is a key factor in GDP growth. Population creates both demands for goods and labour supply

Unlike GDP, GDP per Capita, cannot, obviously rely on population growth, and that is (or at least should be) the goal of governments. and unlike population, the "rest of the factors" affect GDP per Capita just the same

A couple of extra points besides the obvious: population growth, by births or by immigration, affect age distribution, which affects both supplies of labour amd demands for goods and services

Because of it, population stagnation may mean decrease in GDP per Capita and long term economic issues


Books/Papers on Macroprudential Regulation I am looking for some good introductory papers or possible books on macroprudential regulation.

It's not really introductory in the sense that it focusses on what Macro-Prodential means (reducing risk at the cost of efficiency), but rather applied: Martin and Philippon (2014) analyze the great recession in Europe and simulate to what end more macruprudential policies would have ameliorated the situation.

  We provide a first comprehensive account of the dynamics of Eurozone
  countries from the creation of the Euro to the Great recession. We
  model each country as an open economy within a monetary union and
  analyze the dynamics of private leverage, fiscal policy and spreads.
  Our parsimonious model can replicate the time-series for nominal GDP,
  employment, and net exports of Eurozone countries between 2000 and
  2012. We then ask how periphery countries would have fared with: (i) more conservative fiscal policies; (ii) macro-prudential tools to
  control private leverage; (iii) a central bank acting earlier to limit
  sovereign spreads; and (iv) the possibility to recoup the
  competitiveness they lost in the boom.


Why are there base years for GDP in current prices (or Nominal GDP)? I am looking at GDP in current prices for Indian states and there are multiple base years. This is confusing because GDP in current prices is supposed to be reported in the value of the currency for that particular year. So why are there multiple base years?

Here is an illustration of how the data are presented (this is coming from the Reserve Bank of India, source is Central Stats Office)

            Base Year: 2004-05

Year:  2011-12,    2012-13, 2013-14,        2014-15

GDP:  36224493, 41006812,   46418355,   52002992

            Base Year: 2011-12

Year:  2011-12,  2012-13,   2013-14,        2014-15

GDP:  37940203, 41140371,   46427154,   52646842

This is for norminal GDP. Again why is there base years when we are looking at nominal GDP (data for each year should use value of the currency for that particular year) Really appreciate any clarification.

Updating of the base year is an indication of methodological changes in the way the national accounts are measured. This means two series with different base year (or reference year, as others call it) are strictly speaking not comparable over time.

Here is the official document from the Central Statistics Office informing about the changes. As the document states:

  1.3 The reason for changing the base year of the nation
  al accounts periodically is to
  take into account the structural changes which have
  been taking place in the economy
  and  to  depict  a  true  picture  of  the  economy  through
  macro  aggregates  like  Gross
  Domestic Product (GDP), National Income, consumption
   expenditure of Government and
  individuals, capital formation etc.

Also, as this article from the Reserve Bank of India states:

  II.1.1 In January 2015, the Central Statistics Office (CSO) released a new series on India’s national accounts. The distinguishing features of the new series are: (i) updating the base year from 2004-05 to 2011-12; (ii) improved coverage of corporate activity by (a) using the MCA 21 database1 of the Ministry of Corporate Affairs, (b) employing value-based indicators such as sales tax collections in conjunction with volume-based indicators such as industrial production, and (c) use of results from the latest surveys, including on activity in the unorganised sector; and (iii) methodological changes such as shifting from the ‘establishment’ to the ‘enterprise’ approach for estimating value added in mining and manufacturing.

If the base year is not updated when methodological changes are carried out, you would not be able to tell that the series before and after the update are not the same. Hence, changing the base year is a trivial way to tell the public they are different.

That is also the reason why the two series, even if in nominal prices, are different over the years.

A comprehensive and critical analysis of these methodological changes for India can be found in this recent paper.


Did I calculate maximum price of machine correctly? Problem:

A firm wants to buy a machine for its factory. It will work for two years. During the first year it will yield 240 thousand roubles and during the second year it will yield 200 thousands roubles. We need to caclulate maximum price that the firm will agree to pay for the machine. And one important thing: instead of investing money in the machine the firm can put said money in a bank, interest rate per year is 20%.

I concluded that the maximum price for machine is about 306 thousand roubles. My reasoning was following: If the firm will make the investment it will get 440 thousands of roubles in total (240+200=440). If instead of buying the machine the firm will put 306 thousand roubles in its bank account, then after 2 years it will get about 440 thousands of roubles. Such price makes the firm indifferent between said two options. But if the price will be higher than 306 thousand roubles, then it will make more sense to put the money in a bank account.

I got about 306 thousand of roubles by using this formula:

Where $ F_v $ is total sum of money in the future, $i$ is interest rate, $t$ is number of years and $P_v$ is initial sum of money that we need to put in our bank account in order to yield $F_v$ after $t$ years.

Therefore:

But solution in my textbook says that maximum price is 338.9 thousands roubles and that I must calculate it by using this formula:

Where $π_t$ is revenue for given year and $i$ supposedly means something like "rate of inflation" (i.e. how fast money lose their value)

Thus:

But such solution doesn't make sense to me. Firstly, here $i$ means different thing, it's rate of devaluation of money, not interest rate. Secondly, with price equal to 338.9 thousand roubles it's clearly more profitable to put the money in a bank, because we will get about 488 thousand roubles after two years, instead of 440 thousand roubles.

UPDATE 01:

If we take all revenue that the machine yields at the end of the first year and put them in bank, then our total revenue after two years will be 488 thousand roubles instead of 440 thousand roubles. Considering this, now I agree that 338.9 thousand roubles is maximum price.

But I still don't see why we need NPV to calculate this and why $i$ must mean inflation, when it means annual percentage rate

The thing you are missing in your calculation is that the roubles the machine produces in year 1 are more valuable than those in year 2.  Think about 2 different machines with different production schedules

Machine 1 - 440 roubles year 1, 0 in year 2
Machine 2 - 0 in year 1, 440 in year 2

Using your calculation the value of both of those machines would be the same about 306 roubles, but machine 1 produces the goods in year 1.  So in year 2 you can put those roubles in the bank and earn 20 percent interest on them.  So at the end of 2 years you actually have 528 roubles instead of 440.

What the NPV calculator is doing is taking into account the production in year 1 is worth more than the production in year 2 by dividing it by a smaller number, $(1+0.2)$ instead of $(1+0.2)^2$.

Regarding the part about $i$ meaning different things.  $i$ is how we tell how muc we value a dollar today relative to tomorrow.  In the real world inflation makes things in the future cost more so we discount future dollars by that amount.  In your problem a dollar I save today is worth 1.20 tomorrow so if I invest that money in a machine I better earn at least that much otherwise I'd rather put it in the bank.

Explanation of NPV:
Think of there being 2 different machines.  One gets you 240 in one year.  The second gives you nothing in the first year but 200 in the second.  Using your calculations you would say you'd pay
$$ \frac{240}{(1+0.2)} = 200 $$
for machine 1 and
$$ \frac{200}{(1+0.2)^2} \sim 138.9 $$
for machine 2.  Thus you better be willing to pay 338.9 for a machine that does the work of machine 1 and machine 2. That is all NPV is doing here.


If $\succsim$ is transitive but irreflexive, then it is asymmetric, proof If $\succsim$ is transitive but irreflexive, then it is asymmetric.

this is my proof:

Suppose $\succsim$ is not asymmetric, which means that for any $x,y \in X$ $x\succsim y \rightarrow y \succsim x$. By definition $\succsim$ is transitive, i.e. for any $x, y, z \in X$ we have $x \succsim y$ & $y\succsim z$ $\rightarrow$ $x \succsim z$. So since we are supposing $\succsim$ is symmetric:  $y\succsim x \rightarrow x \succsim$ y. Now since  $\succsim$  is transitive  $y \succsim x$ &  $x\succsim y \rightarrow y \succsim y$ but  $\succsim$  is irreflexive so it's a contradition and  $\succsim$ is asymmetric.

What do you think of my proof, is it wrong or not clear enough?

A relation that is not asymmetric need not be symmetric. But if $\succsim$ is not asymmetric, there must be elements $y$ and $x$ such that both $x\succsim y$ and $y\succsim x$ hold and these elements are all you need to arrive at a contradiction.

Also, $x\succsim y\implies y\succsim x$ can hold for an asymmetric relation, namely when $x\succsim y$ does not hold.

I'd like also to point out that "any" is ambiguous here and might be read as "all" instead
of the intended "some."


Could a tax on rental income that depends on price per square meter induce more housing with lower rents? The background of this question is: In Germany rental income is generally taxed the same as regular business income. In some cities, there seem to be housing shortages across different incomes.
Are there countries where rental income is taxed by square meter/footage? Could it provide housing relief?

In the following tables there are three models of taxation shown. The first tries to model the current situation where the taxation is related to the gained income and not to the size and price of a flat. The following tables try to show the situation when taxation is based on price per m².

Why do you think that additional taxes on more expensive apartments (progressive taxes) would lead to lowering the prices and offering them cheaper than market dictates?

Adding taxes on top would just make these apartments even more expensive for the consumer, since the owner will push down the additional cost to the consumer rather than take a haircut. Especially if these apartments are laying around empty anyway.

If I am willing to sell product A for say 1.000$ but there are no buyers - will an increase in the tax help me sell it?
If you on the other hand gave me a tax discount, I might want to sell it cheaper, since I may be left with the same after-tax profit.


Why did the Federal Reserve change the data about USA GDP? This is the data published on 20 March 2013 FOMC meeting:
(http://www.federalreserve.gov/monetarypolicy/fomcprojtabl20130320.htm)

20 March 2013,
Change in real GDP (actual):

year 2008: -3.3%
year 2009: -0.1%
year 2010: +2.4%
year 2011: +2.0%
year 2012: +1.6%

This is the data published on 18 September 2013 FOMC meeting:
(http://www.federalreserve.gov/monetarypolicy/fomcprojtabl20130918.htm)

18 September 2013,
Change in real GDP (actual):

year 2008: -2.8%
year 2009: -0.2%
year 2010: +2.8%
year 2011: +2.0%
year 2012: +2.0%

As you can see, the GDP data for year 2008, 2009, 2010 and 2012 that published on 20 March 2013, and the data that published on 18 September 2013 is different.
Why did the Fed change the data?

This happens all the time and is normal. It's due to measurement error. It is hard to measure these things in real time and as time goes by more data comes in, which allows measurement of GDP and other macroeconomic variables to be better so they are revised. Sometimes the revisions can be quite large. Typically the latest data is also the least reliable.

For some advanced information on how such measurements are made, the issue of measurement error and a discussion of how to improve estimates see this paper

For a discussion on the issues these revisions of GDP data and measurement error pose for monetary policy, see the work of Orphanides, for example here and here. For his discussion on the reliability of GDP estimates in real time see this paper.


Resources to learn about banking and financial services industry Can you recommend resources to learn about how the banks and modern financial system work?

Assuming you want to study finance and banking from an economic perspective then common introductory texts are

Exchange Rates and International Finance from Copeland
Financial Markets and Institutions from Mishkin
Money, Banking and Financial Markets from  Cecchetti & Schoenholtz

Depending on whether you are interested in macro or micro perspective you will want to build upon the above with

The microeconomics of banking from Freiax
Intermediate Financial Theory form Danthine, Jean-Pierre
International Macroeconomics and Finance: Theory and Empirical Methods by Nelson C. Mark

The above-mentioned three intermediate/graduate  books also presuppose some knowledge of econometrics, microeconomics and mathematics so you might want to also first study that before delving into these.