World as a society of interlinked multiplayer individuals If you were to take a game-theoretic model of a world in which each individual tried to optimize their utility function / goals then how would you go about designing a computer simulation of the people's interactions as they try to optimize their goals.
In particular, how can I model the way goals interact?
I guess the model could get arbitrarily complex, but cannot imagine anything nontrivial as given in standard game theory books. Thanks.

Chess is EXPTIME-Complete, which makes it significantly harder than NP-Complete problems.

Perhaps you are interested in the study of economic networks. Strategic network formation sounds like a good starting point. A lot of the work examines when certain classes of graphs arise under pure strategy Nash equilibria. There are exponentially many pure strategies. Enumerating the vertices of the polytope is likely not feasible.

Edit: Some of the big names in the area include Matthew O. Jackson, Rachel Kranton, Sanjeev Goyal, and Hans Haller. I would start with their papers. In particular, Matthew O. Jackson has a book on the subject.

Here are links to their homepages/CVs so you can scout out their publications. Economic networks are a pretty hot area at the moment, so you can likely look at journals like Econometrica to see what is being published.

http://web.stanford.edu/~jacksonm/papersarticles.html
http://econ.duke.edu/people/kranton/networks
http://www.econ.vt.edu/cvsandresearch/hallercv.pdf


How would gross world product look like if fossil fuel is treated as capital and not as income? The idea to treat fossil fuel as capital is found in the first chapter of the book "Small is Beautiful: (A Study of) Economics as if People Mattered" (1973) by E. F. Schumacher. Is there recent research following this idea?

There is a large literature considering the depletion of natural resources, including fossil fuels, in relation to GDP. Some writers explicitly refer to such resources as a kind of natural capital. Others may refer to natural resource assets, or simply to natural resources. A key question within this literature is whether depletion of natural resources should be recognised via a deduction within net domestic product (NDP), in (broadly) the same way that a deduction is made for depreciation of man-made capital.  The range of views is wide. Some examples:

Repetto et al (1989) attempted to calculate Net Domestic Income (NDI) for Indonesia for 1971-84, taking account of resource depletion, and found that the differences from Gross Domestic Income (GDI) were very large (p 8).  Various resources were considered including petroleum (pp 37ff).  It was argued that, for resource-dependent countries, not applying the depreciation concept to the stock of natural resources was "a major omission and inconsistency" (p 4)

Nature's Numbers (1999), a report sponsored by the US Bureau of Economic Analysis, devoted a large section (pp 59-105) to "Accounting for Subsoil Mineral Resources" (including fossil fuels).  It recognised that conventional national accounts treat natural capital in a way which is inconsistent with that of man-made capital (pp 25-6), but stopped short of recommending a deduction for depletion.

Natural Resource and Environmental Economics, a textbook by Perman et al, gives a useful overview of the issues (in the 3rd edition I have it's Chapter 19, especially section 19.2.4 on measuring national income).  It identifies several different methods that have been proposed for estimating the value of resource depletion.  In their concluding remarks (section 19.5), the authors express scepticism as to whether concepts of "adjusted GDP" are worthwhile, mainly because of the difficulty of determining the appropriate valuation basis.

The World Bank has published estimates of the percentage by which world Gross 'National' Income (GNI) would be reduced if allowance were made for depletion of energy resources. Over the period 1970-2015, this varies between about 0.1% and 3%. Illustrating the valuation problem, the pattern of change with sharp increases around 1973 and 1979 (times at which OPEC substantially raised the price of oil) suggests that these estimates have been heavily influenced by market prices. Physical depletion of fossil fuel reserves certainly did not change as dramatically as that pattern might suggest (see the chart here, fossil fuel consumption being a reasonable proxy for depletion).


Have any economists ever argued that the notion of opportunity cost should be done away with? I hold the opinion that the notion of opportunity cost "muddies the intellectual waters" so to speak, and I'd like to know if any professional economists have expressed this sentiment, or similar.

  Question. Have any economists ever argued that the notion of opportunity cost is problematic, or that it should be done away with?

Let me illustrate with an example. Define a function $f : \mathbb{R} \rightarrow \mathbb{R}$ as follows: $$f(x) = 3-x^2$$

Pretend we get to choose $x,$ and that the resulting payoff is $f(x)$. Then obviously, the optimal choice of $x$ is $x=0$, and this gives a payoff (or "benefit", or "utility") of $3$. Seems simple enough.

Okay, but now look what happens once we admit opportunity cost into the issue. It could be argued that by choosing $x=0$ and getting a payoff of $3$, we forgo the benefit associated with choosing $x=1$ at getting a payoff of $2$. So the true payoff of choosing $x=0$, once opportunity costs have been factored in, is at most $3-1$, which is $2$. Proceeding in this way, we can show that the true payoff, after subtracting all the relevant opportunity costs, is at most $3-(3-\varepsilon^2)$, for any choice of $\varepsilon$, no matter how small. Hence the true payoff is at most $\varepsilon^2$ for each choice of $\varepsilon$. So under the viewpoint of opportunity cost, the true payoff of choosing $x=0$ is not $3$, its $0$.

The is a general principle; if we take the concept of opportunity cost seriously, then every continuous decision problem (involving continuous functions) has a maximum payoff of at most $0$, and most choices actually yield a negative payoff. Obviously, this is pretty artificial. With discrete problems, its even worse; the maximum payoff of any decision is vastly reduced, but its only $0$ at the second-best choice(s); the best choice(s) yield a positive payoff.

Anyway, I'd like to know whether any professional economists have ever argued against using this concept.

The concept of Opportunity Cost is not used in order to net the direct
  benefit of a choice, but in
  order to compare it to the direct benefit of alternative choices.

How do we go about using it in Economics?

1) We gather all available alternative choices, say $A, B, C$
2) We measure (in whatever way appropriate for the situation) the benefit from each choice, say $G_A, G_B, G_C$.
3) The opportunity cost of choice $A$, say $OC_A$ is defined as the maximum benefit among the benefits of the alternative choices :

$$OC_A \equiv \max \{G_B, G_C\}$$

If $G_A - OC_A <0$ obviously we will be better off by choosing something else, and not $A$. And that's that.

Standard example: you have some money and the only choices available are $A$ to put it in a bank account yielding $3\%$ interest and $B$ to put it in another bank account that yields $4\%$ interest.

The direct benefit of choice $A$ is $3\%$ and its opportunity cost is the direct benefit from the alternative choice $B$, i.e. $4\%$.

This does not mean that  $A$'s "net benefit" is $3\% - 4\% = -1\%$. This operation just tells us that we have better choices than $A$. Again, it does not, in any meaningful way, say something like "so the net benefit from choosing $A$ is $-1\%$. It only says "if we choose $A$ we will actually get $3\%$ direct benefit, but we would have get $1$ percentage point more if we had chosen $B$" (an even funnier fallacy here is to say, "so I got $3\%$ and I foregone $1\%$, so my "true benefit = gains (-) losses" therefore true benefit is $3\%-1\%=2\%$" -so sir, can you please hand me this $1\%$ the bank gave you on top of your true benefit? Thank you so much).

Turning to your example, the direct benefit of choosing $x^*=0$ is $3$. The highest opportunity cost of choosing $x^*$ will come from choosing $x'=\epsilon>0$. This will have direct benefit $3-\epsilon$, which is the highest opportunity cost of choosing $x^*$.

Perform if you want the subtracting operation, $3-(3-\epsilon) = \epsilon >0$. The important result is that we get a positive number: so the benefit from choosing $x^*$ is greater than the benefit from choosing any available alternative. It is not the case that the "net benefit" from choosing $x$ is $\epsilon$ (again, since you will get $3$, can you please give me the $3-\epsilon$ which is above your "net benefit"?)

My impression is that this confusion surrounding the correct use of opportunity costs has psychological roots together with the use of the word "opportunity" in a different context: the "feelings of disappointment"(disutility) from "missed opportunities", that one may experience when he learns that he could have gotten more, which appear to "subtract" from the utility gained from what he actually got. Indeed, but in such a case, the missed opportunity was not known/available as an alternative choice during the time of decision. One could attempt to construct a utility function accommodating such behavior, but this is a totally different issue, it has nothing to do with how "opportunity cost" is defined and used in Economics.


How will non-rich citizens make a living if jobs keep getting replaced by robots and are outsourced? Decades ago a factory job could support a wife and kids until retirement and they offered insurance, benefits, etc. Now, no more unions, those jobs as well as tech and customer service jobs are outsourced, and anything left in the US is mostly being replaced by a machine or robot.
Assembly lines had 50 guys in the factory, all gone due to 2 robots assembly something and only needs a few men to monitor them. Blockbuster and Borders were destroyed by online video streaming and Ebooks. Wages also aren't keeping up with the cost of living. The rich get all these tax cuts even if they outsource every job they make, but us "little people" keep getting the downside.
I'm young and very scared of the future. Technology and new companies use to make jobs. Now one guy can make billions of dollars with a few friends only.

This is an interesting question a lot of good labour economists have been thinking about for a while. There are a few conflicting theories as to what will happen. You could base a whole career on this question.

This IGM survey will give you some idea as to what leading economists think.

The prevailing opinion seems to be that increased automation is not going to come at a cost to employment. There are countless examples of advancement lowing the returns to labour occurring throughout history (the plough, the steam train, industrial revolution). None of them has shown a long-run reduction in employment. The Solow Swan model for example,  includes inputs to labour, capital and technology. They show technology and labour being complementary. I know of no empirical evidence suggesting that this has changed.

This HBR article suggests that we aren't really seeing a cost in jobs, more a benefit in productivity. It also mentions Robert Solow's famous remark (which was correct at the time):

  you can see the computer age everywhere but in the productivity statistics

This MIT article presents a bleaker perspective with the concluding sentence:

  In other words, in the race against the machine, some are likely to win while many others lose.

Another article suggests that "this time it's different".

The analogy used is that humans are horses and we are reaching peak human

  demand for the labour of horses today is vastly less than it was a century ago, even though horses are extremely strong, fast, capable and intelligent animals. “Peak horse” in the U.S. came in the 1910s

In my opinion, this analogy is intuitively satisfying but is not particularly useful. We will see fewer humans working the supermarket checkouts and more in entertainment in the same way horses are no longer our ploughs and our taxis but are more likely to be racing and performing. Past that I think the comparison is a pretty big logical leap.

The Economist has an opinion somewhere in between

  [Keyne's] worry about technological unemployment was mainly a worry about a “temporary phase of maladjustment” as society and the economy adjusted to ever greater levels of productivity. So it could well prove. However, society may find itself sorely tested if, as seems possible, growth and innovation deliver handsome gains to the skilled, while the rest cling to dwindling employment opportunities at stagnant wages.

More likely, we will see a (potentially painful) transition in the uses of labour. A factory that used to employ thousands will now employ hundreds, possibly eventually only a dozen. These people will seek employment elsewhere and probably find it, either in existing industries or ones that do not yet exist.


How can you tell if any given preference structure is continuous or not? From a given preference structure (not the utility function), how can one tell if it satisfies the continuity axiom of preferences?

By trying to prove whether the following holds.

Note: Image taken from http://www.econ.ucla.edu/iobara/lecturepreferenceandutility201a.pdf


Examples of risk-neutral firms or people in business I am looking for examples of approximately risk-neutral firms or people in business.
Is there an industry where risk-neutrality is common for some agents (firms or people)?
Are there perhaps time periods when some agents in some industries turn risk neutral?
Could some investors be argued to be risk neutral?
Is there a literature on risk-neutrality with real-world examples?
I would especially appreciate examples of non-extreme cases if such ones exist.

Its very hard to give an actual real world example of risk neutral person (firms are just run by people only people can have attitudes to risk) not because they do not exist but because research on micro-level risk neutrality does not publishes name of its participants and all data are anonymized. You also can't say someone is risk neutral just by pointing toward some non-experimental decision they made in real world as in such situation there might be a lot of different effects in play that you cant control for. That being said, there are some studies that try to empirically measure risk attidudes for industries just not really giving particular examples.
For example, Pennings & Philip Garcia (2001) examine the risk attitudes in Dutch farming industry using the certainty equivalence technique. The authors report that in their sample $6\%$ of farmers were shown to be risk neutral, $34\%$ risk averse and $60\%$ risk seeking (see their table 3), but of course they will not provide names of those individuals. So based on this we can conclude that $6\%$ of Dutch farmers out of 373 included in the study were risk neutral.
When it comes to investors, for example Dorn and Huberman (2005) use survey data on self reported attitudes to risk of German investors. The data show that actually most investors are neither too risk averse neither too risk loving. Unfortunately, this does not necessary imply they are exactly risk neutral as they could be just slightly risk averse or risk loving. It is hard to measure what proportion of people are exactly risk neutral outside some experimental framework, but this would seem to suggest some risk-neutral investors probably exist.
I could not find any example of an industry where empirically risk neutral people would dominate. That being said, absence of evidence is not necessary evidence of absence, as it might be due to lack of available data. However, unless there is strong competitive advantage of being risk neutral in some industry I would not expect most people there being risk neutral. The study of Dohmen et al. (2005) conducted on a general population in Germany (they had a nice representative sample of 22,000 individuals) showed that $78\%$ of people are risk averse, $13\%$ risk neutral and $9\%$ to be risk loving. Since the study is quite representative I would expect that it would be generally true for most people. Unless there is some competitive pressure for certain type of individual in the particular industry attitudes of people there should follow the distribution in general population.
Risk attitudes definitely evolve over time (see for example this and this paper), it can even be molded by researchers priming the subjects (see here), but there seem to be no research suggesting that some periods favor risk neutrality as opposed to others. In fact, risk attitudes can be affected by your emotions as well (see Loewenstein et al., 2001) so they are definitely not stable.


Formula for feasibility for production versus import Is there a formula that can tell us whether it's better for a country to produce something inside (creating tariffs & regulations, subsidies) or it is better to import (lowering tariffs, etc)?

For example, imagine there's some gizmo. It can be bought on the external market for \$100, or it can be produced locally, importing \$50 worth of raw materials, and the end price will be \$150.

What other variables we need to consider here, and how do we make this computation of feasibility?

Really, when considering whether importing a good is beneficial to a country we need only look at comparative advantage. For this concept however, we need information on another good which could be produced in each country. Consider the following example:

Suppose we have country A and country B. Both countries can produce only two goods (for simplicity). These goods are gizmos and doodads. Each country has 100 labor hours to spend on production. It costs country A 10 hours to produce a gizmo and 5 hours to produce a doodad. It costs country B 15 hours to produce a gizmo and 6 hours to produce a doodad.

Using this information, we can see that country A can produce both gizmos and doodads more efficiently than country B. This is what we call absolute advantage. A country has absolute advantage in producing a good if it takes less resources for that country to produce the good.

Now, just because country A has an absolute advantage in producing both goods does not mean that they cannot benefit from trade. In order to see how they can benefit, we must look at the opportunity cost of producing each good for both countries. We will consider the case where opportunity costs are constant.

$\textbf{For country A:}$

If they want to produce a gizmo, they must give up the opportunity to produce 2 doodads. Therefore the opportunity cost is 2 doodads. If country A wants to produce a doodad, they must give up the opportunity to produce 0.5 gizmos. Therefore the opportunity cost is 0.5 gizmos.

$\textbf{For country B:}$

If they want to produce a gizmo, they must give up the opportunity to produce 2.5 doodads. If they want to produce a doodad, they must give up the opportunity to produce 0.4 gizmos.

Now, we can see that the opportunity cost for producing gizmos is lower in country A, and the opportunity cost for producing doodas is lower in country B. This means that country A has a comparative advantage in producing gizmos and country B has a comparative advantage in producing doodads. On a side note, this situation will always be the case. If we are looking at a two-country-two-good world, each country will have comparative advantage in production of one good.

What has all of this analysis told us? Well, it has told us that each country would be better off if they produced only the good for which they have comparative advantage in production and traded for the other good.

This is, of course, a very simplified example, but the same basic concept applies when you start adding more countries and more goods. I hope this helps!


Monetary expansion leads to decrease in inflation? This is my professors answer to the question.

Lower cash rate by the Reserve bank will lead to lower nominal interest rate.

And real interest rate = nominal interest rate minus inflation.

And because change is nominal variable does not change real variables, real interest rate remain the same, therefore inflation must decrease.

Lower nominal interest rate leads to a lower opportunity cost of borrowing, which in turn increases investment and consumption, which leads to a higher GDP.

Her answer seem to be very different from what I learn in macroeconomic course, where monetary expansion using the LM-IS AD-AS models. Which monetary expansion would lead to higher inflation in both the short run and the long run.

Is her answer correct in any economic sense?

In a nutshell, I think you're right.

The crux of your professor's argument is that, according to the classical dichotomy, the real interest rate will remain unchanged. However, that is only true in the long run, and we shouldn't be looking at the long run for this question. We should be looking at the short run. In the long run, the nominal interest rate as well as the inflation rate will remain unchanged, so the real interest rate will remain unchanged.

In the short run, the nominal interest rate will decrease, which increases output (according to the Investment-Saving relation) and causes inflation (according to the Aggregate Supply relation).

In the medium run, with output above its natural level, wages will rise due to a shortage of labour and thus prices will increase further. This happens until output is back at its natural level. This increase in price reduces the real stock of money as well, so that the nominal interest rate returns back to its original level according to the Investment-Saving relation (a leftwards shift of money supply in the money market).

In the long run, with prices stable at a higher level, there are no further increases in prices, so inflation becomes 0. (This is a static model, whereas in the real world the economy is dynamic and constantly experiences price increases.) Thus, real interest increases back to its original level.


Explaining the net capital outflow - trade balance identity In an open economy, the following equation always holds, it is an identity:

$S-I=NX$ where $S-I$ represents net capital outflow and $NX$ represents trade balance (net exports).

This equation tells us that there is an inextricable link between the financial markets and the markets for goods and services. But how can we explain it and why is it true, intuitively?

I believe this is the intuition:

What do people use to buy foreign goods?

Either they have to offer domestic goods or they have to offer domestic assets.

What do people use to make foreign investments?

Either they have to offer domestic goods or they have to offer domestic assets.

So if a country sells more exports than it buys imports then it must be that it is buying more foreign assets than they are selling domestic assets. Otherwise whey would be exchanging both less domestic assets and less domestic goods for both more foreign assets and more foreign assets. But since that's the entire set of things usable for trade, that's not possible.


Fair value that a risk averse individual would pay to enter a gamble Introduction

Assuming an individual (or corporation) with risk aversion and a von Neumann-Morgenstern utility curve and given a gamble g with E(g) > 0.
From what I researched, certainty equivalent is defined as the amount of wealth we could offer with certainty that would make him indifferent between accepting that wealth with certainty and facing a gamble g (Jehle and Reny, 2011, Chapter 2, pg. 112).

From that definition, the certainty equivalent is the amount of value that the individual would accept to give up on the gamble g.

Questions

Can you apply the certainty equivalent concept to calculate the fair value that the individual would be willing to pay to enter the gamble g (instead of giving up on the gamble)?
In that case, is it the same value to give up on the gamble?

References

Jehle, G. A. and Reny, P. J., 2011. Advanced Microeconomic Theory (3rd Edition). ISBN-10: 0273731912. Pearson; 3rd edition (April 30, 2011).

Yes.
In general not.

Let's say the individual has initial wealth $W$ and the gamble $g$ has payouts $0$ and $G$, each with probability $1/2$. As you say, the certainty equivalent $C$ of the gamble is the amount $C$ with $$u(W+C)=(u(W)+u(W+G))/2.$$ Now the same individual would be willing to pay at most $P$ to enter the gamble, where $$u(W)=(u(W-P)+u(W+G-P))/2.$$ So if $C$ is the certainty equivalent of $g$ at wealth level $W$, then $P$ is the certainty equivalent of $g$ at wealth level $W-P$. If $u$ is linear, then $P=C=G/2$ follows, but in general $C$ will differ from $P$.


How do I calculate the price and risk of a senior tranche? Say I grant two risky X years loans P(default)=0.1 of 1000 USD. For simplicity let us assume that the interest rate is 0.
I want to sell a X years Senior tranche of 1000 USD and a Junior tranche of USD 1000 backed by these two loans.
How do I calculate the price of these tranches?
This exercise seems trivial if the P(default) of the two loans are either completely uncorrelated or perfectly correlated.
But how do I do this if: 0< correlation < 1?

Let $D_1 = 1$ be the event that the first loan defaults and let $D_2 = 1$ be the event that the second loan defaults. Assume that we know the correlation $\rho$ between $D_1$ and $D_2$ and we know the marginals $p_1$ and $p_2$.
The aim is to compute the probability that one of the two loans defaults (for the junior tranche) and the probability that both default (senior tranche).
First, notice that:
$$
\begin{align*}
&\mathbb{E}[D_1] = \Pr(D_1) = p_1\\
&\mathbb{E}[D_2] = \Pr(D_2) = p_2.
\end{align*}
$$
First, let us try to compute the probability that both loans default.
$$
p_{12} = \Pr(D_1 = 1 \text{ and } D_2 = 1)
$$
The covariance between $D_1$ and $D_2$ is given by:
$$
cov(D_1, D_2) = \mathbb{E}\left[(D_1 - p_1)(D_2 - p_2)\right] = p_{12} - p_1 p_2
$$
Next, the variance of $D_1$ and $D_2$ equals:
$$
\begin{align*}
var(D_1) &= \mathbb{E}\left[(D_1 - p_1)^2\right] = p_1 - (p_1)^2 = p_1(1-p_1),\\
var(D_2) &= p_2(1- p_2).
\end{align*}
$$
So the correlation is given by:
$$
corr(D_1, D_2) = \rho = \frac{cov(D_1, D_2)}{var(D_1)} = \frac{p_{12} - p_1 p_2}{\sqrt{p_1(1-p_1)} \sqrt{p_2(1-p_2)}}
$$
As such, the probability that both default is given by:
$$
p_{12} = \rho \sqrt{p_1(1-p_1)} \sqrt{p_2(1-p_2)} + p_1 p_2.
$$
Then also:
$$
\begin{align*}
\Pr(D_1= 1 \text{ and } D_2 = 0) &= \Pr(D_1 = 1)- \Pr(D_1 = 1 \text{ and } D_2 = 1),\\
&= p_1 - \rho \sqrt{p_1 p_2(1-p_1)(1-p_2)} - p_1 p_2\\
\Pr(D_2 = 1 \text{ and } D_2 = 0) &= p_2 - \rho \sqrt{p_1 p_2(1-p_1)(1-p_2)} - p_1 p_2
\end{align*}
$$
Then the probability that at least one defaults is given by:
$$
\begin{align*}
\Pr(D_1 = 1 \text{ or } D_2 = 1) &= \Pr(D_1 = 1 \text{ and } D_2 = 0) + \Pr(D_1 = 0 \text{ and } D_2 = 1) + \Pr(D_1 = 1 \text{ and } D_2 = 1),\\
&= p_1 + p_2 -  \rho\sqrt{p_1 p_2(1-p_1) (1-p_2)} - p_1 p_2,\\
\end{align*}
$$


Capital in a credit frictions model I won't go into detail of this model because it's really just one point that i'm confused about. This question is based on a model by Matsuyama (2007).

Agents are deciding whether to invest in a project or not
The project gives a payoff of R units of capital
R is a random, uniformly distributed variable over the interval [0,1]
Agents only decide to
invest if return on investment > return on saving; let's call this
cutoff level of capital R*
Question: what is the total level of
capital in this economy?
Answer: capital = the integral of R from R*
to 1.  [1]: http://i.imgur.com/daYZz4A.png

I understand that an integral is like a continuous sum... I just don't quite understand how we can just sum of all the R's to obtain the total level of capital? What if all the R's don't actually occur?

Thank you!

The paper is assuming that some form of "law of large numbers" (LLN) applies for the continuum. The expected value of capital for an individual agent is
$$\mathbb{E}[R\cdot 1_{R\geq R^*}]=\int_{R^*}^1 R\,dR\tag{1}$$
The LLN assumption says that when we have a mass-1 continuum of agents, their actual total will equal their expectation in (1).

What justifies this assumption? Imagine that rather than having a continuum of agents, we simply had a very large number $N$, with each of these agents still having $R$ drawn from the same uniform distribution on $[0,1]$, resulting in an expected value of capital given by (1). Then as $N\rightarrow \infty$, the standard law of large numbers implies that the sample mean of capital will approach the value in (1). If, as we take this limit, we normalize each agent to have a size of $1/N$, then the sample mean will equal the total amount of capital - so in the limit, the amount of capital will always be (1).

Here comes the weird and not-entirely-correct thing that economists do. We often say that having a mass-1 continuum of agents is like taking this $N\rightarrow \infty$ limit (after all, there is an infinite number of agents in the continuum...). We therefore infer that the total value of capital in the continuum will equal the expected value given in (1).

Like I said, this is not entirely correct or rigorous. Judd famously complained about it, pointing out that if we take a continuum of agents each with independent random values, then the resulting function will usually not even be Lebesgue integrable, so we can't even define the aggregate value in a rigorous way. Al-Najjar recently suggested that we replace the continuum assumption with a discrete construction that actually implements the $N\rightarrow \infty$ limit. There are some other suggestions out there too.

Most economists, though, just ignore these technical concerns and continue to assume that when you have a continuum with independently distributed values, you get the expected value when you integrate. I don't mind this, since it's just a convention, and they are right in spirit, since a continuum realistically is intended to model a very large number of agents. (This issue came up once with a coauthor, and after reading Judd and Al-Najjar and others for a few hours, we just threw our hands up and decided to ignore the problem! My personal, technically acceptable way to resolve it is to say that agents - rather than living on a continuum - live in the probability space itself, and define aggregation over agents as probability-weighted integration over this probability space. But this is pretty technical and obscure, and the basic point is that 95% of economists ignore these issues.)


How can nominal interest rates be negative? It used to be (and perhaps still is) standard to teach in economics classes that the nominal interest rate cannot possibly be negative. So why have some nominal interest rates gone negative?
This includes not just interest rates on electronic reserves but also on government bonds.
Interest rates (1990-2020) of 10-year government bonds for Switzerland:

Germany:

Denmark:

Sweden:

Related questions:
The Swiss 10-year interest rate fell to as low as -0.975% in August 2019. I believe this means that if someone bought Fr 100M of these bonds, then in 10 years' time, they'd have lost Fr 9.75M and get back only Fr 90.25M.

Is it possible/plausible that the cost of storing Fr 100M in cash for 10 years exceeds Fr 9.75M (about US$11M)?

And even if storing cash were really so costly, why don't the holder(s) of Fr 100M have alternatives to buying Swiss government bonds? For example why aren't there banks that would gladly take those 100M as deposits at say -0.5% interest rate?

There was only one reason to ever think that nominal interest rates couldn't go negative, which is that the nominal return on both forms of base money (electronic reserves, and paper currency) had a floor of zero -- and investors wouldn't accept a below-zero nominal return when they could get a higher one by holding base money.

But for electronic reserves, there's certainly no practical need for a floor of zero: the central bank can easily pay negative interest on reserves. (For instance, the Swiss National Bank is now paying -0.75% on most "sight deposits", which is their term for electronic bank reserves.) It's quite easy: they just tell the computer to charge a certain amount of interest on reserve accounts, just as they would normally tell it to pay interest.

The potentially serious problem is paper currency, which by its very nature generally pays a nominal interest rate of zero. (If you have a \$5 bill, it will still be worth \$5 in a year - zero nominal interest.) The concern is that if we try to set nominal interest rates below zero, people will just massively switch to paper currency paying 0%, and the traditional financial system would disappear and be replaced by paper.

This is where we reach a very important point, which is that return isn't all that matters in an asset. Other factors, like convenience, play a role as well; different assets are convenient in different ways, and aren't perfect substitutes for each other. This is why in normal times, people are willing to hold paper currency even though it pays less than electronic accounts (because paper is useful in some ways that electronic accounts aren't); inversely, it's why in these abnormal times, when Swiss cash pays more than Swiss deposits, investors don't flock exclusively into cash.

Hence, when the SNB pays -0.75% on electronic reserves, rates in Swiss-denominated money markets (like the SARON overnight rate or LIBOR CHF) also drop to near -0.75%, and not everyone converts their electronic assets into paper. Indeed, there has been very little response on that front: if you look at SNB balance sheet column 16, banknotes in circulation, it hasn't budged very much thus far since negative rates began in December and the rates fell to 0.75% in January. Again, this is just a matter of imperfect substitutability: paper currency simply doesn't have the same kind of transactional and liquidity value that electronic accounts do. (And then there are the costs and risks of paper currency storage, as mentioned in the article you cite.) This is the feature of the world that wasn't adequately captured, before recent events, in the simple zero lower bound models used by many economists.

The one quasi-mystery, to me, is why banks haven't stockpiled paper. After all, even though an electronic account is more useful than paper to an end user, this doesn't apply to a bank that's already overflowing in electronic reserves. (Indeed, conceivably banks could be large-scale intermediaries here, stockpiling paper to back electronic deposits held by their customers - effectively transforming paper into a more convenient asset.) Yet the quantity of banknotes held by Swiss banks has remained low (see the 4th column at the bottom of the 2nd page here).

There are two possibilities here. One is that the logistical costs of holding cash are still higher than the 0.75% spread, so that it's still not worthwhile for banks to hoard. Another is that banks could make a profit by embarking on some large-scale cash hoarding program, but they know that the central bank would quickly get angry and create new rules (like a 0.75% tax on excess cash holdings by banks) to stop this, so they don't bother -- and indeed, maybe there has been under-the-table pressure from the central bank already!

Ultimately, when the government has the authority to regulate financial institutions, it can always disallow organized cash hoarding schemes that threaten the negative interest rate policy, so none of this is a long-term threat. The real issue is cash hoarding by end users - and there, the disadvantages of cash apparently still loom large at -0.75%.

(One complication, by the way, is that I think banks are generally not charging negative interest on small-scale retail deposits. At least superficially, then, the relevant interest rate isn't negative for the typical consumer; but I suspect that banks are making up the difference by charging fees, etc., which is already necessary to recover their costs even when interest rates are at 0%. For large-scale deposits, on the other hand, banks are charging clients to hold cash - and, of course, this must be true, since money market rates wouldn't be negative if it was always possible to find some bank that would give you a zero rate.)


Possible "debt-to-..." ratio indicators for debt-to-economic growth relationship? Suppose we are interested in the relationship between public or external debt and economic growth.

One can look at the debt-to-GDP ratio or debt-to-export ratio.

  What may be other possible "debt-to-... ratio" indicators that might be useful to investigate the relationship between public or external debt and economic growth?

Median household income comes to mind. This can be a useful denominator in capital-heavy economies where labour's share of income is relatively small, as it frames debt and deficit in terms of the burden faced by the most fundamental unit of concern in public policy.

In Canada, where I'm from, the OECD finds that labour share has dropped from close to 70% in 1990 to just over 60% in 2007, while nominal GDP nearly tripled in the same period. National debt, meanwhile, increased roughly 50%, and so while debt-to-GDP would have fallen over this period, the debt-to-household-income would have risen. This was a period of heavy investment in Canada's resource extraction industries, with new technologies like SAG-D coming into their own and kicking off a wave of multi-billion dollar injections of capital.  I don't have time to dig up the stats for the province of Alberta for this period, but I would expect these trends to be even more extreme there, as this is where the majority of these investments occurred.


Maximising a partly concave and partly convex function Let $f: \mathbb{R} \rightarrow \mathbb{R}$ be a twice differentiable and strictly increasing function. Suppose that we are searching for the numbers $x_1$, ..., $x_n$ that maximise

$$\sum_{i=0}^{n}{f(x_i)}$$

subject to the constraints that $\sum_{i=0}^{n}{x_i}=\bar{x}$ and $x_i \geq 0$ for all $i$.

If $f$ is strictly concave everywhere, it is optimal to set $x_i = x_j$ for every $i$ and $j$ (so that $x_i^* = \bar{x}/n$ for all $i$). If $f$ is strictly convex everwhere, it is optimal to set $x_i=\bar{x}$ and $x_j=0$ for some arbitrary $i$ and all $j\neq i$. However, I am interested in the 'mixed' case where $f$ has at least one convex portion but is ultimately concave.

Specifically, suppose that $f$ is strictly concave for all $x \geq \hat{x}$. Does this imply that $x_i^* = x_j^*$ provided that $\bar{x}$ is 'large enough'? If so, what precisely is the assumption that we need to make about $\bar{x}$? If not, are there some additional assumptions we can make to ensure that $x_i^* = x_j^*$?

Many thanks in advance!

Edit 1: It has been pointed out that $f′(x_i^*)=f′(x_j^*)$ whenever $x_i^*>0$ and $x_j^*>0$. This might be a useful step towards an answer.

Edit 2: It has occurred to me that we will probably need to assume something like $f'(x) \rightarrow 0$ as $x \rightarrow \infty$ in order to ensure that $x_i^* = x_j^*$.

If $f$ is strictly convex everywhere, it is optimal to set $x_i
=\overline x$ and $x_j =0$ for some arbitrary $i$ and all $j\ne i$.

I assume from this that the $x_i$ are constrained to be non-negative?

Using the Lagrange multiplier technique with Lagrangian $L=\sum_i f(x_i)-\lambda (\sum_i x_i-\overline x)$, we can conclude that the stationary points occur when $\frac{\mathrm{d} f}{\mathrm{d}x}\big{|}_{x_i}=\lambda$. Furthermore, if some of the $x_i$ are assigned to be zero then we can use the same Lagrange multiplier technique on all of the remaining unassigned $x_i$.

Hence we can deduce that $\sum f(x_i)$ is maximised when, at all of the $x_i$ which do not satisfy $x_i=0$, $f(x)$ has the same derivative.

As an example, consider the case when $f(x)=(x-1)^3$ and $n=2$. If there is a maximum with $x_1$ and $x_2$ both non-zero, then it must be the case that $\frac{\mathrm{d}f}{\mathrm{d}x}=3(x-1)^2$ is the same at $x_1$ and $x_2$.

For $x_1$ and $x_2$ to be distinct we would have to have $x_1=1+\sqrt a, \ x_2=1-\sqrt a$ for some constant $a$. Therefore, it $\overline x \ne 2$, then at the maximum either $x_1=x_2$ or $x_1=0$ and $x_2=\overline x$. On the other hand, if $\overline x=2$ then, for any $0\le a \le 1$, there is a maximum with $x_1=1+\sqrt a, \ x_2=1-\sqrt a$ and $\sum_i f(x_i)=0$.

Finally, there is one point that I would like to make about eventually concave functions. The function graphed below contains a section which is strictly convex but very close to being a horizontal line followed by a section which is strictly concave but is very close to being a straight line. Even for rather large $\overline x$, the maxima will satisfy $x_i=\overline x$ and $x_j=0$ for $j \ne i$.


Why did non-seasonally adjusted gdp usually drops on Q4 and Q1? Yesterday, i stumble upon some of my country macroeconomic data, and i found some interesting pattern on quarter-on-quarter gdp growth, almost every Q4 and Q1 has a negative growth. After checking another country's data, i can't find the same pattern. later i learned that my country data was probably non-seasonally adjusted data, since when i search for non-seasonally adjusted(NSA) GDP for another country, they also show similiar pattern.
My question is :
Why did NSA GDP usually drop on Q4 And Q1, what causes this pattern?
Did this also mean we're usually in recession in Q2 (Since Q4 and Q1 growth are negative)? After the Q2 2020 macroeconomical data released, there are a lot news about our country entering technical recession, even if our Q1 yoy growth was still positive.
Are seasonally adjusted GDP growth are the same as Year-on-year GDP growth?
What data do we use to define recession? Seasonally adjusted one or Non-Seasonally adjusted one?

Output usually falls during certain quarters/months and for many countries it is in the winter. Tourists usually travel for vacations in summer when kids also get long summer holiday. Farm work is highly seasonal and there is more of it in summer than winter (as pointed out by @dismalscience in an excellent comment construction is seasonal too) etc. As a result GDP will fluctuate seasonally and this is in fact the reason why we seasonally adjust series for many research purposes. Although usually these fluctuations are not big enough to cause recessions.
Depending on geography and in which industries country specializes it will be affected differently by seasonal variation in output. There is no a priori reason why it should happen in Q1 and Q4 but for most countries it will be either during winter or summer.  Since you do not mention which country you talk about there is not much what can be said about that.
If real GDP dropped in two consecutive quarters then usually it would qualify as a recession (for example that is definition given by Blanchard et al. Macroeconomics in glossary on pp 569), but that is not the only definition used in literature - there simply is no single agreed upon definition by all. Research on calling recessions  often uses seasonally adjusted real GDP in order to identify recessions (e.g. Hamilton, 2011), but most definitions do not specify whether it should be seasonally adjusted or not.


What is the correct economic term for beneficial "transaction frequency"? I am not an economist but I am trying to track down and understand an economic principal (and/or theory) that I think is called "transaction frequency" but when I go searching on that term I find only similar phrases so obviously I am in error. Below is the best way I can describe what I am looking for.

This is related to what is commonly called in the media "wealth inequality".

I remember about a year ago seeing a video that talked about the economy and how transactions (buy/sell exchanges) help it. Sadly I cannot find that video (and if it used invalid terminology maybe that is a good thing).

What the video presented was that there is a spectrum of transactions defined by the two variables of transaction size and transaction frequency. The video asserted that wealthy individuals (top 20% of the population) tend to make transactions that are large in size but relatively few in the scheme of things (such as multi-million dollar investment buys). Conversely, the video asserted that individuals in the vast majority (80%) of the population mostly make small size transactions in fairly high frequency (i.e.: tens of millions of every day retail & service purchases). Finally the video asserted that it is each transaction -- no matter what size -- that "benefits" the economy and that this means that more money in more hands causing more transactions is much more beneficial to the economy than the relatively few large investments.

Now like I said I am not an economist so I do not know if these assertions are accurate or accepted. I do not even understand exactly how a transaction "benefits" the economy. However if I am ever to achieve understanding then I need to know what it is I am trying to research and thus this question.

Thank you for any information on this matter.

PS: I have often heard statements like "Each 1 dollar spent generates an additional X.XX dollars in economic activity." (Is there a name for this concept?) so perhaps that is what the video was attempting to suggest as the "benefit" of each transaction?

The only actual question I could glean from this seems to be:

How do transactions benefit the economy?

In economics, the value of goods and services is their utility, an abstract measure of how useful they are. The food a restaurant or grocery store sells provides utility by providing nutrition and the pleasure of eating. A car or public transportation provides the utility of ease of movement. A doctor gives the utility of medical care, etc.

In economies with money, money as a medium of exchange provides potential utility. Your money gives you the ability to perform trades with other people, gaining the utility of their goods and/or services, in exchange for them being able to do the same with someone else later.

Whenever a transaction occurs, the party providing the good or service earns a profit by charging more money than they spent on labor, raw materials, etc. The consumer, meanwhile, gains a sort of utility surplus which is the difference between the amount of money spent and the maximum amount they would be willing to spend.

If a fast food restaurant spends \$2.50 to make a burger that they sell to me for \$5, but which I would be willing to pay a maximum of \$7.50 for, after the transaction the restaurant has \$2.50 more than before they began the process to make the burger, while I have gained an amount of utility I would have been willing to spend \$7.50 to gain having only spent \$5. Both parties are enriched.

Not 100% of transactions are mutually beneficial. Sometimes sellers erroneously set their prices too low to earn a profit, sometimes buyers misjudge the value of something and spend more than they should have, sometimes a party is tricked or coerced into making bad decisions. But the vast majority of them are, which is why they keep happening.

As for your P.S., there is the concept of the velocity of money, essentially the rate that money is exchanged for goods and services. When most transactions are beneficial, the more that occur the better as a general rule. If I have $1 and do nothing with it, no one benefits because money is merely potential utility unless I use it for emergency toilet paper or something. If I spend it, both I and the person I give it to (probably) benefit and when they spend it they and the third party benefit and so on. This is one of the reasons certain individuals support government-mandated transfers of money between different segments of society, arguing that the group the money is taken from doesn't use it enough.


Algebraic approach towards convexity I have a function: $ u(x) = x_{1} + x_{2} + \min\{x_{1}, x_{2}\}$. How do we algebraically show if it's convex or not? Also, what would be the general way to show if any given function is convex.

I assume you meant $u(x_1,x_2)=x_1+x_2+\min\{x_1,x_2\}$. To check if a function of two or more variables is convex, you need to check if you can differentiate it twice, calculate its Hessian and check if it is positive semi-definite. On top of that the domain needs to be a convex set but since we talk about utility in economics - you don't need to worry about that too much - Can A Utility Function Take On Negative Values?

In your example:
$$\mathbf{H}=\begin{bmatrix}
 \frac{\partial^2u}{\partial x_1^2} & \frac{\partial^2u}{\partial x_1x_2}  \\
 \frac{\partial^2u}{\partial x_1x_2} & \frac{\partial^2u}{\partial x_2^2}  \\
\end{bmatrix}=\begin{bmatrix}
 0 & 0  \\
 0 & 0  \\
\end{bmatrix}$$

so it is?

The approach described above is a general way of showing a function being convex but as pointed in the comment section, you need to be careful - make sure that all the assumptions are met before jumping to conclusions. (Or else, you end up being mistaken as me right now.)

EDIT.

Minimum function mislead me, I agree.

Let's get back to basics:

$u(x_1,x_2)=x_1+x_2+\min(x_1,x_2)=x_1+x_2 + \frac{x_1+x_2-|x_1-x_2|}{2}=\begin{cases}x_1+2x_2 \;\; \mathrm{for} \;\; x_1 \geq x_2\\ 2x_1+x_2 \;\; \mathrm{for} \;\; x_1<x_2 \end{cases}$

It looks like that (on horizontal axis $x_1$, on vertical axis $x_2$:

It is neither convex, nor concave. Due to the absolute value function that is in a core of minimum function:
Why is the absolute value function not differentiable at x=0?

I thought that eliminating point where $x_1=x_2$ would solve the issue but as shown in the other answer - it does not.

EDIT. 2 (final)

It is, in fact, concave as the user @afreelunch was telling me. You can see it directly from the definition. Or (what I think is even easier) from the way our utility function is built.

We have $u(x_1,x_2) = \min\{2x_1+x_2,x_1+2x_2\}$. Now, let's take it apart: $f_1(x_1) = 2x_1$ and $g_1(x_2) = x_2$, they are both linear Is linear function convex or concave? - hence, concave (and convex but we care about concavity here) and therefore their sum (property of concave function) $h_1(x_1,x_2)=2x_1+x_2$ is also concave. Similarly, $f_2(x_1) = x_1$ and $g_2(x_2)=2x_2$ and $h_2(x_1,x_2)=x_1+2x_2$ is concave as well. Knowing that, we get $\min\{h_1(x_1,x_2),h_2(x_1,x_2)\}$ - minimum of two concave functions - which is then concave (also a well known fact).

In short, minimum preserves concavity (and maximum preserves convexity).


Continuous rational and monotone preference relation implies $x\succsim0$? I updated my proof to a general version as follows: please share your thoughts & 2cent. Thanks

Show a monotone continuous complete preorder on $\mathbb{R^L_+}$ has  $y\geq x\rightarrow y\succsim x$.

  Point of Clarification
   $X=\mathbb{R^L_+}$
   Preorder means the usual reflexivity and transitivity.
   Complete means for any $x,y\in X$, have $x\succsim y$ or $y\succsim x$
   Continuous means the relation is preserved under limits.
   Monotone means for any $x,y\in X$, if $y\gg x$, then $y\succ x$.
   $\succ$ and $\sim$ are respectively asymmetic and symmetric parts of $\succsim$

Outline of Proof
 Go through two cases: (1) $y\gg x$. Easily get the result by definition. (2) Some components are equal while else y is strictly greater x. Use continuity where you add a sequence of small positive $\epsilon$ to y, making it a sequence $y^n_\epsilon$ where for every n, $y^n_\epsilon\gg x$ $\forall n$.

  Proof
   Suppose $\succsim$ is a monotone, continuous, complete preorder on $X=\mathbb{R^L_L}$.
   Case (1) $y\gg x$ (i.e. $y_i>x_i$ $\forall i\in B=\{1,\dots,L\}$).
   By definition, $y\succ x$, which implies $y\succsim x$.
    Case (2) $y_j=x_j$ for some $j\in B$. For $\forall k\not=j,k\in B, y_k>x_k.$
   For some $\epsilon>0$, let the sequence $\epsilon^n\in\mathbb{R^L_+}$ such that $\epsilon_j=\epsilon$, $\epsilon_k=0$.
   Denote the sequence $y^n_\epsilon=y+\epsilon^n$.
   Then, for any $\epsilon>0$ and $\forall n$, $y^n_\epsilon\succ x$, hence $y^n_\epsilon\succsim x$.
   By continuity of $\succsim$, $$\lim_{\epsilon \to 0} {y^n_\epsilon} = y$$
   Hence, $y\succsim x$. $\blacksquare$

 OLDER VERSION

My question is what is the valid reasoning behind that continuous rational and monotone preference relation implies $x\succsim0$. I have put a proof below and would appreciate if you share your 2 cent on the validity/rigor of the proof. Thanks!

Suppose $x\in\mathbb{R^+_L}=\{x\in\mathbb{R^L}:x_l\geq0$ $\forall l=1,\dots,L\}$.

Claim: For every $x\in\mathbb{R^+_L}$, monotonicity implies $x\succsim0$.

Proof:

(1) Suppose $x=(0,\dots,0)$.
Then, $x\sim0$ is possible.

(2) Suppose $x\gg y$. Then, by Definition of monotone preference, $x\succ y$ is possible.

(3) Suppose $\exists$ some $j$ such that $x_j>0$ and $1\leq j\leq L$.Then, I have the following process of elimination:

$x\succsim0$ is possible.
$x\succsim0$ and $0\succsim x$ $\iff x\sim0$ is possible.
$x\succsim0$ but not $0\succsim x$ $\iff x\succ0$ is possible.
$0\succsim x$ but not $x\succsim 0$ $\iff 0\succ x$ is impossible.

The single preference relation that is common in all three scenarios is $x\succsim0$.
Hence, for every $x\in\mathbb{R^+_L}$, monotonicity implies $x\succsim0$. Q.E.D

If we take the definition of monotonicity to be if $x\geqq y$  then $x \succeq y$, you can simplify the proof (though it looks right).

Note $\mathbf{0}\leq x$ for all $x\in \mathbb{R}_+^l$. So by the definition of monotonicity (essentially replacing $y$ with $\mathbf{0}$ above), $x\succeq \mathbf{0}$. I don't think continuity is required (check lexicographic preferences to see it is not necessary for the stated result).


What counts as transactions fee in Coase Theorem? Coase Theorem says that if the transaction fee is negligible then we will have an efficient allocation of resources.

In some of the samples, they quote that it doesn't matter who has the right to pollute. If people own the river, they will sue polluters and get money. If the polluters own the river, the people will pay the polluters to stop polluting.

It seems that the Coase Theorem presume that if a deal can be made, it will be made.

What about if both the polluters and the river owners (the people) can be better off by striking some deals but they don't make deals because they wait till better deals come along.

Say the river owners want more money for pollution?

Can I say that the transaction costs go up?

Notice that once they agree they can just pay with a credit card and hence there is no transaction fee. However, they play a game of chicken first or whatever to get deals coming up.

Does that mean transaction costs go up and hence, Coase Theorem fails?

Transaction costs (or fees, though I have always heard it as costs) is anything that complicates or prevents a transaction. This includes the example you are suggesting, but also things like the costs of suing, or if many people own the river and it is hard for them to organize and strike a deal. Maybe the legal system is terrible and people break deals all the time with impunity, etc, etc.

What you want to say in such cases is that transaction costs are high. Only if something changes that make it harder to strike a deal, it would be appropriate to say that transaction costs increase.


What is some intermediate or advanced macroeconomics textbook use general approach and focus on general topics? What is some intermediate or advanced macroeconomics textbook that use general approach, cover major formulas, math intense and focus on general topics similar to Romer's and Branson's Macroeconomics book?

Instead of being use more specific approach like Macroeconomic Theory: A Dynamic General Equilibrium Approach?

Foundations of Modern Macroeconomics by Ben and Lectures on Macroeconomics by Blanchard are both good, what else are out there and how would you compare those two of four i mentioned with your choices in your answer? I know that a graduate economics textbook that teach general topics tend to be easier.

Have you had a look at Dornbusch and Fischer's Macroeconomics? I would say that is a great book for both Introductory and Intermediate Macroeconomics. It emphasises on basic concepts (I used a really old edition but it still worked for me!) does a review after each section, the formulas are crystal-clear (I may be speaking only of myself though and I apologize in advance), brings up mathematical verification only occasionally, and there is nothing that the diagrams do not explain.

In addition, I used Greg Mankiw's Macroeconomics (still do) to run through topics- it covers most concepts and does not intimidate the reader at any point, but it is not so heavy on the math.

I do not have much idea as to what topics are covered under advanced Macroeconomics, but do take a look at these.


Negative growth rate with positive job growth As per CARE RATINGS for India, in FY18 half of the formal sector firms are showing negative sales/growth but positive job growth? Explain please.

These measure different numbers. Dollar value of items sold can decrease while number of employed people can increase, so there is no contradiction here.


Why does the US have public debt if they make more than that annually? Probably a dumb question:

I know next to nothing about economics and I'm just trying to make sense of what I'm trying to learn.

So, I've been looking into GDP lately, trying to understand what it means, and I came across a wiki page which states that in 2013 the US had a public debt of 17607 billion USD and that it was 74% of its GDP. From my understanding, that means that the US makes around 17607*100/74$\approx$23793 USD per year, so shouldn't that mean that they should have been able to pay the debt in a couple of years?

Also, the same wiki page says that the overall world public debt is 56308 USD. What does that mean? If one country A has a debt to country B, which has debt on country C and country C has debt on country A, can't some of the debts be canceled out?

The names “United States” or “US” refer to different entities here. With regards to the debt, they’re referring to the government of the country. With regards to the GDP, they’re referring to all the businesses of the country. So the government owes several trillions of dollars to those who have purchased treasury bonds, and the businesses of the country produce (every year) an even larger amount of money in profits. But the government only taxes a portion of those profits, and so it would take far longer than just a few years, to pay off all of the debt — and also (at least recently) the government keeps spending more than it collects in taxes, so it is simply getting further and further into debt.

A similar situation is going on with the world as a whole. When talking about the debt of various countries, what people are really discussing are the debts of the various governments of those countries. Basically, the governments of the world owe large sums of money to the businesses (and individuals) of the world. They also tax those businesses (and individuals) every year, and use those taxes to pay back (some of) the debts. But when (say) England owes money to the US and the US owes money to China, there’s no way to really “cancel out” the debt and just say that England owes China, because it’s the government of England who owes money to citizens in the US, and it’s the government of the US who owes money to the citizens of China, and so forth. Sometimes governments owe other governments money, but it’s often simpler to just keep track of the debts rather than try to cancel them out.


Why is it not possible to prevent sudden unemployment of thousands of people? Why is it not possible to prevent sudden unemployment of thousands of people?
Often one can observe, for example in news, that suddenly from one day to the other thousands of people of a company get unemployed. Why is it not possible to prevent this or why do companies not downsize slowly instead of above stated? Of course those companies should know this earlier and they could downsize slowly, but they don't. Why?
I would really appreciate any solutions and ideas

This question boils down to asking why business cycles exist and change employment in shocks.

One possibility is that employment is sticky or not worth changing constantly. A firm cannot constantly calculate and evaluate worker productivity and general profitability without a, perhaps rather expensive, cost, especially if the firm is very large. Constantly hiring and firing to try and have "optimal" employment for a firm is also bad for morale.

And perhaps more to the point, the alternative to firing people in large swathes is lowering wages, which is even worse for worker morale and sometimes not really legal (e.g. salaries are fixed for a year). So if there is a recession for example, a firm will generally choose to keep wages up, and then when it can't afford such a scenario anymore, it will create large layoffs.

Further Reading: The cost of firing changes the dynamics of how people are fired as well. See this article about France and Spain's different changes in employment with respect to the Great Recession. It is possible to prevent large drops in unemployment. Whether it is efficient is another question. My answer only briefly touches on the theory, and there is plenty of literature related to the points I've made that you can look for.


Doubt about Mixed Strategy Nash Equilibrium Here's the video I will be referring too.
Now I am a complete beginner in game theory, so sorry if this sounds like a stupid question, but why would a player want to balance out the payoffs of another player through his strategy.
Like it doesn't make much intuitive sense to me as to why he would want to do that. How exactly is this the best response to the situation?
Edit:
Sorry for not making the question self contained. So the game concerned is the Battle of the Sexes game, and this is the payoff matrix.

Suppose player $i$ plays the mixed strategy $\mathbb{P}_i(B)= p_i$, and assume for now that the support of $\mathbb{P}_i$ is $\{B,F\}$ (i.e. player 1 plays a fully mixed strategy). For both $B$ and $F$ to be in 1's support, he must obtain the same expected payoff from either strategy (otherwise, he would put all the weight on the strategy with the higher payoff!).
Now, the expected utility of player 1 from playing $B$ is:
$\mathbb{E}[u_1(B,.)] = p_2u_1(B,B)+(1-p_2)u_1(B,F) = 2p_2$
Similarly, the expected utility of player 1 from player in $F$ is:
$\mathbb{E}[u_1(F,.)] = p_2u_1(F,B)+(1-p_2)u_1(F,F) = 1-p_2$
The important point to note here is that the expectation is over the actions of player 2 - since player 1 knows the distribution used by player 2 (in equilibrium), but not the realised action.
You can write the best response function of player 1 as follows:
$BR_1(p_2) = \begin{cases}
0 & \text{ if } 2p_2 < 1-p_2 \\
(0,1) & \text{ if } 2p_2 = 1-p_2\\
1 & \text{ if } 2p_2 > 1-p_2 \\
\end{cases}$
Since we assumed that 1 uses a fully mixed strategy, the $BR_1$ function dicates that this can happen only when $2p^*_2 = 1-p^*_2 \implies p^*_2 = \frac{1}{3}$.
In other words, $p^*_2$ is the unique probability that is consistent with player 1 mixing over both her strategies. Whether this forms an equilibrium is still not clear - for that you need to calculate $BR_2$ (using the same steps) and see if $p^*_1\in(0,1)$. In that case, both players are best responding to each other - and hence playing a Nash Equilibrium.
P.S - for instance, if you found out that $p^*_1 = 1$ (i.e. 1 would like to play pure strategy $B$), then our starting assumption is wrong! So we need to redo the calculation for $p^*_2$.


understanding the proof of stochastic dominance. $\int_a^b u(x)dF(x)$ (1)$ = u(t)F(t)|_a^b - \int_a^b F(t)u^\prime(t)dt$ (2)$ = u(b)-\int_a^b F(t)u^\prime(t)dt$

$= u(b)-(\Phi(t)u^\prime(t)|_a^b-\int_a^b \Phi(t)u^{\prime\prime}(t)dt=u(b)-\Phi(b)u^\prime(b)+\int_a^b \Phi(t)u^{\prime\prime}(t)dt$.

From (1) to (2), I know that it is a partial derivative, but shoudn't it be $u(t)F(t)|_a^b - \int_a^b F(t)u^\prime(t)dF(t)$?? How can we transform $dF(t)$ to $dt$?

I also want to know why $\Phi(b)$ is not equal to 1.

I attach the original paper in case the information is not enough.

That's just a question of notation. Note that

$$\mathcal{d}F(t) = f(t)\mathcal{d}t$$

Then the proof should be easy to understand.


Relationship between Revenue-Elasticity and Price-Elasticity I have attempted to solve this problem and would be grateful if someone looked over my solution

5% increase in price  results in 5% decrease in total revenue. I need to determine price elasticity of demand. I have done calculations but I am not sure whether the way I have solved it is true.

$$TR=PQ\mapsto Q=\frac{TR}{P}\rightarrow Q=\frac{0.8TR}{1.2 P}=2/3$$
And then I wrote $$PE=\frac{\frac{8}{12}}{\frac{12}{10}}=5/9$$

But this solution doesn't appear in the test answer options. Can someone please check it and tell what is wrong?

Thanks in advance!

Let's denote the elasticity of $X$ to $Y$ at $Y_0$ with $\eta_{X, Y}(Y_0)$ and solve for the demand ($Q$) elasticity in terms of the revenue elasticity ($R$).

We know that the elasticity is always given by

$$ \eta_{X,Y} = \frac{d X(Y)}{dY}\frac{Y}{X}$$

or equivalently (showing the equivalence is a useful exercise),

$$ \eta_{X,Y} = \frac{d \log X(Y))}{d \log Y}$$

Now,

$$ R(p) = p Q(p) \\
\eta_{R, p}(p) = R'(p) \frac{p}{pQ(p)}\\
\eta_{R, p}(p) = (Q(p) + pQ'(p_0) ) \frac{p}{pQ(p)} \\
\eta_{R, p}(p) = 1 + \frac{pQ'(p_0)}{Q} \\
\eta_{R, p}(p) = 1 + \eta_{Q, p}(p) \\
$$

Given that the left-hand-side elasticity is $-1$ at the initial price $p_0$, the right-hand-side elasticity must be $-2$:

$$-1 = 1 + \eta_{Q, p}(p_0) \Rightarrow \eta_{Q, p}(p_0) = -2$$

Your mistake

You are being sloppy with the mathematics. First you state

$$ Q = \frac{TR}{P}$$

But then you claim

$$ Q = \frac{0.8TR}{1.2P}$$

These two equations just cannot be true at the same time.

Perhaps you want to look at initial $TR_0$, at total revenue after price change $TR_1$, and then state that $TR_1/TR_0 = 0.95$.


Division of labor vs division of work Some authors makes the difference between these two terms.

Could somebody explain what is the difference between division of labor and division of work?

One possible useful distinction between the two expressions could be as follows:

1) Division of work
Assume you have to mail 1.000 letters identical in content to different recipients. For each letter, in order to do that you need to a) fold the letter b) put the letter into the envelope c) write the address d) put a stamp e) go out and put it into the mailbox. Then repeat the sequence 1.000 times. "Division of work" would be to, instead of going through the complete sequence for each letter sequentially, a) fold all letters b) put all letters into the envelope, etc. By performing the same task, you gain efficiency in each task ("learning by doing") and also, you minimize the time needed in between each kind of task/work.
Here the focus is on gaining efficiency by grouping tasks.

2) Division of labor
In the same example, division of labor would be not only to perform each task for all letters instead of all task for each letter, but have different people doing each task. This situation focuses on the phenomenon of different people specializing in different professions.

...And I am certain that some authors that use the distinction, use the terms switched -namely, they call "division of labor" 1) above, and "division of work" 2).


What exactly does "carriers of utility" mean? I understand what 'utility' mean in economics.

While reading "Choices, Values, and Frames" by Daniel Kahneman I encountered above usage. I guess it means 'what utility is attributed to'. Google showed that this usage is common in economics literature, but I couldn't find a definition or an explanation.

What is the definition, if there is one? And if not, how best to interpret this phrase?

(Edit) Examples:
From above book (p-xii):

The proposition that the carriers of utility are states of wealth is accepted as a matter of course in economic analyses and in the prescriptions of decision analysis.
The idea that the effective carriers of utility are gains and losses was not now.

In "Decision, Probability and Utility: Selected Readings" by Peter Gärdenfors and Nils-Eric Sahlin:

As regards the conceptualization of utility, a fundamental question is what kids of entities can be assigned utilities. Or in other words, what are the carriers of utility? ...

This expression is used for the arguments of the utility function, that is, for the objects the agent "cares about". In the canonical model, the only carrier of utility is wealth, but in behavioral economics a lot of things can be considered (beliefs, wealth compared to a reference point, ...).

For instance, saying that the carrier of utility for John is the difference between John's wealth and Lisa's wealth means that the utility function of John is of the form $u(x-y)$ where $x$ is John's wealth and $y$ is Lisa's wealth. It is another way of saying that the only thing that matters to John is his relative wealth compared to Lisa, and not his absolute wealth.


How to address PPP when doing price comparison across countries? I'm measuring some very specific items (across 5 countries) using my country's currency as the base. My questions are:

How should I address PPP in this case? (Is it just like the example in Table 1 here?)
What are the limitations if I decided to just use the market exchange rate? Is it considered "fair"?

As you are interested in very specific items, using an aggregate PPP measure like the ones provided by the World Bank (which are as aggregate as the GDP or private consumption), or the Big Mac index is not very good idea. This answer explains in some detail how PPPs are calculated ((the bottom line is that aggregate PPPs include a whole range of products; see here for more details).

If you are interested in just a few products, or maybe a single product (steel), as one of your comments suggest, you have to look into a more dissagregate PPP. You can find it here. These PPPs are still quite aggregate (for example, in the Classification tab you can find the full list). In your case, you might be interested in the Gross Fixed Capital Formation: Construction index. See here for more details on what this index includes. Notice that this is still quite an aggregate measure of PPP. Another drawback is that this is only available for either 2011 or 2005.

A final note is that you are normally one adjusts for PPP when the interest is in comparing cost of living or wellbeing across countries. Adjusting for PPP makes less sense when the comparison is for example about the cost of sourcing a material from different countries. Here, exchange rates is what you need, as this reflects the actual cost for firms of selling/buying a product in different markets. As you do not provide the context of your question, it is not possible to tell whether PPP is pertinent or not to you.


What impact did major fiscal policy actions taken during the Great Recession (2007-09) have on U.S. economic performance? What impact did fiscal policy actions taken during the Great Recession (2007-09) have on U.S. economic performance?

Bush passed the Economic Stimulus Act of 2008 and also the Emergency Economic Stabilization Act of 2008 which established the Troubled Assets Relief Program. Obama passed the American Recovery and Reinvestment Act in early 2009.
Let me know if I missed something.

The fiscal policies to fight the great recession in the United States were not administered in a way that would allow us to assess this a natural experiment. However, there have been many situations in the past where there was such a natural-experiment setting, and that allows us to approximate the effect of these fiscal policies. For example, if a dollar of additional government spending, when such variation is experimental in nature creates two dollars in private consumption and investment (a multiplier of two), then when the government spends a trillion dollars in a way that may be endogenous, you could guess that the effect on private consumption would be something like two trillion.

The CBO used this methodology in their report Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from October 2010 Through December 2010 (2011):

  The American Recovery and Reinvestment Act of 2009 (ARRA) contains
  provisions that are intended to boost economic activity and employment
  in the United States. Section 1512(e) of the law requires the
  Congressional Budget Office (CBO) to comment on reports filed by
  recipients of ARRA funding that detail the number of jobs funded
  through their activities. This CBO report fulfills that requirement.
  It also provides CBO's estimates of ARRA's overall impact on
  employment and economic output in the fourth quarter of calendar year
  2010. Those estimates—which CBO considers more comprehensive than the recipients' reports—are based on evidence from similar policies
  enacted in the past and on the results of various economic models.

Key findings:

  On that basis, CBO estimates that ARRA’s policies had the following
  effects in the fourth quarter of calendar year 2010:

  They raised real (inflation-adjusted) gross domestic product (GDP)
  by between 1.1 percent and 3.5 percent,
  Lowered the unemployment rate by between 0.7 percentage points and
  1.9 percentage points, Increased the number of people employed by between 1.3 million and 3.5 million, and
  Increased the number of full-time-equivalent jobs by 1.8 million to
  5.0 million compared with what would have occurred otherwise, as shown in Table 1. (Increases in FTE jobs include shifts from
  part-time to full-time work or overtime and are thus generally
  larger than increases in the number of employed workers.)

Another CBO paper, The Fiscal Multiplier and Economic Policy Analysis in the United States (Whalen and Reichling (2015), discusses an economic parameter at the heart of these estimates, the fiscal multiplier.

  The recession from 2007 to 2009 sparked wide interest in the economic
  effects of fiscal policy.  That interest is reflected in an ongoing
  debate over the size of the fiscal multiplier. This  working paper
  addresses three questions: What models do economists use to estimate
  that multiplier?  Why do estimates of it vary widely? How can
  economists use those estimates to judiciously analyze  U.S. economic
  policy?

Tables 1 and 2 are of particular interest, they can help you understand the estimated contributions of various parts of the stimulus to the recovery by time and project type.


Calculating Consumer Surplus Given Table Can someone help me? The answer is supposed to be 36 but I have no idea how they got that answer. Can someone explain why consumer surplus is 36 in this instance? Thanks!
Refer to Table below. If the price is four dollars but only six units are exchanged in the market, consumer surplus will be?
[Hint: Both the supply curve and the demand curve are linear]
Edit: Shouldn't the equation be (1/2)* 8 * 6 = $24?

The key to this is in the hint. It lets you know supply and demand are both linear, so you need to figure out what the functions of those two curves are. In this case, you have
$$ Q_D = 18 - 1.5P $$
$$ Q_S = 3P $$
Plot these on a supply/demand graph (P on the vertical axis, Q on the horizontal), and the consumer surplus is the shaded area (note, it stops at Q=6 because only 6 units were traded in the question):

Using the formula for the area of a trapezoid, we have:
$$ CS = \frac{1}{2} [(12-4)+(8-4)]*6 = 36 $$


What were the problems with the gold standard? I was reading this answer to a question about bitcoin vs gold standard which includes

As a consequence, if Bitcoin standard would ever become adopted it would likely perform even worse than Gold standard did (which is saying something), and would likely go the same way.

It is pretty explicit in stating that the gold standard was pretty bad. I am no economics expert so I don't know why that was the case. Could someone explain it to me to satisfy my curiosity?

There are several problems with gold standard:

Having more than 1 country using a gold standard is economic equivalent of being in monetary/currency union. In fact European Monetary Union is often in literature equated to EMU having a gold standard (see Eichengreen & Tamin 2010).

This creates several problems because optimal currency area (OCA) requires countries to either have completely unrestricted mobility of factors (free movement of labor (e.g. immigration/emigration) and free movement of capital in and out country (e.g. no capital control regulations)), or it requires countries to adopt fiscal union (e.g. create one joint federal government). This is because different countries can experience asymmetric  macroeconomic shocks which require either of the two above to hold in order to accommodate them  (see DeGrauwe Economics of Monetary Union).
Of course there is an option of not accommodating the asymmetric macroeconomic shocks but that leads to worse recessions, higher unemployment and general economic malaise that you could observe in EMU  (which is again a paper equivalent of gold standard) after Great Recession. Hence, it is very inefficient to have gold standard system that is followed by multiple independent countries.

Gold standard partially constraints monetary policy of the government. Being on gold standard essentially means that government fixes exchange rate between gold and its issued bank notes. For example, government might decree that one dollar is worth 1 ounce of gold.

This ties money supply to supply of gold that is determined by gold production. As a consequence, the money supply might expand exactly when economy does not need it just because new gold is discovered under ground, and times when economy needs monetary expansion there might be not enough new gold to actually increase money supply sufficiently. In fact the unwillingness of US to expand money supply during Great Depression  partially  due to being on gold standard, was one of the main reasons why recession of 1929 is now known as Great Depression (see Friedman and Schwartz Monetary History of the United States).  Consequently, gold standard can have extremely disastrous effects on macroeconomic stability.
There is an important caveat to this. The fixed rate can be in principle changed by government, so monetary policy is still in principle possible. Government can one day decree that the fixed exchange between dollar and gold is 1 dollar per ounce of gold another day it can decree it is is 10 dollars per ounce of gold. But typically changing the exchange rate between gold and currency under gold standard was not easy due to various institutional reasons.  Moreover, if the exchange rate between gold and dollar could be changed from minute to minute then it would for all practical purposes cease to be gold standard in anything but name.
Also generally speaking monetary policy is extremely important tool for macroeconomic management as you can learn in any macro textbook (e.g. you can have look at Blanchard et al Macroeconomics a European Perspective, or Mankiw Macroeconomics). Gold standard simply interferes with central bank's ability to conduct monetary policy in efficient manner.

Gold standard was practically unworkable during any major crisis. For example, most countries had to suspend during large crises or wars. Hence, even in the heyday of gold standard countries mostly operated on gold standard in good times while in times of war or crisis switching into alternative monetary arrangements. As explained already in their abstract by Bordo & Finn (1995)

The experiences of these major countries suggest that the gold standard was intended as a contingent rule. By that we mean that the authorities could temporarily abandon the fixed price of gold during an emergency (such as wartime) on the understanding that convertibility at the original price of gold would be restored when the emergency passed.

Hence, even in the best days of gold standard people tacitly agreed it is only good monetary arrangement for good times not bad times (and that was still based on their contemporary 18-19th century understanding of economics - with modern science we know that was mistake and it was not exceptionally great even in good times (definitely not enough to compensate for its drawbacks)).

Having gold standard would put more restrictions on government finances. With fiat currency government budget constraint can be in its static form described as:

$$G−T=\beta +\theta \implies G=T+\beta + \theta$$
where G is government spending, T is the net tax revenue after transfers and interest payments, $\theta$ is government financing by high powered money and $\beta$ is government financing by bonds/debt (see for example Blinder & Solow, 1973; Christ, 1968; Tobin & Buiter 1976).  Now under gold standard government can only use $\theta$ if it mines extra gold or if it changes fixed exchange between gold and money which as discussed above was often difficult.
With fiat money government is much less constrained, even though virtually all mainstream economists agree government can't pay for arbitrary amount of real spending with monetary financing (see this poll among top policy economists), having access to this channel helps.  This is especially important at a time when average government spending to GDP is around 45% for OECD countries (in the heyday of gold standard this was on average about 5%). Most modern societies simply want government that provide plethora of social programs, redistribution and ample funding for public goods. This forces governments to be smart about the ways they pay for these programs and putting on gold standard straitjacket makes little fiscal  sense.

Gold standard tended to be deflationary.

First, even non-economists usually recognize that high inflation is sign of monetary instability, but forget the same holds about deflations. Second, it is widely believed by economists that over the business cycle it is good if economy has moderate inflation rather than deflation (again see any conventional macro textbook such as the Mankiw or Blanchard et al recommended above).
This is due to existence of nominal rigidities in the economy (e.g. nominal contracts are set for specific duration of time; minimum wages; menu costs - that is costs of changing prices frequently, even psychological reasons and so on). Such rigidities make  it  beneficial for economy to have small amount of inflation over time which relaxes them which is especially important during economic downturns when real decreases in wages and increase in prices, but it is simply too difficult for people to adjust prices and renegotiate wages quickly enough.

Gold standard wastes scarce resources. Under gold standard gold - a  scarce resource with many industrial uses - is literally dug from the ground just to be buried under the ground again in bank vault. There is simply no reason to waste scarce resources in such way when you can base currency on paper or heck nowadays even just electronically. Obviously, Bitcoin would not have this problem, but the reason why I asserted it would be even worse is that it would have more constraints on monetary policy (this point 4 while significant pales in comparison with economic importance of points 1-5).

There could be other reasons I forgot to mention above, but on the whole modern scholarship on gold standard considers it a failure and not very efficient monetary arrangement.


How is price elasticity determined in practice? Price elasticity of demand and Price elasticity of supply are two of the most important concepts of microeconomics, but they're generally explained from a hypothetical standpoint, and little effort is given to explaining how they are measured, or how they fluctuate (specifically the scale of fluctuation, not the contributing causes).

Can anyone explain this, and/or point to studies that document the fluctuation of $PE_{d}$ and $PE_{s}$ over time?

In many practical instances, price elasticity of demand (PED) is calculated in a back of the envelope fashion, just as taught in the textbooks! Firms can adjust their price by some small amount and observe the demand response. For relatively small changes in price and quantity, little accuracy is lost by assuming that the demand function is locally linear, so that the change in price and demand jointly give an estimate for $$\frac{dQ}{dp}.$$ Since $p$ and $Q$ are already known, this is enough to calculate the PED:
$$\eta=\frac{dQ}{dp}\frac{p}{Q}.$$

This method yields only a point estimate of elasticity at the current price. However, one can get an incredibly long way with just this estimate thanks to the so-called Lerner condition: that a firm with marginal cost $c$ facing a price elasticity of $\eta$ maximises profit when $$\frac{p-c}{p}=-\frac{1}{\eta}.$$ Once the price elasticity of demand is estimated in the above fashion, this formula can be used to infer if the firm's price is above or below its profit-maximising level (allowing a firm to correct towards that level). Alternatively, this kind of analysis is often used as a heuristic in competition policy (antitrust) because, by estimating the right hand side of the Lerner formula, competition authorities can get an estimate for the left hand side (i.e. for how much power the firm has to price above marginal cost).

One drawback of this approach is that, at least in its simplest implementation, it does not control for factors such as how a change in the price of a product affects the demand of other products sold by the same firm (and thus overall profit).

You can see a nice informal discussion of Amazon's book pricing based on this kind of back of the envelope work here.

For more formal purposes, and when data is readily available, the process is often similar but slightly more careful in the estimation of demand. An excellent example of this kind of work can be found in Ellison & Ellison's 2009 Econometrica Paper, Search, Obfuscation, and Price Elasticities on the Internet. They proceed by estimating the firm's demand function econometrically (rather than via the heuristic method described above), and then calculate the implied PED from this estimated demand. Using an equation analogous to the Lerner condition, they are able to infer how far from the competitive case the market is, and attribute this discrepancy to search obfuscation.

In practice, for economists working outside of a firm, the main difficulty is often obtaining the data necessary to estimate the PED (Ellison & Ellison had excellent data thanks to collaboration with a firm in the market).


Why are there so many migrants in the modern world? I want to ask you if there is an explanation in your science of why there are so many migrants in the modern world?

I live in Russia, and after the dissolution of the USSR a lot of people here had to leave their states (former Soviet republics) trying to find a job in Russia (where the economic situation is a bit better in comparison with the other republics). At the same time many people are trying to emigrate from the former Soviet Union to the West.

When looking at the statistics I see that the situation with the employment in the former USSR is not the worst in the world, for example, according to this source, the unemployment rate in Russia is now 5.1%, in Uzbekistan 10.6%, and this is not so bad in comparison, say, with Spain, where it is 24.7%. However, the difference between 10.6% and 5.1% (together with some other parameters, like quality of life, etc.) force many people, millions of them, to seek a job abroad, and this is difficult for them (I am sorry for the normative statements).

So, to specify my question,

  What is the attitude of the economic theory to this? Is this considered as a result of an unsuccessful economic policy, i.e. of some mistakes in the reforms, or this is regarded as normal (maybe, inevitable)? And

  If these were mistakes, then what were these mistakes?
  If this was normal, then I suppose there must be an understanding in your science of what people should do in this situation. How does the economic theory expect the jobless people to react? Are they supposed to leave their countries, or wait, or die? If they are supposed to leave, then there appears a contradiction between economics and politics, since usually emigration is very, very difficult, often impossible because of the political reasons. How is this contradiction supposed to be resolved?

From what I see in internet I got an impression that the situation in the former USSR is not unique, there are many other countries with similar problems, so, to tell the truth, I don't understand why people here insist that I should specify the country I am speaking about. If this is important, I have in mind the situation in Central Asia, i.e. countries like Uzbekistan, Tajikistan and around.

Are current flows of migration bigger that they were in the past?

We tend to forget history because the numbers involved currently are smaller
relative to world population. For instance, the 8.8 million immigrants who came to the United States in 1901-1910 period is of similar magnitude to the 9.1 million immigrants who came in the 1991-2000 period, but both the U.S. and world populations were much larger than in 1901-1910.

Richard B. Freeman in a nice paper, entitled "People Flows in Globalization," reminds us about this fact.

Some countries indeed receive large inflows of migrants

The US, Russia and Germany are the biggest recipients of immigration (see Table 1 in the above paper). These flows have consequences for factor endowment and there is considerable and often heated controversy over their impacts on destination countries.

How Do Immigrants Affect Their Countries of Arrival?

Freeman examines this question (p.18 to 23) and reviews the empirics. In the basic model of immigration, immigrants reduce earnings of substitute factors and raise the earnings of complementary factors, where complements might include capital and some types of native-born labor. In the basic model, there is full employment but you may intuitively consider quantitative adjustments instead of price/wage adjustements by introducing frictions in the labor market. Note than in most advanced countries,
immigrants have higher unemployment rates and lower employment rates than native workers.

Related to this question a classical paper is "The Economics of Immigration," with theory and evidence by Georges Borjas in Journal of Economic Literature, December 1994. More recently, in 2015, Borjas published an interesting review on Immigration and Globalization. You mal also be intereted in reading his paper on how the collapse of the Soviet Union affects the productivity of American mathematicians.

Regarding policies Freeman  considers "radically economic policies" such
as auctioning immigration visas or charging sizeable fees and spending the funds on current residents to increase the economic incentive for advanced countries to accept greater immigration.


National debt question I have a question regarding the national debt.  I understand that foreign governments and/or central banks hold somewhere north of $6 trillion of US Treasury securities.  I have found minimal information as to how much, if any, foreign national debt the US Treasury and/or the Federal Reserve Bank hold.  I am curious if there are countries that hold our securities and the US, in turn, holds their securities.  If so, doesn’t it make sense to clean-up the respective national balance sheets by calculating values for those securities and simply offset or cancel as much of those positions as possible?

I suspect this is an oversimplification of a complicated issue.

There is some data like that, but not split by private/government entities holding it.

  Exhibit 5 compares foreign holdings of U.S. long-term securities with estimates of U.S.
  holdings of foreign long-term securities as of selected survey dates. At \$17,481 billion, foreign
  holdings of U.S. long-term securities remained considerably larger than the \$10,734 billion in
  foreign securities held by U.S. residents at end-June 2017.

Actually BEA has more up-to-date NIIP data. The latter includes much more than just long-term securities, e.g. derivatives too.

The US Fed does buy some foreign currencies as part of their SOMA (System
Open Market Account) operations, and the Treasury also does that through their Exchange Stabilization Fund (ESF). According to that source these

  are held in [...] in a variety of instruments that yield market rates of return in their respective currencies and have a high degree of liquidity and credit quality.

For example:

  As of June 30 [2018], the euro reserves held by both the SOMA and the ESF totaled \$25.4 billion [...] The amount of yen-denominated deposits and government securities held by the SOMA and the ESF fell to \$16.9 billion [...].

Note that these numbers are pretty insignificant relative to the private positions from the first graph I posted.

The same source mentions that the US does have reciprocal currency swaps with the ECB and the BoJ (about \$1 billion with each). It doesn't have any with China though and the latter's central bank holds large US reserves, trillions...


Is there a term for the personal wealth that is not used to generate income? A rich person can own companies, shares, houses used for renting etc. that are worth billions of $US. That is the wealth that is generating income. I would call it income-generating wealth or income+jobs-generating wealth or growth-generating wealth

On the other hand, the rich person can own wealth like cash, bank accounts, houses, yachts, land used for playing golf etc. that is not used to generate income - this is a wealth that he is using for enjoying life. I would call this wealth leisure wealth.

A rich person can have an income-generating wealth worth billions of $US and in the same time it can have a leisure wealth that is close to zero. He/she can also have an income that is equal with the medium income. And then he/she can have only his own wage as a leisure wealth.

There are fundamental differences between the income-generating wealth and leisure wealth

The income-generating wealth is actually used to spin the wheel of the economy and it is also directly creating jobs.
In the same time, the leisure wealth is used by the rich person in order to actually live like a rich guy - or to live like an average citizen - depending of his/her choice. The leisure wealth is owned on personal name (not assets owned by a company of the owner) and it's for personal use - i.e. not used by any clients (like the houses for rent)

I think there should be distinct terms for the two in order to make a clear distinction between them.

Is there an already invented term for the wealth that I'm calling leisure wealth?

I do not believe that your suggested definitions will hold up. Since this is a forum for questions about economics, I do not see the point of proposing a new definition here. Who is going to see it?

What you call “income generating wealth” is captured by “wealth” in its standard usages. However, what you exclude (such as bank deposits) will be included in “wealth” or “claims on wealth.” From a portfolio perspective, it makes no sense to exclude bank deposits. Furthermore, “income” is well defined, and there are assets that generate no income for the holder, and yet are wealth (for example, a personal residence). Rephrasing to include future income does not help, since the sale of a primary residence is not considered income.

Everything else would be classified as “consumer goods.” If you want to only include things that “make you look like a rich person,” you would end up with the fuzzy category of “positional goods.”

Why not include consumer goods in wealth? One of the regularities of consumer goods is that they have almost no resale value. So there’s no good way to measure its value.

The lines are blurry. For a collector that buys and sells particular goods, those goods are actually assets that are expected to make a profit. However, no statistician could hope to measure the value of these exceptions.