Is the development of "developing countries" evidence against the idea that former colonial powers owe their headway to exploitation? There is a recurring narrative (especially but not exclusively in left-leaning circles) that today's "developed nations", particularly Western former colonial powers, owe much of their wealth and progress to the exploitation of their former colonies. This is frequently used to counter the idea that the "First World's" headway is due to any inherent superiority, either in culture or social organization (such as capitalism, market liberalism or democracy). The implication, apart from the call for reparations that often follows, is that today's "developing nations" are unlikely to ever catch up, replacing the idea of global progress with one of eternal injustice (barring a revolution, which of course is what many proponents of this narrative are aiming for).
However, to my untrained eye, the current development of many "developing countries" seems to falsify this idea. Is that so? I assume some work has been done on this -- can anyone here point me in the right direction? That would be greatly appreciated.

The recent development of many "developing countries" and "emerging markets" does not mean that Western colonial powers did not exploit them in the past.

Emerging economies owe their modern GDP growth to cheap labor, as (former) Western colonial powers switched their (expensive) manufacturing bases to countries like China, India, etc. In the past, they were exploited mainly for their natural resources moreso than labor.

The continued GDP growth of Western colonial powers is due to a shift from manufacturing (labor-intensive, low-education professions) to "high tech" industries which require significantly more education (medical research, computer programming, etc.).

The book "Capital" by Thomas Piketty has a far more detailed history of how capital flows shifted from the 18th century to modern times, and the economic interplay between Western colonial powers and the developing nations. https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century


Deriving average productivity from a CES production function Following the work of Raurich et al. (2012) I got stuck trying to derive the average productivity starting from the following CES production function:

$$Y=A\left [ \alpha K^{\frac{\sigma -1}{\sigma }}+(1-\alpha)(AL)^{\frac{\sigma -1}{\sigma }} \right ]^{\frac{\sigma}{\sigma-1 }}$$

The result they get is:
$$\left (\frac{Y}{AL}  \right )^{\frac{1-\sigma }{\sigma }}=\frac{1}{\alpha \left ( \frac{K}{AL} \right )^{\frac{\sigma-1 }{\sigma }}+(1-\alpha )}$$

Is there anyone who can help me with this?

This is the solution to your difficulty. By the way, which text are you following?


What does irrationality mean under the notion of revealed preferences? An example with terrorism. I am currently studying for an economics of conflict exam and one of the potential questions is likely to be in the vein of "Are Terrorists Rational - Discuss".

However how would rationality be defined in this context?

A canonical example is often metal detectors, whereby it is has been shown that when metal detectors were introduced in airports, terrorists substituted skyjackings for other means hostage taking. This would imply some rational framework where terrorists have some sort of budget constraint and indifference curve.

However, under the assumption that they didn't substitute for another form of terrorist action, would this imply irrationality? On a superficial level it may, but what if they just valued skyjackings really highly? Under the notion of revealed preferences, surely by just attempting to skyjack you are showing that skyjacking is valued to you and you are therefor doing a "rational" action?

So can something ever be irrational?

I think I have worked out some sort of solution to this question.

In Handbook of Defense Economics Chapter 9: Terrorism Theory and Applications, Enders and Sandler give the example of metal detectors in airports to explain the notion of rationality under terrorism.

They show empirically that the inclusion of metal detectors in airports not only decreased the number of skyjackings, but that terrorists substituted towards other means such as more conventional hostage taking. They also give the example of when America fortified their embassies, terrorists attacked America's allies' embassies more. These substitution effects are an example of rationality as either cost benefit analysis is being applied or there optimization with constraints is taking place.

However, my question related to "What if skyjackings didn't decrease after metal detectors were put in", would this imply terrorists aren't rational and we can't use these models to understand their behavior?

The answer to this is that we don't know and that two competing solutions exist:

(1) Terrorists are irrational and act arbitrarily to express anger.

(2) Terrorists simply don't have full information or their preference for skyjacking is extremely high. In this case they could have done a cost benefit analysis but may have calculated incorrectly or not been privy to full information.

I lean towards the later, but it is impossible to prove either.


How does Bolivia maintain its high economic growth and the highest direct foreign investment in South America, despite its economic policies? Nationalization of industries has always been anathema to foreign investment yet Bolivia now has the highest foreign direct investment despite Evo Morales' policies. Also not that it is always bad but in many countries like the Philippines, Korea, Peru and Chile, it was nationalization that stagnated their economies and it was privatization that saved them from stagnation and unlocked huge economic growth. In my simple understanding, this is because privatization removes the corruption inherent in nationalized industries as well as attract foreign investors that provide new capital. President Evo Morales' economic policies were the opposite of this. I even remember reading  that he had a confrontation with foreign investors threatening to pull out of Bolivia because of his policies. Yet somehow and someway he was not only able to keep foreign investment but he was also able to increase it. Bolivian growth also experience widespread growth. This is in widespread contrast with Venezuela where similar policies under Chavez and Maduro is currently causing an economic crisis. How is Evo Morales and Bolivia achieving this growth contrary to Neoliberal and free market capitalism teaching?

This is what I gathered during my research of this topic:

Evo Morales' policies are more centered on economy than they appear. See, for example, an article from May 2017, which praises them for being fiscaly conservative and austere, despite socialist and anti-imperialist rhetoric.

  Even though Evo Morales is a self-described socialist, and (in theory)
  one of the most left-wing of Latin America’s Bolivarian wave, it was a
  shock when the Bolivian president embraced fiscal discipline.

  While the Morales government nationalized several oil and gas
  companies, they simultaneously developed a good enough relationship
  with the private sector. Overall, the government has been surprisingly
  fiscally conservative.

  Institutions like the IMF and World Bank, of which Morales is a strong
  critic, have praised his austerity.

[...]

  Even if Morales rails against neoliberalism, he is not moving the
  country toward a Marxist revolution. The fact is that he understands
  the role of the market in improving people’s lives, especially
  indigenous groups, since they are the most involved in informal
  economic activities.

[...]

  In general, Morales has a better relationship with both business
  leaders and social movements than other governments in the region
  could dream of, proving he’s not as far left as many might think.

It should be mentioned, however, that the public spending increased over 750% from 2006 to 2017 (source). The crucial difference is that this effect was not solely dependent on the price of oil, as in case of Venezuela, and the budget was more balanced (Venezuela deficit grew up to nearly 20% of GDP in 2014, prior to drop in oil prices), but with other factors, like:

investments in increase in production from natural gas (hydrocarbon gas, polyethylene),
social bonds,
strengthening internal demand (increase in internal consumption).

On the other hand, Bolivia's growth of GDP is not that signifficant. In fact, the four quarters average of GDP growth does not exeede 2,5% (it dropped below 0% after 2015) (source). Bolivia's economy is much smaller than Peru and Chile (according to CIA World Factbook, Bolivia GDP is about 83 bln USD, while Peru GDP is 424 bln USD, Chile is 452 bln USD), so there is some kind of 'base effect' as regards measuring the GDP growth in relative values

All in all, the last ten years were preety good for the global economy. In the age of low interest rates the capital was looking for developing countries like Bolivia to invest in. The real test for the Bolivia economy will come, when the bull market ends.


How is it economically responsible to destroy proprty which has value? precursor: bitcoin.stackexchange.com/q/1851

How can it be economically responsible to destroy property which has value?

If a property is destroyed (which is the right of the property holder in most cases, I do not dispute that) then, the holder robs themselves of the economic benefit of otherwise disposing of the property which has value and that they no longer want, rob the economy also of that passed on benefit or, at least their heirs and the future economy are robbed of the benefit.

How can this be economically responsible dominion over property?

I take it that under most jurisdictions a company would be prevented from doing the same as it is not in the best interests of the company, a principle which the directors must uphold.

I wish to gain an economic view of flaw/benefit this practice.

Can this even be justified in such extreme circumstance as; I possess the only ten copy Picasso's, they are validated and dated and, there is no surviving original. I destroy nine of the ten copies.

The general answer would be that it is wasteful and selfish to destroy assets with value. I'm referring to assets as something you own, as property can be confused with land or real estate properties.
Still, I tried to list a few motives for destruction of assets
Responsible destruction
The only cases that come to mind as "responsible" destruction of assets, are when the assets in cause can harm others. Disarmament is a good example here: arms have value, but its destruction reduces the potential arm they can cause.
Destruction for personal gain
The case you provided goes more in the direction on "in which cases can you destroy value for self gain". The Art example you provide is a good one: increasing the scarcity could be economically profitable, when one is sure that the increase in value for the remaining asset is larger than the loss of value from the destroyed asset. If you consider fraud, burning your own house or car for claiming insurance is another example.
Irrational destruction
As many referred, you need to consider that humans don't always act "rationally", and in times of frustration and desperation people feel like destroying stuff. An historical example from the US: In the great depression in 1929, farmers were destroying their own production as the price of crops was below the cost of producing it. At the same time there was hunger around the whole US (source).
Creative destruction
As you tagged this question as reference-request, I believe that you might be interested to read the Wikipedia article on creative destruction, a term coined by Schumpeter, described as

The process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

Although this doesn't answer your question per se, is the only reference I could think of on the topic of "destruction".


Papers on Dutch Disease I am looking for papers on Dutch disease. Especially interested in Venezuela, UK, Colombia, Norway.
Thank you in advance.

A couple of suggestions:

Acosta, P.A., Lartey, E.K.K. & Mandelman, F.S. (2009): Remittances and the Dutch Disease
Bresser-Pereita, L.C. (2008): The Dutch Disease and its neutralization: a Ricardian approach
Ismail, K. (2010): The Structural Manifestation of the 'Dutch Disease’: The Case of Oil Exporting Countries
Larsen, E.R. (2006): Escaping the Resource Curse and the Dutch Disease?
When and Why Norway Caught Up with and Forged Ahead of Its Neighbors
Matsen, E. & Torvik, R. (2005): Optimal Dutch disease
Roemer, M. (2015): Dutch Disease in developing countries: swallowing bitter medicine in The Primary Sector in Economic Development (Routledge Revivals): Proceedings of the Seventh Arne Ryde Symposium


Explaining mixed strategies for one-shot games In the classic introduction to non-cooperative game theory, the mixed strategy for a player is taught as a distribution over strategy space for the player. The distribution essentially gives us the probabilities (say, discrete strategy set) with which a player should play the strategies in a Nash equilibrium.

However probabilities carry the notion of being frequencies and these essentially mean the long-run fraction of games in which the player should play the strategy. However the setting is a one-shot game and this is a contradiction.

How do we resolve the contradiction when explaining what a mixed strategy is?

Ariel Rubinstein tends to be insightful regarding these kinds of questions.

He addresses the interpretation of mixed strategies in section 3 of this paper.

A few possible interpretations aside from deliberate randomization:

Purification: A mixed strategy is a plan of action based on information not specified in the model.
A fictitious long run story.
Population averages, so imagine the player's being pulled from some population distribution where different types play different pure strategies. The  population distribution is the mixed strategy distribution.

An interesting quote regarding player $i$'s mixed strategy reflecting uncertainty among $-i$'s regarding what $i$ will do:

  Mixed strategy can alternatively be viewed as the belief held by all other
  players concerning a player's actions. A mixed strategy equilibrium is then an
  n-tuple of common knowledge expectations, which has the property that all the
  actions to which a strictly positive probability is assigned are optimal, given the
  beliefs. A player's behavior may be perceived by all the other players as
  the outcome of a random device even though this is not the case. Adopting this
  interpretation requires the reassessment of much of applied game theory. In
  particular, it implies that an equilibrium does not lead to a prediction (statistical
  or otherwise) of the players' behavior. Any player i's action which is a best
  response given his expectation about the other players' behavior (the other
  n - 1 strategies) is consistent as a prediction for i's action (this might include
  actions which are outside the support of the mixed strategy). This renders
  meaningless any comparative statics or welfare analysis of the mixed strategy
  equilibrium and brings into question the enormous economic literature which
  utilizes mixed strategy equilibrium.


Paternalistic Government policies A consumer with income $m$ has preferences $U(x , y) = x^a y^{1-a} $ where a is between 0 and 1. A paternalistic Government wants to regulate the choices of the consumer to maximize it's own welfare function: $w(x,y) = \min(x,y)$ . The market prices are $p_x$ and $p_y$.

A. Suppose the government can impose a ceiling on the consumption of either good. Under what parameter condition is it necessary to place a ceiling on good $x$?
B. Suppose, instead, government provides a per unit subsidy on good $x$ and charge a lump sum tax $t$. Derive Marshallian demand for any $(s,t)$.
C. A policy $(s,t)$ is budget balanced if total subsidy paid equal tax. Derive relationship between $s$ and $t$ that must be satisfied by any budget balanced policy.
D. From the government's perspective, find optimum s and t values subject to a balanced budget.

Here's how I tried it:
Part A:
Using optimisation methods, from consumer perspective:
$$ X^*= (x^*,y^*) = \left( \frac{ am}{ p_x} , \frac{(1-a)m}{p_y} \right) $$

However, Government's welfare is maximised at :
$$ X^g= (x^g,y^g) = \left( \frac{ m}{ p_x + p_y} , \frac{m}{p_x + p_y} \right) $$

Then, I considered two cases:
$$ 1. X^* > X^g $$
$$  2. X^* < X^g $$

In the first case, ceiling on good 2 would be effective whereas in second case, ceiling on 1 would be effective, the ceiling being the optimal quantity from government's perspective. The parameter condition for second case,by comparing the quantities of good , was:

$$ \frac{p_y}{p_x} > \frac{1}{a} -1$$

Part B:
Simple optimisation problem:

$$ X^*= (x^*,y^*) = \left( \frac{ a(m-t)}{ p_x - s} , \frac{(1-a)(m-t)}{p_y} \right) $$

Part C:
Putting $sx^* = t$ I get
          $$s = \frac{p_x t}{a(m-t)+ t}$$
Part D:
I am not sure if the method I have used is correct or not.

Government's welfare is maximised at :
$$ X^g= (x^g,y^g) = \left( \frac{ m-t}{ p_x + p_y-s} , \frac{m-t}{p_x + p_y-s} \right) $$

Also,since,budget is balanced, therefore,
  $$ s*\frac{ m-t}{ p_x + p_y-s}= t $$

Now putting the s and t relationship from c part in the above balanced budget identity, I got

$$ t^* = \frac {m(p_x(1-a) -ap_y)}{(p_x +p_y)(1-a)} $$

$$ s^* = p_x - \frac{a p_y}{1-a} $$

Can someone please have a look at my solution and see if I have done it correctly?

It looks right to me. There's an alternative (but equivalent) way to solve part D: we know that the consumer's choice will satisfy

$$ x^* =  \frac{ a(m-t)}{ p_x - s} ,\  y^*= \frac{(1-a)(m-t)}{p_y},  $$
or, with a balanced budget,
$$ x^* =  \frac{ a(m-sx^*)}{ p_x - s},\ y^* = \frac{(1-a)(m-sx^*)}{p_y}.$$

The government wants to maximize $\min\{x,y\}$, which is achieved when $x=y$. Solving
$$ x^*=y^*\iff \frac{ a(m-sx^*)}{ p_x - s}= \frac{(1-a)(m-sx^*)}{p_y}$$

for $s$ yields

$$ s^* = p_x - \frac{a p_y}{1-a}. $$


How do tech giants manage turnover costs? Lately I was struck by different studies concluding median job tenure at Google, Facebook, Amazon, Microsoft and Apple is 1 to 2 years, very low compared to the Bureau of labor statistics which is a little over 4 years average job tenure.

Sources:
DeepTalent
Payscale
Paysa

Turnover is uniformly described in literature as costly and avoidable. Given the fact they have near unlimited power for generous policies, that they let turnover get this high comes as surprising, possibly is a result of a cost calculation.

Is tech giants turnover cheap or unavoidable ? How do they manage turnover costs, generally speaking ?

Companies like Google and FB are talent focused. Turnover is high for a few reasons:
 1). Because the employees tend to be VERY good at what they do, thus their opportunities are vast; and people tend to gravitate towards who pays the most.
 2). Stress.
 3). Contracts. Many employees in these big firms tend to only have short term contracts for specific projects.
 4). These companies demand some of the best talent and work, and if an employee isn't reaching par consistently, no reason to keep them.
I'm sure there are more reasons, but those are researchable. =-)

Hope this helps.


Geometric intuition behind the point where the indifference curve meets the budget line So, this isn't to solve any kind of problem, but rather about the intuition behind the concept. I was wondering if at the optimal point where the indifference curve is tangent to the budget line and utility is maximized, at say, some point A. If you were to draw a vertical line from A down to the horizontal axis, and then draw a horizontal line from A to the vertical axis, would the resulting rectangle have a larger area than any other rectangle created by the other points on the curve? Kind of like the intuition behind least squares regression, but trying to maximize area? Thanks in advance for any help.

No. This is not in general true.
Maximizing the rectangle formed in the described manner would maximize the product $x_1 \times x_2$. In the special case where your utility function takes the form $u(x_1,x_2)=x_1x_2$, utility maximizing implies you pick a point on your budget constraint where the rectangle you described is maximized.
Suppose however, that instead your utility function is given by $v(x_1,x_2)=x_1^{1/3}x_2^{2/3}$ And suppose you are currently maximizing $x_1 \times x_2$ on your budget constraint. Suppose that $p_1=p_2=1$, then maximizing $x_1 \times x_2$ implies $x_1^*=x_2^*$. However maximizing $v$ with these prices gives: $x_1^*=\frac{1}{2}x_2^*$. Thus not maximizing the rectangle subject to your constraint, but still defining a point of tangency between the indifference curve and budget constraint.


Why the total value of the whole economy is constantly appreciating? Take S&P for example. In the long run it just keeps climbing. Same for the market as a whole. Why would this happen? Why the market keeps going up (in the long term) all the time?

(source)

Roughly, people produce "stuff" by spending their time working (labour) and by employing machinery/tools/land/etc. (capital).

If you have more workers or more machinery then it should not come as a surprise that more goods and services get produced.

But this is only part of the story. Even if we divide by the number of people to get the size of the economy per-capita, we still find growth:

So we clearly can't fully attribute growth to an increase in the population of workers.

For some time in the early 19th century, economists thought that growth was due to an increase in the use of machinery during the industrial revolution. If each worker has more tools—went the reasoning—then each worker can produce more and per-capita output will increase. But in 1957, Robert Solow found that only 12.5% of US growth in the first half of the 20th century was due to an increase in the capital / labour ratio. That still leaves 87.5% of growth unexplained.

If growth is not due to an increase in the availability of labour and capital, then it must be driven by the existing capital and labour becoming more productive. Why might that happen?

Education levels increase over time so that an average worker in 2000 produces more value than did an averager worker in 1900. Indeed, in 1900 the average worker was a farm hand or low-level industrial worker who produced a few thousand dollars worth of goods each year. Now, the average worker is a skilled industrial worker or office worker who produces good or services worth tens of thousands of dollars per-year.
Similarly, technological advancement makes tools and machinery more productive over time. For example, a \$200 modern computer is several orders of magnitude more powerful than a \$1million computer was in 1970. That means that we can now produce anything created by (or with the aid of) a computer in quantities many orders of magnitude larger than was possible 40 years ago.

So, in sum, more skilled workers who have access to better tools produce more stuff. Since a country's GDP is just the value of the stuff it produces in a year, education and technology cause GDP to increase over time.


Sequential game equilibrium strategy question The question asks for player B's equilibrium strategy, hence shouldn't player B choose the strategy that gives the highest payoff after player A's move? Why does player B choose 4 over 5 and 6 over 8 when he should choose the one with the highest payoff? I don't get why the answer should be B in this case...

I think the question has a typo. Whoever wrote it was trying to make you think about the fact that a, c and d are not even properly defined strategies for player B. This is because a strategy must specify what player B would do in all possibly scenarios he might face.

However, the typo comes from the fact that b is not part of a NE. If the first payoff instead of being (3,5) it was (5,3) then b will be an equilibrium strategy for B.

Your intuition is partially right, for it to be an NE strategy it had to choose the highest payoffs on the path of play. If it was a SPNE it would have to choose the highest payoffs in all subgames, not only the ones that are reached in equilibrium.


How could monetary policy be affected if cash "gifts" to consumers were more frequently used? A few years ago in the US, everyone who filed taxes received a check for $1000.

If this method of inflation was logistically more feasible, how could this be used in monetary policy, and what existing monetary controls would it affect?

This is only inflationary if the monetary authority monetizes the borrowing. If the Treasury borrows $1000 on the open market by issuing a bond and sends the money to a consumer, no money has been created— it has simply been borrowed from one person and given to another. However, if the monetary authority purchases that bond (swapping base money for the bond), then it is indeed inflationary, as the amount of money now in circulation has increased.

As far as its role in monetary policy— the decision of whether to monetize fiscal authority borrowing is part of standard monetary policy. The phrase you'll often hear is, "the monetary authority moves last," which reflects the fact that the monetary authority can either accommodate spending by monetizing it, increasing inflation, or do nothing, which has the effect of increasing interest rates on government borrowing.


What are the logistic implications of using bottle caps as currency? I have recently been playing the game of fallout 4 and I was struck by an interesting spec of the game.

People in the nuclear post-apocalyptic world use bottle caps as barter money.

Inquiring a little, it is said that it has a certain logic to use them, since they resist more or less well the inclemencies of the climate.

They are difficult to duplicate without heavy machinery, which is scarce in the post-nuclear world.

The banks of the world are supposed to base their value on purified water and that in a certain way, if you came to a bank with 100 bottle caps you could come out with a bucket of water.

(I do not know if this means that the banks function at the same time as exchange houses and water purification and distribution facilities)

All this sounds good and in a way with some logic, but reading this only left me more doubts than answers.

How would inflation work in such an economic environment?

How can people buy expensive objects like houses or maybe vehicles, (they cost at least 10000)?

How would a bank know if another has launched a new version of purple coin that is worth more than any other single bottle cap?

If a new bottle cap of unique color appears, how to corroborate that a bank in another village supports its value? (that is, that is not false).

(Sorry about my tags I could not find some tags for a "what if" scenarios).

How would inflation work in such an economic environment?

Supposedly, whenever a wastelander opens a bottle of Nuka-Cola, "new money" is injected into the world, so that would theoretically drive up inflation, but very minimally. Also, information asymmetry would certainly cause prices to fluctuate differently in different regions of the game. I think we need to assume that banks do not communicate with each other, at least not regularly.

  How can people buy expensive objects like houses or maybe vehicles, (they cost at least 10000)?

While caps are definitely accepted as a form of currency in the Fallout world, many would opt to convert their caps to a larger capital asset that is easier to carry around. Then, the purchaser can use that to barter. It's not ideal to carry tens of thousands of caps, as you're probably implying.

  How would a bank know if another has launched a new version of purple coin that is worth more than any other single bottle cap?

The bank would probably find out when someone tries to convert the new currency for purified water or whatever the good was. My guess is that the new currency would also be commodity-backed based on something else (stimpacks, perhaps?).

  If a new bottle cap of unique color appears, how to corroborate that a bank in another village supports its value? (that is, that is not false).

Not sure how this would work. Maybe show the bank the bottle which the cap was found on? Show that it was indeed Nuka-Cola branded. Then, the bank can take-it-or-leave-it. I'm only aware of regular Nuka-Cola and Nuka-Cola quantum, and I think they have the same cap style.


Is Bill Gates wrong about supply demand curves? In a recent tweet (Aug 14th, 2018, reproduced below), Bill Gates said that supply demand curves don't work for software because the first unit costs a lot and every unit after that is free. Isn't this just modeled by a horizontal supply line?

At the time I was in college, this was basically how the global economy worked...

This chart assumes that the total cost of production increases as supply increases. When a car company makes a new vehicle, the 10th car costs the same to manufacture as the 1000th.
But software doesn’t work like this. Microsoft might spend a lot of money to develop the first unit of a new program, but every unit after that is virtually free to produce.
Unlike the goods that powered our economy in the past, software is an intangible asset -- “something you can’t touch.” And it’s not the only example: data, insurance, e-books, even movies work in similar ways.
The portion of the global economy that doesn’t fit the old model just keeps getting larger. But the rules that govern the economy haven’t kept up. This is one of the biggest trends in the global economy that isn’t getting enough attention.
If you want to understand why this matters, I highly recommend the new book “Capitalism Without Capital” by @haskelecon and @stianwestlake. Here’s my review: link.

No, Bill Gates is correct here. The simple econ 101 cross model is based on a separation of the supply and demand side. Firms are price takers, they assume they can sell as much as they want at the prevailing price and their output decisions have no impact on the price. If firms are not price takers, they have to explicitly take into account how the demand side reacts since this determines the impact on prices. Now with huge returns to scale, price taking is usually not a sensible assumption and therefore the econ 101 cross an inappropriate model.


Why do non-binding price ceilings have no effect? My question seems trivial but I have a particular issue I don't understand. If there's a price ceiling above the price equilibrium, the customers can still use the ceiling as leverage when negotiating, and thus negotiate a lower price. Then the ceiling does have an effect.

You are completely right. If in your setup negotiating is an important feature of how prices are set, then even a non-binding price ceiling matters. Search models in labor economics became popular for showing a feature like this. Not with a price ceiling, but with a price floor. In particular when we study minimum wages. In the labor market, the assumption that wages are negotiated is reasonable and then the level of minimum wage affects equilibrium even if it is non-binding.

The conclusion that a non-binding price ceiling has no effect on equilibrium stems from the assumption that markets are competitive. Prices are not negotiated, they are simply posted and people can either buy or not buy. In that case you should not expect a non-binding price ceiling to have any effect.


Do there exist 'comparative statics' for fixed points? I have a basic question about comparative statics. In Wikipedia, it is mentioned that:

    As a study of statics it compares two different equilibrium states...

What exactly is an equilibrium? I have a fixed point in my model. This does not arise from a strategic utility maximisation. I start from an initial point, iterate repeatedly in a bounded space, and I can prove I converge to a given point. Now I would like to see how sensitive my final fixed point is to my initial starting point, which was exogenous.

Does this classify under comparative statics? Or is it just a sensitivity analysis? I am confused because the usual machinery of comparative statics, that is, the implicit function theorem, does not hold in my setting.

"Comparative statics" may refer to two closely related but not identical exercises:

a) Regarding a specific equilibrium point, we examine how the properties, associated values etc of it change as we vary the value of an exogenous parameter.

b) But also, we can put under "comparative statics" the case where the model has multiple equilibria. Inherently, when more than one equilibria exist, it means that they are dependent on the value of (or inter-relation between) some of the model parameters. Assessing this situation, i.e. contrasting the two solutions, the sets of parameter values for which we obtain the one equilibrium or the other ("values" do not necessarily mean numerical ones -they may be bounds expressed in terms of other parameters etc), understanding the economic essence behind the differences, is a comparison of two static situations.

So @Oliv comment below the question is valid, indeed, the initial condition structurally is just one more exogenous parameter of the model.

That said, in most cases, dependence (or not) on initial conditions (or "history-dependence" more generally) usually falls under stability analysis:

if a fixed point is globally asymptotically stable, it means that there is no dependence on the initial value, whatever it is (in the feasible space).
if a fixed point is asymptotically stable, it means that it has a basin of attraction, but which may be only a subset of the feasible space.

Proving global asymptotic stability is usually difficult (in most cases, one has to find an associated Liapunov function), and it becomes harder the more non-linear is the differential/difference equation/system under study. So computationally showing that it is indeed globally asymptotically stable, is useful.


Logistic regression: Equation for marginal effect at the mean I am estimating the following logistic regression (binomial family) by maximum likelihood:

$$ \ln\left(\frac{Y}{1-Y}\right) = \beta_{0} + \beta_{1}D + \beta_{2}X + \epsilon$$

where D is a dummy. I am interested in the marginal effect at the mean of $D$, i.e. $\beta_{1}$ is of interest. What does the marginal effect at the mean look like in equation form? Would it be:

$$ \frac{1}{\bar{Y}} \left(\frac{e^{\beta_{0}+\beta_{1}+\beta_{2}\bar{X}}}{1+e^{\beta_{0}+\beta_{1}+\beta_{2}\bar{X}}} - \frac{e^{\beta_{0}+\beta_{2}\bar{X}}}{1+e^{\beta_{0}+\beta_{2}\bar{X}}}\right) $$

or

$$\left(\frac{e^{\beta_{0}+\beta_{1}+\beta_{2}\bar{X}}}{1+e^{\beta_{0}+\beta_{1}+\beta_{2}\bar{X}}} - \frac{e^{\beta_{0}+\beta_{2}\bar{X}}}{1+e^{\beta_{0}+\beta_{2}\bar{X}}}\right) $$

My intuition is that Y corresponds to the probability of the event occurring, and the e/(1+e) terms also correspond to the probability of the event occurring, but at specific values of Y. What would the rationale for dividing by $\bar{Y}$ be? Thank you.

A

OP's second expression corresponds to
$$\Delta p = P(Y=1|D=1,X=\bar{X}) - P(Y=1|D=0,X=\bar{X}),$$
which is
$$
\Delta p = \Lambda(\beta_0 + \beta_1 + \beta_2 \bar{X}) - \Lambda(\beta_0 + \beta_2 \bar{X}),
$$
where $\Lambda(z) = e^z/(1+e^z)$.

Rationale for dividing by p

OP's first expression corresponds to $(\Delta p)/p$, where $p$ is the proportion of 1's in the sample $P(Y=1)$. This expresses the MEA $\Delta p$ as a ratio to $p$. This is informative as it lets us have better ideas on how large $\Delta p$ is. (For example, if we just have $\Delta p=0.01$, we don't know how large it is. But if $p=0.02$ is also given, then we know $\Delta p=0.01$ is a quite large effect as it is 50% of $p$.) One might call it "MEA as a ratio to Y-bar". Anyway, MEA usually refers to $\Delta p$, but if you mean $(\Delta p)/p$ by it, it should be OK as long as you explain it.

B

The MEA associated with $D$ can also mean $\dot{p}=\partial P(Y=1|D=\bar{D},X=\bar{X})/\partial \bar{D}$. As
$$P(Y=1|D=\bar{D},X=\bar{X}) = \Lambda(\beta_0+\beta_1 \bar{D} + \beta_2 \bar{X})$$
for your logit model, we have
$$\dot{p} = \frac{\partial \Lambda(\beta_0+\beta_1 \bar{D} + \beta_2 \bar{X})}{\partial \bar{D}} = \beta_1 \lambda(\beta_0 + \beta_1 \bar{D} + \beta_2 \bar{X}),$$
where $\lambda(z) = \Lambda'(z) = e^z / (1+e^z)^2$. Note that $D$ is binary but $\bar{D}$ is continuous so differentiation with respect to $\bar{D}$ makes sense. $\Delta p$ and $\dot{p}$ have different interpretations. I personally think $\Delta p$ in Part A is easier to understand as the notion of $P(Y=1|D=\bar{D}, X=\bar{X})$ is a bit awkward.


If house prices appreciate, why do developers sell them? In many parts of the world, people buy a house expecting its value to increase over time.

But if is widely believed that the building's value will increase, what incentive is there for the developer to sell the property?  Why not hold onto the property, and sell it later at a higher price?

They are different businesses.

Developers make more money developing than landlording. Some do both. But they are different businesses entirely. Also, there is a limited supply of capital and carrying that capital has a cost.

For example. Let's say Bob the Builder borrows $10M to develop a project. The bank lends on the development. Not the completed project. That requires a different type of loan structure, depending on the use: residential vs. commercial, owner occupied residential vs. residential rental, etc.

After the project is completed, Bob will usually look to sell. If he holds the property as a rental or a commercial, he then switches hats and becomes a landlord. And the asset will require refinancing, as above described. Some builders choose this route. But most do not. As their skills, expertise, equipment, personnel, interests, etc. are all used best and most profitably building and developing.


Production set is closed and non-empty? What does it mean that a production set is closed and non-empty? And why is it important?

It is just mathematical assumptions in calculus that makes the mathematical analysis has real economic meaning.  Not of great importance unless you want to look deeply into the derivation of results.

You may read this paper: https://web.stanford.edu/~jdlevin/Econ%20202/Producer%20Theory.pdf

  "Throughout our analysis, we will make the innocent technical assumptions that
  Y is non-empty (so as to have something to study!) and closed (to make it more
  likely that optimal production plans exist)."

Hope this helps.


What is the definition of Eurodollar? What are Eurodollars? How are they distinct from plain old dollars? Asking as an interested but non-specialist outsider, though I do know what demand deposits are and am familiar with the conversation regarding fractional reserve banking.

The definition of Eurodollar is (see Investopedia):

The term eurodollar refers to U.S. dollar-denominated deposits at foreign banks or at the overseas branches of American banks.

They are distinct from regular dollars because they are not held within the US, and as a consequence eurodollars are generally not subject to regulations by the Fed (e.g. reserve requirements) and other US banking regulations (like the federal deposit insurance). Since historically in the past most of the dollar denominated deposits were held in Europe (this was to considerable  extent due to the Marshall plan which led to relatively high circulation of dollars in the Europe) they became known as "eurodollars."
If you want to learn more about history of eurodollars and the mechanisms behind them then you can have look at Schenk(1998): The origins of the Eurodollar market in London, or Einzig & Quinn (1964): The Euro-dollar system: practice and theory of international interest rates.


Replicate Romer and Romer (2004) results I am trying to replicate figure 2 from Romer and Romer's (2004) paper on monetary shocks (http://eml.berkeley.edu/~dromer/papers/AER_September04.pdf). Essentially, having generated a series for monetary shocks, they run the following ADL regression:

$\Delta y_t=a_0+\sum_{k=1}^{11}a_kD_{kt}+\sum_{i=1}^{24}b_i \Delta y_{t-1}+\sum_{j=1}^{36}c_jS_{t-j}+e_t$

where $y$ is the log of industrial production, $S$ are monetary shocks and the $D_k$'s are monthly dummies. The say that the "estimated response of log output after one month is $c_1$, the coefficient on the first lag of $S$; the estimated response of log output after two months is $c_1+(c_2+b_1c_1)$; and so on."

My question is: how do I iterate this forward to produce figure 2, i.e., what is the formula for the response after three months etc?

Sorry for any confusion in my previous answer but there are 2 steps to this process 1) tracing out the impact on the $\Delta$y's and the lags of the shocks and then 2) accumulating the shocks to get the cumulative response (Note that my original answer tried to do this simultaneously). So in the first step (ignoring the intercept, the dummies and the residual terms) we get

$\tilde{\Delta y_1}$ : $c_1$

$\tilde{\Delta y_2}$: $c_2 + b_1c_1 = c_2 + b_1\tilde{\Delta y_1} $

$\tilde{\Delta y_3}$ : $c_3+ b_1(c_2 + b_1c_1) + b_2c1 = c_3 + b_1\tilde{\Delta y_2} + b_2 \tilde{\Delta y_1}$

$\tilde{\Delta y_4}$ : $c_4 + b_1\tilde{\Delta y_3} + b_2 \tilde{\Delta y_2} + b_3 \tilde{\Delta y_1}$

Can you see the pattern? So the general rule is

$\tilde{\Delta y_i}$= $c_{i}+\sum_{r=0}^{i-1}b_{r}\tilde{\Delta y_{i-r}}$

When $\tilde{\Delta y_0}=c_0=b_0=0$ and where $c_i=0$ for $i>36$ and $b_r=0$ for $r>24$.

Now the next step to is to accumulate the shocks so that the IRF value for a given month is

$IRF_i = \sum^i_{j=0} \tilde{\Delta y_j}$

This should give you the results you are looking for. Technically if you were to trace out the exact values of the regression that you specified then you would also need to include the dummy variables but from the sounds of it they only care about tracing out the effects of the monetary shocks.


Why would a low wage country affect negatively the high wages of a country with trading? I was reading a book that asked this question. "Does trade with low-wage countries depress wage rates in high-wage countries?"Why did they mention specifically low-high wages countries?

They mention low-high wages countries due to the following common narrative on trade and inequality:

Globalization allowed low-wage countries to export more labor intensive goods to high-wage countries.
Less skilled workers in those high-wage countries faced import competition and lost their jobs.
Bottoming out of the middle class and rise in inequality.
Leading to a backlash against globalization.

This common narrative suggests development of low-wage countries has come at the expense of low skilled workers in high-wage countries. This narrative has been investigated in many papers and surely in your book!


Definition of "Structural Equation" In Economics The definition of term "Structural Equation" in Economics as defined in  Introductory Econometrics: A Modern. Approach, Fifth Edition. Jeffrey M. Wooldridge. (page 859)

  Structural Equation: An equation derived from economic theory or from less formal economic reasoning

However upon reading earlier works in Studies in Econometric Method I find that structural equations are far from informal.

In this passage of chapter 3 (page 86 in the PDF) by Herbert Simon, he makes a distinction between structural and non-structural equations which I don't fully understand.

How does identifiablity define whether an equation is structural or not? does this mean structural equations assume causality?

First, structural equations assume causality. The following quotation is from Cameron and Trivedi's textbook Microeconometrics: Methods and Applications:

  At one end of the spectrum can be found very highly structured models,
  derived from detailed specification of the underlying economic
  behavior, that analyze causal (behavioral) or structural relationships
  for interdependent microeconomic variables. At the other end are
  reduced form studies that aim to uncover correlations and associations
  among variables, without necessarily relying on a detailed
  specification of all relevant interdependencies.

Second, identifiability does not exactly define whether an equation is structural or not. I would rather say that identifiability is the reason why we are forced to work with nonstructural equations. Parameters in structural equations cannot be identified most of the time. What can be estimated instead are reduced-form (or nonstructural) parameters. For instance, take the following simulatenous equation model
\begin{align*}
 x_i =\alpha_0 y_i +\alpha_1 z_i +\epsilon_i\\
 y_i = \beta_0 x_i+ \beta_1 z_i +\mu_i
\end{align*}
with two endogenous variables $x$ and $y$, an exogenous variable $z$, and $\epsilon$ and $\mu$ as error terms (suppose also $\alpha_0\beta_0\neq 1$).
These two equations are structural. They may correspond to demand and supply equations of a given good, with $x$ the quantity and $y$ the price for instance. Without more assumptions, the coefficients are not identified and cannot be estimated. We can however estimate the parameters $\zeta$ and $\gamma$ of the reduced-form equation:
\begin{align*}
 x_i = \zeta z_i + e_i\\
 y_i = \gamma z_i  +u_i
\end{align*}
with $\zeta=\frac{\alpha_1+\alpha_0\beta_1}{1-\alpha_0\beta_0}$ and $\gamma=\frac{\beta_1+\alpha_1\beta_0}{1-\alpha_0\beta_0}$.

In the second paragraph of the extract, the point is that identifiability (of the structural equations) is not necessary "as long as the structure remains unaltered". For instance, you can well predict the values of $x$ given the knowledge of $z$ and a good estimate of the nonstructural parameters $\zeta$. The last sentence illustrates the fact that, in our case,  i) we do not need to know the causal structure to make a good prediction, ii) it does not help to distinguish between structural and nonstructural equations, and iii) we do not care about identifiability of the structural model.


Are there any effective research efforts into combating wealth inequality? There seems to be no "correct" answer in combating wealth inequality; however, we should attempt to use different methods to combat inequality in cities, then counties, then states, then countries.

However, Politics is a huge barrier. Politicians are afraid to make any drastic efforts.

I don't want to sound opinionated so I won't ask, "What are the best ways to combat wealth inequality". Instead, I will ask, "Are there any effective research efforts into combating wealth inequality"?

I also made a similar post on wealth distribution (for you to see) but the question was deleted for being too broad.

There is a lot of research into this area. You might want to look into the papers of Angus Deaton, Thomas Picketty, Gabriel Zucman, Emanuel Saez or Branko Milanovic for starters.

Especially, Emanuel Saez directly focuses on optimal taxation under different social preferences - including utilitarianism and ralwsianism where reducing inequality matters.

However, most research is on income inequality because wealth inequality is incredibly difficult to measure or track.

You might want to start with this paper and papers cited therein:

  Piketty, T., Saez, E., & Zucman, G. (2013). Rethinking capital and wealth taxation. Arbeitspapier, Paris School of Economics, UC Berkeley und London School of Economics.

PS: Also this is tangent to your question but I would not be so hard on politicians - even assuming that they are completely enlightened social planners in many completely valid moral systems inequality does not matter. Reducing inequality does not necessary means reducing poverty if we measure it in absolute sense and not relative.

This is also a main reason why there is no single agreement on the issue. Combating inequality is not just economic question but question for moral philosophers as well and right answer will vary depending on your personal values and morals


Ok to normalize GDP change by population change? Does it make sense to normalize change in real GDP by the contemporaneous change in population?

I'm interested in this calculation for the following reason. Suppose real GDP increases. I'd like to know what was the population increase that corresponded to this increase. I could then compare two distinct geographic regions, specifically two states in USA during a given time period. If one state increased real GDP by A dollars per person (as calculated above) while another increased it by B dollars per person, then I could declare that the first state was, in a sense, more productive or more efficient.

If g was the growth rate in real GDP and r was the population growth rate, I could alternatively calculate (1+g)/(1+r) and compare states according to this measure. A comparison based on this ratio is essentially the same as a comparison based on g-r: Just perform the algebraic division and subtract a 1 to get g-r. However, I feel that g-r doesn't have the same intuitive appeal as the method described in the previous paragraph. A numerical calculation on actual data shows that the two measures have a low correlation (of 0.2) ....

The method in the first paragraph produces numbers that are on the same footing as GDP per capita and moreover, these calculations can be compared to GDP per capita for an intuitive understanding.

For example, during 2010-2014, the change in real GDP divided by the change in population was 108,000 dollars in USA whereas 2014 GDP per capita was 49,000 dollars. For Pennsyvlania, the calculation resulted in 320,000 dollars versus GDP per capita of 47,000 dollars. For California it produced 114,000 dollars vs GDP per capita of 54,000 dollars.

Here's how I think about it. In 2010, USA real GDP per capita was 45,000 dollars or thereabouts. From 2010-2014, each person that was added to the population corresponded to a real GDP increase of 108,000 dollars.

To get fancy, if there hadn't been any population increase, real GDP might have grown by a certain amount. If we could estimate that amount, we could subtract it from the aforementioned 108,000 dollars and then say with more confidence that each person that was added to the population "caused" real GDP to increase by that much.

By analogy, imagine a 100 men were laying bricks (GDP) on top of one another. Each man could lay 10 bricks per hour. Now, 3 younger, stronger men are added to the workforce who can lay bricks at the rate of 50 per hour. The calculation that I am proposing would produce a number analogous to 50 which could then be compared to the number 10 so as to distinguish between the previous stock of labor and the new stock.

If you'd like to replace population with employed population, that would be fine ... It's has a secondary role in my question.

I guess there might be some purpose to this but generally this is very different than $g-r$ and probably a bad idea.

It isn't the same people growing the population and growing GDP.  $\Delta GDP$  is the $\Delta$ (output of the existing population) + $\Delta$ (output of the new population). When you normalize by new population, you get

$\Delta$ (output per capita of the new population)
plus a nuisance term of

$\Delta$ (output of the existing population) / $\Delta$ population).

Unless incomes drive positive population changes this term is not going to behave much at all like $g-r$.


What is "depreciation" in economics? I have no background in Economics and I am just starting with it. I was reading about the basic terminologies like domestic output, income, and etc. Then, I encountered a term "depreciation" -- It was described with a "machinery" example of a car, like this:

"You purchase a car worth \$5000 with a shelf life of 10 years. It means the consumption rate of the car is $500 per year. This consumption rate is actually the "depreciation" rate. Thus if an output of an economy ignores consumption of its machine stocks, it is referred to as 'gross' concept"

Please answer with respect to this example, and explain what the example is saying.

Thank you.

Depreciation is the loss in value of something. Take the car example. When you buy the car, it is worth 5000 dollars. Your net worth equals the value of the car: 5000 dollars. If you needed to use the money, you could just re-sell the car and you'd get \$5,000 (in theory).

But what about the second year? You are technically still worth \$5,000. But if you try to sell the car, nobody would buy it after you used it for one full year at the same price: the car lost part of its value. In a perfect world, the car would lose \$500 because since you can use it for ten years max, and you used a tenth of that. Thus, the car would sell at \$4,500.

From then on, the same keeps happening: the car losses 10% of its value each year, until the tenth year when it becomes valueless (at least in this perfect world). This periodic fall in value is called depreciation.

When calculating the GDP, the government sums all the goods and services consumed in a given year regardless of its depreciation. If you purchased the car on January 1st, then the GDP increses by \$5,000. The government will most certainly publish the country's gdp by the end of the year. Although the car lost some of its value during that period, this is not taken into account in the GDP. If you took away the depreciation, then it would be the NDP (Net Domestic Product).

The depreciation is also known as "capital consumption" for a simple reason. Imagine that you want to have the same value (in cars) all your life. To achieve this, you would have to save \$500 each year to replace your car every 10 years.  So, you could say that each year, you consume \$500 worth in cars. This is obviously not true, but it is a way of simplifying it.


Why high levels of inflation doesn't leads to high levels of employment? According to the original Phillips curve $\pi=(\mu+z)-u$ there's a negative relation between inflation and unemployment.
That being said, if there were a really high level of inflation, then there would be plenty of employment, and this would be awesome for the economics agents. This would also mean that firms would be producing (so they must be selling a lot, so having a high demand) a lot, this would increase GDP, and therefore the quality of life of all of us.
However in real life, this doesn't seems to work like that, for example take Venezuela.
So what is the problem?
What happens?
Thank you in advance.

here are several reasons for that.
First, if we look beyond the simplified version Philips curve, to the more appropriate modern version of Phillips curve we discover that what matters is not just inflation but that inflation is higher than expected inflation. For example, following Romer Advanced Economics pp 261, the Phillips curve will look like:
$$\pi_t= \pi_t^e +\lambda (\ln Y_t -\ln \bar{Y}_t) + \epsilon^s$$
Where $\pi$ is the inflation, $\pi^e$ expected inflation, $Y$ output, $\bar{Y}$ natural level of output, and $\epsilon^S$ are supply shocks.
The expression above implies:
$$\pi_t- \pi_t^e = \lambda (\ln Y_t -\ln \bar{Y}_t) + \epsilon^s$$
The equation above implies that it’s not just inflation that increases output and thus  employment, but it is situation when inflation is higher than expected inflation. The intuition is that if people expect certain level of inflation they will advance make adjustments for that (for example unions may demand indexing wages to price level) and as a result you don’t get any of the short term positive benefits of inflation that come from decrease in real wages and increases in prices)
If people, expect 5% increase in inflation and inflation increases by 5% this will have no effect on employment. Usually in countries like Venezuela people expect the high inflation because it becomes a commonplace.
In addition, inflation does not just stimulate employment and output but also creates costs
A non-exhautive list includes:

increase in uncertainity and volatility. This holds exclusively for high levels of inflation since modest levels of inflation are not associated with increase in uncertainty and volatility. Higher uncertainity and volatility is generally bad for the economy as it leads to less investment and lower economic growth (see discussion in Mankiw Macroeconomics or Wilson (2006)).

next there are shoeleather costs of expected inflation. As explained in Mankiw Macroeconomic:

One cost is the distorting effect of the inflation tax on the amount of money people hold. As we have already discussed, a higher inflation rate leads to a higher nominal interest rate, which in turn leads to lower real money balances. If people hold lower money balances on average, they must make more frequent trips to the bank to withdraw money—for example, they might withdraw \$50 twice a week rather than \$100 once a week. The inconvenience of reducing money holding is metaphorically called the shoeleather cost of inflation, because walking to the bank more often causes one’s shoes to wear out more quickly

Of course, the above is written for undergraduates, it is not really the cost of new shoes that is biggest cost here, but opportunity cost of wasted time and general costs of adjusting to the inflation.

High inflation causes menu costs. These are costs firms incur to change prices (see Mankiw Macroeconomics).

High inflation tends to be more volatile and this complicates financial planning and distorts peoples intertemporal choices (again have look at Mankiw Macroeconomics).

The list above is not exclusive, the point is that high level of inflation has many costs associated with it. These costs increase disproportionally as inflation becomes higher, while at some point very high inflation won't even necessary have any short run benefits because the increase in uncertainty will depress economic activity more than the output get stimulated by the effect of short run effect of increase in prices
The way how you can think intuitively about this is that at unexpected and low levels of inflation the positive effects of inflation on employment and output dominates any possible negative effects.
However, at large levels of inflation the negative effects of inflation dominate and inflation has more costs for economy than benefits.


Statistical distribution of wages and wealth How are wages distributed globally? Wages do not follow a normal distribution, do they? Is wealth distributed in the same way or differently?

Globally, there is Lakner and Milanovik (2015)'s elephant graph:

Hellebrandt and Mauro (2015)

Thus, the two previous distributions look like bimodal log-normal distributions.

or CDFs, as in MacAskill's book Doing Good Better

Did not find something strictly related to wages. For most of people, income may be a good proxy of wages.


Can a risk-averse agent's Certainty Equivalent be lower than the lowest possible outcome of a gamble? Suppose there is an agent who faces the following gamble g:

50\$ with probability 1/3
100\$ with probability 1/3
150\$ with probability 1/3

Clearly, the E[g] = 100\$. Since agent is risk averse, we would expect that U(E[g]) < U(CE) , where CE is the certainty equivalent. Now, my question is, is it hypothetically possible that the agent's Certainty Equivalent of this gamble will be below 50\$, or is it necessarily true that it will be somewhere between 50\$ and 100\$?

"Since agent is risk averse, we would expect that $U(E[g]) < U(CE)$ ,
  where $CE$ is the certainty equivalent."

This is wrong. I presume the Expected Utility Property holds here, so, if we denote the gamble by $G$, a discrete uniform random variable taking three values according to the setup, we have

$$U(CE) \equiv \sum_{i=1}^3p_iU(g_i) = E[U(G)] < U[E(G)]$$

the inequality to the right due to Jensen's Inequality and the assumption that $U()$ is concave. This also gives us

$$ CE < E(G)$$

which should be intuitive: a risk-neutral person would demand $E(G)$, the expected value of the gamble, in order not to take it. A risk-averse person would require less, to leave the gamble.

Having cleared this, the OP asks: Is it possible that $CE < \min G$?

The answer is : No. Assume that the gamble outcomes are ordered, so $\min G = g_1$.

Ad absurdum, assume that $CE < g_1$ holds. Then we will have

$$U(CE) < U(g_1)$$

Using the definition of $CE$ we replace the left-hand side

$$\sum_{i=1}^3p_iU(g_i) < U(g_1) \implies p_2U(g_2) + p_3U(g_3) < (1-p_1) U(g_1)$$

$$\implies p_2U(g_2) + p_3U(g_3) < p_2U(g_1) + p_3U(g_1)$$

$$\implies p_2[U(g_2)-U(g_1)] + p_3[U(g_3)-U(g_1)] < 0$$

But this is impossible since $g_1 = \min\{g_1,g_2, g_3\}$ and so

$U(g_2)-U(g_1) >0$ and $U(g_3)-U(g_1) >0$.

So assuming $U(CE) < U(g_1)$ led us to an impossible situation, and therefore  it cannot hold.

Intuitively, the worst outcome of being in the gamble is to receive the minimum payoff -so for a rational agent, even if it is risk-averse, it would be irrational to accept less than the worst outcome, since then it would certainly do worse than being in the gamble. Note that "aversion to risk" does not mean "take away all risk at all costs".


Why a current account surplus is bond to lead to an appreciation of a currency? I have got some confusion in trying to explain why a trade surplus is going to lead to an increase in the exchange rate. The usual logic goes as follows.

Export X > Import M
Demand for the country's currency increase
Appreciation happens

What confuses me is step 2. Why the demand for the country's currency increase? I know that there is certainly a high demand for the country's currency because money is needed to buy its exports, but the demand is high does NOT mean the demand is INCREASING. Why can't the demand for the currency just stay high, but constant, so foreigners can get their needed money to buy exports?

We have the following cases:

1) No capital mobility:
If there is no capital mobility, the trade balance is necessarily zero in equilibrium i.e. exports equal imports. When there is a trade surplus, there is an excess of demand for domestic currency over supply of domestic currency. In equilibrium, this surplus must be eliminated to ensure that demand equals supply. So the exchange rate must appreciate, reducing exports and increasing imports for the domestic country until the trade balance is in equilibrium. It doesn't matter if the demand is increasing or not, any excess or deficit must be eliminated by a change in the exchange rate.

2) Capital mobility:
In this case, the Balance of Payments must be zero in equilibrium. This includes the current account(exports and imports) and the capital account (trade in assets with the foreign country). Here a trade surplus or deficit can exist as long as the capital inflows balance it out. If there is a deficit, there must be net capital inflows (borrowing from abroad) and vice versa.

Hope this helps.


EmpirIcal evidence on effects of price floors and ceilings In introductory microeconomics, when studying partial equilibrium, we are introduced to the idea that a price floor will cause excess supply and a price ceiling will cause excess demand.
How strong is the empirical evidence for these results?
I recently read this article: https://www.urban.org/urban-wire/strengths-and-weaknesses-new-study-seattles-minimum-wage-increases that discusses a paper that found that raising the minimum wage does cause labour sold to fall. It also focuses on the limitations of the paper's methodology while also remarking that the quality of the data used is extraordinarily high. It also comments that most of previous research find little evidence for a negative impact on labour sold.
What is the overall empirical consensus/ leaning in the empirical literature regarding price floors and ceilings? Are they found to be as inefficient as described in introductory textbooks? If not, do more advanced theoretical models take that into account?

There is different evidence for price controls in labor market and different evidence for price controls in general.
Minimum Wage
When it comes to minimum wages there is evidence that they do not cause as much unemployment as was thought in the past. According to the literature review by Neumark & Wascher (2006):

Our review indicates that there is a wide range of existing estimates and, accordingly,
a lack of consensus about the overall effects on low-wage employment of an increase in the minimum
wage. However, the oft-stated assertion that recent research fails to support the traditional view that
the minimum wage reduces the employment of low-wage workers is clearly incorrect. A sizable majority
of the studies surveyed in this monograph give a relatively consistent (although not always statistically
significant) indication of negative employment effects of minimum wages. In addition, among the
papers we view as providing the most credible evidence, almost all point to negative employment
effects, both for the United States as well as for many other countries.

However, at the same time there is evidence that at least some of the negative effects might be due to publication bias (see meta analysis of Doucouliagos and Stanley, 2009) so the problem might be even bit less severe than the above excerpt suggest.
Nonetheless, this is likely due to peculiarity of labor market imperfections. For example, there can be  significant quasi rents that usually go to employers due to their better bargaining position, which means that rising minimum wage would have no effect on employment up to the point that all quasi rents are assigned  the worker and only then it would start to have any employment impact. There are also further reasons for this, since your question is very broad I won't go into details but you can learn more in Borjas Labor Economics about these reasons.
In addition, there are also some further caveats. First,  US (where most of the studies on minimum wage come from) has one of the lowest minimum wages relative to average wages in the world, the employment effects are larger in countries with relatively high minimum wage to average wage ratio.  Second, it might have adverse effect on consumers, Peter Harasztosi and Lindner (2019) for example find that about  75% of effect of higher minimum wage in Hungary was passed onto consumers.
Despite of this it is fair to say that when it comes to minimum wage the effects are not as bad as it was originally thought and they can be even beneficial on net basis if set to appropriate level.
Other Price Controls
When it comes to price controls in general, for example on many goods and services markets the consensus still remains that they reduce overall welfare. There might be some exceptions, it is beyond the scope of economics stack exchange to provide literature review on every single price or category of prices there is, but generally speaking evidence shows that price controls either lead to lower quality of goods or scarcity.
For example, Davis and  Kilian (2011) estimate that price controls in energy prices in US had allocative cost on averaged $3.6 billion annually. This, is just one example of course but generally speaking evidence points relatively large adverse effects in most markets   (e.g. see discussions in Finley and Holt (2019); Glaeser, Edward, and Luttmer (2003); Rockoff 1984; Coyne et al (2015) and sources cited therein).


inflation rate vs interest rate on calculating present value of future money i use the formula 100/(1+r)^T to calculate the present value of my future money while r is interest rate and T is year.
However , for my country , interest rate (year) = %8.25 and inflation rate (year) = %12.60
Is it logical if i use inflation rate instead of interest rate at my calculation?

The question has some ambiguity. If you want to calculate something, you need to define what you are interested in. If you want to think in terms of purchasing power, you can use the inflation rate.
However, using inflation would be the wrong answer in the context of finance or project analysis. In the financial context, you are comparing money now versus money in the future. The basis of comparison is an instrument that bridges money from the present to the future, which are debt instruments.
For example, if you are borrowing to finance a project, your profitability depends on the return of the project in nominal terms versus the cost of financing. What the value of the currency does versus a basket of goods during that time does not matter.
The idea of inflation trading off future returns is a beloved concept of conventional economists, but its usefulness is greatly overrated. Since you cannot purchase the CPI basket and store it indefinitely, there is no obvious necessary relationship between inflation rates and the return on investable assets. (People might invoke model relationships, but that puts a lot of faith in the models.)


How will London's role as a financial center be affected after the Brexit and what are possible alternatives? I looked around on this site and couldn't find anything close to what I'm asking on Economics SE, so I hope it is the right place to ask. I am interested in but have no background in economy, so all my assumptions are based on what I have read in European newspapers over the past weeks and months.

Before the Brexit referendum one argument of the "remain" supporters was that London as a whole profited very much from Britain's EU membership. With the free flux of people and money within the EU London could establish/defend its role as an international financial center. Many banks chose London as their seat as they could have access to the EU from an international and English-speaking environment. It was also argued that London acts as a bridge between Europe and North America.

After the Brexit vote I read that many financial institutes consider leaving (or preparing to leave) London in favor of some other places. I have no idea how a typical day of someone working in the financial area looks like, but from my position I do not really see a big impact if Britain leaves the EU. Several disadvantages already exist today, like varying Euro-Pound exchange rates or border controls. The only real reason I can think of is that there may be higher costs on financial transactions between the UK and the EU. Is that all? How would London's financial market be affected should the UK definitely leave the EU?

Also, where would these institutions go? The most frequently heard names are Frankfurt and Paris. Paris as the capital of the second-largest economy in Europe with strong presence of financial industry, and Frankfurt as the main financial center of Germany with important institutions like the European Central Bank. Arguments against are that in Paris it will be rather difficult to communicate in English in everyday life, and Frankfurt is a relatively small city (while I don't know how that alone would be a disadvantage). So what would be potential alternatives for a firm deciding to leave London?

London remained for long as a key financial centre for Europe due to several reasons:

Historic: several universities and authors dedicated to the study of wealth (Smith, Ricardo, Malthus, Keynes
Combination of privileged international positions with US (language + colonization) and commonwealth countries, as well as an average sized internal market
Looser regulation than most countries in EU, providing lower barriers to entrepreneurship
Fairly efficient justice system
Management and investor attitude: social class or country of origin is less of an obstacle than in France, investors not as conservative as in Germany

Comparing these factors to other large cities in Europe, it will be hard to match it.

In Germany, Munich or Berlin could be more attractive for investors than Frankfurt. Paris would be the favorite in France, but regulation doesn't attract investors nor entrepreneurs - so Amsterdam or Luxemburg would be much more inviting in this regard.


Is it viable to put a cap on personal wealth in the U.S.? Setting a cap on personal wealth is a proposal that has been championed by several progressive politicians in the U.S. (Sanders, Ocasio-Cortez, etc.). From what I understand, they argue that by setting a hard limit on wealth, the government will be able to redistribute the excess to better support people below the poverty line.
From my research on this issue, I came across literature here and here which talk about estimating affluence lines by looking at income distribution. These measurements could then help decide how much wealth would be "transferred from the richest to the poorest with a view to ensure that the latter are able to meet their basic needs and participate in society".
My question then is, from an economic standpoint, would this be a viable solution?
I would appreciate if answers to the question could be supported by reputable sources or provide links  to further reading on this topic. I have no background in economics, but would like to be better informed on an issue that has entered political discourse.

Wealth cap that would confiscate and redistribute wealth above certain limit is in an essence just different term for wealth tax (as opposed to situations where there would be just a ban on having more wealth which would be proper cap). Consequently, to see whether such policy is optimal one has to look in literature on wealth taxes. A wealth cap that takes and redistributes wealth tantamount to 100% marginal tax rate on wealth above the 'cap' set by the policy. This is definitely not optimal (in fact one of this is the first rule that you will learn in class on optimal taxation).
First, generally speaking any top marginal tax of 100% and above is suboptimal because it removes any incentive for further economic activity, be it working when talking about income taxes or accumulating wealth. This is undesirable if the objective is to maximize the tax revenue, for lets say redistribution, because if the tax would be even just 99.9% the individual being taxed would still have incentive to be economically active and have incentive to create more wealth that then can be taxed.
Second, the literature shows that optimal top marginal wealth taxes, even in case of Rawlsian social utility function (the most redistributive social function there is), are somewhere in range 0-10% (see Kocherlakota 2005; Fama 2019; Zucman and Saez 2019) or discussion in the famous Mirrlees Review: Dimensions of Tax Design).  Also, note the consensus seems to still be closer to the zero result and only very few scholars would go as high as 10%.
The reason why the optimal wealth taxes are so low even with the most redistributive social preferences is that they create very large behavioral responses that distort economy (e.g. see Jakobsen, Jakobsen, Kleven, & Zucman, 2020), they are very hard to enforce (e.g. large portion of wealth is difficult to price) and they are to a large extent implicit taxes on capital incomes (since company valuation counts as a wealth so they are further implicit taxes on wealth invested in business) and per famous Chamley-Judd result (Chamley, 1986; Judd, 1985) the burden of capital income tax is in long run shifted to labor (although the results does not hold perfectly in practice).
Such high wealth taxes could be justified only if the objective is not maximizing welfare of the poor  (e.g. for example with Ralwsin max-min principle) through redistribution, but just lowering wealth inequality no matter the cost, but I don't think there are many if any economists that would endorse such course of action.
In addition, the literature cited above might be too dense for non-economist, especially if you don't have solid math background. An accessible book discussing inequality and taxation is Inequality by Atkinson. Most of the book does not focus on wealth taxes since many economists consider zero wealth taxes to be optimal, but they are mentioned in some chapters.


What is the difference between knowledge and information? I believe this distinction may have been made by Hayek or some other Austrian.

In this paper (pdf), Peter Boettke goes into great depth explaining the difference between the two concepts in the Austrian school.

Essentially information is any data that might influence an act (or specifically the perceived utility or cost of a choice), and knowledge is the information that the actor has already collected prior to the time they made their decision and/or engaged in their behavior.

This helps to explain seemingly irrational behavior that is merely a manifestation of imperfect or asymmetric information (though it doesn't necessarily preclude or eliminate irrationality by any means).

There is also some room for "false" (or conflicting) knowledge, to provide for further irrationality (in the sense that $A$ knows $U(x)>U(y)$ and $B$ knows
$U(y)>U(x)$ where $U(x)$ is the average perceived utility of $x$ for all actors in the economy.

He of course does a much better job explaining it than I do.


Quantity theory of money: microfoundations The quantity theory of money states the price level is proportional to the amount of money in circulation. That is, if the quantity of money increases by some factor $k$, the price level will increase by the same factor $k$. My question is simple: in which economic models should one expect such a claim to hold true?

To be clear, I am asking about 'microfounded' models which contain full descriptions of the preferences and constraints of the underlying agents (including but not restricted to general equilibrium models). I am not interested in equations like $MV = PY$ unless you can show that they arise from such a model.

In the chapter 4 of the graduate textbook  Lectures on Macroeconomics there is "The Overlapping Generation with Money". In that case we have a model which is microfounded (i.e. accounts for how our consumers interact with money on the microeconomic level). This is essentially an explanation of Paul Samuelson's 1958 "consumption loan model".

You can find a useful set of videos on this model here:
https://www.youtube.com/playlist?list=PL10zuK3j9SNl15Xy-EGteGDTd74j4uE_n


Interpretation of the growth rate of consumption in a simple one-good model In Perman et al. "The efficient and optimal use of natural resources" it is presented a simple single-good model of welfare dynamic optimisation with non-renewable natural resource where:

Obj:
$$
max \int_{t=0}^{t=inf}{U(C) e^{-\rho t} dt}
$$
s.t.
$$
\dot S_t = -R_t
$$
$$
\dot K_t = Q(K_t,R_t)-C_t
$$

That is, the economy is comprised of a single output Q that can be either consumed or added to the capital stock K (that doesn't depreciate).

Solving the model and rearranging the first order conditions, the book found that among the optimal path the growth rate of consumption is:

$$
\frac{\dot C} {C} = \frac {Q_k - \rho}{\eta}
$$

where $Q_k$ is the marginal product of the capital, $\rho$ is the social discount rate and $\eta$ being the elasticity of the marginal utility with respect to consumption is, under bland assumptions, guaranteed to be positive.

Now, my problem is the interpretation of the sign implications of this equation.

If $Q_K$ is greater than $\rho$, the consumption rate increases (and the opposite). What does it mean?

The books explains it considering that $\rho$ (the social discount rate) reflects impatience for future consumption, and $Q_K$ (the marginal product of capital) is the pay-off to delayed consumption.

Under this interpretation the relation implies that along an optimal path
when ‘pay-off’ is greater than ‘impatience’ "consumption is increasing", or that "the economy will be accumulating K and hence growing".

But in my experience if $Q_K$ is higher than the discount rate, I have an higher incentive to stock K rather than consume, so how the consumption could increase ?
Also, it is said that "when ‘pay-off’ is less than ‘impatience’, the economy will be running down K.", but how can the K reduce in this simple model where there is no capital depreciation?

I got stock with this problem for days.

The fact is that in a statical analysis, increasing $Q_K$ reduces consumption. But in a dynamic analysis, increasing $Q_K$ means more capital is saved and hence next year an higher production function that allows for more consumption than today, hence, a positive growth rate of consumption.


welfare economics journals Does anyone know of journals related to welfare economics?
If not, what is the next best alternative to find articles (preferably open access) related to current research in welfare economics?

Thanks

This is from the end of the first chapter in the book Public Finance in Canada 4th edition by Harvy Rosen.

This book is  a primer for welfare economics. The book states gives a list of:

Journal of Public Economics
Canadian Tax Journal
National Tax Journal
Public Finance
Public Finance Quarterly
International Tax and Public Finance
Journal of Public Economic Theory
Economics of Governance

Also remember most general interest economic journals also publish articles that deal with welfare economics/public finance issues.

Hope this list helps


Hyman Minsky's view on Bank Examination In Stabilizing an Unstable Economy (1986), Hyman Minsky argues that "bank examination is largely perfunctory... rather than an inquiry into the economic viability and the exposures to risk of banking organization." ( chapter 10, p.240). He then holds that "the existing examination procedures are not a serious substitute for costumer and collegiate surveillance for giant banks with complex asset and liability structures." (ibid.)

Now here are my two questions:

What exactly does he mean by costumer and collegiate surveillance?
Why is that so important for him? I don't think I really get his point here.

Thank you!

I have the 2008 hardcover edition, and in that edition, Chapter 10 starts on page 249. I could not spot that quote - what is the section title?

In any event, in the 2008 edition, there is a section “Prudence and Surveillance” within Chapter 10. In it, he describes “customer and collegiate surveillance.” The argument is that when banks were largely allowed to fail, the private sector had no choice but to monitor bank risk taking.

Customer surveillance refers to surveillance depositors; they will pull their deposits out if they view the bank as especially risky.
Collegiate surveillance refers to surveillance by banks and other institutions that lend to a bank in the wholesale money markets (e.g., in the Fed Funds market to make up reserve deficiencies).

As for why this matters, this shows up in the rest of Chapter 10. He describes how bank lending determines the level and type of investment.

  Financial market and banking affect investment because the current value of capital assets and thus the demand price for investment outout are determined in financial markets, because the amount of investment that will be financed depends upon banking processes, and because the supply price of investment depends upon the cost of finance. (Page 254 of the 2008 edition; first section of Chapter 10).

In his section “Coda” he then argues that “there are no effective barriers to bank expansion and thus to the destabilising impact of banks on demand.”

In other words, he is worried more about the instability created by banking as a result of the lack of regulation of their portfolio growth, rather than whether people lose money.


What benefits do governments receive from not eliminating debt? Most major economies have substantial government debt; for example among the OECD countries the lowest debt rate is Estonia with around 6% of GDP. Now we may be in a global recession at the moment, but even during the more prosperous times of the twentieth century most countries maintained substantial public debt. Here is a graph of the US federal debt:

And here is one of the UK's national debt:

(Both graphs via Wikimedia.)

What benefits do governments of advanced economies receive from not eliminating their debt?

Most of the same considerations apply to countries as apply to businesses and people, plus a couple of extra cons

Pros of Being Debt Free

No interest payments
Not beholden to someone else (financial freedom)

Cons of Being Debt Free

Buying things on (interest free) credit can save a little money
Paying for things in installments can match costs to income
Interest rates can be used to control economic activity and defend currency
Having a bond market promotes domestic financial activity
Having government bonds provides savers with a safe investment

There is big difference between having no debt and having no net debt.  In the former case, you do not borrow any money and that is rare.  In the latter case you have the money but choose to borrow instead.  Many individuals do this by spending on credit card even though they have money in the bank, or not paying off all of their mortgage because the interest rate is good (so they can earn more with their money elsewhere).

For governments there are extra benefits from having debt (even if you can pay it off).

Perhaps the best way to understand this though is to look at a few notable examples, past and present.

US 1836

If you don't set interest rates, someone else will

The Federal Reserve was only established in 1913, prior to that the US had an uneasy relationship with the concept of central banking.

It seems the founding fathers were against central banking, and it wasn't until Alexander Hamilton that "First Bank of the United States" was created in 1791, mandated to last for 20 years, after which it's mandate was not renewed.

Second Bank was established in 1816.  Andrew Jackson was strongly against central banking (and banking generally!) and so when he came to power in 1832 he pulled the state money out of the bank.  The bank countered by tightening money supply to push the economy into recession.  Andrew Jackson held out and paid off the entire national debt by 1836.  The Second Bank did not have it's chartered renewed, and liquidated in 1838.

With no debt, and no central bank the US money supply was effectively free.  Jackson also introduces the Specie Circular which required all government land be purchased in gold and silver.  The rest of the 1830 saw significant inflation and recession, generally attributed to Jackson defeating the central bank.

The US government had lost control of their own economy, and in 1837 the Bank of England raise rates, forcing up domestic US interest rates, precipitating the 1837 panic.  The following years were marked by major recession.

For more on this see: WDJ article on US debt and Wiki: Second Bank

Norway Today

Keep some debt for liquidity purposes and financial control

Norway currently has around \$170bn of public debt, with a GDP of about \$500bn.  However in 1990 the government established what is now called the "Government Pension Fund of Norway" into which the excess income from Norwegian oil is poured.  It is an equity and bond portfolio currently estimated to be worth in excess of \$700bn.

The government of Norway could choose to pay off all its debts easily, but chooses not to.  Instead they maintain issuance in sovereign debt markets in order to hold a liquid reserve to cover their daily payments.  They also mention using the money to "develop well-functioning and efficient financial markets".  A final consideration in their case is that their assets are abroad, and repatriating them would weaken the Krone, so there is some FX consideration here.

Because of this, it is not surprising that Norway has a AAA credit rating, and that also makes it cheaper for Norway to borrow than even the US (based on 5Y CDS).

For more on this see: Norway Ministry of Finance and Norges Bank

Singapore Today

Issue debt to give people something to invest in

Singapore has had no foreign debt (ie. non-SGD) since 1995, and consistently runs with a fiscal surplus.  Despite this they issue T-Bills and Notes of various maturities consistently and simply invests the proceeds.

Why?  According to the Monetary Authority of Singapore (MAS) the main objectives are:

  Provide a liquid investment alternative with little or no risk of default for individual and institutional investors;
  Establish a liquid government bond market, which serves as a benchmark for the corporate debt securities market; and
  Encourage the development of skills relating to fixed income financial services available in Singapore.

For more on this see: MAS MoneySense

North Korea

If you don't pay, its not really debt...

This is only a semi serious one, but one country that basically has no debt is North Korea, for the simple reason that no-one will lend to them.  They do technically have debts though, including a debt to Sweden for some Volvos, but in 1984 they defaulted on them all and refused to pay anything.  It seems they have no-intention of ever paying.  I don't think I need to explain the downsides to the North Korean approach to economics.

See: North Korea's Stolen Volvos


If Americans drive more and consume more oil, why are cars less efficient? According to this figure from the Center for Climate and Energy Solutions, US, Canada, or Australia car fuel efficiencies are considerably lower than those for Europe or Japan:

At the same time, cities in US, Canada, and Australia, are far more spread out than in Europe or Japan.  There is more car dependency and people drive more and longer distances in North America.

Then why are fuel efficiencies so much lower?  I would think that it makes sense to market the most fuel efficient cars in the market where people drive the largest distances.  And as the automobile market is quite globalised, even if it's European regulations requiring manufacturers to develop cars with higher fuel efficiencies than North American regulations, it would make economic sense to sell the same cars in North America.

What is the economic reason for the observed pattern?

The price of petrol / gasoline is surely a major reason, offsetting the effect of longer distances.  In many European countries it is more than twice as high as in the US, mainly because of differences in tax rates, as shown here.

Given consumer rationality, the price of fuel might be expected to impact on fuel efficiency via choice between car models of different efficiency at the time of purchase.  But do people actually behave rationally in this situation?  Turrentine & Kurani (2007) found from interviews with households that consumers lacked the knowledge and understanding needed to estimate savings in fuel costs over time.  Although their sample was small (57), this finding seems plausible.  However, even if individual consumers do not behave rationally, it remains possible that the price of fuel is still for many an influencing factor, albeit imperfectly assessed, and that the aggregate effect of decisions by many consumers approximates to what might be expected given rational behaviour.

Allcott & Wozny (2014) tested the hypothesis that consumers, on average, are willing to pay \$1 more to buy a car with \$1 less in discounted future fuel costs.  They used panel data relating to purchases of different car models in the US over the period 1999-2008, relying on changes in gasoline prices over time (rather than differences between countries) to permit a test of the hypothesis.  Their sample was impressively large, including 86 million transactions.  Purchases were assumed to be informed by assumptions on future fuel costs. On their base specification, willingness to pay for \$1 less in discounted future fuel costs was estimated as \$0.76.  Alternative specifications with different assumptions on discount rates and the basis for forecasting future fuel costs yielded willingness to pay figures in the range \$0.42 to \$1.01.  Given the large sample, the standard errors of these results were small, at most \$0.06, even after clustering by model and age was allowed for.

The above strongly suggests that the price of fuel has influenced fuel efficiency in the US. I haven't seen a similarly rigorous study for Europe, or comparing the US and Europe, but it seems plausible that this finding would extrapolate, if only approximately, to a cross-sectional inter-country comparison.


Are there historical cases of country A printing the currency of country B for the main purpose of economic warfare? I recently read in a news article that a large amount of Libyan banknotes printed in Russia were seized in Malta following an order coming from the USA. Both Russia and the USA have geostrategic interests in this part of the world so I assume this action is probably linked to an economic warfare operation. Banknotes normally include a large amount of security features that prevent people to easily counterfeit them but I assume that for large countries like China, Russia or the USA it is not a big deal to print banknotes of a foreign country. In time of war it can be quite interesting for a large country to print a lot of banknotes and spread them in the economy of an adversary country to destabilize its economy. But putting apart the above mentioned news article I wasn't able to find evidences of such a scenario so my question is :
Are there historical cases of country A printing the currency of country B for the main purpose of economic warfare ?

Very obscure historical example:
From 1287 to 1295, the Danish nobleman Stig Andersen Hvide was leading a band of outlaws from the island of Hjelm supported by the king of Norway against the king of Denmark. Stig managed to kidnap expert coin makers and bring them to Hjelm, where they produced counterfeit Danish coins.
This allowed Stig and his supporters to buy up all the supplies they wanted in Danish merchant cities. The heavy inflation and the problems it caused for the Danish economy made it difficult for the Danish king to afford assembling an army against Stig.


Demand curve confusion My economics textbook says that demand curves slope downward - but then goes on to say that when demand increases, prices go up! Does anyone else find this confusing?

Edit: from the small number of answers I have received, it seems that this is not a well understood issue in economics. Is anyone aware of alternative approaches which avoid this contradiction (e.g. I have heard that the Austrian School does not use demand curves)?

The book probably intends you to think like this

so you have a downward-sloping demand curve (lower prices lead to higher demand), but if demand increases for a reason not related to price (a shift from the Demand 1 curve to the Demand 2 curve) then the new equilibrium on the upward-sloping supply curve will be at a higher price and quantity

There are a lot of implicit assumptions here, especially

the direction of the slope of the supply curve
whatever changed the demand curve did not affect the supply curve


To what extent are renewables like solar driving down the cost of oil? The price of oil has declined by roughly 66% in the past couple of years, and a lot of people want to know why:

Some people are saying that the recent trend of oil prices dropping means the global economy is consuming less oil and therefore economic leading indicators suggest financial collapse in the future.

They are wrong (today) because oil consumption has been increasing continuously over the last 20 years.

Other, more sensible ideas are that (today) oil prices have been decreasing because oil supply outpaces oil demand. But it hasn't been enough to compensate for the price drops. Its not like oil production has increased by 66%. At most, it has increased by 15%, more likely something like 10%.

So, prices have fallen faster than the production surplus have increased.

Could it be alternative energy technologies like solar (or fear of them on the part of oil producers) that are causing this additional decline in oil prices?

TED talk that provoked this question: http://www.ted.com/talks/al_gore_the_case_for_optimism_on_climate_change

could someone please add the category "substitution" to this question

There are several reasons from supply and demand side. From production side, for example, contrary to anouncement of cutting production (from Saudi Arabia, Venezuela and Qatar), Saudi Arabia continued to increase its production.
(There are some political reasons behind like Saudi Arabia would like to make some pressure on Russia and USA but I don't enter into this discussion as it does not concern an economic mechanism.)

Also, there are some other countries like Canada, Iraq and Iran where the oil production rises, which pushes prices to fall. (I think you can easily find some data about that, I have seen somewhere in web.)

From demand side, there is a risk of deflation in Europe and contraction of demand in most of developping countries, which also affects production side and could make a downward pressure on energy prices.

Another reason could be use of energy efficient technologies (like some cars or machines in some industries.)

What theory says about this issue ?

In fact, the existing literature on environmental economics says that price of exhaustible resources tends to increase as they become scarce. (it is the famous Hotelling rule)

There is a relationship between the use of renewable energies and exhaustible resources. Normally, an economy starts with use of exhaustible resources. Theory says that when economy grows in time, the exhaustible resource becomes scarce and its price increases. In this case, economy will use exhaustible resources until the marginal benefit from its use is equal to price of backstop (solar, wind etc...)

(A very interesting paper to see about subject is Withagen and Van der Ploeg (JEEM-2012))

In this current situation, it is sure that there are less incentives for economies to switch to clean technologies as price of exhaustible resources decreased to much.

To respond to your question, the use of renewable energy is increasing in world but I don't think at all that the huge fall in oil prices is due to "increasing" use of renewables.
This trend for renewables is always present since some decades but until now, oil prices have always increased.

As I have tried to explain, I don't really think there are robust correlations between the drop of oil prices and renewable energy use.