Understanding the effects of government deficit on international trade Understand that I'm a total novice with regard to economics.  Also, while I ultimately have an axe to grind (doesn't everyone?) I'm not trying to do that honing here, I'm simply looking for a sanity check on my "logic" (such as it is).  I don't propose to discuss political implications here.

President Trump is proposing a "tax reform" package that is roughly estimated (based on two separate sources I found) at about $5T over 10 years.  Let's assume that the cost of this package is not significantly offset by spending cuts (at least not cuts that would exceed proposed spending increases in other programs).  So it's reasonable to assume that basically the entire amount would be borrowed, through Treasury securities and similar instruments.

Here it gets a little shaky.  Several sources tell me that foreign sources own about 1/3rd of the US government debt.  While it's obviously difficult to predict how much of the new debt would be purchased by whom, it's a reasonable spitball estimate to assume that about a third would be sold overseas, assuming interest rates remain at least as high as they are currently, and barring any significant change in overseas perceptions of the soundness of US securities, or of the US economy in general.

This means that foreign sources must come up with about $1.7T in US currency over ten years, thus removing the ability of that much US currency to purchase goods and services from the US (or benefiting from that much US currency being paid out of the US to buy foreign goods and services).

(The objection will be made that money is, uh, fungible, and so currencies other than US currency can be used to purchase US goods.  But if I spend my US dollars on T-bills then I will have to convert my rubles to dollars if I want to spend more dollars on US goods and services, and that conversion drives up the "cost" of the dollar, making US goods and services less "attractive".  When it balances out the net-net is to have removed that much US money from the pool of cash available to fund US exports.)

The cost to "create" a job in the US seems to be variously estimated at between \$40K and \$100K a year.  (I couldn't find any sources that were clear and explicit enough to be worth referencing, alas.)  (Most such estimates appear to be orientated towards tech sector jobs, and presumably manufacturing jobs would be "cheaper".)  But let's say that a job "costs" $50K/year -- we are "spitballing", after all.

So, dividing the \$1.7B by \$50K times ten years, I come up with 3.4 million jobs lost for a period of ten years, due to the proposed tax cuts.

Where is my "logic" here weakest?  Is my spitball aim terribly off anywhere?  Are there fatal flaws, or is it simply too fuzzy and "out there" to assess without losing your lunch?

Note: I'm trying to understand the above (presumed) effect in a vacuum of sorts, without considering any of the counterbalancing benefits of deficit spending and related issues.  Basically, I'm only looking for criticisms of my "math", and a "but you forgot about ..." answer is only relevant if it somehow modifies or negates that "math".  Yes, deficit spending has supposed benefits, but I'm not asking about that.

No, your logic doesn't make a ton of sense. That doesn't mean that the Trump tax cuts are a good thing.

Foreign debt isn't the same as a country removing money from the economy. The way the U.S primarily finances debt is through the sale of treasury bonds (T-bills). Essentially an agreement with a private individual (sometimes foreign) that over the course of X time period the debt will be paid back with interest.

This is the same as making a loan with your local bank. They give you money, in this case $5 trillion and after a period of time you pay off the principal loan plus interest payments. The assumption that Trump (and all American presidents since Bill Clinton when we last had a current account surplus) is making is that in the period between making the loan and paying it off the economic stimulus from the tax cuts will outweigh the loan and its payment. The U.S gets extremely favorable terms on its loans with virtually 0 interest rates meaning that the 5 trillion stimulus in decreased taxes may very will increase tax revenue through increased economic activity by more than 5 trillion dollars which is the argument that Trump is making.

Whether or not this occurs depends on where we are on the Laffer Curve which essentially states that at a certain tax rate decreasing taxes will actually increase government revenue by stimulating businesses. Personally I, and many contemporary economists believe that we are not at that point on the Laffer curve and a tax decrease would in the medium run lower output, however clearly Trump disagrees and there is no true consensus among economists as to where we currently fall on the Laffer Curve.


Doubts in modelling the Arthur(1991) paper: Designing economic agents that act like human agent I am implementing Arthur's paper "Designing economic agents that act like human agent: A behavioral approach to bounded rationality" from 1991 in JAVA and I am having a problem understanding one part of the paper:

At one point it says: triggering actions randomly on the basis of their strengths and I don't know what this means.

The algorithm is described as follows:

1.) Actions are represented as $a = (1,2,...,A)$, these values represent the mean and all the actions have a fixed standard deviation. The mean of an action and its standard deviation help in plotting the normal distribution. The payoff of an action, which is unknown before is drawn after the action is chosen from the above described normal distribution.

2.) Ever action has a certain value of strength ($S(t)$) associated with it, the strength depends on prior beliefs (in my case it depends on prior skill set). The current sum of these strengths is C(t).

3.)At every time $t$ I calculate the probability vector $p(t) = S(t)/C(t)$

4.) Choose one action from the set according to the probability

5.) Update the strength of that action (point 3, page 354)

6.) Renormalized (point 4, page 354).

The problem occurs at point 4: choose an action according to the probability, what probability?

I don't know how to translate this statement into code.

Although I still don't understand what these "strengths" are all about, still, mechanically, step $4)$ is now clear.

At each point in time, there is a certain allocation of Strengths to actions, $\{S_i(t),\; i=1,2,...,A\}$. This allocation changes through time.

The allocation is turned into a relative frequency distribution by dividing each $S_i(t)$ by their sum $C(t)$.

But then

$$\sum_{i=1}^A \frac {S_i(t)}{C(t)} =1 $$

and (I presume), $S_i(t) \geq 0,\; \forall i$. So indeed this relative frequency distribution can be treated as a probability distribution, and each $S_i(t)/C(t)$ can be treated as a probability that characterizes action $i$ in period $t$.

So you have to code this probability distribution, and then have the software "randomly draw" from it, as though this distribution was part of  the distributions available in a "random number generator".

The floor is yours now.


What metrics can be used to distinguish between capitalistic and socialistic economies? What macroeconomic indicators are meaningful to distinguish whether a country leans towards socialism or capitalism (and where to find such data, specifically for european countries)?

My opinion is that “capitalism” and “socialism” in this context is in the eye of te beholder. The European countries are mixed economies.

One standard metric is the size of government expenditures as a percentage of GDP. One issue is that different countries have different ways of measuring national accounts data.

The IMF World Economic World Economic Outlook (WEO) has a database that is standardised across countries. For any one country, the national accounts data would probably be a better source, but the key to the WEO is that they worked on comparability for you already.

Link to the data: link to IMF WEO data page

One series to look for is “general government expenditures as a percentage of GDP.” You want “general government” (and not something just like the central government) as countries like Canada have large sub-sovereign governments.

Expenditures gives us a rough idea of the footprint of the government in the economy. However, it will miss things like the effect of regulations. Instead of the government directly taking over some activity, it could force the private sector to follow a very specific set of rules. Whether that is “socialism” or a “properly regulated economy” turns into a political debate.

If you are only interested in European data, Eurostat would likely be your source. Eurostat has worked on getting European countries’ data to follow similar standards, so there is good cross-country comparability for now. I do not know what series to look for there, so you would have to dig. Link to Eurostate website.

The only other sort of data  to work with are various “ease of doing business” indices. The quality of those data series can be debated; there was some recent controversy with some World Bank data of this type in the news. The concern is that it is unclear what to include in these indices, and many of the inputs are qualitative. As may be obvious, I am not a fan of these series, so I do not have any recommendations (you can either search or someone else can give an answer).


What does these "strategy notations" mean? In a sequential game, where there are 8 pizzas.

Player 1 decides number of pizzas he wants. Let's call it S1 (strategy of player 1), and S1 = 5 means player one decided to get 5 pizzas.

Then player 2 decides number of pizzas he wants, and player 2 knows what player 1 decided. Let's call it S2 (strategy of player 2), and S2 = 5 means player two decided to get 5 pizzas.

If the S1 + S2 > 8 then both players get 0 pizzas.

Else, the players get the number of pizzas that they decided to get, also player 1 gets S1 pizzas and player two gets S2 pizzas.

In "solutions" to exercises to an assignment about strategies, they have written the following:

S1* and S2* are "Nash equilibrium" strategies of the player 1 and player 2.

Find all the Nash equilibrium in pure strategies in this sequential game.

(1) S1* ∈ {0, 1, 2, 3, 4, 5, 6, 7, 8} and
S2*(S1) = 8 - S1   if   S1 = S1*,
S2*(S1) > 8 - s1   if   S1 > S1*,
S2*(S1) ∈ {0, 1, 2, 3, 4, 5, 6, 7, 8}   if   S1 < S1*

What does it mean that S1 > S1* or S1 < S1*

It means The player 1 decides a number of pizza which is greater than 8?

What does the notations above mean?

The above post is pretty close (+1), but has not mentioned the subgame perfect Nash Equilibrium and the notation $s_2^*=8-s_1^*$ might be misleading, as it implies that player 2's Nash Equilibrium strategy is a function of $s_1$, which would mean the best response for player 1 could not be anything less than 8.

First consider the action set for each player (each has the same action set):
$$a_1 \in \{0,1,2,...,8\}$$
$$a_2 \in \{0,1,2,...,8\}$$

First consider the strategy set for each player:
$$s_1 \in \{0,1,2,...,8\}$$
$$s_2(s_1) \in \{f: \{0,1,2,...,8\} \rightarrow \{0,1,2,...,8\}\}.$$
Notice that player 1's strategy set is the same as her action set, since player 1 cannot condition her action on player 2's action before moving. On the other hand, player 2's strategy set is the set of all functions mapping player 1's action set into player 2's action set.

If we consider the definition of a Nash Equilibrium,and carefully consider the strategy sets for each player, we can see there are at least 10 Pure Strategy Nash Equilibria:
$$(s_1^*,s_2^*) \in \{(0,8),(1,7),(2,6),(3,5),(4,4),(5,3),(6,1),(7,1),(8,0),(8,8-s_1)\}.$$
In the first 9 equilibria listed (i.e. those the first poster was describing), firm 2's equilibrium strategy is simply a number, not a function that depends on player 1's strategy (e.g. $s_2(s_1)=4$). Notice these would be the equilibria if this were a static game (meaning player 2 did not observe player 1's choice before choosing an action).

The last equilibrium listed $(8,8-s_1)$ is the subgame perfect Nash Equilibrium. To see why, we must use backward induction. Starting with player 2's move, we have 9 possible subgames (one for each of the possible actions chosen by player 1). For the arbitrary subgame in which $s_1=C$, player 2's best response is to choose the action corresponding to $8-C$. We can generalize this across the 9 subgames and deduce that the strategy $s_2(s_1)=8-s_1$ forms a Nash Equilibrium in each of these 9 proper subgames.

So we have determined that in the subgame perfect Nash Equilibrium, player 2 must choose strategy $s_2(s_1)=8-s_1$. We must now find player 1's best response, which can easily be seen to be $s_1=8$. Thus the 10th Nash Equilibrium listed above is the subgame perfect Nash Equilibrium.

You might be inclined to argue that $(8,0)$ and $(8,8-s_1)$ are equivalent outcomes, but they are not. The former cannot be a subgame perfect Nash Equilibrium since player 2's strategy $s_2(s_1)=0$ does not form a Nash Equilibrium in every proper subgame (e.g. in the subgame where player 1 had chosen $s_1=7$, player 2 would still have chosen $s_2(7)=0$.


what in real terms causes one nations currency to be more valuable than another? I would like to understand in atomic terms what makes the value of one nation's currency change with regard to another.  Read that, without citing complex terminology but in basic terms.

Obviously, if one nation does QE then it would follow that the value of that currency is devalued by the ratio of "easing" to the existing supply.

But in all other cases, suppose you have nation A and nation B and their currencies are initially 1-to-1.  What would make nation A's currency be worth more than nation B's currency, and what is the rationale behind it?

So for example, nation A becomes more efficient in manufacturing than nation B; but how would that make the currency of nation A worth more?  Efficiency is the only answer that comes to mind, so I appreciate further elaboration and hope this question has educational value.

Exchange rates are prices.  Just like any other price, they change based on supply and demand.  Country A's currency appreciates relative to B if the citizens of country B want county A's currency.  Why does B want A's currency? Typically for the purpose of buying the goods, services, and investments produced by A.

So what would be some examples of events that would cause A's currency to appreciate relative to B?

If A starts producing some goods B wants, or producing them efficiently, then B will want A's currency in order to buy them
If A has desirable investments (savings accounts, financial assets, or real assets) and B wants a place to save for the future
If A expands their money supply more slowly than B, which reduces the available supply of A's currency relative to B's.
If A's currency is useful for some other purpose, like acting as a medium of exchange between B and another country C.


Effect of Strengthening US Dollar on Commodities Many commodities are prices in US dollars. If the Dollar strengthens, then commodities (in non-US countries) will become more expensive. From the consumers' (suppliers') point of view, this should be a move along the demand (supply) curve, not a shift since nothing has inherently changed in their demand or supply of the actual commodity. For a stronger dollar, a consumer will simply demand less.

Then why is it that a strong US dollars is highly correlated with low commodity prices? Is the efficient market adjusting to pre- strong dollar levels?

Most global commodities are quoted (priced) in US dollars. The more valuable a dollar becomes relative to other currencies, all other things equal, the more commodity prices have to fall to equilibrate. Imagine everything was priced in corn and people start to value corn more or the amount of corn falls. Either way, all the prices in terms of corn (e.g. ears per barrel of oil) would have to fall as a result.


Market for lemons derivation Akerlof's 1970 paper models the utility of two trading groups as

$$
U_1 = M + \sum_{i=1}^n x_i \\
U_2 = M + \sum_{i=1}^n \frac{3}{2} x_i
$$
where $M$ is the consumption of good other than cars, $x_i$ is the quality of the $i$th car, and $n$ is the number of cars.

The quality of the cars held by group one have a uniformly distributed quality $0 \leq x \leq 2$ and the price of goods other than the cars is unitary.

Income for the two groups is denoted $Y_1$ and $Y_2$.

The paper goes on to give the demand for cars for type one traders:
$$
D_1 = Y_1/p \quad \quad  \mu/p > 1 \\
D_1 = 0 \quad \quad  \mu/p < 1
$$
The supply of cars from type one is
$$
S_1 = pN/2 \quad \quad p \leq 2
$$
and their quality is $\mu = p/2$.  The paper states that to drive the expressions for supply and quality, the uniform distribution of car quality is used.  How is this done exactly?

A type-1 seller will trade her car only if the car's measure of quality $x$ (privately known) is less than or equal to the average car quality in the market, $\mu$. $x \in [0,2]$ since no buyer values a car more than $2$ and a car cannot be sold for less than $0$. To find the probability of a car having quality less than or equal to $\mu$, we consider the CDF of $x$, $F(x)$, assuming $x$ is uniformly distributed over the support $[0,2]$:

$$
F(x)=
\begin{cases}
0 && x \leq 0 \\
\frac{x}{2} && x \in  [0,2] \\
1 && x \geq 2.
\end{cases}
$$

So the probability that a car has $x \leq \mu$ is $P(x \leq \mu) = F(\mu) = \frac{\mu}{2}$. A seller facing a price $p$ for her car becomes indifferent towards selling at $\mu = p \implies F = \frac{p}{2}$. Scaling up by a total of $N$ cars possessed by type-1 sellers implies that the market supply from type-1 sellers is $S_1(p) = \frac{p}{2}N$.


Where can I find an interactive graphic showing the development of countries? I remember once finding a graphic which let you slide back and forth, showing how third world countries had developed over time. It would be really handy to find it again, but I've tried all the keywords I can think of and it's not coming up.

I don't know if it is the original that you had in mind, but Gapminder allows you to interactively explore a variety of data sets relating to both developed and developing countries.


How to explain these two discrepancies between BLS OES wage data and salaries of pro athletes? I refer to the Occupational Employment Statistics published by the US Bureau of Labor Statistics, May 2015 edition.

Under occupation title "Athletes and Sports Competitors" (27-2021), we have the following figures:

  Total employment: 11,710.

  Mean annual wage: $\$80,490$.

  Annual 75th percentile wage: $\$89,780$.

The first two of the above statistics imply that total wages paid out to these 11,710 workers was 11,710 × $\$80,490$ = $\$942,537,900$ or a bit under $1b.

But there is a discrepancy between the above figures and the salary figures across the four major US professional sports leagues. The following are the latest annual salary figures from various sources (these shouldn't be too inconsistent from salaries a year or two earlier).

  MLB: 862 players, of which all 862 make at least $\$507,500$. Total salaries = $\$3,781,920,218$.

  NHL: 1719 players, of which all 1719 make at least $\$117,300$. Total salaries = $\$3,524,086,505$.

  NBA: 545 players, of which 505 make at least $\$100,000$. Total salaries = $\$2,942,055,947$.

  NHL: 767 players, of which 766 make at least $\$216,666$. Total salaries = $\$2,142,999,943$.

So there are at least two discrepancies:

1. The BLS says that the total annual wages paid to 11,170 "Athletes and Sports Competitors" was less than $\$1$b.

But in the four major professional sports leagues alone, over $\$12$b is paid out to 3,893 players.

2. The BLS says that the athlete at the 25th percentile (out of 11,170 workers) makes only $\$89,780$. This means that workers #1 — #2927 make $\$89,780$ or more, while workers #2928 — #11,170 make $\$89,780$.

But in the four major professional sports leagues alone, 3,852 players make at least $\$100,000$.

So far I've thought about (and ruled out) two possible explanations for the above discrepancies:

Top-coding of salaries.

This might explain the low estimate for mean annual wage. However, this would fail to explain why the 75%-ile wage is listed at only $\$89,780$.

"Athletes and Sports Competitors" does not include professional athletes.

But this is not consistent with this BLS webpage description of this category of work. There is a photo of a professional-looking baseball player and also this sentence: "Competition for most professional athlete jobs will remain very strong."

Another possible occupation title under which professional sports athletes might fall is "Entertainers and Performers, Sports and Related Workers, All Other" (27-2090, 27-2099), but here again we run into the same trouble. There are only 14,570 workers in this category and the 90th percentile hourly wage is only $\$36.35$.

I'm unable to think of any other explanation. I'd appreciate help from anyone who is more familiar with how the BLS OES are collected and calculated.

All data and sources used above are collected here.

This may not be the complete answer but I believe this is a major issue:

It is extremely difficult to get famous and rich people to participate in surveys. They have handlers that prevent surveyor access. They have multiple phones numbers and homes that makes it difficult to find them. They also have complex affairs that may make it difficult for them to easily summarize. For example, having a complete picture of sponsorship income can be challenging and almost no one knows what a fair value is for their accumulated pension.

In summary, I assume that most of professional athletes are not covered by the BLS survey. Instead, it is people of more modest income, like minor league athletes and golf pros that are actually getting picked up.


Write search model as a signal density inducing posterior belief Consider a decision maker (DM) who as to choose an action from the finite set $\mathcal{Y}$ with cardinality $L. $

The payoff the he gets depends on the action chosen and the state of the world. The state of the world is denoted by $z\equiv (z_1,...,z_L)\in \mathcal{Z}^L\subseteq \mathbb{R}^L$. The payoff when the DM chooses action $y\in \mathcal{Y}$ and the state of the world is $z\in \mathcal{Z}^L$ is denoted by $u(y,z_y)$.

Before choosing the DM does not observe the state of the world. His prior on $z$ is denoted by $F_Z\in \Delta(\mathcal{Z}^L)$ and has marginals that are equivalent across $y$.

Before choosing the DM can discover $z$ by searching sequentially and paying cost $c_y$  when uncovering $z_y$ for each $y\in \mathcal{Y}$.

When search stops, the DM chooses action  $y$ maximising his payoff among the searched actions.

Question

Can we find a conditional signal density $P_{T}(\cdot|z)\in \Delta(\mathcal{T})$ such that the problem above can be rewritten as
$$
\max_{y\in \mathcal{Y}}\sum_{z\in \mathcal{Z}} u(y,z_y) \underbrace{\frac{P_T(t|z) F_Z(z)}{\sum_{z\in \mathcal{Z}}P_T(t|z) F_Z(z)}}_{\text{Posterior belief by Bayes rule}}
$$
for each $t\in \mathcal{T}$?

I am not entirely sure about what you mean with "Before choosing the DM can discover $z$ by searching sequentially and paying cost $c_y$ when uncovering $z_y$ for each $y\in Y$."

However, it sounds like you want your DM to choose both a stoping time, $t$, and an action, $y$. Since the DM is searching sequentially, the decision to continue searching or not will depend on how searching affects their beliefs and the cost of searching, which you are not fully specifying. Searching typically gives you access to some signal that will affect your beliefs, and the cost of searching is usually defined regardless of the result of the signal. You have not specified such searching signal, and it sounds like you only pay a cost for searching if you uncover state $z_y$. However, let me get to your question.

At a high level, you cannot re-write your problem through a signal density, $P_T(\cdot|z)$, because the re-write does not include the searching costs.

Argument for the statemet: Suppose there is a well-defined search problem and the decision-maker chooses $y\in Y$ only after the search phase has concluded (If these assumptions are not true, my argument is just strengthen). Given an optimal search strategy (that can only depend on the prior $F_Z$, the search costs $c_z$, and (perhaps) the interim beliefs during the search process), for each state of the world the DM will (probabilistically) end with some sequence of signals (one for each period they searched). Denote each possible sequence with a different element in $T$ and let $P_T(t|z)$ be the probability that the DM ends with sequence $t$ when the state is $z$. However, each sequence of signals will, in general, have a different cost. This cost cannot be, in general, captured by the probability density.

If searching was free, then sure, your problem is one of choosing $y$ to maximize the expected utility where expectations are taking with respect to some posterior beliefs that arise after searching, and the density $P_T(\cdot|z)$ is the object that summarizes the searching process that is assumed to be well-defined.


Demand derived from Cobb-Douglas utility, interpretation, check I derived demand, given a Cobb-Douglas utility function but I am not really sure if I did it correctly. I am especially struggling with the sum signs and the subscripts of $i$ & $j$. It would be really great if someone could check. I want to maximize utility for 2 goods, here $j$ and $i$.

$\ u(x_i)=\prod_{i=1}^n x^a_i       $

$\ s.t.:M=\sum_{j=1}^n p_jx_j      $

$\ L= \sum_{i=1}^n a_ilogx_i+\lambda(M-\sum_{j=1}^np_jx_j) $

$ (1)\frac{\partial L}{\partial x_i} = \frac{a_i}{ x_i}-\lambda p_i=0$

$ (2)\frac{\partial L}{\partial x_j} = \frac{a_j}{ x_j}-\lambda p_j=0$

$ (3)\frac{\partial L}{\partial \lambda} = M-\sum_{j=1}^np_jx_j=0$

from (1) and (2) it follows:

$ \frac{p_i}{x_i} = \frac{a_i/x_i}{a_j/x_j}=\frac{a_ix_j}{a_jx_i}$

$ x_j = \frac{p_ja_jx_i}{p_ja_j}$

$ x_j$ into (3)

$ M = \sum_{j=1}^np_j(\frac{p_ja_jx_i}{p_j/a_j})=0$

$ x_i=  \frac{a_iM}{\sum_{j=1}^na_jp_j}$

Furthermore I would like to interpret what happens if we have an efficency shock for good $i$. Meaning, good $i$ becomes cheaper. This leads to an increase in relative income. So $M$ increases which leads to an increased demand for good $x_i$, rest hold constant. Is that correct?

From (1) and (2) you get
$$\frac{x_j}{x_i}=\frac{a_j p_i}{a_i p_j},$$
or equivalently,
$$x_j =\frac{a_j p_i}{a_i p_j} x_i.$$
Substituting this into equation 3 for $j=2,...,n$ and $i=1$ (solving for the demand function for good 1) we get
$$M=p_1x_1 + \sum_{j=2}^n p_j  \frac{a_j p_1}{a_1 p_j} x_1$$
$$M=p_1x_1 + \sum_{j=2}^n  \frac{a_j p_1}{a_1} x_1$$
$$M=p_1x_1 + \frac{p_1}{a_1} x_1\sum_{j=2}^n a_j $$
$$M=p_1x_1(1 + \frac{1}{a_1}\sum_{j=2}^n a_j). $$
Finally, solving for $x_1$ we get
$$x_1^* = \frac{M}{p_1}(1+ \frac{\sum_{j=2}^n a_j}{a_1})^{-1}$$
$$x_1^* =\frac{a_1}{\sum_{j=1}^n a_j} \frac{M}{p_1}.$$

Analogously,
$$x_i^*=\frac{a_i}{\sum_{j=1}^n a_j} \frac{M}{p_i},$$
for $i=1,...,n$.

As is always the case for demand functions derived from a Cobb-Douglas utility function, the consumer spends a constant share of income on each good. To see this, rearrange the previous equation to get
$$p_ix_i^*=\frac{a_i}{\sum_{j=1}^n a_j} M,$$
for $i=1,...,n$.


GDP data for the baltic states from 1988-1994 since I have to write a paper on transformation/transition processes in the baltic states (Estonia, Lithuania and Latvia), I would like to analyze GDP data from 1988 (shortly before the end of the soviet union) until now.
I already checked eurostats, the world bank and OECD databases.
Unfortunately I couldn't find any GDP data for these countries for the period from 1988-1994.

I would highly appreciate recommendations for other databases, that might contain the data I am looking for.

The Penn World Tables for those countries goes back to 1990. Some of their indicators may even go back further but I haven't checked.

Access to them is found here


Why is saved money sitting on a bank account bad for the economy? I've seen several news that were concerned about effect of the unspend savings that just sits on a bank account to the global economy.
Given that bank uses to money invest in things, or simply lend them to other people, isn't that money still on the market and contribution to the whole economy?

The Saving Glut of the Rich (68 page working paper)
https://scholar.harvard.edu/files/straub/files/mss_richsavingglut.pdf

A prominent idea in the history of economics is that an excess of savings relative to investment opportunities can present challenges for an economy (e.g., Hobson (1902), Keynes (1936), Eccles(1951)). A recent manifestation of this idea is the “global saving glut,” or the argument that a rise in savings by certain countries is a primary culprit for the decline in interest rates to low levels around the world (e.g., Bernanke (2005), Summers (2014), Rachel and Smith (2017)).

This study shows an equally important saving glut of the rich. In the United States, the rise in savings by the top 1% of the income or wealth distribution since the 1980s has been substantial, it has not boosted investment, and it has been associated with dissaving by the government and the rest of the household sector. The saving glut of the rich has important implications for the concept of national savings, the evolution of the financial sector, and the demand for U.S. produced safe assets. It also warrants consideration in explanations of extremely low interest rates and high debt levels around the world.

The rise in savings by the top 1% has not been accompanied by a rise in net domestic investment. Instead the additional savings have been absorbed in a less conventional manner through dissavings by the government and the rest of the U.S. household sector.  In particular, savings by the bottom 90% have fallen significantly since the early 1980s and the government has run larger deficits, especially after the Great Recession.

It may be surprising that Americans in the top 1% of the wealth distribution hold so much U.S. government and household debt in their portfolios, but the unveiling process clarifies how this is in fact the case.  For example, holdings of business equity by rich Americans represent a substantial claim on such debt.  The reason is that non-financial businesses have increased their holdings of money market funds and time deposits substantially since the mid 1990s, and these time deposits and money market funds are claims on debt through the financial system.  More generally, government and household debt have been financed by rich Americans through direct bond holdings, bond mutual fund holdings, business equity, time deposits, money market funds, and defined contribution pensions.

If it is "good" when savings correspond to investment in the non-financial sector, and it is relatively "bad" when savings do not correspond to investments in the non-financial sector, then the accumulation of financial assets by the top 1% households would seem to "crowd out" investment by saturating the working class with debt and depressing the increase of wages or discharge of debt that would be necessary to stimulate more aggregate demand.


Is there any reliable data on what % of the UK population currently earn less than £17,300 annually? According to the Living Wage Foundation the "real living wage" in the UK is £9 an hour

Which assuming a 37 hour week & rounding to the nearest whole GBP amounts to £17,375

  Formula used ((9*37)/7)*365.25

I don't know how many hours a week or what the annual figure is that the LWF assumes or uses so I've had to just pick a number (37 hours a week in this instance) & calculate from there, so if anyone can provide the correct number of hours (or better yet their annual rather than hourly rate) please do.

I've spent a fair amount of time cruising the ONS & other sites trying to come up with an accurate figure for what % of people earn less than this but simply can't find anything (so far) to provide it.

So does anyone have this figure or a site they could direct me to that has this information?

https://www.gov.uk/government/statistics/percentile-points-from-1-to-99-for-total-income-before-and-after-tax/

The ONS has freely available data on the percentile points of the income distribution as estimated from the Survey of Personal Incomes. The data is collected on a yearly basis, and is currently designated as "Percentile points from 1 to 99 for total income before and after tax".

You should be able to calculate the answer to your question approximately with this information and some linear interpolation. If you really want the exact number, you probably need the actual micro-data, which I'm guessing you will need to submit a request for, unless the ONS anonymized it.

You should check whether these still need to be deflated to get real income.


trading security volume that affects price Curious if there's a formula for this. There are some notorious cases of software (accidentally) and people (purposefully) quickly unloading a given security, causing the price to (temporarily, generally) plummet.

Is there a general formula for determining how many issues can be transacted in a given time period so that the market price is minimally impacted?

There are countless models, from different perspectives (theory/econometric/etc.) on price impact of trade volume. The seminal model in market microstructure---the Kyle model (85 Econometrica) addresses this very issue. There are many descendents of this model.

To demand a "formula" is a little simplistic. The usual framework for these models, if micro-founded, is strategic. The price impact is a property of the resulting game-theoretic equilibrium. In the Kyle model, one has

$$
\Delta p = \lambda\cdot Q
$$

where $\Delta p$ is the price adjustment of market maker when the incoming total order flow is (only market orders are considered) $Q$. The coefficient $\lambda$ (Kyle's lambda) is a measure of price impact, and is determined by the severity of the adverse selection problem faced by the market maker.


Is it possible to quantify & cost the ideological obstruction to climate change? Paul Rogers in an article on Open Democracy, writes:

It is also significant that the term 'hothouse earth' has caught on, and that the idea of runaway climate disruption is covered in the media in some depth - even by newspapers that have long been impregnable citadels of climate denial
The weekly economist has for many years given ample space to climate sceptics, but recently it's coverage has changed markedly. The cover story of its latest is about the failure to tackle climate change.

Is it possible to quantify and cost the ideological obstruction on tackling climate change given that the earlier climate change is tackled the more effective it would be?
One example of a global effort to limit environmental damage was the Montreal protocol on limiting substances that damage the ozone layer that came into force in 1987 with climate projections showing that ozone layer will return to 1980 levels around 2050-70. Of course, the CFC industry is valued in the billions whereas the fossil fuel industry is valued in the trillions so there is likely to be a much larger push-back from the industry. It's this that I want to have numbers on.
In view of the comment below in the top rated answer, I'd suggest that such an exercise would useful in informing class action suits in the future in the same way that we have had class action suits against big tobacco firms. (In the latter, they are polluting peoples lungs and in the former, the planet lungs).

Yes, it is possible to cost it. The range of costs could be estimated by taking the range of estimates of the marginal social cost of carbon (in €/tCO2e), and the range of estimates of the net excess amount of greenhouse gases [GHG] released due to delay (in tCO2e), and multiplying these together.

One starting point would be to ask how long it would have taken to get to zero net GHG if there had been international agreement in 1989, at the start of the IPCC, to put the world on track to tackle climate change (a deal that was killed by the USA, USSR, UK, Japan at the time), and what the total net emissions would have been on that trajectory, versus how they'll be if we achieve a 1.5°C or 2°C trajectory now.

I suspect no one's done it because it's not obvious what the value of the exercise would be: in the absence of a time machine, it doesn't really inform any decisions now.


Are government income and government employee wages counted in GDP? (income approach) The Wikipedia article does not include it nor exclude it.

The wages of government workers are counted as wages of individuals in the income measure of GDP. If the Government trades, then surpluses or profits of these activities are counted as income in the income measure of GDP.

If GDP is being measured at market prices then some indirect taxes (on production or on imports, less any subsidies) are also taken into account; other taxes such as income taxes are not

Meanwhile Government payments of wages in its non-trading activities are counted as government consumption in the expenditure measure of GDP and this amount also counts as Government production in the the production measure of GDP


Total UK Household Income How would I calculate the total UK household income? I want to be able to estimate what a flat 10% income tax would generate (with no personal allowance or other tax breaks).

Not that I agree with this idea!

How about multiplying the average UK household income with the number of households? Both of these should be available from government statistics.


Factoring Technology into Economics models There has been tremendous improvement in technologies in recent years. My question is: have economists been able to properly evaluate and factor the values of recent innovations in the technology sector? We often hear about various economics indicators such has Manufacturing PMI and industrial productions, but these indicators often fail to mention technology related jobs or the values of recent innovations. Can anyone help me understand how technology is valued?

Yes, this is pretty standard stuff in economics.

First, the simplest models contain it in a hidden form. Supply curves are derived from production functions, and include (marginal) cost of production. Technology innovation is then reflected in reduced production costs per unit. It can also change the indifference curves of consumers, leading to changes in the demand curve (shifts, slope change, etc.) Labor costs are also affected, thus also changing macroeconomic models.

Second, there are models which focus specifically on innovation. Look up the Schumpeterian models, or (for a more business-oriented than economic-oriented theory) Christensen's work.

Third, some of the more involved models can accommodate the consequences of a specific technology as opposed to a generic assumption of innovation. For example, brick-and-mortar stores are known to max out at some size due to rising overhead, while for online stores, overhead is considered to rise underproportionally to profit, which predicts "winner takes all" markets, which is what we are seeing today. Similarly, when you look at information assymmetry models, you see that modern information technology can remove some asymmetries from specific markets (new ways for principals to monitor agents, allowing price comparison in some markets, eliminating transaction costs or discovery costs thus making intermediars obsolete). You can get a good, if somewhat dated, review of the results of IT developments on economic models in Macho-Stadler and Perez-Castrillo's "An introduction to the economy of information".

I know this is a rather vague answer, but I'm afraid your question is similarly vague.


Is there any reason deflation would reduce profits? Profits are the difference between input and output prices. So profits would only fall in those industries where output price fell faster than input price.

Is there any reason deflation would reduce profits in all industries rather than just some?

For some models, deflation makes consumers save more, because they expect one unit of money in the future to buy more goods than one unit now. Consumption falls, so revenue and current profits fall.

The fall in demand and profit may have feedback effects: less investment, less innovation.

In general, depends on the model you are using. In a static model with homogeneous firms, the real profits may stay unchanged.


Isn't Bull Put Spread's Maximum Loss = Spread Credit + Loss from sold call + Profit from bought call? I don't grasp the blue difference below. If $P \ge 48$, isn't the investor's

Maximum loss = spread credit + $\color{red}{\text{Loss from his sold 44C}} - \color{limegreen}{\text{profit from his purchased 48C}}$.
= spread credit + $\color{red}{P - 44} - \color{limegreen}{(P - 48})$
= spread credit + $\color{limegreen}{48} - \color{red}{44}$.

=   The last line is wrong anyways, because $3 -4 = -1$.

  Bear Call Spread Example

  Investor is bearish on stock XYZ when it is trading at \$50 per share and believes the stock price will decrease over the next month. The investor sells (writes) \$44 call and buys a \$48 call for a net credit of \$3. Best case scenario is if the stock price ends up at or below \$44 then the options expire worthless and the trader keeps the spread credit. Worst case scenario is if the stock price ends up at or above \$48 then the trader is down the spread credit minus (\$44 - \$48) amount.

  Break even point = 44 strike + spread credit = \$44 + \$3 = \$47

  Maximum Profit = Spread credit = \$3

  Maximum Loss = Spread credit $\color{CornflowerBlue}{- (\$48 - \$44)}$ = \$3 - \$4 = \$1

You have your minus signs mixed up for buying and selling the underlying.  When your short call is exercised, you sell the stock for 44 (credit).  When your long call is exercised, you buy the stock for 48 (debit). So in your terminology, the maximum loss  is:

(-P + 44) + (P - 48) + spread credit = 44 - 48 + 3 = -1

A much easier way to remember this is that with vertical spreads:

If it's a credit spread, the maximum gain is the credit received and the maximum loss is the difference in strikes less the credit received.

If it's a debit spread, the maximum gain is the difference in strikes less the debit paid and the maximum risk is the debit.


Mathematical Proof as to why does the total revenue increase when the prices are increased for an inelastic product? I was recently reading up on the Price Elasticity of Demand and the section of Inelastic demand mentions that if a firm has inelastic demand for its product and wishes to increase its total revenue then it should raise the price of the product. The author has done one calculation to somehow convince the reader, but I think that anyone can conjure numbers just for the sake of argument. I am looking for a mathematical argument that will be rigorous enough to convince me. Please note that I get the intuition behind why this might happen but my textbook does not provide any mathematical reasoning as to why this must happen. Any insights will be much appreciated.

(I do not agree that this is a duplicate of the answer proposed by other members here).

Total Revenue is

$$TR = Q(P)\cdot P$$

The derivative with respect to price is

$$\frac{\partial TR}{\partial P} = Q'(P)\cdot P + Q(P)$$

For this to be positive (and so total revenue to increase with price), we require

$$\frac{\partial TR}{\partial P} > 0 \implies  Q'(P)\cdot P + Q(P) >0 $$

$$\implies \frac{Q'(P)\cdot P}{Q(P)} > -1$$

The left-hand-side is the price elasticity of demand. Now, greater than minus unity means smaller than unity in absolute terms. And it is in that sense that demand at the region is "price inelastic" (the minus sign indicating direction of movement).


Is the Paradox of Value relevant to the value of labour? I trust we're all familiar with the Paradox of Value -- that queer state of affairs in which diamonds, which are not good for anything, are very expensive, while water, which we all need to not die, is very cheap.

This has always reminded me of similar oddities in the labour market -- that a professional player of sports is paid millions of dollars a year, while a kindergarten teacher is paid much more modestly.

Am I correct in thinking that these are two sides of the same coin?  Do the various resolutions of the Paradox also serve to explain the labour market?  Or are there important differences between goods and labour that make this sort of approach unhelpful?

Both of these things can be thought of as Supply/Demand problems where the relevant concept is actually how Demand is decided.

First, let’s look at diamonds. Diamonds are of value because people give them as gifts, proposals can hinge on them, etc. Now why that is a question of history or sociology, but the key idea is that people want them and will pay to make sure they can also give them as gifts. It wouldn’t be fun to plan a proposal, get on a knee, and pull out a Ring-Pop..

Diamonds and water are both of high demand! The difference is that supply of diamonds is small, so people will have to compete via price to get their diamond whereas water is relatively abundant.

Professional sports players too follow this pattern. What’s really important for basketball fans is seeing the absolute best players compete. There’s a reason middle school teams don’t sell out stadiums. So the demand is not for an average basketball player, it’s for the best basketball player.

The supply of truly spectacular basketball players is small (as the majority of draft busts can show) and therefore their salaries are quite high. Teachers are relatively abundant, so their salaries are a low (tragically so).


Did the dollar depreciate when Trump won the election? I expected the the dollar to briefly depreciate against all currencies when Trump won the election (in 2016), but I have just learned that it briefly appreciated against some. It depreciated against the Euro and Pound, but appreciated against the South African Rand and Australian Dollar. Why did the Rand and AUD depreciate against the dollar?

Source

Source

Source

You might find the answer in this article on the Forex website. I hope it helps!


Insurance Company's Role after Natural Distaster Is anything special expected of insurance companies after a natural disaster? Many different sectors have to cooperate to put affected urban communities back together. Recently there are reports of labor shortages that has stunted the rebuilding of some of the cities affected by the hurricane season of 2017. Likewise, I was wondering if there would also be a strain on the available insurance. Are there ever concerns about insurance shortages? The insurance companies typically try to create a "healthy" risk pool, but if several natural disasters hit, are they still expected to function as normal? Perhaps, insurance companies have policies in place for extremely uncommon events that are massive in scale, which may result in massive claims? Is there a historical precedent for how many natural disasters it takes for the insurance companies to "throw in the towel?" Let's assume the majority of victims have insurance (flood, house, ect).

I had in mind the case of the US/Caribbean in light of the recent hurricanes, but any country / case study will be acceptable as an answer as long as it is clearly explained.

Is anything special expected of insurance companies after a natural disaster?

Insurance providers in high-risk areas tend to increase the premiums, particularly for re-insurance (Froot, 2001). Some insurers will also leave the market, with others coming in (Grace, Klein & Liu 2005)

Semi-related: One paper with a 1970-2002 analysis of disasters and financial flows suggests that in poorer countries the migrant's remittances increase after the hurricanes covering $\frac 45$ of the damages, but in richer countries it only stimulates lending, not fully offsetting the losses (Yang 2008).

  Are there ever concerns about insurance shortages? The insurance companies typically try to create a "healthy" risk pool, but if several natural disasters hit, are they still expected to function as normal?

According to the news there wasn't shortage or bankruptcy concerns in the Hurrican Irma. The straight answer for that question is it depends on the impact of the damages.

About functioning as normal: they will probably increase the premiums, as stated above, and might implement lower compensation limits for future losses, or exemptions for certain kinds of damage (e.g. most insurances stopped covering terrorist attacks after the 9/11, or priced it extremely high).

  Many different sectors have to cooperate to put affected urban communities back together. Recently there are reports of labor shortages that has stunted the rebuilding of some of the cities affected by the hurricane season of 2017.

This is not the insurer's problem. If you suffered damages, you receive the previously agreed compensation. It is up to you to rebuild or not with the compensation you received, with whatever conditions the market has at the moment.


person owns object, loses it and refuses to buy it the second time. Is it really an example of sunk cost fallacy? I was traversing the web with examples about the sunk cost fallacy, and bumped into some example that a bit confuses me. The example is taken From here (https://market.subwiki.org/wiki/Sunk_cost_fallacy) and I repeat it below in short. My question is whether it is a fair example of sunk cost fallacy?

Consider person owns an object A, and then the person loses it. Then (quote from that link):
“Assuming rational behavior, whether a person chooses to buy or not buy should be independent of whether the person loses the money or the object. However, what the sunk cost fallacy predicts that losing the object ￼ makes the person less likely to buy another copy of ￼, because the person does not want to admit that the initial purchase of ￼ was wasteful”

I’m confused and not sure because this example is so much different from traditional examples when you keep spending money/effort/time because you already did it in the past. Could anyone clarify?

I see two questions here. Are all fallacies that are based on sunk cost, sunk cost fallacies? Does the example above describe likely human behavior?

The earliest mentions of the sunk cost fallacy seem to come from the following paper.

  Arkes, H. R., & Blumer, C. (1985), The psychology of sunk costs. Organizational Behavior and Human Decision Processes, 35, 124-140.

The definition given is as follows:

  The sunk cost effect is a maladaptive economic behavior that is manifested in a greater tendency to continue an endeavor once an investment in money, effort, or time has been made.

The loss of an object A is a sunk cost as whether or not you owned A in the past is not relevant to whether you should own it in the future. To be less likely (or more likely) to purchase the object A in the future is irrational behavior (a fallacy) related to sunk cost. However, it isn't clear whether it is a sunk cost fallacy based on the definition above. You could argue that you put effort into not owning the object (by losing it). And thus by continuing to put effort into not owning the object (by not purchasing it again) despite that not being the optimal decision, you are committing the sunk cost fallacy.

A clearer argument is that you put effort into owning the object (by purchasing it once), and thus you are more likely to continue to put effort into owning the object (by repurchasing it) based on the sunk cost fallacy. And this latter argument sounds more likely to me, but I have no evidence to back this up.


How does an import driven economy function? Can a country's economy,where everything is imported from other countries, solely depend on the income from its retail industry?

This is an implausible scenario for a country of any size, the problem being how the imported goods would be paid for.  An individual retailer might pay for its imported goods out of income from sales to other residents of the country.  But for the country as a whole this would not work: there has to be sufficient income from foreign sources to pay for its total imports. The only exceptions would be if the country were running down its assets, or borrowing from abroad, neither of which could continue indefinitely.

In theory the required income could come from a) re-export at a profit of imported goods, and/or b) sales of imported goods at a profit to incoming tourists. However, even with clever marketing, it seems unlikely that (a) could be achieved on any scale if it involves no physical processing to add value, in competition with foreign suppliers operating by more direct routes. So far as (b) is concerned, even if the country has natural tourist attractions (eg scenery, heritage), to bring in many tourists would require "tourism infrastructure" (transport, hotels, etc) that is not normally considered part of "retail".


Should we expect more structural technological unemployment if growth becomes more limited by natural resources and less by labour? Technological unemployment, where unemployment arises from (with some oversimplification) workers being replaced by machines, has so far been temporary as new jobs were created that replaced the old jobs.  Structural unemployment has been predicted many times in the past and the present, but has not (yet) occurred.

Historical increases in productivity have led to an increase in overall production.  Physicist Timothy Garrett models the economy as a heat engine, with more details in papers linked from Garretts personal page:

  In each of the past 40 years for which records are available, a continuous 7.1 Watts has been required to maintain every one thousand inflation-adjusted 2005 dollars of historically accumulated economic wealth (not yearly economic output or GDP). As of 2010, civilization was powered by about 17 trillion Watts of power which supported about 2352 trillion dollars of collective global wealth. In 1970, both quantities were less than half this. In the interim, energy consumption and wealth grew equally rapidly in the interim at an average rate of 1.9% per year.

Dr. Garrett is not an economist by training, and I don't know how his models are received by mainstream economists.

How do contemporary forecasts on technological unemployment take into account an economy that is increasingly limited not by the availability of (sufficiently skilled) labour, but rather by the availability of resources?

To illustrate it further: some speculate that in the next years and decades, self-driving cars will displace professional drivers (taxi drivers, lorry drivers, etc.).  This will initially increase unemployment, but it would also lower the labour component of the price of many goods.  Historically, civilization has responded to such events more with an increase in production than with an overall decrease in hours worked.  However, production cannot be increased arbitrarily; resources become increasingly scarce. Therefore, those prices will go up.  That means that perhaps this time around, the feedback preventing structural, technological unemployment does not apply...  hence my question.

I welcome answers that do and answers that do not take into account externalized costs such as damage to natural ecosystems, pollution, and anthropogenic climate change.

I understand that you are asking the following

  Up to now, we have avoided structural unemployment because we increased
  production by more than what the technological efficiency gains
  implied (and so eventually re-employed the labor that had become
  initially obsolete, usually in other industries). But if finite resources put constraints on how
  much we can increase production, won't a time come that structural
  unemployment will emerge?

As @Foobar notes in a comment, technically speaking this appears to have to do with the rate of increase of efficiency in resource use compared to the rate of decrease of resources available.

But one could argue that, efficiency in resource use has its limits, and the constraint will eventually set in. In such a technological unemployment scenario (which I don't believe anyone can really put a reliable time-line on), there is one resource that won't decrease but rather increase in availability: labor. So, and if nothing truly life-changing happens (like devastation of human population, massive colonizations of other planets, or the equivalent of Amalthea's Horn of Plenty), production will tend to utilize this available resource (which we should expect to command a relatively lower reward being in high supply). Meaning, a tendency for production to grow in sectors where services delivered by humans remain central, by their nature (or by the prevailing consumer preferences). Servants, personal assistants, waiters, nurses, sex workers, trainers, teachers, baby sitters, security guards, body guards, arts and sports entertainers... even if only as a relative "luxury", rather than strictly needed in the amounts employed. And we may even see innovative ways of using labor (i.e. once more creating new sectors) -but I leave that to anyone's imagination...
Of course this labor should get paid something for its services, so those employing it should have the income/wealth needed to pay this something... which indirectly brings in the issue of wealth and income inequality, and whether it plays (or not) a part in all these.


Metzler diagram interpretation Suppose we have a graph whose axes are r (interest rate) and S/I/Y/whatever. I'm studying intertemporal models right now, and i got a bit confused.

According to my textbook, the area underneath S is the cost of savings (forgone current consumption), and the area underneath I is the returns on investment. After some digging, i think i've figured out the latter (investment curves are sums of individual corporate investment portfolios sorted from the largest to smallest in terms of returns, where the y (or r, in this case) axis is expected rate of returns). But what I don't get is the former - why is the area underneath the S curve the cost of saving?
*I understand why changing interest rates affect savings, both through the substitution and income/wealth effect, but that's not really helping me interpret the graph.

It is because supply of saving is equal to the cost of saving which is forgone consumption as the graph notes. To explain this further the vertical distance from $x$-axis to the supply curve gives you the value of forgone consumption for some infinitesimal increase in the supply (along the supply curve). This is because value of the forgone consumption needs to be at least equal to the ‘quantity’ of output you decided to save rather than consume times the return you earn on those savings (otherwise you would not supply those savings to the market to begin with).
So the total cost of saving will be the sum of all costs of savings for every small increase in the number of saving (i.e. every difference between the point on supply curve and the $x$-axis). The sum of these adds up to the area under supply curve up to the point where actual return intersects the supply of savings.


Are these products substitutes or independent? A consumer's preferences are represented by the following utility function:

$$u(x,y,m) = x+y+m$$

where $m$ is money. Are the goods $x,y$ substitute goods or independent goods?

Microeconomic textbooks say that they are perfect substitutes. Why? Because the consumer will always want to spend his entire budget on the cheapest product. So, if $p_x<p_y<1$, the consumer will demand only x, while if $p_x$ increases above $p_y$, the consumer will demand only y. So, the demand of y increases with the price of x.

But consider the following situation: x and y are two kinds of rare items that are sold in an auction. The consumer has enough money to buy all available units. Then, if $p_x<1$ the consumer will want to buy all available units of x regardless of $p_y$, and if $p_y<1$ the consumer will want to buy all available units of y regardless of $p_x$. By definition, this means that x and y are independent goods.

Does this mean that the definition of substitutes vs. independent goods depends not only on the utility function but also on the exact situation?

Are there any references that discuss this issue?

The goods are perfect substitutes because the marginal rate of substition between them is constant for all values of $x$, $y$ and $m$, i.e. there is $c \in \mathbb{R}$ such that
$$
\forall (x,y,m) \in \mathbb{R}_+^3: \ MRS_{x,y}(x,y,m) = - \frac{MU_x(x,y,m)}{MU_y(x,y,m)} = c.
$$
This essentially means that the goods $x$ and $y$ are so much alike that the rate of substitution does not diminish.

The total quantities may be limited, but (I think) perfect substitution has nothing to do with set of feasible allocations or the budget set, only with the preference ordering.

Varian defines perfect substitutes in subchapters 3.4 and 4.3. Neither subchapter considers feasibility.


How should one expand the information set in VAR models? I am trying to use VAR for an undergraduate class but keep having degrees-of-freedom issues. I am using quarterly data, have 3o years of data, and have 10 time series.

I want to look at the effects of monetary policy shocks. But we learned that this method produces a price puzzle and that one way to fix the price puzzle is to include commodities prices.

My problem is that this seems like it treats a symptom and not a problem. I thought it might be a better idea to include a broad set of variables instead of just that one. It is justifiable to include lots of information but not justifiable to cherry-pick information, I think.

Anyone know how to include more variables in that set?

My recommendation is that you read through this paper from Bernanke, Boivin, and Eliasz. This paper introduced something called factor-augmented VAR. The gist is that you can use principle component analysis to do exactly what you're after. This method allows you to include hundreds of time series in the conditioning information. And FYI, this does allow one to solve the price puzzle with solid economic rationale instead of the ad hoc inclusion of a single time series.


What is the relation among "welfare economics", "institutional economics", "environmental economics" and "neoclassical economics" I'm doing research about environmental economics, being myself a beginner in the subject.

I got confused with the branches and subdivisions of the schools of thought.

Is environmental economics a branch of welfare economics or institutional economics, and how is this related to the neoclassical school?

As dismalscience said, none of these terms has a truly rigorous and concrete definition. But here is a broad outline:

Environmental economics is the branch of economics that deals with environmental issues, such as providing incentives for pollution abatement, dealling with climate change, managing shared environmental/natural resources, etc.

Neoclassical economics is the dominant paradigm for economic analysis across virtually all fields of economics (including environmental econ). It is cheifly characterised by the assumptions that all actors behave rationally in the pursuit of some well-defined objective. In modern economic work, neoclassical analysis typically manifests in the presentation of a mathematical model of behaviour that embodies this rationality assumption.

Welfare economics is the branch of economics that deals with questions about how the well being of individuals/groups in society (as well as of society in aggregate) can be definied/measured. It also deals with studying the effects of particular policies/economic phenomena on welfare. Such analysis is usually conducted within the framework of neoclassical economics.

Welfare economics provides an important set of tools used by environmental economists to understand who wins and loses under different regimes. It also provides the tools necessary to define what a "good" outcome might be, when all outcomes involve some winners and some losers.

Institutional economics studies how and why particular forms of institutions emerge and how they affect economic outcomes. One particular focus of institutional economics is how society deals with situations where markets would otherwise fail. For example, the environment is a common resource shared by everyone, meaning that individual actors have an incentive to exploit the resource for private gains and hope that others will take care of it instead. A key question addressed by institutional economics is how institutions have evolved to deal with these kinds of problems. Such analysis sometimes, but not always, occurs within the framework of neoclassical economics.


Total Derivative and Composition We are given that $C$ is a function of $Y_D$ and $Y_D=Y-Y\tau$. What would be the total differential of $Y=C(Y_D)$?

So far I have the following:
$$ dY=C_{Y_D}(1-\tau)dY+C_{Y_D}(-Y)d\tau$$

However I am not sure how to write this expression in terms of $C_Y$ and $C_{\tau}$. Where do I go from here? Is leaving the expression in terms of $C_{Y_D}$ appropriate?

$\newcommand{\pd}[2]{\frac{\partial #1}{\partial #2}}
\newcommand{\dd}{\, \mathrm{d}}$
How many arguments does $C$ have? If the only argument to $C$ is $Y_D$, then $C_Y$ and $C_\tau$ might not make sense.
I think it's easy to get yourself in trouble here.

Suppose that $C$'s only argument is $Y_D$. Yet, we want to impose the restriction that $Y_D = Y(1-\tau)$. Well, as you wrote
\begin{align*}
\dd C = C_{Y_D} \dd Y = C_{Y_d} (1-\tau) \dd Y - C_{Y_D} Y \dd \tau
\end{align*}
is correct. But what is $C_Y$ and $C_\tau$? Well, technically,
$$
\pd C Y = \pd C \tau = 0.
$$
This is because $Y$ and $\tau$ do not directly affect $C$.
I guess what you have in mind is something similar to the following.
Suppose you define a function $f$ such that
$$
f(Y, \tau) = C(Y(1-\tau)).
$$
Then
\begin{align*}
f_Y &= \pd f Y = \pd C {Y_D} (1-\tau) \\
f_\tau &= \pd f \tau = -\pd C {Y_D} Y.
\end{align*}
So, really, $C_Y \neq f_Y$ and $C_\tau \neq f_\tau$, because $C_Y$ and $C_\tau$ are both equal to zero.


What would happen if fractional banking was phased out? There are negative interest rates now and into the foreseeable future. This must mean there is too much money being offered compared to the demand for loans. Fractional banking acts as a multiplier on the money available for loan takers, so it drives up the supply.

In this extreme situation, perhaps it would be a good idea to gradually phase out fractional banking and return to a simpler and less risky economy.

What would happen to the economy if fractional banking was gradually abolished?

Fractional banking acts as a multiplier on the money available for loan takers.

Actually, this is subsequently to having taken loans that the money multiplier increases from 1. Fractional banking potentially increases the "money supply", it does not do so performatively. Incidentally this is even why, western economists are currently discussing the possibility of fighting the next downturn with helicopter money.

If I have borrowed, say, a bike, and that I do not plan to use it during the next week, why preclude someone else from borrowing it from me? And the risk that I change my mind and need my bike during the next week is not unmanageable. Especially that the new borrower may have good opportunities to increase to collective wealth.

  What would happen to the economy if fractional banking was gradually abolished?

Resources would be suboptimally employed and we would probably enter a long period of recession. Especially that the world currently "needs" inflation and that credit is the main conventional inflation-engine. That being said, at some point, the entire economic system would likely synchronize with this new credit pace, finally leading the world into a new economic regime, slower, with less volatility and with longer business cycles.


Why a bank never combine all benefits/promotions and issue a single Credit Card Bank today issues multiple type of Credit Cards with different promotions linked to them. Any reason stopping a bank from issuing a single card with combined benefits/promotions, wouldn't that be more consumer friendly resulting more customers and spending?

Should P&G drop all their brands and only sell one shampoo and one deodorant and one toothpaste?

Volkswagen group own Skoda, Volkswagen and Audi (plus some additional brands - but lets exclude those for this example). Each brand has several series/models that are comparable between brand "levels". E.g Skoda Octavia = Volkswagen Passat = Audi A6.. Essentially the same car (sure not exactly the same car, but comparable in size, equipment, material etc.) - but different prices.

Would it be more consumer-friendly to skip the different brands and just offer one car?
Same thing with credit cards. Different cards offer different things and a eligible for consumers with different income/wealth levels.

Take for example MasterCard Black which many banks will offer along with a large credit (e.g 100.000$ per month) and maybe a 24/7 concierge service that can take care of e.g plane tickets, helicopter service or whatever.

Take your average Joe with a yearly salary of 30.000, will he ever be in need of a 100.000 $ credit (or other way around; could he ever repay that debt?!).. and how often will he be using a concierge service for finding business class plane tickets from New York to Paris departuring the same day? Probably never.

That is why banks are not offering all customers the same credit card, because their customers have different needs.


Effort setting game - no idea where to start I have been working on this problem for a few days but I am completely lost on how to start. Any suggestions, comments, hints are greatly appreciated. Here is a scenario:

  Participants are competing in a competition where only the best 3
  products will be chosen and awarded in the amount of $R$.

  To produce a product, each participant picks an effort level $e$. The
  quality of the product q is a function of $e$. Each participant can
  produce one and only one product.

  Each participant has a cost function $c$ which in a convex, increasing function of effort level $e$ and increasing in a cost parameter $\theta$. This
  parameter $\theta$ is uniformly distributed between 0 and 1.
  Participants know their own $\theta$ but do not know others. Although,
  they know the distribution of $\theta$.

The questions at hand are:

1) Assuming that participants can observe others' effort, what is the
probability that a participant who spend an effort $e$ wins a
competition (his product quality is among the top 3)

2) Given the reward amount $R$, what is the equilibrium effort level for a participant with a cost parameter $\theta$.

For me, this question is quite similar to the price setting problem: If there are N sellers in the market with different cost parameters, and buyers are looking for the cheapest product, how are they going to price their product? However, I could not find a reference about the solution to this problem also.

Again, any suggestions, comments, hints are greatly appreciated. Thank you very much!

This problem is similar to first-price (sealed-bid) auctions with independent private values for the buyers. You can read about those for exaxmple here.

Your first question was already ansewered in the comments: given others' efforts the probability of getting the reward is  or 1. Let us assume that $e_1 \geq e_2 \geq \dots$ are the other players' efforts and $e$ is own effort. Then
$$ \Pr[\text{getting }R | e, e_e, e_2, \dots] = \begin{cases} 1 & \text{if } e > e_3 \\ 0 & \text{if } e < e_3 \\ \dots & \text{otherwise} \end{cases} $$
What happens in case of ties is not exactly specified in the question, but as $\theta$ has a continuous distribution, if $e(\theta)$ is strictly monotone
edge cases happen with 0 probability. Based on this, you can also calculate what happens if you do not condition on other players' strategies (you should probably look into order statistics).

Now the player want to maximize the following:
$$ EU(e) = \Pr[\text{getting }R | e]\times R - c(\theta, e) $$

You can start by assuming that players follow pure strategies, so $e_i = e(\theta_i)$.
Also assume that effort is strictly monotone decreasing in $\theta$.
And last, assume that players have symmetric strategies.

Now you have to write down the expected utility defined above in terms of integrals. As of assumption 2. (and the convexity of $c$) you can differentiate it with respect to $e$ to get a (sufficient) first order condition. Then using assumption 3. and luck will get you a solvable differential equation, and hopefully you can find a closed form for $e(\theta)$. That is going to be your equilibrium strategy.

Or to be precise, one of the equilibrium strategies, as we have only looked at a subset (pure symmetric strategies). But finding others (or proving that none exist) is much more challenging.

I hope this is enough to start. If you get stuck, I will gladly expand this answer with some concrete formulas.

Disclaimer: I have not solved this problem, but as it is remarkably similar to the previously mentioned auction problems, this method should work.

There might be another way using the revelation principle. You could come up with a (second price auction-like) game where reporting the truthful $e$ is the dominant strategy, and has the same expected payoffs. Then you could relatively simply calculate the expected payoffs, and based on that, getting the strategies might be quite easy. I am not sure this method works either, but if you are interested I can look into it.


Bank of Canada operating band I read the following quote about the Bank of Canada's "operating band" for inducing target overnight loan rates:

The Bank of Canada has a system of an "operating band" for overnight trading.” This band is one-half of a percentage point wide and at the center of the bank is the target for the overnight rate. For example, if the operating band is from 2.25 to 2.75%, the target for the overnight rate is 2.5%. The top of that band, 2.75%, is the bank rate—the interest rate that the bank charges on one-day loans to LVTS participants. The bottom of the band, 2.25%, is the deposit rate—the interest rate that the bank pays on any surplus left on deposit overnight at the bank.

What I Want To Know: Would making the bank rate higher than 2.75 and the deposit rate lower than 2.25 achieve the same goal? For instance, if you made the operating band 2.0 - 3.0 instead of 2.25 - 2.75.

Widening the acceptable band for the overnight rate would reduce the effectiveness of monetary policy to a certain extent. If the actual market rate is near the middle of the band, then it would be possible for the policy rate band to be moved by 50 basis points, and the actual rate could remain unchanged. This implies a potential need for greater movements in the policy rate band to achieve the same overnight rate trajectory.

Furthermore, allowing more variation in the overnight rate creates greater uncertainty about the average over time, even with the policy stance unchanged. This creates greater risk for fixed income instruments of maturities greater than overnight. Under the assumption that investors are risk averse, this would raise term premia.


Renewal of multiple notions of value in contemporary (green, public good) economy and are there general game theories? https://en.wikipedia.org/wiki/Exchange_value mentions 4 notions of value: economic value, exchange value, use value, price. But this article also mentions that these are Marxian concepts and the contemporary economy do not make distinction among those values and the notion of the market price is sufficient to explain the value of the good of service.

Actually I would like to follow the path of contemporary orthodox economic theory, not heterodox theory. But I feel that there can be cases, where goods can have value that is different from the market price and it would be worth to capture and determine those other values:

value of energy unit produced by different technologies (oil or green). One can argue that the same unit of energy that is sold by the same market price have different societal value because of some environment harm
culture goods: they are not usually appropriately priced by the society, e.g. many countries have subsidies for the concerts of contemporary classical music or for the culture periodicals
scientific discovery service: scientific discovery usually is not priced accordingly - wages for the scientists are small but the impact of their discoveries can be enormous.

So - some valuation always happen in government subsidies etc. Are there valuation theories (orthodox, conventional, non-Marxian) that try to capture this valuation process (e.g. for green economy, for cultural goods, for science investments) in some common terms? Are there game theories that try to determine the multiple types of value for some item?

My question is very important - computer science and artificial intelligence consider reinforcement learning as the most promising approach for the emergence of intelligence. Such learning process requires reward function. One can argue that the simple market price is the best reward function. But - if governments have some subsidy process, some support process for some parts of economy then the value theory and valuation games are very important for the determination of the reward function that is used for the training artificial general intelligence?

The current mainstream theory of value is the subjective theory of value: goods or services have value that people subjectively believe that they have. Rembrandt paintings cost millions because someone subjectively thinks they are worth that much.

If there are no market failures the market price captures the subjective value through supply demand interactions.

However, in case of environment there are market failures. For example, due to lack of property rights to clean air firms use it for free and hence the subjective value of clean air is not reflected in market price. This would be example of negative externality. Externalities can be also positive, for example basic research can’t be patented so it’s value is more than scientist can get out of it by supplying their ideas on market.

If there is a negative or positive externality the subjective value is still there but it’s incredibly hard to find out. An example of how economists try to find this would be to use some econometric techniques like for example hedonic pricing which tries to estimate the value not captured in market price by observing how other market values change when availability of the good suffering the externality changes (for example by looking how pollution affect housing prices). Other techniques exists I would recommend starting with the hedonic pricing as it’s the most simple ones and you will see that many articles discussing it will point out to more complex techniques.

Also note that in many cases government might already correct for these externalities by taxes and subsidies or by issuing property rights over clean air by tradable polluting permits (cap and trade). Assuming, the government where you live already corrects for externalities and does it properly the market price would reflect also the subjective valuation of environmental goods etc.


DSGE Model Solutions as a Vector Time-Series process. Examples? I'm trying to understand how the solutions of a DSGE model can be seen as VAR or VARMA.

Can you give examples of DSGE model solutions which can be seen as such? Also, does this only happen when we use linear methods, or also with non-linear methods?

Any help would be appreciated.

After much reading, here's the conclusion I got.

VAR models can be seen as State-Space models/representations.

Usually DSGE linearised solutions have a State-Space representation, with more restrictions than a regular VAR model would have. In fact, there are papers(I remember one from spanos testing the Smets and Wouters model) showing DSGE solutions don't pass the specification tests we usually do to the data.

For example, instead of assuming that the residuals follow a normal multivariate distribution, they show we would be better to assume a student-t multivariate distribution. Of course, the problem is that most textbooks dealing with multivariate time series - if I remember correctly lutkephöl is one of them - also assume normal distributions. But at least, the time series VAR analysis can be made robust, while I've never seen DSGE model estimations using student-t distributions instead of normal ones.

P.S.: this is more like a note to self, from my self studying the subject. If anyone knows more, be free to share.


Why do companies push users to use inferior software? Sometimes, companies influence users in order to make them use inferior software and other services. For example, Microsoft makes it difficult to use anything other than Bing for Cortana, even though Google is mostly considered to be better. Similarly, Siri uses Safari instead of Chrome and it is difficult to change this, even though the latter is generally considered superior.

At first glance, the answer seems obvious: companies push users to use their products because they are the ones who get revenue from their own products, due to advertisements in search results.

However, this answer seems insufficient. Suppose Microsoft generates $n$ USD in revenue per unit time from using Bing with Cortana. It seems reasonable to suppose that if Cortana had used Google, Google would generate $n + \epsilon$ USD per unit time from her, where $\epsilon > 0$ due to Cortana using a superior search engine, which would cause her her to be at least slightly more popular. If this is the case, why doesn't Microsoft make Cortana use Google under the condition that Google gives $n + \epsilon'$ to Microsoft, where $0 < \epsilon' < \epsilon$? Wouldn't this roughly give Microsoft an additional $\epsilon' > 0$ in profit and give Google an additional $\epsilon - \epsilon' > 0$? If Microsoft using Google would further increase Google's name recognition and decrease Microsoft's, then why not just increase $\epsilon'$ to take this into account?

There are a lot of factors that can explain why they do not. The stackexchange says to avoid "Making statements based on opinion;" but I do not think that this is possible.  There is most likely no one answer to this, and I would mark it a behavioral economic question instead of just micro economics. This answer assumes that your example gives each firm an additional profit.

1) Microeconomics assumes that each firm acts rationally; that is maximizes utility. Traditionally this means maximizing profit. This major assumption has been proved wrong again and again, and evidence suggest that the pure neo-classical model is not a sufficient indicator of firms actions.

2) While the end result of a contract will lead to a higher profit, the transaction cost between the firms may be high. Transaction Cost Theory basically adds friction to the invisible hand of neo-classical economics. Read the introduction, section 2.2-.3, and all of section 3.1. The external transaction cost between the two firms would be huge. Both companies are opportunistic, both firms have their own strategic intent, and assume both firms would not trust each other. What would have to result is an extremely ridged contract trying to encompass all possibilities, which can offset the additional profit both would obtain and lead to an extremely bureaucratic system that is not a characteristic of a successful tech company.  For example, if I was using a Windows Cortana and searched via a joint venture with Google for a pc, would my search be directed to Microsoft's store or Google's store? A better example would Googles licensing rights. Would google be able to license it's product to other firms. If it was, it could charge a lower price else where via more favorable terms and undercut Microsoft all together (much like Microsoft did to IBM with DOS). If it couldn't, it would be depended to Microsoft, something the firm certainly does not need.

3) Google is dealing with anti-trust suits in Europe. For Google, teaming up with Microsoft to gain further market share would not go well in their efforts to prove they are not a monopoly, and it may bring anti-trust suit in the US. For Microsoft, given their history, I am positive they want to stay as far away from this as possible.

4) Potential may be the most over valued asset. While a search engine is valuable today, in the future having your own may be infinitely valuable. I am not a tech guy, but I can see the value in controlling what people find when they search certain key words. The short-term lose of potential profits as a result of an inferior search engine can be far out weighed by devolving one that meets industry standards. Add that with the fact that Microsoft's core business (OS) is not going to be undermined by a poor search engine, I can understand why they want to deploy their own.

As I said earlier, these are just possibilities, and a combination of factors leads them not to collaborate.


Budget Constraint in Utility Maximisation Problem with Lagrange Multipliers Lets say we have a utility function $U: \mathbb{R}^{2} \to \mathbb{R}$ given by $U(x,y)$ and a binding budget constraint $p_{x} x + p_{y} y = m$, where $p_{x}, p_{y}$ are prices of goods $x,y$ and $m$ is income. We can maximize this function subject to our constraint by simply maximizing this the following function in the unconstrained sense:
$$
\mathcal{L}(x,y, \lambda) = U(x,y) + \lambda(m -p_{x}x - p_{y}{x})
$$
where $\lambda$ is usually called the Lagrange Multiplier.

My question: The reason we're able to add the second term on the RHS of the expression above is because our budget constraint binds, i.e. $m - p_{x}x - p_{y}y = 0$, so we're essentially adding zero. But, why is the conventional expression inside the parantheses after $\lambda$ given by $m - p_{x}x - p_{y}y$ and not $p_{x}x + p_{y}y - m$? Shouldn't both expressions give us a zero term? My guess is that this has something to do with the sign of $\lambda$ (which we want to be positive because it can be interpreted as the marginal utility of $m$), but I'm not sure how exactly this works, mathematically. Would appreciate a clarification explained mathematically.

Objective function of Lagrangian can be set up either with $+\lambda$ or $-\lambda$, depending on how you solve the budget constraint.

Actually, for the solution it does not matter if $\lambda$ has negative or positive sign in the equation. You can clearly see it from the formula if you expand the second term:
$$
\mathcal{L}(x,y, \lambda) = U(x,y) + \lambda(m -p_{x}x - p_{y}{y})= U(x,y) +\lambda m -  \lambda p_{x}x - \lambda p_{y}{y}$$

Using the alternative approach you get exactly the same result as:

$$
\mathcal{L}(x,y, \lambda) = U(x,y) - \lambda(p_{x}x + p_{y}{y}-m)= U(x,y) -  \lambda p_{x}x - \lambda p_{y}{y} +\lambda m$$

So the resulting equations are 100% equivalent.

However, it’s easy to confuse when to use which sign so many people just memorize one of the two ways of solving Lagrangian and never use the other, because it’s easier to just memorize one of the ways than every single time thinking about the sign of lambda. There is really nothing deeper about it.


Increase in per capita GDP always means GDP is growing? This question was asked in very popular civil services examination.

  Question is : Whether the following statement is correct or not?
  Statement : If a country is experiencing increase in its per-capita
  GDP, its GDP must necessarily be growing?

The approach I applied is that, in a country like Syria, if mass emigration happens then population will decrease and at the same time GDP might not decrease with same rate. so this statement will be false.

I know my assumption is not too correct, so ignoring that, please help me arrive in correct answer.

Your reasoning seems correct.

if we consider that Gp=G/(population) and we know that Gp is increasing then we have the following possibilities:

if (population) is static or growing then we can conclude that G must necessarily be growing
if (population) is decreasing then G can be either static or actually decreasing slower than (population). In this case, the statement on the question fails


Intuition behind the linkage principle An important result in auction theory is Milgrom & Weber's linkage principle, which, roughly, holds that the expected revenue from an auction is higher is the seller commits ex ante to reveal as much information about the good for sale as possible.

I am trying to understand why this should be true even if bidders are risk-neutral and care only about the expected difference between their value and the price paid.

Is anyone able to provide some intuition for this result?

The linkage principle does not depend on risk-aversion, because risk-neutral bidders simply bid according to the expected value they assign to the auctioned object. Having private information not revealed to other bidders, will generate information rents, reduce competition among bidders and lead to lower seller revenue.

Daniel Quint (U. Wisconson, eBay) has some lectures notes where he works out the Milgrom-Weber result in detail, and also gives the following intuitive explanation:

  One way to think about this is that bidder’s expected payoff can be
  thought of as his “information  rents,” that is, the extra surplus he
  is able to get by having private information. But in auction formats
  where information is revealed which is correlated with his private
  information, his private information becomes “less private” in a
  sense, so he gets a smaller surplus, and therefore more goes to the
  seller. In the logical limit – where information revealed over the
  course of the auction fully reveals the highest type – the seller
  could simply make a take-it-or-leave-it offer to extract full surplus.


Are monotonic and continuous preferences necessarily rational? Let $\succsim$ be a strictly monotonic and continuous preference relation, and let $X=\mathbb{R}^{n}$ be the consumption set.

Is rationality of $\succsim$ implied by these conditions?

I think transitivity is implied by continuity. However, completeness is troubling, as there are elements $x,y \in X$ that cannot be ordered with respect to $\leq$ or $\geq$, and so we cannot use monotonicity to show that $\succsim$ is complete.

I have thought of constructing a sequence $x_{n}$ with $x_{1}=x$ such that $x_{n} \to y$ and either $x_{n}\succsim x_{n+1}$ or $x_{n+1} \succsim x_{n}$. Then by transitivity and continuity we could show that $x$ and $y$ can be ordered with respect to $\succsim$, but I do not think it is possible to construct such a sequence.

Any help would be appreciated, but please give hints and not full solutions.

Consider a preference relation in $\mathbb{R}^2$ such that $x=(x_1,x_2)\succsim (y_1,y_2)=y$ $\iff$ $x_1\geq y_1$ and $x_2\geq y_2$.

1) You might like to argue whether this preference relation is strictly monotonic and continuous.

2) Is the relation defined above complete?

Then, as a side dish, you might also reconsider your claim that continuity is the cause of transitivity.

Note: I just wrote this particular one with the purpose of providing a thought experiment. More in a way to challenge your understanding. I am not sure whether this example provides an answer to your question or not.


What do you call a system in which the payer is not the decision maker? Is there a name for a system in which the person/entity who makes the buying decision is not the same as the person/entity who pays?

Specific examples of this might be situations which arise in insurance but you could also say a date in which a male is paying for a female (or vice-versa) might qualify.

EDIT:
My interest in the problem arose a couple of years ago when I came down with shingles.  My doctor prescribed an anti-viral and I noted that my insurance covered almost the entire prescription cost.  I think I paid about \$10 but the full price was listed somewhere as around $250.  I then pondered the idea of whether or not I would have bought the prescription if I were faced with the entire \$250.  I was honestly pretty torn, leaning towards probably not.  But this overall experience made me ponder how the demand curve is augmented by the situation.

My interest here is primarily in the demand side effects of this kind of a situation.  My example of the date was an attempt to broaden the scope beyond purely an insurance based question.

This is the principal-agent problem or agency problem.  It's one of the most studied problems in economics over the last 40 years.  The Wikipedia entry offers a thorough summary.  One topic of research is mechanism design, which is how to design institutions to avoid or minimize agency problems.


What would be the economic effects of a reduction in the general level of protectionism on the Australian economy? Protectionism methods including: tariffs, subsidies, quotas, local contents rules and export incentives

Would would be the effects of a reduction of these methods, not complete free trade.

Normally protectionism is never the answer as it doesn´t help in anyway.
If for example the subsidies for exportation were to be reduced you would see a drop in the price of items that are exported from autralia , i would place your question more in micro-economics then in macro. Not sure if that answered your question.


Why does the profit function in standard neoclassical theory have exactly one maximum? In neoclassical theory is said that the highest profit occurs when Marginal Cost equals Marginal Revenue, but this condition wouldn't be enough to determine the maximum if there were more than one. The fact that the maximum can be determined like this means that the uniqueness of the maximum derives from the assumptions of the theory? My professor said that the uniqueness is determined by the static nature of the theory, but this seems to me a little vague. How can it be explained in a more satisfactory way?

Mathematically, most neoclassical  models assume that the profits are concave. This guaranties the uniqueness of the maximum. In economic terms, the Neoclassical theory usually assumes that the law of diminishing returns holds. Thus, the more you hire workers, the more you produce, but at a diminishing rate.

I am not so sure what your professor has in mind when he brings up the "static nature of the theory". There are many dynamic neoclassical models and most of them have a unique maximal profit that also arises from having an appropriate form of diminishing returns, i.e. concavity of the profit function.


Why do stocks that don’t pay any dividends change price when the company does better? I don’t understand why (non-dividend paying) stocks increase in price when a company is successful; is it just because everyone expects that everyone else will find it more valuable because the company is doing better? Is the link between this type of stock and the company really just psychological? If investors are getting something other than dividends or just “ownership,” from buying this type of stock, what is it?

Even if a company pays no dividends, its price will usually reflect its "fundamentals" or "how well it's doing". This is because:
If the price is too low (relative to any metric, be it earnings, growth, etc.), then anyone can profitably launch a takeover/acquisition bid.
Example. A company has 1B shares each priced at \$1 (so market cap is \$1B), pays no dividends, and earns \$100B (profits) per year. Then one could buy up all 1B shares for \$1B, own the company entirely, and enjoy \$99B in profits in just the first year alone.
(Second and third paragraphs are identical to another answer I gave.)


Basic model where inflation occurs Why does inflation occur?  To an outsider, inflation appears somewhat mysterious.  Is there an extremely simple mathematical model where inflation naturally occurs?  I would like something that even someone with zero understanding of economics can appreciate.

UPDATE: I am hoping to find an agent-based model which is not defined in terms of inflation, but in terms of more basic (to me) things like supply, demand, et cetera, but where inflation occurs.  For example, the agents' goal could be to optimize revenue and they could have a limited set of possible actions.  Iterating their decisions could then lead to inflation.  Maybe such a model is nonsense, but I'd imagine that if it is not there would be papers about it.

Quoting Wikipedia:

  the quantity theory of money (QTM) states that money supply has a
  direct, proportional relationship with the price level.

According to this theory an increase in money in circulation increases price levels.

So an "extremely simple mathematical model" (and extremely simplistic) would be something like:

$$ \pi_t = \dfrac{M_t-M_{t-1}}{M_t} $$ where $M$ stands for money supply and $\pi$ stands for inflation.