Does the sudden spike in the US jobless claim pose systemic risk to the US unemployment insurance system? There has been an unprecedented short-term increase in US unemployment owing to the Covid-19 crisis.

  Initial jobless claims soared to a seasonally adjusted 3.28 million in the week ended March 21, according to the Department of Labor. That is the highest number of initial jobless claims in history, since the Department of Labor started tracking the data in 1967. The previous high was 695,000 claims filed in the week ending October 2, 1982.

I understand that the $2T stimulus includes extra money for the jobless, perhaps so that they don't start looking for new jobs immediately, i.e. so they stay at home, because hitting the pavement right away in search of a job might actually negate the social distancing efforts employed in combating the epidemic.

An article on Vox (before the stimulus passed) claimed rather alarmingly that

  Recessions have happened in the past, but they come on slowly. The kind of sudden stop in economic activity that we are looking at is well outside the realm of anything we’ve experienced. And it’s going to break the unemployment insurance system unless Congress takes some quick steps to inject funds and change the rules.

Is that a rubbish claim, or can the system really "break" from too many claims and I mean financially (i.e. server issues aside)? Because I'm not quite seeing how the stimulus package "fixed" the system; it did make it sweeter for the insured though.

I agree that the current crisis will not  “break” the unemployment insurance system.  The most that will happen is payments will stop being issued to those who qualify.

History of unemployment insurance (UI) program

Created in 1935, the federal-state unemployment insurance (UI) program temporarily replaces a portion of wages for workers who have been laid off, as long as they are looking and available for work.

The benefits vary by state but in most cases the program provides up to 26 weeks of benefits to unemployed workers provides half of a workers’ previous wages.   Because more workers lose their jobs during economic downturns of the business cycle, this program also provides some needed economic stimulus that helps mitigate the severity of recessions.

How is it funded

The program is funded by taxes on employers, including state taxes and the Federal Unemployment Tax Act (FUTA), which is 6 percent of the first $7,000 of each employee’s wages.  So at this point the insurance is paying for itself per employee.

States have extensive flexibility in determining benefits. Federal requirements are minimal, while ensuring that all states provide basic protections for eligible workers.
States are pretty much free to choose the level of employer tax, benefit level and duration of benefits, and the eligibility criteria.   Some states does choose to run their program differently.

For example,  while the standard maximum time for an eligible person to collect benefits is 26 weeks; some states a can limit it to much less than that.  Most state UI systems replace about half of prior weekly earnings, up to some maximum.
I think the spell of unemployment payments is the issue.

What criteria makes one unqualified for unemployment?

•   Are dismissed for misconduct at work.

•   Are dismissed for misconduct outside of work.

•   Receive severance pay.

•   Committed fraud.

(the next three points are not relevant to the pandemic situation but its good to note)

•   Turn down a suitable job.

•   Don't look for work.

•   Are unable to work.

Self-employed workers, gig workers, undocumented workers, and students traditionally aren’t eligible to apply for UI benefits.

Another important point to make is that to qualify for benefits you must also have earned at least $5,100 in the last year, and you must have worked for at least 15 weeks in the last year (in most cases).

CARES ACT and UI benefits

The CARES ACT extended the UI benefits which has been called the Pandemic Unemployment Assistance.  It temporarily extends unemployment benefits to certain workers affected by COVID-19 and eligible self-employed workers, including:

•   Freelancers and independent contractors

•   Workers seeking part-time work

•   Workers who don't have a long enough work history to qualify for state unemployment insurance benefits

•   Workers who otherwise wouldn't qualify for benefits under state or federal law

(https://www.dol.gov/coronavirus/unemployment-insurance)

There are new unemployment programs under the CARES Act.

Now there are new unemployment programs called Pandemic Unemployment Assistance,  Federal Pandemic Unemployment Compensation, and Pandemic Emergency Unemployment Compensation.

-The Pandemic Unemployment Assistance (PUA) extends benefits to the self-employed, freelancers, and independent contractors.

-The Federal Pandemic Unemployment Compensation (FPUC) provides a federal benefit of $600 a week.

-The Pandemic Emergency Unemployment Compensation (PEUC)    extends benefits for an extra 13 weeks after regular unemployment compensation benefits are exhausted.

SOURCE: https://www.investopedia.com/who-doesn-t-get-unemployment-insurance-4802117#:~:text=Under%20normal%20circumstances%2C%20you%20can,the%202020%20novel%20coronavirus%20pandemic.

All of the additional UI benefits included in the CARES Act are paid by the federal government.  This also has boosted the program temporally.

Not everyone who is not working is getting UI benefits

It was reported in May (https://www.cnbc.com/2020/05/15/44percent-of-us-unemployment-applicants-have-been-denied-or-are-waiting.html   )  that many are not getting benefits.   Often they are workers, in the reports example, in the restaurant business were they are often being told they didn’t earn enough to qualify for unemployment, even when they’ve worked full-time.

Guidance that appears to restrict eligibility with the CARES Act

However, the Department of Labor recently issued guidance that appears to restrict eligibility for the expanded unemployment insurance benefits in the CARES act.

An example provided by a Brookings report was the guidance specified that gig economy workers are only eligible for UI benefits if they are “forced to suspend operations as a direct result of the COVID-19 public health emergency”, apparently excluding workers such as Uber and Lyft drivers who are experiencing a significant loss of income due to reduced demand. Similarly, it states that parents who had to stop working to take care of their children after schools closed will not be eligible for benefits once the school year is over—even though many families rely on child care, summer camps, and other facilities which may still be closed over the summer, and the guidance appears to provide a narrow interpretation of eligibility based on health reasons and on social distancing requirements.

Source: https://www.brookings.edu/blog/up-front/2020/04/07/how-does-unemployment-insurance-work-and-how-is-it-changing-during-the-coronavirus-pandemic/

The CARES act program runs until December 31, 2020 and its benefits are capped at 39 weeks.   I agree that the CARES act may have made it sweeter for those who qualify but it won’t last long.


what is consumer surplus practically? In Microeconomics producer surplus is equivalent to profits minus fixed costs.

However getting a tangible definition of consumer surplus has been difficult for me to ponder.

What is the practical use of knowing  consumer surplus and what does it tell us?

It is better to think of it as a "saving" rather than as a"surplus".
Also, it is better understood if we imagine heterogeneous consumers for whom a threshold price exists, a "maximum willingness to pay". Then at  a given price level, some consumers are willing to buy the product and are expressing their demand for the product, while others are out of the market, because the price is still above their maximum willingness to pay.

If the price falls more towards the equilibrium,  they enter the market.
But the ones already in the market would be willing to buy the good at a higher price. With the added consumers/higher output, they buy the good in a lower price than their maximum willingness to pay, and in that sense, they "save".

Imagine that the market demand function is build gradually not by the same persons increasing their quantity demanded, but by the addition of new consumers (this is easier imagined if we think of durable goods of which most consumers will usually buy just one unit or not at all).


Profit maximization with Cobb-Douglas function I'm trying to maximize a firm's profit given the production function $F(L,K)=L^\alpha K^\beta$ (where $L$ is labor and $K$ is capital) and that $\alpha + \beta \neq 1$.

So, I know that this maximization problem can be written as $\text{max }pF(L,K)-w_1 L-w_2 K$.

Since $pMP_L (L^*,K^*)=w_1$, $p\alpha(L^*)^{\alpha-1}(K^*)^\beta=w_1$. And since $pMP_K (L^*,K^*)=w_2$, $p\beta(L^*)^{\alpha}(K^*)^{\beta-1}=w_2$.

By dividing these functions and simplifying, we get $\displaystyle\frac{\alpha K^*}{\beta L^*}=\displaystyle\frac{w_1}{w_2}$.

I'm unsure how to proceed from here, though. Should I solve for $L^*$ by separating $K^*$ from the equation and plugging into $pMP_L$? Wouldn't this yield a very complicated solution?

Should I solve for $L^∗$ by separating $K^∗$ from the equation and plugging into $pMP_{L}$

Yep, that's about it.

  Wouldn't this yield a very complicated solution?

Somewhat. The math is available at many places, like section 4 here. But you can surely do it yourself!


Development economics papers that used Difference-in-Differences I need to write an assignment paper in development economics that explains the concept of differences-in-differences estimation, and I feel like it can certainly be helpful to look at some examples that actually used this method.
So I wish to look for some sample papers which dealt with issues in development economics that used
the difference-in-differences method as a reference for the paper.
I spent some time searching for examples but it's been surprisingly difficult to find actual example papers displaying this method (I was only able to find hypothetical examples or examples used in the United States). Maybe there is a problem with my searching method.
Is there a website where I can specifically find examples or sample papers on development economics (so the estimation has to be used in developing countries) that used Differences-in-Differences? I think there are friends here who are used to searching for or writing papers like this, and I would appreciate advice on places to refer to or how to find these kinds of papers that match my needs.

A very good paper that I had in my MA curriculum is Jaychandran and Pande, AER 2017: https://www.aeaweb.org/articles?id=10.1257/aer.20151282 (I believe this paper has open access, maybe on one of the authors' websites).
Working through this paper should help you understand DID quite thoroughly. The paper also employs double and even triple DID.


What should the value of a private sector company tell us? At the highest level, would you say that regardless of market/economic environment (free/regulated), a company's value should reflect its ability to efficiently and effectively bring products and services to market that improve the lives of consumers?

Perhaps this is more of a philosophy/ethics question; cant think of any valid argument against this.

For some context, my train of thought is:
If the values of all companies do reflect their ability to improve the lives of consumers, then an equity index should therefore be an indication of how good the private sector is at improving life. The value of an equity index allows us to consider the health of a particular market. The financial markets are complex systems in which both physical and mental health are two large constituents. By physical health, I mean the bodies of employees, the buildings in which they work and the technology they use for example. By mental health, I refer to the emotional and psychological well-being of individuals, teams, whole companies and markets.

Thoughts please.

A company's value, in financial terms is given by its equity, or its difference between its assets and liabilities. The well known expression $E=A-L$ reflects this. When you buy a share, you buy a part of the equity. The point is that since the world we live in is dynamic, decisions today affect outcomes tomorrow. As a result, when you buy part of this equity, you are buying part of the claims on the firms' expected future profits. The market rewards those goods that consumers demand more with a higher price and one can definitely make the argument that a firm's future profits are conditional on it producing goods/services that are valued by the public. Whether or not the goods themselves improve the lives of consumers is a separate question altogether. Do we always buy goods that improve our lives? What does that even mean?


How do you benefit from a fall in interest rates in general as a creditor of public bonds? I’m reading about England debt in 1819 and how interest rate benefited its creditors. The country had a public debt of more than 250% of the GDP.

With peace at last achieved, London is faced with a mountain of debt that it intends to repay.  And for good reason: it is owned by the aristocracy and the most influential members of Parliament (they will not fail to make huge gains on their "consols" (consolidated bonds) thanks to the fall in interest rates,  the Rothschild's fortune dates from these days)

How does the creditors of those consolidated bonds benefited from a fall in interest rates ? How do you benefit from a fall in interest rates in general as a creditor of public bonds?

This is because bond prices increase when interest rate falls.
A general bond pricing formula can be expressed as as a discounted stream of future cash flows from the coupon and the value of the bond itself. Hence we have:
$$ P = \sum^T_{t=1} \frac{C_t}{(1+i)^t}+\frac{M}{(1+i)^T}$$
Where $P$ is the price of the bond, $C$ is the coupon $i$ the interest rate, and $M$ the value at maturity (i.e. the face value). You can also learn more about the formula here if you are interested.
As you can see from the above formula when $i$ increases $P$ decreases and vice versa.  Hence fall in the interest rate is good for you if you are a bond holder as now you can sell your bond on secondary market for more than before.


Proving the asymptotic normality of th Non-linear Least Squares estimator Our model is $Y=X(\beta_0)+u$, where $u\sim IID(0,\sigma_0^2I)$, and $X(\beta)$ is a non-linear function of the beta.

When trying to minimize the $SSR(\beta)$ we get the following FOC:

$\nabla X(\beta)^T(Y-X(\beta))=0$, where $\nabla X(\beta)$ is the gradient.

Well, the FOC is equivalent to $n^{(-1/2)}(\nabla X(\beta)^T(X(\beta_0)+u-X(\beta))=0$.

If we apply a taylor expansion of the first order to each component $X_t(\beta)$ of $X(\beta)$, we obtain $X_t(\beta)=X_t(\beta_0)+\nabla X(\bar\beta_{(t)})^T(\beta-\beta_0)$, where $\bar\beta_{(t)}$ is a point in the line segment that joins $\beta$ and $\beta_0$. This point may be different for each taylor expansion we do, and that's why it's indexed by $t$.

Inserting the taylor expansion in the FOC:
$n^{(-1/2)}(\nabla X(\beta)^T(u-\nabla \bar X^T(\beta-\beta_0))=0$, where $\nabla \bar X$ is the matrix with $\nabla X(\bar\beta_{(i)})$ as each i-th column.

Are all of the above calculations correct? I ask this because in this book, the authors state in page 225 that we should obtain a term with second derivatives of $X(\beta)$... I do not understand why this is.

Any help would be appreciated

It appears that what you do is not a Taylor expansion, but an application of the mean-value theorem (as one should). If it was a Taylor expansion, apart from the remainder, the gradient would have to be evaluated at $\beta_0$. With the mean-value theorem, there is no remainder, and you evaluate the gradient at some $\bar \beta$ that always lies between $\beta$ and $\hat \beta$.

As regards the issue of second derivatives/Hessian, officially speaking they/it only "temporarily" appear in the derivation of asymptotic normality of the non-linear least -squares estimator, but they vanish asymptotically (while in the Maximum likelihood estimator the Hessian stays there).

Apart from that, we want to minimize the sum of squared residuals so, indexing the observations by $i$, and using much simpler notation (you will have to adjust it to vector-matrix notation), you set out to minimize $\sum_i[u_i(\beta)]^2 = \sum_i[y_i-h(\mathbf x_i,\beta)]^2$ w.r. to the vector $\beta$, in order to obtain a $\hat \beta$. So your FOC is (suppressing the regressors and passing the $i$ index to the function $h$)

$$\hat \beta : \sum_i\frac {\partial }{\partial \beta}[y_i-h_i(\beta)]^2 = 0 \implies \sum_i2[y_i-h_i(\hat \beta)] \frac {\partial h_i (\hat \beta)}{\partial \beta} =0, $$

Ignore "$2$" and apply the mean value theorem to the whole expression  to get

$$\sum_i[y_i-h_i(\beta)] \frac {\partial h_i (\hat \beta)}{\partial \beta} =  \sum_i[y_i-h_i(\beta_0)] \frac {\partial h_i (\beta_0)}{\partial \beta} \\
+ (\hat \beta -\beta) \sum_i\left [-\frac {\partial h_i (\bar \beta)}{\partial \beta}\frac {\partial h_i (\bar \beta)}{\partial \beta}+ [y_i-h_i(\bar \beta)]\frac {\partial^2 h_i (\bar \beta)}{\partial \beta^2}\right] =0$$

Note that $y_i-h_i(\beta_0) = u_i$, the true error, divide by $1/n$ and then multiply by $\sqrt n$ as you are allowed to and re-arrange to get

$$\sqrt n (\hat \beta -\beta) = -\left (\frac 1n\sum_i\left [-\frac {\partial h_i (\bar \beta)}{\partial \beta}\frac {\partial h_i (\bar \beta)}{\partial \beta}\right] + \frac 1n\sum_i\left [[y_i-h_i(\bar \beta)]\frac {\partial^2 h_i (\bar \beta)}{\partial \beta^2}\right]\right)^{-1} \cdot \left(\frac 1{\sqrt n} \sum_iu_i \frac {\partial h_i (\beta_0)}{\partial \beta} \right) $$

Now, we consider asymptotic normality, given that consistency holds,  $\hat \beta \xrightarrow{p} \beta_0$. Since $\bar \beta$ is sandwiched between $\hat \beta$ and $\beta_0$, it follows that $\bar \beta \xrightarrow{p} \beta_0$ also. This means that

$$\frac 1n\sum_i\left [[y_i-h_i(\bar \beta)]\frac {\partial^2 h_i (\bar \beta)}{\partial \beta^2}\right] \xrightarrow{p} \frac 1n\sum_i\left [[y_i-h_i(\beta_0)]\frac {\partial^2 h_i (\beta_0)}{\partial \beta^2}\right] \\= \frac 1n\sum_i\left [E(u_i) E\frac {\partial^2 h_i (\beta_0)}{\partial \beta^2}\right] =0$$

because $E(u_i) =0$.

So this term vanishes asymptotically and we are left with (cancelling also the negative sings)

$$\sqrt n (\hat \beta -\beta) \xrightarrow{d} \left (\text {plim}\frac 1n\sum_i\left [\frac {\partial h_i (\beta_0)}{\partial \beta}\frac {\partial h_i (\beta_0)}{\partial \beta}\right] \right)^{-1} \cdot \left(\frac 1{\sqrt n} \sum_iu_i \frac {\partial h_i (\beta_0)}{\partial \beta} \right) $$

You have to assume that the first sum converges to something positive definite, and the second converges in distribution to a normal random variable, and you do indeed make these assumptions (or deeper ones that lead to them). I don't have the specific book you mention, but you can compare the above to Davidson & McKinnon "Econometric Theory and Methods"(2004) ch. 6, around eq. $(6.30)$.


What are the fundamental theorems of welfare economics? All of welfare economics is based on some theorems, some of which I can remember, but I am looking for a comprehensive list.

I presume you meant The Fundamental Theorems:

The first fundamental theorem of welfare economics states that any Walrasian equilibrium is Pareto-efficient.
The second fundamental theorem of welfare economics states that, under the assumptions that every production set $Y_j$ is convex and every preference relation $\geq _i$ is convex and locally nonsatiated, any desired Pareto-efficient allocation can be supported as a price quasi-equilibrium with transfers. Further assumptions are needed to prove this statement for price equilibriums with transfers.

Or you could read Stiglitz's Paper yourself if you were so inclined.


Why are indifference curves (often) of infinite length? Indifference curves are often of infinite length.

Is this implied by monotonicity or non-satiation?

If not, what is/are some condition(s) that are sufficient for indifference curves to have infinite length?

More generally, indifference curves are almost always manifolds without boundary. Which means that the curves don't have endpoints. What property of the utility function guarentees this?

If you are using the definition of indifference curve on wikipedia then they can be of finite or infinite length. For example if you are completely indifferent between the two goods, the indiffernce curve would be of the form $x+y=const$ which is of finite length (in the positive quadrant).

A necessary criteria for infinite length would be that having $0$ of one good provides you with zero utility, so that any combination of a little bit of both has a higher utility than an arbitrary quantity of one good and zero of the other good.

Edit in response to comment: Indifference curves come in families, one can consider the family of indifference curves $x\cdot y = const.$, they satisfy the definition, are of infinite length and if either $x$ or $y$ is equal to zero, then the utility is equal to $0$ as well.


Allocating chores using auctions I live in a student dorm with 16 people and we share a kitchen. Every week someone has to clean the kitchen. Right now we just take turns in a way determined by the numbers of our respective rooms. This is obviously not very efficient. I was thinking about the possibility of using auctions to determine who should do the cleaning. One possibility could be a sealed bid type thing where everyone states how much money they want in order to do the cleaning. Then the person who wants least does the cleaning and the other people fund this by contributing an equal amount.

Is there a more efficient mechanism? Some points I am considering: Should the amount of funding of each person depend on his/hers bid? Should the person cleaning also contribute to the funding? Will it be better to pay the lowest bidder the amount of the second lowest bid?

I am well aware that this kind of thing might be socially/morally objectionable. It is more of a thought experiment.

Interesting questions. To go through the list of questions you have...

Is there a more efficient mechanism? Will it be better to pay the lowest bidder the amount of the second lowest bid?
According to the revenue equivalence theorem, both types of auctions will result in the same expected revenue to the "cleaner," and will result in the same person doing the cleaning.
Should the amount of funding of each person depend on his/her bid?
This is the same question of choosing first-price or second-price auction. Indeed, any type of auction will depend on the bidders' bids to an extent.
Should the person cleaning also contribute to the funding?
This doesn't make a difference, as the difference would be constant at a factor of $\frac{n}{n-1}$ depending on which "rule" you apply. That is, if you switch the rule to saying that the person cleaning woulnd't have to contribute to the funding, then everyone could just increase their bids by a factor of $\frac{n}{n-1}$.

If your constraint is that someone in your dorm will have to do it, then I'd say this (along with simply keep raising the "price" until someone says, "I'll do it") would be the most efficient. If this is not a constraint, though, an outsider (cleaning company, random guy outside of your dorm) might be willing to do it for less.


What is the Gross Domestic Product (GDP)? I suppose GDP is supposed to create a measure of a country's wealth/welfare, something easily indexable.

But how exactly is it composed? And is its composition disputed? How good is it at measuring a country's economic well-being?

Gross Domestic Product
As per wikipedia, we learn that the OECD, an organisation of international recognition for economic policies and macroeconomy, defined the GDP as

Gross domestic product is an aggregate measure of production equal to the sum of the gross values added of all resident institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs). The sum of the final uses of goods and services (all uses except intermediate consumption) measured in purchasers' prices, less the value of imports of goods and services, or the sum of primary incomes distributed by resident producer units.
-- OECD, Glossary

In somewhat simpler terms, it is a quantitative measure of the amount of values produced by all industries and services of a given country. For example, if a company buy some tomatoes and produce a tomato sauce, the difference between the money received for selling the sauce and the money spent for buying the tomatoes (and possibly other products) will be added to the GDP of the country where the tomatoes are being transformed1.
The GDP is based on price, and not all prices are known (for example, prostitution, black market, etc.) or need to be estimated, like public services. Therefore the determination of the actual GDP cannot be reached, but some statistical approaches offer various ways to estimate that number. One should note that the different approaches do not always provide similar results. Furthermore slight variations in the definition of the GDP may provide different results. Even if the GDP is used since decades everywhere, there are still some discussion about how to measure it. Some details are provided in Wikipedia and in the references therein. But one way, is to use the expenses approach where the GDP is calculated as
$$GDP = C + I + X - M + P$$
where $C$ is the consumption, $I$ the investments, $X$ the exports, $M$ the imports and $P$ the public spending. More details can be found here or in the already cited wikipedia.
The GDP number is used to indicate the performance of an economy. The higher it is, the more value the country's econmy produced. It is used to

compare two countries' economy, regardless of the types of industries they have,
see the evolution of a given country economy as a function of time.

Please note that those are only valid with a constant definition and equal estimation approach. One approach
It can be noted that the GDP value of a country is often normalised by the number of inhabitants of that country. This, to simplify the comparison between countries like Luxembourg and India, which have US\$54,940,000,000 (US\$111,716 per capita) and US\$2,308,018,000,000 (US\$1,627 per capita) respectively (as per IMF in 2014 and 2015 via the corresponding Wikipedia's lists: nominal and per capita). The higher the GDP/capita, the richer the population. But this, however is assuming a good repartition of the wealth, which is not always granted.
Discussions on the validity of GDP
The GDP is an indicator of the current state of an economy. However it tends to be used everywhere, every day by policy makers, economic analysts, journalists, etc. This overpowers other complementary indicators. Which, for policy making is probably insufficient.
As mentioned before, the GDP is used as a measure of how rich the inhabitants of a country are, but due to (sometimes very) inequal repartition of wealth, the GDP could be misleading. Apart from the document cited above, some claim that

neither GDP nor this balance sheet takes account of environmental degradation, insecurity or inequality.
-- François Lequiller, OECD

And, as can be found, there are some discussions about alternative indicators to replace or complement the GDP, which should indicate the wealth as well as environmental, equality and some other parameters.
1. That is the main difference with GNP, which concerns residents, that is to say where the company is registered. More on the subject can be found here.


How can a government save, if it has deficit? I am reading an IMF paper about China's debt (link) which says:
❝ Despite a large augmented fiscal deficit of 10 percent, fiscal savings remain higher than other countries, resulting from the biased composition of spending towards investment ❞
How can a government have deficit and at the same time have positive savings?

Government can have savings while having deficit because we are just talking about savings not net savings.
For example, imagine that government has zero tax revenue $\\\$10$ spending and $\\\$10$ of public investment. In this case the government is running deficit of $\\\$20$ yet it is also saving through investment. Due to the deficit being larger than saving on net basis government still dis-saves but saving is not zero.
So it is completely possible to save and run a deficit at the same time.


Growth accounting using CES functions I was wondering how one could use a CES function in growth accounting exercise, does anyone have notes or resources that demonstrate this exercise? I've done growth accounting exercise using Cobb-D function, but never tried with CES.

First, remember that a Cobb-Douglas production function is a special case of a CES production function (see e.g. here).

Secondly, there are critical assumptions that have to be met when one tries to determine TFP (or the "Solow residual" as it is often called). The most important one is perfect competition.
Furthermore constant returns to scale. Without those the factor shares (capital, labor over total output) and output elasticities are not identical.
Thus the standard "growth account exercise" within the Solow-Swan framework is not possible with a general CES function.


Confused by the Term "Welfare Relative to Full Information Welfare" This is a question comes from Field Exam in Advanced Economics Theory (Jan 2016) from UCB Econ Dept. In the first problem (Q1), it asks:

  b) How does welfare relative to the full information welfare depend on $\alpha$ and $\delta$?

I have never seen such expression before. What does the phrase "welfare relative to the full information welfare" mean?

My wild guess is to set up the total welfare as a function of $\alpha$ and $\delta$? Thanks in advance.

Edit 1.

I am asked to "type the question out so that we don't have to follow a link to see it." So here it goes:

  Consider a two period bargaining model in which an uninformed buyer makes
  offers. If there is trade in period 1 the payoffs are ${\alpha}q-p$ for the buyer and $p-q$ for the seller where $p$ is the price and $q$ is the quality and ${\alpha}.0$. We assume the realization of q is only known to the seller and drawn from a Uniform $(0,1)$. If instead they trade in the second period their payoffs from a time zero perspective are ${\delta}({\alpha}q-p)$ and ${\delta}(p-q)$ for ${\delta}\in [0,1]$ and if they don't trade they get 0.

  a) Show that the equilibrium will be characterized by two cutoff types
  $q_1({\alpha};{\delta}) \in [0,1]$ and $q_2({\alpha};{\delta})\in [q_1,1]$ such that types $q < q_1$ trade in the first period and that types $q$ such that $q_1\leq q \leq q_2$ trade in second period and finally types above $q_2$ do not trade.

  b) How does welfare relative to the full information welfare depend on $\alpha$ and $\delta$?(If you find this hard to do analytically, at least work out a few examples with low and high values and explain)

  c) Assume ${\alpha} = 1.7$ and ${\delta} = 0.8$ and suppose that with probability ${\gamma}$ in the second period another buyer arrives in the market in which case, they both simultaneously submit offers to the seller. How does welfare relative to the full information welfare depend on ${\gamma}$? (Do only the ${\gamma} = 1$ case if you are short on time.)

What it means is the following:

Consider the same bargaining game played by two players that are fully informed (i.e. the buyer is also informed about the value of $q$). Then find the equilibrium of this game and calculate welfare. This is the ``full information welfare'' that the question refers to.

Then solve the model where only the seller is informed about the value of $q$ i.e. find the equilibrium of this game. Now calculate equilibrium welfare. How does it compare to the one you calculated for the full-information case? I would probably do this by calculating the fraction
$$\frac{\text{Asymmetric info welfare}}{\text{Full info welfare}}.$$

Lastly, you need to see how this fraction changes as the values of $\alpha$ and $\delta$ change.


Is there a country in the world not in debt? This morning I read the following article:

https://www.bbc.co.uk/news/business-49961301

It got me thinking, is there any country in the world not in debt? I am aware that debt is good for a country, but to what extent? I am fairly uneducated in this area so please educate me!

Thanks in advance.

According to the World Economic Outlook database (April 2018), in 2018, the "General government net debt" of these countries was negative:

  Kazakhstan, Norway, Trinidad and Tobago, Luxembourg, Botswana, Oman, Estonia.

This database doesn't have this datum for Singapore, but I believe the Singapore government also has negative net debt.


How to interpret illigal foreign currency (cash) transfers in terms of Balance of payments There are a lot of examples of legal operations with trade balance and capital flows. Nonetheless, I've failed to find a clear explanations of how to interpret illigal (read, criminal) foreign currency (cash) transfers in terms of Balance of payments. Is such operation capital inflow or outflow, and why is it so? How should it be reflected in real Balance of payments, if this illigal transaction is revealed by foreign state authorities?

This answer starta out with how illegal transactions are normally treated in the national accounts. Transactions that are just attempts to evade currency controls are a special case, discussed later.

If the illegal transaction was somehow measured, there would be two entries: the entry for the illegal good/service on the trade account, and the cash flow in the capital account. That is, they are interpreted in the same way as legal activities. Therefore, in response to:

  Is such operation capital inflow or outflow

Currency leaving the country is a capital outflow, and a capital inflow if the currency was coming into the country.

  why is it so?

To keep the published balance of payments balanced.

The problem is: how do we measure these flows? In particular, we generally have no idea where non-electronic currency (e.g., $100 dollars bills) is being held.

If illegal activities were disguised as something else ("money laundering"), the cash flows should end up in whatever accounts the activity was disguised to be.

Countries tend to only include illegal transactions in the national accounts if the statisticians believe that they have a way of tracking them. For example, Statistics Canada was able to estimate the extent of tobacco smuggling (to avoid taxes) based on the disruption in other data. The underground economy behaves differently in each country, and so attempts to measure its effects varies across countries.

To what extent illegal transactions are just a measure to evade currency controls (and not for trafficking in illegal goods) they would once again show up in the form that the transaction was registered. One typical way this is done is to adjust invoices in trade, so that the amount of money exchanged is greater than the true value of the goods. This shows up in the national accounts as an excessively large imports/exports (depending on the direction of the flow).


Fixed vs pegged exchange rate: What's the difference (if any)? I am told very firmly by an economist that a pegged exchange rate is NOT the same thing as a fixed exchange rate. So what, if any, is the difference between the two?

Addendum: Here's one webpage about the difference. I am looking for simple explanation of the difference and ideally also some good and simple contrasting examples.

Add2: Robert Mundell has a lengthy classification here, but it seems to me that his distinction is not one of kind, but merely one of degree.

As Jason Nichols says, these terms are often used interchangeably.

The general theme is that pretty much anything can be called a "peg" (except perhaps the case where two countries are literally using the same currency), while "fixed" tends to refer to institutional arrangements that are more automatic, where changes in the exchange rate are perceived to be less likely. "Peg" tends to be used when some entity (e.g. a central bank) is doing the "pegging"; the more active and less automatic the behavior of this entity is, the more likely that you'll call the arrangement a "peg".

To further explain the (inconsistent and informal) differences in usage that do seem to exist, I have to describe several different kinds of exchange rate regimes.

At one extreme, country A may use the same currency as country B. Relevant cases include the Euro Area and dollarized Western Hemisphere countries like Panama and Ecuador. In this case, we might say that A and B have a "fixed" exchange rate (at one to one), but we probably wouldn't say that their rate is "pegged". A similar but less certain case would be, for instance, the CFA Franc in Africa, which is in principle distinct from the Euro but has a fixed Euro conversion rate and is guaranteed by the government of a country using the Euro (France). This might be called "fixed" or "pegged".
A less extreme situation is a currency board, where country A has a different currency than country B but promises to always convert them at a certain rate, and has reserves denominated in country B's currency backing up every unit of its own currency so that (in principle) this promise can always be fulfilled. Examples include Argentina's defunct currency board (a good example of a case where this promise was ultimately not fulfilled in practice) and Hong Kong's current currency board. I've seen both "fixed" and "pegged" used to describe such arrangements; as mentioned above, my sense is that "peg" is more common as a descriptor when the arrangement is perceived as being less automatic, with its permanence less certain.
Still weaker is the situation where country A sets a certain exchange rate with country B but doesn't have a formal arrangement like a currency board to back it up. This is extremely common; one rare example among developed countries is Denmark, which pegs to the Euro. This is the last case among (1)-(3) that can still often be called a "fixed" rate or a "peg". The line between this and a currency board in (2) is often blurry, since in this case too central banks often maintain large foreign reserves, perhaps enough to back up every unit of their currency outstanding; but usually this case involves a less universal guarantee of convertibility.
Then there is a vast set of arrangements where the rate is not perceived as being truly fixed for the indefinite future, but instead is allowed to fluctuate within a moderate or large band, or is subject to a "crawling" peg that is adjusted by the central bank, or is pegged to a possibly malleable basket of currencies, etc. These arrangements are usually called "pegs" rather than "fixed", because (after all) they aren't that fixed! A conspicuous modern example is China.
There are even looser arrangements where a central bank floats the currency but pays some attention to exchange rates and wants to avoid fluctuations that are too large (rather than exclusively hewing to some domestic objective like an inflation target), using both the tools of domestic monetary policy (interest rates) and intervention in foreign exchange markets to keep exchange rates in line. This is usually described as a "managed" float, "dirty" float, or something similar; it would rarely be described as a peg, but sometimes the line between (4) and (5) can be blurry.
Then at the extreme other end, we have countries that float their currencies and do not routinely intervene in foreign exchange markets. These arrangements would never be called either "fixed" or "pegged".

To sum up, my overall impression is that it's pretty vague, but that among 1 to 6 above, you're more likely to call something earlier in the list "fixed", something more in the middle of the list a "peg", and something later in the list a "float". But I am not aware of any formal, clearly specified distinction between terms as general as "fixed" and "peg". When exchange rates are classified, as in the IMF's annual report on the topic, this is usually done in a much more specific and descriptive way.


Why does lowering interest rates transfer incomes from households to corporations? In Financial Market, Public Policy, and the East Asian Miracle by Stiglitz and Uy (World Bank Research Observer, vol. 11, no.2, 1996), the authors state that:

  Lowering interest rates transfers incomes from households to corporations, and because the corporate sector has a higher propensity to save, aggregate saving increases.

Why does lowering interest rates benefit corporations over households? Is this presupposing that households are net savers, not net borrowers, and that corporations are the opposite?

A student of mine came up with a very plausible explanation for this statement. I think he's almost certainly on the right lines.

Low interest rates encourage consumption spending and discourage saving. (They might also encourage people to take out loans to fund consumption spending.)
Consumption spending transfers money from households (who are buying goods/services) to corporations (from whom they're buying).
These corporations are assumed to save at a higher rate than households (see the quote in the question), so increased corporate savings more than offset the decrease in household savings.

It's obvious once you think about it!


What effect would destroying large amounts of physical currency have on government finances India has recently recalled high denomination notes and asked people to deposit the physical currency in old notes in their bank accounts. People who have unaccounted wealth are resorting to destroying the currency rather than run the risk of declaring this to the tax-men. Some people estimate upto 20% of notes may not be returned totalling about  3 trillion rupees.

In a cash based economy what possible consequences can destruction of such large amounts of currency cause? I think that reduction in money volume may lead to negative inflation but the question is more about the impact destruction of currency will have on government finances.
Does it make the government richer or poorer?

Note that this question isn't about demonitization per se.

EDIT:

A newspaper report this morning says that the government expects a "windfall" due to cash not being returned by people. It states that any money not returned to central bank (In India that is the RBI), is a reduction in liability of RBI and therefore an equal amount can be paid by RBI to the government.

Is this how monetary policy works?

I was always under the impression that central bank buys government bonds in return for currency. Any physical reduction in currency means government cannot buy the same bonds back from central bank (as it doesn't have the hard cash) and therefore the government should become "poorer" (due to inability to decrease its debt in forms of bonds issued to central bank). The report states that government will get "richer" as central bank's liability is decreased and it can pay that amount to government as dividend.
Can someone clarify how this process is likely to work?

In most modern economies, the central bank certainly has the authority to print money, when it does so to implement its legally defined objective. Let's consider what the implications of this 'elimination' of cash are.

The Balance Sheet

From the asset management side of the central bank, currencies are always a liability - because, amongst other things, they can be deposited in an account with the central bank, which will usually accumulate interest payments. Historically, many central banks used to allow currency to be exchanged for gold.

Central banks must always be concerned with their balance sheet. The reason why they cannot simply issue and distribute it to the masses (known as helicopter money) comes down to this management of liabilities - there is a real constraint here for these institutions. Issue too much currency, and commercial banks might not think you will be able to pay interest on their deposits. Or more aptly, they may believe the only way you can pay this interest is by printing money, decreasing the value of money and  potentially leading to inflation or a runaway zimbabwe situation

So the destruction of currency reduces the financial liabilities of a central bank, benefitting its balance sheet.

Impact on the Economy

Now we can look at the implications for the economy. Shown below is the fisher equation, a simple but valuable representation for money interacts with the economy.

$MV = PY$

This indicates that real output (the right hand side) is equal to the amount of currency in circulation, multiplied by how quickly that currency is circulated around. So if a central bank wanted to keep prices and output constant, it would want to eliminate any changes to the money supply. Otherwise, as you have intuited, there may be a decrease in output or the price level.

But we have to consider if this is really currency in circulation. Are people really using these large denomination notes in actual transactions, or just as a store of wealth? If this currency was unused to begin with then maybe there won't be much of a real impact.

We must also consider that central bank's typically interact with commercial banks only, and are typically most immediately concerned with maintaining their target interest rate with those commercial banks.

How might this play out in practice?

First, these protesters having burned some of their money and so may replace it by withdrawal from their accounts with commercial banks. These commercial banks distribute this physical currency out to consumers, and have less remaining to loan to between themselves. Since for them, loanable funds are more scarce, there will be upward pressure on interest rates.

To maintain the target interest rate, we will then see the central bank response, purchasing bonds from the commercial banks in exchange for cash. Thus the balance of money is restored.

But perhaps this destruction of money was great enough that it has made consumers considerably poorer. Now their bank balance is reduced, they may not want to spend as much. Over the short term, this would be expected to drive down prices and output.

If the central bank sees this play out, or is worried enough to anticipate it, it would likely reduce its interest rate target. With a lower cost to borrowing, we have increased spending in the economy, inflation of asset prices that make people feel richer and hopefully, a restoration of balance.

This is a hypothetical, and relatively simple policy analysis. A less conventional central bank could throw replacement money out of a helicopter, but this seems unlikely to happen in practice.

How does this effect the government?

It will likely benefit them. As I discussed, currency is a liability for central banks. So now some of it is gone, they can print more without having to demand any kind of asset in return. The article you have edited into your question argues that the central bank may print and give money to the government. Normally, because money is a liability, they would have to demand government debt in return. But because the balance sheet already incorporates this currency (which is just replacing what has been destroyed) it need not demand government bonds --- so the government can spend without incurring any debt.


Constructing a Production Possibility Curve (PPC) I am trying to create a PPC, in which there are two goods (e.g. apples and oranges).

  My question is, does it matter which goods are plotted on the x or y-axes? The opportunity cost per good remains the same, but I was wondering what the convention is.

$ \textbf{Answer:}  $
Simply put, it does not matter which good goes on which axis as long as the relationship between the two goods is adjusted for correctly.

$\textbf{Explanation:}$

This can be done as long as the relationship (i.e. the PPC curve) is correctly maintained, that is the function is inverted when you change between the x and y axis.

$\textbf{For Example:} $

Suppose you were given the ppf which was linearly defined $good_1$ as a function of $good_2$  by:

$$good_1(good_2)= -a\times good_2 +b$$
$$\implies good_1= -a\times good_2 +b$$

graphically this can be seen as;

By inverting the function, we now make $good_2$ a function of $good_1$ (i.e. $good_2(good_1)$), which simplistically means solving $good_1= -a\times good_2 +b$ for $good_2 $;

$$ good_2(good_1)=-\frac{1}{a}\times good_1 +\frac{b}{a}$$

i.e. From this
$$good_1= -a\times good_2 +b$$
to this
$$\implies good_2=-\frac{1}{a}\times good_1 +\frac{b}{a}$$

and graphically:

We can see that everything is the same, except that our axes are different but the relationship between the two good is exactly the same. The relationship is now inverted to accommodate the change of "perspective" between having $good_1$ or $ good_2$ in the axis, which is graphically seen by the change in the intercepts.

$*$ I apologise if this is not mathematically rigours, and would appreciate any feedback!


Certifications for economists Are there certifications or professional designations that are specifically geared for economists? i.e much like the CPA and CA exists for accountants.

Separate from their academic qualifications, no there are not.  The reason is that certifications generally serve two functions, either to show a legal status or where there are no academic qualifications required to show some learning process has happened that is similar to an academic designation.

To provide an example, the MD, the CPA and the PE designations have legal meaning.  Their existence is postulated in state and federal law as necessary to engage in certain forms of practice, though medical doctors at the state level also have additional licensing.  Federal physicians do not always have to have a state license, such a military doctors.  Physicians also have higher level certifications to show skill in a narrow area to convince customers they can be trusted in that narrow area.

Beyond this, some fields are heavily populated with people who have no academic degree and for those narrower certifications are available such as CFA or licensing such as the barber's license.  The barber's license is a strange throwback to when barbers did surgery, we still license barbers but the need is less apparent than it was when it started.

Economists have no legal standing.  There is no field of practice that the legislators of the world have felt necessary to impose additional qualifications for beyond a doctorate.  Indeed, you could have a doctorate in another field and engage in economic research and consulting.  This certainly happens with finance professors, mathematicians, sociologists, psychologists and political scientists.  Psychologists and mathematicians have won the Nobel for economics before.

It also is unlikely there are certifications that would be meaningful.  The simplest way to determine the technical skill of an economist is to read their doctoral dissertation, or masters thesis, and their research body of work.  It is an open source process, so unlike craftsmen whose work is only visible to their prior customers the work of economists is very public and very visible.

Of all professions, it should be easier to evaluate an economist than maybe any other.  Certifications would do what?  For whom?


Numeraire negativity to avoid boundary solution With quasilinear utiliy, I've seen that often there is no non-negativity restriction imposed on the numeraire good.
MWG justify it as "to avoid dealing with boudary problems", but I cannot see the - probably trivial - step.

Moreover, are there situations when the nonnegativity constraint on the numeraire can be applied without adding restrictions?

Consider $u(x,y)=2\sqrt x+y$, and the budget constraint is $x+y\le 0.5$.

If non-negativity is imposed, i.e. $x,y\ge0$, then optimal solution to the utility maximization is $\bar x=0.5$ and $\bar y=0$. Note that under this solution, the FOC holds with strict inequality. So we need to discuss various complementary slackness conditions before arriving at the solution.

If we allow $y$ to be negative, then the optimal solution is $x^*=1$ and $y^*=-0.5$. Under this solution, FOC holds with equality, and both $x^*$ and $y^*$ can be solved directly from the FOC (and the budget constraint).

From the perspective of characterizing solutions, it is thus more convenient not to impose the non-negativity constraint(s).


Smart contracts in Dollars In last years I have read a lot about "Smart contracts".

But I cannot understand why we need bitcoin for this?
The old-fashioned US Dollar are not used in Smart Contracts?

I guess it depends on what precisely counts as "self-executing" but escrow transactions are very similar and quite common, particularly in real estate and certain kinds of online transactions.

  An escrow is a deposit of funds, a deed or other instrument by one
  party for the delivery to another party upon completion of a specific
  condition or event. It is an independent neutral account by which the
  interests of all parties to the transaction are protected.

What is Escrow? - Title One


Do all prices just reflect absence of information? In information economics, information has economic value because it allows an agent to make better decisions. For example if an agent needs to buy some good, he will benefit from knowing about the existence of all possible sellers since he will be able to buy at the lowest price.

I was wondering if there is work in economics that takes this view to the extreme and considers that the price of a good/service entirely reflects the absence of information about this good/service (to simplify it would be the sum of “not knowing how to efficiently manufacture this” + “not knowing where to get the raw material”)

It's a deeper discussion, but you could argue that profits reflect information disparities between agents.  However, in the most idealized circumstance, prices themselves arise from scarcity resulting from physical constraints of the system, not informational constraints.


Why is trade deficit a good thing? In general most economist agree that deficit is not a negative thing, but I have trouble understanding why

For example if country A has 10\$ and country A runs trade deficit to B of 2\$ per year, doesn't this necessary mean that in 5 year country A can no long buy product from other country?

I think I am missing something important here. How can a country run trade deficit multiple years without eventually going bankrupt?

One reason that I have been given is that since country A buys country B's product in country A's currency, country B must use that currency in country A, thus the trade is balance in the long run, is that true?

First off, just because economists say that the trade deficit is not a negative thing, does not mean it is positive.

Yes, trade is balanced in the long run. In and of itself, a trade deficit is therefore not necessarily an issue.

When a country runs a trade deficit that means that it is consuming more than it produces. The country consumes at least as much as it produced and then a bit from what other countries produced too. That in itself is not a bad thing. In fact, consuming more than you produce seems rather nice.

However, a trade deficit may also be a symptom of other economic weaknesses. A perpetual deficit may also be the precursor to a crisis. So whether a deficit in a certain case is bad or good depends on the circumstances. A good source is this IMF report.

That being said, it is incorrect and a bit naive to simply see every trade deficit as a problem.


GDP/PPP influence - Adjusted savings: carbon dioxide damage I found this variable and I'm not a native english speaker, so I'm a little bit confused with "adjusted savings" right in front of "carbon dioxide damage". I'd like to know what does this variable really means for GDP/PPP.

I have this variable in some big data table and it highly and positively correlates with GDP/PPP value(the higher value, the higher GDP). Should I take this variable in a way that it expresses how much money each country saves(which explains GDP increase) because the country harms less with carbon dioxide than other countries, or what does it actually mean?

From the definition of adjusted net savings:

  Adjusted net savings are equal to net national savings plus education
  expenditure and minus energy depletion, mineral depletion, net forest
  depletion, and carbon dioxide and particulate emissions damage.

It is a little easier to see on the World Development Indicators Table 4.11

That is:
Adjusted net savings =  Gross savings - Consumption of fixed capital + Education expenditures -Net forest depletion- Energy depletion   - Mineral depletion - Carbon dioxide damage - Local pollution damage

The idea is that ruining the environment is like depreciation in the sense that if you look at savings but ignore depreciation you overstate how much wealth has increased from that savings. Similarly, if you pollute your country that ruined environment makes you poorer than your level of savings suggests.

Update:

Despite the label, you should think of the field "Adjusted savings: carbon dioxide damage" as actually meaning "adjustment to savings from carbon dioxide damage". If you want to calculate national savings rate net of carbon dioxide damage but not net of the other variables, you would calculate it as follows:
=  Gross savings + Education expenditures - Carbon dioxide damage


Does there always exist a consumption bundle at which the indirect utility function is the inverse of the expenditure function? Two questions:

Given $v(\vec{p},m)$ and $e(\vec{p},\bar{U})$, is there only a single point at which these are inverses of each other?
Does an inverse always exist for a given price vector $\vec{p}$, income $m$ and $\bar{U}$, $v$ and $e$?

These are points my mates and I are arguing about as we prepare for our midterm.

Also, I prefer rigorous answers so if you can, feel free to be as thorough as you want.

Regarding question 1:

From the assumption that the consumer has a single income value $m$, there can only be one value for $m$. So by the notion that $e$ and $v$ are inverses, there can only be one value $e$ for which $m$ corresponds to and thus only one $u$. So there is only one point.

Regarding Question 2:

If we have (1) a utility function that is continuous and locally non-satiated and (2) if $m > 0$ and (3) if both UMP and EMP exist, then they are equivalent. And $e$ and $v$ are inverses.

Claim 1: Solving UMP solves EMP.

Proof:

Suppose bundle $c^*$ solves the UMP but not EMP. Let $c'$ solve EMP. Then (1) amount spent on $c^*$ greater then that on $c'$ and so $u(c') \geq u(c^*) $ because obviously spending more means worse off or same utility. But (2) by local nonsatiation a consumption there exists a bundle $c''$ close enough to $c'$ such that amount spent on $c''$ is less than amount spent on $c^*$ and $u(c'') > u(c^*)$. (3) Contradiction because we assumed $c^*$ solves UMP.

Claim 2: Solving EMP solves UMP.

Proof:

Suppose bundle $c^*$ solves EMP but not UMP. Let $c'$ solve UMP. Then (1) $u(c') > u(c^*)$ even though we spend the same amount on each. That is, $c^*$ doesn't solve UMP since less utility for same $m$.   Because amount spent positive, we can find $t$ where $0<t<1$ such that amount spent on $tc'$ is lower than that spent on $c^*$ yet $u(tc') > u(c^*)$ because $c^*$ does not solve the UMP. (3) Contradiction because we said $c^*$ solved EMP.

Summary:

If solutions exist either to UMP or EMP, then solutions exist for the other and they are inverse functions.
If an inverse exists, it must be a point.


Whats the difference between local non-satiation and monotonicity? Is there a practical difference between local non-satiation and montonicity? Can one exist in a utility function without the other?

Monotonicity of preferences is a stronger condition than local nonsatiation. Monotonicity implies local nonsatiation, but not the other way around.

To see this:

Claim: Let $\succsim$ be a monotonic preference relation over $\mathbb{R}^n_{+}$. Therefore, $\succsim$ is locally nonsatiated.

Proof: Fix some $\varepsilon > 0$. Let there be an arbitrary $x \in \mathbb{R}^n_{+}$ and let $\mathbf{1} \in \mathbb{R}^n_{+}$ be the unit vector. For any $\lambda > 0$, we also have $x + \lambda \mathbf{1} \in \mathbb{R}^n_{+}$. Since clearly $x + \lambda \mathbf{1} \gg x,$ $x + \lambda \mathbf{1} \succ x$ by monotonicity. Consider the following metric over $\mathbb{R}^n_{+}$:

$$
d(x+\lambda \mathbf{1}, x) = ||x+\lambda \mathbf{1} -x|| = \lambda||\mathbf{1}|| = \lambda \sqrt{n}.
$$

Thus for $\lambda < \frac{\varepsilon}{\sqrt{n}}$, $d(x+\lambda \mathbf{1}, x) < \varepsilon$ yet $x + \lambda \mathbf{1} \succ x$. Since $x$ was arbitrary, the existence of such a point implies that $\succsim$ is locally nonsatiated. $\blacksquare$

To show that locally nonsatiated preferences do not imply monotonic preferences, you can come up with a utility function $u(\cdot)$ over various goods that strictly increases with respect to some of the goods but reaches a satiation point for at least one of the others. For example, in $\mathbb{R}^2_{+}$:

$$
u(x_1,x_2) = x_1 - |1-x_2|.
$$

A consumer with such preferences is satiated with respect to $x_2$ at $x_2=1$.


Difference between Value-Added TFP and Gross-Output TFP? I am working with EU-KLEMS data, and I am using TFP growth as a proxy for technological change. However, there are 2 variables for TFP - TFP based on Gross Output and TFP based on Value Added.

I understand that Value added in this case might be Gross Output-intermediate consumption, but I am not sure whether this is indeed the case, as there is no such explanation in the EU-KLEMS dataset. The two TFP measures move in a similar fashion across industries, but there are indeed some differences - for example, the VA TFP average increases at a much slower rate than the GO TFP.

I would be eternally grateful if some clarification could be provided on these two measures.

Your assumption is correct.  Value added is Gross Output-intermediate consumption(inputs).

value-added approach is a simple measure that ignores the difficulties of dealing with inter-industry and intra-industry flows of goods and services. Intermediate inputs are simply excluded here.

The value-added approach provides a simple link of industry-level MFP
and sectoral or aggregate MFP growth.

For gross output-based estimates of MFP growth they acknowledge and allow for intermediate inputs as a source of industry growth. In this method they provide a more complete picture of the production process.

If you need more information this manual can help: https://www.pc.gov.au/research/supporting/comparison-gross-output-value-added-methods/cgovam.pdf


Are billboards beneficial for the economy? Why? Billboards cost money to make and don't really seem to significantly benefit anyone other than billboard-makers. A company c putting up billboards presumably increases profits from the resulting increased number of customers, but don't competing businesses' billboards decrease c’s profits by decreasing its number of customers? I don’t see why the total amount of consumption would change, so wouldn't the total amount of business remain roughly constant? So, are billboards economically beneficial or not? Why?

While advertising can be zero sum, here are two additional dimensions you might want to consider.

Billboards, like other forms of advertising, can inform. In this way Ford can talk about their new 8 seat minivan while GM talks about the more fuel efficient engine of their latest model. This can result in happier customers who value their product better and are willing to pay higher prices for this more ideal product.

Billboards, in ways not paralleled by other most other forms of advertising, have a negative externality akin to pollution. When the NY Times decides to increase their number of advertisements slightly they bear the costs in customer unhappiness, giving them an incentive to adjust until the private costs and benefits of a marginal ad are equated. But not so with the billboard. The billboard is typically adjacent to public space, so if a nasty billboard ruins the scenery or obscures another billboard the billboard owner doesn't internalize those costs. Since the private benefits of ad revenue continue to accrue to the owner, this leads to too many billboards even if some level of billboard production would be socially desirable.


Bank Capital and Profit I am struggling a bit with understanding the meaning of capital ratios, and bank profitablity. It seems to me that capital requirements stipulate that a certain fraction of banks' risk weighted assets have to be held as equity. I get why that is the case: for any given value of assets, having more capital serves as a cushion against their falling values. The definition of bank capital is: $$E=A-L$$

Where E represents bank capital. Now, from a textbook I am reading, it says that banks don't like having high amounts of capital, as it reduces their potential profits. I don't understand what that means- doesn't having high amounts of capital mean that the bank is indeed very profitable (maximizing difference between assets and liabilities?)

Two things:

Capital not being put to work reveals no profit. This capital could have been invested into something else which may (or may not) have resulted in profit for the bank. Opportunity cost of capital could be rather big. This means that the bank is actually loosing out on potential profits.
Capital (in form of equity) does not necessarily mean the company is profitable. Many (often smaller) companies are 100% equity financed - this has no relation to profitability what so ever. Increasing the equity/debt ratio does not say anything about if the company is profitable. It could be because the company has build up equity (yay, this means profits), but it could also be because the company has gotten a capital injection (not affecting profits). It works other ways as well - perhaps a company is very profitable (building equity and not paying dividends), but at the same time they increase their debt, keeping the ratio constant; in this case you cannot see if it is profitable or not. Debt is not the same as “not profitable”. Actually most companies have debt because they may be able to invest the debt at a better rate than their interest rate (eg in machinery to increase production resulting in profits).

Increasing the gap between assets and liabilities is exactly the same as described above. Assets = (Equity + Liabilities).


Study whether $\succsim$ represented by $u(x)=\lfloor x \rfloor$ is continuous Using the following definition of continuity: $\succsim$ is continuous if for any bundles $x,y,z$ such that x$\succ$y$\succ$z, there exists $\alpha \in (0,1)$ such that $\alpha x + (1-\alpha)z \sim y$.

I am unable to show continuity/not continuity using this definition.

Are you sure that the definition you want?

With your definition then yes its true.

You should show that $x\succ y\succ z\implies x>y>z$. Hence, you can always find a $\alpha$ such that $\alpha x+(1-\alpha)y=z$, so $u(\alpha x+(1-\alpha)y)=u(z)$ which then implies $\alpha x+(1-\alpha)y\sim z$.

Perhaps the definition you want to use is for all $x^n$ and $y^n$ are two sequences with $x^n\to x$ and $y^n\to y$ and $x^n\succeq y^n$ for all $n$ then $x\succeq y$? But maybe not, I dont want to presume.


Why has M1 grown a lot faster than M3 after the financial crisis? While the fed has printed a lot of money the last decade and the M1 money quantity growth rate has gone up significantly (red), the M3 growth rate (blue) is almost exactly the same as before the financial crisis.

In the euro area, M1 (red) has grown in the same rate as before, while M3 growth (blue) is significantly lower.

Why have M3 not followed the same quantitive expansion as M1?

And can this be an explanation for why we have not seen stronger inflation?

As you point out, central banks have "printed" a considerable amount of money since the 2008 crisis. The following chart of the US monetary base is one of clearest examples of this phenomenon.

The metric you seem to be pointing out through your question is known as the money multiplier: the ratio of broad money (e.g., M1, M2, or MZM) to the monetary base. As we can see with the following chart, in the US, the money multiplier has decreased since the 2008 crisis.

The money multiplier grows when banks and other financial institutions make loans. So in short, M3/MZM hasn't grown because a significant amount of the monetary base has just been kept in bank reserves without being loaned out.

This has been used as an argument on the ineffectiveness of quantitative easing, and that we need to more directly put money into people's hands in order to stimulate the economy.

And if excess reserves were all loaned out and invested/spent, we should indeed see higher levels of inflation in the short term. If the money is invested/spent wisely, then productivity growth may offset that inflation on a longer term assuming we don't continue to increase the money supply.


heteroskedasticity OLS model prediction I am making an OLS model. Firstly, I want to confirm that checking heteroskedasticity.
How to check the presence of heteroskedasticity?
Is it just plot resid against independent variables, right?

Secondly, If the model does have heteroskedasticity, does it impact this OLS model prediction?

You can also statistically test heteroskedasticity (e.g., White's test: regress squared residuals from OLS on $\hat{y}$ and $\hat{y}^2$, or if you have a simple model, regress $\hat{u}^2$ on $x$ and $x^2$).
It's unclear what you mean by your "model having heteroskedasticity" (do you mean the error term is heteroskedastic?) and "impacting the prediction". You can always choose to ignore heteroskedasticity if you want. (You seem to do so, as you mentioned OLS.) Or you can have a different estimator (e.g., WLS) for a better (sometimes only slightly better) predictor using the same model. Or you can even have a model that incorporates heteroskedasticity explicitly as in, for example, GARCH models in time series. Please be more specific if you want more help. You might want to read this post for time series: https://stats.stackexchange.com/questions/175360/forecasting-ar-arch-garch-models


Do you consider a house a normal NECESSITY good or normal LUXURY good? I am trying to write my performance assessment about income and price elasticities of demand but I have a hard time figuring out if a house is a normal necessity good or a normal luxury good.

Everyone needs a house, however, no one needs a mansion. So which is it, is a house a normal necessity good or a normal luxury good?

I would expect necessity goods to have an income elasticity between 0 and 1 in keeping with Engel's Law, which was originally observed for food (an obvious necessity good).

Housing indeed exhibits this feature because poorer households spend a larger fraction of their income on housing. That makes housing look like a necessity good. E.g.,

(source: http://www.lao.ca.gov/reports/2015/finance/housing-costs/housing-costs.aspx)


Is amazon retail not very profitable? I have heard it claimed that amazon's retail business is actually not very profitable (it's claimed that most of their profit comes from their web services).  A rebuttal to this claim I have heard is that it only appears their retail business is not very profitable because they reinvest so much of their revenue, and that if they wanted to "turn on the tap" and stop reinvesting so much they would have to show huge profits from retail. I know next to nothing about accounting and cash flow statements and other public financial disclosures from corporations, so I wonder who is right? And is the rebuttal at least correct that it is not possible to deduce real profitability (as opposed to, I guess, "nominal" profitability) of amazon's retail business (or I guess any business that reinvests so much) from available information?

I don't know if Amazon breaks out downloads such as Kindle or movies from the non-AWS part of income statement. You might look at the annual filing to see if there is a breakdown. You are interested in "retail". If we take "retail" to mean non-AWS then we can use the table I posted. It looks like in 9 recent months retail made 5.7B USD in North America and AWS made 9.9B USD. This is only an operating profit so expect actual profit to be less. If they had overestimated depreciation rates and surged retail investment then it might be that reducing retail investment will increase the retail profit margin. The retail operating margin looks like 3.5% in North America and 0.5% international. At Walmart it was 4.0%. So Amazon is delivering and they make a similar amount on a margin basis in at least in North America albeit the nature of the goods is different. The international segment is the laggard at Amazon.

For comparison is this Walmart statement that follows. Note that at Amazon the recent data column is to the right of the "year ago" column and at Walmart the order of the columns is the opposite...


Assumptions on preference relation This question is from Harvard seminar problem set (Q-3 part b)  https://www.studocu.com/en-us/document/harvard-university/economics/mandatory-assignments/econ2020a-14-ps01-please-give-as-much-additional-information-as-possible/3513583/view
Show that it holds continuous, monotonic, LNS and transversality.
$$|x_1-x_2 -y_1-y_2| \le 1$$ if x~y
I can just show transversality condition
first, for x~y $$-1\le x_1-x_2-y_1-y_2\le 1 $$
for y~z $$-1\le y_1-y_2-z_1-z_2\le 1 $$
When I sum these in equalities, I will obtain
$$-2\le x_1-x_2-z_1-z_2\le 2 $$
So, At the same time, I can say that
$$-1\le x_1-x_2-z_1-z_2\le 1$$
This implies that x~z. Thus, transversality holds. But I cannot prove for others even though I know their definitions. Please help me to do this.

The preference relation is not transitive. As a counterexample take $x=(0,0), y=(0,1), z=(1,1)$.
For monotonicity let $x=(x_1,x_2)=(y_1+1, y_2)$ so that the $x$ bundle contains more of some commodity but no less of any, than $y=(y_1,y_2)$. Then
$$ (y_1+1+y_2-y_1-y_2) = 1 \leq 1 $$
so that the preference relation is not monotonic.
so that the preference relation is strictly monotonic.
The preference relation is continuous since
$$ \{x| x\succeq y\} = \{x_1, x_2 | x_1 + x_2 - y_1 - y_2 \geq -1\} $$
is closed and
$$ \{x| x\preceq y\} = \{x_1, x_2 | x_1 + x_2 - y_1 - y_2 \leq 1\} $$
is also closed
Finally, it is not locally non satiated. Take any $\epsilon\leq 1$ as an example.
EDIT: It is not strictly monotonic, see the comment below


Model with money creation is there any macro model/paper introducing money creation (ex nihilo money creation) ? I would be very interested in reading them.

There are many such models. A prime example would be the IS-LM AS-AD model where money supply is controlled by central bank and money can be created at will from nothing (I suppose that is what you mean by 'ex nihilo').
This model is one of the 'workhorse' models of modern macroeconomics so you can find its exposition in any textbook. If you want an introductory treatment then Blanchard et al Macroeconomics: a European Perspective offers one. If you want graduate treatment Romer Advanced Macroeconomics is good source. Or if you specifically want a paper not a book then you can see the Hicks, J. (1980). IS-LM: an explanation. Journal of Post Keynesian Economics, 3(2), 139-154.


Arrow's impossibility theorem In social choice theory, Arrow's impossibility theorem, the general possibility theorem or Arrow's paradox is an impossibility theorem stating that when voters have three or more distinct alternatives (options), no ranked voting electoral system can convert the ranked preferences of individuals into a community-wide (complete and transitive) ranking while also meeting a specified set of criteria: unrestricted domain, non-dictatorship, Pareto efficiency and independence of irrelevant alternatives (IIA)

So, I'm looking for an example where the preferences satisfy unrestricted domain, non dictatorship, IIA and is an ordering, but not meet the Pareto criteria.

Let the set of alternatives be $A = \left\{a_1,a_2,...,a_k\right\}$. Let the number of players be $n$. Let the set of preference orderings over $A$ be $\mathcal{P}$. Then the set of preference profiles is the Cartesian product
$$
\mathcal{P}^n = \times_{i=1}^{n} \mathcal{P}.
$$
Let us denote the preference ordering
$$
a_1 \succ a_2 \succ ... \succ a_k
$$
by $p^*$. Define the Social Choice Function $F$ by
$$
\forall p \in \mathcal{P}^n: F(p) = p^*.
$$
This SCF $F$ clearly has universal domain, is not a dictatorship, and is also independent of irrelevant alternatives. (Or any alternatives for that matter.)


Hypothetical: If a nation produces absolutely no good or service, would the currency notes it has have any value? We're considering a nation for which the basic necessities are met by another nation, for free.

Now, the nation has lots of currency notes. But it produces nothing. Would I be right in saying that the value of these currency notes is an absolute zero?

I'd say no. No production is required for a money to have value. Money can be valuable  because it facilitates trade. That is, whatever good is used as money can be more valuable than its intrinsic value because it is an liquid instrument that can be used in trade with others to solve the double coincidence of wants problem. Even pure endowment economies can utilize money for this purpose as long as people are not endowed with bundles that are also their equilibrium bundles and the economy is one in which money has a use (see Starr (2003) for several examples of how this can happen). Essentially, money is needed in circumstances where barter and good specific debt is costly or impossible.

For a famous example of an economy without production that did use money consider Radford (1945),
The Economic Organisation of a P.O.W. Camp. In this paper Radford documents how the POW inmates, despite having no production to speak of, with all goods provided by either the captors or the Red Cross, use loose cigarettes as money to price goods and solve the double coincidence of wants problem.


Anscombe and Auman Expected Utility I would like to hopefully get some insights on the Anscombe and Aumann Expected utility.

I've read some proofs and understood the Expected Utility Theorem (VNM) which allows us to approach consumers preferences over not pre-determined lotteries or risky outcomes.

However, I don't manage to rationalize this way the Anscombe and Aumann expected utility, although I believe I understand the proof.

Particularly, I would like to know how I can rely heuristically the 'state space' and 'probability spaces' (other than being antecedent and image of the Aumann act).

Also, sometimes 'objective probabilities' are evoked as well as an explanation with horses, that I don't get.

Sorry for this confusing message and thanks a lot!

AA approach appears to follow two stages: first, "nature" provides which event obtains, which results in the given lottery; second, the lottery is resolved, therefore revealing the intrinsic probabilities. AA suggests to resolve by backward induction. Under usual conditions for vNM utility, agent may define a function for her utility.
I found a nice paper comparing Savage vs. AA approaches, from which I got this construction, e.g. see Fig. 1 and 2. I hope it helps.
https://link.springer.com/article/10.1007/s11166-018-9273-7


Why does any treasury / central bank hold gold? I know the US treasury is slowly selling its gold reserves, but what is the actual mission and purpose when it comes to the holdings?

What is the reasoning behind the slow rate of liquidation? I have even heard "tradition" and "propping up confidence" as reasons. Tradition doesn't feel like more than an excuse. Confidence or creditworthiness should stem from the expected performance of the US economy and tax collected on that activity, since treasury securities are not backed by gold.

It's a holdover from the old Gold Standards. Gold standard regulation required all banks, including the central bank to hold gold as a regulatory asset. In the last gold standard, the Bretton Woods regime, the US in particular had to hold gold to back the dollar. The requirement went away with the collapse of the Bretton Woods agreement in 1973, but the gold didn't.

These days there isn't any requirement to hold gold, and indeed some countries - notably the UK in 1999 and 2002 have sold off significant amounts of their bank holdings. (Note though, it's been suggested there were stability issues behind this sale.) Gold on the Federal Reserve's book isn't even held at market prices, it's marked to a notional statutory value of ~$42.

By the same token, there isn't any requirement not to hold it, so why sell it? There tends to be a lot of inertia in these kinds of systems.

Interestingly, an examination of central bank annual reports shows a fair amount of variation in what they use for their assets. While government debt in the form of treasuries is usually present, the Norwegian central bank holds market securities - presumably due to a lack of government debt. The Federal Reserve added securitized loans in the wake of the 2007 crash in order to stabilise their financial system.


Bond pricing, compute YTM ... why t not = 2? Consider a two-period corporate bond with the following characteristics. The bond was issued at $t = 0$ with face value $FV = 100$ at $t = 2$. In period $t = 1$ and $t = 2$ coupons of $5$ are paid out ($c = 5$). We are in $t = 1$ and the bond issuer has just paid the first coupon. The price of the bond is 101.942.

Suppose that the bond is callable at $101$. The bond issuer is informed by an investment bank that it can issue a new one period zero coupon bond worth $101$ today for a face value of $104.030$ in $t = 2$.What is the yield to maturity on this hypothetical bond?

The eqaution is given by:
$$P_0 : \frac{c}{(1+r)} + \frac{C}{(1+r)^t} + \frac{FV}{(1+r)^t}$$

Where

$c=0$

$FV= 104.03$

$P_0 = 101$

$t=2$

And solve for $r$.
But the right answer is all of this above, but $t=1$ .. Why? When they say that $t=2$?

A better symbolism might be as follows.

T : periods to maturity from issuance,
t : periods remaining to maturity,
n : periods lapsed

Then t = T - n.

In your case, because the 1st coupon was paid the day in question, n = 1. T = 2. Thus, t = 2 - 1 = 1 period remaining to maturity.

You will only discount from the "current" time, in your example the end of year 1, across the remaining periods.


Applications/generalizations of a theorem of Debreu I would like to know how the last theorem in Debreu's paper "Neighboring economic agents" (La Decision 171 (1969): 85-90; reprinted in G. Debreu, Mathematical Economics: Twenty Papers of Gerard Debreu (1986), pp. 173-178) has been used:

Theorem. For a topological space $M$ and a metric space $H$, let $\varphi$ be a set-valued mapping from $M$ to $H$ that is compact-valued (i.e. $\varphi(e)$ is compact for every $e \in M$) and continuous. Further, for each $e \in M$ let $\lesssim_e$ be a total preorder on $\varphi(e)$ such that the set $\{(e, x, y) \in M \times H \times H : x \lesssim_e y\}$ is closed. Then the set-valued mapping $\varphi^0$ from $M$ to $H$ where

$\varphi^0(e) = \{z \in \varphi(e) : x \lesssim_e z \ \ \mbox{for all} \ x \in \varphi(e)\}, \quad e \in M,$

is compact-valued and upper hemi-continuous.

Note that the theorem looks similar to the well-known Berge Maximum Theorem. Prior to the statement of the theorem, Debreu writes that special cases of it "have been repeatedly used in the theory of economic equilibrium and in game theory", but doesn't give any references; in the paper itself, it's used to prove the upper hemi-continuity of the demand correspondence for an agent in an exchange economy.

I'm especially interested in whether there have been any recent uses or generalizations of this theorem, e.g. to mappings that are not compact-valued.

Questions: What are some good examples of and/or references for applications of the above theorem? Has it been generalized to mappings that are not compact-valued?

This result is indeed a version of Berge's maximum theorem. If there is a continuous function $u:M\times H\to\mathbb{R}$ such that $x\preceq_e z$ if and only if $u(e,x)\leq u(e,z)$, one can derive the result directly from Berge's maximum theorem. If $H$ is locally compact, as it is the case if $H=\mathbb{R}^n$, then such a function can always be found, this follows from Theorem 1 in Mas-Colell's On the Continuous Representation of Preorders (at least if $M$ is metrizable, I'm not sure on that point). More on such "jointly continuous utility functions" can be found in chapter 8 of Representations of preference orderings, 1995, by Bridges & Mehta.

Now Debreu did not have such a result available, so he worked with preference relations and essentially reproved Berge's maximum theorem (the generalization is mathematically straightforward). Why did he do so? To understand that, one needs to understand the point of Debreu's paper, which is finding a topology on preference relations that has nioce properties and makes economic behavior continuous. The need for such a result comes from the literature on economies with a continuum of agents.

What does it mean that a continuum of agents economy is the limit of a sequence of finite eonomies? One answer is that the distribution on characteristics of agents converges to the distribution of characteristics in the continuum economy, so the notion of convergence is convergence in distribution. To make this idea operational, one needs to topologize the characteristics of agents. Now an agent is characterized by her endowment and by her preferences (and in more general models by her consumption set). There is a natural topology on endowments, the Euclidean topology, but it is less straightforward to topologize preferences, and that is what Debreu did in his paper. An exposition of this distributional approach can be found in Hildenbrand 1974, Core and equilibria of a large economy.

Now, there are cases where one would like to apply Berge's theorem for non-compact sets of choices. This can be important when studying economies with infinite dimensional commodity spaces, in which being closed and bounded does not imply compactness. One way to deal with this problem is to find a compact set so that the correspondence is compact-valued and nonempty-valued when restricted to this set. There is a large, very technical, literature on "generalized games" or "abstract economies" (basically normalform games in which strategy spaces depend on the actions of others), and they implicitely often contain non-compact generalizations of Berge's theorem. If you can get your hands on the book, check chapter 4 of Xian-Zhi Yuan 1999, KKM Theory and Applications in Nonlinear Analysis. My impression, however, is that these results proved to be not that useful in economic applications. To prove existence of Walrasian equilibria in models with infinite dimensional commodity spaces, one usually uses different methods.


Problems with Representative Sampling I am curious: what exactly are the problems caused by using representative sampling rather than random sampling whenever creating a subsample of large dataset for nonexperimental analysis. Further, how effective is propensity score matching whenever one wants to create balanced comparison groups for non-experimental analyses?

To answer your first question: it depends on the subsample that you want to use.

A representative or stratified sample is constructed by dividing the population of interest into non-overlapping subsets, drawing a random sample from each subset, and then computing weights to adjust for the fact that not all elements from the sample had the same probability of being selected from the population.

The advantage of using a representative or stratified sample is that you can use information that you have about the population to construct your sample and so have more reliable estimates of statistics computed for the population of interest. The disadvantage is that the weights that you computed are right for the stratified sample that you constructed but if you want to explore characteristics that differ between the strata then these weights might very well be the wrong weights. Your estimates would be biased and you probably wouldn't be able to adjust for this bias.

As for propensity score matching. You can only match on what you can see. You'll still have to deal with the problem of omitted variable bias. It's possible that propensity score matching increases rather than decreases the bias. How effective it is depends on what assumptions you make and on whether these assumptions hold.


Is there a difference between buying a currency and selling the currency to be converted to? I'm not an economist. I'm looking to exchange my CAD to EUR. I watched the rates on a exchange office, and I found something strange:

We buy:                   We sell:
1 EUR = 1,4946 CAD (1)    1 EUR = 1,3280 CAD (2)
1 CAD = 0,6691 EUR (3)    1 CAD = 0,7530 EUR (4)

How can there be 4 different rates? I understand why CAD -> EUR is different of EUR -> CAD with the supply and demand. When the exchange office buys 1 CAD, it sells EUR too. I supposed it was to make things easier, so I checked it:

1 EUR = 1,3280 CAD (2)
=> 1,3280 CAD = 1 EUR

1 CAD = 0,6691 EUR (3)
1,3280 * 1 CAD = 1,3280 * 0,6691 EUR
=> 1,3280 CAD = 0.8886 EUR

Here, we found that it's indeed, more interesting for the customer to accept a sell than buying (from the office point of view for the words buy/sell).
But is the difference, normal? And why?

Buy and sell rates are different because the currency vendor wants to make a profit and is also taking some risk with the exchange. It is possible that she cannot unload all the CADs they buy from you immediately and then perhaps in the future they will depreciate. (Perhaps they will appreciate. It is uncertain, hence there is risk.)

The same applies to buying and selling euros.

Usually there is some middle rate $x$ EUR/CAD. The vendor will deviate 1-2% from this in the direction favorable to her, depending on the direction of the deal (buying EURs with CAD or the other way around). You can look up something close the middle rate on XE. Currently this is about 1.394 CAD/EUR. Your vendor seems to sell at a premium that seems higher than normal to me, so perhaps see if you can find another currency merchant.


Emerging Market dollar debt, FX swaps and exchange rate risks "An FX swap, on the other hand, creates no exchange rate risk for its counterparties. This is because currencies are sold and repurchase at fixed spot and forward rates. In other words, when you sell one currency for another through an FX swap, you know from the start how much of your original currency you will get back. An FX swap is a liquidity management tool, not a risk management tool." Source: https://icmacentre.blog/2017/09/22/are-fx-swaps-and-forwards-missing-global-debt-why-the-bis-is-wrong/

However, consider the following: An Emerging Market (EM) corporate issues dollar debt and hedges its exposure by entering an FX swap agreement with an International Entity (i.e. a global bank). The EM corporate exchange the amount of Dollar that it received from bond issuance for domestic EM currency at the beginning of the contract.

In this scenario isn't, the global bank exposing herself to exchange rate risk, ceteris paribus?

1) First, the global bank needs to convert its dollar assets into the EM domestic currency in order to supply the domestic currency to the EM corporate and enter into a FX swap agreement.

2) Second, at the end of the contract the global bank will receive back an amount of EM domestic currency at a predetermined forward rate from the EM corporate. However, the global bank presumably derives "utility" from dollar assets and hence will need to convert the EM currency proceeds that she receives from the FX swap into dollars using the future spot rate.

3) The future spot rate is clearly uncertain at the time when the FX swap is initially signed, hence the global bank is exposing herself to exchange rate risk.

However, the global bank presumably derives "utility" from dollar assets and hence will need to convert the EM currency proceeds that she receives from the FX swap into dollars using the future spot rate.

The bank already had the EM currency though, right? If they had invested it in the EM stock market or any other way they would have had to do switch the returns to dollars anyway, so this is not caused by FX swap.

If the bank did not have the EM currency before entering into the FX swap then it is buying the EM currency when the goal is actually future dollars that creates the exchange rate risk, not FX swap itself.


Expected values vs uncertainty Most models I have seen use expected values. Why is this a better economic model than uncertainty and economic agents thus having to make 'best guesses', with the result of 'animal spirits' playing a large role. For example, it seems like no one knows where bitcoin would head for sure, hence the rife animal spirits-eqsue speculation involved and variable price.

One can distinguish between probabilistic randomness (which can be quantified) and uncertainty. This article by a Fed Researcher discusses this: “The Stock Market: Beyond Risk Lies Uncertainty” (Frank Schmid). As the tag to the question suggests, this is associated with Keynes, and post-Keynesian economics at present. Therefore, if you look at the post-Keynesian literature, you will see more discussion of uncertainty.

“Mainstream” economics and finance focus on quantifiable models. As a result, they rely on probability theory, and expected values are very common. However, option pricing theory does take into account the whole probability distribution, and so “uncertainty” might be thought of as the properties of the tail of the distribution. Rather than describing the price of bitcoin as uncertain, the tendency would be to find a model (such as a “rational bubble”) that might fit observed data. That is, one can argue that it is possible to analyse bitcoin using a standard probabilistic framework.

Whether the probabilistic approach or the more qualitative post-Keynesian approach is “better” is going to be opinion-based, and so I do not want to pursue that. (As a disclaimer, I am in the post-Keynesian camp.)


Economics of Education: Private School Behaviour In producer theory, we assume the firm's objective is profit maximisation.

Can we make the same assumption when looking at private schools or does this assumption not apply?

I actually found the answer in a paper called  Subsidies, Hierarchy and Peers:The Akward Economics of Higher Education. by Gordon C. Winston.

He goes on at length discussing the objectives of colleges, and concludes we cannot use the same methods by which we predict firm behaviour to predict the behaviour of colleges both public and private.

In his conclusion he writes:

  This paper suggests the standard economic intuition and analogies, built on an understanding of profit-making firms and the economic theory that supports it are likely to be a poor guide to understanding higher education and to making predictions and public policy. One who thinks a college is like any other business will look in all the wrong places...

Don't completely understand of all of his arguments but he addresses my question.


How long do stock markets usually take to process complex new public information? Here is a question that I've been thinking about for a while:

Theoretically, assuming investors are rational, a stock's price will be equal to its its intrinsic value (present value of discounted expected future cash flows). Therefore, when a share's price is $S_t$ at time $t$, and a new piece of information $I_t$ comes in that signals to investors that the expectation of future cash flows should go up, then at time $t+\epsilon$, the share price $S_{t+\epsilon}$ should immediately jump discontinuously to reflect this new fact.

However, in practice, investors' cognitive capacities are limited. Depending on the complexity of the information, $\epsilon$ could be longer or shorter.

For example, when news of an acquisition comes out, this will have various complex implications, for the stock price of the acquirer, the target company, and the competitors in both their markets. Compare this with the implications of a simple increase in the interbank rate set by the ECB for example, on the exchange rate between the Euro and the dollar.

The second information probably has a more simple effect on the exchange rate, than the first type of information has on the various companies that are involved.

Now my question is: In practice, how long do investors generally take before they've processed complex new information, like the announcement of a lateral acquisition deal? That is, how long till they've reached a new, relatively stable assessment of expected value?

I've seen data where the exchange rate adjusts literally within a matter of seconds to information about the ECB interest rate. But a reaction to such an acquisition should perhaps take days, instead of minutes?

I used to work for a company called Value Line, which is noted for its stock ranking system. Through a number of tests, its statistics department came to the conclusion that it took up to six months for new information (e.g. earnings) to be reflected in stock prices. So they introduced a time decay factor that would reduce the value of information to zero over a six month period in calculating their rankings.