Naked Economics Chapters 7-9

Does a well-diversified portfolio spread risk or reduced risk?

A well-diversified portfolio will significantly lower the risk of serious losses without lowering your expected return

Why does the author call Social security "one big pyramid scheme"?

American workers pay into Social Security, the money doesn't get invested somewhere so that you can draw on it later but it goes to pay current retirees. Americans have fewer children and living longer so there are fewer workers to pay for every retiree. The program is one big pyramid scheme, and, like any good pyramid scheme, it works fine as long as there are enough workers on the bottom to continue paying the retirees at the top.

Why did Gary Becker state that it pays to be small in interest group politics?

Because the costs of whatever favors they wrangle out of the system are spread over a large, unorganized segment of the population.

Why do you and I subsidize mohair production?

Because we pay mere pennies extra in taxes and we don't really notice it. It costs us almost nothing.

What does a current account deficit imply?

Country is consuming more than producing, not exporting enough to "pay" for the imports

What is GDP? Why do we care about real GDP? Why is GDP per capita a useful measure of productivity?

GDP: gross domestic product which represents the total value of all goods and services produced in an economy Real GDP: the figure has been adjusted to account for information GDP per capita: nation's GDP divided by its population, it is necessary to prevent wildly misleading conclusions

What does the phrase "excessively leveraged" mean?

Many american households were "excessively leveraged," meaning that they had borrowed for more then they could manage.

In uncertain economic times you and I spend less. How does our decision compound the economic uncertainty?

Our natural reaction to precarious economic times is to become more cautious with our spending, which makes our collective situation worse off. Ex: a decision to buy a care next year instead of this year - may cost you your job, which will in turn hurt my business

In our war against poverty, what is our only success story and why?

Our only resounding success is poverty among the elderly, which has fallen from 30% in 1960 to below 10%, largely as the result of Social Security

Why are savings so important for an economy?

Savings are necessary to finance investment, and investment is what makes us more productive as a society

What is meant by "the tyranny of the status quo"?

Small interest groups use politics to protect themselves from "creative destruction." We don't get the benefits of the new economic structure if politics decide to protect the old one.

What does "crowding out" mean in macroeconomics and how does it come about?

The crowding out effect is an economic theory stipulating that rises in public sector spending drive down or even eliminate private sector spending. Though the "crowding out effect" is a general term, it is often used in reference to the stifling of private spending in areas where government purchasing is high.

What is the risk-return tradeoff?

The principle that potential return rises with an increase in risk. Low levels of uncertainty are associated with low potential returns, where as high levels of uncertainty are associated with high potential returns. Invested money can render high profits only if it is subject to the possibility of being lost.

What is the essence of the efficient markets theory?

The problem is that everyone else has access to the same information. The main premise of the theory is that asset prices already reflect all available information

The private or public sectors often support regulatory legislation because it helps them by reducing competition. Discuss how this happens in the teacher certification case.

The teachers' unions always support reforms for more training and testing for teachers. People coming into the teaching field have to take additional classes and exams and existing teachers do not. Making it harder to become a teacher reduces the supply of new entrants into the profession, which is a good thing for those who are already there.

Why is GDP a flawed measure of human flourishing or happiness?

The things we do must make us happy; otherwise we would not do them. Growing richer must make us better off because we can do and have more of the things that we enjoy. GDP isn't a measure of happiness, just our capacity to consume

What basic principles of economics are violated by get-rich-quick schemes?

To acquire high rates of return for a small investment. They cause people too invest money into something without making any profit, thus causing the economy to worsen

Why is increasing productivity so important?

What we can consume is constrained by what we produce, so the higher our GDP, the more options we have access to

What is Okun's law?

When GDP growth = 3%, unemployment is stable. Faster or slower growth will move the unemployment rate up or down by ½% for every 1% of GDP growth

What is the difference between a positive-sum and a zero-sum game?

Zero-sum: it is impossible for one party to advance its position without the other party suffering a corresponding loss Positive sum: outcomes are those in which the sum of winnings and losses is greater than zero

What does the Gini coefficient measure?

a tool that collapses income inequality into a single number (0 = total equality and 100 = total inequality)

What did Albert Einstein say the greatest invention of all time?

any good book on personal finance

Describe the interconnectedness of the global financial system.

if other powerful economies fall into recession, they stop buying our goods and services-and vice versa

What are 2 macroeconomic tools that can be used to bring an economy out of a recession? How does each one work?

monetary and fiscal policy Fiscal policy - Uses the government's capacity to tax and spend as a lever for the economy from reverse into forward. If nervous consumers won't spend, the government will do it for them. Monetary policy - Federal Reserve can raise or lower short term loan rates

How does government finance a budget deficit?

occurs when the government spends more than it collects in revenues and a surplus is the opposite

What good can come out of a recession?

recessions may actually be good for long-term growth because they purge the economy of less productive ventures, just as a harsh winter may be good for long-term health of a species

What is day trading idiocy?

the idiocy of day trading-buying stock in hopes of selling it several hours later at a profit-is that it incurs all the costs of trading stocks without any of the benefits that come from holding equities for the long run.

How "big" is the US government compared to other developed nations?

the ratio of government spending to private spending as a portion of GDP, our government is smaller than most, but we get less than most