Naked Economics Ch. 6-9

Purposes and Kinds of Financial Markets

-Borrowing to make investments that will better us later on. Modern economies could not survive without credit. -Selling shares of a company for a quick gain of cash and giving away future profits

Consumer/Producer Surplus & Taxes

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HDI (Human Development Index)

A broader indicator of national economic health, the HDI uses GDP, life expectancy, literacy, and educational attainment. It is a good tool for assessing progress in developing countries, while telling us less about the overall well-being in rich countries where these things are already high.

"Fast Tracking" Trade

A protection against pork barreling essentially. When the president is negotiating trade agreements, he will get the "fast track" authority so legislators cannot add parts that exempt groups in their interest from the agreements, because a trade agreement with exemptions for each small area that the legislator presides over is no agreement at all.

Changing Demography and Government Spending

America is getting older and that places a heavy burden on the young. The bulk of government benefits, notably Social Security and Medicare, are bestowed on americans who are retired. These programs are financed with payroll taxes imposed on younger americans who are still working.

Fiscal policy

American Recovery and Reinvestment Act - the stimulus bill under the obama administration that put construction workers and other back to work so that they would begin spending again and increase confidence in the economy. It also cut taxes to give consumers more money. Keynesian "fine-tuning" - using government fiscal policy to fine-tune the economy. The government has the tools to smooth the business cycle.

Income Inequality

As America's longest economic boom in history unfolded, the rich got richer while the poor ran in place, or even got poorer. mostly because of disparities in human capital.

Efficient Markets theory

Asset prices already reflect all available information, thus it is difficult, if not impossible, to choose stocks that will outperform the market with any degree of consistency, yet people believe they have the edge all the time. Prices will rise or fall in the future only in response to unanticipated events

AIG Failure

Because aig guaranteed a lot of debt that went bad.

Speculation

Betting on short term price movements such as the stock market, bonds, housing, etc. When it fails, it gets compounded because if the company fails, everybody who bet loses their money.

Diversification

Diversifing your investments yields a decreased risk of extreme loss. Mutual funds are an example. In case one market fails, the others can pick you up. S&P 500.

Increased wealth gap

Economists argue we should not care about this for two reasons. (1) inequality sends important signals in the economy (incentivizing kids to go to college) and (2) as long as everybody is doing better, we should not care.

"Macroeconomic factors control the tides; human capital determines the quality of the boat."

Essentially no matter how good the economy is, the human capital still determines how well off somebody is in relation to others.

"We are the special interests"/ "where you stand depends on where you sit"

Everybody is in an interest group and therefore we all have different viewpoints depending on our group. Because we all want to act in self-interest, people support legislation that helps them.

Green GDP

GDP does not account for environmental degradation (cutting down a forest increases gdp but the fact that the forest is gone makes not impact) (in china environmental degradation is a large externality of their sufficient rise in GDP)

Regulation increases entry barriers and decreases competition and stops creative destruction.

George Stigler says, "groups seek to get themselves licensed" to protect themselves. Again, small, organized groups fly under the radar in getting licensed.

Relative Deprivation

How much poorer or richer you are compared to everyone else. Most people would rather be richer relative to everyone else than richer than that but poorer than everyone else.

Human Capital Theory

Human Capital allows us much more than earning money but also more informed, more appreciative, healthier, safer, and more able to enjoy the fruits of life. Similarly everything we know as a people defines how well off we are as a society.

Interest (rental - r) rate

Individuals, companies, and institutions with surplus capital are renting it to others who can make more productive use of it. Harvard invests its endowment into more productive things such as stocks and bonds, and venture capital funds.

Subsistence vs. Innovation, Growth economy

Innovations creates new jobs (such as the internet) and jobs that are gained do not take away others' jobs (immigrants and women have all entered the labor force consistently and unemployment does not skyrocket) The economic pie gets bigger, not merely resliced

Behavioral Economics & Behavioral Growth Fund

Investors sometimes have too many emotions and are therefore less likely to take risks. Behavioral economics is a large part of investing and is why people make mistakes. Richard Thaler used these mistakes to make monetary gain by making a mutual fund off of the behavioral mistakes of regular investors and has done very well.

Human capital ⇒ productivity ⇒ economic well-being; natural resources ⇏ standard of living

Japan and Switzerland have no natural resources and are rich while nigeria has immense resources but it has done little for their standard of living.

Credit Default Swaps

Just an insurance policy on whether or not some third party will pay back its debts

Pork-barrel legislation/ Christmas ornament-hanging

Lavishing money on small projects that cannot possibly be described as promoting the national interest (mohair farmers) but ensure votes. Nobody else notices except those receiving the money

Measuring progress debate

Many analysts argue over the true factors which make up growth in a country, this includes all sorts of factors from GDP to drug use. Progress has a wide range of definitions.

Ratio of Govt Spending : GDP

Measures the size of the government.

Gini Index

Measures wealth disparity. 0=total equality 100=one person has all the wealth. America is 45 and france is 28.

National Savings

Money we tuck away for stuff. Savings has a profound impact on the economy because they are necessary to finance investment.

Forms of Insurance

Most popular are Health, life, and auto insurance, but also coverage for natural disaster, fraud or theft, or disability insurance. We are willing to pay a predictable amount to protect ourselves from the unpredictable

Real Cost of Living

Not measured in dollars and cents but in the hours and minutes we must work to live

Health Cost of low GDP per capita

People go untreated despite their being the supplies they need to be completely cured. (leprosy is still a large case in india)

Human Capital and Job Creation

People make investments in human capital by going to school and receiving training which will yield return in the future. Human capital is an economic passport

Investments & Taxes ⇒ level of Productivity

Productivity growth depends on investment (taxes are often used to invest in new research to improve us in the future). Increased investment (in both physical capital and human capital) = increased productivity while decreased investment or high taxes can diminish investments.

GDP - Gross Domestic Product

Real GDP - the total value of the goods and services produced in an economy adjusted for inflation nominal GDP - same just not adjusted for inflation GDP per capita - the nations GDP divided by its population (a much better representation of the richness of a country) Measuring GDP growth over time - important for showing economic growth

Current Account Surplus/ Deficit

Reflects the difference between the income that we earn from the rest of the world and the income they earn from us. When in deficit, we are not exporting enough to pay for our imports.

Investment guidelines

Save early, save often, and pay off credit cards because rent on an investment is an expense nonetheless and is something that could be much more useful in the future. More risk = more reward and the converse. If something sounds too good to be true, it probably is.

Incentives for interest groups

Small subsidies can break the rules of a market economy. The government should not be in the business of providing incentives for people to do things that would not otherwise make sense.

Okun's Law

States that GDP growth of 3% a year will leave the unemployment rate unchanged. Faster or slower growth will move the unemployment rate up or down by one-half a percentage point for each percentage point change in GDP.

Large group subsidizes the smaller group

Subsidies are given to the smaller groups to incentivize those small, interest groups to continue doing what they do.

Business Cycle

The cycle of recession and recovery is based off of a number of factors.

Labor market

The demand for labor. Same principles as regular market where the more unique a set of skills, the better compensated their owner will be.

Productivity

The efficiency with which we convert inputs into outputs. The more productive we are, the richer we are. In the modern economy productivity is more effected by technology, specialization, and skills than resources

Futures Markets

The future is risky so many are willing to pay a price for certainty even though we may end up worse off or much better off from paying the price.

Lump of Labor fallacy

The mistaken belief that there is a fixed amount of work to be done in the economy and therefore every new job must come at the expense of a job lost somewhere else.

Measuring Poverty

The poverty line measures the minimum income for an adult or family. Poverty rate is the percent of people below the line. Not much progress has been made since 1970.

Scarcity

The price of a certain skill bears no relation to its actual social value (recall the value of water versus a diamond and which costs more) only its scarcity.

Trade vs. Jobs Protection

The problem is that we don't get the benefits of the new economic structure if politicians decide to protect the old one. Policymakers who fail to appreciate the relationship between the relentless churning of the competitive environment and wealth creation will end up focusing their efforts on methods and skills that are in decline. Those who are affected by globalization of jobs seek protection (tariffs)

Human Capital

The sum total of skills embodied within an individual: education, intelligence, charisma, creativity, work experience, ect. It is what you would be left with if someone stripped away all of your assets.

Monetary policy

The way the government can control money (rather than the flow of it) through interest rates and the Federal Reserve. Lowering interest rates makes investment easier for consumers.

Rentierism

When a state is heavily dependent on a single resource. When the price of this commodity falls, it creates a shock and a recession.

Economics of Regulation

When it comes to interest groups in politics, it pays to be small because whatever favors the small group gets is spread over a large, unorganized segment of the population (mostly through taxes)

Negative GDP

When the GDP is negative it creates a large recession. If they were possible to prevent, we would, but every recession is different and therefore difficult to anticipate.

rule of 72

divide 72 by a rate of growth (rate of interest) and the answer will tell you roughly how long it will take for a growing quantity to double

Productivity Growth = higher standard of living

implied def

Raising Capital

investing and buying on credit

"Does our free market system make poverty inevitable?"

no because it is not a zero sum game. There is no correlation to bill gates being rich and people being poor. He created his wealth not take it away from others

Zero sum game

similar to lump of labor fallacy. The world does not need poor countries in order to have rich countries nor must some people be poor in order for others to be rich.

Recessions

usually begin with a "shock" Demand-side economics - spending can cause more spending which increases confidence in an economy through demand. And vice-versa Great recessions over-leveraged debt - In the Great Recession of 2007, the housing boom caused an over confidence in the market and people "excessively leveraged" meaning they borrowed far more than they could manage, and the down payments became smaller. When the bubble burst however, families could no longer pay their mortgages nor could they sell their houses, this cycle led to collapse. AIG (who insured mortgages) failed, and so did investment banks (which pooled large mortgages and could take small hits, but not large ones). When Lehman Brothers declared bankruptcy because the federal reserve would not save them, the global financial system got seized up. When the financial system gets seized up, no one gets credit. Trans-national recession - When the US economy weakened, we bought less goods abroad and therefore the recession quickly spread globally.