Category: Economics
Economic articles review

“What Does China's Stock Market Crash Tell Us?”

The article on the BBC “What Does China's Stock Market Crash Tell Us?” (BBC News 2015) describes the underlying reasons and consequences of the Chinese financial slowdown. It presents the views of various economists on the ongoing situation in China and concentrates on governmental initiatives to stabilize the financial fall. This piece of writing will discuss how the article relates to chapter 18 “Investments” of the book.

According to the article, the Chinese government initiated strict policies in order to save the stock market. In this effort, it decreased the interest rates and put off the restrictions on money-lending, limited the ability to sell stocks for those shareholders that hold more than 5% of the stocks and made interventions into the market with governmental spending equal to USD 4 billion. Chapter 18 of the book may explain the real intentions behind the actions of the government. According to the neoclassical theory of investment, investment decisions are influenced by many factors, among which are the interest rates and the financial constraint. In order to increase the desired investment rate, it is essential to decrease the interest rate and minimize the financial constraints for the companies and households. When the interest rate goes down, the user cost of investment decreases. Consequently, more investment is desired.

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The government decreased the interest rate in order to encourage investment demand. Besides, it lifted the ban on the credit market, so that investors are able to lend them money from creditors. Particular actions of the government aimed at enhancing the investment demand and may be well explained in the scope of neoclassical investment theory presented in chapter 18 of the book.

“Unemployment Indicators Only Tell Part of the Story”

The article “Unemployment Indicators Only Tell Part of the Story” provides a comparison of the unemployment statistics in the US for the last few years and gives an example of the inefficiency of the accepted unemployment indicators. According to the article, the unemployment rate in the US has decreased in comparison with the level in the crisis of 2008. However, the author suggests that the statistics are not always accurate. This article is related to the materials of chapter 2 “Measuring Macroeconomic Data”. Specifically, the article highlights the existing drawbacks in the methodology of counting the labor force.

The writer provides an example of the young woman that was laid off from her previous work in 2008. However, after the few weeks of her search for job she got sick and could not continue her search. The woman stresses that, according to the current US terminology, she left the pool of the labor force after those four weeks. However, her reason is not included in the two types of not-in-labor-force. According to the book, the first type of out-of-labor-force consists of the discouraged workers (those who gave up seeking in spite of the fact they would like to work). The second group contains those who voluntarily left the category of the labor force (students, housewives, retirees, and others). Occasionally, the woman from the article does not represent either the discouraged or those who voluntarily left the labor force. So, her individual case is not accurately accounted for in the US statistics. The article points out that there are many cases when people are not included in a labor force in spite of the fact that they are in need of a job. The book gives the formula to calculate the unemployment rate dividing a fraction of unemployed to the labor force. Consequently, if the woman from the article is not included in a labor force (but she was out of labor for the reason of the health problems and wants to find a job after the recovery), her case is not counted in the total US unemployment rate. In sum, when one reads the news and compares statistics, it is important to understand what stands behind the numbers.

Our Process

“Yes, Cash Has a Role in Your Portfolio”

The article “Yes, Cash Has a Role in Your Portfolio” provides an insight into the role of cash in an investment portfolio. The author argues that it is important to have a cash account that can be useful in the short run when an investor has a clear plan of how to use the money. The article is related to chapter 5 of the book, according to which, cash is always in demand because it is the most liquid asset.

Money has three main functions – a unit of account, a medium of exchange and a store of value. The article explains the role of cash in the portfolio, which means the store of a value function of money. However, the author stresses that such part of the portfolio (cash) should be utilized within a short period. The reason for such advice is inflation. As soon as cash is the most liquid asset, the interest rate on it is usually very small (or absent). At the same time, the rate of inflation may be higher. For instance, the target US inflation of 2 percent a year will make one’s cash asset worthless in one year. In other words, cash depreciates in value over time on the rate of inflation in the country. Alternatively, when the country faces deflation (downturn in prices) the value of cash may be appreciated. Particular cases are extraordinary for the economy and are usually the result of some restrictions. Thus, cash is not a good investment decision for the long-run; however, it can serve as a good technical instrument in the short run.

“Rising U.S. Compensation Inequality And Productivity Growth”

The article “Rising U.S. Compensation Inequality and Productivity Growth” discusses the recent debate among US economists regarding the relationship between productivity and wages. The author of the article analyses the changes in this relationship for the period from 2007 to 2014. The results of the study suggest that the analysis of the relationship should look at the total compensation of workers, not only at the wage as a single factor in the compensation system. The author concludes, that compensation inequality (growth of compensation for different income-groups) grew more than the wage inequality between 2007 and 2014. The relationship between compensation and productivity shows a breakdown. The analysis in the article is related to the materials of chapter 3 of the textbook. Further, the paper will explain what concepts the author of the article uses for his analysis.

According to the textbook, the relationship between the labor force real wages and productivity is discussed as a part of the Cobb-Douglas production function. The function aims at maximizing the output (the level of production). According to the theory, there are two main production factors – labor productivity and capital productivity. The real wage rate is the price of labor on the market. While determining the equilibrium the real wage comes from the marginal product of labor. Consequently, the formula implies that real wage and productivity growth should be of approximately the same rate. Extrapolating this knowledge to the real-life economy, one may suspect that the total wage growth rate in the US economy should correspond to the productivity growth rate. The author of the article mentions that the modern compensation system consists of several factors, including the wage, health insurance compensations, retirement bonuses that are accumulated, employee referral system, and others. Thus, the real wage does no longer represent the actual price of labor. Alternatively, economists should look at the total compensation growth rate and productivity relationship. The author argues that the equilibrium in the growth rate of two factors has broken in 2000. Consequently, according to the Cobb-Douglas production function, labor receives a declining share of income, whereas an increasing share goes to the capital owners (as a rent).

In sum, the article raises the issue of distribution of income between two production factors – labor and capital. The author makes his conclusions on the basis of a Cobb-Douglas production function that is discussed in chapter 3 of the textbook.

“Much Too Responsible”

The column by famous economist Paul Krugman that appeared in late January 2015, in The New York Times provides the comparison of the two big economies – the US economy and the European zone economy. The article argues that the United States initiated the expansive monetary policy as the economy stimulus aiming to encourage consumer expenditures, create new job-places and guarantee the GDP-growth. European zone, on the other hand, increased the interest rates to encourage savings. The result of the two distinct policies is obvious. While the US experiences GDP-growth, the EU still cannot recover from the financial crisis far more often facing new economic challenges (for instance, the current crisis in Greece). Paul Krugman elaborates on the differences in two macroeconomic policies and gives explanations of the results. The article is related to chapter 4 of the textbook.

Our Benefits

The policies that were used in the US included tax rebates, decreased interest rates, expansive monetary policy and the stimulus for small businesses. According to the concepts in the textbook, those actions are oriented towards the stimulation of consumption.

The European zone chose to stimulate savings. According to chapter 4 in the textbook, in order to stimulate savings government should introduce a tax on consumption and increase return on savings. The particular tax could be collected through sales tax or value-added tax. In Europe, a tax on consumption is practiced in the form of VAT. An additional tool to stimulate savings is reducing budget deficits. According to the article, the European Commission allocates substantial funds to reduce the budget deficits in all member-countries. The particular strategy is also controversial. In comparison to the US and European approaches, the US expansive monetary policy resulted in a high budget deficit in 2009. However, in the long run, the policies led to the minimization of the budget deficit. Contrary to this, European policies failed to be effective and resulted in a deeper recession.

To conclude, there are different governmental policies regarding consumption and savings. The US approach (expenditures stimulation) proved to be more effective in the long run.

“Wyoming, Long on Pride but Short on People, Hopes to Lure Some Back”

The article by J. Tyrkewitz (2015) in The New York Times presents the new recruitment program initiated by the Wyoming state. This state is one of the less populated in the US and has a rigorous climate. Its economy is poorly diversified and depends largely on oil and coal. The main work for local labor is connected with agriculture. Therefore, young citizens tend to leave the state after graduation and move to more prospective places. The median age of the citizens of the state is well above 40. In response to a particular trend, the state’s governors decided to implement the internet-based recruitment program that helps attract young Wyoming citizens who once have left the state. The program aims at luring young and ambitious professionals who will help to diversify the economy and develop the state. This article is connected with the content of Chapter 6 of the textbook, where the sources of economic growth are discussed.

One of the sources of growth is the labor force. Wyoming has faced a problem where GDP growth is hindered due to the outflow of the labor force and the human capital. According to the Solow model, population growth increases the size of the labor force that ensures the GDP growth in the long run. Wyoming experiences the reverse effect as the population in the state is diminishing. The new program that is discussed in the article aims to improve the situation with population growth in the state. Attracting young people means ensuring a higher growth rate and better investment climate. Notably, there are two sides to the problem. On the one hand, the prospective companies avoid the state because the human capital of Wyoming is underdeveloped. On the other hand, knowledgeable and prospective specialists avoid staying in Wyoming because they cannot find a job that satisfies their requirements. Nevertheless, the project that is initiated by the state may have positive consequences on the growth.

In conclusion, the program discussed in the article as vital for Wyoming as without enough labor force the state’s GDP will decrease which will sharpen the situation even more.

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