# Tag Info

11

No, they are not market makers. A market maker is someone who (i) quotes two prices (one 'low' and one 'high'), (ii) will buy from any seller at the low quoted price (even if there is no corresponding buyer right now), (iii) will sell to any buyer at the high quoted price (even if there is no corresponding seller) right now. This injects liquidity into the ...

10

"Foreign Direct Investment" is to be understood as bringing in an economy productive capital, and not just purchasing power. When an economy is seriously below full employment (of capital and labor), then a case can be made that "printing money" (i.e. creating purchasing power out of thin air) may not result in just inflation, but it may ...

10

Purchasing new homes would count as an investment. According to Blanchard et al. Macroeconomics: a European Perspective pp 568 in glossary investment is defined: Investment (I): Purchases of new houses and apartments by people, and purchases of new capital good (machines and plants) by firms. The source above is the leading undergraduate macroeconomics ...

9

Both are economically sound. The notation is just a question of convention. The reason behind the ambiguity is that capital is a stock and investment is a flow variable. You are looking at capital in two different instants. Investment happens during the time between the two instants and its index is either the starting or the ending instant.

8

This is a bit more complicated than it looks. The two are different but equivalent notational conventions, only if it is clear that they incorporate the same assumption of essence (that is rarely stated explicitly nowadays), i.e. that it takes only one period for investment to become part of capital and so productive. Under this assumption the notational ...

8

In general, stock picking does not work. For more information, see this keynote address by Daniel Kahneman, who found that stock-pickers perform worse than chance when they change stocks: https://forum.amundi.com/the-psychology-of-investors-the-cost-of-ideas/ Here is another reference on the subject: Abstract Is expertise portable across closely ...

8

A private person will almost never have an access to borrowing at risk free rate. However, governments such as Germany or Switzerland can borrow at essentially for all practical purposes at risk free rate by issuing government bonds. As a private person you might get access to risk free loan if you are rich enough to be able to negotiate the rate with bank ...

6

Suppose the face value of a bond is $M$ and its interest rate is $\tau$. This means it will pay $\tau \cdot M$ interest every year (other periods are also possible) and at the end of its run (its maturity) it will also repay the face value $M$. Government bonds are usually sold in auctions. Whatever ends up being the market price is considered to be the ...

6

Handing out the principal amount of debt gradually, in increments, is standard practice in investment loans extended by a bank to a corporation. The rationale is clear : the corporation wants to make an investment, say a new factory. The whole plan is laid out and the cash flows of the pre-operational, construction period are also detailed, based on ...

6

This question probably needs the obligatory Efficient Market Hypothesis answer to complement the great answer by Angela Richardson. Broadly, speaking, the EMH reasoning goes like this: Suppose that there was a way—any way—for you to figure out that a stock's price is too low and that the price will be higher tomorrow. They you could make a profit by buying ...

5

If I'm to give a single reference on learning six years of economics by yourself, it would be MIT Economics Course http://ocw.mit.edu/courses/economics/ The MIT has the best graduate economic program, and its undergrad program is definitely in the top 3. The faculty is technical-oriented, which means a lot of math, so you'll be well prepared. The list of ...

5

The seminal academic criticism of dollar cost averaging on many specifications of economic conditions is A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy (Constantinides (1979)). You might also be interested in these papers: Dollar Cost Averaging is an investment system that is widely advocated by brokerage firms and mutual ...

5

A loan is an agent lending funds to another agent. This money can be used for investment spending, or it can be used for personal consumption expenditures. It can be used to buy fixed assets like real estate, which may or may not be "investment" depending on how you use the terminology. In the case of the IMF, the role of the institution is to ensure ...

5

No, you can definitely grow GDP without foreign investment or even trade. There are 3 basic ways to grow GDP. One is increasing human capital, which includes increasing population as well as allowing women to work. Basically, anything that increases the number of people in the labor force. Second, we have physical capital, which is where foreign ...

5

That imagined world, in which individuals only wanted to invest their money in stocks and not on any other product that has anything less than X% annually is inconsistent with how people think about investments (and how financial markets work). The reason is that returns are not static, but respond to demand. If everyone wants to just buy stocks with ...

4

This is a deterministic Optimal Control problem in continuous time. Jorgenson uses nominal terms, so prices are explicitly present. To copy the original and we want to arrive at A standard neoclassical production function, is a constant-returns to scale one over Labor $L$ and capital $K$, $Q = F(K,L), F_L, F_K >0, F_{LL}, F_{KK} <0$, satisfying ...

4

The New Palgrave Dictionary of Economics Article on Adjustment Costs gives a nice overview of the use of adjustment costs in economic models. What is the purpose of scaling investment costs with K here? This function form implies that adjustment costs of size X% of capital $I/k$ cost the same fraction of capital ($c(I/k)$) regardless of the amount of ...

4

The paper is assuming that some form of "law of large numbers" (LLN) applies for the continuum. The expected value of capital for an individual agent is $$\mathbb{E}[R\cdot 1_{R\geq R^*}]=\int_{R^*}^1 R\,dR\tag{1}$$ The LLN assumption says that when we have a mass-1 continuum of agents, their actual total will equal their expectation in (1). What justifies ...

4

Yes, their value would collapse. But not for the reason you might think. It's not because they're the same currency, per se. But rather because a major collapse in the US dollar's value would be part of a much larger economic collapse. Which means that disposable wealth would be rare, and the demand for indulgences such as collectors' coins would dry up. ...

4

Home construction is a form of investment, home purchase is not. There's an important macro difference between creating the capital asset (construction) and transferring it (purchase). Regarding whether a newly built home occupied by its owner counts as investment— yes, because it is a capital asset that produces a stream of housing services. There's more ...

4

Both in Economics and in Accounting, there is the following fundamental principal: we have to subtract revenues generated in a given time period from costs incurred in the same time period (because this is what makes basic sense). Now, "cost" is the value of productive resources absorbed into production, in the given time period. The total value of an "...

4

The multiplier comes from the solution to the goods market equilibrium. In economics everything is endogenous. Increase in income increases consumption that increases demand, demand increases production and production increases income. However, as an echo in a cave the initial increase in income gets 'weaker' as it cycles through the economy and the result 1/...

4

Scenario “C” does not specify “unexpected.” Since greater growth was expected, planned inventory investment would rise to meet higher expected demand.

4

The investment ($I$) equals savings ($S$) result is derived by Keynes just from national identity, as a result it just hold by definition. Keynes in the passage starts with the simplified version of national identity that omits government. That is: $$Y=C+I \implies I=Y-C$$ And simply solves it for investment. The solution of investment tells us that private ...

3

"And also does this have anything to do with discounting vs. coupon bonds, etc?" It does. Assume a bond without coupons, to be fully re-paid in a single payment. On it ("face value" $\equiv B$) the bond writes the amount to be paid, as well as the date of payment. In such a situation, the "face value" includes both the principal amount and the interest....

3

Think of it this way: A dollar today is worth more than a dollar tomorrow Why? Because today you can invest it, and have more money tomorrow! How much more money? It depends on the interest rate. The interest rate on government bonds basically says: "Whoever you are, if you lend me this money I am going to give you back all of it plus a certain interest". ...

3

First it should be clear that this is an (ex post) national account equality: $Y=C+I+G+NX$, the private saving is $S_p=Y-C-T$ and public saving is $S_g=T-G$ thus you have $S_p+S_g-I=NX$. Later you see in this book that the net exports, which depend on the exchange rate, are exactly equal to the Net Capital Outflow. Why? because an export is like a capital ...

3

The investor has erroneously overvalued the value of the stock/commodity. Here is a prominent paper that models irrational bubbles: This paper attempts to formalise herd behaviour or mutual mimetic contagion in speculative markets. The emergence of bubbles is explained as a self-organising process of infection among traders leading to equilibrium ...

3

In a world where capital markets are infinitely deep there shouldn't be any price response to capital and so we wouldn't expect any consequences on firm behavior. There is some good empirical evidence for slow moving capital so that's probably not true. Ethical investing is likely to drive up capital costs at least some. In which case your question boils ...

Only top voted, non community-wiki answers of a minimum length are eligible