11 votes
Accepted

Are stock exchanges market makers?

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 ...
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  • 16.6k
10 votes
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Screw foreign investment, lets just print money

"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 ...
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10 votes
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Is investment in real estate a real investment?

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 ...
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  • 43.5k
9 votes

Which capital accumulation is right? $K_t = (1-\delta)K_{t-1} +I_t$ or $K_t = (1-\delta)K_{t-1}+I_{t-1}$?

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 ...
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  • 26.7k
8 votes

Which capital accumulation is right? $K_t = (1-\delta)K_{t-1} +I_t$ or $K_t = (1-\delta)K_{t-1}+I_{t-1}$?

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 ...
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8 votes

Does stock picking work?

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://...
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8 votes

How to borrow at risk free rate

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 ...
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6 votes
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What is the difference between present value and face value?

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 ...
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6 votes
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Is the loan principal ever delivered in pieces over time?

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 ...
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6 votes

Does stock picking work?

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 ...
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  • 16.6k
5 votes

Best resources to self-educate myself in economics

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 ...
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5 votes
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Does dollar cost averaging actually have any advantage over one time investment?

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 (...
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  • 15.9k
5 votes
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What is the difference between a loan and an investment?

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 ...
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5 votes
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Can't a country grow its GDP without foreign investment?

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 ...
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5 votes
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What would happen if individuals stopped investing their money in conservative low-yield products?

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 ...
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  • 1,135
4 votes

Derive marginal productivity conditions in DW Jorgenson paper

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 ...
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4 votes

Scaling Adjustment Costs

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 ...
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  • 15.9k
4 votes

Capital in a credit frictions model

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 ...
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4 votes

If a currency crashes, does that effect the value of rare or collector coins?

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 ...
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  • 8,012
4 votes

Savings = investment with private money creation?

Say you take out a \$1m loan from ABC Bank - they create two entries on your books: Assets: \$1m cash available funds. Liablities: \$1m loan you owe the bank. Similarly on their books they create ...
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4 votes
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Is a home (primary residence) purchase a form of investment in macroeconomics?

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 ...
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4 votes

Why is investment not a cost in firms profit functions?

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 ...
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4 votes
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How does the GDP multiplier work?

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 ...
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  • 43.5k
4 votes
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Why does the answer not include increased negative unplanned stock investment?

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

Keynes' conception of investment

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 ...
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4 votes
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How to compare investments with different risk and expected return?

The trade-off between risk and expected returns depends on your own preferences. Assume that you are expected utility maximizer and let the return of the investment be given by the random variable $X$....
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  • 8,642
3 votes

What is the difference between present value and face value?

"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 ...
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3 votes

What is the difference between present value and face value?

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. ...
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  • 141
3 votes
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Investment = Saving relation in an open economy

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 ...
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