• Economics,  Math

    Terms of Trade

    The Terms of Trade, very generally, is a ratio of the prices of a country’s exports to the country’s imports. Investopedia’s definition of terms of trade: What are ‘Terms of Trade – TOT’? Terms of trade represent the ratio between a country’s export prices and its import prices. The ratio is calculated by dividing the price of the exports by the price of the imports and multiplying the result by 100. But how exactly do you calculate the “price of exports and imports” of a country like, say Brazil, that has USD 190B of exports a year comprising surely thousands, if not more, of different products, and what to do…

  • Economics

    The First Economic “Laws”

      Ferdinand Lassalle’s Iron Law of Wages, following from Malthus, and David Ricardo’s Law of Rent are some of the very first relatively quantitative attempts at statements or observations of economics and can IMHO be considered a sort of ancestor of modern economics.  In the Iron Law of Wages (coined by Lassalle in 1863 according to Wikipedia), as population increases, the labor supply increases and thus the wage price decreases – which does mean that we assume labor demand is unaffected by the size of the population and thus labor demand is effectively exogenous.  Wages continue to decrease until they hit subsistence levels for laborers.  A further decrease in wages…

  • Economics,  Math

    The Terms of Trade of Brazil

    Source: https://www.nytimes.com/2018/11/09/opinion/what-the-hell-happened-to-brazil-wonkish.html An article in the New York Times by Paul Krugman talked about a current economic downturn in Brazil. What happened: First, the global environment deteriorated sharply, with plunging prices for the commodity exports still crucial to the Brazilian economy. Second, domestic private spendingf also plunged, maybe because of an excessive buildup of debt. Third, policy, instead of fighting the slump, exacerbated it, with fiscal austerity and monetary tightening even as the economy was headed down. What didn’t happen: Maybe the first thing to say about Brazil’s crisis is what it wasn’t. Over the past few decades those who follow international macroeconomics have grown more or less accustomed to…

  • Economics,  Math

    Portfolio Insurance and Black Monday, October 19, 1987

    On the thirtieth anniversary of Black Monday, the stock market crash of October 19th and 20th in 1987, there have been mentions of “portfolio insurance” having possibly exacerbated the crash.   Portfolio insurance, in principle, is exactly what you might expect it to be: if you own a stock, Stock A, you insure it with a put option on Stock A.  Your position becomes equivalent to a call option on Stock A until the put option expires, with the price of this position being the premium of the put option when you bought it. If you are managing a portfolio on behalf of clients, though, and you just need to…

  • Economics

    Value-added Tax and Sales Tax

    (This is mostly a summary of and heavily borrowed from https://en.wikipedia.org/wiki/Value-added_tax, archived). (The first three figures are taken from Wikipedia).   Comparing No Tax, Sales Tax, and VAT Imagine three companies in a value chain that produces and then sells a widget to a consumer. The raw materials producer sells raw materials to the manufacturer for $1.00, earning a gross margin (revenue – Cost Of Goods Sold, COGS) of $1.00. The manufacturer sells its product, the widget, to the retailer for $1.20, earning a gross margin of $0.20. The retailer sells the widget to a non-business consumer (for the customer to use and consume) for $1.50, earning a gross margin…

  • Economics

    The Theory of Interstellar Trade

    The Theory of Interstellar Trade, by Paul Krugman (1978) Archived   Assume we have two planets, Earth and Trantor, separated by a large distance, the traversal of which necessitates travel at velocities comparable to the speed of light.  Assume that Earth and Trantor are in the same inertial reference frame, i.e. they are not accelerating with respect to each other. Assume that a spaceship traveling between the two planets travels at a constant \(v\). Let’s say that from the perspective of an observer on one of the planets, the time it takes for a spaceship to make the trip is \(n\). Then, the time it takes for a spaceship to…