Category Global Economy

How does the government generate revenue besides collecting taxes?

My answer on Quora: For a given country, you can find the actual breakdown of its government’s revenues in the Statement of Government Operations (p. 38, IMF). This is like the government’s income statement. Some governments might give it different names and some governments might be more transparent than others. A government’s revenues can be grouped into […]

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When inflation is running wild, what should governments do to the interest rates?

My answer on Quora: It depends on the source of inflation. Interest rates impact borrowing/savings decisions and can also send a signal about the seriousness of the central bank (whose mandate typically includes some kind of price stability). If inflation shoots up because of a supply shock, then there may not be much interest rates […]

Will social and/or class inequality ever change?

My answer on Quora: If we were to define class inequality as income inequality, then history tells us that it is indeed likely to change. The reasons for those changes is where the real story is. Branko Milanovic in his book Global Inequality presents two key factors that can reduce high levels of inequality: malign and benign factors. Malign factors lowered income inequality in the […]

What are the pros of having a world currency?

My answer on Quora: Let’s define a world currency as a widely used currency for both international transactions and official reserves. An alternative interpretation would be a single currency for the whole world (see here for more on that). Direct benefits include very little exchange rate risk in international transactions, importing goods using your own […]

What are economic structural factors?

My answer on Quora: The structural factors of an economy are those that do not change with the economic cycle. There are structural factors and there are cyclical factors. Think of a trend vs. variations around that trend. Structural factors relate to the supply-side of the economy and cyclical factors relate to the demand-side. Structural factors include laws (like […]

Is population the number one contributor to a country’s long-term economic growth?

My answer on Quora: Population is important, but productivity is most important for long-term economic growth. Throughout most of history before the Industrial Revolution, an economy could only grow about as fast as its population. The Industrial Revolution and the new technologies brought into the production process allowed firms to produce much more than they were ever capable […]

Why would a government fix an exchange rate?

My answer on Quora: A Central Bank may decide to fix the exchange rate of its currency relative to another currency to (1) anchor expectations and provide stability, (2) reduce fluctuations in import prices for local consumers and producers, and (3) reduce exchange rate risk in foreign financial transactions. Fixing the exchange rate comes at […]

How can innovation help improve the economy?

My answer on Quora: The kind of innovation that helps improve the economy could do so by improving the efficiency of production, the quality of goods and services, and the availability (access) of goods and services. Before saying a quick word about those three areas, it is important to note that innovation by itself is […]

What is the difference between ‘economics’ and the ‘economy’?

My answer on Quora: The economy can be thought of as a system of production and exchange of goods and services among people and organizations (private or public). The money, price and financial system are there to facilitate production and exchange, and provide a common unit of value to different goods and services. Traditionally, economics […]

What are the reasons why GDP may understate or overstate economic well-being?

My answer on Quora: There is a distinction between welfare and output in economics. Gross Domestic Product (GDP) is a measure of how much an economy produces in a given period of time. This can typically be done by looking at aggregate expenditures, income, or value-add throughout the production process. It does not measure welfare or well-being, and by definition, is […]

What is the difference between economic and non-economic activity?

My answer on Quora: Sometimes it is easy to distinguish economic from non-economic activity, like buying a T-shirt vs. swimming in a lake. Other times, it is not so clear. For example, is the activity of Quora users considered economic? Users exchange a lot of information free of charge, and Quora is a very valuable […]

When is “good for the economy” not “good for the people”?

My answer on Quora: Let’s begin with a narrow view, then zoom out. With a very narrow view, I can think of an example or two, but they don’t amount to much. In the end, there is no durable example of something that is good for the economy but not good for the broad majority […]

How will the economy survive automation?

My answer on Quora: This is the question of our time, and of past times as well. I do not have an answer for our time, but the 20th century has an answer for the last time this question dominated society – at the onset of the industrial revolutions of the 18th century (in the […]

During a crisis, people invest in US bonds. However, wouldn’t a crisis increase the risk of default?

My answer on Quora: One of the most telling and paradoxical events in the world of finance happened when Standard & Poor’s downgraded US government bonds in August 2011 for the first time ever. Instead of investors reducing their demand for a bond that is now deemed by a leading credit rating agency as riskier than previously […]

How does credibility affect the cost of reducing inflation?

My answer on Quora: The credibility of a central bank plays a strong role in its ability to achieve its objectives, which often includes price stability (i.e. stable inflation around a desired target). If a central bank lacks credibility, investors and firms won’t have much confidence in the central banks ability to keep inflation around […]

Which is better, GDP or HDI?

“In my opinion the point of high GDP is to provide better life for people. That’s higher GDP should lead to Higher HDI, otherwise it is not real development. What is your view?” My answer on Quora: It does not strictly follow that higher GDP leads to higher HDI (Human Development Index). GDP is a […]

What is the best way to reduce inflation in a developing country?

My answer on Quora: There are many ways to try to fight high inflation in developing countries because there can be many sources of high inflation. Ultimately, the key differences between developed and developing economies in the context of fighting high inflation often deal with the effectiveness of monetary policy and any reliance on imports […]

Can devaluing a country’s currency increase its foreign reserves?

My answer on Quora: It depends on the size and direction of the pressure on the currency before the devaluation, and how close the new value of the currency is relative to its market value. First, a devaluation implies that a central bank is moving its currency from one fixed exchange rate to another one where it is worth less, relative to the currency […]

Is the Chinese economy sustainable?

My answer on Quora: As it stands right now, China’s economy is not sustainable. The good news is that the Chinese authorities know what they need to do. The bad news is that it is a lot easier said than done, not just for political reasons but for economic ones too. At the heart of […]

What are the effects of monopolies?

My answer on Quora: In general, monopolies are bad for consumers (higher prices and less choice), bad for workers (potentially lower wages) and suppliers, and bad for overall economic growth (less investment). These results arise when a monopoly does everything it can to solidify its monopoly power so that it keeps all the profits in […]