Monday, June 19, 2017

244. UNEDITED: In other words the nonsense has not been edited out yet!

What is 'Wage-Price Spiral'

The wage-price spiral is a macroeconomic theory used to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. The wage-price spiral suggests that rising wages increases disposable income, thus raising the demand for goods and causing prices to rise. Rising prices cause demand for higher wages, which leads to higher production costs and further upward pressure on prices, creating a conceptual spiral.

BREAKING DOWN 'Wage-Price Spiral'

Wage-price spiral is an economic term that describes how prices increase when wages increase. It's a phenomenon that occasionally occurs when the general prices for goods and services increase, causing workers to demand a wage hike. The wage increase effectively increases general business expenses that are passed on to the consumer in the form of higher prices. It's essentially a loop or cycle that perpetuates itself by consistent prices increases.

The wage-price spiral deals with the causes and consequences of inflation, and it is therefore most popular in Keynesian economic theory. It is also known as the "cost-push" origin of inflation. Another cause of inflation is known as "demand-pull" inflation, which monetary theorists believe originates with the money supply.

How a Wage-Price Spiral Begins

A wage-price spiral is a simple matter of the effect of supply and demand on aggregate prices. People who make income above their cost of living usually decide on an allocation mix between savings and consumer spending. As wages increase, so too does a consumer's propensity to both save and consume.

If the minimum wage of an economy increased, for example, it would cause consumers within the economy to purchase more product, increasing demand. The lift in aggregate demand and the increased wage burden causes businesses to increase the prices of products and services. Even though wages are higher, the increase in prices causes workers to naturally demand even higher wages.

If the higher wages are granted, it will start a spiral where prices subsequently increase, repeating the cycle until wage levels can no longer be supported.

Stopping a Wage-Price Spiral

Governments and economies like to have stable inflation — or price increases. A wage-price spiral often makes inflation increase higher than is ideal. Governments have the option of stopping this inflationary environment through the actions of the Federal Reserve or central bank. A country's central bank can use monetary policy, by way of the interest rate, reserve requirements or open market operations, to curb the wage-price spiral.

However, the United States has done this in the past and actually caused a recession. The 1970s was a time of oil price increases by OPEC that resulted in increased domestic inflation. The Fed responded by raising interest rates to control inflation, stopping the spiral in the short-term but acting as the catalyst for a recession in the early 1980s.

Read more: Wage-Price Spiral http://www.investopedia.com/terms/w/wage-price-spiral.asp#ixzz4kSS03AIZ

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243. Only one price can exist on a market (operating under perfect market conditions) at any one time.

What is the 'Law Of One Price'

The law of one price is the economic theory that the price of a given security, commodity or asset has the same price when exchange rates are taken into consideration. The law of one price is another way of stating the concept of purchasing power parity. The law of one price exists because of the arbitrage opportunities that must be present and available.

BREAKING DOWN 'Law Of One Price'

If the price of a security, commodity or asset is different in two different markets, then an arbitrageur will purchases the asset in the cheaper market and sells it where prices are higher. Arbitrage profits will persist until the price converges across markets.

The law of one price eliminates the possibility of investors from taking advantage of a price disparity between markets because of the actions of arbitrageurs. If a particular security is available for $10 in Market A but is selling for the equivalent of $20 in Market B, investors could purchase the security on Market A and immediately sell it for $20 on Market B, netting a profit without any true risk or shifting of the markets. If the do so they will be acting as arbitrageurs and it is this very act that will drive prices up in Market A and drive prices down in market B. So, as securities bought from Market A are sold on Market B, prices on both markets shift in accordance with the changes in supply and demand. Over time, this would lead to a balancing of the two markets, returning the security to the state held by the law of one price.

In efficient markets, the occurrence of arbitrage opportunities are low, most often caused by an event causing a sudden shift occurring in one market before the other markets are effected. In these days of electronic trading - arbitrage trading, whilst still large, are trading on thinner and thinner margins.

Law of One Price and Commodities

When dealing in commodities, the cost to transport the goods must be included, resulting in different prices when commodities from two different locations are examined. If the difference is goes beyond the transportation costs, this can be a sign of a shortage or excess within a particular region.

Purchasing Power Parity

Purchasing power parity describes the effects controlled by the theory of the law of one price. It relates to a formula that can be applied to compare securities across markets that trade in different currencies. As exchange rates can shift frequently, the formula must be recalculated on a regular basis to ensure equality across the different international markets. The Law of One Expected Return

A continuation of the law of one price is the law of one expected return. This governs the idea that securities with similar asset prices and similar risks would be expected to generate similar returns.

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242. More on Wages and why wages differ.

http://thismatter.com/economics/wage-differentials.htm

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Wednesday, June 14, 2017

241. Beneficiation

Why does SA not "beneficiate" its raw materials that it exports? For the same reason that the sheep farmer sells the wool and purchases his jersey from the local shop.

The answer lies with a phenomenon called "specialisation".

The tomato farmer does not manufacture his own tomato jam. Should he? The answer is clear. He should, only if the marginal return of making jam is higher than spending his time and effort on growing tomatoes. And then, if his return is higher for making jam, should he not stop growing tomatoes and focus on manufacturing jam? The answer is: Yes! it should stay "yes" till the marginal returns are equal.

The prices of and profits made on embarking on various activities will ultimately determine which actions entrepreneurs would take to optimise their return on investment of time and resources. If something is not done, or some activity is not carried out, it is because there is no profit opportunity to do so. If a government wants to use funds to "stimulate" such activity, it can only do so at the cost of the alternative use of the funds (such as the building of a road, hospital or education). So yes "encouraging" an industry will change the rewards for the recipient but at the cost of the person that provided the funds - the taxpayer whose use of the money would have yielded a higher return for him. Or to return to the example of the tomato farmer - he is taxed on his farming endeavor to make it possible for someone else to be subsidised make jam! Overall value is being lost.

Individual firms in South Africa would beneficiate only if it beneficial to do so. And it is best to let the market indicate, through the price mechanism the best allocation of resources and not the bureaucrats.

C.M. Heydenrych

June 2017

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Tuesday, June 13, 2017

240 Indifference curves

https://www.youtube.com/watch?v=iOmDo5jLFw8

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Saturday, June 3, 2017

239. Protect us against Protectionism

Trump any argument against for free trade. A great article: http://www.politicsweb.co.za/documents/reiterating-the-case-for-free-trade--irr?utm_source=Politicsweb+Daily+Headlines&utm_campaign=5711f96dc7-EMAIL_CAMPAIGN_2017_05_25&utm_medium=email&utm_term=0_a86f25db99-5711f96dc7-140204053

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Thursday, June 1, 2017

238. Macro-economic Policies.

How would the policies based on Classical views differ from those based on Keynesian views? To deal with problems of economic growth, poverty and unemployment.