Archive for September 12th, 2015

What Economists Study09.12.15

Economists are social scientists that study how people, companies, and governments use limited resources to satisfy virtually unlimited wants and needs. For example, everyone must make choices about how to use their paycheck to pay for housing, buy food, clothing, and consumer goods, about how to get to and from work, what insurance is best and how to save for the future. The idea of scarcity of resources whether it is money, labor, or raw materials, is one of the basic concepts that economics is based on.

On the other hand, we all have a long list of wants. A new car, maybe a vacation home, a sailboat, or even simpler things like a new television, or better clothes or a bigger apartment. Governments also have a list of things they want to provide like better health care and education, or a way to set aside more land for parks. Companies, of course, always want bigger profits to fuel growth and to maximize returns on their investments.

It is at the intersection of the resources and wants that economists study. They look at how a change in pricing affects the demand for a product, or how an increase in the supply of corn can affect food prices. Most of the time. the answers can be confusing and complicated. Part of this is because of another basic tenet of economics dictates that people, corporations, and government always act in rational ways that maximize the individual’s gain. This tenet is called Homo economist, but as many can attest to, it doesn’t always work that way.

An example of this was tested in 2008 when the US Congress passed legislation that gave many families a tax incentive in the form of a check during the middle of the year. The idea was that by giving people access to their tax refunds earlier, they would spend the money and help stimulate the then-sluggish economy. Traditional economics held to the Homo economist thinking and said the stimulus checks would be saved and not spent. Saving the money would do nothing to move the economy forward and would place a drain on the Treasury Department.

One economist, Christian Broda, tested this idea in a paper he co-authored. By using a data set of sales from mass merchant, drug and grocery stores, Broda was able to show that household spending increased in the weeks after they received their stimulus checks and helped increase spending by 2.6% for that quarter, and 4.1% for the following quarter.

Christian Brodaon nber earned a Ph.D. in Economics from the Massachusetts Institute of Technology and had taught at the University of Chicago for a number of years. His research has been published in a number of economic journals, several of which Broda has edited. Currently, he is the managing director for the New York City-based hedge fund Duquesne Capital Management. A hedge fund is a company that pools assets from many different investors to provide capital to other companies, or invest it on behalf of their clients.

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