Economics

Several principles of economics come to play in an individual’s decision-making such as a purchase of a new house.  These include the following principles that generally, all rational consumers abide by: (Mankiw, 2001, p. 4-16):

a. In making decisions, people have to face trade-offs.  Consumers are faced with several options, especially when deciding what to purchase. If resources were unlimited, then people do not need to decide which among these options one must choose from. This is however not the case. Resources are limited while needs and wants are unlimited. Following this logic, when a major purchase decision has to be made, consumers definitely have to give up another thing that they equally like. This is the concept of trade-offs. When making a decision to buy good A, they trade off another good (good B or good C) in exchange for good A.  In the example of purchasing a new house, an individual may have to forego other things it wants to buy such as a new car, vacation, other major purchases, or savings and investment.  Realizing that life has tradeoffs guides individuals to make better decisions.
b. The cost of what one decides to buy is equivalent to the cost of what one gives up for it...  As a result of trade-offs that people face, they must then be careful in analyzing all the costs and benefits accompanying each available option.  Such is the concept of opportunity cost or what one person gives up in order to get another item.  As earlier stated, this happens because despite unlimited wants of people, scarcity of resources can not satisfy all these wants. Thus, people have to choose one thing and by choosing this, it means giving up something else. In the case of purchasing the new house, its cost is what one gives up for it, be it a vacation, or having money for savings, or having to work two jobs, or another major purchase.
c. Rational consumers think at the margins.  In reality, people do not always need to make decisions that are all or nothing. For instance, in the case of buying a new house, it is not an option of buying a house or living off the streets.  Some choices actually are made based on  “marginal changes” or what economists describe as” small, incremental adjustments to existing plans of action”. For instance, when one is deciding whether to purchase a new house, the person must compare the marginal cost of this purchase (e.g. amortization payments) vis-a vis renting an apartment (rental payments) and marginal benefits (tax shield, joy and security of owning a house) associated with owning a house. By doing this, one can evaluate whether the purchase is worth the attendant costs.
d. Incentives are a good way to motivate people.  As earlier stated, people make decisions based on the costs and benefits of each action.  Thus, when the costs or benefits change, they may decide differently.  This is because people respond to incentives.
For instance, if the rent on apartment increases, people will decide to purchase a house instead. As a result, real estate developers are encouraged to build more houses to accommodate the increase in demand. And because of this, they may hire additional helpers to help them build these houses.  All this happens because the benefit of selling houses is increased.

What are marginal costs and benefits associated with your purchasing decision?
In an individual’s decision to purchase a house, there are several marginal costs and benefits that come into play.  These have to be carefully analyzed and weighed in order to make the most rational decision for the individual (and the family).
Below are some of the marginal costs associated with the decision to purchase a new house
a. Amortization. If the individual is currently renting, and the purchase of the new house entails additional amount from the monthly rent for amortization payments, the difference in the amount is one of the marginal costs.  This is usually the case since it generally costs more to buy a house than rent.  Aside from the amortization payments, one must also consider the mortgage insurance costs that result from buying a house.
b. Travel time. Another marginal cost could be the additional travel time if the house is located farther from work or school (compared to the previous apartment). This travel time entails costs in terms of gasoline expenses, car maintenance, having to forego sleep in order to wake up earlier than usual, or sometimes having to forego sleep.
c. Maintenance costs.  If one used to live in an apartment before which does not entail too much maintenance in terms of cleaning, repairs and security, these will now have to be considered when purchasing a new house. Whereas the apartment owner was mainly responsible for many repairs and maintenance concerns, the homeowner now takes full responsibility for ensuring that their house is well maintained and secured.  All of these translate to costs. If the house comes with a yard (and they usually do), it means having to either mow the lawn or hire someone to do it. It will also mean having to spend more hours cleaning and maintaining the whole house, something that may not have been as tedious in an apartment.
d. Rental restrictions.  There are many restrictions imposed on people renting apartments.  While this encourages discipline and respect to property, this can severely curtail an individual’s freedom to move around.
Despite the marginal costs involved in buying a house, there are also several marginal benefits that one may derive from it.  Some of these are as follows:
a. Tax shield.  The government encourages people to buy homes instead of rent because of its stimulus on the economy.  Towards this end, the government offers tax shield for individuals buying their houses.  This is just one of the many benefits of owning a home.
b. Increased credit rating.  An increased credit rating allows an individual the freedom to eventually secure a bigger loan for another major purchase. This may come in handy for emergency purchases, big-ticket purchases, or even investment and business undertakings.
c. Security and comfort of owning a home.  Whether the individual buying a house is single or married, owning one’s home provides security and comfort that one can not otherwise get from renting an apartment.  One derives a certain sense of self-fulfillment in seeing the fruits of his / her labor. And with a bigger space for everyone, there is less stress and hopefully more harmony among family members. There is also freedom to be creative in designing and renovating the home.

Explain how the strength of the economy as a whole affected the marginal benefits and the marginal costs associated with that decision.
There are several possible economic indicators that may prod one to decide to purchase a house, be it a first house or a second one.  A rational individual must only decide to purchase a house if one is willing and able to do it, and carefully considered all the costs and benefits of that decision.
A large part that figures in one’s decision to make a major home purchase is the state of the economy. Why is this so?  When economy is strong, and interest rates are high, and the demand for houses is also high, the cost of houses is usually also high. With the prospect of high amortization payments a person might be discouraged to buy a house and postpone this decision to a later date. This, of course, assumes that rental payment is much lower compared to buying a house.  If, however, a strong economy means that there are several jobs offering very competitive salaries, then an individual might take a high-paying job (assuming one is qualified for it) and buy a house.
In the case of a weak economy, such as what the US economy is going through right now, the interest rates are constantly falling, and there is a weak demand for houses. As a result, the prices of real estate usually drop. An individual who is still assured of a monthly income (either through a job or a business) might find this the perfect time to buy a house where amortization is decidedly lower.  All other costs are lower, including insurance costs, maintenance costs, and other taxes and insurance. Of course, this scenario assumes that rental payment, while low, is not too low because a vast difference in amortization payment and rental payment might make an individual rethink the decision to buy.

Consider the roles of the domestic economy and international trade in your assessment of the strength of the economy.
The domestic economy is part of the vast network that makes up the global economy.  The behavior of the global economy, therefore, reflects the behavior of the domestic economies that all together make up the global economy.   When there is weak demand in the domestic economy, then it affects manufacturers, causes job losses and in a vicious cycle weakens demand. When there is weak demand in the domestic economy, it may be compensated by an increase in demand in international markets. By absorbing the excess supply of a domestic economy, jobs are saved and this may cause recovery in that domestic economy.  Unfortunately, weak domestic demands are usually a reflection of an international situation. Hence, international trade is usually negatively affected.  Without any demand from domestic economy and international markets, the local economy will eventually weaken too.  This happens if the government does not intervene to arrest the worsening situation and it usually does this by bailing out companies, providing more fiscal (tax) and monetary incentives (interest rates) and pump-priming the economy. By pump-priming the economy, demand is stimulated and this will trigger an upturn in manufacturers’ supplies.  Successful management of economic crisis creates a stimulus not only in the domestic economies, but in countries it trades with.

Determine what situations or conditions could have led you to make a different decision.
Instead of buying a house, one chooses  to remain in his apartment instead, it could be  for the following reasons:
a. Rent is significantly lower compared to buying my own house.  After scouring the neighborhood for potential houses, and diligently computing monthly amortization payments (along with all the attendant payments such as amortization insurance, maintenance costs, renovation costs, costs of moving, among others), yet find that rental payment is still significantly lower than buying a house,  a person may still prefer to rent instead.
b. High amortization.  After carefully factoring all costs involved in buying a home, a person may still not decide to buy one he can not afford it. If a person must keep up with monthly amortizations and drastically change his lifestyle in the process, like having to keep odd jobs, foregoing social activities, then he may not be persuaded to buy one.
c. Interest rate is unstable.  An unstable interest rate (as a result of an unstable economy) means that there is no assurance of a fixed rate over the years. It will severely affect amortization payments (and other costs).  If this is the situation,  a person would prefer to wait for a more stable economy before making such a huge decision.
d. Lack of job security.  If current economic scenario persists, and a person’s job security is threatened, he may need to postpone buying his own house.  There is simply no point in buying a house, despite the security and comfort it offers, if there is no assurance that a person can keep up with the monthly payments. Otherwise, a person will have to face foreclosure, and this is not an attractive option for anyone.
e. More pressing needs.  If for instance, one needs to spend on another more urgent concern, such as health-related matters that require long-term treatment (and not anymore covered by medical insurance), or that person’s child needs to go to college, he may gladly defer any decision to buy a house.
f. Travel time.  If buying a house and transferring to it requires longer travel time, this may not be an attractive option for any person considering the high and fluctuating cost of fuel these days. In the long-term,  the additional cost in fuel and car maintenance might hinder a person from fully appreciating the beauty of his own home.  This is also the same case if there are kids enrolled in a school nearby the apartment and uprooting them means a lot of troubles.
g. The house I can afford is not the best.  Buying a house entails not only computing the costs, but several other factors as well (as discussed earlier).  If buying a house will take me too far away from work, family and close friends,  I may not proceed with it. While sound investments are good in the long-term,  there are other equally important factors to consider in buying a house.  Will the family be happy with it? Will it cut his ties with friends and other family members?  If the answers to these are YES, then the house is not the best there is for that person. Such a major purchase must satisfy the needs beyond shelter.

The development of stadiums in most of the developed countries is precipitated by a considerable lobbying and discussions on the feasibility and the related benefits of establishing a stadium in a given locality (Baade, R. & Sanderson 77). An economic analysis is also carried out and this will be the focus in this study. This assessment stands out as the most fundamental yet it has in the past generated controversies between opponents of government funding and private enterprise. Economists Andrew Zimbalist and John Siegfried who have conducted studies on the stadiums economic impact have unanimously concluded that there are no indicators that show there is a positive economic effect that can be attributed from such stadiums (Noll & Zimbalist, 1998). Nine studies cited by these economists, all done by different consultant economists arrive at a similar conclusion that stadiums do not induce new economic growth (Siegfried & Zimbalist, 2000. p. 103). This however requires in depth analysis as will be done in this study.
The issue of funding a stadium in Canada from private or public source is always a popular topic for academic research. There are various theoretical models that can show the difference in terms of economic benefit derived from either of these two sources that we are interested in. Both macroeconomics and microeconomics theories can help ascertain as to   what strategies the government should implement. This paper will study some general macroeconomics concepts.


Aggregate Supply/Aggregate Demand Model
            Economic analysts argue that shifts in the economy are primarily caused by the shift in aggregate demand. A massive spending by the government in the building of a stadium would substantially affect aggregate demand which would produce a significant shift in the locality’s economy. Graphically, the model is illustrated as shown below:


       
  Figure I show the two variables represented in the model. On the horizontal axis is the quantity variable, which stands for real gross domestic product (Y). The value of annual national production is measured by this variable and it is adjusted for the inflation. The variable on the vertical axis represents the level of price inflation. The slopes of AD and AS curves show the relationship between them. Changing all other variables will cause the curves to shift either to the right or left. Since there are many factors that affect the aggregate demand and aggregate supply, I will only focus on factors relevant to the topic. Change in the population, government demand, investment, and expectations all have a positive relationship with AD curve. Government may decide to construct a stadium according to these factors since they will cause real gross domestic product to increase. However, taxation is a factor that makes the AD curve to shift to opposite direction. This implies it is negatively related to AD. Collecting taxes from people reduce the income they earn; it also leads a decrease in consumption ability. Even if the stadium is built; some of the people will not buy tickets to participate in the activities in the stadium. Eventually, real gross domestic product will fall. Costs of resources and labour wages are negatively correlated to aggregate supply. The construction of a stadium requires a lot of materials such as plastic, concrete and steel and also needs a large number of human resources. Real gross domestic product will decrease due to these two factors. According to this graph, any shift in aggregate demand produces an automatic shift in aggregate supply in order to maintain the quantity level. Such that if the government invested in a stadium, there would be an automatic shift in aggregate supply in the  form of earnings from both full time and part time employment which would multiply in such a manner that they would eventually exceed the government spending.

Keynesian Income-Expenditure Model
             This model is also called the Keynesian cross. It emphasizes that decreasing aggregate demand can produce substantially stable equilibrium which would produce substantial unemployment. The different elements incorporated in this model are both consumption and investment which are expressed by the equation Y=C+I+G+(X-M) and together, the elements shapes the level of output equilibrium. The model is represented graphically as shown below:

           For Keynesian Income-Expenditure Model, expenditure is the variable that needs to be analyzed first. Expenditure has four components: consumption expenditure, investment expenditure, government expenditure and net export.  To determine the relationship and influences of the variables on the right hand side of the equation and the left hand side variable Y or GDP is the essential purpose of this model. Consumption expenditure’s predictability is fairly high as a country's share of gross domestic product. Sports fans would like to attend activities in the stadium. They may also go to restaurants that are located close to the stadium or shops in the mall nearby which could stimulate consumer spending. Therefore, GDP will go up and have a positive impact on the economy. Investment is a crucial part of a stadium project decision. Investment could lead to the improvement of overall domestic production condition. Enterprises and firms might find investing in stadium is profitable and attractive. Since physical capital and inventories are needed when investing in a project, this will also help domestic consumption gain positive returns. Government expenditure should be taken into account as well. In case of China, government expenditure from 2002 to 2006 spent approximately $40 billion in infrastructure in order to transform the cityscape of Beijing because of the Olympic Games.   Even though the stadium is for 2008 Olympics, Beijing’s economic development, environment and the growth of mobile phone industry, internet, and country’s advertising were significantly influenced. (Kent, 2009). Importation of construction materials might be necessary in certain cases. According to the equation, net export is import less export. If a country imports goods more than it exports, then GDP will decrease. Therefore, before the project is carried out, the decision maker must consider this factor. A wrong decision will cause gross domestic product falls.

Fiscal Multiplier Theory
           The idea behind the multiplier effect also referred to as the spending multiplier is that when a government spends a certain amount in its internal business environment, the spending stimulates increased consumption spending which results in an improved national income that supersedes the initial amount of money spent. In this case, this multiplier effect would mean that when a government spends in building a stadium, the overall result is an increased income among the various stakeholders, which eventually will supersede the total amount spent. An illustration of the multiplier process is shown below:

The figure above shows an initial investment by the government in a new mining project worth $ 100 million. This investment produces other incomes such as in steel and car industries that are a multiple of the initial investment.
Applying this scenario in a stadium development, first, it would be important to analyze the immediate beneficiaries of the government spending. Economically, this can be stated that an initial change of the aggregate demand produces an aggregate output in the economy that is normally a multiple of the initial aggregate demand change. This argument needs an analysis using an example. Consider a situation where the government injects $500 million in building a stadium. According to the multiplier theory, the final income that will result out of this investment will be more than the investment. First, it is true that the contractors, the suppliers of the materials are likely to benefit during the period of the works and that will substantially raise their income. The income they earn will be directed to other spending areas which will also benefit especially within the locality of the construction (Rivero, 2009).

The Multiplier Effect Factor-Stadium Example
An economic policy that supports and justifies spending in constructing stadiums is based on this economic principle, the multiplier effect. This effect can be best understood by looking at the secondary economic activities that result following the infusion of new investment during the stadium construction. Economists argue that the multiplier effect is very low in the case of stadiums since they do not induce new spending per se. The multiplier effect would in fact be very low if some of the money generated during an event leaves the locality soon after the event. To illustrate this principle, assume that $ 300 million is disbursed to build a new stadium. Hypothetically, it can be assumed that 50% of this money goes right away into the economy when it is used to purchase building materials. It can also be assumed that another 25% is paid out to the contactors and the workers so that only half is spent on the local economy. The calculation can be extrapolated so that every round of spending utilizes half of the remaining amount to the economy. The multiplier effect can then be calculated as:
1/2 + ¼ +1/8 + ……. (Rivero, 2009)
Eventually, the multiplier effect will be less than 1. A multiplier effect of less than 1 means that the induced spending associated with the initial cost of investment is less than the total that was spent in the investment. If the investment in the above example was $ 300 million, the multiplier effect at the end of the day shows that the new incomes will never reach the original $ 300 million. Using this argument, the construction of stadiums becomes a big burden, more of white elephant projects that do not make economic sense and that have no ability to jumpstart the local economy. Note also that the employment created by a stadium may not have direct benefits to the local economies. For instance, most players do not live in the jurisdiction within which their stadium lies, so do the workers. Also the revenue collected by stadiums is normally shared with the visiting teams which are then spent in other jurisdictions. This scenario presents a leak in the stadiums that erodes the power of the stadiums to produce a substantial impact to the economy.

The Rational Choice Theory
It would be important to analyze the sources of taxes used to fund stadiums. One, it is apparent that the construction of new stadiums does not benefit the entire national economy but it only focuses benefits to the local economy. It has the potential to create new businesses and employment which would generate money primarily for those within its locality. The question then that should be addressed is who should be taxed for developing the stadiums. Well, it would be completely wrong to tax the whole nation if there are no accruing benefits to the whole nation. The taxes should be deducted from the local community who are most likely to benefit economically because of the new stadium (Eckstein, 1983). The rational choice theory argues that costs and benefits should effectively be considered before a choice of spending is adopted. If the cost of building a stadium does not effectively benefit the nation, then there is no rationale of burdening the nation with its taxes The same argument suffices that if there are no benefits accruing to the society or the local community out of the construction of a new stadium then it would not make sense to burden the community with the taxes. If for instance, a stadium in Manitoba draws a lot of crowds from Ottawa, it implies that the stadium reduces income spending in Ottawa since most of the people are likely to go and spend their entertainment money away in Manitoba. As such, the beneficiaries of the stadium are those in Manitoba and not those in Ottawa. This implies that the taxation burden should be laid on people who will actually benefit from the stadium. Consider a situation where the stadium in Manitoba denies spending in Ottawa yet on the other hand, the locals who are denied earnings are still required to contribute the taxes. This would be double jeopardy for them since they would have lost an income opportunity as well as the tax burden. This study generally proposes that taxes for stadiums should be from the immediate community which is likely to be the economic beneficiaries of the stadium. Again, it should be recognized that unless a stadium can attract new people to the locality, the multiplier effects will always remain the same in each expense (Rivero, 2009).