Катя (inostranka) wrote,

.Wharton | Last Day of Boot camp (Day 6)

And so it was, the boot camp was almost over, as all good things must come to an end.

Последний день - учиться лень.
Мы просим вас, учителей,
Не мучать маленьких детей.

The good news was that due to bailing at 10pm the night before I was not sleep-deprived, which turned out to be very smart.

WEMBA: the home game

  1. Accounting: Why would one use LIFO accounting of inventory? Why would one use FIFO? (By now we all know that the answer to "which method is preferable" is "it depends."
  2. Economics: Why would people want to buy a given country's currency, if not to buy its goods? E.g., how can a negative trade balance be possible/sustainable for a country?

Accounting: Inventory

This part is completely technical, apologies to those interested only in the human aspect.

When accounting for inventory expenses, the US GAAP (generally accepted accounting principles) allow the companies to pick among several choices. Some of the options are: LIFO - last in, first out; FIFO - first in, first out; specific naming - specify explicitly which items were used and use their cost. Why the complexity? Imagine a small hardware store. It buys nails, etc., from its supplies and resells them to the customers. For example, it bought 1000 packs of nails at $1/pack in year 2002, and sold 900 of them for $1.50/pack, so the gross profit margin was 50%. In year 2003 it bought another 1000 to increase its inventory and just mixed those new ones with the 100 remaining packs from 2002. However, the supplies has raised the price to $1.10/pack. If the store again sells 900 packs (so that it now has 200 packs remaining) for $1.50/pack, what is the cost of the packs sold (we need the cost to calculate the expenses and the gross margin). Under LIFO, the cost is $1.10 * 900, with the cheaper 2002 nails remaining in the inventory; under FIFO, it's $1 * 100 + $1.10 * 800, with the more expensive 2003 nails remaining in the inventory; and specific naming the store owner would have had to keep track explicitly which packs of nails were on the shelves. Thus, under LIFO the current expenses are higher and the gross margin lower; however, under FIFO the cost of the remaining inventory is higher.

Lunch: Discrimination Suits

During lunch I was sitting with our Economics professor and he mentioned that some time ago he fell into bad company and opened up his own consulting practice instead of staying in academia full-time. It turned out that his consultancy was doing a lot of expert witness research. His company was the one who proved gender-based discrimination in several large brokerage houses, in particular, Merrill Lynch. Having worked at ML for 4 years and read about the hundred million dollar settlements, that caught my attention. How was he able to actually prove discrimination? In Merrill, financial consultants (formerly known as account executives, and now known as financial advisors) make commissions off of their clients' accounts. The bigger the account and the more activity - the bigger the commission. The FCs job is to first find those clients and then manage their accounts. To "find" the accounts they do a lot of the sales/marketing work on their own, but are also often assigned "house accounts" - clients without an existing consultant (when an existing FC leaves or when the client comes to ML on his/her own). The branch manager is responsible for assigning those accounts "equitably" - he needs to assign larger accounts to more experienced FCs, but, at the same time, give younger ones the opportunity to grow with new accounts. The prof described their analysis of the data and that it was absolutely clear that the women were given fewer and smaller accounts than their similarly-successful (as measured by size of existing accounts) male counterparts.

The beauty of this example is that both the current performance (commissions generated, size of current accounts) and the rewards (size of newly assigned accounts) can be clearly and unequivocally measured, and, therefore, discrimination easily proven. In other, more fuzzy areas, such suits would most likely be called frivolous by many of my colleagues...

Economics: International Trade and Currency Exchange

We proved, quite rigorously, but after making some simplifying assumptions, that free international trade is beneficial for all participants. This is quite obvious intuitively, if one extends the theory that perfectly competitive markets are the most efficient - removing international borders simply makes the markets bigger and even more efficient. We also proved that if currency itself were not a commodity (e.g., if no one wanted to simply hold dollars, rather than buy US goods with them), then there could never be a trade deficit.

So, what are the problems with free trade? It works great if everyone has the same rules, however, if some countries want to improve people's quality of life and legislate shorter work hours, better working conditions, stringent safety laws, etc., then they automatically raise the production costs and make their producers disadvantaged compared to countries with fewer worker/environment protection laws. And this is precisely why jobs are flowing out to the developing world - labor there is fundamentally less expensive because the governments don't protect the workers and the workers are willing to work for much less, since they are accustomed to much lower standards of living. What can/does one do? Why, establish tariffs, increase transportation costs, etc., thus hampering the free markets, reducing efficiency, and, therefore, reducing the total world's standard of living (to protect one's own). The take-away is that we would all benefit if the world's standards of living were closer together - it would allow for freer and more efficient trade without jeopardizing our own standards.

Tags: wharton
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