advice on course selection for graduate work in economics

[asquare]

user_name, the other half of the calculation is the expected benefit of the master's. A master's isn't a guarantee of admission to a better school, and a PhD from a better school isn't a guarantee of a better job after graduation. In fact, there is some risk -- someone who is the best student at their undergrad program and is only middle of the pack in a master's might not improve his chances very much. And for a one-year master's program, it's hard to for your grades or recommendations to be available in time to apply to start a PhD immediately after the masters. It could mean waiting a second year, so that you have materials from the master's program to submit. (Also, if we are going to be picky, you really need a discount rate as well as an interest rate in your calculation...)

The bottom line is that it is one thing to do a master's because you've decided that it's worth it to you to have an improved chance of admissions to top PhD programs, and it's another to do a master's because you have been given the impression that it's necessary for a PhD.

[user_name]

The Master's grades will not be in time, but the senior year's grades will be, which is what the OP lacks if he applies now. There's also a risk associated with going straight for a PhD: one may flunk out if one is ill-prepared. Indeed one purpose (among many others) of doing a Master's degree is to reduce this risk.

I completely agree with you that a Master's degree is not the right thing for everybody. It just happens that many people on this board seem to be in a situation where having an MA might turn things around.

PS: I don't remember everything I learnt in corporate finance, but what other discount rate were you talking about? I was treating the stream of his future annual salaries as a perpetuity whose present value is salary divided by interest rate. Of course this is a simplifying assumption because he's not going to live "perpetually", but then again the possible increases in his salary (which were assumed away) could probably act as a counterbalance.

[asquare]

user_name -- you need an interest rate and a discount rate -- you want to compare the value of $40,000 next year to the present discounted value of higher earnings in the future. One of the basic assumptions in macro (and in micro) is that people value money today more than money tomorrow, so when you do the comparison, you have to build that in to the computation. The discount rate quantifies a person's willingness to trade money (or happiness, or whatever) today for money tomorrow. You can think of it as representing impatience.

[user_name]

You're right, asquare. I was mistakenly thinking that the 40,000 would come immediately. Discounting the 40,000 would make it even smaller though.

[werther]

is it usually the case in the U.S. that undergrads (who intend to pursue PhD) go straight into PhD? you're right user_name, i forgot that in majority of canadian PhD programs one must hold a Master's first. but if i do end up doing a Master's, i will probably have to wait until i finish my coursework and then apply (unless i limit myself to canadian programmes), as opposed to applying halfway through the year.. which means 2 more years before i even apply for a PhD.

i would love to apply straight into a PhD, but i don't think i am ready.. nor do i have the funds.

i will have to think more about this.. thanks a lot for your opinions and advice i really appreciate them.

[asquare]

Right, but the salary gains you posit would come even later -- and what matters is when they come relative to the foregone $40,000. So you have to discount the $40,000, but you also have to discount the increased salary, which is worth less (has a lower PDV) each year into the future.

But this is really not related to the OP's question, so let's not hijack the thread

[werther]

Originally Posted by asquare

Right, but the salary gains you posit would come even later -- and what matters is when they come relative to the foregone $40,000. So you have to discount the $40,000, but you also have to discount the increased salary, which is worth less (has a lower PDV) each year into the future.

But this is really not related to the OP's question, so let's not hijack the thread

well i'm learning something

[asquare]

Originally Posted by werther

is it usually the case in the U.S. that undergrads (who intend to pursue PhD) go straight into PhD? you're right user_name, i forgot that in majority of canadian PhD programs one must hold a Master's first. but if i do end up doing a Master's, i will probably have to wait until i finish my coursework and then apply (unless i limit myself to canadian programmes), as opposed to applying halfway through the year.. which means 2 more years before i even apply for a PhD.

Most American students who do PhDs in economics at American universities do not have master's degrees. International students are more likely to have master's, especially if their undergraduate degree wasn't at an English-speaking university.

[user_name]

Originally Posted by asquare

Right, but the salary gains you posit would come even later -- and what matters is when they come relative to the foregone $40,000.

No, I think you were right in the last post. The forgone $40,000 should be discounted by (1 + discount rate), and the part about PV(perpetuity) = A/r where A stands for future annual cash inflow was still correct. Break-even condition (NPV = 0) would then be 40,000/1.04 = A/.04 => A = 1,538. That's the extra amount you'll have to make each year so that you can make up for the foregone income of $40,000.

Originally Posted by asquare

But this is really not related to the OP's question, so let's not hijack the thread

Okay. By the way, some professors have told me that American students make up only 20% of all econ phd students. Is this the case at U Michigan? One more thing, did you have your profile posted somewhere on this board? I'm applying to U Michigan and I'd love to know the profile of a successful applicant.

[asquare]

Nope -- you have to discount the future earnings as well as the $40,000. In your calculation, you are still forgetting that a $1500 bonus paid in 20 years has a lower PDV than a $1500 bonus paid next year. You want to solve (b/(1+r))*40,000=sum from t=5 to retirement {(b/(1+r))^t*W}, where W is the increase in future salary due to getting a master's, and b is the discount rate. The summation starts at t=5 because because it takes approximately 5 years to finish a PhD.

As an aside, to be strictly correct, you'd want E[Wt] -- the expected future bonus at time t, since as discussed, higher wages are likely but not guaranteed. Therefore, the probabilities should also be part of the calculation.

I'm not disputing that it's possible -- even probable -- for there to be some return to schooling that makes the MA economically worthwhile. I was just pointing out that there is a cost beyond tuition. (And now I'm pointing out that you have to discount the whole earnings stream, not just the foregone salary.)