Development economics is a branch of economics which deals with economic aspects of the development process in low income countries. Its focus is not only on methods of promoting economic development, economic growth and structural change but on improving the potential for the mass of the population, for example, through health and workplace conditions, whether through public or private channels. Development economics involves the creation of theories and methods that aid in the determination of policies and practices and can be implemented at either the domestic or international level; this may involve restructuring market incentives or using mathematical methods such as intertemporal optimization for project analysis, or it may involve a mixture of quantitative and qualitative methods. Unlike in many other fields of economics, approaches in development economics may incorporate social and political factors to devise particular plans. Unlike many other fields of economics, there is no consensus on what students should know.
Different approaches may consider the factors that contribute to economic convergence or non-convergence across households and countries. The earliest Western theory of development economics was mercantilism, which developed in the 17th century, paralleling the rise of the nation state. Earlier theories had given little attention to development. For example, the dominant school of thought during medieval feudalism, emphasized reconciliation with Christian theology and ethics, rather than development; the 16th- and 17th-century School of Salamanca, credited as the earliest modern school of economics did not address development specifically. Major European nations in the 17th and 18th century all adopted mercantilist ideals to varying degrees, the influence only ebbing with the 18th-century development of physiocrats in France and classical economics in Britain. Mercantilism held that a nation's prosperity depended on its supply of capital, represented by bullion held by the state, it emphasised the maintenance of a high positive trade balance as a means of accumulating this bullion.
To achieve a positive trade balance, protectionist measures such as tariffs and subsidies to home industries were advocated. Mercantilist development theory advocated colonialism. Theorists most associated with mercantilism include Philipp von Hörnigk, who in his Austria Over All, If She Only Will of 1684 gave the only comprehensive statement of mercantilist theory, emphasizing production and an export-led economy. In France, mercantilist policy is most associated with 17th-century finance minister Jean-Baptiste Colbert, whose policies proved influential in American development. Mercantilist ideas continue in the theories of economic neomercantilism. Following mercantilism was the related theory of economic nationalism, promulgated in the 19th century related to the development and industrialization of the United States and Germany, notably in the policies of the American System in America and the Zollverein in Germany. A significant difference from mercantilism was the de-emphasis on colonies, in favor of a focus on domestic production.
The names most associated with 19th-century economic nationalism are the American Alexander Hamilton, the German-American Friedrich List, the American Henry Clay. Hamilton's 1791 Report on Manufactures, his magnum opus, is the founding text of the American System, drew from the mercantilist economies of Britain under Elizabeth I and France under Colbert. List's 1841 Das Nationale System der Politischen Ökonomie, which emphasized stages of growth, proved influential in the US and Germany, nationalist policies were pursued by politician Henry Clay, by Abraham Lincoln, under the influence of economist Henry Charles Carey. Forms of economic nationalism and neomercantilism have been key in Japan's development in the 19th and 20th centuries, the more recent development of the Four Asian Tigers, most China. Following Brexit and the United States presidential election, 2016, some experts have argued a new kind of "self-seeking capitalism" popularly known as Trumponomics could have a considerable impact on cross-border investment flows and long-term capital allocation The origins of modern development economics are traced to the need for, problems with the industrialization of eastern Europe in the aftermath of World War II.
The key authors are Paul Rosenstein-Rodan, Kurt Mandelbaum, Ragnar Nurkse, Sir Hans Wolfgang Singer. Only after the war did economists turn their concerns towards Asia and Latin America. At the heart of these studies, by authors such as Simon Kuznets and W. Arthur Lewis was an analysis of not only economic growth but structural transformation. An early theory of development economics, the linear-stages-of-growth model was first formulated in the 1950s by W. W. Rostow in The Stages of Growth: A Non-Communist Manifesto, following work of Marx and List; this theory modifies Marx's stages theory of development and focuses on the accelerated accumulation of capital, through the utilization of both domestic and international savings as a means of spurring investment, as the primary means of promoting economic growth and, development. The linear-stages-of-growth model posits that there are a series of five consecutive stages of development which all countries must go through during the process of development.
These stages are "the traditional society, the pre-conditions for take-off, the take-off, the drive to maturity, the age of high mass-consumption" Simple versi
Operations research, or operational research in British usage, is a discipline that deals with the application of advanced analytical methods to help make better decisions. Further, the term operational analysis is used in the British military as an intrinsic part of capability development and assurance. In particular, operational analysis forms part of the Combined Operational Effectiveness and Investment Appraisals, which support British defense capability acquisition decision-making, it is considered to be a sub-field of applied mathematics. The terms management science and decision science are sometimes used as synonyms. Employing techniques from other mathematical sciences, such as mathematical modeling, statistical analysis, mathematical optimization, operations research arrives at optimal or near-optimal solutions to complex decision-making problems; because of its emphasis on human-technology interaction and because of its focus on practical applications, operations research has overlap with other disciplines, notably industrial engineering and operations management, draws on psychology and organization science.
Operations research is concerned with determining the extreme values of some real-world objective: the maximum or minimum. Originating in military efforts before World War II, its techniques have grown to concern problems in a variety of industries. Operational research encompasses a wide range of problem-solving techniques and methods applied in the pursuit of improved decision-making and efficiency, such as simulation, mathematical optimization, queueing theory and other stochastic-process models, Markov decision processes, econometric methods, data envelopment analysis, neural networks, expert systems, decision analysis, the analytic hierarchy process. Nearly all of these techniques involve the construction of mathematical models that attempt to describe the system; because of the computational and statistical nature of most of these fields, OR has strong ties to computer science and analytics. Operational researchers faced with a new problem must determine which of these techniques are most appropriate given the nature of the system, the goals for improvement, constraints on time and computing power.
The major sub-disciplines in modern operational research, as identified by the journal Operations Research, are: Computing and information technologies Financial engineering Manufacturing, service sciences, supply chain management Policy modeling and public sector work Revenue management Simulation Stochastic models Transportation In the decades after the two world wars, the tools of operations research were more applied to problems in business and society. Since that time, operational research has expanded into a field used in industries ranging from petrochemicals to airlines, finance and government, moving to a focus on the development of mathematical models that can be used to analyse and optimize complex systems, has become an area of active academic and industrial research. In the 17th century, mathematicians like Christiaan Huygens and Blaise Pascal tried to solve problems involving complex decisions with probability. Others in the 18th and 19th centuries solved these types of problems with combinatorics.
Charles Babbage's research into the cost of transportation and sorting of mail led to England's universal "Penny Post" in 1840, studies into the dynamical behaviour of railway vehicles in defence of the GWR's broad gauge. Beginning in the 20th century, study of inventory management could be considered the origin of modern operations research with economic order quantity developed by Ford W. Harris in 1913. Operational research may have originated in the efforts of military planners during World War I. Percy Bridgman brought operational research to bear on problems in physics in the 1920s and would attempt to extend these to the social sciences. Modern operational research originated at the Bawdsey Research Station in the UK in 1937 and was the result of an initiative of the station's superintendent, A. P. Rowe. Rowe conceived the idea as a means to analyse and improve the working of the UK's early warning radar system, Chain Home, he analysed the operating of the radar equipment and its communication networks, expanding to include the operating personnel's behaviour.
This allowed remedial action to be taken. Scientists in the United Kingdom including Patrick Blackett, Cecil Gordon, Solly Zuckerman, C. H. Waddington, Owen Wansbrough-Jones, Frank Yates, Jacob Bronowski and Freeman Dyson, in the United States with George Dantzig looked for ways to make better decisions in such areas as logistics and training schedules The modern field of operational research arose during World War II. In the World War II era, operational research was defined as "a scientific method of providing executive departments with a quantitative basis for decisions regarding the operations under their control". Other names for it included quantitative management. During the Second World War close to 1,000 men and women in Britain were engaged in operational research. About 200 operational research scientists worked for the British Army. Patrick Blackett worked for several different organizations during the war. Early in the war while working for the Royal Aircraft Establishment he set up a team known as the "Circus" which helped to reduce the number of anti-aircraft artillery rounds needed to shoot down an enemy aircraft from an
Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is calculated in real terms - i.e. inflation-adjusted terms – to eliminate the distorting effect of inflation on the price of goods produced. Measurement of economic growth uses national income accounting. Since economic growth is measured as the annual percent change of gross domestic product, it has all the advantages and drawbacks of that measure; the economic growth rates of nations are compared using the ratio of the GDP to population or per-capita income. The "rate of economic growth" refers to the geometric annual rate of growth in GDP between the first and the last year over a period of time; this growth rate is the trend in the average level of GDP over the period, which ignores the fluctuations in the GDP around this trend. An increase in economic growth caused by more efficient use of inputs is referred to as intensive growth.
GDP growth caused only by increases in the amount of inputs available for use is called extensive growth. Development of new goods and services creates economic growth; the economic growth rate is calculated from data on GDP estimated by countries' statistical agencies. The rate of growth of GDP per capita is calculated from data on GDP and people for the initial and final periods included in the analysis of the analyst. In national income accounting, per capita output can be calculated using the following factors: output per unit of labor input, hours worked, the percentage of the working age population working and the proportion of the working-age population to the total population. "The rate of change of GDP/population is the sum of the rates of change of these four variables plus their cross products."Economists distinguish between short-run economic changes in production and long-run economic growth. Short-run variation in economic growth is termed the business cycle. Economists attribute the ups and downs in the business cycle to fluctuations in aggregate demand.
In contrast, economic growth is concerned with the long-run trend in production due to structural causes such as technological growth and factor accumulation. Increases in labor productivity have been the most important source of real per capita economic growth. "In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U. S. per capita income, with increased investment in capital explaining only the remaining 20 percent."Increases in productivity lower the real cost of goods. Over the 20th century the real price of many goods fell by over 90%. Economic growth has traditionally been attributed to the accumulation of human and physical capital and the increase in productivity and creation of new goods arising from technological innovation. Further division of labour is fundamental to rising productivity. Before industrialization technological progress resulted in an increase in the population, kept in check by food supply and other resources, which acted to limit per capita income, a condition known as the Malthusian trap.
The rapid economic growth that occurred during the Industrial Revolution was remarkable because it was in excess of population growth, providing an escape from the Malthusian trap. Countries that industrialized saw their population growth slow down, a phenomenon known as the demographic transition. Increases in productivity are the major factor responsible for per capita economic growth – this has been evident since the mid-19th century. Most of the economic growth in the 20th century was due to increased output per unit of labor, materials and land; the balance of the growth in output has come from using more inputs. Both of these changes increase output; the increased output included more of the same goods produced and new goods and services. During the Industrial Revolution, mechanization began to replace hand methods in manufacturing, new processes streamlined production of chemicals, iron and other products. Machine tools made the economical production of metal parts possible, so that parts could be interchangeable.
See: Interchangeable parts. During the Second Industrial Revolution, a major factor of productivity growth was the substitution of inanimate power for human and animal labor. There was a great increase in power as steam powered electricity generation and internal combustion supplanted limited wind and water power. Since that replacement, the great expansion of total power was driven by continuous improvements in energy conversion efficiency. Other major historical sources of productivity were automation, transportation infrastructures, new materials and power, which includes steam and internal combustion engines and electricity. Other productivity improvements included mechanized agriculture and scientific agriculture including chemical fertilizers and livestock and poultry management, the Green Revolution. Interchangeable parts made with machine tools powered by electric motors evolved into mass production, universally used today. Great sources of productivity improvement in the late 19th century were railroads, steam ships, horse-pulled reapers and combine harvesters, steam-powered factories.
The invention of processes for making cheap steel were important for many forms
Cultural economics is the branch of economics that studies the relation of culture to economic outcomes. Here, ` culture' is defined by shared preferences of respective groups. Programmatic issues include whether and how much culture matters as to economic outcomes and what its relation is to institutions; as a growing field in behavioral economics, the role of culture in economic behavior is being demonstrate to cause significant differentials in decision-making and the management and valuation of assets. Applications include the study of social norms. Social identity, beliefs in redistributive justice, hatred, trust, family ties, long-term orientation, the culture of economics. A general analytical theme is how ideas and behaviors are spread among individuals through the formation of social capital, social networks and processes such as social learning, as in the theory of social evolution and information cascades. Methods include case studies and theoretical and empirical modeling of cultural transmission within and across social groups.
In 2013 Said E. Dawlabani added the value systems approach to the cultural emergence aspect of macroeconomics. Cultural economics develops from how wants and tastes are formed in society; this is due to nurture aspects, or what type of environment one is raised in, as it is the internalization of one’s upbringing that shapes their future wants and tastes. Acquired tastes can be thought of as an example of this, as they demonstrate how preferences can be shaped socially. A key thought area that separates the development of cultural economics from traditional economics is a difference in how individuals arrive at their decisions. While a traditional economist will view decision making as having both implicit and explicit consequences, a cultural economist would argue that an individual will not only arrive at their decision based on these implicit and explicit decisions but based on trajectories; these trajectories consist of regularities, which have been built up throughout the years and guide individuals in their decision-making process.
Economists have started to look at cultural economics with a systems thinking approach. In this approach, the economy and culture are each viewed as a single system where "interaction and feedback effects were acknowledged, where in particular the dynamic were made explicit". In this sense, the interdependencies of culture and the economy can be combined and better understood by following this approach. Said E. Dawlabani's book MEMEnomics: The Next-Generation Economic System combines the ideas of value systems and systems thinking to provide one of the first frameworks that explores the effect of economic policies on culture; the book explores the intersections of multiple disciplines such as cultural development, organizational behavior, memetics all in an attempt to explore the roots of cultural economics. The advancing pace of new technology is transforming how the public shares culture; the cultural economic field has seen great growth with the advent of online social networking which has created productivity improvements in how culture is consumed.
New technologies have lead to cultural convergence where all kinds of culture can be accessed on a single device. Throughout their upbringing, younger persons of the current generation are consuming culture faster than their parents did, through new mediums; the smartphone is a blossoming example of this where books, talk and more can all be accessed on a single device in a matter of seconds. This medium and the culture surrounding it is beginning to have an effect on the economy, whether it be increasing communication while lowering costs, lowering the barriers of entry to the technology economy, or making use of excess capacity; this field has seen growth through the advent of new economic studies that have put on a cultural lens. For example, a recent study on Europeans living with their families into adulthood was conducted by Paola Sapienza, a professor at Northwestern University; the study found that those of Southern European descent tend to live at home with their families longer than those of Northern European descent.
Sapienza added cultural critique to her analysis of the research, revealing that it is Southern European culture to stay at home longer and related this to how those who live at home longer have fewer children and start families thus contributing to Europe's falling birthrates. Sapienza's work is an example of how the growth of cultural economics is beginning to spread across the field. An area that cultural economics has a strong presence in is sustainable development. Sustainable development has been defined as "...development that meets the needs of the present without compromising the ability of future generations to meet their own needs...". Culture plays an important role in this as it can determine how people view preparing for these future generations. Delayed gratification is a cultural economic issue that developed countries are dealing with. Economists argue that to ensure that the future is better than today, certain measures must be taken such as collecting taxes or "going green" to protect the environment.
Policies such as these are hard for today's politicians to promote who want to win the vote of today's voters who are concerned with the present and not the future. People want to see the benefits now, not in the future. Economist David Throsby has proposed the idea of culturally sustainable development which compasses both the cultural industries and culture, he has created a set of criteria in regards to for which policy prescriptions can be compared to in order to ensure growth for future generations. The
Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is to appear on both sides of a trade". Its concern is thus the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy, it has two main areas of focus: corporate finance. The subject is concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment", it therefore centers on decision making under uncertainty in the context of the financial markets, the resultant economic and financial models and principles, is concerned with deriving testable or policy implications from acceptable assumptions. It is built on the foundations of microeconomics and decision theory. Financial econometrics is the branch of financial economics that uses econometric techniques to parameterise these relationships. Mathematical finance is related in that it will derive and extend the mathematical or numerical models suggested by financial economics.
Note though that the emphasis there is mathematical consistency, as opposed to compatibility with economic theory. Financial economics has a microeconomic focus, whereas monetary economics is macroeconomic in nature. Financial economics is taught at the postgraduate level. Specialist undergraduate degrees are offered in the discipline; this article provides an overview and survey of the field: for derivations and more technical discussion, see the specific articles linked. As above, the discipline explores how rational investors would apply decision theory to the problem of investment; the subject is thus built on the foundations of microeconomics and decision theory, derives several key results for the application of decision making under uncertainty to the financial markets. Underlying all of financial economics are the concepts of present value and expectation. Calculating their present value allows the decision maker to aggregate the cashflows to be produced by the asset in the future, to a single value at the date in question, to thus more compare two opportunities.
An immediate extension is to combine probabilities with present value, leading to the expected value criterion which sets asset value as a function of the sizes of the expected payouts and the probabilities of their occurrence. This decision method, fails to consider risk aversion. In other words, since individuals receive greater utility from an extra dollar when they are poor and less utility when comparatively rich, the approach is to therefore "adjust" the weight assigned to the various outcomes correspondingly.. Choice under uncertainty here may be characterized as the maximization of expected utility. More formally, the resulting expected utility hypothesis states that, if certain axioms are satisfied, the subjective value associated with a gamble by an individual is that individual's statistical expectation of the valuations of the outcomes of that gamble; the impetus for these ideas arise from various inconsistencies observed under the expected value framework, such as the St. Petersburg paradox.
The concepts of arbitrage-free, "rational", pricing and equilibrium are coupled with the above to derive "classical" financial economics. Rational pricing is the assumption that asset prices will reflect the arbitrage-free price of the asset, as any deviation from this price will be "arbitraged away"; this assumption is useful in pricing fixed income securities bonds, is fundamental to the pricing of derivative instruments. Economic equilibrium is, in general, a state in which economic forces such as supply and demand are balanced, and, in the absence of external influences these equilibrium values of economic variables will not change. General equilibrium deals with the behavior of supply and prices in a whole economy with several or many interacting markets, by seeking to prove that a set of prices exists that will result in an overall equilibrium; the two concepts are linked as follows: where market prices do not allow for profitable arbitrage, i.e. they comprise an arbitrage-free market these prices are said to constitute an "arbitrage equilibrium".
Intuitively, this may be seen by considering that where an arbitrage opportunity does exist prices can be expected to change, are therefore not in equilibrium. An arbitrage equilibrium is thus a precondition for a general economic equilibrium; the immediate, formal, extension of this idea, the fundamental theorem of asset pricing, shows that where markets are as described —and are additionally complete—one may make financial decisions by constructing a risk neutral probability measure corresponding to the market. "Complete" here means that there
Economics is the social science that studies the production and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents. Microeconomics analyzes basic elements in the economy, including individual agents and markets, their interactions, the outcomes of interactions. Individual agents may include, for example, firms and sellers. Macroeconomics analyzes the entire economy and issues affecting it, including unemployment of resources, economic growth, the public policies that address these issues. See glossary of economics. Other broad distinctions within economics include those between positive economics, describing "what is", normative economics, advocating "what ought to be". Economic analysis can be applied throughout society, in business, health care, government. Economic analysis is sometimes applied to such diverse subjects as crime, the family, politics, social institutions, war and the environment; the discipline was renamed in the late 19th century due to Alfred Marshall, from "political economy" to "economics" as a shorter term for "economic science".
At that time, it became more open to rigorous thinking and made increased use of mathematics, which helped support efforts to have it accepted as a science and as a separate discipline outside of political science and other social sciences. There are a variety of modern definitions of economics. Scottish philosopher Adam Smith defined what was called political economy as "an inquiry into the nature and causes of the wealth of nations", in particular as: a branch of the science of a statesman or legislator a plentiful revenue or subsistence for the people... to supply the state or commonwealth with a revenue for the publick services. Jean-Baptiste Say, distinguishing the subject from its public-policy uses, defines it as the science of production and consumption of wealth. On the satirical side, Thomas Carlyle coined "the dismal science" as an epithet for classical economics, in this context linked to the pessimistic analysis of Malthus. John Stuart Mill defines the subject in a social context as: The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.
Alfred Marshall provides a still cited definition in his textbook Principles of Economics that extends analysis beyond wealth and from the societal to the microeconomic level: Economics is a study of man in the ordinary business of life. It enquires how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man. Lionel Robbins developed implications of what has been termed "erhaps the most accepted current definition of the subject": Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. Robbins describes the definition as not classificatory in "pick out certain kinds of behaviour" but rather analytical in "focus attention on a particular aspect of behaviour, the form imposed by the influence of scarcity." He affirmed that previous economists have centred their studies on the analysis of wealth: how wealth is created and consumed. But he said that economics can be used to study other things, such as war, that are outside its usual focus.
This is because war has as the goal winning it, generates both cost and benefits. If the war is not winnable or if the expected costs outweigh the benefits, the deciding actors may never go to war but rather explore other alternatives. We cannot define economics as the science that studies wealth, crime and any other field economic analysis can be applied to; some subsequent comments criticized the definition as overly broad in failing to limit its subject matter to analysis of markets. From the 1960s, such comments abated as the economic theory of maximizing behaviour and rational-choice modelling expanded the domain of the subject to areas treated in other fields. There are other criticisms as well, such as in scarcity not accounting for the macroeconomics of high unemployment. Gary Becker, a contributor to the expansion of economics into new areas, describes the approach he favours as "combin assumptions of maximizing behaviour, stable preferences, market equilibrium, used relentlessly and unflinchingly."
One commentary characterizes the remark as making economics an approach rather than a subject matter but with great specificity as to the "choice process and the type of social interaction that analysis involves." The same source reviews a range of definitions included in principles of economics textbooks and concludes that the lack of agreement need not affect the subject-matter that the texts treat. A