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Economics
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Economics is a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services according to the Merriam-Webster Dictionary. Economics focuses on the behaviour and interactions of economic agents and how economies work, consistent with this focus, textbooks often distinguish between microeconomics and macroeconomics. Microeconomics examines the behaviour of elements in the economy, including individual agents and markets, their interactions. Individual agents may include, for example, households, firms, buyers, macroeconomics analyzes the entire economy and issues affecting it, including unemployment of resources, inflation, economic growth, and the public policies that address these issues. Economic analysis can be applied throughout society, as in business, finance, health care, Economic analyses may also be applied to such diverse subjects as crime, education, the family, law, politics, religion, social institutions, war, science, and the environment. At the turn of the 21st century, the domain of economics in the social sciences has been described as economic imperialism. The ultimate goal of economics is to improve the conditions of people in their everyday life. There are a variety of definitions of economics. Some of the differences may reflect evolving views of the subject or different views among economists, to supply the state or commonwealth with a revenue for the publick services. Say, distinguishing the subject from its uses, defines it as the science of production, distribution. On the satirical side, Thomas Carlyle coined the dismal science as an epithet for classical economics, in this context and it enquires how he gets his income and 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. He affirmed that previous economists have usually centred their studies on the analysis of wealth, how wealth is created, distributed, 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, and, resources are used to attain the goal. If the war is not winnable or if the costs outweigh the benefits. Some subsequent comments criticized the definition as overly broad in failing to limit its subject matter to analysis of markets, there are other criticisms as well, such as in scarcity not accounting for the macroeconomics of high unemployment. The same source reviews a range of included in principles of economics textbooks. Among economists more generally, it argues that a particular definition presented may reflect the direction toward which the author believes economics is evolving, microeconomics examines how entities, forming a market structure, interact within a market to create a market system
2.
Supply and demand
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In microeconomics, supply and demand is an economic model of price determination in a market. By contrast, responses to changes in the price of the good are represented as movements along unchanged supply, a supply schedule is a table that shows the relationship between the price of a good and the quantity supplied. Under the assumption of perfect competition, supply is determined by marginal cost and that is, firms will produce additional output while the cost of producing an extra unit of output is less than the price they would receive. A hike in the cost of raw goods would decrease supply, shifting costs up, while a discount would increase supply, shifting costs down, by its very nature, conceptualizing a supply curve requires the firm to be a perfect competitor. This is true because each point on the curve is the answer to the question If this firm is faced with this potential price, how much output will it be able to. Economists distinguish between the curve of an individual firm and between the market supply curve. The market supply curve is obtained by summing the quantities supplied by all suppliers at each potential price, thus, in the graph of the supply curve, individual firms supply curves are added horizontally to obtain the market supply curve. Economists also distinguish the market supply curve from the long-run market supply curve. In this context, two things are assumed constant by definition of the run, the availability of one or more fixed inputs. In the long run, firms have a chance to adjust their holdings of physical capital, furthermore, in the long run potential competitors can enter or exit the industry in response to market conditions. For both of these reasons, long-run market supply curves are generally flatter than their short-run counterparts, the determinants of supply are, Production costs, how much a goods costs to be produced. Production costs are the cost of the inputs, primarily labor, capital, energy and they depend on the technology used in production, and/or technological advances. Following the law of demand, the curve is almost always represented as downward-sloping, meaning that as price decreases. Just like the supply curves reflect marginal cost curves, demand curves are determined by marginal utility curves, the demand schedule is defined as the willingness and ability of a consumer to purchase a given product in a given frame of time. It is aforementioned, that the curve is generally downward-sloping. Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods, by its very nature, conceptualizing a demand curve requires that the purchaser be a perfect competitor—that is, that the purchaser has no influence over the market price. This is true because each point on the curve is the answer to the question If this buyer is faced with this potential price. If a buyer has market power, so its decision of how much to buy influences the price, then the buyer is not faced with any price
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Outline of economics
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The following hierarchical outline is provided as an overview of and topical guide to economics, Economics – analyzes the production, distribution, and consumption of goods and services. It aims to explain how economies work and how economic agents interact, field of science – widely recognized category of specialized expertise within science, and typically embodies its own terminology and nomenclature. Such a field will usually be represented by one or more scientific journals, there are many economics-related scientific journals. Social science – field of scholarship that explores aspects of human society. Macroeconomics – branch of economics dealing with the performance, structure, behavior, microeconomics – branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of limited resources. These two channels influence growth and employment, and are determined by the central bank and the government respectively. Monopolistic competition, also called competitive market, where there are a number of independent firms which have a very small proportion of the market share. Monopoly, where there is only one provider of a product or service, monopsony, when there is only one buyer in a market. Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm, oligopoly, in which a market is dominated by a small number of firms which own more than 40% of the market share. Oligopsony, a market dominated by many sellers and a few buyers. S, merton Miller, who started his academic career teaching economic history at the LSE, won the Nobel Memorial Prize in 1990 with Harry Markowitz and William F. Sharpe
4.
History of economic thought
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The history of economic thought deals with different thinkers and theories in the subject that became political economy and economics, from the ancient world to the present day. It encompasses many disparate schools of economic thought, ancient Greek writers such as the philosopher Aristotle examined ideas about the art of wealth acquisition, and questioned whether property is best left in private or public hands. In the Middle Ages, scholasticists such as Thomas Aquinas argued that it was an obligation of businesses to sell goods at a just price. Fan Li, an adviser to King Goujian of Yue, wrote on economic issues, chanakya wrote the Arthashastra, a treatise on statecraft, economic policy and military strategy. Ancient Athens, a society, developed an embryonic model of democracy. Xenophons Oeconomicus is a dialogue principally about household management and agriculture, Platos dialogue The Republic describing an ideal city-state run by philosopher-kings contained references to specialization of labor and to production. Plato was the first to advocate the theory of money. Aristotles Politics analyzed different forms of the state as a critique of Platos model of a philosopher-kings, of particular interest for economists, Plato provided a blueprint of a society based on common ownership of resources. Aristotle viewed this model as an oligarchical anathema, though Aristotle did certainly advocate holding many things in common, he argued that not everything could be, simply because of the wickedness of human nature. It is clearly better that property should be private, wrote Aristotle, but the use of it common, in Politics Book I, Aristotle discusses the general nature of households and market exchanges. Aristotle himself highly disapproved of usury and cast scorn on making money through a monopoly, not useful as a means to any of the necessities of life. Thomas Aquinas was an Italian theologian and economic writer and he taught in both Cologne and Paris, and was part of a group of Catholic scholars known as the Schoolmen, who moved their enquiries beyond theology to philosophical and scientific debates. In the treatise Summa Theologica Aquinas dealt with the concept of a just price, similar in many ways to the modern concept of long run equilibrium, a just price was just sufficient to cover the costs of production, including the maintenance of a worker and his family. Aquinas argued it was immoral for sellers to raise their prices simply because buyers had a pressing need for a product, Aquinas discusses a number of topics in the format of questions and replies, substantial tracts dealing with Aristotles theory. Questions 77 and 78 concern economic issues, primarily what a just price might be, Aquinas argued against any form of cheating and recommended always paying compensation in lieu of good service. Whilst human laws might not impose sanctions for unfair dealing, divine law did, one of Aquinas main critics was Duns Scotus, originally from Duns Scotland, who taught in Oxford, Cologne, and Paris. If people did not benefit from a transaction, in Scotus view, Scotus said merchants perform a necessary and useful social role by transporting goods and making them available to the public. Jean Buridan was a French priest, buridanus looked at money from two angles, its metal value and its purchasing power, which he acknowledged can vary
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Schools of economic thought
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In the history of economic thought, a school of economic thought is a group of economic thinkers who share or shared a common perspective on the way economies work. While economists do not always fit into particular schools, particularly in modern times, Economic thought may be roughly divided into three phases, premodern, early modern and modern. Systematic economic theory has developed mainly since the beginning of what is termed the modern era. Currently, the majority of economists follow an approach referred to as mainstream economics. Within the mainstream in the United States, distinctions can be made between the Saltwater school, and the more ideas of the Freshwater school. Both of these schools of thought are associated with the neoclassical synthesis, other longstanding heterodox schools of economic thought include Austrian economics and Marxian economics. Islamic economics is the practice of economics in accordance with Islamic law, Islamic economics seeks to enforce Islamic regulations not only on personal issues, but to implement broader economic goals and policies of an Islamic society, based on uplifting the deprived masses. It was founded on free and unhindered circulation of wealth so as to reach even the lowest echelons of society. One distinguishing feature is the tax on wealth, and bans levying taxes on all kinds of trade, another distinguishing feature is prohibition of interest in the form of excess charged while trading in money. Its pronouncement on use of paper currency also stands out, though promissory notes are recognized, they must be fully backed by reserves. Fractional-reserve banking is disallowed as a form of breach of trust and this school has seen a revived interest in development and understanding since the later part of the 20th century. Economic policy in Europe during the late Middle Ages and early Renaissance treated economic activity as a good which was to be taxed to raise revenues for the nobility and the church. Economic exchanges were regulated by feudal rights, such as the right to collect a toll or hold a faire, as well as guild restrictions, Economic policy, such as it was, was designed to encourage trade through a particular area. Because of the importance of class, sumptuary laws were enacted, regulating dress and housing, including allowable styles, materials. Niccolò Machiavelli in his book The Prince was one of the first authors to theorize economic policy in the form of advice and he did so by stating that princes and republics should limit their expenditures and prevent either the wealthy or the populace from despoiling the other. In this way a state would be seen as generous because it was not a burden on its citizens. The Physiocrats were 18th century French economists who emphasized the importance of productive work and their early support of free trade and deregulation influenced Adam Smith and the classical economists. Classical economics, also called classical political economy, was the form of mainstream economics of the 18th and 19th centuries
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Mainstream economics
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Mainstream economics is widely accepted economics as taught across prominent universities, in contrast to heterodox economics. It has been associated with economics and with the neoclassical synthesis, which combines neoclassical methods. In the United States, mainstream economists are not generally separated into schools, in the early 1970s, so-called fresh-water economists challenged the prevailing consensus in macroeconomics research. Key elements of their approach were that macroeconomics had to be dynamic, quantitative and they were referred to as the freshwater school since Pittsburgh, Chicago, Rochester, and Minneapolis are located nearer to the Great Lakes. They were therefore referred to as the saltwater schools. Today, mainstream economists do not, in general, identify themselves as members of a particular school, prior to the development of modern academic economics, the dominant school in Europe was mercantilism, which was rather a loose set of related ideas than an institutionalized school. From The Wealth of Nations until the Great Depression, the dominant school within the English-speaking world was classical economics, within developing economies, which formed the majority of the worlds population, various schools of development economics have been influential. The term mainstream economics came into use in the late 20th century. M. The term neoclassical synthesis itself also first appears in the 1955 edition of Samuelsons textbook, mainstream economics can be defined, as distinct from other schools of economics, by various criteria, notably by its assumptions, its methods, and its topics. A number of assumptions may underpin many mainstream models, while being rejected by some heterodox schools. These include the neoclassical assumptions of rational choice theory, a representative agent, the starting point of orthodox economic analysis is the individual. People are generally defined as units with a goal, maximisation through rational behaviour. The only differences consist of, the objective of the maximisation. From this theoretical framework, orthodox economists derive that political action should not be used to solve the problems of the economic system, instead, the solution ought to derive from an intervention on the above-mentioned maximisation objectives and constraints. It is in context that economic capitalism finds its justification. Capitalism and its arguments seem logical because orthodox economics theories think of the economy as the sum of the agents trying to maximise their utility or profit through exchange. Geoffrey Hodgson has considered the possibility that evolutionary economics and institutional economics may eventually become a new mainstream and they may use neoclassical economics as a point of departure. At least one institutionalist has argued that neoclassical economics no longer dominates a mainstream economics, a countervailing trend is the expansion of mainstream methods to such seemingly distant fields as crime, the family, law, politics, and religion
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Heterodox economics
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Heterodox economics is an umbrella term used to cover various approaches, schools, or traditions. These include anarchist, socialist, Marxian, institutional, evolutionary, Georgist, Austrian, feminist, social, post-Keynesian, Mainstream economics may be called orthodox or conventional economics by its critics. Alternatively, mainstream economics deals with the rationality–individualism–equilibrium nexus and heterodox economics is more radical in dealing with the institutions–history–social structure nexus, many mainstream economists dismiss heterodox economics as fringe and irrelevant, with little or no influence on the vast majority of academic economists in the English-speaking world. A recent review documents several prominent groups of heterodox economists since at least the 1990s as working together with an increase in coherence across different constituents. Along these lines, the International Confederation of Associations for Pluralism in Economics does not define heterodox economics and has avoided defining its scope, ICAPE defines its mission as promoting pluralism in economics. One study suggests four key factors as important to the study of economics by self-identified heterodox economists, history, natural systems, uncertainty, a number of heterodox schools of economic thought challenged the dominance of neoclassical economics after the neoclassical revolution of the 1870s. Other heterodox schools active before and during the Great Depression included Technocracy, physical scientists and biologists were the first individuals to use energy flows to explain social and economic development. by expending what is called power or energy. Austrians and post-Keynesians who dissented from this emerged as clearly defined heterodox schools. In addition, the Marxist and institutionalist schools remained active, as a consequence, some heterodox economists, such as John B. Davis, proposed that the definition of economics has to be adapted to this new. There is no single heterodox economic theory, there are many different heterodox theories in existence, what they all share, however, is a rejection of the neoclassical orthodoxy as representing the appropriate tool for understanding the workings of economic and social life. The reasons for this rejection may vary, some of the elements commonly found in heterodox critiques are listed below. One of the most broadly accepted principles of economics is the assumption of the rationality of economic agents. Indeed, for a number of economists, the notion of rational maximizing behavior is taken to be synonymous with economic behavior, when some economists studies do not embrace the rationality assumption, they are seen as placing the analyses outside the boundaries of the Neoclassical economics discipline. Neoclassical economics begins with the a priori assumptions that agents are rational and these assumptions provide the backbone for rational choice theory. Many heterodox schools are critical of the homo economicus model of behavior used in standard neoclassical model. A typical version of the critique is that of Satya Gabriel, Neoclassical economic theory is grounded in a conception of human psychology. It is assumed that all beings make economic decisions so as to maximize pleasure or utility
8.
Bretton Woods system
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The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. Also, there was a need to address the lack of cooperation among other countries, the delegates deliberated during 1–22 July 1944, and signed the Bretton Woods agreement on its final day. The United States, which controlled two thirds of the gold, insisted that the Bretton Woods system rest on both gold and the US dollar. Soviet representatives attended the conference but later declined to ratify the final agreements and these organizations became operational in 1945 after a sufficient number of countries had ratified the agreement. On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency. This action, referred to as the Nixon shock, created the situation in which the US dollar became a currency used by many states. At the same time, many fixed currencies also became free-floating, there was a high level of agreement among the powerful nations that failure to coordinate exchange rates during the interwar period had exacerbated political tensions. This facilitated the decisions reached by the Bretton Woods Conference, furthermore, all the participating governments at Bretton Woods agreed that the monetary chaos of the interwar period had yielded several valuable lessons. The experience of World War II was fresh in the minds of public officials, the planners at Bretton Woods hoped to avoid a repeat of the Treaty of Versailles after World War I, which had created enough economic and political tension to lead to WWII. The solution at Versailles for the French, British, and Americans seemed to be make Germany pay for it all, if the demands on Germany were unrealistic, then it was unrealistic for France to pay back Britain, and for Britain to pay back the US. Thus, many assets on bank balance sheets internationally were actually unrecoverable loans, in the 1920s, international flows of speculative financial capital increased, leading to extremes in balance of payments situations in various European countries and the US. In the 1930s, world markets never broke through the barriers and restrictions on trade and investment volume – barriers haphazardly constructed. The lesson was that simply having responsible, hard-working central bankers was not enough, Britain in the 1930s had an exclusionary trading bloc with nations of the British Empire known as the Sterling Area. If Britain imported more than it exported to, say, South Africa and this meant that though Britain was running a trade deficit, it had a financial account surplus, and payments balanced. Increasingly, Britains positive balance of payments required keeping the wealth of Empire nations in British banks, one incentive for, say, South African holders of rand to park their wealth in London and to keep the money in Sterling, was a strongly valued pound sterling. Unfortunately, as Britain deindustrialized in the 1920s, the way out of the deficit was to devalue the currency. But Britain couldnt devalue, or the Empire surplus would leave its banking system, nazi Germany also worked with a bloc of controlled nations by 1940. Germany forced trading partners with a surplus to spend that surplus importing products from Germany, thus, Britain survived by keeping Sterling nation surpluses in its banking system, and Germany survived by forcing trading partners to purchase its own products
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Economic methodology
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Economic methodology is the study of methods, especially the scientific method, in relation to economics, including principles underlying economic reasoning. In contemporary English, methodology may reference theoretical or systematic aspects of a method, Philosophy and economics also takes up methodology at the intersection of the two subjects. Economic methodology has gone from periodic reflections of economists on method to a research field in economics since the 1970s. Economic systems Methodology of econometrics Model John Bryan Davis, D. Wade Hands, handbook of Economic Methodology, E. Elgar Hands, D. Wade, ed. The Philosophy And Methodology Of Economics, Duke University Hausman, Daniel M, the Philosophy of Economics, An Anthology. New York, Cambridge University Press, ISBN 052145929X Boland, L, the Foundations of Economic Method, London, Geo. The Methodology of Economic Model Building, Methodology after Samuelson, London, critical Economic Methodology, A Personal Odyssey, London, Routledge Boland, L. The Foundations of Economic Method, A Popperian Perspective, London, the Rhetoric of Economics, Univ of Wisconsin Press,1998 Daniel M. Hausman. Essays on Philosophy and Economic Methodology, Cambridge University Press,1992 Nell, E. J. and Errouaki, how Economic Methodology Became a Separate Science, Journal of Economic Methodology,18, 163-176. Journal of Economic Methodology - page @ EconPapers Daniel M. Hausman, Philosophy of Economics, Stanford Encyclopedia of Philosophy Milton Friedman, The Methodology of Positive Economics
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Political economy
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Political economy is a term used for studying production and trade, and their relations with law, custom, and government, as well as with the distribution of national income and wealth. Political economy originated in moral philosophy and it was developed in the 18th century as the study of the economies of states, or polities, hence the term political economy. In the late 19th century, the term came to replace political economy. Earlier, William Stanley Jevons, a proponent of mathematical methods applied to the subject, advocated economics for brevity and it is available as an area of study in certain colleges and universities. Originally, political economy meant the study of the conditions under which production or consumption within limited parameters was organized in nation-states, in that way, political economy expanded the emphasis of economics, which comes from the Greek oikos and nomos. Thus, political economy was meant to express the laws of production of wealth at the state level, the phrase économie politique first appeared in France in 1615 with the well-known book by Antoine de Montchrétien, Traité de l’economie politique. The French physiocrats, along with Adam Smith, John Stuart Mill, David Ricardo, Henry George, the worlds first professorship in political economy was established in 1754 at the University of Naples Federico II in southern Italy. The Neapolitan philosopher Antonio Genovesi was the first tenured professor, in 1763, Joseph von Sonnenfels was appointed a Political Economy chair at the University of Vienna, Austria. Thomas Malthus, in 1805, became Englands first professor of economy, at the East India Company College, Haileybury. This left the class of 1998 as the last to be graduated with a Master of Arts in Political Economy. In the United States, political economy first was taught at the College of William and Mary, an early and continuing focus of that research program is what came to be called constitutional political economy. Other traditional topics include analysis of public policy issues as economic regulation, monopoly, rent-seeking, market protection, institutional corruption. From the mid-1990s, the field has expanded, in part aided by new data sets that allow tests of hypotheses on comparative economic systems. New political economy may treat economic ideologies as the phenomenon to explain, thus, Charles S. Maier suggests that a political economy approach interrogates economic doctrines to disclose their sociological and political premises. In sum, regards economic ideas and behavior not as frameworks for analysis and this approach informs Andrew Gambles The Free Economy and the Strong State, and Colin Hays The Political Economy of New Labour. It also informs much work published in New Political Economy, a journal founded by Sheffield University scholars in 1996. International political economy is a field comprising approaches to the actions of various actors. They are also associated with the journal The Review of International Political Economy, there also is a more critical school of IPE, inspired by thinkers such as Antonio Gramsci and Karl Polanyi, two major figures are Matthew Watson and Robert W. Cox
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Microeconomics
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One goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions under which free markets lead to desirable allocations and it also analyzes market failure, where markets fail to produce efficient results. Microeconomics also deals with the effects of economic policies on the aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theory has been built upon microfoundations—i. e, based upon basic assumptions about micro-level behavior. Microeconomic theory typically begins with the study of a single rational, to economists, rationality means an individual possesses stable preferences that are both complete and transitive. The technical assumption that preference relations are continuous is needed to ensure the existence of a utility function, microeconomic theory progresses by defining a competitive budget set which is a subset of the consumption set. It is at point that economists make the technical assumption that preferences are locally non-satiated. Without the assumption of LNS there is no guarantee that an individual would maximize utility. With the necessary tools and assumptions in place the utility maximization problem is developed, the utility maximization problem is the heart of consumer theory. The utility maximization problem attempts to explain the action axiom by imposing rationality axioms on consumer preferences, the utility maximization problem serves not only as the mathematical foundation of consumer theory but as a metaphysical explanation of it as well. That is, the utility maximization problem is used by economists to not only explain what or how individuals make choices, the utility maximization problem is a constrained optimization problem in which an individual seeks to maximize utility subject to a budget constraint. Economists use the extreme value theorem to guarantee that a solution to the utility maximization problem exists and that is, since the budget constraint is both bounded and closed, a solution to the utility maximization problem exists. Economists call the solution to the utility maximization problem a Walrasian demand function or correspondence, the utility maximization problem has so far been developed by taking consumer tastes as the primitive. However, a way to develop microeconomic theory is by taking consumer choice as the primitive. This model of microeconomic theory is referred to as Revealed preference theory, the theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods. In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices, quite often, a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the works well in situations meeting these assumptions
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Macroeconomics
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Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes national, regional, and global economies, Macroeconomics and microeconomics, a pair of terms coined by Ragnar Frisch, are the two most general fields in economics. Macroeconomic models and their forecasts are used by governments to assist in the development, Macroeconomics encompasses a variety of concepts and variables, but there are three central topics for macroeconomic research. Macroeconomic theories usually relate the phenomena of output, unemployment, outside of macroeconomic theory, these topics are also important to all economic agents including workers, consumers, and producers. National output is the amount of everything a country produces in a given period of time. Everything that is produced and sold generates an equal amount of income, therefore, output and income are usually considered equivalent and the two terms are often used interchangeably. Output can be measured as total income, or it can be viewed from the side and measured as the total value of final goods. Macroeconomic output is measured by gross domestic product or one of the other national accounts. Economists interest in long-run increases in output study economic growth, advances in technology, accumulation of machinery and other capital, and better education and human capital all lead to increased economic output over time. However, output does not always increase consistently, business cycles can cause short-term drops in output called recessions. Economists look for macroeconomic policies that prevent economies from slipping into recessions, the amount of unemployment in an economy is measured by the unemployment rate, i. e. the percentage of workers without jobs in the labor force. The unemployment rate in the force only includes workers actively looking for jobs. People who are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded, unemployment can be generally broken down into several types that are related to different causes. Classical unemployment theory suggests that unemployment occurs when wages are too high for employers to be willing to hire more workers, other more modern economic theories suggest that increased wages actually decrease unemployment by creating more consumer demand. Structural unemployment covers a variety of causes of unemployment including a mismatch between workers skills and the skills required for open jobs. Large amounts of unemployment can occur when an economy is transitioning industries. While some types of unemployment may occur regardless of the condition of the economy, Okuns law represents the empirical relationship between unemployment and economic growth. The original version of Okuns law states that a 3% increase in output would lead to a 1% decrease in unemployment, a general price increase across the entire economy is called inflation
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International economics
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It seeks to explain the patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and migration. International finance studies the flow of capital across international markets. International monetary economics and international macroeconomics study flows of money across countries, the economic theory of international trade differs from the remainder of economic theory mainly because of the comparatively limited international mobility of the capital and labour. In that respect, it would appear to differ in degree rather than in principle from the trade between regions in one country. Thus the methodology of international trade economics differs little from that of the remainder of economics, modern trade analysis, on the other hand, depends mainly upon empirical analysis. However, extremely restrictive assumptions have had to be adopted in order to make the problem amenable to theoretical analysis, on those assumptions, it derives a model of the trade patterns that would arise solely from international differences in the relative abundance of labour and capital. The resulting theorem states that, on those assumptions, a country with an abundance of capital would export capital-intensive products. The Stolper-Samuelson theorem, which is described as a corollary of the H-O theorem, was an early example. In its most general form it states that if the price of a good rises then the price of the factor used intensively in that industry will also rise while the price of the factor will fall. In the international context for which it was devised it means that trade lowers the real wage of the scarce factor of production. Those theories have sometimes taken to mean that trade between an industrialised country and a developing country would lower the wages of the unskilled in the industrialised country. Modern trade analysis moves away from the assumptions of the H-O theorem and explores the effects upon trade of a range of factors, including technology. It makes extensive use of econometrics to identify from the available statistics, the contributions of differences of technology have been evaluated in several such studies. The temporary advantage arising from a development of a new technology is seen as contributory factor in one study. Another econometric study also established a correlation between size and the share of exports made up of goods in the production of which there are scale economies. There is a presumption that any exchange that is freely undertaken will benefit both parties, but that does not exclude the possibility that it may be harmful to others. However Paul Samuelson has proved that it always be possible for the gainers from international trade to compensate the losers. They suggested that much of the gain arises from the growth of the most productive firms at the expense of the less productive
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Applied economics
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Applied Economics is the application of economic theory and econometrics in specific settings. As one of the two sets of fields of economics, it is characterized by the application of the core. The process often involves a reduction in the level of abstraction of this core theory and this range of approaches is indicative of what Roger Backhouse and Jeff Biddle argue is the ambiguous nature of the concept of applied economics. It is a concept with multiple meanings, among broad methodological distinctions, one source places it in neither positive nor normative economics but the art of economics, glossed as what most economists do. The origin and meanings of Applied Economics has a history going back to the writing of Say. Say wrote about applying the principles of political economy” to ascertain the rule of action of any combination of circumstances presented to us. The full title of Mill’s work is Principles of Political Economy with Some of Their Applications to Social Philosophy, john Neville Keynes was perhaps the first to use the phrase “applied economics”. This School thought that a body of theory could be established through abstract reasoning – not relying on a wide knowledge of economic facts. From this point of view applying this theory involved making allowances for some of the factors ignored in building the abstract theories, Keynes wrote about applying the political economies hypothetical laws to interpreting and explaining of “concrete industrial facts. Léon Walras, for example, planned to organize his work into volumes on pure, applied. Jaffé describes Walrass plan as involving making a distinction between that which is true, is useful, and is just, in using the term true, Walras referred to propositions that necessarily followed from the nature of things. Pure economics then involves pure logic, Applied economics involves examining ways to achieve practical goals and requires the making judgments about whether or not the logic of pure economics was relevant to the real world. Social economics also presumed pure economics, but dealt with a different range of questions than did applied economics, vilfredo Pareto follows as similar usage suggesting economics might begin by eliminating that which is inessential to examine problems as reduced to their principal and essentials. He distinguishes between pure economics from applied economics with pure economics containing only the lines of argument. Joseph Schumpeter referred to some applied fields in economics the repetition of which might help some of the issues involved in what defining applied economics involves. Pesaran and Harcourt describe Stones attempt to face the challenge of making economics into a science by combining theory and they report Stone’s proposal for the establishment of the now famous Department of Applied Economics at Cambridge. Stone argued that, The ultimate aim of applied economics is to human welfare by the investigation. It is the view of the Department that this can best be achieved by the synthesis of three types of study which now tend to be pursued in isolation, the special character of the Department’s approach to problems of the real world will lie in this attempt at systematic synthesis
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Mathematical economics
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Mathematical economics is the application of mathematical methods to represent theories and analyze problems in economics. An advantage claimed for the approach is its allowing formulation of theoretical relationships with rigor, generality, Mathematics allows economists to form meaningful, testable propositions about wide-ranging and complex subjects which could less easily be expressed informally. Further, the language of mathematics allows economists to make specific, much of economic theory is currently presented in terms of mathematical economic models, a set of stylized and simplified mathematical relationships asserted to clarify assumptions and implications. This rapid systematizing of economics alarmed critics of the discipline as well as some noted economists, the use of mathematics in the service of social and economic analysis dates back to the 17th century. Then, mainly in German universities, a style of instruction emerged which dealt specifically with detailed presentation of data as it related to public administration, gottfried Achenwall lectured in this fashion, coining the term statistics. At the same time, a group of professors in England established a method of reasoning by figures upon things relating to government. Pettys use of detailed numerical data would influence statisticians and economists for some time, the mathematization of economics began in earnest in the 19th century. Most of the analysis of the time was what would later be called classical economics. Subjects were discussed and dispensed with through algebraic means, but calculus was not used, more importantly, until Johann Heinrich von Thünens The Isolated State in 1826, economists did not develop explicit and abstract models for behavior in order to apply the tools of mathematics. Thünens model of farmland use represents the first example of marginal analysis, Thünens work was largely theoretical, but he also mined empirical data in order to attempt to support his generalizations. In comparison to his contemporaries, Thünen built economic models and tools and these included W. S. Jevons who presented paper on a general mathematical theory of political economy in 1862, providing an outline for use of the theory of marginal utility in political economy. In 1871, he published The Principles of Political Economy, declaring that the subject as science must be simply because it deals with quantities. Jevons expected the only collection of statistics for price and quantities would permit the subject as presented to become an exact science, others preceded and followed in expanding mathematical representations of economic problems. At the time, it was thought that utility was quantifiable, Cournot, Walras and Francis Ysidro Edgeworth are considered the precursors to modern mathematical economics. Cournot, a professor of mathematics, developed a treatment in 1838 for duopoly—a market condition defined by competition between two sellers. This treatment of competition, first published in Researches into the Mathematical Principles of Wealth, is referred to as Cournot duopoly and it is assumed that both sellers had equal access to the market and could produce their goods without cost. Further, it assumed that both goods were homogeneous, each seller would vary her output based on the output of the other and the market price would be determined by the total quantity supplied. The profit for each firm would be determined by multiplying their output, Cournots contributions to the mathematization of economics would be neglected for decades, but eventually influenced many of the marginalists
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Econometrics
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Econometrics is the application of statistical methods to economic data and is described as the branch of economics that aims to give empirical content to economic relations. More precisely, it is the analysis of actual economic phenomena based on the concurrent development of theory and observation. An introductory economics textbook describes econometrics as allowing economists to sift through mountains of data to extract simple relationships, the first known use of the term econometrics was by Polish economist Paweł Ciompa in 1910. Ragnar Frisch is credited with coining the term in the sense in which it is used today, the basic tool for econometrics is the multiple linear regression model. Econometric theory uses statistical theory and mathematical statistics to evaluate and develop econometric methods, econometricians try to find estimators that have desirable statistical properties including unbiasedness, efficiency, and consistency. Applied econometrics uses theoretical econometrics and real-world data for assessing economic theories, developing models, analyzing economic history. The basic tool for econometrics is the linear regression model. In modern econometrics, other tools are frequently used. Estimating a linear regression on two variables can be visualized as fitting a line through points representing paired values of the independent and dependent variables. For example, consider Okuns law, which relates GDP growth to the unemployment rate, the unknown parameters β0 and β1 can be estimated. Here β1 is estimated to be −1.77 and β0 is estimated to be 0.83 and this means that if GDP growth increased by one percentage point, the unemployment rate would be predicted to drop by 1.77 points. The model could then be tested for statistical significance as to whether an increase in growth is associated with a decrease in the unemployment, as hypothesized. If the estimate of β1 were not significantly different from 0, the variance in a prediction of the dependent variable as a function of the independent variable is given in polynomial least squares. Econometric theory uses statistical theory and mathematical statistics to evaluate and develop econometric methods, econometricians try to find estimators that have desirable statistical properties including unbiasedness, efficiency, and consistency. Ordinary least squares is used for estimation since it provides the BLUE or best linear unbiased estimator given the Gauss-Markov assumptions. Estimators that incorporate prior beliefs are advocated by those who favor Bayesian statistics over traditional, classical or frequentist approaches, applied econometrics uses theoretical econometrics and real-world data for assessing economic theories, developing econometric models, analyzing economic history, and forecasting. Econometrics may use standard statistical models to study economic questions, but most often they are with observational data, rather than in controlled experiments. In this, the design of studies in econometrics is similar to the design of studies in other observational disciplines, such as astronomy, epidemiology, sociology
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Economic bubble
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An economic bubble or asset bubble is trade in an asset at a price or price range that strongly deviates from the corresponding assets intrinsic value. It could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future, Asset bubbles date back as far as the 1600s and are now widely regarded as a recurrent feature of modern economic history. Because it is difficult to observe intrinsic values in real-life markets, bubbles are often conclusively identified only in retrospect. Such a drop is known as a crash or a bubble burst, prices in an economic bubble can fluctuate erratically, and become impossible to predict from supply and demand alone. While some economists deny that bubbles occur, the cause of bubbles remains disputed by those who are convinced that asset prices often deviate strongly from intrinsic values. Many explanations have suggested, and research has recently shown that bubbles may appear even without uncertainty, speculation. In such cases, the bubbles may be argued to be rational and these approaches require that the timing of the bubble collapse can only be forecast probabilistically and the bubble process is often modelled using a Markov switching model. Similar explanations suggest that bubbles might ultimately be caused by processes of price coordination, more recent theories of asset bubble formation suggest that these events are sociologically driven. For instance, explanations have focused on emerging social norms and the role that culturally-situated stories or narratives play in these events and this was one of the earliest modern financial crises, other episodes were referred to as manias, as in the Dutch tulip mania. The metaphor indicated that the prices of the stock were inflated and fragile – expanded based on nothing but air, and vulnerable to a sudden burst, as in fact occurred. The impact of economic bubbles is debated within and between schools of thought, they are not generally considered beneficial, but its debated how harmful their formation. Political economist Robert E. Wright argues that bubbles can be identified before the fact with high confidence. A protracted period of low risk premiums can simply prolong the downturn in asset price deflation as was the case of the Great Depression in the 1930s for much of the world and the 1990s for Japan. Not only can the aftermath of a crash devastate the economy of a nation, another important aspect of economic bubbles is their impact on spending habits. Market participants with overvalued assets tend to spend more because they feel richer, many observers quote the housing market in the United Kingdom, Australia, New Zealand, Spain and parts of the United States in recent times, as an example of this effect. In an economy with a bank, the bank may therefore attempt to keep an eye on asset price appreciation. This is usually done by increasing the interest rate, in the 1970s, excess monetary expansion after the U. S. came off the gold standard created massive commodities bubbles. These bubbles only ended when the U. S, central Bank finally reined in the excess money, raising federal funds interest rates to over 14%
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Economic system
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An economic system is a system of production, resource allocation, and distribution of goods and services within a society or a given geographic area. It includes the combination of the institutions, agencies, entities, decision-making processes. As such, a system is a type of social system. The mode of production is a related concept, all economic systems have three basic questions to ask, what to produce, how to produce and in what quantities, and who receives the output of production. The study of systems includes how these various agencies and institutions are linked to one another. The analysis of economic systems traditionally focused on the dichotomies and comparisons between market economies and planned economies, and on the distinctions between capitalism and socialism, subsequently, the categorization of economic systems expanded to include other topics and models that do not conform to the traditional dichotomy. Today the dominant form of organization at the world level is based on market-oriented mixed economies. Economic systems is the category in the Journal of Economic Literature classification codes that includes the study of such systems, there are multiple components to economic systems. Decision-making structures of an economy determine the use of inputs, distribution of output, the level of centralization in decision-making. Decisions might be carried out by industrial councils, by a government agency, in one view, every economic system represents an attempt to solve three fundamental and interdependent problems, What goods and services shall be produced, and in what quantities. How shall goods and services be produced and that is, by whom and with what resources and technologies. For whom shall goods and services be produced and that is, who is to enjoy the benefits of the goods and services and how is the total product to be distributed among individuals and groups in the society. Thus every economy is a system that allocates resources for exchange, the system is stabilized through a combination of threat and trust, which are the outcome of institutional arrangements. The means of production may be owned privately, by the state, a decision-making system, this determines who is eligible to make decisions over economic activities. Economic agents with decision-making powers can enter into binding contracts with one another, a coordination mechanism, this determines how information is obtained and used in decision-making. An incentive system, this induces and motivates economic agents to engage in productive activities and it can be based on either material reward or moral suasion. The incentive system may encourage specialization and the division of labour, organizational form, there are two basic forms of organization, actors and regulators. Economic actors include households, work gangs and production teams, firms, joint-ventures, economically regulative organizations are represented by the state and market authorities, the latter may be private or public entities
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Economic growth
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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 gross domestic product, or real GDP. Growth is usually calculated in real terms – i. e. inflation-adjusted terms – to eliminate the 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 rate of economic growth refers to the annual rate of growth in GDP between the first and the last year over a period of time. Implicitly, this rate is the trend in the average level of GDP over the period. An increase in economic growth caused by efficient use of inputs is referred to as intensive growth. GDP growth caused only by increases in the amount of available for use is called extensive growth. The economic growth rate is calculated from data on GDP estimated by countries´statistical agencies, the rate of growth of GDP/capita is calculated from data on GDP and people for the initial and final periods included in the analysis. The rate of change of GDP/population is the sum of the rates of change of four variables plus their cross products. Increases in labor productivity have historically been the most important source of real per capita economic growth, increases in productivity lower the real cost of goods. Over the 20th century the price of many goods fell by over 90%. Economic growth has traditionally been attributed to the accumulation of human and physical capital, 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 eventually saw their population growth slow down, a known as the demographic transition. Increases in productivity are the factor responsible for per capita economic growth – this has been especially evident since the mid-19th century. Most of the growth in the 20th century was due to increased output per unit of labor, materials, energy. 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 goods produced previously and new goods
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Market (economics)
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A market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers and it can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enable the distribution and allocation of resources in a society, Markets allow any trade-able item to be evaluated and priced. A market emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights of services, Markets can also be worldwide, for example the global diamond trade. National economies can be classified, for example as developed markets or developing markets, in mainstream economics, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services, with or without money, is a transaction, a major topic of debate is how much a given market can be considered to be a free market, that is free from government intervention. However it is not always clear how the allocation of resources can be improved since there is always the possibility of government failure, a market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers and it can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enables the distribution and allocation of resources in a society, Markets allow any trade-able item to be evaluated and priced. A market sometimes emerges more or less spontaneously but is often constructed deliberately by human interaction in order to enable the exchange of rights of services. Markets of varying types can spontaneously arise whenever a party has interest in a good or service that other party can provide. Hence there can be a market for cigarettes in correctional facilities, another for chewing gum in a playground, and yet another for contracts for the future delivery of a commodity. Markets vary in form, scale, location, and types of participants, as well as the types of goods and services traded, nevertheless, violence and they apply the market dynamics to facilitate information aggregation. However, market prices may be distorted by a seller or sellers with monopoly power, such price distortions can have an adverse effect on market participants welfare and reduce the efficiency of market outcomes. Also, the level of organization and negotiating power of buyers and sellers markedly affects the functioning of the market. Markets are a system, and systems have structure, the structure of a well-functioning market is defined by the theory of perfect competition. Market failures are often associated with time-inconsistent preferences, information asymmetries, non-perfectly competitive markets, principal–agent problems, externalities, among the major negative externalities which can occur as a side effect of production and market exchange, are air pollution and environmental degradation. There exists a popular thought, especially among economists, that markets would have a structure of a perfect competition
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Experimental economics
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Experimental economics is the application of experimental methods to study economic questions. Data collected in experiments are used to effect size, test the validity of economic theories. Economic experiments usually use cash to motivate subjects, in order to mimic real-world incentives, experiments are used to help understand how and why markets and other exchange systems function as they do. Experimental economics have also expanded to understand institutions and the law, a fundamental aspect of the subject is design of experiments. Experiments may be conducted in the field or in laboratory settings, variants of the subject outside such formal confines include natural and quasi-natural experiments. An alternative approach with experimental dimensions is agent-based computational modeling, coordination games are games with multiple pure strategy Nash equilibria. Deductive selection principles are those that allow predictions based on the properties of the game alone, inductive selection principles are those that allow predictions based on characterizations of dynamics. Under some conditions at least groups of subjects can coordinate even complex non-obvious asymmetric Pareto-best equilibria. This is even though all subjects decide simultaneously and independently without communication, the way by which this happens is not yet fully understood. In games of two players or more, the subjects often form beliefs about what actions the other subjects are taking and this is known as belief learning. Subjects also tend to make the decisions that have rewarded them with high payoffs in the past. This is known as reinforcement learning, until the 1990s, simple adaptive models, such as Cournot competition or fictitious play, were generally used. In the mid-1990s, Alvin E. Roth and Ido Erev demonstrated that reinforcement learning can make predictions in experimental games. Criticisms of EWA include overfitting due to many parameters, lack of generality over games, overfitting is addressed by estimating parameters on some of the experimental periods or experimental subjects and forecasting behavior in the remaining sample. Modern experimental economists have done much notable work recently, roberto Weber has raised issues of learning without feedback. David Cooper and John Kagel have investigated types of learning over similar strategies, Ido Erev and Greg Barron have looked at learning in cognitive strategies. Dale Stahl has characterized learning over decision making rules, Charles A. Holt has studied logit learning in different kinds of games, including games with multiple equilibria. Wilfred Amaldoss has looked at interesting applications of EWA in marketing, amnon Rapoport, Jim Parco and Ryan Murphy have investigated reinforcement-based adaptive learning models in one of the most celebrated paradoxes in game theory known as the centipede game
