World Economy P1

examples of transaction costs

, transport and communications. tariffs, quotas, bureaucratic delays, language barriers, cultural and political barriers.

describe 19th century world growth

-No major international wars (the Royal Navy provided safety at sea) -The spread of European settlers, ideas, railways, arms (no immigration controls) -The Gold Standard -No restrictions on the trade of primary products for manufactures

Main determinants of growth that the Classics - Smith, Malthus, Marx, Ricardo identified

-growth in labour force -capital accumulation -improvements in the efficiency of employment in these 2 facts. eg. Smith emphasised specialisation and the division of labour ie. technical progress -foreign trade - free trade and the 'invisible hand' of the price mechanism are the essential organising principles that facilitate efficiency and thus economic growth

describe who the UK trades a lot with/should trade more with and why

.The UK trades most with the European Union .Trade with relatively small EU countries such as the Netherlands is much higher than is justified by the size of its economy alone (one twentieth of the USA)...but it is a near neighbour with excellent transport links and close cultural ties .The UK's trade with the world's two largest economies - the USA and China - would be much higher if they were not so distant but, despite much technological improvement, transport and communications still imply a significant transaction cost. .Other transactions costs include tariffs, quotas, bureaucratic delays, language barriers, cultural and political barriers.

How does the scientific method work?

1) observation of data 2) asking a Q 3)inducing a hypothesis 4)deducing a prediction 5) testing the prediction 6) corroborating or falsifying the hypothesis

Income per person (GDP per capita measured in constant 1990 dollars) in Western Europe and China, 1200 - 2000. Note that these living standards in Europe begin to climb after______, whereas they actually declined in China until around ______. (Source: Maddison)

1750 1950

Give a history of economists from 1776-1936

1776 Adam Smith 1798 Thomas Malthus 1817 David Ricardo Classical Economists 1867 Karl Marx Marxist alternative 1890 Alfred Marshall Neo classical 1914 First World War 1936 John Maynard Keynes (Great Depression) 1939 Second World War 1973/9 Oil Price Shocks New Classical 1991 Soviet Union Collapse 2007/8 Financial Crash Keynesian revival

examples of nationalised industries and when in Britain?

1940s: The Bank of England, British European Airways, National Coal Board, British Railways, British Steel 1969: Post Office Telecommunications 1973 British Gas 2008: Northern Rock

What does the Phillips Curve show

1958 Professor Phillips published his findings based on 100 years of data on unemployment and wage inflation. The famous Phillips trade off is that as unemployment is low, there is high inflation, as inflation is low there is high unemployment. The two are negatively correlated.

recent history of the world economy: 1970s

1970s: End of Bretton Woods fixed ERs(1973) Oil Price Shocks(1973 & 1979) Double Digit inflation (1973-1982) Chinese Agriculture reforms (1978) Supply Side paradigm Margaret Thatcher (1979)

recent history of the world economy: 1980s

1980s: Ronald Reagan (1980) International Debt Crisis Fall of Berlin Wall (1989) Dissolution of SU (1991)

Adam Smith and a famous reference to institutional change about pins where he estimated somewhere between a ____and ____ fold increase in productivity was made possible by ________ _____ ______ in this pin factory.

240 4800 dividing the labour

define positive criticism vs normative criticism

A positive criticism is one that asserts that the system fails to deliver. It is a testable criticism. A normative criticism accepts that the system will work...but it produces outcomes that we do not like. This criticism is not testable, it is a value judgement For example, claiming that cutting wages will cure unemployment is a testable proposition that can be proven either true or false. Thus asserting that wage cuts will not solve unemployment is a positive criticism. Either it will or won't work.)

How unique Western recognition of human capacity to transform the forces of nature through rational investigation and experiment led to economic growth

A research agenda in experimental science was unique to the West and a fundamental requirement for the acceleration of technical progress, whose full force was not felt until the 19th and 20th centuries. Institutional changes that removed constraints on markets and the free purchase and sale of property, progress in corporate organization and accountancy and the development of trustworthy financial institutions were all contributing factors in reducing risk and promoting entrepreneurship

recent history of the world economy: 200s

Argentine debt default (2001) Collapse of Lehman Bros and the Great Recession (2008)

1930s depression: what change did it cause economics and why? Before/after and what Keynes argued

Classical economics predicted that flexible prices - the invisible hand - would clear all markets, leaving no unsold products, no unemployed resources. The 1930s Great Depression destroyed that claim. Keynes argued that cutting wages would not clear this market. It would not increase the demand for labour and thus increase employment. It would only reduce aggregate incomes, and thus spending, and thus the demand for labour would only fall further If spending in aggregate was falling then governments should compensate by increasing public expenditure - run budget deficits. (Conversely, if aggregate spending was too high and thus inflationary, governments should cut spending - run budget surpluses)

define positive and negative externalities

Externalities are everywhere: Negative externalities exist where production and consumption of some good or services imposes costs on external parties - for example the pollution caused in producing electricity, or in consuming a pizza and discarding the box in the street Positive externalities occur when a market transaction between two parties brings benefits to others - investing in a new iron and steel works, for example, brings extra custom to suppliers and transport businesses and cheaper inputs for the car industry. The point is that the original market decision (to produce pizza or iron and steel) is taken by entrepreneurs who base their decision only on internal costs and revenues (and the associated profits) and fail to consider the external costs and benefits that fall to others.

Describe Dutch per capita income growth from 1400-1700, and 1600-1820s What was the growth due to prior to the 1600s?

From 1400 to 1700, Dutch per capita income growth was the fastest in Europe, and from 1600 to the 1820s its level was highest. Before 1600 this performance was due to the seizure of opportunities for trade in Northern Europe, and its success in transforming traditional agriculture by hydraulic engineering. Thereafter prosperity was augmented by its role in world trade"

What did Thomas Malthus(1766-1834) predict for population?

In An Essay on the Principle of Population (1798) he predicted that population growth had the inevitable tendency to always outrun food supplies. From his observation of the colonisation of North America, his calculations of the rate of growth of settlers' population compared to that of their production of food led him to predict an eventual reduction of living standards to subsistence level. Population growth growing exponentially whilst food growth linearly. Diminishing returns of labour employed on the land

where did Joe Stiglitz trace the origins of the 2008 financial crash?

In Freefall (2010) Stiglitz traces the origins of the 2008 crisis to a deregulatory fervour fuelled by the economic ideology of what he calls 'free-market fundamentalism' and Wall Street's overbearing political influence. This was government failure of a different sort: insufficient monitoring and policing;

define missing markets and the sorts of goods in them and what characteristics they have

In a free market there is an in-built bias to produce anything (no matter how trivial or harmful) for which demand can be stimulated and access restricted to individual fee-payers. The markets are missing for other goods and services which bring immense benefits to all the public but for which demand cannot be necessarily restricted only to those who pay for them PUBLIC GOODS: Non-excludable Non rivalrous merit goods-healthcare, police

How did Keynes argue during the Great Depression that cutting wages would not clear the market as classical economists had claimed? What should governments do if aggregate spending is falling according to Keynes? This is government counter-cyclical demand management

Keynes argued that cutting wages would not clear this market. It would not increase the demand for labour and thus increase employment. It would only reduce aggregate incomes, and thus spending, and thus the demand for labour would only fall further If spending in aggregate was falling then governments should compensate by increasing public expenditure - run budget deficits. (Conversely, if aggregate spending was too high and thus inflationary, governments should cut spending - run budget surpluses)

When was Keynesian economics the dominant paradigm and how did Friedman's fame take off?

Keynesian economics was the dominant paradigm from 1936 until the 1970s. Those (monetarist economists) who argued that Keynes was wrong were very much on the fringes of economic orthodoxy - until Friedman's famous prediction to the American Economic Association in 1967 that inflation would take off. The double-digit inflation of the US and many European countries of the late 1970s, early 80s, corroborated Friedman's prediction and made him world-famous

recent history of the world economy: postwar years

Keynesian paradigm

how might monopoly power lead to market failure

Market failure is particularly relevant to sophisticated technological products (finance?) and especially where there is no alternative supplier. A monopoly producer can dictate the price of the product since it has no competition. The price mechanism in a market system then does not signal relative scarcity and the real value of the product - it reflects the abuse of monopoly power. Not only might market prices reflect some things they should not (like excessive corporate power, above) but they also leave out important elements that ought to be included...externalities

market failure: define asymmetric information and transaction costs and why they cause market failure

Markets also fail where there are excessive transactions costs - where it is too costly to bring buyers and sellers together - and where there is asymmetric information: where one side of a deal knows more than the other. (Unscrupulous traders have been selling snake oil, or its modern equivalent, to gullible bystanders for centuries.)

where was the world first concentration of industrial and economic power? What was the reason for this country's success?

North Western Europe(e.g Great Britain, Belgium, Netherlands, Denmark, Norway, Sweden, Island) saw the world's first concentration of industrial and economic power, and the reason for success was because it developed the markets internally and then overseas: to reach out and access resources; to organise them in an entrepreneurial culture; and then to sell the produce.

Take off of the supply side paradigm and its demise What did Joe Stieglitz argue for about the great boom and bust?

Similarly, the supply side paradigm of the 1980s - to liberate markets and free private enterprise from government intervention - revolutionised mainstream economics and dominated Western policy-making... until the financial crisis and Great Recession began in 2008. In promoting the virtues of unregulated markets, US economist Joe Stiglitz argued that economists must take some of the blame for the great boom and bust that occurred.

What is the classical market solution for unemployment?

The Classical market solution for unemployment is cutting wages. Unemployment, it is alleged, is due to workers asking for higher wages, which only depresses demand from employers. Reducing wages would increase demand for labour and thus cure unemployment...

recent history of the world economy: 1990s

The Great Moderation The Mexican 'tequila crisis' 1994 The Asian financial crisis (1997) Russian rouble collapse (1998)

Korean steel and 'administrative guidance'

The case of POSCO, Korea's state-owned integrated steel industry, is an excellent example of how, if markets fail, governments can promote dynamic comparative advantage. In the early 1970s the Korean government applied for a concessionary loan (that is, at a lower than market rate of interest) from the World Bank to build a steel mill. The application was rejected on the grounds that Korea possessed no comparative advantage in steel. The World Bank, using standard market valuation, was correct in its decision. There are enormous economies of scale in building such capital equipment, which implies a long gestation period before output is large enough to be efficient. And where was the market for all the steel that was proposed? World markets were glutted and domestic steel demands in this developing country were not great. Thus returns on any investment in Korean steel seemed to be way below market rates for the foreseeable future. Manufacturing in chosen sectors - like the motor industry - was also subsidised so that steel production when it eventually came on-stream had a ready-made market. Current market signals were, in effect, ignored and producers were responding to government commands - a system in East Asia known as administrative guidance. Some years later, POSCO eventually won the World Bank accolade of being 'the world's most efficient producer of steel', out-competing many other producers around the globe. Moreover, its success stimulated a host of domestic supply industries to set up which could now sell a range of products to the steel mills: the fraction of local content in POSCO's output increased from 44% to 75% between 1977 and 1984.

What convinced some US and UK economists to believe that there was too much market government intervention in the 1970s?

The double digit inflation of the 1970s and early 1980s convinced some US and UK economists to believe that there was too much government intervention in the market-government failure had occurred where governments had attempted to fine-tune AD but only to create expectations of increasing inflation which was a self fulfilling prophecy.

The Classics believed that increasing returns was determined by __________ which

The extent of the market determines the degree of specialisation and division of labour, which in turn promotes increasing returns. Three sources of increasing returns: 'Learning by doing' Efficient use of time, and The application of machines/technology

Fundamental positive criticism of the fallacy of composition-what is the fallacy of composition?

The final, far-reaching and positive criticism of market systems is that they are chronically unstable. Of the numerous positive criticisms of market theory, the fundamental one here relates to macro-economics and the fallacy of composition - that is, the assumption that what works for the community in an individual market place will work for all market places throughout an economy added together.

In Britain economic growth took off between 1700 and 1820-what helped the economic growth take off?

The integration of domestic markets was greatly improved by creation of a network of turnpike roads and canals and development of coastal shipping. This permitted a more efficient specialisation and division of labour between different regions. Resource allocation was further strengthened by sound public finance and the growth of the banking sector."

what does the gravity model of world trade show?

The value of a country's trade with another varies in direct relation to its income and in inverse relation to its distance:

weakness in early growth theories

The weakness in all of these early theories is in their underestimation of the role of technical progress. Both wage rates and profits may rise as productivity increases; also agricultural as well as industrial productivity may rise. The world economy was booming. What was happening?

There are some commodities which individual consumers may demand - such as harmful weapons or hard drugs or offensively racist or sexist publications - but which society may prefer to outlaw. This is a ____ criticism There are other goods - public and merit goods - that the market system will not provide, or will not provide for all the population. This is a _____ criticism

There are some commodities which individual consumers may demand - such as harmful weapons or hard drugs or offensively racist or sexist publications - but which society may prefer to outlaw. This is a normative criticism There are other goods - public and merit goods - that the market system will not provide, or will not provide for all the population. This is a positive criticism

What effect does cutting wages in an individual labour market vs all labour markets have?

This theory is applicable in micro-economics - the determination of equilibrium employment in one labour market, say for barbers or university lecturers. Workers in this market who are unwilling to take a cut in wages can offer themselves for employment in another market - say, to become waiters or traffic wardens... But this theory cannot work for all labour markets added together: cutting all wages reduces national income and aggregate spending... and thus causes recession. And, of course, there is no other market for the unemployed to go to and find work...(except maybe emigration?) Just such a scenario occurred in the Great Depression in the 1930s and has reappeared in Europe since 2008. This is market failure with a vengeance!

What are the three sources of increasing returns and what is the result of increased returns?

Three sources of increasing returns: 'Learning by doing' Efficient use of time, and The application of machines/technology increased returns leads to increased productivity which thus leads to increased incomes

What is the equation for the gravity model of world trade?

Txy = a.YxYy/Dxy Where Txy is the value of total trade between country X and Y a is a constant Yx is income of country x; Yy is income of country Y, and Dxy is the distance between countries x

market failure: inequality-how is it caused by the free market

Why inequality? Free markets require OCCUPATIONAL and GEOGRAPHICAL mobility. Those resources quickest to move in response to changing demands will earn the highest rewards, meanwhile land, labour and capital tied to traditional employments will be condemned to declining incomes. For those people who cannot pay for decent education or health services, they will never gain much economic opportunity. Similarly, small informal businesses will not have the collateral to borrow more, invest and grow in size to compete on the same terms as large, formal sector corporations who can access cheap capital from a variety of national and international sources. It is always easiest to make money for those who already have it. This is a major normative criticism: free markets may work more or less efficiently for those resources which are mobile...but such markets produce inequitable social outcomes that many find unacceptable.

data from 1850-WW1 shows _______ of primary producers' income per capita

convergence

define deduction

from general law to specific observatuib

define induction

from specific observations to a general law

What happens if if increasing returns to capital employment is greater in the production of manufactures than in farming? What does this consequence teach us?

if increasing returns to capital employment is greater in the production of manufactures than in farming: -The price of food will rise -Wages of industrial workers will be bid up -Rate of return on capital will eventually fall... NEED BALANCED GROWTH IN AGRICULTURE AND INDUSTRY

China invented a number of items well before the West which leaves the question why the explosion of economic growth occurred in Europe in the nineteenth century rather than China. Give some examples of such inventions

paper, printer, banknotes, compass