ECO3033 Possible Test Questions

What was the main factor that Adam Smith said was responsible for increasing the wealth of nations?

Adam Smith said the main factor for increasing the wealth of nations was the division of labor (the specialization of cooperating individuals who perform specific tasks and roles.)

What was the main factor that Adam Smith said was responsible for increasing the wealth of nations? What factor did he say limited the wealth-creating ability of the economy?

Adam Smith said the main factor for increasing the wealth of nations was the division of labor. The factor that limited the creating ability of the economy was the extent of the market of that economy.

What was Hermann Heinrich Gossen best known for? What impact did his ideas have on the development of economics.

Gossen is most known for very explicitly developing general theoretical implications from a theory of marginal utility. Gossen was among the first economists to recognize that a centrally planned economy was unworkable.

Discuss the main contributions to economics of David Hume.

Hume held that passion rather than reason governs human behavior. He argued against the existence of innate ideas, postulating that humans can have knowledge only of the objects of experience, and the relations of ideas, calling the rest "nothing but sophistry and illusion." He also argued that inductive reasoning, and therefore causality, cannot, ultimately, be justified rationally: our belief in causality and induction instead results from custom

Briefly discuss the influence of John R. Hicks on the development of macroeconomic theory.

In regards to macroeconomics, his greatest contribution was the IS-LM Model, which was a macroeconomic tool that shows the relationship between interest rates and real output, in the goods and services market and the money market (also known as the assets market). It essentially summarized a Keynesian view of macroeconomics.

What was the main argument underlying Adam Smith's Theory of Moral Sentiments?

Smith believed that morality and economics were related. He devised in Moral Sentiments the idea of the "impartial observer"- this theory spoke of what the opinion of the general public would be in order to come to a consensus on morality.

Discuss the ideas of the Spanish economists around the time of Adam Smith. What types of ideas did they espouse? Why were their ideas not as prominently known as Smith's? Why did their ideas ultimately have less influence than Smith's?

The Spanish economists around the time of Smith had ideas encouraging a laissez-faire economy. They were mainly pamphleteers & anonymous persona who feared speaking out against the government, compared to a relatively politically free Britain. Because of the controlling government in Spain, the ideas of the Spanish economists were not as prominent as Adam Smith's.

What was the socialist calculation debate? Who were the main participants? Explain both sides, and discuss the strengths and weaknesses of each position.

Typically viewed as a debate between proponents of capitalism and proponents of socialism, the socialist calculation debate was in fact largely a debate between two sides of socialists regarding the utilization of markets and money in a socialist system and to what degree the law of value would be applied to a socialist system. Von Mises and Hayek argue that without individuals determining the price at which they are willing to pay for a good, no feedback can be taken and thus the market cannot adjust where necessary due to government controlled prices. However, this argument has drawn criticism due to Mises assumption that socialism is "impossible" rather than it simply being "inefficient" and thus he overstates the scope of his case

Adam Smith and David Ricardo had significantly different views on the future of prosperity in a market-driven economy. Explain the views of both economists. Which view do you think is more correct? Which view do you think is more closely related to contemporary economic theory? Be sure to support your answers by referencing the ideas of Smith and Ricardo.

Adam Smith believed that the future was bright in a market driven economy, he saw the division of labor and prosperity only being limited to the extent of the market (which was limitless). Ricardo had a more dismal view on prosperity in a market economy because he believed that society would eventually be stuck at a subsistence level (or at the minimum needed to survive). In recent history it is apparent to see the tremendous reduction in poverty (less starvation, high mechanized jobs for many, microwave ovens, electricity, etc.) If we compared the future today with Ricardo's dismal view of subsistence, it would appear that the extent of the market has increased like Smith predicted. Contemporary economic thought generally describes economics as making choices in society impart to scarcity, the majority of society believes that natural resources will eventually deplete to the point where the general population cannot be supported (Ex. collapse by Jared Diamond) at the same time however scarcity up until this point has forced individuals to come up with creative ideas. Therefore it is also a possibility that economics can be redefined as how individuals cooperate to meet their needs. Yet, Ricardian principles are more closely related to contemporary economic thought.

Explain how the concept of equilibrium became the central idea in 20th century economics. What ideas do economics slight by taking an equilibrium approach to analyzing economic activity?

After Marshall determined the question "what decides value?" was largely irrelevant, the emergence of marginalization and the shift in focus to how both sides (production/distribution and exchange) worked together to create equilibrium in a chaotic market. However, focusing so closely on the margins often keeps economists from being able to see the "big picture" in economics on the whole.

What were Alfred Marshall's main contributions to economic theory? Discuss how his ideas influenced the development of economics in the 20th century.

Alfred Marshall wrote the Principles of Economics and answered the 19th century question of what determines value (supply or demand) he concluded that it was both. Alfred Marshall further studied the forces of economic equilibrium, and what brings the market back to price and quantity equilibrium. Marshall's frameworks for market forces (such as supply and demand) are still used today as introductory lessons into economics.

Compare the ideas of John Locke and Thomas Hobbes. Explain how Locke's ideas on philosophy are related to economics.

Both Locke and Hobbes were social contractarians. Locke believed in individual rights such as the right in owning oneself and one's labor, property and resources (product of labor) he saw it as the gov'ts right to protect these rights. (ex. land in far west 1800s) Hobbes view was that there was a need for a social contract. In his 'Leviathon' he stated that all are obligated obey the rules of the sovereign, no matter who the sovereign were. Locke's ideas of owning the product of one's labor lead to the development of the free market economy.

Why did the industrial revolution begin in Britain? Contrast conditions in Britain with other nations (such as France, China, Germany) to explain why Britain had such a favorable environment for industrialization.

Britain was a lot more decentralized than other governments in Europe; the product of this was a more competitive environment and fewer barriers to trade. The British crown had a lot less power than other European states, such as Spain, France, and Germany. China also had a top down economy that prevented industrialization to its full potential and created barriers to trade. The British Common Law gave power to smaller municipalities in exchange for taxation for war, it also allowed for production and decision-making free of many governmental regulations (including wage regulation).

What were the main contributions to economics of Richard Cantillon?

Cantillon presented a theory of the business cycle very similar to the Austrian theory when he analyzed changes in the money supply. Increased money supply is the boom phase that kicks off the business cycle. His brightest achievement in monetary theory was his discussion of the dynamic effect of an increase of the quantity of money on the economy—the effect on relative prices, expenditures, and interest rates. Finally, Cantillon showed that monetizing the economy was good, but that one might have too much of a good thing, thus exposing the greatest error of mercantilism.

Discuss the main contributions of John Stuart Mill to economics. Which economists had the greatest influence on his work? How influential was Mill, both in his own day, and on those economists who followed him?

Complete restatement of David Ricardo just further developed, book was standard for its time. Believed wealth should be redistributed. Problem with this was you take away from the producers incentives. Also if you cut down population you would slow production. Would rather have socialism then what he saw going on in Britain at the time.

Explain Karl Marx's theory of surplus value, making sure to differentiate relative surplus value from absolute surplus value.

Conventionally, value-added is equal to the sum of gross wage income and gross profit income. However, Marx's use of this concept is different, because for Marx, the term refers to the yield, profit or return on production capital invested, i.e. the amount of the increase in the value of capital. Hence, Marx's use of this term has always been translated as "surplus value", distinguishing it from "value-added". According to Marx's theory, surplus value is equal to the new value created by workers in excess of their own labour-cost, which is appropriated by the capitalist as profit when products are sold. Absolute surplus value is the surplus value generated by increasing the length of the Working day, thus increasing the surplus labour time.Relative surplus value is the surplus value generated by cutting wages or reducing the cost of living, thus reducing workers' Necessary labour time in proportion to the surplus value extracted.

One might argue that entrepreneurship is the key ingredient to economic progress. Discuss how the concept of entrepreneurship relates the main ideas of Adam Smith, Leon Walras, and Friedrich Hayek. Discuss the similarities and differences in their approaches.

Entrepreneurship embodies the fundamental ideals of capitalism championed by Adam Smith, in a sense an entrepreneur embodies what Adam Smith advocated in The wealth of nations. Walras and Hayek, recognizing the entrepreneur as a market force, differ on his role. Walras believes he is an equalizing market force that follows a stipulated set of behaviors that creates equilibrium in the market, whereas Hayek believes he is a player who uses knowledge obtained from the market to introduce previously unknown profit opporunities

Economists use simplified models to depict a more complex reality. Discuss the role of simplifying and unrealistic assumptions in economic models. Do such assumptions enhance or detract from a model's usefulness?

Excess assumptions sometimes get in the way of inferences that could be made otherwise, and these assumptions ultimately hurt a model's usefulness. That being said, Some simplifying done by economists in advance is assuming that the market is perfectly competitive and helps the model become a good simplified depiction of reality. Therefore in simplifying models economists focus on what information is relevant to the problem at hand.

Describe the differences between Irving Fisher's equation of exchange and the modern "Friedman" equation. Why do the differences matter from the standpoint of monetary policy?

Fisher's original equation of the quantity theory of money was MV=PT with T being the total amount of transactions being carried out with the money supply. However, this equation did not account for independents making exchanges, nor did it account for government spending. Firedman therefore updated and modified the equation to account for these by replacing "T" with "Q" which stands for the total GDP. Obviously this is a key difference because it fully accounts for all spending, not just in a selected market.

Discuss the similarities and differences in the way the work of John R. Hicks and Paul Samuelson influenced the development of twentieth century economics.

Following his release of the IS/LM model, Hicks and later Samuelson sought to absorb Keynesian economics into neoclassical economic thought, the result being Neoclassical Synthesis. However their approaches were slightly different, in that Hicks did not prominently display and support his theories with mathematics, whereas Samuelsson made it the cornerstone of his theories.

Explain the specie flow mechanism that David Hume described. What are the implications of the specie flow mechanism for the policies advocated by the mercantilists?

Price specie flow mechanism, believed that it would be impossible for an economy to maintain a favorable balance of trade continuously as any mercantilists advocated. Balance of trade would increase and decrease levels of gold and silver.

Mandeville argued that morality and economics are different areas of inquiry, but how did he link together morality and prosperity?

He argued that all social virtues evolved from an instinct of self preservation; Mandeville however, linked morality and prosperity by condemning idleness. He also argued in favor of government control towards channeling activities toward social good. To Mandeville, this meant a laborious poor and exports exceeding imports for the creation of wealth.

Explain the key idea in Malthus's Essay on Population. Discuss the way in which this idea relates to Adam Smith's views on the future direction of economic progress and prosperity.

He believed that population would continue to grow, and resources would continue to shrink. Population growth would increase land rents due to scarcity of land. Malthus regarded ideals of future improvement in the lot of humanity with skepticism, considering that throughout history a segment of every human population seemed relegated to poverty. He explained this phenomenon by arguing that population growth generally expanded in times and in regions of plenty until the size of the population relative to the primary resources caused distress. Smith's allowance for wage increases in the short and intermediate term from capital accumulation and invention contrasted with Malthus, Ricardo, and Karl Marx in their propounding a rigid subsistence-wage theory of labor supply.

Discuss the main contributions to economics of Thorstein Veblen.

He was famous as a witty critic of capitalism. Veblen is famous for the idea of "conspicuous consumption." Conspicuous consumption, along with "conspicuous leisure," is performed to demonstrate wealth or mark social status. As a leading intellectual of the Progressive Era, Veblen attacked production for profit. His emphasis on conspicuous consumption greatly influenced the socialist thinkers and engineers who sought a non-Marxist critique of capitalism.

Heilbroner argues that land, labor, and capital, as marketable factors of production, have only existed for a few hundred years. Explain his reasoning, and discuss the degree to which his reasoning seems valid.

Heilbroner observed that capitalism and market economies allowed for industrialization to occur (specifically during the industrial revolution), even though a system of trade had been in place for thousands of years. Before IR, most commerce was done by sea, but during the industrial revolution, transportation and communication evolved, also before IR there wasn't much of a market for land since people held onto it for their families. Heilbroner was able to attribute the prosperity of the era to the free market and capitalism that fostered competition. An example of this was the Dutch east India trade that stock markets came into being and brought trade to a new era of capitalism. This competitiveness of this era also enabled major producers of the time to continue improving the products they sold to the general public. Therefore new advancements continued to take place and society was bettered as a whole.

What is meant by "heterodox economics? Discuss the influence of heterodox economists on the development of economic ideas.

Heterodox economics is a school of thought that is described as "revealed illegitimacy." Essentially this means the "flavor" was not recognized as mainstream; as a result it was contrasted from orthodox economics. Heterodox economists were needed to further economic thought and progress. W/o those outlets to push boundaries to see economics from another perspective the mainstream/orthodox would have never been presented with shortcomings or inconsistencies in their models. It was through heterodox economics that classical economists were able to emerge from the mercantilists, and the neoclassical were able to emerge from the classicals.

Explain David Hume's contributions to monetary theory and international finance. In the course of your discussion, describe the effects Hume would have expected from an increase in the quantity of money in a country. Explain the effects both in the country with the increased quantity of money and in other countries.

Hume created the idea of species-flow mechanism; this was the idea of 'international price adjustment.' What this meant for the increasing/decreasing of gold in a nation was that as the quantity of gold rises in one nation and decrease in another, the country with increasing species (gold) would contract inflation, as prices rose the buying of products from that nation would fall and the species would begin to flow in the nation with cheaper prices. Because of this the flow of money would remain balanced. A good example of this mechanism is the mercantilists who believed in holding as much gold and silver as possible, as their prices rose in relation to that of their competitors (i.e. france) the flow of species would shift, and vice versa.

What were John Locke's main contributions to economics, politics, and philosophy?

In his most important work, the Essay Concerning Human Understanding, Locke set out to offer an analysis of the human mind and its acquisition of knowledge. He offered an empiricist theory according to which we acquire ideas through our experience of the world. The mind is then able to examine, compare, and combine these ideas in numerous different ways. Knowledge consists of a special kind of relationship between different ideas. In politics, Locke is best known as a proponent of limited government. He uses a theory of natural rights to argue that governments have obligations to their citizens, have only limited powers over their citizens, and can ultimately be overthrown by citizens under certain circumstances. He also provided powerful arguments in favor of religious toleration.

What is Say's Law? Discuss the viewpoints on Say's Law held by David Ricardo and Thomas Robert Malthus. Did they agree or disagree? What were the arguments of each?

It is an economic rule that says that production is the source of demand. According to Say's Law, when an individual produces a product or service, he or she gets paid for that work, and is then able to use that pay to demand other goods and services.

What was the major lasting contribution that William Stanley Jevons made to economics? In developing his contribution, whose ideas did he say he was trying to overturn? Why was he trying to overturn them?

Jevons lasting contribution to economics was his theory of utility, where very extraneous units of a good have less value, which railed against the theories of David Ricardo who believed that value rested entirely on the production process, clearly the opposite of what Jevons believed to be the answer to "what determined value?" He made this distinction because he thought "philosophy would be found to consist solely in pointing out the likeness of things."

Compare and contrast the ideas of Menger, Jevons, and Walras, the three economists who are credited with initiating the marginal revolution in economics.

Jevons, Menger, and Walrus developed the theories of marginal utility almost simultaneously in the early 2oth century despite being geographically hundreds of miles apart from each other. Essentially their theories on marginalization rest with the focus on exchange rather than the production and distribution of goods. However their explanations for marginalization varied, with Jevons placing utility as his central theory of marginalization, leading to the creation of his theory of diminishing marginal utility (that consuming more of the same good will eventually result in a decline in marginal satisfaction). Menger disagreed, arguing that goods have value because they serve various uses that differ on importance. Walras argued that marginalization is achieved through equilibrium, and that not only consumer goods should be considered, but also land, labor, and capital. This lead to his development of the general theory of equilibrium.

Who developed the theory of surplus value? How is surplus value created?

Karl Marx came up with the surplus value, which is equal to the new value created by workers in excess of their labor-cost, which is appropriated by the capitalist as profit when products are sold.

Keynes argues that "animal spirits" control investors' decisions on how to allocate investment resources, resulting in irrational investment decisions and excessive volatility of investments. When Keynes then looks ahead, what does he expect to see happen to stabilize investment behavior in the future?

Keynes argued that investment from the private sector sometimes led to inefficient macroeconomic outcomes, thus a response from the public sector was needed, such as monetary policy actions by the central bank and fiscal policy actions by the government in order to balance out the inefficiencies.

What did Keynes think was the primary cause of the Great Depression? What policies did he advocate to return the economy to full employment?

Keynes believed the Great Depression was a result of a lack of government spending, thus he advocated that increased government spending would increase consumption and give rise to employment, as opposed to the classical economic belief that lower wages for workers would give rise to employment.

What is logical positivism? How does this relate to the falsificationism expressed in the writings of Karl Popper?

Logical Positivism was developed by members of the Vienna Circle. This form of positivism considers the only meaningful philosophical problems are those that can be solved by logical analysis. It also represented the idea that science is meant to establish "truth." Karl Popper wrote about the "verification" of logical positivism. He postulated that empirical tests do not "verify" a theory, only its falsity, and this is why his approach is sometimes called falsificationism.

While Ricardo and Malthus agreed on many things, they also disagreed in a few significant areas. Discuss those areas of disagreement, and explain which economist's argument had more merit in each case.

Malthus and Ricardo disagreed on the corn laws which prevented Britain from importing grain & corn. Malthus believed that the laws were good policy because it would increase domestic profit, Ricardo however disagreed because he took comparative advantage into account. Since Ricardo believed that land was scarce, he saw more land in different areas, he concluded that it would be more productive for nations to trade corn & grain. Ricardo and Malthus also disagreed on Say's Law, Ricardo believed that there were no gluts while Malthus saw evidence of these gluts in a subsistent world, he argued that their would need to be pure consumers, but the capitalists saved and workers did not have enough wealth to buy the necessary amount of goods, and because of this difficulties in fully employing resources.

Compare and constrast Joseph Schumpeter's view of profits with the view of Karl Marx. Where do profits come from? What causes them to decline?

Marx argues that profits originate from a "surplus value" in that capitalists earn their profit by exploiting the working class by not paying them equal wages for the hours they work. Schumpeter's view on profits is that profits originate from innovation and entrepreneurial activities. Marx argues that the decline in profits are a result of investment of technologies that replace physical capital and Schumpeter argues that decline in profit is a short-run result of creative destruction.

Karl Marx, Joseph Schumpeter, and Alfred Marshall all depict the origin and significance of profits differently. Compare and contrast their views on profits. How are profits created? What is their significance in the economy? Are profits desirable or undesirable? Why did these three economists view profits differently?

Marx believed profits originated from surplus value, in which the worker is paid less than the value of his hours worked with the capitalist keeping the difference. Schumpeter argued that profits were a result of innovation and entrepreneurial activities within the market place. Marshall argued that there are two types of profits "normal Profits" that come from routine administrative work carried out by managers, and extraordinary profits that come from entrepreneurs through their own innovations in the marketplace. Whereas Marshall and Schumpeter see these profits as beneficial to the marketplace, Marx believes these profits only justify his theories on the exploitation of labor, seeing the capitalists as greedy figures that take what is not rightfully theirs.

Carl Menger argued that costs are subjective. What does this mean? What alternative to subjectively-determined costs was Menger arguing against? When Alfred Marshall argued that the value of a good is determined by both supply and demand, does this suggest that Menger was wrong about the subjective nature of costs? Discuss the relationship between Marshall's and Menger's ideas on this subject.

Menger believed that instead of possessing units of utility, good's values instead were determined by their varied use of importance. The ideas of Menger and Marshall are actually closely aligned, in that Menger's subjective theory of value claims that both supply and demand benefit from exchange. Menger was simply pointing out that some goods are more valuable than others and thus in a barter economy, it is difficult to trade a lesser good for the perceived greater good, but the introduction of money is always an acceptable medium of exchange.

Explain Carl Menger's distinction between goods of the first order and higher- order goods. What determines the value of higher-order goods, according to Menger? Do you accept Menger's explanation? What is the alternative that Menger was arguing against?

Menger states that goods of lower or first-order are goods that presently have no worth, but that goods of high order represent the future value once these goods are applied to create a product for market. For example, ice in the winter time is a first order good because its use is considered worthless, but the inputs needed to create artificial ice in the coming warmer months, is a high order good due to its future value. Menger was arguing that the value of a finished good should not be determined on the value of the goods that were spent to get the finished product, with this I am cautious to agree with Menger, despite the future earning potential of a good being essential to its success in the market, everything done prior to its introduction can be seen as investment, which always draws and opportunity cost, and investment must be taken into account when valuing a good.

Describe the policies the mercantilists advocated, and discuss how those policies would affect a nation's economy. Why would they have argued for such policies?

Mercantilists advocated for protectionism. Historically, protectionism was associated with economic theories such as mercantilism (that believed that it is beneficial to maintain a positive trade balance), and import substitution. They argued for these policies because They measured wealth by how much precious material was in their possession, and they thought trading it away would make them less wealthy.

Ludwig von Mises argued that "Economics is the youngest of the sciences." What was his argument? Does this argument appear true, or is it just an exaggerated claim of an economist?

Mises argued that laws of social world interact like that the physical world, or that supply & demand would hold up in the same way as the law of gravity. Because of the visible progress of society, instruments recently have allowed for the study of these social properties.

What was Jean-Baptise Say's primary contribution to economics? Explain how his ideas were used and interpreted by later economists.

Say's law, or the law of markets, found in classical economics, states that aggregate production necessarily creates an equal quantity of aggregate demand. Keynes summarized Say's law as "supply creates its own demand", or the assumption "that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product." Keynesian economists, such as Paul Krugman, stress the role of money in negating Say's law: Money that is hoarded (held as cash or analogous financial instruments) is not spent on products. To increase monetary holdings, someone may sell products or labor without immediately spending the proceeds.

Joseph Schumpeter and Israel Kirzner both depicted entrepreneurship as a crucial economic activity, yet they had strikingly different interpretations of the role entrepreneurs play in the economy. Compare and contrast Schumpeter's and Kirzner's ideas on entrepreneurship.

Schumeter's entrepreneur is one who enters and innovates the market through their business practices, either with an entirely new concept or an improving upon an already existing concept. Schumpeter saw the entrepreneur as a destructive force in the economy, leading to is views on "creative destruction." Kirzner's entrepreneur is the opposite, an equilibriating force in the market that discovers previously unnoticed profit opportunities until competition eliminates these profit opportunities.

One can make the argument that the modern market economy only came into being within the past 300 years, when land, labor, and capital began being viewed as marketable factors of production. Yet trade has existed for thousands of years. Explain the reasoning behind this argument, and discuss the degree to which this reasoning seems valid.

Since most trade more than 300 years ago was rarely inter or even intra-national and more centered around where the goods and services were created, it was almost impossible for a market driven economy flourish.

Discuss the influence that Sir William Petty had on the key ideas of Adam Smith and Thomas Robert Malthus. Were Smith and Malthus in agreement with Petty, or did they argue against him?

Sir William Petty believed in a laissez faire economy, and that barriers to trade were harmful to the prosperity of a nation. He warned about gov't who interfered too much in an economy, and that restricting the flow of specie was harmful. Petty believed the division of labor as a factor making goods both better quality and cheaper. (watch vs. pin factory example). He also created a model for population growth that looked at growth backwards. Ricardo agreed with Petty's ideal of comparative advantage and Malthus used Petty's model on population growth to influence his exponential growth idea.

How does Adam Smith argue that college teachers should be compensated? Briefly explain the logic behind his argument.

Smith's argument was straightforward. The institutional failure of universities such as Oxford guaranteed "large salaries" to professors, rendering them "altogether independent of the diligence and success in their professions." In contrast, at Scottish universities the salaries were fairly small, and professors depended on course subscriptions for the majority of their income. At Glasgow, students paid tuition to gain access to the university, but they also paid honoraria to their particular professors. The fees were small, but taken together, they provided a substantial part of a professor's income, giving him a strong incentive to become a superior teacher. Smith saw in this system the institutional secret to Scotland's success, and he encouraged its export to universities across Europe.

What is the idea behind the "single tax?" Whose idea was it? What is the basis of the idea? What influence did it have?

The "single tax" is a system, established by Henry George, that is based on using a singular, land value tax. George believed land to be public property, and by solely taxing land, the need to tax on productive activities would cease. The use of a single land tax remains a favored policy among environmentalists and a central component to the US Green Party's economic platform.

Who were the physiocrats? What were their main ideas, and how do the policy ideas of the physiocrats compare to those of the mercantilists?

The Physiocrats believe that its wasn't how much gold and silver you had, but the productivity. How much land you had and how much you could produce with the land was how they recognized wealth. On the other had the Mercantilists believed that it was all about the collection of gold and silver (precious medals).

Explain the diamond-water paradox. Who originally posed the paradox? How do economists resolve it? Who came up withultimately resolved it with the answer economists accept today?

The diamond/water paradox poses the question of why water which is needed to live has much less value than diamonds, which are not necessary for survival but have much greater value. Adam Smith proposed the paradox, he spoke of two different types of value that these goods held. He used the terms 'value in use' and 'value in exchange'. Smith proposed that while water had a greater value in use, diamonds held greater value in exchange. This theory helped to propose 'labor theory of value' in which the value of a good is determined by the time comprised producing that good.

What is the first subject Adam Smith discusses in The Wealth of Nations? Why is this significant?

The first subject was that a nations wealth is dependent on the division of labor. This is significant because even though it was the first sentence, it was the thesis for his entire work. He foresaw the essence of industrialism by determining that division of labour represents a qualitative increase in productivity.

Who were the scholastics? When did they write, who were the most important scholastic writers, and what were the main ideas they developed?

The scholastic writers were educated monks. They wrote religious guidelines to be applied to secular activity. The most important scholastic writer was St. Thomas Aquinas. Aquinas developed ideas on private property rights, just price and usury. Aquinas's masterwork Summa Theologica, considered to be the pinnacle of scholastic, medieval, and Christian philosophy, began while Aquinas was regent master at the studium provinciale of Santa Sabina in Rome. It was intended as an instructional guide for theology students, including seminarians and the literate laity. It was a compendium of all of the main theological teachings of the Catholic Church.

Discuss the views of the mercantilists related to raw materials. How did raw materials, both produced domestically and abroad, fit into their system?

The mercantilist believed that all raw materials in a country should be used in domestic manufacturing; also they believed that every inch of a country should be used for manufacturing, agriculture, and mining. They believed the exporting of gold and silver should be prohibited, and that import of foreign goods be discouraged as much as possible. They wanted imports to be raw materials that could be finished at home.

What were the key policy ideas of the mercantilists? Explain the logic of the mercantilist ideas, and discuss whether their policies were oriented toward creating wealth and prosperity. What was it that motivated the mercantilists to support their ideas?

The mercantilists were English businessmen who were motivated by success and profits. Because of this they had several key policies that they believed would help them achieve this. The mercantilists viewed raw materials as something that should be imported only if absolutely necessary, and if imported that these goods should be bartered for (instead of using gold & silver), and that goods exported should be paid for in gold and silver. These goods could ultimately be used for the finishing of products on domestic soil. What should be exported, however were finished goods and that every inch of soil be used to produce these goods. Mercantilists wanted to create a trade surplus through having exports exceeding imports, or constantly seeking a surplus balance of payments. They believed in the accumulation gold and silver (bullion) and in the maintaining of this bullion in ones own nation was on what prosperity was dependent. The mercantilists also saw a large working population as a necessary to keep jobs on domestic soil and in order to increase the amount of finished goods for trade.

Ricardo identified the three economic factors of production as land, labor, and capital. What determines the payments made to each factor? As an economy progresses, describe how Ricardo expected that payments to each of these factors would change.

The payments made to land labor and capital are rent, wage, and profit. Ricardo believed that rent did not need to be paid in order for land to be productive, this was contrasted to wage which needed to be paid for laborers to be attractive. Ricardo said that as exponential population growth occurred, the land becomes overworked and food prices rise, because of this the subsistence wage of a worker must also grow.

Who were the physiocrats? What were their main ideas, and how do the policy ideas of the physiocrats compare to those of the mercantilists?

The physiocrats were french economists who believed that the wealth of nations was derived solely from the value of agriculture or land development. In addition the physiocrats believed that agricultural products should be highly priced, whereas the mercantilists were more inclined to measure wealth by the amount of physical riches you were able to obtain (such as silver and gold.) The physiocrats were the first school of economic thought to see labor as a main source of value.

What were the main contributions to economics of Sir William Petty?

To him is attributed 'Laissez-Faires' which is an economic system in which transactions between private parties are free from government interference such as regulations, privileges, tariffs, and subsidies.

Some have criticized economic models for being overly simplified, and unrealistic. Discuss the role of simplifying assumptions in economic models, and consider both the advantages and disadvantages of simplifying and unrealistic assumptions.

The simplification of the economic model is a by product of the marginal revolution in that it gives economists the ability to approach economics from a top-down approach, but impairs their vision to see economics on the whole. This criticism is exemplified by Friedrich Hayek's argument that it is impossible to full account for all market forces in a singular economic plan.

The mercantilists advocated protectionist policies that most economists today would argue reduce a nation's prosperity. Why would they have argued for such policies?

They did not think that trading away gold and sliver would make them wealthier. Wealth is valued by how much gold and silver you have. So trading it away would be trading wealth away. (Protectionism is the economic policy of restraining trade between states (countries) through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow (according to proponents) fair competition between imports and goods and services produced domestically.)

How has the theory of value evolved over the past three centuries? Consider the ideas of the mercantilists, physiocrats, Adam Smith, Ricardo, Marx, and Marshall (and others if you want) in developing your answer.

Value to the merchantalists surrounded the idea of the accumulation of gold and silver, or how much bullion a nation had determined their well-being. The physiocrats saw value in the land and what resources could be created through agriculture. Smith argued that value was created through the division of labor which ultimately increased capital and broadened the extent of the market (which is ever extending) Ricardo however, saw a good only being as valuable as the labor embodied in the good, or the Labor Theory of Value. Karl Marx agreed with Ricardo about the value of a good being determined by labor embodied (value was determined by supply side input), but also developed his own ideas with The Surplus Theory of Value. Marx believed that as workers created value in excess of their labor costs, that this value was appropriated by capitalists as profit. Alfred Marshall viewed the Labor Theory of Value as being oriented on supply, and argued that the value of a good is determined by both supply and demand. Instead, Marshall argued, we should be more focused on how these market forces work to keep the market in equilibrium and specifically what the properties of equilibrium are.

The ideas of Thorstein Veblen, Wesley Clair Mitchell, and John R. Commons are often linked together. Explain both what they had in common, and discuss each individual's ideas to illustrate their differences.

Veblen, Mitchell, and Commons are all main contributors to institutional economics. All followed the beliefs of the school, examining how the evolutionary process and the role of institutions shaped economic behavior. Using these principles to guide them, they each analyzed a different aspect of the American economy, Veblen focusing on the unnecessary waste of wealth and resources to demonstrate one's own personal success, Commons proposed his theory that the economy is in-fact a complicated web of social interaction and relations built through these interactions, giving the incentive for all players to work cooperatively to advance each other's interests, and Mitchell for his empirical work on business cycles and leading the National Bureau for Economic Research in its early decades.

Explain the main contributions of Eugen von Bohm-Bawerk, and explain how those ideas laid the foundations for later theories developed by Ludwig von Mises and Friedrich Hayek.

Von Bohm-Bawerk introduced the concept of time in the production process, stating that production will become more efficient through more complex interaction that yields higher return (digging a hole with hands is not as efficient as taking time to collect raw materials to build shovel), as well as being famous for his criticisms of Marxism which have yet to be refuted today. His work paved the way for later economists such as Ludwig von Mises and Friedrich Hayek to develop their theories of praxeology and the economic calculation problem respectively

Over the past three centuries, economics has been preoccupied by a different main issue in each century. Briefly review the issues that dominated economics in each century, explain how the issues arose, and why the profession moved on to new issues.

Wealth exists in the productive knowledge of its people. The ability to efficiently transform resources (factor inputs) into desired goods and services represents the true source of a nation's wealth. Economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured relative to units of currency. economic equilibrium is a state where economic forces such as supply and demand are balanced and in the absence of external influences the values of economic variables will not change. For example, in the standard text-book model of perfect competition, equilibrium occurs at the point at which quantity demanded and quantity supplied are equal.

What were the main contributions of Jeremy Bentham to economics? How did Bentham's work influence the development of economic ideas?

measured happiness by utility, measuring rod of money. He thought that if society could measure pleasure and pain, then laws could be created that would result in the greatest amount of happiness for the greatest number of individuals. Wanted to design laws that would lead to the greatest good for the greatest number. His work influenced Mills and others to unite theory and policy.

Compare and contrast the views of the mercantilists and the physiocrats on the subject of policies that can make nations more prosperous. Discuss their views on the role of natural resources on wealth creation, and on the public policies they recommended to enhance a nation's wealth.

• Mercantilists believe goods should be finished at home using raw materials & exported; they believed that if anything were imported it should be raw materials (paid for w/bartering and not gold & silver) It promoted governmental regulation of a nation's economy for the purpose of augmenting state power at the expense of rival national powers. • Physiocrats were all about wealth creation coming from the land, they believed that wealth was not measured by gold & silver but what could be produced- products for consumption and physical crops. It is characterized chiefly by a belief that government policy should not interfere with the operation of natural economic laws and that land is the source of all wealth. It is generally regarded as the first scientific school of economics.