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Described by Adam Smith in explaining trade
when one nation has an absolute advantage in the production of one commodity and another nation has an absolute advantage in another, each gain by specializing in the commodity that costs least to produce and trade. Shown by Ricardo in explaining comparative advantage
differs because it only uses labor as an input |
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| Abstinence theory of interest |
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Definition
the money used for lending purposes is the money not used for consumption.
it should be allowed to earn interest since a person has to "abstain" from products now for products later.
makes funds available for borrowers.
Nassau Senior
disutility as a real cost of production (not utilizing and saving)
to produce capital goods, someone must abstain from consumption and capitalist will not abstain unless he is rewarded for his pain. |
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is the difference between exports and imports in an economy
net exports or NX
mercantilists wanted a positive trade balance to keep gold coming in |
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argued that more flexible monetary policy was needed and that as long as the Real Bills Doctrine was followed by banks, no control over bank notes was needed.
Mill argued that Banking School was correct during normal times when markets were quiet |
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| Banking school/Currency School debate |
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extension of Bullion Debate
Currency school carried through the Bullionist position |
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| argued that mixed paper and gold standard should be subject to unbending rules and operate just as a struct gold standard would |
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Ricardo's view on Say's Law
Debate over high inflationary rate due to Napoleonic wartime inflation
Bullionists argued that inflation was due to the monetary expansion that occurred during the wars.
Anti-bullionists maintained that the causes of the inflation were more complicated but included harvest failures and favored the Real Bills Doctrine
Ricardo was a Bullionist |
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| the doctrine that if the issuance of money were related to short-term financial commercial operations (such as the financing of inventories), there could be no overissuance of money. |
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all other things being equal or held constant
keeps one thing constant to analyze its effects on others. |
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ricardo and mill worked on it
happens when one country is more efficient in the production of all commodities
comparing the relative productivities of both countries
opportunity cost is the important thing in comparative advantage |
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| output increases by that same proportional change. |
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| the utility for consumers by being able to purchase a product for a price that is less than the highest price they would be willing to pay. |
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import tariffs designed to protect grain prices in UK
a source of mercantilism and protectionist
Ricardo, Malthus, West and Torrens forumulated the concept of diminishing returns
Ricardo disagreed with the Corn Laws and disagreed that high grain prices were the cause of high rents
first argument was Corn Laws squeeze profits and reduce investment and growth.
Second argument - import constraints on corn reduce local consumer benefits. |
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| cost of production theory of value |
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Definition
Adam Smith
depends on the payments to all the factors of production: land, capital and labor.
total cost of production is thus wages, profits and rent
long-run natural prices emphasize supply and cost of production |
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| helped to create two imporant fields: general equilibrium theory and econometrics |
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argued that the excessive issuing of banknotes was the major cause of price inflation.
Mill's monetary theory fit between the banking and currency schools
Mill believed that during speculative financial booms, currency school's policy of tying issuance of notes to gold was the appropriate policy. |
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adam smith to explain why the price we are willing to pay for a commodity doesn't neccessarily depend on its usefulness.
it depends in comparison to the value we place on its marginal utility and not total utility.
Diamonds have high price, litle utility, water has low price but high utility. |
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| diminishing marginal utility |
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Definition
Menger, Jevons and Walras assumed what it is now considered
states that as a consumption of a goodincreases, its marginal utility decreases.
based on the assumption that whatever marginal utility is, it can be measured
more likly to give up one thing than another if you have consumed more of it |
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studied by Malthus and Ricardo
refers to the rogressive decrease in the marginal output of a production process as the amount of a single factor of pruction is increased holding all other factors of production constant
used in Ricardo as additional workers harvesting on land. after a point, an additional worker creates a negative surplus.
Applied to the study of rent for Ricardo |
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derogatory name given for economics by Thomas Carlyle
Carlyle gave it the name in response to Thomas Malthus's view that starvation would result as projected populaton growth would exceed the rate of increase in food supply |
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brought up by Adam Smith
division of labor increases the productivity of labor
led to specialization
social disadvantage is that workers are given repetitious tasks that soon become monotonous.
human beings become machines
due to the accumulational of capital |
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corresponds to the number of usable inputs that are in some sense employed. For example, hiring an additional worker would increase an extensive margin.
Refers to employed and unemployed in workforce |
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corresponds to the amount of use extracted within a given extensive margin. For example, reducing required production from a given set of workers would decrease the intensive margin.
in workforce, intensive margin are people already in the workforce |
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Adam Smith on division of labor
depends on the extent of the market and accumulation of capital.
means the size of the market in determining the size of division of labor.
small markets can only produce small division of labor |
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| euthanasia of the rentier |
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Definition
A rentier is an individual who lives on interest income (rent) received in compensation for the loan of property held in the form of money, not to be confused with landowners who receive rent paid for the loan of property in land.
Keynestheory focused instead on the advantages that rentiers would find in holding liquid assets rather than in financing employment-creating investment in periods where they felt threatened by uncertainty over the future value of their income and capital. |
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| take most fertile land first |
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price determined at margin for agricultural goods
at margin there is no rent, just labor, direct and indirect |
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Supply creates its own demand.
Income = output.
No hoarding because money is sterile. |
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Marshall's technique to analyze complex problems.
Isolate a part of the economy for analysis, ignoring but not denying the interdependence of all arts of the economy.
called "one-thing-at-a-time-method" |
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a tendency for profits to rise at fixed wages
but profit could fall if wages rise
had major impact on debates about Marx's theory of value.
understood as saying that if one capitalist raises his profits by introducing a new technique that cuts his costs, the collective rate of profit in society goes up. |
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Definition
value produced in final goods or whether final goods determined the values of the factors of production.
marginal utility school asserted that factors of production were valuable but that the extent of their value was determined by the marginal utility received from consuming the final products |
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| functional distribution of income |
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Definition
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is when supply exceeds demand.
there is more production in all fields in comparison to the ability to consume
it helps in recessions and depressions with underutilization of resources |
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Menger, Jevons, Walras and Marshall.
applying marginal analysis to the theory of value and distribution |
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| hypothetical-deductive method |
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| proposed description of scientific model |
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Henry Moore wrestled with
what is the significance of the data observed?
can a person identify how the data observed were generated in the economy? |
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heterodox study.
veblen
charged orthodoz theory with containing normative or ethical judgements that it attempted to hide by pretending to develop positive science.
all writers called for more governmental intervention in markets than do orthodox economists |
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thomas aquinas
based on argument against usury or extreme interest |
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| labor command theory of value |
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adam smith's second theory of value
the value of a good "to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labour which it can enable them to purchase or command"
ex./ requires two hours to capture one beaver or two deer, two deer = one beaveer in the market |
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| labor cost theory of value |
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Definition
adam smith's first theory of value
the exchange value, or price of a good in an economy, is determined by the quantity of labor required to produce it.
difficult to determine because of efficiency of workers cannot be evened out |
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environment where transactions between private parties are free from state intervention
colbert. precursor to invisible hand |
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one foot in mercantilism nd the other into classicalism.
Hume and Cantillon |
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no fixed factos and price = total cost
profit = zero |
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| malthus's population thesis |
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| population outpaces food supply so the population will get checked by disease and famine |
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| change in total cost that arises when the quantity produced changes by one unit |
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neoclassical economics
extra output that can be produced by using one more unity of the input |
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| a period of time in which all inputs in the production process are fixed and the output itself is fixed. |
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thomas mun, david hume
between 1500-1750.
work of merchant businessmen
tried to determine the best policies for promoting the power and wealth of a nation
wealth in the world is fixed
gain of one is the loss of another
positive balance of trade between nations |
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controversy over method between the institutionalists and the orthodoz theorists.
practictioners were so convinced of their correctness that they didnt consider other approaches |
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critical view of his own society where individual happiness was low.
might be a desirable place if economic activity decreased and more attention paid to well being of the individual |
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critical view of his own society where individual happiness was low.
might be a desirable place if economic activity decreased and more attention paid to well being of the individual |
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| Aquinas addressed Aristotle's natural law where a law from nature for man |
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| economics based on what should be and not numbers. value judgement away from positive |
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