International Economics Theory and Policy 8th Edition PDF.12: A Review and Analysis

This text strives to reach a median between these two approaches. First, I believe that students need to learn the theory and models to understand how economists understand the world. I also think these ideas are accessible to most students if they are explained thoroughly. This text presents numerous models in some detail, not by employing advanced mathematics, but rather by walking students through a detailed description of how a model's assumptions influence its conclusions. Second, and perhaps more important, students must learn how the models connect with the real world. I believe that theory is done primarily to guide policy. We do positive economics to help answer the normative questions; for example, what should a country do about its trade policy or its exchange rate policy? The results from models give us insights that help us answer these questions. Thus this text strives to explain why each model is interesting by connecting its results to some aspect of a current policy issue. A prime example is found in Chapter 11 "Evaluating the Controversy between Free Trade and Protectionism" of this book, which addresses the age-old question of whether countries should choose free trade or some type of selected protection. The chapter demonstrates how the results of the various models presented throughout the text contribute to our understanding of this long-standing debate.

Economists have had an enormous impact on trade policy, and they provide a strong rationale for free trade and for removal of trade barriers. Although the objective of a trade agreement is to liberalize trade, the actual provisions are heavily shaped by domestic and international political realities. The world has changed enormously from the time when David Ricardo proposed the law of comparative advantage, and in recent decades economists have modified their theories to account for trade in factors of production, such as capital and labor, the growth of supply chains that today dominate much of world trade, and the success of neomercantilist countries in achieving rapid growth.

international economics theory and policy 8th edition pdf.12

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From the time of Adam Smith in 1776 to the launching of the GATT in 1947, economic theory of trade evolved fairly slowly. Since the GATT was launched in 1947, however, there have been a number of significant modifications to the traditional Western economic theory of international trade. These modifications largely update the basic theory of trade to reflect the new realities of industry and commerce.

Under trade based on product differentiation and economies of scale, several countries may produce the same product broadly defined and trade parts and differentiated products with one another. Thus, the United States might specialize in producing Jeeps, and Europe might specialize in producing Volkswagens. Clearly, a great deal of production in modern developed country economies is in industries that experience increasing returns to scale, and in these industries returns to factors of production would not tend to equalize as a result of international trade. In fact, returns to labor in a labor scarce economy might well increase, rather than decrease, as would be predicted by the factor price equalization theory.

In economic theory, if factors of production are fully mobile, the costs of all factors of production that could move across borders would result in equal costs in all trading countries. This would mean that the basis of comparative advantage for trade between countries would diminish and there would ultimately be less international trade.

Other broad distinctions within economics include those between positive economics, describing "what is", and normative economics, advocating "what ought to be";[4] between economic theory and applied economics; between rational and behavioural economics; and between mainstream economics and heterodox economics.[5]

Jean-Baptiste Say (1803), distinguishing the subject from its public-policy uses, defined it as the science of production, distribution, and consumption of wealth.[29] On the satirical side, Thomas Carlyle (1849) coined "the dismal science" as an epithet for classical economics, in this context, commonly linked to the pessimistic analysis of Malthus (1798).[30] John Stuart Mill (1844) defined the subject in a social context as:

Some subsequent comments criticized the definition as overly broad in failing to limit its subject matter to analysis of markets. From the 1960s, however, such comments abated as the economic theory of maximizing behaviour and rational-choice modelling expanded the domain of the subject to areas previously treated in other fields.[36] There are other criticisms as well, such as in scarcity not accounting for the macroeconomics of high unemployment.[37]

According to economist Ha-Joon Chang economics should be defined not in terms of its methodology or theoretical approach but in terms of its subject matter. Ha-Joon Chang finds a definition like "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses" very peculiar because all other sciences define themselves in terms of the area of inquiry or object of inquiry rather than the methodology. In the biology department, they don't say that all biology should be studied with DNA analysis. People study living organisms in many different ways, so some people will do DNA analysis, others might do anatomy, and still others might build game theoretic models of animal behavior. But they are all called biology because they all study living organisms. According to Ha Joon Chang, this view that you can and should study the economy in only one way (for example by studying only rational choices), and going even one step further and basically redefining economics as a theory of everything, is very peculiar.[39]

Questions regarding distribution of resources are found throughout the writings of the Boeotian poet Hesiod and several economic historians have described Hesiod himself as the "first economist".[40] However, the word Oikos, the Greek word from which the word economy derives, was used for issues regarding how to manage a household (which was understood to be the landowner, his family, and his slaves[41]) rather than to refer to some normative societal system of distribution of resources, which is a much more recent phenomenon.[42][43][44] Xenophon, the author of the Oeconomicus, is credited by philologues for being the source of the word economy.[45] Other notable writers from Antiquity through to the Renaissance which wrote on include Aristotle, Chanakya (also known as Kautilya), Qin Shi Huang, Ibn Khaldun, and Thomas Aquinas. Joseph Schumpeter described 16th and 17th century scholastic writers, including Tomás de Mercado, Luis de Molina, and Juan de Lugo, as "coming nearer than any other group to being the 'founders' of scientific economics" as to monetary, interest, and value theory within a natural-law perspective.[46]

Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it". Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.[65] Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of any market economy to settle in a final stationary state made up of a constant stock of physical wealth (capital) and a constant population size.

A body of theory later termed "neoclassical economics" or "marginalism" formed from about 1870 to 1910. The term "economics" was popularized by such neoclassical economists as Alfred Marshall and Mary Paley Marshall as a concise synonym for "economic science" and a substitute for the earlier "political economy".[24][25] This corresponded to the influence on the subject of mathematical methods used in the natural sciences.[70]

Neoclassical economics systematized supply and demand as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income. It dispensed with the labour theory of value inherited from classical economics in favour of a marginal utility theory of value on the demand side and a more general theory of costs on the supply side.[71] In the 20th century, neoclassical theorists moved away from an earlier notion suggesting that total utility for a society could be measured in favour of ordinal utility, which hypothesizes merely behaviour-based relations across persons.[72][73]

In microeconomics, neoclassical economics represents incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded.[72] In macroeconomics it is reflected in an early and lasting neoclassical synthesis with Keynesian macroeconomics.[74][72]

Neoclassical economics is occasionally referred as orthodox economics whether by its critics or sympathizers. Modern mainstream economics builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as econometrics, game theory, analysis of market failure and imperfect competition, and the neoclassical model of economic growth for analysing long-run variables affecting national income.

Keynesian economics derives from John Maynard Keynes, in particular his book The General Theory of Employment, Interest and Money (1936), which ushered in contemporary macroeconomics as a distinct field.[76] The book focused on determinants of national income in the short run when prices are relatively inflexible. Keynes attempted to explain in broad theoretical detail why high labour-market unemployment might not be self-correcting due to low "effective demand" and why even price flexibility and monetary policy might be unavailing. The term "revolutionary" has been applied to the book in its impact on economic analysis.[77] 2ff7e9595c