Posts Tagged ‘Macroeconomics’


Biersteker (1995) explores apparent triumph of liberal economic ideas in the developing world by concentrating on the nature of change in economic thinking. According to this article dramatic changes in economic thinking in developing countries took place mainly during the period of 1980s and 1990s. Differences in perceptions between countries and their impact on implementing liberal economic ideas are stressed by Biersteker (1995) to explain variations on the levels of economic liberalisation amongst Latin American countries. Biersteker (1995) offers an interesting account of the impact of liberalism on developing countries. Specifically, Biersteker (1995) discounts the impact of following four factors in facilitating change in economic thinking – perception of superiority of liberal ideas by developing countries, exercise of power by international financial institutions such as IMF and the World Bank, intensifying forces of globalisation, and collapse of socialism. Instead, Biersteker (1995) offers explanation for change in economic thinking from four different perspectives: ideational, systematic, domestic interest, and international institutional perspectives. A noteworthy shortcoming associated with this approach is associated with being overly idealistic. While the author accepts this fact by stating that “each of these should be considered as an idealised construction” (Biersteker, 1995, p.181), nevertheless, the idealised approach undermines the level of practical relevance of the work. Reyes and Sawyer (2011) offer an alternative approach to the work of Biersteker (1995) by identifying perception of superiority of liberal ideas as the most significant factor fuelling change in economic thinking in developing counties during the last three decades of the last century.   References Biersteker, T.J. (1995) “The “triumph” of liberal economic ideas in the developing world” in Global Change, Regional Response: The New International Context for Development, editor Stallings, B., Cambridge University Press Reyes, J.A. & Sawyer, C.W. (2011) “Latin American Economic Development” Taylor & Francis


By John Dudovskiy
Category: Economics

Great Depression is rightly perceived as the main stimulating factor behind the emergence of Keynesian framework and ISLM model and the model proved effective to deal with the crisis to a certain extent.  However, a set of significant shortcomings associated with ISLM model such as neglecting expectations, static nature of the model, unrealistic closed-economy assumption, assuming prices to remain fixed etc. have led to the evolution of alternative models. Proposed by Robert Mundell and Marcus Fleming, the Mundell-Fleming model represents an economic model that explains the nature of relationship between the nominal exchange rate and the output of the economy in the short run. Traditionally, this model has been used to justify the argument that maintenance of fixed exchange rate, movement of free capital and independent monetary policy in a simultaneous manner is impossible to achieve. The main difference between Mundell-Fleming model and ISLM model relates to the fact that while ISLM model is effective under a closed-economy, Mundell-Fleming model attempts to analyse an open-economic system. In other words, unlike ISLM, impacts of international finance and international trade are acknowledged in Mundell-Fleming model. Different countries respondent the global economic crisis of 2007 – 2009 differently taking into account unique set of internal and external factors, however, macroeconomic responses to the crisis by many developed counties can be effectively explained with the use of ISLM model. Dramatic decline in the level of consumer spending which also caused the decline of consumer confidence in markets has facilitated the shift of IS curve in ISLM model to the left. Range of responses by governments to this event included reducing the level of interest rates significantly. For example, interest rates were reduced in US, UK and Japan to 0.25 per cent, 0.5 per cent and 0.1 per cent respectively. Reduction of the level of…


By John Dudovskiy
Category: Economics

Pure monopoly refers to a situation where there is only one firm offering a specific type of product or service. However, instances of pure monopoly are very rare in modern markets due to the intensified level of globalisation of economies and anti-monopoly rules and regulations introduced by governments. Working monopoly refers to a situation where any company possesses more than one fourth of the market share. Certain firms are able to attain monopoly in the market due to possession of scare resources, special government grants under certain circumstances, possession of patents for innovations or as a result of merger of two or more large companies in the industry. Achievement of profit maximisation objective is easier by monopolistic firms compared to other market structure due to the lack of competition. In simple terms, consumers have no choice but to purchase products offered by monopolist firm due to the lack or even absence of alternative products in the market. Price discrimination can be divided into three categories: first degree, second degree, and third degree. First degree price discrimination is associated with inelastic markets where a certain business entity is in the position of pricing its products at different levels, at the same time selling to the whole market without competition, which is rare in practical levels. As it is illustrated in figure below, second degree price discrimination relates to elastic market where businesses offer different amounts of their products for different prices. Lastly, the third degree of price discrimination marks the case of combined market where different prices are set for different groups of consumers. Businesses can engage in price discrimination only if they possess certain degree of monopoly. In other words, monopolistic businesses use price discrimination strategies in order to increase the levels of abnormal profits. The degree of price discrimination…


By John Dudovskiy
Category: Economics

Perfect competition can be defined as a situation “in an industry when that industry is made up of many small firms producing homogeneous products, when there is no impediment to the entry or exit of firms, and when full information is available” (Baumon and Blinder, 2011, p.200). Market structure can be specified as perfect competition if the following conditions or assumptions are met: Firstly, there are many supplies in the market and each supplier has an insignificant market share. In other words, no single supplier is in the position of impacting price through manipulations with its supply of products. Secondly, there are no major differences between products offered by suppliers and these products can be consumed as substitution for each-other. To be more specific, even when there are certain differences between products in the same industry, they are identical in consumer perception. Thirdly, consumers are fully aware about costs charged by all suppliers. This situation has implications in a way that a certain supplier decides to increase its prices; the levels of its revenues will decline because of consumers switching to other suppliers. Fourthly, the level of access to various resources is equal for all suppliers. Moreover, all participants in the industry can benefit from breakthroughs and other positive changes in the industry in an equal manner. Fifthly, industry entry and exit barriers for suppliers are insignificant. In other words, new suppliers can join competition at any time with implications on the levels of profits of existing suppliers. Sixthly, there is no divergence between private costs and social costs, as well as, benefits due to the absence of externality in manufacturing and consumption. Six main assumptions associated with perfect competition market structure discussed above have certain implications on profit maximisation attempts of businesses. Outcome of interaction between supply and demand…


By John Dudovskiy
Category: Economics

Burke (2012) links the impacts of the global economic crisis of 2008-2010 with spending cuts on education system by the UK government. Chalabi and Arnett (2013), on the other hand, make an interesting observation related to the issue. Specifically, according to Chalabi and Arnett (2013), the levels of GDP in the UK decreased by 2 per cent between 2008 and 2010, whereas the levels of public expenditure on education have increased by 8 per cent during the same period. A large-scale survey conducted by Education Institution (2009) has attempted to assess impacts of the global economic crisis on education in 48 countries, including the UK. Infrastructure, human resources (HR), and other needs of the UK education system have been found as a result of the survey. Infrastructure needs of UK education system, according to Education Institution (2009) relates to necessity to rebuilt primary schools. Other needs are found to relate to funding for high quality continuing professional development of teachers and challenges associated with reforming curriculum and qualification system. However, it is important to note that Education Institution (2009) findings only relate to education in public sector, and the level of relevance of data to private sector educational institutions are yet to be established. Burke (2012) considers dramatic reduction of numbers of graduate employment schemes offered by multinational companies in 2009 as the direct impact of the global economic crisis. Although, this argument appears to be convincing, Burke (2012) fails to back-up the claim through referring to relevant statistical data. Vaitilingam (2010) points to the risk of lifetime earning loss for a generation of graduates that join full-time workforce during or immediate aftermath of recession. According to Vaitilingam (2010), this situation may occur due to rapid increase in the supply of graduates compared to jobs caused by cuts on graduate…


By John Dudovskiy
Category: Economics

Free trade can be defined as “a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports)” (Britannica, 2014, online). In simple terms, free trade can be explained as an absence of government intervention to the practices of selling to and buying from another country. Promoted by famous economist Adam Smith and David Ricardo, perceived advantages of free trade include benefits to be gained from specialisation practices engaged by countries according to their competitive advantages. This benefit based on theoretical frameworks of absolute advantage and comparative advantage. Specifically, according to the theory of absolute advantage proposed by Smith (1976), countries are perceived to have absolute advantage in producing a product if the production is facilitated in the most efficient way than other countries. Comparative advantage proposed by Ricardo (1817), on the other hand, refers to “the ability to produce a specific product more efficiently than any other product” (Pride et al., 2011, p.70). According to theories of absolute advantage and comparative advantage focus on manufacturing products that can be produced more efficiently than other countries and trading these products for other products with different countries generates more economic gain and value compared to attempts to diversify production within a single country. A basic classical example of trade of two products between two countries found in the most economics textbooks illustrate the advantage of free trade in the most effective manner. Moreover, free trade encourages competition in the market, motivating local producers to find and utilise sources for competitive edge on a constant basis, and high level of competition in the market offers benefits to consumers in terms of more variety of products and services, higher quality, and competitive prices. Another advantage of free trade can be specified…


By John Dudovskiy

The “Open Doors Policy” or the economic reformations of the late 1970s in China enormously changed the entire economy of the country. The trade reformation which focused on liberalizing the trade which shifted the country a step closer to free market attracted huge foreign capital into the country in the form of FDI since 1978. The huge scarce resources of China had to be utilized soon after the reformations which indeed required huge capital. However,China heavily relied on the external funds in order to promote its manufacturing industry and the financing of newly privatized formerly state-owned companies. Therefore,China’s government issued series of policies which favoured the foreign investors. The inflows of foreign capital in the form of FDI brought in advanced technology, knowledge, management know-how which accelerated the economic growth in China in the last three decades. Since the “Open Doors” policy and trade reformations in the country in 1978, the country has been consistently achieving significant economic growth which averages at 10% of GDP. When the growth rate of China is compared to other developed economies such as USA which has an average of 3% GDP growth in the 100 years and Germany which has an average growth rate of 1.3% of GDP and Japan at 3.85% of GDP in the few decades, China is far ahead (IMF, 2009). However, many western policy makers and commentators believe that the main source of growth of China has been mainly due to FDI inflows which have been encouraged by fixed exchange rate. The source of economic growth of China is derived from three phases of development which are broken down into three periods of years. The first phase of development lasted from 1952-1978 where the Chinese government prioritized the development of heavy industries such as steel, chemicals and machinery. The second…


By Anna Jordan
Category: Economics

Externalities relate to an economic side effect of a good or service that generates benefits or costs to someone other than person deciding how much to produce or consume. Generally, externalities occur when firms or people impose costs or benefits on others outside the marketplace. As with any market activity, of course, fuel market carries a number of positive and negative externalities. Following are major external costs associated with oil:   Positive Externalities: ·         Economic Benefits –increased employment, business activity ·         Increased Productivity – use of oil accelerated efficient production in many industries ·         Means of Globalisation – increased trade between countries   Negative Externalities ·         Environmental Damage – environmental damages from oil production, distribution and consumption ·         Health Risks – injuries and illnesses from fuel production and distribution ·         Economic Costs – economic impact of importing fuel ·         Security Risks – political and military costs of maintaining access to oil recourses ·         Limitation of Recourses – depriving future generations from non-renewable recourses ·         Financial Subsidies – different financial subsidies to oil producers The most public attention focused on environmental damages as resource exploration, extraction, processing and distribution cause environmental damages, including wildlife habitat disruption, and release of air, noise and water pollution, both chronic and through spills (VTPI, 2010).  


By John Dudovskiy
Category: Economics

There is a set of  economic factors that determine the size of price elasticity for individual goods: elasticity tend to be higher when the good are luxuries, when substitutes are available, and when consumers have more time to adjust their behaviour.     Therefore, the length of time period that people have to respond to price changes also plays an important role. Demand tends to be more elastic in the long rung rather than in the short run, because when prices change consumers often need more time to respond and change their shopping habits. However, in the short run, the demand for goods may be inelastic, as it takes some time for consumers both to notice and then to respond to price changes (Mankiw, 2004). This is especially true in case of fuel. When price of fuel rises, the quantity of fuel demanded falls only slightly in first few months. So in the short run, demand for fuel may be very inelastic. However, in the long run, the demand for oil may be more price elastic. O’Sullivan and Sheffrin (2007) note that in early 1970’s, when several oil-rich middle-east countries cut their oil exports to the western countries, fuel prices rose quickly. In the short run, consumers’ response to higher oil prices was modest, as there was very little people could do to reduce consumption of gasoline. But as time passed and oil prices stayed high for a considerable period of time, people eventually found ways to consume less petroleum and other oil products. Some people switched to smaller and more efficient cars, while others rode bicycles or used public transport.   References  Mankiw (2004) “Principals of Macroeconomics”,South-WesternCollegePub,UK O’Sullivan and Sheffrin (2007) “Economics: Principals in Action”, Prentice Hall,New Jersey Samuelson and Nordhaus (2001) “Microeconomics”,McGraw-Hill,US


By John Dudovskiy
Category: Economics
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