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Economic Growth

Economic growth

Economic growth is the increase in the value of goods and services produced by an economy. Generally called as an increase in the wealth of a nation. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," rather than growth of aggregate demand.

Origins of the concept of Economic Growth

In the early modern period, some people in Western European nations began conceiving of the idea that economies could "grow", that is, produce a greater economic surplus which could be expended on something other than religious or governmental projects (such as war). The previous view was that only increasing either population or tax rates could generate more surplus money for the Crown or country. During much of the "Mercantilist" period, growth was seen as involving an increase in the total amount of specie, that is circulating medium such as silver and gold, under the control of the state. This "Bullionist" theory led to policies to force trade through a particular state, the acquisition of colonies to supply cheaper raw materials which could then be manufactured and sold. Later, such trade policies were justified instead simply in terms of promoting domestic trade and industry. The post-Bullionist insight that it was the increasing capability of manufacturing which led to policies in the 1700's to encourage manufacturing in itself, and the formula of importing raw materials and exporting finished goods. Under this system high tariffs were erected to allow manufacturers to establish "factories". (The word comes from "factor", the term for someone who carried goods from one stage of production to the next.) Local markets would then pay the fixed costs of capital growth, and then allow them to export abroad, undercutting the prices of manufactured goods elsewhere. Once competition from abroad was removed, prices could then be increased to recoup the costs of establishing the business. Under this theory of growth, the road to increased national wealth was to grant monopolies, which would give an incentive for an individual to exploit a market or resource, confident that he would make all of the profits when all other extra-national competitors were driven out of business. The "Dutch East India company" and the "British East India company" were examples of such state-granted trade monopolies. It should be stressed that Mercantilism was not simply a matter of restricting trade. Within a country, it often meant breaking down trade barriers, building new roads, and abolishing local toll booths, all of which expanded markets. This corresponded to the centralization of power in the hands of the Crown (or "Absolutism"). This process helped produce the modern nation-state in Western Europe. Internationally, Mercantilism led to a contradiction: growth was gained through trade, but to trade with other nations on equal terms was disadvantageous. This – along with the rise of nation-states –encouraged several major wars. The modern conception of economic growth began with the critique of Mercantilism, especially by the physiocrats and with the Scottish Enlightenment thinkers such as David Hume and Adam Smith, and the foundation of the discipline of modern political economy. The theory of the physiocrats was that productive capacity, itself, allowed for growth, and the improving and increasing capital to allow that capacity was "the wealth of nations". Whereas they stressed the importance of agriculture and saw urban industry as "sterile", Smith extended the notion that manufacturing was central to the entire economy. David Ricardo would then argue that trade was a benefit to a country, because if one could buy a good more cheaply from abroad, it meant that there was more profitable work to be done here. This theory of "comparative advantage" would be the central basis for arguments in favor of free trade as an essential component of growth. This notion of growth as increased stocks of capital goods (means of production) was codified as the Solow-Swann Growth Model, which involved a series of equations which showed the relationship between labor-time, capital goods, output, and investment. In this modern view, the role of technological change became crucial, even more important than the accumulation of capital. The late 20th century, with its global economy of a few very wealthy nations, and many very poor nations, led to the study of how the transition from subsistence and resource-based economies, to production and consumption based economies occurred, leading to the field of Development economics, including the work of Amartya Sen and Joseph Stiglitz.

The Question of Growth

The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living. However, there are some problems in using growth in GDP per capita to measure increasing well-being. These include:
- expenditure to offset the adverse environmental effects of economic growth such as pollution. (These are called defensive expenditure.)
- economic 'bads' such as commuting costs.
- measurement of non-marketed output such as housework. (If an individual hires a cleaner instead of cleaning their house themselves, it adds to GDP. The time spent cleaning the house before was not counted as part of GDP, while it is counted now. The house may or may not be cleaner.)
- GDP doesn’t reflect the underground or parallel economy
- Doesn’t reflect DIY activities
- some good output may not be included in GDP e.g. parents doing childcare, friends helping with home improvements, do-it-yourself, and volunteer work.
- property income unrelated to production is excluded from GDP.
- inequality (the uneven distribution of income). (If we assume diminishing marginal utility of income, extra income yields less utility for those with already-high incomes than for those with low incomes, so an increase in GDP may increase utility by different amounts depending upon individual's place in distribution. In particular, economic growth which yields savings not passed down to customers may disproportionately benefit stockholders, who are likely already wealthy) Other measures of national income, such as the Index of Sustainable Economic Welfare or the Genuine Progress Indicator, have been developed in an attempt to give a more complete picture of the level of well-being, but there is no consensus as to which, if any, is a better measure than GDP. GDP still remains by far the most often-used measure, especially since, all else equal, a rise in real GDP is correlated with an increase in the availability of jobs, which are necessary to most individuals' survival. The short-run variation of economic growth is termed the business cycle, and almost all economies experience periodic recessions. The cycle can be a misnomer as the fluctuations are not always regular. Explaining these fluctuations is one of the main focuses of macroeconomics. There are different schools of thought as to the causes of recessions but some consensus- see Keynesianism, Monetarism, New classical economics and New Keynesian economics. Oil shocks, war and harvest failure are obvious causes of recession. Short-run variation in growth has generally dampened in higher income countries since the early 90s and this has been attributed, in part, to better macroeconomic management. The long-run path of economic growth is one of the central questions of economics; despite the caveats given above, an increase in GDP of a country is generally taken as an increase in the standard of living of its inhabitants. Over long periods of time, even small rates of annual growth can have large effects through compounding. A growth rate of 2.5% per annum will lead to a doubling of GDP within 30 years, whilst a growth rate of 8% per annum (experienced by some East Asian Tigers) will lead to a doubling of GDP within 10 years. The neo-classical growth model, developed by Robert Solow in the 1950s, was the first attempt to model long-run growth analytically. This model assumes that countries use their resources efficiently and that there are diminishing returns to capital and labor increases. From these two premises, the neo-classical model makes three important predictions. First, increasing capital relative to labor creates economic growth, since people can be more productive given more capital. Second, poor countries with less capital per person will grow faster because each investment in capital will produce a higher return than rich countries with ample capital. Third, because of diminishing returns to capital, economies will eventually reach a point at which no new increase in capital will create economic growth. This point is called a "steady state." The model also notes that countries can overcome this steady state and continue growing by inventing new technology that allows production with fewer resources, but the model assumes technological progress, "exogenizing" technology from the model. Unsatisfied with Solow's explanation, economists worked to "endogenize" technology in the 1980s. They developed the endogenous growth theory that includes a mathematical explanation of technological advancement. This model also incorporated a new concept of human capital, the skills and knowledge that make workers productive. Unlike physical capital, human capital has increasing rates of return. Therefore, overall there are constant returns to capital, and economies never reach a steady state. Growth does not slow as capital accumulates, but the rate of growth depends on the types of capital a country invests in. Research done in this area has focussed on what increases human capital (e.g. education) or technological change (e.g. innovation). Analysis of recent economic success shows a close correlation between growth and climate, though the actual linkage between the two--and possible causal mechanisms--remains a topic of hot debate. Cold states like Sweden are much more successful economically than warm countries like Nigeria. In early human history, economic as well as cultural development was concentrated in warmer parts of the world, like Egypt. Today, however, cold, Northern states have much higher GDP per capita compared to the hot, tropical states. This aspect of economics (economic geography)--and its influence on human migration and political structures--was extensively studied by Ellsworth Huntington, a professor of Economics at Yale University in the early 20th century.

The limits to growth

The 'limits to growth' debate, much of it prompted by the 1972 Club of Rome study Limits to Growth, considers the ecological impact of growth and wealth creation. Many of the activities required for economic growth use non-renewable resources. Many researchers feel these sustained environmental effects can have an effect on the whole ecosystem. They claim the accumulated effects on the ecosystem put a theoretical limit on growth. Some draw on archaeology to cite examples of cultures they claim have disappeared because they grew beyond the ability of their ecosystems to support them. The claim is that the limits to growth will eventually make growth in resource consumption impossible. Others are more optimistic and believe that, although localized environmental effects may occur, large scale ecological effects are minor. The optimists claim that if these global-scale ecological effects exist, human ingenuity will find ways of adapting to them. The rate or type of economic growth may have important consequences for the environment (the climate and natural capital of ecologies). Concerns about possible negative effects of growth on the environment and society led some to advocate lower levels of growth, from which comes the idea of uneconomic growth, and Green parties which argue that economies are part of a global society and a global ecology and cannot outstrip their natural growth without damaging them. Canadian scientist David Suzuki stated in the 1990s that ecologies can only sustain typically about 1.5-3% new growth per year, and thus any requirement for greater returns from agriculture or forestry will necessarily cannibalize the natural capital of soil or forest. Some think this argument can be applied even to more developed economies. Mainstream economists would argue that economies are driven by new technology — for instance, we have faster computers today than a year ago, but not necessarily physically more computers. We may have been able to break free from physical limitations by relying on more knowledge rather than more physical production. A concern for promoting economic growth over and above all less measurable considerations is a symptom of productivism--usually a pejorative term.

External links

- [http://www.gwagner.net/work/green_accounting.html Green Accounting Bibliography] contains a discussion and related material on green or environmental accounting, an effort to create more comprehensive measures of conventional national income statistics.
- [http://www.stanford.edu/~promer/policyop.htm Beyond Classical and Keynesian Macroeconomic Policy] is Paul Romer's plain-English explaination of Endogenous Growth Theory. Category:Macroeconomics Category:Economic indicators

Gross domestic product

Gross Domestic Product (GDP) is the total value of final goods and services produced within a country's borders in a year. It is one of the measures of national income and output. It may be used as one indicator of the standard of living in a country, but there may be limitations with this view. GDP is often abbreviated as Y.

Definition

GDP is defined as the total value of goods and services produced within a territory during a specified period (or, if not specified, annually, so that "the UK GDP" is the UK's annual product). GDP differs from gross national product (GNP) in excluding inter-country income transfers, in effect attributing to a territory the product generated within it rather than the incomes received in it. Whereas nominal GDP refers to the total amount of money spent on GDP, real GDP adjusts this value for the effects of inflation in order to estimate the actual quantity of goods and services making up GDP. The former is sometimes called "money GDP," while the latter is termed "constant-price" or "inflation-corrected" GDP -- or "GDP in base-year prices" (where the base year is the reference year of the index used). See real vs. nominal in economics. GDP measures only final goods and services, that is those goods and services that are consumed by their final user, and not used as an input into other goods. Measuring intermediate goods and services would lead to double counting of economic activity within a country. This distinction also removes transfers between individuals and companies from GDP. For instance, buying a Renoir doesn't boost GDP by $20m. (If it did, buying and selling the same painting repeatedly to a gallery would imply great wealth rather than penury.) Note that the Renoir purchase would affect the GDP figure, but not as a $20m receipt, the auctioneer's fees would appear in GDP as consumption expenditure, because this is a final service. The most common approach to measuring and understanding GDP is the expenditure method: : GDP = consumption + investment + exports − imports Consumption and investment in this equation are the expenditure on final goods and services. The exports minus imports part of the equation (often called net exports) then adjusts this by subtracting the part of this expenditure not produced domestically (the imports), and adding back in domestic production not consumed at home (the exports). Economists (since Keynes) have preferred to split the general consumption term into two parts; private consumption, and public sector spending. Two advantages of dividing total consumption this way in theoretical macroeconomics are:
- Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption.
- If separated from endogenous private consumption, Government consumption can be treated as exogenous, so that different government spending levels can be considered within a meaningful macroeconomic framework. Therefore GDP can be expressed as: : GDP = private consumption + government + investment + net exports : (or simply GDP = C + G + I + NX)

The components of GDP

Each of the variables C, I, G, and NX :
- C is private consumption (or Consumer expenditures) in the economy. This includes most expenditures of households such as food, rent, medical expenses and so on.
- I is defined as business investments in capital. Examples of investment by a business include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. 'Investment' in GDP is meant very specifically as non-financial product purchases. Buying financial products is classed as saving in macroeconomics, as opposed to investment (which, in the GDP formula is a form of spending). The distinction is (in theory) clear: if money is converted into goods or services, without a repayment liability it is investment. For example, if you buy a bond or share the ownership of the money has only nominally changed hands, and this transfer payment is excluded from the GDP sum. Although such purchases would be called investments in normal speech, from the total-economy point of view, this is simply swapping of deeds, and not part of the real economy or the GDP formula.
- G is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the millitary, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits. The relative size of government expenditure compared to GDP as a whole is critical in the theory of crowding out, and the Keynesian cross.
- NX are "net exports" in the economy (gross exports - gross imports). GDP captures the amount a country produces, including goods and services produced for overseas consumption, therefore exports are added. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic. It is important to understand the meaning of each variable precisely in order to:
- Read national accounts.
- Understand Keynesian or neo-classical macroeconomics.

Examples of GDP component variables

Examples of C, I, G, & NX: If you spend money to renovate your hotel so that occupancy rates increase, that is private investment, but if you buy shares in a consortium to do the same thing it is saving. The former is included when measuring GDP (in I), the latter is not. However, when the consortium conducted its own expenditure on renovation, that expenditure would be included in GDP. If the hotel is your private home your renovation spending would be measured as Consumption, but if a government agency is converting the hotel into an office for civil servants the renovation spending would be measured as part of public sector spending (G). If the renovation involves the purchase of a chandelier from abroad, that spending would also be counted as an increase in imports, so that NX would fall and the total GDP is unaffected by the purchase. (This highlights the fact that GDP is intended to measure domestic production rather than total consumption or spending. Spending is really a convenient means of estimating production.) If you are paid to manufacture the chandelier to hang in a foreign hotel the situation would be reversed, and the payment you receive would be counted in NX (positively, as an export). Again, we see that GDP is attempting to measure production through the means of expenditure; if the chandelier you produced had been bought domestically it would have been included in the GDP figures (in C or I) when purchased by a consumer or a business, but because it was exported it is necessary to 'correct' the amount consumed domestically to give the amount produced domestically. (As in Gross Domestic Product.).

Difference from Aggregate expenditure

An alternative measure of the economy to GDP is the Aggregate expenditure measure, which is identical to GDP except that it excludes items produced but not purchased (net inventory/stock level growth). If the economy produces more goods than are sold, the increase in inventory would generally be included in the GDP figure (as "Investment"). GDP counts these changes in inventory levels as investment.

The GDP Income account

Another way of measuring GDP is to measure the total income payable in the GDP income accounts. This should provide the same figure as the expenditure method described above. The formula for GDP measured using the income approach, called GDP(I), is: : GDP = Compensation of employees + Gross operating surplus + Gross mixed income + Taxes less subsidies on production and imports
- Compensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs.
- Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs are subtracted from gross output to calculate GOS.
- Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses. The sum of COE, GOS and GMI is called total factor income, and measures the value of GDP at factor (basic) prices.The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the Government has levied or paid on that production. So adding taxes less subsidies on production and imports converts GDP at factor cost to GDP(I).

Measurement

International Standards

The international standard for measuring GDP is contained in the book System of National Accounts (1993), which was prepared by representatives of the International Monetary Fund, European Union, Organisation for Economic Co-operation and Development, United Nations and World Bank. The publication is normally referred to as SNA93, to distinguish it from the previous edition published in 1968 (called SNA68). SNA93 sets out a set of rules and procedures for the measurement of national accounts. The standards are designed to be flexible, to allow for differences in local statistical needs and conditions.

National Measurement

Within each country GDP is normally measured by a national government statistical agency, as private sector organisations normally do not have access to the information required (especially information on expenditure and production by governments).
- Australia: Australian Bureau of Statistics (ABS).
- Austria: [http://www.statistik-austria.at Statistik Austria].
- Canada: Statistics Canada (StatCan).
- Russia: [http://www.gks.ru/eng/ Federal State Statistics Service]
- United States: Bureau of Economic Analysis (BEA). GDP can measure spending on all goods and services. GDP can also measure all income earned.

Interest rates

Net interest expense is a transfer payment in all sectors except the financial sector. Net interest expenses in the financial sector is seen as production and value added and is added to GDP..

Cross-border comparison

The level of GDP in different countries may be compared by converting their value in national currency according to either
- current currency exchange rate: GDP calculated by exchange rates prevailing on international currency markets
- purchasing power parity exchange rate: GDP calculated by purchasing power parity (PPP) of each currency relative to a selected standard (usually the United States dollar). The relative ranking of countries may differ dramatically between the two approaches.
- The current exchange rate method converts the value of goods and services using global currency exchange rates. This can offer better indications of a country's international purchasing power and relative economic strength. For instance, if 10% of GDP is being spent on buying hi-tech foreign arms, the number of weapons purchased is entirely governed by current exchange rates, since arms are a traded product bought on the international market (there is no meaningful 'local' price distinct from the international price for high technology goods).
- The purchasing power parity method accounts for the relative effective domestic purchasing power of the average producer or consumer within an economy. This can be a better indicator of the living standards of less-developed countries because it compensates for the weakness of local currencies in world markets. The PPP method of GDP conversion is most relevant to non-traded goods and services. There is a clear pattern of the purchasing power parity method decreasing the disparity in GDP between high and low income (GDP) countries, as compared to the current exchange rate method. This finding is called the Penn effect. For more information see measures of national income.

GDP and standard of living

GDP per capita is often used as an indicator of standard of living in an economy. While this approach has advantages, many criticisms of GDP focus on its use as an indicator of standard of living. The major advantages to using GDP per capita as an indicator of standard of living are that it is measured frequently, widely and consistently. Frequently in that most countries provide information on GDP on a quarterly basis, which allows a user to spot trends more quickly. Widely in that some measure of GDP is available for practically every country in the world, which allow crude comparisons between the standard of living in different countries to be compared. And consistently in that the technical definitions used within GDP are relatively consistent between countries, and so there can be confidence that the same thing is being measured in each country. The major disadvantage of using GDP as an indicator of standard of living is that it is not, strictly speaking, a measure of standard of living. GDP is intended to be a measure of particular types of economic activity within a country. Nothing about the definition of GDP suggests that it is necessarily a measure of standard of living. For instance, in an extreme example, a country which exported 100 per cent of its production would still have a high GDP, but a very poor standard of living. The argument in favour of using GDP is not that it is a good indicator of standard of living, but rather that (all other things being equal) standard of living tends to increase when GDP per capita increases. This makes GDP a proxy for standard of living, rather than a direct measure of it. There are a number of controversies about this use of GDP.

Controversies

Although GDP is widely used by economists, its value as an indicator has also been the subject of controversy. Criticisms of GDP include:
- GDP doesn't take into account the black economy, where the money spent isn't registered, and the non-monetary economy, where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered. Bartering may be more prominent than the use of money, even extending to services (I helped you build your house ten years ago, so now you help me).
- Very often different calculations of GDP are confused among each other. For cross-border comparisons one should especially regard whether it is calculated by purchasing power parity method or current exchange rate method.
- Quality of life is determined by many other things than physical goods (economic or not).
- In 'poor' countries, it may just be that everything is cheap, except for a few western goodies. So one may have little money, but if everything is cheap that evens out nicely. Thus, the standard of living may be quite reasonable, it's just that there are, say, fewer TV-sets, meaning people have to share them (which may actually increase the quality of life in a social sense).
- If many products are of low quality in terms of durability then people will have to (unnecessarily) buy them again and again, thus boosting GDP without increasing their satisfaction. (On the other hand, if products were very durable then that would hamper innovation because people would be less inclined to buy new products, giving producers less of an incentive to develop them.) Similarly, if many products are of low quality in terms of usability and people don't know beforehand which products are the best choice for them, then they will either have to make do with an inferior product or buy again and again until they find something more satisfying. Furthermore, if products have a short lifespan in the market (eg because of fast innovation or fashion) then this process starts all over again when people need a replacement. Note that in a capitalist society these factors working together can easily cause a very high GDP combined with low customer satisfaction.
- GDP doesn't measure the sustainability of growth. A country may achieve a temporary high GDP by over-exploiting natural resources or by misallocating investment. Oil rich states can sustain high GDPs without industrializing, but this high level will not be sustainable past the point that the oil runs out. Economies experiencing a housing bubble or a low private saving rate tend to grow faster due to higher consumption, at the expense of reduced pensions in future.
- GDP counts work that produces no net change. For instance, a hurricane destroying thousands of homes would not be counted by GDP, but the rebuilding of those homes would be. A good recent example would be the aftermath of 2005 Katrina hurricane, which is poised to become the most expensive hurricane in history. GDP would capture the rebuilding activity and suggest a rising living standard, but we're only working toward restoring what was lost for the most part. Therefore, GDP growth would over-estimate the increase in the standard of living. See Negative externalities.
- As a measure of actual sale prices, GDP does not capture the economic surplus between the price paid and subjective value received.
- the annual growth of real GDP is adjusted by using the "GDP deflator", which tends to underestimate the objective differences in the quality of manufactured output over time. (The deflator is explicitly based on subjective experience when measuring such things as the consumer benefit received from computer-power improvements since the early 1980s). Therefore the GDP figure may underestimate the degree to which improving technology and quality-level are increasing the real standard of living.
- Some economists such as Herman Daly consider GDP to be a poor measure even of material well being, especially in developed countries. They argue that GDP only measures production and consumption, not however the level of utility people gain from producing and consuming. This idea is expressed in the theory of uneconomic growth, which states that GDP growth above a certain "economic limit" actually decreases material well being. An extreme example of this is a major war. Historically, GDP growth was often boosted in war time while material living standards fell considerably.
- GDP does not take inequality into account. Some economists have attempted to create a replacement for GDP called the Genuine Progress Indicator (GPI), which attempts to address many of the above criticisms.

Lists of countries by their GDP

- List of countries by GDP (nominal)
- List of countries by GDP (PPP)
- List of countries by GDP (nominal) per capita
- List of countries by GDP (PPP) per capita
- List of African countries by GDP
- List of Asian countries by GDP
- List of European countries by GDP

External links

- [http://www.wie.org/business Frank Dixon from Innovest Partners writes about Why Gross National Happiness is a better indicator of National Happiness and the failures of GNP and Western Economic Systems]
- [http://www.abs.gov.au/Ausstats/abs@.nsf/66f306f503e529a5ca25697e0017661f/3f880ee1d366198cca2569a400061616!OpenDocument Australian Bureau of Statistics Manual on GDP measurement]
- [http://perso.wanadoo.fr/pgreenfinch/eoblpib.htm GDP-indexed bonds]
- [http://www.bea.doc.gov/bea/dn/home/gdp.htm Bureau of Economic Analysis GDP data]

Data

- Complete listing of countries by GDP: [http://aol.countrywatch.com/includes/grank/globrank.asp?TBLS=PPP+Method+Tables&vCOUNTRY=17&TYPE=GRANK Purchasing Power Parity Method] and [http://aol.countrywatch.com/includes/grank/gdpnumericcer.asp?TYPE=GRANK&TBL=NUMERICCER&vCOUNTRY=17 Current Exchange Rate Method ]

Articles

- [http://dieoff.org/page11.htm What's wrong with the GDP?]
- [http://ingrimayne.saintjoe.edu/econ/Measuring/GNP2.html Limitations of GDP Statistics by Schenk, Robert.]
- [http://pages.stern.nyu.edu/~nroubini/MEASURE.HTM whether output and CPI inflation are mismeasured, by Nouriel Roubini and David Backus, in Lectures in Macroeconomics]
- [http://william-king.www.drexel.edu/top/prin/txt/EcoToC.html Ch. 22. Measuring the National Economy, by Dr. Roger A. McCain] Category:Economic indicators Category:Macroeconomics Category:Socioeconomics ko:국내총생산 ja:国内総生産 simple:Gross Domestic Product th:ผลิตภัณฑ์มวลรวม

Real vs. nominal in economics

In everyday speech, a nominal sum is a small or token amount, unrelated to the market value of the object of a transaction. In economics, the distinction between nominal and real numbers is often made. It corresponds to the distinction between money and inflation-corrected numbers. Nominal numbers - such as nominal wages, interest rates and gross domestic product (GDP) - refer to amounts that are paid or earned in money terms. A paycheck shows money wage and a car loan agreement indicates the nominal interest rate. Nominal GDP refers to the amount of money spent to buy the production of a country. Real numbers - real wages, interest rates, and GDP - are corrected for the effects of inflation. They indicate the value of these numbers in terms of the purchasing power of wages, interest, or total production. That is, they try to estimate how many goods and services a wage, an interest payment, or total domestic income will buy.
- real wage is the ratio of the nominal wage to some measure of the price level (for example, the consumer price index).
- the real interest rate is different, since it must be adjusted for the effects of inflation over time on money that is lent. A first approximation for the real interest rate equals the nominal interest rate minus the rate of inflation over the period of the loan.
- The expected real interest rate is the nominal interest rate minus the inflation rate expected over the term of the loan.
- The realized (ex post) real interest rate has the actual inflation rate subtracted from the nominal interest rate.
- In the real world, the real interest rate can only be seen in debt instruments such as Treasury Inflation Protected Instruments, which establishes a real interest rate before-hand, with no guessing involved on the part of the investor.
- the calculation of real gross domestic product is also different from the real wage. As a first approximation, real GDP is calculated by adding up all the goods and services in the economy produced during a year using the prices that prevailed during the base year. Thus the 2004 GDP in 1982 prices (the inflation-corrected GDP) would add up all the 2004 products using the prices that ruled in 1982. Recently, the US has adapted a new method of measuring inflation using chained values instead of a base year, see consumer price index. Category:Economics

Full employment

In economics, full employment has more than one meaning. To many laypeople, it means zero unemployment. Most economists believe that the unemployment rate at full employment is higher than that, corresponding to the Non-Accelerating Inflation Rate of Unemployment (NAIRU). The 20th century British economist William Beveridge stated that an unemployment rate of 3% was full employment. Other economists have provided estimates from 2% to 7%, depending on the country, the time period, and the economists' political biases. (conservatives see full employment as corresponding to a higher unemployment rate than do Social liberals and social democrats.) Some estimate a "range" of possible unemployment rates. For example, for the United States, the Organization for Economic Cooperation and Development (OECD) give estimates of the "full-employment unemployment rate" of 4 to 6.4% in 1999; this is the estimated "structural" unemployment rate plus and minus the standard error of the estimate. The OECD also gives estimates for other countries.[http://www.oecd.org/dataoecd/44/50/2086120.pdf] Ideas associated with the Phillips curve questioned the possibility and value of full employment in a society: this theory suggests that full employment -- especially as defined normatively -- will be associated with positive inflation. The Phillips curve tells us also that there is no single unemployment number that one can single out as the "full employment" rate. Instead, there is a trade-off between unemployment and inflation: a government might choose to attain a lower unemployment rate but would pay for it with higher inflation rates. In 1968, Milton Friedman, leader of the monetarist school of economics, and Edmund Phelps posited a unique full employment rate of unemployment, what they called the "natural" rate of unemployment. But this is seen not as a normative choice as much as something we are stuck with, even if it is unknown. Rather than trying to attain full employment, Friedman argues that policy-makers should try to keep prices stable (a low or even a zero inflation rate). If this policy is sustained, he suggests that the economy will gravitate to the "natural" rate of unemployment automatically. Friedman's view has prevailed so that in much of modern macroeconomics, full employment means the lowest level of unemployment that can be sustained given the structure of the economy. Using the terminology first introduced by James Tobin (following the lead of Franco Modigliani), this equals the Non-Accelerating Inflation Rate of Unemployment (NAIRU) the real gross domestic product equals potential output. This concept is identical to the "natural" rate but reflects the fact that there is nothing "natural" about an economy. At this level of unemployment, there is no unemployment above the level of the NAIRU. That is, at full employment there is no cyclical or deficient-demand unemployment. If the unemployment rate stays below this "natural" or "inflation threshold" level for several years, it is posited that inflation will accelerate, i.e., get worse and worse (in the absence of wage and price controls). Similarly, inflation will get better (decelerate) if unemployment rates exceed the NAIRU for a long time. The theory says that inflation does not rise or fall when the unemployment equals the "natural" rate. This is where the term NAIRU is derived. The level of the NAIRU thus depends on the degree of "supply side" unemployment, i.e., joblessness that can't be abolished by high demand. This includes frictional, structural, classical, and Marxian unemployment. An alternative, more normative, definition (used by some labor economists) would see "full employment" as the attainment of the ideal unemployment rate, where the types of unemployment that reflect labor-market inefficiency (such as structural unemployment) do not exist. Only some frictional unemployment would exist, where workers are temporarily searching for new jobs. For example, Lord William Beveridge defined "full employment" as where the number of unemployed workers equaled the number of job vacancies available. He preferred that the economy be kept above that full employment level in order to allow maximum economic production. Long before Friedman and Phelps, Abba Lerner (1951) developed a version of the NAIRU. Unlike the current view, he saw a range of "full employment" unemployment rates. He distinguished between "high" full employment (the lowest sustainable unemployment under incomes policies) and "low" full employment (the lowest sustainable unemployment rate without these policies). Whatever the definition of full employment, it is difficult to discover exactly what unemployment rate it corresponds to. In the United States, for example, the economy saw stable inflation despite low unemployment during the late 1990s, contradicting most economists' estimates of the NAIRU. The idea that the full-employment unemployment rate (NAIRU) is not a unique number has been seen in recent empirical research. Staiger, Stock, and Watson found that the range of possible values of the NAIRU (from 4.3 to 7.3% unemployment) was too large to be useful to macroeconomic policy-makers. Robert Eisner suggested that for 1956-95 there was a zone from about 5% to about 10% unemployment between the low-unemployment realm of accelerating inflation and the high-unemployment realm of disinflation. In between, he found that inflation falls with falling unemployment. Worse, the NAIRU doesn't stay the same over time -- and can change due to economic policy. For example, some economists argue that British Prime Minister Margaret Thatcher's anti-inflation policies using persistently high unemployment led to higher structural unemployment and a higher NAIRU. The active pursuit of national full employment through interventionist government policies is associated with Keynesian economics and marked the postwar agenda of many Western nations, until the stagflation of the 1970s. Australia was the first country in the world in which full employment in a free society was made official policy by its government. On May 30, 1945, The Australian Labor Party Prime Minister John Curtin and his Employment Minister John Dedman proposed a white paper in the Australian House of Representatives titled Full Employment In Australia, the first time any government apart from totalitarian regimes had unequivocally committed itself to providing work for any person who was willing and able to work. Conditions of full employment lasted in Australia from 1941 to 1975. The following should be understood in discussions of NAIRU: Governments that follow it are attempting to keep unemployment at certain levels (usually over four percent, and as high as ten or more percent) by keeping interest rates high. As interest rates increase, more bankruptcies of individuals and businesses occur, meaning less money to hire staff or purchase goods (the making and distributing of which requires workers, which means jobs). It might also be noted that the main cause of inflation is not high employment, but rather the ability of banks to make money with little to no backing with things of value (commodities such as gold and silver are some examples), thus flooding the market with money and decreasing the value of each dollar already issued in the process, assuming the economy has not kept up to this increase in issued loans. Economists such as Milton Friedman and Dr. Ravi Batra have theorized ways that a modern economy could have low inflation and near full employment (as in close to 100% of those who are not students and are healthy enough to work, and who wish to work at any given point in time), as of yet these have yet to be widely disseminated through the press or introduced by most governments. Paul Martin - former finance minister and present Prime Minister of Canada - once held that full employment could be achieved, yet let go of this idea after gaining power. For more on this see the excellent expose "Shooting the Hippo" by Linda Mcquaig, author and former columnist for many of Canada's top newspapers.

External Sources

[http://www.oecd.org/dataoecd/27/46/18464874.pdf The OECD on measuring the NAIRU] Devine, James. 2004. The "Natural" Rate of Unemployment. In Edward Fullbrook, ed., A Guide to What's Wrong with Economics, London, UK: Anthem Press, 126-32. Eisner, Robert. 1997. A New View of the NAIRU. In Paul Davidson and Jan A. Kregel, eds. Improving the Global Economy. Cheltenham, UK: Edgar Elgar, 1997. Friedman, Milton. 1968. The Role of Monetary Policy. American Economic Review. 58(1) March: 1-21. Lerner, Abba. 1951. Economics of Employment, New York: McGraw-Hill. Staiger, Douglas, James H. Stock, and Mark W. Watson. 1997. The NAIRU, Unemployment and Monetary Policy. Journal of Economic Perspectives. 11(1) Winter: 33-49. Category:Macroeconomics

Mercantilism

Mercantilism is the economic theory holding that the prosperity of a nation depends upon its supply of capital, and that the global volume of trade is "unchangeable." The amount of capital, represented by bullion (amount of precious metal) held by the state, is best increased through a balance of trade with other nations, with large exports and low imports. Mercantilism suggests that the government should advance these goals by playing an active, protectionist role in the economy, by encouraging exports and discouraging imports, especially through the use of tariffs. The economic policy based upon these ideas is often called the mercantile system. Mercantilism was the dominant school of economics throughout the "early modern period" (from the 16th to the 18th century, which roughly corresponded to the emergence of the nation-state). Domestically, this led to some of the first instances of significant government intervention and control over the economy, and it was during this period that much of the modern "capitalist" system was established. Internationally, mercantilism encouraged the many European wars of the period, and fueled European imperialism, as the European powers fought over "available markets". Belief in mercantilism began to fade in the late 18th century, as the arguments of Adam Smith, and the other classical economists won out. Today, mercantilism as a whole is rejected by all serious economists, though some elements are looked upon favorably.

Theory

classical economists and silver were the measure of a nation's wealth. Later mercantilists developed a somewhat more sophisticated view.]] European economists between 1500 and 1750 are today generally considered mercantilists; however, these economists did not see themselves as contributing to a single economic ideology. The term was coined by the Marquis de Mirabeau in 1763, and was popularized by Adam Smith in 1776. The word comes from the Latin word mercari, which means "to run a trade," from merx, meaning "commodity." It was initially used solely by critics, such as Mirabeau and Smith, but was quickly adopted by historians. Originally, the standard English term was mercantile system. The word mercantilism was introduced into English from German in the early 20th century. Mercantilism as a whole cannot be considered a unified theory of economics. There were no mercantilist writers presenting an overarching scheme for the ideal economy, as Adam Smith would later do for classical economics. Rather, each mercantilist writer tended to focus on a single area of the economy. Only later did non-mercantilist scholars integrate these "diverse" ideas into what they called mercantilism. Some scholars thus reject the idea of mercantilism completely, arguing that it gives "a false unity to disparate events". To a certain extent, mercantilist doctrine itself made a general theory of economics impossible. Mercantilists viewed the economic system as a zero-sum game; where a gain by one party was a loss by another. Thus, any system of policies that benefited one group would by definition "harm the other", and there was no possibility of economics being used to maximize the commonwealth, or "common good". Mercantilist writings were also generally created to 'justify' particular practices, rather than as investigations into the best policies. Early mercantilism, which was developed beginning around 1500, was most marked by its 'bullionism'. This period saw a vast inflow of gold and silver from the Spanish colonies in the New World, and an overriding concern was "how the other states of Europe could be able to compete". The bullionists, such as Jean Bodin, Thomas Gresham and John Hales, felt that the wealth and power of a state was measured by the amount of bullion it possessed; and that to grow in power, meant increasing the amount of bullion at the expense of the other powers. The prosperity of a state was measured by the accumulated wealth of its government, with no concept of national income. In part, this focus on reserves of gold and silver was because of their importance during times of war. Armies, which often included mercenaries, were paid in bullion, and navies were funded by gold and silver. The complicated system of international alliances of the period also often required large payments from one state to another. Only a few European states controlled gold or silver mines; for the others, the primary method of increasing bullion supplies was through the balance of trade, or through piracy and the "black market". If a state exported more than it imported, then this imbalance would have to be 'made up' by inflows of money. Thus, mercantilists firmly believed that each nation should seek to export more goods and services than it imported. This led to strict bans on the export of bullion. Bullionists also favored high interest rates, to encourage investors to move their money into their own nation. In the 17th century, a more complex version of mercantilism developed, which rejected 'simple' bullionism. These writers, such as Thomas Mun, felt that overall national wealth was the primary goal; and saw bullion as the most important sign of wealth, but not its totality, as "goods and resources" were also valuable or essential. The support for the balance of trade was preserved; but in a less rigid form. Mun, who worked for the British East India Company, argued that the exports of bullion to Asia were good for Britain, as the goods imported would then be resold to the rest of Europe at a substantial profit. This new view rejected the export of raw materials, as it acknowledged that the transformation of these materials into finished goods was an important "generator" of wealth. Thus, while the bullionists had supported the mass export of wool from Britain, the later mercantilists supported total bans on the export of raw materials, and supported the development of domestic manufacturing industries. Since creating domestic industries required an available supply of capital, the seventeenth century also saw governments dramatically tighten usury limits. This artificially lowered prevailing interest rates, and encouraged the wealthy to invest their money in manufacturing instead. Later mercantilists also placed a greater focus on "service industries". One result of this was the Navigation Acts of 1651, that expelled the Dutch from English shipping. Mercantilist domestic policy was more fragmented than its trade policy. While Adam Smith presented mercantilism as supporting strict controls over the economy, many mercantilists disagreed. The early modern era was one of letters patent and government-imposed monopolies. Some mercantilists supported these; but others acknowledged the "corruption" and "inefficiency" of such systems. Many mercantilists also realized the 'inevitable' result of quotas and price ceilings were black markets. One element mercantilists agreed upon was the economic oppression of the working population. Laborers and farmers were to live at the "margins of subsistence". The goal was to maximize production, with no concern for consumption. Extra money, free time, or education for the "lower classes" was seen to inevitably lead to 'vice' and 'laziness', and would result in 'harm' to the economy.

Causes

Scholars are divided on why mercantilism was the dominant economic ideology for two and a half centuries. One group, represented by Jacob Viner, argues that mercantilism was simply a straightforward, commonsense system that the people of the time simply did not have the analytical tools to discover was actually deeply fallacious. The second school, supported by scholars such as Robert B. Ekelund, contends that mercantilism was not a mistake, but rather the best possible system for those who developed it. This school argues that mercantilist policies were developed and enforced by rent-seeking merchants and governments. Merchants benefited greatly from the enforced monopolies, bans on foreign competition, and poverty of the workers. Governments benefited from the high tariffs and payments from the merchants. Whereas later economic ideas were often developed by academics and philosophers, almost all mercantilist writers were merchants or government officials. Mercantilism developed at a time when the European economy was in transition. Isolated feudal estates were being replaced by centralized nation-states as the locus of power. Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade. Mercantilism focused on how this trade could best aid the states. Another important change was the introduction of double-entry bookkeeping and modern accounting. This accounting made extremely clear the inflow and outflow of trade, contributing to the close scrutiny given to the balance of trade. Prior to mercantilism, the most important economic work done in Europe was by the medieval scholastic theorists. The goal of these thinkers was to find an economic system that was compatible with Christian doctrines of piety and justice. They focused mainly on microeconomics and local exchanges between individuals. Mercantilism was closely aligned with the other theories and ideas that were replacing the medieval worldview. This period saw the adoption of Niccolò Machiavelli's realpolitik and the primacy of the raison d'état in international relations. The mercantilist idea that all trade was a zero sum game, in which each side was trying to best the other in a ruthless competition, was integrated into the works of Thomas Hobbes. This dark view of human nature also fit well with the Puritan view of the world, and some of the most stridently mercantilist legislation, such as the Navigation Acts, was introduced by the government of Oliver Cromwell.

Policies

Oliver Cromwell Mercantilist ideas were the dominant economic ideology of all of Europe in the early modern period, and most states embraced it to a certain degree. Mercantilism was centred in England and France, and it was in these states that mercantilist polices were most often enacted. Mercantilism arose in France in the early 16th century, soon after the monarchy had become the dominant force in French politics. In 1539, an important decree banned the importation of woolen goods from Spain and some parts of Flanders. The next year, a number of restrictions were imposed on the export of bullion. Over the rest of the sixteenth century further protectionist measures were introduced. The height of French mercantilism is closely associated with Jean-Baptiste Colbert, finance minister for 22 years in the 17th century, to the extent that French mercantilism is sometimes called Colbertism. Under Colbert, the French government became deeply involved in the economy in order to increase exports. Protectionist policies were enacted that limited imports and favored exports. Industries were organized into guilds and monopolies, and production was regulated by the state through a series of over a thousands directives outlining how different products should be produced. To encourage industry foreign artisans and craftsmen were imported. Colbert also worked to decrease internal barriers to trade, reducing internal tariffs and building an extensive network of roads and canals. Colbert's policies were quite successful, and France's industrial output and economy grew considerably during this period, as France became the dominant European power. He was less successful in turning France into a major trading power, and Britain and the Netherlands remained supreme in this field. In England, mercantilism reached its peak during the Long Parliament government (1640-1660). Mercantilist policies were also embraced throughout much of the Tudor and Stuart periods, with Robert Walpole being another major proponent. In Britain, government control over the domestic economy was far less extensive than on the Continent, limited by the common law tradition and the steadily increasing power of Parliament. Government-controlled monopolies were common, especially before the English Civil War, but were often controversial. British mercantilist writers were themselves divided on whether domestic controls were necessary. British mercantilism thus mainly took the form of efforts to control trade. A wide array of regulations was put in place to encourage exports and discourage imports. Tariffs were placed on imports and bounties given for exports, and the export of some raw materials was banned completely. The Navigation Acts expelled foreign merchants from England's domestic trade. The nation aggressively sought colonies and once under British control, regulations were imposed that allowed the colony to only produce raw materials and to only trade with Britain. This led to friction with the inhabitants of these colonies, and mercantilist policies were one of the major causes of the American Revolution. Over all, however, mercantilist policies had an important effect on Britain helping turn it into the world's dominant trader, and an international superpower. One domestic policy that had a lasting impact was the conversion of "waste lands" to agricultural use. Mercantilists felt that to maximize a nation's power all land and resources had to be used to their utmost, and this era thus saw projects like the draining of The Fens. The Fens The other nations of Europe also embraced mercantilism to varying degrees. The Netherlands, which had become the financial centre of Europe by being its most efficient trader, had little interest in seeing trade restricted and adopted few mercantilist policies. Mercantilism became prominent in Central Europe and Scandinavia after the Thirty Years' War (1618-1648), with Christina of Sweden and Christian IV of Denmark being notable proponents. The Habsburg Holy Roman Emperors had long been interested in mercantilist policies, but the vast and decentralized nature of their empire made implementing such notions difficult. Some constituent states of the empire did embrace Mercantilism, most notably Prussia, which under Frederick the Great had perhaps the most rigidly controlled economy in Europe. During the economic collapse of the seventeenth century Spain had little coherent economic policy, but French mercantilist policies were imported by Philip V with some success. Russia under Peter I (Peter the Great) attempted to pursue mercantilism, but had little success because of Russia's lack of a large merchant class or an industrial base. Mercantilism also fueled the intense violence of the 17th and 18th centuries in Europe. Since the level of world trade was viewed as fixed, it followed that the only way to increase a nation's trade was to take it from another. A number of wars, most notably the Anglo-Dutch Wars and the Franco-Dutch Wars, can be linked directly to mercantilist theories. The unending warfare of this period also reinforced mercantilism as it was seen as an essential component to military success. It also fueled the imperialism of this era, as each nation that was able attempted to seize colonies that would be sources of raw materials and exclusive markets. During the mercantilist period, European power spread around the globe. As with the domestic economy this expansion was often conducted under the aegis of companies with government-guaranteed monopolies in a certain part of the world, such as the Dutch East India Company or the Hudson's Bay Company (operating in present-day Canada).

Criticisms

Hudson's Bay Company is an attack on mercantilism]] A number of scholars found important flaws with mercantilism long before Adam Smith developed an ideology that could fully replace it. Critics like Dudley North, John Locke, and David Hume undermined much of mercantilism, and it steadily lost favor during the eighteenth century. Mercantilists failed to understand the notions of comparative advantage (although this idea was only fully fleshed out in 1817 by David Ricardo) and the benefits of trade. For instance, Portugal was a far more efficient producer of wine than England, while in England it was relatively cheaper to produce cloth. Thus if Portugal specialized in wine and England in cloth, both states would end up better off if they traded. In modern economic theory, trade is not a zero-sum game of cutthroat competition, as both sides could benefit. By imposing mercantilist import restrictions and tariffs instead, both nations ended up poorer. David Hume famously noted the impossibility of the mercantilists' goal of a constant positive balance of trade. As bullion flowed into one country, the supply would increase and the value of bullion in that state would steadily decline relative to other goods. Conversely, in the state exporting bullion, its value would slowly rise. Eventually it would no longer be cost-effective to export goods from the high-price country to the low-price country, and the balance of trade would reverse itself. Mercantilists fundamentally misunderstood this, long arguing that an increase in the money supply simply meant that everyone gets richer. The importance placed on bullion was also a central target, even if many mercantilists had themselves begun to de-emphasize the importance of gold and silver. Adam Smith noted that bullion was just the same as any other commodity, and there was no reason to give it special treatment. Gold was nothing more than a yellow metal that was valuable only because there was not much of it. The first school to completely reject mercantilism were the Physiocrats of France. Their theories also had several important problems, and the replacement of mercantilism did not come until Adam Smith published The Wealth of Nations in 1776. This book outlines the basics of what is today known as classical economics. Smith spends a considerable portion of the book rebutting the arguments of the mercantilists, though often these are simplified or exaggerated versions of mercantilist thought. Scholars are also divided over the cause of mercantilism's end. Those who believe the theory was simply an error hold that its replacement was inevitable as soon as Smith's ideas that are more accurate were unveiled. Those who feel that mercantilism was rent-seeking hold that it ended only when major power shifts occurred. In Britain mercantilism faded as the Parliament gained the monarch's power to grant monopolies. While the wealthy capitalists who controlled the House of Commons benefited from these monopolies, Parliament found it difficult to implement them due to the high cost of group decision making. Mercantilist regulations were steadily removed over the course of the eighteenth century in Britain, and during the 19th century the British government fully embraced free trade and Smith's laissez-faire economics. On the continent, the process was somewhat different. In France economic control remained in the hands of the royal family and mercantilism continued until the French Revolution. In Germany mercantilism remained an important ideology in the nineteenth and early twentieth centuries, when the historical school of economics was paramount.

Legacy

In the English-speaking world, Adam Smith's utter repudiation of mercantilism was accepted without question, but in the 20th century, most economists have come to accept that in some areas mercantilism had been correct. Most prominently, the economist John Maynard Keynes explicitly supported some of the tenets of mercantilism. Adam Smith had rejected focusing on the money supply, arguing that goods, population, and institutions were the real causes of prosperity. Keynes argued that the money supply, balance of trade, and interest rates were of great importance to an economy. These views later became the basis of monetarism, one of the most important modern schools of economics. Adam Smith rejected the mercantilist focus on production, arguing that consumption was the only way to grow an economy. Keynes argued that encouraging production was just as important as consumption. Keynes also noted that in the early modern period the focus on the bullion supplies was reasonable. In an era before paper money, an increase for bullion was one of the only ways to increase the money supply. Keynes and other economists of the period also realized that the balance of payments is an important concern, and since the 1930s, all nations have closely monitored the inflow and outflow of capital, and most economists agree that a favorable balance of trade is desirable. Keynes also adopted the essential idea of mercantilism that government intervention in the economy is a necessity. While Keynes' economic theories have had a major impact, few have accepted his effort to rehabilitate the word mercantilism. Today the word remains a pejorative term, often used to attack various forms of protectionism. The similarities between Keynesianism, and its successor ideas, with mercantilism have sometimes led critics to call them neo-mercantilism. Some other systems that do copy several mercantilist policies, such as Japan's economic system, are also sometimes called neo-mercantilist. One area Smith was reversed on well before Keynes was on the importance of data. Mercantilists, who were generally merchants or government officials, gathered vast amounts of trade data and used it considerably in their research and writing. William Petty, a strong mercantilist, is generally credited with being the first to use empirical analysis to study the economy. Smith rejected this, arguing that deductive reasoning from base principles was the proper method to discover economic truths. Today economists accept that both methods are important. In specific instances, protectionist mercantilist policies also had an important and positive impact on the state that enacted them. Adam Smith, himself, for instance praised the Navigation Acts as they greatly expanded the British merchant fleet, and played a central role in turning Britain into the naval and economic superpower that it was for several centuries. Some economists thus feel that protecting infant industries, while causing short term harm, can be beneficial in the long term.

Notes

# Jürg Niehans. A History of Economic Theory pg. 6 # Harry Landreth and David C. Colander History of Economic Thought. pg. 44 # Robert B. Ekelund and Robert D. Tollison. Mercantilism as a Rent-Seeking Society. pg. 9 # Landreth and Colander. pg. 48 # David S. Landes The Unbound Prometheus. pg. 31 # Landreth and Colander. pg. 43 # Charles Wilson. Mercantilism. pg. 10 # Robert B. Ekelund and Robert F. Hébert. A History of Economic Theory and Method. pg. 46 # Ekelund and Hébert. pg. 61 # Niehans. pg. 19 # Landreth and Colander. pg. 53 # Hermann Kellenbenz. The Rise of the European Economy. pg. 29 # E.N. Williams. The Ancien Regime in Europe. pg. 177-83 # E. Damsgaard Hansen. European Economic History. pg. 65 # Christopher Hill. The Century of Revolution. pg. 32 # Wilson pg. 15 # Ekelund and Hébert. pg. 43 # Niehans. pg. 19 # Ekelund and Tollison # Wilson pg. 6 # Wilson pg. 3 # Robert S. Walters and David H. Blake. The Politics of Global Economic Relations. # Hansen pg. 64

References

- Ekelund, Robert B. and Robert D. Tollison. Mercantilism as a Rent-Seeking Society: Economic Regulation in Historical Perspective. College Station: Texas A&M University Press, 1981.
- Ekelund, Robert B and Robert F. Hébert. A History of Economic Theory and Method. New York: McGraw-Hill, 1997.
- Heckscher, Eli F. Mercantilism. translation by Mendel Shapiro. London: Allen & Unwin. 1935.
- Keynes, John Maynard. "[http://etext.library.adelaide.edu.au/k/keynes/john_maynard/k44g/chapter23.html Notes on Mercantilism, the Usury Laws, Stamped Money and the Theories of Under-Consumption]." General Theory of Employment, Interest and Money.
- Landreth, Harry and David C. Colander. History of Economic Thought. Boston: Houghton Mifflin, 2002.
- Niehans, Jürg. A History of Economic Theory: Classic Contributions, 1720-1980. Baltimore: Johns Hopkins University Press, 1990.
- Vaggi, Gianni and Peter Groenewegen.. A Concise History of Economic Thought: From Mercantilism to Monetarism. New York: Palgrave Macmillan, 2003.
- Wilson, Charles. Mercantilism. London: Historical Association, 1966
Further reading

- Rothbard, Murray N. [http://www.mises.org/story/1897 Economic Thought Before Adam Smith.] An Austrian Perspective on the History of Economic Thought. Volume I
- Rothbard, Murray N. [http://www.mises.org/story/1897 Classical Economics.] An Austrian Perspective on the History of Economic Thought. Volume II
External links

- [http://www.ecn.bris.ac.uk/het/mun/treasure.txt Thomas Mun's Englands Treasure by Forraign Trade]
- [http://www.econlib.org/library/Smith/smWN.html Book IV of The Wealth of Nations, Adam Smith's attack on the Mercantile System] Category:Economic theories Category:Economic ideologies Category:History of economic thought Category:International trade ja:重商主義

Bullionism

The Theory & It's Origins

Bullionism is an economic theory that defines wealth by the amount of precious metals owned. Bullionism is an early or primitive form of mercantilism. It was derived from the 16th century, when England owed its gold and silver the excess on the balance of trade, but did not possess any gold or silver mines.

Examples Of Bullionists

Thomas Milles (1550-1627) and others recommended accelerating exports in order to get an excess on the balance of trade, changing it into precious metal and hindering the drain of money and precious metal to other countries. Although England practiced the interdiction of exportation of £ or precious metals at about 1600, Milles desired to return to staple ports in order to force merchants from abroad to use their assets to buy English goods and to prevent them from transferring gold or silver from England homewards. But Milles was not viewed as one who had any valuable words to say on the subject, as one of his contemporaries wrote “…Milles was so much out of step with the time that his pamphlets had little influence...” Gerard de Malynes (1586 - 1641), another bullionist, published a book, called A Treatise of the Canker of England's Common Wealth, in which he asserted that the exchange of foreign currency had been rather a trade of value than exchanging the weight of metals and therefore the deficit of English balance of trade would be a consequence of unfair exchanging precious metals by bankers and money changers. In order to ban the flow of exchange rates he demanded for strict fixing of exchange rates of coins only by the concentration of precious metals and weights and for strict regulation and monitoring of foreign trade. But de Malynes did not convince his contemporaries “…that the cambists were responsible for gold outflow or to elicit enthusiasm for a monopoly sale of exchange, par pro pari, by the royal exchanger…" But he succeeded in creating the first economic controversy: Edward Misselden opposed him 1623 in his book The Circle of Commerce: Or, the Balance of Trade.

Dutch East India Company

: This article is about the trading company. For the record label, see Dutch East India Trading. Dutch East India Trading plus Saint Helena in the mid-Atlantic.]] The Dutch East India Company (Vereenigde Oostindische Compagnie or VOC in Dutch, literally "United East Indies Company") was established on March 20, 1602, when the Estates-General of the Netherlands granted it a monopoly to carry out colonial activities in Asia. It was the first multinational corporation in the world and it was the first company to issue stocks. The VOC consisted of 6 Chambers (Kamers) in Amsterdam, Middelburg (for Zeeland), Enkhuizen, Delft, Hoorn and Rotterdam. Delegates of these chambers convened as the Heeren XVII (the Lords Seventeen). To the counsel of Heeren XVII, eight delegates were from the Chamber of Amsterdam, four from Chamber Zeeland and one from each of the smaller Chambers. Access to the seventeenth seat was rotated among the Chamber of Zeeland or one of the smaller Chambers. Amsterdam had thereby the decisive voice. The Zeelanders were particularly suspicious at the start up of the VOC for this reason. The fear was not unfounded, because in practice it meant that indeed Amsterdam stipulated what happened. The start up capital of the Dutch East India Company was 6,424,588 Gulden, which was raised by the 8 chambers;
- The Chamber of Hoorn raised an amount of ƒ 266,868.
- The Chamber of Delft raised an amount of ƒ 469,400.
- The Chamber of Zeeland raised an amount of ƒ 1,300,405.
- The Chamber of Amsterdam raised an amount of ƒ 3,679,915.
- The Chamber of Rotterdam's capital raising did not go so smoothly. They brought in ƒ 173,000 which satisfied by far, the expectations. A considerable part originated from inhabitants of Dordrecht.
- The Chamber of Enkhuizen after the Chambers of Amsterdam and Zeeland with ƒ 540,000 had the largest input in the share capital of VOC. Under the first 358 share holders, were many small entrepreneurs, who dared to take the risk.
- At the registration in the share register of the VOC, immigrants played an important role. Under the 1,143 tenderers were 39 Germans and no less than 301 Zuid-Nederlanders (Belgium); under who, Isaäc le Maire who was the largest subscriber with ƒ 85,000. Belgium The Heeren XVII met alternately 6 years in Amsterdam and 2 years in Middelburg. They defined the VOC's general policy and divided the tasks among the Chambers. The Chambers carried out all the necessary work, built /their own ships and warehouses and traded the merchandise. The Heeren XVII sent the ships' masters off with extensive instructions on the route to be navigated, prevailing winds, currents, shoals and landmarks. The VOC also produced its own sea charts. The company established its headquarters in Batavia on Java (now Jakarta, Indonesia). Other colonial outposts were also established in the East Indies what later became Indonesia, such as on the Spice Islands (Moluccas), which include the Banda Islands where the VOC forcibly maintained a monopoly over nutmeg and mace. Methods used to maintain the monopoly included the violent suppression of the native population, not stopping short of extortion and mass murder. The VOC traded throughout Asia. Ships coming into Batavia from the Netherlands carried silver from Spanish mines in Peru and supplies for VOC settlements in Asia. Silver, combined with copper from Japan, was used to trade with India and China for textiles. These products, such as cotton and silk, including ceramics, were either traded within Asia for the coveted spices or brought back to Europe. The VOC was also instrumental in introducing European ideas and technology to Asia. The Company supported Christian missionaries and traded modern technology with China and Japan. mass murder 1623, for the amount of 2,400 florins]] A more peaceful VOC trade post on Dejima, an artificial island off the coast of Nagasaki, was for a long time the only place where Europeans could trade with Japan. In 1652, Jan van Riebeeck established an outpost at the Cape of Good Hope (the southwestern tip of Africa, currently in South Africa) to re-supply VOC ships on their journey to East Asia. This post later became a fully-fledged colony, the Cape Colony, when more Dutch and other Europeans started to settle there. VOC outposts were also established in Persia (now Iran), Bengal (now Bangladesh and part of India), Ceylon (now Sri Lanka), Malacca (Melaka, now in Malaysia), Siam (now Thailand), mainland China (Canton), Formosa (now Taiwan) and southern India. In 1662, Koxinga expelled the Dutch from Taiwan (see History of Taiwan). By 1669, the VOC was the richest private company the world had ever seen, with over 150 merchant ships, 40 warships, 50,000 employees, a private army of 10,000 soldiers, and a dividend payment of 40%. The company was in almost constant conflict with the English; relations were particularly embittered after the Amboyna Massacre in 1623. During the 18th century, its possessions were increasingly focused on the East Indies. After the fourth war between the United Provinces and England (1780–1784), the VOC got into financial trouble, and in 1798, the company was dissolved, four years after the end of the Estates-General. The East Indies were awarded to the Kingdom of the Netherlands by the Congress of Vienna in 1815. According to some, the history and exploits of the VOC were also an inspiration for the novel Dune.

VOC ships

Dune]
- VOC ship Amsterdam
- VOC ship Arnhem
- VOC ship Batavia
- VOC ship Duyfken
- VOC ship Eendracht (1615)
- VOC ship Galias
- VOC ship Grooten Broeck
- VOC ship Gulden Zeepaert
- VOC ship Klein Amsterdam
- VOC ship Leeuwerik
- VOC ship Leyden
- VOC ship Pera
- VOC ship Ridderschap van Holland
- VOC ship Rooswijk
- VOC ship Sardam
- VOC ship Texel
- VOC ship Utrecht
- VOC ship Vergulde Draeck (Gilt Dragon)
- VOC ship Vianen
- VOC ship Vliegende Swaan
- VOC ship Wapen van Hoorn
- VOC ship Wezel
- VOC ship Zuytdorp

External links

- [http://www.oldest-share.com/ Oldest share] — the oldest share in the world (VOC 1606)
- [http://www.economist.com/displayStory.cfm?Story_ID=179810 A taste of adventure — The history of spices is the history of trade], The Economist, December 17, 1998.
- [http://www.colonialvoyage.com/ Dutch Portuguese Colonial History]
- [http://www.voc.iinet.net.au/voyages.html Voyages by VOC ships to Australia] Category:Colonial Indian companies Category:Companies of the Netherlands East India Company, Dutch Category:Dutch multinationals Category:History of the Netherlands Category:Exploration ships of the Netherlands ms:Syarikat Hindia Timur Belanda ja:オランダ東インド会社 nb:Det nederlandske Ostindiske kompani

Monopoly

:This article is about the state of a player in economics. For the Parker Brothers board game see Monopoly (game). In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a kind of product or service. Monopolies are characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. Monopoly should be distinguished from monopsony, in which there is only one buyer of the product or service; it should also, strictly, be distinguished from the (similar) phenomenon of a cartel. In a monopoly a single firm is the sole provider of a product or service; in a cartel a centralized institution is set up to partially coordinate the actions of several independent providers (which is a form of oligopoly).

Forms of monopoly

Monopolies are often distinguished based on the circumstances under which they arise; the main distinctions are between a monopoly that is the result of law (government-granted monopoly and government monopoly) alone; one that arises from the cost structure of the industry (natural monopoly); and one that arise by other means (eg one firm simply outcompeting all other firms; illegal behaviour; etc). Advocates of economic liberalism assert that a more fundamental way of classifying monopolies is to distinguish those that arise and exist due to violation of the principles of a free market (coercive monopoly) from those that arise and are maintained by consistently outcompeting all other firms.

Legal monopoly

A monopoly based on laws explicitly preventing competition is a legal monopoly or de jure monopoly. When such a monopoly is granted to a private party, it is a government-granted monopoly; when it is operated by government itself, it is a government monopoly or state monopoly. A government monopoly may exist at different levels of government (eg just for one region or locality); a state monopoly is specifically operated by a national government. An example of a "de jure" monopoly is AT&T, which was granted monopoly power by the US government, only to be broken up in 1982 following a Sherman Antitrust suit.

Natural monopoly

Main article: Natural monopoly A natural pool is a monopoly that arises in industries where economies of scale are so large that a single firm can supply the entire market without exhausting them. In these industries competition will tend to be eliminated as the largest (often the first) firm develops a monopoly through its cost advantage. In these industries monopoly may be more economically efficient than competition, although because of potential dynamic efficiencies this is not necessarily clear-cut. Natural monopoly arises when there are large capital costs relative to variable costs, which arises typically in network industries such as electricity and water. It should be distinguished from network effects, which operate on the demand side and do not affect costs. Counter-intuitively, the case of a monopolization of a key source of a natural resource is not considered a natural monopoly, because it is based on the running down of natural capital rather than the amortization of an investment in physical or human capital. Whether an industry is a natural monopoly may change over time through the introduction of new technologies. A natural monopoly industry can also be artificially broken up by government, although (eg electricity liberalization, eg Railtrack) the results are at best mixed. Advocates of free markets, such as libertarians, assert that a natural monopoly is a practical impossibility, and, given that a monopoly is a persistent rather than a transient situation, that there is no historical precedent of one ever existing. They say that the idea of "natural monopoly" is mere theoretical abstraction to justify expanding the scope of government, and that it in the case of nationalization or deprivatization it is the government intervention itself that creates a monopoly where one did not actually exist.

Local monopoly

A local monopoly is a monopoly of a market in a particular area, usually a town or even a smaller locality: the term is used to differentiate a monopoly that is geographically limited within a country, as the default assumption is that a monopoly covers the entire industry in a given country. This may include the ability to charge (to some extent) monopoly pricing, for example in the case of the only gas station on an expressway rest stop, which will serve a certain number of motorists who lack fuel to reach the next station and must pay whatever is charged.

Monopolistic competition

Main article: Monopolistic competition Industries which are dominated by a single firm may allow the firm to act as a near-monopoly or "de facto monopoly", a practice known in economics as monopolistic competition. Common historical examples arguably include corporations such as Microsoft and Standard Oil (Standard's market share of refining was 64% in competition with over 100 other refiners at the time of the trial that resulted in the government-forced breakup). Practices which these entities may be accused of include dumping products below cost to harm competitors, creating tying arrangements between their products, and other practices regulated under antitrust law. Large corporations often attempt to monopolize markets through horizontal integration, in which a parent company consolidates control over several small, seemingly diverse companies (sometimes even using different branding to create the illusion of marketplace competition). Such a monopoly is known as a horizontal monopoly. A magazine publishing firm, for example, might publish many different magazines on many different subjects, but it would still be considered to engage in monopolistic practices if the intent of doing this was to control the entire magazine-reader market, and prevent the emergence of competitors. A monopoly arrived at through vertical integration is called a vertical monopoly. A common example is vertical integration of electricity distribution with electricity generation, which is common because it reduces or eliminates certain costly risks.

Coercive monopoly

Main article: coercive monopoly A coercive monopoly is one that arises and whose existence is maintained as the result of any sort of activity that violates the principle of a free market and is therefore insulated from competition which would otherwise be a potential threat to its superior status. The term is typically used by those who favor laissez-faire capitalism.

Economic analysis

Primary characteristics of a monopoly

- Single Seller :A pure monopoly is an industry in which a single firm is the sole producer of a good or the sole provider of a service. This is usually caused by a blocked entry.
- No Close Substitutes :The product or service is unique in ways which go beyond brand identity, and cannot be easily replaced (a monopoly on water from a certain spring, sold under a certain brand name, is not a true monopoly; neither is Coca-Cola, even though it is differentiated from its competition in flavor).
- Price Maker :In a pure monopoly a single firm controls the total supply of the whole industry and is able to exert a significant degree of control over the price, by changing the quantity supplied (an example of this would be the situation of viagra before competing drugs emerged). In subtotal monopolies (for example diamonds or petroleum at present) a single organization controls enough of the supply that even if it limits the quantity, or raises prices, the other suppliers will be unable to make up the difference and take significant amounts of market share.
- Blocked Entry :The reason a pure monopolist has no competitors is that certain barriers keep would be competitors from entering the market. Depending upon the form of the monopoly these barriers can be economic, technological, legal (basic patents on certain drugs), or of some other type of barrier that completely prevents other firms from entering the market.

Monopolistic pricing

viagra In economics a company is said to have monopoly power if it faces a downward sloping demand curve (see supply and demand). This is in contrast to a price taker that faces a horizontal demand curve. A price taker cannot choose the price that they sell at, since if they set it above the equilibrium price, they will sell none, and if they set it below the equilibrium price, they will have an infinite number of buyers (and be making less money than they could if they sold at the equilibrium price). In contrast, a business with monopoly power can choose the price they want to sell at. If they set it higher, they sell less. If they set it lower, they sell more. In most real markets, the drop in demand associated with a price increase is due partly to losing customers to other sellers and partly to customers who are no longer willing or able to buy the product. In a pure monopoly market, only the l

Economic growth

Origins of the concept of Economic Growth

The Question of Growth

The limits to growth

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Gross domestic product

Definition

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Examples of GDP component variables

Difference from Aggregate expenditure

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Bullionism

The Theory & It's Origins

Examples Of Bullionists

See also

Dutch East India Company

VOC ships

See also

External links

Monopoly

Forms of monopoly

Legal monopoly

Natural monopoly

Local monopoly

Monopolistic competition

Coercive monopoly

Economic analysis

Primary characteristics of a monopoly

Monopolistic pricing