The notion that one can make inferences about the characteristics of financial flows by just observing their label is not new in economic. There is much convention wisdom that show capital flows reflect speculative, unstable behavior while flows reflect evaluations of long run profitability and are based on fundamental economic condition. The flows of funds approach used by many central banks and others for a analysis of the domestic economy developments is based on labels which are deemed meaningful. This view has also been an important part of the traditional analysis of international finance for many years. In fact, the structure of balance of payments accounts reflects an implicit theory that different types of capital flows have different economic implications. For example, the distinction between short-term “hot money” and long-term capital flows undoubtedly reflects the view that short-term capital movements are speculative and reversible while long-term capital flows are based Continue reading
International Economics
Factor Proportions Theory of International Trade
Almost after a century and a quarter of the classical version of the theory of international trade, two Swedish economists, Eli Heckscher and Bertil Ohlin, propounded a theory that is known as the factor endowment theory or the factor proportions theory. In fact, it was Eli Heckscher (1919) who mooted the notion of a country’s comparative advantage (disadvantage) based on relative abundance (scarcity) of factors of production. Later on, his student, Bertil Ohlin (1933) developed this notion of relative factor abundance into a theory of the pattern of international trade. Factor Proportions theory of international trade explains that in a two-country, two-factor, and two-commodity framework different countries are endowed with varying proportions of different factors of production. Some countries have large populations and large labour resources. Thus, a country with a large labour force will be able to produce the goods at a lower cost using a labour intensive mode Continue reading
Sectoral Demand-Shift Theory of Inflation
Under demand-pull inflation, we have shown how expansion in aggregate demand without a proportionate increase in the supply of goods and services leads to an inflationary situation. However, it is not necessary to have a general increase in demand to bring about inflationary pressure. Sometimes, the increase in demand may be confined to some sector of the economy and this increase in demand and the consequent rise in the price in a particular sector may spread to other sectors. Suppose the demand for agricultural goods rises because of inadequate supplies of these goods, there would be a consequent rise in the price of agricultural goods. Thus, the rise in prices spreads to all other sectors in the economy, through rise in the prices of raw materials and wages. The rise in prices in the agricultural sector may push up prices in the industrial sector. Therefore, the inflationary rise in the Continue reading
The Edgeworth Box
In 1881, Francis Y. Edgeworth came up with a way of representing, using the same axis, indifference curves and the corresponding contract curve in his book “Mathematical Psychics: an Essay on the Application of Mathematics to the Moral Sciences”. It was Vilfredo Pareto, in his book “Manual of Political Economy”, 1906, who developed Edgeworth’s ideas into a more understandable and simpler diagram, which today we call the Edgeworth box. Edgeworth box a conceptual device for analyzing possible trading relationships between two individuals or countries, using indifference curves. It is constructed by taking the indifference map of one individual (B) for two goods (X and Y) and inverting it to face the indifference map of second individual (A) for the same two goods. Thus, Edgeworth box is a traditional visualization of the benefits potentially available from international trade. Individual A’s preferences are depicted the three indifference curves A1, A2 and corresponding Continue reading
The Potential Impact of Multilateral Framework on Investments (MFIs)
The development of an Multilateral Framework on Investment (MFI), if such a framework were to be negotiated, would represent a change in the policy-framework cluster of determinants. Although such a framework might also affect some elements of business facilitation (such as investment incentives), it would not involve significant and direct changes in the principal economic determinants. Indeed, by making Foreign Direct Investment (FDI) policies potentially more similar, an MFI would underline the importance of economic (and business facilitation) factors in determining FDI flows. The precise effect of an MFI on the policy-framework cluster of determinants would depend on its content, including definitions, scope and safeguards. Because an MFI is only a hypothesis, three scenarios, based on differing assumptions, are discussed below for purely analytical purposes. The specific implications of each scenario would vary from country to country in accordance with specific economic and developmental conditions and specific national stances vis-a-vis Continue reading
Dumping Concept in Managerial Economics
The term Dumping means selling a firms product in foreign market at a price lower than in the home market. Dumping is a form of price discrimination. Let us elaborate ‘dumping’ by considering the following illustrations : Suppose the producer is selling in two markets; viz, the home market and the world market. In the home market he is saddled as a monopolist but in the world market there is perfect competition. Let us therefore analyse the price-output policy of the producer under this peculiar situation. Since there is perfect competition in the world market, the producer has to take the price which prevails in the world market. This is represented by the horizontal average revenue curve ARw and the marginal revenue curve coincides with the average revenue curve. Thus ARw = MRw. However, in the home market he is a monopolist and therefore average Continue reading