The concepts of economic development and economic growth (in terms of

megaends). From this perspective, how important are natural resources?

Economic development as a process that generates economic and social, quantitative and,
particularly, qualitative changes, which causes the national economy to cumulatively and
durably increase its real national product. In contrast and compared to development,
economic growth is, in a limited sense, an increase of the national income per capita, and
it involves the analysis, especially in quantitative terms, of this process, with a focus on
the functional relations between the endogenous variables; in a wider sense, it involves
the increase of the GDP, GNP and NI, therefore of the national wealth, including the
production capacity, expressed in both absolute and relative size, per capita,
encompassing also the structural modifications of economy.
Economic growth is a complex, long-run phenomenon, subjected to constraints like:
excessive rise of population, limited resources, inadequate infrastructure, inefficient
utilization of resources, excessive governmental intervention, institutional and cultural
models that make the increase difficult, etc.
Economic growth is obtained by an efficient use of the available resources and by
increasing the capacity of production of a country. It facilitates the redistribution of
incomes between population and society. The cumulative effects, the small differences of
the increase rates, become big for periods of one decade or more. It is easier to
redistribute the income in a dynamic, growing society, than in static one.
Why GDP per capita cannot accurately assess the living standard?
GDP is not a measure of the living standard, but sooner or later determines it: investment
(negative one as well) and consumption.
GDP excludes non-market activities as household production: great disadvantage for the
less developed countries.
It does not include black market activities
It ignores distribution of wealth and the previous production of wealth

Relative power equality: the fundamental determinant of economic performance

Perfect competition: producers cannot gather power over consumers= zero producer
power. Without relative power there is no coercive taking and peaceful production
(taking from nature) is the only way to human purposeful action.
The Lorenz curve and the GINI coefficient
The Lorenz curve is a graphical representation of the distribution of income or of wealth.
On the graph, a straight diagonal line represents perfect equality of wealth distribution;
the Lorenz curve lies beneath it, showing the reality of wealth distribution. The difference
between the straight line and the curved line is the amount of inequality of wealth
distribution, a figure described by the Gini coefficient.
The Gini coefficient is the ratio of the area between the line of perfect equality and the
observed Lorenz curve to the area between the line of perfect equality and the line of
perfect inequality. The higher the coefficient, the more unequal the distribution is.

The ex post and the ex ante coercion

Ex ante: Using ex-ante analysis helps to give an idea of future movements in price or the
future impact of a newly implemented policy.
Ex post: Another term for actual returns. The use of historical returns has traditionally
been the most common way to predict the probability of incurring a loss on any given
day.
What is a coercive transaction? Describe it graphically
Our emotional responses produce ordinal rankings and rank classes of situations; they
cover less particular cases (coercive and voluntary, just and unjust); It is mechanisms of
emotional processes that are less local in comparison to mechanisms of abstract
reasoning.

Imagine I am looking to find housing to live in. I am presented, in the status quo, with the
following choices:
1. Pay a landlord rent to live in some building.
2. Be homeless.
If I pay the landlord rent, this will be described as a voluntary, non-coercive transaction.
Now for example two. Imagine I am thinking of getting a job. I have the following
options in the status quo:
1. Get a job and pay income taxes on the income from that job.
2. Do not get a job.
That third option is the one libertarians would choose, but the statethrough violent,
physical coercionhas prevented them from having this option.
Private and public goods. Externalities and market failure: the need for state action
Public goods: Economists define a public good as being non rival and non excludable.
The non-rival part of this definition means that my consumption does not affect your
consumption of a good. Public goods include fresh air, knowledge and information,
national security, flood control systems, lighthouses, and street lighting.
Private goods: A private good IS rival and excludable. An example of the private good is
bread: bread eaten by a given person cannot be consumed by another (rivalry), and it is
easy for a baker to refuse to trade a loaf (exclusive).
Market failure: An economic term that encompasses a situation where, in any given
market, the quantity of a product demanded by consumers does not equate to the quantity
supplied by suppliers. This is a direct result of a lack of certain economically ideal
factors, which prevents equilibrium.
Externalities: Pollution emitted by a factory that spoils the surrounding environment
and affects the health of nearby residents is an example of a negative externality. An
example of a positive externality is the effect of a well-educated labor force on the
productivity of a company.

The paradox of voting and the problem of agendum

Majority of 50%+1, this means that not all voters are single peaked according to
their preferences.

Multiple peaked preferences

There is no equilibrium alternative

The theorem of median voter

A median voter is a voter with a preference between the extreme.
The median voter theorem makes two key assumptions:
First, the theorem assumes that voters can place all election alternatives along a onedimensional political spectrum
Second, the theorem assumes that voters' preferences are single-peaked, which means
that voters choose the alternative closest to their own view. This assumption predicts that
the further away the outcome is from the voter's most preferred outcome, the less likely
the voter is to select that alternative.
The logrolling and its implications
-

Exchanging of votes, I vote for you and then you vote for me.

The reality is that transaction costs are high, and most voters, who are ignorant of
political issues and the political process, see little incentive to attempt to influence their
local legislator's political decisions It is also difficult for voters to be informed of their
legislator's voting habits. In essence, logrolling is a legal way to manipulate voter
preference toward either an efficient or an inefficient outcome that would not otherwise
be enacted
The choice of the optimum majorities. The decision costs and the external cost of
collective decisions

Optimum majority: that rule of collective decision which minimizes the sum of
decision costs and external decision costs (the cost derived from collective
decision)

Why the market structure of perfect competition is the ideal one?.

-

Neo-classical economists argued that perfect competition would produce the best
possible outcomes for consumers, and society.

Under perfect competition, there are many buyers and sellers, and prices reflect supply
and demand. Also, consumers have many substitutes if the good or service they wish to
buy becomes too expensive or its quality begins to fall short. New firms can easily enter
the market, generating additional competition. Companies earn just enough profit to stay
in business and no more, because if they were to earn excess profits, other companies
would enter the market and drive profits back down to the bare minimum.

The prisoners dilemma game without communication

Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary
confinement with no means of communicating with the other. The prosecutors lack
sufficient evidence to convict the pair on the principal charge. They hope to get both
sentenced to a year in prison on a lesser charge. Simultaneously, the prosecutors offer
each prisoner a bargain. Each prisoner is given the opportunity either to: betray the other
by testifying that the other committed the crime, or to cooperate with the other by
remaining silent. The offer is:
-

If A and B each betray the other, each of them serves 2 years in prison

If A betrays B but B remains silent, A will be set free and B will serve 3 years in
prison (and vice versa)

If A and B both remain silent, both of them will only serve 1 year in prison (on the
lesser charge)

The prisoners dilemma game with communication

Communication enlarges the range of possible payoffs, even in the PD, where cheap talk
should make no difference theoretically. Frank (1998) reports experimental results that
show that when subjects are allowed to interact for 30 minutes before playing the PD,
they are able to predict quite accurately their opponents behavior. Moreover, roughly
84% of the subjects who predict that their opponent will cooperate (defect) respond with
the same action. A longer period of communication also leads to a higher probability of
cooperation. Both the level of cooperation and the accuracy of the predictions drop when
players are allowed to interact only for 10 minutes.
The tools of money supply

Discount rate

Required reserve ratio

Open market operations

Moral suasion

The Federal Reserve basically uses three tools to affect the supply of money available for
the economy. Open-market operations are the most subtle of the three, and consist of the
buying and selling of U.S. treasury securities to gently increase or decrease the money
supply in small increments over time.
The discount rate is the interest rate banks are charged when they borrow from the
Federal Reserve. The discount rate can be altered by the Federal Reserve either to
encourage or discourage borrowing from financial institutions. A change in the discount
rate has a more pronounced affect on the money supply, and is often used to send a clear
message to the financial community regarding the Federal Reserves intentions to
increase or decrease the money supply.

The U.S. practices what is known as fractional reserve banking. The reserve
requirement is the percentage of some deposits that banks must keep as vault cash, or on
account with the Federal Reserve at all times. If you deposit $100 into your checking
account, your bank must hold a certain percentage of that deposit in reserve. The rest of
your deposit may be used by the bank to make a loan for example.
The advantages of inflation
Pros: (in the short run) helps economic growth by lowering real interest rates; keeps
unemployment low; safety valve for pressure groups
The disadvantages of inflation
Cons: (in the long run) Cantillon effect, sink rates not sufficient, the automatic increase of
tax rates
Cantillion effect: This effect describes the fact that newly-created money is distributed
neither equally nor simultaneously among the population. This means that people
handling money partially benefit from inflation and partially suffer from it. Monetary
dispersion is never neutral. Market participants who receive the new money early and
exchange it for goods benefit in comparison with those who get the newly-created money
later. We can see a transfer of assets from late money users to early money users.

The quantity theory of money

An economic theory which proposes a positive relationship between changes in the
money supply and the long-term price of goods. It states that increasing the amount of
money in the economy will eventually lead to an equal percentage rise in the prices of
products and services. The calculation behind the quantity theory of money is based upon
Fisher Equation:
Calculated as:

Where:
M represents the money supply.
V represents the velocity of money.
P represents the average price level.
T represents the volume of transactions in the economy.
Why monetary policy can be a problem

Monetary gap

=lapse of time between the moment a monetary measure is taken and the moment that
measure has an impact on economy
The monetary gap is variable and long (longer than the time period in which good
predictions about economy are possible).

The changes in the velocity of money

Velocity is important for measuring the rate at which money in circulation is used for
purchasing goods and services. This helps investors gauge how robust the economy is,
and is a key input in the determination of an
economy's inflation calculation. Economies that exhibit a higher velocity of money
relative to others tend to be further along in the business cycle and should have a higher
rate of inflation, all things held constant.
Shares and bonds. The price of a bond and the interest rate
A bond is a debt investment in which an investor loans money to an entity (typically
corporate or governmental) which borrows the funds for a defined period of time at a
variable or fixed interest rate. Bonds are used by companies, municipalities, states and
sovereign governments to raise money and finance a variety of projects and activities.
Owners of bonds are debtholders, or creditors, of the issuer.

The present value of a future value: if i=10%, 100 euros will become 110 euros
after one year. The present value of 110 euros is 100 euros

The value of a bond which has a coupon of 10 euros when interest rate is 10% is
10:0,1=100 euros

The inverse relation between the price of a bond and interest rate

The determinants of international specialization

-

Specialization determined by climate and the different available factors of

production

Specialization determined through tradition and investments (ex.: auto production

in Romania)

Specialization determined by behavioral traits of populations of the various

countries (ex.: German production of industrial equipment)

External efficiency phenomenon

The false argument of depressive effect of imports

1 a = 1/3 clothes in Germany

1 a = 2 clothes in Romania

After trade: 1 a = 1 clothes

In this situation, international trade benefits: The German auto firm, Romanian
firm producing clothes and the consumer in the two countries

Possible changes in the long run

Costs entailed by changes

Ways to deal with frictions

The false argument of infant industries

Protection to infant industries until they are successful in:

a/producing with the same costs

b/producing with lower costs

Falsehood:

a/in case of the same costs

b/in case of lower costs

The false argument of cheap foreign labor

Logic: higher wages entail higher costs

Proof against:

$10.000/1.000 units, makes $10 per unit

$1.000/50 units, makes $20 per unit

The false argument of specific productivity

Logic:
a/industrial sectors have a higher productivities versus agriculture
b/higher productivities offset lower costs
Conclusion: Industrial sectors should be developed by each country irrespective of costs

In Romania: 1 tractor=200 to corn

In Germany: 1 tractor=100 to corn
Conclusion: Romania should produce corn and Germany should produce tractors
Theory of specific productivity: if W in tractor production is 4 times higher, one
Romanian worker could produce 4x200to= 800 to, which is the equivalent of 4 tractors
When buying German tractors: 200to:100to= 2 tractors
Conclusion: do not import tractors and produce your own tractors (even if they are more
expensive)

The falsehood of the argument: productivity depends on the level of training and capital
per worker
The same training and the same capital per worker entails the same productivity: the
equivalent of 200to corn
200to:200to=1or one tractor, if the tractor is produced by your own industry and the case
of import from Germany is dropped
Why the surplus of foreign trade and the surplus of capital account cannot by
themselves be favorable
The fixed exchange rates: advantages and disadvantages
Advantages:

A fixed exchange rate may minimize instabilities in real economic activity

Central banks can acquire credibility by fixing their country's currency to that of a
more disciplined nation

On a microeconomic level, a country with poorly developed or illiquid money

markets may fix their exchange rates to provide its residents with a synthetic
money market with the liquidity of the markets of the country that provides the
vehicle currency

A fixed exchange rate reduces volatility and fluctuations in relative prices

It eliminates exchange rate risk by reducing the associated uncertainty

It imposes discipline on the monetary authority

International trade and investment ows between countries are facilitated

Speculation in the currency markets is likely to be less destabilizing under a fixed

exchange rate system than it is in a flexible one, since it does not amplify
fluctuations resulting from business cycles

Fixed exchange rates impose a price discipline on nations with higher inflation
rates than the rest of the world, as such a nation is likely to face persistent deficits
in its balance of payments and loss of reserves

Disadvantages:

The main criticism of a fixed exchange rate is that flexible exchange rates serve to adjust
the balance of trade. When a trade deficit occurs under a floating exchange rate, there will
be increased demand for the foreign (rather than domestic) currency, which will push up
the price of the foreign currency in terms of the domestic currency. That in turn makes the
price of foreign goods less attractive to the domestic market and thus pushes down the
trade deficit. Under fixed exchange rates, this automatic rebalancing does not occur
The floating exchange rates: advantages and disadvantages
Floating exchange rates have these main advantages:
1. No need for international management of exchange rates
2. No need for frequent central bank intervention
3. No need for elaborate capital flow restrictions
4. Greater insulation from other countries economic problems
Floating exchange rates also have disadvantages:

Higher volatility:

Use of scarce resources to predict exchange rates

Tendency to worsen existing problems:

The unequal inflation rates or the change in relative prices as a determinant of

changes in exchange rates
As a general rule, a country with a consistently lower inflation rate exhibits a rising
currency value, as its purchasing power increases relative to other currencies. During the
last half of the twentieth century, the countries with low inflation included Japan,
Germany and Switzerland, while the U.S. and Canada achieved low inflation only later.
Those countries with higher inflation typically see depreciation in their currency in
relation to the currencies of their trading partners. This is also usually accompanied by
higher interest rates.

The change in relative incomes as a determinant of changes in exchange rates

The current account is the balance of trade between a country and its trading partners,
reflecting all payments between countries for goods, services, interest and dividends. A
deficit in the current account shows the country is spending more on foreign trade than it
is earning, and that it is borrowing capital from foreign sources to make up the deficit. In
other words, the country requires more foreign currency than it receives through sales of
exports, and it supplies more of its own currency than foreigners demand for its products.
The excess demand for foreign currency lowers the country's exchange rate until
domestic goods and services are cheap enough for foreigners, and foreign assets are too
expensive to generate sales for domestic interests
A ratio comparing export prices to import prices, the terms of trade is related to current
accounts and the balance of payments. If the price of a country's exports rises by a greater
rate than that of its imports, its terms of trade have favorably improved. Increasing terms
of trade shows greater demand for the country's exports. This, in turn, results in rising
revenues from exports, which provides increased demand for the country's currency (and
an increase in the currency's value). If the price of exports rises by a smaller rate than that
of its imports, the currency's value will decrease in relation to its trading partners.

The change in relative interest rates as a determinant of changes in exchange rates

Interest rates, inflation and exchange rates are all highly correlated. By manipulating
interest rates, central banks exert influence over both inflation and exchange rates, and
changing interest rates impact inflation and currency values. Higher interest rates offer
lenders in an economy a higher return relative to other countries. Therefore, higher
interest rates attract foreign capital and cause the exchange rate to rise. The impact of
higher interest rates is mitigated, however, if inflation in the country is much higher than
in others, or if additional factors serve to drive the currency down. The opposite

relationship exists for decreasing interest rates - that is, lower interest rates tend to
decrease exchange rates.
The balance of international payments: components and properties
Recording of all payments between a country and all other countries
The principle of double-entry accounting
All payments to the country by foreigners are receipts and are recorded with +
All payments to foreigners are recorded with
Trade balance: surplus and deficit
Trade balance and economic performance
Increase and decrease in official reserves
Since many international transactions included in the balance of payments do not involve
the payment of money, this figure may differ significantly from net payments made to
foreign entities over a period of time.
In theory, a current account deficit would have to be financed by a net inflow in the
capital and financial account, while a current account surplus should correspond to an
outflow in the capital and financial account for a net figure of zero. In actual practice,
however, the fact that data are compiled from multiple sources gives rise to some degree
of measurement error.
Balance of payments and international investment position data are critical in formulating
national and international economic policy. Certain aspects of the balance of payments
data, such as payment imbalances and foreign direct investment, are key issues that a
nations economic policies seek to address.

Reasons for taxation

Negative externalities: compensation to receiver
Positive externality: compensation to producer

TC=Monetary cost +negative externality

Public goods: (1) non-exclusive: Free rider effect

(2) Non-exhaustive

Implementation of social justice

What is social justice and how can it be implemented?
Rawls maxi-min principle

Coercive transfers versus public goods

The nature of state

Ex ante coercive activities

The tax shifting and the tax incidence

The legal payer of tax

The real payer of tax

Example: the increase of VAT in Romania

Tax incidence reveals which group, the consumers or producers, will pay the price of a
new tax. For example, the demand for cigarettes is fairly inelastic, which means that
despite changes in price, the demand for cigarettes will remain relatively constant. Let's
imagine the government decided to impose an increased tax on cigarettes. In this case, the
producers may increase the sale price by the full amount of the tax. If consumers still
purchased cigarettes in the same amount after the increase in price, it would be said that
the tax incidence fell entirely on the buyers.

The system of flat tax: advantages and disadvantages

A system that applies the same tax rate to every taxpayer regardless of income bracket. A
flat tax applies the same tax rate to all taxpayers, with no deductions or exemptions
allowed. Supporters of a flat tax system propose that it would give taxpayers incentive to
earn more because they would not be penalized with a higher tax bracket. In addition,
supporters argue that a flat tax system is fairer because it imposed the tax on all taxpayers
regardless of income.

Pros:

A flat tax spreads the tax burden across all earners, which means that
more people pay for the benefits of government, direct or indirect, that
they receive.
A flat tax means that the marginal benefit of earning a dollar is always
the same; there are no diminishing returns to working harder to make
more money.
A revenue neutral flat tax will lower taxes on the wealthy, which will
give them more disposable income to spend.

Cons:

Since the basic necessities of life cost at least a certain amount, a flat
tax will cut more deeply into the disposable income of lower-income
taxpayers.
For taxpayers with very low income, the imposition of tax could force
them into penury.
A revenue-neutral flat tax will increase the tax burden on the poor and
middle-class, who are suffering disproportionately in this economy.
By the same token, the marginal utility of a dollar decreases as income
increases; a flat tax will, therefore, in utilitarian terms, impose a lower
tax rate on high-income earners.

The system of progressive taxation: advantages and disadvantages

A tax that takes a larger percentage from the income of high-income earners than it does
from low-income individuals. Basically, taxpayers are broken down into categories based
on taxable income; the more one earns, the more taxes they will have to pay once they
cross the benchmark cut-off points between the different tax bracket levels.

Pro:
1. It helps to provide a buffer against income inequality.
2. It encourages a system of social justice that allows everyone to have a chance at
success.
3. It provides higher overall levels of revenue.
4. It gives people a safety net in which they can operate.
Con:

1. It may be interpreted as discriminatory.

2. Those who barely break into a new tax bracket may lose their additional earnings.
3. It encourages the wealthy to not be transparent about their income.
4. It creates a complicated system of bureaucracy.
The causes of budgetary deficits
Causes:

1/ Disappearance of the capital accumulation norm

2/ Disappearance of the balanced budget norm

3/ Disappearance of the gold standard:

4/ Political myopia

5/ The generational hiatus

The effects of budgetary deficits

Effects:

1/The danger of inflationary monetary growth meant to pay back the government
debt

2/The decrease of loans supply to the private sector, increase in interest rates and
slow down of economic growth

3/The danger of destroying the democratic institutions through the growth of state
sector

Put forth two solutions to the problem of permanent budgetary deficits

The gold standard

The constitutional rule of the balanced budgets