The value of a country's needs and its currency is the amount of goods and services by a unit of currency in the country can buy decision, namely the decision by its purchasing power, and therefore the exchange rate between two currencies can be expressed as the ratio of the purchasing power of the two currencies. However, the size of the purchasing power is reflected by the price levels. Based on this relationship, domestic inflation will mean their currencies depreciate relative to foreign currencies. Relative PPP definitely makes up for some deficiencies in terms of purchasing power parity. Its main points can be simply stated as: currency exchange rate between the two countries will be based on the difference between the two countries the rate of inflation and adjust accordingly.
Hume as an economist made several essential contribution to economic thought. He trotted out the idea of free trade. British mercantilists believed that countries can achieved their prosperity by limited imports and encouraged exports. But David Hume showed this notion was invalid and by using this notion a country could not enhance its wealth. His argument was prices of goods in the country change directly with change of the money supply in the country.
Hume’s influence on Smith, has to be underscored and appreciated; the former’s view that self-interest could be channelled profitably only through economic cooperation and competition was the basis of Smith’s thinking as well. Furthermore, Hume viewed everything in the world as having value due to the amount of labour put into it and favoured a labour theory of value,wealth is a product of physical or mental labour, and Smith’ s thinking reflects the same, it can be thus inferred that the latter borrowed it from Hume. Both thinkers also had as an intellectual focus, economic growth and its causes. Hume’s theory of taxation challenges the view of French physiocrats and questions the subsistence theory of wages and the view that entrepreneurial activity does not yield a surplus. National wealth would be enhanced if taxes were raised a little so as to incentivise the individual to work but too big an increase would curtail the incentive to work harder and have a pernicious effect on the economy.
Global economic integration (GEI) is a phenomenon which has emerged from economic globalisation, and is defined by capital market openness (Mosley 2000). Its two main driving forces are: technological innovation and the reduction of transport and communication costs (Wolf: 181) (B&A: 1), and the liberalisation of world capital markets (B&A: 9) (Wolf: 179). Some examples of international economic organisations which have emerged as a result of GEI are the International Monetary Fund (IMF), World Bank, Organisation for Economic Co-operation and Development (OECD), and World Trade Organisation (WTO). → Limited the range of policy options available to states There exists a common rhetoric in conventional literature that global economic integration limits the range of policy options available to states, negatively affecting/impinging
The neoclassical economists strongly agree that the comparative advantage theory by David Ricardo is much more relevant to international trade then the absolute advantage by Adam Smiths. As a conclusion, Ricardo and Malthus both are pessimistic to the future. While Adam Smith believed of a period of zero economic growth, Ricardo modified the growth model by adding the concept of diminishing returns, which later on the neo-classical economists used for international
Hayek’s explanation of an economy’s business cycle “The Austrian Business Cycle”: In his book “Prices and Production”, Hayek’s argued that any business cycle commence as a result of a monetary policy or approach that is adopted by governments. Hayek agreed with Adam’s Smith theory of free markets. He argued that despite the fact that markets evolved over time as a result of human actions, at a certain stage markets fail resulting in unemployment and inefficient allocation of resources. On analyzing the factors behind markets failure, Hayek suggested that the reason behind fluctuations in the stability of markets was the intervention of governments in the monetary equilibrium of economies. There he argued for a monetary approach to the origins of the cycle.
Real Gross Domestic Product (GDP) per capita, that is, GDP per capita adjusted for inflation, is often used as a proxy for the standard of living in different countries. One factor that frequently cited as a possible source of economic growth is international trade. Therefore, ways in which a country’s exposure to international trade is referred to as “trade openness” that basically resulted in promoting growth in the
One of the most cited articles in economic integration literature is that of Abdel Jaber (1971). According to this study, welfare impacts of economic integration arrangements among developing countries should incorporate employment, productivity, and income effects in addition to the production and consumption effects. Furthermore, a number of studies have argued that economic integration among developing countries should not be treated as a tariff issue but as an approach to economic development. For instance, Roberson (1970) argued that the theories of economic integration have merely focused on gains of better resource allocation, whereas economic development is concerned with the employment of idle resources and better deployment of under-utilized resources to stimulate faster long-run growth. Another worth mentioning study is that of Mikesell (1965).
Indeed, organizations should have an appropriate knowledge about the transaction cost before stepping in. Coase (1937) argued that there are conditions under which it is more efficient for a firm to create an internal market rather than enter foreign ones. This explanation implies that companies weight their expense of trading asset internationally against the bureaucratic cost of performing activities in-house. Indeed, companies will grow as long as they can perform cheaper within their enterprises rather than to outsource their product to external provider. With the emerging of the multinational enterprises, production can take place in the home market itself thus giving rise to a leverage of intangible asset and expertise internally.
The key divergence of this school from previous views is that fluctuations are the outcomes of shocks under a perfectly competitive market setting with flexible prices and wages. An important strand from the new classical theorist emerged from the real business cycle models ala Kydland and Prescott (1982), Long and Plosser (1983), and Prescott (1986) among others. The underlying hypothesis is that output is at its natural level which, is subject to contemporaneous distortion from its steady state path. This changes are ascribed to changes in decisions at the micro level (the Ramsey-Cass-Koopman models). The model relaxes the assumption of market imperfection raised by household heterogeneity and intergenerational linkages (Romer, 2006, p. 48).