Heckscher-Ohlin trade theory (1919)

First developed by Eli Heckscher (1879-1952) and later developed by fellow Swedish economist Bertil Ohlin (1899-1979) in 1933, Heckscher-Ohlin trade theory is a theory to explain the existence and pattern of international trade based on a comparative cost advantage between countries producing different goods. Heckscher and Ohlin state that this advantage exists because of the relative resource endowments of the countries

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Hotelling’s Law (1929)

Formulated by American economist Harold Hotelling (1895-1973) from his observations on the stability of competition, Hotelling’s Law states that competitors differentiate their goods and services as little as possible in order to maximize demand from the public. The law explains why retailers (department stores, newsagents and restaurants) tend to cluster together, and why airlines adopt similar

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Human capital theory (1960s)

With its roots in the work of British economists Sir William Petty (1623-1687) and Adam Smith (1723-1790), human capital theory was extensively developed by American economists Gary Becker (1930- ) and THEODORE SCHULTZ (1902-1998). It postulates that expenditure on training and education is costly, and should be considered an investment since it is undertaken with a view to increasing personal

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Imperfect competition

Developed by English economist Joan Robinson (1903-1983), imperfect competition describes a market characterized by a large number of buyers and sellers, dealing with differentiated products, and in which there are no barriers to entry or exit. Imperfect competition differs from perfect competition principally in that its products are highly differentiated. Also see: monopolistic competition Source: J Robinson, The Economics

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Impossibility theorem (1966)

Formulated by American economist Kenneth Arrow (1921- ), impossibility theorem asserts that it is impossible to devise a constitution or voting system which offers more than two reasonable choices to the individual, or that will guarantee to produce a constant set of preferences for a group which correspond to the preferences of the individuals making up

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Input-output analysis (1941)

The Russian-born American economist Wassily Leontief (1906-1999) used matrix algebra and subsequently computer technology to trace the relationship between industries of the US economy. Every output in an economy can be analyzed in terms of final consumption and all the inputs necessary for its production. By developing a matrix of various production functions, it is possible

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Insider-outsider wage determination (1980S)

Wage determination can be achieved inside a firm when increased productivity permits higher pay for existing workers. It can also be determined externally by the forces operating in the broader labor market. Source: A Lindbeck and D J Snower, The Insider-Outsider Theory of Employment and Unemployment (Cambridge, Massachusetts, and London, 1989) The insider-outsider theory is a

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Internal and external balance

Economic analysis that attempts to balance full employment and price stability (the internal balance of an economy) with the balance of payments equilibrium (the external balance). Source: J E Meade, The Theory of International Economic Policy, vol. I (Oxford, 1951), ch. 10 Internal balance in economics is a state in which a country maintains full employment and price level stability.

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Iron law of wages (19TH CENTURY)

Iron law of wages has its roots in the work of classical economists, although the term was first used by German political economist FERDINAND LASSALLE (1825-1864). It postulates that wages will always revert to subsistence levels. A rise in wages triggers an increase in the population, prompting a fall in wages back to subsistence

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IS-LM model

Developed by English economist John Hicks (1904-1989) and American economist Alvin Hansen (1887-1975) to provide a framework for analyzing the factors determining the level of aggregate demand. IS-LM model (also known as the Hicks-Hansen model) was adopted as a universal framework in studying macroeconomics because it seemed to incorporate different views of the working of the economy. It

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Just price (13TH-15TH CENTURY)

Associated with medieval schoolmen, particularly St Thomas Aquinas (1225-1274), just price concept has no allocative role but is rather a moral concept based on natural justice: the just price depends on moral judgment of a good or service. Source: V A Demant, ed., The Just Price, An Outline of the Medieval Doctrine and Examination

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Keynesian economics

Named after the English economist John Maynard Keynes (1883-1946), Keynesian economics has influenced post-1945 economic management, particularly in its advocacy of government management of the economy. Adherents believe that the macro-economy tends towards extended business cycles, with high levels of unemployed factors. They assert that government management or stimulation of the economy to influence demand (through

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Kondratieff cycles

Named after Russian-born economist NIKOLAI KONDRATIEFF (1892-1938), Kondratieff cycles refers to trade cycle of long duration. KONDRATIEFF studied American, British and French wholesale prices and interest rates from the 18th century, and found that the peaks and troughs in economic activity fell at regular intervals. Joseph Schumpeter applied the term ‘Kondriatieff cycles’ to cycles of 50-60 years

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Labor force participation

The ratio of the population in the labor force (employed, self-employed or unemployed and normally above 16 years of age) to total population. This is an important area of study as it may be possible to explain why certain groups are employed in specific sectors. One of the most significant changes has been the

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Labor market discrimination

Labor market discrimination may take the form of different wage rates for equally productive workers with different personal characteristics (such as race, sex, age, religion, nationality, or education). Labor market discrimination may also take the form of exclusion from jobs on the grounds of social class, union membership, or political beliefs. American economist Gary Becker (1930-)

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Labor theory of value (4TH CENTURY BC- )

With roots in the work of the Greek philosopher Aristotle (384-322 BC), labor theory of value became a central feature in analyses by such classical economists as the Scottish economist Adam Smith (1723-1790) and the English economist David Ricardo (1772-1823). They stated that the value of a commodity was determined by the quantity of labor needed to produce it, the

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Laffer curve (1980S)

Named after American economist Arthur B. Laffer, who maintained that economic expansion could be achieved without government budget deficits. Laffer curve shows the tax-rate at which government tax revenue is maximized, after which it declines. It illustrates the relationship between average tax-rates and total tax revenue, and shows that above a certain average rate of

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Laissez-faire (18TH CENTURY)

A doctrine proposed by the Physiocrats in France, whose principle of ‘Laissez-faire, laissez-passer’ (literally, allow to act, allow to pass) was later adopted by such classical economists as the Scottish Adam Smith (1723-1790). Laissez-faire advocates nonintervention or minimum intervention by government in the economic affairs of a country. Also see: physiocracy, mercantilism, economic liberalism, new classical macroeconomics Source: J Viner,

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Law of diminishing returns

Sometimes referred to as variable factor proportions, law of diminishing returns states that as equal quantities of one variable factor are increased, while other factor inputs remain constant, ceteris paribus, a point is reached beyond which the addition of one more unit of the variable factor will result in a diminishing rate of return and

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Law of large numbers (1713)

Law of large numbers was proven by Swiss mathematician Jakob Bernoulli (1654-1705). This is the fundamental principle of statistics that the sequence xn/n tends to p where the random variables xn have common mean p. This implies that the relative frequency of an event of probability p tends to p as the number of trials tends

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