ECON 344 Final Study Guide

ECON 344 Final Study Guide - ECON/LE344 FINAL STUDY GUIDE...

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ECON/LE344 FINAL STUDY GUIDE I. The Economics of Adam Smith – Oct 1, 3 (Heilbroner, Smith) Law of Markets : Interests of society are promoted through economic freedom not by regulation. Great motivation for ind’s, and the key to econ growth. Is self interest in so doing, and inc the welfare of society. Ppl behaving selfishly to promote society’s best position through competition. Invisible hand is automatic equilibrating mechanism in marketplace. It regulates prices and wages as well as what is produced. Division of Labor : The standard of living (the Wealth of a Nation) could rise only if the productivity of labor would rise. For Smith, the most important force leading to a rising standard of living was division of labor. Smith argues that increasing the division of labor increases productivity. Smith’s Theory of Value : Relationship between value and price; natural price vs. market price. Value has 2 meanings—value in use, and value in exchange (price). Smith rejected the idea that the exchange value of a good or service depended on its utility. Smith distinguished between value in use and value in exchange, and argued that the value in exchange could not depend on the value in use. Paradox of Diamonds and Water—there was little predictable relationship between value in use and value in exchange. Accordingly, Smith argued that value in exchange must depend on the amount of labor required to produce the goods; nat’l price determined by COP. This would determine the rate at which they could be exchanged for one another, though there mentioned are exceptions: if the supply of goods could not be increased by labor, then their value would be determined by their scarcity, and not by the labor embodied in them. So in long-run equilibrium nat’l price=COP. Smith’s Theory of Distribution : Ppl are separated into 3 groups—Workers (receive wages), Capitalists (manus, merchants, farmers), Landowners. The question is: what are the long-term trends in rent, profits, and wages? WORKERS: LR nat’l price of labor is subsistence wage, in SR can be above or below; its set by S & D. Later disproved Wages Funds Theory: to determine SR wage you need a. size of wages fund (total available money to pay workers set aside by capitalists aka variable capital) and b. size of labor force (supply). In growing econ, wage can rise indefinitely bc of lag in labor catching up so if growth stops for long time wage will start falling. Wage is highest in fastest growing countries. High wage will drive up labor and make workers more efficient. CAPITALISTS: profit equals rate of return on invested capital, no LR nat’l rate of profit. Over time in a growing economy price is bound to fall. Make profitable investments first bc harder to find later “diminution of profit is natural effect of prosperity” so its possible to halt SR reverse by finding new investment outlets: a. new territory, b. great technological change. Interest rates are good proxy for profits; assumption is
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This note was uploaded on 04/03/2008 for the course ECON 3440 taught by Professor Boyer during the Fall '07 term at Cornell.

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ECON 344 Final Study Guide - ECON/LE344 FINAL STUDY GUIDE...

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