In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an overall general equilibrium. General equilibrium theory contrasts to the theory of partial equilibrium, which only analyzes single markets.
General equilibrium theory both studies economies using the model of equilibrium pricing and seeks to determine in which circumstances the assumptions of general equilibrium will hold. The theory dates to the 1870s, particularly the work of French economist Léon Walras in his pioneering 1874 work Elements of Pure Economics.
t is often assumed that agents are price takers, and under that assumption two common notions of equilibrium exist: Walrasian, or competitive equilibrium, and its generalization: a price equilibrium with transfers.
Broadly speaking, general equilibrium tries to give an understanding of the whole economy using a "bottom-up" approach, starting with individual markets and agents. (Macroeconomics, as developed by the Keynesian economists, focused on a "top-down" approach, where the analysis starts with larger aggregates, the "big picture".) Therefore, general equilibrium theory has traditionally been classified as part of microeconomics.
General equilibrium theory both studies economies using the model of equilibrium pricing and seeks to determine in which circumstances the assumptions of general equilibrium will hold. The theory dates to the 1870s, particularly the work of French economist Léon Walras in his pioneering 1874 work Elements of Pure Economics.
t is often assumed that agents are price takers, and under that assumption two common notions of equilibrium exist: Walrasian, or competitive equilibrium, and its generalization: a price equilibrium with transfers.
Broadly speaking, general equilibrium tries to give an understanding of the whole economy using a "bottom-up" approach, starting with individual markets and agents. (Macroeconomics, as developed by the Keynesian economists, focused on a "top-down" approach, where the analysis starts with larger aggregates, the "big picture".) Therefore, general equilibrium theory has traditionally been classified as part of microeconomics.
The difference is not as clear as it used to be, since much of modern macroeconomics has emphasized microeconomic foundations, and has constructed general equilibrium models of macroeconomic fluctuations. General equilibrium macroeconomic models usually have a simplified structure that only incorporates a few markets, like a "goods market" and a "financial market". In contrast, general equilibrium models in the microeconomic tradition typically involve a multitude of different goods markets. They are usually complex and require computers to help with numerical solutions.
General equilibrium theory, or Walrasian general equilibrium, attempts to explain the functioning of the macro-economy as a whole, rather than as collections of individual market phenomena. The theory was first developed by the French economist Leon Walras in the late 19th century. It stands in contrast with partial equilibrium theory, or Marshellian partial equilibrium, which only analyzes specific markets or sectors.
BREAKING DOWN 'General Equilibrium Theory'
Walras developed general equilibrium theory to solve a much-debated problem in economics. Up to that point, most economic analyses only demonstrated partial equilibrium — that is, the price at which supply equals demand and markets clear — in individual markets. It was not yet shown that equilibrium could exist for all markets at the same time in aggregate.
Uses of General Equilibrium Theory
General equilibrium theory tried to show how and why all free markets tended toward equilibrium in the long run. The important fact was that markets didn't necessarily reach equilibrium, only that they tended toward it. As Walras wrote in 1889, “The market is like a lake agitated by the wind, where the water is incessantly seeking its level without ever reaching it.”
General equilibrium theory builds on the coordinating processes of a free market price system, first widely popularized by Adam Smith's “The Wealth of Nations” (1776). This system says traders, in a bidding process with other traders, create transaction by buying and selling goods. Those transaction prices act as signals to other producers and consumers to realign their resources and activities along more profitable lines.
Walras, a talented mathematician, believed he proved that any individual market was necessarily in equilibrium if all other markets were also in equilibrium. This became known as Walras’ Law.
Assumptions
There are many assumptions, realistic and unrealistic, inside the general equilibrium framework. Each economy is considered to have a finite number of goods in a finite number of agents. Each agent has a continuous and strictly concave utility function, along with possession of a single pre-existing good (the “production good”). In order to increase his utility, each agent must trade his production good for other goods to be consumed.
There is a specified and limited set of market prices for the goods in this theoretical economy. Each agent relies on these prices to maximize his utility, thereby creating supply and demand for various goods. Like most equilibrium models, markets lack uncertainty, imperfect knowledge or innovation.
What is 'Top-Down Investing'
Top-down investing is an investment analysis approach that involves looking first at the macro picture of the economy, and then looking at the smaller factors in finer detail. After looking at the big-picture conditions around the world, analysts next examine the general market conditions followed by particular industrial sectors to select those that are forecast to outperform the market. From this point, they further analyze the stocks of specific companies to choose potentially successful ones as investments by looking last at a particular company's fundamentals. Top-down approaches prioritize macroeconomic or market-level factors most.Top-down investing can be contrasted with the bottom-up approach, which starts first with a company's fundamentals, where most of the emphasis is put, and then works its way up through the structural hierarchy, looking at macro-global economic factors last.
BREAKING DOWN 'Top-Down Investing'
When looking at the bigger picture, investors use macroeconomic variables, such as GDP, trade balances, currency movements, inflation, interest rates and other aspects of the economy. Then it works down a level to identify high-performing sectors, industries, or regions within the macroeconomy. Based on these factors, top-down investors allocate investments from efficient diversified asset allocations, rather than by analyzing and betting on specific companies. For example, if economic growth in Asia is better than the domestic growth in the United States, an investor might shift his assets internationally by purchasing exchange-traded funds (ETFs) that track specific Asian countries.
Bottom-up investing is an opposite strategy to top-down. Practitioners of the bottom-up approach ignore macroeconomic factors and instead look at individual microeconomic factors that affect specific companies they're watching. For example, a bottom-up investor chooses a company and then looks at its financial health, supply, demand and other factors over a specified time period. Although there is some debate as to whether the top-down approach is better than the bottom-up strategy, many investors have found top-down useful in determining the most promising sectors in a given market.
Top-down investing may produce a more long-term or strategic portfolio, including more passive indexed strategies, while a bottom-up approach may lead to more tactical, actively managed strategies.
What is 'Bottom-Up Investing'
Bottom-up investing is an investment approach that focuses on the analysis of individual stocks and de-emphasizes the significance of macroeconomic cycles and market cycles. In bottom-up investing, the investor focuses his attention on a specific company and its fundamentals, rather than on the industry in which that company operates or on the greater economy as a whole. This approach assumes individual companies can do well even in an industry that is not performing, at least on a relative basis.
Bottom-up investing forces investors to consider microeconomic factors first and foremost. These factors include a company's overall financial health, analysis of financial statements, the products and services offered, supply and demand, and other individual indicators of corporate performance over time. For example, a company's unique marketing strategy or organizational structure may be a leading indicator that causes a bottom-up investor to invest. Alternatively, accounting irregularities on a particular company's financial statements may indicate problems for a firm in an otherwise booming industry sector.
Modern concept of general equilibrium in economics
The modern conception of general equilibrium is provided by a model developed jointly by Kenneth Arrow, Gérard Debreu, and Lionel W. McKenzie in the 1950s.[4][5] Debreu presents this model in Theory of Value (1959) as an axiomatic model, following the style of mathematics promoted by Nicolas Bourbaki. In such an approach, the interpretation of the terms in the theory (e.g., goods, prices) are not fixed by the axioms.
Three important interpretations of the terms of the theory have been often cited. First, suppose commodities are distinguished by the location where they are delivered. Then the Arrow-Debreu model is a spatial model of, for example, international trade.
Second, suppose commodities are distinguished by when they are delivered. That is, suppose all markets equilibrate at some initial instant of time. Agents in the model purchase and sell contracts, where a contract specifies, for example, a good to be delivered and the date at which it is to be delivered. The Arrow–Debreu model of intertemporal equilibrium contains forward markets for all goods at all dates. No markets exist at any future dates.
Third, suppose contracts specify states of nature which affect whether a commodity is to be delivered: "A contract for the transfer of a commodity now specifies, in addition to its physical properties, its location and its date, an event on the occurrence of which the transfer is conditional. This new definition of a commodity allows one to obtain a theory of [risk] free from any probability concept..."
These interpretations can be combined. So the complete Arrow–Debreu model can be said to apply when goods are identified by when they are to be delivered, where they are to be delivered and under what circumstances they are to be delivered, as well as their intrinsic nature. So there would be a complete set of prices for contracts such as "1 ton of Winter red wheat, delivered on 3rd of January in Minneapolis, if there is a hurricane in Florida during December". A general equilibrium model with complete markets of this sort seems to be a long way from describing the workings of real economies, however its proponents argue that it is still useful as a simplified guide as to how real economies function.
Some of the recent work in general equilibrium has in fact explored the implications of incomplete markets, which is to say an intertemporal economy with uncertainty, where there do not exist sufficiently detailed contracts that would allow agents to fully allocate their consumption and resources through time. While it has been shown that such economies will generally still have an equilibrium, the outcome may no longer be Pareto optimal. The basic intuition for this result is that if consumers lack adequate means to transfer their wealth from one time period to another and the future is risky, there is nothing to necessarily tie any price ratio down to the relevant marginal rate of substitution, which is the standard requirement for Pareto optimality. Under some conditions the economy may still be constrained Pareto optimal, meaning that a central authority limited to the same type and number of contracts as the individual agents may not be able to improve upon the outcome, what is needed is the introduction of a full set of possible contracts. Hence, one implication of the theory of incomplete markets is that inefficiency may be a result of underdeveloped financial institutions or credit constraints faced by some members of the public. Research still continues in this area.
What are merit goods?
Merit goods are those goods and services that the government feels that people will under-consume, and which ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service.
Merit goods and services create positive externalities when consumed and these 3rd party spill over benefits can have a significant effect on social welfare. Market failure occurs when merit goods and services are under-consumed under free market conditions.
Policy intervention can help either through offering financial incentives (e.g. consumer or producer subsidies) or through behavioural nudges and information campaigns designed to change our choices.
What are the key differences between a merit good and a public good?
Who provides merit goods?
Both the state and private sector provide merit goods & services. We have an independent education system and people can buy private health care insurance.
Consumption of merit goods is believed often to generate positive externalities- where the social benefit from consumption exceeds the private benefit.
A merit good is a product that society values and judges that people should have regardless of their ability to pay. In this sense, the government is acting paternally in providing merit goods and services. Individuals may not act in their own interest because of imperfect information.
What are some good examples of merit goods?
Good examples of merit goods include health services, contraception, education, work training programmes, public libraries and museums, Citizen's Advice Bureaux and inoculations for children
Education as a merit good
Parents may be unaware of the longer-term benefits that their children might derive from education.
Education is a long-term investment decision. The private costs must be paid now but the private benefits (including higher earnings potential over one's working life) take time to happen. Education provides external benefits including rising incomes and productivity for current and future generations and an increase in occupational mobility to help to reduce unemployment.
Increased spending on education should also provide a stimulus for higher-level research which can add to the long run trend rate of growth. Other external benefits might include the encouragement of a more enlightened and cultured society. Providing that the education system provides a sufficiently good education across all regions and sections of society, increased education and training spending should also open up more equality of opportunity.
Notice here that we are talking about the sorts of goods and services that society judges to be in our best welfare. Judgements involve subjective opinions – and we cannot escape from making value judgements when we are discussing merit goods.
Why does the government provide merit goods and services?
To encourage consumption so that positive externalities of merit goods can be achieved for example free inoculation against infectious diseases
To overcome the information failures linked to merit goods
On grounds of equity – because the government believes that consumption should not be based solely on the grounds of ability to pay for a good or service
TRADE
Trade is a driver for economic growth and sustainable development. To what extent fair play prevails in trade depends on the regulations governing world trade and their enforcement. With its 164 member states, the World Trade Organization (WTO) establishes a basic set of rules for free and fair global trade. However, this multilateral framework requires constant development, which must keep up the pace with globalisation. But the forthcoming WTO Ministerial Conference in December 2017 threatens to end in deadlock.
Germany is one of the leading trade nations. Each year, our economy exports goods and services worth well over 1 trillion euros. Industry accounts for the bulk of German exports. Every fourth job in Germany – and every second in German industry – depends on exports. At the same time, a large part of German industrial production is possible only because of imports: around one third of all German imports are intermediate goods. Trade barriers on world markets have a direct impact on the performance of German industry and thus on prosperity in Germany.
Under the auspices of the WTO, the organisation’s member states have reached an agreement on a comprehensive catalogue of binding and non-discriminatory rules. Each member has an equal say in the drawing up of new rules and guidelines. Decisions are made by consensus. The common goal is the dismantling of obstacles to trade. With its transparency mechanisms and the binding settlement of disputes, the WTO is the indispensable legal backbone of the international trading system. Companies engaged in international trade can depend on a worldwide uniform set of rules and do not have to adapt to different trade conditions with each trading partner.
However, the 164 WTO members still have a long way to go before worldwide trade is freed from all major restrictions and clearly regulated in every aspect. Many important areas of world trade are still subject either to insufficient regulation at the multilateral level or to no such regulation at all (for example, investments, competition, public procurement, digital trade). Moreover, many countries – including Brazil and China – invoke numerous exceptions and special regulations.
WTO – mandate and objectives
The WTO not only provides a negotiation platform for its members to draw up new rules and liberalize trade. It must also provide for transparency in world trade, monitor existing treaties, and mediate disputes between member states. The diverse tasks of the WTO are laid down in several individual treaties:
General Agreement on Tariffs and Trade (GATT)
General Agreement on Trade in Services (GATS)
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
Government Procurement Agreement (GPA)
Information Technology Agreement (ITA)
The GPA and ITA are so-called plurilateral agreements because only some WTO members have signed up to them. At the same time, a number of WTO members have begun to negotiate new agreements on trade in services (Trade in Services Agreement, TiSA) and trade in environmental goods (Environmental Goods Agreement, EGA). While both negotiations are currently stalled – not least because of the opposition of the current U.S. administration – plurilateral agreements can serve as a stepping stone for multilateral trade liberalization and rules-setting. An important prerequisite is that such agreements comply with the WTO rules on “preferential trade agreements”.
WTO faces major challenges
International trade in goods and services continues to be hampered by numerous import duties and other trade barriers. Non-tariff barriers can take very different forms. They include complicated registration procedures, the obligation to pass on company know-how, and price setting by the state. During the global economic crisis that began in 2008, the G20 tasked the WTO with monitoring such potentially protectionist trade measures of the G20 countries and to regularly report on them. The WTO reports show that the number of such trade barriers has grown constantly, even though all G20 governments have committed themselves to putting a stop to, and doing away altogether with, state interference of this kind. Until October of this year, 1321 trade-restrictive measures by G20 members have been counted.
The best means to combat growing protectionism and strengthen the WTO would be the conclusion of the so-called Doha Round. In 2001, the WTO members agreed in Doha (Qatar) to this comprehensive negotiating agenda. But to this day, only a handful of items on that agenda have been successfully concluded. They include an agreement on trade facilitation (Trade Facilitation Agreement, TFA), which entered into force in 2016. The same year, the expanded WTO agreement on information technology products (Information Technology Agreement, ITA II) went into effect; however, only 50 or so WTO members have signed the agreement to date.
Ahead of the WTO Ministerial Conference in Buenos Aires MC11) in mid-December 2017, the BDI and B20 Germany – the official platform for the G20 business dialogue – are advocating for strengthening the WTO and paving the road for a modern trade agenda. Even though a breakthrough in the Doha Round can be expected neither in Argentina nor over the next few years owing to the lack of support and willingness to compromise from the United States and important emerging markets such as China, progress could be made on some promising initiatives. These include, for example, digital trade, improvements for small and medium-sized enterprises, investment facilitation, and stronger transparency mechanisms at the WTO against protectionist measures.
G20 trade-restrictive measures imposed since october 2008
Number of G20 trade-restrictive measures in force: 1 087
Kommentare
Kommentar veröffentlichen