Economics

We have already mentioned bonds, and that they are marketable securities that are purchased by financial intermediaries like mutual funds and pension funds as well as by individuals. We are all aware of U.S. Government bonds, but we also know that you cannot buy stock in Uncle Sam! Clearly, bonds must be different from stocks, though both are investments. Now let’s be specific about what a bond is and how the bond market works.

It has frequently been observed that interest in business or trade cycle theory is itself cyclical (e.g. Zarnowitz 1985, p.524). In periods of sustained prosperity interest wanes, as it did in the 1960s and early 1970s when research into macroeconomic dynamics concentrated on growth theory. At the end of the 1960s, the continued existence of business cycles was questioned. The experiences of the 1970s and early 1980s, especially following the 1973 and 1979 oil price shocks, brought a resurgence of interest in business cycles.

There are a number of important questions about business cycles which remain to be answered conclusively. They include the following:

• Are there long cycles coexisting with the business cycle? If there are, then the practice of treating business cycles as ‘growth cycles’ (i.e. fluctuations around a linear or log linear growth trend) will be misleading. This practice is also dubious if the trend itself is stochastic or nonlinear, as noted in section The Long Swing Hypothesis and the Growth Trend .

The elasticity of demand is its responsiveness to changes in another factor, such as price. British economist Alfred Marshall is generally credited as the first economist to define the concept in 1890, but the German statistician Ernst Engel published a paper five years earlier, showing how changes in income alter the level of demand. The origins of the concept may be disputed, but its importance is not.

IN CONTEXT:

FOCUS

Welfare economics

KEY THINKER

Vilfredo Pareto (1848–1923)

BEFORE

1776 Adam Smith’s The Wealth of Nations relates self-interest to social welfare.

1871 British economist William Jevons says that value depends entirely on utility.

1874 French economist Léon Walras uses equations to determine the overall equilibrium of an economy.

AFTER

1930–50 John Hicks, Paul Samuelson, and others use Pareto optimality as the basis of modern welfare economics.

1954 US economist Kenneth Arrow and French economist Gérard Debreu use mathematics to show a connection between free markets and Pareto optimality.