Economic Distribution: Mastering Economic Distribution, Navigating Wealth Allocation for a Fair World

By Fouad Sabry

What is Economic Distribution

In the field of economics, "distribution" refers to the method by which total output, revenue, or wealth is divided up among individuals or among the various components of production. Each unit of output is equivalent to one unit of revenue, according to the general theory as well as specific examples such as the National revenue and Product Accounts of the United States. The classification of factor incomes and the measurement of their respective shares, as in national Income, are two of the many applications of national accounts. Adjustments to the national accounts or other data sources are typically utilized when the focus of an investigation is on the income of individuals or families. In this context, researchers frequently focus their attention on the percentage of total income that is received by the top x percent of households, the next x percent of households, and so on, as well as the factors that may influence those percentages.

How you will benefit

(I) Insights, and validations about the following topics:

Chapter 1: Distribution in economics

Chapter 2: Economics

Chapter 3: Factors of production

Chapter 4: Neoclassical economics

Chapter 5: Means of production

Chapter 6: Index of economics articles

Chapter 7: Capital (economics)

Chapter 8: Wealth

Chapter 9: Classical economics

Chapter 10: Welfare economics

Chapter 11: Equity (economics)

Chapter 12: Long run and short run

Chapter 13: John Roemer

Chapter 14: Economic justice

Chapter 15: Family economics

Chapter 16: Gains from trade

Chapter 17: Public economics

Chapter 18: Education economics

Chapter 19: The Theory of Wages

Chapter 20: Cambridge capital controversy

Chapter 21: Marxian economics

(II) Answering the public top questions about economic distribution.

(III) Real world examples for the usage of economic distribution in many fields.

(IV) Rich glossary featuring over 1200 terms to unlock a comprehensive understanding of economic distribution

Who this book is for

Professionals, undergraduate and graduate students, enthusiasts, hobbyists, and those who want to go beyond basic knowledge or information for any kind of economic distribution.

• Language: English
• Publisher: One Billion Knowledgeable
• Release date: Nov 6, 2023

Book preview

Chapter 1: Distribution in economics

In economics, distribution refers to the distribution of total output, income, or wealth among individuals or production factors (such as labour, land, and capital). and calculating their respective proportions, as with the national Income. However, when the focus is on the income of individuals or households, national accounts or other data sources are frequently utilized. In this context, the proportion of household income going to the top (or bottom) x percent of households, the next x percent, and so on (defined by equally spaced cut points, say quintiles), as well as the factors that may influence them, are frequently of interest (globalization, tax policy, technology, etc.).

Distribution of income can describe a prospectively observable aspect of an economy. It has been used as a test subject for theories explaining the distribution of income, such as the human capital theory and the economic discrimination theory (Becker, 1993, 1971).

In welfare economics, a level of feasible output possibilities is distinguished from the income distribution for those output possibilities. But in the formal theory of social welfare, rules for selecting from feasible income and output distributions are a way of representing normative economics at a very general level.

In neoclassical economics, the equilibrium output, income, and income distribution are determined by the interaction of supply and demand in factor markets. In the output market, factor demand incorporates the marginal-productivity relationship of that factor. Recent distinctions between human capital, physical capital, and social capital, as well as between social capital and personal capital, have enriched distribution analysis.

Vilfredo Pareto proposed that the distribution of income can be modeled by a power law; this is now known as the Pareto distribution.

{End Chapter 1}

Chapter 2: Economics

A graph depicting Quantity on the X-axis and Price on the Y-axis

The supply and demand model describes how prices vary as a result of a balance between product availability and demand.

Economics examines the actions and relationships of economic actors, as well as the functioning of economies. Microeconomics is the study of the economy's fundamental building blocks, such as individual agents and markets, as well as the interactions between them and the results of those interactions. Households, businesses, customers, and vendors are all examples of possible agents. The field of macroeconomics examines the economy as a whole, including its constituent parts and the forces that shape them, such as the allocation of scarce resources like labor, capital, and land, the value of money, the rate of economic expansion, and government intervention.

Other major divisions in economics include the study of what is (positive economics) and what ought to be (normative economics); Political economy was the original name for this field of study, but economists have been using the term economics since the late 19th century. Therefore, political economy became the de facto method of running a polis or state.

There are numerous current definitions of economics, some of which reflect shifting perspectives on the field or disagreements among economists. Political economy, as defined by Scottish philosopher Adam Smith in 1776, was an inquiry into the nature and causes of the wealth of nations, with the emphasis on the nature:

a subfield of political science concerned with generating enough money for everyone to live comfortably and giving the government enough money to fund public services.

Jean-Baptiste Say (1803) distinguished the field from its public-policy applications by defining economics as the study of how wealth is created, circulated, and consumed. In 1844, John Stuart Mill provided further clarification on the topic:

Economics is the study of the social phenomena that result from the coordinated actions of people to create material wealth, unaltered by the pursuit of any other goal.

In his seminal work Principles of Economics (1890), Alfred Marshall offered a definition that is still widely used. In it, he argued that economics should be studied at both the macro- and micro-levels, not just in relation to wealth:

Economics is the study of regular people doing regular things. It probes his means of financial support and his spending habits. Thus, it is, on the one hand, a branch of the economics discipline and, on the other, a crucial part of the study of man.

To what extent does Lionel Robbins' (1932) probably the most commonly accepted current definition of the subject hold?:

Economics is the study of human action in light of the constraints imposed by limited resources and competing goals.

According to Robbins, the definition is more analytical than categorical because it focuses attention on a particular aspect of behavior, the form imposed by the influence of scarcity rather than picking out certain kinds of behavior. However, he argued that economics can be applied to the study of topics other than peace and security. This is due to the fact that war is fought for the purpose of victory (a desired end), that this pursuit incurs both costs and benefits, and that resources (human life and other costs) are expended in order to achieve victory. The rational actors making the decision may never go to war if they believe it is impossible to win or if the costs are too high relative to the benefits. Economic analysis can be applied to a wide range of fields, but this does not mean that economics is the science of studying all of these fields. Rather, economics is the science of studying the commonalities among them (they all use scarce resources to attain a sought after end).

Some responses later argued that the definition was too general and should have focused solely on market analysis. However, these criticisms faded after the 1960s, when rational-choice modelling and the economic theory of maximizing behavior broadened the scope of economics to include topics previously addressed by other disciplines.

Hesiod, a poet from Boeotia, is often cited as the first economist because of the prevalence of resource distribution questions in his works.

A seaport with a ship arriving

A 1638 painting of a French seaport during the heyday of mercantilism

The subject was shaped primarily by two groups, the mercantilists and the physiocrats of the future. Both of these movements can be traced back to the emergence of modern European capitalism and economic nationalism. The economic doctrine of mercantilism was widely disseminated in pamphlet form by merchants and politicians from the 16th to the 18th centuries. It believed that a country's prosperity was tied to its ability to hoard precious metals. Only by exporting goods and limiting imports other than gold and silver could countries without access to mines obtain these precious metals through trade. State regulation would impose protective tariffs on foreign manufactured goods and ban manufacturing in the colonies, as well as encourage the import of cheap raw materials to be used in manufacturing goods that could then be exported.

Picture of Adam Smith facing to the right

The publication of Adam Smith's The Wealth of Nations in 1776 is considered to be the first formalisation of economic thought.

It has been said that the effective birth of economics as a separate discipline occurred with the publication of Adam Smith's The Wealth of Nations in 1776. In contrast to the physiocratic belief that only agriculture was productive, the book identifies land, labor, and capital as the three factors of production and the main contributors to a nation's wealth.

Smith explains the potential advantages of specialization through division of labor, such as higher labor productivity and benefits from trade, both locally and internationally. Within this context:

He generally, indeed, Neither side has any interest in serving the general public, or how much he is actually advertising it.

By putting more emphasis on domestic rather than international manufacturing,, His only concern is for his own safety; and by guiding that sector in a way that maximizes the value of its output, He is only thinking of himself, which he is a part of, like many other situations, propelled by forces beyond his control toward a goal that was never in his original plans.

It's not always a bad thing that it never became a part of the larger culture either.

By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it

In explaining low living standards, the Reverend Thomas Robert Malthus (1798) introduced the concept of diminishing returns. He claimed that the exponential growth of the human population was outstripping the linear growth of agricultural output. With a growing population competing for a finite amount of land, productivity declines as a result of human effort. According to him, this led to persistently low wages that kept most people from ever enjoying a standard of living above the poverty line. 'Labor theory of value' refers to variations on Smith's work presented by other classical economists. In classical economics, the end goal is a static economy with a constant stock of physical wealth (capital) and a constant population size.

Photograph of Karl Marx facing the viewer The Marxist critique of political economy comes from the work of German philosopher Karl Marx.

Karl Marx is the progenitor of both classical economics and Marxist (later, Marxian) economics. In 1867, the German edition of Marx's seminal work, Das Kapital, was released to the public. Marx argued that the exploitation of labor by capital could be understood through the concepts of labor theory of value and surplus value..

The Economic Doctrines of Karl Marx and the Class Struggle (Erfurt Program) by Karl Kautsky (1854–1938), Finance Capital by Rudolf Hilferding (1877–1941), The Development of Capitalism in Russia and Imperialism, the Highest Stage of Capitalism by Vladimir Lenin (1870–1924), and The Accumulation of Capital by Rosa Luxemburg (1871–1919) all contributed to the expansion of Marxian economics.

Jean-Baptiste Say's Treatise on Political Economy or, The Production, Distribution, and Consumption of Wealth is widely regarded as the first comprehensive treatment of economics as a social science (1803). These three things were only considered in terms of their effects on the economy, with no attention paid to how they were put into practice.

Both its detractors and its apologists occasionally refer to neoclassical economics as orthodox economics. Refinements such as econometrics, game theory, analysis of market failure and imperfect competition, and the neoclassical model of economic growth for analyzing long-run variables affecting national income are all examples of how modern mainstream economics expands on neoclassical economics.

To achieve their goals, individuals, families, and businesses (collectively referred to as economic actors, players, or agents) are the focus of neoclassical economics. We assume that agents are rational actors who are faced with a number of options for how to spend their time and energy, have fixed preferences, clear overarching goals, limited means at their disposal, and the ability to make a decision. When two or more parties must make a decision (a choice) in order to achieve the best possible outcome, this is an economic problem that can be analyzed using economic theory.

John Maynard Keynes John Maynard Keynes was a key theorist in economics.

John Maynard Keynes is widely credited as the father of modern macroeconomics thanks to the ideas presented in his 1936 book The General Theory of Employment, Interest, and Money.

Progress in the Keynesian vein is also linked to the new school of thought known as New Keynesians. Researchers in this field focus on standard Keynesian themes like price and wage rigidity, but they also share with other economists an interest in optimizing models built on microfoundations. These are typically incorporated as endogenous aspects of the models, rather than assumed as in traditional Keynesian ones.

The monetarist ideas and free market support of the Chicago School of Economics have made it famous. If the money supply doesn't grow or shrink by too much, market economies are stable by definition, say monetarists like Milton Friedman.

Many of the foundational principles established by Adam Smith and the classical economists were effectively updated by Milton Friedman.

The key to a prosperous economy, according to the Austrian School, is individual initiative, protection of private property, and unrestricted exchange of goods and services. Sound money, according to Austrian economists, keeps the government from debasing the currency, which would negatively impact the savings rate of the population and artificially distort the economic choices of individuals.

The Freiburg School, the School of Lausanne, post-Keynesian economics, and the Stockholm School are all examples of wschools or trends of thought referring to a particular style of economics practiced at and disseminated from well-defined groups of academicians that have become known worldwide. Some people classify the dominant school of thought in modern economics as Saltwater, representing the schools on the East and West coasts of the United States, and Freshwater, representing the Chicago school.

Classical economics, neoclassical economics, Keynesian economics, the neoclassical synthesis, monetarism, new classical economics, and New Keynesian economics are all schools of thought within macroeconomics.

Analytical economic models form the basis of conventional economic theory. The goal of theoretical development is to identify assumptions that are at least as tractable in terms of the amount of background data they require, more precise in their predictions, and more fruitful in terms of inspiring new lines of inquiry. Although neoclassical economic theory provides the standard (or orthodox) theoretical and methodological framework for the study of economics, other schools of thought, such as heterodox economic theories, are also viable.

Supply and demand, marginalism, rational choice theory, opportunity cost, budget constraints, utility, and the theory of the firm are all central concepts in the study of microeconomics. wherein the principles of microeconomics play a significant role.

There are times when a quantitative test of an economic hypothesis isn't even possible.

Using econometrics and economic data, economic theories are regularly put through rigorous empirical testing. and instead studies large amounts of data through observation; this method is generally seen as less rigorous than controlled experiments, and its results are often more tentative. However, natural experiments are becoming increasingly used in the expanding field of experimental economics.

Regression analysis and other statistical methods are widely used. Professionals rely on these techniques to account for confounding factors like noise and estimate the size, economic significance, and statistical significance (signal strength) of the hypothesized relation(s). This could lead to the acceptance of a hypothesis, albeit on a probabilistic rather than a definitive basis. The falsifiable hypothesis must hold up under scrutiny before it can be accepted. Due to variations in tests, data sets, and preconceived notions, even when using widely accepted methods, a definitive answer or consensus cannot be guaranteed.

The field of experimental economics has advocated for the conduct of carefully designed experiments. This has narrowed the historically noted gap between economics and the natural sciences by making it possible to conduct empirical tests of assumptions. These have discovered that the axioms may not always hold true.

In 2002, psychologist Daniel Kahneman and mathematician Amos Tversky won the Nobel Prize in economics for their empirical discovery of several cognitive biases and heuristics in the field of behavioural economics. In neuroeconomics, similar empirical testing is conducted. The distinction between a model that accounts for selfish, altruistic, and cooperative tendencies, and one that assumes only selfish tendencies, is another case in point.

A vegetable vendor in a marketplace. Economists study trade, Choices in manufacturing and purchasing, such as those that occur in a traditional marketplace. Two traders sit at computer monitors with financial information. Electronic trading brings together buyers and sellers through an electronic trading platform and network to create virtual market places.

Pictured: São Paulo Stock Exchange, Brazil.

The study of microeconomics focuses on the interactions between individual market participants. Private and public organizations of varying types are included here; they all function, in general, with a limited supply of tradable units and minimal government oversight. Apples are an example of a tangible product, while services like computer repair, legal advice, and even live performances could be exchanged.

There are many different kinds of markets. In a perfectly competitive market, no single firm has sufficient market share to determine the price at which a given good or service is sold. Put another way, everyone involved is a price taker because nobody sets the price. However, imperfect competition is common in the real world.

Monopoly, where there is only one seller, duopoly, where there are only two sellers, oligopoly, where there are only a few sellers, monopolistic competition, where there are many sellers producing highly differentiated goods, monopsony, where there is only one buyer, and oligopsony are all examples of imperfect competition (in which there are few buyers of a good). In markets with little or no competition, some businesses may even have the ability to set their own prices.

The assumption underlying the partial equilibrium approach to market analysis is that the state of the market under consideration has no effect on other markets. This approach aggregates (adds up) data from a single market. The theory of general equilibrium analyzes the functioning of numerous markets. It adds up all the trading in all the different markets. Market dynamics and the forces that drive them are the focus of this approach.

Production, in microeconomics, is the process by which inputs are transformed into final products. Manufacturing is an economic process that transforms raw materials into a finished product for sale or personal consumption. The rate of production is the quantity of goods or services created over a given time frame. Production options for consumption goods (food, haircuts, etc.) are distinguished from production options for investment goods (new tractors, buildings, roads, etc.), public goods (national defense, smallpox vaccinations, etc.) or private goods (new computers, bananas, etc.).

Primary factors of production are things like labor, capital (long-lasting manufactured goods used in production, like an existing factory), and land, all of which are inputs (including natural resources). Steel for a new car is an example of an intermediate good that was used in the production of a final good.

How well a system produces the desired output with the available inputs and technology is a measure of its economic efficiency. More output with the same amount of inputs is more efficient. Pareto efficiency is a common benchmark that is reached when no additional changes can improve the situation for any one person or group without negatively impacting another.

An example production–possibility frontier with illustrative points marked.

An informative visual representation of scarcity, cost, and efficiency is the production-possibility frontier (PPF). An economy needs only two goods to function (say guns and butter). The PPF is a table or graph (like the one to the right) that displays the various quantity combinations of the two goods that are producible with a given technology and total factor inputs that limit feasible total output. Each point on the curve represents the maximum possible output of one good, given a feasible output quantity of the other good, and thus represents the economy's potential total output.

The negative slope of the curve and the fact that people are willing to consume beyond the PPF (such as at X) are symbols of scarcity in the diagram. The production of one good decreases as the production of the other rises along the curve. This is due to the fact that switching resources from producing one good to producing another reduces the output of the latter.

The trade-off between the two goods is given by the slope of the curve at any given point on the curve. Using this method, we can quantify the opportunity cost of producing one more unit of one good at the expense of producing one more unit of the other good. Thus, if the price of an additional gun is one hundred sticks of butter, the opportunity cost of that gun is one hundred butter. Because resources are limited, prioritizing one good over another along the PPF means making sacrifices elsewhere. Nonetheless, in a market economy, progress along the curve may indicate that the agents expect the increased output to be worthwhile.

Each point on the curve represents the most productive use of available resources, as measured by output relative to inputs. Because the output of one or both goods could be increased by moving northeast to a point on the curve, a point inside the curve (such as at A) is possible but represents production inefficiency (wasteful use of inputs). High unemployment during a downturn in the business cycle, or an economic structure that discourages the optimal use of available resources, are cited as examples of such inefficiency. Allocative efficiency (also known as Pareto efficiency) may not be fully satisfied even if a point on the curve is chosen because it produces a mix of goods that consumers prefer.

How an economy can be made more effective is a central question in much of the applied economics that informs public policy.

One definition of economics is the study of how societies can best organize themselves in light of scarcity so that available resources are used as effectively as possible., where the subject makes its unique contribution.

A map showing the main trade routes for goods within late medieval Europe

Both theory and data suggest that specialization is essential to economic productivity. Real opportunity costs of production may vary from person to person or country to country due to factors such as differences in human capital stocks per worker or capital/labor ratios. A theoretical benefit could accrue to products that make more efficient use of the more plentiful and, therefore, cheaper input.

One region may specialize in the output for which it has a comparative advantage and benefit from trade with another region that lacks any absolute advantage but has a comparative advantage in producing something else even if the former has an absolute advantage in terms of the ratio of its outputs to inputs in every type of output.

Even though high-income countries have access to the same technologies and factor inputs, there is still significant trade between regions. As a result, researchers have looked into economies of scale and agglomeration to explain why certain trading parties or regions tend to specialize in similar but differentiated product lines.

Combining the above characteristics would be the case of a country that, like developed countries, focuses on the creation of high-tech knowledge products but also engages in trade with developing nations for goods made in factories where labor is relatively cheap and abundant. Specialization in production and trading leads to greater output and utility than would be possible if all countries produced both high-tech and low-tech goods at the same time.

Market prices of outputs and productive inputs determine an allocation of factor inputs by comparative advantage, so that (relatively) low-cost inputs go to producing low-cost outputs, as predicted by theory and observed empirically. As a result, total output might go up whether by accident or design.

A graph depicting Quantity on the X-axis and Price on the Y-axis The supply and demand model describes how prices vary as a result of a balance between product availability and demand.

The graph shows a rise (that is,, right-shift) in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S).

Some of the most obvious characteristics of produced and traded goods in a market economy are their prices and quantities. How production and consumption are kept in equilibrium is explained by the theory of supply and demand. It is used in microeconomics to describe how prices and output are established in a market with perfect competition, where there are no powerful buyers or sellers.

Demand in a given commodity market is the relationship between the quantity and unit price at which all buyers are willing to purchase the good. A table or graph displaying price and quantity demanded is a common representation of demand (as in the figure). Consumers in demand theory are thought to make optimal decisions regarding the quantity of goods they purchase given their income, price points, preferences, etc. The term constrained utility maximization describes this situation (with income and wealth as the constraints on demand). Utility is the assumed connection between how much a consumer values various sets of goods and services.

According to the law of demand, in a competitive market, demand falls as price rises. Simply put, if a product's price doubled, fewer people would buy it (other things unchanged). Consumers shift their purchasing habits toward less expensive commodities as their prices drop (the substitution effect). In addition, the rise in purchasing power due to the drop in prices (the income effect). A rise in income, for instance, would cause the demand curve for a typical good to move away from the origin, as shown in the figure. All factors affecting supply and demand are assumed to be constant for the most part.

The supply of a commodity is defined as the quantity of that commodity that is for sale at a given price. It can be shown as a table or a graph connecting selling price and available stock. It is assumed that producers like corporations will seek to produce and supply the maximum amount of goods that will result in the greatest profit. If all other factors remain constant, the supply curve is a function of price and quantity.

In other words, as shown in the graph, supply increases as the selling price rises. The increased profitability of production is a direct result of the higher price. The supply side can move, too, if something like the price of a productive input or a technological advancement changes. According to the Law of Supply, a higher price usually results in a larger supply and a lower price usually results in a smaller supply. The price of substitutes, the cost of production, the technology used, and the various inputs to production are all assumed to be stable over the evaluation period of supply in this case as well.

At the point where the supply and demand curves in the preceding figure intersect, the market is said to be in equilibrium. When the price falls below the point of equilibrium, supply falls short of demand. A higher price is expected as a result of this. When the price is higher than the point of equilibrium, supply exceeds demand. The result is a lower price. Given a supply and demand curve, the supply and demand model forecasts that prices and quantities will level off at the point where the supply meets the demand. Like the figure, a change in demand (or supply) is expected to result in a different price-quantity dynamic, according to demand-and-supply theory.

In most cases, investors avoid engaging in direct market transactions. On the supply side, they may find employment with and production via businesses. Corporations, partnerships, and trusts are the most common organizational structures. When the costs of doing business are less than doing it on the market, people will start organizing their production in firms, as proposed by Ronald Coase. When workers and investors pool their resources, economies of scale can be realized that would be impossible for individuals to replicate in the market.

In the theory of supply and demand's ideal, perfectly competitive market, numerous suppliers compete for business without significantly affecting prices. Industrial organization generalizes from that narrow context to analyze the strategic actions of companies with considerable market power over prices. It analyzes the make-up and dynamics of such markets. Monopolistic competition, oligopolies of varying types, and monopolies are all common market structures that scholars examine alongside perfect competition.

In economics, uncertainty refers to any potential for either gain or loss that cannot be accurately predicted. Financial and capital markets would be reduced to exchange of a single instrument in each market period, and the communications industry would cease to exist if it were not for it.

A smokestack releasing smoke

Pollution can be a simple example of market failure.

If the environment is responsible for covering the costs of production instead of the producers,, victims of other types of accidents, then prices are distorted. A woman takes samples of water from a river.

Environmental scientist sampling water

The term market failure refers to a wide range of issues that threaten to disprove common economic principles. Economists may classify market failures in a variety of ways, but the following general classes tend to surface in the canonical texts:.

There is a potential for economic inefficiency due to information asymmetries and incomplete markets, but there is also a chance that efficiency can be improved through market, legal, and regulatory remedies, as discussed above.

When competition fails to act as a check on production, we have a situation known as natural monopoly, which encompasses both the practical and technical monopoly concepts. Possible explanations include massive economies of scale.

In a typical market, public goods would be in short supply. Public goods are those that can be used by a large number of people at once and which do not require individual payment to access.

In cases of externalities, the market price does not accurately reflect the true social costs or benefits of production or consumption. One possible negative externality is caused by air pollution, while one possible positive externality is caused by education (less crime, etc.). In an effort to correct the price distortions caused by these externalities, governments frequently tax and otherwise restrict the sale of goods that have negative externalities and subsidize or promote the purchase of goods that have positive externalities.

Some form of price stickiness is postulated in many areas to explain why quantities, rather than prices, respond in the short run to shifts in demand or supply. Typical macroeconomic analysis of the business cycle is included. The factors that contribute to price persistence are examined, along with the implications for achieving a postulated long-run equilibrium. Wage rates in labor markets and posted prices in markets with imperfections in the market structure are two examples of markets with price stickiness.

When it comes to market failure, some sub-disciplines of economics focus more than others. One such area is the study of public sector economics. Externalities, also known as public goods, are an important topic in environmental economics.

Cost-benefit analysis-based regulations and market solutions like emission fees and redefining property rights are two examples of possible policies.

The field of microeconomics known as welfare economics examines the allocation of productive factors within an economy to determine whether or not it is desirable and economically efficient, often in comparison to competitive general equilibrium. It examines the economic activities of the people who make up the hypothetical society under consideration in order to draw conclusions about social welfare. Thus, there is no social welfare apart from the welfare associated with its individual units, and individuals, along with their associated economic activities, are the basic units for aggregating to social welfare, whether of a group, a community, or a society.

The circulation of money in an economy in a macroeconomic model.

Natural resource consumption and waste (including greenhouse gases) are ignored in this model.

Macroeconomics is a subfield of economics that takes a bird's-eye view of the economy to provide a top down, or simplified, explanation of the economy's broad aggregates and their interactions. National income and output, the unemployment rate, and price inflation are examples of aggregates, while examples of subaggregates include total consumption spending and its components, as well as total investment spending. Both fiscal and monetary policy outcomes are analyzed.

Further integration as to micro-based modeling of sectors, such as rationality of players, efficient use of market information, and imperfect competition, has been a hallmark of macroeconomics since at least the 1960s.

The field of economics known as growth economics investigates the causes of economic growth, or the sustained rise in a country's per-capita output. The factors that explain why some countries grow faster than others and whether or not all countries eventually reach the same growth rates are the same ones that are used to explain differences in the level of output per capita between countries.

Investment rates, population growth, and technological progress have all received considerable attention. Both theoretical and empirical models (such as neoclassical and endogenous growth models) and growth accounting reflect these.

A basic illustration of economic/business cycles

The economics of the Great Depression inspired the development of macroeconomics as a distinct field of study. Keynesian economics can be traced back to a book written by John Maynard Keynes during the Great Depression of the 1930s titled The General Theory of Employment, Interest, and Money. During recessions, Keynes argued, low aggregate demand for goods could cause unnecessary increases in unemployment and declines in potential output.

To keep output stable throughout the business cycle, he argued for proactive policy responses from the public sector, such as those taken by the central bank and the government. One of the major takeaways of Keynesian economics is that there isn't always a surefire way for the economy to reach full employment. The IS/LM model developed by John Hicks has had more of an impact than any other explanation of The General Theory.

Different schools of thought, some related to Keynesianism and others not, have emerged over time to shed light on the business cycle. In the neoclassical synthesis, Keynesianism is acknowledged as correct in the short run, but is qualified by classical-like considerations in the intermediate and long runs.

As a result, the new classicals believe that price and wage adjustments are sufficient to reach full employment, while the new Keynesians hold that full employment is achieved automatically only in the long run, and thus government and central-bank policies are necessary because the long run may be very long.

US unemployment rate, 1990–2022.

The unemployment rate, defined as the percentage of the labor force that is unemployed, is a common metric used to assess the severity of the joblessness problem in any given economy. Only people who are actively seeking employment are counted in the labor force. The labor force does not include people who are retired, actively enrolled in school, or deterred from looking for work due to a lack of opportunities. There are a few distinct categories of unemployment, each of which is associated with a unique set of factors.

In most economies that use a price system, money serves as the final means of payment and the unit of account in which prices are stated. Money is universally recognized, has a stable value, can be divided into smaller units, can be carried around easily, has a variable supply, and has a long history of public trust. Money held by the general public and in the form of checkable deposits are included. It's been likened to language in that it's a social convention that benefits individuals primarily because it benefits society as a whole. Famous 19th-century economist Francis Amasa Walker once said, Money is what money does (Money is that money does in the original).

Governments use fiscal policy, which includes changes to spending and taxation, to affect macroeconomic conditions by shifting aggregate demand. There is an output gap, where some of the economy's productive capacity is idle, when aggregate demand is below the economy's potential output. When governments want to increase aggregate demand, they increase spending and reduce taxes. The government can make use of unused resources.

Construction workers who are out of work could be put to use widening highways, for instance. A rise in aggregate demand is the result of tax cuts that free up more money in consumers' pockets to spend. Both tax cuts and government spending have multiplier effects, in which the initial surge in demand causes a domino effect of additional economic activity throughout the economy.

Crowding out can mitigate fiscal policy's impact. The economy is operating at full capacity and there are no idle productive resources when there is no output gap. In this case, an increase in government spending would not lead to a rise in output because it would consume resources that the private sector would have used anyway. When output is low, some economists believe crowding out is always a problem, while others do not.

The Ricardian equivalence argument is also used by those who are skeptical of fiscal policy. They contend that people will cut back on spending and save more in anticipation of future tax increases in order to cover the cost of servicing a larger debt load. Ricardian equivalence states that the increased saving to pay for future higher taxes will cancel out any increase in demand caused by tax cuts.

Inequality in the economy can be measured in a number of ways, including the distribution of income (how much money each person has) and wealth (how much each person has), as well as consumption, land ownership, and human capital. There are varying degrees of inequality between nations, communities, and individuals. Equity, outcome equality, and opportunity equality are all central notions of equality.

Economic disparities have been linked to a variety of political and social problems, such as upheaval, the collapse of democracy, and civil war.

Economics with a focus on the public sector, or government spending, is known as public economics. Many aspects of government spending and taxation, including their impacts on economic efficiency and income distribution, are discussed, as are the political implications of these topics. The latter is a subfield of public choice theory that uses microeconomic concepts to model the behavior of voters, politicians, and bureaucrats in the public sector.

To describe and foretell economic phenomena is a central positive goal of much of economics. The goal of normative economics is to determine how economies should be..

As a normative subfield of economics, welfare economics employs microeconomic tools to assess both the economy's allocative efficiency and its associated income distribution. It looks at the economic actions of people in an effort to gauge social well-being.

List of countries by GDP (PPP) per capita in April 2022.

Factors that influence cross-border exchanges of goods and services are the focus of international trade research. It relates to the magnitude and distribution of trade benefits. Estimating the impact of tariff rate and trade quota changes are examples of policy applications. The study of cross-border capital flows and their impact on currency markets is at the heart of international finance, a branch of macroeconomics. One of the most noticeable results of modern globalization is the expansion of international trade in goods, services, and capital.

The study of labor economics aims to explicate the structure, behavior, and implications of the markets for wage labor. Workers and employers must communicate with one another for labor markets to work. The field of study known as labor economics attempts to make sense of the interplay between workers as the suppliers of labor services and employers as the demanders of labor services. Human effort is quantified by the concept of labor in economics. It is commonly contrasted with other production factors like land and capital. Human capital (referring to workers' skills, not necessarily their work) is a concept developed by some theories, while other macro-economic system theories find the concept to be contradictory.

Focusing on structural change, poverty, and economic growth, development economics analyzes the economic aspects of economic development in relatively low-income countries. Social and political considerations are often incorporated into development economics approaches.

Historically, economists have been criticized for making assumptions that are unrealistic, unverifiable, or oversimplified. This is sometimes done to facilitate the proofs of desired conclusions.

Economic geography, economic history, public choice, energy economics, cultural economics, family economics, and institutional economics are all subdisciplines within the larger discipline of economics.

As a branch of legal theory, law and economics applies economic analysis to the study of law. In this context, economics refers to a set of concepts used to explain the effects of legal rules, evaluate which rules are economically efficient, and forecast future rules. Among the pioneers in this area are Mark Granovetter, Peter Hedstrom, and Richard Swedberg.

In 1974, economist Gary Becker presented a theory of social interactions that could be applied to a variety of situations, such as those involving families, charities, merit goods, groups of people interacting, and even feelings of envy and hatred.

It has been said that the main change in economics since around 1900 has been the proliferation of graduate programmes in the field. The liberal arts, business, and professional studies are all represented by majors, schools, and departments at the majority of the nation's top universities and colleges. See Degrees in Economics at Both the Bachelor's and Master's Level.

Economists