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This chapter examines the issues considered in the allocation of factors in competitive markets. It suggests that general equilibrium analysis is very useful in public finance and international trade and that graphical analysis of the two-sector model can be supplemented with numerical techniques capable of handling larger dimensions. It discusses the Pareto set for factor allocations, which are technically efficient in the sense that any reallocation of inputs would reduce output of at least one good. Several relevant computational exercises and their solutions are provided.

One of the contributions of this book is to use and develop the principles of modern public finance for the analysis of LDCs (less developed countries). This is done by borrowing from two intellectual traditions: that relating to public finance, and that relating to development economics. This chapter briefly reviews the four major strands in public finance literature that form the background to the study. These are: general-equilibrium analysis; Pigouvian welfare economics and optimal taxation; the New Welfare Economics (which says that interpersonal utility comparisons are not meaningful, so the utilitarian approach to adding up utilities is nonsense, and one allocation can only be said to be better than another when the first was a Pareto-improvement over the second); and the New New Welfare Economics, which borrows from the previous three strands, and seeks to analyse the scope of available tax instruments, and to take into account and explain market imperfections. This last approach is the one mainly used in the book to approach applied welfare economics for LDCs; various aspects of the approach are discussed.

The aim of this book is to provide a rigorous framework within which the fundamental question of who should bear the burden of economic development in less developed countries (LDCs) can be addressed in a systematic way. The two main aspects of this analysis are: (1) identifying the critical institutional features of the economy, and the critical parameters (for instance, the magnitudes of demand and supply responses) that determine the consequences of changes in taxes, prices, and other policies; and (2) ascertaining conditions under which certain reforms in pricing and taxation would increase welfare, while showing explicitly the role played by value judgements about how the welfare of various groups, both today and in the future, should be weighed. This introductory chapter addresses various methodological issues: normative versus positive analysis; analysis under limited data availability; analysis of policy and political economy; and general-equilibrium analysis. It also presents an outline of the book, discusses some of the results obtained, and briefly discusses the role of theory.

This chapter traces the development of Keynesian economics in the US from the early days. Although Keynesian economics came into the US in fragments, Samuelson views it as a unifying principle. One of Samuelson's first attempts in Keynesian economics is the simple mathematical formulation expressed as GDP, in terms of consumption and investment, consumption as dependent on income, and investment as fixed. This chapter characterizes the development of Paul Samuelson as a Keynesian economist and appraises the econometric foundation of Keynesian economics. Samuelson was able to expand and articulate the Keynesian paradigm, through a connection to equilibrium analysis of the demand and supply type. The stage for estimating aggregate models was then set and the author of this chapter was a pioneer in the specification and estimation of the Keynesian model.

This chapter deals with an extension of the Arrow–Debreu model, namely, the fully stationary intertemporal Arrow–Debreu model where some consumers face restrictions in their ability to transfer wealth between time periods. This extension represents one of the first steps into a genuinely general equilibrium analysis of economic fluctuations. The question here becomes whether a fully stationary model can feature equilibrium solutions that are not stationary. It shows that if there are no restrictions on intertemporal transfers, then all equilibrium solutions are asymptotically stationary, with little room left for fluctuations. However, if some restrictions exist on individual intertemporal transfers, nonstationary equilibrium allocations can exist. The equilibrium manifold approach is used to gain insight on these economies and to assess the role of restrictions in intertemporal wealth transfers in creating or amplifying economic fluctuations.

Why do macroeconomists usually work with models that seem, to many, to be ridiculous simplifications of reality that stress mathematical coherence over economic substance? This chapter addresses important aspects of macroeconomic methodology. These ideas are infrequently discussed in existing work for nonprofessional economists. There are some reasons for using an overall approach to macroeconomics that seems to give easy ammunition to critics. The chapter covers each of these four “sins”: Aggregation, Rationality, Equilibrium, and Mathematics.

This chapter deals with the long-term financing of Medicare in the United States. The chapter provides a model that features employer-provided health insurance, Medicare for the elderly, and Social Security. It is calibrated to match key statistics for the U.S. economy. It has both taxes on capital income and labor income. The model has a changing demographic structure and exogenous increases in health costs. Individuals face risk in terms of their own health status and health determines household productivity, mortality rates, and health expenditure. The chapter looks at three possible policy reforms and their impact on 2080 tax rates: increases in Medicare premiums, changes in Medicare coverage, and changes in retirement age. Each of them has the potential to lower future labor tax rates, but the demographics and increases in health costs still result in a future of higher taxes.

This chapter provides an overview of some basic concepts and philosophy in microeconomic theory. Microeconomic theory concerns the behavior of individual economic actors and the aggregation of their actions in different institutional frameworks. This description introduces four categories: the individual actor, traditionally either a consumer or a firm; the behavior of the actor, traditionally utility maximization by consumers and profit maximization by firms; an institutional framework, which describes what options the individual actors have and what outcomes they receive as a function of the actions of others, traditionally the price mechanism in an impersonal marketplace; and the mode of analysis for modeling how the various actors' behaviors will aggregate within a given framework, traditionally equilibrium analysis. Ultimately, the purpose of microeconomic theory is to provide a better understanding of economic activity and outcomes. The chapter then considers the levels of scope, detail, emphasis, and complexity of the theories and models presented in the book.