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that is, more consumption and more investment. That is all there is to the model. It contains one behavioral condition — that people tend to save a certain proportion of extra income, a tendency that can be measured. It contains one technical condition — that investment generates additional output, a fact that can be established. And it contains one equilibrium condition — that planned saving must equal planned investment in every period if the income level of the period is to be sustained. Given these three conditions, the model generates a time path of income and even indicates what will happen if income falls off the path
More complex models have since been built, incorporating different saving ratios for different groups in the population, technical conditions for each industry, definite assumptions about the character of technical progress in the economy, monetary and financial equations, and much more.
Labour
Like monetary and international economics, labour economics is an old economic speciality. It gets its raison d'etre from the peculiarities of labour as a commodity. Labour itself is not bought and sold; rather, its services are hired and rented out. But since people cannot be disassociated from their services, various nonmonetary considerations play a role in the sale of labour services as contrasted with the sale of machine time or the rental of land. Yet, the bulk of the literature in labour economics was until recently concerned solely with the demand side of the labour market. Wages, the textbooks all said, were determined by the "marginal productivity of labour," that is, by the relationships of production and by consumer demand. If the supply of labour came into the picture at all, it was merely to allow for the presence of trade unions; unions could only raise wages by limiting the supply of labour.
After a long period of neglect, the supply side of the labour market began, in the 20th century, to attract the attention of economists. First, attention shifted from the individual worker to the household as a supplier of labour services; the increasing tendency of married women to enter the labour force and the wide disparities and fluctuations observed in the rate that females participate in a labour force drew attention to the fact that an individual's decision to supply labour is not independent of the size, age structure, and asset holdings of the household to which he or she belongs. Second, the new concept of "human capital" — that people make capital investments in their children and in themselves by incurring the costs of education and training, the costs of searching for better job opportunities, and the costs of migration to other labour markets — has served as a unifying explanation of the diverse activities of households in labour markets. In this way, capital theory has become the dominant analytical tool of the labour economists,
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replacing or supplementing the traditional theory of consumer behaviour. The economics of training and education, the economics of information, the economics of migration, the economics of health, and the economics of poverty are some of the by-products of this new perspective. A field that was at one time regarded as rather cut-and-dried has taken on new vitality.
Labour economics, old or new, has always regarded the explanation of wages as its principal task, including the factors determining the general level of wages in an economy and the reasons for wage differentials between industries and occupations. Wages are influenced by trade unions; the impact of their activities is of increased importance at a time when most governments manage the economy with one eye on the unemployment statistics. The prewar fears of chronic unemployment gave way to the postwar fears of chronic inflation at or near levels of full employment. In response to this a vast literature sprang up after 1945 analyzing the inflationary pressures stemming from both the supply side and the demand side of labour markets. Whether prices were being pushed up by the labour unions ("cost push") or pulled up by excess purchasing power ("demand pull") became the issues in this long debate on inflation, a controversy that is, of course, intimately related to the quarrels in monetary economics mentioned earlier.
Money
One of the oldest, widely accepted functions of government is control over the supply of money. The dramatic effects of changes in the quantity of money on the level of prices and the volume of economic activity were recognized and thoroughly analyzed in the 18th century, and monetary economics has ever since constituted one of the principal branches of economics. In the 19th century a complex and somewhat crudely formulated tradition grew up known as the "quantity theory of money," which held that any change in the supply of money can only be absorbed by variations in the general level of prices (the purchasing power of money). In consequence, prices will tend to change proportionately with the quantity of money in circulation. As the growth of fiat paper money gave governments increasingly effective control over the stock of circulating media, the quantity theory of money supplied an apparently simple rationale for the management of the economy: all that was needed to prevent inflation or deflation was to vary the quantity of money in circulation inversely with the level of prices.
One of the targets of Keynes's attack on traditional thinking in his General Theory of Employment, Interest and Money was this quantity theory of money. Keynes produced a different theory of the demand for money that implied that the impact of a change in the stock of money on the level of national income is weak and at best indirect; the effect on prices is virtually nil, he maintained, at least in
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economies with heavy unemployment such as prevailed in the 1930s. He put his emphasis instead on government budgetary and tax policy and direct control of investment. As a consequence, economists lost faith in monetary management and came to regard monetary policy as more or less ineffective in controlling the volume of economic activity.
In the 1960s there was a remarkable revival of the older view, at least among a small but growing school of American monetary economists. They accepted much of Keynesian economics but argued that the effects of fiscal policy are unreliable unless the quantity of money is regulated at the same time. They refurbished the quantity theory of money and tested the new version on a variety of data for different countries and for different time periods, leading to the broad conclusion that the quantity of money does matter.
In the late 20th century the controversy was still raging. It is notable that this debate, unlike previous debates in the history of monetary economics, was characterized by disputes over empirical findings — that is, it was focussed on the testable character of different monetary theories rather than on the manner of their formulation. Progress was made slower by the political overtones of the controversy: in some countries, belief in the efficacy of monetary policy had become a kind of litmus test of political conservatism. Nevertheless, a reconciliation between Keynesians and quantity theorists needed only some agreement as to the magnitude of monetary forces and the degree of stability of the demand for money. Monetary economics seemed at last to be coming of age as an empirical discipline.
TRADEAND ECONOMICS
Many transportation innovations occurred because of the needs of the military. Nevertheless, advances in vehicle designs and infrastructure (such as bridges and roads) were soon applied to trade and commerce. The Roman road system, originally created to move troops quickly and efficiently throughout the empire, soon created a massive economic market centered on Rome. The European explorers of the 15th and 16th centuries were originally seeking new paths to the riches of the Orient when they happened on the New World. The trillion-dollar international trade business of today relies entirely on a reliable system of global transportation to meet demand and provide customers all over the world with goods and services
International trade routes connect different countries. These routes reflect the economic interdependence of many nations of the world. Many countries are dependent on other countries for natural resources, finished goods such as automobiles and electronics, and parts for products assembled locally. Many of the world's largest trade partners, such as the United States, Canada, Japan, Mexico,
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and Europe, are connected with numerous transportation services and travel routes. In Asia, Japan has strong maritime trade relations with Southeast Asian countries in order to exchange natural resources for manufactured goods. The U.S. ports of New Orleans, Louisiana, and Miami, Florida, are major ports of entry for trade with Latin American nations.
Treaties and international agreements among countries are used to protect international shipping and travel. These agreements have related to issues such as vessel standardization, allowable ports of entry in a nation, customs procedures, tariffs that can be applied to certain commodities, and rights of passage through international waters. A recent example of such an agreement is the North American Free Trade Agreement (NAFTA), which was signed in 1992 by the governments of Canada, the United States, and Mexico. Among other actions, NAFTA eliminated many tariffs, allowed Mexican trucks to travel into the United States, provided safety and regulatory standards for trucks and buses, and permitted U.S. and Canadian investment on a limited basis in Mexican transportation firms. Similar trade agreements will continue to characterize international transportation.
Besides the economic benefits associated with trade, there are many other indirect economic benefits related to transportation. More than 9.5 million workers are employed in transportation-related industries in the United States, and the transportation-related portion of the U.S. gross domestic product (GDP) in 2000 was $314 billion out of a total GDP of $9.9 trillion. Aerospace, naval, and automobile manufacturers are responsible for a large amount of that figure, as are the industries that supply these manufacturers, such as the steel, rubber, petroleum, and electronics industries
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Economic forecasting
It is the prediction of future economic activity and developments. Forecasting of this nature has grown rapidly since the 1930s, largely in response to the increasing unpredictability of the economic situation, a greater involvement of governments in economic affairs, which requires the preparation of economic plans and projections, and rapid improvement in the quality and coverage of economic statistics and forecasting techniques. There is a vast array of forecasts available, ranging from short-term predictions for specific economic variables (such as interest rates) or of demand for individual products (such as steel or automobiles) to medium- and long-term forecasts of the economy as a whole. Despite their lack of certainty, such forecasts are widely used in business, government, and private affairs to help in formulating policies, strategies, legislation, and long-term plans.
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A useful distinction can be made between macro- and micro-economic forecasts. Macroeconomic forecasts are designed to predict the future course of the entire economy or of specific broad economic variables, whereas microeconomic forecasting is designed to project the likely development of particular economic sectors such as one industry, commodity, or firm. The best known and most widely used form of macroeconomic forecast is that of national income or gross national product (GNP). This predicts, in numerical terms, the major components of a country's economic activity — private consumption, government expenditure, private and public investment, and the balance of exports and imports. All countries devote significant resources to this type of forecasting, typically on a one- to five-year basis. These forecasts are used for a number of different purposes. Governments use them to determine future economic strategy and to predict other variables of the economy such as the likely level of inflation, industrial output, employment, etc. Based on such a forecast, the effects of various proposed government actions (a cut in taxation or an increase in government expenditure, for example) can be tested before official policy is finalized.
Macroeconomic forecasts are also used outside government as a basis for producing more detailed projections of the main components of the economy and in the preparation of microeconomic forecasts. By studying the overall forecast of private consumption, for example, a retailer might, by referring to established patterns of spending, predict the amount that is likely to be spent on foodstuffs and nonfood products and then, working in the microeconomic forecasting area, attempt to determine future expenditures in specific product categories. Similarly, an automobile manufacturer will attempt to predict demand for his product by looking at the predicted level of and trends in disposable incomes and consumption and predictions of interest and exchange rates. He will also forecast production costs from the trend of wage increases and inflation. In general, most microeconomic forecasting starts with some forecast or assumption about the economy as a whole that is then modified or analyzed into its components in light of special factors and considerations applicable to a particular product, industry, or other concern.
Forecasts range from one month to 10 years or more. However, largely owing to the economic shocks of the last 20 years (e.g., the quadrupling of oil prices in 1972), there has been a trend away from highly numerical long-term forecasts in favour of indications of the broad direction of economic developments, based on both statistical evidence and more or less subjective judgments on such basic aspects of the economy as population growth, technological progress, and social changes. A set of long-term forecasts may be made to indicate the likely outcomes of several different but equally plausible assumptions in a technique often called scenario building.
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The techniques of economic forecasting have developed rapidly in recent decades. This in part reflects the growing understanding of the ways in which numerous economic variables affect each other. Equally important reasons are the better availability of good statistics and the development of computer methods for processing large amounts of data. Computer capacity has made possible the practical development of mathematical models of the economy through which it is possible to explore the relationships between the key determinants of the economic system with a speed and to a degree of detail that were not possible before. Most governments and large forecasting organizations use computers in this technique known as econometric forecasting.
Supply and demand
Supply and demand in economics is relationship between the quantity that producers wish to sell at various prices and the quantity of a commodity that consumers wish to buy.
The quantity of a commodity demanded can be seen to depend on the price of that commodity, the prices of all other commodities, the incomes of consumers, and their tastes. In economic analysis, the last three factors are often held constant; the analysis then involves examining the relationship between various prices and the maximum quantity that would potentially be purchased at each of these prices. These price-quantity combinations may be plotted on a curve, known as a demand curve.
The quantity of a commodity that is available in the market depends not only on the price obtainable for the commodity but also on the prices of substitutable products, the techniques of production, and the availability and costs of labour and other factors of production. In analyzing supply in the short run, one usually assumes that all but the price are constant in order to observe the relationship between various prices and the quantity potentially offered by suppliers at each price. It is the function of a market to equate demand and supply through the price mechanism. If buyers wish to purchase more of a commodity than is available at the prevailing price, they will tend to bid the price up. If they wish to purchase less than is available at the prevailing price, suppliers will bid prices down. Thus, there is a tendency toward an equilibrium price, at which the quantity demanded is just equal to the quantity supplied.
As the price rises, the quantity offered usually increases, and the willingness of consumers to buy an article normally declines, but these changes are not necessarily proportional. The measure of the responsiveness of supply and demand to changes in price is their elasticity. Elasticity is calculated as the ratio of the percentage change in the quantity demanded or supplied to the percentage change