Weekly Thought Evaluations (WTEs) #4 again!

Economic models

The Physiocrat model of economic life was developed in the eighteenth century and was highly characterized by the argument government non-interference with the operation of economic laws. The physiocrats believed that land is the main factor of production and the primary source of wealth. The main thinking was the emphasis on productive work. Their arguments largely differed with that of mercantilists who argued that the primary source of nation wealth was in Gold and silver stocks. The physiocrats believed that the real wealth of nation is from the agricultural products. The model structure consisted of three major classes namely the sterile, propriety class and the productive class. The production process starts with the propriety class who are the owners of the land as the primary means of production. The propriety class consisted of the most integral class of people since they were considered as the movers of the production activities. Agricultural production relied on the propriety class willingness to give out their land for an agricultural production... The propriety class is also consumers of agricultural products and thus their desire to consume drives them to lease additional land for production (Forstater & Gary Mongiovi, 2007).

The production class is actively engaged in an agricultural production process, and they rely on the propriety class for production purposes. The landlords desire to lease out more land for production purposes create more income for the production class and sterile class. The proprietor class was, therefore, critical in stimulating economic activities which benefited different the other two social classes. The merchants traded the surplus agricultural products in exchange for foreign products. The physiocrats, therefore, believed that agriculture was the backbone of the country’s wealth. The physiocrats envisaged a society in which the moral and economic laws will play, and that positive law will be in harmony with the natural law. The physiocrats asserted that the prices were solely determined by demand and supply plus production costs. They also asserted that there was always a fair market price which was derived from free trade. They acknowledged the contribution of the land cultivators but the profits were more assigned to the propriety class. The economic model also advocated for the government to charge fixed interests rates (Backhaus, 2011).

DRI model is a large-scale econometric model and consist of approximately seven hundred equations and also made up of several variables that are determined exogenously. The model closely follows national expenditure and income accounts. According to the model the supply side is based on explicit production function resulting in a potential output. The difference existing between the potential and actual output is the basic channel through which the supply and demand imbalances influence price adjustments. The exchange rate depends on real commodity price movements and the conditions of interest rate parity. The wage rate of the model is determined by the extended Philip curve as a function of inflation expectations the gap between full and actual unemployment rate and productivity. The producer prices are determined to exchange rate, a gap between full and actual unemployment and industrial capacity utilization. The financial sector has different rates and money supply. The long-term interest rates are fixed by expectation hypothesis and have an effect of real variables such as investment, housing and consumption (Samuels, Biddle & Davis, 20013).

The DRI model structure forecasts approximately one thousand and two hundred concepts involving the prices, interest rates, industrial detail, international trade, incomes, financial and demands. The model is made up of eight blocks namely tax sector, international trade, aggregate supply, domestic spending, prices, financial, expectations and domestic income. Tax blocks, domestic spending, and income correspond to product accounts and national income (Reinert, 2011).

Both the physiocrats and the modern approaches recognize the role of government in fixing interests. However, the physiocrats believed that the government should not be involved with an interference of trade but let it flow freely. What the model advocated is a totally liberal trade (Backhaus, 2011).. On the contrary, according to the modern approach models, the role of government is integral in controlling trade. The model pays attention to the role played by central government in long-term inflation phenomenon. The government plays a critical role in regulating money supply in the economy thus reducing the level of inflation. The physiocrats approach argues that prices of commodities on the market are purely determined by demand and supply, production costs and also assumed that the prices in the market will remain constantly fair. According to the modern approaches, the interaction between a set of demand and supply relations determine price levels, spending, and production (Reinert, 2011). The total cost of production involves other additional aspects such as capital research and development costs and capital expenditures. Typically the demand levels of goods and services are driven by income, wealth expectations, financial conditions and prices. Finally, in physiocrats approach, the wealth of the nation is only derived from agricultural products. On the other hand, the wealth of nation under the modern approach is determined by several factors including value addition, foreign exchange trade, and financial investments among other factors.

References

Samuels, W. J., Biddle, J., & Davis, J. B. (2003). A companion to the history of economic thought. Malden, MA: Blackwell.

Backhaus, J. G. (2011). Handbook of the History of Economic Thought: Insights on the Founders of Modern Economics. New York, NY: Springer New York.

Reinert, S. A. (2011). Translating empire: Emulation and the origins of political economy. Cambridge, Mass: Harvard University Press.

Forstater, M., & Gary Mongiovi, S. P. (2007). Post-Keynesian Macroeconomics. london: Routledge.