Fifty Economic Fallacies Exposed by Geoffrey Edward Wood

By Geoffrey Edward Wood

For the reason that 1988, Professor Geoffrey wooden of the Sir John Cass enterprise tuition, urban of London, has written a typical column within the IEA's magazine monetary Affairs, during which he exposes well known fiscal fallacies. This e-book collects fifty of those columns and exposes various universal fallacies - for instance, concerning the intended risks of loose exchange, the talents of governments to manage the economic system, the consequences of presidency law, and constructing the "correct" cost at which to hitch the Euro. those lucid and stimulating columns are necessary to scholars suffering to grasp many of the complexities of monetary concept and its functions, who frequently locate the simplest solution to research monetary research is to work out such fallacies uncovered. it's a textual content quite appropriate for first-year economics scholars, complementing latest textbooks because it does, and clarifying easy strategies in economics whereas demonstrating the sensible makes use of of financial concept.

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People in one country buy from another country or countries goods which can be produced domestically, but only at a cost so high as to offset any saving in expenditure on transport. There is a still further reason for engaging in international trade. Suppose that one country was less efficient than the rest of the world in producing every good. Less efficient in the sense that it required more units of everything used in production (that is, of every ‘factor of production’, to use the technical term) to produce every good in that country than it did elsewhere.

So mistaken speculation – speculation whose expectations are falsified – is unlikely to be a persistent problem. If speculators tend on average to move exchange rates to a ‘correct’ level, why do governments object to them? The answer lies in the meaning of the word ‘correct’. They may well be exchange 47 f i f t y e c o n o m i c fa l l ac i e s e x p o s e d rates which governments do not like – but exchange rates which are nevertheless the consequence of government policies. Governments often wish to achieve an end, but are unwilling to conduct policy accordingly.

Either prospective buyers of the currency have become more convinced the inflation target will be achieved; or alternatively, there was never much doubt about that, but something has happened to the domestic economy to require a higher interest rate to achieve the target. The first gives one confidence in the currency, the second increases the prospective return from holding it. Both make it more attractive, and thus tend to raise its price – to make it appreciate on the foreign exchanges. Hence one complaint, when a currency appreciates and makes life harder for firms competing with firms elsewhere, is the result of policy to resist inflation.

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