Eco Oly Extras

Lipsey Lancaster Theorem

Another way of saying second best theory where fixing one of five problems will not always improve overall welfare (polluting monopolies)

Tinbergen rule

In order to achieve n goals, need to use n different policies or tools

The impossible trinity

Cannot simultaneously have fixed e/r, free capital movement and independent monetary policy

Mundell Fleming Framework

In a small open economy, monetary policy and fiscal policy have different effects under fixed and floating e/r. Explains impossible trinity

Dornbusch Overshooting

Following shocks, e/r often changes more than it needs to, but re adjusts over time to a natural level

Time inconsistency of policy

A policy optimal ex ante not always optimal ex post hence ruining credibility especially with MP

Baumols Cost Disease

Sectors with low productivity growth still have to increase wages over time, not always due to govt inefficiency

Solow residual / total factory productivity

LRAS growth no always due to better human or physical capital, can be due to tech, innovation policy or better institutions. Not always just investment

Schumpterian Creative Destruction

Growth happens through R&D making new technologies and making old ones obsolete. Hence PC not always optimal as R&D won’t occur at same scale due to fears or IP stolen

Beveridge Curve

Inverse relation between unemployment and job vacancies. If both high, likely a shift implying worse matching efficiency

Insider outsider theory

Insiders (employed) may push for higher wages keeping disequilibrium and harming outsiders (unemployed)

Harberger Triangle

DWL triangle

Trade diversion vs creation (Customs unions)

Creation (shift to cheap imports from expensive domestic) vs diversion (Cheap out of union imports to more expensive in union imports)

Ballassa Samuelson

Explains expensive in 1st world. Tradable sector growth flows onto other sectors causing real exchange rate appreciation