Adams Smith Invisible Hand Theory
Victor Dos Santos, 30-10-2011 Project 1
1.) Try to relate the economic freedom index, the gdp, the rate of unemployment and the inflation so as to prove the validity of the metaphor of the invisible hand by Adam smith (1000 words)
Economic History – Project 1
Adams smith theory of the invisible had is used to state the self-regulating tendency of themarkets. As we see in the economic history, markets always tend to regulate themselves by nature. As we perceive along history, GDP, inflation rate and so on have increased a lot since the 1900s (not taking into consideration historical events such as World War 1, 2, etc.) We will start by associating the economic freedom index during the last 10 years. The economic market freedom is used toindicate the possibilities of having free choice over a market, meaning this the capability of entering and exiting the market, how regulated is the market, etc… So as we can see over the past years, the economic freedom index has varied in various countries. For example, in Latino America markets have changed from been repressed to been mostly not free, and who knows how is it going to be in thefuture. Like this markets all over the world are tending to get a balance between been a total free market and been a repressed market. About the GDP, it’s the market value of all final goods, services, etc. that produces a country within a period of time. It’s normally used to calculate how sustainable a country is and to indicate its standard of living. Over the past years, the GDP (Gross DomesticProduct) tends to increase, besides the global crisis. Countries since 1990 have had the tendency of increasing their GDP. For example, we look at Spain’s GDP over time and we see that from 551,215 (1990) it has raised up to 1,395,104 (2011) and it’s expected that in 2016, its gets up to 1,643,376. We can clearly observe the tendency of incensement of the GDP. We can also see how after globalcrisis such as those in the crack of 29th or the great depression, markets tends to naturally balance again regulating its economy, proving Adams smith theory. Also linking the GDP with the economic freedom index, we observe that as the country’s economy is freer, its GDP is higher than those countries whose economic market is repressed, meaning this that a countries GDP is related to its type ofeconomy and also as we will see later to the unemployment and inflation. Another clear example we have is the crack of 29th, in which the American gross domestic product declined for four straight years. Later the GDP slowly increased back to its 1929 level, which was finally exceeded again in 1936. This shows how economy tends to regulate and even increase over time.
EXAMPLE: GDP COUNTRY 2002United States China Japan 10,642,300
The inflation rate is a measure of the inflation of a country. It’s also the percentage rate of change in price level over time. Throughout the economic history, the inflation has had lots of incensementsand declines. Looking at the US history, the percentage of inflation has changed during the course of time. Throughout World War 2, the inflation rate increased up to a 2,5% but rapidly decreased until now a days, that’s a 0%.
As we saw in the beginning, developing countries with a repressed market have higher inflation and lower GDPs. Except in few occasions marked by historical events;normally all of the economies are stable and are improving day by day. Unemployment rate is also a fact that drastically it’s getting worst now a days. Historically, during the great depression we also observed how unemployment was another measure of the depression's impact. During 1929 to 1939, the unemployment rate was of 13.3%. In 1940 it was said that about 5.3 millions of Americans where still...
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