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MODULE 13: The Economics of Paul Samuelson Chapter Overview: Paul Samuelson is known for writing a popular textbook in introductory economics. Other than this, he has also contributed to the dearth of economic theories in Post WWII economics. He has contributed fundamental insights in consumer theory and welfare economics, international trade, finance, and in macroeconomics. Samuelson made significant contributions to the synthesis of Keynesian macroeconomics and general equilibrium theory, which is now known as "neoclassical macroeconomics. In 1970, Paul Samuelson became the first American to receive the Nobel Prize in Economics.Paul Samuelson [1515 zoos} (mg; source: httpsji'vnmvnobelprize.orgfprizesfeconomicsciencalmfsamuelsonfhiogla phical Factor Price Equalization reory Samuelson showed that intemaijonal trade will bring about equalization in the relative and absolute returns to homogenous factors of production. As such, international trade becomes a substitute forthe immobility offactors. What this means is that international trade will cause wages of homogenous labor {labor with the same training, skills, and productivity} to be the same in all trading nations. Given two trading nations; one with a high wage and one with a low wage. in the absence of m the relative price of the commodity that is laborintensive would be low since wages are low {low wage nation}, thus the low wage nation specializes on the commodity which is labor intensive. As the low wage nation specializes on the labori rrtensive commodity and will export the commodity, the demand for labor in the country rises resulting in a rise in wages. On the other hand, the high wage country would reduce its production of the labor intensive commodity and will import it, reducing the demand for labor resulting in the tail of wages. As it is, wages in the low wage country rose while wages in the high wage country fell so that in the end wages are equalized. On Public Goods There goods that the private sector cannot provide because of the difficulty of charging those who benefit from them, examples of which are national defense, infrastructure like roads and bridges, etc. Samuelson was the first to attempt a rigorous definition of a public good in his paper, "The Pure Theory of Public Expenditure" which was published in November, 1954. He defines a public good as "a public consumption good, like an outdoor circus or national defense, which is provided for each person to enjoy or not, according to his tastes" (Medema, p.718). In his analysis, he used indifference curves and the Pareto optima to show the welfare effects of a public good. Like his theory on capital, his contributions regarding this concept are too complex 53 to describe in just a few sentences. An exhaustive discussion the nature of a public good and public expenditure is part of another subject, Public Finance.Microeconomic Concepts Samuelson demonstrated how combining the accelerator theory of investment with the Keynesian income determination model explains the cyclical nature of business cycles. With respect to policy making, Samuelson argues for government intervention via fiscal and monetary policies towards the achievement of full employment. At full employment, the market works well, except at providing public goods and problems of externalities. Paul Samuelson, together with other economists, like Robert Dorfman and Robert Solow, worked on price theory and growth theory integrating segregated fields. Again, a discussion of these theories is reserved for higher courses in Economics.1. Briefly explain why factor prices in two trading countries are eventually equalized after trade. 2. Paul Samuelson's contribution to economics was his synthesis of the old classical microeconomics and the new Keynesian economics. Provide a concept of his that illustrates this synthesis of theories
