Define, explain and illustrate the following terms:
(i) Pareto optimality
(ii) Pareto improvement
(iii) No-envy allocation
(iv) Fair allocation
(v) Initial endowment allocation
(vi) Separating hyperplane
(vii) Supporting hyperplane
(viii) Feasible allocation
(ix) Equilibrium allocation
Define the following terms
(1- Autarky
(2- gains from international trade
(3- complete markets
( transfer problem (or paradox)4-
5-Strategic reallocation of endowments
(6- Flexible functional form
(7- Likelihood function
(8- Almost ideal demand system
(9- Non-parametric testing
(10- Testing
(11- Likelihood ratio test
(12- Goodness of fit
(13- Theory consistent parameter restrictions
14- Uncertainty
( State of the world (nature)15-
16- State contingent commodity
(17- Complete, contingent markets
(18- Rational expectations
(19- Incomplete markets
(20- Temporary equilibrium
SOLUTION
Pareto Optimality
The concept of Pareto Optimality has its application in the field of economics as well as other areas where in it is said that in an economy to make someone achieve better outcomes is by making another worse off (Fleurbaey, 2008). The conditions prevailing in the perfectly competitive markets is an example of Pareto Optimality wherein for the producers to be better off the consumers are worse off or the better off of one producer is the result of other producer being the worse off. Most of the policies of the government are based on the justification of this concept.
Pareto Improvement
It is an extension of the Pareto Optimality concept. It is argued that having an alternative arrangement to an already existing arrangement where the benefit of one is not resulting in the worse off of the other is Pareto improvement. Pareto improvements have been derived from Kaldor-Hicks improvement (Fleurbaey, 2008).
No-envy allocation
No-envy allocation or envy free allocation means that no individual would like to have the share in the allocation meant for another person (Fleurbaey, 2008). Generally the No-envy allocation results in the Pareto efficient as in no-envy allocation an alternate arrangement will not result in additional benefit for other at the cost of the benefit of the first.
Fair allocation
The fair allocation is the one in which the allocation is based on the fair allocation of resources in economic models. Fair allocation is a subset of allocations and the no-envy allocation is the subset of fair allocation. This theory postulates that the allocation has been done fairly and the rearrangement will result in one being better off at the cost of other being worse off.
Initial Endowment Allocation
It is the initial distribution of goods in an economy amongst the individuals in the economy. It is the initial endowment which will result in trade between the two parties that will be voluntary and will become stagnant till both the parties see advantage from the exchange of resources that are allocated.
Feasible Allocation
This is another allocation that is possible and can actually be possible in the economy. An allocation in equilibrium has to be feasible whereas a feasible allocation may not be in equilibrium. Thus feasible allocation is the set of all possible allocations in the economy.
Equilibrium Allocation
It is that state in the economy wherein the allocation of resources is such that the equilibrium is being maintained in the economy. A state in economy can be in equilibrium and also remain competitive so as to result in trade in the economy. The equilibrium allocation may be Pareto efficient or it may not be. For example the economy may be having equilibrium allocation but the Pareto efficiency does not exist if the consumption of one depends upon whether the same commodity is being consumed by other or not.
Autarky
Autarky is the state where a country or an economy is self sufficient and is able to meet all the requirements from the given resources in the economy. The state of Autarky does not mean that it is the best possible solution for the economy rather it means that the economy equilibrium is achieved. However taking the comparative advantage will be more helpful in generating trade surplus and meet the demand of larger part of the economy.
Gains from International Trade
Gains from international trade can be explained as the gains that an economy can have by having the comparative advantage and exchange the products with another economy in order to take advantage of the specialization for both the economies there by leading to trade surplus for both the economies.
Complete Markets
Complete markets in economics are defined as the markets where from the given set of resources all possible future outcomes can be made possible. All the resources can be exchanged with each other. This exchange can either be directly or indirectly. Complete market is hypothetical market where the goods are exchanged without any transaction cost.
Strategic Reallocation of endowments
The strategic reallocation of endowments refers to the allocation of resources in order to achieve the strategic targets with the given resources in the economy.
Flexible functional form
A flexible functional form is said to have parameters that can estimate twice continuously differentiable function to second order in such a way in a given domain.
Likelihood function
It is function of given set of parameters that define the likelihood of given set of values being equal to the probability of the observed value of the given parameter values. Likelihood function is dependent of the probability distribution for example it will give different results under normal distribution than exponential distribution.
Almost ideal demand system
Almost ideal demand system is the first order approximation and satisfies the conditions of the choice and gives the perfect alignment with the consumers and satisfies the household data of the budget(Deaton & Muellbauer, 2010).. The Almost ideal demand system can be used for testing the symmetry and the homogenous restriction on the parameters. The most important advantage of the system is that is simple but is applicable on linear estimation only.
Non Parametric Testing
Under this testing there are no parameters and thus it is distribution free testing. These tests can be irrespective of the distribution of the given set and the homogeneity in the variance. The non parametric tests are performed on the medians and thus result in zero down of the influence of the data lying outside the dataset.
Goodness of Fit
Goodness of fit is statistical method that estimates how well a given set of data fits the observed values. This method assists in estimating the discrepancy in the given set of data. It helps in filter out the set of data that is irrelevant and does not pass the goodness fit test. (Diewert, 1974)
Incomplete Markets
Incomplete markets in economics are defined as the markets where from the given set of resources all possible future outcomes cannot be made. All the resources can be exchanged with each other based on certain conditions and there is transactional cost associated with the exchange.
Piecemeal reform
The piecemeal reform refers to the reform in parts in order to estimate the effect of the reforms that have taken place as well as give time for settlement.
Rational Expectations
As per the hypothesis in the economics the rational expectations refers to the expectations of the individuals in the economy for the variables prevailing in the economy that are rational and are free from any bias (Sargent, 1987). The rational expectation is not individual expectation but is collective in nature. This is to say that the individual expectation in an economy may be wrong but is correct when the average of the whole group is taken.
References:
Thomas J. Sargent (1987). “Rational expectations,” The New Palgrave: A Dictionary of Economics, v. 4, pp. 76-79.
Deaton A., S, Muellbauer J. (2010). An Almost Ideal Demand System
P. Barten, “Maximum Likelihood Estimation of a Complete System of Demand Equations,” Euro. Econ. Rev., Fall 1969, 1, 7-73.
Diewert, W.E. (1974b), “Functional Forms for Revenue and Factor Requirements Functions”,
International Economic Review 15, 119-130.
Fleurbaey, Marc, “Economics and Economic Justice”, The Stanford Encyclopedia of Philosophy (Fall 2008 Edition), Edward N. Zalta (ed.), URL = <http://plato.stanford.edu/archives/fall2008/entries/economic-justice/>.
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